B. TAKEN BEFORE OVERDUE Sec. 57. Rights of holder in due course.

- A holder in
due course holds the instrument free from any defect
One of the requisites of due course is that the holder of title of prior parties, and free from defenses
of the instrument became such before it is overdue. It available to prior parties among themselves, and may
applies to an instrument payable at a fixed or enforce payment of the instrument for the full amount
determinable future time. thereof against all parties liable thereon.
With respect to instruments payable on demand, Sec. Examples (See p. 220)
53 governs w/ the purchase is one of an overdue
instrument. Applicability of Sec. 54

Sec. 53. When person not deemed holder in due This is intended to define the situation in which the
course. - Where an instrument payable on demand is holder must protect himself by refusing to make
negotiated on an unreasonable length of time after its further payments.
issue, the holder is not deemed a holder in due
course. 1. it is applicable only where the obligation
incurred by the holder of a bill or note is such
What constitutes a reasonable time? that upon discovering the infirmity in the
instrument, he is relieved from all further
Sec. 193. Reasonable time, what constitutes. - In legal obligations to make further payments
determining what is a "reasonable time" regard is to
be had to the nature of the instrument, the usage of where the note has been transferred to him in
trade or business with respect to such instruments, consideration of his promise to make future paymenrs
and the facts of the particular case.. to his transferor. In that case, if it should turn out that,
by reason of fraud on the part of the transferor, the
D. NOTICE OF INFIRMITY OR DEFECT maker of the note had a defense thereto, the
transferee would be under no obligation to pay the
Sec. 54. Notice before full amount is paid. - Where
balance of the amount that he had agreed to pay the
the transferee receives notice of any infirmity in the
transferor.
instrument or defect in the title of the person
negotiating the same before he has paid the full 2. It does not apply where the holder has given
amount agreed to be paid therefor, he will be deemed for the paper his promise which he must
a holder in due course only to the extent of the perform, as for instance, when he has
amount therefore paid by him. incurred liability to a third person. In such a
case, he is in the same position and entitled
a. Effect of notice before full payment
to the same protection as one who has paid
for the instrument in money or property at the
1. No amount has yet been paid
time of the transfer.
Where an instrument has been taken but the
Illustrative Case p. 221
purchaser has not yet paid anything, and he receives
notice of infirmity in the instrument or defect in the title Sec. 55. When title defective. - The title of a person
of the holder, he is relieved from the obligation to who negotiates an instrument is defective within the
make payment. If he does so, he is not entitled to the meaning of this Act when he obtained the instrument,
same protection as a holder in due course. or any signature thereto, by fraud, duress, or force
and fear, or other unlawful means, or for an illegal
The term paid is not limited to the payment of money,
consideration, or when he negotiates it in breach of
but includes the performance in any other manner of
faith, or under such circumstances as amount to a
an obligation.
fraud.
Examples (see p. 220)
Defects of title in general
2. An amount has been paid
1. Defects of title are defined to cover all those
Where the instrument has been transferred to him in situations which are known as personal or
consideration of his promise to make future payments equitable defenses and also to cover those
to his transferor, he is under no legal obligation to pay equities of ownership where there is a
the balance of the amount he has agreed to pay on breach of faith in negotiation.
discovering the infirmity or defect. If he does, he can 2. Infirmities must include things that are wrong
be considered a holder in due course only to the with the instrument itself as distinguished
extent of the amount theretofore paid to him. from those things that are lacking in the
contracts on the instruments
 (Sec. 13-16/21,23,124,125) 5. Lack of bad faith

When title of a person defective In order to constitute notice, the holder must have had
actual or chargeable knowledge of the infirmity or
1. In the acquisition – when he obtained the defect (Sec. 56) or must have had acted in bad faith
instrument or any signature thereto by fraud, (Sec. 55)
duress, or force and fear or other unlawful
means, or for an illegal consideration. What constitutes notice of infirmity or defect

2. In the negotiation – when he negotiates the In order to constitute notice, the transferee must have
instrument in breach of faith, or under such actual knowledge of the infirmity in the instrument or
circumstances as amount to a fraud. Duress defect; in the title of the indorser or knowledge of such
or force and fear include all acts which facts that his action in taking the instrument amounts
overcome the signer’s will. to bad faith.

Notice that if the instrument has been dishonored, Actual knowledge is usually shown by the instrument
any defense against the instrument after the itself.
instrument has been acquired does not prevent a
1. Mere negligence to make inquiries not
holder from qualifying as a holder in due course.
sufficient
Example (see p.218)
(Sec. 54/56) negligence in itself is not sufficient to
3. Bad faith of an agent constitute notice since it is not the equivalent of either
actual knowledge or bad faith. Actual knowledge is
Knowledge of an agent acting within the scope of his usually shown by the instrument itself.
authority is a constructive knowledge of the principal
and will render the principal not a holder in due the test is not that of negligence, but rather, did the
course. transferee have notice of the infirmity or defect or
have a reasonable suspicion of the same?

2. Knowledge amounting to bad faith

Good faith taker and negotiator
There is difference between the existence of
The object of sec. 55, in connection with Sec. 52 is to suspicious circumstances and actual suspicion of the
prevent one from becoming a holder in due course holder.
who takes an instrument with notice that his transferor
is not acting honestly. It is not necessary that the buyer of the instrument
had notice or knowledge of the exact fraud or the
It emphasizes honesty on the negotiator as brought to particulars thereof, committed by the assignor, since
the notice of the taker. all that is required is knowledge of such facts that his
action in taking the instrument amounted to bad faith.
Examples p. 224
Examples (see p. 233)
Sec. 56. What constitutes notice of defect. - To
constitutes notice of an infirmity in the instrument or 3. Effect of notice of defect
defect in the title of the person negotiating the same,
the person to whom it is negotiated must have had Knowledge or chargeable notice of any defect, at the
actual knowledge of the infirmity or defect, or time of taking of an instrument, which destroys the
knowledge of such facts that his action in taking the status of a holder as a holder in due course, opens all
instrument amounted to bad faith. defenses otherwise cut off against him and not merely
that relating to the defect of which he had notice.
4. Notice at time of negotiation
Notice to the agent is ordinarily deemed notice to the
the status of a holder in due course can be predicated principal and notice to a partner is notice to the
only on a negotiation, since one of the requirements partnership.
or conditions of holder-in-due course status is at the
time of the instrument was negotiated to him, he had 4. Doctrine of constructive notice not applicable
no notice of any infirmity in the instrument or defect in - has never been applied to commercial paper.
the title of the person negotiating it.
The true test as to negotiable paper is that of good or
However, every holder is deemed prima facie to be a bad faith.
holder in due course. (sec 59)
A notice of lis pendens affecting land is applicable day as previously agreed upon, defendant Gatchalian
only to a person who is dealing with the land itself, issued a "Stop Payment Order" on the check, with the
and a purchaser of a negotiable instrument secured drawee bank. The CFI of Manila then ordered
by a mortgage on the land is not dealing in land, and defendants to pay the plaintiff the sum of P600 with
constructive record notice of an infirmity in the legal interest until paid. In this action, defendants seek
instrument does not amount to bad faith. to recover the value of the check, contending that
plaintiff is not a holder in due course.
Facts that are not notice
ISSUE: WON plaintiff is a holder in due course?
Under the US Uniform Commercial Code, knowledge
of the following facts, standing alone, is not notice of a HELD: Under the Negotiable Instruments Law,
defense or claim if the holder has knowledge of the Section 52 (c) provides that a holder in due course is
fact: one who takes the instrument "in good faith and for
value;" and Section 52 (d), that in order that one may
1. the instrument is antedated or postdated; be a holder in due course it is necessary that "at the
2. it was issued or negotiated in return for an time the instrument was negotiated to him "he had no
executory promise or accompanied by a notice of any . . . defect in the title of the person
separate agreement, unless the purchaser negotiating it;" and lastly Section 59, that every holder
has notice that a defense or claim has arisen is deemed prima facie to be a holder in due course. In
from the terms thereof. the case at bar the rule that a possessor of the
3. Any party has signed for an accommodation instrument is prima facie a holder in due course does
party; not apply because there was a defect in the title of the
4. An incomplete instrument has been holder (Manuel Gonzales), because the instrument is
completed, unless the purchaser has notice not payable to him or to bearer.
of any improper completion;
5. Any person negotiating the instrument is or On the other hand, the stipulation of facts indicated
was a fiduciary; by the appellants in their brief, like the fact that the
6. There has been default in payment of drawer had no account with the payee; that the holder
interest on the instrument or in payment of did not show or tell the payee why he had the check in
any other instrument except one of the same his possession and why he was using it for the
series. payment of his own personal account — show that
holder's title was defective or suspicious, to say the
In addition, the filing or recording of a document does least. As holder's title was defective or suspicious, it
not of itself constitute notice to a person who would cannot be stated that the payee acquired the check
otherwise qualify as a holder in due course. To be without knowledge of said defect in holder's title, and
effective, notice must be received at such time and in for this reason the presumption that it is a holder in
such manner as to give the holder a reasonable due course or that it acquired the instrument in good
opportunity to act on the information. faith does not exist. And having presented no
evidence that it acquired the check in good faith, it
Notice must be received before the holder receives
(payee) cannot be considered as a holder in due
the instrument; otherwise, later notice is irrelevant.
course. In other words, under the circumstances of
E. GOOD FAITH the case, instead of the presumption that payee was a
holder in good faith, the fact is that it acquired
VICENTE DE OCAMPO & CO. VS. ANITA possession of the instrument under circumstances
GATCHALIAN that should have put it to inquiry as to the title of the
holder who negotiated the check to it. The burden
(GR No. L 15126 ;Nov. 30, 1961) –
was, therefore, placed upon it to show that
Facts: Herein defendants issued a check amounting notwithstanding the suspicious circumstances, it
to P600 to one Manuel Gonzales, who represented acquired the check in actual good faith
himself as authorized by the owner of the car,
In the case at bar as the payee acquired the check
Ocampo Clinic, which will be shown to the owner as
under circumstances which should have put it to
evidence of defendants’ good faith in the intention to
inquiry, why the holder had the check and used it to
purchase the said car. Without knowledge of this
pay his own personal account, the duty devolved
transaction, plaintiff received from Gonzales the
upon it, plaintiff-appellee, to prove that it actually
subject check for the payment of the hospitalization of
acquired said check in good faith. The stipulation of
his wife. On the failure of Gonzales to appear the day
facts contains no statement of such good faith, hence,
following, to bring the car and its certificate of
plaintiff payee has not proved that it acquired the
registration and to return the check on the following
check in good faith and may not be deemed a holder
in due course thereof. It was payee's duty to ascertain A holder cannot claim it acted in good faith when it
from the holder Manuel Gonzales what the nature of accepted and discounted post-dated crossed checks
the latter's title to the check was or the nature of his from the payee, when it was all too aware that the
possession. Having failed in this respect, we must subject checks were crossed and bore restrictions
declare that plaintiff-appellee was guilty of gross that they were for deposit to payee’s account only;
neglect in not finding out the nature of the title and hence, could not be further negotiated.
possession of Manuel Gonzales, amounting to legal
absence of good faith, and it may not be considered Note that the law does not absolutely bar a holder
as a holder of the check in good faith. To such effect who is not a holder in due course from recovering on
is the consensus of authority. the checks. The holder may recover from the party
who indorsed/encashed the checks “If the latter has
Additional Notes: no valid excuse for refusing payment.”

Gross neglect sec 56.

such as the fact that appellants had no obligation or
liability to the Ocampo Clinic; that the amount of the Sec. 56. What constitutes notice of defect. - To
check did not correspond exactly with the obligation constitutes notice of an infirmity in the instrument
of Matilde Gonzales to Dr. V. R. de Ocampo; and that or defect in the title of the person negotiating the
the check had two parallel lines in the upper left hand
same, the person to whom it is negotiated must
corner, which practice means that the check could
only be deposited but may not be converted into cash have had actual knowledge of the infirmity or
— all these circumstances should have put the defect, or knowledge of such facts that his action
plaintiff-appellee to inquiry as to the why and in taking the instrument amounted to bad faith.
wherefore of the possession of the check by Manuel
Gonzales, and why he used it to pay Matilde's
account. CELY YANG VS. CA

Gross neglect sec 56. (GR No. 138074; Aug. 15, 2003)

Sec. 56. What constitutes notice of defect. - To Facts: Cely Yang and Prem Chandiramani were to
constitutes notice of an infirmity in the instrument exchange dollar drafts and checks with the difference
or defect in the title of the person negotiating the to be divided equally as their profit. Chandiramani did
same, the person to whom it is negotiated must not appear at the rendezvous and Ranigo, Yang’s
have had actual knowledge of the infirmity or representative, allegedly lost the two cashier’s checks
defect, or knowledge of such facts that his action and the dollar draft bought by petitioner. Ranigo
in taking the instrument amounted to bad faith. reported the alleged loss of the checks and the dollar
draft to Liong. Liong, in turn, informed Yang, and the
Effects of Crossing a Check loss was then reported to the police. The checks and
the dollar draft were not lost because Chandiramani
Crossing a check relates to the mode of making
was able to get hold of said instruments, without
payment, the drawer intending the check to be
delivering the exchange consideration consisting of
deposited only by the rightful person i.e., the payee
the PCIB manager’s check and the Hang Seng Bank
named therein.
dollar draft. Yang requested FEBTC and Equitable to
In order to preserve the worthiness of checks, stop payment on the instruments she believed to be
crossing of a check should have the following effects: lost. Both banks complied with her request, but upon
the representation of PCIB, FEBTC subsequently
(a) The check may not be encashed but only lifted the stop payment order on FEBTC Dollar Draft
deposited in the bank; No. 4771. Yang lodged a Complaint for injunction and
damages against Equitable, Chandiramani, and David
(b) The check may be negotiated only once – to one (payee of the subject checks). The Court rendered
who has an account with a bank; and judgment in favor of defendant Fernando David
(c) The act of crossing the check serves as warning to against the plaintiff Cely Yang and declaring the
the holder that the check has been issued for a definit former entitled to the proceeds of the two (2) cashier’s
e purpose so that he must inquire if he has received checks.
the check pursuant to that purpose, otherwise, he is ISSUE: WON Fernando David is a holder in due
not a holder in due course . (State Investment House course?
Inc. vs. CA; Bataan Cigar and Cigarette Factory vs.
CA) HELD: Yes. Petitioner fails to point any
circumstance which should have put David on inquiry
as to the why and wherefore of the possession of the especially if the financial condition of the issuer of the
checks by Chandiramani. David was not privy to the instrument is not well-known.
transaction between petitioner and Chandiramani.
Instead, Chandiramani and David had a separate b. Taking of instrument for value.
dealing in which it was precisely Chandiramani’s duty
Right to enforce an instrument free from certain
to deliver the checks to David as payee. The evidence
defenses; and a holder for value may enforce the
shows that Chandiramani performed said task to the
liability of an accommodation party notwithstanding
letter. Petitioner admits that David took the step of
that at the time of taking the instrument he knew him
asking the manager of his bank to verify from FEBTC
to be only an accommodation party. (sec. 29)
and Equitable as to the genuineness of the checks
and only accepted the same after being assured that The time when and the extent to which value is given
there was nothing wrong with said checks. At that is material on the question of the status as a holder in
time, David was not aware of any "stop payment" due course.
order. Under these circumstances, David thus had no
obligation to ascertain from Chandiramani what the See sec. 52/54
nature of the latter’s title to the checks was, if any, or
Sec. 54. Notice before full amount is paid. - Where
the nature of his possession. Thus, we cannot hold
the transferee receives notice of any infirmity in the
him guilty of gross neglect amounting to legal
instrument or defect in the title of the person
absence of good faith, absent any showing that there
negotiating the same before he has paid the full
was something amiss about Chandiramani’s
amount agreed to be paid therefor, he will be deemed
acquisition or possession of the checks. David did not
a holder in due course only to the extent of the
close his eyes deliberately to the nature or the
amount therefore paid by him.
particulars of a fraud allegedly committed by
Chandiramani upon the petitioner, absent any Sec. 26. What constitutes holder for value. - Where
knowledge on his part that the action in taking the value has at any time been given for the instrument,
instruments amounted to bad faith. Moreover, the the holder is deemed a holder for value in respect to
factual circumstances in De Ocampo and in Bataan all parties who become such prior to that time.
Cigar are not present in this case. For here, there is
no dispute that the crossed checks were delivered Sec. 27. When lien on instrument constitutes
and duly deposited by David, the payee named holder for value. — Where the holder has a lien on
therein, in his bank account. In other words, the the instrument arising either from contract or by
purpose behind the crossing of the checks was implication of law, he is deemed a holder for value to
satisfied by the payee. the extent of his lien.

F. HOLDER FOR VALUE c. Three methods of giving value for an

instrument
Sec. 24. Presumption of consideration. - Every
negotiable instrument is deemed prima facie to have Under the US Uniform Commercial Code, a holder
been issued for a valuable consideration; and every takes the instrument for value-
person whose signature appears thereon to have
become a party thereto for value. a. To the extent that the agreed consideration
has been performed or that he acquires a
Sec. 25. Value, what constitutes. — Value is any security interest in or a lien on the instrument
consideration sufficient to support a simple contract. otherwise by legal process;
An antecedent or pre-existing debt constitutes value; b. When he takes the instrument in payment of
and is deemed such whether the instrument is or as security for an antecedent claim
payable on demand or at a future time. against any person whether or not the claim
is due.
a. Adequacy of consideration c. When he gives a negotiable instrument for it
or makes an irrevocable commitment to a
Any consideration sufficient to support a simple
third person.
contract is value (sec. 25)

It is not necessary that the consideration should be

adequate (see Art. 1355, Civil Code) or represent full STELCO MARKETING CORPORATION VS. CA
value.
(GR No. 96160 ; June 17, 1992) – Stelco Marketing
The purchase of an instrument at a discount does not Corporation is engaged in the distribution and sale to
necessarily prevent one from being a bona fide holder the public of structural steel bars. On 7 different
occasions in September and October 1980, it sold to on the basis of the averments of the complaint but
RYL Construction, Inc. quantities of steel bars of was shortly dissolved upon the filing of a counter-
various sizes and rolls of G.I. wire. These bars and bond by STEELWELD. RYL could no longer be
wire were delivered at different places at the located and could not be served with summons. It
indication of RYL Construction, Inc. The aggregate never appeared. Only STEELWELD filed an answer,
price for the purchases was P126,859.61. Although under date of 16 July 1985. Judgment was rendered
the corresponding invoices issued by STELCO on 26 June 1986. The judgment sentenced Steelweld
stipulated that RYL would pay "COD" (cash on to pay to Stelco the amount of P126,129.86 with legal
delivery), the latter made no payments for the rate of interest from 9 May 1985, when the case was
construction materials thus ordered and delivered instituted until fully paid, plus another sum equivalent
despite insistent demands for payment by the former. to 25% of the total amount due as and for attorney's
On April 4, 1981, RYL gave to Armstrong Industries fees.
— described by STELCO as its "sister corporation"
and "manufacturing arm" — a check drawn against From this adverse judgment STEELWELD appealed
Metrobank in the amount of P126,129.86, numbered to the Court of Appeals 17 and there succeeded in
765380 and dated 4 April 1981. That check was a reversing the judgment..
company check of another corporation, Steelweld
STELCO's motion for reconsideration was denied by
Corporation of the Philippines, signed by its President,
the Appellate Tribunal's resolution dated 13
Peter Rafael Limson, and its Vice-President, Artemio
November 1990. STELCO appealed.
Torres. The check was issued by Limson at the
behest of his friend, Romeo Y. Lim, President of RYL. …as far as Steelweld is concerned, there was no
Romeo Lim had asked Limson for financial commercial transaction between said appellant and
assistance, and the latter had agreed to give Lim a appellee. Moreover, there is no evidence that
check only by way of accommodation, "only as appellee Stelco Marketing became a holder for value.
guaranty but not to pay for anything." Why the check Nowhere in the check itself does the name of Stelco
was made out in the amount of P126,129.86 is not Marketing appear as payee, indorsee or depositor
explained. The check was actually issued in said thereof. Finally, appellee's complaint is for the
amount of P126,129.86, and as already stated, was collection of the unpaid accounts for delivery of steels
given by R.Y. Lim to Armstrong, Industries, in bars and construction materials. It having been
payment of an obligation. When the latter deposited established that appellee had no commercial
the check at its bank, it was dishonored because transaction with appellant Stelco, appellee had no
"drawn against insufficient funds." When so cause of action against said appellant.
deposited, the check bore two (2) indorsements, that
of "RYL Construction," followed by that of "Armstrong
Industries." On account of the dishonor of Metrobank
ISSUE NO. 1 WON the fourth condition, i.e. as to
Check 765380, and on complaint of Armstrong
notice, for a holder in due course is applicable to an
Industries (through a Mr. Young), Rafael Limson and
accommodation party?
Artemio Torres were charged in the Regional Trial
Court of Manila with a violation of Batas Pambansa HELD: "A holder in due course," says the law, "is a
Bilang 22. They were acquitted in a decision rendered holder who has taken the instrument under the
on 28 June 1984 "on the ground that the check in following conditions: (a) That it is complete and
question was not issued by the drawer 'to apply on regular upon its face; (b) That he became the holder
account for value,' it being merely for accommodation of it before it was overdue, and without notice that it
purposes." That judgment however conditioned the had been previously dishonored, if such was the fact;
acquittal with the pronouncement that "this is not (c) That he took it in good faith and for value; (d) That
however to release Steelweld Corporation from its at the time it was negotiated to him, he had no notice
liability under Sec. 29 of the Negotiable Instruments of any infirmity in the instrument or defect in the title of
Law for having issued it for the accommodation of the persons negotiating it." As regards an
Romeo Lim." Eleven months later — and some 4 accommodation party (such as STEELWELD), the
years after issuance of the check — in May, 1985, fourth condition, i.e., lack of notice of any infirmity in
STELCO filed with the Regional Trial Court of the instrument or defect in title of the persons
Caloocan City a civil complaint against both RYL and negotiating it, has no application. This is because
STEELWELD for the recovery of the value of the steel Section 29 of the law above quoted preserves the
bars and wire sold to and delivered to RYL in the right of recourse of a "holder for value" against the
amount of P126,129.86, plus 18% interest from 20 accommodation party notwithstanding that "such
August 1980 and 25% of the total amount sought to holder, at the time of taking the instrument, knew him
be recovered as and by way of attorney's fees. A to be only an accommodation party."
preliminary attachment was issued by the trial court
ISSUE NO.2: WON STELCO ever became a holder Sec. 29. Liability of accommodation party. - An
in due course of Check 765380, a bearer instrument accommodation party is one who has signed the
within the contemplation of the Negotiable instrument as maker, drawer, acceptor, or
Instruments Law? HELD: NO. It never did. There is no indorser, without receiving value therefor, and for
evidence whatever that STELCO's possession of the purpose of lending his name to some other
Check 765380 ever dated back to any time before the person. Such a person is liable on the instrument
instrument's presentment and dishonor. There is no to a holder for value, notwithstanding such
evidence whatsoever that the check was ever given to holder, at the time of taking the instrument, knew
it, or indorsed to it in any manner or form in payment him to be only an accommodation party.
of an obligation or as security for an obligation, or for
any other purpose before it was presented for 7. RIGHTS OF HOLDERS NOT IN DUE
payment. On the contrary, STELCO never became a COURSE
holder for value and that "(n)owhere in the check itself
Sec. 57. Rights of holder in due course. - A holder
does the name of Stelco Marketing appear as payee,
in due course holds the instrument free from any
indorsee or depositor thereof." What the record shows
defect of title of prior parties, and free from
is that: (1) the STEELWELD company check in
defenses available to prior parties among
question was given by its president to R.Y. Lim; (2) it
themselves, and may enforce payment of the
was given only by way of accommodation, to be "used
instrument for the full amount thereof against all
as collateral for another obligation;" (3) in breach of
parties liable thereon.
the agreement, however, R.Y. Lim indorsed the check
to Armstrong in payment of an obligation; (4) Rights of a holder in due course
Armstrong deposited the check to its account, after
indorsing it; (5) the check was dishonored. The record 1. He may sue on the instrument in his own
does not show any intervention or participation by name (Sec. 51)
STELCO in any manner or form whatsoever in these 2. He may receive payment and if the payment
transactions, or any communication of any sort is in due course, the instrument is
between STEELWELD and STELCO, or between discharged.
either of them and Armstrong Industries, at any time 3. He holds the instrument free from any defect
before the dishonor of the check. The record does of title prior parties;
show that after the check had been deposited and 4. He holds the instrument free from defenses
dishonored, STELCO came into possession of it in available to prior parties among themselves;
some way, and was able, several years after the 5. He may enforce payment of the instrument
dishonor of the check, to give it in evidence at the trial for the full amount thereof against all parties
of the civil case it had instituted against the drawers of liable thereon. (sec. 54)
the check (Limson and Torres) and RYL. Possession 6. SALAS VS. CA
of a negotiable instrument after presentment and
dishonor, or payment, is utterly inconsequential; it Facts: Juanita Salas (Petitioner) bought a
does not make the possessor a holder for value within motor vehicle from the Violago Motor Sales
the meaning of the law; it gives rise to no liability on Corporation (VMS) as evidenced by a
the part of the maker or drawer and indorsers. It is promissory note. This note was subsequently
clear rom the relevant circumstances that STELCO endorsed to Filinvest Finance & Leasing
cannot be deemed a holder of the check for value. It Corporation (private respondent) which
does not meet two of the essential requisites financed the purchase. Petitioner defaulted
prescribed by the statute. It did not become "the in her installments allegedly due to a
holder of it before it was overdue, and without notice discrepancy in the engine and chassis
that it had been previously dishonored," and it did not numbers of the vehicle delivered to her and
take the check "in good faith and for value." Neither is those indicated in the sales invoice,
there any evidence whatever that Armstrong certificate of registration and deed of chattel
Industries, to whom R.Y. Lim negotiated the check, mortgage, which fact she discovered when
accepted the instrument and attempted to encash it in the vehicle figured in an accident. This failure
behalf, and as agent of STELCO. On the contrary, the to pay prompted private respondent to
indications are that Armstrong was really the intended initiate an action for a sum of money against
payee of the check and was the party actually injured petitioner before the Regional Trial Court.
by its dishonor; it was after all its representative (a Mr. Imputing fraud, bad faith and
Young) who instituted the criminal prosecution of the misrepresentation against VMS for having
drawers, Limson and Torres, albeit unsuccessfully. delivered a different vehicle to petitioner, the
latter prayed for a reversal of the trial court's
Additional Notes:
 decision so that she may be absolved from purpose so that he must inquire if he has
the obligation under the contract. received the check pursuant to that purpose,
Petitioner's motion for reconsideration was otherwise he is not a holder in due course. It
denied; hence, the present recourse. results therefore that when State Investment
ISSUE: WON VMS’ fraud in the conduct House rediscounted the check knowing that
of its business, specifically in the delivery it was a crossed check he was knowingly
of a defective truck, would release violating the avowed intention of crossing the
petitioner-maker from paying First check. Furthermore, his failure to inquire
Finance the amount stated in the note? from the holder, party defendant New
HELD: No. The note was a negotiable Sikatuna Wood Industries, Inc., the purpose
instrument and was validly negotiated to for which the three checks were cross
private respondent who is a holder in due despite the warning of the crossing, prevents
course and as such holds the instrument free him from being considered in good faith and
from defenses available to prior parties thus he is not a holder in due course. Being
among themselves. This being so, petitioner not a holder in due course, plaintiff is subject
cannot set up against respondent the to personal defenses, such as lack of
defense of nullity of the contract of sale consideration between appellants and New
between her and VMS. Sikatuna Wood Industries. Note that under
State Investment House vs. CA the facts the checks were postdated and
New Sikatuna Wood Industries, Inc. issued only as a loan to New Sikatuna Wood
requested for a loan from Chua. The latter Industries, Inc. if and when deposits were
agreed to grant the same subject to the made to back up the checks. Such deposits
condition that the former should wait until were not made, hence no loan was made,
December 1980 when he would have the hence, the three checks are without
money. In view of this agreement, private consideration (Sec. 28, Negotiable
respondent Chua issued three (3) "crossed Instruments Law).
checks" payable to New Sikatuna Wood
Industries, Inc. all postdated December 22, Sec. 14. Blanks; when may be filled. - Where the
1980. Subsequently, New Sikatuna entered instrument is wanting in any material particular, the
into an agreement with herein petitioner person in possession thereof has a prima facie
State Investment House, Inc. whereby New authority to complete it by filling up the blanks therein.
Sikatuna assigned and discounted with And a signature on a blank paper delivered by the
petitioner eleven (11) postdated checks person making the signature in order that the paper
including the aforementioned three (3) may be converted into a negotiable instrument
postdated checks issued by Chua. The operates as a prima facie authority to fill it up as such
checks, however, were dishonored by for any amount. In order, however, that any such
reason of "insufficient funds", "stop payment" instrument when completed may be enforced against
and "account closed", respectively. Petitioner any person who became a party thereto prior to its
claims that despite demands on Chua to completion, it must be filled up strictly in accordance
make good said checks, the latter failed to with the authority given and within a reasonable time.
pay the same necessitating the former to file But if any such instrument, after completion, is
an action for collection. When the CA negotiated to a holder in due course, it is valid and
reversed the trial court ruling favoring State effectual for all purposes in his hands, and he may
Investment House, the latter elevated the enforce it as if it had been filled up strictly in
issue before the SC. accordance with the authority given and within a
7. ISSUE: WON petitioner is a holder in due reasonable time.
course as to entitle it to proceed against
private respondents Chua for the amount Sec. 16. Delivery; when effectual; when presumed.
stated in the dishonored checks? - Every contract on a negotiable instrument is
8. HELD: The Intermediate Appellate Court incomplete and revocable until delivery of the
(now Court of Appeals), correctly elucidated instrument for the purpose of giving effect thereto. As
that the effects of crossing a check are: the between immediate parties and as regards a remote
check may not be encashed but only party other than a holder in due course, the delivery,
deposited in the bank; the check may be in order to be effectual, must be made either by or
negotiated only once to one who has an under the authority of the party making, drawing,
account with a bank; and the act of crossing accepting, or indorsing, as the case may be; and, in
the check serves as a warning to the holder such case, the delivery may be shown to have been
that the check has been issued for a definite conditional, or for a special purpose only, and not for
the purpose of transferring the property in the is the occasion of the loss. The one who made the
instrument. But where the instrument is in the hands wrong possible is estopped by his neglect.
of a holder in due course, a valid delivery thereof by
all parties prior to him so as to make them liable to Real defenses available against a holder in due
him is conclusively presumed. And where the course
instrument is no longer in the possession of a party
Personal defenses or equities – defenses that cannot
whose signature appears thereon, a valid and
be set up against a holder in due course.
intentional delivery by him is presumed until the
contrary is proved. They are cut-off by negotiation of the instrument to a
holder in due course.
Importance and foundation of due course holding
This rule which permits a holder in due course to take
1. A holder in due course acquires a right better
an instrument free of all personal defenses is a
than any of his predecessors because he
necessity if commercial papers are to circulate freely
takes the instrument free of most defenses
and prospective purchasers are to accept them
available to prior parties among themselves.
routinely and willingly.
The fact that the instrument has been stolen, or
Real defenses – which attach to the instrument itself
negotiated in breach of faith, or has not been
would be available against all persons even as
delivered is no defense against a holder in due
against a holder in due course (Sec. 58)
course.
In the case of immediate parties, all defenses are
A holder in due course may enforce the full amount of
available.
the instrument without regard to the amount he paid
for it. A holder not a holder in due course acquires the
instrument subject to all defenses, whether personal
EXPN:
or real, because he is treated as a mere assignee of a
Sec. 27. When lien on instrument constitutes non-negotiable paper.
holder for value. — Where the holder has a lien on
Sec. 58. When subject to original defense. - In the
the instrument arising either from contract or by
hands of any holder other than a holder in due course,
implication of law, he is deemed a holder for value to
a negotiable instrument is subject to the same
the extent of his lien.
defenses as if it were non-negotiable. But a holder
Sec. 54. Notice before full amount is paid. - Where who derives his title through a holder in due course,
the transferee receives notice of any infirmity in the and who is not himself a party to any fraud or illegality
instrument or defect in the title of the person affecting the instrument, has all the rights of such
negotiating the same before he has paid the full former holder in respect of all parties prior to the
amount agreed to be paid therefor, he will be deemed latter.
a holder in due course only to the extent of the
PRUDENCIO VS. CA (GR No.; July 14, 1986) – In
amount therefore paid by him.
1955, Concepcion and Tamayo Construction
Sec. 124. Alteration of instrument; effect of. - Enterprise had a contract with the Bureau of Public
Where a negotiable instrument is materially altered Works. The firm needed fund to push through with the
without the assent of all parties liable thereon, it is contract so it convinced spouses Eulalio and Elisa
avoided, except as against a party who has himself Prudencio to mortgage their parcel of land with the
made, authorized, or assented to the alteration and Philippine National Bank for P10,000.00. Prudencio,
subsequent indorsers. without consideration, agreed and so he mortgaged
the land and executed a promissory note for P10k in
But when an instrument has been materially altered favor of PNB. Prudencio also authorized PNB to issue
and is in the hands of a holder in due course not a the P10k check to the construction firm. In December
party to the alteration, he may enforce payment 1955, the firm executed a Deed of Assignment in
thereof according to its original tenor. favor of PNB which provides that any payment from
the Bureau of Public Works in consideration of work
2. One putting negotiable paper on the market done (by the firm) so far shall be paid directly to PNB
is estopped from contesting the – this will also ensure that the loan gets to be paid off
consequences and incidents of his act. before maturity. Notwithstanding the provision in the
Deed of Assignment, the Bureau of Public Works
Where loss has happened, which must fall on one of
asked PNB if it can make the payments instead to the
two (2) innocent persons, it shall be borne by him who
firm because the firm needs the money to buy
construction materials to complete the project. Young) who instituted the criminal prosecution of the
Notwithstanding the provision of the Deed of drawers, Limson and Torres, albeit unsuccessful.
Assignment, PNB agreed. And so the loan matured
without PNB actually receiving any payment from the Defenses in general
Bureau of Public Works. Prudencio, upon learning
Defenses are grounds or reasons pleaded or offered
that no payment was made on the loan, petitioned to
by the defendant in a case, showing why the plaintiff,
have the mortgage cancelled (to save his property
as a matter of law or fact, should not be given the
from foreclosure). The trial court ruled against
relief seeks.
Prudencio; the Court of Appeals affirmed the trial
court. There are two (2) kinds of defenses which may be
interposed to an action upon a negotiable instrument:
ISSUE: WON Prudencio should pay the
real, absolute or universal defenses and personal,
promissory note to PNB?
limited or equitable defenses.
HELD: No. PNB is not a holder in due course.
A holder not a holder in due course takes negotiable
Prudencio is an accommodation party for he signed
instrument subject to all defenses of any party which
the promissory note as maker but he did not receive
would be available in an action on a simple contract
value or consideration therefor. He expected the firm
to pay money.
(accommodated party) to pay the loan – this
obligation was shifted to the Bureau of Public Works Real defenses
by way of the Deed of Assignment). As a general rule,
an accommodation party is liable on the instrument to Those defenses that are available against all parties,
a holder for value/in due course, notwithstanding such both immediate and remote, including holders in due
holder at the time of taking the instrument knew him to course or holders through the latter.
be only an accommodation party. The exception is
They are called real because they attach to the res,
that if the holder, in this case PNB, is not a holder in
that is, the instrument itself regardless of the merits or
due course. The court finds that PNB is not a holder in
demerits of the holder or the conduct or agreement of
due course because it has not acted in good faith
the parties.
when it waived the supposed payments from the
Bureau of Public Works contrary to the Deed of - They challenge the validity of the instrument
Assignment. Had the Deed been followed, the loan itself in its inception. From the standpoint of
would have been paid off at maturity. public policy, they are good against a holder
in due course. The instrument cannot be
STELCO MARKETING CORPORATION VS. CA
enforced by the holder because there is no
(supra , p. 18 ) - STELCO came into possession of it
contract to enforce
in some way, and was able, several years after the
- This does not imply that the instrument is
dishonor of the check, to give it in evidence at the trial
valueless and can never be enforced. It is
of the civil case it had instituted against the drawers of
only unenforceable against the party entitled
the check (Limson and Torres) and RYL. Possession
to set up the defense, but not against those
of a negotiable instrument after presentment and
to whom such a defense is not available
dishonor, or payment, is utterly inconsequential; it
such as, in the case of forgery, persons
does not make the possessor a holder for value within
precluded from setting it up.
the meaning of the law; it gives rise to no liability on
- The case of the real or absolute defense is
the part of the maker or drawer and indorsers. It is
presented where the contract is void (not
clear from the relevant circumstances that STELCO
merely voidable) or where the contract itself
cannot be deemed a holder of the check for value. It
is declared void by law.
does not meet two of the essential requisites
- A real defense applies only to the person
prescribed by the statute. It did not become "the
who has made or drawn the instrument.
holder of it before it was overdue, and without notice
that it had been previously dishonored," and it did not Examples of real defenses see p. 240
take the check "in good faith and for value." Neither is
there any evidence whatever that Armstrong (Sec. 55 – personal defenses)
Industries, to whom R.Y. Lim negotiated the check,
accepted the instrument and attempted to encash it in Sec. 15, Sec. 23
behalf, and as agent of STELCO. On the contrary, the
Sec. 124 first sentence, Sec. 125)
indications are that Armstrong was really the intended
payee of the check and was the party actually injured Sec. 88, 118, 121, 122
by its dishonor; it was after all its representative (a Mr.
Personal Defenses
 - Which grow out of the agreement or conduct Notes:
of a particular person in regard to the
instrument which renders it inequitable for When there is an intermediary, M and P are not
him, though holding the legal title, to enforce immediate parties.
it against the party sought to be made liable
M and B are remote parties; A, P and B consequently.
but which are not available against a holder
in due course (Sec. 57) or holders with all M, P, and A are prior parties w/ respect to B.
the rights of a holder in due course (sec. 59)
- They are called personal defenses because As between the immediate parties, no distinction need
they are available only against the person or be made between real and personal defenses.
subsequent holder who stands in privity with
When the instrument has passed to a remote party in
him.
relation to a prior party, the latter can only set up real
- They are called personal defenses because
defense.
they are available only against the person or
subsequent holder who stands in privity with Defenses available against a holder not a holder
him. in a due course
- They can be used only between original
parties or immediate parties or against one A mere assignee or one who is not a holder in due
who is not a holder in due course on the course takes the instrument subject to all valid claims
same basis as if the instrument is non- of any party which would be available in an action on
negotiable. A holder in due course takes the an ordinary contract.
instrument free from personal defenses.
- While a real defense questions the legal “Same defenses” does not limit the defenses since
validity if the instrument itself, a personal the section is not exclusive and does not prevent
defense affects only the validity of the pleading other defenses of an entirely different
agreement for which the instrument was character not dealt with or covered in such section but
issued. specifically permitted by any other statute.

Examples of personal defenses (see p. 241) Defenses subject to estoppel

Sec. 13, 28, 16, 55, 124, 125, 58, 50. 121, 122, 20, 7 Real and personal defenses are subject to estoppel
NCC Art. 1413, Art. 1869) since the rules and principles governing estoppel
generally are applied to commercial instruments. All
Spoliation – alteration made by a stranger to an the defenses such as forgery or illegality mat be
instrument. precluded by estoppel.

Immediate, remote and prior parties explained Fraud in factum and fraud in inducement
distinguished
1. Immediate parties have direct contractual
relation to each other. 1. Fraud in the execution or fraud in factum

Immediacy signifies privity not mere proximity. Exists when a person, without negligence, has signed
an instrument which was in fact a negotiable
2. Remote parties – one who takes title to an instrument, but was deceived as to the character of
instrument by negotiation from either the the instrument and without knowledge of it, as where
original payee or any subsequent holder. a note was signed by one under the belief that he was
signing as a witness to a deed, or where the signature
Parties who are not in direct contractual relation to
was procured by fraudulent use of carbon paper.
each other.
However, if the prior party is not a holder in due
3. Prior parties
course, the instrument is subject to all defenses (Sec.
Illustration see p. 242 58)

M (PN) P(PAYEE) A (INDORSE) B Kind of fraud: real defense (sec. 14) because there is
no contract. It implies that the person did not know
Notes: what he was signing, but where the signer by the
exercise of reasonable diligence could have
M and P are immediate parties discovered the nature of the instrument, the fraud
cannot be considered a real defense, as where a
M (PN) X(INTERMEDIARY) P (PAYEE)
person who can read, signed a note but failed to 1. Rights as a mere transferee
read it.
If a person is not a holder in due course, his rights are
2. Fraud in the inducement or simple fraud those of a transferee of a non-negotiable instrument
so that he is not free from personal defenses.
It is that which relates to the quality, quantity, value or
character of the consideration of the instrument. 2. Rights of transferee from a holder in due
course
The signer is led by deception to execute what he
knows is a negotiable instrument and therefore, Sec. 58 provides this exception: a holder, free from
necessarily signed with knowledge that the instrument fraud or illegality, who derives his title from a holder in
would probably pass into the hands of an innocent due course has all the rights of the latter even though
purchaser. he himself is a mere transferee or does not satisfy the
requirements of a holder in due course (Sec. 59)
Here, the deceit is not in the character of the
instrument but in its amount or its terms. It implies Note that there are 2 requisites:
that the signer knew what he was signing but that he
was induced by fraud to sign. a. That he derives his title through a holder in
due course;
b. That he was not himself a party to any fraud
or illegality affecting the instrument

Rights of holder not in due course (Sec. 58)

3. Rights of re-acquirer with a defective title,
(Sec. 14, 16, 51, 53) from a holder in due course.
Right of holder not in due course to receive But a payee or indorsee whose title is defective
payment cannot better it by selling the instrument to a holder in
due course and buying it again.
It does not follow as a legal proposition that simply
because one is not a holder in due course he cannot The principle above seems to apply whether or not
recover on the instrument. The law does not provide the reacquirer was a party to the “illegality or fraud
that a holder not in due course may not, in any case, affecting the instrument.” (Sec. 58)
recover on the instrument.
A holder not in due course should not be permitted to
- If B, for instance, purchase from A an wash an instrument clean by passing it into the hands
overdue negotiable promissory note signed of a holder in due course and then repurchase it. He
by M, B is not a holder in due course but he is remitted to his former position. Similarly, a holder in
may recover from M. (Sec. 51). due course who negotiates the instrument to a holder
- A, if M or A has no valid excuse for refusing other than the one in due course and then reacquires
payment. it, will hold the instrument as a holder in due course.
- The only advantage of a holder who is not a
holder in due course is that the negotiable Important example p. 247-248
instrument is subject to defenses as if it were
non-negotiable. (Sec. 58; Chan Wan vs. Tan Sec. 59. Who is deemed holder in due course. -
Kim) Every holder is deemed prima facie to be a holder
- Where crossed checks were issued by the in due course; but when it is shown that the title
drawer without consideration (Sec. 28) in of any person who has negotiated the instrument
breach of faith (Sec. 55), no right of recourse was defective, the burden is on the holder to
is available to a holder in bad faith against prove that he or some person under whom he
the drawer. (State Investment House vs. claims acquired the title as holder in due course.
IAC) But the last-mentioned rule does not apply in
favor of a party who became bound on the
Right of purchaser from a holder in due course instrument prior to the acquisition of such
defective title.
Whether a holder takes a negotiable instrument free
of equities and defenses that might obtain between When holder presumed a holder in due course
the original parties depends upon the further fact of
his status as a holder in due course or as a taker The presumption arises only in favor of a person who
through such holder. is a holder in the sense (Sec 191) that he is a payee
or indorsee who is in possession of the instrument, or fraud or illegality affecting the instrument, has all
the bearer thereof. the rights of such former holder in respect of all
parties prior to the latter.
1. Proof of being a holder – once the person
through whose hands an instrument has CHARLES FOSSUM VS. FERNANDEZ HERMANOS
passed shows that he is a holder, the
presumption accrues in his favor. He does (GR No. L - 19461)
not have to prove that he acquired the
Herein petitioner was the resident agent in Manila of
instrument under all the circumstances
the American Iron Products Company, Inc. (AIPCI),
required under Sec. 52.
engaged in business in New York City, while
2. Burden of proof on the holder where
Fernandez Hermanos is a general commercial
indorser’s title defective
partnership engaged in business in the Philippines.
The burden of proof shifts to the holder who must Fossum, acting as agent of AIPCI, procured an order
show he is a holder in due course although he is not from respondent to deliver a tail shaft, to be installed
himself a holder in due course. on the ship Romulus . It was stipulated that the tail
shaft would be in accordance with the specifications
A person who acquires the title from a prior holder in contained in a blueprint given to Fossum and that the
due course is referred to as holder through a holder in shaft should be shipped from New York in March or
due course. April 1920. The manufacture and shipment of the
shaft was delayed considerably. Meanwhile AIPCI
Where proof has been offered of the genuineness of had drawn a time draft for $2250, at 60 days, upon
the maker’s and payee’s signatures, the holder is Fernandez Hermanos, for the price of the shaft, and
deemed to be a holder in due course and the duty of payable to Philippine National Bank (PNB). It was
proceeding to offer some proof of fraud or defect presented to Fernandez Hermanos for acceptance,
specified, is cast upon the party alleging it, and, until and was accepted by the firm according to its tenor.
such proof is offered, there is no duty upon the holder Subsequently, the shaft was found not to be in
to prove that he or some other person under whom he conformity with the specifications and was incapable
claims acquired the title as holder in due course. of use for its intended purpose. Upon discovering this,
Fernandez Hermanos refused to pay the draft, and it
EXPN:
remained for a time dishonored in PNB Manila. Later
The holder has no burden of proving that he is a the bank indorsed the draft in blank, without
holder in due course in favor of a party who became consideration, and delivered it to Fossum, who then
bound on the instrument prior to the acquisition of instituted this action against Fernandez Hermanos.
such defective title. In other words, in this case, we The trial court held that the consideration for the draft
revert to the presumption that the holder is a holder in and for its acceptance by Fernandez Hermanos has
due course. completely failed and no action whatever can be
maintained on the instrument by AIPCI, or by any
Impt. Example p. 249-250 other person against whom the defense of failure of
consideration is available.
8. ACCOMMODATION PARTIES
ISSUE: WON Fossum is a holder in due course,
Sec. 29. Liability of accommodation party. - An
such that an action can be maintained on the
accommodation party is one who has signed the
instrument?
instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for HELD: NO. Fossum is far from being a holder in due
the purpose of lending his name to some other course. He was himself a party to the contract which
person. Such a person is liable on the instrument supplied the consideration for the draft, albeit acting in
to a holder for value, notwithstanding such a representative capacity. Also, he procured the
holder, at the time of taking the instrument, knew instrument to be indorsed by the bank and delivered
him to be only an accommodation party. to himself without the payment of value, after it was
overdue, and with full notice that, as between the
9. SHELTER RULE
original parties, the consideration had completely
Sec. 58. When subject to original defense. - In the failed. Under these circumstances, recovery on the
hands of any holder other than a holder in due draft is out of the question. He calls attention,
course, a negotiable instrument is subject to the however, to the familiar rule that a person who is not
same defenses as if it were non-negotiable. But a himself a holder in due course may yet recover
holder who derives his title through a holder in against the person primarily liable where it appears
due course, and who is not himself a party to any that such holder derives his title through a holder in
due course. There is not a line of proof tending to Sec. 61. Liability of drawer. - The drawer by
show that the bank itself was ever a holder in due drawing the instrument admits the existence of
course. It was incumbent on Fossum to show that the the payee and his then capacity to indorse; and
bank was a holder in due course, and can have no engages that, on due presentment, the instrument
assistance from the presumption expressed in sec 59 will be accepted or paid, or both, according to its
of NIL, to the effect that every holder is deemed prima tenor, and that if it be dishonored and the
facie to be a holder in due course. This presumption necessary proceedings on dishonor be duly
arises only in favor of a person who is a holder in the taken, he will pay the amount thereof to the holder
sense defined in sec 191 of NIL, that is, a payee or or to any subsequent indorser who may be
indorsee who is in possession of the draft, or the compelled to pay it. But the drawer may insert in
bearer thereof. Under this definition, in order to be a the instrument an express stipulation negativing
holder, one must be in possession of the note or the or limiting his own liability to the holder.
bearer thereof. (Night & Day Bank vs. Rosenbaum) If
this action had been instituted by the bank itself, the Sec. 66. Liability of general indorser. - Every
presumption that the bank was a holder in due course indorser who indorses without qualification,
would have arisen from the tenor of the draft and the warrants to all subsequent holders in due
fact that it was in the bank's possession; but when the course:chanroblesvirtuallawlibrary
instrument passed out of the possession of the bank
(a) The matters and things mentioned in
and into the possession of Fossum, no presumption
subdivisions (a), (b), and (c) of the next preceding
arises as to the character in which the bank held the
section; and
paper. The bank's relation to the instrument became
past history when it delivered the document to
Fossum; and it was incumbent upon him to show that
the bank had in fact acquired the instrument for value (b) That the instrument is, at the time of his
and under such conditions as would constitute it a indorsement, valid and subsisting;
holder in due course. Moreover, Fossum personally
And, in addition, he engages that, on due
made the contract which constituted the consideration
presentment, it shall be accepted or paid, or both,
for the draft. He was therefore a party in fact, if not in
as the case may be, according to its tenor, and
law, to the transaction giving origin to the instrument;
that if it be dishonored and the necessary
and it is difficult to see how he could strip himself of
proceedings on dishonor be duly taken, he will
the character to agent with respect to the origin of the
pay the amount thereof to the holder, or to any
contract and maintain this action in his own name
subsequent indorser who may be compelled to
where his principal could not. An agent who actually
pay it.
makes a contract, and who has notice of all equities
emanating therefrom, can stand on no better footing Sec. 192. Persons primarily liable on instrument. -
than his principal with respect to commercial paper The person "primarily" liable on an instrument is
growing out of the transaction. To place him on any the person who, by the terms of the instrument, is
higher plane would be incompatible with the absolutely required to pay the same. All other
fundamental conception underlying the relation of parties are "secondarily" liable.
principal and agent. If the original payee of a note
unenforceable for lack of consideration repurchases 1. primary liable:
the instrument after transferring it to a holder in due a. the maker of PN
course, the paper again becomes subject in the b. the acceptor of a BE
payee's hands to the same defenses to which it would c. the ceritifier of a check
have been subject if the paper had never passed
through the hands of a holder in due course. The 2. Secondarily (conditionally) liable:
same is true where the instrument is retransferred to a. drawer of bill
an agent of the payee. b. indorser of a note or bill
3. not liable:
CHAPTER 5 a. drawee until he accepts the instrument
in which case he becomes an acceptor
LIABILITIES OF PARTIES
General Rule:
Liability refers to the obligation of a party to a
negotiable instrument to pay the same according to its A person becomes a party to an instrument by signing
terms. The parties to a negotiable instrument may be his name thereon.
classified according to their liability as follows:
No person is liable on an instrument unless his
1. Primary and Secondary Liability signature appears thereon. (Sec. 18-21)
In lending his name to an accommodated party, the dishonored by non-acceptance or non-payment,
accommodation party is, in effect, a surety, solidarily notice of dishonor must be given to the drawer
liable with the principal, the accommodated party. and to each indorser, and any drawer or indorser
to whom such notice is not given is discharged.
Primary party and secondary party distinguished
Sec. 118. When protest need not be made; when
(Sec. 192), the person primarily liable on the must be made. - Where any negotiable instrument
instrument is the person who by the terms of the has been dishonored, it may be protested for non-
instrument is absolutely required to pay the same acceptance or non-payment, as the case may be;
(unconditionally bound), all other parties are but protest is not required except in the case of
secondarily liable (conditionally bound). foreign bills of exchange.
Being unconditionally liable, the primary party is Sec. 120. When persons secondarily liable on the
absolutely required to pay the instrument upon its instrument are discharged. - A person secondarily
maturity. liable on the instrument is:
PAYMENT BY PARTY SECONDARILY LIABLE (a) By any act which discharges the instrument;
Conditional liability of secondary party (b) By the intentional cancellation of his signature
by the holder;
1. the secondary party undertakes to pay the
instrument only after certain conditions have (c) By the discharge of a prior party;
been fulfilled, to wit:
a. due presentment for payment or acceptance (d) By a valid tender or payment made by a prior
to primary party (Sec. 70) party;
b. dishonor by such party (Sec. 184&151)
c. due notice of dishonor to the drawer or (e) By a release of the principal debtor unless the
indorser (Sec. 89) holder's right of recourse against the party
d. protest in case of foreign BE secondarily liable is expressly reserved;

Sec. 68. Order in which indorsers are liable. - As (f) By any agreement binding upon the holder to
respect one another, indorsers are liable prima extend the time of payment or to postpone the
facie in the order in which they indorse; but holder's right to enforce the instrument unless
evidence is admissible to show that, as between made with the assent of the party secondarily
or among themselves, they have agreed liable or unless the right of recourse against such
otherwise. Joint payees or joint indorsees who party is expressly reserved.
indorse are deemed to indorse jointly and
Sec. 151. Rights of holder where bill not accepted.
severally. robles virtual law library
- When a bill is dishonored by nonacceptance, an
Sec. 70. Effect of want of demand on principal immediate right of recourse against the drawer
debtor. - Presentment for payment is not and indorsers accrues to the holder and no
necessary in order to charge the person primarily presentment for payment is necessary
liable on the instrument; but if the instrument is,
Sec. 184. Promissory note, defined. - A negotiable
by its terms, payable at a special place, and he is
promissory note within the meaning of this Act is
able and willing to pay it there at maturity, such
an unconditional promise in writing made by one
ability and willingness are equivalent to a tender
person to another, signed by the maker, engaging
of payment upon his part. But except as herein
to pay on demand, or at a fixed or determinable
otherwise provided, presentment for payment is
future time, a sum certain in money to order or to
necessary in order to charge the drawer and
bearer. Where a note is drawn to the maker's own
indorsers.
order, it is not complete until indorsed by him.
Sec. 84. Liability of person secondarily liable,
LIABILITY VS. WARRANTIES
when instrument dishonored. - Subject to the
provisions of this Act, when the instrument is LIABILITY AND/OR WARRANTIES OF PARTIES
dishonored by non-payment, an immediate right
of recourse to all parties secondarily liable A. MAKER
thereon accrues to the holder.

Sec. 89. To whom notice of dishonor must be Sec. 60. Liability of maker. - The maker of a
given. - Except as herein otherwise provided, negotiable instrument, by making it, engages that
when a negotiable instrument has been he will pay it according to its tenor, and admits
the existence of the payee and his then capacity engages that, on due presentment, the instrument
to indorse. will be accepted or paid, or both, according to its
tenor, and that if it be dishonored and the
Applies only to the promissory note. It includes an necessary proceedings on dishonor be duly
accommodation maker and a surety who signs as taken, he will pay the amount thereof to the holder
maker. or to any subsequent indorser who may be
compelled to pay it. But the drawer may insert in
1. Liability unconditional – the maker is
the instrument an express stipulation negativing
undoubtedly a party primary liable as he is
or limiting his own liability to the holder.
the one to whom the holder will look first for
payment and the one who is expected to Liability of drawer
pay.
The drawer, by merely signing his name on the bill as
a. He engages to pay the note according to its drawer, admits the existence of the payee and his
terms, subject to no condition whatsoever. then capacity to indorse the instrument at the time it
Due presentment for payment (Sec. 70), and was executed.
due notice of dishonor (Sec. 89) are not
necessary for the purpose of charging the 1. Liability conditional
maker with liability, which is necessary,
The drawer does not promise to pay the bill
however, to fix the liability of any drawer or
absolutely. He makes no warranties but he engages
indorser.
to pay after certain conditions are complied with:
b. He promises to pay not only to the payee but
to any subsequent holder who is legally a. The bill is presented for acceptance (Sec.
entitled to the instrument at its maturity date 143) or for payment (Sec. 170) to the drawer.
even if the holder does not demand payment b. The bill is dishonored by non-acceptance or
at that time. non-payment, as the case may be.
c. He remains fully liable despite the fact that c. The necessary proceedings of dishonor are
the instrument is presented for payment late duly taken. Such proceedings are:
until prescription has run (Sec. 75) 1. Notice of dishonor is given to the drawer.
d. He admits the existence of the payee and his (Sec. 89); subject to certain exceptions (Sec.
then capacity (at the time of signing the note) 114)
to indorse. The rule operates to prevent the 2. In case of foreign bills, protest is made
maker from escaping liability by showing the followed by a notice of protest (Sec. 152)
non-existence and incapacity of the payee.
The payee must exist because there is no Drawer – secondary liability. But the drawer may
negotiable instrument until it is delivered to insert in the instrument an express stipulation
him. The payee must have the capacity to negativing or limiting is own liability to the holder
contract because the note is intended to be (see Sec. 61 , p.21 )
negotiated and not to be retained with the
a. Relationship with Drawee – there is a
payee.
contractual relation between the drawer and the
drawee. Thus, a drawer may have drawn the bill
2. Presumption arising from signature – a
against the drawee because the latter is holding
person placing his name on the face of a
an amount in trust for the drawer, or the drawee
note is prima facie a maker and liable as
may have extended credit to the drawer and
such and he is presumed to have acted with
agreed to honor any bill drawn by the drawer
care and to have signed the instrument in
against said drawee.
question with full knowledge of its contents.
b. Relationship with Collecting Bank – the privity
Example p. 254
of contract is between the holder-depositor and
3. Return of note – the maker has the right to the collecting bank. There is no privity of contract
demand the return of the note at the time of between the drawer and the collecting bank.
payment.
JAI ALAI CORP OF THE PHILS. VS. BPI
B. DRAWER (GR No. L - 29432 ; Aug. 6, 1975) – Petitioner
deposited 10 checks in its current account with BPI
Sec. 61. Liability of drawer. - The drawer by
which were acquired from Antonio Ramirez, a regular
drawing the instrument admits the existence of
jai-alai bettor and a sales agent of the Inter-Island
the payee and his then capacity to indorse; and
Gas. All the checks were payable to InterIsland Gas
Service, Inc. or order. After the checks had been abide by the consequences if the agent who indorses
submitted to Inter-bank clearing, Inter-Island Gas the same is without authority." Respondent which
discovered that all the indorsements made on the relied upon the petitioner's warranty should not be
checks purportedly by its cashiers were forgeries. The held liable for the resulting loss. The depositor of a
drawers of the checks demanded reimbursement from check as indorser warrants that it is genuine and in all
the drawee-banks, who in turn demanded from BPI. respects what it purports to be. Having indorsed the
BPI thus debited the value of the checks against checks to respondent bank, petitioner is deemed to
petitioner's current account and forwarded to the latter have given the warranty prescribed in Section 66 of
the checks containing the forged indorsements which the NIL that every single one of those checks " is
petitioner refused to accept. genuine and in all respects what it purports to be."

ISSUE: WON BPI had the right to debit from C. ACCEPTOR

petitioner's current account the value of the checks
with the forged indorsements? Sec. 62. Liability of acceptor. - The acceptor, by
accepting the instrument, engages that he will pay
HELD: Yes. BPI acted within legal bounds when it it according to the tenor of his acceptance and
debited the petitioner's account. When the petitioner admits:
deposited the checks with the respondent, the nature
of the relationship created at that stage was one of (a) The existence of the drawer, the
agency, that is, the bank was to collect from the genuineness of his signature, and his
drawees of the checks the corresponding proceeds. It capacity and authority to draw the
is true that the respondent had already collected the instrument; and
proceeds of the checks when it debited the (b) The existence of the payee and his then
petitioner's account, so that following the rule in capacity to indorse.
Gullas vs. Philippine National Bank 2 it might be
Sec. 127. Bill not an assignment of funds in hands
argued that the relationship between the parties had
of drawee. - A bill of itself does not operate as an
become that of creditor and debtor as to preclude the
assignment of the funds in the hands of the
respondent from using the petitioner's funds to make
drawee available for the payment thereof, and the
payments not authorized by the latter. It is our view
drawee is not liable on the bill unless and until he
nonetheless that no creditor-debtor relationship was
accepts the same.
created between the parties. Since the indorsements
were forgeries, they are inoperative, the payment Sec. 139. Kinds of acceptance. - An acceptance is
made by the drawee banks therefore is inoperative either general or qualified. A general acceptance
and relationship of a creditor and debtor was not assents without qualification to the order of the
created. Having indorsed the checks to respondent drawer. A qualified acceptance in express terms
bank, petitioner is deemed to have given the warranty varies the effect of the bill as drawn.
prescribed in Section 66 of the NIL that every single
one of those checks "is genuine and in all respects Sec. 140. What constitutes a general acceptance. -
what it purports to be." BPI, being the collecting bank An acceptance to pay at a particular place is a
is liable to the drawee banks when it submitted the general acceptance unless it expressly states that
checks for clearing. The petitioner was, moreover, the bill is to be paid there only and not elsewhere.
grossly recreant in accepting the checks in question
Sec. 141. Qualified acceptance. - An acceptance is
from Ramirez. It could not have escaped the attention
qualified which is:
of the petitioner that the payee of all the checks was a
corporation — the InterIsland Gas Service, Inc. Yet, (a) Conditional; that is to say, which makes
the petitioner cashed these checks to a mere payment by the acceptor dependent on the
individual who was admittedly a habitue at its jai-alai fulfillment of a condition therein stated;
games without aSking any inquiry as to his authority
to exchange checks belonging to the payee- (b) Partial; that is to say, an acceptance to pay
corporation. In Insular Drug Co. vs. National, the part only of the amount for which the bill is drawn;
Court made the pronouncement that: ". . . The right of
an agent to indorse commercial paper is a very (c) Local; that is to say, an acceptance to pay only
responsible power and will not be lightly inferred. A at a particular place;
salesman with authority to collect money belonging to
(d) Qualified as to time;
his principal does not have the implied authority to
indorse checks received in payment. Any person (e) The acceptance of some, one or more of the
taking checks made payable to a corporation, which drawees but not of all.
can act only by agents, does so at his peril, and must
Sec. 165. Agreement of acceptor for honor. - The The drawer’s instructions are reflected on the face
acceptor for honor, by such acceptance, engages and by the terms of the check, otherwise, the bank
that he will, on due presentment, pay the bill violates its duty to charge the drawer’s account only
according to the terms of his acceptance provided for properly payable items and shall be liable for the
it shall not have been paid by the drawee and amount charged to the drawer’s account.
provided also that is shall have been duly
presented for payment and protested for non- 3. Retraction of acceptance
payment and notice of dishonor given to him.
The BE itself implies a representation by the drawer
Sec. 189. When check operates as an assignment. that the drawee is already in receipt of funds to pay,
- A check of itself does not operate as an and the acceptance (admission of the truth of that
assignment of any part of the funds to the credit representation) makes the drawee primarily liable.
of the drawer with the bank, and the bank is not The drawee who has accepted cannot retract this
liable to the holder unless and until it accepts or admission as against a holder for value, since he has
certifies the check. thereby obtained a suspension of the holder’s
remedies against the drawer and an extension of
Liability of acceptor credit.

1. Liability of drawee before acceptance 4. Payment of check despite stop-payment

order
The drawee of a bill is not liable before acceptance
(Sec. 189). He is not obliged to the payee or any If a drawee-bank accepts or pays a check despite a
holder to accept a bill although he may be liable to the stop payment order from the drawer, through
drawer for breach of contract if he refuses without oversight or otherwise, it cannot refuse to pay the
valid reason to accept the bill. holder or recover what has been paid; neither may it
debit the drawer’s account unless the acceptance nor
General rule: payment was made prior to the receipt of the order.
A refusal by the drawee to accept a bill constitutes a 5. Similarity to liability of maker and drawer
dishonor of the instrument which triggers the liability
of secondary parties – drawer and indorser. The acceptor has the same liability as the maker of a
promissory note and the drawer of a bill with respect
EXPN: to the existence of the payee and his capacity to
indorse ( Sec. 60 and 61)
Except those indorsing qualifiedly (sec. 38)
Like the maker, neither presentment for payment nor
Unless the drawee accepts, he owes no duty to either
notice of dishonor is necessary to charge him with
the payee or any other holder. His only obligation is to
liability, except where he is an acceptor for honor.
the drawer to pay in accordance with the latter’s
orders. Liability depends on tenor of acceptance
2. Liability of drawee after acceptance General Rule:
Once the drawee accepts a bill, he becomes an No one but the drawee may accept; a stranger or
acceptor. He is in virtually the same position as the volunteer is not bound by acceptance (Sec. 192)
maker of a noted.
EXPN:
The same result takes place when a drawee bank
certifies a check drawn on the bank (Sec. 187) When a bill is accepted for honor supra protest (Sec.
158 and 161)
The acceptor is primarily bound on the instrument for
by his acceptance, he engages to pay it according to 1. While the maker of a note or the drawer of a
the terms of his acceptance subject to no condition BE to pay according to the tenor of the
whatsoever. His acceptance is a promise to pay instrument, the acceptor engages to pay
according to the tenor of his acceptance. according to the tenor of his acceptance,
which is not the same as the tenor of the bill
The bank (drawee) on which a check is drawn, is itself because the acceptance may be
under strict liability based on the contract between the qualified (Sec. 139 and 141).
bank, and its customer (drawer), to pay the check only
to the payee’s order. If his acceptance is general or absolute (Sec. 139),
then he is liable to pay according to the tenor of his
acceptance which incidentally is also the tenor of the 1. Defenses precluded
bill itself.
The acceptor is consequently precluded from
2. The nature of acceptance is important only in asserting a defense that:
the determination of the kind of liabilities of
the parties involved, but not in the a. The drawer is fictitious or non-existent
determination of whether a commercial b. The drawer’s signature is a forgery
paper is a BE (Sec. 126). As long as a c. Or that he has no funds in his hands
commercial paper conforms with the belonging to the drawer w/ which to pay the
definition of a BE, that paper is considered a bill
BE. d. Or that the drawer has overdrawn the
account
Example: p. 259 e. Or that the drawer has no capacity to
contract
Effect of acceptance of an altered bill f. Or has no authority to draw a bill.
Suppose a bill is altered without authority by the By accepting unconditionally a bill, the drawee
payee before acceptance, and is subsequently becomes liable to a holder, and he cannot allege want
accepted by the acceptor as altered, is the latter liable or failure of consideration between him and the
to an innocent holder according to the original tenor of drawer.
the bill, the tenor of acceptance?
The holder is a stranger as regards the transaction
If a bill originally for P3,000 is altered by P, the payee, between the drawer and the drawee.
to P8,000 and is accepted by W, the acceptor, for
P8,000, how much is W liable to A, a holder in due 2. Matters not admitted
course – for P3,000 or P8,000?
the acceptor does not admit the genuineness of the
1. Tenor of acceptance indorser’s signature because it is only the signature of
the drawer that he warrants, although the purported
Accdg. To one view, W is liable for P8,000 at it is the indorsement was on the bill at the time it was
tenor of his acceptance. Since an acceptor by Sec. accepted.
62, engages to pay the bill according to the tenor of
his acceptance, he must pay to the innocent payee or An acceptor is only held to a knowledge of the
subsequent holder the amount called for by the bill at signature of the drawer. By accepting a bill, he only
the time he accepted, even though larger than the admits the genuineness of such signature and cannot
original amount ordered by the drawer. be charged with knowledge of the want of
genuineness of any other part of the instrument or of
Case p. 260 the title of the holder.
2. Original tenor of bill Payment without acceptance
The opposite view holds that W is liable only for 1. Distinction between payment and
P3,000, the original tenor of the bill prior to alteration. acceptance
This view seems to be more logical. Sec. 62 should
be read in relation to the definition of acceptance in Payment by the drawee may not be considered as
Sec. 132 means assent to pay according to the order equivalent of acceptance. There is a distinction
of the drawer and not according to what appears to be between payment (actual performance) and
the order of the drawer. acceptance (promise to perform an act) (Sec. 189)

Note that under Sec. 124 (par. 2), a holder in due Acceptance of the bill is the signification by the
course may enforce payment of a materially altered drawee of his assent to the order of the drawer. But
instrument not according to its altered tenor but acceptance is not required for checks, for the same
“according to its original tenor”. are payable on demand.

Warranties of the acceptor 2. Payment amounts to more than

acceptance
The acceptor, by signing the bill as such, warrants the
existence of the payee and his then capacity to Payment of the amount of a bill of a check by the
indorse. In addition, he also admits the existence of drawee implies not only acceptance but also
the drawer, the genuineness of his signature, and his compliance with the drawee’s obligation.
capacity and authority to draw the bill.
Payment amounts to more than an acceptance for the 1. Liability as guarantor
second is an obligation to pay, the first is a discharge
of indebtedness. The first implies not only the A person who writes, in addition to his signature on
drawee’s assent to the order of the drawer but also an the back of an instrument, “I hereby guarantee
admission of his corresponding obligation to pay the payment of this instrument” or “payment guaranteed”
instrument and his clear compliance with that or their equivalent, indicates his intention to be bound
obligation. as a guarantor in which case he is not discharged
from liability merely because of the lack of due
The payment of the check includes its acceptance. It presentment or due notice of dishonor.
has been held that acceptance by the drawee may be
implied. Unlike an indorser, a guarantor is liable only
subsidiarily after the assets of the principal debtor
Illustrative Cases: p. 262-263 have been exhausted.

D. INDORSERS 2. Liability as surety

Sec. 63. When a person deemed indorser. - A A person who writes his name on the back of an
person placing his signature upon an instrument instrument followed by the words “as surety” shows by
otherwise than as maker, drawer, or acceptor, is such added words his intention to be bound as a
deemed to be indorser unless he clearly indicates surety rather than an indorser. As surety, he is
by appropriate words his intention to be bound in primarily and absolutely liable with the principal debtor
some other capacity. without benefit of exhaustion of the properties of the
latter and without also the necessity of presentment or
Sec. 68. Order in which indorsers are liable. - As notice of dishonor.
respect one another, indorsers are liable prima
facie in the order in which they indorse; but 3. Signature made for identification only
evidence is admissible to show that, as between
or among themselves, they have agreed A party is liable only as a guarantor and not an
otherwise. Joint payees or joint indorsees who indorser if his indorsement is made for identification
indorse are deemed to indorse jointly and only.
severally.
4. Engagement of guarantor
a. When a guarantor signs an instrument
payment guaranteed or equivalent words,
the signer engages that if the instrument is
not paid when due he will pay it according to
When a person deemed an indorser its tenor even if the party entitled to payment
has tried to collect from the party liable for it
A person signing his name on the back of an
and has been unable to do so and it is
instrument is nothing else appearing, a general
apparent that it is useless to proceed against
indorser (Sec. 66) and liable as such (Sec. 17 (f)).
him.
Being an indorser, he is chargeable only after
presentment and notice of dishonor. Liability of agent bank or collection
1. Parol evidence inadmissible As a mere agent for collection, a bank is not bound to
know the genuineness of prior indorsements.
The law requires that he indicates by appropriate
words his intention to be bound in some other 1. An intermediate or collecting bank which
capacity on the instrument itself. accepts a check for deposit and forwards it
to the drawee-bank for payment stamped “all
2. Reason for the rule
prior indorsements guaranteed” does not
The full and free circulation of negotiable papers indorse the check as a general indorser but
which take the place of money is a matter of great merely as an agent bank, guaranteeing only
importance. To require each assignee, before “prior indorsement”, not the genuineness of
accepting them, to inquire into and investigate every the check itself, so that it s not liable to the
circumstance bearing upon the original issuance and drawee bank which paid the check in case
to take cognizance of all the equities between the the signature of the drawer was forged.
original parties, would utterly destroy their commercial
value and seriously impede business transactions. 2. A bank is estopped, from raising the non-
negotiability of checks (it accepts for
When a person liable as guarantor or surety deposit)on the back of which it stamped its
 guarantee of “all prior indorsements and/or value. The liability of the appellant remains
lack of indorsement” and subsequently primary and unconditional. To sanction the
presented those checks for clearing with appellant's theory is to give unwarranted legal
another bank which on the strength of the recognition to the patent absurdity of a situation
guarantee cleared the checks and credited where an indorser, when sued on an instrument
the account of the first bank. by a holder in due course and for value, can
escape liability on his indorsement by the
convenient expedient of interposing the defense
3. A collecting bank which allowed a crossed that he is a mere accommodation indorser.
check payable to 2 payees to be deposited
by a co-payee in his account with the co- a. Conditions precedent to make unqualified
payee later withdrawing the entire proceeds indorser liable
thereof upon presentment with the drawee
B. Irregular indorser
bank w/o the other payee (corporation)
having indorsed the check or authorized him Sec. 64. Liability of irregular indorser. - Where
to indorse it in its behalf is liable to the other a person, not otherwise a party to an
payee for the full amount of the check. The instrument, places thereon his signature in
collecting bank has the duty to ascertain the blank before delivery, he is liable as indorser,
genuineness of all prior indorsements. in accordance with the following
rules:chanroblesvirtuallawlibrary
ANG TIONG vs. LORENZO TING (G.R. No. L -
26767, February 22, 1968) - Lorenzo Ting issued (a) If the instrument is payable to the order of
a check payable to “cash or bearer.” With Felipe a third person, he is liable to the payee and to
Ang’s signature (indorsement in blank) at the all subsequent parties.
back thereof, the instrument was received by Ang
Tiong who thereafter presented it to the bank for
payment. The drawee bank dishonored it. Ang
(b) If the instrument is payable to the order of
Tiong made written demands on both Ting and
the maker or drawer, or is payable to bearer,
Ang to make good the amount represented by the
he is liable to all parties subsequent to the
check. These demands unheeded, Ang Tiong
maker or drawer.
then filed a suit for collection. The trial court
adjudged for herein petitioner. Only Felipe Ang
appealed, maintaining that he is only an
accommodation party. (c) If he signs for the accommodation of the
payee, he is liable to all parties
ISSUE: WON Felipe Ang is an accommodation subsequent to the payee.
party? What is the liability of an
accommodation indorser? Irregular or anomalous indorsement explained

HELD: NO. Felipe Ang is a general indorser Usually denotes an indorsement for some purpose
(Section 63, NIL), in the absence of any other than to transfer the instrument or an
indication by appropriate words his intention to be indorsement by a stranger to the instrument or by one
bound in some other capacity. Even on the not in the actual or apparent chain of title, especially
assumption that Ang is a mere accommodation an indorsement made prior to the delivery of the
party as he professes to be, he is nevertheless by instrument to the payee.
the clear mandate of section 29 of the Negotiable
Instruments Law. That the appellant, again Sec. 4 – an irregular indorser is a person who:
assuming him to be an accommodation indorser,
a. Not otherwise a party to an instrument
may obtain security from the maker to protect
b. Places thereon his signature in blank
himself against the danger of insolvency of the
c. Before delivery
latter, cannot in any manner affect his liability to
the appellee, as the said remedy is a matter of The indorser is not a maker, drawer, acceptor, or
concern exclusively between accommodation regular indorser.
indorser and accommodated party. So that the
fact that the appellant stands only as a surety in Sec. 64 deals only with the liability of an irregular
relation to the maker, granting this to be true for indorser to the payee and subsequent parties. It has
the sake of argument, is immaterial to the claim no application to a case where the signature was
of the appellee, and does not a whit diminish nor placed on the instrument after delivery to the payee.
defeat the rights of the latter who is a holder for
Sec. 68 – the rights and liabilities of several irregular dishonor of the Instrument and the giving of notice of
indorsers as among themselves. the dishonor.

Example p. 267 1. Negotiation by delivery under section 65

means that indorsement is not necessary
An irregular or anomalous indorser is an because the instrument is payable to bearer.
accommodation indorser. He is not necessarily so The words “by delivery”, therefore, refer to a
where he participates in the consideration for the holder who negotiates the instrument in the
instrument (Sec. 29) same condition in which he received it,
making no indorsement at all.
Rule as to liability of irregular or anomalous
indorser
2. A qualified indorsement is made by adding to
1. Instrument payable to the order of a third the indorser’s signature the words “without
person recourse” or any words of similar import.
2. Instrument payable to the order of maker or
drawer or to be bearer. 3. The indorser is liable to a subsequent holder
3. Irregular indorser signing for accommodation for payment of the instrument, if for example,
of payee the maker’s or acceptor’s signature was
obtained by fraud (Sec. 65) for he warrants
Warranties of irregular indorser that the instrument is genuine and in all
respects what it is as represented to be.
It must be noted that Sec. 64 provides only for the
parties to whom an irregular indorser is liable. His
- If the maker or a prior indorser is a minor or
warranties are the same as those of a general
otherwise without capacity to enter into a
indorser under Sec. 66 inasmuch as his indorsement
contract, the holder can collect from any
is in blank which, in itself, is an indorsement without
indorser whose name follows that of the
qualification.
incapacitated party.
C. Qualified Indorser - A founder of a negotiable paper cannot claim
he has a good title to it.
Sec. 65. Warranty where negotiation by delivery
and so forth. — Every person negotiating an Warranty liability of one negotiating by delivery
instrument by delivery or by a qualified and of qualified indorser
indorsement warrants:
1. The liability of a person negotiating a bearer
(a) That the instrument is genuine and in all instrument by mere delivery is the same as
respects what it purports to be; the person who negotiates by qualified
indorsement.
(b) That he has a good title to it;

(c) That all prior parties had capacity to contract;

Both do not assume to pay the instrument in the event
(d) That he has no knowledge of any fact which of its dishonor unless the dishonor is based on any of
would impair the validity of the instrument or the four implied warranties enumerated in Sec. 65
render it valueless. (they are merely assigning a credit)

But when the negotiation is by delivery only, the 2. While the liability of the one who negotiates
warranty extends in favor of no holder other than by mere delivery extends in favor only of his
the immediate transferee. immediate transferee, the qualified indorser
is liable to all subsequent holders who make
The provisions of subdivision (c) of this section title through his indorsement for a breach of
do not apply to a person negotiating public or any of his warrants.
corporation securities other than bills and notes. 3. The indorser is liable to a subsequent holder
for payment of the instrument if, for example,
Negotiation by delivery/qualified indorsement
the maker’s or acceptor’s signature was
Every indorser makes certain warranties or obtained by fraud (
guarantees about the instrument he is negotiating
(Sec. 65/66). This warranty liability is unconditional (it
is not conditioned upon proper presentment and
2. 1. The secondary party undertakes to pay the
instrument only after certain conditions have
3. been fulfilled:
a. Due presentment for payment or acceptance
4. Liability and/or Warranties of Parties
to primary party (Sec. 70)
Sec. 60. Liability of maker. - The maker of a
Sec. 70. Effect of want of demand on principal
negotiable instrument, by making it, engages that
debtor. - Presentment for payment is not necessary
he will pay it according to its tenor, and admits
in order to charge the person primarily liable on the
the existence of the payee and his then capacity
instrument; but if the instrument is, by its terms,
to indorse.
payable at a special place, and he is able and willing
Liability – refers to the obligation of a party to a to pay it there at maturity, such ability and willingness
negotiable instrument to pay the same according to its are equivalent to a tender of payment upon his part.
terms. The parties to a negotiable instrument may be But except as herein otherwise provided, presentment
classified according to their liability as follows: for payment is necessary in order to charge the
drawer and indorsers.
1. Primarily liable:
a. The maker of a promissory note b. Dishonor by such party
b. The acceptor of a bill of exchange
Sec. 184. Promissory note, defined. - A negotiable
c. The certifier of a check
promissory note within the meaning of this Act is an
unconditional promise in writing made by one person
2. Secondarily (conditionally) liable:
to another, signed by the maker, engaging to pay on
a. The drawer of a bill
demand, or at a fixed or determinable future time, a
b. The indorser of a note or a bill
sum certain in money to order or to bearer. Where a
note is drawn to the maker's own order, it is not
3. The drawee until he accepts the instrument
complete until indorsed by him.
in which case he becomes an acceptor.
Sec. 151. Rights of holder where bill not accepted.
A person becomes a party to an instrument by signing
- When a bill is dishonored by nonacceptance, an
his name thereon.
immediate right of recourse against the drawer and
General Rule: indorsers accrues to the holder and no presentment
for payment is necessary.
No person is liable on an instrument unless his
signature appears thereon. (Secs. 18-21) c. Due notice of dishonor to the drawer or
indroser
In lending his name to an accommodated party, the
accommodation party is, in effect, a surety, solidarily Sec. 89. To whom notice of dishonor must be
liable with the principal, the accommodated party. given. - Except as herein otherwise provided, when a
(Sec. 29) negotiable instrument has been dishonored by non-
acceptance or non-payment, notice of dishonor must
Primary and Secondary Part Distinguished be given to the drawer and to each indorser, and any
drawer or indorser to whom such notice is not given is
Sec. 192. Persons primarily liable on instrument. -
discharged.
The person "primarily" liable on an instrument is the
person who, by the terms of the instrument, is d. protest in case of foreign bills of exchange.
absolutely required to pay the same. All other parties
are "secondarily" liable. 2. General rule:

Primary Secondary The liability of all secondary parties to an instrument

Unconditionally bound; Conditionally bound ends when the primary party pays the full amount of
hence, absolutely the instrument to the proper party
required to pay the
instrument upon its Sec. 119. Instrument; how discharged. - A
maturity. negotiable instrument is discharged:

(a) By payment in due course by or on behalf of the

Conditional liability of Secondary Party principal debtor;
(b) By payment in due course by the party Maker – applies only to the promissory note. It
accommodated, where the instrument is made or includes an accommodation maker and a surety who
accepted for his accommodation; signs as maker.

(c) By the intentional cancellation thereof by the 1. Liability unconditional

holder; - The maker is undoubtedly a party primarily
liable as he is the one to whom the holder
(d) By any other act which will discharge a simple will look first for payment and the one who is
contract for the payment of money; expected to pay.
(e) When the principal debtor becomes the holder of
a. He engages to pay the note according to its
the instrument at or after maturity in his own right.
terms, subject to no condition whatsoever.
Sec. 120. When persons secondarily liable on the Due presentment for payment (Sec. 70), and
instrument are discharged. - A person secondarily due notice of dishonor (Sec. 89) are not
liable on the instrument is discharged: necessary for the purpose of charging the
maker with liability, which is necessary, to fix
(a) By any act which discharges the instrument; the liability of any drawer or indorser.
(b) By the intentional cancellation of his signature by
b. He promises to pay not only to the payee but
the holder;
to any subsequent holder who is legally
(c) By the discharge of a prior party; entitled to the instrument at its maturity date
even if the holder does not demand payment
(d) By a valid tender or payment made by a prior at that time.
party;
c. He remains fully liable despite the fact that
(e) By a release of the principal debtor unless the the instrument is presented for payment late
holder's right of recourse against the party secondarily until prescription has run.
liable is expressly reserved;

(f) By any agreement binding upon the holder to Sec. 75. Presentment where instrument payable at
extend the time of payment or to postpone the bank. - Where the instrument is payable at a bank,
holder's right to enforce the instrument unless made presentment for payment must be made during
with the assent of the party secondarily liable or banking hours, unless the person to make payment
unless the right of recourse against such party is has no funds there to meet it at any time during the
expressly reserved. day, in which case presentment at any hour before
the bank is closed on that day is sufficient.
Secondary parties face only potential or contingent
secondary liability on the instrument and it does not d. he “admits the existence of the payee and
arise until the party who is primarily liable has his then capacity (at the time of signing the
defaulted in his performance. note) to indorse.
- The rule operates to prevent the maker from
The liability is comparable in most respects to that of
escaping liability by showing the non-
the guarantor in an ordinary contract.
existence and incapacity of the payee.
3. Secondary parties are liable in the - The payee must exist because there is no
reverse order in which they signed the negotiable instrument until it is delivered to
instrument. him.
- The payee must have the capacity to
Sec. 68. Order in which indorsers are liable. - As contract because the note is intended to be
respect one another, indorsers are liable prima facie negotiated and not to be retained with the
in the order in which they indorse; but evidence is payee.
admissible to show that, as between or among
themselves, they have agreed otherwise. Joint 2. Presumption arising from signature.
payees or joint indorsees who indorse are deemed to - A person placing his name on the face of a
indorse jointly and severally. note is prima facie a maker and liable as
such.
Liability of Maker - And he is presumed to have acted with care
and to have signed the instrument in
question with full knowledge of its contents.
 3. Return of note. Sec. 70. Effect of want of demand on principal
- The maker has the right to demand the debtor. - Presentment for payment is not necessary
return of the note at the time of payment. in order to charge the person primarily liable on the
instrument; but if the instrument is, by its terms,
A receipt for payment is no substitute for the payable at a special place, and he is able and willing
instrument. to pay it there at maturity, such ability and willingness
are equivalent to a tender of payment upon his part.
If the note has been lost or accidentally destroyed, or
But except as herein otherwise provided, presentment
cannot be returned for any reason, the maker may
for payment is necessary in order to charge the
require the holder to furnish a bond to indemnify him
drawer and indorsers.
against liability in case it later appears in the hands of
a holder in due course. As the case may be.
B. LIABILITY OF DRAWER b. The bill is dishonored by non-acceptance or
non-payment, as the case may be; and
Sec. 61. Liability of drawer. - The drawer by drawing
the instrument admits the existence of the payee and
c. The necessary proceedings of dishonor are
his then capacity to indorse; and engages that, on due
duly taken. Such proceedings are:
presentment, the instrument will be accepted or paid,
or both, according to its tenor, and that if it be
1. Notice of dishonor is given to the drawer
dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount thereof Sec. 89. To whom notice of dishonor must be
to the holder or to any subsequent indorser who may given. - Except as herein otherwise provided, when a
be compelled to pay it. But the drawer may insert in negotiable instrument has been dishonored by non-
the instrument an express stipulation negativing or acceptance or non-payment, notice of dishonor must
limiting his own liability to the holder. be given to the drawer and to each indorser, and any
drawer or indorser to whom such notice is not given is
Liability of drawer
discharged.
Just as the maker of a note, the drawer, by merely
Subject to certain exceptions:
signing his name on the bill as drawer, admits the
existence of the payee and his then capacity to Sec. 114. When notice need not be given to
indorse the instrument at the time it was executed. drawer. - Notice of dishonor is not required to be
given to the drawer in either of the following cases:
1. Liability conditional
- However, the drawer does not promise to (a) Where the drawer and drawee are the same
pay the bill absolutely. He makes no person;
warranties but he engages to pay after
certain conditions are complied with, to wit: (b) When the drawee is fictitious person or a person
not having capacity to contract;
a. The bill is presented for acceptance
(c) When the drawer is the person to whom the
Sec. 143. When presentment for acceptance must be instrument is presented for payment;
made. - Presentment for acceptance must be made:

(a) Where the bill is payable after sight, or in any other

case, where presentment for acceptance is necessary (d) Where the drawer has no right to expect or require
in order to fix the maturity of the instrument; or that the drawee or acceptor will honor the instrument;

(b) Where the bill expressly stipulates that it shall be (e) Where the drawer has countermanded payment.
presented for acceptance; or
2. in case of foreign bills, protest is made followed by
(c) Where the bill is drawn payable elsewhere than at a notice of protest.
the residence or place of business of the drawee.
Sec. 114. When notice need not be given to
In no other case is presentment for acceptance drawer. - Notice of dishonor is not required to be
necessary in order to render any party to the bill given to the drawer in either of the following cases:
liable.
(a) Where the drawer and drawee are the same
Or for payment: person;
(b) When the drawee is fictitious person or a person security and not for value to a payee who negotiated
not having capacity to contract; the same without his knowledge and consent to a
holder in due course, by the mere expediency of
(c) When the drawer is the person to whom the withdrawing his funds from the drawee bank.
instrument is presented for payment;
a. By issuing a check, the drawer impliedly
(d) Where the drawer has no right to expect or require represents the existence of fund or credit at
that the drawee or acceptor will honor the instrument; the time it is drawn, and is available for its
payment in the drawee bank.
(e) Where the drawer has countermanded payment.

2.In case of foreign bills, protest is given to the The check is presumed to be presented for
drawer. payment immediately or within a reasonable
time after issue.
Sec. 152. In what cases protest necessary. - Where
a foreign bill appearing on its face to be such is
dishonored by nonacceptance, it must be duly
b. The drawer can still be made liable under a
protested for nonacceptance, by nonacceptance is
separate contract distinct from the
dishonored and where such a bill which has not
instrument.
previously been dishonored by nonpayment, it must
be duly protested for nonpayment. If it is not so Sec. 89. To whom notice of dishonor must be
protested, the drawer and indorsers are discharged. given. - Except as herein otherwise provided, when a
Where a bill does not appear on its face to be a negotiable instrument has been dishonored by non-
foreign bill, protest thereof in case of dishonor is acceptance or non-payment, notice of dishonor must
unnecessary. be given to the drawer and to each indorser, and any
drawer or indorser to whom such notice is not given is
d. Indorsers
discharged.
The drawer, therefore, is only secondarily liable to the
Sec. 152. In what cases protest necessary. - Where
holder, or to any subsequent indorser, who may be
a foreign bill appearing on its face to be such is
compelled to pay it.
dishonored by nonacceptance, it must be duly
Sec. 61. Liability of drawer. - The drawer by drawing protested for nonacceptance, by nonacceptance is
the instrument admits the existence of the payee and dishonored and where such a bill which has not
his then capacity to indorse; and engages that, on due previously been dishonored by nonpayment, it must
presentment, the instrument will be accepted or paid, be duly protested for nonpayment. If it is not so
or both, according to its tenor, and that if it be protested, the drawer and indorsers are discharged.
dishonored and the necessary proceedings on Where a bill does not appear on its face to be a
dishonor be duly taken, he will pay the amount thereof foreign bill, protest thereof in case of dishonor is
to the holder or to any subsequent indorser who may unnecessary.
be compelled to pay it. But the drawer may insert in
In case where the drawer also executed a separate
the instrument an express stipulation negativing or
letter of undertaking in consideration for the bank’s
limiting his own liability to the holder.
negotiation of its sight drafts, the drawer can still be
His liabilities are conditional in the same manner as made liable under the letter of undertaking even if he
the liabilities of a general indorser. is discharged due to the bank’s failure to protest the
non-acceptance of the drafts where he promised to
pay on demand the full amount of the drafts.
Liability of a drawer of a check – the drawer of a The liability under the letter of undertaking is direct
check is held to stricter liability than the drawer of and primary, and independent from that under the
other bills of exchange. sight drafts, which subsists even if they are
dishonored for non-acceptance or non-payment.
Sec. 186. Within what time a check must be
presented. - A check must be presented for payment Example on p. 256
within a reasonable time after its issue or the drawer
will be discharged from liability thereon to the extent Drawer distinguished from maker
of the loss caused by the delay.
Drawer Maker
The drawer may not unilaterally discharge himself Issues BE Issues PN
from liability on checks issued by him merely as Secondarily liable Primarily liable
Negative or limit his Maker may not negative
 liability or limit his liability. The same result takes place when a drawee bank
certifies a check drawn on the bank.

c. Liability of acceptor Sec. 187. Certification of check; effect of. - Where

a check is certified by the bank on which it is drawn,
Sec. 62. Liability of acceptor. - The acceptor, by the certification is equivalent to an acceptance.
accepting the instrument, engages that he will pay it
according to the tenor of his acceptance and admits: The acceptor is primarily bound on the instrument for
by his acceptance, subject to no condition
(a) The existence of the drawer, the genuineness of whatsoever. His acceptance, in other words, is a
his signature, and his capacity and authority to draw promise to pay according to the tenor of his
the instrument; and acceptance.
(b) The existence of the payee and his then capacity The bank (drawee) on which a check is drawn, is
to indorse. under strict liability based on the contract between the
bank and its customer (drawer), to pay the check only
1. liability of drawee before acceptance
to the payee’s order.
As already pointed out, the drawee of a bill is not
The drawer’s instructions are reflected on the face
liable thereon before acceptance.
and by the terms of the check, otherwise, the bank
Sec. 189. When check operates as an assignment. violates its duty to charge the drawer’s account only
- A check of itself does not operate as an assignment for properly payable items and shall be liable for the
of any part of the funds to the credit of the drawer with amount charged to the drawer’s account.
the bank, and the bank is not liable to the holder
3. Retraction of acceptance
unless and until it accepts or certifies the check.
The BE itself implies a representation by the drawer
He is not obligated to the payee or any holder to
that the drawee is already in receipt of funds to pay,
accept a bill although he may be liable to the drawer
and the acceptance (admission of the truth of that
for breach of contract if he refuses without a valid
representation) makes the drawee primarily liable.
reason to accept the bill.
The drawee who has accepted cannot retract this
General Rule
admission as against a holder for value, since he has
A refusal by the drawee to accept a bill thereby obtained a suspension of the holder’s
constitutes a dishonor of the instrument which remedies against the drawer and an extension of
triggers the liability of secondary parties – drawer credit.
and indorser – except those indorsing qualifiedly,
4. Payment of check despite non-payment
that is, without guaranteeing payment.
order
Sec. 38. Qualified indorsement. - A qualified
If a drawee bank accepts or pays a check despite a
indorsement constitutes the indorser a mere assignor
stop payment order from the drawer, through
of the title to the instrument. It may be made by
oversight or otherwise, it cannot refuse to pay the
adding to the indorser's signature the words "without
holder or recover what has been paid, neither may it
recourse" or any words of similar import. Such an
debit the drawer’s account unless the acceptance nor
indorsement does not impair the negotiable character
payment was made prior to the receipt of the order.
of the instrument.
5. Similarity to liability of maker and drawer.
Unless the drawee accepts, he owes no duty to either
the payee or any other holder. His only obligation is to The acceptor has the same liability as the maker of a
the drawer to pay in accordance with the latter’s promissory note and the drawer of a bill with respect
orders. to the existence of the payee and his capacity to
indorse.
2. Liability of drawee after acceptance.
Sec. 60. Liability of maker. - The maker of a
Once the drawee accepts a bill, he becomes an
negotiable instrument, by making it, engages that he
acceptor.
will pay it according to its tenor, and admits the
He is in virtually the same position as the maker of a existence of the payee and his then capacity to
note. indorse.

Relationship
Sec. 61. Liability of drawer. - The drawer by drawing (d) Qualified as to time;
the instrument admits the existence of the payee and
his then capacity to indorse; and engages that, on due (e) The acceptance of some, one or more of the
presentment, the instrument will be accepted or paid, drawees but not of all.
or both, according to its tenor, and that if it be
if his acceptance is general or absolute, then he is
dishonored and the necessary proceedings on
liable to pay according to the tenor of his
dishonor be duly taken, he will pay the amount thereof
acceptance which incidentally is also the tenor of
to the holder or to any subsequent indorser who may
the bill itself.
be compelled to pay it. But the drawer may insert in
the instrument an express stipulation negativing or Sec. 139. Kinds of acceptance. - An acceptance is
limiting his own liability to the holder. either general or qualified. A general acceptance
assents without qualification to the order of the
Like the maker, neither presentment for payment nor
drawer. A qualified acceptance in express terms
notice of dishonor is necessary to charge the acceptor
varies the effect of the bill as drawn.
with liability, except where he is an acceptor for honor.
The nature of acceptance is important only in the
Sec. 165. Agreement of acceptor for honor. - The
determination of the kind of liabilities of the parties
acceptor for honor, by such acceptance, engages that
involved, but not in the determination of whether a
he will, on due presentment, pay the bill according to
commercial paper is a BE or not.
the terms of his acceptance provided it shall not have
been paid by the drawee and provided also that is As long as a commercial paper conforms with the
shall have been duly presented for payment and definition of a BE, that paper is considered a bill of
protested for non-payment and notice of dishonor exchange.
given to him.
Sec. 126. Bill of exchange, defined. - A bill of
Liability depends on the tenor of acceptance exchange is an unconditional order in writing
addressed by one person to another, signed by the
General Rule
person giving it, requiring the person to whom it is
No one but the drawee may accept; a stranger or addressed to pay on demand or at a fixed or
volunteer is not bound by acceptance. The exception determinable future time a sum certain in money to
is when a bill is accepted for honor supra protest. order or to bearer.

1. While the maker of a note or the drawer of a Effect of acceptance of an altered bill
bill engages to pay according to the tenor of
For instance, if a bill originally for P 3,000 is altered by
the instrument, the acceptor engages to pay
P, the payee, to P8,000 and is accepted by W, the
according to the tenor of his acceptance,
acceptor, for P8,000, how much is W liable to A, a
which is not the same as the tenor of the bill
holder in due course – for P3,000 or P8,000?
itself because the acceptance may be
qualified. 1. Tenor of acceptance – W is liable for P8,000
as it is the tenor of his acceptance. “Since an
Sec. 139. Kinds of acceptance. - An acceptance is
acceptor by Sec. 62 engages to pay the bill
either general or qualified. A general acceptance
according to the tenor of his acceptance, he
assents without qualification to the order of the
must pay to the innocent payee or
drawer. A qualified acceptance in express terms
subsequent holder the amount called for by
varies the effect of the bill as drawn.
the bill at the time he accepted, even though
Sec. 141. Qualified acceptance. - An acceptance is larger than the original amount ordered by
qualified which is: the drawer.

(a) Conditional; that is to say, which makes payment Illustrative case*

by the acceptor dependent on the fulfillment of a
Since the payee is protected by Sec. 62, its collecting
condition therein stated;
agent bank’s where It deposited the draft, has no right
to debit the amount it refunded to the drawee bank
from the payee’s account. The remedy of the
(b) Partial; that is to say, an acceptance to pay part collecting bank is against the drawee-bank or the
only of the amount for which the bill is drawn; person responsible for the alteration.

(c) Local; that is to say, an acceptance to pay only at

a particular place;
 2. Original tenor of the bill. W is liable only for Payment without acceptance
P3,000, the original tenor of the bill prior to
alteration. (more logical) 1. Distinction between payment and
acceptance
Sec. 62 should be read in relation to the definition of
acceptance in Sec. 132. Assent to the order of the Payment by the drawee may not be considered as
drawer in Sec. 132 means “assent to pay according to equivalent of acceptance. (Sec. 23)
the order of the drawer” and not according to what
Sec. 189
appears to be the order of the drawer.
Payment Acceptance
It is argued that the acceptor has “assented to the
Actual performance A promise to perform an
alteration” by accepting an altered bill under Sec. 124. thereof. act
But it is difficult to see how an acceptor could have The acceptance of a bill
“assented” if he had no knowledge of the alteration. is the signification by
the drawee of his
Furthermore, it should be noted that under Sec. 124 assent to the order of
(par. 2, a holder in due course may enforce payment the drawer.
of a materially altered instrument not according to its But acceptance is not
altered tenor but according to its original tenor.” required for checks, for
the same are payable
Warranties of the acceptor on demand.
Discharge of Obligation to pay
The acceptor, by signing the bill as such, warrants the
indebtedness
existence of the payee and his then capacity to
Implies not only the
indorse. drawee’s assent to the
order of the drawer but
In addition, he also admits the existence of the
also an admission of his
drawer, the genuineness of his signature, and his
corresponding
capacity and authority to draw the bill. obligation to pay the
instrument and his clear
1. Defenses precluded – the acceptor is
compliance with that
precluded from asserting a defense that the
obligation
drawer is fictitious or non-existent, or that the
drawer’s signature is a forgery, or that he
has no funds in his hands belonging to the 2. Payment amounts to more than
drawer with which to pay the bill, or that the acceptance
drawer has overdrawn his account, or that
the drawer has no capacity to contract or has Payment of the amount of a bill check by the drawee
no authority to draw a bill. implies not only acceptance but also compliance with
By accepting unconditionally a bill, the the drawee’s obligation.
drawee becomes liable to a holder, and he
The rule holding that such payment has all the
cannot allege want or failure of consideration
efficacy of an acceptance is founded upon the
between him and the drawer.
principle that the greater includes the less. The
- The holder is a stranger as regards the
payment of the check includes its acceptance.
transaction between the drawer and the
drawee. It has been held that acceptance by the drawee may
be implied.
2. Matters not admitted – the acceptor does not
admit the genuineness of the indorser’s Sec. 63. When a person deemed indorser. - A
signature because it is only the signature of person placing his signature upon an instrument
the drawer that he warrants, although the otherwise than as maker, drawer, or acceptor, is
purported indorsement was on the bill at the deemed to be indorser unless he clearly indicates
time it was accepted. by appropriate words his intention to be bound in
some other capacity.
An acceptor is only held to a knowledge of the
signature of the drawer. By accepting a bill, he only When a person deemed an indorser
admits the genuineness of such signature and cannot
be charged with knowledge of the want of A person signing his name on the back of an
genuineness of any other part of the instrument or of instrument is, nothing else appearing, a general
the title of the holder. indorser and liable as such.
Being an indorser, he is chargeable only after its tenor even if the party entitled to payment
presentment and notice of dishonor. has not attempted to collect from the party
liable for it.
1. Parol evidence inadmissible
b. When he signs collection guaranteed or
One who signs as an indorser cannot show by parol
equivalent words, the signer engages that if
evidence his intention to be bound in some other
the instrument is not paid when due, he will
capacity.
pay it according to its tenor but only after the
The law requires that he indicates by appropriate party entitled to payment has tried to collect
words his intention to be bound in some other from the party liable for it and has been
capacity on the instrument itself. unable to do so and it is apparent that it is
useless to proceed against him.
2. Reason for the rule

The rule is founded upon commercial necessity. Liability of agent bank for collection
When a person is liable as guarantor or surety As a mere agent for collection, a bank is not bound to
know the genuineness of prior indorsements.
1. Liability as guarantor
1. An intermediate or collecting bank which
A person who writes, in addition to his signature on
accepts a check for deposit and forwards it
the back of an instrument, “I hereby guarantee
to the drawee-bank for payment stamped “all
payment of this instrument”, or “payment guaranteed”
prior indorsements guaranteed”, does not
or their equivalent, indicates his intention to be bound
indorse the check as a general indorser but
as a guarantor in which case he is not discharged
merely as an agent bank, guaranteeing only
from liability merely because of the lack of due
“prior indorsements”, not the genuineness of
presentment or due notice of dishonor.
the check itself, so that it is not liable to the
He waives the need for presentment, protest or notice drawee bank which paid the check in case
of dishonor. Unlike an indorser, a guarantor is liable the signature of the drawer was forged.
only subsidiarily after the assets of the principal
debtor have been exhausted. (Art. 2058) 2. A bank is estopped from raising the non-
negotiability of checks (it accepts for deposit)
2. Liability as surety on the back of which it stamped its
guarantee of “all prior indorsements and/or
A person who writes his name on the back of an lack of indorsement” and subsequently
instrument followed by the words “as surety” shows by presented those checks for clearing with
such added words his intention to be bound as a another bank with the strength of the
surety rather than as an indorser. guarantee cleared the checks and credited
the account of the first bank.
As surety, he is primarily and absolutely liable with
the principal debtor without benefit of exhaustion of
the properties of the latter and without also the
3. The irregular or anomalous indorser indorses
necessity of presentment or notice of dishonor.
the instrument in an unusual, singular or
3. Signature made for identification only peculiar manner. His name appears where
we would naturally expect another name.
A party is liable only as a guarantor and not as Thus, if an instrument is made payable to the
indorser if his indorsement is made for identification order of P as the payee, P’s name should
only. appear on the back of the instrument as the
first indorser but instead we find the name of
4. Engagement of guarantor X. In such a case, X is an irregular or
Under the Uniform Commercial Code, a guarantor anomalous indorser.
may sign an instrument either payment guaranteed or
collection guaranteed. 4. An irregular or anomalous indorser is an
accommodation indorser. He is not
a. When a guarantor signs an instrument necessarily so where he participates in the
payment guaranteed or equivalent words, consideration for the instrument. (Sec. 29)
the signer engages that if the instrument is
not paid when due, he will pay it according to
Rules as to liability or irregular or anomalous
Sec. 64 set our rules for 3 classes of cases regarding fraud (Sec. 65) for he warrants that the
the liability of an irregular or an anomalous indorser: instrument is genuine and in all respects
what it is as represented to be.
Examples p. 268
If the maker or a prior indorser is a minor or without
1. Instrument payable to the order of a third capacity to enter into a contract, the holder can collect
person from any indorser whose name follows that of the
2. Instrument payable to the order of maker or incapacitated party.
drawer or to bearer.
3. Irregular indorser signing for accommodation A founder of a negotiable paper cannot claim he has
of payee. a good title to it.

Warranties of irregular indorser Warranty liability of one negotiating by delivery

and of qualified indorser
It must be noted that Sec. 64 provides only for the
parties to whom an irregular indorser is liable. His 1. The liability of a person negotiating a bearer
warranties are the same as those of a general instrument by mere delivery is the same as
indorser under Sec. 66 inasmuch as his indorsement the person who negotiates by qualified
is in blank which is an indorsement without inforsement. (Sec. 38)
qualification
Both do not assume to pay the instrument in the
Sec. 65. Warranty where negotiation by delivery event of its dishonor unless the dishonor is based on
and so forth. — Every person negotiating an any of the four implied warranties enumerated in Sec.
instrument by delivery or by a qualified indorsement 65. They are merely assigning a credit.
warrants:
2. The liability of the one who negotiates by
(a) That the instrument is genuine and in all respects mere delivery extends in favor only of his
what it purports to be; immediate transferee.

(b) That he has a good title to it; While the qualified indorser is liable to all subsequent
holders who make title through his indorsement for a
(c) That all prior parties had capacity to contract; breach of any of his warranties.
(d) That he has no knowledge of any fact which would Examples p. 271
impair the validity of the instrument or render it
valueless. Liability of collecting/issuing bank

But when the negotiation is by delivery only, the 1. Guarantees even if previous indorsement
warranty extends in favor of no holder other than the forged – the warranty that the instrument is
immediate transferee. genuine and it all respects what it purports to
be covers all the defects in the instrument
The provisions of subdivision (c) of this section do not affecting the validity thereof, including a
apply to a person negotiating public or corporation forged i
securities other than bills and notes.

Negotiation by delivery/qualified indorsement

1. Negotiation “by delivery” under Sec. 65

means that indorsement is not necessary
because the instrument is payable to bearer.
The words “by delivery”, therefore, refer to a
holder who negotiates the instrument in the
same condition in which he received it,
making no indorsement at all. So a blank
indorser of an instrument does not negotiate
it “by delivery” within this section as his
liability would be governed by Sec. 66.
Sec. 66. Liability of general indorser. - Every
indorser who indorses without qualification, warrants
2. The indorser is liable to a subsequent holder
to all subsequent holders in due course:
for payment of the instrument if the maker’s
or acceptor’s signature was obtained by
(a) The matters and things mentioned in subdivisions
(a), (b), and (c) of the next preceding section; and

(b) That the instrument is, at the time of his

indorsement, valid and subsisting;

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 pay it.

The phrase to any subsequent indorser refers to any

of the indorsers between the drawer and the holder.

They may be called as intervening indorsers. Note

that the drawer may, by express stipulation, inserted
in the instrument, negative or limit his own liability to
the holder.