Nego Inst Law Final

NEGIOTABLE INSTRUMENT:
DEFINITION AND
CHARACTERISTCS (2005)
What is a negotiable instrument?
Give the characteristics. (2%)
SUGGESTED ANSWER:
Negotiable Instrument is a written
contract for the payment of money,
by its form and on its face, which is
intended as a substitute for money
and one person to another as money,
in such a manner as to give a holder
in due course the right to hold the
instrument free from defenses
available to prior parties. Such
instrument must comply with Sec. 1
of the Negotiable Instrument Law to
be considered negotiable.
The characteristics of a negotiable
instrument are;
1) Negotiability - That quality or
attribute whereby a bill, note or check
passes or may pass from hand to
hand, similar to money, so as to give
the holder in due course the right to
hold the instrument and collect the
sum payable for himself free from
defenses.
2) Accumulation of Secondary
Contracts as they are transferred
from one person to another.
Instruments are negotiable when
they conform to all the requirements
prescribed by the NIL (Act 2031, 03
February 1911).
Although considered as medium for
payment of obligations, negotiable
instruments are not legal tender

(Sec. 60, New Central Bank Act, R.A.
7653).
Q: Can the delivery of a negotiable
instrument discharge an obligation?
A: Settled is the rule that payment
must be made in legal tender. A
check is not legal tender and,
therefore, cannot constitute a valid
tender of payment. Since a
negotiable instrument is only a
substitute for money and not money,
the delivery of such an instrument
does not, by itself, operate as
payment. Mere delivery of checks
does not discharge the obligation
under a judgment. The obligation is
not extinguished and remains
suspended until the payment by
commercial document is actually
realized. (BPI vs. Royeca, 2008,
Nachura)
Notes:
(1) Negotiable instruments shall
produce the effect of payment
only when they have been
encashed or when through the
fault of the creditor they have
been impaired. (Art. 1249, Civil
Code)
(2) BUT a CHECK which has been
cleared and credited to the account
of the creditor shall be equivalent
to a delivery to the creditor of cash.
IDENTIFICATION
OF
A
NEGOTIABLE
INSTRUMENT
(2005)
State and explain whether the
following
are
negotiable
NEGOTIABLE INSTRUMENTS LAW by JEREMIAH V. TRINIDAD

Page 1 of 56
instruments under the Negotiable

Instruments Law: (5%)
Non-Negotiable being payable out

of a particular fund.
1) Postal Money Order;

2) A certificate of time deposit
which states This is to certify that
bearer has deposited in this bank
the sum of FOUR THOUSAND
PESOS
(P4,000.00)
only,
repayable to the depositor 200
days after date.
3) Letters of credit;
4) Warehouse receipts;
5) Treasury warrants payable from
a specific fund.
NEGOTIABLE DOCUMENT vs.

NEGOTIABLE
INSTRUMENT
(2005)
Distinguish a negotiable document
from a negotiable instrument.
(2%)
SUGGESTED ANSWER:
1) Postal Money Order NonNegotiable as it is governed by
postal rules and regulation which
may be inconsistent with the NIL
and it can only be negotiated
once.
2) A certificate of time deposit
which states This is to certify that
bearer has deposited in this bank
the sum of FOUR THOUSAND
PESOS
(P4,000.00)
only,
repayable to the depositor 200
days after date.
Non-Negotiable as it does not
comply with the requisites of Sec.
1 of NIL.
3) Letters of credit - NonNegotiable
4) Warehouse receipts - NonNegotiable for the same as Bill of
Lading it merely represents good,
not money.
5) Treasury warrants payable from
a specific fund -
SUGGESTED ANSWER:
Negotiable
Instrument
have
requisites of Sec. 1 of the NIL, a
holder of this instrument have
right
of
recourse
against
intermediate parties who are
secondarily liable, Holder in due
course may have rights better
than transferor, its subject is
money and the Instrument itself is
property of value.
On the other hand, negotiable
document does not contain
requisites of Sec. 1 of NIL, it has
no
secondary
liability
of
intermediate parties, transferee
merely steps into the shoes of the
transferor, its subject are goods
and the instrument is merely
evidence of title;
FORMS AND INTERPRETATION
REQUISITES OF NEGOTIABILITY
What are the requisites of a
negotiable instrument? (1996)
SUGGESTED ANSWER:
The requisites of a negotiable
instrument are as follows:
1) It must be in writing and signed
by the maker or drawer;

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2) Must contain an unconditional

promise or order to pay a sum
certain in money;
3) Must be payable on demand, or
at a
fixed or determinable
future time;
4) Must be payable to order or to
bearer; and
5) Where the instrument is
addressed to a drawee, he
must be named or otherwise
indicated
therein
with
reasonable certainty (Sec. 1).
Section 184 (defining a promissory
note) and Section 126 (defining a
bill of exchange) contain the same
requisites in Section 1.
IN WRITING AND SIGNED BY THE
MAKER OR DRAWER
No person is liable on the instrument
whose signature does not appear
thereon.
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 (Sec. 18).
Signature of any party may be
made by duly authorized agent;
no particular form of appointment
necessary (Sec. 19)
"In writing" - includes print; written
or typed. Section 191 of the NIL
provides that the word written
includes printed, and writing
includes print.
Reason: Since an instrument is a
document,
there
must
be
something in written form that can

be transferred from person to
person. (Abad)
Signature is binding and may be in
Fund
for Reimbursement
Indicating a
Particular Fund
(non-negotiable)
(1) The drawee pays There is only one act
the payee from his the drawee pays

own
funds directly
from
the
afterwards.
particular fund indicated.
(2) The drawee pays
himself from the

particular fund
indicated.
fund
Particular
fundParticular
indicated is the direct
indicated is not thesource of payment.
direct
source
of(Sundiang and Aquino)
payment.
ones
handwriting,
printed,
engraved,
lithographed
or
photographed so long as it is
intended or adopted as the signature
of the signer or made with his
authority.
It may appear on any part of the
instrument.
However,
if
the
signature is so placed upon the
instrument that it is not clear in
what
capacity
the
person
intended to sign, he is deemed an
indorser. (Sec. 17[f])
CONTAINING
AN
UNCONDITIONAL
PROMISE TO PAY OR
ORDER TO PAY
An unqualified order or promise to pay

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is unconditional, though coupled with:

(1) An
indication
of
a
particular fund out of which
reimbursement is to be made, or
a particular account to be
debited with the amount; or
(2) A
statement
of
the
transaction which gives rise to
the instrument.
insufficient
But an order or promise to pay out

of a particular fund is not
unconditional (Sec. 3).
A mere request or authority to pay

does not constitute an order.
Although the mere use of polite
words like "please" does not of itself
deprive the instrument of its
characteristics as an order, its
language must clearly indicate a
demand upon the drawee to pay.
Unconditional
The promise or order to pay, to be
unconditional, must be unqualified.
Must not be dependent upon a
contingent event that is not certain
to happen. (Abad)
Fact that the condition appearing
on the instrument has been fulfilled
will not convert it into a negotiable
one (see Sec. 4)
A
negotiable
instrument
is
conditional when reference to the
fund clearly indicates an intention
that such fund alone should be the
source of payment. (Metropolitan
Bank vs. CA, 1991)
Order or promise to pay
As to promissory note: Promise to
pay should be express on the face of
the instrument
The word "promise" is not absolutely
necessary.
Any
expression
equivalent to a promise is sufficient.
Mere acknowledgment of a debt is
As to bill of exchange: Order

command made by the drawer
addressed to the drawee ordering the
latter to pay the payee or the holder a
sum certain in money; the instrument
is, by its nature, demanding a right.
Words which are equivalent to an
order are sufficient.
Sum payable must be certain

The sum payable is a sum certain,
although it is to be paid:
(1) with interest; or
(2) by stated installments; or
(3) by stated installments, with a
provision that, upon default in
payment of any installment or of
interest, the whole shall become
due; or
(4) with exchange, whether at a fixed
rate or at the current rate; or
(5) with costs of collection or an
attorney's fee, in case payment
shall not be made at maturity
(Sec. 2).
Note: A sum is certain if from the face
of the instrument it can be
determined even if it requires
mathematical
computation.
(Sundiang and Aquino)
Payable in money
Capable of being transformed into
money, since negotiable instruments
are intended to be substitutes for
money

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Money as used in the law is not

necessarily limited to legal tender
as defined by law but includes any
particular kind of current money.
(see, Sec. 6(e) and PNB v. Zulueta)
An agreement to pay in foreign
currency is valid. (RA 8183)
Non-negotiable: An instrument which
contains an order or promise to do an
act in addition to the payment of
money (with the exception of certain
acts enumerated in Sec. 5)
Payable in personal property like
merchandise, shares of stock or gold.
Maker or the person primarily liable
has the option to require something
to be done in lieu of payment of
money. (Campos)
Negotiable: If the option to require
something to be done in lieu of
payment of money is with the holder
PAYABLE ON DEMAND OR AT
FIXED OR DETERMINABLE TIME
Purpose: to inform the holder of the
instrument of the date when he may
enforce payment thereof.
On demand: An instrument is
payable on demand:
(1)
Where it is expressed to be
payable on demand, or at sight, or on
presentation; or
(2)
In which no time for payment
is expressed.
holder to accept payment will

terminate the running of interest, if
any, but the obligation to pay the note
remains.
At a fixed time: Only on the stipulated
date, and not before, may the holder
demand its payment.
Should he fail to demand payment,
the instrument becomes overdue but
remains valid and negotiable. It is
merely converted to a demand
instrument with respect to the person
who issued, accepted, or indorsed it
when overdue. (Sec. 7)
At a determinable future time: An
instrument
is
payable
at
a
determinable future time, which is
expressed to be payable:
(1)
At a fixed period after date or
sight; or
(2)
On or before a fixed or
determinable future time specified
therein; or
(3)
On or at a fixed period after
the occurrence of a specified event
which is certain to happen, though
the time of happening be uncertain.
An instrument payable upon a
contingency is not negotiable, and
the happening of the event does not
cure the defect (Sec. 4).
Note: Requires that the maturity of
the instrument can be absolutely
determined with certainty. (Abad)
Examples: At a fixed period after date
or sight, e.g., 30 days after date.
Where an instrument is issued,

accepted, or indorsed when overdue,
it is, as regards the person so
issuing, accepting, or indorsing it,
payable on demand (Sec. 7).
On or before a fixed or determinable

future time specified therein, e.g.,
payable on or before December 1,
2000
Note: Holder may call for payment

any time; maker has an option to pay
at any time, and the refusal of the
On or at a fixed period after the

occurrence of a specified event
which is certain to happen, though

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the time of happening be uncertain,

e.g., payable within 60 days after the
death of Jose
Effect of acceleration provisions: If
option (absolute or conditional) to
accelerate maturity is on the maker,
still
NEGOTIABLE
If option to accelerate is on the
holder and can be exercised only
after the happening of a specified
event/act over which he has no
control
(conditional),
still
NEGOTIABLE
Note: If option is absolute, nonnegotiable.
Insecurity Clauses: Provisions in the
contract which allow the holder to
accelerate payment if he deems
himself insecure. The instrument is
rendered non-negotiable. (Sundiang
and Aquino)
Provisions
extending
time
of
payment:
General rule: Negotiability not
affected. Effect is similar with that of
an acceleration clause at the option
of the maker.
Exception: Where a note with a fixed
maturity provides that the maker has
the option to extend time of payment
until the happening of contingency,
the instrument is NOT negotiable.
The time for payment may never
come at all.
PAYABLE TO ORDER OR TO
BEARER (ASKED IN 1998)
Must contain words of negotiability:
For example:
(1)
Pay to the order of Juan
Cruz, or I promise to pay to the
order of Juan Cruz
(2)
Pay to Juan Cruz or order,
or I promise to pay Juan Cruz or
order
Note: Need not follow the language
of the law, but any term which clearly
indicates an intention to conform to
the legal requirements is sufficient.
Negotiability determined from the
face of the instrument: The
negotiability or non-negotiability of an
instrument is determined from the
face of the instrument itself. Where
words "or bearer" printed on a check
are cancelled by the drawer,
instrument becomes not negotiable.
(Caltex vs. CA, 1992)
Payable to bearer: The instrument is
payable to bearer:
(1)
When it is expressed to be so
payable; or
(2)
When it is payable to a person
named therein or bearer; or
(3)
When it is payable to the
order of a fictitious or non- existing
person, and such fact was known to
the person making it so payable; or
(4)
When the name of the payee
does not purport to be the name of
any person; or
(5)
When the only or last
indorsement is an indorsement in
blank (Sec. 9).
Examples:
(1)
Expressed to be so payable "I promise to pay the bearer the sum"
(2)
Payable to a person named
therein or bearer -"Pay to A or
bearer"
(3)
Payable to the order of a
fictitious person or non- existing
person, and such fact was known to
the person making it so payable Pay to John Doe or order"
(4)
Name of payee does not
purport to be the name of any person
"Pay to cash"; "Pay to sundries."
(5)
Only or last indorsement is an

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indorsement in blank.
Note: May be negotiated by mere
delivery
Bearer Instrument (1998)
A delivers a bearer instrument to B. B
then specially indorses it to C and C
later indorses it in blank to D. E
steals the instrument from D and,
forging the signature of D, succeeds
in negotiating it to F who acquires
the instrument in good faith and for
value.
a) If, for any reason, the drawee bank
refuses to honor the check, can F
enforce the instrument against the
drawer?
b) In case of the dishonor of the
check by both the drawee and the
drawer, can F hold any of B, C and D
liable secondarily on the instrument?
SUGGESTED ANSWER:
a) Yes. The instrument was payable
to bearer as it was a bearer
instrument. It could be negotiated by
mere delivery despite the presence
of special indorsements.
The forged signature is unnecessary
to presume the juridical relation
between or among the parties prior to
the forgery and the parties after the
forgery. The only party who can raise
the defense of forgery against a
holder in due course is the person
whose signature is forged.
b) Only B and C can be held liable by
F. The instrument at the time of the
forgery was payable to bearer, being
a bearer instrument. Moreover, the
instrument was indorsed in blank by
C to D. D, whose signature was
forged by E cannot be held liable by
F.
Bearer Instrument (1997)
Richard Clinton makes a promissory
note payable to bearer and delivers
the same to Aurora Page. Aurora
Page, however, endorses it to X in

this manner:
Payable to X. Signed: Aurora Page.
Later, X, without endorsing the
promissory note, transfers and
delivers the same to Napoleon. The
note is subsequently dishonored by
Richard Clinton. May Napoleon
proceed against Richard Clinton for
the note? (5%)
SUGGESTED ANSWER:
Yes. Richard Clinton is liable to
Napoleon under the promissory note.
The note made by Richard Clinton is
a bearer instrument. Despite special
indorsement made by Aurora Page
thereon, the note remained a bearer
instrument and can be negotiated by
mere delivery. When X delivered and
transferred the note to Napoleon, the
latter became a holder thereof. As
such holder, Napoleon can proceed
against Richard Clinton.
Fictitious payee rule: It is not
necessary that the person referred to
in the instrument is really nonexistent or fictitious to make the
instrument payable to bearer. The
person to whose order the instrument
is made payable may in fact be
existing but he is still fictitious or nonexistent under Sec. 9(c) of the NIL if
the person making it so payable does
not intend to pay the specified
persons.
A check drawn payable to the order
of cash is a check payable to bearer,
and the bank may pay it to the
person presenting it for payment
without the drawer's indorsement.
(Ang Tek Lian vs. CA, 1950)
Payable to order: The instrument is
payable to order where it is drawn
payable to the order of a specified
person or to him or his order. It may
be drawn payable to the order of:

Page 7 of 56
(1) A
payee who is not maker,

drawer, or drawee; or
(2) The drawer or maker; or
(3) The drawee; or
(4) Two or more payees jointly; or
(5) One or some of several payees;
or
(6) The holder of an office for the
time being.
Where the instrument is payable to
order, the payee must be named or
otherwise indicated therein with
reasonable certainty (Sec. 8).
Notes: Without the words "to order"
or "to the order of" the instrument is
payable only to the person
designated therein and is therefore
non-negotiable.
(Consolidated
Omissions and
Provisions That
Do Not Affect
Negotiability
Additional
Provisions
That Do Not
Affect
(1) Non-dating of the (1) Authorizes

(2)
(3)
(4)
(5)
the
sale of collateral
instrument
securities
on
Non-specification of
default;
value given, or that
any value had been (2) Authorizes
given
confession
of
Non-specification of
judgment
on
place where it is
default;
drawn or
place (3) Waives the benefit
where it is payable
of law intended to
Bears a seal
protect the debtor;
or
Designation
of
particular kind of (4) Allows the creditor
the
option
to
currency in which
require something
payment is to be
in lieu of money.
made. (Sec. 6)
(Sec. 5)
Note: Negotiability is
affected
when
instrument contains a
promise or order to do
any act in addition to
the payment of money.
Plywood Industries vs. IFC Leasing,

1987)
For order instruments - negotiation

requires delivery and indorsement of
the transferor. (Sec. 30)
Where the maker is the payee:
(1) In effect making himself liable to
himself. Thus, the instrument
produces no legal effect.
(2) Will produce legal effects only
once the payee-maker indorses
the instrument to another person
because such indorsement will
then give rise to rights and
obligations. (Abad)
IF BILL OF EXCHANGE, DRAWEE
MUST
BE
NAMED
OR
DESIGNATED WITH REASONABLE
CERTAINTY
(1) Applies only to bill of exchange
(2) A bill may be addressed to 2 or
more drawees jointly whether
they are partners or not, but not
to 2 or more drawees in the
alternative or in succession (Sec.
128).
Examples:
(1) To Juan Cruz and Jose Reyes
negotiable
(2) To Juan Cruz or Jose Reyes
not negotiable; no certainty as to
drawee
Determination of negotiability: In
determining the negotiability of an
instrument, the instrument in its
entirety and by what appears on its
face must be considered. It must
comply with the requirements of
Sec. 1 of the Negotiable Instruments
Law. (Caltex Phils. v. CA, 1992)
The acceptance of a bill of exchange
is not important in the determination
of its negotiability. The nature of
acceptance is important only on the
determination of the kind of liabilities
of the parties involved. (PBCOM vs.
Aruego, 1993)

Page 8 of 56
BAR QUESTIONS:
A.) Negotiability (1997)
Can a bill of exchange or a
promissory note qualify as a
negotiable instrument if
a. it is not dated; or
b. the day and the month, but not the
year of its maturity, is given; or
c. it is payable to cash or
d. it names two alternative drawees
SUGGESTED ANSWER:
a) Yes. Date is not a material
particular required by Sec 1
NIL for the negotiability of an
instrument.
b) No. The time for payment is not
determinable in this case. The year is
not stated.
c) Yes. Sec 9d NIL makes the
instrument
payable
to bearer
because the name of the payee does
not purport
to be the name of any person.
d) A bill may not be addressed to two
or more drawees in the alternative or
in succession, to be negotiable (Sec
128 NIL). To do so makes the order
conditional.
B.) Negotiability (1993)
Discuss the negotiability or nonnegotiability of the following notes:
1) Manila, September 1, 1993
P2,500.00
I promise to pay Pedro San Juan or
order the sum of P2,500.
(Sgd.) Noel Castro
2) Manila, June 3, 1993
P10,000.00
For value received, I promise to pay
Sergio Dee or order the sum of
P10,000.00 in five (5) installments,
with the first installment payable on

October 5, 1993 and the other
installments on or before the fifth day
of the succeeding month or
thereafter.
(Sgd.) Lito Villa
SUGGESTED ANSWER:
The promissory note is negotiable as
it complies with Sec
1, NIL.
Firstly, it is in writing and signed by
the maker, Noel Castro.
Secondly, the promise is
unconditional to pay a sum certain in
money, that is, P2,500.00
Thirdly, it is payable on demand as
no date of maturity is specified.
Fourth, it is payable to order.
The promissory note is negotiable. All
the requirements of Sec 1 NIL are
complied with. The sum to be paid is
still certain despite that the sum is to
be paid by installments (Sec 2b NIL)
C.) Negotiability (2002)
Which of the following stipulations or
features of a promissory note (PN)
affect or do not affect its negotiability,
assuming that the PN is otherwise
negotiable? Indicate your answer by
writing the paragraph number of the
stipulation or feature of the PN as
shown below and your corresponding
answer, either Affected or Not
affected. Explain (5%).
a) The date of the PN is February
30, 2002.
b) The PN bears interest payable on
the last day of each calendar quarter
at a rate equal to five percent (5%)
above the then prevailing 91-day
Treasury Bill rate as published at the
beginning of such calendar quarter.
c) The PN gives the maker the option
to make payment either in money or
in quantity of palay or equivalent
value.

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d) The PN gives the holder the option

either to require payment in money or
to require the maker to serve as the
bodyguard or escort of the holder for
30 days.
SUGGESTED ANSWER:
a) Paragraph 1 negotiability is
NOT AFFECTED.
The date is not one of the
requirements for negotiability.
b) Paragraph 2 negotiability is
NOT AFFECTED
The interest is to be computed at a
particular time and is determinable. It
does not make the sum uncertain or
the promise conditional.
c) Paragraph 3 negotiability is
AFFECTED.
Giving the maker the option renders
the promise conditional
d) Paragraph 4 negotiability is
NOT AFFECTED.
Giving the option to the holder does
not make the promise conditional.
D.) Negotiability; Requisites (2000)
a) MP bought a used cell phone from
JR. JR preferred cash but MP is a
friend so JR accepted MRs promis
sory note for P10,000. JR
thought of converting the note into
cash by endorsing it to his brother
KR. The promissory note is a piece
of paper with the following handprinted notation: MP WILL PAY JR
TEN THOUSAND PESOS IN
PAYMENT FOR HIS CELLPHONE 1
WEEK FROM TODAY. Below this
notation MPs signature with 8/1/00
next to it, indicating the date of the
promissory note. When JR presented
MPs note to KR, the latter said it was
not a negotiable instrument under the
law and so could not be a valid
substitute for cash. JR took the
opposite view, insisting on the notes
negotiability. You are asked to
referee. Which of the opposing views
is correct?
b) TH is an indorsee of a promissory
note that simply states: PAY TO
JUAN TAN OR ORDER 400
PESOS. The note has no date, no
place
of
payment
and
no
consideration mentioned. It was
signed by MK and written under his
letterhead specifying the address,
which happens to be his residence.
TH accepted the promissory note as
payment for services rendered to SH,
who in turn received the note from
Juan Tan as payment for a prepaid
cell phone card worth 450 pesos.
The payee acknowledged having
received the note on August 1, 2000.
A Bar reviewee had told TH, who
happens to be your friend, that TH is
not a holder in due course under
Article 52 of the Negotiable
Instruments Law (Act 2031) and
therefore does not enjoy the rights
and protection under the statute. TH
asks for our advice specifically in
connection with the note being
undated and not mentioning a place
of payment and any consideration.
What would your advice be? (2%).
SUGGESTED ANSWER:
a) KR is right. The promissory note is
not negotiable. It is not issued to
order or bearer. There is no word of
negotiability containing therein. It is
not issued in accordance with
Section 1 of the Negotiable
Instruments Law
b) The fact that the instrument is
undated and does not mention the
place of payment does not militate
against its being negotiable. The date
and place of payment are not
material particulars required to make
an instrument negotiable.
The fact that no mention is made of
any consideration is not material.
Consideration is presumed.
Kinds of Negotiable Instruments

Page 10 of 56
A. Define the following: (1) a

negotiable promissory note, (2) a bill
of exchange and (3) a check. (3%)
B. You are Pedro Cruz. Draft the
appropriate contract language for (1)
your negotiable promissory note and
(2) your check, each containing the
essential elements of a negotiable
instrument (2%)
SUGGESTED ANSWER:
PROMISSORY NOTE (Sec. 184)
(1)
An unconditional promise in
writing
(2)
Made by one person to
another
(3)
Signed by the maker
(4)
Engaging
to
pay on
demand, or
at
a fixed or
determinable future time
(5)
A sum certain in money to
order or to bearer
(6)
Where a note is drawn to the
maker's own order, it is not complete
until indorsed by him.
KINDS OF PROMISSORY NOTES
(1)
Certificate of deposit a form
of promissory note which is a written
acknowledgment of a bank of its
receipt of a certain sum with a
promise to repay the same.
(2)
Bonds a certificate or
evidence of a debt on which the
issuing company or governmental
body
promises
to
pay
the
bondholders a specified amount of
interest for a specified length of time,
and to repay the loan on the
expiration date.
(3)
Debenture a promissory
note or bond backed by the general
credit of a corporation and usually
not secured by a mortgage or lien on
any specific property. (Sundiang and
Aquino)
BILL OF EXCHANGE (Sec. 126)
(1)
An unconditional order
writing
in
(2)
Addressed by one person to
another
(3)
Signed by the person giving it
(4)
Requiring the person to whom
it is addressed to pay on demand or
at a fixed or determinable future time
(5)
A sum certain in money to
order or to bearer
KINDS OF BILLS OF EXCHANGE
(1)
Draft used synonymously
with bill of exchange although it
normally refers to a bill of exchange
used in documentary exchange like
letters of credit transactions.
(2)
Inland and foreign bill an
Inland bill is a bill which is, or on its
face purports to be, both drawn and
payable within the Philippines. Any
other bill is a foreign bill.
(3)
Time draft draft that is
payable at a fixed date.
(4)
Sight or demand draft
payable when the holder presents it
for payment.
(5)
Trade acceptance used in
contracts of sale where the seller as
drawer orders the buyer (as drawee)
to pay a sum certain to the same
seller (payee).
(6)
Bankers acceptance a time
draft across the face which the
drawee has written the word
accepted. (Sundiang and Aquino)
(7)
Check - A bill of exchange
drawn on a bank payable on demand
(Sec. 185). It is the most common
form of bill of exchange.
Instances when a bill of exchange
may be treated as a promissory note:
(1)
The drawer and the drawee
are the same person;
(2)
Drawee is a fictitious person;
(3)
Drawee does NOT have the
capacity to contract (Sec. 130)
(4)
Where the bill is drawn on a
person who is legally absent;
(5)
Where the instrument is so
ambiguous that there is doubt
whether it is a bill or note, the holder

Page 11 of 56
may treat it as either at his election

(Sec.
17[e])
CHECK
(Sec. 185)
A check is a
bill
of
exchange
drawn on a
bank payable
on demand.
surety or insurance company in

favor of a designated beneficiary,
pursuant to which
such company acts
Promissory Note
Bill of Exchange
as a surety to the
debtor or obligor of
such beneficiary. A
Unconditional promise
Unconditional order
CASH BOND is a
Involves 2 parties
Involves 3 parties
security in the form
Maker is primarily liable
Drawer
is
only of cash established
by a guarantor or
secondarily liable
Bill
of
Exchange
Check
surety to secure the
Only one presentment: for Two presentments:
payment
of
for acceptance and for obligation
Not necessarily
drawn payment
It is necessary that a another.
on a deposit. The drawee check be drawn on a
B.
(1) need not be a bank
bank
deposit.
Negotiable promissory note - Otherwise,
Completion
there would and Delivery
September 15, 2002
Two steps involved in the execution
be fraud.
For value received, I hereby
of negotiable instruments
Death of a drawer of a Death of the drawer
promise to pay
Juan
Santos
or
Writing
of the instrument
BOE,
with
the of a (1)
check, with
the
order the sum of
TEN THOUSAND
completely
knowledge
of the bank, knowledge
of
thein accordance with the
does thirty
not (30)
revokedays
the bank, requisites
revokes theof negotiability under
PESOS (P10,000)
authority of the drawee authority
of
the
from date hereof.
Sec. 1.
to pay.
banker(2)
to pay. Delivery of the instrument by
be maker
presentedor the drawer to the
(Signed) Pedro May
Cruz be presented for Must the
payment
within for payment
a
payeewithin
in order
to give legal effect
reasonable time after its reasonable time after
to: Philippine National
Bank
thereto. (Abad)
last negotiation.
its issue.
Escolta, Manila Branch
payable onOF DATE (Sec. 13)
May be payable on AlwaysINSERTION
demand
demand
or
at
a
fixed
or
Negotiable
Instrument:
Any holder may insert the true date
determinable future time
Ambiguous Instruments (1998)
of issue or acceptance of an
How do you treat a negotiable
instrument where:
instrument that is so ambiguous
(1)
The instrument is expressed
that there is doubt whether it is a
to be payable at a fixed period after
bill or a note? (5%)
date is issued undated; or
(2)
The acceptance of an
SUGGESTED ANSWER:
instrument payable at a fixed
1. Where a negotiable instrument is
period after sight is undated.
so ambiguous that there is doubt
whether it is a bill or a note, the
The insertion of a wrong date does
holder may treat it either as a bill of
not avoid the instrument in the
exchange or a promissory note at
hands of a subsequent holder in
his election.
due course; but as to him, the date
so inserted is to be regarded as the
Bond: Cash Bond vs. Surety
true date.
Bond (2004)
Distinguish clearly cash bond from
The instrument is not invalid for the
surety bond.
reason only that it is ante-dated or
post-dated, provided this is not
SUGGESTED ANSWER:
done for an illegal or fraudulent
A SURETY BOND is issued by a
purpose. The person to whom an
Page 12 of 56
instrument so dated is delivered

acquires the title thereto as of the
date of delivery (Sec. 12).
COMPLETION OF BLANKS (Sec.
14)
Where the instrument is wanting in
any material particular, the person
in possession thereof has a prima
facie authority to complete it by
filling up the blanks therein.
A signature on a blank paper
delivered by the person making the
signature in order that the paper
may be converted into a negotiable
instrument operates as a prima
facie authority to fill it up as such
for any amount.
For such instrument to be
enforceable against any person
who became a party thereto prior to
its completion, it must be filled up
strictly in accordance with the
authority given and within a
reasonable time.
When subsequently negotiated to a
holder in due course (HDC), there
is a presumption that such
instrument is filled up strictly in
accordance with the authority given
and within reasonable time.
INCOMPLETE AND DELIVERED
INSTRUMENTS (Sec. 14)
(1)
Holder has prima facie
authority to fill up the instrument.
(2)
The instrument must be
filled up strictly in accordance with
the authority given and within
reasonable time
(3)
HDC may enforce the
instrument as if filled up according
to (2) above.
Incomplete & Delivered (2004)
AX, a businessman, was preparing
for a business trip abroad. As he
usually did in the past, he signed

several checks in blank and
entrusted them to his secretary with
instruction to safeguard them and
fill them out only when required to
pay accounts during his absence.
OB, his secretary, filled out one of
the checks by placing her name as
the payee. She filled out the
amount, endorsed and delivered
the check to KC, who accepted it in
good faith for payment of gems that
KC sold to OB. Later, OB told AX of
what she did with regrets. AX timely
directed the bank to dishonor the
check. Could AX be held liable to
KC? Answer and reason briefly.
(5%)
SUGGESTED ANSWER:
Yes. AX could be held liable to KC.
This is a case of an incomplete
check, which has been delivered.
Under Section 14 of the Negotiable
Instruments Law, KC, as a holder in
due course, can enforce payment
of the check as if it had been filled
up strictly in accordance with the
authority given by AX to OB and
within a reasonable time.
Incomplete and Delivered (2005)
Brad was in desperate need of
money to pay his debt to Pete, a
loan shark. Pete threatened to take
Brads life if he failed to pay. Brad
and Pete went to see Seorita
Isobel, Brads rich cousin, and
asked her if she could sign a
promissory note in his favor in the
amount of P10,000.00 to pay Pete.
Fearing that Pete would kill Brad,
Seorita Isobel acceded to the
request. She affixed her signature
on a piece of paper with the
assurance of Brad that he will just
fill it up later. Brad then filled up the
blank paper, making a promissory
note
for
the
amount
of
P100,000.00. He then indorsed and

Page 13 of 56
delivered the same to Pete, who

accepted the note as payment of
the debt. What defense or
defenses can Seorita Isobel set
up against Pete? Explain. (3%)
SUGGESTED ANSWER:
The defense (personal defense)
which Seorita Isobel can set up
against Pete is that the amount of
P100,000.00 is not in accordance
with the authority given to her to
Brad (in the presence of Pete) and
that Pete was not a holder in due
course for acting in bad faith when
accepted the note as payment
despite his knowledge that it was
only 10,000.00 that was allowed by
Seorita Isobel during their meeting
with Brad.
Incomplete
and
undelivered
Instruments; holder in due
course (2000)
A, single proprietor of a business
concern, is about to leave for a
business trip and, as he so often
does on these occasions, signs
several checks in blank. He
instructs B, his secretary, to
safekeep the checks and fill them
out when and as required to pay
accounts during his absence. B fills
out one of the checks by placing
her name as payee, fills in the
amount, endorses and delivers the
check to C who accepts it in good
faith as payment for goods sold to
B. B regrets her action and tells A
what she did. A directs the Bank in
time to dishonor the check. When
C encashes the check, it is
dishonored. Can A be held liable to
C?
SUGGESTED ANSWER:
Yes, A can be held liable to C,
assuming that the latter gave notice
of dishonor to A. This is a case of
an incomplete instrument but
delivered as it was entrusted to B,

the secretary of A. Moreover, under
the
doctrine
of
comparative
negligence, as between A and C,
both innocent parties, it was the
negligence of A in entrusting the
check to B which is the proximate
cause of the loss.
INCOMPLETE
AND
UNDELIVERED INSTRUMENTS
(Sec. 15)
Where an incomplete instrument
has not been delivered, it will not
be a valid contract in the hands of
any holder, as against any person
whose signature was placed
thereon
before
delivery
if
completed and negotiated without
authority. Non-delivery of an
incomplete instrument is a real
defense.
Note: A drawee bank whose
negligent custody of the checks,
after partial execution, contributed
to its escape, is stopped from
raising the real defense under Sec.
15.
Incomplete
and
undelivered
instruments (2000)
PN makes a promissory note for
P5,000.00, but leaves the name of
the payee in blank because he
wanted to verify its correct spelling
first. He mindlessly left the note on
top of his desk at the end of the
workday. When he returned the
following morning, the note was
missing. It turned up later when X
presented it to PN for payment.
Before X, T, who turned out to have
filched the note from PNs office,
had endorsed the note after
inserting his own name in the blank
space
as
the
payee.
PN
dishonored the note, contending
that he did not authorize its
completion and delivery. But X said

Page 14 of 56
he had no participation in, or

knowledge about, the pilferage and
alteration of the note and therefore
he enjoys the rights of a holder in
due course under the Negotiable
Instruments Law. Who is correct
and why? (3%)
SUGGESTED ANSWER:
a) PN is right. The instrument is
incomplete and undelivered. It did
not create any contract that would
bind PN to an obligation to pay the
amount thereof.
Incomplete
Instruments;
Incomplete
Delivered
Instruments
vs.
Incomplete
Undelivered Instrument (2006)
Jun was about to leave for a
business trip. As his usual practice,
he signed several blank checks. He
instructed
Ruth, his secretary, to fill them as
payment for his obligations. Ruth
filled one check with her name as
payee, placed P30,000.00 thereon,
endorsed and delivered it to Marie.
She accepted the check in good
faith as payment for goods she
delivered to Ruth. Eventually, Ruth
regretted what she did and
apologized to Jun. Immediately he
directed the drawee bank to
dishonor the check. When Marie
encashed the check, it was
dishonored.
1. Is Jun liable to Marie? (5%)
SUGGESTED ANSWER:
Yes. This covers the delivery of an
incomplete
instrument,
under
Section 14 of the Negotiable
Instruments Law, which provides
that there was prima facie authority
on the part of Ruth to fill-up any of
the material particulars thereof.
Having done so, and when it is first
completed before it is negotiated to
a holder in due course like Marie, it
is valid for all purposes, and Marie

may enforce it within a reasonable
time, as if it had been filled up
strictly in accordance with the
authority given.
2. Supposing the check was stolen
while in Ruth's possession and a
thief filled the blank check,
endorsed and delivered it to Marie
in payment for the goods he
purchased from her, is Jun liable to
Marie if the check is dishonored?
(5%)
COMPLETE AND UNDELIVERED
INSTRUMENTS (Sec. 16)
Every contract on a negotiable
instrument is incomplete and
revocable until delivery of the
instrument for the purpose of giving
effect thereto.
Between immediate parties and as
regards a remote party other than a
holder in due course, the delivery,
in order to be effectual, must be
made either by or under the
authority of the party making,
drawing, accepting, or indorsing.
When the instrument is in the
hands of HDC, a valid delivery
thereof by all parties prior to him so
as to make them liable to him is
conclusively presumed.
Signature
General rule: One whose signature
does not appear on the instrument
shall not be liable thereon.
Exceptions:
(1)
The principal who signs
through an agent
(2)
The forger
(3)
One who indorses in a
separate instrument (allonge) OR
where an acceptance is written on

Page 15 of 56
a separate paper
(4)
One who signs his assumed
or trade name
(5)
A person negotiating by
delivery (as in the case of a bearer
instrument) is liable to his
immediate indorsee.
SIGNING IN TRADE NAME
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 (Sec. 18)
SIGNATURE OF AGENT
Signature of any party may be
made by duly authorized agent,
established as in ordinary agency.
SIGNATURE PER PROCURATION
Operates as notice that the agent
has limited authority to sign, and
the principal is bound only in case
the agent in so signing acted within
the actual limits of his authority
(Sec. 21)
LIABILITY
General rule: Where a person adds
to his signature words indicating
that he signs on behalf of a
principal, then he is not liable if he
was duly authorized.
Exceptions:
(1)
Mere addition of words
describing him as an agent without
disclosing his principal (Sec. 20)
(2)
Where a broker or agent
negotiates an instrument without
indorsement, he incurs all liabilities
in Sec. 65, unless he discloses
name of principal and the fact that
he is only acting as an agent. (Sec.
69)
INDORSEMENT BY MINOR OR
CORPORATION
The indorsement or assignment of
the instrument by a corporation or
by an infant (minor) passes the

property therein, notwithstanding
that from want of capacity, the
corporation or infant may incur no
liability thereon (Sec. 22).
REAL defense but available only
to the incapacitated party (i.e. the
minor or the corporation).
FORGERY
Counterfeit making or fraudulent
alteration of any writing, which may
consist of:
(1)
Signing of anothers name
with intent to defraud; or
(2)
Alteration of an instrument in
the name, amount, name of payee,
etc. with intent to defraud.
General rule: When a signature is
forged or made without the
authority of the person, only the
forged
signature
(not
the
instrument itself and the other
genuine signatures) is wholly
inoperative
Effects:
(1)
No right to retain the
instrument
(2)
No right to give a discharge
therefor
(3)
No right to enforce payment
thereof against any party thereto
can be acquired through or under
such signature
Exception: The party against whom
it is sought to be enforced is
precluded from setting up the
forgery or want of authority as a
defense (Sec. 23).
PERSONS PRECLUDED FROM
SETTING UP DEFENSE OF
FORGERY
(1)
Those who warrant or admit
the genuineness of the signature in
question. This includes indorsers,

Page 16 of 56
persons negotiating by delivery and

acceptors.
(2)
Those who, by their acts,
silence,
or
negligence,
are
estopped from setting up the
defense of forgery.
Payees signature forged
(1) Maker and payee are not liable.

(2) Indorsers subsequent to
are liable.
(3) Party who made the forgery is liab
Indorsers signature forged
(1) Maker, payee, indorser

signature/s was/were forge
all indorsers preceding the
are not liable.
(2) Indorsers subsequent to
are liable.
(3) Party who made the forgery is liab
BILL OF EXCHANGE
Order Instrument
Drawers signature forged
(1) Drawer is not liable because

he was never a party to the
instrument.
(2) Drawee is liable if it paid (no
recourse to drawer) because
he admitted the genuineness o
the drawers signature. Drawee
cannot recover from
the
collecting bank because there
is no privity between the
collecting bank and the drawer
The collecting bank does no
give any warranty re: the
drawers signature. (Associated
Bank vs. CA)
(3) Indorsers subsequent to forgery liable
RULES ON FORGERY
PROMISSORY NOTE
Order
Makers signature forged
(1) Maker is not

never became
instrument.
(2) Indorsers subsequen
are liable bec
warranties.
(3) Party who made the
Forgery; Liabilities; Prior

Subsequent Parties (1990)
&

Page 17 of 56
a) Camilo may not enforce said

promissory note against
Mario and Jose. The promissory
note at the time of forgery being
payable to order, the signature of
Payees signature forged (1) Drawer and payee are
Pablo was essential for the
(2) Drawee is liable
instrument to pass title to
may pass liability
the collection chain subsequent
parties. A forged
(3) Indorsers subsequen signature was inoperative (Sec 23
are liable (such
NIL). Accordingly, the parties
bank)
(4) Party who made the forgerybefore the forgery are not juridically
related to parties after the forgery
Indorsers signature forged
(1) Drawer,
payee, to allow such enforcement.
whose signature b) Camilo may not go against
forged and
Pablo, the latter not having
preceding the forgeryindorsed the instrument.
liable.
c) Camilo may enforce the
(2) Drawee is liable if it paid.
(3) Indorsers subsequen instrument against Julian because
of his special indorsement to
are liable. (such
bank)
Camilo, thereby making him
(4) Party who made the forgerysecondarily liable, both being
parties after the forgery.
d) Julian, in turn, may enforce the
Jose loaned Mario some money
instrument against Bert who, by his
and, to evidence his indebtedness,
forgery, has rendered himself
Mario executed and delivered to
primarily liable.
Jose a promissory note payable to
e) Pablo preserves his right to
his order.
recover from either Mario or Jose
Jose endorsed the note to Pablo.
who remain parties juridically
Bert fraudulently obtained the note
related to him. Mario is still
from Pablo and endorsed it to
considered primarily liable to Pablo.
Julian by forging Pablos signature.
Pablo may, in case of dishonor, go
Julian endorsed the note to Camilo.
after Jose who, by his special
a) May Camilo enforce the said
indorsement, is secondarily liable.
promissory note against Mario and
Note: It is possible that an answer
Jose?
might distinguish between blank
b) May Camilo go against Pablo?
and special indorsements of prior
c) May Camilo enforce said note
parties
which
can
thereby
against Julian?
materially
alter
the
above
d) Against whom can Julian have
suggested answers. The problem
the right of recourse?
did not clearly indicate the kind of
e) May Pablo recover from either
indorsements made.
Mario or Jose?
(such as collec
last endorser)
(4) Party who made
liable
SUGGESTED ANSWER:
Forgery; Liabilities; Prior &

Subsequent Parties (1995)
Alex issued a negotiable PN
(promissory note) payable to Benito
or order in payment of certain
goods. Benito indorsed the PN to
Celso in payment of an existing

Page 18 of 56
obligation. Later Alex found the

goods to be defective. While in
Celsos possession the PN was
stolen by Dennis who forged
Celsos signature and discounted it
with Edgar, a money lender who
did not make inquiries about the
PN. Edgar indorsed the PN to
Felix, a holder in due course. When
Felix demanded payment of the PN
from Alex the latter refused to pay.
Dennis could no longer be located.
1. What are the rights of Felix, if
any, against Alex, Benito, Celso
and Edgar? Explain
2. Does Celso have any right
against Alex, Benito and Felix?
Explain.
SUGGESTED ANSWER:
1. Felix has no right to claim
against Alex, Benito and Celso who
are parties prior to the forgery of
Celsos signature by Dennis.
Parties to an instrument who are
such prior to the forgery cannot be
held liable by any party who
became such at or subsequent to
the forgery.
However, Edgar, who became a
party to the instrument subsequent
to the forgery and who indorsed the
same to Felix, can be held liable by
the latter.
2. Celso has the right to collect
from Alex and Benito. Celso is a
party subsequent to the two.
However, Celso has no right to
claim against Felix who is a party
subsequent to Celso (Sec 60 and
66 NIL)
Checks; Forged Check; Effects
(2006)
Discuss the legal consequences
when a bank honors a forged
check. (5%)
SUGGESTED ANSWER:
The legal consequences when a
bank honors a forged check are as

follows:
(a) When Drawer's Signature is
Forged: Drawee-bank by accepting
the check cannot set up the
defense of forgery, because by
accepting the instrument, the
drawee
bank
admits
the
genuineness of signature of drawer
(BPI
Family Bank vs. Buenaventura
G.R. No. 148196, September 30,
2005; Section 23, Negotiable
Instruments Law).
Unless a forgery is attributable to
the fault or negligence of the
drawer himself, the remedy of the
drawee-bank is against the party
responsible
for
the
forgery.
Otherwise, drawee-bank bears the
loss
(BPI
Family
Bank
v.
Buenaventura, G.R. No. 148196,
September 30, 2005). A draweebank paying on a forged check
must be considered as paying out
of its funds and cannot charge the
amount to the drawer (Samsung
Construction Co. Phils, v. Far East
Bank, G.R. No. 129015, August 13,
2004). If the drawee-bank has
charged drawer's account, the
latter can recover such amount
from the drawee-bank (Associated
Bank v. Court of Appeals, G.R. No.
107382, January 31, 1996; Bank of
P. I. v. Case Montessori
Internationale, G.R. No. 149454,
May 28, 2004).
However, the drawer may be
precluded or estopped from setting
up the defense of forgery as
against the draweebank, when it is
shown that the drawer himself had
been guilty of gross negligence as
to have facilitated the forgery
(Metropolitan Waterworks v. Court
of Appeals, G.R. No. L- 62943, 143
SCRA 20, July 14, 1986).
(NOTA BENE: The question does

Page 19 of 56
not qualify the term "forged check".

An answer addressing the liabilities
of a drawer should be deemed
sufficient. Answers addressing
liabilities of parties should likewise
be given full credit)
Defenses; Forgery (2004)
CX maintained a checking account
with UBANK, Makati Branch. One
of his checks in a stub of fifty was
missing. Later, he discovered that
Ms. DY forged his signature and
succeeded to encash P15,000 from
another branch of the bank. DY
was able to encash the check when
ET, a friend, guaranteed due
execution, saying that she was a
holder in due course. Can CX
recover the money from the bank?
Reason briefly. (5%)
SUGGESTED ANSWER:
Yes, CX can recover from the bank.
Under Section 23 of the Negotiable
Instruments Law, forgery is a real
defense. The forged check is
wholly inoperative in relation to CX.
CX cannot be held liable thereon
by anyone, not even by a holder in
due course. Under a forged
signature of the drawer, there is no
valid instrument that would give
rise to a contract which can be the
basis or source of liability on the
part of the drawer. The drawee
bank has no right or authority to
touch the drawer's funds deposited
with the drawee bank.
ACCEPTANCE AND PAYMENT
UNDER MISTAKE
(1)
When the drawee accepts or
pays a forged instrument
A bank is bound to know the
signatures of its depositors. If a
bank pays a forged check it must
be considered as making the
payment out of its own funds and
cannot charge the account of the
depositor whose signature was

forged. (PNB vs. Quimpo, 1988)
A bank is liable, irrespective of its
good faith, in paying a forged
check. (Samsung vs. Far East
Bank, 2004)
(2)
Extensions of Price vs. Neal
doctrine
Doctrine: As between equally
innocent persons, the drawee who
pays money on a check or draft the
signature on which was forged
CANNOT recover the money from
the one who received it. The
drawee is bound to know the
signature of its depositor.
Notes: The bar to recovery is
extended to overdrafts and stop
payment orders.
(a)
Overdraft occurs when a
check is issued for an amount more
than what the drawer has in deposit
with the drawee bank. Rule: The
drawee who pays the holder of the
bill cannot recover from the holder
what he paid under mistake
(b)
Stop Payment Order is one
issued by the drawer of a check
countermanding his first order to
the drawee bank to pay the check.
Rule: The drawee bank is bound to
follow the order, provided it is
received prior to its certification or
payment of the check.
(3)
Effects of Negligence of
Depositor
If such negligence was the
proximate cause of the loss, the
drawee-bank is NOT liable
It
is
the
duty
of
the
depositor/drawer
to
carefully
examine
banks
statements,
cancelled checks, his check stubs,
and other pertinent records within a
reasonable time and to report any
errors without unreasonable delay.

Page 20 of 56
indorsements (BPI v CA, 1992).

If a drawer/depositors negligence
and delay should cause a bank to
honor a forged check, drawer
cannot later complain should bank
refuse to recredit his account.
WHEN DRAWEE MAY RECOVER
FROM DRAWER
(1)
Where the instrument is
originally a bearer instrument,
because the indorsement can be
disregarded as being unnecessary
to the holders title
(2)
Indorsement forged by an
employee or agent of the drawer
(3)
If due to the drawers
negligence/delay, the forgery is not
discovered until it is too late for the
bank to recover from the holder or
the forger
WHEN DRAWEE MAY NOT
RECOVER FROM HOLDER
(1)
Where the instrument is
originally a bearer instrument,
because the indorsement can be
disregarded as being unnecessary
to the holders title
(2)
If drawee fails to act
promptly, if he delays in informing
the holder whom he paid
BETWEEN DRAWEE BANK AND
COLLECTING BANK
Collecting bank is only liable for
forged indorsements and not
forgeries of the drawer or makers
signature (PNB v CA, 1968).
The collecting bank or last indorser
generally suffers the loss because
it has the duty to ascertain the
genuineness
of
all
prior
indorsements considering that the
act of presenting the check for
payment to the drawee is an
assertion that the party making the
presentment had done its duty to
ascertain the genuineness of the
In presenting the checks for

clearing, the collecting agent made
an express guarantee on the
validity
of
all
the
prior
endorsements.
The drawee bank is not similarly
situated as the collecting bank
because the former makes no
warranty as to the genuineness of
any indorsement. The drawee
banks duty is but to verify the
genuineness of the drawers
signature
and
not
of
the
indorsement because only the
drawer is its client.
Notes:
However,
where
the
negligence of the drawee bank is
the proximate cause of the
collecting banks payment of a
check with a forged indorsement,
the drawee bank may be held liable
to the collecting bank.
When both are guilty of negligence,
the degree of negligence of each
will be weighed in considering the
amount of loss which each should
bear (BPI v CA, 1992)
Checks; Validity; Waiver of
Banks liability for negligence
(1991)
Mr. Lim issued a check drawn
against BPI Bank in favor of Mr Yu
as payment of certain shares of
stock which he purchased. On the
same day that he issued the check
to Yu, Lim ordered BPI to stop
payment. Per standard banking
practice, Lim was made to sign a
waiver of BPIs liability in the event
that it should pay Yu through
oversight or inadvertence. Despite
the stop order by Lim, BPI
nevertheless
paid
Yu
upon
presentation of the check. Lim sued

Page 21 of 56
BPI for paying against his order.

Decide the case.
payable on demand or at a future

time. (Sec. 25)
SUGGESTED ANSWER:
In the event that Mr. Lim, in fact,
had sufficient legal reasons to
issue the stop payment order, he
may sue BPI for paying against his
order. The waiver executed by Mr
Lim did not mean that it need not
exercise due diligence to protect
the interest of its account holder. It
is not amiss to state that the
drawee, unless the instrument has
earlier been accepted by it, is not
bound to honor payment to the
holder of the check that thereby
excludes it from any liability if it
were to comply with its stop
payment order (Sec 61 NIL)
ALTERNATIVE ANSWER:
1991 6b) BPI would not be liable to
Mr Lim. Mr Lim and BPI are
governed by their own agreement.
The waiver executed by Mr Lim,
neither being one of future fraud or
gross negligence, would be valid.
The problem does not indicate the
existence of fraud or gross
negligence on the part of BPI so as
to warrant liability on its part.
Who is a Holder for Value (HFV)?

(1)
A holder of an instrument for
which value has been given at any
given time but only with respect to
all parties who have become
parties to the instrument prior to the
time at which value has been
given. (Sec. 26)
(2)
A holder who as a lien on
the instrument but only to the
extent of his lien. (Sec. 27)
Consideration
Consideration: Some right, interest,
benefit, or advantage conferred
upon a promisor, to which he is
otherwise not lawfully entitled, or
any detriment, prejudice, loss or
disadvantage
suffered
or
undertaken by the promise other
than to such as he is at the time of
consent bound to suffer. (Gabriel v.
Monte de Piedad)
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 (Sec. 29).
Value: Any consideration sufficient

to support a simple contract.
An antecedent or pre-existing debt
constitutes value; and is deemed
such whether the instrument is
Burden of proof - presumption of

consideration: Every negotiable
instrument is deemed prima facie
to have been issued for a valuable
consideration; and every person
whose signature appears thereon
to have become a party thereto for
value (Sec. 24).
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, hence, a personal defense.
Accommodation Party
LIABILITY
The person to whom the instrument
thus executed is subsequently
negotiated has a right of recourse
against the accommodation party in
spite of the formers knowledge
that no consideration passed
between the accommodation and
accommodated parties (Sec. 29).

Page 22 of 56
Liable on the instrument to a holder

for value notwithstanding such
holder at the time of the taking of
the instrument knew him to be only
an accommodation party. Hence,
as regards an AP, the 4th condition,
i.e., lack of notice of infirmity in the
instrument or defect in the title of
the persons negotiating it, has no
application.
(Stelco
Marketing
Corp. vs. CA, 1992)
ACCOMMODATION
SURETY
PARTY AS
Accommodation Party (AP) is

generally regarded as a surety for
the party accommodated
When the AP makes payment to
holder of the note, he has the right
to sue the accommodated party for
reimbursement.
(Agro
Conglomerates, Inc. v. CA)
Note: A corporation cannot act as
an accommodation party. The issue
or endorsement of negotiable
instruments by a corporation
without consideration and for the
accommodation of another is ultra
vires (Crisologo v. CA)
Parties; Accommodation Party
(1990)
To accommodate Carmen, maker
of a promissory note, Jorge signed
as indorser thereon, and the
instrument was negotiated to Raffy,
a holder for value. At the time Raffy
took the instrument, he knew Jorge
to be an accomodation party only.
When the promissory note was not
paid, and Raffy discovered that
Carmen had no funds, he sued
Jorge. Jorge pleads in defense the
fact that he had endorsed the
instrument without receiving value
therefor, and the further fact that
Raffy knew that at the time he took
the instrument Jorge had not

received any value or consideration
of any kind for his indorsement. Is
Jorge liable? Discuss.
SUGGESTED ANSWER:
Yes. Jorge is liable. Sec 29 of the
NIL
provides
that
an
accommodation party is liable on
the instrument to a holder for value,
notwithstanding the holder at the
time of taking said instrument knew
him to be only an accommodation
party. This is the nature or the
essence of accommodation.
(1991)
On June 1, 1990, A obtained a loan
of P100th from B, payable not later
than 20Dec1990. B required A to
issue him a check for that amount
to be dated 20Dec1990. Since he
does not have any checking
account, A, with the knowledge of
B, requested his friend, C,
President of Saad Banking Corp
(Saad) to accommodate him. C
agreed, he signed a check for the
aforesaid amount dated 20Dec
1990, drawn against Saads
account with the ABC Commercial
Banking Co. The By-laws of Saad
requires that checks issued by it
must be signed by the President
and the Treasurer or the VicePresident. Since the Treasurer was
absent, C requested the VicePresident to co-sign the check,
which the latter reluctantly did. The
check was delivered to B. The
check was dishonored upon
presentment on due date for
insufficiency of funds.
a) Is Saad liable on the check as
an accommodation party?
b) If it is not, who then, under the
above
facts,
is/are
the
accommodation party?

Page 23 of 56
SUGGESTED ANSWER:
a.) Saad is not liable on the check
as an accommodation party. The
act
of
the
corporation
in
accommodating a friend of the
President, is ultra vires (CrisologoJose v CA GR 80599, 15Sep1989).
While it may be legally possible for
the corporation, whose business is
to
provide
financial
accommodations in the ordinary
course of business, such as one
given by a financing company to be
an accommodation party, this
situation, however, is not the case
in the bar problem.
b) Considering that both the
President and Vice- President were
signatories to the accommodation,
they themselves can be subject to
the liabilities of accommodation
parties to the instrument in their
personal capacity (Crisologo-Jose
v CA 15Sep1989)

(1998)
For the purpose of lending his
name without receiving value
therefore, Pedro makes a note for
P20,000 payable to the order of X
who in turn negotiates it to Y, the
latter knowing that Pedro is not a
party for value.
1. May Y recover from Pedro if the
latter interposes the absence of
consideration? (3%)
2. Supposing under the same facts,
Pedro pays the said P20,000 may
he recover the same amount from
X? (2%)

(1996)
Nora applied for a loan of P100th
with BUR Bank. By way of
accommodation, Noras sister,
Vilma, executed a promissory note
in favor of BUR Bank. When Nora
defaulted, BUR Bank sued Vilma,
despite its knowledge that Vilma
received no part of the loan. May
Vilma be held liable? Explain.
SUGGESTED ANSWER:
1. Yes. Y can recover from Pedro.
Pedro is an accommodation party.
Absence of consideration is in the
nature of an accommodation.
Defense
of
absence
of
consideration cannot be validly
interposed
by accommodation
party against a holder in due
course.
2. If Pedro pays the said P20,000
to Y, Pedro can recover the amount
from X. X is the accommodated
party or the party ultimately liable
for the instrument. Pedro is only an
accommodation party. Otherwise, it
would be unjust enrichment on the
part of X if he is not to pay Pedro.
SUGGESTED ANSWER:
Yes, Vilma may be held liable.
Vilma is an accommodation party.
As such, she is liable on the
instrument to a holder for value
such as BUR Bank. This is true
even if BUR Bank was aware at the
time it took the instrument that
Vilma is merely an accommodation
party and received no part of the
loan (See Sec 29, NIL; Eulalio
Prudencio v CA GR L-34539, Jul
14, 86 143 s 7)

(2003)
Susan Kawada borrowed P500,000
from XYZ Bank which required her,
together with Rose Reyes who did
not receive any amount from the
bank, to execute a promissory note
payable to the bank, or its order on
stated maturities. The note was
executed as so agreed.
What kind of liability was incurred
by Rose, that of an accommodation
party or that of a solidary debtor?

Page 24 of 56
Explain. (4%)
SUGGESTED ANSWER:
(per Dondee) Rose may be held
liable. Rose is an accommodation
party. Absence of consideration is
in the nature of an accommodation.
Defense
of
absence
of
consideration cannot be validly
interposed
by accommodation
party against a holder in due
course.
(2003)
Juan Sy purchased from A
Appliance Center one generator set
on
installment
with
chattel
mortgage in favor of the vendor.
After getting hold of the generator
set, Juan Sy immediately sold it
without consent of the vendor. Juan
Sy was criminally charged with
estafa. To settle the case extra
judicially, Juan Sy paid the sum of
P20,000 and for the balance of
P5,000.00
he
executed
a
promissory note for said amount
with
Ben
Lopez
as
an
accommodation party. Juan Sy
failed to pay the balance.
1) What is the liability of Ben Lopez
as an accommodation party?
Explain.
2) What is the liability of Juan Sy?
Juan Sy has the obligation to

reimburse Ben Lopez for the
amount paid. If Juan Sy pays
directly to the holder of the
promissory note, or he pays Ben
Lopez for the reimbursement of the
payment by the latter to the holder,
the instrument is discharged.
(2005)
Dagul has a business arrangement
with Facundo. The latter would lend
money to another, through Dagul,
whose name would appear in the
promissory note as the lender.
Dagul would then immediately
indorse the note to Facundo. Is
Dagul an accommodation party?
Explain. (2%)
SUGGESTED ANSWER:
YES! Dagul is an accommodation
party because in the case at bar,
he is essentially, a person who
signs as maker without receiving
any consideration, signs as an
accommodation party merely for
the purpose of lending the credit of
his
name.
And
as
an
accommodation party he cannot
set up lack of consideration against
any holder, even as to one who is
not a holder in due course.
Negotiation
SUGGESTED ANSWER:
1)
Ben
Lopez,
as
an
accommodation party, is liable as
maker to the holder up to the sum
of P5,000 even if he did not receive
any
consideration
for
the
promissory note. This is the nature
of accommodation. But Ben Lopez
can ask for reimbursement from
Juan Sy, the accommodation party.
2) Juan Sy is liable to the extent of
P5,000 in the hands of a holder in
due course (Sec 14 NIL). If Ben
Lopez paid the promissory note,
NEGOTIATION
DISTINGUISHED
FROM ASSIGNMENT
Negotiation
Assignment

Page 25 of 56
The transfer of the

instrument from one
person to another so
as to constitute the
transferee as holder
thereof (Sec.30).
The transferee does

not become a holder
and he merely steps
into the shoes of the
transferor.
Any
defense
available
against the transferor
is available against
the transferee.
MODES OF NEGOTIATION
BY DELIVERY IF PAYABLE TO
BEARER (SEC. 30)
Delivery
means
transfer
of
possession of instrument by the
maker or drawer, with intent to
transfer title to the payee and
recognize him as holder thereof.
Issuance is the first delivery of the
instrument complete in form to a
person who takes it as a holder
(Sec. 191).
Requisites
(1)
Mechanical act of writing the
instrument completely and in
accordance with the requirements
of Section 1; and
(2)
The delivery of the complete
instrument by the maker or drawer
to the payee or holder with the
intention of giving effect to it.
Presumption of delivery
(1)
Where the instrument is no
longer in the possession of a party
whose signature appears thereon,
a valid and intentional delivery by
him is presumed until the contrary
is proved (Sec. 16)
(2)
If it is in the hands of a HDC,
the presumption is conclusive (Sec.
16)
Presumption as to date
(1)
Date is not an essential
element of negotiability
(2)
An undated instrument is
considered to be dated as of the

time it was issued
BY INDORSEMENT COMPLETED
BY DELIVERY IF PAYABLE TO
ORDER (SEC. 30)
Indorsement
(1)
Where
placed
The
indorsement must be written (Sec.
31):
(a)
On the instrument itself, or
(b)
On a separate piece of
paper attached to the instrument
called allonge
(2)
Signature of the indorser,
without additional words, is a
sufficient indorsement (Sec. 31)
(3)
Must be of the ENTIRE
instrument
(a)
CANNOT indorse a part only
of the amount payable; BUT if the
instrument has been paid in part,
then the instrument may be
indorsed as to the residue (Sec.
32)
(b)
CANNOT
transfer
the
instrument to two or more
indorsees severally (Sec. 32)
(c)
If not an indorsement of the
entire instrument, the transfer
remains valid, but as a mere
assignment which subjects the
holder to all defenses on the
instrument (Campos)
Kinds of indorsement
As to manner of future method
of negotiation
(1)
Special
(a)
Specifies the person to
whom/to
whose
order
the
instrument is to be payable;
indorsement of such indorsee is
necessary to further negotiation.
(b)
A special indorser is liable to

Page 26 of 56
all subsequent holders, unless the

instrument is an originally bearer
instrument, in which case he is
liable only to those who take title
through his indorsement (Sec 40).
(c)
An instrument, payable to
bearer, and indorsed specially, may
nevertheless be further negotiated
by delivery. (Sec 40)
Originally bearer instrument always
remains a bearer instrument
(Sundiang and Aquino)
(2)
Blank
(a)
Specifies
no
indorsee,
instrument so indorsed is payable
to bearer, and may be negotiated
by delivery
(b)
The holder may convert a
blank indorsement into a special
indorsement by writing over the
signature of the indorser in blank
any contract consistent with the
character of the indorsement. (Sec
35)
(c)
An order instrument may be
converted into a bearer instrument
by means of a blank indorsement,
and may be later reconverted into
an
order
instrument
by
a
subsequent special indorsement
indorsement. (Sec 37)

(2)
As to kind of liability assumed

by indorser
(1)
Qualified
(a)
Constitutes indorser as mere
assignor of title
(b)
Made by adding the words
without recourse (Sec. 38).
(c)
But this does not mean that
the transferee only has the rights of
an assignee; transfer remains a
negotiation and transferee can still
be a holder capable of acquiring a
title free from defenses of prior
parties.
(d)
Effects:
(i)
Relieves
the
qualified
indorser of his liability to pay the
instrument should the maker be
unable to pay
(ii)
The qualified indorser does
not guarantee the solvency of the
maker, but merely his legal title to
the instrument
(iii)
The instrument may still be
further negotiated; no effect on its
negotiability
(2)
As to title transferred
(1)
Restrictive
Such
indorsement either:
(a)
Prohibits further negotiation
of instrument
(b)
Constitutes indorsee as
agent of indorser
(c)
Vests title in indorsee in trust
for another (Sec 36)
Rights of Restrictive Indorsee:
(a)
Receive payment
(b)
Bring any action thereon that
the indorser could bring.
(c)
Transfer his rights as such
indorsee, but all subsequent
indorsees acquire only the title of
first indorsee under restrictive
Non-restrictive
Non-qualified
As to presence/absence of
express limitations
(1)
Conditional
(a)
Additional condition annexed
to indorsers liability; such condition
must be expressed
(b)
Where an indorsement is
conditional, a party required to pay
the instrument may disregard the
condition, and make payment to
the indorsee or his transferee,
whether condition has been fulfilled
or not.
(c)
But any person to whom an
instrument
so
indorsed
is
negotiated, will hold the same, or
the proceeds thereof, subject to the

Page 27 of 56
rights of the person

conditionally. (Sec. 39)
indorsing
to an instrument payable to the

order of the transferor. This
cannot
apply
to
bearer
instruments.
Other kinds of indorsement

(1)
Absolute One by which the
indorser binds himself to pay, upon
no other condition than the failure
of prior parties to do so, and of due
notice to him of such failure
(2)
Joint Where instrument
payable to the order of two or more
payees or indorsees not partners,
all must indorse, unless the one
indorsing has authority to endorse
for the others (Sec. 41)
(3)
Irregular Where a person,
not otherwise a party to the
instrument, places thereon his
signature in blank before delivery,
he is liable as indorser
Cancellation of indorsement:
Sec.
48.
Striking
out
indorsement. The holder may at
any time strike out any
indorsement which is not
necessary to his title. The
indorser whose indorsement is
struck out, and all indorsers
subsequent to him, are thereby
relieved from liability on the
instrument.
(2)
Unconditional
Rights of the Holder

A holder is a payee or indorsee of a
bill or note who is in possession of
it, or the bearer thereof (Sec. 191).
He has the following rights (Sec.
51):
(1)
To sue on the instrument
in his own name
Unindorsed intruments: Sec. 49.
Transfer without indorsement;
effect of. Where the holder of an
instrument payable to his order
transfers it for value without
indorsing it, the transfer vests in
the transferee such title as the
transferor had therein, and the
transferee acquires in addition,
the
right
to
have
the
indorsement of the transferor.
But for the purpose of
determining
whether
the
transferee is a holder in due
course, the negotiation takes
effect as of the time when the
indorsement is actually made.
Note: This section applies only
Indorsement by agent: Sec. 20.

Liability of person signing as
agent, and so forth. Where the
instrument contains or a person
adds to his signature words
indicating that he signs for or on
behalf of a principal or in a
representative capacity, he is
not liable on the instrument if he
was duly authorized; but the
mere
addition
of
words
describing him as an agent, or
as filling a representative
character, without disclosing his
principal, does not exempt him
from personal liability.
(2) Payment in due course to
the
holder
discharges
instrument
HOLDER IN DUE COURSE
(HDC)
WHO ARE HDCS
(1) HDC under Sec. 52
(2) HDC under Sec. 58: A
holder who derives title to the
instrument through a HDC has
all the rights of the latter even
though he himself satisfies none
of the requirements of due
course holding

Page 28 of 56
(3) HDC
under
Sec.
59
(presumption): Every holder is
deemed prima facie to be a
holder in due course
Sec. 191 defines holder as the
payee or indorsee of a bill or
note, who is in possession of it,
or the bearer thereof. The word
holder in the first clause of
Sec. 52 and in the second
subsection thereof may be
replaced by the definition in
Sec. 191 so as to read a holder
in due course as a payee or an
indorsee in possession, etc. (De
Ocampo v. Gatchalian, 1961)
REQUISITES OF A HOLDER
IN DUE COURSE (1996)
What constitutes a holder in due
course. A holder in due course
is a holder who has taken the
instrument under the following
conditions:
(a) That it is complete and
regular upon its face;
(b) 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;
(c) That he took it in good faith
and for value;
(d) 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.
(Sec. 52)
That the instrument is complete
and regular upon its face
(1) It is incomplete when it is
wanting
in
any
material
particular or particular proper to
be inserted in a negotiable
instrument without which the
same will not be complete.
Material particulars: A change in

the following is considered a
material alteration (Sec. 125):
(a) Date
(b) Sum payable, either for
principal or interest
(c) Time or place of payment
(d) Number or relations of the
parties
(e) Medium or currency in which
payment is to be made
(f) Or which adds a place of
payment where no place of
payment is specified
(g) Or any other change or
addition which alters the effect
of the instrument in any respect
(2) That he became the holder
of it before it was overdue and
without notice that it had been
previously dishonored, if such
was the fact
Overdue The following
cannot be HDCs:
(a) A holder who became such
after the date of maturity of the
instrument
(instrument
is
overdue);
(b) In
case
of
demand
instruments: a holder who
negotiates
it
after
an
unreasonable length of time
after its issue (Sec. 53)
(c) Instruments
with
fixed
maturity
but
subject
to
acceleration: ultimate date of
maturity is the date of maturity
for the purpose of determining
whether a purchaser is a HDC
(d) Undated instruments: Prima
facie presumption that it was
negotiated
before
it
was
overdue (Sec. 45)
Notes:
(1) An overdue instrument is still
negotiable, but it is subject to

Page 29 of 56
the defense existing at the time

of the transfer.
(2) As to what constitutes a
reasonable time, regard is to be
had to the nature of the
instrument, the usage of trade
or business with respect to such
instrument, and the facts of the
particular case. (Sec. 193)
(3) An instrument is not invalid
for the reason only that it is
ANTE-DATED
OR
POSTDATED
provided
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
(Sec. 12).
That he took it in good faith
AND for value
Value
(1) Any consideration sufficient
to support a simple contract.
(2) An antecedent or preexisting debt constitutes value,
whether the instrument is
payable on demand or at a
future time (Sec. 25)
Holder for value
(1) Where value has at any time
been given for the instrument,
the holder is deemed a HFV in
respect to all parties who
become such prior to that time
(Sec. 26); and
(2) Where the holder has a lien
on the instrument, he is deemed
a HFV to the extent of his lien
(Sec .27).
(3) The holder is a holder for
value only to the extent that the
consideration agreed upon has
been
paid,
delivered,
or
performed.
(Sundiang
and
Aquino)
Presumption: Every negotiable
instrument is deemed prima

facie issued for valuable
consideration; and every person
whose
signature
appears
thereon is deemed to have
become a party thereto for
value (Sec. 24).
Such presumption cannot be
overcome by the petitioners
bare denial of receipt of the
consideration.
(Bayani
vs.
People, 2004)
Good faith
Holder must have taken the
instrument in good faith and 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.
Actual knowledge
What constitutes notice of
defect. To constitute notice of
an infirmity in the instrument or
defect in the title of the person
negotiating the same, the
person to whom it is negotiated
must
have
had
actual
knowledge of the infirmity or
defect, or knowledge of such
facts that his action in taking the
instrument amounted to bad
faith. (Sec. 56)
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.
Suspicious circumstances
BAD FAITH - does not require
actual knowledge of the exact
fraud that was practiced;
knowledge that there was
something wrong about the
assignors acquisition of title is

Page 30 of 56
sufficient
A check with 2 parallel lines in
the upper left hand corner
means that it could only be
deposited and may not be
converted
to
cash.
Consequently,
such
circumstance should put the
payee on inquiry and upon him
devolves the duty to ascertain
the holders title to the check or
the nature of his possession.
Failing in this respect, the
payee is declared guilty of gross
negligence amounting to legal
absence of good faith and as
such the consensus of authority
is to the effect that the holder of
the check is not a holder in
good faith. (State Investment
House vs. IAC, 1989)
Defective title
Title is NOT defective when at
the time it was negotiated to
him, he had NO notice of:
(1) any infirmity in instrument
(2) any defect in title of person
negotiating
Title is DEFECTIVE when (Sec.
55):
(1) instrument/signature
obtained by fraud, duress, force
or fear or other unlawful means
OR for an illegal consideration;
or
(2) instrument is negotiated in
breach of faith, or fraudulent
circumstances
NOTICE of infirmity or defect
actual knowledge of the infirmity
or defect OR knowledge of such
facts that his action in taking the
instrument amounted to bad
faith (Sec.56)
RIGHT of a transferee who

receives NOTICE of any
infirmity or defect BEFORE he
has PAID THE FULL amount for
the instrument. He will be
deemed a HDC only to the
extent of the amount therefore
paid by him (Sec.54)
RIGHTS OF A HOLDER IN
DUE COURSE
(1) To sue on the instrument in
his own name (Sec. 51)
(2) To receive payment on the
instrument (Sec. 51)
(3) Holds instrument free of any
defect of title of prior parties
(Sec. 57)
(4) Free
from
defenses
available to prior parties among
themselves (Sec. 57)
(5) May enforce payment of
instrument for full amount,
against all parties liable (Sec.
57)
DEFENSES
HOLDER
AGAINST
THE
PRESUMPTION IN FAVOR OF
DUE COURSE HOLDING
Every holder is deemed prima
facie to be a holder in due
course (Sec. 59).
(1) BURDEN SHIFTS when it is
shown that the title of any
person who has negotiated the
instrument
was
defective.
Holder MUST then PROVE that
he or some person under whom
he claims acquired the title as a
holder in due course.
(2) But the last mentioned rule
does not apply in favor of a
party who became bound on the
instrument
prior
to
the
acquisition of such defective
title. (Sec. 59)
HOLDER
NOT
IN
DUE

Page 31 of 56
COURSE
(1) One who became a holder
of an instrument without any,
some or all of the requisites
under Sec. 52
(2) With respect to demand
instruments, if it is negotiated
an unreasonable length of time
after its issue, the holder is
deemed not a holder in due
course. (Sec. 53)
(3) Rights of a holder not in due
course (Sec. 51):
(a) To sue on the instrument
under in his own name
(b) To enforce the instrument
The only disadvantage of a
holder who is not a holder in
due course is that the
negotiable instrument is subject
to defenses as if it were nonnegotiable. [Chan Wan vs. Tan
Kim (1960)]
Parties; Holder in Due Course
(1993)
Larry issued a negotiable
promissory note to Evelyn and
authorized the latter to fill up the
amount in blank with his loan
account in the sum of P1,000.
However,
Evelyn
inserted
P5,000 in violation of the
instruction. She negotiated the
note to Julie who had
knowledge of the infirmity. Julie
in turn negotiated said note to
Devi for value and who had no
knowledge of the infirmity.
1) Can Devi enforce the note
against Larry and if she can, for
how much? Explain.
2) Supposing Devi endorses the
note to Baby for value but who
has knowledge of the infirmity,
can the latter enforce the note
against Larry?
SUGGESTED ANSWER:
1) Yes, Devi can enforce the
negotiable promissory note
against Larry in the amount of
P5,000. Devi is a holder in due
course and the breach of trust
committed by Evelyn cannot be
set up by Larry against Devi
because it is a personal
defense. As a holder in due
course, Devi is not subject to
such personal defense.
2) Yes. Baby is not a holder in
due course because she has
knowledge of the breach of trust
committed by
Evelyn against Larry which is
just a personal defense. But
having taken the instrument
from Devi, a holder in due
course, Baby has all the rights
of a holder in due course.
Baby did not participate in the
breach of trust committed by
Evelyn who filled the blank but
filled up the instrument with
P5,000 instead of P1,000 as
instructed by Larry (Sec 58 NIL)
(1996)
Eva issued to Imelda a check in
the amount of P50th post-dated
Sep 30, 1995, as security for a
diamond ring to be sold on
commission. On Sep 15, 1995,
Imelda negotiated the check to
MT investment which paid the
amount of P40th to her. Eva
failed to sell the ring, so she
returned it to Imelda on Sep 19,
1995. Unable to retrieve her
check, Eva withdrew her funds
from the drawee bank. Thus,
when MT Investment presented
the check for payment, the
drawee bank dishonored it.
Later on, when MT Investment
sued her, Eva raised the
defense
of
absence
of
consideration, the check having

Page 32 of 56
been issued merely as security

for the ring that she could not
sell. Does Eva have a valid
defense. Explain.
SUGGESTED ANSWER:
No. Eva does not have a valid
defense. First, MT Investment is
a holder in due course and, as
such, holds the postdated check
free from any defect of title of
prior parties and from defenses
available to prior parties among
themselves. Eva can invoke the
defense
of
absence
of
consideration
against
MT
Investment only if the latter was
privy to the purpose for which
the checks were issued and,
therefore, not a holder in due
course. Second, it is not a
ground for the discharge of the
postdated check as against a
holder in due course that it was
issued merely as security. The
only grounds for the discharge
of negotiable instruments are
those set forth in Sec 119 of the
NIL and none of those grounds
are available to Eva. The latter
may not unilaterally discharge
herself from her liability by the
mere expediency of withdrawing
her funds from the drawee
bank. (State Investments v CA
GR 101163, Jan 11, 93
217s32).
(1998)
X makes a promissory note for
P10,000 payable to A, a minor,
to help him buy school books. A
endorses the note to B for
value, who in turn endorses the
note to C. C knows A is a minor.
If C sues X on the note, can X
set up the defenses of minority
and lack of consideration? (3%)
SUGGESTED ANSWER:
Yes. C is not a holder in due
course. The promissory note is
not a negotiable instrument as it
does not contain any word of
negotiability, that is, order or
bear, or words of similar
meaning or import. Not being a
holder in due course, C is to
subject such personal defenses
of minority and lack of
consideration. C is a mere
assignee who is subject to all
defenses.
ALTERNATIVE ANSWER:
X cannot set up the defense of
the minority of A. Defense of
minority is available to the minor
only. Suc defense is not
available to X.
X cannot set up the defense
against C. Lack of consideration
is a personal defense which is
only
available
between
immediate parties or against
parties who are not holders in
due course. Cs knowledge that
A is a minor does not prevent C
from being a holder in due
course. C took the promissory
note from a holder for value, B.
Parties;
Holder
in
Due
Course; Indorsement in blank
(2002)
A. AB issued a promissory note
fo P1,000 payable to CD or his
order on September 15, 2002.
CD indorsed the note in blank
and delivered the same to EF.
GH stole the note from EF and
on
September
14,
2002
presented it to AB for payment.
When asked by AB, GH said
CD gave him the note in
payment for two cavans of rice.
AB therefore paid GH P1,00 on
the same date. On September
15, 2002, EF discovered that
the note of AB was not in his

Page 33 of 56
possession and he went to AB.

It was then that EF found out
that AB had already made
payment on the note. Can EF
still claim payment from AB?
Why? (3%)
B. As a sequel to the same facts
narrated above, EF, out of pity
for AB who had already paid
P1,000.00 to GH, decided to
forgive AB and instead go after
CD who indorsed the note in
blank to him. Is CD still liable to
EF by virtue of the indorsement
in blank? Why? (2%)
SUGGESTED ANSWER:
A. No. EF cannot claim
payment from AB. EF is not a
holder of the promissory note.
To make the presentment for
payment, it is necessary to
exhibit the instrument, which EF
cannot do because he is not in
possession thereof.
B. No, because CD negotiated
the instrument by delivery.
Negotiability; Holder in Due
Course (1992)
Perla brought a motor car
payable on installments from
Automotive
Company
for
P250th. She made a down
payment of P50th and executed
a promissory note for the
balance.
The
company
subsequently indorsed the note
to Reliable Finance Corporation
which financed the purchase.
The promissory note read:
For value received, I promised
to pay Automotive
Company or order at its office in
Legaspi City, the sum of
P200,000.00 with interest at
twelve (12%) percent per
annum, payable in equal
installments
of
P20,000.00
monthly for ten (10) months
starting October 21, 1991.

Manila September 21, 1991.
(sgd) Perla
Pay to the order of Reliable
Finance
Corporation.
Automotive Company
By: (Sgd) Manager
Because Perla defaulted in the
payment of her installments,
Reliable Finance Corporation
initiated a case against her for a
sum of money. Perla argued
that the promissory note is
merely an assignment of credit,
a non-negotiable instrument
open to all defenses available to
the assignor and, therefore,
Reliable Finance Corporation is
not a holder in due course.
a) Is the promissory note a
mere assignment of credit or a
negotiable instrument? Why?
b) Is Reliable Finance Corp a
holder in due course?
Explain briefly.
SUGGESTED ANSWER:
a) The promissory note in the
problem
is
a
negotiable
instrument, being in compliance
with the provisions of Sec 1 NIL.
Neither the fact that the payable
sum is to be paid with interest
nor that the maturities are in
stated installments renders
uncertain the amount payable
(Sec 2 NIL)
b) Yes, Reliable Finance
Corporation is a holder in due
course
given
the
factual
settings.
Said
corporation
apparently took the promissory
note for value, and there are no
indications that it acquired it in
bad faith (Sec 52 NIL see Salas

Page 34 of 56
v CA 181 s 296)
Holder in due course (2000)
PN makes a promissory note for
P5,000.00, but leaves the name
of the payee in blank because
he wanted to verify its correct
spelling first. He mindlessly left
the note on top of his desk at
the end of the workday. When
he returned the following
morning, the note was missing.
It turned up later when X
presented it to PN for payment.
Before X, T, who turned out to
have filched the note from PNs
office, had endorsed the note
after inserting his own name in
the blank space as the payee.
PN dishonored the note,
contending that he did not
authorize its completion and
delivery. But X said he had no
participation in, or knowledge
about,
the
pilferage
and
alteration of the note and
therefore he enjoys the rights of
a holder in due course under
the Negotiable
Instruments Law. Can the
payee in a promissory note be a
holder in due course within the
meaning of the Negotiable
Instruments Law (Act 2031)?
Explain your answer. (2%)
SUGGESTED ANSWER:
A payee in a promissory note
cannot be a holder in due
course within the meaning of
the Negotiable Instruments Law,
because a payee is an
immediate party in relation to
the maker. The payee is subject
to whatever defenses, real of
personal, available to the maker
of the promissory note.
ALTERNATIVE ANSWER:
A payee can be a holder in due
course. A holder is defined as
the payee or indorsee of the

instrument who is in possession
of it. Every holder is deemed
prima facie to be a holder in due
course.
Liabilities of Parties
Primary
liability:
The
unconditional promise attaches
the moment the maker makes
the
instrument
while
the
acceptors
assent
to
the
unconditional order attaches the
moment
he
accepts
the
instrument. No further act is
necessary in order for the
liability to accrue. Presentment
for payment is all that is
necessary.
PARTIES PRIMARILY LIABLE
(Sec. 60 and 62)
Persons who by the terms of
the instrument are absolutely
required to pay the same
MAKER (SEC. 60)
Promises to pay according to
the tenor of the instrument
(promissory note)
ACCEPTOR (SEC. 62)
Upon acceptance of the bill of
exchange, engages to pay the
bill according to the tenor of the
acceptance.
Unconditionally liable; he is
duty-bound to pay the holder at
date of maturity, WON holder
demands payment from him,
and he is not relieved from
liability even if the instrument
should become overdue due to
failure of holder to make such
demand.
Note: Until he accepts the bill of
exchange, the drawee assumes
no liability to pay the instrument.

Page 35 of 56
PARTIES
SECONDARILY
LIABLE
Secondary liability: A party
secondarily liable is not bound
to pay unless the following have
been fulfilled:
(1) Due presentment or demand
to the primary party
(2) Dishonor by such party
(3) Notice of dishonor to
secondary party, and, in cases
of foreign bills of exchange,
protest of the bill
DRAWER (SEC. 61)
(1) Engages that the instrument
will be accepted or paid, or
both, according to its tenor on
due presentment;
(2) Engages that he will pay the
amount of the instrument to the
holder or to any subsequent
indorser who may be compelled
to pay the same if the
instrument be dishonored upon
due
presentment
and
proceedings on dishonor be
taken,
Limiting liability: Drawer may
insert in the instrument an
express
stipulation
negativing/limiting
his
own
liability to the holder.
INDORSERS
The following indorsers assume
the
liability
to
pay
the
instrument:
(1) General
or
Unqualified
Indorser; and
(2) Irregular Indorser
General
or
unqualified
indorser (Sec. 66)
Engages that he will pay the
amount of the instrument to the
holder or to any subsequent
indorser who may be compelled
to pay the same if the

instrument be dishonored upon
due
presentment
and
proceedings on dishonor be
taken.
Who is a General or Unqualified
Indorser? Every person who
indorses WITHOUT qualification
(Sec. 66)
A person placing his signature
upon an instrument other than
as a maker, drawer, or acceptor
unless
he
indicates
by
appropriate words his intention
to be bound in some other
capacity (Sec. 63).
A person, who places his
signature on an instrument
negotiable by delivery, incurs all
the liabilities of an indorser
(Sec. 67).
Note: A qualified indorser does
not assume the liability to pay
the instrument since he is
merely an assignor of the title to
the instrument. However, he
becomes
liable
once
he
breaches a warranty.
Who is a qualified indorser?
One who is constituted as a
mere assignor of the title to the
instrument by adding to his
signature the words "without
recourse" or any words of
similar import.
Irregular Indorser
When a person not otherwise a
party to an instrument, places
thereon his signature in blank
before delivery, he is liable as
an indorser, in accordance with
these rules:
(1) Instrument payable to order
of 3rd person: liable to payee

Page 36 of 56
and to all subsequent parties

(2) Instrument payable to the
order of maker/drawer, or
payable to bearer: liable to all
parties
subsequent
to
maker/drawer
(3) Signs for accommodation of
payee: liable to all parties
subsequent to payee (Sec. 64)
its tenor, and that if it is

dishonored, he will pay if the
necessary
proceedings
for
dishonor are made.
Order
of
Liability among
Indorsers (Sec. 68)
(1) Among themselves: liable
prima facie in the order they
indorse, but proof of another
agreement admissible
(2) As to the Holder: Holder
may sue any of the indorsers,
regardless
of
order
of
indorsement
(3) Joint
payees/indorsees
deemed to indorse solidarily
Indorser: Irregular Indorser
vs. General Indorser (2005)
Distinguish an irregular indorser
from a general indorser. (3%)
SUGGESTED ANSWER:
Irregular Indorser is not a party
to the instrument but he places
his signature in blank before
delivery. He is not a party but he
becomes one because of his
signature in the instrument.
Because his signature he is
considered an indorser and he
is liable to the parties in the
instrument.
While, a General Indorser
warrant that the instrument is
genuine, that he has a good title
to it, that all prior parties had
capacity to contract; that the
instrument at the time of the
indorsement is valid and
subsisting; and that on due
presentment, the instrument will
be accepted or paid or both
accepted and paid according to
Page 37 of 56
Maker
WARRANTIES
(1) Existence
of the
payee;
(2) His then
capacity to
indorse
Accepto
r
General/
Unqualified
Indorser
Drawer
(1) Existence (1) Existence of

of the
the payee;
payee;
(2) His then
(2) His then
capacity to
capacity
indorse
to
indorse;
(3) Existence
of the
drawer;
(4) Genuinen
ess of the
drawers
signature
(5) Drawers
capacity
and
authority
to draw
the
instrument
;
(1) Genuineness
of the
instrument in
all respects
that it
purports to
be;
(2) His good title
to the
instrument;
(3) All prior
parties
capacity to
contract;
(4) The
instrumentis
valid and
subsisting at
the time of
his
indorsement
(1)
(2)
(3)
(4)
Qu
alifi
ed
Ind
Genuinene
ss of the
instrument
in all
respects
that it
purports to
be;
His good
title to the
instrument;
All prior
parties
capacity to
contract;
No
knowledge
of any fact
which
would
impair the
validity of
the
instrument
or render it
valueless.
Person
Negotiating by Delivery
(1) Genuineness of the
instrument in all
respects that it
purports to be;
(2) His good title to
the instrument;
(3) Prior parties
capacity to
contract
(4) No knowledgeof
any fact which
would impair the
validity of the
instrument or
render it valueles.
Note: Warranty
extends only to
immediate
transferee
Note: No. 3
does not apply
to person
negotiating
public or
corporation
securities other
than bills and
notes
Presentment for Payment

Presentment means:
(1) The production of a Bill of
Exchange to the drawer or
acceptor for payment; or
(2) The
production
of
a
Promissory Note to the party
liable for payment.
Date
and
time
of
presentment:
(1) Bearing fixed maturity/not
payable on demand on the
day it falls due if day of maturity
falls on Sunday or a holiday, the
instruments falling due or
becoming payable on Saturday
are to be presented for payment
on
the
next
succeeding
business day (Sec. 85)
(2) Payable on demand within

a reasonable time after its
issue, iv at the option of the
holder, may be presented for
payment before twelve o'clock
noon on Saturday when that
entire day is not a holiday (Sec.
85)
(3) Demand bill of exchange
within a reasonable time after
the last negotiation. (Sec. 71)
Note: Although presentment
was made within a reasonable
time from last negotiation, it
may have been made within an
unreasonable
time
from
issuance. Thus holder may still
not be a holder in due course
under Sec. 71.

Page 38 of 56
NECESSITY
OF
PRESENTMENT
FOR
PAYMENT
When necessary: In order to
charge
the
drawer
and
indorsers
(Sec. 70)
When NOT necessary:
(1) To charge the person
primarily
liable
on
the
instrument
(Sec. 70)
(2) To charge the drawer where
he has no right to expect or
require that the drawee or
acceptor will pay the instrument.
(Sec. 79)
(3) To charge an indorser where
the instrument was made or
accepted
for
his
accommodation and he has no
reason to expect that the
instrument will be paid if
presented. (Sec. 80)
(4) When the bill of exchange
has previously been dishonored
by non-acceptance and has not
been subsequently accepted
PARTIES
TO
WHOM
PRESENTMENT
FOR
PAYMENT SHOULD BE MADE
General rule: Presentment for
payment must be made to the
person primarily liable on the
instrument or if he is absent or
inaccessible, to any person
found at the place where the
presentment is made.
Exceptions: Where the person
primarily liable is/are:
(1) Dead presentment for
payment must be made to his
personal representative
(2) Partners presentment for
payment may be made to any
one of them, even though there
has been a dissolution of the

firm
(3) Several
persons,
not
partners (joint debtors)
presentment for payment must
be made to them all
DISPENSATION
WITH
PRESENTMENT
FOR
PAYMENT
When Excused:
(1) Where, after the exercise of
reasonable
diligence,
presentment cannot be made;
(2) Where the drawee is a
fictitious person;
(3) By waiver of presentment,
express or implied. (Sec. 82)
Place of Payment (2000)
PN is the holder of a negotiable
promissory note within the
meaning of the Negotiable
Instruments Law (Act 2031).
The note was originally issued
by RP to XL as payee. XL
indorsed the note to PN for
goods bought by XL. The note
mentions the place of payment
on the specified maturity date
as the office of the corporate
secretary of PX Bank during
banking hours. ON maturity
date, RP was at the aforesaid
office ready to pay the note but
PN did not show up. What PN
later did was to sue XL for the
face value of the note, plus
interest and costs. Will the suit
prosper? Explain. (5%)
SUGGESTED ANSWER:
Yes. The suit will prosper as far
as the face value of the note is
concerned, but not with respect
to the interest due subsequent
to the maturity of the note and
the costs of collection. RP was
ready and willing to pay the
note at the specified place of

Page 39 of 56
payment on the specified

maturity date, but PN did not
show up. PN lost his right to
recover
the
interest
due
subsequent to the maturity of
the note and the costs of
collection.
DISHONOR
BY
NONPAYMENT
The instrument is dishonored by
non-payment when:
(1) It is duly presented for
payment and payment is
refused or cannot be obtained;
or
(2) Presentment is excused and
the instrument is overdue and
unpaid (Sec. 83).
In case of waiver of protest,
whether in the case of a foreign
bill of exchange or other NI
deemed to be a waiver not only
of a formal protest but also of
presentment and notice of
dishonor (Sec. 111)
Notice of Dishonor
Notice given by holder or his
agent to party or parties
secondarily liable that the
instrument was dishonored by:
(1) Non-acceptance
by
the
drawee of a bill; or
(2) Non-payment
by
the
acceptor of a bill; or
(3) Non-payment by the maker of
a note (Sec. 89)
Requisites:
(1) Given by holder or his agent, or
by any party who may be compelled
by the holder to pay (Sec. 90)
(2) Given to secondary party or his
agent (Sec. 97)
(3) Given within the periods provided
by law (Sec. 102)
(4) Given at the proper place (Secs.

103 and 104)
PARTIES TO BE NOTIFIED
(1) Non-acceptance (bill) to
persons secondarily liable, namely,
the drawer and indorsers as the case
may be
(2) Non-payment (both bill and note)
to indorsers
Note: Notice must be given to persons
secondarily liable. Otherwise, such
parties are discharged. Notice may be
given to the party himself or to his
agent.
When given
Notice may be given as soon as the
instrument is dishonored (Sec. 102)
When not necessary to give to
drawer (1996)
SUGGESTED ANSWER:
Notice of dishonor is not required to be
given to the drawer in any of the
following cases:
(1) Drawer and drawee are the
same;
(2) Drawee is a fictitious person or
not having the capacity to contract;
(3) Drawer is the person to whom
the instrument is presented for
payment;
(4) The drawer has no right to
expect or require that the drawee or
acceptor swill honor the instrument;
(5) Where
the
drawer
has
countermanded payment (Sec. 114)
When not necessary to give to
Indorser

Page 40 of 56
Notice of dishonor is not required to be

given to an indorser in the following
cases:
(1) Drawee is a fictitious person or
does not have the capacity to
contract, and indorser was aware of
that fact at the time he indorsed the
instrument;
(2) Indorser is the person to whom
the instrument is presented for
payment;
(3) Instrument
was made or
accepted
for
his
accommodation. (Sec. 115)
Who will benefit
If given by or on behalf of the holder
(Sec. 92):
(1) All subsequent holders
(2) All prior parties (as to holder)
who have a right of recourse against
the party to whom it is given.
If given by the indorser (Sec. 93):
(1) Holder
(2) All parties subsequent to the
party to whom notice is given.
PARTIES WHO MAY GIVE NOTICE
OF DISHONOR
The notice may be given by or on behalf
of the holder, or by or on behalf of any
party to the instrument who might be
compelled to pay it to the holder, and
who, upon taking it up, would have a
right to reimbursement from the party to
whom the notice is given. (Sec. 90)
Who should give (Sec. 90):
(1)
Holder
(2)
Agent or representative of holder.
(3)
Any party who may be compelled
to pay like indorsers.

(4)
Agent of any party who may be
compelled.
EFFECT OF NOTICE
Notice of dishonor is required to charge
parties secondarily liable.
Upon valid notice of dishonor,
immediate right of recourse against the
indorser arises. It is as if the indorser
becomes primarily liable in the sense
that the holder need not claim payment
from the person primarily liable
(Sundiang and Aquino).
FORM OF NOTICE (Sec. 96)
The notice may be:
(1)
In writing; or
(2)
Merely oral
The notice may be given in any terms
which:
(1)
Sufficiently
identify
the
instrument; and
(2)
Indicate that it has been
dishonored by non-acceptance or nonpayment
It may in all cases be given by
delivering it personally or through the
mails
WAIVER
Notice of dishonor may be waived either
before the time of giving notice has
arrived or after the omission to give due
notice, and the waiver may be
expressed or implied. (Sec. 109)
Where the waiver is embodied in the
instrument itself, it is binding upon all

Page 41 of 56
parties; but, where it is written above

the signature of an indorser, it binds him
only. (Sec. 110)
DISPENSATION WITH NOTICE
(1)
When party to be notified knows
about the dishonor, actually or
constructively (Secs. 114-117)
(2)
If waived (Sec. 109)
(3)
When after due diligence, it
cannot be given (Sec. 112).
EFFECT OF FAILURE TO GIVE
NOTICE
Failure to give notice to parties
secondarily liable discharges such
parties
An omission to give notice of dishonor
by non-acceptance does not prejudice
the rights of a holder in due course
subsequent to the omission (Sec. 117)
Discharge of Negotiable Instrument
Discharge: The release of all parties,
whether primary or secondary, from the
obligation on the instrument. It renders
the instrument without force and effect
and, consequently, non-negotiable (De
Leon)
DISCHARGE OF NEGOTIABLE
INSTRUMENT
A negotiable instrument is discharged:
(1) By payment in due course by
or on behalf of the principal
debtor;
(2) By payment in due course by the
party accommodated, where the
instrument is made or accepted for
his accommodation;
(3) By the intentional cancellation

thereof by the holder;
(4) By any other act which will
discharge a simple contract for the
payment of money;
(5) When the principal debtor
becomes the holder of the
instrument at or after maturity in his
own right. (Sec. 119)
BY PAYMENT IN DUE COURSE
(ASKED IN 2000)
Payment is made in due course
when it is made at or after the
maturity of the payment to the holder
thereof in good faith and without
notice that his title is defective. (Sec.
88)
Requisites:
(1) Payment must be made at or after
maturity.
(2) Payment must be made to the
holder.
(3) Payment must be made in good
faith and without notice that
holders title is defective.
If payment is made before
maturity
and
the
note
is
negotiated to a HDC, the latter
may recover on the instrument.
Payment to one of several payees
or indorsees in the alternative
discharges the instrument, but
payment to one of several joint
payees or joint indorsers is not a
discharge.
The party receiving
payment must have been authorized
by others to receive payment.

Page 42 of 56
By whom made:
(1) payment in due course by or
on behalf of principal debtor
(2) payment in due course by party
accommodated where party is
made/accepted for accommodation
BY INTENTIONAL CANCELLATION
A cancellation made unintentionally
or under a mistake or without the
authority of the holder, is inoperative.
But where an instrument or any
signature thereon appears to have
been cancelled, the burden of proof
lies on the party who alleges that the
cancellation was made unintentionally
or under a mistake or without authority.
(Sec. 123)
BY OTHER ACTS THAT
DISCHARGE
A
SIMPLE
CONTRACT FOR PAYMENT
OF MONEY
Any other act which discharges a
simple contract for
payment of money (Art. 1231 of the
Civil Code), ex. issuance of a renewal
note (novation).
BY
REACQUISITION
OF
PRINCIPAL DEBTOR IN HIS OWN
RIGHT
Principal debtor becomes holder of
instrument at or after maturity in his
own right
BY MATERIAL ALTERATION
Material alteration without assent of
all parties liable avoids instrument
except as against party to
alteration and subsequent indorsers

(Sec. 124)
DISCHARGE
OF
SECONDARILY LIABLE
PARTIES
GROUNDS UNDER SEC. 120

A person secondarily liable on the
instrument is discharged:
(1) By any act which discharges
the instrument;
(2) By the intentional cancellation
of his signature by the holder;
(3) By the discharge of a prior
party;
(4) By a valid tender or payment
made by a prior party;
(5) By a release of the principal
debtor unless the holder's right of
recourse against the party secondarily
liable is expressly reserved;
(6) By any agreement binding upon
the holder to extend the time of
payment or to postpone the holder's
right to enforce the instrument unless
made with the assent of the party
secondarily liable or unless the right of
recourse against such party is
expressly reserved. (Sec. 120)
OTHER GROUNDS
(1) Failure
to
make
due
presentment (Secs. 70, 144)
(2) Failure to give notice of
dishonor
(3) Certification of check at
instance of holder
(4) Reacquisition by prior party
(5) Where instrument negotiated
back to a prior party, such party may
reissue and further negotiate, but not

Page 43 of 56
entitled to enforce payment against

any intervening party to whom he was
personally liable
(6) Where instrument is paid by
party secondarily liable, it is not
discharged, but
(a) the party so paying it is remitted
to his former rights as regard to all
prior parties
(b) and he may strike out his own
and all subsequent indorsements, and
again negotiate instrument, except:
where it is payable to order of 3rd
party and has been
paid by drawer or where its
made/accepted for accommodation
and has been paid by party
accommodated
(7) by
taking
a
qualified
acceptance
RIGHT
OF
PARTY
WHO
DISCHARGED INSTRUMENT
Where the instrument is paid by a
party secondarily liable thereon, it is
not discharged; but the party so
paying it is remitted to his former
rights as regards to all prior parties,
and he may strike out his own and all
subsequent indorsements, and again
negotiate the instrument, except:
(1) Where it is payable to the order
of a third person, and has been paid
by the drawer;
(2) Where it was made or accepted
for accommodation, and has been
paid by the party accommodated.
(Sec. 121)
RENUNCIATION BY HOLDER (Sec.
122)
The holder may expressly renounce
his rights against any party to the

instrument before, at, or after its
maturity.
An
absolute
and
unconditional renunciation of his rights
against the principal debtor made at or
after the maturity of the instrument
discharges the instrument.
Renunciation must be in writing unless
the instrument is delivered up to the
person primarily liable thereon
Renunciation does not affect the rights
of an HDC without notice
Material Alteration
CONCEPT
Any change in the instrument which
affects or changes the liability of the
parties in any way.
Any alteration which changes the
date, sum payable, time or place of
payment, number of relation of the
parties, or medium of currency of
payment where none is specified or
which alters the effect of the
instrument in any respect (PNB v. CA,
GR No. L-26001, Oct. 21, 1968)
An alteration is said to be material if it
alters the effect of the instrument. In
other words, a material alteration is
one which changes the items which
are required to be stated under Sec. 1
of the NIL (ibid.)
Changes in the following constitute
material alterations (Sec. 125):
(1) Date
(2) Sum payable, either for

Page 44 of 56
principal or interest
(3) Time or place of payment
(4) Number or relations of the
parties
(5) Medium or currency in which
payment is to be made
(6) That which adds a place of
payment where no place of payment
is specified
(7) Any other change or addition
which alters the effect of the
instrument in any respect.
EFFECT
OF
MATERIAL
ALTERATION
(1) Alteration by a party Avoids
the instrument except as against the
party who made, authorized, or
assented to the alteration and
subsequent indorsers. However, if an
altered instrument is negotiated to a
HDC, he may enforce payment
thereof according to its original tenor
regardless of whether the alteration
was innocent or fraudulent.
(2) Alteration by a stranger
(spoliation) -the effect is the same as
where the alteration was made by a
party wherein a HDC can recover on
the original tenor of the instrument
(Sec. 124).
Checks;
Effects;
Alterations;
Prescriptive Period (1996)
William issued to Albert a check for
P10,000 drawn on XM Bank. Albert
altered the amount of the check to
P210,000 and deposited the check to
his account with ND Bank. When ND
Bank presented the check for
Mercantile Law Bar Examination Q &
A (1990-2006) Page 79 of 103 Version
1990-2003 Arranged by SULAW Class

2005 Version 1990-2006 Updated by
Dondee payment through the Clearing
House, XM Bank honored it.
Thereafter, Albert withdrew the
P210,000 and closed his account.
When the check was returned to him
after a month, William discovered the
alteration. XM Bank recredited
P210,000 to Williams current account,
and sought reimbursement from ND
Bank. ND Bank refused, claiming that
XM Bank failed to return the altered
check to it within 24 hour clearing
period. Who, as between, XM Bank
and ND Bank, should bear the loss?
Explain.
SUGGESTED ANSWER:
ND Bank should bear the loss if XM
Bank returned the altered check to ND
Bank within twenty four hours after its
discovery of the alteration. Under the
given facts, William discovered the
alteration when the altered check was
returned to him after a month. It may
safely be assumed that William
immediately advised XM Bank of such
fact and that the latter promptly
notified ND Bank thereafter. Central
Bank Circular No. 9, as amended, on
which the decisions of the Supreme
Court in Hongkong & Shanghai
Banking Corp v Peoples Bank & Trust
Co and Republic Bank vs CA were
based was expressly cancelled and
superseded by CB No 317 dated Dec
23 1970. The latter was in turn
amended by CB Circular No 580,
dated Sept 19, 1977. As to altered
checks, the new rules provide that the
drawee bank can still return them

Page 45 of 56
even after 4:00 pm of the next day

provided it does so within 24 hours
from discovery of the alteration but in
no event beyond the period fixed or
provided by law for filing of a legal
action by the returning bank against
the bank sending the same. Assuming
that the relationship between the
drawee bank and the collecting bank
is evidenced by some written
document, the prescriptive period
would be 10 years. (Campos, NIL 5th
ed 454-455)
ALTERNATIVE ANSWER:
XM Bank should bear the loss. When
the drawee bank (XM Bank) failed to
return the altered check to the
collecting bank (ND Bank) within the
24 hour clearing period provided in
Sec 4c of CB Circular 9, dated Feb
17, 1949, the latter is absolved from
liability. (See HSBC v PB&T Co GR L28226 Sep 30 1970; 35 s 140; also
Rep Bank CA GR 42725 Apr 22, 1991
196 s 100)
Checks;
Material
Alterations;
Liability (1999)
A check for P50,000.00 was drawn
against drawee bank and made
payable to XYZ Marketing or order.
Thecheck was deposited with payees
account at ABC Bankwhich then sent
the check for clearing to drawee bank.
Drawee bank refused to honor the
check on ground that the serial
number thereof had been altered. XYZ
marketing sued drawee bank.
a. Is it proper for the drawee bank to
dishonor the check for the reason that
it had been altered? Explain (2%)

b. In instant suit, drawee bank
contended that XYZ Marketing as
payee could not sue the drawee bank
as there was no privity between then.
Drawee theorized that there was no
basis to make it liable for the check. Is
this contention correct? Explain. (3%)
SUGGESTED ANSWER:
a. No. The serial number is not a
material particular of the check. Its
alteration does not constitute material
alteration of the instrument. The serial
number is not material to the
negotiability of the instrument.
b. Yes. As a general rule, the drawee
is not liable under the check because
there is no privity of contract between
XYZ Marketing, as payee, and ABC
Bank as the drawee bank. However, if
the action taken by the bank is an
abuse of right which caused damage
not only to the issuer of the check but
also to the payee, the payee has
cause of action under quasi-delict.
Acceptance
DEFINITION
The signification by the drawee of his
assent to the order of the drawer (Sec.
132)
Requisites (Sec. 132):
(1) Must be in writing
(2) Signed by the drawee
(3) Must not express that the
drawee will perform his promise by
any other means than the payment of
money
Kinds of Acceptance:
(1) General assents
without

Page 46 of 56
qualification to the order of the drawer

(2) Qualified which in express
terms varies the effect of the bill as
drawn:
(a) Conditional makes payment
by the acceptor dependent on the
fulfillment of a condition therein stated
(b) Partial an acceptance to pay
part only of the amount for which the
bill is drawn.
(c)
Local an acceptance to pay
only at a particular place.
(d) Qualified as to time
(e) The acceptance of some one or
more of the drawees but not of all.
(Sec. 141)
Proof of acceptance (Sundiang and
Aquino): The written acceptance may
be in the instrument itself or in a
separate instrument. However, under
Sec. 133, the holder of a bill
presenting the same for acceptance
may require the acceptance be written
on the bill, and, if such request is
refused, may treat the bill as
dishonored
Effects: When an acceptance is
written on a paper than the bill itself, it
does not bind the acceptor except in
favor of a person to whom it is shown
and who, on the faith thereof, receives
the bill for value.
MANNER
EXPRESS ACCEPTANCE
Must be in writing and signed by the
drawee and must not express that the
drawee will perform his promise by
any other means than the payment of

money. (Sec. 132) If request for a
written acceptance is refused, the
holder may treat the bill as dishonored
(Sec. 133)
IMPLIED ACCEPTANCE
(1) If the drawee refuses to return
the instrument within 24 hours after it
was delivered for acceptance.
(2) If the drawee destroys the
same.
(3) If the drawee makes an
unconditional promise in writing before
the instrument is drawn, with respect
to every person who, upon the faith
thereof, receives the bill for value.
TIME FOR ACCEPTANCE (Sec. 136)
The drawee is allowed twenty-four
hours after presentment in which to
decide whether or not he will accept
the bill.
The acceptance, if given, dates as of
the day of presentation.
RULES GOVERNING ACCEPTANCE
Q: What is the implication of payment
without acceptance by a drawee?
A: Act No. 2031, or the Negotiable
Instruments Law (NIL), explicitly
provides that the acceptor, by
accepting the instrument, engages
that he will pay it according to the
tenor of his acceptance. This provision
applies with equal force in case the
drawee pays a bill without having
previously accepted it. His actual
payment of the amount in the check
implies not only his assent to the order
of the drawer and a recognition of his

Page 47 of 56
corresponding obligation to pay the

aforementioned sum, but also, his
clear compliance with that obligation.
Actual payment by the drawee is
greater than his acceptance, which is
merely a promise in writing to pay. The
payment of a check includes its
acceptance. (FEBTC vs. Gold Palace
Jewellery Co,, Nachura, 2008)
Right to unqualified acceptance: The
holder may refuse to take a qualified
acceptance and if he does not obtain
an unqualified acceptance, he may
treat the bill as dishonored by nonacceptance.
Where a qualified acceptance is
taken, the drawers 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 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.
However, acceptance is presumed to
be unqualified or absolute. (Sundiang
and Aquino)
Presentment for Acceptance
Requisites:
(1) By the holder, or by some
person authorized to receive payment
on his behalf;
(2) At a reasonable hour on a
business day;
(3) At a proper place as herein
defined;
(4) To the person primarily liable on
the instrument, or if he is absent or
inaccessible, to any person found at
the place where the presentment is
made.
General rule: Presentment for
acceptance is not necessary in order
to render any party to the bill liable.
(Sec. 143, last par.)
When presentment for acceptance
necessary:
Presentment
for
acceptance must be made:
(1) Where the bill is payable after
sight, or in any other case, where
presentment for acceptance is
necessary in order to fix the maturity
of the instrument; or
(2) Where the bill expressly
stipulates that it shall be presented for
acceptance; or
(3) Where the bill is drawn payable
elsewhere than at the residence or
place of business of the drawee.(Sec.
143)
Note: It is not necessary to present a
check for acceptance because it is not
one of those required under Sec. 143.
When presentment for acceptance
excused: Presentment for acceptance
is excused and a bill may be treated
as dishonored by non-acceptance in
either of the following cases:
(1) Where the drawee is dead, or
has absconded, or is a fictitious
person or a person not having

Page 48 of 56
capacity to contract by bill.

(2) Where, after the exercise of
reasonable diligence,
presentment cannot be made.
(3) Where, although presentment
has been irregular, acceptance has
been refused on some other ground.
(Sec. 148)
TIME/PLACE/MANNER
PRESENTMENT
OF
WHEN MADE
A bill may be presented for
acceptance on any day on which
negotiable instruments may be
presented for payment under the
provisions of Sections 72 and 85 of
this Act. When Saturday is not
otherwise a holiday, presentment for
acceptance may be made before
twelve o'clock noon on that day. (Sec.
146)
What
constitutes
sufficient
presentment?
Presentment
for
payment, to be sufficient, must be
made:
(1) By the holder, or by some
person authorized to receive payment
on his behalf;
(2) At a reasonable hour on a
business day;
(3) At the proper place as herein
defined (see Sec. 73);
(4) To the person primarily liable on
the instrument or if he is absent or
inaccessible, to any person found at
the place where the presentment is
made. (Sec. 72)
Time of maturity: Every negotiable
instrument is payable at the time fixed

therein without grace. When they day
of maturity falls upon Sunday, or a
holiday, the instrument is payable on
the next succeeding business day.
Instruments falling due or becoming
payable on Saturday are to be
presented for payment on the next
succeeding business day, except that
instrument payable on demand may,
at the option of the holder be
presented for payment before twelve
oclock noon on Saturday when that
entire day is not a holiday. (Sec. 85)
HOW MADE (SEC. 145)
(1) By or on behalf of the holder
(2) At a reasonable hour
(3) On a business day
(4) Before the bill is overdue
(5) To the drawee or his agent
Where a bill is addressed to 2 or more
drawees who are not partners
presentment must be made to them all
XPT. One
has
authority
to
accept/refuse for all
Where the drawee is dead
presentment may be made to his
personal representative
Where the drawee has been adjudged
a bankrupt or insolvent or has made
an assignment for the benefit of
creditors presentment may be made
to him or to his trustee or assignee.
Checks; Effect; Acceptance by the
drawee bank (1998)
X draws a check against his current
account with the Ortigas branch of

Page 49 of 56
Bonifacio Bank in favor of B. Although

X does not have sufficient funds, the
bank honors the check when it is
presented for payment. Apparently, X
has conspired with the banks
bookkeeper so that his ledger card
would show that he still has sufficient
funds. The bank files an action for
recovery of the amount paid to B
because the check presented has no
sufficient funds. Decide the case (5%)
SUGGESTED ANSWER:
The bank cannot recover the amount
paid to B for the check. When the
bank honored the check, it became an
acceptor. As acceptor, the bank
became primarily and directly liable to
the payee/holder B.
The recourse of the bank should be
against X and its bookkeeper who
conspired to make Xs ledger show
that he has sufficient funds.
ALTERNATIVE ANSWER:
The bank can recover from B. This is
solutio indebiti because there is
payment by the bank to B when such
payment is not due. The check issued
by X to B as payee had no sufficient
funds.
Checks; Presentment (1994)
Gemma drew a check on September
13, 1990. The holder presented the
check to the drawee bank only on
March 5, 1994. The bank dishonored
the check on the same date. After
dishonor by the drawee bank, the
holder gave a formal notice of
dishonor to Gemma through a letter
dated April 27, 1994.
1) What is meant by unreasonable
time as applied to presentment?

2) Is Gemma liable to the holder?
SUGGESTED ANSWER:
1) As applied to presentment for
payment, reasonable time: is meant
not more than 6 months from the date
of issue. Beyond said period, it is
unreasonable time and the check
becomes stale.
2) No. Aside form the check being
already stale, Gemma is also
discharged form liability under the
check, being a drawer and a person
whose liability is secondary, this is due
to the giving of the notice of dishonor
beyond the period allowed by law. The
giving of notice of dishonor on April
27, 1994 is more than one (1) month
from March 5, 1994 when the check
was dishonored. Since it is not shown
that Gemma and the holder resided in
the same place, the period within
which to give notice of dishonor must
be the same time that the notice
would reach Gemma if sent by mail.
(NIL Sec 103 & 104; Far East Realty
Investment Inc v CA 166 S 256)
ALTERNATIVE ANSWER:
2) Gemma can still be liable under the
original contract for the consideration
of which the check was issued.
EFFECT OF FAILURE TO MAKE
PRESENTMENT (Sec. 144)
Failure
to
make
presentment
discharges the drawer and all
indorsers (Sec. 144).
DISHONOR BY NON-ACCEPTANCE
When dishonored by non-acceptance:
A bill is dishonored by non-

Page 50 of 56
acceptance:
(1) When it is duly presented for
acceptance and such an acceptance
as is prescribed by this Act is refused
or cannot be obtained; or
(2) When
presentment
for
acceptance is excused and the bill is
not accepted. (Sec. 149)
Duty of holder: Where a bill is duly
presented for acceptance and is not
accepted within the prescribed time,
the person presenting it must treat the
bill as dishonored by non- acceptance
or he loses the right of recourse
against the drawer and indorsers.
(Sec. 150)
Effect: When a bill is dishonored by
non-acceptance, an immediate right of
recourse against the drawer and
indorsers accrues to the holder and
no presentment for payment is
necessary. (Sec. 151)
Promissory Notes
A promissory note is:
(1) An unconditional promise in
writing
(2) Made by one person to another
(3) Signed by the maker
(4) Engaging to pay on demand,
or at a fixed or determinable future
time
(5) A sum certain in money to order
or to bearer
(6) Where a note is drawn to the
maker's own order, it is not complete
until indorsed by him. (Sec. 184)
There are originally 2 parties in a
promissory note:
(1) Maker party who executes the

written promise to pay.
(2) Payee party in whose favor
the promissory note is made payable.
Checks
DEFINITION
A check is a bill of exchange drawn on
a bank payable on demand. Except as
herein otherwise provided, the
provisions of this Act applicable to a
bill of exchange payable on demand
apply to a check. (Sec. 185)
KINDS
(1) Cashiers Check One drawn
by the cashier of a bank, in the name
of the bank against the bank itself
payable to a third person. It is a
primary obligation of the issuing bank
and accepted in advance upon
issuance (Tan vs. CA 1994).
(2) Managers Check A check
drawn by the manager of a bank in the
name of the bank itself payable to a
third person. It is similar to the
cashiers check as to the effect and
use.
In issuing a managers check, the
bank assumed the liabilities of the
acceptor under Sec. 62, NIL
(Equitable PCI Bank v. Ong (2006)
(3) Memorandum Check A check
given by a borrower to a lender for the
amount of a short loan, with the
understanding that it is not to be
presented at the bank, but will be
redeemed by the maker himself when
the loan falls due and which

Page 51 of 56
understanding is evidenced by writing

the word memorandum, memo or
mem on the check.
(4) Certified Check An agreement
whereby the bank against whom a
check is drawn undertakes to pay it at
any future time when presented for
payment (Sec. 187)
(a) Certification is equivalent to
acceptance. (Sec. 187)
(b) Where the holder of a check
procures it to be accepted or certified,
the drawer and all indorsers are
discharged from liability. (Sec. 188)
(c)
A check of itself does not
operate as an assignment of any part
of the funds to the credit of the drawer
with the bank, and the bank is not
liable to the holder unless and until it
accepts or certifies the check. (Sec.
189)
(5) Crossed Check The NIL is
silent with respect to crossed checks,
although the Code of Commerce
makes reference to such instruments.
Article 541 of the Code of Commerce
states: The maker or any legal holder
of a check shall be entitled to indicate
therein that it be paid to a certain
banker or institution, which he shall do
by writing across the face the name of
said banker or institution, or only the
words and company.
Under usual practice, crossing a
check is done by placing two parallel
lines diagonally on the left top portion
of the check (State Investment House
vs. IAC, 1989).
Checks: Crossed Checks (2005)

What is a crossed check? What are
the effects of crossing a check?
Explain.
SUGGESTED ANSWER:
A Crossed Check under accepted
banking practice, crossing a check is
done by writing two parallel lines
diagonally on the left top portion of the
checks. The crossing is special where
the name of the bank or a business
institution is written between the two
parallel lines, which means that th
drawee should pay only with the
intervention of that company.
Effects of Crossed Checks
1) The check may not be encashed
but only deposited in the bank.
2) The check may be negotiated only
onceto one who has an account
with a bank.
3) The act of crossing the check
serves as a warning to the holder that
the check has been issued for a
definite purpose, so that he must
inquire if he has received the check
pursuant to that purpose; otherwise,
he is not a holder in due course.
Checks: Crossed Checks vs.
Cancelled Checks (2004)
Distinguish clearly (1) crossed checks
from cancelled checks;
SUGGESTED ANSWER:
A crossed check is one with two
parallel lines drawn diagonally across
its face or across a corner thereof. On
the other hand, a cancelled check is

Page 52 of 56
one marked or stamped "paid" and/or

"cancelled" by or o behalf of a drawee
bank to indicate payment thereof.
Checks; Crossed Check (1991)
Mr Pablo sought to borrow P200th
from Mr Carlos. Carlos agreed to loan
the amount in the form of a postdated
check which was crossed (i.e. 2
parallel lines diagonally drawn on the
top left portion of the check).
Before the due date of the check, Pabl
discounted it with Noble On due date,
Noble deposited the check with his
bank. The check was dishonored.
Noble sued Pablo. The court
dismissed Nobles complaint. Was the
courts decision correct?
SUGGESTED ANSWER:
The courts decision was incorrect.
Pablo and Carlos, being immediate
parties to the instrument, are
governed by the rules of privity. Given
the factual circumstances of the
problem, Pablo has no valid excuse
from
denying
liability,
(State
investment House v IAC GR 72764
13July1989). Pablo undoubtedly had
benefited in the transaction. To hold
otherwise would also contravene the
basic rules of unjust enrichment. Even
in negotiable instruments, the Civil
Code and other laws of genera
application can still apply suppletorily.
ALTERNATIVE ANSWER:
The dismissal by the court was
correct. A check whether or not postdated or crossed, is still a negotiable
instrument and unless Pablo is a
general indorser, which is not
expressed in the factual settings, he

cannot be held liable for the dishonor
of the instrument. In State Investment
House v IAC (GR 72764 13Jul1989),
the court did not go so far as to hold
that the fact of crossing would render
the instrument non-negotiable.
ALTERNATIVE ANSWER:
In State Investment House v IAC (GR
72764 13Jul1989), the SC considered
a crossed check as subjecting a
subsequent holder thereof to the
contractual covenants of the payor
and the payee. If such were the case,
then the instrument is not one which
can still be said to contain an
unconditional promise to pay or order
a sum certain in money. In the transfer
of
non-negotiable
credits
by
assignment, the transferor does not
assume liability for the fault of the
debtor or obligor. Accordingly the
courts decision was correct.
ALTERNATIVE ANSWER:
Yes. The check is crossed. It should
have forewarned Mr. Noble that it was
issued for a specific purpose. Hence,
Mr Noble could not be a holder in due
course. He is subject to the personal
defense of breach of trust/ agreement
by Mr. Pablo. Such defense is
available in favor of Mr Carlos against
Mr Noble.
Po Press issued in favor of Jose a
postdated crossed check, in payment
of newsprint which Jose promised to
deliver. Jose sold and negotiated the
check to Excel Inc. at a discount.

Page 53 of 56
Excel did not ask Jose the purpose of

crossing the check. Since Jose failed
to deliver the newsprint, Po ordered
the drawee bank to stop payment on
the check.
Efforts of Excel to collect from Po
failed. Excel wants to know from you
as counsel:
1) What are the effects of crossing a
check?
2) Whether as second indorser and
holder of the crossed check, is it a
holder in due course?
3) Whether Pos defense of lack of
consideration as against Jose is also
available as against Excel?
SUGGESTED ANSWER:
1) The effects of crossing a check are:
a. The check is for deposit only in the
account of the payee
b. The check may be indorsed only
once in favor of a person who has an
account with a bank
c. The check is issued for a specific
purpose and the person who takes it
not in accordance with said purpose
does not become a holder in due
course and is not entitled to payment
thereunder.
2) No. It is a crossed check and Excel
did not take it in accordance with the
purpose for which the check was
issued. Failure on its part to inquire as
to said purpose, as such failure or
refusal constituted bad faith.
3) Yes. Not being a holder in due
course, Excel is subject to the
personal defense which Po Press can
set up against Jose (State Investment
House v IAC 175 S 310)

On Oct 12, 1993, Chelsea Straights, a
corp engaged in the manufacture of
cigarettes, ordered from Moises 2,000
bales of tobacco. Chelsea issued to
Moises two crossed checks postdated
15 Mar 94 and 15 Apr 94 in full
payment therefor. On 19 Jan 94
Moises sold to Dragon Investment
House at a discount the two checks
drawn by Chelsea in his favor. Moises
failed to deliver the bales of tobacco
as agreed despite Chelseas demand.
Consequently, on 1 Mar 9, Chelsea
issued a stop payment order on the
2 checks issued to Moises. Dragon,
claiming to be a holder in due course,
filed a complaint for collection against
Chelsea for the value of the checks.
Rule on the complaint of Dragon. Give
your legal basis.
SUGGESTED ANSWER:
Dragon cannot collect from Chelsea.
The instruments are crossed checks
which were intended to pay for the
2,000 bales of tobacco to be delivered
to Moises. It was therefore the
obligation of Dragon to inquire as to
the purpose of the issuance of the 2
crossed checks before causing them
to be discounted. Failure on its part to
make such inquiry, which resulted in
its bad faith, Dragon cannot claim to
be a holder in due course. Moreover,
the checks were sold, not endorsed,
by him to Dragon which did not
become a holder in due course. Not
being a holder in due course, Dragon
is subject to the personal defense on
the part of Chelsea concerning the

Page 54 of 56
breach of trust on the part of Moises

Lim in not complying with his
obligation to deliver the 2000 bales of
tobacco.
House files a complaint against

Pentium and CD Bytes for the
payment of the dishonored check, will
the complaint prosper? Explain.

What are the effects of crossing a
check?
SUGGESTED ANSWER:
The complaint filed by Fund House
against Pentium will not prosper but
the one against CD Bytes will. Fund
House is not a holder in due course
and, therefore, Pentium can raise the
defense of failure of consideration
against it. The check in question was
issued by Pentium to pay for a
computer that it ordered from CD
Bytes. The computer not having been
delivered, there was a failure of
consideration. The check discounted
with Fund House by CD Bytes is a
crossed check and this should have
put Fund House on inquiry. It should
have ascertained the title of CD Bytes
to the check or the nature of the
latters possession. Failing in this
respect, Fund House is deemed guilty
of gross negligence amounting to
legal absence of good faith and, thus,
not a holder in due course. Fund
House can collect from CD Bytes as
the latter was the immediate indorser
of the check. (See Bataan Cigar and
Cigarette Factory v CA et al 230 s 643
GR 93048 Mar 3, 94)
SUGGESTED ANSWER:
The effects of crossing a check are as
follows:
a. The check may not be encashed
but only deposited in a bank;
b. The check may be negotiated only
once to one who has an account with
a bank;
c. The act of crossing a check serves
as a warning to the holder thereof that
the check has been issued for a
definite purpose so that the holder
must inquire if he has received the
check pursuant to that purpose,
otherwise he is not a holder in due
course (See Bataan Cigar and
Cigarette Factory, Inc. v CA GR
93048, Mar 3, 1994;
230 s 643)
On March 1, 1996, Pentium Company
ordered a computer from CD Bytes,
and issued a crossed check in the
amount of P30,000 post-dated Mar
31, 1996. Upon receipt of the check,
CD Bytes discounted the check with
Fund House. On April 1, 1996,
Pentium stopped payment of the
check for failure of CD Bytes to deliver
the computer. Thus, when Fund
House deposited the check, the
drawee bank dishonored it. If Fund
Types: Special and General

The crossing may be special wherein
between the two parallel lines is
written the name of a bank or a
business institution, in which case the
drawee should pay only with the
intervention of that bank or company,
or crossing may be general wherein

Page 55 of 56
between two parallel diagonal lines

are written the words "and Co." or
none at all as in the case at bar, in
which case the drawee should not
encash the same but merely accept
the same for deposit (supra).
Effects:
(1) The check may not be
encashed; it may only be deposited
with the bank;
(2) The check may be negotiated
only once to a person who has an
account with the bank; and
(3) It serves as a warning to a
holder that the check has been issued
for a definite purpose. (Bataan Cigar
vs. CA, 1994)
PRESENTMENT FOR PAYMENT
A check of itself does not operate as
an assignment of any part of the funds
to the credit of the drawer with the
bank. The bank is not liable to the
holder, unless and until it accepts or
certifies the check. (Sec. 189)
TIME
When to present? A check must be
presented
for
payment
within
reasonable time after its issue.
EFFECT OF DELAY
The drawer will be discharged from
liability thereon to the extent of the
loss caused by the delay. (Sec. 186)
Certification of checks: An agreement
whereby the bank against whom a
check is drawn, undertakes to pay it at
any future time when presented for
payment
Effects:
(1) Equivalent to acceptance (Sec.
187) and is the operative act that
makes banks liable
(2) Assignment of the funds of the
drawer in the hands of the drawee
(Sec. 189)
(3) If obtained by the holder,
discharges the persons secondarily
liable thereon (Sec. 188)
Refusal of drawee bank to certify: The
holder has no action against the bank
but he has a right of action against the
drawer. The drawer in turn has right of
action against the bank based on the
original contact of deposit between
them.

Page 56 of 56

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NEGIOTABLE INSTRUMENT:

instruments are not legal tender

NEGOTIABLE INSTRUMENTS LAW by JEREMIAH V. TRINIDAD

instruments under the Negotiable

Non-Negotiable being payable out

1) Postal Money Order;

NEGOTIABLE DOCUMENT vs.

NEGOTIABLE INSTRUMENTS LAW by JEREMIAH V. TRINIDAD

2) Must contain an unconditional

something in written form that can

(1) The drawee pays There is only one act

the payee from his the drawee pays

himself from the

NEGOTIABLE INSTRUMENTS LAW by JEREMIAH V. TRINIDAD

is unconditional, though coupled with:

But an order or promise to pay out

A mere request or authority to pay

As to bill of exchange: Order

Sum payable must be certain

NEGOTIABLE INSTRUMENTS LAW by JEREMIAH V. TRINIDAD

Money as used in the law is not

holder to accept payment will

Where an instrument is issued,

On or before a fixed or determinable

Note: Holder may call for payment

On or at a fixed period after the

NEGOTIABLE INSTRUMENTS LAW by JEREMIAH V. TRINIDAD

the time of happening be uncertain,

NEGOTIABLE INSTRUMENTS LAW by JEREMIAH V. TRINIDAD

Page, however, endorses it to X in

NEGOTIABLE INSTRUMENTS LAW by JEREMIAH V. TRINIDAD

payee who is not maker,

(1) Non-dating of the (1) Authorizes

Plywood Industries vs. IFC Leasing,

For order instruments - negotiation

NEGOTIABLE INSTRUMENTS LAW by JEREMIAH V. TRINIDAD

with the first installment payable on

NEGOTIABLE INSTRUMENTS LAW by JEREMIAH V. TRINIDAD

d) The PN gives the holder the option

NEGOTIABLE INSTRUMENTS LAW by JEREMIAH V. TRINIDAD

A. Define the following: (1) a

NEGOTIABLE INSTRUMENTS LAW by JEREMIAH V. TRINIDAD

may treat it as either at his election

surety or insurance company in

instrument so dated is delivered

usually did in the past, he signed

NEGOTIABLE INSTRUMENTS LAW by JEREMIAH V. TRINIDAD

delivered the same to Pete, who

delivered as it was entrusted to B,

NEGOTIABLE INSTRUMENTS LAW by JEREMIAH V. TRINIDAD

he had no participation in, or

is valid for all purposes, and Marie

NEGOTIABLE INSTRUMENTS LAW by JEREMIAH V. TRINIDAD

by an infant (minor) passes the

NEGOTIABLE INSTRUMENTS LAW by JEREMIAH V. TRINIDAD

persons negotiating by delivery and

Payees signature forged

(1) Maker and payee are not liable.

Indorsers signature forged

(1) Maker, payee, indorser

(1) Drawer is not liable because

(1) Maker is not

Forgery; Liabilities; Prior

NEGOTIABLE INSTRUMENTS LAW by JEREMIAH V. TRINIDAD