Quiz No.

4 – Negotiable Instruments Law - Negotiation

I
Ramos was the payee of a check for P100,000. He wrote at the back an instruction for the bank
to pay P30,000 to Montinola and deposit the balance of P70,000 to Ramos’ account. Was the
check validly negotiated? (10%)

Answer: Quizzer and Reviewer on Negotiable Instruments Law and Related Laws by Hernando
B. Perez, p. 153; Montinola vs. PNB, 88 Phil. 178; Asked, 1963 Bar Exams

No. The check was not validly negotiated because an indorsement which purports to transfer to
the indorsee a part only of the amount payable does not operate as negotiation of instrument.
Montinola may not, therefore, be regarded as an indorsee. At most, he may be regarded as an
assignee of the P30,000 sold to him by Ramos, in which case, he is subject to all defenses
available to the drawer.

II
An instrument was indorsed by A in blank and delivered to B. B wrote above the signature of A
the following: “To B”. Is the indorsement still a blank indorsement? (10%)

Answer: Quizzer and Reviewer on Negotiable Instruments Law and Related Laws by Hernando
B. Perez, p. 156; Section 35, NIL; In re Jarmulowsky, N.Y., 249 F. 319, 161 C.C.A. 327, L.R.A.
1918E 634

No. The indorsement is no longer a blank indorsement since it was converted into a special
indorsement when B inserted “To B”, which is consistent with the character of the indorsement.
The holder of a bill or note indorsed in blank may write over the indorsement any contract not
inconsistent with the undertaking of the indorser or the intention of the parties.

III
A issued a promissory note payable to B or order for P100,000. B who did not give the agreed
consideration to A, negotiated the instrument to C for the agreed consideration of P90,000. Upon
negotiation of the instrument, C paid B only P50,000 with the agreement that the balance of
P40,000 will be paid one month later. One week after payment of P50,000 and before payment
of the balance, A informed C that B did not give him the consideration stated in the note he
issued. Is C a holder in due course? (10%)

Answer: Quizzer and Reviewer on Negotiable Instruments Law and Related Laws by Hernando
B. Perez, pp. 183-184

C is a holder in due course only to the extent of P50,000, the amount paid by him at the time he
acquired notice of the infirmity in the instrument or defect in the title of B. The status of C will
not improve even if he paid the balance of P40,000 after acquiring the notice of the infirmity of
the instrument.

IV
Angel de la Cruz made a time deposit with Security Bank which issued 280mCertificates of
Time Deposit (CTDs) payable to bearer. To secure purchases of fuel products from Caltex, dela
Cruz delivered without indorsement the said CTDs to the former. Later, de la Cruz claimed said
CTDs to be lost and so he executed an affidavit of loss. Security Bank issued 280 replacement
CTDs in favor of said depositor. De la Cruz obtained a loan from Security Bank and executed a
notarized Deed of Assignment of Time Deposit covering said CTDs, which authorized the bank
to pre-terminate, set-off and apply the said time deposits to the payment of whatever amounts
may be due on the loan upon its maturity. Caltex informed Security Bank of its possession of the
original CTDs and of its decision to pre-terminate the same. Security Bank demanded a copy of
the agreement evidencing the guaranty executed by de la Cruz, which Caltex was unable to
provide. Thereafter, the loan of de la Cruz with Security Bank matured and the latter applied the
time deposits to the payment of the matured loan. As between Caltex and Security Bank, who
has a better right to the CTDs?

Answer: Quizzer and Reviewer on Negotiable Instruments Law and Related Laws by Hernando
B. Perez, pp. 149-150

The CTDs in possession of Caltex were only delivered but not indorsed and no document
evidencing any contract of pledge or guarantee agreement between Caltex and de la Cruz was
presented. Consequently, the mere delivery of the CTDs did not legally vest in Caltex any right
effective against and binding upon Security Bank. Article 2096 of the Civil Code provides that
“A pledge shall not take effect against third persons if a description of the thing pledged and the
date of the pledge do not appear in a public instrument.” On the other hand, the assignment of the
CTDs in favor of Security Bank was embodied in a public instrument. With regard to this mode
of transfer, the Civil Code declares in Art. 1625 thereof that, “An assignment of credit, right or
action shall produce no effect as against third persons, unless it appears in a public instrument, or
the instrument is recorded in the Registry of Property in case the assignment involves real
property.” Security Bank duly complied with this statutory requirement. Contrarily, Caltex,
whether as purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit
or the extent of its lien nor the execution of any public instrument which could affect or bind
Security Bank. Necessarily, therefore, as between Caltex and Security Bank, the latter has
definitely the better right over the CTDs in question. (Caltex (Phils), Inc. vs. Court of Appeals.
G.R. No. 97753, August 10, 1992).

V
Roxas sold to Rodrigo and Marissa Cawili vegetable oil. As payment therefore, spouses Cawili
issued a personal check in the amount of P348,805.50. However, when Roxas tried to encash the
check, it was dishonored by the drawee bank. Spouses Cawili assured him that they would
replace the bounced check with a cashier’s check from BPI. Rodrigo Cawili and Roxas went to
BPI Branch in Mandaluyong and upon instructions of the Branch Manager, BPI Cashier’s Check
in the amount of P348,805.50 was issued, drawn against the account of Marissa Cawili, payable
to Roxas. Rodrigo then handed the cashier’s check to Roxas. The following day, Roxas returned
to BPI’s branch in Mandaluyong to encash the cashier’s check but it was dishonored on the
ground that Marissa’s account was closed on that date. Upon being sued, BPI claimed that Roxas
was not a holder in due course because the latter was not a holder for value.

a. Was Roxas a holder for value and hence, a holder in due course? (5%)
b. May BPI be relieved of its liability under the cashier’s check it issued? (5%)

Answer: Quizzer and Reviewer on Negotiable Instruments Law and Related Laws by Hernando
B. Perez, pp. 194-195

a. Roxas was a holder for value and a holder in due course. Roxas received the cashier’s
check as payment for the vegetable oil he sold to Cawili. The fact that Rodrigo was the
one who purchased the cashier’s check from BPI will not affect Roxas’ status as a holder
for value since the check was delivered to him as payment for the vegetable oil he sold to
spouses Cawili. Roxas is presumed to be a holder in due course and the one who claims
otherwise must prove that one or more of the conditions required to constitute a holder in
due course are lacking. BPI failed to prove that Roxas was not a holder for value. (Bank
of the Philippine Islands vs. Roxas, 536 SCRA 168, October 15, 2007).
b. BPI cannot be relieved of its liability under the cashier’s check it issued. A cashier’s
check is really the bank’s own check and may be treated as a promissory note with the
bank as maker. The check becomes the primary obligation of the bank which issues it and
constitutes a written promise to pay upon demand. It is of judicial notice that a cashier’s
check is deemed as cash. This is because the mere issuance of a cashier’s check is
considered acceptance thereof. Hence, a bank becomes liable to the payee the moment it
issued the cashier’s check. (Ibid.)
 VI
X, an insolvent person, made a note payable to A or bearer. A with prior knowledge of the
insolvency of X, indorsed the instrument without recourse to B who merely delivered the
instrument to C, without indorsement. B also knew of the insolvency of X at the time of his
negotiation. C who did not know of the insolvency of X, delivered the instrument to D. When D
cannot obtain payment from X because of the latter’s insolvency, he gave notice of his dishonor
to A, B, and C. May D hold A, B, or C liable?

Answer: Quizzer and Reviewer on Negotiable Instruments Law and Related Laws by Hernando
B. Perez, pp. 211-212

A, the qualified indorser is liable to D because he violated his warranty that he has no knowledge
of any fact which would impair the validity of the instrument or render it valueless. B who
negotiated the instrument by mere delivery is not liable to D even if he violated his warranty
because his warranty extends only in favor of his immediate transferee. D is not an immediate
transferee of B. C did not violate his warranty because he did not know of the insolvency of X
and therefore, he is not liable to D even if the latter is his immediate transferee.

VII
a. Where a check is payable to joint payees who are not partners, who should indorse the
same? Why? (5%)
b. What is the effect of payment of said check upon the indorsement of only one of the
payees? Why? (5%)

Answer: Quizzer and Reviewer on Negotiable Instruments Law and Related Laws by Hernando
B. Perez, p. 154

a. 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.
b. The payment of an instrument despite a missing indorsement is equivalent to payment on
a forged indorsement or an unauthorized indorsement in itself in the case of joint payees.
The bank that credits the proceeds of a check to the account of indorsing payee is liable
for conversion to the non-indorsing payee for the entire amount of the check. (Metrobank
vs BA Finance, 607 SCRA 620, December 4, 2009; Asked, 2008 Bar Exams).

VIII
A delivers a bearer instrument to B. B then specially indorses it to C and C later indorses it in
blank to D. E steals the instrument from D and, forging the signature of D, succeeds in
“negotiating” it to F who acquires the instrument in good faith and for value.

a. If, for any reason, the drawee bank refuses to honor the check, can F enforce the instrument
against the drawer? (5%)
b. In case of the dishonor of the check by both the drawee and the drawer, can F hold any of B, C
and D liable secondarily on the instrument? (5%)

Answer: 1997 Bar Exam

a. Yes. The instrument was payable to bearer as it was a bearer instrument. It could be negotiated
by mere delivery despite the presence of special indorsements. The forged signature is
unnecessary to presume the juridical relation between or among the parties prior to the forgery
and the parties after the forgery. The only party who can raise the defense of forgery against a
holder in due course is the person whose signature is forged.

b. Only B and C can be held liable by F. the instrument at the time of the forgery was payable to
bearer, being a bearer instrument. Moreover, the instrument was indorsed in blank by C to D. D,
whose signature was forged by E cannot be held liable by F.
 IX
On March 1, 1996, Pentium Company ordered a computer from CD Bytes, and issued a crossed
check in the amount of P30, 000 post-dated Mar 31, 1996. Upon receipt of the check, CD Bytes
discounted the check with Fund House. On April 1, 1996, Pentium stopped payment of the check
for failure of CD Bytes to deliver the computer. Thus, when Fund House deposited the check, the
drawee bank dishonored it. If Fund House files a complaint against Pentium and CD Bytes for
the payment of the dishonored check, will the complaint prosper? Explain

Answer: 1996 Bar

The complaint filed by Fund House against Pentium will not prosper but the one against CD
Bytes will. Fund House is not a holder in due course and, therefore, Pentium can raise the
defense of failure of consideration against it. The check in question was issued by Pentium to
pay for a computer that it ordered from CD Bytes. The computer not having been delivered, there
was failure of consideration. The check discounted with Fund House by CD Bytes is a crossed
check and this should have put Fund House on inquiry. It should have ascertained the title of CD
Bytes to the check or the nature of the latter’s possession. Failing in this respect Fund House is
deemed guilty of gross negligence amounting to legal absence of good faith and, thus, not a
holder in due course. Fund House can collect from CD Bytes as the latter was the immediate
indorser of the check. (See Bataan Cigar and Cigarette Factory, Inc. vs. CA, et. al., G.R. No.
93048, March 3, 1994; 230 SCRA 643).

Alternative Answer:

The case will prosper as against the CD Bytes, the immediate indorser but not as against Pentium
Company. The effect of crossing a check relates to the mode of its presentment for payment
which must be made by the holder, or by some person authorized to receive payment on his
behalf. Thus, in the absence of due presentment, as in this case where the check was not
presented by the payee (CD Bytes) or the proper party authorized to make presentment of the
checks, the drawer (Pentium Company) cannot be held liable. However, Fund House may
recover from the immediate indorser, if the latter has no valid excuse for refusing payment.

X
X, Y and Z signed a promissory note in favor of A stating: “We promise to pay A on December
31, 2001 the sum of P5, 000. “When the note fell due, A sued X and Y who put up the defense
that A should have impleaded Z. Is the defense valid? Why? (10%)

Answer: 2001 Bar

The defense is not valid. The liability of X, Y and Z under the promissory note is joint. Such
being the case, Z is not an indispensable party. The fact that A did not implead Z will not prevent
A from collecting the proportionate share of X and Y in the payment of the loan.