Negotiable Instrument (Atty. Dumaguing) (1).docx

8/14/2019 Negotiable Instrument (Atty. Dumaguing) (1).docx

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Notes on Negotiable Instruments

Atty. Abelardo Dumaguing

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Important provisionsSec. 1Elements of Negotiable InstrumentSec. 2certainty of the amount payableSec. 3 in rel. to Sec. 47 unconditional character of instrumentSec. 4determinable future time, fixed future time, contingencySec. 5provisions that do not affect the negotiability of the instrument

Sec. 6omissions and additionsSec. 7payable on demandSec. 8payable to orderSec. 9payable to bearerSec. 11presumption of date (date is presumed correct)Sec. 12antedate and postdateSec. 13insertion of dateSec. 14incomplete instrument but deliveredSec. 15incomplete and undeliveredSec. 16complete instrument but undeliveredSec. 23forgery

Sec. 124material alterationSec. 125material alteration

Sec. 24presumption of valuable considerationSec. 28want of consideration and failure of considerationSec. 29accommodation partySec. 30negotiation (referring to transfer of instrument)Sec. 33-39kinds of indorsement eg. Blank, special, restrictive (36), qualified, conditionalSec. 48striking out indorsementSec. 52what constitutes a holder in due course

Sec. 59Sec. 57rights of a holder in due courseSec. 60liability of a makerSec. 61liability of a drawerSec. 62liability of an acceptorSec. 65 & 66warranties of an indorserSec. 70-73presentment for paymentSec. 89notice of dishonorSec. 126definition of bill of exchangeSec. 184definition of a promissory noteSec. 185definition of a check

What is a negotiable instrument?

It is a written contractual obligation that requires payment of money with the following essential elements:

1. in writing and signeda. by the maker (if a promissory note)b. by the drawer (if a check)

2. contains unconditionala. promise (for promissory note), orb. order (for check or bill of exchange[BOE])

3. must be payable ona. demandb. fixed future time, orc. determinable future time

4. payable toa. order, orb. bearer

5. Drawee (element required in check or bill of exchange)drawee must be NAMED or be INDICATED with a REASONABLE CERTAINTY (if he cant be

named)

WRITTEN AND SIGNEDKinds of signature:

1. Conventional signature2. Personalized signature


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UNCONDITIONAL PROMISE/ORDER

Promise to pay shall be ABSOLUTEEx:P10,000.00

I promise to pay to the to the order of Pedro tenthousand pesos.

(Sgd)Amado

If it is ABSOLUTE then it is NEGOTIABLE and PAYABLE ON DEMAND

CONDITIONAL PROMISE

P20,000.00

I promise to pay to the to the to Mario or his orderafter the unconditional surrender of the Al Qaeda

network to the Allied Forces

(Sgd)Amado

If it is CONDITIONAL then it is NON-NEGOTIABLE

Ex:P30,000.00

I promise to pay thirty thousand pesos to Ruby orbearer after she will celebrate Christmas of the year2001.

(Sgd)AmadoThis is not negotiable because it is with condition.

Ex:P5,000.00

I promise to pay unconditionally to the order of Antonfive thousand pesos when it rains today.

(Sgd)Harry PotterThis is not negotiable because it with condition for it is dependent on the happening of an event that not sure tohappen.

DEMAND (Sec. 7)OVERDUENO TIME for payment is indicatedEXPRESSLY made payable on demand

EXPRESSLYP40,000.00

On demand, pay to the order of Juana forty thousandpesos.

To: Clara (Sgd) Bella

NO TIME

Baguio City19 November 2001

P40,000.00Pay to the order of Juana forty thousand pesos.

To: Clara (drawee) (Sgd)BellaNo time for paymentso it is payable on demand.

NB: A CHECK has NO TIME OF PAYMENT therefore it ispayable on demand.Sec. 185A check is a bill of exchange drawn on a bank payable on demand


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Instrument is OVERDUE

Ex:

At the outset bill of exchange/promissory note was issued at 1 May 2001 and payable on 7 August 2001.

Baguio City1 May 2001

P8,000.00I promise to pay to Ana or bearer the sum of eight

thousand pesos on 7 August 2001.(Sgd) Pablo

- Overdue and yet it was endorsed payable on demand

- When you indorsed an overdue instrument then it is payable on demand

Sec. 47An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsedor discharged by payment or otherwise. (ex: destroying the instrument)

STALE CHECK (when not presented for payment within 6 months)Stale check can still be negotiated but it needs the replacement of new one.

(nb: check cannot be overdue because it is payable on demand)

STALE DEMAND (by laches)FIXED FUTURE TIMEEx: Christmas day of 2001

DETERMINABLE FUTURE TIMEDay certain

How to determinewith reference to the happening of a specified event that is sure to happen but it cannot beknown when.

Ex: Death of any being

P50,000.00I promise to pay to the order of Berto fifty thousand

pesos 1 week after his only carabao will die.(Sgd) Harry Potter

Carabao will diespecified event

P80,000.00

I promise to pay to the order of Claro eighty thousandpesos 1 month after his only cow will die of syphilis.

(Sgd) Harry PotterCow will die of syphilisnot sure to happen

Payable upon a contingencyUnder last paragraph of Sec. 4, an instrument payable upon a contingency is not negotiable and the happening ofthe event does not cure the defect.

Q: What if the only cow of Claro will die of syphilis?A: The instrument is still not negotiablebecause the happening of the contingent event does not cure the defect.(Sec. 4 last par.)

*Day certain

PAYABLE TO ORDERSec. 8Payable to

i. the ORDER of a specified personorii. a specified person or his order.


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Order or a specified personEx: to the order of Juan

Specified person or his orderEx: to Juan or (his) orderIn this instance, payment is not limited to Juan but also to the pleasure of Juan (eg: by indorsing, signing at the

back of the instrument and deliver it to somebody)

NOT NEGOTIABLE, if payable to SPECIFIED PERSON because there is a limitation.

*Sec. 34Indorsement

PAYABLE TO BEARER (Sec. 9)5 Instances:

1. EXPRESSLY (eg: Pay to BEARER)2. Person named/specified therein or BEARER (eg: Pay to Jose [payee] or bearer)

Sec. 8, last par.when the instrument ispayable to orderthe payee must be namedor otherwiseindicated therein with reasonable certainty.

Payeeperson specified in the instrumentSec. 9no need of specifying the person

Q: How to know if the instrument is payable to bearer?A: See Sec. 9

In, ORDERpayee must indorse it firstIn, BEARERpayee does not need to endorse

3. FICTITIOUS PERSON/PAYEE and such is known to the person making it payable.(eg: Pay to the order of Tarzan)

4. NAME OF THE PAYEE DOES NOT PURPORT TO THE NAME OF ANY PERSON(eg: Pay to the order of CASH)nb: the word order is not the controlling factor

5. WHEN THE ONLY OR LAST INDORSEMENT IS AN INDORSEMENT IN BLANK (in relation to Secs. 33and 34

1. Fictitious2. Expressly made payable3. Not named4. Indorsement in blank5. Specified (named)

BLANK INDORSEMENT- signature affix, written at the back of the instrument- made by the payee who is first to indorse

CLASSIFICATIONS OF INDORSEMENT1. Blank indorsement

- an indorsement that does not specify the indorseeEx:

Baguio City22 November 2001

P50,000.00I promise to pay to the order of Ruby the sum of fifty

thousand pesos.(Sgd) Harry Potter

At the back

To: (Sgd)Ruby

2. Special indorsement- one that specifies the indorsee

Ex:Face of instrument (same as above)

At the back


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To: Rosanna (Sgd) RubyTo: (Sgd)Rosanna(blank indorsement)-This is payable to bearer because last indorsement is in blank, hence the whole instrument is converted topayable to bearer (blank indorsement)

-Last indorsement matters

-not permitted to alter the instrument (that is: in words) to make it payable to bearer.-impossible and illegal to make an instrument payable to bearer to become payable to order.

UNCONDITIONAL PROMISE OR ORDER TO PAY A SUM CERTAIN IN MONEY

Sec.2the amount payable remains a sum certain although it is to be paid with an interest by stated installmentswith an acceleration clause although it is to be paid with exchange with cost of collection or an attorneys fee.(keyword: CESIACost, Exchange, Stated, Interest, Acceleration)

1. with an INTEREST-must be in writing to be binding on the debtor (Art. 1956, NCC)

Ex: bill of exchange/Promissory Note-obligor bound himself to pay interest as written on the face of the instrument.

1.22 November 2001

P10,000.00I promise to pay to the order of Pedro ten thousand

pesos with an interest of 2% per monthon 22 January2002.

(Sgd) Harry Potter-amount ispayable in sum certainalthough it is with interest

-P10, 400.00 due on 22 January 2002

2.P12,000.00

I promise to pay to Maria or bearer the sum of twelvethousand pesos with an interest on 22 April 2002.

(Sgd) Harry Potter-even if rate of interest is not specified, the legal rate of interest shall be applied. (Central Bank Circular #416 the legal rate of interest is 12% per annum)

Bill of Exchange/Promissory note representing balance of installment sales (6% painterest)

-obligation arises from a sale

Sec. 1amount payable sum certainSec. 2.sum certain but to pay by stated installment, with an interest, acceleration clause, exchange, cost ofcollection/attorneys fee (CESIA)

Nb: 1) It must be EXPRESSLY STATED that there is payment of interest (Art. 1956, NCC)2) If there is stipulation but no rate then legal rate of interest applies.

2. STATED INSTALLMENTThe following must be specified:

a. Amountof each installment and

b. Due datefor each installment

If there is not amount and due date specified the it is NOT NEGOTIABLE because the amount will be uncertain.

PAYABLE BY INSTALLMENTEx:Negotiable; amount sum certainP20,000.00

Pay to Adquilen or bearer the sum of twentythousand pesos by installment as follows:

a) P3,000.00 due on 1 January 2002b) P4,000.00 due on 2 February 2002


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c) P5,000.00 due on 3 March 2002d) P2,000.00 due on 4 April 2002e) P6,000.00 due on 5 May 2002

To: Reynaldo (Sgd) HarryPotter

Negotiable; amount sum certainP16,000.00

Pay to the order of Indong the sum of sixteenthousand pesos on two(2) equal installments the first tob due on 6 July 2002 and the other to be due on 16July 2002.

(Sgd) Harry Potter

To: Reynaldo (or with reasonable certainty)

NOT NEGOTIABLEP12,000.00

I promise to pay to the order of Gandeza the sum oftwelve thousand pesos by stated installments on 1January 2002 and 2 February 2002.

(Sgd) Harry Potter

3. ACCELERATION CLAUSEDefinition: with a provision that upon default the whole amounts shall become due.

Stated installment but in default the whole shall become due.

Ex:NEGOTIABLEP20,000.00

Pay to Adquilen or bearer the sum of twentythousand pesos by installment as follows:

a) P3,000.00 due on 1 January 2002b) P4,000.00 due on 2 February 2002c) P5,000.00 due on 3 March 2002d) P2,000.00 due on 4 April 2002e) P6,000.00 due on 5 May 2002

In the event there is failure to pay anyone of theforegoing installments then the entire remainingobligation as of the time of default shall immediatelybecome due.

To: Clara (Sgd) HarryPotter

4. EXCHANGE-difference in value of same amount of money by different countries

ExUS$1 and Canadian$1(here, the US dollar is more valuable. Their difference is called EXCHANGE)

Exchange must be at:1. Fixed rate

-by agreement of the parties

2. Current rate-average rate that will be prevailing at the time of the transaction during a particular date.

Ex: of an instrument payable with an EXCHANGECalifornia USA

26 November 2001US$2,000.00

Pay to the order of Jose the sum of two thousand US


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dollar in Philippine peso at a rate of P51.00 per dollaron 25 December 2001.

To: Maria (Sgd) HarryPotter

US$2,000.00Pay to the order of Juan de la Cruz the sum of two

thousand US dollar in Philippine peso at the currentrate of exchange.

To: Clara (Sgd) HarryPotter-here, the instrument is payable on demand because no time of payment is made

-current rate at the time of the payment prevails (Ponce vs CA, 90 SCRA 332)

5. COST OF COLLECTION OR/AND ATTORNEYS FEE-does not include any other expenses

Ex:P50,000.00

I promise to pay to the order of Juan de la Cruz fiftythousand pesos on 16 January 2002.

In the event I fail to pay and as a consequence acase will be filed against me, I bind myself to pay anadditional amount equivalent to 20% of the principalobligation to pay cost of collection or attorneys fee.

(Sgd) Harry Potter

SECTION 3-Promise is unconditional

ORDER/PROMISE to pay remains UNCONDITIONAL although couple with:1. An indication of particular fund

-for reimbursement

2. Statement of the transaction which gave rise to the instrument.

-a mere statement on how come the instrument was issued in ONLY a statement stating WHAT TRANSPIREDbetween the parties as a consequence of it the instrument was issued.

P50,000.00I promise to pay to the order of Reynaldo the sum of

fifty thousand pesos on 5 May 2002.This promissory note was executed by me because

of the fact that I purchased from the payee aMitshubishi Lancer car model 1964 with plate numberADB398 and the aforesaid amount represents mybalance on that sale.

(Sgd) Harry Potter-In the first paragraph, the promise to pay is absolute

-In the second paragraph, mere statement of what transpired.Q: What prompted Harry to issue the promissory note?A: There was a sale/transaction

P50,000.00I promise to pay to the order of Reynaldo fifty

thousand pesos after he will sell to me his car withplate number ADB 398.

(Sgd) Harry PotterQ: Is this negotiable?A: It is NOT because the condition is unconditional.


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INDICATION OF PARTICULAR FUND OUT OF WHICH THE REIMBURSEMENT IS TO BE MADE

FUND is a source of reimbursementi. It can be where the drawee can be reimbursed, orii. Where the drawee may be able to compensate for what he will pay

Last paragraph of Sec. 3-but an order or promise to pay out of a particular fund is not unconditional. (here, the FUND means the

actual source of payment)

Fund as source of payment vs. Fund as source of reimbursement

Fund as source of paymentEx:P10,000,000.00

Pay to the order of the DPWH the sum of ten millionpesos on 15 January 2002 out of the fund in theNational Government Treasury.

(Sgd) Auditor GeneralTo: The Treasurer of the Philippines-fund is mentioned-this is NOT NEGOTIABLE (but valid) because the order to pay is conditionalfor it is payable out of particularfund.-it is conditional because payment depends on a condition that the fund indicated is sufficient (Payment is basedin contingency, that is the availability of funds.

A TREASURY WARRANT is not negotiable because it ispayable out of a particular fund.

-DRAWEE IS REQUIRED TO PAY BUT WHETHER HE CAN BE REIMBURSED OR NOTIS BESIDE THEPOINT

P90,000.00Pay to the order of Pedro or bearer the sum of ninety

thousand pesos and reimburse yourself out of moneywhich is in your custody.

(Sgd) Harry Potter (drawer)To: Marlon (drawee)-here, the fund is the money of the drawer in the possession of the drawee. (the fund here is the source ofpayment)

-The drawee will pay whether the fund indicated is sufficient or not.

SEC. 5 (provisions that do not affect the negotiability of the instrument)They are the following:

1. Sale of collateral securities2. Confession of Judgment3. Waives the benefit of any law4. Gives the holder an election/(option) to require something to be done in lieu of payment of money.

(keyword: COWS: Confession, Option, Waives, Sale)

Sec. 5(d)Holder:

1. May demand MONEY or2. Something to be done (ie: performance of an act)

Sec. 5 Par. 1(where it adds act) NOT NEGOTIABLE

ACT + MONEY = NOT NEGOTIABLEEx:P20,000.00

I promise to pay to the order of Ruby the sum oftwenty thousand pesos and deliver two(2) cows to theholder.

(Sgd) Harry Potter-NOT NEGOTIABLE because it will be hard to determine the liability of the indorser.


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Where the holder has the opt ion (or e lect ion to requi re someth ing to be done)Ex:P10,000.00

I promise to pay to the order of Ruby the sum of tenthousand pesos ordeliver a carabao at the option of

the holder.(Sgd) Harry Potter

Q: Who has the privilege of choosing?A: The HOLDER (ie. Last indorser/bearer but never to the drawer or drawee) not the maker or payee. Even if itis a Bill of Exchange (not the drawer or drawee)

Sec. 5 (a) Sale of Collateral Security-maker makes assurance of payment (ex: execution of mortgage)

Collateral Security-refers to a property constituted to guarantee satisfaction or payment of obligation.

Ex:P50,000.00I promise to pay to the order on 5 May 2002. This

obligation is secured by a mortgage involving my car, aMitshubishi Lancer with plate numbe ADB 398 whichmay be sold by the holder in a public auction sale andthe proceeds thereof may be applied to satisfy theaforesaid obligation, in the event this note is not paid atmaturity.

For this purpose, I hereby appoint the holder as myattorney in fact to undertake the public auction sale inmy behalf.

(Sgd) Harry Potter-Any holder can make the auction

-in the event this note is not paid at maturity this is not a condition

-The car can be sold at public auction sale if note is not paid at maturity.

-Selling the car here is nota condition; it is only an optionof the holder.

-Source of payment does not come from the proceed of the sale.-Here, there is authority of the holder to sell collateral securityEx:P50,000.00

I promise to pay to the order of Ruby fifty thousandpesos on 5 May 2002 after I am able to sell my

Mitshubishi Lancer Car with plate number ABD 398 in apublic auction sale to be undertaken by me or myattorney in face.

(Sgd) Harry Potter-NOT NEGOTIABLE because there is a condition. Payment depends on the sale of the car.

Sec. 5 (b)3 forms of Confession of Judgment

1. WARRANT of Attorney2. Cognovit Actionem3. Relicta verificationem

Warrant of attorney-Confession of judgment made before an action filed in the court

In this jurisdiction this form of judgment is VOID because:1. It enlarges the field of fraud;2. It denies a party his day in court; and,3. It deprives a party his statutory right to appeal.

If warrant of attorney is made as if note warrant of attorney is made at all

Confession of judgment means that the obligor acknowledge his liability that may arise from the instrument.


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Cognovit actionem-one that is made after a case has been filed in court.

*This is VALID in this jurisdiction.

Relicta actionem-similar to cognovit actionem, valid also in this jurisdiction, buthere, the defendant or the respondent initially raisea defense against a claim but later on abandons this defense.

Ex:Defendant denying that he paid the liability, but the abandonment is tantamount to a liability.

P50,000.00I promise to pay to the order of Ruby fifty thousand

pesos on 6 June 2002. In the event I failed to pay theaforesaid obligation and as a consequence thereof acase should be filed against me in court for collection

of sums of money, I hereby authorize Pedro as myattorney in fact to acknowledge in my behalf the liabilitythat may arise from the issuance of this note.

(Sgd) Harry Potter

If warrant of attorney is made as if no warrant of attorney is made at all.

Sec. 5 (c)-obligor = drawer/indorser in relation to Sec. 89Sec. 89-person secondarilyliable(referring to the drawer/indorser) is entitled to a notice of dishonor.

Q: What is the advantage of the person secondarily liable?A: He can be discharged/relieved from liability.

NOTICE OF DISHONOR-notice to be made by the holder informing the person secondarily liable the fact that the instrument was refusedpayment or acceptance.

Q: What is the form of the notice?A: It must be in writing(for convinience).

BP 22 is not the same with Sec. 89 of NIL

Ex: Bill of ExchangeP20,000.00

Pay to the order of Ruby twenty thousand pesos on 3March 2002.

Notice of Dishonor is hereby waived.

(Sgd) Harry Potter (drawer)To: Reynaldo (drawee)-even if one does not receive a NOTICE, he is still liable.

Sec. 61. Omissions (may be intentional or not)2. Additions

INTENTIONAL OMISSION:the instrument:1. is not dated2. does not specify the value given3. does not specify theplacewhere it is issued or drawn

ADDITIONS1. seal2. particular kind of current money which payment is to be made (ie: designating of denomination)

NOT DATED-When the promissory note is not dated, and one does not know when it was executed, then he can put the dateof issue [Sec. 17 (c)]


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DOES NOT SPECIFY THE VALUE GIVEN-There is a presumption that it is in exchange of a valuable consideration (Sec. 24 Presumption ofConsideration)

PLACE (issued/drawn)

See: Sec. 17in relation to Sec. 73(Place of presentment)

In his (obligors)1. residence2. place of business, or3. in any other place where he could be found.

Promissory note vs Bill of Exchange

PROMISSORY NOTE BILL OF EXCHANGE

-Unconditional promise-4 essential elements

1. Unconditional promise2. Signed by maker3. Payable on demand or at a fixed or

determinable future time4. Payable to bearer or order

-need not be presented for acceptance-two parties (originally)-maker is primarily liable

-Unconditional order-5 elements

1. Unconditional order in writing2. Addressed by one person to another3. Signed by the person issuing it4. Order to pay on demand or at a fixed or

determinable future time a sum certain inmoney

5. Order to pay must be to order or to bearer.

-drawee must be named

-may be presented for acceptance-three parties-drawer is secondarily liable

PRESENTMENT FOR ACCEPTANCE-drawer may be liable under Sec. 62 once the bill of exchange has been accepted.

Sec. 60:liability of the maker-maker is the person to whom you should present the instrument first-maker is principally liable

*In a bill of exchange, the one primarily liable is the drawee.

Bill of Exchange vs Check

Bill of Exchange Check-payable on demand or at a fixed or determinablefuture time-drawee may not be a bank-act of issuing without sufficient fund is NOTCRIMINAL-may be presented for acceptance

-always payable on demand

-drawee is always a bank-act is CRIMINAL

-need not be presented for acceptance

CROSSED CHECK [Generally]Baguio City

6 December 2001

P80,000.

Pay to the order of CASH the amount of eighty thousand pesos.

(Sgd) Harry PotterTo: PNBank

CROSSED CHECK1. Generally crossed by 2 diagonal parallel lines at the upper left corner of the check

or instrument.2. Specially


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The example is GENERALLY CROSSED CHECK

SPECIALLY CROSSED CHECKEx:

Baguio City6 December 2001

P80,000.

Pay to the order of CASH the amount of eighty thousand pesos.

(Sgd) Harry PotterTo: PNBank-specific name of a bank is written in between the 2 diagonal parallel lines.

-named bank merely becomes a drawee bank

PURPOSE OF CROSSED CHECK1. It will be for deposit2. Negotiated only once by the payee

-drawee has issued that crossed check to see to it that the particular objective will be achieved.

DRAFT/BANK DRAFT-a check drawn by one bank against another bank.

Addenda:1) Sec. 184Promissory Note: Unconditionalpromise in writing

Sec. 126Bill of Exchange: Unconditional order

2) Promissory Note4 Elements

3) PNnot presented-maker, when he presents PN = payment

BOEpresented for acceptance or payment

Upon acceptancedrawee becomes primarily liable under Sec. 62

4) PN2 parties (maker and payee)BOE 3 parties (1. drawer issues instrument; 2. payee; 3. drawee whom the instrument is addressed

[required to pay])

Sec. 126

5) Makerliable-pay instrument according to the tenor of Sec. 60.-person directly responsible to pay to whom instrument should be presented first

If he refuses to pay then go to the person who indorse it.

BOE: drawersecondarily liableDraweeprimarily liable

-Any indorser is also secondarily liable.

Check drawn for specific amount but not sufficiently funded with the drawee and is subsequently dishonored

(bouncing check) by the drawee.

Sec. 6 Addendum:

A. Seal, not essential1) For advertisement2) For identification3) For embellishment

B. Designation of particular kind of current money in which payment is to be made-denomination


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P100,000.00Marlon promised to pay to the order of Reynaldo one

hundred thousand pesos with use of 100 pieces ofP100 bills.

(Sgd) Harry Potter-payment of P100,000 with the use of P100 bills-specify denomination but not condition simply a designation of the denomination used.

As differentiated with:Sec. 2amount payable is to be made in exchange (speaks of two kind of currency)

Sec. 184To pay on1. Demand2. Fixed future time, or3. Determinable future time

A sum certain in money to order or a bearer

CASHIERSCHECK-check drawn by a cashier of a particular bank against the same bank where he is employed as a cashier.

Effect: as good as cash, but not a legal tender

Date of payment-takes the effect of payment when encashed

MANAGERS CHECK-check drawn by a manager of a particular bank against the same bank where he is employed as manager-as good as cash, but not a legal tender-takes effect when encashed

BLANK CHECK-incomplete instrument (Secs. 14 and 15)-the amount is not yet written

MEMORANDUM CHECK-contains memorandum to the effect that this will be followed before encashing-not condition-guidelines-written at the back on another paper attach to the check.

GUARANTEE CHECK-issued to simply guarantee payment of an existing obligation.

ACCOMMODATION CHECK-issued by drawer who did not receive any valuable consideration for drawing it from the payee or bearer.

Sec. 12

ANTE-DATED POST-DATED

-date earlier than the actual date of drawing orissuance

-date later than the actual date of issuance ordrawing the instrumenteffect:before encashing, wait for the arrival of postdate

allowed, but VOID if used for fraudulent purpose.

NEGOTIATION-refers to transfer of instrument-purpose: makes the transferee becomes holder of the instrument as:

1. Bearer, or2. Endorser

But, NOT if the transferee if for depositary only.

Q: How to negotiate a BEARER INSTRUMENT?A: By delivery.

Q: How to negotiate an ORDER INSTRUMENT?


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A: By indorsement plus delivery.

INDORSEMENT (Secs. 39 and 40)-signature affixed at the back of the instrument by the person negotiating it.

Face: signature of the drawer/maker

Back: signature of the person negotiating itEx: FACE

Payable to the order of Juan.

BACK

(Sgd) Juan

indorsement

SPECIAL INDORSEMENT

-if indorsee is specifically named

BLANK INDORSEMENT

last indorser-payable to bearer

Sec. 36RESTRICTIVE INDORSEMENT1. Prohibits further negotiation

ex: To: Maria only (-negotiable but ceases to be because further negotiation is prohibited.

2. When it constitutes the indorsee being an agent of indorserex: To: Maria for collection only

(Sgd) Harry Potter

3. When it vests title to the indorsee in trust of for the benefit of other personsex: To: Maria in trust for my son

(Sgd) Juan

CONDITIONAL INDORSEMENT-nothing to do with promise or order to pay

ex: To: Maria if she tops the 2001 Bar Exams (not referring with the promise to pay)

Suspensive conditionhappening of event gives rise to the obligation.

-however, the payee may disregard such condition or vice versa he may not be required to pay without thehappening of the event.

QUALIFIED INDORSEMENT-indorsee is only an assignee of the indorser

ex: To: Maria sans (without) recourse

indorser indorses the instrument to indorsee for payment from payee, but if drawee is insolvent, indorsee hasnot recourse against indorser.(but not for other reason than insolvency)

Sec. 13INSERTION OF DATEPurpose: to determine the maturity of the instrument or the amount of interest

INSTANCES WHERE DATE MAY BE INSERTED1. Instrument is payable at a fixed period after datebu tthe instrument is undated.

2. Instrument is payable at fixed period after sightbu tthe acceptance is undated.

A. Example of f ixed period after date(no date)___________

8,000.00


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I promise to pay to the order of Ruby eight thousandpesos five days after dateof this instrument.

(Sgd) Harry Potter-five days = fixed period-insert the date of issue, then maturity can now be determined.

Sec. 17 (c)where the instrument is not dated

Q: What is the effect of inserting a wrong date and thereafter the instrument is negotiated in due course?A: Sec 13. Insertion of a wrong date does not avoid the instrument but as to him that is the true date because ofthe right of a holder in due course (see: Sec. 57)

Q: Who is a holder in due course?A: Under Sec. 52, he who: (the conditions)

1. Takes the instrument complete and regular upon its face2. Takes the instrument before it is overdue

3. Takes the instrument in good faith4. Takes the instrument without knowledge of the infirmity or defect of the instrument.(keyword: COGI: Complete, Overdue, Good faith, Infirmity)

Complete and regular upon its face-all the essential elements are present, including all matters like date.

regular upon its faceno suspicion of alteration

before overdueEx: Suppose the check was issued on 1 January 2002, today is 7 January 2002, the check is already overdue

for value and in good faithfor value in exchange for valuable consideration

without knowledge of the infirmity or defect

Sec. 59 Presumption: Every holder is a holder in due course(this is a disputable presumption theadverse party may prove the insufficiency of the conditions)

See: Sec. 52 vs Sec. 59

Sec. 57Rights of a holder in due course1. Hold the instrument free form defect (Sec. 13 vs Sec. 57)2. To enforce the payment in its fu l l amoun t

See: Sec. 13

B. after sightafter is shown/presentedfor payment and there is acceptance.Ex: Bill of Exchange

1 January 2002P10,000.00

Pay to the order of Jose ten thousand pesos six daysafter sight.

(Sgd) PabloTo: Maria-Jose presented it to Maria for her acceptance

-Maria accepted it with her signature (but no d ate)So, the holder must insert the date

Sec. 14speaks of incompleteinstrument however, it was delivered

INCOMPLETE means an essential element i s lack ingEx: NOT SUM CERTAIN IN MONEYP.00

Pay to the order of Jose the sum of..


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(Sgd) MartaPNBank

wanting in any material particular (eg: the amount payable is wanting, therefore incomplete)

BUT it can be delivered (but it cannot be negotiated because the instrument is not negotiable for one of its

essential element is absent)

-The person in the possession thereof has a prima facie authority to complete it by filling up the blank therein(he is still apossessor, not still a holderbecause the instrument is not yet negotiable)

Q: What is the evidence of the authority?A: The signature on the blank paper.

Q: How to fill up?A: 1. Fill up the blank strictly in accordance with the authority given

2. Fill it up within a reasonable timeif he exceeds the authority then a holder in due course has a right under Sec. 57

negotiation by delivery = to bearer

Warranties of an Indorser (Secs. 65 and 66)1. That the instrument is genuine and in all respect what it purports to be;2. That he has a good title to it;3. That all prior parties had the capacity to contract;4. That he has no knowledge of any fact which would impair the validity of the instrument or render it

valueless.

ILLUSTRATION OF SEC. 14

FACEBaguio City

10 January 2002P__________.00

Pay to the order of Juan the sum of_________________

(Sgd) PedroLand BankFacts:

Pedro instructed Juan to put any amount but not exceeding P40,000.00. However, Juan placedP47,000.00.

Subsequently, Juan indorsed the check to Marta.

BACK (Special Indorsement)

To: Marta (indorsee)

(Sgd) Juan

Question #1Q: As a holder (indorsee), what can Marta do with the check?A: Marts may:

1. Indorse it further, or2. Present the check to the drawee bank for payment

Question #2Q: If Marta chose to present the check for payment but the bank dishonors the check, what must Marta do so that

she can recover from the persons who are secondarily liable?A: Marta should give notice of dishonorto the persons secondarily liable [ie: 1) the drawer and 2) the drawee]

Q: What if Marta did not give any notice of dishonor?A: Then the persons secondarily liable are DISCHARGED from liability.

NO form of notice but it must be in writing for purposes of convinience.

Question #3Q: If Marta is not a holder in due course (ex: she knew of the infirmity/defect), can she enforce the check against

Pedro?


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A: No. She cannot enforce the instrument against Pedro because the latter can raise the personal defense thatthe instrument was filled up not strictly in accordance with the authority given. The law requires that in orderthat the instrument may be enforced it must be filled up with authority given and within a reasonable time.

Question #4

Q: Will your answer be the same as in the preceding question if Marta is a holder in due course (ie: she did notknow that there was infirmity/defect and if she knew, she was not a party thereor)?

A: NO. My answer will not be the same as in the preceding question. Marta can enforce the instrument as if itwas strictly filled up in accordance with the authority given and within a reasonable time. (see: last sentenceof Sec. 14, NIL) [Sec. 57 Rights of holder in due course]

Marta can enforce the instrument free from defect and in its full amount of P47,000.00

Question #5Q: Can Marta require Juan to pay P47,000.00 if the bank and Pedro do not pay?A: YES.

Juan warrants Marta that:1. The check is genuine and in all respect what it purports to be(ie: the amount is correct even if it was

written not strictly in accordance of the authority given)

SEC. 15INCOMPLETEinstrument and UNDELIVEREDundelivered means NO VALID DELIVERY

-no essential particular and no valid delivery

See: Sec 8payee must be named

-instrument is INCOMPLETE

-COMPLETED and NEGOTIATED without authority

-Effect of signing: the instrument is NOT a valid contractin the hands of ANY HOLDER

-the instrument cannot be enforced by the holder (nb: even holder in due course) against the person who becamethe party theretoprior to delivery

ILLUSTRATION:

FACEP80,000.00

Pay to the order of Mr. ____________________the sum of eighty thousand pesos .

(Sgd) RUATo: PNBank

Facts:Because of his gross negligence, RUA lost his incomplete instrument. Amado was the finder. He

(Amado) placed his name as payee unknown to RUA.Thereafter, Amado negotiated the check to Lito.

BACK (after completion)

To: Lito

(Sgd) Amado (indorser)

Nb: from Amado to Lito = there is a valid delivery BUT from RUA to Amado = no valid delivery.

-Lito cannot enforce the instrument against RUA if the instrument is dishonored by the bank.


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any holder includes holder in due course

Lito cannot enforce the instrument against RUA because the check cannot be valid in the hands of ANYHOLDER. Even if Lito is a holder in due course he cannot enforce it against RUA considering that RUA was a

person who place the signature in the instrument before delivery.

INCOMPLETE INSTRUMENT INCOMPLETE AND UNDELIVEREDINSTRUMENT

Can be enforced by a holder in due course Cannot be enforce by a holder in due course

FACEP____________.00

Pay to BEARER the sum of____________________

(Sgd) AmadoTo: Land Bank

Facts:Amado placed this incomplete instrument in his cabinet. Rey took it without the consent of Amado.Subsequently, Rey put the amount of ninety thousand pesos. Later, Rey indorsed it to Bartolo.Bartolo presented the instrument to the bank but it was dishonored. He gave a notice of dishonor to Rey

and Amado.

BACK (after completion)

To: Bartolo

(Sgd) Rey

Read: Sec. 40 in relation to Sec. 30

In instrumentpayable to bearer= it can be negotiated by DELIVERY only, NO NEED TO INDORSE

Sec. 40: Payable to bearer can be indorsed but it may not be necessary because Sec. 30 payable to bearer isnegotiated by delivery.

- the instrument must be incomplete and undelivered

Question #1Q: Can Bartolo require Amado to pay P90,000.00A: NO.

Reason: The check is not a valid contract in the hands of any holder. Bartolo cannot enforce against Amadobecause Amado is theperson who placed his signature before del ivery.

Question #2 (use Sec. 65 in relation to Sec. 66: WARRANTY)Q: Can Bartolo require Rey to pay P90,000.00?

[additional facts: Rey made a SPECIAL INDORSEMENT (this made Amado a general indorser) and since Reyindorsed it, Sec. 66 applies, otherwise, Sec. 65 applies]

A: YES. Bartolo can require Rey to pay the P90,000.00.As an indorser Rey warrants to Bartolo that the instrument is genuine and in all respects what it purports

to be.[Rey incurred his warranty when he indorsed the check/instrument to Bartolo; nb:Amado is a drawer and

he has NO WARRANTY, i t is only the INDORSER who w arrants]

Even if Rey has no valid title, as far as Bartolo is concern Rey has a valid/good title because Reywarrants this.

Amado has areal defense (ie: the instrument is NOT a valid contract in the hands of any holder) underSec. 15.

Sec. 14 is only a PERSONAL DEFENSE (that the instrument was filled up not strictly in accordance withthe authority given)

USE Sec. 65 when:


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1. There is a qualified indorser2. When the instrument is negotiated by delivery only

USE Sec. 66 when:1. One indorses an instrument without qualifications, or2. One is a general indorser (and this includes special indorser)

SEC. 16 (here, no problem about the instrument for it is COMPLETEbu tit is UNDELIVERED)

undelivered means NO EFFECTUAL DELIVERY (ie: no legal effect)

*There must have been a delivery BUT not effectual (eg: delivery was made by a person not authorized)

Q: When will the delivery be considered effectual?A: If the delivery is made by the drawer/maker (indorser/acceptor or anyone who is authorized by him). [it mustbe made either BYTHE AUTHORITY or UNDERTHE AUTHORITYof the person making, drawing, indorsing,accepting]

-The instrument is COMPLETE but CONTRACT involving the complete instrument is INCOMPLETE if there is NODELIVERY.

-Any time before delivery the complete instrument does not produce any legal effect.

KINDS OF DELIVERY1. Conditional delivery2. Delivery for a special purpose3. Delivery not intended to transfer title (it may transfer physical possession but not the title)

Conditional delivery-happening of the suspensive condition the delivery becomes effectual

Delivery for a special purpose-to make the person to whom it is delivered a trustee or depositary (ie: special purpose of safekeeping)

Q: What is the consequence if there is NO EFFECTUAL DELIVERY but it is in the hands of a holder in duecourse?

A: There is a conclusive presumption that there is a valid and intentional delivery by all parties prior to him(holder in due course). [All these prior parties can be liable to a holder in due course]

TERMS in Sec. 161. IMMEDIATE PARTY refers to the one who knows the defect/infirmity of the instrument (this does not

meanproximity)2. REMOTE PARTY OTHER THAT HOLDER IN DUE COURSErefers to a party who is not aware of the

defect/infirmity of the instrument (eg: one who received an instrument after overdue)

P80,000.00Pay to the order of Juan eighty thousand pesos.

(Sgd) PedroTo: Land Bank

Facts:Pedro signed this instrument, put it in his cabinet and the sister of Juan took it without Pedros consent. The sister of Juan delivered the instrument to Juan but she is not authorized by Pedro.Later, Juan indorsed the instrument to Harry.

BACK

To: Harry

(Sgd) Juan

Harry is still an IMMEDIATE PARTY as long as he is aware that the instrument was not deliverd by Pedro (NOTPROXIMITY)


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BUT, If Harry is NOT AWARE but the check is overdue, then Harry is a REMOTE PARTY OTHER THANHOLDER IN DUE COURSE

Question #1Q: As a holder in due course what may Harry do with the check?A: Harry can 1) present the check to Land Bank for payment, or 2) indorse if further.

Question #2Q: If Harry presents the check to the Land Bank for payment but the bank refuses to pay, what should Harry doso that he may be able to recover?A: Harry shall give a notice of dishonor to Pedro and Juan.

Question #3Q: If Harry is not a HOLDER IN DUE COURSE can he require Pedro to pay P80,000.00?A: NO.

Reason: There is no effectual delivery because the check was not delivered by or under the authority ofPedro.

Question #4

Q: Will your answer be the same as in the preceding question if Harry is a holder in due course?A: See: Sec 16, last sentence: And where the instrument is no longer in the possession of a party whosesignature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proven.

In the hands of a holder in due course, a valid and intentional delivery is conclusively presumedto havebeen made by all partiesprior to him (holder in due course) [until the contrary is proven]

***Juan is a prior party and he warrants

Question #5Q: If Harry decides to go against Juan will the latter be liable?A: YES.

Reason: Juan as indorser warrants that he has a good title to the check (see: Sec. 65)

ANOTHER ILLUSTRATION OF SEC. 16

P80,000.00Pay to the order of Juan eighty thousand pesos.

(Sgd) PedroT: Land Bank

Facts:Pedro instructed Juan to indorse this check until such time the latter will be able to complete the

construction of Pedros house.Construction has never started when Juan indorsed the check to Ruby.

Subsequently, Ruby indorsed the check to Clara.

BACK

To: Ruby(Sgd) Juan

To: Clara(Sgd) Ruby

Question #1Q: If Clara is not a holder in due course can she require Pedro to pay after giving him notice of dishonor?A: NO.

Pedro has a personal defense that there was no effectual delivery of the instrument considering thatdelivery was conditional and the suspensive condition was not fulfilled. (Juan was not acting under the authority ofPedro).

Question #2Q: Will your answer be the same as in the preceding question if Clara is a holder in due course?


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A: NO. My answer is not the same as in the preceding question because Clara can require Pedro to pay becausethe law provides that when the instrument is in the hands of a holder in due course a valid and intentionaldelivery by all parties prior to him (holder in due course) so as to make them (prior parties) liable to her, isconclus ive ly presumed.

(Clara holds the instrument as though there was a valid deliveryfrom Pedro, Juan and Ruby)

Question #3Q: As a holder in due course, can Clara require Juan to pay?A: YES. Clara can require Juan to pay (*warranty of Juan extends beyond Ruby)

[See: Sec. 66, opening sentence (every indorser who indorses without qualification, warrants, to allsubsequent holders in due course ) in relation toPar(b) of Sec. 65 (that he has a good title to it)]

Juan is a general indorser and he warrants ALL SUBSEQUENT HOLDERS IN DUE COURSE that he hasa good title.

Question #4Q: If Clara fails to find Pedro and Juan, can she require Ruby to pay?A: YES. Clara can require Ruby to pay because the latter is a general indorser and such she warrants that the

check is genuine.

NOTES:-Check is complete, therefore, negotiable.-Delivery is conditional (ie: construction)-The suspensive condition was not fulfilled, therefore, the delivery is NOT EFFECTUAL.

Juan was not acting under the authority of Pedro because of the non-fulfillment of the obligation,therefore, no effectual delivery to Ruby (as far as Pedro is concern)


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SEC. 14 vs SEC. 15 vs SEC. 16

Sec. 14 Sec. 15 Sec. 161. INCOMPLETE instrument butDELIVERED.

2. A Personal Defense(can be availed of only as againsta holder who is NOT a holder in due course).

3. DEFENSE: That the instrument was filled up NOTSTRICTLY in accordance with author i ty given and with areasonable time.

4. Cannot be enforced by one who in not a holder in duecourse.Against whom? Against a person who placed hissignature thereonpriorto the completion.

5. In the hands of a holder in due course, the instrumentis AS IF it was filled up strictly in accordance with theauthority given.

1. INCOMPLETE instrument but UNDELIVERED.

2. A Real Defense (can be availed of even as against aholder in due course)

3. DEFENSE: That the instrument is NOT A VALIDCONTRACT in the hands of any holder.

4. Cannot be enforced even by one who is a holder in duecourse.Against whom? Any person who became a party prior tocompletion or delivery.

5. In the hands of any holder, the instrument is not a validcontract.

1. COMPLETE instrument butUNDELIVERED

2. A Personal Defense(can be awaited of only against aholder who is not a holder in due course).

3. DEFENSE: That there is NO EFFECTUAL DELIVERYof the instrument because:

a) The delivery was conditional and thesuspensive condition was not fulfilled.

OR

b) The delivery was special purpose only andthe instrument was not intended to benegotiated.

4. Cannot be enforced by one who is NOT A HOLDER INDUE COURSE.Against whom? Person who placed his signature beforedelivery of instrument.

5. In the hands of a holder in due course, a valid andintentional deliveryby all parties prior to a holder in duecourse is conclusively presumed. All such prior partiesmay be liable to the holder in due course.

In NIL, equity = personal defenses


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Sec. FORGERY(limited to the defect in the signature)(NOT: if the sum certain is changed from P10,000.00 to P100,000.00 (this example is a material alteration)

Forgery may mean:1. Counterfeit-making (similar to feigning, faking, or simulating) of anothers signature with the INTENTION TO

DEFRAUD him (this is intention to defraud is essential to constitute forgery)

2. Signature obtained through fraud(ie: fraud in factum)Ex: a person signs a paper not knowing that the paper will be made a negotiable instrument.

3. Signature obtained through irresistible force or uncontrollable fear.4. Signature place without authority.

Forgery is a real defense

THE EFFECTS OF FORGERY:1. The forged signature is rendered WHOLLY INOPERATIVE (when it does not operate to create or give rise to a

liability).2. NO right to RETAIN the instrument (as far as the one who signed is concern)3. NO right to ENFORCE the instrument can be acquired.4. NO right to give a DISCHARGE can be acquired.

- the acceptor/drawee has no right to accept payment or pay the instrument as far as the person whose signaturewas forged.

-if the drawee bank pays then I cannot debit against the drawers (whose signature was forged) account.

Nb:the instrument can still be validly negotiatedbut ONLY the forged signature is rendered INOPERATIVE.

WHO MAY BE LIABLE IN CASE OF FORGERY1. The forger

- the forger is precluded from setting up forgery as a defense.

2. The subsequent indorser (he is an indorser who makes his indorsement after forgery is committed. (alsoprecluded from setting up forgery as a defense.)Reason: The indorser warrants (Secs. 65 and 66)

3. The acceptor/drawee who accepts an instrument where the signature of the drawer was forged (also precludedfrom setting up forgery as a defense.)See: Sec. 62

REMEDY: Dishonor the instrument if there is a doubt in the signature.

FORGERYPayable to ORDERForgery in the signature of the drawer is a real defenseby the DRAWER.

Drawers defense: that the forged signature is rendered wholly inoperative (ie. He [the drawer] will never be liable in that

forged signature)

Forgery in the signature of the payee is a real defenseby BOTH the drawer and payee (or original indorser).

Drawers defense:that he is notliable because of lack of valid indorsementby the payee.(NB: In an instrument that is payable to order, a valid indorsement by the payeeis necessary to negotiate the instrument,sec. 30)

Payees defense: that the forged signature is rendered wholly inoperative.

FaceP80,000.00

Pay to theORDER of Amado eighty thousand

pesos. (Sgd)PedroTo: PNBankThis instrument was forged by Amado.BackTo: Bella

(Sgd) AmadoTo: Harry

(Sgd) Bella


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QUESTIONS:1) If the bank dishonors the check and H gives notice of dishonor to Pedro, is the latter liable?Ans: No. The forged signature is wholly inoperative. (real defense)

Pedro will never be liable for that signature because Harry did not acquire any right to enforce payment of theinstrument, based on that signature, against the person whose signature was forged. (NB: even if you are a holder in due

course)

2) If Harry gives notice of dishonor to Amado, can Harry recover from the former?Ans: Yes. Reason: he is a forger and as such he is precluded from setting up forgery or want of authority as a defense.

As a general indorser, he warrants under Art. 66 that the signature is genuine and in all respects what it purportsto be

3) If Harry gives notice of dishonor to Bella, will Bella be liable to pay?Ans: Yes. Reason: She is a subsequent indorser and precluded from setting forgery as a defense. And by indorsing thecheck, she warrants to Harry that the instrument is genuine and in all respects what it purports to be.

Forged instrument in hands of a HOLDER IN DUE COURSE cant be enforced for payment.

Forged signature does not make you liable to the instrument

NB: When the payees signature was ONLY forged, the payee and the drawer can still avail of the real defense. Reason:No valid indorsement by the payee.(see: sec. 30indorsement + delivery)

Illustration (forgery in the signature of the PAYEE)

FaceP80,000.00

Pay to theORDER of Juan eighty thousand pesos.(Sgd)

BertoTo: Land Bank

BackTo: Pablo

(Sgd)JuanTo: Harry

(Sgd) PabloThis payees (aka orginal indorser) signature is forged by Pablo.

QUESTIONS:1) If The bank does not pay Harry and Harry gives notice of dishonor (NOD) to Berto, is the latter liable?Ans: NO. Berto can set up the real defense that the forged signature of Juan (payee) is wholly inoperative (that is using

the payees forged signature as a real defense).Berto is not made liable even to a HOLDER IN DUE COURSE bec. of lack of valid indorsement by the payee.

2) If Harry gives NOD to Juan, is the latter liable?Ans: NO. Reason: Forged signature is rendered wholly inoperative. Juan cant be made liable on the basis of that forgedsignature.

As a holder (even HDC), Harry did not acquire any right to enforce the instrument against Juan.

3) If Harry gives a NOD to Pablo, is the latter liable?Ans: YES. Reason: Pablo is the FORGER and SUBSEQUENT INDORSER. As such, he is precluded from setting upforgery or want of authority. And he warrants that the instrument is genuine and in all respects what it purports to be.

Face

P60,000.00Pay to REY or BEARER sixty thousand pesos.

(Sgd)PabloTo: PNBank

BackTo: Pedro

(Sgd)REYTo: Harry


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REMEMBER: What issue is raised in the problem?

Juan as liable forger does not apply in negotiation by delivery(b.i.)

3) If Harry gives NOD to Nena, is the latter liable?Ans: YES. She warrants under 65 that the instrument is genuine and in al respects what it purports to be (including

Pedros forged signature), and her warranty extends to Harry as her immediate transferee.

FaceP60,000.00

Pay to JUAN or BEARER sixty thousand pesos.

(Sgd) PedroTo: LandBankthis signature was forged by Juan

BackTo: Nena

(Sgd)

JuanTo: Harry

(Delivered by) Nena

QUESTIONS:1) If the bank does not pay and Harry gives NOD to Pedro, is the latter liable?Ans: NO. Perdo can set up a real defense that the signature is wholly inoperative, and this does not make Pedro liable.

The Holder did not acquire any right to enforce payment of the instrument against Pedro.

2) If Harry give a NOD to Juan, is the latter liable?Ans: NO. (here, forgery is an incidental matter;the issue is the INDORSEMENT: will the indorsement make him liable?)

Sec. 40. Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer, is indorsedspecially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser toonly such holders as make title through his indorsement.

Apply 40; do not apply 65 bec. it was NOT negotiated by delivery only; see: 66 is applicable but 40 is MOREPARTICULAR.

Juan is liable as indorser to ONLY such holder as make title through his indorsement, that is TO NENA ONLY.

40 last sentence vs 65 last paragraph : similarity in immediate transferee but different in reasoning.

3) If Harry gives NOD to Nena, is the latter liable?Ans: YES. She warrants under 65 that the instrument is genuine and in al respects what it purports to be (includingPedros forged signature), and her warranty extends to Harry as her immediate transferee.

DOCTRINE IN FORGERY1) San Carlos Milling Co. vs BPI, 59 P 59

FaceUS$10,000.00

Pay to the order of San Carlos Milling Co

(Sgd) BaldwinTo: BPIForged by Dolores

BackTo: Hongkong and Shanghai Bank (HSB)

(Sgd) Dolores inbehalf of SCMC

signature of the drawer was forged

DOCTRINE:A bank (drawee bank) is BOUND to know the signature of its depositors (ie. The drawers). If it pays a forged check(forged signature of the drawer), it is considered as making payment out of its own funds and cannot debit the amount sopaid against the account of the depositor(drawer) whose signature was forged.


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Eg: BPI cannot debit the amount so paid against Baldwin account.

2) GELAC vs HK and Shanghai Bank, 43 Phil 711

Face

P2,000.00Pay to the order of MELICOR

(Sgd)GELACTo: PNBank

BackTo: Maasim

(Sgd)MELICORTo: HSB

(Sgd)Maasim

This was forged by Maasim

this check was drawn by GELAC involving payment of insurance proceeds for MELICOR.

This check was lost and Maasim had possession of the check and tried to make it appear that it was indorsed to him byMELICOR.

The practice of GELAC is to send the check by mail.

8: order instrumentpayee must be named.

Maasim deposited the check to HSB and the amount was allowed to be credited in Maasims account, and so he wasallowed to withdraw amount.

HSB presented to PNB. PNB paid.

Now, PNB wants to debit against the deposit account of GELAC.

DOCTRINE:When a check ispayable to the order of a personand it ispresented for payment BY ANOTHERit is the duty of

the bankto see to it that the check was duly indorsed by the original payee . (Reason: no valid indorsement)

So, PNB should see to it that MELICOR made a valid indorsement. It cannot debit against the account ofGELAC.

***Forgery in the signature of the payee is a real defenseby the drawer.

PNB can go against HSB; HSB can go against Maasim.

3) PNB vs Motor Service, 63 Phil 693

Face

Pay to the order of International Auto-repair Shop(IARS) or ORDER.

(Sgd) J.Klar

in behalf othe PANTRANCOTo: PNBThis was forged

BackTo: Motor Service

(Sgd)IARS

byunknown personTo: Natl City Bank of New York (NCBNY)


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(Sgd)Motor Service

When PANTRANCO had repairs it went to IARS

There were two checks involved in this case.

NCBNY presented to PNB for payment then PNB paid NCBNY; PNB wanted to debit the amount against the account ofPANTRANCO.PNB waived its rights to sue NCBNY thats why it sued Motor Service.

There was negligence on the part of PNB bec. it failed to see to it that the signature of J. Klar is GENUINE. So, PNB isguilty of CONSTRUCTIVE NEGLIGENCE by not ascertaining of its drawers/depositors signature is genuine or forged.

Motor Service was negligent bec. it accepted indorsement of UNKNOWN PERSON. It should ascertain his identity. So, itwas guilty of ACTUAL NEGLIGENCE in accepting check from persons whose identity remains unknown.

Q: Who shall bear the loss then?

A: The one guilty of actual negligence.

SC: PNB can go against Motor Service and let Motor Service to go against the unknown person.

4) PNB vs CA, 25 SCRA

Face

Pay to the order of Mariano Pulido(Sgd)

GSISTo: PNBank

BackTo: Manuel Go

(Sgd)M. PulidoTo: Lim

(Sgd)M. GoTo: PCIB

(Sgd)Lim

PCIB said: all prior indorsements guaranteed

Signatories of GSIS check are manager and auditor

Managers and Auditors signature were forged (this check was lost)

2 months before PCIB went to PNB. GSIS has already notifiedPNB to stop payment bec. GSIS said that the check wasforged (lost).

But PNB still paid bec. of the ANNOTATION: PCIB guaranteed that the indorsement were GENUINE but not thesignature.

SO, GSIS is not liable bec. its signature is wholly inoperative.

There was GREATER or ACTUAL NEGLIGENCE by PNB.

DOCTRINE OF JUS TERTIISWhen one of the two innocent persons must suffer from a wrongful act of a third person, the one guilty of actualnegligence or who put it into the power of a 3 rdperson to perpetrate the wrong shall bear the loss.

Here, the 3rdperson is the GSIS.

5) Republic Bank vs. Mauricia Ebrada, 65 SCRA 693

Signature of payee (original indorser) was forged.Ebrada also raised the issue that she was only an accommodation pary (29)


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Check payable to the order of a specified person.

DOCTRINEa person who takes a check or purchases draft is bound to satisfy himself that the check he is taking is genuine,

and by putting it into circulation, or by presenting it for payment or by indorsing it, he impliedly asserts that he hasperformed his duty.

Face (GENUINE)

Pay to A or ORDER(Sgd)

YTo: Bank

Back (FORGED)To: B

(Sgd)A

(Sgd)B

B presented this to the BANK.

B is the holder.if B purchases a draft, B should believe in good faith that the check in his possession is genuine.

Drawee bank cannot debit account of Y.Bank can go against B (basis: one who purchases a draft must satisfy himself that such draft is genuine)

Doctrine in GELAC is not applicable but the doctrine in Rep Bank vs Ebrada does not mean abandonment of ruling inGELAC case.

6)FaceP10,000.00

Pay to the order of Inter Island Gas Services, Corp(IGSP)

(Sgd) DDTo: VB10 different drawers in various drawee banks

BackTo: Jai Alai

(Sgd)IGSCorp

(by A.Ramirez)To: BPI

(Sgd)Jai Alai

BPI credited amount of checks to the account of Jai Alai; VB does not pay.

Signature of Alfredo Ramirez was NOT AUTHORIZED (therefore, forgery)

NOTE: The payee is corporationa corporation can act only through its Board of Directors. The Board can authorize anyof the corporate employees or officers to act for in its behalf.

DOCTRINE:A person taking a check of corporation (which can act only through its Board of Directors) does so on his own peril whenthe one who indorses in behalf of the corporation was in fact not authorized.

If you are the holder, you cannot compel the drawee to pay BUT go against the indorsee, or the person who appear tobe secondarily liable.

bec. VB does not pay, BPI sued Jai Alai.


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When Ramirez signed the checks in favor of Jai Alai, the latter should have verified the validity (ie. Authorization ofRamirez) of the formers signature.When Jai Alai accepted the checks from Ramirez, he did so in his own peril.\

7) PNB vs CA (1997)

FaceP80,000.00

Pay to the order of Ana eighty thousand pesos.

(Sgd) PedroTo: X BankThis signature was forged.

BackTo: Y Bank (indorsee)

(Sgd) Ana(indorsed check to

Y Bank [indorser])

Y Bank presented payment by X Bank.

NOTE: X Bank is the drawee bank, Y Bank is the collecting bank (where the payee deposits/indorses the check)Similar to Rep. Bank vs Ebrada case/doctrine.

DOCTRINE:A collecting bank incurs the liability of the indorser (warrants the check is genuine)

MATERIAL ALTERATIONIt is any unauthorized changein the instrument.It includes:

a) Change in the amount payable.b) Change in the maturity date.c) Change in the number or relation.d) Change in the nature of the instrument.e) Adds interest when in fact not stipulated.

EFFECTS OF MATERIAL ALTERATION1. The instrument is AVOIDED.2. The instrument cannot be enforced against the party who did not authorize nor assented to the alteration.3. A HDC can enforce the instrument according to its original tenor. [but not as altered; only the original]4. Material alteration is a REAL DEFENSE.

Q: Who may be liable in case of alteration?

A: 1) The party who: a)made, b) authorized, c) assented to the alteration.2) A subsequent indorser bec. of his warranty that the instrument is genuine and in all respects what it purports to

be.

Alteration distinguished from forgeryAlteration Forgery1. It refers to anyunauthorized change.

2. The instrument isAVOIDED.

3. A HDC may recoverbut is limited only as to theoriginal tenor.

1. It pertains tounauthorized signature.

2. The forged signature isrendered INOPERATIVE.

3. The HDC cannot

recover in someinstances.

Secs 124 and 125

AVOIDED, except as to the person who assented or authorized to the alteration.

AVOIDEDvoid as far as the person who did not make or authorized or has assented to the alteration is concern.


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FaceUS$79.00 (to US$39,000.00)

Pay to the order of Azucena Pace.

(Sgd) Luis

Gonzalez (Ambassador)

To: PNBankthis was altered.

BackTo: Banco Atlantico de Espanyol

(Sgd) AzucenaPace

Banco Atlantico presented this for payment by the PNB (before this BA allowed AP to withdraw the amount even withoutclearing.

PNB was informed that the checks were altered.

BA sued PNB, impleading AG

BA should have waited for the clearing.In Internationa banking practice, the collecting bank should wait for the clearing of the check, esp. if the check

involves large amount.

SC: BA cannot recover bec.since the 3 checks were fraudulently altered they are rendered wholly inoperative. (acc. toAD wholly inoperative is for forgery, so this is a wrong reasoning)

Sec. 29ACCOMMODATION PARTY

He becomes a party to the instrument without receiving a valuable considerationtherefore.He may be a accommodation maker/drawer/indorser/acceptor.He lends his name or credit to another. He does not receive anything for becoming a party to the instrument.He may receive payment for lending his name.

Eg. One borrowed money from you but you have none, instead you drew a check in his favor.

Accommodation indorser

Accommodation acceptor eg. A bank who pays your payee even if you do not have any deposit in the bank but youhave a good credit. Reason: bank did not receive any valuable consideration.

One remains an AP even if he receives payment bec. of the good name he lends.

What matters is he received nothing for being a drawer.lending name or good credit

NB: An accommodation party is liable to a HOLDER FOR VALUE (HFV)

Illustration:Without receiving valuable consideration from Nena, the drawer Pedro issued a check to the former. Nena

indorsed this check to Clara for payment of services rendered by Clara (HFV) to Nena. The amount of the check isP10,000.00.

Clara presented the check for payment by the drawee bank but was dishonored. As consequence, Clara gaveNOD to Pedro and another notice to Nena.

QUESTIONS:1) Can Clara require Pedro to pay P10,000.00?

Ans: YES. Pedro is liable to a HFV.

2) Suppose Nena paid P3.00 to Pedro for the latters good credit which he lent to the former, will your answer be the sameas in the answer in question number 1?Ans: YES. See: 29 - notwithstanding such holder at a time of taking the instrument knew him to be an accommodationparty.

Sec. 28WANT OF CONSIDERATION

1. Want of consideration2. Failure of consideration3. Partial failure of consideration


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***all of them are PERSONAL DEFENSES

Want of consideration- the parties did not contemplate of intend a value or valuable consideration for the issuance or indorsement of theinstrument.

Failure of consideration- If the parties agreed on a consideration for the issuance or indorsement of instrument but that, which was stipulated, didnot materialize then this is called failure of consideration.

Partial failure of consideration- If parties agreed on a particular consideration or specific amount but ONLY partof it was satisfied or delivered then thisis calledpartial failure of consideration(this is a defense PRO TANTOor reduced or mitigated liability)

Illustration:Juana was a drawer of a check containing the amount of P100,000.00 which is made payable to the order of

Jose. Juana issued this check to Kose with the understanding that Jose will deliver 10 carabaos to Juana. Jose indorsedthe check to Harry who is a HDC.

The drawee bank PNB did not pay the check upon presentment by Harry.

QUESTIONS: (assume that in Q1 and Q2 no carabao was delivered)1) Can Harry require Juana to pay P100,000.00?Ans: YES. Failure of consideration is a personal defense and so that is not available to Juana against a HDC.

2) Suppose Harry is not a HDC, is Juana liable to pay?Ans: NO. Juana is not l iable bec. failure of consideration is a personal defense which she may avail against one who isnot a HDC.

3) Suppose only 3 carabaos equivalent to P30K were delivered by Jose to Juana, can Harry who is not a HDC requireJuana to pay P100,000.00?Ans: NO. Juana has a defense PRO TANTO against the holder who is not a HDC.

How much could Juana be made liable?She is liable as much as P30K bec. she has a defense pro tanto (reduced liability).

Sec. 60

Illustration:Amado issued a promissory note payable to the order of Rey P20K. Rey indorsed this to Ronnie. Ronnie

presented this note for payment by Amado. Amado refused to pay bec. he contends that Rey is insane an so he could notincur liability.

Is the contention of Amado tenable or not?NOT tenable.See: 60. The maker by making the instrument engages to pay according to its original tenor. The maker

ADMITS the existence of the payee and his then capacity to indorse.Amado has admitted that Rey has the capacity to indorse. He is already precluded form contending the legal

capacity of the payee.

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