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1 Form of negotiable instruments. An instrument to be negotiable mustconform to the following requirements:

(a) It must be in writing and signed by the maker or drawer;

Must be in writing

There must be a writing of some kind.

If the instrument was not in writing, there would be nothing to be negotiated or passedfrom hand to hand.

Example: You cannot tell someone Well, you know. You owe me ten million due next

month. But I need money very bad and I cant wait till next month. Im willing todiscount you for 80% of the amount due. That someone will say, Wheres the receipt?Where is the document? He will not listen to you because it is merely a verbal promiseto pay.

Must be signed It is an indication of the party binding himself.

Valid signatures: 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. Problem: Mr. Estrada signs the following check:

Pay P10,000 to the order of Charlene Gonzales forservices rendered.

Jose Velarde

Would that be binding? If he intended the name Jose Velarde to be his signature forthat 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 incorporatedin the body of the instrument, it would be valid. Example:

I, Jose Cruz, promise to pay Ruel Santos or bearerP10,000.

(b) 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, P10,000will 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 P10,000payable one month after the end of the war.

Manuel Santos

Since a date of maturity is mentioned, it is like a promise to pay.

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(2) If words of negotiability are mentioned Example:

I acknowledge to be indebted to Jose Cruz. Due to JoseCruz 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 notan 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 tochoose not to pay.

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 ororder P10,000.

To Jose Cruz ManuelSantos

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

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 wherepayment is unsure.

A condition is defined in the Civil Code as an event which may or may not happen or a

past event which is unknown to the parties. Example: I promise to pay Jose Cruz if he passes the examination for accountants.

This is conditional. Even if the condition is fulfilled, that will not be negotiable becauseof the principle that negotiability is determined merely by the four corners of theinstrument without requiring evidence aliunde.

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.

I promise to pay Jose Cruz or order P10,000 ten days after thedeath of his mother-in-law.

Manuel SantosHis mother-in-law will surely die because nobody gets out of life alive. (JDJ: Sooner

or later, his mother-in-law will die although he will probably be praying sooner.)

The sum must be certain. This is so that people will know how much they will get when the instrument falls due.

Because if the amount is uncertain, people will not be willing to take that instrument. This is not a sum certain: I promise to pay Jose Cruz whatever the balance due him

after a consideration of the records.

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Must be payable in money

This is because negotiable instruments are intended to be substitutes for money.

Money was invented as the medium of exchange because barter is a cumbersome way

of doing business. Example: A is interested in buying a car but his business ismanufacturing nails. He cannot say to the car seller that I will buy your car and pay

you in nails. Money is a common measure of value. In barter, you will have to determine if one car

is equivalent to how many gallons of paint or gasoline, feet of lumber, kilos of rice,centimeters of textile. Very cumbersome.

When 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. R.A. 529 has been repealed by R.A. 8171. It is now valid to stipulate that I will pay

you in foreign currency.

(c) 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.

(d) Must be payable to order or to bearer

These are the words of negotiability.

If its payable to a specific person like the Kauffman vs. National Bankcase:

Pay to George A Kauffman, New York Philippine Fiber ProduceCo., $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 tothe 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.

(e) Where the instrument is addressed to a drawee, he must be named orotherwise indicated with reasonable certainty.

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.

2 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; or

The sum is certain even if it is with interest.

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Under the Civil Code, there must be a stipulation undertaking to pay interest.

When the Central Bank circular lifted the ceiling on interest rates, the interest rate that

will govern is that stipulated upon by the parties. Medelcase: Interest must not be unconscionable. There the stipulated interest was 5

% per month. Court said thats 66% a year and that is unconscionable. 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 whatwill apply will be the legal rate which is 12% under Circular 416.

(b) By stated installments; or

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 notnegotiable.(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 notnegotiable. 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 youllknow each installment will be P1000 and will be paid every 15th day of the month.

(c) By stated installments, with a provision that, upon defaultin payment of any installment or of interest, the whole shall become due; or

When 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 exchange, whether at a fixed rate or at the currentrate; or

Exchange contemplates at least two currencies. Thats why the example given in the

book of Agbayani is wrong because it only mentions one currency. So there must be atleast two currencies.Example: A client who sells chemicals to a factory in Meycauayan. The buyer was notable to pay. He sued the buyer. They agreed to compromise and they agreed that theywill pay $60,000 in installments and the parties fixed the rate of exchange at 28:1. andwhatever the rate of exchange, whether it goes up or goes lower, that will be the rate ofexchange used for computing.

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 willpay Jose Cruz P10,000 in United States currency on December 15, 2001 according tothe rate of exchange on that day that would be valid because supposedlybusinessmen know what will be the rate of exchange.

Gregorio Araneta case:

FACTS: Gregorio Araneta imported equipment from England. To pay for it, he appliesfor a letter of credit with the PNB. So PNB paid the seller in English pounds.Araneta had not yet reimbursed the bank. Meanwhile the English pound wasdevalued.

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ISSUE: What rate of exchange is to be used in paying the PNB The rate of exchangewhen PNB paid the English exporter or the rate of exchange when GregorioAraneta is paying?

HELD: The letter credit was consummated when PNB paid the English seller.Therefore it is the rate of exchange at that time that should be used as basisfor computing how much GA will pay.

The Gregorio Araneta case became relevant again in 1983 when the government wenton a standstill and required the banks to surrender all the dollars. All the banks have nosingle cent left. Meanwhile the goods were arriving and the goods are consigned to thebanks. The banks refused to release the goods to the seller or importers. The rate ofexchange rocketed from 11, 14, 18, 21, 23 until it reached 25. The banks were sayingthat the clients should sign an undertaking to pay whatever is the rate of exchange.And the clients were saying no because according to the Gregorio Araneta case, the rateof exchange at the time of the sale should be followed. The bank said that if you dontsign we will not release your goods. Hence, the factories were idle. The raw materialswere not being released and storage fees were accumulating. The clients said that theway the situation developed, it cannot be solved on a cases to cases basis. Thegovernment came out with a solution. It eventually stepped in. The Central Bankissued a forward exchange cover that said We will guarantee that when dollars come inwe will sell to you at a fixed rate. With that assurance, the banks start releasing thegoods. CB we will absorb any exchange loss.

(e) With costs of collection or an attorneys fee, in casepayment 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 annegotiable instrument which contains a payment for attorneys fees if it is not paid thanone 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 amountpayable before that or after that is uncertain, that is irrelevant. Thus, if you know onthe date of maturity that this is the amount due that is negotiable. If the amount willbecome uncertain afterwards because of the attorneys fees, this is irrelevant.

Anyway, under the Code of Professional Responsibility, agreement on attorneys fees isalways subject to the control of the court. Even if the parties stipulate I will pay 20%attorneys fees, the court can always reduce that. That will not be binding on the court.Even if it says I will pay reasonable attorneys fees that will be negotiable because if youpay 20% the court will say that is unreasonable since this is a simple collection case. Courtwill reduce it to 10%.

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3 When promise is unconditional. An unqualified order or promise to pay isunconditional 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; or

A 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 ofpaymentbut merely the source ofreimbursement.

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. Theparticular account to be debited is merely an instruction on how to make the entries inthe 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 tofind out that it is negotiable.

Elizalde Company vs. Bian Transportation Company:

FACTS: Bian Transportation Company bought two motor vehicles. They signed apromissory note and to secure payment, they mortgaged the motor vehicles.The promissory notes were negotiated and were not paid. So Elizalde who washolding the promissory note sued. Bians defense was that the promissorynote was not negotiable because it was mentioned that it was subject to chattelmortgage.

ISSUE: Whether the note was negotiable.HELD: Yes. For reference to mortgage to destroy negotiability, the promise to pay

must be burdened with the terms and conditions of the chattel mortgage.

Since the reference to the chattel mortgage did not make the promise to payburdened with the terms and conditions of the chattel mortgage, thepromissory note was still 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.

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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, nomoney shall be paid out of the treasury unless there is an appropriation for thatpurpose. Thats why it is not a negotiable instrument.

Case ofAbubakar (Im not sure if this is the title, sounds like it, sorry), which wasreiterated in the Metropolitan Bankcase:FACTS: There was a rural bank in Mindoro, somebody deposited treasury warrants.

And this bank in turn deposited it in Metro Bank where they were maintainingan account. Metrobank will bring it to the clearing house. This depositor keptnagging them whether the treasury warrants were already cleared. Everytimehe will nag the bank in Mindoro, that bank will in turn nag Metrobank. Becausethe depositor kept nagging, out of sheer exasperation, Metrobank allowed himto withdraw the money. Eventually the warrants were brought to the clearinghouse where they were dishonored by the National Treasurer. Metrobank wasrunning after the bank in Mindoro since under 66 it warranted that theinstrument was genuine and in all respects what it purported to be. Itwarranted that the signatures were genuine.

ISSUE: Whether Metrobank can invoke 66.HELD: No, Metrobank cannot invoke 66 because this is a treasury warrant. It is not

a negotiable instrument. Therefore 66 is not applicable. Metrobank mustbear the loss because it allowed him to withdraw the money.

A reference to the fund which will be the source of payment will not destroy negotiability

if payment is not limited to that particular fund. For instance, the negotiableinstruments says Pay Jose Cruz or order P10,000. Apply the proceeds from the sale ofmy shares in San Miguel Corporation. From the tenor of that, while there is aninstruction to use the proceeds from the sale of the shares of stocks to pay, payment isnot limited to that particular fund.

4 Determinable future time; what constitutes. An instrument is payable at a

determinable future time, within the meaning of this Act, which is expressed to bepayable (a) At a fixed period after date or sight; or

Instrument is payable at a determinable future time if it is paid at a fixed period. If you

will notice the subsequent provisions are elaborations of 1. Example: If promissory note, I promise to pay 30 days from today. If bill of exchange,

Pay to Jose Cruz P10,000 or order 30 days after sight or after presentation foracceptance.

(b) On or before a fixed or determinable future time specified therein; or

Example: I promise to pay Jose Cruz or order P10,000 on or before December 15,2001. There are different types of acceleration notes:

(1) One that provides that if any installment that is not paid, the balance willautomatically become due. By express provision of the law, this is negotiable.

(2) One that says that if the holder feels insecure then the holder can require the makerto put up securities and if the maker fails to do so, the holder can order the balancebe immediately due and demandable.

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Is this negotiable? There are two views:

(a) One view said it is not negotiable because it refers to an undertaking otherthan to pay a sum of money to put up security. And under the law, theobligation must be purely to pay a sum certain in money. It also arguedthat the date of maturity is uncertain because the holder can accelerate it.

(b) The other view said that it is negotiable because the undertaking to put up

security is merely an accessory obligation to secure compliance with theprincipal obligation to pay a sum of money. Plus, the control is actually withthe maker since he can prevent acceleration by putting up extra security.

(3) One that says that if the holder feels insecure, he can accelerate the date ofmaturity. There is a conflict of views whether that is negotiable or not. Again, there are

two views. One view said it is negotiable other said it is notbut according toJDJ, the better view is that it is not negotiable because the date of maturity isuncertain.

Here the holder can simply say I feel insecure and declare the obligation due.

From the tenor of 4, the option to pay before the maturity like I promise topay on or before must be on the maker or the acceptor.

If it is with the holder, the date of maturity becomes uncertain.

The two situations are treated different by the law because if the option is with

the maker and he pays before the date of maturity, the instrument isdischarged. Under 119, therefore all parties who are liable are also discharged.

But if the option is with the holder and he accelerates the date of maturity and

the maker fails to pay, all those not yet liable will become liable joint andseverally. Their obligation will fall due and that in effect is prejudicial to them.

The first situation where the option is with the maker, payment before the

maturity date is beneficial. The parties are not liable. But the second situationis prejudicial. And people will not be willing to bind themselves in such asituation. Thats why in such a case, the date of maturity is considereduncertain.

(c) On or at a fixed period after the occurrence of a specified event which iscertain to happen, though the time of happening be uncertain.

Take note that it says on or after. Thus, the following: I promise to pay Jose Cruz

or order 10 days before the death of Pablo Reyes. is not negotiable. Pablo Reyeshas to die first before he can compute the date of maturity. After Pablo Reyes dies,you count backward ten days. So what will happen? By the time you are able to fixthe date of maturity, the obligation will be overdue. That is not allowed.

An instrument payable upon a contingency is not negotiable, and the happening ofthe event does not cure the defect.

Remember that to determine negotiability, you only look at the four corners and youdont go into evidence aliunde.

Philippine Education Company vs. Soriano:

FACTS: Montinola bought several postal money orders. He used the money orders topay for books he ordered from the Philippine Education Company (JDJ:Philippine Education Company used to be the biggest bookstore here. Anyprofessional would go there and find a book he needs there.). PEC took themoney orders and deposited it with the bank. Later, the bank refused to pay, it

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said that was bought by Montinola who left without paying. PEC said it was aholder in due course.

HELD: SC said that a money order is not a negotiable instrument. The court gaveseveral reasons:(1) Although it said pay to the order of in the money order, that is not

negotiable because under postal regulations, the bureau of posts can

refuse to pay on numerous grounds so that the order is not unconditional,therefore that is not negotiable.

(2) A money order can be indorsed only once.(3) The post office is not run by the government for commercial profit, but for

public service.

November 14, 2001

Under Section () 5, an instrument which contains an order or promise to do any actin addition to the payment of money is not negotiable because we said for anegotiable instrument to be a substitute for money, the obligation must be purely pecuniaryin character. However, Section 5 enumerates provisions which do not affectnegotiability:

(a)Authorizes the sale of collateral securities in case the instrument be notpaid at maturity; This is common in cases of pledge or mortgage where there will be astipulation that if the obligation secured is not paid, then the property pledged or mortgagedcan be foreclosed by the pledgee or mortgagee

(b)Authorizes a confession of judgment if the instrument be not paid at

maturity; The SC has said that this is a void stipulation

(c) Waives the benefit of any law for the advantage or protection of the

obligor; for instance, rule on venue. There may be a provision there that any action arisingtherefrom shall be filed exclusively in the courts of competent jurisdiction in Makati and anyother proper venue is hereby waived. It must stipulate that it will be exclusive, otherwise,the SC has said that that will be merely permissive.

Remember 13, Rule 39 which says certain properties are exempt from executionlike proceeds from life insurance policies, tools of a carpenter, library of a lawyer to theextent of P100,000.00- there may be a waiver of such.

(d) Gives the holder an election to require something to be done in lieu ofpayment of money. If PN says I promise to pay to the order of Jose Cruz 100 thou or 500sacks of rice at the option of the holder this is negotiable because the obligation of themaker to pay cash is absolute since the holder can always choose to demand cash ratherthan ask for the delivery of rice.

6 also mentions matters which do not affect negotiability:

(a) the negotiable character of an instrument is not affected if, like an old maid, it isnot dated. this is taken care of by 13: the date may be inserted and 17c: it will bedated as of the date it was issued

(b) Does not specify the value given because under 24, it is presumed value has

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been given.

(c) Does not specify the place where it is drawn or where it is payable becausethats taken care of by 73

(d) Bears a seal; This is relevant in common law but not in civil law because in

common law, consideration presumed in a contract. However, if it is sealed, consideration ispresumed.

(e) Designates a particular kind of current money in which payment is to bemade.

So if it says payment will be made in US currency, that will be valid since RA 7181expressly provides it is now valid to stipulate that payment will be made in foreign currency.

7 states when an instrument is payable on demand:

(a) when it is expressly payable on demand, or at sight, or on presentation; likeI promise to pay on demand or at sight or if it is a bill of exchange Pay at sight or onpresentation.

(b) In which no time for payment is expressed. In other words, it is simply silent asto when it will be paid.

Now, the last paragraph says if an instrument is issued, accepted or indorsed whenoverdue, it is as regards the person so issuing, accepting or indorsing, payable on demand.

Suppose: a bill of exchange was issued in August 2001 and it is payable on October15, 2001 and it was indorsed to Jose Cruz by the payee today. It was already overdue. Joseimmediately went to the drawee and presented it for acceptance and the drawee dishonoredit. The holder gives the payee who indorsed it to him notice of dishonor and the payee thenclaimed he has been discharged from liability saying because when he presented it for

payment, it was too late, it was already overdue.NO! because when he indorsed it, it was already overdue. Therefore, as between him

and the indorsee, the date will not be October 15, that will be considered payable ondemand. This is only as between them. The drawer, however, will be discharged. He canclaim the presentment for payment was made out of time and therefore, he has beendischarged because that instrument will be payable on demand only as between the payeewho negotiated it out of time and the person to whom he indorsed it but not with respect toother parties.

8 says to whom the instrument may be payable to order . How do you make aninstrument payable to order? You make it payable to the order of a specified person or tohim or to his order. Pay to the order of Jose Cruz or Pay to Jose Cruz or his order.

The law mentions who may be the payee:(a) someone who is not the maker, like I promise to pay Jose Cruz. and I sign the

PN; or someone who is not the drawer or drawee, like Jose Cruz draws a bill of exchangePay to Manuel Santos, addressed to Pablo Reyes.

(b) Payee may be the drawer, like somebody who has a current account and he wantsto withdraw money from it, so he issues a check payable to the order of himself (Jose Cruz)- Pay to the order of Jose Cruz.

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So the banks always advise you that you should avoid issuing checks payable to theorder of cash because these are payable to bearer. If they are lost and somebody else canencash it. May be payable to the order of the maker; Now, the law provides that if themaker issues a PN payable to the order of himself, that is not complete until and unless heindorses it. Remember the commentary of Jose Manresa on contracts, Although the lawdoes not mention this expressly, it is understood and implied that there must at least be

two parties to a contract because the law says consent is one of the requisites of acontract. So if somebody makes a PN payable to the order of himself, that is not completeuntil he indorses it. That is by express provision of the law.

(c) Payee may be the drawee; like here is somebody who borrowed money from thebank and hes maintaining his current account in the same bank and now, hes going to payfor his loan. He can issue a check payable to the bank from whom he borrowed money andwhere he is maintaining his account.

(d) May be payable to Two or more payees jointly; like Pay to the order of Jose CruzAND Manuel Santos. or .. to Mr. AND Mrs. Jose Cruz.

(e) To One or some of several payees; like Pay to Jose Cruz OR Manuel Santos.

(f) The holder of an office for the time being. Like here is somebody, say a businessfirm which is paying for its license fees in the city. You say Pay to the Treasurer of the Cityof Manila. Or is paying for taxes, you say Pay to the Commissioner of Internal Revenue.

When the instrument is payable to order, the payee must be named or

otherwise indicated with reasonable certainty. You have this case of Equitable Bank.This fellow Cassals is a swindler, like that in Montinola in that Philippine Education case, Ithink hes the same Montinola involved in the PNB case (88 Phil). So he went to Edward J.Nell (EJN) and said he was interested in buying a skidder and he said he was going to pay

for it with a domestic letter of credit to be issued by Equitable Bank. So, EJN was interestedbecause that would be sure payment.

Then, Cassals came back and said the bank was requiring him to put up a marginaldeposit for the Letter of Credit. He asked EJN if it could accommodate him by putting up themarginal deposit to facilitate the release of the L/C. Well, that should have given EJN awarning because normally, banks dont ask for marginal deposits anymore. So, if they askfor it, it means your financial condition is in bad shape.

Anyway, EJN agreed. They issued a check to be used for the marginal deposit. Theyput there Pay to the order of Equitable Banking Corp. A/C Casville Enterprises. So, Cassalsgot the skidder, got the check, deposited it in the account of Casville Enterprises and afterthe check was cleared, withdrew the money. He disappeared with the money and theskidder.

EJN became impatient, it followed up the L/C with Equitable Bank. It said Whatletter of credit? So, they now sued Equitable Bank. They said it issued the check to be usedfor the marginal deposit of the L/C. The check was instead deposited in the account ofCasville Ent. With Equitable Bank and the bank allowed the money to be withdrawn. Inother words, EJN said you (the bank) allowed the money to be diverted to a purposedifferent from what we intended it to be paid for, therefore, were suing you. Now, the SCsaid, under the negotiable Instruments Law, the payee must be named with reasonablecertainty. Here, it wasnt clear who the payee was. Was it Equitable Bank or Casville

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Enterprises? If it is the bank, in what capacity and for what purpose is the check beingissued? Is it as agent? As trustee? Therefore, the Court said the check was not negotiable.It wasnt indicated with reasonable certainty.

But, I think if you ask any businessman, theyd understand A/C to mean for theaccount of Casville Ent. It means that EJN issued this check payable to Equitable Bank tobe applied to an obligation of Casville Ent. to Equitable Bank. That is how a businessman

would interpret this.

In fact, now, the BIR requires you when you pay for your income tax return, you justopen an account with the bank and the bank will just debit your account and remit themoney to BIR. But that wasnt the rule before so sometimes, there were times that I wouldbuy a managers check to pay for my income tax and the bank will put there Pay to theorder of Commissioner of Internal Revenue and places there for the account of JackJimenez because they said thats for your protection. Hindi naman kayo pipila sa BIRoffice para magbayad e. You will probably just send one of the messengers in your office topay for your income tax.That notation will prevent the application of that check to pay forthe tax liability of somebody else. That means that it can be used only for your own taxliability. But, anyway, I think the conclusion of the Court here is correct in the sense that itis EJN who should bear the loss because its their fault. It was the one who made this

possible. They allowed themselves to be sweet- talked by Cassals.

9 states when the instrument is payable to bearer.(a) When it is expressed to be so payable; I promise to pay to the bearer.

(b) When it is payable to a person named therein or bearer; I promise to pay toJose Cruz or bearer.

(c)When it is payable to a fictitious or non-existing person, and such fact wasknown to the person making it so payable;

(d) When the name of the payee does not purport to be the name of anyperson;

(e) When the only or last indorsement is an indorsement in blank.

In the last three instances, the instrument on its face appears to be payable to orderbut the law makes it payable to bearer.

Subsection (c) does not mean a person who does not exist. There may be such aperson. It means that the maker or drawer did not intend that person to receive theproceeds of the negotiable instrument. That is exemplified in that case of Mueller(?) andMartin vs. Liberty Bank.

Mueller and Martin, a partnership, was maintaining its account with Liberty Bank.Mueller, one of the partners, wanted to steal money from the partnership and he wasauthorized checks in behalf of the partnership. So he signed a check payable to acorporation of which he was the secretary and then he indorsed that check in behalf of thecorporation to himself and deposited the money. After it was cleared, of course, hewithdrew the money.

When Martin, his partner, discovered it, he sued the bank. The theory was that theindorsement of the check by the corporation to Mueller was not valid because he was notauthorized as secretary to indorse checks by the corporation. Since that indorsement wasnot authorized, Mueller, the indorsee, did not get valid title. Therefore, the payment to himwas not valid and the bank should return the money. In effect, this is forgery.

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The Court said No, because when Mueller signed that check, although it was truethere was really such a corporation in existence, it was not his intention that such corp.should collect the proceeds of the check. His intention was to steal the money. He didntintend the corp. to get the money so the payee was a fictitious person. Therefore, the checkis payable to bearer and since it is payable to bearer, no indorsement is needed to negotiateit. Mere delivery is sufficient so that the so-called unauthorized indorsement made by

Mueller was not necessary to acquire title. It was payable to bearer so it transferred title toMueller so he validly deposited it in his account.

Now, for corporations, usually, you need two signatories, depending on the amountespecially with the rate of inflation now. Usually, our clients will pass a resolution requiringso may signatories to sign depending on the amount. Lets say, 50k or less, 1 signature. Ifits a big amount theyd say 2 signatories. The officers complained, every board meeting,there would be brought to them hundreds of checks to be signed.

Now, if a check has to be signed by 2 officers, then the intention of both signatoriesmust concur. In that Mueller case, if the check was to be signed by two parties, if Muellerintended to steal the money but the other signatory did not know it, and thought it was alegitimate obligation, that will not be payable to bearer. For that designation of the payee tobe fictitious, they must have the same intention.

On the other hand, you have that American Sash and Door Companycase. Thisis a factory that makes doors, window jams, and the like. There, a payroll clerk namedShoock(?) padded the payroll. He placed there a lot of fictitious names. They didnt havesuch employees. The officer signing the checks to pay the salaries did not know. He thoughtthey really had such employees so everyday hed issue the checks for these employees whoactually didnt exist. The clerk would then get the checks, forge the indorsements of thepayees and deposit them in his account.

When his dishonesty was discovered, the American Sash & Door Co. sued the bank.The question now is are the indorsements on those checks forged? This is because if theyare forged, then the drawee bank must bear the loss because the bank deposited itscontract with the depositor that it will only pay if the check it issued was validly indorsed tothe person to whom it paid. Remember there were no such employees in the payroll.

The Court said here that this is a case of forgery. It is the intention of the officersigning the check that is controlling. This officer did not know that those employees/ payeeswere fictitious. Not the intention of the unfaithful clerk who mechanically prepared thechecks, put there the date, the amount and the payee. Hes not the one authorized to signor is not a signatory so hes not the one who draws and issues the checks. Since theofficer/s didnt know these employees were fictitious, when Shoock indorsed in their behalf,that is forgery. So the bank must return the money to the account of American Sash.

Letter d. The most common example here is a check payable to the order of Cash.Unless the payee is Johnny Cash.

You have that Ang Tek Lian case. Ang Tek Lian issued a check payable to Lee HuaHong. Lee Hua Hong presented it to the bank. It was dishonored for lack of funds. He filed a

case for estafa against Ang Tek Lian. The decision of the SC said he was being charged withestafa for issuing a rubber check, now called the bouncing check. After the war they werecalled Douglas McArthur checks because McArthur said I shall return.

The defense of Ang Tek Lian was that he did not commit fraud because he did notindorse it at the back and therefore, the bank will not honor that without my indorsement atthe back. Therefore, when Lee Hua Hong took the check, he knew or should have knownthat that check will not be paid by the bank. That will not be honored because theres noindorsement at the back by the drawer.

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The SC said We dont know anything about that practice. This is a check payable tothe order of cash therefore it is payable to bearer. No indorsement at the back is needed. Totransfer title to it, mere delivery is sufficient.

Well, banks now require this signature at the back. Somehow, they believe that bythe fact that it was signed at the back by the drawer is an assurance that the drawer hasactually released and delivered the check and it was not just swiped by somebody who

happened to see it on his desk.

Letter e. This refers to a case where the instrument is payable to order and then itwas indorsed in blank.

I forgot to mention we have this Caltexcase. Angel dela Cruz went to Caltex. Hewanted to buy gasoline products on credit. He applied for a credit line. Caltex said Sure,but we require collateral. Dela Cruz offered his time deposit with Security Bank ascollateral. He was given a credit line so he bought gasoline products to the maximum extentof his credit line.

Then he went to Security Bank and said the time deposit it gave him was lost andsought its replacement. The bank replaced it. He then borrowed money and gave the timedeposit replacement certificate as collateral hold-out arrangement. Security bank agreed.

He disappeared with the gasoline products and the money he borrowed from Security Bank.

When his loan fell due, Security Bank was going to collect. The issue now is who hasa better right to collect the proceeds of the certificate of time deposit? Caltex said that thecollateral was pledged to them earlier.

The side issue that cropped up was that whether the instrument was negotiable.The Court said it was. The certificate of time deposit says This is to certify that

bearer has deposited so much repayable to the depositor. It was argued that this waspayable to the depositor, not payable to bearer. The Court said, But who's is the depositor?The bearer!" Because thats what the certificate says. Since the depositor is the bearer, itspayable to bearer.

As to the question of who had the better right, the Court said, There are no

provisions in the NIL regarding pledge of negotiable instruments so we have to apply theCivil Code. The Civil Code says that if you will pledge a negotiable instrument, for it to bindthird parties, the pledge must appear in a public instrument. It must be notarized and youmust indorse it. These two conditions were not satisfied in the case of Caltex. It was notnotarized and dela Cruz did not indorse the certificate to Caltex. Security Bank has a betterright to collect the proceeds of the instrument.

10 says you need not use the exact words of the law but other words equivalent tothem which indicate the intention to conform to the requirements hereof are sufficient. Likeinstead of saying bearer, you can say possessor or holder or instead of saying Pay toJose Cruz or order, you can say Pay to Jose Cruz or his indorsees or assignees.

Under 11, if an instrument or acceptance is date, that is presumed to be the true

date. If the instrument says I promise to pay 30 days from today. And it is datedNovember 14, 2001. It is presumed that that is the true date but it can be rebutted.

Under 12, ante-dating or post-dating an instrument does not affect its validity.

Under 13, where an instrument expressed to be payable at a fixed periodafter date, like I promise to pay 30 days from today. or the acceptance of aninstrument payable at a fixed period after sight is undated , like in a bill of exchange,Pay 30 days after sight and it was accepted and the acceptor did not indicate the date.

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The holder may insert there the true date of issuance or acceptance . The holder canput the date it was issued or the date it was accepted.

The insertion of wrong date does not avoid the instrument in the hands of asubsequent holder in due course but as to him, the date so inserted shall be

regarded as the true date.

Suppose somebody issued a bill of exchange which says Pay to the order of JoseCruz P10,000.00 30 days after sight. It was accepted on September 15, 2001 but theacceptance was not dated. Then it was indorsed to Manuel Santos, a holder in due course.He was told that it was accepted in November 2 nd so he place November 2 as the date ofacceptance.

Now hes trying to collect and the acceptor refuses to pay. If he runs after thedrawer, can the drawer say that he has been discharged because the actual date ofacceptance was Sept. 15 and so Manuel presented it for payment when it was alreadyoverdue. No, because hes a holder in due course, the law will protect him. November 2 willbe considered as to him.

The recurring theme of the law is to protect the holder in due course because it isnot his fault. It is the omission to insert the true date that made it possible to insert the

wrong date. Therefore, the law will protect him. The insertion of a wrong date will not avoidthe instrument in the hands of a holder in due course.

So if the party inserted the wrong date and he held on to it, that will be avoided asto him because the instrument will remain valid only with respect to a holder in due course.Since here, said party is the one who knowingly inserted the wrong date, the instrument isvoid as to him.

14 refers to incomplete but delivered instruments. If the instrument is wantingin any material particular, the person in possession is presumed to have authority

to fill it up. So from the fact that there is an omission in the instrument and a person is inpossession, the law presumes he has authority to fill up the blank.

For example, the instrument says I promise to pay Jose Cruz or order P10,000.00

with interest at the rate of ______. The payee can insert there the rate of interest.Then, 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 authority to fill it up for any amount. So we have that expression He wasgiven a blank check. It means he has been authorized to write there any amount he wants.

But the paper must have been delivered with the intention to convert it into anegotiable instrument. If somebody approaches Sharon Cuneta and asks for autograph towhich Sharon obliged and then the fellow types a negotiable instrument over it, this will notapply. When she signed it, it was not with the intention of launching a negotiableinstrument.

Now, for that person to enforce it, there are two requirements. He must fill it up inaccordance with the authority given and within a reasonable time. For instance, Ive

been buying supplies. My supplier with whom I have a running account and I had a disputeas to how much has been used. I told him I will send my bookkeeper to meet with youbookkeeper to make a reconciliation of accounts.

And then I told him To show him that I, in good faith and Im not simply trying touse this to delay payment, heres my check. Fill it up with the right amount resulting fromthe reconciliation of accounts but only up to P50,000.00. if it more than P50,000.00, Iwould like to review the records.

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The two bookkeepers agreed that the balance due is P30,000.00. The supplier placedP60,000.00 on the check. The check bounced. Can he run after me as drawer? UnderSection 61, the answer is NO. I can raise the defense that he did not fill it up in accordancewith the authority I gave him. But if he indorses that to a holder in due course, that holderin due course can run after me for P60,000.00. The defense is not available because again,the law will protect the holder in due course. It is my fault. By leaving the amount blank, I

made it possible for the supplier to write there a bigger amount.

November 19, 2001

SECTION 15

Drawer/Maker or any person who affixes his signature before delivery of anincomplete and undelivered instrument is not liable to any holder, even a holder in duecourse. The NIL gives the phrase any holder which covers all types of holders.

Indosers in an incomplete and undelivered instrument are liable under SEC. 66 forbreach of warranty.

Development Bank of Rizal case:

Where no delivery was made, there can be no cause of action since there was no titletransferred.

SECTION 16

Refers to complete but undelivered instruments

Ex. A check was issued to Jose Cruz and that he could have the money representedby the check if he passes the accounting exam. Later, Jose failed the exam and the checkwas subsequently dishonored. Jose cannot go against the drawer/maker because theinstrument was not negotiated. The defense in favor of the drawer/maker could not beinvoked against a Holder in Due Course.

SECTION 17

Words shall prevail over numbers. In People v. Romero, the defendant wasacquitted from estafa because the amount in words (a smaller amount) made the checkdrawn against sufficient funds. If the amount in numbers ( a bigger amount) were used,there would have been estafa since the check would have been drawn against insufficientfunds.

If the instrument is ambiguous, the holder may elect to treat such instrument eitheras a promissory note or a bill of exchange (e.g. a promissory note with an acceptance).Relate this to SECTION 130.

Interpret ambiguous signatures to refer to indorsers because they are least liable.

SECTION 18

General Rule: A person whose signature does not appear on the instrument is not liable.EXCEPT:1. Duly authorized agent signs for a person whereby such person shall be liable;2. Forger is liable for the signature he forges;3. Signature in a separate paper when the original instrument has no more space;4. Estoppel;5. Signing under a trade or assumed name; and6. When the instrument can be negotiated by mere delivery.

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SECTION 19/20

To avoid liability, the agent:1. Must be authorized;2. Must indicate that he signs as an agent; and3. Must indicate his principal

A letterhead with the name of the principal appearing thereon is sufficient to indicatethe principal.

The agent, although authorized, must act within the given authority.

SECTION 22

When a negotiable instrument is indorsed by a minor/corporation, the defense ofincapacity is personal only to the said minor/corporation.

However, the minor shall be liable under the following exceptions:

1. The minor actively misrepresents his age and it appears that he is physically of such age(estoppel);

2. The minor kept the fruits or benefits; and3. The minor spent the money in good faith (relate to Art. 1427 NCC).

Art. 1427. When a minor between eighteen and twenty-oneyears of age, who has entered into a contract without theconsent of the parent or guardian, voluntarily pays a sum ofmoney or delivers a fungible thing in fulfillment of theobligation, there shall be no right to recover the same from theobligee who has spent or consumed it in good faith.

The liabilities of the other parties are:

1. Maker Section 602. Drawer Section 613. Acceptor Section 62

4. Indorsers Section 66

SECTION 23

Types of Forgery:

1. Fraud amounting to forgery or fraud in factum;2. Duress amounting to fraud; and3. Fraudulent impersonation.

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Examples:

Fraud in factum Jose Cruz obtains the signature of Juan Santos by misleading the latterinto believing that what was signed was only for an autograph. There was no intention tocirculate a negotiable instrument.

Duress forced to sign or make a negotiable instrument.

Impersonation there must be an intention that the impersonator is the one who shouldreceive the instrument.

Case 1:A -> B -> C-> D-> E (holder in due course)

B forges As signature (Pay to B or order)

1. Can E run after A? No, because of the forgery defense.2. Can E run after B? Yes, because he is the forger.3. Can E run after C or D? Yes, because, as indorsers, they have a warranty.

Case 2:A -> B -> C-> D-> E (holder in due course)

A herein makes a note which says: Pay to B or order

D forges Cs signature (D made it appear that C indorsed the note)

1. Can E run after A or B? No, because E has no title.2. Can E run after C? No, because of the forgery defense.3. Can E run after D? Yes, because of the warranty as indorser.

Case 3:A -> B -> C-> D-> E (holder in due course)

A herein makes a note which says: Pay to B or bearer

D forges Cs signature (D made it appear that C indorsed the note)

1. Can E run after A? Yes, but if E was not a holder in due course, A can claim want ofdelivery of a complete instrument as a defense under Section 16 NIL.

2. Can E run after B? No, because E has no title.3. Can E run after C? No, because of the defense of forgery.4. Can E run after D? Yes, because D is the forger/warranty of indorser.

The forgery of the indorsement is immaterial since the instrument is payable to bearerwhich makes it negotiable by mere delivery.

However, if there was an indorsement (although unnecessary), the holder can run afterprior parties if he can trace his title to such prior parties. There should be no break. InCase 3, E can trace only up to D because there was a break when the forgery wascommitted.

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20 November 2001

Prefatory Remarks: examples of forged signatures. Photocopied sample passed around.II. Bill of ExchangeA. Drawer

1. Order

a. Acceptedb. Not Accepted

2. Bearera. Acceptedb. Not Accepted

Hypothetical Cases

CASE 1: B FORGEDTHESIGNATUREOF A, ASDRAWERONABILLOFEXCHANGEPAYABLETO B ORORDER.B INDORSEDITTO C, C TO D, D TO E. E PRESENTEDTO X, X ACCEPTEDANDPAID.Q. Can X debit the account of A?

A. No because there is no warranty of ___, because the signature is forged.

Q. Can X get back the money paid to E?A. No, under Section 62, which is based on the old ruling of Pryce v. Neill. The drawee

cannot get back the money from the payee. Under Section 62, the acceptor by accepting

admits the genuineness of the signature of the drawer. That is why when you open an

account you submit specimen signature.

Q. What is the remedy of X?

A. To run after B, the forger. Sue for reimbursement.

CASE 2: B FORGEDTHESIGNATUREOF A, ASDRAWERONABILLOFEXCHANGEPAYABLETO B ORORDER.B INDORSEDITTO C, C TO D, D TO E. E PRESENTEDTO X, X DISHONOREDIT.Q. Can E run after A?

A. No, because the signature is forged.

Q. Can E run after X?A. No, because the drawee is not liable unless he accepts.

Q. Can E run after B? C? D?A. Yes, because as indorsers B, C, and D warrant that the instrument is genuine in all respects what it purports to be.

CASE 3: B FORGEDTHESIGNATUREOF A, ASDRAWERONABILLOFEXCHANGEPAYABLETO B ORBEARER.B INDORSEDITTO C, C TO D, D TO E. E PRESENTEDTO X, X ACCEPTEDANDPAIDQ. Can X debit As account?

A. No because the signature is forged

Q. Can X get back the money from E?A. No because under Section 62, he admits that the signature of drawer is genuine.

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Q. What is Xs remedy?A. To run after B.

CASE 4: B FORGEDTHESIGNATUREOF A, ASDRAWERONABILLOFEXCHANGEPAYABLETO B ORBEARER.B INDORSEDITTO C, C TO D, D TO E. E PRESENTEDTO X, X DISHONOREDIT.Q. Can E run after A?

A. No because signature is forged.

Q. Can E sue X?

A. No because the drawee is not liable unless he accepts.

Q. Can E run after B, C and D?A. Yes, because as indorsers B, C and D warrant the genuineness of the instrument in all respects what it purports to be.

CASE 5: A DRAWSABILLOFEXCHANGEPAYABLETO B ORORDER. B INDORSEDITTO C. D STOLEITANDFORGEDTHEINDORSEMENTOF C ANDINDORSEDITTO E. E PRESENTEDTO X, X ACCEPTEDANDPAID.Q. Can X debit the account of A?

A. No because A ordered it pay to B or order. C did not order X to pay to D. This is a forged

indorsement.

Q. Can X get back the money from E?A. Yes, because X only admits that the signature of the drawer is genuine. He does not admit the signature of the indorsers are genuine. And

since this is payable to order, a valid indorsement is needed for D to acquire title. But since the indorsement of C is forged, D did not

acquire valid title. So E must return the money to X.

Q. Can E run after A?

A. No, because the indorsement of C is forged. He did not acquire title.

Q. Can E run after B? C?A. No, because it is a forged indorsement.

Q. Can E run after D?A. Yes, because as indorser D warrants that the instrument is genuine in all respects what it purports to be.

CASE 6: A ISSUESABILLOFEXCHANGEPAYABLETO B ORORDER. B INDORSESITTO C. D STOLEITANDFORGEDTHEINDORSEMENTOF C ANDINDORSEDITTO E. E PRESENTEDTO X, X DISHONOREDIT.Q. Can X debit the account of A?

A. No, X did not pay anything.

Q. Can E hold X liable?A. No, because X is not liable unless he accepts.

Q. Can E run after A? B? C?

A. No, because forged indorsement

Q. Can E run after D?

A. Yes, because as indorser D warrants that the instrument is genuine in all respects what it

purports to be.

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CASE 7: A ISSUEDABILLOFEXCHANGEPAYABLETO B ORBEARER. B INDORSESITTO C. D STOLEITANDFORGEDTHEINDORSEMENTOF C ANDINDORSEDITTO E. E PRESENTEDTO X, X ACCEPTEDANDPAID.Q. Can X debit the account of A?

A. Yes, because it is a bearer instrument. The instruction of A to X is pay to the bearer.

Q. Can X get back the money from E?

A. No, because E is the bearer.

Q. What is Cs remedy?

A. Run after D, the thief who stole the bill of exchange.

CASE 8: A ISSUEDABILLOFEXCHANGEPAYABLETO B ORBEARER. B INDORSESITTO C. D STOLEITANDFORGEDTHEINDORSEMENTOF C ANDINDORSEDITTO E. E PRESENTEDTO X, X DISHONOREDIT.Q. Can X debit the account of A?

A. No, X did not pay anything.

Q. Can E sue X for payment?A. No, X did not accept.

Q. Can E run after A?A. It depends whether E is a holder in due course. Because the defense of A is want of

delivery of a complete instrument, which can be raised against someone who is not a

holder in due course, but it cannot be raised against a holder in due course.

Q. Can E run after D?

A. Yes, because D is indorser.

Q. Can E run after C?

A. No, because Cs signature is forged.

Q. Can E run after B?

A. No, because E cannot trace his title to the indorsement of B.

CASE 9: B FORGEDTHESIGNATUREOF A ONAPROMISSORYNOTE (ORBILLOFEXCHANGE) PAYABLETO BORORDER. B INDORSESITTO C. D STOLEITANDFORGEDTHEINDORSEMENTOF C ANDINDORSEDITTOE.Q. Can E collect from A?

A. No, because As signature is forged.

Q. Can E collect from C?

A. No, because signature is forged

Q. Can E collect from B?

A. No, because indorsement is forged

Q. Can E run after D?A. Yes, because D warrants that the instrument is genuine in all respects what it purports tobe.

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CASE 10: B FORGED THE SIGNATURE OF A ON A BILL OF EXCHANGE PAYABLE TO B OR BEARER. BINDORSESITTO C. D STOLEIT, FORGEDTHEINDORSEMENTOF C ANDINDORSEDITTO E.Q. Can E run after A?

A. No, because As signature is forged, it is not operative, it is not binding.

Q. Can E run after D?

A. Yes, because D is liable as indorser.

Q. Can E run after C?

A. No, because Cs signature is forged.

Q. Can E run after B?

A. No, because E cannot trace his title to B, because of the forged indorsement of C.

CASE 11: B FORGED THE SIGNATURE OF A ON A BILL OF EXCHANGE PAYABLE TO B OR ORDER. BINDORSEDTO C. D STOLEIT, FORGEDTHEINDORSEMENTOF C ANDINDORSEDITTO E. E PRESENTEDTOX, X ACCEPTEDANDPAID.Q. Can X debit the account of A?

A. No, because the signature is forged.

Q. Can X get back the money from E?A. Yes, because there is a forged indorsement. Remember the drawee when he accepts, admits the signature of the drawer is genuine, but

not the signature of the indorser. And since it is payable to order, the genuine indorsement of C is needed to ___ title. So he can get back the

money from E.

Q. Can E run after A?A. No, because signature is forged

Q. Can E run after C? B?

A. No, because signature is forged

Q. Can E run after D?A. Yes, because the indorser warrants that the instrument is genuine in all respects what it purports to be.

CASE 12: B FORGED THE SIGNATURE OF A ON A BILL OF EXCHANGE PAYABLE TO B OR ORDER. BINDORSEDTO C. D STOLEITANDFORGEDTHEINDORSEMENTOF C ANDINDORSEDITTO E. E PRESENTEDTO X, X DISHONOREDIT.Q. Can X debit the account of A?

A. No, X has not paid anything.

Q. Can E sue X for payment?A. No, X did not accept, drawee not liable unless he accepts

Q. Can E run after A?

A. No, the signature is forged.

Q. Can E run after C?

A. No, the signature is forged.

Q. Can E run after B?

A. No, forged indorsement.

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Q. Can E run after D?A. Yes, because as indorser D warrants that the instrument is genuine in all respects what it purports to be.

CASE 13: B FORGED THE SIGNATURE OF A AS DRAWER ON A BILL OF EXCHANGE PAYABLE TO B ORBEARER. B INDORSEDTO C. D STOLE IT, FORGEDTHE INDORSEMENTOF C AND INDORSED ITTO E. EPRESENTEDTO X, X ACCEPTEDANDPAID.

Q. Can X debit the account of A?A. No, forged signature

Q. Can X get back the money from E?A. No because when X accepted it he admitted the genuineness of the signature of A. And a forged indorsement is not needed for E toacquire title, when it is payable to bearer. So the forged indorsement is immaterial to the title of E.

Q. What is Xs remedy?

A. To run after B who forged the bill of exchange.

CASE 14: B FORGED THE SIGNATURE OF A AS DRAWER ON A BILL OF EXCHANGE PAYABLE TO B ORBEARER. B INDORSEDTO C. D STOLE IT, FORGEDTHE INDORSEMENTOF C AND INDORSED ITTO E. EPRESENTED

TO

X, XDISHONORED

IT

.Q. Can X debit the account of A?A. No, X has not paid anything.

Q. Can E sue X for payment?

A. No, X has not accepted.

Q. Can E run after A as drawer?A. No, As signature is forged.

Q. Can E run after C?

A. No, signature is forged.

Q. Can E run after B?A. No, E cannot trace his title to the indorsement of B.

Q. Can E run after D?A. Yes, because as indorser D warrants that the instrument is genuine in all respects what it purports to be.

Exceptions to general rules

This ___ points out that there are exceptions to these general rules because of estoppel.1. In a case of father whose son forged his signature. And when the drawee bank asked

the father, Did you issue this check? He said, Yes. He will be in estoppel; he cannottell the bank You must reinstate that amount to my account. Because he told the bank

it was genuine, he is in estoppel.2. Or the drawer may be asked to bear the loss because of unreasonable delay in informing

the drawee about the forgery. The bank is suppose to send to the drawer regularly astatement showing the deposit and the drawers of his account. The bank also refers thecancelled check to the drawer. But the drawer has the obligation owing to the drawee toexamine the bank statement to reconcile it with his own record. Also to examine thechecks to see if the signatures are genuinehis signature and the signatures of theindorsers. But if there was delay, and because of the delay the bank was prejudiced,then the loss will be shifted to the drawer.

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When will the bank be prejudiced? If the bank would have recovered themoney if the drawer had notified promptly the bank of the forgery. For instance,the forger had not yet withdrawn the money from the bankthe money was stillintactand had the bank been notified promptly, it could have frozen theaccount. But if at the time it sent the bank statements and cancelled checks, theforger had already withdrawn the money and disappeared, then the __ will not

prejudice it, because even if it had been promptly notified it should no longerrecover the money.

Slatter (?) & Co. Case (negligence in the delivery). Slatter & Co., a New York stockbroker, had two customers who happened to have the same nameH.E. Richards, one inOklahama, the other in Texas. The one in Texas ordered the company to sell his shares andto send the proceeds from the sale. The company complied, but in sending the check whichwas payable to H.E. Richards it erroneously sent it to H.E. Richards in Oklahoma. Thisfellow deposited the check in his account, and later withdrew the money. Now the companyis suing the bank to get back the money. The court said, No. The bank had no way ofknowing that the company sent it to the wrong H.E. Richards. So this was due to you ownnegligence, so must bear the loss.

NOVEMBER 21, 2001CASES ON FORGERY

CALINOG v PNB

Fr. Calinog was maintaining a current account with PNB

a certain Andrea was able to encash a check issued by him

when he received the bank statement, there was a discrepancy of P1 500

when he confronted the bank, the bank refused to return the amount

SC: Fr. Calinogs signature was forged; therefore, the bank was liable to him

PNB v QUIMPO Gozon was a depositor of PNB

he went to the bank with his friend Santos Santos was in the car while Gozon transacted business with the bank

when Santos saw that Gozon left his check book, he took a check and filled it up for P5

000; forged the signature of Gozon; encashed the check Gozon sued PNB; PNB claims that Gozons negligence was the proximate cause

SC: The bank should know the signature of the drawer. Gozon cannot be considered

negligent because he had no reason to suspect that his friend would steal his check.The mere fact that a negotiable instrument is stolen from you does not constitutenegligence.

MWSS v CA MWSS was using its own personalized checks printed by its own printer and not the

official PNB checks 23 checks with forged signatures of MWSS officers were presented with PNB over a

period of 3 months; PNB paid the checks when MWSS discovered the forgery, it sued PNB for the return of the money

SC: MWSS was guilty of negligence. It was allowed to have its checks printed by a by a

private printing press. It failed to adopt security measures in the printing of the checks.It did not reconcile the bank statements with its records.

PRICE v NEAL

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Price was the drawee in 2 bills of exchange

he indorsed said bills to Neal

the drawers signature turned out to be forged

Price sued Neal to get back the money on the theory of payment by mistake

SC: Price cannot recover. As the drawee, it was his obligation to verify the signature of

the drawer. He was guilty of negligence, so he must bear the loss.

PNB v CA Lim deposited in his current account with PCI a check issued by GSIS in favor of Pulido

who in turn indorsed to it to Go; Go indorsed it to Lim PCI as collecting bank presented the check to PNB; PNB honored the check

when the forgery was discovered, PNB returned the money to GSIS and sued PCI

SC: PNB cannot get back the money from PCI. Under Section 62 of the NIL, the

acceptor admits the genuineness of the signature of the drawer and that applies also topayment because payment implies and presupposes acceptance.

SECURITY BANK v TRIUMPH LUMBER Triumph Lumber was maintaining a current account with Security Bank

when robbers broke into the office, Triumph discovered that some check books weremissing; it did not inform the bank

checks were forged and presented to the bank; the bank honored them

SC: A drawer who discovered the loss of its check book and did not notify the bank of

the loss should bear the loss caused by the subsequent payment of the checks in whichthe signature of the drawer had been forged.

GEMPESAW v CA

Gempesaw maintained a current account with PBC

she used checks to pay the suppliers of the grocery stores she owned

her bookkeeper was the one who prepared the checks and she merely signed them

she never examined the sales invoices which supported the payments nor the bank

statements for the canceled check in 2 years, the bookkeeper was able to steal about P1 M; the payees never received the

checks Gempesaw sued PBC

SC: GENERAL RULE: A bank which pays a check on a forged instrument cannot debit the

account of the drawer.EXCEPTION: Where over a period of 2 years, a depositor signed checks prepared by her

bookkeeper without ascertaining the correctness of their amounts, did not examine thebank statements and canceled checks, and discovered later on that the signatures of thepayees were forgeries, the loss should be divided equally between the depositor and thedrawee bank, since her negligence resulted in the payment of the checks.

PROVINCE OF TARLAC the province of Tarlac maintained an account with PNB

it was operating a hospital and to fund its operations, checks were drawn payable to the

Chief of the hospital; the cashier received the checks after the cashier retired, he continued to receive checks; he forged the indorsements

the cashier deposited the forged checks with Associated Bank

the province sued PNB; PNB filed a 3rd party complaint against AB

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SC: PNB cannot debit Tarlacs account because the Chiefs signature was forged.

However, PNB can demand reimbursement from AB. Nevertheless, Tarlac should bear of the loss for its negligence. (Tarlac and AB liable proportionally)

MELLICOR/HSBC v PNB (???)

JAI ALAI v BPI (no discussion)

ASSOCIATED BANK

Reyes was engaged in the business of selling RTWs to department stores the department stores issued cross checks payable to her account only; however, she never received them

when she followed up, she discovered that the checks were deposited by a certain

Sayson who was able to withdraw the money SC: Reyes could sue the stores for payment and they can in turn sue the collecting

banks for paying the checks; the banks can ran after AB. BUT to avoid circuity, Reyescan sue AB directly

MANILA LIGHTER TRANSPORTATION v CA the corporation sent its collector to collect payments from its customers

collector forged indorsements on 49 checks; indorsed to X and Y X and Y deposited the checks with China Bank

when China Bank presented them for payment, the drawee bank paid

MLT sued China Bank

SC: MLT should bear the loss. Where the indorsement of the payee of several checks

were forged by an employee of the payee and the checks were deposited in a bankaccount and the collecting bank allowed withdrawals after the checks had been cleared,the payee cannot recover from the collecting bank, where the payee was guilty ofnegligence by allowing a condition in which its employees could appropriate the checksand falsify the indorsement.

CLEARING

all checks have a magnetic ink recognition to identify upon which bank it is drawn

once a check reaches the clearing house, the computer will automatically credit bank X

account & debit bank Y account this is merely tentative because the check will be delivered to bank Y and bank Y has 24

hours within which to accept the check from the time it received the same if bank Y rejects it, the check will be returned to the clearing house and the computer

will reverse the entries: it will debit bank X account & credit bank Y account if bank Y accepts it, the check is cleared and the amount will be credited to bank X

the drawee bank can collect from the collecting bank if the indorsement is forged

however, if the check is not returned to the collecting bank within 24 hours, the drawee

bank is barred from setting up forgery; he is deemed to have accepted the check. Thisis applicable to cases involving forgery of indorsement and alteration of amount.

PING-PONG OF CHECKS: Collecting bank presents to drawee bank drawee bank

rejects the check and returns it to collecting bank if the drawee bank returns the check to collecting bank, the collecting bank cannot

return it (it is allowed to return only once-otherwise, it will be fined), unless thedepositor redeposits (allowed to deposit 2x)

the drawee bank has appropriate prescriptive period to run after collecting bank after

discovery of fraud 24 hours

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RULES AS INTERPRETED BY CLEARING HOUSE:

1. If the drawee bank fails to return the check, it is barred from requesting the bank toreverse the entries

2. The drawee bank can sue but the money remains with the collecting bank3. If the drawee bank returns the check within 24 hours it can sue and money

remains with drawee bank

FOUR BASIC RULES IN FORGERY

1. A party whose signature was forged is not liable unless he is in estoppel2. A person negotiating an instrument after forgery is liable because of his warranties3. A HIDC acquires good title if forged indorsement is not necessary for his title as

in the case of forged indorsement in a bearer instrument.4. A drawee who pays/accepts a bill with a forged signature of a drawer cannot get

back the payment

November 22, 2001 Thursday

SECTION 24

Every NI is deemed to be issued for a valuable consideration.

Travel Inc. case

There was this fellow bringing in passengers to a travel agency buying tickets. To pay forthe tickets, he issued a check w/c bounced. The travel agency sued him on the basis of thecheck. CA dismissed the complaint and said the plaintiff has the burden of proof to showhow much is the worth of the tickets actually purchased from the travel agency and saidthat there was conflicting and the plaintiff failed to proved by preponderance the value ofthe ticket purchased.

SC: Plaintiff sued on the basis of the dishonored check therefore it is presumed that thecheck was issued for a valuable consideration and plaintiff need not prove the amount ofconsideration issued for the check. The burden was on the defendant to prove the facevalue of the check is not the consideration.

Villaluz case

The accused was being prosecuted for issuing a bouncing check. SC said that sinceconsideration was presumed drawer should be ordered to pay its value because he failed toprove that there was no consideration.

SECTION 25In civil law, a consideration may consist an obligation to give like to deliver a car, ring; to

do, to sing in a concert; not to do like in a contract, you may have a provision wheresomebody selling his business that there be a stipulation that for the next 5 years the sellerwill not engage in a competing line of business. The law says that a pre-existing debtconstitutes value. In civil law, remember that donation is a contract and consideration maybe love, affection, generosity, kindness. Sometimes someone may give something out ofhatred.

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SECTION 26If A issued a P/N in favor of B but actually B didnt give him any consideration. B thenindorses it to C who pays for it and now C negotiates it to D. D is considered a holder forvalue w/ respect to A, B, C because C gave value and A and B were parties before whobecame bound before the value was given.

SECTION 27This is common in labor cases. The arbiter decided the case in favor of the employee andemployer wants to appeal. The er will post a bond. Surety Co. will require collateral but theywill not accept real estate. They would insist it would be cash, money market placement,time deposit, T-bills because this is a very risky undertaking about 95% they will be heldliable. They would want collateral which would be easily converted to cash. If here is an erw/ a certificate of time deposit w/c is negotiable for P1M and the judgment in favor of theee is P0.5M so that collateral the surety co. is asking for is PO.5M but what they have is thenegotiable certificate of time deposit, so they would give it as collateral to the extent ofP0.5M. So surety co. can be considered a holder for value up to P0.5M only because thatwas the only amount it will be entitled to recover in case it is held liable to the ee.

SECTION 28

Absence of consideration is a matter of defense against a person not a HIDC

Jose Cruz issued a check for a ring but it turned out to be fake but the check was indorsedto a HIDC. The drawer cannot raise that defense.

Partial failure of consideration is a defense pro tanto ..

Somebody issue a check to pay for 2 tons of molasses but the seller delivered only 1 ton.Check bounced. If he is sued, he can raise the defense that there is partial failure ofconsideration. Only 1 ton was delivered. He should only be made liable to the extent of ofthe face value of the check.

Cornell case

Want of consideration between the drawer and acceptor is a defense against the payee. If

the drawee accepted the B/E and the holder returned on the date of maturity to demandpayment, the acceptor cannot raise the defense that the drawer doesnt have sufficientfunds therefore I cannot pay you. Under sec. 62, the drawee, by accepting the instrumentadmits the authority of the drawer to draw the instrument. That means he admits either thedrawer has sufficient funds with him or they have an arrangement wherein to advance hisown funds.

SECTION 29

In the play Merchant of Venice, A signed a P/N as accommodation maker because Bwanted to borrow money from S but his credit standing was poor. So A signed the P/N asaccommodation maker and the stipulation was that should he fail to pay S can extract 1 lb.of flesh. Because A could not pay, S now was demanding his 1 lb. of flesh.

w/o receiving value thereforHe didnt receive any share of the proceeds of the P/N. This is common when you have aco-signer in a P/N. Take the case of a surety co. Some banks would require a surety co. toco-sign the P/N of the maker. If maker doesnt pay, they just run after the surety co..Surety co will co-sign but it will charge a fee because it is lending its credit. Still it is anaccommodation party because it will not receive anything from the proceeds of the P/N butit will be paid a consideration for acting as surety. The same way you have that Phil.Exchange Foreign Loan Guaranty Corp. before. These people borrowing abroad that govt.

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formed corp. would bind itself solidarily but then it would charge a guaranty fee. Its anaccommodation maker. So the accommodation party cannot raise the defense that he didntreceive any consideration.

Clark v. Sellner

The consideration that supports the obligation of the accommodation party is the

consideration that supports the obligation of the party accommodated. There need not bean independent consideration for the obligation of the surety. You find that in civil law.

Prudencio v. CA (Jack doesnt agree with this)

Concepcion and Tamayo Construction had a project with the govt. They obtained a loanfrom PNB as working capital. This is common in the construction business. PNB required CTto assign the proceeds of the contract to PNB. It wanted to be sure it got paid. It was notsatisfied with that. It asked Prudencio spouses to sign as co-makers and they mortgagedtheir property as security to the loan. CT didnt have sufficient working capital. They couldnot pay their suppliers and workers so they pleaded w/ PNB to release a portion of theproceeds of the payment made by the owner of the project so it could pay its suppliers andworkers. But CT didnt have much working capital so they eventually abandoned the project.

PNB now was forced to foreclose the property of PS. PS filed case to stop foreclosure andthe cancellation of the mortgage.

SC: PS were accommodation makers and for the holder of a NI to be able to collect fromaccommodation party, holder must meet all requirements of HIDC except for the fact theholder is aware for want of consideration on the accommodation party for theaccommodation party did not receive any consideration. PNB didnt meet thoserequirements. One of the requirements of a HIDC is that it acted in GF. PNB didnt act in GF.Why? PS agreed to co-sign because they learned that proceeds of the contract wereassigned to PNB so they felt they were safe. But what happened was PNB released a portionof the money. So it acted in BF, thus not meeting requirements of a HIDC thus cant recover

JACK: WRONG!1) Sec. 29 doesnt say HIDC but holder for value

2) Sec. 52 says to be a HIDC party must have acted in GF a time he took the inst.SC was talking about something that happened long after PNB to the P/N.3) Partial release of proceeds cannot make PNB in BF. Probably they have made an

error of judgment. They acted in GF. Had they not released any money, noquestion CT would be able to pay its suppliers and workers and the project wouldgrind to a halt. These laborers are paid on a weekly basis. If you dont pay themthat week, they disappear. Probably that was the intention of PNB because if theydidnt release, definitely CT will default. They were hoping by releasing some, itwould be able to keep going and finish the project but apparently that was notthe case.

Jose v. CA

Jose was claiming a certain property belonging to the client of Atty. Beltran. There was asettlement. She agreed to give up his claims for a certain amount and to facilitate thesettlement Atty. Beltran signed a check to pay Jose. Whose check was that? It was thecheck of the company of which he was president. So he and the VP co-signed the checkrepresenting the amount to be paid to Jose to give up her claim against the property ofclient of Atty. Beltran. When Jose tried to collect on the check. Check bounced for lack ffunds. She now sued corp. headed by Atty. Beltran.

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SC: NO, the issuance of the check was ultra vires. No biz purpose so far corp. is concerned.Remember, as a general rule, a corp. cannot be a surety for the obligation another becauseit has no business purpose. When Atty. Beltran and the VP signed that check, in behalf ofcorp. they were exceeding their authority as agents of corp. The rule is that when the agentexceeds its authority it becomes personally liable. It is Atty. Beltran who should be sued andheld personally liable.

People v. Maniego

Milagros Pamintuan issued a postdated check and asked disbursing officer of AFP toexchange it w/ cash. Maniego the sister was asked to sign as accommodation indorser.When check fell due, it bounced for lack of funds. Criminal case was filed against Pamintuanand Maniego. P jumped bail and disappeared and Maniego was acquitted by the TC. TC saidit has not been shown that he acted w/ conspiracy w/ Pamintuan. but TC held her civillyliable. She appealed. She said that since she was acquitted TC should not have held hercivilly liable.

SC: No it is true that you didnt incur criminal liability beech it was not shown that youconspired with P however before it was exchanged for cash by the disbursing officer of AFPyou were acting as accommodation indorser and an accommodation indorser is liable when

check bounces.

SECTION 30

Thats why I told you in some decisions one penned by Justice Martin and onepenned by Justice Romero where holder of check w/ a forged indorsement was ordered toreturn the money. SC said that under sec 66 the general indorser warrants the instrumentwhat it purports to be. That is wrong. That is not negotiation because the holder did nottransfer the check to the drawee. That was presentment for payment. The holder signs thecheck at the back to acknowledge receipt of payment and not form purpose of transferringtitle.

Now if the instrument is payable to order, to negotiate sign at the back then deliver.If its payable to bearer, mere delivery is sufficient. But if the party indorses and delivers it,

that is also negotiation.

Caltex caseThis is where Angel dela Cruz who had a deposit with Security Bank with a certification.This is to certify that bearer has so much of deposit repayable to the depositor. He pledgedthat to Caltex as collateral for his credit line. Then he told SB that it got lost and asked for areplacement and gave it as a collateral for a loan w/c he got from SB. He disappeared.Dispute is who had a better right to the proceeds of the cert. Caltex said this was pledgedto us.

SC: This is a NI. But there are no provisions in NIL governing pledge of NI. So we shouldfall back on NIL. NIL says for a pledge of a NI to bind 3 rd parties pledge must appear in apublic instrument and the pledgor must indorse the instrument. These requirements werenot complied w/. Pledge was not notarized. and Dela cruz didnt indorse certificate. SB hadbetter right.

SECTION 31

To negotiate, to indorse, one mist write on the instrument or a paper attached to it(allonge). That is sufficient, it works as an indorsement because by operation of law that iswhat happens. Just like in your sale. The seller by simply signing the deed of sale warrantsthat the thing he sells is free from hidden defects and he also warrants against evictioneven though the contract is silent. His mere act of signing the law imposes those liabilitiesupon him.

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SECTION 32

Indorsement must be of entire instrumentException: If instrument is paid in part, for example when it is paid on installments. 1st

installment has been paid then it can be indorsed w/ respect to the balance. The lawrequires that there must be indorsement of entire instrument because we said NI are

intended to circulate and it would be very difficult to negotiate that further if you couldhave partial indorsemenst. You have a check for 100K and payee will indorse 50K of that.who keeps the check. The indorsee now will indorse 30K of that to another party. Thatanother party will indorse 15K of that. Its very very difficult. Thats why law prohibits that.Now if a partial indorsement is made, the effect of that will be an assignment notnegotiation so personal defenses can be raised. Law also prohibits transfer to 2 or moreindorsees. For instance you have a check for 100K to Jose Cruz 50K and Manuel Santos50K.

SECTION 33

There are other kinds of indorsement: joint, successive, facultative, irregular.

facultative waives demand and notice of dishonor.

This classification is not mutually exclusive. You can have indorsement w/c is thecombination of these. You can have an indorsement w/c is conditional and facultative.

SECTION 34

SPECIAL- specifies person to whom it is being indorsed. Like if co-payee writes at the backto Jose Cruz, then signs it. Thats special indorsement. And to negotiate further Jose Cruzmust indorse if payable to bearer. If payable to bearer it can be negotiated further by meredelivery.

BLANK- does not name any person. The co-payee just signs at the back. That becomepayable to bearer under Sec. 9 so it may be negotiated further by mere delivery.

SECTION 35

A holder may convert a blank indorsement into special by writing over signature of theindorser in blank any contract consistent with the character of indorsement. Because if anorder instrument is indorsed in blank it becomes payable to bearer. Holder may be afraid ifhe loses that the finder may be able to collect payment because it is payable to bearer. Toprotect himself, he can insert his name to change blank to special so instru