Dang

Rules on indorsement
a. Indorsement of an instrument payable to bearer

Sec. 40 Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer, is

indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing
specially is liable as indorser to only such holders as make title through his indorsement.

An instrument payable to bearer is not converted into an instrument payable to order by being
indorsed specially. However, the person who indorsed specially is liable only to those holders who
can trace their title to the instrument by a series of unbroken indorsements from such special
indorser. Sec. 40 does not apply to instruments originally payable to order which was indorsed in
blank.

b. Where instrument is payable to two or more persons

Sec. 41. Indorsement where payable to two or more persons. - Where an instrument is payable to
the order of two or more payees or indorsees who are not partners, all must indorse unless the one
indorsing has authority to indorse for the others.

If an instrument is payable to the order of A and B, either as payees or indorsees, both must indorse
in order for the transaction to operate as a negotiation. A and B will then be jointly and severally
liable and an action will lie against any of them individually. If one of them should pay, the other
is liable to contribute his share to the paying indorser.

Under section 41, if the joint payees/ indorsees are partners, then the indorsement by one of the
partners of his own name and that of his partner, who is a co-payee with him, may constitute an
indorsement by each of them, and thus effect a valid negotiation. Thus, a partner signing has
authority to sign his partner’s name. For example, an instrument is intended to be negotiated to A
and B as partners doing business under the firm name “Manila Book Co.”, then the indorsement
must name such firm as indorsee not A and B as joint indorsees. Otherwise, the proceeds belong to
A and B and not to the partnership, and any further negotiation must be signed both by A and B.

c. Instrument is drawn or indorsed to a person as cashier

Sec. 42. Effect of instrument drawn or indorsed to a person as cashier. - Where an instrument is
drawn or indorsed to a person as "cashier" or other fiscal officer of a bank or corporation, it is
deemed prima facie to be payable to the bank or corporation of which he is such officer, and may
be negotiated by either the indorsement of the bank or corporation or the indorsement of the officer.

Where an instrument is intended for a corporation, it is usually issued or indorsed in its name.
Sometimes, however, the indorsement of payee is made to the fiscal officer of the corporation, thus:
“Pay to Cashier, ABC Corp.” In such a case, it is presumed that it is payable to the corporation and
not to the officer. The indorsement should therefore be made by the officer, thus: “ABC Corp., by
Juan Cruz, Cashier.” Assuming the authority of Juan Cruz to indorse for the corporation, such
indorsement would bind it.
Dang

d. Where name of payee or indorsee is misspelled

Sec. 43. Indorsement where name is misspelled, and so forth. - Where the name of a payee or
indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described
adding, if he thinks fit, his proper signature.

e. Indorsement in a representative capacity

Sec. 44. Indorsement in representative capacity. - Where any person is under obligation to indorse
in a representative capacity, he may indorse in such terms as to negative personal liability.

An instrument may be indorsed either personally or through an agent. And the authority of the
agent need not be in writing. In so signing, an agent should make it plain that he is merely signing
in behalf of the principal, otherwise he may be held personally liable. The most common form of
indorsement by an agent is “Pedro Reyes by Jose Santos, agent.”

f. Presumption as to time of indorsement

Sec. 45. Time of indorsement; presumption. - Except where an indorsement bears date after the
maturity of the instrument, every negotiation is deemed prima facie to have been effected before
the instrument was overdue.

g. Place of indorsement

Sec. 46. Place of indorsement; presumption. - Except where the contrary appears, every
indorsement is presumed prima facie to have been made at the place where the instrument is dated.

Although indorsements after maturity are good to transfer title, they prevent a holder from
becoming a holder in due course, thus subjecting him to defenses, if any. The presumption that
every negotiation was effected before the instrument was overdue is therefore significant, since
indorsements are usually not dated. The law of the place of dating will govern any controversy
should there be a conflict of laws.

h. Striking out of indorsement

Sec. 48. Striking out indorsement. - The holder may at any time strike out any indorsement which
is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers
subsequent to him, are thereby relieved from liability on the instrument.

A holder must be able to trace his title to the instrument back to the original owner, the payee. If
the instrument is payable to bearer on its face, then whether there are indorsements on the back of
the instrument would be immaterial to the title of the bearer, who is presumptively the owner and
holder by his mere possession of such instrument. None of the indorsements would be necessary to
his title since mere delivery would have been enough to transfer title from one holder to another.
The holder would thus have a right to cancel any or all indorsements. Should he do so, then any
indorser whose signature is cancelled and all indorsers subsequent to him would be discharged
from liability on the instrument.

Where the instrument is payable to order on its face, the situation is different. If all the indorsements
appearing on the back of the instrument are special, then all of them would be necessary to the
holder’s title.
Dang

i. Transfer of an order instrument without indorsement

Sec. 49. Transfer without indorsement; effect of. - Where the holder of an instrument payable to
his order transfers it for value without indorsing it, the transfer vests in the transferee such title
as the transferor had therein, and the transferee acquires in addition, the right to have the
indorsement of the transferor. But 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.

If his predecessor had legal title, the transferee of an unendorsed instrument acquires such,
subject however to the defenses and equities available among prior parties. Thus, he has a right to
sue in his own name, but he cannot be considered a “holder” of the instrument since he is neither
a payee nor indorsee, nor is he a “bearer” because the instrument is not payable to bearer. Since
he is not a holder, when he sues on the instrument the presumption of ownership in favor of a
holder cannot be availed of by him. He must prove that he is the owner of the instrument as a
condition precedent to his right to introduce the instrument in evidence and to recover thereon. It
is the exception rather than the rule for a payee of an order instrument or a special indorsee to
transfer the instrument without indorsement, and therefore since the situation is abnormal it is
only fair to the maker and to prior holders to require the possessor to prove without the aid of an
initial presumption in his favor, that he came into possession by virtue of a legitimate transaction
with the last holder.

But the transferee of an unendorsed instrument may become a holder by obtaining the
indorsement of his transferor. It is only at this time that the instrument can be considered as
having been negotiated. As to what kind of indorsement such transferee is entitle to, the majority
view is that, unless there is proof of an agreement to the contrary, he has a right to an unqualified
and not merely a qualified indorsement. Section 49 applies only to an instrument payable to the
order of the transferor, i.e., where he is either the specified payee or a special indorsee of an order
instrument. It cannot apply to bearer instruments.