Nego Reviewer .docx

GENERAL CONCEPTS NEGOTIABLE INSTRUMENTS – A written contract for the payment of money which complies with the requirements of Sec 1 of the Negotiable Instruments Law (NIL), which by its form and on its face, is intended to hand as money, so as to give the holder in due course (HDC) the right to hold the instrument free from personal defenses and available to prior parties (Jose R. Sundiang and Timoteo B. Aquino, Reviewer on Commercial Law, 2006 ed.).

particular account to be debited with the amount NOTE: An order or promise to pay out of a particular fund is not unconditional o The promise or order to pay to be unconditional must be unqualified, absolute and obligatory; nor merely aspirational o TEST: Does the instrument carry the general credit of the drawer or the maker or only the credit of a particular fund?

REQUISITES (Sec 1 NIL) 1. Must be in WRITING and signed by the maker or drawer – Signature is binding however written or printed as long as it is intended to be the signature of the signer or made with his authority o

o

o

Assumed or Trade name – NO person is liable on the NI whose signature does not appear thereon unless otherwise provided. But one who signs in a trade or assumed name will be liable to the same extent as if he signed his own name (Sec 18 NIL) Signature by agent – The signature of any party ma be made by a duly authorized agent. No particular form is necessary If the signature placed on the NI is not clear so what capacity the person intended to sign, he is deemed as an indorser (Sec 17.f NIL)

2. Must contain an UNCONDITIONAL promise or order to pay a sum certain in money – There must be an express promise or order to pay a sum certain in money o o o

“Promise” need not be used; an equivalent expression is sufficient Order is a command or imperative direction. A mere request or authority to pay is not equivalent to an order. There must be a clear demand upon the drawee to pay

WHEN UNCONDITIONAL (Sec 3 NIL) There is an unqualified or unconditional order or promise to pay if there is:

a. An indication of a particular fund out of which reimbursement is to be made, or a

FUND FOR REIMBURSEMENT Acts involved

Drawee pays the payee from his own funds, afterwards the drawee pays himself from the particular fund indicated

Nature of fund indicated

Particular fund indicated is NOT the direct source of payment but only the source of reimbursement Unconditional Pay to the order of X P1,000 and reimburse yourself from the rentals of my house

Effect Example

PARTICULAR FUND FOR PAYMENT There is only one act: the drawee pays directly from the particular fund indicated. Payment is subject to the condition that the fund is sufficient Particular fund indicated is the direct source of payment Conditional I promise to pay X or order the sum of P1,000 out of my salary in XYZ corp

NOTE: Bills and checks by itself do 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 127 and 189 NIL) Page | 1

Account to be debited with the amount – The payment does not depend upon the existence or adequacy or the particular account to be debited. It is negotiable because the instrument is to be paid first after the particular account indicated will be debited (De Leon, The Law on Negotiable Instruments 2010 ed.) b.

A statement of the transaction which gives rise to the NI – Where the promise or order is subject to the terms and conditions of the transaction stated, the instrument is rendered non-negotiable. The NI must be burdened with the terms and conditions of that agreement to destroy its negotiability (Villanueva, Commercial Law Review 2004 ed.) NOTE: Reference to another transaction or document must be descriptive rather than restrictive. SUM PAYABLE MUST CERTAIN (Sec 2) – A sum is certain if the amount to be unconditionally paid by the maker or drawee can be determined on the face of the instrument and is not affected by the fact that the exact amount is arrived at only after a mathematical computation o NI is a device intended to take the place of money, it is essential, then, that it represents a fixed amount of money. The amount to be paid must be stated plainly on the face of the instrument and must be determinable from the face of the instrument itself without reference to any outside source Sum payable is certain even if (ISA-Ex-Co):

a. With INTEREST b. By STATED installments i. ii.

The amount of each installment is indicated; AND The due date is fixed or at least determinable

c. By stated installments with a provision that upon default in payment of any installment

or of interest, the whole shall become due (ACCELERATION clause) d. With EXCHANGE, whether at a fixed rate or at the current rate; or e. With COSTS of collection or an attorney’s fees, in case payment shall not be made at maturity PAYABLE IN MONEY – An instrument which contains an order or promise to in addition to the payment of money is not negotiable o If the order or promise gives the holder an option to require something to be done in lieu of payment, its negotiability is not affected o If the option to pay money or something in lieu thereof is with the maker or the person primarily liable, the instrument is not negotiable CERTAINTY OF SUM PAYABLE GENERAL RULE: An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable (Sec 5 NIL) REASON: The instrument calls for an act other than payment of money is not negotiable because a NI is intended as a substitute for money EXCEPTIONS:

(1) Authorizes the sale of collateral securities on default (2) Authorizes confession of judgment on default NOTE: Confession of judgment clauses are VOID as being against public policy because the PN bargains away his day in court however such nullity does nto affect the negotiability of the instrument (National Bank v. Manila Oil Refining Co, G.R. no L-18103, June 8, 1922)

(3) Waives the benefit of law intended to protect the debtor such as presentment for payment, notice of dishonor and protest or; (4) Allows the holder the option to require something in lieu of money Page | 2

NOTE: An instrument is still negotiable although the amount to be paid is expressed in currency that is not legal tender so long as it is expressed in money (PNB v. Zulueta, G.R. no L-7271, August 30, 1957) REASON: Under the Sec 1 of RA 8183, all monetary obligations shall be settled in Philippine currency which is legal tender in the Philippines. However, the parties may agree that the obligation shall be settled in any other currency at the time of payment  Sec 1(b) and 6(e) call for the payment of money but the law does not require the payment should be made in legal tender  The Uniform Currency Act (RA 529) has repealed RA 8183; the parties may now—not only in the case of NI—but in any contract involving payment of debt money, agree now that the payment should be made in a foreign currency IS A NEGOTIABLE INSTRUMENT A LEGAL TENDER? No. a.) Sec 60 of the New Central Bank Act (RA 7653) provides that: Checks are not legal tender. Checks representing demand deposits do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor; provided that a check which has been cleared and credited to the account of the creditor/s shall be equivalent to the creditor of cash in an amount equal to the amount credited to his account b.) Art 1249 NCC (impairment clause): The delivery of a note payable to order or a bill of exchange or any other mercantile document shall produce payment only when they have been encashed or through the fault of the creditor, the value is impaired c.) The SC ruled that the creditor cannot be compelled to accept a check in payment of a debt (Leticia Co v. PNB, G.R. no L51767, June 29, 1982). Acceptance of a check is not tantamount to payment WHAT IS LEGAL TENDER? a.) It is that kind of currency which the law compels a creditor to receive in payment of a debt, be it public or private, provided it is tendered in the right amount b.) Sec 52 New Central Bank Act: All notes and coins issued by BSP shall be fully guaranteed by the Government of the

Philippines and shall be legal tender for all debts, both public or private NOTE: Checks representing demand deposits do not have legal tender power and their acceptance in the payment of debts is at the option of the creditor; provided that that a check which has been cleared and credited to the account of the creditor/s shall be equivalent to the creditor of cash in an amount equal to the amount credited to his account (Sec 60 RA 7653) 3. Must be PAYABLE

on demand, or at a fixed or determinable future time – Purpose: To inform the holder of the NI of the date when he may enforce payment thereof. Before to maturity, he cannot compel the maker or acceptor to pay unless there is a valid acceleration clause WHEN PAYABLE ON DEMAND (Sec 7) a. Where it is expressed to be payable on demand, at sight or on presentation – NI is payable on demand not only as between parties but also as to subsequent parties  AT sight – the NI is payable as soon as it is seen by the party primarily liable b. Where no period of payment is stated – Refers only to immediate parties since between immediate parties there is no difference between HDC and a person not HDC c. Where issued, accepted or indorsed after maturity (only as between immediate parties) PAYABLE AT A FIXED OR DETERMINABLE FUTURE TIME – The time must be certain so that the holder will know when he may enforce the NI and the person liable, when he may be required to pay (Sec 4 NIL) WHAT CONSTITUTES DETERMINABLE FUTURE TIME (Sec 4) a. At a fixed period after date or sight – After sight: after the drawee has seen the NI upon presentment for acceptance b. On or before a fixed or determinable future time specified therein; or

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c.

Before the occurrence of a specified event which is certain to happen, though the time of happening is certain (Sec 4 NIL) d. A NI payable on contingency is not negotiable even if the contingent event does happen NOTE: If the day and month, but not the year of payment is given, it is not negotiable due to its uncertainty o If the NI states that the amount shall be paid in 2 equal installments, the 2nd being payable on a fixed date, the NI can be considered negotiable since the 1 st installment would then be payable on demand o Presumption as to date: If NI is dated, such date is prima facie presumed to be the true date of making, drawing, acceptance or indorsement as the case may be (Sec 11) o If NI is not dated, it will be considered to be dated as of the time it was issued (Sec 17 NIL) EFFECT OF ACCELERATION CLAUSE – Acceleration clause does not affect the negotiability of the NI (Sec 4.b NIL) o If acceleration clause is at the option of the holder: negotiability depends on the nature of the provision: (a) If only upon happening of a specified event over which he has no control = negotiable (b) If option is unconditional = non-negotiable (c) Acceleration clause to apply upon default = negotiable

4. Must be payable to ORDER or to bearer – words of negotiability: Payable to order or to bearer. This serves as an expression of consent that the instrument may be transferred

o

Need not expressly state payable to “order” or “bearer” as long as intention to legal requirements is sufficient (substantial compliance)

WHEN PAYABLE TO ORDER (Sec 8) – NI is payable to order where it is drawn payable to the order of a specified person, or to him or his order. It may be made payable to the order of: a. A payee who is not the maker, drawee or drawer

b.

c. d. e. f.

NOTE: Payee must be named or indicated with reasonable certainty. If there is no payee, in a NI payable to order, no one could indorse the NI (Sec 8.a)  Subject to the rules in Sec 13, 14 and 15 on incomplete instruments, leaving the payee blank may make the NI non-negotiable because an instrument payable to order may be negotiated only by indorsement AND delivery The drawer or maker NOTE: If maker is made the payee, the NI must be indorsed to be complete (Sec 14 NIL)  Where the NI is payable to the order of the drawer and it is accepted by the drawee, the NI is equivalent to a PN made by the acceptor in favor of the drawer The drawee Two or more payees jointly One or some of several payees The holder of an office for the time being

PAYABLE TO BEARER (Sec 9 NIL) – Only NI under Subsections A and B are bearer instruments on the face. Those under Subsections C, D, and E are order instruments on the face: (OPEN-F)

a. When it is EXPRESSED to be so payable b. When it is payable to a PERSON named therein or bearer c. When it is payable to the order of a FICTITTIOUS or non-existing person, and such fact was known to the person making it so payable – Fictitious person is not limited to persons having no real existence. An existing person may be considered a fictitious payee, if the person making it so payable does not intend to pay the specified person  REASON: There is no one to indorse it, hence if the maker intended to give it negotiability, it could only be on the theory that it became payable to bearer  A note payable to the estate of a person still existing at the time of its execution is payable to bearer since it is payable to a non-existing person Page | 4

That the payee is a fictitious or non-existing person must be known to the maker or drawer otherwise it is an order instrument When the name of the payee does NOT purport to be the name of any person – e.g., pay to cash or pay to sundries  The payee named is one who does not exist and has never existed. Since indorsement is obviously impossible, the manifest intention of the drawer is to make the instrument a bearer paper negotiable by delivery When the ONLY or last indorsement is an indorsement in blank – It becomes payable to bearer even if it is originally payable to a specified person  NI originally payable to bearer can be negotiated by mere delivery even if it is indorsed specially. If it is originally a BEARER instrument, it will ALWAYS be a bearer instrument (Sec 40 NIL)  As opposed to an original order instrument becoming payable to bearer, if ht same is indorsed specially, it can no longer be negotiated further by mere delivery, it has to be indorsed  When the instrument is payable only to a specified person or his agent, it is not payable to order, thus non-negotiable 

d.

e.

5. When the instrument is ADDRESSED to a drawee, he must be named or otherwise indicated therein with reasonable certainty – It is applicable only to a bill of exchange o Omission of drawee may be filled later (Sec 14 NIL) o A bill may be addressed to 2 or more drawees jointly, whether they are partners or not in the alternative or in succession (Sec 128 NIL) because there would be no certainty as the person to whom the bill should be presented for payment or acceptance

APPLICABILITY The provisions of NIL apply only to negotiable instruments. If the instrument is negotiable, the instrument is not governed by the provisions of NIL (Metropolitan Bank and Trust Co v. CA, 194 SCRA 169, 1991).

NEGOTIABLE INSTRUMENTS AND NON-NEGOTIABLE INSTRUMENTS DISTINGUISHED NEGOTIABLE INSTRUMENTS Only negotiable instruments are governed by NIL Can be transferred by negotiation or by assignment Transferee can become HDC if all requirements under Sec 52 NIL are complied with If last transferee is HDC, prior parties may not raise defenses against HDC (except real defenses)

NON-NEGOTIABLE INSTRUMENTS NIL does not apply Can be transferred only by assignment Transferee can never become HDC All defenses available to prior parties may be raise against last transferee

GOVERNING LAWS 1. NEGOTIABLE INSTRUMENTS LAW (Act 2031) 2. CODE OF COMMERCE – Negotiable instruments are governed by the provisions of the Code of Commerce that were not impliedly repealed by NIL NOTE: The provisions on CROSSED CHECKS are still in force because there is no provision in NIL that deals with crossed checks. (Chan Wan v. Tan Kim, 109 PHIL 706, 1960). 3. Law Merchant (Sec 196 NIL) 4. CIVIL CODE – applicable suppletorily FUNCTIONS OF NEGOTIABLE INSTRUMENTS 1. It operates as a substitute of money 2. It is a means of creating and transferring credit 3. It facilitates sale of goods 4. It increases the purchasing medium in circulation (Sundiang, Reviewer on Commercial Law) 5. It is a proof of transactions Sec 52 of the New Central Bank Act (RA 7653) provides that only notes and coins issued by the Banko Sentral ng Pilipinas are Page | 5

considered legal tender, hence, negotiable instruments are NOT legal tender. Delivery of instrument does not operate as payment.

instrument and collect the sum payable for himself free from defenses

Sec 69 of the same law expressly provides that checks are not legal tender. Sec 60 states that checks representing demand deposits do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor. Provided, however, that a check which has been cleared and credited to the account of the creditor shall be equivalent to delivery to the creditor of cash in an amount equal to the amount credited to his account (Sundiang, Reviewer on Commercial Law).

2. ACCUMULATION OF SECONDARY CONTRACTS – Secondary contracts are picked up and carried along with them as they are negotiated from one person to another, or in the course of negotiation from one person to another, or in the course of negotiation of NI, a series of juridical ties between the parties thereto arise by law or by privity (Sundiang, Reviewer on Commercial Law)

STAGES IN THE NEGOTIABLE INSTRUMENT 1. PREPARATION AND SIGNING complete with all the requirements provided under Sec 1 NIL 2. ISSUANCE – First delivery of the instrument to the payee (from maker to payee/bearer or from drawee to the payee/bearer) 3. NEGOTIATION – Transfer from one person to another so as to constitute the transferee a holder 4. PRESENTMENT for acceptance for certain kinds of Bills of Exchange – The bill of exchange shall be presented to the drawee so that the latter will signify his agreement to the order of the drawer to pay 5. ACCEPTANCE – Written assent of the drawee to the order 6. DISHONOR by non-acceptance – Refusal to accept by the drawee 7. PRESENTMENT for payment – The instrument is shown to the maker or drawee/acceptor so that the said maker or drawee/acceptor will pay 8. DISHONOR by nonpayment – Refusal to pay by the maker or drawee/acceptor 9. NOTICE OF DISHONOR – Notice to the persons secondarily liable that the maker or drawee/acceptor refused to pay or accept the NI 10. PROTEST – applicable to foreign bills 11. DISCHARGE

FEATURES OF A NEGOTIABLE INSTRUMENT 1. NEGOTIABILITY –That attribute or property whereby a bill or note or check may pass from hand to hand similar to money, so as to give the holder in due course the right to hold the

INTERPRETATION OF NEGOTIABLE INSTRUMENT (Sec 17 NIL) The rules in Sec 17 are applicable only when the instrument is ambiguous or uncertain or when there are omissions therein. If the terms are clear, the NI must be enforced as it reads.  When the meaning is doubtful, the courts have adopted the policy of resoling in favor of the negotiability of the instrument. 1. Words prevail over figures 2. Interest stipulated runs from the date of the NI, or if undated, from its issue 3. If undated, the instrument is deemed dated at its issue 4. Written words prevail over printed provisions 5. When there is doubt whether the NI is a bill or a note, the holder, at his election, may treat it as either a bill or a note – Where in a bill, the drawer and the drawee are the same person or where the drawee is a fictitious person, or a person not having capacity to contract, the holder may treat the NI at his option,, either as a bill of exchange or promissory note (Sec 130 NIL) 6. When it is not clear in what capacity a person signs, he is deemed an indorser 7. When 2 or more persons sign “We promise to pay,” their liability is JOINT (each liable for his part) but if they sign “I promise to pay,” the liability is SOLIDARY (each can be compelled to comply with the entire obligation

KINDS OF NEGOTIABLE INSTRUMENTS A. PROMISSORY NOTE (PN) – An unconditional promise, in writing, made by one person to another, signed by the maker

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engaging to pay, on demand or at a fixed or determinable future time, a sum of certain money, ot order or to bearer (Sec 184 NIL) PARTIES: a. Maker – Party who executes the written promise to pay b. Payee – Party in whose favor the promissory note is made payable

NOTE: Prior to the acceptance of the Bill of Exchange, there is no party primarily liable in a bill of bill of exchange. It is only when a drawee becomes an acceptor that he is primarily liable. LEGAL BASIS: A bill itself does not operate as an assignment of funds in the hands of the drawee available for payment thereof, and the drawee is not liable until and unless he accepts the same (Sec 127 NIL)

EXAMPLE: Payee July 15, 2012 Manila

c.

Payee – Party in whose favor the bill is drawn or payable

P10,000 Fifteen (15) days after date, I promise to pay Mr. X or order the sum of Ten Thousand Pesos (P10,000) Sgd. Mr. Y

EXAMPLE: Payee July 15, 2012 Manila P10,000

Maker B. BILL OF EXCHANGE (BEX) – 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, on demand or at a fixed or determinable future time, a sum certain in money, to order or to bearer (Sec 126 NIL) PARTIES: a. Drawer – Party who executes the written order to pay NOTE: A bill of exchange requires in its inception three parties: drawer, drawee and payee b. Drawee – The person to whom the bill is addressed and who is ordered to pay The drawee is not really a party to the bill. He assumes liability only when he accepts the bill usually by writing the word “accepted and signing his name on the face thereof” (Sec 132 and 133 NIL) in which case he ceases to be drawee and becomes known as an ACCEPTOR (Hector De Leon, The Law on Negotiable Instruments) ACCEPTOR – A drawee who ACCEPTS the order to pay made by the drawer

Fifteen (15) days after date, pay Mr. X or order the sum of Ten Thousand Pesos (P10,000). Sgd. Mr. Y To: Mr. Z President, XYZ Corp Mendiola, Manila Drawee/Acceptor

Drawer

NOTE: The parties need not all be distinct persons. Thus, the drawer may draw on himself payable to his own order (De Leon, The Law on Negotiable Instruments, 2010 ed.).

BILL OF EXCHANGE TREATED AS PROMISSORY NOTE INSTANCES WHEN A BILL OF EXCHANGE MAY BE TREATED AS PN AT THE ELECTION OF THE HOLDER (Sec 17e and Sec 130 NIL): (FLACS) 1. Drawee is a FICTITIOUS person 2. Where the bill is drawn on a person who is LEGALLY absent 3. Where the bill is AMBIGUOUS (Sec 17e NIL)

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4. Drawee does not have the CAPACITY to contract (Sec 130 NIL); and 5. The drawer and drawee are the SAME person

PROMISSORY NOTE AND BILL OF EXCHANGE DISTINGUISHED NATURE NUMBER OF PARTIES LIABLITY OF CREATOR PRESENTMENT

RIGHT TO LIMIT LIABILITY

PROMISSORY NOTE Unconditional promise Involves 2 parties

BILL OF EXCHANGE Unconditional order

Maker is primarily liable Only one presentment for payment

Drawer is only secondarily liable Generally 2 presentments: a. Acceptance b. Payment

Maker of the note may NOT insert an express stipulation limiting or negativing his own liability to the holder

Involves 3 parties

NOTE: 2 presentments only in cases provided in Sec 143 Drawer may insert in the instrument an express stipulation limiting or negativing his own liability to the holder (Sec 61 NIL)

C. CHECK – A bill of exchange drawn on a bank payable on demand (Sec 185 NIL). It is also the most common form of bill of exchange



Except as otherwise provided, the provisions of NIL applicable to a bill of exchange payable on demand apply to a check (Sec 185 NIL)

EXCHANGE AND CHECK DISTINGUISHED WHEN PAYABLE

EXCHANGE May be payable on demand or at a

CHECK Always payable on demand

PRESENTMENT

DRAWN ON DEPOSIT

WHEN PRESENTMENT MADE

EFFECT OF ACCEPTANCE OR CERTIFICATION EFFECT OF DRAWER’S DEATH

fixed or determinable future time Must be presented for acceptance

Need NOT be drawn on a deposit, hence it is not necessary that the drawer of a bill of exchange should have funds in the hands of the drawee May be presented for payment within reasonable time after last negotiation If accepted: drawer/indorser remains liable Death of a drawer of BOE, with the knowledge of the bank, does not revoke the authority of the drawee to pay

Need not be presented for acceptance, however, if the holder requests and the bank desires, he may accept Is drawn on deposit, otherwise there would be fraud

Must be presented within a reasonable time after its issue If certified: drawer/indorser are discharged Death of the drawer of the check, with the knowledge of the bank, revokes the authority of the banker to pay

D. CERTIFICATE OF DEPOSIT issued by banks, payable to the depositor or his order, or to bearer – A form of promissory note which is a written acknowledgment of a bank of its receipt of a certain sum with a promise to repay the same  A written acknowledgment by a bank or banker of the receipt of a sum of money on deposit which the bank or banker promises to pay to the depositor, to the order of the Page | 8

depositor, or to some other person or his order, whereby the relation of debtor and creditor between the bank and depositor is created E.

F.

TRADE ACCEPTANCE – A bill of exchange payable to order and at a certain maturity, drawn by a seller against the purchaser of goods as drawee, for a fixed sum of money, showing on its face the acceptance of the purchaser of the goods and that it has arisen out of a purchase by goods by the acceptor

receiving value therefore, and for the purpose of lending his name to some other person (Sec 29 NIL) 7. REFEREE IN CASE OF NEED (Sec 130 NIL) – A person who may be designated in the instrument as the person who may be resorted to by the parties in case of dispute (Sundiang, Reviewer on Commercial Law)

NON-NEGOTIABLE INSTRUMENTS AND NEGOTIABLE INSTRUMENTS DISTINGUISHED

BONDS, which are in the nature of promissory notes – A certificate or evidence of a debt which the issuing company or governmental body promises to pay the bondholders a specified amount of interest for a specified length of time, and to repay the loan on the expiration date

G. DRAFTS –which are bills of exchange drawn by one bank upon another  In Bank drafts, the drawer and drawee are liable to the purchaser of draft for not complying with his instructions

H. DEBENTURE – A promissory note or bond backed by the

APPLICABLE LAW TRANSFERABILITY TRANSFEREE

DEFENSES

general credit of a corporation and usually not secured by a mortgage or lien on any specific property I.

BANK NOTES – Promissory notes of the issuing bank which are payable to bearer on demand

NATURE OF TITLE

OTHER PARTIES TO A NEGOTIABLE INSTRUMENT 1. INDORSER – A person placing his signature upon an instrument, otherwise than as maker, drawer or acceptor 2. INDORSEE – in the case of instrument payable to order 3. Persons negotiating by mere delivery 4. Persons to whom the instrument is negotiated by mere delivery, in case the instrument is payable to bearer 5. ACCEPTOR – A drawee who accepts the order to pay made by the drawer. It is only when a drawee becomes an acceptor that he is primarily liable (Sundiang, Reviewer on Commercial Law) 6. ACCOMODATION PARTY – One who has signed the instrument as maker, drawer, acceptor, or indorser, without

SOLVENCY OF THE DEBTOR

NEGOTIABLE INSTRUMENTS Only NI is governed by NIL Transferable by negotiation or by assignment The transferee can be a HDC if all the requirements are complied with A holder in due course takes the NI free from personal defenses Requires clean title, one that is free from any infirmities in the instrument and defects of title of prior transferors Solvency of the debtor is in the sense guaranteed by the indorsers because they engage that the instrument will be accepted, paid or both and that they will pay if the

NON-NEGOTIABLE INSTRUMENTS Application of NIL is only by analogy Transferrable only by assignment The transferee remains to be an assignee and can never be a HDC All defenses available to prior parties may be raised against the last transferee Transferee acquires a derivative title only

Solvency of the debtor is not guaranteed under Art 1628 NCC unless expressly stipulated (Timoteo Aquino, Cases on Banks, Negotiable Instruments and

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instrument is dishonored

other Commercial Documents)

1. TREASURY WARRANT – Being payable out of a particular fund of the national treasury (Metrobank v. CA, G.R. no 88866, February 18, 1991) 2. POSTAL MONEY ORDERS – REASONS: a. Under postal regulations, the bureau of posts can refuse to pay on numerous grounds, thus the order is not unconditional b. A money order can be indorsed only once c. The post office is not run by the government for commercial profit, but for public service (Phil Education Co Inc v. Soriano, G.R. no L-22405, June 30, 1971) 3. LETTER OF CREDIT – Being payable to a specified person 4. TRUST RECEIPT – Being payable to the entrustor, conditioned upon the resale of the goods 5. NEGOTIABLE DOCUMENT OF TITLE, BILL OF LADING AND WAREHOUSE RECEIPT – Being payable in goods rather than money 6. CERTIFICATE OF STOCKS – It is a written instrument signed by proper officer of a corporation stating that the person named therein is the owner of a designated number of shares of stock. It is also without an unconditional promise or order to pay sum certain in money (De Leon,l The Law on Negotiable Instruments)

1. The WHOLE of the instrument shall be considered 2. Only what APPEARS on the face of instrument shall be considered 3. REQUISITES enumerated in Sec 1 NIL; and 4. Should contain words or TERMS of negotiability such as “order” or “bearer” (Gopenco, Commercial Law Reviewer citied in Aquino, p. 23) RATIONALE OF FORMALITIES OF NEGOTIABLE INSTRUMENTS 1. To become effective substitutes for money 2. To be desirable tools for credit transactions 3. For security of mercantile transactions

PROVISIONS AND OMMISIONS AFFECT NEGOTIABILITY

1. PROVISIONS which a. Authorizes the sale of COLLATERAL SECURITIES in case the instrument be not paid at maturity b. Authorizes a CONFESSION of judgment if the instrument be not paid at maturity c. WAIVES the benefit of any law intended for the advantage or protection of the obligor; or d. Gives the holder an election to require something to be done IN LIEU of payment of money (Sec 5 NIL)

2. OMMISSIONS (Sec 6) a. It is not dated – The date referred is the date of the making or drawing of the NI. If the NI is not dated, it will be considered to be dated as of the time it was issued  Sec 13 NIL contemplates a situation where the date is necessary to fix the maturity date or to make the maturity date determinable. The reason is that unless the true date is inserted, one will not know when the NI is due

NEGOTIABILITY NEGOTIABILITY – The requisites of negotiability are provided for under Sec1 NIL. It is the most important provision of NIL because the law does not apply if the instrument does not meet the requisites of negotiability as provided therein (Aquino, Cases on Banks, Negotiable Instruments and other Commercial Documents)

FACTORS THAT AFFECT THE DETERMINATION OF NEGOTIABILITY OF INSTRUMENTS (WART)

THAT DO NOT

b.

It does not specify the value given or that any value has been given – Consideration is presumed (Sec 24 NIL)

c.

It does not specify the place where it is drawn or where it is payable – It should be noted that Sec 73 NIL already provides for the rules on the proper place of

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presentment where no place is specified. On the other hand, Sec 75 covers a situation where it is payable at a bank

o

d. It bears a seal e. It designates a particular kind of current money in which payment is to be made

o

3. ACCEPTANCE – The acceptance of a bill of exchange is not important in the determination of its negotiability. The nature of acceptance is important only in the determination of the kind of liabilities of the parties involved (PBCom v. Aruego, G.R. no L-25836-37, January 31, 1981) 4. INDORSEMENT – The presence of indorsement of the NI does not affect the negotiability of the NI. This rule is subject to the provision that a PN that is payable to the order of the maker himself is not yet complete unless it is indorsed by the maker (Sec 184 NIL). Moreover, an indorsement may prevent further negotiation of the NI, in which case, subsequent transferees can no longer be considered holders (Sec 36)

TRANSFER AND NEGOTIATION DELIVERY

– Transfer of possession, whether actual or constructive, from one person to another  Contract of NI is incomplete and revocable until delivery of NI for the purpose of giving effect thereto (Sec 16)  Without the initial delivery of the instrument to the payee, there can be no liability on the NI (e.g. if delivered merely for safekeeping = no liability)  ISSUANCE – First delivery of the NI complete in form to a person who takes it as a holder

MODES OF TRANSFER 1. NEGOTIATION – NI is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by mere delivery; if payable to order, it is negotiated by indorsement of the holder completed by delivery (Sec 30 NIL)

o

EFFECT: Makes the transferee the holder of the NI (Sec 191). The right to collect a sum certain in money is transferred from one person to another BEARER – the person in possession of a bill or note payable to bearer HOLDER – payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof (Sec 191) a. NI Payable to ORDER – Where the NI is payable to order, there are 2 steps required for its negotiation b. NI payable to BEARER – It is negotiated by mere delivery without indorsement

2. ASSIGNMENT – A method of transferring a negotiable or non-negotiable instrument whereby the assignee is merely placed in the position of the assignor and acquires the NI subject to all defenses that may be set up against the original payee o A person taking a NI by assignment in a separate piece of paper takes it subject to the rules on assignment. And where the holder of the bill payable to order transferred it without indorsement, it operates as an equitable assignment NOTE: If the instrument is not negotiable, it can still be transferred but only through assignment ASSIGNMENT AND NEGOTIATION DISTINGUISHED ASSIGNMENT NEGOTIATION Applicable law Civil Code NIL Type of Pertains to contracts in Pertains to NI transaction general Nature o f the The transferee is a The transferee is a transferee mere assignee holder who may be HDC Availability of Assignee steps into the HDC takes it free from defenses shoes of the assignor personal defenses and merely acquires available among whatever rights the parties assignor may have As to The transferee can The transferee can possibility of never become HDC become HDC in proper become HDC cases

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HOW NEGOTIATION TAKES PLACE a.

b.

c.

ISSUANCE – The first delivery of the NI, complete in form, to a person who takes it as a holder (Sec 191). It is the first transfer of NI to a payee Steps: (1) Mechanical act of writing the NI completely and in accordance with the requirements under Sec 1 NIL (2) The delivery of the complete instrument by the maker or drawer to the payee or holder with the intention of giving effect to it SUBSEQUENT NEGOTIATION (Sec 30 NIL) – AN NI is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof (1) If payable to bearer, NI may be negotiated by mere delivery (2) If payable to order, NI negotiated by indorsement completed by delivery  In both cases, delivery must be intended to give effect to the transfer of NI (DBP v. Sima Wei, G.R. no 85419, March 9, 1993) INCOMPLETE NEGOTIATION OF ORDER INSTRUMENT (Sec 49 NIL) – Contemplates a case where there is delivery and payment of value but NO indorsement  Applicable only to NI payable to order  Effect: The NI is in effect merely assigned to the transferee. It is only at the time of indorsement that the transferee acquires all the rights of the holder  For the purpose of determining whether the transferee is HDC, the negotiation takes effect as of the time when the indorsement is made. Hence, before indorsement, the transferee is not a holder (Sec 49 NIL)

RIGHTS OF TRANSFEREE FOR VALUE a. Acquires only the rights of the transferor; and b. Right to require the transferor to indorse the NI NOTE: Transferees in this situation do not enjoy the presumption of ownership in favor of holders

REASON: Mere possession of a NI does not in itself conclusively establish either the right of the possessor to receive payment, or of the right of one who has made payment to be discharged from liability (BPI v. CA and Salazar, G.R. no 136202, January 25, 2007) EQUITABLE ASSIGNMENT – The transaction is an equitable assignment and the transferee acquires the NI subject to the defenses and equities available among prior parties. If the transferor had legal title, the transferee acquires such title, and the right to have the indorsement of the transferor and also the right, as holder of the legal title, to maintain legal action against the maker or acceptance or other party liable to the transferor. 3. BY OPERATION OF LAW – The full title to a bill may pass without assignment or indorsement or delivery, i.e. by operation of law (De-Ba-De) a. By the DEATH of the holder, where the title vests in his personal representatives b. By the BANKRUPTCY of the holder, where the title vests in his assignee or trustee c. Upon the DEATH of a joint payee or indorsee, in which case the title vests in the surviving payee or indorsee in general 4. INDORSEMENT – It is the writing of the name of the indorser on the NI with the intent either to transfer the title to the same, or to strengthen the security of the holder by assuming a contingent liability for its future payment, or both

HOW INDORSEMENT IS MADE – The indorsement must be written on the NI itself or upon a paper attached thereto (allonge). The signature of the indorser without additional words is sufficient (Sec 31 NIL). o Allonge can only be used when there is no longer any room on NI for further indorsements. o Where the indorsement is written in an allonge, the same must be tacked or pasted on the NI so as to become part of it; otherwise, it cannot be considered an allonge. Indorsement may made in any form, as long as it is meant to be an indorsement.

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NATURE: An indorsement is not only a mode of transfer, it is also a contract.

INDORSEMENT AS A CONTRACT – Unless the indorsement is qualified (sec 65), every indorser is a new obligor and the terms are found on the face of the NI, with the additional obligation that if the NI is dishonored by nonpayment or nonacceptance, and notice is given to the indorser, the latter will pay for it.

2.

3.

NOTE: A qualified indorser is liable in case of breach of warranties (Sec 65).

RULES ON INDORSEMENT 1. Indorsement must be of the entire NI EXCEPT: Where NI has been paid in part, it may be indorsed as to the residue or balance (Sec 32) o An indorsement which purports to transfer to the indorsee a part only of the amount payable does not operate as a negation of NI, it operates merely as an assignment (Montinola v. PNB, G.R. no L-2861, February 26, 1951) o NOTE: An indorsement which purports to transfer the NI to 2 or more indorsees severally does not operate as a negotiation of NI (Sec 32) o Sec 32 does not prohibit discounting, whereby the indorsee pays the indorser les than the face amount of the NI. The discount is given in consideration of the period during which the purchaser has to way before he can cash the NI with the maker or acceptor, which can be done only at the maturity of NI o If the indorsement of NI does not comply with Sec 32, the transfer is a mere assignment which subjects the holder to all defenses on the NI EFFECT OF PARTIAL INDORSEMENT a. It doesn't operate as an indorsement b. It may constitute a valid assignment though b inding between the parties c. The person to whom the instrument is indorse d would not be

4. 5.

considered an indorsee but merely an assignee and would therefore take the instrument subject to the defenses a vailable between the original parties Where a person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negate personal liability (Sec 44 NIL) a. He must add words describing himself as agent b. He must disclose his principal c. He must be duly authorized in writing Where NI is drawn or indorsed to a person as “cashier” or other fiscal officer or corporation, it is deemed prima facie to be payable to the bank or corporation of which he is an officer, and may be negotiated by either indorsement of the bank or corporation or indorsement of the officer NOTE: The cashier or treasurer may prove that the NI were in fact indorsed to them in their personal capacities and not to the corporations. They can prove that they own the NI. Where the name of a payee or indorsee is wrongly misspelled, he may indorse the NI as therein described, adding, if he thinks fit, his proper signature (Sec 43 NIL) Joint indorsement – Where NI is payable to the order of 2 or more payees or indorsees who are not partners, all must indorse (Sec 11) EXCEPTION: a. Where the payee or indorsees are partners AND b. Where the payee or indorsee indorsing has authority to indorse for the others

CLASSIFICATION OF INDORSEMENT A. As to METHODS of negotiation 1. SPECIAL – Specifies the person to whom or whose order, the NI is to be payable, and the indorsement of such indorsee is necessary to the further negotiation of the NI (Sec 34 NIL) o If the NI is originally payable to order and it is negotiated by the payee by special indorsement, the indorsement of the indorsee is necessary to further negotiation of the instrument (Sec 34) o If the NI is originally payable to bearer, it may be negotiated by mere delivery even if the original bearer indorsed it specially (Sec 40 NIL) o Example: Pay to X, signed M. Page | 13

2. BLANK – Specifies no person to whom or to whose order the NI is to be payable and may be negotiated by delivery (Sec 34) o Example: An NI payable to the order of X, is indorsed by the latter by merely affixing his signature without specifying an indorsee

RULES ON BLANK INDORSEMENT a. b. c.

If NI is originally payable to order and negotiated by special indorsement, it can be further negotiated by indorsement completed by delivery If originally payable to order and negotiated by blank indorsement, it can be negotiated further by mere delivery If originally payable to bearer, it can be further negotiated by mere delivery even if the original bearer negotiated it by special indorsement

EFFECTS OF BLANK INDORSEMENT: (a) To make the NI payable to bearer and (b) may be converted to special indorsement by writing over the signature of indorser in blank any contract consistent with character of indorsement (Sec 35 NIL)

B. As to presence or absence of LIMITATIONS 1. ABSOLUTE (UNCONDITIONAL) – One by which the indorser binds himself to pay: a. Upon no other condition than failure of prior parties to do so; and b. Upon due notice to him of such failure 2. CONDITIONAL – Right of the indorsee is made to depend on the happening of a contingent event. Party required to pay may disregard the conditions (Sec 39 NIL) o Where an additional condition is annexed to the indorser’s liability. Such condition must be express. o If an indorsement is conditional, the party required to pay the NI may disregard the condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or not. But any person to whom the I so indorsed is negotiated will hold the same,

o o

or the proceeds thereof, subject to the rights of the person indorsing conditionally Example: Pay to X if he tops the 2013 bar exams NOTE: Conditional indorsement does NOT render an instrument non-negotiable but if the condition is on the face of the NI, the condition renders it non-negotiable as the promise or order therein would not be unconditional.

C. As to the kind of TITLE transferred 1. RESTRICTIVE – An indorsement is restrictive when it either (Sec 36 NIL): a. Prohibits further negotiation of the NI – E.g., Pay to Y only, signed M b. Constitutes the indorsee as the agent of the indorser (e.g., indorsement for deposit) – Pay to X for collection, signed M c. Vests the title in the indorsee in trust for so to the use of some other persons – Pay to Y in trust for A, signed M o Mere absence of words implying power to negotiate does not make an indorsement restrictive (Sec 36 NIL) o The omission of words of negotiability in the indorsement does NOT affect the negotiability but such omission in the body will render the NI nonnegotiable o A restrictive indorsement destroys the negotiability of the instrument and bars any further negotiation to HDC

EFFECT OF RESTRICTIVE INDORSEMENT (PAT) It confers upon the indorsee the right to: a. Receive PAYMENT of the NI b. Bring any ACTION thereon that the indorser could bring c. TRANSFER his rights as such indorsee, where the from of the indorsement authorizes him to do so (Sec 37 NIL) NOTE: An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise (Sec 47 NIL)

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o

This refers only to the first kind (Sec 36.a NIL) because this is the only type of restrictive indorsement that completely destroys the negotiability of the instrument b.

D. As to scope of LIABILITY of indorser 1. QUALIFIED – Constitutes the indorser a mere assignor of the title to the NI (Sec 38) o By adding the words “without recourse” above his signature, the indorser expressly rids himself of his liability as indorser, i.e. the holder would have no recourse to him should the maker fail to pay on the due date o A qualified indorser merely assumes the contract of sale/assignment of NI and agrees merely to transfer title o It is made by adding to the indorser’s signature words like “sans recourse,” “without recourse,” indorser not holder,” “at the indorser’s own risk” or other terms of similar import o Oral testimony is not admissible to establish that an unqualified NI is in fact qualified (Velasco v. Tan Liuan, G.R. no 17239, March 17, 1922) WITHOUT RECOURSE – Without resort to a person secondarily liable after the default of the person primarily liable NOTE: Qualified indorsement is usually resorted to if the indorser wants to transfer his rights over the instrument but does not want to assume responsibilities under the secondary contract

EFFECTS OF QUALIFIED INDORSEMENT a.

A qualified indorser has limited liability, i.e. he is liable for breach of warranty if the NI is dishonored by nonacceptance or non-payment due to: 1) Forgery – Warranty as to genuineness 2) Lack of good title on the part of the indorser – warranty as to good title 3) Lack of capacity to indorse on the part of the prior parties – warranty as to capacity to contract; or

c.

4) Fact that at the time of the indorsement, the NI was valueless or not value, and he knew of the fact – warranty as to ignorance of certain facts A qualified indorsement does not impair the negotiable character of the instrument (Sec 38, last sentence) A qualified indorser is liable to all the parties who derive their title through his indorsement

2. GENERAL(UNQUALIFIED) – The indorser indorses the instrument without any qualified and subject liabilities under Sec 66 NIL

E. OTHER kinds of indorsement 1. JOINT – Indorsement payable to the order of 2 or more persons (Sec 41 NIL) GENERAL RULE: Where the instrument is payable to 2 or more payees, ALL must indorse in order that the NI may be validly negotiated REASON: To make it an indorsement of the entire instrument because if only one indorses, he passes only his part of the instrument EXCEPTION: a. Where the payees or indorsees indorsing has the authority to indorse for the others; and b. Where the payees or indorsees are partners (Sec 41 NIL) 2. IRREGULAR – A person who, not otherwise a party to an instrument, places thereon his signature in blank before delivery (Sec 64 NIL)

LIABILITY OF IRREGULAR INDORSER (Sec 64) a. b. c.

If the NI is payable to the order of a third person (payee), he is liable to the payee and to all subsequent parties If the NI is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all parties subsequent to the maker or drawer If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee

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PRESUMPTION AS TO TIME OF INDORSEMENT GENERAL RULE: Negotiation is deemed prima facie to have been effected before the instrument is overdue EXCEPTION: IF the indorsement bears a date after the maturity of the instrument (Sec 45 NIL) NOTE: IF the indorsement bears a date, the presumption would be that the date written is the true date (Sec 11 NIL)

PRESUMPTION AS TO PLACE OF INDORSEMENT (Sec 46 NIL) Except where the contrary appears, every indorsement is presumed to have been made at the place where the NI is date.

RENEGOTIATION OF PRIOR PARTIES  



Sec 50 refers to a re-acquirer or holder who negotiates the NI and then subsequently reacquires it. Where an NI is negotiated back to a prior party, such party may reissue and further negotiate the same. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable (Sec 50 NIL) REASON: To avoid circuitousness of suits

LIMITATIONS: A prior party may cannot renegotiate the NI: 1. Where it is payable to order of a third person, and has been paid by the drawer 2. Where it was made or accepted for accommodation and has been paid by the party accommodated

STRIKING OUT (CANCELLATION) INDORSEMENT (Sec 48 NIL) The holder may at any time strike out or cancel the indorsement which is not necessary to his title. EFFECT: The indorser whose indorsement is stricken out, and all the indorsers subsequent to him are relieved from liability on the NI (Sec 48). NOTE: If the NI is negotiated by special indorsement, the holder has no right to strike out such indorsement nor can he convert the special indorsement into a blank indorsement.

WHEN HOLDER MAY CANCEL INDORSEMENT 1. An indorsement payable to bearer on its face – By virtue of Sec 48, the holder may strike out all intervening indorsements or any of them since they are not necessary to his title 2. Instrument originally payable to order – Under Sec 9(e), NI which is upon its face payable order becomes payable to bearer when the only or last indorsement is in blank. Hence, when a blank indorsement is followed by a special indorsement and the holder cancels all indorsements subsequent to the blank indorsement, the NI would become payable to bearer s the last indorsement would be in blank. The special indorsements are not necessary to the holder’s title as he could have acquired the title to NI by mere delivery NOTE: The indorser may NOT strike out the payee’s indorsement since the NI is payable to order, it cannot be validly negotiated without his indorsement

CONTINUATION (Sec 47 NIL)

OF

NEGOTIABLE

CHARACTER

GENERAL RULE: An instrument which is negotiable shall continue to be such until it has been: 1. RESTRICTIVELY INDORSED – This refers only to the first kind (Sec 36.a NIL) because this is the only type of restrictive indorsement that completely destroys the negotiability of the instrument 2. DISCHARGED BY PAYMENT OR OTHERWISE (Sec 47 NIL) – This must be understood to be payment made at or after maturity because if the payment was made before maturity, the person so paying can still renegotiate or reissue the instrument. Hence, payment before maturity does not destroy negotiability TRANSFER WITHOUT INDORSEMENT (Sec 49 NIL)  Contemplates a case where there is delivery and payment of value but NO indorsement (unendorsed)  Applicable only to NI payable to order  The holder acquires only the rights of his predecessor and the right to have the NI indorsed by the transferor  EFFECT: The instrument is in effect merely assigned to the transferee. It is only at the time of indorsement that the transferee acquires the rights of a holder

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

For the purpose of determining whether the transferee is HDC, the negotiation takes effect as of the time when the indorsement is made. Hence, before the indorsement the transferee is not a holder (Sec 49)

HOLDERS HOLDER – A payee or indorsee of a bill or note who is in possession of it or the bearer thereof entitled to receive the sum for which it calls (Sec 191 NIL)

CLASSIFICATION OF HOLDERS 1. HOLDER IN DUE COURSE – One who has taken the instrument under the conditions of Sec 52 NIL and holds the NI free from personal defenses available to prior parties 2. SIMPLE HOLDER (HOLDER NOT IN DUE COURSE) – One who became a holder without any, some or all of the requisites under Sec 52. He holds the NI subject to the same defenses as if it were non-negotiable. He may enforce the NI and receive payment therefor 3. HOLDER FOR VALUE – Where value has at anytime been given for the NI, the holder is deemed a holder for value in respect to all parties who become such prior to that time (Sec 26 NIL) o The mere fact that the present holder paid nothing for a note or is not a holder for value does not preclude recovery, but only lets in all defenses, if any, that might be urged against the original payees o Where the holder has a lien on the NI, arising from either contract or by implication of law, he is deemed a holder for value to the extent of his lien (sec 27 NIL)  If the amount called for by the NI is less than the principal debt secured by such NI, the pledgee is a holder for value for the full amount and may recover all  If the debt secured by the NI is less than the sum for which it was issued, the pledgee may recover call but he becomes merely a trustee as to the excess. This is in line with the general rule against splitting of cause of action under Sec 32

PRESUMPTION OF VALUE: there is a prima facie presumption that every NI is issued for valuable consideration and may be rebutted by contrary proof o Absence or failure of consideration is a defense against a holder not in due course o CONSIDERATION – Valuable consideration (Sec 191); any consideration sufficient to support a simple contract (Sec 25). BANK CREDIT AS VALUE: When the holder of a check deposits it with his bank (not drawee bank) and the bank credits it to his account, is the bank a holder for value? The bank becomes a holder for value only when the deposit withdraws the amount of the deposited instrument. If such withdrawal takes place before maturity and before the bank receives notice of any defense on the NI, the bank is HDC against whom such defense would be unavailable. How determined: First In First Out (FIFO) – First money in is presumed to be the first money paid out IMPORTANCE OF THE CLASSIFICATION: Each class of holders has defenses which are available to one class and which may not be available to the other classes. NOTE: If there are NO defenses, the distinction between HDC and one who is not HDC is IMMATERIAL

RIGHTS OF HOLDERS IN GENERAL (Sec 51 NIL) 1. May SUE thereon in his own name – Even if he is a holder only for collection or as pledge to the NI 2. Payment to him in due course discharges the NI – Payment in due course is made: a. At or after the maturity of the NI b. To the holder thereof c. In good faith; and d. Without notice that his title is defective RIGHT TO SUE OF TRANSFEREE OF AN UNINDORSED INSTRUMENT A transferee of an unendorsed NI is certainly not an holder under Sec 191 NIL and cannot be considered HDC. However, the

Page | 17

transferee may sue in his own name under the principle in assignment that the assignee steps into the shoes of the assignor. CAN A PAYEE BE A HDC? Yes. If the payee satisfies the requirements of Sec 52, the payee can be HDC (Cely Yang v. CA, G.R. no 138074, August 15, 2003). REASON: Sec 191 defines a holder as the payee or indorsee of a bill or note who is in possession of it or the bearer thereof. Such payee may either have acquired the note from another holder or he did not deal strictly with the maker thereof. CAN A DRAWEE BE HDC? No. While a payee may be a HDC, a drawee does not, by paying a bill, become HDC. REASON: A holder refers to one who has taken the NI as it passes along in the course of negotiation towards the drawee and not the drawee who, on the acceptance and payment of the NI, thereby strips it of all negotiability and reduces it to a mere voucher or proof of payment (National Bank of Commerce v. Seattle National Bank, 187 Pac 342).

HOLDER IN DUE COURSE  

 

All the 4 conditions under Sec 52 must concur in order to qualify a person as HDC The holder of a non-negotiable instrument cannot attain the status of HDC. The fact that the instrument is non-negotiable is a sign of warning to a prospective purchaser and places him on guard and on inquiry A holder not HDC has all the rights of the latter except that the instrument is subject to the defenses as if it were nonnegotiable (Sec 58) Personal defenses cannot be set up against HDC but real defenses which attach to the NI itself, would be available against all persons even as against HDC

REQUISITES FOR HOLDER IN DUE COURSE (Sec 52 NIL) 1. That the instrument is COMPLETE and REGULAR upon its face

a.

b.

Complete – An instrument is incomplete when it is wanting in any material particular proper to be inserted in a NI without which the same will not be complete (Sec 14). BUT if the omission is not a important particular, such omission will not deprive the holder to be HDC REASON: The taking of an incomplete instrument puts the purchaser on inquiry as to why it is incomplete. If he fails to do so, he takes the NI subject to all defenses Regular on its face – TO render the NI irregular under sec 52(a) NIL, the alteration must be visible or apparent on its face. If not apparent, the matter is governed solely by Sec 124 (on alteration) which renders the NI void

2. That he has become a holder of it before it was OVERDUE and WITHOUT notice that it had been previously dishonored if such were the case a.

Before overdue – A holder who takes an overdue instrument is put on inquiry although he is not actually aware of any existing defense of a prior party. A person taking an overdue NI should certainly question why the NI is still in circulation even if it is overdue  On the date of maturity, the NI is not overdue and a holder who acquires the NI on that date is HDC because the principal debtor has the whole day to pay

WHEN IS THE DATE OF MATURITY? a. The date of maturity is the time fixed therein b. If NI is payable on demand, the date of maturity is determined at the time of presentment (Sec 183 NIL). The same applies if payable on sight c. If NI is payable on the occurrence of a specified event which is certain to happen, the date of maturity is fixed by the happening of the event (Sec 4.c NIL) EFFECT OF POSTDATING OR ANTEDATING – An instrument is not only valid but also negotiable although it is antedated or postdated. A holder thereof can be HDC and he is not put on inquiry for the mere fact that it is antedated or postdated. A postdated check is payable either: a. Fixed or determinable future time specified therein; or

Page | 18

b.

If no time is expressed, on demand or on after the date of the NI NOTE: If the postdating or antedating of NI is for an illegal or fraudulent purpose, the NI is void.

the payee or the indorsee acquired possession of the NI under circumstances that should have put him to inquiry as to the title of the holder who negotiated the NI. The burden is now on the part of the holder to show that despite the suspicious circumstances, it acquired the check in actual good faith (De Ocampo v. Gatchalian, G.R. no L-15126, November 30, 1961)

INSTALLMENT INSTRUMENTS – A purchaser after maturity of the first installment with notice that it was unpaid takes the paper as overdue paper. Consequently, a purchaser of an installment note after an installment is overdue may be HDC as to the balance if he has NO notice of the failure to pay of the first installment.

Good faith – refers to the indorsee or transferee not the indorser or transferor of the NI. Bad faith – means that the indorsee or transferee must have knowledge of facts which render it dishonest for him to take a particular piece of negotiable paper.

INTEREST – Where by the terms of the NI, the principal was to become due upon the default of the payment of interest, one who takes the NI upon which the interest is overdue is not HDC.

Proof of bad faith: It is not necessary to show knowledge of exact truth. It is sufficient that such knowledge tends to show that there was something wrong with the transaction.

NOTE: An overdue NI may still be negotiated but the holder cannot be HDC. b.

b.

Without notice of dishonor – An instrument may be dishonored by: (1) Non-acceptance (Sec 149 NIL) (2) Nonpayment (Sec 83) NOTE: While dishonor by nonpayment can only take place at the time of maturity, dishonor by non-acceptance of bill may occur even before the date of maturity DEMAND INSTRUMENTS (Sec 53 NIL) – Where NI payable on demand is negotiated on an unreasonable length of time after its issue, the holder is not deemed HDC. o In determining what is unreasonable length of time regard must be given to the NATURE of the instrument, the USAGE OF TRADE OR BUSINESS with respect to such NI and the FACTS of the particular case (Sec 193 NIL) NOTE: Dishonored NI may still be negotiated and the holder WITHOUT notice can be HDC

Value – Any consideration to support a contract (Sec 25 NIL) CONSIDERATION FOR THE ISSUANCE AND SUBSEQUENT TRANSFER – Every NI is deemed prima facie to have been issued for a valuable consideration. Every person whose signature appears thereon is presumed to have become a party thereto for value (Sec 24 NIL) o Consideration is not relevant to the “negotiability”” of an NI but it is significant on the question of whether or not one is HDC Value includes: a. An antecedent or pre-existing debt b. Value previously given (Sec 25) c. Lien arising from contract or by operation of law but the holder is deemed a holder for value to the extent of his lien (Sec 27 NIL) NOTE: It is not necessary that the consideration should be adequate (Art 1355 NCC), but love and affection do not constitute value within the meaning of the law.

3. That he has taken it in GOOD FAITH and for VALUE a.

Good faith – Although good faith on the part of the holder is presumed, such presumption is destroyed if

Page | 19

4. That at the time of its negotiation to him, he had NO

NOTICE of any infirmity in the instrument or in the title of the person negotiating it NOTICE OF DEFECT – The person to whom it is negotiated must have had actual or chargeable knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the NI amounted to bad faith (Sec 56 NIL) How Proven: The question of good faith or bad faith is a question of fact which must be determined in accordance with the particular circumstances of the case (circumstantial evidence) EFFECT OF PURCHASE AT A DISCOUNT: The purchase of NI at a discount, does not itself constitute bad faith because in most cases, a purchaser at a discount is a influenced by the financial condition of the issuer of the NI rather than by the possibility it was obtained subject to a defense. EFFECT OF NOTICE BEFORE FULL PAYMENT – If the transferee receives notice of any defect or infirmity in the NI before paying the full amount, he will be HDC only as to the extent of the amount paid by him (Sec 54 NIL) o This does not apply where the holder has given for the NI a promise which he must perform, in which case he would be in the same position as one who has paid money or property at the time of the transfer. CONSTRUCTIVE NOTICE NOT SUFFICIENT – There must actual notice of the defect or infirmity in the NI. However, notice to an agent is chargeable to the principal. IIS MERE NEGLIGENCE TO MAKE INQUIRIES SUFFICIENT TO CONSTITUTE NOTICE OF INFIRMITY OR DEFECT? No. Under Sec 54 and 56 NIL, negligence in itself is not sufficient to constitute notice since it is not equivalent to either actual knowledge or bad faith o If the holder had actual knowledge of suspicious circumstances, coupled with the means of readily informing himself of the facts and he willfully abstained from making inquiries, his intentional ignorance may amount to bad faith

EFFECTS OF NOTICE OF DEFECT a. It destroys the status of the holder as HDC b. The holder is open to all defenses and not merely those relating to defect of which he had notice (Sec 58) WHEN TITLE IS DEFECTIVE (Sec 55 NIL) a. In the ACQUISITION thereof, the title of a person becomes defective when he obtains the NI or any signature thereto by: (1) fraud; (2) force, duress or fear; (3) other unlawful mean; or (40 for an illegal consideration b. In the NEGOTIATION thereof, the title becomes defective when he negotiates it in (5) breach of faith; or (6) under circumstances that amount to fraud (Sec 55 NIL) NOTE: BUT when it is shown that the title of any person who has negotiated the NI was defective, the burden is on the holder to prove that he or some other person under whom he claims acquired the title as HDC (Sec 59 NIL). INFIRMITIES – include things that are wrong with the NI itself as distinguished from those things that are lacking in the contracts on the NI. Such infirmities are to be found in situations arising from: a. Maturity date not listed on the NI (Sec 13) b. Lack in material particulars (Sec 14) c. Incomplete and undelivered NI (Sec 15) d. Complete but undelivered NI (Sec 16) e. Signature by procuration (Sec 21) f. Forged signature (Sec 23) WHAT IS THE EFFECT OF ACQUIRING NOTICE OF INFIRMITY BEFORE PAYMENT OF FULL CONSIDERATION? The transferee will be deemed HDC only to the extent of the amount therefor paid by him (Sec 54)

RIGHTS OF HOLDER IN DUE COURSE (Sec 51 and 57 NIL) 1. May SUE on the instrument in his own name 2. May RECEIVE payment and if payment is in due course, the instrument is discharged

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3. HOLDS the instrument free from any defect of title of prior parties and free from personal defenses available to parties among themselves 4. May ENFORCE payment of the instrument for the full amount thereof against all parties liable thereon EXCEPTIONS: a. When the holder is a holder for value only to the extent of his lien – HDC only to that extent (Sec 27 NIL) b. When the holder acquired notice of any infirmity in the NI or defect in the title of the person negotiating the same BEFORE he has paid the full amount agreed to be paid therefor – HDC only to the extent of the amount paid (Sec 54 NIL) c. In case of alteration as to amount – HDC may enforce payment only according to its original tenor (Sec 124 NIL)

WHO IS DEEMED A HOLDER IN DUE COURSE (Sec 59 NIL) Every holder of a NI is deemed prima facie HDC. However, this presumption arises only in favor of a peson who is a holder as defined under Sec 181 NIL, i.e. a payee or indorsee who is in possession of the instrument or bearer thereof  When it is shown that the title of any person who has negotiated the NI was defective, the burden is on the holder to prove that he or some other person under whom he claims, acquired the title as HDC  EXCEPTION: The holder has no burden of proving that he has HDC in favor of a party who became bound on the NI prior to the acquisition of such defective title

WHO IS NOT DEEMED A HOLDER IN DUE COURSE (Sec 53 NIL) Where an NI payable on demand is negotiated for an unreasonable length of time after issue, he holder is not deemed HDC. WHAT IS REASONABLE TIME? As to what constitutes reasonable time, the law provides that: “Regard is to be had to the nature of the instrument, usage of trade

or business (if any), with respect to such instruments and the facts of the particular case. (Sec 193 NIL)

HOLDER NOT IN DUE COURSE One who became the holder of NI without any, some or all of the requisites for due course holding under Sec 52 NIL GENERAL RULE: If a holder is not HDC, he is subject to the same defenses as if it were non-negotiable. In other words, a holder not in due course is subject to both personal and real defenses available to parties primarily or secondarily liable. EXCEPTION (SHELTER RULE): If a holder derives his title through HDC and if he is not a party to any fraud or illegality affecting the NI, he has all the rights of such former holder (HDC) in respect of all parties prior to the latter (Sec 58 NIL) REASON: Without this provision, the hands of the HDC would be tied in disposing the instrument because he would still have to look for a buyer who had notice of the defect. NOTE: A payee whose title is defective title is defective cannot better his title by selling the NI to HDC and buying it back again.  The presumption refers only to the status of the present holder and not to any previous holder. Thus if the present holder’s rights depend on a previous holder’s status as HDC, he would have to prove such fact and cannot rely on the presumption because the latter is no longer the holder. EXCEPTION TO THE EXCEPTION: The rule under Sec 58 does not apply if the holder was previous holder not in due course who had subsequently repurchased the instrument either personally or through an agent. REASON: A holder who is not HDC cannot improve his situation by reacquiring the NI (Fossum v. Fernandez, G.R. no L-20080, March 27, 1923).

RIGHTS OF A HOLDER NOT IN DUE COURSE 1. He may SUE on the instrument in his own name 2. He may RECEIVE payment and if the payment is in due course, the instrument is discharged 3. He HOLDS the instrument subject to the same defenses as if it were non-negotiable

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NOTE: This, prior parties can avail against him any defense available among these prior parties and prevent the said holder from collecting in whole or in part the amount stated in the NI. 4. If he derives his title through HDC and if he is not party to any fraud or illegality affecting the NI, he has ALL the rights of such former holder (HDC) in respect of all parties prior to the latter (SHELTER RULE)

Real defenses Personal defenses Rights

FAILURE TO MAKE INQUIRY GENERAL RULE: Failure to make inquiry after notice of the facts merely sufficient to cause a person of ordinary prudence to make inquiry as to an infirmity in the NI and defect in the holder’s title, is not evidence of bad faith to bar him from recovery. REASON: The law does not impose a duty on the part of every holder to make inquiry before acquiring the NI. EXCEPTIONS: 1. Where the holder’s title is defective or suspicious that would compel a reasonable man to investigate, it cannot be stated that the payee acquired the NI without the knowledge of said defect in the holder’s title and for this reason the presumption is that it is HDC or that it acquired the instrument in good faith does not exist (De Ocampo v. Gatchalian, G.R. no L-15126, November 30, 1961). 2. Holder to whom cashier’s check is not indorsed in due course and negotiated for value is not HDC (Mesina v. IAC, G.R. no 70145, November 13, 1986) NOTE: The holder may not be considered HDC because of the NI involved, as in the case where a person takes a crossed check without making further inquiries. The act of crossing a check serves as a warning to the holder that the check has been issued for a definite purpose (Bataan Cigar and Cigarette Factory v. CA, G.R. no 93048, March 3, 1994)

HOLDER IN DUE COURSE AND HOLDER NOT IN DUE COURSE DISTINGUISHED Compliance with the requisites

HOLDER IN DUE COURSE All the conditions under Sec 52 NIL are PRESENT

HOLDER NOT IN DUE COURSE One, some or all of the requisites under Sec 52 are ABSENT

His rights can be defeated by real defenses His rights cannot be defeated by personal defenses He has the right to enforce payment, sue in his own name, and negotiate the NI

His rights can be defeated by real defenses His rights can be defeated by personal defenses He has the right to enforce payment, sue in his own name, and negotiate the NI

LIABILITY OF PARTIES LIABILITY AND WARRANTY DISTINGUISHED Liability to pay

Requisites to enforce liability When action must be brought

LIABILITY Makes the parties liable to pay the sum certain in money stated in the NI

Condition on presentment and notice of dishonor Action cannot be brought until maturity of the NI

WARRANTY Impose no direct obligation to pay in the absence of breach thereof. In case of breach, the person who breached the same may either be liable or barred from asserting a particular defense Does not require presentment and notice of dishonor May be

CLASSITIFICATION OF PARTIES ACCORDING TO LIABILITY 1. PRIMARY PARTY – Unconditionally liable; the primary party is bound to pay the holder at the date of maturity, whether or not the holder demands payment him (Sec 192 NIL)

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o

He is not relieve from liability even if NI should become overdue due to holder’s failure to make a demand a. Maker of a promissory note b. Acceptor of Bill of Exchange; and c. Certifier of Bill of Exchange

2. SECONDARY PARTY – Conditionally liable; the secondary party is not bound to pay unless the following conditions have been fulfilled: (a) due presentment or demand to the primary party for payment or acceptance; (b) its dishonor by the party; and (c) taking of proceedings required by law after dishonor, i.e. notice of dishonor and in case of foreign Bills of Exchange, protest of the bill (Sec 70 NIL) a. Drawer of a bill; and b. Indorsee of a note or bill 3. NOT LIABLE a. Drawee until he accepts the NI in which case he comes an acceptor

PRIMARY LIABILITY DISTINGUISHED Liability

When to pay

AND

PRIMARY LIABLE Who by the terms of the NI is absolutely required to pay the same (Sec 92 NIL) Unconditionally bound to pay Absolutely required to pay upon maturity of NI

SECONDARY

LIABILITY

SECONDARY LIABLE Who by the terms of the NI is not absolutely required to pay Conditionally bound to pay Required to pay after conditions have been fulfilled: 1. Due presentment for payment or acceptance of primary party; 2. Dishonor by such party 3. Taking of the proceedings required by law after dishonor

(notice and/or protest)

PRIMARILY LIABLE 1. MAKER (Sec 60 NIL)– applies only to promissory notes a. Engages to pay according to the tenor of the NI b. Admits the existence of the payee and his then capacity to indorse o Due presentment for payment (Sec 70 NIL) and due notice of dishonored (Sec 89 NIL) are not necessary for the purpose of charging the maker with liability. It is necessary, however, fix the liability of the drawer or indorser o By executing a PN, the maker warrants that the payee named in the NI is existing; therefore, he cannot question the corporate existence of the payee o Maker also represents to the world that the payee has the capacity to indorse at the time of the making of PN and thus represents that the payee can transfer a good and valid title to the PN by indorsement  Maker cannot raise the defense of minority; insanity of payee or ultra-vires act of corporation 2. ACCEPTOR (Sec 62 NIL) – drawee has no liability on the bill unless and until he accepts the same. Once he accepts, he becomes primarily liable on the instrument because he accepts to pay it according to the tenor of his acceptance, subject to no condition whatsoever o Acceptance applies only to bills of exchange o Object: to bind the drawee and to make him an actual and bound party to the instrument a. The drawee of a bill is not liable before acceptance. Once he accepts, he becomes an acceptor and become primarily bound on the NI subject to no condition whatsoever Acceptor engages to pay according to the tenor of his acceptance: o The acceptor engages to pay according to the tenor of his acceptance, which is not the same as tenor of the bill itself because the acceptance may be qualified (Sec 139 NIL) Page | 23

o

Like the maker of PN, neither presentment for payment nor notice of dishonor is necessary to charge him with liability, except were he is an acceptor

REQUISITES FOR VALID ACCEPTANCE (SEC 132) a. It must be in writing b. It must be signed by the drawee c. It must not change the implied promise of the acceptor to pay only in money NOTE: There can be no valid oral or implied acceptance except under Sec 137 (constructive acceptance) o Acceptance is made by writing the word “accepted” or by the drawee’s signature alone

STATUS OF DRAWEE PRIOR TO ACCEPTANCE OR PAYMENT – The drawee is not liable on the bill of exchange or check until he accepts it. Even HDC cannot sue drawer prior to his acceptance  REASON: Mere issuance of the bill does not render the drawee liable because it does not operate as an assignment of the funds in the hands of the drawee  When the bill is accepted, the acceptor becomes primarily liable under Sec 62  Bank is not liable until it accepts or certifies the check. Prior to certification, the drawer may issue a stop payment order NOTE: If the drawee bank refuses to accept the bill without justifiable reason/s, the drawee may be liable to the drawer for breach of contract or damages based on

CONSTRUCTIVE ACCEPTANCE – The drawee has 24 hrs after presentment to determine whether to accept the bill or not. o 24 hr-period is counted from time of delivery  If check is returned unaccepted within 24 hrs = not dishonored since drawee still has the remainder of the period to accept or dishonor  If check is returned and fails to accept within the remainder of the 24 hrs = dishonored

If check is returned with statement of refusal = dishonored  If drawee destroys the check instead of returning or accepting = deemed accepted (Sec 137) unless the destruction is accidental  If the bill is delivered to the drawee who destroys the same  If the drawee does not return the bill, accepted or non-accepted within 24 hrs (24-hr rule) or such time allowed by holder Sec 137 NIL uses the word “refuses” which clearly implies a demand for the return of the bill. Mere failure to return on time is not acceptance; Sec 150 provides if no acceptance is given within the prescribed time, the bill is deemed dishonored



o o

ACCEPTANCE ON A SEPARATE INSTRUMENT – An acceptance is valid even if it is not written on the same instrument, e.g. letter or telegram. o Acceptance may be on an existing bill or a future bill: (1) Extrinsic acceptance – acceptance on an existing bill; acceptance may be conditional (2) Virtual acceptance – acceptance on an future bill; acceptance must be unconditional o To be valid, such acceptance must identify the bill to which the acceptance and must be clear and unequivocal o Sec 134 requires that the acceptance be shown and purchaser take the take the bill for value on the faith of such acceptance  EFFECT: Subsequent holders acquire the rights of the relying party from whom they take the NI, applying Sec 58 and 49

KINDS OF ACCEPTANCE (1) General acceptance – Sec 140 provides that an acceptance to pay at a particular place is a general acceptance UNLESS it expressly states that the bill is to be paid there only and not elsewhere (2) Conditional acceptance – If any of the following are present:

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(a) Conditional i.e., which makes payment by the acceptor dependent on the fulfillment of a condition (b) Partial i.e., acceptance only to the part of the anount (c) Local i.e., acceptance to pay ONLY at a particular place (d) Qualified as to time (e) Acceptance of some one or more of the drawees but not all TRADE ACCEPTANCE – Draft or bill of exchange with a definite maturity, drawn by seller or buyer for the purchase of goods, bearing across its face the acceptance of the buyer o Generally limited to domestic transactions BANKER’S ACCEPTANCE – Negotiable time draft or bill of exchange drawn on and accepted by a commercial bank o Generally used for international trade e.g., financial, import-export transactions o Used when buyer and seller are not known to each other; acceptance substitutes the bank’s credit for the unknown firm o Effect: Accepting bank is unconditionally and irrevocably liable to pay holder at maturity. Drawer and indorsers are subsidiarily liable

WARRANTIES OF THE ACCEPTOR (Sec 62 NIL) a. b.

Admits the existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the NI and; Admits the existence of the payee and his then capacity to indorse  The acceptor does NOT admit the genuineness of the indorser’s signature because it is only the signature of the drawer that he warrants by virtue of the business relationship between the bank and the drawer.

NOTE: The warranty established by Sec 62 is in favor of holders of the NI after acceptance and when the drawee bank cashes or pays the check, the cycle of negotiation is terminated. It is illogical thereafter to speak of subsequent holders who can invoke the warranty under Sec 62 (PNB v.

National City Bank of New York, G.R. no 43596, October 3,1 1956)

SECONDARILY LIABLE DRAWER, GENERAL INDORSER AND IRREGULAR INDORSER DISTINGUISHED DRAWER (Sec 61)

GENERAL INDORSER (Sec 66) Admits the Warrants to all existence of the subsequent HDC: payee and his a. That the capacity to indorse instrument is GENUINE and in all respect what it purports to be b. He has GOOD TITLE to it c. ALL prior parties had capacity to contract d. The instrument is, at the time of indorsement, VALID and subsisting Engages that the Engages that the NI instrument will be will be accepted or accepted or paid by paid, or both, as in the party primarily the case may be, liable; and according to its tenor; and Engages that if the instrument is dishonored and proper proceedings are brought, he will pay to the party entitled to be paid

If the NI is dishonored and necessary proceedings on dishonor be duly taken, he will pay to the party entitled to be paid

IRREGULAR INDORSER (Sec 64) A person not, not otherwise a party to an NI, places his signature thereon in blank before delivery If the NI is payable to the order of a 3rd person, he is liable to the payee and subsequent parties

If the NI payable to the order of maker or drawer or to bearer, he is liable to all parties subsequent to the maker or drawer If he signs for accommodation of the payee, he is liable to all parties subsequent to the payee

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1. DRAWER (Sec 61) – The liability of drawer is conditional. The drawer does not promise to pay the bill absolutely. He makes no warranty but he engages to pay after the following conditions are complied with: a. The bill is PRESENTED for acceptance (Sec 143 NIL) or for payment (Sec 70) as the case may be to the drawee b. The bill is DISHONORED by non-acceptance or nonpayment, as the case may be; and c. The necessary PROCEEDINGS on dishonor are duly taken: (1) Notice of dishonor was given to the drawer (2) In case of foreign bills, protest is made o The drawer is secondarily liable to (1) holder; or (2) any subsequent indorser who is compelled to pay (or known as INTERVENING INDORSERS) o Sec 61 allows the drawer to negative or limit his liability by express stipulation NOTE: There is a contractual relation between the drawer and the drawee o A drawer may not unilaterally discharge himself from liability on the checks issued by him as security and not for value and negotiated to HDC by the mere expediency of withdrawing his funds from the drawee (State Investment House Inc v. CA, G.R. no 101163, January 11, 1993) o When the holder deposits his check with the collecting bank, the nature of relationship created is one of agency, i.e. the bank is to collect from the drawee of the check the corresponding proceeds. Thus, the privity of contract is between the holder-depositor and the collecting bank. There is no privity of contract between the drawer and the collecting bank

DRAWER AND MAKER DISTINGUISHED Undertaking Liability Limitation of liability

DRAWER Issues the bill of exchange Secondarily liable Can negative or limit his liability

MAKER Makes a promissory note Primarily liable Cannot limit his liability

2. GENERAL INDORSER (Sec 66) – Gen indorser makes 2 contracts: contract of sale of NI and special contract of indorsement o Liable as assignor of credit AND also on his indorsement o Under Sec 66 warranties of Gen indorser run to “all subsequent HDCs” = indorse should not have knowledge of breach of warranty at the time of indorsement o If NI payable to bearer is specially indorsed = indorser becomes liable under Sec 66  EXCEPT if holder chooses to strike out the indorsement as not necessary to title o When maker issues PN payable to his own order, it is not complete until he indorses it = not the same as indorsement to make him liable under Sec 66  Such indorsement is merely a step in the issuance of NI so that 1st transferee may become a holder (effect 1st transferee becomes payee)  Liability of maker is still as MAKER o When banks require holders of a check to sign at the back = not same as indorsement but mere acknowledgment of receipt of cash paid by drawee bank o Bank stamps “all prior and/or lack of indorsement guaranteed” – liable against forgery not because of Sec 66 but because fo express warranty

CONDITIONS PREDECENT TO INDORSER’S LIABILITY a. b.

Due presentment for payment or acceptance must be made If dishonored, the proceedings on dishonor be duly taken

NOTE: Liability of an unqualified indorser is similar to that of drawer

WARRANTIES: a. b. c.

NI is GENUINE and in all respects what it purports to be He has GOOD TITLE to it ALL PRIOR parties had capacity to contract; and

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d. e.

He has NO KNOWLEDGE of any fact that would impair the validity of NI or render it valueless NI at the time of the indorsement is VALID and subsisting  Unqualified indorser – guarantees that NI is valid and subsisting whether or not he has no knowledge of the fact  Qualified indorser – warrants merely that he has no knowledge of any fact that would invalidate the NI

3. IRREGULAR INDORSER (Sec 64) – Although the law does not sate that all irregular indorsers are accommodation parties, they are usually accommodation parties. TO BE CONSIDERED AN IRREGULAR INDORSER a. A person must NOT be party to the NI b. He must have signed the NI in BLANK c. He must have signed BEFORE delivery NOTE: The party is called an “irregular” or an “anomalous” indorser because he indorses in an unusual, singular, or peculiar manner. His name usually appears where we would naturally expect another name LIABLITY OF IRREGULAR INDORSER – An irregular indorser is liable as a general indorser because he indorses without qualification o Sec 64 provides only for the parties to whom an irregular indorser is liable 4. RESTRICTIVE INDORSER – Liability of restrictive indorser depends on the kind of restrictive indorsement is made o If indorsement prohibits further negotiation = NI ceases to be negotiable but restrictive indorser is liable to his immediate indorsee as Gen indorser unless otherwise indicated o If by restrictive indorsement, indorsee is made an agent of indorser = any subsequent indorsee who acquires title from agent acquires only such title o Restrictive indorsement for the benefit of 3rd party = liable as Gen indorser unless otherwise indicated

5. AGENT OR BROKER (Sec 69) – When a broker or agent negotiates an instrument without indorsement, he incurs all liabilities under Sec 65 (general indorser) unless he discloses the name of his principal and the fact that he is acting only as agent (Sec 69) o The principal whose name is undisclosed on the NI cannot be liable because no person is liable on an instrument unless his signature appears thereon (Sec 18 NIL).  Where the agent signs his name but does not disclose the name of the principal or that he is acting only as an agent = no action against the principal and the agent is personally liable to the holder  Agent signed his name band indicated he is acting in a representative capacity but did not disclose principal’s name = parol evidence cannot be used to evade agent’s personal liability  Agent signed his name without indicating that he acted as agent but disclosed the name of principal = agent is presumptively liable but parol evidence is admissible to show that he is an agent of a third person  Where agent disclosed on the NI that he is acting in a representative capacity and the name of his principal = parol evidence is admissible to exonerate the agent from personal liability o Where the agent discloses the name of the principal and expressly indicates that an agency exists between them = principal is bound and agent is not personally liable UNLESS he had not authority from the principal o If agent signs by procuration, it serves as a notice that the agent’s authority is limited o If agent in signing by procuration exceeded his authority = principal is not liable even to HDC WHEN PERSON SIGNING THE INSTRUMENT NOT DEEMED AS AN INDORSER

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a. b.

c.

The person who signed the NI has clearly indicated by appropriate words his intention to be bound in some OTHER capacity (Sec 63 NIL) A person signs for the purpose of indetifying a person only and not for the purpose of incurring any liability (American Bank v. Macondray & Co, G.R. no 1808, August 23, 1905) A person only guarantees prior indorsements (PNB v. CA, G.R. no L-26001, October 29, 1968)

Warranties

LIMITED LIABILITY 1. QUALIFIED INDORSER (Sec 65 NIL) – A qualified indorser is not secondarily liable. His qualified indorsement transfers title without rendering him secondarily liable. However, he is liable for his warranties to all subsequent holders: a. That the instrument is genuine and in all respects what it purports to be b. That he has good title to it c. That all prior parties had capacity to contract d. That he has no knowledge of any fact that would impair the validity of the NI or render it valueless NOTE: The difference with a general indorser is that a general indorser warrants that the NI is valid and subsisting at the time of his indorsement while a qualified indorser only warrants that he has no knowledge of any fact which would impair the validity of the NI EFFECT: If the validity of the NI was already impaired at the time of negotiation, the qualified indorser is not liable if he had no knowledge of such fact. 2. PERSON NEGOTIATING BY DELIVERY – A person negotiating a NI by delivery is subject to the same warranties as a qualified indorser under Sec 65. However, the warranty extends to the immediate transferee ONLY.

QUALIFIED INDORSER AND PERSON NEGOTIATING BY DELIVERY DISTINGUISHED QUALIFIED INDORSER

PERSON NEGOTIATING BY DELIVERY

To whom warranties extend

1. NI is genuine and in all respects what it purports to be 2. He has good title to it 3. All prior parties had capacity to contract 4. He had no knowledge of any fact that would impair the validity of NI or render it valueless Liable to all parties who derive their title from his indorsement

GENERAL INDORSER DISTINGUISHED

AND

GENERAL INDORSER Nature of liability Warranty as to ignorance of certain facts

To whom warranties extend

There is secondary liability and warranties Warrants that the NI is at the time of his indorsement valid and subsisting regardless whether he is ignorant of such fact To subsequent HDC, subsequent parties deriving their title from HDC and his immediate transfree

SAME

Warranties extend to immediate transferee only

QUALIFIED

INDORSER

QUALIFIED INDORSER/NEGOTIATING BY DELIVERY No secondary liability; liable only for breach of warranty Warrants that he has no knowledge of any fact which would impair the validity of the NI or render it valueless Person negotiating by mere delivery: To immediate transferee only Qualified indorser: To all parties who derive their title through his indorsement

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LIABILITY OF INDORSER WHERE PAPER NEGOTIABLE BY DELIVERY (Sec 67) – A person who incurs his indorsement on NI negotiable by delivery, he incurs all the liabilities of an indorser  This applies to bearer NI only  Example: M issued a note to X payable to bearer. X may negotiate the NI by mere delivery. Suppose X indorses the note to A, Pay to A without recourse (qualified indorsement).A may negotiate the note by delivery. A can hold X liable for breach of warranty of a qualified indorser (Sec 65). But if the indorsement is general, A may hold X liable for breach of warranty of a general indorser

 



ORDER OF LIABILITY (Sec 68 NIL) There is no order of liability among the indorsers as against the holder. He is free to choose to recover from any indorser in case of dishonor of the NI.  With respect to one another, indorsers are liable prima facie in the order in which they appear unless the contrary is proven

SIGNATURE BY TRADE NAME – Under Sec 18 NIL, a person whose signature does not appear on the instrument is not liable thereon unless expressly provided. But a person who signs in a trade or assumed name will be liable as if he signed his own name  This is not an exception to the rule which forbids action on a NI against one whose name does not appear thereon but it is an instance in which the defendant’s business name serves the same purpose that would be served by the use of his given name

ACCOMMODATION

o

o

ACCOMMODATION – A special arrangement which a person called the accommodation party, lends his name and credit to another called the accommodated party, without any consideration

ACCOMMODATION PARTY – An accommodation party is one who has signed the NI as maker, drawer, acceptor or indorser, without receiving value therefor, for the purpose of lending his name to some other person. Such person is liable on the NI to the holder for value, despite the latter’s knowledge of him as an accommodation party (Sec 29)

o

An accommodation party in lending his name to the accommodated party, is in effect a surety for the latter Since the relationship between the accommodated and accommodation party is one of principal and surety, should the accommodation party pay to the holder, he has a right to claim from the accommodated party LIABILITY: The accommodation party’s liability is primary or secondary depending on whether he signed as maker, drawer, acceptor or indorser o If accommodation party signed as maker = primarily liable  Effect: There is absence of consideration and holder cannot recover from accommodation party  If accommodation party signed as co-maker = there is consideration although accommodation party received no part of it but holder can recover from him o If accommodation party signed as drawer = secondarily liable o If accommodation party signed as acceptor = primarily liable o If accommodation signed as indorser = secondarily liable  An accommodation party, whether irregular or otherwise, is liable as general indorser under Sec 66 unless he indicates otherwise The liability of an accommodation party under Sec 29 is limited only to HDC because in the hands of a non-HDC, a NI is subject to the same defenses as if it were nonnegotiable Even if the holder knows the party to be an accommodation party, it does not prevent him from becoming HDC and recovering from accommodation party A corporation, unless expressly authorized by its charter, has no authority to sign as accommodation party and cannot be liable to holder for value

REQUISITES OF AN ACCOMODATION PARTY (Sec 29 NIL) 1. He must be a PARTY to the instrument, signing as a maker, drawer, acceptor or indorser 2. He must NOT receive value therefor; and

Page | 29

3. He must for the purpose of LENDING his name or credit NOTE: “Without receiving value therefor” means without receiving value by virtue of the NI (Clark v. Sellner, G.R. no 16477, November 22, 1921)

RELATION BETWEEN ACCOMMODATION PARTY ACCOMMODATED PARTY (PRINCIPAL AND SURETY)

AND

When the accommodation party makes payment to the holder of the note, it has the right to sue the accommodated party for reimbursement since the relation between them is in effect that of principal and surety, the accommodation party being the surety for the accommodated party. However, the accommodated party cannot recover from the accommodation party. As between them, absence of consideration is a defense.

LIABILITY OF AN ACCOMMODATION PARTY o The liability of an accommodation party is DIRECT and

o

IMMEDIATE. It is a settled rule that a surety is bound equally and absolutely with the principal and is deemed an ORIGINAL PROMISOR and debtor from the beginning (Romeo Garcia v. Dionisio Llamas, G.R> no 154127, December 8, 2003) The accommodation party is liable on the NI to a holder for value despite that such holder, at the time of the taking of the NI, knew him only to be an accommodation party. Hence, as regards an accommodation party, the 4th condition, i.e. lack of notice of infirmity in the instrument or defect in the title of the person negotiating it, has NO application (Stelco Marketing Corp v. CA, G.R. no 96160, June 17, 1992)

NOTE: The corporation is not liable if it acts as an accommodation party. This is because the issue or indorsement of NI by a corporation without consideration and for the accommodation of another is ultra vires. Hence, one who has taken the NI with knowledge of the accommodation nature thereof cannot recover against a corporation where it is only an accommodation party (Crisologo-Jose v. CA, G.R. no 80599, September 15, 1989).

LIABILITY OF ACCOMMODATED PARTY

When the accommodation party makes payment to the holder of the notes, they have the right to sue the accommodated party for reimbursement since the relation between them is in effect of a principal and surety, the accommodation party being the surety.

LIABILITY AMONG PARTIES IN ACCOMMODATION A solidary accommodation party may seek reimbursement from the accommodated party or other accommodation parties, subject to the following rules: 1. A solidary accommodation party such as an accommodation maker may demand from the principal debtor reimbursement for the amount that he paid to the payee 2. A solidary accommodation party who pays on the said PN may directly demand reimbursement from his co-accommodation maker without first directing his action against the principal debtor provided that: a. He made the payment by virtue of a judicial demand; or b. A principal debtor is insolvent

SPECIFIC RIGHTS OF ACCOMMODATION PARTY 1. Right to REVOKE accommodation 2. Right to REIMBURSEMENT from an accommodated party after making the payment (Agro Conglomerates Inc v. CA, G.R. no L-17845, April 27, 1967)

ACCOMODATION PARTY DISTINGUISHED Purpose for signing Value received Availability of parole evidence

ACCOMMODATION PARTY Signs NI to lend his name or credit to some other person (Sec 29) Signs NI without receiving value therefor May always show by parole evidence that he is only accommodation party

REGULAR PARTY Purpose for signing is not the same as accommodation party Signs NI for value Cannot disclaim or limit his personal liability as appearing on the NI by parole evidence (Maulini v. Serrano, G.R. no L-8844, December 16m 1914) Page | 30

Availability of absence or failure of consideration as defense Right to sue

Cannot avail of the defense of absence or failure of consideration against a holder NOT in due course After paying the holder, may sue for reimbursement from the accommodated party

Can avail of said defense against a holder not in due course May not sue any subsequent party for reimbursement (PNB v. Maza, G.R. no L-24224, November 3, 1925)

LIABILITY ON THE INSTRUMENT GENERAL RULE: A person whose signature does not appear on the NI is not liable (Sec 18 NIL) EXCEPTIONS (PITACA-DF) 1. Persons whose signature were forged but who are PRECLUDED from setting up the defense of forgery (Sec 23 NIL) 2. INCAPACITATED persons who sign through their legal guardians 3. One who signs in a TRADE or assumed name (Sec 18 NIL) 4. One who signs through an AGENT or authorized representative (Sec 137 NIL) 5. In case of CONSTRUCTIVE acceptance (Sec 137) 6. Indorsers who sign on a separate piece of paper (ALLONGE) 7. Persons who negotiate by mere DELIVERY. They are liable for breach of warranty although they did not sign (Sec 65 NIL) 8. FORGERS of signature (Sec 23 NIL)

DEFENSES AND EQUITIES DEFENSES –The right of the holder to enforce payment of NI may be defeated by the defenses that may be raised by the person primarily or secondarily liable

KINDS OF DEFENSES 1. REAL DEFENSES (ABSOLUTE DEFENSES) – Those which attach to the instrument itself and generally disclose an

absence of one of the essential elements of a contract or where the admitted contract is void for all purposes for reasons of public policy o Available against all holders, even HDC 2. PERSONAL DEFENSES (EQUITABLE DEFENSES) – Those wherein a true contract appears, but for some reason, such as fraud, the defendant is excused from the obligation to perform o Can be raised only against non-HDC KINDS OF CLAIMS OF OWNERSHIP (EQUITIES) 1. Legal title – May recover even from HDC 2. Equitable title – May not recover from HDC, only from nonHDC

REAL AND PERSONAL DEFENSE DISTINGUISHED REAL DEFENSES

PERSONAL DEFENSES NATURE the NI Those which are available only against against a person not HDC or a or not subsequent holder who stands parties in privity with him

Those that attach to itself and are available all holders, whether HDC, but only by entitled to raise them STATUS OF CONTRACT Void Voidable AVAILABILITY AGAINST HDC Available against HDC Not available against HDC DEFENSES Key: PAID-WIFI-MUD-FEM Key: CUBIC: RAIN-WIFI-MICU 1. PRESCRIPTION 1. Non-delivery of COMPLETE 2. Material ALTERATION (Sec instrument (Sec 16) 124) 2. ULTRA VIRES acts of 3. ILLEGALITY – If declared corporations where the void for any purpose corporation has the power 4. DURESS – amounting to to issue negotiable paper forgery but the issuance was not 5. WANT of authority of authorized for the agent particular purpose for 6. NON-DELIVERY of which it was issued Incomplete Instrument 3. Negotiation in BREACH of (Sec 15) faith (Sec 55) 7. FORGERY (Sec 23) 4. INSERTION of wrong date in an instrument (Sec 13)

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8. INSANITY – Where the insane person has a guardian appointed by the court 9. MINORITY – available only to the minor 10. ULTRA VIRES act of corporation 11. DISCHARGE in insolvency 12. Fraud in FACTUM or Esse Contractus – Fraud in execution 13. Execution of NI between public ENEMIES 14. MARRIAGE in the case of a wife NOTE: An Instrument subject to real defense cannot be enforced against the person to whom the defense is available but it can be enforced against those whom such defense is not available such as under Sec 23

5. CONDITIONAL delivery of complete instrument 6. Filling up blank beyond REASONABLE time (Sec 14) 7. ABSENCE or failure of consideration whether partial or total (Sec 28) 8. ILLEGAL consideration (Sec 55) 9. Filling up blank NOT within authority (Sec 14) 10. WANT of authority agent where he has apparent authority 11. Fraud in INDUCEMENT 12. Acquisition by FORCE, duress or fear (Sec 55) 13. INTOXICATION 14. MISTAKE 15. INSANITY – Where there is no notice of insanity in the part of the one contracting with the insane person 16. Negotiation under CIRCUMSTANCES that amount to fraud (Sec 55) 17. Acquisition of the instrument by UNLAWFUL means (Sec 55)

EFFECTS OF CERTAIN DEFENSES A. MINORITY – Under Sec 22 NIL, If a minor indorses a NI, although he cannot be held liable on his contract of indorsement, the title to the instrument passes to his indorsee o Real defense o EFFECT: Subsequent holder, if HDC, can recover from the maker free from the defenses of minority and other personal defenses EXAMPLE: A makes a note payable to B (minor). B indorses the note to C, who in turn, indorses it to D. Upon maturity, D sues A (maker).

A cannot raise the defense of minority of B because: (1) Sec 22 provides that indorsement of NI by a minor passes the property therein; and (2) under Sec 60, the maker warrants the capacity of the payee to indorse o If A is insolvent, D cannot sue B because as to B, minority is a real defense o Is C liable to D? Yes, under Sec 66, a general indorser warrants the capacity of all prior parties o Minority is a real defense available only to the minor and is not a personal defense which by availed of by the parties other than such minor NOTE: However, the minor shall be liable under the following exceptions: a. The minor actively misrepresents his age and it appears that he is physically of such age (Estoppel) – A minor may be held bound by his signature in an instrument where he is guilty of actual fraud committed by specifically stating that he is of age when, in fact, he is not (Mercado v. Espiritu, 37 PHIL 215) b. The minor kept the fruits or benefits; or c. The minor spent the money in good faith (Art 1427 NCC) o

OTHER INCAPACITATED PERSONS – Insane, demented persons and deaf-mute or those who have no capacity to give consent (Art 1327 NCC), their capacity is a real defense as far as such person is concerned. It is available against HDC B. FRAUD – Under Sec 55, fraud renders a party’s title defective which is a personal defense and cannot be used against HDC o Where the fraud is practice on the maker or signer of NI in which he is tricked into signing a paper which he does not know to be a NI, he cannot be liable to any holder, even HDC. This is called fraud in factum or fraud in the execution – real defense o Where the signer knows the paper he is signing is NI but is deceived as to its value or terms, the fraud is fraud in inducement – personal defense and not available against HDC

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o

Where the signer does not know the nature of the paper he is signing but he could have known using ordinary care – personal defense

TYPES OF FRAUD a.

b.

FRAUD IN FACTUM (REAL DEFENSE) – The person who signs the instrument lacks knowledge of the character or essential terms of the instrument. But the defense is not available if the party had reasonable opportunity to obtain such knowledge o An essential element is that the maker or indorser must have exercise ordinary diligence and in no manner contributed negligently to the imposition FRAUD IN INDUCEMENT (PERSONAL DEFENSE) – The person who signs the same as NI but was induced by fraud

C. INCOMPLETE BUT DELIVERED NI – This is only a PERSONAL defense (See Sec 14 NIL) Two kinds of writings: 1) Incomplete instruments – There is an intent to make it NI 2) Blank paper or paper so far incomplete that it does not constitute NI, but signed – To be considered complete, it must be shown that:  Delivery of instrument  Delivery must have been for the purpose of converting it to NI (There must be intent to deliver otherwise maker is not liable even to HDC) o In order that such instrument, when completed, may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given o Authority extends to the insertion of the date, place of payment, the amount, the name of the payee and the time of payment  The insertion of a wrong date, by one having knowledge of the true date of issue, will avoid the instrument as to him, but an innocent party may enforce the same despite the improper date





First or subsequent holder may insert his name or the name of the person to whom he negotiates the NI but unless authorized, he cannot fill in a predecessor’s name enlarge the predecessor’s liability beyond the latter’s contract As to time, Sec 14 provides that in order to be enforceable against a party prior to completion, it must be filled in within a reasonable time, which is reckoned from the date of issuance

1. PRIMA FACIE AUTHORITY TO COMPLETE THE INSTRUMENT REQUISITES: a. Want of a material particular in the instrument (Sec 125) NOTE: Material particular includes matters stated in Sec 125 NIL b. Possession thereof by a person c. That such person had authority to fill up the blank (1) Strictly in accordance with the authority given; (2) Within a reasonable time (3) 2. PRIMA FACIE AUTHORITY TO FILL IT UP FOR ANY AMOUNT REQUISITES a. Signature on a blank paper b. Person signing in blank delivers it to another c. Delivery was for the purpose of converting it into NI NOTE: IF the holder of the NI, after it was filled up, is HDC, the holder may enforce the instrument as if it has been filled up strictly in accordance with the authority given and within reasonable time. D. INCOMPLETE AND UNDELIVERED NI (Sec 15 NIL) – Under Sec 15, an instrument which is not only undelivered but also incomplete, is a REAL defense, which not even HDC can recover o RATIO: There is no valid contract o The conclusive presumption of delivery under Sec 16 does not apply  If NI is complete, Sec 16 applies o Test: If an instrument contains all the requisites for making it negotiable, it should be considered complete even if there may be blanks as to non-essentials

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o

However, as against a drawee bank, the drawer is estopped to rely on Sec 15 if his negligent custody of the checks after partial execution, contributed to its loss o

TWO STEPS IN THE EXECUTION OF NI a. The act of writing the instrument completely and in accordance with Sec 1; and b. The delivery of the instrument with the intention of giving effect thereto NOTE: If completed and negotiated without authority, not a valid contract against a person who has signed before delivery of the contract even in the hands of HDC but subsequent indorsers are liable. This is a real defense which belongs to the drawer (or parties prior to the delivery of NI to the payee) against any holder REASON: The law does not make any distinction between HDC and a holder not in due course. Where an INCOMPLETE and UNDELIVERED instrument is in the hands of HDC, there is a prima facie presumption of delivery which the maker may rebut by proof of non-delivery E.

COMPLETE BUT UNDELIVERED NI (Sec 16 NIL) –

Non-delivery of a complete instrument is only a PERSONAL defense (See Sec 16 NIL on Delivery) o RATIO: Delivery is a prerequisite for liability; even if the instrument is complete but if undelivered, there is no contract o However, if the NI is no longer in the possession of the person who signed it, there is a disputable presumption of delivery IMMEDIATE PARTIES AND REMOTE PARTIES WHO ARE NOT HDC Delivery must be coupled with the intention of transferring title to the NI and made either by or under the authority of the party making, drawing, accepting or indorsing, as the case may be It may be shown that: a. There was no delivery b. Delivery was not authorized c. Delivery was conditional; or d. Delivery was for a special purpose only

If holder is HDC, there is a conclusive presumption of delivery  This applies even if NI is payable to bearer Every contract on a NI is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto 

F.

DURESS – Duress is merely a personal defense which cannot be used to defeat the rights of HDC o However, where the duress is so serious as to result to a lack of contractual intent, it can be used as a real defense o E.g., the signer acted not in accordance with his own will, but in accordance with the will of another because of his well-founded fear of an imminent and serious injury

G. ILLEGALITY – available against HDC. o Under Sec 55 NIL, illegal consideration is mere personal defense, available only against non-HDC o Although a NI may have been issued or negotiated for an illegal consideration, only the parties involved in the illegality and subsequent parties who are not HDC can be adversely affected o HDC can still recover o HOWEVER, NI, if declared void for any/all purposes, the defense of illegality becomes a real defense

HDC Delivery is CONCLUSIVE if he is in possession of a complete NI so as to make all prior parties to him liable It CANNOT be shown that there was no delivery, or that delivery was not authorized, or that it was conditional, or delivery was for a special purpose only

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COMPARISON OF SEC 14, 15 AND 16 NIL INCOMPLETE BUT DELIVERED (Sec 14) Delivered

Wanting in a material particular

Blank paper with signature

Prima facie authority to complete it by filling up the blanks therein

Signature operates as a prima facie authority to fill it up as such for any amount

If filled up strictly in accordance with authority given and within a reasonable time

INCOMPLETE AND UNDELIVERED (Sec 15 ) Undelivered

COMPLETE BUT UNDELIVERED (Sec 16) Undelivered NOTE: Delivery may be conditional or for a special purpose only and not for the purpose of transferring title

COMPLETENESS Mechanically incomplete

Mechanically complete

AUTHORITY OF PERSON IN POSSESSION No authority to complete and/or negotiate NI

WHEN ENFORCEABLE No enforceable

May negotiate if delivered to him by or under the authority of the party making, indorsing, drawing or accepting as the case may be

When delivery is made by or under authority of the party making, indorsing, drawing or accepting, as the case may be

KIND OF DEFENSE Personal 1. If HDC, he can enforce the NI as completed against parties prior or subsequent to the completion 2. If not HDC, he can enforce the NI as completed only against parties subsequent to the completion but not against those prior thereto

Real

Personal

RIGHTS OF HOLDER None in the hands of any holder. However, the invalidity of NI is only with reference to parties whose signature appear on the NI after delivery, the NI is valid

o H. PRESCRIPTION – refers to the extinctive prescription and may be raised even against HDC (real defense). Under NCC, the prescriptive period of an action based on a written contract is 10 years from accrual of cause of action o In case of checks, the action of the depositor against his drawee bank commences to run from the time he is given notice of payment (PCIB v. CA, G.R. no 121413, January 29, 2001)

Can enforce the NI NOTE: Where the NI is in the hands of HDC, a valid thereof by all parties prior to him so as to make them liable to him is conclusively presumed. Where the NI is no longer in possession of a party whose signature appears thereon, a valid and intentional delivery to him is presumed until the contrary is proved

The failure of the payee to encash a check for more than 10 years undoubtedly results in the impairment of the check through his unreasonable and unexplained delay (Myron C. Papa v. Valencia, G.R. no 105188, January 23, 1998)

NOTE: This is contrary to the ruling in NAMARCO v. F.U.N.D. (G.R. no L-22578, January 31, 1978). In this case, the SC held that the delivery of promissory notes payable to order, or bills of exchange or drafts or other mercantile document shall

Page | 35

produce the effect of payment only when realized, or when by the fault of the creditor, the privileges are inherent in their negotiable character are impaired. The clause in Art 1249 is applicable ONLY to instruments executed by THIRD PERSONS and delivered by the debtor to the creditor and does NOT apply to instruments executed by the debtor himself and delivered to the creditor. I.

(c) (d) (e) (f)

A serial number is an item which is not an essential requisite of negotiability under Sec 1 NIL and which does not affect the rights of the parties, hence its alteration is not material (PNB v. CA, 2256 SCRA 491).

MATERIAL ALTERATION – Any alteration which changes the date, sum payable, number or relation of the parties, time or place of payment, or medium of currency, or adds a place of payment where none is specified, or which alters the effect of the NI in any respect (PNB v. CA, G.R. no L-26001, October 29, 1968) o Since it changes the contract of the parties, a material alteration avoids the instrument (Effect: No longer a NI) and discharges all parties, unless they authorized or consented to the alteration o EXCEPT: As to subsequent indorser because by indorsing the NI, he warrants that the instrument is in all respects what it purports to be and that it was valid and subsisting at the time of his indorsement (Sec 6566 NIL) o It is a PARTIAL DEFENSE because HDC can enforce it according to its original tenor o Material Alteration is a PERSONAL defense when used to deny liability according to the original tenor of the instrument, but it is a REAL defense when relied on to deny liability according to the altered terms o Intent is immaterial in the alteration NOTE: The alteration mentioned under Sec 124 must be distinguished from Sec 23. The intent to defraud distinguishes forgery from innocent alterations and spoliation. Sec 23 applies only to forged signatures or signatures made without the authority of the person whose signature it purports to be. Consequently, if the forgery consists of alteration in the amount, Sec 124 applies.

WHAT CONSTITUTES MATERIAL ALTERATION (SEC 125) (a) Date (b) Sum payable or interest

Time or place of payment Number or relations of parties Medium or currency of payment Any other change or addition which alters the effect of NI

NOTE: Spoliation, material alteration by a stranger, does not affect the NI, provided the original meaning can be ascertained o An innocent alteration---generally, changes on items other than those required to be stated under Sec 1 NIL— and spoliation will not avoid the NI, but the holder may enforce it only according to the original tenor. EFFECTS OF MATERIAL ALTERATION a. Alteration by a PARTY – Avoids the NI except as against the party who (1) made, (2) authorized, or (3) assented to the alteration and (4) subsequent indorsers. However, if an altered NI is negotiated to HDC, he may enforce the payment according to its original tenor regardless whether the alteration was innocent or fraudulent. NOTE: Since distinction is made, it does not matter whether it is favorable or unfavorable to the party making the alteration. The intent of the law is to preserve the integrity of the NI b. Alteration by a STRANGER (Spoliation) – The effect is the same as where the is made by a party in which case HDC can recover on the original tenor of the NI (Sec 124 NIL) J.

ULTRA VIRES ACTS – A corporation may raise want of authority as a real defense but the negotiation of the corporation may pass title to the NI (Sec 22 NIL).

o

ULTRA VIRES ACT – One committed outside the object for which a corporation is created as defined

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o

by the law of its organization and therefore beyond the power conferred upon it by law It is merely voidable which may be enforced by performance

K. INSERTION OF WRONG DATE – If a wrong date was inserted, HDC has the right to regard the wrongfully inserted date as the true date o The insertion of a wrong date does not avoid the NI in the hands of a subsequent HDC; but as to him, the date so inserted is to be regarded as the true date (Sec 13 NIL) L.

CONSIDERATION – Sec 28 reiterates the rule laid down by Sec 24 that every NI is deemed prima facie to have been issued for a valuable consideration o The defendant has the burden of proving that there was no consideration for the NI o Sec 28 provides that absence or failure of consideration is a personal defense available only against non-HDC  As to HDC, the presumption of consideration is conclusive o Absence of consideration = total lack of consideration o Failure of consideration means that something was agreed upon as consideration for a contract but for some reason, the consideration did not materialize o Partial failure of consideration means that part of the consideration did not materialize  In such case, the maker may raise set up as a defense pro tanto (partial defense) against the payee or holder not in due course, i.e. he is not liable to the extent of the price of the undelivered portion (Sec 29 NIL)

ABSENCE OF CONSIDERATION AND FAILURE OF CONSIDERATON DISTINGUISHED ABSENCE OF CONSIDERATION FAILURE OF CONSIDERATION DEFINITION It is the total lack of any valid It is the neglect or failure of one consideration of the parties to give, to do, or

to perform the consideration agreed upon TYPE OF TRANSACTION INVOLVED Embraces transactions where Implies the giving of valuable no consideration was intended consideration was to pass contemplated but that it failed to pass EFFECT OF WANT OF CONSIDERATON (Sec 28 NIL) o Both are valid defenses against a person not a holder in due course. These defenses are only personal or equitable. o Partial failure of consideration is merely a defense pro tanto, whether the failure is an ascertained or liquidated amount or otherwise (Sec 28 NIL) NOTE: The drawee, by accepting unconditionally the bill, becomes liable to the holder and therefore cannot allege want of consideration between him and the drawer REASON: The holder is a stranger in relation to the transaction between the drawer and drawee, and if the hlder has given value to the drawer and has no knowledge of any equity between the drawer and drawee, he in the same situation as an indorsee in good faith Consideration founded on (1) love and affection or (2) upon gratitude is good consideration but does NOT constitute such valuable consideration as is sufficient of itself to support the obligation of the bill or note. M. FORGERY – Counterfeiting or fraudulent alteration of any writing which may consist of:

1. Signing of another’s name with intent to defraud; or 2. Alteration of an NI in the name, amount, name of payee, etc. with intent to defraud o

Under Sec 23, forgery is a real defense. A person whose signature to an instrument was forged was never a party and never consented to the contract which gave rise to such instrument; as such, he cannot be held liable thereon by anyone, not even HDC

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TWO situations contemplated under Sec 23: a. Want of authority of agent – Where the signature on the instrument is affixed by one who purports to be an agent but who does not have the authority to bind the alleged principal b. Where the signature is affixed by one who does not claim to act as an agent and who has no authority to bind the apparent signer EFFECTS: a. When a signature is forged or made without the authority of the person, the signature (not the instrument itself and the genuine signatures) is inoperative and no one can gain title to the instrument through it b. NO right to retain the instrument, or to give discharge therefore, or to enforce payment thereof against any party thereto, can be acquired EXCEPTION: Where the party against whom it is sought to enforce a right is precluded from setting up the forgery or want of authority (Sec 23 NIL) PERSONS PRECLUDED FROM SETTING UP DEFENSE OF FORGERY 1. Person who WARRANT or admit the genuineness of the signature in question Warrantors of Genuineness include: a. Indorsers – Indorsers can be held liable because of their breach of warranty that the instrument is genuine and in all respect what it purports to be (Sec 66) b. Persons negotiating by mere delivery; and c. Acceptors 2. Those who by their acts, silence, or negligence are ESTOPPED from setting up the defense of forgery – These include acts or omission that amount to ratification, express or implied  But a person precluded from raising the defense of forgery may still recover damages under NCC on torts

If the instrument is payable to bearer, the forgery of the indorsement is immaterial since it is negotiable by mere delivery NOTE: A person whose signature is forged as maker, drawer, payee or indorsee of a check or note was never a party or did not give consent to the contract which gave rise to the NI. Since his signature does not appear in the NI, he cannot be held liable thereon by anyone (Gempesaw v. CA, G.R. no 92244, February 9, 1993) 

o

o

o

o

In case of forgery of an indorsement of an instrument payable to order, it is not only the person whose signature was forged who would not be liable but also the parties prior to such person. Payment under a forged instrument is not the drawer’s order. The general rule is that, in the case of forgery of the indorsement of the payee of the check the drawee bank cannot debit the drawer’s account and the loss shall be borne by the drawee bank. The depository or collecting bank is liable to the drawee in case of a forged indorsement because it guarantees all prior indorsements. But this is subject to the qualification that the drawee himself was not negligent or guilty of such conduct as would estop him from asserting the forged character of the indorsement against the drawer Where an instrument is originally payable to bearer, the effects of a forged indorsement is different. The holder of such instrument who did not know of the forgery can still enforce it against the drawer or maker because he can cancel the forged indorsement as not being necessary to his title (Sec 48). REASON: Payable to bearer instruments are negotiated by mere delivery Should there be an indorsement subsequent to the forged one, the holder, should he be unable to recover from the maker, may have a right against the subsequent indorser on the latter’s warranty that the instrument is genuine and valid at the time of his indorsement NOTE: The burden of proving the genuineness of a signature is on the person basing his claim thereon.

ACCEPTANCE AND PAYMENT UNDER MISTAKE

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1. Price v. Neal Doctrine – When the drawer’s signature is forged on a bill or check and the drawee did not detect the forgery thereon, the drawee cannot charge the amount thereof to the drawer’s account o RATIO: The drawee is bound the know the signature of the drawer by reason of its business relations with the drawer. o Forgery as a defense is not available to the acceptor under Sec 62 NIL o Sec 62 covers bills paid without prior acceptance and bills accepted since one who pays a bill necessarily accepts it. (No distinction between acceptance and payment) 2. Application of Price v. Neal Doctrine a. Stop Payment Order – A stop payment order is one issued by the drawer of a check countermanding his first order to the drawee bank to pay the check i.e., the drawer is ordering the drawee bank not to pay the check issued by him.  The drawee bank is bound to follow the stop order provided it is received prior to its certification or payment of the check  RATIO: Payment was voluntary on the part of the drawee bank which, because of the stop order, was under no legal obligation to pay and its negligence is paying precludes it from reclaiming the amount from a bona fide holder  EXCEPTION: Drawee bank may claim from drawer if such payment discharged a legitimate debt of the drawer  If stop order comes after the bank has certified or accepted the check, the bank is under legal duty to pay the holder and will not be liable to the drawer for doing so  Certification and acceptance are akin to assignment of credit i.e., funds are segregated to be given to the payee EFFECT OF NEGLIGENCE OF DEPOSITOR – The drawee bank is not liable if the proximate cause of the wrongful payment is the negligence of the drawer

o

o

If the negligence of the depositor should delay the discovery of the forgeries and this negligence is should deprive the bank to recover from the forger, the depositor will have to bear the burden of the loss and cannot demand a re-credit from the bank RATIO: It is the duty of the depositor to carefully examine the bank’s statement, his cancelled checks and check stubs within a reasonable time, and to report any errors without unreasonable delay

EFFECT OF PAYMENT UNDER FORGED INDORSEMENTS – A drawee can recover the amount paid by him on a forged indorsement since he makes no warranty as to the genuineness of any indorsement o When the drawee learns about the forgery, the drawee has the duty to notify the holder whom he has paid as soon as possible. If he fails to act promptly, he may lose his right to recover against the holder if his negligent delay operates to the latter’s prejudice o If the draw fails to recover from an insolvent holder, he cannot recover from the drawer o Payable to bearer instruments: The drawee bank may debit the drawer’s account in spite of the forged indorsement because such indorsement may be disregarded as being unnecessary to the holder’s title EXCEPT: If drawee’s negligence prejudices the holder o Where both drawee and collecting banks are guilty of negligence, the degree of negligence of each will be weighed in considering the amount of loss each should bear (contributory negligence) NOTE: In such cases, the doctrine of contributory negligence is applied. Art 2179 NCC provides: When the plaintiff’s own negligence was the immediate and proximate cause of his injury, he cannot recover damages. But if his negligence was only contributory, the immediate and proximate cause of the injury being the defendant’s lack of due care, the plaintiff may recover damages but the courts shall mitigate the damages to be awarded. EFFECT OF NEGLIGENCE OF DRAWEE IN INFORMING RECIPIENT OF FORGERY If it shown that the drawee on learning of the forgery did not give prompt notice of it and that damages resulted, recovery by the Page | 39

drawee is barred. The drawee should be allowed to shift that loss to the drawee only upon clear showing that the drawee’s delay in notifying him of the forgery caused him damage. No such damage has been shown by Clearfield. (Clearfield Trust Co v. United

States, 318 US, 363, 63 S. S. Ct. 573) EFFECT OF NEGLIGENCE OF DRAWER IN CASE OF FORGED INDORSEMENTS ON CHECKS – The drawer, as soon as he discovers the forged indorsement, should promptly notify the drawee bank. Otherwise, if the drawer’s negligent delay is the proximate cause of any subsequent loss to the bank, the drawee bank may recover from the drawer.

24-HOUR CLEARING RULE When the drawee bank fails to return a forged check or altered check to the collecting bank within the 24-hour releasing period, the collecting bank is absolved from liability (Republic Bank v. CA, G.R. no 42725, April 22, 1991)

CUT-OFF RULE Parties PRIOR to the forged signature are cut-off from the parties AFTER the forgery in the sense that prior parties cannot be held liable and raise the defense of forgery. The holder can only enforce the NI against parties who became such after the forgery. EXCEPTION: When the prior parties are precluded from setting up the defense of forgery either because of their warranties, representation or negligence (Gempesaw v. CA) NOTE: Where a depositor is using his own personalized checks, its failure to provide adequate security measures to prevent forgeries of checks constitutes gross negligence and bars it from setting up the defense of forgery (MWSS v. CA, G.R. no L-62943, July 14, 1986) o But the mere fact that a check had been removed and stolen in a checkbook without the knowledge and consent of the owner cannot be considered negligence (PNB v. Quimpo, G.R. no L-53194, March 14, 1988) ILLUSTRATION C forged then indorsed to D A ----- B ----- C ----- D ----- E ----- H

1. A and B can raise the defense of forgery for being parties prior to the forgery as against C, D, E and H unless precluded from setting up forgery 2. H can enforce the NI only against C (the forger), D, E and M (maker) unless precluded from setting up the defense of forgery NOTE: The liability of the maker is absolute if the NI involved is payable to bearer. TEST TO DETERMINE WHO WILL BEAR THE LOSS IN CASE OF A FORGED CHECK 1. Was there a gross negligence on the part of the drawer? If yes, drawer is liable (MWSS v. CA) 2. If there is none, it should be the drawee bank REASON: The drawee bank should have known that the signature was forged considering that the signature appearing on the check was even compared with the specimen signature of the authorized signatory of the corporation (Samsung Corp and Supply Co v. FEBTC, G.R. no 134712, August 13, 2004) 3. BUT if there is a collecting bank, the collecting bank bears the loss REASON: The collecting bank or last indorser generally suffers the loss because it has 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 doen its duty to ascertain the genuineness of the indorsements (Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corp, 157 SCRA 186)

RULES ON FORGERY PROMISSORY NOTES ORDER INSTRUMENT BEARER INSTRUMENT MAKER’S SIGNATURE FORGED Maker is not liable because he Maker is not liable never became a party to the NI

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Indorsers subsequent to Indorsers may be made liable forgery are liable because of to persons who obtain title their warranties through their indorsements Party who made the forgery is Party who made the forgery is liable liable PAYEE’S SIGNATURE FORGED Maker and payee not liable Maker is liable Indorsers subsequent to Indorsement is not necessary forgery are liable to title and the maker engages to pay the holder Party who made the forgery is Party who made the forgery is liable liable INDORSER’S SIGNATURE FORGED Maker, payee and indorser Maker is liable. Indorsement is whose signature was forged is not necessary to title and the not liable maker engages to pay the holder Indorsers subsequent to Indorser whose signature was forgery are liable because of forged is not liable their warranties Party who made the forgery is Party who made the forgery is liable liable

BILLS OF EXCHANGE ORDER INSTRUMENT BEARER INSTRUMENT DRAWER’S SIGNATURE FORGED Drawer is not liable because Drawer is not liable he was never party to the NI Drawee is liable if it paid (no Drawee is liable if it paid. recourse to drawer—Price v. Drawee cannot recover from Neal doctrine) because he the collecting bank because it admitted the genuineness of is bound to know the drawer’s the drawer’s signature signature since the latter is its depositor. Drawee cannot recover from the collecting bank because The drawee may recover from there is no privity between the the drawer when the latter’s collecting bank and the negligence is the proximate drawer. The latter does not cause of the loss or give any warranty regarding

the signature of the drawer contributed thereto (Associated Bank v. CA, 208 (Gempesaw v. CA) SCRA 465) Indorsers subsequent to forgery liable (such as collecting bank or last indorser) Party who made the forgery is Party who made the forgery is liable liable PAYEE’S SIGNATURE FORGED Drawer, drawee and payee not Drawer is liable (his liable (Cut-off rule applies) indorsement is not necessary to pass title) Drawee is liable; no privity between drawer and payee because indorsement of payee is not necessary (Ang Tek Lian v. CA, G.R. no L-2516, September 25, 1950) Payee is not liable Indorsers subsequent to Collecting bank is liable forgery are liable (such as because of warranty. collecting bank) But it may recover from the person who forged the indorsement on the check and deposited or enchased the same (Jai-Alai Corp v. BPI, G.R. no L-29432, August 6, 1975) Party who made the forgery is Party who made the forgery is liable liable INDORSER’S SIGNATURE FORGED Drawer, payee and indorser Drawer is liable (indorsement whose signature was forged not necessary to title) are not liable (Cut-off rule does NOT apply) Drawee is liable if it paid Drawee is liable Indorsers subsequent to Indorser whose signature was forgery are liable (such as forged is liable because collecting bank) indorsement is not necessary to title Page | 41

Party who made the forgery is liable

Party who made the forgery is liable

ENFORCEMENT OF LIABILITY PRIMARY LIABILITY 1. As to MAKER – The unconditional promise attaches the moment the maker makes the NI 2. As to the ACCEPTOR – The acceptor’s assent to the unconditional order attaches the moment he accepts the NI NOTE: No further act is necessary in order for their liability to accrue. What is necessary only is for the holder to enforce such liability by presenting it for payment

SECONDARY LIABILITY 1. Indorser 2. Drawer Their liability cannot be immediately enforced. There are necessary steps which should be taken in order to charge these persons. Unless the holder is excused from taking any of the steps, the persons secondarily liable are discharged.

STEPS IN PROMISSORY NOTE 1. Presentment for payment to the maker unless excused WHEN PRESENTMENT FOR PAYMENT IS EXCUSED a. After exercise of reasonable diligence, it cannot be made b. Drawee is a fictitious person c. Express or implied waiver (Sec 82 NIL)  Effect: the holder may treat the NI as a bill or note and hold the drawer liable as maker who is a primary party not entitled to presentment  Waiver of notice does not mean waiver of presentment  To bind indorser or drawer, his waiver must be with knowledge of the facts which release him, so if he pays not knowing there was no demand and no notice, he can recover

2. If dishonored by nonpayment, notice of dishonor should be given to the persons secondarily liable unless excused WHEN NOTICE OF DISHONOR IS EXCUSED: a. When notice is waived b. When dispensed with under Sec 112 NIL c. As to drawer under Sec 114 d. As to indorser under Sec 115 e. When due notice of dishonor by non-acceptance has been given f. As to HDC without notice

STEPS IN BILL OF EXCHANGE 1. Presentment

for acceptance or negotiation within reasonable time after it is acquired ONLY in the following instances: a. b. c.

Where the bill is payable after sight When it is necessary in order to fix maturity of the NI Where the bill expressly stipulates that it shall be presented for acceptance d. Where the bill is drawn payable elsewhere than at the residence or place of business of drawee (Sec 143 NIL) NOTE: In all above cases, the holder must either present the bill for acceptance or negotiate it within a reasonable time; otherwise, the drawer and all indorsers are discharged (Sec 144)

2. If dishonored by NON-ACCEPTANCE: a. b.

Notice of dishonor given to drawer and indorsers unless excused; or Protest in case of foreign bills unless excused

3. If bill is accepted: a. b.

Presentment for payment to the acceptor unless excused under Sec 82 NIL If dishonored upon presentment for payment: (1) Notice of dishonor to persons secondarily liable; or (2) Protest for dishonor by nonpayment in case of foreign bills

STEPS IN ORDER TO CHARGE PERSONS SECONDARILY LIABLE IN OTHER CASES

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1. Protest for payment by drawee in order to charge an acceptor honor *Sec 165 and 167) or a referee in case of need (Sec 167 NIL) 2. Protest for nonpayment by the acceptor for honor is also required (Sec 167)

PRESENTMENT – The production of a bill of exchange to the drawee for his acceptance, or to the drawee or acceptor for payment OR the production of a promissory note to the party liable for the payment of the same (Sec 70 NIL)

PRESENTMENT FOR PAYMENT PRESENTMENT FOR PAYMENT CONSISTS OF 1. Personal DEMAND for payment at the proper place 2. Readiness to EXHIBIT the NI if required; and 3. To RECEIVE payment and surrender the NI if the debtor is willing to pay NOTE: Mere informal talk not accompanied by presentment is not sufficient. Demand on phone is also not sufficient unless maker waives exhibition, whether implied or express (Gilpin v. Savage, 201 NY 167, 94 N.E. 656) REQUISITES 1. MADE by the holder or any person authorized to receive payment on his behalf 2. At a REASONABLE HOUR on a business day 3. At a proper PLACE 4. To the person primarily LIABLE, or if he is absent or inaccessible, to any person found at the place, where the presentment is made (Sec 72 NIL) GENERAL RULE: Presentment for payment is NOT necessary in order to charge the person primarily liable but is necessary in order to charge the drawer and indorser, except as otherwise provided.

WHEN PRESENTMENT IS NOT REQURIED 1. In order to charge the DRAWER – Where he has no right to expect or require the at the drawee or acceptor will pay the NI (Sec 79) such as in case of a check where payment has been stopped

2. In order to charge the INDORSER – When the NI was made or accepted for his accommodation and he has no reason to expect that the NI will be paid if presented (Sec 80 NIL) NOTE: Only the drawer and indorser referred to in these sections are not discharged but all other parties secondarily liable are relieved of their liability

WHEN DELAY IN MAKING PRESENTMENT OR GIVING NOTICE IS EXCUSED 1. When caused by circumstances beyond the control of the holder; and 2. Not imputable to his default, misconduct, or negligence (Sec 81 NIL)

WHEN PRESENTMENT SHOULD BE MADE INSTRUMENT PN payable on demand Bill of Exchange payable on demand Payable on a specified date

WHEN PAYABLE Within reasonable time after issue Within reasonable time after its last negotiation On the date it falls due (Sec 71 NIL)

NOTE: In determining what is reasonable time, regard is to be had to the nature of the NI, the usage of trade or business with respect to such NI and the facts of the particular case (Sec 193 NIL).

HOW COMPUTED When the NI is payable at a fixed period after date, after sight or after the happening of a specified event—the time of payment is determined by excluding the day from which time is to begin to run and by including the date of payment (Sec 86)

TIME OF MATURITY Every NI is payable at the time fixed therein without grace.

WHEN MATURITY FALLS ON A SUNDAY OR HOLIDAY NIs falling due or becoming payables on Saturday are to be presented for payment on the next business day .

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EXCEPTION: The NI which is payable on demand may, at the option of the holder, be presented for payment before 12 noon on a Saturday when that entire day is not a holiday (Sec 85 NIL)

TIME OF PRESENTMENT OF INSTRUMENT WITH FIXED MATURITY WHEN PRESENTED Made before maturity If made after maturity

Presentment on Sunday or Holiday

EFFECT Not effective Too late unless delay is excusable Effect: Secondary parties will be discharged NI will have to be presented on the next business day (Sec 194 NIL)

PROPER PLACE OF PRESENTMENT (Sec 75 NIL) 1. Where a place of payment is specified in the NI, it shall be presented there 2. Where no place of payment is specified but the address of the person to make payment is given in the NI, it is there presented 3. Where no place of payment is specified and no address is given, the NI is presented at the usual place of business or residence of the person to make payment 4. In any other case, presentment is to be made to the person to make payment wherever he can be found OR presented at his last known place of business or residence o If the NI is, by its terms, payable at a special place, and the person primarily liable is able and willing to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part (Sec 70 NIL)

EXHIBITION (Sec 74 NIL) PURPOSES: 1. To enable he debtor to determine the genuineness of the NI and the right of the holder to receive payment; and 2. To enable him to reclaim possession upon payment WHEN EXCUSED:

1. When debtor does not demand to see the NI but refuses payment on some other grounds; and 2. When the NI is lost or destroyed NOTE: Even if the rule requires that the NI must be exhibited to determine its genuineness, this is rendered unnecessary not by the omission of the authenticity of the note implicit from the averment that substantial payments were made thereon and by express waiver of demand, presentment, protests and notice of protest and nonpayment in the note (Ansaldo v. CA, G.R. no 47696, August 29, 1989)

SPECIAL CASES 1. NI payable at a bank – must be made during banking hours, unless there are no funds to meet it at any time during the day, presentment at any hour before the bank is closed on that day is sufficient (Sec 75 NIL) 2. Person liable is dead – may be made to his personal representative, if there be one and if he can be found (Sec 76 NIL) 3. Persons liable are partners – may be made to any of the partners, even if their partnership has been dissolved (Sec 77 NIL) 4. Persons liable are joint debtors – must be made to all of them (Sec 78 NIL)

PRESENTMENT for ACCEPTANCE REQUISITES 1. 2. 3. 4.

Must be made by or on behalf of the holder At a reasonable hour on a business day Before the bill is overdue; and To the drawee or some other person authorized to accept or refuse to accept on his behalf

GENERAL RULE: Presentment for acceptance is NOT necessary in order to render any party to the bill liable.

WHEN REQUIRED 1. Where the bill is payable after sight, or when it is necessary in order to fix the maturity of the NI 2. Where the bill expressly stipulates that it shall be presented for acceptance

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3. Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee 9Sec 143 NIL) NOTE: The holder must either present it for acceptance or negotiate it within a reasonable time; upon failure to do so, the drawer and all indorsers are discharged.

WHEN EXCUSED (Sec 148 NIL) 1. Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to contract by bill 2. After exercise of due diligence, presentment cannot be made 3. Although presentment has been irregular, acceptance has been refused on some other ground

RULES ON PRESENTMENT FOR ACCEPTANCE (Sec 145 NIL) 1. Where the bill is addressed to two or more drawees who are not partners, presentment must be made to ALL of them unless one has the authority to accept or refuse acceptance for all, in which case presentment may be made to him only 2. Where the drawee is dead, presentment may be made to his personal representative 3. Where the drawee has been adjudged bankrupt or insolvent or has made an assignment for the benefit of creditors, presentment may be made to him or to his trustee or assignee NOTE: A bill may be presented for acceptance on any day on which NI may be presented for payment under Sec 72 and 75 NIL.

ACCEPTANCE – The signification by the drawee of his assent to the order of the drawer o It is the act by which the drawee manifests his consent to comply with the request contained in the bill of exchange directed to him

FORM OF ACCEPTANCE (Sec 132 NIL) 1. Must be in WRITING 2. SIGNED by the drawee 3. Must not express that the drawee will perform his promise by any other means than the PAYMENT OF MONEY NOTE: The holder of the bill presenting the same for acceptance may require that it be written on the bill and if such request is refused, may treat the bill as dishonored (Sec 133 NIL)

KINDS OF ACCEPTANCE

1. GENERAL – Assents without qualification to the order of the drawer 2. QUALIFIED – which in express terms varies the effect of the bill as drawn a. CONDITIONAL – Makes payment by the acceptor dependent on the fulfillment of a condition therein stated b. PARTIAL –A acceptance to pay part only of the amount for which the bill is drawn c. LOCAL – An acceptance to pay at a particular place d. Qualified as to TIME e. The acceptance of one or some of the drawees but NOT ALL (Sec 141 NIL)

EFFECT OF QUALIFIED ACCEPTANCE The drawer and the indorsers are DISCHARGED unless: a. They have expressly or impliedly AUTHORIZED the holder to take qualified acceptance; or b. Subsequently ASSENTED thereto Thus, a subsequent party which caused the dishonor of the check through its qualified indorsement cannot hold prior parties liable on the NI (Gonzales v. RCBC, G.R. no 156294, November 29, 2006) The holder has the right to require the drawee to accept the bill without qualification. If the latter refused, he can treat the bill as dishonored by non-acceptance (Sec 142 NIL) 3. IMPLIED COSNTRUCTIVE ACCEPTANCE (Sec 137 NIL) – If after 24 hours the drawee fails to return the NI, he is deemed to have accepted the NI. This also applies if the drawee destroyed the NI. o Acceptance in the sense used in NIL is not required for checks for the same are payable on DEMAND o Payment is not acceptance because the latter is a “promise to perform an act while the former is the actual performance (PNB v. CA, G.R. no L-26001, October 29, 1968). But the effect is the same: discharge of the NI 4. EXTRINSIC (Sec 134 NIL) – Acceptance may be made on a paper other than the bill 5. VIRTUAL (Sec 135 NIL) – Contemplates the situation where an acceptance is made on a bill that has not yet been drawn (acceptance in advance)

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4. Given at the proper PLACE (Sec 103 and 104 NIL)

DISHONOR – Where a bill is duly presented for acceptance and is NOT accepted within the prescribed time: 1. The person presenting it must treat the bill as dishonored by acceptance otherwise he loses the right of recourse against the drawer and indorsers; and 2. Proper notice of dishonor should be given to the drawer and indorsers

DISHONOR BY NONPAYMENT (Sec 83 NIL) 1. Payment is refused or cannot be obtained after due presentment for payment 2. Presentment is excused and the NI is overdue and unpaid EFFECT: There is an immediate right of recourse by the holder against persons secondarily liable. However, notice of dishonor is generally required (Sec 84 NIL).

DISHONOR BY NON-ACCEPTANCE (Sec 149 NIL) 1. When it is duly presented for acceptance and such acceptance is refused or cannot be obtained; or 2. When presentment for acceptance is excused, and the bill is not accepted EFFECT: Immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary (Sec 151 NIL)

NOTICE OF DISHONOR – Notice is given by holder or his agent to party or parties secondarily liable that the NI was dishonored by non-acceptance by the drawee of a bill or by nonpayment by the acceptor of the bill or by nonpayment by the maker of the note (Sec 89 NIL) NOTE: Only persons secondarily liable are given notice of dishonor. A joint maker, an accommodation maker, or a surety need not be given a notice of dishonor. But an irregular or accommodation indorser is entitled as any indorser to notice of dishonor otherwise he is discharged from liability.

REQUISITES FOR NOTICE OF DISHONOR 1. Given by the holder or his agent, or by ANY PARTY who may be compelled by the holder to pay (Sec 90 NIL) 2. Given to a SECONDARY PARTY or his agent (Sec 97 NIL) 3. Given with the PERIODS provided by law (Sec 102); and

HOW GIVEN (Sec 96) Notice of dishonor may be: 1. Oral; or 2. Written NOTE: Notice of dishonor must be served personally or by mail.

CONTENTS OF NOTICE OF DISHONOR 1. Sufficient DESCRIPTION of the NI to identify it 2. A statement that it has been PRESENTED for payment or for acceptance and that it has been dishonored; and 3. A statement that the party giving notice intends to look for the party addressed for PAYMENT

BY WHOM GIVEN (Sec 90 NIL) 1. Holder 2. Another, on behalf of the holder; or 3. Any party to the NI who may be compelled to pay it to the holder, and who would have a right of REIMBURSEMENT from the party to whom notice was given (Sec 90 NIL) TO WHOM GIVEN 1. Non-acceptance (Bill) – to persons secondarily liable, namely the drawer and indorsers as the case may be 2. Nonpayment (both bill and note) – indorsers NOTE: Notice must be given to persons secondarily liable. Otherwise such parties are discharged. Notice may be given to the party himself or to his agent WHEN GIVEN: As soon as the NI is dishonored (Sec 102).

WHEN NOTICE IS DISPENSED WITH: 1. When party to be notified knows about the dishonor, actually or constructively (Sec 115 NIL) 2. If waived (Sec 109 NIL); or 3. When after due diligence, it cannot be given (Sec 112 NIL)

NOTICE OF DISHONOR INURES TO THE BENEFIT OF 1. When given by or on behalf of a holder a. All parties prior to the holder, who have a right of recourse against the party to whom notice is given; and Page | 46

b.

All holders subsequent to the holder giving notice (Sec 92 NIL) 2. When given by or on behalf of a party entitled to give notice a. The holder; and b. All parties subsequent to the party to whom notice is given (Sec 93 NIL)

EFFECT OF LACK OF NOTICE OF DISHONOR ON INSTRUMENT PAYABLE IN INSTALLMENT 1. NO acceleration clause – Failure to give notice of dishonor on a previous installment does not discharge drawers and indorsers as to succeeding installments 2. WITH acceleration clause – It depends upon whether the clause is optional or automatic a. Automatic – Failure to give notice of dishonor as to a previous installment will discharge the person secondarily liable as to the succeeding installments b. Optional – If not exercised, the rule would be the same as where there is no acceleration clause. If it is exercised, the rule would be the same as where the installment contains an automatic acceleration clause

DISHONOR IN THE HANDS OF AN AGENT (Sec 94 NIL) Agent can do either of the following: 1. Directly give notice to persons secondarily liable; or 2. Give notice to his principal. In such case, he must give notice within the time allowed by law as if he were a holder NOTE: Where a party receives notice of dishonor, he has, after the receipt of notice, the same time for giving notice to antecedent parties that the holder has after the dishonor (Sec 107 NIL)

WAIVER OF NOTICE DISHONOR

NOTE: Waiver may be express or implied (Sec 109 NIL) As to who are affected by an express waiver depends on where the waiver was written: 1. If it appears in the body or in the face of the NI, it binds all parties 2. If it is written above the signature of an indorser, it binds him only (Sec 110 NIL) WHEN NOTICE OF DISHONOR IS NOT REQUIRED TO BE GIVEN DRAWER (Sec 114) INDORSER (Sec 115) Drawee & drawee are the same Drawee is a fictitious person or has no capacity to contract and if indorser was aware of such fact at the time of indorsement Drawee is a fictitious person or Indorser is the person to has no capacity to contract whom the NI is presented for payment Drawer is the person to whom NI was made or accepted for NI is presented for payment his accommodation (Sec 115) Drawer has no right to expect or require that the drawee or acceptor will honor NI Where NI has countermanded payment NOTE: If an NI is not accepted by the drawee, there is no sense presenting in again for payment, and notice of dishonor must at once be given. If there was acceptance presentment for payment is still required and if payment is refused, there is still a NEED for notice of dishonor (Sec 115). An omission to give notice of dishonor by non-acceptance does NOT prejudice the rights of HDC subsequent to omission (Sec 117)

WHEN MADE: 1. Before the time of giving notice; or 2. After the omission to give due notice

ENFORCEMENT OF LIABILITY PRESENTMENT PAYMENT Promissory notes

NOTICE OF DISHONOR ACCEPTANCE NATURE OF INSTRUMENT

Sec 143

Promissory notes

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Bills of exchange Checks

Holder/Agent

Sec 76, 77 & 78 Person primarily liable: o Maker/drawee o If debtor is dead, to his personal representative o If liable as partners, presentment may be made to any one of them o If joint debtors, presentment must be made to all of them o Any person found at the place of presentment (Substituted presentment)

Sec 74: exhibiting NI

Sec 72 & 85: If NI is payable on a future determinable time, must be presented on DUE DATE, except if it falls on a Sat, Sun or holiday in which case it must be made the next business day Sec 85/194: If NI is payable on demand, it must be made within reasonable time a. Note – after issue b. Bill – from last negotiation

Bill is payable after sight or when it is necessary in order to fix the maturity of the NI o Bill expressly stipulates o Bill is drawn payable elsewhere than at the residence or place of trade or business of drawee BY WHOM Holder/agent o

TO WHOM Sec 145 Drawee/Agent WITH authority to accept or reject (acceptance gives rise to liability on the part the drawee) o If there are 2 or more drawees who are not partners, presentment must be made to all of them unless one has the authority to accept or refuse for all o If debtor is dead, to his personal representative o If adjudged bankrupt or insolvent or has made an assignment, presentment must be made to him, his trustee or assignee HOW MADE By producing the bill (because the bill will be stamped ACCEPTED WHEN MADE If payable on a future determinable time, presentment must be before it is overdue or at maturity IF payable on demand, the bill must be presented within a reasonable time from last negotaiton (including Sat 12 noon)

Bills of exchange Checks

Sec 90 & 91: o Holder/agent o By or on behalf of any party who might be compelled to pay it to the holder and who has a right of reimbursement from the party to whom the notice is given Sec 89 & 97: Drawer/Indorser or any person secondarily liable or his agent Sec 98-101 o If dead, to his personal representative o If parties, notice to anyone of partners o If jointly liable, notice to each one of them unless one has authority to receive notice for others o If adjudged bankrupt or insolvent or an assignment was made, notice must given to him, his trustee or his assignee

Either VERBALLY or in WRITING. Must describe the NI and state the fact of presentment and fact of dishonor If living in the same AREA, notice must be given within 24 hrs from dishonor If living in a DIFFERENT AREA, the dropping of letter in a mailbox is sufficient compliance

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c.

Check – 6 months after issue; including Sat up to 12 noon

Sec 73 o Place designated by the parties o If none, at the address of the maker/acceptor as stated in the NI o If none, at his residence or office o If none, any place where he is found

Sec 79-82 o When drawer has no right to expect to or require that drawee or acceptor will pay NI o Where the NI was made or accepted for his accommodation and he has no reason to expect that the NI will be paid if presented o When the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct or negligence o Even after the exercise of due diligence, presentment cannot be made o Drawee is a fictitious person o Waiver, express or implied

WHERE MADE NO REQUIREMENT because it is immaterial. What is more important is that the bill was accepted

HOW EXCUSED Sec 148 o Drawee is dead, absconded, a fictitious person or a person with no capacity to contract by bill o After exercise of due diligence, presentment cannot be made o Although presentment was irregular, acceptance has been refused on some other ground

FOREIGN BILL OF EXCHANGE One which is on its face or purports to be: 1. Drawn in the Philippines but payable outside the Philippines 2. Payable in the Philippines but drawn outside the Philippines

o o o

Address of party indicated/added in his NI If none, at his residence or office If none, where is sojourning

Sec 112-114 (DRAWER) o After the exercise of due diligence, it cannot be given to does not reach the parties sought to be charged o Delay is caused by circumstances beyond the control of the holder & not imputable to his default, misconduct or negligence o Drawer and drawee is the same person o Drawee is a fictitious person or with no capacity to contract o Drawer is the person to whom NI was is presented for payment o Drawer has no right to expect or require that drawee or acceptor will honor NI o Drawer has countermanded payment Sec 115 (INDORSER) o When the drawee is a fictitious person or a person with no capacity to contract and the indorser was aware of such fact at the time of indorsement o Indorser is the person to whom NI was presented for payment o When NI was made or accepted for his accommodation

INLAND BILL OF EXCHANGE EXCHANGE DISTINGUISHED INLAND BILL OF EXCHANGE

AND

FOREIGN

BILL

OF

FOREIGN BILL OF EXCHANGE

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A bill which is or on its face purports to be both drawn and payable WITHIN the Philippines

One which is or on its face purports to be draw or payable OUTSIDE the Philippines

PROTEST – The formal instrument executed usually by a notary public certifying that the legal steps necessary to fix the liability of the drawee and the indorsers have been taken

REQUISITES FOR PROTEST 1. Must be MADE by a a. Notary public; or b. Any respectable resident of the place where the bill is dishonored, in the presence of 2 or more credible witnesses (Sec 154 NIL) 2. Must be ANNEXED to the bill or must contain a copy thereof (Sec 153) 3. Must be under the hand and SEAL of the notary public making it 4. Must SPECIFY a. 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 d. The demand and the answer given, if any or the fact that the drawee or acceptor could not be found (Sec 153 NIL)

PURPOSES OF PROTEST 1. For uniformity in international transactions 2. To furnish an authentic and satisfactory evidence of dishonor NOTE: Protest is necessary only in case of foreign bills of exchange, which have been dishonored by non-acceptance or nonpayment. EFFECT OF NON-PROTEST: The drawer and indorsers are discharged (Sec 118 NIL).

PROTEST IS ABSOLUTELY REQUIRED 1. Upon dishonor by non-acceptance of a foreign bill appearing on its face to be such (Sec 152 NIL) 2. Upon dishonor by nonpayment of a foreign bill appearing on its face to be such, if not having been previously dishonored by non-acceptance (Sec 152)

3. Before a bill can be accepted for honor, it must be protested for dishonor by non-acceptance or protested fro better security (Sec 161 NIL) 4. Before a bill can be presented for payment to the acceptor for honor or the referee in case of need, it must be protested by the holder for non-payment to any party liable thereon (Sec 167) 5. Before a bill can be paid for honor, it must be protested by the holder for nonpayment by any party liable thereon (Sec 171) NOTICE OF DISHONOR AND PROTEST DISTINGUISHED NOTICE OF DISHONOR PROTEST WHEN REQUIRED Required in inland bill Required in foreign bill FORM May be oral or written Always written BY WHOM MADE May be made by the party or Made by a notary public or a agent respectable resident in the present of 2 or more witnesses WHERE MADE Made in the residence of Made in the place of dishonor parties WHEN MADE: On the day of dishonor unless delay is excused. When a bill has been duly noted, the protest may be subsequently extended as of the date of noting (Sec 155 NIL). WHERE MADE: At the place where it is dishonored EXCEPT where the bill is payable at a place other than the residence of the drawee, it must be protested at the place where it is expressed to be payable (Sec 156 NIL)

PROTEST FOR BETTER SECURITY One made by the holder of a bill after it has been accepted but before it matures against the drawer and indorsers, where the acceptor has been adjudged bankrupt or insolvent, or made an assignment for the benefit of the creditors (Sec 158) PURPOSE: To give acceptor the opportunity to perform an act that will ensure payment

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ACCEPTANCE FOR HONOR An undertaking by a stranger to a bill after protest for the benefit of any party liable thereon or for the honor of the person for whose account the bill is drawn such acceptance inures also to the benefit of all parties subsequent to the person for whose honor it is accepted, and conditioned to pay the bill when it becomes due if he original drawee does not pay it (Sec 161-170 NIL)

REQUISITES (Sec 161-162 NIL) 1. The bill must have been protested for dishonor by nonacceptance or for better security 2. The acceptor for honor must be stranger to the bill 3. The holder must consent to the acceptance for honor 4. Bill must not be overdue 5. Must follow the formalities prescribed in Sec 162: a. Must be in writing b. Must indicate it is an acceptance for honor c. Signed by the acceptor for honor d. Must contain an express or implied promise to pay money e. The accepted bill for honor must be delivered to the holder

LIABILITY FOR ACCEPTANCE FOR HONOR 1. The acceptor for honor is liable to the holder and to all parties to the bill subsequent to the party for whose honor he has accepted (Sec 164 NIL) 2. By such acceptance, he engages that he will on due presentment pay the bill according to the terms of his acceptance, provided it shall not have been paid by the drawee, and that it shall have been duly presented for payment and protested for nonpayment and notice of dishonor given to him (Sec 165) ACCEPTANCE FOR HONOR FOR BILL PAYABLE AFTER SIGHT Where a bill payable after sight is accepted for honor, its maturity is calculated from the date of the noting for non-acceptance and not from the date of the acceptance for honor (Sec 166 NIL) PROTEST OF BILL ACCEPTED FOR HONOR Where a dishonored bill has been accepted for honor before protest or contains a referee in case of need, it must be protested for

nonpayment before it is presented for payment to the acceptor for honor or referee in case of need (Sec 167) PRESENTMENT FOR PAYMENT TO ACCEPTOR FOR HONOR; HOW MADE 1. If it is to be presented in the place where the protest for nonpayment was made, it must be presented not later than the day following the maturity 2. If it is to be presented in some other place than the place where protested, it must be forwarded within the time specified in Sec 104 WHEN DELAY IS EXCUSED: Where there is delay in making presentment to the acceptor for honor or referee in case of need, Sec 81 applies: Where circumstances beyond the holder’s control but not imputable to holder’s fault or negligence (Sec 169) WHEN DISHONORED BY ACCEPTOR FOR HONOR: It must be protested for nonpayment by him (Sec 170)

PAYMENT FOR HONOR Payment made by a person, whether a party to the bill or not, after it has been protested for nonpayment, for the benefit of any party liable thereon or for the benefit of the person for whose account it was drawn (Sec 171-177)

REQUISITES(Sec 171-172 NIL) 1. The bill has been dishonored by non-acceptance 2. It has been protested for nonpayment 3. Payment supra protest (another term for payment for honor because prior protest for nonpayment is required) is made by any person, even by a party thereto 4. The payment is attested by a notarial act of honor which must be appended to the protest or form of an extension of it 5. The notarial act must be based on the declaration made by the payor for honor or his agent of his intention to pay the bill for honor and for whose honor he pays NOTE: If the above formalities are not complied with, payment will operate as VOLUNTARY PAYMENT and the payor will acquire no right to full reimbursement against the party whose honor he pays. (Sec 172)

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In payment for honor, the payee cannot refuse payment. If he refuses, he cannot recover from the parties who would have been discharged had he accepted the same. In acceptance for honor, the holder’s consent is necessary

Liability

RIGHT OF PAYOR FOR HONOR

Notarial act

To receive both the bill and protest to enable him to enforce his rights against parties who are liable to him.

ORDINARY ACCEPTANCE HONOR DISTINGUISHED Necessity of protest Consent of holder Liability of acceptor By whom accepted Number of acceptors Effect of payment

AND

ACCEPTANCE

FOR

ORDINARY ACCEPTANCE Previous protest is NOT required Implied

ACCEPTANCE FOR HONOR Previous protest IS required Required

Primary

Secondary

Drawee is acceptor

Acceptor must be stranger to the bill There may be several acceptors for honor for different parties in the bill Bill is NOT discharged upon payment by acceptor for honor

No acceptor in the alternative or in succession Instrument IS discharged upon payment by the acceptor

ACCEPTANCE FOR HONOR AND PAYMENT FOR HONOR DISTINGUISHED Bill Previous protest Consent of holder

ACCEPTANCE FOR HONOR Bill must be overdue Previously protested for non-acceptance or for better security Necessary

By whom made

Effects

Acceptor is secondarily liable Made by a stranger or party not liable on the bill Notarial act of honor is not necessary Sec 164, 165

PAYMENT BY PERSON PRIMARILY LIABLE PAYMENT FOR HONOR DISTINGUISHED

Necessity of protest Party liable In whose favor payment is made Notarial act Payment in due course

PAYMENT BY PERSON PRIMARILY LIABLE No need to protest for nonpayment or non-acceptance A party to the NI: maker or drawee-acceptor In favor of specific parties

Not necessary Discharges the NI

PAYMENT FOR HONOR Bill may be overdue Previously protested for nonpayment Is not necessary

Acceptor is primarily liable Made by any person whether a party or stranger to the bill Notarial act of honor is necessary Sec 175, 177

AND

PAYMENT FOR HONOR

Need to protest for nonpayment May be a stranger or may be a party In favor of a specified person and the law requires that there is a statement of the person for whose honor payment is made Necessary Cannot be payment in due course & payment discharges only the parties after the party in whose fabor the payment for honor is made

BILLS IN SET One composed of several parts, each part being numbered and containing a reference to the other parts, the whole of the parts constituting one bill (Sec 178 NIL)

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PURPOSE: It is usually availed of in cases where a bill had to be sent to a distant place through some conveyance. If each part is sent by different means of conveyance, the chance that at least one part of the set would reach its destination would be greater.

RIGHTS OF HOLDERS WHERE PARTS ARE NEGOTIATED SEPARATELY 1. If both are HDC, the holder whose title first accrues is considered the true owner of the bill 2. But the person who accepts or pays in due course shall not be prejudiced (Sec 178 NIL)

OBLIGATION OF HOLDER WHO INDORSES 2 OR MORE PARTS OF BILL IN SET 1. The person shall be liable on every such part 2. Every indorser subsequent to him is liable on the part he has himself indorsed, as if such parts were separate bills (Sec 180)

DISCHARGE DISCHARGE OF INSTRUMENT –A release of all parties, whether primary or secondary, from the obligations arising thereunder. It renders the NI without force and effect, and consequently, it can no longer be negotiated

INSTANCES 1. 2. 3. 4.

By payment in due course or on behalf of the principal debtor Payment by accommodation party Intentional cancellation by the holder By any act which will discharge a simple contract for the payment of money 5. When the principal debtor becomes the holder of the NI or after maturity in his own right (Sec 119)

A. PAYMENT IN DUE COURSE REQUISITES a. Payment must be made at or after maturity b. Payment must be made to the holder c. Payment must be made in good faith and without notice that the holder’s title is defective (Sec 88 NIL)

BY WHOM MADE a. By maker or acceptor or (selected accommodated party) b. Surety, if a primary party; or c. By an agent on behalf of the principal

B. PAYMENT BY ACCOMODATED PARTY REASON: He is the one ultimately liable on the NI C. CANCELLATION – It includes any act of tearing, erasing, obliterating, or burning. It is not limited to writing the word “cancelled” or “paid,” or drawing crisscross lines across the NI (Sec 123). It may be made by any other means by which the intention to cancel the NI may be evident.

INTENTIONAL CANCELLATION REQUISITES 1. Intentionally done 2. By the holder thereof; and 3. By writing the word “cancelled” or “paid” on the face of the NI or of the NI is torn up, burned, mutilated or destroyed EFFECT OF UNINTENTIONAL CANCELLATION If the NI is unintentionally cancelled or cancelled by mistake or without authority of the holder, the cancellation is INOPERATIVE but party who alleges that cancellation was made unintentionally, under mistake or without authority has the burden of proof (Sec 123 NIL) D. ANY

OTHER ACT WHICH DISCHARGES THE INSTRUMENT – The law on obligations and contracts will apply. Art 1231 provides how obligations may be extinguished: 1. Payment or performance of obligation 2. Loss of thing due 3. Condonation or remission of debt 4. Confusion or merger in the rights of the creditor and debtor 5. Compensation 6. Novation 7. Annulment 8. Rescission Page | 53

9. Fulfillment of resolutory condition 10. Prescription However, although such ways discharge the NI as between immediate parties, they will not do so in the hands of HDC. NOTE: The NI must be surrendered to the payor. If the NI is not surrendered, it may fall in the hands of HDC who may have the right to enforce the NI despite the previous payment

DISCHARGE OF PERSONS SECONDARILY LIABLE 1. By any ACT which discharges the NI 2. By the INTENTIONAL cancellation of his signature by the holder 3. By the DISCHARGE of a prior party NOTE: The release of the principal debtor must be by t act of the holder and not by operation of law. 4. By a VALID tender or payment made by a prior party Tender of payment means the act by which one produces and offers to a person holding a claim against or demand against him the amount of money which he considers and admits to be due, in satisfaction of such claim or demand without any stipulation or condition 5. By the RELEASE of the principal debtor, unless the holder’s right of recourse against the party secondarily liable is expressly reserved 6. By any AGREEMENT binding upon the holder to extend the time of payment or to postpone the holder’s right to enforce the NI (Sec 120) Instances when the agreement to extend the time of payment does NOT discharge a party secondarily liable 1. Where the extension of time is consented to by such party 2. Where the holder expressly reserves his right of recourse against such party

EFFECTS OF PAYMENT BY PARTIES SECONDARILY LIABLE 1. NI will not be discharged 2. It only cancels his own liability and that of the parties subsequent to him

3. He may strike out his own and all subsequent indorsements and again negotiate the NI except a. Where it is payable to the order of a third person and has been paid by the drawer; and b. Where it was made or accepted for accommodation and has been paid by the party accommodated (Sec 121 NIL)

E. RENUNCIATION

(Sec 122 NIL) – The act of surrendering a right or claim without recompense, but it can be applied with equal property to the relinquishing of a demand upon an agreement supported by a consideration o It must be with written declaration to that effect and if oral, must be accompanied by surrender of the NI to the person primarily liable thereon REQUISITES 1. Absolute and unconditional 2. Made in favor of the person primarily liable; and 3. Made at or after maturity

EFFECTS 1. A renunciation in favor of a secondary party may be made by the holder before, at or after maturity of the NI. The effect is to discharge the only such secondary party and all parties subsequent to him but the NI itself must remain in force 2. A renunciation in favor of the principal debtor may be effected at or after maturity. The effect is to discharge the NI and all parties thereto provided the renunciation is made unconditionally and absolutely NOTE: In either case, renunciation does not affect the HDC without notice. F. PRINCIPAL DEBTOR BECOMES THE HOLDER – An instrument is discharged when the principal debtor becomes the holder of the instrument at or after maturity date in his own right. o In his own right – construed to exclude a case where a maker acquires the NI in a purely representative capacity (Sigler v. Sigler, 98 Kans. 524, 158 P. 864)

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o

The note is not discharged when the maker acquires it as agent of another. Nor is it discharged when the maker becomes the holder, like as executor or administrator

G. SURRENDER OF THE INSTRUMENT – The NI must be surrendered to the payor whenever discharge is by payment by or in behalf of the principal debtor, payment by the accommodated party, by renunciation or by any other ground that discharges simple contract

CHECKS CHECK – An instrument which is in the form of a bill of exchange but is always payable on demand and always drawn on a bank (Sec 185 NIL) Elements: (1) Contain an unconditional order (2) For payment of money (3) Amount of which is definite and certain (4) May be transferred by indorsement or by delivery depending if payable to bearer or to order o Checks are not mere contracts but: 1. A representation of FUNDS on deposit 2. Representation of CREDIT stated in monetary value 3. SUBSTITUTE for cash; and 4. As PAYMENT for an obligation o But a check itself does NOT operate as assignment of any part of the funds to the credit of the drawer with the bank. The bank is not liable to the holder UNLESS AND UNTIL it accepts or certifies the check (Sec 189 NIL)

PRESENTMENT FOR PAYMENT A check must be presented for payment within 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 NIL). When a check is crossed, it is the duty of the collecting bank to ascertain that check is only deposited to the payee’s account (Phil Commercial Bank v. Phil Commercial and International Bank, G.R. no 180257, February 23, 2011).

TYPES OF CHECKS 1. PERSONAL CHECK – Most common form of check 2. CASHIER’S CHECK – One drawn by the cashier of a bank, in the name of the bank against the bank itself payable to a third person. It is a primary obligation of the issuing bank and accepted in advance upon issuance (Tan v. CA, G.R. no 108555, December 20, 1994) 3. MANAGER’S CHECK – A check drawn by the manager of a bank in the name of the bank itself payable to a third person. It is similar to the cashier’s check as to the effect and use o Drawn by a bank itself and has the effect of acceptance. It is more like a promissory note; as such bank is primarily liable 4. MEMORANDUM CHECK – A check given by a borrower to a lender for the amount of a short loan, with the understanding that it is not to be presented at the bank, but will be redeemed by the maker himself when the loan falls due and which understanding is evidence by writing the word “memorandum,” “memo” or “mem” on the check o Check where the word “memorandum” or “memo” is written across its face meaning that the drawer will pay the holder absolutely, without need of presentment 5. CERTIFIED CHECK – An agreement whereby the bank against whom a check is drawn undertakes to pay it any future time when presented for payment (Sec 187 NIL) 6. TRAVELER’S CHECK – It is one upon which the holder’s signature must appear twice: one to be affixed by him at the time it is issued; and the second, for countersignature, to be affixed by him in the presence of the payee before it is paid otherwise it is incomplete

CERTIFICATION OF CHECKS An agreement whereby the bank against whom a check is drawn, undertakes to pay it at any future time when presented for payment EFFECTS 1. Equivalent to acceptance (Sec 187 NIL) and is the operative act that makes banks liable 2. Assignment of the funds of the drawer in the hands of the drawee (Sec 189)

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3. If obtained by the holder, discharges the persons secondarily liable thereon (Sec 188) NOTE: Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon (Sec 186)

REFUSAL OF DRAWEE BANK TO PAY AND CERTIFY GENERAL RULE: If a bank refuses to pay a check (despite the sufficiency of funds), the payee-holder cannot, as provided under Sec 185 and 189 NIL sue the bank. The payee should instead sue the drawer who might in turn sue the bank REASON: No privity of contract exists between the drawee-bank and payee (Sincere Villanueva v. Marlyn Nite, G.R. no 148211, July 25, 2006) EXCEPTION: If the drawer himself ordered the bank to pay and such drawer has sufficient funds therein

COLLECTION OF CHECKS On the check’s due date, the holder of a check may either proceed directly to the drawee bank and present the same for payment or he may deposit it in his account with his bank known as the depositary bank or collecting bank.  It is only after the check has been cleared and collected from the drawee bank that final credit is made in the payeedepositor’s account

CLEARING OF CHECKS When a check is sent to the clearinghouse the collecting bank acts as the agent of the depositor. The collecting bank does not become the owner of the amount covered by the check as the same is only being collected from the drawee bank for the principal, the depositor (BPI v. CA, G.R. no 112392, February 29, 2000)

CROSSED CHECK – A check which in addition to the usual contents of an ordinary check contains also the name of a certain banker or business entity through whom it must be presented for payment

KINDS 1. CROSSED SPECIALLY – The name of a particular bank or company is written or appears between the parallel lines in

which case the drawee-bank must pay the check only upon presentment by such bank or company (Chan Wan v. Tan Kim, G.R. no L-15380, September 39, 1960) 2. CROSSED GENERALLY – Only the words “and Co.” are written between the parallel lines or when none at all is written between said lines Where the manager obtained and encashed manager’s checks that were plainly crossed checks, the SC held the following effects: 1. It may not be encashed but may only be deposited with the bank 2. It may be negotiated only once to a person who has an account with the bank; and 3. It serves as a warning to the holder that the check has been issued for a definite purpose and he must inquire if he received the check pursuant to this purpose; otherwise he is not HDC (Associated Bank v. CA, G.R. no 89802, May 7, 1992) The NIL is silent with respect to crossed checks, although the Code of Commerce makes reference to such instrument. Nonetheless, the SC has taken judicial cognizance of the practice that a check with 2 parallel lines in the upper left hand corner means that it could only be deposited and not converted into cash. The effects of crossing a check thus relates to the mode of payment, meaning that the drawer had intended the check for deposit only by the rightful person, i.e. payee named therein (Cely Yang v. CA, G.R. no 138074, August 15, 2003)

IRON CLAD RULE Prohibits the countermanding of payment of certified checks (Republic v. PNB, G.R. no 16106, December 1, 1961) NOTE: The holder must be HDC so that the stop payment order may not be successfully invoked against him (Mesina v. IAC, G.R. no 70145, November 13, 1986)

CRIMES INVOLVING CHECKS A. CHECK KITING – It is the practice of taking advantage of the float, the time that elapses between the deposit of the check in one back and its collection in another NOTE: In anticipation of the dishonor of the check that was deposited, the conspirators will release the original check with another worthless check

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o CASES WHEN BANK MAY REFUSE PAYMENT 1. The BANK is insolvent 2. The drawer’s deposit is INSUFFICIENT or he has no account with the back or said account has been closed or garnished 3. The DRAWER is insolvent and proper notice is received by the bank 4. The drawer DIES and proper notice is received by the bank 5. The drawer has COUNTERMANDED payment 6. The holder REFUSES to identify himself 7. The bank has reason to believe the check is FORGERY NOTE: A bank is under no obligation to make partial payment on a check up to the amount of the drawer’s funds as where the check is drawn for an amount larger than what the drawer has on deposit. In case of partial payment, the check holder could not be called upon to surrender the check and the bank would be without a voucher affording a certain means of showing payment (Moran v. CA, G.R. no 105836, march 1994) B. ESTAFA – By express provision of BP22, prosecution of said law is without prejudice to any liability under RPC, particularly Art 315(d) – Deceit is necessary Elements 1) Offender issued a postdated check or issued a check in payment of an obligation 2) Such postdating or issuing a check was done when offender had no funds in the bank or his funds deposited therein were not sufficient to cover the amount of the check NOTE: o Good faith is a defense in a charge of estafa by postdating or issuing a check o the drawer’s failure to cover the issued check within 3 days from notice of dishonor is prima facie evidence of deceit o If the check was issued in payment of pre-existing debt, there is NO estafa

o

Offender must be able to obtain something from the offended party by means of the check he issues and delivers (for value or consideration) If postdating a check issued as mere guarantee/promissory note, there is NO estafa

C. BP 22 (BOUNCING CHECKS LAW) – If check is dishonored of insufficient funds, the drawer may be held civilly liable (under NIL) and criminally liable under BP 22. o Purpose: To prevent increase in the number of worthless checks issued by unscrupulous persons causing prejudice to the banking system and to the flow of business and trade Acts punishable: 1) Making, drawing or issuing a check knowing at the time of issue that the drawer has no sufficient funds/credit with the drawee bank – knowledge of insufficient funds is essential 2) Failure to keep sufficient funds to cover the check for 90 days from date of check – drawing and issuance of said check is prima facie evidence of drawer’s knowledge of insufficient funds  EXCEPT if Drawer pays holder the amount of the check within 5 banking days after notice of dishonor or makes arrangement for payment in full by the drawee (same period)  Payment within 5 banking days does not remove criminal liability o To dishonor check = write reason for dishonor in the check and in the notice of dishonor (prima facie evidence of issuance, due presentment and dishonor of check) o If check is presented after 90 days and dishonored = no criminal liability o Check is presented “on account or for value” WHERE THE ACCUSED WAS ACQUITTED OF THE CRIMINAL CHARGES UNDER BP 22, MAY HE STILL BE HELD CIVILLY LIABLE FOR THE CHECKS HE ISSUED? Yes. Since the court held that upon issuance of a check, in the absence of evidence to the contrary, it is presumed that the same was issued for valuable consideration. Under NIL, it is presumed that every

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party to an NI acquires the same for a consideration or for value. As petitioner alleged that there was no consideration for the issuance of the subject checks, it devolved upon him to present convincing evidence to overthrow the presumption and prove that the checks were in fact issued without valuable consideration (Cayanan v. North Star International Travel, G.R. no 172954, October 5, 2011)

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