WARNING: Do not use these notes as a substitute for your own notes, annotations and lectures of our professors

because these contains typographical errors and were not made under the supervision or authority of the professor. These can only serve as a guide for the better understanding of the subject matter. SHOWING THAT YOU ARE USING THESE DURING CLASSES (especially during recitations) MIGHT OFFEND THE PROFESSOR, so please be warned about the inherent dangers of relying on these notes.

When the car was delivered, there was a discrepancy in the chassis number in the invoice and the chassis number of the car. Therefore there was a breach of contract or failure of consideration.

If there is no transfer of the promissory note from C to State Investment House can the company collect the balance of the promissory note? Can S stop paying because there was a breach of contract or failure of consideration? Between S and C, S can stop paying because C breached the contract. It delivered a car different from what was specified by its client. But, in this case the promissory note has been transferred in favor of State Investment House. So can State Investment House enforce payment of the promissory note against S? Can S raise the defense that the car is defective and therefore he is not liable for the balance of the promissory note? It will depend on 2 things. 1. Is the instrument negotiable in the sense that there is conformance to the elements of negotiability under Sec 1 of the NIL? And 2. Is the State Investment House a holder in due course because it has all the conditions of a holder in due course under Sec 52? If it is negotiable and holder in due course then State Investment House can enforce payment of the promissory note despite the failure of consideration; despite breach of contract; despite the defect in the vehicle. But if the instrument is not negotiable then State Investment House simply steps into the shoes of C. it is governed simply by the law on assignment of credit. In assignment of credit, the assignee cannot acquire a right better than that of the assignor. So State Investment House is mere assignee or transferee not a holder, cannot acquire a right, title or interest to the PN better than that of the assignor. (Warning: This is not what Dean actually said) What if the instrument is negotiable but S was able to overcome the presumption that SIH is a holder in due course (because if the instrument is negotiable there is a presumption that the holder is a holder in due course), by showing that the title of C was defective? If the holder, SIH, was not able to prove that it acquired the title as a holder in due course, can SIH enforce payment of the PN, or can S invoke the defense of breach of contract as a defense and stop paying? In this case S can stop paying because if the instrument is negotiable but the holder is not a holder in due course governed only by the law on assignment of credit. The assignee simply steps in to the shoes of the assignor. State Investment House vs CA D issued checks payable to the order of P as a security for items of jewelries that D obtained from P to be sold on commission basis. P negotiates the checks to State Investment House. D did not sell the jewelries, so he returned the jewelries to P and demanded for the return of the checks. Unfortunately the checks were negotiated already in favor of State Investment House. D withdrew his funds from Equitable. So when State Investment House presented the checks Equitable, the bank dishonored the

~PS

But if any of you lacks wisdom, he should pray to God, who will give it to him; because God gives generously and graciously to all. But when you pray, you must believe and not doubt at all. Whoever doubts is like a wave in the sea that is driven and blown about by the wind. JAMES 1:5-6 ACT 2031 THE NEGOTIABLE INSTRUMENTS LAW (Based on the Lectures of Dean Divina) Introduction The study of Negotiable Instruments Law is basically as study of the law on assignment of credit except for that one big difference. Negotiable Instruments Law is equivalent to assignment of credit, except the rights accorded to a holder and subject to 2 essential requisites, that is: 1. Sec. 1 (The instruments must be negotiable); and 2. Sec. 52 (The holder must be a holder in due course) If these two are present then it is governed by Negotiable Instruments Law. But if one is lacking then it should be governed by the law on assignment of credit. FORMULA: 1. 2. 3. Negotiable Instrument (NI) + Holder in due course (HDC) = Negotiable Instruments Law (NIL) Non Negotiable Instrument (NN) + Holder in due course (HDC) = Assignment of credit (A/C) Negotiable Instrument (NI) + Non-holder in due course (NHDC) = Assignment of Credit (A/C). This is subject to one exception.

NI + HDC = NIL NN + HDC = A/C NI + NHDC = A/C What is the only exception here (the instrument is still negotiable but the holder is not a holder in due course)? If the non-holder in due course acquires the instrument from a holder in due course and he has not taken part in any fraud or illegality, in which case he has all the rights of a holder in due course, not just a mere assignee or transferee. Salas vs CA 181 SCRA Salas (S) purchased a car on installment basis. He paid the down payment and issued a promissory note for the balance of the purchase price payable to the car company (C). The car company negotiated the instrument to the State Investment House

!1

instrument. Can State Investment House collect against D and P assuming that there was notice of dishonor? Can D say the check has no more consideration? At the outset there was consideration, but I returned the jewelries so there was already a failure of consideration I am not liable to pay anymore.? In this case the check is negotiable and therefore the presumption is the holder is a holder in due course. SO that defense of failure of consideration is not available against State Investment House. What if the instrument is not negotiable because it does not conform to the elements of negotiability under Sec 1 or the State Investment House is not a holder in due course? You apply the law on assignment of credit. The State Investment House simply steps into the shoes of P as assignor and therefore cannot acquire a right or title better than that of the assignor. The case which almost cost the loss of the bank for P500 M Two foreigners were in possession of 2 checks worth $10 M (exchange rate at that time was 56:1). These checks were drawn against a bank in the Fiji Islands, Republic of Vanuatu. The foreigners told the manager they would like to open an account in the bank. The manager opened the account and the checks were deposited. The foreigners requested for a certificate of deposit made payable after 1 year. By that time the manager would have known if the checks are cleared or not because checks drawn abroad will be subject for clearing after 30 days. In 30 days you will know if the checks were funded or honored. The manager tagged along his assistant manager because under the rules of the bank 2 officials must sign the certificate of the deposits. So the 2 issued the certificate to the foreigners. The foreigners left the country. After 2 months the bank got a call from American Express Company. The certificate of deposit was negotiated to American Express Company.The American Express Company wanted to collect the $10 M. Is the bank liable to pay? It depends. Is the instrument negotiable? Can a certificate of deposit be considered as a negotiable instrument? In the case of Caltex vs IAC 212 SCRA The certificate of deposit indicates: This certifies that bearer deposited the sum of P5 K and payable to such depositor in December 31, 2011, with 12% interest per annum. Signed by the manager. Is this negotiable? In the case of Caltex vs IAC it is negotiable. Who is the depositor? It is bearer. It is payable to bearer. The depositor being referred to is the bearer therefore it is negotiable. A certificate of deposit may be a negotiable instrument if it conforms to the elements of negotiability under Sec 1 of NIL, and if

American Express Company is holder in due course the bank will be liable to pay for $10 M.

In our case, fortunately, our certificate of deposit was payable to of a specific person. It provides that this certifies that Juan de la Cruz deposited of a sum of #. Payable to him in Dec. 31, 2011. What if it says to the order of Juan de la Cruz? It becomes a negotiable instrument. Take out the two words, order of? It becomes just payable to Juan de la Cruz. It is a different story. So dont take the words of negotiability for granted. Dont take order or bearer for granted, because they spell a difference between a mere assignee and a holder with more rights and privileges than a mere assignee or transferee. You will encounter many cases in our book where the SC said the instrument is not negotiable therefore dont apply the warranties of an indorser. There is one case, Golden Savings Bank vs CA (Metrobank vs CA, 1991) D deposited with ABC Rural Bank of Mindoro treasury warrants and then ABC in turn deposited the same in its account with Metrobank. So ABC was a Rural Bank and ABC has no clearing facilities. It is not a universal bank or a commercial bank. D came to follow it up with ABC, Have the warrants cleared? ABC as soon as D makes the follow up have makes a call with Metrobank, Have the warrants been cleared? Not yet. There were series of follow ups by D to ABC, ABC to Metrobank to the point that Metrobank got exasperated and cleared the warrants and allowed ABC to withdraw from the proceeds of the warrants. After clearing the warrants of ABC, ABC credited the account of D allowing D to make withdrawals from his own account. After a month, the warrants were dishonored by the clearing house (in the case Bureau of Treasury).

So Metrobank now wants to enforce the warranties of ABC. According to Metrobank, ABC signed the warrants. That amounts to indorsement. When you signed at the back of the check or instrument that signature goes with it all the warrants of an indorser under the negotiable instruments law. But, the SC said that the warrants are not negotiable therefore the warranties of an indorser do not apply in this case. NIL_2 What is the TEST to determine NEGOTIABILITY (1989)? There is only one test, that is, if on its FACE it conforms to the REQUISITES of negotiability under SEC 1 of NIL. May an INSTRUMENT be negotiable even if it is VOID? May an instrument be negotiable even though the MAKER is INSOLVENT? May the instrument be negotiable even though it is VOIDABLE or UNENFORCEABLE? Yes because the test is conformity with Sec 1 of the NIL.

!2

Can the parties STIPULATE that the instrument is NEGOTIABLE even though it is not? BETWEEN THE PARTIES they can stipulate that the instrument is negotiable even though it is not, in the sense that it does not conform to Sec 1. That is by ESTOPPEL. But that arrangement does not bind 3rd persons.

What are the FUNCTIONS of a negotiable instrument? 1. substitute for money 2. medium of exchange 3. medium of credit transactions What are the CHARACTERISTICS/FEATURES of negotiable instruments? 1. negotiability 2. accumulation of secondary contracts What are the KINDS/TYPES of negotiable instruments? 1. promissory notes 2. bill of exchange 3. checks (Sec 185) although a special kind of bill of exchange drawn on a bank payable on demand, it is considered as special type of negotiable instrument The NIL provides for these 3. But, there are other instruments which are considered negotiable if they conform to Sec 1 and they will fall under the specie of promissory note, bill of exchange, or check. Examples of a PROMISSORY NOTE: Certificates of deposit, due bills, bonds, commercial paper Examples of a BILL OF EXCHAGE: Trade acceptances (an instrument drawn by the buyer against the seller and accepted by the latter); bankers acceptances

crossed. If the check is crossed then the lack or failure of consideration becomes a defense. WHICH of these provisions AFFECT the NEGOTIABILTY of the instrument? Payable in two installments Non-negotiable Payable in equal installments Non-negotiable These are non-negotiable because the law says stated installments the due dates of the installments must be indicated. Payable in stated installments coupled with acceleration clause Negotiable Payable in dollars computed in Philippine currency at the prevailing rate at the time of payment. Negotiable With interest but silent as to rate Negotiable I promise to pay to the order of Juan de la Cruz the amount of P100 K with interest Negotiable. Is it still sum certain within the meaning of the NIL Sec 2 if it says with interest only? Yes because if it is silent as to rate, it means that the legal rate applies. What is the legal rate 6% or 12%? The fact that it is susceptible to two rates, does it affect the certainty of the sum payable? No because the presumption of the law comes in, that is 12% if it arose from a loan, forbearance of money, goods or credit and 6% if it did not arise from a loan, forbearance of money, goods, or credit. So the legal rate is 6% or 12% depending upon the obligation. Payable out of a particular fund Non-negotiable because the fund may or may not exist

Drafts - in LC, it is used to facilitate the payment of the beneficiary Kinds of drafts are: 1. sight drafts (being payable at sight) and 2. usance (payable after 60 days after sight)

3.

What are the TYPES of CHECK? 1. PERSONAL and impersonal or corporate check 2. CASHIERS check or MANAGERS check TRAVELLERS check One that must be SIGNED TWICE (once upon PURCHASE [at the time of issuance] and upon NEGOTIATION [in the presence of the payee before it is paid]) 4. 5.

What if it indicates the fund from which reimbursement is to be made after payment? Negotiable What if it includes a statement which gave rise to the transaction and the statement is long? I promise to pay to the order of Juan de la Cruz the amount of P500 K with interest of 12% per annum on or before Dec. 31 2011. This promissory note is issued in payment of the purchase price of a vehicle Negotiable Payable before the death of A Non negotiable because it is not certain After the death of A Negotiable

MEMORANDUM check CROSSED check There are 2 PARALLEL LINES on the left hand corner of the check, which MEANS that: 1) It is only for DEPOSIT, it cannot be encashed; 2) It can be NEGOTIATED only ONCE in favor of one who has an account with the bank; 3) It serves as a WARNING that the check was issued for SPECIFIC PURPOSES and the holder must acquire that check consistent with those purposes, otherwise he will not qualify as a holder in due course

The holder in due course acquires title to instrument free from all personal defenses, like lack of consideration or failure of consideration. The SC said that would change if the check is

Pay a sum of money or to pay taxes: I promise to pay to the order of Juan de la Cruz the amount of

!3

P100 K or to pay his taxes Non-negotiable

check is of legal tender. Cashiers check and managers check are the same in terms of being a check issued by the bank against itself. The only difference is that a cashiers check is issued by the cashier of the branch against the bank itself, while managers check is issued by the manager against the bank itself. What do you mean by a check issued by the bank against itself? It may be the drawer and the drawee are both the bank. In an ordinary check there are three parties: the drawer, the drawee, and the payee. In an ordinary check the drawer is always the bank. The drawer may either be a natural or juridical person. If the drawer and the drawee are one, it means it is just like a promissory note. So the bank is ordering itself to pay somebody. That is why in many cases SC said it is good as cash, because the bank has presumably the assets to back up that the check that it issued. Survey of cases on cashiers check ending with the 2009 decision: New Pacific Timber vs Seneris 101 SCRA (1980) A compromise agreement was entered into by the plaintiff and the defendant. Under the terms of the agreement the defendant agreed to pay the plaintiff. The compromise agreement was submitted by the court for approval and that rendered judgment on the basis of the compromise agreement. Unfortunately, the defendant, judgment debtor, breached the terms of the compromise agreement. He did not pay the plaintiff as promised under the compromise agreement. So the plaintiff, the judgment creditor, moved for the issuance of writ of execution (a judgment based on a compromise agreement is immediately executory. In case of breach you can immediately move for an issuance of a writ of execution). It was granted by the court. The judgment creditor levied on the properties of the judgment debtor and set the date of sale. But before the sale of the levied personal properties, the judgment debtor tendered payment in the form of a cash and check drawn against Equitable Bank. The sheriff consulted the lawyer of the judgment creditor. The lawyer said that a cashiers check is not good as cash so dont accept it. It has to be cash so continue with the auction sale. So the sheriff conducted the auction sale.

What will make it negotiable? It should be at the option of the holder Payable on demand at the option of the maker Non-negotiable Payable on demand at the option of the holder Negotiable Payable on demand. Silent as to whose option Negotiable December 31 ___ I promise to pay to the order of Juan de la Cruz the amount of P100K on December 31 ____. Non-negotiable What is the FICTITIOUS-PAYEE rule? The instrument is payable to bearer when it is payable to the order of a fictitious person or non-existing person and such fact was known to the person making it so payable (Sec 9c). It says there that payable to a fictitious person or NON-EXISTING person. That is considered payable to bearer. Can you have an instrument payable to bearer if the person really exists? If the payee really exists can it still be covered by the fictitious payee rule and therefore payable to bearer? This is very important specially if it is a check which is payable to order of a person who really exists because if it is payable to order it requires the indorsement of the payee or indorsee to transfer title. But if it is covered by the fictitious-payee rule that means it can be negotiated by mere delivery because it is considered a bearer instrument.

Can you have a fictitious-payee if the person really exists? Yes as held in the case of PNB vs Spouses Rodriguez, and that is, if the maker DID NOT INTEND him to be the real payee of the instrument. NIL_1b Test of Negotiability Negotiability cannot be determined by agreement except between the parties. But that arrangement does not bind 3rd persons. Negotiable instrument serves as: 1. Substitute for money 2. Medium for commercial transaction 3. An instrument of credit First Function: Substitute for money You could use a check in the payment of an obligation and the creditor, if he accepts the check, we can therefore consider the check as same as money. Any action to collect should be held in abeyance until the check is dishonored. But is check good as cash? We simply said that an instrument may be a substitute for money but a check is not necessarily money, with the exception of cashiers check or managers check. There are conflicting decisions on whether or not cashiers

The judgment debtor took the case all the way to the SC arguing that the sheriff should not have proceeded with the sale because the tender of a cashiers check is payment in cash. HELD: A cashiers check issued by a bank of good standing is good as cash. This means that for as long as the bank is operating in good condition, not insolvent, not closed, not distressed. PAL vs CA (1990) A check was issued in favor of judgment creditor covering a judgment debt. Unfortunately, it was supposedly for the creditor but made payable to the sheriff for the account of the judgment creditor. The sheriff instead of giving the payment to the judgment creditor pocketed the money. ISSUE: Whether or not the issuance of a check payable to the sheriff for the account of the judgment creditor is good as cash. Did it extinguish the obligation of the judgment debtor?

!4

HELD: The majority (CJ Narvasa dissented) of the SC held a check whether ordinary check or cashiers check is not legal tender. It does not produce the effect of cash.

A cashiers check simply proves the affirmative capacity of the obligor to pay, because you buy/purchase a cashiers check from a bank. You dont issue a cashiers check. It only proves that the obligor/buyer has the affirmative capacity to pay but the check is not legal tender. The SC reiterated its ruling PAL vs CA in the case of Roman Catholic Church vs CA. Tibajia vs CA, 223 SCRA This has the same facts as in the case of New Pacific Timbers vs Seneris, except for the parties. A cashiers check was tendered in payment of a debt, but the SC ruled otherwise. HELD: SC held that cashiers check is not legal tender without saying that the ruling in new Pacific Timber vs Seneris is abrogated. Tan vs CA, 239 SCRA(1994) A cashiers check was purchased from Puerto Prinsesa Branch of PCI Bank. The cashiers check was brought to Manila deposited in an account with RCBC Manila. The depositor accomplished a deposit slip for local check not a deposit slip for regional check. A check bought from a provincial bank is a provincial check as a distinguished from a check drawn from a Metro Manila branch which is a local check. If it is provincial check you must accomplish a deposit slip for regional check. If it is local check accomplish a check for local check. As a consequence the local check which was deposited for his account was misrouted. It was not credited to his account. So when he issued a check in payment of an obligation thinking that the cashiers check purchased had been credited to his account, the checks were dishonored. He sued the bank for damages.

Is the drawee bank liable for allowing the encashment despite the stop payment order? HELD: The rural bank is not liable because a managers check payable to cash is good as cash. Another thing we learned from this case is that a managers check or cashier is not subject to stop payment. The buyer cannot ask the bank for a stop payment order. Who can issue a stop payment order? It is the drawer only. In a cashiers check or managers check the drawer is the bank, so only the bank can issue a stop payment against itself, not the purchaser. The only exception, the only time when a managers check or a cashiers check may be subject to a stop payment order - In the case of People vs Misina that is if the cashiers check was lost. In that case the purchaser issued the stop payment order to the bank. Given all these rulings, what is the better view? When you become lawyers it depends on what side you would argue. But technically: Under Sec 60 of RA 7653, Central Bank Act of 1990 provides that the debtor cannot compel the creditor to accept a check in payment of a debt. If the debtor cannot compel the creditor to accept a check in payment of a debt it means it is not legal tender, because legal tender is a currency which the debtor may compel the creditor to accept when tendered in the right amount. The law makes no distinction between ordinary checks and cashiers check. If the law makes no distinction, why should we distinguish?

Under Art 1249 of the NCC a check and other mercantile documents do not produce the effect of payment until encashed or when through the fault of the creditor they have been impaired.

HELD: If there is any mistake, it is the obligation of the bank to call the attention of the client. In the commercial world/parlance, the cashiers check is good as cash and therefore that cashiers check should have been given outright credit regardless of the kind of deposit slip signed or accomplished by the client. Pabugais vs Sahijiwani (2004) A cashiers check is not legal tender. However, if the creditor accepts without objection it becomes legal tender by estoppel. In other words, the creditor has the option to refuse to accept the cashiers check because it is not legal tender but once he accepts it becomes legal tender. Security Bank and Trust Company vs Rizal Commercial Banking Corporation (2009) SC held it was legal tender Managers check was made payable to cash and there was a stop payment order made by the purchaser, because the one who intended to encash the check was not the intended payee. Despite the stop payment order the drawee bank allowed the encashment.

Therefore the creditor should be given the discretion not to accept or to accept it. But if he accepts then it becomes legal tender by estoppel following the ruling in Pabugais vs Sajihiwani. 2nd Function: Medium or instrument of credit transaction What does medium of obtaining or extending credit mean? Lets say you need to raise funds, you can issue bonds to the public. In our discussion in banking and quasi banking, an entity may issue debt instruments with recourse. So these are not deposits instruments but instruments as alternative to deposits like bonds and commercial papers. Lets say ABC Co. needs funding or money but it does not want to go to the bank, because it is expensive and the banks requires mortgage on properties or collaterals. So instead of going to the bank the company just issues bonds to the public. So the bonds now are used as an instrument of credit to obtain funds from the public. FEATURES of Negotiable Instruments 1. Negotiability the capability to be transferred from one person to another

2.

Accumulation of secondary contracts

!5

if the instrument is negotiated you get secondary contract I.e. Promissory not from M to P, that is one contract. If P negotiated to A, that is another contract.A to B, another contract.

As held in GSIS vs CA

3 KINDS of Negotiable Instruments under Negotiable Instruments Law 1) Promissory Notes 2) Bill of Exchange 3) Checks There are various TYPES of PROMISSORY NOTES Bonds Commercial papers Certificates of Deposit Caltex vs IAC, where despite the phraseology of the instruments the SC still considered it a negotiable instrument. Certificates of Deposit when it conforms to the elements of negotiability may be considered a negotiable instrument it falls under the specie of promissory notes a promise to pay by the company that issued it. BILLS OF EXCHANGE Drafts The beneficiary of an LC may issue a draft against the issuing bank or confirming bank as a mode of payment.

Postal Money Order As held in Phil. Education Co. vs Soriano, because there are many restrictions which make them incompatible with concepts of a negotiable instruments. And besides, when the government engages in postal service it is not engaged in a proprietary function but a governmental function.

I.e. Post Office of Manila will instruct Post Office of Dapitan, Zamboanga to pay to the order of the holder. Treasury Warrants As held in Metrobank vs CA, because treasury warrants require appropriations from the national government which means the funds may or may not exist. It is payable out or a particular fund which means the promise to pay is unconditional.

Stock Certificates There is no payment of sum of money. It is simply an acknowledgement by the corporation that the person named therein owns X number of shares. It is considered quasi-negotiable because it can only be transferred by indorsement plus delivery.

Withdrawal slips

2 KINDS: 1) Sight drafts payable on demand 2) Usance drafts payable after sight, 60 days after sight payable to the order of Juan de la Cruz the amount of P100 K which means that the maturity of the instrument is fixed only upon acceptance of the drawee.

Firestone vs CA. Usually you issue a check in payment of an obligation. Drawer has an account with the drawee bank. The drawer will issue a check to its creditor in payment of an obligation. That check will be presented to the drawee bank. That is how it goes. Typical ordinary check transaction: Drawer issue a check payable to the order of payee drawn against the bank. The payee has two options, either to encash to the drawee bank or deposit the check to his bank, which is called the collecting or presenting bank, who will collect from the drawee bank. Collecting bank will send the check for clearing through Philippine Clearing House Corporation. If the check clears (meaning that if the check is not returned) then the account of the collecting bank will be credited and account of drawee bank will be debited and the collecting bank can now credit it to the account of P and the Drawee bank will debit the account of the drawer. Supposing D instead of issuing check to P issued withdrawal slips. Withdrawal slips will be deposited to his collecting bank. The collecting bank will send it to the drawee bank. Drawee bank clears. Are they negotiable? Supposing one of those withdrawal slips was dishonored by the drawee bank. Is the drawee bank required to send notice of dishonor to the parties? No. SC said withdrawal slips are not negotiable instruments. So the obligation of giving notice of dishonor to the drawer, indorser in nego does not apply despite the fact that withdrawal slips are treated like checks.

After sight payable to the order of so and so That means you have to present the instrument for the acceptance of the drawee. If the drawee accepts then that is the only time that you can fix the maturity of the instrument Traders Acceptance It is a draft drawn by seller against the buyer. Pay to the order of myself the amount of P100 K on or before this day. Drawn against the buyer. If the buyer accepts that means he is liable.

What is so special about this? What the payee or the seller can do is to negotiate the trade acceptance in favor of a bank. Example: Coca-Cola (buyer) buys sugar from Central Azucarrera (seller). So the seller will issue a draft against the buyer, pay to the order of myself. If the buyer accepts it is already liable. So what payee-seller will do is to negotiate the draft/trade acceptance in favor of a bank. Since it was already accepted by Coca-Cola presumably with plenty of resources being the top corporation in the Philippines, the bank will buy it from the seller. Instrument considered NON-NEGOTIABLE Warehouse Receipts It does not represent an unconditional promise or order to pay a sum certain in money. It is a promise to deliver goods not to pay money.

Real Estate Mortgage

TITLE I Negotiable Instrument in General CHAPTER I Form and Interpretation ELEMENTS

!6


1.

must be in WRITING You can use any kind of instrument as long as the promise or order is in writing. You can use ball pen, pencil.

Example: Maker has to say payable in 2 installments. First one payable on this date, second one due on this date c) With acceleration clause Meaning default of one installment renders the entire obligation due and demandable. d) With rate of exchange Example: Dollars computed in Philippine Currency at prevailing rate of exchange, because you know the prevailing rate of exchange is provided for by BSP. It is not something which is uncertain because there is a way of determining. e) With cost of collection or an attorneys fees If the cost of collection or attorneys fees are to be determined after the maturity of the instrument. The law says it will not affect the negotiability. It is still a sum certain because by that time the instrument ceases to be negotiable in its commercial sense. If the attorneys fees are payable at the outset and does not contain any amount like reasonable attorneys fees then it is not sum certain. If it is payable before the maturity, then the cost of collection or attorneys fees must be clear as to amount. Otherwise, it is not a sum certain within the meaning of the Negotiable Instruments Law If it is after maturity, reasonable attorneys fees it is considered something which will not affect the certainty of the sum payable. Reasonable attorneys fee is something which will not affect the certainty of the sum payable, because the court anyway will fix it. If the cost of collection or attorneys fee is payable after maturity, even though the instrument will just say plus cost of collection and attorneys fees silent as to amount, it will not affect the certainty of the sum payable because the court will be the one to fix it.

Lets say you are in a restaurant, you got a napkin, you forgot your money, you can issue a promissory note in that napkin to the waiter or to the owner of the bar. I promise to pay to the order of the owner the sum of so much, on or before this day and this was signed voluntarily, not under the influence of liquor. 2) SIGNED by the maker or drawer Where should the maker or drawer sign? In the instrument. Usually at the right hand corner, below. If the signature is placed elsewhere, not in the customary place? As long as he intends to be bound as a drawer or maker 3) Must contain an UNCONDITIONAL PROMISE or ORDER TO PAY When you say unconditional we follow the same test of condition under the Civil Code, which means that it does not depend upon the happening of a future and uncertain event. It must not depend upon a contingent event. Examples: I promise to pay to the order of Juan de la Cruz if I pass the Bar Examination; flat 1 in special commercial law or mercantile law review. The happening of the event does cure the defect. It does not make the instrument negotiable. Of course, when we say unconditional promise or order is not subject to any condition EXCEPT the implied conditions under the Negotiable Instruments Law. What are the IMPLIED CONDITIONS? 1. To make the drawer and the indorser liable you have to present the instrument for payment; and 2. The maker or the drawee should dishonor. 3. If it is dishonored you should give notice to the drawer or the indorser. Otherwise they are not liable. Is it necessary to use the word I promise all the time? Words of similar import are acceptable like I bind myself to pay, I guarantee to pay. In the case Traders Royal Bank vs CA The SC said that a mere acknowledgment of a debt is not a promise to pay therefore it is not a negotiable instrument. 4) SUM CERTAIN in money Sum payable is determined from the face of the instrument without making any reference from the any document or instrument. On the very face of the instrument one should know how much exactly is the obligation to be paid. Sec 2. The sum payable is sum certain within the meaning of this Act, although it is to be paid is - b) With stated installments. Stated installments means that the due date of the installment payments must be indicated.

a) With interest The sum is certain because the presumption of the law comes in, and that is, the legal rate of interest. It doesnt matter also if there are 2 options of legal rate (6 or 12) because the law applies. The legal rate is fixed by law 6% if the obligation does not to pertain loan, forbearance of money, goods or credit. It is 12% if it pertains to a loan, forbearance of money, goods or credit.

Sec 3 What if it indicates a fund to be reimbursed or a fund to be debited after payment, like pay to the order of Juan de la Cruz the amount of so much and thereafter debit the account or reimburse yourself from the account of Pedro Reyes in Equitable PCI Bank or Banco de Oro? The order or promise to pay is unconditional within the meaning the law though coupled with an indication of a particular fund out of which reimbursement is to be made, or a particular account to be debited with the amount. This is because the debiting comes after the payment.

But, if its payable out of a particular fund, like a treasury warrant, the instrument is non-negotiable because the order or promise to pay is no longer unconditional. The fund may or may not exist. 4) Payable on DEMAND Sec 7

!7

When is the instrument payable on demand? 1. where it is expressed to be payable on demand, or at sight, or on presentation; or 2. where no time of payment is expressed; or 3. if issued, accepted, or indorsed when overdue, it is considered payable on demand as regards the person so issuing, accepting, or indorsing it

so payable i.e. pay to the order of King Neptune, pay to the order of Superman.

d.

when the name of the payee does not purport to be the name of any person, like an instrument payable to Cash

5) Payable at a FIXED or DETERMINABLE FUTURE time Sec 4 If the instrument is expressed to be payable a. at FIXED period AFTER date or sight b. ON or BEFORE a fixed or determinable future time specified therein

In the US it is possible that you have a person with the name of Mr. Cash. But, in the Philippines when you say payable to cash it is payable to bearer. The reason is that it does not purport to be the name of any person. What if in the Philippines you have a person with the name of Mr. Cash? Is that still payable to Bearer? Is that still covered by the fictitiouspayee rule? That is the ruling in the case of Spouses Rodriguez vs PNB 566 SCRA So even if the person really exists as long as the maker or the drawer did not intend him to be the payee of the instrument, that is still considered to be payable to bearer. Lets say you have an instrument payable to the order of Juan de la Cruz. Juan de la Cruz really exists, but the drawer did not intend him to be the payee. Then Juan de la Cruz went to the Bank. Can the bank allow the encashment? Can the drawer say you should not have allowed him because he did not sign at the back? Not necessarily, because if it is payable to the order of a person although existing but not intended by the maker or the drawer to be the payee it is considered payable to bearer. An instrument payable to bearer can be negotiated without indorsement

c.

6.

ON or AT a fixed period AFTER the occurrence of a specified event, which is certain to happen although the time of the happening is uncertain

It is not on or before the occurrence of a specified event which is certain to happen In our example earlier it is payable before the death of A. This is not negotiable because we do not know when A will die. If it is payable after the death of A, then it is negotiable because it is certain to happen. Payable to ORDER or BEARER

Sec 8 When is an instrument considered payable to ORDER? Where the instrument is drawn payable to the order of a specified person or to him or his order, like pay to the order of Juan de la Cruz; or Payable to him or to his order, like Juan or order

Can it be payable to the order of the maker or drawer, meaning the drawer is also the payee? Bank of America vs CA. The draft issued by Inter Resin, the drawer is also the payee. This is possible because the Sec 8(b) says so. What about an instrument payable to two or more persons jointly like, Pay to order of A and B? This is allowed under Sec 8 (c). What if the instrument is payable to order of A and B? Both of them signed at the back; you have a check payable to order of A and B both of them signed at the back of the check. A alone went to the bank. Can the bank allow the encashment even though B was not around? Yes, because the last indorsement is in blank. It is a blank indorsement which converts the order instrument into a bearer instrument. So anyone in possession may actually encash it.

3.

e.

when the only or last indorsement is an indorsement in blank

NIL_2

Sec 9 It is very important to determine when an instrument is considered payable to bearer, because if it is payable to bearer it can be negotiated by mere delivery, unlike an order instrument which cannot be negotiated by mere delivery, but requires the indorsement plus delivery. When is an instrument payable to BEARER? When - 1. EXPRESSED to be so payable 2. payable to a person NAMED therein OR BEARER - like Payable to Juan or bearer payable to the ORDER of a FICTITIOUS or NON-EXISTING PERSON, and such FACT was KNOWN to the person making it so payable - Like Payable to the order of King Neptune; or Superman, Catwoman

So A alone can go to the bank and encash it because by that time by virtue of the indorsement at the back, by virtue of the signature at the back it becomes now payable to bearer under Sec 9, when the only and last indorsement is in blank. Sec 9 Payable to BEARER a. expressed to be so payable, like pay to bearer b. payable to a person named therein or bearer, like pay to Juan or bearer c. payable to the order of a fictitious person or non-existing person and such fact was known to the person making it

4.

5.

name of the PAYEE does NOT purport to be the NAME of any PERSON - Like Pay to Cash ONLY or LAST INDORSEMENT is an indorsement IN BLANK 3. i.e. I promise to pay to the order of Juan de la Cruz. Juan de la Cruz indorsed, lets say Pay to Pedro Reyes and then signed, that is a special indorsement.

!8

But, if Juan de la Cruz simply affixed his signature in the instrument, then that is considered as payable to bearer the only indorsement is in blank.

apply is Sec 23, the rule on forgery. So FORGERY is not limited to the counterfeit-making of signature, it also includes a situation where the signature is genuine but given for the purpose other than to be bound by the instrument, in this case, for autograph purposes. A signature on a negotiable instrument without any other particulars operates as a PRIMA FACIE authority on the part of the HOLDER to fill it up. In other words, if there is a signature on a negotiable instrument given for the purpose of giving effect to that instrument and all the rest are blank then the one in possession, the payee, has the prima facie authority to fill it up. So it can be the amount, date, the interest rate, place of payment. So he has the prima facie authority to fill up the blanks. It is incumbent upon the maker or drawer to prove that the payee filled up the instrument not in accordance with the authority given by the drawer and within a reasonable time. If he failed to overcome the presumption then the prima facie authority obviously stands. So the maker or drawer is liable as filled up, as completed. But, that is only prima facie between the maker or the drawer and payee. However, if the instrument is negotiated after completion to a holder in due course (HDC), there is now CONCLUSIVE presumption that the instrument was filled up in accordance with the instruction of the maker or drawer and within a reasonable time. So that prima facie presumption in the hands of the payee, when negotiated to a holder under the conditions making the holder a HDC, the presumption becomes conclusive, that the instrument was filled up in accordance with the instructions of the maker or drawer and within reasonable time. That means that insofar as the HDC is concerned, he can enforce the instrument as filled, as completed. And that presumption of authority cannot be overcome by any evidence to the contrary. So that is the beauty of being a holder in due course.

Fictitious-Payee Rule As held in PNB vs Rodriguez, the instrument is payable to bearer even though the person really exists. The fictitious-payee rule does not only cover a fictitious-payee or a non-existing person. It also includes an existing person as long as it is not intended to be a payee of the instrument. The maker or drawer did not intend him to be the payee of the instrument. That is considered payable to bearer. However, the fictitious-payee rule is subject to an exception, that is, the COMMERCIAL BAD FAITH exception. If there is bad faith on the part of the drawee-bank, that will not be covered by the so called fictitious-payee rule.

Example: You have a check payable to the order of Juan de la Cruz and there is a person with the name of Juan de la Cruz. So the maker, however, did not intend him to be the payee of the check. That is considered payable to bearer. It does not require therefore the indorsement of the payee before he can transfer title. However, if there is bad faith on the part of the drawee bank, then this commercial bad faith exception would make the instrument no longer payable to bearer but payable to order. So in this case it will require the indorsement of the payee or indorsee.

30% of the questions in Nego are based on abnormal instruments.

What are the 5 ABNORMAL INSTRUMENTS under Negotiable Instruments Law 1. Incomplete but delivered (Sec 14) 2. Incomplete and undelivered (Sec 15) 3. Complete but undelivered (Sec 16) 4. Forged signature or made without authority (Sec 23) 5. Material Alteration (Sec 124) Sec 14 What is the rule on INCOMPLETE but DELIVERED 1. The SIGNATURE of the maker or drawer has to be GENUINE; and 2. Given for the PURPOSE of GIVING EFFECT to a negotiable instrument 1st requirement: If the SIGNATURE is NOT GENUINE then you apply the rule on forgery under Sec 23. 2nd requirement: It is given for the purpose of giving effect on the negotiable instrument. If the signature is given for autograph purposes, that may be genuine. But is that covered by the rule on incomplete but delivered?

So this kind of infirmity, INCOMPELETE but DELIVERED does NOT AFFECT the rights of a HDC. Example: M signed on a negotiable instrument, intended for the P but the amount left in blank. P has the prima facie authority to fill it up. So P filled it up for P100K. Lets say that P was only authorized only up to P10K. In favor of P there is a prima facie presumption that the instrument is payable for P100K. It is incumbent upon M to prove that authority accorded by M is not P100K. That is the price he should pay for simply affixing his signature on the instrument without completing all the material particulars.

Example: You are a fan of Lady Gaga and you watched her concert. After the concert you got her signature. Lady Gaga obliged. Then you made a promissory note under that signature, I, Lady Gaga, promise to pay to the order of Bruno Mars. Signed Lady Gaga. Is that covered by the rule on incomplete but delivered? It is not. The signature may have been genuine but is not given for the purpose of giving effect to the instrument. The section to

Lets say P negotiates in favor of X, under conditions making X a HDC. For how much can X enforce the instrument against the maker? As completed, as filled up for P100K. So from a mere prima facie presumption from the payee, when it goes to the HDC after completion it is now conclusive. No way can M disprove that the amount is for P100K.

!9

If the maker dishonors, how much is P liable to X? Also for P100K, because under Sec 65 under NIL he warrants that the instrument is genuine and in all respects what it purports to be.

any holder only against a party prior to completion and delivery. Since P is a party after such completion and delivery therefore he is not covered by that rule. So he is liable as an indorser under Sec 65, he warrants that the instrument is genuine and in all respects what it purports to be.

Sec 124 How do you distinguish Sec 14 from this one M issued a promissory note payable to order of P for P10K. Everything complete for P10K. Now P ALTERED it to P100K. How much is M liable to P? The law says in cases of material alteration, the one who altered it cannot enforce it. It is AVOIDED insofar as he is concerned. However, if it is negotiated to A, a holder under the conditions making the holder a HDC, how much can A enforce the instrument against M? Under Sec 124 of the NIL A may enforce the instrument for P10K, only in accordance with the original tenor of the instrument. So as distinguished from Sec 14 where the HDC can enforce the instrument as completed, as filled up, for material alteration the law says (Sec 124), the HDC can only enforce it in accordance with the original tenor of the instrument which is P10K. If M dishonors for how much is P liable to A? For P100K because, again, as indorser he warrants that the instrument is genuine and in all respects what it purports to be. Sec 15 INCOMPLETE and UNDELIVERED If the instrument is incomplete and undelivered the PAYEE CANNOT ENFORCE it against the maker or drawer. And if it is negotiated in favor of a HDC, the law says that kind of instrument (incomplete and undelivered) is NOT a VALID contract in the hands of ANY HOLDER only against a PARTY PRIOR to its completion and delivery. Example: M signed a promissory note but left the amount in blank intended for P, the payee. M left the promissory note on top of his table, left his office. P was able to obtain possession of that promissory note. Can P enforce that promissory note against the Maker? NO, because it is both incomplete and undelivered. So there is no prima facie presumption or authority in favor of the payee because the instrument is both incomplete and undelivered. The prima facie authority applies only to incomplete but delivered instruments, but not in incomplete and undelivered. Supposing P completes the instrument, filled up the amount and then negotiated the instrument to A under conditions making A a HDC. Can A enforce the instrument against M, the maker? Law says no, because an incomplete and undelivered instrument is not a valid contract in the hands of any holder. So whether or not he is a HD, it does not really matter if it is incomplete and undelivered. It becomes a defense available even against a holder in due course. Can A, the HDC, enforce instrument against P, the one who enforced or negotiated it? Yes because the law say it is not a valid contract in the hands of

So if it is Sec 14, Incomplete but delivered, it is only a personal defense, not available against a holder in due course. Material alteration (Sec 124) is partly real, partly personal, in the sense that if the instrument is enforced beyond the original tenor, it is a real defense. But, to the extent the instrument is being enforced only according to its original tenor, it is only a personal defense not available against the holder in due course. If it is Sec 15, Incomplete and undelivered, it is a real defense available even against a HDC. Sec 16 COMPLETE but UNDELIVERED The maker or drawer may sign an instrument, a promissory note, or check for that matter, it may be complete in all material particulars but unless he delivers it then that contract is revocable. That means it can be withdrawn at anytime. So no right can be given in favor of the intended payee. However, the law says if the instrument which is complete is in the hands of the payee there is a prima facie presumption of valid and intentional delivery. But that is only prima facie in favor of the payee or any immediate party. When we say immediate party it means one who knows the limitations of the instrument. If the payee, however, negotiates to a holder under the conditions making a holder a HDC there is now a conclusive presumption of a valid and intentional delivery for the purpose of giving effect to the instrument.

Similarly, it can be established also by the maker and the drawer, as the case maybe, that instrument was delivered for a specific purpose, like for safe-keeping or custodianship. So there can be limitations or conditions placed on the delivery. Take note that the limitations or conditions are not on the promise or order to pay; otherwise it is not a negotiable instrument. The limitations or conditions are placed on the delivery, like deliver to P only for sake-keeping, or deliver to P but not to be enforced against M. All the limitations or conditions do not exist on a prima facie basis insofar as the payee is concerned. One who is in possession, the presumption is, although prima facie, there is valid and intentional delivery and there are no conditions in the delivery. It is now incumbent upon the maker or drawer to prove that there are conditions or limitations to the delivery. If the instrument is delivered in the hands of the HDC those limitations, those conditions on delivery do not apply, because in the hands of a HDC it is not just a prima facie presumption but a conclusive presumption of valid and intentional delivery to make all prior parties liable to him. Example: M made a promissory note, complete in all material particulars. He placed it on top of his table, not for delivery to the intended payee, but the payee got hold of it. In the favor of the payee is a presumption that there was valid

!10

delivery. P, on a prima facie basis, can enforce the instrument against M.

It is incumbent upon M to prove that there was no valid delivery.

OR lets say M made a promissory note complete in all material particular but only for safe-keeping, therefore not to be enforced. But again, because there is a prima facie presumption in favor of P, it is incumbent upon the maker or drawer to prove that it is only for safe-keeping. But if the instrument is negotiated to A, a HDC, then the HDC can enforce the instrument against M despite the fact that it is only for safe-keeping, despite the fact that it should not be delivered to the payee, because of the conclusive presumption in favor of the HDC to make all prior parties liable on the instrument. Regarding CHECKS there are conflicting decisions.

What is the LONG ROUTE or CIRCUITOUS ROUTE? Circuitous route was applied in cases of: Banco de Oro vs Equitable Bank 157 SCRA China Bank vs CA 182 SCRA Associated Bank vs CA 25 SCRA

In a check transaction, there are 3 parties the drawer, payee, and the drawee. Supposing the D (drawer) filled up a check complete in all material particulars in payment of the services that P (payee) rendered to D, But D did not deliver it to P. It was drawn against the ABC (drawee bank). For whatever reason the check did not end up to P, but instead deposited in the account of X, with XYZ bank. XYZ bank sent the check for clearing, with the drawee. The check clears. So the clearing account of XYZ was credited, and the clearing account of the drawee bank was debited. So XYZ credits to X, and drawee debits D. Take note that the check is payable to Ps order and therefore it could not transfer title without his indorsement plus delivery. It could not have been transferred in favor of X, because it was without Ps indorsement or delivery or both. But X was able to deposit it to XYZ and XYZ credited it to the account of X. Does P have a cause of action against all of the parties, especially against the collecting bank? There are 2 conflicting SC decisions; 2 conflicting schools of thought: DBP of Rizal vs Sim Wei 219 SCRA Westmont Bank vs Ong, 375 SCRA DBP of Rizal vs Sim Wei 219 SCRA The SC said that the payee has ho cause of action against the collecting bank because there is no delivery to him. Since there is no delivery he does not acquire title to the instrument. If he has no title to the instrument he has no cause of action arising from that particular instrument. 1. 2.

Lets say D is issued a check payable to the order of P in payment for legal services. It was handed over to X the messenger of P. (As you know lawyers dont go to the clients to get their check. Instead, they sent their messengers. So the messenger is sent there and the messenger should be familiar with the signature of his boss). Suppose X, the messenger of P, forged Ps signature and then deposited it to his account with XYZ Bank. XYZ is called the collecting bank or the presenting bank because it collects the proceeds of the check from the drawee-bank through the Philippine Clearing House Corp. (PCHC), and after collecting the proceeds credits the account of the depositor. All banks have clearing accounts with PCHC. The members, which are banks, of PCHC have clearing accounts. PCHC is not BSP. It is not controlled by BSP. It is a private corporation. The members are banks. So the checks are cleared through the PCHC. So every morning or afternoon, as the case maybe, messengers go to the PCHC to pick up the checks drawn against the respective branches. That check will be presented to the drawee and the drawee now will examine if it is genuine, if it is ok.

Take note in this case that the drawee has no way of determining the forgery of the payees indorsement, because the payee does not have an account with the drawee. The one who has an account with the drawee is the drawer, but not the payee. Thats why in case of forgery of the Payees indorsement the drawee will not be able to return the check right away. It will take a while before he can discover the forgery and return it. In this case the check was sent for clearing, if the check clears, that means the clearing account of the collecting bank will be credited and the account of the drawee-bank is debited. If the account the drawee-bank is debited, drawee bank will debit the account of the drawer and the collecting bank will credit the account of the depositor X. Under the circuitous route P has to proceed against the drawer, because the check does not produce the effect of payment until encashed. What about the DRAWER? The drawer can proceed against the drawee, because the instruction of the drawer to the drawee is to pay to the order of P, not to any person who acquires title by virtue of Ps indorsement. That instruction was contravened. That instruction was breached. Therefore the drawer has the right to seek reimbursement from the drawee. What about the DRAWEE? The drawee can proceed against the collecting bank, because when the collecting bank sent the check for clearing it assumes all the warranties of an indorser under the NIL. That means the instrument is genuine, and in all respects what it purports to be. That warranties, obviously, has been breached because of the forgery of Ps indorsment. Since there is a breach of warranty then collecting bank is liable to reimburse the drawee-bank the amount of the check.

Westmont Bank vs Ong, 375 SCRA The SC said that the payee may proceed directly against the collecting bank because in case of forged indorsement or no indorsement, like in this case, then the payee may proceed directly against the collecting bank under the so called, SHORT-CUT ROUTE of determining the chain of liability for forgery of the payees indorsement. There are 2 ROUTES in determining the chain of liability in case of forgery of the payees indorsement: 1. Circuitous and 2. Short-cut

In fact when a check is sent for clearing there is a stamp mark

!11

which says, All prior indorsement and/or lack of indorsement guaranteed. It is the duty of the collecting bank to stamp mark the check with all prior indorsement and/or lack of indorsement guaranteed, at the back of the check. That means all the warranties of an indorser under Sec 65. In fact there is one case where the SC said that the mere act of sending the check for clearing already amounts to indorsment. And an indorsement carries with it all the warranties of an indorser under the NIL.

autograph purposes. The signature may be genuine but it is covered by the rule on forgery because it was not given for the purpose of being bound on the instrument.

What about the collecting bank? If X still has an account with the collecting bank, then the collecting bank may debit the account of the depositor, as held in the case of Jai-Alai vs BPI 66 SCRA, even without the consent of the depositor, because when the depositor makes a check deposit, he signs at the back of the check twice. That signature is tantamount to all the warranties of an indorser under the NIL. Because there is a breach of warranty, there being forgery, the collecting bank can debit the account of the depositor even without his consent.

What is the basic RULE on forgery? Lets simplify Sec 23 by simply saying that NO RIGHT can be acquired under a FORGED SIGNATURE or one made without authority. So by this statement we are clear that it is merely the signature which is inoperative. It is only the signature that has no effect, but not the instrument itself. So despite a forged signature certain rights may be acquired on that instrument even though it bears a forged signature of one of the parties to the transaction.

Example: P forged the drawers signature on a check. The check was supposedly drawn against ABC Bank, but the payee forged the drawers signature. Because the signature of the payee is forged, there is no order to pay given to the drawee. What if P, after forging the signature, negotiates the check in favor of A and under conditions making him a holder in due course? A goes to the drawee bank. The bank dishonors. The drawer is not liable because his signature is forged. What about P? He is liable, because his signature is genuine and he is liable as an indorser under the NIL. So he warrants that the instrument is genuine and in all respects what it purports to be. When the signature of the maker or the drawer is forged, then it is as if there is no promise to pay. What are the EXCEPTIONS, where a right may be acquired under a forged signature or one made without authority? The person against whom the instrument shall be enforced is barred or precluded from invoking the defense of forgery. What are the CASES or instances where a party is BARRED from invoking the defense of forgery? 1. T h o s e w h o b y t h e i r A C T I O N , O M I S S I O N , o r NEGLIGENCE are estopped from denying genuiness of the signature 2. Those who WARRANT the genuiness of the signature 3. If the forger is NOT NECESSARY to the TITLE of the holder

What about the forger, does he have a right? Of course. He has the right to love, the right to vote, the right to hear, to listen to lectures. But under the NIL, he has no right. What about SHORT-CUT ROUTE? This was applied in the cases of: Associated Bank vs CA (208 SCRA) Westmont Bank vs Ong (375 SCRA)

So short-cut route, SC said that lets cut chase, lets make it shorter. Who is the one liable ultimately in case of forged indorsement? The collecting bank. So why go to the circuitous route? Lets allow the payee to proceed directly against the collecting bank, because after all he has the last touch. He was the last one at fault. So the presumption is he was the one who caused all the problem. He has the obligation to ascertain that the genuiness of the indorsement. Failing which he is liable.

So the GENERAL RULE is that in case of forgery of the payees indorsement, whether circuitous route or short-cut route, the one liable is the collecting bank. NIL_3 1241 FORGERY What is FORGERY? Forgery is not limited to the counterfeit making of a signature. Forgery includes: counterfeit making of signature; or signature given without authority; or signature given for the purpose other than to be bound on the negotiable instrument The one which we are most familiar with is the counterfeit of the signature. When you say forged, that means that the signature is a fake. That is what we commonly associate forgery with. But as we said, it includes a signature given without authority. So if an agent signs in behalf of the principal without authority of the principal, then the effects are similar to forgery. And the 3rd one is that the signature may be genuine but given for the purpose other than to be bound on the negotiable instrument. The example given above is the signature given for

2.

Example: 1. M issues a promissory note to the order of P. P forged Ms signature and then negotiated to A. Then A to B. B goes to M. M dishonored because the signature is forged B can go against P or A because of their warranties as indorser. M issued a promissory note payable to the order of P. A forged Ps signature and made it payable to him.

So pay to A signed P. Ps indorsement was forged by A. After forging Ps indorsement, A negotiated to B. Then B to C. Can C enforce the promissory note against M? Is it an order instrument or bearer instrument? If it is a bearer instrument can C enforce payment of the promissory note to M? Can M reason that there is forgery of the instrument in this case? No, because the forgery is not necessary to the title of the

!12

holder. With or without the indorsement this instrument can be negotiated by mere delivery.

account. That is simple. Lets complicate it a little bit P instead of the going to bank over the counter deposited the check to his account with ABC. As we said last time, in this kind of transaction the bank that presents the check for clearing is called the presenting bank or colleting bank. Presenting bank because it presents the check to the drawee and at the same time a collecting bank because it is supposed to collect the check proceeds from the drawee. All banks, universal banks, commercial banks, thrift banks maintain a clearing account with the Philippine Clearing House Corporation. Now those banks without clearing accounts open accounts with those banks with clearing accounts. Example, a Rural Bank has no clearing facility. So a rural bank will have an account with Metrobank. Metrobank will be the one to send the check for clearing of all accounts drawn against Rural Bank. So it has a tie-up with a bank which has clearing facilities. Banks which are universal, commercial and thrift are required to have a clearing account with PCHC. All of them are considered members of PCHC. This is very important because in many cases the SC said that if it issues or executes rules or matters which concerns clearing items then the banks are bound by the rules issued by the PCHC. The 24 hour clearing rule, for instance is not a court mandated rule or legislation. It is a rule issued by PCHC but banks are bound because they are considered members-participants of the PCHC. When you become a member you adhere to the rules and regulations that PCHC will issue. Now the PCHC is not the BSP. It is not an agency of the BSP. It is not a government corporation. It is a private corporation that facilitates the clearing of checks. Everyday all banks send their messengers to PCHC. These messengers pick up the checks drawn against their respective branches and then they deliver the checks to their respective branches for the branch manager to see if the checks are genuine or not. So it is not a question of ABC Bank as the collecting bank asking the drawee-bank, Hey! There is a check being deposited with my account, can you please confirm if it is valid or not? Obviously, that kind of thinking will never work because there are many branches of banks in the country. So they just pick it up the checks at the PCHCdelivered to their respective branches for comparison, whether or not it is genuine or forged. If the signature is forged. P deposited the check with the collecting bank. The collecting bank sent the check to the draweebank through the PCHC. The drawee picks up the check from PCHC and the check goes back to the drawee. The drawee compares the signature of on the check with the signature of the drawer. The drawee must dishonor the check, because the drawee is supposed to know the signature of the drawer. So if there is an indication of forgery, it must right there and then dishonor. This is where the 24 HOUR RULE applies. Under the 24 HOUR RULE, in case of forgery of the signature the drawee must return the check to the collecting bank within 24 hours not within the following day.

What if it is an order instrument? Under Sec 30 an order instrument can be negotiated only by 2 steps indorsement plus delivery. So if the indorsement is forged then no title transferred in favor of the subsequent holder. But in this case, the forgery is not on the signature of the maker. The forgery is on the indorsement and the rule is that parties subsequent to the forgery cannot enforce the instrument against parties prior to the forgery. So virtue of the forgery the relationship between the parties prior to the forgery and after the forgery is cut-off. So the juridical tie is cut-off by virtue of the forged indorsement. So therefore can C enforce the instrument against M? No, because there was forged indorsement. Title cannot be transferred to AA to BB to C. Can C enforce the instrument against P, assuming M dishonors? No Can C enforce the instrument against A or B? Yes, because they are parties subsequent to the forgery. In drawing a check there are 3 parties the drawer, the drawee, and the payee. The difference between a check and a bill of exchange is that a check is drawn against the bank and payable on demand. Example: The signature of the drawer (D) is forged. P forged Ds signature. P has the option either to go to the drawee-bank and encash the check or to deposit the check to his account. Lets say P goes to the drawee-bank to encash the check over the counter. The drawee-bank is supposed to know the signature of the drawer. The drawer maintains an account with the drawee. When you open an account you are asked to give a specimen signature or a specimen signature card. And every time a check is drawn against your account the signature verifier or the cashier as the case may be compares the signature on the check and specimen signature of the signature card. It they dont match then the drawee must dishonor the check because of the forgery.

What if the drawee honors the check because the forgery was perfectly done? What are the rights of D? The SC held in many cases that the drawee has the obligation to restore the account of the drawer, because no right can be acquired from this forged signature. When will you know that the signature is forged? When you receive a statement of account, it contains all the checks that the drawer has supposedly issued. So when you maintain a checking account every month you receive a statement of account from the drawee-with the check stubs you have issued. So you have to compare, check each and every check that you have issued to recall if you indeed issued a check in favor of a particular person. So once you received the statement account, you noticed that it has been debited for so much cannot recall having issued such check in favor of somebody else. It was paid to the bank and the drawee-bank. So the drawee-bank has the obligation to restore the

What happens if the drawee did not return the check to the collecting bank? Under the PCHC rules the account of the drawee will be

!13

debited and the account of the collecting bank will be credited. So once the account of the collecting bank has been credited then the collecting bank can now credit the account of P. And the account of the drawer with the drawee-bank will be debited.

What if the signature of the drawer is genuine, and instead what is forged is the signature or indorsement of the payee? Example: D, drawer, issued a check in favor of P for payment of legal services. The check and the signature of the drawer are genuine. D handed over the check to X, messenger of D. X forged the signature of P and deposited the check in his account with ABC Bank. ABC Bank sent the check to the drawee-bank through the PCHC. Is the drawee-bank expected to return the check within 24 hours? No, because the payee does not have an account with the drawee bank, unlike in the first situation it is the signature of the drawer which was forged and the drawer maintains an account with the drawee. In case of forgery of the payees indorsement, the payee may not have an account with the drawee bank. So the drawee-bank has no way of ascertaining whether the signature of the payee is genuine or forged. So if the check is sent for clearing, in all likelihood, the account of the drawee-bank will be debited and the account of the collecting bank will be credited. So the collecting bank will now credit the account of the depositor-forger and the account of the drawer will be debited.

In fact there is one case where the SC held that the mere act of sending the check for clearing even without the stamp mark, all prior and/or lack of indorsment guaranteed, is tantamount to an indorsment. So therefore the collecting bank assumes all the warranties of an indorser. And since there is a forgery this case, it is deemed to have breached that warranty and therefore liable to reimburse the drawee-bank.

3.

The collecting bank has the right to debit the account of the depositor-forger, in the case of Jai-Alai vs BPI 66 SCRA, because when the depositor deposits a check to his account with the collecting bank he signs at the back of the check. That signature is tantamount to indorsement. So it goes with it the warranty that the instrument is genuine and in all respects what it purports to be. That was breached or violated; therefore the collecting bank can debit the account with or without his consent.

On the other hand, the SHORT-CUT route is based on this premise: The one who is ultimately liable is the collecting bank. He is the one who is supposed to ascertain the genuiness of the indorsement. So why go to the circuitous route, if you know anyway the party ultimately responsible. In the case of Associated Bank vs CA 208 SCRA the payee was allowed to proceed against the collecting bank because of the principle of quasi-delict, for negligence. But, in recent cases, Westmont Bank vs Ong in particular, it was not based on quasi-delict. It was based on the NIL. The collecting bank has the obligation to ascertain the genuiness of the indorsement. Failing which, it is liable. EXCEPTIONS There are parties who warrant the genuiness of the signature. So those who warrant the signature are precluded or are not allowed to invoke forgery. Who are these parties who are PRECLUDED from denying forgery by admitting the genuiness of the signature? 4. the ACCEPTOR 5. the INDORSER 3. Negligence INDORSER The indorser warrants that the instrument is genuine and in all respects what it purports to be. So when the indorser negotiates, he admits the signatures of the previous parties. ACCEPTOR Does the drawee admit the genuiness of the drawers signature? He does not. It is the acceptor that admits the genuiness of drawers signature. So if the drawee accepts the order to pay, that is tantamount to admitting that the signature of the drawer is genuine, otherwise he should not have accepted.

Once P starts complaining with the drawer, You havent paid me my attorneys fees. P starts to investigate and then realizes that his account has been debited and yet no payment has been made. What are the rights and obligations of the parties? There are 2 ways to determine the chain of liability - the circuitous route and the short-cut route. Whether circuitous route or the short-cut route, generally it is the INDORSER or collecting bank which bears the liability. So in case of forgery (this was asked twice in the bar already) of the payees indorsement it is the indorser that generally bears the liability. If it is under the CIRCUITOUS route, the explanation of the SC in the 2009 case of Bank of America the reasons are these: 1. With respect to the payee he has the right to seek for payment against the drawer, because insofar as he is concerned, the check does not have the effect of payment until encashed.

2.

3.

On the other hand the drawer may seek reimbursement from the drawee, because the instruction of the drawer to the drawee was contravened or violated. The drawer instructed the drawee to pay the payee or any person who acquires title by virtue of his indorsement. That was contravened or breached by the drawee-bank. So the drawee-bank is dutybound to reimburse the drawer. The drawee-bank has the right to proceed against the collecting bank because when the collecting-bank sent the check for clearing it assumes all the warranties of an indorser. The stamp mark, all prior and/or lack of indorsement guaranteed, that is tantamount to indorsement. And an indorsement carries with it all the warranties of a general indorser under Sec 65 of the NIL.

So the drawee is not liable unless and until he accepts the instrument. The liability of the drawee is premised on his acceptance. Being a mere drawee per se does not make him liable to the instrument. It is the act of acceptance that makes him liable on the negotiable instrument. If the drawee dishonors the check without valid reason, he is not liable under the NIL, meaning the payee cannot proceed

!14

against the drawee for the dishonor of the check. But the SC held, in so many cases, that the drawee, however, is liable to the drawer for breach of contract. So the drawer has funds with the drawee bank, the signature is genuine, but the drawee dishonors the check issued by the drawer, in so many cases, the SC said that the drawer can proceed against the drawee for breach of contract. But take note that under the NIL the drawee is not liable on the negotiable instruments unless and until the drawee accepts the same. Therefore can the payee file a case against the drawee bank for dishonoring the check or the instrument? No. The cause of action pertains to the drawer. The drawer can proceed against the drawee, but the payee has no cause of action against the drawee because the liability of the drawee is premised on acceptance of the check. Once he accepts then he is barred from denying the genuiness of the drawers signature. Bar Question: Romeo fearful for his life issued a check payable to the order of his girlfriend Juliet. He instructed her that if something happens to him, present the check to the drawee to get the money for her sustenance. The threat on the life of Romeo was aborted so he survived. Juliet, however, presented the check to the drawee-bank. The drawee bank dishonors. Due to the dishonor Juliet broke up with Romeo. Does Juliet, payee, have a cause of action against the drawee? Juliet has no cause of action because the drawee is not liable unless and until he accepts the check. The payee has no cause of action against the drawee because the liability of the liability of the drawee is premised on acceptance. There is one author who said that the drawee-bank is liable because if the drawee-bank did not dishonor the check Juliet would not have broken up with Romeo. The liability is based on quasi-delict. But how can you answer a question in nego based on quasi-delict? It doesnt make sense. The question is on Commercial Law, not on Civil Law. You have to answer it based on the principles of nego, not under the principle of quasi-delict. NEGLIGENCE Unless the party against whom the instrument is sought to be enforced is precluded from invoking the defense of forgery. These are those by their action, omission, negligence, estoppel are barred from invoking the defense of forgery. Example: Even though the signature is forged, but if the person claims it to be genuine then he is estopped from denying forgery. In case of NEGLIGENCE, the negligent party is precluded or barred from invoking forgery. Who can be the NEGLIGENT PARTY? You can have the negligence of the: drawer drawee collecting bank Negligence of the DRAWER PNB vs Quimpo 158 SCRA D and A are best friends. A accompanied D to the bank to

transact business, but then D left his checkbook inside his car. A saw the checkbook of his best friend, got a piece and because he was the best friend he knew As signature and he forged the signature of his best friend. A went to the bank and the bank allowed the encashment. After that D, upon receiving his statement of account noticed that he issued a check to his friend, A. But he never issued that check, so he went to the bank and cried forgery.

The bank said that you are negligent, because if you did not leave the checkbook inside your car then your friend would not have obtained a piece and could not have committed forgery. Your negligence facilitated the commission of the forgery. Is that the kind of negligence contemplated by law? It has to be gross negligence not the kind of negligence referred to by PNB. The SC said that PNB it is your negligence that facilitated the forgery, because you are supposed to know the signature of the drawer. And you are supposed to dishonor the check containing the forged signature. Failing which you are duty bound to restore the account of the drawer. How do you distinguish this with the case of Security Bank vs Triump Lumber Co? It involves LOST CHECKBOOK, but this time the drawer was considered negligent. The DRAWER KNEW already that the checkbook was lost but did NOT NOTIFIED security BANK. MWSS vs CA 140 SCRA The signatures of authorized signatories of MWSS were forged. But despite the fact that the account was debited, the SC did not made the drawee-bank liable to restore the account of the drawer, because of the following reasons: MWSS customized its own checks. So it does not use the checks of PNB. It prints its own checks. And anyone can access to the printing press. So there are no appropriate security measures. MWSS would not bother to check ____

All these things taken together, the SC says, amounted to negligence on the part of the drawer. That is why it was barred from invoking the defense of forgery. Gempesaw vs CA This involves trust on ones accountant. Gempesaw owned a Sari-sari store in Caloocan. Her accountant for 8 years would just prepare the checks for the signature of Gempesaw. The Checks were supposed to be issued in favor to the supplier of Gempesaw. But all the entries in the check (the amount, the payee), the transactions, the invoices were all prepared by the accountant. Gempesaw blindedly just signed the check prepared by the accountant. It turns out the some of these cases resulted in the forgery of the signature.

The SC said that too much trust in ones accountant and failure to set-up an accounting system, where you can monitor and track the checks that you issued amounted to negligence. With all your business, you are supposed to have an accounting procedural system so that you can compare the checks you have supposedly issued with the checks duly returned by the drawee-bank. And you are supposed to act right away if there is a forgery on your signature.

BPI vs Montessori What about a statement or a provision in the statement of account which says that if there is no complaint in 10 days from receipt of the statement of account, then the transactions are conclusively presumed to be valid? The stipulation does not prevent the invocation of forgery if thats what really happened.

!15

Ilusorio vs CA Trust in ones secretary. Every time the bank will call-up, it will be picked-up by the secretary. Secretary said that yes my boss issued a check, yes for that amount, yes as dated, yes to that payee. So true enough the forgery was committed. So in that case Ilusorio, the drawer, was barred from invoking the defense of forgery. Republic vs Equitable Bank There is a limit on the authority of the drawers authorized signatories. Lets say the authorized signatory can only sign up to P5K, but the amount is beyond P5K but despite the fact that amount is beyond the authorized limit, the drawer did not complain. So therefore the drawer is barred, likewise from invoking forgery. Negligence of the DRAWEE Almost all the cases in the negligence of the drawee pertain to the inability or FAILURE TO DETECT the forgery of the drawers signature. Negligence of the COLLECTING BANK Collecting banks liability is based on its warranty as an indorser. There are cases, however, where the liabilities of the drawee and the collecting bank were fixed. In the case of: Gempesaw vs CA it was 50:50 BPI vs CA it was 60:40. 60% drawee-bank; 40% collecting bank. That is the only case in the history of the NIL where the liability of that is fixed at 60:40. Why? What is the basis of the 60:40? There was more negligence on the part the drawee rather than the collecting bank, but the SC did not explain why 60:40. It made its own allocation. But it can be deduced that it has something to do with the negligence on the part of the drawee-bank. BPI vs CA An impostor was able to claim the proceeds of a pre-terminated money market placement with BPI. Lets say that PhilAm has a money market placement with BPI and the authorized investor of PhilAm is X. Y pretended to be X and he gave instructions to BPI as drawee to pre-terminate the money market placement. And through the series of instruction given, the BPI personnel believed that he is dealing with the real X. It turned out that Y was not really the investor but the impostor.

the impostor was the one who obtained the proceeds. Who is liable to pay? BPI, the drawee-bank, did not require the surrender or return of the instrument evidencing the money market placement. It was negligent. What about China Bank, collecting bank? Negligent because it allowed the opening of the account without conducting a thorough background investigation and allowed the withdrawal of the proceeds. In this case there was more negligence on the part of BPI that is why it has to share more of the burden than that of the collecting bank. NIL_4b Fictitious-Payee Rule If an instrument is payable to the order of a 3rd person, like pay to the order of John, that is an order instrument. And therefore that instrument cannot be negotiated without the indorsement of John plus delivery. Is it possible for an order instrument to be considered payable to bearer? Yes, if it is payable to the order of a fictitious person or a nonexisting person, and such fact is known to the person issuing or making it. Under the fictitious-payee rule, which is a principle borrowed by the SC from the US SC, even though the person really exists, but he is not intended payee of the maker or drawer then he is considered, likewise a fictitious-payee. And therefore the instrument is considered payable to bearer. Example: If you have an instrument payable to the order of John, and John really exists but he is not the intended payee of the drawer or the maker. In that case it is considered payable to bearer still. How is this applied in the Philippine setting? Spouses Rodriguez vs PNB Spouses A and B (Spouses Rodriguez) have an account with PNB. And then you have the Philippine National Bank Employees Association (PNBEA) also with an account with PNB. PNBEA and A and B have a discounting arrangement, that is PNBEA issues checks payable to its members, X and Y, membersemployees of the association. If the account of PNBEA is not funded, A and B will discount the checks, meaning X and Y will negotiate the checks to A and B, then A and B will issue replacements payable to X and Y. That will be spouses A and B payable to X and Y, employees or members of the association. Certain officers of the association committed fraud. They made it appear the certain employees wanted to borrow money, lets say J and Y. So they issued checks payable to J and Y and then discounted to A and B. So A and B now issued checks payable to J and Y. When PNB learned about the fraud, PNB closed the account of PNBEA. But A and B have already an existing check payable to J and Y. J and Y or the officers of the PNBEA in connivance with the

The impostor was able to claim the proceeds of the preterminated the market placement. So BPI issued a check in favor of the impostor. The impostor went to China Bank and opens an account and deposited the check representing the proceeds of the money-market placement. China Bank, the collecting bank in that case, did not conduct a thorough investigation of the background of the investor. It allowed the opening of an account with a mere strength of the Taxpayer Account Number (TAN). Later on the impostor withdrew proceeds of the check. After that the real investor instructed BPI to terminate the investment. BPI said you already terminated it. The drawer conducted an investigation and he discovered that

!16

manager of PNB were allowed to obtain the proceeds of the checks issued by A and B to J and Y, even though J and Y did not indorse the checks.

Antedating and postdating are allowed as long as it was not done for fraudulent purpose

Ordinarily, J has to indorse the checks. If he deposits to his bank, he must indorse the check. But in this case even without the indorsement of J, PNB, due to the fraud of its manager, allowed the encashment. The defense of PNB when it was sued by A and B is that this is covered by the fictitious-payee rule, meaning, it does not need the indorsement of J because A and B did not intended them to be the payee of the checks anyway. If they are fictitious-payees, therefore they are payable to bearer and therefore PNB may allow the encashment even without the indorsements. The SC said fictitious-payee rule applies even if the payee really exists as long as the maker or the drawer did not intended to be the payee. But that is subject to an exception THE COMMERCIAL BAD FAITH exception, meaning PNB cannot invoke the fictitious-payee rule because there was fraud on the part of its manager. So the commercial bad faith exception strips the application of the fictitious-payee rule. And because it is not applicable that means that the checks are absolutely payable to order and therefore requires the indorsements of the payees. Sec 11 Date, presumption as to. - Where the instrument or an acceptance or any indorsement thereon is dated, such date is deemed prima facie to be the true date of the making, drawing, acceptance, or indorsement, as the case may be. That is very important specially if you have and instrument payable after date or counted from the date of the instrument. Example: The instrument is payable 30 days after date. You have to know the date of the instrument to determine when it will mature. The date appearing on the instrument is deemed prima facie the true date thereof. If there is no date indicated, then date of issuance is the date of the instrument. Sec 12 Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery. Post dated The instrument contains a date later than the true date of issuance. Example: If today (July 14, 2011) I issued a check dated Sept. 30, 2011, that is post dated. Antedated The instrument contains a date earlier than the true date of issuance. Example: If today I issued a check dated June 30 2011, that is antedated.

Sec. 13. When date may be inserted. - Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date.

Sec 13 covers 2 kinds of instruments 6. an instrument payable after date, but the date of the instrument is not indicated; and 7. an instrument payable after sight, but the date of acceptance is not indicated Example: A promissory note which says I promise to pay to Juan de la Cruz the amount of P100K, 60 days after date, but the date is not indicated. The presumption is like Sec 14, the payee may insert the date. Any date as indicated will be the prima facie date of the instrument. Lets say that the payee made it earlier than the true date of the payment the parties in order to accelerate maturity of the instrument. Example: An instrument payable after 60 days after date, but the intention is June 30 2011 from the date of the instrument. So June 30 plus 60 is Aug 30. The payee wants to accelerate the payment thereof, so instead of indicating June 30, he indicates May 30. So the maturity date will be July rather than August. So the date as indicated, as inserted is the prima facie date of the instrument. But, if that instrument after insertion of the wrong date is negotiated to a HDC then the HDC may enforce the instrument as filled up. So the date appearing on the instrument is conclusively presumed to be the true date of the instrument insofar the HDC is concerned. So Sec 13 and 14 are related to each other in the sense that the HDC may enforce the instrument as filled up, as completed. Whether it is the date of the instrument, whether it is the amount payable, the name of the payee, or the interest insofar as the HDC is concerned, he may enforce the instrument as filled up, as completed and the authority given to him by law is presumed to be conclusive. Sec. 17. Construction where instrument is ambiguous. - Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply: (a) Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount; (b) Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof;

!17

 (c) Where the instrument is not dated, it will be considered to be dated as of the time it was issued; (d) Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail; Example: A check which says. Pay to order of Juan de la Cruz. The word order was cancelled and then written only. So because the written words prevail over the printed words then that instrument is considered payable to Juan de la Cruz only and therefore nonnegotiable.

Liability of person signing in trade or assumed name. - No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise expressly provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name.

2.

Only a person whose signature appears on the instrument is liable. If you dont see your signature on the instrument, then you are not liable. In that case you are not the indorser, not the drawer, not the maker, not the acceptor. Who are the parties liable to the instrument? 1. The maker 2. The acceptor 3. The drawer 4. The indorser Exceptions are: 1. One who signs in a trade or business name, - Like Juan de la Cruz doing business under the business style of Juan de la Cruz Trading Agent who signed in behalf of the principal and discloses the name of his principal. - The principal is liable even though his signature does not appear on the instrument because the agent acted on behalf of the principal and the agent disclosed his principal

(e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; (f) Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser;

This principle of construction only applies if there is a doubt in the capacity of the person signing the instrument. But if there is no doubt, like when he indicated as a guarantor or as a surety, then he is liable based in the in capacity or concept in which he signed the instrument. Example: When I was with the Bank I was often approached by employees. One has a check payable to the said employee but it was from abroad, which requires 30 day clearing. So he requested for my indorsement so that he can encash the check. What if I say that sure no problem. Pay to Juan de la Cruz for ID only signed NTD. Am I liable as an indorser? No, because there is no doubt in what capacity that I signed the instrument. It is clear I signed the instrument for identification only. In that case I am just a guarantor or not even a guarantor but only for identification purposes, that means I am vouching that he is the guy. (g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon.

3. 4.

Forger whenever the acceptor makes his acceptance of bill of exchange on a separate paper (allonge)

Liability of an Agent (Sec 19-21) These are the requisites so that the agent or anyone acting in representative capacity may be liable: 6. he must disclose who his principal is 7. he must sign in behalf of the principal 8. impliedly he must act within the scope of his authority Failure to comply with these requisites make the agent liable personally

PNB vs Concepcion Mining If one of the co-makers died and the holder of the promissory note filed a collection case only against the surviving co-maker, the surviving co-maker cannot invoke the defense that the estate of the deceased co-maker must be impleaded. Because the liability is joint and several therefore, he is liable for the entire amount of the loan and there is no need for the holder to implead the estate of the deceased co-maker. I, or Either of us promise to pay - joint and several We promise to pay, signed by two or more persons Joint I/We promise to pay - Joint and several

Sec 22 This refers to an instrument payable to a minor, instrument payable to the corporation, but the corporation is not authorized by its articles of incorporation to make the said instrument. If an instrument is payable to a minor and the minor negotiates then the minority is not an obstacle to the transfer of title of the instrument to the holder. The holder despite of the minority of the one who negotiated it can still enforce the instrument against the maker or drawee. If the maker or drawee dishonors the instrument then the minor is not liable because minority is real defense. But although it is real defense, that is personal only to the minor, which defense cannot be invoked by the maker of the promissory note. Same thing with the corporation.

Example: M issues a promissory note payable to ABC corporation. ABC through its authorized signatory negotiated the instrument to X, but

Sec. 18.

!18

ABC is not allowed by its articles to negotiate or indorse an instrument payable to the corporation.

The law says that a pledgee or a holder of lien on the instrument is only a holder for value up to the extent of his lien. What do you mean by that? M issues a promissory note payable to the order of P. P obtains a loan from PNB secured by a pledge on the promissory note issued by M to P. In the case of IRC vs CA 174 SCRA deed of assignment of an instrument is considered a pledge.

Under Corporation Law if the article of incorporation does not allow the negotiation or indorsement then that would be ultra vires. But under the NIL that ultra vires act, nevertheless transfers title in favor of subsequent holder. So the holder may enforce the instrument against the maker despite the incapacity or lack of authority of ABC. If the maker dishonors, however, then ABC is not liable and it can invoke the ultra vires act. So same situation and treated as that of a minor. Example: M issues a promissory note payable to a minor A negotiates to X. Despite the minority of A the indorsement transfers title to X. Therefore M cannot say that he is not liable. M is liable despite the minority of A. But if M dishonors, A is not liable because minority is a real defense. II. CONSIDERATION Sec. 24. This provides for 2 presumptions in case of a negotiable instrument: 1. Every negotiable instrument is presumed to have been issued for a valuable consideration 4. That is why there is no need to indicate the words, for value received in the promissory note because the presumption is that the instrument was issued for a valuable consideration. 5. The presumption is only prima facie and could be overcome by evidence to the contrary. 6. If you tie up Sec 24 with Sec 59, if the instrument is negotiable there is also a presumption that the holder is a holder in due course. Both presumption is prima facie only and can be overcome by evidence to the contrary.

Can PNB collect from the maker? Is PNB a HDC or holder for value? Under Sec 27 PNB as pledgee is considered a holder for value up to the extent of his lien. Lets say the promissory note is for 100K and then P obtained a loan from PNB for 75K. How much can PNB collect from M? 100K, but because he is the holder for value up to the extent of his lien only, he has the obligation to remit the excess of 25K to the payee. What if between M and P there are defenses, P forged Ms signature. P obtained a loan from PNB secured by a pledge or assignment of that promissory note? If it is real defense, that real defense can be invoked even against the holder for value. If it is only personal defense, PNB can collect only up to extent of the amount of its lien. Sec. 28. Effect of want of consideration. - Absence or failure of consideration is a matter of defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise.

Absence or failure of consideration is a personal defense not available against a HDC. Absence of consideration - Means that at the outset there is no consideration; at the very start there is no consideration Failure of consideration - There was valid consideration but there was failure to perform such consideration Void consideration - Similar to absence or lack of consideration Absence of consideration is a personal defense not available against a HDC. We have to correlate this, however, with the SC decision pertaining to cross-checks. In case the checks are crossed, it serves several purposes. The checks as crossed have specific characteristics: 1. cannot be encashed, but only for deposit 2. can be negotiated only once in favor of someone with an account with the bank 3. (most important) serves as a warning that the checks were issued for specific purpose, and therefore the holder must acquire such instrument consistent with the such purpose, otherwise he does not qualify as HDC

2.

Every person whose signature appears thereon to have become a party thereto for value

Sec. 25. Value, what constitutes. Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time. What do you mean by valuable consideration? Does it mean adequate consideration? The law does not say adequate. It merely says valuable, meaning it presupposes a consideration sufficient to support a simple contract. Sec. 26. What constitutes holder for value. - Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time.

Sec. 27. When lien on instrument constitutes holder for value. Where the holder has a lien on the instrument arising either from contract or by implication of law, he is deemed a holder for value to the extent of his lien. May a mortgagee or pledgee be considered a HDC?

Bataan Cigar vs State Investment House D issued a crossed check payable to the order of P drawn against ABC Bank. The checks was issued for payment of bales of tobacco that P is supposed to deliver to D. P did not deliver the

!19

bales of tobacco, but P could not return the checks because P negotiated the checks in favor of State Investment House (SIH). If the SIH goes to the drawee and the drawee dishonors SIH, the holder, can enforce the instrument against the drawer despite the fact that there was failure of consideration because such a personal defense not available to a HDC. However, if the check is crossed it is a different story altogether. In that case SIH must prove that it acquired the instrument consistent with that purpose otherwise it does not qualify as a HDC. In other words, failure of consideration is a defense even against a HDC if the check is crossed, because this instrument was issued for a specific purpose, in payment of tobacco leaves which were not delivered.

for lending his name as long he did not receiver a consideration on the instrument he accommodated, then he is still qualified as an accommodation party.

The accommodation party is liable to a holder for value, even if such holder knew that the former acted as an accommodation party. In other words lack of consideration is not a defense available to an accommodation party, because precisely he signed the instrument without receiving consideration or value on the instrument. Example: If M issues an instrument payable to the order of P, just to accommodate P and without receiving value on the promissory note. P negotiates to PNB. PNB now goes to M can M say I did not receive any consideration on that promissory note? No because by express provision of law the accommodation party is liable to the holder for value, even though such holder knew that the former acted only as an accommodation party. So the knowledge of the holder for value of the fact that someone acted only as accommodation party will not excuse the accommodation party from liability.

Sec. 29. Liability of accommodation party. - An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party.

There are 3 requisites of an accommodation party 1. he signed the instrument as a maker, drawer, acceptor, or indorser 2. he signed the instrument without receiving value on the instrument 3. he signed the instrument for the purpose of lending his name to another person 1st element Example: Facundo is a rich business man. He is in look out for people who want to borrow from him. Once a borrower has been identified, he will ask his right hand man, M, to issue a promissory note payable to the order of the borrower to accommodate the borrower. Is Facundo an accommodation party because he was the one who provided money through M? He is not because he did not sign the instrument as a maker, drawer, acceptor, or indorser. 2nd element He did not receive any consideration for that instrument to be accommodated. What if he receives any consideration for lending his name? Example: M to accommodate P issues a promissory note to accommodate P. Because there was no consideration, just to accommodate P, P cannot enforce the instrument against M. Lets say P would like to capitalize with the credit standing of M, so M as rich businessman and P has no credit standing. P would capitalize on the credit standing of M, so P will now negotiate the instrument with PNB. So now because the instrument was issued by M, supposedly with money, then PNB may buy the instrument or allow the negotiation and pay the payee. Supposing the agreement between M and P is this: I will get x amount from you once you get credit from 3rd party, like PNB, for lending you my name to you. Does he cease to be an accommodation party? No, because the law says it is the fact that he did not receive a consideration on the instrument that makes one an accommodation party. So even though M received a consideration

What is the liability of an accommodation party? Is it correct to say that an accommodation party is liable as a surety? It depends on what concept he signed the instrument. He is not liable as a surety but he has the rights of a surety, in a sense that has the right to seek reimbursement from the party accommodated. But, his liability depends on what concept he signed the instrument. If he signs as a maker he is liable as a maker. If he signs as a drawer he is liable as a drawer. If he signs as acceptor, he is liable as acceptor. If he signs as indorser, he is liable as indorser, as the case may be. Is he solidarily liable with the party accommodated? Here is the problem, there are 2 recent cases (2009 and 2011) where the SC said that the accommodation party is liable solidarily with the accommodated party, which means that the holder may enforce the instrument either against the accommodation party or the party accommodated. So the accommodation party cannot say to the holder to sue first the party accommodated because he is liable solidarily with the accommodated party. This is contrary to previous decisions of the SC that it depends on what concept he signed the instrument.

Lets reconcile. When you read these 2 cases where the SC said that the accommodation party is liable solidarily with the principal debtor or the party accommodated, the accommodated party signed as co-maker And of course if he signs as a comaker, the only conclusion is that he is liable solidarily with the party accommodated. If you sign as a drawer, how can you be liable solidarily with the party accommodated? So it is still dependent on what concept he signed the instrument. The decisions of the SC to the effect that the accommodation party is liable solidarily with the party accommodated have as background a promissory note signed solidarily by both the accommodation party and the party accommodated. The right of an accommodation party is similar to that of a surety. Insofar as the relationship of the accommodation party to the accommodated party is concerned, it is one of suretyship. That

!20

means he has the right to seek reimbursement from the party accommodated.

make it a holder in due course. As such it cannot enforce the instrument against the accommodation party.

Does the insolvency of the accommodated party extinguish the liability of the accommodation party? No. The insolvency of the accommodated party does not extinguish the liability of the accommodation party. The SC suggested that the accommodation party may file a contingent claim against the party accommodated in the liquidation proceedings (Associated Bank vs CA). Does the extension of time given by the holder to the party accommodated extinguish the liability of the accommodation party? No. The extension of time of payment given to the accommodated party does not extinguish the obligation of the accommodation party. This is in recognition that insofar as the holder is concerned he is not a surety. His liability depends on what concept he signed the instrument. Because if he is a surety it would have been different, the obligation would be extinguished since there is a change in terms of the contract without prior consent.

In that case also, the SC said that the accommodation party is in effect a surety and following the principle in credit transaction, in case of change in the terms of the principal contract without the consent of the surety, the surety is released from liability. However, in Associated Bank vs CA (2009) The SC said that extension of time of payment does not release the accommodation party from liability even though he is supposed to be surety. How do we reconcile these two cases? Prudencio vs CA - change in the terms and conditions of the principal contract including extension of the time of payment will release the accommodation party from liability. Associated Bank vs CA the extension of time of payment or even insolvency of the party accommodated does not release the accommodation party from liability because the liability is solidary with the principal debtor. These are 2 completely conflicting decisions. In this case apply the most recent case Associated Bank vs CA, that liability of the accommodation party is not extinguished just because the term of payment was extended. But the principle of a holder being a holder in due course except for the notice of want of consideration is still applicable because there is no SC decision contrary to it. III. NEGOTIATION Sec. 30 - 35 Negotiation It is the transfer of the instrument to make the holder the transferee thereof. The term holder has a precise meaning under the NIL, as distinguished from a mere assignee or transferee. The holder acquires the rights of a HDC if the instrument is negotiable The transfer of the instrument to make the transferee a mere assignee is governed by the law on assignment of credit. The mode of negotiation depends on whether or not the instrument is a bearer or order instrument. If it is an order instrument, it cannot be negotiated without the indorsement of the payee or indorsee plus delivery If is a bearer instrument, it can be negotiated by mere delivery Example: An order instrument which was not indorsed but only delivered is not negotiation. It is assignment. The other party is just a mere assignee or transferee. How does he acquire the right of a holder? By compelling the payee or indorsee to indorse it to him. If there is an indorsement plus delivery then he has the rights of a holder. He is considered as a holder under NIL, not just a mere transferee. May a non-negotiable instrument be negotiated? You cannot, because the term negation has a precise meaning under the NIL. You can only negotiate if the instrument negotiable and if it is transferred to a person to make him a holder then he is such HDC presumably.

His right as a surety pertains to the party accommodated, not to the holder and his liability depends on the concept he signed the instrument, in this case a co-maker, then the extension of time to pay given to the party accommodated does not extinguish his liability (Associated Bank vs CA).

NIL_5 Is an accommodation party entitled to a notice of dishonor? It depends on what concept he signed the instrument. A maker and an acceptor are not entitled to a notice of dishonor. Only the indorser and the drawer, the parties secondarily liable are entitled to a notice of dishonor. Is it necessary for a holder of an instrument where there is an accommodation party to be holder in due course so that he can enforce the instrument against the accommodation party? The holder enforcing the instrument against the accommodation party must also be a HDC except for the notice of want of consideration. In other words we dont include if he is a holder in due course or not his knowledge that the instrument was drawn or issued for accommodation purposes, because by express provision of law under Sec 29, the holder for value may proceed against the accommodation party even though such holder knew that the accommodation party only acted as such. But, other than the notice of want of consideration, everything else the holder must be a HDC to be able to enforce the instrument against the accommodation party (Prudencio vs CA).

Prudencio vs CA Maker obtained a loan from PNB. A, acting as accommodation party, signed as a maker. One of the conditions of the loan agreement is collection by M from the DPWH (so it is a loan secured by assignment of receivables), will be applied to his obligation with the PNB. What PNB did was not to apply the collection to the obligation, but instead allowed the remittance to M.

Can PNB enforce the instrument in case of non-payment against the accommodation party? PNB is not a holder in due course, because one of the requirements for the grant of the loan is that the receivables from the government must be applied to the obligation, but for PNB to remit the payment to the debtor, the maker of the PN, does not

!21

set-off by the receivables it had with Philfinance, then it can also be raised against Sesbreno.

Sesbreno vs CA 222 SCRA (Warning: There might be some inaccuracies here) The issue in this case is whether or not a non-negotiable instrument and may be negotiated. On the face of the PN is a stamp mark Non-negotiable. Sesbreno made a money market placement with Philfinance. In a money market placement, the investor places his funds with the company and the company issues a post dated check (PDC) covering the principal plus interest. Let say he placed 100k payable in 90 days, so Philfinance will issue a check covering the principal plus interest up to 90 days. Being a money market placement Philfinance will assign or sell the receivables for Sesbreno or any client investor for that matter.

Who is liable here? Pilipinas Bank because it did not surrender the PN, so it can be held liable for damages. So under NIL only a negotiable instrument may be negotiated. But a non-negotiable instrument may be assigned or transferred except that the assignee or transferee acquires no right or title better than that of the assignor. How do you distinguish negotiation from assignment? Negotiation is governed by NIL; assignment governed by the law on assignment of credit under the NCC In negotiation, the holder may acquire a better right than the one negotiating the instrument; in assignment, the assignee cannot not acquire better right than the transferor In negotiation, the holder acquires better title to instrument free from personal defenses. In assignment, the assignee acquires the instrument subject to both personal and real defenses In negotiation, notice of the negotiation is not necessary, meaning the maker or drawer need not be informed of the negotiation; in assignment of credit, notice is necessary In negotiation, the indorser warrants the solvency of the maker or drawer as the case may be; in assignment the assignor does not warrant the solvency of the obligor.

One instrument was assigned or transferred to Sesbreno as a consideration for his money market placement - A promissory note of Delta Motors issued for Philifinance. Delta Motors issued a PN to Philfinance. Philfinance assigned it to Sesbreno as consideration for the money market placement. So Sebreno got postdated check covering the principal plus interest, promissory note issued by Deltamotors to Philifinance. The PN, however, is in the possession of Pilipinas Bank. Pilipinas Bank, Philfinance and Delta Motors where at that time owned by Silverio. So instead of delivering the PN to Sisbreno, Philfinance delivered a custodianship receipt, meaning is in the possession of Pilipinas Bank___ at anytime he could demand delivery. On maturity of the placement Philfinance could not return the principal nor pay the interest because it went bankrupt. Sesbreno now wanted to enforce the proceeds of the promissory note, but the PN is in the possession of Pilipinas Bank. So he went to Pilipinas Bank and demanded for the delivery of the PN, but Pilipinas Bank refused. Sesbreno filed an action against Delta and Pilipinas Bank.

A promissory note for 1M and signed only for 50M, can the debtor extinguish his obligation by paying only 50M? Special Purpose Vehicle (SPV) SPV is a law created by congress to help banks unload bad assets, because bad assets affect the books of the bank (meaning bad assets, non-collectible assets or loans or receivables have a burden on the finance of the bank). They make the balance sheets not healthy. Any bank burdened by debts would be losing. So the bank to take off its bad assets from its books can sell to an SPV. Those assets which have not been paid and have matured, the bank will sell to an SPV. Lately there have been surge of cases as to how much may the debtor will have to pay. Example: The bank has receivable from Juan de la Cruz. The bank assigned the receivable to the SPV Company. The bank thought that the PN cannot be collected anymore so it decided to sell the PN to an SPV at a discounted price from 100M to 20M. So atleast the bank got 20 rather than nothing. SPV will collect the full amount. If the debtor wants to pay his obligation how much will the debtor have to pay? If you have a loan secured by a mortgage and the property was sold only for so much, how much will you pay to be able to redeem, is it for the amount sold or the full amount under the PN? Philippine Asset Investment Co vs CA In this case the counsel of the creditor made a mistake. RTC ruled that the amount that the debtor will have to pay is only for the amount for which the PN was sold, not for the face

The PN transferred or sold to Sesbreno and issued by Delta to Philfinace has on its face non-negotiable. May a non-negotiable instrument be negotiated? No. May a non-negotiable instrument be assigned or transferred? Yes. But because it is only assignment or transfer, not negotiation, then the assignee simply steps into the shoes of the assignor. He does not acquire the rights of a holder under Sec 30 of NIL. This issue became relevant because between Philfinance and Delta Motors, there is compensation. There was set-off. So Philfinance and Delta Motors are both creditors and debtors of each other.

Delta Motors said it is not liable to Sesbreno because Philfinance is also liable to it. So its debts to Philfinance were extinguished by its receivables from Philfinace. May that defense of compensation or set-off be invoked against Sesbreno? Yes, because it is not a negotiable instrument. Sesbreno was a mere assignee of the instrument and a mere assignee or transferee, not a holder as defined under Sec 30, every defense that can be raised by Delta Motors against Philfinance can also be raised against Sesbreno. So if the debt of Delta Motors had been

!22

value. So if the face value is 100 and it was sold for 20 then the debtor may pay for 20.

instrument, all through out the way it can be negotiated by mere delivery despite special indorsements.

The lawyer of the creditor went to the SC on question of law because there was no settled jurisprudence. SC, unfortunately, said that you violated the hierarchy of courts. You should have gone to the CA. So the case was dismissed for technicality. So what we have is a decision of the RTC affirmed by technicality by the SC only the amount for which the PN was sold has to be paid by the borrower. Obviously it is not a precedent setting. It is not a full discussion of the merits of the case. It is only a minute resolution. But, when you become lawyers and when you represent the borrower-creditor you argue on the basis of this minute resolution. If you are representing the creditor, how do you argue? Based on the NIL. If it is a negotiable instrument, the HDC may enforce the instrument for the whole amount against all parties liable to the instrument. If it is mere assignee or transferee then that defense would probably work, liable only for the amount for which it was sold. But if it is negotiable, the law is clear that the instrument may be enforced for the whole amount, not for the amount for which it was sold. How do you negotiate a negotiable instrument? It depends. If it is an order instrument, by indorsement plus delivery If it is a bearer instrument, by mere delivery The most favorite topic in the bar, other than HDC and elements of negotiability is this one How to negotiate a bearer instrument that has special indorsement? This was asked no less than 9 times in the bar, and still appropriate for MCQ. Example: M issued a promissory note to payable to P or bearer. How may P negotiate the instrument? A bearer instrument may be negotiated by mere delivery. What if P negotiated the instrument by delivery to A and A indorsed it to B specially plus delivery, can this instrument be negotiated still by delivery? Yes, because Sec 40 says that an originally bearer instrument will always be a bearer instrument may be negotiated by mere delivery despite special indorsement in between. Sec. 40. Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement. So B therefore may negotiate the instrument by mere delivery to C. and C may also negotiate the instrument by mere delivery.

C negotiated the instrument to D by delivery, so can D enforce the instrument against M? Yes because the instrument could be negotiated by delivery therefore M is liable. D acquired title on the instrument by delivery. If M dishonors can D run after P? No. What are the warranties of a person negotiating by mere delivery? He does not warrant the solvency of the maker. He does not warrant that the instrument will be paid as distinguished from a general indorser. A general indorser warrants that the instrument will be paid. One negotiating by delivery does not warrants that. He only warrants that he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. And besides, the liability of someone negotiating by delivery extends only to the immediate transferee. So if at all his liability only extends to A and not anyone beyond A. Is A liable to D if M and P dishonors? No, because someone indorsing specially a bearer instrument at the very outset is liable only to such party or holder who derives title by such special indorsement. D did not acquire title over the instrument by virtue of As special indorsement. He acquired title only by virtue of Cs delivery. If A dishonors is B liable to D? No, because D did not acquire title by virtue of Bs indorsement. Can D run after C? Only if he breaches his warranties as someone negotiating by delivery. What about this one? M issued a bearer instrument to P. P negotiates to A by delivery, A to B indorsed specially, B to C indorsed specially, C to D indorsed specially D goes to M. Is M liable to pay? Yes If M does not pay is P liable to D? No because P is liable only to A If P does not pay can D run after A, B, C? Yes, because this time D acquired title by virtue of the special indorsements of A, B, and C. Summary of the rules under Sec 40 If the instrument is originally payable to bearer then it can be negotiated by delivery all through out the stages of negotiation. The fact that one of the parties indorsed it specially does not diminish the capability of the instrument from being negotiated by mere delivery. In other words a bearer instrument will always be a bearer instrument. One indorsing specially is liable only to such holder who acquires title by virtue of such special indorsement. The liability of a party who negotiates by mere delivery extends only to his immediate transferee and only in case of breach of his warranty.

What about this one: A indorsed to B specially, B indorsed to C specially, and C to D by delivery? Is this allowed? Yes, because the special indorsements do not affect the bearer character of the instrument. If at the outset it is a bearer

Example:

!23

1st instance: M issued an instrument payable to P or bearer. P negotiated to A by delivery. A specially indorsed to B. B specially indorsed to C. C negotiated to D by delivery.

D can enforce the instrument against M because the fact that there was special indorsement in between does not affect the capability of instrument from being negotiated by mere delivery being an originally bearer instrument. If M does not pay, P is not liable because his liability extends only to his immediate transferee and only in case of breach of warranty. A is not liable to D because D did not acquire title by virtue of As indorsement. Neither is B liable to D, because D did not acquire title by virtue of Bs special indorsement. C is liable to D, the immediate transferee, but only in case of breach of warranty. 2nd instance: You have a bearer instrument. M issued it to P. P negotiated to A by delivery. A indorsed to B specially. B indorsed to C specially. C indorsed to D specially. D has the right to enforce the instrument against M because D acquired title by virtue of such special indorsements. If M dishonors, P is not liable to D because Ps liability extends only to A. If P dishonors, D may enforce the instrument against A, B, and C, because in this particular case there is now a successive unbroken chain of special indorsement such that D acquires title by virtue of such successive, unbroken chain of special indorsements. Lets distinguish this from an order instrument. Example: M issued a promissory note, payable to P or order. How can P negotiate to A? Only by indorsement plus delivery being an order instrument. So Pay to A sgd P. Is this a special indorsement or indorsement in blank? Special indorsement, because P specifies the indorsee to whom the instrument is payable (Pay to A). What if P simply signed and delivered to A, is there a valid negotiation? Yes, because there was indorsement plus delivery. A got a blank indorsement, therefore can this be negotiated by A by mere delivery? Yes, because under Sec 9 if the only or last indorsement is in blank, then it becomes a bearer instrument. So because of that blank indorsement, P did not specify to whom the instrument is payable he simply affixed his signature on the instrument, it becomes a bearer instrument. And therefore A can negotiate by mere delivery to B or to anyone.

Supposing B would like to negotiate to C, B can negotiate it by mere delivery because it is a bearer instrument. Supposing B want to be more secured so he indorsed specially, Pay to C, signed B, how can C negotiate the instrument? C can negotiate by indorsement plus delivery because the last indorsement is special indorsement and in case of special indorsement the indorsement of the special indorsee is necessary to further negotiation of the instrument.

So how do you distinguish this from the first situation? The first one is originally a bearer instrument. An originally bearer instrument will always be a bearer instrument and can be negotiated by mere delivery despite special indorsements in between. If it is an order instrument at the outset, then the last indorsement determines the mode of subsequent negotiations: 1. If it is a blank indorsement then it can be negotiated by mere delivery/ 2. If it is a special indorsement, it requires the indorsement of the of the special indorsee plus delivery.

So that is the distinction between Sec 35 and Sec 40 of the NIL. Sec. 36. When indorsement restrictive. - An indorsement is restrictive which either: (a) Prohibits the further negotiation of the instrument; or (b) Constitutes the indorsee the agent of the indorser; or (c) Vests the title in the indorsee in trust for or to the use of some other persons. But the mere absence of words implying power to negotiate does not make an indorsement restrictive.

Kinds of Indorsements under NIL: 1. special (Sec 34) 2. blank (Sec 34) 3. restrictive (Sec 36) 4. qualified (Sec 38) 5. conditional (Sec 39) 6. joint (Sec 41) Sec 36 on the first mode of restrictive indorsement must be read in relation to Sec 47. Sec. 47. Continuation of negotiable character. - An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise. Under the 1st mode of restrictive indorsement is the one that prohibits the further negation of the instrument Example: M issues a negotiable instrument to P. P would like to indorse restrictively. So he can indorse by stating Pay to A only, signed P. Is this instrument still negotiable? Under Sec 47 it says that it cease to be negotiable if it is discharged or restrictively indorsed. Therefore the subsequent transferees will not acquire the right of the holder but only the rights of A. NIL_7 Negotiation

!24

It is the transfer of a negotiable instrument to constitute the transferee the holder thereof.

How an instrument may be negotiated depends on whether it is an order instrument or bearer instrument. If it is a bearer instrument it may be negotiated by mere delivery. Fictitious-Payee Rule If an instrument is payable to the order of a person who really exists but the maker or the drawer did not intend him to be the payee, it is considered as payable to bearer. The significance lies in the fact that if its a bearer instrument, although payable to order, it can be negotiated by mere delivery. The bank can encash it even if without the indorsement of the indorsee or the payee.

If it is indorsed only in part, like an instrument payable to order of A for P100K, but the payee transferred only P50K, and keeps the P50K is not negotiation because if we split the instrument between two persons, two persons will be enforcing the same rights arising from one instrument. So to prevent splitting of cause of action, the law requires the indorsement must be of the entire instrument. Kinds of Indorsement 1. Special 2. Blank 3. Restrictive 4. Qualified 5. Conditional The one who can indorse is 1. the payee; or 2. the indorsee The signature of the payee without additional words is tantamount to indorsement Special Indorsement If the indorsement specifies the person to whom the instrument is payable Blank Indorsement If the indorsement does not indicate the person to whom or to whose order the instrument is payable. The indorsement need not follow the words of negotiability. What should follow the words of negotiability is the promissory note or the bill of exchange, but not the indorsement. The indorsement need not be Pay to the order of A. It can be simply Pay to A, plus the signature of the payee. In case of special indorsement, the indorsement of the indorsee is necessary to the further negotiation of the instrument. If P specifies A as the indorsee of the instrument (Pay to A, sgd P), then this instrument cannot be transferred from A to B without As indorsement. A can indorse it specially (Pay to B, sgd A) or in blank. It is called in blank because it only contains the signature of A (signed A). Order instrument If it is an order instrument the last indorsement (its kind) determines the mode of subsequent negotiation. If it is special indorsement that means it cannot be negotiated further without indorsement of the special indorser plus delivery. If it is a blank indorsement, if it is the signature of P (sgd P) only, it can be negotiated by mere delivery only. Distinguish this from a bearer instrument.

If it is an order Instrument, it is negotiated by indorsement plus delivery. That is why under Sec 49 of the NIL if the instrument is payable to order but delivered only, without indorsement the transferee acquires only the rights of an assignee, not the rights of holder as defined by NIL.

If you have an order instrument it must be indorsed and delivered. If it is only delivered without indorsement, under Sec 49, it is not negotiation but mere assignment. And the transferee acquires not the rights of a holder but the rights of a transferee. He is entitled, however, to compel the indorsement of the instrument. In which case, upon indorsement, he becomes a holder thereof. What are the characteristics of indorsement? 1. Sec 31 tells us that the signature of the indorser, without additional words, is a sufficient indorsement. This is the reason why in our discussion on forgery the signature of the depositor is very important. The signature of the depositor in the instrument is tantamount to all the warranties of an indorser under the NIL, because under the law the mere signature of the indorser, without additional words, is tantamount to indorsement. BPI vs Jai-Alai When the depositor-forger deposited the check after the forging the payees indorsement to BPI, after the discovery of the indorsement BPI debited the account of the depositor-forger without his consent. The SC upheld the action of BPI in debiting the account of the forger-depositor because by depositing the check with the collecting bank and by affixing his signature, that signature comes with it all the warranties of an indorsee, specifically, the instrument is genuine and in all respects to what it purports to be. Likewise, even though there is no signature if there is stampmark all prior or lack of indorsement guaranteed by the collecting bank, that is also tantamount to warranties of an indorser. There is even one case where despite the lack of the stamp mark all prior and lack of indosement guaranteed, the mere act of sending the instrument for clearing to the drawee bank through the PCHC amount to the warranties on an indorser under the NIL. 2. Sec 32. The indorsement must be of the entire instrument. It must be on the instrument itself or in a paper attached to the instrument called allonge. The indorsement cannot be in part unless it has been paid and only the residual balance is negotiated.

Bearer Instrument If it is a bearer instrument despite special indorsements in between the instrument can be negotiated by mere delivery Liabilities of the parties Negotiation by delivery The warranties of a person negotiating by delivery extend only to immediate transferee. Qualified indorsement

!25

All the warranties extend to subsequent holders.

The warranties of person negotiating by delivery and a qualified indorser are the same, the difference is that to whom the warranties extend. Negotiation by delivery Liability will attach only if there is a breach of warranties

render the instrument valueless or worthless.

If C pays D, can C run after P, A, B? Yes, because he acquired title by virtue of their special indorsements. The rule is that subsequent party may enforce the instrument against prior party. Prior party is liable to subsequent party. Sec 36 Sec 37 Restrictive Indorsement

Example: Instrument payable to bearer that M issues to P. P indorsed specially to A. A indorsed specially to B. B indorse specially to C. C negotiates to D by mere delivery. D acquired title by virtue of the delivery of C on the reason that the special indorsements did not impair the negotiable character of the instrument and its capacity of being delivered by mere delivery. So despite those special indorsements C may transfer title by mere delivery. D presented the instrument to M for Payment. If M pays upon maturity the instrument is discharged. If M dishonors against whom can the instrument be enforced by D assuming there is an appropriate notice of dishonor? D cannot run after P, A, and B because being an originally bearer instrument the liability of a person negotiating by special indorsement is only to the person or party who acquires title by virtue of such special indorsement. If Specially Indorsed How do we know that those indorsers are liable to the ultimate holder? If there is a successive unbroken chain of special indorsements If the instrument is negotiated by C to D specially that there is now a successive unbroken chain of special indorsements, so that D now acquires title by virtue of all the special indorsments thats why in that case D can enforce the instrument against P, A, B, and C upon giving an appropriate notice of dishonor. In this case P, A, B, and C are general indorsers, and as general indorsers under Sec 66 they warrant that: %L. the instrument is valid and subsisting; %L. the instrument will be paid upon presentment for payment; and %L. if dishonored and appropriate proceedings are paid against them, then will pay the holder

2. 3.

3 Kinds/Modes of Restrictive indorsement 1. One that prohibits further the negotiation of the instrument Example: Pay to A only. Sgd P Constitutes the indorsee as an agent of the indorser

Example: Pay to A for collection only. Sgd P Vests title in the indorsee for some other person

Example: Pay to A in trust for X There is a difference between agency and trust, but for Nego purposes they mean the same time thing, that is, the agent or trustee can enforce the instrument, can receive payment in case of non-payment, but only as agent or trustee, not in their own right.

Trustee has legal title over the instrument, unlike a mere agent who does not have title. But in terms of the capacity to receive payment from the maker and in terms of the ability to file a case against the maker in case of dishonor, whether agent of trustee, they can do it but as an agent of indorser P or in trust for X. In terms of restrictive indorsement under the 2nd and 3rd mode, can the instrument be further negotiated? Example: A promissory note payable to the order of P. P indorsed restrictively to A for collection only. Can A negotiate the instrument to B? Yes, but B acquires only title of the first restrictive indorsee. So he can receive payment but only as agent of the indorser. Or he can file an action as agent of the indorser. So he cannot acquire title better the 1st restrictive indorser. Sec 38 Qualified Indorsement Example: Pay to A without recourse. Sgd P Qualified indorsement consists of the signature of the indorser plus the words without recourse, or san recourse or words of such similar import. If you have a qualified indorsement does that mean that the subsequent indorsements should also be qualified? No. So the qualified indorsement pertains only to an indorser but not necessarily to dictate the mode of subsequent negotiations. In our example, if you have an instrument payable to the order of P. P indorsed qualifiedly to A without recourse and signed by P.

If negotiated by delivery If it is by delivery only then P, A, and B are not liable to D because D did not acquire title by virtue of their special indorsements. So D, therefore, can only run after C. C is liable only to D only if C breaches his warranties as a person negotiating by delivery under Sec 65. Just because the maker or the party primarily liable did not pay does that automatically make C liable. Unlike a general indorser, one negotiating by delivery does not warrant that the instrument is subsisting; or that the instrument will paid or accepted or both upon presentment for acceptance; and that if it is dishonored he will pay the holder. On negotiating by delivery warrants that he does not know of any information that would render the instrument valueless or worthless. So if C is aware that M is insolvent, but negotiates the instrument by delivery then C becomes liable now because C warrants that he does not know of any information that would

!26

Can A negotiate the instrument to B without qualification? Yes If B is the holder and he goes to M, M should pay. If M pays the instrument is discharged If M dishonors what should B do to be able to enforce the instrument? He should present a notice of dishonor to the parties 2ndarily liable. Can B run after P? Only if P breaches his warranties as qualified indorser. What are the warranties of a qualified indorser? Same warranties as a person negotiating by delivery. The 1st 3 warranties are the same for qualified indorser or the person negotiating by delivery or a qualified indorser. 1. That the instrument is genuine and in all respects what it purports to be. Meaning, there is no forgery on whatever is contained in the instrument.

If he did not pass, he must remit to P. If passes he keeps the proceeds.

Sec 41 If there 2 or more payees or indorsees, all must indorse, unless one is authorized by the other or one is the partner of the other, in which case any of them may indorse. Sec 42 This refers to an instrument payable to the cashier or an officer of a corporation. In this case it is deemed prima-facie payable to the corporation. Who may indorse the instrument if payable to the cashier of UST or ABC Bank for instance? The law says indorsed either by the cashier or authorized signatory of the corporation. Sec 43 Misspelling In case of misspelling, on the assumption that there was misspelling, then it must be indorsed as misspelled but adding if he thinks fit his true signature. In practice, you dont assume that there was a misspelling. Instead you refer it back to the drawer so that they can authenticate. Sec 44 Representative Capacity How an instrument may be negotiated or indorsed by an agent, guardian, administrator executor 2 Requisites He must disclose who his principal is; and He must sign in behalf of the principal, Failure which he incurs the liability of a general indorser. Sec 45 Time of indorsement The presumption is that the instrument was indorsed before it was overdue Sec 46 Place of Indorsement Where it is dated Sec 47 Should be discussed in relation to Sec 36. An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise. When the law says restrictively indorsed or discharged it refers to the first mode, the one which prohibits the further negotiation. Sec 38 Cancellation or Striking out of indorsement What can be cancelled or struck out is only the indorsement not necessary to the title of the holder. In case the indorsement is cancelled or struck out, then the party whose indorsement was struck out or cancelled and the parties subsequent to him are relieved from liability. Example: Originally Bearer Instrument

1. 2.

That he has good title to it That he does not know of any information that would render the instrument valueless or worthless

A qualified indorser or one negotiating by delivery does not make the same warranties as a general indorser that the instrument shall be paid or accepted when presented for payment; and if not paid he will be liable to the holder provided appropriate proceedings have been taken against them.

So is P liable to B? It depends if he violates or breaches his warranties as a qualified indorser. If not then P is not liable to B.

What about A, is he liable to B? Yes, because he is a general indorser. But always keep in mind that a general indorser only becomes liable only if the instrument is dishonored and the appropriate proceedings have been taken against him. In other words, A must receive the appropriate notice of dishonor from B within the period and in accordance with the manner prescribed by the NIL, otherwise the general indorser is not liable.

Sec 39 Conditional Indorsement Example: A promissory note that M issued to the order of P. P negotiated to A but indorsing it conditionally, if A pass the Bar. Sgd P. Can A enforce the instrument against the maker pending the results of the bar examinations? M is not liable to pay until the condition is fulfilled. But may M opt to pay. He may disregard the condition because he issued the instrument without a condition and therefore he cannot be burdened by any condition on his obligation to pay. OR he may wait for the outcome of the bar. If A did not pass, M is not liable. But if he pays, what happens now to P and A? The rights of A will depend on passing the bar. The law says, subject to rights of the person indorsing conditionally. So if M pays without waiting of the condition then A holds the proceeds of the promissory note subject to the rights of the person indorsing conditionally.

!27

Bearer instrument which M issued to P. P indorsed specially to A. A indorsed specially to B. B indorsed specially to C. C indorsed specially to D.

not only be governed by NIL but more by the Civil Code (Caltex vs CA, SCRA 212). The right of the pledgee is to foreclose the pledge in case of non-payment, but not all the rights of a HDC under Sec 52.

If an instrument is originally bearer instrument it can be negotiated by mere delivery. There was no need for special indorsement therefore D can cancel the indorsement of A. So A and all parties subsequent to him are relieved from liability. (Warning: Dean previously said that D can cancel Ps special indorsement, but later on he took it back. According to Atty. De Leon D may strike out Ps indorsement, making the instrument enforceable only against M.)

Sec 51 What are the rights of mere holder under Sec 51? 1. he may collect on the instrument 2. he may sue in his own name in case of non-payment 3. payment to him in due course discharges the instrument Under Sec 88 payment is payment in due course, when it is made in favor of the holder at maturity without notice that his title is defective. Sec 52 What are the conditions to make a holder a HDC under NIL? A holder in due course is a holder who has taken the instrument under the following conditions: 1. That it is complete and regular on its face 2. That he became the holder of it before it was overdue and without notice that it has been previously dishonored, if such was the fact 3. That he took it in good faith and for value 4. That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

What if he cancelled the indorsement of B? Then only B is relieved from liability and all parties subsequent to him, C. Originally Order Instrument In case of order instrument the indorsement of the payee cannot be cancelled because the indorsement of the payee is necessary for the further negotiation of the instrument. So if it is an order instrument, how and in what instance can you cancel an indorsement? In case there is a blank indorsement. If there is blank indorsement then it can be negotiated by mere delivery. If after the blank indorsement there are special indorsements then the special indorsements can be cancelled because these are not necessary to his title. If so then the subsequent parties are relieved from liability. Example: Order instrument that M issues to P. P indorsed in blank to A. A indorsed specially to B. B indorsed specially to C. The blank indorsement by P enabled the instrument to be negotiated by mere delivery. So C does not need the special indorsements of A and B, because the blank indorsement of P would be enough to transfer title in favor of the holder. So C may cancel As special indorsement. If he does, then A and parties subsequent to him are relieved from liability. If C cancels the only Bs special indorsement, then only B is relieved from liability. NIL_9 CHAPTER IV RIGHTS OF THE HOLDER What are the obligations or liabilities of a holder? None. The holder has rights, not obligations or liabilities. Chapter 5 refers to the liabilities of the parties (the maker, drawer, acceptor, indorser), but with respect to the holder, he has no obligations on the negotiable instrument. He has rights. Kinds of Holder 1. ordinary holder (Sec 51) 2. holder for value (Sec 27) 3. holder in due course (Sec 52) Pledgee Does a pledgee qualify as a holder in due course? Pledgee is only a holder for value to the extent of his lien. So not the rights of a HDC under Sec 52. His rights as a pledgee will

1st Condition What do you mean by complete? Not wanting or lacking in any material particulars. When do you say it is material? If it affects or changes the rights and obligations of the parties. So if there is no payee, there is no amount, no interest, no due date of payment Check Number or Serial number The absence of check number the does not make the instrument incomplete. The absence of a serial number, likewise does not make the check incomplete. So the check number and serial number are not material particulars (PNB vs CA) If what is altered is the check number or the serial number it will not be governed by the rule on material alteration because it is not a material particular. Regular Upon its Face What if the irregularity is not apparent on the face of the instrument? If the irregularity is not apparent on its face he can still qualify as a HDC but his rights will be governed by Sec 124 that is he can only enforce the instrument according to the original tenor thereof. 2nd Condition Is it possible for the instrument be dishonored and yet not yet due for payment and therefore could be negotiated to a holder qualifying him as a HDC? Sec 52 paragraph 2 contemplates an instrument which has been dishonored and yet negotiated to a holder and if that holder had no notice of that dishonor, then he is qualified.

Is it possible then for an instrument to be dishonored and yet negotiated to a HDC before maturity, because if an instrument is negotiated after maturity, the presumption is the holder is not a HDC? Sec 143 contemplates 2 Kinds of Presentment:

!28

1. 2.

presentment for acceptance presentment for payment

Ordinarily, in a bill of exchange presentment for acceptance is presentment for payment. Example: When you present the check for acceptance it is considered as presentment for payment. But there are certain instruments which require presentment for payment independently of the presentment for payment, like if an instrument is payable after sight, where it is necessary to fix the maturity of the instrument. Example: The drawer drew a bill of exchange against ABC payable to the order of P directing the drawee to pay the payee to pay P100K 60 days after sight that means that the instrument must be presented for acceptance of the drawee to fix the maturity of the instrument. Unless the drawee accepts the instrument then you cannot determine when the instrument will be paid. Once accepted thats the time you start counting the 60 days. On the 60th day after acceptance and after sight you have to present again the instrument for payment. What if on presentment for acceptance of the instrument it is already dishonored? Then it is possible it is possible that the instrument is not yet mature but presented for acceptance and dishonored by non-acceptance and negotiated to a holder. If the holder is not aware of the non-acceptance then he still qualifies a HDC. 3rd Condition That he took the instrument in good faith and for value 4th Condition The critical period is, at the time of negotiation. If at the time of negation, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it he qualifies as a HDC even though subsequent to the negotiation he has notice of the infirmity or defect in the title of the person negotiating the instrument. The Payee In our jurisdiction a payee may be considered as a HDC so the definition of holder under Sec 191 means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof. But in the 2 cases where the payee is considered a HDC, the payee did not acquire directly from the instrument from the maker or the drawer. Instead he acquired it from a 3rd party intervening between the maker and the payee, or drawer and the payee. Example: If the payee acquired the instrument from the maker and constituted the payee as a HDC and he holds the instrument free from any defect of title and free from personal defenses. Lets say the maker without consideration issued the instrument to the payee constituting the payee as HDC and holds it free from defect of title and free from personal defenses. Is the maker liable on that instrument to the payee despite lack of consideration? If you say that the payee is a HDC and free from personal defenses, theoretically the maker is entitled to pay the payee. But that is not the impediment obviously.

The impediment is that the payee acquired the instrument from an intervening party between the maker and payee, or drawer and payee. De Ocampo vs Gatchalian An agent of a seller of a car obtained a check from the interested buyer to show that he is interested in buying the car of the seller. So the agent got the check. The buyer-drawer in the transaction issued a check payable to the order of the payee, the seller of the car. He did not give it directly to the seller; instead he gave it to the agent for the agent to show it to the seller that the buyer is interested in buying the car. The agent negotiated it to the payee, not to show good faith in buying the car by the buyer but in payment of his wifes hospitalization expenses. In this case the payee acquired the instrument from an agent even though it was issued by the drawer. In that case the conclusion is that payee is not a HDC. He did not qualify for the following reasons: 1. The amount of the check did not correspond exactly with the obligation of the wife to the payee; and it is different from the purchase price of the car 2. The check is crossed. If the check is crossed then it serves as a warning to the holder that it was issued for a specific purpose and therefore the holder must inquire if he acquired the check consistent to that purpose. If not, he does not qualify as a HDC.

Yang vs CA X tells to D, the drawer, to issue a check payable to the order P and in exchange for the check and demand draft or dollar draft, I will issue to you a new instrument (Example: Issue a check to P for 90K and I will issue a check to you for 100K). D issued a check payable to P, in that case a demand draft or dollar draft, but he did not give it directly to P instead he gave it to X and X negotiated it to the payee. X did not give the exchange instrument to the drawer. So the drawer was defrauded in issuing the instrument payable to the order the payee.

Will the payee qualify as a HDC in this case? The holder acquired the instrument under the 4 conditions therefore he qualified as a HDC. So the drawer may be defrauded but because there was negotiation by X to P and P acquired the instrument under the 4 conditions under Sec 52 then the encashment of the check is within his rights. Sec 56 What constitutes defect of title? There is defect either in: 1. the acquisition of the instrument or 2. the negotiation thereof Defect in the Acquisition There is a defect in the acquisition if the party acquired the instrument by fraud, force, duress, and other unlawful means or for illegal consideration. Examples Fraud The payee obtained a check from the drawer because the drawer issued to him a check in payment for a 14 karat jewelry. So instead the payee gave to him jewelry made of tin can.

!29

Employment of force, duress, and fear Twisting the arm of the drawer for him to issue a check; poking a gun at the head of the drawer

Illegal Consideration The drawer issued a check in payment of a gambling debt; or to stifle criminal prosecution; or to rig the results of an election Defect in the title brought about by negotiation What could be a defect in the title brought about by negotiation? Example: Maker issued a promissory note to the payee, but the maker already paid the promissory note but despite that the payee negotiates the instrument to another party. So there is a defect in the negotiation because the instrument has already been paid but that breach of negotiation will not affects the rights of a HDC. Sec 56 What constitutes notice of infirmity? 1. Actual notice or 2. Constructive notice Actual Notice If he is completely aware of it Constructive Notice Constructive in the sense that if a party ought to know that the circumstances under which he acquired the instrument amounts to bad faith. Sec 57 The rights of a HDC In addition to the rights of a holder under Sec 51 (the right to receive payment, the right to sue in his own name) Sec 57 tells us the other rights of a HDC 1. He holds the instrument free from any defect of title of prior parties 2. He holds the instrument free from personal defenses among prior parties 3. He may enforce payment of the instrument for the full amount thereof against all parties liable thereon

2. Personal Defenses - They are only personal to the party concerned who by reason of his conduct or agreement make it inequitable for him to enforce the instrument. - Not available against a HDC

Examples: Sec 13, Filling up of a wrong date. If the date inserted is erroneous or wrong insofar as the HDC is concerned he can enforce the instrument based on the instrument as inserted because he can enforce the instrument as completed as filled up. Sec 14, Incomplete but delivered Sec 16, Complete but undelivered Sec 28, Absence of consideration Sec 57, defect in the negotiation or the acquisition by of the title by fraud, force, fear, duress, illegal consideration, or negotiation by breach of faith, and other circumstance amounting to fraud Simple fraud Discharge by payment or renunciation or release before maturity Discharge of party secondarily liable by discharge of prior party

What about material alteration not done by the holder? The material alteration is both personal and real defense. It is personal defense only if the instrument is being enforced in accordance with the original tenor. It is a real defense available against a HDC, if it is being enforced in excess of the original tenor. Cases regarding the Rights of a HDC Salas vs CA, 181 SCRA (asked twice in the bar) M purchased a car from P. M paid the down payment and issued a promissory note for the balance of the purchase price of the car. There was a discrepancy in the chassis and engine number in the invoice and the chassis and engine number of the car. But the instrument was negotiated already in favor of another party, State Investment House (SIH) Can SIH enforce the promissory note despite the failure of consideration (because there was a consideration but it did not conform with the agreement)? If an instrument is negotiable, then the presumption is that the holder is a holder in due course, and as such holder he acquires title to the instrument free from personal consideration. Since the failure of consideration is merely a personal defense, not available against a HDC the maker or drawer of the check, as the case may be is liable on the instrument. He cannot invoke the breach of contract or failure of consideration by the payee-car company. That defense can be invoked against the car company but not against the holder who acquired the instrument against the said company.

2 Kinds of Defenses 1. Real Defenses - Called as such because they attach to the instrument regardless of the merits and demerits of the holder. That is why these are available even against a HDC. Examples: Sec 15, Incomplete and undelivered Sec 23, Forgery Fraud in fact, which also fall under forgery. The signature was given for the purpose different from that intended by maker or drawer. Sec 124, Fraudulent alteration by the holder Sec 22, Minority Sec 119, Discharge of the instrument. But the discharge must be after maturity

Other causes of discharge (NoCoMeRePrePaLo). Novation Compensation Merger Rescission Prescription Payment Loss

These are the modes of extinguishment under the Civil Code

State Investment House vs CA 217 SCRA The drawer issued checks payable to the order of payee drawn against Equitable Bank as security of items of jewelry that D obtained from P to be sold on commission basis. P negotiated the check to SIH. In the meantime the D failed to sell the jewelries, so D returned the jewelries and demanded the checks issued as a security be returned to him. Unfortunately the checks cannot be returned anymore because it was already negotiated to SIH. So upon

!30

knowing this, the withdrew or closed his account with Equitable Bank.

When the check was presented for payment, it was dishonored for being drawn against a closed account or insufficiency of funds, as the case may be. Can the Holder, SIH, enforce the instrument against the Drawee and/or the Drawer; or can the drawer invoke the defense that those checks had no consideration? SIH is presumed to be a HDC because the checks are negotiable in nature and therefore as such holder he can enforce the checks without being subjected to personal defenses like absence of consideration. What about the act of withdrawing the funds by the drawer? One of the defenses that were given by the drawer is that he was not given a notice of dishonor. The liability of the drawer and the indorsers is premised on the dishonor of the instrument and of the giving of the appropriate notice of dishonor. The SC said that it is not a good defense because one of the cases where notice of dishonor is not necessary is when the drawer had no right to expect or require that the instrument would be honored anyway. Since he withdrew the funds from the drawee bank he had no right to expect that the instrument would be honored, so it is pointless giving him a notice of dishonor. Crossed Checks While the HDC acquire title to the instrument free from personal defenses that principle has to be modified if the checks are crossed. As we saw in: Bataan Cigar vs CA and State Investment House vs CA. If the checks are crossed the effects are as follows: 1. it cannot be encashed, it can only be deposited 2. it can be negotiated only once in favor of someone with an account with the bank 3. serves as a warning that the checks have been issued for a specific purpose, with certain limitation and therefore the holder must acquire the instrument consistent with the purpose or limitations, otherwise he does not qualify as HDC

Can the crossed check be enforced or can the drawer raise the defense that the check is not supposed to be negotiated because it is only for financial assistance? If a check is crossed, that defense, that limitation place on the check can be raised even against the HDC.

Sec 58 There are 2 conditions to concur so that the transaction will be governed by NIL, not just by the law on assignment of credit 1. The instrument must be negotiable; and 2. holder must be a HDC If the instrument is non-negotiable, that serves as a warning that the purchaser that there a certain limitations attached to the instrument. So both must concur negotiable under Sec 1 and HDC under Sec 52. Is there an exception where a non-holder in due course may acquire the rights of a HDC? Sec 58 tells us that if a holder is not a HDC it is as if the instrument is not negotiable, which means transaction is governed by the law on assignment of credit, not the NIL with respect to the rights of the transferee. The exception is if the non-HDC acquires title from a HDC and is not himself a party to any fraud or illegality. Example: M issues promissory note to P without consideration. P negotiates to A. Lets say B is aware that the instrument from the beginning has no consideration. But A negotiated the instrument to him. Is B a HDC? No because he did not satisfy the 4th condition, he had notice of the infirmity of the instrument because there was no consideration. Does B have the rights of a HDC? Yes, under Sec 58 because he acquired the instrument from A, who is a holder in due course and is not a party in any fraud or illegality. B acquired the rights of a HDC with respect to the parties prior to such HDC, meaning B can enforce the instrument against P if M dishonors because he has the rights of A against parties prior him. CHAPTER V LIABILITIES OF PARTIES Maker vs Drawer 1. A maker is primarily liable as distinguished from a drawer, who is a party secondarily liable 2. Maker is a term appropriate for a promissory note; while a Drawer is a term appropriate for a bill of exchange 3. A maker cannot limit his liability. He is liable based on the tenor of the instrument. A drawer can issue an instrument without recourse to him, meaning he can negative his personal liability by issuing an instrument without recourse to him. Sec 61 tells us that it is possible for the drawer to issue an instrument without recourse.

Bataan Cigar vs CA The drawer issued crossed checks payable to order of P drawn against ABC Bank in payment for bales of tobacco that P supposedly has to deliver to the drawer. P did not deliver did not deliver the bales of tobacco as agreed upon and also negotiated the check to State Investment House (SIH). Can SIH enforce the check despite lack of consideration? Ordinarily if the checks are not crossed that defense is not available against the HDC (Salas vs CA). But because checks are crossed, then it changes the complexion of the law. This time SIH has limited rights. That defense of lack of consideration which erstwhile was not available against a HDC, became available if the check is crossed. State Investment House vs CA A crossed check was issued only as a financial assistance not to be negotiated, but the payee in breach of faith negotiated the instrument.

Liable for the Tenor of the Instrument Can the maker introduce parol evidence to show that the amount indicated in the promissory note is not the amount agreed upon by the parties? I.e. Maker issue a PN for 10K, can he say that it actually is only for 5K because they have an agreement that it is only for 5K? No, because the law says he is liable to pay according to the

!31

tenor of the instrument 4. Both the maker and the drawer admits that the payee exists and his then capacity to indorse

not to accept 2nd indorsed check, because it has no way of determining if the indorsement of P to A is genuine, and if it accepts 2nd indorsed check and then it was proven that the Ps indorsement is forged the fault is on ABC.

Accumulation of Secondary Contracts If M issues a promissory payable note to the order of P. P negotiates to A. A to B, You have so many contracts. You have promissory note and you have accumulation of 2ndary contracts P to A, A to B. Can B enforce the instrument against A the indorser? No. An indorser, a party secondarily liable is liable only if 2 conditions concur: 1. the instrument is dishonored by parties primarily liable; and 2. Appropriate proceedings were taken against him, which means giving him the appropriate notice of dishonor.

But in those cases where there is acceptance of 2nd indorsed check, usually P has a facility arrangement with the bank. He signs an agreement with the bank the in case the instrument is dishonored he will be liable. D issued a payable to the order of P drawn against ABC Bank. P negotiates to A. (Asked twice in the Bar) Can A enforce the instrument against P, the indorser? No, because the drawer and the indorser are parties secondarily liable. They are liable to the instrument only if the instrument is dishonored by non-acceptance by the drawee and appropriate proceedings are taken against them, which means A gave notice of dishonor from the drawer and indorser. An instrument cannot be dishonored by non-acceptance unless it is present for acceptance. That is why A must presented the instrument to ABC. If the bank dishonors then D and P becomes primarily liable. So from 2ndary liability they become primarily liable (Tuazon vs Bartolome). Tuazon vs Bartolome If A files an action only against the indorser, P, is D an indispensable party? Is there a need to implead the drawer of the check as an indispensable party to give relief to all parties liable to the instrument? It is the option of the holder whom to sue. If he files an action only against the indorser, he need not implead the drawer. It is his call. The non-inclusion of D will not result in the dismissal of the complaint. He is not an indispensable party insofar as the holder is concerned. Here P, as indorser, has the right of reimbursement from D, the drawer, because D warrants to pay the amount of the instrument to the party who was made liable thereon in case of dishonor and was given the notice of dishonor. In such case D is liable to P.

That is why the holder cannot proceed directly against the indorser, because the liability of the indorser is yet to be determined, is yet to attach, is yet to arise. Only if the instrument is dishonored by the party primarily liable, which presupposes the presentment of payment of the instrument to the party primarily liable, in this case the maker. If the maker pays to the holder at maturity without notice that the title of B, the holder, is defective, then it effectively discharges the instrument. That cannot be further negotiated because of the discharge. All the liabilities are likewise extinguished, even those of the indorsers, P and A. If M dishonors, under Sec 68 the indorsers are liable in the order in which they indorse, which means that the prior party is liable to subsequent party or subsequent parties may enforce the instrument against prior parties. But that order is only between the indorsers. It does not bind the holder. In other words, the holder may choose which one to sue either P or A. So between A and P, they are liable in the order in which they indorsed but it does not bind the holder who can sue whoever he wants to sue. In our example if B gives notice of dishonor to A only then he can sue A only. What about P? P is discharged if he was not given any notice of dishonor, unless A gives P a notice of dishonor within the period allowed by law, because notice that is given by A to P inures to the benefit of the holder. The point is that the holder may choose which one to sue, either A or P. If B sues A only then P is not an indispensable party. There is no need for B to implead P, because P insofar as B is concerned is not an indispensable party. How can A obtain reimbursement from P? The remedy available to A is to file a 3rd party complaint against P for reimbursement or indemnification because after all P, a prior party, is liable to A, a subsequent party. Checks D issued a check payable to the order of P drawn against ABC Bank. P negotiates to A. A is the holder. It stops there. In the real world that is the best it can go. So only 2nd indorsement. It is very rare that there is a 2nd indorsement because of the policy of banks

So P despite the non-inclusion of D as dispensable party can file a 3rd party complaint against D, so that in case P is made to pay A, in the same case, P can claim for reimbursement from the drawer without having to file it later on. Villanueva vs Nite If the drawee-bank dishonors the check, despite the fact that it is funded, does the payee have a cause of action against the drawee? The payee has no cause of action against the drawee, because the drawee is not liable on the instrument, unless and until it accepts the same. That is why in NIL there is no liability for a drawee. There is no chapter or section on the liability of the drawee, but yet there is a section on the liability of an acceptor.

Probably P may have a cause of action against the drawee under quasi-delict as you have seen in the case of Romeo and Juliet, which was asked in the bar. But for NIL it is clear that the drawee is not liable on the instrument, unless and until it accepts the same. What are the remedies of the parties? If the payee goes to the bank and the drawee-bank dishonors, the payee can sue the drawer. And the drawer can sue the drawee-bank for breach of contract. If the account is funded and there is no reason to dishonor the check, the drawee is liable to

!32

the drawer or principal. If the drawer has a current account with the bank, he has a right to order the bank to pay any payee. And if the amount is enough, the amount is the same or more, or if the account is funded then the drawee has no right to dishonor the check. If it does, it is liable for breach of contract.

The drawer and the indorser are secondarily liable. Their liability is premised or dependent on the dishonor of the instrument for non-payment. That presupposes therefore that the instrument must be presented for payment to the party primarily liable. Asked in the Bar: What if the instrument indicates that payment should be made at a special place (place specified by the parties; i.e. BDO Head Office), and the holder did not show up? Does that discharge the instrument? Does that discharge the parties primarily liable to the instrument? Does that negate or extinguish liability? No, because presentment for payment is not necessary to charge the parties primarily liable. He is required to pay even without the need for presentment for payment.

A check was issued by D to P drawn against ABC. P negotiates to A. P is the indorser in this case. As an indorser he is liable only in case of dishonor and then was given appropriate notice of dishonor. Is there an instance where despite lack of notice of dishonor P may be held liable? If the indorser negotiates the instrument with recourse to him, the lack of notice of dishonor to the indorser will not extinguish his liability. His liability is not based on NIL, but because of the agreement he signed that the negotiation is with recourse to him. With recourse, means that if the instrument is not paid I will pay (Great Asian Sales vs CA)

However the law says if it is payable at a special place and the party primarily liable shows up, then that is equivalent to tender of payment. So from that time on the party liable thereon is not liable to pay the accruing interest. He is liable to pay the principal amount, but the interest that has accrued on that date or interest accruing thereafter is no longer the liability of the obligor. Sec 74 Presentment for payment is the production of the instrument to the party primarily liable. In other words the instrument must be exhibited to the party primarily liable. Without the exhibit of the instrument the party primarily liable may opt not to pay. However after paying it, the law says he may take up the instrument. If the instrument evidencing the credit is in the possession of the creditor or the holder the presumption is that the instrument is still unpaid (Far East Bank vs Querimit). Sec 74 confirms the prerogative of the obligor or the party primarily liable to require the submission or the surrender of the instrument after paying it. Otherwise the presumption is that it is not yet paid. Far East Bank vs Querimit In the books of Far East Bank (FEB) the obligation is already paid. The instrument in that case was a certificate of time deposit (CTD). CTD can be a negotiable instrument if all the elements are present (Caltex vs CA). In the books of the bank the CTD is no longer outstanding. Unfortunately, the CTD was still in possession of the holder. Between the books of the bank and the possession of the holder, which has the greater weight? SC said making reference to Sec 74, the obligation is still outstanding if the instrument is still in the possession of the creditor or the holder. The procedural aspect as to where, how, when are all important because if there is no valid presentment for payment the drawer and the indorser are discharged. Sec 71 If the instrument has a due date, you make presentment for payment on the due date. If it is payable on demand when do you make presentment for payment? Promissory note within a reasonable time from issuance

NIL_10 I can do all things through Christ who strengthens me. PHILIPPIANS 4:13

We know that all things work together for good to those who love God, to those who are called according to His purpose.

ROMANS 8:28

Sec 70 Presentment for payment - is the production of the instrument to the party primarily liable for the purpose of demanding and receiving payment

Presentment for payment is not necessary to charge persons primarily liable, because with or without presentment he is required absolutely to pay the instrument: The maker based on the tenor of the instrument The acceptor based on the tenor of his acceptance Presentment for payment is necessary to charge the drawer and indorser liable to the instrument.

!33

Bill of exchange within a reasonable time from the last negotiation Check within a reasonable time from issuance

Sec 72 Requisites for Presentment for Payment 1. It should be made by the holder to the party primarily liable 2. At reasonable hour on a business day 3. At the proper place Sec 73 in the following order: (Code: SAURO) 1. place Specified in the instrument 2. Address of the person to make the payment 3. Usual place of business or Residence 4. any Other place where he may be found

indorser only and dropping the drawer; or the drawer and dropping the indorser, because his right of action has accrued against drawer or the indorser in a bill of exchange, or the indorser in a promissory note, without having to sue the maker or the party primarily liable. If he wants to, he can sue as many defendants as possible, but that is his option. In other words, he need not wait for a case to be filed against the parties primarily liable. He can sue directly the parties secondarily liable, who by reason of the dishonor of the instrument become parties primarily liable on the instrument.

Sec 75 Supposing a holder of a check goes to the bank. At 9 am the account is not funded. The manager of the branch called up the drawer. The drawer told the manager to give him up to 3 hours to fund the check. But the holder insisted that the bank should either honor it or dishonor it right here right now indicate DAIF, so that he can sue the drawer the following day. Does the law allow the drawer to make good his check? Does the law give the drawer the time to fund the check? Yes. The payee or holder cannot insist that the decision be made by the branch manager right there right now, because the law affords the drawer up to the close of the business hours to fund the check. Moran vs CA The check was deposited and sent for clearing. The funds were insufficient. So the drawee bank dishonored the instrument. The contention of the drawer is: You should have honored it up to the extent of my deposit. The SC said that it is all or nothing. If your account with the bank is not sufficiently funded, the check should be dishonored. The bank has no obligation to fund it for you. The bank has no obligation to make good the check up to the amount of your deposit. Sec 75 of NIL is an over the counter transaction. When a check is deposited and sent for clearing. Then it is the amount of your deposit at that time of day. If the funds is not sufficient, the bank is well on its right to dishonor the check. Sec 84 This tells us the consequence of a dishonor for non-payment: Subject to the provisions of this Act, an immediate right of recourse accrues in favor of the holder against the parties secondarily liable. Subject to the provisions of this act This refers to the giving of the appropriate notice of dishonor. The liability of the drawer and the indorser or the parties secondarily liable is premised on the presentment for payment, dishonor of the instrument by non-payment, and the giving of the appropriate notice of dishonor. An immediate right of recourse accrues in favor of the holder against the parties 2ndarily liable: Does it mean that he can sue drawer and indorser and never mind the drawee? Can he sue the indorser and never mind the maker in case of a promissory note? Does he have to sue the maker and together the indorser in case of a promissory note? What the law means it is that he has the option to choose to sue either the maker or the indorser in a promissory note; or the

Sec 83 When is an instrument considered dishonored by non-payment? 1. When the presentment for payment is made and payment cannot be obtained; or 2. When presentment for payment is excused or waived and the instrument is overdue and unpaid In the coverage of the bar the discussion on bill in set, protest are not part of the bar. No body uses bill in set anymore. The syllabus only includes dishonor, discharge. It does not include anymore the procedural aspect. Why? Because in practice one sentence makes all the difference: Presentment for payment, notice of dishonor, and protest are hereby waived. So one half of your NIL is covered by one sentence. Sec 88 Payment in due course What are the requisites of payment in due course? Payment is made in due course when 1. it is made by the party primarily liable 2. at or after the maturity of the payment 3. to the holder thereof 4. in good faith and without notice that his title is defective Does the phrase without notice that his title is defective refer to the maker or to the holder? The title of the holder.

The drawer and the indorser become liable to the instrument if the instrument is dishonored for non-payment and the appropriate notice of dishonor is given to them. D issued an instrument payable to the order of P. P indorsed to A. A to B. B to C. C goes to the drawee presented the instrument for payment and the drawee dishonors. Sec 89 The holder must give notice of dishonor to B, A, P and D, the drawer and each of the indorsers. Otherwise they are discharged. If C notifies B only, what happens to A, P, and D? They are discharged, unless within the period prescribed by law B gives notice to prior parties. Notice given by a subsequent party to a prior party inures to the benefit of the holder. C notified B only. If B notified A, A notified P, P notified D those notices inures to the benefit of the holder. One important thing is that the drawer and the indorser is given the notice within the period prescribed by law. What if C notifies A, what happens to B? B is discharged because A cannot notify B. He can only notify a

!34

prior party who upon being given a notice of dishonor will be liable to the party subsequent to him.

Sec 90 Who are the parties who can give notice of dishonor? 1. The holder or his agent 2. The party who may be compelled to pay it to the holder and who would have the right of reimbursement from the party to whom notice is given C, the holder, or his agent may give notice of dishonor to each of the indorsers and the drawer; otherwise as general rule they are discharged from liability.

6 months (this is based on customs, usage, and practice; what the law only says is reasonable time) unless, the check has a date on the face thereof within which presentment for payment must be made. In this case the check must be presented within the period, otherwise it becomes stale.

What happens if the check was not presented within reasonable time from issuance? Does that discharge or extinguish the obligation of the drawer? Only to the extent that the drawer has been prejudiced. If there is no prejudice to the drawer, the drawer is still liable to pay the payee, because under Art 1249 NCC a check does not produce the effect of payment until it is encashed or due to the fault of the creditor its value was impaired.

If C notifies B, then B in that case becomes a party entitled to give notice because having received the notice of dishonor from C he is compelled and may be compelled to pay the instrument. B may give notice of dishonor to A and A may give notice of dishonor to P and then P to D. So subsequent party may give notice of dishonor to prior party. But, a prior party cannot give notice of dishonor to subsequent party because prior party is liable to subsequent party. Supposing in the hands of C, the instrument is dishonored and then he notifies B, A, P, and D. Then after giving notice of dishonor to the parties prior to him, he negotiates the instrument to Y, a subsequent holder. Is Y bound give another notice of dishonor to the drawer and indorsers? As long as the drawer and the indorsers have been given the notice of dishonor there is no need to notify them all over again. One notice is sufficient. The subsequent holder need not give another notice of dishonor to the parties prior to him. To repeat the discussion, the holder or subsequent party may give notice of dishonor to prior party. Prior party is liable to subsequent party. A party cannot give notice of dishonor to a subsequent party because he is liable to him. He can only give notice of dishonor to a party prior to him upon invoking the right of reimbursement. In our discussion, B cannot notify C because B is a party subsequent to C, instead he can notify A. The notice given by B to A inures to the holder and subsequent holders likewise if the instrument is subsequently negotiated. Checks Is a dishonored check the same as stale check? They have the same effects or consequences, but a stale check is different from a dishonored check. A stale check is a check which has become worthless because it was not presented for payment within reasonable time from issuance.

So if by reason of the delay in the presentment for payment, the drawee bank becomes insolvent. In that case the inaction of the holder caused prejudice to the drawer. In this case the drawers liability is extinguished. But if there is no impairment, injury, or damage to the drawer anyway then his obligation to the payee or to the holder still subsists. It only means that that particular check cannot be enforced anymore, but the drawer is still liable to pay the payee for his obligation.

Combo (meaning combination) Account Moran vs CA/ Alunan vs Traders Royal Bank A drawer has a savings account and a current account. He issued a check. The balance of the current account was insufficient for the check he issued, but if you combine the deposit in the savings and the current account the aggregate deposit should be more than enough to cover the obligation. Does the drawee bank have the obligation to combine or aggregate the deposit from the savings and current so the check issued by the drawer will be honored? There is no such thing as automatic transfer of funds from savings to current or current to savings. It is a facility that must be applied for with the bank. If you want a transfer of funds arrangement, it is something which you must apply for with the bank because it is not automatic.

From the previous discussions we said that there are conflicting decisions on whether or not cashiers check is legal tender. It is submitted that the correct answer should be under Sec 60 RA 7653 checks, whether managers check or cashiers check, are not legal tender because under the law the debtor cannot compel the creditor to accept the check in payment of a debt. If the debtor cannot compel the creditor to accept a check in payment of a debt, it means that it is not legal tender. Legal tender is a currency which the debtor may compel the creditor to accept when tendered in the right amount.

However while there are conflicting decisions on whether or not cashiers check is legal tender, with respect to redemption there is no conflict. In case of Fortunado vs CA and reiterated in subsequent decisions, a redemptioner may tender redemption price in the form of a managers check or cashiers check. So the mortgagee or the judgment creditor cannot refuse to accept a managers check or cashiers check when it is tendered as a redemption price, because redemption is not an obligation. It is a right. So the limitation on cashiers check as not being legal tender only applies to an obligation, but not in the exercise of a right. Rule 32, Rules of Court: A judgment may be satisfied through a

Under Sec 185 a check is a bill of exchange drawn in a bank and payable on demand as distinguished from an ordinary bill of exchange which need not be payable on demand. That is why it must be presented within a reasonable time from the issuance, not from negotiation. A dishonored check is one presented for payment to the drawee but the drawee dishonors it. What do we mean by reasonable time?

!35

certified check. The drawee is not liable on the instrument unless and until it accepts the same OR if IT CERTIFIES the same, because certification is tantamount to acceptance. Certified check is good as cash because it is accepted by the therefore it makes the drawee bank liable already.

File an action for interpleader, because there are conflicting claims on the same deposit. You dont take sides. Let the court decide on what to do.

NIL_11 Ask, and it will be given to you; seek and you will find; knock, and it will be opened. Or what man is there among you who, if his son asks for bread, will give him stone? Or if he asks for a fish, will he give him a serpent? If you then, being evil, know how to give good gifts to your children, how much more will your Father who is in heaven give good things to those who ask Him! MATTHEW 7:11

A certified check is different from a cashiers check. A certified check is a check already accepted by the drawee-bank, therefore it is liable. As a general rule with respect to bill of exchange or a promissory note, the notice of dishonor must be given within 24 hours, not the following day. What about a check, is that the same requirement? For the purpose of BP 22 is it 24 hours? 5 days for the drawer to make good his check with respect to the prosecution for violation of BP 22. It is not 24 hours under the NIL. Usually you sue the drawer, because the drawer knew or opt to have known that the check is not funded and he has 5 days to make good the check, otherwise there is a presumption the he issued a bouncing check or worthless check. Can you sue an indorser for violation of BP 22? The gravamen of the offense under BP 22 the knowingly issuing a worthless check. Does that extend to an indorser? Yes, the indorser may be held liable for violation of BP 22 if it can be establish that when he indorsed the instrument he knew that the account is not funded. We know that closed account, unfunded account, or drawn against insufficient fund (DAIF) liable for BP 22 What about if the drawer issued a stop payment order to the drawee, can he be held liable for BP 22? Under banking rules if there is a stop payment order by the drawer, drawee is required to indicate on the check whether or not the account is funded. So the stop payment order does not negate criminal liability if the account is not funded. And the drawee-bank has the obligation to indicate on the instrument whether or not the account is funded despite the stop payment order.

God keeps every promise he makes. He is like a shield for all who seek his protection.

PROVERBS 30:15

Bill of exchange payable after sight: D issues a bill of exchange payable to the order of P drawn against X and says Pay to order of P $ 100 K, 30 days after sight. Signed D. P negotiates to A. A to B. What are the rights or remedies available to B? B may present the instrument for the acceptance of the drawee, X; or Negotiate This instrument requires presentment for acceptance separately from presentment of payment. Why? When is presentment for acceptance necessary? Sec 143 Where the bill- 1. is payable after sight, or where presentment for acceptance is necessary in order to fix the maturity of the instrument; or 2. stipulates that it shall be presented for acceptance; or 3. is drawn payable elsewhere than at the residence or place of business of the drawee.

In this case the instrument is payable at a fixed date after sight. So presentment for payment is necessary in case of a usance draft, in order to fix the maturity of the instrument. What about sight bills (payable at sight) does it require payment for acceptance? Sec 143 says if the bill is payable AFTER sight, not at sight. If the draft is at sight, it does not require presentment for acceptance (Prudential Bank vs IAC). What happens if there is delay in the presentment for acceptance or no negotiation within reasonable time? The drawer and the indorser are discharged. The holder still has rights. He can negotiate later on even though there was delay. B decides to present the instrument for the acceptance of X. 2 things might happen. It may be honored, meaning accepted, or it may be dishonored by non-acceptance. What does acceptance mean? Sec 132. The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer.

If you issue a check but you dont want to pay your creditor, make sure that the account is funded and issue stop payment order. So in that case you will not be charged for violation of BP 22. After you have funded the account and issued a stop payment order, the drawee-bank will not honor the check issued to the payee. After that you can withdraw your money. But what is important is at the time it was presented you have funds. What do you mean by drawn against uncollected deposits (DAUD)? You funded your account with a check that is yet to be cleared. If that is the reason for dishonor, can there be a prosecution for violation of BP 22? Yes. There is one case in our book. There are 2 drawers, A or B account. A wanted to withdraw, but B issued a stop payment order. What do you do in that case?

!36

What are the kinds of acceptance? 1. Actual and Constructive 2. General and Qualified Actual Acceptance Sec 132 Requisites for actual acceptance: 1. in writing 2. signed by the drawee 3. acceptance to pay money, not any other act 4. made in the instrument itself or on a separate instrument. But insofar as the holder is concerned he can insist that the acceptance be made in the instrument itself

In case of dishonor by nonacceptance, an immediate right of recourse against the drawer and indorsers accrues in favor of the holder against parties secondarily liable subject to the provision of this law, which means giving the appropriate notice of dishonor.

If the instrument is dishonored by non-acceptance, the holder, B, must give notice of dishonor to the drawer and each of the indorsers, otherwise they are discharged. Lets assume that C is the holder. B negotiates to C and B was the one who presented the instrument for acceptance, or it was in his hands the instrument was dishonored. C must give notice to the drawer and each of the indorsers otherwise the instrument is discharged. Within what period should C notify the drawer and the indorser? Within 24 hours. Supposing C notified B, are A, P, and D discharged? Yes Absolutely? B can notify A within the same period allowed by law. B is entitled to give notice to A, P, and D because there are two persons who can give notice of dishonor the holder or any party who may be compelled to pay, and who after paying it up has the right to secure reimbursement against the party to whom notice of dishonor was given. The notice given by B to A inures to the benefit of C. If A notifies P also within the same period, the notice given by A to P inures to the benefit of the holder. So therefore C, the holder, can proceed against B, A, and P despite the fact that initially C did not give notice to B, A, and P. Supposing C notifies B, B notifies P, what happens to A? A is discharged. The notice given by B to P inures also to the benefit of the holder. What if C negotiates to D, and D to Y, should Y give notice again to parties prior to him? Not anymore because the notice given by the holder inures to the benefit of subsequent holders. Is there any formality in giving notice of dishonor? It may be made verbally or in writing. No specific form is required as long as the drawer and the indorsers are informed. Supposing C notifies everybody, B, A, P, and D, can C afterwards decide just to file an action against the drawer, and drop his claim against the indorsers? Yes Can the drawer implead as 3rd party defendants B, A, and P? No. D cannot file a 3rd party complaint against B, and P because D is liable to P. Supposing C decides to file an action only against B, can B file a motion to implead D, P, and A as additional party defendants? No. The holder can decide who to sue and the drawer and indorsers not sued are discharged (Tuazon vs Bartolome). The remedy available to B is to file a 3rd party complaint against A, P, and D, against whom A has a right of recourse, but not just a motion to implead them as party defendants.

Constructive Acceptance Sec 137 1. drawee destroys the instrument 2. drawee retains or refuses within 24 hours after delivery to return the bill Is there an implied acceptance under NIL or bill exchange? None, because you have constructive, not implied. Sec 132 and 137 does not use the term implied acceptance. The term used by law is constructive, not implied. General Acceptance (Sec 140) One where the drawee accepts the instrument without qualification. Qualified Acceptance (Sec 141) Kinds: (Code: Carlo and Petra Lovers Tampuhan Sometimes) 1. Conditional accepts subject to a condition 2. Partial to pay part only of the amount for which the bill is drawn (i.e. bill is for 100K, only for 50K) 3. Local to be accepted only at a particular place, to the exclusion of other place (i.e. Head office of BDO)

4. qualified as to Time i.e. Pay to the order X 30 days or 60 days after sight

5.

acceptance of Some or more of the drawees, but not all

What is the effect of qualified acceptance? Sec 142 The holder may refuse to take a qualified acceptance If he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance. In case of qualified acceptance, the drawer and indorsers are discharged from liability on the bill UNLESS they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent thereto. When the drawer or an indorser receives notice of a qualified acceptance, he must, within a reasonable time, express his dissent to the holder or he will be deemed to have assented thereto. The other option is to dishonor the instrument by nonacceptance In case of dishonor of the instrument by non-acceptance, what should B do to preserve his rights against parties liable to the instrument?

!37

What are the cases where notice of dishonor is necessary to be given to the drawer? Sec 114. (Code: San Fernando Pampanga Rotary Club) 1. The drawer and the drawee are the Same person 2. The drawee is a Fictitious person 3. When the drawer is the same person to whom the instrument is Presented for payment 4. When he has no Right to expect that the instrument will be accepted or paid 5. Where the drawer has Countermanded payment or stop payment order

Signed drawee. Can the holder now collect payment from the drawee or acceptor? He must wait for the maturity, meaning wait for 30 days after acceptance. On maturity, what should C do to preserve his right as the holder? Present the instrument for payment. 2 things may happen again: 1. acceptance for payment or 2. dishonored for non-payment If the acceptor pays, does that discharge the instrument? Yes. Sec 88 in relation to Sec 119. Requisites for payment in due course. Payment is made in due course when: 1. it is made by the party primarily liable 2. at or after the maturity of the payment 3. to the holder thereof 4. in good faith and without notice that his title is defective

These are the cases that even without notice the drawer is liable. What are the instances where notice of dishonor is not necessary to be given to the indorser? Sec 115 1. If the drawee is a fictitious person and not having the capacity to contract 2. Where the indorser is the same person to whom instrument is presented for payment 3. Where the instrument was made or accepted for his accomodation

What are other cases where notice of dishonor is not necessary? Sec 109. When there is a waiver. Sec 111. Waiver of protest Sec 112. When despite the exercise of due diligence notice of dishonor cannot be given. When does the waiver affect only the indorser? When does the waiver affect all the parties to the instrument? Sec 110. When it is embodied in the instrument itself, it is binding upon all parties; but where it is written above the signature of an indorser, it binds him only. If the drawer closed his account and the holder presented the instrument for acceptance and the drawee dishonors, is the drawer entitled to be given notice of dishonor? State Investment House vs CA (217 SCRA) The drawer in that case after being informed that the check was negotiated to SIH, withdrew his funds closed her accounts. One of the defenses given by the drawer is that he is not liable because he was not given the appropriate notice of dishonor. Notice is not necessary because the drawer has no right to expect that the instrument will be honored. Lets say the drawee dishonored the check because it is under garnishment. Is the drawer entitled to be given notice of dishonor? No. He has no right to expect that it will be paid or honored anyway. The check was drawn against insufficient funds (DAIF). Is he entitled to be given notice of dishonor? No, because he has no right to expect that the instrument will be accepted or paid. D issued a stop payment order, but it is funded. Is he entitled to be given notice of dishonor? No, this falls under Sec 114 (e) the drawer is not entitled to be given notice of dishonor where the drawer has countermanded payment. Countermand means stop payment. Pay to the order of P the amount of $100K 30 days after sight. C presented the instrument to the drawee. The drawee accepted.

OR it may be dishonored for non payment Is it possible for the instrument to be accepted, and then eventually dishonored for non-payment? Yes What should the holder do in case of dishonor by non-payment? The holder must notify the drawer and the indorsers otherwise they are discharged. In case of dishonor by non-acceptance of the drawee, can the holder sue the drawer and the indorser after giving them the appropriate notice of dishonor without suing or filing an action against the drawee? Should he wait for the maturity of the instrument? Sec 151. When a bill is dishonored by non-acceptance, an immediate right of recourse against the drawer and the indorsers accrues to the holder and no presentment for payment is necessary.

There is no need to wait for maturity and present the instrument all over again for payment. There is no need for the holder to file any case against the drawee, he may proceed directly and right away to the indorser, subject to the giving of the appropriate notice of dishonor. In case of dishonor by non-payment, the principle is the same. Give notice of dishonor, otherwise the drawer and the indorser are discharged from liability. Lets say that the instrument is drawn abroad payable in the Philippines or drawn here payable abroad, is there any particular requirement to be complied with, otherwise the drawer and the indorser are discharged? Sec 152. Protest. Why is protest necessary in that case? Is protest necessary if a bill is drawn and payable in the Philippines? No When is protest necessary? In case of a foreign bill of exchange. If it not both drawn and payable in the Philippines, the foreign bill of exchange must be protested, not just giving of notice of dishonor.

!38

It must be made by a notary public or a respectable resident of the place where the bill is dishonored , in the presence of 2 credible witness (Sec 154). Otherwise the drawer and the indorser are discharged. Sec 119 What does discharge mean? The parties on the instrument whether primarily or secondarily liable are released from liability. When is a negotiable instrument discharged? 1. Payment by the principal debtor at or after maturity to the holder without notice that title of the holder is defective (Sec 119 in relation to Sec 88) Sec 47. An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise.

1. 2.

Prescription Fulfillment of a resolutory condition

4. When the principal debtor becomes the holder of the instrument at or after maturity in his own right. Is this not a surplusage? Will it not fall under the preceding paragraph? Doesnt this amount to merger or confusion? Yes. This is basically merger or confusion. The merger of the personality of the creditor and debtor in one person. The last paragraph is a redundancy it should be covered by the preceding paragraph because confusion is also a mode of extinguishing an obligation.

Sec 120 What are the cases which discharges persons secondarily liable? (Code: AC D TRE) 1. Any Act which discharges the instrument 2. Intentional Cancellation of his signature by the holder This must be read in relation to Sec 48. The holder cannot cancel the indorsement necessary to his title. The effect of that cancellation of that particular signature and all parties subsequent to him are discharged from liability. 3. Discharge of a prior party This is because the subsequent party will lose his right of recourse against a prior party. 4. Tender or payment by a prior party If the tender or payment is accepted it will discharge the parties subsequent to him. It has the same effect as discharge of a prior party. Release of the principal debtor unless the right of recourse expressly reserved against the party secondarily liable 5.

Payment made before maturity do not discharge the instrument. In fact it can be negotiated 2. Payment by the party accommodated, where the instrument is made or accepted for his accommodation

Payment made by the party accommodated discharges the instrument because in case of an accommodation party the party accommodated is the principal debtor. Does payment made by the accommodation party discharge the instrument? No, because the party primarily liable or the principal debtor is the party accommodated. If the accommodation party pays the instrument he is entitled to reimbursement from the party accommodated (Sec 29).

3. Intentional cancellation thereof by the holder

6.

Intentional cancellation means the instrument itself is cancelled, not just the signature of the drawer or the indorser as the case may be. It can be tearing up the paper, destroying it, burning it, or just placing the word cancelled. It the word cancelled is written across the face of the instrument, the presumption is that the cancellation was made intentionally. He who alleges otherwise has the burden of proving that the cancellation is not intentional (Sec 123).

Any agreement binding upon the holder to Extend the time of payment UNLESS made with the assent of the party secondarily liable or UNLESS the right of recourse against such party is expressly reserved

4.

This is likened to a situation where the terms and conditions of the principal contract are amended or changed without the consent of the surety, the surety is released from liability. Does payment by a secondary party discharge the instrument? No. The effect of such payment is that the secondary party is remitted to his former rights. Therefore he has a right of recourse against parties prior to him.

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

This is because a negotiable instrument is a contract for the payment of money. That obligation may be extinguished using the same mode of extinguishment. Modes of extinguishing an obligation under the Civil Code (Code: NoCoMeRePaLo) 1. Novation 2. Compensation 3. Merger 4. Remission 5. Payment 6. Loss

Sec 124 Material Alteration (This was taken up in relation to the abnormal instruments.) To be covered by Sec 124, what is altered should be a material particular, which is something which will change the rights and relations of parties. Sec 125 Instances which constitutes a material alteration 1. date of payment (i.e. instead of 30 days it was made 60 days after sight)

Other than these are:

!39

2. 3. 4.

5.

sum payable (i.e. amount has been altered from 10K to 100K; or even the interest) time or place of payment number or the relations of the parties (i.e. instead of order, it became bearer) medium or currency of payment (i.e. P to $)

An unconditional in writing made by one person to another, Signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer

Alteration of a serial number or check number is not a material alteration. What are the consequences of a material alteration? The law does not talk about beneficial alteration. It only talks about material alteration. It could be adverse or favorable to the holder. The bottom line is if it is a material alteration if it is made without the consent of the parties liable thereon, then the entire instrument is avoided except as to those who assented or consented to the material alteration and subsequent indorsers. Example: M issued a promissory note payable to the order of P for 10K. P Altered the instrument to 100K and negotiated to A, who has knowledge of the alteration. A negotiated to B also with notice of the alteration. Can B enforce the instrument against M? The law says in case of material alteration the instrument is avoided, except as against those who assented, consented to the alteration, and subsequent indorsers. What about the discussion that the holder in due course may enforce the instrument according to the original tenor? That is if the holder is a HDC. In this example B is aware that the instrument was altered from 10K to 100K, therefore the entire instrument is avoided. M is not liable even for a single centavo. This instrument in so far as the M is concerned is avoided, not just for 10K but for the entire amount. M is liable for 10K not for 100K only if the holder is a HDC, because Sec 124 says the HDC may enforce the instrument in accordance with the original tenor provided he is not a party to the alteration. The instrument is avoided except as against the parties who assented, consented, or did the alteration, and subsequent indorsers. Therefore if M dishonors the instrument is P liable to B for 100K? Yes, because he was the one responsible for the alteration. Is A liable to B for 100K, despite the fact that B is not a HDC? Yes, because the law says as a against the party who cause the alteration and subsequent indorsers. It does not matter that B is not a HDC because by express provision of law the indorser warrants that the instrument is genuine and in all respects what it purports to be. Kinds of Negotiable Instruments 1. Bill of exchange (Sec 126) 2. Promissory note (Sec 184) 3. Check (Sec 184) Bill of Exchange (Sec 126) An unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand at a fixed or determinable future time a sum certain in money to order or to bearer. Promissory note (Sec 184)

3 parties in a Bill of Exchange 1. Drawer 2. Drawee 3. Payee 2 parties in a Promissory Note 1. Maker 2. Payee If the payee negotiates he becomes an indorser. The drawer is liable based on the tenor of the instrument, the same with the maker. The drawee-acceptor is liable based on the tenor of his acceptance. How do you reconcile this with Sec 124, that the holder may enforce the instrument in accordance with the original tenor? Metrobank vs Cabilzo The amount was altered from P1,000 to P91,000. The drawer issued a check for P1,000 payable to the payee, but the payee altered it to P91,000. The payee deposited the check in his account with the collecting bank. The collecting bank sent the check for clearing. The signature of the drawer is genuine, so therefore it could not be returned on account of forgery. What is the liability of the drawee-acceptor? Anything in excess of the tenor of the instrument has to be returned to the drawer. So P90,000 must be returned to the drawer, but the P1,000 need not be, because the drawer is still liable based on the tenor of its acceptance. Can the drawee rely on the warranty of the collecting bank, because when the collecting bank sent the check for clearing it assumes the warranties of an indorser? No, the drawee must return the amount excess of the original tenor of the instrument and cannot rely on the warranties of the collecting bank as an indorser. Check (Sec 185) A bill of exchange drawn on a bank payable on demand. How do we distinguish a check from a bill of exchange? In both cases, the issuance of a bill of exchange or a check does not operate as an assignment of funds in favor of the payee or the holder. The drawee is not liable in both bill or exchange or check unless and until the drawee accepts the same. And in case of a check unless the drawee certifies the same. 1. 2. 3. 4. A bill of exchange need not be drawn against a bank; a check is always drawn against a bank A bill of exchange may be on demand or at a determinable future time; a check is always payable on demand A bill of exchange does not presuppose the existence of funds with the drawee; a check presupposes that the drawer has existing funds with the drawee-bank A bill of exchange must be presented within reasonable time from the last negotiation; a check must be presented for payment within reasonable time from issuance

!40

5.

6. 7.

In a bill of exchange the death of the drawer does not extinguish the authority of the drawee to pay the payee; in a check the death of the drawer known to the drawee bank, extinguishes or revoke the authority of the drawee-bank to pay the payee A bill of exchange in certain cases requires presentment for acceptance under Sec 143; a check does not require presentment for acceptance In case of a check which is certified upon the instance of the holder, the drawer and the indorser are discharged; there is no such thing in a bill of exchange

On Clearing Rules: What is the remedy available to an aggrieved party, if there is a dispute between banks involving a check or clearing items? What is the forum for the drawee bank to enforce the warranties of the indorser (collecting bank)? If the dispute concerns clearing items or checks between bank members of PCHC, then recourse is outside of court. They must exhaust procedures within the PCHC. Any recourse to the court is premature. It will be dismissed for prematurity of cause of action.

A bank cannot file a 3rd party complaint against another bank in the RTC. Example: ABC files an action against XYZ. XYZ wants to drag another bank, that 3rd party complaint have to be ventilated likewise to the PCHC, outside of courts, for as long as the dispute pertains to a clearing items, a check and between or among members banks of the PCHC. What is the remedy available if a bank is aggrieved by the decision of the PCHC?

If the check is not presented within reasonable time from issuance, the drawer is not necessarily discharged from liability. The check merely becomes stale but it does not extinguish the liability of the drawer, unless the drawer is impaired or prejudiced by reason of the delay in the presentment of the instrument. This happens if the drawer becomes insolvent. Kinds of Bill of Exchange Draft a) Sight draft draft payable at sight; once accepted by the drawee, the drawee becomes liable b) Usance draft or time draft or term draft payable at a fixed period after sight Traders acceptance or bankers acceptance a) Traders acceptance is a bill of exchange drawn by the seller against the buyer and accepted by the latter. Example: Seller sells sugar to the Coca-cola, the buyer. Seller drew a bill of exchange against Coca-Cola, buyer. If the buyer accepts the bill of exchange, it is a traders acceptance. Because it is accepted by Coca-Cola, then the seller may negotiate that instrument to any interested party. b) Bankers acceptance is drawn on a bank and accepted by the latter. This is different from a cashiers check. Cashiers check is a check drawn by the bank against itself.

Metrobank vs CA, 2009 Under PCHC rules the remedy available to an aggrieved bank is to file a petition for review with the RTC. Is that the right remedy? Jurisdiction is conferred by law not by agreement. Therefore, while petition for review is the remedy allowed under PCHC Rules, that is not the in accordance with the Rules of Court. What are the remedies available to an aggrieved party being aggrieved by an arbitral award? Any of these 3 remedies: 1. Petition to vacate the award with the RTC 2. Petition for review Rule 43 with the CA on both question of fact or question of law 3. Petition for certiorari Rule 65 if there is grave abuse of discretion amounting to lack or excess jurisdiction (Metropolitan Bank & Trust Company vs Court of Appeals 579 SCRA, 2009)

In bankers acceptance the bill of exchange need not be issued by a bank, but simply addressed against the bank and simply accepted by the bank. Cashiers check is both issued and the drawer and the drawee are both the bank. Kinds of Promissory Note Certificate of Deposit (CTD) Bond is a long term promissory note involving large amounts, various borrowers and usually for more than 1 year. Commercial Paper (CP) may be long term or short term; evidence of indebtedness issued to the public upon approval by the SEC What about a Treasury Bill? It is an evidence of indebtedness of the government issued by the National Treasury. So it is specie of a promissory note. It is the only bill that is not a bill of exchange. Kinds of Checks Cashiers Check Managers Check Crossed Check Memorandum Check

NIL_12 The Lord is near to all who call upon Him, to all who call Him in truth. He will fulfill the desires of those who fear Him; He also will hear their cries and save them. PSALMS 145:18-19

Come to Me, all you who labor and are heavy laden, and I will give you rest. Take My yoke, upon you and learn from Me, for I am gentle and lowly in heart, and you will find rest for your souls. For my yoke is easy and My burden is light. MATTHEW 11:28-29

Liabilities of Parties: 1. Liabilities of a Drawer PNB vs CA Drawer drew a check against drawee ABC payable to the order of P. The drawee paid the payee, but the checks were lost thats

!41

why the drawee was not able to debit the account of the drawer. If the checks are lost, in the event that the drawee-bank discovered that the account of the drawer was not debited, can the drawee debit the account of the drawer? Will the drawee be held liable for damages for debiting the account of drawer belatedly? If the drawee pays the payee upon the instructions of the drawer then the drawee to prevent unjust enrichment can debit the account of the drawer.

When the law says appropriate, it is means based on the formalities as to time, place, and manner. If there was no valid notice then the liability of the indorser does not attach. Great Asian Sales Corp. vs CA D issued various checks payable to the order of P drawn against ABC Bank. P obtained a loan from ABC Finance Co. secured by assignment of receivables with recourse. P signed a deed of assignment whereby P assigned or indorsed the various checks in favor of the finance company with recourse. The checks when presented to the drawee bank were dishonored. P the indorser of the checks were not given notice of dishonor. Is P liable despite the lack of notice of dishonor? Yes, not because of NIL but because of the deed of assignment executed by P in favor of the finance company whereby the checks were indorsed with recourse. If it is based only on NIL, then notice of dishonor would be necessary to make the indorser liable. But because the indorser assumed a separate obligation under a separate agreement, deed of assignment, then the liability of the indorser shall be governed either by the NIL or the contract. Under the contract the indorser is still liable despite the lack of the notice of dishonor. Traders Royal Bank vs Radio Phil. Network (RPN) In case of forged indorsement and the check is deposited with the collecting bank, the collecting bank generally assumes liability. So in case of forgery of the payees indorsement, the general rule is that the collecting bank assumes liability, because when it sents the check for clearing it assumes the warranties of an indorser. What if the payees indorsement was forged, but the forger had the check encashed over the counter? Can the drawee rely on the warranties of the collecting bank in this case? No, because if the checks were not deposited to a presenting bank or collecting bank how can you apply the warranties of the collecting bank? In that case the only one liable is the drawee-bank for allowing the encashment of the check bearing a forged indorsement. So not all cases of forged indorsement will make the collecting bank liable if there is no collecting bank liable anyway in the equation. Allied Banking Corp vs CA Negotiation of a draft:The beneficiary of a LC may either be paid in cash or his account with the bank may credited be or a draft may be drawn against the issuing bank or confirming bank. The payee, the beneficiary of the LC, may negotiate the draft. If the entity that pays the draft at a discounts that bank is called a negotiating bank. In this case the negotiating bank required as a condition to the negotiation of the draft payable to the order the beneficiary, that the officers of the corporation paying the draft must execute a surety agreement binding themselves liable with the corporation in case of dishonor of the draft. The draft after negotiation to the negotiating bank was dishonored by the drawee- bank, issuing bank of the LC. No notice of dishonor was given to the officers of the corporation acting as a surety.

Solidbank vs Arrieta If the drawer issued a check that was dishonored for being drawn against insufficient funds, does that mean that any and all subsequent checks issued will be dishonored for insufficiency of funds? Just because the check was dishonored once does not mean the checks will be dishonored again for the same reason. It depends on whether or not subsequent check issuance was backed up by sufficient funds.

2. Liabilities of Indorser Gullas vs PNB There is a treasury warrant for P365. P is the payee of the treasury warrants. P goes to PNB to transact the treasury warrant with the bank, but the bank wouldnt want to transact with the payee unless it is indorsed by somebody known to the bank. Gullas signed at the back of the treasury warrant. He became an indorser of the treasury warrant. By reason of his indorsement, PNB made good the treasury warrant. PNB paid the payee. Subsequently when the treasury warrant was sent for clearing, it was discovered that the treasury warrant was spurious. The PNB wanted to debit the account of Gullas.

In an effort to comply with the old NIL, the drawee sent notice of dishonor to Gullas. Unfortunately when the notice of dishonor was sent to Gullas he was in Manila, not in Cebu. PNB thought that there was a valid notice of dishonor. Thereafter, it debited the account of Gullas. Gullas issued a check in payment of an obligation. It was dishonored for being drawn against insufficient funds. Gullas sued PNB. PNB argued on compensation. They are both debtors and creditors of each other. So in a contract of deposit Gullas may be the creditor and PNB may be the creditor, but with respect to the treasury warrants indorsed by Gullas, Gullas is the debtor and PNB is the creditor. PNB argued that there was set-off by operation of law. SC said, first, treasury warrants is not a negotiable instrument. But even if assuming that it was negotiable and subject to the giving of notice of dishonor, the notice of dishonor must comply with the formalities prescribed by law. In this case if Gullas was in Manila and the notice of dishonor was given in Cebu. That means that there was no valid notice of dishonor. If there was no valid notice of dishonor, then the liability of the indorser does not fall due. If the obligation of the indorser does not become due then there is not basis to apply compensation or set-off by operation of law. The liability of an indorser is premised on presentment for payment, dishonor, and giving the appropriate notice of dishonor.

!42

Despite the lack of notice of dishonor, is the surety liable? Is surety entitled to a notice of dishonor? A surety is not entitled of a notice of dishonor unlike an indorser. An indorser is liable if there is a notice of dishonor. Tthe liability of a surety is broader than an indorser.

deliver to B debit the account of B? Yes, because B has not right to the check in the first place, there being no indorsement.

Gonzales vs RCBC RCBC paid the monetary value of the foreign check on the strength of the indorsement of one of its officers. Unfortunately this officer indorsed at the back of the check indicating that it is indorsed only for certain amount. Lets say the amount is for $10K, but it was indorsed only for $5K. As a consequence the draweebank dishonored the check because of irregularity. Can irregular indorser, RCBC recover from the payee of the check? The holder has the right of recourse against the indorser. The indorser is liable to the holder or subsequent holders or any party who may be compelled to pay the instrument. However, this is not so if the one who cause the irregularity is RCBC. So RCBC, while a party subsequent to the payee and therefore generally has a right of recourse against the payeeindorser that will not apply if the irregular indorser is the cause of the irregularity. The drawee-bank would not have dishonored the check had it not for the amount written by its officer accept it only for a certain amount. It was the cause of dishonor, so because of that it has no right of recourse against the payee of the instrument.

What is the remedy available to B? B should have required the indorsement of A, so that he would have the full rights of a holder. Failing which he is left a transferee subject to all the defenses against the transferor.

BPI vs CA Sec 49 If an instrument is payable to order, it must be indorsed and delivered so that there will be negotiation. If an instrument is payable to the order of A, A must indorse and deliver. What if A does not indorse, but only delivers to B and B deposited the check to his account with BPI? Despite the lack of indorsement BPI paid B. Subsequently BPI discovered that there was no indorsement by A to B, just a transfer of the instrument from A to B. BPI debited the account B. B sued BPI for damages, arguing that BPI should not have deducted the same. The transfer of A to B is presumed to have consideration. Is there a presumption of consideration if an instrument is payable to order and the payee transfers the instrument without indorsement? None. The presumption of consideration only applies if the instrument is negotiable and the transferee, the one in possession qualifies as a holder. The term holder has a precise meaning under the NIL. He must be the indorsee of the bill. The bill or the note must have been indorsed to him and delivered.

If both process are not observed, meaning an order instrument is just delivered not indorsed, the transferee does not acquire the rights of the holder and the presumption of consideration does not apply. Can BPI after discovery that there was not indorsement, just

!43