67951124 Negotiable Instruments Law
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NEGOTIABLE INSTRUMENTS 2007 The common forms of negotiable instruments are : Promissory note, Bill of Exchan ge and Check. PROMISSORY NOTE (184): It is an unconditional promise in writing by one person to another signed by mak er engaging to pay on demand or at a fixed determinable future time,a sum certai n in money to order or bearer. It must be (1)in writing and signed by the maker (one who makes promise and signs instrumen t) (2)it must contain an unconditional promise to pay a sum certain in money (3)it must be payable on demand or at a fixed or determinable future time (4)it must be payable to order or to bearer Parties: 1.maker 2.payee (is party to whom promise is made or instrument is payable.) BAR: M who lives in Baguio desires to borrow P1000 from his friend P who lives i n Manila,payable within one year, with such interest as P may wish to charge. As sume that you are P s lawyer. Prepare a promissory note to be signed by M and inc lude in it such provisions as you believe will best protect your client s interest . HELD: Manila,August 10,2006 P1,000.00 One year from date, I promise to pay to P or order the sum of ONE THOUSA ND PESOS (P1000.00) with interest at 14% per annum, payable in advance ,with 10% of the amount due for costs of collection and attorney s fees in case of default. Presentment and notice of dishonor waived. (sgd) M Where note is payable to order: BAR: M makes a note payable to P or order. P indorses the note to A. X finds it. X indorses the note to B forging A s signature thereto. HELD: A whose indorsement is forged is not liable to B,whether B is a holder in due course or not. Being forged, indorsement is wholly inoperative. M and P are also not liable to B. BAR:M makes a note payable to the order of P. P indorses it to A. X obtained po ssession of the note fraudulently and indorses it to B by forging A s signature. B indorses to C --C cannot enforce instrument against M and P since C s right against them are cut off by the forged signature of A which is wholly inoperative. --C may go against B --C or B has a right of recourse against X,the forger. Where note is payable to bearer: Party whose indorsement is forged is liable to a holder in due course, but not t o one who is not a holder in due course. Other parties, including the maker prior to the party whose signature is forged ,may also be held liable by one who is not a holder in due course. BILL OF EXCHANGE (1-6): It is an unconditional order in writing addressed by one person to another, sig
Transcript of 67951124 Negotiable Instruments Law
NEGOTIABLE INSTRUMENTS 2007
The common forms of negotiable instruments are : Promissory note, Bill of Exchange and Check.
PROMISSORY NOTE (184): It is an unconditional promise in writing by one person to another signed by maker engaging to pay on demand or at a fixed determinable future time,a sum certain in money to order or bearer.It must be(1)in writing and signed by the maker (one who makes promise and signs instrument)(2)it must contain an unconditional promise to pay a sum certain in money(3)it must be payable on demand or at a fixed or determinable future time(4)it must be payable to order or to bearer
Parties: 1.maker 2.payee (is party to whom promise is made or instrument is payable.)
BAR: M who lives in Baguio desires to borrow P1000 from his friend P who lives in Manila,payable within one year, with such interest as P may wish to charge. Assume that you are P�s lawyer. Prepare a promissory note to be signed by M and include in it such provisions as you believe will best protect your client�s interest.HELD:
Manila,August 10,2006
P1,000.00One year from date, I promise to pay to P or order the sum of ONE THOUSA
ND PESOS (P1000.00) with interest at 14% per annum, payable in advance ,with 10% of the amount due for costs of collection and attorney�s fees in case of default. Presentment and notice of dishonor waived.
(sgd) M
Where note is payable to order:BAR: M makes a note payable to P or order. P indorses the note to A. X finds it. X indorses the note to B forging A�s signature thereto.HELD: A whose indorsement is forged is not liable to B,whether B is a holder in due course or not. Being forged, indorsement is wholly inoperative. M and P are also not liable to B.
BAR:M makes a note payable to the order of P. P indorses it to A. X obtained possession of the note fraudulently and indorses it to B by forging A�s signature. B indorses to C--C cannot enforce instrument against M and P since C�s right against them are cut off by the forged signature of A which is wholly inoperative.--C may go against B--C or B has a right of recourse against X,the forger.
Where note is payable to bearer:Party whose indorsement is forged is liable to a holder in due course, but not to one who is not a holder in due course.Other parties, including the maker prior to the party whose signature is forged ,may also be held liable by one who is not a holder in due course.
BILL OF EXCHANGE (1-6): It is an unconditional order in writing addressed by one person to another, sig
ned 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 bearer.It must be(1)in writing and signed by the drawer(2)must contain an unconditional order to pay a sum certain in money(3)it must be payable on demand or at a fixed or determinate future time(4)payable to order or bearer(5)drawee must be named or otherwise indicated with reasonable certainty.
Parties are:1.drawer is person who draws the bill, 2.drawee is party upon which the bill is drawn 3.payee is party in whose favor the bill is drawn or is payable.
Where bill is payable to order:Party whose signature is forged is not liable to any holder, even a holder in due course. The forged indorsement is wholly inoperative.--if the drawee (bank) pays under a forge signature, drawer is not liable on the bill and the drawee may not debit the drawer�s account--if checks are received merely for collection and deposit, the bank, as agent, cannot be expected to know or ascertain the genuiness of all prior indorsements.
Where bill is payable to bearer:Drawee may debit the drawer�s account inspite of the forged signature(indorsement). Since forged indorsement is not necessary to the title of the holder . Drawee cannot recover from the holder. Remedy of Drawer is to go against the forger. Payee is not bound to any of these (even if his signature is forged)
BAR:M is induced through simple fraud committed by P to issue a promissory note in favor of P. Here P is a party to the fraud. P indorsed the note to A. A has notice of the fraud but did not take part in it. By A, the note is indorsed to B, a holder in due course.B in turn, indorses the note to C who knows how the note was obtained but without being a party to a fraud.--even if C is not a holder in due course, he has all the rights of such holder in respect of M,P and A having derived his title from B, a holder in due course and the defenses of fraud cannot be set-up against him.--if instead of indorsing the note to C, B indorses it to P, payee, the latter cannot recover on the instrument since he is a party to the fraud.4blue 95: if the instrument is ambiguous such that there is doubt whether it is a bill or a note, the holder may treat it as a note or a bill at his option.4blue 95:where promissory note is signed by 2 makers, the payee of the note had the right to hold any one of the two signers of the promissory note responsible for the payment of the whole amount of the note.
GENERAL PRINCIPLES:
SEC1 � An instrument to be negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;* If the instrument was not in writing, there would be nothing to be negotiated or passed from hand to hand.* It must be signed ,as such valid �signatures� are: Thumbmarks, chops in the case of the Chinese, Koreans and Japanese and signatures of corporate officers printed through the use of a check-writing machine which is a common practice with companies.
Pay P10,000 to the order of Cristina for services rendered.BatMan
Would that be binding? If he intended the name BatMan to be his signature for that particular transaction, the signature would be binding.Remember: Whatever symbol is affixed in the instrument, if the party intended that to be his signature � that would be binding. Usually the signature of the maker and the drawer can be found in the bottom right hand corner. But the location is not really crucial. Even if the signature is incorporated in the body of the instrument, it would be valid. Example: I, Jose Cruz, promise to pay Ruel Santos or bearer P10,000.
(b) Must be payable on demand or at a fixed or determinable future time.So people or parties will know when the instrument or payment is due.
(c) Must be payable to order or to bearerTO BE NEGOTIABLE!These are the words of negotiability,w/o these it is not negotiable. If it�s payable to a specific person like the Kauffman vs. National Bank case:Pay to George A Kauffman, New York Philippine Fiber Produce Co., $45,000.(sgd.)National Bank, Manila==> then that is not negotiable. The party need not use the exact word �order�. He could use equivalent words like �pay to Jose Cruz or his indorsees� or �Pay to Jose Cruz or his assigns.� These are equivalent to �Jose Cruz or order.�It was held that a promise �to pay to order of bearer� is considered �pay to order� but that has been criticized because if it�s payable to the order of bearer, that�s payable to the bearer because who the bearer is the one will give the order to pay.The word �bearer� need not be used. You could use �holder� or �the possessor�. If it says �pay to bearer Jose Cruz� that is not payable to bearer because bearer here is merely descriptive of Jose Cruz. Same way if you say �pay to the novelist Jose Cruz�, �pay to the doctor Jose Cruz.�
(d) Where the instrument is addressed to a drawee, he must be named or otherwise indicated with reasonable certainty(BILL of EXCHANGE Only).This is so that people will know from whom they are supposed to demand payment.But if the name of the drawee is left blank, it is an incomplete instrument. It can be remedied by filling up.(e) Must contain an unconditional promise or order to pay a sum certain in money;If it is a promissory note, it must contain a promise to pay. * The words need not be exactly �I promise to pay.� Equivalent words like �I agree to pay� or �I will pay� will be sufficient. �Good for P10,000� or �Due, Jose Cruz, P10,000� wl imply a promise to pay. * An acknowledgment of a debt is not a promise to pay. For an acknowledgement is merely proof of a prior obligation, a promise to pay creates a new obligation.* However, an acknowledgment of a debt becomes a promise in two instances: (1) The date of payment is mentioned* Jimenez vs. Bucoy: I acknowledge being indebted to Jose Cruz for P10,000 payable one month after the end of the war.Manuel Santos* Since a date of maturity is mentioned, it is like a promise to pay.(2) If words of negotiability are mentioned* Example:I acknowledge to be indebted to Jose Cruz. Due to Jose Cruz or order, P10,000.Manuel Santos* The use of the words of the words of negotiability would imply a promise to pay.
If it is a bill of exchange, it must contain an order to pay.* The instrument need not use the exact word �pay�. It could say �I command to pay� or �I order you to pay� and it will be an equivalent to an order to pay.* An authority to pay is not an order to pay because it means that the person to whom it is being given is given only the discretion to pay or not to pay. So he has the option to choose not to pay(DAPAT walang OPTION)* A mere request to pay is likewise not an order to pay. Example:Please give Jose Cruz P10,000.Manuel Santos
But the mere use of words of civility would not detract from the nature of the promise. Example:Jose Cruz will oblige Manuel Santos by paying Pablo Ramos or order P10,000.
To Jose Cruz Manuel SantosThis means that Manuel Santos will consider himself indebted and obliged to Jose Cruz if Jose Cruz will pay Pablo Ramos. This is equivalent to an order to pay.
The promise or order must be unconditional.* If it is conditional then payment is not certain. If payment is not certain, it would be difficult to circulate that because people would not want to accept something where payment is unsure.* If the event is certain to happen but when it will happen is unknown, then that is not a condition but is a period. Example: Death.
Must be payable in moneyWhen you say payable in money, the denomination must be specified. �I will pay you 300 in English currency, 300 bucks, 300 pence, 300 pounds, 300 schillings.It is now valid to stipulate that �I will pay you in foreign currency.SEC2 � 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; orThe sum is certain even if it is with interest. As a rule, if the interest is not unconscionable, it is the rate stipulated by the parties. If the instrument provided for payment of interest but did not indicate the rate, then what will apply will be the legal rate which is 12% under Circular 416.
(b) By stated installments; For the amount to be certain, it must indicate:(1) The amount of each installment AND (2) The date when each installment will be due If it says:(1) �I promise to pay 10,000 in installments� � that is not negotiable. (2) �I promise to pay 10,000 in 10 installments� � that is not negotiable. You don�t know how much is the installment and when to be paid. (3) �I promise to pay to Jose Cruz or order in 10 monthly installments� � that is not negotiable. You don�t know how much each installment will be. (4) �I promise to pay 10,000 in 10 equal monthly installments starting November 15, 2001 and every 15th day of the month thereafter� � that is negotiable because you�ll know each installment will be P1000 and will be paid every 15th day of the month.
(c) By stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; orWhen there is a provision for payment in installments with an acceleration clause. That is, if any installment is not paid then the balance will become due and demandable. Under the law, it is expressly mentioned that that sum is certain.
(d) With costs of collection or an attorney�s fee, in case payment shall not be made at maturity.Under Article 2208, as a rule, attorney�s fees cannot be recovered. One exception is when there is a stipulation. In fact, a party will be more interested in taking an negotiable instrument which contains a payment for attorney�s fees if it is not paid than one which does not contain such a stipulation.Now suppose the promissory note says �I will pay reasonable attorney�s fees if this is not paid at maturity.� Will that be a negotiable? Yes, because in determining whether the sum payable is certain, the reckoning point is the date of maturity. If the amount payable before that or after that is uncertain, that is irrelevant. Thus, if you know on the date of maturity that this is the amount due that is negotiable. If the amount will become uncertain afterwards because of the attorney�s fees, this is irrelevant.
(e) With exchange, whether at a fixed rate or at the current rate; The current rate is the rate of exchange computed daily. The law presupposes that merchants are familiar with the rate of exchange. So when the instrument says �I will pay Jose Cruz P10,000 in United States currency on December 15, 2001 according to the rate of exchange on that day� � that would be valid because supposedly businessmen know what will be the rate of exchange.
SEC3 � 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; orA promise to pay is unconditional even if it is coupled with an indication of the particular fund out of which reimbursement is to be made or account to be debited.The fund is not the source of payment but merely the source of reimbursement. Example: It says �Pay Jose Cruz P10,000 and reimburse yourself from the proceeds of the sale of my shares of stock in San Miguel Corporation.� That is negotiable. The particular account to be debited is merely an instruction on how to make the entries in the books. �Debit my representation allowance.�
(b) A statement of the transaction which gives rise to the instrument.* A negotiable instrument is issued when there is an underlying contract � that is the consideration. So if it mentions the underlying contract which gives rise to its issuance, that will still be negotiable. * Example: �I promise to pay Jose Cruz pursuant to our deed of sale.� That is negotiable. * The reference to the contract will destroy negotiability if the obligation to pay becomes subject to the terms and conditions of the contract. Then it becomes conditional.* But suppose if you examine the contract you will find actually that the promise is still unconditional, will that make it negotiable? No. Because again your basic rule, negotiability is to be determined only by looking at the 4 corners of the instrument without looking at evidence aliunde. There you have to look into evidence aliunde to find out that it is negotiable.
But an order or promise to pay out of a particular fund is not unconditional.An order or promise to pay out of a particular fund is conditional because it presupposes and is subject to the condition that there are sufficient funds in the source of payment. Example: �I promise to pay Jose Cruz P10,000 from the proceeds of the sale of my shares in San Miguel Corporation.� That is not negotiable. This is why time and again the court has said that a treasury warrant is not a negotiable instrument because it is payable out of a particular fund. Under the Constitution, no money shall be paid out of the treasury unless there is an appr
opriation for that purpose. That�s why it is not a negotiable instrument.
Not Negotiable if :1.Pay out of certain fund (if for reimbursement then it is negotiable, but if for payment ,then ,not negotiable)2.stock certificates3.treasury warrant (since it is payable to particular fund)4.money order (not negotiable and it may only be indorse once)5.check payable to an undisclosed third party or person
6.payable to specified person (w/ no �order or bearer�)7.conditional �in consideration of� or that it contains terms and conditions8.debtor has option to pay (but if option is with creditor, then ,it is negotiable)4blue 95: if during the period of negotiation, the instrument states that it is to pay money plus do an act, then such is not negotiable.However, if act is after maturity and at option of holder, then it is valid (ex: get money or get car)
Sec. 5. Additional provisions not affecting negotiability. - An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. But the negotiable character of an instrument otherwise negotiable is not affected by a provision which:(a) authorizes the sale of collateral securities in case the instrument be not paid at maturity; or (b) authorizes a confession of judgment if the instrument be not paid at maturity; or (c) waives the benefit of any law intended for the advantage or protection of the obligor; or (d) gives the holder an election to require something to be done in lieu of payment of money.But nothing in this section shall validate any provision or stipulation otherwise illegal.
Sec. 6. Omissions; seal; particular money. - The validity and negotiable character of an instrument are not affected by the fact that: (a) it is not dated(presumed to be at date of issuance)(b) does not specify the value given, or that any value had been given therefor; or (c) does not specify the place where it is drawn or the place where it is payable; or (d) bears a seal; or (e) designates a particular kind of current money in which payment is to be made.But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument.
Sec. 7. When payable on demand. - An instrument is payable on demand: (a) When it is so expressed to be payable on demand, or at sight, or on presentation; or (b) In which no time for payment is expressed.Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand.
Sec. 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. 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. 12. Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery. Sec. 13.� When date may be inserted. - Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date.
Sec. 8. When payable to order. - The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of: (a) A payee who is not maker, drawer, or drawee; or (b) The drawer or maker; or (c) The drawee; or (d) Two or more payees jointly; or (e) One or some of several payees; or (f)� The holder of an office for the time being.Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty.
Sec. 9. When payable to bearer. - The instrument is payable to bearer: (a) When it is expressed to be so payable; or (b) When it is payable to a person named therein or bearer; or (c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or 4blue95: non existing is when I knew him to be dead but it turned out he is alive ,ex:�pay to the estate of X�4blue95:it is fictitious if I knew it doesn�t exist however, if 1 party is in good faith & knows that such person exist (even though hinde!) then, it is not a bearer instrument anymore.
(d) When the name of the payee does not purport to be the name of any person; or (e) When the only or last indorsement is an indorsement in blank.
Order�-it is indorsement + deliveryBearer�it is delivery only
Sec1 + delivery makes the instrument complete/good in absence of one makes it incomplete.-- such is necessary not only to original contract but also to indorsement or acceptance.-- no rights will arise until it is delivered.--if interest charge depends upon the creditor,like the illustration in first page,then ,it is negotiable. Sec. 14. Blanks; when may be filled. Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up s
trictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time.
CLASSES OF HOLDERS
1.HOLDER IN DUE COURSEA holder in due course is a holder who has taken the instrument under the following conditions. (a) That it is complete and regular upon its face; (b) the he became the holder of it before it was overdue and without notice that it had been previously dishonored if such was the fact; (c) That he took it for value and in good faith; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.4blue 95:To constitute notice of defect in the title of the person negotiating the same, the person to whom it is negotiated must have actual knowledge of the defect, or knowledge of such facts that his action in taking the instrument amounts to bad faith.4blue 95: A payee can be a �holder in due course�. A holder is defined as the payee or indorsee of the instrument who is in possession of it. Every holder is deemed prima facie to be a holder in due course.
Rights of a holder in due course:Like any holder, a holder in due course may enforce the instrument and sue thereon in his own name.He also holds the instrument free from any defect of title of prior parties, free from defenses of prior parties among themselves, and he may enforce payment of the instrument for full amount thereof, against all parties liable thereon.The fact that the postdated checks were merely issued as security is not a ground for the discharge of the instrument as against a holder in due course. The only ground are those outlined in Section 119 of the Negotiable Instruments Law (State vs. CA, 217 SCRA 32)
Bar Question: Eva issued to Imelda a check in the amount of P50,000.00 postdated September 30, 1995, as security for a diamond ring to be sold on commission. On September 15, 1995. Imelda negotiated the check to MT Investment which paid the amount of P40,000.00 to her.Eva failed to sell the ring, so she returned it to Imelda on September 19, 1995. unable to retrieve her check, Eva withdrew her funds from the drawee bank. Thus, when MT Investment presented the check for payment, the drawee bank dishonored it. Later on, when MT Investment sued her. Eva raised the defense o absence of consideration, the check having been issued merely as security for the ring that she could not sell.Does Eva have a valid defense? Explain (1996 Bar)Suggested Answer: (U.P. Law Center) No, she does not have a valid defense. First. MT Investment is a holder in due course and, as such holds the postdated check free from any defect of title of prior parties and from defenses available to prior parties among themselves. Eva can invoke the defense of absence of consideration against MT Investment only if the latter was privy to the purpose for which the checks were issued and, therefore, not a holder in due course.
Sec 119:Discharge of Instrument:1.payment in due course or on behalf of principal debtor2.payment in due course by party accommodated3.intentional cancellation by the holder4.any act w/c discharge simple contract for payment of money5.principal debtor becomes holder of instrument at or after maturity in his own
right.
2. HOLDER NOT IN DUE COURSEA holder not in due course is one who became a holder of an instrument without any, some, or all of the requisites under Sec. 52 of the Negotiable Instruments Law.The only disadvantage of a holder who is not a holder in due course is that the instrument is subject to defenses as if it were non-negotiable (Bataan vs. CA, 230 SCRA 647)
Bar Question: Rolando, intending to buy a car, saw an old friend, who is an agent to sell the car belonging to Delgado Clinic. After negotiation. Rolando decided to buy said car. He drew upon request of Roger a crossed check for P600.00 payable to Delgado Clinic as evidence of his good faith, but which will merely be shown to Delgado Clinic by roger who received said check. The check would then be returned when Roger brings the car and its registration certificate for Rolando�s inspection.For failure of roger to bring the car and its certificate of registration, and to return the check, Rolando issued a �stop payment order to the drawee bank. In the meantime, Roger paid the check to the Delgado Clinic for the hospital bill of his wife and was given P158.25 as change. Delgado Clinic filed suit against Rolando to recover the value of the check. May Delgado Clinic be considered a holder in due course, hence, entitle to recover? Decide with reasons. (1977, 1962 Bar)Answer: No. Delgado Clinic cannot be considered a holder in due course and hence, cannot recover under the instrument.It will be noted from the problem that (1) the check is payable to Delgado Clinic, but drawn by Rolando, who had no account at all with Delgado Clinic (2) it was crossed check, meaning that it could only be deposited by its holder but could not be converted into cash (3) the check was used to pay the account, not of the drawer. Rolando, but of a third person, Roger and (4) the amount of the check was more than the amount paid to Delgado Clinic.All these circumstances should put Delgado Clinic to inquiry as to the whys and wherefores of the possession of the check by Roger and why Roger used it to pay for the account of his wife with Delgado Clinic, and the latter (Delgado clinic) not having done so, it was a holder with knowledge of the defect of title of the person negotiating the check. At least one of the requisites for a holder to be considered a holder in due course � that he has no knowledge of the defect of title of the person negotiating the instrument � is absent.Hence, Delgado Clinic is not a holder in due course � and therefore, not entitled to recover from Rolando, the drawer of the check.
Rights of HolderThe holder of a negotiable instrument may sue there under in his own name, and payment to him in due course discharges the instrument.If a promissory note is non-negotiable, subsequent holders can never be holders in due course, but are mere assignees against whom defenses may be raised by prior parties. (Consolidated vs. IFC, 149 SCRA 448).
Rights of Holder Not IN Due CourseA holder not in due course an enforce the instrument and sue under it in his own name. prior parties, however, even though remote, can avail against him any defense among these prior parties and prevent the said holder from collecting in whole or in par the amount stated in said in instrument.That a holder is not a holder in due course does not mean that he cannot recover under the instrument (State vs. IAC, supra)
DEFENSES OF PRIOR PARTIES AGAINST THE HOLDER
1.REAL OR ABSOLUTE DEFENSESA real or absolute defenses is a defense which attaches to the instrument irresp
ective of the parties and is predicated on the principle that the right sought to be enforced has never, existed or has ceased to exist.Examples of real defenses are: forgery or unauthorized signature; void contract; material alteration, incomplete and undelivered instrument.
Against Whom AvailableA real defense is available against all holders, whether in due course or not.
Bar Question: On April 1, 1954. �A� delivered to �B� the follwing document �I promise to pay to the order of �B� the sum of P1,000.00 on or before June 30, 1954 (Sgd) �A� Two weeks later, �B� endorsed and delivered the note to �X� �X� demanded payment from �A� whfused to pay alleging nullity of the note but adding �give me 10 days and I will pay.� Whereupon �X� immediately left and informed �B� accordingly.On July 15, 1954. �X� filed suit recover from �A� and �B� jointly and severally, the amount of the note. �A�s� defense is that the note is void. It representing money won in a game of chance (duly proved), while �B�s� defense for payment (so therefore he must be discharge from the instrument). How would you decide the case? State your reason fully but briefly (1955 Bar)Answer: The defense of �A� that the note is void because it represented money won in a game of chance which was proved, would have been a real defense available against all holders. However, by his telling �X� Give me 10 days and I will pay. �he is estopped from now alleging any defense to the enforcement of the note. Because of these circumstances, I submit �A� is liable to �X�The defense of �B� that he is discharged because �X� accepted an extension from �A� of 10 days, is not a valid defense as �B� by his failure to object to said extension after he was informed about it, refused said extension impliedly, and is deemed to have conformed to it. Hence, B is not discharged by said extension.
2.PERSONAL OR EQUITABLE DEFENSESA personal or equitable defense is a defense growing out of an agreement or conduct of a particular person in regard to an instrument which renders it inequitable for him, although owner of it, to enforce it against the defendant.Examples of personal defenses are: complete but undelivered instrument, delivered but incomplete instrument; absence or failure of consideration; defect of title.
Against Whom AvailableThe defense is available against all holders not in due course, except those who derive their rights from holders in due course and who are not parties to any fraud or illegality affecting the instrument.
Bar Question: �A� induces �B� by fraud to make a promissory note payable on demand to the order of �A� in the sum of P5000.00a) Can �A� file an action successfully against the maker �B� for the amount of the note? No. A, the payee of the promissory note who induced by fraud B to make the questioned promissory note, cannot successfully file an action against B. The fraud committed by A is a defense (personal defense), which B. under the law, is allowed to invoke against Ab) Going further � �A� transfers the note �C� who pays P5000.00 therefore and acquires the note under circumstances that make him C, a holder in due course. Can C file an action successfully against B, the maker of the note, for the amount of the note? C, who is a holder in due course of the note, can file an action successfully and collect against A. A holder in due course (like C in the problem), holds the instrument free form defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon (like B the drawer, in the problem)What defense/defenses can B interpose? Reasons. (1978 Bar)
The problem itself does not mention any circumstance which could be a possible defense against a holder n de course. If besides the facts mentioned in the problem. B can show that the fraud committed by A was fraud in factum, or misrepresentation as to the nature of the instrument or that the (B) lacked contractual capacity, these defenses, being real defenses, may prevent recovery against B, even if the instrument is in the hands of a holder in due course, like C, in the problem.
Bar Question: �A� issued a promissory note payable to �B� or bearer. �A� delivered the note to �B�. �B� indorsed the note to �C� �C� placed the note in his drawer, which was stolen by janitor �X�. �X� indorsed the note to �D� by forging �C�s� signature. �D� indorsed the note turn delivered the note to �F� a holder in due course, without indorsement. Discuss the individual to �F� of �A�, �B� and �C� (2001 Bar)HELD:As a general indorser, �B� is secondarily liable to �F�.�C� is liable to �F� since it is due to the negligence of �C� in placing the note in his drawer that enabled �X� to steal the same and forge the signature of �C� relative to the indorsement in favor of �D�. As between �C� and �F� who are both innocent parties, it is �C� w negligence is the proximate cause of the loss. Hence �C� should suffer the loss.
LIABILITIES OF PARTIES
PARTIES PRIMARILY LIABLE
1. Makera. Engages to pay according to the tenor of the instrument;b. Admits the existence of the payee and his capacity to indorse
2. Acceptor or the Drawee Who Accepts the Instrumenta. Engages to pay according to the tenor of his acceptance.b. Admits the existence of the drawer, the genuineness of his signature and his capacity and authority to draw the instrument.c. Admits the existence of the payee and his capacity to indorse.
Bar Question: A bill of exchange was delivered to a drawee for acceptance and he refused to accept it. Can he be held liable on said bill? Give your reason (1947 Bar)Answer: the drawee who has not accepted the bill of exchange is not a party to he instrument, and is therefore not liable, primarily or secondarily.It is a drawee�s acceptance of the bill which makes him primarily liable under it.
Bar Question: A check for Fifty Thousand (P50,000.00) Pesos was drawn against drawee bank and made payable to XYZ marketing order. The check was deposited with payee�s account at ABC Bank which then sent the check for clearing to drawee bank.Drawee bank refused to honor the check on ground that the serial number thereof had been altered.XYZ Marketing sued drawee bank.In instant suit, drawee bank contented that XYZ Marketing as payee could not sue the drawee bank as there was no privity between them. Drawee theorized that there was no basis to make it liable for the check. Is this contention correct? Explain (1999 Bar)Suggested Answer( U.P. Law Center): Yes as a general rule, the drawee is not liable under the check because there is no privity of contact between XYZ Marketing, as payee, and ABC Bank as he drawee bank. However, if the action taken by the bank is an abuse of right which caused damage not only to the issuer of the check but also to the payee, the payee has a cause of action under quasi-delict.
PARTIES WITH LIMITED LIABILITY
1. The Qualified Indorser
Bar Question: What are the warranties of a qualified indorser? (1946 Bar)
Answer: The warranties of a qualified indorser are: (a) that the instrumentis genuine and in all respects what is purports to be; (b) that he has good title to it; (c) that all prior parties had capacity to contract; (d) that he has no knowledge of any fact which would impair the validity of the instrument, or render it valueless.
2. Person Negotiating by Deliverya) Warranties �same as those of a qualified indorser;b) Warranties extend to immediate transferee only
Bar Question: A makes a promissory note payable t bearer and delivers it to B. In turn, B negotiates it by mere delivery to C, who endorses I especially to D. D negotiates it by special indorsement ot E who negotiates it to F by mere delivery. A did not pay. To whom are B, C, D, and E liable? Explain your answer. (1979 Bar)Answer: B is liable to C only for breach of any of the following warranties: (a) that the instrument is genuine and in all respects what it purports to be; (b) that he has good title to it. (c) that all prior parties had capacity to contract; and (d) that h has not knowledge of any fact which would impair he validity of the instrument and render it valueless.C, by virtue of his indorsement, is liable as a general indorser to D and E, only because the latter obtained their titles through C�s special indrosement. As C is a genera indroser, D and E can hold him liable to pay by reason of A�s non-payment, or by reason of breach of the warranties of a general indroser.D, because of his special indorsement, is liable as a general indroser to E, because the latter obtained his title through the said special indorsement of D. E can make D pay if A, the maker and party primarily liable, fails to pay or if D commits a breach of any of the warranties of a general indorser.E, is liable to F only if he (E) commits a breach of any of the warranties mentioned in the first paragraph hereof, if he does not breach any of said warranties, then he does not have any liability to F by the mere fact alone of A�s non-payment of the note
PARTIES SECONDARILY LIABLE
1. Drawera) Admits the existence of the payee and his capacity to endorseb) Engages that the instrument will be accepted or paid by the party primarily liable.c) Engages that if the instrument is dishonored and proper proceedings are brought, he will pay to the party entitled to be paid.
Bar Question: As payment for goods received. Masikap gave to Humimok on November 3, his check drawn on the Eternal Bank of Manila, On November 4, Humimok negotiated the check to Dr. Kahusayan in payment of dental work performed by the latter. On November 11, Kahusayan went to Eternal Bank to encash the check. He could not cash the check because on November 10, Central Bank had forbidden Eternal Bank to do business in the Philippines on grounds of insolvency. Masikap, Humimok and kahusayan all reside in Manila.a. Can Kahusayan hold Masikap liable on the uncashed check? Explain briefly.b. Can Kahusayan hold Humimok liable on the check? Explain briefly.c. Can Kahusayan still collect from Humimok for the dental work done on the latter? Explain briefly.d. Assume that Eternal Bank was not closed by Central Bank but simply refused to honor and encash the check. Can Kahusayan hold Masikap liable? Explain briefly (19869 Bar) Answer: (a) Kahusayan can hold Masikap liable on the uncashed check. The failure by Eternal Bank to honor the check, whatever may be its reason, amounts to a dishonor by the drawee. An immediate right of recourse in favor of the holder (Kahusayan) accrues against the parties who are secondarily liable and who are notif
ied of the dishonor. Masikap, the drawer of he check, is secondarily liable o the holder, Kahusayan, and therefore can be made to pay after the dishonor of his (Masikap�s) check by Eternal Bank.(b) Kahusayan can hold Humimok liable on the check. Assuming that Kahusayan prefers to run after Humimok, the latter is liable because as indorser he is secondarily liable to the holder, especially as in this case when the drawee. Eternal Bank, dishonor the check.(c) Kahusayan can still collect for dental work performed on Humimok. A check when used to pay an obligation does not produce the effect of payment unless it is encashed by the creditor, or deposited to his bank account which is eventually credited with the amount of the check.(d) Yes, Kahusayan can hold Masikap liable. Whatever may be the cause for the dishonor of the check by the drawee bank has no effect on the right of the holder to seek recourse for payment against anyone of the parties who is secondarily liable for payment against is notified of the dishonor; if as in this case, the check is dishonored by the drawee (Eternal Bank).
2. The irregular IndorserAn irregular indorser is one who affixes his signature in blank on an instrument before delivery.
Rules as to liability:1. Instrument payable to order of third person � irregular indorser liable to payee and to subsequent parties;2. Instrument payable to order of maker or drawer � he is liable to all parties subsequent to the maker or drawer;3. Irregular indorser signs for accommodation of payee � he is liable to all parties subsequent to the payee.
3. The General Indorsera) Warrants (1) the genuineness of the instrument, (2) his good title to it (3) he capacity to contract of prior parties, and (4) instrument is valid and subsisting.b) Engages that the instrument will be paid by the party primarily liable.c) Engages that if the instrument is dishonored, and proper proceedings are taken, he will pay to he party entitled to be paid.By reason of the statutory warranty of a general indorser in Section 65 of the Negotiable Instruments law, a collecting bank which indorsers a check bearing a forged indorsement and presents it to the drawee bank guarantees all prior indorsements, including the forged indorsement, it warrants that he instrument is genuine, and that it is valid and subsisting at the time of his indorsement. Because the indorsement is a forgery, the collecting bank commits a breach of this scheme operates without regard to fault on the part of the collecting/presenting bank. Even if the latter bank was not negligent, it would still be liable to the drawee bank because of its indorsement (Associated vs. CA, 252 SCRA 620).The collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the indorsements (ibid).Aside from its warranties as an indorser, the collecting bank is made liable because it is privy to the depositor who negotiated the check because it knows him, his address and history for being a client thereof. Thus, it is in a better position to detect forgery, fraud or irregularity in the indorsement. (Ibid)
Bar Question: �A� makes a promissory note payable to �B� or bearer. �A� delivers the note to �B�. �B� indorses the note to �C� �C� places the note in his wallet, which was stolen by �Xnding the note, indorses it to �D� by forging �C�s� signature. �D� indorses the note to �E�,n turn delivers the note to �F�, a holder in due course without indorsement.
What are the liabilities of �A�, �B� and �C� to �F�? Explain briefly (1981 Bar).Answer: A is primarily liable to F as maker of he bearer promissory note. A as maker, is the person to whom the holder of the note will have to make a presentment for payment on the date of maturity.B as indorser of the promissory note, is secondarily liable to F. this means that if the note is dishonored by A, he maker, when a presentment for payment is made by F t B, a right of recourse against B accrues in favor of F. F may thereafter present the note to V for payment, because B by then is already liable under the note.C, has no liability to F. as prior holder of the promissory note, his signature as indorser does not appear on the note. While it is true that the note, in spite of the special indorsement to him, can continue to be negotiated by mere delivery, the note being a bearer note, his liability as a party secondarily liable extends only to the person to whom he may have negotiated the note by mere delivery. As he (C ) is however sought to be secondarily liable under his indorsement, which however is forged then C can defend himself by stating that under the law, his signature is inoperative and no right to enforce payment o the instrument against him is acquired through or under his forged signature.
When Secondary Liability Attaches
Acts Needed Before Secondary Liability Attachesa) Presentment for payment in notes and presentment for acceptance and/or payment in bills of exchange;b) Dishonor by non-payment in notes and dishonor by non-acceptance and/or non-payment in bills of exchange;c) Notice of dishonor to secondary parties.
Bar Question: �X� draws a bill of exchange against �Y� in favor of �W� for P1000.00 requesting the drawee to pay on December 24, 1962. �W:� indorses the instrument to �P� on September 1 and on September 15 presents it for acceptance. The bill is dishonored. �P� promptly sues �W� for payment. Will the case prosper? Give reasons for your answer. (1963 Bar)Answer: No, the case will not prosper for the reason that no notice of dishonor, which is a prerequisite to enforcement against a secondary party, has been made by D, the holder, to W, who is a secondary party.
Bar Question: �A� draws a check in favor of �B� who indorses it, to �C� The bank refuses payment for lack of funds. Without further notice �C� filed a complaint against �A� and �B� for collection. What should be the decision? (1946 Bar)Answer: The case against �A� and �B� for collection should be dismissed.�A � the drawer, and �B� the payee-indorser, are parties secondarily liable under the instrument. Before this secondary liability can attach them, they should be informed of the dishonor. This prerequisite it appears, was not complied with by �C:, the holder.Hence, �C�s� suit for collection agaist �A� and �B�, and beiong premature for lack of noticef dishonor, should be dismisnissed.
Bar Question: A issued a promissory note to B in the following tenor �I promise to pay to the order of B P1,000.00 sixty days after date (Sgd) A�. The note was subsequently negotiated with prior indorsement to B to C to D, and E, the holder. When e presented the note for payment to a, the latter refused to pay. E then gave a notice of dishonor to C only.May E immediately proceed against B,C, and D? (1984 Bar)Answer: E, the holder, may proceed against C only, because it was to him that he gave the notice of dishonor. He (E) cannot proceed against B and D for his failure to notify them of the dishonor by non-payment. In order that C may protect his rights, he may, after receiving notice of dishonor from E, in turn give notice of dishonor to the prior parties A and B. it was no necessary to him C and D is therefore not liable to him C
Order in Which Indorsers LiableThey are liable in the order in which their indorsements appear in the instrument � the latter ones having a right of recourse against the prior ones.
Execution and Negotiation of the Instrument by Agents and Others
A. BY AGENTSRequisitesa) The agent must be authorizedb) He must disclose his principal.c) He must sign for and in behalf of his principalWhere an alleged agent affixed his signature to an instrument, without stating that he does so as representative of his principal, his liability is governed by Sec. 20 of the Negotiable Instruments Law, which provides that �where the instrument contains or a person adds to his signature words that he signs for or in behalf of a principal or in a representative capacity, he is not liable on the instrument, if he was duly authorized, nut the mere addition of words describing him as agent or as filling a representative character without disclosing his principal does not exempt him from personal liability (Phil Bank vs. Aruego, 102 SCRA 530).The negotiable Instruments Law provides that where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability. An agent, when so signing, should indicate that he is merely signing in behalf of th principal and must disclose the name of his principal; otherwise the shall beheld liable (Francisco vs. CA, 319 SCRA 354)
Signature per ProcurationA signature per procuration is one made by an agent with a limited authority to sign, and the principal is bound only if the agent acts within the limits of the authority.It is made by adding �per procuration�, �per proc.� Or �p.p� under the agent�s signature.
B. UNDER A TRADE NAME OR ASSUMED NAMEThe person signing his trade name or assumed name is liable as if the name where his own.
Indorsements by Minors and Disqualified CorporationMinors and disqualified corporations, although incapacitated to make or draw instruments, can negotiate instruments, transferring valid titles thereto, but are not liable as indorsers under the said signatures.
Bar Question: (1) X makes a promissory note for P500.00 payable to A, a minor to help him buy school books. A indorses the note to B, who in turn, indorses the note to C. C known A�s minority. If C sues X in the note, can X set up the defenses of minority and lack of consideration? (1998, 1989 Bar)Answer: X when sued by C on the note, cannot set up the minority of A as a defense., while a minor cannot make a promissory note for lack of contractual capacity, he (the minor) may however validly indorse the note and vest title in the transferee, however, the minor incurs no liability at all arising from his indorsement.
ACCOMMODATIONAccommodation is a legal arrangement under which a person called the accommodation party lends his name and credit to another called the accommodated party, without consideration. A person to whom the instrument is executed is subsequently negotiated, has a right of recourse against accommodation party inspite of the former�s knowledge that no consideration passed between the accommodation and accommodated parties.
Requisites of an AccommodationFor an accommodation to exist, the following must be present: (a) The accommodation party must sign as maker, drawer, acceptor or indorser, (b) No value is received by the accommodation party from the accommodated party; and (c) The purpose is to lend the name (Jose vs CA 177 SCRA 594).An accommodation party is one who has signed the instrument as maker, drawer, acceptor, rindorser, without receiving value therefore, and for the purpose of lending his name of another person. Bar Question: State the liability of the accommodation party (1952 Bar)Answer: The negotiable Instruments Law by clear mandate makers the accommodation party liable on the instrument to a holder for value notwithstanding hat such holder at the time of taking he instrument knew him to be only an accommodation party, it is not a valid defense that the accommodation party did not receive any valuable consideration when he execute the instrument. He is liable to a holder for value of his being an accommodation party.An accommodation party to a negotiable instrument, inspite o the lack of consideration between him and the accommodated party, is liable to any other holder not the accommodated party (Travel-On vs. CA, 210 SCRA 351)An accommodation party�s liability as a solidarily party is unconditional and is not affected by an extension of payment granted by the creditor to the debtor, however, where the holder allowed payments by the drawer direct to the contractor without availing of the deed of assignment in its favor, said holder is a bad faith holder, not a holder in due course against whom an extension to pay granted by the drawer is a defense by the accommodation party (Prudencio vs CA 143 SCRA 6)
Bar Question: To accommodate Carmen, drawer of a promissory note, Jorge signed as indorser thereon, and the instrument was negotiated to Ratify, a holder for value. At the time Raffy took the instrument, he knew Jorge to be an accommodation party only. When the promissory note was not paid, and Raffy discovered that Carmen had no funds he sued Jorge, Jorge pleads in defense the fact that he had indorsed the instrument without receiving value therefore, and the further fact that Raffy knew that a time he took the instrument Jorge had not received any value or consideration of any kind for his indorsement.Is Jorge liable? Discuss with reason (1996, 1990, 1975 Bar)Answer: Jorge is liable to Rafft. An accommodation party (like Jorge in the example) is liable on the instrument to a holder for value (which Raffy is) notwithstanding the fact that such holder at the time of the taking of the instrument knew him only to be an accommodation party.This is not only by express provision of the law, but also because the accommodated and the accommodation parties stand to each other as principal and surely such that if the accommodation party is made to pay the obligation, he can claim reimbursement from the accommodate party.
Bar Question: Juan Sy purchased from �A� Appliance Center one (1) generator set on installment with chattel mortgage in favor of the vendor After getting hold of the generator set. Juan Sy immediately sold it without consent of the vendor. Juan Sy was criminally charged with estafa.To settle the case extra0judicailly, Juan Sy paid the sum of P20,000.00 and for the balance of P5000.00, he executed a promissory note for said amount with Ben Lopez as an accommodation party. Juan Sy failed to pay the balance.a. What is the liability of Ben Lopez as an accommodation party? Ben Lopez as an accommodation party, is liable as maker to the holder up to the sum of P5000.00 even if he did not receive any consideration for the promissory note. This is the nature of accommodation. But Ben Lopez can ask for reimbursement form Juan Sy, the accommodated party.b. What is the liability of Juan Sy? (1993 Bar)Juan Sy is liable to the extent of P5000.00 in the hands of a holder in due coruse (Sec. 14. NIL) if Ben Lopez paid the promissory note, Juan Sy has the obligation to reimburse Ben Lopez for th
e amount paid. If Juan Sy pays directly o the holder of the promissory note, or he pays Ben Lopez for the reimbursement of the payment by the latter to the holder, the instrument is discharged. The liability of an accommodation party does not extend to corporate officers is ultra vires. However, these officers are personally liable (Jose vs. CA 177 SCRA 594).
Bar Question: On 1 June 1990. A obtained a loan of P100,000.00 from B payable not later than 20 December 1990. Since he does not have any checking account A, with the knowledge of B, requested his friend, Cm President of the Saad Banking Corporation. The By-laws of SAAD requires that checks issued by it must be signed by the president and the treasurer or the vice-president. Since the treasurer was absent. C requested the vice-president to co-sign the check, which the latter reluctantly did. The check was delivered to B; the check was dishonored upon presentment due date for insufficient funds. a. Is the SAAD Banking Corporation liable on the check as an accommodation arty? SAAD Banking Corporation is not liable on the check issued by it to accommodate another person. The act of the bank in issuing a check for accommodation purpose is ultra vires.b. If is no, who then, under the above facts, is/are the accommodation party? (1991 Bar) As the check does not bind SAAD Banking, then the signatories to the check, the President and the Vice President of said bank, become liable in their personal capacities as accommodation parties to said check.A promissory note, with an accommodation co-maker, used to settle an estafa case, has an Illegality of cause, and does not make the accommodation co-maker liable (United vs Paler, 112 SCRA 404)
RIGHTS OF AN ACCOMMODATION PARTY1) Against the Accommodated Party The accommodation party, if obliged to pay to a holder of value, can seek reimbursement from the accommodated party.
2) Against the Co-accommodation PartySince the Negotiable Instruments Law doe not define the right of an accommodation maker to seek reimbursement form another accommodation maker, this deficiency should be supplied by Article 2073 of the New Civil Code. Where a solidary accommodation maker paid to the bank the balance due on a promissory note, he may seek contribution from the other solidary accommodation, maker, in the absence of a contrary agreement between them. This right springs from an implied promise between the accommodation makers to share equally the burdens resulting from their execution of the note. They are joint guarantors of the principal debtor (Sadaya vs. Sevilla, 19 SCRA 924)
A solidary accommodation maker (1) may demand from the principal debtor reimbursement of the amount which he paid on the promissory note, and (2) he may demand contribution from his co-accommodation maker, without firs directing his action against the principal debtor, provided that (a) he made the payment by virtue of a judicial demand, or (b) the principal debtor is insolvent (Ibid).A solidary accommodation maker, who paid the balance due on a promissory note, is not entitled to demand contribution from his co-accommodation maker where he made the payment voluntarily and without any judicial demand and there is no proof that he principal debtor is insolvent (Ibid)
Bar Question: Santos purchased Vera�s car for P50,000.00. Not having enough cash on hand, Santos offered to pay in check. Vera refused to accept the check unless it is endorsed by Reyes, their mutual friend Reyes, endorsed Santos check and accepted it. The next day Vera presented the check to the drawee bank for payment. Payment was refused but Reyes refused to pay, saying that he endorsed merely as a friend.a. Is Reyes liable to Vera? Reyes is liable to Vera, His liability springs from
the fact that he (Reyes) is an accommodation indorser. An accommodation indorser of an instrument is secondarily liable to the holder, inspite of the fact that the holder, at the time of the affixing of the accommodation indorsement, knew that the accommodation indorser did no receive any consideration for his being an indorser to the instrument.b. In the event Reyes voluntarily pays Vera, does Reyes have the right to recover from Santos? Explain (1985, 1976 Bar) In the even Reyes pays Vera, he (Reyes) has a righ of reimbursement from the person he has accommodated � the relationship between the two being that of principal and surely. RULES WITH REGARD DEFICIENT INSTRUMENTS:
1. COMPLETE BUT UNDELIVERED INSTRUMENTa negotiable instrument like a written contract has no legal effect until it has been delivered in accordance with the purpose and intent of the parties. Without delivery there can be no liability.EX: M makes a bearer promissory note, completes it with all material particulars, and places the same inside an unlocked drawer in his office table--- as such, in absence of delivery, there is no contract.
a) Between immediate parties and a remote party not a holder in due course, delivery to be effectual must be made by or under the authority of the maker, drawer, acceptor or indorser, as the case may be;Immediate parties refers to those who are immediate in the sense of having or being held to know of the conditions or limitations placed upon the delivery of the instrument (it contemplate privity not proximity)Remote Party are those not in direct contractual relation to each other, but if they are chargeable with knowledge or notice of any infirmities in the instrument or defect in title of person negotiating, they will be considered immediate parties.EX: M makes a bearer promissory note, completes it with all material particulars, and places the same inside an unlocked drawer in his office table, P, his office secretary, steals the note, and indorses it to A, A to B, Bto C and Cto D. D has knowledge that the note was stolen by P.
P and D are immediate parties, although latter is remote from M since he is not a holder in due course.M may prove that no delivery was made or that it was not authorized, but D can recover from P, A, B and D as they are indorsers. But suppose M delivers note to X, his agent,with instruction to deliver it to P for safekeeping, P can enforce the instrument as he is not an immediate party.
4blue95: what if it is delivered conditionally or for a special purpose?
BAR: Suppose Maycel delivers the note to Junmar on condition that it will not be binding on her until a co-maker has been procured or for safekeeping or for collection only.Junmar cannot enforce the instrument against Maycel since the latter can set up defense that the delivery was conditional or for a special purpose only and not for the purpose of transferring title to the instrument.
b) if the instrument is in the hands of a holder in due course, all prior deliveries are conclusively presumed valid;As such ,the maker cannot prove that the note was stolen by Payee or was delivered conditionally or for a special purpose.An exemption to such ,according to 4blue 95, is where there was no actual delivery to anyone for any purpose by maker who was a victim of THEFT or ROBBERY committed in his house and there was no fault or negligence on his part, then ,it would be unreasonable to hold him liable even to an innocent holder for value.
2. INCOMPLETE BUT DELIVERED INSTRUMENT
a) Holder has prima facie authority to complete the instrument;blanks for date, name of payee ,amount or rate of interest may be filled in and even the blank for the name of the drawer may be filled in.authority to complete is not an authority to alter. So the holder has no authority to change the amount after it has been filled in or to insert the words �or order� or �or bearer� after the name of the payee.Neither may authority be presumed unless the character of the instrument directly indicates it ,to add at the end of the instrument the words �with interest�EX: M makes a promissory note leaving the amount blank, and delivers same to P, the payee, with instructions to fill up the amount with his loan account which does not exceed P600 including interest. P inserts P2000 on the space for amount in breach of the instruction and negotiates the note.If P negotiated the note to A, who has knowledge of the abnormality or deficiency, A is a holder not in due course, consequently, M can prevent A from enforcing the note against him (M) by asserting the abnormality or deficiency involved.4blue 95:A person in possession of a check has prima facie authority to complete it by filling up the blanks therein (Pacheco vs. CA, 319 SCRA 595).
b) Completion to be done within a reasonable time and according to the authority given;reasonable time is to reckoned from the time of the issuance of the instrument because the interest involved is that of the issuer and not from the time of each successive negotiation.
c) Holder in due course of the instrument previously completed in breach of instructions can enforce the same as if regularly completed.As such, the maker cannot put up the defense that the payee (P) exceeded his authority, therefore,the holder in due course can collect to M.
Causes for Abnormality and Deficiency1. Lack of essential requisites to a contract which are
a. Lawful subject matterb. Consideration; andc. Consent
2. Lack of regularity in issue by absence ofa. the material particulars of the questioned instrument, or in their correctness; andb. the delivery of instrument made with the knowledge and/or conformity of the maker or the drawer and with intention of making the transferee a holder of the instrument.
3. INCOMPLETE AND UNDELIVERED INSTRUMENTCompleted and delivered without authority, the instrument is not a valid contract against any person(even on a holder in due course) who signed before delivery.
Bar Question: Jose makes a note payable to bearer with the amount blank and delivers it to Karen for safekeeping. Marina fills up the note for P 20,000.00 and negotiates it to Adriano. Can Jose dishonor the note and refuse payment to Adriano on the ground that the note (a) was incomplete and (b) was originally delivered to Karen for safekeeping only and not for negotiating? (1982 Bar)Answer: Yes, Jose can dishonor the note. This is a situation where the note is incomplete and undelivered Incomplete because at the time the maker parted with it, it lacked a material particular � the amount was blank. Undelivered because it was delivered to Karen not for the purpose of making Karen the holder of the instrument, but for safekeeping only. Hence, the subsequent possession by Marina of the note, whether she lawfully or unlawfully took it from Karen, was without the authority of Jose.If an instrument is incomplete but delivered without authority of the drawer or
maker, the instrument is not a valid contract against any person who signed the instrument before the unauthorized delivery. Hence, Jose can dishonor the note and refuse to pay Adriano.
Bar Question: PN makes a promissory note fro P5000.00 but leaves the name of the payee in blank because he wanted to verify its correct spelling first. He mindlessly left the note on top of his desk at the end of the workday. When he returned the following morning, the note was missing. If turned up later when X presented it to PN to payment Before X, T, who turned cut to have filched the note from PN�s office, had endorsed the note after inserting his own name in the blank space as the payee. PN dishonored the note, contending that he did not authorize its completion and delivery, but X said he had no participation in, or knowledge about, the pilferage and alteration of the note and therefore he enjoys the rights of a holder is due course under the Negotiable Instrument Law. Who is correct and why? (2000 Bar)Answer: PN is correct He is not liable to X. The incomplete and undelivered note is a real defense, and can be invoked against all holders, whether in due course or not.
4. ABSENCE OR FAILURE OF CONSIDERATIONa) Absence of consideration is the total lack o consideration, no consideration, or illegal consideration.b) Failure of consideration is failure of the agreed consideration to materialized.c) both absence and failure of consideration are defenses personal to the prejudiced party, and available against any person not a holder in due course.The existence of consideration in the issue of checks and their indorsements is presumed. It is not the holder�s burden to prove the existence of such consideration. ( Travel-On vs. CA, 210 SCRA 351)
a. Example of an Instrument Without ConsiderationM makes a bearer promissory note and delivers without consideration the same to P, a long friend which P subsequent negotiates.a) If P negotiated the note to A, who has knowledge of the abnormality or deficiency, A is a holder not in due course, consequently, M can prevent A from enforcing the note against him (M) by asserting the abnormality or deficiency involved.b) If A negotiated the note to B, who pays value for the same, and had no knowledge of the abnormality or deficiency involved, then he (B) is a holder in due course, and may enforce the instrument against MM cannot invoke the abnormality or deficiency as a defense against B, because the abnormalities (incomplete but delivered, complete but undelivered) and the deficiencies (absence or failure of consideration) are personal or equitable defenses, and therefore available only against the parties who are directly responsible for the above stated abnormalities or deficiencies, or their immediate transferees who are aware of aforesaid abnormalities and deficiencies committed by their transferors.
c) If B, the holder in due course, negotiates the note to C, who pays value, but who has knowledge of the above stated abnormality or deficiency, he (C) can enforce the note according to its tenor against M, the maker. Under the second sentence of Sec. 58 of the Negotiable Instruments Law, a transferee from a holder in due course of a negotiable instrument (suffering from any of the above stated abnormalities and deficiencies) acquires all of the rights of the holder in due course, including the right to enforce the instrument against M, according to its tenor.
Exceptions to Consequences of Instrument Issued Without ConsiderationAccommodation partyExample: Where M made a promissory note payable to P, to accommodate P in his cr
edit arrangements with A to whom he (P) endorsed the note, and (A) has knowledge of the lack of consideration to the note due to he accommodation of P by M.Consequence of such is that A can enforce the note against M, inspite of A�s knowledge of the absence of consideration between M and P.
b. Example of an Instrument Where There is a Failure of Consideration M makes a promissory note payable to P in the amount of P1000 of P�s promise to deliver merchandise to M in five days. The note was negotiated by P, who failed to comply with his promise to deliver the merchandise.
Bar Question: Sumabad issued a promissory note to the order of Panloob as consideration for the textiles purchased from the latter. The promissory note recites, that the amount of P100,000.00 is payable in five monthly installments of P20,000 each, beginning on December 1, 1986 and every first day of month thereafter until fully paid. Provided that the holder may declare the entire amount due and demandable in the event the maker fails to pay on time any installment in full, or whenever the holder for valid reasons finds his claim unsecured. Panloob indorsed and delivered the note for value to Humabol who acted in good faith. Panloob�s factory burns down and he is unable to deliver the textiles. Sumabod does not pay as promised.Can Humabol as an innocent purchaser for value hold Sumabod liable on the promissory note? Explain. (1986 Bar)Answer: Yes, Humabol, as an innocent purchaser for value of the promissory note issued by Sumabod, can hold Sumabod liable.The note was issued by Sumabod as consideration of textiles purchased by Sumabod from Panloob. Obviously, the textiles purchased were not at all delivered by Panloob to Sumabod, as Panloob�s textile factory was burned down.Between Panloob and Sumabod, there is a failure of consideration- the promise to deliver the textiles bought not having materialized.The failure of consideration between the original parties to a promissory note does not it any manner affect the right of an innocent holder for value in good faith (in short, a holder in due course) from asserting his right to collect from the party primarily liable under the said note.Hence, Humabol can hold Sumabod liable under the promissory note.
Bar Question: If a candidate in an election for public office indorses a negotiable instrument at the request of a leader who promises to make all the voters in a given precinct vote for him, and the candidate actually gets only one vote, can the indorses hold the drawer of the check liable? (1968 Bar)Answer: Analyzing first the problem, the candidate is only an indorser, not the drawer of the instrument. It is not clear whether or not the leader who made the promise is also an indorser of the instrument.With these clarrificatins, I submit that the Indorsee after, of course, the instrument having been dishonored by the drawee bank, can proceed against any of the secondary parties including the drawer. The failure of consideration of the illegality of the promise is a defense against the enforcement of the check by the indorsee against the indorser-candidate, but not by the drawer against whom the presumption of consideration for the issuance of the check operates.
5.MATERIAL ALTERATION OF THE INSTRUMENTAny alteration which changes the date, the sum payable, the time or place of payment, number or relation of the parties, or medium or currency of payment, or adds a pace of payment where none is specified, or which alters the effect of the instrument in any respect is a material alteration.Under Section 125 (f) of the Negotiable Instruments Law, an alteration is said to be material if it alters the effect of the instrument, it means an unauthorized change in an instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party. In other words, a material alteration is one which changes the items which are required to be stated under Section 1 of the Negotiable Instruments Law vs CA, 258 SCRA 491).
A serial number is an item which is not an essential requisite for negotiability under Section 1 of the Negotiable Instruments Law (Ibid)
Bar Question: A check for Fifty Thousand (P50000.00) Pesos was drawn against drawee bank and made payable to XYZ marketing or order. The check was deposited with payee�s account at ABC Bank which then sent the check for clearing to drawee bank.Drawee bank refused to honor the check on ground that the serial number thereof had been altered.XYZ Marketing sued drawee bank.Is it proper for the drawee bank to dishonor the check for the reason that it had been altered? Explain (1999 Bar)Suggested Answer (UP Law Center): No the serial number is not a material particular of the check. Its alteration does not constitute material alteration of the instrument. The serial number is not material to the negotiability of the instrument.
Effect of the Alteration:A material alteration avoids the instrument except as against the party who made, authorized or assented to the alteration, and subsequent indorsers.Where the altered instrument, however, 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.
Alteration of the Instrumenta.of the Amount Bar Question: Larry issued a negotiable promissory note to Evelyn and authorized the latter to fill up the amount in blank with his loan account in the sum of P1,000.00. However, Evelyn inserted P5000 in violation of the instruction. She negotiated the note to Julie who had knowledge of the infirmity. Julie in turn negotiated said note to Devi for value and who had no knowledge of the infirmity.a. Can Devi enforce the note against Larry and if she can, for how much? yes, Devi can enforce the negotiable promissory note against Larry in the amount of P5000. Devi is a holder in due course and the breach of trust committed by Evelyn cannot be set up by Larry against Devi because it is a personal defense. As a holder in due course, Devi is not subject to such personal defense.b. Supposing Devi endorses the note to Baby for value but who has knowledge of the infirmity, can the latter enforce the note against Larry? Yes Baby is not a holder in due course because she had knowledge of the breach of trust committed by Evelyn against Larry which is just a personal defense. But having taken the instrument from Devi, a holder in due course. Baby has all the rights of a holder in due course. Baby did not participate in the breach of trust committed by Evelyn who filled the blank but filled up the instrument with P5000.00 instead of P1000.00 as instructed by Larry. (Sec. 58, NIL).
b. of the Name of Indorsers
Bar Question: Pedro writes out a check for P1000.00 in favor of Jose or order against his current account with Bank of America. Juan steals the checks, erases the name of Jose and superimposes his own name. Juan deposits the check at Citibank and after clearing. Juan withdraws the amount and absconds. Upon discovery by Pedro of the material alteration, he lodged a complaint at the Bank of America, who credited the amount to Pedro. Bank of America demands reimbursement from Citibank which refuses on the ground that it only acted as an agent for collection. Who bears the loss? Why? (1977, 1972 Bar)Answer: Between Bank of America, the drawee bank, and Citibank, the bank which received for deposit the materiality altered check (collecting bank) the latter will have to bear the loss.Under the Negotiable Instruments Law, where a negotiable instrument is materially altered without the assent of the parties liable thereon (Pedro the drawee, in
the problem), it is avoided, except as against a party who has himself made, authorized or assented to the alteration and subsequent indorsers.In banking practice the collecting bank (Citibank in the problem) guarantees all prior indorsements.� By virtue of said indorsements, the collecting bank becomes liable to the drawee bank under the said indorsement and therefore will have to reimburse the drawee bank the amount of the materially altered check.It is true that Citibank acted only as collecting agent for its depositor, but sine the check was materially altered after it left the drawer;s hands, the collecting bank had no right at all to pay the sum stated therein to the person responsible for the material alteration or anyone else deriving his right from the materially altered instrument.Citibank which previously had been paid by Bank of America the amount of the materially altered check has to reimburse to Bank of America the said amount, without prejudice to Citibank running after Juan, the person who materially altered the check and who deposited the check with it (Citibank).
6. FORGERYa) Forgery is the counterfeit making or fraudulent alteration of any writing.b) It may consist of (1) signing of another�s name with intent to defraud, and (2) alteration of an instrument in the name, amount, description of payee, etc. with intent to defraud;c) The signature is wholly inoperative, and no right to retain the instrument, or to give a discharge therefore, or to enforce payment thereof against any party to it, is acquired through or under such signature.
Example: M makes a bearer promissory note, leaves the amount blank, places said note inside the drawer of his unlocked office table, where it was stolen by P, his office secretary, who inserts P1000 on the bank space for amount, and negotiates the noteOr that the signature of M is forged on a promissory note where P, the forger, is also the payee.a) If P negotiated the note to A, who has knowledge of the abnormality (Incomplete and undelivered) or deficiency (maker�s signature forged), and therefore, he (A), is a holder not in due course, A cannot enforce the note against P.b) If A, in turn, negotiated the note to B, who paid value and was unaware of the above stated abnormality or deficiency, and therefore he (B) is a holder in due course, B cannot enforce the note against M. The abnormality (incomplete and undelivered note) or deficiency (signature of maker forged) created a real defense ( a defense attaching to the instrument itself) which M, the maker can invoke against all holders, whether holders in due course or not.c) If B negotiated to C, who paid value, but who was aware of the abnormality or deficiency, C cannot invoke the derivatives rights under Sec. 58 of the Negotiable Instruments Law, because B, from whom C derived his rights, did not acquire the right to enforce the note against M as explained above.
Bar Questions in connection with Forgery in Signature of the following:
a. of the Maker
Bar Question: Juan makes a negotiable promissory note payable to his order, signing Pedro�s name thereon as maker without Pedro�s knowledge and consent. Juan then indorses the note to Jose, who, in turn, indorses it to Carlos under circumstances which make Carlos a holder in due course. May Carlos enforce the note against Pedro? And if the note is dishonored by Pedro, may Carlos hold Juan and Jose liable on their respective indorsements? Reason out your answer. (1989 Bar)Answer: Carlos cannot enforce the note against Pedro, because Pedro�s purported signature on the note is a forgery, and no right to enforce payment under such signature can be acquired by any holder even by a holder in due course like Carlos.Carlos however, can enforce the instrument against Juan and Jose the signatures
of these two being genuine.
b. of the Indorser
Bar Question: Alex issued a negotiable promissory note (PN) payable to Benito or order in payment of certain goods. Benito indorsed the PN to Celso in payment of an existing obligation. Later Alex found the goods to be defective. While in Celso�s possession the PN was stolen by Dennis who forged Celso�s signature and discounted it with Edgar, a money lender who did not make inquiries about the ON. Edgar indorse the PN to Felix, a holder in due course. When Felix demanded payment of the PN from Alex the latter refused to pay. Dennis could no longer be located.a. What are the rights of Felix, if any, against Alex, Benito, Celso and Edgar?Felix has not right to claim against Alex, Benito and Celso who are parties prior to the forgery of Celso�s signature by Dennis. Parities to an instrument who are such prior to the forgery cannot be held liable by any party who became such at or subsequent to the forgery. However, Edgar, who became a party to the instrument subsequent to the forgery and who indorsed the same to Felix, can be held liable by the latter. (Sec. 124, NIL)b. Does Celso have any right against Alex, Benito and Felix? Celso has the right to collect from Alex and Benito, Celso is a party subsequent to the two. However, Celso has no right to claim against Felix who is party subsequent to Celso (Secs 60 and 66, NIL)
Bar Question: Juan makes a promissory note payable to the order of Pedro, who indorses it to Jose. Somehow, Roberto obtains possession of the note and, forging the signature of Jose, indorses it to Amado, Amado then indorses the note to Nilo, the holder.State the right and liabilities of the parties. (1984 Bar)Answer: Jose, being the indorses of the note, has a right to demand payment form Juan, the party primarily liable, and if Juan dishonors by non-payment, Jose has a right of recourse against Pedro, provided Pedro is given by Jose a notice of dishonor by non-payment.Nilo, the present holder of the note, has no right of recourse against Juan. Pedro or Jose, Nilo having derived his right to the instrument from the forged indorsement made by Roberto. A forged signature is wholly inoperative and cannot vest any right of the forger, or any person who derived his right from the forged signature, as against those who became parties to the instrument before the forgery was committed.Nilo, however, can proceed against the forger, and Amado (Jose�s indorsee), because they are precluded from asserting forgery as a defense.
CLASSES OF NEGOTIATION
a. By Delivery of the Instrument Alone (BEARER)Negotiation of negotiable instrument may be effected by the delivery alone of the instrument to the transferee in those negotiable instrument which are originally payable to bearer, or originally payable to order instruments where he last indorsement is an indorsement in blank.
Bar Question: �A� makes a promissory note payabale to bearer, and delivers it to �B�, who endorsed it to �C� Sgd. �B� Subsequently, �C� without indorsing the note, transferee it to �D�. Upon presentation for payment by �D� , �A� dishonored the note. May �D� hold �A� liable? Reason out your answer.98, 1975, 1967 Bar)Answer: �D� may hold �A� liable. The note is a payable to bearer note and is negotiable by delivery. Even if a subsequent holder negotiates it further by a special indorsement, it is nevertheless further negotiable by delivery. Hence, the imdorsement by the special indorsee �C�, to negotiable the instrument to �D� was not necessary and a more delivery of the instrument by him to �D� was a valid negotiation As �D� was constituted holder by said delivery of the instrument to him by C, he (D) can enfor
ce the instrument against A, the party primarily liable.
Bar Question: Santos Jr finds and pockets a bearer check lying with other papers on his father�s (Santos Sr�s) desk. Santos Sr�s special indorsement to Reyes sis at the back of the check. Santos Jr. crosses out the special indorsement and writes his own special indorsement as follows �Pay to Rev. Fr. Cruz for his chapel project. Santos Jr,� and gives the check as a gift to Fr. Cruz, Fr. Cruz indorses the check to Omega Hardware Co. ion payment of purchases of cement. Omega hardware indorses the check to Tan Supply Co., in payment of purchase of deliveries. Tan Supply, although previously told by Santos Sr. that the check had been lost, needs funds very badly and therefore accepts the check. In the hands of the Tan Supply the check is dishonored by non-payment by the drawee-bank, acting on the drawer�s stop-payment order supported by Santos Sr�s affidavit of loss earlier received by the drawee-bank. Against whom may Tan Supply enforce its rights on the instrument, assuming due compliance with all proceedings on dishonor? (1975 Bar)Answer: Tan Supply can enforce the instrument against all prior parties, including Santos Sr. because Tan Supply having derived its rights from Omega Hardware, a holder in due course, acquires and enjoys all the rights of such holder in due course.The cancellation by Santos Jr. of his father special indorsement does not have any material effect on the further negotiability of the check by any holder, the check being a bearer check such that any indorsement thereon may be disregarded and even cancelled by subsequent holders, such indorsements not being necessary to their titles.
Effects of Indorsement on Instrument Negotiable by Deliverywhere an instrument negotiable by delivery is indorsed by the holder, he becomes liable as an indorser. Effects of Lack of Indorsement on an Instrument Negotiable by Indorsement Followed by DeliveryWhere a holder of an instrument payable to order transfers it for value without indorsing it, the transferee is vested with the title, and acquires the right to have the indorsement of the transferor. For the purpose of determining whether the transferee is a holder in due course or not, the negotiation takes effect on the date indorsement was actually made.
Striking Out of Indorsementsthe holder may strike out indorsements not necessary to his title. The indorser whose indorsement is struck out and all indorsers subsequent to him are relieved from liability on the instrument.
b. By Indorsement Followed by Delivery (ORDER)
A negotiable instrument payable to the order of a specified person or to him or his order, may be negotiated by the payee by indorsement followed by delivery of the instrument to the indorsee. Subsequent negotiations may be made in this manner if the holder who indorsees acquired the instrument under a special indorsement.
Bar Question: Anna makes a promissory note payable to bearer and deliveries it to Bing. In turn, Bing negotiates it by mere delivery to Carmen, who endorses it specially to dong. Dong negotiates it by special indorsement to Emma, who negotiates it to Fe by mere delivery. Anna did not pay. To whom are Bing Carmen, Dong and Emma liable? Explain your answer fully (1988 Bar)Answer: The liabilities of the parties are as follows:BING � is liable for breach of the warranties of a qualified indorser because not being a general indorser, his liability for breach of warranty extends to his immediate transferee only, Carmen.CARMEN � is liable because of her indrosement, to all subsequent parties: Dong, Em
ma and Fe. The secondary liability of an indorser makes such indorser liable to all subsequent parties.DONG - is liable as an indorser to all parties subsequent to him, Emma and Fe because the secondary liability of an indorser extends to all subsequent parties.EMMA � is liable for breach of warranties of a qualified indorser to Fe only. Fe being her immediate transferee.The warranties for which Bing or Emma could be made liable, if breached, to their respective immediate transferee, consist of the following (a) That the instrument is genuine and in all respects what is purports to be; (b) that he has good title to it; (c) that all prior parties had capacity to contract; and (d) the he has no knowledge of any fact which would impair the validity of the instrument and render it valueless.
MINORS/INCAPACITATED PERSONS & CORPORATION1.Minors- contracts entered into by a minor are voidable at his instance or at the instance of his guardian. Minority is not a personal defense that may be set up by other parties but it is a real defense available only to the minor. Hence, minor may disaffirm and recover the instrument form a holder in due course.
BAR: Maycel issues a negotiable instrument payable to the order of Carmella,a minor. Carmella indorses instrument to Junmar.According to 4blue95, Maycel becomes liable to Junmar since the indorsement by Carmella passes title to Junmar. But if Maycel cannot pay and Junmar sues Carmella, the latter may raise the defense of minority . Carmella may even disaffirm her indorsement and recover the instrument from Junmar 4blue 95: A minor may be held bound by his signature in an instrument where he is guilty of actual fraud by stating the he is of age when in fact he is not.
2.Incapacitated persons (follow rule on minors)3.CorporationsIt is not liable on notes in a suit thereon by an indorsee where the corporation is w/o capacity to make the contract in fulfillment of which they were executed. it applies only to ultra vires acts(beyond its powers).As such,one who deals with officers of corp must know their powers and extent of their authority.but if act is voidable at option of the debtor,then the defense of the corp is cut off.
CLASSES OF INDORSEMENTS
Bar Question: State the different ways of indorsing checks. (1969 Bar)Answer: At indorsement whether of a check or other negotiable instrument may be special or in blank or it may be restrictive, qualified, conditional, general, regular or irregular.
Bar Question: Assume now that you are �P� the indorsee of the promissory note as follows: (a) conditionally; (b) specially; (c) restrictively. Explain what each indorsements means. (1960 Bar)Answer: (a) Conditional Indorsement �Pay to x if he passes the bar examination of 1960�
(b) Special Indorsement�Pay to X(Sgd) P�
(c) Restrictive Indorsement �Pay to X only (Sgd) P.�
In a conditional indorsement, the right of the indorsee under the instrument is made to depend on the happening of the contingent event stated in the instrument. Said indorse may however negotiate the instrument, succeeding indorsees acquiring right to it subject to the condition in the original indorsement.
In a special indorsement, the name of the indorsee is specified.A restrictive indorsement limits the right of the indorsee by restricting further negotiation, or making the indorsee the collecting agent of the indorser, or making him (indorsee) a trustee of a person named in the indorsement.
Bar Question: �After an indorsement , a promissory note is like a bill of exchange�. Explain what this means. (1950 Bar)Answer: A promissory note is like a bill of exchange after an indorsement. This means that after the first indorsement of a promissory note, it is transacted like a bill of exchange, because after the act (the first indorsement), the note starts to have three parties performing functions akin to the original three parties of a bill. Thus, the maker of the note is equivalent to the acceptor of the bill in that both are primarily liable, the payee of the note, who is also the first indorser is equivalent to the drawer of the bill, and the first indorsee of the note is equivalent to the payee of the bill of exchange entitled to be paid under the said note.
Incidents in the Life of an Instrument After Its Issue
A. NegotiationNegotiation is the transfer of a negotiable instrument from one person to another as to constitute the transferee the holder thereof.
a. Negotiation Must be of Whole Instrument
Bar Question: �A� disbursing officer of the USAFE, was the payee of a check of P100,000.00 issued to him in 1942. in 1944 he sold P 30,m000.00 of the said check to �B� for P90,000.00 in Japanese military notes, of which only P45,000.00 was paid. The writing made by �A� at the back of the check was an instruction to the bank to pay P30,000.00 to �B� and to deposit the balance of P70,000.00 to his {�A�s�) credit. As the check legally negotiated within the meaning of Negotiable Instrument Law? Reason (1963 Bar)Answer: No, the check was not legally negotiated within the meaning of the Negotiable Instrument Law.A negotiation to be valid under the law must be of the whole instrument. A, in effect has endorsed to two indorsers P30,000.00 for B, and P70,000.00 to his bank for his account. This indorsement does not operate as a negotiation of the whole instrument.
What rights may be transferred by negotiation? (1949 Bar)Answer: Negotiation constitutes the transferee a holder of the instrument. A holder is entitled to collect the instrument from the party primarily liable, and if dishonored from the secondary parties. He can sue in court on the instrument. If the holder is a holder in due course, he takes the instrument free form defects of the title of prior parties, free from defenses of prior parties among themselves, and he can enforce the instrument for the full amount thereof against all parties liable thereon.
OTHER FORMS OF INDORSEMENT NOT INCLUDED ABOVE
a) blank Indorsement
Bar Question: Define or explain and then exemplify �indorsement in blank of a negotiable instrument. (1948 bar)Answer: A blank indorsement is an indorsement which does not specify the name of the indorsee, and usually consists of the indorser�s signature, and nothing else, found at the back of the instrument.
Example:(�Sgd) AB�
The signature is found written across the back of the negotiable instrument.The blank indorsement allows the transferee the right to negotiate the instrument further by mere delivery of the instrument to the next transferee.
b) regular indorsementA regular indorsement is one placed after the issued of the instrument.
c) Irregular IndorsementAn irregular indorsement is one placed in blank before the issue of the instrument
Bar Question: The XYZ Bank is willing to lend your firm the sum of P500,000.00 payable in five (5) years with interest at 12%.Suppose the bank requires your firm to secure the signature of a person who is well-known to it before your firm�s promissory note can be accepted, what do you call that person and what are his liabilities? (1975 Bar)Answer: The person known to XYZ Bank and whose signature appears on the note is called as an irregular indorser, because his indorsement was affixed before the issue of the note.An irregular indorser is liable to the payee and to subsequent holders. Hence, in the problem above, an irregular indorser is liable secondarily to XYZ bank, the payee whenever my firm dishonors said promissory note, and to subsequent holders.
d) qualified IndorsementA qualified indorsement is one where the indorser places under his signature the words �without recourse� or the like. The qualified indorser does not become liable secondarily under his indorsement.
Bar Question: In payment of canned goods he had purchased, Pedro Flores of Cabanatuan drew a check upon the Philippine National Bank for P1000.00 payable to the order of Veraz and Co., the seller in Manila. He sent the check �without recourse� to Juan Santos. The latter indorsed it in blank. For consideration to Pablo Reyes who in turn sold it for P800 by delivery to Antonio Gomez. The canned goods were never forwarded to Flores.a. Gomez presented the check to the bank, but payment was refused because Reyes had not indorsed it. 1) Is the bank right in so refusing? Why?2) May Gomez successfully sue the bank if he can prove that Flores has enough funds there? Why?b. If Gomez gave due notice to Veraz and Co., may he recover from the latter? Reasons.c. If Gomez gave the notice to Flores, may he recover from the latter even if, as stated, the canned goods were never delivered? Reasons.d. May Gomez recover from Santos? Why? May he recover from Reyes? Why? (1968 Bar)Answer: (a) 1 No. the bank has no right o refuse payment to Gomez on the ground that Reyes had not indorsed the check. Santos (the holder before Reyes) indorsed it to Reyes in blank, hence, Reyes could negotiate it further by delivery.2 Yes, Gomez can successfully sue the bank if he can prove that Flores had enough funds there, because a drawee bank is liable to a holder unless the drawer issued a stop payment order.(b) No. Veraz & Co is not liable to Gomez a said Company made a qualified indorsement and therefore does not answer for the failure to pay of the primarily liable.(c) Yes. Gomez can recover from Flores, even if the canned goods were not received by Flores. There is here a failure of consideration, but this defense is not
available against a holder in due course like Gomez.(d) Yes. Gomez may recover from Santos, as Santos is secondarily liable by virtue of his indorsement.Yes, Gomez can recover from Reyes because Gomez is an immediate transferee of Reyes.The recovery by Gomez from Reyes because Gomez is an immediate transferee of Reyes.The recovery by Gomez from any one of the secondary p[arties liable will bar recovery fro the other secondary parties.
PRESENTMENT FOR PAYMENT
1. In bills of Exchange
PRESENTMENT FOR ACCEPTANCETo get acceptance of the drawee for the purpose of making him liable primarily as an acceptor. It is also a prerequisite to the accrual of secondary liability against the drawer and the indorsers.
When NecessaryIt is necessary in the following cases: (1) to fix the maturity date, (2) where the bill expressly stipulates presentment, (3) where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.Presentment for acceptance must be made within a reasonable time, by the holder or his agent, to the drawee or his agent at a reasonable hour on a business day, before the bill is overdue.
Bar Question: Gemma drew a check on September 13, 1990. the holder presented the check to the drawee bank only on March 5, 1994. The bank dishonored the check on the same date. After dishonor by the drawee bank, the holder gave a formal notice of dishonor to Gemma through a letter dated April 27, 1994.a) What is meant by �unreasonable time� as applied to presentment? As applied to presentment for payment �reasonable time� is meant not more than six (6) months form the date of issue. Beyond said period, it is �unreasonable time� and the check becomes stale.b) Is Gemma liable to the holder? (1994 Bar) No. Aside form the check being already stale. Gemma is also discharged from liability under the check, being a drawer and a person whose liability is secondary. This is due to the giving of the notice of dishonor beyond the period allowed by law. The giving of notice of dishonor on April 27, 1994 is more than one (1) month from March 5, 1994 when the check was dishonored. Since it is not shown that Gemma and the holder resided in the same place, the period within to give notice of dishonor must be at the same time that the notice would reach Gemma if sent by mail. (NIL Secs. 103 and 104; Far East Realty Investment Inc. v. CA, 166 SCRA 256)
When ExcusedPresentment for acceptance is excused (1) where the drawee is dead hides or is a fictitious or incapacitated person. (2) when after due diligence presentment cannot be made, (3) when acceptance is refused on another ground although presentment is irregular.
When Instrument Dishonored By Non-acceptanceThe instrument is considered dishonored by non-acceptance (1) where such acceptance is refused or cannot be obtained, and (2) where acceptance being excused, the bill is not accepted.
PRESENTMENT FOR PAYMENT The purpose of presentment for payment of an accepted bill is to collect from th
e acceptor, and if refused, to collect form the secondary parties.The accepted bill must be presented for payment within a reasonable time from last negotiation by the holder or his agent, to the acceptor or his agent, at a reasonable hour on a business day, and at the proper place as defined. The bill must be exhibited to the acceptor and surrendered to him when he pays. Presentment for payment is excused: (1) when after due diligence, it cannot be made, (2) when the drawee is a fictitious person, and (3) where there is a waiver of presentment.
Acceptance in Bills of ExchangeAcceptance is the significance by the drawee of his assent to the order of the drawer.The acceptance must be in writing, signed by the drawee and must not express that the drawee will perform his promise by means other than money payment.
how MadeThe acceptance may be on the bill, on a separate paper and may even be made in writing before the bill is drawn.The drawee, if he wants to dishonor, must do so expressly within twenty four (24) hours form presentment to him. If he refuses to act, tears the bill or, refuses to return the bill within said period of twenty our hours, he is deemed to have accepted the bill.A sight draft (usually accompanying a letter of credit in importations) is payable on demand, and needs no acceptance by the drawee (Prudential vs. IAC, 216 SCRA 257)
Bar Question: A bill of exchange was delivered to a drawee for acceptance: he tore it to pieces and threw it away. Can he be held liable on said bill? Give your reason (1947 Bar)Answer: The drawee, by tearing the bill of exchange presented to him for acceptance, is deemed to have accepted the bill. He therefore becomes liable on the bill as a primary party, being now the acceptor of it.
Classes of Acceptance
General and QualifiedA general acceptance assents without qualification to the order of the drawer.A qualified acceptance varies the effect of the bill as drawn. The acceptance is qualified if it is: (a) conditional, (b) partial, (c) local, (d) qualified as to time, (e) accepted by some or more of the drawee but not by all.
Express and Constructive Acceptance is express if written on the instrument by the drawee, and constructive. If the drawee, within twenty four hours from presentment to him of the instrument, destroys the same, or refuses or fails to return the bill accepted or unaccepted.
2. In Promissory NotesPresentment for Payment Not necessary to make the maker liable, but it is necessary to make the secondary parties liable.For a valid presentment for payment of a promissory note, the following are necessary: (1) made within a reasonable time after issue: (2) by the holder or his agent; (3) to the party liable under it; (4) at a reasonable hour on a business day; and (5) at the proper place.The holder must exhibit the instrument to the debtor and should deliver it to said debtor if the latter pays.
Bar Question: PN is the holder of a negotiable promissory note within the meaning of the Negotiable Instruments Law (Act 2031). The note was originally issued by RP to XL as payee. XL indorsed the note to PN for goods bought by XL. The note mentions the place of payment on the specified maturity date as the office of the corporate secretary of PX Bank during banking hours. On maturity date, RP was at the aforesaid Office ready to pay the note by PN did not show up. What PN later did was to sue XL for the face value of the note, plus interest and costs. Will the suit prosper? Explain (2000 Bar)Suggested Answer (U.P. Law Center): Yes. The suit will prosper as far as the face value of the note is concerned, but not with respect to the interest due subsequent to the maturity of the note and the costs of collection. RP was ready and willing to pay the note at the specified place of payment on the specified maturity date, but PN did not show up. PN lost his right to recover the interest due subsequent to the maturity of the note and the costs of collection.
When not RequiredPresentment is not required: (1) when after due diligence, presentment cannot be made, (2) when presentment is waived, and (3) when the indorser is an accommodated party.
When Instrument Considered DishonoredThe instrument is considered dishonored (1) when after due presentment for payment, payment is refused, and (2) when presentment being excused, the instrument is overdue and unpaid.
Discharge of the Instrument and of the Parties
1. Causes for Discharge of the Instrument and Discharge of All Partiesa.) Payment by the debtor;b) Payment by the accommodated party;c) Intentional cancellation by the holder of the instrument;d) Any other act discharging a simple money obligation, ande) Debtor becomes holder of the instrument at or after maturity in his own right.
2. Causes for Discharge of Secondary partiesa) Any act discharging the instrumentb) Cancellation of indorser�s signature by the holder;c) Discharge of a prior party;d) Tender of payment by a prior party;e) Release of the principal debtor;f) Extension of payment by the holder, or postponement of his right to enforce, without the assent of the secondary parties, and without reservation of any right of recourse against the secondary parties.
Bar Question: The XYZ bank is willing to lend your firm the sum of P500,000.00 payable in five years with interest at 12% per annum secured only by a surety bond.Prior to its maturity, the bank indorses the note to Mr. Ramos, who in turn indorses it to Mr. Santos. Thereafter, Mr. Santos indorses the note back to the bank upon maturity. Explain the liability of Mr. Ramos to the bank if the note is not paid by your firm (1973 Bar)Answer: Mr. Ramos is not liable to XYZ bank even if the note is not paid by my firm on maturity of the note.The indorsement by Santos to XYZ Bank which was a party to the instrument prior to Ramos and over who indorser Ramos has a right of recourse, discharged the intermediate parties, Santos and Ramos. Hence, Ramos is not liable to XYZ.
Payment For Honor (Payment Supra Protest)
A payment for honor is a payment made through a notarial act of honor of a party liable under, or a stranger to the bill after, said bill had been dishonored by non-payment by the acceptor and protested for non-payment by the holder.
Legal Consequencesa) All parties subsequent to the party for whose honor payment is made are discharge, andb) The payer for honor is subrogated and succeeds to both. The rights and duties of the holder, as regards the party for whose honor payments is made, and all parties liable to the latter
DISHONOR
1. In Promissory NotesIn a promissory note, dishonor by non-payment takes place when it is duly presented for payment and payments refused or cannot be obtained, or it presentment is excused, the instrument is overdue and unpaid.
2. In Bills of ExchangeIn bills of exchange, where the bill is presented for acceptance and is returned dishonored, or within twenty four hours from presentment, is not returned accepted or unaccepted, there is a dishonor by non-acceptance.There is a dishonor by non-payment if the bill, after it has been accepted, is not paid when presented for payment, or presentment being excused, is not paid on the date of maturity.
Notice of DishonorIt is notice given by the holder or his agent to the party or parties secondarily liable that the instrument was dishonored by non-acceptance by the drawee of a bill, or by non-payment by the acceptor of a bill or by non-payment by the maker of a note.
1. PurposeThe notice of dishonor is given by the holder to the parties secondarily liable, for the purpose of preserving his right of recourse against them.
2. RequisitesThe notice is given (1) by the holder or his agent, or by any party who may be compelled by the holder to pay (2) to the secondary party or his agent, (3) within the periods provided for by law, and (4) at the proper place.
3. When Dispensed WithNotice of dishonor may be dispensed with (1) if waived, (2) when after due diligence, it cannot be given and (3) when the party to be notified knows about the dishonor, actually or constructively.
a. In the Case of the Drawer
Bar Question: When is notice of dishonor not required to be given to the drawer? 91996, 1952 Bar)Answer: Notice of dishonor need not be given to the drawer in the following cases: (a) when the drawer and the drawee are the same person; (b) when the drawee is a fictitious or incapacitated person; (c) when the drawer is the person to whom the instrument is presented for payment (d) when the drawer lies no right to expect that the drawee will accept, or that the acceptor will pay, the instrument.
b. In the Case of the IndorserNotice of dishonor is not required to be given to the indorser in the following cases (1) when the drawee is a fictitious or incapacitated person, and the indor
ser was aware of it at the time of his indorsement, (2) where the indorser is the person to whom the instrument was presented for payment, and (3) where the instrument was made or accepted for his accommodation.
Protest in Lieu of Dishonor in Foreign Bill
1. Foreign billA foreign bill is a bill of exchange which is not its face drawn and made payable within the Philippines.
2. ProtestA protest is formal instrument, executed by a notary or other competent person, certifying that the facts necessary to the dishonor of the instrument by non-acceptance or non-payment have taken place.
a. When RequiredWhen a foreign bill is dishonored by non-acceptance it must be protested for non-acceptance. If dishonored by non-payment, it must be protested for non-payment. If not so protested, the drawer and indorsers are discharged it must be made on the day of dishonor. There may also be a protest for better security.
Bar Question: When a foreign bill of exchange is dishonored by non-acceptance, what should the payee do, if anything is required of him by the law, in order to protect his rights? (1948 Bar)Answer: When a foreign bill is dishonored by non-acceptance, the payee should, on the same date of dishonor, cause a protest to be made by a notary public or by a respectable citizen of the place where the dishonor took place, in the presence of two witnesses stating the facts and circumstances of dishonor.This protest will preserve his right of recourse against the parties secondarily liable under the instrument.
b. When Protest Dispensed withProtest is dispensed with in those cases where notice of dishonor is dispensed with.
Foreign BillsAcceptance for Honor (Acceptance Supra Protest)It is an undertaking by a stranger to the bill after protest, for he benefit of all parties subsequent to the person for whose honor it is accepted and conditioned to pay the bill when it becomes due, if the original drawee does not pay it.
Bills in a SetA bill in a set is a bill of exchange drawn in several parts, each part of the set being numbered and containing a reference to the other parts, the whole of the parts constituting just one bill.
Liability Under the Bill in a SetThe acceptance and payment of one part discharges all parts, as a general rule.There are, however, instances where more than one liability may attach to the whole of the set, and these are (a) where more than one part is negotiated by the same holder, and (b) where the drawee accepts one part, but pays the unaccepted part.
CHECKA CHECK is a BILL OF EXCHANGE drawn on a bank and payable on demand.
Bar Question: Romeo had P100,000.00 in his current account in the Matatag Banking Corporation. Romeo learned that his enemy had hired a contract killer to liquidate him. Fearful for his life, he mailed to his fiancée, Juliet, a check for P100,000.00 in the bank. The check was payable to Juliet or order and was accompanie
d by a letter stating that he was giving her money out of his great love for her and because something would happen to him anytime now.The hit contract was called off by Romeo�s enemy. Meanwhile, Juliet broke off her engagement to Romeo because of the humiliation she suffered at the bank. Does Romeo have a right to action against the bank? Explain (1986 Bar) Answer:Yes, Romeo has a right of action against the bank. He has the alternative action of running after the bank for damages for its dishonor of the check inspite of the fact that it was funded when it was presented for payment by Juliet, or for the withdrawal of his deposit with its increments, as all these belong to him.
Stop Payment Order By Drawer
Bar Question: A drew a check for P1000.00 on B, the bank, payable to the order to c and delivered the check to the latter for value C indorsed the check in blank and negotiated it to D, who lost it. At D�s request. A ordered payment stopped by notifying B. The stop order was overlooked and the check was paid to E, who had taken the check, without actual knowledge of the loss, in payment of merchandise to a stranger whom he thought owned the check. D now sues the bank, b, for the amount of the check. Decide the case with brief reasons. (1979 Bar)Answer: B, the bank is liable to D. A check by itself does not operate as an assignment of any part of the funds to the credit of the drawer with a bank. Before the bank accepts or certifies the check, the drawer may countermand or stop payment of a check issued by him, which A, the drawer in the problem did. If the bank for any reason, and in spite of said stop payment order, allowed as in this case, the check to be encashed, then it becomes liable to the drawer or to any subsequent lawful holder like D in the problem.
Bar Question: Mr. Lim issued a check drawn against BPI in favor of Mr. Yu as payment for certain shares of stocks which he purchased. On the same day that he issued the check to Mr. Yu, Mr. Lim ordered BPI to stop payment. Per standard banking practice, Mr. Lim was made to sign a waiver of BPI�s liability on the event that it should pay Mr. Yu through oversight or inadvertence. Despite the stop order by Mr. Lim., BPI nevertheless paid Mr. Yu upon presentation of the check. Mr. Lim sued BPI for paying against his order. Decide the case (1991 Bar) Answer: BPI should answer to Mr. Lim for the bank�s failure to honor the stop payment order of Mr. Lim.A drawee bank is liable on a check drawn by it upon the check�s presentment to the bank for payment. If before such presentment, the drawer made a stop payment order to the bank, then the bank should not pay the check when presented.The signed waiver by Mr. Lim of the bank�s liability in case pf payment through oversight or inadvertence by the bank will not free the bank from liability.If a check lawfully issued is not honored due to a stop payment order of the drawer, the drawer is guilty of estafa under the Revised Penal Code (Sales vs, CA, 164 SCRA 717)
Certification of CheckIt is an agreement whereby the bank binds itself to pay the check at any future time when presented for payment.
Effect of Certification
Bar Question: What is the effect on the drawer and all indorsers of a check if the holder thereof procures it to be certified or accepted by the drawee bank? (1965 Bar) Answer: The certification is equivalent to an acceptance of the check by the drawee bank, and the drawer and the indorsers are discharged from liability thereon.
Bar Question: �A� drew a check against his current account at Katipunan Bank in favor to �C� Although �A� did not have sufficient funds the bank honored the check when it was presented for payment. Apparently �A� had conspired with the bank�s bookkeeper so that his ledger cards would show that he still had sufficient funds. May the bank recover from �C�? (1970, 1998 Bar)Answer: No, the bank may not recover against C. the act of the bank in honoring the check in favor of C amounts to a certification of the check. By this certification, the indorsers (including C, the payee) are discharged from liability on the check.
Check Used as Payment of Obligation
Bar Question: For an indebtedness owing by �X� to �Z� , �X� gave �Z� check covering the entimount �Z� refused to accept it �X� claimed that the check is legal tender and because of such refusal he was discharged from further liability is �X�s� contention correct and why? (1960 Bar)Answer: �X�s� contention is not correct. A check is not legal tender, hence, a creditor can validly refuse to accept it from the debtor in payment of an obligation of said debtor to the creditor.
If Used for Redemption in foreclosuresA redemption is not rendered invalid by the fact that the sheriff accepted a check rather than cash.If in good faith, the redemptioner pays, and the officer receives before the expiration of the time of the redemption, an ordinary banker�s check, he payment is regarded as sufficient (Fortunato vs. CA, 196 SCRA 269)
Checks Without Funds The essential elements in order to sustain a conviction under the above paragraph are: (1) that the offender postdated or issued a check in payment of an obligation contracted at the time the check was issued (2) that such postdating or issuing a check was done when the offender had no funds in the bank, or his funds deposited therein were not sufficient to cover the amount of the check. (3) deceit or damage to the payee thereof (Pacheco vs. CA, 319 SCRA 595 People vs. Panganiban 335 SCRA 354; People vs. Tan, 338 SCRA 331; People vs. Guilon, 349 SCRA 610)The law penalizes the issuance of check if it were the immediate consideration for the reciprocal receipt of benefits. In other words, the check must be issued concurrently with and in exchange for, a material gain to make it a punishable offense under the RPC.
Cashier�s, Manager�s or Certified Checkspayment by even a certified check, which is not legal tender, cannot support a valid tender of payment (Roman vs. IAC, 1914 SCRA 411).A cashier�s check is a primary obligation of the issuing bank and accepted in advance by its mere issuance, and by its peculiar character and general use in the commercial world, is regarded substantially to be as good as the money which it represents (Tan vs. CA, 238 SCRA 310)A manager�s check is one drawn by the bank�s manager upon the bank itself. It is similar to a cashier�s check both as to effect and use. A cashier�s check is a check of the bank�s cashier on his own or another check. In effect, it is a bill of exchange drawn by the cashier of a bank upon the bank itself, and accepted ion advance by the act of its issuance (International vs. Gueco, 351 SCRA 516)A negotiable instrument such as a check, whether a manager�s check or ordinary check, is not legal tender (BPI vs. CA 326 SCRA 641)A manager�s check is like a cashier�s check which, in the commercial world, is regarded substantially to be as good as the money it represents (Ibid)
If Used for Redemption in ForeclosuresRedemption by a mortgagor using a bank manager�s check of a commercial banking cor
poration cannot be refused by the mortgagee, as said method has already been sanctioned by the courts in Javellana vs. Mirasol, 40 Phil 761 (Co vs. PNB, 114 SCRA 842; New Pacific vs. Seneris 101 SCRA 686)
Uncleared Check Paid by Foreign BankPayment of checks by a foreign bank without previously clearing checks with the drawee bank is contrary to normal or ordinary practice specially where the drawee bank is a foreign bank and the amounts involved are large and bars recovery (Banco Atlantico vs. Auditor, 81 SCRA 335)The collecting bank or last endorser generally suffers the loss because it has duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements. The rule finds more meaning where the check involved is drawn on a foreign bank and therefore collection is more difficult than when the drawee bank is a local one even though the check in question is a manager�s check (BPI, 81 SCRA 75)
Crossed ChecksA crossed check is a check which in addition to the usual contents of an ordinary check contains also the name of a certain banker or business entity through whom it must be presented for payment. The banker�s or entity name is usually stamped across the face of the check.Crossing of a check is usually done by placing two parallel lines diagonally on the left top portion of the check.The crossing is special when between the two parallel line sis written the name of a bank or a business institution, in which case the drawee should pay only with the intervention of that bank or company.The crossing is regular when between the two parallel diagonal lines the words �and Co� only, or none at all, are written by the drawer.Crossing a check is a good precaution when the check is forwarded by mail in payment of an obligation, or sent o an agent for the payment of specified obligations. The crossing will ward off encashment by unauthorized persons.The payee of a crossed check should not encash the check but should deposit it to his account (State vs. IAC, 175 SCRA 310)The effects of crossing a check are: (1) that the check may not be encahsed but only deposited with a bank; (2) that the check may be negotiated only once � to one who has an account with a bank; and (3) that the act of crossing serves as a warning to the holder that the check has been issued for a definite purpose so that the he must inquire if he has received the check pursuant to that purpose (Associated vs. CA, 208 SCRA 465; Bataan vs. CA, 230 SCRA 643)
Bar Question: Po Press issued in favor of Jose a postdated crossed check, in payment of newsprint which Jose promised to deliver. Jose sold and negotiated the check to Excel Inc. at a discount. Excel did not ask Jose the purpose of crossing the check. Since Jose failed to deliver the newsprint. Po ordered the drawee bank to stop payment on the check.Efforts of Excel to collect from Po failed. Excel wants to know from you as counsel.a. What are the effects of crossing a check?b. Whether as second indorser and holder of the crossed check, it is a holder in due course?c. Whether Po�s defense of lack of consideration as against Jose is also available as against Excel? (1994 Bar)Suggested Answer: (U.P Law Center): (a) The effects of crossing a check are: 1) the check is for deposit only in the account of the payee: 2) the check may be indorsed only once in favor of a person who has an account with a bank 3) the check is issued for a specific purpose and the person who takes it not in accordance with said purpose does not become a holder in due course and is not entitled to payment thereunder.
(b) No. it is a crossed check and Excel did not take it in accordance with the purpose for which the check was issued. Failure on its part to inquire as to said purpose prevented Excel from becoming a holder in due course, as such failure or refusal constituted bad faith.(c) Yes. Not being a holder in due course. Excel is subject to the personal defense which Po Press can set up against Jose (State Investment House vs. IAC, 175 SCRA 310)
Forgery in Checks
A. Forgery in Signature of the Drawer on a checkThe drawer is not liable and his drawee bank cannot charge the drawer�s account for said check because a bank is supposed to know the signatures of its customers and bears the damage in case t pays under a forged signature of its drawer-customer.Where the signatures of the GSIS Manager and Auditor are forged on a check drawn on the PNB and the instrument reaches a holder in due course who deposits the check with PCIB, the clearing of the check by PNB makes PNB liable for damages to GSIS under the forged check on the ground that a bank is supposed to know the signatures of its customers (PNB vs CA 25 SCRA 693) The drawee bank is considered as paying out of its own funds and cannot charge the drawer�s account (PNB vs Quimpo. 158 SCRA 582)Assuming that the PCIB had been guilty of negligence in not discovering that the check was forged, it is undeniable that the PNB had also been guilty of a greater degree of negligence, because it had a previous and formal notice from the GSIS that the check had been lost with he request that payment thereof be stopped. Thus, by not returning the check to the PCIB, by thereby indicating that the PNB had found nothing wrong with the check and would honor the same, and by actually paying its amount to the PCIB, the PNB induced the latter, not only to believe that the check was genuine and good in every respect, but also to pay its amount to Augusto Lim. The PNB was therefore, the primary or proximate cause of the loss and hence may not recover from the PCIB (PNB vs. CA, supra)
Bar Question: Placido, a bank depositor, left his checkbook on his house Unknown to him, a visitor at the time, noticing the same, took a check therefrom, filled it up in the amount of P3000.00 and succedded in encashing the check on the same day. Placido�s account was thereby debited in the same amount.Discovering the erroneous debit. Placido demanded that the bank credit him with a like amount. The bank refused on the ground that Placido was negligent in leaving his checkbook on his desk so that he could not put up the defense of forgery or want of authority under the Negotiable Instruments Law.The facts disclose that even to the naked eye, there were marked differences between Placido�s signature and the one on he check forged by the visitor.As between Placido and the bank, who should bear the loss? Explain (1992, 1949 Bar)Answer: The bank will bear the loss. The bank in the problem is the drawee bank, it s apart of the drawee bank�s obligation to see to it that the drawer�s signature on the check when checked with bank records, like the specimen signature of the drawer on file with the bank, should tally with the signature on the questioned check. If as in the problem above, there are marked differences between Placido�s signature as verified from bank records, and the signature on the questioned check, then it is the bank records, which is negligent in allowing the encashment of the check, and therefore, it (the bank) should bear the consequences of the forgery of the questioned check. This is without prejudice to the bank proceeding against the forger.
Bar Question: Fernando forged the name of Daniel, manager of a Trading company, as the drawer of a check. The Bank of the Philippine Islands, the drawee bank, did not detect the forgery and paid the amount.May the bank charge the amount paid against the account of the alleged drawee? Reasons. (1977 Bar)
Answer: NO, the bank (BPI) cannot charge the amount paid against the account of the drawer of the check.A drawee bank, under the law, is required to be familiar with he drawer�s signature, and if he said signature turns out to be a forgery, it (drawee bank) will have to bear the consequences of the forgery.Where a signature to an instrument is forged. It is wholly inoperative and no right to enforce payment can be acquired by any person through or under such forged signature. Fernando, therefore, is not entitled to be paid, and if BPI the drawee bank, paid Fernando under the said forged signature of the drawer of the check, it cannot charged the amount it paid to Fernando against the account of the drawer.
Bar Question: �B� forged �A�s� signature as drawer of a check drawn on Citibank. The check was purportedly payable to the order of �B� B then indorsed the check to �C� a holder in due course, who deposited the same to his account with Bank of P.I. The check passed through the normal course of clearing and accordingly the drawee. Citibank, credited the collecting bank, Bank of P.I., with the amount of the check which Citibank in turn debited from �A�s� deposit account. Upon receiving his monthly statement from Citibank, together with the canceled checks debited from his deposit account, discovered the forgerya. Can �A� compel Citibank to recredit A�s account for the amount of the forged check.? Yes he can.The drawee , Citibank, becomes liable on the forgery of the drawer�s signature because Citibank, as drawee is under obligation to be certain that the drawer�s signature is his true and genuine signature, the drawer being a client of the drawee bank.b.does Citibank in turn have a recourse against the collecting bank which is BPI?yes, Citibank, in turn has a right to recourse against BPI, the collecting bank. The forged signature of the drawer. A, is wholly inoperative and any transferee of the instrument acquired no right at all to enforce the instrument. The act of Citibank of crediting the account of BPI for the amount of the check is a case of �solution indebti� Hence, Citibank is entitled to its return.c.can Citibank or BPI proceed against C as indorser? Yes, BPI ha a right to recourse against C, the indorser, who deposited the questioned check with it (BPI). When BPI accepted the check for deposit, it acted as collecting agent for C. as the signature of A on the check is forged, that signature is inoperative and does not obligate A to pay under he check. BPI therefore was unable to collect for C any amount under the questioned check, BPI�s act of crediting C�s account with BPI, or making c pay back the amount, if C has already withdrawn the questioned amount from his BPI account Citibank, if it has not yet run after BPI, has a right to recourse against C. as Citibank can be made to credit A�s account with it for the amount in the forged check, which amount Citibank has not yet recovered from BPI, Citibank can make c directly pay to it he amount involved. Where there is no clear indication in the checks issued that the drawe�s signatures are forgeries, and the drawer uses personalized checks not issued by the drawee bank and where no security measures were provided by the drawer fro the printing of the checks by a private printing press, the drawee bank cannot be blamed for no detecting the fraud, and cannot be made liable thereunder (MWSS vs. CA 143 SCRA 20).
B. Forgery in the Signature of IndorsersAs a matter of practical significance, problems arising from forged indorsements of checks may generally be broken in to two types of cases: (1) where forgery was accomplished by a person not associated with the drawer � for example a mail robbery; and (2) where the indorsement was forged by an agent of the drawer. This difference in situations would determine the effect of the drawer�s negligence with respect to forged indorsements (Gempesaw vs CA, 218 SCRA 682).
Bar Question: A check for P1000.00 was drawn on the Philippine National Bank by X in favor of Y. �Y�s� signature was forged by Z who afterwards cashed the check at the China Banking Corporation. Thereafter the check was cleared at the Philippine
National Bank. As between X, PNB and the China Banking Corporation, who should bear the loss? (1948 Bar)Answer: As beteen X, PNB and China Banking Corporation, the last one, China Banking Corporation should bear the loss, because having allowed the encashment of the check, and having indorsed it to PNB for clearing git warranted the genuineness of the signatures of prior indorsers. PNB cannot charge the account of X, but can recover from China Banking who in turn can proceed against the forger Z.
Bar Question: Jose loaned Mario some money and to evidence his indebtedness. Mario executed and delivered to Jose a promissory note payable to his order.Jose indorsed the note to Pablo Bert fraudulently obtained the note from Pablo and indorsed it to Julian by forging Pablo�s signature Julian then indorsed the note to Camilo.a. May Camilo enforce the said promissory note against Mario and Jose? Camilo cannot enforce the promissory note against Mario and Jose because Camilo derived his rights from the forged signature of indorsement of Pablo. A forged signature is wholly inoperative and cannot vest any right to the forger or any person who became parties to the instrument before the forgery was committed.b. May Camilo go against Pablo? Camilo may not go against Pablo, because Pablo�s signature of indorsement is a forgery, having been effected by Julian, the forger. A forged signature is inoperative against the person whose signature was forged.c. May Camilo enforce said against Julian? Camilo can enforce the note against Julian, the latter being the forger of Pablos�s signatured. Against whom can Julian have the right to recourse? Julian does not have any right of recourse against any person he being a forger of the signature of an indorser. Pablo in the probleme. May Pablo recover from either Mario or Jose? Explain your answers (1990 Bar) Pablo being an indorsee of the note can recover from either Mario or Jose
Bar Question: Where the indorsee of a payee on a check is forged and payment of the check is made by the drawee bank, may the drawee bank debit the drawer�s account for the amount of the check? Explain (1970 Bar)Answer: Yes, the drawee bank may debit the drawer�s account. While the drawee bank must be cautious in the security of the signatures of drawers of checks drawn on it under the theory that it should know the signatures of its own clients, it has however no responsibility for the signatures of indorsers, the payee being one of them. In banking practice, the signatures of theindorsers, as a prerequisite to clearing are guaranteed by the bank where he check may be deposited by the last holder. If nay of these indorsements are forgeries immediate responsibility will be on that bank which are guaranteed the indorsements, not on the drawee bank of the check. Bar Question: bernan issued a check payable to the order of Fernando in the sum of P12,000.00 and drawn on �X� Bank. The check was delivered to Matilde by Adriano for encashment. At that time, the check had the indorsements of (1) Fernando and (2) Rose. When Matilde enchased it with �X: Bank, she affixed her signature on the check. Upon Matilde�s receipt of the cash proceeds of the check she turned over the amount to Adriano. �X� Bank was informed by bernan that the alleged indorsement of the payee Fernando was a forgery, since the latter has died two (2) years ago. �X� Bank, having refunded the amount to bernan, sued Matilde, who refused to return the money.a.Was �X� Bank correct in paying bernan? �X� Bank was correct in paying bernan. If a check drawn on a bank is presented to it fro encashment, it is its obligation to see to it that the one presenting the check for payment derives his title from prior parties who have validity negotiated the check. As the signature of Fernando was forged, the issue of the check by bernan to him did not produce the effect of payment. Fernando can therefore again demand payment from him (bernan)The payment by �X� Bank to bernan is to replace the amount debited from bernan�s account on a check drawn by him which did not accomplish its objective because of a f
orgery of the payee�s (Fernando) signature.b.Does �X� Bank have a cause of action against Matilde? Give reasons for your answers. (1982 Bar) X bank has a cause of action against Matilde because Matilde is an indorser of the questioned check.
Bar Question: Gonzales & Co., owes Jose Garcia P10,000 and draws a check for that amount on the Manila Banking Corporation payable to Garcia. The check is delivered to Antonio Cruz, employee of Garcia Cruz forges the signature of Garcia, as an indorser, then endorses it personally, cashing it at the International Banking Corporation. The latter collects the amount of the check from the Manila Banking Corporation, and the latter charges the amount of the check against the account of Gonzales & Co. Discuss the respective rights of all the parties in relation to the check and the indorsements and payments made in relation thereto, as well as their respective obligations. Give reasons for your answer (1957 Bar) Answer: this is a case of forgery in the indorsement. Between Manila Banking Corporation and international Banking Corporation, the later bears the loss because the forger and parties after him do not acquire any right to enforce the instrument under the forged indorsement. As Manila Banking has paid the instrument to International Banking, it can proceed against the latter. International Banking can in turn proceed against Cruz, the forger.Manila Banking cannot charge the account of Gonzales and Co., as said bank will not suffer damage after being paid by International Bank.Gonzales and Co., still Garcia P10,000.00 which the latter can collect.
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