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Notes on Negotiable Instruments 1

Atty. Abelardo Dumaguing

Important provisions
Sec. 1 – Elements of Negotiable Instrument
Sec. 2 – certainty of the amount payable
Sec. 3 in rel. to Sec. 47 – unconditional character of instrument
Sec. 4 – determinable future time, fixed future time, contingency
Sec. 5 – provisions that do not affect the negotiability of the instrument
Sec. 6 – omissions and additions
Sec. 7 – payable on demand
Sec. 8 – payable to order
Sec. 9 – payable to bearer
Sec. 11 – presumption of date (date is presumed correct)
Sec. 12 – antedate and postdate
Sec. 13 – insertion of date
Sec. 14 – incomplete instrument but delivered
Sec. 15 – incomplete and undelivered
Sec. 16 – complete instrument but undelivered
Sec. 23 – forgery
Sec. 124 – material alteration
Sec. 125 – material alteration
Sec. 24 – presumption of valuable consideration
Sec. 28 – want of consideration and failure of consideration
Sec. 29 – accommodation party
Sec. 30 – negotiation (referring to transfer of instrument)
Sec. 33-39 – kinds of indorsement eg. Blank, special, restrictive (36), qualified, conditional
Sec. 48 – striking out indorsement
Sec. 52 – what constitutes a holder in due course
Sec. 59
Sec. 57 – rights of a holder in due course
Sec. 60 – liability of a maker
Sec. 61 – liability of a drawer
Sec. 62 – liability of an acceptor
Sec. 65 & 66 – warranties of an indorser
Sec. 70-73 – presentment for payment
Sec. 89 – notice of dishonor
Sec. 126 – definition of bill of exchange
Sec. 184 – definition of a promissory note
Sec. 185 – definition of a check

What is a negotiable instrument?

It is a written contractual obligation that requires payment of money with the following essential elements:

1. in writing and signed
a. by the maker (if a promissory note)
b. by the drawer (if a check)

2. contains unconditional
a. promise (for promissory note), or
b. order (for check or bill of exchange[BOE])

3. must be payable on
a. demand
b. fixed future time, or
c. determinable future time

4. payable to
a. order, or
b. bearer

5. Drawee (element required in check or bill of exchange)
drawee must be NAMED or be INDICATED with a REASONABLE CERTAINTY (if he can’t be named)

WRITTEN AND SIGNED
Kinds of signature:
1. Conventional signature
2. Personalized signature

UNCONDITIONAL PROMISE/ORDER

Promise to pay shall be ABSOLUTE

Notes on Negotiable Instruments 2
Atty. Abelardo Dumaguing

Ex:
P10,000.00

I promise to pay to the to the order of Perdo ten
thousand pesos.

(Sgd)Amado
If it is ABSOLUTE then it is NEGOTIABLE and PAYABLE ON DEMAND

CONDITIONAL PROMISE
P20,000.00

I promise to pay to the to the to Mario or his order
after the unconditional surrender of the Al Qaeda
network to the Allied Forces

(Sgd)Amado
If it is CONDITIONAL then it is NON-NEGOTIABLE

Ex:
P30,000.00

I promise to pay thirty thousand pesos to Ruby or
bearer after she will celebrate Christmas of the year
2001.

(Sgd)Amado
This is not negotiable because it is with condition.

Ex:
P5,000.00

I promise to pay unconditionally to the order of Anton
five thousand pesos when it rains today.

(Sgd)Harry Potter
This is not negotiable because it with condition for it is dependent on the happening of an event that not sure to happen.

DEMAND (Sec. 7)
OVERDUE
NO TIME for payment is indicated
EXPRESSLY made payable on demand

EXPRESSLY
P40,000.00

On demand, pay to the order of Juana forty thousand
pesos.

To: Clara (Sgd) Bella

NO TIME
Baguio City
19 November 2001
P40,000.00
Pay to the order of Juana forty thousand pesos.

To: Clara (drawee) (Sgd)
Bella
No time for payment so it is payable on demand.

NB: A CHECK has NO TIME OF PAYMENT therefore it is payable on demand.
Sec. 185 – A check is a bill of exchange drawn on a bank payable on demand

Instrument is OVERDUE

Ex:

At the outset bill of exchange/promissory note was issued at 1 May 2001 and payable on 7 August 2001.

Notes on Negotiable Instruments 3
Atty. Abelardo Dumaguing

Baguio City
1 May 2001
P8,000.00
I promise to pay to Ana or bearer the sum of eight
thousand pesos on 7 August 2001.
(Sgd) Pablo

- Overdue and yet it was endorsed payable on demand

- When you indorsed an overdue instrument then it is payable on demand

Sec. 47 – An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or
discharged by payment or otherwise. (ex: destroying the instrument)

STALE CHECK (when not presented for payment within 6 months)
Stale check can still be negotiated but it needs the replacement of new one.

(nb: check cannot be overdue because it is payable on demand)

STALE DEMAND (by laches)
FIXED FUTURE TIME
Ex: Christmas day of 2001

DETERMINABLE FUTURE TIME
Day certain

How to determine – with reference to the happening of a specified event that is sure to happen but it cannot be known
when.

Ex: Death of any being

P50,000.00
I promise to pay to the order of Berto fifty thousand
pesos 1 week after his only carabao will die.
(Sgd) Harry Potter
Carabao will die – specified event

P80,000.00
I promise to pay to the order of Claro eighty thousand
pesos 1 month after his only cow will die of syphilis.
(Sgd) Harry Potter
Cow will die of syphilis – not sure to happen

Payable upon a contingency
Under last paragraph of Sec. 4, an instrument payable upon a contingency is not negotiable and the happening of the
event does not cure the defect.

Q: What if the only cow of Claro will die of syphilis?
A: The instrument is still not negotiable because the happening of the contingent event does not cure the defect. (Sec. 4
last par.)

*Day certain

PAYABLE TO ORDER
Sec. 8 – Payable to
i. the ORDER of a specified person or
ii. a specified person or his order.

Order or a specified person
Ex: to the order of Juan

Specified person or his order
Ex: to Juan or (his) order
In this instance, payment is not limited to Juan but also to the pleasure of Juan (eg: by indorsing, signing at the back of
the instrument and deliver it to somebody)

NOT NEGOTIABLE, if payable to SPECIFIED PERSON because there is a limitation.

*Sec. 34 – Indorsement

00 I promise to pay to the order of Ruby the sum of fifty thousand pesos. Fictitious 2. written at the back of the instrument . FICTITIOUS PERSON/PAYEE and such is known to the person making it payable. . -impossible and illegal to make an instrument payable to bearer to become payable to order. EXPRESSLY (eg: Pay to BEARER) 2.made by the payee who is first to indorse CLASSIFICATIONS OF INDORSEMENT 1.000.one that specifies the indorsee Ex: Face of instrument (same as above) At the back To: Rosanna (Sgd) Ruby To: (Sgd) Rosanna (blank indorsement) -This is payable to bearer because last indorsement is in blank. 9) 5 Instances: 1. last par. BEARER – payee does not need to endorse 3. Expressly made payable 3. hence the whole instrument is converted to payable to bearer(blank indorsement) -Last indorsement matters -not permitted to alter the instrument (that is: in words) to make it payable to bearer. Not named 4. NAME OF THE PAYEE DOES NOT PURPORT TO THE NAME OF ANY PERSON (eg: Pay to the order of CASH) nb: the word “order” is not the controlling factor 5. Indorsement in blank 5. Specified (named) BLANK INDORSEMENT . 8. Abelardo Dumaguing PAYABLE TO BEARER (Sec. Special indorsement . Person named/specified therein or BEARER (eg: Pay to Jose [payee] or bearer) Sec. 9 – no need of specifying the person Q: How to know if the instrument is payable to bearer? A: See Sec. Blank indorsement . Payee – person specified in the instrument Sec. WHEN THE ONLY OR LAST INDORSEMENT IS AN INDORSEMENT IN BLANK (in relation to Secs. (eg: Pay to the order of Tarzan) 4. 9 In. Notes on Negotiable Instruments 4 Atty. (Sgd) Harry Potter At the back To: (Sgd) Ruby 2.an indorsement that does not specify the indorsee Ex: Baguio City 22 November 2001 P50. – when the instrument is payable to order the payee must be named or otherwise indicated therein with reasonable certainty.signature affix. 33 and 34 1. ORDER – payee must indorse it first In.

(Central Bank Circular #416 – the legal rate of interest is 12% per annum) Bill of Exchange/Promissory note representing balance of installment sales (6% pa – interest) -obligation arises from a sale Sec. Abelardo Dumaguing UNCONDITIONAL PROMISE OR ORDER TO PAY A SUM CERTAIN IN MONEY Sec.400.2 – the amount payable remains a sum certain although it is to be paid with an interest by stated installments with an acceleration clause although it is to be paid with exchange with cost of collection or an attorney’s fee. Notes on Negotiable Instruments 5 Atty. 1956.00 I promise to pay to Maria or bearer the sum of twelve thousand pesos with an interest on 22 April 2002.00 due on 4 April 2002 e) P6. Exchange.00 due on 3 March 2002 d) P2. Interest. 1 – amount payable sum certain Sec.000. Stated. the legal rate of interest shall be applied.00 due on 5 May 2002 To: Reynaldo (Sgd) Harry Potter . STATED INSTALLMENT The following must be specified: a.000.000. PAYABLE BY INSTALLMENT Ex: Negotiable. – sum certain but to pay by stated installment. (Sgd) Harry Potter -amount is payable in sum certain although it is with interest -P10. 2. Acceleration) 1.000. NCC) 2) If there is stipulation but no rate then legal rate of interest applies. (keyword: CESIA – Cost. Amount of each installment and b. P12.00 Pay to Adquilen or bearer the sum of twenty thousand pesos by installment as follows: a) P3.000. 1. cost of collection/attorney’s fee (CESIA) Nb: 1) It must be EXPRESSLY STATED that there is payment of interest (Art.00 due on 2 February 2002 c) P5. with an INTEREST -must be in writing to be binding on the debtor (Art. 2. NCC) Ex: Bill of Exchange/Promissory Note -obligor bound himself to pay interest as written on the face of the instrument. Due date for each installment If there is not amount and due date specified the it is NOT NEGOTIABLE because the amount will be uncertain.00 due on 1 January 2002 b) P4. with an interest.00 due on 22 January 2002 2.000.000. exchange.00 I promise to pay to the order of Pedro ten thousand pesos with an interest of 2% per month on 22 January 2002.000. amount sum certain P20. acceleration clause. 22 November 2001 P10. 1956. (Sgd) Harry Potter -even if rate of interest is not specified.

00 due on 2 February 2002 c) P5. Ex: of an instrument payable with an EXCHANGE California USA 26 November 2001 US$2. Their difference is called EXCHANGE) Exchange must be at: 1. amount sum certain P16.00 due on 1 January 2002 b) P4.000. To: Maria (Sgd) Harry Potter . Abelardo Dumaguing Negotiable.00 due on 4 April 2002 e) P6. Stated installment but in default the whole shall become due.00 due on 3 March 2002 d) P2. Current rate -average rate that will be prevailing at the time of the transaction during a particular date. Ex: NEGOTIABLE P20.00 per dollar on 25 December 2001. EXCHANGE -difference in value of same amount of money by different countries Ex US$1 and Canadian$1 (here.00 I promise to pay to the order of Gandeza the sum of twelve thousand pesos by stated installments on 1 January 2002 and 2 February 2002.00 Pay to Adquilen or bearer the sum of twenty thousand pesos by installment as follows: a) P3.000. ACCELERATION CLAUSE Definition: with a provision that upon default the whole amounts shall become due.000. To: Clara (Sgd) Harry Potter 4.00 Pay to the order of Jose the sum of two thousand US dollar in Philippine peso at a rate of P51.000.000.000. Notes on Negotiable Instruments 6 Atty.000. the US dollar is more valuable. (Sgd) Harry Potter 3.00 Pay to the order of Indong the sum of sixteen thousand pesos on two(2) equal installments the first to b due on 6 July 2002 and the other to be due on 16 July 2002.00 due on 5 May 2002 In the event there is failure to pay anyone of the foregoing installments then the entire remaining obligation as of the time of default shall immediately become due.000. (Sgd) Harry Potter To: Reynaldo (or with reasonable certainty) NOT NEGOTIABLE P12. Fixed rate -by agreement of the parties 2.000.

or ii. (Sgd) Harry Potter -In the first paragraph. To: Clara (Sgd) Harry Potter -here.000.00 Pay to the order of Juan de la Cruz the sum of two thousand US dollar in Philippine peso at the current rate of exchange.00 I promise to pay to the order of Reynaldo fifty thousand pesos after he will sell to me his car with plate number ADB 398.00 I promise to pay to the order of Reynaldo the sum of fifty thousand pesos on 5 May 2002. Notes on Negotiable Instruments 7 Atty. I bind myself to pay an additional amount equivalent to 20% of the principal obligation to pay cost of collection or attorney’s fee. 90 SCRA 332) 5. -a mere statement on how come the instrument was issued in ONLY a statement stating WHAT TRANSPIRED between the parties as a consequence of it the instrument was issued.00 I promise to pay to the order of Juan de la Cruz fifty thousand pesos on 16 January 2002.000.000. the instrument is payable on demand because no time of payment is made -current rate at the time of the payment prevails (Ponce vs CA. mere statement of what transpired. This promissory note was executed by me because of the fact that I purchased from the payee a Mitshubishi Lancer car model 1964 with plate number ADB398 and the aforesaid amount represents my balance on that sale. COST OF COLLECTION OR/AND ATTORNEY’S FEE -does not include any other expenses Ex: P50. An indication of particular fund -for reimbursement 2. In the event I fail to pay and as a consequence a case will be filed against me. Statement of the transaction which gave rise to the instrument. Q: What prompted Harry to issue the promissory note? A: There was a sale/transaction P50. P50. (Sgd) Harry Potter SECTION 3 -Promise is unconditional ORDER/PROMISE to pay remains UNCONDITIONAL although couple with: 1. INDICATION OF PARTICULAR FUND OUT OF WHICH THE REIMBURSEMENT IS TO BE MADE FUND is a source of reimbursement i. Abelardo Dumaguing US$2. (Sgd) Harry Potter Q: Is this negotiable? A: It is NOT because the condition is unconditional. Where the drawee may be able to compensate for what he will pay .000. It can be where the drawee can be reimbursed. the promise to pay is absolute -In the second paragraph.

(Sgd) Harry Potter (drawer) To: Marlon (drawee) -here.00 Pay to the order of Pedro or bearer the sum of ninety thousand pesos and reimburse yourself out of money which is in your custody. SEC.000.000.00 Pay to the order of the DPWH the sum of ten million pesos on 15 January 2002 out of the fund in the National Government Treasury. Confession of Judgment 3. (Sgd) Auditor General To: The Treasurer of the Philippines -“fund” is mentioned -this is NOT NEGOTIABLE (but valid) because the order to pay is conditional for it is payable out of particular fund. the “fund” is the money of the drawer in the possession of the drawee. (Sgd) Harry Potter -NOT NEGOTIABLE because it will be hard to determine the liability of the indorser. the FUND means the actual source of payment) Fund as source of payment vs. “Where the holder has the option (or election to require something to be done) Ex: P10. Fund as source of reimbursement Fund as source of payment Ex: P10. 3 -“but an order or promise to pay out of a particular fund is not unconditional. (Sgd) Harry Potter Q: Who has the privilege of choosing? .00 I promise to pay to the order of Ruby the sum of ten thousand pesos or deliver a carabao at the option of the holder. Option.000. -DRAWEE IS REQUIRED TO PAY BUT WHETHER HE CAN BE REIMBURSED OR NOT IS BESIDE THE POINT P90. 5(d) Holder: 1. Waives. -it is conditional because payment depends on a condition that the fund indicated is sufficient (Payment is based in contingency. Sale of collateral securities 2. Sale) Sec. Abelardo Dumaguing Last paragraph of Sec. (the “fund” here is the source of payment) -The drawee will pay whether the fund indicated is sufficient or not. (keyword: COWS: Confession.000. 5 (provisions that do not affect the negotiability of the instrument) They are the following: 1. Gives the holder an election/(option) to require something to be done in lieu of payment of money. May demand MONEY or 2. Notes on Negotiable Instruments 8 Atty. that is the availability of funds. Something to be done (ie: performance of an act) Sec.000.00 I promise to pay to the order of Ruby the sum of twenty thousand pesos and deliver two(2) cows to the holder. 5 Par. Waives the benefit of any law 4. 1 – (where it adds act) NOT NEGOTIABLE ACT + MONEY = NOT NEGOTIABLE Ex: P20. (here. A TREASURY WARRANT is not negotiable because it is payable out of a particular fund.

00 I promise to pay to the order of Ruby fifty thousand pesos on 5 May 2002 after I am able to sell my Mitshubishi Lancer Car with plate number ABD 398 in a public auction sale to be undertaken by me or my attorney in face. It deprives a party his statutory right to appeal. Cognovit Actionem 3. 2. Relicta verificationem Warrant of attorney -Confession of judgment made before an action filed in the court In this jurisdiction this form of judgment is VOID because: 1.000. Last indorser/bearer but never to the drawer or drawee) not the maker or payee. and. Ex: P50.00 I promise to pay to the order on 5 May 2002. . Payment depends on the sale of the car. It enlarges the field of fraud. valid also in this jurisdiction. It denies a party his day in court. 3. If warrant of attorney is made as if note warrant of attorney is made at all Confession of judgment means that the obligor acknowledge his liability that may arise from the instrument. there is authority of the holder to sell collateral security Ex: P50. (Sgd) Harry Potter -Any holder can make the auction -“in the event this note is not paid at maturity” – this is not a condition -The car can be sold at public auction sale if note is not paid at maturity. 5 (b) 3 forms of Confession of Judgment 1. Sec.000. -Here. Relicta actionem -similar to cognovit actionem. in the event this note is not paid at maturity. Notes on Negotiable Instruments 9 Atty. I hereby appoint the holder as my attorney in fact to undertake the public auction sale in my behalf. Even if it is a Bill of Exchange (not the drawer or drawee) Sec. *This is VALID in this jurisdiction. (Sgd) Harry Potter -NOT NEGOTIABLE because there is a condition. but here. the defendant or the respondent initially raise a defense against a claim but later on abandons this defense. it is only an option of the holder. Cognovit actionem -one that is made after a case has been filed in court. WARRANT of Attorney 2. -Selling the car here is not a condition. 5 (a) Sale of Collateral Security -maker makes assurance of payment (ex: execution of mortgage) Collateral Security -refers to a property constituted to guarantee satisfaction or payment of obligation. For this purpose. a Mitshubishi Lancer with plate numbe ADB 398 which may be sold by the holder in a public auction sale and the proceeds thereof may be applied to satisfy the aforesaid obligation. This obligation is secured by a mortgage involving my car. -Source of payment does not come from the proceed of the sale. Abelardo Dumaguing A: The HOLDER (ie.

Notice of Dishonor is hereby waived. Omissions (may be intentional or not) 2. P50. Sec. In the event I failed to pay the aforesaid obligation and as a consequence thereof a case should be filed against me in court for collection of sums of money. particular kind of current money which payment is to be made (ie: designating of denomination) NOT DATED -When the promissory note is not dated. then he can put the date of issue [Sec. I hereby authorize Pedro as my attorney in fact to acknowledge in my behalf the liability that may arise from the issuance of this note. NOTICE OF DISHONOR -notice to be made by the holder informing the person secondarily liable the fact that the instrument was refused payment or acceptance. is not dated 2.00 Pay to the order of Ruby twenty thousand pesos on 3 March 2002. 24 – Presumption of Consideration) PLACE (issued/drawn) See: Sec. 17 (c)] DOES NOT SPECIFY THE VALUE GIVEN -There is a presumption that it is in exchange of a valuable consideration (Sec. 5 (c) -obligor = drawer/indorser in relation to Sec. (Sgd) Harry Potter If warrant of attorney is made as if no warrant of attorney is made at all. (Sgd) Harry Potter (drawer) To: Reynaldo (drawee) -even if one does not receive a NOTICE. he is still liable. BP 22 is not the same with Sec. Abelardo Dumaguing Ex: Defendant denying that he paid the liability. Q: What is the form of the notice? A: It must be in writing (for convinience). 89 of NIL Ex: Bill of Exchange P20. does not specify the value given 3. seal 2.000. 73 (Place of presentment) .000. 17 in relation to Sec. 89 Sec. Notes on Negotiable Instruments 10 Atty. 89 -person secondarily liable (referring to the drawer/indorser) is entitled to a notice of dishonor. and one does not know when it was executed. Q: What is the advantage of the person secondarily liable? A: He can be discharged/relieved from liability. but the abandonment is tantamount to a liability. Sec. 6 1. Additions INTENTIONAL OMISSION: the instrument: 1.00 I promise to pay to the order of Ruby fifty thousand pesos on 6 June 2002. does not specify the place where it is issued or drawn ADDITIONS 1.

Generally – crossed by 2 diagonal parallel lines at the upper left corner of the check or instrument. Sec. in any other place where he could be found. Unconditional promise 1.000. the one primarily liable is the drawee. Specially The example is GENERALLY CROSSED CHECK SPECIALLY CROSSED CHECK Ex: Baguio City 6 December 2001 . place of business. Pay to the order of CASH the amount of eighty thousand pesos. Order to pay must be to order or to bearer. Order to pay on demand or at a fixed or 4. Abelardo Dumaguing In his (obligor’s) 1. 60: liability of the maker -maker is the person to whom you should present the instrument first -maker is principally liable *In a bill of exchange. 62 once the bill of exchange has been accepted. Notes on Negotiable Instruments 11 Atty. Unconditional order in writing 2. residence 2. Promissory note vs Bill of Exchange PROMISSORY NOTE BILL OF EXCHANGE -Unconditional promise -Unconditional order -4 essential elements -5 elements 1. 2. Payable on demand or at a fixed or 3. Signed by the person issuing it determinable future time 4. -drawee must be named -may be presented for acceptance -need not be presented for acceptance -three parties -two parties (originally) -drawer is secondarily liable -maker is primarily liable PRESENTMENT FOR ACCEPTANCE -drawer may be liable under Sec. Bill of Exchange vs Check Bill of Exchange Check -payable on demand or at a fixed or determinable -always payable on demand future time -drawee may not be a bank -drawee is always a bank -act of issuing without sufficient fund is NOT -act is CRIMINAL CRIMINAL -may be presented for acceptance -need not be presented for acceptance CROSSED CHECK [Generally] Baguio City 6 December 2001 P80. (Sgd) Harry Potter To: PNBank CROSSED CHECK 1. Payable to bearer or order determinable future time a sum certain in money 5. or 3. Signed by maker 2. Addressed by one person to another 3.

Check drawn for specific amount but not sufficiently funded with the drawee and is subsequently dishonored (bouncing check) by the drawee.00 Marlon promised to pay to the order of Reynaldo one hundred thousand pesos with use of 100 pieces of P100 bills. 6 Addendum: A.000. Seal. 184 – Promissory Note: Unconditional promise in writing Sec. -person directly responsible to pay to whom instrument should be presented first If he refuses to pay then go to the person who indorse it. Notes on Negotiable Instruments 12 Atty. DRAFT/BANK DRAFT -a check drawn by one bank against another bank. It will be for deposit 2.000. (Sgd) Harry Potter To: PNBank -specific name of a bank is written in between the 2 diagonal parallel lines. Pay to the order of CASH the amount of eighty thousand pesos. when he presents PN = payment BOE – presented for acceptance or payment Upon acceptance – drawee becomes primarily liable under Sec. payee. 62 4) PN – 2 parties (maker and payee) BOE – 3 parties (1. 2. BOE: drawer – secondarily liable Drawee – primarily liable -Any indorser is also secondarily liable. Sec. Designation of particular kind of current money in which payment is to be made -denomination P100. drawer – issues instrument. 126 – Bill of Exchange: Unconditional order 2) Promissory Note – 4 Elements 3) PN – not presented -maker. -named bank merely becomes a drawee bank PURPOSE OF CROSSED CHECK 1. (Sgd) Harry Potter -payment of P100. 3. Addenda: 1) Sec. Negotiated only once by the payee -drawee has issued that crossed check to see to it that the particular objective will be achieved. not essential 1) For advertisement 2) For identification 3) For embellishment B. drawee – whom the instrument is addressed [required to pay]) Sec. 126 5) Maker – liable -pay instrument according to the tenor of Sec.000 with the use of P100 bills . Abelardo Dumaguing P80. 60.

Q: How to negotiate a BEARER INSTRUMENT? A: By delivery. Face: signature of the drawer/maker Back: signature of the person negotiating it Ex: FACE . but not a legal tender Date of payment -takes the effect of payment when encashed MANAGER’S CHECK -check drawn by a manager of a particular bank against the same bank where he is employed as manager -as good as cash. but VOID if used for fraudulent purpose. 2 – amount payable is to be made in exchange (speaks of two kind of currency) Sec. Demand 2. Q: How to negotiate an ORDER INSTRUMENT? A: By indorsement plus delivery. NOT if the transferee if for depositary only. Notes on Negotiable Instruments 13 Atty. NEGOTIATION -refers to transfer of instrument -purpose: makes the transferee becomes holder of the instrument as: 1. ACCOMMODATION CHECK -issued by drawer who did not receive any valuable consideration for drawing it from the payee or bearer. 12 ANTE-DATED POST-DATED -date earlier than the actual date of drawing or -date later than the actual date of issuance or issuance drawing the instrument effect: before encashing. Endorser But. 14 and 15) -the amount is not yet written MEMORANDUM CHECK -contains memorandum to the effect that this will be followed before encashing -not condition -guidelines -written at the back on another paper attach to the check. or 3. Abelardo Dumaguing -specify denomination but not condition simply a designation of the denomination used. wait for the arrival of post date allowed. 184 To pay on 1. Determinable future time A sum certain in money to order or a bearer CASHIER’S CHECK -check drawn by a cashier of a particular bank against the same bank where he is employed as a cashier. INDORSEMENT (Secs. Bearer. but not a legal tender -takes effect when encashed BLANK CHECK -incomplete instrument (Secs. GUARANTEE CHECK -issued to simply guarantee payment of an existing obligation. Fixed future time. As differentiated with: Sec. Effect: as good as cash. Sec. 39 and 40) -signature affixed at the back of the instrument by the person negotiating it. or 2.

indorsee has not recourse against indorser.00 I promise to pay to the order of Ruby eight thousand pesos five days after date of this instrument.000. Example of “fixed period after date” (no date)___________ 8. the payee may disregard such condition or vice versa he may not be required to pay without the happening of the event. but if drawee is insolvent. 2.(but not for other reason than insolvency) Sec. 13 – INSERTION OF DATE Purpose: to determine the maturity of the instrument or the amount of interest INSTANCES WHERE DATE MAY BE INSERTED 1. When it vests title to the indorsee in trust of for the benefit of other persons ex: To: Maria in trust for my son (Sgd) Juan CONDITIONAL INDORSEMENT -nothing to do with promise or order to pay ex: To: Maria if she tops the 2001 Bar Exams (not referring with the promise to pay) Suspensive condition – happening of event gives rise to the obligation. Prohibits further negotiation ex: To: Maria only (-negotiable but ceases to be because further negotiation is prohibited. When it constitutes the indorsee being an agent of indorser ex: To: Maria for collection only (Sgd) Harry Potter 3. BACK (Sgd) Juan indorsement SPECIAL INDORSEMENT -if indorsee is specifically named BLANK INDORSEMENT last indorser -payable to bearer Sec. then maturity can now be determined. 2. Instrument is payable at a fixed period after date but the instrument is undated. QUALIFIED INDORSEMENT -indorsee is only an assignee of the indorser ex: To: Maria sans (without) recourse indorser indorses the instrument to indorsee for payment from payee. -however. Instrument is payable at fixed period after sight but the acceptance is undated. . 36 – RESTRICTIVE INDORSEMENT 1. A. (Sgd) Harry Potter -“five days” = fixed period -insert the date of issue. Notes on Negotiable Instruments 14 Atty. Abelardo Dumaguing Payable to the order of Juan.

00 Pay to the order of Jose the sum of ……………………. To enforce the payment in its full amount See: Sec. Takes the instrument without knowledge of the infirmity or defect of the instrument.000. Abelardo Dumaguing Sec. Takes the instrument in good faith 4. therefore incomplete) BUT it can be delivered (but it cannot be negotiated because the instrument is not negotiable for one of its essential element is absent) . Good faith. it was “delivered” INCOMPLETE means an essential element is lacking Ex: NOT SUM CERTAIN IN MONEY P……………. 52. 57 – Rights of a holder in due course 1. 14 – speaks of “incomplete” instrument however. Takes the instrument before it is overdue 3. the holder must insert the date Sec. “regular upon its face” – no suspicion of alteration “before overdue” Ex: Suppose the check was issued on 1 January 2002. Overdue. 59 Sec. Insertion of a wrong date does not avoid the instrument but as to him that is the true date because of the right of a holder in due course (see: Sec. he who: (the conditions) 1. 13 vs Sec. 59 – Presumption: “Every holder is a holder in due course” (this is a disputable presumption – the adverse party may prove the insufficiency of the conditions) See: Sec. (Sgd) Pablo To: Maria -Jose presented it to Maria for her acceptance -Maria accepted it with her signature (but no date) So. today is 7 January 2002. 57) 2.00 Pay to the order of Jose ten thousand pesos six days after sight. 13 B. (Sgd) Marta PNBank “wanting in any material particular” (eg: the amount payable is wanting. Hold the instrument free form defect (Sec. Notes on Negotiable Instruments 15 Atty. Infirmity) “Complete and regular upon its face” -all the essential elements are present. (keyword: COGI: Complete. 52 vs Sec. Ex: Bill of Exchange 1 January 2002 P10. the check is already overdue “for value and in good faith” “for value” – in exchange for valuable consideration “without knowledge of the infirmity or defect” Sec. Takes the instrument complete and regular upon its face 2. 57) Q: Who is a holder in due course? A: Under Sec.. 17 (c) – where the instrument is not dated Q: What is the effect of inserting a wrong date and thereafter the instrument is negotiated in due course? A: Sec 13. including all matters like date. “after sight” – after is shown/presented for payment and there is acceptance.

The law requires that in order that the instrument may be enforced it must be filled up with authority given and within a reasonable time. 14 FACE Baguio City 10 January 2002 P__________.00 Pay to the order of Juan the sum of _________________ (Sgd) Pedro Land Bank Facts: Pedro instructed Juan to put any amount but not exceeding P40.000. However. Subsequently. That all prior parties had the capacity to contract. 4. That the instrument is genuine and in all respect what it purports to be. Marta can enforce the instrument as if it was strictly filled up in accordance with the authority given and within a reasonable time. My answer will not be the same as in the preceding question. (see: last sentence of Sec.000. Indorse it further. what must Marta do so that she can recover from the persons who are secondarily liable? A: Marta should give notice of dishonor to the persons secondarily liable [ie: 1) the drawer and 2) the drawee] Q: What if Marta did not give any notice of dishonor? A: Then the persons secondarily liable are DISCHARGED from liability. That he has a good title to it. not still a holder because the instrument is not yet negotiable) Q: What is the evidence of the authority? A: The signature on the blank paper. 14.00. 57 – Rights of holder in due course] . Q: How to fill up? A: 1. Question #3 Q: If Marta is not a holder in due course (ex: she knew of the infirmity/defect). NO form of notice but it must be in writing for purposes of convinience.00. what can Marta do with the check? A: Marts may: 1. 3. Present the check to the drawee bank for payment Question #2 Q: If Marta chose to present the check for payment but the bank dishonors the check. or 2. BACK (Special Indorsement) To: Marta (indorsee) (Sgd) Juan Question #1 Q: As a holder (indorsee). Abelardo Dumaguing -The person in the possession thereof has a prima facie authority to complete it by filling up the blank therein (he is still a possessor. ILLUSTRATION OF SEC. Juan placed P47. Question #4 Q: Will your answer be the same as in the preceding question if Marta is a holder in due course (ie: she did not know that there was infirmity/defect and if she knew. 65 and 66) 1. Fill it up within a reasonable time if he exceeds the authority then a holder in due course has a right under Sec. she was not a party thereor)? A: NO. 2. Notes on Negotiable Instruments 16 Atty. She cannot enforce the instrument against Pedro because the latter can raise the personal defense that the instrument was filled up not strictly in accordance with the authority given. Fill up the blank strictly in accordance with the authority given 2. can she enforce the check against Pedro? A: No. That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. 57 negotiation by delivery = to bearer Warranties of an Indorser (Secs. Juan indorsed the check to Marta. NIL) [Sec.

“any holder” – includes holder in due course Lito cannot enforce the instrument against RUA because the check cannot be valid in the hands of ANY HOLDER. Abelardo Dumaguing Marta can enforce the instrument free from defect and in its full amount of P47. Thereafter.00 Pay to the order of Mr.000.000. ____________________ the sum of eighty thousand pesos . Juan warrants Marta that: 1. Amado negotiated the check to Lito. He (Amado) placed his name as payee unknown to RUA. The check is genuine and in all respect what it purports to be (ie: the amount is correct even if it was written not strictly in accordance of the authority given) SEC. Amado was the finder. 15 – INCOMPLETE instrument and UNDELIVERED “undelivered” means NO VALID DELIVERY -no essential particular and no valid delivery See: Sec 8 – “payee must be named” -instrument is INCOMPLETE -COMPLETED and NEGOTIATED without authority -Effect of signing: the instrument is NOT a valid contract in the hands of ANY HOLDER -the instrument cannot be enforced by the holder (nb: even holder in due course) against the person who became the party thereto prior to delivery ILLUSTRATION: FACE P80. Even if Lito is a holder in due course he cannot enforce it against RUA considering that RUA was a person who place the signature in the instrument before delivery. Notes on Negotiable Instruments 17 Atty. (Sgd) RUA To: PNBank Facts: Because of his gross negligence.00 Question #5 Q: Can Marta require Juan to pay P47.000. INCOMPLETE INSTRUMENT INCOMPLETE AND UNDELIVERED INSTRUMENT Can be enforced by a holder in due course Cannot be enforce by a holder in due course . -Lito cannot enforce the instrument against RUA if the instrument is dishonored by the bank. BACK (after completion) To: Lito (Sgd) Amado (indorser) Nb: from Amado to Lito = there is a valid delivery BUT from RUA to Amado = no valid delivery. RUA lost his incomplete instrument.00 if the bank and Pedro do not pay? A: YES.

Later. 66 when: 1. 65 in relation to Sec. Rey took it without the consent of Amado. nb: Amado is a drawer and he has NO WARRANTY. . Question #2 (use Sec. Rey indorsed it to Bartolo.00.000. Reason: The check is not a valid contract in the hands of any holder. Subsequently. 65 applies] A: YES. He gave a notice of dishonor to Rey and Amado.the instrument must be incomplete and undelivered Question #1 Q: Can Bartolo require Amado to pay P90. Abelardo Dumaguing FACE P____________. 40: Payable to bearer can be indorsed but it may not be necessary because Sec.00 Pay to BEARER the sum of ____________________ (Sgd) Amado To: Land Bank Facts: Amado placed this incomplete instrument in his cabinet.00 A: NO.000. Bartolo presented the instrument to the bank but it was dishonored. no problem about the instrument for it is COMPLETE but it is UNDELIVERED) “undelivered” means NO EFFECTUAL DELIVERY (ie: no legal effect) *There must have been a delivery BUT not effectual (eg: delivery was made by a person not authorized) . One indorses an instrument without qualifications. 40 in relation to Sec. 66 applies. as far as Bartolo is concern Rey has a valid/good title because Rey warrants this. When the instrument is negotiated by delivery only USE Sec. There is a qualified indorser 2. [Rey incurred his warranty when he indorsed the check/instrument to Bartolo. 14 is only a PERSONAL DEFENSE (that the instrument was filled up not strictly in accordance with the authority given) USE Sec. Bartolo can require Rey to pay the P90. BACK (after completion) To: Bartolo (Sgd) Rey Read: Sec. One is a general indorser (and this includes special indorser) SEC. NO NEED TO INDORSE Sec. 65 when: 1. Sec.000. 66: WARRANTY) Q: Can Bartolo require Rey to pay P90. Rey put the amount of ninety thousand pesos.00? [additional facts: Rey made a SPECIAL INDORSEMENT (this made Amado a general indorser) and since Rey indorsed it. Sec. Notes on Negotiable Instruments 18 Atty. As an indorser Rey warrants to Bartolo that the instrument is genuine and in all respects what it purports to be. otherwise. 16 (here. Bartolo cannot enforce against Amado because Amado is the person who placed his signature before delivery. 30 – payable to bearer is negotiated by delivery. Amado has a real defense (ie: the instrument is NOT a valid contract in the hands of any holder) under Sec. 15. Sec. or 2. 30 In instrument payable to bearer = it can be negotiated by DELIVERY only. it is only the INDORSER who warrants] Even if Rey has no valid title.

(Sgd) Pedro To: Land Bank Facts: Pedro signed this instrument. put it in his cabinet and the sister of Juan took it without Pedro’s consent. then Harry is a REMOTE PARTY OTHER THAN HOLDER IN DUE COURSE Question #1 Q: As a holder in due course what may Harry do with the check? A: Harry can 1) present the check to Land Bank for payment. [All these prior parties can be liable to a holder in due course] TERMS in Sec. The sister of Juan delivered the instrument to Juan but she is not authorized by Pedro. or 2) indorse if further. 16 1. Conditional delivery 2. IMMEDIATE PARTY – refers to the one who knows the defect/infirmity of the instrument (this does not mean proximity) 2.000. . Delivery not intended to transfer title (it may transfer physical possession but not the title) Conditional delivery -happening of the suspensive condition the delivery becomes effectual Delivery for a special purpose -to make the person to whom it is delivered a trustee or depositary (ie: special purpose of safekeeping) Q: What is the consequence if there is NO EFFECTUAL DELIVERY but it is in the hands of a holder in due course? A: There is a conclusive presumption that there is a valid and intentional delivery by all parties prior to him (holder in due course).000.00 Pay to the order of Juan eighty thousand pesos. accepting] -The instrument is COMPLETE but CONTRACT involving the complete instrument is INCOMPLETE if there is NO DELIVERY. Reason: There is no effectual delivery because the check was not delivered by or under the authority of Pedro. Later. Delivery for a special purpose 3. Notes on Negotiable Instruments 19 Atty. [it must be made either BY THE AUTHORITY or UNDER THE AUTHORITY of the person making. what should Harry do so that he may be able to recover? A: Harry shall give a notice of dishonor to Pedro and Juan. -Any time before delivery the complete instrument does not produce any legal effect. Question #2 Q: If Harry presents the check to the Land Bank for payment but the bank refuses to pay. BACK To: Harry (Sgd) Juan Harry is still an IMMEDIATE PARTY as long as he is aware that the instrument was not deliverd by Pedro (NOT PROXIMITY) BUT. drawing. KINDS OF DELIVERY 1. Juan indorsed the instrument to Harry. Question #3 Q: If Harry is not a HOLDER IN DUE COURSE can he require Pedro to pay P80. Abelardo Dumaguing Q: When will the delivery be considered effectual? A: If the delivery is made by the drawer/maker (indorser/acceptor or anyone who is authorized by him). REMOTE PARTY OTHER THAT HOLDER IN DUE COURSE – refers to a party who is not aware of the defect/infirmity of the instrument (eg: one who received an instrument after overdue) P80. If Harry is NOT AWARE but the check is overdue. indorsing.00? A: NO.

to all subsequent holders in due course” ) in relation to Par(b) of Sec.00 Pay to the order of Juan eighty thousand pesos. (Sgd) Pedro T: Land Bank Facts: Pedro instructed Juan to indorse this check until such time the latter will be able to complete the construction of Pedro’s house. can she require Ruby to pay? A: YES. can Clara require Juan to pay? A: YES. 16 P80. (Clara holds the instrument as though there was a valid delivery from Pedro. Subsequently. Abelardo Dumaguing Question #4 Q: Will your answer be the same as in the preceding question if Harry is a holder in due course? A: See: Sec 16. Question #4 Q: If Clara fails to find Pedro and Juan. Question #2 Q: Will your answer be the same as in the preceding question if Clara is a holder in due course? A: NO.” In the hands of a holder in due course. a valid and intentional delivery by him is presumed until the contrary is proven. Pedro has a personal defense that there was no effectual delivery of the instrument considering that delivery was conditional and the suspensive condition was not fulfilled. BACK To: Ruby (Sgd) Juan To: Clara (Sgd) Ruby Question #1 Q: If Clara is not a holder in due course can she require Pedro to pay after giving him notice of dishonor? A: NO. Ruby indorsed the check to Clara. Reason: Juan as indorser warrants that he has a good title to the check (see: Sec. My answer is not the same as in the preceding question because Clara can require Pedro to pay because the law provides that when the instrument is in the hands of a holder in due course a valid and intentional delivery by all parties prior to him (holder in due course) so as to make them (prior parties) liable to her. opening sentence (“every indorser who indorses without qualification. Construction has never started when Juan indorsed the check to Ruby. Juan and Ruby) Question #3 Q: As a holder in due course. a valid and intentional delivery is conclusively presumed to have been made by all parties prior to him (holder in due course) [until the contrary is proven] ***Juan is a prior party and he warrants Question #5 Q: If Harry decides to go against Juan will the latter be liable? A: YES. . warrants. 66. last sentence: “ And where the instrument is no longer in the possession of a party whose signature appears thereon. 65) ANOTHER ILLUSTRATION OF SEC. Notes on Negotiable Instruments 20 Atty. is conclusively presumed. Clara can require Juan to pay (*warranty of Juan extends beyond Ruby) [See: Sec. (Juan was not acting under the authority of Pedro). 65 (“that he has a good title to it”)] Juan is a general indorser and he warrants ALL SUBSEQUENT HOLDERS IN DUE COURSE that he has a good title. Clara can require Ruby to pay because the latter is a general indorser and such she warrants that the check is genuine.000.

therefore. Notes on Negotiable Instruments 21 Atty. the delivery is NOT EFFECTUAL. negotiable. Juan was not acting under the authority of Pedro because of the non-fulfillment of the obligation. therefore. therefore. Abelardo Dumaguing NOTES: -Check is complete. no effectual delivery to Ruby (as far as Pedro is concern) . -Delivery is conditional (ie: construction) -The suspensive condition was not fulfilled.

intentional delivery by all parties prior to a holder in due authority given. INCOMPLETE instrument but UNDELIVERED. COMPLETE instrument but UNDELIVERED 2. A Personal Defense (can be awaited of only against a a holder who is NOT a holder in due course). INCOMPLETE instrument but DELIVERED. 14 vs SEC. 4. DEFENSE: That the instrument is NOT A VALID 3. Cannot be enforced by one who is NOT A HOLDER IN course. a) The delivery was conditional and the suspensive condition was not fulfilled. In the hands of any holder. completion or delivery. of the instrument because: reasonable time. Cannot be enforced by one who in not a holder in due 4. 14 Sec. Cannot be enforced even by one who is a holder in 4. 15 Sec. Against whom? Against a person who placed his Against whom? Any person who became a party prior to Against whom? Person who placed his signature before signature thereon prior to the completion. In the hands of a holder in due course. a valid and is “AS IF” it was filled up strictly in accordance with the contract. the instrument 5. In NIL. 1. 16 1. A Personal Defense (can be availed of only as against 2. In the hands of a holder in due course. All such prior parties may be liable to the holder in due course. 1. DUE COURSE. equity = personal defenses . DEFENSE: That there is NO EFFECTUAL DELIVERY STRICTLY in accordance with authority given and with a CONTRACT in the hands of any holder. delivery of instrument. OR b) The delivery was special purpose only and the instrument was not intended to be negotiated. 16 Sec. course is conclusively presumed. DEFENSE: That the instrument was filled up NOT 3. holder in due course) holder who is not a holder in due course). 5. due course. the instrument is not a valid 5. 3.SEC. 15 vs SEC. A Real Defense (can be availed of even as against a 2.

Nb: the instrument can still be validly negotiated but ONLY the forged signature is rendered INOPERATIVE.000. The subsequent indorser (he is an indorser who makes his indorsement after forgery is committed. sec. . 65 and 66) 3. The forger . NO right to give a DISCHARGE can be acquired.000. 4. Signature obtained through fraud (ie: fraud in factum) Ex: a person signs a paper not knowing that the paper will be made a negotiable instrument.the acceptor/drawee has no right to accept payment or pay the instrument as far as the person whose signature was forged. or simulating) of another’s signature with the INTENTION TO DEFRAUD him (this is intention to defraud is essential to constitute forgery) 2.00 Pay to theORDER of Amado eighty thousand pesos. Drawer’s defense: that the forged signature is rendered wholly inoperative (ie. The acceptor/drawee who accepts an instrument where the signature of the drawer was forged (also precluded from setting up forgery as a defense.) Reason: The indorser warrants (Secs. The forged signature is rendered WHOLLY INOPERATIVE (when it does not operate to create or give rise to a liability). 62 REMEDY: Dishonor the instrument if there is a doubt in the signature. NO right to ENFORCE the instrument can be acquired. Signature place without authority. Face P80. 2. (NB: In an instrument that is payable to order.000. Signature obtained through irresistible force or uncontrollable fear. FORGERY Payable to ORDER Forgery in the signature of the drawer is a real defense by the DRAWER. 4. (Sgd) Pedro To: PNBank This instrument was forged by Amado. He [the drawer] will never be liable in that forged signature) Forgery in the signature of the payee is a real defense by BOTH the drawer and payee (or original indorser). Drawer’s defense: that he is not liable because of lack of valid indorsement by the payee.Sec. 2. Forgery is a real defense THE EFFECTS OF FORGERY: 1. NO right to RETAIN the instrument (as far as the one who signed is concern) 3. a valid indorsement by the payee is necessary to negotiate the instrument.00 to P100. FORGERY (limited to the defect in the signature) (NOT: if the sum certain is changed from P10. Counterfeit-making (similar to feigning. (also precluded from setting up forgery as a defense. WHO MAY BE LIABLE IN CASE OF FORGERY 1.) See: Sec.the forger is precluded from setting up forgery as a defense. 30) Payee’s defense: that the forged signature is rendered wholly inoperative. faking. Back To: Bella (Sgd ) Amado To: Harry (Sgd ) Bella QUESTIONS: . -if the drawee bank pays then I cannot debit against the drawer’s (whose signature was forged) account.00 (this example is a material alteration) Forgery may mean: 1. 3.

he warrants under Art. of lack of valid indorsement by the payee. Harry did not acquire any right to enforce the instrument against Juan. As a general indorser. Reason: Pablo is the FORGER and SUBSEQUENT INDORSER. Reason: She is a subsequent indorser and precluded from setting forgery as a defense.000. the payee and the drawer can still avail of the real defense.1) If the bank dishonors the check and H gives notice of dishonor to Pedro. (NB: even if you are a holder in due course) 2) If Harry gives notice of dishonor to Amado. Reason: Forged signature is rendered wholly inoperative. he is precluded from setting up forgery or want of authority. 30 – indorsement + delivery) Illustration (forgery in the signature of the PAYEE) Face P80. (Sgd) Pablo To: PNBank Back To: Pedro (Sgd ) REY To: Harry  (Delivered by) Pedro this signature was forged by Pedro not by indorsement bec. is the latter liable? Ans: NO. Forged instrument in hands of a HOLDER IN DUE COURSE can’t be enforced for payment.00 Pay to REY or BEARER sixty thousand pesos. Reason: he is a forger and as such he is precluded from setting up forgery or want of authority as a defense. based on that signature. (real defense) Pedro will never be liable for that signature because Harry did not acquire any right to enforce payment of the instrument.000. As such. As a holder (even HDC). And by indorsing the check. is the latter liable? Ans: NO. And he warrants that the instrument is genuine and in all respects what it purports to be. Face P60. is the latter liable? Ans: YES. (see: sec. will Bella be liable to pay? Ans: Yes. against the person whose signature was forged. Forged signature does not make you liable to the instrument NB: When the payee’s signature was ONLY forged.00 Pay to theORDER of Juan eighty thousand pesos. is the latter liable? Ans: No. she warrants to Harry that the instrument is genuine and in all respects what it purports to be. 66 that the signature is genuine and in all respects what it purports to be 3) If Harry gives notice of dishonor to Bella. Reason: No valid indorsement by the payee. Juan can’t be made liable on the basis of that forged signature. can Harry recover from the former? Ans: Yes. this is a bearer instrument. Berto is not made liable even to a HOLDER IN DUE COURSE bec. . (Sgd) Berto To: Land Bank Back To: Pablo (Sgd ) Juan To: Harry (Sgd ) Pablo This payee’s (aka orginal indorser) signature is forged by Pablo. QUESTIONS: 1) If The bank does not pay Harry and Harry gives notice of dishonor (NOD) to Berto. 2) If Harry gives NOD to Juan. 3) If Harry gives a NOD to Pablo. The forged signature is wholly inoperative. Berto can set up the real defense that the forged signature of Juan (payee) is wholly inoperative (that is using the payee’s forged signature as a real defense).

the FORGERY is IRRELEVANT. REMEMBER: “What issue is raised in the problem?” Juan as liable forger does not apply in negotiation by delivery(b. Even if there is forgery. 3) What defense which Rey can raise if Harry is not a HDC? Ans: Rey can avail of the defense of the LACK OF EFFECTUAL or VALID DELIVERY (under §16) NB: This is a personal defense in forgery NOT a real defense. The bearer/holder acquires title even sans indorsement. and that if it be dishonored and the necessary proceedings on dishonor be duly taken. is the latter liable? Ans: NO. Liability of drawer. or both. QUESTIONS: 1) If the bank does not pay Harry. the instrument will be accepted or paid. . on due presentment.The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse. is the latter liable? Ans: YES. and no knowledge of any fact that would impair the validity of the instrument.). 2) If Harry give a NOD to Juan. Perdo can set up a real defense that the signature is wholly inoperative. [nb: NOT immediate party] Harry is not the immediate transferee of Juan. is the latter liable? Ans: NO. Indorsement by the payee is not necessary to the title of the bearer/holder. (See: §65) Warranty extend in favor of NO HOLDER OTHER THAN THE IMMEDIATE TRANSFEREE. *Harry is an IMMEDIATE TRANSFEREE (see: last sentence of §65). [§16 as personal defense can’t be used against a HDC] ***But Rey cant avail of the defense of forgery as REAL DEFENSE if this is a order instrument. the payee does not need to indorse. NB: Forgery anent indorsement of the payee is IMMATERIAL or IRRELEVANT (reason: bec. In order instrument. However. (S gd) Pedro To: LandBank this signature was forged by Juan.i. Pablo can’t use forger as a defense bec. he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it.NOTE: Under §30. and Harry gives NOD to Pablo. 4) If Harry gives a NOD to Pedro. there is no need to indorse the bearer instrument. Pablo is liable to Harry. BEARER INSTRUMENT Face P60. Back To: Nena (Deli vered by) Juan To: Harry  (Delivered by) Nena QUESTIONS: 1) If the bank does not pay and Harry gives NOD to Pedro. is the latter liable? . indorsement is not needed in b. the bearer instrument may be indorsed. can Rey avail of the defense of forgery to defeat the claim of Harry? Ans: NO. 61. and engages that. NOTE: The question here is not of forgery (in §23) but of warranty (in §65).) 3) If Harry gives NOD to Nena. under §40. Negotiation is made by delivery only. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder. valid indorsement by the payee is necessary to the title of the holder. In a bearer instrument. he warrants under §65 that “he has a good title in the instrument. The Holder did not acquire any right to enforce payment of the instrument against Pedro. is the latter liable? Ans: YES.000.i. 2) If Harry gives a NOD to Rey. Harry acquires title even with or without indorsement for bearer instrument need not be indorsed.00 Pay to JUAN or BEARER sixty thousand pesos. Forgery in the indorsement is IRRELEVANT or IMMATERIAL to the title of Harry bec. Sec. forgery can’t always be availed of as a defense. according to its tenor. and this does not make Pedro liable. Reason: Bec.

and her warranty extends to Harry as her immediate transferee. 2) GELAC vs HK and Shanghai Bank. DOCTRINE IN FORGERY 1) San Carlos Milling Co. see: §66 is applicable but §40 is MORE PARTICULAR.000. is the latter liable? Ans: NO. 43 Phil 711 Face P2. payable to bearer. it was NOT negotiated by delivery only. Eg: BPI cannot debit the amount so paid against Baldwin account. Face P60. and this does not make Pedro liable. is the latter liable? Ans: NO.00 .Ans: YES. it is considered as making payment out of its own funds and cannot debit the amount so paid against the account of the depositor(drawer) whose signature was forged. forgery is an incidental matter. She warrants under §65 that the instrument is genuine and in al respects what it purports to be (including Pedro’s forged signature).00 Pay to the order of San Carlos Milling Co (Sg d) Baldwin To: BPI Forged by Dolores Back To: Hongkong and Shanghai Bank (HSB) (Sgd) Dolores in behalf of SCMC signature of the drawer was forged DOCTRINE: A bank (drawee bank) is BOUND to know the signature of its depositors (ie. Juan is liable as indorser to ONLY such holder as make title through his indorsement. She warrants under §65 that the instrument is genuine and in al respects what it purports to be (including Pedro’s forged signature). that is TO NENA ONLY. 3) If Harry gives NOD to Nena. Perdo can set up a real defense that the signature is wholly inoperative.Where an instrument. 59 P 59 Face US$10. but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement. (S gd) Pedro To: LandBank this signature was forged by Juan Back To: Nena (Sgd) Juan To: Harry (Deliv ered by) Nena QUESTIONS: 1) If the bank does not pay and Harry gives NOD to Pedro. Apply §40.000. §40 last sentence vs §65 last paragraph : similarity in immediate transferee but different in reasoning. vs BPI. do not apply §65 bec. (here.00 Pay to JUAN or BEARER sixty thousand pesos. 2) If Harry give a NOD to Juan. If it pays a “ forged check” (forged signature of the drawer). 40.000. is indorsed specially. the issue is the INDORSEMENT: will the indorsement make him liable?) Sec. Indorsement of instrument payable to bearer. and her warranty extends to Harry as her immediate transferee. The drawers). it may nevertheless be further negotiated by delivery. The Holder did not acquire any right to enforce payment of the instrument against Pedro. . is the latter liable? Ans: YES.

Maasim deposited the check to HSB and the amount was allowed to be credited in Maasim’s account. §8: order instrument – payee must be named.” (Reason: no valid indorsement) So. (Sgd) J. Pay to the order of MELICOR (Sgd) GELAC To: PNBank Back To: Maasim (Sgd) MELICOR To: HSB (Sgd) Maasim This was forged by Maasim this check was drawn by GELAC involving payment of insurance proceeds for MELICOR. Now. This check was lost and Maasim had possession of the check and tried to make it appear that it was indorsed to him by MELICOR. Klar in behalf of the PANTRANCO To: PNB This was forged Back To: Motor Service (Sgd) IARS by unknown person To: Nat’l City Bank of New York (NCBNY) (Sgd) Motor Service When PANTRANCO had repairs it went to IARS There were two checks involved in this case. . HSB presented to PNB. PNB wants to debit against the deposit account of GELAC. PNB should see to it that MELICOR made a valid indorsement. DOCTRINE: “When a check is payable to the order of a person and it is presented for payment BY ANOTHER it is the duty of the bank to see to it that the check was duly indorsed by the original payee. PNB can go against HSB. HSB can go against Maasim. and so he was allowed to withdraw amount. 3) PNB vs Motor Service. 63 Phil 693 Face Pay to the order of International Auto-repair Shop (IARS) or ORDER. PNB paid. The practice of GELAC is to send the check by mail. ***Forgery in the signature of the payee is a real defense by the drawer. It cannot debit against the account of GELAC.

So. DOCTRINE “a person who takes a check or purchases draft is bound to satisfy himself that the check he is taking is genuine. 5) Republic Bank vs. it accepted indorsement of UNKNOWN PERSON. its signature is wholly inoperative. Here. 25 SCRA Face Pay to the order of Mariano Pulido (Sgd) GSIS To: PNBank Back To: Manuel Go (Sgd) M. GSIS said that the check was forged (lost). he impliedly asserts that he has performed his duty. or by presenting it for payment or by indorsing it. 65 SCRA 693 Signature of payee (original indorser) was forged. it was guilty of ACTUAL NEGLIGENCE in accepting check from persons whose identity remains unknown. PNB is guilty of CONSTRUCTIVE NEGLIGENCE by not ascertaining of its drawer’s/depositor’s signature is genuine or forged. It should ascertain his identity. “There was negligence on the part of PNB bec. of the ANNOTATION: PCIB guaranteed that the indorsement were GENUINE but not the signature. SO. and by putting it into circulation. But PNB still paid bec. Q: Who shall bear the loss then? A: The one guilty of actual negligence. Klar is GENUINE. DOCTRINE OF JUS TERTIIS “When one of the two innocent persons must suffer from a wrongful act of a third person. PNB wanted to debit the amount against the account of PANTRANCO. Mauricia Ebrada. the one guilty of actual negligence or who put it into the power of a 3rd person to perpetrate the wrong shall bear the loss. Go To: PCIB (Sgd) Lim PCIB said: “all prior indorsements guaranteed” Signatories of GSIS check are manager and auditor Manager’s and Auditor’s signature were forged (this check was lost) 2 months before PCIB went to PNB. Face (GENUINE) Pay to A or ORDER . 4) PNB vs CA. the 3rd person is the GSIS. GSIS has already notified PNB to stop payment bec. Pulido To: Lim (Sgd) M.” Motor Service was negligent bec. SC: PNB can go against Motor Service and let Motor Service to go against the unknown person. GSIS is not liable bec. There was GREATER or ACTUAL NEGLIGENCE by PNB. PNB waived its rights to sue NCBNY that’s why it sued Motor Service.NCBNY presented to PNB for payment then PNB paid NCBNY. So. it failed to see to it that the signature of J. Ebrada also raised the issue that she was only an accommodation pary (§29) Check payable to the order of a specified person.

\ 7) PNB vs CA (1997) Face P80. (Sg d) Pedro To: X Bank . The Board can authorize any of the corporate employees or officers to act for in its behalf. VB does not pay. (Sgd) Y To: Bank Back (FORGED) To: B (Sgd) A (Sgd) B B presented this to the BANK. Ramirez) To: BPI (Sgd) Jai Alai BPI credited amount of checks to the account of Jai Alai. the latter should have verified the validity (ie. VB does not pay.000. B is the holder. When Jai Alai accepted the checks from Ramirez. BPI sued Jai Alai. Corp (IGSP) (Sg d) DD To: VB 10 different drawers in various drawee banks Back To: Jai Alai (Sgd) IGSCorp (by A. you cannot compel the drawee to pay BUT go against the indorsee. if B purchases a draft.00 Pay to the order of Inter Island Gas Services. or the person who appear to be secondarily liable. 6) Face P10.00 Pay to the order of Ana eighty thousand pesos. forgery) NOTE: The payee is corporation – a corporation can act only through its Board of Directors. If you are the holder. When Ramirez signed the checks in favor of Jai Alai. Authorization of Ramirez) of the former’s signature. Bank can go against B (basis: one who purchases a draft must satisfy himself that such draft is genuine) Doctrine in GELAC is not applicable but the doctrine in Rep Bank vs Ebrada does not mean abandonment of ruling in GELAC case. B should believe in good faith that the check in his possession is genuine. DOCTRINE: “A person taking a check of corporation (which can act only through its Board of Directors) does so on his own peril when the one who indorses in behalf of the corporation was in fact not authorized.000. Drawee bank cannot debit account of Y. Signature of Alfredo Ramirez was NOT AUTHORIZED (therefore. bec. he did so in his own peril.

This signature was forged. Material alteration – substantial change (unauthorized) Alteration spoliation – a material alteration made by a 3rd person or stranger. The HDC cannot recover in some 3. c) Change in the number or relation. Changing number of indorsements . NOTE: X Bank is the drawee bank. Bank vs Ebrada case/doctrine. b) authorized.eg. DOCTRINE: “A collecting bank incurs the liability of the indorser (warrants the check is genuine…) MATERIAL ALTERATION It is any unauthorized change in the instrument. The instrument cannot be enforced against the party who did not authorize nor assented to the alteration. 3. Back To: Y Bank (indorsee) (Sgd) Ana (indorsed check to Y Bank [indorser]) Y Bank presented payment by X Bank. of his warranty that the instrument is genuine and in all respects what it purports to be. 2) A subsequent indorser bec.eg. Q: Who may be liable in case of alteration? A: 1) The party who: a)made. The instrument is rendered INOPERATIVE. Before overdue) Change in the number or relation . except as to the person who assented or authorized to the alteration.increase or decrease Change in the maturity date . AVOIDED. 2. The forged signature is 2. 3. unauthorized signature. To make yourself a holder in due course (ie. Y Bank is the collecting bank (where the payee deposits/indorses the check) Similar to Rep. 2. [but not as altered. It includes: a) Change in the amount payable. A HDC can enforce the instrument according to its original tenor.same effects with material alteration done by a party of an instrument. c) assented to the alteration. but is limited only as to the original tenor. A HDC may recover instances. Secs 124 and 125 AVOIDED. It pertains to unauthorized change. It refers to any 1. Material alteration is a REAL DEFENSE. b) Change in the maturity date. e) Adds interest when in fact not stipulated. d) Change in the nature of the instrument. The instrument is AVOIDED. AVOIDED – void as far as the person who did not make or authorized or has assented to the alteration is concern. Change in the amount payable . You cannot enforce as to the alteration but you can as to the original tenor. only the original] 4. EFFECTS OF MATERIAL ALTERATION 1. Alteration distinguished from forgery Alteration Forgery 1. .

Banco Atlantico vs Auditor General. is the latter liable to pay P77K? Ans: YES. is the latter liable to pay P77K? Ans: YES.3 checks involved. As a subsequent indorser. Danny is not liable to pay the P77K bec. The general rule is that the instrument is avoided except to the one who made or is not authorized to make the alteration. you assented. the US$79 became US$375. First you did not know the alteration then later you knew.00) Pay to the order of Azucena Pace. Back To: Banco Atlantico de Espanyol (Sgd) Azucena Pace . can Harry as HDC recover the amount other than P77K from Danny? Ans: YES. The bank dishonored it. bec. Pablo is liable bec.00 to P77. he is the one who made the material alteration and he was not authorized by Danny to make the material alteration. material alteration is real defense. the law provides that the instrument can be enforced against the party who made the alteration.00. 1 check payment for a living quarter.000.00. YES.00? Ans: NO. Pablo indorsed the check to Indong. Subsequently. as far as he is concern the instrument is AVOIDED.000.00 (to US$39. Indong is liable to pay P77K. Azucena Pace deposited the check after altering it. 2) Will there be a difference in your answer if Harry is a HDC? Ans: NONE. Harry presented the check for payment by PNBank (the drawee bank. QUESTIONS: 1) If Harry will give NOD to Danny. under the law a subsequent indorser is liable in material alteration. 4) What if Harry gives NOD to Indong. Without any authority from Danny. Instrument is payable to order then you made it payable to bearer. Pablo (the payee) changed the amount of P69.Change in the nature of the instrument . He did not authorize or assent to the alteration. Primary reason: Pablo is liable to pay P77K bec. 5) Assuming that Indong and Pablo are not in the country and Harry badly needs money and wants to recover from the drawer.000 (alteration in the amount). Adds interest when in fact not stipulated Real defense You cannot use your unlawful act as a defense Assented – eg. so. 81 scra 335 .000. Here. Illustration (material alteration) As a drawer Danny issued a check to Pablo in the amount of P69. Indong indorsed it to Harry. . the HDC can enforce the instrument according to its original tenor. Later. Pablo falls under the exception. Face US$79.eg. a check is payable in the amount of US$79 for one living quarter. Pablo as an indorser warrants to all subsequent holders that the instrument is genuine and in all respects what it purports to be. Indong is liable to pay P77K bec. is the latter liable to pay P77.Nb: legal way to change the nature from order instrument to bearer instrument – make an indorsement in blank under §9 last Prgph.000. (Sgd) Luis Gonzalez (Ambassador) To: PNBank this was altered. As HDC Harry can recover the amount of P69K ONLY from Danny bec. 3) If Harry gives NOD to Pablo.000. he warrants that the instrument is genuine and in all respects what it purports to be. Indong is liable bec.

See: §29 .00. He may be a accommodation maker/drawer/indorser/acceptor. A bank who pays your payee even if you do not have any deposit in the bank but you have a good credit. PNB was informed that the checks were altered. One borrowed money from you but you have none.00? Ans: YES. so this is a wrong reasoning) Sec.00 which is made payable to the order of Jose. 29 – ACCOMMODATION PARTY He becomes a party to the instrument without receiving a valuable consideration therefore. Partial failure of consideration ***all of them are PERSONAL DEFENSES Want of consideration . The amount of the check is P10. 28 – WANT OF CONSIDERATION 1. which was stipulated. He does not receive anything for becoming a party to the instrument. if the check involves large amount. 2) Suppose Nena paid P3. Sec. SC: BA cannot recover bec.000. .000. impleading AG BA should have waited for the clearing. Clara gave NOD to Pedro and another notice to Nena. Accommodation indorser Accommodation acceptor – eg. of the good name he lends.Banco Atlantico presented this for payment by the PNB (before this BA allowed AP to withdraw the amount even without clearing. Reason: bank did not receive any valuable consideration. The drawee bank PNB did not pay the check upon presentment by Harry. to AD wholly inoperative is for forgery. Failure of consideration . He lends his name or credit to another. Nena indorsed this check to Clara for payment of services rendered by Clara (HFV) to Nena. instead you drew a check in his favor. In Internationa banking practice. will your answer be the same as in the answer in question number 1? Ans: YES. did not materialize then this is called failure of consideration. QUESTIONS: 1) Can Clara require Pedro to pay P10. esp. Pedro is liable to a HFV.”since the 3 checks were fraudulently altered they are rendered wholly inoperative. What matters is he received nothing for being a drawer. BA sued PNB.If parties agreed on a particular consideration or specific amount but ONLY part of it was satisfied or delivered then this is called partial failure of consideration (this is a defense PRO TANTO or reduced or mitigated liability) Illustration: Juana was a drawer of a check containing the amount of P100. He may receive payment for lending his name. the drawer Pedro issued a check to the former.If the parties agreed on a consideration for the issuance or indorsement of instrument but that. Eg.000. Want of consideration 2.… notwithstanding such holder at a time of taking the instrument knew him to be an accommodation party. Jose indorsed the check to Harry who is a HDC. Juana issued this check to Kose with the understanding that Jose will deliver 10 carabaos to Juana. Failure of consideration 3. Partial failure of consideration .” (acc. Clara presented the check for payment by the drawee bank but was dishonored.00 to Pedro for the latter’s good credit which he lent to the former. As consequence. One remains an AP even if he receives payment bec. “lending name or good credit” NB: An accommodation party is liable to a HOLDER FOR VALUE (HFV) Illustration: Without receiving valuable consideration from Nena.the parties did not contemplate of intend a value or valuable consideration for the issuance or indorsement of the instrument. the collecting bank should wait for the clearing of the check.

See: §60. How much could Juana be made liable? She is liable as much as P30K bec. Juana is not liable bec. he contends that Rey is insane an so he could not incur liability. “ The maker ADMITS the existence of the payee and his then capacity to indorse. Rey indorsed this to Ronnie.00? Ans: YES. Ronnie presented this note for payment by Amado. she has a defense pro tanto (reduced liability).00? Ans: NO.QUESTIONS: (assume that in Q1 and Q2 no carabao was delivered) 1) Can Harry require Juana to pay P100. 2) Suppose Harry is not a HDC. Juana has a defense PRO TANTO against the holder who is not a HDC. failure of consideration is a personal defense which she may avail against one who is not a HDC. Amado refused to pay bec. 60 Illustration: Amado issued a promissory note payable to the order of Rey P20K. Failure of consideration is a personal defense and so that is not available to Juana against a HDC.000. can Harry who is not a HDC require Juana to pay P100. He is already precluded form contending the legal capacity of the payee. The maker by making the instrument engages to pay according to its original tenor. is Juana liable to pay? Ans: NO.” Amado has admitted that Rey has the capacity to indorse. Is the contention of Amado tenable or not? NOT tenable. .000. Sec. 3) Suppose only 3 carabaos equivalent to P30K were delivered by Jose to Juana.