Nil Dumaguing

7/25/2019 Nil Dumaguing

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Notes on Negotiable Instruments

Atty. Abelardo Dumaguing 1

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

Sec. 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 forgery

Sec. 124 material alterationSec. 125 material alteration

Sec. 24 presumption of valuable consideration

Sec. 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 course

Sec. 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 dishonor

Sec. 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 unconditional

a. 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

UNCONDITIONAL PROMISE/ORDER

Promise to pay shall be ABSOLUTE


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Ex:

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

CONDITIONAL PROMISE

If it is CONDITIONAL then it is NON-NEGOTIABLE

Ex:

This is not negotiable because it is with condition.

Ex:

This is not negotiable because it with condition for it is dependent on the happening of an event that not sure tohappen.

DEMAND (Sec. 7)OVERDUE

NO TIME for payment is indicatedEXPRESSLY made payable on demand

EXPRESSLY

NO TIME

No time for paymentso it is payable on demand.

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

P10,000.00

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

(Sgd)Amado

P20,000.00

I promise to pay to the to the to Mario or his orderafter the unconditional surrender of the Al Qaedanetwork to the Allied Forces

(Sgd)Amado

P30,000.00

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

(Sgd)Amado

P5,000.00

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

(Sgd)Harry Potter

P40,000.00

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

To: Clara (Sgd) Bella

Baguio City19 November 2001

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

To: Clara (drawee) (Sgd)Bella


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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.

- 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 certain

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

Ex: Death of any being

Carabao will die specified event

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 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. 8 Payable to

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

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

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

P80,000.00I promise to pay to the order of Claro eighty thousand

pesos 1 month after his only cow will die of syphilis.(Sgd) Harry Potter

Order or a specified personEx: to the order of Juan

Specified person or his orderEx: to Juan or (his) order


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In this instance, payment is not limited to Juan but also to the pleasure of Juan (eg: by indorsing, signing at theback 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 ispayable to orderthe payee must be namedor otherwiseindicated 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 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 named

4. 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:

At the back

2. Special indorsement

-one that specifies the indorsee

Ex:Face of instrument (same as above)

At the back

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

Baguio City22 November 2001

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

thousand pesos.(Sgd) Harry Potter

To: (Sgd)Ruby

To: Rosanna (Sgd) RubyTo: (Sgd)Rosanna(blank indorsement)


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-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 installmentswith 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.

-amount ispayable in sum certainalthough it is with interest

-P10, 400.00 due on 22 January 2002

2.

-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 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 andb. 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 certain

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

P12,000.00I promise to pay to Maria or bearer the sum of twelve

thousand pesos with an interest on 22 April 2002.

(Sgd) Harry Potter

P20,000.00Pay 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) HarryPotter


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Negotiable; amount sum certain

NOT NEGOTIABLE

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:NEGOTIABLE

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 EXCHANGE

P16,000.00Pay 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 July2002.

(Sgd) Harry Potter

To: Reynaldo (or with reasonable certainty)

P12,000.00I promise to pay to the order of Gandeza the sum of

twelve thousand pesos by stated installments on 1January 2002 and 2 February 2002.

(Sgd) Harry Potter

P20,000.00Pay to Adquilen or bearer the sum of twenty thousand

pesos by installment as follows:a) P3,000.00 due on 1 January 2002

b) 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

California USA26 November 2001

US$2,000.00Pay to the order of Jose the sum of two thousand US

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

To: Maria (Sgd) HarryPotter


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-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:

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.

-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

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

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

thousand US dollar in Philippine peso at the current rateof exchange.

To: Clara (Sgd) HarryPotter

P50,000.00I 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 anadditional amount equivalent to 20% of the principalobligation to pay cost of collection or attorneys fee.

(Sgd) Harry Potter

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 a MitshubishiLancer car model 1964 with plate number ADB398 and

the aforesaid amount represents my balance on thatsale.

(Sgd) Harry Potter

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

thousand pesos after he will sell to me his car with platenumber ADB 398.

(Sgd) Harry Potter


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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:

-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 based

in 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 THE POINT

-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:

-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:

P10,000,000.00Pay to the order of the DPWH the sum of ten million

pesos on 15 January 2002 out of the fund in theNational Government Treasury.

(Sgd) Auditor GeneralTo: The Treasurer of the Philippines

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)

P20,000.00I promise to pay to the order of Ruby the sum of

twenty thousand pesos and deliver two(2) cows to theholder.

(Sgd) Harry Potter

P10,000.00I promise to pay to the order of Ruby the sum of ten

thousand pesos ordeliver a carabao at the option of theholder.

(Sgd) Harry Potter


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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 isa 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:

-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:

-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, buthere, the defendant or the respondent initially raisea defense against a claim but later on abandons this defense.

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

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

pesos on 5 May 2002 after I am able to sell myMitshubishi Lancer Car with plate number ABD 398 in apublic auction sale to be undertaken by me or myattorney in face.

(Sgd) Harry Potter


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

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 Exchange

-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)]

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)

P50,000.00

I promise to pay to the order of Ruby fifty thousandpesos 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 ofsums 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

P20,000.00Pay 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)


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1. residence2. place of business, or3. in any other place where he could be found.

Promissory note vs Bill of Exchange

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

CROSSED CHECK [Generally]

!CROSSED CHECK1. 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:

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

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

Baguio City6 December 2001

P80,000.

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

(Sgd) Harry PotterTo: PNBank


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-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: Unconditionalpromise in writing

Sec. 126 Bill of Exchange: Unconditional order

2) Promissory Note 4 Elements

3) 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. 126

5) 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 liableDrawee 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 identification

3) For embellishment

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

-payment of P100,000 with the use of P100 bills

Baguio City6 December 2001

P80,000.

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

(Sgd) Harry PotterTo: PNBank

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


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-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 time

A 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.

Sec. 12

"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?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 it

Ex: FACE

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 post

date


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BACK

SPECIAL INDORSEMENT-if indorsee is specifically named

BLANK INDORSEMENT"last 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 pay

ex: 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 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. 13 INSERTION 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 datebutthe instrument is undated.

2. Instrument is payable at fixed period after sightbutthe acceptance is undated.

A. Example of fixed period after date

-five days = fixed period-insert the date of issue, then maturity can now be determined.

Payable to the order of Juan.

(Sgd) Juan"indorsement

(no date)___________8,000.00

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

(Sgd) Harry Potter


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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 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 theadverse party may prove the insufficiency of the conditions)

See: Sec. 52 vs Sec. 59

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

See: Sec. 13

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

-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 incompleteinstrument however, it was delivered

INCOMPLETE means an essential element is lackingEx: NOT SUM CERTAIN IN MONEY

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 itsessential element is absent)

1 January 2002P10,000.00

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

(Sgd) PabloTo: Maria

P.00Pay to the order of Jose the sum of

..

(Sgd) MartaPNBank


16/34



-The person in the possessionthereof has a prima facie authorityto 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 given2. Fill it up within a reasonable time

if 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

FACE

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)

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 #3

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

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 #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)?

Baguio City10 January 2002

P__________.00Pay to the order of Juan the sum of

_________________

(Sgd) PedroLand Bank

To: Marta (indorsee)

(Sgd) Juan


17/34



A: NO. My answer will not be the same as in the preceding question. Marta can enforcethe 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 #5

Q: 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 waswritten not strictly in accordance of the authority given)

SEC. 15 INCOMPLETEinstrument 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 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:

FACE

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)

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 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.

P80,000.00Pay to the order of Mr. ____________________

the sum of eighty thousand pesos .(Sgd) RUA

To: PNBank

To: Lito

(Sgd) Amado (indorser)

INCOMPLETE INSTRUMENT INCOMPLETE AND UNDELIVEREDINSTRUMENT


18/34



FACE

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)

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 P90,000.00

A: NO.Reason: The check is not a valid contract in the hands of any holder. Bartolo cannot enforce against Amado

because Amado is theperson 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 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: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 COMPLETEbutit is UNDELIVERED)

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

P____________.00Pay to BEARER the sum of

____________________

(Sgd) AmadoTo: Land Bank

To: Bartolo

(Sgd) Rey


19/34



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 AUTHORITYor 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 presumptionthat there is a valid and intentional delivery by all parties prior to him (holderin due course). [All these prior parties can be liable to a holder in due course]

TERMS in Sec. 16

1. IMMEDIATE PARTY refers to the one who knows the defect/infirmity of the instrument (this does notmeanproximity)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)

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

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

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.

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

(Sgd) PedroTo: Land Bank

To: Harry

(Sgd) Juan


20/34



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 #4Q: 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

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

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 ofPedro).

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 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, isconclusively 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)]

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

(Sgd) PedroT: Land Bank

To: Ruby(Sgd) Juan

To: Clara(Sgd) Ruby


21/34



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)


22/34



SEC. 14 vs SEC. 15 vs SEC. 16

In NIL, equity = personal defenses

Sec. 14 Sec. 15 Sec. 16

1. INCOMPLETE instrument butDELIVERED.

2. A Personal Defense(can be availedof only as against a holder who isNOT a holder in due course).

3. DEFENSE: That the instrumentwas filled up NOT STRICTLY inaccordance with authority given andwith a reasonable time.

4. Cannot be enforced by one who innot a holder in due course.

Against whom?Against a person whoplaced his signature thereon prior tothe completion.

5. In the hands of a holder in duecourse, the instrument is AS IF itwas filled up strictly in accordancewith the authority given.

1. INCOMPLETE instrument butUNDELIVERED.

2. A Real Defense (can be availed ofeven as against a holder in duecourse)

3. DEFENSE: That the instrument isNOT A VALID CONTRACT in thehands of any holder.

4. Cannot be enforced even by onewho is a holder in due course.

Against whom? Any person whobecame a party prior to completion ordelivery.

5. In the hands of any holder, theinstrument is not a valid contract.

1. COMPLETE instrument butUNDELIVERED

2. A Personal Defense (can beawaited of only against a holder whois not a holder in due course).

3. DEFENSE: That there is NOEFFECTUAL DELIVERY of theinstrument because:

a) The de l i very wasconditional and thesuspensive conditionwas not fulfilled.

ORb) The de l i very was

special purpose onlyand the instrumentwas not intended to benegotiated.

4. Cannot be enforced by one who isNOT A HOLDER IN DUE COURSE.

Against whom? Person who placedhis signature before delivery ofinstrument.

5. In the hands of a holder in duecourse, a valid and intentional deliveryby all parties prior to a holder in due

course is conclusively presumed. Allsuch prior parties may be liable to theholder in due course.


23/34


24/34



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 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 thatforged 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.

Face

This instrument was forged by Amado.

Back

P80,000.00Pay to theORDER of Amado eighty thousand

pesos.

(Sgd) PedroTo: PNBank

To: Bella

(Sgd) AmadoTo: Harry

(Sgd) Bella


25/34



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 duecourse)

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. 30 indorsement + delivery)

Illustration (forgery in the signature of the PAYEE)

Face

Back

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 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

Back

P80,000.00Pay to theORDER of Juan eighty thousand pesos.

(Sgd) BertoTo: Land Bank

To: Pablo

(Sgd) JuanTo: Harry

(Sgd) Pablo

P60,000.00

Pay to REY or BEARER sixty thousand pesos.

(Sgd) PabloTo: PNBank


26/34



this signature was forged by Pedro

"not 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 inb.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 thencapacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according toits tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amountthereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in theinstrument 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 evenwith 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 personaldefense 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 factthat would impair the validity of the instrument.

*Harry is an IMMEDIATE TRANSFEREE (see: last sentence of 65).

BEARER INSTRUMENTFace

this signature was forged by Juan.

Back

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?

To: Pedro

(Sgd) REYTo: Harry

"(Delivered by) Pedro

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

(Sgd) PedroTo: LandBank

To: Nena

(Delivered by) JuanTo: Harry

"(Delivered by) Nena


27/34



Ans: NO. (See: 65) Warranty extend in favor of NO HOLDER OTHER THAN THE IMMEDIATE TRANSFEREE. [nb: NOTimmediate 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 alwaysbe 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 (includingPedros forged signature), and her warranty extends to Harry as her immediate transferee.

Face

this signature was forged by Juan

Back

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

Face

Forged by Dolores

Back

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

(Sgd) PedroTo: LandBank

To: Nena(Sgd)

JuanTo: Harry

(Delivered by) Nena

US$10,000.00Pay to the order of San Carlos Milling Co

(Sgd) BaldwinTo: BPI


28/34



!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 forgedcheck (forged signature of the drawer), it is considered as making payment out of its own funds and cannot debit theamount 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 711

Face

Back

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 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 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

To: Hongkong and Shanghai Bank (HSB)

(Sgd) Dolores inbehalf of SCMC

P2,000.00Pay to the order of MELICOR

(Sgd)GELACTo: PNBank

To: Maasim

(Sgd) MELICORTo: HSB

(Sgd) Maasim


29/34



This was forged

Back

!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 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, 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

Back

PCIB said: all prior indorsements guaranteed

!Signatories of GSIS check are manager and auditor

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

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

(Sgd) J.

Klarin behalf of

the PANTRANCOTo: PNB

To: Motor Service(Sgd)

IARSby

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

(Sgd)Motor Service

Pay to the order of Mariano Pulido(Sgd)

GSISTo: PNBank

To: Manuel Go

(Sgd) M. PulidoTo: Lim

(Sgd) M. GoTo: PCIB

(Sgd) Lim


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!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 3rdperson 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)!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)

Back (FORGED)

!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)Face

10 different drawers in various drawee banks

Back

Pay to A or ORDER(Sgd)

Y

To: Bank

To: B

(Sgd) A

(Sgd) B

P10,000.00Pay to the order of Inter Island Gas Services, Corp

(IGSP)

(Sgd) DDTo: VB


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!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 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.!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)

Face

This signature was forged.

Back

!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?

To: Jai Alai

(Sgd) IGSCorp(by

A. Ramirez)To: BPI

(Sgd) Jai Alai

P80,000.00

Pay to the order of Ana eighty thousand pesos.

(Sgd) PedroTo: X Bank

To: Y Bank (indorsee)(Sgd) Ana

(indorsed checkto Y Bank [indorser])


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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 forgery

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 3rdperson 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 (thepayee) 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 notauthorize 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 tomake the material alteration.

Alteration Forgery

1 . I t r e f e r s t o anyunauthorized change.

2. The instrument isAVOIDED.

3. A HDC may recover butis limited only as to theoriginal tenor.

1 . I t p e r t a i n s t ounauthorized signature.

2. The forged signature isrendered INOPERATIVE.

3. The HDC cannotrecover in some instances.


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Primary reason: Pablo is liable to pay P77K bec. the law provides that the instrument can be enforced against the partywho made the alteration. The general rule is that the instrument is avoided except to the one who made or is notauthorized 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 itpurports 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 isgenuine 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 thedrawer, 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 instrumentaccording 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 livingquarter; the US$79 became US$375,000 (alteration in the amount); Azucena Pace deposited the check after altering it.

Face

this was altered.

Back

!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. 29 ACCOMMODATION 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 you havea 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

US$79.00 (to US$39,000.00)

Pay to the order of Azucena Pace.

(Sgd) LuisGonzalez (Ambassador)

To: PNBank

To: Banco Atlantico de Espanyol(Sgd) Azucena

Pace


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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. 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 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 liable 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

Nil Dumaguing

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