THE 3-DAY FLOAT RULE AND THE PROCESS OF MONETIZING A CHECK:

When does a check become a money?

a) WHEN ENCASHED;

b) WHEN CLEARED;

How does a check become a money?

a) BY ENCASHMENT;

b) BY CLEARING;

* ENCASHMENT happens when the PAYEE presents the check directly to the DRAWEE BANK and requests
that the same be converted into cash equivalent.

EXAMPLE: Pedro has a bank account in BPI-Ayala Branch. He issued a check for P5,000.00 in favor of
Clara who has an account at BDO-Pateros. QUESTION: How can that check be converted into cash for
Clara?

Answer: As an option, Clara can ENCASH the check by presenting it to BPI-Ayala which is the Drawee
Bank. BPI will examine if the check is funded and if the signature of Pedro thereat is genuine. So the first
option for Clara is to resort to the method of encashment.

* CLEARING on the other hand happens when the PAYEE deposits the check instead to his own bank
account (COLLECTING BANK) and then it will be forwarded to the PHILIPPINE CLEARING HOUSE (PCH)
which will thereafter forward it to the DRAWEE BANK. The PCH is an agency of the government that
serves as the middle entity between the Collecting Bank and the Drawee Bank in order to transmit
checks that need to be submitted to the process of eligibility screening or more legally known as
"clearing".

In the process of clearing, the DRAWEE BANK will examine if the check is funded and if the drawer’s
signature thereat is genuine. If there is no problem, it will report the matter back to the PCH which later
reports to COLLECTING BANK so that the check becomes a withdrawable balance within 3 days. If the
check however is problematic (either forged or unfunded), the same report shall be made within the 3-
day float period so that the check will be formally dishonored.

EXAMPLE: Pedro has a bank account in BPI-Ayala. He issued a check for P5,000.00 in favor of Clara who
has an account at BDO-Pateros. QUESTION: How can that check be converted into cash for Clara?

Answer: The first option was already discussed above which is by encashment. As another option, Clara
can DEPOSIT the check to her own account in BDO-Pateros which is the Collecting Bank. BDO-Pateros
will then transmit it to PCH for purposes of CLEARING and then PCH will transmit the check to BPI which
is the Drawee Bank. BPI will examine if the check is funded and if the signature of Pedro thereat is
genuine. If there is no problem, BPI will report back to PCH then to BDO so that the check becomes a
withdrawable balance within 3 days. The same period to report must have to be observed in case the
check turns out to be forged or unfunded. So in short, the other option for Clara (aside from
encashment) is by clearing.

NOTE: Between the two (2) modes, encashment is of course more convenient and advantageous
because the check becomes a money right away in such a less amount of effort. However, in instances
that encashment is not practical or feasible, clearing is the remaing option that takes day/s to complete
after rigorous examination by the eyes of Collecting Bank, PCH and ultimately the drawee bank. It is the
drawee bank that ultimately determines its eligibility because it has the capacity to gauge the sufficiency
of funds and genuineness of signature of the check's drawer who is its client.

RULES GOVERNING LIABILITY IN CASE OF FORGERY OF SIGNATURE IN A CHECK:

A. If what was forged is the signature of the DRAWER in the check and it went through clearing or
encashment, the DRAWEE BANK ultimately suffers the loss.

REASON: The Drawee Bank ought to know the signature of its depositor.

B. If what was forged is the name and signature of the PAYEE as endorsement and it went through
clearing, the COLLECTING BANK ultimately suffers the loss.

REASON: The Collecting Bank failed to properly identify the payee. The fact that the payee deposits the
check to the Collecting Bank, the former is understood to be the client of the latter which has access on
records of its genuine identity and specimen signatures.

C. If what was forged is the name and signature of the PAYEE and it was successfully encashed before the
Drawee Bank, is the Drawee Bank liable?

ANSWER: Qualify. If there is no any alteration in the entries of the check, the Drawee Bank is not liable
because it cannot verify the true identity of the real payee and it has to rely on the genuineness of what
is barely written in the instrument together with the supporting identifications presented.

On the other hand, if there is apparent alteration in the entries of the check, and it was successfully
encashed, the Drawee Bank becomes liable because it failed to establish the true identity of the real
payee. Such alterations are “red flags” that should have alarmed the Drawee Bank to investigate deeply
by inquiring from the issuer himself.

TYPES OF INDORSEMENT AND THEIR PHYSICAL FEATURES:

BLANK INDORSEMENT – whereby all that the holder does is to affix his signature at the back of the
instrument and then write nothing else.

Signature

SPECIAL INDORSEMENT – whereby the payee writes the name of the person to whom the instrument is
intended to be transferred followed by his signature.

PAY TO JOSE MADRIGAL JR.

Signature

CONDITIONAL INDORSEMENT – whereby the payee writes the name of the person to whom the
instrument is intended to be transferred together with the demand to fulfill first a future and uncertain
event, then followed by his signature.

PAY TO JOSE MADRIGAL JR. IF HE GRADUATES AS CUM LAUDE IN COLLEGE IN THE YEAR 2022.

Signature

QUALIFIED INDORSEMENT – whereby the payee writes the name of the person to whom the instrument
is intended to be transferred followed by a disclaimer of liability prior to his signature.

PAY TO JOSE MADRIGAL JR.

Sans Recourse,

Signature

RESTRICTIVE INDORSEMENT – whereby the payee writes the name of the only particular person to
whom the instrument is exclusively intended to be transferred followed by his signature.

PAY TO JOSE MADRIGAL JR. ONLY.

Signature

EFFECTS OF INDORSEMENT:
1. By indorsement, the General Indorser warrants that if the instrument is dishonored, he assumes the
liability, except when his signature is forged or if he merely represents a principal. The General Indorser
is the original payee who seeks to transfer the instrument to another person by writing an indorsement
at the dorsal side of the instrument. Take note that only the payee has the power to indorse the
instrument.

2. A BLANK INDORSEMENT practically creates a situation that whoever holds the instrument is the
rightful payee or indorsee thereof. This is because Indorsement In Blank does not identify a particular
person to whom the instrument is intended to be negotiated or transferred. However, the current bank
practices would still look at the declared payee in the ventral portion of the check instrument and would
limit its payment thereto as and by way of observing fraud-prevention measures. Banks nowadays do not
normally accept second indorsement anymore which is contrary to the principle of negotiation under the
negotiable instruments law.

By the principle of negotiation, a negotiable instrument may be transferred through the process of
indorsement from one person to another. This process may continue from one qualified holder to
another qualified holder until the instrument has been finally discharged and its purpose is satisfied.

3. A SPECIAL INDORSEMENT identifies who the transferee is. He therefore can further indorse the
instrument to another person and so on and so forth as illustrated below:

PAY TO JOSE MADRIGAL JR.

Bentham Quijano (Signature)

PAY TO JAMES DOE

Jose Madrigal Jr. (Signature)

 PAY TO RICO MAMBO III

James Doe (Signature)

In the above example, the original payee is Bentham Quijano. He indorsed the instrument to Jose
Madrigal Jr. Then Jose Madrigal Jr. indorsed the instrument to James Doe, then the latter indorsed the
same to Rico Mambo III.

If the instrument is dishonored, the indorser is liable only to the person whom he made the immediate
indorsement. For instance, James Doe is liable only to Rico Mambo III. On the other hand, Jose Madrigal
Jr. is liable only to James Doe. And Bentham Quijano is liable only to Jose Madrigal Jr. The indorser is not
liable to the one who is not his immediate indorsee. So in the given example, James Doe is not liable to
Jose Madrigal Jr.

4. A CONDITIONAL INDORSEMENT naturally expects something in return from the indorsee, that is to
fulfill a given condition first before he can enjoy the benefit of the instrument. If he cannot satisfy the
condition, then he cannot receive the benefit of payment. Consequently, the instrument is already
discharged and the obligation under the instrument is already extinguished. If he can satisfy the
condition however, then he is entitled to the payment and the process of indorsement continues.

5. A QUALIFIED INDORSEMENT on the other hand is a waiver of liability. “Sans recourse” means without
recourse. If the payee makes the indorsement that is qualified in nature, that is a warning to the
indorsee that if he accepts the same, he recognizes that he will not run after the indorser should the
instrument be dishonored. Consequently, the holder of the instrument cannot hold the indorser liable
because the indorsement to him is qualified and he accepts it anyway. He should have refused
acceptance of it if he is uncomfortable in the first place.

6. A RESTRICTIVE INDORSEMENT finally is an indication that the instrument is being transferred only to
a specific person and nothing else. This means that no further transfer of the instrument can still be
made and negotiation thereof ends to him. Consequently, this type of indorsement kills the negotiable
character of the instrument.

IMPORTANT THINGS TO REMEMBER IN NEGOTIABLE INSTRUMENTS LAW:

Validity is different from negotiability because they require different elements under the law. An
instrument may be valid but is non-negotiable because some elements are lacking. However, an
instrument that is void or invalid is ipso facto non-negotiable while an instrument that is negotiable is
ipso facto.

The DRAWEE is not liable on the BILL OF EXCHANGE except only when he accepts it.
A cross-check is negotiable ONLY ONCE to the person who has an account with the same drawee bank.
However, any person who may get hold of a cross-check will not qualify as a holder-in-due-course
because the said instrument is not regular upon its face.

A check or promissory note is a contract. For it to be valid, it must possess 3 elements i.e. valid consent,
object and cause or consideration. Absence of any of which denies the existence of a valid contract.

If a promissory note is payable either in sum certain in money or in kind, and the choice of what to be
paid depends upon the will of the payee, the instrument is negotiable. If the choice depends upon the
will of the maker, the instrument is non-negotiable.

A check that does not bear maturity date and value is still valid and negotiable. Unless it is clear that the
lacking details are due to an honest and unintentional omission, it is deemed payable on demand and
the lacking information may be supplied by the payee. However, if the drawer’s signature is missing or
the payee’s name is intentionally lacking, it is invalid and the holder of which will not qualify as a holder-
in-due-course. The absence of these features without clear instruction from the drawer is a fatal defect
to the acceptability of the instrument.

An instrument is considered a BEARER INSTRUMENT if it is payable to the order of a fictitious name or a

non-existing person like “Batman”, “Spiderman”, “Superman”, “Barbie Doll” etc.. provided such fact was
known to the person making it so payable. It is both valid and negotiable.

An instrument is considered a BEARER INSTRUMENT if it is payable to the order of name of payee which
does not purport to be the name of any existing person like “Pres. Ferdinand Edralin Marcos”.

A check is NOT MONEY because it may bounce or be dishonored anytime. A check becomes money in 2
ways: when cashed or when cleared.

An IRREGULAR INDORSER is one who, not being a party to the instrument, shall affix his signature
thereon in blank, without any value and for no valid reason. A GENERAL INDORSER on the other hand, is
one who affixes his signature on the instrument for value, other than as a maker, drawer or acceptor.

If a principal is duly-represented by an agent who acted within the scope of his authority, the former is
still liable on the instrument even if the latter’s signature is the one appearing thereon.

A bearer instrument may be negotiated by mere delivery. A person negotiating a bearer instrument by
mere delivery is liable thereon but only to the immediate transferee.

A forger who forges the signature of another in the instrument is liable thereon. However, a person
whose signature has been forged but who ratifies the said forgery becomes liable to the instrument. The
forger has been exculpated from liability.

HOW TO NEGOTIATE A NEGOTIABLE INSTRUMENT? It depends. If it is an Order Instrument, its holder

shall negotiate it by indorsement followed by delivery. If it is a Bearer Instrument, its holder shall
negotiate it by mere delivery. NOTE: Indorsement and Delivery are the two (2) elements of negotiation.
EFFECT OF INDORSEMENT: By indorsement, the General Indorser warrants that if the instrument is
dishonored, he assumes the liability, except when his signature is forged or if he merely represents a
principal.

The word of negotiability (“order” or “bearer”) is not a requirement in indorsement. With or without it,
an indorsement which is not restrictive in nature shall not affect the negotiable character of the
instrument.

An ACCOMMODATION PARTY is one who signs on the instrument as drawer, maker or indorser
WITHOUT RECEIVING ANY VALUE therefore and merely for purpose of lending his name. He is liable on
the instrument.

A PREPROCURATION is a person signing the instrument in behalf of the corporation with limited
authority to sign.

Based on jurisprudence, a Regular Check is valid for deposit and acceptance by the bank within a period
of six (6) months from date of its maturity. Beyond this period, the checks is stale and may not be
honored anymore by the bank. In the case of a Manager’s Check, it is valid for deposit within the period
printed and declared on its face. In the absence of such written declaration, it has to be presented within
the same period of six (6) months from date of issue, otherwise it is deemed stale and needs to be
replaced by the issuing bank. In the case of MDS Checks, or those checks issued by government under
the modified disbursement systems accounts through government servicing banks such as Landbank of
the Philippines (LBP), Development Bank of the Philippines (DBP) and Philippine Veterans Bank (PVB),
the same should be presented within a period of three (3) months from date of issue, otherwise the
same is stale and needs to be replaced by the issuing bank with prior approval of the Department of
Budget and Management (DBM) since the funds thereof consequently returns to the national treasury.

For purposes of filing a case for Violation of B.P. 22, the prescriptive rule is different; the check must
rather be deposited to the bank within a period of ninety (90) days from date of its maturity. Otherwise,
if the check was deposited beyond the 90-day mandatory period but still within the period of validity or
at least is recognized by the bank, and the same bounced for reasons such as CA, DAIF, DAUD, SPO, the
issuer can no longer be held criminally liable under BP 22, as a general rule. Instead, a mere Civil Case for
collection of sum of money may be filed against the issuer of the bounced check. The only exception to
this is when it can be proven by a bank certification or testimony in court that the subject account of the
drawer has long been closed even prior to actual date of his issuance of the subject check. In this case,
the presumption of knowledge on insufficiency or lack of funds still arises and the drawer may still be
prosecuted for BP 22 even if the checks were not deposited within 90-days but still within the 6-month
validity period.

A NOTICE OF DISHONOR is a formal notice by the payee to the drawer that the check he issued has been
dishonored by the bank for a particular reason (DAIF, DAUD, SPO, CA) and that he is being given an
opportunity to make an arrangement for the payment of the value of said check within five (5) days from
personal receipt of said notice. Within four (4) years from the lapse of the 5-day grace period, the
aggrieved payee may file the criminal case for Violation of BP 22 against the drawer. Beyond it, the action
has prescribed and may no longer be pursued in court.

A Notice of Dishonor is an indispensable requirement for the filing of a criminal case for Violation of BP
22. Without proof that it was personally received by the drawer, the latter may not be convicted for the
crime.

5. HOW TO DISCHARGE AN INSTRUMENT?

A. by payment-in-due-course by the person primarily liable thereon;

B. by payment-in-due-course by the accommodated party;

C. by intentional cancellation of the instrument by its holder;

D. when the principal debtor becomes the holder of the instrument

on or after maturity in his own right; and

E. by any other act which will discharge a simple contract for the

payment of money.

There is PAYMENT-IN-DUE-COURSE when payment was made to the person entitled to receive the
payment ON OR AFTER the maturity date at the place agreed upon. If payment was made BEFORE the
maturity date, the instrument is not yet discharged and may still be validly negotiated to others if not
surrendered to the issuer.

ALLONGE is a sheet of paper attached to an instrument where the indorsements are written. Initially,
indorsements are written at the back of the instrument. If space is no longer sufficient, allonge is
attached.
 CERTIFIED CHECK is a negotiable instrument. COUNTER CHECK is a non-negotiable instrument because it
is a withdrawal slip.

The liability of a CO-MAKER under the instrument is PRIMARY while that of a GUARANTOR is
SECONDARY.

Primary Liability – both the Principal Borrower and the Co-Maker are solidarily liable to the creditor.

Secondary Liability – The Guarantor shall only be liable in case of insolvency or insufficiency of
exhausted assets of the Principal Borrower.