Professional Documents
Culture Documents
INTRODUCTION
Bill of an order made by one person to another to pay money to a third person
exchange
Check a form of bill of exchange wherein the one who issues it orders his bank to pay the person named on the
check, which is always payable on demand
Certificate of a form of promissory note issued by a bank reciting a deposit of a certain sum of money, payable either
deposit at a fixed time or on demand, to the depositor named therein
Bond a form of promissory note issued by a corporation, public or private, payable at a definite date in the
future, usually for a long term
Draft a form of bill of exchange that evidences an order made by one person (e.g. the buyer of the goods)
addressed to a person having in his possession funds of such buyer, ordering the addressee to pay the
purchase price to the seller of the goods
Bank draft a type of draft wherein the order is made by one bank to another bank
drawer the person who gives the order to pay in a bill of secondary -- liability is conditioned upon two factors:
exchange (1) demand or presentment duly made on the primary
party, and (2) notice of dishonor
drawee the addressee of the order in a bill of exchange primary, once he accepts the order of the drawer to
pay, in which case he becomes an acceptor
indorser the person who transfers an instrument to another (1) liability as a seller or transferor of personal
by signing the back of the instrument property, and (2) liability when the two conditions
mentioned above have been fulfilled
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Metrobank v. CA
Gomez deposited treasury warrants in his account with Golden Savings, who deposited them with Metrobank.
Metrobank allowed Golden Savings to withdraw on the value of the warrants before they had been cleared, and
consequently Golden Savings allowed Gomez to withdraw too. The warrants were subsequently dishonored, and
Metrobank demanded Golden Savings to be paid for their value. However, the Court said that Metrobank was negligent.
Moreover, the warrants were not negotiable instruments, thus Golden Savings could not be held liable as an indorser.
The Negotiable Instruments Law (NIL) does not apply to documents that are not negotiable instruments. The document
in question was not a negotiable instrument because it did not contain an unconditional promise or order to pay a sum
certain in money. Therefore, when Golden Savings “indorsed” said non-negotiable instruments to Metrobank for
clearing, and not to guarantee their genuineness, liability could not be imposed upon the former.
CHAPTER I
REQUISITES OF NEGOTIABILITY
Sec. 1. Form of negotiable instruments. - An instrument to be negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.
Sec. 184. Promissory note, defined. - A negotiable promissory note within the meaning of this Act is an unconditional
promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or
determinable future time, a sum certain in money to order or to bearer. Where a note is drawn to the maker's own order,
it is not complete until indorsed by him.
Sec. 126. Bill of exchange, defined. - A bill of exchange is an unconditional order in writing addressed by one person to
another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to bearer.
HKSBC v. CIR
HSBC filed administrative claims for refund of erroneously paid DST to the BIR pursuant to BIR Ruling No. 132-99,
which provides that instruction made through an electronic message by a non-resident payor-client to debit his local or
foreign current account maintained in the PH and to pay a certain named recipient also residing in the PH is not subject
to DST imposed under Sec. 181 of the Tax Code. The Tax Code imposes DST on either (a) the acceptance or (b) the
payment of a foreign BOE, or order for the payment of money drawn abroad but payable in the PH. The court held that
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the electronic messages are not BOE. As there was no BOE or order for the payment drawn abroad and made payable
here in the PH, there could have been no acceptance or payment.
Sec. 18. Liability of person signing in trade or assumed name. - No person is liable on the instrument whose signature
does not appear thereon, except as herein otherwise expressly provided. But one who signs in a trade or assumed name
will be liable to the same extent as if he had signed in his own name.
Sec. 19. Signature by agent; authority; how shown. - The signature of any party may be made by a duly authorized
agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be
established as in other cases of agency.
Written form includes handwritten words, printed words, and typewritten words
though usually found at the lower right hand corner, it may appear on any part of the instrument, as
long as the maker’s or drawer’s intention is shown
in case of ambiguity as to what capacity the person intended to sign, the assumption is that he is an
indorser
Mere acknowledgment of a debt (e.g. “I.O.U”) No, there must be an express promise to pay
Mere request or authority to pay No, the instrument must be clearly demanding a right
Sec. 3. When promise is unconditional. - An unqualified order or promise to pay is unconditional within the meaning of
this Act though coupled with:
(a) 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
(b) A statement of the transaction which gives rise to the instrument.
But an order or promise to pay out of a particular fund is not unconditional.
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Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum certain within the meaning of this Act,
although it is to be paid:
(a) with interest; or Note: There can be a stipulation to pay higher or lower
interest depending on whether the instrument was paid on
or before maturity.
(b) by stated installments; Note: The due date and amount of each installment must
be mentioned.
(d) with exchange, whether at a fixed rate or at the Note: An instrument expressed in foreign currency may
current rate; or contain a provision that the same is payable in Philippine
currency at a fixed rate or at the current rate.
(e) with costs of collection or an attorney's fee, in case Note: If such provision for attorney’s fees is blank, it
payment shall not be made at maturity. amounts to a promise to pay reasonable fees, which may be
determined by the court.
4. Payable in money
Thus, an instrument is not negotiable if it is payable in personal property, services, shares of stock, or even gold. The
term “money” includes any kind of current money such as foreign currency, and is not just limited to “legal tender.”
Sec. 4. Determinable future time; what constitutes. - An instrument is payable at a determinable future time, within the
meaning of this Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or E.g., I promise to pay Juan Reyes or order the sum of P100
thirty days after date
(b) On or before a fixed or determinable future time E.g., I promise to pay Juan Reyes or order the sum of P100
specified therein; or on or before December 1, 2016
(c) On or at a fixed period after the occurrence of a E.g., I promise to pay Juan Reyes or order the sum of P100
specified event which is certain to happen, though the time sixty days after the death of Jose Cruz
of happening be uncertain.
An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect.
Note:
● Sec. 11. Date, presumption as to. - Where the instrument or an acceptance or any indorsement thereon is dated,
such date is deemed prima facie to be the true date of the making, drawing, acceptance, or indorsement, as the case
may be.
● Sec. 17. Construction where instrument is ambiguous. - Where the language of the instrument is ambiguous or there
are omissions therein, the following rules of construction apply: xxx (c) Where the instrument is not dated, it will be
considered to be dated as of the time it was issued; xxx
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RFC v. CA
A promissory note executed by Anduiza against RFC contained the provision that the loan may be paid, “on or before
October 31, 1951.” During the interim period prior to the indicated time of maturity, a certain Madrid paid the loan in
behalf of Anduiza, which RFC duly accepted. When Madrid’s demand for payment from Anduiza remained unheeded, he
filed a suit against RFC and Anduiza, for the former to cancel the mortgages on the loan, and for Anduiza to
acknowledge the debt he owed Madrid. The bank argued that the payment made by Madrid did not constitute valid
payment for the loan of Anduiza since the payment was made prematurely. The court held that since the promissory
note contained the phrase “on or BEFORE [date of maturity],” Madrid’s payment was valid. Hence, Anduiza should
acknowledge the debt he owed Madrid, and the bank should release the mortgages as the debt was considered paid.
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Note: With or without such provision, the becomes overdue and thus payable on
holder may still choose to be indulgent demand. (Sec. 7)
Note:
Sec. 10. Terms, when sufficient. - The instrument need not follow the language of this Act, but any terms are sufficient
which clearly indicate an intention to conform to the requirements hereof.
Garcia v. Llamas
Garcia and De Jesus were ordered by to pay, jointly and severally, Llamas based on a promissory note they issued in
favor of the latter. Garcia raised the defense that he signed the note merely as an accommodation party to De Jesus. SC
ruled that Garcia cannot avail himself of NIL’s provisions on the liabilities and defenses of an accommodation party
because the note herein is not a negotiable instrument. The note was made payable to a specific person rather than to
bearer or to order. The promissory note is thus covered by the general provisions of the Civil Code, not the NIL.
Sec. 8. When payable to order. - The instrument is payable E.g., I promise to pay to the order of Juan Cruz;
to order where it is drawn payable to the order of a I promise to pay Juan Cruz or order
specified person or to him or his order. Xxx Note: Without the words “to the order of” or “to order,” the
instrument is payable only to the person designated
therein and is therefore non-negotiable.
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part of the transaction involving the checks. Thus, the spouses’ checks are deemed payable to order. PNB was negligent
in allowing the checks to be paid to the PEMSLA account even without indorsement from the named payees.
People v. Wagas
Because the check he issued in favor of Ligaray as payment for 200 bags of rice was dishonored, Wagas was found guilty
of estafa. On appeal, SC acquitted Wagas since the prosecution failed to prove with certainty that it was Wagas who had
defrauded Ligaray by issuing the check. The check herein was made payable to cash. This type of check was payable to
the bearer and could be negotiated by mere delivery without the need of an indorsement. This rendered it highly
probable that Wagas had issued the check to somebody else like Cañada who then negotiated it to Ligaray, as Wagas
claimed.
(b) Payee
Sec. 8. When payable to order. - xxx It may be drawn payable to the order of:
(a) A payee who is not maker, drawer, or drawee; or E.g., I promise to pay Juan Cruz or order the sum of P100
(Sgd.) Pedro Reyes
(b) The drawer or maker; or E.g., I promise to pay myself or order the sum of P100
(Sgd.) Pedro Reyes
Note: Sec. 184: xxx Where a note is drawn to the maker’s
own order, it is not complete until indorsed by him.
(c) The drawee; or E.g., Pay to the order of yourself the sum of P100
(Sgd.) Pedro Reyes
To: Juan Cruz
(d) Two or more payees jointly; or E.g., I promise to pay to the order of Juan Cruz and Jose
Santos the sum of P100.
(Sgd.) Pedro Reyes
Note: When negotiating the instrument, all the joint
payees must indorse.
(e) One or some of several payees; or E.g., I promise to pay to the order of Juan Cruz or Jose
Santos the sum of P100.
(Sgd.) Pedro Reyes
Note: When negotiating the instrument, only one of the
several payees need indorse.
(f) The holder of an office for the time being. E.g., I promise to pay to the order of the Secretary of X
Association the sum of P100.
(Sgd.) Pedro Reyes
Interpretations Effect
(1) The payee must the Non-negotiable. The payee
person who will hold is uncertain.
the office at maturity.
(2) The payee must be the Not desirable. The person
person holding the will continue to be the
office at the time of the payee although he has
issuance of the ceased to be the holder of
instrument. the office.
(3) The payee must be the Floating promise. This is
person who happens to the most acceptable because
be the holder at any the payee is certain and
particular moment. easily determinable.
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Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable
certainty.
Note:
Sec. 43. Indorsement where name is misspelled, and so E.g., if the payee is designated as Juan Gonzalez instead of
forth. - Where the name of a payee or indorsee is wrongly Juan Gonzales, he should indorse the instrument by
designated or misspelled, he may indorse the instrument signing “Juan Gonzalez” and not “Gonzales,” but he may
as therein described adding, if he thinks fit, his proper add the latter if he wants to
signature.
(c) Drawee
Sec. 128. Bill addressed to more than one drawee. - A bill E.g., a bill may be addressed “To: Juan Cruz and Jose
may be addressed to two or more drawees jointly, whether Reyes,” but not “To: Juan Cruz or Jose Reyes”
they are partners or not; but not to two or more drawees in Why? Because otherwise, there would be no certainty as
the alternative or in succession. the person to whom the bill should be presented for
payment or acceptance.
Sec. 130. When bill may be treated as promissory note. - Why? Because otherwise, no one can ever be made
Where in a bill the drawer and drawee are the same primarily liable on the bill. Since the drawer was
person or where the drawee is a fictitious person or a responsible for naming such a drawee, it is to be assumed
person not having capacity to contract, the holder may that he intended to be primarily liable himself.
treat the instrument at his option either as a bill of
exchange or as a promissory note.
CHAPTER II TRANSFER
Sec. 191. Definition and meaning of terms. - In this Act, unless the contract otherwise requires:
"Delivery" means transfer of possession, actual or constructive, from one person to another
"Issue" means the first delivery of the instrument, complete in form, to a person who takes it as a holder
Actual – by manual transfer of possession
Constructive – by any other act manifesting intent to transfer right of possession
Sec. 16. Delivery; when effectual; when presumed. - Every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of giving effect thereto.
Without the initial delivery of the instrument from the maker to the payee, there can be no liability on the
instrument.
Delivery must be intended to give effect to the instrument, otherwise, there is no delivery within the meaning of the
above provision.
Presumption: Once the delivery is no longer in the possession of the person who signed it, a valid delivery by him is
presumed, until the contrary is proved; and as to the holder in due course, the presumption is conclusive, provided
the instrument is complete.
In re Martens’ Estate
The Court affirmed the decision of the trial court, which denied the claim of appellant Mabel Martens Bonk against the
administrator of her mother’s estate based on a note for $1,500, stating that the note sued upon could not be made the
basis of a valid claim against the estate since there was no legal delivery of the same during the lifetime of the decedent.
That the note was prepared and executed by the decedent; that she told one Simon Fisher that the note was in favor of
the appellant; and that she had placed it inside a safety deposit box do not show a legal delivery of the note in question.
Patrimonio v. Gutierrez
Patrimonio entrusted blank checks to Gutierrez, instructing the latter not to use them without his consent and to use
them only for business expenses. Gutierrez loaned from Octavio Marasigan using a blank check. Gutierrez had prima
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facie authority to fill out the checks under Sec. 14 of the NIL . Under this rule, if the maker or drawer delivers a pre-
signed blank paper to another person in order to convert it to a negotiable instrument, that person is deemed to have
prima facie authority to fill it up. While under the law, Gutierrez had prima facie authority to complete the check, such
prima facie authority does not extend to its transfer or negotiation. In this case, no evidence shows that Gutierrez
obtained Patrimonio’s approval to fill up the blank or to use the check. SC held that Marasigan was not a holder in due
course and that Patrimonio could avail of the defense that Gutierrez exceeded his authority to fill out and use the check
in order to avoid liability to Marasigan under the negotiable instrument aka the check.
2. Negotiation
Sec. 191. Definition and meaning of terms. - In this Act, unless the contract otherwise requires:
"Bearer" means the person in possession of a bill or note which is payable to bearer;
"Holder" means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof
Where an instrument is payable to bearer: The person in possession of the instrument is the bearer as well as the
holder
Where an instrument is payable to order: The payee or indorsee in possession of the instrument is the holder
Sec. 30. What constitutes negotiation. - An instrument is negotiated when it is transferred from one person to another in
such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if
payable to order, it is negotiated by the indorsement of the holder and completed by delivery.
Negotiation Transfer
It is the transfer of a negotiable instrument made in such It is a broader term than negotiation. If an instrument is
manner that the transferee becomes a holder and thus transferred without negotiation, the transfer is a mere
possibly a holder in due course capable of acquiring a assignment which constitutes the transferee as a mere
better title to the instrument that that of his transferor. assignee not a holder, subject to all defenses existing
Note: A negotiation may be for value as in a sale, or by way among prior parties.
of gift. In either case, there will be a valid transfer.
However, the rights acquired by the transferee in each Thus, transfer includes both an ordinary assignment and a
case may be different. negotiation.
3. Methods of negotiation
Sec. 31. Indorsement; how made. - The indorsement must be written on the instrument itself or upon a paper attached
thereto. The signature of the indorser, without additional words, is a sufficient indorsement.
Allonge – a slip of paper attached to a negotiable instrument for the purpose of receiving additional indorsements
when there is no longer any room on the instrument itself
o Paper must be so firmly attached to the instrument as to become a part thereof.
b. In case of joint payees
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c. If name misspelled
Sec. 43. Indorsement where name is misspelled, and so forth. - Where the name of a payee or indorsee is wrongly
designated or misspelled, he may indorse the instrument as therein described adding, if he thinks fit, his proper
signature.
The indorsement should be made by the holder in the manner he was designated, otherwise the signature will prima
facie not be a valid indorsement of the instrument. After such indorsement, he may sign his correct name.
Sec. 32. Indorsement must be of entire instrument. - The indorsement must be an indorsement of the entire instrument.
An indorsement which purports to transfer to the indorsee a part E.g., if a bill for P100 is indorsed by the payee to
only of the amount payable, or which purports to transfer the A for P50; if a bill for P100 is indorsed by the
instrument to two or more indorsees severally, does not operate as a payee to A for P50 and to B for P50
negotiation of the instrument. Note: However, where the payees are joint, i.e.,
“pay to A and B,” the negotiation is valid.
But where the instrument has been paid in part, it may be indorsed E.g., if a note payable by installments, where
as to the residue. some installments have been paid, the
instrument may still be negotiated for the
remaining unpaid installments
Purpose: To protect the obligors from more than one action on the instrument
o The maker and all the prior parties, in assuming liability, took the risk of only one cause of action against them.
Effect of indorsement that does not comply with the provision: The transfer is not necessarily void. It remains valid,
not as a negotiation, but as a mere assignment which subjects the holder to all defenses on the instrument.
The provision does not prohibit a transaction where the indorsee pays the indorser less that the face amount of the
instrument, title transferring to the indorsee. This is called a discount of the instrument.
o There is no splitting of the cause of action for it belongs wholly to the purchaser who buys at a discount.
o The discount is given in consideration of the period during which the purchase has to wait before he can cash
the instrument with the maker or acceptor, which can be done only at the maturity of the instrument.
6. Kinds of indorsements
Sec. 33. Kinds of indorsement. - An indorsement may be either special or in blank; and it may also be either restrictive or
qualified or conditional.
a. Basis of classification
Where only the signature of the indorser appears, it is called a blank indorsement.
Where indorsements contain additional words which modify the rights of subsequent holders or the liabilities of the
indorser, they are classified into special, restrictive, qualified, and conditional.
Note: The provision does not provide for one classification scheme.
Special or in blank Has to do with the future mode of negotiation, whether by indorsement and
delivery or by delivery alone
Restrictive or non-restrictive Has to do with the kind of title transferred
Qualified or unqualified Has to do with the scope of the liability assumed by the indorser
Conditional or unconditional Has to do with the presence or absence of express limitations put by the
indorser upon the primary obligor’s privileges of paying the holder
Sec. 34. Special indorsement; indorsement in blank. - A special indorsement specifies the person to whom, or to whose
order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further negotiation of
the instrument. An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and
may be negotiated by delivery.
Sec. 40. Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer, is indorsed specially, it
may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such
holders as make title through his indorsement.
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“Pay X or order,” followed by the signature of the indorser. so indorsed is payable to bearer, and may be negotiated by
In either case, the indorsement of the special indorsee is delivery. Thus, where only the signature of the indorser
necessary for the further negotiation of the instrument. appears, with no indication of the person to whom it is
payable it is a blank indorsement, and further negotiation
of such instrument may be effected by mere delivery
regardless of whether the instrument is on its face payable
to bearer or not.
Note: It is not as safe as a special indorsement.
Illustration: A makes an instrument payable to bearer and delivers it to B, who in turn negotiates and delivers it to C. C
indorses it specially to D, who in turn indorses it specially to E. E however negotiates it to F by mere delivery.
A bearer (B)
(maker) (no indorsement)
C
Pay to D
(sgd.) C
Pay to E
(sgd.) D
(no indorsement by E)
F
A person who negotiates by mere delivery is liable only to his immediate transferee. A special indorsee however is
liable to 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. Thus:
o B is liable only to and not to D, E, and F.
o C and D, the special indorsers, are not liable to F who does not take his title through their indorsements.
o C is however liable to both D and E because they take title through his indorsement.
o D is liable only to E, since the latter is the only one who takes through his indorsement.
o E is of course liable to F.
Sec. 35. Blank indorsement; how changed to special indorsement. - 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.
Thus, the holder may write his name above the signature of the indorser in blank, thus converting the indorsement
into a special one, rendering it negotiable by indorsement and delivery, unless it is upon an originally bearer
instrument.
c. Qualified indorsement
Sec. 38. Qualified indorsement. - A qualified indorsement constitutes the indorser a mere assignor of the title to the
instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar
import. Such an indorsement does not impair the negotiable character of the instrument.
An indorser by his indorsement impliedly enters into two contracts. If he wants to relieve himself of either contract
he must do so in clear and express terms.
A qualified indorsement rould still be a negotiation and the transferee would still be a holder capable of acquiring a
title free from defenses of prior parties. The only effect is to relieve the qualified indorser of his liability to pay the
instrument should the maker be unable to pay at maturity.
o He does not guarantee the solvency of the maker, but merely his legal title to the instrument.
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o The qualification has no effect on the negotiability of the instrument and it may be further negotiated with the
same freedom as if it had not been so indorsed.
Fay v. Witte
Witte indorsed a note to Fay before maturity. Fay filed the action due to non-payment. Witte argues that he is not liable
as he is a qualified indorser. The Court held that he was an unqualified indorser that was liable for the non-payment.
Under the NIL, there is no implied qualified indorsement. The words “without recourse” or other words of similar
import must be used. In the indorsement signed by Witte, no such words were used. The payee’s name being on the back
of the note gives rise to the presumption that he is an unqualified indorser, unless there are words expressing a different
intention.
Conditional indorsement
● Unconditional or absolute indorsement: Every indorser is liable to pay the instrument on two implied
conditions: (1) that due demand or presentment be made on the party primarily liable on the date of maturity,
and (2) that should the party primarily liable fail to pay on such presentment, a notice of dishonor be promptly
sent to the indorser.
● Conditional indorsement: An additional express condition is annexed to the indorser’s liability. Such condition
does not impair the negotiability of the instrument and is binding upon all holders subsequent to the conditional
indorsement. Example: indorsement by payee to X “if he marries before the age of 25.”
Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the party required to pay the instrument may
disregard the condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or not. But
any person to whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of
the person indorsing conditionally.
● An indorsee who does not fulfill the condition on or before the date of maturity cannot compel the maker to pay
him.
● The maker, if he chooses, may disregard the condition and pay the holder. Reason: The maker has the right to
terminate his liability on the date agreed by him and cannot be burdened with conditions which were not part of
his contract.
Restrictive indorsement
Sec. 36. When indorsement restrictive. - An indorsement is restrictive which either: (a) Prohibits the further negotiation of the
instrument; or (b) Constitutes the indorsee the agent of the indorser; or (c) Vests the title in the indorsee in trust for or to the
use of some other persons. But the mere absence of words implying power to negotiate does not make an indorsement
restrictive.
Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A restrictive indorsement confers upon the indorsee the right: (a)
to receive payment of the instrument; (b) to bring any action thereon that the indorser could bring; (c) to transfer his rights as
such indorsee, where the form of the indorsement authorizes him to do so. But all subsequent indorsees acquire only the title of
the first indorsee under the restrictive indorsement.
Examples:
● “Pay to X” = not restrictive.
● “Pay to X only” = restrictive, for it prohibits further negotiation of the instrument.
● “Pay to X for collection” = restrictive, for it makes the indorsee an agent to collect in behalf of the indorser.
● “Pay to X for Y’s use” = restrictive, for it vests the title of the indorsee in trust for or to the use of some other
person.
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NEGOTIABLE INSTRUMENTS • PROF. JACINTO • CAROLINO, COSTALES, DELA CRUZ & ORACION • E2018
Examples:
● “Pay to X Bank for deposit” = generally held to be a restrictive indorsement wherein the bank obligates itself as
the depositor’s collecting agent, assuming no responsibility beyond care in selecting correspondents.
● “Prior indorsements and/or lack of indorsements guaranteed” = generally non-restrictive since it does not
indicate that the bank obligates itself as a collecting agent. However, if such statement appears in the deposit
slip filled up by the holder, the bank obligates itself as a collecting agent.
● “For payee’s account only” = restrictive (?), for it requires that the check be deposited in a bank in which the
payee has an account.
Sec. 41. Indorsement where payable to two or more persons. - Where an instrument is payable to the order of two or more
payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others.
● Joint payees: Sec. 8(d). Example: “Pay to the order of X and Y.”
● Alternative payees: Sec. 8(e). Example: “Pay to the order of X or Y.”
● Joint payees or joint indorsees who are partners (Sec. 41): This provision must be interpreted in the light of our
civil law concept of partnership, which states that a partnership is a juridical person. Thus, if an instrument is
intended to be negotiated to X and Y as partners, then the indorsement must name such firm as indorsee, and
not X and Y as joint payees or indorsees. Example: “Pay to the order of X or Y Co.”
Unindorsed instruments
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.
The transferee of an unindorsed instrument acquires the defenses and equities available among the prior parties, but he
cannot be considered a holder or a bearer. He may only be considered a holder by obtaining the indorsement of his
transferor. This indorsement is generally considered to be unqualified.
Cancellation of indorsements
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.
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NEGOTIABLE INSTRUMENTS • PROF. JACINTO • CAROLINO, COSTALES, DELA CRUZ & ORACION • E2018
● If an instrument is payable to the bearer on its face, then any indorsements on the back of the instrument are
immaterial to the title of the bearer, who is presumptively the owner and holder by his mere possession of such
instrument.
● If the instrument is payable to order on its face, special indorsements appearing on the back of the instrument
are necessary to the holder’s title and cannot be struck out.
Indorsement by agent
Sec. 44. Indorsement in representative capacity. - Where any person is under obligation to indorse in a representative capacity,
he may indorse in such terms as to negative personal liability.
The authority of the agent need not be in writing. Upon signing, the agent should make it plain that he is merely signing
in behalf of the principal, otherwise he may be held personally liable. Example of indorsement by agent: “X by Y, agent.”
Presumption as to indorsements
Sec. 45. Time of indorsement; presumption. - Except where an indorsement bears date after the maturity of the instrument,
every negotiation is deemed prima facie to have been effected before the instrument was overdue.
Sec. 46. Place of indorsement; presumption. - Except where the contrary appears, every indorsement is presumed prima facie
to have been made at the place where the instrument is dated.
Sec. 42. Effect of instrument drawn or indorsed to a person as cashier. - Where an instrument is drawn or indorsed to a person
as "cashier" or other fiscal officer of a bank or corporation, it is deemed prima facie to be payable to the bank or corporation of
which he is such officer, and may be negotiated by either the indorsement of the bank or corporation or the indorsement of the
officer.
Examples:
● “Pay to Cashier, XYZ Corporation” = there is a rebuttable presumption that the instrument is payable not to
the officer personally, but to his corporation.
● “Pay to Treasurer of the town of X” = payable to the town, which is the real payee. But generally the term
“corporation” in Sec. 42 does not include cities and towns.
Sec. 47. Continuation of negotiable character. - An instrument negotiable in its origin continues to be negotiable until it has
been restrictively indorsed or discharged by payment or otherwise.
● Overdue instrument: retains its negotiability until it has been restrictively endorsed so as to prohibit further
negotiation.
Other cases
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NEGOTIABLE INSTRUMENTS • PROF. JACINTO • CAROLINO, COSTALES, DELA CRUZ & ORACION • E2018
recourse” provision. Since the 15 checks were dishonored, an obligation on the part of Great Asian arose from the four
contracts, and that obligation is to pay Bancasia the full value of the checks, including the stipulated penalty and
attorney’s fees. The Court also explained that a negotiable instrument may be assigned instead of being negotiated.
Since in discounting of receivables the assignee is subrogated as creditor of the receivable, the endorsement of the
negotiable instrument becomes necessary to enable the assignee to collect from the drawer. This is particularly true with
checks because collecting banks will not accept checks unless endorsed by the payee. The purpose of the endorsement is
merely to facilitate collection of the proceeds of the checks.
Sec. 52. What constitutes a holder in due course. - A holder in due course is a holder who has taken the instrument
under the following conditions:
Yang v. CA
Yang and Chandimari entered into an agreement that the latter would issue to the former a manager’s check in
exchange for two checks that Yang has payable to the order of David. Yang delivered her part of the agreement but did
not receive anything in return. Chandimari was able to get hold of the checks and deliver them to David. Yang filed a
complaint seeking the return of the value of the instruments she delivered.
SC: Every holder of a negotiable instrument is presumed to be a holder in due course. This is especially true if one is a
holder because he is the payee or indorsee of the instrument, as in this case. Given the circumstances, David had no
obligation to ask Chandiramani how he acquired possession of the checks. He was not privy to the transaction between
Yang and Chandiramani. David is not guilty of gross neglect amounting to legal absence of good faith, absent any
showing that there was something amiss about Chandiramani’s acquisition of the checks.
The fact that a holder is not in due course will in no way affect the negotiability of the instrument. It only affects
such holder’s rights, and does not necessarily prevent subsequent holders from acquiring the status of due course
holder.
(1) He can acquire a better title than his predecessors because he takes the instrument free from any defect of title
of prior parties.
Sec. 57. Rights of holder in due course. - A holder in due course holds the instrument free from any defect of title of prior
parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument
for the full amount thereof against all parties liable thereon.
Sec. 58. When subject to original defense. - In the hands of any holder other than a holder in due course, a negotiable
instrument is subject to the same defenses as if it were non-negotiable. But a holder who derives his title through a
holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights
of such former holder in respect of all parties prior to the latter.
Sec. 191. Definition and meaning of terms. - In this Act, unless the contract otherwise requires:
"Value" means valuable consideration
“Value” and “consideration” are generally convertible terms. However, they may have different implications:
o When the payee of a note sues the maker, or the payee of a bill sues the drawer, or an indorsee sues his
immediate indorser, the term “consideration” is the more proper term to use.
o Where a holder sues any part to the instrument with whom he himself has not dealt, the term “value” is the
more proper term to use.
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NEGOTIABLE INSTRUMENTS • PROF. JACINTO • CAROLINO, COSTALES, DELA CRUZ & ORACION • E2018
Sec. 24. Presumption of consideration. - Every negotiable instrument is deemed prima facie to have been issued for a
valuable consideration; and every person whose signature appears thereon to have become a party thereto for value.
Sec. 25. Value, what constitutes. — Value is any consideration sufficient to support a simple contract. An antecedent or
pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future
time.
If negotiable instrument was given as a gift – whatever defenses can be set up against the transferor can also be set
up against the transferee
If negotiable instrument was given for a valuable consideration (and other requisites of Sec. 52 are present) – the
transferee will be free from such defenses
Note: Value need not be full and a holder will be one for value even if he gave less than the face value of the
instrument, provided that intention of the transferor is to transfer the full amount represented by the instrument.
Question: When the holder of a check deposits it with his bank (assuming it is not the drawee bank) and the bank
credits it to his account, is the bank at this stage a holder for value?
Majority: No. The bank has parted with nothing. The crediting is a mere bookkeeping entry.
o The bank become a holder for value only when the depositor withdraws the amount of the deposited instrument.
And where such withdrawal takes place before maturity an before the bank receives notice of any defense on the
instrument, the bank is a holder in due course against whom such defense would be unavailable.
Question: How can one determine whether the funds represented by the deposited instrument have been
withdrawn?
Majority: The first money in is presumed to be the first money paid out.
Minority: As long as the balance in the depositor’s account equals or exceeds the amount of the
instrument deposited, the latter cannot be considered as withdrawn for the purpose of treating the
bank as a holder for value.
Sec. 26. What constitutes holder for value. - Where value has at any time been given for the instrument, the holder is
deemed a holder for value in respect to all parties who become such prior to that time.
If A (maker) issues a note to B (payee) without consideration – B indorses it to C without consideration – C indorses
it to D for value, then D is a holder for value not only as against C, but also as against A and B.
If A (maker) issues a note to B (payee) without consideration – B indorses it to C for value – C indorses it to D
without consideration, then D is a holder for value as against A and B, but not as against C.
The mere fact that the present holder paid nothing for a note or is not a holder for value does not preclude recovery,
but only lets in all defenses if any, that might be urged against the original payee.
Sec. 27. When lien on instrument constitutes holder for value. — Where the holder has a lien on the instrument arising
either from contract or by implication of law, he is deemed a holder for value to the extent of his lien.
If a negotiable instrument is given as a collateral for a debt, the holder has a lien on the instrument.
o If the amount called for by the instrument < principal debt secured by the instrument, then the pledgee is a
holder for value of the full amount and may therefore recover all.
o If the amount called for by the instrument > principal debt secured by the instrument, and there are no existing
defenses among prior parties, then the pledgee is a holder for value only to the extent of the lien but may still
recover all, holding the excess merely as a trustee.
This is in conformity with the general rule against splitting the cause of action under Sec. 32, NIL.
o If the amount called for by the instrument > principal debt secured by the instrument, AND there are existing
defenses among prior parties of which the pledgee had no knowledge, then the pledgee is a holder for value only
to the extent of the lien and may recover only the amount of the debt.
Note: The above principles should not be confused with the rights of a purchaser who buys the instrument at a
discount. Such purchaser is entitled to recover the full amount although he paid less for the instrument.
v. Burden of proof
Sec. 24. Presumption of consideration. - Every negotiable instrument is deemed prima facie to have been issued for a
valuable consideration; and every person whose signature appears thereon to have become a party thereto for value.
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NEGOTIABLE INSTRUMENTS • PROF. JACINTO • CAROLINO, COSTALES, DELA CRUZ & ORACION • E2018
Whether or not the words “for value received” appear in an instrument is immaterial. In their absence, the
presumption fills in the gap. On the other hand, their presence will not preclude evidence to show lack of
consideration. The presumption is prima facie and may be rebutted by proof to the contrary.
Sec. 28. Effect of want of consideration. - Absence or failure of consideration is a matter of defense as against any person
not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an
ascertained and liquidated amount or otherwise.
The holder must have taken the instrument in good faith and 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.
Note: Due course holding is not affected by the holder’s acquisition of knowledge after he has taken the instrument.
Sec. 55. When title defective. - The title of a person who negotiates an instrument is defective within the meaning of this
Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful
means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount
to a fraud.
Sec. 56. What constitutes notice of defect. - To constitutes 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.
In order to constitute notice, (1) the holder must have actual and not merely constructive knowledge of the defect, or
(2) he must have acted in bad faith.
Gross negligence in itself would not constitute notice. Anything short of either actual knowledge or bad faith will not
constitute notice.
Bad faith, being a state of mind, can only be proven by circumstantial evidence. The question of good faith or bad
faith thus is a question of fact which must be determined in accordance with the particular circumstances of each
case.
General rule: Negligence in tracking down a suspicious circumstance which would put a prudent man on inquiry is
not of itself sufficient, though it may properly be admitted, together with other circumstances, as evidence of bad
faith.
o Exception: Where the suspicious circumstances are so cogent and obvious that to remain passive would amount
to bad faith, the holder will be subject to defenses.
There is a difference between the existence of suspicious circumstances and actual suspicion of the purchaser. If he
does in fact suspect and fails to make investigation lest is disclose a defense, he is not a purchaser in good faith.
“A blundering fool may, therefore, be found to have acted in good faith, though under like circumstances a shrewd
businessman might be deemed to have acted in bad faith.”
In order to show that the defendant had “knowledge of such facts that his action in taking the instrument amounted
to bad faith” it is not necessary to prove that the defendant knew the exact fraud that was practiced upon the
plaintiff by the defendant’s assignor, it being sufficient to show that the defendant had notice that there was
something wrong about his assignor’s acquisition of title, although he did not have notice of the particular wrong
that was committed.
Bad faith may under certain circumstances be imputed from knowledge of the purchaser of other suspicious
transactions of the transferor.
o E.g., knowledge of the indorsee that the payee had previously sold to other parties worthless chattels similar to
those sold to the defendant is admissible to show bad faith
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NEGOTIABLE INSTRUMENTS • PROF. JACINTO • CAROLINO, COSTALES, DELA CRUZ & ORACION • E2018
New Sikatuna Wood requested for a loan from Spouses Chua. Latter issued post-dated crossed checks in favor of former.
Thereafter, New Sikatuna Wood sold checks to SIHI, which upon deposit were dishonored. SIHI filed an action for
collection against the Spouses Chua.
SC: Effects of crossing a check: (1) the check may not be encashed but only deposited in the bank; (2) the check may be
negotiated only once—to one who has an account with a bank; (3) the act of crossing the check serves the 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. The subject checks were crossed generally and
issued payable to NSW which could only mean that the drawer has intended the same for deposit only by the rightful
person. Consequently, no right of recourse is available to SIHI against Spouses Chua considering that NSW is the proper
party authorized to make presentment of the checks in question.
De Ocampo v. Gatchalian
Manuel purported himself to be selling the car of De Ocampo. Manuel advised Gatchalian to draw a check of P600.00
payable to De Ocampo so that Manuel may show it to De Ocampo and that Manuel in the meantime will hold it for
safekeeping. Gatchalian agreed and gave Manuel the check. Meanwhile, Manuel gave the check to his wife who in turn
gave the check to De Ocampo as payment of her bills with the clinic.
SC: De Ocampo is not a holder in due course for his lack of good faith. De Ocampo should have inquired as to the legal
title of Manuel to the said check. The fact that Gatchalian has no obligation to De Ocampo and yet he’s named as the
payee in the check should have apprised De Ocampo; that the check did not correspond to Manuel’s wife’s obligation with
the clinic because of the fact that it was for P600.00 – more than the indebtedness; that why was Manuel in possession of
the check – all these gave De Ocampo the duty to ascertain from the holder Manuel Gonzales what the nature of the
latter’s title to the check was or the nature of his possession.
Reason for this rule: To protect the general buying public from finance companies.
General rule: Purchase of an instrument at a discount does not, of itself, constitute bad faith.
Merritt executed a $300 note to Vaughan, representative of the Southern Hospital Association, who was selling its stock.
Vaughan then assigned the note to Brunson, who sold it to Ham for $100 only. Ham now brings this suit against Merritt
to recover upon the note. Merritt’s testimony shows that the note was obtained from her through fraud. The issue was
whether Ham was a bona fide purchaser, without notice. Held: The fact that the note was sold for so small an amount,
standing alone, it is not sufficient to show that Ham is not a bona fide purchaser. There is no other evidence that Ham
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NEGOTIABLE INSTRUMENTS • PROF. JACINTO • CAROLINO, COSTALES, DELA CRUZ & ORACION • E2018
had any notice of infirmity. He is therefore a bona fide purchaser and should be allowed to recover.
Doctrine: The mere fact that a purchaser takes the note at a large discount is not sufficient, standing alone, to constitute
bad faith under Section 56 of the NIL.
General rule: Notice of defenses to a purchaser before he has acquired title and before he has paid any portion of the
purchase price prevents him from being a holder in due course.
Sec. 54. Notice before full amount is paid. - Where the transferee receives notice of any infirmity in the instrument or
defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he
will be deemed a holder in due course only to the extent of the amount theretofore paid by him.
The word “paid” under Section 54 includes any performance by the purchaser, such as:
● The payment of money.
● The giving of credit.
● The assumption of obligations.
● The rendition of services.
● The transfer of title to property.
● The performance of any other promise.
What if the purchaser pays the remainder despite receiving the notice of infirmity? He cannot recover such amount
from the maker because, to that extent, the purchaser is subject to the defenses the maker may have.
Sec. 29. Liability of accommodation party. - An accommodation party is one who has signed the instrument as maker,
drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other
person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of
taking the instrument, knew him to be only an accommodation party.
The accommodation party is a surety for the principal debtor. The title of the holder for value is not impaired by his
knowledge that the party sought to be held liable merely is an accommodation maker. Hence, the accommodation maker
can’t refuse to pay on the ground of such knowledge.
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NEGOTIABLE INSTRUMENTS • PROF. JACINTO • CAROLINO, COSTALES, DELA CRUZ & ORACION • E2018
Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument is materially altered without the assent of
all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the
alteration and subsequent indorsers.
But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the
alteration, he may enforce payment thereof according to its original tenor.
Effects of alteration:
Alteration is apparent on the face of the instrument.. Alteration is apparent and material.
The purchaser is put on inquiry as to all defenses and The holder is not a holder in due course.
equities.
Bad faith found on the face of the instrument Bad faith where the evidence relies on extrinsic
circumstances
Purchaser is put on inquiry as to all defenses and equities Putting the purchaser on inquiry would hamper the main
function of negotiable instruments
Miles City Bank filed an action to recover on a $5,000 check issued by the respondent and drawn on Bank of Baker.
Miles City Bank cashed the check and paid it to J.W. Clark, without first sending the check to Bank of Baker for
collection. The check payment was stopped by the issuer. Held: Miles City Bank was negligent for encashing the check
without sending the same through collection first, which is not the usual and ordinary course of business. Moreover, the
alteration on the check was so obvious as to impart notice to the plaintiff, that failure to take notice amounted to bad
faith and gross negligence.
Doctrine: If the circumstances surrounding the presentment of the check were sufficient to have cause suspicious of its
apparent alterations and infirmities, failure to take notice thereof constitutes bad faith so as to overcome the legal
presumption that one is a holder in due course.
Non-acceptance Non-payment
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NEGOTIABLE INSTRUMENTS • PROF. JACINTO • CAROLINO, COSTALES, DELA CRUZ & ORACION • E2018
Drawee refuses to accept the order of the drawer as stated Maker or acceptor fails to pay at the date of maturity
in the will
Date of maturity:
● For instruments payable after sight: Fixed by the date of presentment.
● For instruments with a suspensive condition: Fixed by the happening of the event.
● For instruments with fixed maturity but subject to acceleration: Fixed by the date of maturity for the purpose of
determining whether a purchaser is a holder in due course, unless such purchaser had knowledge of an earlier
maturity at the time he acquired title.
Sec. 53. Where person not deemed holder in due course. - Where an instrument payable on demand is negotiated on an
unreasonable length of time after its issue, the holder is not deemed a holder in due course.
1. Nature of the instrument: Which instrument generally lasts longer depending on its function? Demand
certificate of deposit > demand note > demand bill of exchange > check.
2. Usage of trade or business: Usage must be both general and local.
3. Facts of the case
4. Payment of interest
Other rules:
● For instruments with undated indorsement: Presumed negotiated before overdue.
● For instruments purchased after maturity: Remain negotiable and retain their commercial attributes. The
purchaser takes the instrument subject to all defenses and equities.
Shidler, Winchester, and Galbeath executed three installment notes payable to CCP in consideration of insurance
premiums. CCP negotiated these notes to Bliss to secure the payment of one of CCP’s notes ($5,000) in which CCP was
the maker and Bliss was the holder. CCP soon became insolvent and bankrupt. CCP defaulted on the payment of its
$5,000 note held by Bliss, so the latter sued Shidler, Winchester, and Galbeath on their notes. There was an issue of
whether Bliss was a holder in due course, considering that the first installment of one of the notes was unpaid. Held:
Court remanded the case for further proceedings, ruling that the lower court had to figure out whether the transferee
had notice of the unpaid installment.
Doctrine: A transferee of an installment note is a holder in due course as to the installments to mature in the future
when the transfer is made after one or more but not all of the installments are due on its face, unless the past due
installments have not in fact been paid, and he has notice of that fact. He is put on inquiry that there may be some
defenses against it, and he cannot be a holder in due course.
Chiang Yia Min allegedly remitted $100,000 to the Philippines through Pacific Banking Corporation to RCBC Makati, to
be used by him to qualify as a foreign investor under Philippine laws. However, the money was sent to RCBC Shaw and
was subsequently withdrawn by way of checks issued in favor of Papercom and Tom Pek. Chiang filed a complaint
against RCBC, Papercom, and Tom Pek claiming that he did not allow the opening of the account at RCBC Shaw and
that he did not authorize its withdrawal. Held: The opening of the account and the withdrawal were authorized by
Chiang Yia Min. Chiang failed to show that Papercom and Tom Pek colluded to defraud him.
Doctrine: The person who alleges fraud or negligence must prove it, because the general presumption is that men act
with care and prudence. Good faith is always presumed and it is the burden of the party claiming otherwise to adduce
clear and convincing evidence to the contrary.
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Pierce v Carlton
M.J. Carlton and others issued three promissory notes payable to Crawford & Ceas for an amount of $2100. The notes
were dated February 11, 1913 and payable on June 1, 1914, June 1, 1915, and June 1, 1916 respectively. The payee
indorsed the notes in blank, which the plaintiff bought for $1800, allegedly without notice or knowledge of any infirmity
affecting the notes. Plaintiff then sold and delivered the notes to his brother Thomas for $2100. However, he bought
them back in June 1915 for the same amount as there was a dispute about the notes. Defendants manifested that the
plaintiff had actually aided the payees in procuring the notes fraudulently and had knowledge of the infirmity the first
time he acquired them. Judgment was rendered against Pierce.
SC: The general rule is that one who acquires title from a holder in due course may recover, though he may have had
notice of the infirmity when he acquired the instrument from such holder. However, if the note was invalid between the
maker and the payee, the latter cannot be a bona fide holder even if he acquires the same from a holder in due course. In
this case, although his brother Thomas was a holder in due course, the plaintiff already had knowledge of the infirmity
of the notes at the time he acquired them for the first time. A holder who reacquires from a holder in due course and
who, at the time he first held title had knowledge of the defense of a prior party, is disqualified from obtaining the rights
of a holder in due course.
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NEGOTIABLE INSTRUMENTS • PROF. JACINTO • CAROLINO, COSTALES, DELA CRUZ & ORACION • E2018
1. In General – Liability of signatories to a NI depends on whether there are existing defenses or claims of
ownership on it.
a. Kinds
i. Real defenses – available against all holders, including HDCs. These attach to the instrument
itself and generally disclose an absence of one of the elements of a contract or where the
admitted contract is void for all reasons of public policy.
ii. Personal defenses – can be raised only against those not HDCs. A true contract exists but for
some reason, such as fraud, the defendant is excused from the obligation to perform.
b. Two kinds of claims of ownership (a.k.a. equities)
i. Legal title – One who has legal title to the instrument may recover possession even from a
HDC.
ii. Equitable title – May not recover its possession from a HDC but may recover from one who is
not a HDC.
Sec. 57. Rights of holder in due course. - A holder in due course holds the instrument free from any defect of title of prior
parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument
for the full amount thereof against all parties liable thereon.
Sec. 58. When subject to original defense. - In the hands of any holder other than a holder in due course, a negotiable
instrument is subject to the same defenses as if it were non-negotiable. But a holder who derives his title through a
holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights
of such former holder in respect of all parties prior to the latter.
If a holder is not in due course, the general rules on contract apply and there will be no need to distinguish
between real or personal defenses because the assignee cannot acquire a better title than his transferor.
Sec. 55. When title defective. - The title of a person who negotiates an instrument is defective within the meaning of this
Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful
means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount
to a fraud.
Real defenses – forgery (23, NIL), incapacity (22), fraud in the execution, some types of duress, and lack of
delivery of an incomplete instrument (15).
Personal defenses – those mentioned in Section 55, want of consideration (28), incompleteness of the instrument
(14), and lack of delivery of a complete instrument (16).
2. Incapacity
Sec. 22. Effect of indorsement by infant or corporation.- The indorsement or assignment of the instrument by a
corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or
infant may incur no liability thereon.
Should a minor indorse a NI, although he cannot be held liable on his contract of indorsement, title to the
instrument passes to the indorsee who can rightfully recover from the maker, free from the defense of minority
and other personal defenses if he is a HDC.
Minority is a real defense available ONLY to a minor and not a personal defense which may be availed of other
than such minor. The same rules apply to a corporation which has no capacity to indorse under its charter.
Insane or demented persons, deaf-mutes who do not know how to write – such incapacitites are real defenses
likened to vitiated consent.
o Why? Sections 60, 61, 62, 65, 66 – the maker, drawer, acceptor and indorser admit the capacity of the payee
to indorse and hence cannot set up such incapacity as a defense.
Murray v. Thompson, et al.
Murray was injured while in the employ of a brick company and was paid $1,750 as damages. The note was to mature on
June 1, 1915, the date on which he would attain majority but his father later sold the note to respondent Thompson
without informing him the he was not the payee. Father and son received the payment and invested in a saloon business
but lost. The court ruled that the contract of indorsement of a minor is not void and the indorsee has a right to enforce
payment from all parties prior to the infant indorser. The incapacity of the minor cannot be availed of by prior parties.
However, the words “passes the property therein” cannot mean to deprive the infant of the right to disaffirm and recover
the note from the possession of the indorsee who takes with constructive notice of the incapacity.
3. Illegality
Generally a personal defense not available against HDCs.
Such a contract is equivalent to an inexistent contract in the NCC for having an illegal cause.
On the other hand, the NIL provides that although a NI may have been issued for an illegal
consideration, only the parties involved in the illegality and subsequent parties who are not HDCs can
be adversely affected by such defect.
Example: Although a gambling note may be unenforceable between the original parties because of
illegal consideration, it is valid and enforceable in the hands of a HDC who can recover the full amount
from the maker.
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NEGOTIABLE INSTRUMENTS • PROF. JACINTO • CAROLINO, COSTALES, DELA CRUZ & ORACION • E2018
This is a situation where, although the contract lacks the essential element of a lawful cause or
consideration (NCC), the NIL treats the defect as a defense only available against those NOT HDCs.
The NCC and NIL are not inconsistent since they deal with different situations.
A statute may declare a contract void in which case the defense of illegality becomes real.
Rodriguez v. Martinez
Martinez issued a check payable to Montalvo in consideration of a gambling debt. Montalvo subsequently indorsed it to
Rodriguez, who did not have any knowledge of the underlying transaction for which the check was executed. When
Martinez refused to pay, Rodriguez filed a case for collection against him. The Court held that as a holder in due course,
Rodriguez could recover the full amount of the check despite it being issued for an illegal consideration.
Although a gambling note may be unenforceable between the original parties by reason of illegal consideration, it is valid
and enforceable in the hands of a holder in due course, who can recover its full amount against the maker.
4. Forgery
a. In general –
Sec. 23. Forged signature; effect of. - When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor,
or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the
party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.
Under Section 23, forgery is a real defense. A person whose signature was forged was never a party and never
consented to the contract, thus he cannot be held liable, not even by a HDC.
The fact that a holder is a HDC is immaterial since there is no true maker or drawer of the instrument.
Sec. 18. Liability of person signing in trade or assumed name. - No person is liable on the instrument whose signature
does not appear thereon, except as herein otherwise expressly provided. But one who signs in a trade or assumed name
will be liable to the same extent as if he had signed in his own name.
Illustration: A makes a note payable to B. B indorses it specially to C, and later it was stolen by D. D forges C’s
signature and sells the note to E. E indorses if to F, a HDC.
F cannot go against A or B because his rights against them were cut off by the forged signature of C. Neither
can he go against C because C has no privity with him unless C is guilty of estoppels.
He may go against E, a general indorser, who warranted the genuineness and validity of the instrument at the
time of indorsement. C also has a right against A and B because he is the real owner and his rights were not affected by
the forgery.
C may recover possession of the instrument from F even if the latter is a HDC because F has no right to retain
the instrument and should surrender it to the rightful owner, C, who may enforce it against A or B.
Section 23 does not avoid the instrument but only the forged signature.
If the instrument is originally payable to bearer, the effects of a forged instrument will be different.
o The holder can enforce a forged instrument against the drawer or maker because he can cancel the
forged instrument as not being necessary to his title (48, NIL)
o However, if the forged note is subsequently indorsed and the holder is not able to recover from the
maker, he may have a right of recourse against his immediate indorser on his warranty.
The burden of proving the genuineness of a signature is on the person claiming such.
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NEGOTIABLE INSTRUMENTS • PROF. JACINTO • CAROLINO, COSTALES, DELA CRUZ & ORACION • E2018
account of Virginia and not from North Star’s corporate account. The Court held Cayanan civilly liable on the checks, as
he was not able to refute the presumption under Sec. 24, NIL that the same were issued for valuable consideration.
In the absence of evidence to the contrary, it is presumed that checks were issued for valuable consideration, which may
consist either in some right, interest, profit or benefit accruing to the party who makes the contract, or some forbearance,
detriment, loss or some responsibility, to act, or labor, or service given, suffered or undertaken by the other side. Under
the Negotiable Instruments Law, it is presumed that every party to an instrument acquires the same for a consideration
or for value. The burden of proof is on the person who alleges otherwise.
Mendoza v. Fermin
In the testate proceedings of her father’s estate, Aurora discovered a Deed of Absolute Sale conveying her father’s
property in Paranaque to one Eduardo C. Sanchez. She filed a case for annulment of the Deed and the corresponding
TCT on the belief that her father’s signature thereon was forged. The Court held that the preponderance of evidence was
in her favor. In comparing Leonardo’s specimen signatures and the questioned signatures, it found that the latter were
awkwardly made. Questionable circumstances also surrounded the sale itself.
The general rule is, forgery cannot be presumed and must be proved by clear, positive and convincing evidence; the
burden of proof of which lies on the party alleging forgery. The best evidence of a forged signature in the instrument is
the instrument itself reflecting the alleged forged signature. The fact of forgery can only be established by comparison
between the alleged forged signature and the authentic and genuine signature of the person whose signature is theorized
upon to have been forged.
Sec. 62. Liability of acceptor. - The acceptor, by accepting the instrument, engages that he will pay it according to the
tenor of his acceptance and admits:
(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the
instrument; and
(b) The existence of the payee and his then capacity to indorse.
Since the acceptor admits the genuineness of the drawer’s signature, he is precluded by Section 23 from denying
liability based on forgery.
If he accepts the instrument and then subsequently learns of the forgery before he has paid it, he cannot refuse
payment. Neither can he recover what he paid under Section 62.
Prevailing views dictate that whether or not a drawee has accepted the instrument and subsequently paid it, he
cannot recover because he is bound to know the drawer’s signature.
Section 62 applies to both to accepted and non-accepted bills.
Exceptions:
1. (Price v. Neal) – The drawee can recover if a person is guilty of fraud or negligence in obtaining the bill or if
he did not give value therefor. The drawee can also recover from the one who bought the instrument from a
known forger.
2. A purchaser who took from a complete stranger without making inquiries which would have revealed the
forgery is guilty of negligence and cannot retain the proceeds of the forged bill.
Price v. Neal
Neal sold two bills (and indorsed one) to Price, who paid a valuable consideration for both. It was later discovered that
the instruments were forged. There was no drawer at all, and the forger was hanged, so Price filed an action against
Neal. Neal was found to be innocent and bona fide. There was neglect on the part of Price, so he was barred from
recovering from Neal.
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NEGOTIABLE INSTRUMENTS • PROF. JACINTO • CAROLINO, COSTALES, DELA CRUZ & ORACION • E2018
In a case of a misfortune which has happened without the defendant’s fault or neglect, and without neglect also on the
plaintiff’s part, there is no reason to throw off the loss from one innocent man upon another innocent man.
SC: PNB induced PCIB, not only to believe that the check was genuine and good in every respect, but, also, to pay its
amount to Lim. PNB was the primary or proximate cause of the loss, and, hence, may not recover from PCIB.
Doctrine: Actual payment of the amount of a check implies not only an assent to said order of the drawer and a
recognition of the drawer’s obligation to pay the aforementioned sum, i.e., acceptance, but, also, a compliance with such
obligation. The prevailing view, therefore, is that Sec. 62, NIL (liability of acceptor) applies in the case of a drawee who
pays a bill without having previously accepted it.
Recall:
General rule: Money paid under a mistake may be recovered.
Exception (Price v. Neal): The drawee who pays an accepted bill or a non-accepted bill, which bears the forged
signature of the drawer could not recover the money paid out on either bill.
o The drawee is bound to know the signature of the drawer and must therefore bear the loss in case it
turns out to be forged.
Exception to the exception: A person guilty of fraud or negligence in obtaining the bill, or who had not given
value therefor, has no right to retain the money paid to him by the drawee of a forged bill.
o Thus, the drawee can recover from the forger or from one who bought from a known forger.
(1) OVERDRAFT (doctrine extended to cover the drawee of a bill who honors an overdraft)
Overdraft – occurs when a check is issued for an amount more than what the drawer has in deposit with the
drawee bank.
It is the drawee’s duty before accepting or paying the bill to find out whether he owed the drawer that amount;
on the other hand, the payee or holder had no means of knowing what the actual account of the drawer was, and
he had the right to assume that the drawee would not accept or pay the bill unless he had sufficient funds of the
drawer to cover it.
(2) STOP PAYMENT ORDER (doctrine extended to cover the drawee who pays the check despite the stop order)
Stop payment order – issued by the drawer of a check countermanding his first order to the drawee bank to pay
said check, i.e., the drawer is ordering the drawee bank not to pay the check issued by him.
The drawee bank is bound to follow the stop order, provided it is received prior to its certification or payment of
the check.
o If the stop order comes after the bank has certified or accepted the check, the bank is under legal duty
to pay the holder and will not be liable to the drawer for doing so.
Payment by the drawee bank despite the stop order is considered voluntary because it was under no legal
obligation to pay, and its negligence in paying precludes it from reclaiming the amount from a bona fide holder.
If the negligence of the depositor should delay discovery of the forgeries and this negligence should deprive the
bank of the opportunity to recover from the forger, the depositor would have to bear the burden of the loss and
cannot thereafter demand a re-crediting by the bank, i.e., the bank is freed from liability only if the proximate
cause of its wrongful payment is the negligence of the drawer, but not otherwise.
General rule: Price v. Neal doctrine not applicable in the case of the drawee’s acceptance or payment of a
genuine bill where only an indorsement has been forged. Thus, the drawee can recover the amount paid out by
him from the holder who received payment; he cannot, however, recover from the drawer should the latter be
insolvent.
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NEGOTIABLE INSTRUMENTS • PROF. JACINTO • CAROLINO, COSTALES, DELA CRUZ & ORACION • E2018
Exception: Where the negligence of the drawee bank is the proximate cause of a collecting bank’s payment of a
check with a forged instrument, the former may be held liable to the latter bank.
o Where both the drawee and collecting banks are guilty of negligence, the degree of negligence of each
will be weighed in considering the amount of loss which each should bear.
SC: Great Eastern ordered the HSBC to pay Melicor, and the money was actually paid to Maasim and was never paid to
Melicor, and he never paid to Melicor, and he never personally endorsed the check, or authorized any one to endorse it
for him, and the alleged endorsement was a forgery. Thus, HSBC is liable. However, HSBC may recover from PNB for it
was the latter’s duty to know whether or not Melicor’s indorsement was genuine before cashing the check. PNB’s remedy
is against Maasim to whom it paid the money.
Doctrine: Where a check is drawn payable to the order of one person and is presented to a bank by another and purports
upon its face to have been duly indorsed by the payee of the check, it is the duty of the bank to know that the check was
duly indorsed by the original payee, and where the bank pays the amount of the check to a third person, who has forged
the signature of the payee, the loss falls upon the bank who cashed the check, and its only remedy is against the person
to whom it paid the money.
SC: Considering that Jai Alai indorsed the checks when it deposited them with BPI, the former as an indorser
guaranteed the genuineness of all prior indorsements thereon. BPI which relied upon Jai Alai’s warranty should not be
held liable for the resulting loss.
Doctrine: Under Sec. 67, NIL (liability of indorser where paper negotiable by deliver), “Where a person places his
indorsement on an instrument negotiable by delivery he incurs all the liability of an indorser,” and under Sec. 66, NIL
(liability of a general indorser), a general indorser warrants that the instrument “is genuine and in all respects what it
purports to be.”
SC: It is only the negotiation based on the forged or unauthorized signature which is inoperative. Thus, negotiation from
(1) to (2) inoperative; while negotiation from (2) to (3) and from (3) to (4) are valid. Bank has the remedy to recover from
Ebrada who, as the last indorser of the check, warranted that she has good title to it.
Doctrine: The drawee of a check can recover from the holder the money paid to him on a forged instrument. This is
because the indorser is supposed to warrant to the drawee that the signatures of the payee and previous indorsers are
genuine. One who purchases a check or draft is bound to satisfy himself that the paper is genuine and that by indorsing
it or presenting it for payment or putting it into circulation before presentation he impliedly asserts that he has
performed his duty and the drawee who has paid the forged check, without actual negligence on his part, may recover
the money paid from such negligent purchasers.
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