Promissory Note

 Definition: an unconditional promise in writing made by one person to

another, signed by the maker, engaging to pay on demand, or at a fixed
determinable future time, a sum certain in money to order or to bearer. (Sec
184)
 Parties:
 Maker: person who executes the written promise to pay
 Payee: person in whose favor the PN is made payable (if payable
to bearer, no payee is designated and it is payable to the person in
possession thereof)
 Is maker liable as indorser: NO. The maker of a note payable to himself
who indorses it is NOT liable as indorser but only as maker
 Since the indorsement by the maker-payee isn’t part of a sale of the
note, it should not give rise to any warranty.
 In the absence of such warranties, it is immaterial whether the
defendant is sued as an indorser or as maker since, in either event,
he may set up the defense of fraud against the plaintiff unless the
plaintiff is a holder in due course.
 Special types of Promissory notes Cod-B-Bn-Db
 Certificate of Deposit: Written acknowledgement by a bank of the
receipt of money on deposit which the bank promises to pay to the
depositor, bearer, or to some other person or order
 Bonds: A promise, under seal to pay money; usually sold to raise
capital
(1) More formal in character
(2) Runs for a longer period of time
(3) Issued under different legal circumstances
 Classes of bonds
1. Mortgage bonds: conveyed to a trustee for the benefit of
the bondholders in case of default
a. Chattel Mortgage note: secured by personal
property
b. Real Estate Mortgage: by real property
2. Equipment bonds: secured by mortgage or pledge of
corporate movable equipment (ex. Rolling stock for railroads)
3. Collateral trust bonds: secured by lien on securities
deposited with a trustee as collateral
4. Guaranteed bonds: secured by guaranty; implies double
obligation of the issuing and the guaranteeing
 5. Debentures: secured by the general credit of the
corporation and restrictive agreements (shorter term than
mortgage bonds) protected by negative pledge clauses
6. Income bonds: interest is payable only out of net profit
7. Convertible bonds: confers on the holder the option of
exchanging it for a more speculative class of security, such
as, for preferred shares or common shares
8. Redeemable bonds: give privilege to the issuing
corporation to pay off the bonds even before the date of
maturity
9. Registered Bonds: issued to specified person named and
the fact of issuance to him is registered in the books of the
issuing corporation
10. Coupon bonds: Those to which are attached a sheetof
dated, numbered and similarly printed coupons which
thebondholder may cut off when due or thereafter. Such
couponsmay be served and deposited in a bank, negotiated
before thematurity of the interest they represent, and
transferred justlike any commercial paper (NEGOTIABLE
PN UNDER NIL)

 Bank Notes: instrument issued by a bank for circulation as money

payable to bearer on demand
- Regarded as cash and pass from hand to hand without any
evidence of title in the holder than that which arises from
possession; but not legal tender
 Due bills: shows on its face an acknowledgement by a person of
his indebtedness to another
Due to B 10K payable to his order
Sgd A

 Clearing House Due Bill: Device of clearing house associations to save

inconvenience and labor incident to the settling of balances between the
members of the association
 The certificates or due bills are issued, instead of actual payment of money,
by one member of the association to another
 They are not merely certificates of deposit creating a contract of bailment
but are negotiable as checks payable to bearer, or as promissory notes
payable to order or bearer
CHECKS

Sec 185 Check = a bill of exchange drawn on a bank payable on demand

- INCOMPLETE

CROSSED CHECKS
= checks which are drawn 2 parallel lines transversally on its face

- Kinds of crossed checks:

o Check crossed specially
 when the name of a particular banker or a company is written
between parallel lines drawn transversally on the face of the check

Y Bank
Pay to B or order 100K only
Sgd A
To: X Bank
 Drawee X Bank MUST pay the check ONLY upon presentment by
Y bank

o Check crossed generally

 when only the words “And company” are written between the
parallel lines, or when nothing is written at all between the parallel
lines
 In this case, payment must be made through the intervention of any
company which is duly authorized.
 Otherwise, the payment will be not valid.
 In actual practice, the holder of a crossed check merely deposits it
for collection with the bank indicated between the parallel lines or
with any bank where he keeps an account in the case of a check
crossed generally
Pay to B or order 100K only
Sgd A
To: X Bank
 Drawee X Bank MUST pay the check through the intervention of
some bank or banker

- Purpose: insure payment to the payee particularly when it is forwarded by mail or

when it is entrusted to an agent
- Effects of crossing a check:
o Does NOT destroy its negotiability
o Such check can ONLY be DEPOSITED; NOT be converted in cash
o PAYEE has the duty to ASCERTAIN HOLDER’S TITLE to the check or
the nature of possession, otherwise guilty of gross negligence amounting to
legal absence of good faith and as such non HDC
- Where other than payee of crossed check presented it for payment, there is NO
proper presentment and DRAWER is NOT LIABLE thereon
- Are holders of crossed checks HDC? IF sec 52
- NIL does not provide that non HDC may not in any case recover on the instrument
is the drawer has no valid excuse for refusing payment(?)

Bataan Cigar and Cigarette Factory Inc. vs. CA (GR No. 93048, March 3, 1994) 230
SCRA 643
3 postdated crossed checks
drawer: Bataan Cigar & Cigarette Factory, Inc.
payee/1st indorser: King Tim Pua George (supplier)
2nd indorser: SIHI

- Bataan Cigar has engaged one of its suppliers, King Tim Pua George (aka George
King), to deliver 2K bales(large bundle; closely pressed package) of tobacco
leaves. In consideration of such, Petitioner BCCFI on July 13, 1978 issued crossed
checks post dated sometime in March 1979 in the total amount of P820,000.00.
- Petitioner BCCFI relying on the supplier King George’s representation that he
would complete delivery within three months from December 5, 1978, petitioner
agreed to purchase additional 2,500 bales of tobacco leaves, despite the supplier's
failure to deliver in accordance with their earlier agreement. Again petitioner
issued post dated crossed checks in the total amount of P1,100,000.00, payable
sometime in September 1979.
- Simultaneous to these transactions was the discounting of King of the checks to
State Investment House.
 - Bataan then issued a stop payment order due to George King;s failure to deliver
the tobacco leaves.
- SIHI tried to collect from BCCFI but failed. SIHI instituted a case for collection of
sum of money

W SIHI a 2nd indorser, a holder of crossed, a HDC and thus can collect from drawer
BCCFI. NO, not HDC due to absence of good faith for not ascertaining George King’s
title to the check or the nature of possession. SIHI is guilty of gross negligence and is not
a bona fide holder.
Drawer BCCFI has personal defense of failure of consideration. SIHI however can
collect from its immediate indorser, George King

- WHAT are crossed checks: Crossed check is one where two parallel lines are
drawn across its face or across a corner thereof. It may be crossed generally or
specially.

- KINDS of crossed checks: A check is crossed specially when the name of a

particular banker or a company is written between the parallel lines drawn. It is
crossed generally when only the words "and company" are written or nothing is
written at all between the parallel lines. It may be issued so that the presentment
can be made only by a bank. Veritably the Negotiable Instruments Law (NIL) does
not mention "crossed checks," although Article 541 9 of the Code of Commerce
refers to such instruments.

- The negotiability of the check isn’t affected by it being crossed, whether specially
or generally. It may be legally negotiated from one person to another as long as the
one who encashes the check with the drawee bank or if its specially crossed, by
the bank mentioned between the parallel lines.
-

- Jurisprudence provides the following EFFECTS OF CROSSING A CHECK:

1. The check may not be encashed but only deposited in the bank
2. The check may be negotiated only once—to one who has an account with a
bank
3. The act of crossing the check serves the 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, he is not a holder in due course.
 - The check should have placed the holder in inquiry and upon him devolves the
duty to ascertain the indorser’s title to the check or the nature of his possession.
Failing in this respect, the holder is declared guilty of gross negligence amount to
legal absence of good faith.

- In the present case, petitioner’s defense in stopping payment is as good to SIHI as

it is to King because really the consideration for the checks were the delivery of
the bales of tobacco leaves which King failed to do. There being failure of
consideration, SIHI is not a holder in due course.

- Petition granted; RTC’s decision (was affirmed by CA) reversed

Myron C. Papa vs. AU Valencia, et al. (248 SCRA 643, 1998)

Check 40K
Drawer: AU Valencia and Penarroyo
Payee: Myron C Papa
Mortgagee bank: Associated Citizens bank
- Myron C. Papa, acting as attorney-in-fact of Angela M. Butte, sold, a parcel of
land, consisting of 286.60 square meters, located at corner Retiro and Cadiz
Streets, La Loma, Quezon City, and covered by Transfer Certificate of Title to
respondent Peñarroyo, through respondent Valencia
- prior to the alleged sale, the said property, together with several other parcels of
land likewise owned by Angela M. Butte, had been mortgaged by her to the
Associated Banking Corporation (now Associated Citizens Bank)
- after the alleged sale, but before the title to the subject property had been released,
Angela M. Butte passed away;
- and despite representations made by herein respondents to the bank to release the
title to the property sold to respondent Peñarroyo, the Associted Citizens bank
refused to release it unless and until all the mortgaged properties of the late Angela
M. Butte were also redeemed;
- that in order to protect his rights and interests over the property, respondent
Peñarroyo caused the annotation on the title of an adverse claim as evidenced by
Entry No. P.E.-6118/T-28993, inscribed on 18 January 1997.
- The respondents AU Valencia and Penarroyo filed with the RTC Pasig a
complaint for specific performance against petitioner
to deliver the title and turn over the accrued rentals.
- RTC Pasig: ruled in favor of private respondents and ordered Papa the conveyance
of the property or if not, its payment
 - On appeal, the petitioner papa argued that alleged sale of the subject property had
not been consummated because he did not encash the check amounting to
P40,000.00, and as such did not also produce the effect of payment as provided
under Art.1249 of the Civil Code
- CA affirmed with modifications the lower court’s decision It held that there was a
consummated sale of the subject property despite such

W the check is a valid tender of payment/Whether or not there was a valid sale of
the subject property. YES While it is true that the delivery of a check produces the
effect of payment only when it is cashed, pursuant to Art. 1249 of the Civil Code, the rule
is otherwise if the debtor is prejudiced by the creditor's unreasonable delay in
presentment. (more than 10 yrs delay)

- Petitioner's assertion that he never encashed the aforesaid check is not

substantiated and is at odds with his statement in his answer that "he can no longer
recall the transaction which is supposed to have happened 10 years ago." After
more than ten (10) years from the payment in party by cash and in part by check,
the presumption is that the check had been encashed. As already stated, he even
waived the presentation of oral evidence
- EFFECT : The acceptance of a check implies an undertaking of due diligence in
presenting it for payment, and if he from whom it is received sustains loss by want
of such diligence, it will be held to operate as actual payment of the debt or
obligation for which it was given. It has, likewise, been held that if no
presentment is made at all, the drawer cannot be held liable irrespective of loss or
injury12 unless presentment is otherwise excused.
- This is in harmony with Article 1249 of the Civil Code under which payment by
way of check or other negotiable instrument is conditioned on its being cashed,
except when through the fault of the creditor, the instrument is impaired. The
payee of a check would be a creditor under this provision and if its no-payment is
caused by his negligence, payment will be deemed effected and the obligation for
which the check was given as conditional payment will be discharged.

- Considering that respondents Valencia and Peñarroyo had fulfilled their part of the
contract of sale by delivering the payment of the purchase price, said respondents,
therefore, had the right to compel petitioner to deliver to them the owner's
duplicate of TCT No. 28993 of Angela M. Butte and the peaceful possession and
enjoyment of the lot in question.

- What is certain is that despite the said assignment of mortgage rights, the title to
the subject property has remained in the name of the late Angela M. Butte. The
 cause of action for specific performance which respondents Valencia and
Peñarroyo have against petitioner is different from the cause of action which the
estate of Ramon Papa, Jr. may have to enforce whatever rights or liens it has on
the property by reason of its being an alleged assignee of the bank's rights of
mortgage.

- Finally, the estate of Angela M. Butte is not an indispensable party. Under Section
3 of Rule 3 of the Rules of Court, an executor or administrator may sue or be sued
without joining the party for whose benefit the action is presented or defended.
Neither is the estate of Ramon Papa, Jr. an indispensable party without whom, no
final determination of the action can be had. Whatever prior and subsisting
mortgage rights the estate of Ramon Papa, Jr. has over the property may still be
enforced regardless of the change in ownership thereof.

- Petition denied and CA’s decision affirmed

Phil. Commercial Int’l Bank vs. CA (drawer Ford & drawee citibank) (350 SCRA
446, 2001)
Crossed check (AISH andaming ekek)
Drawer: Ford Philippines
Drawee: Citibank
Payee: Commissioner of Internal Revenue (payment of percentage or manufacturer’s
sales tax)
Collecting Bank: Phil. Commercial Intl Bank (used to be Insular Bank of Asia and
America)

- Ford Philippines drew a check with Citibank in the amount of P4,746,114.41, in

favor of the Commissioner of Internal Revenue as payment of plaintiff;s
percentage or manufacturer's sales taxes for the third quarter of 1977.
- It was deposited with the degendant IBAA (now PCIBank) and was subsequently
cleared at the Central Bank. Upon presentment with the defendant Citibank, the
proceeds of the check was paid to IBAA as collecting or depository bank.
- The proceeds of the same Citibank check of the plaintiff was never paid to or
received by the payee thereof, the Commissioner of Internal Revenue. Thus
plaintiff was compelled to make a second payment to the Bureau of Internal
Revenue
- It is further admitted by defendant Citibank that during the time of the transactions
in question, plaintiff had been maintaining a checking account with defendant
Citibank; that Citibank Check No. SN-04867 which was drawn and issued by the
plaintiff in favor of the Commissioner of Internal Revenue was a crossed check in
 that, on its face were two parallel lines and written in between said lines was the
phrase "Payee's Account Only"; and that defendant Citibank paid the full face
value of the check in the amount of P4,746,114.41 to the defendant IBAA.
- It has been duly established that for the payment of plaintiff's percentage tax for
the last quarter of 1977, the Bureau of Internal Revenue issued Revenue Tax
Receipt No. 18747002, dated October 20, 1977, designating therein in
Muntinlupa, Metro Manila, as the authorized agent bank of Metrobanl, Alabang
branch to receive the tax payment of the plaintiff.
- Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in
the amount of P4,746,114.41 was not paid to the Commissioner of Internal
Revenue.
- defendant IBAA was merged with the Philippine Commercial International Bank
(PCI Bank) with the latter as the surviving entity.
- an investigation by the National Bureau of Investigation (NBI) revealed that
Citibank Check No. SN-04867 was recalled by Godofredo Rivera, the General
Ledger Accountant of Ford. He purportedly needed to hold back the check because
there was an error in the computation of the tax due to the Bureau of Internal
Revenue (BIR). With Rivera's instruction, PCIBank replaced the check with two
of its own Manager's Checks (MCs). Alleged members of a syndicate later
deposited the two MCs with the Pacific Banking Corporation.
- Ford, with leave of court, filed a third-party complaint before the trial court
impleading Pacific Banking Corporation (PBC) and Godofredo Rivera, as third
party defendants. But the court dismissed the complaint against PBC for lack of
cause of action. The course likewise dismissed the third-party complaint against
Godofredo Rivera because he could not be served with summons as the NBI
declared him as a "fugitive from justice" (charged in court who remain at large)
- The trial court decided in favor of Ford ordering drawee Citibank and collecting
bank PCIB to pay drawer Ford; on citibank’s cross claim ordering PCIB to
reimburse drawee Citibank for whatever it has paid; for counterclaims , dismissed
- Citibank and PCIBank, elevated their respective petitions for review on certiorari
to the Courts of Appeals: ordering collecting bank PCIB to pay
- PCIB moved to reconsider while Ford filed motion for partial reconsideration;
denied
- PCIB seeks reversal contending that it merely acted on the instruction of Ford and
such casue of action had already prescribed.
- Ford praying for reinstated of lc’s decision which found both PCIB and citibank
liable
-
Whether Ford the right to recover the value of the checks intended as payment to
CIR? YES
PCIBank AND Citibank are liable (50:50) to Ford with interest

HELD:
- The checks were drawn against the drawee bank but the title of the person
negotiating the same was allegedly defective because the instrument was obtained
by fraud and unlawful means, and the proceeds of the checks were not remitted to
the payee. It was established that instead paying the Commissioner, the checks
were diverted and encashed for the envetual distribution among members of the
syndicate.
- Pursuant to this, it is vital to show that the negotiation is made by the perpetrator
in breach of faith amounting to fraud. The person negotiating the checks must
have gone beyond the authority given by his principal. If the principal could prove
that there was no negligence in the performance of his duties, he may set up the
personal defense to escape liability and recover from other parties who, through
their own negligence, allowed the commission of the crime.
- It should be resolved if Ford is guilty of the imputed contributory negligence that
would defeat its claim for reimbursement, bearing in mind that its employees were
among the members of the syndicate. It appears although the employees of Ford
initiated the transactions attributable to the organized syndicate, their actions were
not the proximate cause of encashing the checks payable to CIR. The degree of
Ford’s negligence couldn’t be characterized as the proximate cause of the injury to
parties.( proximate cause is that which, in the natural and continuous sequence,
unbroken by any efficient, intervening cause produces the injury and without the
result would not have occurred).
- The mere fact that the forgery was committed 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, doesn’t entitle
the bank to shift the loss to the drawer-payor, in the absence of some circumstance
raising estoppel against the drawer.

- Note: not only PCIB but also Citibank is responsible for negligence. Citibank was
negligent in the performance of its duties as a drawee bank. It failed to establish its
payments of Ford’s checks were made in due course and legally in order.

The Intl Corp. Bank vs. Spouses Gueco (351 SCRA 516)
Manager’s check
Drawer:
FACTS:
- Gueco spouses obtained a loan from ICB (now Union Bank) to purchase a car- a
Nissan Sentra 1600 4DR, 1989 Model. In consideration thereof, the Spouses
executed promissory notes which were payable in monthly installments and chattel
mortgage over the car to serve as security for the notes.
- The Spouses defaulted in payment of installments. Consequently, the Bank filed
civil actionor "Sum of Money with Prayer for a Writ of Replevin" On August 25,
1995, Dr. Francis Gueco was served summons and was fetched by the sheriff and
representative of the bank for a meeting in the bank premises. Desi Tomas, the
Bank's Assistant Vice President demanded payment of the amount of P184,000.00
which represents the unpaid balance for the car loan. After some negotiations and
computation, the amount was lowered to P154,000.00, However, as a result of the
non-payment of the reduced amount on that date, the car was detained inside the
bank's compound.
- Dr. Gueco went to the bank and talked with its Administrative Support, Auto
Loans/Credit Card Collection Head, Jefferson Rivera. The negotiations resulted in
the further reduction of the outstanding loan to P150,000.00.
-
- On August 29, 1995, Dr. Gueco delivered a manager's check in amount of
P150,000.00 but the car was not released because of his refusal to sign the Joint
Motion to Dismiss. It is the contention of the Gueco spouses and their counsel that
Dr. Gueco need not sign the motion for joint dismissal considering that they had
not yet filed their Answer. Petitioner, however, insisted that the joint motion to
dismiss is standard operating procedure in their bank to effect a compromise and
to preclude future filing of claims, counterclaims or suits for damages.
- After several demand letters and meetings with bank representatives, the
respondents Gueco spouses initiated a civil action for damages before the
Metropolitan Trial Court of Quezon City, Branch 33. The Metropolitan Trial
Court dismissed the complaint for lack of merit.
- On appeal, Metropolitan TC’s decision was reversed In its decision, the RTC held
that there was a meeting of the minds between the parties as to the reduction of the
amount of indebtedness and the release of the car but said agreement did not
include the signing of the joint motion to dismiss as a condition sine qua non for
the effectivity of the compromise.ordering the bank to to return immediately the
subject car to the appellants in good working condition; Appellee may deposit the
Manager's check - the proceeds of which have long been under the control of the
issuing bank in favor of the appellee since its issuance, whereas the funds have
long been paid by appellants to .secure said Manager's Check, over which
appellants have no control;
- Elevated to CA who affirmed rtc’s decision
Whether or not the spouses should replace the check they paid to the bank after it
became stale. YES It appeared that the check has not been encashed. The delivery of the
manager’s check did not constitute payment. The original obligation to pay still exists.
Indeed, the circumstances that caused the non-presentment of the check should be
considered to determine who should bear the loss. In this case, ICB held on the check and
refused to encash the same because of the controversy surrounding the signing of the
joint motion to dismiss. There is no bad faith or negligence on the part of ICB.

.
- In the meeting of August 29, 1995, respondent Dr. Gueco delivered a manager's
check representing the reduced amount of P150,000.00. Said check was given to
Mr. Rivera, a representative of respondent bank. However, since Dr. Gueco
refused to sign the joint motion to dismiss, he was made to execute a statement to
the effect that he was withholding the payment of the check.14 Subsequently, in a
letter addressed to Ms. Desi Tomas, vice president of the bank, dated September 4,
1995, Dr. Gueco instructed the bank to disregard the 'hold order" letter and
demanded the immediate release of his car,15 to which the former replied that the
condition of signing the joint motion to dismiss must be satisfied and that they had
kept the check which could be claimed by Dr. Gueco anytime.16 While there is
controversy as to whether the document evidencing the order to hold payment of
the check was formally offered as evidence by petitioners,17 it appears from the
pleadings that said check has not been encashed.
- STALE CHECK s one which has not been presented for payment within a
reasonable time after its issue. It is valueless and, therefore, should not be paid.
Under the negotiable instruments law, an instrument not payable on demand must
be presented for payment on the day it falls due. When the instrument is payable
on demand, presentment must be made within a reasonable time after its issue. In
the case of a bill of exchange, presentment is sufficient if made within a
reasonable time after the last negotiation thereof.
- A check must be presented for payment within a reasonable time after its
issue,22 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.23 The test is whether the payee
employed such diligence as a prudent man exercises in his own affairs.24 This is
because the nature and theory behind the use of a check points to its immediate use
and payability. In a case, a check payable on demand which was long overdue by
about two and a half (2-1/2) years was considered a stale check.25 Failure of a
payee to encash a check for more than ten (10) years undoubtedly resulted in the
check becoming stale.26 Thus, even a delay of one (1) week27 or two (2)
 days,28 under the specific circumstances of the cited cases constituted unreasonable
time as a matter of law.
- In the case at bar, however, the check involved is not an ordinary bill of exchange
but a manager's check. A manager's check is one drawn by the bank's manager
upon the bank itself. It is similar to a cashier's check both as to effect and use. A
cashier's check is a check of the bank's cashier on his own or another check. In
effect, 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.29 It is really the bank's own
check and may be treated as a promissory note with the bank as a maker.30 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 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.31
-
- Even assuming that presentment is needed, failure to present for payment within a
reasonable time will result to the discharge of the drawer only to the extent of the
loss caused by the delay.32 Failure to present on time, thus, does not totally wipe
out all liability. In fact, the legal situation amounts to an acknowledgment of
liability in the sum stated in the check. In this case, the Gueco spouses have not
alleged, much less shown that they or the bank which issued the manager's check
has suffered damage or loss caused by the delay or non-presentment. Definitely,
the original obligation to pay certainly has not been erased.
-
- It has been held that, if the check had become stale, it becomes imperative that the
circumstances that caused its non-presentment be determined.33 In the case at bar,
there is no doubt that the petitioner bank held on the check and refused to encash
the same because of the controversy surrounding the signing of the joint motion to
dismiss. We see no bad faith or negligence in this position taken by the
Bank.1âwphi1.nêt
-
-

The main issue though unrelated to NIL in this case was whether or not the signing of the
joint motion to dismiss a part of the compromise agreement between the spouses and the
bank. The answer is NO, it is not a part of the compromise agreement entered by the
parties. And thus, the signing is dispensible in releasing the car to the spouses.

DISCHARGE
Sec 119 Discharge of instrument by P2 In OM
(a) Payment in due course by or on behalf of principal debtor
(b) Payment in due course by party accommodated where instrument is made or
accepted for his accommodation
(c) Intentional cancellation by holder
(d) Other act which will discharge a simple contract for payment of money
(e) Principal debtor becomes holder at or after maturity

- Payment in due course MaGoWi

o Sec 88 Payment in due course = made at or after the maturity of the
payment to the holder in good faith and without notice that title is defective
o R of HDC to receive payment; if p in due course discharges instrument
o Possession of the note by the maker is presumptive evidence that it has
been paid

- Payment by principal debtor DISCHARGED

o MUST be payment in due course BY a principal debtor
o IF NOT principal debtor, his payment only conceals his own liability and
those who are obligated after him. All prior parties primarily or secondarily
liable on the bill, are liable to such payer, and the payer might cancel
indorsements subsequent to his own and reissue the paper, and it would be
valid against prior parties
o Principal debtor: person ultimately bound to pay the debt
 NOT necessarily the one primarily liable
 NOT necessarily the maker/drawee nor an accommodated
indorser/payee
- Payment by 3rd persons NOT DISCHARGED
- Payment by drawer or indorser NOT DISCHARGED
- Payment by an accommodation party NOT DISCHAGED
- Payment by accommodated party DISCHARGED
o Since an accommodated party is the one ultimately liable on the
accommodation instrument (the real debtor if you will)
o Thus, his payment discharged the instrument as if paid by principal debtor

- Payment by check or other negotiable paper:

o GR: NOT discharged
o E: cashed or through fault of creditor impaired
 o A creditor is not bound to accept a check in satisfaction of his demand
because a check, even if good when offered, doesn’t meet requirements of a
legal tender
- Waiver of objection to tender of payment by check
o GR: an object to a tender must, to be available to the creditor, be made in
good time and that the grounds for objection must be specified; and that an
objection to tender on one ground is a waiver of all other objections which
could have been made at that time
o It is ordinarily required of one to whom payment is offered in the form of a
check, he makes his objection at the time the offer of by check instead of an
offer of payment in money
o Reason: to afford the debtor the opportunity to secure the specific money
which the law prescribed shall be accepted in payment of debts

- Intentional Cancellation DISCHARGED

o MUST be intentional as an essential elemnt
o MUST be made by holder
o How: by writing the word, “cancelled” or “paid” on the face of the
instrument
o Presumption that cancellation is intentional: when instrument is torn up,
burned or mutilated
- Any act which DISCHARGES a contract
o Sec 196 any case not provided shall be governed by provisions of existing
legislation or in default, rules of the law merchant
o Art 1231 CC Obligations are extinguished by PLC3N
 Payment or performance
 Loss of the thing due
 Condonation or remission (cancel)
 Confusion or merger of the rights of creditor and debtor (like where
principal debtor reacquires in his own right)
 Compensation
 Novation (substitution of a new obligation from an old one)
o Others: annulment, rescission, fulfillment of a resolutory condition and
prescription
- Reacquisition by principal debtor in his own right DISCHARGED
o MUST by reacquired by principal debtor
o MUST be in his own right and NOT in a representative capacity
o MUST be at or after the date of maturity
 Otherwise it will merely be a negotiation back to the principal debtor
 o Rationale: the merger in his person the characters of creditor and debtor

Sec 120 Discharge of persons secondarily liable by

(a) Any act which discharges the instrument
(b) Intentional cancellation of his signature by holder
(c) Discharge of prior party
(d) Valid tender of payment made by prior party
(e) Release of the principal debtor unless holder’s right of recourse against party
secondarily liable is expressly reserved
(f) Any agreement binding upon the holder to extend the time of payment or to
postpone holder’s right to enforce the instrument unless with assent of party
secondarily liable or unless the right of recourse against such party is
expressly reserved

- Any act which discharges the instrument: Sec 119 P2 In OM

o
- Intentional cancellation of signature
o Where holder intentionally STRIKES OUT the signature of a person
secondarily liable (effect: as if he has never been a party)
o Right of holder to strike out indorsement
 When available: when indorsement is not necessary to his title (Sec
48)
 Effect: indorser whose indorsement is struck out & all indorsers
subsequent to him are RELIEVED from liability, basically
discharged
If originally payable to bearer
o Always negotiated by mere delivery
o Holder may strike out ALL intervening indrosement or any
o EX M payable to P or bearer, indorsed as follows
Pay to A
Sgd P
Pay to B
Sgd A
Pay to C
Sgd B
C, the present holder may strike out ALL indorsements because they are not necessary to
his title
o IF C cancels P’s indorsement to A: P( whose indorsement is struck out) A
& B (indorsers subsequent to him) are released from liability on the
 instrument. C could only claim against M. A & B are also discharged from
liability cuz they are deprived of their right of recourse against P
o IF C strikes out B’s indorsement to C; only B will be freed from liability. C
can claim against P & A

If originally payable to order

o Indorser may not strike out payee’s indorsement because it was an order
instrument
o If from blank I to Special Is: Special indorsements are not necessary to the
holder’s title as even without any subsequent indorsement he could have
acquired title to the instrument by mere delivery
o EX M payable to P or order, indorsed as follows
(Blank indorsement)
Sgd P
Pay to B
Sgd A
Pay to C
Sgd B
C, the present holder can only strike out A & B because their indorsement is not
necessary to C’s title by virtue of the the blank indorsement of P
o IF C cancels A&B’s indorsements, note would become payable to bearer
o IF C cancels A;s indorsement, B is also relieved from liability being an
indorser subsequent to A. But P’s indorsement is necessary to C’s title since
P cannot validly negotiate the note, which is order
o C can claim against P or M, but not A or B

- Discharge of prior party

o Scope: only to discharge by the act of the holder and NOT to discharge by
operation of law (like lack of notice of dishonor)
o Rationale: the discharge deprives a subsequent party of a right of recourse
against the party discharged by the holder
o EX M payable to P or order, indorsed as follows
(Blank indorsement)
Sgd P
Pay to B
Sgd A
Pay to C
Sgd B
C, the present holder can only strike out A & B because their indorsement is not
necessary to C’s title by virtue of the the blank indorsement of P
 o IF C cancels A&B’s indorsements, note would become payable to bearer
o IF C cancels A;s indorsement, B is also relieved from liability being an
indorser subsequent to A. But P’s indorsement is necessary to C’s title since
P cannot validly negotiate the note, which is order
o C can claim against P or M, but not A or B

- Valid tender of payment by prior party

o Tender of payment: act by which one produces and offers to a person
holding a claim or demand against him the amount of money which he
considers and admits to be due
o MUST be accepted by holder
o Deemed accepted if holder unjustly refuses to accept
o If D an indorser validly tenders payment and F unjustifiably (he hates him)
refuses to accept, D is discharged

- Release of principal debtor

o With the release of the principal debtor, all subsequent parties lose their
right of recourse against him
o HOWEVER if holder reserved his right of recourse against the said
subsequent parties (must be express)
o MUST be an act of the holder and not by operation of law
o MUST be for value
o Ex. I promise to P or order 100K dec 25 Sgd M. P-A-B-C
o If C releases M the maker, P, A and B, the persons secondarily liable are
likewise discharged
o IF C, in releasing Mm expressly reserved his right against parties
secondarily liable, then they are not discharged. By such reservation, it is
understood that the right of recourse of P, A and B against M are ALSO
reserved

- Agreement for extension of time

o GR: indorsers are discharged
o E:
 consent by party secondarily liable
 holder expressly reserves his right of recourse against the party
secondarily liable
o MUST be supported by a valuable consideration and for a definite period
 o Consistent with the rule that an extension granted to the debtor by the
creditor without the consent of the guarantor extinguishes the guaranty
under art 2079 CC
o Mere failure on the part of the holder to demand payment does not of itself
constitute an extension of time referred to herein

Sec 121 Right of a party(secondarily liable) who discharges (pays) instrument:

Right to remit to his former rights as regards all prior parties;
Right to strike out his own and all subsequent indorsements and again negotiate the
instruments
E:
(a)when payable to the order of a 3rd person and been paid by drawer; and
(b) when made or accepted for accommodation and paid by party accommodated
- Effect of payment of party secondarily liable: only cancels his own liability and
that of parties subsequent to him
- With respect to prior parties, the reacquirer (party 2ndarily liable who paid) is
REMITTED to his former position and consequently, he may strike out his own
and all subsequent indorsements as they are now not necessary to his title
- Ex.
Pay to the order of B 100K dec 25
Sgd A
To: X

Accepted Sgd X
B-C-D-E-F
- IF D pays the bill, it is not discharged, but it discharges him and E & F to whom
he is personally liable.
- But he is remitted to his former right as regards all prior parties: A, B & C; and
- D may strike out his indorsement to E and renegotiate the instrument. Of course,
D’s right to sue ABC and to renegotiate may be exercised even without cancelling
intervening indorsements

- IF A pays the bill, it would be under Sec121(a) and so drawer A cannot further
negotiate the bill.

- IF B is an accommodated party and B pays, neither can he renegotiate the bill

since it would fall under (b)

Sec 122 Renunciation by holder: holder may expressly renounce his rights against any
party before, at or after its maturity
Absolute & unconditional renunciation against principal debtor made at or after maturity
DISCHARGES
Renunciation DOES NOT affect rights of HDC without notice
MUST be in writing UNLESS delivered up to the person primarily liable
- Renunciation: act of surrendering a right or claim without recompense but it can
be applied with equal propriety to the relinquishing of a demand upon an
agreement supported by a consideration
- Scope: only unilateral act of holder without consideration ( meron o walang
consi???)
- Form: in writing; express
- Time: before/at/after maturity
- When discharges instrument: absolute & unconditional; in favor of person
primarily liable; made at or after maturity
- EX.
I promise to pay B or order 100K dec25
Sgd A
B-C-D-E-F
- If F renounces his rights against D & E, then D & E are discharged.
- If F renounces in favor of A, the instrument is discharged as well as the parties
- If F, after he made the renunciation, negotiates the instrument to G, a HDC
without notice, G CAN STILL ENFORCE the instrument because “ enunciation
does not affect the rights of a HDC without notice”

Sec 123 Cancellation; Unintentional; Burden of Proof

If cancellation is unintentional/under mistake/without authority, inoperative
If appears to have been cancelled, burden of proof lies on the party who alleges that
it was made unintentionally/under mistake/without authority
- Cancellation: act of drawing of criss cross lines, tearing, obliterating, erasing,
burning or other means by which the intention to cancel the instrument is evident
- When cancellation is inoperative: made unintentionally/under mistake/without
authority of holder
- Burden of proof in case of cancellation: upon the person who alleges that the
cancellation is inoperative