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TRUE or FALSE. Answer TRUE if the statement is true, or FALSE if the statement is false. Explain your answer in
not more than two (2) sentences. (5%)
a. A loan agreement which provides that the debtor shall pay interest at the rate determined by the
banks branch manager violates the disclosure requirement of the Truth in Lending Act.
b. Under the Warehouse Receipts Law, a warehouseman loses his lien upon the goods when he
surrenders possession thereof.
c. The Howey Test states that there is an investment contract when a person invests money in a common
enterprise and is led to expect profits primarily from the efforts of others.
d. A document, dated July 15, 2009, that reads: "Pay to X or order the sum of P5,000.00 five days after his
pet dog, Sparky, dies. Signed Y." is a negotiable instrument.
e. "A bank is bound to know its depositors signature" is an inflexible rule in determining the liability of a
bank in forgery cases.

Gaudencio, a store owner, obtained a P1-million loan from Bathala Financing Corporation (BFC). As security,
Gaudencio executed a "Deed of Assignment of Receivables," assigning 15 checks received from various
customers who bought merchandise from his store. The checks were duly indorsed by Gaudencios customers.
The Deed of Assignment contains the following stipulation:
"If, for any reason, the receivables or any part thereof cannot be paid by the obligors, the ASSIGNOR
unconditionally and irrevocably agrees to pay the same, assuming the liability to pay, by way of penalty,
three percent (3%) of the total amount unpaid, for the period of delay until the same is fully paid."
When the checks became due, BFC deposited them for collection, but the drawee banks dishonored all the
checks for one of the following reasons: "account closed," "payment stopped," "account under garnishment," or
"insufficiency of funds." BFC wrote Gaudencio notifying him of the dishonored checks, and demanding payment
of the loan. Because Gaudencio did not pay, BFC filed a collection suit.
In his defense, Gaudencio contended that [a] BFC did not give timely notice of dishonor (of the checks); and [b]
considering that the checks were duly indorsed, BFC should proceed against the drawers and the indorsers of the
Are Gaudencios defenses tenable? Explain. (5%)

a. As a rule under the Negotiable Instruments Law, a subsequent party may hold a prior party liable but
not vice-versa. Give two (2) instances where a prior party may hold a subsequent party liable. (2%)
b. How does the "shelter principle" embodied in the Negotiable Instruments Law operate to give the
rights of a holder-in-due course to a holder who does not have the status of a holder-in-due course?
Briefly explain. (2%)
AB Corporation drew a check for payment to XY Bank. The check was given to an officer of AB Corporation who
was instructed to deliver it to XY Bank. Instead, the officer, intending to defraud the Corporation, filled up the
check by making himself as the payee and delivered it to XY Bank for deposit to his personal account. AB
Corporation come to know of the officer's fraudulent act after he absconded. AB Corporation asked XY Bank to
recredits its amount. XY Bank refused.
a. If you were the judge, what issues would you consider relevant to resolve the case? Explain (3%)
b. How would you decide the case? Explain. (2%)
Pancho drew a check to Bong and Gerard jointly. Bong indorsed the check and also forged Gerard's
endorsement. The payor bank paid the check and charged Pancho's account for the amount of the check. Gerard
received nothing from the payment.
a. Pancho asked the payor bank to recredit his account. Should the bank comply? Explain fully. (3%)
b. Based on the facts, was Pancho as drawerdischarged on the instrument? Why?(2%)

R issued a check for P1M which he used to pay S for killing his political enemy.
a. Can the check be considered a negotiable instrument?
b. Does S. have a cause of action against R in case of dishonor by the drawee bank?
c. If S negotiated the check to T, who accepted it in good faith and for value, may R be held secondarily
liable by T?
Reason briefly in (a), (b) and (c).

- II -
Discuss the legal consequences when a bank honors a forged check. 5%
- III -
Jun was about to leave for a business trip. As his usual practice, he signed several blank checks. He instructed
Ruth, his secretary, to fill them as payment for his obligations. Ruth filled one check with her name as payee,
placed P30,000.00 thereon, endorsed and delivered it to Marie. She accepted the check in good faith as payment
for goods she delivered to Ruth. Eventually, Ruth regretted what she did and apologized to Jun. Immediately he
directed the drawee bank to dishonor the check. When Marie encashed the check. it was dishonored.
1. Is Jun liable to Marie? 5%
2. Supposing the check was stolen while in Ruth's possession and a thief filled the blank check, endorsed
and delibvered it to Marie in payment for the goods he purchased from her, is Jun liable to Marie if the
check is dishonored? 5%

- I -

(1.) What is a negotiable instrument? Give the characteristics of a negotiable instrument. (2%)

(2.) Distinguish a negotiable document from a negotiable instrument. (2%)

(3.) State and explain whether the following are negotiable instruments under the Negotiable Instruments Law:
(i) Postal Money Order;

(ii) A certificate of time deposit which states This is to certify that bearer has deposited in this bank
the sum of FOUR THOUSAND PESOS (P4,000.00) only, repayable to the depositor 200 days after date.

(iii) Letters of credit;

(iv) Warehouse receipts;

(v) Treasury warrants payable from a specific fund. (5%)
- II -

(1.) Dagul has a business arrangement with Facundo. The latter would lend money to another, through Dagul,
whose name would appear in the promissory note as the lender. Dagul would then immediately indorse the note
to Facundo.

Is Dagul an accommodation party? Explain. (2%)

(2.) a) What is a crossed check?

What are the effects of crossing a check? Explain.

b) Distinguish an irregular indorser from a general indorser. (3%)

(3.) Brad was in desperate need of money to pay his debt to Pete, a loan shark. Pete threatened to take Brads
life if he failed to pay. Brad and Pete went to see Seorita Isobel, Brads rich cousin, and asked her if she could
sign a promissory note in his favor in the amount of P10,000.00 to pay Pete. Fearing that Pete would kill Brad,
Seorita Isobel acceded to the request. She affixed her signature on a piece of paper with the assurance of Brad
that he will just fill it up later. Brad then filled up the blank paper, making a promissory note for the amount of
P100,000.00. He then indorsed and delivered the same to Pete, who accepted the note as payment of the debt.

What defense or defenses can Seorita Isobel set up against Pete? Explain. (3%)