I.

TRANSFER OF NEGOTIATION
A promissory note may be a negotiable instrument if it is an unconditional
promise in writing made by one person to another, signed by the maker, engaging to pay
on demand to the payee, or at fixed or determinable future time, certain in money, to
order or to bearer.
However, If an instrument is said to be negotiable, it may be transferred through (a)
Negotiation, (b) Assignment, (c) By operation of law.
1. Negotiation
- When a negotiable instrument is transferred by negotiation, the transferee
becomes the holder of the instrument.
-May either be by indorsement completed by delivery or by mere delivery.
2. Assignment
-Method of transferring a non-negotiable instrument whereby the assignee is
merely placed in the position of the assignor and acquires
the instrument subject to all defenses that might have been setup against
the original payee.
3. By operation of Law
The title passes by operation of law in the following cases:
(a) By the death of the holder, where the title vests in his personal representative
(b) The bankruptcy of the holder, where the title vests in his assignee
(c) Where the holder is an unmarried woman, on her subsequent marriage the title
vests in her husband
(d) Upon the death of a joint payee or indorsee in which case the general rule
is that the title vests at once in the surviving payee or trustee

Distinction between Negotiation and Assignment

Mode of Transfer
 Negotiation- can be effected by mere delivery or endorsement followed by
delivery
 Assignment- is always done in writing

Consideration
 Negotiation - is normally presumed.

-The endorsee is not required to prove that he has obtained the

instrument for consideration
  Assignment-consideration is not presumed

-The assignee has to prove that he has obtained the instrument for
consideration.
Suit against
 Negotiation-an assignee cannot sue for the third party in his own name.
 Assignment-A transferee can sue the third party

Governing Act
 Negotiation-is regulated by the Negotiable Instruments Act, 1881.
 Assignment-is regulated by the Transfer of the Property Act.

II. NEGOTIATION
1. Issuance
It is the first delivery of the instrument complete in form to a person who takes it
as a holder (NIL, Sec. 191)

NOTE: Issuance to the payee is negotiation because the transfer

constitutes the payee the holder of the instrument (AQUINO, Negotiable
Instruments, supra at 96)
It can be inferred from the definition of the word “issue” that delivery is the final
act essential to the consummation of the instrument as an obligation. Without
delivery, the instrument cannot be deemed as issued (AQUINO, Negotiable
Instruments, supra at 97)
STEPS:
 Mechanical act of writing the instrument completely and in
accordance with the requirements of Sec. 1; and
 The delivery of the complete instrument by the maker or drawer to
the payee of holder with the intention of giving effect to it (DE
LEON, Negotiable Instruments Law)

2. Subsequent Negotiation
An instrument is negotiated when it is transferred from one person to another in
such a manner as to constitute the transferee the holder thereof (NIL, Sec. 30)

o If payable to bearer a negotiable instrument may be negotiated by

mere delivery
 o If payable to order, a negotiable instrument may be negotiated by
indorsement completed by delivery.

3. Indorsement
Is the writing of the name of the indorser on the instrument with the intent either to
transfer the title to the same, or to strengthen the security of the holder by assuming a
contingent liability for its future payment, or both.

III. INDORSEMENT

HOW INDORSEMENT ARE MADE:

The indorsement must be written:
1. On the instrument itself, or;
2. Upon a paper attached thereto (allonge). The signature of the indorser without
additional words is sufficient.
Where the indorsement is written in an allonge, the same must be tacked or pasted on
the instrument so as to become part of it; otherwise, it cannot be considered, an allonge.
The signature of the indorser, without any additional words, is a sufficient indorsement.
Indorsement may be made in any form, as long as it is meant to be an indorsement.

HOW INDORSEMENT WRITTEN?

• Means must show that there is indorsement
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 only of the amount payable, or which purports to transfer
the instrument to two or more indorsees severally, does not operate as a negotiation of
the instrument. But where the instrument has been paid in part, it may be indorsed as to
the residue.
MAY ALLONGE BE USED WHERE THERE IS ROOM ON INSTRUMENT
FOR INDORSEMENT?
• It has been held that the use of an allonge is allowable only when
there is a physical impossibility of writing the indorsement on the
instrument itself, and an indorsement on a separate piece of paper where there is
sufficient space on the instrument for indorsement will be considered as a mere
assignment and not a negotiation.
NATURE: An indorsement is not only a mode of transfer, it is also a contract.

INDORSEMENT AS A CONTRACT:
Unless the indorsement is qualified every indorser is a new obligor and the terms are
found on the face of the bill or note with the additional obligation that if the instrument
is dishonored by non-payment or non-acceptance, and notice was given to the indorser
the latter will pay for it.

NATURE OF AN INDORSEMENT:
•It is not only a mode of transfer
•It is also a contract
• Every indorser is a new drawer and the terms are found on the face of the bill or note
• The indorsement of the bill or not implies an undertaking from the indorser to
the person in whose favor it is made and to every other person to whom the bill or
note may afterwards be transferred, exactly similar to that which is implied by
drawing a bill except that, in the case of drawing a bill, the stipulations with
respect to the drawer’s responsibility and undertaking don't apply
• The general indorser in effect, states to every person who follows him—this
instrument will be paid by the maker, if a note, or accepted the drawee or paid by the
acceptor, if a bill. If it is dishonored by non-payment or non-acceptance, and you give
me notice thereof, I will pay it.

WHERE THE INDORSEMENT IS WRITTEN

 The indorsement may be written on the instrument itself or upon a
paper attached thereto.
 Allonge: paper attached to the instrument

INDORSEMENT MUST BE OF THE WHOLE INSTRUMENT

• The general rule is that the instrument must be of the entire instrument
• Accordingly, an indorsement of a part of the instrument doesn’t operate as a
negotiation thereof.

EFFECT OF PARTIAL INDORSEMENT

• It doesn't operate as an indorsement
• It may constitute a valid assignment though binding between the parties
• The person to whom the instrument is indorsed would not be considered an
indorsee but merely an assignee and would therefore take the instrument subject
to the defenses available between the original parties

EXCEPTION
• But where the instrument has been paid in part, it may be indorsed as to the
residue

TRANSFER TO TWO OR MORE INDORSEES SEVERALLY

• An indorsement which purports to transfer the instrument to two or
more indorsees severally, doesn't operate as a negotiation of the instrument

Example:
Where the indorsement of the check was only for a part of the amount payable, it
is not legally negotiated within the meaning of Section 32, which provides that the
indorsement must be an indorsement of the entire instrument. An indorsement which
purports to transfer to the indorsee a part only of the amount payable doesn't
operate as a negotiation of the instrument. Montinola may therefore be not regarded
as an indorsee. At most he may be regarded as a mere assignee of the P30,000 sold to
him.
In which case, as an assignee, he is subject to the defenses available to the drawer
Provincial Treasurer. 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.

KINDS OF INDORSEMENT
1. Special
2. Inblank
3. Absolute
4. Conditional
5. Restrictive
6. Qualified
7. Joint
8. Successive
9. Irregular
10.Facultative

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.
SPECIAL AND BLANK INDORSEMENT
HOW FURTHER NEGOTIATED
1. Where the instrument is originally payable to order and it is negotiated by the
payee by special indorsement, it can be further negotiated by the indorsee of the
instrument completed by delivery.
2. Where the instrument is originally payable to order and it is negotiated by the
payee in blank indorsement, it can be further negotiated by the holder by mere
delivery. The reason is that the effect of a blank indorsement is to make the instrument
payable to bearer.
3. Where the instrument is originally payable to bearer, it can be further
negotiated by mere delivery, even if the original bearer negotiated it by special
indorsement.
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.

APPLICATION OF SECTION 35
•Suppose that A makes a note with B as payee. It is indorsed as follows:
 (Indorsement in blank) (Sgd.) B.
• Delivery was then made to C. C may place above the signature of B, “Pay to C.” so as
to make the indorsement thus:
 Pay to C.
(Sgd.) B.
•This converts the blank indorsement to a special indorsement

LIMITATION UPON CONVERSION OF BLANK INDORSEMENT

• Holder must not write any contract not consistent with the indorsement,
that is, the contract so written must not change the contract of the blank indorser
• The following has been held to be inconsistent with the contract of blank
indorsement—“pay to X and Y”, “Demand and notice waived”, “I guaranty payment”,
“Without Recourse”
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.

PROHIBITION OF FURTHER NEGOTIATION

1. Pay to C only
2. Pay to C and no other person

INDORSEE AGENT OF THE INDORSER

• Known as the agency-type of indorsement

“Pay to C for collection”

(Sgd.) B
• Hence, any action the indorsee may file is subject to defenses available against
the indorser such as lack of consideration

• Thus, where the proof tends to show that the plaintiff holds the draft for collection
only, and that the acceptance of it by defendants was conditional, and that after
such an acceptance, the defendants refused to accept the goods evidenced by the
draft, which were returned to and accepted by the plaintiff, who agreed to release
the defendants from any liability, plaintiff thereafter cannot recover

INDORSEMENTS FOR DEPOSIT

• An indorsement for deposit constitutes the indorsee the agent of the indorser
• “Pay to C for deposit (Sgd.) B”—such an indorsement, like an indorsement for
collection, constitutes a relation of title in the depositor in the absence of any
practice or agreement to the contrary
• In any event, a restrictive indorsement of an instrument for collection or deposit,
or to the use of the indorser and for his benefit, in the absence of any other
circumstances, will not divest the indorser of his title thereto until the money is paid.
• Indorsements for deposits are usually informal..

PRESUMPTION OF CONSIDERATION IN RESTRICTIVE INDORSEMENTS

• As a general rule, an indorsement of a negotiable bill which purports to pass the
title to the bill to the indorsee, imports a consideration and the burden of proving
want of consideration rests upon the party alleging it.
• The restrictive indorsements which are held to negative the presumption
of a consideration are such as to indicate that they are intended to pass title but
merely to enable the indorsee to collect for the benefit of the indorser, such as
indorsements “for collection” or others showing that the indorser is entitled to the
proceeds.
• But an indorsement to one person for the use or benefit of another, affords no
such indication. The indorser parts with the whole title to the bill and the presumption
is that he done so for a consideration.
• The only effect of such an indorsement, by way of restriction, is to give notice of the
rights of the beneficiary named in the indorsement and protect him against
misappropriation.

EFFECT OF OMISSION OF WORDS OF NEGOTIABILITY

• The mere absence of words of negotiability doesn't make the indorsement
restrictive
• While the omission of words in the indorsement doesn't affect negotiability of
the instrument, such omission in the body thereof will render the instrument non-
negotiable

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.

RESTRICTIVE INDORSEE MAY RECEIVE PAYMENT

• A restrictive indorsement confers upon the indorsee the right to receive the
payment of instrument.

RESTRICTIVE INDORSEE MAY BRING AN ACTION

• A restrictive indorsement confers upon the indorsee the right to bring any action
thereon that the indorser could bring.
• In a restrictive indorsement “for deposit”, can the indorsee such as B in the
illustration, bring an action against the indorser, such as A? Yes if the indorser received
value for said indorsement.

RESTRICTIVE INDORSEE MAY TRANSFER HIS RIGHTS

• It is stated in the interpretation of the clause in Section 47 declaring a paper
negotiable in its origin to continue negotiable until it has been restrictively
indorsed, is that the words “until it has been restrictively indorsed” don't contemplate
every restrictive indorsement but a restrictive indorsement that prohibits the
further negotiation of the instrument under subdivision 1 of Section 36
• Section 46 didn't mean to declare the effects of a restrictive indorsement but to
preserve as far as possible the negotiability of an instrument negotiable in its origin and
that the implication of Section
47 should not be taken as destroying negotiability of an instrument heretofore
universally accepted as negotiable

EXTENT OF NEGOTIABILITY AFTER RESTRICTIVE INDORSEMENT

• That all forms of restrictive negotiability impose some degree of limitation on
negotiability
• That they don't all impose the same degree of limitation
• That the indorsement itself discloses the extent of the limitation in the particular
case

LIMITATION ON TRANSFER OF RIGHT: ILLUSTRATION

• But all subsequent indorsees acquire only title of the first indorsee under the
restrictive indorsement
• Illustrations of this rule:
o In the indorsement, “pay to A for collection,” the rights of the
subsequent indorsees are subject to the restrictive
indorsement—namely, he can collect only for being a
restrictive indorsee, he acquires only the title of the first
indorsee whose right is merely to collect
o Suppose the P1000 note is indorsed as “Pay to B for deposit only.
(Sgd.) A” and that B owes Y P1000, B cannot transfer the note
to Y for said debt. Or suppose B transfers the note to another
person for P1000, B cannot use the P1000 for his own personal
expenses. He must safely keep the money for the benefit of A.
o “Pay to A for account of B”—gives notice that the instrument cannot
be negotiated by A for his own debt or benefit.

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.

HOW QUALIFIED INDORSEMENT IS MADE

• By adding to the indorser’s signature the words “without recourse”, “Sans
recours”, “indorser not holden”, or “with intent to transfer title only and not to incur
liability as indorser”, “at indorsee’s own risk”.
EFFECT OF QUALIFIED INDORSEMENT
• Constitutes the indorser a mere assignor of the title to the instrument
• One who indorses without recourse states that all parties to the paper are genuine; I
am the lawful owner of the paper and I have title to it and know of no reason why you
could not recover on it as a valid instrument, but on thing I don't guarantee; I
don't guarantee the financial responsibility on that paper but I do say that I hold the
title the same as any other personal property.

QUALIFIED INDORSER HAS LIMITED SECONDARY LIABILITY

• He is secondarily liable on his warranties as an indorser under Section 65, that is,
the qualified indorser is liable if the instrument is dishonored by non-acceptance or
non-payment due to:
1. Forgery
2. Lack of good title on the part of the indorser
3. Lack of capacity to indorse on the part of the prior parties
4. The fact that, at the time of the indorsement, the instrument was valueless or not
valid and he knew of that fact.

A QUALIFIED INDORSEMENT DOESN'T IMPAIR THE NEGOTIABLE

CHARACTER OF THE INSTRUMENT
Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the
party required to pay the instrument may disregardthe 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.

ABSOLUTE INDORSEMENT
• One by which the indorser binds himself to pay upon no other condition than
the failure of prior parties to do so and upon due notice to him of such failure

CONDITIONAL INDORSEMENT
• An indorsement subject to a contingent event, that is, an event that may or
may not happen, or a past event unknown to the parties
• Suppose a note for P1000 with A maker, and B payee. It is then indorsed as
follows “Pay to Y if he passes the bar examinations. (Sgd.) B”—this is a conditional
indorsement as Y may or may not pass the bar examination.

OBLIGATION OF CONDITIONAL INDORSEE

• Y indorsee holds the note or the proceeds thereof, if he is paid by A, subject to the
rights of B
• If A disregards the condition and pays Y without waiting for the condition to
be fulfilled, Y doesn't immediately acquire ownership of the sum
• Y must hold in trust while the condition is not fulfilled
• It is upon the fulfillment of the condition that such ownership over the proceeds of
the note is absolutely acquired by the conditional indorsee Y.

A CONDITIONAL INDORSEMENT DOESN'T RENDER AN INSTRUMENT

NON-NEGOTIABLE
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.

APPLICATION OF SECTION 40
• Section applies only to instruments which are originally payable to bearer.
• Cannot apply where the paper is originally made payable to order and indorsed in
blank; for by Section 9, a note or bill which is payable to order becomes payable only
when the last indorsement is in blank; and hence, when a blank indorsement is
followed by a special indorsement, the instrument is not within the terms of Section 9.
NEGOTIATION OFINSTRUMENT PAYABLE TO BEARER BUT SPECIALLY
INDORSED
• Where an instrument payable to bearer is indorsed, it may nevertheless be
further negotiated by delivery.
• An instrument which is originally payable to bearer is always payable to bearer.
• Hence, even when it has been specially indorsed, it is still payable to bearer.

EFFECT ON LIABILITY OF SPECIAL INDORSER

Pay P1000 to bearer
(Sgd.) A
*C is bearer and he delivered to D
*D specially indorsed it to E
*E specially indorsed it to F
*F delivered to G, bearer.
• Is D liable to G being the first who specially indorsed the instrument? No, because
G didn't take title through D’s indorsement but through delivery of D
• To whom D is liable? To E and F, because they acquired the title to the instrument
through the special indorsement of D. Had F merely indorsed the instrument to G,
D would be liable also to G for the same reason.

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.

HOW INDORSEMENT OF JOINT PAYEES MADE:

• Where the instrument is payable to two or more payees, all payees must each
indorse in order to negotiate the instrument.

• If only one indorses, he passes only his part of the instrument—such an indorsement
wouldn't operate as such because it would not be an indorsement of the whole
instrument.

• Exceptions to the rule:

1. Where the payee or person indorsing has authority to indorse for the others

2. Where the payee or indorsees are partners

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 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.

APPLICATION OF SECTION 42
Pay P1000 to the order of cashier, Lyceum of the Philippines.

(Sgd.) A

• Presumption is that the note is payable to Lyceum, not to the cashier personally
• And the note may be indorsed by any duly authorized officer of Lyceum other
than the cashier.

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.
HOW AGENT MUST INDORSE?
1. He must add words describing himself as agent
2. At the same time, disclose his principal
3. He must be duly authorized

WHEN NEGOTIABLE INSTRUMENT RENDERED NON-NEGOTIABLE

1. Restrictive indorsement which further prohibits the further negotiation of an
instrument.
2. By a discharge thereof by payment or otherwise.

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.

WHEN HOLDER MAY OR MAY NOT STRIKE OUT INDORSEMENT

• But where the instrument is transferred by special indorsement, the holder has
no right to strike out the name of the person mentioned in
such indorsement and insert his own name in place thereof; nor can he strike out
such name and convert such special indorsement into a blank indorsement
• The holder who acquires title subsequent to the succeeding special
indorsement must trace his title not only through the blank indorsement
but through the special indorsement as well.

EFFECT OF STRIKING OUT

1. The indorser whose indorsement is struck out is relieved from his liability on the
instrument
2. All subsequent indorsers are also relieved from their liability on the instrument.
Sec. 64 Liability of irregular indorser. - Where a person, not otherwise a party
to an instrument, places thereon his signature in blank before delivery, he is liable as
indorser, in accordance with the following rules:

(a) If the instrument is payable to the order of a third person, he is liable to the payee
and to all subsequent parties.

(b) If the instrument is payable to the order of the maker or drawer, or is

payable to bearer, he is liable to all parties subsequent to the maker or drawer.

(c) If he signs for the accommodation of the payee, he is liable to all parties
subsequent to the payee.
IRREGULAR INDORSER
• An irregular indorser is one who not otherwise a party to an instrument,
places his signature thereon his signature in blank before delivery.

IRREGULAR INDORSEMENT
• Its an indorsement in an unusual, peculiar, or singular manner.
• His name appears where he would naturally expect another name.

BEFORE DELIVERY
• It means the initial delivery
• Provision doesn’t apply if the signature was placed after delivery
TRANSFER AND
NEGOTIATION
REPORTED BY:

GROUP 1
Eljay Campita
Andrea Mae Alexis Dimayuga
Jasper Feliciano
Noel Oliver Maturingan
John Michael Rosales
Veronica Villena
Patricia Villamayor

BALM- 4B