Negotiable Instrument (Atty. Dumaguing)
Embed Size (px)
Transcript of Negotiable Instrument (Atty. Dumaguing)
Atty. Abelardo Dumaguing
Sec. 1 Elements of Negotiable InstrumentSec. 2 certainty of the amount payableSec. 3 in rel. to Sec. 47 unconditional character of instrument Sec. 4 determinable future time, fixed future time, contingencySec. 5 provisions that do not affect the negotiability of the instrumentSec. 6 omissions and additionsSec. 7 payable on demandSec. 8 payable to orderSec. 9 payable to bearerSec. 11 presumption of date (date is presumed correct)Sec. 12 antedate and postdateSec. 13 insertion of dateSec. 14 incomplete instrument but deliveredSec. 15 incomplete and undeliveredSec. 16 complete instrument but undeliveredSec. 23 forgerySec. 124 material alterationSec. 125 material alterationSec. 24 presumption of valuable considerationSec. 28 want of consideration and failure of considerationSec. 29 accommodation partySec. 30 negotiation (referring to transfer of instrument)Sec. 33-39 kinds of indorsement eg. Blank, special, restrictive (36), qualified, conditionalSec. 48 striking out indorsementSec. 52 what constitutes a holder in due courseSec. 59Sec. 57 rights of a holder in due courseSec. 60 liability of a makerSec. 61 liability of a drawerSec. 62 liability of an acceptorSec. 65 & 66 warranties of an indorserSec. 70-73 presentment for paymentSec. 89 notice of dishonorSec. 126 definition of bill of exchangeSec. 184 definition of a promissory noteSec. 185 definition 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 on a. demand b. fixed future time, orc. determinable future time
4. payable to a. 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
UNCONDITIONAL PROMISE/ORDERPromise to pay shall be ABSOLUTEEx: P10,000.00
I promise to pay to the to the order of Perdo ten thousand pesos.
If it is ABSOLUTE then it is NEGOTIABLE and PAYABLE ON DEMAND
I promise to pay to the to the to Mario or his order after the unconditional surrender of the Al Qaeda network to the Allied Forces
If it is CONDITIONAL then it is NON-NEGOTIABLE
I promise to pay thirty thousand pesos to Ruby or bearer after she will celebrate Christmas of the year 2001.
This is not negotiable because it is with condition.
I promise to pay unconditionally to the order of Anton five thousand pesos when it rains today.
This is not negotiable because it with condition for it is dependent on the happening of an event that not sure to happen.
DEMAND (Sec. 7)OVERDUENO TIME for payment is indicatedEXPRESSLY made payable on demand
On demand, pay to the order of Juana forty thousand pesos.
To: Clara (Sgd) Bella
NO TIMEBaguio City19 November 2001P40,000.00 Pay to the order of Juana forty thousand pesos.
To: Clara (drawee) (Sgd) Bella
No time for payment so it is payable on demand.
NB: A CHECK has NO TIME OF PAYMENT therefore it is payable on demand.Sec. 185 A check is a bill of exchange drawn on a bank payable on demand
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 2001P8,000.00 I 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. 47 An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or 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 certainHow to determine with reference to the happening of a specified event that is sure to happen but it cannot be known when.
Ex: Death of any beingP50,000.00 I promise to pay to the order of Berto fifty thousand pesos 1 week after his only carabao will die.(Sgd) Harry Potter
Carabao will die specified event
P80,000.00 I promise to pay to the order of Claro eighty thousand pesos 1 month after his only cow will die of syphilis.(Sgd) Harry Potter
Cow will die of syphilis not sure to happen
Payable upon a contingencyUnder last paragraph of Sec. 4, an instrument payable upon a contingency is not negotiable and the happening of the event does not cure the defect.
Q: What if the only cow of Claro will die of syphilis?A: The instrument is still not negotiable because the happening of the contingent event does not cure the defect. (Sec. 4 last par.)
PAYABLE TO ORDERSec. 8 Payable to i. the ORDER of a specified person orii. a specified person or his order.
Order or a specified personEx: to the order of Juan
Specified person or his orderEx: to Juan or (his) order
In 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. 34 Indorsement
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 is payable to order the payee must be named or otherwise indicated therein with reasonable certainty.
Payee person specified in the instrumentSec. 9 no need of specifying the person
Q: How to know if the instrument is payable to bearer?A: See Sec. 9
In, ORDER payee must indorse it firstIn, BEARER payee 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 factor5. WHEN THE ONLY OR LAST INDORSEMENT IS AN INDORSEMENT IN BLANK (in relation to Secs. 33 and 34
1. Fictitious2. Expressly made payable3. Not named4. Indorsement in blank5. Specified (named)
BLANK INDORSEMENTsignature affix, written at the back of the instrument// made by the payee who is first to indorseCLASSIFICATIONS OF INDORSEMENT1. Blank indorsement- an indorsement that does not specify the indorseeEx:Baguio City22 November 2001P50,000.00 I promise to pay to the order of Ruby the sum of fifty thousand pesos.(Sgd) Harry Potter
At the backTo: (Sgd) Ruby
2. Special indorsement - one that specifies the indorseeEx: Face of instrument (same as above)
At the backTo: Rosanna (Sgd) RubyTo: (Sgd) Rosanna(blank indorsement)
-This is payable to bearer because last indorsement is in blank, hence the whole instrument is converted to payable 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.2 the amount payable remains a sum certain although it is to be paid with an interest by stated installments with an acceleration clause although it is to be paid with exchange with cost of collection or an attorneys fee. (keyword: CESIA Cost, 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 2001P10,000.00 I promise to pay to the order of Pedro ten thousand pesos with an interest of 2% per month on 22 January 2002.
(Sgd) Harry Potter
-amount is payable in sum certain although 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 twelve thousand 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% pa interest) -obligation arises from a sale
Sec. 1 amount payable sum certainSec. 2. sum certain but to pay by stated installment, with an interest, acceleration clause, exchange, cost of collection/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. Amount of each installment andb. Due date for 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 twenty thousand 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
To: Reynaldo (Sgd) Harry Potter
Negotiable; amount sum certainP16,000.00 Pay to the order of Indong the sum of sixteen thousand pesos on two(2) equal installments the first to b due on 6 July 2002 and the other to be due on 16 July 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 of twelve thousand pesos by stated installments on 1 January 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 twenty thousand 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 the foregoing installments then the entire remaining obligation as of the time of default shall immediately become due.
To: Clara (Sgd) Harry Potter
4. EXCHANGE -difference in value of same amount of money by different countriesExUS$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 USA26 November 2001US$2,000.00 Pay to the order of Jose the sum of two thousand US dollar in Philippine peso at a rate of P51.00 per dollar on 25 December 2001.
To: Maria (Sgd) Harry Potter
US$2,000.00 Pay to the order of Juan de la Cruz the sum of two thousand US dollar in Philippine peso at the current rate of exchange.
To: Clara (Sgd) Harry Potter
-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 expensesEx:P50,000.00 I promise to pay to the order of Juan de la Cruz fifty thousand pesos on 16 January 2002. In the event I fail to pay and as a consequence a case will be filed against me, I bind myself to pay an additional amount equivalent to 20% of the principal obligation 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 TRANSPIRED between the parties as a consequence of it the instrument was issued.
P50,000.00 I 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 a Mitshubishi Lancer car model 1964 with plate number ADB398 and the aforesaid amount represents my balance 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
P50,000.00 I promise to pay to the order of Reynaldo fifty thousand pesos after he will sell to me his car with plate number ADB 398.(Sgd) Harry Potter
Q: Is this negotiable?A: It is NOT because the condition is unconditional.
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 million pesos on 15 January 2002 out of the fund in the National 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 conditional for it is payable out of particular fund.-it is conditional because payment depends on a condition that the fund indicated is sufficient (Payment is based in contingency, that is the availability of funds.
A TREASURY WARRANT is not negotiable because it is payable out of a particular fund.
-DRAWEE IS REQUIRED TO PAY BUT WHETHER HE CAN BE REIMBURSED OR NOT IS BESIDE THE POINT
P90,000.00 Pay to the order of Pedro or bearer the sum of ninety thousand pesos and reimburse yourself out of money which 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 of payment)
-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 Judgment 3. 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 of twenty thousand pesos and deliver two(2) cows to the holder.
(Sgd) Harry Potter
-NOT NEGOTIABLE because it will be hard to determine the liability of the indorser.
Where the holder has the option (or election to require something to be done)Ex:P10,000.00 I promise to pay to the order of Ruby the sum of ten thousand pesos or deliver 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 it is 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:P50,000.00 I promise to pay to the order on 5 May 2002. This obligation is secured by a mortgage involving my car, a Mitshubishi Lancer with plate numbe ADB 398 which may be sold by the holder in a public auction sale and the proceeds thereof may be applied to satisfy the aforesaid obligation, in the event this note is not paid at maturity. For this purpose, I hereby appoint the holder as my attorney in fact to undertake the public auction sale in my 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 not a condition; it is only an option of 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 thousand pesos on 5 May 2002 after I am able to sell my Mitshubishi Lancer Car with plate number ABD 398 in a public auction sale to be undertaken by me or my attorney 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 Judgment1. 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.
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, but here, the defendant or the respondent initially raise a 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.P50,000.00 I promise to pay to the order of Ruby fifty thousand pesos on 6 June 2002. In the event I failed to pay the aforesaid obligation and as a consequence thereof a case should be filed against me in court for collection of sums of money, I hereby authorize Pedro as my attorney in fact to acknowledge in my behalf the liability that 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. 89
Sec. 89 -person secondarily liable (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 refused payment 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 3 March 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 given 3. does not specify the place where it is issued or drawn
ADDITIONS1. seal 2. 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 date of issue [Sec. 17 (c)]
DOES NOT SPECIFY THE VALUE GIVEN-There is a presumption that it is in exchange of a valuable consideration (Sec. 24 Presumption of Consideration)
See: Sec. 17 in 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 ExchangePROMISSORY NOTEBILL OF EXCHANGE
-Unconditional promise-4 essential elements1. 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 elements1. 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 in money5. 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 CheckBill of ExchangeCheck
-payable on demand or at a fixed or determinable future time-drawee may not be a bank-act of issuing without sufficient fund is NOT CRIMINAL-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 City6 December 2001
P80,000. Pay to the order of CASH the amount of eighty thousand pesos.
(Sgd) Harry PotterTo: PNBank
CROSSED CHECK 1. Generally crossed by 2 diagonal parallel lines at the upper left corner of the check or instrument.2. Specially
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. 184 Promissory Note: Unconditional promise in writing Sec. 126 Bill of Exchange: Unconditional order
2) Promissory Note 4 Elements3) PN not presented-maker, when he presents PN = payment
BOE presented for acceptance or payment
Upon acceptance drawee becomes primarily liable under Sec. 62
4) PN 2 parties (maker and payee)BOE 3 parties (1. drawer issues instrument; 2. payee; 3. drawee whom the instrument is addressed [required to pay]
Sec. 1265) Maker liable -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: drawer secondarily liable Drawee primarily 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
P100,000.00 Marlon promised to pay to the order of Reynaldo one hundred thousand pesos with use of 100 pieces of P100 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. 2 amount payable is to be made in exchange (speaks of two kind of currency)
Sec. 184To pay on1. Demand2. Fixed future time, or3. Determinable future timeA sum certain in money to order or a bearer
CASHIERS CHECK -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.
-date earlier than the actual date of drawing or issuance-date later than the actual date of issuance or drawing the instrument effect: before encashing, wait for the arrival of post date
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, or 2.)EndorserBut, 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?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/makerBack: signature of the person negotiating itEx: FACEPayable to the order of Juan.
BACK (Sgd) Juan indorsement
SPECIAL INDORSEMENT-if indorsee is specifically named
BLANK INDORSEMENTlast indorser-payable to bearer
Sec. 36 RESTRICTIVE 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 payex: To: Maria if she tops the 2001 Bar Exams (not referring with the promise to pay)
Suspensive condition happening 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 the happening of the event.
QUALIFIED INDORSEMENT-indorsee is only an assignee of the indorserex: To: Maria sans (without) recourseindorser indorses the instrument to indorsee for payment from payee, but if drawee is insolvent, indorsee has not recourse against indorser.(but not for other reason than insolvency)
Sec. 13 INSERTION OF DATE Purpose: 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 date but the instrument is undated.2. Instrument is payable at fixed period after sight but the acceptance is undated.
A. Example of fixed period after date(no date)___________ 8,000.00 I promise to pay to the order of Ruby eight thousand pesos five days after date of 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 of the 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 overdue3. 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 face no 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 the adverse party may prove the insufficiency of the conditions)See: Sec. 52 vs Sec. 59
Sec. 57 Rights of a holder in due course 1. Hold the instrument free form defect (Sec. 13 vs Sec. 57)2. To enforce the payment in its full amountSee: Sec. 13
B. after sight after is shown/presented for payment and there is acceptance.Ex: Bill of Exchange1 January 2002P10,000.00 Pay to the order of Jose ten thousand pesos six days after sight.(Sgd) PabloTo: Maria
-Jose presented it to Maria for her acceptance-Maria accepted it with her signature (but no date)So, the holder must insert the date
Sec. 14 speaks of incomplete instrument however, it was deliveredINCOMPLETE means an essential element is lackingEx: NOT SUM CERTAIN IN MONEYP.00 Pay to the order of Jose the sum of ..
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 a possessor, not still a holder because 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 bearerWarranties 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. 14FACEBaguio City 10 January 2002P__________.00 Pay to the order of Juan the sum of _________________
(Sgd) PedroLand Bank
Facts:Pedro instructed Juan to put any amount but not exceeding P40,000.00. However, Juan placed P47,000.00.Subsequently, Juan indorsed the check to Marta.
BACK (Special Indorsement)To: Marta (indorsee)
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 dishonor to 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?
A: No. She cannot enforce the instrument against Pedro because the latter can raise the personal defense that the instrument was filled up not strictly in accordance with the authority given. The law requires that in order that the instrument may be enforced it must be filled up with authority given and within a reasonable time.
Question #4Q: Will your answer be the same as in the preceding question if Marta is a holder in due course (ie: she did not know 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 it was strictly filled up in accordance with the authority given and within a reasonable time. (see: last sentence of 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. 15 INCOMPLETE instrument and UNDELIVEREDundelivered means NO VALID DELIVERY-no essential particular and no valid delivery
See: Sec 8 payee must be named-instrument is INCOMPLETE-COMPLETED and NEGOTIATED without authority-Effect of signing: the instrument is NOT a valid contract in the hands of ANY HOLDER -the instrument cannot be enforced by the holder (nb: even holder in due course) against the person who became the party thereto prior to deliveryILLUSTRATION: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.
any holder includes holder in due course
Lito cannot enforce the instrument against RUA because the check cannot be valid in the hands of ANY HOLDER. 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 UNDELIVERED INSTRUMENT
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
Read: Sec. 40 in relation to Sec. 30
In instrument payable 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 is negotiated 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 Amado because Amado is the person who placed his signature before delivery.
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 Rey indorsed 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, it is only the INDORSER who warrants]
Even if Rey has no valid title, as far as Bartolo is concern Rey has a valid/good title because Rey warrants this.
Amado has a real defense (ie: the instrument is NOT a valid contract in the hands of any holder) under Sec. 15.
Sec. 14 is only a PERSONAL DEFENSE (that the instrument was filled up not strictly in accordance with the authority given)
USE Sec. 65 when: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 COMPLETE but it 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 must be made either BY THE AUTHORITY or UNDER THE AUTHORITY of the person making, drawing, indorsing, accepting]
-The instrument is COMPLETE but CONTRACT involving the complete instrument is INCOMPLETE if there is NO DELIVERY.
-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 due course?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 mean proximity)2. REMOTE PARTY OTHER THAT HOLDER IN DUE COURSE refers to a party who is not aware of the defect/infirmity of the instrument (eg: one who received an instrument after overdue)
P80,000.00 Pay 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.
Harry is still an IMMEDIATE PARTY as long as he is aware that the instrument was not deliverd by Pedro (NOT PROXIMITY)
BUT, If Harry is NOT AWARE but the check is overdue, then Harry is a REMOTE PARTY OTHER THAN HOLDER 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 do so 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 of Pedro.
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 whose signature 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 presumed to have been made by all parties prior 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
P80,000.00 Pay 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.BACKTo: Ruby (Sgd) JuanTo: 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 that delivery was conditional and the suspensive condition was not fulfilled. (Juan was not acting under the authority of Pedro).
Question #2Q: Will your answer be the same as in the preceding question if Clara is a holder in due course?A: NO. My answer is not the same as in the preceding question because Clara can require Pedro to pay because the law provides that when the instrument is in the hands of a holder in due course a valid and intentional delivery by all parties prior to him (holder in due course) so as to make them (prior parties) liable to her, is conclusively presumed.(Clara holds the instrument as though there was a valid delivery from 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 all subsequent holders in due course ) in relation to Par(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 has a 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)
SEC. 14 vs SEC. 15 vs SEC. 16 Sec. 14Sec. 15Sec. 16
1. INCOMPLETE instrument but DELIVERED.
2. A Personal Defense (can be availed of only as against a holder who is NOT a holder in due course).
3. DEFENSE: That the instrument was filled up NOT STRICTLY in accordance with authority given and with a reasonable time.
4. Cannot be enforced by one who in not a holder in due course.Against whom? Against a person who placed his signature thereon prior to the completion.
5. In the hands of a holder in due course, the instrument is AS IF it was filled up strictly in accordance with the authority given.1. INCOMPLETE instrument but UNDELIVERED.
2. A Real Defense (can be availed of even as against a holder in due course)
3. DEFENSE: That the instrument is NOT A VALID CONTRACT in the hands of any holder.
4. Cannot be enforced even by one who is a holder in due course.Against whom? Any person who became a party prior to completion or delivery.
5. In the hands of any holder, the instrument is not a valid contract.1. COMPLETE instrument but UNDELIVERED
2. A Personal Defense (can be awaited of only against a holder who is not a holder in due course).
3. DEFENSE: That there is NO EFFECTUAL DELIVERY of the instrument because:
a) The delivery was conditional and the suspensive condition was not fulfilled.ORb) The delivery was special purpose only and the instrument was not intended to be negotiated.
4. Cannot be enforced by one who is NOT A HOLDER IN DUE COURSE.Against whom? Person who placed his signature before delivery of instrument.
5. In the hands of a holder in due course, a valid and intentional delivery by all parties prior to a holder in due course is conclusively presumed. All such prior parties may be liable to the holder in due course.
In NIL, equity = personal defenses
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 signature was 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 negotiated but 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. (also precluded 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 precluded from 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 defense by 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 defense by BOTH the drawer and payee (or original indorser).
Drawers defense: that he is not liable because of lack of valid indorsement by the payee. (NB: In an instrument that is payable to order, a valid indorsement by the payee is 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: PNBank
This instrument was forged by Amado.BackTo: Bella (Sgd) AmadoTo: Harry (Sgd) Bella
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 the instrument, 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 purports to 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 the check, 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. 30 indorsement + 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) Pablo
This 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 forged signature.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 up forgery or want of authority. And he warrants that the instrument is genuine and in all respects what it purports to be.
FaceP60,000.00 Pay to REY or BEARER sixty thousand pesos. (Sgd) PabloTo: PNBank
BackTo: Pedro (Sgd) REYTo: Harry (Delivered by) Pedro
this signature was forged by Pedronot by indorsement bec. this is a bearer instrument.
NOTE: Under 30, there is no need to indorse the bearer instrument. Negotiation is made by delivery only.However, under 40, the bearer instrument may be indorsed.
In a bearer instrument, the payee does not need to indorse.
Indorsement by the payee is not necessary to the title of the bearer/holder.
NB: Forgery anent indorsement of the payee is IMMATERIAL or IRRELEVANT (reason: bec. indorsement is not needed in b.i.).The bearer/holder acquires title even sans indorsement.In order instrument, valid indorsement by the payee is necessary to the title of the holder.
QUESTIONS:1) If the bank does not pay Harry, and Harry gives NOD to Pablo, is the latter liable?Ans: YES. Pablo is liable to Harry. Pablo cant use forger as a defense bec. the FORGERY is IRRELEVANT.
Sec. 61. Liability of drawer. - The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder.
2) If Harry gives a NOD to Rey, can Rey avail of the defense of forgery to defeat the claim of Harry?Ans: NO. Forgery in the indorsement is IRRELEVANT or IMMATERIAL to the title of Harry bec. Harry acquires title even with or without indorsement for bearer instrument need not be indorsed.
3) What defense which Rey can raise if Harry is not a HDC?Ans: Rey can avail of the defense of the LACK OF EFFECTUAL or VALID DELIVERY (under 16) NB: This is a personal defense in forgery NOT a real defense. [16 as personal defense cant be used against a HDC]***But Rey cant avail of the defense of forgery as REAL DEFENSE if this is a order instrument.
4) If Harry gives a NOD to Pedro, is the latter liable?Ans: YES. Reason: Bec. he warrants under 65 that he has a good title in the instrument, and no knowledge of any fact that would impair the validity of the instrument.*Harry is an IMMEDIATE TRANSFEREE (see: last sentence of 65).
BEARER INSTRUMENTFaceP60,000.00 Pay to JUAN or BEARER sixty thousand pesos. (Sgd) PedroTo: LandBank
this signature was forged by Juan.
BackTo: Nena (Delivered by) 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. (See: 65) Warranty extend in favor of NO HOLDER OTHER THAN THE IMMEDIATE TRANSFEREE. [nb: NOT immediate party]Harry is not the immediate transferee of Juan.
NOTE: The question here is not of forgery (in 23) but of warranty (in 65). Even if there is forgery, forgery cant always be availed of as a defense.
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: LandBank
this 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 indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement.
Apply 40; do not apply 65 bec. it was NOT negotiated by delivery only; see: 66 is applicable but 40 is MORE PARTICULAR.
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 (including Pedros 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: BPI
Forged by Dolores
BackTo: Hongkong and Shanghai Bank (HSB) (Sgd) Dolores in behalf 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 so paid against the account of the depositor(drawer) whose signature was forged.
Eg: BPI cannot debit the amount so paid against Baldwin account.
2) GELAC vs HK and Shanghai Bank, 43 Phil 711FaceP2,000.00 Pay 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 by MELICOR.
The practice of GELAC is to send the check by mail. 8: order instrument payee must be named.
Maasim deposited the check to HSB and the amount was allowed to be credited in Maasims account, and so he was allowed to withdraw amount.
HSB presented to PNB. PNB paid.
Now, PNB wants to debit against the deposit account of GELAC.
DOCTRINE:When a check is payable to the order of a person and it is presented for payment BY ANOTHER it is the duty of the bank to 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 of GELAC.***Forgery in the signature of the payee is a real defense by the drawer.PNB can go against HSB; HSB can go against Maasim.
3) PNB vs Motor Service, 63 Phil 693Face Pay to the order of International Auto-repair Shop (IARS) or ORDER.
(Sgd) J. Klar in behalf of the PANTRANCOTo: PNB
This was forged
BackTo: Motor Service (Sgd) IARS by unknown personTo: Natl City Bank of New York (NCBNY) (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 of PANTRANCO.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 is guilty 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, it was 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 SCRAFace 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 guaranteedSignatories of GSIS check are manager and auditorManagers and Auditors signature were forged (this check was lost)2 months before PCIB went to PNB. GSIS has already notified PNB to stop payment bec. GSIS said that the check was forged (lost).But PNB still paid bec. of the ANNOTATION: PCIB guaranteed that the indorsement were GENUINE but not the signature.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 actual negligence or who put it into the power of a 3rd person to perpetrate the wrong shall bear the loss.
Here, the 3rd person 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)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 has performed his duty.
Face (GENUINE) Pay to A or ORDER (Sgd) YTo: Bank
Back (FORGED)To: B (Sgd) A
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 in GELAC case.
6) FaceP10,000.00 Pay to the order of Inter Island Gas Services, Corp (IGSP)
(Sgd) DD To: VB
10 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 corporation a corporation can act only through its Board of Directors. The Board can authorize any of 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 when the 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 to be secondarily liable.
bec. VB does not pay, BPI sued Jai Alai.When Ramirez signed the checks in favor of Jai Alai, the latter should have verified the validity (ie. Authorization of Ramirez) 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 Bank
This 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 change in 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 Forgery
1. It refers to any unauthorized change.
2. The instrument is AVOIDED.
3. A HDC may recover but is limited only as to the original tenor.1. It pertains to unauthorized signature.
2. The forged signature is rendered INOPERATIVE.
3. The HDC cannot recover in some instances.
Secs 124 and 125
AVOIDED, except as to the person who assented or authorized to the alteration.
AVOIDED void as far as the person who did not make or authorized or has assented to the alteration is concern.
You cannot enforce as to the alteration but you can as to the original tenor.
Material alteration substantial change (unauthorized)
Alteration spoliation a material alteration made by a 3rd person or stranger. same effects with material alteration done by a party of an instrument.
Change in the amount payable increase or decrease
Change in the maturity date eg. To make yourself a holder in due course (ie. Before overdue)
Change in the number or relation eg. Changing number of indorsements
Change in the nature of the instrument eg. Instrument is payable to order then you made it payable to bearer. Nb: legal way to change the nature from order instrument to bearer instrument make an indorsement in blank under 9 last Prgph.
Adds interest when in fact not stipulated
Real defenseYou cannot use your unlawful act as a defense
Assented eg. First you did not know the alteration then later you knew, so, you assented.
Illustration (material alteration)
As a drawer Danny issued a check to Pablo in the amount of P69,000.00. Without any authority from Danny, Pablo (the payee) changed the amount of P69,000.00 to P77,000.00.Pablo indorsed the check to Indong. Later, Indong indorsed it to Harry.Subsequently, Harry presented the check for payment by PNBank (the drawee bank. The bank dishonored it.
QUESTIONS:1) If Harry will give NOD to Danny, is the latter liable to pay P77,000.00?Ans: NO. Danny is not liable to pay the P77K bec. as far as he is concern the instrument is AVOIDED. He did not authorize or assent to the alteration.
2) Will there be a difference in your answer if Harry is a HDC?Ans: NONE, bec. material alteration is real defense.
3) If Harry gives NOD to Pablo, is the latter liable to pay P77K?Ans: YES. Pablo is liable bec. he is the one who made the material alteration and he was not authorized by Danny to make the material alteration.
Primary reason: Pablo is liable to pay P77K bec. the law provides that the instrument can be enforced against the party who made the alteration. The general rule is that the instrument is avoided except to the one who made or is not authorized to make the alteration. Here, Pablo falls under the exception.
Pablo as an indorser warrants to all subsequent holders that the instrument is genuine and in all respects what it purports to be.
4) What if Harry gives NOD to Indong, is the latter liable to pay P77K?Ans: YES. Indong is liable to pay P77K bec. under the law a subsequent indorser is liable in material alteration.
YES. Indong is liable to pay P77K. As a subsequent indorser, Indong is liable bec. he warrants that the instrument is genuine and in all respects what it purports to be.
5) Assuming that Indong and Pablo are not in the country and Harry badly needs money and wants to recover from the drawer, can Harry as HDC recover the amount other than P77K from Danny?Ans: YES. As HDC Harry can recover the amount of P69K ONLY from Danny bec. the HDC can enforce the instrument according to its original tenor.
Banco Atlantico vs Auditor General, 81 scra 335- 3 checks involved; 1 check payment for a living quarter; a check is payable in the amount of US$79 for one living quarter; the US$79 became US$375,000 (alteration in the amount); Azucena Pace deposited the check after altering it.FaceUS$79.00 (to US$39,000.00)
Pay to the order of Azucena Pace.
(Sgd) Luis Gonzalez (Ambassador)
this was altered.
BackTo: Banco Atlantico de Espanyol (Sgd) Azucena Pace
Banco Atlantico presented this for payment by the PNB (before this BA allowed AP to withdraw the amount even without clearing.
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. to AD wholly inoperative is for forgery, so this is a wrong reasoning)
Sec. 29 ACCOMMODATION PARTY
He becomes a party to the instrument without receiving a valuable consideration therefore.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 acceptor eg. A bank who pays your payee even if you do not have any deposit in the bank but you have 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 creditNB: 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 is P10,000.00.Clara presented the check for payment by the drawee bank but was dishonored. As consequence, Clara gave NOD 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 same as 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 accommodation party.
Sec. 28 WANT OF CONSIDERATION
1. Want of consideration2. Failure of consideration3. Partial failure of consideration***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 the instrument.
Failure of consideration- If the parties agreed on a consideration for the issuance or indorsement of instrument but that, which was stipulated, did not materialize then this is called failure of consideration.
Partial failure of consideration- If parties agreed on a particular consideration or specific amount but ONLY part of it was satisfied or delivered then this is called partial failure of consideration (this is a defense PRO TANTO or 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 indorsed the 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 liable bec. failure of consideration is a personal defense which she may avail against one who is not a HDC.
3) Suppose only 3 carabaos equivalent to P30K were delivered by Jose to Juana, can Harry who is not a HDC require Juana 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).
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 not incur 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.