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Q: Who are the parties liable in case of forgery in a negotiable instrument?

A: Applying the "cut-off rule", the parties prior to the forged signature are cut off from the parties
after the forgery in the sense that prior parties cannot be held liable and can raise the defense
of forgery. The holder can enforce the instrument against parties who became such after the
forgery. The only instance when prior parties are liable is if they are precluded from setting up
the defense of forgery either because of their warranties, representations or their negligence.
(Aquino p. 252)

Q: Concepion and Tamayo Construction Enterprise had a contract with the DPWH for the
construction of a municipal building. The firm needed fund to push through with the contract
thus it convinced Sps Castillo to mortgage their land, without valuable consideration, with the
PNB for Php 100,000. Sps then executed a promissory note amounting to Php 100,000 in favor
of PNB. The firm also executed a Deed of Assignment in favor of PNB which provides that any
payment from the DPWH shall be paid directly to PNB to ensure the payment of the loan before
its maturity. The DPWH asked PNB if it can make payment directly to the firm because the
latter needs the money to buy construction materials to complete the project. Notwithstanding
the provision in the Deed of Assignment, the PNB agreed and the loan matured without PNB
actually receiving any payment from DPWH. Is PNB a holder in due course?

A: The Sps Castillo is an accommodation party for he signed the promissory note as maker but
he did not receive value or consideration therefor. He expected the firm (accommodated party)
to pay the loan – this obligation was shifted to the DPWH by way of the Deed of Assignment).
As a general rule, an accommodation party is liable on the instrument to a holder for value/in
due course, notwithstanding such holder at the time of taking the instrument knew him to be
only an accommodation party. The exception is that if the holder, in this case PNB, is not a
holder in due course. The court finds that PNB is not a holder in due course because it has not
acted in good faith (pursuant to Section 52 of the Negotiable Instruments Law) when it waived
the supposed payments from the DPWH contrary to the Deed of Assignment. Had the Deed
been followed, the loan would have been paid off at maturity. (Prudencio vs CA, 143 SCRA 7)

Q: When is fraud a personal and real defense?

A: Fraud may be either be "fraud in inducement" or "fraud in execution or fraud in factum".

Fraud in inducement is a personal defense. The person who signs the instrument intends to
sign the same as a negotiable instrument but was induced to do so only through fraud and his
consent to issue a negotiable instrument was vitiated by fraud.
Fraud in execution or fraud in factum is a real defense. The person is induce to sign an
instrument not knowing its character is a note and a bill. The person who signs the instrument
does not know that he is signing a negotiable instrument.

Q: When is an alteration material?

A: An alteration is said to be material if it alters the effect of the instrument. It means an

unathorized change in an instrument that purports to modify in any respect the obligation of a
party of an unauthorized addition of words and numbers or other change to an incomplete
instrument relating to the obligation of a party. In other words, a material alteration is one which
changes the items which are required as stated under Section 1 of the NIL. (PNB vs CA, 256
SCRA 491)

Q: Has the drawee of a bill of exchange the right to recover a payment which he has made to
a holder in due course of a bill on which the signature of the drawer was forged?

A: The rule adopted and followed in almost all American jurisdictions as the doctrine of Price
v. Neal (3 Burr 1354, 97 Eng. Rep. 871.) is that as between equally innocent persons, the
drawee who pays money on a check or draft the signature on which was forged cannot recover
the money from the one who received it. Acceptance prior to payment is not a prerequisite to
the rule; and the rule applies alike where payment is received without prior acceptance and
where it is paid after acceptance. (Kansas Bankers Surety Co. v. Ford Country State Bank, 338
Pd. 309.) (De Leon, p. 113)

Q: What will happen if the drawee accepts or pays a forged instrument?

A: Where the drawer's signature is forged, the drawer is not liable whether or not the instrument
is payable to bearer or payable to order. The drawer was never a party to the instrument- he
did not promise to pay anybody. The drawer's account cannot be debited if his signature in a
check was forged. A drawee-bank is bound to know the signature in a check was forged. Hence,
the drawee-bank is liable if it encashed checks bearing the forger signature of the drawer.
(Section 23, NIL)

Q: If a person delivers a blank paper containing his signature to another person for the purpose
of converting it into a negotiable instrument the person to whom the negotiable instrument is
delivered has prima facie authority to fill it up with any amount. Hence, there are three things
that must be present for the presumption to operate. What are the requisites?
A: Three things must be present in order for the presumption to operate: a) There must be
delivery of a paper to another person; b.) the paper that was delivered was a blank paper
containing the signature of the person who will deliver; and c.) the delivery was for the purpose
of converting the paper into a negotiable instrument. (Aquino, p. 224)

Q: What is the effect if the place where the payment should be made is ommitted in the
negotiable instrument?

A: It will be noted that Section 1 does not require a negotiable instrument to specify the place
where it is made or drawn or where it is payable. However, Section 73 specifies where
presentment for payment should be made when the place of payment is not specified.
An instrument is presumed to have been made where it is dated. A note that does not specify
the place of payment is presumed to be payable at the place of residence of the maker.
If the place of execution or payment is not stated, it is presumed to be the maker's or drawer's
place of business or his home. (De Leon, p. 48)

Q: Is the word fictitious provided in Section 9 of the Negotiable Instruments Law limited to non-
existent real person?

A: The word "fictitious" is not limited to a person having no real existence, as otherwise the
word "non-existing" would have been sufficient without more. A fictitious person is meant to be
one who, though named or specified as payee in an instrument, has no right to it because the
maker or drawer so intended and it matters not, therefore, whether the name of the payee used
by him be that one living or dead, or one who never existed.

Thus, a check made expressly payable to a non-fictitious and existing person is not
necessarily an order instrument. If the payee is not the intended recipient of the proteeds of the
instrument, the payee is considered a "fictitious" payee and the check is a bearer instrument.
In a fictitious-payee situation, the drawee-bank, in the absence of bad faith or gross negligence,
is absolved from liability and the drawer of the check bears the loss. This rule protects the
depositary bank and assigns the loss to the drawer of the check who was in a better position to
prevent the loss in the first place. (Philippine National Bank v. Rodriguez, 566 SCRA 513

Q: Section 12 contemplate instruments which are antedated or post-dated by the parties in

accordance with a mutual agreement to that effect. However, the law also provides instances
when date may be inserted. What are the instances?
A: Section 13 provides that date may be inserted in the following instances:
(a) where an instrument is payable at a fixed period after date but is issued undated; and
(b) where an instrument is payable at a fixed period after sight but the acceptance is undated.

(Section 13, NIL)

Q: A negotiable instrument like any other written contract, has no legal inception or existence,
as such, until it has been delivered in accordance with the purpose and intent of the parties.
What constitutes delivery?

A: Delivery may be made either by the maker or drawer himself or through a duly authorized
agent. It has been held that mailing a negotiable instrument with intent to transmit it to the payee
constitutes (constructive) delivery. But a note drawn by a testator and found among his effects
after his death is not enforceable, no delivery being shown. An undelivered instrument is
inoperative because delivery is a prerequisite to liability. However, if the instrument is no longer
in the possession of the person who signed it and it is complete in its terms, "a valid and
intentional delivery by him is presumed until the contrary is proved. (De Leon, p. 74)