NEGOTIABLE INSTRUMENTS 2007

The common forms of negotiable instruments are : Promissory note, Bill of Exchange and Check.

PROMISSORY NOTE (184): It is an unconditional promise in writing by one person to another signed by maker engaging to pay on demand or at a fixed determinable future time,a sum certain in money to order or bearer.It must be(1)in writing and signed by the maker (one who makes promise and signs instrument)(2)it must contain an unconditional promise to pay a sum certain in money(3)it must be payable on demand or at a fixed or determinable future time(4)it must be payable to order or to bearer

Parties: 1.maker 2.payee (is party to whom promise is made or instrument is payable.)

BAR: M who lives in Baguio desires to borrow P1000 from his friend P who lives in Manila,payable within one year, with such interest as P may wish to charge. Assume that you are Ps lawyer. Prepare a promissory note to be signed by M and include in it such provisions as you believe will best protect your clients interest.HELD:

Manila,August 10,2006

P1,000.00One year from date, I promise to pay to P or order the sum of ONE THOUSA

ND PESOS (P1000.00) with interest at 14% per annum, payable in advance ,with 10% of the amount due for costs of collection and attorneys fees in case of default. Presentment and notice of dishonor waived.

(sgd) M

Where note is payable to order:BAR: M makes a note payable to P or order. P indorses the note to A. X finds it. X indorses the note to B forging As signature thereto.HELD: A whose indorsement is forged is not liable to B,whether B is a holder in due course or not. Being forged, indorsement is wholly inoperative. M and P are also not liable to B.

BAR:M makes a note payable to the order of P. P indorses it to A. X obtained possession of the note fraudulently and indorses it to B by forging As signature. B indorses to C--C cannot enforce instrument against M and P since Cs right against them are cut off by the forged signature of A which is wholly inoperative.--C may go against B--C or B has a right of recourse against X,the forger.

Where note is payable to bearer:Party whose indorsement is forged is liable to a holder in due course, but not to one who is not a holder in due course.Other parties, including the maker prior to the party whose signature is forged ,may also be held liable by one who is not a holder in due course.

BILL OF EXCHANGE (1-6): It is an unconditional order in writing addressed by one person to another, sig

ned by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or bearer.It must be(1)in writing and signed by the drawer(2)must contain an unconditional order to pay a sum certain in money(3)it must be payable on demand or at a fixed or determinate future time(4)payable to order or bearer(5)drawee must be named or otherwise indicated with reasonable certainty.

Parties are:1.drawer is person who draws the bill, 2.drawee is party upon which the bill is drawn 3.payee is party in whose favor the bill is drawn or is payable.

Where bill is payable to order:Party whose signature is forged is not liable to any holder, even a holder in due course. The forged indorsement is wholly inoperative.--if the drawee (bank) pays under a forge signature, drawer is not liable on the bill and the drawee may not debit the drawers account--if checks are received merely for collection and deposit, the bank, as agent, cannot be expected to know or ascertain the genuiness of all prior indorsements.

Where bill is payable to bearer:Drawee may debit the drawers account inspite of the forged signature(indorsement). Since forged indorsement is not necessary to the title of the holder . Drawee cannot recover from the holder. Remedy of Drawer is to go against the forger. Payee is not bound to any of these (even if his signature is forged)

BAR:M is induced through simple fraud committed by P to issue a promissory note in favor of P. Here P is a party to the fraud. P indorsed the note to A. A has notice of the fraud but did not take part in it. By A, the note is indorsed to B, a holder in due course.B in turn, indorses the note to C who knows how the note was obtained but without being a party to a fraud.--even if C is not a holder in due course, he has all the rights of such holder in respect of M,P and A having derived his title from B, a holder in due course and the defenses of fraud cannot be set-up against him.--if instead of indorsing the note to C, B indorses it to P, payee, the latter cannot recover on the instrument since he is a party to the fraud.4blue 95: if the instrument is ambiguous such that there is doubt whether it is a bill or a note, the holder may treat it as a note or a bill at his option.4blue 95:where promissory note is signed by 2 makers, the payee of the note had the right to hold any one of the two signers of the promissory note responsible for the payment of the whole amount of the note.

GENERAL PRINCIPLES:

SEC1 An instrument to be negotiable must conform to the following requirements:

(a) It must be in writing and signed by the maker or drawer;* If the instrument was not in writing, there would be nothing to be negotiated or passed from hand to hand.* It must be signed ,as such valid signatures are: Thumbmarks, chops in the case of the Chinese, Koreans and Japanese and signatures of corporate officers printed through the use of a check-writing machine which is a common practice with companies.

Pay P10,000 to the order of Cristina for services rendered.BatMan

Would that be binding? If he intended the name BatMan to be his signature for that particular transaction, the signature would be binding.Remember: Whatever symbol is affixed in the instrument, if the party intended that to be his signature that would be binding. Usually the signature of the maker and the drawer can be found in the bottom right hand corner. But the location is not really crucial. Even if the signature is incorporated in the body of the instrument, it would be valid. Example: I, Jose Cruz, promise to pay Ruel Santos or bearer P10,000.

(b) Must be payable on demand or at a fixed or determinable future time.So people or parties will know when the instrument or payment is due.

(c) Must be payable to order or to bearerTO BE NEGOTIABLE!These are the words of negotiability,w/o these it is not negotiable. If its payable to a specific person like the Kauffman vs. National Bank case:Pay to George A Kauffman, New York Philippine Fiber Produce Co., $45,000.(sgd.)National Bank, Manila==> then that is not negotiable. The party need not use the exact word order. He could use equivalent words like pay to Jose Cruz or his indorsees or Pay to Jose Cruz or his assigns. These are equivalent to Jose Cruz or order.It was held that a promise to pay to order of bearer is considered pay to order but that has been criticized because if its payable to the order of bearer, thats payable to the bearer because who the bearer is the one will give the order to pay.The word bearer need not be used. You could use holder or the possessor. If it says pay to bearer Jose Cruz that is not payable to bearer because bearer here is merely descriptive of Jose Cruz. Same way if you say pay to the novelist Jose Cruz, pay to the doctor Jose Cruz.

(d) Where the instrument is addressed to a drawee, he must be named or otherwise indicated with reasonable certainty(BILL of EXCHANGE Only).This is so that people will know from whom they are supposed to demand payment.But if the name of the drawee is left blank, it is an incomplete instrument. It can be remedied by filling up.(e) Must contain an unconditional promise or order to pay a sum certain in money;If it is a promissory note, it must contain a promise to pay. * The words need not be exactly I promise to pay. Equivalent words like I agree to pay or I will pay will be sufficient. Good for P10,000 or Due, Jose Cruz, P10,000 wl imply a promise to pay. * An acknowledgment of a debt is not a promise to pay. For an acknowledgement is merely proof of a prior obligation, a promise to pay creates a new obligation.* However, an acknowledgment of a debt becomes a promise in two instances: (1) The date of payment is mentioned* Jimenez vs. Bucoy: I acknowledge being indebted to Jose Cruz for P10,000 payable one month after the end of the war.Manuel Santos* Since a date of maturity is mentioned, it is like a promise to pay.(2) If words of negotiability are mentioned* Example:I acknowledge to be indebted to Jose Cruz. Due to Jose Cruz or order, P10,000.Manuel Santos* The use of the words of the words of negotiability would imply a promise to pay.

If it is a bill of exchange, it must contain an order to pay.* The instrument need not use the exact word pay. It could say I command to pay or I order you to pay and it will be an equivalent to an order to pay.* An authority to pay is not an order to pay because it means that the person to whom it is being given is given only the discretion to pay or not to pay. So he has the option to choose not to pay(DAPAT walang OPTION)* A mere request to pay is likewise not an order to pay. Example:Please give Jose Cruz P10,000.Manuel Santos

But the mere use of words of civility would not detract from the nature of the promise. Example:Jose Cruz will oblige Manuel Santos by paying Pablo Ramos or order P10,000.

To Jose Cruz Manuel SantosThis means that Manuel Santos will consider himself indebted and obliged to Jose Cruz if Jose Cruz will pay Pablo Ramos. This is equivalent to an order to pay.

The promise or order must be unconditional.* If it is conditional then payment is not certain. If payment is not certain, it would be difficult to circulate that because people would not want to accept something where payment is unsure.* If the event is certain to happen but when it will happen is unknown, then that is not a condition but is a period. Example: Death.

Must be payable in moneyWhen you say payable in money, the denomination must be specified. I will pay you 300 in English currency, 300 bucks, 300 pence, 300 pounds, 300 schillings.It is now valid to stipulate that I will pay you in foreign currency.SEC2 What constitutes certainty as to sum. The sum payable is a sum certain within the meaning of this act, although it is to be paid.

(a) With interest; orThe sum is certain even if it is with interest. As a rule, if the interest is not unconscionable, it is the rate stipulated by the parties. If the instrument provided for payment of interest but did not indicate the rate, then what will apply will be the legal rate which is 12% under Circular 416.

(b) By stated installments; For the amount to be certain, it must indicate:(1) The amount of each installment AND (2) The date when each installment will be due If it says:(1) I promise to pay 10,000 in installments that is not negotiable. (2) I promise to pay 10,000 in 10 installments that is not negotiable. You dont know how much is the installment and when to be paid. (3) I promise to pay to Jose Cruz or order in 10 monthly installments that is not negotiable. You dont know how much each installment will be. (4) I promise to pay 10,000 in 10 equal monthly installments starting November 15, 2001 and every 15th day of the month thereafter that is negotiable because youll know each installment will be P1000 and will be paid every 15th day of the month.

(c) By stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; orWhen there is a provision for payment in installments with an acceleration clause. That is, if any installment is not paid then the balance will become due and demandable. Under the law, it is expressly mentioned that that sum is certain.

(d) With costs of collection or an attorneys fee, in case payment shall not be made at maturity.Under Article 2208, as a rule, attorneys fees cannot be recovered. One exception is when there is a stipulation. In fact, a party will be more interested in taking an negotiable instrument which contains a payment for attorneys fees if it is not paid than one which does not contain such a stipulation.Now suppose the promissory note says I will pay reasonable attorneys fees if this is not paid at maturity. Will that be a negotiable? Yes, because in determining whether the sum payable is certain, the reckoning point is the date of maturity. If the amount payable before that or after that is uncertain, that is irrelevant. Thus, if you know on the date of maturity that this is the amount due that is negotiable. If the amount will become uncertain afterwards because of the attorneys fees, this is irrelevant.

(e) With exchange, whether at a fixed rate or at the current rate; The current rate is the rate of exchange computed daily. The law presupposes that merchants are familiar with the rate of exchange. So when the instrument says I will pay Jose Cruz P10,000 in United States currency on December 15, 2001 according to the rate of exchange on that day that would be valid because supposedly businessmen know what will be the rate of exchange.

SEC3 When promise is unconditional. An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with

(a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; orA promise to pay is unconditional even if it is coupled with an indication of the particular fund out of which reimbursement is to be made or account to be debited.The fund is not the source of payment but merely the source of reimbursement. Example: It says Pay Jose Cruz P10,000 and reimburse yourself from the proceeds of the sale of my shares of stock in San Miguel Corporation. That is negotiable. The particular account to be debited is merely an instruction on how to make the entries in the books. Debit my representation allowance.

(b) A statement of the transaction which gives rise to the instrument.* A negotiable instrument is issued when there is an underlying contract that is the consideration. So if it mentions the underlying contract which gives rise to its issuance, that will still be negotiable. * Example: I promise to pay Jose Cruz pursuant to our deed of sale. That is negotiable. * The reference to the contract will destroy negotiability if the obligation to pay becomes subject to the terms and conditions of the contract. Then it becomes conditional.* But suppose if you examine the contract you will find actually that the promise is still unconditional, will that make it negotiable? No. Because again your basic rule, negotiability is to be determined only by looking at the 4 corners of the instrument without looking at evidence aliunde. There you have to look into evidence aliunde to find out that it is negotiable.

But an order or promise to pay out of a particular fund is not unconditional.An order or promise to pay out of a particular fund is conditional because it presupposes and is subject to the condition that there are sufficient funds in the source of payment. Example: I promise to pay Jose Cruz P10,000 from the proceeds of the sale of my shares in San Miguel Corporation. That is not negotiable. This is why time and again the court has said that a treasury warrant is not a negotiable instrument because it is payable out of a particular fund. Under the Constitution, no money shall be paid out of the treasury unless there is an appr

opriation for that purpose. Thats why it is not a negotiable instrument.

Not Negotiable if :1.Pay out of certain fund (if for reimbursement then it is negotiable, but if for payment ,then ,not negotiable)2.stock certificates3.treasury warrant (since it is payable to particular fund)4.money order (not negotiable and it may only be indorse once)5.check payable to an undisclosed third party or person

6.payable to specified person (w/ no order or bearer)7.conditional in consideration of or that it contains terms and conditions8.debtor has option to pay (but if option is with creditor, then ,it is negotiable)4blue 95: if during the period of negotiation, the instrument states that it is to pay money plus do an act, then such is not negotiable.However, if act is after maturity and at option of holder, then it is valid (ex: get money or get car)

Sec. 5. Additional provisions not affecting negotiability. - An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. But the negotiable character of an instrument otherwise negotiable is not affected by a provision which:(a) authorizes the sale of collateral securities in case the instrument be not paid at maturity; or (b) authorizes a confession of judgment if the instrument be not paid at maturity; or (c) waives the benefit of any law intended for the advantage or protection of the obligor; or (d) gives the holder an election to require something to be done in lieu of payment of money.But nothing in this section shall validate any provision or stipulation otherwise illegal.

Sec. 6. Omissions; seal; particular money. - The validity and negotiable character of an instrument are not affected by the fact that: (a) it is not dated(presumed to be at date of issuance)(b) does not specify the value given, or that any value had been given therefor; or (c) does not specify the place where it is drawn or the place where it is payable; or (d) bears a seal; or (e) designates a particular kind of current money in which payment is to be made.But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument.

Sec. 7. When payable on demand. - An instrument is payable on demand: (a) When it is so expressed to be payable on demand, or at sight, or on presentation; or (b) In which no time for payment is expressed.Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand.

Sec. 10. Terms, when sufficient. - The instrument need not follow the language of this Act, but any terms are sufficient which clearly indicate an intention to conform to the requirements hereof. Sec. 11. Date, presumption as to. - Where the instrument or an acceptance or any

indorsement thereon is dated, such date is deemed prima facie to be the true date of the making, drawing, acceptance, or indorsement, as the case may be. Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery. Sec. 13. When date may be inserted. - Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date.

Sec. 8. When payable to order. - The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of: (a) A payee who is not maker, drawer, or drawee; or (b) The drawer or maker; or (c) The drawee; or (d) Two or more payees jointly; or (e) One or some of several payees; or (f) The holder of an office for the time being.Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty.

Sec. 9. When payable to bearer. - The instrument is payable to bearer: (a) When it is expressed to be so payable; or (b) When it is payable to a person named therein or bearer; or (c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or 4blue95: non existing is when I knew him to be dead but it turned out he is alive ,ex:pay to the estate of X4blue95:it is fictitious if I knew it doesnt exist however, if 1 party is in good faith & knows that such person exist (even though hinde!) then, it is not a bearer instrument anymore.

(d) When the name of the payee does not purport to be the name of any person; or (e) When the only or last indorsement is an indorsement in blank.

Order-it is indorsement + deliveryBearerit is delivery only

Sec1 + delivery makes the instrument complete/good in absence of one makes it incomplete.-- such is necessary not only to original contract but also to indorsement or acceptance.-- no rights will arise until it is delivered.--if interest charge depends upon the creditor,like the illustration in first page,then ,it is negotiable. Sec. 14. Blanks; when may be filled. Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up s

trictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time.

CLASSES OF HOLDERS

1.HOLDER IN DUE COURSEA holder in due course is a holder who has taken the instrument under the following conditions. (a) That it is complete and regular upon its face; (b) the he became the holder of it before it was overdue and without notice that it had been previously dishonored if such was the fact; (c) That he took it for value and in good faith; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.4blue 95:To constitute notice of defect in the title of the person negotiating the same, the person to whom it is negotiated must have actual knowledge of the defect, or knowledge of such facts that his action in taking the instrument amounts to bad faith.4blue 95: A payee can be a holder in due course. A holder is defined as the payee or indorsee of the instrument who is in possession of it. Every holder is deemed prima facie to be a holder in due course.

Rights of a holder in due course:Like any holder, a holder in due course may enforce the instrument and sue thereon in his own name.He also holds the instrument free from any defect of title of prior parties, free from defenses of prior parties among themselves, and he may enforce payment of the instrument for full amount thereof, against all parties liable thereon.The fact that the postdated checks were merely issued as security is not a ground for the discharge of the instrument as against a holder in due course. The only ground are those outlined in Section 119 of the Negotiable Instruments Law (State vs. CA, 217 SCRA 32)

Bar Question: Eva issued to Imelda a check in the amount of P50,000.00 postdated September 30, 1995, as security for a diamond ring to be sold on commission. On September 15, 1995. Imelda negotiated the check to MT Investment which paid the amount of P40,000.00 to her.Eva failed to sell the ring, so she returned it to Imelda on September 19, 1995. unable to retrieve her check, Eva withdrew her funds from the drawee bank. Thus, when MT Investment presented the check for payment, the drawee bank dishonored it. Later on, when MT Investment sued her. Eva raised the defense o absence of consideration, the check having been issued merely as security for the ring that she could not sell.Does Eva have a valid defense? Explain (1996 Bar)Suggested Answer: (U.P. Law Center) No, she does not have a valid defense. First. MT Investment is a holder in due course and, as such holds the postdated check free from any defect of title of prior parties and from defenses available to prior parties among themselves. Eva can invoke the defense of absence of consideration against MT Investment only if the latter was privy to the purpose for which the checks were issued and, therefore, not a holder in due course.

Sec 119:Discharge of Instrument:1.payment in due course or on behalf of principal debtor2.payment in due course by party accommodated3.intentional cancellation by the holder4.any act w/c discharge simple contract for payment of money5.principal debtor becomes holder of instrument at or after maturity in his own

right.

2. HOLDER NOT IN DUE COURSEA holder not in due course is one who became a holder of an instrument without any, some, or all of the requisites under Sec. 52 of the Negotiable Instruments Law.The only disadvantage of a holder who is not a holder in due course is that the instrument is subject to defenses as if it were non-negotiable (Bataan vs. CA, 230 SCRA 647)

Bar Question: Rolando, intending to buy a car, saw an old friend, who is an agent to sell the car belonging to Delgado Clinic. After negotiation. Rolando decided to buy said car. He drew upon request of Roger a crossed check for P600.00 payable to Delgado Clinic as evidence of his good faith, but which will merely be shown to Delgado Clinic by roger who received said check. The check would then be returned when Roger brings the car and its registration certificate for Rolandos inspection.For failure of roger to bring the car and its certificate of registration, and to return the check, Rolando issued a stop payment order to the drawee bank. In the meantime, Roger paid the check to the Delgado Clinic for the hospital bill of his wife and was given P158.25 as change. Delgado Clinic filed suit against Rolando to recover the value of the check. May Delgado Clinic be considered a holder in due course, hence, entitle to recover? Decide with reasons. (1977, 1962 Bar)Answer: No. Delgado Clinic cannot be considered a holder in due course and hence, cannot recover under the instrument.It will be noted from the problem that (1) the check is payable to Delgado Clinic, but drawn by Rolando, who had no account at all with Delgado Clinic (2) it was crossed check, meaning that it could only be deposited by its holder but could not be converted into cash (3) the check was used to pay the account, not of the drawer. Rolando, but of a third person, Roger and (4) the amount of the check was more than the amount paid to Delgado Clinic.All these circumstances should put Delgado Clinic to inquiry as to the whys and wherefores of the possession of the check by Roger and why Roger used it to pay for the account of his wife with Delgado Clinic, and the latter (Delgado clinic) not having done so, it was a holder with knowledge of the defect of title of the person negotiating the check. At least one of the requisites for a holder to be considered a holder in due course that he has no knowledge of the defect of title of the person negotiating the instrument is absent.Hence, Delgado Clinic is not a holder in due course and therefore, not entitled to recover from Rolando, the drawer of the check.

Rights of HolderThe holder of a negotiable instrument may sue there under in his own name, and payment to him in due course discharges the instrument.If a promissory note is non-negotiable, subsequent holders can never be holders in due course, but are mere assignees against whom defenses may be raised by prior parties. (Consolidated vs. IFC, 149 SCRA 448).

Rights of Holder Not IN Due CourseA holder not in due course an enforce the instrument and sue under it in his own name. prior parties, however, even though remote, can avail against him any defense among these prior parties and prevent the said holder from collecting in whole or in par the amount stated in said in instrument.That a holder is not a holder in due course does not mean that he cannot recover under the instrument (State vs. IAC, supra)

DEFENSES OF PRIOR PARTIES AGAINST THE HOLDER

1.REAL OR ABSOLUTE DEFENSESA real or absolute defenses is a defense which attaches to the instrument irresp

ective of the parties and is predicated on the principle that the right sought to be enforced has never, existed or has ceased to exist.Examples of real defenses are: forgery or unauthorized signature; void contract; material alteration, incomplete and undelivered instrument.

Against Whom AvailableA real defense is available against all holders, whether in due course or not.

Bar Question: On April 1, 1954. A delivered to B the follwing document I promise to pay to the order of B the sum of P1,000.00 on or before June 30, 1954 (Sgd) A Two weeks later, B endorsed and delivered the note to X X demanded payment from A whfused to pay alleging nullity of the note but adding give me 10 days and I will pay. Whereupon X immediately left and informed B accordingly.On July 15, 1954. X filed suit recover from A and B jointly and severally, the amount of the note. As defense is that the note is void. It representing money won in a game of chance (duly proved), while Bs defense for payment (so therefore he must be discharge from the instrument). How would you decide the case? State your reason fully but briefly (1955 Bar)Answer: The defense of A that the note is void because it represented money won in a game of chance which was proved, would have been a real defense available against all holders. However, by his telling X Give me 10 days and I will pay. he is estopped from now alleging any defense to the enforcement of the note. Because of these circumstances, I submit A is liable to XThe defense of B that he is discharged because X accepted an extension from A of 10 days, is not a valid defense as B by his failure to object to said extension after he was informed about it, refused said extension impliedly, and is deemed to have conformed to it. Hence, B is not discharged by said extension.

2.PERSONAL OR EQUITABLE DEFENSESA personal or equitable defense is a defense growing out of an agreement or conduct of a particular person in regard to an instrument which renders it inequitable for him, although owner of it, to enforce it against the defendant.Examples of personal defenses are: complete but undelivered instrument, delivered but incomplete instrument; absence or failure of consideration; defect of title.

Against Whom AvailableThe defense is available against all holders not in due course, except those who derive their rights from holders in due course and who are not parties to any fraud or illegality affecting the instrument.

Bar Question: A induces B by fraud to make a promissory note payable on demand to the order of A in the sum of P5000.00a) Can A file an action successfully against the maker B for the amount of the note? No. A, the payee of the promissory note who induced by fraud B to make the questioned promissory note, cannot successfully file an action against B. The fraud committed by A is a defense (personal defense), which B. under the law, is allowed to invoke against Ab) Going further A transfers the note C who pays P5000.00 therefore and acquires the note under circumstances that make him C, a holder in due course. Can C file an action successfully against B, the maker of the note, for the amount of the note? C, who is a holder in due course of the note, can file an action successfully and collect against A. A holder in due course (like C in the problem), holds the instrument free form defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon (like B the drawer, in the problem)What defense/defenses can B interpose? Reasons. (1978 Bar)

The problem itself does not mention any circumstance which could be a possible defense against a holder n de course. If besides the facts mentioned in the problem. B can show that the fraud committed by A was fraud in factum, or misrepresentation as to the nature of the instrument or that the (B) lacked contractual capacity, these defenses, being real defenses, may prevent recovery against B, even if the instrument is in the hands of a holder in due course, like C, in the problem.

Bar Question: A issued a promissory note payable to B or bearer. A delivered the note to B. B indorsed the note to C C placed the note in his drawer, which was stolen by janitor X. X indorsed the note to D by forging Cs signature. D indorsed the note turn delivered the note to F a holder in due course, without indorsement. Discuss the individual to F of A, B and C (2001 Bar)HELD:As a general indorser, B is secondarily liable to F.C is liable to F since it is due to the negligence of C in placing the note in his drawer that enabled X to steal the same and forge the signature of C relative to the indorsement in favor of D. As between C and F who are both innocent parties, it is C w negligence is the proximate cause of the loss. Hence C should suffer the loss.

LIABILITIES OF PARTIES

PARTIES PRIMARILY LIABLE

1. Makera. Engages to pay according to the tenor of the instrument;b. Admits the existence of the payee and his capacity to indorse

2. Acceptor or the Drawee Who Accepts the Instrumenta. Engages to pay according to the tenor of his acceptance.b. Admits the existence of the drawer, the genuineness of his signature and his capacity and authority to draw the instrument.c. Admits the existence of the payee and his capacity to indorse.

Bar Question: A bill of exchange was delivered to a drawee for acceptance and he refused to accept it. Can he be held liable on said bill? Give your reason (1947 Bar)Answer: the drawee who has not accepted the bill of exchange is not a party to he instrument, and is therefore not liable, primarily or secondarily.It is a drawees acceptance of the bill which makes him primarily liable under it.

Bar Question: A check for Fifty Thousand (P50,000.00) Pesos was drawn against drawee bank and made payable to XYZ marketing order. The check was deposited with payees account at ABC Bank which then sent the check for clearing to drawee bank.Drawee bank refused to honor the check on ground that the serial number thereof had been altered.XYZ Marketing sued drawee bank.In instant suit, drawee bank contented that XYZ Marketing as payee could not sue the drawee bank as there was no privity between them. Drawee theorized that there was no basis to make it liable for the check. Is this contention correct? Explain (1999 Bar)Suggested Answer( U.P. Law Center): Yes as a general rule, the drawee is not liable under the check because there is no privity of contact between XYZ Marketing, as payee, and ABC Bank as he drawee bank. However, if the action taken by the bank is an abuse of right which caused damage not only to the issuer of the check but also to the payee, the payee has a cause of action under quasi-delict.

PARTIES WITH LIMITED LIABILITY

1. The Qualified Indorser

Bar Question: What are the warranties of a qualified indorser? (1946 Bar)

Answer: The warranties of a qualified indorser are: (a) that the instrumentis genuine and in all respects what is purports to be; (b) that he has good title to it; (c) that all prior parties had capacity to contract; (d) that he has no knowledge of any fact which would impair the validity of the instrument, or render it valueless.

2. Person Negotiating by Deliverya) Warranties same as those of a qualified indorser;b) Warranties extend to immediate transferee only

Bar Question: A makes a promissory note payable t bearer and delivers it to B. In turn, B negotiates it by mere delivery to C, who endorses I especially to D. D negotiates it by special indorsement ot E who negotiates it to F by mere delivery. A did not pay. To whom are B, C, D, and E liable? Explain your answer. (1979 Bar)Answer: B is liable to C only for breach of any of the following warranties: (a) that the instrument is genuine and in all respects what it purports to be; (b) that he has good title to it. (c) that all prior parties had capacity to contract; and (d) that h has not knowledge of any fact which would impair he validity of the instrument and render it valueless.C, by virtue of his indorsement, is liable as a general indorser to D and E, only because the latter obtained their titles through Cs special indrosement. As C is a genera indroser, D and E can hold him liable to pay by reason of As non-payment, or by reason of breach of the warranties of a general indroser.D, because of his special indorsement, is liable as a general indroser to E, because the latter obtained his title through the said special indorsement of D. E can make D pay if A, the maker and party primarily liable, fails to pay or if D commits a breach of any of the warranties of a general indorser.E, is liable to F only if he (E) commits a breach of any of the warranties mentioned in the first paragraph hereof, if he does not breach any of said warranties, then he does not have any liability to F by the mere fact alone of As non-payment of the note

PARTIES SECONDARILY LIABLE

1. Drawera) Admits the existence of the payee and his capacity to endorseb) Engages that the instrument will be accepted or paid by the party primarily liable.c) Engages that if the instrument is dishonored and proper proceedings are brought, he will pay to the party entitled to be paid.

Bar Question: As payment for goods received. Masikap gave to Humimok on November 3, his check drawn on the Eternal Bank of Manila, On November 4, Humimok negotiated the check to Dr. Kahusayan in payment of dental work performed by the latter. On November 11, Kahusayan went to Eternal Bank to encash the check. He could not cash the check because on November 10, Central Bank had forbidden Eternal Bank to do business in the Philippines on grounds of insolvency. Masikap, Humimok and kahusayan all reside in Manila.a. Can Kahusayan hold Masikap liable on the uncashed check? Explain briefly.b. Can Kahusayan hold Humimok liable on the check? Explain briefly.c. Can Kahusayan still collect from Humimok for the dental work done on the latter? Explain briefly.d. Assume that Eternal Bank was not closed by Central Bank but simply refused to honor and encash the check. Can Kahusayan hold Masikap liable? Explain briefly (19869 Bar) Answer: (a) Kahusayan can hold Masikap liable on the uncashed check. The failure by Eternal Bank to honor the check, whatever may be its reason, amounts to a dishonor by the drawee. An immediate right of recourse in favor of the holder (Kahusayan) accrues against the parties who are secondarily liable and who are notif

ied of the dishonor. Masikap, the drawer of he check, is secondarily liable o the holder, Kahusayan, and therefore can be made to pay after the dishonor of his (Masikaps) check by Eternal Bank.(b) Kahusayan can hold Humimok liable on the check. Assuming that Kahusayan prefers to run after Humimok, the latter is liable because as indorser he is secondarily liable to the holder, especially as in this case when the drawee. Eternal Bank, dishonor the check.(c) Kahusayan can still collect for dental work performed on Humimok. A check when used to pay an obligation does not produce the effect of payment unless it is encashed by the creditor, or deposited to his bank account which is eventually credited with the amount of the check.(d) Yes, Kahusayan can hold Masikap liable. Whatever may be the cause for the dishonor of the check by the drawee bank has no effect on the right of the holder to seek recourse for payment against anyone of the parties who is secondarily liable for payment against is notified of the dishonor; if as in this case, the check is dishonored by the drawee (Eternal Bank).

2. The irregular IndorserAn irregular indorser is one who affixes his signature in blank on an instrument before delivery.

Rules as to liability:1. Instrument payable to order of third person irregular indorser liable to payee and to subsequent parties;2. Instrument payable to order of maker or drawer he is liable to all parties subsequent to the maker or drawer;3. Irregular indorser signs for accommodation of payee he is liable to all parties subsequent to the payee.

3. The General Indorsera) Warrants (1) the genuineness of the instrument, (2) his good title to it (3) he capacity to contract of prior parties, and (4) instrument is valid and subsisting.b) Engages that the instrument will be paid by the party primarily liable.c) Engages that if the instrument is dishonored, and proper proceedings are taken, he will pay to he party entitled to be paid.By reason of the statutory warranty of a general indorser in Section 65 of the Negotiable Instruments law, a collecting bank which indorsers a check bearing a forged indorsement and presents it to the drawee bank guarantees all prior indorsements, including the forged indorsement, it warrants that he instrument is genuine, and that it is valid and subsisting at the time of his indorsement. Because the indorsement is a forgery, the collecting bank commits a breach of this scheme operates without regard to fault on the part of the collecting/presenting bank. Even if the latter bank was not negligent, it would still be liable to the drawee bank because of its indorsement (Associated vs. CA, 252 SCRA 620).The collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the indorsements (ibid).Aside from its warranties as an indorser, the collecting bank is made liable because it is privy to the depositor who negotiated the check because it knows him, his address and history for being a client thereof. Thus, it is in a better position to detect forgery, fraud or irregularity in the indorsement. (Ibid)

Bar Question: A makes a promissory note payable to B or bearer. A delivers the note to B. B indorses the note to C C places the note in his wallet, which was stolen by Xnding the note, indorses it to D by forging Cs signature. D indorses the note to E,n turn delivers the note to F, a holder in due course without indorsement.

What are the liabilities of A, B and C to F? Explain briefly (1981 Bar).Answer: A is primarily liable to F as maker of he bearer promissory note. A as maker, is the person to whom the holder of the note will have to make a presentment for payment on the date of maturity.B as indorser of the promissory note, is secondarily liable to F. this means that if the note is dishonored by A, he maker, when a presentment for payment is made by F t B, a right of recourse against B accrues in favor of F. F may thereafter present the note to V for payment, because B by then is already liable under the note.C, has no liability to F. as prior holder of the promissory note, his signature as indorser does not appear on the note. While it is true that the note, in spite of the special indorsement to him, can continue to be negotiated by mere delivery, the note being a bearer note, his liability as a party secondarily liable extends only to the person to whom he may have negotiated the note by mere delivery. As he (C ) is however sought to be secondarily liable under his indorsement, which however is forged then C can defend himself by stating that under the law, his signature is inoperative and no right to enforce payment o the instrument against him is acquired through or under his forged signature.

When Secondary Liability Attaches

Acts Needed Before Secondary Liability Attachesa) Presentment for payment in notes and presentment for acceptance and/or payment in bills of exchange;b) Dishonor by non-payment in notes and dishonor by non-acceptance and/or non-payment in bills of exchange;c) Notice of dishonor to secondary parties.

Bar Question: X draws a bill of exchange against Y in favor of W for P1000.00 requesting the drawee to pay on December 24, 1962. W: indorses the instrument to P on September 1 and on September 15 presents it for acceptance. The bill is dishonored. P promptly sues W for payment. Will the case prosper? Give reasons for your answer. (1963 Bar)Answer: No, the case will not prosper for the reason that no notice of dishonor, which is a prerequisite to enforcement against a secondary party, has been made by D, the holder, to W, who is a secondary party.

Bar Question: A draws a check in favor of B who indorses it, to C The bank refuses payment for lack of funds. Without further notice C filed a complaint against A and B for collection. What should be the decision? (1946 Bar)Answer: The case against A and B for collection should be dismissed.A the drawer, and B the payee-indorser, are parties secondarily liable under the instrument. Before this secondary liability can attach them, they should be informed of the dishonor. This prerequisite it appears, was not complied with by C:, the holder.Hence, Cs suit for collection agaist A and B, and beiong premature for lack of noticef dishonor, should be dismisnissed.

Bar Question: A issued a promissory note to B in the following tenor I promise to pay to the order of B P1,000.00 sixty days after date (Sgd) A. The note was subsequently negotiated with prior indorsement to B to C to D, and E, the holder. When e presented the note for payment to a, the latter refused to pay. E then gave a notice of dishonor to C only.May E immediately proceed against B,C, and D? (1984 Bar)Answer: E, the holder, may proceed against C only, because it was to him that he gave the notice of dishonor. He (E) cannot proceed against B and D for his failure to notify them of the dishonor by non-payment. In order that C may protect his rights, he may, after receiving notice of dishonor from E, in turn give notice of dishonor to the prior parties A and B. it was no necessary to him C and D is therefore not liable to him C

Order in Which Indorsers LiableThey are liable in the order in which their indorsements appear in the instrument the latter ones having a right of recourse against the prior ones.

Execution and Negotiation of the Instrument by Agents and Others

A. BY AGENTSRequisitesa) The agent must be authorizedb) He must disclose his principal.c) He must sign for and in behalf of his principalWhere an alleged agent affixed his signature to an instrument, without stating that he does so as representative of his principal, his liability is governed by Sec. 20 of the Negotiable Instruments Law, which provides that where the instrument contains or a person adds to his signature words that he signs for or in behalf of a principal or in a representative capacity, he is not liable on the instrument, if he was duly authorized, nut the mere addition of words describing him as agent or as filling a representative character without disclosing his principal does not exempt him from personal liability (Phil Bank vs. Aruego, 102 SCRA 530).The negotiable Instruments Law provides that where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability. An agent, when so signing, should indicate that he is merely signing in behalf of th principal and must disclose the name of his principal; otherwise the shall beheld liable (Francisco vs. CA, 319 SCRA 354)

Signature per ProcurationA signature per procuration is one made by an agent with a limited authority to sign, and the principal is bound only if the agent acts within the limits of the authority.It is made by adding per procuration, per proc. Or p.p under the agents signature.

B. UNDER A TRADE NAME OR ASSUMED NAMEThe person signing his trade name or assumed name is liable as if the name where his own.

Indorsements by Minors and Disqualified CorporationMinors and disqualified corporations, although incapacitated to make or draw instruments, can negotiate instruments, transferring valid titles thereto, but are not liable as indorsers under the said signatures.

Bar Question: (1) X makes a promissory note for P500.00 payable to A, a minor to help him buy school books. A indorses the note to B, who in turn, indorses the note to C. C known As minority. If C sues X in the note, can X set up the defenses of minority and lack of consideration? (1998, 1989 Bar)Answer: X when sued by C on the note, cannot set up the minority of A as a defense., while a minor cannot make a promissory note for lack of contractual capacity, he (the minor) may however validly indorse the note and vest title in the transferee, however, the minor incurs no liability at all arising from his indorsement.

ACCOMMODATIONAccommodation is a legal arrangement under which a person called the accommodation party lends his name and credit to another called the accommodated party, without consideration. A person to whom the instrument is executed is subsequently negotiated, has a right of recourse against accommodation party inspite of the formers knowledge that no consideration passed between the accommodation and accommodated parties.

Requisites of an AccommodationFor an accommodation to exist, the following must be present: (a) The accommodation party must sign as maker, drawer, acceptor or indorser, (b) No value is received by the accommodation party from the accommodated party; and (c) The purpose is to lend the name (Jose vs CA 177 SCRA 594).An accommodation party is one who has signed the instrument as maker, drawer, acceptor, rindorser, without receiving value therefore, and for the purpose of lending his name of another person. Bar Question: State the liability of the accommodation party (1952 Bar)Answer: The negotiable Instruments Law by clear mandate makers the accommodation party liable on the instrument to a holder for value notwithstanding hat such holder at the time of taking he instrument knew him to be only an accommodation party, it is not a valid defense that the accommodation party did not receive any valuable consideration when he execute the instrument. He is liable to a holder for value of his being an accommodation party.An accommodation party to a negotiable instrument, inspite o the lack of consideration between him and the accommodated party, is liable to any other holder not the accommodated party (Travel-On vs. CA, 210 SCRA 351)An accommodation partys liability as a solidarily party is unconditional and is not affected by an extension of payment granted by the creditor to the debtor, however, where the holder allowed payments by the drawer direct to the contractor without availing of the deed of assignment in its favor, said holder is a bad faith holder, not a holder in due course against whom an extension to pay granted by the drawer is a defense by the accommodation party (Prudencio vs CA 143 SCRA 6)

Bar Question: To accommodate Carmen, drawer of a promissory note, Jorge signed as indorser thereon, and the instrument was negotiated to Ratify, a holder for value. At the time Raffy took the instrument, he knew Jorge to be an accommodation party only. When the promissory note was not paid, and Raffy discovered that Carmen had no funds he sued Jorge, Jorge pleads in defense the fact that he had indorsed the instrument without receiving value therefore, and the further fact that Raffy knew that a time he took the instrument Jorge had not received any value or consideration of any kind for his indorsement.Is Jorge liable? Discuss with reason (1996, 1990, 1975 Bar)Answer: Jorge is liable to Rafft. An accommodation party (like Jorge in the example) is liable on the instrument to a holder for value (which Raffy is) notwithstanding the fact that such holder at the time of the taking of the instrument knew him only to be an accommodation party.This is not only by express provision of the law, but also because the accommodated and the accommodation parties stand to each other as principal and surely such that if the accommodation party is made to pay the obligation, he can claim reimbursement from the accommodate party.

Bar Question: Juan Sy purchased from A Appliance Center one (1) generator set on installment with chattel mortgage in favor of the vendor After getting hold of the generator set. Juan Sy immediately sold it without consent of the vendor. Juan Sy was criminally charged with estafa.To settle the case extra0judicailly, Juan Sy paid the sum of P20,000.00 and for the balance of P5000.00, he executed a promissory note for said amount with Ben Lopez as an accommodation party. Juan Sy failed to pay the balance.a. What is the liability of Ben Lopez as an accommodation party? Ben Lopez as an accommodation party, is liable as maker to the holder up to the sum of P5000.00 even if he did not receive any consideration for the promissory note. This is the nature of accommodation. But Ben Lopez can ask for reimbursement form Juan Sy, the accommodated party.b. What is the liability of Juan Sy? (1993 Bar)Juan Sy is liable to the extent of P5000.00 in the hands of a holder in due coruse (Sec. 14. NIL) if Ben Lopez paid the promissory note, Juan Sy has the obligation to reimburse Ben Lopez for th

e amount paid. If Juan Sy pays directly o the holder of the promissory note, or he pays Ben Lopez for the reimbursement of the payment by the latter to the holder, the instrument is discharged. The liability of an accommodation party does not extend to corporate officers is ultra vires. However, these officers are personally liable (Jose vs. CA 177 SCRA 594).

Bar Question: On 1 June 1990. A obtained a loan of P100,000.00 from B payable not later than 20 December 1990. Since he does not have any checking account A, with the knowledge of B, requested his friend, Cm President of the Saad Banking Corporation. The By-laws of SAAD requires that checks issued by it must be signed by the president and the treasurer or the vice-president. Since the treasurer was absent. C requested the vice-president to co-sign the check, which the latter reluctantly did. The check was delivered to B; the check was dishonored upon presentment due date for insufficient funds. a. Is the SAAD Banking Corporation liable on the check as an accommodation arty? SAAD Banking Corporation is not liable on the check issued by it to accommodate another person. The act of the bank in issuing a check for accommodation purpose is ultra vires.b. If is no, who then, under the above facts, is/are the accommodation party? (1991 Bar) As the check does not bind SAAD Banking, then the signatories to the check, the President and the Vice President of said bank, become liable in their personal capacities as accommodation parties to said check.A promissory note, with an accommodation co-maker, used to settle an estafa case, has an Illegality of cause, and does not make the accommodation co-maker liable (United vs Paler, 112 SCRA 404)

RIGHTS OF AN ACCOMMODATION PARTY1) Against the Accommodated Party The accommodation party, if obliged to pay to a holder of value, can seek reimbursement from the accommodated party.

2) Against the Co-accommodation PartySince the Negotiable Instruments Law doe not define the right of an accommodation maker to seek reimbursement form another accommodation maker, this deficiency should be supplied by Article 2073 of the New Civil Code. Where a solidary accommodation maker paid to the bank the balance due on a promissory note, he may seek contribution from the other solidary accommodation, maker, in the absence of a contrary agreement between them. This right springs from an implied promise between the accommodation makers to share equally the burdens resulting from their execution of the note. They are joint guarantors of the principal debtor (Sadaya vs. Sevilla, 19 SCRA 924)

A solidary accommodation maker (1) may demand from the principal debtor reimbursement of the amount which he paid on the promissory note, and (2) he may demand contribution from his co-accommodation maker, without firs directing his action against the principal debtor, provided that (a) he made the payment by virtue of a judicial demand, or (b) the principal debtor is insolvent (Ibid).A solidary accommodation maker, who paid the balance due on a promissory note, is not entitled to demand contribution from his co-accommodation maker where he made the payment voluntarily and without any judicial demand and there is no proof that he principal debtor is insolvent (Ibid)

Bar Question: Santos purchased Veras car for P50,000.00. Not having enough cash on hand, Santos offered to pay in check. Vera refused to accept the check unless it is endorsed by Reyes, their mutual friend Reyes, endorsed Santos check and accepted it. The next day Vera presented the check to the drawee bank for payment. Payment was refused but Reyes refused to pay, saying that he endorsed merely as a friend.a. Is Reyes liable to Vera? Reyes is liable to Vera, His liability springs from

the fact that he (Reyes) is an accommodation indorser. An accommodation indorser of an instrument is secondarily liable to the holder, inspite of the fact that the holder, at the time of the affixing of the accommodation indorsement, knew that the accommodation indorser did no receive any consideration for his being an indorser to the instrument.b. In the event Reyes voluntarily pays Vera, does Reyes have the right to recover from Santos? Explain (1985, 1976 Bar) In the even Reyes pays Vera, he (Reyes) has a righ of reimbursement from the person he has accommodated the relationship between the two being that of principal and surely. RULES WITH REGARD DEFICIENT INSTRUMENTS:

1. COMPLETE BUT UNDELIVERED INSTRUMENTa negotiable instrument like a written contract has no legal effect until it has been delivered in accordance with the purpose and intent of the parties. Without delivery there can be no liability.EX: M makes a bearer promissory note, completes it with all material particulars, and places the same inside an unlocked drawer in his office table--- as such, in absence of delivery, there is no contract.

a) Between immediate parties and a remote party not a holder in due course, delivery to be effectual must be made by or under the authority of the maker, drawer, acceptor or indorser, as the case may be;Immediate parties refers to those who are immediate in the sense of having or being held to know of the conditions or limitations placed upon the delivery of the instrument (it contemplate privity not proximity)Remote Party are those not in direct contractual relation to each other, but if they are chargeable with knowledge or notice of any infirmities in the instrument or defect in title of person negotiating, they will be considered immediate parties.EX: M makes a bearer promissory note, completes it with all material particulars, and places the same inside an unlocked drawer in his office table, P, his office secretary, steals the note, and indorses it to A, A to B, Bto C and Cto D. D has knowledge that the note was stolen by P.

P and D are immediate parties, although latter is remote from M since he is not a holder in due course.M may prove that no delivery was made or that it was not authorized, but D can recover from P, A, B and D as they are indorsers. But suppose M delivers note to X, his agent,with instruction to deliver it to P for safekeeping, P can enforce the instrument as he is not an immediate party.

4blue95: what if it is delivered conditionally or for a special purpose?

BAR: Suppose Maycel delivers the note to Junmar on condition that it will not be binding on her until a co-maker has been procured or for safekeeping or for collection only.Junmar cannot enforce the instrument against Maycel since the latter can set up defense that the delivery was conditional or for a special purpose only and not for the purpose of transferring title to the instrument.

b) if the instrument is in the hands of a holder in due course, all prior deliveries are conclusively presumed valid;As such ,the maker cannot prove that the note was stolen by Payee or was delivered conditionally or for a special purpose.An exemption to such ,according to 4blue 95, is where there was no actual delivery to anyone for any purpose by maker who was a victim of THEFT or ROBBERY committed in his house and there was no fault or negligence on his part, then ,it would be unreasonable to hold him liable even to an innocent holder for value.

2. INCOMPLETE BUT DELIVERED INSTRUMENT

a) Holder has prima facie authority to complete the instrument;blanks for date, name of payee ,amount or rate of interest may be filled in and even the blank for the name of the drawer may be filled in.authority to complete is not an authority to alter. So the holder has no authority to change the amount after it has been filled in or to insert the words or order or or bearer after the name of the payee.Neither may authority be presumed unless the character of the instrument directly indicates it ,to add at the end of the instrument the words with interestEX: M makes a promissory note leaving the amount blank, and delivers same to P, the payee, with instructions to fill up the amount with his loan account which does not exceed P600 including interest. P inserts P2000 on the space for amount in breach of the instruction and negotiates the note.If P negotiated the note to A, who has knowledge of the abnormality or deficiency, A is a holder not in due course, consequently, M can prevent A from enforcing the note against him (M) by asserting the abnormality or deficiency involved.4blue 95:A person in possession of a check has prima facie authority to complete it by filling up the blanks therein (Pacheco vs. CA, 319 SCRA 595).

b) Completion to be done within a reasonable time and according to the authority given;reasonable time is to reckoned from the time of the issuance of the instrument because the interest involved is that of the issuer and not from the time of each successive negotiation.

c) Holder in due course of the instrument previously completed in breach of instructions can enforce the same as if regularly completed.As such, the maker cannot put up the defense that the payee (P) exceeded his authority, therefore,the holder in due course can collect to M.

Causes for Abnormality and Deficiency1. Lack of essential requisites to a contract which are

a. Lawful subject matterb. Consideration; andc. Consent

2. Lack of regularity in issue by absence ofa. the material particulars of the questioned instrument, or in their correctness; andb. the delivery of instrument made with the knowledge and/or conformity of the maker or the drawer and with intention of making the transferee a holder of the instrument.

3. INCOMPLETE AND UNDELIVERED INSTRUMENTCompleted and delivered without authority, the instrument is not a valid contract against any person(even on a holder in due course) who signed before delivery.

Bar Question: Jose makes a note payable to bearer with the amount blank and delivers it to Karen for safekeeping. Marina fills up the note for P 20,000.00 and negotiates it to Adriano. Can Jose dishonor the note and refuse payment to Adriano on the ground that the note (a) was incomplete and (b) was originally delivered to Karen for safekeeping only and not for negotiating? (1982 Bar)Answer: Yes, Jose can dishonor the note. This is a situation where the note is incomplete and undelivered Incomplete because at the time the maker parted with it, it lacked a material particular the amount was blank. Undelivered because it was delivered to Karen not for the purpose of making Karen the holder of the instrument, but for safekeeping only. Hence, the subsequent possession by Marina of the note, whether she lawfully or unlawfully took it from Karen, was without the authority of Jose.If an instrument is incomplete but delivered without authority of the drawer or

maker, the instrument is not a valid contract against any person who signed the instrument before the unauthorized delivery. Hence, Jose can dishonor the note and refuse to pay Adriano.

Bar Question: PN makes a promissory note fro P5000.00 but leaves the name of the payee in blank because he wanted to verify its correct spelling first. He mindlessly left the note on top of his desk at the end of the workday. When he returned the following morning, the note was missing. If turned up later when X presented it to PN to payment Before X, T, who turned cut to have filched the note from PNs office, had endorsed the note after inserting his own name in the blank space as the payee. PN dishonored the note, contending that he did not authorize its completion and delivery, but X said he had no participation in, or knowledge about, the pilferage and alteration of the note and therefore he enjoys the rights of a holder is due course under the Negotiable Instrument Law. Who is correct and why? (2000 Bar)Answer: PN is correct He is not liable to X. The incomplete and undelivered note is a real defense, and can be invoked against all holders, whether in due course or not.

4. ABSENCE OR FAILURE OF CONSIDERATIONa) Absence of consideration is the total lack o consideration, no consideration, or illegal consideration.b) Failure of consideration is failure of the agreed consideration to materialized.c) both absence and failure of consideration are defenses personal to the prejudiced party, and available against any person not a holder in due course.The existence of consideration in the issue of checks and their indorsements is presumed. It is not the holders burden to prove the existence of such consideration. ( Travel-On vs. CA, 210 SCRA 351)

a. Example of an Instrument Without ConsiderationM makes a bearer promissory note and delivers without consideration the same to P, a long friend which P subsequent negotiates.a) If P negotiated the note to A, who has knowledge of the abnormality or deficiency, A is a holder not in due course, consequently, M can prevent A from enforcing the note against him (M) by asserting the abnormality or deficiency involved.b) If A negotiated the note to B, who pays value for the same, and had no knowledge of the abnormality or deficiency involved, then he (B) is a holder in due course, and may enforce the instrument against MM cannot invoke the abnormality or deficiency as a defense against B, because the abnormalities (incomplete but delivered, complete but undelivered) and the deficiencies (absence or failure of consideration) are personal or equitable defenses, and therefore available only against the parties who are directly responsible for the above stated abnormalities or deficiencies, or their immediate transferees who are aware of aforesaid abnormalities and deficiencies committed by their transferors.

c) If B, the holder in due course, negotiates the note to C, who pays value, but who has knowledge of the above stated abnormality or deficiency, he (C) can enforce the note according to its tenor against M, the maker. Under the second sentence of Sec. 58 of the Negotiable Instruments Law, a transferee from a holder in due course of a negotiable instrument (suffering from any of the above stated abnormalities and deficiencies) acquires all of the rights of the holder in due course, including the right to enforce the instrument against M, according to its tenor.

Exceptions to Consequences of Instrument Issued Without ConsiderationAccommodation partyExample: Where M made a promissory note payable to P, to accommodate P in his cr

edit arrangements with A to whom he (P) endorsed the note, and (A) has knowledge of the lack of consideration to the note due to he accommodation of P by M.Consequence of such is that A can enforce the note against M, inspite of As knowledge of the absence of consideration between M and P.

b. Example of an Instrument Where There is a Failure of Consideration M makes a promissory note payable to P in the amount of P1000 of Ps promise to deliver merchandise to M in five days. The note was negotiated by P, who failed to comply with his promise to deliver the merchandise.

Bar Question: Sumabad issued a promissory note to the order of Panloob as consideration for the textiles purchased from the latter. The promissory note recites, that the amount of P100,000.00 is payable in five monthly installments of P20,000 each, beginning on December 1, 1986 and every first day of month thereafter until fully paid. Provided that the holder may declare the entire amount due and demandable in the event the maker fails to pay on time any installment in full, or whenever the holder for valid reasons finds his claim unsecured. Panloob indorsed and delivered the note for value to Humabol who acted in good faith. Panloobs factory burns down and he is unable to deliver the textiles. Sumabod does not pay as promised.Can Humabol as an innocent purchaser for value hold Sumabod liable on the promissory note? Explain. (1986 Bar)Answer: Yes, Humabol, as an innocent purchaser for value of the promissory note issued by Sumabod, can hold Sumabod liable.The note was issued by Sumabod as consideration of textiles purchased by Sumabod from Panloob. Obviously, the textiles purchased were not at all delivered by Panloob to Sumabod, as Panloobs textile factory was burned down.Between Panloob and Sumabod, there is a failure of consideration- the promise to deliver the textiles bought not having materialized.The failure of consideration between the original parties to a promissory note does not it any manner affect the right of an innocent holder for value in good faith (in short, a holder in due course) from asserting his right to collect from the party primarily liable under the said note.Hence, Humabol can hold Sumabod liable under the promissory note.

Bar Question: If a candidate in an election for public office indorses a negotiable instrument at the request of a leader who promises to make all the voters in a given precinct vote for him, and the candidate actually gets only one vote, can the indorses hold the drawer of the check liable? (1968 Bar)Answer: Analyzing first the problem, the candidate is only an indorser, not the drawer of the instrument. It is not clear whether or not the leader who made the promise is also an indorser of the instrument.With these clarrificatins, I submit that the Indorsee after, of course, the instrument having been dishonored by the drawee bank, can proceed against any of the secondary parties including the drawer. The failure of consideration of the illegality of the promise is a defense against the enforcement of the check by the indorsee against the indorser-candidate, but not by the drawer against whom the presumption of consideration for the issuance of the check operates.

5.MATERIAL ALTERATION OF THE INSTRUMENTAny alteration which changes the date, the sum payable, the time or place of payment, number or relation of the parties, or medium or currency of payment, or adds a pace of payment where none is specified, or which alters the effect of the instrument in any respect is a material alteration.Under Section 125 (f) of the Negotiable Instruments Law, an alteration is said to be material if it alters the effect of the instrument, it means an unauthorized change in an instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party. In other words, a material alteration is one which changes the items which are required to be stated under Section 1 of the Negotiable Instruments Law vs CA, 258 SCRA 491).

A serial number is an item which is not an essential requisite for negotiability under Section 1 of the Negotiable Instruments Law (Ibid)

Bar Question: A check for Fifty Thousand (P50000.00) Pesos was drawn against drawee bank and made payable to XYZ marketing or order. The check was deposited with payees account at ABC Bank which then sent the check for clearing to drawee bank.Drawee bank refused to honor the check on ground that the serial number thereof had been altered.XYZ Marketing sued drawee bank.Is it proper for the drawee bank to dishonor the check for the reason that it had been altered? Explain (1999 Bar)Suggested Answer (UP Law Center): No the serial number is not a material particular of the check. Its alteration does not constitute material alteration of the instrument. The serial number is not material to the negotiability of the instrument.

Effect of the Alteration:A material alteration avoids the instrument except as against the party who made, authorized or assented to the alteration, and subsequent indorsers.Where the altered instrument, however, is in the hands of a holder in due course, not a party to the alteration, he may enforce payment thereof according to its original tenor.

Alteration of the Instrumenta.of the Amount Bar Question: Larry issued a negotiable promissory note to Evelyn and authorized the latter to fill up the amount in blank with his loan account in the sum of P1,000.00. However, Evelyn inserted P5000 in violation of the instruction. She negotiated the note to Julie who had knowledge of the infirmity. Julie in turn negotiated said note to Devi for value and who had no knowledge of the infirmity.a. Can Devi enforce the note against Larry and if she can, for how much? yes, Devi can enforce the negotiable promissory note against Larry in the amount of P5000. Devi is a holder in due course and the breach of trust committed by Evelyn cannot be set up by Larry against Devi because it is a personal defense. As a holder in due course, Devi is not subject to such personal defense.b. Supposing Devi endorses the note to Baby for value but who has knowledge of the infirmity, can the latter enforce the note against Larry? Yes Baby is not a holder in due course because she had knowledge of the breach of trust committed by Evelyn against Larry which is just a personal defense. But having taken the instrument from Devi, a holder in due course. Baby has all the rights of a holder in due course. Baby did not participate in the breach of trust committed by Evelyn who filled the blank but filled up the instrument with P5000.00 instead of P1000.00 as instructed by Larry. (Sec. 58, NIL).

b. of the Name of Indorsers

Bar Question: Pedro writes out a check for P1000.00 in favor of Jose or order against his current account with Bank of America. Juan steals the checks, erases the name of Jose and superimposes his own name. Juan deposits the check at Citibank and after clearing. Juan withdraws the amount and absconds. Upon discovery by Pedro of the material alteration, he lodged a complaint at the Bank of America, who credited the amount to Pedro. Bank of America demands reimbursement from Citibank which refuses on the ground that it only acted as an agent for collection. Who bears the loss? Why? (1977, 1972 Bar)Answer: Between Bank of America, the drawee bank, and Citibank, the bank which received for deposit the materiality altered check (collecting bank) the latter will have to bear the loss.Under the Negotiable Instruments Law, where a negotiable instrument is materially altered without the assent of the parties liable thereon (Pedro the drawee, in

the problem), it is avoided, except as against a party who has himself made, authorized or assented to the alteration and subsequent indorsers.In banking practice the collecting bank (Citibank in the problem) guarantees all prior indorsements. By virtue of said indorsements, the collecting bank becomes liable to the drawee bank under the said indorsement and therefore will have to reimburse the drawee bank the amount of the materially altered check.It is true that Citibank acted only as collecting agent for its depositor, but sine the check was materially altered after it left the drawer;s hands, the collecting bank had no right at all to pay the sum stated therein to the person responsible for the material alteration or anyone else deriving his right from the materially altered instrument.Citibank which previously had been paid by Bank of America the amount of the materially altered check has to reimburse to Bank of America the said amount, without prejudice to Citibank running after Juan, the person who materially altered the check and who deposited the check with it (Citibank).

6. FORGERYa) Forgery is the counterfeit making or fraudulent alteration of any writing.b) It may consist of (1) signing of anothers name with intent to defraud, and (2) alteration of an instrument in the name, amount, description of payee, etc. with intent to defraud;c) The signature is wholly inoperative, and no right to retain the instrument, or to give a discharge therefore, or to enforce payment thereof against any party to it, is acquired through or under such signature.

Example: M makes a bearer promissory note, leaves the amount blank, places said note inside the drawer of his unlocked office table, where it was stolen by P, his office secretary, who inserts P1000 on the bank space for amount, and negotiates the noteOr that the signature of M is forged on a promissory note where P, the forger, is also the payee.a) If P negotiated the note to A, who has knowledge of the abnormality (Incomplete and undelivered) or deficiency (makers signature forged), and therefore, he (A), is a holder not in due course, A cannot enforce the note against P.b) If A, in turn, negotiated the note to B, who paid value and was unaware of the above stated abnormality or deficiency, and therefore he (B) is a holder in due course, B cannot enforce the note against M. The abnormality (incomplete and undelivered note) or deficiency (signature of maker forged) created a real defense ( a defense attaching to the instrument itself) which M, the maker can invoke against all holders, whether holders in due course or not.c) If B negotiated to C, who paid value, but who was aware of the abnormality or deficiency, C cannot invoke the derivatives rights under Sec. 58 of the Negotiable Instruments Law, because B, from whom C derived his rights, did not acquire the right to enforce the note against M as explained above.

Bar Questions in connection with Forgery in Signature of the following:

a. of the Maker

Bar Question: Juan makes a negotiable promissory note payable to his order, signing Pedros name thereon as maker without Pedros knowledge and consent. Juan then indorses the note to Jose, who, in turn, indorses it to Carlos under circumstances which make Carlos a holder in due course. May Carlos enforce the note against Pedro? And if the note is dishonored by Pedro, may Carlos hold Juan and Jose liable on their respective indorsements? Reason out your answer. (1989 Bar)Answer: Carlos cannot enforce the note against Pedro, because Pedros purported signature on the note is a forgery, and no right to enforce payment under such signature can be acquired by any holder even by a holder in due course like Carlos.Carlos however, can enforce the instrument against Juan and Jose the signatures

of these two being genuine.

b. of the Indorser

Bar Question: Alex issued a negotiable promissory note (PN) payable to Benito or order in payment of certain goods. Benito indorsed the PN to Celso in payment of an existing obligation. Later Alex found the goods to be defective. While in Celsos possession the PN was stolen by Dennis who forged Celsos signature and discounted it with Edgar, a money lender who did not make inquiries about the ON. Edgar indorse the PN to Felix, a holder in due course. When Felix demanded payment of the PN from Alex the latter refused to pay. Dennis could no longer be located.a. What are the rights of Felix, if any, against Alex, Benito, Celso and Edgar?Felix has not right to claim against Alex, Benito and Celso who are parties prior to the forgery of Celsos signature by Dennis. Parities to an instrument who are such prior to the forgery cannot be held liable by any party who became such at or subsequent to the forgery. However, Edgar, who became a party to the instrument subsequent to the forgery and who indorsed the same to Felix, can be held liable by the latter. (Sec. 124, NIL)b. Does Celso have any right against Alex, Benito and Felix? Celso has the right to collect from Alex and Benito, Celso is a party subsequent to the two. However, Celso has no right to claim against Felix who is party subsequent to Celso (Secs 60 and 66, NIL)

Bar Question: Juan makes a promissory note payable to the order of Pedro, who indorses it to Jose. Somehow, Roberto obtains possession of the note and, forging the signature of Jose, indorses it to Amado, Amado then indorses the note to Nilo, the holder.State the right and liabilities of the parties. (1984 Bar)Answer: Jose, being the indorses of the note, has a right to demand payment form Juan, the party primarily liable, and if Juan dishonors by non-payment, Jose has a right of recourse against Pedro, provided Pedro is given by Jose a notice of dishonor by non-payment.Nilo, the present holder of the note, has no right of recourse against Juan. Pedro or Jose, Nilo having derived his right to the instrument from the forged indorsement made by Roberto. A forged signature is wholly inoperative and cannot vest any right of the forger, or any person who derived his right from the forged signature, as against those who became parties to the instrument before the forgery was committed.Nilo, however, can proceed against the forger, and Amado (Joses indorsee), because they are precluded from asserting forgery as a defense.

CLASSES OF NEGOTIATION

a. By Delivery of the Instrument Alone (BEARER)Negotiation of negotiable instrument may be effected by the delivery alone of the instrument to the transferee in those negotiable instrument which are originally payable to bearer, or originally payable to order instruments where he last indorsement is an indorsement in blank.

Bar Question: A makes a promissory note payabale to bearer, and delivers it to B, who endorsed it to C Sgd. B Subsequently, C without indorsing the note, transferee it to D. Upon presentation for payment by D , A dishonored the note. May D hold A liable? Reason out your answer.98, 1975, 1967 Bar)Answer: D may hold A liable. The note is a payable to bearer note and is negotiable by delivery. Even if a subsequent holder negotiates it further by a special indorsement, it is nevertheless further negotiable by delivery. Hence, the imdorsement by the special indorsee C, to negotiable the instrument to D was not necessary and a more delivery of the instrument by him to D was a valid negotiation As D was constituted holder by said delivery of the instrument to him by C, he (D) can enfor

ce the instrument against A, the party primarily liable.

Bar Question: Santos Jr finds and pockets a bearer check lying with other papers on his fathers (Santos Srs) desk. Santos Srs special indorsement to Reyes sis at the back of the check. Santos Jr. crosses out the special indorsement and writes his own special indorsement as follows Pay to Rev. Fr. Cruz for his chapel project. Santos Jr, and gives the check as a gift to Fr. Cruz, Fr. Cruz indorses the check to Omega Hardware Co. ion payment of purchases of cement. Omega hardware indorses the check to Tan Supply Co., in payment of purchase of deliveries. Tan Supply, although previously told by Santos Sr. that the check had been lost, needs funds very badly and therefore accepts the check. In the hands of the Tan Supply the check is dishonored by non-payment by the drawee-bank, acting on the drawers stop-payment order supported by Santos Srs affidavit of loss earlier received by the drawee-bank. Against whom may Tan Supply enforce its rights on the instrument, assuming due compliance with all proceedings on dishonor? (1975 Bar)Answer: Tan Supply can enforce the instrument against all prior parties, including Santos Sr. because Tan Supply having derived its rights from Omega Hardware, a holder in due course, acquires and enjoys all the rights of such holder in due course.The cancellation by Santos Jr. of his father special indorsement does not have any material effect on the further negotiability of the check by any holder, the check being a bearer check such that any indorsement thereon may be disregarded and even cancelled by subsequent holders, such indorsements not being necessary to their titles.

Effects of Indorsement on Instrument Negotiable by Deliverywhere an instrument negotiable by delivery is indorsed by the holder, he becomes liable as an indorser. Effects of Lack of Indorsement on an Instrument Negotiable by Indorsement Followed by DeliveryWhere a holder of an instrument payable to order transfers it for value without indorsing it, the transferee is vested with the title, and acquires the right to have the indorsement of the transferor. For the purpose of determining whether the transferee is a holder in due course or not, the negotiation takes effect on the date indorsement was actually made.

Striking Out of Indorsementsthe holder may strike out indorsements not necessary to his title. The indorser whose indorsement is struck out and all indorsers subsequent to him are relieved from liability on the instrument.

b. By Indorsement Followed by Delivery (ORDER)

A negotiable instrument payable to the order of a specified person or to him or his order, may be negotiated by the payee by indorsement followed by delivery of the instrument to the indorsee. Subsequent negotiations may be made in this manner if the holder who indorsees acquired the instrument under a special indorsement.

Bar Question: Anna makes a promissory note payable to bearer and deliveries it to Bing. In turn, Bing negotiates it by mere delivery to Carmen, who endorses it specially to dong. Dong negotiates it by special indorsement to Emma, who negotiates it to Fe by mere delivery. Anna did not pay. To whom are Bing Carmen, Dong and Emma liable? Explain your answer fully (1988 Bar)Answer: The liabilities of the parties are as follows:BING is liable for breach of the warranties of a qualified indorser because not being a general indorser, his liability for breach of warranty extends to his immediate transferee only, Carmen.CARMEN is liable because of her indrosement, to all subsequent parties: Dong, Em

ma and Fe. The secondary liability of an indorser makes such indorser liable to all subsequent parties.DONG - is liable as an indorser to all parties subsequent to him, Emma and Fe because the secondary liability of an indorser extends to all subsequent parties.EMMA is liable for breach of warranties of a qualified indorser to Fe only. Fe being her immediate transferee.The warranties for which Bing or Emma could be made liable, if breached, to their respective immediate transferee, consist of the following (a) That the instrument is genuine and in all respects what is purports to be; (b) that he has good title to it; (c) that all prior parties had capacity to contract; and (d) the he has no knowledge of any fact which would impair the validity of the instrument and render it valueless.

MINORS/INCAPACITATED PERSONS & CORPORATION1.Minors- contracts entered into by a minor are voidable at his instance or at the instance of his guardian. Minority is not a personal defense that may be set up by other parties but it is a real defense available only to the minor. Hence, minor may disaffirm and recover the instrument form a holder in due course.

BAR: Maycel issues a negotiable instrument payable to the order of Carmella,a minor. Carmella indorses instrument to Junmar.According to 4blue95, Maycel becomes liable to Junmar since the indorsement by Carmella passes title to Junmar. But if Maycel cannot pay and Junmar sues Carmella, the latter may raise the defense of minority . Carmella may even disaffirm her indorsement and recover the instrument from Junmar 4blue 95: A minor may be held bound by his signature in an