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COMMERCIAL LAW REVIEW

Commercial Law That branch of private laws governing rights,
obligations, and relations of persons engaged in commerce or trade, and
necessarily includes the purchase, sale, exchange, traffic or distribution of
goods, commodities, productions, services or property, tangible or
intangible, the instrumentalities and agencies by which they are promoted,
and the means and appliances by which they are carried on.

Trade The business traffic within the limitations of a state.
Commerce Covers intercourse with foreign state.

3 Principal Characteristics:
1) Universal/International It exists in every civilized society, and
are the hallmark of modern mankind.
2) Progressive Accumulates new ideas and keeps abreast with
contemporary developments.
3) Equitable and Uniform It is equitable as it involves primarily
the exchange of values and consideration. It Is uniform as
within a country, a commercial act or contract ought to be
governed by the same set of rules.
4) Customary It embodies rules being followed from time to
time or are invoked in everyday transactions. Commercial
customs, usages and practices eventually find their way being
formally adopted by society either through statutory provisions
or jurisprudential recognition.


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NEGOTIABLE INSTRUMENTS LAW

Nature and Coverage

NIL only applies to negotiable instruments and covers the entire subject of
negotiable instruments and must be treated as a complete body of law
3
upon the subject and controlling on all cases to which it is applicable.

Crossed-checks 9only negotiable once) is covered by Arts. 443-566 of the
Code of Commerce.

What are negotiable instruments?
A negotiable instrument is a document warranting the payment of money
contemplated by a contract for the payment of money the promise of or
order for conveyance of which is unconditional and the payee designated
on and memorialized by the instrument capable of change through
transfer by valid negotiation of the instrument.

Examples of Negotiable Instruments:
Letters of credit and trust receipts are not negotiable instruments,
4
although drafts issued with letters of credit are negotiable instruments.

Functions of Negotiable Instruments:
1) Meant to be substitutes for money and thereby increase the purchasing
media in circulation. But, they are not legal tender.
Exception: A check which has been cleared and credited to creditors
.5
account shall be equivalent to a delivery to the creditor of cash
A check only produces payment when:
a.
they have been encashed; or

1 Based on CLVs Commercial Law Review Book, Dean Sundiangs

Commercial Law Reviewer, some books of Agbayani, Atty. Jack Jimenezs
Lectures, and some stuff from Atty. Ampil and Quimson.
2 Act No. 2031.
3 Bank of Italy v. Symmes, 118 Cal. App. 716 5 P.2d.
4 Lee v. CA, 375 SCRA 5579.
5 Sec. 60 New Central Bank Act.

-1b. through the fault of the creditor they have been
6
impaired.
2) Means of creating and transferring credit.
3) Facilitates sale of goods.
4) Increases the purchasing medium in circulation.

Principal Features of Negotiable Instruments:
1) Negotiability That attribute or property whereby a bill or
mote or check may pass from hand to hand similar to money, so
as to give the holder in due course the right to hold the
instrument and to collect the sum payable for himself free from
defenses.
2) Accumulation of secondary contracts They are transferred
from one person to another, as to allow a transferee to have
better title than the transferor, creating a series of juridical ties
between the parties either by law or by privity.
3) Commercial instruments created by law

Negotiation
Assignment
Pertains to negotiable instruments
Pertains to contracts in general


Holder in due course receives the Transferee only steps into the
instrument free from personal shoes of the transferor, such that
defenses of transferor.
any defense which may be set up

against transferor may be set up

against transferee.


For negotiation, there must be When a promissory note marked
indorsement and delivery, for order non-negotiable is not at the same
instruments, and mere delivery for time stamped non-transferable or
bearer instruments.
non-assignable, it may still be

assigned or transferred, in whole or
Requisites for valid negotiation:
in part, even without the consent of
1) Compliance with Section the promissory, since such consent
1 of NIL
is not necessary for the validity and
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2) Valid negotiation
enforceability of the assignment.
3) Holder is a holder in due
course

Specific Instruments Covered:
1) Promissory notes It is a solemn acknowledgement of a debt
and formal commitment to repay it on the date and under the
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conditions agreed upon by borrower and lender. Generally
involves 2 parties: the maker and the payee.
2) Bill of Exchange - An unconditional order in writing addressed
by one person to another, signed 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 to
bearer. Involves 3 parties in general: drawer, payee,
drawee/acceptor.
3) Check a bill of exchange drawn on a bank and payable on
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demand.

Bill of Exchange
Promissory Note
Check
Unconditional Order
Unconditional
It is necessary that a

Promise
check is drawn on a


deposit.
Otherwise,
Involves 3 parties
Involves 2 parties
there would be fraud.



Drawer
secondarily Maker
primarily Death of drawer of a
6 Art. 1249, Civil Code.
7 Sebreno v. CA, 222 SCRA 466.
8 Pentacapital Investment v. Mahinay, 623 SCRA 284.
9 Sec. 185, NIL.
10 Sec. 71, NIL.

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liable
liable
check,
with
the


knowledge by the bank,
Generally,
2 Only
one revokes the authority of
presentments:
for presentment (for the banker to pay.
payment
and
for payment)

acceptance.
Must be presented for

payment
within
a
Must be presented for
reasonable time from
11
payment within a
issue.
reasonable time after
10
its last negotiation.


Person Primarily Protected: Holder in due course. Every holder is
presumed to be a holder in due course. (Sec. 59)

Who is a holder in due course?
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One who takes the instrument:
1) Which is complete and regular upon its face;
2) Before it was overdue, without notice of any previous dishonor;
3) In good faith and for value;
4) Without notice of an infirmity on the instrument, or defect in
the titles of the person negotiating it to him.

Formal Requisites of negotiable instruments: (SUDOC)
But, the instrument need not follow the exact language of the NIL, but the
terms are sufficient which clearly indicate an intention to conform to the
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requirements of the law.

1) It must be in writing and signed by the maker or drawer
-
It must be in writing of some kind
-
If not in writing, there is nothing to be negotiated or passed
from hand to hand.
-
Signing is an indication of the party binding himself.
-
Valid signatures: thumbmarks, chops (for Chinese, Koreans and
Japanese), signatures of corporate officers printed though a
check-writing machine.
-
Whatever signature is affixed in the instrument, if the party
intended that to be his signature, then that would be binding.
-
Location of signature is not crucial. It may even be incorporated
into the body of the instrument.

2) Must contain an unconditional promise or order to pay a sum
certain in money.
-
If a promissory note: must contain a promise to pay.
-
Acknowledgement of a debt is not a promise to pay. It is a mere
proof of a prior obligation.

When does an acknowledgement of debt become a promise to pay?
In 2 instances:
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a) When the date of payment is mentioned.
b) If words of negotiability are mentioned.

-
If a bill of exchange, must contain an order to pay.
-
Exact word pay need not be used.
-
An authority to pay is not an order to bay: it means that the
person to whom it is given only the discretion to pay or not to
pay. So he has the option to choose not to pay.
-
Mere request to pay is not an order to pay.
-
Mere use of words of civility will not detract from the nature of
the promise.

11 Sec.. 186, NIL.

12 Sec. 52, NIL.
13 Sec. 10, NIL.
14 Jimenez v. Bucoy.

-2Exact words of the law need not be used, other words equivalent to them
which indicate an intent to conform to the requirements thereof are
15
sufficient.

-
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.
-
Condition: an event which may or may not happen or a past
event unknown to the parties.
-
If the event is certain to happen but when it will happen is
unknown, then that is not a condition but a period.

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When is a promise unconditional?
A promise to pay is unconditional even if with:
1) An indication of a particular fund out of which reimbursement is
to be made or a particular account to be debited with the
amount; (here, the fund is not the source of payment, but
merely a source of reimbursement)
2) A statement of the transaction which gives rise to the
instrument. (A nego. Instrument is issued when there is an
underlying contrac, that is the consideration. So if it mentions
the underlying contract giving rise to its issuance, that will be
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.
-
Always remember that Negotiability determined only by looking
at the 4 corners of the instrument without looking at evidence
aliunde.
-
HOWEVER, an order or promise to pay out of a particular fund
is not unconditional. This presupposes and is subject to the
condition that there are sufficient funds in the source of
payment. Thus, a treasury warrant, payable out of a particular
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fund of the government, is not a negotiable instrument.

The sum must be certain
-
This is so that people will know how much they will get when
the instrument falls due. If the amount is uncertain, people will
not be willing to take the instrument.



What constitutes Certainty of Sum?

Sum is still certain even if:
a) With interest stipulated (Usury law now ineffective).
b) By stated installments (must not only be stated, but the
maturity/date of each installment must be fixed or
determinable).
c)
By stated installment, with accelaration clause (but must
still be accompanied with de-escalation clause for validity)
d) With either fixed or current rate of exchange, or payable
in foreign exchange. (for this to apply, there must be 2
currencies. Ex. USD and PhP)
e) With costs of collection or attys fees (must be stipulated),
in case payment not made at maturity. (At maturity, the
instrument is no longer fully negotiable since any
transferee acquiring it would not be a holder in due
18
course. )

-
The sum is still certain if on the face of the instrument, it can be
mathematically computed.

15 Sec. 10, NIL.

16 Sec. 3, NIL.
17 See Abbubakar v.Auditor Gen.
18 Secs. 52 and 58, NIL.

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-
-
-
-

The instrument is not rendered non-negotiable if it is the holder

who is given an election to require something to be done in lieu
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of payment of money.
There must be stipulation of interest. Interest rate stipulated is
what governs the parties.
Interest, though not subject to any ceiling, must not be
20
unconscionable. Ex. 66% per year is unconscionable.
As a rule, if the interest is not unconscionable, it is the rate
stipulated by the parties which would apply. 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% p.a.
under CB Circular No. 416.
In determining whether an instrument is negotiable, the
reckoning point is the date of maturity. If you know on the date
of maturity that this is the amount due, then it is negotiable. If
the amount will become uncertain after because of attys fees,
then this is irrelevant.
21
Attys fees will always be subject to the control of the Court.
Even if there is a stipulation on attys fees, courts may still
reduce it.

3)

It must be payable on demand, or at sight, or at a fixed or

determinable future time

When is an instrument payable on demand?
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Payable on demand when:
a) When expressed to be payable on demand, or at sight, or
on presentation;
b) When no time for payment is expressed;
c)
When an instrument is issued, accepted, or endorsed
when overdue, it is, as regards the person so issuing,
accepting or indorsing it, payable on demand. (Special
rule)

23
What constitutes determinable future time?
a) at a fixed period after date or sight. (Ex. 10 days after
sight)
b) on or before a fixed or determinable future time specified
therein (Ex. On or before Dec. 25, 2012)
c)
on or at a fixed period after the occurrence of a specified
event which is certain to happen, though the time of
happening be uncertain. (Ex. 30 days after death of B). if
before, then not negotiable.
d) Instrument payable upon a contingency is not negotiable
and the happening of the event does not cure the
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defect.

25
Thus, money order is not negotiable, because:
a) Although it says paid to the order of, that is not negotiable as
under postal regulations, the bureau of posts can refuse to pay
on numerous grounds so that the order is not unconditional,
thus, it is not negotiable.
b) A money order can be indorsed only once.
c)
The post office is not run by the government for commercial
profit, but for public service.

Ante-dating or post-dating an instrument does not affect its validity. But, it
is invalid if done for an illegal or fraudulent purpose. The person to whom

19 Sec. 5(d), NIL.

20 Medel Case.
21 See Code of Professional Responsibility.
22 Sec. 7, NIL.
23 Sec. 4, NIL.
24 West Point Banking v. Gaunt, 34 ALR 862.
25 Phil. Education Co. v. Soriano.

-3the instrument so dated is delivered acquires the title thereto as of the
26
date of delivery.

What is the importance of the date?
It is important to:
1) determine when the instrument, endorsement or acceptance is
due (maturity); and
2) to determine prescription of cause of action.
But, it is not important an essential element for negotiability.

Where an instrument expressed to be payable at a fixed period after date,
of the acceptance of an instrument payable at a fixed period after sight is
undated, and it was accepted and the acceptor did not indicate the date,
the holder may insert there the true date of the issuance or acceptance.
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 shall
27
be regarded as the true date.

4) It must be payable to order or to bearer

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When is an instrument payable to order?
a) When it is drawn payable to the order of a specified
person or to him or his order;
b) Drawee as payee: once accepted is equivalent to a PN in
favor of the drawee.
c)
Maker as payee: instrument not complete until the maker
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endorses;
d) Drawee as payee: authorizes the drawee to pay himself.
e) When the instrument is payable to order, the payee must
be named or otherwise indicated therein with reasonable
30
certainty.
f)
Subject to the rules in Sec. 13, 14 and 15, on incomplete
instruments, leaving the payee blank may make the
instrument non-negotiable. This is because an instrument
payable to order may be negotiated only by endorsement
and delivery.
g) Pay to ___ or order, Pay to the order of ___, or pay
to ___ or order Php___.


Who can be payee in order instrument?
a) person who is neither maker, drawer or drawee;
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b) payable to order of maker;
c)
payable to the order of the drawer;
d) payable to the order of the drawee;
e) payable to 2 or more payees jointly;
f)
payable to the order of an office for time being.

32

When is an instrument payable to bearer?
a) When expressed to be so payable to bearer;
b) When it is payable to a person named therein or bearer;
c)
When it is payable to the order of a fictitious or non-
existing person, and such fact was known to the person so
making it payable; (This means that the maker/drawer did
not intend that person to receive the proceeds of the
33
negotiable instrument. )
d) When the name of payee does not purport to be the
name of any person;
26 Sec. 12, NIL.
27 Sec. 13, NIL.
28 Sec. 8 NIL.
29 Sec. 184, NIL.
30 Sec. 8, NIL.
31 Sec. 184, NIL.
32 Sec. 9, NIL.
33 See Mueller and Martin v. Liberty Bank. See also American Sash and Door
Co. case, where the drawer did not know the fictitious character of the payees.
When the checks were indorsed, there was forgery.

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e)
f)

When the only or last endorsement is an endorsement in

blank. (Ex. Payable to the order of cash, unless payee is
Johnny Cash.)
Check payable to the order of cash is payable to bearer,
and the bank may pay it to the person presenting it for
34
payment without the drawers endorsement.

Words equivalent to bearer: Assignee, holder, possessor, on return of this
certificate properly endorsed, order of the bearer.

5) In Bills of Exchange, drawee must be named or other wise
indicated therein with reasonable certainty.
35
-
Omission of payee may be filled in later.
-
If name of payee is left blank, it is an incomplete instrument,
36
but may be remedied.

37
Provisions or omissions not affecting negotiability:
1) If the instrument authorizes the sale of collateral securities in
case the instrument be not paid at maturity; (this is common in
pledges or mortgages where there will be a stipulation that is
the obligation secured is not paid, then the property pledged or
mortgaged can be foreclosed by the pledgee or mortgagee.
2) Authorizes a confession of judgment if the instrument be not
paid at maturity. (but accdg. To SC, this is a void stipulation.)
3) Waives benefit of any law for the advantage or protection of
the obligor. Ex. Rule on venue.
4) Gives the holder an election to require something to be done in
lieu of payment of money.
38
5) If the instrument is not dated (date may be inserted later , and
39
it will be dated as of the date of issue ) If the instrument or
acceptance is dated, it is presumed to be the true date (but may
40
be rebutted).
6) Does not specify the value given, under sec. 24, it is presumed
that value has been given.
7) Does not specify the place where it is drawn or where it is
41
payable.
8) Bears a seal (this is relevant in common law, but not in civil law
as in common law, consideration is presumed, in a contract; if
there is a seal, consideration is presumed).
9) Designates a particular kind of currency in which payment is to
be made. (RA 7181 provides that it is valid to stipulate that
payment will be made in foreign currency).
10) Addressed to more than one drawee jointly.

42
Rules of Construction in negotiable instruments:

34 Ang Tek Lian v. CA, 87 Phil. 383.

35 Sec. 14, NIL.
36 But See Equitable Bank case, where SC said that the payee was not
named with reasonable certainty as it provided pay to the order of Equitable
Bank Corp. A/C Casville Ent..
37 Secs. 5 and 6, NIL.
38 Sec. 13, NIL.
39 Sec. 17, NIL.
40 Sec. 11, NIL.
41 See Sec. 73, NIL. Sec. 73. Place of presentment. - Presentment for
payment is made at the proper place:
(a) Where a place of payment is specified in the instrument and it is
there presented;
(b) Where no place of payment is specified but the address of the
person to make payment is given in the instrument and it is there
presented;
(c) Where no place of payment is specified and no address is given
and the instrument is presented at the usual place of business or
residence of the person to make payment;
(d) In any other case if presented to the person to make payment
wherever he can be found, or if presented at his last known place of
business or residence.
42 Sec. 17, NIL.

1)

2)
3)
4)
5)
6)
7)

-4The sum expressed in words takes precedence over the sum
expressed in numbers;
Exception: Where the words are ambiguous or uncertain, then
reference to the figures should be made.
Where the interest is stipulated, without specification of the
starting date, the interest runs from the date of the instrument,
and if undated, from the issue thereof.
An undated instrument is considered to be dated as of time
issued.
Written provisions prevail over printed provisions of
instrument.
Where the instrument is ambiguous as to whether it is a note or
a bill, the holder may treat it as either at his election.
When the capacity of the signatory is not clear, he is to be
deemed an indorser.
I promise to pay when signed by 2 or more persons is deemed
to be jointly and severally signed, i.e. solidary liability.

Irregular Instruments:
Incomplete
but
delivered (Sec. 14)

Incomplete
but
Undelivered (Sec. 15)

Complete
but
Undelivered (Sec. 16)

When an instrument is
lacking in any material
particular, person in
possession thereof has
prima facie authority to
complete it by filling-up
the blanks therein.

Signature on a blank
paper
delivered
by
person
making
the
signature in order that
paper may be converted
into
a
negotiable
instrument is prima facie
authority to fill it up as
such for any amount.

In order that any such
instrument
when
completed
may
be
enforced against any
person who became a
party thereto prior to its
completion, it must be:
a)
filled-up
strictly
in
accordance
with
the
authority
given;
b)
within
a
reasonable
time.

Such instrument after
completion, is negotiated
to 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.

Validity of instrument:
1)
As against a

Where an instrument has

not been delivered, it will
not, if completed and
negotiated,
without
authority, be a valid
contract in the hands of
any holder, as against any
person whose signature
was placed thereon
before delivery.

Those whose signatures
appear before delivery,
non-delivery
of
an
incomplete instrument is
a valid defense, not only
between original parties
but also against a holder
in due course. This is a
real defense (valid even
against a holder in due
course).

Those whose signatures
appear after delivery the
instrument is valid and
enforceable.

Make or drawer may be
estopped from claiming
the above defense if
there
should
be
negligence on his part.

While the drawer of a
check owed a duty to the
bank on which the check
was drawn to guard
against the escape of a
check signed in blank
which had been stoled,
he owed no such duty to
the purchaser of the
check and therefore, the
drawer cannot be held
liable to such purchaser
provided
that
the
incomplete instrument
43
was not yet delivered.

Every contract on a
negotiable instrument is
incomplete and revocable
until delivery of the
instrument
for
the
purpose of giving effect
thereto.

As between immediate
parties, and as regards a
remote party other than a
holder in due course, the
delivery in order to be
effectual, must be made
either by or under the
authority of the party
making,
drawing,
accepting or indorsing, as
the case may be.

Immediate parties
refers to persons who
know or are presumed to
know the conditions or
limitations placed upon
the delivery of the
instrument, excluding a
holder in due course.

Delivery may be shown to
be conditional or for a
special purpose only, and
not for the purpose of
transferring the property
(title) in the instrument.

Where instrument is in
the hands of a holder in
due course, a valid
delivery thereof by all
parties prior to him so as
to make them liable to
him
is
conclusively
presumed.

Where the instrument is
no longer in possession of
the party whose signature
appears thereon, a valid

43 Linicks v. Nuttwig, 140 App. Div. 265.

44 Ching v. Dao.

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-5-

2)

holder in due
course: It is
always valid
and
enforceable
to the full
extent. The
defense of
filling-up
contrary to
authorization
is a mere
personal or
equitable
defense.
As against
one not a
holder in due
course: to
the Maker or
drawer,
it
may
be
entirely
invalid, valid
up to the
amount
authorized,
or valid in
whole
as
against
parties who
became such
after
completion
of
the
instrument.

Incomplete undelivered
checks are not valid, and
thus, may not be
44
encashed.

Where no delivery was
made, there can e no
cause of action since
there was no title
45
transferred.

and intentional delivery

by him is presumed until
the contrary is proved.

Delivery need not be
actual and may be
constructive.
Thus,
depositing a note by mail
with intent to transmit it
to the payee in the usual
was is a delivery in
contemplation of law.

Where the debtor who
drew 2 checks payable to
his creditor, but never
rd
delivered, but a 3 party
was able to collect the
proceeds thereof by
forgery., the creditor did
not gain standing as
against any person to
recover on the checks
since he acquired no
interest over them by
46
reason of delivery.

Forgery

Sec. 23. Forged signature; effect of. - When a signature is forged or made
without the authority of the person whose signature it purports to be, it
is wholly inoperative, and no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any party
thereto, can be acquired through or under such signature, unless the
party against whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority.

Types:
1) Fraud amounting to forgery or fraud in factum (Ex. 2 nieces
make their aunt sign a note making her believe that it is a mere
contract to sell)
2) Duress amounting to fraud (Ex. A puts a gun to your head and
forces you to sign a promissory note)
3) Fraudulent impersonation. (Ex. To receive the proceeds of a
note payable to B, A tells the maker that he is B)

For there to be forgery which would exempt a person from liability even as
against a holder in due course, there must be duress in the execution of
the instrument.

A document formally presented is presumed to be genuine, until it is
47
proved to be fraudulent.

Illustrations:

1) Promissory note:

45 Development Bank of Rizal case.

46 Development Bank v. Sim Wei.
47 Samsung v. Far East Bank.

A-> B-> C ->D -> E (Payable to order B or order)

B forges signature of A.

E cannot run after A, because forgery is a complete defense, and may be
set up even if E is a holder in due course.

E can run after B, being the forger, he is precluded from setting up forgery.

E can run after C/D, as they are endorsers who warrant that the instrument
is genuine and in all respects, what it purports to be.

A-> B-> C ->D -> E (Payable to order B or bearer)
B forges signature of A.

Liability of a to E is based on W/N E is a holder in due course. If holder in
due course, A is liable. If not, then A may set up the personal defense of
want of delivery of a complete instrument (Sec. 16)

E cannot run after B, though his indorsement is not required for
negotitation, there is still forgery, the instrument does not bind him. He
cannot trace his title back to B. But, E may run after C/D. though their
indorsements not required, where a person places his indorsement on an
.48
instrument negotiable by delivery, he incurs all the liability of an indorser

Forgery of a PN:
1) Forgery of makers signature Maker cannot be held liable by
any holder, even an HIDC.
2) Forgery of indorsement:
a) Payable to order Party whose signature is forged and
parties prior to him, including the maker, cannot be held
liable by the holder, whether he be an HIDC or not. Forged
signature, which is inoperative, is the only means by which
title is acquired.
b) Payable to bearer Party whose indorsement was forged
and parties prior to him, including the maker, may be held
liable by an HIDC but not one who is not an HIDC,
provided, the note was mechanically complete before the
forgery.


- the forged signature is not necessary for title. But,
the defense of a party prior to the forged insdorsement of want of delivery
of a mechanically complete instrument is still available as against non-
HIDCs.

2) Bill of Exchange


A-> B-> C ->D -> E (Payable to order B or order)
B forges signature of A. X accepted as drawee.

E cannot run after A, due to the forgery. X should pay to A, acceptor, by
accepting the instrument, engages that he will pay it according to the
49
tenor of his acceptance. X cannot recover from drawer A due to the
forgery, A not liable on the instrument. His remedy is to run after the
forger. E can collect form C/D, due to their indorsement. If X does not
accept, he is not liable.


A-> B-> C ->D -> E (Payable to order B or order)
D steals the bill and forges indorsement of C to E. X accepted as drawee.

X cannot debit account of A, as this is a forged instrument and acceptor did
not follow the instructions of A to pay to B or his order. X can get back the
money from E, as he only admits the signature of the drawer is genuine. He
48 Sec. 67, NIL.
49 Sec. 62, NIL.

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does not admit the signature of the indorsers. If X did not accept the
instrument, then he is not liable. Being an order instrument, valid
indorsement required to acquire title. Since indorsement of C is forged, no
title was acquired by D, and thus, no title acquired by E. E cannot run after
A, B, C. E can run after D, as indorser, he warranted that the instrument
was genuine.

Forgery of Bills of Exchange:
1) Forgery of drawers signature
a) With acceptance of drawee Drawee by accepting the
instrument can no longer set up the defense of forgery, as
when he accepted it, he admitted the genuineness of the
signature of the drawer.
b) Without acceptance of drawee Unless a forgery or
alienation is atribultable to the fault/negligence of the
drawer himself, the remedy of the drawee bank that
negligently clears a forged check (even if without
accepting it) and/or altered check for payment is against
the party responsible for the forgery or alteration,
50
otherwise, the drawee bears the loss. In case of forged
51
check, drawer can recover form the drawee bank. But, if
there is no acceptance, and no payment by drawee,
drawee cannot be made liable. Where forgery of drawers
signature is obvious from its face, drawee is guilty of gross
52
negligence in paying the check.

4 Basic Rules in forgery:
1) A party whose signature was forged is not liable

UNLESS he is in estoppel, or negligent.
2) A person negotiating an instrument after a forgery is liable
because of his warranties.
3) A holder in due course acquires good title, IF the 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 the
drawer cannot get back the payment, his recourse is to run
after forger. By accepting, he admits that the instrument is
genuine. (but does not warrant the genuineness of signatures of
indorsers.)

Forgery of an indorsement:
1) Payable to order Party whose signature is forged and parties
prior to him, including the maker, cannot be held liable by any
holder.
2) Payable to bearer originally Party whose signature was
forged and parties prior to and subsequent to him, including the
maker, may be held liable by a HIDC, BUT not one who is not an
HIDC, provided that the note was mechanically complete before
forgery.

Cases on forgery:

Calinor v. PNB
A was able to get hold of a check of B, which was for the latters account in
PNB. A encashed the check. B saw his bank statement, and saw a
discrepancy due to the encashment. He confronted the bank, but refused
to return the amount. The SC held that since the alleged drawers
signature was forged, he could not be held liable on the instrument. Thus,
the bank bears the loss and should restore the amount debited from Bs
account.

PNB v. Quimpo

50 BPI Family Savings v. Buenaventura.

51 Associated Bank v. CA.
52 Calinog v. PNB.

-6A, a depositor of PNB, went to the bank with his friend B. B was left alone
in the car, and he saw the check book of A. he took a check from it and
forged As signature, and thereafter encashed the check. A sued the bank,
and the bank raised the defense that A was negligent. SC held that it is the
bank who is liable, as it should have known the signature of the drawer,
being its depositor. A could not have been negligent as he had no reason
to suspect that his friend would dupe him and steal his check. There is no
negligence by the mere fact that a negotiable instrument is stolen from
you.

Casa Montessori v. Banco Filipino
There is no estoppel in case a check is forged and encashed by your
independent contractor. Not being your employee, there is no vicarious
liability. Estoppel presupposes knowledge.

MWSS v. CA
M was using its own private printer to print its check, and 23 of these
checks with forged signatures of its officers were presented to the bank
over a period of 3 months, which the bank paid. When the forgery was
discovered, M sued the bank. SC held that M was guilty of negligence, as it
allowed its checks to be printed by a private printing press. It failed to
adopt security measures in the printing of the checks. It also did not
reconcile its bank statements with its own records. Being negligent, M
should bear the loss, as he who causes the loss should bear it.

PNB v. CA
A check was deposited with the bank by A. the check was subject to
various indorsements: G-> P -> O -> L. The drawee bank accepted the
check, despite there being a forged signature thereon. This being the case,
the drawee bank was held to bear the loss. Under Sec. 62 of the NIL, the
acceptor admits the genuineness of the signature of the drawer, and that
applies also to payment, as payment presupposes acceptance.

Illusorio v. CA
I entrusted his checks to his secretary while out of the country, and also
the management of his accounts were left to her. The secretary was able
to encash and deposit his checks. I is precluded from setting up the forgery
because his negligence is the proximate cause of his loss. he could have
prevented the forgery is he just exercised due diligence in the
management of his accounts.

Gempesaw v. CA
G paid suppliers using checks from her account with a bank. But, the
checks were merely signed by her, and prepared by her bookkeeper. She
also did not check the sales invoices from her suppliers, and neither did
she examine her bank statements. The bookkeeper was able to steal from
her, and the payees never received the checks. SC held that the general
rule is that a bank which pays a check on a forged instrument cannot debit
the account of the drawer. As an exception, where over a period of 2
years, a depositor signed checks prepared by her bookkeeper without
ascertaining the correctness of their amounts, nor did an examination of
bank statements and canceled check, and later on discovered that the
signatures of the payees were forged, the loss should be divided between
the depositor and the drawee bank, since the depositors negligence is the
cause for the payment of the checks.

Associated Bank v. CA
A province issued checks for the maintenance of a hospital, payable to the
latters chief. The checks were received by the cashier, but, after retiring,
checks were still being received by him, thus, was able to deposit the same
with a bank. The province sued its bank, and the latter filed a 3rd party
complaint against the cashiers bank. The provinces bank cannot debit the
account of the province, the payees signature being forged. However,
there was negligence on the part of the province, who should share in the
loss. The collecting bank guarantees all prior indorsements, including the
forged ones. Even if a collecting bank is not negligent, it is still liable to the
drawee bank. The draweee is only duty bound to ascertain the

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genuineness of the drawers signature and not those of the indorsers. The
collecting bank is liable because it is privy to the depositor who negotiated
the check.

PCIB v. CA
Ford issued crossed checks to the BIR to pay for percentage taxes. But due
to some syndicate, the checks were deposited in the names of other
persons with another bank. The SC held the drawee bank and collecting
bank liable. The checks were without proper indorsements and were also
crossed (for payees account only).


Clearing House Rules (for checks):
1) If the drawee bank fails to return a check, it is barred from
requesting he bank to reverse the entries
2) The drawee bank can sue but the money remains with the
collecting bank.
3) If the drawee bank returns the check within 24 hours, it can sue
and money remains with the drawee bank.
4) If check returned only after 24 hours, drawee can still sue
collecting bank, but the money remains with the collecting
bank.

Material Alteration
What is material alteration?
A material alteration is to be one which changes the date, the sum
payable, the time or place of payment, the number of relations of the
parties, the currency in which payment is to be made or one which adds a
place of payment where no place of payment is specified, or any change or
53
addition which alters the effect of the instrument in any respect.

What is the effect of a material alteration?
Where a negotiable instrument is materially altered without the assent of
all parties liable thereon, it is avoided. There is no difference between
54
fraudulent and innocent alterations.
Exception: it is not avoided as against a party who has himself made,
authorized, or assented to the alteration and subsequent indorsers.

But when an instrument has been materially altered and 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.

Rule on signatures:
GR: A person whose signature does not appear on the instrument is not
liable thereon.

Exceptions:

1) Forged signatures: A person whose signature was forged but
55
precluded from setting-up forgery as a defense, is liable as the
forger. Ex. If forger is in estoppel; forger is negligent.
56
2) Acceptance on separate piece of paper of a BoE.
3) Unconditional promise in advance to accept a Bill before being
57
drawn, which promise must be in writing.
4) Trade Name: One who signs using a trade or assumed name will
58
be liable as if he had signed in his own name.

53 Bank of America v. Phil. Racing Club, citing Sec. 126, NIL.

54 Elliot v. Blair, 47 Ill. 342.
55 Sec. 23. NIL Forged signature; effect of. - When a signature is forged or
made without the authority of the person whose signature it purports to be, it is
wholly inoperative, and no right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party thereto, can be
acquired through or under such signature, unless the party against whom it
is sought to enforce such right is precluded from setting up the forgery
or want of authority. (emphasis supplied)
56 Sec. 134, NIL.
57 Sec. 135, NIL.

-75) Signature of an agent: Signature of a party may be made by a
duly authorized agent, which does not require a special form of
59
agency, is made liable. The principal is liable, not the agent if:
a) The agent must be authorized (and act within the given
authority);
b) the agent signs the instrument;
c)
indicates thereon that he does so in a representative
capacity; and
60
d) discloses the principal. Letterhead indicating name of
principal is sufficient.
The rule is that when the agent exceeds his authority, he becomes
personally liable.61
62
6) When the instrument can be negotiated by mere delivery
7) Estoppel.

Defense of Incapacity:
When the negotiable instrument is indorsed by a minor or a corporation ,
the defense of incapacity is personal: may be set up by such
minor/corporation only.

The indorsement or assignment of the instrument by a corporation or by
an infant passes the property therein, notwithstanding that from want of
63
capacity, the corporation or infant may incur no liability thereon. This
applies to persons who are similarly incapacitated, such as deaf-mutes who
do not know how to read or write, those suffering from civil interdiction,

etc.

When is a minor liable?
A minor is liable when:
a) The minor actively misrepresents his age, and that he is
physically of age (estoppel);
b) The minor kept the fruits or benefits; and
64
c)
The minor spent the money in good faith.

Consideration

GR: Every negotiable instrument is deemed prima facie to have been
issued for a valuable consideration; and every person whose signature
65
appears thereon to have become a party thereto for value.

What is value? It is any consideration sufficient to support a simple
contract. An antecedent or pre-existing debt constitutes value; and is
deemed such whether the instrument is payable on demand or at a future
66
time.

Who is a holder for value?
A holder one for value is where value has been given at any time for the
instrument. He is a holder for value in respect to all parties who become
67
such prior to that time.

Can a lien on the instrument be considered as value to be a holder for
value?
Yes. When holder has a lien on the instrument arising either from contract
or by implication of law, he is deemed a holder for value to the extent of

58 Sec. 18, NIL.

59 Sec. 19, NIL.
60 Sec. 20, NIL.
61 Crisologo-Jose v. CA.
62 See Sec. 65, NIL.
63 Sec. 22, NIL.
64 Art. 1427, Civil Code: A minor who has entered a contract without the
consent of the parent or guardian, voluntarily pays a sum of money or delivers
a fungible thing in fulfilment of the obligation, there shall be no right to recover
the same form the obligee who has spent or consumed it in good faith.
65 Sec. 24 NIL.
66 Sec. 25, NIL.
67 Sec. 26, NIL.

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68

his lien.

Example: surety co. requires posting of bond or other collateral to agree to
become a surety. If there is a judgment for P500,000, and the judgment
debtor gives the surety as collateral a certificate of time deposit worth
P1m, then the surety is a holder for value only up to P500,000.

What is the Effect of Want of Consideration?
Absence or failure of consideration is a matter of defense as against any
person not a holder in due course; and partial failure of consideration is a
defense pro tanto, whether the failure is an ascertained and liquidated
69
amount or otherwise.

Example of partial failure of consideration: A issues a check for payment of
100 sacks of palay. Seller only selivers 50 sacks. A should only be made
liable to the extent of of the face value of the check.

Accommodation Party

What is an accommodation party?
An accommodation party is one who has signed the instrument as maker,
drawer, acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. Such a person is liable
on the instrument to a holder for value, notwithstanding such holder, at
the time of taking the instrument, knew him to be only an accommodation
70
party.

Requisites of accommodation party:
1) Signs as maker, drawer, acceptor or indorser
2) Without receiving value
3) To lend his name/credit to some other person.

Rights and Obligations of An Accommodation Party
Accommodation An act of signing an instrument as maker, drawer,
acceptor or indorser by one who, without receiving value therefore, lends
his name to some other person.

Accommodation Party = Accommodation paper/note

Receipt of amount in consideration for lending name Does not affect
the act as an accommodation, so long as the consideration is not a share in
the proceeds of the instrument. The consideration that supports the
obligation of the accommodation party is the consideration that supports
the obligation of the party accommodated, and need not be an
71
independent consideration.

without receiving value therefore without receiving value by virtue of
the instrument.

If note contains value received If no value was really received, note is
still an accommodation note.

Accommodation party is still liable on the note to a holder for value,
despite notice of accommodation.

Right of recovery from accommodated party gives one the right to sue
for reimbursement (from accommodation party or surety).

Co-accommodation makers share equally the burdens as joint
guarantors (if one of them paid, the one paying may demand from the
other joint guarantors their share. Except if there is judicial demand or the
principal debtor is insolvent).
68 Sec. 27, NIL.
69 Sec. 28, NIL.
70 Sec. 29, NIL.
71 Clark v. Sellner.

Lack of consideration can be interposed as a defense against
accommodated party.

Negotiation
What is negotiation?
An instrument is negotiated when it is transferred from one person to
another in such manner as to constitute the transferee the holder
72
thereof.

How instruments are negotiated:
Bearer Instrument
Order Instrument
Negotiated by mere delivery
Negotiated by delivery coupled by
indorsement.

Indorsement must be written on
the instrument itself or upon a
paper attached thereto (called an
allonge). The signature of the
indorser, without additional words,
73
is a sufficient indorsement.

The indorsement must be an
indorsement of the entire
instrument. An indorsement which
purports to transfer to the indorsee
a part only of the amount payable,
or which purports to transfer the
instrument to two or more
indorsees severally, does not
operate as a negotiation of the
instrument. But where the
instrument has been paid in part, it
may be indorsed as to the
74
residue.

Assignment Assignee merely steps into the shoes of the assignor, and
any defenses which may be set up against the latter may be set up against
the former. If there is improper negotiation, then there is a mere
assignment even if the instrument is negotiable.

Kinds of Indorsement
Special
In Blank
Qualified
Restrictive
Conditional
Specifies the
person
to
whom, or to
whose order,
the
instrument is
to
be
payable, and
the
indorsement
of
such
indorsee is
necessary to
the further
Negotiation
of
the
75
instrument.

Specifies no
indorsee, and
an instrument
so indorsed is
payable
to
bearer, and
may be
negotiated by
76
delivery.

holder
may
convert
a
blank
indorsement
into a special
indorsement
by
writing over
the signature
of the indorser

Constitutes
the indorser
a
mere
assignor of
the title to
the
instrument.
It may be
made
by
adding
to
the
indorser's
signature the
words
"without
recourse" or
any
words
of
similar
import. Such

Indorsement is
restrictive
which either:
(a) Prohibits
the
further
negotiation of
the
instrument; or
(b) Constitutes
the indorsee
the agent of
the indorser;
or
(c) Vests the
title in the
indorsee
in
trust for or to
the use of
some other
persons.

The
party required
to pay the
instrument
may disregard
the condition
and
make
payment to
the indorsee
or
his
transferee
whether the
condition has
been fulfilled
or not. But any
person
to
whom
an
instrument so
indorsed is
negotiated will

72 Sec. 30, NIL.

73 Sec. 31, NIL.
74 Sec. 32, NIL.
75 Sec. 34, NIL.
76 Sec. 34, NIL.

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in blank any
contract
consistent
with
the
character of
the
77
indorsement.

an
indorsement
does
not
impair the
negotiable
character of
the
78
instrument.

But the mere

absence
of
words
implying
power
to
negotiate does
not make an
indorsement
79
restrictive.

hold the same,

or
the
proceeds
thereof,
subject to the
rights
of the person
indorsing
81
conditionally.

Confers upon
the indorsee
the right:
(a) to receive
payment of
the
instrument;
(b) to bring
any
action
thereon that
the indorser
could bring;
(c) to transfer
his rights as
such indorsee,
where
the
form of the
indorsement
authorizes him
to do so.
But
all
subsequent
indorsees
acquire only
the title of the
first indorsee
under
the restrictive
80
indorsement.

What happens if an instrument payable to bearer is indorsed?
Where an instrument, payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery; but the person indorsing
specially is liable as indorser to only such holders as make title through his
82
indorsement.

What if the instrument is payable to 2 or more persons?
Where an instrument is payable to the order of two or more payees or
indorsees who are not partners, all must indorse unless the one indorsing
83
has authority to indorse for the others.

What is the effect of an instrument drawn or indorsed to a person as
cashier?
Where an instrument is drawn or indorsed to a person as "cashier" or
other fiscal officer of a bank or corporation, it is deemed prima facie to be
payable to the bank or corporation of which he is such officer, and may be
negotiated by either the indorsement of the bank or corporation or the
84
indorsement of the officer.

What if the name of payee or indorsee is misspelled?
Where the name of a payee or indorsee is wrongly designated or
misspelled, he may indorse the instrument as therein described adding, if
85
he thinks fit, his proper signature.
77 Sec. 35, NIL.
78 Sec. 38, NIL.
79 Sec. 36, NIL.
80 Sec. 37, NIL.
81 Sec. 39, NIL.
82 Sec. 40, NIL.
83 Sec. 41, NIL.
84 Sec. 42, NIL.
85 Sec. 43, NIL.

What is the effect of an Indorsement in representative capacity?
Where any person is under obligation to indorse in a representative
86
capacity, he may indorse in such terms as to negative personal liability.

Presumption of date/place of indorsement:
Except where an indorsement bears date after the maturity of the
instrument, every negotiation is deemed prima facie to have been effected
87
before the instrument was overdue.

Except where the contrary appears, every indorsement is presumed prima
88
facie to have been made at the place where the instrument is dated.

Does a negotiable instrument continue to be negotiable even after
issuance?
Yes. An instrument negotiable in its origin continues to be negotiable until
89
it has been restrictively indorsed or discharged by payment or otherwise.

Can an indorsement be striken out? What is its effect?
The holder may at any time strike out any indorsement which is not
necessary to his title. The indorser whose indorsement is struck out, and all
indorsers subsequent to him, are thereby relieved from liability on the
90
instrument.

What is the effect of a transfer without indorsement?
Where the holder of an instrument payable to his order transfers it for
value without indorsing it, the transfer vests in the transferee such title as
the transferor had therein, and the transferee acquires in addition, the
right to have the indorsement of the transferor. But for the purpose of
determining whether the transferee is a holder in due course, the
negotiation takes effect as of the time when the indorsement is actually
91
made. Here, there is basically only an assignment.

When may a prior party negotiate an instrument?
Where an instrument is negotiated back to a prior party, such party may,
subject to the provisions of the NIL, reissue and further negotiable the
same. But he is not entitled to enforce payment thereof against any
92
intervening party to whom he was personally liable.

Example:

A B C D E
If E indorses the instrument back to B, and in case A refuses to pay, he
cannot run after C, D, and E as B is liable to them. there will be
compensation of liabilities, and thus B is precluded from running after C, D,
and E. If however, B is only a qualified indorser, C,D, and E have no
recourse as to him, so they cannot run after him. There will be no
compensation, and thus, B can run after them.

Holders in Due Course

The NIL was drafted primarily to protect holders in due course.

Holder A holder means a payee or indorsee of a bill or note, who is in
93
possession of it, or the bearer thereof.

Kinds of holders:
1) Simple Holder The instrument is subject to he same defenses
as if it were non-negotiable; he may enforce the instrument and
86 Sec. 44, NIL.
87 Sec. 45, NIL.
88 Sec. 46, NIL.
89 Sec. 47, NIL.
90 Sec. 48, NIL.
91 Sec. 49, NIL.
92 Sec. 50, NIL.
93 Sec. 191, NIL; Hi-Cement v. Insular Bank of Asia, 534 SCRA 269.

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94

2)

receive payment therefore.

Holder for Value Importance for the liability of an
95
accommodation party.
Holder in due course

3)

Who is a holder in due course?
A holder in due course is a holder who has taken the instrument under the
following

(a) That it is complete and regular upon its face;

When is an instrument incomplete?
An instrument is incomplete when it is wanting in any material particular
or particular proper to be inserted in a negotiable instrument without
96
which the same will not be complete.

Common type of irregularity: Alteration upon the face of the instrument.
The alteration must be apparent on the face of the instrument, for if it is
not apparent, the matter is governed by Sec. 124, which renders the
instrument void.

Would absence of the required documentary stamp make the instrument
incomplete? NO.97


(b) That he became the holder of it before it was overdue, and
without notice that it has been previously dishonored, if such
was the fact;
When is an instrument overdue?
An instrument is overdue after the date of maturity.
Note Payable on demand the date of maturity is determined by the date
of presentment, which must be made within a reasonable time after issue.
Bill payable on demand the date of maturity is determined by the date of
the last negotiation.
-
If an instrument payable on demand is negotiated after an
unreasonable length of time after issue, the holder is deemed
98
not a holder in due course.
What is unreasonable length of time?
-
Unreasonable length of time is determined by the nature of the
instrument, the customs and usages of the trade or business
with respect to such instrument, and the facts of each particular
99
case.
-
Under B.P. 22, it seems that 90 days is the reasonable period for
100
negotiable instruments payable on demand.

An overdue instrument carries with it the strong indication that it has been
dishonored. Is it still negotiable?
Yes. But it is subject to defenses existing at the time of the transfer.


(c) That he took it in good faith and for value;
Good faith refers to the good faith of the indorsee or transferee and not
101
the seller of the instrument.

Bad faith does not require actual knowledge of the exact truth; it is
sufficient that the facts within the knowledge tend to show that there was
something wrong with the transaction.

102
Value any consideration sufficient to support a simple contract.
- love and affection do not constitute value within the meaning of the

94 Sec. 91, NIL.

95 See Sec. 26, NIL.
96 Sec. 14, NIL.
97 Farmers Savings Bank v. Noel, 187 NW 555.
98 Sec. 53, NIL.
99 Sec. 53, NIL.
100 PNB v. Seeto.
101 Helmer v. Krolick, 36 Mich. 321.
102 Sec. 25, NIL.

103

104

law. adequacy of consideration is not required.

(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
105
person negotiating it.
Notice covers only situations where the holder had actual or
chargeable knowledge of the infirmity or defect or must have
acted in bad faith.
-
Knowledge of the agent is constructive knowledge to the
principal and will render the principal not a holder in due
106
course.
-
Title is defective when the instrument is obtained or any
signature thereto, by fraud, duress or force and fear, or other
unlawful means, or for an illegal consideration, or when it is
negotiated in breach of faith, or under such circumstances as
107
amount to fraud.
-
A negotiable promissory note which is obtained by a party by
virtue of a contract of merger does not render the holder a
holder in due course since only a negotiation by indorsement
could operate as a valid transfer to make such holder in due
108
course.
-
Where transferee receives notice of any infirmity in the
instrument or defect in the title of the person negotiating the
same before he had paid the full amount agreed to be paid, he
will be deemed a holder in due course only to the extent of the
109
amount therefore paid by him.
Example: Payee of a post-dated check for 10,000. Payee tells his
friend that the check is due next month, but he needs money
immediately, and offers to indorse the check for 8,000. Friend
gives 4,000, promising to give the rest the next day. The following
day, friend learns that the check was issued for a fake ring, but
still gives the 4,000. Check was dishonored. He tries to collect
from the drawer. He can collect as much as 5,000 because the
agreement was that he will pay 8,000 for a 10,000 check. So the
consideration corresponds to the face value on a ratio of 4:5. For
every P5 peso face value, he will give a P4 consideration. So to
determine whether he is a holder in due course, there should be a
proportionate amount between the amount he paid and the face
value of the check.

May a payee be a holder in due course?
A holder in due course may be the payee, as sec. 191 defines a holder as
the payee or indorsee of a bill or note who is in possession of it or the
bearer thereof a holder, by definition includes a payee. But if the omission
is not an important particular, such omission will not deprive the holder of
110
the right of a holder in due course.

May a drawee be a holder in due course?
A drawee does not by paying the bill become a holder in due course since a
holder refers to one who has taken the instrument as it passes along in the
course of negotiation. Whereas, the drawee, upon acceptance and
payment, strips the instrument of negotiability and reduces it to a mere
111
voucher or proof of payment.

Presumption: Every holder is generally deemed prima facie to be a holder
112
in due course. He who claims otherwise would have the burden of proof.

103 Cockrell v. McKenna, 489 ALR 234.

104 Art. 1355, Civil Code.
105 Sec. 53, NIL.
106 Stalker v. Mc Donald, 40 Am. Dec. 389.
107 Sec. 55 NIL.
108 BPI v. CA.
109 Sec. 54, NIL.
110 Failure to put the year of the date renders the instrument not regular upon
its face. United Railway v. Siberian Commercial, 19 ALR 506, 201 P.21.
111 American Homing v. miliken National Bank, 273 Fed. 550..
112 Sec. 59, NIL.

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However:

When it is shown that title of any person who has negotiated

the instrument was defective, as when the instrument payable
to him or bearer, then the burden of proof shifts to the holder
who must show he is a holder in due course or that he acquired
his title from a holder in due course although he is not himself a
113
holder in due course.

For a holder who simply seeks to avail of the rights of his

immediate transferee, there is no presumption that a person
through whose hands the instrument ahs passed was a holder
114
in due course.

If the original payee of a note unenforceable for lack of

consideration repurchase the instrument after transferring it to
a holder in due course, the paper again becomes subject in the
payees hands to the same defenses; the same is true where the
115
instrument is re-transferred to an agent of the payee.

What are the rights of a holder in general?
116
The holder of a negotiable instrument:
1) may to sue thereon in his own name; and
Even when he holds the instrument merely in a representative
capacity, such as a holder for collection only, or a pledgee of a
117
note.
2) payment to him in due course discharges the instrument.

Payment in due course is payment made (i) at or after the maturity of
the instrument; (ii) to the holder thereof; and (iii) in good faith, and
118
without notice that his title is defective.

The NIL does not provide that a holder who is not a holder in due course,
may not in any case, recover on the instrument. The only disadvantage of a
holder who is not a holder in due course is that the negotiable instrument
119
is subject to defenses as if it were non-negotiable.

When is title defective?
Title is defective when the party obtained the instrument by fraud, duress,
force and fear, or other unlawful means, or illegal consideration, or when
he negotiates in breach of faith or under circumstances amounting to
120
fraud. For example, a buyer ordered 10 cases of expensive linen from
the seller, for which a bill of exchange was issued, but when the goods
were shipped, they turned out to be mere sack cloth. In this case, there
was fraud in the negotiation of the check, and thus, the holder did not
acquire title to it. For a holder who simply seeks to avail of the rights of his
immediate transferee, there is no presumption that a person through
121
whose hands and instrument has passed was a holder in due course.
Also, when it is shown that title of any person who has negotiated the
instrument was defective, as when the instrument is not payable to him or
to bearer, then the burden of proof shifts to the holder who must show he
is a HIDC although he is not himself a holder in due course.

What is the effect of notice of defect?
When there is notice of defect, the person to whom the instrument is
negotiated has actual knowledge of the infirmity or defect, or knowledge
of such facts that his action in taking the instrument amounts to bad faith.
122
Mere negligence is not enough. They must know that something is
wrong, either what is exactly wrong or they know that there are facts

113 De Ocampo v. Gatchalian.

114 Fossum v. Fernandez Hermanos.
115 Fossum v. Fernandez Hermanos.
116 Sec. 51, NIL.
117 Alabama City v. Kyle, 202 Ala. 552; Walmer v. First Acceptance, 212 NW
638.
118 Sec. 88, NIL.
119 Chan Wan v. Tan Kim, 109 Phil. 706.
120 Sec. 55, NIL.
121 Asia Bank v. Ten Sen Guan.
122 Sec. 56, NIL.

123

which would make their acts amount to bad faith.

Rights of transferees of unendorsed negotiable instrument:
1) Although a transferee of an unendorsed instrument is not a
holder as defined in Sec. 191, the prevailing theory is that if the
transferor could sue in his own name, then the transferee may
also do so under the principle in assignment that the assignee
steps into the shoes of the assignor.
2) Under Sec. 49, where the holder of an instrument payable to his
order transfers it for value without indorsing it, the transfer
vests in the transferee such title as the transferor has therein.

Determining if the holder is a holder in due course; Cases:

Buyer wanted to obtain a car, and a friend said he knew of a seller. Friend
said that the seller wanted to make sure that buyer is serious, and thus
wanted to see a check. Crossed check issued by buyer, but no car or seller
appeared. Friend had actually paid the check to a hospital to pay for
hospital bills of his wife, with the excess of the value of the check being
given to him as change. Payment of check was stopped by buyer, so when
the hospital presented it for payment, it was dishonored. SC said that the
hospital is not a holder in due course, as the holder should take a crossed
check with caution, and should inquire what the purpose of its issuance is,
and the title of the payee. Not being the case, it cannot be a holder in due
124
course.

Holder of a check deposited paychecks with a bank, telling it not to present
them for payment right away. Even without clearance of the check, holder
was allowed to withdrawn the amount. Checks were eventually presented
for payment, but were dishonored due to having an altered amount. SC
said that the bank was not a holder in due course as they were told not to
present the checks right away, and disregarded banking practice by
125
allowing the holder to withdraw the amount despite non-clearance.

J bought a cashiers check but left it lying around. Check was stolen, so J
had the check stopped. The check was indorsed by the thief to M, with the
latter demanding payment, which the bank refused. SC said that M is not a
holder in due course, having refused to explain his possession of the check.
126
It was also held that he had notice of a defect in the title of the thief.
According to Atty. Jack, it would have been better if the Court had used
forgery to prevent recovery of M.

A company paid a check to supplier, which was obtained from another
person, who gave the check only to serve as guaranty, not to be paid.
Supplier sued the company, and the SC said it was not a holder in due
course. The check was payable to order, but did not have any indorsement
to the supplier. When the supplier obtained the check, there was already a
stamp at the back saying it was already previously dishonored, thus it was
127
not a holder in due course.

S bought a car from V motors, and obtained a loan from F to pay for it.
Promissory note executed for V motors, which was indorsed to F. S refused
to pay saying that there was a discrepancy between the engine number
and chassis number of the car. SC held that F was a holder in due course,
and these defenses cannot prevent a holder in due course from being
128
paid.

E issued 6 post-dated checks to C, with the latter saying that she would
rediscount them and deposits the proceed in the account of E as payment.
This she did not do. E stopped the payment of checks, thus they were

123 De Ocampo v. Gatchalian.

124 Ocampo v. Gatchalian.
125 Banco Atlantico case cited by Atty. Jack.
126 Mesina v. IAC.
127 Stelco Marketing v. CA.
128 Violago Motors v. BA Finance

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dishonored when they were presented for payment. C begged E for

another chance, so E issued replacement checks. Again, C did not deposit
the funds as promised, so the checks were dishonored when presented for
payment. E was sued, and raised the defense of lack of consideration, but
SC said that the indorsee was a holder in due course, thus, the personal
129
defense of want of consideration could not be used.

After determining if the holder is a holder in due course, what are the
rights of holders in due course?
130
A holder in due course
1) holds the instrument free from any defect of title of prior
parties, and
2) free from defenses available to prior parties among themselves,
and
3) may enforce payment of the instrument for the full amount
thereof against all parties liable thereon.

Exceptions:

HIDC cannot recover in full when:
131
a) There is a restrictive endorsement;
b) When title of the person negotiating the instrument is
132
forged; and
133
c)
Material alteration.
d) When the instrument is payable in installments;
e) When the lien of the holder is not for the full amount.





2

Persona Defenses: DIDAFIN These grow out of the agreement or

conduct of a particular person in regard to the instrument which
renders it inequitable for him, though holding the legal title, to
enforce it against the [arty sough to be made liable but which are not
available against an HIDC:
Duress (intimidation)
Illegality (when the law does not so provide)
Discharge before maturity
Aalteration (Unintentional)
Fraud in inducement
Incompleteness (delivered)
No Consideration

Real Defenses: F EU ADM WIWI these are defenses which

can be set up against ANY HOLDER (even an HIDC):
Fraud in factum
Forgery
Execution of Instruments between public enemies
Ultra Vires acts of a corporation
Alteration (material)
Duress amounting to forgery
Minority (only for the minor)
Marriage (in the case of a wife)
Want of authority of and agent
Illegality
Want of delivery of an incomplete instrument
Insanity (where insane has a guardian appointed by court)

129 Escarte case cited by Atty. Jack.
130 Sec. 57, NIL.
131 Sec. 37, NIL: Effect of restrictive indorsement; rights of indorsee. - A
restrictive indorsement confers upon the indorsee the right:
(a) to receive payment of the instrument;
(b) to bring any action thereon that the indorser could bring;
(c) to transfer his rights as such indorsee, where the form of the indorsement
authorizes him to do so.
But all subsequent indorsees acquire only the title of the first indorsee under
the restrictive indorsement.
132 Sec. 55, NIL: When title defective. - The title of a person who negotiates
an instrument is defective within the meaning of this Act when he obtained the
instrument, or any signature thereto, by fraud, duress, or force and fear, or
other unlawful means, or for an illegal consideration, or when he negotiates it
in breach of faith, or under such circumstances as amount to a fraud.
133 Sec. 124, NIL: Alteration of instrument; effect of. - Where a negotiable
instrument is materially altered without the assent of all parties liable thereon, it
is avoided, except as against a party who has himself made, authorized, or
assented to the alteration and subsequent indorsers.
But when an instrument has been materially altered and 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.

What is the consequence if the holder is one other than a holder in due
course?
In the hands of a holder other than a holder in due course, a negotiable
instrument is subject to the same defenses as if it were non-negotiable.
Exception: a holder who is not a holder in due course but derives his title
from a holder in due course is given the same rights of such former holder,
provided, he himself is not a party to any fraud or illegality affecting the
134
instrument.

Example:
A B C D E
A issued a check to pay for a ring bought from B. turns out the ring was a
fake, but check indorsed down the line to D, HIDC. D then indorsed it to E,
not aware that the check was issued for a fake ring. Under Sec. 58, if the
check bounces, A cannot raise the defense that E knew that the check was
issued for a fake ring. If D knew of the defect, but indorses it to E, a HIDC,
he cannot have it renegotiated back to him just to improve his title and
turn himself into a HIDC.

Presumption: Every holder is deemed prima facie to be a holder in due
135
course.

This ma be rebutted: when it is shown that the title of any person who has
negotiated the instrument was defective, the burden is on the holder to
prove that he or some person under whom he claims acquired title as a
HIDC. This however does not apply in favor of a party who became bound
136
on the instrument prior to the acquisition of such defective title.

Example:
A vessel was fabricated, for which a company drew a bill of exchange,
which was negotiated to a bank, then to F, the latter being aware that the
fabrication of the vessel did not meet the specifications, and thus, there
was failure of consideration. The SC held that F, holder, failed to prove that
the bank from whom he acquired the instrument was a HIDC. The
presumption of being a holder in due course only applies to those who are
currently holders of the instrument, not to those who had already
137
negotiated the instrument to other persons.

Parties to the Instrument

138
139
Liability of Drawer: Liability is primary and unconditional.
A maker of a negotiable promissory note warrants:
1) He will pay according to the tenor of the PN;
2) That the payee exists; and
3) The payee has capacity to endorse.
134 Sec. 58, NIL.
135 Sec. 59, NIL.
136 Id.
137 Fossum v. Fernandez-Hermanos.
138 Sec. 60, NIL.
139 PNB v. Macenas.

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The maker is precluded from setting up the ff:

1) That the payee is a fictitious person;
2) That the payee was insane, a minor, or a corporation acting
ultra vires.

Liability of joint makers:

When a party signs a PN as co-maker, and binds himself to be

jointly and severally liable with the principal debtor in case the
latter defaults in the payment of a loan, such undertaking is
deemed to be that of a surety as an insurer of the debt, not as a
guarantor who warrants merely the solvency of the debtor. The
creditors right to proceed against the surety exists
independently of his right to proceed against the principal.

When a maker signs a PN as a solidary co-maker with others, he

cannot be considered as a mere guarantor. Where the PN
expressly states that the three signatories therein are jointly
and severally liable, any one, some, or all of them may be
proceeded against for the entire obligation. The choice is left to
the solidary creditor to determine against whom he will enforce
the obligation.

140
Liability of drawer: Only secondary and conditional.
The drawer, by drawing the instrument, admits:
1) the existence of the payee and his capacity to indorse
2) and engages that on due presentment, the instrument will be
accepted or paid or both, according to its tenor,
3) and that if it be dishonored, and the necessary proceedings for
the dishonor be duly take, he will pay the amount thereof to
the holder or any subsequent indorser who may be compelled
to pay it.
4) But, the drawer may insert in the instrument an express
stipulation negativing or limiting his own liability to the holder
(i.e. without recourse).

Example:
A check was drawn against PNB, and when presented for payment, BPI
debited the account of the drawer, but did not deliver the money to the
holder. The holder then seeks payment from the drawer. SC said that the
drawer is liable, as a drawer warrants that the instrument will be paid, and
if not, he will pay it.

Drawer will pay only when:
a) The bill is dishonored; and
b) The necessary proceedings for dishonor have been taken.

To whom drawer is secondarily liable:
a) The holder;
b) Any indorser intervening between the holder and the drawer
who is compelled to pay by the holder, the drawer will be liable
to the indorser so compelled to pay.

141
Liability of Acceptor:
The acceptor, by accepting the instrument, engages that he will pay it
according to the tenor of his acceptance, and admits:
1) the existence of the drawer, the genuineness of his signature,
and his capacity and authority to draw the instrument; and
2) the existence of the payee, and his then capacity to indorse.

What if the bill was issued for P4,000, and the holder changed it to
P40,000. It was then presented for acceptance. It was accepted. How much
can be enforcer against the acceptor?
There are 2 views:
1) he should pay P40,000, since that is the tenor of the
acceptance.
140 Sec. 61, NIL.
141 Sec. 62, NIL.

2)

- 13 He should only pay P4,000. According to Sec. 132, acceptance is
the assent to the order of the drawer. And here, the order was
only to pay for P4,000. Also, under Sec. 124, even with material
142
alteration, HIDC can only enforce it for the original amount.

Acceptor precluded from:
a) Setting-up the defense that the drawer is non-existent or
fictitious;
b) He cannot claim that the drawers signature is a forgery;
c)
He cannot escape liability by alleging want of consideration
between him and the drawer.

Note: Acceptor must first accept before he is burdened by the above
liabilities. Payment of the amount of the check implies not only acceptance
143
but also compliance with the drawees obligation.

144
Liability of person negotiating by delivery or qualified indorsement:
Every person negotiating an instrument by delivery or by a qualified
indorsement warrants:
1) That the instrument is genuine and in all respects what it
purports to be;
2) That he has good title to it;
3) That all prior parties had capacity to contract;
4) That he has no knowledge of any fact which would impair the
validity of the instrument or render it valueless.
5) But, when negotiation is by delivery only, the warranty extends
in favor of no holder other that the immediate transferee.
Number 3 does not apply to persons negotiating public/corporation
securities other than bills or notes.

Note: A qualified indorser does not warrant that the instrument shall be
paid. He is liable only if the maker or acceptor is insolvent, and he knew of
it.

Liability of indorsers:
After an instrument is dishonored by non-payment, indorsers cease to be
secondarily liable, and they become principal debtors whose liability
145
become identical to that of the original obligor.

Who are deemed to be indorsers?
A person placing his signature upon an instrument otherwise than as a
maker, drawer, or acceptor, is deemed to be an indorser, unless he clearly
indicates by appropriate words his intention to be bound in some other
146
capacity.

Liability of different indorsers:

147
1) Irregular Indorser
Where a person, not otherwise a party to the instrument, places thereon
his signature in blank before delivery, he is liable as indorser, in accordance
with the following rules:
a) If the instrument is payable to the order of a third person, he is
liable to the payee and to all subsequent parties.
b) If the instrument is payable to bearer, he is liable to all parties
subsequent to the maker or drawer.
c)
If he signs for the accommodation of the payee, he is liable to
all parties subsequent to the payee.

148
2) General Indorser

142 According to Atty. Jack, the second view is better.

143 PNB v. CA.
144 Sec. 65, NIL.
145 Tuazon v. Heirs of Bartolome Ramos.
146 Sec. 63, NIL.
147 Sec. 64, NIL.
148 Sec. 66, NIL.

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Every indorser who indorses without qualification, warrants to all

subsequent holders in due course:
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 the instrument is, at the time of his indorsement, valid and
subsisting;
e) And in addition, he engages that on due presentment, it shall be
accepted or paid or both, as the case may be, according to its
tenor, and that if it be dishonored and the necessary
proceedings on dishonor be duly taken, he will pay the amount
thereof to the holder, or to any subsequent indorser who may
be compelled to take it.

What is the effect when an indorsers indorses the instrument, but there
is no need for such indorsement, as the instrument may be negotiated by
mere delivery?
Where a person places his indorsement on an instrument negotiable by
149
delivery, he incurs all the liability of an indorser.

150
Order in which indorsers are liable:
As respect one another, indorsers are liable prima facie in the order in
which they indorse; but evidence is admissible to show that, as between or
among themselves, they have agreed otherwise. Joint payees or joint
indorsees who indorse are deemed to indorse jointly and severally.

151
Liability of an agent or broker:
Where a broker or other agent negotiates an instrument without
indorsement, he incurs all the liabilities of persons negotiating by delivery
152
or by qualified indorsement, unless he discloses the name of his
principal and the fact that he is acting only as agent.

How to make persons secondarily liable pay:

Who are primarily liable?
1) For PNs the Maker
2) For BoE the Acceptor

Who are secondarily liable?
1) Drawer
2) Indorsers
Failure to take any of the two steps (presentment and notice of dishonor)
will discharge persons secondarily liable.

To whom presentment for payment made:
1) For PN to the maker.
2) For BoEs The drawee/acceptor.

149 Sec. 67, NIL.

150 Sec. 68, NIL.
151 Sec. 69, NIL.
152 That the instrument is genuine and in all respects what it purports to be;
1)
That he has good title to it;
2)
That all prior parties had capacity to contract;
3)
That he has no knowledge of any fact which would impair the
validity of the instrument or render it valueless.
4)
But, when negotiation is by delivery only, the warranty extends in
favor of no holder other that the immediate transferee.

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