162709688-Negotiable-Instruments-Law.pdf

NEGOTIABLE INSTRUMENTS LAW

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Negotiable Instruments Law

Negotiable instrument defined: - A written instrument signed by the maker or drawer for the unconditional payment of a fixed sum of money, at a fixed or determinable future time, or on demand, to a payee or to his order or to bearer - A written contract for the payment of money which by its form and on its face is intended as a substitute for money and passes from hand to hand as money, so as to give the holder in due course the right to hold the instrument and collect the sum for himself

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Negotiable Instruments Law

Vs. Non-negotiable instrument: a) A negotiable instrument contains all of the requisites of Sec. 1 of the NIL; while a non-negotiable instrument does not have any, some or all of the requisites mentioned in the said section of the law b) A negotiable instrument is transferrable by negotiation, among other forms of transfer; while a non-negotiable instrument is transferrable by assignment, not by negotiation c) A holder in due course of a negotiable instrument can have rights better than his transferor; while a transferee of a non-negotiable instrument acquires no better rights than his transferor d) Prior parties to a negotiable instrument warrant payment; a prior party to a non-negotiable instrument does not warrant payment but merely the legality of his title 3

Negotiable Instruments Law

Vs. Negotiable document: a) In negotiable instruments, the subject is money; while in negotiable documents of title, the subject is goods b) A negotiable instrument is itself the property with value; while in negotiable document of title, the document is a mere evidence of title, the things of value being the goods mentioned in the document c) A negotiable instrument has all the requisites of Sec. 1 of the NIL; while a negotiable document of title does not have these requisites d) A holder of negotiable instrument may run after the secondary parties for payment if dishonored by the party primarily liable; while intermediate parties in a negotiable document of title are not secondarily liable if the document is dishonored e) A holder of a negotiable instrument, if a holder in due course, may acquire rights over the instrument better than his predecessors; while a holder of a negotiable document of title can never acquire rights to the document better than his predecessors 4

Negotiable Instruments Law

Common forms of negotiable instruments: a) Negotiable promissory note – an unconditional promise in writing by one person to another signed by the maker engaging to pay on demand or at a fixed or determinable future time, a sum certain n money, to order or to bearer - special types of promissory notes – bonds, due bills, etc. b) Negotiable bill of exchange – is an unconditional order in writing 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 - special types of bills of exchange – banker’s acceptance, money orders c) Check – a bill of exchange drawn on a bank and payable on demand 5

Negotiable Instruments Law

Promissory note vs. bill of exchange: a) A promissory note contains an unconditional promise; while a bill of exchange contains an unconditional order b) In a note; there are two original parties; while in a bill, there are three parties c) In a note; the original issuer (maker) is primarily liable; while in a bill, the original issuer (drawer) is only secondarily liable d) In a note, only one presentment (for payment) is required; in a bill, two presentments (for acceptance and for payment) are required

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Negotiable Instruments Law

Requisites of Negotiability: - in writing - unconditional promise or order - payable on demand or at a fixed or determinable future time - payable to order or bearer - drawee must be named or indicated with reasonable certainty

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NIL– Meaning of Particular Requisites

1. Unconditional promise or order – not affected by:

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indication of particular fund from which the acceptor reimburses himself after paying the holder

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statement of the transaction which gives rise to the instrument

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NIL– Meaning of Particular Requisites

2. Sum Certain – not affected although -

with interest

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by stated installments

- by stated installments with acceleration in case of default -

with exchange

- with costs of collection or attorney’s fees

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NIL– Meaning of Particular Requisites

3. In money General rule – if with promise or order of additional act, non-negotiable Acts not affecting negotiability: -

authorizes sale of collateral securities on default

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authorizes confession of judgment

-

waives the benefit of law intended to protect the debtor

- allows creditor option to require something in lieu of money 10

NIL– Meaning of Particular Requisites

4. Payable on demand, When:

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expressed to be payable on demand, at sight or on presentation

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no period of payment is stated

-

instrument is issued, accepted or indorsed after maturity

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NIL– Meaning of Particular Requisites

4. Payable on demand (cont.) Exercises: When are the following notes payable? a) The note reads: “_______ after date, the undersigned hereby promises to pay. . . .”

b) On January 15, 2006, “A” made a promissory note to the order of “B”, payable on January 30, 2006. “B” endorsed and delivered the note to “C”. As regards “B”, when is the note payable?

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NIL– Meaning of Particular Requisites

5. Determinable future time - instances

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at a fixed period after date or sight

- on or before a specified, fixed or determinable future time -

on or at a fixed period after the occurrence of a specified event certain to happen, although exact date is not certain

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NIL– Meaning of Particular Requisites

6. Payable to order -

issued or drawn payable to the order of a specified person, or to him or his order

Note: A bill may be addressed to two or more drawees jointly, whether they are partners or not; but not to two or more drawees in the alternative or in succession,

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NIL– Meaning of Particular Requisites

7. Payable to bearer -

when expressed to be so payable

- when payable to a person named therein or bearer - when payable to the order of a fictitious or non-existing person and such fact was known to the drawer or maker -

when the name of the payee is not the name of a person

- when the only and last indorsement is an indorsement in blank 15

NIL– Meaning of Particular Requisites

Rules as to dates: a) Where the instrument, its acceptance, or indorsement is dated, such date is presumed to be the corresponding true date b) When date is important: 1) where instrument is payable within a specified period after date, or after acceptance 2) when instrument is payable on demand 3) when instrument is an interest-bearing one c) Antedating or postdating does not affect negotiability

validity or

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NIL-Rules on Interpretation

Rules on interpretation of instruments:

1. Discrepancy between amount in figures and in words – words prevail 2. Instrument not dated – presumed dated on the date of issue 3. Conflict between written and printed provisions – written provisions prevail

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Negotiable Instruments Law

Rules on interpretation of instruments (cont.): 4. Interest provided for but no starting date stated – starting date is date of instrument, otherwise, date of issue Exercise: For value received, X executed a promissory note in favor of Y for P100,000 agreeing to pay interest thereon but without specifying the rate thereof. Can Y collect interest on the note? 18

Negotiable Instruments Law

Rules on interpretation of instruments (cont.): 5. Instrument ambiguous – holder may treat it either as a note or as a bill 6. Signature does not indicate capacity in which made – he is deemed an indorser 7. “I promise to pay” signed by two makers – solidary liability

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Negotiable Instruments Law

Exercise: A and B executed and delivered to C a promissory note which reads thus: “I promise to pay C or bearer the sum of P20,000 with interest at 12 % on or before June 30, 2006 – Cebu City, Feb. 1, 2006 – Sgd. A and B” Two months later, for value received, C delivered to D the aforesaid note with the indorsement: “Pay to D”; and on April 25, 2006, the said note was indorsed in black by D, and delivered to X without consideration. Upon A’s refusal to pay despite demand, X filed an action to collect from A the total amount of the promissory note, with 12% interest per annum from Feb. 1, 2006, and the costs. A’s defense is that his liability cannot exceed more than one half of the amount due. 1. Is A’s defense valid? 2. Is X entitled to the whole amount of the note? 20

Negotiable Instruments Law

ABNORMAL AND SIMILARLY DEFICIENT NEGOTIABLE INSTRUMENTS

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Negotiable Instruments Law

Causes for abnormality and deficiency 1. Lack of essential requisites of a contract 2. Lack of regularity in issue by absence of: a) the material particulars of the questioned instrument, or in their correctness; and b) the delivery of instrument made with the knowledge and/or conformity of the maker or drawer and with intention of making the transferee the holder thereof

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Negotiable Instruments Law

Situations where subsequent holder in due course not affected by abnormality or deficiency 1. Incomplete but delivered negotiable instrument Rules: a) Holder has prima facie authority to complete the instrument b) Completion to be done within a reasonable time and according to the authority given c) Holder in due course of the instrument previously completed in breach of instructions can enforce the same as if regularly completed 23

Negotiable Instruments Law

Exercise:

Maria issued a negotiable promissory note and authorized Pilar to fill up the amount in blank up to P10,000 only. However, Pilar filled it up to P100,000 and negotiated the note to Pepe. For what amount are Maria and Pilar liable to Pepe?

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Negotiable Instruments Law

Situations where subsequent holder in due course not affected by abnormality or deficiency (cont.) 2. Complete but undelivered negotiable instrument Rules: a) Between immediate parties and a remote party not a holder in due course, delivery to be effectual must be made by or under the authority of the maker, drawer, acceptor or indorser, as the case may be; b) If the instrument is in the hands of a holder in due course, all prior deliveries are conclusively presumed valid; c) If the instrument is out of the hands of the person who signed it, a valid and intentional delivery is disputably presumed.

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Negotiable Instruments Law

Exercise: A succeeded in making B affix his signature on a check without B’s knowing that it was a check. At the time of signing, the check was complete in all respects. A intended to cash the check the following morning, but that night, it was stolen by C who succeeded in negotiating the same to D, a holder in due course. D cashed the check the following morning. B refused to have the amount of the check deducted from his bank deposit.

Who may properly be charged with the amount of the check? 26

Negotiable Instruments Law

Situations where subsequent holder in due course not affected by abnormality or deficiency (cont.) 3. Complete and delivered negotiable instrument issued without consideration, or with a consideration consisting of a promise which the payee failed to comply with Rules: a) Absence of consideration is the total lack of consideration, no consideration or illegal consideration b) Failure of consideration is failure of agreed consideration to materialize c) Both absence and failure of consideration are defenses personal to the prejudiced party, and available against any person not a holder in due course 27

Negotiable Instruments Law

Exercise: Sumabod issued a promissory note to the order of Panloob as consideration for textiles purchased from the latter. The promissory note recites that the amount of P100,000 is payable in five monthly installments of P20,000 each, beginning on December 1, 2005 and every first day of the month thereafter until fully paid, provided that the holder may declare the entire amount due and demandable in the event the maker fails to pay in time any installment in full, or whenever the holder for valid reasons finds his claim unsecured. Panloob indorsed and delivered the note for value to Humabol who acted in good faith. Panloob’s factory burns down and he is unable to deliver the textiles. Sumabod does not pay as promised. Can Humabol as innocent purchaser for value hold Sumabod liable on the promissory note? 28

Negotiable Instruments Law

Exercise: A executed a promissory note for P50,000 payable to the order of B for the purchase of a certain merchandise from B. Only one half of the merchandise was delivered; but B nonetheless indorsed the promissory not to C for value. Prior to maturity, C indorsed the note at a discount to D who had knowledge of B’s partial failure to deliver the merchandise. a) Can D now recover the full amount of the promissory note? b) If instead of being indorsed to D, the promissory note was reacquired by B. Can B now hold A liable on his promissory note? 29

Negotiable Instruments Law

Exercise: Romeo had P100,000 in his current account at the Matatag Banking Corporation. Romeo learned that his enemy had hired a contract killer to liquidate him. Fearful for his life, he mailed to his fiancée, Juliet, a check for his P100,000 in the bank. The check was payable to Juliet or order and was accompanied by a letter stating that he was giving her his money out of his great love for her and because something would happen to him anytime now. Juliet presented the check for payment but the bank refused to honor it. Does Juliet have any right of action against the bank? 30

Negotiable Instruments Law

Exercise:

X makes a promissory note for P500,000 payable to A, a minor, to help him buy school books. A indorses the note to B who, in turn, indorses the note to C. C knows A’s minority. If C sues X on the note, can X set up the defenses of minority and lack of consideration?

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Negotiable Instruments Law

Exception: When M made a promissory note payable to P, to accommodate P in his credit arrangement with A, to whom he (P) endorsed the note, and A has knowledge of the lack of consideration to the note due to the accommodation of P by M. In this case, A can enforce the note against M, inspite of A’s knowledge of the absence of consideration between M and P.

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Negotiable Instruments Law

Situations where subsequent holder in due course not affected by abnormality or deficiency (cont.)

2. Incomplete and undelivered Example: M makes a bearer promissory note, leaves the amount in blank, places said note inside the drawer of his unlocked office table, where it was stolen by P, his office secretary, who inserts P1,000 on the blank space for the amount, and negotiates the note. 33

Negotiable Instruments Law

Exercise: PN makes a promissory note for P5,000 but leaves the name of the payee in blank because he wanted to verify its correct spelling first. He mindlessly left the note on top of his desk at the end of the workday. When he returned the following morning, the note was missing. It turned up later when X presented it to PN for payment. Before X, T, who turned out to have filched the note fro PN’s office, had endorsed the note after inserting his own name in the blank space as the payee. PN dishonored the note, contending that he did not authorize its completion and delivery. But X said he had no participation in, or knowledge about, the pilferage and alteration of the noted and therefore he enjoys the rights of a holder in due course under the NIL. Who is correct and why? 34

Negotiable Instruments Law

FORGERY

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Negotiable Instruments Law - Forgery

Concept: - It is the counterfeit making or fraudulent alteration of any writing; it may consist of: a) Signing of another’s name with intent to defraud; and b) Alteration of an instrument in the name, amount, description of payee, etc. with intent to defraud

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Negotiable Instruments Law - Forgery

Example: Maria’s signature on a promissory note is forged by Pedro, who is also the payee. Effect: The signature is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party to it, is acquired through or under such signature 37

Negotiable Instruments Law - Forgery

Exercise: Mario makes a negotiable promissory payable to his order, signing Rico’s name thereon as maker without the latter’s knowledge and consent. Mario then indorses the note to Andrei, who, in turn indorses it to Lydel under circumstances which makes Lydel a holder in due course. 1) May Lydel enforce the note against Rico? 2) If the note is dishonored by Rico, may Lydel hold Mario and Andrei liable on their respective indorsements? 38

Negotiable Instruments Law - Forgery

Exercise: Adele makes a promissory note payable to the order of Barbara, who indorses it to Claire. Somehow, Dana obtains possession of the note and, forging the signature of Claire, indorses it to Evelyn. Evelyn then indorses the note to Fanny, the holder. State the rights and liabilities of the parties.

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Negotiable Instruments Law - Forgery

Forgery in Checks – signature of the drawer

- The drawer is not liable and the drawee bank cannot charge the drawer’s account for said check because a bank is supposed to know the signature of its customers, and bears the damage in case it pays under a forged signature of its drawer-customer. (A forged signature is “wholly inoperative” and payment made “through or under such signature” is ineffectual or does not discharge the instrument.) 40

Negotiable Instruments Law - Forgery

Exercise: Armando, a bank depositor, left his checkbook in his office. Unknown to him, a visitor who noticed the checkbook took a check therefrom, filled it up in the amount of P10,000 and succeeded in encashing the check on the same day. Armando’s account was thereby debited in the same amount. Discovering the erroneous debit, Armando demanded that the bank credit him with a like amount. The bank refused on the ground that Armando was negligent in leaving his checkbook on his desk so that he could no longer put up the defense of forgery or want of authority under the Negotiable Instrument Law. The facts disclose that even to the naked eye, there were marked differences between Armando’s signature and the one on the check forged by the visitor. As between Armando and the bank, who should bear the loss? 41

Negotiable Instruments Law - Forgery

Exercise: Manuel forged the name of Nathan, manager of a shipping company, as the drawee of a check. The International Exchange Bank, the drawee bank, did not detect the forgery and paid the amount. May the bank charge the amount paid against the account of the alleged drawer?

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Negotiable Instruments Law - Forgery

Exercise: Hector forged the signature of Ingrid as the drawer of a check drawn on Manilabank. The check was purportedly payable to the order of Hector. Hector then indorsed the check to Jason, a holder in due course, who deposited the same to his account with PNB. The check passed through the normal course of clearing and accordingly the drawee, Manilabank, credited the collecting bank, PNB, with the amount of the check with it (Manilabank) in turn debited from Ingrid’s deposit account. Upon receiving her monthly statement from Manilabank, together with the cancelled checks debited from her deposit account, Ingrid discovered the forgery. 1. Can Ingrid compel Manilabank to recredit to her account the amount of the forged check? 2. Does Manilabank in turn have a recourse against the collecting bank, PNB? 3. Can Manilabank or PNB, as the case may be, proceed against Jason, the indorser? 43

Negotiable Instruments Law

Forgery in signature of indorsers: General rule – drawee bank which has paid a check on which an indorsement has been forged cannot charge the drawer’s account for the amount of the said check Exception – where the drawer is guilty of such negligence which causes the bank to honor such check or checks

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Negotiable Instruments Law

Exercise: Patricia issued a check payable to the order of Queenie in the sum of P100,000, and drawn on Lank Bank. The check was delivered to Ronald by Isidore for encashment. At that time, the check had the indorsements of (1) Queenie and (2) Stacey. When Ronald encashed it with Land Bank, he affixed his signature on the check. Upon his receipt of the cash proceeds of the check, he turned over the amount to Isidore. Land Bank was informed by Patricia that the alleged indorsement of the payee, Queenie, was a forgery, since the latter has died six months ago. Land Bank, having refunded the amount to Hernan, sued Ronald, who refused to return the money.

1. Was Land Bank correct in paying Patricia? 2. Does Land Bank have a cause of action against Ronald? 45

Negotiable Instruments Law

Exercise: Luanne drew a check for P50,000 payable to the order of Philip, drawn against DBP. The check was endorsed and delivered to Adrian who, in turn, deposited the check in his account with IBank. The check was cleared in due course and DBP paid IBank the amount of the check. Twenty days later, it was discovered that the signature of Philip was forged. IBank paid DBP, and notified Adrian that it had debited his account with the corresponding amount. Who, as between Adrian and IBank, should bear the loss?

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Negotiable Instruments Law To cover pay for legal fees, Agnes issued a check payable to the order of Atty. Manalo. She put the check in a sealed envelope and gave it to Isabel, her secretary for seven years, for delivery to Atty. Manalo. Isabel, suspecting that the envelope contained a check, opened it, forged Atty. Manalo’s signature on the back of the check, and deposited the check in her own savings account with Metrobank. Metrobank than credited the amount of the check to Isabel’s account after it had been cleared by the drawee bank, RCBC. When Agnes asked Isabel for Atty. Manalo’s receipt, Isabel replied that Atty. Manalo was out of town but her secretary received the check. One week later, Agnes called Atty. Manalo and was surprised to discover that the latter never got the check. Isabel, feigning illness, had been absent for the last two days and, therefore, could not be questioned. Agnes immediately went to RCBC and found that her check had been cleared five days before. Upon RCBC’s immediate inquiry from Metrobank, the latter informed the former that Isabel already been paid the amount of the check and had in fact she had closed her account two days before. Agnes demands that RCBC recredits her account with the amount of the check. Does RCBC have a right of action against Metrobank? 47

Negotiable Instruments Law

MATERIAL ALTERATION

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Negotiable Instruments Law

Material alteration: - Any alteration which changes the date, the sum payable, the time or place, number or relations of the parties, or medium or currency of payment, or adds a place of payment where none is specified, or which alters the effect of the instrument in any respect (Sec. 125) Effect: Material alteration avoids the instrument except as against a party who has himself made, authorized, or assented to the alteration, and subsequent indorsers. (Sec. 124) Exception: When a materially altered instrument is in the hands of a holder in due course not a party to the alteration, he may enforce payment according to the original tenor of the instrument. 49

Negotiable Instruments Law

Exercise:

A check for P100,000 was drawn against Philbank and made payable to Phil-Asia Security Company or order. The check was deposited with the payee’s account at IBank which then sent the check for clearing to Philbank. Philbank refused to honor the check on the ground that the serial number thereof had been altered. Phil-Asia Security Company sued Philbank. Is it proper for Philbank to dishonor the check for the reason that it had been altered? 50

Negotiable Instruments Law

Exercise: alteration of amount

Amy issued a negotiable promissory note to Faith in the amount of P5,000. however, Faith changed the amount to P10,000. She then negotiated the note to Jenny who had knowledge of the infirmity. Jenny in turn negotiated said note to Marie for value and who had no knowledge of the infirmity. 1. Can Marie enforce the note against Amy and if she can, for how much? 2. Supposing Marie endorses the note to Rose for value but who has knowledge of the infirmity, can the latter enforce the note against Amy? 51

Negotiable Instruments Law

Exercise: alteration in the name of indorsers

Pedro writes out a check for P10,000 in favor of Jose or order against his current account with BPI. Juan steals the check, erases the name of Jose and superimposes his own name. Juan deposits the check at Global Bank and after clearing, Juan withdraws the amount and absconds. Upon discovery by Pedro of the material alteration, he lodged a complaint at the BPI which credited the amount to Pedro. BPI demands reimbursement from Global Bank which refused on the ground that it only acted as an agent for collection. Who bears the loss?

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Negotiable Instruments Law

ACCOMMODATION

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Negotiable Instruments Law

Accommodation: - a legal arrangement under which a person called the accommodation party lends his name and credit to another called the accommodated party, without compensation Accommodation party: - one who has signed the instrument as make, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Requisites: 1. accommodation party must sign as maker, drawer, acceptor indorser 2. No value is received by accommodation party 3. Purpose is to lend accommodation party’s name

or

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Negotiable Instruments Law

Effect: A person to whom the instrument thus executed is subsequently negotiated, has a right of recourse against the accommodation party inspite of the former’s knowledge that no consideration passed between the accommodation and accommodated party. Points to remember: - The accommodation party has the right, after paying the holder, to obtain reimbursement from the party accommodated since the relation between them is that of principal and surety, the accommodation party being the surety. - The liability of an accommodation party does not extend to corporate accommodation because the act of the corporate officers is ultra vires. However, these officers are personally liable. 55

Negotiable Instruments Law

Exercise: To accommodate Carmen, maker of a promissory note, Jorge signed as indorser thereon, and the instrument was negotiated to Raffy, a holder for value. At the time Raffy took the instrument, he knew Jorge to be an accommodation party only. When the promissory note was not paid, and Raffy discovered that Carmen had no funds, he sued Jorge. Jorge pleads in defense the fact that he had indorsed the instrument without receiving value therefor, and the further fact that Raffy knew that at the time he took the instrument Jorge had not received any value or consideration of any kind for his indorsement. Is Jorge liable? 56

Negotiable Instruments Law

On June 1, 2005, A obtained a loan of P50,000 from B, payable not later than November 15, 2005. Since he does not have any checking account, A, with the knowledge of B, requested his friend C, president of KLM Marketing Corporation, to accommodate him. C agreed; he sighed a check for the aforesaid amount dated November 15, 2005, drawn against KLM’s account with Security Bank. The by-laws of KLM requires that checks issued by it must be signed by the president and the treasurer or the vicepresident. Since the treasurer was absent, C requested the vice-president, D, to co-sign the check, which the latter reluctantly did. The check was delivered to B; the check was dishonored upon presentment on due date for insufficiency of funds. 1. Is KLM Marketing Corporation liable on the check as an accommodation party? 2. If it is not, who then, under the above facts, is/are the accommodation party/parties? 57

Negotiable Instruments Law

EXECUTION AND NEGOTIATION - BY AGENTS - UNDER TRADE NAME - BY MINOR OR CORPORATION

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Negotiable Instruments Law

By agents

Requisites: 1. The agent must be authorized 2. He must disclose his principal 3. He must sign for and on behalf of his principal Rule if principal is not disclosed: - agent is personally liable on the instrument even if he is duly authorized

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Negotiable Instruments Law

Under a trade or assumed name Effect: - The person so signing his trade name or assumed name is liable as if the name were his own

Indorsement by minor or disqualified corporation Effect: - Indorsement by minor or other incapacitated person – passes title to the holder and parties prior to the minor/incapacitated can be held liable 60

Negotiable Instruments Law

Exercise:

Aubrey makes a promissory note for P5,000 payable to Myles, a minor, to help him buy school supplies. Myles indorses the note to Chris who knows of Myles’ minority. If Chris sues Aubrey on the note, can she set up the defense of minority and lack of consideration?

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Negotiable Instruments Law

LIABILITIES OF PARTIES

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Negotiable Instruments Law

Parties priamarily liable: 1. Maker a) engages to pay according to the tenor of the instrument; and b) admits the existence of the payee and his capacity to indorse Therefore, the maker cannot set up the defense that the payee is a fictitious person or that the payee was insane, a minor, or a corporation acting ultra vires

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Negotiable Instruments Law

Parties primarily liable (cont)

2. Acceptor (Drawee who accepts the instrument) a) engages to pay according to the tenor of his acceptance; b) admits the existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and c) admits the existence of the payee and his then capacity to indorse

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Negotiable Instruments Law

Exercise: A check for P100,000 was drawn against Philbank and made payable to Phil-Asia Security Company or order. The check was deposited with the payee’s account at IBank which then sent the check for clearing to Philbank.

Philbank refused to honor the check on the ground that the serial number thereof had been altered. Phil-Asia Security Company sued Philbank. Philbank’s defense is that Phil-Asia Security as payee could not sue the drawee bank as there was no privity between them. It theorized that there was no basis to make it liable for the check. Is this contention correct?

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Negotiable Instruments Law

Parties secondarily liable 1. Drawer a) admits the existence of the payee and his capacity to endorse; b) engages that the instrument will be accepted or paid or both, according to its tenor; and c) engages that if the instrument is dishonored and the necessary proceedings of dishonor are taken he will pay to the party entitled to be paid (Sec. 61) To whom drawer is liable: a) holder; or b) indorser compelled to pay 66

Negotiable Instruments Law

Exercise As payment for goods received, Marlene gave to Nadia on April 3, her check drawn on Urban Bank. On April 4, Nadia negotiated the check to Atty. Ortiz in payment for legal services rendered by the latter. On April 11, Atty. Ortiz went to Urban Bank to encash the check. He could not, however, encash the check because on April 8, the Banko Sentral had placed the bank under receivership. Marlene, Nadia and Atty. Ortiz all reside in Cebu CIty. 1. Can Atty. Ortiz hold Marlene liable on the uncashed check? 2. Can Atty. Ortiz hold Nadia liable on the check? 3. Can Atty. Ortiz still collect from Nadia for the legal services rendered to the latter? 4. Assume that Urban Bank was not closed by the Banko Sentral but simply refused to honor and encash the check. Can Atty. Ortiz hold Marlene liable? 67

Negotiable Instruments Law

Exercise:

Alvin delivers a bearer check to Bert. Bert then especially indorses it to Carlo, and Carlo later indorses it in blank to David. Erwin steals the instrument from David and, forging the signature of David, succeeds in “negotiating” it to Ferdie who acquired the instrument in good faith and for value. In case of dishonor by both the drawee and the drawer, can Ferdie hold any of Bert, Carlo and David secondarily liable on the check?

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Negotiable Instruments Law

Parties secondarily liable (cont)

Indorser – person who places his signature upon an instrument otherwise than as maker, drawer or acceptor, unless he clearly indicates by appropriate words his intention to be bound in some other capacity

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Negotiable Instruments Law

Parties secondarily liable (cont)

2. General Indorser (Sec. 66) a) warrants (to all subsequent holders in due course) 1) the genuineness of the instrument; 2) his good title to it; 3) the capacity of the prior parties to contract; and 4) that the instrument is valid and subsisting b) engages that the instrument will be paid by the party primarily liable; and c) engages that if the instrument is dishonored and the proper proceedings of dishonor are taken, he will pay to the party entitled to be paid (Sec. 66) 70

Negotiable Instruments Law

Exercise:

Danny makes a promissory note payable to Jonathan or bearer. Danny delivers the note to Jonathan. Jonathan indorses the note to Merilyn. Merilyn places the note in her bag, which was stolen by Garlene, who, finding the note, indorses it to Grace by forging Merilyn’s signature. Grace indorses the note to Roland, who in turn delivers the note to Judy, a holder in due course, without indorsement. What are the liabilities of Danny, Jonathan and Merilyn to Judy?

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Negotiable Instruments Law

Parties secondarily liable (cont)

3. Irregular indorser (Sec. 64) - one who affixes his signature in blank on an instrument before delivery Rules as to liability: a) Instrument payable to order of third person – irregular indorser liable to payee and to subsequent parties b) Instrument payable to order of maker or drawer – he is liable to all parties subsequent to the maker or drawer c) Irregular indorser signs for accommodation of payee – he is liable to all parties subsequent to the payee

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Negotiable Instruments Law

When secondary liability attaches: Acts needed before secondary liability attaches: a) Presentment for payment in notes and presentment for acceptance and/or payment for bills of exchange b) Dishonor by non-payment in notes and dishonor by nonacceptance and/or non-payment in bills of exchange c) Notice of dishonor to secondary parties Order in which indorsers are liable: - They are liable in the order in which their indorsements appear in the instrument, i.e., the latter ones having a right of recourse against the prior ones - as between or among themselves, the indorsers may agree otherwise 73

Negotiable Instruments Law

Exercises: 1. Kathryn draws a bill of exchange against Carmel in favor of Beatriz for P10,000, requesting the drawee to pay on June 30, 2005. Beatriz indorses the instrument to Patricia on May 5, 2005 and on May 20, 2005 Patricia presents it for acceptance. The bill is dishonored. Patricia promptly sues Beatriz for payment. Will the case prosper? 2. Frank issued a promissory note to Waldemar in the following tenor: “I promise to pay the order of Waldemar P10,000 sixty days after date. (Sgd.) Frank.” The note was subsequently negotiated with prior indorsement by Waldemar to Aika, to Isabella and to Athena, the holder. When Athena presented the note for payment to Frank, the latter refused to pay. Athena then gave a notice of dishonor to Aika only. May Athena immediately proceed against Waldemar, Aika and Isabella? 74

Negotiable Instruments Law

Parties with limited liability 1. Qualified indorser - warrants 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 which would impair the validity of the instrument, or render it valueless Limited liability of qualified indorser - He is secondarily liable on his warranties as indorser under Sec. 65, i.e., he is liable if the instrument is dishonored by non-acceptance or non-payment due to (1) forgery; (2) lack of good title on the part of the indorser; (3) lack of capacity to indorse on the part of prior parties; or (4) that at the time of the indorsement, the instrument was valueless or not valid and he knew of 75 that fact.

Negotiable Instruments Law

Parties with limited liability (cont) 2. Person negotiating by delivery - same warranties as that of a qualified indorser - unlike in a qualified indorsement, warranties extend only to immediate transferees

Exercise: Adolf makes a promissory note payable to bearer and delivers it to Benjie. In turn, Benjie negotiates it by mere delivery to Chester, who endorses it specially to Drew. Drew negotiates it by special indorsement to Ernie who negotiates it to Fidel by mere delivery. Adolf did not pay. To whom are Benjie, Chester, Drew and Ernie liable? 76

Negotiable Instruments Law

INCIDENTS IN THE LIFE OF AN INSTRUMENT AFTER ITS ISSUE

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Negotiable Instruments Law

a) Issue – the first delivery of the instrument, complete in form to a person who takes it as a holder

b) Delivery – transfer of possession with intent to transfer title; it consist principally of placing the transferee in possession of the instrument, but it must be accompanied by an intent to transfer title. Delivery is essential as “every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto” (Sec. 16) c) Negotiation – such transfer of an instrument from one person to another as to constitute the transferee the holder of the instrument; a mode of transferring an instrument

78

Negotiable Instruments Law

d) Presentment for acceptance in certain kinds of bills of exchange – exhibiting the bill to the drawee and demanding that he accept it, that its, signify his assent to the order or command of the drawer e) Acceptance – the signification by the drawee of his assent to the order of the drawer - in the case of checks, stamping the word “certified” coupled with the signing underneath the stamp by the proper bank officer is equivalent to acceptance f) Dishonor by non-acceptance – where the bill is presented for acceptance, and acceptance is refused by the drawee or cannot be obtained - also, where presentment for acceptance is excused, and the bill is not accepted 79

Negotiable Instruments Law

g) Presentment for payment – exhibiting the instrument to the person primarily liable thereon and demanding payment from him on the date of maturity; presentment for payment is required for all kinds of negotiable instruments h) Dishonor by non-payment – where the instrument is presented for payment and payment is refused or cannot be obtained - also, where presentment for payment is excused and the instrument is overdue and unpaid i) Notice of dishonor – the purpose is to notify the drawer and the indorsers that the instrument has not been accepted by the drawee, or that it has not been paid by the acceptor, in the case of bills, or by the maker, in the case of notes j ) Discharge – an instrument is usually discharged by payment in due course by or on behalf of the principal debtor; but where the one paying is a party secondarily liable on the instrument, it is not 80 discharged

Negotiable Instruments Law

Negotiation - the transfer of a negotiable instrument from one person to another as to constitute the transferee the holder thereof vs. Assignment: - Assignment is the method of transferring a nonnegotiable instrument whereby the assignee is merely placed in the position of the assignor and acquires the instrument subject to all defenses that might have been set up against the original payee

81

Negotiable Instruments Law – Negotiation

Kinds of negotiation: 1. By delivery of the instrument alone in those negotiable instruments which are a) originally payable to bearer, or b) originally payable to order where the only or last indorsement is an indorsement in blank

Exercise: Alan makes a promissory note payable to bearer, and delivers it to Beth, who endorsed it to Chit. Subsequently, Chit without indorsing the note, transfers it to Dana. Upon presentation for payment, Alan dishonored the note. May Dana hold Alan liable? 82

Negotiable Instruments Law - Negotiation

Kinds of negotiation (cont) 2. By indorsement coupled with delivery Kinds of indorsements: a) Special indorsement b) Indorsement in blank c) Conditional indorsement d. Restrictive indorsement e) Regular indorsement f) Irregular indorsement g) Qualified indorsement 83

Negotiable Instruments Law

Effect of indorsement on bearer instrument - holder becomes liable as an indorser

Effect of lack of indorsement of order instrument (Sec. 49): - the transferee is vested with title (rights of the transferor) and acquires the right to have the indorsement of the transferor -

the transferee becomes a holder in due course as of the time of the actual indorsement

Effect of striking out of indorsement: - the indorser whose indorsement is struck out and all indorsers subsequent to him are relieved from liability on the instrument 84

Negotiable Instruments Law

RIGHTS OF A HOLDER

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Negotiable Instruments Law

Rights of a holder In general - the holder of a negotiable instrument may sue thereon in his own name, and payment to him in due course discharges the instrument Classes of holders: 1. Holder in due course 2. Holder not in due course

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Negotiable Instruments Law

Holder in due course - one who has taken the instrument under the following conditions: a) that it is complete and regular upon its face b) that he became the holder thereof before it was overdue and without notice that it has been previously dishonored, if such was the fact c) that he took it in good faith and for value d) that at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it (Sec. 52)

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Negotiable Instruments Law Patti bought a car payable in installments from Auto Center Company for P600,000. She made a down payment of P100,000 and executed a promissory note for the balance. The company subsequently indorsed the note to Philacor Finance Corp. which financed the purchase. The promissory note reads: “For value received, I promise to pay Auto Center Company or order at its office in Cebu City, the sum of P500,000 with interest at 12% per annum, payable in equal monthly installments of P50,000 monthly for 10 months starting May 15, 2006. Cebu City, April 5, 2006. (Sgd.) Patti Pay to the order of Philacor Finance Corp. Auto Center Company By: (Sgd.) President”

Because Patti defaulted in the payment of her installments, Philacor initiated a case against her for a sum of money. Patty argued that the promissory note is merely an assignment of credit, a non-negotiable instrument open to all defenses available to the assignor and, therefore, Philacor is not a holder in due course. Is Philacor Finance Corp. a holder in due course? 88

Negotiable Instruments Law

Exercise: Alvin issued to Vincent a check in the amount of P50,000 postdated October 30, 2005, as security for a diamond ring to be sold on commission. On October 15, 2005, Vincent negotiated the check to ACF Lending Co. which paid the amount of P40,000 to him. Alvin failed to sell the ring so he returned it to Vincent on October 20, 2005. Unable to retrieve his check, Alvin withdrew his funds from the drawee bank. Thus, when ACF Lending presented the check of payment, the drawee bank dishonored it. Later on, when ACF Lending sued him, Alvin (Alvin) raised the defense of absence of consideration, the check having been issued merely as security for the ring that he could not sell. Does Alvin have a valid defense? 89

Negotiable Instruments Law

Holder not in due course - one who became a holder of a negotiable instrument without any, some, or all of the requisites under Sec. 52 of the NIL - A holder not in due course can enforce the instrument and sue thereon under his own name However, prior parties, even though remote, can avail themselves against him of any defense among these prior parties and prevent the said holder from collecting in whole or in part the amount stated in the said instrument

90

Negotiable Instruments Law

Exercise: Rosean, intending to buy a car, saw an old friend, Allison, who is an agent to sell the car belonging to the RFC Finance Corp. After negotiation, Rosean decided to buy the said car. She drew upon request of Allison, a crossed check for P5,000 payable to RFC Finance Corp as evidence of her good faith, but which will merely be shown to RFC by Allison who received said check. The check would then be returned when Allison brings the car and its registration certificate for Rosean’s inspection. For failure of Allison to bring the car and its certificate of registration, and to return the check, Rosean issued a “stop payment order” to the bank. In the meantime, Allison paid the check to RFC Finance Corp for the amortization of his (her) own personal loan and was given P1,500 as change. RFC filed suit against Rosean to recover the value of the check. May RFC Finance Corp. be considered a holder in due course, hence, entitled to recover? 91

Negotiable Instruments Law

DEFENSES

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Negotiable Instruments Law

Defenses of prior parties against the holder

Classes of defenses: 1. Real or absolute defenses 2. Personal or equitable defenses

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Negotiable Instruments Law

1. Real or absolute defenses - those which attach to the instrument irrespective of the parties and is predicated on the principle that the right sought to be enforced has never existed or has ceased to exist Examples: forgery or unauthorized signature; void contract; material alteration; incomplete and undelivered instrument Against whom available: against all holders, whether in due course or not

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Negotiable Instruments Law Exercise: On April 1, 2005, Rona delivered Cherstine the following document “I promise to pay to the order of Cherstine the sum of P100,000 on or before June 10, 2005. (Sgd. Rona)” Two weeks later, Cherstine endorsed and delivered the note to John. John demanded payment from Rona who refused to pay alleging nullity of the note, whereupon, John informed Cherstine accordingly. On July 1, 2005, John filed suit to recover from Rona and Cherstine, jointly and severally, the amount of the note. Rona’s defense is that the note is void, it representing money won in a game of chance (duly proved). 1) How would you decide the case? 2) If Rona, while refusing to pay on the ground of nullity of the instrument, wrote on the note “give me 10 days and I will pay” and John likewise informed Cherstine of the dishonor, will your decision be the same if Cherstine raised as a defense her discharge because of the extension? 95

Negotiable Instruments Law

2. Personal or equitable defenses - those growing out of an agreement or conduct of a particular person in regard to an instrument which renders it inequitable of him, although owner of it, to enforce it against the defendant, but which are not available against bona fide purchasers for value without notice

Examples: incomplete but delivered instrument; delivered but incomplete instrument; absence or failure of consideration; ultra vires act of corporation

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Negotiable Instruments Law

Exercise: A induces B by fraud to make a promissory note payable on demand to the order of A in the sum of P20,000. a) Can A successfully file an action against B, the maker, for the amount of the note? b) Going further. A transfers the note to C who pays P20,000 therefor and acquires the note under circumstances that make him (C) a holder in due course. Can C successfully file an action against B for the amount of the note? c) What defense/defenses can B interpose?

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Negotiable Instruments Law

PRESENTMENT

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Negotiable Instruments Law – Presentment

Presentment defined: - 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 payment of the same

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Negotiable Instruments Law - Presentment

Rule in promissory notes: - presentment for payment is not necessary to charge the maker but it is necessary to make the secondary parties liable

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Negotiable Instruments Law – Presentment – Promissory Notes

Requisites/steps: 1. made within the period required (Sec. 71) - if payable at a fixed or determinable time - if payable on demand 2. to the person primarily liable 3. by the holder or his agent 4. at a reasonable hour on a business day 5. at the proper place (Sec. 73)

How is presentment made?

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Negotiable Instruments Law – Presentment – Promissory Note

Presentment is not required: -

when after due diligence, presentment cannot be made - when presentment is waived - when the indorser is an accommodation party

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Negotiable Instruments Law – Presentment – Promissory Note

Promissory note is considered dishonored: -

when after due presentment, payment is refused When presentment being excused, the instrument is overdue and unpaid

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Negotiable Instruments Law – Presentment – Promissory Note

Exercise:

Harve is the holder of a negotiable promissory note within the meaning of the Negotiable Instruments Law. The note was originally issued by Annally to Maricar as payee. Maricar indorsed the note to Harve for goods bought by her. The note mentions the place of payment on the specified maturity date as the office of the corporate secretary of Global Bank during banking hours. On maturity date, Annally was at the aforesaid office ready to pay the note but Harve did not show up. What Harve later did was to sue Maricar for the face value of the note, plus interest and costs. Will the suit prosper? 104

Negotiable Instruments Law - Presentment

Presentment in bills of exchange: a) Presentment for Acceptance - the production of a bill to the drawee for his acceptance b) Presentment for Payment – the production of a bill to the acceptor for payment

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Negotiable Instruments Law – Presentment – Bills of Exchange

Purpose of presentment for acceptance: - To get the acceptance of the drawee for the making him primarily liable as an acceptor

purpose of

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Negotiable Instruments Law – Presentment – Bills of Exchange

Presentment for acceptance is necessary: - to fix the maturity date - where the bill expressly stipulates presentment - where the bill is drawn payable elsewhere than at the residence or place of business of the drawee (Sec. 143)

107

Negotiable Instruments Law – Presentment – Bills of Exchange

Requisites:

1. must be made within reasonable period - if payable at a fixed or determinable time - if payable on demand 2. by the holder or his agent 3. to the drawee or his agent 4. at a reasonable time on a business day 5. before the bill is overdue

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Negotiable Instruments Law – Presentment – Bills of Exchange

Presentment for acceptance is excused: - where the drawee is dead, has absconded, or is a fictitious or incapacitated person - where after due diligence, presentment cannot be made - when acceptance is refused on another ground although presentment is irregular

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Negotiable Instruments Law – Presentment – Bills of Exchange

Presentment for payment Purpose: - to collect from the acceptor, and if refused, to collect from the secondary parties

110

Negotiable Instruments Law – Presentment – Bills of Exchange

Requisites: 1. must be made within reasonable time 2. by the holder or his agent 3. to the acceptor or his agent 4. at a reasonable hour on a business day 5. at the proper place

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Negotiable Instruments Law – Presentment – Bills of Exchange

Presentment for payment is excused: -

when after due diligence, it cannot be made when the drawee is a fictitious person where there is a waiver of presentment

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Negotiable Instruments Law – Presentment – Bills of Exchange

ACCEPTANCE

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Negotiable Instruments Law – Presentment – Bills of Exchange

Acceptance - signification by the drawee of his assent to the order of the drawer Requisites: 1. must be in writing 2. signed by the drawee 3. must not express that the drawee will perform his promise by means other than money payment 4. must be communicated or delivered to the holder

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Negotiable Instruments Law – Presentment – Bills of Exchange

How acceptance is made: -

on the bill **If the drawer refuses to write his acceptance, the holder may treat it as dishonored

-

on a separate paper **the acceptance does not bind the acceptor except in favor of a person to whom it is shown and who, on the faith thereof, receives the bill for value

-

in writing before the bill is drawn **an unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who, upon the faith thereof, receives the bill for value 115

Negotiable Instruments Law – Presentment – Bills of Exchange

Kinds of acceptance: 1. general - assents without qualification to the order of the drawer 2. qualified - varies the effect of the bill as drawn -

qualified acceptance maybe conditional, partial, local, qualified as to time, or acceptance of some, or more drawees but not all

one

3. express - written on the instrument by the drawee 4. implied - if the drawer destroys the instrument, or if, within 24 hours from presentment, refuses to return the bill

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Negotiable Instruments Law – Presentment – Bills of Exchange

DISHONOR

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Negotiable Instruments Law - Dishonor

In promissory notes 1. by non-payment – when it is duly presented for payment and payment is refused or cannot be obtained, or if presented is excused, the instrument is overdue In bills of exchange 1. by non-acceptance - where the bill is presented for acceptance and is returned dishonored, or within 24 hours from presentment, is not returned accepted or unaccepted 2. by non-payment - if the bill, after it has been accepted, is not paid when presented for payment, or presentment being excused, is not paid on the date of maturity

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Negotiable Instruments Law - Dishonor

Notice of dishonor - notice given by the holder to the party or parties secondarily liable that the instrument was dishonored by non-acceptance or nonpayment, and that the party notified is expected to pay it Requisites: 1. by the holder, his agent, or party compelled to pay 2. to the secondary party 3. within the period provided by law 4. at the proper place 119

Negotiable Instruments Law - Dishonor

When notice of dishonor is not required: 1. when notice is waived 2. when notice is dispensed with 3. as to the drawer under Sec. 114 4. as to the indorser under Sec. 115

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Negotiable Instruments Law - Dishonor

Exercise:

Kenneth drew a check on September 13, 2003. The holder presented the check to the drawee bank only on March 5, 2005. The bank dishonored the check on the same date. After dishonor by the drawee bank, the holder gave a formal notice of dishonor to Kenneth through a letter dated April 10, 2005. Is Kenneth liable to the holder?

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Negotiable Instruments Law - Dishonor

PROTEST IN LIEU OF DISHONOR

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Negotiable Instruments Law – Protest in Lieu of Dishonor

Foreign bill: - a bill of exchange which, on its face, is not and made payable in the Philippines

drawn

Protest: - formal instrument, executed by a notary or any competent person (Sec. 154), certifying that the facts necessary to the dishonor of the instrument by non-acceptance or nonpayment have taken place

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Negotiable Instruments Law – Protest in Lieu of Dishonor

When protest is required: a) where the foreign bill is dishonored by non-acceptance b) where the foreign bill is dishonored by non-payment, it not having been previously dishonored by non-acceptance c) where the bill has been accepted for honor, it must be protested for non-payment before it is presented for payment to the acceptor for honor d) where the bill contains a referee in case of need, it must be protested for non-payment before it is presented for payment to the referee in case of need

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Negotiable Instruments Law – Protest in Lieu of Dishonor

How protest is made: - must be annexed to the bill or must contain a copy thereof, and must be under the hand and seal of the notary making it and must specify: 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 made and the answer given, if any, or the fact that the drawee or acceptor could not be found 125

Negotiable Instruments Law – Protest in Lieu of Dishonor

DISCHARGE

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Negotiable Instruments Law - Discharge

Causes of discharge of all parties: 1. payment by the debtor 2. payment by the accommodated party 3. intentional cancellation by the holder of the instrument 4. any act discharging a simple money obligation; and 5. when debtor becomes the holder of the instrument at or after its maturity

127

Negotiable Instruments Law - Discharge

Causes for discharge of secondary parties: 1. 2. 3. 4. 5.

any act discharging the instrument cancellation of indorser’s signature by the holder cancellation of indorser’s signature by the holder valid tender of payment by a prior party release of principal debtor unless right of recourse is expressly reserved 6. extension of time of payment without consent of secondary party or unless right or recourse is expressly reserved

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Negotiable Instruments Law - Discharge

Exercise: The Family bank is willing to lend your firm the sum of P500,000 payable in 5 years with interest at 12% per annum secured only by a security bond.

Prior to its maturity, the bank indorses the note to Mr. Ramos, who in turn indorses it to Mr. Gomez. Thereafter, Mr. Gomez indorses the note back to the bank upon maturity. Explain the liability of Mr. Cruz to the bank if the note is not paid by your firm.

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Negotiable Instruments Law - Discharge

CHECKS

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Negotiable Instruments Law - Checks

Check defined: - a bill of exchange drawn on a bank and demand

payable on

**must be presented for payment within reasonable time from issue

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Negotiable Instruments Law - Checks

Check vs. Bill of Exchange:

1. a check always has a bank for its drawee while an ordinary bill of exchange may have any capacitated person for its drawee 2. a check is always payable on demand while a bill of exchange need not be so payable 3. if check is certified or accepted, the drawer and indorsers are discharged while if a bill is accepted, the drawer and indorsers remain liable

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Negotiable Instruments Law - Checks

Certification - an agreement whereby the bank binds itself to pay the check at any future time when presented for payment Effects: 1. it is equivalent to acceptance 2. operates as an assignment of funds of the drawer 3. the holder becomes the depositor 4. the drawer cannot issue stop-payment order 5. the bank cannot refuse to pay 6. the drawer and indorsers are discharged

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Negotiable Instruments Law - Checks

Exercise: Andrew drew a check for P10,000 on Equitable, the bank, payable to the order of Charles and delivered the check to the latter for value. Charles indorsed the check in blank and negotiated it to Darwin, who lost it. At Darwin’s request, Andrew ordered payment stopped by notifying Equitable. The stop order was overlooked and the check was paid to Efren, who had taken the check, without actual knowledge of the loss, in payment of merchandise sold to a stranger whom he thought owned the check. Darwin now sues the bank, Equitable, for the amount of the check. Decide the case.

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Negotiable Instruments Law - Checks

Exercise:

Al drew a check against his current account at the Chinabank in favor of Bill. Although Al did not have sufficient funds, the bank honored the check when it was presented for payment. Apparently, Al had conspired with the bank’s bookkeeper so that his ledger cares would show that he still had sufficient funds. May the bank recover from Bill?

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