NEGOTIABLE INSTRUMENTS LAW
RIGHTS OF THE HOLDER
Sec. 51. Right of holder to sue; payment. — The holder of
a negotiable instrument may sue thereon in his own
name; and payment to him in due course discharges the
instrument.
Meaning of holder.
"Holder" means the payee or indorsee of a bill or note
who is in possession of it, the bearer thereof entitled to
receive the sum for which it calls. Thus, the "holders"
includes not only persons possessing bearer instruments
but also payees and indorsees possessing order
instruments.
Classes of holders.
1. Holders simply (Sec. 51.) - Lowest kind of holder.
2. Holders for value (see Sec. 26.); and
3. Holders in due course. (Sees. 52,57.) - Highest
kind of holder.
A person who qualifies as a holder but does not meet all
the conditions to qualify as a holder in due course is
called ordinary holder or mere holder (or assignee or
transferee).
The holder of a negotiable Instrument is not necessarily
the owner thereof. For example, a thief who steals a
bearer paper is a holder but obviously is not the owner
although he can legally transfer (negotiate) the same to
another who then becomes the new holder.
Rights of holder in general.
In general, the following are the rights of a holder:
(1) Right to sue. — A holder may sue on the
instrument in his name. Under Section 51, a
holder even though he be a holder only for
collection may sue in his own name.
A person who is neither the payee nor a holder
of a bad check has neither the personality to sue
nor a cause of action against the drawer.
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(2) Right to receive payment. — He may receive
payment and if the payment is in due course
(Sec. 88.), the instrument is discharged.
Payment in due course is payment "made (a) at or
after the maturity of the instrument (b) to the
holder thereof (c) in good faith and without
notice that his title is defective.
(3) Right of transferee of unindorsed instrument to
sue — A transferee of unindorsed instrument is
certainly not a "holder" as defined by Section 191,
and, therefore, cannot be a holder in due course
under Section 52. It is believed, nevertheless,
that he may do so. If the "transfer vests in the
transferee such title as the transferor had" (Sec.
49.) and if the transferor had legal title, this must
pass by the transfer although subject to
defenses.
Sec. 52. What constitutes a holder in due course.
— A holder in due course is a holder who has
taken the instrument under the following
conditions:
a) That it is complete and regular upon its face;
b) That he became the holder of it before it
was overdue, and without notice that it had
been previously dishonored, if such was the
fact;
c) That he took it in good faith and for value;
d) That at the time it was negotiated to him he
had no notice of any infirmity in the
instrument or defect in the title of the
person negotiating it.
What constitutes a holder in due course.
A holder in due course is a holder who took the
instrument under the conditions enumerated in Section
52. He takes the Instrument free of most defenses, or
adverse claims to it by other parties.
The law, in using the term "holder in due course," uses it
as the equivalent for the old expression "bona fide
holder" or "bona fide holder for value without notice.
BAR QUESTIONS ALERT!!!!
Q: What constitutes a holder in due course? (1996 BAR)
 NEGOTIABLE INSTRUMENTS LAW
A: A holder in due course is one who has taken the
instrument under the following conditions:
(1) That it is complete and regular upon its face;
(2) That he became a holder of it before it was
overdue and without notice that it had been
previously dishonored, if such was the fact;
(3) That he took it in good faith and for value;
(4) That at the time it was negotiated to him, he had
no notice of any infirmity in the instrument or
defect in the title of the person negotiating it.
Q: Perla brought a motor car payable in installments
from Automotive Company for P250,000. She made a
down payment of P50,000 and executed a promissory
note for the balance.
The company subsequently indorsed the note to Reliable
Finance Corporation which financed the purchase. The
promissory note read:
“For value received, I promise to pay Automotive
Company or order at its office in Legaspi City, the sum of
P200,000.00 with interest at twelve (12%) per cent per
annum, payable in equal installments of P20,000.00
monthly for ten (10) months starting October 21, 1991.
Manila September 21, 1991.
(Sgd.) Perla
Pay to the order of Reliable Finance Corp.
Automotive Company
By:
(Sgd.) Manager
Because Perla defaulted in the payment of her
installments, Reliable Finance Corporation initiated a
case against her for a sum of money.
Perla argued that the promissory note is merely open to
all defenses available to the assignor and, therefore,
Reliable Finance Corporation is not a holder in due
course.
a. Is the promissory note a mere assignment of credit or
a negotiable instrument? Why?
b. Is Reliable Finance Corporation a holder in due course?
Explain briefly. (1992 BAR)
A:
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a. The promissory note in the problem is a negotiable
instrument, being in compliance with the provisions of
Section 1 of the NIL. Neither the fact that the payable sum
is to be paid with interest nor that the maturities are in
stated installments renders uncertain the amount
payable.
b. YES. Reliable Finance Corporation is a holder in due
course given the factual settings. Said corporation
apparently took the promissory note for value, and there
are no indications that it acquired it in bad faith.
Q: 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 P1,000. However,
Evelyn inserted P5,000 in violation of the instruction.
She negotiated the note to Julie who had no knowledge
of the infirmity. Julie in turn negotiated said note to Devi
for value and who had no knowledge of the infirmity.
a. Can Devi enforce the note against Larry and if she can,
for how much? Explain.
b. Supposing Devi endorses the note to Baby for value
but who has knowledge of the infirmity, can the latter
enforce the note against Larry? (1993 BAR)
A:
a. Devi can enforce the note against Larry since she is a
holder in due course. Since the document delivered to
Evelyn is in blank and she was authorized to fill up the
amount in the promissory note, Devi can enforce against
Larry the amount of P5,000.00 as this case falls squarely
under Sec 14 of the Negotiable Instruments Law. As
against a holder in due course, the instrument is always
valid and enforceable to the full extent. The defense of
filing- up contrary to authorization is a mere personal or
equitable defense. (Villanueva, Commercial Law Review,
2009 edition)
b. Baby cannot enforce the note against Larry since she is
not a holder in due course because Larry could interpose
the real and personal defenses to defeat the claim of
Baby. However, because of the shelter principle in
Negotiable Instruments Law, Baby could be elevated to a
status of a holder in due course since a person not holder
in due course steps in the shoes of the prior party.
Therefore, Baby could enforce the note against Larry the
same way as Devi could enforce it.
 NEGOTIABLE INSTRUMENTS LAW
Q: PN makes a promissory note for P5,000, but leaves
the name of the payee in blank because he wanted to
verify its correct spelling first. He mindlessly left the
note on top of his desk at the end of the workday. When
he returned the following morning, the note was
missing. It turned up later when X presented it to PN for
payment. Before X, T, who turned out to have filched the
note from PN’s office, had endorsed the note after
inserting his own name in the blank space as the payee.
PN dishonored the note, contending that he did not
authorize its completion and delivery. Xxx Can the payee
in a promissory note be a “holder in due course” within
the NIL? Explain your answer. (2000 BAR)
A: NO, a payee in a promissory note cannot be a “holder
in due course” within the meaning of the NIL, because a
payee is an immediate party in relation to the maker. The
payee is subject to whatever defenses, real or personal,
available to the maker of the promissory note.
Q: X borrowed money from Y in the amount of
Php1Million and as payment, issued a check. Y then
indorsed the check to his sister Z for no consideration.
When Z deposited the check to her account, the check
was dishonored for insufficiency of funds.
a. Is Z a holder in due course? Explain your answer.
b. Who is liable on the check, the drawer or the indorser?
Explain your answer. (2012 BAR)
A:
a. NO. A holder in due course is a holder who has taken
the instrument under the following conditions: (a)That it
is complete and regular upon its face; (b) That he became
the holder of it before it was overdue, and without notice
that it had been previously dishonored, if such was the
fact; (c) That he took it in good faith and for value; (d)
That at the time it was negotiated to him he had no
notice of any infirmity in the instrument or defect in the
title of the person negotiating it. All of the four conditions
must concur in order for a holder to qualify as a holder in
due course. In the case at hand, Z did not acquire the
instrument for value. As such she cannot be considered
as a holder in due course.
b. The drawer. The instrument was validly negotiated to Z
by virtue of the endorsement made by Y despite lack of
any consideration. The drawer cannot evade liability since
Z, as a holder of the instrument, has the right to collect
upon the same. Likewise, the drawer may not raise as a
defense the fact of lack of consideration since it is a
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personal defense that may only be raised by Y since the
drawer is not privy to said transaction.
Sec. 53. Where person not deemed holder in due course.
— Where an instrument payable on demand is negotiated
an unreasonable length of time after its issue, the holder
Is not deemed a holder in due course
Holder in due course in instrument payable on demand.
One of the requisites of due course holding is that the
holder of the instrument became such "before it is
overdue." As to what constitutes a reasonable time,
depends upon the facts of the particular case. The law
provides that "regard is to be had to the nature of the
instrument, the usage of trade or business (if any) with
respect to such instruments, and the facts of the
particular case."
Under Section 53, if the negotiation of a demand
instrument is made outside of the reasonable time after
its issue, the holder cannot be deemed a holder in due
course, for the fact that the instrument has been in
circulation for such a length of time gives rise to a strong
indication that it has already been dishonored.
Sec. 54. Notice before full amount paid. — Where the
transferee receives notice of any infirmity in the
instrument or defect in the title of the person negotiating
the same before he has paid the full amount agreed to be
paid therefor, he will be deemed a holder in due course
only to the extent of the amount theretofore paid by him.
When Section 54 not applicable.
Section 54 is intended to define the situation in which the
holder must protect himself by refusing to make further
payments.
(1) It is applicable only where the obligation incurred
by the holder of a bill or note is such that upon
discovering the infirmity in the instrument, he is
relieved from all further legal obligations to
make further payments, as, for example, where
the note has been transferred to him in
consideration of his promise to make future
payments to his transferor. In that case, if it
 NEGOTIABLE INSTRUMENTS LAW
should turn out that, by reason of fraud on the
part of the transferor, the maker of the note had
a defense thereto, the transferee would be
under no obligation to pay the balance of the
amount that he had agreed to pay the transferor.
(2) It does not apply where the holder has given for
the paper his promise which he must perform,
as, for instance, when he has incurred liability to
a third person. In such a case, he is in the same
position and entitled to the same protection as
one who has paid for the instrument in money or
property at the time of the transfer.
Sec. 55. When title is defective. — The title of a person
who negotiates an instrument is defective within the
meaning of this Act when he obtained the instrument, or
any signature thereto, by fraud, duress, or force and fear,
or other unlawful means, or for an illegal consideration,
or when he negotiates it in breach of faith, or under such
circumstances as amount to a fraud.
Defective title in general
Defects of title are defined in Section 55 to cover all
those situations which are known as personal or
equitable defenses (infra.) and also to cover those
equities of ownership where there is a breach of faith in
negotiation.
Infirmities then must include things that are wrong with
the instrument itself as distinguished from those things
that are lacking in the contracts on the instruments.
Such infirmities are to be found in situations arising under
Sections 13, 14, 15, 16 (usual defects of the title), 21, 23,124,
and 125.
The object of Section 55, when taken in connection with
Section 56, is to prevent one from becoming a holder in
due course who takes an instrument with notice that his
transferor is not acting honestly. It is the same object as it
is found in the good faith in Section 52(c) but viewed
from a somewhat different angle. The said clause has
regard to the attitude of the taker of the instrument,
while Section 55 emphasizes rather the honesty of the
negotiator as brought to the notice of the taker.
EXAMPLES:
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1. Fraud. — Brokers employed to buy stock
represented that they bought the stock and
received a check, therefore, but had not in fact
bought. It was held that their title to the check
was defective because they obtained it by means
of fraud.
2. Duress, or force and fear. — Where A, by the use
of violence and intimidation, forced P to indorse
a promissory note in favor of A.
3. Other unlawful means. —Where the instrument
has been stolen. It has been held that a person
who acquires an instrument by indorsement of a
part thereof gets title by unlawful means since
the transfer is in contravention of the law.
4. Illegal consideration. — A note given to stifle a
criminal prosecution is invalid or in consideration
of the payee killing a person.
5. Negotiation in breach of faith. — Where the
payee of a note negotiated it after receiving
payment from the maker; where the payee
transfers the instrument in breach of agreement;
where a note is given in payment of goods to be
delivered and the note is negotiated without
delivery of the goods; where a note held merely
as collateral or security is negotiated.
6. Circumstances amounting to fraud. — Where
the payee of a note negotiated it after being told
that the maker intends to resist payment or that
the transferor had no legal right to transfer.
Sec. 56. What constitutes notice of defect. — To
constitute notice of an infirmity in the instrument or
defect in the title of the person negotiating the same, the
person to whom it is negotiated must have had actual
knowledge of the infirmity or defect, or knowledge of
such facts that his action in taking the instrument
amounted to bad faith.
In order to constitute notice, the transferee must have
actual knowledge of the infirmity or defect; or knowledge
of such facts (which do not appear on the face of the
instrument) that his action in taking the instrument
amounts to bad faith. Actual knowledge is usually shown
by the instrument itself.
 NEGOTIABLE INSTRUMENTS LAW
Mere negligence to make inquiries not sufficient. —
Under Sections 54 and 56, negligence in itself is not
sufficient to constitute notice since it is not the
equivalent of either actual knowledge or bad faith. The
question of bad faith or good faith is mostly a question of
fact. Notice is to be determined by the simple test of
honesty and good faith and not by speculative issue as to
the indorsee's negligence.
Knowledge amounting to bad faith. — It is not necessary
that the buyer of the instrument had notice or knowledge
of the exact fraud or the particulars thereof, committed
by the assignor, since all that is required is "knowledge of
such facts that his action in taking the instrument
amounted to bad faith."
Effect of a notice of defect. — Knowledge or chargeable
notice of any defect, at the time of taking of an
instrument, which destroys the status of a holder as a
holder in due course, opens all defenses otherwise cut off
against him and not merely that relating to the defect of
which he had notice, (see Sec. 58.)
Thus, a holder with knowledge of failure of consideration
is subject to the defense that a note was obtained by
fraud. This does not, however, modify the rule that one
holding from a holder in due course may have all the
rights of the latter. Notice to the agent is ordinarily
deemed notice to the principal and notice to a partner is
notice to the partnership.
Doctrine of constructive notice not applicable. —The
doctrine has never been applied to commercial paper.
The true test as to negotiable paper is that of good or bad
faith. Thus, a notice of lis pendens affecting land is
applicable only to a person who is dealing with the land
itself, and a purchaser of a negotiable instrument secured
by a mortgage on the land is not dealing in land, and
constructive record notice of an infirmity in the
instrument does not amount to bad faith.
Sec. 57. Rights of holder in due course. — A holder in due
course holds the instrument free from any defect of title
of prior parties, and free from defenses available to prior
parties among themselves, and may enforce payment of
the instrument for the full amount thereof against all
parties liable thereon.
Rights of a holder in due course.
The following are the rights of a holder in due course:
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1. He may sue on the instrument in his own name
(Sec. 51.);
2. He may receive payment and if the payment is in
due course, the instrument is discharged (ibid.)}
3. He holds the instrument free from any defect of
title of prior parties;
4. He holds the instrument free from defenses
available to prior parties among themselves; and
5. He may enforce payment of the instrument for
the full amount thereof against all parties liable
thereon, (see Sec. 54.)
In other words, one putting negotiable paper on the
market is estopped from contesting the consequences
and incidents of his act; It is also said that the basic
principle on which paper having defects is sustained in
the hands of a holder in due course is comprehended in
the legal maxim that where loss has happened which
must fall on one of two innocent persons, it shall be
borne by him who is the occasion of the loss. The one
who made the wrong possible is estopped by his neglect.
This rule which permits a holder in due course to take an
instrument free of all personal defenses is a necessity if
commercial papers are to circulate freely and prospective
purchasers are to accept them routinely and willingly.
Real defenses, which attach to the instrument itself,
would be available against all persons even as against a
holder in due course.
Sec. 58. When subject to original defenses. — In the
hands of any holder other than a holder in due course, a
negotiable instrument is subject to the same defenses as
if it were non-negotiable. But a holder who derives his
title through a holder in due course, and who is not
himself a party to any fraud or illegally affecting the
instrument, has all the rights of such former holder in
respect of all parties prior to the latter.
What is the Shelter Principle?
Status as a holder in due course (HDC) may strengthen
the rights of a holder to receive payment on a negotiable
instrument. When a holder may not qualify as a HDC, the
shelter rule is a separate principle that may protect her
rights. Pursuant to the shelter rule, the transferee of a
negotiable instrument receives all of the rights of the
transferor of the instrument, unless the transfer is carried
out by fraud or illegal means. This is important in
 NEGOTIABLE INSTRUMENTS LAW
situations where the transferor is a holder in due course,
but the transferee is not.
Example: A HDC may gift the negotiable instrument to
the transferee. In this case, the transferee did not provide
value for the instrument and does not qualify as a holder
in due course.
The shelter rule will allow the transferee to receive all of
the rights of the transferor (a holder in due course) and
receive heightened protection. This rule makes the paper
more marketable for the holder in due course.
The shelter rule provides liquidity to a HDC who, after
accepting an instrument, learns of a dense against its
enforcement. The HDC could validly transfer the
instrument to another holder who has notice of the
underlying defense. The new holder would have the same
rights as the HDC. It is important to note that, if a holder
in due course learns that there is a valid defense against
enforcement or that the underlying obligation has been
discharged, she must disclose that information to the
transferee who provides value for the instrument. If not,
the transfer by the HDC to the new holder could be
deemed fraudulent. This would destroy the shelter
principle protections.
Note: An exception to the shelter rule is that it does not
apply if the holder in due course transfers the instrument
back to a prior holder who was aware of its non-
enforceable status and proceeded to transfer it to a
holder in due course.
BAR QUESTION ALERT!!!
Q: How does the “shelter principle” embodied in the
Negotiable Instruments Law operate to give rights of a
holder-in- due course to a holder who does not have the
status of a holder-in-due course? Briefly explain. (2008
BAR)
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A: The shelter principle provides that a person, to whom a
holder in due course has transferred the negotiable
instrument, as well as any later transferee, will succeed to
the rights of the holder in due course. As a result,
transferees of holders in due course are generally not
subject to defenses against the payment of an
instrument. This doctrine ensures the free transferability
of the negotiable instrument.
Its name derives from the idea that the transferees “take
shelter” in the rights of the holder in due course.
However, this principle presupposes that the holder for
value is not a party to the fraud.
Since a holder for value merely steps into the shoes of the
indorser, the holder for value will be able to acquire the
rights of a holder in due course if the indorser is a holder
in due course.
Sec. 59. Who is deemed holder in due course. — Every
holder is deemed prima facie to be a holder in due course;
but when it is shown that the title of any person who has
negotiated the instrument was defective, the burden is
on the holder to prove that he or some person under
whom he claims acquired the title as holder in due
course. But the last mentioned rules does not apply in
favor of a party who became bound on the instrument
prior to the acquisition of such defective title.
Rights of holder not in due course.
A holder not in due course has the following rights:
(1) He may sue on the instrument in his own name
(Sec. 51.);
(2) He may receive payment and if the payment is in
due course, the instrument is discharged (ibid.);
(3) He is entitled to the instrument but holds it
subject to the same defenses as if it were non-
negotiable (Sec. 58.); and
(4) He has all the rights of the holder in due course
from whom he derives his title in respect of all
parties prior to such holder, provided he is not
himself a party to any fraud or illegality affecting
the instrument.
The presumption expressed in this section to the effect
that every holder is deemed prima facie to be a holder in
due course arises only in favor of a person who is a holder
in the sense defined in Section 191, that is, a payee or
indorsee who is in possession of the instrument, or the
bearer thereof. There is no presumption that a person
 NEGOTIABLE INSTRUMENTS LAW
through whose hands an instrument has passed was a
holder in due course.
BAR QUESTIONS ALERT!!!
Q: 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:
a. Whether as second indorser and holder of the crossed
check, is it a holder in due course?
b. Whether Po’s defense of lack of consideration as
against Jose is also available as against Excel? (1994, 1995
BAR)
A:
a. Excel Inc. is not a holder in due course. The act of
crossing the check imposes upon the holder thereof the
duty to ascertain the indorser’s title to the check or the
nature of his possession or the purpose for which it was
issued. Excel is guilty of gross negligence amounting to
legal absence of good faith for its failure to inquire from
Jose the purpose for which the three checks were
crossed despite the warning of the crossing, hence, it is
not deemed a holder in due course.
b. YES, the defense of lack of consideration as against
Jose is also available as against Excel. For not being a
holder in due course, Excel is subject to personal
defenses as if the check were non-negotiable, such as
lack of consideration between Po Press and Jose. In this
case, Jose’s failure to deliver the newsprint resulted in
the absence of consideration for the issuance of the
check. Consequently, Po Press cannot be made liable to
pay the face value of the check.
Q: On Oct 12, 1993, Chelsea Straights, a corporation
engaged in the manufacture of cigarettes, ordered from
Moises 2,000 bales of tobacco. Chelsea issued to Moises
two crossed checks postdated 15 Mar 94 and 15 Apr 94 in
full payment therefor. On 19 Jan 94 Moises sold to
Dragon Investment House at a discount the two checks
drawn by Chelsea in his favor. Moises failed to deliver
the bales of tobacco as agreed despite Chelsea’s
demand. Consequently, on 1 Mar 94 Chelsea issued a
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“stop payment” order on the 2 checks issued to Moises.
Dragon, claiming to be a holder in due course, filed a
complaint for collection against Chelsea for the value of
the checks. Rule on the complaint of Dragon. Give your
legal basis. (1995 BAR)
A: The complaint should be dismissed. The act of crossing
the check imposes upon the holder thereof the duty to
ascertain the indorser’s, in this case Moises’ title to the
check or the nature of his possession. Failing in this
respect, Dragon cannot be deemed a holder in due
course and as such, Moises is subject to personal
defenses as if the check were non- negotiable, such as
lack of consideration between Chelsea and Moises for
Moises’ failure to deliver the bales of tobacco. There
being no consideration for the issuance of the check,
Chelsea cannot thus be made liable to pay the face value
of the check and this constitutes a defense not only
against Moises but even against Dragon who is not a
holder in due course.
Q: What are the effects of crossing a check? (1996 BAR)
A: The effects of crossing a check are as follows:
1. The check may not be encashed but only
deposited in a banks;
2. The check may be negotiated only once to one
who has an account with a bank;
3. The act of crossing a check serves as a warning
to the holder thereof that the check has been
issued for a definite purpose so that the holder
must inquire if he has received the check
pursuant to that purpose, otherwise he is not a
holder in due course.
Q: 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 (1996 BAR)
A: The case will prosper as against the CD Bytes, the
immediate indorser but not as against Pentium Company.
 NEGOTIABLE INSTRUMENTS LAW
The effect of crossing a check relates to the mode of its
SECONDARY LIABLE
presentment for payment which must be made by the PRINCIPAL LIABLE PARTY
PARTY
holder, or by some person authorized to receive payment
unconditionally bound - conditionally bound -
on his behalf. Thus, in the absence of due presentment, absolutely required to pay undertakes to pay the
as in this case where the check was not presented by the the instrument upon its instrument only after
payee (CD Bytes) or the proper party authorized to make maturity certain conditions have
presentment of the checks, the drawer (Pentium been fulfilled, to wit: due
Company) cannot be held liable. However, Fund House presentment for payment
may recover from the immediate indorser, if the latter or acceptance to primary
has no valid excuse for refusing payment. party (see Sec. 70.),
dishonor by such party
Q: Distinguish clearly (1) crossed checks from cancelled (see Sees. 184 and 151.),
checks (2004 BAR) and the taking of
proceedings required by
A: A crossed check is one with two parallel lines drawn law after dishonor, (see
diagonally on the left portion of the check. On the other Sees. 89,118.)
hand, a cancelled check is one marked or stamped "paid" are liable in the reverse
and/or "cancelled" by or on behalf of a drawee bank to order in which they signed
indicate payment thereof. the instrument
the liability of all secondary
parties to an instrument
Q: What is a crossed check? What are the effects of ends when the primary
party pays the full amount
crossing a check? Explain. (2005 BAR)
of the instrument to the
A: A crossed check is a check with two parallel lines proper party
written diagonally on the left top portion of the check. secondary parties face only
The effects of crossing a check are: the check may not be potential secondary
encashed but only deposited in the bank; the check may liability on the instrument.
be negotiated only once to one who has an account with
a bank; and the act of crossing the check serves as a Liability refers to the obligation of a party to a negotiable
warning to the holder that the check has been issued for instrument to pay the same according to its terms. The
a definite purpose so that he must inquire if he has parties to a negotiable instrument may be classified
received the check pursuant to that purpose, otherwise according to their liability as follows:
he is not a holder in due course.
Primarily liable:
The act of crossing a check serves as a warning to the
drawee bank that payment must be made to the right (a) the maker of a promissory note;
party; otherwise the bank has no authority to use the (b) the acceptor of a bill of exchange; and
drawer's funds deposited with the bank. To be assured (c) the certifier of a check.
that it will avoid any mistake in paying to the wrong party,
Secondarily (conditionally) liable:
banks adopted the policy that crossed checks must be
deposited in the payee's account. When withdrawal is (a) the drawer of a bill; and
made, the banks can be sure that they are paying to the (b) the indorser of a note or a bill.
right party.
Not liable:

(a) The drawee until he accepts the instrument in

LIABILITIES OF PARTIES which case he becomes an acceptor.

Sec. 60. Liability of maker. —The maker of a negotiable The rule operates to prevent the maker from escaping
instrument by making it engages that he will pay it liability by showing the non-existence and incapacity of
according to its tenor, and admits the existence of the the payee. The payee must exist because there is no
payee and his then capacity to indorse. negotiable instrument until it is delivered to him. The

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 NEGOTIABLE INSTRUMENTS LAW
payee must have the capacity to contract because the the instrument, negative or limit his own liability to the
note is intended to be negotiated and not to be retained holder, (ibid.)
with die payee.
(3) Liability of a drawer of a check. — The drawer may
not unilaterally discharge himself from liability on checks
issued by him merely as security and not for value to a
Sec. 61. Liability of drawer. — The drawer by drawing the
payee who negotiated the same without his knowledge
instrument admits the existence of the payee and his
and consent to a holder in due course, by the mere
then capacity to indorse; and engages that on due
expediency of withdrawing his funds from the drawee
presentment the instrument will be accepted or paid, or
bank. By issuing a check, the drawer impliedly represents
both, according to its tenor, and that if it be dishonored,
that funds or credit are available for its payment in the
and the necessary proceedings on dishonor be duly
drawee bank.
taken, he will pay the amount thereof to the holder, or to
any subsequent indorser who may be compelled to pay it.
But the drawer may insert in the instrument an express
Drawer distinguished from maker.
stipulation negativing or limiting his own liability to the
holder. The following are the differences:

(1) The drawer issues a bill of exchange, while the

maker, a promissory note;
Liability of drawer.
(2) The drawer is only secondarily liable, while the
Just as the maker of a note, the drawer, by merely signing maker is primarily liable; and
his name on the bill as drawer, admits the existence of (3) The drawer can negative, or limit his liability,
the payee and his then capacity to indorse the instrument while the maker may not do so.
at the time it was executed.

(1) Liability conditional. — However, the drawer does not

promise to pay the bill absolutely. He makes no
warranties but he engages to pay after certain conditions
are complied with, to wit:
(a) The bill is presented for acceptance (see Sec.
143.) or for payment (see Sec. 70.), as the case
may be, to the drawee;
(b) The bill is dishonored by non-acceptance or
nonpayment, as the case may be; and
(c) The necessary proceedings of dishonor are duly
taken. Such proceedings are:
1) notice of dishonor is given to the drawer
(Sec. 89.) subject to certain exceptions (see
Sec. 114.); and
2) in case of foreign bills, protest is made
followed by a notice of protest, (see Sec.
152.)
(2) Liability of a general indorser. — The drawer,
therefore, is only secondarily liable to the holder, or to
any subsequent indorser, who may be compelled to pay
it. (Sec. 61.) His liabilities are conditional in the same
manner as the liabilities of a general indorser. (see Sec.
66.) The phrase "to any subsequent indorser" refers to
any of the indorsers between the drawer and the holder.
They may also be called as intervening indorsers. Note
that the drawer may, by express stipulation, inserted in
Sec. 62. Liability of acceptor. — The acceptor by
accepting the instrument engages that he will pay it
according to the tenor of his acceptance; and admits —
(a) The existence of the drawer, the genuineness of
his signature, and his capacity and authority to
draw the instrument; and
(b) The existence of the payee and his then capacity
to indorse.
Liability of acceptor.
(1) Liability of drawee before acceptance. — As
already pointed out, the drawee of a bill is not
liable thereon before acceptance, (see Sec. 189.)
He is not obligated to the payee or any holder to
accept a bill although he may be liable to the
drawer for breach of contract if he refuses
without valid reason to accept the bill. As a
general rule, a refusal by the drawee to accept a
bill constitutes a dishonor of the instrument
which triggers the liability of secondary parties
— drawer and indorser — except those
indorsing qualifiedly (Sec. 38.), that is, without
guaranteeing payment. Unless the drawee
accepts, he owes no duty to either the payee or

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 NEGOTIABLE INSTRUMENTS LAW
any other holder. His only obligation is to the for payment nor notice of dishonor is necessary
drawer to pay in accordance with the latter's to charge him with liability, except where he is an
orders. acceptor for honor, (see Sec. 165.)

(2) Liability of drawee after acceptance. — Once

the drawee accepts, he becomes an acceptor. He
is in virtually the same position as the maker of a Sec. 63. When person deemed indorser. — A person
note. The same result takes place when a drawee placing his signature upon an instrument otherwise than
bank certifies a check drawn on the bank. (Sec. as maker, drawer or acceptor is deemed to be an
187.) The acceptor is primarily bound on the indorser, unless he clearly indicates by appropriate words
instrument for by his acceptance, he engages to his intention to be bound in some other capacity.
pay it according to the terms of his acceptance,
subject to no condition whatsoever. His
acceptance, in other words, is a promise to pay.
A person signing his name on the back of an instrument
is, nothing else appearing, a general indorser (Sec. 66)
The bank (drawee) on which a check is drawn, is
and liable as such, (see Sec. 17[f].) Being an indorser, he is
under strict liability based on the contract
chargeable only after presentment and notice of
between the bank and its customer (drawer), to
dishonor.
pay the check only to the payee's order. The
drawer's instructions are reflected on the face The rule is founded upon commercial necessity. The full
and by the terms of the check, otherwise, the and free circulation of negotiable papers which take the
bank violates its duty to charge the drawer's place of money is a matter of great importance. To
account only for properly payable items and shall require each assignee, before accepting them, to inquire
be liable for the amount charged to the drawer's into and investigate every circumstance bearing upon the
account. original issuance and to take cognizance of all the equities
between the original parties, would utterly destroy their
(3) Retraction of acceptance. — The bill of commercial value and seriously impede business
exchange itself implies a representation by the transactions.
drawer that the drawee is already in receipt of
funds to pay, and the acceptance (admission of
the truth of that representation) makes the Liability of agent bank for collection.
drawee primarily liable. The drawee who has
accepted cannot retract this admission as against As a mere agent for collection, a bank is not bound to
a holder for value, since he has thereby obtained know the genuineness of prior indorsements.
a suspension of the holder's remedies against
(1) An intermediate or collecting bank which accepts
the drawer and an extension of credit.
a check for deposit and forwards it to the
drawee-bank for payment stamped "all prior
(4) Payment of check despite stop-payment order.
indorsements guaranteed," does not indorse
— If a drawee bank accepts or pays a check
the check as a general indorser but merely as
despite a stop payment order from the drawer,
an agent bank, guaranteeing only "prior
through oversight or otherwise, it cannot refuse
indorsements," not the genuineness of the
to pay the holder or recover what has been paid;
check itself, so that it is not liable to the drawee
neither may it debit the drawer's account unless
bank which paid the check in case the signature
the acceptance nor payment was made prior to
of the drawer was forged.
the receipt of the order.
(2) A bank is estopped, however, from raising the
(5) Similarity to liability of maker and drawer. —
non- negotiability of checks (it accepts for
The acceptor has the same liability as the maker
deposit) on the back of which it stamped its
of a promissory note and the drawer of a bill with
guarantee of "all prior indorsements and/ or
respect to the existence of the payee and his
lack of indorsement" and subsequently
capacity to indorse, (see comments under Sees.
presented those checks for clearing with
60 and 61.) Like the maker, neither presentment
another bank which on the strength of the

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 NEGOTIABLE INSTRUMENTS LAW
guarantee cleared the checks and credited the
account of the first bank.
Sec. 64. Liability of Irregular Indorser. — Where a
person, not otherwise a party to an instrument, places
thereon his signature in blank before delivery, he is liable
as indorser, in accordance with the following rules:
(a) If the instrument is payable to the order of a
third person, he is liable to the payee and to
all subsequent parties.
(b) 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.
(c) If he signs for the accommodation of the
payee, he is liable to all parties subsequent to
the payee.
Irregular or anomalous indorsement explained.
The term usually denotes an indorsement for some
purpose other than to transfer the instrument, or an
indorsement by a stranger to the instrument or by one
not in the actual or apparent chain of title, especially an
indorsement made prior to the delivery of the instrument
to the payee.
The purpose of the indorsement not for transfer is usually
to add the signer's credit to the instrument.
Based on this section, an irregular or anomalous indorser
is a person who, (1) not otherwise a party to an
instrument, (2) places thereon his signature in blank, (3)
before delivery. The phrase "not otherwise a party to an
instrument" means that the irregular indorser is not a
maker, drawer, acceptor, or regular indorser there on.
The irregular or anomalous indorser indorses the
instrument in an unusual, singular or peculiar manner. His
name appears where we would naturally expect another
name. Thus, if an instrument is made payable to the order
of P as the payee, P's name should appear on the back of
the instrument as the first indorser but instead we find
the name of X. In such case, X is an irregular or anomalous
indorser. Usually, an irregular or anomalous indorser is an
accommodation indorser. He is not necessarily so where
he participates in the consideration for the instrument
Page 11 of 14
Sec. 65. Warranty where negotiation by delivery, and so
forth. — Every person negotiating an instrument by
delivery or by a qualified indorsement warrants —
(a) That the instrument is genuine and in all respects
what it purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which
would impair the validity of the instrument or
render it valueless.
But when the negotiation is by delivery only, the warranty
extends in favor of no holder other than the immediate
transferee.
The provisions of subdivision (c) of this section do not
apply to persons negotiating public or corporation
securities, other than bills and notes.
Every indorser makes certain warranties or guarantees
about the instrument the is negotiating. (Sec. 65, 66.)
This warranty liability is unconditional, i.e., it is not
conditioned upon proper presentment and dishonor of
the Instrument and the giving of notice of the dishonor.
(1) Negotiation "by delivery" tinder Section 65 means that
indorsement is not necessary because the instrument is
payable to bearer.
The words "by delivery," therefore, refer to a holder who
negotiates the instrument in the same condition in which
he received it, making no indorsement at all. So a blank
indorser of an instrument does not negotiate it "by
delivery" within this section as his liability would be
governed by Section 66.
(2) A qualified indorsement is made by adding to the
indorser's signature the words "without recourse" or any
words of similar import.
Liability of collecting/issuing bank.
The warranty "that the instrument is genuine and it all
respects what it purports to be" covens all the defects in
the instrument affecting the validity thereof, including a
forged indorsement. Thus, the last indorser will be liable
for the amount indicated in the negotiable instrument
even if a previous indorsement was forged. It has been
held in a line of cases that "a collecting bank which
indorses a check bearing a forged indorsement and
presents it to the drawee bank guarantees all prior
 NEGOTIABLE INSTRUMENTS LAW
indorsements, including the forged indorsement itself,
and ultimately should be held liable therefor."
General indorser and irregular indorser distinguished.

The following are the differences:

Sec. 66. Liability of general indorser. — Every indorser
(1) A general indorser makes either a blank or special
who indorses without qualification, warrants to all
indorsement, while an irregular indorser always makes a
subsequent holders in due course —
blank indorsement;
(a) The matters and things mentioned in
(2) A general indorser indorses the instrument after its
subdivisions (a), (b) and (c) of the next preceding
delivery to the payee, while an irregular indorser indorses
section; and
before its delivery to die payee; and
(b) That the instrument is at the time of his
(3) A general indorser is liable only to parties subsequent
indorsement, valid and subsisting.
to him, while an irregular indorser is liable to the payee
And, in addition, he engages that on due presentment, it and subsequent parties unless he signs for the
shall be accepted or paid, or both, as the case may be, accommodation of the payee in which case he is liable
according to its tenor, and that if it be dishonored, and only to all parties subsequent to the payee.
the necessary proceedings on dishonor be duly taken, he
will pay the amount thereof to the holder, or to any
subsequent indorser who may be compelled to pay it. QUALIFIED INDORSER GENERAL INDORSER
(Sec. 65) (Sec. 66)
That he has no knowledge That the instrument is at
Although Section 66 states that the warranties of of any fact which would the time of his
unqualified indorsers run "to all subsequent holders in impair the validity of the indorsement, valid and
due course," it should not be construed literally in the instrument or render it subsisting
sense that holders not in due course cannot enforce the valueless.
warranties.
But when the negotiation he engages that on due
The warranties of Section 65 run to any person to whom is by delivery only, the presentment, it shall be
the instrument has been negotiated and there is no warranty extends in favor accepted or paid, or both,
reason why the same result should not be obtained under of no holder other than the as the case may be,
Section 66. To hold otherwise, the transferee of a immediate transferee. according to its tenor, and
that if it be dishonored, and
qualified indorser would have greater rights than the
the necessary proceedings
transferee of a general indorser.
on dishonor be duly taken,
The unqualified indorser, in addition to his warranties, he will pay the amount
engages to pay the instrument if it is dishonored. In order thereof to the holder, or to
any subsequent indorser
to enforce his liability in this respect, the following
who may be compelled to
conditions must be complied with:
pay it.
(1) Due presentment for payment or acceptance, as the
case may be, must be made; and

(2) If the instrument is dishonored (by non-presentment
or non-acceptance), the necessary proceedings on
dishonor be duly taken. (Sec. 66, par. 2.)
These conditions, unless waived, must be met in order
that a secondary party may be held liable on his
promissory liability as distinguished from his warranty
liability. The liability of the unqualified indorser is similar
to that of the drawer, (see Sec. 61.) An indorsement is
presumed unqualified. To be qualified, it must contain
specific words qualifying liability.
Sec. 67. Liability of indorser where paper negotiable by
delivery. — Where a person places his indorsement on an
instrument negotiable by delivery he incurs all the
liabilities of an indorser.
Sec. 68. Order in which indorsers are liable. — As
respects one another, indorsers are liable prima facie in
the order in which they indorse; but evidence is
admissible to show that as between or among
themselves, they have agreed otherwise. Joint payees or

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 NEGOTIABLE INSTRUMENTS LAW
joint indorsees who indorse are deemed to indorse jointly
and severally.
Order of liability among indorsers.
(1) Among themselves. — This section governs the
liability of indorsers only as among themselves. It
establishes a disputable presumption that every
indorser is liable to all indorsers subsequent to
him. This prima facie order of liability may be
rebutted because it may be shown by parol
evidence either written or oral, hat "as between
or among themselves they have agreed
otherwise." Thus, an irregular indorser (Sec. 64.)
will not be liable to the accommodated party
although from the order in which he indorsed,
the latter appears subsequent to the former.
(2) To the holder. — The holder of an instrument
which has been dishonored is not bound by the
above section. As to him, indorsers are liable in
any order and none of them can interpose as a
defense against him an agreement among
themselves that they are not liable in the order of
their indorsements. The rule must be qualified in
the case of a qualified indorser and an indorser of
a bearer instrument, title to which the immediate
holder took by delivery alone.
Liability of joint payees or joint indorsees who
indorse.
(1) Solidary liability. — Under Section 68, "joint
payees or joint indorsees who indorse are deemed to
indorse jointly and severally." Their liability, therefore,
is solidary so that none of them can escape liability
just because proper notice of dishonor (Sec. 89.) was
not given to the other.
Parol evidence is inadmissible that they signed as
guarantors only. But the one who pays may demand
reimbursement from the others.
(2) Joint liability. — Under Section 184, a note made
payable to the order of the maker is not complete
until indorsed by him.
Sec. 69. Liability of an agent or broker. — Where a
broker or other agent negotiates an instrument
without indorsement, he incurs all the liabilities
prescribed by section sixty-five of this Act, unless he
Page 13 of 14
discloses the name of his principal and the fact that he
is acting only as agent.
Liability of an agent or broker.
(1) Personal liability. — This section refers to
instruments which are payable to bearer and are,
therefore, negotiable by delivery.
(a) The agent or broker who negotiates by mere
delivery incurs the liabilities prescribed in
Section 65.
(b) If he negotiates the instrument by qualified
indorsement, his warranties are also those
stated in Section 65 and if by general
indorsement, those stated in Section 66.
(2) Exemption from liability. — To escape personal
liability, he must disclose his principal and the fact that
he is acting only as agent. (Sec. 20.)
Parol evidence is not admissible to relieve a broker or
other agent whose indorsement brings him within
Section 69.
BAR QUESTIONS ALERT!!!
Q: 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? (2001 BAR)
A: 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.
Q: A check for P50,000 was drawn against drawee
bank and made payable to XYZ Marketing or order.
The check was deposited with payee’s account at ABC
Bank which then sent the check for clearing to
drawee bank. Drawee bank refused to honor the
check on ground that the serial number thereof had
been altered. XYZ Marketing sued drawee bank. In
instant suit, drawee bank contended that XYZ
Marketing as payee could not sue the drawee bank as
 NEGOTIABLE INSTRUMENTS LAW
there was no privity between them. Drawee be held liable to it. However, since the issuance of the
theorized that there was no basis to make it liable for check was attended with the negligence of Lyric Bank,
the check. (1999 BAR) it should share the loss with Yamaha Bank on a 50%
basis.
a. Is this contention correct?

b. Is it proper for the drawee bank to dishonor the

check for the reason that it had been altered? Q: Distinguish an irregular indorser from a general
indorser. (2005 BAR)
A:
A: An irregular indorser, not otherwise a party to the
a. YES. As a general rule, the drawee is not liable
instrument, places his signature thereon in blank
under the check because there is no privity of contract
before delivery to add credit thereto. A general
between XYZ Marketing, as payee, and ABC Bank as
indorser is a regular party to the instrument like a
the drawee bank. However, if the action taken by the
maker, drawer or acceptor and he signs upon delivery
bank is an abuse of right which caused damage not
of the instrument while an irregular indorser signs for
only to the issuer of the check but also to the payee,
valuable consideration.
the payee has a cause of action under quasi-delict.

b. The serial number is not a material particular of the

check. Its alteration does not constitute material
alteration of the instrument. The serial number is not
material to the negotiability of the instrument.
Q: Marlon deposited with LYRIC bank a money
market placement of P1M for a term of 31 days. On
maturity date, one claiming to be Marlon called up
the LYRIC Bank account officer and instructed him to
give the manager’s check representing the proceeds
of the money market placement to Marlon’s
girlfriend, Ingrid. The check, which bore the forged
signature of Marlon, was deposited in Ingrid’s
account with YAMAHA Bank. YAMAHA Bank stamped
a guaranty on the check reading: “All prior
endorsements and/or lack of endorsement
guaranteed.” Upon presentment of the check, LYRIC
Bank funds the check. Days later, Marlon goes to
LYRIC Bank to collect his money market placement
and discovers the foregoing transactions.
Q: Pancho drew a check to Bong and Gerard jointly.
Bong indorsed the check and also forged Gerard’s
indorsement. The payor bank paid the check and
charged Pancho’s account for the amount of the
check. Gerard received nothing from the payment.
Pancho asked the payor bank to recredit his account.
Should the bank comply? Explain fully. (2008 BAR)
A: YES, the bank should recredit the full amount of the
check to the account of Pancho, considering that the
check was payable to the account of Pancho.
Considering that the check was payable to Bong and
Gerard jointly, the indorsement of Gerard was
necessary to negotiate the check pursuant to Sec. 41
of the NIL, to wit: Where an instrument is payable to
the order of 2 or more payees or indorsees who are
not partners, all must indorse unless the one indorsing
has authority to indorse for the others. Since Bong
forged the signature of Gerard without authority, the
indorsement was wholly inoperative.

Marlon thereupon sues LYRIC Bank which in turn files

a third-party complaint against YAMAHA Bank.
Discuss the respective rights and liabilities of the two
banks. (2010 BAR)

A: Since the money market placement of Marlon is in

the nature of a loan to Lyric Bank, and since he did not
authorize the release of the money market placement
to Ingrid, the obligation of Lyric Bank to him has not
been paid. Lyric Bank still has the obligation to pay
him. Since Yamaha Bank indorsed the check bearing
the forged endorsement of Marlon and guaranteed all
endorsements, including the forged endorsement,
when it presented the check to Lyric Bank, it should

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