Audio Lec_Dean Sundiang

GAYLE ANGELI RECTO Negotiable Instruments Dean Jose Sundiang  Audio Lecture Summary

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SECS 1-9 Secs 2-9 are elaboration of Sec 1

Elements: Negotiability   Accumulation of Secondary Contracts  Illustrations: If:    

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MAKER  PAYEE P does not negotiate the instrument and  presents it for payment M does not pay  M is the only one liable  MAKER  PAYEE  A  B  C C (the holder in due course) presents the  instrument to M M dishonors  C must provide a notice of dishonor to P, A, B  >> P, A, B shall become liable for payment also But if no notice of dishonor is made upon P, A,  B  they are discharged from liability (Sec 115)

Indorsement  a contract in itself (Sec 40) It is an accumulation of secondary contract  Here, more parties become liable  What constitutes negotiability?  Sec 1 a. Writing and signed by M/D Not necessarily the usual signature of the M/D  Enough that there is intent to be bound by such signature  b. Unconditional promise – promise – sum  sum certain BSP (Sec 52 of New Central Bank Act) RE RE coins   amended by virtue of a Resolution coins  up to P 1,000  1, 5, 10 peso coins centavo coins  up to P 100  1, 5, 10, 25 centavo  If higher than that  NOT legal tender Legal tender  a kind of currency which the law compels  the creditor to accept as payment of a debt, be public or private, provided it’s tendered in the right amount

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Sec 22  – speaks of an infant If the payee is an infant or a corporation  Submission by Dean Sundiang: the proper term is “incapacitated”  because an infant cannot act If the payee happens to be an infant / corporation  instrument is  thereafter negotiated to a holder for value without notice or malice of the incapacity of the payee The holder for value can enforce payment from the party o primarily liable BUT NOT against the infant or the corporation Hence, while this is a real defense (to wit, wit, itit can can be be raised o even against a holder in due course), it is personal as to the infant/ corporation Illustration: Maker  order of I/C  A (innocent purchaser for value)   A presented it for payment to M  Can M raise as as a defense against A the incapacity of I/C?  NO!  It’s only I/C who can raise that defense against A o although such defense is a real defense Why? >> BECAUSE BECAUSE under Sec 60, 61, 61, 62, 62, the Maker/ Maker/ Drawer,   Acceptor  they all admit the existence of the payee and his t hen capacity to indorse Because of that admission, they cannot raise this defense o

Sec 17  – rules on construction Only applies if there is any ambiguity in the terms and and conditions conditions on  the instrument Same rules as in statutory construction  Like when the amounts stated in words words and and numbers DIFFER  the  amount stated in words shall prevail BECAUSE it’s easier to alter  the  the amount in numbers than o that in words SMC case  SMC issued in payment of dividends o Don’t leave a space between Peso sign and  first number on checks Last par in Sec 17  “I promise to pay” signed by 2 or more persons  They are jointly and solidarily liable o

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Acts within the scope of his authority Discloses his principal Indicates through appropriate words that he is only acting in a representative capacity

If a PN was issued payable to the order of of the debtor debtor M  order of D o o Amount in PN = P 50,000 B owes C = P30,000 o Article 2195 CC  incorporeal rights may be pledged In this case  it’s evidence by a nego instrument instrument o o Hence, it must be indorsed Sec 27  although the note is for P 50,000 and the debt was P 30,000, B cannot make a partial negotiation unless there has been partial payment o It must be the entire amount D  C (negotiated the entire amount) Sec 27  C shall have a lien arising from the contract of pledge only up to P 30,000 C shall be a holder for value o Art 2118  became due C can collect from the Maker o If M does not not have a defense, even even ifif C is not a holder in o due course  C can collect the P50, 000 from M C must return the P20,000 to D  If M has a personal/ equitable defense and C is a holder o in due course C can only only recover P30,000 P30,000

Some instruments may be negotiable under other laws but NOT under Section 1 of the Negotiable Instruments Law GR: GR: one whose signature does not appear on the instrument cannot be held liable as he is not a party thereto (Sec 18) XPNs: XPNs : One who signs through an agent (Law on Agency) o The acts of the agent shall be considered the  act of the principal if: He is duly authorized by the principal 

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Consideration is presumed Instrument must be supported by a valuable consideration Does not mean that the the amount amount paid must be the exact amount But must not be so insignificant so small Question in the Bar: Love and affection  may be a “valuable “valuable consideration” o

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Must be read together with Secs 124 and 125 (Material alterations) Occurs when a signature is made without authorization from the person whose signature it purports to be  it is wholly inoperative What the law declares to be wholly inoperative is NOT the instrument itself BUT the FORGED SIGNATURE The law uses the term “antecedent” (pertaining to what’s o wholly inoperative) Otherwise, if what the law intends to make wholly o inoperative is the instrument itself  nobody can be held liable There are parties who are precluded from setting setting up as defense forgery or want of authority Sec 23 – 23 – those  those who are estopped to do so o Indorsers  BECAUSE of the warranties under o  Sec 65  Sec 66  Acceptor o  Under Sec 62 – 62 – acceptor  acceptor is deemed to have  accepted the existence of the drawer and the genuineness of his signature by the act of “accepting” The cut-off rule an instrument is payable to order and if indorser’s signature was the one forged while maker’s signature signature was genuine “parties prior to the indorser whose signature was was forged o cannot be held liable” Shall also apply even if instrument is payable to bearer, o but only as between the immediate parties (Justice Vitug) But since it is payable to bearer, hence signature is not o necessary in negotiating the instrument, such rule should not be applied (Dean Sundiang)

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Illustrations (if instrument is payable to order ) M  P (forged the signature)  A  B  C (holder)  Sec 23: M’s signature is wholly inoperative o Hence, M cannot be held liable o P liable  because he is the forger o A and B liable  because of warranties o If instrument is PAYABLE TO ORDER M (signature is genuine)  P  stolen by A  B  C  Even if facts do not state that P’s signature was not forged  one  can assume that P’s signature was forged because, it being an instrument payable to order, an indorsement is needed for the same to be negotiated A could not have negotiated the instrument to B without forging the  signature of P (Sec 23) C cannot hold M liable under the cut-off rule  Reason: M only promised payment to P or upon the o order of P Since P never indorsed the instrument (as it  was merely stolen), M can never be held liable In a BoE     

D (signature was forged)  X (drawee)  P  A  B  C Assuming it was dishonored by X for non-payment A notice of dishonor was given to C and the indorsers D cannot be held liable because his signature was wholly inoperative But the indorsers (P,A,B) can be held liable P – because he forged the signature o o  A,B – because of the warranties

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D (genuine signature this time)  X (drawee)  P  A (stole the instrument)  B  C Dishonored by X  Although D’s signature was genuine, the instrument being payable to order  D cannot be held liable D – not liable under the cut-off rule o It was P’s signature that was forged because A stole the instrument Suppose that X accepted Under Sec 62 – X cannot raise the same as defense o because he is deemed to have accepted the genuineness of the signature

In case drawee bank pays the check and it later on turns out that t he drawer’s signature had been forged : Determine WON there was gross negligence on the part of the  drawer If not stated in the problem  assumption is that drawer did not act  with gross negligence ANSWER/ RULE: The drawee bank should bear the loss, barring  gross negligence on the part of the drawer In other words, if the drawer has not acted with gross negligence, he  must bear the loss Reason: the nature of business of banks is fiduciary  Reason: the nature of the relationship is Art 1980 CC  mutuum  The rule that one has to rely on the four corners of the title/  instrument does not apply to banks because of the nature of the business of banks Banks do not just grant loans; they do investigations o ** The power to collect does not carry with it to negotiate. In the case involving Jai Alai Corporation, it was ruled that the latter  acted with gross negligence when it accepted a check payable to t he order of the adverse party but was indorsed by a me re collector, hence, Jai Alai Corporation should bear the loss herein. Hence, it cannot be deemed that Jai Alai Corporation was a holder in  due course ** A check was paid by the bank and the latter later on discovered the signature of the alleged drawer was forged. D (alleged drawer whose signature was forged)  P  A  DB  (drawee bank who paid) DB then demanded return of what it has paid  A refused, contending that she merely acted as an accommodation  party (Sec 29) It turned out then that D had been dead for 10 years  Hence, there was gross negligence on the part of A  SC ruled that A should bear the loss as she was the one who  encashed it ** In the case of Associated Bank (DB)  Province of Tarlac (D) issued a check payable to the order of the Hospital of Tarlac (P) as donation, which was intrusted to a former employee (FE) of D so that he may deliver the same to P FE then forged the signature of the authorized signatory of D  FE then was able to encash the check with DB  Who should bear the loss?  The Court adopted the Solomonic Solution  ½ to be borne by D and ½ by DB o

There was gross negligence on the part of D for intrusting the check to a person who was no longer connected with D

** In the case of Illusorio (not agreed with by Dean Sundiang) Illusorio (D), a businessman handling many companies intrusted his  checkbook to his secretary, including his credit card The secretary took one of the checks and forged the signature of  Illusorio and encashed the same Bank (DB) paid the check  Who should bear the loss? SC ruled that it should be D as there  was gross negligence on his part as he intrusted the check and the cards to his secretary ** Illusorio ruling was later on abandoned in Samsung Construction and Supply Company The checks were intrusted to an officer of the corporation (D), where  there was an authorized signatory In the case of corporations  there must be a Resolution o of the Board authorizing the opening of a bank account, including the authorized signatories Someone, however, was able to get a check, forged the signature  and encashed the same The teller of the DB examined the signature, compared with  specimen signatures and was convinced that the signature was genuine Check was paid by DB  Who should bear the loss?  SC ruled that it should be DB as there  was no gross negligence on the part of D ** A man (D) and his friend were inside the car. Man left his friend in the car with his checkbook. Friend tore a check and was then able to encash it Friend forged the signature  Who should bear the loss?  SC ruled it should be DB because  there was no gross negligence on the part of D

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In determining the negotiability of an instrument you only consider what appears on the face of the instrument (as submitted by Dean Sundiang) But in the case of BDO SC applied doctrine of estoppel where, notwithstanding the non-negotiability of an instrument, a party who has alleged the negotiability of an instrument, and having received benefits therefrom, cannot assail the same. Under the law, the Phil. Deposit Insurance Corp. has jurisdiction even if it is non-negotiable

** D issued a check payable to the order of P. Before it was delivered P, it was stolen by T from D. The DB is PNB and BDO is the collecting bank T deposited the check to BDO, the collecting bank  BDO forwarded the check to PNB and it was paid.  T was able to withdraw the amount from BDO  Who should bear the loss?  SC ruled that it should be BDO  When a collecting bank forwards a check to DB, there is o the guaranty of indorsements SC adopted US ruling  although the check was not o delivered to P, even assuming if D had sufficient funds in the bank but through negligence of the teller/employee of the bank, it was dishonored  P has no CoA against DB unless the latter has certified the check as there as there is no privity of contract Certification is equivalent to acceptance  P’s remedy now is to go after D based on the  original obligation that gave rise to the issuance of the checks D has right of action against DB if D has  sufficient funds DB can be held liable for damages in favor of  D DB (PNB) now can go after BDO because of  the warranty at the back of the check  lack of indorsements are fully guaranteed Therefore  P can go after BDO, the   collecting bank to achieve a desirable shortcut Dean Sundiang does not agree with this ruling  if this were  followed, then D should also have a CoA against PNB (no matter how complete the form is as to its negotiability, as long as it is not delivered, under Sec 16  it will not produce any effect) Dean Sundiang: The instrument was never delivered to P, therefore,  he acquired to right. The remedy of P is to go after the drawer. A shortcut cannot be used. Summary of Ruling:  P  D o o Assuming D has sufficient funds, D  DB DB  CB o Hence, using the doctrine of desirable shortcut, P  CB o

Material Alteration (Secs 124 and 125) A type of forgery  The instrument becomes wholly inoperative  No right can be acquired from that instrument  EXCEPT as against the parties who: o Made the alteration  Authorized the alteration  Subsequent indorsers  However, under the last par Sec 124  if the instrument falls into the  hands of a holder in due course, he can enforce payment according to its original tenor Sec 62  acceptor is liable according to the tenor of his o acceptance Would there be a difference between tenor of bill when o drawn and tenor of acceptance? IT DEPENDS If acceptor makes an unqualified/ general  acceptance  no difference If qualified/ conditional/ partial acceptance   there is difference (Sec 139 in relation with149) But holder here has the option of not accepting such acceptance by the drawee He can treat the bill as having been dishonored for nonacceptance 

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D issued a BoE payable to order of P Original Tenor: P20,000 o Altered Tenor: P200,000 (P made the alteration upon o delivery to him) After making the alteration, P presented it for acceptance o to DB DB, not noticing the alteration, accepted it as altered o Thereafter, P  A  B C o Before C could present it for payment to DB, DB was o informed re material alteration Sec 2  acceptor is liable depending on the tenor of his o acceptance Sec 124 however  acceptor is liable according to its o original tenor For how much can C enforce it against DB? Original o or altered tenor? HANGING QUESTION How do you reconcile? o What constitutes? (Sec 125) PNB case  alteration of the serial number of a check o does not constitute material alteration, under the last sub par Sec 125 Does not affect negotiability under Sec 1  Change in the name of the payee is also not a material o alteration as the instrument here cannot be enforced according to its material alteration

Illustration: ** M issued a PN payable to order of P for P10,000  original tenor P altered the amount and made it P100,000  altered tenor  P  A  B  C (holder)  For how much can C enforce the instrument against M?  Under  Sec 124, when an instrument is materially altered, it is avoided EXCEPT as to the one who made the alteration and s ubsequent indorsers If C is a holder in due course  he can enforce payment o according to its original tenor, not according to its altered tenor P,A,B  can enforce payment according to its altered o  tenor If M has no defense as a matter of fact and C is a holder o in due course  original tenor (Sec 52 and Sec 124)

Sec 29    

accommodation party One who is signs the instrument as a M,D,A,I without receiving any value therefor But he is liable to a holder for value even if the holder for value knew him to be an accommodation party only XPN to the GR on presumption that every contract is presumed to be entered into for a valuable consideration The purpose is just to lend his name on the instrument without receiving any valuable consideration

Illustration: M signed a PN as an accommodation maker payable to the order of P, the accommodated party; amount = P30,000 P did not give any valuable consideration to M  M signed it only to lend his name to P, maybe because M has a  better credit standing than P To help P, M signed it  P  A 

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A paid P30,000 to P Hence, A becomes a holder for value But when P negotiated it to A, P told A that M is merely an accommodation party Upon maturity date, A presented it for payment for M Can M raise as a defense against A want/absence of consideration? (can M refuse to pay?)  NO. (Sec 29) 2 sets of relationships: o Between M (accommodation party) and A  (holder for value)  want of consideration is NOT a valid defense Suppose M dishonored it and P paid A, can P ask for reimbursement from M?  GR: Sec 68 the indorsers are liable in the order that they indorse. Prior parties are liable to subsequent parties this rule only applies insofar as indorsers are concerned This rule does not apply to a holder. o The holder can hold anyone liable in the order that he o wants ANSWER: of course not.  ingratitude (how can you ask o for reimbursement if there was no disbursement Hence, between the immediate parties  want of o consideration is a valid defense Sec 119  payment in due course made by the o accommodated party will discharge the instrument (because the accommodated party cannot ask for reimbursement from the accommodation party) The accommodation party’s liability depends o If he signed as an accommodation maker/  accommodation acceptor  he is primarily liable If he signed as an accommodation drawer/  accommodation indorser he is only secondarily liable

** In the case of Crisologo Jose  a corporation may not be an accommodation party Some of the officers thereof made it appear that the corporation was  merely an accommodation party They signed it on behalf of the corporation  Sec 45 – such was an ultra vires act  Hence, those who signed shall be held liable o ** In the case of Sevilla  co-maker sets up a mortgage, pledge, etc. Co-maker does not receive any consideration  The principal debtors is liable  But if co-maker pays, he can ask for reimbursement from the principal  debtor Can he ask for payment from other co-makers? IT DEPENDS  As ruled in Sevilla  in accordance with the Insolvency o Law, the co-maker can run after the other co-makers only if he has been declared insolvent OR  under the CC, if there has been a prior judgment