AN OVERVIEW OF NEGOTIABLE INSTRUMENTS LAW [ACT 2031] CHAPTER 1 Application of the Law CHAPTER 7 Discharge & Payment for Honor CHAPTER 8 Notice of Dishonor 1\W SIMPLIFIED NEGOTIABLE INSTRUMENTS LA\ ; (AGUIDE TO PASSING THE BAR) Chapter 1 APPLICABILITY OF NEGOTIABLE INSTRUMENTS LAW Negotiable Instruments Law The governing law for instruments which are negotiable is the Negotiable Instruments Law. Section 190 of Act 2031 provides that: “This Act shall be known as_the Negotiable Instruments Law.” Effectivity of the Negotiable Instruments Law Act 2031 or otherwise known as the Negotiable Instruments Law was enacted on 3 February 1911. Section 198 of the said Act provides that: “Time when Act takes effect. — This Act shall take effect ninety days after its publication in the Official \). Gazette of the Philippine Islands shall have been completed.” As such, this Act took effect on 2 June 1911. Applicability of the law I. Application of Act 2031 The provisions of this Act do not) apply to negotiable instruments made and delivered prior to the taking effect hereof. (Sec. 195) II. Non-negotiable instruments or cases not provided for in the Act Any case not provided for in this Act shall be governed by the provisions of existing legislation or in default thereof, by the rules of the law on merchant. (Sec. 196) Simply put, Act 2031 or the Negotiable Instruments Law is applicable only to instruments which are negotiable or instru-Chapter 1 3 APPLICABILITY OF NEGOTIABLE INSTRUMENTS LAW ments which are in substantial compliance or in conformity with Sec. 1. If it is not negotiable, it is governed by the existing legislation or the rules of the law on merchant. And since com- mercial instruments are generally presupposes by existing debts or contracts, then the civil code will govern particularly the law on contracts, oS a Hence, one must be able to determine first which instrument is negotiable and which is not. Stated otherwise, the Negotiable Instruments Law will only set in if the instrument is negotiable. If not, do not apply Act 2031. The Negotiable Instrument Law was enacted for the purpose of facilitating, not hindering or hampering transactions in commercial paper. (Statement Investment House, Inc. v. CA, G.R. No. 101163 [1993]) Illustration: 24 July 2012 I promise to pay Federer or bearer if he will marry_ Sharapova Php100,000 on demand. wih Spd. Mirka While there is a promise to pay by the maker, Mirka to Federer the payee, the amount of Php100,000 on demand, the instrument is nobnegotiable because it does not comply with the requirements set forth under Sec. 1, par. a that it must contain an unconditional_promise to pay. By imposing a condition, it destroys the character of negotiability and thus will be governed by the law on general contracts. In this case, Art. 1181 of the Civil Code provides that, “in conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition.” That is, Federer acquires no right unlesshe marries Sharapova. The Php100,000 which Mirka promised to pay Federer is not demandable and shall depend only upon the happening of the event which constitutes the obligation to pay.\W SIMPLIFIED Et [ABLE INSTRUMENTS LA\ ‘ NET GUIDE TO PASSING THE BAR) II]. Negotiable Instruments as an accessory or incident of contract Prior to the issuance of promissory note or bill of ex negotiable instruments whether change, the same presupposes a le, a promissory note can be issued contract or agreement, Exampl i dered, but the payor may not have the for services already rende: Seen i resent for the fees rendered or seve may ne tae ee the acquisition of a vehicle on installment basis. Be it a contract of service, contract of sale, debt agreement or other contracts, a negotiable instrument can be issued as a medium of exchange or substitute for money or instrument of consideration, Further, it is provided in Sec. 24.that: “Presumption « of consideration. Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose ereon_to have become_a_party thereto for value.” Likewise, Sec. 25 provides what constitutes value. “Value is any consideration sufficient to support. a simple contract. An antecedent or pre-existing debt. constitutes value; _and_is deemed such whether the instrument is payable on demand or at a future time.” In the case of Travel-on, Inc. v. CA (G.R. No. L-56169 [1992)), it was held that the checks are the all important evidence of petitioner’s case, that these checks clearly established private respondent's indebtedness to petitioner, that private tespondent was liable thereunder. It is important to stress that a check which is regular on its face is deemed prima facie to have been issued for a valuable consideration and every person whose signature appears thereon is deemed to have become a party thereto for value, Thus, the mere introduction of the instrument sued on in evidence prima facie entitles the plaintiff to recovery. Further, the rule is quite settled that a negotiable instrument is presumed to have been given or indorsed for a sufficient consideration unless otherwise contradicted and overcome by other competent evidence.Chapter 1 5 APPLICABILITY OF NEGOTIABLE INSTRUMENTS LAW Also, Sec. 5(s) of Rule 131 establishes the presumption “(t]hat a negotiable instrument was given or indorsed for a suffi- cient consideration; . ..” Similar support is stated in the Civil Code, to wit: “Art. 1350. In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other; in remuneratory ones, the service or benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor. Art. 1354. Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary.” Based on the foregoing, the cause or consideration need not be stated in the instrument, the tenor that gives rise to the note or bill. It need not be alleged or proved, although rebuttable. But once stated, it does not affect the negotiability of the instrument since all the more with reason and basis that it is negotiable and such is authorized by Sec. 3(b) of the NIL which provides that: “When promise is unconditional. — An unquali- fied order or promise to pay is unconditional within the meaning of this Act though coupled with: XxX (b) A statement of the transaction which gives rise to the instrument.” Holder of the instrument In Sec. 191, “Holder” means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof. As to what constitutes holder for value, Sec. 26 provides that: “Where value has at any time been given for the instrument, the holder is deemed a holder for valueSIMPLIFIED |EGOTIABLE INSTRUMENTS: LAW ‘ N (AGUIDETO PASSING THE BAR) in respect to all parties who become such prior to that bute hy (eg 24 July 2012 I promise to pay Federer or bearer Php100,000 on demand. Spd. Mirka In this case, behind this negotiable instrument is a consi- deration. Ttneed not be stated_on the face of the note. The law ' presumes the consideration. ‘As such, if Federer indorsed the instrument to Agassi, then Agassi to Bjorn, Bjorn to Cilic and Cilic to Djokovic, on this score, the consideration is not known. But of course, Cilic must have received valuable consideration from Djokovic either the sum of Php100,000 or its equivalent for the issuance or negotiation of the note. For this reason, Djokovic becomes the holder for value and has now the right to enforce the instrument primarily to the maker, Mirka and in case of non payment, to the parties secondary liable, Federer, Agassi, Bjorn and Cilic by virtue of their warranties under Sec. 66 of NIL. Effect of want of consideration Section 28 stated that absence or failure of consideration is a matter of defense as against any person not)a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise. In Chan Wan v. Tan Kim and Chen So (G.R. No. 1-15380 {1960}), it bears important to mention that needless to say, if it were true that the checks had been issued in payment for shoes that.were never made and delivered, Tan Kim would have a good defense as against a holder who is notaholder in due course. In another case, Leodegario Bayani I ani v. People (G.R. No. 154947 [2004]), the evidence on record shows that EvangelistaChapter 1 APPLICABILITY OF NEGOTIABLE INSTRUMENTS LAW rediscounted the check and gave Php55,000.00 to Rubia after the latter endorsed the same. As such, Evangelista is a holder of the check in due course. Under Sec. 28 of the Negotiable Instruments Law (NIL), absence or failure of consideration is a matter of defense only as against any’ person not a holder in due course. x x x Such presumption cannot be overcome by the petitioner's. bare denial of receipt of the amount of Php55,000,00 from Rubia. When lien on instrument constitutes holder for value Where the holder has a lien on the instrument arising either from contract or by implicatidn’of law, he is deemed a holder for value to the extent of his lien. (Sec. 27) Simply put, when a negotiable instrument has been pledged or made as a,collateral to secure an obligation, the holder of the instrument or pledge in this case has a lien on the instrument to the extent of the amount pledged or secured as collateral, If the amount of debt is lesser than the amount in the instrument, the pledgee cari still collect the ful amount but has the obligation to return the excess to the pledgor. For this matter, if a credit which has been pledged becomes due before it is redeemed, the pledgee may collect and receive the amount due. He shall apply the same to the payment of his claim, and deliver the surplus, should there be any, to the pledgor. (Art. 2118 of the Civil Code) Example: Mirka makes a promissory note for Php100,000 to the order of Federer who pledges the same instrument to Agassi to secure an obligation for Php85,000. In this case, Agassi is considered a holder for value to the extent of the obligation for Php85,000, his lien on the instrument. Upon maturity of the instrument and the said instrument has not yet been redeemed by Federer, Agassi can collect the full amount of Php 100,000, (though the Php85,000 is not yet due to Agassi), and hold for the account of the pledgor Federer the amount of Php15,000. Under the Civil Code, Agassi shall apply the same to the payment of his claim, and deliver the surplus to Federer, otherwise solution indebiti sets in.5 coe a Negotiable Instruments under Act 2031 () Promissory Note (Sec. 184) (B:) Bill of Exchange (Secs. 126-131) E)\_ Checks (Secs. 185, 186, 189, 193) Bills in Set (Secs. 178-183) Inland and foreign bill of exchange (Sec. 129) Bill treated as promissory note (Sec. 130) Option bill or note (Sec. 17[e]) amm oa A. Promissory note defined A negotiable promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a note is drawn to the maker's own order, it is not complete until indorsed by him. (Sec. 184) Essential features of Promissory Note Contains unconditional promise In writing Signed by the maker Engaging to pay on demand, or a fixed determinable future time Must be payable in a sum certain in money Payable to order or bearer There are two (2) parties: the maker and the payee Maker is a party primarily liable. fe pr PnXnNagu Parties In a promissory note 1, Maker — the one making the unconditional promise to pay another, the one signi i . engaging to pay, igning the instrument and isChapter 1 APPLICABILITY OF NEGOTIABLE INSTRUMENTS LAW 2. Payee — the Person to whom the unconditional promise to pay is made or which the payment is to be made. If the Promissory note is presupposes by a contract of debt or asa consideration of the instrument there is a pre-existing debt, the maker is the debtor and the Payee is the creditor. Thus, if Mirka is indebted to Federer in the amount of Php100,000 the tenor of the Promissory note will be: : 24 July 2012 I promise to pay Federer or bearer Php100,000 on demand. Jutwe Sgd. Mirka ))-\.. Mirka is the maker, the one making an unconditional promise to pay Federer, the payee in the amount of Php100,000 on demand. Mirka also as the maker, is the one signing the instrument and by making the instrument engages that he will pay it according to its tenor, and admits the existence of the payee. and his then capacity to indorse. (Sec. 60) B. Bill of exchange defined A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay ondemand or at a fixed or determinable future time a sum certain in money to order or to bearer. (Sec. 126) Essential features of Bill of Exchange 1. Contains unconditional order 2. Inwriting 3. Signed by the drawer addressed to a drawee 4 Requiring the drawee to pay on demand or at fixed determinable future timeIMPLIFIED. NEGOTIABLE INSTRUMENTS LAW SII " (A GUIDE TO PASSING THE BAR) 5. Must be payable in a sum certain in money . Payable to order or bearer 7. There are three (3) parties: the drawer, the drawee, and the payee 8: Drawer isa party secondarily_liable 9. Drawee is a party not liable on the bill unless and until he accepts the same. Parties in a bill of exchange 1. Drawer - the one drawing the instrument or giving an order in writing to pay another. 2. Drawee — the person to whom the unconditional order in writing is addressed or the one required to-pay.the instrument. 3. Payee- the oneto whom payment is to be made by the drawer upon order to the drawee. If a bill of exchange is presupposes by a contract of sale on credit, the buyer is the drawer and the seller is the payee. On the other hand, the drawee is the one who will make the payment to the payee upon the order of the drawer. 24 July 2012 — SSC-R Manila Pay to Federer or order Php100,000 on demand. To: Roddick - Jue Drawer Sgd. Dinara Dinara is the drawer, the one making an unconditional order to pay Federer, the payee in the amount of Php100,000 on demand. Dinara also as the drawer, is the one signing the instrument requiring Roddick, the drawee to Pay Federer upon demand. Dinara also, by drawing the instrument admits the existence of the payee and his then capacity.to indorse; and engages that, 01Chapter 1 1 APPLICABILITY OF NEGOTIABLE INSTRUMENTS LAW, due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and 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. But the drawer may insert.in the instrument an express stipulation. negativing or limiting his own liability to the holder. (Sec. 61) Bill not an assignment of funds In the hands of drawee Abill of itself does not operate as an assignment of the funds in the hands of the drawee available for the payment thereof, and. the drawee is not liable on the bill unless and until he accepts the same. (Sec. 127) Illustration: 24 July 2012 SSC-R Manila Pay to Federer or order Php100,000 on demand. To: Roddick . 5d. Dinara If Federer indorses the instrument to Agassi, Agassi to Bjorn and Bjorn to Cilic, Cilic as the holder may present the instrument to Roddick for payment. If Roddick refuses to pay, Roddick as the drawee cannot’be compelled to pay Cilic even if Dinara as the drawer has sufficient funds in the hands of Roddick, Reason, as stated in Sec. 127, the bill in itself does not operate as an assignment of the funds in the hands of the drawee available for the payment thereof, and the drawee is not liable on the bill unless and until he accepts the same. But the rule is different when a check is involved and that failure of a bank to pay the check of a merchant or trader, when the deposit is sufficient, entitles the drawer to substantial damages without any proof of actual damages. (Moran v. CA, G.R. No. 105836 [1994])(PLIFIED NEGOTIABLE INSTRUMENTS LAW SIMI (AGUIDE TO PASSING THE BAR) In support further, Sec. 62 encompassed that a drawee is liable only until it accepts the instrument. Simply put, no acceptance no liability. This presupposes further that the drawee has no contractual obligation to the payee prior to its acceptance, Bill addressed to more than one drawee A bill may be addressed to two or more drawees jointly, whether they are partners or not, but not to two or more drawees in the alternative or in succession. (Sec. 128) > Probibitel 4 Illustration: 24 July 2012 SSC-R Manila Pay to Federer or order Php100,000 on demand. To: Roddick and Agassi Sgd. Dinara By having the instrument addressed to two or more drawees jointly simply means that presentment for acceptance must be made to them all, unless one has authority to accept or refuse acceptance for all, in which case presentment may be made to him only. (Sec. 145[a]) [Emphasis supplied] Presentment must be made to them all. A demand on one of several joint drawees may be made when they are partners)or when one is authorized by the other. Thus, in this case, the bill must be presented for acceptance both to Roddick and Agassi since neither the party is authorized by the other. 24 July 2012 SSC-R Manila Pay to Federer or order Php100,000 on demand. To: Roddick or Agassi Sgd. Dinara. Chapter 1 APPUCARBILITY OF NEGOTIABLE INSTRUMENTS LAW In this case the instrument is not negotiable since it is addressed to joint drawees in the alternative. Section 128 pro- hibits two or more drawees in the alternative or in succession. [Emphasis supplied] C. Check defined A check is a bill of exchange drawn on a bank payable on demand, Except as herein otherwise provided, the provisions of Act 2031 applicable to a bill of exchange payable on demand apply toa check. (Sec. 185) A check is a negotiable instrument that serves as a substi- tute for money and as a convenient form of payment in financial transactions and obligations. The use of checks as payment al- lows commercial and banking transactions to proceed without the actual handling of money, thus, doing away with the need to physically count bills and coins whenever payment is made. It permits commercial and banking transactions to be carried out quickly and efficiently. (Mitra v. People, G.R. No. 191404 [2010]) A check is not only a written evidence of a contract right but also a species of property, Just as deed to a piece of land must be delivered in order to convey title to the grantee, so must a nego- tiable instrument be delivered to the payee in order to evidence its existence as a binding contract. (DBR v. Sima Wei, G.R. No. 85419 [1993]) Parties In a check 1. Drawer 2. Drawee 3. Payee Acheckis a special kind of bill of exchange where the drawee normally is a bank. Under Sec. 62, a bank is not liable until it accepts the instrument. This is the reason why a check is required to be presented for payment and as a matter of procedure, a Verification in addition to the clearing process is observed by the drawee bank. The purpose is to limit its liability,\W SIMPLIFIED SGOTIABLE INSTRUMENTS LA\ ‘ “ (AGUIDE TO PASSING THE BAR) While a check is a negotiable instrument, it aoe a Produce the effect of payment that would edtingaia fie obliga ion but only_when_it has been encashed, Neither the cre = male compelled to accept the check as a mode of payment. Article 1249 of the Civil Code provides that: “The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes_payable to order, or bills of exchange or other mercantile do shall e the effect of nt hen they hav: n_cashed, 0 n ie fault of the creditor they have been impaired. xxx.” [Emphasis supplied] Within what time a check must be presented A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. (Sec. 186) Section 193 provides what constitutes reasonable time, to wit: “In determining what is a ‘reasonable time’ re- gard is to be had to the nature of the instrument, the usage of trade or business with respect to such instru- ments, and the facts of the particular case.” In the case of Wong v. CA (351 SCRA 100 [2001)), the Supreme Court said that, by current banking practice, a check becomes stale after more than six (6) months or 180 days. In this case, the respondent deposited the checks 157 days after the date of the check. Hence, said checks cannot be considered stale. Further, in the case of International Corporate Bank v. Gueco [351 SCRA 517 (2001)], the following are the salient points:Chapter 1 15 APPLICABILITY OF NEGOTIABLE INSTRUMENTS LAW 1. Astale check is one which has not been presented for payment within a reasonable time after its issue. It is valueless and therefore should not be paid; 2. An instrument not payable on demand must be presented for payment on the day it falls due; 3. When the instrument is payable on demand, present- ment must be made within a reasonable time after its issue; 4. In the case the bill of exchange, presentment is suffi- cient if made within a reasonable time after the last ne- gotiation. It was ruled also in this case that, a check must be present- ed for payment within a reasonable time after its issue, and in determining what is a “reasonable time,” regard is to be had to the nature of the instrument, the usage of trade or business with respect to such instruments, and the facts of the particular case. The test is whether the payee employed such diligence as a pru- dent man exercises in his own affairs. This is because the nature and the theory behind the use of a check points to its immediate use and payability. A check as distinguished from an ordinary bill of exchange, is supposed to be drawn against a previous deposit of funds ordinarily intended for immediate payment. x x x A bank is under no obligation to make part payment ona check, up to only the amount of the drawer’s fund. x x x Failure of a bank to pay the check of a merchant or trader, when the deposit is sufficient, entitles the drawer to substantial damages without any proof of actual damages. (Moran v. CA, G.R. No. 105836 [1994]) Likewise, a check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder unless and until it accepts or certifies the check. (Sec. 189) “As held in Security Bank and Trust Co. v. CA (291 SCRA 33 [1998}), the following are of material importance: 1. There was no contractual relation created between theW SIMPLIFIED IEGOTIABLE INSTRUMENTS LA\ * N (AGUIDE TO PASSING THE BAR) drawee bank and the payee as a result of the payment by the former of the amount of the check; 2. Drawee bank simply paid (or is paying) the check for and in behalf of the drawer; 3. If the check was dishonored upon presentment for payment, the payee cannot sue the drawee bank but only the drawer for lack of privity; and The funds from which the check shall be paid belong to the. drawer and merely deposited with the drawee bank, Kinds of Checks 1. Manager’s check — drawn by the bank’s manager upon the bank itself payable to third person and is similar to cashier's check both as to effect and use. 2. Cashier’s checks — is a check of the bank’s cashier on his own or another check. It is a bill of exchange drawn by the cashier of a bank upon the bank itself, and accepted in advance by the act of its issuance. It is really the bank’s own check and may be treated a promissory note with the bank as a maker. The check becomes the primary obligation of the bank which issues it and constitutes its written promise to pay upon demand. The mere issuance of it is s considered an acceptance thereof. If treated as promissory note, the drawer would be the maker and in which case the holder need not prove presentment for payment or present the bill to the drawee for acceptance. (International Corporate Bank v. Gueco, supra) 3. Certified checks — where a check is certified by the bank on which itis drawn, the certi fication is equivalent to an acceptance. (Sec. 187) It likewise guarantees the availability of funds for the check. And, where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon. (Sec. 188)Chapter 1 APPLICABILITY OF NEGOTIABLE INSTRUMENTS LAW ” 4. = caer not presented or encashed within six 5. Crossed check, — bears two parallel lines across its ce normally on the upper left side diagonally and Signifying either for payee’s account only or for deposit y Accrossed check is defined as a check crossed with two (2) lines, between which are either the name of a. bank or the words “and company,” in full or abbreviat- ed. In the former case, the banker on whom it is drawn must not pay the money for the check to any other than the banker named; in the latter case, he must not pay it to any other than a banker. (Black’s Law Dictionary 301, 4th Ed., citing 2 Steph. Comm. 118, note C; 7 Exch. 389; [1903] A.C. 240; Farmers’ Bank v. Johnson, King & Co., 134 Ga. 486, 68 S.E. 65, 30 L.R.A., N.S. 697) In one case, it was ruled that the crossing of one of the subject checks should have put petitioner on guard; it was duty-bound to ascertain the indorser’s title to the check or the nature of his possession. And crossing of the checks mean; _a. Thecheck may notbeencashed but only deposited in the bank; 'b. The check may be negotiated only once to one who has an account with a bank; and cl The act of crossing the check 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, otherwise, heisnota holder in due course. (Traders Royal Bank v. Radio Philippines Network, Inc., G.R. No. 138510 [2002]) 6. Bad checks — a check that is not honored because the account either contains insufficient funds or does not exist, Also termed hot check; worthless check; rubber[PLIFIED BLE INSTRUMENTS LAW SIMI OTA GUIDE ‘TO PASSING THE BAR) check; bounced check; cold check; bogus check; false check; dry check. 7. Blank check — a check signed by the drawer but left blank as to the payee or the mount, or both. 8. Cancelled check — a check bearing a notation that it has been paid by the bank on which it was drawn. A cancelled check is often used as evidence of payment. 9. Memorandum check — a check that a borrower gives toa lender for the amount of the short-term loan, with the understanding that it is not to be presented for payment but will be redeemed by the borrower when the loan falls due. 10. Traveler’s check — a cashier’s check that must be signed by the purchaser at the time of purchase and countersigned when cashed. An instrument that (1) is payable on demand, (2) is drawn on or payable at or through a bank, (3) is designated by the term “trav- eler’s check” or by a substantially similar term, and (4) requires, as a condition to payment, a countersigna- ture by a person whose specimen signature by a per- son whose specimen signature appears on the instru- ment. (Black’s Law Dictionary, 7th Edition. No. 6-10, p- 230) D. Bills in set Bills In set constitute one bill Where a bill is drawn in a set, each i dra , Part of the set being numbered and containing a reference to the other parts, the whole of the parts constitutes one bill. (Sec. 178) A bill in a set is one negotiable instru ment composed of several Parts on pee), each partbeing numbered and containing a reference to the othe ituti eect, parts, the whole of the Parts constitutingChapter 1 APPLICABILITY OF NEGOTIABLE INSTRUMENTS LAW Illustration: First Part Page 1 of 2 SSC-R Manil Exchange for Php100,000 24 July 2012 . First 10 days after sight of this First of Exchange (Second part unpaid), pay to the order of Federer Php100,000 To: Roddick Sgd. Dinara Bulacan Second part Page 2 of 2 SSC-R Manila Exchange for Php100,000 24 July 2012 Second 10 days after sight of this Second of Exchange (First part unpaid), pay to the order of Federer Php 100,000 To: Roddick Sgd. Dinara Bulacan Purpose of a bill in set The_purpose of drawing. bability that at least one part o tion, bills in set is to increase the pro- f the bill would reach its destina- Right of holders where different parts are negotiated Where two or more parts of a set are negotiated to different holders in due course, the holder whose title first accrues is, as between such holders, the true owner of the bill. But nothing[ED (GOTIABLE INSTRUMENTS LAW SIMPLIFII * ne (A GUIDE TO PASSING THE BAR) in this section affects the right of a person who, in due course, accepts or pays the parts first presented to him. (Sec. 179) In the preceding illustration, if Federer negotiates the first part of the bill to Agassi on 26 July 2012, and the second part to Bjorn on 28 July 2012, both are holders in due course, Agassi is considered as the true owner as his title first accrues. As to drawee, Roddick should accept or pay only Agassi. However, if Bjorn presented his bill for acceptance and payment ahead of Agassi and Roddick accepts and pays the second part in due course, Roddick is not liable to Agassi. Liability of holder who indorses two or more parts of a set to different persons Where the holder of a set indorses two or more parts to dif- ferent persons, he is liable on every such part, and every indorser subsequent to him is liable on the part he has himself indorsed, as if such parts were separate bills. (Sec. 180) Acceptance of bill drawn in sets The acceptance may be written on any part and it must be written on one part only. If the drawee accepts more than one part and such accepted parts negotiated to different holders in due course, he is liable on every such part as if it were a separate bill. (Sec. 181) * Simply put, the drawee in bills in set is required to accept only one part of the bill and the acceptance thereof may be written on the said (one) part of the set. Such that if the drawee accepted all the parts of the bill (by writing its acceptance on every bill) and these parts of the bill were subsequently negotiated, then the drawee is liable on every part of the bill as if it were a separate bill. In the given illustration, since there are two (2) parts of the bill, then upon negotiation, the drawee is liable for Php100,000 each. But if not negotiated, the drawee is liable only for one part of the bill, Php 100,000.Chapter 1 2 APPLICABILITY OF NEGOTIABLE INSTRUMENTS LAW Payment by acceptor of bills drawn in sets When the acceptor of a bill drawn in a set pays it without requiring the part bearing his acceptance to be delivered up to him, and the part at maturity is outstanding in the hands of a holder in due course, he is liable to the holder thereon, (Sec. 182) In other words, the drawee upon paying the bill, before he accepts, he must require that part of the bill in a set bearing his acceptance to be delivered to him or surrendered for payment. The acceptor should pay the part bearing his acceptance. Should he not do so, and the part at maturity is still outstanding in the hands of a holder in due course, then is liable to the holder. Effect of discharging one of a set Except as herein otherwise provided, where any one part of a bill drawn in a set is discharged by payment or otherwise, the whole bill is discharged, (Sec. 183) Discharging by payment of one set except for Secs. 180, 181 and 182, the whole bill is discharged. This is simply because that part constituting bills in set is regarded as one bill. Payment in a part of the bill is payment in whole. E. Inland and foreign bills of exchange An inland bill of exchange is a bill which is, or on its face purports to be, both drawn and payable within the Philippines. Any other bill is a foreign bill. Unless the contrary appears on the face of the bill, the holder may treat it as an inland bill. (Sec. 129) Kinds of Bills of Exchange: 1. Inland Bill—drawnand payable within the Philippines. 2. Foreign Bill — drawn in the Philippines but payable outside of the country or drawn outside of the country but payable in the Philippines or drawn and payable outside the Philippines.IFIED LE INSTRUMENTS LAW SIMPL! . NET NGUIDE TO PASSING THE BAR) Illustration: 1. Inland Bill 24 July 2012 SSC-R Manila Pay to Federer or order Php 100,000 on demand. To: Roddick Bustos, Bulacan Sgd. Dinara 2. Foreign Bill 24 July 2012 Switzerland Pay to Federer or order Php100,000 on demand. To: Roddick Bustos, Bulacan Sgd. Dinara Section 118 requires that_a_protest is necessary in case of foreign bills, and failure to do so will discharge the parties secondarily liable, However, while it is necessary to determine whether the bill is foreign or an inland bill for purposes of protest, if the contrary appears on the face of the bill, the holder may treat it as an inland bill. This simply means that either the country where the bill is drawn and/or Payable must appear or be printed on the face of the bill. Otherwise, the holder is Privileged to treat it as an inland bill. Once treated as an inland bill, protest is no longer necessary, - A protest under Sec. 154 is made b: i . YY a not ublic or b any respectable resident of the place where the bills lishonored, in the presence of two (2) or more credible witnesses specifyingChapter 1 APPLICABILITY OF NEGOTIABLE INSTRUMENTS LAW as mandated by Sec. 153, annexed to the bill or must contain a copy thereof, and must be under the hand and seal of the notary making it and must specify: av The time and place of presentment; b. The fact that presentment was made and the manner thereof; c. The cause or reason for protesting the bill; and, d, The demand made and the answer given, if any, or the fact that the drawee or acceptor could not be found. E. When bill may be treated as promissory note 1. The drawer and drawee are the same person or 2. The drawee is a fictitious person or 3. The drawee person not having capacity to contract, the holder may treat the instrument at his optioneither as a bill of exchange or as a promissory note. (Sec. 130) 4. Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election. (Sec. 17[c]) If the drawer and the drawee are the same person, to whom is the drawer commanding or giving order to pay? As such, if treated as a note, the maker becomes the drawer and the liability now is primary as compared to a drawer which is merely sec- ondary. If the drawee is a fictitious person, who should accept the bill? If nobody would accept the bill, there is nobody can the payee or holder presents the bill for payment. Hence, may be treated as a note. If the drawee has no capacity to contract, then it will be invalid, Importance of treating the bill as a promissory note Section 70 provides that presentment for payment is nec- essary in order to charge the drawer and indorsers, Parties sec-COTIABLE INSTRUMENTS LAW SIMPLIFIED “ e (A GUIDE TO PASSING THE BAR) i s case when treated as a note, the drawe, poe te ence the holder of the instrument Need n, i prove presentment for payment. In other words, it can be dis. with already. Besides, Sec. 114 likewise provides that no. tice of dishonor is no longer required to make the drawer liable, G. Option bill or note Section 17(e) states that: “Where the instrument is so ambj- guous that there is doubt whether it is a bill or note, the holder may treat it as either at his election.” Illustration: 24 July 2012 I promise to pay Federer or bearer Php100,000 payable on 24 July 2014. To: Roddick Sgd. Mirka It is basic in Negotiable Instruments Law that a promissory note has only two (2) parties namely: the maker and the payee. In this case, there appears a drawer which must be present only in a bill of exchange. As such, there is ambiguity whether the instrument is a note or a bill. For this matter, the payee or holder may treat it as his discretion either as a bill or a note.Chapter 2 NEGOTIABILITY Use and consequence of negotiable Instruments . 2 3. 8. Nao -s Alternative formoney Asi ‘ t C A substitute or means for credit transaction Medium of exchange for sales or commercial transac- tions Accumulation of contracts Indtrumént of credit Instrument of consideration Convenient form of payment in financial transactions and obligations A contract right Be that as it may, it is clear that negotiable instruments are not legal tender and as such, the creditor is not bound to accept negotiable instruments such as promissory note, bill of exchange, checks, etc. RA 7653, Sec. 52 provides that: * Legal Tender Power. — All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private: Provided, however, That, unless otherwise fixed by the Monetary Board, coins shall be legal tender in amounts not exceeding Fifty pesos (P50.00) for denominations of Twenty-five centavos 25PLIFIED: NEGOTIABLE INSTRUMENTS LAW SIMPL! * (AGUIDE TO PASSING THE BAR) and above, and in amounts not exceeding Twenty pesos (P20.00) for denominations of Ten centavos or less. In the same stratum, RA 8183 also provides: Section 1. All monetary obligations shall be settled in the Philippine currency which is legal tender in the Philippines. However, the parties may agree that the obligation or transaction shall be settled in any other currency at the time of payment. _Negotiability The capability of commercial paper to have its title trans- ferred by indorsement and delivery, or delivery alone, so that the transferee has a rightful claim on it. Negotiability (which pertains to commercial paper) differs from assignability (which pertains to contracts in general) because an assignee traditionally takes title subject to all equities, and an assignment is not complete without notice to the debtor, whereas an indorsee takes free of all equities and without any notice to the debtor. (Black’s Law Dictionary, 7th Edition, p. 1058 ) Basic in negotiable instruments law, that to be negotiable, the instrument must conform with Sec. 1, to wit: “Form of negotiable instruments, An instrument to be negotiable must conform to the following re- quirements: a. Itmustbein writing and signed by the maker or drawer; b. Must contain an unconditional promise or order to pay a sum certain in money; ¢. Must be payable on demand, or at a fixed or determinable future time; d. Must be payable to order or to bearer; and e. Where the’ instrument is addressed to a drawee, he must be named or otherwise in- dicated therein with reasonable certainty.Chapter 2 NEGOTIABILITY Promissory Note and Bill of Exchange PN BE Two: Maker & Payee Three: Drawer, drawee & payee Maker: Primary liable Drawer: Secondarily liable Drawe: Not liable until he accepts Only par. a tod Par.atoe Unconditional promise Unconditional order Signature - Secs. 18-23 Unconditional promise - Sec. 3 Sum certain in money - Sec. 2 Payable on demand - Sec. 7 Determinable future time — Sec. 4 Payable to order — Sec. 8 Payable to bearer — Sec. 9 Section 1 Explained A ‘The instrument must be in writing In writing means written upon paper, or substitute for paper. This is the first element of negotiability. For if it is not written, there is no instrument to speak of. And once it is in writing, a test now is whether such instrument is negotiable or not. In the case of Caltex (Philippines, Inc.) v. CA and Security Bank and Trust Company (G.R. No. 97753 [1992], 212 SCRA 448), it was held that: On this score, the accepted rule is that the nego-INSTRUMENTS, LAW SIMPLIFIED El * Nem BIDE TO PASSING THE BAR) iti fi i writin, 0 c th ia t ment i In the construction of a bill r note, the intention of the parties is to control, ifit can be legally ascertained, while the writing may be read in the light of surrounding circumstances in order to more perfectly understand the intent and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, but what is the meaning of the words they have used. What the parties meant must be determined by what they said. [Emphasis supplied] B. Signature of the maker or drawer Signature is defined as a person’s name or mark written by that person or at the person’s direction. In commercial law, it is any name, mark or writing used with the intention of authen- ticating a document, (Black’s Law Dictionary 7th Edition) The signature is an assertion to the contract which gives rise to the instrument. The signature of the maker or drawer in an be any symbol, full name, surname or initials, ident document. Thus, in RPB v. CA (G.R. No. 93073 [1992]), it was held that persons who write their names on the face of the promissory notes are makers and are liable as such. __ Further,_no_person is liable on_the_instrument_whose signature does not appear thereon, except as herein otherwise expressly provided, (Sec. 18, 1st par.) __Itis basic that one cannot be bound in an instrument where his signature does not appear thereon. Ano signature instrumentChapter 2 a NEGOTIABILITY simply means _no one has intended to commit an obligation. However, this principle admits of certain exception, to wit: 1. A person signing in a trade name or assumed name. In this case, he will be liable to the same extent as if he had signed in his own name. (Sec. 18, 2nd par.) 2. Duly authorized agent signing for the principal. As such, the principal is bound by the signature of the agent. (Sec. 19) 3. Incase of forgery under Sec. 23 the forger is liable even if his own signature does not appear on the instrument. 4. Anindorser signing ona separate paper (called allonge) attached to the instrument. (Sec. 31) 5. The acceptor when the acceptance is written on a paper other the bill itself. (Sec. 134) Effect of forged signature When a signature is forged or made without the authority of the person whose signature it purports to be: 1. 2. 3. 4. It is wholly inoperative, and No right to retain the instrument, or No right to give a discharge therefor, or No right to enforce payment thereof against any party thereto, can be acquired through or under such signa- ture, unless the party against whom it is sought to en- force such right is precluded from setting up the forg- ery or want of authority. (Sec. 23) Article 169 of the Revised Penal Code provides how forgery is committed. The forgery referred to in this section may be committed by any of the following means: 1. By giving to a treasury or bank note or any instrument, payable to bearer or order mentioned therein, the appearance of a true genuine document.W SIMPLIFIED EGOTIABLE INSTRUMENTS LA\ * Ne (A GUIDE TO PASSING THE BAR) substituting, counterfeiting or altering by in - c 2 By erasine res, letters, words or signs contained any means the figui therein. In Associated Bank v. CA(G.RNo. 107382/G.R. No. 107612 [1996)), it was held that a forged signature, whether it be that of the drawer or the payee, is wholly inoperative and no one can gain title to the instrument through it. A person whose signature to an instrument was forged was never a party and never consented to the contract which allegedly gave rise to such instrument. Section 23 does not avoid the instrument but only the forged signature. Thus, a forged indorsement does not operate as the payee’s indorsement. The exception to the general tule in Sec. 23 is where “a party against whom it is sought to ¢ enforce a right is precluded from setting up the forgery or want of authority.” Parties who warrant or admit the genuineness of the signature in question and those who, by their acts, silence or negligence are estopped from setting up the defense of forgery, are precluded from using this defense. Indorsers, persons negotiating by delivery, and acceptors are warrantors of the genuineness of the signatures on the instrument, In bearer instruments, the signature of the payee or hold- er is unnecessary to pass title to the instrument, Hence, when the indorsement is a forgery, only the person whose signature is forged can raise the defense of forgery against a holder in due course, Simply put, the following are precluded from setting up the defense of forgery: 1. The party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority by their acts, silence or negligence; and 2. Parties who warrant or admit the genuineness of the signature in question under Secs, 65 and 66. The signatories of a negotiable instrument are as follows: 1. MakerChapter 2 31 NEGOTIABILITY 2. Drawer 3. Indorser Forged signature of the maker A. Forged signature of the Maker in an order instrument When the signature of the maker in a bearer instrument is forged and that the payee indorses the instrument, the indorsee cannot proceed against the maker, because as to the maker, the instrument is inoperative. The right of the indorsee is to proceed against the payee. Example: Mirka makes a promissory note payable to Federer or order for Php100,000. The signature of Mirka is | forged by Federer and indorses the instrument to Agassi. In this | case, Agassi-has no right to proceed against Mirka because it is wholly inoperative in so far as Mirka is concerned. Mirka’s true signature is not appearing on the instrument, therefore she is not bound nor liable to pay the instrument. Agassi_can instead proceed against Federer, the forger because of his warranties as an indorser, | “in The Great Eastern’ Life Insurance Co. v. Hongkong & Shanghai Banking Corporation and Philippine National Bank (G.R. No. 1-18657 [1922]), the money was on deposit in the Shanghai Bank, and it had no legal right to pay it out to anyone except the plaintiff or its order. Here, the plaintiff ordered the Shanghai Bank to pay the Php2,000 to Melicor, and the money was actually paid to Maasim and was never paid to Melicor, and he never paid to Melicor, and he never personally endorsed the check, or authorized any one to endorse it for him, and the alleged endorsement was a forgery. Hence, upon the undisputed facts, it must follow that the Shanghai Bank has no defense to this action. It is admitted that the Philippine National Bank cashed the check upon a forged signature, and placed the money to the credit of Maasim, who was a forger. That the Philippine National Bank then endorsed the check and forwarded it to the Shanghai Bank by whom it was paid. The Philippine National Bank hadE \W SIMPLIFIED |EGOTLABLE INSTRUMENTS LA\ N (AGUIDE TO PASSING THE BAR) 32 /,the money to Maasim or anyone no license or authority to pay, ¥ else upon a forged signature. It_was its legal duty to know that Melicor’s endorsement was genuine before cashing the check. Its remedy is against Maasim to whom it paid the money. All- more deliver B. Forged signature of the Maker in a bearer instrument When the signature of the maker in a bearer instrument is forged and that the payee indorses the instrument, the indorsee who is a holder in due course can proceed against all the parties, the maker, payee and prior parties or indorsers as well. Ina bearer. instrument, negotiation is made by delivery only. The signature. is immaterial. But of course, the forger is also criminally liable, Forged signature of the drawer. A. Forged signature of the Drawer (without the collecting bank) This contemplates a forgery of the signature of the drawer where the instrument was encashed or presented for payment at the very same drawee bank. The drawer-depositor has all the right against the drawee-depository bank as the latter is regarded as negligent in not ascertaining the genuineness of the signature of its client or the drawer-depositor. Inthe case of Samsung Construction Company Philippines, Inc. v. Far East Bank and Trust Company and CA (G.R. No. 129015 [2004]), it was held that: 1. The general rule is to the effect that a forged signature is “wholly inoperative,” and payment made “through. or under such signature” is ineffectual or does not dis- charge the instrument. : 2. If payment is made, the drawee cannot charge it to the drawer’s account, The traditional justification for the result is that the drawee is in a superior position to detect a forgery because he has the maker’s signature and is expected to know and compare it. The rule has a healthy cautionary effect on banks by encouraging care in the comparison of the signaturesChapter 2 3 NEGOTIABILITY against those on the signature cards they have on file. Moreover, the very opportunity of the drawee to insure and to distribute the cost among its customers who use checks makes the drawee an ideal party to spread the Tisk to insurance. Brady, in his treatise The Law of Forged and Altered Checks, elucidates: When a person deposits money in a general account in a bank, against which he has the privilege of drawing checks in the ordinary course of business, the telationship between the bank and the depositor is that of debtor and creditor. So far as the legal relationship between the two is concerned, the situation is_the same_as though the bank had borrowed money from the depositor, agreeing to repay it on demand, or had bought goods from the depositor, agreeing to pay for them on demand. The bank owes the depositor money in the same sense that any debtor owes money to his creditor. Added to this, in the case of bank and depositor, there is, of course, the bank’s obligation to pay checks drawn by the depositor in proper form and presented in due course. When the bank receives the deposit, it impliedly agrees to pay only upon the depositor’s order, When the bank pays a check, on which the depositor’s signature is a forgery, ithas failed to. comply with its contract in this respect, Therefore, the bank is held liable. The fact that the forgery is a clever one is immate- tial. The forged signature may so closely resemble the genuine as to defy detection by the depositor himself. And yet, if a bank pays the check, it is paying out its own money and not the depositor’s.. The forgery may be committed by a trusted employee or confidential agent. The_bank still must bear the loss, Even in a case where the forged check was drawn by the depositor’s partner, the loss was placed upon the bank. The case referred to is Robinson;GOTIAI IMPLIFIED LE INSTRUMENTS: LAW SI ws ACUIDE TO PASSING THE BAR) ity Bank, Ark, 216 S. W. Rep. 717. In this case, the plaintiff brought suit against the defendant bank for money which had been deposited to the plaintiff's credit and which the bank had paid out on checks bearing forgeries of the plaintiff's signature. XXX It was held that the bank was liable. It was further held that the fact that the plaintiff waited eight or nine months after discovering the forgery, before notifying the bank, did not, as_a_matter of _law, constitute a ratification of the payment, so as to preclude the plaintiff from holding the bank liable. xxx This rule of liability can be stated briefly in these ” The rule is variously expressed in the many decisions in which the question has been considered. But they all sum up to the proposition that a bank must know the signatures of those whose general deposits it carries. [Emphasis supplied] words: By no meansis the principle rendered obsolete with the advent of modern commercial transactions. Contem- porary texts still affirm this well-entrenched standard. Nickles, in his book Negotiable Instruments and Other Related Commercial Paper wrote, thus: The deposit contract between a payor bank and its customer determines who can draw against the customer’s account by specifying whose signature is necessary on checks that are chargeable against the customer’s account. Therefore, a check drawn against the account of an individual customer that is signed by someone other than the customer, and without author- ity from her, is not properly payable and is not charge- able to the customer’s account, inasmuch as any “un- authorized signature on an instrument is ineffective” as the signature of the person whose name is signed. Thus, the first matter of inquiry is into whether the ‘eck was indeed forged. A document formally pre-Chapter 2 35 NEGOTIABILITY sented is presumed to be genuine until it is proved to be fraudulent. Ina forgery trial, this presumption must be overcome but this can only be done by convincing testimony and effective illustrations. The bare fact that the forgery was committed by an em- ployee of the party whose signature was forged can- not necessarily imply that such party’s negligence was the cause for the forgery, Employers do not possess the preternatural gift of cognition as to the evil that may lurk within the hearts and minds of their employees. The Court’s pronouncement in PCI Bank v. Court of Ap- peals applies in this case, to wit: [T]he mere fact that the forgery was commit- ted by a drawer-payor’s confidential employee or agent, who by virtue of his position had unusual facilities for perpetrating the fraud and imposing the forged paper upon the bank, does not entitle the bank to shift the loss to the drawer-payor, in the absence of some circumstance raising estop- pel against the drawer. Quite" palpably, the general rule remains that the drawee who has paid upon the forged signature bears the loss. The exception to this rule arises only when negligence can_be traced_on the part of the drawer whose signature was forged, and the need arises to weigh the comparative negligence between the drawer and the drawee to determine who should bear the burden of loss. ‘ The justification for the distinction between forgery of the signature of the drawer. and forgery of an indorsement is that the drawee is ina position to verify the drawer’s signature by comparison with one in his hands, but has ordinarily no opportunity to verify an. indorsement, Thus, a drawee bank is generally liable to its depositor in paying a check which bears either a forgerySIMPLIFIED [EGOTIABLE INSTRUMENTS LAW * N (AGUIDE TO. PASSING THE BAR) of the drawer’s signature or_a forged indorsement. But the bank may, as a general rule, recover back the money which it has paid on a check bearing a forged indorsement, whereas it has not this right to the same extent with reference to a check bearing a forgery of the drawer’s signature. B. Forged signature of the drawer (With collecting bank) This contemplates a forgery of the signature of the drawer where the instrument was deposited or presented for payment in another bank called the collecting bank as distinguished from the drawee bank. Generally, the collecting banks were held to be negligent for failing to observe precautionary. measures to detect the forgery. In Traders Royal Bank v. Radio Philippines Network, Inc. (G.R. No. 138510 [2002]), it was settled that when a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature. Consequently, if a bank pays a forged check, it must be considered as paying out of its funds and cannot charge the amount so paid to the account of the depositor. A bank is engaged in a business impressed with public interest and it has the duty to protect its many clients and depo- sitors who transact business with it. It is under the obligation to treat the accounts of the depositors and clients with meticulous care, whether such accounts consist only of a few hundreds or millions of pesos, 4 ctin, ere a check is deposited and whi indorses the check upon presentment with the drawee bank, in . So even if the indorsement on the check 1 and cannot set w: ri ” [Emphasis deposited by the bank’s client is forged, the collecting bank is. supplied]‘Chapter 2 7 NEGOTIABILITY Xxx "SECTION 63, When person deemed indorser, — A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to be an indorser unless he clearly indicates by appropriate words his intention to be bound in some other capacity.” Upon the other hand, the Philippine Clearing House Corporation (PCHC) rules provide: “Sec. 17, BANK GUARANTEE, All checks cleared through the PCHC shall bear the guarantee affixed thereto by the Presenting Bank/Branch which shall read as follows: “Cleared thru the Philippine Clearing House Cor- poration. All prior endorsements and/or lack of en- dorsement guaranteed. NAME OF BANK/BRANCH BRSTN (Date of clearing).” xxx A collecting bank which indorses a check bearing a forged indorsement and presents it to the drawee bank guarantees all prior indorsements, including the forged indorsement itself, and ultimately should be held liable therefor. Acommercial bank cannot escape the liability of an endorser of a check and which may turn out to be a forged endorsement. Whenever any bank treats the signature at the back of the checks as endorsements and thus logically guarantees the same as such there can be no doubt said bank has considered the checks as negotiable. (Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corporation, G.R. No. 74917 [1988}). In this case of BDO, it was further held that: “4. When endorsement is forged, the collecting bank or last indorser generally suffers the loss, 2. Drawer owes no duty of diligence to the collecting bank, the law imposes a duty of diligence on the col- lecting bank to scrutinize checks deposited with it for the purpose of determining their genuineness and reg-enema IMENTS LAW. SIMPLIFIED E UI NEGOTIABLE INSTR SSING THE BAR) * (AGUIDE TO PA: primarily engaged in > ting bank being, he collecting, na the expert and olds itself out to the public ahigh standard. ularity. TI banking h the law holds it to ze fone the matter of forge! propos ry in endorsements, this Court hasized that i the collecting bank or last tly emy 0 a a enerally.suers the loss because it has the duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements. This is laid down in the case of PNB v. National City Bank (63 Phil. 711). As such, in another case, the Court held that if the drawee- bank discovers that the signature of the payee was forged after it has paid the amount of the check to the holder thereof, it can recover the amount paid from the collecting bank. (Supra) In the case of Bank of America, Nt & Sa v. Associated Citizens Bank (G.R. No. 141001 [2009]), the Supreme Court said that the bank on which a check is drawn, known as the drawee bank, is under strict liability, based on the contract between the bank and its customer (drawer), to pay the check only to the payee or the payee’s order. The drawer’s instructions are reflected on the face_and by the terms of the check, When the drawee bank pays a person other than the payee named on the check, it does not comply with the terms of the check and violates its duty to charge the drawer’s account only for properly payable items. Thus, it was ruled in Philippine National Bank v. Rodriguez (G.R. No. 170325 [2008]) that a drawee should charge to the drawer’s accounts only the payables authorized by the latter; otherwise, the drawee will be violating the instructions of the drawer and shall be liable for the amount charged to the drawer'’s account. A collecting bank where a check is deposited, and which endorses the check upon presentment with the rie bale is an endorser. Under Sec. 66 of the Negotiable Instruments Law, an seni warrants “that the instrument is genuine and in all respects what it purports to be; that he has good title to it; that all Prior parties had capacity to contract; and that the instrument isatChapter 2 39 NEGOTIABILITY the time of his endorsement valid and subsisting.” This Court has repeatedly held that in check transactions, the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all Prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements. In this case, when Associated Bank stamped the back of the four checks with the phrase “all prior endorsements and /or lack of endorsement guaranteed,” that bank had for all intents and purposes treated the checks as negotiable instruments and, accordingly, assumed _the warranty of an endorser, Being so, Associated Bank cannot deny liability on the checks. In Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corporation, it was held that: x x x the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it for the purpose of determining their genuineness and regularity. The collecting bank being primarily engaged in banking holds itself out to the publicas the expertand the law holds it to a high standard of conduct. x x x In presenting the checks for clearing and for payment, the defendant [collecting bank] made an express guarantee on the validity of “all prior endorsements.” Thus, stamped at the back of the checks are the defendant's clear warranty: ALL PRIOR ENDORSEMENTS AND/ OR LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff [drawee] would not have paid on the checks. No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty has proven to be false and inaccurate, the defendant is liable for any damage arising out of the falsity of its representation. Associated Bank was also clearly negligent in disregarding established banking rules and regulations by allowing the four checks to be presented by, and deposited in the personal bank account of, a person who was not the payee named in the checks. The checks were issued to the “Order of Miller Offset Press, Inc.,”NEGOTIABLE INSTRUMENTS LAW SIMPLIFIED (AGUIDE TO PASSING THE BAR) 40 but were deposited, and paid by Associated Bank, to the personal joint acount of Ching by Seng (a.k.a. Robert Ching) and Uy Chung Guan Seng. It could not have escaped Associated Bank’s attention that the payee of the checks is a corporation while the person who deposited the checks in his own account is an individual. Verily, when the bank allowed its client to collect on crossed checks issued in the name of another, the bank is guilty of negligence. As ruled by the Court in Jai-Alai Corporation of the Philippines v. Bank of the Philippine Islands, one who accepts and encashes a check from an individual knowing that the payee is a corporation does so at his peril. Accordingly, it holds that Associated Bank is liable for the amount of the four checks and should reimburse the amount of the checks to Bank of America. In another case, Metropolitan Bank and Trust Company (formerly Asianbank Corporation) v. BA Finance Corporation (G.R. No. 179952 [2009}), it was opined that a collecting bank, Asianbank in this case, where a check is deposited and which indorses the check upon presentment with the drawee bank, is an indorser. This is because in indorsing a check to the drawee bank, a collecting bank stamps the back of the check with the phrase “all prior endorsements and/or lack of endorsement guaranteed” and, for all intents and purposes, treats the check as a negotiable instrument, hence, assumes the warranty of an indorser. Without Asianbank’s warranty, the drawee bank (China Bank in this case) would not have paid the value of the subject check. Petitioner, as the collecting bank or last indorser, generally suffers the loss because ithas the duty to ascertain the genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of prior indorsements. Exception to the Liability of the Collecting Bank or the “60% - 40%” or “50% - 50%” Liability rule In Allied Banking Corporation v. Lim Sio Wan, Metropoli- tan Bank and Trust Co., and Producers Bank (G.R. No. 133179Chapter 2 41 NEGOTIABILITY {2008)), Allied avers that even if it had not issued the check pay- ment, the money represented by the check would still be lost be- cause of Metrobank’s negligence in indorsing the check without verifying the genuineness of the indorsement thereon. Section 66 in relation to Sec. 65 of the Negotiable Instruments Law provides: Section 66. Liability of general indorser, — Every indorser who indorses without qualification, warrants to all subsequent holders in due course; a) The matters and things mentioned in subdivisions (a), (b) and (c) of the next Preceding section; and b) That the instrument is at the time of his indorsement valid and subsisting; And in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the case may be according to its tenor, and that if it be dishonored, and 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. Section 65. Warranty where negotiation by delivery, 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 of it; c) Thatall prior parties had capacity to contract; d) Thathe has no knowledge of any fact which would im- pair the validity of the instrument or render it value- less. 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 ap- ply to persons negotiating public or corporation securities, other than bills and notes.EI PLIFIED NEGOTIABLE INSTRUMENTS LAW SIMI * (A GUIDE TO PASSING THE BAR) The warranty “# instrument i i i i respects what i to be” IL th def cts i i nt affecting lidity thereof, i ng a fe indorsement. Thus, the last indorser will be liable for the amount indicated in the negotiable instrument even if a previous indorsement was forged. The Supreme Court heldin 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 indorsements, including the forged indorsement itself, and ultimately should be held liable therefor.” [Emphasis supplied] However, this general rule is subject to_exceptions. One such exception is when the issuance of the check itself was ded wii igence. Thus, in the cases cited above where the collecting bank is generally held liable, in two of the cases where the checks were negligently issued, the Court held the institution issuing the check just as liable as or more liable than the collecting bank. [Emphasis supplied] In isolated cases where the checks were deposited in an account other than that of the payees on the strength of forged indorsements, it was held that the collecting bank solely liable for the whole amount of the checks involved for having indorsed the same. In Republic Bank v. Ebrada, the check was properly issued by the Bureau of Treasury. While in Banco de Oro Savings and Mortgage Bank (Banco de Oro) v. Equitable Banking Corporation, Banco de Oro admittedly issued the checks in the name of the correct payees. And in Traders Royal Bank v, Radio Philippines Network, Inc., the checks were issued at the Tequest of Radio Philippines Network, Inc. from Traders Royal Bank. A. 60% _- 40% liability rule [60% drawee bank & 40% collecting bank] However, in Bank of the Philippine Islands y. Court of Appeals, the Court said that the drawee bank is liable for 60% of the amount on the face of the negotiable instrument and the collecting bank is liable for 40%. The court also noted the relative negligence exhibited by two banks, to wit: Both banks were negligent in the selection and supervision of their employees resulting in the en-Chapter 2 a NEGOTIABILITY cashment of the forged checks by an impostor. Both banks were not able to overcome the presumption of negligence in the selection and supervision of their employees, It was the gross negligence of the employ- ees of both banks which resulted in the fraud and the subsequent loss. While it is true that petitioner BPI’s negligence may have been the proximate cause of the loss, respondent CBC’s negligence contributed equally to the success of the impostor in encashing the pro- ceeds of the forged checks. Under these circumstances, we apply Article 2179 of the Civil Code to the effect that while respondent CBC may recover its losses, such losses are subject to mitigation by the courts. (See Phoenix Construction, Inc. v. Intermediate Appellate Courts, 148 SCRA 353 [1987]). Considering the comparative negligence of the two (2) banks, the Court ruled that the demands of substantial justice are satisfied by allocating the loss of Php2,413,215.16 and the costs of the arbitration proceeding in the amount of Php7,250.00 and the cost of litigation on a 60-40 ratio. B. 50% - 50% Liability rule (Drawer and collecting bank) Similarly, the Court ruled in Associated Bank v. Court of Appeals that the issuing institution and the collecting bankshould equally share the liability for the loss of amount represented by the checks concerned due to the negligence of both parties, The Court finds as reasonable, the proportionate sharing of fifty percent-fifty percent (50%-50%). Due to the negligence of the Province of Tarlac in releasing the checks to an unauthorized person (Fausto Pangilinan), in allowing the retired hospital cashier to receive the checks for the payee hospital for a period close to three years and in not properly ascertaining why the retired hospital cashier was collecting checks for the payee hospital in addition to the hospital's real cashier, respondent Province contributed to the loss amounting to P203,300.00 and shall be liable to the PNB for fifty (50%) percent thereof. In effect,“4 NEGOTIABLE INSTRUMENTS LAW SIMPLIFIED (A GUIDE TO PASSING THE BAR) the Province of Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB. The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It is liable on its warranties as indorser of the checks which were deposited by Fausto Pangilinan, having guaranteed the genuineness of all prior indorsements, including that of the chief of the payee hospital, Dr. Adena Canlas. Associated Bank was also remiss in its duty to ascertain the genuineness of the payee’s indorsement. A reading of the facts of the two immediately preceding cases would reveal that the reason why the bank or institution which issued the check was held partially liable for the amount of the check was because of the negligence of these parties which resulted in the issuance of the checks. In this instant case of Allied Bank, the trial court correctly found Allied negligent in issuing the manager’s check and in transmitting it to Santos without even a written authorization. In fact, Allied did not even ask for the certificate evidencing the money market placement or call up Lim Sio Wan at her residence or office to confirm her instructions. Both actions could have prevented the whole fraudulent transaction from unfolding. Allied’s negligence must be considered as the proximate cause of the resulting loss. To reiterate, had Allied exercised the diligence due froma financial institution, the check would not have been issued and no loss of funds would have resulted. In fact, there would have been no issuance of indorsement had there been no check in the first place. The liability of Allied, however, is concurrent with that of Metrobank as the last indorser of the check. When Metrobank indorsed the check in compliance with the PCHC Rules and Regulations without verifying the authenticity of Lim Sio Wan’s indorsement and when it accepted the check despite the fact that it was cross-checked payable to Ppayee’s account only, its negligence and cavalier indorsement contributed to the easier release of Lim Sio Wan’s money and perpetuation of the fraud.Chapter 2 45 NEGOTIABILITY Given the relative participation of Allied and Metrobank to the instant case, both banks cannot be adjudged as equally liable. Hence, the 60:40 ratio of the liabilities of Allied and Metrobank, as ruled by the CA, must be upheld. FCC, having no participation in the negotiation of the check and in the forgery of Lim Sio Wan's indorsement, can raise the real defense of forgery as against both banks, As to Producers Bank, Allied Bank’s argument that Pro- ducers Bank must be held liable as employer of Santos under Art. 2180 of the Civil Code is erroneous. Article 2180 pertains to the vicarious liability of an employer for quasi-delicts that an employee has committed. Such Provision of law does not apply to civil liability arising from delict. One also cannot apply the principle of subsidiary liability in Art. 103 of the Revised Penal Code in the instant case. Such liability on the part of the employer for the civil aspect of the criminal act of the employee is based on the conviction of the employee for a crime. Here, there has been no conviction for any crime. As to the claim that there was unjust enrichment on the part of Producers Bank, the same is correct. Allied correctly claims in its petition that Producers Bank should reimburse Allied for whatever judgment that may be rendered against it pursuant to Art, 22 of the Civil Code, which provides: “Every person who through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just cause or legal ground, shall return the same to him.” Xxx In the instant case, Lim Sio Wan’s money market placement in Allied Bank was pre-terminated and withdrawn without her consent. Moreover, the proceeds of the placement were deposited in Producers Bank’s account in Metrobank without any justification. In other words, there is no reason that the proceeds of Lim Sio Wans’ placement should be deposited in FCC's account purportedly as payment for FCC’s money marketE INSTRUMENTS | AW SIMPLIFIED 46 NEGOTIABLI THE BAR) (A GUIDE TO PASSING erest in Producers Bank. With such Payment, Producers Bank's indebtedness to FCC was extinguished, thereby benefiting the former. Clearly, Producers Bank was Amjustly enriched at the expense of Lim Sio Wan. Based on the facts and circumstances of the case, Producers Bank should reimburse Allied and Metrobank for the amounts the two latter banks are ordered to pay Lim Sio Wan. It cannot be validly claimed that FCC, and not Producers Bank, should be considered as having been unjustly enriched. It must be remembered that FCC’s money market placement with Producers Bank was already due and demandable; thus, Producers Bank’s payment thereof was justified. FCC was entitled to such payment. As earlier stated, the fact that the indorsement on the check was forged cannot be raised against FCC which was not a part in any stage of the negotiation of the check. FCC was not unjustly enriched. placement and int Forged signature of the indorser A. Forged signature of the Indorser in an order instrument Example: Mirka makes a promissory note payable to Federer or order Php100,000. Suppose while Agassi holds the instrument, Bjorn took it unlawfully and forged the signature of Agassi, then indorsed it to Bjorn, Bjorn to Cilic then Cilic to Djokovic. In this case, Djokovic can proceed against Bjorn, the forger of the signature of Agassi. Djokovic cannot collect from Mirka, Federer and Agassi, because as to them the instrument is wholly inoperative. They are the parties prior to the forgery and hence not liable. Instead, Djokovic can collect from Bjorn and Cilic being the subsequent parties, because they warrant the instrument under Section 66. The parties prior to the forgery are not liable simply because the instrument cannot be negotiated to Cilic and Djokovic had Bjorn did not forge the signature of Agassi. The instrument will not be in possession of Djokovic were if not for the forgery ofChapter 2 47 NEGOTIABILITY Bjorn. Simply put, in_an_order instrument and the signature of the indorser is forged, only the forger and the subsequent parties are liable, In Natividad Gempesaw v. CA (GR No. 92244 [1993}), in this case the petitioner draws checks against her checking account with the respondent bank as drawee. Her customary practice of issuing checks in payment of her suppliers was as follows: the checks were prepared and filled up as to all material particulars by her trusted bookkeeper, Alicia Galang, an employee for more than eight (8) years. x x x It is the drawer, whose signature is genuine, who instituted this action to recover from the drawee bank the money value of eighty-two (82) checks paid out by the drawee bank to holders of those checks where the indorsements of the payees were forged. As held by the Supreme Court, to wit: 1.__ Forgery ya. Forgery is areal or absolute defense by the party'whose signature is forged. b. A party whose signature to an instrument was forged was never a party and never gave his consent to the contract which gave rise to the instrument. Since his signature does not appear in the instrument, he cannot be held liable thereon by anyone, not even by a holder in due course. Thus, if a person’s signature is forged as a maker of a promissory note, he cannot be made to pay because he never made the promise to pay. Or where a person’s signature as a drawer of a check is forged, the drawee bank cannot charge the amount thereof against the drawer’s account because he never gave the bank the order to pay. c. Section 23 does not refer only to the forged signature of the maker of a promissory note and of the drawer ofa check. It covers also a forged indorsement, i.e., the forged signature of the payee or indorsee of a note or check.FIED NEGOTIABLE INSTRUMENTS LAW SIMPLII (A GUIDE TO PASSING THE BAR) Under the said provision a forged signature is “wholly inoperative,” no_one can gain title to. the instrument through such forged indorsement. Suchan indorsement prevents any subsequent party from acquiring any right as against any party whose name appears prior to the forgery. Although rights may exist between and among parties subsequent to the forged indorsement, not one of them can acquire rights against parties prior to the forgery. i prior to the forgery. The law makes an exception. to these rules where a party is precluded from setting up forgery as a defense. 2. __ Forged indorsements As a matter of practical significance, problems arising from forged indorsements of checks may generally be broken into two types of cases: 1. Where forgery was accomplished by a person not associated with the drawer.— for example a mail robbery; and Where the indorsement was forged by an agent of the drawer. This difference in situations would determine the effect of the drawer’s negligence with respect to forged indorsements. While there is no duty resting on the depositor to look for forged indorsements on his cancelled checks in contrast to a duty imposed upon him to look for forgeries of his own name, a depositor is under _a duty to set up an accounting system and a business procedure as are reasonably calculated to prevent or render difficult the forgery of indorsements, particularly by the depositor’s own employees. And if the drawer (depositor) learns that a check drawn by him has been paid under a forged indorsement, the drawer is under pty Promptly to report such fact to the drawee bank:For his negligence or failure either to