NEGOTIABLE INSTRUMENTS LAW

July 21WHERE WERE WE

COMPLETE but UNDELIVERED (sec 16)

Q: What is the presumption with regards to delivery?
A: There is a prima facie presumption that there is delivery if the
instrument is in the holder not in due course.
Q: What is the effect?
A: Any holder of the instrument can say that theres delivery. Its
already on the person who claims otherwise to prove that there was
no delivery.
Q: Who proves then?
A: The person requested to pay the instrument because of the
rebuttable presumption of delivery.

Holder thru a HDC: same rights with HDC because he

acquires right of the HDC.

B. Holder not HDC: Prior parties can raise the defense of

complete, undelivered so cannot be held liable.
Subsequent, warrants good title so held liable.
The person negotiated it by delivery, he can be
held liable only of immediate transferor (extends
only to immediate transferee).
Perpetrators of fraud: ultimately can be held
liable because theft as the law penalizes such.
Example:
BILL OF EXCHANGE

If the instrument is in the possession of a HDC, there is a conclusive

presumption of delivery. Hence the defect of complete, undelivered
is a personal defence.
Personal defense then:
A. HDC: Prior parties cant raise the defense of complete,
undelivered instrument so the prior parties can be held liable.
Subsequent parties: if they are indorsers, they
warrant that they have good title to it.
Q: if the issue is delivery, what is the warranty that is
effected? Can you infer delivery by looking at the instrument
alone?
A: That prior parties have good title to it.

Negotiated it by delivery: he can be held liable only

of immediate transferor (extends only to immediate
transferee).
Perpetrators of fraud: ultimately can be held liable
because theft as the law penalizes such.

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If before this instrument was delivered, it was stolen by Y,

drafted(drawn) by B supposed to be payable to A but stolen by Y.
negotiated it to A CDE. Assume that in hands of E, it was
presented to X for acceptance; and was accepted. What are the
rights of E?
1. Go first to the person primarily liable, X
(drawee/acceptor).
Q: Can X be held liable?
Q:Who are the persons secondarily liable?
A: B can be held liable since he cannot raise the personal defense of
Complete but undelivered instrument
Indorsers: A, C and D can be held liable since they warrant that they
have good title to the instrument
"If E is a holder NOT in due course "

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you can still prove that E is a holder through a holder in due
course unless the contrary is given; as long as the twin
requirements are complied with (that he is not a party to the
fraud or illegality and he acquired the instrument from a
holder in due course)
-X as drawee is the person primarily liable, he cannot raise
the personal defense of complete but undelivered
instrument
-B as drawer cannot raise the personal defense of complete
but undelivered instrument
-indorsers: A, C and D can be held liable since they warrant that they
have good title to the instrument
-D, as prior party to the theft, can be held liable since he cannot raise
personal defense of complete but undelivered instrument
-Y is ultimately liable since theft is punishable under the law
"If E is a holder NOT in due course " and "D is not a holder in due
course"
>then E is a mere holder NOT in due course
-X cannot be held liable, he can raise personal defense of complete
but undelivered instrument (his liability is to pay the person under
the order of the drawer; since B never delivered the instrument,
there was never an "order" to pay yet so he can raise the defense)
B as drawer cannot be held liable since he can raise the personal
defense of complete but undelivered instrument
-indorsers: A, C and D can be held liable since they warrant that they
have good title to the instrument
-Y is ultimately liable since theft is penalized under the law

- those who know of the infirmity of the instrument

EXAMPLE:
PROMISORY NOTE:
If before this instrument was delivered to , it was stolen by Y,
drafted by B supposed to be payable to A but stolen by Y. negotiated
it to A CDE. DISCUSS THE RIGHTS OF E

IF E IS A HOLDER IN DUE COURSE:

E can go primarily to B because B cannot put up the defense of
complete but undelivered, They can also go to A, C AND D because
as endorsers they warrant they have a good title to the instrument.
And Y is ultimately liable since theft is punishable under the law

IF E IS NOT A HOLDER IN DUE COURSE:

If E is not a holder in due course it is presumed that he is a
holder through a holder in due course because D is a holder
in due course and that he is not a party of the illegality.
They can also go to A, C AND D because as endorsers they
warrant they have a good title to the instrument.
And Y is ultimately liable since theft is punishable under the
law
IF E and D IS NOT A HOLDER IN DUE COURSE:
E cannot cannot suuccesfully payment from B because B can
put up a defense of a personal defense of complete but
undelivered instrument.

*immediate party- 'privity not proximity'

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E can also go to A, C AND D because as endorsers they
warrant they have a good title to the instrument.
And Y is ultimately liable since theft is punishable under the
law

intention to create such instrument. So here, you look at the party

who signed the document. If there is no intention to create a
negotiable instrument, this type of fraud applies.
Example:

Q: If this is a bearer instrument would that change your answer?

A: Yes, Sir because it can be negotiated by delivery because no one
can stop you by indorsing it. E a holder in due course can go to D
who is the immediate transferor and who warranted that it has good
title to it. And can definitely go to Y who is ultimately liable since
theft is punishable under the law.

You got an autograph from Naruto. He signed there love

lots, Naruto. And then you wrote above the signature I promise to
pay Mr. Rudela or bearer 1M. Whats the intention of Naruto here?
Just autograph! So if you circulate this instrument, you are liable of
fraud in esse contractus.

Q: Now, differentiate fraud in factum from fraud in inducement.

Q: (What is forgery)
A: Forgery is a crime, punishable by the RPC and the important
element there is the intent to defraud.

A: Fraud in inducement is when the signer of the negotiable

instrument knew what he was signing but that he was induced by
fraud to sign it.

Q: What is done in forgery?

Example:

A: Counterfeiting or fraudulent alteration of signature and of any

writing.

You issue a negotiable instrument that says you promise to

pay a seller of a Naruto figurine for 1M. The seller deceived you that
what he has was an authentic Naruto figurine when in truth, it was
not. (This is a personal defense. More on this when we discuss about
consideration.)

Q: If there is an alteration in the amount written on the instrument,

is that forgery?
A: Yes. But section 23 is limited to forgery of signature. Thus, forgery
of the amount will not be covered under section 23 but it will be
governed by section 124 (material alterations).
Q: What are the forms of forgery?
A: (1) Fraud in factum/ fraud amounting to forgery/ fraud in esse
contractus an act of putting up a contract, making it appear as a
negotiable instrument but the signature was not made with the
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So, the difference between the 2 is that in fraud in factum, there is

no intention to make a negotiable instrument while in fraud in
inducement, there is an intention to make but only for a different
consideration.
Bottle of wines, can you remember? A discussion in oblicon. Wa na
mu kahinumdum? Instead of wine, vinegar ang gihatag. Di jud mo

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kahinumdum noh? Cge lang. Kinsay teacher? Hala parihas tag
teacher sir. Suriii
Q: Next kind of fraud?
A: (2) Duress amounting to forgery theres an exertion of
unreasonable force to make the maker/drawer sign.
Example:
When someone forces you to sign and you do not have a
choice but to sign because your loved one will be in danger if you will
not sign. Ayay loved one jud? Hmmm pwede sad you are the person
who was held at gun point. Or your hand was forced to make an
instrument. Pero kanang gigunitan lang ang kamot dayun mu sign na
dayun ka, aw lahi nana. Di nana forgery, thats love. Pwede pud lust.

if the intention of Ms. Lim is really to impersonate Naruto so that she

can get the negotiable instrument. If there was an intention to issue
a negotiable instrument, not because you thought that she is really
Naruto, but because you just want to issue a negotiable instrument
to her, then that is not fraudulent impersonation. So only when you
are induced to issue a negotiable instrument on the belief that this
person is who he/she said to be, when in fact he/she is not.
Another example: Mr. Singh made you believe that she is Pia
Wurtzbach. On the belief that she is Pia, you issued a
negotiable instrument to her, then that is fraudulent
impersonation if Mr. Singh made it appear that she really is
Pia W. But if you still issued a negotiable instrument even if
you knew that she is not Pia, then that is not fraudulent
impersonation. That is stupidity.

Q: The third type of forgery?

ATTY AMAGO: So only these 3 types of forgery can be considered as

forgery under Sec. 23.

A: (3) Fraudulent impersonation when you sign an instrument with

the belief that youre paying to that specific person but in truth, that
person receiving the instrument is not the person whom you
intended to pay. Or its when you are induced to issue a negotiable
instrument on the belief that this person is who she/he said to be,
when in fact she/he is not.

Effects of Forged Signature under Sec. 23

1) The forged signature is wholly inoperative,
2) It does not give a right to retain the instrument, or
3) To give a discharge therefor, or
4) To enforce payment thereof against any party thereto.

Example:
You thought that Ms. Lim is Naruto but the truth is she is
not. But you believed that she is Naruto because she was in costume.
So here, it is fraudulent impersonation if Ms. Lim really intended to
impersonate Naruto so that she can get the negotiable instrument
which you issued for Naruto.
ATTY AMAGO: On the belief that she is Naruto, you issued a
negotiable instrument to her. That can be fraudulent impersonation
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ATTY AMAGO: The discussion in your book will tell you that this is a
real defense because Sec. 23 mentions the phrase any party. With
that phrase any party, then this must be a defense available
against any party, and so must be considered a real defense.
Q: Now that we know that it is a real defense, we know that the
defect is forgery. Discuss now the rights of a holder against the
parties of a forged instrument.
HOLDER IN DUE COURSE
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I. Promissory Note
a) Signature of maker is forged
Prior party
o Maker cannot be held liable because he can raise
the real defense of forgery. In fact, he can say that
he is not a party to the instrument because his
signature was never placed on the instrument. He
has no interest over the instrument.
Subsequent parties
o Indorsers can be held liable because they warrant
that the instrument is genuine and in all respects
what it purports to be.
o Person negotiating by delivery can be held liable if
he/she is the immediate transferor (because the
warranty that the instrument is genuine and in all
respects what it purports that is made by this person
only extends to the immediate transferee.)
o Forger can be held liable because forgery is
penalized under the law.
b) Signature of indorser is forged
Prior parties (Maker, Payee or any indorser whose signature
was not forged) (they are parties to the instrument prior to
the forgery)
We dichotomize:
o If it is a bearer instrument prior parties to the
forgery can be held liable the forged signature is not
necessary to the title of the holder. (Or you can
state: they are precluded from raising the defense of
forgery because the forged signature is not
necessary to the title of the holder.)
ATTY AMAGO: Take note that a bearer
instrument can simply be negotiated by mere
delivery. So if there is a forgery in one of the
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signature of the purported indorser, it does not

matter because the instrument is supposed to be
delivered only. So even if theres no signature in
the first place, the instrument would then be
readily negotiated.
o

If it is an order instrument prior parties cannot be

held liable because the real defense of forgery can
be raised against the holder in due course.

Subsequent parties:
o Indorsers (subsequent to the forgery) can be held
liable because they warrant that the instrument is
genuine and in all respects what it purports to be
*and they that they have good title to it.

ATTY AMAGO: *At times, it may be necessary to

say that they have good title to it because
most likely, an instrument which is forged is also
not delivered. Kay if gi-forge na ang imong
signature, you who is supposed to be the real
owner of that instrument would have not let go
of it. Why was your signature forged? Because
someone must have gotten the instrument from
you, without you delivering it yet. So that being
the case, sometimes delivery is also an issue in
case of forgery.
But if you just state because of their warranty
that the instrument is genuine and in all respects
what it purports to be, that will already merit
full points because forgery is the issue and it has
something to do with the genuineness of the
instrument.

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o

Persons negotiating by delivery can be held liable

because a forged signature is not necessary to the
title of the holder.
Forger can be held liable since forgery is penalized
under the law.

ILLUSTRATION:
I promise to pay P or order P10,000 on July 27, 2016.
Sgd. (M)
MPABC
X (Forger)
Discuss the rights of C in relation to prior parties.
Absent any stipulation, C is considered a holder in due
course.
C cannot successfully demand payment from M because M
can raise the real defense of forgery against C who is a
holder in due course.
C can successfully demand payment from indorsers P, A, and
B because they warrant that the instrument is genuine and
in all respects what it purports to be.
C can also successfully demand payment from M who is the
forger because forgery is penalized under the law.
Q: If instead of Ms Signature which was forged by X, A lost the
instrument, was found by X and X signed in As behalf and negotiated
to B then B to C. Discuss the rights of C.
M P A B C
| X (Forger)

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C cannot successfully demand payment from M, the

person primary liable, because M can set up the real
defense of forgery even against a holder in due course.
He cannot also successfully demand from indorsers P
and A because they are prior parties to the forgery and
as such they can also raise the defense of forgery even
against a holder in due course.
However, C can go and successfully demand payment
from B who is an indorser subsequent to the forgery
because B warrants that the instrument is genuine and
in all respects what it purports to be.
Ultimately, C can successfully demand payment from X
who is the perpetrator of the forgery because forgery is
penalized under the law.
Q: If instead of an order instrument, you have a bearer instrument.
How will that change the answer during the first example when X
forged Ms signature?

M P A B C
|
X (Forger)

C who is a holder in due course cannot successfully

demand payment from M because M can set up the real
defense of forgery even against C who is a holder in due
course.

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C cannot also go after P and A because they do not make
any warranty to C that the instrument is genuine and in
all respects what it purports to be.
However, C may go after B who is the immediate
transferor and warranted to him that the instrument is
genuine and in all respects what it purports to be.
C can also successfully demand payment from X who is
the person ultimately liable because he perpetrated the
forgery which is penalized under the law.
Q: You may be wondering about P and A.. Sir, dili nalang ba jud na
sila makabayad?
Take note class that when C demands payment from B
and he pays, B will have to go to A and A will also go to P.
Q: Is the promissory note rendered inoperative because of the
forgery?
No. When the law mentions inoperative, it only refers to
the signature which was forged and not to the entire
instrument. Only the signature is rendered inoperative,
does not give right to the holder of the instrument, does
not give a discharge therefor or enforce payment
thereof. Thus, the instrument remains to be a valid
negotiable instrument in the hands of all those holders
who may have signed the instrument genuinely.
Q: What if the holder is a holder through a holder in due course?
His rights will be the same to a holder in due course
because he acquired the rights of a holder in due course.

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Q: Now, holder NOT in due course? (The signature of M, the maker,

was forged.)
M cannot be held liable because he can raise the real
defense of forgery against a holder not in due course.
To subsequent parties who are indorsers, they can be
held liable because they warrant that the instrument is
genuine and in all respects what it purports to be.
To a person negotiating by delivery, he can be held liable
if he is the immediate transferor because only him
warranted that the instrument is genuine and in all
respects what it purports to be.
Ultimately, the forger is held liable because he
perpetrated the crime of forgery which is penalized
under the law.
Q: If it is the signature of the indorser which is forged, how will it
affect the rights of a holder NOT in due course?

M P A B C
|
X (Forger)

If it is a bearer instrument, the prior parties may be held

liable because the forged signature is not necessary to
the title of the current holder, whether he is a holder in
due course or not a holder in due course. The presence
of a forged signature in the instrument will not have any
effect.

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Correction ni Sir: They cannot be held liable because
they did not make any warranty to the current holder
that the instrument is genuine and in all respects what it
purports to be. Take note that in a bearer instrument,
only the immediate transferor can be held liable. So
while prior parties, since it is a bearer instrument, they
cannot be held liable. (SAKTO SI ALEX!!!)
Q: How about if it is an order instrument?
The prior parties cannot be held liable because they can
raise the real defense of forgery.
Q: What if it is subsequent parties as indorsers?
They are liable because they warrant that the
instrument is genuine and in all respects what it
purports to be.
Q: Persons negotiating by delivery?
The holder not in due course can successfully demand
payment from the immediate transferor because it is
only him who warrants that the instrument is genuine
and in all respects what it purports to be to the holder
who is the immediate transferee.
Q: As to the forger?
As a rule, he is always to be held liable because he
perpetrated the forgery and it is penalized by law.

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Q: This is an order instrument and the signature of M was forged by

X who negotiated the instrument to P, then to A, to B and to C.
Discuss the rights of C against prior parties. B and C are holders not
in due course.

Subsequent endorsers:
As endorsers they warrant that the instrument is genuine
and in all in respects what it purports to be
Persons negotiating by delivery:
It is only the immediate transferor who is liable. Only he
warrants that the instrument is genuine and in all respects
what it purports to be to the immediate transferee.
Forger:
Always liable because we do not tolerate fraud in
commercial transactions

ORDER INSTRUMENT
The signature of M was forged by X, who negotiated the instrument
to P, then to A, to B, and then to C. (NHDC and NHDC)
Discuss the rights of C:

C cannot successfully claim from M because forgery is a real

defense available to M.

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C can successfully claim from P A and B because as

endorsers, they warrant to that the instrument is genuine
and in all respects what it purports to be.
Ultimately C can go to X, the forger because we do not
tolerate the crime of forgery in commercial transaction.

If instead it was the signature of A that was forged by X after the

instrument was negotiated by M to P to A. Discuss the rights of C.

C not a holder in due course cannot successfully claim from

M because forgery is a real defense available to M.
C also cannot from P and A as a prior party before the
defect; P and A can raise the defense of forgery.
C however can claim from B because as endorser B warrant
to that the instrument is genuine and in all respects what it
purports to be.
Ultimately C can go to X, the forger because we do not
tolerate the crime of forgery in commercial transaction.

Q: But what the signature that was forged is that of A?

BEARER INSTRUMENT
If the instrument is a Bearer Instrument: The signature of M was
forged by X, and C further negotiated the instrument to D (NHDC).
Discuss the rights of D.

D cannot successfully claim from M because forgery is a real

defense available to M.
D can proceed against C because C is an immediate
transferor and warrants that the instrument is genuine and
in all respects what it purports to be.

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D also cannot from P and A as a prior party before the

defect; P and A can raise the defense of forgery and they do
not warrant the genuineness of the instrument.
Ultimately D can go to X, the forger because we do not
tolerate the crime of forgery in commercial transaction.

D can successfully claim from M because as prior party to

the forgery, the instrument being a BI M is required to
endorse such and M is now precluded from raising the
defense. Maker is primarily liable.
D cannot claim from P, A and B as a prior party; P and A can
raise the defense of forgery because it being the BI, they
never give any warranty to it. Prior party since it is a BI, they
cannot be held liable. Warranties do not extend to current
holders. Under Section 65 the warranty only extends to the
immediate transferee. Even if HDC pa na, di cannot be held
liable because this is a bearer instrument. They are not the
immediate transferors.
D can proceed against C because C is an immediate
transferor and warrants that the instrument is genuine and
in all respects what it purports to be

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