NEGOTIABLE INSTRUMENTS LAW

IV. RIGHTS OF THE HOLDER [Sections 51 - 59]

Section 51:
1. If B purchases an overdue negotiable promissory note signed by A, he is not a holder in
due course; but he may recover from A, if the latter has no valid excuse for refusing
payment. The only disadvantage of a holder who is not a holder in due course is that the
negotiable instrument is subject to defenses as if it were non-negotiable.”

Section 52:
1. A is indebted to B in the amount of P100,000.00. In order to raise funds to pay for his
obligation, A sold his old car to C for P100,000.00 on January 20, 2001. A agreed to deliver
the car to C on January 25, 2001. However, A convinced C to immediately issue a check
and to make the check payable to B. A informed C that the check will be issued to B
because of A’s outstanding obligation. Hence, C issued a check to B to pay for the loan of
A payable on January 25, 2001. The check was delivered to B through A. B and C were
not aware at that time that the car was sold, it was already destroyed by fire. A fraudulently
hid such fact in order to convince C to issue the check and to convince B to accept the
check. Can B, the payee of the check be considered a holder in due course?

Answer:
Yes, he can be considered a holder in due course. Nothing in the problem indicates that
he is not a holder in due course, hence, the presumption that he is a holder in due course
stands. All the requirements of Section 52 of the NIL are present in the case because it
appears that A is a holder of the instrument who has taken the instrument complete and
regular on its face, he took it before it was overdue and it was not previously dishonored;
he took it in good faith and for value and he had no notice of any infirmity in the instrument
or a defect of the title of a prior part

2. Rolando, intending to buy a car, saw an old friend, Roger, who is an agent to sell the car
belonging to Delgado Clinic. After negotiation Rolando decided to buy said car. He drew
upon request of Roger, a crossed check for P600 payable to Delgado Clinic as evidence
of his good faith, but which was merely meant to be shown to Delgado Clinic by Roger
who received said check. The check would then be returned when Roger brings the car
and its registration certificate for Rolando’s inspection. For failure of Roger to bring the car
and its certificate of registration, and to return the check, Rolando issued a “stop payment
order” to the drawee bank. In the meantime, Roger paid the check to the Delgado Clinic
for the hospital bill of his wife and was given P158.25 as change. May Delgado Clinic be
considered a holder in due course, hence entitled to recover? Decide with reasons.

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 Answer:
Delgado Clinic may not be considered a holder in due course, hence not entitled to
recover. Although Delgado Clinic was not in fact aware of the circumstances with respect
to the delivery of the check to Roger, there are circumstances that should have put on
inquiry. Thus, it should have noted that Rolando had no relation with it; that the amount of
the check did not correspond exactly with the obligation of Roger to the clinic; and that the
check is a crossed check, which means that the check could only be deposited but may
not be converted into cash should have put the clinic to inquiry as to the possession of the
check by Roger, and why he used it to pay his accounts. (1977 and 1962 Bar)

3. On October 12, 1993, Chealsea Straights (CHEALSEA), a corporation engaged in the

manufacture of cigarettes, ordered from Moises Lim 2,000 bales oftobacco. CHEALSEA
issued to Moises Lim two crossed checks postdated 15 March 1994 and 15 April 1994 in
full payment therefor. On 19 January 1994 Moises Lim sold to Dragon Investment
(DRAGON) at a discount the two checks drawn by CHEALSEA in his favor.

Moises Lim failed to deliver the bales oftobacco as agreed despite CHEALSEA’s demand.
Consequently, on 1 March 1994 CHEALSEA issued a stop payment order on the two
checks issued to Moises Lim. DRAGON, claiming to be a holder in due course, filed a
complaint for collection against CHEALSEA for the value ofthe checks. Rule on the
complaint ofDRAGON. Give your legal basis

Answer:
DRAGON is not a holder in due course. Since the negotiable instruments involved are
crossed checks, there is already a warning to the purchaser, DRAGON, that the check
was only for deposit to the account ofthe payee and it is under obligation to inquire as to
the purpose ofthe issuance ofthe two crossed checks before taking the checks. Since
DRAGON failed to make such inquiry, it shall be considered in bad faith. (1995 Bar) [Note:
The problem merely used the word “sold” hence it is not indicated if there was indeed
negotiation to DRAGON. Of course, the answer would be the same if there was no
negotiation because DRAGON will not even be a holder. It will be an assignee thatsteps
into the shoes ofthe transferor Moises Lim.]

4. Po Press issued in favor of Jose a postdated crossed check, in payment of newsprint

which Jose promised to deliver. Jose sold and negotiated the check to Excel, Inc. at a
discount. Excel did not ask Jose the purpose of crossing the check. Since Jose failed to
deliver the newsprint, Po ordered the drawee bank to stop payment on the check. Efforts
of Excel to collect from Po failed. Excel wants to know from you as counsel:
1) Is Excel a holder in due course? 2) Can Po Press raise absence or failure of
consideration as a defense?

Answer:

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 1) Excel is not a holder in due course. The instrument involved is a crossed check and
was supposed to be deposited only. Excel is therefore obligated to inquire regarding the
circumstances involving the issuance of the check. Failure on his part, as in this case, will
prevent him from becoming a holder in due course; such failure or refusal constituted bad
faith.

2) Yes. Since Excel is not a holder in due course, Excel is subject to the personal defense
which Po Press can set up against Jose. There was failure of consideration in the problem
because Jose failed to deliver the newsprint to Po Press. (1994 Bar)

5. Larry issued a negotiable promissory note to Evelyn and authorized the latter to fill up the
amount in blank with his loan account in the sum of Pl,000.00. However, Evelyn inserted
P5,000.00 in violation of the instruction. She negotiated the note to Julie who had
knowledge of the infirmity. Julie in turn negotiated said note to Devi for value and who had
no knowledge ofthe infirmity. Supposing Devi endorses the note to Baby for value but who
has knowledge ofthe infirmity, can the latter enforce the note against Larry?

Answer:
Yes. The problem indicates thatBaby is not a holderin due course. When she took the
instrument, she had knowledge ofthe breach oftrust committed by Evelyn against Larry.
However, she has all the rights of a holder in due course because she took the instrument
from Devi, a holder in due course. Although Baby is not a holder in due course, she did
not participate in the breach oftrust committed by Evelyn. Hence, Larry cannot set up the
defense that the instrument was completed in breach oftrust against Baby because such
defense is a personal defense. (1993 Bar)

Section 54:
1. If the holder took the instrument on the strength of his promise to deliver P200,000.00,
but he had only delivered P100,000.00, he is a holder in due course only up to
P100,000.00 if he receives notice Of infirmity before he could fully pay the consideration.

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V. LIABILITY OF THE PARTIES

Sections 60-69, NIL

Section 60 Liability of maker

1. A makes a promissory note payable to B 'or bearer. A delivers the note to B. B indorses
the note to C. C places the note in his wallet, which was stolen by X, who finding the
note, indorses it to D, by forging C’s signature. D indorses the note to E, who in turn
delivers the note to F, a holder in due course, without indorsement. What are the
liabilities ofA, B, and C to F?

A: A is liable to F, a holder in due course. Although X forged the signature of C, the

liability ofthe maker remains because he engages to pay any bearer ofthe instrument.
Indorsement is not necessary for the title of the holder because the instrument may be
negotiated by mere delivery.

B and C are not liable to F as persons secondarily liable. Indorsers of bearer instruments
are liable to those persons who obtain title through their indorsement. F did not obtain title
through the indorsement of B and C because C’s signature was forged. Moreover, the
instrument was merely delivered by E to F hence even if C indorsed the instrument, F cannot
trace his title from their indorsements. (1981 Bar)

2. Juan de la Cruz signs a promissory note payable to Pedro Lim or bearer, and delivers it
personally to Pedro Lim. The latter somehow misplaces the said note and Carlos Ros
finds the note lying around the corridor of the building. Carlos Ros endorses the
promissory note to Juana Bond, for value, by forging the signature of Pedro Lim. May
Juana Bond hold Juan de la Cruz liable on the note?

Answer: Juana Bond may hold Juan de la Cruz liable. The promissory not is payable to
bearer hence title is transferred through negotiation by mere delivery of the note. Juana Bond
may obtain title even ifthere is no indorsement. However, Juan de la Cruz may validly invoke the
defense ofnon-delivery of a complete instrument by Pedro Lim ifJuana Bond is not a holder in
due course. It does not appear however thatJuana Bond is not a holder in due course so she is
presumed to be such holder in due course. (1980 Bar)

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Section 62 Liability of acceptor

Ms. WS deposited in her checking account at P Bank a check in the amount of P100,000. The
drawer of the check is Mr. X and the drawee is C Bank. The following day, upon inquiry by Ms.
WS, P Bank confirmed that the check was already cleared. Hence, Ms. WS issued two checks
to Ms. O one for P60,000 and another for P40,000 drawn against her checking account with P
Bank. On the same day, Ms. 0 presented the checks to P Bank for payment. However, instead
ofgetting cash, Ms. 0 requested that a manager’s check in the amount of PIOO.OOO be issued
to her by P Bank. P Bank issued a manager’s check to Ms. O in the amount of P100,000.00
which Ms. O deposited in her account with E Bank. Later, Ms. O received notice from E Bank
that the manager’s check that she deposited was dishonored because P Bank stopped its
payment. When Ms. O confronted the officers of P Bank, she was informed that the check which
WS deposited which was drawn against the account of Mr. X in C Bank was dishonored by the
latter because the said account of Mr. X was already closed. Did P Bank validly dishonor the
manager’s check?

A: No. P Bank invalidly dishonored the manager’s check. The manager’s check becomes the
primary obligation of the bank which issues it and constitutes its written promise to pay upon
demand. The mere issuance ofthe manager’s check is considered an acceptance thereof and
the same check stands on the same footing as a certified check. For all intents and purposes, the
payee becomes the depositor ofthe drawee bank, with rights and duties ofone in such a situation.
In addition, by accepting the P100,000.00 check from Ms. WS and eventually issuing a manager’s
check in favor of Ms. O, P Bank assumed the liabilities of an acceptor under Section 62 of the
Negotiable Instruments Law. Under Section 62, an acceptor engages to pay according to the
tenor of his acceptance (Equitable PCI Bank v. Rowena Ong, G.R. No. 156207, September 15,
2006, 502 SCRA 119).

Section 64 Liability of irregular indorser

An irregular indorser is liable as indorser, in accordance with the following rules:46
(1) If the instrument is payable to the order of a third person, he is liable to the payee and to
all subsequent parties.
(2) If the instrument is payable to the order of the maker or drawer, or is payable to bearer,
he is liable to all parties subsequent to the maker or drawer.
(3) If he signs for the accommodation of the payee, he is liable to all parties subsequent to
the payee.
The rules specified above are also supplemented by Sections 66 and 68 in so far as they are not
in conflict with Section 64. In other words, the irregular indorser is liable as a general indorser
because he indorses without qualification. However, as between themselves, the irregular
indorser together with other indorsers are liable prima facie in the order in which they indorse.

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Section 66 Liability of general indorser

Illustration:

M, maker, issued an instrument to P, payee. P indorsed the instrument

to A, A to B, and B to C. C is the present holder who is a holder in due course
and P, A, and B are general indorsers. P, A, and B are secondarily liable. P
engages that M will honor the instrument if properly presented for payment
and if M dishonors it and the necessary proceeding for dishonor is duly taken,
P engages to pay C. P also engages to pay A and B if they may be compelled
by C to pay or if A may be compelled by B to pay in proper cases.

In the given problem, P, A and B cannot refuse to pay or honor their secondary
liability on the ground that the instrument is fake or that the maker was an
insane person because that would be contrary to their warranties. A and B
cannot likewise refuse to make good their secondary liability on the ground
that the note was altered as that would be contrary to their warranty under
paragraph (a) of Section 66.25

Other Problems In Relation to Liability of Parties

1. Anna makes a promissory note payable to bearer and delivers it to Bing. In turn, Bing
negotiates it by mere delivery to Carmen, who endorses it specially to Dong. Dong
negotiates it by special indorsement to Emma, who negotiates it to Fe by mere delivery.
Anna did not pay. To whom are Bing, Carmen, Dong and Emma liable? Explain your
answer fully.

A: Bing negotiated the instrument by mere delivery hence she is not secondarily liable at
all. She is only liable for breach of warranty to her immediate transferee but no such breach
appears in the given problem. Carmen is secondarily liable to Dong and Emma only. A person
who indorses a bearer instrument is liable only to persons who acquire title through his
indorsement. (Sec. 40, NIL). In the given problem, only Dong and Emma acquired their titles
through the indorsement of Carmen. Fe cannot trace her title from the indorsement of Carmen
hence the latter is not secondarily liable to Fe.

For the same reason, Dong is secondarily liable only to Emma because Emma’s title was
derived from the indorsement of Dong. Dong is not secondarily liable to Fe because the latter
cannot trace her title from the indorsement of Dong.

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 Emma is liable to Fe because she is an immediate party. Fe is also liable to Emma if there
is breach of warranty. (1988 Bar)

2. X draws a check payable against his current account with the Ortigas Branch of Bonifacio
Bank in favor of B. Although X does not have sufficient funds, the bank honors the check
when it is presented for payment. Apparently, X has conspired with the bank’s bookkeeper
so that his ledger card would show that he still has sufficient funds. The bank files an
action for recovery of the amount paid to B because the check presented has no sufficient
funds. Decide the case.

A: The bank cannot recover the amount paid to B for the check. Although payment of a
check is not equivalent to acceptance, the drawee who pays a check is liable as an acceptor. As
acceptor, the bank became primarily liable to the payee, B. The cause of action of the bank is
against X and its bookkeeper who conspired to make X’s ledger show that he has sufficient funds.
(1998 and 1970 Bar)

3. A drew a check for Pl,000.00 on B, the bank, payable to the order of C and delivered the
check to the latter for value. C indorsed the check in blank and negotiated it to D, who lost
it. At D’s request, A ordered payment stopped by notifying B. The stop order was
overlooked and the check was paid to E, who had taken the check, without actual
knowledge of the loss, in payment of merchandise sold to a stranger whom he thought
owned the check. D now sues the bank, B, for the amount of the check. Decide the case
with brief reasons.

A: The suit of D against the bank may not prosper. A check of itself does not
operate as an assignment of any part of the funds to the credit of drawer with the bank,
and the bank is not liable to the holder, unless it accepts or certifies the check. (Section
189, NIL) There is no privity between the bank and D. This is true even if D is a holder. D
is not even the holder of the check in question because he lost the same. (1979 Bar)

4. Mr. Lim issued a check drawn against BPI Bank in favor of Mr. Yu as payment for certain
shares of stock which he purchased. On the same day that he issued the check to Mr. Yu,
Mr. Lim ordered to stop payment per standard banking practice, Mr. Lim was made to sign
a waiver of BPI’s liability in the event that it should pay Mr. Yu through oversight or

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 inadvertence. Despite the stop order by Mr. Lim, BPI nevertheless paid Mr. Yu upon
presentation of the check. Mr. Lim sued BPI for paying against his order. Decide the case.

A: In the event Mr. Lim, in fact, had sufficient legal reasons to issue the stop
payment order, he may sue BPI for paying against his order. The bank is still liable for its
failure to exercise due diligence despite the waiver executed by Mr. Lim. (1991 Bar)

5. As payment for goods received, Masikap gave to Humimok on November 3, his check
drawn on the Eternal Bank of Manila. On November 11, Kahusayan went to Eternal Bank
to encash the check. He could not cash the check because on November 10, Central Bank
had forbidden Eternal Bank to do business in the Philippines on grounds of insolvency.
Masikap, Humimok and Kahusayan all reside in Manila.

(a) Can Kahusayan hold Masikap liable on the uncashed check? Explain.
(b) Can Kahusayan hold Humimok liable on the check? Explain.
(c) Can Kahusayan still collect from Humimok for the dental work done on the latter? Explain

(d) Assume that Eternal Bank was not closed by Central Bank but simply refused to honor
and encash the check. Can Kahusayan hold Masikap liable? Explain.

A:
(a) The drawer, Masikap, is secondarily liable to the holder Kahusayan. When an instrument is
dishonored and the proper proceedings are duly taken, the holder has an immediate right of
recourse against the drawer of the instrument.

(b)The problem does not state if the instrument is a bearer instrument or an order instrument. It
also does not state how the instrument was negotiated to Kahusayan. If the check was negotiated

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by delivery, Humimok would not be secondarily liable. On the other hand, Humimok is secondarily
liable if he indorsed the check as a general indorser to Kahusayan. Humimok would not be
secondarily liable if his indorsement is qualified. Humimok would also be liable for breach of
warranty but the same does not appear to be present.

© Yes, Kahusayan can still collect from Humimok what may be due for the dental work done.
Delivery of a check is not deemed payment unless the same is encashed. Since the check was
not honored, the obligation of Humimok remains.

(d) The liability of Masikap remains. The secondary liability of Masikap to Kahusayan does not
depend on the capability of the drawee to honor the instrument. The secondary liability operates
so long as the drawee bank fails or refuses to pay and the necessary proceedings for dishonor
are duly taken. (Sec. 61, NIL) (1986 Bar)

6. Ms. G is an employee of R Bank. His mother, Mrs. EV is the holder of a foreign check
in the amount of $7,500 drawn by Mr. DZ against W Bank of Los Angeles, California. R Bank
gives special accommodations to its employees to receive the check’s value without waiting for
the clearing period. Accordingly, Ms. G was allowed to encash the foreign check by R Bank before
it was cleared but after it was indorsed by Ms. G. In accepting the check, one of R Bank’s officers
endorsed or signed the check after placing the notation “up to P17,500.00 only.” Later, the check
was dishonored by W Bank on the ground that it was irregularly indorsed because of the notation
that was made by the bank’s officer. R Bank now seeks to recover from Mrs. EV and Ms. G on
the ground that they are liable as indorsers under Section 66 of the Negotiable Instruments Law.
Will the claim of R Bank prosper?

A: No, the claim will not prosper. Although Mrs. EV and Ms. G were endorsers, their
liabilities and warranties under Section 66 in favor of subsequent holders extend only to the state
of the instrument at the time of their indorsement and such liabilities and warranties cannot be
used by the party who introduced a defect on the instrument. The secondary liability of endorsers
must be read in the light of the rule in equity that those who come to court should come with clean
hands. The holder or subsequent endorser who tries to claim the instrument which has been
dishonored because of an “irregular indorsement” must not be the endorser himself that gave the
cause for dishonour. Otherwise, a clear injustice results when any subsequent party to the
instrument may simply make the instrument defective and later claim from prior endorsers who
have no knowledge or participation in causing or introducing said defect to the instrument which

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thereby caused its dishonor (Melva Theresa Alviar Gonzalez v. Rizal Commercial Banking
Corporation, G.R. No. 156294, November 29, 2006, 508 SCRA 459, 465-466).

VI. PRESENTMENT FOR PAYMENT [Sections 70 - 88]

Section 71

1. Gemma drew a check on September 13, 1990. The holder presented the check to the
drawee bank only on March 5,1994. The bank dishonored the check on the same date.
After dishonor by the drawee bank, the holder gave a formal notice of dishonor to Gemma
through a letter dated April 27, 1994. (a) What is meant by “unreasonable time” as applied
to presentment? (b) Is Gemma liable to the holder?

Answer:
(a) The concept of what is reasonable is relative. “Reasonable time” has been defined as
so much time as is necessary under the circumstances for a reasonable prudent and
diligent man to do, conveniently, what the contract or duty requires should be done, having
a regard for the rights and possibility of loss, if any, to the other party (Far Realty
Investment, Inc. v. Hon. Court of Appeals, G.R. No. L-36549, October 5, 1998). However,
with respect to checks, the Supreme Court had taken cognizance of the current banking
practice that check becomes stale after more than six months or 180 days (Luis S. Wong
v. Court of Appeals, G.R. No. 117857, February 2, 2001, 142 SCAD 713)

(b) No. Gemma is no longer liable to the holder based on the instrument. Gemma is
already discharged from secondary liability under the check, because presentment and
notice of dishonor was made after an unreasonable length of time of more than three (3)
years. The check was already stale at the time of presentment. However, Gemma may
still be liable to the holder if the latter is her contracting party. Failure to present the
instrument on time does not totally wipe out all liability based on contract. Although she
may not be liable on the check, she may be liable on their contract. (1994 Bar)

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Section 73

1. Can this instrument be presented in the residence of Mr. M in Manila? Where should the
following instrument be presented for payment?

January 10, 2009

I promise to pay Mr. or order, the sum of
P100 on January 5, 2010. This instrument must be
presented for payment at 118 Rodriguez Avenue,
Teresa, Rizal.
Sgd: Mr. M

Answer:
No, the instrument cannot be presented in Manila. The instrument should be presented at
No. 118 E. Rodriguez Avenue, Teresa, Rizal because the same is indicated as the place
where presentment must be made. Hence, the instrument must be presented in the said
address and not in any other address. It cannot be presented in the addresses mentioned
in paragraphs (b), (c), and (d) ofSection 73.

2. Where should this instrument be presented for payment?

January 10, 2009

I promise to pay Leona or order, the sum of P100 on January 5, 2011.

Sgd: Mr. M
No. 111, Osmena St, Teresa Rizal

Answer:
The instrument should be presented for payment in Teresa, Rizal. The instrument does
not indicate the place where presentment should be made, hence, presentment must be
in the address of the Maker, Mr. M, indicated in the note, No. Ill Osmena Street, Teresa,
Rizal pursuant to Section 73(b).

Section 77

1. Mr. A and Mr. B, who are partners, issued a promissory note payable to the order of Mr.
P. Mr. P indorsed and delivered the instrument to Mr. C, the present holder.

Answer:
The instrument may be presented either to Mr. A or Mr. B. Presentment to any one ofthem
is sufficient.

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 2. Suppose in the preceding example that the promissory note states that the same must be
presented for payment at No. Ill, E. Rodriguez Avenue, Teresa, Rizal. At the time
presentment for payment is supposed to be made, Mr. A is at the said address in Teresa,
Rizal while Mr. B is residing near the house ofthe holder, Mr. C in Morong, Rizal

Answer:
In this case, Mr. C cannot presentthe instrument for payment to Mr. B although it would
be more convenient and even ifMr. A and Mr. B are partners because the instrument states
that the same must be presented for payment in Teresa, Rizal.

Section 78

1. if there are two debtors, Mr. A and Mr. B and the total obligation is Pl,000.00

Answer:
Mr. A is liable only for P500.00 while Mr. B is liable only for P500.00. Applying this rule, if
there are two or more makers or two or more acceptors, each maker or acceptor is liable
only for their share in the obligation, hence, there must be presentment to all of them.

Section 85

If the instrument is payable on a fixed day, it should be paid on such date. For example, if
the instrument is payable on December 12, 2010, it should be paid on December 12, 2010.

If the maturity day falls on a Sunday, Saturday or a holiday, the instrument is payable on
the next succeeding business day. For instance, the instrument is payable on December
5, 2010. December 5, 2010 is a Sunday, hence, the instrument is payable on December
6, 2010 which is a Monday (unless December 6 is also declared a holiday).

However, ifthe instrument is payable on December 7, 2005, a Tuesday but the President
of the Philippines will declare December 7, 2010 as a special non-working holiday, then
the instrument is payable on December 8, 2010, the next business day.

If the instrument is payable on December 4, 2010, a Saturday, the instrument is payable

on December 6, 2010, the next succeeding business day. Ifthe instrument is payable on
demand, the instrument may, at the option of the holder, may be presented for payment
before 12:00 noon on a Saturday when the entire day is not a holiday.

Section 86

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 (1) The instrument is payable twelve months from date and the date appearing on the
instrument is December 8, 2010. Using the rule under Section 86, the instrument should
be payable on December 8, 2011 not December 7, 2011 because December 8, 2010 is
not included in the computation.

(2) If the instrument is payable ten (10) days after sight or presentment for acceptance
and the instrument was presented for acceptance on December 3, 2010, the instrument
is payable on December 13, 2010. In determining the ten day period, December 3, 2010
shall be excluded and the last day, December 13, 2010 shall be included.

(3) If the instrument is payable within ten (10) days from the death of Mr. X and Mr. X died
on December 10, 2010, the instrument is payable on December 20, 2010 because the
date of death of Mr. X shall be excluded, and the date of payment, the last day ofthe ten
day period, December 20, 2010 shall be included.

Section 87

A promissory note made by the maker Mr. M which states that it is payable at BPI Escolta
Branch is equivalent to an order to that specific bank to pay the note for the account of Mr.
M. However, there is no order to a bank if the instrument only states that it is payable in
any bank in Negros Oriental without specifying a particular bank.

VII. NOTICE OF DISHONOR

1. To whom is the waiver of notice of dishonor made by Mr. M binding in the following
example if Mr. P indorsed the instrument to Mr. A who in turn indorsed it to B, who
indorsed it to C, the present holder.

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 Dec. 3, 2004

I promise to pay to the order of Mr. P P2,000.00 on March 8, 2006. Notice of dishonor waived.

Sgd. Mr. M.

A: The waiver of notice of dishonor is binding on P and all subsequent holders. This is a
waiver in the instrument itself and therefore binding on all parties. The waiver is binding not only
on Mr. P, but also Mr. A , Mr. B and Mr. C because Section 110 provides that it is binding on all
parties. Hence, notice of dishonor need not be given to Mr. P, Mr. A, and Mr. B to make them
secondarily liable.

2. Mr. M issued an instrument to Mr. P payable to the order of Mr. P. Mr. P the indorsed the
instrument to Mr. A this way: “Pay to Mr. A, Notice of Dishonor Waived, Sgd., Mr. P.” There
is no waiver in the instrument itself. Mr. A thereafter indorsed the instrument to Mr. B who
in turn indorsed the instrument to Mr. C. To whom is the notice binding.

A: The waiver of the notice of dishonor is binding only on Mr. P. In other words, Mr. A, Mr.
B and Mr. C are not deemed to have waived notice of dishonor. The notice of dishonor was waived
after the issuance of the instrument by an indorser and the waiver is therefore binding only the
indorser who made the waiver. Consequently, notice of dishonor must be given Mr. A and Mr. B
but no notice is required to be given to Mr. P.

3. X draws a bill of exchange against Y in favor of W for P5,000.00. requesting the drawee
to pay on December 24, 1962. W indorses the instrument to P on September 1 and on
September 15 presents it for acceptance. The bill is dishonored. P promptly sues W for
payment. Will the case prosper?

A: The case will not prosper to enforce the secondary liability of W. It does not
appear that notice of dishonor was given to W, hence W was discharged. However, P may
sue W based on their contract. Thus, if the indorsement was made by W as consideration
for the goods that he purchased, the liability of W to pay for the goods remains. (1963 Bar)

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 4. A draws a check in favor of B who indorses it to C. The bank refuses payment for lack of
funds. Without further notice, C filed a complaint against A and B for collection. What
should be the decision?

A: The case against B to enforce the latter’s secondary liability should be

dismissed. The absence of notice of dishonor discharges the persons secondarily liable.
If at all, B is liable to C based only on their contract. However, the case against A the
drawer should prosper even in the absence of notice of dishonor. A has no reason to
expect that the instrument will be honored because he did not maintain sufficient funds in
his account. Hence, notice of dishonor is dispensed with.

5. A issued a promissory note to B in the following tenor: “I promise to pay to the order of B
Pl,000.00 sixty days after date. Sgd. A”. The note was subsequently negotiated with
proper indorsement by B to C, C to D, and D to E, the holder. When E presented the note
for payment to A, the latter refused to pay. E then gave a notice of dishonor to C only, (a)
May E immediately proceed against B, C, or D? (b) What should C do to protect his rights,
if any, against A, B, and D?

Answers:

(a) E may not proceed immediately against B or D, but he may proceed against C. B and
D are discharged because they were not given by E notice of dishonor. (Section 89, NIL)
However, the liability of C remains because due notice of dishonor was given to him.

(b) C may give notice of dishonor to B to protect his interest against them. Notice of
dishonor may be given by C to B because B is an indorser who is liable to C.
C has no interest against D because D is not secondarily liable to him. C may not1 give
due notice of dishonor to D because he is a subsequent party who may not be compelled
to pay by C. Notice of dishonor is not necessary in order to charge A. A is the maker and
his primary liability accrues even in the absence of notice of dishonor. (1984 Bar)

VIII. DISCHARGED OF NEGOTIABLE INSTRUMENT [ Sections 119 - 125]

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Section 120. Par (c) - by the discharged of a prior party

1. If the payee P indorses the instrument to A, then A to B, B to C and C to D, intentional

cancellation by D of A’s signature discharges B and C. B and C are also discharged
because they are deprived oftheir right of recourse against A when A’s signature is
cancelled.

Section 121

The drawer who paid an instrument that is payable to a third person is still permitted to
recover what he paid to the holder, that is, he is permitted to enforce the obligation or to
seek reimbursement from the acceptor:

1. Mr. X deposited the amount of PIO,000.00 with Mr. Y with the agreement that Mr. Y will
accept a bill addressed to him for that amount. Later, Mr. X drew a bill of exchange
addressed to Y with Z as payee. If Mr. X pays the present holder, Mr. X can ask for the
return of the P10,000.00 from Mr. Y. However, if the amount has not yet been delivered
by Mr. X to Mr. Y and it was Mr. Y who paid the holder, Mr. Y can demand reimbursement
from Mr. X. On the other hand, in the latter case (where no amount was given by X to Y)
where Mr. X instead of Mr. Y paid the holder, X has no more recourse against Mr. Y.

Section 124-125

1. The amount reflected in the negotiable note was increased by the payee from PIO,000.00
to P20,000.00 without the assent of the maker, X. The payee, Y, then indorsed the note
to A, then A to B, then B to C, the present holder. If C is a holder in due course, C can
recover from X the amount of P10,000.00, the original tenor of the instrument. If X will pay,
the instrument is discharged only with respect to that amount and the person who made
the alteration, Y, and the subsequent indorsers A and B, are liable for the balance. Even
if we assume that payment by X is payment in due course that discharges the instrument,
X, A and B are still liable because they are indorsers who warrant that the instrument is
genuine and in all respects what it purports to be.

2. Mario de Guzman issued to Honesto Santos a check for P50,000.00 as payment for the
second-hand car. Without the knowledge ofMario, Honesto changed the amountto
P150,000.00 which alteration could not be detected by the naked eye. Honesto deposited
the altered check with Shure Bank which forwarded the same to Progressive Bank for
payment. Progressive Bank without noticing the alteration paid the check, debiting
P150,000.00 from the account of Mario. Honesto withdrew the amount ofP150,000.00
from Shure Bank and disappeared. After receiving his bank statement, Mario discovered

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 the alteration and demanded restitution from Progressive Bank. Discuss fully the rights
and liabilities of the parties concerned.

Answer:
Progressive Bank, the drawee ofthe check, should comply with the demand of Mario for
restitution ofthe amount of P150,000.00 to his account. Progressive Bank has no right to
deduct such amount from Mario’s account. The order of Mario is to pay P50.000.00 and
material alteration avoids the instrument. (Section 124, NIL) Progressive Bank is also
responsible for the negligence of its employees in not noticing the alteration. As between
Progressive Bank and Shure Bank, the latter is liable provided no negligence can be
ascribed to Progressive Bank. As a collecting bank, Shure warrants the genuineness of
the check and that the check is in all respects what it purports to be. (1995 Bar)

3. In consideration of some goods he bought, A issued to B a personal check in the amount

ofP280. Without the knowledge ofA, B raised the amount of P2.800.00. The alteration is
not apparent to the naked eye. B then deposited the altered check in his account with the
PNB, which released it for clearing. The Bank of P.I., which is the drawee bank, did not
notice the alteration and the check was therefore cleared. B was able to withdraw the
P2,800.00. After which he closed his account. When A received his bank statement and
cancelled checks for that month, he noticed the discrepancy in the amount when he
compared the altered check with his check stub. He immediately notified then in turn
demanded recredit from the BPI, which cannot now locate B. Discuss the right and
liabilities of the parties under the circumstances.

Answer:
BPI should recredit the account of A. Under Section 124 of the Negotiable Instrument Law,
a material alteration avoids the instrument, except as to those who made, authorized or
assented to the alteration and subsequent indorsers. B, the holder of the check is not a
holder in due course and he was even the one who caused the alteration, hence, the
instrument is avoided as to B. BPI can, in turn, collect whatever amount that it returned to
A from the collecting bank, PNB. The alteration is covered by the warranties of the
collecting bank. If the clearing was done through the PCHC, the drawee can file a claim
against the collecting bank within the period prescribed by law. Whatever amount that may
be paid by the collecting bank can be recovered from B. (See 1977 Bar)

IX. Bills of Exchange [Section 126-131]

Nota Bene: Only Section 126 was assigned a case. (No Problem from Aquino)

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X. ACCEPTANCE [Section 132-142] -

(No Problem from Aquino)

XI. PRESENTMENT FOR ACCEPTANCE [ Section 143-151]

Nota Bene: Only Section 143 was assigned a case.

Gist: Presentment for acceptance must be made by or on behalf of the holder at a reasonable
hour, on a business day and before the bill is overdue, to the drawee or some person authorized
to accept or refuse acceptance on his behalf

1. The example below is covered by Section 147 because the instrument should be
presented for acceptance in Davao City but is payable in Pasay City the day after its date.
Thus, if the instrument was delivered on January 4, 2010, the holder must present it for
acceptance in Davao City and must present it for payment in Pasay City within two days.
Hence, delay in this example is understandable.

January 4, 2010
Makati City
Pay to the order of Mr. P P2,000.00 on January 6, 2010 at the Philippine National
Bank Head Office in Pasay City.
Sgd. Mr. DR
Drawer
To: Mr. DW
Drawee
Cebu City

XII. PROTEST [ Sections 152 - 160]

Section 156 - Protest; Where made:

1. If the bill of exchange states that it is payable in ABC Bank in Manila. The place of business
and residence of Mr. DW, the drawee is Tokyo, Japan. The instrument was drawn and
presented for acceptance in Tokyo, Japan. In this case, protest must be made in Manila.

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XIII. ACCEPTANCE FOR HONOR [Section 161-170] - No Case Assignment

XIV. PAYMENT FOR HONOR [ Section 171 - 177]

Section 174 - Preference of parties offering to pay for honor

1. Mr. DR, the drawer, issued a bill of exchange to the order of Mr. P, Mr. P indorsed the
instrument to Mr. A, Mr. A indorsed it to Mr. B, Mr. B indorsed it to Mr. C, Mr. C indorsed
it to Mr. D who indorsed it to Mr. E, the present holder. Later, the drawee, Mr. DW refused
to pay the bill of exchange and protest was duly made. Mr. X and Mr. Y both offered to
pay the bill for honor. Mr. X wants to pay for the honor of Mr. P while Mr. Y wants to pay
for the honor of Mr. D. Hence, applying Section 174, preference should be given to Mr. X
because payment in behalf of Mr. P discharges more parties.

Section 175 - Effect on subsequent parties where bill is paid for honor

1. Mr. DR, the drawer, issued a bill of exchange to the order of Mr. P, Mr. P indorsed the
instrument to Mr. A, Mr. A indorsed it to Mr. B, Mr. B indorsed it to Mr. C, Mr. C indorsed
it to Mr. D who indorsed it to Mr. E, the present holder. Later, the drawee, Mr. DW refused
to pay the bill of exchange and protest was duly made. Mr. X offered to pay the bill for
honor. Mr. X wants to pay for the honor of Mr. A. Hence, applying Section 175, Mr. B, Mr.
C, and Mr. D are discharged. However, Mr. X has a right of recourse against the persons
who are liable to Mr. A, the person for whose honor he paid the instrument. Thus, he has
a right to claim reimbursement from Mr. DR and Mr. P
Section 176 - Where holder refuses to receive payment supra protest.

1. Mr. DR, the drawer, issued a bill ofexchange to the order of Mr. P, Mr. P indorsed the
instrument to Mr. A, Mr. A indorsed it to Mr. B, Mr. B indorsed it to Mr. C, Mr. C indorsed
it to Mr. D who indorsed it to Mr. E, the present holder. Later, the drawee, Mr. DW refused
to pay the bill of exchange and protest was duly made. Mr. X offered to pay the bill for
honor. Mr. X wants to pay for the honor of Mr. A. Mr. E the holder must accept the payment.
If the payment will not be accepted, Mr. B, Mr. C, and Mr. D who were supposed to be
discharged are still discharged just the same because ofthe refusal ofthe holder to accept
the payment.

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XVI. PROMISSORY NOTES AND CHECKS [Section 184-189]

1. On January 9, 1981, S Bank issued a manager’s check for P8 million, payable to “CASH,”
as proceeds of the loan granted to G Corporation. On the same day, the P8-million check,
along with other checks, was deposited by C Corporation in its Current Account with R
Bank. Immediately, R Bank honored the P8-million check and allowed C Corporation to
withdraw the same. On the next banking day, G Corporation issued a “Stop Payment
Order” to S Bank, claiming that the P8-million check was released to a third party by
mistake. Consequently, S Bank dishonored and returned the manager’s check to R Bank.
Thereafter, the check was returned back and forth between the two banks, resulting in
automatic debits and credits in each bank’s clearing balance. R Bank claims that it had
the right to rely on the integrity of the check which was payable to cash. S Bank argued
that R Bank violated the rule of the Monetary Board disallowing banks from honoring
checks which are still drawn on uncollected deposits. Whose position is tenable?

A: R Bank’s position is tenable. In immediately crediting the amount of P8 million

to Corporation’s account, R Bank relied on the integrity and honor of the check as it is
regarded in commercial transactions. Where the questioned check, which was payable to
“Cash,” appeared regular on its face, and the bank found nothing unusual in the
transaction, as the drawer usually issued checks in big amounts made payable to cash, R
Bank cannot be faulted in paying the value of the questioned check. The questioned check
issued by S Bank is not just an ordinary check but a manager’s check. A manager’s check
is one drawn by a bank’s manager upon the bank itself. It stands on the same footing as
a certified check, which is deemed to have been accepted by the bank that certified it. As
the bank’s own check, a manager’s check becomes the primary obligation of the bank and
is accepted in advance by the act of its issuance.

S Bank’s argument that there was violation of banking rules is untenable. Banks
are given the discretion to allow immediate drawings on uncollected deposits of manager’s
checks, among others. Consequently, R Bank, in allowing the immediate withdrawal
against the subject manager’s check, only exercised a prerogative expressly granted to it
by the Monetary Board. Moreover, the rules promulgated by the Monetary Board do not
alter the extraordinary nature of the manager’s check and the relative rights of the parties
thereto. S Bank’s liability as drawer remains the same — by drawing the instrument, it
admits the existence of the payee and his then capacity to indorse; and engages that on
due presentment, the instrument will be accepted, or paid, or both, according to its tenor.
(SBTC v. RCBC, G.R. No. 170984, January 30, 2009).

POSSIBLE QUESTION

1. What are the effects of Crossing Checks?

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 The specific effects of crossing of checks were enumerated by the Supreme
Court as follows:

(1) The check may not be encashed but only deposited in the bank;
(2) The check may be negotiated only once — to one who has an account with
the bank; and
(3) The act of crossing serves as a warning to the holder that the check has been
issued for a definite purpose so that he must inquire if he has received the
check pursuant to that purpose.

Consequently, crossing of checks should put the holder on inquiry and upon him
devolves the duty to ascertain the indorser’s title to the check or the nature of his
possession. Failing in this respect, the holder is declared guilty of gross negligence
amounting to legal absence of good faith, contrary to Sec. 52(c) of the NIL, and as such
the consensus authority is to the effect that the holder of the check is not a holder in due
course.

2. Ms. LV maintains a savings account and a current account with P Bank with automatic
fund transfer from the savings account to the current account. In June, LV deposited a
check worth P35,271.60 in her savings account. At that time, she had P35.993.48 in her
savings account and P776.93 in her current account. Later that month, LV issued a check
in the amount of Pl 1,500.00 in favor of BL. BL thereafter indorsed the check of PL. When
PL deposited the check, the same was dishonored because it was allegedly drawn against
insufficient funds. It was discovered later that the check that LV deposited was credited
23 days after she deposited the same because a bank employee misposted the same in
another account. LV’s previously dishonored check was later re-deposited by PL and
cleared by the drawee bank. Ms. LV thereafter sued P Bank for moral damages. P Bank
claims that it is not liable for moral and exemplary damages because it was in good faith
and had even profusely apologized for the error. Will the claim for moral and exemplary
damages prosper?

A: The claim will prosper. A bank is under obligation to treat the accounts of its
depositors with meticulous care whether such account consists only of a few hundred
pesos or of millions of pesos. Responsibility arising from negligence in the performance
of this obligation is demandable. While the bank’s negligence was not attended with malice
and bad faith, nevertheless, it caused serious anxiety, embarrassment and humiliation.
The fact remains that the bank has committed a serious error. Consequently, moral
damages should be awarded.

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