Kinds and modes of transfer:

a) By Assignment- it is method of transferring a non-negotiable instrument

whereby the assignee is placed in the position of the assignor and
acquires the instrument subject to all defenses that might have been set
up against the original payee.
b) By operation of law- the full title to a bill or note may pass, without either
by assignment, indorsement, or delivery, that is, by operation of law, (1) by
the death of the holder to his personal representative; (2) by the
bankruptcy of the holder to his assignee or trustee; (3) by a joint payee to
the surviving payee or indorsee.
c) By Negotiation – the transfer of a negotiable instrument from one person
to another in such manner to constitute the transferee the holder thereof.
Negotiation is the transfer of negotiable instrument from one
person to another in such a manner as to constitute the transferee
the holder thereof.

1) If payable to order, it is negotiated by indorsement completed by

delivery.
2) If payable to bearer, it is negotiated only by delivery.

Holder means the payee or indorsee of a bill or note, who is in

possession of it, or bearer thereof.
M executes a negotiable promissory note in favor of P. P indorsed the
instrument to A but delivered to X. Who is the holder?
Distinctions?
1) Negotiation refers only to negotiable instruments while assignment
refers generally to an ordinary contract.
2) In negotiation, the indorser warrants the solvency of prior party,
while in assignment, the assignor does not warrant the prior
parties.
3) In negotiation, the transferee is the holder, while in assignment the
transferee is the assignee.
4) In negotiation, a holder is due course may acquire a better title than
that of the prior party, while an assignee merely steps into the
shoes of the assignor.
Indorsement. Concept?
It is a legal transaction, effected by a writing of one’s name on the back,
whereby one not only transfers one’s full legal title to the paper
transferred, but likewise enters to an implied guaranty that the note or
instrument will be duly paid.
Position? – the indorsement must be written on the instrument itself
(customarily at the back) or on an attached paper called allonge.
Who indorse? The party to whose order the instrument is made
payable should indorse the instrument.
Indorsements, formal requisites?
• Rule – the signature of the indorser, without additional words, is sufficient,
making the instrument the control the rights of the parties.
• However, it is not essential written by pen, or pencil, or partly of a printed
form to be filled by the indorser; or by means of a rubber or typewriter.
• Be signed by the indorser with no particular form; any mark or
designation, initials of the indorser, or figures which he thinks proper to
adopt, provided it is used as a substitute for his name and he intends to
bind himself thereby.
• Additional words may be employed to express intent to negotiate, like it
may contain pledge or a guaranty.
Examples:
1) Pay to Steve Perez. (Sgd) Rey Cruz
2) Pay to the order of Steve Perez. (Sgd.) Rey Cruz
3) (Sgd) Rey Cruz.
Effect?
a) “Pay to A P8,000 and to B P2,000”
b) “Pay to A P8,000 out of the amount of P10,000 of this note.”
c) “Pay to A and B “P10,000.”
How is indorsement made?
It must be written on the instrument itself or upon a paper attached thereto
otherwise known as allonge.
Kinds?
1) Special – specifies the person to whom or to whose order the instrument is to
be payable;
2) Blank – specifies no indorsee.
3) Restrictive – it restricts or prohibits entirely the further negotiation of an
instrument.
4) Qualified – constitutes the indorser a mere assignor of the title of the
instrument. It is made by adding the words “without recourse”.
5) Conditional – one by which the indorser annexes a condition to his liability.
6) Facultative – indorser enlarges his liability by waiving usual demand and
notice if dishonor.
7) Irregular – when a person places his signature in blank before delivery.
The indorsement must be an
indorsement of the entire instrument.
Indorsement which purports to transfer to the indorser a part
only of the amount payable, or which purports the
instrument to two or more indorsers severally, does not
operate as negotiation of the instrument. But where the
instrument has been paid in part, it may indorsed as to the
residue.
“I promise to pay P or order P10,000.” (Sgd. M). P indorsed it
to A writing “Pay to A P6,000.”
a) Is the indorsement valid?
b) If P proceed to M and collected only P4,000, later P
indorsed to a by writing “Pay to A, P6,000 only.” Is it valid?
An indorsement is restrictive:
• Prohibits the further negotiation of the instrument.
“Pay to A only”
• Constitutes the indorsee the agent of the indorser.
“Pay to A for collection.”
• Vests the title in the indorsee in trust for or to the use of the some
other person.
“Pay to A for the use of B.”
Qualified indorsement?
• M executes a promissory note payable to P or bearer. P indorsed it to
A, A to B, B to C. The indorsement of A to B is qualified. If M is
insolvent, what is the right of C?
C may proceed against P or B because they indorsed the instrument
unqualifiedly. C cannot proceed to A, he indorsed qualifiedly – “I am
not liable if the maker insolvent.
A qualified indorser does not warrant the financial responsibility of the
maker, only the other facts.
Instrument negotiable continues to
be such? Exceptions:
• When the instrument is restrictively indorsed.
• When it is discharged by payment or otherwise.

The holder may at one time strike out any indorsement which is not necessary
to his title. The indorser whose indorsement is struck out, and all indorsers
subsequent to him are relieved from liability.
Effect of transfer without indorsement?
1) The transferee may collect payment from the person liable, and:
2) may compel the transferor to indorse the instrument to him so he can
negotiate.
Conditional indorsement?
• Where an indorsement is conditional, the party required to pay the
instrument may disregard the condition and make the payment to the
indorsee or his transferee whether the condition has been fulfilled or not.
But any person to whom an instrument so indorsed is negotiated, will
hold the same, or the proceeds thereof, subject to the rights of the
person indorsing conditionally.
M executed a promissory note for P10,000 payable to P or order. P
indorsed to A: “Pay to A if he will pass the CPA exams in Dec 25, 2009.”
(Sgd. P)
1. Is instrument conditional? 2. negotiable? 3. payable on demand? 4. Is
indorsement conditional?
Indorsement of instrument
originally payable to bearer (Sec 40)
• 1. if indorsed specially, it may nevertheless be furtheB r negotiated by
mere delivery.
• 2. A person indorsing specially is liable as indorser to only such
holders as make title through his indorsement.
• M makes a note payable to P or bearer. P indorses the note to A, A to
B, B to C; then C delivers the note to D; D delivers the note to H. P is
liable to A, B and C, but not to D and H. A liable to B and C but not to
D and H; B is liable to C but not to D and H; C is liable to D but not to
H; D is liable to H.
Indorsement if instrument is
payable to two or more persons.
• 1. Two or more payees or indorsers jointly:
all payees or indorsees must indorse the instrument except as follows:
(a) if the joint payees or indorsees are partners; (b) if one of them is
authorized to indorse for the others.
2. Two or more payees or indorsees severally:
Any one of them may indorse the instrument.
Where an instrument is drawn or indorsed to the order of two or more payees or
indorsees who are not partners, all must indorse unless the one indorsing has to
authority to indorse for the others. (Sec. 41)

Where the instrument is drawn or indorsed to a person as “cashier” or

other fiscal officer of a bank or corporation, it is deemed prima facie
to be payable to the bank or corporation of which he is such officer,
and may be negotiated by either the indorsement of the bank or
corporation or the indorsement of the officer. (Sec. 42)
Where the name of the payee or indorsee is wrongly designated or
misspelled, he may indorse the instrument as therein described
adding, if he thinks fit, his proper signature. (Sec. 43)
Continuation of negotiable character
• An instrument negotiable in origin continues to be negotiable until:
(1) It is restrictively indorsed;
(2) It is discharged by payment or otherwise.
The instrument continues to be negotiable but the transferee after
maturity is not a holder in due course. Transfer to such transferees
would be equivalent to mere assignment and subject to defenses. The
holder not in due course can still collect from persons liable on the
instrument.
Striking our indorsement
• 1. Rules on which instruments may be struck out:
The holder of a negotiable instrument may at any time strike out any
indorsement not necessary to his title.
How to determine?
1) The instrument is an order instrument:
a) If there are blank as well as special indorsements, the holder may
strike out any insdorsement immediately following a blank
indorsement.
Striking indorsements…
b) if there are only special indorsements, the holder may not strike out
any indorsement since he must trace his title through all the
indorsements.
Exception: If the instrument is negotiated to a prior party, such prior
party may strike out his indorsement and those intervening parties.
2. If the instrument is a bearer instrument on its face, the holder may
strike out any indorsement, whether the same is blank or a special
indorsement, since the same is not necessary to his title.
Striking out indorsements.. Effect..
• The indorser whose indorsement is struck out is relieved from his liability on the
instrument.
• All subsequent indorsers are likewise relieved from their liability on the
instrument.
EFFECT of transfer without indorsement of an instrument payable to order. (Sec 49)
1) The transfer vests in the transferee such title as the transferor had in the
instrument.
2) The transferee acquires the right to have the indorsement of the transferor.
However for the purpose of determining whether the transferee is a holder in
due course, the negotiation takes effect as of the time when the indorsement
was made.
Sec. 50.
Where an instrument is negotiated back to a prior party, such party
may, subject to the provisions of this Act, reissue and further
negotiate the same. But he is not entitled to enforce payment thereof
against an intervening party to whom he was personally liable.
Exceptions: a) where the instrument is payable to order of a specified
person and has been paid by the drawer. B) where it was made or
accepted for accommodation and has been paid by the party
accommodated.
Effects:
1) Such prior party may reissue or renegotiate the same;
2) He cannot enforce payment against any intervening party;
3) He may strike out his indorsement and those of intervening parties;
4) Intervening parties enjoy a temporary defense whole prior party is
the holder. If prior party renegotiates the instrument to a holder in
due course, the latter can go after intervening parties.