TRANSFER AND NEGOTIATION

1. If the instrument is negotiable. Transfer thereof can be effected either through:

a. Negotiation; or
b. Assignment

If the instrument is merely assigned, the transferee does not become a holder and he
merely steps into the shoes of the transferor (Salas v. CA). any defense available against
the transferor id available against the transferee. Example: where the instrument that is
payable to order was merely delivered without indorsement.

2. ISSUANCE
“Issue” is the first delivery of the instrument complete in form to a person who takes it
as a holder. (Sec. 191, NIL)
1. Issuance to the payee is negotiation because the transferor constitutes the payee
the holder of the instrument. The payee may even be a holder in due course if he
has acquired the note from another holder or he has not directly dealt with the
maker thereof.
2. Delivery is defined as the transfer of possession of the instrument by the maker or
drawer with the intention to transfer title to the payee and recognize him as holder
thereof ( De la Victoria v. Burgos)
3. NEGOTIATION

An instrument is negotiated when it is transferred from one person to another in such manner
as to constitute the transferee the holder thereof.

a. If payable to bearer, it is negotiated by delivery;

b. If payable to order, it is negotiated by the indorsement of the holder completed by
delivery.
4. BEARER INSTURMENT ALWAYS A BEARER INSTRUMENT

Where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further

negotiated by delivery; but any person indorsing specially is liable as indorser to only such
holders as make title through his indorsement (Sec. 40)

A delivered bearer instrument to B; B indorsed the instrument to C; C delivered the bearer

instrument to D.

But, since the instrument was negotiated to the holder by delivery, Sec. 40 provides that the D
has no right against B, the one who indorsed the instrument, because the D did not obtain title
though the indorsement of B. D can only hold A and C liable.

If B indorsed the instrument to C and C indorsed the instrument to D, B and C are both liable to
D as general indorsers under Section 66.
If D negotiates the instrument to Erika by mere delivery, in this case, Erika can hold A and D
liable under Section 65. B and C are not liable to Erika since Erika cannot trace her title over the
instrument to them.

PROBLEM:

Richard Clinton makes a promissory note payable to bearer ad delivers the same to Aurora Page. Aurora
Page however indorses it to X in this manner:
“Payable to X. Signed: Aurora Page”
Later, without indorsing the promissory note, X transfers and delivers the same to Napoleon. Richard
Clinton subsequently dishonors the note. May Napoleon proceed against Richard Clinto for the note?
A. Yes, Napoleon may proceed against Richard Clinton. The instrument was negotiated by delivery
to Napoleon. Despite the special indorsement of Ms. Page, it can still be negotiated by delivery
because it is originally a bearer instrument (Sec. 40, NIL). Hence, Napoleon became a holder who
has the right to enforce the instrument against the maker, Richard Clinton.

5. INCOMPLETE NEGOTIATION OF ORDER INSTRUMENT

A. Where the holder of an instrument payable to his order transfers it for value
without indorsing it, the transfer vests in the transferee shall title as the
transferor had therein, and the transferee acquires in addition, the right to have
the indorsement of the transferor (Sec. 49, NIL)
B. For the purpose of determining whether the transferee is a holder in due course,
the negotiation takes effect as of the time when the indorsement is actually
made (Sec. 49, NIL)
Example:
M through fraud was induced by A to issue a negotiable promissory note payable
to the order of A. The payee, A, delivered the note to B on May 3, 2003 without
indorsing it. On May 20, 2003, A, upon B’s request, placed his indorsement at
the back of the note “Pay to B, Sgd. A”. If B learned about the fraud committed
by A prior to May 20, 2003, B cannot be a holder in due course because he had
knowledge of the defect of title of A at the time the negotiation was made
complete. He can be a holder in due course if he had no such knowledge at the
time the indorsement was made on May 20, 2003.
6. INDORSEMENT
A. where the indorsement should be placed.
1. On the instrument itself; or
2. Separate piece of paper attached to the instrument called “allonge.” (Sec. 31,
NIL)
B. Indorsement must be of the entire instrument (Sec. 32, NIL). Example: an
instrument for P5,000 cannot be indored for less like P1,000. Exception: when
there was a previous partial payment.
C. Section 32 of the NIL disallows negotiation to two or more indorsees severally.
Example: Indorsement of a P20,000 note that states “Pay to Jose Crux, P15,000
 and Pedro Santos P5,000” is not considered negotiation although it may be
considered as an assignment.
D. Where an instrument is originally payable to order, the indorsement of the
indorsee is necessary to further negotiate the instrument. Otherwise, the holder
is not a holder but a mere assignee because the instrument was not
NEGOTIATED.
7. KINDS OF INDORSEMENT
a. Blank indorsement- no indorsee is specified and it is done by affixing the
indorser’s signature (Sec. 34). This makes the instrument payable to bearer. As
such, the instrument can be further negotiated by mere delivery. But, Sec. 35
states that the instrument may again be converted into an order instrument by
way of special indorsement.

Example: Indorsement of X with signature

b. Special indorsement- designates the indorsee. “Pay to X”

Note: The holder may convert a blank indorsement into a special indorsement by
writing over the signature of the indorser in blank any contract consistent with
the character of the indorsement (Sec. 35, NIL)
c. Qualified Indorsement- qualified indorsement constitutes the indorser a mere
assignor of the title to the instrument. It may be made by adding to the
indorser’s signature the words “without recourse or sans recourse” or any words
of similar import. Such an indorsement does not impair the negotiable character
of the instrument. (Sec. 38).
In effect, the indorser is telling the indorsee that, in case a party primarily liable
on the instrument, like the maker, defaults, he or she cannot resort to the
indorser.
A qualified indorser, however, may still be held liable under breach of warranties
under Section 65.
d. Conditional indorsement (sec. 39, NIL)- the party required to pay the instrument
may disregard the condition and make payment to the indorsee or his transferee
whether the condition has been fulfilled or not. However, the party required to
pay the instrument may disregard the condition and to the indorsee the full
amount stated in the instrument because he has the right to extinguish the
obligation.
BUT, the indorsee has no right to spend the money because he or she should
hold the money paid to him in trust for the indorser.

Note: compare this when the condition is on the instrument itself.

e. Joint indorsement. (Sec. 41)- in case the instrument is payable to the order of
two or more payees jointly, all of them, irrespective of their share must indorse
the instrument to effect a valid negotiation. If only one will indorse, such
 indorsement is invalid because the law requires that the indorsement must be of
the entire instrument

Note: Exceptions: First is where the payees are partners an second is where one of the payees
was authorized to indorse on behalf of the other payees.

f. Indorsement to a cashier (Sec. 42)- an instrument may be indorsed to a

corporation or any other juridical entity. If the instrument is indorsed to a
Cashier of a corporation, the law presumes that the instrument is indorsed to the
corporation and not the cashier in his or her personal capacity. Any new cashier
may negotiate the note even though he was not yet the cashier at the time it
was negotiated to the corporation.
g. Misspelled indorsement (Sec. 43)- in case his name is misspelled, the payee or
indorsee may indorse by adopting the misspelled name and , at his option, add
the name properly spelled and signature.
h. Indorsement in representative capacity (Sec. 44)- the representative may state
that he or she is indorsing the instrument in his/her official capacity.
8. Restrictive Indorsement (Sec. 36, NIL)
a. Prohibits further negotiation of the instrument “Pay to X only” or “Pay to X for
Collection only”
b. Constitutes the indorsee the agent of the indorser “pay to x for collection”; or
c. Vest the title in the indorsee in trust for or to the use of some other persons “Pay to
X in trust for Y”
9. Rights of restrictive indorsee (Sec. 37, NIL)
a. To receive payment of the instrument
b. To bring any action thereon that the indorser could bring;
c. To transfer his rights as such indorsee where the form of the indorsement
authorizes him to do so. In case of transfer, all subsequent indorsees acquire
only the title of the first indorsee under the restrictive indorsement.

A issued a PN to B. B restrictively indorsed the instrument to C. If C transfers the note to D, D

will just assume whatever title C has over the instrument, that is, the right to collect from A.

10. NEGOTIATION BY PRIOR PARTY

Where an instrument is negotiated back to a prior party, such party may reissue and further
negotiate the same. But he is not entitled to enforce payment thereof against any intervening
party to whom he was personally liable (Sec. 50, NIL). However, he may strike out the
intervening indorsements because they are not necessary for his title and he is liable to them
because of his initial indorsement (Sec. 48, NIL).

Example: “A” payee indorsed the instrument to B, B then indorsed it to C, C to D, then D to B. B

can further negotiate the instrument. He may also strike out the indorsements of C and D.
Assignment: assign cases.

1. Salas v. CA, G.R. 76788, Jan. 22, 1990

2. De la Victoria V. Burgos, 245 SCRA 374 (1995)
3. Sesbreno v. court of Appeals
4. Ang Tek Lian v. Court of Appeals
5. Montinola v PNB 88 Phil 178