Basic Principles and Jurisprudence on Negotiable Instruments Law 2012 Edition - Piad-libre

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CONCEPTUAL FRAMEWORK l. Birth/Creation of Negotiable Instruments (sec. 10-29) II. Life (sec. 30-69) ̇ Negotiability ̇ Holder in due course ̇ Parties III. Death (sec. 70-189) ̇ Proceedings ̇ Defenses ̇ Discharge

ACT NO. 2031 February 03, 1911 THE NEGOTIABLE INSTRUMENTS LAW Introduction History and Development The term commercial paper refers to written promises or obligations to pay sums of money that arise from the use of such instruments as drafts, promissory notes, checks and trade acceptances. (The most common instruments are checks and promissory notes.)4 However, the term commercial paper in its broadest sense may refer to either negotiable or non-negotiable instruments. During the early part of the Middle Ages, merchants and traders had to carry gold and silver to pay for the goods they purchased at the various international fairs. Obviously these precious metals were continually subject to loss or theft through the perils of travel.5 To eliminate the dangers of this sort, merchants began to deposit their gold and silver with bankers. When they needed 4

5

Business Law Text and Cases, Second Edition, Howell, Allison, Henley, 1981, page 400 Ibid.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

funds to pay for goods they had purchased, they “drew” on them by giving the seller a written order addressed to the bank, telling it to deliver part of the gold or silver to the seller. These orders, called bills of exchange, were thus substitutes for money. Today, checks and the drafts and promissory notes that are payable on demand serve this same basic purpose.6 The second major purpose of commercial paper is to serve as credit device; this came about as a logical extension of the initial use of commercial paper. Soon after bills of exchange became established as substitutes for money, merchants who wished to purchase goods on credit discovered that sellers were sometimes willing to accept bills of exchange that were not payable until a stated time in the future—such as “ninety days after date.” If the seller was satisfied as to the commercial reputation of the bill’s drawer (the purchaser), he would take such an instrument (called a time bill or draft) and wait until the maturity date to collect it. In this way the seller/payee extended credit to the buyer/drawer.7 Soon thereafter ways were devised by which payees could sell these instruments to third parties, usually banks, and receive immediate cash in return. Since the banks would then have to wait for the maturity dates before receiving payment, the payees would have to sell them the paper at a discount—that is, perhaps five or ten percent less than the face amount. This meant, in effect, that the purchasing banks were charging the sellers interest in advance as compensation for their role in the transaction.8 Today, because of the widespread use of time notes and drafts, the credit aspect of commercial paper is as important to the business community as its “substitute for money” aspect.9 The negotiability of bills of exchange and promissory notes originated in the customs of merchants. The statute of Anne, which is declaratory of the common law, established the negotiability of promissory notes.10

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Ibid. (italics supplied) Ibid, pages 401-402. 8 Ibid. 9 Ibid. 10 Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 1 7

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Negotiable Instrument; definition A negotiable instrument is a special contract which on its face is signed by the maker or drawer, making an unqualified promise or order to pay on demand or at a fixed or determinable future time, a sum certain in money, to order or bearer, and when it is addressed to a drawee, the latter must be named or otherwise indicated therein with reasonable certainty. Or simply stated: It is a special contract which complies with the requirements laid down under Section 1 of the Negotiable Instruments Law. Purpose of the enactment of the Negotiable Instruments Law The Negotiable Instruments Law was enacted for the purpose of facilitating, not hindering or hampering transactions in commercial paper. Thus, the said statute should not be tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a single case.11 Functions of a Negotiable Instrument 1. Substitute for money—merchants often do not want to carry cash for fear of loss or theft. 2. Credit device—some forms of negotiable instruments extend credit from one party to another. 3. Recordkeeping device—these records are used for financial statements, tax returns, and the like. Negotiable Instrument as a substitute for money The essence of negotiability which characterizes a negotiable paper as a credit instrument lies in its freedom to circulate freely as a substitute for money.12 (Firestone Tire & Rubber Company of the Philippines vs. Court of Appeals and Luzon Development Bank, G.R. No. 113236, March 5, 2011, [Quisumbing, J.])

11

State Investment House, Inc. v. Court of Appeals, 217 SCRA 32 (1993), cited in Osmeña vs. Citibank, March 23, 2004 12 Traders Royal Bank vs. Court of Appeals, 269 SCRA 15, 26 (1997)

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment (See. 189, Act 2031 on Neg. Inst..; Art. 1249, Civil Code; Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan Suncor v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a manager’s check or ordinary cheek, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3).13 Words of Negotiability The language of negotiability which characterize a negotiable paper as a credit instrument is its freedom to circulate as a substitute for money. Hence, freedom of negotiability is the touchstone relating to the protection of holders in due course, and the freedom of negotiability is the foundation for the protection which the law throws around a holder in due course (11 Am. Jur. 2d, 32). As held in Caltex (Philippines), Inc vs. Court of Appeals,14 “The accepted rule is that the negotiability or nonnegotiability of an instrument is determined from the writing, that is, from the face of the instrument itself. In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained. While the writing may be read in the light of the surrounding circumstance in order to more perfectly understand the intent and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, but what is the meaning of the words they have used. What the parties meant must be determined by what they said.” 13

14

Philippine Airlines, Inc. vs. Court of Appeals, G.R. No. L-49188, Jan. 30, 1990, [Gutierrez, J.] G.R. No. 97753, August 10, 1992, 212 SCRA 448, emphasis ours

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Quasi-Negotiable Instruments In one case, that of Capco vs. Macaset15, the Supreme Court had an occasion to rule that: “[c]ertificates of stocks are considered as “quasi-negotiable” instruments. When the owner or shareholder of these certificates signs the printed form of sale or assignment at the back of every stock certificate without filling in the blanks provided for the name of the transferee as well as for the name of the attorney-in-fact, the said owner or shareholder, in effect, confers on another all the indicia of ownership of the said stock certificates. (Campos and Lopez-Campos, Notes and Cases on Negotiable Instruments Law, 1971 ed., p 605)” The phrase quasi-negotiable has been termed as unhappy one; and certainly it is far from satisfactory, as it conveys no accurate, well-defined meaning. But still it described better than any other short-hand expression the nature of those instruments which, while not negotiable in the sense of the law merchant, are so framed and so dealt with, as frequently to convey as good a title to the transferee as it they were negotiable. (Daniel, The Elements of Negotiable Instruments Law, page 27) Very frequently by application of the principles of estoppels, and to effectuate the ends of justice and the intention of the parties, the courts decree a better title to the transferee than actually existed in his transferrer; and the result reached in many cases is the same as would be reached if the instrument were negotiable.16 Types of Negotiable Instruments. The Philippine Negotiable Instruments Law was basically lifted from the provisions of the United States Uniform Currency Act, in which Secs. 13-104 thereof specified four types of instruments (e.g. drafts, checks, certificates of deposit, and notes). In the Philippine setting, however, Act 2031 (Negotiable Instruments Law) provides for three (e.g., promissory notes, bills of exchange, checks), noteworthy is the inclusion of Drafts and Certificates of Time Deposit through the decisions of the Supreme Court interpreting our law on negotiable instruments.

15 16

G.R. No. 90888, September 13, 1990 Railroad Co. v. Howard, 7 Wall. 415

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

At present, in Philippine jurisdiction, we generally recognize five types of negotiable instruments, to wit: 1. Promissory Notes17 2. Bills of Exchange18 3. Check19 4. Draft20 5. Certificates of Time Deposit21 2002 Bar Question: A. Define the following: (1) a negotiable promissory note, (2) a bill of exchange and (3) a check. (3%) B. You are Pedro Cruz. Draft the appropriate contract language for (1) your negotiable promissory note and (2) your check, each containing the essential elements of a negotiable instrument. (2%) ANSWER: A. (1) Sec. 184, Act. 2031—it is an unconditional promise in writing made 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 in money to order or to bearer. (2) Sec. 126, Act 2031—is 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. (3) Sec. 185, Act 2031—it is a bill of exchange drawn on a bank payable on demand. 17

Sec. 184, Act 2031, Negotiable Instruments Law. Sec. 126, ibid. 19 Sec. 185, ibid. 20 BPI vs. Commissioner of Internal Revenue, 21 Caltex (Philippines), Inc. vs. Court of Appeals, G.R. No. 97753, August 10, 1992. 18

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B. (1) September 1, 2002 I promise to pay Pancho Dela Torre, or order, ONE HUNDRED THOUSAND PESOS (Php 100,000.00), on December 25, 2002. (Sgd) Pedro Cruz (2) Bank of the Philippine Islands-Malate, Manila September 1, 2002 Pay to the order of Pancho Dela Torre, the amount of ONE HUNDRED THOUSAND PESOS (Php 100,000.00). (Sgd) Pedro Cruz 1. What is a Promissory Note? It is an unconditional promise in writing made 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 in money to order or to bearer. (Sec. 184, Negotiable Instruments Law) In the case of Pentacapital Investment Corporation vs. Makilito B. Mahinay,22 citing Sierra vs. Court of Appeals,23 it was held that: “A promissory note is a solemn acknowledgment of a debt and a formal commitment to repay it on the date and under the conditions agreed upon by the borrower and the lender. A person who signs such an instrument is bound to honor it as a legitimate obligation duly assumed by him through the signature he affixes thereto as a token of his good faith. If he reneges on his promise without cause, he forfeits the sympathy and assistance of this Court and deserves instead its sharp repudiation.”

22 23

G.R. No. 171736, July 5, 2010, [Nachura, J.:] G.R. No. 90270, July 24, 1992, 211 SCRA 785, 795

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

Test to determine a promissory note “To constitute a good promissory note, no precise words of contract are necessary, provided they amount, in legal effect, to a promise to pay. In other words, if over and above the mere acknowledgment of the debtor there may be collected from the words used a promise to pay it, the instrument may be regarded as a promissory note. (Jimenez vs. Bucoy, G.R. No. L-10221, February 28, 1958, [Bengzon, J.]) “Due A. B. $325, payable on demand,” or “I acknowledge myself to be indebted to A in $ 109, to be paid on demand, for value received,” or “I.O.U. $85 to be paid on May 5th,” are held to be promissory notes, significance being given to words of payment as indicating a promise to pay. (1 Daniel Neg. Inst., see 39 and cases cited [Cowan vs. Hallack, (Colo.) 13 Pacific Reporter 700, 703) (Supra) “An acknowledgment may become a promise by the addition of words by which a promise of payment is naturally implied, such as, “payable”, “payable on a given day”, “payable on demand”, “paid…when called for,”…(10 Corpus Juris Secundump p. 523.) (supra) Who are the parties to a Promissory Note? The maker, he is the person who drafted and issued the promissory note, and made a promise that upon demand or at a fixed or determinable future time, he will pay a sum certain in money to order or to bearer to the holder of the instrument or to a holder in due course. The payee, is the person in whose favor the promissory note was issued. Intimidation, vitiation of consent in promissory notes Carmela Brobio Mangahas vs. Eufrocina Brobio G.R. No. 183852, October 20, 2010 NACHURA, J.:

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FACTS:

On January 10, 2002, Pacifico S. Brobio (Pacifico) died intestate, leaving three parcels of land. He was survived by his wife, respondent Eufrocina A. Brobio, and four legitimate and three illegitimate children; petitioner Carmela Brobio Mangahas is one of the illegitimate children. On May 12, 2002, the heirs of the deceased executed a Deed of Extrajudicial Settlement of Estate of the Late Pacifico Brobio with Waiver. In the Deed, petitioner and Pacifico’s other children, in consideration of their love and affection for respondent and the sum of P150,000.00, waived and ceded their respective shares over the three parcels of land in favor of respondent. According to petitioner, respondent promised to give her an additional amount for her share in her father’s estate. Thus, after the signing of the Deed, petitioner demanded from respondent the promised additional amount, but respondent refused to pay, claiming that she had no more money. A year later, while processing her tax obligations with the Bureau of Internal Revenue (BIR), respondent was required to submit an original copy of the Deed. Left with no more original copy of the Deed, respondent summoned petitioner to her office on May 31, 2003 and asked her to countersign a copy of the Deed. Petitioner refused to countersign the document, demanding that respondent first give her the additional amount that she promised. Considering the value of the three parcels of land (which she claimed to be worth P20M), petitioner asked for P1M, but respondent begged her to lower the amount. Petitioner agreed to lower it to P600, 000.00. Because respondent did not have the money at that time and petitioner refused to countersign the Deed without any assurance that the amount would be paid, respondent executed a promissory note. Petitioner agreed to sign the Deed when respondent signed the promissory note which read —

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

31 May 2003 This is to promise that I will give [a] (sic) Financial Assistance to CARMELA B. MANGAHAS the amount of P600,000.00 Six Hundred Thousand only on June 15, 2003. (SGD) EUFROCINA A. BROBIO When the promissory note fell due, respondent failed and refused to pay despite demand. Petitioner made several more demands upon respondent but the latter kept on insisting that she had no money. ISSUES: Was intimidation used to execute the promissory note subject of the case? RULING: Contracts are voidable where consent thereto is given through mistake, violence, intimidation, undue influence, or fraud. In determining whether consent is vitiated by any of these circumstances, courts are given a wide latitude in weighing the facts or circumstances in a given case and in deciding in favor of what they believe actually occurred, considering the age, physical infirmity, intelligence, relationship, and conduct of the parties at the time of the execution of the contract and subsequent thereto, irrespective of whether the contract is in a public or private writing. Nowhere is it alleged that mistake, violence, fraud, or intimidation attended the execution of the promissory note. Still, respondent insists that she was “forced” into signing the promissory note because petitioner would not sign the document required by the BIR. In one case, the Court – in characterizing a similar argument by respondents therein – held that such allegation is tantamount to saying that the other party exerted undue influence upon them. However, the Court said that the fact that respondents were “forced” to sign the documents does not amount to vitiated consent.

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There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. For undue influence to be present, the influence exerted must have so overpowered or subjugated the mind of a contracting party as to destroy his free agency, making him express the will of another rather than his own. Respondent may have desperately needed petitioner’s signature on the Deed, but there is no showing that she was deprived of free agency when she signed the promissory note. Being forced into a situation does not amount to vitiated consent where it is not shown that the party is deprived of free will and choice. Respondent still had a choice: she could have refused to execute the promissory note and resorted to judicial means to obtain petitioner’s signature. Instead, respondent chose to execute the promissory note to obtain petitioner’s signature, thereby agreeing to pay the amount demanded by petitioner. Contrary to the CA’s findings, the situation did not amount to intimidation that vitiated consent. There is intimidation when one of the contracting parties is compelled to give his consent by a reasonable and well-grounded fear of an imminent and grave evil upon his person or property, or upon the person or property of his spouse, descendants, or ascendants. Certainly, the payment of penalties for delayed payment of taxes would not qualify as a “reasonable and well-grounded fear of an imminent and grave evil.” (emphasis supplied) We join the RTC in holding that courts will not set aside contracts merely because solicitation, importunity, argument, persuasion, or appeal to affection was used to obtain the consent of the other party. Influence obtained by persuasion or argument or by appeal to affection is not prohibited either in law or morals and is not obnoxious even in courts of equity.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

Question: Does the reference to the penalty charges in the promissory note constitute substantial compliance with the disclosure requirement of the Truth in Lending Act? ANSWER: Yes. The Court has affirmed that financial charges are amply disclosed if stated in the promissory note. In the case of Development Bank of the Philippines vs. Arcilla, Jr. The Court there said, “Under Circular 158 of the Central Bank, the lender is required to include the information required by R.A. 3765 in the contract covering the credit transaction or any other document to be acknowledged and signed by the borrower. In addition, the contract or document shall specify additional charges, if any, which will be collected in case certain stipulations in the contract are not met by the debtor.” In this case, the promissory notes signed by the Yus contained data, including penalty charges, required by the Truth in Lending Act. They cannot avoid liability based on a rigid interpretation of the Truth in Lending Act that contravenes its goal. (Bank of the Philippine Islands, Inc. vs. Sps Yu, G.R. No. 184122 January 20, 2010, [Abad, J.]) 2. Bill of Exchange defined. A Bill of Exchange is 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, Negotiable Instruments Law) In the once celebrated case of Manuel Bastida vs. The Acting Commissioner of Customs and The Court of Tax Appeals,24 it was held that: “[A]s bills exchange they are, fundamentally, negotiable instruments. And a negotiable instrument “is more like 24

G.R. No. L-24011, October 24, 2970, [Castro, J:]

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money than a contract right or chose in action.”25 As such, it may be the “subject of conversion (Knight vs. Seney 290 Ill. 11) or of replevin (Rothwell vs. Taylor 303 Ill. 263.)26 it may also be the “subject of sale, like any other goods or wares.”27 As the Tax Court aptly observed, “checks may be bought and sold like a commodity. As a matter of fact in the United States the deposit of a check with a bank is considered a sale (Helvering vs. Stein [CA 4] 115 F 2d 468; Burton vs. United States, 196 US 283, 49 L ed 482).” Money orders, also considered as bills of exchange of limited negotiability, possess the same attributes as other negotiable instruments. Thus, they may, be bought and sold like checks.” (emphasis supplied) As long as a commercial paper conforms with the definition of a bill of exchange, that paper is considered a bill of exchange. The nature of acceptance is important only in the determination of the kind of liabilities of the parties involved, but not in the determination of whether a commercial paper is a bill of exchange or not. (Philippine Bank of Commerce vs. Aruego, G.R. No. L-25836-37, January 31, 1981, [Fernandez, J.]) (emphasis supplied) Illustrative Case: Philippine Bank of Commerce vs. Jose M. Aruego G.R. Nos. L-25836-37, January 31, 1981 FERNANDEZ, J.: FACTS:

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On December 1, 1959, the Philippine Bank of Commerce instituted an action against Jose M. Aruego Civil Case No. 42066 for the recovery of the total sum of about P35, 000.00 with daily interest thereon from November 17, 1959 until fully paid and commission equivalent to 3/8% for every thirty (30) days or fraction thereof plus attorney’s fees equivalent to 10% of the total amount due and costs. The complaint filed by the Philippine Bank of Commerce contains Twenty-Two

Ludwig Teller, Bills and Notes, p. 6 (1948) Ibid., pp. 6-7 27 Ibid., p. 7 26

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

(22) causes of action referring to Twenty-Two (22) transactions entered into by the said Bank and Aruego on different dates covering the period from August 28, 1950 to March 14, 1951. The sum sought to be recovered represents the cost of the printing of “World Current Events”, a periodical published by the defendant. To facilitate the payment of the printing the defendant obtained a credit accommodation from the plaintiff. Thus, for every printing of the “World Current Events”, the printer Encal Press and Photo Engraving, collected the cost of printing by drawing a draft against the plaintiff, said draft being sent later to the defendant for acceptance. As an added security for the payment of the amounts advanced to Encal Press and Photo Engraving, the plaintiff bank also required the defendant Aruego to execute a trust receipt in favor of said bank wherein said defendant undertook to hold in trust for plaintiff the periodicals and to sell the same with the promise to turn over to the plaintiff the proceeds of the sale of said publication to answer for the payment of all obligations arising from the draft. Defendant contends that the drafts signed by him were not really bills of exchange but mere pieces of evidence of indebtedness because payments were made before acceptance. ISSUE:

Is his contention tenable?

RULING: The contention is without merit.Under the Negotiable Instruments Law, a bill of exchange is 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. As long as a commercial paper conforms with the definition of a bill of exchange, that paper is considered a bill of exchange. The nature of acceptance is important only in the determination of the kind of liabilities of the parties involved, but not in the determination of whether a commercial paper is a bill of exchange or not.

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From the definition, does the bill of exchange operate as an assignment of funds in the hands of the drawee? A bill in itself does not operate as an assignment of the funds in the hands of the drawee available for the payment thereof. (Sec. 127, Negotiable Instruments Law) Doctrine of Equitable Assignment The doctrine of equitable assignment is the creature of courts of equity, and the phrase “equitable assignment” is used because, by the technicalities of pleadings at law, no legal assignment can be effectuated.28 It is contended that the bill, whether for the whole of the fund or debt, or only a part, may be evidence to show an assignment; and that with other circumstances indicating that such was the intention, will vest in the holder an exclusive claim to the debt or fund, and bind it in the hands of the drawee after notice.29 The bill for the entire amount of debt or fund should operate as an equitable assignment thereof.30 Moreover, it may be regarded as a settled doctrine that an order founded upon a good consideration, given for a specific debt or fund owing by or in the hands of a third person, operates as, or rather is evidence of, an equitable assignment of the demand to the holder.31 Who are the parties to a bill of exchange? The drawer, is the person drawing an instrument making an unconditional order in writing to the drawee, requiring him to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. The drawee, is the person being required by the drawer to pay on demand or at a fixed or determinable future time a sum certain in money to the payee, or his order, or to the bearer of the instrument. 28

Bank of Commerce v. Bogy, 44 Mo. 15; Grammel v. Cramer, 55 Mich. 201 Daniel on Negotiable Instruments, page 18; Mandeville v. Welch, 5 Whaet. 277; Buckner v. Sayre, 17 B. Monroe, 754, cited in the Elements of Negotiable Instruments Law, Daniel, page 8 30 Supra 31 The Elements of Negotiable Instruments Law, Daniel, page 9 29

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

The payee, is the person in whose favor the bill of exchange was issued. What is the rule if the Bill of Exchange is addressed to more than one drawee? A bill may be addressed to two or more drawees jointly, whether they are partners of not. But not to two or more drawees in the alternative or in succession. Example: To:

Lancelot Borja and/or Margaux Borja Bo. Obrero, Iloilo City

In the above instance, the drawee is addressed to two or more persons jointly, whether they are partners or not. Thus, payment of any one of them extinguishes the entire obligation. To:

Lancelot Borja, and in his incapacity or insolvency, Margaux Borja; Lancelot Borja, Margaux Borja, or Mizpah Borja in succession.

In the second instance, the bill was addressed to two or more drawees in the alternative or in succession, such is not allowed under the law. Bills of exchange are either foreign or inland Foreign Bill of Exchange—when drawn in one State or country, and made payable in another State or country;32 Inland Bill of Exchange—when drawn, and made payable, in the same State or country.33

32 33

The Elements of Negotiable Instruments Law, Daniel, page 5 Ibid

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Difference between bills and notes In their original structure, a bill of exchange and a promissory note do not strongly resemble each other. In a bill, there are three original parties: drawer, drawee, and payee; in a note only two: maker and payee. In a bill the acceptor is the primary debtor. In a note the maker is the only debtor. But if the note be transferred to a third party by the payee, it becomes strikingly similar to a bill. The indorser becomes then, as it were, the drawer; the maker, the acceptor; and the indorsee, the payee.34 (The Elements of the Law of Negotiable Instruments, by: John W. Daniel, 1908) Bank notes or bank bills Bank notes or bank bills (as they are equally as often called) are the promissory notes of incorporated banks, designed to circulate like money, and payable to bearer on demand.35 The terms “bank notes” and “bank bills” are of the like signification, and for the purposes of interpretation, both in criminal and civil jurisprudence, are equivalent and interchangeable.36 In form and substance they are promissory notes, and they are governed by very many of the principles which apply to the negotiable notes of individuals given in the course of trade. But they are designed to constitute a circulating medium, and this circumstance imparts to them peculiar characteristics, and essentially varies the rules which govern promissory notes in general. They have been held not securities for money, but money itself.37 Chief Characteristics of— Bank Bills • 34 35

36 37

38

Always payable on demand;38 Daniel on Negotiable Instruments, page 29 The Elements of Negotiable Instruments Law, Daniel, page 15 (Bold supplied) Ibid Soutcot v. Watson, 3 Atk. 226; Daniel on Negotiable Instruments, page 1664, ibid Daniel on Negotiable Instruments, page 1666

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

•

Usually payable to bearer, though sometimes expressed to be payable to a person named or bearer;39

•

A lawful tender in payment of debts, unless objected to because they are not money.40

Bank Notes •

Are not, legally speaking, money, but in a popular sense are often spoken of as money, and are conventionally used in its stead with the like effect.41

3. Draft, defined. A draft is a form of a bill of exchange used mainly in transactions between persons physically remote from each other, an order made by one person, say the buyer of goods, addressed to a person having in his possession funds of such buyer ordering the addressee to pay the purchase price to the seller of the goods, and where the order is made by one bank to another, it is referred to as a bank draft. (Bank of the Philippine Islands vs. Commission of Internal Revenue, 496 SCRA 601) In order for a draft to work, one of two general conditions must exist. Either the drawee must owe the drawer a debt (in which case the drawer is simply telling the drawee to pay the debt or a portion of it to a third party) or some kind of agreement or relationship must exist between the parties under which the drawee has consented to the drawing of the draft upon him or her. If neither of these conditions existed, obviously the drawee would not obey the order to pay the amount of the draft to the payee or to any subsequent holder of the instrument.42 A trade acceptance is a draft or bill of exchange drawn by the seller of the goods on the purchaser of those goods and accepted (signed) by the purchaser. The purpose of the transaction is to enable the seller to raise money on the paper before the purchaser’s obligation matures under the sales contract.43 39 40 41 42

Ibid, page 1665 Ibid, page 1672a Ibid, page 1672 Business Law Text and Cases, Second Edition, Howell, Allison, Henley, 1981, page 402

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To illustrate, X corporation has sold goods to Y company. Due to the fact that Y company still wishes to utilize the cash instead of paying in cash, X corporation (drawer) draws a trade acceptance on Y company for the purchase of the goods. The instrument orders Y company to pay the amount due to the order of X corporation on a particular future time. It is then presented to an officer of Y company who accepts it by signing the same and returns it to X corporation. The acceptance in effect, would be a promise of Y company to pay X corporation when the same becomes due. It can now be negotiated to a third person, say X corporation’s bank and receives cash immediately. Nature of Draft, as distinguished from Bill of Exchange The case of Republic of the Philippines vs. Philippine National Bank, et al44, laid down a detailed discussion of the nature of Drafts, to wit: “To begin with, we may say that a demand draft is a bill of exchange payable on demand (Arnd vs. Aylesworth, 145 Iowa 185; Ward vs. City Trust Company, 102 N.Y.S. 50; Bank of Republic vs. Republic State Bank, 42 S.W. 2d, 27). Considered as a bill of exchange, a draft is said to be, like the former, an open letter of request from, and an order by, one person on another to pay a sum of money therein mentioned to a third person, on demand or at a future time therein specified (13 Words and Phrases, 371). As a matter of fact, the term “draft” is often used, and is the common term, for all bills of exchange. And the words “draft” and “bill of exchange” are used indiscriminately (Ennis vs. Coshoctan Nat. Bank, 108 S.E., 811; Hinnermann vs. Rosenback, 39 N.Y. 98, 100, 101; Wilson vs. Bechenau, 48 Supp. 272, 275). On the other hand, a bill of exchange within the meaning of our Negotiable Instruments Law (Act No. 2031) does not operate as an assignment of funds in the hands of the drawee who is not liable on the instrument until he accepts it. This is the clear import of Section 127. It says: “A bill of exchange of itself does not operate as an assignment of the funds in the hands of the drawee available for the payment thereon and the drawee is not liable on the bill unless and until he accepts the same.” In other words, in order 43 44

Ibid. G.R. No. L-16106, December 30, 1961

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

that a drawee may be liable on the draft and then become obligated to the payee it is necessary that he first accepts the same. In fact, our law requires that with regard to drafts or bills of exchange there is need that they be presented whether for acceptance or for payment within a reasonable time after their issuance or after their last negotiation thereon as the case may be (Section 71, Act 2031). Failure to make such presentment will discharge the drawer from liability or to the extent of the loss caused by the delay (Section 186, Ibid.) (emphasis supplied) Since it is admitted that the demand drafts herein involved have not been presented either for acceptance or for payment, the inevitable consequence is that the appellee bank never had any chance of accepting or rejecting them. Verily, appellee bank never became a debtor of the payee concerned and as such the aforesaid drafts cannot be considered as credits subject to escheat within the meaning of the law.” Demand Draft distinguished from a cashier’s or manager’s check In the very same case of Republic of the Philippines vs. Philippine National Bank, et al, it has been held that: “a demand draft is very different from a cashier’s or manager’s check, contrary to appellant’s pretense, for it has been held that the latter is a primary obligation of the bank which issues it and constitutes its written promise to pay on demand. Thus, a cashier’s check has been clearly characterized In Re Bank of the United States, 277 N.Y.S. 96, 100, as follows: A cashier’s check issued by a bank, however, is not an ordinary draft. The latter is a bill of exchange payable on demand. It is an order upon a third party purporting to drawn upon a deposit of funds. (Drinkall vs. Movious State Bank, 11 N.D. 10, 88 N.W. 724, 57 L.R.A. 341, 95 Am. St. Rep. 693; State vs. Tyler County State Bank (Tex. Com. App.) 277 S.W. 625, 42 A.L.R. 1347). A cashier’s check is of a very different character. It is the primary obligation of the bank which issues it (Nissenbaum vs. State, 38 Ga. App. 253, S.E. 776) and constituted its written promise to pay upon demand (Steinmetz vs. Schultz, 59 S.D. 603, 241 N.W. 734)

21

The following definitions cited by the appellant also confirm this view: A cashier’s check is a check of the bank’s cashier on his or another bank. It is in effect a bill of exchange drawn by a bank on itself and accepted in advance by the act of issuance (10 C.J.S. 409) A cashier’s check issued on request of a depositor is the substantial equivalent of a certified check and the deposit represented by the check passes to the credit of the checkholder, who is thereafter a depositor to that amount. (Lummus Cotton Gin Co. vs. Walker, 70 So. 754, 756, 195 Ala. 552) A cashier’s check, being merely bill of exchange drawn by a bank on itself, and accepted in advance by the act of issuance, is not subject to countermand by the payee after indorsement, and has the same legal effects as a certificate deposit or a certified check. (Walker vs. Sellers, 77 So. 715; 201 Ala. 189) A demand draft is not therefore of the same category as a cashier’s check which should come within the purview of the law.” 4. Certificates of Time Deposit; Negotiable Instrument. A certificate of deposit is a receipt of a bank or banker for a certain sum of money received upon deposit, and it is generally framed in such a form as to constitute a promissory note, payable to the depositor, or to the depositor or order, or to bearer. (The Elements of Negotiable Instruments Law, Daniel, page 16) In order, however, to be negotiable, a certificate of deposit must possess the requisite features of certainty in respect to parties, and time and mode of payment and the same causes which deprive bills and notes of negotiability would affect it in like manner. (ibid) Illustrative case: Caltex (Philippines), Inc. vs. Court of Appeals and Security Bank and Trust Company

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

G.R. No. 97753, August 10, 1992 REGALADO, J.: Facts:

On various dates Security Bank and Trust Company (SBTC) issued 280 certificates of time deposit (CTD) in favor of one Angel dela Cruz who deposited with SBTC the aggregate amount of Php 1,200,000.00. A sample text of the certificates of time deposit is reproduced below: SECURITY BANK AND TRUST COMPANY 6778 Ayala Ave., Makati No. 90101 Metro Manila, Philippines SUCAT OFFICEP 4,000.00 CERTIFICATE OF DEPOSIT Rate 16% Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____. This is to Certify that BEARER has deposited in this Bank the sum of PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said depositor 731 days. after date, upon presentation and surrender of this certificate, with interest at the rate of 16% per cent per annum. (Sgd. Illegible) (Sgd. Illegible) ___________ ___________ AUTHORIZED SIGNATURES Angel dela Cruz delivered the said CTDs to Caltex (Philippines) Inc. (Caltex) in connection with his purchased of fuel products from the latter. Sometime in March 1982, Angel dela Cruz informed SBTC that he lost all the certificates of time deposit in dispute. On March 25, 1982, Angel dela Cruz negotiated and obtained loan from defendant bank in the amount of Php 875,000.00. On the same date, said depositor

23

executed a notarized Deed of Assignment of Time Deposit stated, among others, that dela Cruz surrenders to SBTC “full control of the indicated time deposits from and after date” of the assignment and further authorizes said bank to pre-terminate, set-off and “apply the said time deposits to the payment of whatever amount or amounts may be due” on the loan upon its maturity. Sometime in 1982, plaintiff’s agent went to the defendant bank and presented for verification the CTD declared lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff “as security for purchases made with Caltex. On November 26 1982, defendant received a letter from herein plaintiff formally informing it of its possession of the CTD’s in question and of its decision to pre-terminate the same. Accordingly, defendant bank rejected the plaintiff’s demand and claim for payment of value of the CTDs. In April 1983, the loan in the amount of Php 875,000.00 with defendant bank matured and fell due, and the latter set-off and applied the time deposits in question to the payment of the matured loan. Plaintiff filed the instant complaint praying that the defendant bank be ordered to pay it the aggregate value of the certificates of time deposit of Php 1,120,000.00 plus interest and compounded interest therein at 16% per annum, moral and exemplary damages as well as attorney’s fees.Trial court rendered its decision dismissing the instant complaint. Issue:

Whether or not the Certificates of Time Deposit are considered as negotiable instruments?

Ruling:

The CTDs in question are negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites for an instrument to become negotiable. The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties’

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

bone of contention is with regard to requisite (d) set forth above. x x x The documents provide that the amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is the “bearer”. The documents do not say that the depositor is Angel dela Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment. xxx On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the fact of the instrument itself45. In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained.46 While the writing may be read in the light of the surrounding circumstances in order to prove perfectly understanding the intent and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted instead. The duty of the court in such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, but what is the meaning of the words they have used. What the parties meant must be determined by what they said.47 Certificates of Time Deposit; Issued without Valuable Consideration; Not Covered by the Philippine Deposit Insurance Corporation.

45

11 Am. Jur. 2d, Bills and Notes, 79. Ibid, 86. 47 Ibid, 87-88. 46

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Illustrative Case: Philippine Deposit Insurance Corporation vs. Court of Appeals and John Francis Cotaoco G.R. No. 118917, December 22, 1997 KAPUNAN, J: Petitioner Philippine Deposit Insurance Corporation (PDIC) seeks the reversal of the decision of the Court of Appeals affirming with modification the decision of the Regional Trial Court holding petitioner liable for the value of thirteen (13) certificates of time deposit (CTDs) in the possession of private respondents. The facts, as found by the Court of Appeals, are as follows: On September 22, 1983, plaintiffs-appellees invested in money market placements with the Premiere Financing Corporation (PFC) in the sum of P10,000.00 each for which they were issued by the PFC corresponding promissory notes and checks. On the same date (September 22, 1983), John Francis Cotaoco, for and in behalf of plaintiffsappellees, went to the PFC to encash the promissory notes and checks, but the PFC referred him to the Regent Saving Bank (RSB). Instead of paying the promissory notes and checks, the RSB, upon agreement of Cotaoco, issued the subject 13 certificates of time deposit with Nos. 09648 to 09660, inclusive, each stating, among others, that the same certifies that the bearer thereof has deposited with the RSB the sum of P10,000.00; that the certificate shall bear 14% interest per annum; that the certificate is insured up to P15,000.00 with the PDIC; and that the maturity date thereof is on November 3, 1983 (Exhs. “B”, “B-1 to “B-12”). On the aforesaid maturity dated (November 3, 1983), Cotaoco went to the RSB to encash the said certificates. Thereat, RSB Executive Vice President Jose M. Damian requested Cotaoco for a deferment or an extension of a few days to enable the RSB to raise the amount to pay for the same (Exh. “D”). Cotaoco agreed. Despite said extension, the RSB still failed to pay the value of the certificates. Instead, RSB advised Cotaoco to file a claim with the PDIC.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

Meanwhile, on June 15, 1984, the Monetary Board of the Central Bank issued Resolution No. 788 (Exh. “2”, Records, p. 159) suspending the operations of the RSB. Eventually, the records of RSB were secured and its deposit liabilities were eventually determined. On December 7, 1984, the Monetary Board issued Resolution No. 1496 (Exh. “1”) liquidating the RSB. Subsequently, a masterlist or inventory of the RSB assets and liabilities was prepared. However, the certificates of time deposit of plaintiffs-appellees were not included in the list on the ground that the certificates were not funded by the PFC or duly recorded as liabilities of RSB. On September 4, 1984, plaintiffs-appellees filed with the PDIC their respective claims for the amount of the certificates (Exhs. “C,” “C-1” to “C-12”). Sabina Yu, James Ngkaion, Elaine Ngkaion and Jeffrey Ngkaion, who have similar claims on their certificates of time deposit with the RSB, likewise filed their claims with the PDIC. To their dismay, PDIC refused the aforesaid claims on the ground that the Traders Royal Bank Check No. 299255 dated September 22, 1983 for the amount of P125,846.07 (Exh. “B”) issued by PFC for the aforementioned certificates was returned by the drawee bank for having been drawn against insufficient funds; and said check was not replaced by the PFC, resulting in the cancellation of the certificates as indebtedness or liabilities of RSB.48 Consequently, on March 31, 1987, private respondents filed an action for collection against PDIC, RSB and the Central Bank. On September 14, 1987, the trial court, declared the Central Bank in default for failing to file an answer. On May 29, 1989, the trial court rendered its decision ordering the defendants therein to pay plaintiffs, jointly and severally, the amount corresponding to the latter’s certificates of time deposit. Both PDIC and RSB appealed. The Central Bank, on the other hand, filed a petition for certiorari, prohibition and mandamus 48

Rollo, pp. 30-31.

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before the Court of Appeals praying that the writ of execution issued by the trial court against it be set aside. On February 8, 1995, the Court of Appeals rendered its decision granting the Central Bank’s petition but dismissing the appeals of PDIC and RSB. Hence, this petition by PDIC assigning the following errors: I THE CA ERRED IN HOLDING THAT THE SUBJECT CTDS ARE NEGOTIABLE INSTRUMENTS II THE CA ERRED IN HOLDING THAT THE CTDS WERE ACQUIRED FOR VALUE AND CONSIDERATION III THE CA ERRED WHEN IT HELD THAT BECAUSE THE CTDS STATE THAT THESE WERE INSURED PETITIONER SHOULD BE HELD LIABLE FOR THE SAME. We deal jointly with petitioner’s first and third assigned errors. Relying on this Court’s ruling in Caltex (Philippines), Inc. v. Court of Appeals and Security Bank and Trust Company,49 the Court of Appeals concluded that the subject CTDs are negotiable. Petitioner, on the other hand, contends that the CTDs are nonnegotiable since they do not contain an unconditional promise or order to pay a sum certain in money nor are they made payable to order or bearer, as required by Section 1 of the Negotiable Instruments Law. Whether the CTDs in question are negotiable or not is, however, immaterial in the present case. The Philippine Deposit Insurance Corporation was created by law and, as such, is governed primarily by the provisions of the special law creating it.50 The liability of the PDIC for insured deposits therefore is 49 50

212 SCRA 448 (1992). Section 4, Corporation Code.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

statutory and, under Republic Act No. 3591,51 as amended, such liability rests upon the existence of deposits with the insured bank, not on the negotiability or non-negotiability of the certificates evidencing these deposits. The authority for this conclusion finds support in decisions by American state courts applying their respective bank guaranty laws. Invariably, the plaintiffs in these cases argued that the negotiability of the certificates of deposit in their possession entitled them to be paid out of the bank guaranty fund, a contention that the courts uniformly rejected. Thus, the plaintiffs in Fourth Nat. Bank of Wichita v. Wilson52 argued that: . . . the court should hold the certificates to be guaranteed because they are negotiable instruments, and were acquired by the present holders in due course; otherwise it is said certificates of deposit will be deprived of the quality of commercial paper. Certificates of deposit have been regarded as the highest form of collateral. They are of wide currency in the banking and business worlds, and are particularly useful to persons of small means, because they bear interest, and may be readily cashed; therefore to deprive them of the benefit of the guaranty fund would be a calamity. . . . The Supreme Court of Kansas, however, found the plaintiffs’ contention to be without merit, ruling thus: . . . The argument confuses negotiability of commercial paper with statutory guaranty of deposits. The guaranty is something extrinsic to all forms of evidence of bank obligation; and negotiability of instruments has no dependence on existence or nonexistence of the guaranty. . . . Whatever the status of the plaintiffs may be as holders in due course under the Negotiable Instruments Law, they cannot be assignees of a deposit which was not made, and 51

Entitled “An Act Establishing The Philippine Deposit Insurance Corporation, Defining Its Powers And Duties And For Other Purposes.” 52 204 Pac. 715 (1992), 110 Kan. 380.

29

cannot be entitled to the benefit of a guaranty which did not come into existence. . . . In arriving at the above decision, the Kansas Supreme Court relied on its earlier ruling in American State Bank v. Foster,53 which arose from the same facts as the Fourth National Bank case. There, the Court held: . . . Even if the plaintiff were to be regarded as an innocent purchaser of the certificates as negotiable instruments, its situation would be in no wise bettered so far as relate to a claim against the guaranty fund. The fund protects deposits only. And if no deposit is made, or no deposit within the protection of the guaranty law, the transfer of a certificate cannot impose a liability on the fund. . . . where a certificate of deposit is given under such circumstances that it is not protected by the guaranty fund, although that fact is not indicated by anything on its face, its indorsement to an innocent holder cannot confer that quality upon it. In like fashion did the Supreme Court of Nebraska brush aside a similar contention in State v. Farmers’ Stale Bank:54 In this contention we think the appellants fail to distinguish between the liability of the maker of a negotiable instrument, which rests upon the law pertaining to negotiable paper, and the liability of the guaranty fund, which is purely statutory. The circumstances under which the guaranty fund may be liable are entirely apart from the law pertaining to negotiable paper. A holder of a certificate of deposit in a bank who seeks to hold the guaranty fund liable for its payment must show that the transaction leading up to the issuance of the certificate was such that the law holds the guaranty fund liable for its payment. . . . The Farmers’ State Bank ruling was reiterated by the Nebraska Supreme Court in State v. Home State Bank of Dunning55 and in State v. Kilgore State Bank.56 The same ruling was adopted by the Supreme Court of South Dakota in Mildenstein v. Hirning.57 53 54 55 56

204 196 201 205

Pac. 709, 110 Kan. 520 (1922). N.W. 908, 111 Neb. 117 (1923). N.W. 971, 113 Neb. 93 (1925). N.W. 297 (1925).

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

In the case at bar, the Court of Appeals initially found the subject CTDs to be negotiable. Subsequently, however, respondent court deemed the issue immaterial, albeit for entirely different reasons. . . . Besides, whether the certificates are negotiable or not is of no moment. The fact remains that the certificates categorically state that their bearer [sic] have a deposit in the RSB; that the same will mature on November 3, 1993; and that the certificates are insured by PDIC.58 We disagree with respondent court’s rationale. The fact that the certificates state that the certificates are insured by PDIC does not ipso facto make the latter liable for the same should the contingency insured against arise. As stated earlier, the deposit liability of PDIC is determined by the provisions of R.A. No. 3519, and statements in the certificates that the same are insured by PDIC are not binding upon the latter. . . . The mere fact that a certificate recites on its face that a certain sum has been deposited, or that officers of the bank may have stated that the deposit is protected by the guaranty law, does not make the guaranty fund liable for payment, if in fact a deposit has not been made . . . . The banks have nothing to do with the guaranty fund as such. It is a fund raised by assessments against all state banks, administered by officers of the state to protect deposits in banks. . . .59 We come now to petitioner’s second assigned error. In order that a claim for deposit insurance with the PDIC may prosper, the law requires that a corresponding deposit be placed in the insured bank. This is implicit from a reading of the following provisions of R.A. 3519: Sec. 1. There is hereby created a Philippine Deposit Insurance Corporation . . . which shall insure, as provided, the deposits of all banks which are entitled to the benefits of insurance under this Act . . . . (Emphasis supplied). 57 58 59

207 N.W. 979 (1926). Rollo, p. 38. State v. Farmers’ State Bank, supra, note 6.

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xxx xxx xxx Sec. 10(a) . . . xxx xxx xxx (c) Whenever an insured bank shall have been closed on account of insolvency, payment of the insured deposits in such bank shall be made by the Corporation as soon as possible . . . .(Emphasis supplied.) A deposit as defined in Section 3(f) of R.A. No. 3591, may be constituted only if money or the equivalent of money is received by a bank: Sec. 3. As used in this Act — (f) The term “deposit” means the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account or which is evidenced by passbook, check and/or certificate of deposit printed or issued in accordance with Central Bank rules and regulations and other applicable laws, together with such other obligations of a bank which, consistent with banking usage and practices, the Board of Directors shall determine and prescribe by regulations to be deposit liabilities of the Bank . . . . (Emphasis ours.) Did RSB receive money or its equivalent when it issued the certificates of time deposit? The Court of Appeals, in resolving who between RSB and PFC issued the certificates to private respondents, answered this question in the negative. A perusal of the impugned decision, however, reveals that such finding is grounded entirely on speculation, and thus, cannot bind this Court:60 Equally unimpressive is the contention of PDIC and RSB that the certificates were issued to PFC which did not acquire 60

Cuizon vs. Court of Appeals, G.R. No. 102096, August 22, 1996.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

the same for value because the check issued by the latter for the certificates bounced for insufficiency of funds. First, granting arguendo that the certificates were originally issued in favor of PFC, such issuance could only give rise to the presumption that the amount stated in the certificates have been deposited to RSB. Had not PFC deposited the amount stated therein, then RSB would have surely refused to issue the certificates certifying to such fact. Second, why did not RSB demand that PFC pay the certificates or file a claim against PFC on the ground that the latter failed to pay for the value of the certificates? It could very well be that the reason why RSB did not run after PFC for payment of the value of the certificates was because the instruments were issued to the latter by RSB for value or were already paid to RSB by plaintiffs-appellees. Third, if it is true that at the time RSB issued the certificates to PFC, the instruments were paid for with checks still to be encashed, then why did not RSB specifically state in the certificates that the validity thereof hinges on the encashment of said check? Fourth, even if it is true that PFC did not deposit with or pay the RSB the amount stated in the certificates, the latter is not be such reason freed from civil liability to plaintiffs-appellees. For, by issuing the certificates, RSB bound itself to pay the amount stated therein to whoever is the bearer upon its presentment for encashment. Truly, there is no reason to depart from the established principle that where a bank issues a certificate of deposit acknowledging a deposit made with a third person or an officer of the bank, or with another bank representing it to be the certificate of the bank, upon which assurance the depositor accepts it, the bank is liable for the amount of the deposit (Michis, Banks and Banking, Vol. 5A, pp. 48-49, as cited in the Decision on p. 3 thereof).61 Moreover, such finding totally ignores the evidence presented by defendants. Cardola de Jesus, RSB Deputy Liquidator, testified that RSB received three (3) checks in consideration for the issuance of several CTDs, including the ones in dispute. The first check amounted to P159,153.93, the second, P121,665.95, and the third, P125,846.07 In consideration of the third check, private respondents received thirteen (13) certificates of deposit with Nos. 09648 to 09660, inclusive, with a value of 61

Id., at 39-40.

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P10,000.00 each or a total of P130,000.00. To conform with the value of the third check, CTD No. 09648 was “chopped,” and only the sum of P5,846.07 was credited in favor of private respondents. The first two checks “made good in the clearing” while the third was returned for being “drawn against insufficient funds.” The check in question appears on the records as Exhibit “3” (for Regent),62 and is described in RSB’s offer or evidence as “Traders Royal Bank Check No. 292555 dated September 22, 1983 covering the amount or P125,846.07 . . . issued by Premiere Financing Corporation.”63 At the back of said check are the words “Refer to Drawer,”64 indicating that the drawee bank (Traders Royal Bank) refused to pay the value represented by said check. By reason of the check’s dishonor, RSB cancelled the corresponding as evidence by an RSB “ticket” dated November 4, 1983.65 These pieces of evidence convincingly show that the subject CTDs were indeed issued without RSB receiving any money therefor. No deposit, as defined in Section 3 (f) of R.A. No. 3591, therefore came into existence. Accordingly, petitioner PDIC cannot be held liable for value of the certificates of time deposit held by private respondents. ACCORDINGLY, the instant petition is hereby GRANTED and the decision of the Court of Appeals REVERSED. Petitioner is absolved from any liability to private respondents. SO ORDERED. Davide, Jr., Bellosillo and Vitug, JJ., concur. 5. Check defined. A check is a bill of exchange drawn on a bank payable on demand. (Sec. 185, Negotiable Instruments Law) A check is (1) a draft or order (2) upon a bank or banking house, (3) purporting to be drawn upon a deposit of funds (4) for the payment at all events of a certain sum of money, (5) to a 62

Records, p. 161. Id., at 155. 64 Exhibit 3-1 (Regent). 65 Exhibits “5” and “5-A” (Regent); records, p. 163. 63

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

certain person therein named, or to him or his order, or to bearer, and (6) payable instantly on demand.66 Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check. A check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account. (Equitable PCI Bank vs. Ong, 502 SCRA 119) Check and Inland Bills of Exchange, distinguished The Supreme Court of the United States, in the leading case of Merchants Bank v. State Bank, says of checks when contrasted with bills of exchange: “Bank checks are not inland bills of exchange, but have many of the properties of such commercial paper, and many of the rules of the law merchants are alike applicable to both. Each is for a specified sum, payable in money—in both cases, there is a drawer, a drawee, and payee. Without acceptance, no action can be maintained by the holder, upon either, against drawee. The chief points of difference are that (1) a check is always drawn on a bank or banker; (2) the drawer is not discharged by the laches of the holder in presentment, unless he can show that he has sustained some injury by the default; (3) it is not due until payment is demanded, and the statute of limitations runs only from that time; (4) it is, by its fact, the appropriation of so much money of the drawer, in the hands of the drawee, to the payment of an admitted liability of the drawer; (5) it is not necessary that the drawer of a bill should have funds in the hands of the drawee—a check in such case would be a fraud.”67 A check is a draft or order A bill is also a draft or order; and it is often said that a check is, in legal effect, a bill of exchange drawn on a bank or banking

66

Blair & Hoge v. Wilson, 28 Gratt. 170; Ridgely Bank v. Patton, 109 Ill, 484, cited in Daniel, page 17 67 Merchants’ Bank v. State Bank, 10 Wall. 647, cited in Daniel, page 18 (italics supplied)

35

house, with some peculiarities.68 In some cases it is called a bill payable on demand,69 and in others an inland bill, or in the nature of an inland bill, payable on demand;70 and the expression that a check is “like a bill” has been criticized on the ground that “nihil simile est idem,” whereas “checks are bills, or rather bill is the genus, and check is a species,”71 In form a check is a bill on a banking house, and it is perfectly correct to say that it is a bill with some peculiarities, or in other words, a species of bill of exchange. (Daniel, page 18) Characteristics of a check A check has the character of negotiability and at the same time it constitutes an evidence of indebtedness. By mutual agreement of the parties, the negotiable character of a check may be waived and the instrument may be treated simply as proof of an obligation. (Sps. Pacheco vs. Court of Appeals, G.R. No. 126670, December 2, 1999, [Ynares-Santiago, J.]) A check is a negotiable instrument that serves as a substitute for money and as a convenient form of payment in financial transactions and negotiations. The use of checks as payment allows commercial and banking transactions to proceed without the actual handling of money, thus, doing away with the need to physically count bills and coins whenever payment is made. It permits commercial and banking transactions to be carried out quickly and efficiently. But the convenience afforded by checks is damaged by unfunded checks that adversely affect confidence in our commercial and banking activities, and ultimately injure public interest. (Mitra vs. People of the Philippines, G.R. No. 191404, July 5, 2010) As a general rule, checks and other papers deposited in a bank for collection remain the property of the depositor, and the bank performs the service of collection as his agent, even though it is authorized to apply the proceeds on a debt of the owner.” (7 68

Billgerry v. Branch, 19 Gratt. 418; Cruger v. Armstrong, 3 Johns. Cas. 5; State v. Crawford, 13 La. Ann. 301, ibid 69 Harker v. Anderson, 21 Wend. 372; Edwards on Bills, 396, ibid 70 Merchant’s Bank v. Spicer, 6 Wend. 445; Purell v. Allemong, 22 Gratt. 742, ibid 71 Matter of Brown, 2 Story, 502, ibid

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

C. J., sec. 245, pp. 597, 598; Richardson vs. New Orleans Coffee Co., 102 Fed., 785; Philadelphia vs. Eckles, 98 Fed., 485; Commercial Nat. Bank vs. Armstrong, 148 U. S., 50; St. Louis, etc. R. Co. vs. Johnston, 133 U. S., 566; Ward vs. Smith, 19 Law ed., 207; Carpenter vs. National Shawmut Bank, 187 Fed., 1.)72 Is Check considered a ‘legal tender’? A check, whether a manager’s check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. (Tibajia vs. CA, G.R. No. 100290, June 4, 1993, [Padilla, J.]) However, in the case of Fortunado vs. Court of Appeals73 the Supreme Court stressed that, “We are not, by this decision, sanctioning the use of a check for the payment of obligations over the objections of the creditor.” In Cebu International Finance Corporation vs. Courts of Appeals, Vicente Alegre74, the High Court ruled that: “[i]n a loan transaction, the obligation to pay a sum certain in money may be paid in money, which is the legal tender or, by the use of a check. A check is not a legal tender, and therefore cannot constitute valid tender of payment. In Philippine Airlines, Inc. vs. Court of Appeals75, this Court held that: “[s]ince a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment (citation omitted).” Moreover, the following provisions support the ruling of the Tibajia case, to wit: a. Article 1249 (NCC) The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall 72

Chinese Grocer’s Association vs. American Apothecaries Co., G.R. No. L43667, March 31, 1938, [Villa-Real, J.:] 73 G.R. No. 78556, 25 Paril 1991, 196 SCRA 269. 74 G.R. No. 123031, October 12, 1999 75 18 SCRA 557 (1990)

37

produce the effect of payment only when they have been cashed, or when through the fault of the creditor they may have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance. b. Section 1 (R.A. 529) Every provision contained in, or made with respect to, any obligation which purports to give the obligee the right to require payment in gold or in any particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, shall be as it is hereby declared against public policy null and void, and of no effect, and no such provision shall be contained in, or made with respect to, any obligation thereafter incurred. Every obligation heretofore and hereafter incurred, whether or not any such provision as to payment contained therein or made with respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts. c. Section 63 (R.A. 265, Central Bank Act) Legal Character—Checks representing deposit money 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 a delivery to the creditor of cash in an amount equal to the amount credited to his account. However, noteworthy is the fact that the prohibition in Section 1 of R.A. 529 does not apply when: a. Transactions were the funds involved are the proceeds of loans or investments made directly or indirectly, through bona fide intermediaries or agents, by foreign governments, their agencies and instrumentalities, and international financial and banking institutions so long as the funds are Identifiable, as having emanated from the sources enumerated above;

38

Basic Principles and Jurisprudence on the Negotiable Instruments Law

b. Transactions affecting high priority economic projects for agricultural industrial and power development as may be determined by the National Economic Council which are financed by or through foreign funds; c. Forward exchange transactions entered into between banks or between banks and individuals or juridical persons; d. Import-export and other international banking financial investment and industrial transactions. With the exception of the cases enumerated in items (a), (b), (c) and (d) in the foregoing provision, in, which cases the terms of the parties’ agreement shall apply, every other domestic obligation heretofore or hereinafter incurred whether or not any such provision as to payment is contained therein or made with respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts: Provided, that if the obligation was incurred prior to the enactment of this Act and required payment in a particular kind of coin or currency other than Philippine currency, it shall be discharged in Philippine currency measured at the prevailing rates of exchange at the time the obligation was incurred, except in case of a loan made in foreign currency stipulated to be payable in the currency in which case the rate of exchange prevailing at the time of the stipulated date of payment shall prevail. All coins and currency, including Central Bank notes, heretofore and hereinafter issued and drawn by the Government of the Philippines shall be legal tender for all debts, public and private. (As amended by RA 4100, Section 1, approved June 19, 1964) Under the above-quoted provision of Republic Act 529, if the obligation was incurred prior to the enactment of the Act and require payment in a particular kind of coin or currency other than the Philippine currency the same shall be discharged in Philippine currency measured at the prevailing rate of exchange at the time the obligation was incurred. As we have adverted to, Republic Act 529 was enacted on June 16, 1950. In the case now before us the obligation of the appellant to pay the appellee the 20% of $ 140,000.00, or the sum of $ 28,000.00, accrued on August 25,

39

1961, or after the enactment of Republic Act 529. It follows that the provision of Republic Act 529 which requires payment at the prevailing rate of exchange when the obligation was incurred cannot be applied. Republic Act 529 does not provide for the rate of exchange for the payment of the obligation incurred after the enactment of said Act. The logical conclusion, therefore, is that the rate of exchange should be that prevailing at the time of payment. This view finds support in the ruling of this Court in the case of Engel vs. Velasco & Co.76 where this Court held that even if the obligation assumed by the defendant was to pay the plaintiff a sum of money expressed in American currency, the indemnity to be followed should be expressed in Philippine currency at the rate of exchange at the time of judgment rather than at the rate of exchange prevailing on the date of defendant’s breach. This is also the ruling of American court as follows: The value of domestic money of a payment made in foreign money is fixed with respect to the rate of exchange at the time of payment. (70 CJS p. 228) According to the weight of authority the amount of recovery depends upon the current rate of exchange, and not the par value of the particular money involved. (48 C.J. 605-606) The value in domestic money of a payment made in foreign money is fixed in reference to the rate of exchange at the time of such payment. (48 C.J. 605)77 It is to be noted that while an agreement to pay in dollars is declared as null and void and of no effect, what the law specifically prohibits is payment in currency other than legal tender. It does not defeat a creditor’s claim for payment, as it specifically provides that “every other domestic obligation…whether or not any such provision as to payment is contained therein or made with respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts.” A contrary rule would allow a person to profit or enrich himself inequitable at another’s expense. (Ponce vs. Court of Appeals, G.R. No. L-49494, May 31, 1979, [Melencio-Herrera, J.]) 76 77

47 Phil 115, 142. Kalalao vs. Luz, G.R. No. L-27782, July 31, 1970.

40

Basic Principles and Jurisprudence on the Negotiable Instruments Law

As held in Eastbound Navigation, Ltd. vs. Juan Ysmael & Co., Inc., 102 Phil 1 (1957), and Arrieta vs. National Rice & Corn Corp.78, if there is any agreement to pay an obligation in a currency other than Philippine legal tender, the same is null and void as contrary to public policy, pursuant to Republic Act No 529, and the most that could be demanded is to pay said obligation in Philippine currency. In other words, what is prohibited by RA No. 529 is the payment of an obligation in dollars, meaning that a creditor cannot oblige the debtor to pay him in dollars, even if the loan were given in said currency. In such a case, the indemnity to be allowed should be expressed in Philippine currency on the basis of the current rate of exchange at the time of payment.79 (supra) Exception to the Rule; check not a legal tender. In the case of Salvacion F. Vda. De Eduque vs. Jose M. Ocampo80, the Supreme Court already upheld that Japanese military notes were legal tender during Japanese occupation. But appellant argues, further, that the consignation of a cashier’s check, which is not legal tender, is not binding upon him. This question, however, has never been raised in the lower court. Upon the contrary, defendant accepted impliedly in the consignation of the cashier’s check when he himself asked the court that out of the money thus consigned he be paid the amount of the second loan of P15,000. It is a rule that “a cashier’s check may constitute a sufficient tender where no objection is made on this ground.”81 If effect, when there is implied acceptance, it thus operates as a waiver on the part of the person receiving it to later question the same. He is estopped by virtue his act of implied acceptance. What is a crossed-check? This is a check with two parallel lines in the upper left hand corner. (Bank of America, NT & SA, vs. Associated Citizens Bank, G.R. No. 141001, 141018, May 21, 2009, [Carpio, J.])

78

10 SCRA 79 (1964) Kalalo vs. Luz, 34 SCRA 337 (1970) 80 G.R. No. L-222, 26 April 1950, penned by Chief Justice Moran 81 62 C.J., p. 670; see also 40 Amer. Jur. P. 764 (emphasis supplied) 79

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Under usual practice, crossing a check is done by placing two parallel lines diagonally on the left portion of the check. The crossing may be special wherein between the two parallel lines is written the name of a bank or a business institution, in which case the drawee should pay only with the intervention of that bank or company, or crossing may be general wherein between two parallel diagonal lines are written the words “and Co.” or none at all as in the case at bar, in which case the drawee should not encash the same but merely accept the same for deposit. (State Investment House vs. Intermediate Appellate Court, G.R. No. 72764, July 13, 1989, [Fernan, C.J:]) Illustrative Case: CHAN WAN vs. TAN KIM and CHEN SO G.R. No. L-15380, Sept. 30, 1960 BENGZON, J: This suit to collect eleven checks totaling P4,290.00 is here for decision because it involves no issue of fact. Such checks payable to “cash or bearer” and drawn by defendant Tan Kim (the other defendant is her husband) upon the Equitable Banking Corporation, were all presented for payment by Chan Wan to the drawee bank, but they “were all dishonored and returned to him unpaid due to insufficient funds and/or causes attributable to the drawer.” At the hearing of the case, in the Manila court of first instance, the plaintiff did not take the witness stand. His attorney, however, testified only to identify the checks — which are Exhibits A to K — plus the letters of demand upon defendants. On the other hand, Tan Kim declared without contradiction that the checks had been issued to two persons named Pinong and Muy for some shoes the former had promised to make and “were intended as mere receipts”. In view of such circumstances, the court declined to order payment for two principal reasons: (a) plaintiff failed to prove he was a holder in due course, and (b) the checks being crossed

42

Basic Principles and Jurisprudence on the Negotiable Instruments Law

checks should not have been deposited instead with the bank mentioned in the crossing. It may be stated in this connection, that defendants asserted a counterclaim, the court dismissed it for failure of proof, and from such dismissal they did not appeal. The only issue is, therefore, the plaintiff’s right to collect on the eleven commercial documents. The Negotiable Instruments Law regulating the issuance of negotiable checks, the rights and the liabilities arising therefrom, does not mention “crossed checks”. Art. 541 of the Code of Commerce refers to such instruments.82 The bills of Exchange Act of England of 1882, contains several provisions about them, some of which are quoted in the margin.83 In the case of Philippine National Bank vs. Zulueta, 101 Phil., 1071; 55 Off. Gaz., 222, we applied some provisions of said Bills of Exchange Act because the Negotiable Law, originating

82

SEC. 541. — The maker or any legal holder of a check shall be entitled to indicate therein that it be paid to certain banker or institution, which he shall do by writing across the face the name of said banker or institution, or only the words “and company.” The payment made to a person other than the banker or institution shall not exempt the person on whom it is drawn, if the payment was not correctly made. 83 76. [General and Special Crossing Defined.] — (1) Where a check bears across its face an addition of — (a) The words “and company” or any abbreviation thereof between two parallel transverse lines, either with or without the words “not negotiable;” or (b) Two parallel transverse lines simply, either with or without the words “not negotiable;” that addition constitutes a crossing, and the cheque is crossed generally. (2) Where a cheque bears across its face an addition of the name of a banker, either with or without the words “not negotiable,” that addition constitutes a crossing, and the cheque is crossed specially and to that banker. 79. . . . (2) Where the banker on whom a cheque is drawn which is so crossed nevertheless pays the same, or pays the same, or pays a cheque crossed generally otherwise than to a banker, or if crossed specially otherwise than to the banker to whom it is crossed, or his agent for collection being a banker, he is liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid. (Taken from Brannan’s Negotiable Instruments Law, 60th Ed. 1250-1251.)

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from England and codified in the United States, permits resort thereto in matters not covered by it and local legislation.84 Eight of the checks here in question bear across their face two parallel transverse lines between which these words are written: non-negotiable — China Banking Corporation. These checks have, therefore, been crossed specially to the China Banking Corporation, and should have been presented for payment by China Banking, and not by Chan Wan.85 Inasmuch as Chan Wan did present them for payment himself — the Manila court said — there was no proper presentment, and the liability did not attach to the drawer. We agree to the legal premises and conclusion. It must be remembered, at this point, that the drawer in drawing the check engaged that “on due presentment, the check would be paid, and that if it be dishonored . . . he will pay the amount thereof to the holder”.86 Wherefore, in the absence of due presentment, the drawer did not become liable. Nevertheless we find, on the backs of the checks, endorsements which apparently show they had been deposited with the China Banking Corporation and were, by the latter, presented to the drawee bank for collection. For instance, on the back of the check Exhibit A (same as in Exh. B), this endorsement appears: For deposit to the account of White House Shoe Supply with the China Banking Corporation and then this: Cleared through the clearing office of Central Bank of the Philippines. All prior endorsements and/or lack of endorsements guaranteed. China Banking Corporation. And on the back of Exh. G: 84

Sec. 196, Negotiable Instruments Law. If it is not presented by said Bank for payment, the drawee runs the risk, in case of payment to persons not entitled thereto. So the practice is for the drawee to refuse when presented by individuals. The check is generally deposited with the bank mentioned in the crossing, so that the latter may take charge of the collection. 86 Sec. 61. Negotiable Instruments Law. 85

44

Basic Principles and Jurisprudence on the Negotiable Instruments Law

For deposit to the credit of our account. Viuda e Hijos de Chua Chiong Pio. People’s Shoe Company. followed by the endorsement of China Banking Corporation as in Exhibits A and B. All the crossed checks have the “clearance” endorsement of China Banking Corporation. These circumstances would seem to show deposit of the checks with China Banking Corporation and subsequent presentation by the latter through the clearing office; but as drawee had no funds, they were unpaid and returned, some of them stamped “account closed”. How they reached his hands, plaintiff did not indicate. Most probably, as the trial court surmised, — this is not a finding of fact — he got them after they had been thus returned, because he presented them in court with such “account closed” stamps, without bothering to explain. Naturally and rightly, the lower court held him not to be a holder in due course under the circumstances, since he knew, upon taking them up, that the checks had already been dishonored.87 Yet it does not follow as a legal proposition, that simply because he was not a holder in due course Chan Wan could not recover on the checks. The Negotiable Instruments Law does not provide that a holder88 who is not a holder in due course, may not in any case, recover on the instrument. If B purchases an overdue negotiable promissory note signed by A, he is not a holder in due course; but he may recover from A,89 if the latter has no valid excuse for refusing payment. The only disadvantage of holder who is not a holder in due course is that the negotiable instrument is subject to defense as if it were non- negotiable.90 (emphasis supplied) Now what defense did the defendant Tan Kim prove? The lower court’s decision does not mention any; evidently His Honor had in mind the defense pleaded in defendant’s answer, but though it [is] unnecessary to specify, because the “crossing” and presentation incidents sufficed to bar recovery, in his opinion. 87 88

89 90

Sec. 52 (b), Negotiable Instruments Law. He was a holder all right, because he had possession of the checks that were payable to bearer. Sec. 51. Negotiable Instruments Law. SEC. 58 Negotiable Instruments Law.

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Tan Kim admitted on cross-examination either that the checks had been issued as evidence of debts to Pinong and Muy, and/or that they had been issued in payment of shoes which Pinong had promised to make for her. Seeming to imply that Pinong had to make the shoes, she asserted Pinong had “promised to pay the checks for me”. Yet she did not complete the idea, perhaps because she was just answering cross- questions, her main testimony having referred merely to their counter-claim. Needless to say, if it were true that the checks had been issued in payment for shoes that were never made and delivered, Tan Kim would have a good defense as against a holder who is not a holder in due course.91 Considering the deficiency of important details on which a fair adjudication of the parties’ right depends, we think the record should be and is hereby returned, in the interest of justice, to the court below for additional evidence, and such further proceedings as are not inconsistent with this opinion. With the understanding that, as defendants did not appeal, their counterclaim must be and is hereby definitely dismissed. So ordered. Paras, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera, Gutierrez David, Paredes and Dizon, JJ., concur. What are the effects of crossing a check? It means that it could only be deposited and could not be converted into cash. Thus, the effect of crossing a check relates to the mode of payment, meaning that the drawer had intended the check for deposit only by the rightful person, i.e., the payee named therein. (Bank of America, NT & SA, vs. Associated Citizens Bank, G.R. No. 141001, 141018, May 21, 2009, [Carpio, J.]) In Bataan Cigar v. Court of Appeals, the Supreme Court enumerated the effects of crossing a check as follows: a.) The check may not be encashed but only deposited in the bank; 91

Lack of consideration is a defense. (Sec. 28, Negotiable Instruments Law.)

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

b.) The check may be negotiated only once—to one who has an account with a bank; and c.) The act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose; otherwise, he is not a holder in due course. The effect therefore of crossing a check relates to the mode of its presentment for payment. Under Section 72 of the Negotiable Instruments Law, presentment for payment to be sufficient must be made (a) by the holder, or by some person authorized to receive payment on his behalf…As to who the holder or authorized person will depend on the instructions stated on the face of the check. (State Investment House vs. Intermediate Appellate Court, G.R. No. 72764, July 13, 1989, [Fernan, C.J:]) The act of crossing a check serves as a warning to the holder that the check has been issued for a definite purpose so that the holder thereof must inquire if he has received the check pursuant to that purpose; otherwise, he is not a holder in due course. (Dino vs. Loot, G.R. No. 170912, April 19, 2010, [Carpio, J.]) Duty of the collecting bank when dealing with crossed checks In Philippine Commercial International Bank vs. Court of Appeals and Ford Phils., Inc.,92 it was held that: “the crossing of the check with the phrase “Payee’s Account Only,” is a warning that the checks should be deposited only in the account of the CIR. Thus, it is the duty of the collecting bank PCIBank to ascertain that the check be deposited in payee’s account only. Therefore, it is the collecting bank (PCIBank) which is bound to scrutinize the check and to know its depositors before it could make the clearing indorsement “all prior indorsements and/or lack of indorsement guaranteed. In Banco de Oro and Mortgage Bank vs. Equitable Banking Corporation,93 we ruled:

92

G.R. Nos. 121413, 121479, 128604, January 29, 2011 157 SCRA 188 (1988) 94 Id. at 194 93

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“Anent petitioner’s liability on said instruments, this court is in full accord with the ruling of the PCHC’s Board of Directors that: ‘In presenting the checks for clearing and for payment, the defendant made an express guarantee on the validity of “all prior endorsements.” Thus, stamped at the back of the checks are the defendant’s clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have paid on the checks.’ No amount of legal jargon can reverse the clear meaning of defendant’s warranty. As the warranty has proven to be false and inaccurate, the defendant is liable for any damage arising out of the falsity of its representation.”94 What may be the ways of crossing a check? The crossing may be “special” wherein between the two parallel lines is written the name of a bank or business institution, in which case the drawee should pay only with the intervention of that bank or company. It may also be “general” wherein between two parallel diagonal lines are written the words “and Co.” or none at all, in which case the drawee should not encash the same but merely accept the same for deposit. (Bank of America, NT & SA, vs. Associated Citizens Bank, G.R. No. 141001, 141018, May 21, 2009, [Carpio, J.]) Liability of depository bank for allowing the deposit of crossed checks which were issued in favor of and payable to one person, and without being indorsed by the former, to the account of another person Vicente Go vs. Metropolitan Bank and Trust Co. G.R. No. 168842, August 11, 2010 NACHURA, J.:

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FACTS:

Basic Principles and Jurisprudence on the Negotiable Instruments Law

Petitioner (Vicente Go) alleged that he was doing business under the name “Hope Pharmacy” which sells medicine and other pharmaceutical products in the City of Cebu. Petitioner had in his employ Chua as his pharmacist and trustee or caretaker of the business; Tabañag, on the other hand, took care of the receipts and invoices and assisted Chua in making deposits for petitioner’s accounts in the business operations of Hope Pharmacy. Petitioner claimed that there were unauthorized deposits and encashments made by Chua and Tabañag in the total amount of One Hundred Nine Thousand Four Hundred Thirty-three Pesos and Thirty Centavos (P109,433.30). Petitioner also averred that there were thirty-two (32) checks with Hope Pharmacy as payee, for varying sums, amounting to One Million Four Hundred NinetyTwo Thousand Five Hundred Ninety-Five Pesos and Six Centavos (P1,492,595.06), that were not endorsed by him but were deposited under the personal account of Chua with respondent bank. Petitioner claimed that the said checks were crossed checks payable to Hope Pharmacy only; and that without the participation and connivance of respondent bank (which was the depository of said crossedchecks), the checks could not have been accepted for deposit to any other account, except petitioner’s account.

ISSUE:

May the depository bank (Metrobank) be liable for allowing the deposit of crossed checks which were issued in favor of and payable to herein petitioner (Vicente Go) and without being indorsed by the latter, to the account of Maria Teresa Chua (one of the respondents)?

RULING: A check is a bill of exchange drawn on a bank payable on demand. There are different kinds of checks. In this case, crossed checks are the subject of the

49

controversy. A crossed check is one where two parallel lines are drawn across its face or across the corner thereof. It may be crossed generally or specially. A check is crossed specially when the name of a particular banker or a company is written between the parallel lines drawn. It is crossed generally when only the words “and company” are written or nothing is written at all between the parallel lines, as in this case. It may be issued so that presentment can be made only by a bank. In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check has the following effects: (a) the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once — to one who has an account with a bank; and (c) the act of crossing the check serves as warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course. The Court has taken judicial cognizance of the practice that a check with two parallel lines in the upper left hand corner means that it could only be deposited and not converted into cash. The effect 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., the payee named therein. The crossing of a check is a warning that the check should be deposited only in the account of the payee. Thus, it is the duty of the collecting bank to ascertain that the check be deposited to the payee’s account only. In the instant case, there is no dispute that the subject 32 checks with the total amount of P1,492,595.06 were crossed checks with petitioner as the named payee. It is the submission of petitioner that respondent bank should be held accountable for the entire amount of the checks because it accepted the checks for deposit under Chua’s account despite the fact that the checks

50

Basic Principles and Jurisprudence on the Negotiable Instruments Law

were crossed and that the payee named therein was not Chua. In its defense, respondent bank countered that petitioner is not entitled to reimbursement of the total sum of P1,492,595.06 from either Maria Teresa Chua or respondent bank because petitioner was not damaged thereby. Respondent bank’s contention is meritorious. Respondent bank should not be held liable for the entire amount of the checks considering that, as found by the RTC and affirmed by the CA, the checks were actually given to Chua as payments by petitioner for loans obtained from the parents of Chua. Furthermore, petitioner’s non-inclusion of Chua and Tabañag in the petition before this Court is, in effect, an admission by the petitioner that Chua, in representation of her parents, had rightful claim to the proceeds of the checks, as payments by petitioner for money he borrowed from the parents of Chua. Therefore, petitioner suffered no pecuniary loss in the deposit of the checks to the account of Chua. However, we affirm the finding of the RTC that respondent bank was negligent in permitting the deposit and encashment of the crossed checks without the proper indorsement. An indorsement is necessary for the proper negotiation of checks specially if the payee named therein or holder thereof is not the one depositing or encashing it. Knowing fully well that the subject checks were crossed, that the payee was not the holder and that the checks contained no indorsement, respondent bank should have taken reasonable steps in order to determine the validity of the representations made by Chua. Respondent bank was amiss in its duty as an agent of the payee. Prudence dictates that respondent bank should not have merely relied on the assurances given by Chua. xxx xxx

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Negligence was committed by respondent bank in accepting for deposit the crossed checks without indorsement and in not verifying the authenticity of the negotiation of the checks. The law imposes a duty of extraordinary diligence on the collecting bank to scrutinize checks deposited with it, for the purpose of determining their genuineness and regularity. As a business affected with public interest and because of the nature of its functions, the banks are under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of the relationship. The fact that this arrangement had been practiced for three years without Mr. Go/Hope Pharmacy raising any objection does not detract from the duty of the bank to exercise extraordinary diligence. Thus, the Decision of the RTC, as affirmed by the CA, holding respondent bank liable for moral damages is sufficient to remind it of its responsibility to exercise extraordinary diligence in the course of its business which is imbued with public interest. WHEREFORE, the Decision dated May 27, 2005 and the Resolution dated August 31, 2005 of the Court of Appeals in CA-G.R. CV No. 63469 are hereby AFFIRMED. Within what time should a check be presented for payment? A check must be presented for payment within a reasonable period after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. (Sec. 186, Negotiable Instruments Law) The present banking practice requires that a check must be issued within six (6) months from the date of issuance, otherwise, the check becomes stale, and the drawer will be discharged from liability thereon to the extent of the loss caused by the delay.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

A stale check is valueless A stale check is one which has not been presented for payment within a reasonable time after its issue. It is valueless and, therefore should not be paid. Under the negotiable instruments law, an instrument not payable on demand must be presented for payment on the day it falls due. When the instrument is payable on demand, presentment must be made within a reasonable time after its issue. In the case of a bill of exchange, presentment is sufficient if made within a reasonable time after the last negotiation thereof.95 (International Corporate Bank vs. Sps. Gueco, G.R. No. 141968, February 12, 2001, [Kapunan, J.]) Moreover, in Crystal vs. Court of Appeals96, “it has been held that, if the check had become stale, it becomes imperative that the circumstances that caused its non-presentment be determined.” What constitutes reasonable time? In determining what is a reasonable time, regard is to be had to the nature of the instrument, the usage of trade or business with respect to such instruments, and the facts of the particular case. (Sec. 193, Negotiable Instruments Law) The test is whether the payee employed such diligence as a prudent man exercises in his own affairs.97 This is because the nature and theory behind the use of a check points to its immediate use and payability. (International Corporate Bank vs. Sps. Gueco, G.R. No. 141968, February 12, 2001) (emphasis supplied) ‘Acceptance’ not required in checks; ‘Acceptance’ synonymous with ‘Certification of Checks’ A comprehensive discussion was laid down by the Supreme Court in the case of Philippine National Bank vs. The National City Bank of New York and Motor Service Company, Inc., G.R. No. L-43596, October 31, 1936, wherein it was held that: “[a] check is a bill of exchange payable on demand and only the rules 95

Section 71, Negotiable Instruments Law 71 SCRA 443 (1976) 97 Jeff Bras, Stones vs. McCullough (1934) 188 Ark. 1108, 69 S.W. (2d) 863 96

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governing bills of exchange payable on demand are applicable to it, according to Section 185 of the Negotiable Instruments Law. In view of the fact that acceptance is a step unnecessary, in so far as bills of exchange payable on demand are concerned (Sec. 143), it follows that the provisions relative to “acceptance” are without application to checks. Acceptance implies, in effect, subsequent negotiation of the instrument, which is not true in case of the payment of a check because from the moment the check is paid it is withdrawn from circulation. The warranty established by section 62, is in favor of holders of the instrument after its acceptance. When the drawee bank cashes or pays a check, the cycle of negotiation is terminated, and it is illogical thereafter to speak of subsequent holders who can invoke the warranty provided in section 62 against the drawee. Moreover, according to section 191, “acceptance” means “an acceptance completed by delivery or notification” and this concept is entirely incompatible with payment, because when payment is made the check is retained by the bank, and there is no such thing as delivery or notification to the party receiving the payment. Checks are not to be accepted, but presented at once for payment. (1 Bouvier’s Law Dictionary, 476) There can be no such thing as “acceptance” in the ordinary sense of the term. A check being payable immediately and on demand, the bank can fulfill its duty to the depositor only by paying the amount demanded. The holder has no right to demand from the bank anything but payment of the check, and the bank has no right, against the drawer, to do anything but to pay it. (5 R.C.L., p. 516, par. 38) A check is not an instrument which in the ordinary course of business calls for acceptance. The holder can never claim acceptance as his legal right. He can present for payment, and only for payment. (1 Morse on Banks and Banking, 6th ed., pp. 898, 899.) There is, however, nothing in the law or in, business practice against the presentation of checks for acceptance, before they are paid, in which case we have a “certification” equivalent to “acceptance” according to section 187, which provides that “where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance”, and it is then that the warranty under section 62 exists. This certification or acceptance consists in the signification by the drawee of his assent to the order of the drawer, which must not express that the drawee will perform his promise by any other means than the payment of money. (Section

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

132) When the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon (sec. 188), and then the check operates as an assignment of a part of the funds to the credit of the drawer with bank. (sec. 189) There is nothing in the nature of the check which intrinsically precludes its acceptance, in like manner and with like effect as a bill of exchange or draft may be accepted. The bank may accept if it chooses; and it is frequently induced by convenience, by the exigencies of business, or by the desire to oblige customers, voluntarily to incur the obligation. The act by which the bank places itself under obligation to pay to the holder the sum called for by a check must be the expressed promise or undertaking of the bank signifying its intent to assume the obligation, or some act from which the law will imperatively imply such valid promise or undertaking. The most ordinary form which such an act assumes is the acceptance by the bank of the check, or, as it is perhaps more often called, the certifying of the check. (1 Morse on Banks and Banking, pp. 898, 899; 5 R.C.L., p. 520) No doubt a bank may by an unequivocal promise in writing make itself liable in any event to pay the check upon demand, but this is not an “acceptance” of the check in the true sense of that term. Although a check does not call for acceptance, and the holder can present it only for payment, the certification of checks is a means in constant and extensive use in the business of banking, and its effects and consequences are regulated by the law merchant. Checks drawn upon banks or banker, thus marked or certified, enter largely into the commercial and financial transactions of the country; they pass from hand to hand, in the payment of debts, the purchase of property, and in the transfer of balances from one house and one bank to another. x x x The check becomes a basis of credit—any easy mode of passing money from hand to hand, and answers the purposes of money. (5 R.C.L., pp. 516, 517) What is the effect of a check being certified by the drawee bank? Where a check is certified by the bank on which it is drawn the certification is equivalent to an acceptance. (Sec. 187, Negotiable Instruments Law)

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The purpose of procuring a check to be certified is to impart strength and credit to the paper by obtaining an acknowledgment from the certifying bank that the drawer has funds therein sufficient to cover the check and securing the engagement of the bank that the check will be paid upon presentation. A certified check has a distinctive character as a species of commercial paper, and performs important functions in banking and commercial business. When a check is certified, it ceases to possess the character, or to perform the functions, of a check, and represents so much money on deposit, payable to the holder on demand. (Philippine National Bank vs. The National City Bank of New York, October 31, 1936) (emphasis supplied) In the case of New Pacific Timber & Supply Co., Inc. vs. Seneris98, “[s]ince the check had been certified by the drawee bank, by the certification, the funds represented by the check are transferred from the credit of the maker to that of the payee or holder, and for all intents and purposes, the latter becomes the depositor of the drawee bank, with rights and duties of one in such situation. Where a check is certified by the bank on which it is drawn, the certification is equivalent to acceptance. Said certification “implies that the check is drawn upon sufficient funds in the hands of the drawee, that they have been set apart for its satisfaction, and that they shall be so applied whenever the check is presented for payment. It is an understanding that the check is good then, and shall continue good, and this agreement is as binding on the bank as its notes on circulation, a certificate of deposit payable to the order of depositor, or any other obligation it can assume. The object of certifying a check, as regards both parties, is to enable the holder to use it as money.” When the holder procures the check to be certified, “the check operates as an assignment of a part of the funds to the creditors.” Hence, the exception to the rule enunciated under Section 63 of the Central Bank to the effect “that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to his account” x x x (Equitable PCI Bank vs. Rowena Ong, G.R. No. 156207 [September 15, 2006]) (emphasis supplied)

98

G.R. No. L-41764, 19 December 1980, 101 SCRA 686, 693

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

All the authorities, both English and American, hold that a check may be accepted, though acceptance is not usual. By the law merchant, the certificate of the bank that a check is good is equivalent to acceptance. It implies that the check is drawn upon sufficient funds in the hands of the drawee, that they have been set apart for its satisfaction, and that they shall be so applied whenever the check is presented for payment. It is an undertaking that the check is good then, and shall continue good, and this agreement is as binding on the bank as its notes of circulation, a certificate of deposit payable to the order of the depositor, or any other obligation it can assume. The object of certifying a check as regards both parties is to enable the holder to use it as money. The transferee takes it with the same readiness and sense of security that he would take the notes of the bank. It is available also to him for all purposes of money. Thus it continues to perform its important functions until in the course of business it goes back to the bank for redemption, and is extinguished by payment. It cannot be doubted that the certifying bank intended these consequences, and it is liable accordingly. To hold otherwise would render these important securities only a snare and a delusion. A bank incurs no greater risk in certifying a check than in giving a certificate of deposit. In well- regulated banks the practice is at once to charge the check to the account of the drawer, to credit in a certified check account, and, when the check is paid, to debit that account in the amount. Nothing can be simpler or safer than this process. (Merchants’ Bank vs. States Bank, 10 Wall., 604, at p. 647; 19 Law. Ed., 1008, 1009, cited in PNB vs. National City Bank of New York, id.) Ordinarily the acceptance or certification of a check is performed and evidenced by some word or mark, usually the words “good”, “certified” or “accepted” written upon the check by the banker or bank officer. (1 Morse, Banks and Banking, 915; 1 Bouvier’s Law Dictionary, 476.) The bank virtually says, that check is good; we have the money of the drawer here ready to pay it. We will pay it now if you receive it. The holder says, No, I will not take the money; you may certify the check and retain the money for me until this check is presented. The law will not permit a check, when due, to be thus presented, and the money to be left with the bank for the accommodation of the holder without discharging the drawer. The money being due and the check presented, it is his own fault if the holder declines to receive the

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pay, and for his own convenience has the money appropriated to that check to its future presentment at any time within the statute of limitations. (1 Morse on Banks and Banking, p. 920.) What happens if the holder of the check procures it to be certified? Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability therefrom. (Sec. 188, Negotiable Instruments Law) ‘Payment’ and ‘Certification of Checks’ distinguished In the PNB case, the Supreme Court laid down a detailed discussion and held that: “[w]ith few exceptions, the weight of authority is to the effect that “payment” neither includes nor implies “acceptance”. In National Bank vs. First National Bank ([19101, 141 Mo. App., 719; 125 S.W., 513), the court asks, if a mere promise to pay a check is binding on a bank, why should not the absolute payment of the check should have the same effect? In response, it is submitted that the two things, —that is acceptance and payment, —are entirely different. If the drawee accepts the paper after seeing it, and then permits it to go into circulation as genuine, on all the principles of estoppel, he ought to be prevented from setting up forgery to defeat liability to one who has taken the paper on the faith of the acceptance, or certification. On the other hand, mere payment of the paper at the termination of its course does not act as an estoppel. The attempt to state a general rule covering both acceptance and payment is responsible for a large part of the conflicting arguments which have been advanced by the courts with respect to the rule. (Annotation at 12 A.L.R., 1090 1921.]) In First National Bank vs. Brule National Bank ([1917], 12 A.L.R., 1079, 1085), the Court said: We are of the opinion that “payment is not acceptance”. Acceptance, as defined by Section 131, cannot be confounded with payment… Acceptance, certification, or payment of a check, by the express language of the statute, discharges the liability only

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

of the persons named in the statute, to wit, the drawer and all indorsers, and the contract of indorsement by the negotiator if the check is discharged by acceptance, certification, or payment. But clearly the statute does not say that the contract or warranty of the negotiator, created by Section 65, is discharged by these acts. The rule supported by the majority of the cases (14 A.L.R. 764), that payment of a check on a forged or unauthorized indorsement of the payee’s name, and charging the same to the drawer’s account, do not amount to an acceptance so as to make the bank liable to the payee, is supported by all of the recent cases in which the question is considered. (cases cited, Annotation at 69 A.L.R., 1076, 1077 [1930]) Merely stamping a check “paid” upon its payment on a forged or unauthorized indorsement is not an acceptance thereof so as to render the drawee bank liable to the true payee. (Anderson vs. Tacoma National Bank [1928], 146 Wash., 520 520; Pac., 8; Annotation at 69 A.L.R., 1077, [1930]) In State Bank of Chicago vs. Mid-City Trust & Savings Bank (12 A.L.R., 989; 991, 992), the Court said: The defendant in error contends that the payment of the check shows acceptance by the bank, urging that there can be no more definite act by the bank upon which a check has been drawn, showing acceptance than the payment of the check. Section 184 of the Negotiable Instruments Act (Sec. 202) provides that the provisions of the act applicable to bills of exchange apply to a check, and section 131 (sec. 149), that the acceptance of a bill must be in writing signed by the drawee. Payment is the final act which extinguishes a bill. Acceptance is a promise to pay in the future and continues the life of the bill. It was held in the First National Bank vs. Whitman (94 U.S., 343; 24 L. ed., 229), that payment of a check upon a forged indorsement did not operate as an acceptance in favor of the true owner. The contrary was held in Pickle vs. Muse (Fickle vs. People’s Nat. Bank, 88 Tenn., 380; 7 L.R.A., 93; 17 Am. St. Rep., 900; 12 S.W., 919), and Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep. 751) at a time when the Negotiable Instruments Act was not in force in those states. The opinion of the Supreme Court of the United States

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seems more logical, and the provision of the Negotiable Instruments Act now require an acceptance to be in writing. Under this statute the payment of a check on a forged indorsement, stamping it “paid”, and charging it to the account of the drawer, do not constitute an acceptance of the check or create a liability of the bank to the true holder or the payee. (Elyria Sav. & Bkg. Co. vs. Walker Bin Co., 92 Ohio St., 406; L.R.A. 1916 D, 433; 111 N.E., 147; Ann. Cas. 1917 D, 1055; Baltimore & O.R. Co. vs. First National Bank, 102 Va., 753; 47 S.E., 837; State Bank of Chicago vs. Mid-City Trust & Savings Bank 12 A.L.R., pp. 989, 991, 992.) Before drawee’s acceptance of check there is no privity of contract between drawee and payee. Drawee’s payment of check on unauthorized indorsement does not constitute “acceptance” of check. (Sinclair Refining Co. vs. Moultrie Banking Co., 165 S.E., 860 [1932]) The great weight of authority is to the effect that the payment of a check upon a forged or unauthorized indorsement and the stamping of it “paid” does not constitute an acceptance. (Dakota Radio Apparatus Co. vs. First Nat. Bank of Rapid City, 244 N.W., 351, 352 [1932].) Paying of the check, cashing it on presentment is not acceptance. (South Boston Trust Co. vs. Levin, 249 Mass., 45, 48, 49; 143 N.E., 816; Blocker, Shepard Co. vs. Granite Trust Company, 187 Me., 53, 54 [1933].) In Rauch vs. Bankers National Bank of Chicago (143 III. App. 625, 636, 637 [1908]), the language of the decision was as follows: “…The plaintiffs say that this acceptance was made by the very unauthorized payments of which they complain. This suggestion does not seem forceful to us. It is the contention which was made before the Supreme Court of the United States in First National Bank vs. Whitman (94 U.S., 343), and repudiated by that court. The language of the opinion in that case is so apt in the present case that we quote it: “It is further contended that such an acceptance of a check as creates a privity between the payee and the bank is

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

established by the payment of the amount of this check in the manner described. This argument is based upon the erroneous assumption that the bank has paid this check. If this were true, it would have discharged all of its duty, and there would be an end to the claim against it. The bank supposed that it had paid the check, but this was an error. The money it paid was upon a pretended and not a real indorsement of the name of the payee…We cannot recognize the argument that payment of the amount of the check or sight draft under such circumstances amounts to an acceptance creating a privity of contract with the real owner. “It is difficult to construe a payment as an acceptance under any circumstances…A banker or individual may be ready to make actual payment of a check or draft when presented, while unwilling to make a promise to pay than to meet the promise when required. The difference between the transactions is essential and inherent.” And in Wharf vs. Seattle National Bank (24 Pac. [2d], 120, 123 [1933]): It is the rule that payment of a check on unauthorized or forged indorsement does not operate as an acceptance of the check so as to authorize an action by the real owner to recover its amount from the drawee bank. (Michie on Banks and Banking, vol. 5, sec. 278, p. 521.) (See also, Federal Land Bank vs. Collings, 156 Miss., 893; 127 So., 570; 69 A.L.R., 1068.) In a very recent case, Federal Land Bank vs. Collins (69 A.L.R., 1068, 1072-1074), this question was discussed at considerable length. The court said: In the light of the first of these statutes, counsel for appellant is forced to stand upon the narrow ledge that the payment of the check by the two banks will constitute an acceptance. The drawee bank simply marked it “paid” and did not write anything else except the date. The bank first paying the check, the Commercial National Bank and Trust Company, simply wrote its name as indorser and passed the check on to the drawee bank; does this constitute

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acceptance? The precise question has not been presented to this court for decision. Without reference to authorities in other jurisdictions it would appear that the drawee bank had never written its name across the paper and therefore, under the strict terms of the statute, could not be bound as the acceptor, in the second place, it does not appear to us to be illogical and unsound to say that the payment of a check by the drawee, and the stamping of it “paid”, is equivalent to the same thing as acceptance of a check; however, there is a variety of opinions in the various jurisdictions on this question. Counsel correctly states that the theory upon which numerous courts hold that the payment of a check creates privity between the holder of the check and the drawee bank is tantamount to a pro tanto assignment of that part of the funds. It is most easily understood how the payment of the check, when not authorized to be done by the drawee bank, might under such circumstances create liability on the part of the drawee to the drawer. Counsel cites the case of Pickle vs. Muse (88 Tenn, 380; 12 S.W., 919; 7 L.R.A., 93; 17 Am. St. Rep., 900), wherein Judge Lurton held that the acceptance of a check was necessary order to give the holder thereof a right of action thereon against the bank, and further held in a case similar to this, so far as the question is concerned, that the acceptance of a check by the bank and its subsequent charge of the amount to the drawer, although it was presented by, and payment made, an unauthorized person. Judge Lurton cited the case of National Bank of the Republic vs. Millard (10 Wall., 152; 19 L.ed., 897), wherein the Supreme Court of the United States, not having such a case before it, threw out the suggestion that, if it was shown that a bank had charged the check on its books against the drawer and made settlement with the drawee that the holder could recover on account of money had and received, invoking the rule of justice and fairness, it might be said there was an implied promise to the holder to pay it on demand. (See National Bank of the Republic vs. Millard, 10 Wall. [77 U.S.], 152; 19 L.ed., 899.) The Tennessee court then argued that it would be inequitable and unconscionable for the owner and payee of the check to be limited to an action against an insolvent drawer and might thereby lose the debt. They recognized the legal principle that there is no privity between the drawer bank and the holder, or payee, of the check, and proceeded to hold that no particular kind of writing was necessary to constitute an acceptance and that it became a question of fact, and the bank became liable when it stamped it “paid” and charged it to the

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

account of the drawer, and cites, in support of its opinion, Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep. 751); Saylor vs. Bushong (100 Pa., 23; 45 Am. Rep., 353); and Dodge vs. Bank (20 Ohio St., 234; 5 Am. Rep., 648.) This decision was in 1890, prior to the enactment of the Negotiable Instruments Law by the State of Tennessee. However, in this case Judge Snodgrass points out that the Millard Case, supra, was dicta. The Dodge case, from the Ohio court, held exactly as the Tennessee court, but subsequently in the case of Elyria Bank vs. Walker Bin Co. (92 Ohio St., 406; 111 N.E., 147; L.R.A. 1916 D, 433; Ann. Cas. 1917 D, 1055), the court held to the contrary, called attention to the fact that the Dodge case was no longer the law, and proceeded to announce that, whatever might have been the law before the passage of the Negotiable Instrument Act in that state, it was no longer the law; and the rule announced in the Dodge case had been “discarded”. The court, in the latter case, expressed its doubts that the courts of Tennessee and Pennsylvania would adhere to the rule announced in the Pickle case, quoted supra, in the fact of the Negotiable Instrument Law. Subsequent to the Millard case, the Supreme Court of the United States, in the case of First National Bank of Washington vs. Whitman (94 U.S., 343, 347; 24 L.ed., 229), where the bank, without any knowledge that the indorsement of the payee was unauthorized, paid the check, and it was contended that by the payment the privity of contract existing between the drawer and drawee was imparted to the payee, said: “It is further contended that such an acceptance of the check as creates a privity between the payee and the bank is established by the payment of the amount of this check in the manner described. This argument is based upon the erroneous assumption that the bank has paid this check. If this were true, it would have discharged all of its duty, and there would be an end of the claim against it. The bank supposed that it had paid the check; but this was an error. The money it paid was upon a pretended and not a real indorsement of the name of the payee. The real indorsement of the payee was as necessary to a valid payment as the real signature of the drawer; and in law the check remains unpaid. Its pretended payment did not diminish the funds

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of the drawer in the bank, or put money in the pocket of the person entitled to the payment. The state of the account was the same after the pretended payment as it was before.” “We cannot recognize the argument that a payment of the amount of a check or sight draft under such circumstances amounts to an acceptance, creating a privity of contract with the real owner. It is difficult to construe a payment as an acceptance under any circumstances. The two things are essentially different. One is a promise to perform at, the other an actual performance. A banker or an individual may be ready to make actual payment of a check or draft when presented, while unwilling to make a promise to pay than to meet the promise when required. The difference between the transactions is essential and inherent.” Nature of a manager’s check. A manager’s check is one drawn by a bank’s manager upon the bank itself. It stands on the same footing as a certified check, which is deemed to have been accepted by the bank that certified it. As the bank’s own check, a manager’s check becomes the primary obligation of the bank and is accepted in advance by the act of its issuance. (Security Bank and Trust Company vs. Rizal Commercial Banking Corporation, G.R. No. 170984, 170987, January 30, 2009, [Quisumbing, J.]) A manager’s check is an order of the bank to pay, drawn upon itself, committing in effect its total resources, integrity and honor behind its issuance, and by its peculiar character and general use in commerce, a manager’s check is regarded substantially to be as good as the money it represents. (Citibank N.A. (Formerly First National City Bank) vs. Sabeniano, 504 SCRA 378) [It] stands on the same footing as a certified check.99 The effect of certification is found in Section 187, Negotiable Instruments Law.100 The effect of issuing a manager’s check was 99

Supra note 21 at 411 [Soler v. Court of Appeals, G.R. No. 123892, 21 May 2011, 358 SCRA 57, 64] 100 Sec. 187. Certification of check; effect of.—Where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

incontrovertibly elucidated when [we] it was declared that [a] manager’s check is one drawn by the bank’s manager upon the bank itself. It is similar to a cashier’s check both as to the effect and use. A cashier’s check is a check of the bank’s cashier on his own or another check. In effect, it is a bill of exchange drawn by the cashier of a bank upon the bank itself, and accepted in advance by the act of its issuance. It is really the bank’s own check and may be treated as a promissory note with the bank as a maker. The check becomes the primary obligation of the bank which issued it and constitutes its written promise to pay upon demand. The mere issuance of it is considered an acceptance thereof. x x x.101 (Equitable PCI Bank vs. Rowena Ong, G.R. No. 156207, September 15, 2006, [Chico-Nazario, J.]) Given that a check is more than just an instrument of credit used in commercial transactions for it also serves as a receipt or evidence for the drawee bank of the cancellation of the said check due to payment, then, the possession by the drawee bank of the said Manager’s Checks (MC’s), duly stamped “Paid” gives rise to the presumption that the said Manager’s Checks (MC’s) were already paid out to the intended payee. (supra) Cashier’s Check deemed as cash In the case of New Pacific Timber & Supply Company, Inc. vs. Hon. Alberto Seneris,102 it was held that: “It is to be emphasized in this connection that the check deposited by the petitioner in the amount of P50, 000.00 is not an ordinary check but a Cashier’s Check of the Equitable Banking Corporation, a bank of good standing and reputation. As testified to by the Ex-Officio Sheriff with whom it has been deposited, it is a certified crossed check.103 It is a well-known and accepted practice in the business sector that a Cashier’s Check is deemed as cash. Moreover, since the said check had been certified by the drawee bank, by the certification, the funds represented by the check are transferred from the credit of the maker to that of the payee or holder, and for all intents and purposes, the latter becomes the depositor of the drawee bank, with rights and duties 101

102 103

International Corporate Bank vs. Gueco, G.R. No. 141968, 12 February 2001 G.R. No. L-41764, December 19, 1980, [Concepcion, Jr., J.:] p. 35, t.s.n., May 24, 1975

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of one in such situation.104 Where a check is certified by the bank on which it is drawn, the certification is equivalent to acceptance.105 Said certification “implies that the check is drawn upon sufficient funds in the hands of the drawee, that they have been set apart for its satisfaction, and that they shall be so applied whenever the check is presented for payment. It is an understanding that the check is good then, and shall continue good, and this agreement is as binding on the bank as its notes in circulation, a certificate of deposit payable to the order of the depositor, or any other obligation it can assume. The object of certifying a check, as regards both parties, is to enable the holder to use it as money.”106 When the holder procures the check to be certified, “the check operates as an assignment of a part of the funds to the creditors.”107 Hence, the exception to the rule enunciated under Section 63 of the Central Bank Act to the effect “that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to his account” shall apply in this case.” Problem: X delivered stocks of vegetable oil to Y sometime on March 1993. As payment therefor, Y issued a personal check in the amount of Php 348, 805.50. However, when the check was encashed, it was dishonored by the drawee bank. Y then assured X that he would replace the bounced check with a cashier’s check from the Bank of the Philippine Islands (BPI). Thereafter, BPI cashier’s check no. 14428 in the amount of Php 348, 805.50 was issued, drawn against the account of Y. The following day, X returned to drawee bank to encash the check but it was dishonored, the bank then informed X that Y’s account was closed on that date. 104

Gregorio Araneta, Inc. vs. Paz Tuazon de Paterno and Jose Vidal, L2886, August 22, 1952, 49 O.G. No. 1, p. 59 105 Section 187. Certification of check; effect of. — Where a check is certified by the bank on which it is drawn, the certification is equivalent to acceptance. (Negotiable Instruments Law) 106 PNB vs. Nat. City Bank of New York, 63 Phil. 711, 718-719 107 PNB vs., Nat. City Bank of New York, supra, 711-717; Sec. 189. When check operates as an assignment. — A cheek of itself does 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 it. (Negotiable Instruments Law) [Emphasis supplied]

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X then filed a complaint for collection of sum of money against BPI. In it’s answer, BPI claimed that it issued the check by mistake in good faith; that its dishonor was due to lack of consideration; and that X’s remedy was to sue Y who purchased the check. a. Is X a holder in due course despite BPI’s contention that there was lack of consideration? b. Is BPI liable to X for the amount of the cashier’s check? c. What is the nature of a cashier’s check? ANSWER: a. YES. X is a holder in due course. Sec. 52. (NIL)—a holder in due course is a holder who has taken the instrument under the following conditions: a. That it is complete and regular upon it’s face; b. That he became the holder of it before it was overdue and without notice that it had been previously dishonored; 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. Value in general terms may be some right, interest, profit or benefit to the party who makes the contract or some forbearance, detriment, loan, responsibility, etc., on the other side. Here, there is no dispute that X received Y’s cashier’s check as payment for the former’s vegetable oil. The fact that it was Y who purchased the cashier’s check from BPI will not affect X’s status as a holder for value since the check was delivered to him as payment for the vegetable oil he sold to Y. (Bank of the Philippine Islands vs. Gregorio C. Roxas, G.R. No. 157833, October 15, 2007 [Sandoval-Gutierrez, J.]).

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b. YES. BPI is liable for the amount of the cashier’s check. A cashier’s check is really the bank’s own check and may be treated as a promissory note with the bank as a maker. The check becomes the primary obligation of the bank which issues it and constitutes a written promise to pay upon demand. (BPI vs. Roxas) c. It is a well known and accepted practice in the business sector that a cashier’s check is deemed as cash. This is because the mere issuance of a cashier’s check is considered acceptance thereof. (BPI vs. Roxas). What is a Memorandum check? A memorandum check is in the form of an ordinary check, with the word “memorandum”, or “memo” or “mem” written across its face, signifying that the maker or drawer engages to pay the bona fide holder absolutely, without any condition concerning its presentment.108 (People of the Philippines vs. Hon. David Nitafan, et al, G.R. No. 75954, October 22, 1992) Such a check is an evidence of debt against the drawer and although may not be intended to be presented,109 has the same effect as an ordinary check,110 and if passed to the third person, will be valid in his hands like any other check.111 (Ibid.) Feature of a Memorandum Check A memorandum check may carry with it 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. This understanding may be manifested by writing across the check “Memorandum”, “Memo”, or “Mem.” (People vs. Nitafan, supra) It presents all the features of other negotiable instruments when transferred or indorsed to a bona fide holder for value. It is a contract by which the maker engages to pay the bona fide holder absolutely, and not upon a condition to pay if the bank upon which 108

Franklin Bank v. Freeman, 16 Pick 535 Cushing v. Gore, 15 Mass. 69.z 110 Dykes v. Leather Manufactures Bank, 11 Page 612 111 Franklin Bank v. Freeman, supra 109

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

it be drawn should not pay upon presentation at maturity, and if due notice of the presentation and nonpayment should be given.112 Liabilities of a drawee bank The bank of which a check is drawn, known as the drawee bank, is under strict liability, based on the contract between the bank and its customer (drawer), to pay the check only to the payee or the payee’s order. The drawer’s instructions are reflected on the face and by the terms of the check. When the drawee bank pays a person other than the payee named on the check, it does not comply with the terms of the check and violates its duty to charge the drawer’s account only for properly payable items. Thus, the Supreme Court ruled in Philippine National Bank vs. Rodriguez, that a drawee should charge to the drawer’s account only the payables authorized by the latter; otherwise, the drawee will be violating the instructions of the drawer and shall be liable for the amount charged to the drawer’s account. (Bank of America, NT & SA, vs. Associated Citizens Bank, G.R. No. 141001, 141018, May 21, 2009, [Carpio, J.]) Liability of an endorser bank under Section 66 of the Negotiable Instruments Law In check transactions, the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements. (Bank of America, NT & SA, vs. Associated Citizens Bank, G.R. No. 141001, 141018, May 21, 2009, [Carpio, J.]) If a bank refuses to pay a check, can the payee-holder thereof sue the bank? No. If a bank refuses to pay a check (notwithstanding sufficiency of funds), the payee-holder cannot sue the bank—the 112

Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 407, citations omitted

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payee-holder should instead sue the drawer who might in turn sue the bank. (Villanueva vs. Nite, 496 SCRA 459 [2006]). Section 189113 is sound law based on logic and established legal principles: no privity of contract between the drawee-bank and the payee. (supra) Is there any difference between a Check and a Promissory Note? A check is a form of a bill of exchange wherein it is an unconditional order in writing addressed by one person to another (usually a bank), 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, whereas, a promissory note is an unconditional promise to pay made by one person addressed to another, on demand or also at a fixed or determinable future time, a sum certain in money to order or to bearer. A check necessarily involves three individuals, the drawer, the payee, and the drawee (bank), whereas, a promissory note only involves two persons, the maker and the payee. In checks, liability of the drawee bank arises from the moment the latter accepts the check being presented either for acceptance or payment, whereas in promissory notes, liability of the maker attaches from the moment the instrument was delivered to the payee for the purpose of giving effect thereto. Questions: Does a collecting bank, over the objections of the depositor, have the authority to withdraw unilaterally from such depositor’s account the amount it had previously paid upon certain unindorsed order instruments deposited by the depositor to another account that she later closed?

113

SEC. 189. When check operates as an assignment. – A check of itself does 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. (emphasis ours)

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ANSWER: This was the query poised by Justice Azcuna in the case of Bank of the Philippine Islands vs. Court of Appeals, et al, where it was held that: The collecting bank, had the right to debit the depositor’s account for the value of the checks it previously credited in her favor. It is of no moment that the account debited by the collecting bank was different from the original account to which the proceeds of the check were credited because both admittedly belonged to depositor.114 The right to set-off was explained in Associated Bank vs. Tan.115 A bank generally has a right of set-off over the deposits therein for the payment of any withdrawals on the part of a depositor. The right of a collecting bank to debit a clients account for the value of a dishonored check that has previously been credited has fairly been established by jurisprudence. To begin with, Article 1980 of the Civil Code provides that “[f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan.” Hence, the relationship between banks and depositors has been held to be that of creditor and debtor. Thus, legal compensation under Article 1278 of the Civil Code may take place “when all the requisites mentioned in Article 1279 are present.” xxx While, however, it is conceded that petitioner had the right to set-off the amount it paid to Templonuevo against the deposit of Salazar, the issue of whether it acted judiciously is an entirely different matter.116 As businesses affected with public interest, and because of the nature of their functions, banks are under obligation to treat the accounts of their depositors with meticulous 114

Bank of the Philippine Islands vs. Court of Appeals, et al, January 25, 2007, G.R. No. 136202 115 G.R. No. 156940, December 14, 2004, 446 SCRA 282 116 Id

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care, always having in mind the fiduciary nature of their relationship.117 In this regard, petitioner was clearly remiss in its duty to private respondent Salazar as its depositor. To begin with, the irregularity appeared plainly on the face of the checks. Despite the obvious lack of indorsement thereon, petitioner permitted the encashment of these checks three times on three separate occasions. This negates petitioner’s claim that it merely made a mistake in crediting the value of the checks to Salazar’s account and instead bolsters the conclusion of the CA that petitioner recognized Salazar’s claim of ownership of the checks and acted deliberately in paying the same, contrary to ordinary banking policy and practice. It must be emphasized that the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it, for the purpose of determining their genuineness and regularity. The collecting bank, being primarily engaged in banking, holds itself out to the public as the expert on this field, and the law thus holds it to a high standard of conduct.118 The taking and collection of a bank without the proper indorsement amount to a conversion of the check by the bank.119 In depositing the check under his name, the depositor does not automatically become the owner of the amount deposited In Bank of the Philippine Islands vs. Court of Appeals and Benjamin Napiza120: “as correctly held by the Court of Appeals, in depositing the check in his name, private respondent did not become the outright owner of the amount stated therein. Under the above rule, by depositing the check with petitioner, private respondent was, in a way, merely designating petitioner as the collecting bank. This is in consonance with the rule that a negotiable instrument, such as a check, whether a manager’s check or ordinary check, is not legal tender.121 As such, after receiving the deposit, under its own rules, petitioner shall credit 117

118

119

120

Prudential Bank v. CA, G.R. No. 125536, March 16, 2000, 328 SCRA 264; Simex International [Manila], Inc. v. CA, G.R. No.88013, March 19, 1990, 183 SCRA 360; BPI v. IAC, G.R. No. 69162, February 21, 1992, 206 SCRA 408 Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corp., G.R. No. L-74917, January 20,1988, 157 SCRA 188 Associated Bank v. CA, G.R. No. 89802, May 7, 1992, 208 SCRA 465; City Trust Banking Corp. v. IAC, G.R. No. 84281, May 27, 1994, 232 SCRA 559 February 29, 2000

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the amount in private respondent’s account or infuse value thereon only after the drawee bank shall have paid the amount of the check or the check has been cleared for deposit. Again, this is in accordance with ordinary banking practices and with this Court’s pronouncement that “the collecting bank or last endorser generally suffers the loss because [it] has the duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements.”122 The rule finds more meaning in this case where the check involved is drawn on a foreign bank and therefore collection is more difficult than when the drawee bank is a local one even though the check in question is a manager’s check.123" Distinguish between ‘Drawn Against Insufficient Funds” (DAIF) and “Drawn Against Uncollected Deposit” (DAUD). ANSWER: DAIF

DAUD

Is a condition in which a depositor’s balance is inadequate for the bank to pay a check.

It means that the account has, on its face, sufficient funds but not yet available to the drawer because the deposit, usually a check, had not yet been cleared.

It subjects the depositor to possible prosecution for estafa and Bouncing Checks Law (BP 22)

It does not expose the depositor the estafa and BP 22

121

122

123

Philippine Airlines, Inc. v. Court of Appeals, L-49188, 181 SCRA 557, 568 (1990) citing Sec. 189 of the Negotiable Instruments Law; Art. 1249, Civil Code; Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44 and 21 R.C.L. 60, 61 Associated Bank v. Court of Appeals, 322 Phil. 677, 699-700 citing Bank of the Philippines Islands v. Court of Appeals, G.R. No. 102383, 216 SCRA 51, 63 (1992), Banco de Oro v. Equitable Banking Corporation, G.R. 74917, 157 SCRA 188 (1988) and Great Eastern Life Insurance Co. v. Hongkong and Shanghai Banking Corporation, 43 Phil. 678 A manager’s check is like a cashier’s check which, in the commercial world, is regarded substantially to be as good as the money it represents (Tan v. Court of Appeals, G.R. No. 108555, 239 SCRA 310, 322 (1944)

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(Bank of the Philippine Islands vs. Suarez, G.R. No. 167750, March 15, 2010, [Carpio. J.]) Prescriptive Period to bring action The statute of limitations begins to run when the bank gives the depositor notice of the payment, which is ordinarily when the check is returned to the alleged drawer as a voucher with a statement of his account,124 and an action upon a check is ordinarily governed by the statutory period applicable to the instruments in writing.125 (Philippine Commercial International Bank vs. Court of Appeals and Ford Philippines, Inc., January 29, 2001) Our laws on the matter provide that the action upon a written contract must be brought within ten years from the time the right of action accrues.126 Hence, the reckoning time for the prescriptive period begins when the instrument was issued and the corresponding check was returned by the bank to its depositor (normally a month thereafter). Applying the same rule, the cause of action for the recovery of the proceeds of Citibank Check No. SN 04867 would normally be a month after December 19, 1977, when Citibank paid the face value of the check in the amount of P4,746,114.41. Since the original complaint for the cause of action was filed on January 20, 1984, barely six years had lapsed. Thus, we conclude that Ford’s cause of action to recover the amount of Citibank Check No. SN 04867 was seasonably filed within the period provided by law. (supra)

PHILIPPINE CLEARING HOUSE ACT What is the purpose of the creation of the Philippine Clearing House Corporation? ANSWER: The Philippine Clearing House Corporation was created to facilitate the clearing of checks among member banks. (Insular Savings Bank vs. Far Eastern Bank and Trust Company, G.R. No. 141818, June 22, 2006, [Ynares-Santiago, J.]) 124

Supra note 20 at Section 605, Vda De Bataclan, et al vs. Medina, 102 Phil. 181, 186 (1957) 125 Ibid 126 Civil Code, Art. 1144

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Under its Articles of Incorporation, the PCHC provides “an effective, convenient, efficient, economical and relevant exchange and facilitate services limited to check processing and sorting by way of assisting member banks, entities in clearing checks and other clearing items as defined and existing in future Central Bank of the Philippines Circulars, memoranda, circular letters rules and regulations and policies in pursuance of Section 107 of RA 265. “Pursuant to its function involving the clearing of checks and other clearing items, the PCHC has adopted rules and regulations designed to provide member banks with a procedure whereby disputes involving the clearance of checks and other negotiable instruments undergo a process of arbitration prior to submission to the courts below. This procedure not only ensures a uniformity of rulings relating to factual disputes involving checks and other negotiable instruments but also provides a mechanism for settling minor disputes among participating and member banks who would otherwise go directly to the trial courts. While the PCHC Rules and Regulations allow appeal to the Regional Trial Courts only on questions of fact already decided by the PCHC arbitration when warranted and appropriate.”127 In Banco de Oro Savings and Mortgage Banks vs. Equitable Banking Corporation128, this Court had the occasion to rule on the validity of these rules as well as the jurisdiction of the PCHC as a forum for resolving disputes and controversies involving checks and other clearing items when it held that “the participation of two banks…in the Clearing Operations of the PCHC (was) a manifestation of its submission to its jurisdiction.”129 What is the extent of the jurisdiction of the Philippine Clearing House Corporation (PCHC)? Among the member banks of the PCHC exists a compromissoire or an arbitration agreement embedded in their contract wherein they consent that any future dispute or controversy between its PCHC participants involving any check would be submitted to the Arbitration Committee for arbitration. 127

Associated Bank vs. Court of Appeals, et al., G.R. No. 107918, June 14, 1994 128 157 SCRA 188 (1988) 129 Ibid., page 196, cited in Associated Bank vs. Court of Appeals, June 14, 1994

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The PCHC has its own Rules and Procedure for Arbitration (PCHC Rules). However, this is governed by Republic Act No. 876, also known as the Arbitration Law and supplemented by the Rules of Court. (Insular Savings Bank vs. Far Eastern Bank and Trust Company, G.R. No. 141818, June 22, 2006, [YnaresSantiago, J.]) Moreover, take note that, since the PCHC Rules came about only as a result of an agreement between and among member banks of PCHC and not by law, it cannot confer jurisdiction to the RTC. Thus, the portion of the PCHC Rules granting jurisdiction to the RTC review arbitral awards, only on questions of law, cannot be given effect. (ibid.) In the case of Associated Bank vs. Court of Appeals, et al.,130 it was held that: “[u]nder the rules and regulations of the Philippine Clearing House Corporation (PCHC), the mere act of participation of agreement by the parties to abide by its rules and regulations.131 And as a consequence of such participation, a party cannot invoke the jurisdiction of the courts over disputes and controversies which fall under the PCHC Rules and Regulations without first going through the arbitration processes laid out by the body. Since claims relating to the regularity of checks cleared by banking institutions are among those claims which should first be submitted for resolution by the PCHC’s Arbitration Committee, petitioner Associated Bank, having voluntarily bound itself to abide by such rules and regulations, is estopped from seeking relief from the Regional Trial Court on the coattails of a private claim and in the guise of a third party complaint without first having obtained a decision adverse to its claim from the said body. It cannot bypass the arbitration process on the basis of its averment that its third party complaint is inextricably linked to the original complaint in the Regional Trial Court. The applicable PCHC provisions on the question of jurisdiction provide: Sec. 3—AGREEMENT TO THESE RULES It is the general agreement and understanding, that any participant in the PCHC MICR clearing operations, by the mere act of participation, thereby manifests its

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agreement to these Rules and Regulations, and its subsequent amendments. xxx xxx xxx Sec. 36—ARBITRATIONS 36.1 Any dispute or controversy between two or more clearing participants involving any check/item thru PCHC shall be submitted to the Arbitration Committee, upon written complaint of any involved participant by filing the same with the PCHC serving the same upon the other party or parties, who shall within fifteen (15) days after receipt thereof, file with the Arbitration Committee its written answer to such written complaint and also within the same period serve the same upon the complaining participant. This period of fifteen (15) days may be extended by the Committee not more than once for another period of fifteen (15) days, but upon agreement in writing of the complaining party, said extension may before such period as the latter may agree to. Section 36.6 is even more emphatic: 26.6 The fact that a bank participates in the clearing operations of PCHC shall be deemed its written and subscribed consent to the binding effect of this arbitration agreement as if it had done so in accordance with Section 4 of the Republic Act No. 876 otherwise known as the Arbitration Law. Thus, not only do the parties manifest by mere participation their consent to these rules, but such participation is deemed (their) written and subscribed consent to the binding effect of arbitration agreements under the PCHC rules. Moreover, a participant subject to the Clearing House Rules and Regulations of the PCHC may go on appeal to any Regional Trial Courts…where the head office of any of the parties is located only after a decision or award 130 131

G.R. No. 107918, June 14, 1994, [Kapunan, J.] PCHC Rules and Regulations, Sec. 3 9hereinafter cited as Rules)

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has been rendered by the arbitration committee or arbitrator on questions of law.132 Clearly therefore, petitioner Associated Bank, by its voluntary participation and its consent to the arbitration rules cannot go directly to the Regional Trial Court when it finds it convenient to do so. The jurisdiction of the PCHC under the rules and regulations is clear, undeniable and is particularly applicable to all the parties in the third party complaint under their obligation to first seek redress of their disputes and grievances with the PCHC before going to the trial court.” Third-Party Complaints As a general rule, a trial court that has established jurisdiction over the main action also acquires jurisdiction over a third-party complaint, even if it could not have done so had the latter been filed as an independent action. This rule, however, does not apply to banks that have agreed to submit their disputes over check clearings to arbitration under the rules of the Philippine Clearing House Corporation. In that event, primary recourse should be to the PCHC Arbitration Committee, without prejudice to an appeal to the trial courts. In other words, without first resorting to the PCHC, the third-party complaint would be premature. (Allied Banking Corporation vs. Court of Appeals and Bank of the Philippine Islands, Inc., G.R. No. 123871, August 31, 1998, [Panganiban, J.:]) Illustrative Case: Allied Banking Corporation vs. Court of Appeals and Bank of the Philippine Islands, Inc. G.R. No. 123871, August 31, 1998 PANGANIBAN, J.: Hyatt Terraces Baguio issued two crossed checks drawn against Allied Banking Corp. (hereinafter, ALLIED) in favor of appellee Meszellen Commodities Services, Inc. (hereinafter, MESZELLEN). Said checks were deposited on August 5, 1980 and August 18, 1980, respectively, with the now defunct 132

Rules, Sec. 13

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

Commercial Bank and Trust Company (hereinafter, COMTRUST). Upon receipt of the above checks, COMTRUST stamped at the back thereof the warranty “All prior endorsements and/or lack of endorsements guaranteed.” After the checks were cleared through the Philippine Clearing House Corporation (hereinafter, PCHC), ALLIED BANK paid the proceeds of said checks to COMTRUST as the collecting bank. On March 17, 1981, the payee, MESZELLEN, sued the drawee, ALLIED BANK, for damages which it allegedly suffered when the value[s] of the checks were paid not to it but to some other person. Almost ten years later, or on January 10, 1991, before defendant ALLIED BANK could finish presenting its evidence, it filed a third party complaint against Bank of the Philippine Islands (hereinafter, BPI, appellee herein) as successor-in-interest of COMTRUST, for reimbursement in the event that it would be adjudged liable in the main case to pay plaintiff, MESZELLEN. The third party complaint was admitted [in] an Order dated May 16, 1991 issued by the Regional Trial Court of Pasig, Branch 162. On July 16, 1991, BPI filed a motion to dismiss said third party complaint grounded on the following: 1) that the court ha[d] no jurisdiction over the nature of the action; and 2) that the cause of action of the third party plaintiff ha[d] already prescribed. On September 16, 1991, the trial court issued an order dismissing the third party complaint. Defendant-third party plaintiff’s motion for reconsideration of this order was subsequently denied.133 Petitioner raises the following issues:134 I. The Respondent Honorable Court of Appeals erred in holding that the cause of action of the third-party complaint ha[d] already prescribed. II. The Respondent Honorable Court of Appeals erred in holding that the filing of the third party complaint should be disallowed as it would only delay the resolution of the case. 133 134

CA Decision, pp. 1-2; rollo, pp. 24-25 Petition, p. 6; rollo, p. 16

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The Court’s Ruling The petition is bereft of merit. Critical Issue: Mandatory Recourse to PCHC To buttress its claim, private respondent contends that petitioner’s remedy rests with the PCHC, of which both Allied and BPI are members, in consonance with the Clearing House Rules and Regulations which, in part, states: Sec. 38 — Arbitration Any dispute or controversy between two or more clearing participants involving any check/item cleared thru PCHC shall be submitted to the Arbitration Committee, upon written complaint of any involved participant by filing the same with the PCHC serving the same upon the other party or parties, who shall within fifteen (15) days after receipt thereof file with the Arbitration Committee its written answer to such written complaint and also within the same period serve the same upon the complaining participant, . . . . Private respondent cites Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corporation 135 and Associated Bank v. Court of Appeals,136 which upheld the right of the PCHC to settle and adjudicate disputes between member banks. In Banco de Oro, the Court ruled: The participation of the two banks, petitioner and private respondent, in the clearing operations of PCHC is a manifestation of their submission to its jurisdiction. Secs. 3 and 36.6 of the PCHC-CHRR clearing rules and regulations provide: Sec. 3. AGREEMENT TO THESE RULES. — It is the general agreement and understanding that any participant in the Philippine Clearing House Corporation, MICR clearing operations[,] by the mere 135 136

157 SCRA 188, January 20, 1988, per Gancayco, J 233 SCRA 137, June 14, 1994, per Kapunan, J

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fact of their participation, thereby manifests its agreement to these Rules and Regulations and its subsequent amendments. Sec. 36.6. (ARBITRATION) — The fact that a bank participates in the clearing operations of the PCHC shall be deemed its written and subscribed consent to the binding effect of this arbitration agreement as if it had done so in accordance with section 4 of (the) Republic Act. No. 876, otherwise known as the Arbitration Law. Further[,] Section 2 of the Arbitration Law mandates: Two or more persons or parties may submit to the arbitration of one or more arbitrators any controversy existing between them at the time of the submission and which may be the subject of any action, or the parties of any contract may in such contract agree to settle by arbitration a controversy thereafter arising between them. Such submission or contract shall be valid and irrevocable, save upon grounds as exist at law for the revocation of any contract. Such submission or contract may include question arising out of valuations, appraisals or other controversies which may be collateral, incidental, precedent or subsequent to any issue between the parties. (Emphasis supplied.) Associated Bank also disallowed a similar third-party complaint, ruling thus: Under the rules and regulations of the Philippine Clearing House Corporation (PCHC), the mere act of participation of the parties concerned in its operations in effect amounts to a manifestation of agreement by the parties to abide by its rules and regulations. As a consequence of such participation, a party cannot invoke the jurisdiction of the courts over disputes and controversies which fall under the PCHC Rules and Regulations without first going through the arbitration processes laid out by the body. Since claims

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relating to the regularity of checks cleared by banking institutions are among those claims which should first be submitted for resolution by the PCHC’s Arbitration Committee, petitioner Associated Bank, having voluntarily bound itself to abide by such rules and regulations, is estopped from seeking relief from the Regional Trial Court on the coattails of a private claim and in the guise of a third party complaint without first having obtained a decision adverse to its claim from the said body. It cannot bypass the arbitration process on the basis of its averment that its third party complaint is inextricably linked to the original complaint in the Regional Trial Court. xxx xxx xxx Clearly therefore, petitioner Associated Bank, by its voluntary participation and its consent to the arbitration rules cannot go directly to the Regional Trial Court when it finds it convenient to do so. The jurisdiction of the PCHC under the rules and regulations is clear, undeniable and is particularly applicable to all the parties in the third party complaint under their obligation to first seek redress of their disputes and grievances [from] the PCHC before going to the trial court. Finally, the contention that the third party complaint should not have been dismissed for being a necessary and inseparable offshoot of the main case over which the court a quo had already exercised jurisdiction misses the fundamental point about such pleading. A third party complaint is a mere procedural device which under the Rules of Court is allowed only with the court’s permission. It is an action “actually independent of, separate and distinct from the plaintiffs’ complaint” (s)uch that, were it not for the Rules of Court, it would be necessary to file the action separately from the original complaint by the defendant against the third party. (Emphasis supplied.) Banco de Oro and Associated Bank are clear and unequivocal: a third-party complaint of one bank against another involving a check cleared through the PCHC is unavailing, unless the third-party claimant has first exhausted the arbitral authority of the PCHC Arbitration Committee and obtained a decision from said body adverse to its claim.

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Recognizing the role of the PCHC in the arbitration of disputes between participating banks, the Court in Associated Bank further held: “Pursuant to its function involving the clearing of checks and other clearing items, the PCHC has adopted rules and regulations designed to provide member banks with a procedure whereby disputes involving the clearance of checks and other negotiable instruments undergo a process of arbitration prior to submission to the courts below. This procedure not only ensures a uniformity of rulings relating to factual disputes involving checks and other negotiable instruments but also provides a mechanism for settling minor disputes among participating and member banks which would otherwise go directly to the trial courts.” We defer to the primary authority of PCHC over the present dispute, because its technical expertise in this field enables it to better resolve questions of this nature. This is not prejudicial to the interest of any party, since primary recourse to the PCHC does not preclude an appeal to the regional trial courts on questions of law. Section 13 of the PCHC Rules reads: Sec. 13. The findings of facts of the decision or award rendered by the Arbitration Committee or by the sole Arbitrator as the case may be shall be final and conclusive upon all the parties in said arbitration dispute. The decision or award of the Arbitration Committee or of the Sole Arbitrator shall be appealable only on questions of law to any of the Regional Trial Courts in the National Capital Judicial Region where the Head Office of any of the parties is located. The appellant shall perfect his appeal by filing a notice of appeal to the Arbitration Secretariat and filing a Petition with the Regional Trial Court of the National Capital Region . . . . Furthermore, when the error is so patent, gross and prejudicial as to constitute grave abuse of discretion, courts may address questions of fact already decided by the arbitrator.137 137

138

Asia Construction and Development Corporation v. Construction Industry Arbitration Commission, 218 SCRA 529, February 8, 1993; Sime Darby v. Deputy Administrator, 180 SCRA 177, December 15, 1989 Regalado, Remedial Law Compendium, Vol. 1, 5th revised ed., p. 95; Republic v. Central Surety and Insurance Co., 25 SCRA 641, October 26, 1968; Eastern Assurance & Surety Corporation v. Cui, 105 SCRA 622, July 20, 1981; Talisay-Silay Milling Co. Inc. and J. Amado Araneta v. CIR and Central Azucarera del Danao, 18 SCRA 894, November 29, 1966

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We are not unaware of the rule that a trial court, which has jurisdiction over the main action, also has jurisdiction over the third-party complaint, even if the said court would have had no jurisdiction over it had it been filed as an independent action.138 However, this doctrine does not apply in the case of banks, which have given written and subscribed consent to arbitration under the auspices of the PCHC. By participating in the clearing operations of the PCHC, petitioner agreed to submit disputes of this nature to arbitration. Accordingly, it cannot invoke the jurisdiction of the trial courts without a prior recourse to the PCHC Arbitration Committee. Having given its free and voluntary consent to the arbitration clause, petitioner cannot unilaterally take it back according to its whim. In the world of commerce, especially in the field of banking, the promised word is crucial. Once given, it may no longer be broken. Upon the other hand, arbitration as an alternative method of dispute resolution is encouraged by this Court. Aside from unclogging judicial dockets, it also hastens solutions especially of commercial disputes. In view of the foregoing, a discussion of the issues raised by the petitioners is unnecessary. WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioner. SO ORDERED. Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur. Does PCHC’s jurisdiction extend to non-negotiable checks? As provided in the articles of incorporation of PCHC its operation extend to “clearing checks and other clearing items.” No doubt transactions on non-negotiable checks are within the ambit of its jurisdiction. x x x The term check as used in the said Articles of Incorporation of PCHC can only connote checks in general use in commercial and business activities. It cannot be conceived to be limited to negotiable checks only. Checks are used between banks and bankers and their customers, and are

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designed to facilitate banking operations. It is of the essence to be payable on demand, because the contract between the banker and the customer is that the money is needed on demand.139 (Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation, G.R. No. 74917, January 20, 1988, [Gancayco, J.]) Viewing these provisions (Sec. 3 and 36.6 PCHC-CHRR clearing rules and regulations; Sec. 2 Arbitration Law; Sec. 21 of the same rules), the conclusion is clear that the PCHC Rules and Regulations should not be interpreted to be applicable only to checks which are negotiable instruments but also to nonnegotiable instruments and that the PCHC has jurisdiction over this case even as the checks subject of this litigations are admittedly non-negotiable. (supra) What may be some of the judicial remedies available to the losing party in case the Philippine Clearing House Commission Arbitration Committee denies its motion for reconsideration? ANSWER: a. It may petition the proper Regional Trial Court to issue an order vacating the award on the grounds provided for under Section 24 of the Arbitration Law; b. File a petition for review under Rule 43 of the Rules of Court with the Court of Appeals on questions of fact, of law, or mixed questions of fact and law; or c. File a petition for certiorari under Rule 45 of the Rules of Court on the ground that the Arbitrator Committee acted without or in excess of jurisdiction or with grave abuse of discretion amounting to lack or excess of jurisdiction. (Insular Savings Bank vs. Far Eastern Bank and Trust Company, G.R. No. 141818, June 22, 2006, [Ynares-Santiago, J.]) What are the grounds under Section 24 of the Arbitration Law for the issuance of the Regional Trial Court of an order to vacate the award granted by the Philippine Clearing House Corporation Arbitration Committee?

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ANSWER: SEC. 24. Grounds for vacating award. – In any one of the following cases, the court must make an order vacating the award upon the petition of any party to the controversy when such party proves affirmatively that in the arbitration proceedings: (a) The award was procured by corruption, fraud or other undue means; or (b) That there was evident partiality or corruption in the arbitrators or any of them; or (c) That the arbitrators were guilty of misconduct in refusing to postpone the hearing upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; that one or more of the arbitrators was disqualified to act as such under section nine hereof, and willfully refrained from disclosing such disqualification or of any other misbehavior by which the rights of any party have been materially prejudiced; or (d) That the arbitrators exceeded their powers, or so imperfectly executed them, that a mutual, final and definite award upon the subject matter submitted to them was not made. xxxx (Insular Savings Bank vs. Far Eastern Bank and Trust Company, G.R. No. 141818, June 22, 2006, [Ynares-Santiago, J.]) BATAS PAMBANSA BILANG 22 (BOUNCING CHECKS LAW) Reason for the law BP 22 or the Bouncing Checks Law was enacted for the specific purpose of addressing the problem of the continued issuance and circulation of unfunded checks by irresponsible persons. To stem the harm caused by these bouncing checks to the community, BP 22 considers the mere act of issuing an unfunded check as an offense not only against property but also

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against public order.140 The purpose of BP 22 in declaring the mere issuance of a bouncing check as malum prohibitum is to punish the offender in order to deter him and others from committing the offense, to isolate him from society, to reform and rehabilitate him, and to maintain social order.141 The penalty is stiff. BP 22 imposes the penalty of imprisonment for at least 30 days or a fine of up to double the amount of the check or both imprisonment and fine. (Mitra vs. People, G.R. No. 191404, July 5, 2010, [Mendoza, J.:]) Elements of violation of Section 1 of Batas Pambansa Bilang 22 a) The making, drawing, and issuance of any check to apply for account or for value; b) The knowledge of the maker, drawer, or issuer that at the time of issue he does not have sufficient funds in or credit with the drawee bank for the payment of the check in full upon its presentment; and c) The subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or dishonor for the same reason had not the drawer, without any valid cause, ordered the bank to stop payment. (Ting vs. CA, 398 Phil. 481 (2000); Sycip, Jr. vs. CA, G.R. No. 125059, March 17, 2000, 328 SCRA 447. See Batas Pambansa Bilang 22 (1979), Section 1, cited in Lunaria vs. People of the Philippines, G.R. No. 160127, November 11, 2008) Illustrative Case: Eumelia Mitra vs. People of the Philippines and Felicisimo Tarcelo G.R. No. 191404, July 5, 2010 MENDOZA, J.: FACTS:

Petitioner Eumelia R. Mitra (Mitra) was the Treasurer, and Florencio L. Cabrera, Jr. (now deceased) was the President, of Lucky Nine Credit Corporation (LNCC), a corporation engaged in money lending activities.

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Between 1996 and 1999, private respondent Felicisimo S. Tarcelo (Tarcelo) invested money in LNCC. As the usual practice in money placement transactions, Tarcelo was issued checks equivalent to the amounts he invested plus the interest on his investments. When Tarcelo presented these checks for payment, they were dishonored for the reason “account closed.” Tarcelo made several oral demands on LNCC for the payment of these checks but he was frustrated. Constrained, in 2002, he caused the filing of seven informations for violation of Batas Pambansa Blg. 22 (BP 22) in the total amount of P925, 000.00 with the MTCC in Batangas City. ISSUES: Whether or not the elements of violation of Batas Pambansa Bilang 22 must be proved beyond reasonable doubt as against the corporation who owns the current account where the subject checks were drawn before liability attaches to the signatories? RULING: A check is a negotiable instrument that serves as a substitute for money and as a convenient form of payment in financial transactions and obligations. The use of checks as payment allows commercial and banking transactions to proceed without the actual handling of money, thus, doing away with the need to physically count bills and coins whenever payment is made. It permits commercial and banking transactions to be carried out quickly and efficiently. But the convenience afforded by checks is damaged by unfunded checks that adversely affect confidence in our commercial and banking activities, and ultimately injure public interest. BP 22 or the Bouncing Checks Law was enacted for the specific purpose of addressing the problem of the continued issuance and circulation of unfunded checks by irresponsible persons. To stem the harm caused by these bouncing checks to the community, BP 22 considers the mere act of issuing an unfunded check as an offense not only against property but also against

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public order. The purpose of BP 22 in declaring the mere issuance of a bouncing check as malum prohibitum is to punish the offender in order to deter him and others from committing the offense, to isolate him from society, to reform and rehabilitate him, and to maintain social order. The penalty is stiff. BP 22 imposes the penalty of imprisonment for at least 30 days or a fine of up to double the amount of the check or both imprisonment and fine. Mitra posits in this petition that before the signatory to a bouncing corporate check can be held liable, all the elements of the crime of violation of BP 22 must first be proven against the corporation. The corporation must first be declared to have committed the violation before the liability attaches to the signatories of the checks. The Court finds itself unable to agree with Mitra’s posture. The third paragraph of Section 1 of BP 22 reads: “Where the check is drawn by a corporation, company or entity, the person or persons who actually signed the check in behalf of such drawer shall be liable under this Act.” This provision recognizes the reality that a corporation can only act through its officers. Hence, its wording is unequivocal and mandatory - that the person who actually signed the corporate check shall be held liable for a violation of BP 22. This provision does not contain any condition, qualification or limitation. In the case of Llamado v. Court of Appeals,142 the Court ruled that the accused was liable on the unfunded corporate check which he signed as treasurer of the corporation. He could not invoke his lack of involvement in the negotiation for the transaction as a defense because BP 22 punishes the mere issuance of a bouncing check, not the purpose for which the check was issued or in consideration of the terms and conditions relating to its issuance. In this case, Mitra 142

337 Phil. 153, 160 (1997)

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signed the LNCC checks as treasurer. Following Llamado, she must then be held liable for violating BP 22. Another essential element of a violation of BP 22 is the drawer’s knowledge that he has insufficient funds or credit with the drawee bank to cover his check. Because this involves a state of mind that is difficult to establish, BP 22 creates the prima facie presumption that once the check is dishonored, the drawer of the check gains knowledge of the insufficiency, unless within five banking days from receipt of the notice of dishonor, the drawer pays the holder of the check or makes arrangements with the drawee bank for the payment of the check. The service of the notice of dishonor gives the drawer the opportunity to make good the check within those five days to avert his prosecution for violating BP 22. Mitra alleges that there was no proper service on her of the notice of dishonor and, so, an essential element of the offense is missing. This contention raises a factual issue that is not proper for review. It is not the function of the Court to re-examine the finding of facts of the Court of Appeals. Our review is limited to errors of law and cannot touch errors of facts unless the petitioner shows that the trial court overlooked facts or circumstances that warrant a different disposition of the case or that the findings of fact have no basis on record. Hence, with respect to the issue of the propriety of service on Mitra of the notice of dishonor, the Court gives full faith and credit to the consistent findings of the MTCC, the RTC and the CA. The defense postulated that there was no demand served upon the accused, said denial deserves scant consideration. Positive allegation of the prosecution that a demand letter was served upon the accused prevails over the denial made by the accused. Though, having denied that there was no demand letter served on April 10, 2000, however, the prosecution positively alleged and proved that the questioned

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demand letter was served upon the accused on April 10, 2000, that was at the time they were attending Court hearing before Branch I of this Court. In fact, the prosecution had submitted a Certification issued by the other Branch of this Court certifying the fact that the accused were present during the April 10, 2010 hearing. With such straightforward and categorical testimony of the witness, the Court believes that the prosecution has achieved what was dismally lacking in the three (3) cases of Betty King, Victor Ting and Caras evidence of the receipt by the accused of the demand letter sent to her. The Court accepts the prosecution’s narrative that the accused refused to sign the same to evidence their receipt thereof. To require the prosecution to produce the signature of the accused on said demand letter would be imposing an undue hardship on it. As well, actual receipt acknowledgment is not and has never been required of the prosecution either by law or jurisprudence. [emphasis supplied] With the notice of dishonor duly served and disregarded, there arose the presumption that Mitra and Cabrera knew that there were insufficient funds to cover the checks upon their presentment for payment. In fact, the account was already closed. To reiterate the elements of a violation of BP 22 as contained in the above-quoted provision, a violation exists where: 1. a person makes or draws and issues a check to apply on account or for value; 2. the person who makes or draws and issues the check knows at the time of issue that he does not have sufficient funds in or credit with the drawee bank for the full payment of the check upon its presentment; and 3. the check is subsequently dishonored by the drawee bank for insufficiency of funds or credit, or would have been dishonored for the same reason had not

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the drawer, without any valid reason, ordered the bank to stop payment. There is no dispute that Mitra signed the checks and that the bank dishonored the checks because the account had been closed. Notice of dishonor was properly given, but Mitra failed to pay the checks or make arrangements for their payment within five days from notice. With all the above elements duly proven, Mitra cannot escape the civil and criminal liabilities that BP 22 imposes for its breach. Ways of violating B.P. Blg. 22 There are two (2) ways of violating B.P. Blg. 22: (1) by making or drawing and issuing a check to apply on account or for value knowing at the time of issue that the check is not sufficiently funded; and (2) by having sufficient funds in or credit with the drawee bank at the time of issue but failing to keep sufficient funds therein or credit with said bank to cover the full amount of the check when presented to the drawee bank within a period of ninety (90) days.143 (Wong vs. Court of Appeals, G.R. No. 117857, February 2, 2001) Failure of the drawer to maintain funds in his bank to cover the check for 90 days Nowhere in the said provision does the law require a maker to maintain funds in his bank account for only 90 days. Rather, the clear import of the law is to establish a prima facie presumption of knowledge of such insufficiency of funds under the following conditions (1) presentment within 90 days from date of the check, and (2) the dishonor of the check and failure of the maker to make arrangements for payment in full within 5 banking days after notice thereof. That the check must be deposited within ninety (90) days is simply one of the conditions for the prima facie presumption of knowledge of lack of funds to arise. It is not an element of the offense. Neither does it discharge petitioner from his duty to maintain sufficient funds in the account within a reasonable time thereof. (Wong vs. Court of Appeals, G.R. No. 117857, February 2, 2001) 143

Section 1, B.P. Blg. 22

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Lack of criminal intent irrelevant; gravamen of the offense It bears repeating that the lack of criminal intent of the part of the accused is irrelevant.144 The law has made the mere act of issuing a worthless check a malum prohibitum, an act proscribed by legislature for being deemed pernicious and inimical to public welfare.145 In fact, even in cases where there had been payment, through compensation or some other means, there could still be prosecution for violation of B.P. 22. The gravamen of the offense under this law is the act of issuing a worthless check that is dishonored upon its presentment for payment, not the nonpayment of the obligation. 146 (Lunaria vs. People of the Philippines, G.R. No. 160127, November 11, 2008) (emphasis supplied) Congress, in the exercise of police power, enacted BP 22 in order to maintain public confidence in commercial transactions.147 (Spouses Yap vs. First e-Bank Corporation, G.R. No. 169889, September 29, 2009, [Corona, J.], citing Lozano vs. Martinez) Intention of the parties in the issuance of the check immaterial; criminal intent of the issuer of the check immaterial In Abarquez vs. Court of Appeals148, it was held that: “[t]he fact that petitioner issued the subject checks knowing the

144

145

146

147

148

People v. Lo Ho Wing, G.R. No. 88017, 21 January 1991, 193 SCRA 122, 130. See Macalalag v. People, G.R. No. 164358, December 20, 2006, 511 SCRA 400; Tan v. Mendez, 432 Phil. 760 (2002); People v. Laggui, G.R. Nos. 76262-63, March 16, 1989, 171 SCRA 305, 311; People v. Manzanilla, G.R. Nos. L-66003-04, 11 December 1987, 156 SCRA 279, 283 Macalalag v. People, G.R. No. 164358, December 20, 2006, 511 SCRA 400; Tan v. Mendez, 432 Phil. 760 (2002); People v. Laggui, G.R. Nos. 76262-63, March 16, 1989, 171 SCRA 305, 311; People v. Manzanilla, G.R. Nos. L-66003-04, December 11, 1987, 156 SCRA 279, 283 Macalalag v. People, G.R. No. 164358; December 20, 2006, 511 SCRA 400; Tan v. Mendez, 432 Phil. 760 (2002); Lozano v. Martinez, G.R. No. L63419, December 18, 1986, 146 SCRA 323, 338 The gravamen of the offense punishable by BP 22 is the act of making and issuing a worthless check or a check that is dishonored upon its presentation for payment. It is not the nonpayment of an obligation which the law punishes. The law G.R. No. 148557, August 7, 2003

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inadequacy of his funds in the bank to cover said checks makes him liable under B.P. 22. As elaborated in Meriz vs. People149 “The Court has consistently declared that the cause or reason for the issuance of the check is inconsequential in determining criminal culpability under B.P. 22. The Court has since said that a check issued as an evidence of a debt, although not intended for encashment, has the same effect like any other check and must thus be held to be within the contemplation of B.P. 22. Once a check is presented for payment, the drawee bank gives it the usual course whether issued in payment of an obligation or just as a guaranty of an obligation. B.P. 22 does not concern itself with what might actually be envisioned by the parties, its primordial intention being instead to ensure the stability and commercial value of checks as being virtual substitutes for currency. It is a policy that can easily be eroded if one has yet to determine the reason for which checks are issued, or the terms and conditions for their issuance, before an appropriate application of legislative enactment can be made. The gravamen of the offense under B.P. 22 is the act of making or issuing a worthless check or a check that is dishonored upon presentment for payment. The act effectively declares the offense to be one of malum prohibitum. The only valid query then is whether the law has been breached, i.e., by the mere act of issuing a bad check, without so much regard as to the criminal intent of the issuer.” More so, in the case of Cruz vs. Court of Appeals,150 where it was held that: When a check is presented for payment, the drawee bank will generally accept the same regardless of whether it was issued in payment of an obligation or merely to guarantee the said obligation. What the law punishes is the issuance of a bouncing check151 not the purpose for which it was issued nor the term and conditions relating to its issuance. 149 150 151

Pp. 531-532 G.R. No. 108738, June 17, 1994, [Kapunan, J.:] Lozano vs. Martinez, 146 SCRA 523; People vs. Veridiano II, 132 SCRA 523

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The mere act of issuing a worthless check is malum prohibitum.152 This point has been made clear by this Court, thus: It is now settled that Batas Pambansa Bilang 22 applies even in cases where dishonored checks are issued merely in the form of a deposit or a guarantee. The enactment in question does not make any distinction as to whether the checks within its contemplation are issued in payment of an obligation or merely to guarantee the said obligation. In accordance with the pertinent rule of statutory construction, inasmuch as the law has not made any distinction in this regard, no such distinction can be made by means of interpretation or application. Furthermore, the history of the enactment of subject statute evinces the definite legislative intent to make the prohibition all-embracing, without making any exception from the operation thereof in favor of a guarantee. This intent may be gathered from the statement of the sponsor of the bill (Cabinet Bill No. 9) which was enacted later into Batas Pambansa Bilang 22, when it was introduced before the Batasan Pambansa, that the bill was introduced to discourage the issuance of bouncing checks, to prevent checks from becoming “useless scraps of paper” and to restore respectability to checks, all without distinction as to the purpose of the issuance of the checks. The legislative intent as above said is made all the more clear when it is considered that while the original text of Cabinet Bill No. 9, supra, had contained a proviso excluding from the coverage of the law a check issued as a mere guarantee, the final version of the bill as approved and enacted by the Committee on the Revision of Laws in the Batasan deleted the abovementioned qualifying proviso deliberately for the purpose of making the enforcement of the act more effective (Batasan Record, First Regular Session, December 4, 1978, Volume II, pp.1035-1036).

152

Que vs. People, 154 SCRA 160

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Consequently, what are important are the facts that the accused had deliberately issued the checks in question to cover accounts and that the checks in question to cover accounts and that the checks were dishonored upon presentment regardless of whether or not the accused merely issued the checks as a guarantee. (pp. 4-5, Dec. IAC) [pp. 37-38, Rollo].153 The importance of arresting the proliferation of worthless checks need not be underscored. The mischief created by unfunded checks in circulation is injurious not only to the payee or holder, but to the public as well. This harmful practice “can very well pollute the channels of trade and commerce, injure the banking system and eventually hurt the welfare of society and the public interest.”154" Knowledge of the payee of the insufficiency or lack of funds of the drawer immaterial The knowledge of the payee of the insufficiency or lack of material funds of the drawer with the drawee bank is immaterial as deceit is not an essential element of an offense penalized by B.P. 22. The gravamen of the offense is the issuance of a bad check, hence, malice and intent in the issuance thereof is inconsequential.155 (Ty vs. People of the Philippines, G.R. No. 149275, September 27, 2004) (emphasis supplied) An essential element of the offense is “knowledge” on the part of the maker or drawer of the check of the insufficiency of his funds in or credit with the bank to cover the check upon its presentment. Since this involves a state of mind difficult to establish, the statute itself creates a prima facie presumption of such knowledge where payment of the check “is refused by the drawee because of insufficient funds in or credit with such bank when presented within ninety (90) days from the date of the check.” To mitigate the harshness of the law in its application, the statute provides that such presumption shall not arise if within five (5) banking days from receipt of the notice of dishonor, the maker or drawer makes arrangements for payment of the check by the bank 153 154 155

Id., pp. 164-165 Lozano vs. Martinez, supra, p. 340 Cruz v. Court of Appeals, G.R. No. 108738, 17 June 1994, 233 SCRA 301

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or pays the holder the amount of the check.156 (Wong vs. Court of Appeals, G.R. No. 117857, February 2, 2001) No independent civil action There is no independent civil action to recover civil liability arising from the issuance of an unfunded check prohibited and punished under Batas Pambansa Bilang 22 (BP 22). (Heirs of Eduardo Simon vs. Chan and Court of Appeals, G.R. No. 157547, February 23, 2011, [Bersamin, J.]) “The Supreme Court has settled the issue of whether or not a violation of BP 22 can give rise to civil liability in Banal v. Judge Tadeo, Jr.,157 holding: xxx Article 20 of the New Civil Code provides: Every person, who contrary to law, willfully or negligently causes damage to another, shall indemnify the latter for the same. Regardless, therefore, of whether or not a special law so provides, indemnification of the offended party may be had on account of the damage, loss or injury directly suffered as a consequence of the wrongful act of another. The indemnity which a person is sentenced to pay forms an integral part of the penalty imposed by law for the commission of a crime (Quemel v. Court of Appeals, 22 SCRA 44, citing Bagtas v. Director of Prisons, 84 Phil. 692). Every crime gives rise to a penal or criminal action for the punishment of the guilty party, and also to civil action for the restitution of the thing, repair of the damage, and indemnification for the losses (United States v. Bernardo, 19 Phil. 625) xxx Civil liability to the offended party cannot thus be denied. The payee of the check is entitled to receive the payment of money 156 157

Lozano vs. Martinez, 146 SCRA 323, 330-331 (1986) G.R. No. L-78911, December 11, 1987, 156 SCRA 325

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for which the worthless check was issued. Having been caused the damage, she is entitled to recompense. Surely, it could not have been the intendment of the framer of Batas Pambansa Blg. 22 to leave the offended party defrauded and empty-handed by excluding the civil liability of the offender, giving her only the remedy, which in many cases results in a Pyrrhic Victory, of having to file a separate civil suit. To do so may leave the offended party unable to recover even the face value of the check due her, thereby unjustly enriching the errant drawer at the expense of the payee. The protection which the law seeks to provide would, therefore, be brought to naught.” (supra) Notice of dishonor essential Both the spirit and letter of the Bouncing Checks Law require, for the act to be punished under said law, not only that the accused issued a check that was dishonored, but that likewise the accused was actually notified in writing of the fact of dishonor. The consistent rule is that penal statutes have to be construed strictly against the State and liberally in favor of the accused.158 (Abarquez vs. Court of Appeals, G.R. No. 148557, August 7, 2003, published in The New Philippine Law Report, Vol. XXXI, No. 8, August 2003, page 21) (emphasis supplied) Proof of receipt of the notice of dishonor of drawer must be clearly established In James Svendsen vs. People of the Philippines,159 citing Rico v. People of the Philippines,160 this Court held: “x x x [I]f x x x notice of non-payment by the drawee bank is not sent to the maker or drawer of the bum check, or if there is no proof as to when such notice was received by the drawer, then the presumption of knowledge as provided in Section 2 of B.P. 22 cannot arise, since there would simply be no way of reckoning the crucial five-day period.

158

159 160

Domagasang vs. CA, G.R. No. 139292, 5 December 2000, 347 SCRA 75, 83 G.R. No. 175381, February 26, 2008 440 Phil. 540 (2002)

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x x x In recent cases, we had the occasion to emphasize that not only must there be a written notice of dishonor or demand actually received by the drawer of a dishonored check, but there must also be proof of receipt thereof that is properly authenticated, and not mere registered receipt and/ or return receipt. Thus, as held in Domagsang vs. Court of Appeals, while Section 2 of B.P. 22 indeed does not state that the notice of dishonor be in writing, this must be taken in conjunction with Section 3 of the law, i.e., “that where there is no sufficient funds in or credit with such drawee bank, such fact shall always be explicitly stated in the notice of dishonor or refusal”. A mere oral notice or demand to pay would appear to be insufficient for conviction under the law. In our view, both the spirit and letter of the Bouncing Checks Law require for the act to be punished thereunder not only that the accused issued a check that is dishonored, but also that the accused has actually been notified in writing of the fact of dishonor. This is consistent with the rule that penal statutes must be construed strictly against the state and liberally in favor of the accused. x x x In fine, the failure of the prosecution to prove the existence and receipt by petitioner of the requisite written notice of dishonor and that he was given at least five banking days within which to settle his account constitutes sufficient ground for his acquittal.161 (Italics in the original; underscoring and emphasis omitted) The evidence for the prosecution failed to prove the second element. While the registry receipt,162 which is said to cover the letter-notice of dishonor and of demand sent to petitioner, was presented, there is no proof that he or a duly authorized agent received the same. Receipts for registered letters including return receipts do not themselves prove receipt; they must be properly authenticated to serve as proof of receipt of the letters.163 Thus in Ting v. Court of Appeals,164 this Court observed: 161 162 163 164

Id. At 554-555 MeTC records, p. 49 Supra note 440 Phil. 540 (2002) at 540-555 398 Phil. 481 (2000)

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x x x All that we have on record is an illegible signature on the registry receipt as evidence that someone received the letter. As to whether this signature is that of one of the petitioners or of their authorized agent remains a mystery. From the registry receipt alone, it is possible that petitioners or their authorized agent did not receive the demand letter. Possibilities, however, cannot replace proof beyond reasonable doubt.165 However, apparently, a contrary ruling was laid down in the subsequent case of Eumelia Mitra vs. People of the Philippines (G.R. No. 191404, July 5, 2010), wherein it was held that: “positive allegation of the prosecution that a demand letter was served upon the accused prevails over the denial made by the accused. x x x The court accepts the prosecution’s narrative that the accused refused to sign to evidence their receipt thereof. To require the prosecution to produce the signature of the accused on said demand letter would be imposing an undue hardship on it. x x x As well, actual receipt acknowledgment is not and has never been required of the prosecution either by law or jurisprudence.” As the rule now stands, the Mitra case is controlling. Payment as a matter of defense in B.P. 22 cases In the Abarquez case, the Supreme Court laid down the following doctrines: The prima facie presumption that the drawer has knowledge of the insufficiency of funds or credit at the time of the issuance, or on the payment for presentment, of the check may be rebutted by payment of the value of the check either by the drawer or by the drawee bank within five banking days from notice of the dishonor given by the drawer. The payment thus becomes a complete defense regardless of the strength of the evidence offered by the prosecution. It must be presupposed, then, that the issuer received a notice of dishonor and that, within five days from receipt thereof, he failed to pay the amount of the check or to make arrangement for its payment.166

165 166

Id. At 494 Meriz vs. People, p. 533

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In Caras vs. Court of Appeals167, we note that the law provides for a prima facie rule of evidence. Knowledge of insufficiency of funds in or credit with the bank is presumed from the act of making, drawing, and issuing a check payment of which is refused by the drawee bank for insufficiency of funds when presented within 90 days from the date of issue. However, this presumption is rebutted when it is shown that the maker or drawer pays or makes arrangements for the payment of the check within five banking days after receiving notice that such check had been dishonored. Thus, it is essential for the maker or drawer to be notified of the dishonor of her check, so he could pay the value thereof or make arrangements for its payment within the period prescribed by law. In Griffith vs. Court of Appeals168, we held that: “While we agree with the private respondent that the gravamen of violation of B.P. 22 is the issuance of worthless checks that are dishonored upon their presentment for payment, we should not apply penal laws mechanically. We must find if the application of the law is consistent with the purpose and the reason for the law. Ratione cessat lex, et cessat lex (When the reason for the law ceases, the law ceases.) It is not the letter alone but the spirit of the law also that give it life. This is especially so in this case where a debtor’s criminalization would not serve the ends of justice but in fact subvert it. The creditor having collected already more than a sufficient amount to cover the value of the checks for payment of rentals, via auction sale, we find that holding the debtor’s president to answer for a criminal offense under B.P. 22 two years after said collection, is no longer tenable nor justified by law or equitable consideration.” Matters to be proved by the prosecution in BP 22 cases Under Batas Pambansa Bilang 22 (BP 22), the prosecution must prove not only that the accused issued a check that was subsequently dishonored. It must also [be] established that the accused was actually notified that the check was dishonored, and that he or she failed, within five banking days from receipt of notice,

167 168

G.R. No. 129900, 2 October 2001, 366 SCRA 371, 380 G.R. No. 129764, 12 March 2002

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to pay the holder of the check the amount due therein or to make arrangement for its payment. Absent proof that the accused received such notice, a prosecution for violation of the Bouncing Check Law cannot prosper. (Betty King vs. People of the Philippines, G.R. No. 131540, December 2, 1999, [Panganiban, J.])

I. FORM AND INTERPRETATION Section 1. Form of negotiable instruments. - An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. Notes: Parties to Negotiable Instruments: In sum, parties to negotiable instruments may be primary, or secondary or incidental. Primary parties are those which are the primary participants to the creation of a negotiable instrument (e.g., maker, drawer, payee, drawee/acceptor). Secondary or incidental parties are those which came in or become involved only after the instrument is negotiated or transferred to a third person (e.g., indorsers, indorsees). They may also be classified as parties primarily liable and parties secondarily liable.

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The person “primarily” liable on an instrument is the person who, by the terms of the instrument, is absolutely required to pay the same. All other parties are “secondarily” liable. (Sec. 192) Parties to a Promissory Note, include: a) Maker; b) Payee Parties to a Bill of Exchange, include: a) Drawer; b) Drawee; c) Payee At the onset, it ought to be proper for us to define the terms that the reader would encounter throughout the entire study of this subject matter, as specified in Section 191—that unless the contract otherwise requires: “Acceptance” means an acceptance completed by delivery or notification; ”Action” includes counterclaim and set-off; ”Bank” includes any person or association of persons carrying on the business of banking, whether incorporated or not; ”Bearer” means the person in possession of a bill or note which is payable to bearer; ”Bill” means bill of exchange, and “note” means negotiable promissory note; ”Delivery” means transfer of possession, actual or constructive, from one person to another; ”Holder” means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof; ”Indorsement” means an indorsement completed by delivery;

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”Instrument” means negotiable instrument; ”Issue” means the first delivery of the instrument, complete in form, to a person who takes it as a holder; ”Person” includes a body of persons, whether incorporated or not; ”Value” means valuable consideration; ”Written” includes printed, and “writing” includes print. The law does not require any particular form, either as to a bill of exchange or promissory note, or other negotiable instrument, and while it would be unwise to depart from the approved forms in vogue amongst merchants, yet the law respects substance more than form; and where the intention appears to assume the obligations which devolve upon drawers and makers of negotiable instruments, it will be enforced, although not evidenced in the usual commercial form. Thus, an order written under a note, “Please pay the above note, and hold it against me in our settlement,” signed by the drawer and accepted by the drawee, has been held a good bill;169 and so, also, it has been held that a like order written under an account is a bill of exchange.170 And where an indorsement was made on a bond, ordering the contents to be paid to order for value received, it was held a good bill.171 (Daniel, Elements of the Law of Negotiable Instruments Law, page 35) Must be in Writing As a substitute for money, a negotiable instrument, similar to money, must be written or contained in a medium, in such a way that it could by physically transferrable from hand to hand. Strictly speaking, there are no verbal negotiable instruments. It may be written on any paper, cloth, board, parchment, wood, plastic, so long as it has a semi-permanent character, so as to manifest the intent of the maker or drawer to create a 169 170 171

Leonard v. Mason, 1 Wend. 252 Hoyt v. Lynch, 2 Sandf. 328 Bay v. Frazer, 1 Bay, 66

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negotiable instrument, capable of being negotiated or transferred from one person to another. Otherwise, if such is incapable of being physically transferred its negotiable character would be defeated. “[T]his “writing” can be handwritten, printed, or typewritten, or it can consists of “any other intentional [method of] reduction to tangible form.” (Business Law, Howell, p. 412) For a negotiable instrument to operate practically as either a substitute for cash or a credit device, or both, it is essential that the instrument can be easily transferable without danger of being uncollectible.172 The whole of the bill or note must be expressed in writing. Whether the instrument be a bill of exchange or a promissory note, or otherwise, and whether or not it be negotiable, must be determined by its face, without reference to any other source.173 Signed by the Maker or Drawer Section 1 requires that the instrument be signed either by the maker or drawer. This is in line with the provision that ‘No person is liable on the instrument whose signature does not appear thereon’.174 Moreover, a negotiable instrument being essentially a contract requires that there be consent of the maker or drawer, since they are the ones who start with the creation and initial delivery of an instrument. Consent is thus, manifested by their affixing their signature on the instrument. The term signed means “any symbol executed or adopted by a party with [the] present intention to authenticate a writing.” Thus a signing can occur through the use of one’s initials, a rubber stamp, or some other type of “signature”, such as the mark X, so long as it is made with the intention of giving assent to the writing’s terms. (ibid, p. 413) It does not matter upon what portion of the instrument, the maker or drawer affixes his name, so long that he signs as drawer 172 173 174

Miller & Jentz, Business Law Today, 9th Edition, 2011, page 391 Daniel on Negotiable Instrument, 77; Gibbon v. Scott, 2 Stark, 268 Sec. 18, NIL

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or maker.175 It is not material whether the writing is in pencil or ink,176 although as matter of permanence and security, ink is, of course, preferable. And the name may be printed a well as written, though, in such cases, it cannot prove itself, and must be shown to have been adopted and used by the party as his signature.177 If another sign the name of the party in his presence and at his request, it is the same as if he did it himself;178 and if another sign the party’s name by verbal or other authority, it is sufficient.179 The full name may be written; and at least the surname should appear, and generally does. But this is not indispensable—the initials are sufficient,180 and any mark which the party uses to indicate his intention to bind himself will be as effectual as his signature,181 whether there be a certificate of witnesses on the instrument or not.182 But, of course, a mark does not prove itself like a signature, although it is an adminicle of proof.183 Any peculiarity in it may be shown as evidence of proof;184 but, unless there be an attesting witness, or one who saw it written, or is familiar with its characteristics, the plaintiff cannot recover.185 Nor it is necessary that the substance upon which the instrument is written should be paper—parchment, cloth, leather, or any other substitute for paper will suffice.186 (Daniel, Elements of the Law of Negotiable Instruments, page 35-36) Must Contain Unconditional Promise or Order In perspective, a negotiable instrument operates as an undertaking of a person, be it a maker, who promises to pay, or a drawer, which in turn, orders another person to pay on his behalf, that is made without any condition to another person, identified as the payee, and receiving anything of value in exchange thereof.

175

Clason v. Bailey, 14 Johns, 484; Schmidt v. Schmaeller, 45 Mo. 502 Reed v. Roark, 14 Tex. 329; Closson v. Stearns, 4 Vt. 11 177 Brown v. Butchers’ Bank, 6 Hill, 443; Schneider v. Norris, 2 Maule & S. 286 178 Sager v. Tupper, 42 Mich. 605 179 Daniel on Negotiable Instruments, page 274, 299 180 Merchants’ Bank v. Spicer, 6 Wend. 443; 1 Parsons on Notes and Bills, 36 181 Lyons v. Holmes, 11 S.C. 429 182 Willoughby v. Moulton, 47 N.H. 205; Shank v. Butach, 28 Ind. 19 183 Hilborn v. Alford, 22 Cal. 482; Flowers v. Billing, 45 Ala. 488 184 George v. Surrey, 1 Moody & M. 516; 2 Parsons on Notes and Bills, 480 185 Thompson on Bills, 30, 31, 33 186 Daniel on Negotiable Instruments, 77 176

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Vital is the requirement that the promise or order to pay must be unconditional. Since, a negotiable instrument is intended as a substitute for money, the payee and the subsequent holder thereof must be assured that they would be able to receive the amount indicated on the face of the instrument without any other condition or additional burden. If a bill, it must contain a certain direction to pay—if a note, a certain promise to pay. A bill is, in its nature, the demanding of a right, not the mere asking of a favor, and therefore a supplication made or authority given to pay an amount is not a bill. (Daniel, Elements of the Law of Negotiable Instruments, page 45) A promissory note must contain a certain promise to pay. “I promise to pay, or cause to be paid,” would suffice, because the undertaking that the payment be made is definite and certain.187 It is said by Story, that “it seems that to constitute a good promissory note, there must be an express promise upon the fact of the instrument to pay the money; for a mere promise implied by law, founded upon an acknowledged indebtedness, will not be sufficient.”188 But we think the better language is used by Byles, who says: “No precise words of contract are necessary, provided they amount, in legal effect, to a promise to pay,”189 In other words, if over and above the mere acknowledgment of debt, there may be collected from the words used a promise to pay it, the instrument may be regarded as a promissory note.190 The instrument must be payable unconditionally and at all events in order to be negotiable.191 To be unconditional, the payment of the instrument must not be made to depend upon a future uncertain event, which may, or may not happen. A promise is unconditional, although it is coupled with (a) an indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or (b) a statement of the transaction which gives rise to the instrument. (Sec. 2, NIL) 187 188 189 190 191

Lovell v. Hill, 6 Car. & P. 238; Caviness v. Rushton, 101 Ind. 500 Story on Promissory Notes, 14 Byles on Bills, 8 Daniel on Negotiable Instruments, 36; Cowan v. Hallack, 9 Colo. 578 Daniel, Elements of the Law of Negotiable Instruments, 46

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And an instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect.192 The contingency implied deprives the instrument of its negotiable character, as the events named may never happen.193 If the time must certainly come, although the particular day is not mentioned, the instrument is regarded as negotiable, as the fact of payment is certain.194 If the instrument is payable at, or within a certain time after, a man’s death, it is sufficient, because the event must occur;195 and a promise to pay “on demand, after my decease, $850,” signed by the promissory, is a good note, negotiable as any other, and binding on the promissor’s estate at his death.196 So a note payable “one day after date or at my death,”197 and if the day of payment must come at some time, it has been said that the distance is immaterial.198 (Daniel, Elements of the Law of Negotiable Instruments, page 48) However, an order or promise to pay out of a particular fund is not unconditional. (Sec. 2, N.I.L.) In accordance with these principles the negotiable character of the instrument is destroyed if it be made payable expressly or impliedly out of a particular fund.199 Illustrations: The insertion in an order to pay a certain sum “on account of brick work done on a certain building”200 or “out of rents,”201 or “out of my growing substance,”202 or “out of a certain claim,”203 or “out of my part of the estate of A,”204 or “out of the amount due on contract.”205 On the same principle, receivers’ certificates are not regarded as negotiable, although framed with the negotiable words usual in promissory notes. 206 (Daniel, Elements of the Law of Negotiable Instruments, page 50) 192

Sec. 4, NIL Daniel, Elements of the Law of Negotiable Instruments, 47 194 Daniel on Negotiable Instruments, 43 195 Cooke v. Colehan, 2 Stra. 1217; Conn v. Thornton, 46 Ala. 587; Price v. Jones, 105 Ind. 544. 196 Bristol v. Warner, 19 Conn. 7 197 Conn v. Thornton, 46 Ala. 588 198 Worth v. Case, 42 N.Y. 362 199 Daniel, Elements of the Law of Negotiable Instruments, 50 200 Pitman v. Crawford, 3 Gratt. 127 201 J Parsons on Notes and Bills, 43 202 Josselyn v. Lacier, 10 Mod. 294 203 Richardson v. Carpenter, 46 N.Y.661 204 Mills v. Kuykendale, 2 Black., 47 205 Hoagland v. Erck, 11 Neb. 580 206 Staunton v. Railroad Co., 31 Fed. 587; McCurdy v. Bowes, 88 Ind.583 193

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An order to pay A, or order, “$300.00 or what may be due on my deposit book”, is conditional.207 Therefore, the same in non-negotiable. 2011 Bar Question: A writes a promissory note in favor of his creditor, B. It says: “Subject to my option, I promise to pay B Php1 Million or his order or give Php1 Million worth of cement or to authorize him to sell my house worth Php1 Million. Signed, A.” Is the note negotiable? A. No, because the exercise of the option to pay lies with A, the maker and debtor. B. No, because it authorizes the sale of collateral securities in case the note is not paid at maturity. C. Yes, because the note is really payable to B or his order, the other provisions being merely optional. D. Yes, because an election to require something to be done in lieu of payment of money does not affect negotiability. To Pay a sum certain in Money The sum or amount which is promised or ordered to be paid by the maker or drawer as the case may be must be certain. This would enable to payee or any subsequent holder to be able to know how much they are going to claim from the person primarily liable thereon. Thus, if an instrument is to be a substitute for money and have an equivalent degree of acceptability, the necessity that the amount be a sum certain is obvious. This requirement of certainty is met if the holder can determine from the terms of the instrument itself the amount he or she is entitled to receive at maturity. (Ibid, Howell, p. 417) The amount which the debtor promises or engages to pay must either be stated in the instrument itself, in figures or words, or must be ascertainable from data somewhere on the paper. 207

The Negotiable Instruments Law Annotated, by Joseph Doddridge Brannan, Second Edition 1911, page 3, citing National Sav. Bank v. Cable, 73 Conn. 568 Atl. 428.

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Illustrations: A note to pay a certain sum, “and all other sums which may be due” is not negotiable, as the aggregate amount is not capable of definite ascertainment.208 So, if it be for a certain sum “and whatever sum you may collect of me for C,;”209 or if it be for “the proceeds of a shipment of goods, value about £2,000, consigned by me to you;”210 or “the demands of the sick club in part of interest;”211 or “a certain sum, the same to go as set-off;”212 or if it be expressed, “deducting all advances and expenses;”213 or if it be due for “$800 and such additional premium as may be due on policy No. 218,171.”214 But a promise to pay bearer a certain sum per acre for so many acres as a certain tract contained was held to be negotiable as soon as the number of acres was indorsed upon it.215 (Daniel, Elements of the Law of Negotiable Instruments, page 51) It is essential to the negotiability of the bill or note that it purports to be only for the payment of money. Such at least may be stated to be the general rule, for if any other agreement of a different character be engrafted upon it, it becomes a special contract clogged and involved with other matters, and has been deemed to lose thereby its character as a commercial instrument.216 (ibid, page 55) Payable on Demand or at a Fixed or Determinable Future Time This requirement recognizes that the holder of an instrument wants to know with certainty when he or she will be entitled to payment. Any appreciable uncertainty as to time of payment makes the instrument commercially unacceptable and defeats the concept that a negotiable instrument is a substitute for money. (Howell, p. 418) An instrument is payable on demand: (a) when it is so expressed to be payable on demand, or at sight, or on 208 209

210 211 212 213 214 215 216

Smith v. Nightinglare, 2 Stark, 375 Legro v. Staples, 16 Me. 252; Lime Rock F. & M. Ins. Co. v. Hewitt, 60 Me. 407 Jones v. Simpson, 2 B & C, 318 Bolton v. Dugdale, 4 B & Ad. 619 Clarke v. Percival, 2 B & Ad. 660 Cashman v. Haynes, 20 Pick, 132 Marret v. Equitable Ins. Co., 54 Me. 537 Smith v. Clopton, 4 Tex. 109 Fletcher v. Thompson, 55 N.H. 308; Ingham v. Dudley, 60 Iowa 16

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

presentation; or (b) in which no time for payment is fixed. (Sec. 7, NIL) Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand. (ibid) An instrument may also be payable on a fixed future time, as on its face, the holder can clearly discern the date and time when the instrument shall become due. Example: April 8, 2012; or April 3, 2007. When an instrument is payable at a determinable future time, the holder thereof would be able to know the date and time when instrument would become due by referring to a fixed or known future event. Example: 10-days after Christmas this year; or 15days after New Year of next year. Payable to Order or Bearer The requirement that an instrument be made payable to Order or Bearer are what we call “words of negotiability”, this implies that an instrument, provided it complies with all other requisites of Section 1 of the Negotiable Instruments Law, can be negotiated or transferred to other persons, in the manner provided for under the law. Without these so-called words of negotiability, an instrument would not be negotiable, as on its face it would be intended only to be payable to the person named therein, thus, preventing it to be further negotiated. An instrument is payable to Order where it is drawn payable to the order of a specified person or to him or his order. (Sec. 8, NIL) It may be drawn payable to the order of217: a) A payee who is not maker, drawer, or drawee; or b) The drawer or maker; or c) The drawee; or d) Two or more payees jointly; or

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e) One or some of several payees; or f) The holder of an office for the time being. Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty.218 On the other hand, an instrument is payable to Bearer219: a) When it is expressed to be so payable; or b) When it is payable to a person named therein or bearer; or c) When it is payable to the order of a fictitious or nonexisting person, and such fact was known to the person making it so payable; or d) When the name of the payee does not purport to be the name of any person; or e) When the only or last indorsement is an indorsement in blank. 2000 Bar Question: MP bought a used cellphone from JR. JR preferred cash but MP is a friend so JR accepted MP’s promissory note for P10,000.00. JR thought of converting the note into cash by endorsing it to his brother KR. The promissory note is a piece of paper with the following hand-printed notation: “MP WILL PAY JR TEN THOUSAND PESOS IN PAYMENT FOR HIS CELLPHONE 1 WEEK FROM TODAY”. Below this notation MP’s signature with “8/1/ 00” next to it, indicating the date of the promissory note. When JR presented MP’s note to KR, the latter said it was not a negotiable instrument under the law and so could not be a valid substitute for cash. JR took the opposite view, insisting on the note’s negotiability. You are asked to referee. Which of the opposing views is correct? Explain. (3%) ANSWER: KR’s view is correct. The promissory note does not meet the requirements of Sec. 1, Act 2031, which requires that

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the instrument be payable to bearer or order, therefore it is non-negotiable. Drawee must be named or otherwise Indicated therein with reasonable certainty It should be noted that the requirement on Sec. 1 (e) applies only if the instrument is a Bill of Exchange, wherein, the Drawer orders a Drawee to pay the payee or his Order, or Bearer thereof, in which case, the drawee, who becomes subsequently the acceptor thereof is the person primarily liable to pay the instrument. As for the requirements of a Promissory Note, Sec. 1 (a) to (d) would suffice. Whether the Bill is payable on demand or at a fixed or determinable future time, so long as the holder would be able to know or identify the person to whom he would be demanding or enforcing payment of the instrument. The requisite is that the drawee must be Named. Example: Pepito Aguilar 1002, Santos Avenue, Sta. Cruz, Manila Or Luis Lustriano of Luzurriaga & Associates Ortigas Center, Pasig City Drawee may also be Indicated with Reasonable Certainty. Example: Brgy. Captain Brgy. Sto Domingo, Laguna Or Hon. Municipal Mayor Municipality of Oton, Iloilo

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The instrument can only be negotiable if it complies with Section 1 A document will only become a Negotiable Instrument if it complies with the requisites of Section 1 of the Negotiable Instruments law, unconditionally and in a single document. It should be noted that the existence of a negotiable instrument is different on ‘who’ is liable on the instrument. The existence of a negotiable instrument is answered if the paper strictly complies with Section 1 of the Negotiable Instruments Law, liability, on the other hand may be addressed taking into consideration certain factors, like, proper negotiation, existence of a consideration, holder in due course, and the like. Thus, if what we have is a mere innominate contract, without complying with Section 1 of the said law, then, it may be governed by the Civil Code, or other pertinent provisions of the Code of Commerce, but it cannot avail of the provisions of Act 2031. Distinction between a negotiable and non-negotiable instrument In the case of Consolidated Plywood Industries, Inc. vs. IFC Leasing and Acceptance Corp.,220 this Court had the occasion to clearly distinguish between a negotiable and non-negotiable instrument. Among others, the instrument in order to be considered negotiable must contain the so-called “words of negotiability— i.e. must be payable to “order” or “bearer”. Under Section 8 of the Negotiable Instruments Law, there are only two ways by which an instrument may be made payable to order. There must always be a specified person named in the instrument and the bill or note is to be paid to the person designated in the instrument or to any person to whom he has indorsed and delivered the same. Without the words “or order or “to the order of”, the instrument is payable only to the person designated therein and is therefore non-negotiable. Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a negotiable instrument, but will merely “step into the shoes” of the person designated in the instrument and will thus be open to all defenses available against 220

149 SCRA 459 (1987).

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the latter. (Juanita Salas vs. Court of Appeals, G.R. No. 76788, January 22, 1990, [Fernan, C.J.:]) In the above-mentioned case of Juanita Salas vs. Court of Appeals, the pertinent portion of the note reads: PROMISSORY NOTE (MONTHLY) P58,138.20 San Fernando, Pampanga, Philippines Feb. 11, 1980 For value received, I/We jointly and severally, promise to pay Violago Motor Sales Corporation or order, at its office in San Fernando, Pampanga, the sum of FIFTY EIGHT THOUSAND ONE HUNDRED THIRTY EIGHT & 201/100 ONLY (P58,138.20) Philippine currency, which amount includes interest at 14% per annum based on the diminishing balance, the said principal sum, to be payable, without need of notice or demand, in installments of the amounts following and at the dates hereinafter set forth, to wit: P1,614.95 monthly for “36” months due and payable on the 21st day of each month starting March 21, 1980 thru and inclusive of February 21, 1983. P_________ monthly for ______ months due and payable on the ______ day of each month starting _____198__ thru and inclusive of _____, 198________ provided that interest at 14% per annum shall be added on each unpaid installment from maturity hereof until fully paid. xxx xxx xxx Maker; Co-Maker: (SIGNED) JUANITA SALAS _________________ Address: ____________________ ________________________ WITNESSES SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE TAN # TAN # PAY TO THE ORDER OF FILINVEST FINANCE AND LEASING CORPORATION VIOLAGO MOTOR SALES CORPORATION BY: (SIGNED) GENEVEVA V. BALTAZAR Cash Manager

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A careful study of the questioned promissory note shows that it is a negotiable instrument, having complied with the requisites under the law as follows: [a] it is in writing signed by the maker Juanita Salas; [b] it contains an unconditional promise to pay the amount of P58,138.20; [c] it is payable at a fixed or determinable future time which is “p1,614.95 monthly for 36 months due and payable on the 21st day of each month starting March 21, 1980 thru and inclusive of Feb. 21, 1983”; [d] it is payable to Violago Motor Sales Corporation, or order and as such, [e] the drawee is named or indicated with certainty. (supra) The case of Narcisa Buencamino, et. al., vs. Hernandez, et al.1 talks about the negotiability of Government negotiable land certificates, which provide as follows, to wit: AMOUNT: P10,000.00 NEGOTIABLE LAND CERTIFICATE THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES is indebted unto the BEARER in the sum of TEN THOUSAND PESOS. This certificate is issued in accordance with the provisions of Section 9, Republic Act No. 1400, entitled “AN ACT DEFINING A LAND TENURE POLICY, PROVIDING FOR AN INSTRUMENTALITY TO CARRY OUT THE POLICY, AND APPROPRIATING FUNDS FOR ITS IMPLEMENTATION”, approved September 9, 1955, and is due and payable to BEARER on demand and upon presentation at the Central Bank of the Philippines without interest, if presented for payment within five years from the date of issue; with interest at the rate of 4 per centum per annum, if presented for payment after five years from the date of issue; with interest at the rate of 4-½ per centum per annum, if presented for payment after ten years from the date of issue; and, with interest at the rate of 5 per centum per annum, if presented for payment after fifteen years from the date of issue. Both principal and interest are payable by the Treasurer of the Philippines, through the Central Bank of the Philippines, in legal tender currency of the Philippines. This land certificate is part of the total negotiable land certificates issued and limited to the aggregate principal sum of SIXTY MILLION PESOS a year, to be issued during the first two years from September 9, 1955 when Republic Act No. 1400 was approved, and P30 million each year during the succeeding years, for the purchase of private

221

G.R. No. L-14883, July 31, 1963, [Regals, J.:]

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agricultural lands for resale at cost to bona-fide tenants or occupants, or, in the case of estates abandoned by the owners for the last five years, to private individuals who will work the lands themselves and who are qualified to acquire or own lands, but who do not own more than six hectares of lands in the Philippines. Manila, Philippines, August 9, 1957. Encashment of this certificate may not be made until after five (5) years from the date of execution of the Deed of Sale of Hacienda de Leon, pursuant to the conditions under Paragraph “b” of the Memorandum Agreement executed between the Land Tenure Administration and the owners of Hacienda de Leon on May 11, 1957, acknowledged before Marcelo Lagramada, Notary Public for Manila, as Doc. No. 324, Page 66, Book No. 6, Series of 1957. (Sgd.) JUAN CAÑIZARES Registrar of the Central Bank of the Philippines (Sgd.) CARLOS P. GARCIA President of the Phil. (Sgd.) VICENTE GELLA Treasurer of the Phil. Date of issue: August 9, 1957 Recorded: Illegible Examined: Illegible

Under Republic Act No. 1400, the land certificates, as in this case, “shall be payable to bearer upon demand.” “The one issued, however, were, payable to bearer only after the lapse of five years from a given period. Obviously then, the requirement that they should be payable on demand was not met since an instrument payable on demand is one which is (a) expressed to be payable on demand, or at sight, or on presentation; or (b) expresses no time for payment (Sec. 7, Negotiable Instruments Law), the five-year period within which the certificates could not be encashed was an expression of the time for the payment contrary to the paragraph (b) of the last law cited.” In another significant case, that of Consolidated Plywood Industries, Inc., et al vs. IFC Leasing and Acceptance Corporation222, “[t]he pertinent portion of the note is as follows:

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FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL PRODUCTS MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS & 71/100 only (P 1,093,789.71), Philippine Currency, the said principal sum, to be payable in 24 monthly installments starting July 15, 1978 and every 15th of the month thereafter until fully paid. ...

Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a promissory note “must be payable to order or bearer,” it cannot be denied that the promissory note in question is not a negotiable instrument. The instrument in order to be considered negotiable-i.e. must contain the so-called ‘word of negotiability’, must be payable to ‘order’ or ‘bearer’. These words serve as an expression of consent that the instrument may be transferred. This consent is indispensable since a maker assumes greater risk under a negotiable instrument than under a non-negotiable one… xxx xxx xxx When instrument is payable to order. SEC. 8 WHEN PAYABLE TO ORDER.—the instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order… xxx xxx xxx These are the only two ways by which an instrument may be made payable to order. There must always be a specified person named in the instrument. It means that the bill or note is to be paid to the person designated in the instrument or to any person to whom he has indorsed and delivered the same. Without the words “or order” or “to the order of,” 222

G.R. No. 72593, April 30, 1987.

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the instrument is payable only to the person designated therein and is therefore non-negotiable. Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a negotiable instrument but will merely “step into the shoes” of the person designated in the instrument and will thus be open to all defenses available against the latter.” (Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law, Third Editions, page 38). (Emphasis supplied) Therefore, considering that the subject promissory note is not a negotiable instrument, it follows that the respondent can never be a holder in due course but remains a mere assignee of the note in question. Thus, the petitioner may raise against the respondent all defenses available to it as against the sellerassignor Industrial Products Marketing.” Treasury warrant; not a Negotiable Instrument. Treasury warrants do not fall within the purview of the Negotiable Instruments Law. Treasury warrants are payable from a particular appropriation of an order “payable out of a particular fund”, and is not unconditional. Postal Money Orders; not a Negotiable Instrument. It is not disputed that our postal statues were patterned after statutes in force in the United States. For this reason, ours are generally construed in accordance with the construction given in the United States to their own postal statutes, in the absence of any special reason justifying a departure from this policy or practice. The weight of authority in the United States is that postal money orders are not negotiable instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912), the reason behind this rule being that, in establishing and operating a postal money order system, the government is not engaging in commercial transactions but merely exercises a governmental power for the public benefit. (Philippine Education Co., Inc., vs. Soriano, G.R. No. L-22405, June 30, 1971, [Dizon, J.]) It is to be noted in this connection that some of the restrictions imposed upon money orders by postal laws and

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regulations are inconsistent with the character of negotiable instruments. For instance, such laws and regulations usually provide for not more than one endorsement; payment of money orders may be withheld under a variety of circumstances. (49 C.J. 1153, supra) Central Bank Certificate of Indebtedness; not a Negotiable Instrument In the case of Traders Royal Bank vs. Court of Appeals, Filriters Guaranty Assurance Corporation and Central Bank of the Philippines223, it was held that: “the subject CBCI is not a negotiable instrument in the absence of words of negotiability within the meaning of the negotiable instruments law (Act 2031). The pertinent portions of the subject CBCI read: xxx xxx xxx The Central Bank of the Philippines (the Bank) for value received, hereby promises to pay bearer, of if this Certificate of indebtedness be registered, to FILRITERS GUARANTY ASSURANCE CORPORATION, the registered owner hereof, the principal sum of FIVE HUNDRED THOUSAND PESOS. xxx xxx xxx Properly understood, a certificate of indebtedness pertains to certificates for the creation and maintenance of a permanent improvement revolving fund, is similar to a “bond” (82 Minn. 202). Being equivalent to a bond, it is properly understood as acknowledgment of an obligation to pay a fixed sum of money, it is usually used for the purpose of long term loans. Problem: What is the nature and characteristic of a NOW account? Is it Negotiable within the ambit of the Negotiable Instruments Law?

223

G.R. No. 93397, March 3, 1997, [Torres, J.]

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ANSWER: Negotiable Orders of Withdrawals (NOW Accounts) is defined as savings accounts from which funds may be withdrawn by means of negotiable orders of withdrawal. They shall be kept and maintained separately from the regular savings deposits subject to withdrawal through the presentation of withdrawal slips and passbooks. Only natural persons shall be eligible to maintain NOW Accounts. The authority to offer NOW Accounts shall be granted only to thrift banks that meet the requirements laid down by the Central Bank Regulations. They are not negotiable within the provisions of the Negotiable Instruments Law because of certain limits and restrictions, to wit: (a.) The order of withdrawal shall be payable only to a specific person, natural or juridical, and not to bearer nor to the order of a specified person; Only the payee can encash this order of withdrawal with drawee bank, or deposit it in his account with the drawee bank or with any other bank. When is an instrument considered to be complete? When is it incomplete? An instrument is complete if it complies with the requirements of Section 1 of the Negotiable Instruments Law, embodied in a single document or medium, and that there must be no other conditions imposed for its validity or compliance. An instrument is incomplete if it lacks any material particular essential for its completion. Essentials of a Bill or Note224 To be a negotiable bill of exchange or promissory note, the instrument must have the following essential characteristics: a) The bill must contain an order 224

Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 26

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b) The note must contain a promise c) The order or promise must be unconditional d) It must be an absolute order or promise for the payment of money alone e) The amount of money must be certain f)

The time of payment must be a time certain to arrive

g) The instrument must be specific as to all its parties h) The instrument must be delivered What are the effects if the instrument is incomplete? Strictly speaking, we do not have any negotiable instrument. An instrument only comes within the purview of the Negotiable Instruments Law if it complies with the requisites of Section 1 of the Negotiable Instruments Law, in the absence thereof, we only have a private document or contract, in which the Negotiable Instruments Law has no application. Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum certain within the meaning of this Act, although it is to be paid: (a) With interest; or (b) By stated installments; or (c) By stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; or (d) With exchange, whether at a fixed rate or at the current rate; or (e) With costs of collection or an attorney’s fee, in case payment shall not be made at maturity. Notes: When sum is considered certain. The sum becomes certain if the maker, drawee, or holder of the instrument would be able to discern with exact certainty how much would he pay or collect, as the case may be, on the value of the negotiable instrument.

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With Interest The sum is considered certain although coupled with the payment of interest. It should be borne in mind that the payment of the interest is only in addition to the principal sum to be paid, thus, the sum payable is still certain. Example: P30,000.00 plus 2% monthly interest; or Pay 10% of P100,000.00 By stated installments Though coupled with payment in stated installments, the sum is still considered certain. The main reason is that said installment, is only a mode of payment of the main obligation, certainly entire sum due or payable could still be identified. Example: Promise to pay bearer P10,000.00 in 2 equal installments; or Promise to pay bearer five installments of P2,000.00 each. By stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due This is similar to payment by stated installments as previously mentioned, but this one contains an acceleration clause, where, default in the payment of any installment or of interest, the whole sum or amount becomes due. In Acceleration Clauses: Instruments due at a fixed future date sometimes have clauses providing that the date of maturity shall be moved ahead if a specified event occurs prior to the stated due date. An instrument issued this year with a maturity date [of] two years hence might contain, for example, either of these acceleration clauses: (1) “This instrument shall become immediately due and payable upon the maker’s (or acceptor’s) bankruptcy; or (2) for a note payable in monthly installments: “If

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any instrument is not paid when due, the entire instrument is due and demandable.” (Howell, p. 421) With exchange, whether at a fixed rate or at the current rate The sum is still certain, though it is made coupled with exchange whether fixed rate or at current rate. In this instance, a reasonable prudent person would still be able to determine the sum payable. Example: Pay to bearer an amount equivalent to $100.00; or Pay to bearer an amount equivalent to the prevailing rate of $100.00; or Pay to bearer an amount equivalent to $100.00 at an exchange rate of Php 43.50 per dollar. With costs of collection or an attorney’s fee, in case payment shall not be made at maturity This would be self-explanatory. Again the most important fact to determine is whether or not the holder would be able to determine the amount due, despite the additional cost of collection or attorney’s fee. The attorney’s fee is due if the unpaid note is placed in the hands of an attorney for collection, although no suit is brought. A stipulation in a mortgage securing the note for fees in case of suit on the mortgage securing the note for fees in case of suit on the mortgage is cumulative and not restrictive of the provision of the note. (Brannan, page 5, citing, Morrison v. Ornbaun, 30 Mont. 111, 75 Pac. 953.) A provision in a promissory note for attorney’s fees “if collected by attorney, or if suit is brought on this note,” is a promise to pay attorney’s fees for collection only after dishonor, and does not impair the negotiability of the note. (Ibid, citing First Natl. Bank of Shawano v. Miller, 139 Wis. 126, 120 N.W. 820, S.C. sec. 104.) Likewise, “[a] provision in a note for an attorney’s fee, but leaving blank the amount thereof, amounts to a promise to pay a reasonable sum as an attorney’s fee, and does not render the

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note non-negotiable. Where the plaintiff employed an attorney, it is sufficient to show what is a reasonable fee, and it is not necessary to prove an express agreement as to fees, or that plaintiff paid the attorney before the suit.” (Brannan, page 6, citing McCormick v. Swem (Utah) 102 Pac. 626) Example: For value received, I promise to pay David Lancelot, or order, the amount of Php 100,000.00, ten days after sight. It is understood that an amount equivalent to the cost of collection would be made payable in addition to the principal amount, and an amount equivalent to Twenty-Five Per Cent (25%) of the amount due as Attorney’s Fees, should there be default in the payment after demand. (sgd) Abigail Margaux

In the case of H.R. Andreas vs. B.A. Green225, the promissory note was worded as follows: P15,000.00

MANILA, P. I Aug. 19th, 1921

On or before the 19th day of November, 1921, or on thirty (30) days written demand notice, for value received, I promise to pay to Harry Bridge, at Manila, P.I., the sum of fifteen thousand pesos (P15, 000) with interest thereon at the rate of twelve per cent (12%) per annum. If not paid when due after thirty days written demand notice, this note shall bear interest at the rate of 12 per cent per annum until paid; and a further sum equal to 10 per cent of the total amount due as and for expenses of collection for attorney’s fees whether actually incurred or not and in addition to all costs as provided for in the Code of Civil Procedure. This note is secured by real-estate mortgage of even date. (Sgd.) B. A. GREEN 225

G.R. No. L-24322, December 16, 1925

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The Supreme Court in the above-mentioned case held that: “[s]tipulations in negotiable instruments for the payment of collection and attorney’s fees are not forbidden by lay in this jurisdiction. x x x The purpose of a stipulation in a note for a reasonable attorney’s fees is not to give the lender a larger compensation for the loan than the law allows, but is to safeguard the lender against future loss or damage by being compelled to retain counsel to institute judicial proceedings to collect his debt.” Sec. 3. When promise is unconditional. - An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with: (a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or (b) A statement of the transaction which gives rise to the instr ument. But an order or promise to pay out of a particular fund is not unconditional Notes: When is promise to pay unconditional? A promise to pay is unconditional if no other requirement or qualification or condition is needed for its payment. Moreover, an unqualified order or promise to pay is unconditional, though coupled with: a. An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or b. A statement of the transaction which gives rise to the instrument. An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount

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In this instance, the promise or order to pay is still unconditional because payment is not premised upon any condition, or subject to the availability of funds of a particular account. The holder of the instrument is assured that he be paid upon presentment of the instrument. It should be taken into consideration that the law uses the word reimbursement, which implies that payment is to be advanced by the person primarily liable and merely reimburse the same from a particular account. Thus, regardless of the availability of funds in that account, the holder receives payment. Example: To: Maria Santos 1020 Licauco Drive, Ortigas Center, Pasig This 26th day of October 2011 Please pay, Mario Delos Santos, or order, P10,000.00 five (5) days after sight, and reimburse said amount from my savings account with PSBank account number 01092837-99. (sgd) Jose Santos An order drawn by the X company directing payment of a certain sum, “on account of contract between you (the drawee) and the X Company” held negotiable, the words “on account of” not having the same effect as “out of the proceeds of.” (Brannan, page 6, citing First Nat. Bank v. Lightner, 74 Kans. 736, 88 Pac. 59, 8 L.R.A. (N.S.) 231, 118 Am. St. Rep. 353.) An order to pay on or before a fixed day and “charge the same to the $1,800 payment,” is not conditional. (Ibid, citing Shepard v. Abbott, 179 Mass. 300, 60 N.E. 782) A bill of exchange is not made non-negotiable because it contains the words “charge to my account and credit according to a registered letter I have addressed to you.” These words do not mean according to the conditions mentioned in the letter, but merely charge my account and credit according to the letter. (Ibid, citing In re Boyse, 33 Ch. Div. 612)

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A statement of the transaction which gives rise to the instrument Though an instrument may contain the reason for the issuance thereof, it does not in any way impose a condition upon the payment of the instrument. What is important is that the statement of transactions must not be made as the condition for payment of the instrument. Examples: As payment for the 10 crates of apple, I promise to pay Mario Santos, or his order, Php 100,000.00 five (5) days after sight. (sgd) Maria Delos Santos

Note that in the example above, the statement of the transaction which gave rise to the instrument did not render the instrument conditional, thus, the same is negotiable. However, what if, say for instance that in the same example, the 10 crates of apple were not delivered to Maria, but she had already parted with her promissory note, will that make the instrument non-negotiable? The answer is no, it should be remembered that an instrument is negotiable the moment it complies with Section 1 of the negotiable instruments law. However, if the question pertains to Maria’s liability on the promissory note, then we have a different answer, which will be later on discussed in the succeeding pages of this work. It should be remembered that the existence of a negotiable instrument differs from the question of “who?” is liable on the negotiable instrument. The former merely requires compliance with Section 1 of the law, while the latter takes into consideration other aspects of liability, e.g., holder in due course, not a holder in due course, transfer or negotiation, etc.

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What about if the order or promise is to pay out of a particular fund, is it still unconditional? No. An order or promise to pay out of a particular fund is not unconditional. (Sec. 3, Negotiable Instruments Law) It is conditional because from the phrase itself, pay out of a particular fund, makes the payment of the instrument dependent upon the available funds on the account, thus, the same is conditional, therefore, non-negotiable. It is of no moment if there are indeed actual available funds on the account, what matters is what is the implication of the written words on the face of the paper. Treasury warrants, which, by their nature are payable out of particular funds which are the subject of appropriations for which these treasury warrants were issued are non-negotiable, simply because the repayment of which is dependent upon the availability of a particular fund. Sec. 4. Determinable future time; what constitutes. - An instrument is payable at a determinable future time, within the meaning of this Act, which is expressed to be payable: (a) At a fixed period after date or sight; or (b) On or before a fixed or determinable future time specified therein; or (c) On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain. An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. Notes: What constitutes a determinable future time? An instrument to be negotiable must be made either payable on a fixed date or at a determinable future time, the latter phrase means a period of time which could be determined with reference to another particular time, or event which is certain to happen though the time of happening is uncertain.

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Fixed period after date or sight This refers to a fixed or definite time after seeing, or accepting the instrument, or on the date specified on the instrument. Example: Ten days after sight; or Ten days after date of the instrument On or before a fixed or determinable future time specified therein This provision is self-explanatory. Example: Pay bearer P1, 000.00 on or before January 9, 2012 Pay bearer P1, 000.00 on or before Christmas day of 2012 If the instrument is made payable upon a contingency, is it negotiable? What if the contingency occurred? An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. (Sec. 4, Negotiable Instruments Law) What is a contingency? Contingency refers to future uncertain events, or past events unknown to parties, or circumstances which may or may not happen. Example: I promise to pay bearer, or order, P1, 000.00 after passing the bar exams Pay bearer, P500.00 to buy umbrella when it rains on December 25, 2011 Notes, payable at a certain time, but secured by a mortgage executed as part of the same transaction, and reciting that the whole debt shall be due in case of sale or removal of the property

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by the mortgagor without the consent of the mortgagee, or in case the mortgagee deems himself insecure, are uncertain as to time and amount of payment and are therefore not negotiable. (Brannan, page 8, citing Iowa Nat. Bank v. Carter (Iowa), 123 N.W. 237, S.C. secs. 25, 26) Reason for the rule As a substitute for money, payment of the negotiable instrument must never be subject to any uncertainties, or contingency, to do so would create a situation where the holder of the instrument could not enforce payment on the person primarily liable by reason of the event or contingency upon which an obligation to pay would arise never occurred. This, entirely defeats the purpose for the creation of the negotiable instrument. 2011 Bar Question: A promissory note states, on its face: “I, X, promise to pay Y the amount of Php 5,000.00 five days after completion of the on-going construction of my house. Signed, X.” Is the note negotiable? A. Yes, since it is payable at a fixed period after the occurrence of a specified event. B. No, since it is payable at a fixed period after the occurrence of an event which may not happen. C. Yes, since it is payable at a fixed period or determinable future time. D. No, since it should be payable at a fixed period before the occurrence of a specified event. Sec. 5. Additional provisions not affecting negotiability. - An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. But the negotiable character of an instrument otherwise negotiable is not affected by a provision which: (a) Authorizes the sale of collateral securities in case the instrument be not paid at maturity; or (b) Authorizes a confession of judgment if the instrument be not paid at maturity; or

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(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. But nothing in this section shall validate any provision or stipulation otherwise illegal. Notes: If an act is imposed in addition to the order or promise to pay a sum certain in money, is the instrument still negotiable? No. An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. (Sec. 5, Negotiable Instruments Law) This would impose additional burden to the person primarily liable on the instrument. 2011 Bar Question: B borrowed Php1 million from L and offered to him his BMW car worth Php1 Million as collateral. B then executed a promissory note that reads: “I, B, promise to pay L or bearer the amount of Php1 Million and to keep my BMW car (loan collateral) free from any other encumbrance. Signed, B.” Is this note negotiable? A. Yes, since it is payable to bearer. B. Yes, since it contains an unconditional promise to pay a sum certain in money. C. No, since the promise to just pay a sum of money is unclear. D. No, since it contains a promise to do an act in addition to the payment of money. 2002 Bar Question: Which of the following stipulations or features of a promissory note (PN) affect or do not affect its

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negotiability, assuming that the PN is otherwise negotiable? Indicate your answer by writing the paragraph number of the stipulation or feature of the PN as shown below and your corresponding answer, either “Affected” or “Not affected.” Explain. (5%) (1) The date of the PN is “February 30, 2002.” (2) The PN bears interest payable on the last day of each calendar quarter at a rate equal to five percent (5%) above the then prevailing 91-day Treasury Bill rate as published at the beginning of such calendar quarter. (3) The PN gives the maker the option to make payment either in money or in quantity of palay of equivalent value. (4) The PN gives the holder the option either to require payment in money or to require the maker to serve as the bodyguard or escort of the holder for 30 days. ANSWER: (1) Not affected; Sec. 12, Negotiable Instruments Law, the instrument is not invalid for the reason only that it is antedated or post-dated, provided this is not done for an illegal or fraudulent purpose. Thus, date is not essential for its negotiability. (2) Not affected; Sec. 2, Act 2031, the sum payable is a sum certain within the meaning of this Act, although it is to be paid with installments, or with exchange, whether at a fixed rate or at the current rate. (3) Affected; it makes the payment of the instrument conditional by giving the maker an option to pay in money or other palay. (4) Not Affected; Sec. 5 (d), Act 2031, the negotiable character of an instrument otherwise negotiable is not affected by a provision which gives the holder an election to require something to be done in lieu of payment of money.

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What may be some provisions added to the instrument which would not affect its negotiability? The negotiable character of an instrument otherwise negotiable is not affected by a provision which: a. Authorizes the sale of collateral securities in case the instrument is not paid at maturity; or b. Authorizes a confession of judgment if the instrument be not paid at maturity; or 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. Authorization of sale of collateral securities in case the instrument be not paid at maturity A note, reciting that the title to property for which it is given shall remain in the payee, and that he shall have the right to declare the money due and take possession of the property whenever he may deem himself insecure, “even before the maturity of the note,” is not negotiable. (Brannan, page 9, citing Kimpton v. Studebaker Bros. Co., 14 Idaho, 552, 94 Pac. 1039, 125 Am. St. Rep. 185) Warrants of Attorney to Confess Judgment In the case of Philippine National Bank vs. Manila Oil Refining & By-Products Company, Inc.226 the written instrument read as follows: RENEWAL P61,000.00 MANILA, P.I., May 8, 1920. On demand after date we promise to pay to the order of the Philippine National Bank sixty-one thousand only pesos at Philippine National Bank, Manila, P.I.

226

G.R. No. L-18103, June 8, 1922, [Malcom, J.:].

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Without defalcation, value received; and to hereby authorize any attorney in the Philippine Islands, in case this note be not paid at maturity, to appear in my name and confess judgment for the above sum with interest, cost of suit and attorney’s fees of ten (10) per cent for collection, a release of all errors and waiver of all rights to inquisition and appeal, and to the benefit of all laws exempting property, real or personal, from levy or sale. Value received. No. ____ Due ____ MANILA OIL REFINING & BY-PRODUCTS CO., INC., (Sgd.) VICENTE SOTELO, Manager. MANILA OIL REFINING & BY-PRODUCTS CO., INC., (Sgd.) RAFAEL LOPEZ, Treasurer

The question raised in reference to the aforementioned Promissory Note concerns the validity of one of its provisions whereby in case the same is not paid at maturity, the maker authorizes any attorney to appear and confess judgment thereon for the principal amount, with interest, costs, and attorney’s fees, and waives all errors, rights to inquisition, and appeal, and all property exceptions. The attorney for the appellee contends that the Negotiable Instruments Law (Act No 2031) expressly recognizes judgment notes, and that they are enforceable under the regular procedure. The Negotiable Instruments Law, in Section 5, provides that “The negotiable character of an instrument otherwise negotiable is not affected by a provision which”. . . (b) Authorizes a confession of judgment if the instrument be not paid at maturity.” We do not believe, however, that his provision of law can be taken to sanction judgments by confession, because it is a portion of a uniform law which merely provides that, in jurisdiction where judgment notes are recognized, such clauses shall not affect the negotiable character of the instrument. Moreover, the same section of the

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Negotiable Instruments Law concludes with these words. “But nothing in this section shall validate any provision or otherwise illegal.” Judgments by confession as appeared at common law were considered an amicable, easy, and cheap way to settle and secure debts. They are a quick remedy and serve to save the court’s time. They also save the time and money of the litigants and the government the expenses that a long litigation entails. In one sense, instruments of this character may be considered as special agreements, with power to enter up judgments on them, binding the parties to the result as they themselves viewed it. On the other hand, there are disadvantages to the commercial world which outweigh the considerations just mentioned. Such warrants of attorney are void as against public policy, because they enlarge the field of fraud, because under these instruments the promissory bargains away his right to a day in court, and because the effect of the instrument is to strike down the right of appeal accorded by statute. The recognition of such a form of obligation would bring about a complete reorganization of commercial customs and practices, with reference to short-term obligations. It can readily be seen that judgment notes, instead of resulting to the advantage of commercial life in the Philippines might be the source of abuse and oppression, and make the court involuntary parties thereto. We are of the opinion that warrants of attorney to confess judgment are not authorized nor contemplated by our law. We are further of the opinion that provisions in notes authorizing attorneys to appear and confess judgments against makers should not be recognized in this jurisdiction by implication and should only be considered as valid when given express legislative sanction. (supra) In the Memoranda of Amici Curiae in the case of PNB, Professor Jose A. Espiritu, of the University of the Philippines, states: 1. Confession of judgment has been defined as “a voluntary submission to the jurisdiction of the court, giving consent and without the service of process, what could otherwise

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be obtained by summons and complaint, and other formal proceedings, an acknowledgment of indebtedness, upon which it is contemplated that a judgment may and will be rendered.” (8 Cyc., pp. 563, 564) 2. As to the general effects of confession of judgment, the following statements may be mentioned: “A warrant to confess judgment does not destroy the negotiability of the note. Such a note is commonly called a “judgment note.” Decisions to the contrary in the States where the Negotiable Instruments Law is now in force are abrogated thereby, since it expressly provides that the negotiable character of an instrument otherwise negotiable is not affected by a provision which authorizes a confession of judgment, if the instrument is not paid at maturity. However, this statutory provision does not apply to stipulations for the confession of judgment “prior” to maturity.” (8 C.J., p. 128, sec. 222) 3. Nature of Requisites. “A judgment may be rendered upon the confession of defendant, either in an action regularly commenced against him by the issuance and service of process, in which case the confession may be made by his attorney of record, or, without the institution of a suit, upon a confession by defendant in person or by his attorney in fact. It implies something more than a mere admission of a debt to plaintiff, in addition, it is defendant’s consent that a judgment shall be entered against him…..” (23 cyc., 699) 4. Statutory Provisions, “Statutes regulating the confession of judgments without action, or otherwise than according to the course of the common law, are strictly construed, and a strict compliance with their provisions must be shown in order to sustain the validity of the judgment.” (Chapin vs. Tompson, 20 Cla., 681) “And this applies also to statutory restriction upon the right to confess judgment, as that authority to confess judgment shall not be given in the same instrument which contains the promise or obligation to pay the debt, or that such confession shall not be authorized by any instrument executed prior to suit brought.” (23 Cyc., 699, 700)

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5. Warrant or Power of Attorney—Validity and Necessity. “A judgment by confession may be entered upon a written authority, called a warrant or letter of attorney, by which the debtor empowers an attorney to enter an appearance for him, waive process, and confess judgment against him for a designated sum, except where this method of proceeding is prohibited by statute. The warrant as the basis of judgment is generally required to be placed on file in the clerk’s office, and no judgment can be so entered until it is so filed.” (23 Cyc., 703) 6. Requisites and Sufficiency. “A warrant or power of attorney to confess judgment should be in writing and should conform to the requirements of the statute in force at the time of its execution, although in the absence of specific authority directions it is sufficient, without much regard to its form, if it contains the essential of a good power and clearly states its purpose. It must be signed by the person against whom the judgment is to be entered…..” (23 Cyc., 704) How about illegal provisions or stipulations? Nothing in this section (Sec. 5) shall validate any provision or stipulation otherwise illegal. Sec. 6. Omissions; seal; particular money. - The validity and negotiable character of an instrument are not affected by the fact that: (a) It is not dated; or (b) Does not specify the value given, or that any value had been given therefor; or (c) Does not specify the place where it is drawn or the place where it is payable; or (d) Bears a seal; or (e) Designates a particular kind of current money in which payment is to be made. But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument.

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Notes: This provision thus rejects the possible view that such omissions cause an instrument to be incomplete and therefore nonnegotiable.227 These Omissions does not in any way affect the validity and negotiable character of an instrument so long as the same adheres with the requirements of Sec. 1. Undated instrument Negotiability of an instrument is not affected by an omission of the date. Sec. 7 (b) of the N.I.L. provides that where no time for payment is expressed on the face of the instrument, the same shall be presumed to be payable on demand. Also, Sec. 11, makes a presumption on instrument dates, where the instrument or an acceptance or any indorsement thereon is dated, such date is deemed prima facie to be the true date of the making, drawing, acceptance or indorsement, as the case may be. Moreover, Sec. 12, N.I.L. also recognizes that an instrument is not invalid by reason only that it is post-dated or ante-dated, so long as it is not done for an illegal or fraudulent purpose. Subsequently, Sec. 13 thereof also declares that a proper date may be inserted on an undated instrument. Thus, date is not an essential requirement for the validity or negotiability of a Bill or Note. No mention of the value given in exchange of the Bill of Note The validity and negotiability of a Bill or Note is not affected by the mere fact that the instrument does not specify the value given, or that any value had been given therefor.228 This is because the law presumes that every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value.229

227

Business Law, Second Edition, Rate A. Howell, 1981, p. 425 Sec. 6 (b), N.I.L. 229 Sec. 24, N.I.L. 228

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Designation of a particular kind of current money in which payment is made Note that the law makes mention of a current money, referring to a particular currency. Thus, “[a] check payable “in current funds” is not payable in money and is not negotiable.” (Brannan, page 9, citing Dille v. White, 132 Iowa, 327, 109 N.W. 909, 10 L.R.A. (N.S.) 510, following former Iowa cases, but not citing the N.I.L. S.C. sec. 65, emphasis supplied) Payment in current money is different from current funds, in as much as the latter implies that payment of the instrument is premised upon the availability of the current fund, eventually making it conditional. Sec. 7. When payable on demand. - An instrument is payable on demand: (a) When it is so expressed to be payable on demand, or at sight, or on presentation; or (b) In which no time for payment is expressed. Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand. Notes: When note is expressed to be payable on demand A note payable on demand after date is a demand note, and presentment need not be made the day after date, but only within a reasonable time to hold an indorser. (Brannan, page 11, citing Hardon v. Dixon, 77 App. Div. 241, 78 N.Y.S. 106), holding that the Statute of Limitations did not begin to run on such a note until the day after its date, said to have no application. (Ibid, citing Schlesinger v. Schultz, 110 App. Div. 356, 96 N.Y.S. 383, S.C. secs. 71, 73) What would be the effect if the instrument is dated and was issued, accepted, or indorsed when already overdue? Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or

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indorsing it, payable on demand. (Sec. 7, Negotiable Instruments Law) Sec. 8. When payable to order. - The instrument 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 drawn payable to the order of: (a) A payee who is not maker, drawer, or drawee; or (b) The drawer or maker; or (c) The drawee; or (d) Two or more payees jointly; or (e) One or some of several payees; or (f) The holder of an office for the time being. Where the instrument is payable to order, the payee must be named or otherwise indicated with reasonable certainty. Notes: “Pay to —— order” means “pay to my order,” and a bill so reading and indorsed by the drawer is a valid bill of exchange. (Brannan, page 12, citing Chamberlain v. Young [1893], 2 Q.B. 206) An order means any form of words implying a right on the part of the drawer to command, and a corresponding duty on the part of the drawee to make, the payment specified.230 The order to pay must be distinguished from a mere request to pay— Prof. Norton said: “[o]ur purpose here is to illustrate the difference between a mandatory form of words directing payment and a mere request. The theory of a bill of exchange is that the drawer has funds in the hands of the drawee, which he orders or directs to be delivered or paid over to the payee or indorsee of the bill. Hence, where the instrument is so written 230

Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 27

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as to show that the drawee has or attempts to exercise no right to order the money paid, it is not a bill of exchange. To determine whether or not the instrument is so written is, of course, a question purely of the construction of the instrument. Parol evidence cannot be admitted, since, if the bill is to operate as money, the instrument must be pronounced to be a bill or note according to its face. The point to be determined is whether the terms of the instrument, on the one hand, leave compliance or refusal optional, or, on the other hand, amount to an imperative direction. In the former case it is a mere request; in the latter it is a demand, with which the drawee must in common honesty comply, and amount to the order which is a necessary constituent of a bill of exchange.” 231 (emphasis supplied) The payee must be named or otherwise indicated therein with reasonable certainty In the case of Equitable Banking Corporation vs. Intermediate Appellate Court232, the subject check reads: Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF CASVILLE ENTERPRISES, INC. The said check was declared by the Supreme Court to be equivocal and patently ambiguous. x x x the payee ceased to be indicated with reasonable certainty in contravention of Section 8 of the Negotiable Instruments Law.233 As worded, it could be accepted as deposit to the account of the party named after the symbols “A/C” or payable to the Bank as trustee, or as an agent, for Casville Enterprises, Inc., with the latter being the ultimate beneficiary. Sec. 9. When payable to bearer. - The instrument is payable to bearer: (a) When it is expressed to be so payable; or (b) When it is payable to a person named therein or bearer; or

231 232 233

Id., footnotes omitted. G.R. No. 74451, May 25, 1988 Section 8, Negotiable Instruments Law

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(c) When it is payable to the order of a fictitious or nonexisting person, and such fact was known to the person making it so payable; or (d) When the name of the payee does not purport to be the name of any person; or (e) When the only or last indorsement is an indorsement in blank. Notes: When the payee of the check is not intended to be the true recipient of its proceeds, is it payable to order or bearer? As a rule, when the payee is “fictitious” or not intended to be the true recipient of the proceeds, the check is considered as a BEARER instrument. The distinction between bearer and order instruments lies in their manner of negotiation. Under Section 30 of the NIL, an order instrument requires an indorsement from the payee or holder before it may be validly negotiated. A bearer instrument, on the other hand, does not require an indorsement to be validly negotiated. It is negotiable by delivery. (Philippine National Bank vs. Erlando T. Rodriguez and Norma Rodriguez, G.R. No. 170325, September 26, 2008, Reyes, R.T., J.]) When instrument is payable to the order of a fictitious or nonexisting person A check that is payable to a specified payee is an order instrument. However, under Section 9 (c) of the NIL, a check payable to a specified payee may nevertheless be considered as a bearer instrument if it is payable to the order of a fictitious or non-existing person, and such fact is known to the person making it so payable. Thus, checks issued to “Prinsipe Abante” or “Si Malakas at si Maganda,” who are well-known characters in Philippine mythology, are bearer instruments because the named payees are fictitious and non-existent. (Philippine National Bank vs. Erlando T. Rodriguez and Norma Rodriguez, supra)

143

Term “Fictitious” as used under Section 9 (c) We have yet to discuss a broader meaning of the item “fictitious” as used in the NIL. It is for this reason that we look somewhere for guidance. Court rulings in the United States are a logical starting point since our law on negotiable instruments was directly lifted from the Uniform Negotiable Instruments Law of the United States.234 A review of the US jurisprudence yields that an actual existing and living payee may also be “fictitious” if the maker of the check did not intent for the payee to receive the proceeds of the check. This usually occurs when the maker places a name of an existing payee on the check for convenience or to cover up an illegal activity.235 Thus, a check made expressly payable to a nonfictitious and existing person is not necessarily an order instrument. If the payee is not the intended recipient of the proceeds of the check, the payee is considered a “fictitious” payee and the check is a bearer instrument. (Philippine National Bank vs. Erlando T. Rodriguez and Norma Rodriguez, supra) FICTITIOUS-PAYEE RULE; Who is liable under it; exceptions. When a person making the check so payable did not intend for the specified payee to have any part in the transaction, the payee is considered as fictitious payee. (Mueller & Martin vs. Liberty Insurance Bank). Fictitious-payee rule extends protection even to non-bank transferee of the checks. (Getty Petroleum Corp. vs. American Express Travel Related Services Company, Inc, 90 NY 2d 322 (1997), citing the Uniform Commercial Code, Sec. 3405) In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears the loss. When faced with a check payable to a fictitious payee, it is treated as a bearer instrument that can be negotiated by delivery. The underlying theory is that one cannot expect a fictitious payee to negotiate the check by placing his indorsement thereon. And since the 234

235

Campos, J.C., Jr. and Lopez-Campos, M.C., Notes and Selected Cases on Negotiable Instruments Law (1994), 5th ed, pp.8-9 Bourne v. Maryland Casualty, 192 SE 605 (1937); Norton v. City Bank & Trust Co., 294 F.839 (1923); United States v. Chase Nat. Bank, 250 F. 105 (1918)

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maker knew this limitation, he must have intended for the instrument to be negotiated by mere delivery. Thus, in case of controversy, the drawer of the check will bear the loss. This rule is justified for otherwise, it will be most convenient for the maker who desires to escape payment of the check to always deny the validity of the indorsement. This despite the fact that the fictitious payee was purposely named without any intention that the payee should receive the proceeds of the check.236 (Philippine National Bank vs. Erlando T. Rodriguez and Norma Rodriguez, supra) The rule protects the depositary bank and assigns the loss to the drawer of the check who was in a better position to prevent the loss in the first place. (Getty Petroleum Corp. vs. American Express Travel Related Services Company, Inc.) However, there is a ‘commercial bad faith’ exception to the fictitious-payee rule. A showing of commercial bad faith on the part of the drawee bank, or any transferee of the check for that matter, will work to strip it of its defense. The exception will cause it to bear the loss. Commercial bad faith is present if the transferee of the checks acts dishonestly, and is a party to the fraudulent scheme. (Philippine National Bank vs. Erlando T. Rodriguez, et al, G.R. No. 170325, September 26, 2008 [Reyes, R.T., J.]) The payee in an order instrument was not properly identified with reasonable certainty, what would be the effect thereof to the instrument? Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty, otherwise, it would be considered as a bearer instrument. Knowledge of the drawer of the fictitious and non-existing character of the payee controls A requested a bank to draw a draft to the order of C Bros., an existing firm who were ignorant of the transaction. A indorsed the draft in the name of C Bros., and the indorsee collected it from the drawee. Held, that the knowledge of the drawer of the fictitious or non-existing character of the payee controls, not the knowledge of the person at whose request the draft is drawn. 236

Mueller & Martin v. Liberty Insurance Bank, 187 Ky. 44, 218 SW 465 (1920)

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That the draft was not payable to bearer and that the drawee could recover the money from the indorsee. (Brannan, pages 1314, citing, Seaboard Nat. Bank v. Bank of America, 193 N.Y. 26, 85 N.E. 829; Jordan Marsh Co. v. Nat. Shawmut Bank, 201 Mass. 397, 87 N.E. 740 accord, italics supplied) Illustrative cases: A clerk had a power of attorney to draw checks on his employer’s bank account. The clerk fraudulently drew checks to X, an existing person, but who had no interest in the checks and was not intended by the clerk to receive them. The clerk indorsed the name of X and negotiated the checks for his own purposes, and the drawee bank paid them in good faith. Held, that the payee was a fictitious person within the section, that the checks were payable to bearer and that the payment by the bank was rightful. (Brannan, page 14, citing Snyder v. Corn Exch. Nat. Bank, 221 Pa. 599, 70 Atl. 876, S.C. sec. 124) The name of the drawer was forged to checks made payable to real persons. It did not appear who the forger was, but he knew that the payees would never have any interest in the checks. The drawee bank paid the checks to defendant, a holder in due course, on the forged indorsement of the payee. Held, that the payees were fictitious, that the checks were payable to bearer, and that the drawer could not recover the money from defendant. (Ibid, citing Trust Company of America v. Hamilton Bank, 127 App. Div. 515, 112 N.Y. Supp. 84) An instrument knowingly made payable to the order of a fictitious or non-existing person is negotiable without indorsement, but to recover upon the instrument as payable to bearer, it must be shown that the maker had knowledge of the fiction, and if the plaintiff declares only upon the instrument as payable to order, it is not necessary to decide whether there is evidence of such knowledge, as the issue is not open. (Ibid, citing Boles v. Harding, 201 Mass. 103, 87 N.E. 481) A bill payable to a real person not intended by the drawer to have any interest in it is payable to a fictitious person, and is to be treated as payable to bearer, and the acceptor’s ignorance of the fiction is immaterial. (Ibid, citing Bank of England v. Vagliano [1891], A.C. 107)

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The drawer’s ignorance that the payee is non-existing is also immaterial. (Ibid, citing Clutton v. Attenborough [1897], A.C. 9). But if the payee is a real person intended by the drawer to be the payee, he is not a fictitious person, and the drawer is not liable to one claiming under a forged indorsement of the payee’s name, although the payee really had no interest in the instrument. (Brannan, page 15, citing Bank of England v. Vagliano and Clutton v. Attenborough, distinguished. Vinden v. Huges [1905], 1 K.B. 795; North & South Wales Bank v. Macbeth [1908], App. Cas. 137) When the only or last indorsement is an indorsement in blank A promissory note indorsed in blank by the payee is payable to bearer. (Brannan, page 16, citing Mass. Nat. Bank v. Snow, 187 Mass. 159, 72 N.E. 959, S.C. secs. 16, 56, 124, 191; Unaka Nat. Bank v. Butler, 113 Tenn. 574, 83 S.W. 655 (a check), S.C. sec. 56) The indorsement in blank of a non-negotiable promissory note does not make it negotiable, and the indorser is liable only as an assignor. (Ibid, citing Wettlaufer v. Baxter (Ky.), 125 S.W. 741) Sec. 10. Terms, when sufficient. - The instrument need not follow the language of this Act, but any terms are sufficient which clearly indicate an intention to conform to the requirements hereof. Notes: Substantial compliance with the requirements of negotiability The law does not require that the Bill or Note have to literally follow the language of the Negotiable Instruments Law, it is enough that looking at the face of the instrument, substantial compliance from Sec. 1 of the said law can be inferred. Illustrative case: A certificate of deposit reciting that “X has deposited in the Y bank three thousand dollars to the credit of himself, payable in current funds on return to this certificate properly indorsed on July 1, 1909” is a negotiable instrument under the N.I.L. (Brannan,

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page 16, citing, Forest v. Safety Banking & Trust Co. (E.D. Pa.), 174 Fed. 345) Sec. 11. Date, presumption as to. - Where the instrument or an acceptance or any indorsement thereon is dated, such date is deemed prima facie to be the true date of the making, drawing, acceptance, or indorsement, as the case may be. Notes: A Date in a bill or note is not essential to its validity The date of an instrument is not necessary to it in law, that its absence avoids the instrument. It is not an essential characteristic of the instrument, as other qualities are characteristic of the instrument or of its negotiability. For this reason the date may be supplied by parol, the date of delivery being the day of date; or it may be antedated or postdated, or, if the date be left blank, all parties are deemed to consent that the holder may fill up the blank with a date. Legally speaking, the chief importance of a date is that it is presumptive evidence of the time of its actual execution, a presumption, however, which may be contradicted by parol evidence.5 Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery. Notes: An indorsee of a post-dated check is not put upon inquiry merely because of its negotiation prior to its date. (Brannan, page 17, citing Albert v. Hoffman, 64 Misc. Rep. 87; 117 N.Y. Supp. 1043, S.C. sec. 25.) A post-dated check is not invalid, and may be properly stamped as a bill payable on demand. (Ibid, citing, Royal Bank v. Tottenham, [1894] 2 Q.B. 715; Hitchcock v. Edwards, 60 L.T. Rep. 636.) A post-dated check is not irregular x x x so as to charge the holder with equities. (Ibid)

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Sec. 13. When date may be inserted. - Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date. Notes: If the instrument is issued undated, is it a negotiable instrument? ANSWER: Yes. Where— a. an instrument expressed to be payable at a fixed date is issued undated or b. where the acceptance of an instrument payable at a fixed period after sight is undated Then any holder may insert therein the true date of issue or acceptance, and the instrument shall be paid accordingly. (Sec. 13, Negotiable Instruments Law) The validity and negotiable character of an instrument is not affected by the fact that it is not dated. (Sec. 5, Negotiable Instruments Law) What if a wrong date was inserted by the holder? The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course but it is as to him, the date so inserted is to be regarded as the true date. (Sec. 13, Negotiable Instruments Law)

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Illustrative case: An undated note, payable four months after date, was delivered to the payee by an accommodation indorser on December 1st. The payee, without authority, filled in the date December 30th. Held, that in the absence of other authority the payee could only fill in the blank with the date of issue and that the indorser was discharged. (Brannan, page 17, citing Bank of Houston v. Day, (Mo. App.), 122 S.W. 756.) Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any 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 and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. Notes: What happens when there are blanks on the instrument? When there are blanks on the instrument, so long as they are material to the completion of the instrument, it may be filled up by the person in possession thereof. Illustrative case: Defendant signed a note in blank on the statement that it was to be used to borrow money for a co-defendant who was jointly liable with the plaintiff to a bank. The note was filled up in the presence of plaintiffs, who were made payees, and delivered them, and they paid the co-defendant’s share of the debt to the

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bank. Held, that the note was filled up in accordance with the authority given, that the payees were holders for value and could recover on the note. (Brannan, page 19, citing Hermann’s Ex’r. v. Gregory (Ky.), 115 S.W. 809, S.C.sec. 25.) General Rule: When there are blanks on the instrument, consisting of material particulars, the person in possession thereof has a prima facie authority to fill it up. Provided, that he fills it up strictly in accordance with the authority given and within a reasonable time. We have here an instance, where a paper, which has yet to comply with Sec. 1, there being wanting of any material particular, may be filled up by the person in possession thereof. But in order to bind any person who became a party to the instrument prior to its completion, such blanks must be filled up strictly in accordance with the authority given to the person in possession thereof. However, if the instrument, after completion, regardless of whether or not he complied with the authority given him, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, irrespective of how the blank was filled up, as the law gives a presumption that it had been filled up strictly in accordance with the authority given and within a reasonable time. What if the instrument which was irregularly filled up was negotiated to a person not a holder in due course? Will the answer be the same? No. The answer will not be the same. If it was negotiated to a person not a holder in due course, he cannot enforce the instrument, as it was not filled up strictly in accordance with the authority given and within a reasonable time. How must the blanks to the instrument be filled up? They must be filled up: a) Strictly in accordance with the authority give; AND Ex. If the authority was for the payment of bills due and it was filled up strictly for that purpose. b) Within a reasonable time.

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Ex. In the above example, it was filled up almost immediately thereafter the knowledge of the bills due. Materiality of the blanks to the completion of the instrument The word “material” in this section is not synonymous with “necessary” so as to restrict the right of filling a blank to something essential to a complete negotiable instrument. Therefore the name of a place may be written after delivery in a blank space after the word “at” and the instrument will not be thereby avoided in the hands of a holder in due course. (Brannan, page 18, citing Johnston v. Hoover, 139 Iowa, 143; 117 N.W. 277) Where the maker of a note signed and delivered it, leaving a blank after the amount between the words “at” and “value received,” the payee or any subsequent holder was authorized to fill the blank with a place of payment either without or without the State, and such act was not an alteration avoiding the note. (Ibid, citing Diamond Distilleries Co. v. Gott (Ky.), 126 S.W. 131.) Presumption of authority to sign Hence, the law merely requires that the instrument be in the possession of a person other than the drawer or maker. From such possession, together with the fact that the instrument is wanting in a material particular, the law presumes agency to fill up the blanks.238 Because of this, the burden of proving want of authority or that the authority granted was exceeded, is placed on the person questioning such authority.239 (John Dy vs. People of the Philippines, et al, G.R. No. 158312, November 14, 2008, [Quisumbing, Acting C.J.]) Suppose a person signed a blank instrument and delivered it to the payee, would the holder still have the authority to convert it into a negotiable instrument? Yes. A signature on a blank paper delivered by the person making the signature in order that the paper may be converted 238

239

I.A.F. Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, 168 (1987 ed) J.C. Campos, Jr. and M.C. Lopez-Campos, Notes and Selected Cases on Negotiable Instruments Law, 351 (3rd ed., 1971)

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into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. (Sec. 14, Negotiable Instruments Law) Burden to prove authority The burden is on the plaintiff, a party prior to the completion of an instrument signed in blank, to prove that the blanks were filled up within a reasonable time. From October to the following June 9 is, if unexplained, more than a reasonable time. (Brannan, page 19, citing Madden v. Gaston, 121 N.Y. Supp. 951, semble, S.C. sec. 16) Sec. 15. Incomplete instrument not delivered. - Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. Notes: Incomplete and undelivered instruments A class of cases, illustrative of want of consent, arises when in an incomplete instrument has been signed and stolen, without any delivery to an agent in trust, or otherwise, intervening. In such cases no trust for any purpose has been created. No instrument has been perfected. No appearance of validity has been given it. No negligence can be imputed. Therefore if the blank be filled, it is sheer forgery, in which the maker is in no wise involved, and he is not therefore bound, even to a bona fide holder without notice.240 (Daniel, Elements of the Law of Negotiable Instruments, page 140) What is required in order that the completed blank instrument may be enforceable against any person? In order that any 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 and within a reasonable time. 240

1 Parsons on Notes and Bills, 114; Daniel on Negotiable Instruments, 839

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What if the above-indicated instrument was negotiated to a holder in due course? If such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. What is the rule in incomplete and undelivered instruments? Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. (Sec. 15, Negotiable Instruments Law) Does Section 15 include a holder in due course? Yes. There was no intention of the part of the person whose signature was placed before delivery to make or draw a negotiable instrument, thus, it will not be binding upon him. What if the instrument is later on completed, but not delivered While it cannot be said that the authorities are uniform, it may be stated to be safely settled that if a negotiable instrument has been fully completed in form and signed by the drawer or maker, and, before delivery, is stolen from the possession of the party who has signed it, and passed by the thief to a bona fide holder for value in the usual course of business, it would afford him no defense against such bona fide holder. Whether the instrument be payable to bearer, or to the order of the thief, if it be indorsed by him, we can see no reason why the bona fide holder should not be entitled to recover. The want of delivery is a defect not apparent on the face of the bill or note. That party has given the appearance of validity to his paper. His signature is itself an assurance that his obligation has been perfected by delivery; and it being necessary that the loss should fall upon one of two innocent parties, it should fall upon the one whose act had opened the door for it to enter.241 (Daniel, Elements of the Law of Negotiable Instruments, page 129)

241

Daniel on Negotiable Instruments, 837; Kinyon v. Wohlford, 17 Minn. 239

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Where the maker has perfected the instrument, and left it undelivered in a safe, desk, or other receptacle, it should then be at his hazard. Such papers are made for use, and not for preservation. The maker creates the risk of their being eloigned by keeping them on hand, and places them on the same basis as negotiable papers which have been put upon the market. When once issued the purchaser is protected and the owner loses, even though he had guarded his property with bolt and bar; and if bankers and others who must necessarily be in possession of negotiable securities in the course of trade are not protected, we can discover no principle which can be invoked to protect one who holds his own paper contrary to the ordinary wants and usages of trade.242 (Ibid) Illustrative Case: Bank of America NT & SA vs. Philippine Racing Club G.R. No. 150228, July 30, 2009 LEONARDO-DE CASTRO, J.: FACTS:

242

Philippine Racing Club Inc. (PRCI) maintained a Current Account with Bank of America. The authorized joint signatories with respect to said account were the President (Antonia Reyes) and Vice-President for Finance (Gregorio Reyes).On or about the 2nd week of December 1988, the President and Vice President were scheduled to go out of the country in connection with the corporation’s business. In order not to disrupt operations in their absence, they pre-signed several checks relating to said account. The intention was to insure continuity of the corporation’s operations by making available cash/money especially to settle obligations that might become due. These checks were entrusted to the accountant with instruction to make use of the same as the need arose. The internal arrangement was, in the event there was need to make use of the checks, the accountant would prepare the corresponding voucher and thereafter complete the entries on the pre-signed checks. Thompson on Bills (Wilson’s ed.), 92; 1 Parsons on Notes and Bills, 114

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On December 16, 1988, a John Doe presented two (2) checks to the bank for encashment a couple of the pre-signed checks worth Php 110,000.00 each. The two (2) checks had similar entries with similar infirmities and irregularities. Despite the highly irregular entries on the face of the checks, the bank, without as much as verifying and/or confirming the legitimacy of the checks considering the substantial amount involved and the obvious infirmity/defect of the check on their faces, encashed said checks. A verification process, even by way of a telephone call to PRCI office, would have taken less than ten (10) minutes. But this was not done by the bank. Investigation conducted by PRCI yielded the fact that there was no transaction involving PRCI that call for the payment of Php 220,000.00 to anyone. The checks appeared to have come into the hands of any employee of PRCI who eventually completed without authority the entries on the presigned checks. PRCI’s demand for the bank to pay fell on deaf ears. Hence, complaint was filed. ISSUE:

Whether the proximate cause of the wrongful encashment of the checks in question was due to (a) petitioner’s failure to make a verification regarding the said checks with the respondent in view of the misplacement of entries on the face of the checks.

RULING: It is well-settled that banks are engaged in a business impressed with public interest, and it is their duty to protect in return their many clients and depositors who transact business with them. They have the obligation to treat their client’s account meticulously and with the highest degree of care, considering the fiduciary nature of their relationship. The diligence required of banks, therefore, is more than of a good father of a family.243 In the case at bar, extraordinary diligence demands that petitioner should have ascertained from the 243

Samsung Construction Company Philippines, Inc. v. Far East Bank and Trust Company, Inc., G.R. No. 129015, August 13, 2004, 436 SCRA 402, 421

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respondent the authenticity of the subject checks or the accuracy of the entries therein not only because of the presence of highly irregular entries on the face of the checks but also of the decidedly unusual circumstances surrounding their encashment. x x x the confluence of the irregularities on the face of the checks and circumstances that depart from the usual banking practice of respondent should have put petitioner’s employees on guard that the checks were possibly not issued by the respondent in due course of its business. Petitioner’s subtle sophistry cannot exculpate it from behavior that fell extremely short of the highest degree of care and diligence required of it as a banking institution. In defense of its cashier/teller’s questionable action, petitioner insists that pursuant to Sections 14244 and 16 245 of the NIL, it could validly presume, upon presentation of the checks, that the party who filled up the blanks had authority and that a valid and intentional delivery to the party presenting the checks had taken 244

245

Sec. 14. Blanks, when may be filled. – Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any 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 and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. Sec. 16, Delivery; when effectual; when presumed. – Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties, and as regards a remote party other than a holder in due course, the delivery in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing as the case may be; and in such case the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder of a due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved

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place. Thus, in petitioner’s view, the sole blame for this debacle should be shifted to respondent for having its signatories pre-sign and deliver the subject checks.246 Petitioner argues that there was indeed delivery in this case because, following American jurisprudence, the gross negligence of respondent’s accountant in safekeeping the subject checks which resulted in their theft should be treated as a voluntary delivery by the maker who is estopped from claiming non-delivery of the instrument.247 Petitioner’s contention would have been correct if the subject checks were correctly and properly filled out by the thief and presented to the bank in good order. In that instance, there would be nothing to give notice to the bank of any infirmity in the title of the holder of the checks and it could validly presume that there was proper delivery to the holder. The bank could not be faulted if it encashed the checks under those circumstances. However, the undisputed facts plainly show that there were circumstances that should have alerted the bank to the likelihood that the checks were not properly delivered to the person who encashed the same. In all, we see no reason to depart from the finding in the assailed CA Decision that the subject checks are properly characterized as incomplete and undelivered instruments this making Section 15248 of the NIL applicable in this case. 2000 Bar Question: PN makes a promissory note for P5, 000.00, 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 246 247 248

Rollo, p. 304 Id. at 306 Sec. 15. Incomplete instrument not delivered. – Where an incomplete instrument has not been delivered it will not, if completed and negotiated, without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery

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for payment. Before X, T, who turned out to have filched the note from 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 note and therefore he enjoys the rights of a holder in due course under the Negotiable Instruments Law. Who is correct and why? (3%) ANSWER: A. PN is correct. Sec. 15, Act 2031, provides that where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. Therefore PN is correct when he dishonored the note. Sec. 16. Delivery; when effectual; when presumed. - Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved. Notes: Delivery is the final step necessary to perfect the existence of any written contract; and, therefore, as long as a bill or note

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remains in the hands of the drawer or maker, it is a nullity.249 (Daniel, Elements of the Law of Negotiable Instruments, page 42) The inception of a note is defined by Judge Platt to mean “when it was first given, or when it first became the evidence of an existing contract.” It has no legal inception until it is delivered as evidence of a subsisting debt. The mere writing and signing of a bill or note, which the drawer or maker retains in his hands, forms no contract. No person has then a right of action upon it any more than if it were blank paper. The inception of the paper is when there came into existence a right of action upon it. This is because while the note or bill is in the maker’s hands, it can be erased, canceled, or revoked. It cannot, therefore, be an evidence of indebtedness until it is beyond such possibility. The decisive step for this is the delivery.250 So essential is delivery that it has been held that where a promissory note, the existence of which was unknown to the grantee, lay in the grantor’s possession, and was found amongst his papers after death, the payee could not claim or sue upon it;251 and though such a note should be found, accompanied with written directions to deliver it to the payee, the payee will still have no right of action, unless the directions be valid as a testament.252 (Ibid) When can there be Delivery? Two things must concur in a delivery. The first is the transfer, actual or constructive, of the possession of the instrument; the second an intent to transfer the title on the part of the transferrer. The minds of both parties, to this extent, must concur.253 On the other hand, such acts as handing completed notes to the payee, who, though objecting to the form, retained them; or depositing completed notes, properly addressed, in the post office; 249 250

251 252 253

Devries v. Shumate, 53 Md. 216; Purviance v. Jones, 120 Ind. 164 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 68, citations omitted Disher v. Disher, 1 P. Wms. 204 Gough v. Findon, 7 Exch. 48 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 69, citations omitted

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or giving a duplicate bill in place of one lost, which the payee treated as an original,—have been held to constitute sufficient deliveries. It is to be noted, however, that the delivery needs to be to the payee, nor need the intent of the transferrer to transfer title be communicated to him. For, as will be seen, a bill or note may be delivered in escrow, and take effect on performance of the condition, without knowledge or actual assent of the payee, and a note delivered in a sealed envelope, to be opened after the maker’s death, is operative, although the payee does not become aware of the existence of the note until after the death occurs. The outward and visible indication of delivery is possession.254 Types of Delivery Delivery may be constructive a well as actual. (Ibid) There is actual delivery, when it is effected by the manual passing of the instrument itself to the payee or his agent.255 There is constructive delivery, when it is effected by direction to a third person in actual possession of the instrument to deliver it to, or to hold it for, the payee.256 Delivery may also be upon conditions. Deliveries upon conditions are of two classes: delivery as an escrow, and delivery to the other party to the instrument upon a condition. Delivery as an escrow is defined as a delivery to a third person, made to await the happening of an event, or performance of a condition, or some affirmative action on the part of the other party, before he is entitled to the absolute delivery of the instrument, as distinguished from the affirmative action of the party who delivers the instrument in escrow. The authorities agree that a delivery in escrow has two elements: It must be to some person not ultimately entitled to receive it; and the delivery must take effect and the title to the instrument pass the instant condition of the escrow is fulfilled, even though the depositary has not formally delivered it to the person entitled to the possession. In these respects it is like the escrow of a deed, from the analogy of which it is in fact drawn. There are, however, these distinctions: A deed once delivered to 254 255

256

Id., pp. 69-70 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 67 Id.

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be held in escrow by a third party, and wrongly passed on by him, is subject to defenses, even in the hands of a purchaser for value without notice, but a negotiable instrument is not. A deed being delivered conditionally to the obligee, parol evidence that it was conditional is admissible.257 A delivery upon a condition is where the instrument is delivered to the payee, to be held by him pending some future event.258 A direction to a third person, who is in actual custody of the instrument, to hold it subject to the payee’s or transferee’s order, or an order to the depositary to deliver it, or a delivery to a third person for the payee without condition is sufficient in legal contemplation. In either of the cases suggested the delivery would be constructive.259 (Elements of the Law of Negotiable Instruments, page 42) Without delivery there can be no valid and binding contract Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument to the payee for the purposes of giving effect thereto.260 The first delivery of the instrument, complete in form, to the payee who takes it as a holder, is called issuance of the instrument.261 Without the initial delivery of the instrument from the drawer of the check to the payee, there can be no valid and binding contract and no liability on the instrument. (Gempesaw vs. Court of Appeals, G.R. No. 92244, February 9, 1993) This is further explained in People vs. Yabut262, “the place where the bills were written, signed, or dated does not necessarily fix or determine the place where they were executed. What is of decisive importance is the delivery thereof. The delivery of the 254 255

256 257

258 259 260 261 262

Id., pp. 69-70 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 67 Id. Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, pp. 70-71, citations, omitted Id., p. 71 Gordon v. Adams, 127 Ill. 225; Howe v. Ould, 28 Gratt. 7 NIL, Sec. 16 Ibid., Sec. 191, par. 10 No. L-42902, 29 April 1977, 76 SCRA 624

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

instrument is the final act essential to its consummation as an obligation. An undelivered bill or note is inoperative. Until delivery, the contract is revocable. And the issuance as well as the delivery of the check must be to a person who takes it as a holder, which means “(t)he payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof.” Delivery of the check signifies transfer of possession, whether actual or constructive, from one person to another with intent to transfer title thereto.” Delivery denotes physical transfer Significantly, delivery is the final act essential to the negotiability of an instrument. Delivery denotes physical transfer of the instrument by the maker or drawer coupled with an intention to convey title to the payee and recognize him as a holder.263 It means more than handing over to another; it imports such transfer of the instrument to another as to enable the latter to hold it for himself.264 (John Dy vs. People of the Philippines, et al, G.R. No. 158312, November 14, 2008, [Quisumbing, Acting C.J.]) In the case of Development Bank of Rizal vs. Sima Wei, et al,265 it was ruled by the High Court that “it had had long been recognized the business custom of using printed checks where blanks are provided for the date of issuance, the name of the payee, the amount payable and the drawer’s signature. All the drawer has to do when he wishes to issue a check is to properly fill up the blanks and sign it. However, the mere fact that he has done these does not give rise to any liability on his part, until and unless the check is delivered to the payee or his representative. A negotiable instrument, of which a check is, is not only a written evidence of a contract right but also a species of property. Just as a deed to a piece of land must be delivered in order to convey title to the grantee, so must a negotiable instrument be delivered to the payee in order to evidence its existence as a binding contract. (emphasis supplied) 263

De la Victoria vs. Burgos, G.R. No. 111190, June 27, 1995, 245 SCRA 374, 379 264 Lewis County et al. v. State Bank of Peck, 170 Pacific Reporter 98, 100 (1918), citing Bigelow, Bills, Notes and Checks, 2nd Ed., p. 13 265 G.R. No. 85419, March 9, 1993, [Campos, Jr., J.:] 266 In re Martens’ Estate, 226 Iowa 162, 283 N.W. 885 (1939); Shriver vs. Danby, 113 A. 612 (1921). 267 Negotiable Instruments Law, Sec. 191, par. 6.

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Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its delivery to him.266 Delivery of an instrument means transfer of possession, actual or constructive, from one person to another.267 Without the initial delivery of the instrument from the drawer to the payee, there can be no liability on the instrument. Moreover, such delivery must be intended to give effect to the instrument.” (supra) When does the instrument become effectual between the parties? Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved. As ordinarily understood, delivery means the transfer of the possession of the instrument by the maker or drawer with intent to transfer title to the payee and recognize him as the holder thereof. (Dela Victoria vs. Burgos, G.R. No. 111190, June 27, 1995, [Bellosillo, J.]) A bill of exchange payable to the order of the drawer does not come into existence until it is delivered as well as indorsed by the payee. (Brannan, page 19, citing Stouffer v. Curtis, 198 Mass. 560, 85 N.E. 180) Intention essential It is essential to delivery that the minds of both parties should assent, in order to bind them; and if, through inattention, infirmity, or otherwise, one does not assent, the act of the other is nugatory.268 Therefore, leaving a check on the desk of a clerk of a bank, and without knowledge of such clerk of an officer of the bank, does not constitute delivery.269

268 269

Daniel on Negotiable Instruments, 67 Chicopee Bank v. Philadelphia Bank, 8 Wall. 641; Kinney v. Ford, 52 Barb. 194

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

Delivery must be for purposes of giving effect thereto Note however that delivery as the term is used in the aforementioned provision means that the party delivering did so for the purpose of giving effect thereto.270 Otherwise, it cannot be said that there has been delivery of the negotiable instrument. Once there is delivery, the person to whom the instrument is delivered gets the title to the instrument completely and irrevocably. (San Miguel Corporation vs. Puzon, G.R. No. 167567, September 22, 2010, [Del Castillo, J.:]) San Miguel Corporation vs. Bartolome Puzon, Jr. G.R. No. 167567, September 22, 2010 DEL CASTILLO, J.: Puzon was a dealer of beer products of San Miguel Corporation (SMC). He purchased products on credit. To ensure payment and as a business practice, SMC required him to issue post-dated checks equivalent to the value of the products purchased on credit before the same were released to him. Said checks were returned to Puzon when the transactions covered by these checks were paid or settled in full. On December 31, 2000, Puzon purchased products on credit amounting to P11,820,327.00 for which he issued, and gave to SMC, BPI Check Nos. 27904 (for P309,500.00) and 27903 (for P11,510,827.00) to cover the said transaction. On January 23, 2001, Puzon, together with his accountant, visited the SMC Sales Office to reconcile his account with SMC. During that visit Puzon allegedly requested to see BPI Check No. 17657. However, when he got hold of BPI Check No. 27903 which was attached to a bond paper together with BPI Check No. 17657 he allegedly immediately left the office with his accountant, bringing the checks with them. SMC sent a letter to Puzon demanding the return of the said checks. Puzon ignored the demand hence SMC filed a complaint against him for theft with the City Prosecutor’s Office. The High Court held that: “[t]he essential elements of the crime of theft are the following: (1) that there be a taking of personal property; (2) that said property belongs to another; (3) that the taking be done with intent to gain; (4) that the taking be done without the consent of the owner; and (5) that the taking be

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accomplished without the use of violence or intimidation against persons or force upon things.271 Considering that the second element is that the thing taken belongs to another, it is relevant to determine whether ownership of the subject check was transferred to petitioner. On this point the Negotiable Instruments Law provides: Sec. 12. Antedated and Postdated—the instrument is not invalid for the reason only that it is antedated or postdated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the dated of delivery. (underscoring supplied) Note however that delivery as the term is used in the aforementioned provision means that the party delivering did so for the purpose of giving effect thereto.272 Otherwise, it cannot be said that there has been delivery of the negotiable instrument. Once there it delivery, the person to whom the instrument is delivered gets the title to the instrument completely and irrevocably. If the subject check was given by Puzon to SMC in payment of the obligation, the purpose of giving effect to the instrument is evident thus title to or ownership of the check was transferred upon delivery. However, if the check was not given as payment, there being no intent to give effect to the instrument, then ownership of the check was not transferred to SMC. The evidence of SMC failed to establish that the check was given in payment of the obligation of Puzon. There was no provisional receipt or official receipt issued for the amount of the check. What was issued was a receipt for the document, a “POSTDATED CHECK SLIP.”273 Furthermore, the petitioner’s demand letter sent to respondent states “As per company policies on receivables, all 270 271

272 273

Sec. 16 of the Negotiable Instruments Law Aoas v. People, G.R. No. 155339, March 3, 2008; 547 SCRA 311, 317318; People v. Puig, G.R. Nos. 173654-765, August 28, 2008, 563 SCRA 564, 570; Cruz v. People, G.R. No. 176504, September 3, 2008, 564 SCRA 99, 110. Sec. 16 of the Negotiable Instruments Law Rollo, p. 76

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

issuances are to be covered by post-dated checks. However, you have deviated from this policy by forcibly taking away the check you have issued to us to cover the December issuance.”274 Notably, the term “payment” was not issued instead the terms “covered” and “cover” were used. When taken in conjunction with the counter-affidavit of Puzon—where he stated that “As the [liquid beer] contents are paid for, the SMC return[s] to me the corresponding PDCs or request[s] me to replace them with whatever was the unpaid balance.”275—it becomes clear that both parties did not intend for the check to pay for the beer products. The evidence proves that the check was accepted, not as payment, but in accordance with the long-standing policy of SMC to require its dealers to issue postdated checks to cover its receivables. The check was only meant to cover the transaction and in the meantime Puzon was to pay for the transaction by some other means other than the check. This being so, title to the check did not transfer to SMC; it remained with Puzon. The second element of the felony of theft was therefore not established. Petitioner was not able to show that Puzon took a check that belonged to another. Hence, the prosecutor and the DOJ were correct in finding no probable cause for theft.” How must the delivery of the instrument be made for it to be effectual? The delivery, in order to be effectual as between immediate parties and as regards a remote party other than a holder in due course, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be. Illustrative Case: Loreto Dela Victoria vs. Hon. Jose P. Burgos and Raul H. Sesbreño G.R. No. 111190, June 27, 1995 BELLOSILLO, J:

274 275

Demand letter. Id. At 79. Id. At 113.

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FACTS:

Raul H. Sesbreño filed a complaint for damages against Assistant City Fiscals Bienvenido N. Mabanto, Jr., and Dario D. Rama, Jr., before the Regional Trial Court of Cebu City. After trial judgment was rendered ordering the defendants to pay P11, 000.00 to the plaintiff, private respondent herein. The decision having become final and executory, on motion of the latter, the trial court ordered its execution. A notice of garnishment was served on petitioner Loreto dela Victoria as City Fiscal of Mandaue City where defendant Mabanto, Jr. was then detailed. The notice directed petitioner not to disburse, transfer, release or convey to any other person except to the deputy sheriff concerned the salary checks or other checks, monies, or cash due or belonging to Mabanto, Jr., under penalty of law. Petitioner moved to quash the notice of garnishment claiming that he was not in possession of any money, funds, credit, property or anything of value belonging to Mabanto, Jr., except his salary and RATA checks, but that said checks were not yet properties of Mabanto, Jr., until delivered to him. He further claimed that, as such, they were still public funds which could not be subject of garnishment.

ISSUE:

Whether a check still in the hands of the maker or its duly authorized representative is owned by the payee before physical delivery to the latter?

RULING: Garnishment is considered as a species of attachment for reaching credits belonging to the judgment debtor owing to him from a stranger to the litigation. Emphasis is laid on the phrase “belonging to the judgment debtor” since it is the focal point in resolving the issues raised. As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public funds. He received his compensation in the form of checks from the Department of Justice through petitioner a City Fiscal of Mandaue City and head of office. Under Sec. 16 of the Negotiable Instruments Law, every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As ordinarily understood, delivery means the

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

transfer of the possession of the instrument by the maker or drawer with intent to transfer title to the payee and recognize him as the holder thereof. According to the trial court, the checks of Mabanto, Jr., were already released by the Department of Justice duly signed by the officer concerned through petitioner and upon service of the writ of garnishment by the sheriff petitioner was under obligation to hold them for the judgment creditor. It recognized the role of the petitioner as custodian of the checks. At the same time however it considered the checks as no longer government funds and presumed delivered to the payee based on the last sentence of Sec. 16 of the Negotiable Instruments Law which states: “And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed.” Yet, the presumption is not conclusive because the last portion of the provision says “until the contrary is proved.” However this phrase was deleted by the trial court for no apparent reason. Proof of the contrary is its own finding that the checks were in the custody of the petitioner. Inasmuch as said checks had not yet been delivered to Mabanto, Jr., they did not belong to him and still had the character of public funds. In Tiro v. Hontanosas276 we ruled thatThe salary check of a government officer of employee such as a teacher does not belong to him before it is physically delivered to him. Until that time the check belongs to the government. Accordingly, before there is actual delivery of the check, the payee has no power over it; he cannot assign it without the consent of the Government. What if the instrument is in the hands of a holder in due course, is delivery conclusively presumed? Where the instrument is in the hands of a holder in due course, a valid delivery thereof by all the parties prior to him so as to make them liable to him is conclusively presumed. 276

No. L-32312, 25 November 1983, 125 SCRA 697.

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But the presumption both as to the fact and the time of delivery may be rebutted.277 As a bill or note takes effect only by delivery, so it takes effect only on delivery; and if this be subsequent to its date, it will be binding only from the day of actual delivery.278 If the bill or note bears no date, the time must be computed from its delivery; and if the day of actual delivery cannot be proved, it will be computed from the earliest day on which it appears to have been in the hands of the payee or any holder.279 Burden of proving delivery Under the last clause of section 16 and section 14, the burden is on the defendant to show the agreement under which a negotiable instrument signed in blank was delivered and that the terms have been violated. (Brannan, page 22, citing Madden v. Gaston (Misc. Rep.) 121 N.Y. Supp. 951 S.C. sec. 14) Sec. 17. Construction where instrument is ambiguous. Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply: (a) Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount; (b) Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof; (c) Where the instrument is not dated, it will be considered to be dated as of the time it was issued; (d) Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail; 277 278 279

Woodford v. Dorwin, 3 Vt. 82; Scaife v. Byrd, 39 Ark. 568 Lovejoy v. Whipple, 18 Vt. 379 Clark v. Sigourney, 17 Conn. 511; Richardson v. Lincoln, 5 Metc. (Mass.) 201

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(e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; (f) Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser; (g) Where an instrument containing the word “I promise to pay” is signed by two or more persons, they are deemed to be jointly and severally liable thereon. Notes: Where sum payable is written in words or figures The law mandates that where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable. Example: Sum payable is Eleven Million Seven Hundred Six Thousand Pesos (Php 11,706.00); in this instance we follow the sum expressed in words. But if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount. Example: Sum payable is Six Million Seven Fifty Pesos (Php 6,000,750.00); in this instance there is ambiguity in the sum payable in words, thus, reference may be had to the figures to fix the amount. In another illustration, the instrument provides that the sum payable is Eleven Million Six Hundred Fifty Seven Thousad Nine Hundred Fifty Pesos (Php 6,750,980.00). What should be the construction of the instrument?

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The instrument is not negotiable, the sum payable is uncertain. The sum payable in words and figures must be reconciled in order for Sec. 17 (a) to apply, otherwise, we have a non-negotiable instrument for being uncertain as to the amount payable. 2011 Bar Question: X issued a check in favor of his creditor, Y. It reads: “Pay to Y the amount of Seven Thousand Hundred Pesos (Php700, 000.00). Signed, X”. What amount should be construed as true in such a case? A. Php700, 000.00. B. Php700.00. C. Php7, 000.00. D. Php700, 100.00. Where the instrument provides for the payment of interest Where the instrument provides for the payment of interest, without specifying the date from which the interest is to run, the interest runs from the date of the instrument. Example: For value received I promise to pay David Lancelot, or his order, Php 1,000.00 with 10% interest per annum. (Sgd) Abigail Margaux (January 1, 2011) In the above-cited example, there was no date specified as to when the interest will start to run, applying Sec. 17 (b), the rate of interest will start to run on January 1, 2011, which is the date of the instrument. However, where the said instrument is undated, interest runs from the time of issuance thereof.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

In the above example, assuming the instrument is undated, the 10% interest shall commence from the time of the actual issuance or delivery thereof, as the holder of an undated instrument has a prima facie authority to insert the proper date as may be necessary. Undated Instrument This provision is self-explanatory. The same rule as abovementioned shall be followed. This manifests that date is not essential to the validity of the instrument, but only as with regards to liability. Conflict between the Written and Printed provisions Printed provisions here would mean those printed by the use of a typewriter, risograph, or any other mark which came about as a result of a mechanical process. Whereas, written provisions are those writings made by hand. And in case of conflict, written provisions prevail over the printed ones. Ambiguity of whether a Bill or a Note An instrument in the following form: $1000

New York 190

Pay to the order of Rosario Didato Value received and charge on account to 38 Stanton Street Lansa Rosalia May be declared upon as a promissory note. (Brannan, page 24, citing Didato v. Coniglio, 50 Misc. R. 280, 100 N.Y. Supp. 466) Where there is ambiguity whether the instrument is a bill or a note, the holder may treat it as either at his election. (Sec. 17 (e), N.I.L.) Where signature is placed in such a way that the capacity of the signatory is uncertain; signature may be treated as an indorser

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This provision applies only to cases of doubt arising out of the location of the signature. Therefore one who signed in the place of the maker’s name is not an indorser. (Ibid, citing Germania Natl. Bank v. Mariner, 129 Wis. 544, 109 N.W. 574, S.C. secs. 63, 64.) Joint and Several Liability A promissory note reads: I/We hereby consent to any extension which may be requested by anyone of us for the payment of the note. It was held that said promissory note expressly provides that the signatories engaged to pay, jointly and severally, the amount specified therein. And that this did not guarantee the payment of one signatory by the other signatories, but in fact bound themselves solidarily to pay the said amount. (China Banking Corporation vs. Court of Appeals, G.R. No. L-59887, August 31, 1982, [Relova, J.:]) In another case, that of Republic Planters Bank vs. Court of Appeals and Fermin Canlas280, defendant Shozo Yamaguchi and private respondent Fermin Canlas were President/Chief Operating Officer and Treasurer respectively, of Worldwide Garment Manufacturing, Inc., by virtue of Board Resolution No. 1 dated August 1, 1979, defendant Shozo Yamaguchi and private respondent Fermin Canlas were authorized to apply for credit facilities with the petitioner Republic Planters Bank in the forms of export advances and letters of credit/trust receipts accommodations, worded in the following manner: ___________, after date, for value received, I/we, jointly and severally promise to pay to the ORDER of the REPUBLIC PLANTERS BANK, at its office in Manila, Philippines, the sum of ___________ PESOS(....) Philippine Currency...

280

G.R. No. 93073, December 21, 1992, [Campos, J.]

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

“Please credit proceeds of this note to: ________ Savings Account ______XX Current Account No. 1372-00257-6 of WORLDWIDE GARMENT MFG. CORP. The only issue material to the resolution of the Honorable Court is whether private respondent Fermin Canlas is solidarily liable with the other defendants, on the promissory notes? It was held by the Supreme Court that: “private respondent Fermin Canlas is solidarily liable on each of the promissory notes bearing his signature for the following reasons: The promissory notes are negotiable instruments and must be governed by the Negotiable Instruments Law.281 Under the Negotiable Instruments Law, persons who write their names on the face of promissory notes are makers and are liable as such.282 By signing the notes, the maker promises to pay to the order of the payee or any holder283 according to the tenor thereof.284 Based on the above provisions of law, there is no denying that private respondent Fermin Canlas is one of the co-makers of the promissory notes. As such, he cannot escape liability arising therefrom. Where an instrument containing the words “I promise to pay” is signed by two or more persons, they are deemed to be jointly and severally liable thereon.285 An instrument which begins “I”, “We”, or “Either of us” promise to pay, when signed by two or more persons, makes them solidarily liable.286 The fact that the singular pronoun is used indicates that the promise is individual as to each other; meaning that each of the co-signers is deemed to have made an independent singular promise to pay the notes in full. 281 282

283 284 285 286

Act 2031, enacted on February 3, 1911 Negotiable Instruments Law, section 184; H.D. Lee Mercantile Co. vs. Mercantile Co., 275 P. 807 (1929) Ibid, Section 1 Ibid, Section 60 Ibid, Section 17 (g). Powell vs- Mobley, 142 S.E. 678 (1928); Keenig vs. Curran’s Restaurant, 159 Atl. 553 (1932)

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In the case at bar, the solidary liability of private respondent Fermin Canlas is made clearer and certain, without reason for ambiguity, by the presence of the phrase “joint and several” as describing the unconditional promise to pay to the order of Republic Planters Bank. A joint and several note is one in which the makers bind themselves both jointly and individually to the payee so that all may be sued together for its enforcement, or the creditor may select one or more as the object of the suit.287 A joint and several obligation in common law corresponds to a civil law solidary obligation; that is, one of several debtors bound in such wise that each is liable for the entire amount, and not merely for his proportionate share.288 By making a joint and several promise to pay to the order of Republic Planters Bank, private respondent Fermin Canlas assumed the solidary liability of a debtor and the payee may choose to enforce the notes against him alone or jointly with Yamaguchi and Pinch Manufacturing Corporation as solidary debtors. As to whether the interpolation of the phrase “and (in) his personal capacity” below the signatures of the makers in the notes will affect the liability of the makers, we do not find it necessary to resolve and decide, because it is immaterial and will not affect to the liability of private respondent Fermin Canlas as a joint and several debtor of the notes. With or without the presence of said phrase, private respondent Fermin Canlas is primarily liable as a co-maker of each of the notes and his liability is that of solidary debtor”.289 Philippine National Bank vs. Concepcion Mining Company, Inc., et al G.R. No. L-16968, July 31, 1962 LABRADOR, J: Appeal from a judgment or decision of the Court of First Instance of Manila, Hon. Gustavo Victoriano, presiding, sentencing defendants Concepcion Mining Company and Jose Sarte to pay jointly and severally to the plaintiff the amount of P7, 197.26 with 287 288 289

Rice vs.Gove, 22 pick Mass 158; 33 AM Dec. 724 Black’s Law Dictionary, p. 1249 (5th ed., 1979 Republic Planters Bank vs. Court of Appeals, G.R. No. 93073, December 21, 1992, [Campos, Jr., J]

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interest up to September 29, 1959, plus a daily interest of P1.3698 thereafter up to the time the amount is fully paid, plus 10% of the amount as attorney’s fees, and costs of this suit. The present action was instituted by the plaintiff to recover from the defendants the face of a promissory note the pertinent part of which reads as follows: Manila, March 12, 1954 NINETY DAYS after date, for value received, I promise to pay to the order of the Philippine National Bank . . . In case it is necessary to collect this note by or through an attorney-at-law, the makers and indorsers shall pay ten percent (10%) of the amount due on the note as attorney’s fees, which in no case shall be less than P100.00 exclusive of all costs and fees allowed by law as stipulated in the contract of real estate mortgage. Demand and Dishonor Waived. Holder may accept partial payment reserving his right of recourse again each and all indorsers. (Purpose — mining industry) CONCEPCION MINING COMPANY, INC., By: (Sgd.) VICENTE LEGARDA President (Sgd.) VICENTE LEGARDA (Sgd.) JOSE S SARTE “Please issue check to — Mr. Jose S. Sarte” Upon the filing of the complaint the defendants presented their answer in which they allege that the co-maker the promissory note Don Vicente L. Legarda died on February 24, 1946 and his estate is in the process of judicial determination in Special Proceedings No. 29060 of the Court of First Instance of Manila. On the basis of this allegation it is prayed, as a special defense,

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that the estate of said deceased Vicente L. Legarda be included as party-defendant. The court in its decision ruled that the inclusion of said defendant is unnecessary and immaterial, in accordance with the provisions of Article 1216 of the Civil Code and section 17 (g) of the Negotiable Instruments Law. A motion to reconsider this decision was denied and thereupon defendants presented a petition for relief, asking that the effects of the judgment be suspended for the reason that the deceased Vicente L. Legarda should have been included as a party-defendant and his liability should be determined in pursuance of the provisions of the promissory note. This motion for relief was also denied, hence defendant appealed to this Court. Section 17 (g) of the Negotiable Instruments Law provides as follows: SEC. 17. Construction where instrument is ambiguous. — Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply: xxx

xxx

xxx

(g) Where an instrument containing the word “I promise to pay” is signed by two or more persons, they are deemed to be jointly and severally liable thereon. And Article 1216 of the Civil Code of the Philippines also provides as follows: ART. 1216. The creditor may proceed against any one of the solidary debtors or some of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others so long as the debt has not been fully collected. In view of the above quoted provisions, and as the promissory note was executed jointly and severally by the same parties, namely, Concepcion Mining Company, Inc. and Vicente L. Legarda and Jose S. Sarte, the payee of the promissory note had the right to hold any one or any two of the signers of the

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promissory note responsible for the payment of the amount of the note. This judgment of the lower court should be affirmed. Our attention has been attracted to the discrepancies in the printed record on appeal. We note, first, that the names of the defendants, who are evidently the Concepcion Mining Co., Inc. and Jose S. Sarte, do not appear in the printed record on appeal. The title of the complaint set forth in the record on appeal does not contain the name of Jose Sarte, when it should, as two defendants are named in the complaint and the only defense of the defendants is the non-inclusion of the deceased Vicente L. Legarda as a defendant in the action. We also note that the copy of the promissory note which is set forth in the record on appeal does not contain the name of the third maker Jose S. Sarte. Fortunately, the brief of appellee on page 4 sets forth said name of Jose S. Sarte as one of the co-maker of the promissory note. Evidently, there is an attempt to mislead the court into believing that Jose S. Sarte is not one of the co-makers. The attorney for the defendants Atty. Jose S. Sarte himself and he should be held primarily responsible for the correctness of the record on appeal. We, therefore, order the said Atty. Jose S. Sarte to explain why in his record on appeal his own name as one of the defendants does not appear and neither does his name appear as one of the co-signers of the promissory note in question. So ordered. Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Dizon, Regala and Makalintal, JJ., concur. Reyes, J.B.L., J., took no part. 2001 Bar Question: X, Y, and Z signed a promissory note in favor of A stating: “We promise to pay A on December 31, 2001 the sum of P5, 000.00.” When the note fell due, A sued X and Y who put up the defense that A should have impleaded Z. Is the defense valid? ANSWER: No. Sec. 17 (g), Act 2031, where an instrument containing the word “I promise to pay” is signed by two or more persons, they are deemed to be jointly and severally liable thereon.

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Sec. 18. Liability of person signing in trade or assumed name. - No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise expressly provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name. Notes: Who may be liable on the negotiable instrument? Only persons signing under their name are liable on the instrument. No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise expressly provided. Since a negotiable instrument is a special form of contract, the signature of the parties is needed as a manifestation of their consent to be bound the said instrument. What may be the liability of a person signing under a trade or assumed name? A person who signs in under a trade or assumed name will be liable to the same extent as if he had signed in his own name. (Sec. 18, Negotiable Instrument Law) Example: Alex Cruz issued a promissory note to the order of Nico Santos, but instead of using the name Alex Cruz, he signed under his trade-name Curzifix Radio Works, thus, under the law he will be treated as if he signed as Alex Cruz. Indication of a maker Under the Negotiable Instruments Law, persons who write their names on the face of the promissory notes are makers and are liable as such.290 By signing the notes, the maker promises to pay to the order of the payee or to any holder291 according to the

290

291

Negotiable Instruments Law, section 184; H.D. Lee Mercantile Co. vs. Mercantile Co., 276 P. 807 (1929). Ibid, Section 1.

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tenor thereof292. (Republic Planters Bank vs. Court of Appeals, G.R. No. 93073, December 21, 1992, [Campos, Jr., J]) No application to an oral guaranty by the payee This section has no application to an oral guaranty by the payee upon transferring a note for value without indorsement, the guaranty being an original and absolute obligation to which the note is collateral. (Brannan, page 25, citing Swenson v. Stoltz, Wash. 318, 78 Pac. 999, S.C. sec. 49.) Sec. 19. Signature by agent; authority; how shown. - The signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be established as in other cases of agency. Notes: May the signature be made through an agent? How should the authority be shown? Yes, the signature of any party may be made by a duly authorized agent. For this purpose, no particular form of appointment is necessary. A person may become a party to, or transfer, a bill or note by the hand of an agent. Whether one whose name purports to have been signed by another as drawer, acceptor, maker, or indorser is liable as such depends upon the authority express or implied, of the person who wrote the signature. If such authority existed, the principal, and he alone, is bound. No particular form of appointment is necessary, and the authority of the agent may be established as in other cases of agency.293 The best mode for an agent to sign or indorse a negotiable instruments for his principal, so that it may clearly appear that he is “the mere scribe” who applies the executive hand as the instrument of another, is as follows: “A.B. by his attorney or agent, C.D.;” or “A.B. by C.D., agent;” or, “C.D., for A.B.;” or, “C.D., agent 292 293

Ibid, Section 60. Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 65

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for A.B.”294 (Daniel, Elements of the Law of Negotiable Instruments, page 79) When an instrument payable to X, was indorsed “X by Y with power of attorney” plaintiff, in order to prove his title, must show the authority of the agent to indorse. (Ibid, citing Scotland County Nat. Bank v. Hohn (Mo. App.), 125 S.W. 539, S.C. sec. 30.) What are particular cases or instances which establishes agency? In a contract of agency, one binds oneself to render some service or to do something in representation or on behalf of another, with the latter’s consent or authority. The following are the elements of agency: (1) the parties’ consent, express or implied, to establish the relationship; (2) the object, which is the execution of a juridical act in relation to a third person; (3) the representation, by which the one who acts as agent does so, not for oneself, but as a representative; (4) the limitation that the agent acts within the scope of his or her authority. As the basis of agency is representation, there must be, on the part of the principal, an actual intention to appoint, an intention naturally inferable from the principal’s words or actions. In the same manner, there must be an intention on the part of the agent to accept the appointment and act upon it. Absent such mutual intent, there is generally no agency. (Dominion Insurance Corp. vs. CA, 426 Phil. 620 [2002]; Tuazon, et al. vs. Heirs of Bartolome Ramos, G.R. No. 156262, July 14, 2005, cited in Civil Law Reviewer, Albano, Albano, Jr., Albano-Pua, Albano III, 2008 Edition, page 836) Agency may be express or implied from the acts of the principal, from his silence or lack of action, or his failure to repudiate the agency knowing that another person is acting on his behalf without authority. (Ibid, p. 837) Agency may be oral, unless the law requires a specific form. (Ibid, Art. 1869, NCC)

294

Bradlee v. Boston Glass Co., 46 Pick. 347; Weaver v. Carnall, 35 Ark. 198; 1 Parsons on Notes and Bills, 91; Tannant v. Rocky Mountain Nat. Bank, 1 Colo. 278

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General Rule: The power of persons to incur liability as parties to, and to transfer, negotiable instruments by the hands of others is governed by the general rules applicable to principals and agents.295 EXCEPTION— An undisclosed principal cannot sue or be sued as a party to a negotiable instrument.296 Sec. 20. Liability of person signing as agent, and so forth. Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability. Notes: All persons who are themselves competent to become parties to a negotiable contract, in their own individual right, can do so through the instrumentality of an agent. (Daniel, Elements of the Law of Negotiable Instruments, page 75) If the agent signs a note with his own name, and discloses no principal, he is personally bound. The party so signing must have intended to bind somebody upon the instrument, and no promissor but himself thereon appearing, it must be construed as his note or as a nullity.297 And although he term himself “agent,” such suffix to his name will be regarded as a mere description personae, or as an earmark of the transaction, and may be rejected as surplusage.298 (ibid, page 80) Three things are essential to the creation of an obligation on the part of one individual by and through the act of another, 295

296 297

298

Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 65 Ibid. Arnold v. Stackpole, 11 Mass. 27; Sharpe v. Bellis, 61 Pa. St. 71; Finan v. Babcock, 58 Mich. 305 Toledo Iron & Agr. Works v. Heisser, 51 Mo. 128; Arnold v. Sprague, 34 Vt. 409

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viz: (1) The principal himself must be competent; (2) The agent must be competent to act as such; (3) Authority, express or implied, verbal or in writing, must be conferred by the principal upon the agent. (ibid, page 75) If the agent exceeded his authority in signing his principal’s name, or sign his own professedly as binding his principal, who is named, he is not bound as a party to the paper itself, but only in an action of tort for falsely assuming authority to bind another. (ibid, page 80) What is the liability of a person signing as an agent? He is not liable on the instrument, where he adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity if he was duly authorized. However, the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability. (Sec. 20, Negotiable Instruments Law) Illustrative Case: Philippine Bank of Commerce vs. Jose M. Aruego G.R. Nos. L-25836-37, January 31, 1981 FERNANDEZ, J.: FACTS:

On December 1, 1959, the Philippine Bank of Commerce instituted an action against Jose M. Aruego Civil Case No. 42066 for the recovery of the total sum of about P35,000.00 with daily interest thereon from November 17, 1959 until fully paid and commission equivalent to 3/8% for every thirty (30) days or fraction thereof plus attorney’s fees equivalent to 10% of the total amount due and costs. The complaint filed by the Philippine Bank of Commerce contains Twenty-Two (22) causes of action referring to Twenty-Two (22) transactions entered into by the said Bank and Aruego on different dates covering the period from August 28, 1950 to March 14, 1951. The sum sought to be recovered represents the cost of the printing of “World

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Current Events”, a periodical published by the defendant. To facilitate the payment of the printing the defendant obtained a credit accommodation from the plaintiff. Thus, for every printing of the “World Current Events”, the printer Encal Press and Photo Engraving, collected the cost of printing by drawing a draft against the plaintiff, said draft being sent later to the defendant for acceptance. As an added security for the payment of the amounts advanced to Encal Press and Photo Engraving, the plaintiff bank also required the defendant Aruego to execute a trust receipt in favor of said bank wherein said defendant undertook to hold in trust for plaintiff the periodicals and to sell the same with the promise to turn over to the plaintiff the proceeds of the sale of said publication to answer for the payment of all obligations arising from the draft. Aruego contends that he signed the bills of exchange referred to in the plaintiff’s complaint in a representative capacity, as the then President of the Philippine Education Foundation Company, publisher of “World Current Events and Decision Law Journal,” printed by Encal Press and Photo-Engraving, drawer of the said bills of exchange in favor of the plaintiff bank; ISSUE:

Is his contention tenable?

RULING: Section 20 of the Negotiable Instruments Law provides that “Where the instrument contains or a person add to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent or as filing a representative character, without disclosing his principal, does not exempt him from personal liability.” An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he was signing as a representative of the Philippine Education Foundation Company. He merely signed as follows: “JOSE ARUEGO (Acceptor) (SGD) JOSE ARUEGO.

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For failure to disclose his principal, Aruego is personally liable for the draft he has accepted. Principal must be disclosed It is a general principle of commercial law that a negotiable instrument must wear no mask, but must reveal its character upon its face. And it extends to the liability of parties thereto, who must appear as distinctly as the terms of the instrument itself, in order to be bound thereby. It follows, therefore, that no party can be charged as principal upon a negotiable instrument unless his name is disclosed therein. The reason for this rule is that each party who takes a negotiable instrument makes his contracts with the parties who appear on its face to be bound for its payment; it is “a courier without luggage,” whose countenance is its passport; and in suits upon negotiable instruments, no evidence is admissible to charge any person as a principal party thereto, unless his name in some way is disclosed upon the instrument itself;299 although upon other written contracts, not negotiable, it is often competent to show that, although signed in the name of the agent only, they were executed in the business of the principal, and with the intent that he should be bound. (Daniel, Elements of the Law of Negotiable Instruments, page 79-80) A note was written on a lithographed receipt form, with the name of a corporation at the head, and the impressed seal of the company upon the paper, but not referred to in the note, and the defendants added the word “president” and “secretary” respectively to their signatures. Held, not such disclosure of a principal as will exempt the signers from personal liability. (Brannan, page 27, citing Daniel v. Glidden, 38 Wash. 556, 80 Pac. 811, sub nom. Daniel v. Buttner.) Where defendant signed a note as a “trustee,” held, that as to holders in due course the principal must be disclosed on the face of the note in order to relieve defendant of personal liability (semble), but as between defendant and the payee the disclosure might be made aliunde, and is a question of fact x x x. (Ibid, citing Megowan v. Peterson, 173 N.Y. 1, 65 N.E. 738.)

299

Cragin v. Lovell, 109 U.S. 194; Texas Land Co. v. Carroll, 63 Tex. 51; Brown v. Baker, 7 Allen, 339

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If the payee knows the nature and object of the trust, and that the maker of the note was acting in his capacity as trustee, the maker is not individually liable to the payee, although none of such information appears on the note. (Ibid, citing Kerby v. Ruegamer, 107 App. Div. 491, 95 N.Y. Supp. 408.) Effect of non-disclosure Where the agent signs his name but nowhere in the instrument has he disclosed the fact that he is acting in a representative capacity or the name of the third party for whom he might have acted as agent, the agent is personally liable to take holder of the instrument and cannot be permitted to prove that he was merely acting as agent of another and parol or extrinsic evidence is not admissible to avoid the agent’s personal liability. (Republic Planters Bank vs. Court of Appeals, G.R. No. 93073, December 21, 1992, [Campos, Jr., J:], citing, Crocker National Bank vs. Say, 209 Cal 436; 288 P 69 (1930); Dayries vs. Lindsly, 54 So. 791 (1911); Granada vs. PNB, 18 SCRA 1 (1966) As a general rule, officers or directors under the old corporate name bear no personal liability for acts done or contracts entered into by officers of the corporation, if duly authorized. Inasmuch as such officers acted in their capacity as agent of the old corporation and the change of name meant only the continuation of the old juridical entity, the corporation bearing the same name is still bound by the acts of its agents if authorized by the Board.300 Certainly an agent who actually makes a contract, and who has notice of all equities emanating therefrom, can stand on no better footing that his principal with respect to commercial paper growing out of the transaction. To place him on any higher plane would be incompatible with the fundamental conception underlying the relation of the principal and agent. (Fossum vs. Hermanos, G.R. No. L-19461, March 28, 1923, [Street, J:]) It is a well-known rule of law that if the original payee of a note unenforceable for lack of consideration repurchase the instrument after transferring it to a holder in due course, the paper again becomes subject in the payee’s hands to the same defenses 300

Ibid.

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to which it would have been subject if the paper had never passed through the hands of a holder in due course. (Fossum vs. Hermanos, G.R. No. L-19461, March 28, 1923, [Street, J:], citing Kost vs. Bender, 25 Mich., 515; Shade vs. Hayes, L.R.A. [1915 D], 271; 8 C.J., 470.) The same is true where the instrument is retransferred to an agent of the payee. (supra, citing Battersbee vs. Calkins, 128 Mich., 569) In Dollarhide vs. Hopkins (72 III. App., 509), the plaintiff, as agent of a corporation engaged in manufacturing agricultural implements, sold to the defendant a separator for threshing small grain, with a general warranty that the machine, properly handled, would thresh and clean grain as well as any other separator of like size. The notes in suit were executed by the defendant in payment of the separator, and were assigned to the plaintiff before maturity. They were then indorsed by the plaintiff bank which became holder in due course; but afterwards, and before the commencement of the action, the notes were retransferred by the bank to the plaintiff. In an action upon the notes the defendant alleged and proved breach of warranty and showed that the plaintiff knew of the defect in the separator at the time he purchased the notes. It was held that the plaintiff could not recover, notwithstanding the fact that the notes had passed through a bank, in whose hands they would not have been subject to the defense which had been interposed (54 L.R.A., 678) Ratification A corporation, as well as an individual, may ratify the acts of another, when such acts are done and performed in the name of the alleged principal; and the ratification may be by express consent, or by conduct of the alleged principal inconsistent with any other hypothesis than that he approved and intended to adopt what had been done in his name. Intelligent acquiescence amounts to a binding ratification.301 Three things are essential to a ratification: (1) The party must have the capacity to have made the contract in the particular mode adopted; (2) The principal must have known all of the facts attending the transaction; (3) The contract must have been 301

Knox County v. Aspinwall, 32 How. 544; Supervisors v. Schenck, 5 Wall. 782; Bissell v. Jeffersonville, 24 How. 299; Daniel on Negotiable Instruments, 317

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originally lawful.302 (Daniel, Elements of the Law of Negotiable Instruments, page 81) Revocation of agency A general authority to an agent is presumed to continue until its revocation is generally known. And if A is the agent of B to draw bills in his name, B will be liable as drawer to ignorant indorsees, who had no knowledge of the change in the relationship of the parties, or of the revocation of the agency.303 (Ibid) Other Illustrative cases: A note reading “six months after demand I promise to pay” and signed “J.H.S. Laundry and Dye Works, J.H.S. Managing Director” is the note of the company and J.H.S. is not personally liable. (Brannan, page 26, citing, Chapman v. Smethurst [1909], 1 K.B. 927) However, in a different case, A check was drawn in favor of plaintiff was stamped near the top with the words “B. Marcus & Co. (Limited)” and signed by the two defendants as follows: “B. Marcus, Director, S.H. David’s, Director—Secretary,” the space for the signature of the secretary left blank. The name of the company appeared only at the top of the check. Held, that the defendants were personally liable on the check. (Ibid, citing Landes v. Marcus and Davids (K.B. Div. Mar. 31, 1909), 25 T.L. Rep. 478) Sec. 21. Signature by procuration; effect of. - A signature by “procuration” operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority. Notes: Whenever an authority purports to be derived from a written instrument, or the agent signs the paper with the words “by procuration,” in such a case the party dealing with him is bound to 302 303

Daniel on Negotiable Instruments, 318-320 Chitty on Bill [32]. 42; Story on Agency, 470, 473; Smith v. Stranger, Peake Add. 116

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take notice that there is a written instrument of procuration, and he ought to call for and examine the instrument itself to see whether it justifies the act of the agent. Under such circumstances, he is chargeable with inquiry as to the extent of the agent’s authority; and if, without examining into it when he knows of its existence—and especially if he has it in his possession—he ventures to deal with the agent, he acts at his peril, and must bear the loss if the agent transcended his authority.304 But no duty exists to make inquiry respecting private instructions to the agent from his principal, whether written or oral, for they may well be presumed to be of a secret and confidential nature.305 (Daniel, Elements of the Law of Negotiable Instruments, page 77) What is a signature by procuration? What is the effect thereof? Signature by procuration operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority. (Sec. 21, Negotiable Instruments Law) Illustrative Cases: The manager of a company in order to obtain a guarantee for the company’s business, without authority, gave a note signed “for myself and in representation of the company.” This was not necessary or in the ordinary course of the company’s business. Held. That the company was not liable on the note. (Brannan, page 27, citing Re Cunningham & Co., 36 Ch. D. 532.) An agent of a company drew a check “per proc.,” in excess of his authority. The company is not liable on the check to one who cashed it in good faith, but must account for any money which came into its possession and was employed for its benefit. (Ibid, citing Reid v. Rigby & Co. [1984] 2 Q.B. 40. See also Bissel v. Fox, 53 L.T.R. 193, S.C. infra, p. 309.) Directors of a company which had no power to accept bills, accepted a bill “per proc.” The company. Held, that they were

304

305

Stainback v. Bank of Virginia, 11 Gratt. 259; North River Bank v. Aymar, 3 Hill, 262 North River Bank v. Aymar, 3 Hill, 262; Story on Agency, 73

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personally liable in an action for false representations. (Ibid, citing West London Commercial Bank v. Kitson, 13 Q.B.D. 360.) Where an agent accepts or indorses “per proc.,” the taker of a bill or note so accepted or indorsed is bound to inquire as to the extent of the agent’s authority. But when the agent has the authority to do the act in question, his abuse of such authority will not affect bona fide holder for value. (Ibid, citing Bryant, Powis & Bryant v. Quebec Bank, [1893] A.C. 170, 179.) 2011 Bar Question: Under the Negotiable Instruments Law, a signature by procuration operates as a notice that the agent has but a limited authority to sign. Thus, a person who takes a bill that is drawn, accepted, or indorsed by procuration is duty-bound to inquire into the extent of the agent’s authority by: A. examining the agent’s special power of attorney. B. examining the bill to determine the extent of such authority. C. asking the agent about the extent of such authority. D. asking the principal about the extent of such authority. In a signature by procuration, the principal is bound only in case the agent acted within the actual limits of his authority. The signature of the agent in such a case operates as notice that he has A. a qualified authority to sign. B. a limited authority to sign. C. a special authority to sign. D. full authority to sign. Sec. 22. Effect of indorsement by infant or corporation.- The indorsement or assignment of the instrument by a corporation or by an infant passes the property therein,

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notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon. Notes: What is the effect of an indorsement by an infant or a corporation? ANSWER: The indorsement or assignment of the instrument by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability. (Sec. 22, Negotiable Instruments Law) Indorsements made by infant or corporations Infant, as being referred to by Sec. 22 means unemancipated minors, who lack the capacity to act with legal effect. Under Sec. 22, their indorsement, notwithstanding the fact of their want of legal capacity to act transfers title of the instrument to another, without incurring any liability thereafter. Same rule is applied to a corporation, who, in this instance, may have acted ultra vires. This provision deals with the lack of legal capacity of the infant or corporation, which, despite their incapacity may validly transfer title over the instrument without incurring any liability. The capacity of parties is in general governed by the same rules as their power to make a contract. It is of two kinds:306 (31) a) Capacity to incur liability. b) Capacity to transfer the instrument. The following classes of persons incur no liability, though they may make a valid transfer of the instrument:307 (32) a) A person non compos mentis. 306

307

Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 63 Id.

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b) An infant. c) In some jurisdictions, a married woman. d) A corporation, when the act is ultra vires. Sec. 23. Forged signature; effect of. - When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. Notes: Forgery The counterfeiting of any writing, consisting in the signing of another’s name with intent to defraud, is forgery.308 (Bank of the Philippine Islands vs. CASA Montessori Internationale, G.R. Nos. 149454, 149507, May 28, 2004, [Panganiban, J.]) The most usual species of forgery is fraudulently writing the name of an existing person; but where one is in possession of a paper containing a genuine signature, and fraudulently fills it up so as to make it appear to be signed as maker, or indorser, or other party to a bill or note, it is as much a forgery as if the signature itself had been forged.309 Intent to defraud, and “uttering,” essential An intent to defraud is essential to constitute forgery, and although a bill or note will not be binding upon those whom it purports to bind if their names have been signed to it, or it has been altered without authority, the party who has ignorantly or innocently executed or altered it under a supposed authority, will not be deemed guilty of forgery.310 (Elements of the Law of Negotiable Instruments, Daniel, 285)

308

309 310

Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol I (1989 ed.), page 191 Rex V. Hales, 17 St. Trials; Powell v. Commonwealth, 1T Gratt. 822 Roscoe’s Cr. Ev. 505

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The delivery of a bill or note, or other written contract, is necessary to its validity; and so the “uttering,” which is the term used to describe the delivery by a forger or counterfeiter to some person of the forged instrument, is necessary in order to complete the crime of forgery. Giving the bill or note to a confederate to utter is an uttering thereof.311 (Ibid) What is the effect of forgery to the instrument? When a signature is forged or made without the authority of the person whose signature it purports to be, •

It is wholly inoperative,

•

And no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto can be acquired through or under such signature.

The case of Natividad Gempesaw vs. The Honorable Court of Appeals and Philippine Bank of Communications312, the Supreme Court, speaking through Justice Campos laid down a detailed discussion on the nature and effect of forgery, to wit: “Under the aforecited provision, forgery is a real or absolute defense by the party whose signature was forged. A party whose signature to an instrument was forged was never a party and never gave his consent to the contract which gave rise to the instrument. Since his signature does not appear in the instrument, he cannot be held liable thereon by anyone, not even by a holder in due course. Thus, if a person’s signature is forged as a maker of a promissory note, he cannot be made to pay because he never made the promise to pay. Or where a person’s signature as a drawer of a check is forged, he cannot charge the amount thereof against the drawer’s account because he never gave the bank the order to pay. And said section does not refer only to the forged signature of the maker of a promissory note and of the drawer of a check. It covers also a forged indorsement, i.e., the forged signature of the payee or indorsee of a note or a check. Since under said provision a 311 312

Chitty on Bills [785] G.R. No. 92244, February 9, 1993

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forged signature is “wholly inoperative”, no one can gain title to the instrument through such forged indorsement. Such an indorsement prevents any subsequent party from acquiring any right as against any party whose name appears prior to the forgery. Although rights may exist between and among parties subsequent to the forged indorsement, not one of them can acquire rights against parties prior to the forgery. Such forged indorsement cuts off the rights of all subsequent parties as against parties prior to the forgery. However, the law makes an exception to these rules where a party is precluded from setting up forgery as a defense.” Types of forgeries: 1. Where forgery was accomplished by a person not associated with the drawer—for example a mail robbery; and 2. Where the indorsement was forged by an agent of the drawer. This difference in situations would determine the effect of the drawer’s negligence with respect to forged indorsements. While there is no duty resting on the depositor to look for forged indorsements on his cancelled checks in contrast to a duty imposed upon him to look for forgeries of his own name, a depositor is under a duty to set up an accounting system and a business procedure as are reasonably calculated to prevent or render difficult the forgery of indorsements, particularly by the depositor’s own employees. And if the drawer (depositor) learns that a check drawn by him has been paid under a forged indorsement, the drawer is under duty promptly to report such fact to the drawee bank.313 For his negligence or failure either to discover or to report promptly the fact of such forgery to the drawee, the drawer losses his right against the drawee who has debited his account under a forged indorsement.314 In other words, he is precluded from using forgery as a basis for his claim for recrediting of his account. (Gempesaw vs. Court of Appeals, [1993]) 313 314

Britton, Bills and Notes, Sec. 143, pp. 663-664 City of New York vs. Bronx County Trust Co., 261 N.Y. 64, 184 N.E. 495 (1933); Detroit Piston Ring Co. vs. Wayne County & Home Savings Bank, 252 Mich. 163, 233 N.W. 185 (1930); C.E. Erickson Co. vs. Iowa Nat. Bank 211 Iowa 495, 230 N.W. 342 (1930)

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Illustrative case: The Great Eastern Life Assurance Co., vs. Hong Kong & Shanghai Banking Corporation and Philippine National Bank G.R. No. L-18657, August 23, 1922 JOHNS, J.: FACTS:

May 3, 1920, the plaintiff drew its check for P2,000 on the Hongkong and Shanghai Banking Corporation with whom it had an account, payable to the order of Lazaro Melicor. E. M. Maasim fraudulently obtained possession of the check, forged Melicor’s signature, as an endorser, and then personally endorsed and presented it to the Philippine National Bank where the amount of the check was placed to his credit. After having paid the check, and on the next day, the Philippine national Bank endorsed the check to the Hongkong and Shanghai Banking Corporation which paid it and charged the amount of the check to the account of the plaintiff. In the ordinary course of business, the Hongkong Shanghai Banking Corporation rendered a bank statement to the plaintiff showing that the amount of the check was charged to its account, and no objection was then made to the statement. About four months after the check was charged to the account of the plaintiff, it developed that Lazaro Melicor, to whom the check was made payable, had never received it, and that his signature, as an endorser, was forged by Maasim, who presented and deposited it to his private account in the Philippine National Bank. With this knowledge, the plaintiff promptly made a demand upon the Hongkong and Shanghai Banking Corporation that it should be given credit for the amount of the forged check, which the bank refused to do, and the plaintiff commenced this action to recover the P2,000 which

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was paid on the forged check. On the petition of the Shanghai Bank, the Philippine National Bank was made defendant. The Shanghai Bank denies any liability, but prays that, if a judgment should be rendered against it, in turn, it should have like judgment against the Philippine National Bank which denies all liability to either party. ISSUES: Who is responsible for the refund to the drawer of the amount of the check drawn and payable to order, when its value was collected by a third person by means of forgery of the signature of the payee?Is it the drawee or the last indorser, who ignored the forgery at the time of making the payment, or the forger? RULING: Plaintiff’s check was drawn on Shanghai Bank payable to the order of Melicor. In other words, the plaintiff authorized and directed the Shanghai Bank to pay Melicor, or his order, P2,000. It did not authorize or direct the bank to pay the check to any other person than Melicor, or his order, and the testimony is undisputed that Melicor never did part with his title or endorse the check, and never received any of its proceeds. Neither is the plaintiff estopped or bound by the banks statement, which was made to it by the Shanghai Bank. This is not a case where the plaintiff’s own signature was forged to one of its checks. In such a case, the plaintiff would have known the forgery, and it would have been its duty to have promptly notified the bank of any forged signature, and any failure on its part would have released the bank from any liability. That is not this case. Here, the forgery was that of Melicor, who was the payee of the check, and the legal presumption is that the bank would not honor the check without the genuine endorsement of Melicor. In other words, when the plaintiff received its bank statement, it had a right to assume that Melicor had personally endorsed the check, and that, otherwise, the bank would not have paid it. xxx The money was on deposit in the Shanghai Bank, and it had no legal right to pay it out to anyone except the

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plaintiff or its order. Here, the plaintiff ordered the Shanghai Bank to pay the P2,000 to Melicor, and the money was actually paid to Maasim and was never paid to Melicor, and he never paid to Melicor, and he never personally endorsed the check, or authorized any one to endorse it for him, and the alleged endorsement was a forgery. Hence, upon the undisputed facts, it must follow that the Shanghai Bank has no defense to this action. It is admitted that the Philippine National Bank cashed the check upon a forged signature, and placed the money to the credit of Maasim, who was a forger. That the Philippine National Bank then endorsed the check and forwarded it to the Shanghai Bank by whom it was paid. The Philippine National Bank had no license or authority to pay the money to Maasim or anyone else upon a forge[d] signature. It was its legal duty to know that Melicor’s endorsement was genuine before cashing the check. Its remedy is against Maasim to whom it paid the money. Adopting of forged signature If one’s signature is forged, it is, as a general rule, a mere nullity as to him. It is legally accurate to say that he did not make the instrument. But if the person whose signature has been forged pronounces it genuine, or the instrument valid, the question arises whether or not such declaration renders him liable as if he were a party to a genuine instrument; and a variety of circumstances affect its just solution. (Elements of the Law of Negotiable Instruments, Daniel, 285) In the first place, when third parties buy the paper on his assurances or representations of the genuineness of his signature, or of the validity of the instrument, or are induced to act upon such assurances or representations, and would suffer loss if he were permitted to set up forgery as a defense, it is quite clear upon principles of estoppel that such defense cannot be made.315 (Ibid) 315

Workman v. Wright, 33 Ohio St. 405; Woodruff v. Monroe, 33 Md. 158; Beeman v. Duck, 11 M & W 251

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In the second place, if no principle of estoppel applies, and if through mistake a party stated that a signature is genuine, and afterward he discovers his error, and speedily corrects it, and before the holder has changed his relation to the paper, or anyone has dealt with it upon the faith of his admission, forgery can be successfully pleaded.316 (Ibid, pp. 285-286) In the third place, it may be stated that where the party, knowing his signature to be a forgery, deliberately and understandingly adopts it as his own, he would be bound, because ratification thus made is equivalent to a previous authority, provided, however, that an innocent third party has been induced to act upon the faith of the adoption in such a way as to suffer loss by its repudiation. This is based upon the familiar principles of estoppel. But whether such deliberate adoption of a forgery, without the consequent loss to a third party, acting on the faith thereof, would be binding is a mooted question, both in England and America.317 (Ibid, p. 286) 2011 Bar Question: Due to his debt to C, D wrote a promissory note which is payable to the order of C. C’s brother, M, misrepresenting himself as agent of C, obtained the note from D. M then negotiated the note to N after forging the signature of C. May N enforce the note against D? A. Yes, since D is the principal debtor. B. No, since the signature of C was forged. C. No, since it is C who can enforce it, the note being payable to the order of C. D. Yes, since D, as maker, is primarily liable on the note. Forgery committed by an agent having authority to indorse An agent having authority to indorse checks payable to his principal and to deposit them in a certain bank for collection, indorsed his principal’s name and transferred the checks to a third 316

Daniel on Negotiable Instruments, 1352; Woodruff v. Monroes, 33 Md. 158 317 on Negotiable Instruments, 1352a, 1352b, and cases cited

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person who deposited them in defendant’s bank, which collected and paid the amount to such third person in good faith. Held, that the indorsement by the agent was not a forgery and the defendant was not liable to the principal for a conversion of the checks. (Brannan, page 29, citing Salen v. Bank, 110 App. Div. 636, 97 N.Y. Supp. 361.) Is there any exception to the forgery rule? Yes. Section 23 of the Negotiable Instruments Law further provides that, unless the party against whom the instrument is sought to enforce such right is precluded from setting up the forgery or want of authority. Who are these persons that are precluded from setting up the defense of forgery? Those persons who warrant or admit the genuineness of the signature in question (e.g., indorsers, persons negotiating by delivery, acceptors of bills of exchange) Those who, by their acts, silence or negligence, are estopped from setting up the defense of forgery. (estoppel) When the forged signature is unnecessary to the title of the holder as when the indorsement is forged on an instrument payable to bearer. When one party is estopped to deny the genuineness of another’s signature The relation of one party to a negotiable instrument is often such that he cannot deny the genuineness of another’s signature, for, having treated it himself as genuine, it would be fraud to permit him to assert the contrary. Having issued or transferred the instrument as genuine in all respects, he would not only be bound by his guaranty that it is genuine, but it would be unjust to and fraudulent upon other to permit him to deny it; and proof of his having so issued or used it would be sufficient to entitle the holder to recover against him.318 (Elements of the Law of Negotiable Instruments, Daniel, p. 286) 318

Hortsman v. Henshaw, 11 How. 177; Meacher v. Fort, 3 Hill (S.C.) 227; Alleman v. Wheeler, 101 Ind. 144

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If a bank pays out on a forged check, is it liable to reimburse the drawer from whose account the funds were paid out? General rule remains that the drawee who has paid upon the forged signature bears the loss. The exception to this rule arises only when negligence can be traced on the part of the drawer whose signature was forged, and the need arises to weigh the comparative negligence between the drawer and the drawee to determine who should bear the burden of loss. x x x The general rule is to the effect that a forged signature is “wholly inoperative”, and payment made ‘through or under such signature’ is ineffectual or does not discharge the instrument. If payment is made, the drawee cannot charge it to the drawer’s account. The traditional justification for the result is that the drawee is in a superior position to detect a forgery because he has the maker’s signature and is expected to know and compare it. The rule has a healthy cautionary effect on banks by encouraging care in the comparison of the signatures against those on the signature cards they have on file. Moreover, the very opportunity of the drawee to insure and to distribute the cost among its customers who use checks makes the drawee an ideal party to spread the risk to insurance. (Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company, G.R. No. 129015, August 13, 2004 [Tinga, J.]) Moreover, the same case held that: “Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by the party whose signature is forged. xxx Still, even if the bank performed with utmost diligence, the drawer whose signature was forged may still recover from the bank as long as he or she is not precluded from setting up the defense of forgery. After all, Section 23 of the Negotiable Instruments Law plainly states that no right to enforce the payment of check can arise out of a forged signature. x x x Consequently, if a bank pays a forged check, it must be considered as paying out its funds and cannot charge the amount so paid to the account of the depositor. A bank is liable, irrespective of its good faith, in paying a forged check.

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xxx Judicial notice can be taken that it is highly unusual in practice for a business establishment to draw a check for close to a million pesos and make it payable to cash or bearer, and not to order. xxx The Court recently emphasized that the highest degree of care and diligence is required of banks. Banks are engaged in a business impressed with public interest, and it is their duty to protect in return their many clients and depositor who transact business with them. They have the obligation to treat their client’s account meticulously and with the highest degree of care, considering the fiduciary nature of their relationship. The diligence required of banks, therefore, is more than that of a good father of a family. Given the circumstances, extraordinary diligence dictates that FEBTC should have ascertained from Jong personally that the signature in the questionable check is his. A bank is bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged. (7 C.J., 683, cited in San Carlos Milling Co., Ltd. vs. Bank of the Philippine Islands and China Banking Corporation, G.R. No. L-37467, December 11, 1933, [Hull, J.]) Forgery committed by drawer-payor’s confidential employee; liability In Philippine Commercial International Bank vs. Court of Appeals and Form Philippines, Inc., “[t]he mere fact that the forgery was committed by a drawer-payor’s confidential employee or agent, who by virtue of his position had unusual facilities for perpetrating fraud and imposing the forged paper upon the bank, does not entitle the bank the shift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against the drawer.39 This rule likewise applies to the checks fraudulently 319

Am Jur 2d, Volume 10, Banks Section 604 (1963 Edition)

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negotiated or diverted by the confidential employees who hold them in their possession. xxx On this point, jurisprudence regarding the imputed negligence of employer in a master-servant relationship is instructive. Since a master may be held for his servant’s wrongful act, the law imputes to the master the act of the servant, and if the act is negligent or wrongful and proximately results in an injury to a third person, the negligence or wrongful conduct is the negligence or wrongful conduct of the master, for which he is liable.320 The general rule is that if the master is injured by the negligence of a third person and the concurring contributory negligence of his own servant or agent, the latter’s negligence is imputed to his superior and will defeat the superior’s action against the third person, assuming, of course that the contributory negligence was the proximate cause of the injury of which complaint is made.321 Duty of the encashing bank In the same case of Philippine Commercial International Bank vs. Court of Appeals and Form Philippines, Inc., it was ruled that: “[l]astly, banking business requires that the one who first cashes and negotiates the check must take some precautions to learn whether or not it is genuine. And if the one cashing the check through indifference or other circumstance assists the forger in committing the fraud, he should not be permitted to retain the proceeds of the check from the drawee whose sole fault was that it did not discover the forgery or the defect in the title of the person negotiating the instrument before paying the check. For this reason, a bank which cashes a check drawn upon another bank, without requiring proof as to the identity of the persons presenting it, or making inquiries with regard to them, cannot hold the proceeds against the drawee when the proceeds of the checks were afterwards diverted to the hands of a third party. In such cases the drawee bank has a right to believe that the cashing bank (or the collecting bank) had, by the usual proper investigation, satisfied itself of the authenticity of the negotiation of the checks. Thus, one who encashed a check which had been forged or 320 321

Am Jur 2d, Volume 58, Negligence, Section 458 Am Jur 2d, Volume 58, Negligence Section 464

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diverted in turn received payment thereon from the drawee, is guilty of negligence which proximately contributed to the success of the fraud practiced on the drawee bank. The latter may recover from the holder the money paid on the check.322” Depositor owes a duty to the drawee bank to examine his cancelled checks for forgery of his own signature; his failure to do so is tantamount to his negligence which bar his recovery; however, he has no similar duty as to forged indorsements As held by the Supreme Court in the case of Gempesaw vs. Court of Appeals323, “[a]s a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot charge the drawer’s account for the amount of said check. An exception to this rule is where the drawer is guilty of such negligence which causes the bank to honor such a check or checks. If a check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the forged indorsement by mere examination of his cancelled check. This accounts for the rule that although a depositor owes a duty to his drawee bank to examine his cancelled checks for forgery of his own signature, he has no similar duty as to forged indorsements. A different situation arises where the indorsement was forged by an employee or agent of the drawer, or done with active participation of the latter. Most of the cases involving forgery by an agent or employee deal with the payee’s indorsement. The drawer and the payee often time shave business relations of long standing. The continued occurrence of business transactions of the same nature provides the opportunity for the agent/employee to commit the fraud after having developed familiarity with the signatures of the parties. However, sooner or later, some leak will show on the drawer’s books. It will then be just a question of time until the fraud is discovered. This is especially true when the agent participates a series of forgeries as in the case at bar.” The fact that forgery was committed by an employee of the party whose signature was forged cannot necessarily imply that such party’s negligence was the cause for the forgery 322

323

Supra note 20 at Section 611, (Vda De Bataclan et al, vs. Medina, 102 Phil. 181, 186 (1957) February 9, 1993, G.R. No. 92244

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The discussion laid down by the Supreme Court in the case of Samsung Construction Co. Phils., Inc. vs. Far East Bank & Trust Company324 is extensive on the matter, to wit: “We recognize that Section 23 of the Negotiable Instruments Law bars a party from setting up the defense of forgery if it is guilty of negligence. Yet, we are unable to conclude that Samsung Corporation was guilty of negligence in this case. The appellate court failed to explain precisely how the Korean accountant was negligent or how more care and prudence on his part would have prevented the forgery. We cannot sustain this “tar and feathering” resorted to without any basis. The bare fact that the forgery was committed by an employee of the party whose signature was forged cannot necessarily imply that such party’s negligence was the cause for the forgery. Employers do not possess the preternatural gift of cognition as to the evil that may lurk within the hearts and minds of their employees. The Court’s pronouncement in PCI Bank v. Court of Appeals, applies in this case, to wit: [T]he mere fact that the forgery was committed by a drawerpayor’s confidential employee or agent, who by virtue of his position had unusual facilities for perpetrating fraud and imposing the forged paper upon the bank, does not entitle the bank to shift the loss to the drawer-payor, in the absence of some circumstance raising estoppels against the drawer. Still, in the absence of evidence to the contrary, we can conclude that there was no negligence on Samsung Construction’s part. The presumption remains that every person takes ordinary care of his concerns, and that the ordinary course of business has been followed. Negligence is not presumed, but must be proven by him who alleges it. While the complaint was lodged at the instance of Samsung Construction, the matter it had to prove was the claim it had alleged—whether the check was forged. It cannot be required as well to prove that it was not negligent, because the legal presumption remains that ordinary care was employed. 324

August 13, 2004, published in The New Philippine Law Report, Vol. XXXII No. 8, August 2004, pages 30-31

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Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that Samsung Construction was negligent. While the payee, as in this case, may not have the personal knowledge as to the standard procedures observed by the drawer, it well has the means of disputing the presumption of regularity. Proving a negative fact may be a “difficult office”, but necessarily so, as it seeks to overcome a presumption in law. FEBTC was unable to dispute the presumption of ordinary care exercised by Samsung Construction, hence we cannot agree with the Court of Appeals’ finding of negligence. The assailed Decision replicated the extensive efforts which FEBTC devoted to establish that there was no negligence on the part of the bank in its acceptance and payment of the forged check. However, the degree of diligence exercised by the bank would be irrelevant if the drawer is not precluded from setting up the defense of forgery under Section 23 by his own negligence. The rule of equity enunciated in PNB v. National City Bank of New York, as relied upon by the Court of Appeals, deserves careful examination. The point in issue has sometimes been said to be that of negligence. The drawee who has paid upon the forged signature is held to bear the loss, because he has been negligent in failing to recognize that the handwriting is not that of his customer. But it follows obviously that if the payee, holder, or presenter of the forged paper has himself been in default, if he was himself been guilty of a negligence prior to that of the banker, or if any act of his own he has at all contributed to induce the banker’s negligence, then he may lose his right to cast the loss upon the banker. Quite palpably, the general rule remains that the drawee who has paid upon the forged signature bears the loss. The exception to his rule arises only when negligence can be traced on the part of the drawer whose signature was forged, and the need arises to weigh the comparative negligence between the drawer and the drawee to determine who should bear the loss. The Court finds no basis to conclude that Samsung Construction was negligent in the safekeeping of checks. For one, the settled rule is that the mere fact that the depositor leaves his check book lying around does not constitute such negligence as will free the bank from liability to him, where a clerk of the depositor or other

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persons taking advantage of the opportunity, abstract some of the check blanks, forges the depositor’s signature and collect on the checks from the bank. And for another, in point of fact Samsung Construction was not negligent at all since it reported the forgery almost immediately upon discovery.” Forged Indorsement; effect thereof In the case of Republic Bank vs. Mauricia Ebrada325, a question was poised by the ponente, Justice Martin in this wise, “[i]t is clear from the provision that where the signature on a negotiable instrument if forged, the negotiation of the check is without force or effect. But does this mean that the existence of one forged signature therein will render void all the other negotiations of the check with respect to the other parties whose signature are genuine?” The Court held that: “[i]n the case of Beam vs. Farrel, (135 Iowa 670, 113 N.W. 590), where a check has several indorsements on it, it was held that it is only the negotiation based on the forged or unauthorized signature which is inoperative. Applying this principle to the case before us, it can be safely concluded that it is only the negotiation predicated on the forged indorsement that should be declared inoperative. This means that the negotiation of check in question from Martin Lorenzo (who died seven (7) years before the issuance of the instrument in question), the original payee, to Ramon R. Lorenzo, the second indorser, should be declared of no effect, but the negotiation of the aforesaid check from Ramon R. Lorenzo to Adelaida Dominguez, the third indorser, and from Adelaida Dominguez to the defendant-appellant who did not know of the forgery, should be considered valid and enforceable, barring any claim of forgery.326 A subsequent question was then again raised by Justice Martin, when he asked: “What happens then, if, after the drawee bank has paid the amount of the check to the holder thereof, it was discovered that the signature of the payee was forged? Can the drawee bank recover from the one who encashed the check?”

325 326

G.R. No. L-40796, July 31, 1975, [Martin, J.], bold supplied Since endorsers are precluded from setting up the defense of forgery

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The High Court answered this query citing the case of State vs. Broadway Mut. Bank327, wherein it was held that: “the drawee of a check can recover from the holder the money paid to him on a forged instrument. It is not supposed to be its duty to ascertain whether the signatures of the payees or indorsers are genuine or not. This is because the indorser is supposed to warrant to the drawee that the signatures of the payee and pervious indorsers are genuine, warranty not extending only to holders in due course. One who purchases a check or draft is bound to satisfy himself that the paper is genuine and that by indorsing it or presenting it for payment or putting it into circulation before presentation he impliedly asserts that he has performed his duty and that drawee who has paid the forged check, without actual negligence on his part, may recover the money paid from such negligent purchasers. In such cases the recovery is permitted because although the drawee was in a way negligent in failing to detect the forgery, yet if the encasher of the check had performed his duty, the forgery would in all probability, have been detected and the fraud defeated. The reason for allowing the drawee bank to recover from the encahser is: Every one with the least experience in business knows that no business man would accept a check in exchange for money or goods unless he is satisfied that the check is genuine. He accepts it only because he has proof that it is genuine, or because he has sufficient confidence in the honesty and financial responsibility of the person who vouches for it. If he is deceived he has suffered a loss of his cash or goods through his own mistake. His own credulity or recklessness, or misplaced confidence was the sole cause of his loss. Why should he be permitted to shift the loss due to his own fault in assuming the risk, upon the drawee, simply because of the accidental circumstance that the drawee afterwards failed to detect the forgery when the check was presented?328 327 328

282 S.W. 196, 197 Gloucester Bank v. Salem Bank, 17 Mass. 33; Bank of U.S. Bank of Georgia, 10 Wheat 333, 6 L. Ed. 384; National Bank of America v. Bangs, 196 Mass. 441, 8 Am. Rep. 349; First National Bank of Danvers v. First National Bank of Salem, 151 Mass. 280, 24 N.E. 44, 21 Am. St. Rep. 450; First National Bank v. Ricker, 71 Ill. 439, 22 Am. Rep. 104; Rouvant v. Bank, 63 Tex. 610; Bank v. Bank, 30 Ill. 96 Am. Dec. 554; People’s Bank v. Franklyn Bank, 88

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Similarly, in the case before us, the defendant-appellant, upon receiving the check in question from Adelaida Dominguez, was duty-bound to ascertain whether the check in question was genuine before presenting it to the plaintiff-bank for payment. Her failure to do so makes her liable for the loss and the plaintiff-bank may recover from her the money she received for the check. As reasoned out above, had she performed the duty of ascertaining the genuineness of the check, in all probability the forgery would have been detected and the fraud defeated.” Moreover, in the same case, the court held that: “[i]n our jurisdiction, we have a case of similar import329 The Great Eastern Life Insurance Company drew its check for P2000.00 on Hongkong and Shanghai Banking Corporation payable to the order of Lazaro Melicor. A certain E.M. Maasin fraudulently obtained the check and forged the signature of Melicor, as an indorser, and then personally indorsed and presented the check to the Philippine National Bank where the amount of the check was placed to his (Maasin’s) credit. On the next day, the Philippine National Bank indorsed the check to the Hongkong and Shanghai Banking Corporation which paid it and charged the amount of the check to the insurance company. They Court held that the Hongkong and Shanghai Banking Corporation was liable to the insurance company for the amount of the check and that the Philippine National Bank was in turn liable to the Hongkong and Shanghai Banking Corporation. Said the Court: Where a check is drawn payable to the order of one person and is presented to a bank by another and purports upon its face to have been duly indorsed by the payee of the check, it is the duty of the bank to know that the check was duly indorsed by the original payee, and where the bank pays the amount of the check to a third person, who has forged the signature of the payee, the loss falls upon the bank who cashed the check, and its only remedy is against the person to whom it paid the money.

329

Tenn. 299, 12 S.W. 716, 6 L.R.A. 724, 17 Am St. Rep. 884; Ellis & Morton v. Trust Co., 4 Ohio St. 628, 64 Am. Dec. 610; Bank v. Bank, 58 Ohio St. 207, 50 N.E. 723; Bank v. Bank, 22 Neb. 769, 36 N.W. 289, 3 Am. St. Rep. 294; Canadian Bank v. Bingham, 20 Wash. 484, 71 Pac. 43, 60 L.R.A. 955 Great Eastern Life Insurance Company vs. Hongkong and Shanghai Banking Corporation, 43 Phil. 678

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2011 Bar Question: D, debtor of C, wrote a promissory note payable to the order of C. C’s brother, M, misrepresenting himself as C’s agent, obtained the note from D, then negotiated it to N after forging C’s signature. N indorsed it to E, who indorsed it to F, a holder in due course. May F recover from E? A. No, since the forgery of C’s signature results in the discharge of E. B. Yes, since only the forged signature is inoperative and E is bound as indorser. C. No, since the signature of C, the payee, was forged. D. Yes, since the signature of C is immaterial, he being the payee. Exception to the Rule; Payment made upon a check to which the name of the drawer has been forged; comparative negligence The Supreme Court in the case of Philippine National Bank vs. The National City Bank of New York330, speaking through Justice Recto held: “[T]he rule is perfectly well settled that in determining the relative rights of a drawee who, under a mistake of fact, has paid, and a holder who has received such payment, upon a check to which the name of the drawer has been forged, it is only fair to consider the question of diligence or negligence of the parties in respect thereto. (Woods and Malone vs. Colony Bank [1902[, 56 L.R.A., 929, 932.) The responsibility of the drawee who pays a forged check, for the genuineness of the drawer’s signature, is absolute only in favor of one who has not, by his own fault or negligence, contributed to the success of the fraud or to mislead the drawee. (National Bank of America vs. Bangs, 106 Mass., 441; 8 am. Rep., 349; Woods and Malone vs. 330

October 31, 1936

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Colony Bank, supra, de Fereit vs. Bank of America, 23 La., Ann., 310; B.B. Ford & Co. vs. People’s Bank of Orangeburg, 74 S.C., 180; 180 L.R.A. [N.S.], 63.) If it appears that the one to whom payment was made was not an innocent sufferer, but was guilty of negligence in not doing something, which plain duty demanded, and which, if it had been done would have avoided entailing loss on any one, he is not entitled to retain the money’s paid through a mistake on the part of the drawee bank. (First Nat. Bank of Danvers vs; First Nat. Bank of Salem, 151 Mass., 280; 24 N.E., 44; 21 A. S. R., 450; First Nat. Bank of Orleans vs. State Bank of Alma, 22 Neb., 769; 36 N. W., 289; 3 A. S. R., 294; American Exp. Co. vs. State Nat. Bank, 27 Okla., 824; 113 Pac., 711; 33 L. R. A. [N. S.], 188; B. B. Ford & Co. vs. People’s Bank of Orangeburg, 74 S. C., 180; 54 S. E., 204; 114 A. S. R., 986; 7 Ann. Cas., 744; 10 L. R. A. [N. S.], 63; People’s Bank vs. Franklin Bank, 88 Tenn. 299; 12 S. W., 716; 17 A. S. R.) 884; 6 L. R. A., 724; Canadian Bank of Commerce vs. Bingham, 30 Wash., 484; 71 Pac., 43; 60 L. R. A., 955.) In other words, to entitle the holder of a forged check to retain the money obtained he must be able to show that the whole responsibility of determining the validity of the signature was upon the drawee, and that the negligence of such drawee was not lessened by any failure of any precaution which, from his implied assertion in presenting the check as a sufficient voucher, the drawee had the right to believe he had taken. (Ellis vs. Ohio Life Insurance & Trust Co., 4 Ohio St., 628; Rouvant vs. Bank, 63 Tex., 610; Bank vs. Ricker, 71 Ill., 429; First National Bank of Danvers vs. First Nat. Bank of Salem, 24 N. E., 44, 45; B. B. Ford & Co. vs. People’s Bank of Orangeburg, supra.) The recovery is permitted in such case, because, although the drawee was constructively negligent in failing to detect the forgery, yet if the purchaser had performed his duty, the forgery would in all possibility have been detected and the fraud defeated. (First National Bank of Lisbon vs. Bank of Wyndmere, 15 N. D., 209; 10 L. R. A. [N. S.], 49.)

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In the absence of actual fault on the part of the drawee, his constructive fault in not knowing the signature of the drawer and detecting the forgery will not preclude his recovery from the one who took the check under circumstances of suspicion without proper precaution, or whose conduct has been such as to mislead the drawee or induce him to pay the check without the usual scrutiny or other precautions against mistake or fraud. (National Bank of America vs. Bangs, supra; First National Bank vs. Indiana National Bank, 30 N. E., 808-810; Woods and Malone vs. Colony Bank, supra; First National Bank of Danvers vs. First Nat. Bank of Salem, 151 Mass., 280.) Where a loss, which must be borne by two parties alike innocent of forgery, can be traced to the neglect or fault of either, it is unreasonable that it would be borne by him, even if innocent of any intentional fraud, through whose means it has succeeded. (Gloucester Bank vs. Salem Bank, 17 Mass., 33; First Nat. Bank of Danvers vs. First National Bank of Salem, supra; B. B. Ford & Co. vs. People’s Bank of Orangeburg, supra.) Again if the indorser is guilty of negligence in receiving and paying the check or draft, or has reason to believe that the instrument is not genuine, but fails to inform the drawee of his suspicions the indorser according to the reasoning of some courts will be held liable to the drawee upon his implied warranty that the instrument is genuine. (B. B. Ford & Co. vs. People’s Bank of Orangeburg, supra; Newberry Sav. Bank vs. Bank of Columbia, 93 S. C., 294; 38 L. R. A. [N. S], 1200.) Most of the courts now agree that one who purchases a check or draft is bound to satisfy himself that the paper is genuine; and that by indorsing it or presenting it for payment or putting it into circulation before presentation he impliedly asserts that he has performed his duty, the drawee, who has, without actual negligence on his part, paid the forged demand, may recover the money paid from such negligent purchaser. (Lisbon First National Bank vs. Wyndmere Bank, supra.) Of course, the drawee must, in order to recover

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back the holder, show that he himself was free from fault. (See also 5 R. C. L., pp. 556-558.) So, if a collecting bank is alone culpable, and, on account of its negligence only, the loss has occurred, the drawee may recover the amount it paid on the forged draft or check. (Security Commercial & Sav. Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.) But we are aware of no case in which the principle that the drawee is bound to know the signature of the drawer of a bill or check which he undertakes to pay has been held to be decisive in favor of a payee of a forged bill or check to which he himself given credit by his indorsement. (See also, Mckleroy vs. Bank, 14 La. Ann., 458; Canal Bank vs. Bank of Albany, 1 Hill, 287; Rouvant vs. Bank, supra, First Nat. Bank vs. Indiana National Bank; 30 N. E., 808-810.) In First Nat Bank vs. United States National Bank331, the court declared: “A holder cannot profit by mistake which his negligent disregard of duty has contributed to induce the drawee to commit…The holder must refund, if by his negligence he has contributed to the consummation of the mistake on the part of the drawee by misleading him…If the only fault attributable to the drawee is the constructive fault which the law raises from the bald fact that he has failed to detect the forgery, and if he is not chargeable with factual fault in addition to such constructive fault, then he is not precluded from recovery from a holder whose conduct has been such as to mislead the drawee or induce him to pay the check or bill of exchange without the usual security against fraud. The holder must refund to a drawee who is not guilty of actual fault if the holder was negligent in not making due inquiry concerning the validity of the check before he took it, and if the drawee can be said to have been excused from making inquiry before taking the check because of having had a right to, presume that the holder had made such inquiry.” “Where a bank, without inquiry or identification of the person presenting a forged check, purchases it, indorses it, generally, 331

([1921], 100 Or., 264; 14 A. L. R., 479; 197 Pac., 547)

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and presents it to the drawee bank, which pays it, the latter may recover if its only negligence was its mistake in having failed to detect the forgery, since its mistake, did not mislead the purchaser to bring about a change in position.” (Security Commercial & Savings Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.) Also, a drawee could recover from another bank the portion of the proceeds of a forged check cashed by the latter and deposited by the foreigner in the second bank and never withdrawn, upon the discovery of the forgery three months later, after the drawee had paid the check and returned the voucher to the purported drawer, where the purchasing bank was negligent in taking the check, and was not injured by the drawee’s negligence in discovering and reporting the forgery as to the amount left on deposit, since it was not a purchaser for value. (First State Bank & T. Co. vs. First Nat. Bank [1924], 314 Ill., 269; 145 N. E., 382.) Similarly, it has been held that the drawee of a check could recover the amount paid on the check, after discovery of the forgery, from another bank, which put the check into circulation by cashing it for the one who had forged the signature of both the drawer and payee, without making an inquiry as to who he was although he was a stranger, after which the check reached, and was paid by, the drawee, after going through the hands of several intermediate indorsees. (71 A. L. R., p. 340.) It has been held by many courts that a drawee of a check, who is deceived by forgery of the drawer’s signature may recover the payment back, unless his mistake has placed an innocent holder of the paper in a worse position than he would have been in if the discovery of the forgery had been made on presentation. (5 R.C.L., p. 559; 2 Daniel on Negotiable Instruments, 1538.) Forgeries often deceived the eye of the most cautious experts; and when a bank has been deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being deceived. (17 A.L.R. 891; 5 R.C.L., 559.) Daniel, in his treatise on Negotiable Instruments, has the following to say:

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“In all the cases which hold the drawee absolutely estopped by acceptance or payment from denying genuineness of the drawer’s name, the loss is thrown upon him on the ground of negligence on his part in accepting or paying, until he has ascertained the bill to be genuine. But the holder has preceded him in negligence, by himself not ascertaining the true character of the paper before he received it, or presented it for acceptance or payment. And although, as a general rule, the drawee is more likely to know the drawer’s handwriting than a stranger is, if he is in fact deceived as to its genuineness, we do not perceive that he should suffer more deeply by mistake than a stranger, who, without knowing the handwriting, has taken the paper without previously ascertaining its genuineness. And the mistake of the drawee should always be allowed to be corrected, unless the holder, acting upon faith and confidence induced by his honoring the draft, would be placed in a worse position by according such privilege to him. This view has been applied in a well considered case, and is imitated in another, and is forcefully presented by Mr. Chitty, who says it is going a great way to charge the acceptor with knowledge of his correspondent’s handwriting, “unless some bona fide holder has purchased the paper on the faith of such an act.” Negligence in making payment under a mistake of fact is not now deemed a bar to recovery of it, and we do not see why any exception should be made to the principle, which would apply as well as to release an obligation not consummated by payment. (Vol. 2, 6th edition, pp. 1537-1539.) Forged Signature of the drawer differs in treatment than a forged signature of the indorser Further, in the case of Samsung Construction332, it was stated that: “[i]t is also worth noting that the forged signatures in PNB v. National City Bank of New York were not of the drawer, but of indorsers. The same circumstance attends PNB v. Court of Appeals (25 SCRA 693 [1968]), which was also cited by the Court of Appeals. It is accepted that a forged signature of the drawer differs in treatment than a forged signature of the indorser. The justification for the distinction between forgery of the signature of the drawer and forgery of an indorsement is 332

Samsung Construction vs. FEBTC [2004], published in The New Philippine Law Reports Vol. No. XXXVII, No. 8, August 2004, page 31

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that the drawee is in a position to verify the drawer’s signature by comparison with one in his hands, but has ordinarily no opportunity to verify an indorsement. Thus, a drawee bank is generally liable to his depositor in paying a check which bears either a forgery of the drawer’s signature or a forged indorsement. But the bank may, as a general rule, recover back the money which it has paid on a check bearing a forged indorsement, whereas it has not this right to the same extent with reference to a check bearing a forgery of the drawer’s signature.” 2011 Bar Question: Forgery of bills of exchange may be subdivided into, a) forgery of an indorsement on the bill and b) forgery of the drawer’s signature, which may either be with acceptance by the drawee, or A. with acceptance but the bill is paid by the drawee. B. without acceptance but the bill is paid by the drawer. C. without acceptance but the bill is paid by the drawee. D. with acceptance but the bill is paid by the drawer. Forged signature of the Payee; effects thereof In the case of Westmont Bank vs. Ong333, it was held that: “[s]ince the signature of the payee, in the case at bar, was forged to make it appear that he had made an endorsement in favor of the forger, such signature should be deemed as inoperative and ineffectual. Petitioner, as the collecting bank, grossly erred in making payment by virtue of said forged signature. The payee, herein respondent, should therefore be allowed to recover from the collecting bank. The collecting bank is liable to the payee and must bear the loss because of its legal duty to ascertain that the payee’s endorsement was genuine before cashing the check. As a general rule, a bank or corporation who has obtained possession of a 333

G.R. No. 132560, January 30, 2002, published in Philippine Law Report Vol. XXX, No. 1, January 2002, page 9

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check upon an unauthorized or forged indorsement of the payee’s signature and who collects the amount of the check from the drawee, is liable for the proceeds thereof to the payee or other owner, notwithstanding that the amount has been paid to the person from whom the check was obtained. The theory of the rule is that the possession of the check on the forged or unauthorized indorsement is wrongful, and when the money had been collected on the check, the bank or other person or corporation can be held as for moneys had and received, and the proceeds are held for the rightful owners who may recover them. The position of the bank taking the check on the forged or unauthorized indorsement is the same as if had taken the check and collected the money without indorsement at all and the act of the bank amount to conversion of the check.” 2011 Bar Question: X found a check on the street, drawn by Y against ABC Bank, with Z as payee. X forged Z’s signature as an indorser, then indorsed it personally and delivered it to DEF Bank. The latter, in turn, indorsed it to ABC Bank which charged it to the Y’s account. Y later sued ABC Bank but it set up the forgery as its defense. Will it prosper? A. No, since the payee’s signature has been forged. B. No, since Y’s remedy is to run after the forger, X. C. Yes, since forgery is only a personal defense. D. Yes, since ABC Bank is bound to know the signature of Y, its client. Doctrines Laid down in the case of Philippine National Bank v. The National City Bank of New York on the Rule on Forgery 1. That where a check is accepted or certified by the bank on which it is drawn, the bank is estopped to deny the genuineness of the drawer’s signature and his capacity to issue the instrument; 2. That if a drawee bank pays a forged check which was previously accepted or certified by the said bank it cannot

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recover from a holder who did not participate in the forgery and did not have actual notice thereof; 3. That the payment of a check does not include or imply its acceptance in the sense that this would be used in section 62 of the Negotiable Instruments Law; 4. That in case of the payment of a forged check, even without former acceptance, the drawee cannot recover from a holder in due course not chargeable with any act of negligence or disregard of duty; 5. That to entitle the holder of a forged check to retain the money obtained thereon, there must be a showing that the duty to ascertain the genuineness of the signature rested entirely upon the drawee, and that the constructive negligence of such drawee in failing to detect the forgery was not affected by any disregard of duty on the part of the holder, or by failure of any precaution which, from his implied assertion in presenting the check as a sufficient voucher, the drawee had the right to believe he had taken; 6. That in the absence of actual fault on the part of the drawee, his constructive fault in not knowing the signature of the drawer and detecting the forgery will not preclude his recovery from the one who took the check under circumstances of suspicion and without proper precaution, or whose conduct has been such as to mislead the drawee or induce him to pay the check without the usual scrutiny or other precautions against mistake or fraud; 7. That one who purchases a check or draft is bound to satisfy himself that the paper is genuine, and that by indorsing it or presenting it for payment or putting it into circulation before presentation he impliedly asserts that he performed his duty; 8. That while the foregoing rule, chosen from a welter of decisions on the use as the correct one, will not hinder the circulation of two recognized mediums of exchange by which the great bulk of business is carried on, namely, drafts and checks, on the other hand, it will encourage and demand prudent business methods on the part of those receiving such mediums of exchange;

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9. That it being a matter of record in the present case, that the appellee bank in no more chargeable with the knowledge of the drawer’s signature that the appellant is, as the drawer was as much the customer of the appellant as of the appellee, the presumption that the drawee bank is bound to know more than any indorser the signature of its depositor does not hold; 10. That according to the undisputed facts of the case the appellant in purchasing the papers in question from unknown persons without making any inquiry as to the identity and authority of the said persons negotiating and indorsing them, acted negligently and contributed to the appellee’s constructive negligence in failing to detect the forgery; 11. That under the circumstances of the case, if the appellee bank is allowed to recover, there will be no change of position as to the injury or prejudice of the appellant.

II. CONSIDERATION Sec. 24. Presumption of consideration. - Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value. Notes: By consideration, is meant a benefit or gain of some kind to the party making the promise, or a loss or injury of some kind to the party to whom it is made. By the common law a promise made without consideration was invalid, and in order to enforce any contract it was necessary to aver and prove a consideration. (Daniel, Elements of the Law of Negotiable Instruments, page 56) What is the rule on presumption of consideration in negotiable instruments? Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value. (Sec. 24, Negotiable Instruments Law)

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However, “[t]he presumption that a negotiable instrument is issued for a valuable consideration is only prima facie. It can be rebutted by proof to the contrary.” (Bank of the Philippine Islands vs. Laguna Coconut Oil Co., et al, 48 Phil 5, cited in Pineda vs. Dela Rama, G.R. No. L-31831, April 28, 1983, [Gutierrez, Jr., J.:]) If the Act establishes this presumption for the case where there might be doubt with respect to the existence of a valuable consideration, in order to avoid taking of evidence in the matter, when the consideration appears from the instrument itself by the expression of the value, the introduction of evidence is entirely unnecessary and improper. (concurring opinion, Justice Torres, in the case of Maulini, et al vs. Serrano, December 16, 1914.) Moreover, it has been stated that: “[t]he omission of the words “for value received” does not weaken the presumption of valuable consideration. (Brannan, page 32, citing McLeod v. Hunter, 29 Misc. R. 558, 61 N.Y. Supp. 73.) Burden of proof is shifted to the party alleging the absence of consideration Where the maker pleads want of consideration, plaintiff (payee) may recover in the absence of evidence in support of the plea. But if defendant gives evidence tending to show want of consideration the burden is on the plaintiff to show by a fair of preponderance of evidence upon the whole case that there was consideration. (Brannan, page 31, citing Bringman v. Van Glahn, 71 App. Div. 537, 75 N.Y. Supp. 845, semble.) In Cely Yang vs. Court of Appeals, et al334, “with respect to consideration, Section 24 of the Negotiable Instruments Law created a presumption that every party to an instrument acquired the same for a consideration or for value. Thus, the law itself creates a presumption in David’s favor that he gave valuable consideration for the checks in question. In alleging otherwise, the petitioner has the onus to prove that David got hold of the checks absent said consideration. In other words, the petitioner must present convincing evidence to overthrow the presumption.”

334

G.R. No. 138074, August 15, 2003, published in The New Philippine Law Report, Vol. XXXI, No.8, August 2003, page 17, citations omitted

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Negotiable Instrument, Issued for an Illegal Consideration The Supreme Court held in the case of Pineda vs. Dela Rama335, “[w]hether or not the supposed cash advance reached the destination is of no moment. The consideration for the promissory note—to influence public officers in the performance of their duties—is contrary to law and public policy. The promissory note is void ab initio and no cause of action for the collection cases can arise from it.” Sec. 25. Value, what constitutes. — Value is any consideration sufficient to support a simple contract. An antecedent or preexisting debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time. Notes: What is value? Value is any consideration sufficient to support a simple contract. A promise to forbear suing on an antecedent debt is value. (Brannan, page 34, citing Milius v. Kauffmann, 104 App. Div. 442, 93 N.Y. Supp. 669.) The surrender of a non-negotiable note is sufficient consideration for a negotiable note. (Ibid, citing Petrie v. Miller, 57 App. Div. 17, 67 N.Y. Supp. 1042, affirmed 173 N.Y. 596 without report.) How about pre-existing debts? Are they considered as value? Yes. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a fixed or at a future time. (Sec. 25, Negotiable Instruments Law) According to section 25 of the same Act, value is any consideration sufficient to support a simple contract, and so broad is the scope the law gives to the meaning of “value” in this kind of instruments that it considers as such a prior of preexistent debt, 335

G.R. No. L-31831 April 28, 1983

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whether the instrument be payable on demand or at some future date. (concurring opinion, Justice Torres, in the case of Maulini, et al vs. Serrano, December 16, 1914.) Payment or part payment of a pre-existing debt is value. (Brannan, page 33, citing Bigelow Co. v. Automatic Gas Co., 56 Misc. R. 389, 107 N.Y. Supp. 894; other citations omitted) An antecedent or pre-existing debt is value, even though the instrument is transferred merely as collateral security for such debt. (Brannan, page 33, citing Brewster v. Sharder, 26 Misc. R. 480, 57 N.Y. Supp. 606, S.C. sec. 112; other citations omitted) There is no doubt that a pre-existing debt of the drawer, maker, or acceptor is a valid consideration for his drawing or accepting a bill or executing a note, and indeed is as frequently the consideration of negotiable paper as a debt contracted at the time,336 and it is equally as valid and sufficient consideration for the indorsement and transfer to the creditor of the bill or note of a third party which is in his hands. (Daniel, Elements of the Law of Negotiable Instruments, page 61) What includes a valuable consideration Valuable consideration may in general terms, be said to consist either in some right, interest, profit or benefit accruing to the party who makes the contract, or some forbearance, detriment, loss or some responsibility, to act, or labor, or service given, suffered or undertaken by the other aide. Simply defined, valuable consideration means an obligation to give, to do, or not to do in favor of the party who makes the contract, such as the maker or indorser.337 (Ty vs. People of the Philippines, G.R. No. 149275, September 27, 2004) In an exchange of checks each check is a consideration for the other; each is an independent obligation and not conditional on the payment of the other. Hence, one who bona fide gives his check for that of a third person without notice of the illegality of such check is not bound to stop payment of his own check upon 336

337

Swift v. Tyson, 16 Pet. 1; Townsley v. Sumrall, 2 Pet. 170; McIntyre v. Yates, 104 Ill. 500 Agbayani, Aguedo, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, 1992 Edition, p. 235; Citations omitted

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receiving notice of the illegality of the check exchanged for his, and he may recover against the drawer of such check. (Brannan, page 33, citing Matlock v. Scheuerman, 51 Oregon 49, 93 Pac. 823, 17 L.R.A. (N.S.) 747, S.C. secs. 53, 56, 186.) Consideration sufficient, even if it benefited a third person The case of Bridges vs. Vann, et al,338 tells us that “it is no defense to an action on a promissory note for the maker to say that there was no consideration which was beneficial to him personally; it is sufficient if the consideration was a benefit conferred upon a third person, or a detriment suffered by the promise, at the instance of the promissory. It is enough if the obligee foregoes some right or privilege or suffers some detriment and the release and extinguishment of the original obligation of George Vann, Sr., for that of appellants meets the requirement. Appellee accepted one debtor in place of another and gave up a valid, subsisting obligation for the note executed by the appellants. This, of itself, is sufficient consideration for the new notes.” (supra) Consequently, “a sale of goods to the maker of a note is a consideration for the indorsement of a third person before the delivery of the note.” (Brannan, page 32, citing, Mohlman v. McKane, 60 App. Div. 546, 69 N.Y. Supp. 1046.) Consideration must be absolute In one case, “a bank receiving a certificate of deposit and crediting the same to the depositor, does not give value where the credit was not absolute but conditional upon the collection of the certificate. (Brannan, page 32, citing Commercial Nat. Bank v. State Bank, 132 Iowa 706, 109 N.W. 198.) Effect of absence of valuable consideration In one case, “[d]efendant, by mistake, gave a check to the payee who indorsed it to a plaintiff as a loan. Held, that plaintiff was not a holder in due course, having given no value. (Brannan, page 33, citing Rosenthal v. Parson, 110 N.Y. Supp. 223.)

338

88 Kan 98, 127 Pacific Reporter 604, 9 November 1912; Citations omitted

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Sec. 26. What constitutes holder for value. - Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time. 2011 Bar Question: X executed a promissory note with a face value of Php 50,000.00, payable to the order of Y. Y indorsed the note to Z, to whom Y owed Php 30,000.00. If X has no defense at all against Y, for how much may Z collect from X? A. Php 20,000.00, as he is a holder for value to the extent of the difference between Y’s debt and the value of the note. B. Php 30,000.00, as he is a holder for value to the extent of his lien. C. Php 50,000.00, but with the obligation to hold Php 20,000.00 for Y’s benefit. D. None, as Z’s remedy is to run after his debtor, Y. Sec. 27. When lien on instrument constitutes holder for value. — Where the holder has a lien on the instrument arising either from contract or by implication of law, he is deemed a holder for value to the extent of his lien. Notes: What constitutes a holder for value? ANSWER: A holder for value is a holder which has given anything of value for the instrument. Thus, where value has at anytime been given for the instrument, the holder is deemed a holder for value in respect to all parties who became such prior to that time. (Sec. 26, Negotiable Instruments Law). Moreover, where the holder has a lien on the instrument arising either from contract or by implication of law, he is deemed a holder for value to the extent of his lien. (Sec. 27, Negotiable Instruments Law)

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In the case of Maulini, et al vs. Serrano339, Supreme Court Associate Justice Torres wrote the foregoing concurring opinion, to wit: “[s]ection 26 provides that where value has at any time been given for the instrument, the holder is deemed a holder for value, both in respect to the maker and to the defendant indorser, it is immaterial whether he did so directly to the person who appears in the promissory note as the maker or whether he delivered the sum to the defendant in order that this latter might in turn deliver it to the maker.” Illustrative case: The holder of a note for $2,000, surrendered it for a payment of $500, and a new note for $1,500 executed by the maker and indorsed by defendant. Held, that the holder of the note was a holder for value. (Brannan, page 35, citing Van Norden Trust Co. v. L. Rosenburg, 62 Misc. R. 285, 114 N.Y. Supp. 1025.) 2011 Bar Question: Under the Negotiable Instruments Law, if the holder has a lien on the instrument which arises either from a contract or by implication of law, he would be a holder for value to the extent of A. his successor’s interest. B. his predecessor’s interest. C. the lien in his favor. D. the amount indicated on the instrument’s face. Sec. 28. Effect of want of consideration. - Absence or failure of consideration is a matter of defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise. Notes: Want, failure, or illegality of consideration 339

supra

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Prof. Daniel said: “[w]hile consideration is presumed in all cases of negotiable contracts, and the plaintiff can rely upon this presumption, and thus cast the burden of showing its absence upon the defendant, the presumption is rebuttable, and when the want or failure of a sufficient consideration is attacked and substantial evidence is offered to sustain this defense, the burden shifts, and it rests with the plaintiff upon the whole case to show by a preponderance of evidence a consideration sufficient to support the instrument sued on. The defense of absence or failure of consideration is good only between immediate parties. The consideration is presumed to be legal, and, so far as presumptions and burden of proof are concerned, is governed by the same principles that apply to want or failure of consideration; but if in consequence of the illegality of consideration, the instrument is by law declared void, thus defense avails not only as between the immediate parties, but also against the bona fide holder for value.” (Elements of the Law of Negotiable Instruments, Daniel, p. 304) What is the effect of lack of consideration? The absence or failure of consideration is a matter of defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is ascertained and liquidated amount or otherwise. (Sec. 28, Negotiable Instruments Law) The defense that there was failure or absence of consideration can only be invoked by the drawer if the holder was a privy to the purpose for which the instrument were issued and therefore is not a holder in due course. (State Investment House vs. Court of Appeals and Nora B. Moulic, G.R. No. 101163, January 11, 1993, [Bellosillo, J:]) The drawee by acceptance becomes liable to the payee or his indorsee, and also to the drawer himself. But the drawer and acceptor are the immediate parties to the consideration, and if the acceptance be without consideration, the drawer cannot recover from the acceptor. The payee holds a different relation; he is a stranger to the transaction between the drawer and the acceptor, and is, therefore, in a legal sense a remote party. In a suit by him against the acceptor, the question of consideration between the drawer and the acceptor cannot be inquired into.

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The payee or holder gives value to the drawer, and if he is ignorant of the equities between the drawer and the acceptor, he is in the position of a bona fide indorsee. Hence, it is no defense to a suit against the acceptor of a draft which has been discounted, and upon which money has been advanced by the plaintiff, that the draft was accepted or the accommodation of the drawer. (Philippine National Bank vs. Bartolome Picornell, et al, G.R. No. L-18751, 18915, September 26, 1922, [Romualdez, J:], citing 3 R.C.L., pp. 1143, 1144, par, 358.) It is a well-known rule of law that if the original payee of a note unenforceable for lack of consideration repurchase the instrument after transferring it to a holder in due course, the paper again becomes subject in the payee’s hands to the same defenses to which it would have been subject if the paper had never passed through the hands of a holder in due course. (Fossum vs. Hermanos, G.R. No. L-19461, March 28, 1923, [Street, J:], citing Kost vs. Bender, 25 Mich., 515; Shade vs. Hayes, L.R.A. [1915 D], 271; 8 C.J., 470.) The same is true where the instrument is retransferred to an agent of the payee. (supra, citing Battersbee vs. Calkins, 128 Mich., 569) Illustrative Case: A check was made by A to the order of B to be used to pay C for withdrawing a charge of rape against B, alleged to be a false charge, and to prevent his re-arrest on said charge. The check was indorsed by B to C and by C to the plaintiff, without consideration, and upon payment being stopped plaintiff sued A. Held, that A could not defend on the ground of duress which was not exercised on him, but that he could defend on the ground of want of consideration. (Brannan, page 36, citing Weiss v. Reiser, 62 Misc. Rep. 292, 114 N.Y. Supp. 983.) In a suit between remote parties to a bill of exchange, as the payee or indorsee and the acceptor, to sustain the defense of no consideration, there must have been no consideration received by the defendant and plaintiff must have been given no consideration. (Ibid, citing National Park Bank v. Saitta, 127 App. Div. 624, 111 N.Y. Supp. 927, S.C. sec. 133.)

227

Partial Want of Consideration Whenever the defendant is entitled to go into the question of consideration, he may set up the partial as well as the total want of consideration.340 So, where a father gives his son a note partly for services and partly as a gratuity, the partial want of consideration might be pleaded as to such portion of the amount as was gratuitous; and it would be no objection that no distinct amount was fixed upon as compensation for the services, but it would be for the jury [judge] to settle what amount was founded on the one consideration, and what on the other.341 If a note be given by mistake on settlement of account for an amount greater than that actually due, there is want of consideration as to the excess, and between the parties it may be pleaded.342 (Daniel, Elements of the Law of Negotiable Instruments, page 66-67) Total and Partial failure of consideration The total failure of consideration is a good defense to a suit upon a bill or note as the original want of it, and is confined to the like parties. If the contract is rescinded, the consideration of the bill or note totally fails, and payment of it cannot be enforced.343 And a partial failure of the consideration is a good defense pro tanto.344 But such part as is alleged to have failed must be distinct and definite, for only a total failure, or the failure of a specific and ascertained part, can be availed of by way of defense; and if it be an unliquidated claim the defendant must resort to his crossaction.345 Thus, where bills have been accepted in consideration of the payee giving the acceptor the lease of a house, and he let him into possession, but gave no lease, it was held no defense to an action on the bill, but that there was merely a counter-claim for damages.346 So where the bill was given for work to be done, and the work when done was bungled in part, and not worth the amount 340 341 342 343 344 345

346

McGregor v. Bishop, 14 Ont. 10; Daniel on Negotiable Instruments, 201 Parish v. Stone, 14 Pick. 198 Seeley v. Engell, 13 N.Y. 542; Claxon v. Demaree, 14 Bush. 173 Hacker v. Brown, 81 Mo. 68; Maltz v. Fletcher, 52 Mich. 484 Agnew v. Aldem, 84 Ala. 502; Torinus v. Buckham, 29 Minn. 128 Elminger v. Drew, 4 McLean, 388; Stobe v. Peake, 16 Vt. 213; Pulsifer v. Hotchkiss, 12 Conn. 234 Moggridge v. Jones, 14 East, 485

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of the bill. 347 (Daniel, Elements of the Law of Negotiable Instruments, page 68) Partial Illegality of consideration When the defense is founded on illegality of consideration, it is to be distinguished from a defense on the ground of a want or failure of consideration by this peculiarity—that a partial illegality vitiates the bill or note in too, while the partial want of consideration only vitiates it pro tanto.348 (ibid) Who are parties privy in negotiable instruments The same rule which admits inquiry into the consideration of negotiable paper between the original payor and payee extends to admit such inquiry in any suit between parties between whom there is privity. That is to pay, between immediate parties to any contract evidenced by the drawing, accepting, making or indorsing a bill or note, or may be shown that there was no consideration (as, that it was for accommodation);349 or that consideration has failed, or a set-off may be pleaded; but as between other parties remote to each other, none of these defenses are admissible. It becomes important then to determine who are to be regarded as the immediate parties, or parties between whom there is a privity, to a negotiable instrument, and who are remote. Among the former may be classed: (1) The drawer and acceptor of a bill;350 or (2) The drawer and payee351 of a bill as a general rule; (3) The maker and payee of a note;352 and (4) The indorser and immediate indorsee of a bill or note.353 (ibid, page 69) Who are remote parties to negotiable instruments But want of consideration, or the failure thereof, cannot be pleaded in a suit brought: (1) By an indorsee against the maker of a note;354 (2) By an indorsee against a prior, but not his immediate 347 348

349 350 351

352 353

354

Trickey v. Larne, 6 M & W 278 Hanauer v. Doane, 12 Wall. 342; Hyslop v. Clark, 14 Johns 465; Mn Namra v. Gargett, 68 Mich. 454 Murphy v. Keyes, 39 N.Y. Sup. Ct. 18; Wilson v. Ellsworth, 25 Nebr. 246 Thomas v. Thomas, 7 Wis. 476; Spurgeon v. McPheeters, 42 Ind. 527 McCulloch v. Hoffman, 10 Hun, 133; Spurgeon v. McPheeters, 42 Ind. 527 Kennedy v. Goodman, 14 Nebr. 585; Flaun v. Wallace, 9 S.E. 571 Barnett v. Offerman, 7 Watts, 130; Klein v. Keyes, 17 Mo. 326; Platt v. Snipe, 43 Ark. 23 Price v. Keen, 40 N.J.L 332; Brunes v. Scott, 117 U.S. 582

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indorser;355 (3) By the indorsee against the acceptor of a bill, as a general rule.356 They are regarded as remote parties to each other, and between such parties two distinct considerations must be inquired into in order to perfect a defense against the holder: (1) The consideration which the defendant received for his liability; and (2) That which the plaintiff gave for his title.357 And if any immediate holder gave value for the instrument, that intervening consideration will sustain the plaintiff’s title.358 (ibid) Want, Failure, or Fraudulency of consideration If the original consideration were tainted with fraud or illegality, or has failed in whole, or in part, and the bill or note has passed into the hands of a bona fide holder for value without notice, yet if returned for a valuable consideration to the payee who is a privy to the original consideration, he could stand upon no better footing than if the instrument had remained in his hands.359 (ibid) Defenses between privy parties 1. That the bill or note has been lost or stolen;360 2. Was executed under duress;361 3. Under fraudulent misrepresentations;362 4. Fraudulent consideration;363 5. Illegal consideration;364 6. Fraudulently obtained from an immediate holder;365 7. Been in any way the subject of fraud or felony;366

355 356 357

358

359

360 361 362 363 364 365 366

Ethridge v. Gallagher, 55 Miss. 464; 1 Parsons on Notes and Bills, 176 Flower v. Sadler, 10 Q.B. Div. 572 Laflin & Rand Power Co. v. Sinsheimer, 48 Md. 411; Hoffman & Co. v. Bank of Milwaukee, 12 Wall. 181 United States v. Bank of Metropolis, 15 Pwt. 393; Swift v. Tyson, 16 Pet. 1; Goetz v. Bank of Kansas City, 119 U.S. 556 Swayner v. Wiswell, 9 Allen, 42; Kost v. Bender, 25 Mich. 516; Cline v. Templeton, 78 Ky. 550 Mills v. Barner, 1 M & W, 425 Clark v. Peace, 41 N.H. 414; Griffith v. Sitgreaves, 90 Pa. St. 161 Vathir v. Zane, 6 Gratt. 246; Hutchinson v. Bogg, 28 Pa. St. 294 Rogers v. Morton, 12 Wend. 484 Shirley v. Howard, 53 Ill. 455; Holden v. Cosgrove, 12 Gray, 216 1 Parsons on Notes and Bills, 188 Holden v. Cosgrove, 12 Gray, 216; Western Bank v. Mills, 7 Cush. 546

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How illegality may be purged—renewal of instrument If the consideration of the original bill or note be illegal, a renewal of it will be open to the same objection and defense;367 and if the original instrument was obtained by fraud, a renewal of it by the original parties without knowledge of the fraud, would stand in the same footing.368 But if at the time the renewal was executed the parties signing knew of the fraud in the original, they will be regarded as purging the contract of the fraud, and cannot then plead it.369 So if the maker of a note held by an indorsee who knew that the consideration between the maker and the payee had failed when he took it, executes to him a new note, it had been held to be a waiver of the defense, and the payee of the new note can recover.370 (ibid, page 71-72) Partial Illegality of the instrument If a note or bill be given for a consideration which is in part illegal, a new note for the same, or in renewal of the first, is equally void.371 But a new note for that part of the consideration which is legal is good and valid. And if several new notes are given for the old one, some of the new one may be taken for the legal part, and so be valid, especially if they are only adequate to their part or if the deduction be otherwise favored by circumstances.372 (Ibid, page 72) Sec. 29. Liability of accommodation party. - An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party. Notes: 367

368 369 370 371

372

Schutt v. Evans, 109 Pa. St. 627; Wegner v. Biering, 65 Tex. 511; Sawyer v. Wiswell, 9 Allen, 39 Sawyer v. Wiswell, 9 Allen, 39 Sawyer v. Wiswell, 9 Allen, 39; Calvin v. Sterrett, 41 Kan, 220 Gil v. Morris, 11 Heisk, 614; Keyes v. Mann, 63 Iowa, 560 Chapman v. Black, 2 B & Ald. 588; Seeligson v. Lewis, 65 Tex. 115; Preston v. Jackson, 2 Stark. 237 Daniel on Negotiable Instruments, 206; Crookshank v. Rose, 5 Car. & P. 19

231

Who is an accommodation party? An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. (Sec. 29, Negotiable Instruments Law) In lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. He lends his name to enable the accommodated party to obtain credit or to raise money. He receives no part of the consideration for the instrument but assumes liability to the other parties thereto because he wants to accommodate another. (Philippine Bank of Commerce vs. Aruego, G.R. No. L-25836-37, January 31, 1981, [Fernandez, J.]; Ang vs. Associated Bank, G.R. No. 146511, September 5, 2007, 532 SCRA 244, 272-273, cited in Claude P. Bautista vs. Auto Plus Traders, Inc., G.R. No. 166405, August 6, 2008, [Quisumbing, J:]) In accommodation transactions recognized by the Negotiable Instruments Law, an accommodation party lends his credit to the accommodated party, by issuing or indorsing a check which is held by a payee or indorsee as a holder in due course, who gave full value therefor to the accommodated party. The latter, in other words, receives or realizes full value which the accommodated party then must repay to the accommodating party, unless of course the accommodating party intended to make a donation to the accommodated party. But the accommodating party is bound on the check to the holder in due course who necessarily a third party and is not the accommodated party. Having issued or indorsed the check, the accommodating party has warranted to the holder in due course that he will pay the same according to its tenor. (Travel-On, Inc. vs. Court of Appeals and Arturo Miranda, G.R. No. L-56169, June 26, 1992, [Feliciano, J:]) Nature of the relationship between the accommodation party and the accommodated party “[T]he relation between an accommodation party and the accommodated party is one of principal and surety—the accommodation party being the surety.373 As such, he is deemed an original promissors and debtor from the beginning,374 he is

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

considered in law as the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter since their liabilities are interwoven as to be inseparable.375 Although a contract of suretyship is in essence accessory or collateral to a valid principal obligation, the surety’s liability to the creditor is immediate, primary and absolute; he is directly and equally bound with the principal.376 As an equivalent of a regular party to the undertaking, a surety becomes liable to the debt and duty of the principal obligor even without possessing a direct or personal interest in the obligations nor does he receive any benefit therefrom.377 (Eusebio Gonzales vs. Philippine Commercial and International Bank, et. al., G.R. No. 180257, February 23, 2011, [Velasco, J.:]) An accommodation bill or note is not considered a real security, but a mere blank, until it has been negotiated, and it then becomes binding upon all of the accommodation indorsers in like manner and to the like effect as if they were successive indorsers,378 but until it has been negotiated any party may withdraw his indorsement, acceptance, or other liability upon it, and rescind his engagement;379 and that right is not impaired by the circumstance that he may be indemnified by an assignment, or other security.380 (Daniel, Elements on the Law of Negotiable Instruments, page 59) 373

Garcia v. Llamas, supra at 305; Agro Conglomerates, Inc. v. Court of Appeals, 401 Phil. 644, 654- 655 (2000); Spouses Gardose v. Tarroza, supra at 807; Caneda, Jr. v. Court of Appeals, G.R. No. 81322, February 5, 1990, 181 SCRA 762, 772; Crisologo-Jose v. Court of Appeals, supra at 598; Prudencio v. Court of Appeals, 227 Phil. 7, 12 (1986); and Philippine Bank of Commerce v. Aruego, supra at 539 374 Garcia v. Llamas, supra at 305 375 Trade & Investment Development Corp. v. Roblett Industrial Construction Corp., G.R. No. 139290, November 11, 2005, 474 SCRA 510, 531 376 International Finance Corporation v. Imperial Textile Mills, Inc., G.R. No. 160324, November 15, 2005, 475 SCRA 149, 160; Trade & Investment Development Corp. v. Roblett Industrial Construction Corp., id. at 531; Garcia v. Llamas, supra at 305; Agro Conglomerates, Inc. v. Court of Appeals, supra at 655; and Philippine Bank of Commerce v. Aruego, supra at 540 377 International Finance Corporation v. Imperial Textile Mills, Inc., id. at 160161 and Trade & Investment Development Corp. v. Roblett Industrial Construction Corp., id. at 531 278 Withworth v. Adams, 5 Rand. 342; May v. Boisseau, 8 Leigh, 164 379 Second Nat. Bank v. Howe, 40 Minn, 390 380 May v. Boisseau, 8 Leight, 164

233

To whom does the accommodation refer to? The accommodation to which reference is made in the section quoted is not the person who takes the note—that is, the payee or indorsee, but one to the maker or indorser of the note. (Maulini, et al vs. Serrano, G.R. No. L-8844, December 16, 1914, [Moreland, J.]) What are the requisites of an accommodation party? An accommodation party is one who meets all the three requisites: (a) He must be a Party to the instrument, signing as a maker, drawer, acceptor, or indorser; (b) He must not receive value therefor; and (c) And he must sign for the purpose of lending his name or credit to some other person. (Claude P. Bautista vs. Auto Plus Traders, Inc., G.R. No. 166405, August 6, 2008, [Quisumbing, J.]; Ernestina Crisologo-Jose vs. Court of Appeals, G.R. No. 80599, September 15, 1989 ) Without receiving value therefor. Based on the foregoing requisites, it is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument. From the standpoint of contract law, he differs from the ordinary concept of a debtor therein in the sense that he has not received any valuable consideration for the instrument he signs. Nevertheless, he is liable to a holder for value as if the contract was not for accommodation381 in whatever capacity such accommodation party signed the instrument, whether primary or secondarily. Thus, it has been held that in lending his name to the accommodated party, the accommodation party is in effect a surety for the latter.382 (Ernestina Crisologo-Jose vs. Court of Appeals, et al, G.R. No. 80599, September 15, 1989, [Regalado, J.]) As to whether or not the defendant is an accommodation party, it should be taken into account that by putting his signature 381 382

Ang Tiong vs. Ting, et al., 22 SCRA 713 (1968) Philippine Bank of Commerce vs. Aruego, 102 SCRA 530 (1981)

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

to the note, he lent his name, not to the creditor, but to those who signed with him placing himself with respect to the creditor in the same position and with the same liability as the said signers. It should be noted that the phrase “without receiving value therefor,” as used in Section 29 of the foresaid Act, means “without receiving value by virtue of the instrument” and not, as it apparently is supposed to mean, “without receiving payment for lending his name.” If, as in the instant case, a sum of money was received by virtue of the note, it is immaterial, so far as the creditor is concerned, whether one of the signers has, or has not, received anything in payment of the use of his name. In reality the legal situation of the defendant in this case may properly be regarded as that of a joint surety rather than of an accommodation party. The defendant, as a joint surety, may, upon the maturity of the note, pay the debt, demand the collateral security and dispose of it to his benefit; but there is no proof whatever that this was done. As to the plaintiff, he is the “holder for value”, under the phrase of said Section 29, for he had paid the money to the signers at the time the note was executed and delivered to him. (R.N. Clark vs. George C. Sellner, G.R. No. L-16477, November 22, 1921, [Romualdez, J:]) (emphasis supplied) The phrase “without receiving value therefor” used in Sec. 29 of the NIL means “without receiving payment value by virtue of the instrument” and not as it is apparently supposed to mean, “without receiving payment for lending his name.”383 Stated differently, when a third person advances the face value of the note to the accommodated party at the time of its creation, the consideration for the note as regards its makers is the money advanced to the accommodated party. It is enough that value was given for the note at the time of its creation.384 (Tomas Ang vs. Associated Bank and Antonio Ang Eng Liong, G.R. No. 146511, September 5, 2007, [Azcuna, J.]) In the words of Joseph Doddridge Brannan: “the words “value therefor” in section 29 mean value for the negotiable instrument, not value for the use of the name, and that one may be an accommodating party although he is paid nothing for the

383 384

Clark v. Sellner, 42 Phil. 384, 386 (1921) Caneda, Jr. v. Court of Appeals, supra at 772

235

use of his name.” (citing Morris County Brick Co. v. Austin (N.J.) 75 Atl. 550.)385 The Rule on Accommodation party does not apply to corporations The aforequoted provision of the Negotiable Instruments Law which holds an accommodation party liable on the instrument to a holder for value, although such holder at the time of taking the instrument knew him to be only an accommodation party, does not include nor apply to corporations which are accommodation parties.386 This is because the issue or indorsement of negotiable paper by a corporation without consideration and for the accommodation of another is ultra vires.387 Hence, one who has taken the instrument with knowledge of the accommodation nature thereof cannot recover against a corporation where it is only an accommodation party. If the form of the instrument, or the nature of the transaction, is such as to charge the indorsee with knowledge that the issue or indorsement of the instrument by the corporation is for the accommodation of another, he cannot recover against the corporation thereon.388 (Ernestina CrisologoJose vs. Court of Appeals, et al, G.R. No. 80599, September 15, 1989, [Regalado, J.]) In other relevant and older cases, it was held that: “a manufacturing corporation has no power to bind itself as an accommodation party. Therefore in such a case the plaintiff must show both that he paid value and also that he did not know of the accommodation character of the instrument. (Brannan, page 38, citing Nat. Bank v. Snyder Co., 117 App. Div. 370, 102 N.Y. Supp.. 478; Bradley Engineering Co., v. Heyburn (Wash.), 106 Pac. 170, S.C. sec. 119; Cf. In re Troy & Cohoes Shirt Co., infra, sec. 56.) The possession and negotiation by the maker of a note with the indorsement of the payee imports that the indorsement was for accommodation, and neither sec. 29 nor sec. 22 give power to a corporation to make accommodation indorsements. (Ibid, citing Oppenheim v. Simon Reigel Cigar Co., 90 N.Y. Supp. 355.) 385

386 387 388

Cited in the Negotiable Instruments Law Annotated, Joseph Doddridge Brannan, second edition, 1911, page 38 11 C.J.S. 309 14A C.J. 732 Oppenheim vs. Simon Reigel Cigar Co., 90 N.Y.S. 355, cited in 11 C.J.S. 309

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

Exception— By way of exception, an officer or agent of a corporation shall have the power to execute or indorse a negotiable paper in the name of the corporation for the accommodation of a third person only if specifically authorized to do so.389 Corollarily, corporate officers, such as the president and vice-president, have no power to execute for mere accommodation a negotiable instrument of the corporation for their individual debts or transactions arising from or in relation to matter in which the corporation has no legitimate concern. Since such accommodation paper cannot thus be enforced against the corporation, especially since it is not involved in any aspect of the corporate business or operations, the inescapable conclusion in law and in logic is that the signatories thereof shall be personally liable therefor, as well as the consequences arising from their acts in connection therewith. x x x The fact that for lack of capacity the corporation is not bound by an accommodation paper does not thereby absolve, but should render personally liable, the signatories of said instrument where the facts show that the accommodation involved was for their personal account, undertaking and the creditor was aware thereof. (supra) Does the accommodation party have any liability? Yes, such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party. (Sec. 29, Negotiable Instruments Law) To paraphrase, the accommodation party is liable to a holder for value as if the contract was not for an accommodation. It is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument. Nor is it correct to say that the holder for value is not a holder in due course merely because at the time he acquired the instrument, he knew that the indorser was only an accommodation party.390 389

390

In re Wrentham Mfg. Co., 2 Low. 119; Hall vs. Auburn Turnp. Co., 27 Cal. 255, cited in 14A C.J. 461 Beutel’s Brannan Negotiable Instruments Law, 7th ed., pp. 568-569; Stuart del Rosario, Treatise on Negotiable Instruments, 1961 ed., 165, 242-243; Alvendia, The Negotiable Instruments Law, pp 55, 57-58; National Bank vs. Maza, et al, 48 Phil. 210.

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(Ang Tiong vs. Lorenzo Ting, G.R. No. L-26767, February 22, 1968, [Castro, J:]) Illustrative Case: Philippine Bank of Commerce vs. Jose M. Aruego G.R. Nos. L-25836-37, January 31, 1981 FERNANDEZ, J.: FACTS:

On December 1, 1959, the Philippine Bank of Commerce instituted an action against Jose M. Aruego Civil Case No. 42066 for the recovery of the total sum of about P35,000.00 with daily interest thereon from November 17, 1959 until fully paid and commission equivalent to 3/8% for every thirty (30) days or fraction thereof plus attorney’s fees equivalent to 10% of the total amount due and costs. The complaint filed by the Philippine Bank of Commerce contains Twenty-Two (22) causes of action referring to Twenty-Two (22) transactions entered into by the said Bank and Aruego on different dates covering the period from August 28, 1950 to March 14, 1951. The sum sought to be recovered represents the cost of the printing of “World Current Events”, a periodical published by the defendant. To facilitate the payment of the printing the defendant obtained a credit accommodation from the plaintiff. Thus, for every printing of the “World Current Events”, the printer Encal Press and Photo Engraving, collected the cost of printing by drawing a draft against the plaintiff, said draft being sent later to the defendant for acceptance. As an added security for the payment of the amounts advanced to Encal Press and Photo Engraving, the plaintiff bank also required the defendant Aruego to execute a trust receipt in favor of said bank wherein said defendant undertook to hold in trust for plaintiff the periodicals and to sell the same with the promise to turn over to the plaintiff the proceeds of the sale of said publication to answer for the payment of all obligations arising from the draft.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

Aruego contends that he signed the bills of exchange not as principal obligor, but as accommodation or additional party obligor, to add to the security of said plaintiff bank. His reason is that unlike real bills of exchange, where payment of the face value is advanced to the drawer only upon acceptance of the same by the drawee, in the case in question, payment for the supposed bill of exchange were made before acceptance; so that in effect, although these documents are labeled bills of exchange, legally they are not bills of exchange but mere instruments evidencing indebtedness of the drawee of who received the face value thereof, with the defendant as only a additional security of the same. ISSUE:

Is his contention tenable?

RULING: Defendant contends that he signed the drafts only as an accommodation party and as such, should be made liable only after showing that the drawer is incapable of paying. This contention is without merit. An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value therefor and for the purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of the taking of the instrument knew him to be only an accommodation party. In lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. He lends his name to enable the accommodated party to obtain credit or to raise money. He receives no part of the consideration for the instrument but assumes liability to the other parties thereto because he wants to accommodate another. In the instant case, the defendant signed as a drawee/acceptor. Under the Negotiable Instrument Law, a drawee is primarily liable. Thus, if the defendant who is a lawyer, he should not have signed as an acceptor/drawee. In doing so, he became primarily and personally liable for the drafts.

239

Prudencio vs. Court of Appeals391, held that: “In the case of Philippine Bank of Commerce v. Aruego (102 SCRA 530, 539), we held that “…in lending his name to the accommodated party, the accommodation party is in effect a surety…” However, unlike in a contract of suretyship, the liability of the accommodation party remains not only primary but also unconditional to a holder for value such that even if the accommodated party received an extension of the period for payment without the consent of the accommodation party, the latter is still liable for the whole obligation and such extension does not release him because as far as the holder for value is concerned, he is a solidary co-debtor. Expounding on the nature of the liability of an accommodation party under the aforequoted section, we ruled in Ang Tiong v. Ting (22 SCRA 713, 716): “[3.] That the appellant, again assuming him to be an accommodation indorser, may obtain security from the maker to protect himself against the danger of insolvency of the latter, cannot in any manner affect his liability to the appellee, as the said remedy is a matter of concern exclusively between the accommodation indorser and accommodated party. So that the appellant stands only as a surety in relation to the maker, granting this to be true for the sake of argument, is immaterial to the claim of the appellee, and does not a whit diminish nor defeat the rights of the latter who is a holder for value. The liability of the appellant remains primary and unconditional. To sanction the appellant’s theory is to give unwarranted legal recognition to the patent absurdity of a situation where an indorser, when sued on an instrument by a holder in due course and for value, can escape liability on his indorsement by the convenient expedient of interposing the defense that he is a mere accommodation indorser. There is, therefore, no question that as accommodation makers, petitioners would be primarily and unconditionally liable on the promissory note to a holder for value, regardless of whether they stand as sureties or solidary co-debtors since such distinction would be entirely immaterial and inconsequential as far as a holder 391

G.R. No. L-34539, July 14, 1986.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

for value is concerned. Consequently, the petitioners cannot claim to have been released from their obligation simply because the time of payment of such obligation was temporarily deferred by PNB without their knowledge and consent. There has to be another basis for their claim of having been freed from their obligation. The question which should be resolved in this instant petition, therefore, is whether or not PNB can be considered a holder for value under Section 29 of the Negotiable Instruments Law such that the petitioners must be necessarily barred from setting up the defense of want of consideration or some other personal defenses which may be set up against a party who is not a holder in due course. A holder for value under Section 29 of the Negotiable Instruments Law is one who must meet all the requirements of a holder in due course under Section 52 of the same law expect notice of want of consideration. (Agbayani, Commercial Law of the Philippines, 1964, p.208). If he does not qualify as a holder in due course then he holds the instrument subject to the same defenses as if it were non-negotiable. (Section 58, Negotiable Instruments Law).” Problem: Mr. B, in his capacity as President and Presiding Officer of BB Bus Lines, Inc., purchased various spare tires from AA Auto Supply, and issued two (2) post-dated checks to cover his purchases. The checks were subsequently dishonored. Thereafter, two counts of violation of BP 22 were filed against Mr. B. The criminal cases were eventually dismissed on a demurrer to evidence filed by Mr. B, but the latter was directed to pay AA Auto Supply the value of the checks with interest of 12% per annum and cost. Mr. B through a petition for review on certiorari with the Supreme Court raised the issue that he being an officer of the corporation, he should not be personally and civilly held liable for the value of the checks. AA Auto Supply, on the other hand, contends that, Mr. B, by issuing his check to cover the obligation of the corporation, became an accommodation party, thus, he is liable on the instrument to a holder for value.

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Is Mr. B liable? ANSWER: No. Judicial entities have personalities separate and distinct from its officers and the persons composing it. Generally, the stockholders and officers are not personally liable for the obligations of the corporations except only when the veil of corporate fiction is being used as a cloak or cover for fraud or illegality, or to work injustice. These situations, however, do not exist in this case. The evidence shows that it is BB Bus Lines, Inc. that has obligations to AA Auto Supply for tires. There is no agreement that Mr. B shall be held liable for the corporation’s obligations in his personal capacity. Hence, he cannot be held liable for the value of the checks. Likewise, Mr. B cannot be considered liable as an accommodation party. An accommodation party lends his name to enable the accommodated party to obtain credit or to raise money; he received no part of the consideration for the instrument but assumes liability to the other party/ies thereto. The first two elements are present here, however there is insufficient evidence presented in the instant case to show the presence of the third requisite. All that the evidence shows is that Mr. B signed the check corresponding to the spare tires received by BB Bus Lines, Inc. There is no showing of when petitioner issued the check and in what capacity. In the absence of concrete evidence it cannot just be presumed that Mr. B intended to lend his name to the corporation. Hence, Mr. B cannot be considered as an accommodation party. (Claude P. Bautista vs. Auto Plus Traders, Inc., G.R. No. 166405, August 6, 2008, [Quisumbing, J.]) Extent of liability of the Accommodation Party In Ang vs Associated Bank,392, the High Court held that: “the liability of an accommodation party remains not only primary but also unconditional to a holder for value, even if the accommodated party received an extension of the period for payment without the consent of the accommodation party, the latter is still liable for the 392

supra

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whole obligation and such extension does not release him because as far as a holder for value is concerned, he is a solidary co-debtor.393 In Clark v. Sellner,394 this Court held: “x x x The mere delay of the creditor in enforcing the guaranty has not by any means impaired his action against the defendant. It should not be lost sight of that the defendant’s signature on the note is an assurance to the creditor that the collateral guaranty will remain good, and that otherwise, he, the defendant, will be personally responsible for the payment. True, that if the creditor had done any act whereby the guaranty was impaired in its value, or discharged, such an act would have wholly or partially released the surety, but it must be born in mind that it is a recognized doctrine in the matter of suretyship that with respect to the surety, the creditor is under no obligation to display any diligence in the enforcement of his rights as a creditor. His mere inaction, indulgence, passiveness, or delay in proceeding against the principal debtor, or the fact that he did not enforce the guaranty or apply on the payment of such funds as were available, constitute no defense at all for the surety, unless the contract expressly requires diligence and promptness on the party of the creditor, which is not the case in the present action. There is in some decisions a tendency toward holding that the creditor’s laches may discharge the surety, meaning by laches a negligent forbearance. This theory, however, is not generally accepted and the courts almost universally consider it essentially inconsistent with the relation of the parties to the note. (21 R.C.L., 10321034)395" Solidary Accommodation Maker On principle, a solidary accommodation maker—who made payment—has the right to contribution, from his coaccommodation maker, in the absence of agreement to the contrary between them, and subject to conditions imposed by law. 393 394 395

Prudencio v. Court of Appeals, supra at 12-13 42 Phil. 384 (1921) Id. at 387-388

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This right springs from an implied promise between the accommodation makers to share equally the burdens that may ensue from their having consented to stamp their signatures on the promissory note.396 For having lent their signatures to the principal debtor, they clearly placed themselves—in so far as payment made by one may create liability on the other—in the category of mere joint grantors of the former.397 This is as it should be. Not one of them benefited by the promissory note. They stand on the same footing. In misfortune, their burdens should be equally spread. (Intestate Estate of Victor Sevilla, et al vs. Francisco Sevilla, G.R. No. L-17845, April 27, 1967, [Sanchez, J:]) The rule is that: (1) A joint and several accommodation maker of a negotiable promissory note may demand from the principal debtor reimbursement for the amount that he had paid to the payee; and (2) a joint and several accommodation maker who pays on the promissory note 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. (supra) In the case of Ernestina Crisologo-Jose vs. Court of Appeals, et al398, it was held: “[t]he fact that he was only a cosignatory does not detract from his personal liability. A co-maker or co-drawee under the circumstances in this case is as much an accommodation party as the other co-signatory or, for that matter, as a lone signatory in an accommodation instrument. Under the doctrine in Philippine Bank of Commerce vs. Aruego, supra, he is in effect a co-surety for the accommodated party with whom he and his co-signatory, as the other co-surety, assume solidary liability ex lege for the debt involved.” On the other hand, “an accommodation maker of a note is liable to one whom it was indorsed in payment of an antecedent debt, the use of the note having been restricted by the maker. 396 397

398

Daniel on Negotiable Instruments, id., p. 1597. Daniel on Negotiable Instruments, id., p. 1595; and Footnote 65…: “The liability of co-sureties to each other for contribution is not joint [joint and several] but several”, citing Vansant vs. Gardner, 240 Ky. 318, 42 S.W. (2nd) 300; Voss vs. Lewis, 126 Ind. 155, 25 N.E. 892. G.R. No. 80599, September 15, 1989

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(Brannan, page 39, citing English v. Schlesinger, 55 Misc. R. 584, 105 N.Y. Supp. 989.) Accommodation Indorser In case of accommodation indorsement the indorser makes the indorsement for the accommodation of the maker. Such indorsement is generally for the purpose of better securing the payment of the note—that is, he lend his name to the maker, not the holder. Putting it another way: An accommodation note is one to which the accommodation party has put his name, without consideration, for the purpose of accommodating some other party who is to use it and is expected to pay it. The credit given to the accommodation party is sufficient consideration to bind the accommodation maker. Where, however, an indorsement is made as a favor to the indorsee, who requests it, not the better to secure payment, but to relieve himself from a distasteful situation, and where the only consideration for such indorsement passes from the indorser to the indorsee, the situation does not present one creating an accommodation indorsement, nor one where there is a consideration sufficient to sustain an action on the indorsement. (Maulini, et al vs. Serrano) Right of the Accommodation Party to sue the Accommodated Party “[I]t may be properly remarked that when the accommodation parties make 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 that of principal and sureties, the accommodation parties being the sureties.” (Philippine National Bank vs. Ramon Maza and Francisco Mecenas, G.R. No. L-24224, November 3, 1925) Extinction of an Accommodation Note If an accommodation note has once been negotiated and paid at maturity it is extinguished and cannot be re-issued so as to bind the accommodating party. A repeated use of the instrument is not within the authority given. (Brannan, page 38, citing Comstock v. Buckley, (Wis.), 124 N.W. 414, S.C. sec. 58.)

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Knowledge of an indorsee for value that the note was given for the accommodation payee is not a defense Knowledge of an indorsee for value that the note was given for the accommodation of the payee is not a defense to an action by the indorsee against the accommodating maker. Nor is an agreement between the payee and maker that the note should be deposited in a bank as collateral security for advances to be made to the payee (and which were made) and that the bank should hold and not negotiate the note, although the indorsee of the bank had knowledge of the agreement. The bank being a holder in due course could transfer its rights to the plaintiff. (Brannan, page 38, citing Black v. Bank of Westminster, 96 Md. 399, 54 Atl. 88, S.C. sec. 56.) Illustrative Cases: Where it was agreed between the maker and the payee of a note that each should receive one-half the proceeds of the discount and pay one-half of the note, the maker was not an accommodation maker. (Brannan, page 38, citing, Reyburn v. Queen City Savings Bank & Trust Co., 171 Fed. 609, 96 C.C.A. 373.) An accommodation note may be negotiated after maturity even though it be the first negotiation and to one having knowledge of the accommodation so as to make the accommodation maker liable. (Ibid, citing Marling v. Jones, 138 Wis. 82, 119 N.W. 931; Mersick v. Alderman, 77 Conn. 634, 60 Atl. 109, semble, S.C. sec. 52.)

III. NEGOTIATION Sec. 30. What constitutes negotiation. - An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder and completed by delivery. Notes:

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What constitutes negotiation? An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. (Sec. 30, Negotiable Instruments Law) It is important to bear in mind that the negotiation of a negotiable instrument must be distinguished from the assignment or transfer of an instrument whether that be negotiable or nonnegotiable. Only an instrument qualifying as a negotiable instrument under the relevant statute may be negotiated either by indorsement thereof coupled with delivery, or by delivery alone where the negotiable instrument is in bearer form. A negotiable instrument may, however, instead of being negotiated, also be assigned or transferred. The legal consequences of negotiation as distinguished from assignment of a negotiable instrument are, of course, different. A non-negotiable instrument may, obviously, not be negotiated; but it may be assigned or transferred, absent an express prohibition against assignment or transfer written in the face of the instrument. (Sesbreño vs. CA, G.R. No. 89252, May 24, 1993, [Feliciano, J.]) The words “not negotiable”, stamped on the face of the bill of lading, did not destroy its assignability, but the sole effect was to exempt the bill from the statutory provisions relative thereto, and a bill, though not negotiable, may be transferred by assignment, the assignee taking subject to the equities between the original parties. (supra) Distinction between Assignability and Negotiability399 1. Assignability pertains to contracts in general. 2. An assignment is the legal method of transferring property or rights evidenced by a contract. 3. An assignment is an impracticable method, as regards circulating medium, because: a. Title created by assignment, as against the debtor, is not complete without notice to the debtor.

399

Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 9

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b. No subsequent purchaser of the property or rights can acquire better title than that of his immediate assignor. 4. Negotiability pertains to a special class of contracts. 5. Negotiability facilitates their transfer as a circulating medium, because: a. The bona fide purchaser for value is presumed to be the true owner, and has good title. b. Transfer is effected by indorsement or delivery. c. In general, a consideration for the contractual relation is conclusively presumed as between parties not immediate. Purpose of Negotiability400 Negotiable bills and notes in some respects play the part of money in business affairs. The fundamental purpose of negotiability is to endow them with all the qualities necessary for a limited commercial medium.401 Professor Charles Norton goes on to say that: “[p]robably the primary object of negotiability is to give bills or notes the effect which money, in the shape of government bills or notes, plays in commercial transactions. These last are an unquestioned medium of payment for debts or for the transfer of property rights. They are such an unquestioned medium because the credit or solvency of the government, which has caused them to be issued, is behind them. It is the distinct promise of a whole nation to exchange for the bill or note itself, in precious metal, a sum of money intrinsically worth its face. x x x A man’s credit is rated at the amount of property or valuable rights he has or can procure. He makes this credit available in his bill or note because his credit is its guaranty of future payment. The elements of credit may be either his earning capacity or the accumulated property he owns. Business men rely upon these as the source of probable future payment. And so the merchant sells goods, and the bank discounts for the seller the buyer’s note or draft. And business men who have no property in cash are by means of credit enabled to conduct and carry to 400 401

Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 17 Id.

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completion business and commercial enterprises. Other business men will take these promises of men of undoubted credit, and treat them as cash. Thus we see bills and notes going from hand to hand in commercial markets, and credit taking the part of money in commercial transactions. And here, perhaps, as a part of this theory of negotiability, it is well to show how far and under what circumstances courts have treated negotiable instruments as liquidation of indebtedness.”402 If an instrument is payable to bearer, how is it negotiated? If the instrument is payable to bearer, it is negotiated by delivery. How about if the instrument is payable to order? If payable to order, it is negotiated by the indorsement of the holder and completed by delivery. Effect of a defective negotiation; Legal title to instrument not vested in plaintiff According to Prof. Daniel: “[a]s has been seen, the transferee of a non-negotiable contract must bring action in the name of the original payee, to the use of the transferee. This is upon the theory that, notwithstanding the assignment, the legal title remains in the original owner. But the transfer of a negotiable contract carries with it the legal title thereto, and the owner thereof must bring action in his own name. It follows that if the plaintiff is not the legal owner of the instrument, he cannot maintain suit thereon in his own name. Any defense which attacks the method and manner of transferring the legal title to a negotiable instrument, or that would invalidate the transfer, or any denial of the existence of a transfer to the plaintiff, either by delivery, or by indorsement and deliver, as the case may be, would, if made out, constitute a legal bar to an action brought thereon. What has been heretofore said on the subject transfer by indorsement and deliver, and of the steps that may be necessary in detail to effectuate a change of legal ownership from one person to another, need not be repeated here. x x x It is generally sufficient here to say that if the plaintiff is not the owner or the agent or trustee of the owner, a defense 402

Id.

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successfully setting up the fact will defeat recovery.” (Elements of the Law of Negotiable Instruments, Daniel, p. 305-306) Illustrative Case: The plaintiff made a note to the order of X, who was to negotiate it for plaintiff’s benefit. About three months later after several unsuccessful attempts to negotiate the note, plaintiff asked X for the note and was falsely told that it had been destroyed. About six months thereafter but before its maturity X delivered the note, without indorsing it, to defendant as collateral for a loan to himself. Plaintiff sued to restrain defendant from disposing of the note and for its cancellation. Held, that the relief should not be granted, that although defendant was not a holder in due course under the Negotiable Instruments Law, yet plaintiff was liable to him on the ground that X was his agent to borrow money from him. (Brannan, page 40, citing Sublette v. Brewington (Mo. App.), 122 S.W. 1150.) In another case, “the cashier of a bank sold certain notes, indorsed in blank by the payee, to defendant who deposited them in his private box in the bank. The cashier had a key to the box and was authorized by defendant to collect the notes. The cashier abstracted the notes from the box and sold them to plaintiff, a bona fide purchaser. Plaintiff deposited them in his private box, authorizing the cashier to collect them. When the notes were due the cashier got new notes from the maker, payable to the order of the defendant, forged defendant’s indorsement and deposited the notes in plaintiff’s box where they were found after the suicide of the cashier. Held, that there was sufficient delivery of the original notes to plaintiff to complete a valid transfer, whether they were deposited in his box by him or by the cashier, and that plaintiff was entitled to impress a trust on the new notes taken in place thereof. (Ibid, citing Irwin v. Deming, 142 Iowa, 299; 120 N.W. 645.) Sec. 31. Indorsement; how made. - The indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement. Notes:

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

Meaning of term “indorsement” INDORSEMENT—Is the writing of the name of the indorser on the instrument with the intent wither 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. It strictly applies only to negotiable instruments.403 Indorsing an instrument, in its literal sense means writing one’s name on the back thereof; and, in its technical sense, it means writing one’s name thereon with intent to pass title thereto and to incur the liability of a party who warrants payment of the instrument, provided it is duly presented to the principal at maturity, not paid by him, and such fact is duly notified to the indorser. Indorsement, strictly speaking, is applicable only to negotiable paper, and the term includes delivery for value to the indorsee, but it is otherwise as to an instrument not negotiable.404 (Daniel, Elements of the Law of Negotiable Instruments, page 107-108) The formal requisites of an indorsement are:405 a) Though usually on the back of the instrument, an indorsement is on its face, but it must be somewhere upon it. When by reason of rapid circulation the instrument becomes filled with indorsements, the law merchant permits the holder to paste on a slip of paper for his own and subsequent indorsements. This is called an allonge.406 b) The usual form of indorsement is the signature of the indorser, with or without a direction to pay the indorsee described or to him or order. Any form of words with the signature from which the intent of the holder to incur the liability of an indorser may be gathered is a sufficient indorsement.407 By an indorsement, therefore, a party not only passes his interest in the bill to another, but also pledges his credit for the 403

404 405

406 407

Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 106 Daniel of Negotiable Instruments, 666 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 106 Id. Id.

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honor of the bill. In other words, an indorsement is at once a transfer and a contract.408 Nature of Indorsement The nature of an indorsement is a follows: It is a) A contract which the indorser assumes with his indorsee and subsequent holder that, if the drawee, acceptor, or maker fails to honor the bill or note, he will, upon the performance of certain conditions imposed by the law merchant, indemnify the holder for all loss incurred by reason of the dishonor of the bill or note.409 b) A transfer of the title to the instrument.410 The student must fully grasp this idea,—that the indorsement is a contract, and a contract to which the law merchant and the common law have appended very peculiar conditions. It is contract something in the nature of a guaranty, something in the nature of a warranty, and to the liability under which the laws have attached the very unusual conditions of presentment, demand, and notice of dishonor. It is, to be sure, an evidence of a transfer of title, but it is principally a development of a form of contract at the hands of the creators of the body of rules of the law merchant.411 The last general element of an indorsement is that it is a transfer of the title to the instrument. It is sufficient here to say, in general terms, that by this is meant nothing more than that it is a mere purchase and sale of a piece of property. The indorser or transferrer is viewed in many respects as a vendor, and the indorsee or transferee as a vendee. It is, of course, not tangible property, but a chose in action, and as such transferee or vendee the indorsee merely purchases the rights of the indorser.412 Requisites of indorsement The requisites of an indorsement are as follows:413 408 409

410 411 412 413

Id., p. 107, citations omitted Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 128 Id. Id., citations omitted Id., p. 132 Id.

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a) It must follow the tenor of the bill or note. b) It must be by the payee or a subsequent holder. c) It is only complete upon delivery. It must follow the tenor of the bill or note. The indorser, as well as the acceptor, may not alter the amount of money obligated in the instrument to be paid, nor the time, place, or manner of payment. If, for instance, the indorser ordered payment of part of the sum called for in the original instrument to one person, and part to another, it would amount to an apportionment of the contract, and the acceptor or maker would thus, by the indorser’s act, be liable to two actions where, by the terms of the original contract, he was liable to but one. Were the rule otherwise, the indorser would be empowered to make a contract for the maker or acceptor without his assent,—a reduction ad absurdum. But this does not mean that, when an instrument has been paid in part, a receipt for the amount paid may not be written on its back, and the indorser may not transfer the balance, nor that the note may not be transferred to two or more persons, who hold it on co-ownership as a joint right, nor that an instrument may not be indorsed to a third person as collateral security for a claim equaling but part of the amount called for in the instrument itself. All these are perfectly proper courses, because they transfer but one right of action. The test is, does the transfer cut up the right of action, or vary it, or invest different persons with different rights of action against different parties to the instrument? If it does, the indorsement is void as such.414 Who may indorse. The sense of this rule is, however, restricted. x x x [A] person who is not a holder or owner of the instrument in any sense, but who puts his name upon it merely to support its circulation by his credit, may incur liability as a so-called “irregular indorser.” All that we would here say is that in case of instruments payable to order the payee must be in the first instance the first indorser.415

414

415

Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, pp. 131-132 Id., p. 134

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This is because of several reasons. The first is that the property of the instrument is in the payee. Until he indorses it, the legal title is not transferred. Mere possession by someone else of the instrument unendorsed does not entitle that other person to the full rights of a bona fide purchaser, and if the maker or acceptor pays it to such person, it is at the risk of possible repayment.416 But this rule is not universal in its application. An indorsement is only necessary to transfer the legal as distinguished from the equitable title to the paper. If by mistake, accident, or fraud, the indorsement has been omitted, when it was intended that the indorsement should be made, the payee may be compelled by a court of equity to make the indorsement. Meantime the transferee holds the bill or note under the same rights that he would have acquired under the assignment of paper not negotiable. In other words, he is the beneficial owner, and has those rights and only those rights against prior parties which the payee or his assignor must have,—and every equitable defense available against them is available against him. This rule applies to subsequent holders. In cases of indorsements in full, the indorsee in such indorsement named must for the same reasons himself indorse the instrument. In no other way will the transfer convey the legal title to the holder, so that he can at law hold the other parties liable to him.417 The second reason rests upon the theory that the liability of indorsers to each other is regulated by the position of their names. This reason also is restricted in its application. To this rule, too, the irregular indorser, who has not owned the paper, and to whom no such transfer has been made, is also an exception; although, of course, where the second accommodation indorser of an instrument has paid and taken it up, he becomes a holder for value, and may compel the first accommodation indorser to pay him, although both are accommodation indorsers.418 [T]he contract which each indorser makes when he indorses the paper is that he is liable to every subsequent indorsee, just as

416 417 418

Id. Id., pp. 134-135 Id., p. 135

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every antecedent party is liable to him. The liability is several. It is successive. And the object of the rule is only to maintain these indorsements in the regular order of their liability. It does not go further than this.419 Thus where A made a note payable to B or order, and B afterwards indorsed the note to C, who afterwards indorsed it to B again, the court, upon suit by B against C, refused a recovery because it was a prior indorser calling upon a subsequent one; and the inference of the decision is that this course was not allowed because it involved circuitry of action. One who has indorsed a bill or note, and become liable as indorser, cannot, as a rule, on having the instrument reindorsed to him by the other, bring an action against him on the indorsement, for the intermediate indorsee would have his remedy over, and the result of the action would be to place the parties in precisely the same situation as before any action at all. But if such prior indorser had indorsed without recourse, or if the circumstances otherwise negative the right of his intermediate indorsee to sue upon the indorsement, the objection as to circuitry of action would be removed, and the prior indorser could recover under the indorsement back as indorsee.420 Necessity for Delivery. As in the case of the inception of the original contract rights under the principal terms of the instrument, and also under the acceptance, an indorsement requires delivery. And the rules and reasons relating to the delivery of an indorsed instrument by the payee or indorser are in most respects the same as those already given relating to the delivery of bills and notes and of acceptances. The negotiation of the instrument begins with the act of indorsement as distinguished from the intention of the parties to indorse, and is consummated by the delivery of the instrument and its acceptance with the intention to pass and vest title. On these simple acts the whole contract rests. The law prima facie presumes the other elements of contract. For example, delivery once being made and the title having once passed, these facts of themselves import a consideration. Possession of the instruments 419 420

Id. Id., citations omitted

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obviates the necessity of pleading delivery, non-delivery being wholly a matter of affirmative defense. And the terms “indorsed” in pleading includes delivery for value to the indorsee. But both indorsement and delivery must concur in the transfer. The indorsement without delivery is nothing, although the indorser has in fact signed his name and the indorsee knows that it is signed. Still the contracts so far as it has gone may be revoked by the indorser, and the indorsement countermanded, unless some contract right other than that of the indorsement itself exists in the indorsee. The delivery must be made by the indorser, otherwise the transfer of the instrument is not by his order. His executor or administrator even cannot make delivery, although the payee before his decease has written a name upon it. So, too, if a transferee of a bill or note send it back to his indorser, refusing to accept it, this is a refusal of an offer, and his subsequent getting possession of the instrument without assent of the indorser will not invest him with title, because there was then no intention to contract present between them, and hence no contract.421 How should the indorsement be made? The indorsement must be written on the instrument itself or upon a paper attached thereto. Moreover, the signature of the indorser, without additional words, is sufficient indorsement. (Sec. 31, Negotiable Instruments Law) An indorsement is necessary for the proper negotiation of check specially if the payee named therein or holder thereof is not the one depositing or encashing it. (Vicente Go vs. Metropolitan Bank and Trust Co., G.R. No. 168842, August 11, 2010) Thus, it was held that “stamping the name of the payee on the back with a rubber stamp with his authority and with intent to indorse the instrument, is a valid indorsement.” (Brannan, page 41, citing Mayers v. McRimmon, 140 N.C. 640, 53 S.E. 447, 111 Am. St. Rep. 879, S.C. sec. 49.)

421

Id., pp. 136-137

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Where shall an indorsement be written? While an indorsement, as its derivation and meaning would indicate, should be, and generally is, placed on the back of the instrument, it may be written—although unusual and irregular— on any other portion of it, even on the face, and under the maker’s name.422 (Daniel, Elements of the Law of Negotiable Instruments, page 111) At any rate, the indorsement must, as a general rule, be somewhere on the paper itself, or attached thereto, and unless it is, the party cannot be held liable as an indorser,423 but a promise made on a sufficient consideration will sustain an action upon its breach.424 (ibid, page 112) Allonge It is not necessary, however, that the indorsement should be upon the original bill or note, in order to constitute it such, in the full sense of the term. It sometimes happens that by rapid circulation from hand to hand, the back of the paper is completely covered by indorsements; and in such cases the holder may tack or paste on a piece of paper sufficient to bear his own and subsequent indorsements, and thereon the indorsements may be made. Such addition of the original instruments is called and an allonge, and it becomes for the purposes above named, incorporated as a part of it.425 (ibid, page 112) What is the effect of transfer without indorsement? Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein. (Sec. 49, Negotiable Instruments Law) In the case of banks, they are deemed to be negligent when they accept for deposit crossed checks without indorsement and in not verifying the authenticity of the negotiation of the checks.426

422 423 424 425 426

Partridge v. Davis, 20 Vt. 449; Bigelow on Bills and Notes, 135 Fenn v. Harrison, 3 T.R. 757; Daniel on Negotiable Instruments, 748 Moxon v. Pulling, 4 Campb. 51; French v. Tunrner, 15 Ind. 59 Crosby v. Roub, 16 Wis. 622; Folger v. Chase, 18 Pick. 63 Vicente Go vs. Metropolitan Bank and Trust Co., G.R. No. 168842

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Irregular Indorsements A person whose name is on the back of a bill or note payable to the order of the maker or drawer, or payable to bearer, is deemed to be a indorser.427 If an instrument is payable to bearer, or to order of the maker or drawer, and indorsed in blank, so that it passes by delivery, a person, not otherwise a party to the instrument, whose name appears on the back of the instrument, is deemed to be an indorser only. In such case the name of the indorser appears in its regular place upon the instrument, and is treated, as in fact it appears to be, as if it had been made by one to whom the instrument had been delivered, and who, before himself transferring it by delivery, had indorsed it in order to incur the liability of indorser to his transferee and subsequent holders. The effect of the indorsement cannot be varied by parol proof.428 Indorsement in full It is one which mentions the name of the person in whose favor it is made; and to whom or to whose order, the sum is to be paid. For instance: “Pay to B, or order,” signed A, is an indorsement in full by A, the payee or holder of the paper to B. An indorsement in full prevents the bill or note from being indorsed by anyone but the indorsee.429 (Daniel, Elements of the Law of Negotiable Instruments, page 112) Can the transferee force the transferor to make his indorsement? Yes, the transferee acquires in addition, the right to have the indorsement of the transferor. (Sec. 49, Negotiable Instruments Law) But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made. (ibid) 427

428

429

Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 138 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, pp. 138-139 Mead v. Young, 4 T.R. 28

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Can there be partial indorsement? As a general rule, no, there can be no partial indorsement of the instrument. The indorsement must be an indorsement of the entire instrument. As an exception to the rule, however, where the instrument has been paid in part, it may indorsed as to the residue. Sec. 32. Indorsement must be of entire instrument. - The indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the instrument. But where the instrument has been paid in part, it may be indorsed as to the residue. Notes: What is the effect of partial indorsement? ANSWER: An indorsement which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the instrument. (Section 32, Negotiable Instruments Law) Example: An instrument reads: Pay to David Lancelot, or order, Php 1,000.00 upon demand. Applying Sec. 32, the instrument must be indorsed in its entirety to a subsequent holder, if for instance, the instrument is indorsed only to the extent of Php 500.00, said indorsement does not operate as a negotiation of the instrument. But, if there was payment made by the maker to the extent of Php 750.00, the

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instrument may be further indorsed, only to the extent of the residue which in this case is Php 250.00 Sec. 33. Kinds of indorsement. - An indorsement may be either be special or in blank; and it may also be either restrictive or qualified or conditional. Notes: What are the different kinds of indorsements? ANSWER: 1. Special indorsement; 2. Indorsement in blank; 3. Restrictive indorsement; 4. Qualified indorsement. Sec. 34. Special indorsement; indorsement in blank. - A special indorsement specifies the person to whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further negotiation of the instrument. An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery. Notes: What constitutes a special indorsement? ANSWER: A special indorsement specifies the person to whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further negotiation of the instrument. (Sec. 34, Negotiable Instruments Law) An instrument which is originally payable to bearer, or which has been indorsed in blank, though afterwards specially indorsed, is still payable to bearer; except as to the special indorser, who,

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on such an instrument, after such an indorsement, is only liable on his indorsement to such parties as make title through it.430 Where an instrument is specially indorsed, title can only be transferred from the indorsee by his indorsement. In the very outset, this principle must be sharply contrasted with the case of bills or notes payable to bearer or indorsed in blank. With bills or notes payable to bearer or indorsed in blank, the holder is presumed to be the true owner. Possession and title are one and the same thing and this though the party possession it is in no wise a party to the instrument. But where the direction in the contract is to pay specially to some person, that person and no other can direct that the money is to be paid in its turn. No other person can personate this indorsee, and by forgery satisfy the condition of this contract. And it does not avail even that the bills is paid under a forged indorsement. Such payment or transfer was not in contemplation of the parties making the contract, and is utterly void.431 What constitutes indorsement in blank? ANSWER: Indorsement in blank specifies no indorsee, and an instrument so indorses is payable to bearer, and may be negotiated by delivery. (Sec. 34, Negotiable Instruments Law) It is one which does not mention the name of the indorsee, and generally consists simply of the name of the indorser written on the back of the instrument. When the bill or note is indorsed in blank, it is, as has been said, transferable by mere delivery to the transferee; but one indorsed in full must be indorsed again by the indorsee, in order to render it transferable to every intent—for he who indorses to a particular person, declares his intention not to be made liable except by that person’s indorsement over. (Daniel, Elements of the Law of Negotiable Instruments, page 113) The student must keep in mind that this relates only to an instrument held by a bona fide holder. Where the instrument is 430

431

Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 116 Id., p. 117

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not in the possession of a bona fide holder, but of the finder or the thief, this extreme rule does not apply. The instrument is, then, like all other property. It cannot be enforced by the wrongful holder. But, when once it is in the hands of the bona fide holder, then it is treated as money in the ordinary course of business. Alike in case of money and of paper indorsed in blank, where either has been stolen or found, the true owner cannot recover it after it has been paid away fairly and honestly upon a valuable consideration, because it is necessary for the purpose of commerce that its currency should be established and secured.432 Illustrative Cases: An indorsement in blank is not nullified by a guaranty following it and guaranteeing the payment of a greater rate of interest, and costs of collection, and waiving demand and notice of non-payment. (Brannan, page 42,citing Elgin City Banking, Co. v. Hall, 119 Tenn. 548, 108 S.W. 1068, S.C. secs. 38, 52-3.) Sec. 35. Blank indorsement; how changed to special indorsement. - The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement. Notes: The receiver of a negotiable instrument indorsed in blank, or any bona fide holder of it, may write over it an indorsement in full to himself, or to another, or any contract consistent with the character of an indorsement;433 but he cannot enlarge the liability of the indorser in blank by writing over it a waiver of any of his rights, such as demand and notice;434 and he cannot fill it up so as to make the instrument payable in part to one person and in part to another. The indorser’s contract is single and entire, and the obligation created thereby cannot be broken into fragments, and the indorser required to pay in fractions to different persons.435 432

433

434 435

Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, pp. 111-112, citations omitted Evans v. Gee, 11 Pet. 80; Condon v. Pearce, 43 Mid. 83; Johnson v. Mitchell, 50 Tex. 212 Daniel on Negotiable Instruments, 694 Erwin v. Lynn, 16 Ohio (N.S.), 547

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(Daniel, Elements of the Law of Negotiable Instruments, page 113) Combination of the rules In case of the combination of the two classes,— indorsements in blank and in full,—the application of the rules is somewhat confusing to the student. For example, let us assume that there are indorsed upon an instrument some blank indorsements, then some special indorsements, and after these again some indorsements in blank. The special indorser will be liable only to those “who can make their title through his special indorsement.” The rule is well settled that if a note or bill be once indorsed in blank, though afterwards indorsed in full, it will still, as against the drawer, the payee, and prior indorsers, by payable to bearer, though, as against the special indorser himself, title must be made through his indorsee.436 Can a blank indorsement be changed to a special indorsement? ANSWER: Yes. The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of indorsement. (Sec. 35, Negotiable Instruments Law) Sec. 36. When indorsement restrictive. - An indorsement is restrictive which either: (a) Prohibits the further negotiation of the instrument; or (b) Constitutes the indorsee the agent of the indorser; or (c) Vests the title in the indorsee in trust for or to the use of some other persons. But the mere absence of words implying power to negotiate does not make an indorsement restrictive. 436

Id., p. 118

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Notes: A RESTRICTIVE INDORSEMENT—Means that the indorsee is deputed by the indorser to be his agent in collecting the bill or note, or else that the title is vested in the indorsee as a trustee or for the use or for the benefit of a third person.437 An indorsement may be so worded as to restrict the further negotiability of the instrument; and it is then called a restrictive indorsement. Thus, “pay the contents to J.S. only,” or “to J.S. for my use,” or “to order for my use,” or “for me,” are restrictive indorsements, and put an end to the negotiability of the paper.438 Of the like character is an indorsement, “credit my account,” or “pay J.S. or order for account or on account of C.D.,” or “for collection,” or “for collection and immediate returns.”439 These and similar restrictive words indicate that the indorsee is merely an agent to receive the money, and that he paid no consideration for the paper, as a purchaser would not intelligently accept such an indorsement. The indorsee in such a case can only collect the money; he cannot sell or hypothecate the instrument for his own benefit, nor can he hold the indorser liable to himself. The restrictive words of the indorsement give notice of the trust engrafted upon it, and if the indorsee passes it off for his own debt, or in any other manner violate the trust, the transferee would take it subject to the trust.440 (Daniel, Elements of the Law of Negotiable Instruments, page 114) 2011 Bar Question: Z wrote out an instrument that states: “Pay to X the amount of Php1 Million for collection only. Signed, Z.” X indorsed it to his creditor, Y, to whom he owed Php1 million. Y now wants to collect and satisfy X’s debt through the Php1 million on the check. May he validly do so? A. Yes, since the indorsement to Y is for Php1 Million. 437 438 439

440

Id., p. 119 Wilson v. Holmes, 5 Mass. 543; Williams v. Potter, 72 Ind. 354 First Nat. Bank v. Reno County, 3 Fed. 257; White v. National Bank, 102 U.S. 658; Continental Nat. Bank v. Weems, 69 Tex. 489 Hook v. Pratt, 78 N.Y. 371; Claflin v. Wilson, 51 Iowa, 15; Daniel on Negotiable Instrument, 698

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B. No, since Z is not a party to the loan between X and Y. C. No, since X is merely an agent of Z, his only right being to collect. D. Yes, since X owed Y Php1 Million. When is indorsement considered restrictive? ANSWER: An indorsement is considered restrictive which either: 1. Prohibits the further negotiation of the instrument; or 2. Constitutes the indorsee the agent of the indorser; or 3. Vests the title in the indorsee in trust for or to the use of some other persons. What if on the face of the instrument, there is the absence of words implying the power to negotiate, does it make the indorsement restrictive? ANSWER: No. The mere absence of words implying power to negotiate does not make an indorsement restrictive. (Sec. 36, Negotiable Instruments Law) Only after complying with Sec. 36 (a) to (c) will there be a restrictive indorsement. The law does not presume it from the mere absence of words implying the power to negotiate. Must be written in express words at the back of the instrument In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in express words at the back of the instrument, so that any subsequent party may be forewarned that it ceases to be negotiable. However, the restrictive indorsee acquires the right to receive payment and bring any action thereon as any indorser, but he can no longer transfer his rights as such indorsee where the form of the indorsement does not

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authorize him to do so.441 (Gempesaw vs. Court of Appeals, G.R. No. 92244, February 9, 1993, bold supplied) Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A restrictive indorsement confers upon the indorsee the right: (a) To receive payment of the instrument; (b) To bring any action thereon that the indorser could bring; (c) To transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so. But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement. Notes: What are the effects of restrictive indorsement? ANSWER: A restrictive indorsement confers upon the indorsee the right: 1. To receive payment of the instrument; 2. To bring any action thereon that the indorser could bring; 3. To transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so. But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement. Indorsee for collection can sue in his own name An indorsee for collection can sue in his own name, but he takes the instrument subject to all equities existing between his indorser and the maker. Payment by the maker to the indorser after the indorsement is a good defense, and parol evidence to show that the indorsee was the actual owner of part of the note is 441

NIL, Sec. 37

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

inadmissible as tending to contradict the indorsement. (Brannan, page 44, citing Smith v. Bayer, 46 Or. 143, 79 Pac. 497, 114 Am. St. Rep. 858.) Kinds of restrictive indorsement The first and the commonest variety, and the one which is generally spoken of by some text writers as restrictive indorsement, is that where the holder deputes to some person the business of collecting the bill; the other where the holder indorses the instrument to one person for the use or benefit of, or as the trustee of, another. Upon an indorsement of the first kind the instrument is no longer negotiable; the second variety of indorsement does not, however, restrict its circulation. Examples of the first species of indorsement are indorsements “For collection,” the indorsement for collection meaning that the holder takes no title to it and can transfer to none, but can merely present it and receive the money upon it. In construing these and other cases like them, such as “Pay to A only,” or “Pay to A for my use,” or “Pay to A for me,” or “Pay to my steward and no other person,” or “Pay to my servant for my use,” the courts have been governed by two principles. The first and most important is the reason that the natural construction of such a form of words is that it implies a mere authority to receive the money called for in the instrument for the use of the indorser himself, or according to his directions. It therefore vests a mere agency in the indorsee, and shows that he, at least, did not give a valuable consideration for the bill or note and is not therefore its absolute owner. It follows from this that the restrictive indorser, in creating such agency, did not intend to pass the title to the indorsee, but rather to retain it in himself. And hence, there being no intention to transfer, the instrument cannot be negotiated through the indorsement. The second is the reason that the restrictive indorsement, like the conditional indorsement, operates as notice both to the persons called upon to pay the instrument and those who might acquire it after the indorsement as purchasers. No subsequent purchaser could take the instrument in good faith, because whoever reads the indorsement, as it would be every purchaser’s legal duty to read it, must see that its operation was limited. Such a purchaser must see that the object of the indorser was to prevent the money received from being applied to the use of any other person than himself. And therefore, whomsoever the money might be paid, it

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would be paid in trust for the indorser, and wheresoever the instrument traveled it carried that trust on the face of it.442 2011 Bar Question: A negotiable instrument can be indorsed by way of a restrictive indorsement, which prohibits further negotiation and constitutes the indorsee as agent of the indorser. As agent, the indorsee has the right, among others, to A. demand payment of the instrument only. B. notify the drawer of the payment of the instrument. C. receive payment of the instrument. D. instruct that payment be made to the drawee. May the indorsee of a promissory note indorsed to him “for deposit” file a suit against the indorser? A. Yes, as long as the indorser received value for the restrictive indorsement. B. Yes, as long as the indorser received value for the conditional indorsement. C. Yes, whether or not the indorser received value for the conditional indorsement. D. Yes, whether or not the indorser received value for the restrictive indorsement. Sec. 38. Qualified indorsement. - A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser’s signature the words “without recourse” or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument. Notes: AN INDORSEMENT WITHOUT RECOURSE—means that 442

Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, pp. 125-127

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

the indorser exempts himself from liability to indemnify the holder upon the dishonor of the bill or note.443 An indorsement qualified by the words “without recourse,” “sans recourse,” or “at the indorsee’s own risk,” renders the indorser a mere assignor of the title of the instrument, and relieves him of all responsibility for its payment,444 though not from certain liabilities which have been already enumerated.445 But such an indorsement does not throw any suspicion upon the character of the paper. 446 (Daniel, Elements of the Law of Negotiable Instruments, pages 114-115) The indorsement without recourse is in form of words, “Without recourse,” or “Sans recourse,” or “At the indorsee’s own risk,” or “I hereby indorse and transfer my right and interest in this bill to C D, or order, but with this express condition: that I shall not be liable to him or to any subsequent holder for the acceptance or payment of the bill.” Such indorsements throw no discredit on the bill. Such an indorser does not escape from the effect of the warranties, as explained hereafter. The promise of a negotiable bill or note indorses it to a third person, merely stipulating that, as indorser, he is not to be responsible if the acceptor or maker does not pay it. This he may do, because he has the property in the bill or note, and he may dispose of it on what terms he pleases. Such and indorsement does not render the negotiable security no longer negotiable. The bill or note remains negotiable in the hands of the indorsee, although he has no remedy against the indorser without recourse. And, into whose hands so ever the bill or note may come, the maker is still liable according to the terms of his original contract. The question with the courts in construing indorsements without recourse is whether the words of indorsement are such that they clearly express an intention on the part of the indorser not to be bound, and a corresponding intention on the part of the immediate subsequent indorsees, evidenced by their acceptance of the instrument with such an indorsement, to exempt the indorser from his liability. The presumption is rather that the usual liability of an indorser is 443

444 445 446

Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 119 Wilson v. Codman’s Exr., 3 Cranch, 192; Borden v. Clark, 26 Mich. 410 See ante, 173 Lomax v. Picot, 2 Rand. 260; Kelley v. Whitnet, 45 Wis. 117

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intended to be incurred. And, to overcome this, it must clearly appear that the transfer of the instrument was only to transfer the title to it, and not to indemnify the indorsee against loss in case it was not paid by the acceptor or maker. (Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, pp. 120121, citations omitted) Act No. 2031, known as the Negotiable Instruments Law, x x x establishes various kinds of indorsements by means of which the liability of the indorser is in some manner limited, distinguishing it from that of the regular or general indorser, and among those kinds is that of the qualified indorsement which, pursuant to section 38 of the same Act, constitutes the indorser a mere assignor of the title to the instrument, and may be made by adding to the indorser’s signature the words “without recourse” or any words of similar import. (concurring opinion, Torres, J., in (Maulini, et al vs. Serrano [1914]) If it was not its purpose or intent to assume and agree to pay the notes, it should have indorsed them “without recourse”, or in such a manner as to disclaim any personal liability. When a person makes an unqualified indorsement of a promissory note, the Negotiable Instruments Law specifies and defines his liability, and parol testimony is not admissible to explain or defeat such liability. (Jose Velasco vs. Tan Liuan & Co., G.R. No. 17230, March 17, 1922, [Johns, J;]) Such an indorsement relieves the indorser of the general obligation to pay if the instrument is dishonored but not of the liability arising from the warranties on the instrument as provided in Section 65 of the Negotiable Instruments Law. (Metropol (Bacolod) Financing & Investment Corporation vs. Sambok Motors Company, G.R. No. L-39641, February 28, 1983, [De Castro, J.]) “Recourse” means resort to a person who is secondarily liable after the default of the person who is primarily liable.447 Appellant by indorsing the note “with recourse” does not make itself a qualified indorser but a general indorser who is secondarily liable, because by such indorsement, it agreed that if Dr. Villaruel fails to pay the note, plaintiff-appellee can go after said appellant. 447

Ogden, the Law of Negotiable Instruments, p.200 citing Industrial Bank and Trust Company vs. Hesselberg, 195 S.W. (2d) 470

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

The effect of such indorsement is that the note was indorsed without qualification. A person who indorses without qualification engages that on due presentment, the note shall be accepted or paid, or both as the case may be, and that if it be dishonored, he will pay the amount thereof to the holder.448 (Ibid) Liability of indorser “without recourse” When the indorsement is “without recourse” the indorser specially decline to assume any responsibility as a party to the bill or note; but the very act of transferring it, he engages that it is what it purports to be—the valid obligation of those whose names are upon it. He is like a drawer who draws without recourse; but is nevertheless liable if he draws upon a fictitious party, or one without funds. And, therefore, the holder may recover against the indorser “without recourse,” (1) if any of the prior signatures were not genuine; or (2) if the note was invalid between the original parties, because of the want, or illegality of, the consideration; or if (3) prior party was incompetent, or (4) the indorser was without title.449 (Daniel, Elements of the Law of Negotiable Instruments, page 109) 2011 Bar Question: X is the holder of an instrument payable to him (X) or his order, with Y as maker. X then indorsed it as follows: “Subject to no recourse, pay to Z. Signed, X.” When Z went to collect from Y, it turned out that Y’s signature was forged. Z now sues X for collection. Will it prosper? A. Yes, because X, as a conditional indorser, warrants that the note is genuine. B. Yes, because X, as a qualified indorser, warrants that the note is genuine. C. No, because X made a qualified indorsement. D. No, because a qualified indorsement does not include the warranty of genuineness.

448 449

Ang Tiong vs. Ting, 22 SCRA 715 Dumont v. Williamson, 18 Ohio (N.S.) 515; Seeley v. Reed, 28 Fed. 167; Challiss v. McCrum, 22 Kan. 127

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What is a qualified indorsement? How is it made? ANSWER: A qualified indorsement constitutes the indorser a mere assignor of the title of the instrument. It may be made by adding to the indorser’s signature the words “without recourse” or any words of similar import. (Sec. 38, Negotiable Instruments Law) Does a qualified indorsement impair the negotiable character of the instrument? ANSWER: No. Such an indorsement does not impair the negotiable character of the instrument. Illustrative case: The payee wrote on the back of the instrument the words, “I hereby transfer and assign all my rights, title, and interest to and in within the note.” Held, that this is a qualified indorsement and equivalent to an indorsement without recourse. (Brannan, page 45, citing Evans v. Freeman, 143 N.C. 61, 54 S.E. 847.) The fact that an indorsement is “without recourse” is not enough to put a purchaser upon notice of equities. (Ibid, citing Elgin City Banking Co. v. Hall, 119 Tenn. 548, 108 S.W. 1068, S.C. secs. 34, 52-3.) Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the party required to pay the instrument 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 an instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of the person indorsing conditionally. Notes: A CONDITIONAL INDORSEMENT—Means an indorsement by which the title to the instrument does not pass until the condition mentioned in the indorsement is fulfilled.450

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

Rationale of the provision The conditional indorsement is a device by which a payee or an indorsee may part with the possession of an instrument, but not with the legal title to it. Mr. Daniel instances “Pay to A B, or order, if he arrives at 21 years of age,” or “Pay to A B, or order, unless before payment I give you notice to the contrary,” as examples of conditional indorsement, the former being an indorsement upon a condition precedent, and the latter one upon a condition subsequent. These conditional indorsement have not come very often before the courts, but they are recognized as distinct class. It may be said, by way of criticism, that in them commercial convenience has overridden the strict theory of negotiability. This theory would not permit to exist a condition which charged every subsequent indorsee with the duty of seeing whether the condition had been fulfilled before he could legally own the instrument. For, certainly, with the conditional indorsement, as well as with the conditional bill or note, it would be a most effective restriction to circulation as a medium of payment.451 [I]t is well to note the authority usually referred to as the leading case upon the subject,—ROBERTSON v. KENSINGTON.452 There is this indorsement was made upon an ordinary draft: “Pay the within sum of Messrs. Clerk & Ross, or order, upon my name appearing in the ‘Gazette’ as ensign in any regiment of the line, between the 1st and 64th, if within two months from this date.” This was transferred to bona fide holders, and the acceptors paid the bill on its maturity to one of these. In the meantime the indorser’s name had never appeared in the Gazette as an ensign, and he brought suit as the payee of the bill against the acceptors who had accepted the bill after this indorsement had been written upon it. And it is to be inferred from the report of the case that the court decided that such an indorsement was only a conditional transfer of the absolute interest in the bill, and, its condition never having been performed, the transfer was defeated. As appears from the cases, the point emphasized is that the condition operates as notice, and, being merely a notice, 450

451

452

Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 119 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, pp. 121-122 ROBERTSON v. KENSINGTON, 4 Taunt. 30

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it does not destroy the negotiability of the bill or note. Thus, where a note in usual form had these words upon it, signed by the makers, “The within obligation is to be delivered to the payees of the note as a consideration for a judgment which has to be assigned to the makers,” the court properly said the words were no part of the note. Their effect is only to show the consideration, and to operate as a notice to any person who might purchase the note. By this was meant that it was the intention of the parties that it was not to affect the original contract. And in cases of conditional indorsement, when it is not the intention of the original parties that the main instrument should be contingent, the act of the conditional indorser is not to be understood as operating to change the main instrument. The terms of the face of the instrument still remain an absolute negotiable order or promise of payment to someone. That someone might in turn negotiate the bill or note to someone else, who in his turn might continue his negotiation until it came to the conditional indorser. But he, on parting with it, having the right of property himself, might make a special contract which would be distinct from the contract embodied on the face of the instrument. And the only purpose and result of this contract would be to notify every holder subsequent to himself, and the maker or acceptor, when the time for the payment of the instrument arrived, that he as an indorser parted with the instrument upon the understanding that his ownership of it was not to cease until some stated condition was fulfilled. As between the immediate indorser and indorsee, there can be little doubt that this is a correct and proper rule. As to them the contract of indorsement is but an ordinary contract, open to all objections and defenses to which other contracts are open. Some of these objections and defenses may even be shown by parol evidence. This is because the contract consists partly of written indorsement, partly of the act of delivery of the bill to the indorsee, and partly of the mutual intention with which the delivery is made by the indorser and received by the indorsee. But when the question is not one between the immediate indorser and indorsee, but between the indorser or indorsee and third parties holding in good faith and for value, it becomes much more embarrassing. It is clear that parol evidence or evidence of intention cannot be allowed to engraft a condition upon the instrument such that it will affect third parties. But where the indorsement is in writing, the rule is so far settled that the maker or acceptor and probably prior parties are bound to take notice of the title of the indorsee, and, having such notice, they

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pay the instrument to him or to subsequent parties at the risk of repayment to the conditional indorser, if the condition is unfulfilled. But, on the other hand, the conditional indorser cannot restrict the negotiability of the instrument and prevent its further indorsement by his indorsee. The terms of the original instrument making it negotiable prevail, and persons other than the conditional indorsee may take it subject to the notice of the condition. And though there is little, if any, authority upon the point, still it may be assumed that in the absence of an express warranty no other than a conditional warranty of title in the subsequent indorser would be implied. There seems to be no reason why the other implied warranties should not remain a part of the contract. But the notice of a conditional title with which the subsequent purchaser of the instrument would be charged would seem to expressly except warranty of title from the obligations of the indorser. (Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, pp. 121-124) Absolute and Conditional indorsements An absolute indorsement is one by which the indorser binds himself to pay, upon no other condition than the failure of prior parties to do so, and of due notice to him of such failure (protest preceding it when necessary, as in the case of a foreign bill). A conditional indorsement is one by which the indorser annexes some other condition to his liability. Sometimes the condition is precedent, and sometimes subsequent. Thus, “Pay to A.B. or order, of he arrives at twenty-one years of age,” or, “if he is living when it becomes due,” is an indorsement upon a condition precedent. “Pay A.B. or order, unless, before payment, I give you notice to the contrary,” is upon a condition subsequent. The condition attached to the indorsement in no manner affect the negotiability of the paper.453 (Daniel, Elements of the Law of Negotiable Instruments, pages 113-144) In conditional indorsements, can the fact that the condition had not yet been fulfilled be disregarded by the party required to pay?

453

Story on Notes, 140; Daniel on Negotiable Instruments, 697

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ANSWER: Yes. Where an indorsement is conditional, the party required to pay the instrument may disregard the condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or not. What if the aforementioned instrument was indorsed to another person? ANSWER: Any person to whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of the person indorsing conditionally. (Sec. 39, Negotiable Instruments Law) Sec. 40. Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement. Notes: What is the effect of an indorsement made on an instrument which is payable to bearer? ANSWER: Where an instrument, payable to bearer, is indorsed specially it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement. (Sec. 40, Negotiable Instruments Law) Furthermore, the holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument. (Sec. 48, Negotiable Instruments Law)

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Illustration: The instrument reads: Pay to Margaux, or bearer, Php 1,000.00. (sgd) Lance The instrument was thereafter negotiated by delivery from Margaux to Karl, but Karl indorsed it and delivered it to Kate. In this instance, Kate can further negotiate the note by delivery to a subsequent holder, and Karl then becomes liable as an indorser to Kate and to subsequent holders. Sec. 41. Indorsement where payable to two or more persons. - Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others. Notes: If a bill or note be made payable to several persons not partners, the transfer can only be made by a joint indorsement of all of them; and as Chitty says, “If a bill has been transferred to several persons not in partnership, the right to transfer is in all collectively, and not in any one individually.”454 Where, however, one of two or more joint payees or transferees undertake to transfer the instrument, the extent of the transfer will depend upon the nature of his interest. Such interest, whatever it is, passes to his indorsee or assignee; but nothing beyond that, as against his coparty, unless indeed there be some other element in the transaction in the nature of fraud, agency, or other circumstance, modifying the rights of the parties.455 No action could be maintained on the indorsement of one of the joint parties,456 the interest passing thereby being equitable merely. (Daniel, Elements of the Law of Negotiable Instruments, page 115) 454 455 456

Chitty on Bills [201], 232; Daniel on Negotiable Instruments, 701a Brown v. Dickinson, 27 Gratt. 693 Caverick v. Vickery, 2 Dough. 652

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An assignment by one joint payee of his interest to another payee carries with it authority to indorse instrument for him. (Brannan, page 47, citing Kaufman v. State Sav. Bank, 151 Mich. 65, 114 N.W. 863, 18 L.R.A. (N.S.) 630, 123 Am. St. Rep. 259.) How can an instrument be indorsed if it is payable to two or more persons? Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others. (Sec. 41, Negotiable Instruments Law) Illustrative Case: Metropolitan Bank and Trust Company (formerly Asianbank Corporation) vs. BA Finance Corporation and Malayan Insurance Co., Inc. G.R. No. 179952, December 4, 2009 CARPIO-MORALES, J.: Bitanga obtained from BA Finance a loan in the amount of Php 329, 280 secured by a chattel mortgage. As required by the mortgage agreement, Bitanga insured his car with Malayan Insurance Co., Inc. Policy contains a stipulation that: “Loss, if any shall be payable to BA FINANCE CORP. as its interest may appear. It is hereby expressly understood that his policy or any renewal thereof, shall not be cancelled without prior notification and conformity by BA FINANCE CORPORATION.” The car was stolen, and on Bitanga’s claim, Malayan Insurance issued a check payable to the order of “B.A. Finance Corporation and Lamberto Bitanga.” For Php 224, 500, drawn against China Banking Corporation. The check was crossed with the notation “For Deposit Payee’s Account Only.” Without the indorsement or authority of his co-payee BA Finance, Bitanga deposited the check to his account with the Asianbank Corporation, now merged with Metropolitan Bank and Trust Company. Bitanga subsequently withdrew the entire proceeds of the check. BA Finance upon knowing of the same instituted a complaint for sum of money and damages.

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The Court held that: “[w]here an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others.457 Bitanga alone endorsed the crossed check, and petitioner allowed the deposit and release of the proceeds thereof, despite the absence of authority of Bitanga’s co-payee BA Finance to endorse it on its behalf…The payment of an instrument over a missing indorsement is the equivalent of payment on a forged indorsement458 or an unauthorized indorsement in itself in the case of joint payees.459 Clearly, petitioner, through its employee, was negligent when it allowed the deposit of the crossed check, despite the lone endorsement of Bitanga, ostensibly ignoring the fact that the check did not, it bears repeating, carry the indorsement of BA Finance.460 As has been repeatedly emphasized, the banking business is imbued with public interest such that the highest degree of diligence and highest standards of integrity and performance are expected of banks in order to maintain the trust and confidence of the public in general in the banking sector.461 Undoubtedly, BA Finance has a cause of action against petitioner.” Subsequently, this question was raised therein on whether or not petitioner Metrobank is liable to BA Finance for the full value of the check? The Court held that” “provisions of the Negotiable Instruments Law and underlying jurisprudential teachings on the black-letter law provide definitive justification for petitioner’s full liability on the value of the check. To be sure, a collecting bank, Asianbank in this case, where a check is deposited and which indorses the check upon 457 458

459

460

461

Sec. 41, Act 2031 Kelly v. Central Bank and Trust Co. (Colo App), 794 P2d 1037, 12 UCCRS2d 1089; Humberto Decorators, Inc. v. Plaza Nat’l Bank, 180 NJ Super 170, 434 A2d 618, 32 UCCRS 494; Vide: 11 Am Jur 2d, Bills and Notes, §224, at p. 557 Beyer v. First Nat’l Bank, 188 Mont 208, 612 P2d 1285, 29 UCCRS 563; Vide: 11 Am Jur 2d, Bills and Notes, §224, at p. 557 Gempesaw v. Court of Appeals, G.R. No. 92244, Feb. 9, 1993, 218 SCRA 682, 695 Philippine Commercial International Bank v. Court of Appeals, G.R. No. 121413, January 29, 2001, 350 SCRA 446

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presentment with the drawee bank, is an indorser.462 This is because in indorsing a check to the drawee bank, a collecting bank stamps the back of the check with the phrase “all prior endorsements and/or lack of endorsement guaranteed”463 and, for all intents and purposes, treats the check as a negotiable instrument, hence, assumes the warranty of an indorser. 464 Without Asianbank’s warranty, the drawee bank (China Bank in this case) would not have paid the value of the subject check. Petitioner, as 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 done its duty to ascertain the genuineness of prior indorsements.465 Sections 65 and 66 of the Negotiable Instruments Law state that: Accordingly, one who credits the proceeds of a check to the account of the indorsing payee is liable in conversion to the nonindorsing payee for the entire amount of the check.466" 465

466

Sections 65 and 66 of the Negotiable Instruments Law state that: Sec. 65.– Every person negotiating an instrument by delivery or by a qualified indorsement 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. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation securities other than bills and notes. Sec. 66. Liability of general indorser. –Every indorser who indorses without qualification, warrants to all subsequent holders in due course: (a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and (b) That the instrument is, at the time of his indorsement, valid and subsisting; And in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it Vide Peoples Nat. Bank v. American Fidelity Fire Ins. Co., 39 Md. App. 614, 386 A.2d 1254, 24 U.C.C. Rep. Serv. 362 (1978); Middle States Leasing Corp. v. Manufacturers Hanover Trust Co., 62 A.D.2d 273, 404 N.Y.S.2d 846, 23 U.C.C. Rep. Serv. 1215 (1st Dep’t 1978); Vide 11 Am Jur 2d, Bills and Notes, §225, at p. 557

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Sec. 42. Effect of instrument drawn or indorsed to a person as cashier. - Where an instrument is drawn or indorsed to a person as “cashier” or other fiscal officer of a bank or corporation, it is deemed prima facie to be payable to the bank or corporation of which he is such officer, and may be negotiated by either the indorsement of the bank or corporation or the indorsement of the officer. Notes: Where the president of a bank by authority of the directors discharges the duties ordinarily performed by a cashier, a draft drawn payable to the president by name with the addition of “pt” is payable to the bank. (Brannan, page 48, citing Griffin v. Erskine, 131 Iowa, 444, 109 N.W. 13.) S was cashier of the C bank. A certificate of deposit issued by the C bank to the order of “S Cashier” was indorsed “S Cashier” and came to the plaintiff, a holder in due course. Held, that the indorsement was that of the bank, and that it was not competent of the bank to show that S acted in his own interest and in violation of his duty to the bank. (Ibid, citing Johnson v. Buffalo Bank, 134 Iowa, 731, 112 N.W. 165.) Where a note was indorsed to A, parol evidence is not admissible to show that a bank was intended as indorsee, even though A is, in fact, cashier of such bank. If A delivers the note to the bank without indorsement, the bank may sue upon it, but subject to equities. (Ibid, citing First Nat. Bank v. McCullough, 50 Oregon, 508, 93 Pc. 366, 17 L.R.A. (N.S.) 1105, 126 Am. St. Rep. 758.) Sec. 43. Indorsement where name is misspelled, and so forth. - Where the name of a payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described adding, if he thinks fit, his proper signature. Notes: What is the remedy if the name of the payee or indorsee is wrongly misspelled?

281

ANSWER: Where the name of the payee or indorsee is wrongly designated or misspelled, he may endorse the instrument as therein described adding, if he thinks fit, his proper signature. (Sec. 43, Negotiable Instruments Law) This is an instance where a bill or note is indorsed specially designating the name of the person to be indorsed, and his name is wrongly designated or misspelled. The remedy here is for that person whose name was misspelled to indorse using his proper name or signature. Sec. 44. Indorsement in representative capacity. - Where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability. Notes: How could an instrument be indorsed in a representative capacity? ANSWER: Where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability. (Sec. 44, Negotiable Instruments Law) He may do so by disclosing his principal and signing for or in behalf of said principal. Otherwise, if he signs without disclosing his principal, he may be personally liable as an indorser of the bill or note. Sec. 45. Time of indorsement; presumption. - Except where an indorsement bears date after the maturity of the instrument, every negotiation is deemed prima facie to have been effected before the instrument was overdue. Notes:

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What is the presumption regarding the time of the indorsement of the instrument? Is there any exception to the presumption? ANSWER: Every negotiation is deemed prima facie effected before the instrument was overdue. Except where an indorsement bears date after the maturity of the instrument. (Sec. 45, Negotiable Instruments Law) The presumption is grounded upon good faith and sound business practices, and only applies when there is no date indicated for the maturity of the instrument, otherwise, the written date will govern. Sec. 46. Place of indorsement; presumption. - Except where the contrary appears, every indorsement is presumed prima facie to have been made at the place where the instrument is dated. Notes: What is the presumption regarding the place of indorsement of the instrument? ANSWER: Every instrument is presumed prima facie to have been made at the place where the instrument is dated. Except where the contrary appears. (Sec. 46, Negotiable Instruments Law) Sec. 47. Continuation of negotiable character. - An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise. Notes: What is the rule on the continuity of a negotiable instrument?

283

ANSWER: An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise. (Sec. 47, Negotiable Instruments Law) However, the same rule is subject to the statute of limitations. Overdue note still negotiable An overdue promissory note is still negotiable within a statute exempting from attachment debts secured by bills of exchange or negotiable promissory notes, and hence the amount due thereon is exempt from foreign attachment. (Brannan, page 49, citing Oaskdale Mfg. Co. v. Clarke, 29 R.I. 192, 69 Atl. 681.) After maturity, negotiable paper circulates, but transferee only acquires the right and title of the transferrer After maturity negotiable paper still passes from hand to hand ad infinitum until paid. Moreover, the indorser, after maturity, writes in the same form, and is bound only upon the same condition of demand upon the drawer and notice of nonpayment as any other indorser. The paper retains its commercial attributes, and circulates as such in the community; but there is this vital distinction between the rights of a transferee who received the paper before, and of one who received it after maturity. The transferee of negotiable paper to whom it is transferred after maturity, acquires nothing but the actual right and title of the transferrer;467 and the like rule applies to the transferee who takes the paper after a refusal to accept by the drawee, provided he had notice of such refusal.468 In other words, the transferee of negotiable paper refused acceptance (with notice thereof), or overdue, takes it subject to all the equities with which it was encumbered in the hands of the party from whom he received it; for it comes, to use Lord Ellenborough’s words, “disgraced to him.” Thus, if he took it from a thief, or finder, or from a bankrupt incapacitated by law to make the transfer, he could not recover on it, inasmuch as the thief, finder, or bankrupt could not.469 467 468 469

Texas v. Hardenburg, 10 Wall. 68; Morgan v. United States, 113 U.S. 500 O’Keefe v. Dunn, 6 Taunt. 305; Bartlett v. Benson, 14 M & W 733 Byles on Bills [161], 284; Ashurst v. Royal Bank, 27 Law Times, 168

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(Daniel, Elements of the Law of Negotiable Instruments, pages 126-127) Sec. 48. Striking out indorsement. - The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument. Notes: Where an indorsement is not necessary to the title of the holder of the bill or note, he may, as a rule, strike it out and all indorsers subsequent to him are relieved from their liability. It should be taken into consideration that indorsers incur liability once they indorse the bill or note. And once that indorsement is stricken off, all subsequent indorsers are relieved from liability. Illustrative cases: An indorsee indorsed the note to a bank for collection, and upon its dishonor received it back. Held, such indorsee in possession of the note was a “holder” under sec. 191, and that he could sue upon it without striking out his indorsement. Mere possession was sufficient evidence of ownership to support the suit (sec. 51). (Brannan, page 49, citing New Haven Mrg. Co. v. New Haven Pulp Co., 76 Conn. 126, 55 Atl. 604.) One in possession of negotiable paper, indorsed in blank by the payee, is prima facie the owner thereof, and the mere erasure of subsequent indorsements does not destroy this presumption. (Ibid, citing King v. Bellamy (Kan.), 108 Pac. 117.) Plaintiff sued the maker and the payee on a note indorsed by the payee in blank, under which indorsement appeared the words “to acc’t of B.F.E.” Held, that even if these words constituted a subsequent restrictive indorsement, it was not necessary to plaintiff’s title, and he could strike it out at the trial and recover as bearer. (Ibid, citing Jerman v. Edwards, 29 App. D.C. 535.) Sec. 49. Transfer without indorsement; effect of. - Where the holder of an instrument payable to his order transfers it for

285

value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made. Notes: Section 49 of the Negotiable Instruments Law contemplates a situation whereby the payee or indorsee delivers a negotiable instrument for value without indorsing it.470 It bears stressing that the above transaction is an equitable assignment and the transferee acquires the instrument subject to defenses and equities available among prior parties. Thus, if the transferor had legal title, the transferee acquires such title and, in addition, 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 acceptor or other party liable to the transferor. The underlying premises of this provision, however, is that a valid transfer of ownership of the negotiable instrument in question has taken place.471 Transferees in this situation do not enjoy the presumption of ownership in favor of holders since they are neither payees nor indorsees of such instruments. The weight of authority is that the mere possession of a negotiable instrument does not in itself conclusively establish neither the right of the possessor to receive payment, or of the right of one who has made payment to be discharged from liability. Thus, something more than mere possession by persons who are not payees or indorsers of the instruments is necessary to authorize payment to them in the absence of any other facts from which the authority to receive payment may be inferred.472 It is an exception to the general rule for a payee of an order instrument to transfer the instrument without indorsement. 470

471 472

Bank of the Philippine Islands vs. Court of Appeals, et al, G.R. No. 136202, January 25, 2007, [Azcuna, J.] Ibid. 11 Am Jur 2d, § 988, citing Doubleday v. Kress, 50 NY 410, Hoffmaster v. Black, 84 NE 423, and First Nat. Bank v. Gorman, 21 P2d 549

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Precisely because the situation is abnormal, it is but fair to the maker and to prior holders to require possessors to prove without the aid of an initial presumption in their favor, that they came into possession by virtue of a legitimate transaction with the last holder.473 “It has been held in Scotland that under the Bills of Exchange Act, section 31 (4) which is the same as section 49, N.I.L., the transferee for value, but without indorsement, of a bill accepted for the accommodation of the drawer-payee gets the title of the transferor and may hold the acceptor without first getting an indorsement. (Hood v. Stewart, 17 Session Cases (4th Series) 749. x x x Section 49 seems to change the law to the extent that transfer for value, even without indorsement, of an instrument, payable to order, passes the legal title, although subject to equities. But accommodation, as against a transferee for value, is not, properly speaking, an equity but only a defense against the accommodated party and transferees without value.” (cited in Brannan, pages 50-51) “This section vests the title in the transferee without indorsement, and is not affected by secs. 30, 31. (Swenson v. Stoltz, 36 Wash. 318, 78 Pac. 999, S.C. sec. 18; Meuer v. Phoenix Nat. Bank, 94 App. Div. 331, 88 N.Y. Supp. 83, S.C. sec. 187.) But the transferee without indorsement of a note payable to order cannot be a holder in due course, notwithstanding sec. 59, for under sec. 191 he is neither “holder,” because not a payee or indorsee, nor “bearer,” because the instrument is not payable to bearer.” (Mayers v. McRimmon, 140 N.C. 640, 53 S.E. 447, 111 Am. St. Rep. 879, S.C. sec. 31, cited in Brannan, page 51) Illustrative Cases: “Plaintiff sued the maker on a note, on the back of which appeared an indorsement of the name of the payee, but gave no proof of genuineness of the indorsement. Held, that plaintiff could recover as the equitable owner of the note, subject to any defenses against the payee.” (Johnson County Savings Bank v. Scoggin Drug Co. (N.C.), 67 S.E. 253.) 473

Campos Jr. and Lopez Campos, “Notes and Selected Cases on Negotiable Instruments Law,” p. 108, (1994)

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“Defendant, to accommodate C, drew a bill to his own order on C, who accepted the bill and transferred it to plaintiff for a loan. Defendant neglected to indorse the bill, which was not noticed by plaintiff when he made the advance. Held, that defendant was the “holder” of the bill within sec. 2 (N.I.L. sec. 191), that he transferred it by means of C to the plaintiff, and that plaintiff was entitled to have the indorsement of defendant and to recover against him on the bill.” (Walters v. Neary, 21 T.L.R. 146; cf. Day v. Longhurst, Weekly notes (1893), 3, S.C. sec. 191., cited in Brannan, page 52) Sec. 50. When prior party may negotiate instrument. - Where an instrument is negotiated back to a prior party, such party may, subject to the provisions of this Act, reissue and further negotiable the same. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable. Notes: Can a prior party further negotiate the instrument? ANSWER: Yes. Where an instrument is negotiated back to a prior party, such party may, subject to the provisions of the Negotiable Instruments Law, reissue and further negotiate the same. (Sec. 50, Negotiable Instruments Law) Are there limitations on the reissuance or further negotiation of the instrument? ANSWER: Yes. The prior party is not entitled to enforce payment of the instrument against any intervening party to whom he was personally liable. (Sec. 50, Negotiable Instruments Law) Illustration: A indorsed the note to B, B to C, C to D, then D back to B. Applying this rule, B can still further reissue or negotiate said note,

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however, the limitation is that he cannot enforce payment against C and D (hereto referred as intervening parties), in case the note is dishonored by the maker, this is because B is also liable to C and D as an indorser, before the note was negotiated back to him.

IV. RIGHTS OF THE HOLDER It is a general principle of the law merchant that, as between the immediate parties to a negotiable instrument—parties between whom there is a privity—the only superiority of such an instrument over other unsealed evidences of debt is that it prima facie imports a consideration. But a bona fide holder for value of such an instrument takes it discharged of all the equities existing between antecedent parties, and may recover it although it be without any validity as between the parties prior to himself, as, for example, if it was without consideration originally, or the consideration has failed, or the instrument was subsequently released or paid, or even through it was originally obtained by fraud, theft, or robbery.474 This general rule is subject to certain exceptions, treated of in the succeeding sections. (Daniel, Elements of the Law of Negotiable Instruments, page 122) It should be observed, however, that as between him and his immediate predecessor, or party between whom and himself a privity exists, he stands upon the same footing as the payee of a note against the maker. Fraud, illegality, want or failure of consideration may be pleaded against him by such immediate party as freely as if the instrument were not negotiable.475 (Ibid) Sec. 51. Right of holder to sue; payment. - The holder of a negotiable instrument may to sue thereon in his own name; and payment to him in due course discharges the instrument. Notes: Holder with legal title may sue Any holder of a bill or note who can trace a clear legal title to it, is entitled to sue upon it in his own name, whether he possesses the beneficial interest in its contents or not.476 If the 474 475 476

Daniel on Negotiable Instruments, 169a, and cases cited Daniel on Negotiable Instruments, 810 Caldwell v. Lawrence, 84 Ill. 161; Harpending v. Daniel, 80 Ky. 456

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note by payable to A or B, it may be sued upon by them jointly or by either one of them.477 If there be a special indorsement, or assignment to a particular person, he is the proper person to sue; and if he is in possession he may sue although his name be indorsed on the paper, after the special indorsement or assignment. For in such case his indorsement will be presumed to be a mere memorandum, or evidence that he had negotiated the paper and then taken it up.478 (Ibid, page 268) Agents, receivers, assignees, trustees, or personal representatives, may sue on a note or bill payable to bearer, or indorsed in blank.479 And the done cause mortis of a note payable to the donor ’s order may use the name of his personal representative, even against his protest.480 But a mere depositary of such a note cannot maintain suit.481 If the paper be indorsed specially to a particular person, none but such person or his representative can sue.482 A party for accommodation who pays the bill may sue prior parties, but not subsequent ones. If an acceptor or maker for accommodation pays the bill he cannot sue drawer or indorser upon the bill, because, according to its terms, he is liable to them. But he may sue the accommodation party for money paid at his request.483 (Ibid, page 269) Cause of action indivisible It is a general principle of law that a party cannot divide an entire demand or cause of action, and maintain several suits for its recovery; and a recovery for part of an entire demand will bar an action for the remainder, if due at the time that the first action was brought. (Ibid, page 271) When instrument payable to bearer An action on a bill or note payable to bearer, or indorsed in blank, may be maintained in the name of the nominal holder who 477 478 479

480 481 482 483

Westgate v. Healy, 4 R.I. 524 Humphreyville v. Culver, 73 Ill. 485 Law v. Parnell, 7 C.B. (N.S.) 282; Bowman v. Wood, 15 Mass, 534; Haxtun v. Bishop, 3 Wend. 13; Daniel on Negotiable Instruments, 264; 2 Parsons on Notes and Bills, 446 Grover v. Grover, 24 Pick. 261; Sessions v. Mosley, 4 Cush. 87 Sherwood v. Roys, 14 Pick. 172 Daniel on Negotiable Instruments, 692, 1181a Stark v. Alford, 49 Tex. 260

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is not the owner by the owner’s consent; and that possession by such nominal holder is prima facie sufficient evidence of his right to sue, and cannot be rebutted by proof that he has no beneficial interest, or by anything else but proof of mala fides.484 If it were shown that the plaintiff upon suing upon a note payable to bearer or indorsed in blank, has no interest in it, and in addition that he is suing against the will of the party beneficially interested, he could not recover, and his conduct would be in bad faith.485 It matters not that such nominal holder will receive the amount as trustee, agent, or pledge.486 The suit by him holding the paper shows his title to recover; and it cannot matter to the defendant who discharges the debt that the plaintiff is accountable over to a third party. Evidence, however, that the plaintiff has no interest in the instrument will be competent when foundation has been laid for its introduction by offer to prove offset, or other defense, available against a third person who is its true owner.487 (Ibid, page 273) Rights of a holder under a blank indorsement The holder of a note blank as to the payee may fill it up with his own name and sue upon it.488 If payable to a fictitious person, it may be sued on as payable to bearer.489 The holder of such a paper, in transferring it, should not use the fictitious name, but pass it by delivery only, or by indorsement,490 and even after the trial, where judgment has gone for the plaintiff under the impression that the indorsement had been filled up, the correction being made nunc pro tunc.491 (Ibid, page 274) But the filling up of the blank indorsement is formal merely, and not necessary that it should be filled up at all, for the mere act of suing upon it by the holder evidences his intention to treat the indorser as a transferrer and indorser to himself.492 And if the plaintiff omit to state in his declaration all the indorsements after 484 485 486

487 488 489 490 491 492

Demuth v. Cutler, 50 Me. 300; Rubelman v. McNichol, 13 Mo. App. 584 Tonne v. Wasson, 128 Mass. 517 Nicolay v. Fritschle, 40 Mo. 67; King v. Fleece, 7 Heisk. 67; Bowman v. Wood, 15 Mass. 534 Logan v. Cassell, 88 Pa. St. 290 Crutchley v. Clarence, 2 Maule & S 90 Parsons on Notes and Bills, 448 Maniort v. Roberts, 4 E.D. Smith, 83 Whitter v. Hayden, 9 Allen, 408 Rees v. Conococheague Bank, 5 Rand. 329; Poorman v. Mills, 35 Cal. 118

291

the first indorsement in blank, he may strike out the intervening indorsements, and aver that the first blank indorser indorsed immediately to himself.493 (Ibid) When indorsement is in full If the bill or note be not payable to bearer or indorsed in blank, or indorsed specially to himself, the holder cannot (unless authorized by statute) sue in his own name, for although he may possess the entire beneficial interest, the legal title is still outstanding in his transferrer, and he must use his name in order to maintain the suit.494 By leaving the instrument unendorsed, the transferrer necessitates and authorizes the use of his name to the recovery of the amount; and he cannot object to its use, or release the action when instituted.495 If the transferrer indorses the paper, then his name cannot be used save by his own consent; for then the legal title and right to sue is vested in his indorsee.496 But if the suit is commenced without his consent, he may subsequently assent to it.497 (Ibid, pages 274-275) Possession is prima facie evidence of ownership Possession is in itself prima facie evidence of the right of the party to sue and receive money when he holds under a legal title, and also that the title, although not expressly, is actually vested in him. And therefore in order to defeat his suit, it must be shown that he is a mala fide holder.498 As said in a Maryland case by Chambers, J.: “A bill payable to bearer, or a bill payable to order and indorsed in blank, will pass by delivery, and bare possession is prima facie evidence of title, and for that reason possession of such a bill would entitle the holder to sue.”499 And possession of the note or bill is prima facie evidence that the same was indorsed by the person by whom it purports to be indorsed;500 and production 493

494

495

496 497 498

499 500

Rand. V. Dovey, 83 Pa. St. 281; Merz v. Kaiser, 20 La. Ann. 379; Byles on Bills [149], 268 Allen v. Newbury, 8 Iowa 65; Robinson v. Wilkinson, 38 Mich. 301; Marsh v. Hayford, 80 Mc. 97 Paese v. Hirst, 10 B & C 123; Amherst Academy v. Cowles, 6 Pick, 427; Royce v. Nye, 52 Vt. 372 Bowie v. Duval, 1 Gill & J 175; Mosher v. Allen, 16 Mass. 451 Golder v. Foss, 43 Me, 364 Wheeler v. Johnson, 97 Mass. 39; Wilson Sewing Machine Co. v. Spears, 50 Mich, 534; Union Nat. Bank v. Barber, 56 Iowa, 562 Whiteford v. Burckmyer, 1 Gill, 127 Bank v. Mallan, 37 Minn. 404

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

at the trial is prima facie evidence that it remains unpaid. But possession of the instrument is not always necessary in order to institute a suit. If the holder has indorsed a note in blank and pledged it as collateral security, he may negotiate it to a third person, while still pledged, and such person may sue as indorsee while it is still in pledge, and maintain an action by discharging the lien and producing the note at the trial.501 (Ibid, page 275) Who may be sued? General Principle As a general rule, the holder may sue all the prior parties on the bill or note, but not any subsequent party. Thus a payee may sue the acceptor or maker. An indorsee may sue the acceptor or maker, and all prior indorsers. (Ibid, page 276) When indorser can sue acceptor or maker The indorser of a bill or note cannot sue the acceptor or maker until he has paid or satisfied it. But as soon as he does this he may sue the acceptor or maker.502 And if one indorser sues a prior party, it is not necessary for him to show that he had received notice, provided it was duly received by such prior party.503 Where there are a number or indorsers, any one may sue, by arrangement between them, all indorsers subsequent to his being stricken out.504 (Ibid) When drawer can sue acceptor and vice versa “The drawer,” says Mr. Chitty, “may maintain an action on the bill against the acceptor, in case of a refusal to pay a bill already accepted, but not on a refusal to accept, in which latter case the action must be special on the contract to accept.”505 Certainly the drawer may sue the acceptor if he had to pay the bill, or may leave it in the hands of the indorsee to sue for his benefit;506 but is has been held that he cannot recover without evidence that he has paid the bill.”507 (Ibid, page 277) 501 502 503 504 505 506

507

Fisher v. Bradford, 7 Greenl. 28 Hoyt v. Wilkinson, 10 Pick. 31; McDonald v. Magruder, 3 Pet. 470 Ellsworth v. Brewer, 11 Pick, 316 Walwyn v. St. Quintin, 1 Bos & P 652 Chitty on Bills [537], 608 Louviere v. Laubray, 10 Mod. 36; Thurman v. Van Brunt, 19 Barb. 410; Williams v. James, 15 Ad & El (N.S.) 69 Thompson v. Flower, 1 Mart. N.S. (La) 301; 2 Parsons on Notes and Bills, 453

293

Where the acceptance is for the drawer’s accommodation, and the acceptor pays the bill, he cannot sue the drawer upon the bill, for it imports no liability to him, but he may sue for money paid at his request.508 But an acceptor for honor of the drawer or indorser may sue such drawer or indorser upon the bill itself.509 (Ibid) Sec. 52. What constitutes a holder in due course. - A holder in due course is a holder 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 of it 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. Notes: The act of crossing a check serves as a warning to the holder that the check has been issued for a definite purpose so that the holder thereof must inquire if he has received the check pursuant to that purpose; otherwise, he is not a holder in due course. (Dino vs. Loot, G.R. No. 170912, April 19, 2010, [Carpio, J.]) However, the fact that respondents are not holders in due course does not automatically mean that they cannot recover on the check. The Negotiable Instruments Law does not provide that holder who is not a holder in due course may not in any case recover on the instrument. The only disadvantage of a holder who is not in due course is that the negotiable instrument is subject to defenses as if it were non-negotiable. Among such defenses is the absence or failure of consideration, which petitioner sufficiently established in this case. Petitioner issued the subject check supposedly for a loan in favor of Consing’s group, who turned out to be a syndicate defrauding gullible individuals. Since 508 509

Bell v. Norwood, 7 La. 95; Stark v. Alford, 49 Tex. 260 2 Parsons on Notes and Bills, 455

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

there is in fact no valid loan to speak of, there is no consideration for the issuance of the check. Consequently, petitioner cannot be obliged to pay the face value of the check. (supra) “An allegation in an answer that plaintiff is not a holder in due course is a conclusion of law and insufficient to show which of the conditions named in sec. 52 has not been complied with.” (Rogers v. Morton, 46 Misc. R. 494, 95 N.Y. Supp. 49, S.C. secs. 26, 30, cited in Brannan, page 54) “A woman delivered to her husband a check made payable to a certain creditor, with instructions to pay her debt with it. The husband handed the check to the creditor as payment upon a debt of his own to the same creditor who accepted it as such in good faith. Held, the creditor was a holder in due course of the check.” (Boston Steel & Iron Co. v. Steuer, 183 Mass. 140, 66 N.E. 646, 97 Am. St. Rep. 426, S.C. sec. 14, Ibid) “A note payable to the maker’s order was indorsed in blank to a bank. The note was afterwards altered by inserting “payable with interest.” The bank made a deed of trust of all its property including the note to secure its creditors. Held, that in Virgina a pre-existing debt is a valuable consideration for a deed of trust to secure it, and that the trustee was a holder in due course and could recover on the note according to its original tenor, under sec. 124.” (Trustees of American Bank v. McComb, 105 Va. 473, 54 S.E. 14, S.C. secs. 25, 52-1, cited in Brannan, pages 54-55) “The payee of a note agreed with the accommodation maker that it should not be negotiated to one R, of which fact R was aware. The payee offered to sell the note to R, who lent the money to S, who bought the note. Before maturity S sold the note to plaintiff, who was ignorant that it was an accommodation note and of the agreement, and who paid for it by his own note to S, who still held it. Held, plaintiff could recover of the maker the full amount of the latter’s note.” (Mehlinger v. Harriman, 185 Mass. 245, 70 N.E. 51., cited in Brannan, page 55) Complete and Regular upon its Face “The fact that the words “payable with interest” are written on a blank space after the words “value received” in the same

295

handwriting as the other written parts of the note, does not prevent the note being complete and regular on its face.” (Trustees of American Bank v. McComb, 105 Va. 473, 54 S.E. 14, sec. 25, 52, cited in Brannan, page 55) “A partner in a firm which had dissolved, but without giving notice thereof, signed notes in blank payable to X and sent them to X or to a bank where they were filled up as to date, amount, and maturity by the cashier as occasion required, and the proceeds placed to the credit of X. Held, that the bank was not a holder in due course, and could not recover against the retired partner without proof that he had authorized or ratified the issue of the notes.” (Hunder v. Allen, 127 App. Div. 572; 111 N.Y. Supp. 820, ibid) “A post-dated check is valid and negotiable, and is complete and regular on its face, notwithstanding it is stamped as a check, and not as a bill of exchange payable on time.” (Hitchcock v. Edwards, 60 L.T. Rep. 636, cited in Brannan, page 56.) “The defendant accepted a bill otherwise complete, but the place for the drawer’s signature was left blank and under it was written, “Drawn to the order of X.” The bill was sent to X to be used for a certain purpose. X instead of using the bill for such purpose transferred it to plaintiff, who paid value bonafide. X indorsed the bill, but neglected to sign it was drawer until after it was overdue and dishonored. Held, that the bill was not complete and regular when plaintiff took it and that he could not recover.” (South Wales, etc., Co. v.. Underwood (Q.B. Div. 1899), 15 T.L. Rep. 157, ibid) Became Holder before Overdue “A note providing that any delinquency in the payment of interest “shall cause the note to immediately become due and collectible” is made overdue by the failure to pay the interest when due, and a subsequent taker cannot be a holder in due course.” (Hodge v. Wallace, 129 Wis. 84, 108 N.W. 212, 116 Am. St. Rep. 938, cited in Brannan, page 56) “A note payable one day after date is not overdue at any time on the day after its date.” (Wilkins v. Usher, 123 Ky. 696, 97 S.W. 37, S.C. sec. 25, Brannan, page 56)

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

“A bill drawn for the acceptor’s accommodation but which had never been negotiated was in the hands of the drawer after maturity, and having come into the possession of the drawer’s solicitors, the latter claimed a lien on it for services previously rendered the drawer in an action to recover the bill from a converter, and sued the acceptor on the bill. Held, that plaintiffs taking the bill overdue could acquire no rights against the acceptor.” (Redfern v. Rosenthal, 86 L.T. Rep. 855, cited in Brannan, page 56) “In his own right” is used merely in contradistinction to a right in a representative capacity, but indicates a right not subject to that of another person, and good against all the world. x x x A gave a demand note payable to B or order on the understanding that it would not be negotiated. B, however, indorsed the note for value to C. Afterwards A paid B the amount of the note. B then obtained the note from C by fraud and gave it to A. Held, that A was not a holder for value, the previous payment not being a consideration given when he received back the note, and he is still liable to C on the note.” (Nash v. DeFreville [1900] 2 Q.B. 72, cited in Brannan, page 56) Meaning of term “before maturity” The holder in order to acquire a better right and title to the paper than his transferrer, must have possessed of it before it is overdue. For if it were already paid by the maker or acceptor, and had been left outstanding, it would be already discharged, and they would not be bound to pay it again to anyone who acquired if after the period when payment was due. And if it were not paid at maturity, it is then considered as dishonored; and although still transferable in like manner and form as before, yet the fact of its dishonor, which is apparent from its face, is equivalent to notice to the holder that he takes it subject to its infirmities, and can acquire no better title than his transferrer.510 The doctrine applicable to this subject has been admirably stated by Chief Justice Shaw, who says: “Where a negotiable note is found in circulation after it’s due, it carries suspicion on the fact of it. The question instantly arises: Why is it in circulation? Why is it not paid? There is something wrong. Therefore, although it does not 510

Morgan v. United States, 113 U.S. 500; Speck v. Pullman Car Co., 121 Ill. 57

297

give the indorsee notice of any specific matter of defense, such as set-off payment, or fraudulent acquisition, yet it puts him on inquiry; he takes only such title as the indorser himself has, and subject to any defense which might be made if the suit were brought by the indorser.”511 But there is this limitation to this doctrine: that if the holder acquired the paper after maturity, from one who became a bona fide holder for value and without notice before maturity, he is then protected by the strength of his transferrer’s title.512 (Daniel, Elements of the Law of Negotiable Instruments, pages 151-152) Took it in Good Faith and for Value “A bank discounting a note and obtaining credit in favor of the seller in another solvent bank for the amount, is a holder for value. But the mere statement that such credit was given, when it does not appear how it was given or that it was ever used, is not enough to enable the court to determine whether the credit was real or substantial.” (Elgin City Banking Co. v. Hall, 119 Tenn. 548 S.W. 1068, S.C. secs, 34, 38, cited in Brannan, page 57) “The manager of a bank stole negotiable securities from the bank and pledged them with A. He afterwards got them back, with other negotiable securities from A by fraud and replaced them in the bank. The bank knew nothing of the transaction. Held, that the bank was a holder in due course and entitled to keep the securities.” (Brannan, page 58 citing London & County Banking Co. v. London & River Plate Bank, 21 Q.B.D. 535.) The purchaser must have acquired the instrument for a valuable consideration.513 In some cases it is said that the holder must have parted with “full value,” sometimes “fair value,” and sometimes the expression “for value” is used. And if he does so at any price, the holder acquires full rights and interests in the instrument as against all parties, unless he had notice of defects, or willfully abstained from inquiry under circumstances which justify the imputation of bad faith. (Daniel, Elements of the Law of Negotiable Instruments, page 145)

511 512 513

Fisher v. Leland, 4 Cush. 456 Ante, 201 See ante 90-115 (Murray v. Lardner, 2 Wall. 710)

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

Without notice of fraud or defect of title, and illegality In order to stand upon a better footing than his transferrer, the holder must acquire the instrument without notice of fraud, defect of title, illegality of consideration, or other fact which impeaches its validity in his tranferrer’s hands; and word notice in this connection signifies the same as knowledge. Knowledge of fraud or illegality impeaches the bona fides of the holder, or at least destroys the superiority of his title, and leaves him in the shoes of the transferrer.514 And any fraud upon the transferrer incapacitates the transferee or one acquiring from him with notice from recovering against the transferrer.515 (Daniel, Elements of the Law of Negotiable Instruments, page 155) Illustrative Case: Crossed Checks; Holder in Due Course. State Investment House vs. Intermediate Appellate Court, Anita Chua and Harris Chua G.R. No. 72764, July 13, 1989 FERNAN, C.J: Petitioner State Investment House seeks a review of the decision of respondent Intermediate Appellate Court (now Court of Appeals) in AC-G.R. CV No. 04523 reversing the decision of the Regional Trial Court of Manila, Branch XXXVII dated April 30, 1984 and dismissing the complaint for collection filed by petitioner against private respondents Spouses Anita Peña Chua and Harris Chua. It appears that shortly before September 5, 1980, New Sikatuna Wood Industries, Inc. requested for a loan from private respondent Harris Chua. The latter agreed to grant the same subject to the condition that the former should wait until December 1980 when he would have the money. In view of this agreement,

514

515

Hanauer v. Doane, 12 Wall. 342; Crampton v. Perkins, 65 Md. 24; Mace v. Kennedy, 68 Mich. 70 Lenheim v. Fay, 27 Mich. 70

299

private respondent-wife, Anita Peña Chua issued three (3) crossed checks payable to New Sikatuna Wood Industries, Inc. all postdated December 22, 1980 as follows: DRAWEE BANK

CHECK NO.

DATE

AMOUNT

1. China Banking Corporation

589053

Dec. 22, 1980

P98,750.00

2. International Corporate Bank

04045549

Dec. 22, 1980

102,313.00

3. Metropolitan Bank & Trust Co.

036512

Dec. 22, 1980

98,387.00

The total value of the three (3) postdated checks amounted to P 299,450.00. Subsequently, New Sikatuna Wood Industries, Inc. entered into an agreement with herein petitioner State Investment House, Inc. whereby for and in consideration of the sum of Pl,047,402.91 under a deed of sale, the former assigned and discounted with petitioner eleven (11) postdated checks including the aforementioned three (3) postdated checks issued by herein private respondent-wife Anita Peña Chua to New Sikatuna Wood Industries, Inc. When the three checks issued by private respondent Anita Peña Chua were allegedly deposited by petitioner, these checks were dishonored by reason of “insufficient funds”, “stop payment” and “account closed”, respectively. Petitioner claims that despite demands on private respondent Anita Peña to make good said checks, the latter failed to pay the same necessitating the former to file an action for collection against the latter and her husband Harris Chua before the Regional Trial Court of Manila, Branch XXXVII docketed as Civil Case No. 82-10547. Private respondents-defendants filed a third party complaint against New Sikatuna Wood Industries, Inc. for reimbursement and indemnification in the event that they be held liable to

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

petitioner-plaintiff. For failure of third party defendant to answer the third party complaint despite due service of summons, the latter was declared in default. On April 30, 1984, the lower court516 rendered judgment against herein private respondent’s spouses, the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered in favor of the plaintiff or against the defendants ordering the defendants to pay jointly and severally to the plaintiff the following amounts: 1. P 229,450.00 with interest at the rate of 12% per annum from February 24,1981 until fully paid; 2. P 29,945.00 as and for attorney’s fees; and 3. the costs of suit. On the third party complaint, third party defendant New Sikatuna Wood Industries, Inc. is ordered to pay third party plaintiffs Anita Peña Chua and Harris Chua all amounts said defendants’ third- party plaintiffs may pay to the plaintiff on account of this case.517 On appeal filed by private respondents in AC-G.R. CV No. 04523, the Intermediate Appellate Court518 (now Court of Appeals) reversed the lower court’s judgment in the now assailed decision, the dispositive portion of which reads: WHEREFORE, finding this appeal meritorious, We Reverse and Set Aside the appealed judgment, dated April 30, 1984 and a new judgment is hereby rendered dismissing the complaint, with costs against plaintiff-appellee.519 Hence, this petition.

516

517 518

519

Presided over by then Judge (now Court of Appeals Justice) Bienvenido C. Ejercito. Petition, Annex “A”, RTC Decision, Rollo, pp. 42- 43. Penned by Justice Eduardo P. Caguioa, concurred in by Presiding Justice Ramon G. Gaviola, Jr., Justices Ma. Rosario Quetulio-Losa and Leonor Ines-Luciano. Rollo, p. 51.

301

The pivotal issue in this case is whether or not petitioner is a holder in due course as to entitle it to proceed against private respondents for the amount stated in the dishonored checks. Section 52(c) of the Negotiable Instruments Law defines a holder in due course as one who takes the instrument “in good faith and for value”. On the other hand, Section 52(d) provides that in order that one may be a holder in due course, it is necessary that “at the time the instrument was negotiated to him he had no notice of any x x x defect in the title of the person negotiating it.” However, under Section 59 every holder is deemed prima facie to be a holder in due course. Admittedly, the Negotiable Instruments Law regulating the issuance of negotiable checks as well as the rights and liabilities arising therefrom, does not mention “crossed checks”. But this Court has taken cognizance of the practice that a check with two parallel lines in the upper left hand corner means that it could only be deposited and may not be converted into cash. Consequently, such circumstance should put the payee on inquiry and upon him devolves the duty to ascertain the holder’s title to the check or the nature of his possession. Failing in this respect, the payee is declared guilty of gross negligence amounting to legal absence of good faith and as such the consensus of authority is to the effect that the holder of the check is not a holder in good faith.520 Petitioner submits that at the time of the negotiation and endorsement of the checks in question by New Sikatuna Wood Industries, it had no knowledge of the transaction and/or arrangement made between the latter and private respondents. We agree with respondent appellate court. Relying on the ruling in Ocampo v. Gatchalian (supra), the Intermediate Appellate Court (now Court of Appeals), correctly elucidated that the effects of crossing a check are: the check may not be encashed but only deposited in the bank; the check may be negotiated only once to one who has an account with a bank; and the act of crossing the check serves as a warning to the holder 520

Ocampo & Co. v. Gatchalian, 3 SCRA 603 (1961).

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise he is not a holder in due course. Further, the appellate court said: It results therefore that when appellee rediscounted the check knowing that it was a crossed check he was knowingly violating the avowed intention of crossing the check. Furthermore, his failure to inquire from the holder, party defendant New Sikatuna Wood Industries, Inc., the purpose for which the three checks were cross despite the warning of the crossing, prevents him from being considered in good faith and thus he is not a holder in due course. Being not a holder in due course, plaintiff is subject to personal defenses, such as lack of consideration between appellants and New Sikatuna Wood Industries. Note that under the facts the checks were postdated and issued only as a loan to New Sikatuna Wood Industries, Inc. if and when deposits were made to back up the checks. Such deposits were not made, hence no loan was made, hence the three checks are without consideration (Sec. 28, Negotiable Instruments Law). Likewise New Sikatuna Wood Industries negotiated the three checks in breach of faith in violation of Article (sic) 55, Negotiable Instruments Law, which is a personal defense available to the drawer of the check.521 In addition, such instruments are mentioned in Section 541 of the Negotiable Instruments Law as follows: Sec. 541. The maker or any legal holder of a check shall be entitled to indicate therein that it be paid to a certain banker or institution, which he shall do by writing across the face the name of said banker or institution, or only the words “and company.” The payment made to a person other than the banker or institution shall not exempt the person on whom it is drawn, if the payment was not correctly made. 521

Petition, Annex “B”, IAC Decision, Rollo, pp. 50- 51.

303

Under usual practice, crossing a check is done by placing two parallel lines diagonally on the left top portion of the check. The crossing may be special wherein between the two parallel lines is written the name of a bank or a business institution, in which case the drawee should pay only with the intervention of that bank or company, or crossing may be general wherein between two parallel diagonal lines are written the words “and Co.” or none at all as in the case at bar, in which case the drawee should not encash the same but merely accept the same for deposit. The effect therefore of crossing a check relates to the mode of its presentment for payment. Under Section 72 of the Negotiable Instruments Law, presentment for payment to be sufficient must be made (a) by the holder, or by some person authorized to receive payment on his behalf ... As to who the holder or authorized person will be depends on the instructions stated on the face of the check. The three subject checks in the case at bar had been crossed generally and issued payable to New Sikatuna Wood Industries, Inc. which could only mean that the drawer had intended the same for deposit only by the rightful person, i.e., the payee named therein. Apparently, it was not the payee who presented the same for payment and therefore, there was no proper presentment, and the liability did not attach to the drawer. Thus, in the absence of due presentment, the drawer did not become liable. 522 Consequently, no right of recourse is available to petitioner against the drawer of the subject checks, private respondent wife, considering that petitioner is not the proper party authorized to make presentment of the checks in question. Yet it does not follow as a legal proposition that simply because petitioner was not a holder in due course as found by the appellate court for having taken the instruments in question with notice that the same is for deposit only to the account of payee named in the subject checks, petitioner could not recover on the checks. The Negotiable Instruments Law does not provide that a holder who is not a holder in due course may not in any 522

Chan Wan v. Tan Kim and Chen So, L-15380, September 30, 1960,109 Phil. 706 (1960).

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

case recover on the instrument for in the case at bar, petitioner may recover from the New Sikatuna Wood Industries, Inc. if the latter has no valid excuse for refusing payment. The only disadvantage of a holder who is not in due course is that the negotiable instrument is subject to defenses as if it were nonnegotiable.523 That the subject checks had been issued subject to the condition that private respondents on due date would make the backup deposit for said checks but which condition apparently was not made, thus resulting in the non-consummation of the loan intended to be granted by private respondents to New Sikatuna Wood Industries, Inc., constitutes a good defense against petitioner who is not a holder in due course. WHEREFORE, the decision appealed from is hereby AFFIRMED with costs against petitioner. SO ORDERED. Gutierrez, Jr., Bidin and Cortes, JJ., concur. Feliciano, J., is on leave. Bataan Cigar and Cigarette Factory vs. The Court of Appeals and State Investment House, Inc. G.R. No. 93048, March 3, 1994 NOCON, J: For our review is the decision of the Court of Appeals in the case entitled “State Investment House, Inc. v. Bataan Cigar & Cigarette Factory Inc.,”524 affirming the decision of the Regional Trial Court525 in a complaint filed by the State Investment House, Inc. (hereinafter referred to as SIHI) for collection on three unpaid checks issued by Bataan Cigar & Cigarette Factory, Inc. (hereinafter referred to as BCCFI). The foregoing decisions unanimously ruled in favor of SIHI, the private respondent in this case. 523 524

525

Chan Wan v. Tan Kim and Chen So, supra. CA-G.R. CV No. 03032, Justice Jorge R. Coquia, ponente, Justices Josue N. Bellosillo and Venancio D. Aldecoa, Jr., concurring, November 13, 1987. Judge Agusto E. Villarin, presiding, Branch XL, National Capital Region, Manila.

305

Emanating from the records are the following facts. Petitioner, Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation involved in the manufacturing of cigarettes, engaged one of its suppliers, King Tim Pua George (herein after referred to as George King), to deliver 2,000 bales of tobacco leaf starting October 1978. In consideration thereof, BCCFI, on July 13, 1978 issued crossed checks post dated sometime in March 1979 in the total amount of P820,000.00.526 Relying on the supplier’s representation that he would complete delivery within three months from December 5, 1978, petitioner agreed to purchase additional 2,500 bales of tobacco leaves, despite the supplier’s failure to deliver in accordance with their earlier agreement. Again petitioner issued post dated crossed checks in the total amount of P1,100,000.00, payable sometime in September 1979.527 During these times, George King was simultaneously dealing with private respondent SIHI. On July 19, 1978, he sold at a discount check TCBT 551826 528 bearing an amount of P164,000.00, post dated March 31, 1979, drawn by petitioner, naming George King as payee to SIHI. On December 19 and 26, 1978, he again sold to respondent checks TCBT Nos. 608967 & 608968, 529 both in the amount of P100,000.00, post dated September 15 & 30, 1979 respectively, drawn by petitioner in favor of George King. In as much as George King failed to deliver the bales of tobacco leaf as agreed despite petitioner’s demand, BCCFI issued on March 30, 1979, a stop payment order on all checks payable to George King, including check TCBT 551826. Subsequently, stop payment was also ordered on checks TCBT Nos. 608967 & 608968 on September 14 & 28, 1979, respectively, due to George King’s failure to deliver the tobacco leaves. Efforts of SIHI to collect from BCCFI having failed, it instituted the present case, naming only BCCFI as party defendant. The trial court pronounced SIHI as having a valid claim being a 526 527 528 529

Exhibit “1”, Folder of Exhibits, p. 11. Exhibit “4”, Folder of Exhibits, p. 14. Annex “A”, Folder of Exhibits, p. 3. Annexes “B” and “C”, Folder of Exhibits, pp. 4-5.

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holder in due course. It further said that the non-inclusion of King Tim Pua George as party defendant is immaterial in this case, since he, as payee, is not an indispensable party. The main issue then is whether SIHI, a second indorser, a holder of crossed checks, is a holder in due course, to be able to collect from the drawer, BCCFI. The Negotiable Instruments Law states what constitutes a holder in due course, thus: Sec. 52 — A holder in due course is a holder 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 of it before it was overdue, and without notice that it had 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. Section 59 of the NIL further states that every holder is deemed prima facie a holder in due course. However, when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims, acquired the title as holder in due course. The facts in this present case are on all fours to the case of State Investment House, Inc. (the very respondent in this case) v. Intermediate Appellate Court530 wherein we made a discourse on the effects of crossing of checks. As preliminary, a check is defined by law as a bill of exchange drawn on a bank payable on demand.531 There are a variety of checks, the more popular of which are the memorandum check, cashier’s check, traveler’s check and crossed check. 530 531

G.R. No. 72764, 175 SCRA 310. Sec. 185, Negotiable Instruments Law.

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Crossed check is one where two parallel lines are drawn across its face or across a corner thereof. It may be crossed generally or specially. A check is crossed specially when the name of a particular banker or a company is written between the parallel lines drawn. It is crossed generally when only the words “and company” are written or nothing is written at all between the parallel lines. It may be issued so that the presentment can be made only by a bank. Veritably the Negotiable Instruments Law (NIL) does not mention “crossed checks,” although Article 541532 of the Code of Commerce refers to such instruments. According to commentators, the negotiability of a check is not affected by its being crossed, whether specially or generally. It may legally be negotiated from one person to another as long as the one who encashes the check with the drawee bank is another bank, or if it is specially crossed, by the bank mentioned between the parallel lines.533 This is specially true in England where the Negotiable Instrument Law originated. In the Philippine business setting, however, we used to be beset with bouncing checks, forging of checks, and so forth that banks have become quite guarded in encashing checks, particularly those which name a specific payee. Unless one is a valued client, a bank will not even accept second indorsements on checks. In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check should have the following effects: (a) the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once — to one who has an account with a bank; (c) and the act of crossing the check serves as warning to the holder that the check has been issued for a definite purpose so that he must

532

533

Article 541 — The maker of any legal holder of a check shall be entitled to indicate therein that it be paid to a certain banker or institution, which he shall do by writing across the face the name of said banker or institution, or only the words “and company”. CAMPOS AND LOPEZ-CAMPOS, Negotiable Instruments Law, p. 574575; AGBAYANI, AGUEDO, Commercial Laws of the Philippines, Vol. 1, 1987 Ed., p. 446.

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inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course.534 The foregoing was adopted in the case of SIHI v. IAC, supra. In that case, New Sikatuna Wood Industries, Inc. also sold at a discount to SIHI three post-dated crossed checks, issued by Anita Peña Chua naming as payee New Sikatuna Wood Industries, Inc. Ruling that SIHI was not a holder in due course, we then said: The three checks in the case at bar had been crossed generally and issued payable to New Sikatuna Wood Industries, Inc. which could only mean that the drawer had intended the same for deposit only by the rightful person, i.e. the payee named therein. Apparently, it was not the payee who presented the same for payment and therefore, there was no proper presentment, and the liability did not attach to the drawer. Thus, in the absence of due presentment, the drawer did not become liable. Consequently, no right of recourse is available to petitioner (SIHI) against the drawer of the subject checks, private respondent wife (Anita), considering that petitioner is not the proper party authorized to make presentment of the checks in question. xxx xxx xxx That the subject checks had been issued subject to the condition that private respondents (Anita and her husband) on due date would make the backup deposit for said checks but which condition apparently was not made, thus resulting in the non-consummation of the loan intended to be granted by private respondents to New Sikatuna Wood Industries, Inc., constitutes a good defense against petitioner who is not a holder in due course.535 It is then settled that crossing of checks should put the holder on inquiry and upon him devolves the duty to ascertain the 534

535

Ocampo v. Gatchalian, G.R. No. L-15126, 3 SCRA 603 (1961); Associated Bank v. Court of Appeals, G.R. No. 89802, 208 SCRA 465; SIHI v. IAC, supra. Id. at pp. 316-317.

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indorser’s title to the check or the nature of his possession. Failing in this respect, the holder is declared guilty of gross negligence amounting to legal absence of good faith, contrary to Sec. 52(c) of the Negotiable Instruments Law,536 and as such the consensus of authority is to the effect that the holder of the check is not a holder in due course. In the present case, BCCFI’s defense in stopping payment is as good to SIHI as it is to George King. Because, really, the checks were issued with the intention that George King would supply BCCFI with the bales of tobacco leaf. There being failure of consideration, SIHI is not a holder in due course. Consequently, BCCFI cannot be obliged to pay the checks. The foregoing does not mean, however, that respondent could not recover from the checks. The only disadvantage of a holder who is not a holder in due course is that the instrument is subject to defenses as if it were non-negotiable. 537 Hence, respondent can collect from the immediate indorser, in this case, George King. WHEREFORE, finding that the court a quo erred in the application of law, the instant petition is hereby GRANTED. The decision of the Regional Trial Court as affirmed by the Court of Appeals is hereby REVERSED. Cost against private respondent. SO ORDERED. Narvasa, C.J., Regalado and Puno, JJ., concur. Padilla, J., took no part. Security Checks; Holder in Due Course. State Investment House, Inc. vs. Court of Appeals and Nora B. Moulic G.R. No. 101163, January 11, 1993 BELLOSILLO, J: 536 537

quoted supra. Chan Wan v. Tan Kim and Chen So, L-15380, 109 Phil., 706 (1960); SIHI v. IAC, supra.

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The liability to a holder in due course of the drawer of checks issued to another merely as security, and the right of a real estate mortgagee after extrajudicial foreclosure to recover the balance of the obligation, are the issues in this Petition for Review of the Decision of respondent Court of Appeals. Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be sold on commission, two (2) post-dated Equitable Banking Corporation checks in the amount of Fifty Thousand Pesos (P50,000.00) each, one dated 30 August 1979 and the other, 30 September 1979. Thereafter, the payee negotiated the checks to petitioner State Investment House. Inc. (STATE). MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before maturity of the checks. The checks, however, could no longer be retrieved as they had already been negotiated. Consequently, before their maturity dates, MOULIC withdrew her funds from the drawee bank. Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20 December 1979, STATE allegedly notified MOULIC of the dishonor of the checks and requested that it be paid in cash instead, although MOULIC avers that no such notice was given her. On 6 October 1983, STATE sued to recover the value of the checks plus attorney’s fees and expenses of litigation. In her Answer, MOULIC contends that she incurred no obligation on the checks because the jewelry was never sold and the checks were negotiated without her knowledge and consent. She also instituted a Third-Party Complaint against Corazon Victoriano, who later assumed full responsibility for the checks. On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party Complaint, and ordered STATE to pay MOULIC P3,000.00 for attorney’s fees. STATE elevated the order of dismissal to the Court of Appeals, but the appellate court affirmed the trial court on the ground that the Notice of Dishonor to MOULIC was made beyond

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the period prescribed by the Negotiable Instruments Law and that even if STATE did serve such notice on MOULIC within the reglementary period it would be of no consequence as the checks should never have been presented for payment. The sale of the jewelry was never effected; the checks, therefore, ceased to serve their purpose as security for the jewelry. We are not persuaded. The negotiability of the checks is not in dispute. Indubitably, they were negotiable. After all, at the pre-trial, the parties agreed to limit the issue to whether or not STATE was a holder of the checks in due course.538 In this regard, Sec. 52 of the Negotiable Instruments Law provides — Sec. 52. What constitutes a holder in due course. — A holder in due course is a holder 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 of it before it was overdue, and without notice that it was 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. Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable instrument is a holder in due course.539 Consequently, the burden of proving that STATE is not a holder in due course lies in the person who disputes the presumption. In this regard, MOULIC failed. The evidence clearly shows that: (a) on their faces the postdated checks were complete and regular: (b) petitioner bought these checks from the payee, Corazon Victoriano, before their due dates;540 (c) petitioner took these checks in good faith and for value, albeit at a discounted price; and, (d) petitioner was never 538 539

540

Rollo, pp. 13-14. State Investment House, Inc. v. Court of Appeals, G.R. No. 72764, 13 July 1989; 175 SCRA 310, bold supplied Per Deeds of Sale of 2 July 1979 and 25 July 1979, respectively; Rollo, p. 13.

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informed nor made aware that these checks were merely issued to payee as security and not for value. Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free from any defect of title of prior parties, and from defenses available to prior parties among themselves; STATE may, therefore, enforce full payment of the checks.541 MOULIC cannot set up against STATE the defense that there was failure or absence of consideration. MOULIC can only invoke this defense against STATE if it was privy to the purpose for which they were issued and therefore is not a holder in due course. That the post-dated checks were merely issued as security is not a ground for the discharge of the instrument as against a holder in due course. For the only grounds are those outlined in Sec. 119 of the Negotiable Instruments Law: Sec. 119. Instrument; how discharged. — A negotiable instrument is discharged: (a) By payment in due course by or on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right. Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the discharge of the instrument. But, the intentional cancellation contemplated under paragraph (c) is that cancellation effected by destroying the instrument either by tearing it up,542 burning it,543 or writing the word “cancelled” on the instrument. The act of destroying the instrument must also be made by the holder of the instrument intentionally. Since MOULIC 541

542

543

Salas v. Court of Appeals, G.R. No. 76788, 22 January 1990; 181 SCRA 296. Montgomery v. Schwald, 177 Mo App 75, 166 SW 831; Wilkins v. Shaglund, 127 Neb 589, 256 NW 31. See Henson v. Henson, 268 SW 378.

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failed to get back possession of the post-dated checks, the intentional cancellation of the said checks is altogether impossible. On the other hand, the acts which will discharge a simple contract for the payment of money under paragraph (d) are determined by other existing legislations since Sec. 119 does not specify what these acts are, e.g., Art. 1231 of the Civil Code544 which enumerates the modes of extinguishing obligations. Again, none of the modes outlined therein is applicable in the instant case as Sec. 119 contemplates of a situation where the holder of the instrument is the creditor while its drawer is the debtor. In the present action, the payee, Corazon Victoriano, was no longer MOULIC’s creditor at the time the jewelry was returned. Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the mere expediency of withdrawing her funds from the drawee bank. She is thus liable as she has no legal basis to excuse herself from liability on her checks to a holder in due course. Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment. The need for such notice is not absolute; there are exceptions under Sec. 114 of the Negotiable Instruments Law: Sec. 114. When notice need not be given to drawer. — Notice of dishonor is not required to be given to the drawer in the following cases: (a) Where the drawer and the drawee are the same person; (b) When the drawee is a fictitious person or a person not having capacity to contract; (c) When the drawer is the person to whom the instrument is presented for payment: (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; (e) Where the drawer had countermanded payment. Indeed, MOULIC’S actuations leave much to be desired. She did not retrieve the checks when she returned the jewelry. She simply withdrew her funds from her drawee bank and 544

Art. 1231. Obligations are extinguished: (1) By payment or performance; (2) By the loss of the thing due; (3) By the condonation or remission of the debt; (4) By the confusion or merger of the rights of creditor and debtor; (5) By compensation; (6) By novation . . . . .

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transferred them to another to protect herself. After withdrawing her funds, she could not have expected her checks to be honored. In other words, she was responsible for the dishonor of her checks, hence, there was no need to serve her Notice of Dishonor, which is simply bringing to the knowledge of the drawer or indorser of the instrument, either verbally or by writing, the fact that a specified instrument, upon proper proceedings taken, has not been accepted or has not been paid, and that the party notified is expected to pay it.545 In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating, not hindering or hampering transactions in commercial paper. Thus, the said statute should not be tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a single case.546 The drawing and negotiation of a check have certain effects aside from the transfer of title or the incurring of liability in regard to the instrument by the transferor. The holder who takes the negotiated paper makes a contract with the parties on the face of the instrument. There is an implied representation that funds or credit are available for the payment of the instrument in the bank upon which it is drawn.547 Consequently, the withdrawal of the money from the drawee bank to avoid liability on the checks cannot prejudice the rights of holders in due course. In the instant case, such withdrawal renders the drawer, Nora B. Moulic, liable to STATE, a holder in due course of the checks. Under the facts of this case, STATE could not expect payment as MOULIC left no funds with the drawee bank to meet her obligation on the checks,548 so that Notice of Dishonor would be futile. The Court of Appeals also held that allowing recovery on the checks would constitute unjust enrichment on the part of STATE Investment House, Inc. This is error.

545 546 547 548

Martin v. Browns, 75 Ala 442. Reinhart v. Lucas, 118 W Va 466, 190 SE 772. 11 Am Jur 589. See Agbayani, Commercial Laws of the Philippines, Vol. 1, 1984 Ed., citing Ellenbogen v. State Bank, 197 NY Supp 278.

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The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the obligation of Corazon Victoriano and her husband at the time their property mortgaged to STATE was extrajudicially foreclosed amounted to P1.9 million; the bid price at public auction was only P1 million.549 Thus, the value of the property foreclosed was not even enough to pay the debt in full. Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of mortgage, the mortgagee is entitled to claim the deficiency from the debtor.550 The step thus taken by the mortgagee-bank in resorting to an extra-judicial foreclosure was merely to find a proceeding for the sale of the property and its action cannot be taken to mean a waiver of its right to demand payment for the whole debt.551 For, while Act 3135, as amended, does not discuss the mortgagee’s right to recover such deficiency, it does not contain any provision either, expressly or impliedly, prohibiting recovery. In this jurisdiction, when the legislature intends to foreclose the right of a creditor to sue for any deficiency resulting from foreclosure of a security given to guarantee an obligation, it so expressly provides. For instance, with respect to pledges, Art. 2115 of the Civil Code552 does not allow the creditor to recover the deficiency from the sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a thing sold on installment basis, in the event of foreclosure, the vendor “shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary will be void”.553 It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it cannot be concluded that the creditor loses his right recognized by the Rules of Court to take action for the recovery of any unpaid balance on the principal obligation simply because he has chosen to extrajudicially foreclose the real 549 550

551 552

553

TSN, 25 April 1985, pp. 16-17. Philippine Bank of Commerce v. de Vera, No. L-18816, 29 December 1962; 6 SCRA 1029. Medina v. Philippine National Bank, 56 Phil 651. Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. . . . If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary. Art. 1484 [3] of the Civil Code.

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estate mortgage pursuant to a Special Power of Attorney given him by the mortgagor in the contract of mortgage.554 The filing of the Complaint and the Third-Party Complaint to enforce the checks against MOULIC and the VICTORIANO spouses, respectively, is just another means of recovering the unpaid balance of the debt of the VICTORIANOs. In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in due course, STATE, without prejudice to any action for recompense she may pursue against the VICTORIANOs as Third-Party Defendants who had already been declared as in default. WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED and a new one entered declaring private respondent NORA B. MOULIC liable to petitioner STATE INVESTMENT HOUSE, INC., for the value of EBC Checks Nos. 30089658 and 30089660 in the total amount of P100,000.00, P3,000.00 as attorney’s fees, and the costs of suit, without prejudice to any action for recompense she may pursue against the VICTORIANOs as Third-Party Defendants. Costs against private respondent. SO ORDERED. Cruz and Griño-Aquino, JJ., concur. Padilla, J., took no part. Holder in due Course; Holder in good faith and for value Vicente R. De Ocampo & Co., vs. Anita Gatchalian, et al G.R. No. L-15126, November 30, 1961 LABRADOR, J: Appeal from a judgment of the Court of First Instance of Manila, Hon. Conrado M. Velasquez, presiding, sentencing the defendants to pay the plaintiff the sum of P600, with legal interest from September 10, 1953 until paid, and to pay the costs. 554

See Note 14.

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The action is for the recovery of the value of a check for P600 payable to the plaintiff and drawn by defendant Anita C. Gatchalian. The complaint sets forth the check and alleges that plaintiff received it in payment of the indebtedness of one Matilde Gonzales; that upon receipt of said check, plaintiff gave Matilde Gonzales P158.25, the difference between the face value of the check and Matilde Gonzales’ indebtedness. The defendants admit the execution of the check but they allege in their answer, as affirmative defense, that it was issued subject to a condition, which was not fulfilled, and that plaintiff was guilty of gross negligence in not taking steps to protect itself. At the time of the trial, the parties submitted a stipulation of facts, which reads as follows: Plaintiff and defendants through their respective undersigned attorney’s respectfully submit the following Agreed Stipulation of Facts; First. — That on or about 8 September 1953, in the evening, defendant Anita C. Gatchalian who was then interested in looking for a car for the use of her husband and the family, was shown and offered a car by Manuel Gonzales who was accompanied by Emil Fajardo, the latter being personally known to defendant Anita C. Gatchalian; Second. — That Manuel Gonzales represented to defend Anita C. Gatchalian that he was duly authorized by the owner of the car, Ocampo Clinic, to look for a buyer of said car and to negotiate for and accomplish said sale, but which facts were not known to plaintiff; Third. — That defendant Anita C. Gatchalian, finding the price of the car quoted by Manuel Gonzales to her satisfaction, requested Manuel Gonzales to bring the car the day following together with the certificate of registration of the car, so that her husband would be able to see same; that on this request of defendant Anita C. Gatchalian, Manuel Gonzales advised her that the owner of the car will not be willing to give the certificate of registration unless there is a showing that the party interested in the purchase of said car is ready and willing to make such purchase and that for

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this purpose Manuel Gonzales requested defendant Anita C. Gatchalian to give him (Manuel Gonzales) a check which will be shown to the owner as evidence of buyer’s good faith in the intention to purchase the said car, the said check to be for safekeeping only of Manuel Gonzales and to be returned to defendant Anita C. Gatchalian the following day when Manuel Gonzales brings the car and the certificate of registration, but which facts were not known to plaintiff; Fourth. — That relying on these representations of Manuel Gonzales and with his assurance that said check will be only for safekeeping and which will be returned to said defendant the following day when the car and its certificate of registration will be brought by Manuel Gonzales to defendants, but which facts were not known to plaintiff, defendant Anita C. Gatchalian drew and issued a check, Exh. “B”; that Manuel Gonzales executed and issued a receipt for said check, Exh. “1”; Fifth. — That on the failure of Manuel Gonzales to appear the day following and on his failure to bring the car and its certificate of registration and to return the check, Exh. “B”, on the following day as previously agreed upon, defendant Anita C. Gatchalian issued a “Stop Payment Order” on the check, Exh. “3”, with the drawee bank. Said “Stop Payment Order” was issued without previous notice on plaintiff not being know to defendant, Anita C. Gatchalian and who furthermore had no reason to know check was given to plaintiff; Sixth. — That defendants, both or either of them, did not know personally Manuel Gonzales or any member of his family at any time prior to September 1953, but that defendant Hipolito Gatchalian is personally acquainted with V. R. de Ocampo; Seventh. — That defendants, both or either of them, had no arrangements or agreement with the Ocampo Clinic at any time prior to, on or after 9 September 1953 for the hospitalization of the wife of Manuel Gonzales and neither or both of said defendants had assumed, expressly or

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impliedly, with the Ocampo Clinic, the obligation of Manuel Gonzales or his wife for the hospitalization of the latter; Eight. — That defendants, both or either of them, had no obligation or liability, directly or indirectly with the Ocampo Clinic before, or on 9 September 1953; Ninth. — That Manuel Gonzales having received the check Exh. “B” from defendant Anita C. Gatchalian under the representations and conditions herein above specified, delivered the same to the Ocampo Clinic, in payment of the fees and expenses arising from the hospitalization of his wife; Tenth. — That plaintiff for and in consideration of fees and expenses of hospitalization and the release of the wife of Manuel Gonzales from its hospital, accepted said check, applying P441.75 (Exhibit “A”) thereof to payment of said fees and expenses and delivering to Manuel Gonzales the amount of P158.25 (as per receipt, Exhibit “D”) representing the balance on the amount of the said check, Exh. “B”; Eleventh. — That the acts of acceptance of the check and application of its proceeds in the manner specified above were made without previous inquiry by plaintiff from defendants: Twelfth. — That plaintiff filed or caused to be filed with the Office of the City Fiscal of Manila, a complaint for estafa against Manuel Gonzales based on and arising from the acts of said Manuel Gonzales in paying his obligations with plaintiff and receiving the cash balance of the check, Exh. “B” and that said complaint was subsequently dropped; Thirteenth. — That the exhibits mentioned in this stipulation and the other exhibits submitted previously, be considered as parts of this stipulation, without necessity of formally offering them in evidence; WHEREFORE, it is most respectfully prayed that this agreed stipulation of facts be admitted and that the parties hereto be given fifteen days from today within which to submit

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simultaneously their memorandum to discuss the issues of law arising from the facts, reserving to either party the right to submit reply memorandum, if necessary, within ten days from receipt of their main memoranda. (pp. 21-25, Defendant’s Record on Appeal). No other evidence was submitted and upon said stipulation the court rendered the judgment already alluded above. In their appeal defendants-appellants contend that the check is not a negotiable instrument, under the facts and circumstances stated in the stipulation of facts, and that plaintiff is not a holder in due course. In support of the first contention, it is argued that defendant Gatchalian had no intention to transfer her property in the instrument as it was for safekeeping merely and, therefore, there was no delivery required by law (Section 16, Negotiable Instruments Law); that assuming for the sake of argument that delivery was not for safekeeping merely, delivery was conditional and the condition was not fulfilled. In support of the contention that plaintiff-appellee is not a holder in due course, the appellant argues that plaintiff-appellee cannot be a holder in due course because there was no negotiation prior to plaintiff-appellee’s acquiring the possession of the check; that a holder in due course presupposes a prior party from whose hands negotiation proceeded, and in the case at bar, plaintiffappellee is the payee, the maker and the payee being original parties. It is also claimed that the plaintiff-appellee is not a holder in due course because it acquired the check with notice of defect in the title of the holder, Manuel Gonzales, and because under the circumstances stated in the stipulation of facts there were circumstances that brought suspicion about Gonzales’ possession and negotiation, which circumstances should have placed the plaintiff-appellee under the duty, to inquire into the title of the holder. The circumstances are as follows: The check is not a personal check of Manuel Gonzales. (Paragraph Ninth, Stipulation of Facts). Plaintiff could have inquired why a person would use the check of another to pay his own debt. Furthermore, plaintiff had the “means of knowledge” inasmuch as defendant

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Hipolito Gatchalian is personally acquainted with V. R. de Ocampo (Paragraph Sixth, Stipulation of Facts.). The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales and Dr. V. R. de Ocampo (Paragraph Sixth, Stipulation of Facts). The maker is not in any manner obligated to Ocampo Clinic nor to Manuel Gonzales. (Par. 7, Stipulation of Facts.) The check could not have been intended to pay the hospital fees which amounted only to P441.75. The check is in the amount of P600.00, which is in excess of the amount due plaintiff. (Par. 10, Stipulation of Facts). It was necessary for plaintiff to give Manuel Gonzales change in the sum P158.25 (Par. 10, Stipulation of Facts). Since Manuel Gonzales is the party obliged to pay, plaintiff should have been more cautious and wary in accepting a piece of paper and disbursing cold cash. The check is payable to bearer. Hence, any person who holds it should have been subjected to inquiries. EVEN IN A BANK, CHECKS ARE NOT CASHED WITHOUT INQUIRY FROM THE BEARER. The same inquiries should have been made by plaintiff. (Defendants-appellants’ brief, pp. 52-53) Answering the first contention of appellant, counsel for plaintiff-appellee argues that in accordance with the best authority on the Negotiable Instruments Law, plaintiff-appellee may be considered as a holder in due course, citing Brannan’s Negotiable Instruments Law, 6th edition, page 252. On this issue Brannan holds that a payee may be a holder in due course and says that to this effect is the greater weight of authority, thus: Whether the payee may be a holder in due course under the N. I. L., as he was at common law, is a question upon which the courts are in serious conflict. There can be no doubt that a proper interpretation of the act read as a whole leads to the conclusion that a payee may be a holder in due

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course under any circumstance in which he meets the requirements of Sec. 52. The argument of Professor Brannan in an earlier edition of this work has never been successfully answered and is here repeated. Section 191 defines “holder” as the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. Sec. 52 defendants defines a holder in due course as “a holder who has taken the instrument under the following conditions: 1. That it is complete and regular on its face. 2. That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact. 3. That he took it in good faith and for value. 4. 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.” Since “holder”, as defined in sec. 191, includes a payee who is in possession the word holder in the first clause of sec. 52 and in the second subsection may be replaced by the definition in sec. 191 so as to read “a holder in due course is a payee or indorsee who is in possession,” etc. (Brannan’s on Negotiable Instruments Law, 6th ed., p. 543). The first argument of the defendants-appellants, therefore, depends upon whether or not the plaintiff-appellee is a holder in due course. If it is such a holder in due course, it is immaterial that it was the payee and an immediate party to the instrument. The other contention of the plaintiff is that there has been no negotiation of the instrument, because the drawer did not deliver the instrument to Manuel Gonzales with the intention of negotiating the same, or for the purpose of giving effect thereto, for as the stipulation of facts declares the check was to remain in the possession Manuel Gonzales, and was not to be negotiated, but was to serve merely as evidence of good faith of defendants in their desire to purchase the car being sold to them. Admitting that such was the intention of the drawer of the check when she delivered it to Manuel Gonzales, it was no fault of the plaintiffappellee drawee if Manuel Gonzales delivered the check or

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negotiated it. As the check was payable to the plaintiff-appellee, and was entrusted to Manuel Gonzales by Gatchalian, the delivery to Manuel Gonzales was a delivery by the drawer to his own agent; in other words, Manuel Gonzales was the agent of the drawer Anita Gatchalian insofar as the possession of the check is concerned. So, when the agent of drawer Manuel Gonzales negotiated the check with the intention of getting its value from plaintiff-appellee, negotiation took place through no fault of the plaintiff-appellee, unless it can be shown that the plaintiff-appellee should be considered as having notice of the defect in the possession of the holder Manuel Gonzales. Our resolution of this issue leads us to a consideration of the last question presented by the appellants, i.e., whether the plaintiff-appellee may be considered as a holder in due course. Section 52, Negotiable Instruments Law, defines holder in due course, thus: A holder in due course is a holder 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 of it before it was overdue, and without notice that it had 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. The stipulation of facts expressly states that plaintiff-appellee was not aware of the circumstances under which the check was delivered to Manuel Gonzales, but we agree with the defendantsappellants that the circumstances indicated by them in their briefs, such as the fact that appellants had no obligation or liability to the Ocampo Clinic; that the amount of the check did not correspond exactly with the obligation of Matilde Gonzales to Dr. V. R. de

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Ocampo; and that the check had two parallel lines in the upper left hand corner, which practice means that the check could only be deposited but may not be converted into cash — all these circumstances should have put the plaintiff-appellee to inquiry as to the why and wherefore of the possession of the check by Manuel Gonzales, and why he used it to pay Matilde’s account. It was payee’s duty to ascertain from the holder Manuel Gonzales what the nature of the latter’s title to the check was or the nature of his possession. Having failed in this respect, we must declare that plaintiff-appellee was guilty of gross neglect in not finding out the nature of the title and possession of Manuel Gonzales, amounting to legal absence of good faith, and it may not be considered as a holder of the check in good faith. To such effect is the consensus of authority. In order to show that the defendant had “knowledge of such facts that his action in taking the instrument amounted to bad faith,” it is not necessary to prove that the defendant knew the exact fraud that was practiced upon the plaintiff by the defendant’s assignor, it being sufficient to show that the defendant had notice that there was something wrong about his assignor’s acquisition of title, although he did not have notice of the particular wrong that was committed. Paika v. Perry, 225 Mass. 563, 114 N.E. 830. It is sufficient that the buyer of a note had notice or knowledge that the note was in some way tainted with fraud. It is not necessary that he should know the particulars or even the nature of the fraud, since all that is required is knowledge of such facts that his action in taking the note amounted bad faith. Ozark Motor Co. v. Horton (Mo. App.), 196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229 Pac. 391. Liberty bonds stolen from the plaintiff were brought by the thief, a boy fifteen years old, less than five feet tall, immature in appearance and bearing on his face the stamp a degenerate, to the defendants’ clerk for sale. The boy stated that they belonged to his mother. The defendants paid the boy for the bonds without any further inquiry. Held, the plaintiff could recover the value of the bonds. The term ‘bad faith’ does not necessarily involve furtive motives, but means

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bad faith in a commercial sense. The manner in which the defendants conducted their Liberty Loan department provided an easy way for thieves to dispose of their plunder. It was a case of “no questions asked.” Although gross negligence does not of itself constitute bad faith, it is evidence from which bad faith may be inferred. The circumstances thrust the duty upon the defendants to make further inquiries and they had no right to shut their eyes deliberately to obvious facts. Morris v. Muir, 111 Misc. Rep. 739, 181 N.Y. Supp. 913, affd. in memo., 191 App. Div. 947, 181 N.Y. Supp. 945.” (pp. 640-642, Brannan’s Negotiable Instruments Law, 6th ed.). The above considerations would seem sufficient to justify our ruling that plaintiff-appellee should not be allowed to recover the value of the check. Let us now examine the express provisions of the Negotiable Instruments Law pertinent to the matter to find if our ruling conforms thereto. Section 52 (c) provides that a holder in due course is one who takes the instrument “in good faith and for value;” Section 59, “that every holder is deemed prima facie to be a holder in due course;” and Section 52 (d), that in order that one may be a holder in due course it is necessary that “at the time the instrument was negotiated to him “he had no notice of any . . . defect in the title of the person negotiating it;” and lastly Section 59, that every holder is deemed prima facie to be a holder in due course. In the case at bar the rule that a possessor of the instrument is prima facie a holder in due course does not apply because there was a defect in the title of the holder (Manuel Gonzales), because the instrument is not payable to him or to bearer. On the other hand, the stipulation of facts indicated by the appellants in their brief, like the fact that the drawer had no account with the payee; that the holder did not show or tell the payee why he had the check in his possession and why he was using it for the payment of his own personal account — show that holder’s title was defective or suspicious, to say the least. As holder’s title was defective or suspicious, it cannot be stated that the payee acquired the check without knowledge of said defect in holder’s title, and for this reason the presumption that it is a holder in due course or that it acquired the instrument in good faith does not exist. And having presented no evidence that it acquired the check in good

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faith, it (payee) cannot be considered as a holder in due course. In other words, under the circumstances of the case, instead of the presumption that payee was a holder in good faith, the fact is that it acquired possession of the instrument under circumstances that should have put it to inquiry as to the title of the holder who negotiated the check to it. The burden was, therefore, placed upon it to show that notwithstanding the suspicious circumstances, it acquired the check in actual good faith. The rule applicable to the case at bar is that described in the case of Howard National Bank v. Wilson, et al., 96 Vt. 438, 120 At. 889, 894, where the Supreme Court of Vermont made the following disquisition: Prior to the Negotiable Instruments Act, two distinct lines of cases had developed in this country. The first had its origin in Gill v. Cubitt, 3 B. & C. 466, 10 E. L. 215, where the rule was distinctly laid down by the court of King’s Bench that the purchaser of negotiable paper must exercise reasonable prudence and caution, and that, if the circumstances were such as ought to have excited the suspicion of a prudent and careful man, and he made no inquiry, he did not stand in the legal position of a bona fide holder. The rule was adopted by the courts of this country generally and seem to have become a fixed rule in the law of negotiable paper. Later in Goodman v. Harvey, 4 A. & E. 870, 31 E. C. L. 381, the English court abandoned its former position and adopted the rule that nothing short of actual bad faith or fraud in the purchaser would deprive him of the character of a bona fide purchaser and let in defenses existing between prior parties, that no circumstances of suspicion merely, or want of proper caution in the purchaser, would have this effect, and that even gross negligence would have no effect, except as evidence tending to establish bad faith or fraud. Some of the American courts adhered to the earlier rule, while others followed the change inaugurated in Goodman v. Harvey. The question was before this court in Roth v. Colvin, 32 Vt. 125, and, on full consideration of the question, a rule was adopted in harmony with that announced in Gill v. Cubitt, which has been adhered to in subsequent cases, including those cited above. Stated briefly, one line of cases including our own had adopted the test of the reasonably prudent

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man and the other that of actual good faith. It would seem that it was the intent of the Negotiable Instruments Act to harmonize this disagreement by adopting the latter test. That such is the view generally accepted by the courts appears from a recent review of the cases concerning what constitutes notice of defect. Brannan on Neg. Ins. Law, 187201. To effectuate the general purpose of the act to make uniform the Negotiable Instruments Law of those states which should enact it, we are constrained to hold (contrary to the rule adopted in our former decisions) that negligence on the part of the plaintiff, or suspicious circumstances sufficient to put a prudent man on inquiry, will not of themselves prevent a recovery, but are to be considered merely as evidence bearing on the question of bad faith. See G. L. 3113, 3172, where such a course is required in construing other uniform acts. It comes to this then: When the case has taken such shape that the plaintiff is called upon to prove himself a holder in due course to be entitled to recover, he is required to establish the conditions entitling him to standing as such, including good faith in taking the instrument. It devolves upon him to disclose the facts and circumstances attending the transfer, from which good or bad faith in the transaction may be inferred. In the case at bar as the payee acquired the check under circumstances which should have put it to inquiry, why the holder had the check and used it to pay his own personal account, the duty devolved upon it, plaintiff-appellee, to prove that it actually acquired said check in good faith. The stipulation of facts contains no statement of such good faith, hence we are forced to the conclusion that plaintiff payee has not proved that it acquired the check in good faith and may not be deemed a holder in due course thereof. For the foregoing considerations, the decision appealed from should be, as it is hereby, reversed, and the defendants are absolved from the complaint. With costs against plaintiff-appellee. Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and De Leon, JJ., concur.

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Bengzon, C.J., concurs in the result. Non-applicability of lack of notice or infirmity in the instrument, to accommodation party transaction To be sure, as regards an accommodation party (such as STEELWELD), the fourth condition, i.e., lack of notice of any infirmity in the instrument or defect in the title of the persons negotiating it, has no application. This is because Section 29 of the law above quoted preserves the right of recourse of a “holder in due course” against the accommodation party notwithstanding that “such holder, at the time of taking the instrument knew him to be only an accommodation party.” (Stelco Marketing Corporation vs., Court of Appeals and Steelweld Corporation of the Philippines, Inc., G.R. No. 96160, June 17, 1992, [Narvasa, C.J:], citing Agbayani, Commercial Laws of the Philippines, 1975 ed., Vol. I, citing Prudential Bank and Trust Co. vs. Ramesh Trading Co., C.A. 32908-R, Sept. 10, 1964, bold supplied) Financing Company, not a holder in good faith as to the buyer In the case of Consolidated Plywood Industries, Inc. et al vs. IFC Leasing and Acceptance Corporation555, the High Court held, subscribing to the view of Campos and Campos, that: “a financing company is not a holder in good faith as to the buyer, to wit: In installment sales, the buyer usually issues a note payable to the seller to cover the purchase price. Many times, in pursuance of a previous arrangement with the seller, a finance company pays the full price and the note is indorsed to it, subrogating it to the right to collect the price from the buyer, with interest. With the increasing frequency of installment buying in this country, it is most probable that the tendency of the courts in United States to protect the buyer against the finance company will, the finance company will be subject to the defense of failure of consideration and cannot recover the purchase price from the buyer. As against the argument that such a rule would seriously affect 555

G.R. No. 72593, April 30, 1987.

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“a certain mode of transacting business adopted throughout the State,” a court in one case stated: It may be that our holding here will require some changes in business methods and will impose a greater burden on the finance companies. We think the buyer—Mr. & Mrs. General Public –should have some protection somewhere along the line. We believe the finance company is better able to bear the risk of the dealer’s insolvency than the buyer and in a far better position to protect his interests against unscrupulous and insolvent dealers… If this opinion imposes great burdens on finance companies it is a potent argument in favor of a rule which will afford public protection to the general public buying against unscrupulous dealers in personal property…(Mutual Finance Co. v. Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953]) (Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law, Third Edition, p. 128). In the case of Commercial Credit Corporation v. Orange County Machine Works (34 Cal. 2d 766) involving similar facts, it was held that in a very real sense, the finance company was a moving force in the transaction from its very inception and acted as a party to it. When a finance company actively participates in a transaction of this type from its inception, it cannot be regarded as a holder in due course of the note given in the transaction. In like manner, therefore, even assuming that the subject promissory note is negotiable, the respondent, a financing company which actively participated in the sale on installment of the two subject Allis Crawler tractors, cannot be regarded as a holder in due course of said note. If follows that the respondent’s rights under the promissory note involved in this case are subject to all defenses that the petitioner have against the seller-assignor, Industrial Products Marketing. For Section 58 of the Negotiable Instruments Law provides that “in the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable…”

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Whether or not payee is deemed a holder in due course On this note, the ruling of the Supreme Court in the case of Prudencio vs. Court of Appeals, G.R. No. L-34539, July 14, 1986, is controlling, wherein it was held that: “[a]lthough as a general rule, a payee may be considered a holder in due course we think that such a rule cannot apply with respect to the respondent PNB. Not only was PNB an immediate party or in privy to the promissory note, that is, it had dealt directly with the petitioners knowing fully well that the latter only signed as accommodation makers but more important, it was the Deed of Assignment executed by the Construction Company in favor of PNB which principally moved the petitioners to sign the promissory note also in favor of PNB. Petitioners were made to believe and on that belief entered into the agreement that no other conditions would alter the terms thereof and yet, PNB altered the same…From the foregoing circumstances, PNB cannot be regarded as having acted in good faith which is also one of the requisites of a holder in due course under Section 52 of the Negotiable Instruments Law. The PNB knew that the promissory note which it took from the accommodation makers was signed by the latter because of full reliance of the Deed of Assignment, which, PNB had no intention to comply with strictly…We, therefore, hold that respondent PNB is not a holder in due course.” In those cases where a payee was considered a holder in due course, such payee either acquired the note from another holder or has not directly dealt with the maker thereof. As was held in the case of Bank of Commerce and Savings v. Randell (186 NorthWestern Reporter 71) (emphasis supplied): We conclude, therefore, that a payee who receives a negotiable promissory note, in good faith, for value, before maturity, and without any notice of any infirmity, from a holder, not the maker to whom it was negotiated as a completed instrument, is a holder in due course within the purview of [a] Negotiable Instruments Law, so as to preclude the defense of fraud and failure of consideration between the maker and the holder to whom the instrument, was delivered. (supra) (emphasis supplied)

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Similarly, in the case of Stone v. Goldberg & Lewis (60 Southern Reporter 748) on rehearing and quoting Daniel on Negotiable Instruments, it was held: It is a general principle of the law merchant that, as between the immediate parties to a negotiable instrument-the parties between whom there is a privity-the consideration may be inquired into; and as to them the only superiority of a bill or note over other unsealed evidence of debt is that it prima facie imports a consideration. (supra) 2000 Bar Question: Can the payee in a promissory note be a “holder in due course” within the meaning of the Negotiable Instruments Law (Act 2031) Explain your answer. (2%) ANSWER: Yes. Provided, such payee acquired the note from another holder or has not directly dealt with the maker thereof. Sec. 191, Act 2031, defines a holder as the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof, and in Sec. 59, every holder is deemed prima facie to be a holder in due course. Sec. 53. When person not deemed holder in due course. Where an instrument payable on demand is negotiated on an unreasonable length of time after its issue, the holder is not deemed a holder in due course. Illustrative cases: “Sixteen months is not an unreasonable time where payments of monthly interest were made to the payee and also to plaintiff after he took the instrument.” (Brannan, page 59, citing McLean v. Bryer, 24 R.I. 599, 54 Atl. 378, S.C. sec. 64-1.) “Five days between the issue and negotiation of a cashier’s check is not an unreasonable time, such a check, whether certified or not, being a bill of exchange payable on demand.” (Mfg. Co. v. Summers, 143 N.C. 102, 55 S.E. 522, S.C. sec. 59, cited in Brannan, page 59)

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“A check dated and issued on one day and negotiated at noon the next day is not overdue so as to convey notice to the indorsee of its illegality or of its previous dishonor.” (Ibid, citing Matlock v. Scheuerman, 51 Oregon, 49, 93 Pac. 823, 17 L.R.S. (N.S.) 747, S.C. secs. 25, 56, 186.) Sec. 54. Notice before full amount is paid. - Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the extent of the amount therefore paid by him. Illustrative case: “Where a bank discounted a note and placed the proceeds to the credit of the debtor, quaere whether the mere fact that the note was not paid when due is such notice of defect of title of the depositor as to make the subsequent payment of the balance of the proceeds a wrongful payment.” (Albany County Bank v. People’s Ice Co., 92 Ap. Div. 47, 86 N.Y. Supp. 773, Ibid) Sec. 55. When title defective. - The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud. Notes: Breach must be committed by the perpetrator Pursuant to this provision, it is vital to show that the negotiation is made by the perpetrator in breach of faith amounting to fraud. The person negotiating must have gone beyond the authority given by his principal. If the principal could prove that there was no negligence in the performance of his duties, he may set up the personal defense to escape liability and recover from other parties who, through their own negligence, allowed the commission of the crime. (Philippine Commercial International

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Bank vs. Court of Appeals and Ford Philippines, Inc., G.R. Nos. 121413, 121479, 128604, January 29, 2011, [Quisumbing, J.]) Reason for the Rule Justice Street, in his dissent in the case of Asia Banking Corporation vs. Ten Sen Guan, G.R. No. L-19397, February 16, 1923, explained that “[t]he reason for this statutory rule given by the courts in innumerable decisions is that the guilty maker of an instrument vitiated by fraud or illegality will naturally seek to put it in the hands of some other person in order to cut off the defense to which the instrument is subject, and a presumption arises against the bona fides of the transfer. The law therefore requires the holder of such paper to manifest the most complete can do and show exactly the circumstances under which the paper was acquired. This fraud having been set up in the defendant’s answer and established by the proof, it became incumbent upon the plaintiff in this case to prove that it occupies the position of a bona fide purchaser of said draft for value and without notice.” Illustrative Cases: “The title of the payee of a note is defective where the only consideration is accrued interest on a loan previously made at an unlawful rate of interest.” (Keene v. Behan, 40 Wash. 505, 82 Pac. 884, cited in Brannan. Page 60) “If one of the signatures of several makers is obtained by fraud so as to make the title of the payee defective as to him, it will be defective as to the other makers also, since the equality of burden is thus disturbed and increased as to them.” (Hodge v. Smith, 130 Wis. 326, 110 N.W. 192, S.C. secs. 16, 52-3, cited in Brannan, page 60). “But a holder in due course can recover against those who signed.” (First Nat. Bank of Durand v. Shaw, 157 Mich. 192, 121 N.W. 811, ibid) “The fraud consisted in the fact that the signatures of some of the makers were forged.” (Ibid) “X owed plaintiff. In order to provide funds to pay the debt, defendant at X’s request drew a check payable to X or order, which X was to pay into his bank to meet his check for the same amount to plaintiff. X indorsed the defendant’s check, paid it into

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his bank and gave his own check to plaintiff. Defendant changed his mind and stopped his check, whereupon X stopped his check and indorsed and delivered defendant’s check to plaintiff who had notice of its dishonor. Held, that as the check was an accommodation bill and plaintiff, even assuming that he gave consideration for it, not being a holder in due course, since he took the check with notice that it had been dishonored, took it subject to any defect of title at the time of dishonor, and as X had negotiated it to plaintiff in breach of faith, there was a defect of title attaching to it and the plaintiff could not recover.” (Hornby v. McLaren (C.A., March 31, 1908). 24 T.L. Rep. 494, cited in Brannan, page 60) Sec. 56. What constitutes notice of defect. - To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith. Notes: This provision is self-explanatory. That in order to constitute a notice of defect in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith. The same is a matter of evidentiary fact which must be established by actual knowledge. Sec. 57. Rights of holder in due course. - A holder in due course holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon. Notes: A holder in due course, as established in Sec. 52, has the right to:

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a) Hold the bill or note free from any defect of title of prior parties, b) Be free from defenses available to prior parties, and c) Enforce payment of the instrument for the full amount thereof against parties liable thereon. Right to hold the bill or note free from any defect of title of prior parties A holder in due course holds the instrument free from any defect of title of prior parties; thus, they acquire better title over the bill or note than their predecessors in interest. It does not matter if the title of the previous holder is tainted with irregularities, so long as the holder qualifies as a holder in due course, he ipso facto acquires a valid and effectual title over the instrument and supersedes any defect of title of prior parties. Be free from defenses available to prior parties As a consequence of the right to hold the instrument free from any defect of title of prior parties, a holder in due course is also free from any defenses available to prior parties. So that the maker of a promissory note cannot raise a defense of absence of consideration, because it only affects the title of the transferor, but never the validity and enforceability of the note when it is acquired by a holder in due course. Enforce payment of the instrument for the full amount thereof against parties liable thereon Ultimately, as indicated under Sec. 51, the holder has the right to sue for the payment of the instrument. Corollary, the holder in due course has the right to enforce payment of the instrument for the full amount thereof against parties liable thereon. In as much as the holder has the right to hold the instrument free from any defect of title of prior parties, and free from any defenses available against them, as a consequence, he has the absolute right to enforce payment to its full amount. 2011 Bar Question: A holder in due course holds the instrument free from any defect of title of prior parties and free from defenses

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available to prior parties among themselves. An example of such a defense is – A. fraud in inducement. B. duress amounting to forgery. C. fraud in esse contractus. D. alteration. Sec. 58. When subject to original defense. - In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were nonnegotiable. But a holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter. Notes: Owner, though not himself bona fide holder, acquires title of his transferor A transferee can generally get as good a title as his transferrer possesses, and it is, therefore, a settled principle that if the party who transferred the instrument to the holder acquired the note before maturity, and was himself unaffected by any infirmity in it, the holder acquires as good a title as he held, although it were overdue and dishonored at the time of transfer.556 Thus, it has been held that in an action by a second indorsee of a bill given for a smuggling debt, he could recover against the acceptor, although he took it overdue, his indorser having acquired it bona fide, without notice before it fell due.557 And, therefore, even if he have notice that there was fraud in the inception of the paper, or that it was lost or stolen, or that the consideration has failed between some anterior parties, or the paper be overdue and dishonored, he is, nevertheless, entitled to recover, provided his immediate indorser was a bona fide holder for value unaffected by any of these defenses. As soon as the paper comes into the hands of a holder, unaffected by any defect, its character as a 556 557

Woodman v. Churchill, 52 Me. 58; Bassett v. Avery, 15 Ohio St. 209 Chalmers v. Lanion, 1 Campb. 383

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negotiable security is established; and the power of transferring it to others, with the same immunity which attached in his own hands, is incident to his legal right, and necessary to sustain the character and value of the instrument as property, and to protect the bona fide holder in its enjoyment. To prohibit him from selling as good a right and title as himself has, would destroy the very object for which they are secured to him—would indeed be paradoxical. And it has been justly said that this doctrine “is indispensable to the security and circulation of negotiable instruments, and is founded on the most comprehensive and liberal principles of public policy.558 But this rule is subject to the single exception that if the note were invalid as between maker and payee, the payee could not himself by purchase from a bona fide holder become a successor to his rights; it not being essential to such bona fide holder’s protection to extend the principle so far. 559 (Daniel, Elements of the Law of Negotiable Instruments, pages 124-125) Illustrative Cases: “A payee whose title is defective cannot better it by selling the instrument to a holder in due course and buying it back again.” (Andrews v. Robertson, 111 Wis. 334, 87 N.W. 190, 87 Am. St. Rep. 870, cited in Brannan, page 68) “A note, made or indorsed by defendants for the accommodation of a third person, was delivered to an agent to be negotiated and the proceeds paid to such third person. The agent sold the note to a bona fide purchaser but appropriated the proceeds to his own use. At maturity the note was protested for non-payment, and the agent paid it and afterwards sold it to the plaintiff, who had notice of the dishonor and agreed with the agent to extend the time. Held, that the agent having fraudulently sold the note could not acquire a good title by payment to or purchase from the bona fide purchaser and could not give a good title to plaintiff.” (Comstock v. Buckley, (Wis.) 124 N.W. 414, S.C. sec. 29, ibid)

558

559

Scotland County v. Hill, 132 U.S. 117; Porter v. Pittsburg Steel Co., 122 U.S. 267 Todd v. Wick, 38 Ohio St. 387; Sawyer v. Wiswell, 9 Allen, 42

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Sec. 59. Who is deemed holder in due course. - Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in due course. But the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title. Notes: Meaning of term “bona fide holder;” presumption Two presumptions may be considered as settled principles of commercial law—principles which have been, for the most part, reiterated by the Supreme Court of the United States, and prevail throughout the Union: First. That to entitled one to the rights and protection of a purchase of holder of a negotiable instrument, as set out in the preceding paragraphs of this chapter, the paper must have been acquired (1) bona fide, (2) for a valuable consideration, (3) in the usual and ordinary course of business, (4) before maturity, or rather when it was not overdue, and (5) without notice of facts which impeach its validity as between antecedent parties.560 Second. The mere possession of a negotiable instrument, produced in evidence by the indorsee, or by the assignee where no indorsement is necessary, imports prima facie that he acquired it bona fide for full value, in the usual course of business, before maturity, and without notice of any circumstance impeaching its validity; and that he is the owner thereof, entitled to recover the full amount against all prior parties. In other words, the production of the instrument and proof that it is genuine (where indeed such proof is necessary), prima facie establishes his case; and he may there rest it. 561 (Daniel, Elements of the Law of Negotiable Instruments, page 123) Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable instrument is a holder 560 561

Daniel on Negotiable Instruments, 769a Daniel on Negotiable Instruments, 812, and cases cited

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in due course. Consequently, the burden of proving that [the holder] is not a holder in due course lies in the person who disputes the presumption. (State Investment House vs. Court of Appeals and Nora B. Moulic, G.R. No. 101163, January 11, 1993, [Bellosillo, J:], bold supplied) The presumption expressed in [this] section arise only in favor of a person who is a holder in the sense defined in Section 191 of the same Law, that is, a payee or indorsee who is in possession of the draft, or the bearer thereof. Under this definition, in order to be a holder, one must be in possession of the note or the bearer thereof. (Night & Day Bank vs. Roseenbaum, 191 Mo. App., 559, 574.) If this action had been instituted by the bank itself, the presumption that the bank was a holder in due course would have arisen from the tenor of the draft and the fact that it was in the bank’s possession; but when the instrument passed out of the possession of the bank and into the possession of the present plaintiff, no presumption arises as to the character in which the bank held the paper. The bank’s relation to the instrument became past history when it delivered the document to the plaintiff; and it was incumbent upon the plaintiff in this action to show that the bank had in fact acquired the instrument for value and under such conditions as would constitute it a holder in due course. In the entire absence of proof on this point, the action must fail. (Fossum vs. Hermanos, G.R. No. L-19461, March 28, 1923, [Street, J:], bold supplied) The defendant being the holder of the instrument, he is also unquestionably the holder in due course. In the first place, in order to avoid doubts with respect to this matter which might require the introduction of evidence, the Act before mentioned has provided, in section 59, that every holder is deemed prima facie to be a holder in due course, and such is the weight it gives to this presumption and to the consequences derived therefrom, that it imposes upon the holder the burden to prove that he or some person under whom he claims acquired the title in due course, only when it is shown that the title of any person who has negotiated the instrument was defective. This rule, however, pursuant to the said section, does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title, in which case the defendant Serrano is not included, because, in the first place, he was not bound on the

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instrument prior to the acquisition of the title by the plaintiff, but it was the maker of the promissory note who was bound on the instrument executed in favor of the defendant or indorser prior to the acquisition of the title by the plaintiff, and, in the second place, it does not appear, nor was it proved, as will be seen hereinafter, that the title in question was defective. (concurring opinion, Justice Torres, in the case of Maulini, et al vs. Serrano, December 16, 1914.) “This section is declaratory of the common law. The Negotiable Instrument Act is in the main a codification of the common law rules. Where it lays down a new rule it controls; but where its language is consistent with the rule previously recognized, it should be construed as simply declaratory of the law as it was before the adoption of the Act.” (Cambell v. Fourth Nat. Bank (Ky.), 126 S.W. 114, S.C. sec. 25, cited in Brannan, page 69) Illustrative Cases: “In an action by an indorsee against the maker, where defendant admits that the note was made for a valuable consideration, but denies, on information and belief, the indorsements, it was sufficient for the plaintiff to introduce the note in evidence with the indorsements thereon.” (Beck v. Maller, 131 App. Div. 243, 115 N.Y. Supp. 596, Ibid) “When defendant has proved fraud, the further inquiry is not whether defendant has shown that plaintiff took with notice of the fraud, but whether plaintiff had shown that he took in good faith and without notice.” (Cox v. Cline, 139 Iowa 128, 117 N.W. 48, Ibid) “Where the evidence establishes that the title of the party negotiating the instrument was defective, the holder claiming to be a purchaser in good faith for value and without notice must make his claim good by the greater weight of evidence.” (Mfg. Co. v. Summers, 143 N.C. 102, 55 S.E. 522, S,C. sec. 53; other American cases omitted, Ibid) “Proof that plaintiff gave value before maturity is not enough to show good faith.” (Natl Bank v. Foley, 54 Misc. R. 126, 103 N.Y. Supp. 553, S.C. secs. 25, 52-3, Ibid)

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Bona fides essential The holder, in order to be entitled to protection against offsets and equities and defenses based upon frauds, pleaded by prior parties, must have acquired the paper in good faith from his predecessor. “Fraud cuts down everything,”562 and although the holder may pay value, yet, if his acquisition of the paper be in any respect fraudulent—as where it is made or transferred to give him preference over other parties to a compromise of creditors— he cannot claim the position of a bona fide holder.563 In pleading, mala fides must be distinctly alleged, and an allegation that the party is not the bona fide holder is not sufficient.564 It is the bona fides of the holder alone that is to be considered, not that of his transferrer, and the fact that the payee had interest to part with the paper, is not a circumstance which affects the rights of his indorsee.565 (Ibid, 142)

V. LIABILITIES OF PARTIES Defenses; Classification The defenses that may be interposed to an action upon a negotiable contract may be grouped or arranged into five classes: 1. That the defendant did not make the instrument. a. Forgery (Sec. 23); b. Material Alterations (Sec. 125) 2. That the contract sued upon is in law unenforceable a. Incapacity of the party; b. Want, failure, or illegality of the consideration c. That the paper was obtained by fraud; d. That it was obtained by duress 3. That the plaintiff is not entitled to sue thereon a. That the legal title to the instrument is not vested in the plaintiff

562 563 564 565

Rogers v. Hadley, 32 L.J. Exch. 248 Daniel on Negotiable Instruments, 193 et seq Uther v. Rich, 10 Ad & El 784 Helmer v. Krolick, 36 Mich. 373

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4. That the obligation created has been discharged: a. By payment; b. By bankruptcy, or assignment under insolvent laws; c. By accord and satisfaction; d. By release; e. By covenant not to sue; f.

By substitution of another obligation;

g. By set-off; h. Under what circumstances a surety or guarantor is discharged when the principal is not 5. That the action upon the instrument is barred by statute of limitations Defenses available against a bona fide holder for value, and without notice, as against any other party They are those which go to show that the instrument was absolutely and utterly void, and not merely voidable 1. By reason of the incapacity of the party assuming to contract; 2. By reason of some positive interdiction of law; or 3. By reason of the want of consent of the party sought to be bound to the particular contract.566 Real and Personal Defenses Mr. Norton, in his treatise on the subject of Bills and Notes, adopts the classification of Professor Ames in his work on that subject, and classifies defenses into real and personal,—grouping all defenses that are good against a bona fide holder for value under the class described by him as “real defenses,” and all the defenses good as between immediate parties, but not available against a bona fide holder, he groups under class denominated as “personal defenses.” He thus defines the two classes of defenses:

566

Daniel on Negotiable Instruments, 806

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“(a) Real—Or those that attach to the instrument itself, and are good against all persons. “(b) Personal—Or those that grow out of the agreement or conduct of a particular person in regard to the instrument, which renders it inequitable for him, though holding the legal title, to enforce it against the defendant, but which are not available against bona fide purchasers for value without notice.”567 (Daniel, Elements of the Law of Negotiable Instruments, page 142) In general, this classification shows that a bona fide holder can recover when the defense interposed is a personal defense, but cannot recover when the defense is real. In the case of immediate parties, all defenses are available, because each independent contract is governed by the general laws of contract. In the case of remote parties, where the holder enforcing the instrument is a purchaser for value without notice, a personal defense cannot be successfully interposed, and only the real defenses are allowed by the courts.568 With real defenses the right sought to be enforced has never existed, or has ceased to exist. They are called “real defenses” because they attach to the res or the thing, irrespective of the conduct or agreement of the parties to it. It cannot be enforced by the holder because there is no contract to enforce. Personal defenses, in contrast to this, are founded upon the act, conduct, or agreement of the parties with reference to the instrument.569 Personal Defenses: Lack or Failure of Consideration—is essentially a breach of contract. It exists in a commercial paper where a maker or drawer of an instrument issues it to the payee in any case where the payee does not give “consideration” under ordinary contract law principles. In such situations “want of consideration” can be asserted by the maker or drawer against an ordinary holder. To illustrate: D, a distant relative of P, drafts a check and makes a gift of it to P so that P can attend college. P negotiates the check 567 568 569

Norton on Bills and Notes, 216 Norton on Bills and Notes, page 217 Id.

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to H. P does not go to college, and D, in disgust, stops payment of the check. If H sues D on the instrument, D can successfully assert the defense of “want of consideration”—but only if H fails to qualify as an HDC (holder in due course).570 Fraud in the inducement—where a person signs a negotiable instrument (knowing it to be such) has been induced to sign by some intentional misrepresentation of the other party.571 For instance, X agrees to buy Y’s car for Php 120,000.00 after the assurance that the latter brought it brand-new and is only eight months old, X issues a check for Php 70,000.00 as downpayment and a post-dated check for Php 50,000.00, thereafter he learned that said car was brought by Y second-hand from a junkshop for only Php 20,000.00. Y’s intentional misrepresentation constitutes fraud in the inducement, and X can assert his defense against Y and against any subsequent holder who does not qualify as an HDC.572 Illegality—like the general defense of fraud, some types of illegality constitute personal defenses and other constitute real defenses. This is so because although certain transactions are illegal (prohibited) under state statutes or ordinances, the applicable statutes do not always provide that the prohibited transactions are void. If a statute voids the transaction, the defense is real; if it does not, the defense is merely personal.573 Nondelivery of an instrument—sometimes and instrument finds its way into the hands of a subsequent holder through loss or theft. In such a case the maker or drawer of the instrument has available the defense of nondelivery. To illustrate: M is the maker of a bearer instrument that is stolen from her home by X and negotiated to H. If H is merely an ordinary holder, he takes the instrument subject to the defense of nondelivery and therefore cannot enforce it against M.574 Unauthorized completion of an incomplete but delivered instrument—In Sec. 14 of Act 2031, where an instrument is lacking in any material particular or where a person placed his 570 571 572 573 574

Business Law, Howell, page 455-456 with notation Id. Id., page 457 Id. Id.

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signature on a blank paper, the holder thereof has the prima facie authority to fill it up, strictly in accordance with the authority granted and within a reasonable time. Thus, where said holder filled up the blanks in the instrument but not in accordance with the authority given, this, in effect can be set up as a defense, however, the same does not apply against a holder in due course. Prior payment—If for instance the bill or note is already paid by the person primarily liable, but, for some reason the instrument is not physically surrendered to him, and said instrument is further negotiated to another person, the maker or named drawee, as the case may be, may set-up the defense of prior payment, which already extinguishes their liability on the instrument. Thus, it is a personal defense as it can be availed only by the person who already made the prior payment, but not by the person who subsequently negotiated it to the subsequent holder. When instrument which is materially altered and is in the hands of a holder in due course not a party to the alteration— In such a case, the holder in due course may enforce the payment of the instrument, but only up to the extent of its original tenor, before it was materially altered. Real Defenses: Forgery—In Sec. 23, Act 2031, where the signature of a person is forged or made without the authority of the person it purports to be, it is wholly inoperative and no right to retain the instrument, or give a discharge thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. Fraud in the execution (Fraud in factum)—in this case, a person is caused to sign a negotiable instrument under circumstances in which he or she honestly and reasonably believes it to be something other than a negotiable instrument.575 Material Alteration (Deliberate)—Sec. 124, Act 2031 states that where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against 575

Business Law, Howell, page 459

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

a party who has himself made, authorized, or assented to the alteration and subsequent holders. Illegality (When declared by the statute)—When a law is passed declaring void any contract on which the negotiable instrument may be based, it will in effect invalidate any negotiable instrument issued as consideration for such an illegal act. It should be taken into consideration that the freedom to enter into contracts and conduct trade and commerce is always subject to the qualification that the same should not be contrary to any law, duly passed and enacted by the State. Incapacity—where the maker or drawer is a minor, or is insane, or his capacity to act is prevented by civil interdiction, strictly speaking, he cannot act with any valid or legal effect, thus, if a minor makes a promissory note, his minority can be raised as a real defense, as being a minor, he cannot enter into contracts, much more issue a promissory note. The minor cannot be held liable for the note he issued, but his parents or guardian may be held subsidiarily liable for civil indemnity, for they exercise parental authority over him. 2011 Bar Question: P sold to M a pair of gecko (tuko) for Php50,000.00. M then issued a promissory note to P promising to pay the money within 90 days. Unknown to P and M, a law was passed a month before the sale that prohibits and declares void any agreement to sell gecko in the country. If X acquired the note in good faith and for value, may he enforce payment on it? A. No, since the law declared void the contract on which the promissory note was founded. B. No, since it was not X who bought the gecko. C. Yes, since he is a holder in due course of a note which is distinct from the sale of gecko. D. Yes, since he is a holder in due course and P and M were not aware of the law that prohibited the sale of gecko.

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Types of Fraud Two kinds of fraud are recognized in the area of commercial paper; one creates a personal defense and the other a real defense. Fraud in the inducement falls into the personal category. It arises where a person who signs a negotiable instrument (knowing it to be such) has been induced to sign by some misrepresentation from the other party.576 Unlike fraud in the inducement, in the case of Fraud in the execution (fraud in factum) a person is caused to sign a negotiable instrument under circumstances in which he or she honestly and reasonably believes it to be something other than a negotiable instrument.577 Sec. 60. Liability of maker. - The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse. Notes: Liabilities and warranties of the maker By making the note, the maker— a) Engages that he will pay it according to the tenor of the note; b) Admits the existence of the payee; and c) Admits the payee’s capacity to indorse. In effect, the maker is estopped or precluded from making a stand in contrary to the foregoing. Sec. 61. Liability of drawer. - The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in 576 577

Business Law, Howell, page 457 Id., with notations, page 459

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

the instrument an express stipulation negativing or limiting his own liability to the holder. Notes: Liabilities and warranties of the drawer The drawer, by drawing the bill— a) Admits the existence of the payee; b) Admits the payees capacity to indorser; He further engages that— c) On due presentment, the instrument will be accepted or paid, or both, according to its tenor; and d) If it be dishonored and the necessary proceedings on dishonor be duly take, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. Limitation of liability The drawer may insert in the written instrument an express stipulation negativing or limiting his own liability to the holder. Liability of drawer before acceptance The drawer of a bill undertakes that when it is presented to the drawee be will accept it; and by acceptance is meant an undertaking on the acceptor’s part to pay the bill according to its tenor.578 Until the bill has been accepted, the drawer is the primary debtor, and his liability is contingent and conditioned upon a strict compliance with the law as to presentment of the bill for acceptance (if the bill be of such a character that it is necessary to present it for acceptance), and due protest and notice of dishonor. After acceptance, the drawer becomes secondarily liable, and his position is that of the first indorser upon a promissory note.579 (Daniel, Elements of the Law of Negotiable Instruments, page 172) (emphasis supplied) 578 579

Story on Bills, 272; Cox v. National Bank, 100 U.S. 712 Daniel on Negotiable Instruments, 479

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Relation of drawee to bill before acceptance Until he has accepted the bill, so entirely is the drawee a stranger to it, that he may himself discount it. And he may then transfer it as the bona fide holder to another, who may sue and charge the drawer.580 He may discount it either for the drawer, the payee, or an indorsee. “If the acceptor discounts the bill for the drawer, and then indorses it away, the drawer will be liable upon it to the holder, and the transfer by the drawer to the acceptor will operate as an indorsement, although, at the time, the drawer does not intend to transfer by way of indorsement, being under the impression that the bill is discharged by coming into the hands of the acceptor. Nor will the payment of the amount, less the discount, be deemed a payment of the bill by the acceptor.”581 (Daniel, Elements of the Law of Negotiable Instruments, pages 172-173) The effect of acceptance of a bill Is to constitute the acceptor the principal debtor.582 The bill becomes by the acceptance very similar to a promissory note— the acceptance being the promissory, and the drawer standing in the relation of an indorser. (Ibid) But in respect to the acceptor’s position with regard to the drawer, and the amount for which he renders himself liable by accepting the bill, it is well to observe that the acceptance does not entitle the acceptor to charge it in account against the drawer from the date of acceptance, unless he pays the whole amount at the time, or discharges the drawer from all responsibility.583 (Ibid) Like the maker of a note, the acceptor is bound by all the terms of the instrument, and if it contains a stipulation for payment of attorney’s fees, he is bound by it.584 (Ibid) If the acceptance be for the drawer’s accommodation, the acceptor does not thereby become entitled to sue the drawer upon 580 581 582

583 584

Desha v. Stewart, 6 Ala. 852; Swope v. Ross, 40 Pa. St. 186 Swope v. Ross, 40 Pa. St. 186 Heutematte v. Morris, 101 N.Y. 63; Capital City Ins. Co. v. Quinn, 73 Ala. 560 Bracton v. Willing, 4 Call, 288 Smith v. Muncie Nat. Bank, 29 Ind. 158

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

the bill; but when he has paid the bill, and not before, he may recover back the amount from the drawer in an action for money had and received.585 If the acceptor put the bill in circulation, he is estopped from showing it was then paid.586 (Ibid) 2011 Bar Question: D draws a bill of exchange that states: “One month from date, pay to B or his order Php100,000.00. Signed, D.” The drawee named in the bill is E. B negotiated the bill to M, M to N, N to O, and O to P. Due to non-acceptance and after proceedings for dishonor were made, P asked O to pay, which O did. From whom may O recover? A. B, being the payee B. N, as indorser to O C. E, being the drawee D. D, being the drawer Sec. 62. Liability of acceptor. - The acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance and admits: (a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee and his then capacity to indorse. Notes: Comment of Dean James Barr Ames587: “Since an acceptor, by section 62, engages to pay the bill “according to the tenor of his acceptance,” he must pay to the innocent payee or subsequent holder the amount called for by the amount ordered by the drawer. A bank certifying a raised check is in the 585 586 587

Christian v. Keen, 80 Va. 377; Martin v. Muncy, 40 La. Ann. 190 Hinton v. Bank of Columbus, 9 Port. (Ala.) 463 Dean, Harvard Law School, cited in The Negotiable Instruments Law Annotated, by Joseph Doddridge Brannan, Second Edition, 1911, page 74, citing 4 Harvard Law Review, 306, 307, bold supplied.

351

same case, since section 187 assimilates a certification to an acceptance. If an acceptor or certifying bank must honor his acceptance or certification in such a case, a fortiori a drawee who pays a raised bill or check, without acceptance or certification, should not recover the money paid from an innocent holder. These are changes for the better, and, so far as adopted, bring the law of this country into harmony with the law of nearly, if not indeed all, of the European States.” “Defendant bank, without negligence cashed a forged check on plaintiff bank, indorsed it, “Indorsement guaranteed. Pay any national or state bank or order,” and sent it for collection and it was paid by plaintiff, who upon discovery of the forgery, sued to recover the money. Held, that plaintiff could not recover; that section 62 was intended to adopt the doctrine of Price v. Neal, 3 Burrow 1354, and applied as well to payment as to an acceptance by the drawee of a forged bill or check. Also, that the indorsement of the defendant bank was not a guaranty to the drawee, but only to indorsees, Semble, that such an indorsement is only for collection and does not transfer title to an indorsee.” (National Bank of Rolla v. First Nat. Bank of Salem (Mo. App.) 125 S.W. 513; National Bank of Commerce v. Mechanics’ Am. Nat. Bank (Mo. App.), 127 S.W. 429 accord, cited in Brannan, page 74) Section 62 does not apply to instruments acquired without consideration “Some unknown person forged a check on plaintiff bank and paid the same to the city to discharge a street assessment on defendant’s land, which defendants subsequently sold. The plaintiff bank having paid the check and charged the account of its depositor, upon discovery of the forgery, credited the sum back to the depositor and sued defendants for the amount. Held, that section 62, N.I.L. has no application in behalf of one who has acquired the paper without consideration. That the plaintiff was entitled to be subrogated to the lien of the city as against the proceeds of the sale of the land in the hands of defendants, if it should appear upon a new trial that the payment of the assessments were purely gratuitous and not in discharge of a real or supposed obligation on the part of the depositor or the unknown forger.” (Title Guarantee & Trust Co., v. Haven, 196 N.Y. 487, 89 N.E. 1082, cited in Brannan, page 74)

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Diligence required of the collecting bank The case of Banco de Oro vs. Equitable Bank588, citing the case of American Exchange National Bank vs. Yorkville Bank589, held that: “the drawer owes no duty of diligence to the collecting bank (one who had accepted an altered check and had paid over the proceeds to the depositor) except of seasonably discovering the alteration by a comparison of its returned checks and check stubs or other equivalent record, and to inform the drawee thereof.” In this case it was further held that: “The real and underlying reasons why negligence of the drawer constitutes no defense to the collecting bank are that there is no privity between the drawer and the collecting bank (Corn Exchange Bank vs. Nassau Bank, 204 N.Y.S. 80) and the drawer owe to that bank no duty of vigilance (New York Produce Exchange Bank vs. Twelfth Ward Bank, 204 N.Y.S. 54) and no act of the collecting bank is induced by any act or representation or admission of the drawer (Seaboard National Bank vs. Bank of America (supra) and it follows that negligence on the part of the drawer cannot create any liability from it to the collecting bank, and the drawer thus is neither a necessary nor a proper party to an action by the drawee bank against such bank. It is quite true that depositors in banks are under the obligation of examining their passbooks and returned vouchers as a protection against the payment by the depositary bank against forged checks, and negligence in the performance of that obligation may relieve that bank of liability for the repayment of amounts paid out on forged checks, which but for such negligence it would be bound to repay. A leading case on that subject is Morgan vs. United States Mortgage and Trust Col. 208 N.Y. 218, 101 N.E. 871 Amn. Cas. 1914D, 462, L.R.A. 1915D, 74.” “Thus we hold that while the drawer generally owes no duty of diligence to the collecting bank, the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it for the purpose of determining their genuineness and 588 589

January 20, 1988, bold supplied 204 N.Y.S. 621 101 N.E. 87l Anm. Cas. 1914D, 462, L.RA. 191D, 74

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regularity. The collecting bank being primarily engaged in banking holds itself out to the public as the expert and the law holds it to a high standard of conduct.” (supra) Problem: Sometime on June 1998, Samuel Tagoe, a foreigner, purchased from a Jewelry Store several pieces of jewelry valued at Php 258, 000.00. In payment of the same, he offered a Foreign Draft issued in favor of United Overseas Bank (Malaysia)-UOB, addressed to Land Bank of the Philippines (LBP), payable to the Jewelry Store for Php 380, 000.00. Subsequently said draft was cleared and the collecting bank, Far East Bank was credited with the amount. Three (3) weeks thereafter, LBP informed Far East that the amount in the Foreign Draft had been materially altered from Php 300.00 to Php 380, 000.00 and it was returning the same. Far East Bank then refunded the amount and debited the same from the account of the Jewelry Store, however, there is a deficiency of Php 211, 946.64, thus Far East Bank demanded for the payment thereof, and when the same went futile, they filed a case for sum of money against the Jewelry Store. RTC ruled in favor of Far East Bank, however, on appeal, the CA reversed the ruling that Far East Bank could not charge the Jewelry Store on its secondary liability as an indorser. Bank appealed the ruling to the SC. Is the petition for review on certiorari under rule 45, meritorious? ANSWER: No. Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance. This provision applies with equal force in case the drawee pays a bill without having previously accepted it. His actual payment of the amount in the check implies not only his assent to the order of

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the drawer and a recognition of his corresponding obligation to pay the aforementioned sum, but also, his clear compliance with that obligation. Actual payment by the drawee is greater than his acceptance, which is merely a promise in writing to pay. The payment of a check includes its acceptance. Unmistakable herein is the fact that the drawee bank cleared and paid the subject foreign draft and forwarded the amount thereof to the collecting bank. The latter then credited to the Jewelry Store’s account the payment it received. Following the plain language of the law, the drawee, by said payment, recognized and complied with its obligation to pay in accordance with the tenor of his acceptance. The tenor of his acceptance is determined by the terms of the bill as it is when the drawee accepts. Stated simply, LBP was liable on its payment of the check according to the tenor of the check at the time of payment, which was the raised amount. Because of that engagement, LBP could no longer repudiate the payment it erroneously made to a due course holder. We note at his point that Gold Palace (Jewelry Store) was not a participant in the alteration of the draft, was not negligent, and was a holder in due course—it received the draft complete and regular on its face, before it became overdue and without notice of any dishonor, in good faith and for value, and absent any knowledge of any infirmity in the instrument or defect in the title of the person negotiating it. Having relied on the drawee bank’s clearance and payment of the draft and not being negligent, respondent Store is amply protected by the said Section 62. Commercial policy favors the protection of anyone who, in due course, changes his position on the faith of the drawee bank’s clearance and payment of a check or draft. (Far East Bank & Trust Company vs. Gold Palace Jewelry Company, G.R. No. 168274, August 20, 2008 [Nachura, J.]) 2011 Bar Question: A bill of exchange has D as drawer, E as drawee and F as payee. The bill was then indorsed to G, G to H, and H to I. I, the current holder presented the bill to E for acceptance. E accepted but, as it later turned out, D is a fictitious person. Is E freed from liability?

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A. No, since by accepting, E admits the existence of the drawer. B. No, since by accepting, E warrants that he is solvent. C. Yes, if E was not aware of that fact at the time of acceptance. D. Yes, since a bill of exchange with a fictitious drawer is void and inexistent. Can a drawee who accepts a materially altered check recover from the holder and the drawer? A. No, he cannot recover from either of them. B. Yes from both of them. C. Yes but only from the drawer. D. Yes but only from the holder. A bill of exchange states on its face: “One (1) month after sight, pay to the order of Mr. R the amount of Php50,000.00, chargeable to the account of Mr. S. Signed, Mr. T.” Mr. S, the drawee, accepted the bill upon presentment by writing on it the words “I shall pay Php30,000.00 three (3) months after sight.” May he accept under such terms, which varies the command in the bill of exchange? A. Yes, since a drawee accepts according to the tenor of his acceptance. B. No, since, once he accepts, a drawee is liable according to the tenor of the bill. C. Yes, provided the drawer and payee agree to the acceptance. D. No, since he is bound as drawee to accept the bill according to its tenor. Sec. 63. When a person deemed indorser. - A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to be indorser unless he clearly indicates by appropriate words his intention to be bound in some other capacity.

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Notes: Justice Torres, in his concurring opinion in the case of Fernando Maulini, et al vs. Antonio G. Serrano590, stated that: “[s]ection 63 of the Act above-cited says that a person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor is deemed to be an indorser, unless he clearly indicated by appropriate words his contention to be bound in some other capacity. This provision of the law clearly indicates that in every negotiable instrument it is absolutely necessary to specify the capacity in which the person intervenes who is mentioned therein or takes part in its negotiation, because only by so doing can it be determined what liabilities arise from that intervention and from whom, how and when they must be exacted. And if, in the event of a failure to express the capacity in which the person who signed the negotiable instrument intended to be bound, he should be deemed to be an indorser, when the very words of the instrument expressly and conclusively show that such he is, as occurs in the present case, and when the indorsement contains no restriction, modification, condition or qualification whatsoever, there cannot be attributed to him, without violating the provisions of the said Act, any other intention than that of being bound in the capacity in which he appears in the instrument itself, not can evidence be admitted or, if already admitted, taken into consideration, for the purpose of proving such other intention, for the simple reason that if the law has already fixed and determined the capacity in which it must be considered that the person who signed the negotiable instrument intervened and the intention of his being bound in a definite capacity, for no other purpose, undoubtedly, than that there shall be no other evidence given in the matter, when the capacity appears in the instrument itself and the intention is determined by the very same capacity as occurs in this case, the admission of evidence in reference thereto is entirely unnecessary, unless, and contrary to the purposes of the law, which is clear and precise in its provisions and admits of no subterfuges or evasions for escaping obligations contracted upon the basis of credit, with evident and sure detriment to those who intervened or took part in the negotiation of the instrument.”

590

G.R. No. L-8844, December 16, 1914, bold supplied

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Illustrative Cases: “Where defendant’s signature appeared with another in the place for the maker’s name, he is not deemed an indorser although the body of the instrument names the other signer as a promissor without mention of defendant’s name.” (Germania Nat. Bank v. Mariner, 129 Wis. 544, 109 N.W. 574, S.C. secs. 17-6, 64, cited in Brannan, page 75) “The payee of a note, who indorsed it to enable the maker to negotiate it for his own benefit, is liable merely as an accommodation indorser and is discharged if no notice of dishonor is given.” (Ibid, citing Mechanics’ & Farmers’ Savings Bank v. Katterjohn (Ky.), 125 S.W. 1071, S.C. secs. 109, 196.) “Upon a sale of property the seller required the buyer to procure an indorser to a note to be given for part of the price. The buyer executed a note to the seller with the blank indorsement of the defendant. Held, that defendant was liable as an indorser and not as a maker.” (Roesale v. Lancaster, 130 App. Div. 1, 114 N.Y. Supp. 387, cited in Brannan, pages 75-76) Sec. 64. Liability of irregular indorser. - Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following rules: (a) If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties. (b) If the instrument 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. (c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee. Notes: If instrument is payable to the order of a third person, he is liable to the payee and all subsequent parties “This section has no application to a case where the signature was placed on the instrument after its delivery to the

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

payee.” (Kohn v. Consolidated Bank Co., 30 Misc. R. 725, 63 N.Y. Supp. 265.) If the instrument 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 Professor Ames, a legal scholar in the field of Negotiable Instruments made the following comment on this provision, on the following wise: “[t]his section (referring to Section 64 (2) is an otherwise excellent piece of codification, but defective because under subsection 2 a party signing as indorser for the accommodation of an acceptor would not be liable to a drawerpayee, but only to subsequent parties..” However, the U.S. Supreme Court held in the case of Haddock, Blanchard & Co. v. Haddock591, that “[o]ne who endorsed a bill in blank before delivery for the purpose of backing the acceptor is liable to the drawerpayee, who had indorsed and transferred the instrument and was compelled to take it up.” “In this case the court reached the desirable result advocated by Professor Ames without an amendment of the section, by holding that sections 63 and 64-2 merely established a presumption and that parol evidence was admissible to show an intention that the indorser should be liable to the drawer.”592 “In Jenkings v. Coomber [1898] 2 Q.B. 168, it was held that, where A drew a bill on B, payable to his own order, which B accepted, and C, in accordance with a previous agreement to guarantee its payment, wrote his name on the back, and the bill was delivered to A, C was not liable as indorser, as the bill had not been indorsed by A before C put his name on the back.”593 Illustrative Cases: “A note recited “The A.B. Co. promise to pay to the order of C,” and was signed by A. B. Co., E.R.S. Treasurer, J.W.M.” Held, section 64 was not applicable, because J.W.M. did not place “his signature in blank” on the note and he was therefore not liable as indorser. That there was a plain ambiguity on the face of the 591 592 593

192 N.Y. 499, 85 N.E. 682, S.C. secs. 29, 64-3, 68. Brannan, page 78 Ibid, page 79

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note, and that evidence was admissible even against a holder in due course to show that J.W.M. was secretary of the A.B. Co. and intended to sign as such but omitted his title by mistake.” (Germania Nat. Bank v. Mariner, 129 Wis. 544, 109 N.W. 574, S.C. secs. 17-6, 63, cited in Brannan, page 77) “This section deals only with the liability of an irregular indorser to the payee and subsequent parties and does not define the rights and liabilities of several irregular indorsers as between themselves. This is done by section 68.” (Wilson v. Hendee, 74 N.J. Law 640, 66 Atl. 413, S.C. secs. 63, 64-1, 68, Ibid) “One who endorses under this section is entitled to the same defenses as to legality or consideration as the maker for whose accommodation he signed.” (Leonard v. Drapper, 187 Mass, 536, 73 N.E. 644, semble S.C. sec. 66, ibid) Sec. 65. Warranty where negotiation by delivery and so forth. — Every person negotiating an instrument by delivery or by a qualified indorsement warrants: (a) That the instrument is genuine and in all respects what it purports to be; (b) That he has a 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. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation securities other than bills and notes. Notes: That the instrument is genuine and in all respects what it purports to be

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

The warranty “that the instrument is genuine and in all respects what it purports to be” covers all the defects in the instrument affecting the validity thereof, including a forged indorsement. Thus, the last indorser will be liable for the amount indicated in the negotiable instrument even if a previous indorsement was forged. We held in a line of cases that “a collecting bank which indorses a check bearing a forged indorsement and presents it to the drawee bank guarantees all prior indorsements, including forged indorsement itself, and ultimately should be held liable therefor.”594 (Allied Banking Corporation vs. Lim Sio Wan, et al, G.R. No. 133179, March 27, 2008) Exception However, this general rule is subject to exceptions. One such exception is when the issuance of the check itself was attended with negligence. Thus, in the cases cited above where the collecting bank is generally held liable, in two of the cases where checks were negligently issued, this Court held the institution issuing the check just as liable as or more liable than the collecting bank. (supra) Illustrative Cases: The payee of a note secured by chattel mortgage transferred the note and mortgage, indorsing the note as follows: “By agreement with recourse after all security has been exhausted waiving protest.” Held, that the indorser was liable only for the balance due after the security has been exhausted, and as no cause of action accrues against him until the security is exhausted he cannot be joined as a defendant in the action to foreclose the mortgage. (Smith v. Bradley, 16 N. Dak. 306, 112 N.W. 1062, cited in Brannan, page 81)

594

Traders Royal Bank v. Radio Philippines Network, Inc., G.R. No. 138510, October 10, 2002, 390 SCRA 608, 617; Associated Bank v. Court of Appeals, G.R. No. 107382, January 31, 1996, 252 SCRA 620, 633; Bank of the Philippine Islands v. Court of Appeals, G.R. No. 102383, November 26, 1992, 216 SCRA 51, 63; Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corporation, G.R. No. 74917, January 20, 1988, 157 SCRA 188, 198; Republic Bank v. Ebrada, No. L-40796, July 31, 1975, 65 SCRA 680, 687-688

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An action for cancellation of a note because cashier’s checks received therefor were worthless is not an action for breach of warranty in negotiation of the checks, and is therefore not governed by this section. (Dille v. White, 132 Iowa, 327, 109 N.W. 909, 10 L.R.A. (N.S.) 510, S.C. supra, sec. 6-5, ibid) The transferor by delivery of a forged note is not released from liability as warrantor by the act of the transferee in receiving interest from the alleged maker and extending the note, without the consent of the transferor, all the parties still in ignorance of the forgery. (Cluseau v. Wagner (La.), 52 So. 547, ibid) Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification, warrants to all subsequent holders in due course: (a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and (b) That the instrument is, at the time of his indorsement, valid and subsisting; And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. Notes: Matters mentioned in subdivisions (a), (b) and (c) of Section 65 are the following: (a)That the instrument is genuine and in all respects what it purports to be; (b) That he has a good title to it; (c) That all prior parties had capacity to contract 2011 Bar Question: Which of the following indorsers expressly warrants in negotiating an instrument that 1) it is genuine and true;

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

2) he has a good title to it; 3) all prior parties have capacity to negotiate; and 4) it is valid and subsisting at the time of his indorsement? A. The irregular indorser. B. The regular indorser. C. The general indorser. D. The qualified indorser. Liabilities of an indorser In People v. Maniego,595 this Court described the liabilities of an indorser as follows: Appellant’s contention that as a mere indorser, she may not be liable on account of the dishonor of the checks indorsed by her, is likewise untenable. Under the law, the holder or last indorsee of a negotiable instrument has the right “to enforce payment of the instrument for the full amount thereon against all parties liable thereon. Among the “parties liable thereon” is an indorser of the instrument, i.e., “a person placing his signature upon an instrument otherwise than as a maker, drawer or acceptor x x x unless he clearly indicated by appropriate words his intention to be bound by some other capacity.” Such an indorser “who indorses without qualification, inter alia “engages that on due presentment, x x x (the instrument) shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings of dishonor be duly taken, he will pay the amount thereof to the holder, or any subsequent indorser who may be compelled to pay it.” Maniego may also be deemed an “accommodation party” in the light of the facts, i.e., a person “who has signed the instrument as maker drawer, acceptor, or indorser, without receiving value thereof, and for the purpose of lending his name to some other person.” As such, she is under the law “liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew x x x (her) to be only an accommodation 595

L-30910, 148 SCRA 30, 25 (1987), cited in Bank of the Philippine Islands vs. Court of Appeals and Benjamin C. Napiza, February 29, 2000

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party,” although she has the right, after paying the holder, to obtain reimbursement from the party accommodated, “since the relation between them is in effect that of principal and surety, the accommodation party being a surety. It is thus clear that ordinarily private respondent may be held liable as an indorser of the check or even as an accommodation party.596 2011 Bar Question: M, the maker, issued a promissory note to P, the payee which states: “I, M, promise to pay P or order the amount of Php1 Million. Signed, M.” P negotiated the note by indorsement to N, then N to O also by indorsement, and O to Q, again by indorsement. But before O indorsed the note to Q, O’s wife wrote the figure “2” on the note after “Php1” without O’s knowledge, making it appear that the note is for Php12 Million. For how much is O liable to Q? A. Php1 Million since it is the original tenor of the note. B. Php1 Million since he warrants that the note is genuine and in all respects what it purports to be. C. Php12 Million since he warrants his solvency and that he has a good title to the note. D. Php12 Million since he warrants that the note is genuine and in all respects what it purports to be. Notice of dishonor necessary to charge all indorsers The Negotiable Instruments Law contains provisions establishing the liability of a general indorser and giving the procedure for a notice of dishonor. The general indorser of negotiable instrument engages that if it be dishonored and the necessary proceedings of dishonor be duly taken, he will pay the 596

In Town Savings and Loan Bank, Inc. v. Court of Appeals, G.R. No. 106011, 223 SCRA 459 (1993), the Court held that the accommodation parties to a promissory note are liable for the amount of the loan notwithstanding that they were not the actual beneficiaries of such loan as they merely signed the promissory note in order that the party accommodated could be granted the full amount of the loan

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

amount thereof to the holder. (Sec. 66, Negotiable Instruments Law) In this connection, it has been held in a long line of authorities that notice of dishonor is in order to charge all indorser and that the right of action against him does not accrue until the notice is given. (Paulino Gullas vs. Philippine National Bank, G.R. No. L-43191, November 13, 1935, [Malcom, J:]; citing Asia Banking Corporation vs. Javier [1923] 44 Phil., 777, bold supplied) Section 66 cannot be used by a party which introduced a defect in the instrument In Melva Theresa Alviar Gonzales vs. Rizal Commercial Banking Corporation 597, petitioner is an employee of the respondent bank, the former’s mother was issued a foreign check in the amount of $7,500, her mother then endorsed the check. Since respondent bank gives special accommodations to its employees to receive the check’s value without awaiting the clearing period, petitioner presented the foreign check to respondent bank’s Head of Retail Banking. After examination the head of retail banking requested petitioner to endorse it which the latter did. Olivia Gomez (Head of Retail Banking) acquiesced to the early encashment of the check and signed the check but indicated thereon her authority of “up to P17,500.00 only”. Afterwards, Olivia Gomez directed Gonzales to present the check to RCBC employee Carlos Ramos and procure his signature. After inspecting the check, Carlos Ramos also signed it with an “ok” annotation. After getting the said signatures Gonzales presented the check to Rolando Zornosa, Supervisor of the Remittance section of the Foreign Department of the RCBC Head Office, who after scrutinizing the entries and signatures therein authorized its encashment. Gonzales then received its peso equivalent of P155, 270.85. Thereafter respondent bank tried to collect the amount of the check with the foreign drawee bank, however, the check was twice dishonored by reason of irregular endorsement and again dishonored due to account closed. Respondent RCBC filed a case against petitioner for the collection of the amount. The Supreme Court held that: “[t]he foreign drawee bank, Wilkshire Center Bank N.A., refused to pay the bearer of this dollarcheck drawn against it because of the defect introduced by respondent RCBC, through its employee, Olivia Gomez. It is, 597

G.R. No. 156294, November 29, 2006

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therefore, a useless piece of paper if returned in that state to its original payee, Eva Alviar. There is no doubt in the mind of the Court that a subsequent party which caused the defect in the instrument cannot have any recourse against any of the prior endorsers in good faith. xxx This provision (Sec. 66, NIL), however, cannot be used by the party which introduced a defect on the instrument, such as respondent RCBC in this case, which qualifiedly endorsed the same, to hold prior endorsers liable on the instrument x x x results in the absurd situation whereby a subsequent party may render an instrument useless and inutile and let innocent parties bear the loss while he himself gets away scot-free. Section 66 of the Negotiable Instruments Law which further states that the general endorser additionally engages that, on due presentment, the instrument shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent endorser who may be compelled to pay it, it must be read in the light of the rule in equity requiring that those who come to court should come with clean hands. The holder or subsequent endorser who tries to claim under the instrument which had been dishonored for “irregular endorsement” must not be the irregular endorser himself who gave cause for the dishonor. Otherwise, a clear injustice results when any subsequent party to the instrument may simply make the instrument defective and later claim from prior endorsers who have no knowledge or participation in causing or introducing said defect to the instrument, which thereby caused its dishonor.” Refusal of the Bank to pay the check drawn upon it. As a general rule, a bank has a right to set-off the deposits in its hands for the payment of any indebtedness to it on the part of a depositor. In Louisiana, however, a civil law jurisdiction, the rule is denied, and it is held that a bank has no right, without an order from or special assent of the depositor to retain out of his deposit an amount sufficient to meet his indebtedness. The basis

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

of the Louisiana doctrine is the theory of confidential contracts arising from irregular deposits, e.g., the deposit of money with a banker. With freedom of selection and after full preference to the minority rule as more in harmony with modern banking practice. (1 Morse on Banks and Banking, 5th ed., Sec. 324; Garrison vs. Union Trust Company [1905], 111 A.S.R, 407; Louisiana Civil Code Annotated, Arts. 2207 et seq.; Gordon & Gomila vs. Muchler [1882], 34 L. Ann., 604; 8 Manrea, Comentarios al Codigo Civil Español, 4th ed., 359 et seq., 11 Manresa pp. 694 et seq.) Starting, therefore, from the premise that the Philippine National Bank had with respect to the deposit of Gullas a right of set-off, we next consider if that remedy was enforced properly. The fact we believe is undeniable that prior to the mailing of notice of dishonor, and without waiting for any action by Gullas, the bank made use of the money standing in his account to make good for the treasury warrant. At this point recall that Gullas was merely an indorser and had issued in good faith. As to a depositor who has funds sufficient to meet payment of a check drawn by him in favor of a third party, it has been held that he has a right of action against the bank for its refusal to pay such a check in the absence of notice to him that the bank has applied the funds so deposited in extinguishment of past due claims held against him. (Callahan vs. Bank of Anderson [1904], 2 Ann. Cas., 203). The decision cited represents the minority doctrine, for on principle it would seem that notice is not necessary to a maker because the right is based on the doctrine that the relationship is that of creditor and debtor. However this may be, as to an indorser the situation is different, and notice should actually have been given him in order that he might protect his interests. (Paulino Gullas vs. Philippine National Bank, G.R. No. L-43191, November 13, 1935, [Malcom, J:]) Endorser is estopped from claiming that the check is nonnegotiable In the case of Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation, Philippine Clearing House Corporation, and Regional Trial Court of Quezon City, Branch XCII (92)598, the plaintiff (BDO) drew six (6) crossed Manager’s 598

G.R. No. 74917, January 20, 1988

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Check payable to certain member establishments of Visa Card, deposited with the defendant. Following normal procedures, and after stamping at the back of the Checks the usual endorsements. All prior and/or lack of endorsement guaranteed the defendant sent the checks for clearing through the Philippine Clearing House Corporation. Accordingly, plaintiff paid the checks, thereafter it was discovered that the endorsements appearing at the back of the Checks and purporting to be that of the payees were forged and/or unauthorized or otherwise belong to persons other than the payees. The Supreme Court ruled: “petitioner (BDO) is estopped from raising the defense of non-negotiability of the checks in question. It stamped its guarantee on the back of the checks and subsequently presented these checks for clearing and it was on the basis of these endorsements by the petitioner that the proceeds were credited in its clearing account. The petitioner by its own acts and representation cannot now deny liability because it assumed the liabilities of an endorser by stamping its guarantee at the back of the checks. The petitioner having stamped its guarantee of “all prior endorsements and/or lack of endorsements” is now estopped from claiming that the checks under consideration are not negotiable instruments. The checks were accepted for deposit by the petitioner stamping thereon its guarantee, in order that it can clear the said checks with the respondent bank. By such deliberate and positive attitude of the petitioner it has for all intents and purposes treated the said checks as negotiable instruments and accordingly assumed the warranty of the endorser when it stamped its guarantee of prior endorsements at the back of the checks. It led the said respondent to believe that it was acting as endorser of the checks and on the strength of its guarantee said respondent cleared the checks in question and credited the account of the petitioner. Petitioner is now barred from taking an opposite posture by claiming that the disputed checks are not negotiable instrument. A commercial bank cannot escape the liability of an endorser of a check and which may turn out to be a forged endorsement. Whenever any bank treats the signature at the back of the checks as endorsements and thus logically guarantees the same as such

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

there can be no doubt said bank has considered the checks as negotiable. Apropos the matter of forgery in endorsements, this Court has succinctly emphasized that the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements. This is laid down in the case of PNB vs. National City Bank599. In another case, this court held that if the drawee-bank discovers that the signature of the payee was forged after it has paid the amount of the check to the holder thereof, it can recover the amount paid from the collecting bank600. We made clear in Our decision in Philippine National Bank vs. The National City Bank of NY & Motor Service Co., that: 1. Where a check is accepted or certified by the bank on which it is drawn, the bank is estopped to deny the genuineness of the drawers signature and his capacity to issue the instrument; 2. If a drawee bank pays a forged check which was previously accepted or certified by the said bank, it can recover from a holder who did not participate in the forgery and did not have actual notice thereof; 3. The payment of a check does not include or imply its acceptance in the sense that this word is used in Section 82 of the Negotiable Instruments Act.601 Reason for the rule— In the same case, “This Court enunciated in Philippine National Bank vs. Court of Appeals602, a point relevant to the issue when it stated the doctrine of estoppels is based upon the grounds of public policy, fair dealing, good faith and justice and its purpose is to forbid one to speak against his own act, representations or 599 600 601 602

63 Phil. 711 Republic Bank vs. Ebrada, 65 SCRA 680 Supra (10 Saura Import & Export Co., 24 SCRA 974) 94 SCRA 357

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commitments to the injury of one whom they were directed and who reasonably relied thereon.” A truism stated by this Court is that—”The doctrine of estoppels precludes a party from repudiating an obligation voluntarily assumed after having accepted benefits therefrom. To countenance such repudiation would be contrary to equity and put premium on fraud or misrepresentation.603" Illustrative Case: A made a note to the order of B, forged B’s indorsement, then procured C’s indorsement for A’s accommodation, and negotiated the note. Held, C by his indorsement, guaranteed the genuineness of B’s signature, and was liable to a holder in due course. (Packard v. Windholz, 88 App. Div. 365, 84 N.Y. Supp. 666, cited in Brannan, page 83) An indorser of a check does not warrant the genuineness of the drawer’s signature to the drawee who pays it. The drawee is not a holder in due course under Sec. 52, nor a holder under the definition in Sec. 191. The drawee when he accepts a check becomes the guarantor thereof. (Farmer’s Bank v. Bank of Rutherford, 115 Tenn. 64, 88 S.W. 939, 112 Am. St. Rep. 817) But the drawee may recover back the money when the drawee was without fault and the indorser was guilty of negligence in not discovering the forgery. (Williamsburgh Trust Co. v. Tum Suden, 120 App. Div. 518, 105 N.Y. Supp. 335) A note made by a corporation was indorsed by defendants before its delivery to the payee. The consideration was known to all parties to be an illegal purchase by the corporation of its own capital stock. Held, that the payee was not a holder in due course because he knew of the illegality and want of consideration, and could not hold the indorsers upon their warranty. (Burke v.Smith, (Md.), 75 Atl. 114) 2011 Bar Question: P sold to M 10 grams of shabu worth Php 5,000.00. As he had no money at the time of the sale, M wrote a 603

10 Saura Import & Export Co., 24 SCRA 974

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

promissory note promising to pay P or his order Php 5,000. P then indorsed the note to X (who did not know about the shabu), and X to Y. Unable to collect from P, Y then sued X on the note. X set up the defense of illegality of consideration. Is he correct? A. No, since X, being a subsequent indorser, warrants that the note is valid and subsisting. B. No, since X, a general indorser, warrants that the note is valid and subsisting. C. Yes, since a void contract does not give rise to any right. D. Yes, since the note was born of an illegal consideration which is a real defense. Sec. 67. Liability of indorser where paper negotiable by delivery. — Where a person places his indorsement on an instrument negotiable by delivery, he incurs all the liability of an indorser. Notes: See, cross-reference comments and notes on Sec. 48. Sec. 68. Order in which indorsers are liable. - As respect one another, indorsers are liable prima facie in the order in which they indorse; but evidence is admissible to show that, as between or among themselves, they have agreed otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally. 2011 Bar Question: M makes a promissory note that states: “I, M, promise to pay Php5,000.00 to B or bearer. Signed, M.” M negotiated the note by delivery to B, B to N, and N to O. B had known that M was bankrupt when M issued the note. Who would be liable to O? A. M and N since they may be assumed to know of M’s bankruptcy

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B. N, being O’s immediate negotiator of a bearer note C. B, M, and N, being indorsers by delivery of a bearer note D. B, having known of M’s bankruptcy Sec. 69. Liability of an agent or broker. - Where a broker or other agent negotiates an instrument without indorsement, he incurs all the liabilities prescribed by Section Sixty-five of this Act, unless he discloses the name of his principal and the fact that he is acting only as agent.

VI. PRESENTATION FOR PAYMENT Obligations of maker, acceptor, drawer, and indorser, respectively, as to payment; general rule The engagement entered into by the acceptor of a bill and the maker of a note is, that it shall be paid at its maturity—that is, on the day that it falls due, and at the place specified for payment, if any place be designated—upon its presentment. This engagement is absolute, but that of the drawer of a bill and the indorser of a bill or note is conditional, and contingent upon the true presentment at maturity, and notice in case it is not paid. The maker and acceptor are bound, although the bill or note be not presented on the day it falls due;604 but the drawer and indorsers are discharged if such presentment be not made, unless some sufficient cause excuses the holder for failure to perform that duty.605 It is important, therefore, to ascertain how the presentment should be provided for by the holder of the bill or note, lest by failure to observe the necessary precautions, the drawer and indorsers may be discharged, and the solvency of his debt destroyed or impaired. We shall consider, therefore, in order: (1) The person by and whom the instrument should be presented. (2) The time of presentment. (3) The place of presentment. (4) The mode of presentment. 604 605

Sims v. National Com. Bank, 73 Ala. 251 Magruder v. Bank of Washington, 3 Pet. 92; Cox v. National Bank, 100 U.S. 712; Harvey v. Girard Nat. Bank, 119 Pa. St. 212

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Sec. 70. Effect of want of demand on principal debtor. Presentment for payment is not necessary in order to charge the person primarily liable on the instrument; but if the instrument is, by its terms, payable at a special place, and he is able and willing to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part. But except as herein otherwise provided, presentment for payment is necessary in order to charge the drawer and indorsers. Illustrative Case: Presentment for payment is unnecessary to charge the person primarily liable whether the instrument is payable on time or on demand, although it is made payable at a particular place. (Farmer’s Nat. Bank v. Venner, 192 Mass. 531, 78 N.E. 540; Hyman v. Doyle, 53 Misc. R. 597, 103 N.Y. Supp. 778, cited in Brannan, page 88) Where a note names no place of payment, it is generally payable at the maker’s residence or place of business. Where a note, payable on or before a given date with the option to the holder to declare the whole due on default as to monthly installments of interest, did not fix a place of payment and the maker had a place of business in the city where the note was payable and was able and willing to make interest payments as they matured, the holder could not declare the note due for failure to pay installments of interest, without presentment, demand and refusal at the maker’s place of business, although the note may not be, under section 70 N.I.L., “By its terms payable at a special place.” (Bradley v. Washington Mill Co. (Wash.), 103 Pac. 822, ibid) Sec. 71. Presentment where instrument is not payable on demand and where payable on demand. - Where the instrument is not payable on demand, presentment must be made on the day it falls due. Where it is payable on demand, presentment must be made within a reasonable time after its issue, except that in the case of a bill of exchange, presentment for payment will be sufficient if made within a reasonable time after the last negotiation thereof.

373

Notes: Under this section and section 193 the burden is on the holder to prove presentment without a reasonable time, and the defendant indorser need not plead failure to make due presentment. Where the facts are ascertained and not in dispute reasonable time is a question of law. Circumstances held to make three and a half years an unreasonable time. (Commercial Nat. Bank v. Zimmerman, 185 N.Y., 210 77 N.E. 1020, cited in Brannan, page 89) Bills payable on demand or at sight without grace (which are immediately payable in presentment), or payable at a certain number of days after date, need not be presented, for acceptance at all, but only for payment. And the fact that such bills are payable at a bank, or other particular place, does not alter the rule on the subject.606 But it is usual and best, when the bill is payable at a future day, to present it for acceptance, in order to ascertain whether it will certainly be honored, and to procure the assurance of the acceptor’s liability.607 And in such cases, if acceptance be refused, the holder must make protest, and give notice in the same manner as if the bill were payable at so many days after sight. There are, however, three exceptions to this general rule that is not necessary to present a bill payable at a fixed time for acceptance, but only at maturity for payment: First, when there is an express direction to the payee or holder of a bill; second, when it is put into the hands of an agent for negotiation; and, third, where the drawer and drawer are either the same person, or the drawer is a member of the firm or connected with the corporation which is the drawee. (Daniel, Elements of the Law of Negotiable Instruments, pages 163-164) Bills payable at sight, or at so many days after sight, or after demand, or after any other event not absolutely fixed, must be presented to the drawee for acceptance and payment, or for acceptance only, without unreasonable delay, or the drawer and indorsers will be discharged, for they have an interest in having the bills accepted immediately in order to shorten the time of payment, and thus put a limit to the period of their liability and also enable them to protect themselves by other means before it 606 607

Bank of Washington v. Triplett, 1 Pet. 25; Townley v. Sumrall, 2 Pet. 170 United Stated v. Barker, 4 Wash. C.C. 464; Story on Bills, 288

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

is too late, if the bill is not accepted and paid within the time originally contemplated by them.608 When the words “acceptance waived” are embodied in a bill, the ordinary proceedings in acceptance are dispensed with, and merged into those of payment or nonpayment.609 (Ibid, page 164) Presentment to the drawee, it has been held, is necessary even though the drawer has requested him not to accept;610 but the holder is not bound to present again after refusal to accept and notice given, even though the drawer requests him to do so, and promises that the bill shall be honored.611 (Ibid) The only cases in which the holder of a bill which, according to its tenor, should be presented for acceptance, can charge the drawer without presenting it for acceptance, arise when the relations between the drawer and drawee are such as to constitute the drawing of the bill a fraud upon the holder.612 When the bill is presented the acceptance must be according to its tenor to pay in money. If it be to pay another bill, it is no acceptance, and the bill should be protested.613 What constitutes a reasonable time? No hard and fast demarcation line can be drawn between what may be considered as a reasonable or unreasonable time, because “reasonable time” depends upon the peculiar facts and circumstances in each case. (Tolentino, Comments and Jurisprudence on Commercial Laws of the Philippines, Vol. I, Eight Edition, p. 327) “Reasonable time” has been defined as so much time as is necessary under the circumstances for a reasonable prudent and diligent man to do, conveniently, what the contract or duty requires should be done, having a regard for the rights, and possibility of loss, if any, to the other party. (Far East Realty Investment Inc. vs. 608

609

610 611 612

613

Bell v. First Nat. Bank, 115 U.S. 379; Mitchell v. De Grand, 1 Mason, 176; Robinson v. Ames, 20 Johns, 146 Carson v. Russel, 26 Tex. 472; English v. Wall, 12 Rob. (La.) 132; Webb v. Mears, 9 Wright, 222 Hill v. Heap, Dowl. & R.N.P. 57; 1 Parsons on Notes and Bills, 388 Hickligg v. Hardey, 7 Taunt. 312 Bank of Washington v. Triplett. 1 Pet. 25; Smith’s Mercantile Law (Holcombe & Gholson’s ed.), 304 Russel v. Phillips, 14 Q.B. 891

375

Court of Appeals, Dy Hian Tat, et al, G.R. No. L-36549, October 5, 1988, citing Citizens’ Bank Bldg. v. L& E. Werthiermer 189 S.W. 361, 362, 126 Ark, 38, Ann. Cas. 1917 E, 520) Sec. 72. What constitutes a sufficient presentment. Presentment for payment, to be sufficient, must be made: (a) By the holder, or by some person authorized to receive payment on his behalf; (b) At a reasonable hour on a business day; (c) At a proper place as herein defined; (d) To the person primarily liable on the instrument, or if he is absent or inaccessible, to any person found at the place where the presentment is made. Notes: Presentment by the Holder or his authorized agent The bill must be presented by the holder or his authorized agent, and to the drawee or his authorized agent. The party in possession of the bill is with ostensible legal title thereto, presumed to be the holder, and to have the right to make presentment for acceptance of payment.614 The drawee may accept without risk, and if he refuse, the protest will inure to the benefit of the rightful holder.615 If the drawee cannot be found, and any person has been indicated to be resorted to in case of need (au besoin), the bill should be presented to that person.616 (Daniel, Elements of the Law of Negotiable Instruments, page 165) Any bona fide holder of a negotiable instrument, or anyone lawfully in possession of it for the purpose of receiving payment, may present it for payment at maturity.617 (supra, page 200) The mere possession of a negotiable instrument which is payable to the order of the payee, and is indorsed by him in blank, or of a negotiable instrument payable to bearer, is in itself sufficient 614

615 616 617

Bank of Utica v. Smith, 18 Johns. 230; Freemen v. Boynton, 7 Mass. 483; Agnew v. Bank of Gettysburg, 2 Harr & Groll, 478 Chitty on Bills (13th Am. Ed.), 311 Story on Bills, 229; Edwards on Bills, 402 Leftly v. Mills, 4 T.R. 170; Bachellor v. Priest, 12 Pick. 399

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

evidence of his right to present it, and to demand payment thereof.618 And payment to such person will always be valid, unless he is known to the payor to have acquired possession wrongfully. And if the party holding possession of a negotiable instrument which is not indorsed by the payee, or has been indorsed by him specially, to another, and has not been indorsed over by such indorsee but has been placed in the holder’s hands as agent, for the purpose of receiving payment to him will be valid; even, as it has been held, although made in a manner different from that provided for in the instructions to the agent. The fact that the instrument is not indorsed by the owner is, as has been held, under such circumstances, of no importance. Such indorsement would be necessary to the negotiation of the instrument, but would not be necessary to the validity of the payment. (Ibid) As has been indicated, the presentment may be made by the holder or owner himself, or by his duly authorized agent, and his authority need not be in writing, although possibly the maker or acceptor may insist upon a written authorization or indorsement to the agent before being required to make payment.619 (Ibid) To whom; general rule Presentment for payment must be made to the drawee or acceptor of the bill, or maker of the note, or to an authorized agent. A personal demand is not necessary, and it is sufficient to make the demand at his usual residence or place of business of his wife, or other agent; for it is the duty of an acceptor or promissory, if he is not present himself, to leave provision for the payment of his bills or notes.620 (Supra, page 203) Sec. 73. Place of presentment. - Presentment for payment is made at the proper place: (a) Where a place of payment is specified in the instrument and it is there presented; (b) Where no place of payment is specified but the address of the person to make payment is given in the instrument and it is there presented; 618 619 620

Weber v. Orten, 91 Mo. 680; Jackson v. Love, 82 N.C. 405 Tiedeman on Bills and Notes, 311, note 2 Matthews v. Haydon, 2 Esp. 509; Brown v. McDermott, 5 Esp. 265

377

(c) Where no place of payment is specified and no address is given and the instrument is presented at the usual place of business or residence of the person to make payment; (d) In any other case if presented to the person to make payment wherever he can be found, or if presented at his last known place of business or residence. Notes: Presentment to person on premises If presentment be made at the place specified in the instrument, or in the case of one payable generally at the place of business of the acceptor or maker during business hours, or at his domicile during a reasonable hour of the day, it is sufficient if it be made to any person to be found upon the premises, especially if the maker be absent or inaccessible.621 Where presentment was made to the wife of the maker, she informing the holder that her husband was out of town, it was held sufficient.622 And so it was deemed sufficient to charge the indorser where the holder presented the bill to an inmate of the maker’s house, who was coming out, and who stated that the acceptor had removed—the holder leaving a card containing notice for the acceptor of the maturity of the bill. 623 Where there is no one to answer, presentment at the maker’s dwelling is sufficient.624 (Daniel, Elements of the Law of Negotiable Instruments, page 204) Illustrative Cases: A note payable at a bank is properly presented for payment at the bank although the bank is in the hands of a receiver and closed. Presentment need not be made to the receiver personally, he having no authority to pay. (Schlesinger v. Schultz, 110 App. Div. 356, 96 N.Y. Supp. 383, S.C. secs. 7-1, 71, cited in Brannan, page 92)

621

622 623 624

Cromwell v. Hynson, 2 Campb. 596; Phillips v. Astberg, 2 Taunt. 206; Draper v. Clemons, 4 Mo. 52 Moodie v. Morrall, 1 Const. Rep. 367 Buxton v. Jone, 1 M & G 83; Story on Bills (Bennett’s ed.), 350, note 1 Stivers v. Prentice, 3 B. Mon. 461

378

Basic Principles and Jurisprudence on the Negotiable Instruments Law

Where a note is payable at a certain store, presentment for payment at such store to a person connected therewith is sufficient and no personal demand on the maker is necessary. (Nelson v. Grondahl, 13 N.D. 363, 100 N.W. 1093, ibid) Where a note is payable at a designated branch of a trust company, presentation at the original office of the company on the date of maturity and at the branch after banking hours on the day following is not sufficient as against an indorser. (Ironclad Mfg. Co. v. Sackin, 129 App. Div. 555, 114 N.Y. Supp. 43, cited in Brannan, page 93) A note was made payable at the home of the maker and at maturity he was called up by telephone and asked what he was going to do about it, and answered that he could not pay, and was told that the note would be protested. Held, that the right of the maker under section 74 to the exhibition of the note was waived, and that the demand over the telephone was a sufficient presentment to charge the indorser. (Gilpin v. Savage, 60 Misc. Rep. 605, 112 N.Y. Supp. 802, ibid) Sec. 74. Instrument must be exhibited. - The instrument must be exhibited to the person from whom payment is demanded, and when it is paid, must be delivered up to the party paying it. Notes: Must be actually exhibited Presentment of the bill or note, and demand of payment, should be made by an actual exhibition of the instrument itself; or at least the demand of payment should be accompanied by some clear indication that the instrument is at hand, ready to be delivered, and such must really be the case.625 This is requisite in order that the drawee or acceptor may be able to judge (1) of the genuineness of the instrument; (2) of the right of the holder to receive payment; and (3) that he may immediately reclaim possession of it upon paying the amount. If, on demand of payment, the exhibition of the paper is not asked for, and the 625

Musson v. Laek, 4 How. 262; Nailor v. Bowie, 3 Md. 251; Crandall v. Schroeppel, 1 Hun, 557; Etheridge v. Ladd, 44 Barb. 69

379

party to whom demand is made declines to pay on other grounds, a more formal presentment by actual exhibition of the paper will be considered as waived.626 x x x The demand of payment should not vary from the tenor of the paper; and if it be payable simply in money, without specifying the kind, a demand for gold coin would be insufficient to charge and indorser.627 (Daniel, Elements of the Law of Negotiable Instruments, page 220) Presentment by mail Bills of exchange are most frequently drawn on parties at distant places, and it is undoubtedly legal, customary, and proper to forward them by mail to correspondents or other agents at the place where the drawee is addressed, to -be by them presented, in due course. (Ibid, pages 220-221) Leaving instrument in debtor’s hands A bill or note, when presented for payment, cannot be left in the debtor’s hands as when presented for acceptance; and if it is so left, presentment cannot be considered as made until payment is demanded. (Ibid) Sec. 75. Presentment where instrument payable at bank. Where the instrument is payable at a bank, presentment for payment must be made during banking hours, unless the person to make payment has no funds there to meet it at any time during the day, in which case presentment at any hour before the bank is closed on that day is sufficient. Notes: As to mode of presentment of negotiable paper payable at a bank When a bill or note is made payable at a bank, it is considered a sufficient presentment of it if it is actually in the bank at maturity, read to be delivered up to any party who may be entitled to it on payment of the amount due; and if, at the close of business hours, the bill or note remains unpaid, it is considered as dishonored, and notice should be immediately given to the proper 626 627

Lockwood v. Crawford, 18 Conn. 361; King v. Crowell, 61 Me. 244 Langenberger v. Kroeger, 48 Cal. 147

380

Basic Principles and Jurisprudence on the Negotiable Instruments Law

parties.628 Such also is the case when the instrument is payable at a particular place.629 Sometimes a formal presentment of the bill or note, in such cases, at the bank, or upon the maker, is made; and the cases are uniform in holding that such a presentment at the bank is sufficient, even when the place is mentioned in the memorandum;630 but it is settled that nothing more than the presence of the paper there is necessary.631 (Daniel, Elements of the Law of Negotiable Instruments, page 222) The person to make payment has until the close of banking hours of the bank where the instrument is made payable in which to pay it, and if before the close of such hours he deposits money enough to pay it, a demand earlier in the day is premature. (German-American Bank v. Milliman, 31 Misc. R. 87, 65 N.Y. Supp. 242, cited in Brannan, page 94) Sec. 76. Presentment where principal debtor is dead. - Where the person primarily liable on the instrument is dead and no place of payment is specified, presentment for payment must be made to his personal representative, if such there be, and if, with the exercise of reasonable diligence, he can be found. Notes: When acceptor or maker is dead If the acceptor or maker be dead at the time of the maturity of the bill or note, it should be presented to his personal representative, if one be appointed, and his place of residence can, by reasonable inquiries, be ascertained.632 If there be no personal representative, the presentment should be made, and payment demanded, at the dwelling-house of the deceased, if the instrument were payable generally.633 But if it was drawn 628

629 630

631

632

633

Chicopee Bank v. Philadelphia Bank, 8 Wall. 641; People’s Bank v. Brooks, 31 Md. 7; Folger v. Chase, 18 Pick. 63 Hunt v. Maybee, 7 N.Y. 266 Bank of Utica v. Smith, 18 Johns 230; Woodbridge v. Brigham, 13 Mass 556; Saunderson v. Judge, 2 H. Bl. 509 Fullerton v. Bank of United States, 1 Pet. 604; Merchant’s Bank v. Elderkin, 25 N.Y. 178 Magruder v. Union Bank, 3 Pet. 87; Juniata Bank v. Hale, 16 Serg. & R. 167 Magruder v. Union Bank, 3 Pet. 87; Juniata Bank v. Hale, 16 Serg. & R. 167; Story on Notes, 253

381

payable at a particular place, then it will be sufficient that it was presented at such place.634 (Daniel, Elements of the Law of Negotiable Instruments, page 204) Illustrative case: Calling two or three times at the banking office of the administrator of a deceased maker, and again seeking him at a railroad station near the seat of his other business interests at a time when he might be expected to be there, warrants a finding of reasonable diligence to present a note for payment. (Reed v. Spear, 107 App. Div. 144, 94 N.Y. Supp. 1007, S.C. secs. 89, 96, ibid) Sec. 77. Presentment to persons liable as partners. - Where the persons primarily liable on the instrument are liable as partners and no place of payment is specified, presentment for payment may be made to any one of them, even though there has been a dissolution of the firm. Sec. 78. Presentment to joint debtors. - Where there are several persons, not partners, primarily liable on the instrument and no place of payment is specified, presentment must be made to them all. Notes: Where there are several promissors When the note is executed by several joint promissors who are not partners, but liable only as joint and several promissors, it has been held, and, as we think correctly, that presentment should be made to each, in order to fix the liability of an indorser.635 But presentment of a bill drawn upon or accepted by, and of a note executed by, a co-partnership firm, is sufficient, if made to any one of the members of such firm.636 And if the signature of the parties entitled to presentment be apparently that of a partnership, 634

635

636

Boyd’s Admr. V. City Sav. Bank, 15 Gratt. 501; Holtz v. Boppe, 37 N.Y. 634; Philport v. Bryant, 1 Moore & P. 754 Blake v. McMillen, 33 Iowa, 150; Union Bank v. Willis, 8 Metc. (Mass.) 504; Arnold v. Dresser, 8 Allen, 435 Branch of State Bank v. McLeran, 26 Iowa, 306; Shedd v. Brett, 1 Pick. 401

382

Basic Principles and Jurisprudence on the Negotiable Instruments Law

as, for instance, if signed “Walter & Burr,” presentment to either is sufficient. 637 (Daniels, Elements of the Law of Negotiable Instruments, page 205) Even after the dissolution of the firm, presentment to any one of the partners is sufficient, for as to the bill or note upon which they are liable, the liability continues until duly satisfied or discharged.638 (Ibid) In the event of the death of one of the members of the firm to which presentment should be made before the maturity of the bill or note, the presentment should be made to the survivors, and not to the personal representative of the deceased, because the liability devolves upon the surviving partner.639 The same rule obtains in the event of the death of one of two or more joint makers not partners.640 (Ibid) Sec. 79. When presentment not required to charge the drawer. - Presentment for payment is not required in order to charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument. Sec. 80. When presentment not required to charge the indorser. -Presentment is not required in order to charge an indorser where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented. 2011 Bar Question: X executed a promissory note in favor of Y by way of accommodation. It says: “Pay to Y or order the amount of Php50,000.00. Signed, X.” Y then indorsed the note to Z, and Z to T. When T sought collection from Y, the latter countered as indorser that there should have been a presentment first to the maker who dishonors it. Is Y correct? 637 638 639 640

Erwin v. Downs, 15 N.Y. 375 Crowley v. Barry, 4 Gill, 194; Hubbard v. Matthews, 4 N.Y. 50 Cayuga Bank v. Hunt, 2 Hill, 635; Story on Bills, 346-362 Daniel on Negotiable Instruments, 596

383

A. No, since Y is the real debtor and thus, there is no need for presentment for payment and dishonor by the maker. B. Yes, since as an indorser who is secondarily liable, there must first be presentment for payment and dishonor by the maker. C. No, since the absolute rule is that there is no need for presentment for payment and dishonor to hold an indorser liable. D. Yes, since the secondary liability of Y and Z would only arise after presentment for payment and dishonor by the maker. Sec. 81. When delay in making presentment is excused. Delay in making presentment for payment is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, presentment must be made with reasonable diligence. Sec. 82. When presentment for payment is excused. Presentment for payment is excused: (a) Where, after the exercise of reasonable diligence, presentment, as required by this Act, cannot be made; (b) Where the drawee is a fictitious person; (c) By waiver of presentment, express or implied. Sec. 83. When instrument dishonored by non-payment. - The instrument is dishonored by non-payment when: (a) It is duly presented for payment and payment is refused or cannot be obtained; or (b) Presentment is excused and the instrument is overdue and unpaid. Sec. 84. Liability of person secondarily liable, when instrument dishonored. - Subject to the provisions of this Act, when the instrument is dishonored by non-payment, an

384

Basic Principles and Jurisprudence on the Negotiable Instruments Law

immediate right of recourse to all parties secondarily liable thereon accrues to the holder. Notes: For Section 84 to apply, the check must be presented for payment within a reasonable period of time after its issue The applicability of this provision is subject to the condition imposed under Sec. 186, to the effect that the check must be presented for payment within a reasonable period of time after its issue. (Philippine National Bank vs., Benito Seeto, G.R. No. L4388, August 13, 1952, [Labrador, J:]) It must however be noted that Sec. 186 explicitly provides for the discharge of the drawer. The silence of Section 186 as to the indorser is due to the fact that his discharge is already expressly covered by the provision of Section 84, the indorser being a person secondarily liable on the instrument. The reason for the difference between the liability of the indorser and that of the drawer in case of dishonor is that the drawer is not probably or necessarily prejudiced thereby, while an indorser is, actually or by legal presumption. (supra) When does liability arise? After an instrument is dishonored by nonpayment, indorsers cease to be merely secondarily liable; they become principal debtors whose liability becomes identical to that of the original obligor. The holder of a negotiable instrument need not even proceed against the maker before suing the indorser.641 (Tuazon vs. Heirs of Bartolome Ramos, G.R. No. 156262, July 14, 2005) Sec. 85. Time of maturity. - Every negotiable instrument is payable at the time fixed therein without grace. When the day of maturity falls upon Sunday or a holiday, the instruments falling due or becoming payable on Saturday are to be presented for payment on the next succeeding business day except that instruments payable on demand may, at the option of the holder, be presented for payment before twelve o’clock noon on Saturday when that entire day is not a holiday.

641

Metropol (Bacolod) Financing & Investment Corp. v. Sambok Motors Company, 205 Phil. 758, 762, February 28, 1983

385

Notes: The third sentence of this section presents the anomaly that while an instrument falling due on Saturday must be presented on Monday in order to hold drawers and indorsers, yet if the instrument is payable at a special place and the person primarily liable is able and willing to pay it there at maturity (see section 70), it must be presented on Saturday in order to charge the parties liable for such payment with interest after Saturday. This question has arisen in a practical way in Boston, and counsel for both parties agreed upon this construction of the sentence, but the question has not been submitted to a court. It seems also that if a bank or other collecting agent should fail to present the instrument on Saturday such agent might be chargeable with negligence and liable for any loss thereby caused to the principal. (Brannan, page 99) General rule as to time In respect to the maker of a note and the acceptor of a bill, it is not important upon what day the presentment is made, provided it be made at some time before the statute of limitations bar action against them.642 In respect, however, to the drawer of a bill and the indorser of a bill or note, it is essential to the fixing of their liability that the presentment should be made on the day of maturity, provided it is within the power of the holder to make it.643 If the presentment be made before the bill or note is due, it is entirely premature and nugatory, and, so far as it affects the drawer or indorser, a perfect nullity.644 (Daniel, Elements of the Law of Negotiable Instruments, page 206) When instrument payable on demand All bills of exchange payable on demand are closely assimilated to checks, and contemplate the immediate payment of the amount called for. They are payable immediately on presentment, without grace, and if the drawee and the payee or indorsee reside in the same place, it is laid down by a number of the authorities that they must be presented within business hours 642 643

644

Chitty on Bills [354], 396; Metzger v. Waddell, 1 N. Mex. 409 1 Parsons on Notes and Bills, 373; Pendleton v. Knickerbocker Life Ins. Co., 7 Fed. 170 Griffin v. Goff, 12 Johns, 423; Jackson v. Newton, 8 Watts, 401; Farmer’s Bank v. Duvall, 7 Gill & J 78

386

Basic Principles and Jurisprudence on the Negotiable Instruments Law

of the day on which they are drawn in order to holder the drawer in the event of the failure of the drawee to honor them.645 And if the drawee resides in a different place they must be forwarded by the regular post of the day after they were received.646 But these rules are not inflexible. What is reasonable time must depend upon circumstances and in many cases upon the time, the mode, and the place of receiving bills, and upon the relations of the parties between whom the question arises.647 Where the draft required indorsement by a school board, which had to be convened, delay of a week to forward it was held justifiable.648 (Supra, page 208) Sec. 86. Time; how computed. - When the instrument is payable at a fixed period after date, after sight, or after that happening of a specified event, the time of payment is determined by excluding the day from which the time is to begin to run, and by including the date of payment. Sec. 87. Rule where instrument payable at bank. - Where the instrument is made payable at a bank, it is equivalent to an order to the bank to pay the same for the account of the principal debtor thereon. Notes: A bank has no authority to pay notes of a depositor made before the adoption of the Negotiable Instruments Law ad payable at another bank. (Elliot v. Worcester Trust Co., 189 Mass. 542, 75 N.E. 944) When the depositor sues the bank, the bank cannot claim the rights of a bona fide purchaser for value before maturity when it simply pleads a general denial and payment and files no claim in set-off. (Ibid, cited in Brannan, page 101) Sec. 88. What constitutes payment in due course. - Payment is made in due course when it is made at or after the maturity of the payment to the holder thereof in good faith and without notice that his title is defective. 645

646 647

648

Kampmann v. Williams, 70 Tex. 571; McMonigal v. Brown, 45 Ohio St. 504 Chitty on Bills (13th Am. Ed.), 432; Parker v. Reddick, 65 Miss. 246 Morgan v. United States, 113 U.S. 501; Marbourg v. Brinkman, 23 Mo. App. 513 Muncy Borough School Dist. V. Commonwealth, 84 Pa. St. 464

387

Notes: The payee of a demand note held a mortgage to secure the debt. He sold and transferred the mortgage to one person for full value and afterwards indorsed the note to a holder in due course. Held, that the note was not paid by the sale of the mortgage. (Glasscock v. Balls, 24 Q.B.D. 13, S.C. sec. 119-1, ibid)

VII. NOTICE OF DISHONOR Necessity of notice; general rule When a negotiable bill or note is dishonored by nonacceptance on presentment for acceptance, or by nonpayment at its maturity, it is the duty of the holder to give immediate notice of such dishonor to the drawer, if it be a bill, and to the indorser, whether it be a bill or note. The party primarily liable is not entitled to notice, for it was his duty to have provided for payment of the paper; and the fact that he is the maker or acceptor for accommodation does not change the rule.649 (Daniel, Elements of the Law of Negotiable Instruments, page 234) Notice is not due to any party of a bill or note not negotiable, the rules of the law merchant concerning notice and protest applying to none but strictly commercial instruments.650 (Supra) It is regarded as entering a condition in the contract of the drawer and indorser of a bill, and of the indorser of a note, that he shall only be bound in the event that acceptance or payment is only demanded; and he notified if it is not made. And in default of notice of non-acceptance or nonpayment, the party entitled to notice is at once discharged, unless some excuse exist which exonerates the holder.651 (Supra) Failure to notify party entitled to notice discharges debt for which bill was drawn or indorsed So absolute is the necessity for notice to an indorser, in order to charge him, that if a note has been indorsed to the holder in conditional payment of a debt, the failure to give notice to the 649 650 651

Hays v. N.W. Bank, 9 Gratt. 127 Pitman v. Breckinridge, 3 Gratt. 129 Rothschild v. Currie, 41 Eng. C.L. 43; Musson v. Lake, 4 How. 262

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

indorser will not only discharge the indorser as a party to the notice, but also a debtor upon the original consideration, even though it be secured by a mortgage or deed of trust. The notes, then, is made an absolute discharge of his liability, and the indorsee must look solely to prior parties.652 (Supra, page 234-235) Sec. 89. To whom notice of dishonor must be given. - Except as herein otherwise provided, when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged. Notes: Professor Ames states: “By section 89, if the drawer of a check is not notified of the dishonor, he will be absolutely discharged, although he has suffered no loss by the failure to give him notice. Yet by section 186 the drawer is only discharged to the extent of loss caused by delay in presentment of the check for payment within a reasonable time.”653 Where notice of dishonor to the drawer of a check is required it must be alleged in the complaint. (Ewald v. Faulhaber Co., 105 N.Y. Supp. 114, cited in Brannan, page 102) Judgment for the payees of a check against the drawer cannot be sustained in the absence of proof that notice of dishonor was given to the drawer. (Kuflick v. Glasser, 114 N.Y. Supp. 870, ibid) The drawer of a check is discharged by failure to give him notice of dishonor, the bank refusing to pay because it was short of funds, and subsequently proving to be insolvent. (Bacigalupo v. Parrillo, 112 N.Y. Supp. 1040, ibid) In an action against the indorser of a note it is not sufficient to allege that upon maturity the note was duly presented for payment, and the indorser duly notified of non-payment. The allegation and evidence must show the demand and note to have 652 653

Shipman v. Cook, 1 Green, 251; Peacock v. Purcell, 14 C.B. (N.S.) 728 Cited in Brannan, page 101

389

been upon such a day as will charge the defendant. (Hoyland v. National Bank of Middlesborough (Ky.), 126 S.W. 356, Brannan, page 102-103) An allegation that due notice of the protest of a note was duly given to an indorser is sufficient allegation of notice of dishonor; the term “protest” including a popular sense all the steps taken to fix the liability of an indorser, and the word “duly”, in legal parlance, meaning “according to law,” and relating not to form only, but including both form and substance. (Sherman v. Ecker, 59 Misc. Rep. 216, 110 N.Y. Supp. 265, cited in Brannan, page 103) Failure to notify an indorser of an installment note of the non-payment of previous installments does not affect his liability for later installments of the non-payment of which he has been duly notified. (Hopkins v. Merrill, 79 Conn. 626, 66 Atl. 174, S.C. sec. 66, ibid) A joint maker, though a surety, is not an indorser and is primarily liable, and, therefore, is not entitled to notice of dishonor. (Rouse v. Wooten, 140 N.C. 557, 53 S.E. 430, 111 Am. St. Rep. 875, ibid) Although presentment is excused because no administrator had been appointed (sec. 76), yet if the instrument is dishonored (sec. 83) notice of dishonor must be given to the indorser in compliance with sec. 89. (Reed v. Spear, 107 App. Div. 144, 94 N.Y. Supp. 1007, S.C. secs. 76, 96, ibid) An action against an indorser after legal notice of dishonor is not barred because judgment was rendered in his favor in a previous action solely for the reason that he had not been notified before that action was brought. (Peck v. Eston, 74, Conn. 456, 51 Atl. 134, S.C. sec. 64-1, ibid) Illustrative Case: Asian Banking Corporation vs. Juan Javier G.R. No. L-19051, April 4, 1923 AVANCEÑA, J:

390

Basic Principles and Jurisprudence on the Negotiable Instruments Law

On May 10, 1920, Salvador B. Chaves drew a check on the Philippine National Bank for P11,000 in favor of La Insular, a concern doing business in this city. This check was indorsed by the limited partners of La Insular, and then deposited by Salvador B. Chaves in his current account with the plaintiff, Asia Banking Corporation. The deposit was made on July 14, 1920. On June 25, 1920, Salvador B. Chaves drew another check for P18,785.30 on the Philippine National Bank, in favor of the aforesaid La Insular. This check was also indorsed by the limited partners of La Insular, and was likewise deposited by Salvador B. Chaves in his current account with the plaintiff, Asia Banking Corporation, on July 6, 1920. The amount represented by both checks was used by Salvador B. Chaves after they were deposited in the plaintiff bank, by drawing checks on the plaintiff. Subsequently these checks were presented by the plaintiff to the Philippine National Bank for payment, but the latter refused to pay on the ground that the drawer, Salvador B. Chaves, had no funds therein. The plaintiff now brings this action against the defendant, as indorser, for the payment of the value of both checks. The lower court sentenced the defendant to pay the plaintiff P11,000, upon the check of May 10, 1920, with interest thereon at 9 per cent per annum from July 10, 1920, and P18,778.34 on the check of June 25, 1920, with interest thereon at 9 per cent per annum from August 5, 1920. From this judgment the defendant appealed. One of the contentions of the appellant in support of this appeal is, that at all events its liability as indorser of the checks in question was extinguished. We may say in connection with this assignment of error that the liability of the defendant never arose. Section 89 of the Negotiable Instruments Law (Act No. 2031) provides that, when a negotiable instrument is dishonored for nonacceptance or non-payment, notice thereof must be given to the drawer and each of the indorsers, and those who are not notified shall be discharged from liability, except where this act provides otherwise. According to this, the indorsers are not liable unless

391

they are notified that the document was dishonored. Then, under the general principle of the law of procedure, it will be incumbent upon the plaintiff, who seeks to enforce the defendant’s liability upon these checks as indorser, to establish said liability by proving that notice was given to the defendant within the time, and in the manner, required by the law that the checks in question had been dishonored. If these facts are not proven, the plaintiff has not sufficiently established the defendant’s liability. There is no proof in the record tending to show that plaintiff gave any notice whatsoever to the defendant that the checks in question had been dishonored, and there it has not established its cause of action. (bold supplied) For the foregoing, the judgment appealed from is reversed and the defendant is absolved from the complaint without special pronouncement as to costs. So ordered. Araullo, C. J., Street, Malcolm, and Ostrand., concur. Effect of Notice of Dishonor; required only to preserve the right of the payee to recover on the check A notice of dishonor is required only to preserve the right of the payee to recover on the check. It preserves the liability of the drawer and the indorsers on the check. Otherwise, if the payee fails to give notice to them, they are discharged from their liability thereon, and the payee is precluded from enforcing payment on the check. (Bank of the Philippine Islands vs. Spouses Royeca, G.R. No. 176664, July 21, 2008, bold supplied) Sec. 90. By whom given. - The notice may be given by or on behalf of the holder, or by or on behalf of any party to the instrument who might be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the party to whom the notice is given. Sec. 91. Notice given by agent. - Notice of dishonor may be given by any agent either in his own name or in the name of any party entitled to given notice, whether that party be his principal or not.

392

Basic Principles and Jurisprudence on the Negotiable Instruments Law

Illustrative Case: A note made by A to the order of B, indorsed by B and also by A, was protested for non-payment. Notice addressed to B was sent to A, who forwarded it to B. Held, that although A could not give notice in his own behalf to B under Sec. 90, since B was presumptively an accommodation indorser for A and not liable, yet A could forward it to B, on behalf of the holder, and as his agent. (Trader’s Royal Bank v. Jones, 104 App. Div. 433, 93 N.Y. Supp. 768, cited in Brannan, page 104) Sec. 92. Effect of notice on behalf of holder. - Where notice is given by or on behalf of the holder, it inures to the benefit of all subsequent holders and all prior parties who have a right of recourse against the party to whom it is given. Sec. 93. Effect where notice is given by party entitled thereto. - Where notice is given by or on behalf of a party entitled to give notice, it inures to the benefit of the holder and all parties subsequent to the party to whom notice is given. Sec. 94. When agent may give notice. - Where the instrument has been dishonored in the hands of an agent, he may either himself give notice to the parties liable thereon, or he may give notice to his principal. If he gives notice to his principal, he must do so within the same time as if he were the holder, and the principal, upon the receipt of such notice, has himself the same time for giving notice as if the agent had been an independent holder. Notes: Illustrative Case: A branch of a country banking company sent to a London bank for collection a bill bearing several indorsements. Upon dishonor the London bank sent notice by post on the next day to another branch of the forwarding bank. The next day notice was sent by telegraph to the right branch, and the subsequent notices of sufficient notice of dishonor were given in due time. Held, that sufficient notice of dishonor was given and the first indorser was

393

liable. (Fielding v. Corry [1898] 1 Q.B. 268, cited in Brannan, page 105) Sec. 95. When notice sufficient. - A written notice need not be signed and an insufficient written notice may be supplemented and validated by verbal communication. A misdescription of the instrument does not vitiate the notice unless the party to whom the notice is given is in fact misled thereby. Illustrative Case: Where the notice of protest described the note correctly and the envelope was correctly addressed and was received and opened by the indorser, the notice was sufficient, although the notice was on its face by mistake addressed to the maker. (Wilson v. Peck, 121 N.Y. Supp. 344, S.C. secs. 103-3, 106) But it was held otherwise where both the notice and the envelope containing it were addressed to another party. (Marshall v. Sonneman, 216 Pa. 65, 64 Atl. 874, S.C. sec. 97, cited in Brannan, page 105) Sec. 96. Form of notice. - The notice may be in writing or merely oral and may be given in any terms which sufficiently identify the instrument, and indicate that it has been dishonored by non-acceptance or non-payment. It may in all cases be given by delivering it personally or through the mails. Notes: Form of notice No particular phrase or form is necessary. The object of it is to inform the party to whom it is sent: (1) That the bill or note has been presented; (2) That it has been dishonored by nonacceptance, or nonpayment; and (3) That the holder considers him liable, and looks to him for payment. And in framing the notice, all that is necessary to appraise the party of the dishonor of the instrument is, to intimate that he is expected to pay it. (Daniel, Elements of the Law of Negotiable Instruments, page 236)

394

Basic Principles and Jurisprudence on the Negotiable Instruments Law

In order that a notice should answer these conditions, and duly intimate dishonor to the drawer or indorser, it should therefore, either expressly or by just and natural implication, comprise the following elements: (1) A sufficient description of the bill or note to ascertain its identity. (2) That it has been duly presented for acceptance or payment to the drawee, acceptor, or maker. (3) That it has been dishonored by non-acceptance or nonpayment. (4) That the holder looks to the party notified for payment.654 (Ibid) Notice may be verbal or written The notice need not be in writing; it is sufficient if it be given verbally;655 but for precision and safety written notice is preferable. Verbal notice must be necessarily confined to those cases in which notice is directly given to the party in person, or is sent by a messenger to his place of business or residence. It seems that a verbal notice is less strictly construed than a written one, especially when its sufficiency is impliedly admitted by the party’s response.656 Mere knowledge of dishonor does not constitute notice.657 Notice signifies more; but when the fact of dishonor is communicated by one entitled to call for payment, it becomes notice, as it is then to be inferred that the intention is to hold the party notified responsible. 658 (Daniel, Elements of the Law of Negotiable Instruments, page 235-236) Description of the bill or note dishonored The notice should describe the bill or note in unmistakable terms; should state where the note is, that the party notified may find it; should state who the holder is, and who gives the notice, or at whose request it is given. Such, at least in theory, are the requisites of a proper notice; and a good business man should never neglect to comply with them. But the courts are not strict in requiring this thorough description of the dishonored instrument; and the requirements of the law are considered as satisfied by any description which, under all the circumstances of the case, 654

655

656 657

658

Bank of Old Dominion v. McVeigh, 29 Gratt. 558; Thompson v. Williams, 14 Cal. 162; Story on Notes, 348; Daniel on Negotiable Instruments, 973 Boyd’s Admr. V. City Sav. Bank, 15 Gratt. 501; First Nat. Bank v. Ryerson, 23 Iowa, 508; Stanley v. McElrath, 25 Pac. 16 Phillips v. Gould, 8 C & P 355; Byles on Bills [264], 211, 212 Juniata Bank v. Hale, 16 Serg & R 157; Bank of Old Dominion v. McVeigh, 29 Gratt. 559 Caunt v. Thompson, 7 C.B. 400; Miers v. Brown, 11 M & W 372

395

so designates the bill or note as to leave no doubt in the mind of the party, as a reasonable man, what bill or note was intended.659 Story says that “the description of the note should be sufficiently definite to enable the indorser to know to what one in particular the notice applies; for an indorser may have indorsed many notes of very different dates, sums, and times of payment, and payable to different persons, so that he may be ignorant, unless the description in the note is special, to which it properly applies or which it designates.”660 But no misdescription of the amount, or of the date, or of the names of the parties, or of the time the paper fell due, or other defect will vitiate the notice, unless it misleads the party to whom sent.661 (Supra, page 236-237) By whom notice given The notice of dishonor should emanate from the holder of the instrument at the time of its dishonor, and should be communicated to all the parties whom he means to hold liable for its payment. But it is not absolutely necessary that it should come from him, for the holder is entitled to the benefit of notice given in due time by any party to the instrument who would be liable to him if he, the holder, had himself given him notice of dishonor.147 (Ibid) Illustrative Cases: After several efforts to find an indorser, notice of the dishonor was delivered at his store to his wife, who acted as his assistant. Held, a sufficient service, especially when the indorser actually received the notice upon the same day. (Reed v. Spear, 107 App. Div. 144, 94 N.Y. Supp. 1007, S.C. secs. 76, 89, cited in Brannan, page 106) The certificate of protest being (by statute) prima facie evidence of the facts therein stated, the burden is on the indorser 659

660 661

662

Gilbert v. Dennis, 3 Metc. (Mass.) 495; Shelton v. Braithwaite, 7 M & W 436; Glickman v. Early, 47 N.W. 272 Story on Notes, 349 Bank of Alexandria v. Swan, 9 Pet. 33; Mills v. Bank of United States, 11 Wheat 431; Dennistoun v. Stewart, 17 How. 606; Smith v. Whiting, 12 Mass, 6 Chapman v. Keene, 3 Ad. & El. 193; Bank of United States v. Goddard, 5 Mason, 366; Stafford v. Yates, 18 Johns, 327

396

Basic Principles and Jurisprudence on the Negotiable Instruments Law

to show that he did not receive notice either personally or through the mails, where the certificate alleges that he was duly notified of the dishonor. (ibid) A notice which contained a copy of the note and declared that payment had been demanded and refused, is sufficient. (Marshall v. Sonneman, 216 Pa. 65, 65 Atl. 874 infra, S.C. sec. 97, ibid) Sec. 97. To whom notice may be given. - Notice of dishonor may be given either to the party himself or to his agent in that behalf. Notice: To whom notice should be given; general rule Each indorser of a bill or note is entitled to notice, and so also is the drawer of a bill payable to a third party, as bill generally are.663 The acceptor of a bill and the maker of a note are not entitled to notice, the being the primary debtors, nor are those who, from their irregular execution of the instrument, are adjudged joint makers or sureties, their contract being to pay in default of the principal, at all events.664 Where there are several successive indorsers, the holder may, and ordinarily does, give notice to all, with a view to preserve his recourse upon all. But he is not bound to give notice to all, in order to bind those to whom he does give it. He may, if he please, give notice to any one or more of the indorsers, who are then made liable to him; and the indorser receiving notice must then notify antecedent indorsers in order to assure himself.665 It is not, therefore, necessary for the notary to take any notice of the residence of the maker of the note, or make any inquiry as to the residence of any of the indorsers except the last. A different rule would obstruct business, and is not required.666 (Daniel, Elements of the Law of Negotiable Instruments, page 240-241)

663 664

665 666

Joseph v. Salomon, 19 Fla. 623; Sweet v. Swift, 65 Mich. 91 Fitch v. Citizens’ Nat. Bank, 97 Ind. 212; Hofheimer v. Losen, 24 Mo. App. 657 Cardwell v. Allen, 33 Gratt. 167; Wood v. Callaghan, 61 Mich. 402 Lawson v. Farmers’ Bank, 1 Ohio St. 206; Warren v. Gilman, 17 Me. 360

397

Notice to agent Notice to the agent of the part for the general conduct of his business is the same as if given to the principal in person.667 But notice to the party’s attorney or solicitor, unless he is specially authorized to receive it, is insufficient.668 If an agent draws a bill in his own name, notice should be given to him, and if given to his principal it will be insufficient, he being no party to the paper.669 If the paper be signed by a duly authorized agent in the principal’s name, notice should be given to the principal, who is the party liable.670 If a note be payable by installments, demand and notice as to the last installment binds the indorser as to that.671 (Ibid, page 241) Illustrative Case: Leaving the notice at the window of the cashier of a hotel corporation is not sufficient service, it not appearing that any one’s attention was drawn to the notice, or that any one was present, and the president and managers having testified that it was not brought to their attention. (Am. Exch. Nat. Bank v Am. Hotel Victoria Co., 103 App. Div. 372, 92 N.Y. Supp. 1006, cited in Brannan, page 106) But the notice of dishonor and the envelope containing it were addressed to the second indorser and delivered by a notary public to the first indorser. Held, that this did not fix the liability of the first indorser, even though he read the notice; it did not inform him that he was looked to for payment. (Marshall v. Sonneman, ibid) Sec. 98. Notice where party is dead. - When any party is dead and his death is known to the party giving notice, the notice must be given to a personal representative, if there be one, and if with reasonable diligence, he can be found. If there be no personal representative, notice may be sent to the last residence or last place of business of the deceased. 667

Crosse v. Smith, 1 Maule & S. 545; Lake Shore Nat. Bank v. Colliery Co., 58 N.Y.S.C. 68 668 Louisiana State Bank v. Ellery, 16 Mart. 87; Crosse v. Smith, 1 Maule & S. 545 669 Grosvenor v. Stone, 8 Pick. 79 670 Clay v. Oakley, 17 Mart. 137 671 Eastman v. Turman, 24 Cal. 383

398

Basic Principles and Jurisprudence on the Negotiable Instruments Law

Illustrative Case: Notice to the representative of a deceased indorser of a note, made and payable in Canada, must be given in accordance with the laws of Canada, although the indorser’s residence has been in New York. (Merchant’s Bank v. Brown, 86 App. Div. 599, 83 N.Y. Supp. 1037, cited in Brannan, page 107) Sec. 99. Notice to partners. - Where the parties to be notified are partners, notice to any one partner is notice to the firm, even though there has been a dissolution. Sec. 100. Notice to persons jointly liable. - Notice to joint persons who are not partners must be given to each of them unless one of them has authority to receive such notice for the others. Sec. 101. Notice to bankrupt. - Where a party has been adjudged a bankrupt or an insolvent, or has made an assignment for the benefit of creditors, notice may be given either to the party himself or to his trustee or assignee. Sec. 102. Time within which notice must be given. - Notice may be given as soon as the instrument is dishonored and, unless delay is excused as hereinafter provided, must be given within the time fixed by this Act. Sec. 103. Where parties reside in same place. - Where the person giving and the person to receive notice reside in the same place, notice must be given within the following times: (a) If given at the place of business of the person to receive notice, it must be given before the close of business hours on the day following. (b) If given at his residence, it must be given before the usual hours of rest on the day following. (c) If sent by mail, it must be deposited in the post office in time to reach him in usual course on the day following.

399

Notes: What is meant by expression “same place” According to once class of cases, all persons are to be regarded as of the same place who receive their mails through the same post-office. (Daniel, Elements of the Law of Negotiable Instruments, page 246) Illustrative Case: A notice placed in a small chute on the day of protest, but not postmarked until the next day at noon, is mailed in time and it will be presumed, in the absence of evidence to the contrary that the notice reached its destination by 5 o’clock, which would be before the close of business hours, both parties residing in Manhattan. The indorser swore that he did not get the notice until the following day, but did not testify that he was at his office on the day that it was mailed. This was not enough to show that the notice was not received on time. (Wilson v. Peck (Misc. Rep.) 121, N.Y. Supp. 344, S.C. secs. 95, 106, cited in Brannan, page 108) Sec. 104. Where parties reside in different places. - Where the person giving and the person to receive notice reside in different places, the notice must be given within the following times: (a) If sent by mail, it must be deposited in the post office in time to go by mail the day following the day of dishonor, or if there be no mail at a convenient hour on last day, by the next mail thereafter. (b) If given otherwise than through the post office, then within the time that notice would have been received in due course of mail, if it had been deposited in the post office within the time specified in the last subdivision. Sec. 105. When sender deemed to have given due notice. Where notice of dishonor is duly addressed and deposited in the post office, the sender is deemed to have given due notice, notwithstanding any miscarriage in the mails.

400

Basic Principles and Jurisprudence on the Negotiable Instruments Law

Illustrative Case: Although non-receipt of a duly mailed notice of dishonor does not discharge an indorser, evidence of such non-receipt is competent on the question whether the note was actually mailed. (Union Bank of Brooklyn v. Deshel (App. Div.), 123 N.Y. Supp. 585, cited in Brannan, page 109) Sec. 106. Deposit in post office; what constitutes. - Notice is deemed to have been deposited in the post-office when deposited in any branch post office or in any letter box under the control of the post-office department. Sec. 107. Notice to subsequent party; time of. - Where a party receives notice of dishonor, he has, after the receipt of such notice, the same time for giving notice to antecedent parties that the holder has after the dishonor. Illustrative Case: When the answer alleged that the indorser had no notice of dishonor, the burden is on the holder to show that due notice was given. It is not shown by testimony of a notary that, not knowing the address of the indorser, he enclosed the notice of dishonor to a subsequent indorser with postage for forwarding the notice to the prior indorser. (Fuller Buggy Co. v. Waldorn, 112 App. Div. 814, 99 N.Y. Supp, 920, cited in Brannan, page 110) Plaintiff indorsed and deposited a check for collection in bank on the 28th. On the 29th he was notified of the dishonor of the check, and on the 30th he notified the defendant indorser by telegraph. Held, that the notice was in due time. (Jurgens v Wichmann, 124 App. Div. 531, 108 N.Y. Supp. 881, ibid) Sec. 108. Where notice must be sent. - Where a party has added an address to his signature, notice of dishonor must be sent to that address; but if he has not given such address, then the notice must be sent as follows: (a) Either to the post-office nearest to his place of residence or to the post-office where he is accustomed to receive his letters; or

401

(b) If he lives in one place and has his place of business in another, notice may be sent to either place; or (c) If he is sojourning in another place, notice may be sent to the place where he is so sojourning. But where the notice is actually received by the party within the time specified in this Act, it will be sufficient, though not sent in accordance with the requirement of this section. Notes: Illustrative Cases: Notice of protest addressed merely “C.H., N.Y.,” is not sufficient where there is no evidence that the indorser lived or ever had lived, or was sojourning in New York, or that any inquiry was made to ascertain the fact. (Fonesca v. Hartman, 84 N.Y. Supp. 131, cited in Brannan, page 111) The indorser lived at the place where the note was dated, but moved from said place at some time not stated. Held, that notice of dishonor mailed to said place was sufficient, the court assuming that there had been no change of residence up to that time. (Mohlman v. McKane, 60 App. Div. 546, 69 N.Y. Supp. 1046, ibid) Notice to an indorser, who has added no address to his signature, mailed to the post office of his place of residence is good, but not if addressed to a house where the indorser does not reside or do business or receive his letters, even though he owned the house and his sons did business there. (Ebling Brewing Co. v. Reinheimer, 32 N.Y. Misc. R. 594, 66 N.Y. Supp. 458, ibid) Where a notary inquired of several persons as to the post office address of an indorser, all of whom seemed to have some information and stated their belief that a certain town was the nearest town to the farm where the indorser lived, and a much larger place than the town where the indorser actually received his mail, a notice of dishonor sent to such nearest town was sufficient, although the indorser did not received it within a reasonable time. (Vogel v. Starr, 132 Mo. App. 430, 112 S.W. 27, ibid)

402

Basic Principles and Jurisprudence on the Negotiable Instruments Law

Plaintiff, the payee of a dishonored note, knew that the defendant indorser lived in New York City, but claimed that he did not know his address. Defendant testified that plaintiff had frequently corresponded with defendant at his New York address. The notice of dishonor was mailed to defendant in the care of the maker, but not delivered to defendant. Held, that this was not sufficient notice, and that defendant was discharged. (E.I. Dupont, etc., Power Co. v. Rooney, 63 Rep. 344, 117 N.Y. Supp. 220, ibid) Sec. 109. Waiver of notice. - Notice of dishonor may be waived either before the time of giving notice has arrived or after the omission to give due notice, and the waiver may be expressed or implied. Illustrative Cases: If presentment for payment be waived (see secs. 82 and 83) notice of dishonor is dispensed with. (Baumeister v. Kuntz, 53 Fla. 340, 42 So. 886, S.C. sec. 64-1, cited in Brannan, page 112) Defendant was one of several payees and indorsers of a note. Some days before its maturity defendant indorsed a renewal note having also several payees. The maker struck out the name of one of the payees in the renewal note and substituted his own name as payee, and several day after maturity of the original note took it up by the renewal note. Held, that defendant had not waived notice of dishonor of the original note and was not liable on it. (First Nat. Bank v. Gridley, 112 App. Div. 398, 98 N.Y. Supp. 445, S.C. secs. 66, 119-4, ibid) A mere oral promise to renew a note, made after its maturity by an accommodation indorser, is not a waiver of the failure to give notice of dishonor; such promise is not an acknowledgment of liability. (Mechanics’ and Farmers’ Savings Bank v. Katterjohn (Ky.), 125 S.W. 1071, S.C. secs. 63, 196, ibid) Plaintiff, an indorser of a check deposited by him with defendant bank, was not given due notice of its dishonor. With knowledge thereof, plaintiff gave his own check for the dishonored check and sued defendant for its failure to give him due notice of such dishonor. Held, that plaintiff had waived the bank’s laches

403

and could not recover. (Weil v. Corn Exchange Bank, 63 Misc. Rep. 300, 116 N.Y. Supp. 665, ibid) A bill was drawn by A Company to its own order on the B Company and accepted and indorsed to the C Company. All three companies knew that the bill would be dishonored. No notice of dishonor was given to the drawer, because the secretary of the C Company, who was also secretary of the other two companies, knew it never was intended to make the drawer liable. Held, that it was not the duty of the secretary of the C Company to communicate his knowledge of the dishonor to the drawer, that his knowledge was therefore not notice to the drawer, and that the latter was discharged. (In re Fenwick [1902] 1 Ch. 507, ibid) Sec. 110. Whom affected by waiver. - Where the waiver is embodied in the instrument itself, it is binding upon all parties; but, where it is written above the signature of an indorser, it binds him only. Sec. 111. Waiver of protest. - A waiver of protest, whether in the case of a foreign bill of exchange or other negotiable instrument, is deemed to be a waiver not only of a formal protest but also of presentment and notice of dishonor. Sec. 112. When notice is dispensed with. - Notice of dishonor is dispensed with when, after the exercise of reasonable diligence, it cannot be given to or does not reach the parties sought to be charged. Illustrative Case: Failure, after the exercise of reasonable diligence, to find the drawer of a dishonored bill at the address given by him, does not dispense with notice if an address at which he is to be found comes to the holder’s knowledge before action brought. (Studdy v. Beesty, 60 T.L. Rep. 647, cited in Brannan, page 113) Sec. 113. Delay in giving notice; how excused. - Delay in giving notice of dishonor is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When

404

Basic Principles and Jurisprudence on the Negotiable Instruments Law

the cause of delay ceases to operate, notice must be given with reasonable diligence. Notes: Delay in giving notice of dishonor caused by the necessity of making inquiries as to the address of the party to be notified is excusable, the holder being ignorant of the address. (The Elmville, [1904], P. 319, ibid) Sec. 114. When notice need not be given to drawer. - Notice of dishonor is not required to be given to the drawer in either of the following cases: (a) Where the drawer and drawee are the same person; (b) When the drawee is fictitious person or a person not having capacity to contract; (c) When the drawer is the person to whom the instrument is presented for payment; (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; (e) Where the drawer has countermanded payment. Illustrative Cases: Defendant gave a check which was duly presented to the drawee bank and dishonored, for what reason did not appear. Notice of dishonor was not given to defendant for fourteen days thereafter. Held, that the failure to give notice is dispensed with only under defined circumstances, and that the burden is on the holder of the check, or one claiming under him, to excuse the failure to give notice. (Cassel v. Regierer, 114 N.Y. Supp. 601, cited in Brannan, page 114) Sec. 115. When notice need not be given to indorser. — Notice of dishonor is not required to be given to an indorser in either of the following cases: (a) When the drawee is a fictitious person or person not having capacity to contract, and the indorser was

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aware of that fact at the time he indorsed the instrument; (b) Where the indorser is the person to whom the instrument is presented for payment; (c) Where the instrument was made or accepted for his accommodation. Notes: Neither the receipt by defendant, with other of property of the maker of a note on an agreement to take care of the note at maturity, nor an admission that defendant, with others, was responsible for the note, will support an action against defendant alone on the ground that such receipt of property or such admission is a waiver of presentment and notice of dishonor or an excuse therefrom. (Jordan v. Reed (N.J.), 71 Atl. 280, cited in Brannan, page 115) Illustrative Cases: A stockholder of a corporation, who endorsed, before delivery, a note made by another stockholder, to raise money for the corporation is not entitled to notice of dishonor, because the instrument was really for his benefit. (Mercantile Bank v. Busby (Tenn.), 113 S.W. 390, S.C. supra, sec. 64, ibid) 2011 Bar Question: Notice of dishonor is not required to be made in all cases. One instance where such notice is not necessary is when the indorser is the one to whom the instrument is suppose to be presented for payment. The rationale here is that the indorser A. already knows of the dishonor and it makes no sense to notify him of it. B. is bound to make the acceptance in all cases. C. has no reason to expect the dishonor of the instrument. D. must be made to account for all his actions.

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Sec. 116. Notice of non-payment where acceptance refused. - Where due notice of dishonor by non-acceptance has been given, notice of a subsequent dishonor by non-payment is not necessary unless in the meantime the instrument has been accepted. Sec. 117. Effect of omission to give notice of non-acceptance. - An omission to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due course subsequent to the omission. Sec. 118. When protest need not be made; when must be made. - Where any negotiable instrument has been dishonored, it may be protested for non-acceptance or nonpayment, as the case may be; but protest is not required except in the case of foreign bills of exchange. Notes: There mere fact of a protest is not conclusive upon the dishonor of the instrument and due notice to the indorser; other evidence is competent on these questions and they must be left to the jury. Where no formal protest is necessary, and defendant admitted having received notice of dishonor, and did not ask to have the questions of presentment and payment submitted to the jury, he was not aggrieved by the court allowing the notary to amend his certificate of protest by annexing his seal or by the admission of his certificate in evidence. (Demelman v. Brazier, 198 Mass. 458, 84 N.E. 856, S.C. sec. 55, cited in Brannan, page 115)

VIII. DISCHARGE OF NEGOTIABLE INSTRUMENTS Sec. 119. Instrument; how discharged. - A negotiable instrument is discharged: (a) By payment in due course by or on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation;

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(c) By the intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right. Notes: Enumeration is exclusive The modes of discharge of a person primarily liable mentioned in this section are exclusive. Hence a plea that one of the makers to the knowledge of the payee-holder signed a note as surety only and had been discharged by an extension of time by the payee to the principal debtor is bad. (Vanderford v. Farmers’ Bank, 105 Md. 164, 66 Atl. 47, 10 L.R.A. (N.S.), 129, S.C. sec. 120-6, cited in Brannan, page 117) An accommodating maker who placed the word “surety” after his signature is not discharged by an extension of time given without his consent to the co-maker. (Cellers v. Mecham, 49 Oregon 186, 89 Pac. 426, 10 L.R.A. (N.S.), 133, ibid). So also where time was given to an accommodated payee by a holder, with knowledge of the accommodation, it was held that the accommodation maker was not discharged. (National Citizens’ Bank v. Toplitz, 81 App. Div. 593, 81 N.Y. Supp. 422, ibid) A demand note is discharged when the holder upon payment of a part surrenders the note to the maker, although the maker promised at the time to pay the balance. (Schwartzman v. Post, 84 N.Y. Supp. 922, 94 App. Div. 474, 87 N.Y. Supp. 872, cited in Brannan, page 118) A note is discharged when it is surrendered to the maker and cancelled by him after maturity in exchange for a renewal note, although the maker had altered the renewal note by striking out the name of one of the payees and substituting his own name. (First Nat. Bank v. Gridley, 112 N.Y. App. Div. 398, 98 N.Y. Supp. 445, S.C. secs. 66, 109, cited in Brannan, pages 118-119) “In his own right” is not used merely in contradistinction to a right in a representative capacity, but indicates a right not subject

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

to that of another person, and good against all the world. (ibid, page 119) Payment, nature of By payment is meant the discharge of a contract to pay money by giving to the party entitled to receive it, the amount agreed to be paid by one of the parties who entered into the agreement. Payment is not a contract. It is the discharge of a contract in which the party of the first part has a right to demand payment, and the party of the second part has a right to make payment. (Elements of the Law of Negotiable Instruments, Daniel, p. 306) A sale is altogether different. It is a contract which does not extinguish a bill or note, but continues it in circulation as a valid security against all parties. And it is necessary to constitute a transaction a sale that both parties should then expressly or impliedly agree, the one to sell, and the other to purchase the paper.672 (Ibid, pp. 306-307) Credit given by the drawee of a bill, or by a party to a bill or note, who is liable for its payment to the holder at his request, is equivalent to payment.673 But if a bill accepted for the drawer’s accommodation be sent to bank for collection, and be credited to the holder at maturity, it has been held that the bank, as its holder, may sue the acceptor.674 (Ibid) “Payment of a debt is not necessarily a payment of money; but that is payment which the parties contract shall be accepted as payment,” or which the law recognizes as such.675 When a party to the instrument pays to the holder the amount due upon it, he cannot show that he was acting as the secret agent of another, and convert the payment thus made into a purchase. (Ibid) Sec. 88 is controlling as to what constitutes payment in due course Sec. 88 of the Negotiable Instruments Law mandates as to what constitutes payment in due course, it states that, payment is 672 673 674 675

Lancey v. Clark, 64 N.Y. 209; Eastman v. Plumer, 32 N.H. 238 Savage v. Merle, 5 Pick. 83 Pacific Bank v. Mitchell, 9 Metc. (Mass.) 297 Huffmanns v. Walker, 29 Gratt. 315; Lionberger v. Kinealy, 13 Mo. App. 4

409

made in due course when it is made at or after the maturity of the payment to the holder thereof in good faith and without notice that his title is defective. It therefore follows that, when there is notice or knowledge that there is indeed a defect in the title of the holder of the bill or not, yet despite which, payment was made, it will not discharge the instrument. Who may make payment Any party to a bill or note may pay it, and an indorser who has been discharged by failure of notice may still sue a prior indorser or other parties who were not discharged, because, although not compelled to pay it, he acquires the right of the holder from whom he took the instrument, or is remitted to his own rights as indorsee.676 But it seems that if the indorser has another note given to secure and indemnify him for his indorsement, and, not being notified, waives the defense, and voluntarily pays the bill or note, he cannot enforce the note given him as indemnity.677 And a stranger has no right to pay or discharge the contract of another, and cannot pay a bill or note so as to acquire the rights of a holder, except supra protest, as hereinafter indicated.678 But a stranger may always purchase a bill or note with the consent of the holder. Where the drawer, when discharged by the failure of the collecting agent of the holder to present in due time, nevertheless took up and paid his draft, but under protest, to protect his credit, he was held a mere volunteer with no right to recover against the collecting agent of the holder through whose default he was discharged from payment.679 (Supra, p. 308) Payment under mistake of law or fact It is a general principle that money paid with knowledge of fact, but under a mistake of law, cannot be recovered back.680 But a party paying money under a mistake of the real facts may recover it back.681 Therefore, where a bank paid a post-dated 676 677 678 679 680 681

Ellsworth v. Brewer, 11 Pick. 316 Bachelor v. Priest, 12 Pick. 399 Edwards on Bills; Burton v. Slaughter, 26 Gratt. 919 Harvey v. Girard Nat. Bank, 119 Pa. St. 212 Adams v. Reeves, 68 N.C. 134 National Bank of the Commonwealth, 139 Mass. 513

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check to a holder who knew that the drawer was insolvent, and that the drawee has no funds, but was in expectation of them that day, and none were received by the bank, it was held that the amount might be recovered back.682 So an indorser, discharged by laches, who pays a bill to the holder under a misrepresentation of fact, may recover back the amount, and so if such indorser pays the bill, relying on the notarial certificate of due presentment, when in fact no such presentment was made.683 (Supra, p. 309) Surrender of instrument and giving receipt as evidence of payment The party making payment should insist on the presentment of the paper by the party demanding payment, in order to make sure that it is at the time of his possession, and not outstanding in another. And if at the time he makes payment it is outstanding, and held by a bona fide holder for value, he will be liable to pay it again, and a receipt taken will be no protection.684 The party making payment of the bill or note should also not fail to insist upon its being surrendered up, as a voucher that the party receiving the money was entitled to do so, and also that he has paid it to him.685 The possession of the note by the maker is presumptive evidence that he has paid it;686 and so, likewise, is the possession of the bill by the acceptor, provided it can be shown that it passed out of his hands after he accepted it, though otherwise it would seem not.687 (Supra, pp. 309-310) In addition to the surrender of the instrument, the fact that it has been paid should be indorsed upon the paper itself. This is at once advertises the fact of payment to every person who might subsequently come into possession of the instrument by accident or fraud. This precaution is especially wise and necessary if the instrument has been paid before maturity. When an indorser makes payment, it is especially desirable that he should take a receipt as well as require delivery of the instrument.688 If there be a general receipt of payment on the back of the instrument, it will be presumed that it was made by the maker or acceptor, who 682 683 684 685 686 687 688

Martin v. Morgan, 3 Moore, 635 Milnes v. Duncan, 6 B & C 671; Talbot v. National Bank, 129 Mass. 67 Wheeler v. Guild, 20 Pick. 545; Davis v. Miller, 14 Gratt 1 Otisfield v. Mayberry, 63 Me. 197 Dugan v. United States, 3 Wheat. 172; Norris v. Badger, 6 Cow. 449 Pfiel v. Vanbatenberg, 2 Campb. 439; Barring v. Clark, 19 Pick. 220 Story on Notes, 452

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was primarily liable; and this presumption would exist even when the drawer had possession and sued the acceptor upon a bill indorsed with such a receipt.689 (Supra, p. 310) To whom payment may be made Payment of a bill or note should be made to the legal owner or holder thereof, or someone authorized by him to receive it.690 If it be payable to bearer or indorsed in blank, any person having it in possession may be presumed to be entitled to receive payment, unless the payor have notice to the contrary;691 and a payment to such person will be valid, although he may be a thief, finder, or fraudulent holder.692 (Ibid) Payment in due course by the party accommodated In accommodation instruments, the instrument is discharged by the payment of the accommodation party to holder of the bill or note, but rather, it is the payment of accommodated party to the accommodation party which discharge the instrument.

not the the will

Intentional cancellation by the holder The intentional cancellation contemplated under paragraph (c) is that cancellation effected by destroying the instrument either by tearing it up,693 burning it,694 or writing the word “cancelled” on the instrument. The act of destroying the instrument must also be made by the holder of the instrument intentionally. (State Investment House vs. Court of Appeals, January 11, 1993) To discharge the instrument, cancellation must be intentionally made by the holder. On the contrary, any cancellation made by the holder which is unintentional or was caused through negligence will not discharge the instrument, as there is no clear 689 690 691

692

693

694

Scholey v. Walsby, Peake Cas. 24; Jones v. Fort, 9 B & C 764 Stevenson v. Woodhull, 19 Fed. 575; Draper v. Rice, 56 Iowa, 114 Chappelear v. Martin, 45 Ohio St. 132; Brennan v. Merchant’s Bank, 62 Mich. 343 Bank of the United States v. United States, 2 How. 711; Dugan v. United States, 3 Wheat. 172; Bank of Utica v. Smith, 18 Johns. 230 Montgomery v. Schwald, 177 Mo App 75, 166 SW 831; Wilkins v. Shaglund, 127 Neb 589, 256 NW 31. See Henson v. Henson, 268 SW 378.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

indicia that the holder intended to waive any person’s liability thereon. Moreover, similar to ordinary contracts, intentional cancellation is an expressed action of the holder to condone or cancel a debt. Other acts which will discharge a simple contract for the payment of money Art. 1231 of the New Civil Code enumerates the modes how an obligation is extinguished: 1) By payment or performance; 2) By loss of the thing due; 3) By the condonation or remission of the debt; 4) By the confusion or merger of rights of the creditor and debtor; 5) By compensation; 6) By novation. Novation; as a ground to discharge the instrument In the case of Anamer Salazar vs. J.Y. Brothers Marketing Corporation695, Anamer Salazar was approached by Isagani Calleja and Jess Kallos, if she knew a supplier of rice. Answering in the positive, Salazar accompanied the two to J.Y. Bros. As a consequence, Salazar, with Calleja and Kallos procured from J.Y. Bros. 300 cavans of rice worth P214,000.00. As payment, Salazar negotiated and indorsed to J.Y. Bros. Prudential Bank Check No. 067481 dated October 15, 1996 issued by Nena Jaucia Timario in the amount of P214,000.00 with the assurance that the check good as cash. On that assurance, J.Y. Bros. parted with 300 cavans of rice to Salazar. However, upon presentment, the check was dishonored due to “closed account.” Informed of the dishonor of the check, Calleja, Kallos and Salazar delivered to J.Y. Bros. a replacement cross Solid Bank Check No. PA365704 dated October 29, 1996 again issued by

695

G.R. No. 171998, October 20, 2010, [Peralta, J.:]

413

Nena Jauican Timario in the amount of P214,000.00 but which, just the same, bounced due to insufficient funds. Petitioner contends that the issuance of the Solid Bank check and the acceptance thereof by the respondent, in replacement of the dishonored Prudential Bank check, amounted to novation that discharged the latter check, notwithstanding its eventual dishonor by the drawee bank, had the effect of erasing whatever criminal responsibility, under Article 315 of the Revised Penal Code, the drawer or indorser of the Prudential Bank check would have incurred in the issuance thereof in the amount of P214,000.00; and that a check is a contract which is susceptible to a novation just like any other contract. The Supreme Court held that Novation as a ground for extinguishing an obligation, “is done by the substitution or change of the obligation by a subsequent one which extinguishes the first, either by changing the object or principal conditions, or by substituting the person of the debtor, or by subrogating a third person in the rights of the creditor. Novation may: [E]ither be extinctive or modificatory, much being dependent on the nature of the change and the intention of the parties. Extinctive novation is never presumed, there must be an express intention to novate; in cases where it is implied, the acts of the parties must clearly demonstrate their intent to dissolve the old obligation as the moving consideration for the emergence of the new one. Implied novation necessitates that the incompatibility between the old and the new obligation be total on every point such that the old obligation is completely superseded by the new one. The test of incompatibility is whether they can stand together, each one having an independent existence; if they cannot and are irreconcilable, the subsequent obligation also extinguishes the first. An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation and, second, creating a new one in its stead. This kind of novation presupposes a confluence of four essential requisites: (1) a previous valid obligation, (2) an agreement of all parties concerned to a new contract, (3) the extinguishment of the old obligation, and (4) the birth of a valid new obligation. Novation is merely modification,

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

where the change brought about by any subsequent agreement is merely incidental to the main obligation (e.g., a change in interest rates or an extension of time to pay; in this instance, the new agreement will not have the effect of extinguishing the first but would merely supplement some but not all of its provisions.) The obligation to pay a sum of money is not novated by an instrument that expressly recognizes the old, changes only the terms of payment, adds other obligations not incompatible with the old one or the new contract merely supplements the old one.696 In this case, respondent’s acceptance of the Solid Bank check, which replaced the dishonored Prudential Bank check, did not result to novation as there was no express agreement to establish that petitioner was already discharged from his liability to pay respondent the amount of P214,000.00 as payment for the 300 bags of rice. As we said, novation is never presumed, there must be an express intention to novate. In fact, when the Solid Bank check was delivered to respondent, the same was also indorsed by petitioner which shows petitioner’s recognition of the existing obligation to respondent to pay P214,000.00 subject of the replaced Prudential Bank check. Moreover, respondent’s acceptance of the Solid Bank check did not result to any incompatibility, since the two checks— Prudential and Solid Bank checks—were precisely for the purpose of paying the amount of P214,000.00, i.e., the credit obtained from the purchase of the 300 bags of rice from respondent. Indeed, there was no substantial change in the object or principal condition of the obligation of the obligation of petitioner as indorser of the check to pay the amount of P214,000.00. It would appear that respondent accepted the Solid Bank check to give petitioner the chance to pay her obligation.” In a similar case of Nyco Sales Corporation vs. BA Finance Corporation,697 “[t]here are only two ways which indicate the presence of novation and thereby produce the effect of extinguishing an obligation by another which substitutes the same. 696

697

Foundation Specialists, Inc. vs. Betnoval Ready Concrete, Inc., and Stronghold Insurance Co., Inc., G.R. No. 170674, August 24, 2009, 596 SCRA 697. G.R. No. 71694, August 16, 1991, 200 SCRA 637

415

First, novation must be explicitly stated and declared in unequivocal terms as novation is never presumed. Secondly, the old and the new obligation must be incompatible on every point. The test of incompatibility is whether or not the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first.” Upon payment of the bank, as drawee, the check ceased to be a negotiable instrument, and became a mere voucher or proof of payment. (National Bank of Commerce of Seattle v. Seattle Nat. Bank, 187 P. 342, 346, cited in Philippine National Bank vs. Court of Appeals and Philippine Commercial and Industrial Bank, G.R. No. L-26001, October 29, 1968, [Concepcion, J:]) Principal debtor becomes the holder in his own right This pre-supposes that the principal debtor, became the holder of the instrument in his own right, thereby creating a scenario that he is at the same the creditor and debtor of himself. The instrument ought to be discharged as it would be absurd for a person to be a creditor and a debtor of himself all at the same time. For instance, A executed a promissory note in favor of B or his order, B endorsed and delivered it to C, C further negotiated it to D, and D to A. In this case, assuming that the instrument is due for payment, this circumstance discharges the promissory note. However, if A got hold of it before it was overdue, he can still negotiate it to a subsequent party, and this provision will find no application. Illustrative Cases: The plaintiff, the second indorser of a note, was requested by the defendant, the maker, on the day of maturity, to take up the note and defendant promised to pay him. Plaintiff paid the holder, but in some way defendant got possession of the note without having paid it. Held, that defendant was not a holder in his own right, that the instrument was not discharged and defendant was liable to plaintiff. (Korkemas v. Macksoud, 131 App. Div. 728, 116 N.Y. Supp. 85, cited in Brannan, page 119)

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

A gave a demand note payable to B or order on the understanding that it should not be negotiated. Afterwards A paid B the amount of the note. B then obtained the note from C by fraud and gave it to A. Held, that A was not a holder for value, the previous payment not being a consideration given when he received back the note, and he is still liable to C on the note. (Nash v. De Freville [1900] 2 Q.B. 72, ibid) Sec. 120. When persons secondarily liable on the instrument are discharged. - A person secondarily liable on the instrument is discharged: (a) By any act which discharges the instrument; (b) By the intentional cancellation of his signature by the holder; (c) By the discharge of a prior party; (d) By a valid tender or payment made by a prior party; (e) By a release of the principal debtor unless the holder ’s right of recourse against the party secondarily liable is expressly reserved; (f) By any agreement binding upon the holder to extend the time of payment or to postpone the holder’s right to enforce the instrument unless made with the assent of the party secondarily liable or unless the right of recourse against such party is expressly reserved. Notes: Innumerable decisions have already been rendered in the state courts of the United States to the effect that although the drawer of a check is discharged only to the extent of loss caused by unreasonable delay in presentment, an indorser is wholly discharged thereby irrespective of any question of loss or injury. (Swift & Co. vs. Miller, 62 Ind. App. 312, 113 N.E. 447, cited in Brannan’s Negotiable Instruments Law, p. 1134, Nuzum vs. Sheppard, 87 W. Va. 243, 104 S.E. 587, 11 A.L.R. 1024, Ibid., cited in Philippine National Bank vs., Benito Seeto, G.R. No. L4388, August 13, 1952, [Labrador, J:])

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The proposition maintained in the reported case (Nuzman vs. Sheppard, ante. 1024) that the indorser of a check, unlike the drawer, is relieved of liability thereon by an unreasonable delay in presenting the same for payment, whether or not he is injured by the delay, is supported by the great weight of authority. (Cases cited) The Court, in Gough v. Staats (N.Y.) supra, says: “Upon the question of due diligence to charge an indorser, whether he has been prejudiced or not by the delay is perfectly immaterial. It is not inquired into. The law presumes he has been prejudiced.” According to the Court in Caroll v. Sweet (1891) 128 N.Y. 19, 13 L.R.A. 43, 27 N.E. 763, “presentment to due time as fixed by the law merchant was a condition upon performance of which the liability of the defendant, as indorser, depended, and this delay was not excused although the drawer of the check had no funds, or was insolvent, or because presentment would not been unavailing as a means of procuring payment.” Only where there is affirmative proof that the indorsers knew when he cashed the check that there would be no funds in the bank to meet it can the rule be avoided. Otherwise, the failure to present the check in due course of payment will discharge the indorser even though such presentment would have been unavailing. Start v. Tupper (Vt.) supra (11 A.L.R. Annotation, pp. 1028-1029) We have been unable to find any authority sustaining the proposition that an indorser of a check is not discharged from liability for an unreasonable delay in presentment for payment. This is contrary to the essential nature and character of negotiable instruments—their negotiability. They are supposed to be passed on with promptness in the ordinary course of business transactions; not to be retained or kept for such time as the holder may want, otherwise the smooth flow of commercial transactions would be hindered. (Philippine National Bank vs., Benito Seeto, G.R. No. L-4388, August 13, 1952, [Labrador, J:]) No consideration is necessary to support a discharge by the intentional cancellation of a party’s signature by the holder. (McCormick v. Shea, 50 Misc. R. 592, 99 N.Y. Supp. 467, cited in Brannan, page 120)

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

An agreement by the holder of a note not to press a suit begun against the maker while certain monthly payments continue to be made, discharges non-assenting indorsers. (Deahy v. Choquet, 28 R.I. 338, 67 Atl. 421, 14 L.R.A. (N.S.), 847, S.C. sec. 64-1, cited in Brannan, page 121) An offer to prove a change by the cashier of a bank holding a note, on which defendant claimed to be a surety, by altering to a later a marginal notation of the due date made by the cashier when the note was discounted, and making a lie change in the entry as to the maturity of the note in the bank’s index book of notes, was rightly refused in the absence of evidence to who that these acts of the cashier were within his authority or were ratified by the bank. (Vanderford v. Farmers’ Bank, ibid, page 122) The negotiable quality of a promissory note, payable on or before a fixed day, is not destroyed by a provision that the maker and indorsers severally waive presentment and notice of protest, and consent that the time of payment may be extended without notice. (First Nat. Bank of Pomeroy v. Buttery, (N.D.), 116 N.W. 341, 16 L.R.A. (N.S.), 878, ibid) Defendant indorsed a note, payable to plaintiff, for the accommodation of the maker. Before maturity, the maker gave a series of notes, falling due weekly, and agreed that the plaintiff might hold the old notes as collateral until the new notes were paid. The old note was protested when due, and charged to the account of the maker, and the new notes were discounted, and credited to his account. Held, that this was not as a matter of law an unconditional extension releasing the indorser, but presented a question of fact whether a right to sue the indorser was reserved. Defendant could have paid the old note, and demanded the notes held by the plaintiff for the debt, and proceeded at once against the maker on them. (National Park Bank v. Koheler, 121 N.Y. Supp. 640, ibid) 2011 Bar Question: Any agreement binding upon the holder to extend the time of payment or to postpone the holder’s right to enforce the instrument results in the discharge of the party secondarily liable unless made with the latter’s

419

consent. This agreement refers to one which the holder made with the A. principal debtor. B. principal creditor. C. secondary creditor. D. secondary debtor. The rule is that the intentional cancellation of a person secondarily liable results in the discharge of the latter. With respect to an indorser, the holder’s right to cancel his signature is: A. without limitation. B. not limited to the case where the indorsement is necessary to his title. C. limited to the case where the indorsement is not necessary to his title. D. limited to the case where the indorsement is necessary to his title. Sec. 121. Right of party who discharges instrument. - Where the instrument is paid by a party secondarily liable thereon, it is not discharged; but the party so paying it is remitted to his former rights as regard all prior parties, and he may strike out his own and all subsequent indorsements and against negotiate the instrument, 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. Notes: In an action by the indorsee of a promissory note against an indorser, payment by a subsequent indorser is not a defense unless defendant can show that the payment was made for him. (Twelfth Ward Bank v. Brooks, 63 App. Div. 220, 71 N.Y. Supp. 388, cited in Brannan, page 123)

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

Payment by an anomalous indorser extinguishes the note, and neither he nor his transferee can hold the maker on the note, for the anomalous indorser had no former rights on the instrument. (Quimby v. Varnum, 190 Mas. 211, 76 N.E. 671, ibid) Sec. 122. Renunciation by holder. - The holder may expressly renounce his rights against any party to the instrument before, at, or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument. But a renunciation does not affect the rights of a holder in due course without notice. A renunciation must be in writing unless the instrument is delivered up to the person primarily liable thereon. Notes: An agreement for immediate payment of part of a promissory note is sufficient consideration for the release of a surety from obligation to pay the residue. But under section 122 N.I.L. such release must be in writing, “renunciation” being used in the sense of “release.” (Baldwin v. Daly, 41 Wash. 416, 83 Pac. 724; Pitt v. Little (Wash.), 108 Pac. 491, cited in Brannan, page 123) A holder may covenant not to sue the maker and reserve his rights against an indorser even though the note is made by a firm and indorsed by members of the firm individually. (Faneuil Hall Nat. Bank v. Meloon, 183 Mass. 66, 66 N.E. 410, 97 Am. St. Rep. 416, ibid) Illustrative Cases: After the death of the payee of a promissory note was found enclosed in an envelope with a writing addressed to his executors stating that he wished the note cancelled in case of his death, and if the law did not allow this to notify his heirs that it was his wish and orders. Held, not a valid renunciation. (Leak v. Dew, 102 App. Div. 529, 92, N.Y. Supp. 891, Brannan, page 123) The holder of a demand note, being in articulo mortis, instructed his nurse to write a memorandum to the effect that the note should be destroyed as soon as it could be found. Held, that

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this was not a renunciation within the statute, but merely an expression of an intention or desire to renounce. (In re George, 44 Ch. D. 627, cited in Brannan, page 123) C, the holder of a note made by B, delivered the note to X, a devisee under the will of B, and verbally renounced his rights. The real estate in X’s hands was charged with payment of the testator’s debts. Held, that the note was not discharged, for although the word “maker” could not probably includes his devisees. (Edwards v. Walters, [1896] 2 Ch. 157, cited in Brannan, page 124) Sec. 123. Cancellation; unintentional; burden of proof. - A cancellation made unintentionally or under a mistake or without the authority of the holder, is inoperative but where an instrument or any signature thereon appears to have been cancelled, the burden of proof lies on the party who alleges that the cancellation was made unintentionally or under a mistake or without authority. Illustrative Case: An agent for collection, without authority, accepted from the acceptor less than the amount claimed by the holder, and allowed the acceptor to cancel his signature. The holder refused to ratify the agent’s act, returned the money to the acceptor, and received back the bill. Held, that the cancellation was inoperative. (Dominion Bank v. Anderson, 15 Cas. (1888) 408, cited in Brannan, page 124) Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce payment thereof according to its original tenor.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

Notes: Alterations on the serial number of a check, not material alterations; reasons thereto— The High Court held in the case of International Corporate Bank, Inc. vs. Court of Appeals and Philippine National Bank698, that: “[t]he question on whether an alteration of the serial number of a check is a material alteration under the Negotiable Instruments Law is already a settled matter. In Philippine National Bank v. Court of Appeals, this Court ruled that the alteration on the serial number of a check is not a material alteration. Thus: “An alteration is said to be material if it alters the effect of the instrument. It means an unauthorized change in an instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of words or number or other change to an incomplete instrument relation to the obligation of a party. In other words, a material alteration is one which changes the item which are required to be stated under Section 1 of the Negotiable Instrument[s] Law.” xxxx In his book entitled “Pandect of Commercial Law and Jurisprudence”, Justice Jose C. Vitug opines that “an innocent alteration (generally, changes on items other than those required to be stated under Sec. 1, N.I.L.) and spoliation (alterations done by a stranger) will not avoid the instrument, but the holder may enforce it only according to its original tenor. xxxx The case at bench is unique in the sense that what was altered is the serial number of the check in question, an item which, it can readily be observed, is not an essential requisite for negotiability under Section 1 of the Negotiable Instruments Law. The aforementioned alteration did not change the relations between the parties. The name of the 698

G.R. No. 129910, September 5, 2006, [Carpio, J.]

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drawer and the drawee were not altered. The intended payee was the same. The sum of money due to the payee remained the same. x x x xxxx The check’s serial number is not the sole indication of its origin. As succinctly found by the Court of Appeals, the name of the government agency which issued the subject check was prominently printed therein. The check’s issuer was therefore sufficiently identified, rendering the referral to the serial number redundant and inconsequential. x x x xxxx Petitioner, thus cannot refuse to accept the check in question on the ground that the serial number was altered, the same being immaterial or innocent one.699 Illustrative Cases: This section applies to the physical alteration of the instrument. An extension of time, given by the holder of a note to the principal maker, without the consent of a surety co-maker is not an alteration. (Richards v. Market Exch. Bank Co. (Ohio), 90 N.E. 1000, S.C. sec. 119, cited in Brannan, page 127) Where the mere inspection of a check showed that it had been altered (in date), a purchaser cannot recover on it according to its original tenor. He cannot be a holder in due course because it was not regular on its face (section 52). (Elias v. Whitney, 50 Misc. R. 326, 98 N.Y. Supp. 667, cited in Brannan, page 125) Where the alteration is material and suspicious, it is incumbent upon the party offering it to give some evidence to explain its condition. Whether the alteration is suspicious is a question of law for the court, but when the instrument has been admitted, the question whether the alteration was made before or after delivery or with consent of the parties is for the jury. (Ofenstein v. Bryan, 20 App. D.C. 1; Towles v. Tanner, 21 App. D.C. 530, semble, ibid) 699

326 Phil. 504 (1996), 511-516

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

The proper practice when a note is offered which appears to have been altered is for the court to determine, upon inspection and in view of the state of the evidence, whether the instrument should be admitted without further proof to explain the alterations, and to the exercise of the court’s sound discretion no exception lies. (Wood v Skelly, 196 Mass. 114, 81 N.E. 872, ibid) The payee of a check represented that it was lost and received another check from the drawer, and collected it, and then changed the first check by dating it ten days later, and transferred it to plaintiff, a holder in due course. Held, that the drawer’s loss was not caused by delay in presentment, but by reliance on the payee’s false representations, and the plaintiff could recover from the drawer of the check according to its original tenor. (Moekowitz v. Deutsch, 46 Misc. Rep., 603, 92 N.Y. Supp. 721, cited in Brannan, page 126) A written agreement, securely glued to an accepted bill of exchange, is a part thereof, and if it be detached therefrom, without the acceptor’s consent, this is a fraudulent material alteration. But a holder in due course may recover on the instrument according to its original terms. (Bothell v. Schweitzer (Neb.), 120 N.W. 1129, cited in Brannan, page 127) 2011 Bar Question: A material alteration of an instrument without the assent of all parties liable thereon results in its avoidance, EXCEPT against a A. prior indorsee. B. subsequent acceptor. C. subsequent indorser. D. prior acceptor. Sec. 125. What constitutes a material alteration. - Any alteration which changes: (a) The date; (b) The sum payable, either for principal or interest; (c) The time or place of payment:

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(d) The number or the relations of the parties; (e) The medium or currency in which payment is to be made; (f) Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration. Notes: Material alteration; general rule Any change in the terms of a written contract which varies its original legal effect and operation, whether in respect to the obligation it imports, or its force as matter of evidence, when made by any party to the contract, is an alteration thereof, unless all the other parties to the contract gave their express or implied consent to such change. And the effect of such alteration is to nullify and destroy the altered instrument as a legal obligation, whether made with fraudulent intent or not.700 (Elements of the Law of Negotiable Instruments, Daniel, pp. 289-290, emphasis ours) In what material alteration consists Prof. Daniel said: “In order to constitute an alteration material, it must have the legal effect of changing the legal status or relationship of the parties to the instrument. This is true, without regard to the question whether it injures or benefits either the debtor or creditor. Hence, a material alteration may consist in changing its date, or the time or place of payment, or the amount of principal or interest to be paid, or the medium or currency in which payment is to be made, or the number or the relations of parties, or the character and effect of the instrument as matter of obligation or evidence.701 And the alteration may effected by adding to the instrument some new provision, or by substituting one provision for another, or by obliterating or subtracting from it some provision incorporated in it. As has been indicated, it will be no answer to a plea of alteration that its 700 701

Daniel on Negotiable Instruments, 1375, Drexler v/ Smith, 30 Fed. 757 Weir v. Walmsley Ind. 246; Warden v. Ryan, 37 Mo. App. 566; Wager v. Brooks, 37 Minn. 392

426

Basic Principles and Jurisprudence on the Negotiable Instruments Law

operation is favorable to the parties affected by it, whether in lessening or increasing the amount to be paid, or in enlarging or abbreviating the time of payment, or otherwise. No man has a right to vary another’s obligation at his discretion, whether for his good or ill. It ceases, when thus varied, to be that other’s act, and it is sufficient for him to say: “This is not my contract.”702 Even a decrease of the amount destroys the identity, and confuses and traces of his obligation, and every reason of policy and principle forbid that the laws should tolerate tampering with the rights and engagements of others. (supra, emphasis supplied, pp. 290-291) In the Philippine setting, the case of Philippine National Bank vs. Court of Appeals703, laid down distinctively as to what constitutes material alteration. The ponente Justice Kapunan wrote: “[a]n alteration is said to be material if it alters the effect of the instrument. 704 It means an unauthorized change in an instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party.705 In other words, a material alteration is one which changes the items which are required to be stated under Section 1 of the Negotiable Instruments Law…In his book entitled “Pandect of Commercial Law and Jurisprudence,” Justice Jose C. Vitug opines that “an innocent alteration (generally, changes on items other than those required to be stated under Sec. 1, N.I.L.) and spoliation (alterations done by a stranger) will not avoid the instrument, but the holder may enforce it only according to its original tenor.”706 “Reproduced hereunder are some examples of material and immaterial alterations: A. Material Alterations: (1) Substitution the words “or bearer” for “order.” (2) Writing “protest waived” above blank indorsements. (3) A change in the date from which interest is to run.

702 703

704

705

G.R. No. 107508, April 25, 1996. Agbayani, Commentaries and Jurisprudence of the Commercial Laws of the Philippines, Vol. 1, 1992 ed., p. 403. Nicklees, Negotiable Instruments and other related Commercial Paper, 1993 2nd ed., p. 168. Vitug, Pandect of Commercial Law and Jurisprudence, 1990 ed., p. 55

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(4) A check was originally drawn as follows: “Iron County Bank, Crystal Falls, Mich. Aug. 5, 1901. Pay to G.L. or order $9 fifty cents CTR” The insertion of the figure 5 before the figure 9, the instrument being otherwise unchanged. (5) Adding the words “with interest” with or without a fixed rate. (6) An alteration in the maturity of a note, whether the time for payment is thereby curtailed or extended. (7) An instrument was payable “First Nat’l Bank” the plaintiff added the word “Marion”. (8) Plaintiff, without consent of the defendant, struck out the name of the defendant as payee and inserted the name of the maker of the original note. (9) Striking out the name of the payee and substituting that of the person who actually discounted the note. (10) Substituting the address of the maker for the name of a co-maker.707 B. Immaterial Alterations: (1) Changing “I promise to pay” to “We promise to pay”, where there are two makers. (2) Adding the word “annual” after the interest clause. (3) Adding the date of maturity as a marginal notation. (4) Filling in the date of actual delivery where the makers of a note gave it with the date in blank, “July ________.” (5) An alteration of the marginal figures of a note where the sum stated in words in the body remained unchanged. (6) The insertion of the legal rate of interest where the note had a provision for “interest at ___________ per cent.” (7) A printed form of promissory note had on the margin the printed words: “Extended to ____________.” 707

Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. 1, 1992 ed., pp. 403-404.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

The holder on or after maturity wrote in the blank space the words: “May 1, 1913,” as a reference memorandum of a promise made by him to the principal maker at the time the words were written to extend the time of payment. (8) Where there was a blank for the place of payment, filling in the blank with the place desired. (9) Adding to an indorsee’s name the abbreviation “Cash” when it had been agreed that the drafts should be discounted by the trust company of which the indorsee was cashier. (10) The indorsement of a note by a stranger after its delivery to the payee at the time the note was negotiated to the plaintiff. (11) An extension of time given by the holder of a note to the principal maker, without the consent of a surety co-maker.708 The case at bench is unique in the sense that what was altered is the serial number of the check in question, an item which, it can readily be observed, is not an essential requisite for negotiability under Section 1 of the Negotiable Instruments Law. The aforementioned alteration did not change the relations between the parties. The name of the drawer and the drawee were not altered. The intended payee was the same. The sum of money due to the payee remained the same. Changing date of instrument and time of payment Any change in the date imparts a new legal effect and operation to it, and is a material alteration, which avoids it as against prior parties and sureties even in the hands of a bona fide holder without notice.709 The time the instrument became a subsisting contract, and the time when the contract is to be performed in many cases, and a thousand circumstances may arise which may add consequence to the question when the instrument was issued. It matter not that the time of payment by relation to the date, may be prolonger, for suffice it to say it was 708 709

Id., at 404-405. Master v. Miller, 4 T.R. 320; Crawford v. West Side Bank, 100 N.Y. 56; Britton v. Dierker, 46 Mo. 592

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not the time agreed on. (Daniel, Elements of the Law of Negotiable Instruments, Daniel, p. 291) The alteration may be in the year, or the month, or the day of the monthly, or in all three.710 (Ibid,pp. 291-292) A change in the time of payment is obviously of the same nature as a change in the date, identical in principle and effect; and whether such change delays, accelerates, or preserves in legal effect the time specified, or implied for payment, it constitutes a material alteration.711 (Ibid) Changing place of payment When the instrument has been drawn payable at a particular place, the obliteration of such place, so as to make it payable generally, constitutes a material alteration as against all the parties not consenting;712 and likewise where no place is designated, it is a material alteration to insert one.713 (Supra, p. 292) Even a bona fide holder cannot recover upon an acceptance so altered, nor upon a note so altered against parties prior to the one making the alteration.714 Changing the place of date would change the rights of the parties, and hence is an alteration.715 (Ibid, pp. 292-293) Change in amount of principal or interest Any change in the amount of the principal for which the instrument is executed is a material alteration, whether it be increased or lessened. (Supra, p. 293) Any addition of words making the bill or note bear interest is of the same character as if it changed the principal.716 (Ibid) 710

711 712 713

714 715 716

Thompson on Bills, 111; Jacob v. Hart, 2 Stark. 45; Outhwaite v. Luntley, 4 Campb. 179; Walton v. Hastings, 4 Campb. 223 Bathe v. Taylor, 15 East, 412; Miller v. Gilleland, 19 Pa. St. 119 McCurbin v. Turnbull, Thompson on Bills, 112 Nazro v. Fuller, 24 Wend. 374; Townsend v. Star Wagon Co., 10 Nebr. 615; Whitesides v. Northern Bank, 10 Bush, 501 Nazro v. Fuller, 24 Wend. 374; Sudler v. Collins, 2 Houst. 538 Mahaiwe Bank v. Douglass, 31 Conn. 170 Harsh v. Klepper, 28 Ohio St. 200; Woodworth v. Anderson, 63 Iowa, 503; Davis v. Henry, 13 Nebr. 500

430

Basic Principles and Jurisprudence on the Negotiable Instruments Law

Change as to parties Any alteration in the personality, number, or relations of the parties is, as a general rule, a material alteration. Thus, where C., member of the firm of C. & Co., obtained an accommodation indorsement to his individual note, and then added “& Co.” to his signature, thus making it his firm’s note, it was held a material alteration.717 (Supra, p. 295) [T]he erasure of the name of one of two drawers or makers, or payees, who have indorsed the paper, or of one of several cosureties, or the name of the payee and inserting another, is likewise a material alteration.718 So the substitution of one drawer or drawee, or maker or co-maker for another, is of like effect.719 (Supra, pp. 295-296) However, “[w]hether or not the addition of another name to that of the maker (when there is but one) is a material alteration, which discharges him, is a question upon which authorities are divided. Applying sound principle to the controversy, it would seem that the alteration should be regarded as immaterial. The addition does not vary the original maker’s liabilities in any respect. There could be no motive of fraud upon him or others to induce the addition. And while it would come within the letter of those declarations of courts that maintain anything which affects the integrity of the instrument to be a material alteration, it does not seem to come within their spirit.720 (Supra, p. 296) Change affecting the character of the obligation A change in the character or effect of the instrument, whether in respect to its obligation or to its weight in evidence, is a material alteration. Thus, the addition of a seal to the signature of the maker of a note converts it into a bond, against which no plea of want of consideration can be made, and thus invests his contract with attributes which he decline to impart to it.721 Consequently

717 718

719 720 721

Haskell v. Champion, 30 Miss. 136 Mason v. Bradley, 11 M & W 590; Cumberland Bank v. Hall, 1 Hals. 215; McCramer v. Thompson, 21 Iowa, 244; Robinson v. Berryman, 22 Mo. App. 510; Horn v. Bank, 32 Kan. 521 Davis v. Coleman, 7 Ired. 424; Swtate v. Polk, 7 Black. 27 Daniel on Negotiable Instruments, 1388, 1389, and cases cited United States v. Linn, 1 How. 104; Marshall v. Gougler, 10 Serg. & R. 164

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the note is avoided. So a bond is avoided by detaching the seal.722 As when a seal is added to the name of one of several co-makers of a note, all are discharged, because the holder could not have the same recourse against the three which he held before; one would be estopped from denying a want of consideration which might inure to the benefit of all, and new relations and obligations would be created. (Ibid, pp. 296-297) [T]he changing of a note from “I promise” to “We promise” is material, because it changes a joint and several note into one joint only.723 (Supra, p. 297) The addition of the name of a witness to an instrument required by law to be witnesses is a material alteration, but if the instrument need not be witnesses or if it already has on it the number of witness required by law, the alteration is immaterial. (Ibid) Change in consideration It has been held that if a bill be expressed generally “for value received,” and words are added describing such consideration as “for the good-will and lease in trade” of a certain person, or “for a certain tract of land,” it is materially altered and avoided.724 The reasons assigned are, first, that it makes the note a confession in evidence of a fact which might otherwise requires extraneous proof; and, second, that it puts the holder upon inquiry whether that consideration passed.725(Ibid) Change in words of negotiability The addition of the negotiable words, “or order,” or “bearer,” is not an alteration when there were intended to have been inserted, and were accidentally left out.726 Where the effect of such addition is to impart negotiability to an instrument not designed to be negotiable, it is a most material alteration in the nature of the contract, and the bill or note is thereby avoided.727 722 723 724 725

726 727

Piercy v. Piercy, 5 W. Va. 199 Humphreys v. Guillow, 13 N.H. 385; Hemmenway v. Stone, 7 Mass. 58 Knill v. Williams, 10 East, 413; Low v. Argrove, 30 Ga. 129 2 Parsons on Notes and Bills, 562; Daniel on Negotiable Instruments, 1394 Kershaw v. Cox, 3 Esp. 246; Byrom v. Thompdon, 11 Ad. & El. 31 Bruce v. Westcott, 3 Barb. 274; Johnson v. Bank of the United States, 2 B. Mon. 310

432

Basic Principles and Jurisprudence on the Negotiable Instruments Law

So the interlineations of “or bearer” in a negotiable note, payable to a certain person or order, is an alteration of it, because it materially changes the manner of its negotiability.728 (Supra, pp. 297-298) Rights of bona fide holder of altered instrument As a general rule, the material alteration of an instrument will vitiate it, even in the hands of a bona fide holder without notice. But when the drawer of the bill or the maker of the note has himself, by careless execution of the instrument, left room for any alteration to be made, wither by insertion or erasure, without defacing it, or exciting the suspicions of a careful man, he will be liable upon it to any bona fide holder without notice when the opportunity which has afforded has been embraced, and the instrument filled up with a larger amount or different terms than those which it bore at the time he signed it.729 (Supra, pp. 299-300) The true principle applicable to such cases is that the party who puts his paper in circulation, invites the public to receive it of anyone having it in possession with apparent title, and he is estopped to urge an actual defect in that which, through his act, ostensibly has none.730 “It is the duty of the maker of the note to guard not only himself, but the public, against frauds and alteration by refusing to sign negotiable paper made on such a form as to admit of fraudulent practices upon them with ease, and without ready detection.”731 The inspection of the paper itself furnishes the only criterion by which a stranger to whom it is offered can test its character, and when the inspection reveals nothing to arouse the suspicions of a prudent man, he will not be permitted to suffer when there has been an actual alteration, to which the payor by his negligence contributed.732 (Ibid) If the alteration were made without any fault on the part of the maker, drawer, or acceptor, neither will then be bound, although the alteration were so skillfully made as to escape notice upon careful observation. Thus, where a banker’s check had been 728 729

730 731 732

Booth v. Powers, 56 N.H. 30; Union Nat. Bank v. Roberts, 45 Wis. 373 Garrard v. Haddan, 67 Pa. St. 82; Johnston Harvester Co. v. McLean, 57 Wis. 258; Lowden v. National Bank, 38 Kan. 533 Van Duzer v. Howe, 21 N.Y. 538 Zimmerman v. Rote, 75 Pa. St. 188; Brown v. Reed, 79 Pa. St. 370 Daniel on Negotiable Instruments, 1405; Blakey v. Johnson, 13 Bush, 204

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dexterously altered by a chemical process, the original sum being expunged, and a larger inserted, the banker was not allowed to recover of the drawer more than the sum for which the draft actually called when he drew it.733 (Ibid) Effect of material alteration fraudulently made When a party to a bill or note fraudulently alters its legal effects he not only destroys it’s the instrument by thus destroying its legal identity, but he also extinguishes the debt for which it was given. And it cannot afterward be made the basis of, or evidence for, a recovery in any form of action. (Ibid, pp. 300-301) Effect of material alteration innocently made If the alteration is material, and was made innocently, the instrument, notwithstanding, is vitiated, and no suit thereon can be maintained.734 But the holder may sue upon the original cause of action;735 but he could not sue any party whose remedy, after making payment, would be impaired by the alteration.736 (Supra, pp. 301) Can the drawee bank still recover the value of the check even if it failed to return the check within 24-hour clearing period because the check was tampered? In the same case of PNB vs. CA, “whether or not the drawee bank may still recover the value of the check from the collecting bank even if it failed to return the check within the twenty-four (24) hours clearing period because the check was tampered— suffice it to state that since there is no material alteration in the check, petitioner has no right to dishonor it and return it to PBCom, the same being in all respects negotiable.” Illustrative Cases: Defendant signed a note payable to her own order which was delivered unendorsed to plaintiff in renewal of another note 733 734

735

736

Hall v. Fuller, 5 B & C 750 Angle v. N.W., etc, Inc. Co., 92 U.S. 342; Harsh v. Klepper, 20 Ohio St. 200; Booth v. Powers, 56 N.Y. 31; Moore v. Hutchinson, 69 Mo. 429 Atkinson v. Hawden, 2 Ad. & El. 169; Owen v. Hall, 70 Md. 100; Sloman v. Cox, 1 Cromp., M & R 471 Alderson v. Langdale, 3 B & Ald. 660

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

on which defendant was an indorser. Plaintiff without the consent of defendant struck out the name of defendant as payee and inserted the name of the maker of the original note, who then indorsed the new note. Held, that the alteration was material and the note was avoided as to the defendant. (Hoffman v. Planters’ Nat. Bank, 99 Va. 480, 39 S.E. 134, cited in Brannan, page 129) It is not material alteration to add an indorsee’s name the abbreviation “Cash” when it had been agreed that the draft should be discounted by the trust company of which the indorsee was cashier. (Brimingham Trust Co. v. Whitney, 95 App. Div. 280, 88 N.Y. Supp. 578, cited in Brannan, page 129)

BILLS OF EXCHANGE IX. FORM AND INTERPRETATION Sec. 126. Bill of exchange, defined. - A bill of exchange is 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. Illustrative Cases: An order by a contractor, directing the owner of the building to pay another a certain sum of money and deduct it from any amount due on final payment, is not a bill of exchange. (Buttrick Lumber Co. v. Collins, 202 Mass. 413, 89 N.E. 138, cited in Brannan, page 130) An order for the payment of money, addressed to no one in particular but generally to any one for whom the drawer might be employed or who owed him money, is too indefinite and uncertain to be binding on any one. (Dugane v. Hvezda Pokroku No. 4 (Iowa), 119 N.W. 141, ibid) Sec. 127. Bill not an assignment of funds in hands of drawee. - A bill of itself does not operate as an assignment of the funds in the hands of the drawee available for the payment

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thereof, and the drawee is not liable on the bill unless and until he accepts the same. Illustrative Cases: A having a certain sum on deposit with a bank, gave a check for a larger sum. Held, that the check on presentation operated as an intended assignation of the amount of the deposit. (British Linen Co. Bank v. Carruthers, 10 Sess. Case. 923, cited in Brannan, page 131) A bill accepted payable at a banker’s operates on presentment as an intended assignation of the hands of the acceptor in the banker’s hands. (British Linen Co. v. Rainey, 12 Sess. Cas. 825, ibid) Sec. 128. Bill addressed to more than one drawee. - 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. Sec. 129. Inland and foreign bills of exchange. - An inland bill of exchange is a bill which is, or on its face purports to be, both drawn and payable within the Philippines. Any other bill is a foreign bill. Unless the contrary appears on the face of the bill, the holder may treat it as an inland bill. Sec. 130. When bill may be treated as promissory note. Where in a bill the drawer and 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 instrument at his option either as a bill of exchange or as a promissory note. 2011 Bar Question: A bill of exchange has T for its drawee, U as drawer, and F as holder. When F went to T for presentment, F learned that T is only 15 years old. F wants to recover from U but the latter insists that a notice of dishonor must first be made, the instrument being a bill of exchange. Is he correct?

436

Basic Principles and Jurisprudence on the Negotiable Instruments Law

A. Yes, since a notice of dishonor is essential to charging the drawer. B. No, since T can waive the requirement of notice of dishonor. C. No, since F can treat U as maker due to the minority of T, the drawee. D. Yes, since in a bill of exchange, notice of dishonor is at all times required. If the drawer and the drawee are the same person, the holder may present the instrument for payment without need of a previous presentment for acceptance. In such a case, the holder treats it as a A. non-negotiable instrument. B. promissory note. C. letter of credit. D. check. P authorized A to sign a bill of exchange in his (P’s) name. The bill reads: “Pay to B or order the sum of Php1 million. Signed, A (for and in behalf of P).” The bill was drawn on P. B indorsed the bill to C, C to D, and D to E. May E treat the bill as a promissory note? A. No, because the instrument is payable to order and has been indorsed several times. B. Yes, because the drawer and drawee are one and the same person. C. No, because the instrument is a bill of exchange. D. Yes, because A was only an agent of P. P authorized A to sign a negotiable instrument in his (P’s) name. It reads: “Pay to B or order the sum of Php1 million. Signed, A (for and in behalf of P).” The instrument shows that it was drawn on P. B then indorsed to C, C to D, and D to E. E then treated it as a bill of exchange. Is presentment for acceptance necessary in this case?

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A. No, since the drawer and drawee are the same person. B. No, since the bill is non-negotiable, the drawer and drawee being the same person. C. Yes, since the bill is payable to order, presentment is required for acceptance. D. Yes, in order to hold all persons liable on the bill. Sec. 131. Referee in case of need. - The drawer of a bill and any indorser may insert thereon the name of a person to whom the holder may resort in case of need; that is to say, in case the bill is dishonored by non-acceptance or nonpayment. Such person is called a referee in case of need. It is in the option of the holder to resort to the referee in case of need or not as he may see fit.

X. ACCEPTANCE Sec. 132. Acceptance; how made, by and so forth. - The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. The acceptance must be in writing and signed by the drawee. It must not express that the drawee will perform his promise by any other means than the payment of money. Notes: Section 132, requiring the acceptor of a bill of exchange to be in writing, does not apply to a foreign bill, payable in another State; the law of such State not having been proved, the common law, according to such acceptance may be oral will be held to apply. (Bank of Laddonia v. Bright-Coy Commission Co. (Mo.. App.), 120 S.W. 648, cited in Brannan, page 133) “Acceptance”, in the sense in which this term is used in the Negotiable Instruments Law is not required for checks, for the same are payable on demand.737 737

Sections 143 and 185, Act No 2031; Phil Nat. Bank vs. Nat. City Bank of New York, 63 Phil 711; I Morse on Banks and Banking, 6th ed. 898, 899; Watchel v. Rosen, 249 N.Y. 386, 164 N.E. 326.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

Promise and Acceptance of check; distinguished. “Acceptance” and “payment” are, within the purview of said Law, essentially different things, for the former is “a promise to perform an act”, whereas the latter is the “actual performance” thereof.738 In the words of the Law,739 “the acceptance of a bill is the signification by the drawee of his assent to the order of the drawer”, which, in the case of checks, is payment, on demand, of a given sum of money. Upon the other hand, actual payment of the amount of a check implies not only an assent to said order of the drawer and recognition of the drawer’s recognition of the drawer’s obligation to pay the aforementioned sum, but, also, a compliance with said obligation. (Philippine National Bank vs. Court of Appeals and Philippine Commercial and Industrial Bank, G.R. No. L-26001, October 29, 1968, [Concepcion, C.J:]) 2011 Bar Question: X, drawee of a bill of exchange, wrote the words: “Accepted, with promise to make payment within two days. Signed, X.” The drawer questioned the acceptance as invalid. Is the acceptance valid? A. Yes, because the acceptance is in reality a clear assent to the order of the drawer to pay. B. Yes, because the form of the acceptance is really immaterial. C. No, because the acceptance must be a clear assent to the order of the drawer to pay. D. No, because the document must not express that the drawee will perform his promise within two days. Sec. 133. Holder entitled to acceptance on face of bill. - The holder of a bill presenting the same for acceptance may require that the acceptance be written on the bill, and, if such request is refused, may treat the bill as dishonored.

738

739

First Natioal Bank of Washington v. Whitman, 94 U.S. 343, 347, 24 L. ed. 229. Section 132, Act No. 2031.

439

Notes: This section is not confined to sight bills but is applicable to all bills of exchange. Presentment for acceptance of a bill, payable at a fixed time is not necessary to charge the drawer or indorser, but it may be presented for acceptance at any time. (National Park Bank v. Saitta, 127 App. Div. 624, 111 N.Y. Supp. 927, S.C. sec. 28, cited in Brannan, page 134) Sec. 134. Acceptance by separate instrument. - Where an acceptance is written on a paper other than the bill itself, it 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. Sec. 135. Promise to accept; when equivalent to acceptance. - 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. Sec. 136. Time allowed drawee to accept. - The drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept the bill; the acceptance, if given, dates as of the day of presentation. Sec. 137. Liability of drawee returning or destroying bill. Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within twenty-four hours after such delivery or within such other period as the holder may allow, to return the bill accepted or non-accepted to the holder, he will be deemed to have accepted the same. Notes: It was held that under section 137 N.I.L., the presentation for acceptance is a demand for acceptance which, if the bill is retained by the drawee, implies a demand for its return if acceptance is declined, and that the mere failure to return the bill within twenty-four hours is acceptance. And it was further held that under section 185 a check was subject to the same rules, and that failure to return within twenty-four hours a check sent to

440

Basic Principles and Jurisprudence on the Negotiable Instruments Law

a drawee band for payment was an acceptance of a check upon which the holder could recover against the bank, although the delay was due to the neglect of a notary public to whom the check was handed by the drawee bank to protest on the day of its receipt by the bank. (Brannan, page 136) The delivery of a check by a bank to a notary public for protest is not a compliance with this section and does not relieve the drawee from liability, following Wisner v. First Nat. Bank; Provident S. & B. Co. v. First Nat. Bank, 37 Pa. Super. Ct. 17. (ibid) In order to hold a drawee as acceptor under this section, the burden is upon the plaintiff to show that the instrument was negotiable paper of the nature and kind that could be presented for acceptance or that it was actually delivered to the drawee for acceptance and not for payment. (First Nat. Bank of Omaha v. Whitmore, 177 Fed. Rep. 397, ibid) Sec. 138. Acceptance of incomplete bill. - A bill may be accepted before it has been signed by the drawer, or while otherwise incomplete, or when it is overdue, or after it has been dishonored by a previous refusal to accept, or by nonpayment. But when a bill payable after sight is dishonored by non-acceptance and the drawee subsequently accepts it, the holder, in the absence of any different agreement, is entitled to have the bill accepted as of the date of the first presentment. Sec. 139. Kinds of acceptance. - An acceptance is either general or qualified. A general acceptance assents without qualification to the order of the drawer. A qualified acceptance in express terms varies the effect of the bill as drawn. Sec. 140. What constitutes a general acceptance. - 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. Sec. 141. Qualified acceptance. - An acceptance is qualified which is:

441

(a) Conditional; that is to say, which makes payment by the acceptor dependent on the fulfillment of a condition therein stated; (b) Partial; that is to say, an acceptance to pay part only of the amount for which the bill is drawn; (c) Local; that is to say, an acceptance to pay only at a particular place; (d) Qualified as to time; (e) The acceptance of some, one or more of the drawees but not of all. Sec. 142. Rights of parties as to qualified acceptance. - The holder may refuse to take a qualified acceptance and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance. Where a qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill unless they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent thereto. When the drawer or an indorser receives notice of a qualified acceptance, he must, within a reasonable time, express his dissent to the holder or he will be deemed to have assented thereto.

XI. PRESENTMENT FOR ACCEPTANCE Sec. 143. When presentment for acceptance must be made. Presentment for acceptance must be made: (a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or (b) Where the bill expressly stipulates that it shall be presented for acceptance; or (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. In no other case is presentment for acceptance necessary in order to render any party to the bill liable.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

Notes: Sight Drafts do not require presentment for acceptance Bills payable on demand or at sight without grace (which are immediately payable on presentment), or payable at a certain number of days after date, or after any other certain event, or payable on a day certain, need not be presented, for acceptance at all, but only for payment. (Elements of the Law of Negotiable Instruments, Daniel, page 163) Bills payable at sight, or at so many days after sight, or after demand, or after any other event not absolutely fixed, must be presented to the drawee for acceptance and payment, or for acceptance only, without unreasonable delay, or the drawer and indorsers will be discharged, for they have an interest in having the bills accepted immediately in order to shorten the time of payment, and thus put a limit to the period of their liability; and also enable them to protect themselves by other means before it is too late, if the bill is not accepted and paid within the time originally contemplated by them.740 (Ibid) When the words “acceptance waived” are embodied in a bill, the ordinary proceedings in acceptance are dispensed with, and merged into those of payment or nonpayment.741 (Ibid) Exception to the Rule— There are, however, three exceptions to this general rule that it is not necessary to present a bill payable at a fixed time for acceptance, but only at maturity for payment: First, when there is an express direction to the payee or holder of a bill; Second, when it is into the hands of an agent for negotiation; and

740

741

Bell v. First Nat. Bank, 115 U.S. 379; Mitchell v. De Grand, 1 Mason, 176; Robinson v. Ames, 20 Johns, 146 Carson v. Russel, 26 Tex. 472; English v. Wall, 12 Rob. (La.) 132; Webb v. Mears, 9 Wright, 222.

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Third, where the drawer and drawee are either the same person, or the drawer is a member of the form or connected with the corporation which is the drawee. (Ibid) Significance of Acceptance The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer;742 this may be done in writing by the drawee in the bill itself, or in a separate instrument.743 (Prudential Bank vs. Intermediate Appellate Court, G.R. No. 74886, December 8, 1992, [Davide, Jr., J.]) The effect of the acceptance of a bill Is to constitute the acceptor the principal debtor.744 The bills becomes by the acceptance very similar to a promissory note— the acceptor being the promissor, and the drawer standing in the relation of an indorser. (Daniel, Elements of the Law of Negotiable Instruments, page 173) But in respect to the acceptor’s position with regard to the drawer, and the amount for which he renders himself liable by accepting the bill, it is well to observe that the acceptance does not entitle the acceptor to charge it in account against the drawer from the date of acceptance, unless he pays the whole amount at the time or discharges the drawer from all responsibility.745 (Ibid) Like the maker of a note, the acceptor is bound by all the terms of the instrument, and if it contain a stipulation for payment of attorney’s fees, he is bound by it.746 (Ibid) If the acceptance be for the drawer’s accommodation, the acceptor does not thereby become entitled to sue the drawer upon the bill; but when he has paid the bill, and not before, he may recover back the amount from the drawer in an action for money had and received.747 If the acceptor put the bill in circulation, he is estopped from showing it was then paid.748 742 743 744 745 746 747 748

Section 132, NIL Sections 133 and 34, Id. Heurtematte v. Morris, 1Y. 63; Capital City Ins. Co. v. Quinn, 73 Ala. 560 Bracton v. Willing, 4 Call, 288 Smith v. Muncie Nat. Bank, 29 Ind. 158 Christian v. Keen, 80 Va. 377; Martin v. Muncy, 40 La. Ann. 190 Hinton v. Bank of Columbus, 9 Port. (Ala.) 463

444

Basic Principles and Jurisprudence on the Negotiable Instruments Law

When drawer of bill requiring presentment for acceptance bound without such presentment Presentment to the drawee, it has been held, is necessary, even though the drawer has requested him not to accept;749 but the holder is not bound to present again after refusal to accept and notice given, even though the drawer requests him to do so, and promises that the bill shall be honored.750 (Daniel, Elements of the Law of Negotiable Instruments, pages 164 to 165) The only cases in which the holder of a bill which, according to its tenor, should be presented for acceptance, can discharge the drawer without presenting it for acceptance, arise when the relations between the drawer and drawee are such as to constitute the drawing of the bill a fraud upon the holder.751 When the bill is presented the acceptance must be according to its tenor to pay money. If it be to pay another bill, it is not acceptance, and the bill should be protested.752 (Ibid) Acceptance admits 1. Signature of drawer—It follows from the fact that the acceptor assumes to pay the bill, and becomes the principal debtor for the amount specified, that acceptance is an admission of everything essential to the existence of such liability. Therefore, acceptance, is, in the first place, an admission of the signature of the drawer, the drawee being supposed to know his correspondent’s handwriting, and, by accepting, to acknowledge it; and in a suit against the acceptor he would not be permitted to plead or show that the handwriting was not the drawer’s and would be bound by his acceptance even though the drawer’s name were forged. 753 (Daniel, Elements of the Law of Negotiable Instruments, page 174) 2. Admission of funds of drawer in drawee’s hands— In the second place, acceptance admits that the acceptor 749 750 751

752 753

Hill v. Heap, Dowl. & R.N.P. 57; 1 Parsons on Notes and Bills, 388 Hickligg v. Hardey, 7 Taunt. 312 Bank of Washington v. Triplett, 1 Pet. 25; Smith’s Mercantile Law (Holcombe & Gholson’s ed.), 304 Russell v. Phillips, 14 Q.B. 891 Jenys v. Fawler, 2 Stra. 946; Hoffman & Co. v. Bank of Milwaukee, 12 Wall. 193; Goetz v. Bank, 119 U.S. 556

445

had funds of the drawer in his hands, for the drawing of the bill implies this, and acceptance in the usual course of business only follows when it is the fact. Therefore, the acceptor cannot deny that he was in funds when suit is brought by a holder of the bill;754 though as between himself and the drawer it is only prima facie evidence that the drawer had funds in his hands, and he may rebut this presumption by showing that the acceptance was for the drawer’s accommodation, or otherwise under circumstances which place him under no obligation to pay the bill to him.755 (Ibid) 3. Admission of drawer’s capacity to draw—In the third place, the acceptor admits the capacity of the drawer to draw the bill, for otherwise, it would not be valid;756 and therefore he cannot set up a plea, that the drawer of a bill, which he had accepted, was a body corporate having no legal authority to draw the bill, or was a bankrupt, infant, or fictitious person.757 When the bill is drawn in the name of a firm, acceptance admits that there is such a firm, and if it be drawn by a person as executor, it admits his right to sue in that character.758 (Ibid) 4. Admission of payee’s capacity to indorse—In the fourth place, the acceptor admits the capacity of the payee to indorse the bill when it is drawn payable to the payee’s order, for by the very act of acceptance he agrees to pay to his order;759 and, therefore, he cannot show that at the time of acceptance the payee was an infant, an insane person, a bankrupt, or a corporation without legal existence.760 It is a general principle, applicable to all negotiable securities, that a person shall not dispute 754

755

756 757

758

759 760

Raborg v. Peyton, 2 Wheat. 385; Hortsman v. Henshaw, 11 How. 177; Heurtematte v. Morris, 101 N.Y. 63 Daniel on Negotiable Instruments, 174-176; Park v. Nichols, 20 Ill. App. 143; Klopfer v. Levi, 33 Mo. App. 322 Story on Bills, 113; Byles on Bills [193], 325 Halifax v. Lyle, 3 Welsb., Hurl & Gord. (Exch.) 466; Braithwaite v. Gardiner, 8 Q.B. 473; Taylor v. Croker, 4 Esp. 187; Cowton v. Wickersham, 54 Pa. St. 302; Cooper v. Meyer, 10 B & C 468 Bass v. Clive, 4 Maule & S. 13; Aspinwall v. Wake, 10 Bing. 51 (portions omitted) Daniel on Negotiable Instruments, 93, 242 Jones v. Darch, 4 Price, 300; Smith v. Marsack, 6 C.B. 486; Drayton v. Dale, 2 B & C 293; Daniel on Negotiable Instruments, 93 et seq. (portions omitted)

446

Basic Principles and Jurisprudence on the Negotiable Instruments Law

the power of another to indorse such instrument, when he asserts by the instrument which he issued to the world, that the other has such power.761 Indeed, there could be no reason why the acceptor should be interested to show that the payee was incompetent to make the order; for he has been guaranteed in that regard by the drawer, and may charge the amount in account against him whether the payee were competent or not. (Ibid, pages 175-176) 5. Admission of agent’s handwriting and authority—In the fifth place, if the bill be drawn by one professing to act as agent of the drawer, the acceptance admits his handwriting and authority as agent to draw.762 (Ibid) Acceptance does not admit 1. Signature of payee—In the first place, it does not admit the genuineness of the signature of the payee when it purports to bear his indorsement, or that any other indorser, for with their handwriting he is not presumed to be familiar; and, therefore, if the signature of the payee or other indorser be forged, the acceptor will not be bound to pay the bill to anyone who is compelled to trace title through such indorsements.763 And if he has gone so far as to pay the bill to any one holding it under such forged indorsement, he may, as a general rule, recover back the amount.764 The rule would not apply, however, where the drawer had issued the bill with the forged indorsement upon it, for then the acceptor could charge the amount in account against him, and as the forged indorsement could in such case subject him to no loss, he would not be entitled to recover back the amount.765 The acceptance does not admit the signature of the indorser, even when the bill is payable to the drawer’s order, and purports to be indorsed by him in the same 761 762 763 764

765

Daniel on Negotiable Instruments, chap. 42, section 3 Robinson v. Yarrow, 7 Taunt 455; 1 Parsons on Notes and Bills, 322 Holt v. Ross, 54 N.Y. 474; Edwards on Bills, 432 Holt v. Ross, 54 N.Y. 474; Dick v. Leverich, 11 La. 573; Williams v. Drexel, 14 Md. 586 Hortsman v. Henshaw, 11 How. 177; Cogill v. American Exchange Bank, 1 N.Y. 113

447

handwriting as the drawer’s.766 But if the drawer is a fictitious person, and the bill is payable to the drawer’s order, the acceptor’s undertaking is that he will pay to the signature of the same person that signed for the drawer; and in such case the holder may show, as against the acceptor, that the signature of the fictitious drawer and of the first indorser are in the same handwriting. 767 (Daniel, Elements of the Law of Negotiable Instruments, page 177) 2. No admission of agency to indorse—In the second place, acceptance does not admit agency to indorse, which must be proved by the holder in order to recover against the acceptor, even though the acceptor acknowledges agency to draw the bill, and the indorsement was upon it at the time of acceptance. (Ibid) 3. No admission of genuineness of terms in body of the bill—In the third place, the acceptance does not admit the genuineness of the terms contained in the body of that bill at the time of the acceptance; and, therefore, if at that time they had been altered so as to purport to bind the drawer for a larger sum, or in a different manner than that in the original bill, he will not be bound by his acceptance to pay the amount, unless the drawer had by his own carelessness afforded opportunity for the alteration, and the acceptor could therefore charge him in account with the whole amount.768 But where the drawer alters it himself, or acquiesces in an alteration, before acceptance, it binds him, and therefore the acceptor.769 (Ibid, page 178) Sec. 144. When failure to present releases drawer and indorser. - Except as herein otherwise provided, the holder of a bill which is required by the next preceding section to be presented for acceptance must either present it for acceptance or negotiate it within a reasonable time. If he fails to do so, the drawer and all indorsers are discharged. 766 767 768

769

Robinson v. Yarrow, 7 Taunt 455; Williams v. Drexel, 14 Md. 566 Cooper v. Meyer, 10 B & C 468; Beeman v. Duck, 11 M & W 251 Young v. Grote, 4 Bing 253; Young v. Lehman, 63 Ala. 519; White Continental Nat. Bank, 64 N.Y. 320 Langton v. Lazarus, 5 M & W 628; Ward v. Allen, 2 Metc. (Mass.) 57

448

Basic Principles and Jurisprudence on the Negotiable Instruments Law

Sec. 145. Presentment; how made. - Presentment for acceptance must be made by or on behalf of the holder at a reasonable hour, on a business day and before the bill is overdue, to the drawee or some person authorized to accept or refuse acceptance on his behalf; and (a) Where a bill is addressed to two or more drawees who are not partners, presentment must be made to them all unless one has authority to accept or refuse acceptance for all, in which case presentment may be made to him only; (b) Where the drawee is dead, presentment may be made to his personal representative; (c) Where the drawee has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors, presentment may be made to him or to his trustee or assignee. Notes: To whom should the bill be presented for acceptance? The drawing of a bill imports a contract on the part of the drawer that the drawee is a person competent to accept and, therefore, if the holder upon presentment of the bill ascertains that the drawee is incapable of contracting. (Ibid, page 178-179) It follows, therefore, as a general rule, that the bill should and can be accepted only by the party on whom drawn or his authorized agent, except in the cases of acceptance for honor;770 and if a bill addresses to one be accepted by two persons, it has been thought that the acceptance of the first will be vitiated by having been altered in an essential part,771 unless made with the acceptor’s consent. But if any other person, after an acceptance, subsequently accepts the bill for the purpose of guaranteeing its credit, at the acceptor’s request, in the usual form of an acceptance, then, if there is a sufficient consideration, he may be bound thereby as a guarantor; but he is not liable as an acceptor.772 And the addition will not be a material alteration.773 (Ibid) 770

771 772 773

Polhill v. Walter, 3 B & Ad 114; May v. Kelly, 27 Ala. 497; Keenan v. Nash, 8 Minn. 409 Thompson on Bills, 112, 212 Story on Bills, 254; Jackson v. Hudson, 2 Campb. 447 Smith v. Lockridge, 425

449

How presentment for acceptance should be made The holder of the bill should have it in his possession, make an actual exhibit of it to the drawee, and request its acceptance.774 “The term presentment imports not a mere notice of existence of a draft which the party has in his possession, but the exhibiting of it to the person on whom it is drawn, that he may see the same, and examine his accounts or correspondence, and judge what he shall do; whether he shall accept the draft or not.”775 (Daniel, Elements of the Law of Negotiable Instruments, page 169) If the holder does not produce the bill, the drawee may require him to do so, and decline accepting, save in the proper form by writing his name on its face; and then unless the holder produces it the drawer cannot be charged with the penalties of non-acceptance; but if the drawee makes no such requirement and does what is equivalent to acceptance he cannot afterward refuse to be held on the ground that he did not see the bill.776 (Ibid) Sec. 146. On what days presentment may be made. - A bill may be presented for acceptance on any day on which negotiable instruments may be presented for payment under the provisions of Sections seventy-two and eighty-five of this Act. When Saturday is not otherwise a holiday, presentment for acceptance may be made before twelve o’clock noon on that day. Notes: Within what period of time presentment for acceptance must be made It seems to be the general commercial law of the civilized world, that when a bill is payable at a day certain—as, for instance, on a day named, or a fixed day after date—it need not be presented until the day of payment, in order to charge the drawer or an indorser.777 The reason for this is that the drawer, by fixing a date 774 775

776 777

1 Parsons on Notes and Bills, 348 Fall River Union Bank v. Willard, 5 Metc. (Mass.) 216; Edwards on Bills, 505 Fall River Union Bank v. Willard, 5 Metc. (Mass.)216 Townsley v. Sumrall, 2 Pet. 178; Bachellor v. Priest, 12 Pick. 399

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

certain for payment, assumes the responsibility of providing funds at that time, whatever may have been his previous credit with the drawee. And as to the indorser, by the very act of indorsement, he draws a new bill on the same terms; and, besides, he waives his right of immediate acceptance by not enforcing it himself, but putting his bill into circulation without acceptance.778 If payable at sight, or at a certain time after sight, or on demand, the only rule which can be laid down is that it must be presented within a reasonable time,779 unless there be some well-established usage of trade which fixes a definite time for such payment, in which case such usage would control.780 If the bill be not presented within a reasonable time, the drawee is discharged, although all the parties continue solvent, and there is no damage caused by the delay. 781 (Daniel, Elements of the Law of Negotiable Instruments, page 170 to 171) Sec. 147. Presentment where time is insufficient. - Where the holder of a bill drawn payable elsewhere than at the place of business or the residence of the drawee has no time, with the exercise of reasonable diligence, to present the bill for acceptance before presenting it for payment on the day that it falls due, the delay caused by presenting the bill for acceptance before presenting it for payment is excused and does not discharge the drawers and indorsers. Sec. 148. Where presentment is excused. - Presentment for acceptance is excused and a bill may be treated as dishonored by non-acceptance in either of the following cases: (a) Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to contract by bill. (b) Where, after the exercise of reasonable diligence, presentment cannot be made. (c) Where, although presentment has been irregular, acceptance has been refused on some other ground. 778 779 780 781

Allen v. Suydam, 17 Wend. 368 Wallace v. Agry, 4 Mason, 336; Bridgeport Bank v. Dyer, 19 Conn. 136 Mellish v. Rawdon, 9 Bing. 416 Carter v. Flower, 16 M & W 743; Thornburg v. Emmons, 23 W. Va. 333

451

Sec. 149. When dishonored by non-acceptance. - A bill is dishonored by non-acceptance: (a) When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or cannot be obtained; or (b) When presentment for acceptance is excused and the bill is not accepted. Sec. 150. Duty of holder where bill not accepted. - Where a bill is duly presented for acceptance and is not accepted within the prescribed time, the person presenting it must treat the bill as dishonored by non-acceptance or he loses the right of recourse against the drawer and indorsers. Notes: Liability of drawer before acceptance The drawer of a bill undertakes that when it is presented to the drawee he will accept it; any by acceptance is meant an undertaking on the acceptor’s part to pay the bill according to its tenor.782 Until the bill has been accepted, the drawer is the primary debtor, and his liability is contingent and conditioned upon a strict compliance with the law as to presentment of the bill for acceptance (if the bill be of such a character that it is necessary to present it for acceptance), and due protest and notice of dishonor. After acceptance, the drawer becomes secondarily liable, and his position is that of the first indorser upon a promissory note.783 (Daniel, Elements of the Law of Negotiable Instruments, page 172) Relation of drawee to bill before acceptance Until he has accepted the bill, so entirely is the drawee a stranger to it, that he may himself discount it. And he may then transfer it as the bona fide holder to another, who may sue and charge the drawer.784 (Daniel, Elements of the Law of Negotiable Instruments, page 173) 782 783 784

Story on Bills, 272; Cox v. National Bank, 100 U.S. 712 Daniel on Negotiable Instruments, 479 Desha v. Stewart, 6 Ala. 852; Swope v. Ross, 40 Pa. St. 186

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

Sec. 151. Rights of holder where bill not accepted. - When a bill is dishonored by non-acceptance, an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary.

XII. PROTEST Meaning of term “Protest” The term includes, in a popular sense, all the steps taken to fix the liability of a drawer or indorser, upon the dishonor of commercial paper to which he is a party. More accurately speaking, it is the solemn declaration on the part of the holder against any loss to be sustained by him by reason of the nonacceptance, or even nonpayment, as the case may be, of the bill in question; and a calling of the notary to witness that due steps have been taken to prevent it. The word “protest” signifies to testify before; and the testimony before the notary that proper steps were taken to fix the drawer’s liability is the substance, and the certificate of the notary the formal evidence, to which the terms protest is legally applicable.785 (Daniel, Elements of the Law of Negotiable Instruments, page 225) What instruments must or may be protested When a foreign bill of exchange is presented for acceptance or payment, and acceptance or payment is refused, the holder must take what is called a protest, in order to charge the drawer or any indorser. According to the law of most foreign nations, a protest is essential in the case of the dishonor of any bill.786 So indispensable is the protest of a foreign bill in case of its dishonor, that no other evidence will supply the place of it, and no part of the facts requisite to the protest can be proved by extraneous testimony, and it has been said, that it is a part of the constitution of a foreign bill.787 (Ibid, page 226) By whom the protest should be made and how authenticated As to the person by whom the protest should be made, it is necessary, as a general rule, that it should be made by a notary 785 786 787

Daniel on Negotiable Instruments, 929 Thompson on Bills (Wilson’s ed.), 307 Union Bank v. Hyde, 6 Wheat. 572; Borough v. Perkins, 1 Salk. 121

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public in person, and by the same notary who presented and noted the bill.788 The notary is a public officer, commissioned by the State, and possessing an official seal, and full faith and credit are given to his official acts, in foreign countries as well as his own.789 But when no notary can be conveniently found, the protest may be made by any respectable private individual residing in the place where the bill is dishonored.790 If, however, the protest is made by a notary, the official seal of the notary attached to the certificate of protest is everywhere received as a sufficient prima facie proof of its authenticity. The courts take judicial notice of the seal, and it proves itself by its appearance upon the certificate. But may be controverted as false, fictitious, or improperly annexed.791 But if the protest is made by a notary, and the certificate is not authenticated by the notary’s seal, or if it is made by a private person, it does not prove itself, and there must be extraneous evidence to show that it was duly made by the person officiating.792 (Supra, page 227-228) Place of protest It is usually made at the place where the dishonor occurs.793 If the protest be for non-acceptance, the place of protest should be the place where the bill is presented for acceptance, and a like rule obtains if the protest be for nonpayment;794 but when the bill is drawn upon the drawee in one place, and by its terms made payable in another, there is eminent authority for the statement that the protest for non-acceptance may be made at either place.795 (Supra, page 228) The presentment and demand of payment; notary must have personal knowledge of The first step taken is the presentment of the instrument to 788

789 790 791

792 793

794 795

Ocean Nat. Bank v. Williams, 102 Mass. 141; Sacriber v. Brown. 3 McLean, 481; Commercial Bank v. Varnum, 49 N.Y. 269; Commercial Bank v. Barksdale, 36 Mo. 563 Daniel on Negotiable Instruments, 579, 587 Burke v. McKay, 2 How. 66; Read v. Bank of Kentucky, 1 T.B. Mon. 91 Pierce v. Indseth, 106 U.S. 549; Nichols v. Webb, 8 Wheat. 326; Bradley v. Northern Bank, 60 Ala. 258 Carter v. Burley, 9 N.H. 558; Chanoine v. Fowler, 3 Wend. 173 Benjamin’s Chalmer’s Digest, 175; Ames on Bills and Notes, 450; Edwards on Bills, 580 Story on Bills, 282 Chitty on Bills, [334], 374

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the drawee, or acceptor, or maker, by the notary, and a demand of payment. By the law merchant, it is absolutely necessary that the notary himself should make his formal presentment and demand. And, although the holder may have already presented the bill and demanded acceptance or payment, and been refused, it is still necessary that the presentment and demand, which are to be made the basis of the notary’s certificate, should be made by him in person. For otherwise his testimony contained in the protest would be hearsay and secondary, and would lack the very element of certainty which the protest is especially designed to assure. Not even his clerk, nor, unless authorized by law, his deputy, can perform these functions for the notary, as it is to his official character that the law imputes the solemnity and sanction which are accorded his certificate.796 (Supra, page 228-229) What certificate must contain The protest, or, more strictly speaking, the notarial certificate thereof, should set forth: (1) The time of presentment; (2) The place of presentment; (3) The fact and manner of presentment; (4) The demand of payment; (5) The fact of dishonor; (6) The name of the party by whom presentment was made; and (7) The name of the person to whom presentment was made.797 (Supra, page 229) Protest; evidence only of facts that are and should be stated The admission of the certificate of protest as evidence only makes it evidence of such facts as it should and does distinctly state.798 The purpose of the certificate, as it has been seen, is to enable the plaintiff, by this species of documentary evidence, to prove all of the essential requirements of a formal and legal presentment of the instrument for acceptance or payment, and that due demand was made and that the bill or note was in fact dishonored. It follows, therefore, that the certificate of protest can be taken as evidence only as to the essentials stated, and hence the certificate is not evidence of any collateral facts which may be stated in it. (Supra, page 233)

796 797 798

Daniel on Negotiable Instruments, 579, 587, 938 Daniel on Negotiable Instrument, 950 Duchess County Bank v. Ibbottaon, 5 Den. 110

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Sec. 152. In what cases protest necessary. - Where a foreign bill appearing on its face to be such is dishonored by nonacceptance, it must be duly protested for non-acceptance, by non-acceptance is dishonored and where such a bill which has not previously been dishonored by nonpayment, it must be duly protested for nonpayment. If it is not so protested, the drawer and indorsers are discharged. Where a bill does not appear on its face to be a foreign bill, protest thereof in case of dishonor is unnecessary. Notes: Contract of an indorser and Contract of a guarantor/surety distinguished. The distinction was laid down in the case of Allied Banking Corporation vs. Court of Appeals, et al799, to wit: 1. The contract of indorsement is primarily that of transfer, while the contract of guaranty is that of personal security.800 2. The liability of a guarantor/surety is broader than that of an indorser. 3. Unless the bill is promptly presented for payment at maturity and due notice of dishonor given to the indorser within a reasonable time, he will be discharged from liability thereon.801 On the other hand, except where required by the provisions of the contract of suretyship, a demand or notice of default is not required to fix the surety’s liability.802 Sec. 153. Protest; how made. - The protest 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;

799 800

801 802

G.R. No. 125851, July 11, 2006, [Quisumbing, J.] Acme Shoe, Rubber & Plastic Corp. v. Curt of Appeals, G.R. No. 103576, August 22, 1996, 260 SCRA 714, 719 Supra note 5 (Sec. 152. NIL) Umali v. Court of Appeals, G.R. No. 126490, March 31, 1998, 288 SCRA 422, 439

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

(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. Sec. 154. Protest, by whom made. - Protest may be made by: (a) A notary public; or (b) By any respectable resident of the place where the bill is dishonored, in the presence of two or more credible witnesses. Sec. 155. Protest; when to be made. - When a bill is protested, such protest must be made on the day of its dishonor unless delay is excused as herein provided. When a bill has been duly noted, the protest may be subsequently extended as of the date of the noting. Illustrative Case: A bill was protested on the 25th September, but nothing on the bill was 24th September. The extended protest dated 25th September contained 25th September was date of noting. The protest was held invalid. (M’Pherson v. Wright, 12 Secs, Cas. 942, cited in Brannan, page 143) Sec. 156. Protest; where made. - A bill must be protested at the place where it is dishonored, except that when a bill drawn payable at the place of business or residence of some person other than the drawee has been dishonored by nonacceptance, it must be protested for non-payment at the place where it is expressed to be payable, and no further presentment for payment to, or demand on, the drawee is necessary. Sec. 157. Protest both for non-acceptance and non-payment. - A bill which has been protested for non-acceptance may be subsequently protested for non-payment.

457

Sec. 158. Protest before maturity where acceptor insolvent. Where the acceptor has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors before the bill matures, the holder may cause the bill to be protested for better security against the drawer and indorsers. Sec. 159. When protest dispensed with. - Protest is dispensed with by any circumstances which would dispense with notice of dishonor. Delay in noting or protesting is excused when delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, the bill must be noted or protested with reasonable diligence. Sec. 160. Protest where bill is lost and so forth. - When a bill is lost or destroyed or is wrongly detained from the person entitled to hold it, protest may be made on a copy or written particulars thereof.

XIII. ACCEPTANCE FOR HONOR There is a peculiar kind of acceptance called acceptance for honor, or supra protest. This most frequently happens when the original drawee (and the drawee au besoin, if any) refuses to accept the bill, in which case a stranger may accept the bill for the honor of some one of the parties thereto, which acceptance will inure to the benefit of all the parties subsequent to him for whose honor it was accepted.803 (Daniel, Elements of the Law of Negotiable Instruments, page 183-184) An acceptance for honor is only allowable when acceptance by the drawee has been refused, and then the bill has been protested, and hence it is called acceptance supra protest.804 The reason assigned for this is that the drawers and indorsers have a right to say that the bill was not primarily drawn on the acceptor for honor; and the only proof of the refusal of the 803

804

Konig v. Bayard, 1 Pet 250; Hoare v. Cazenove, 16 East, 391; Story on Bills, 255, 256 Bailey on Bills, 177; Story on Bills, 255, 256

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

original drawee is by protest, that being the known instrument, by the customs of merchants, to establish the facts.805 The usual form used in such acceptance is, “Accepted supra protest, for the honor of A.B.” Another approved form is, “Accepted under protest, for the honor of A.B., and will be paid for his account, if regularly protested and refused when due.” It is essential that the acceptor for honor appear before a notary public and declare that he accepts the protested bill in honor of the drawer or indorser, as the case may be, and that he will pay it at the appointed time.806 (Ibid) It is the duty of the acceptor supra protest, as soon as he has made the acceptance, to notify the fact to the party for whose honor it is done;807 and the party paying a bill under protest for honor must give reasonable notice to the person for whose honor he pays, otherwise he will not be bound to refund.808 (Ibid) Who may be an acceptor for honor? A stranger may undoubtedly accept for honor; and by the word stranger in this connection is meant any third person not a party to the bill. It seems that acceptance for honor may also be made by the drawee, who, if he does not choose to accept the bill drawn generally on account of the person in whose favor, or on whose account, he is advised it is drawn, he may accept it for honor of the drawer, or of the indorsers, or of all or any of them.809 (Ibid, page 185) But if the drawee were bound in good faith to accept the bill, he cannot change his relations to the parties, and accept it supra protest for the honor of an indorser; he must either accept or refuse.810 (Ibid) An acceptor supra protest for the honor of an indorser may, however, recover against such indorser, though he accepted at the instance of the drawee, and as his agent, provided the indorser were not thereby damnified. The indorser might avail himself of any defense which he could have made, and the drawee accepted 805 806 807 808 809 810

Story on Bill, 256 Gazzam v. Armstrong, 3 Dana, 554 Story on Bills, 259; Edwards on Bills, 441 Wood v. Pugh, 7 Ohio, Pt. II, 156 Story on Bills, 259 Schimmelpennich v. Bayard, 1 Pet. 264

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for his honor, and then sued upon the acceptance.811 It is immaterial, indeed, as to the defenses which a drawer or indorser may make against an acceptor for honor, whether such acceptor acted at the instance of the drawer, or as the agent of the drawee.812 (Ibid) Several acceptors for honor of different parties While there cannot be successive acceptors of a bill, generally speaking, there may be several acceptors supra protest for the honor of different parties—that is, one may accept for the honor of the drawer, another for the honor of the first indorser, and another for the honor of the second indorser, and so on.813 (Ibid, page 185) And the acceptor supra protest may accept for the honor of any one, or all, of the parties to the bill; and his acceptance should designate for whose honor it was made, in which case it could be at once perceived for who benefit it inured.814 If the acceptance do not specify for whose honor it was made, it will be construed to be for the honor of the drawer;815 and if for the honor of the bill, or of all the parties, it should be so expressed.816 (Ibid, pages 185186) Sec. 161. When bill may be accepted for honor. - When a bill of exchange has been protested for dishonor by nonacceptance or protested for better security and is not overdue, any person not being a party already liable thereon may, with the consent of the holder, intervene and accept the bill supra protest for the honor of any party liable thereon or for the honor of the person for whose account the bill is drawn. The acceptance for honor may be for part only of the sum for which the bill is drawn; and where there has been an acceptance for honor for one party, there may be a further acceptance by a different person for the honor of another party. 811 812 813

814 815 816

Konig v. Bayard, 1 Pet, 250 Gazzam v. Armstrong, 3 Dana, 554; Wood v. Pugh, 7 Ohio, 156 Story on Bills, 260; Byles on Bills [255], 403; 1 Parsons on Notes and Bills, 315 Hussey v. Jacob, 1 Ld. Raym. 88; 1 Parsons on Notes and Bills, 313 Gazzam v. Armstrong, 3 Dana, 552 Goodall v. Polhill, 1 C.B. 233; Byles on Bills [259], 406

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

Sec. 162. Acceptance for honor; how made. - An acceptance for honor supra protest must be in writing and indicate that it is an acceptance for honor and must be signed by the acceptor for honor. Sec. 163. When deemed to be an acceptance for honor of the drawer. - Where an acceptance for honor does not expressly state for whose honor it is made, it is deemed to be an acceptance for the honor of the drawer. Sec. 164. Liability of the acceptor for honor. - 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. Notes: Liability of the acceptor for honor The acceptance for honor or supra protest is not an absolute engagement like an ordinary acceptance for value. It is a conditional engagement, and to render it absolute, the performance of several acts as conditions precedent are essential. Such an acceptance, says Lord Tenterden, C.J., “is to be considered not as absolutely such, but in the nature of a conditional acceptance. It is equivalent to saying to the holder of the bill, ‘keep this bill, don’t return it, and when the time arrives at which it ought to be paid, if it be not paid by the party to whom it was originally drawn, come to me and you shall have your money.’”817 The nature of such an acceptor’s undertaking is more analogous to that of an indorser818 than that of an ordinary acceptor, and to render him absolutely liable it is necessary: First. To present the bill at maturity to the original drawee, notwithstanding his prior refusal, because between the time of such refusal and the time of maturity, effects may have reached the drawee, out of which he might, if the bill were again presented, pay it; and the drawer and other parties are entitled to the chance of any benefit which might arise from such second demand. And if it were not made (except in the case of a bill made payable at a 817 818

Williams v. Germaine, 7 B & C 457 1 Parsons on Notes and Bills, 315

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place not being the residence of the drawee), the drawer and indorsers would be discharged; and as the acceptor supra protest would thereby lose recourse against him, he is also discharged.819 Second. Upon refusal by the original drawee to pay the bill when it is presented at maturity, it must be again protested for nonpayment, and such protest and presentment must be alleged in the declaration against the acceptor supra protest. And third, it is then necessary to present the bill in due time to the acceptor supra protest.820 If on such presentment the acceptor supra protest refuses to pay, there must be another formal protest, stating the presentment for payment to the drawee, the protest for his nonpayment, the presentment of the bill and acceptance to the acceptor supra protest, and demand of payment of him, and the protest for his nonpayment; and notice thereof must be forthwith forwarded to the drawer and indorsers.821 (Daniel, Elements of the Law of Negotiable Instruments, page 187) Admissions of acceptor for honor The rule has been broadly stated to be that he does not admit the genuineness of the signature of any party for whose honor the acceptance is given, not even the drawer’s and therefore he could recover money paid to the holder if the bill should prove to be a forgery;822 but the rule stated is certainly subject to the modification that one who accepts for the honor of the drawer is estopped from denying that the bill is a valid bill; and, consequently, it would not be competent for him to set up a defense to an action by an indorsee that the payee is a fictitious person, and that he was ignorant of the fact at the time he accepted the bill.823 (Supra, page 188) Holder not bound to take acceptance for honor The holder is in no case bound to take an acceptance for honor;824 but if he receives it, and it is for the honor of a particular 819 820 821 822 823 824

Barry v. Clark, 19 Pick. 220; Story on Bills, 261 Chitty on Bills [350, 351], 392; Story on Bills, 261 Chitty on Bills [352], 393; 1 Parsons on Notes and Bills, 320 1 Parsons on Notes and Bills, 323 Phillips v. Thurn, 18 C.B. (N.S.) 694 Mitford v. Walcott, 12 Mod. 410; Chitty on Bills [345], 387

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

party, he cannot sue such party until the maturity of the bill, and its dishonor by the acceptor supra protest.825 And if the acceptance is for the honor of all the parties to the bill, he cannot sue any of them until it has matured and been dishonored.826 (Supra, page 188) Sec. 165. Agreement of acceptor for honor. - The acceptor for honor, by such acceptance, 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 provided also that is shall have been duly presented for payment and protested for non-payment and notice of dishonor given to him. Sec. 166. Maturity of bill payable after sight; accepted for honor. - Where a bill payable after sight is accepted for honor, its maturity is calculated from the date of the noting for nonacceptance and not from the date of the acceptance for honor. Notes: Professor Ames explains that: “[s]ection 166 enacts that the maturity of an acceptance for honor of a bill payable after sight shall be calculated from the date of the noting for non-acceptance, and not, as was erroneously decided in Williams v. Germaine827, from the date of the acceptance for honor.” (Brannan, page 146) Sec. 167. Protest of bill accepted for honor, and so forth. Where a dishonored bill has been accepted for honor supra protest or contains a referee in case of need, it must be protested for non-payment before it is presented for payment to the acceptor for honor or referee in case of need. Sec. 168. Presentment for payment to acceptor for honor, how made. - Presentment for payment to the acceptor for honor must be made as follows: (a) If it is to be presented in the place where the protest for non-payment was made, it must be presented not later than the day following its maturity. 825 826 827

Williams v. Germaine, 7 B & C, 468 Story on Bills, 258 7 B & C, 408

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(b) If it is to be presented in some other place than the place where it was protested, then it must be forwarded within the time specified in Section one hundred and four. Sec. 169. When delay in making presentment is excused. The provisions of Section eighty-one apply where there is delay in making presentment to the acceptor for honor or referee in case of need. Sec. 170. Dishonor of bill by acceptor for honor. - When the bill is dishonored by the acceptor for honor, it must be protested for non-payment by him.

XIV. PAYMENT FOR HONOR Sec. 171. Who may make payment for honor. - Where a bill has been protested for non-payment, any person may intervene and pay it supra protest for the honor of any person liable thereon or for the honor of the person for whose account it was drawn. Sec. 172. Payment for honor; how made. - The payment for honor supra protest, in order to operate as such and not as a mere voluntary payment, must be attested by a notarial act of honor which may be appended to the protest or form an extension to it. Sec. 173. Declaration before payment for honor. - The notarial act of honor must be founded on a declaration made by the payer for honor or by his agent in that behalf declaring his intention to pay the bill for honor and for whose honor he pays. Sec. 174. Preference of parties offering to pay for honor. Where two or more persons offer to pay a bill for the honor of different parties, the person whose payment will discharge most parties to the bill is to be given the preference. Sec. 175. Effect on subsequent parties where bill is paid for honor. - Where a bill has been paid for honor, all parties

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

subsequent to the party for whose honor it is paid are discharged but the payer for honor is subrogated for, and succeeds to, both the rights and duties of the holder as regards the party for whose honor he pays and all parties liable to the latter. Sec. 176. Where holder refuses to receive payment supra protest. - Where the holder of a bill refuses to receive payment supra protest, he loses his right of recourse against any party who would have been discharged by such payment. Sec. 177. Rights of payer for honor. - The payer for honor, on paying to the holder the amount of the bill and the notarial expenses incidental to its dishonor, is entitled to receive both the bill itself and the protest.

XV. BILLS IN SET Notes: In order to avoid delay and inconvenience which may result from the loss or miscarriage of a foreign bill, and to facilitate and expedite its transmission for acceptance or payment, the custom has prevailed from an early period for the drawer to draw and deliver to the payee several parts of the same bill of exchange, which may be forwarded by different conveyances, and any one of them being paid, the others are to be void. These several parts are called a set, and constitute in law one and the same bill.828 Sometimes there are four, but usually three parts.829 And if any person undertakes to draw or deliver a foreign bill to another person, it seems that he is bound to deliver the usual number of parts,830 and it has been thought that the promise may, in such a case, demand as many parts as he pleases.831 (Daniel, Elements of the Law of Negotiable Instruments, page 39) It is usual for the drawer, and to his protection it is essential, to incorporate in each part of the set a condition that it shall only 828 829 830 831

Daniel on Negotiable Instruments, 113; Story on Bills, 66 Daniel on Negotiable Instruments, 113; Story on Bills, 66 Kearney v. West Granada Mining Co., 1 H & N, 412 Chitty on Bills [154], 178; Byles on Bills [376], 556

465

be payable provided the other remains unpaid. This operates as notice to the world that all the parts constitute one bill, and if drawee pay any part, the whole is extinguished.832 The drawee should accept but one part of the set. And having accepted one part, he should not pay another part, for he would still be liable on the accepted part.833 When, however, he pays the part he accepts, the whole bill is extinguished.834 For it is the duty of the person taking one part to inquire after the others; and he is advertised by their absence they, or one of them, may be outstanding in the hands of a prior bona fide holder.835 Sec. 178. Bills in set constitute one bill. - Where a bill is drawn in a set, each part of the set being numbered and containing a reference to the other parts, the whole of the parts constitutes one bill. Sec. 179. Right of holders where different parts are negotiated. - Where two or more parts of a set are negotiated to different holders in due course, the holder whose title first accrues is, as between such holders, the true owner of the bill. But nothing in this section affects the right of a person who, in due course, accepts or pays the parts first presented to him. Sec. 180. Liability of holder who indorses two or more parts of a set to different persons. - Where the holder of a set indorses two or more parts to different persons he is liable on every such part, and every indorser subsequent to him is liable on the part he has himself indorsed, as if such parts were separate bills. Sec. 181. Acceptance of bill drawn in sets. - The acceptance may be written on any part and it must be written on one part only. If the drawee accepts more than one part and such accepted parts negotiated to different holders in due course, he is liable on every such part as if it were a separate bill. 832 833 834 835

Daniel on Negotiable Instruments, 114; Ingraham v. Gibbs, 2 Dall 134 Holdsworth v. Hunter, 10 B & C, 449; Chitty on Bills [155], 178 Ibid Lang v. Smyth, 7 Bing, 284, 294; 5 M & P, 7

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

Sec. 182. Payment by acceptor of bills drawn in sets. - When the acceptor of a bill drawn in a set pays it without requiring the part bearing his acceptance to be delivered up to him, and the part at maturity is outstanding in the hands of a holder in due course, he is liable to the holder thereon. Sec. 183. Effect of discharging one of a set. - Except as herein otherwise provided, where any one part of a bill drawn in a set is discharged by payment or otherwise, the whole bill is discharged.

XVI. PROMISSORY NOTES AND CHECKS Sec. 184. Promissory note, defined. - A negotiable promissory note within the meaning of this Act is an unconditional promise in writing made 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 in money to order or to bearer. Where a note is drawn to the maker’s own order, it is not complete until indorsed by him. Notes: A complaint on a note payable to the maker’s order which fails to allege indorsement by the maker is defective. (Simon v. Mintz, 51 Misc. Rep. 670, 101 N.Y. Supp. 86; Edelman v. Rams, 58 Misc. Rep. 561, 109 N.Y. Supp. 816, cited in Brannan, page 150) Illustrative Cases: An instrument reading “Having been cause of a money loss to my friend X, I have given her three hundred dollars. I hold this amount in trust for her and one year after date or thereafter, on demand, I promise to pay to the order of X, her heirs or assigns, three hundred dollars with interest” is a valid promissory note. As it does not appear upon the fact that there was no consideration or an invalid consideration, it will be presumed that there was a valid consideration. In the absence of evidence to the contrary the court must assume that the money loss referred to was legally chargeable to the maker. (Hickok v. Bunting, 92 App. Div. 167, 86 N.Y. Supp. 1059, cited in Brannan, page 151)

467

A stipulation in a promissory note that “no extension of time of payment, with or without our knowledge, by the recipient of interest or otherwise, shall release us or either of us from the obligation of payment” is an express contract that the time of payment may be extended to any one or all of the sureties, guarantors, indorsers, or makers of the note without notice to all or any one of them and renders the note non-negotiable. (Union Stockyards Nat. Bank v. Bolan, 14 Idaho 87, 93 Pac. 508, 125 Am. St. Rep. 146, ibid) Sec. 185. Check, defined. - A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check. Notes: The provision that a check is a bill of exchange is declaratory. (M’Lean v. Clydesdale Banking Co., 9 App. Cas. 95, cited in Brannan, page 152) An order on a bank to pay “provided the receipt form at the foot hereof is duly signed, stamped, and dated,” is not an unconditional order to pay and is therefore not a check. (Bavins v. London & S.w. Bank, [1900] 1 Q.B. 270, ibid) But a check which bore at the foot the words “The receipt at the back hereof must be signed, which signature will be taken as an indorsement of the check,” and on the check of which was a receipt form, is negotiable, since the order to pay is unconditional, the words at the foot not being addressed to the bankers and not affecting the order to them. (Nathan v. Ogdens, 21 T.L.R., 775 (semble), ibid) Illustrative Case: A deposit in the A bank by the drawer of a certified check of the B bank is not the same as a deposit of cash, although the amount is credited to the depositor, and if the B bank fails the depositor cannot hold the A bank, no negligence in failing to present the check for payment being shown. (Gaden v. Newfoundland Savings Bank [1899] A.C. 281, Privy Council, ibid)

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

Sec. 186. Within what time a check must be presented. - A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. Notes: This refers only to delay in the presentment of checks but is silent on delay in giving notice of dishonor. (Great Asian Sales Center Corporation vs. Court of Appeals, G.R. No. 105774, April 25, 2002, [Carpio, J.]) Where the payee of a check indorsed and deposited it in his own bank, which credited him with the amount as cash to be drawn against, the bank became prima facie the owner of the check and not a mere agent to collect, and in order to charge the payee as indorser the bank must present the check to the drawee bank within a reasonable time. (Aebi v. Bank of Evansville, 124 Wis. 73, 102 N.W. 329, 68 L.R.A. 964, 109 Am. St. Rep. 925, cited in Brannan, page 153) The indorser of a check does not waive delay in presentment and renew his obligation by procuring and indorsing a duplicate of a lost check from liability upon which he has been discharged by such delay. (ibid) Although under sec. 185 a check is a bill of exchange payable on demand, it is intended for immediate use and not to circulate as a promissory note. Therefore the transfer of a check to successive holders, where it is drawn and delivered in the place where the drawee bank is located, does not extend the time for presentment. If the check is delivered on one day and is not presented before the close of banking hours the next business day, the drawer is discharged to the extent of the loss suffered from the failure to present. (Gordon v. Levine, 194 Mass. 418, 80 N.E. 505, 120 Am. St. Rep. 565; Matlcok v. Scheuerman, 51 Oregon 49, 93 Pac. 823, 17 L.R.A. (N.S.) 747, S.C. secs. 25, 53, 56; Dehoust v. Lewis, 128 App. Div. 131, 112 N.Y. Supp. 559, ibid) In an action on a check unpaid because of the payee’s failure to present within a reasonable time and until after the closing of

469

the drawee bank, the burden is on the plaintiff to show that the drawer has suffered no loss by said delay. (Dehouset v. Lewis, supra) Sec. 187. Certification of check; effect of. - Where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance. Notes: The holder has no right to demand from the bank anything but payment of the check. And the bank has no right, as against the drawer, to do anything else but pay it. Consequently, there is no such thing as acceptance of checks in the ordinary sense of the term. For acceptance ordinarily implies that the drawer requests the drawee to pay the amount at a future day, and the drawee “accepts” to do so, thereby becoming the principal debtor, and the drawer being his surety. But still, by consent of the holder, the bank may enter into an engagement quite similar to that of acceptance, by certifying the check to be “good” instead of paying it.836 Where the drawer of a check before delivery to the payee procuress its certification and the bank fails before presentation for payment, the bank is not liable on the check of the drawer, but only to the holder, and therefore the drawer on receiving the check from the payee cannot set it off against a debt to the bank. (Schlesinger v. Kurzok, 47 Misc. R. 634, 94 N.Y. Supp. 442, cited in Brannan, page 154) Notice to a bank by a depositor that his certified check, indorsed in blank, had been lost and to stop payment would not justify the bank in refusing payment to a holder in due course. (Poess v. Twelfth Ward Bank, 43 Misc. R. 45, 86 N.Y. Supp. 857, semble, S.C. secs. 16, 51., ibid) Illustrative Case: The payee of a check given to him for value transferred it, also for value, to plaintiff, but without indorsing it. The payee died the next day, and the drawer, although having no equities against 836

Daniel on Negotiable Instruments, 1601

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

the check, stopped payment. Plaintiff subsequently sent the check to the drawee bank, and the teller certified it without asking any questions. Held, that under sec. 49 N.I.L. the title of the payee vested in the plaintiff, and that the bank was liable to him upon its certification. (Meuer v. Phoenix Nat. Bank, 94 App. Div. 331, 88 N.Y. Supp. 83, S.C. sec. 49, ibid) Sec. 188. Effect where the holder of check procures it to be certified. - Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon. Notes: By certifying a check (1) the bank becomes the principal and only debtor; (2) the holder by taking a certificate of the check from the bank, instead of requiring payment, discharges the drawer;837 (3) and the check then circulates as the representative of so much cash in bank, payable on demand to the holder. Such in brief is the effect of the certification of a check. It has been said to be, and obviously is, “equivalent to acceptance”838 in respect to the obligation it creates upon a bank; but it would be confounding terms to regard it as altogether the same thing in its effect upon the relations of parties. (Daniel, page 22) The certification by a bank of an acceptance made payable at its counter by one of its customers, has the same effect and imports the same obligation on the part of the bank as the like certification of a check drawn upon it.839 It is a short-hand certificate of deposit.840 (ibid) No particular words are essential to a legal certification of a check—it is usual to use the word “good”841—it is sufficient if the name or initials of the proper officer is written on, or across, the fact of the check.842 837

838 839 840

841 842

Boyd v. Nasmith, 17 Ont. 42, citing Daniel on Negotiable Instruments, 1601a Merchants’ Bank v. State Bank 10 Wall. 647 Flour City Nat. Bank v. Traders’ Nat. Bank, 42 Hun, 244 Thomas v. Bank of British North America, 82 N.Y. 1; Farmers’ Bank v. Bank of Allen County (Tenn.), 12 S.W. 545 Barnet v. Smith, 10 Fost. 256 Morse on Banking, 284

471

The mere acceptance by the payee of a check certified by the procurement of the drawer is not a discharge of the drawer, even though the bank at the time the check was certified transferred the amount to the credit of the payee, such transfer being without the knowledge or acquiescence of the payee. (Cullinan v. Union Surety & Guaranty Co., 79 App. Div. 409, 80 N.Y. Supp. 58, cited in Brannan, page 105) But where the holder procures certification of a check, this is payment to the amount of the check, and where the check contained a statement on the back that it was to be in full payment, such procuring of certification is an acceptance of the check in full payment. (St. Regis Paper Co. v. Tonawanda Co., 107 App. Div. 90, 94, N.Y. Supp. 946, ibid) When the holder procures certification of a check, the drawer is discharged and the bank becomes a debtor to the holder and cannot avoid payment by showing that the holder obtained the check from the drawer by false pretenses. The certification has the same effect as if the holder had drawn the money, re-deposited it and taken a certificate of deposit of it. (Brannan, page 155) Sec. 189. When check operates as an assignment. - A check of itself does 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. Notes: Before its payment or certification by the bank the drawer of a check may countermand the order, and payment thereafter to the payee by the bank is wrongful. (Pease & Dwyer v. State Nat. Bank, 114 Tenn. 693, 88 S.W. 172, cf. Unaka Bank v. Butler, supra, sec. 56; Poess v. Twelfth Ward Bank, supra, sec. 187.) A bank is under no legal obligation to the holder of an unaccepted and uncertified check. Payment is therefore voluntary and cannot be recovered back from a bona fide holder on the ground that the drawer had previously countermanded payment of the check. (National Bank v. Berrall, 70 N.J.L. 757, 58 Atl. 189, 103 Am. St. Rep. 821, cited in Brannan, page 156)

472

Basic Principles and Jurisprudence on the Negotiable Instruments Law

A drawee bank paid and charged to the account of the drawer checks indorsed by an agent of the payee who had no authority to indorse or collect the checks, and who appropriated the money. Held, that the bank was not liable to the payee in assumptsit for money had and received. (B & O. Ry. Co. v. First Nat. Bank, 102 Va. 753, 47 S.E. 837, ibid) A bank being asked to cash a check on another bank, telephones to the drawee bank and was informed that the check was “good” or “all right,” and thereupon cashed the check, but before presentment for payment the drawer notified the drawee bank not to pay the check. Held, the drawee bank was not liable on the check, because it was not acceptor or certified in writing. (Van Buskirk v. State Ban, 35 Colo. 142, 83 Pac. 778, 117 Am. St. Rep. 182, ibid) Notwithstanding section 189, an action in equity will lie by the payee of a check to whom an assignment of the fund was also given, and such assignment will be upheld against subsequent claimants. (Hope v. Stanhope State Bank, 138 Iowa, 39, 115 N.E. 476, cited in Brannan, page 156)

XVII. GENERAL PROVISIONS Sec. 190. Short title. - This Act shall be known as the Negotiable Instruments Law. Sec. 191. Definition and meaning of terms. - In this Act, unless the contract otherwise requires: “Acceptance” means an acceptance completed by delivery or notification; ”Action” includes counterclaim and set-off; ”Bank” includes any person or association of persons carrying on the business of banking, whether incorporated or not; ”Bearer” means the person in possession of a bill or note which is payable to bearer;

473

”Bill” means bill of exchange, and “note” means negotiable promissory note; ”Delivery” means transfer of possession, actual or constructive, from one person to another; ”Holder” means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof; ”Indorsement” means an indorsement completed by delivery; ”Instrument” means negotiable instrument; ”Issue” means the first delivery of the instrument, complete in form, to a person who takes it as a holder; ”Person” includes a body of persons, whether incorporated or not; ”Value” means valuable consideration; ”Written” includes printed, and “writing” includes print. Notes: BEARER The maker of a note who has obtained possession of it by theft after it has been indorsed in blank by the payee is the bearer within the meaning indorsed in bank by the aye is the bearer within the meaning of the statute. (Mass Nat. Bank. v. Snow, 187 Mass. 159 , 72 N.E, 959, S.C., secs. 9-5, 16, 56, 124, cited in Brannan, page 158) INDORSEMENT The possessor of an undisclosed bill payable to order, who is not the payee is neither a “holder” not a “bearer”. (Day v. Longhurst, W.N. (1893), cited in Brannan, page 158)

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

Sec. 192. Persons primarily liable on instrument. - The person “primarily” liable on an instrument is the person who, by the terms of the instrument, is absolutely required to pay the same. All other parties are “secondarily” liable. Note: An accommodation maker is a person primarily liable even though he add the word “surety” to his signature or the fact that he signed for accommodation is otherwise known to the holder. (Cited in Brannan, page 159) Sec. 193. Reasonable time, what constitutes. - In determining what is a “reasonable time” regard is to be had to the nature of the instrument, the usage of trade or business with respect to such instruments, and the facts of the particular case. Sec. 194. Time, how computed; when last day falls on holiday. - Where the day, or the last day for doing any act herein required or permitted to be done falls on a Sunday or on a holiday, the act may be done on the next succeeding secular or business day. Sec. 195. Application of Act. - The provisions of this Act do not apply to negotiable instruments made and delivered prior to the taking effect hereof. Sec. 196. Cases not provided for in Act. - Any case not provided for in this Act shall be governed by the provisions of existing legislation or in default thereof, by the rules of the law merchant. Sec. 197. Repeals. - All acts and laws and parts thereof inconsistent with this Act are hereby repealed. Sec. 198. Time when Act takes effect. - This Act shall take effect ninety days after its publication in the Official Gazette of the Philippine Islands shall have been completed. Enacted: February 3, 1911

475

APPENDIX A SUMMARY OF DOCTRINES843 Origin on Negotiability844 1. The negotiability of bills of exchange and promissory notes originated in the custom of merchants. The statute of Anne, which is declaratory of the common law, established the negotiability of promissory notes.845 Distinction between Assignability and Negotiability846 2. Assignability pertains to contracts in general.847 3. An assignment is the legal method of transferring property or rights evidenced by contract.848 4. It is an impracticable method, as regards a circulating medium, because:849 a. Title created by assignment, as against the debtor, is not complete without notice to the debtor. b. No subsequent purchaser of the property or right can acquire better title than that of his immediate assignor. 5. Negotiability pertains to a special class of contracts.850 6. Negotiability facilitates their transfer as a circulating medium, because:851 (No. 6-7) a. The bona fide purchaser for value is presumed to be the true owner, and has good title. b. Transfer is effected by indorsement or delivery.

843

844 845 846 847 848 849 850 851

As found on the pages of the book Handbook of Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900 Id., p. 1 Id. Id., p. 9 Id., p. 9 Id. Id. Id. Id.

476

Basic Principles and Jurisprudence on the Negotiable Instruments Law

c. In general, a consideration for the contractual relation is conclusively presumed as between parties not immediate. Indicia of Negotiability852 7. The instrument must contain express words of negotiability, although there is no set form of such expression. It is enough if the intention of the parties to make it negotiable can be fairly construed from the terms of the contract.853 (8) 8. The usual form of making an instrument negotiable is making it payable either854 (9) a. To order, or b. To bearer Purpose of Negotiability855 9. Negotiable bills and notes in some respects play the part of money in business affairs. The fundamental purpose of negotiability is to endow them with all qualities necessary for a limited commercial medium.856 (10) Payment by Negotiable Instrument857 10. The common rules regarding a negotiable instrument as a medium of payment are as follows:858 (11) a. Where a negotiable instrument to which the debtor is a party as drawer, acceptor, maker, or indorser is received for a debt, whether precedent or contemporaneous, in the absence of agreement to the contract a presumption arises in most jurisdictions that the instrument is received in conditional, and not in absolute, payment. 852 853 854 855 856 857 858

Id., p. 14 Id. Id. Id., p. 17 Id. Id., p. 19 Id.

477

b. Where a negotiable instrument to which the debtor is not a party is received for a debt, in the absence of agreement to the contrary a presumption arises in most jurisdictions that the instrument is received in conditional payment if the debt was precedent; but that it is in absolute payment if the debt be contemporaneous. Definition and Forms of Bills of Exchange859 11. A bill of exchange is an unconditional order in writing upon one person by another for the payment of a sum of money absolutely and at all events.860 Bills of exchange are classified as foreign bills and inland bills.861 (12) Definition and Form of Note862 12. A promissory note is an unconditional written promise, signed but not sealed by the maker, to pay absolutely and at all events a sum certain in money, either to the bearer or to a person therein designate or to his order.863 (13) Essentials of Bill or Note864 13. To be a negotiable bill of exchange or promissory note, the instrument must have the following essential characteristics:865 (14) a. The bill must contain an order. b. The note must contain a promise. c. The order or promise must be unconditional. d. It must be an absolute order or promise for the payment of money alone.

859 860 861 862 863 864 865

Id., Id. Id. Id., Id. Id., Id.,

p. 22

p. 25 p. 26 p. 26

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

e. The amount of money must be certain. f.

The time of payment must be a time certain to arrive.

g. The instrument must be specific as to all its parties. h. The instrument must be delivered. Order contained in Bill866 14. An order means any form of words implying a right on the part of the drawer to command, and a corresponding duty on the part of the drawee to make, the payment specified.867 (15) Promise contained in Note868 15. A promise means any form of words from which an intent of the maker to pay can be construed.869 (16) Certainty as to the Terms of the Order or Promise870 16. A bill or note must be payable absolutely and at a time certain.871 (17) EXCEPTIONS—(a) If the instrument be payable upon the happening of an event which is certain to happen, though the time when it will happen be uncertain, the instrument is negotiable.872 (b) Bills and notes are subject to the implied conditions of presentment and notice of dishonor.873 17. The instrument must not be payable out of any particular fund.874 (18) DISTINCTION—Indicating to a drawee a source or fund out of which he may be reimbursed is not charging payment upon a particular fund.875 866 867 868 869 870 871 872 873 874 875

Id., Id. Id., Id. Id., Id. Id. Id., Id., Id.

p. 27 p. 29 p. 31

p. 32 p. 32

479

18. The following are absolute promises to pay money, and are negotiable instruments:876 (19) Instruments payable (a) On demand, or (b) At sight, or on a fixed period after sight or one in which no time is expressed which is equivalent to an instrument payable on demand. 19. An instrument payable in installments, even though it provides that upon non-payment of an installment the whole becomes due, is a negotiable instrument.877 (20) Payment of Money Only878 20. The instrument must be for payment in money only.879 (21) 21. A negotiable instrument must be for the payment of money without connected promise, whether disjunctive or conjunctive, for the performance of some other act.880 (22) 22. (a) A negotiable instrument may contain an additional agreement, which is not of the essence of the order or promise, but is merely incidental or collateral to it.881 (23) 23. (b) A negotiable instrument may give the holder an option between payment of money and some other thing.882 (24) 24. The amount of money to be paid out must be certain.883 (25) EXCEPTIONS—(a) That the instrument is payable with interest does not destroy its negotiability.884 (b) That the instrument is payable with current exchange does not destroy its negotiability.885 876 877 878 879 880 881 882 883 884 885

Id., p. 32 Id. Id., p. 42 Id. Id. Id. Id. Id. Id. Id.

480

Basic Principles and Jurisprudence on the Negotiable Instruments Law

Specification of Parties886 25. The instrument must be specific as to all its parties.887 (26) 26. By signature is meant any written emblem made by a person with the intent of entering into a contract obligation.888 (27) 27. The note or bill must contain the signature of the maker or maker, drawer or drawers.889 (28) 28. The bill must be addressed to some person.890 (29) EXCEPTIONS—(a) If the drawee can be otherwise sufficiently identified from the bill it is sufficient.891 (b) An unaddressed bill accepted or a bill accepted, where the drawer and acceptor are one and the same person, is to be treated as a promissory note, and is negotiable.892 29. The bill or note must point out some person to whom the money is to be paid.893 (30) The following are the common rules concerning the nomination of payees:894 a) The payee of an instrument, except one payable to bearer, must be a person in being, natural or legal, and ascertainable, at the time of issue. b) Where the payee and maker or drawer are the same person, the instrument is not issued until after its indorsement and delivery. c) The payee may be a fictitious or non-existing person, but the instrument is then construed as payable to bearer, and title thereto is made by estoppel.

886 887 888 889 890 891 892 893 894

Id., p. 54 Id. Id. Id. Id. Id. Id. Id. Id.

481

Capacity of Parties895 30. The capacity of parties is in general governed by the same rules as their power to make a contract. It is of two kinds:896 (31) a) Capacity to incur liability. b) Capacity to transfer the instrument. 31. The following classes of persons incur no liability, though they may make a valid transfer of the instrument:897 (32) a) A person non compos mentis. b) An infant. c) In some jurisdictions, a married woman. d) A corporation, when the act is ultra vires. 32. The following persons may transfer, but can incur only personal liability:898 (33) a) Executors. b) Administrators. c) Guardians. d) Trustees. Authority of Agent899 33. The power of persons to incur liability as parties to, and to transfer, negotiable instruments by the hands of others is governed by the general rules applicable to principals and agents.900 (34) EXCEPTION—An undisclosed principal cannot sue or be sued as a party to a negotiable instrument.901

895 896 897 898 899 900 901

Id., p. 63 Id. Id. Id., p. 64 Id., p. 65 Id. Id.

482

Basic Principles and Jurisprudence on the Negotiable Instruments Law

Delivery of Instruments902 34. A bill or note is inoperative as against the drawer or maker until delivery.903 (35) 35. Delivery means transfer of possession with intent to transfer title, and is of two kinds:904 (36) a) Actual delivery, which is effected by the manual passing of the instrument itself to the payee or his agent. b) Constructive delivery, which is effected by direction to a third person in actual possession of the instrument to deliver it to, or to hold it for, the payee.905 36. Delivery in escrow means delivery to a third person to hold until a certain event happens, or a certain condition is fulfilled. A bill or note delivered in escrow becomes absolute in the hands of a bona fide purchaser for value, whether or not the event happens or the condition is fulfilled.906 (37) Date907 37. A date in a bill or note is not necessary to its validity.908 (38) Value Received909 38. Value received is not necessary to be expressed in a negotiable instrument.910 (39) Days of Grace911 39. Days of grace are days added to the nominal time of payment of all bills or notes except those impliedly or 902 903 904 905 906 907 908 909 910 911

Id., Id. Id. Id. Id., Id., Id. Id., Id. Id.,

p. 67

pp. 67-68 p. 72 73 p 75

483

expressly payable on demand, and are computed by excluding the day of date and including the day of payment.912 (40) Acceptance of Bills of Exchange; Definition913 40. An acceptance is an undertaking by the drawee to pay the bill when due.914 (41) Acceptance According to Tenor915 41. The acceptance must be absolute and according to the tenor of the bill to bind all the parties to it.916 (42) 42. THE TENOR OF THE BILL—Is the request in the bill to pay the money at the time and place and in the manner mentioned in it. A change in the acceptance in any one of these respects renders the acceptance “qualified.”917 (43) 43. The payment of the bill by the acceptor may be made dependent on a condition. It is then called “conditional” acceptance.918 (44) 44. A qualified acceptance is only valid—919 (45) a) As to all parties subsequent to the acceptance. b) As to all prior parties who, upon due notice, assent. Who may Accept920 45. The only person permitted by the law merchant to be an acceptor is the person to whom the bill is addressed. Another person is liable only upon a collateral undertaking.921 (46) EXCEPTION—An acceptor for honor.922 912 913 914 915 916 917 918 919 920 921 922

Id. Id., p. 78 Id. Id., p. 82 Id. Id. Id. Id. Id., p. 86 Id. Id.

484

Basic Principles and Jurisprudence on the Negotiable Instruments Law

Delivery923 46. An acceptance is probably complete only upon delivery.924 (47) Forms and Varieties of Acceptance925 47. An acceptance, if in writing, is constituted by any words from which an intention to accept can be gathered.926 (48) 48. An acceptance, if verbal, is constituted by any words which evidence such intention clearly and unequivocally, if they addressed to the drawer or holder, and he waive his right to a written acceptance. An acceptance may also be implied from conduct evidencing such intention.927 (49) Same; Implied Acceptance928 49. AN IMPLIED ACCEPTANCE—Is any act which clearly indicates an intention to comply with the request of the drawer, or any conduct of the drawee from which the holder is justified in drawing the conclusion that the drawee intended to accept the bill, and intended to be so understood.929 (50) Same; Acceptance on Separate Paper930 50. If the bill is in existence, for the convenience of business the acceptance may be on a separate paper, but the promise must be clear and unequivocal.931 (51) 51. If the bill is not in existence, for the convenience of business the acceptance may be on a separate paper.932 923 924 925 926 927 928 929 930 931 932

Id., Id. Id., Id. Id. Id., Id. Id., Id. Id.

p. 88 p. 89

p. 93 p. 95

485

Its elements are:933 a) That the contemplated drawee shall described the bill to be drawn, and promise to accept it. b) That the bill shall be drawn in a reasonable time after such promise is written. c) That the holder shall take the bill upon the credit of the promise. Parol Acceptance of a Bill934 52. In the absence of statute to the contrary, an unequivocal parol promise to accept a specific existing bill is binding. But a promise to accept a future bill, even though the bill be taken by the holder upon the faith and credit of such promise, is not binding as an acceptance.935 (53) Acceptance for Honor or Supra Protest936 53. DEFINITION—An acceptance supra protest is an undertaking by a stranger to the bill, after protest, for the benefit of all parties subsequent to him for whose honor it is made, ad conditioned to pay the bill when it becomes due if the original drawee does not.937 (54) 54. An acceptance supra protest may be made—938 (54a) a) After dishonor by non-acceptance. b) After protest for better security after acceptance. Time Allowed for Acceptance939 55. The drawee is allowed a reasonable time, generally held to be 24 hours, within which to accept a bill of exchange.940

933 934 935 936 937 938 939 940

Id. Id., Id. Id., Id., Id. Id., Id.

p. 99 p. 101 pp 101-102 p. 103

486

Basic Principles and Jurisprudence on the Negotiable Instruments Law

Indorsement; definition941 56. INDORSEMENT—Is the writing of the name of the indorser on the instrument with the intent wither 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. It strictly applies only to negotiable instruments.942 Formal Requisites943 57. The formal requisites of an indorsement are:944 a) Though usually on the back of the instrument, an indorsement is on its face, but it must be somewhere upon it. When by reason of rapid circulation the instrument becomes filled with indorsements, the law merchant permits the holder to paste on a slip of paper for his own and subsequent indorsements. This is called an allonge.945 b) The usual form of indorsement is the signature of the indorser, with or without a direction to pay the indorsee described or to him or order. Any form of words with the signature from which the intent of the holder to incur the liability of an indorser may be gathered is a sufficient indorsement.946 Indorsement in Blank947 58. AN INDORSEMENT IN BLANK.—Specifies no indorsee, and the instrument so ordered is payable to bearer, and may be negotiated by delivery.948 59. The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser any contract consistent with the character of the indorsement.949 941 942 943 944 945 946 947 948 949

Id., p. 105 Id. Id., p. 105 Id. Id. Id. Id., p. 110 Id. Id.

487

Special Indorsement950 60. A SPECIAL INDORSEMENT.—Specifies the person to whom, or to whose order, the instrument is payable; and the instrument of such indorsee is necessary to the further negotiation of the instrument.951 61. An instrument which is originally payable to bearer, or which has been indorsed in blank, though afterwards specially indorsed, is still payable to bearer; except as to the special indorser, who, on such an instrument, after such an indorsement, is only liable on his indorsement to such parties as make title through it.952 Indorsement Without Recourse, Conditional and Restrictive Indorsement953 62. AN INDORSEMENT WITHOUT RECOURSE—Means that the indorser exempts himself from liability to indemnify the holder upon the dishonor of the bill or note.954 63. A CONDITIONAL INDORSEMENT—Means an indorsement by which the title to the instrument does not pass until the condition mentioned in the indorsement is fulfilled.955 64. A RESTRICTIVE INDORSEMENT—Means that the indorsee is deputed by the indorser to be his agent in collecting the bill or note, or else that the title is vested in the indorsee as a trustee or for the use or for the benefit of a third person.956 Nature of Indorsement957 65. The nature of an indorsement is as follows: It is958 950 951 952 953 954 955 956 957 958

Id., p. 116 Id. Id. Id., p. 119 Id. Id. Id. Id., p. 128 Id.

488

Basic Principles and Jurisprudence on the Negotiable Instruments Law

a) A contract which the indorser assumes with his indorsee and subsequent holders that, if the drawee, acceptor, or maker fails to honor the bill or note, he will, upon the performance of certain conditions imposed by the law merchant, indemnify the holder for all loss incurred by reason of the dishonor of the bill or note. b) A transfer of the title to the instrument. Requisite of Indorsement959 66. The requisites of an indorsement are as follows:960 a) It must follow the tenor of the bill or note. b) It must be by the payee or a subsequent holder. c) It is only complete upon delivery. Irregular Indorsements961 67. A person whose name is on the back of a bill or note payable to the order of the maker or drawer, or payable to bearer, is deemed to be a indorser.962 68. Where a person signs his name on the back of a negotiable bill or note payable to order of third person, before the signature of the payee, different rules prevail in different jurisdictions as to the liability of the irregular indorser.963 a) In some jurisdictions he is prima facie presumed to assume no liability to the payee, and to be a second indorser; but this presumption may be rebutted by showing that the indorsement was made to give the maker credit with the payee, and the irregular indorser then becomes liable as first indorser, upon the theory that the payee may indorse to him without recourse, and fill up the blank indorsement of the irregular indorser to himself. 959 960 961 962 963

Id., p. 131 Id. Id., p. 138 Id. Id.

489

b) In other jurisdictions the irregular indorser is presumed to be a joint maker. c) In other jurisdictions he is presumed to be a guarantor. d) In other jurisdictions he is presumed to be an indorser. e) In other jurisdictions the liability of the irregular indorser is regulated by statute. Acceptor and Maker964 69. The acceptor ad maker each promises the payee and subsequent holder that he will pay the bill or note according to its tenor at the time of signing.965 Facts which the Acceptor Admits966 70. The acceptor of a bill of exchange, by acceptance, admits as against a bona fide holder:967 a) The genuineness of the drawer’s signature. b) The existence of the drawer. c) The capacity of the drawer to make the draft. d) His authority to draw for the sum named. e) Where the bill is to the payee’s order, that the payee was competent to make the indorsement. Facts which the Acceptor Does Not Admit968 71. An acceptance does not admit:969 a) That the payee’s or subsequent indorsements are genuine. b) That all the terms contained in the bill at the time of acceptance are genuine. 964 965 966 967 968 969

Id., p. 144 Id. Id., p. 146 Id. Id., p. 151 Id.

490

Basic Principles and Jurisprudence on the Negotiable Instruments Law

Acceptor Supra Protest970 72. The undertaking of the acceptor supra protest is analogous to that of the indorser.971 73. To consummate the liability of the acceptor supra protest, it is necessary to take three steps:972 a) To present the bill at maturity to the original drawee. b) Upon refusal of the original drawee to pay, to protest for nonpayment. c) To present the bill for payment to the acceptor supra protest. Drawer and Indorser973 74. Every drawer promises the payee and subsequent holders, and every indorser promises his indorsee and subsequent holders, that if the bill or note is presented for payment to the drawee, acceptor, or maker, and payment demanded and refused, and the necessary proceedings on dishonor be taken, he will indemnify the holder for loss.974 75. The drawer of a bill of exchange promises the payee and subsequent holder, and the indorsers before acceptance promise subsequent holder, that if on due presentment the bill be not accepted, and necessary proceedings on dishonor be taken, he will indemnify them for loss.975 76. The liability of the drawer and of each indorser is several from that of all the other parties to the instrument.976 Undertaking of Drawer977 77. The drawer of a bill before acceptance undertakes with the payee and subsequent holders:978 970 971 972 973 974 975 976 977 978

Id., p. 152 Id. Id. Id., p. 156 Id. Id. Id. Id., p. 159 Id.

491

a) That there is a drawee, and that he is capable of accepting. b) That he will accept. Warranties of Indorser979 78. Every indorser who indorses without qualification warrants to his indorsee and to all subsequent holders:980 a) That the bill or note is, in every respect and as to all prior parties, genuine, and neither forged, fictitious nor altered. b) That the bill or note is a valid and subsisting obligation, and that the contract obligations of all prior parties are valid. c) That the prior parties were competent to bind themselves, whether as drawer, acceptor, maker, or indorser. d) That he, as indorser, has good title to the bill or note, and also a right to transfer it. Warranties of Indorser Without Recourse—Of Transferror by Delivery981 79. Every person who negotiates a bill or note by indorsement without recourse or by delivery warrants:982 a) That the instrument is, in every respect and as to all prior parties, genuine, and neither forged, fictitious, not altered. b) That he has good title to the instrument, and also a right to transfer it. c) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. d) That all prior parties were competent to bind themselves, although the authorities are not unanimous upon this point. 979 980 981 982

Id., p. 162 Id. Id., p. 167 Id.

492

Basic Principles and Jurisprudence on the Negotiable Instruments Law

e) That the instrument is a valid and subsisting obligation, although the authorities are not unanimous upon this point, and in states which have adopted the Negotiable Instruments Law this warranty is not implied. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee.983 Damages Against the Acceptor, Maker, Drawer, and Indorsers Upon the Bill or Note and Upon the Warranties984 80. The acceptor of a bill of exchange and the maker of a promissory note is liable, upon its dishonor, for the amount of the bill or note and legal interest, and also notarial expenses where they are allowed by law.985 Where the drawee of a bill of exchange has agreed for a valuable consideration to accept it, he is liable, upon its dishonor, for his breach of promise to accept, in all damages which are the immediate consequences of such breach.986 The measure of damages to be recovered against a drawer or indorser upon his indorsement is—987 a) On an inland bill: the amount of the bill and interest, and also protest fees where they are allowed. b) On a foreign bill: the amount of the bill, interest, protest fees, re-exchange, or damages in lieu thereof. The measure of damages to be recovered against the drawer or indorser in case of a breach of warranty is the original consideration.988 Accommodation Parties and Persons Accommodated989 983 984 985 986 987 988 989

Id. Id., p. 170 Id. Id. Id. Id. Id., p. 176

493

81. AN ACCOMMODATION PARTY—Means a person who has signed a bill or note as acceptor or drawer, maker, or indorser, without recompense, and for the purpose of lending his name to some other person as a means of credit.990 82. The accommodated party impliedly contracts:991 a) That he will pay the bill or note. b) That he will repay the accommodation party for all loss incurred, if that party is compelled to pay in case of his default. 83. The accommodation party is liable to all parties except the party accommodated.992 Conflict of Laws993 84. The validity of the contract of the acceptor, maker, drawer, and indorser of a bill or note is determined generally by law of the place where the contract is made.994 (83a) 85. The interpretation and obligation of the contract of the acceptor, maker, drawer, and indorser of a bill or note are determined by the law of the place where the contract is made, unless the contract is to be performed in another place, in which case the law of the place of performance governs.995 (83b) Transfer; definition996 86. The transfer of a bill or note is either the assignment or devolution of the right to its enforcement.997 (84) Validity between Immediate Parties998

990 991 992 993 994 995 996 997 998

Id. Id. Id. Id., p. 183 Id. Id. 1 Id., p. 191 Id. Id., p. 192

494

Basic Principles and Jurisprudence on the Negotiable Instruments Law

87. As between immediate parties or parties privy, any cause which would invalidate an ordinary contract will invalidate the contract created by the transfer.999 (85) Methods of Transfer1000 88. There are three methods of transfer:1001 (86) a) By assignment. b) By operation of law. c) By negotiation. Same; by Assignment1002 89. A bill or note may be transferred by assignment, or sale, distinguished from negotiation, subject to the same conditions that would be requisite in the case of an ordinary chose in action.1003 (87) Same; by Operation of Law1004 90. The full title to a bill or note passes, without assignment or negotiation, by operation of law, in following cases:1005 (88) a) Upon the death of the holder, when the title vests in his personal representative, or b) Upon the bankruptcy of the holder, when the title vests in his assignee, or c) At common law, if the holder is an unmarried woman, upon her subsequent marriage, when the title vests in her husband, or d) At common law, if a bill or note be made payable or be transferred to a married woman, when the title vests in her husband, or 999

Id. Id., p. 196 1001 Id. 1002 Id., p. 196 1003 Id. 1004 Id., p. 198 1005 Id. 1000

495

e) Upon the death of a joint payee or indorsee, when the title vests at once in the survivor or survivors. Same; by Negotiation1006 91. “Negotiation” means transfer of a bill or note in the form and manner prescribed by the law merchant, with the incidents and privileges annexed thereby.1007 (88a) 92. There are two modes of negotiation: (a) Negotiation by indorsement, and (b) negotiation by delivery. The form of the instrument determines which mode is applicable.1008 (89) Negotiation by Indorsement1009 93. A bill or note which is in legal effect payable to order is negotiated by indorsement.1010 (90) 94. The transferee of an instrument made payable to order without indorsement is the equitable owner, and takes it subject to all the equities vested in prior parties.1011 (90a) Same; by Delivery1012 95. A bill or note which is in legal effect payable to bearer is negotiated by delivery without legal indorsement.1013 (91) Overdue Paper1014 96. Negotiable paper may be transferred by indorsement or delivery when overdue.1015 (92)

1006

Id., Id. 1008 Id. 1009 Id., 1010 Id. 1011 Id. 1012 Id., 1013 Id. 1014 Id., 1015 Id.

p. 200

1007

p. 200

p. 204 p. 207

496

Basic Principles and Jurisprudence on the Negotiable Instruments Law

Right to Sue1016 97. The person to whom a bill or note is negotiated, or to whom it is transferred by operation of law, acquires the right to sue thereon in his own name.1017 (92a) Defenses Commonly Interposed Against a Purchaser For Value Without Notice;1018 Real and Personal Defenses1019 98. The defenses interposed by a party to a bill or note in a suit brought by a holder against him are commonly of two classes:1020 (93) a) REAL—Or those that attach to the instrument itself and are good against all persons. b) PERSONAL—Or those that grow out of the agreement or conduct of a particular person in regard to the instrument which renders it inequitable for him, though holding the legal title, to enforce it against the defendant, but which are not available against bona fide purchasers for value without notice. Same; Real Defenses1021 99. Common real defenses are-—(94) a) The incapacity of the defendant to make the contract. b) Illegality, when the contract is declared void by the statute. c) The discharge of the instrument by alteration. The incapacity of the defendant is usually due to infancy, x x x lack of understanding, or incapacity of a corporation to contract.1022

1016

Id., p. 212 Id. 1018 Id., p. 216 1019 Id. 1020 Id. 1021 Id., p. 218 1022 Id. 1017

497

INFANCY—A negotiable instrument or its indorsement made by an infant is voidable, not void.1023 100. CORPORATIONS—In the United States private corporations, unless restrained by charter, have capacity to draw, accept, make, and indorse bills and notes.1024 (96) 101. The bill or note of a corporation, and its indorsement thereon, although it has capacity to issue negotiable paper, is unenforceable, except in favor of a bona fide purchaser, unless made or transferred for the purposes of its incorporation.1025 (97) 102. The indorsement or assignment of the instrument by a corporation passes the property therein, notwithstanding that from want of capacity the corporation may incur no liability thereon.1026 (98) 103. PERSONS NON COMPOS MENTIS—Total lack of understanding in persons non compos mentis or drunken is a defense to the enforcement of a bill or note, both as between immediate parties and as against bona fide holder, when the party sought to be charged was an adjudged incompetent. It is doubtful whether in itself it is such a defense to an instrument sought to be enforced by a holder if the holder was one in good faith for value, and without notice. It is in itself a defense between the immediate parties, unless, perhaps, the contract was fair and the other party had no knowledge of the lunatic’s incompetency.1027 (99) 104. STATUTES.—Statutes which avoid instruments are of the following varieties:1028 (100) a) Those which in words declare the contract void. b) Those which annex a penalty to the consideration or performance of the act for which the bill, note, or indorsement is given. 1023

Id. Id., p. 222 1025 Id. 1026 Id. 1027 Id., pp. 226-227 1028 Id., p. 234 1024

498

Basic Principles and Jurisprudence on the Negotiable Instruments Law

105. In many states the holder of a bill or note, even if he be a purchaser for value without notice, cannot recover the amount of the instrument from persons who were parties to the instrument at its inception, when the instrument was negotiated in its inception at a rate greater than the legal rate of interest.1029 (102) 106. Where an indorsee acquires a bill or note by way of discount at a rate greater than the legal rate of interest, such transfer is a sale by the indorser and a purchase by the indorsee, for which the indorsee may recover the full amount of the maker, acceptor, or other prior parties, but (in some jurisdiction) only the amount paid for the bill of his prior indorser.1030 (103) 107. FAILURE TO STAMP.—Failure to affix a revenue stamp to a negotiable instrument is sometimes by statute made a real defense.1031 (104) 108. ALTERATION.—Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alteration, and subsequent indorsers.1032 (105) 109. Alterations are material1033 (106) a) Which purports to lessen or place an additional burden on any of the parties. Such are changes in the date, time, place, amount, or medium of payment and the rate of interest. b) Which purport to change the liabilities and obligations of all or any of the parties. Such are the addition or removal of the signature of a maker, drawer, indorser, payee, or co-surety. c) Which purport to change the operation of the instrument, or its effect in evidence. Such are adding words of negotiability or of a special consideration after value received, or changing the form of the indorsement, or changing the liability from joint to 1029

Id. Id. 1031 Id., 244 1032 Id., p. 246 1033 Id., p. 248 1030

499

several, or from joint to joint and several, as the case may be. 110. FORGERY.—Forgery of a negotiable instrument, or the indorsement thereon, except in case of ratification or estoppel, nullifies the instrument as to all parties against whom the forgery is committed.1034 (107) 111. Common personal defenses are:1035 (108) a) Fraud. b) Duress. c) Want or failure of consideration. d) Illegality, unless the contract is declared void by statute. e) Payment, or renunciation or release, before maturity. f)

Discharge of party secondarily liable by release of prior party.

112. FRAUD.—Where a person is induced by fraud to execute a bill or note, he is liable thereon as against a bona fide purchaser for value.1036 (109) 113. Where a person is induced by fraud to sign a bill or note under the belief that he is signing a different instrument, his signature is null and void, and he is not liable thereon, even as against a bona fide purchaser for value, provided that in so signing he acted without negligence.1037 (110) 114. CONSIDERATION.—Any consideration which will support a simple contract is sufficient to support a negotiable bill or note, or the transfer or indorsement thereof.1038 (111) In case of negotiable instruments consideration is presumed, but this presumption may be rebutted.1039 115. Defenses interposed by reason of some defect in the consideration are usually want or failure of consideration,

1034

Id., Id., 1036 Id., 1037 Id. 1038 Id., 1039 Id. 1035

p. 254 p. 260 p. 262 p. 270

500

Basic Principles and Jurisprudence on the Negotiable Instruments Law

and illegality of consideration, where it does not avoid the instrument.1040 (112) 116. As between immediate parties, a partial want or failure of consideration is a defense pro tanto, but the part alleged to have failed must be clearly ascertained. But these are not defenses to an action brought by a purchaser of the instrument for value without notice.1041 (113) 117. Where there is a total want of consideration between immediate parties, or the consideration of the note, though good in the first instance, entirely fails, this is a defense between immediate parties. But these are not defenses to an action brought by a purchaser of the instrument for value without notice.1042 (114) 118. ILLEGAL CONSIDERATION.—A consideration may be rendered illegal by statute, or by the rules of common law, or because it is against public welfare to treat the consideration as a valid consideration. An illegal consideration, whether total or partial, renders the instrument unenforceable, as between immediate parties, but it is not in general a defense to the action of the purchaser for value without notice.1043 (115) 119. DISCHARGE OF THE INSTRUMENT—A negotiable instrument may be discharged by payment, or by act of the holder, or by operation of law.1044 (116) 120. When the instrument has been discharged, it ceases to be negotiable.1045 (117) 121. PAYMENT—A bill or note is discharged by payment at or after maturity by or on behalf of the acceptor or maker to the holder, in good faith and without notice that his title is defective.1046 (118) 122. DISCHARGE BY ACT OF HOLDER—The holder may discharge the instrument by1047 (119) 1040

Id., Id. 1042 Id. 1043 Id., 1044 Id., 1045 Id. 1046 Id., 1047 Id.,

p. 276

1041

p. 283 p. 294 p. 295 p. 302

501

a) Renunciation or release at or after maturity; b) Cancellation. 123. DISCHARGE BY PARTIES SECONDARILY LIABLE.— Where the holder of a negotiable instrument does any act which will impair any right of the drawee or of any indorser against other parties to the instrument liable to him, it operates as a discharge of the obligation of the drawer or indorser. This does not apply if, subsequent to such discharge, a purchaser for value without notice before maturity acquires the instrument.1048 (120-121) SUMMARY OF DEFENSES1049 Real Defenses 1) Incapacity to contract: a) Infancy; b) Insanity; c) Intoxication; d) Corporate incapacity. 2) Illegality, when the contract is declared void by statute 3) The discharge of the instrument by a) Alteration; b) Cancellation; c) Payment, or renunciation or release, at or after maturity Personal Defenses 1) Fraud, whereby the defendant was induced to execute the instrument; 2) Duress; 3) Want or failure of consideration; 4) Illegality, unless the contract is declared void by the statute; 1048 1049

Id., p. 304 Id., p. 308

502

Basic Principles and Jurisprudence on the Negotiable Instruments Law

5) Payment, or renunciation or release, before maturity; 6) Discharge of party secondarily liable by discharge of prior party. Purchaser for Value Without Notice1050 What Constitutes1051 124. To constitute a purchaser of a negotiable instrument a purchaser for value without notice, the purchase must be:1052 (122) a) For a valuable consideration. b) Without notice of facts which impeach its validity between antecedent parties. Value1053 125. Value, as a consideration for transfer, means any legal consideration sufficient to support a contract. An antecedent or pre-existing debt in most jurisdictions constitutes value sufficient for a consideration for a negotiable bill or note or the transfer thereof.1054 (123) 126. THE TRANSFER.—A bill or note transferred as collateral to an indebtedness is in most jurisdictions transferred for value and upon sufficient consideration.1055 (124) Notice1056 127. Notice is either actual or constructive.1057 (125) 128. ACTUAL NOTICE—Means either knowledge or means of knowledge to which the purchaser dishonestly shuts his eyes.1058 (126) 1050

Id., Id. 1052 Id., 1053 Id., 1054 Id. 1055 Id. 1056 Id., 1057 Id. 1058 Id.

p. 309

1051

p. 309 p. 310

p. 317

503

129. CONSTRUCTIVE NOTICE—Means knowledge to be derived from the face of the instrument. The purchaser is charged with notice of whatever appears thereon.1059 (127) Presumption and Burden of Proof—Order of Proof1060 130. The holder of a bill or note is, in the first instance, presumed to be a holder for value and without notice; but if it is proved on the trial that the bill or note, in its issue or negotiation, was affected by the defenses hereinafter specified, it is incumbent for the holder to prove that he is such a purchaser.1061 (128) 131. The usual order of proof on a trial is:1062 (129) a) To produce the paper sued on. b) To prove the signatures of the defendant and of all persons whose indorsement is necessary to establish the plaintiff’s title. c) To prove, as against the drawee or indorsers, presentment, demand, dishonor, and notice of dishonor to them, or circumstances to excuse these acts. 132. Upon proof of the facts specified in the foregoing section, the holder may rest for his recovery until evidence is adduced showing:1063 (130) a) That the holder when he took the paper had notice of the equities. b) Or that there was fraud, duress, or illegality in the issue or subsequent negotiation of the instrument. 133. Upon proof of facts specified last above, the purchaser must show that he or some person under whom he claims was a purchaser for value without notice.1064 (131)

1059

Id. Id., p. 327 1061 Id. 1062 Id. 1063 Id. 1064 Id. 1060

504

Basic Principles and Jurisprudence on the Negotiable Instruments Law

Presentment and Notice of Dishonor1065 In General1066 134. To charge the drawer and indorsers, presentment for acceptance or for the payment, as the case may be, to be followed in case of refusal by notice of dishonor is necessary.1067 (132) Presentment1068 135. The presentment of a bill or note is commonly as follows:1069 (133) a) Of a bill for acceptance. b) Of a bill or note for payment. 136. A bill or note is presented by exhibiting it and requesting its acceptance or payment. When presented, the instrument must be in the possession of the person presenting the same.1070 (134) 137. Presentment for acceptance is necessary in the case of bills payable at or after sight, or after demand. In other cases, in the absence of express stipulation, it is optional.1071 (134a) 138. Presentment for acceptance may be made at any time before maturity, except in cases of bills payable at or after sight, or after demand.1072 (135) 139. Bills payable at or after sight, or on or after demand, or after any other uncertain event, must be presented within a reasonable time.1073 (136) 140. Presentment for payment must be made on the day when the bill or note is due. A bill or note properly presentment for payment must be paid forthwith.1074 (137) 1065

Id., p. 336 Id. 1067 Id. 1068 Id., p. 337 1069 Id. 1070 Id. 1071 Id. 1072 Id. 1073 Id. 1074 Id. 1066

505

141. Presentment should be made during usual and reasonable hours.1075 (138) 142. The presentment for acceptance, if the bill is addressed to the drawee at a particular place, should be made at that place. If the bill is not addressed to any particular place, presentment should be made either to the drawee personally, or at his dwelling or place of business at the time of presentment.1076 (139) 143. It is not necessary that a presentment for payment should be personal. It is sufficient if made at the place specified in the instrument, or personally if the maker or acceptor waives his right of having it made at the place stipulated in the contract; and, if no place is specified in the instrument, then if made at the place of business or residence of the maker or acceptor.1077 (140) Same; By Whom and To Whom Made; Effect of Failure to Present; Notice of Dishonor; Protest1078 144. Presentment must be made by the lawful holder, or his authorized agent, to the drawee, acceptor, or maker, or his authorized agent.1079 (141) 145. A failure to make due presentment for acceptance, when it is incumbent on the holder to make the same, deprives him of his remedy both on the bill itself and on the consideration for which it was given.1080 (142) 146. A failure to present a bill or note for payment at the proper place or time—1081 (143) a) Relieves the acceptor or maker from payment of further interest and costs of suit, if he was ready with funds to meet the bill or note at the stipulated time and place of payment, but not from the principal sum of the bill or note. b) It discharges the drawer and indorses from liability. 1075

Id. Id., p. 337-338 1077 Id., p. 338 1078 Id., p. 360 1079 Id. 1080 Id. 1081 Id. 1076

506

Basic Principles and Jurisprudence on the Negotiable Instruments Law

147. Upon presentment of a bill for acceptance, or of a bill or note for payment, and a refusal to accept the bill or to pay the bill or note, notice of its dishonor must be given to the drawer of the bill, and to the indorsers of the bill or note. It is usual to protest it, though this is necessary only with foreign bills.1082 (144) Notice of Dishonor1083 148. NOTICE OF DISHONOR—Is bringing, either verbally or by writing, to the knowledge of the drawer or the indorser of an instrument, the fact that a specified negotiable instrument, upon proper proceedings taken, has not been accepted, or has not been paid, and that the party notified is expected to pay it.1084 (145) 149. Notice must be given as follows:1085 (146) a) By the holder of the instrument, or by any person upon whom a liability is fixed to any person upon whom it is sought to fix a liability. b) Between parties residing in the same place, either by giving it personally, verbal or in writing, or by leaving a written notice at the residence or place of business of the party to be charged; between parties residing in different places, by depositing in the post office, postage paid, a written notice properly addressed to the person to be charged. c) Within one day after an unqualified refusal to accept the bill or pay the instrument, or by an indorser within one day after he has received notice of his own liability. This means in proper hours of a business day between co-residents, by or before the last post, if there be one the next day, if not, in the first practicable mail thereafter. Excuses for Failure to Present or Give Notice1086 150. Presentment and notice of dishonor are dispensed with in the case of a drawer or indorser whose duty is, as 1082

Id. Id., p. 372 1084 Id. 1085 Id. 1086 Id., p. 394 1083

507

between himself and the prior parties to the instrument, to pay it at maturity.1087 (147) 151. Presentment is dispensed with when, after the exercise of reasonable diligence, it cannot be made; and notice of dishonor is dispensed with when, after the exercise of reasonable diligence, it cannot be given, or does not reach the parties to be charged.1088 (147a) 152. Presentment and notice of dishonor may be dispensed with by waiver, express or implied.1089 (147b) Checks1090 In General1091 153. A check is a draft or order on a bank or banker, purporting to be drawn on a deposit of funds, for the payment, at all events, of a certain sum of money to a certain person therein named, or to him or his order, or to bearer, and payable instantly on demand.1092 (148) 154. A check resembles an inland bill or exchange payable on demand, except that it is always drawn on a banker; and many, but not all, of the rules governing a bill, are applicable to it.1093 (149) 155. In some, but not all, states, an instrument, in the form of a check, drawn in one state on a banker in another state, is held to be a foreign bill of exchange, and not a check.1094 (150) Checks as Negotiable Instruments1095 156. A check is not a bill of exchange, but it is in the nature of a bill of exchange payable on demand, and is governed by most of the rules applicable to such an instrument. It 1087

Id. Id. 1089 Id. 1090 Id., p. 404 1091 Id. 1092 Id. 1093 Id. 1094 Id. 1095 Id., p. 408 1088

508

Basic Principles and Jurisprudence on the Negotiable Instruments Law

is subject to the same rules as regards transfer, indorsement, and negotiability.1096 (151) Presentment and Notice of Dishonor; Effect of Delay1097 157. The drawer of a check is not discharged from his obligation by unreasonable delay in presentment of the check for payment, or in giving him notice of dishonor, in case of presentment and dishonor, unless he has been actually prejudiced thereby; but if he has suffered a loss thereby, as by failure of the bank, he is discharged to the extent of his loss.1098 (152) 158. In determining what is a reasonable time, regard must be had to the nature of the instrument, the usage of trade and of banker, and the effect of the particular case. A check is deemed to have been presented within a reasonable time when presented according to the following rules:1099 (153) a) If the person who received it and the banker are in the same place, it must, in the absence of special circumstances, be presented during business hours of the next secular day after it is received. b) If the person who received it and the banker are in different places, it must, in the absence of special circumstances, be forwarded for presentment on the next secular day after it is received, and the agent to whom it is sent must present it during business hours of the next secular day after it is received by him. 159. STATUS OF “STALE” CHECK—If the delay in presenting a check is so unreasonable as to make the check “stale” (a year and a half, for instance, or perhaps five months, or even less), the bank will be put in inquiry as to the equities of the drawer, and will pay at its peril; and the check will perhaps be treated like and overdue bill, and cease to be negotiable.1100 (154) 1096

Id. Id., p. 412 1098 Id. 1099 Id. 1100 Id. 1101 Id., p. 418 1097

509

Rights of Holder Against Bank1101 160. By the weight of authority, though there are decisions to the contrary, which are controlling in the particular jurisdictions, the holder of a check has no right of action against the bank on which it is drawn for refusal to pay it, unless the bank has assumed an obligation to him by certifying or accepting it; his only remedy is such a case being against the drawer, and against the indorsers, if there are any.1102 (155) Certification and Acceptance of Checks1103 161. By certifying a check to be good, the bank assumes an unconditional obligation to the holder presenting it, and to every subsequent holder, to pay it on demand; and this obligation may be enforced by the holder against the bank. And a delay in presentment will not discharge the obligation.1104 (156) 162. The certification of a check at the instance of the holder discharges the drawer and indorsers from liability, but the drawer is not discharged where he himself has it certified, and put it in circulation. The drawer will also be discharged if the holder takes the parol acceptance of the bank instead of payment.1105 (157) 163. Where the drawer of a check has no funds in a bank and the bank verbally promises the holder to honor the check, this, it has been held (though there are decisions apparently to the contrary), is a mere parol promise to answer for the debt of another, within the statute of frauds, and cannot be enforced. But such a promise where the bank has funds of the drawer, whether express or implied, is clearly binding as a promise to pay its own debt.1106 (158) 164. Where a bank pays a check to a holder under an unauthorized indorsement, and charges the amount to the account of the drawer, it is liable for the amount of 1102

Id. Id., p. 419 1104 Id., pp. 419-420 1105 Id. 1106 Id. 1103

510

Basic Principles and Jurisprudence on the Negotiable Instruments Law

the check to the true holder on demand. The action, it would seem, should be brought, not on the check, but on the promise implied in law from its receipt of the money from the drawer for the true holder’s use.1107 (159) Failure of Bank to Honor Check1108 165. A bank having funds of a depositor is bound to honor its checks to the amount of those funds, and, for a failure to do so, is liable for damages. The bank, however, must have had a reasonable time since the deposit in which to make proper entries on its books so as to show the amount to the depositor’s credit.1109 (160)

1107

Id. Id., p. 427 1109 Id. 1108

511

APPENDIX B 2011 Bar Examination Questionnaire for Commercial Law Set A 1. P rode a Sentinel Liner bus going to Baguio from Manila. At a stop-over in Tarlac, the bus driver, the conductor, and the passengers disembarked for lunch. P decided, however, to remain in the bus, the door of which was not locked. At this point, V, a vendor, sneaked into the bus and offered P some refreshments. When P rudely declined, V attacked him, resulting in P suffering from bruises and contusions. Does he have cause to sue Sentinel Liner? A. Yes, since the carrier’s crew did nothing to protect a passenger who remained in the bus during the stopover. B. No, since the carrier’s crew could not have foreseen the attack. C. Yes, since the bus is liable for anything that goes wrong in the course of a trip. D. No, since the attack on P took place when the bus was at a stop-over. 2. A cargo ship of X Shipping, Co. ran aground off the coast of Cebu during a storm and lost all its cargo amounting to Php50 Million. The ship itself suffered damages estimated at Php80 Million. The cargo owners filed a suit against X Shipping but it invoked the doctrine of limited liability since its vessel suffered an Php80 Million damage, more than the collective value of all lost cargo. Is X Shipping correct? A. Yes, since under that doctrine, the value of the lost cargo and the damage to the ship can be set-off. B. No, since each cargo owner has a separate and individual claim for damages. C. Yes, since the extent of the ship’s damage was greater than that of the value of the lost cargo.

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D. No, since X Shipping neither incurred a total loss nor abandoned its ship. 3. A writes a promissory note in favor of his creditor, B. It says: “Subject to my option, I promise to pay B Php1 Million or his order or give Php1 Million worth of cement or to authorize him to sell my house worth Php1 Million. Signed, A.” Is the note negotiable? A. No, because the exercise of the option to pay lies with A, the maker and debtor. B. No, because it authorizes the sale of collateral securities in case the note is not paid at maturity. C. Yes, because the note is really payable to B or his order, the other provisions being merely optional. D. Yes, because an election to require something to be done in lieu of payment of money does not affect negotiability. 4. ABC Corp. increased its capital stocks from Php10 Million to Php15 Million and, in the process, issued 1,000 new shares divided into Common Shares “B” and Common Shares “C.” T, a stockholder owning 500 shares, insists on buying the newly issued shares through a right of preemption. The company claims, however, that its By-laws deny T any right of pre-emption. Is the corporation correct? A. No, since the By-Laws cannot deny a shareholder his right of pre-emption. B. Yes, but the denial of his pre-emptive right extends only to 500 shares. C. Yes, since the denial of the right under the By-laws is binding on T. D. No, since pre-emptive rights are governed by the articles of incorporation. 5. M makes a promissory note that states: “I, M, promise to pay Php5,000.00 to B or bearer. Signed, M.” M negotiated

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the note by delivery to B, B to N, and N to O. B had known that M was bankrupt when M issued the note. Who would be liable to O? A. M and N since they may be assumed to know of M’s bankruptcy B. N, being O’s immediate negotiator of a bearer note C. B, M, and N, being indorsers by delivery of a bearer note D. B, having known of M’s bankruptcy 6. S delivered 10 boxes of cellphones to Trek Bus Liner, for transport from Manila to Ilocos Sur on the following day, for which S paid the freightage. Meanwhile, the boxes were stored in the bus liner’s bodega. That night, however, a robber broke into the bodega and stole S’s boxes. S sues Trek Bus Liner for contractual breach but the latter argues that S has no cause of action based on such breach since the loss occurred while the goods awaited transport. Who is correct? A. The bus liner since the goods were not lost while being transported. B. S since the goods were unconditionally placed with T for transportation. C. S since the freightage for the goods had been paid. D. The bus liner since the loss was due to a fortuitous event. 7. X Corp. operates a call center that received orders for pizzas on behalf of Y Corp. which operates a chain of pizza restaurants. The two companies have the same set of corporate officers. After 2 years, X Corp. dismissed its call agents for no apparent reason. The agents filed a collective suit for illegal dismissal against both X Corp. and Y Corp. based on the doctrine of piercing the veil of corporate fiction. The latter set up the defense that the agents are in the employ of X Corp. which is a separate juridical entity. Is this defense appropriate?

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A. No, since the doctrine would apply, the two companies having the same set of corporate officers. B. No, the real employer is Y Corp., the pizza company, with X Corp. serving as an arm for receiving its outside orders for pizzas. C. Yes, it is not shown that one company completely dominates the finances, policies, and business practices of the other. D. Yes, since the two companies perform two distinct businesses. 8. A negotiable instrument can be indorsed by way of a restrictive indorsement, which prohibits further negotiation and constitutes the indorsee as agent of the indorser. As agent, the indorsee has the right, among others, to A. demand payment of the instrument only. B. notify the drawer of the payment of the instrument. C. receive payment of the instrument. D. instruct that payment be made to the drawee. 9. Under the Negotiable Instruments Law, a signature by procuration operates as a notice that the agent has but a limited authority to sign. Thus, a person who takes a bill that is drawn, accepted, or indorsed by procuration is duty-bound to inquire into the extent of the agent’s authority by: A. examining the agent’s special power of attorney. B. examining the bill to determine the extent of such authority. C. asking the agent about the extent of such authority. D. asking the principal about the extent of such authority. 10. Under the Negotiable Instruments Law, if the holder has a lien on the instrument which arises either from a

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contract or by implication of law, he would be a holder for value to the extent of A. his successor’s interest. B. his predecessor’s interest. C. the lien in his favor. D. the amount indicated on the instrument’s face. 11. The liability of a common carrier for the goods it transports begins from the time of A. conditional receipt. B. constructive receipt. C. actual receipt. D. either actual or constructive receipt. 12. On X’s failure to pay his loan to ABC Bank, the latter foreclosed the Real Estate Mortgage he executed in its favor. The auction sale was set for Dec. 1, 2010 with the notices of sale published as the law required. The sale was, however, cancelled when Dec. 1, 2010 was declared a holiday and re-scheduled to Jan. 10, 2011 without republication of notice. The auction sale then proceeded on the new date. Under the circumstances, the auction sale is A. rescissible. B. unenforceable. C. void. D. voidable. 13. X executed a promissory note with a face value of Php50,000.00, payable to the order of Y. Y indorsed the note to Z, to whom Y owed Php30,000.00. If X has no defense at all against Y, for how much may Z collect from X? A. Php20,000.00, as he is a holder for value to the extent of the difference between Y’s debt and the value of the note.

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B. Php30,000.00, as he is a holder for value to the extent of his lien. C. Php50,000.00, but with the obligation to hold Php20,000.00 for Y’s benefit. D. None, as Z’s remedy is to run after his debtor, Y. 14. Under the Anti-Money Laundering Law, a covered institution is required to maintain a system of verifying the true identity of their clients as well as persons purporting to act on behalf of A. those doing business with such clients. B. unknown principals. C. the covered institution. D. such clients. 15. It is settled that neither par value nor book value is an accurate indicator of the fair value of a share of stock of a corporation. As to unpaid subscriptions to its shares of stock, as they are regarded as corporate assets, they should be included in the A. capital value. B. book value. C. par value. D. market value. 16. P sold to M 10 grams of shabu worth Php 5,000.00. As he had no money at the time of the sale, M wrote a promissory note promising to pay P or his order Php 5,000. P then indorsed the note to X (who did not know about the shabu), and X to Y. Unable to collect from P, Y then sued X on the note. X set up the defense of illegality of consideration. Is he correct? A. No, since X, being a subsequent indorser, warrants that the note is valid and subsisting. B. No, since X, a general indorser, warrants that the note is valid and subsisting.

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C. Yes, since a void contract does not give rise to any right. D. Yes, since the note was born of an illegal consideration which is a real defense. 17. In a contract of carriage, the common carrier is liable for the injury or death of a passenger resulting from its employee’s fault although the latter acted beyond the scope of his authority. This is based on the A. rule that the carrier has an implied duty to transport the passenger safely. B. rule that the carrier has an express duty to transport the passenger safely C. Doctrine of Respondeat Superior. D. rule in culpa aquiliana. 18. A holder in due course holds the instrument free from any defect of title of prior parties and free from defenses available to prior parties among themselves. An example of such a defense is – A. fraud in inducement. B. duress amounting to forgery. C. fraud in esse contractus. D. alteration. 19. In elections for the Board of Trustees of non-stock corporations, members may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. This is true – A. unless set aside by the members in plenary session. B. in every case even if the Board of Trustees resolves otherwise. C. unless otherwise provided in the Articles of Incorporation or in the By-laws. D. in every case even if the majority of the members decide otherwise during the elections.

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20. The rule is that the valuation of the shares of a stockholder who exercises his appraisal rights is determined as of the day prior to the date on which the vote was taken. This is true – A. regardless of any depreciation or appreciation in the share’s fair value. B. regardless of any appreciation in the share’s fair value. C. regardless of any depreciation in the share’s fair value. D. only if there is no appreciation or depreciation in the share’s fair value. 21. T Shipping, Co. insured all of its vessels with R Insurance, Co. The insurance policies stated that the insurer shall answer for all damages due to perils of the sea. One of the insured’s ship, the MV Dona Priscilla, ran aground in the Panama Canal when its engine pipes leaked and the oil seeped into the cargo compartment. The leakage was caused by the extensive mileage that the ship had accumulated. May the insurer be made to answer for the damage to the cargo and the ship? A. Yes, because the insurance policy covered any or all damage arising from perils of the sea. B. Yes, since there appears to have been no fault on the part of the shipowner and shipcaptain. C. No, since the proximate cause of the damage was the breach of warranty of seaworthiness of the ship. D. No, since the proximate cause of the damage was due to ordinary usage of the ship, and thus not due to a peril of the sea. 22. X has been a long-time household helper of Z. X’s husband, Y, has also been Z’s long-time driver. May Z insure the lives of both X and Y with Z as beneficiary? A. Yes, since X and Y render services to Z.

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B. No, since X and Y have no pecuniary interest on the life of Z arising from their employment with him. C. No, since Z has no pecuniary interest in the lives of X and Y arising from their employment with him. D. Yes, since X and Y are Z’s employees. 23. X, Co., a partnership, is composed of A (capitalist partner), B (capitalist partner) and C (industrial partner). If you were partner A, who between B and C would you have an insurable interest on, such that you may then insure him? A. No one, as there is merely a partnership contract among A, B and C. B. Both B and C, as they are your partners. C. Only C, as he is an industrial partner. D. Only B, as he is a capitalist partner. 24. X is the holder of an instrument payable to him (X) or his order, with Y as maker. X then indorsed it as follows: “Subject to no recourse, pay to Z. Signed, X.” When Z went to collect from Y, it turned out that Y’s signature was forged. Z now sues X for collection. Will it prosper? A. Yes, because X, as a conditional indorser, warrants that the note is genuine. B. Yes, because X, as a qualified indorser, warrants that the note is genuine. C. No, because X made a qualified indorsement. D. No, because a qualified indorsement does not include the warranty of genuineness. 25. A bill of exchange has T for its drawee, U as drawer, and F as holder. When F went to T for presentment, F learned that T is only 15 years old. F wants to recover from U but the latter insists that a notice of dishonor must first be made, the instrument being a bill of exchange. Is he correct? A. Yes, since a notice of dishonor is essential to charging the drawer.

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B. No, since T can waive the requirement of notice of dishonor. C. No, since F can treat U as maker due to the minority of T, the drawee. D. Yes, since in a bill of exchange, notice of dishonor is at all times required. 26. An insured, who gains knowledge of a material fact already after the effectivity of the insurance policy, is not obliged to divulge it. The reason for this is that the test of concealment of material fact is determined A. at the time of the issuance of the policy. B. at any time before the payment of premium. C. at the time of the payment of the premium. D. at any time before the policy becomes effective. 27. T, the captain of MV Don Alan, while asleep in his cabin, dreamt of an Intensity 8 earthquake along the path of his ship. On waking up, he immediately ordered the ship to return to port. True enough, the earthquake and tsunami struck three days later and his ship was saved. Was the deviation proper? A. Yes, because the deviation was made in good faith and on a reasonable ground for believing that it was necessary to avoid a peril. B. No, because no reasonable ground for avoiding a peril existed at the time of the deviation. C. No, because T relied merely on his supposed gift of prophecy. D. Yes, because the deviation took place based on a reasonable belief of the captain. 28. X, drawee of a bill of exchange, wrote the words: “Accepted, with promise to make payment within two days. Signed, X.” The drawer questioned the acceptance as invalid. Is the acceptance valid?

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A. Yes, because the acceptance is in reality a clear assent to the order of the drawer to pay. B. Yes, because the form of the acceptance is really immaterial. C. No, because the acceptance must be a clear assent to the order of the drawer to pay. D. No, because the document must not express that the drawee will perform his promise within two days. 29. X came up with a new way of presenting a telephone directory in a mobile phone, which he dubbed as the “iTel” and which uses lesser time for locating names and telephone numbers. May X have his “iTel” copyrighted in his name? A. No, because it is a mere system or method. B. Yes, because it is an original creation. C. Yes, because it entailed the application of X’s intellect. D. No, because it did not entail any application of X’s intellect. 30. D, debtor of C, wrote a promissory note payable to the order of C. C’s brother, M, misrepresenting himself as C’s agent, obtained the note from D, then negotiated it to N after forging C’s signature. N indorsed it to E, who indorsed it to F, a holder in due course. May F recover from E? A. No, since the forgery of C’s signature results in the discharge of E. B. Yes, since only the forged signature is inoperative and E is bound as indorser. C. No, since the signature of C, the payee, was forged. D. Yes, since the signature of C is immaterial, he being the payee. 31. A material alteration of an instrument without the assent of all parties liable thereon results in its avoidance, EXCEPT against a

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A. prior indorsee. B. subsequent acceptor. C. subsequent indorser. D. prior acceptor. 32. X constituted a chattel mortgage on a car (valued at Php1 Million pesos) to secure a P500,000.00 loan. For the mortgage to be valid, X should have A. the right to mortgage the car to the extent of half its value. B. ownership of the car. C. unqualified free disposal of his car. D. registered the car in his name. 33. B borrowed Php1 million from L and offered to him his BMW car worth Php1 Million as collateral. B then executed a promissory note that reads: “I, B, promise to pay L or bearer the amount of Php1 Million and to keep my BMW car (loan collateral) free from any other encumbrance. Signed, B.” Is this note negotiable? A. Yes, since it is payable to bearer. B. Yes, since it contains an unconditional promise to pay a sum certain in money. C. No, since the promise to just pay a sum of money is unclear. D. No, since it contains a promise to do an act in addition to the payment of money. 34. A bank can be placed under receivership when, if allowed to continue in business, its depositors or creditors would incur A. probable losses B. inevitable losses C. possible losses D. a slight chance of losses

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35. EFG Foundation, Inc., a non-profit organization, scheduled an election for its six-member Board of Trustees. X, Y and Z, who are minority members of the foundation, wish to exercise cumulative voting in order to protect their interest, although the Foundation’s Articles and By-laws are silent on the matter. As to each of the three, what is the maximum number of votes that he/she can cast? A. 6 B. 9 C. 12 D. 3 36. If the drawer and the drawee are the same person, the holder may present the instrument for payment without need of a previous presentment for acceptance. In such a case, the holder treats it as a A. non-negotiable instrument. B. promissory note. C. letter of credit. D. check. 37. D draws a bill of exchange that states: “One month from date, pay to B or his order Php100,000.00. Signed, D.” The drawee named in the bill is E. B negotiated the bill to M, M to N, N to O, and O to P. Due to non-acceptance and after proceedings for dishonor were made, P asked O to pay, which O did. From whom may O recover? A. B, being the payee B. N, as indorser to O C. E, being the drawee D. D, being the drawer 38. T, an associate attorney in XYZ Law Office, wrote a newspaper publisher a letter disputing a columnist’s claim about an incident in the attorney’s family. T used the law

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firm’s letterhead and its computer in preparing the letter. T also requested the firm’s messenger to deliver the letter to the publisher. Who owns the copyright to the letter? A. T, since he is the original creator of the contents of the letter. B. Both T and the publisher, one wrote the letter to the other who has possession of it. C. The law office since T was an employee and he wrote it on the firm’s letterhead. D. The publisher to whom the letter was sent. 39. E received goods from T for display and sale in E’s store. E was to turn over to T the proceeds of any sale and return the ones unsold. To document their agreement, E executed a trust receipt in T’s favor covering the goods. When E failed to turn over the proceeds from his sale of the goods or return the ones unsold despite demand, he was charged in court for estafa. E moved to dismiss on the ground that his liability is only civil. Is he correct? A. No, since he committed fraud when he promised to pay for the goods and did not. B. No, since his breach of the trust receipt agreement subjects him to both civil and criminal liability for estafa. C. Yes, since E cannot be charged with estafa over goods covered a trust receipt. D. Yes, since it was merely a consignment sale and the buyer could not pay. 40. The authorized alteration of a warehouse receipt which does not change its tenor renders the warehouseman liable according to the terms of the receipt A. in its original tenor if the alteration is material. B. in its original tenor. C. as altered if there is fraud. D. as altered.

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41. Any agreement binding upon the holder to extend the time of payment or to postpone the holder’s right to enforce the instrument results in the discharge of the party secondarily liable unless made with the latter’s consent. This agreement refers to one which the holder made with the A. principal debtor. B. principal creditor. C. secondary creditor. D. secondary debtor. 42. Upon execution of a trust receipt over goods, the party who is obliged to release such goods and who retains security interest on those goods, is called the A. holder. B. shipper. C. entrustee. D. entrustor. 43. X, warehouseman, sent a text message to Y, to whom X had issued a warehouse receipt for Y’s 500 sacks of corn, notifying him of the due date and time to settle the storage fees. The message stated also that if Y does not settle the warehouse charges within 10 days, he will advertise the goods for sale at a public auction. When Y ignored the demand, X sold 100 sacks of corn at a public auction. For X’s failure to comply with the statutory requirement of written notice to satisfy his lien, the sale of the 100 sacks of corn is A. voidable. B. rescissible. C. unenforceable. D. void. 44. On June 1, 2011, X mailed to Y Insurance, Co. his application for life insurance, with payment for 5 years of

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

premium enclosed in it. On July 21, 2011, the insurance company accepted the application and mailed, on the same day, its acceptance plus the cover note. It reached X’s residence on August 11, 2011. But, as it happened, on August 4, 2011, X figured in a car accident. He died a day later. May X’s heirs recover on the insurance policy? A. Yes, since under the Cognition Theory, the insurance contract was perfected upon acceptance by the insurer of X’s application. B. No, since there is no privity of contract between the insurer and X’s heirs. C. No, since X had no knowledge of the insurer’s acceptance of his application before he died. D. Yes, since under the Manifestation Theory, the insurance contract was perfected upon acceptance of the insurer of X’s application. 45. A bill of exchange has D as drawer, E as drawee and F as payee. The bill was then indorsed to G, G to H, and H to I. I, the current holder presented the bill to E for acceptance. E accepted but, as it later turned out, D is a fictitious person. Is E freed from liability? A. No, since by accepting, E admits the existence of the drawer. B. No, since by accepting, E warrants that he is solvent. C. Yes, if E was not aware of that fact at the time of acceptance. D. Yes, since a bill of exchange with a fictitious drawer is void and inexistent. 46. Due to his debt to C, D wrote a promissory note which is payable to the order of C. C’s brother, M, misrepresenting himself as agent of C, obtained the note from D. M then negotiated the note to N after forging the signature of C. May N enforce the note against D? A. Yes, since D is the principal debtor. B. No, since the signature of C was forged.

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C. No, since it is C who can enforce it, the note being payable to the order of C. D. Yes, since D, as maker, is primarily liable on the note. 47. T Corp. has a corporate term of 20 years under its Articles of Incorporation or from June 1, 1980 to June 1, 2000. On June 1, 1991 it amended its Articles of Incorporation to extend its life by 15 years from June 1, 1980 to June 1, 2015. The SEC approved this amendment. On June 1, 2011, however, T Corp decided to shorten its term by 1 year or until June 1, 2014. Both the 1991 and 2011 amendments were approved by majority vote of its Board of Directors and ratified in a special meeting by its stockholders representing at least 2/3 of its outstanding capital stock. The SEC, however, disapproved the 2011 amendment on the ground that it cannot be made earlier than 5 years prior to the expiration date of the corporate term, which is June 1, 2014. Is this SEC disapproval correct? A. No, since the 5-year rule on amendment of corporate term applies only to extension, not to shortening, of term. B. Yes, any amendment affecting corporate term cannot be made earlier than 5 years prior to the corporation’s expiration date. C. No, since a corporation can in fact have a corporate life of 50 years. D. Yes, the amendment to shorten corporate term cannot be made earlier than 5 years prior to the corporation’s expiration date. 48. B, while drunk, accepted a passenger in his taxicab. B then drove the taxi recklessly, and inevitably, it crashed into an electric post, resulting in serious physical injuries to the passengers. The latter then filed a suit for tort against B’s operator, A, but A raised the defense of having exercised extraordinary diligence in the safety of the passenger. Is his defense tenable?

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

A. Yes, as a common carrier can rebut the presumption of negligence by raising such a defense. B. No, as in tort actions, the proper defense is due diligence in the selection and supervision of the employee by the employer. C. No, as B, the common carrier’s employee, was obviously negligent due to his intoxication. D. Yes, as a common carrier can invoke extraordinary diligence in the safety of passengers in tort cases. 49. X is a director in T Corp. who was elected to a 1-year term on Feb. 1, 2010. On April 11, 2010, X resigned and was replaced by R, who assumed as director on May 17, 2010. On Nov. 21, 2010, R died. S was then elected in his place. Until which time should S serve as director? A. April 11, 2011. B. Feb. 1, 2011. C. May 17, 2011. D. Nov. 21, 2011. 50. M, the maker, issued a promissory note to P, the payee which states: “I, M, promise to pay P or order the amount of Php1 Million. Signed, M.” P negotiated the note by indorsement to N, then N to O also by indorsement, and O to Q, again by indorsement. But before O indorsed the note to Q, O’s wife wrote the figure “2” on the note after “Php1” without O’s knowledge, making it appear that the note is for Php12 Million. For how much is O liable to Q? A. Php1 Million since it is the original tenor of the note. B. Php1 Million since he warrants that the note is genuine and in all respects what it purports to be. C. Php12 Million since he warrants his solvency and that he has a good title to the note. D. Php12 Million since he warrants that the note is genuine and in all respects what it purports to be.

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51. X Corp., whose business purpose is to manufacture and sell vehicles, invested its funds in Y Corp., an investment firm, through a resolution of its Board of Directors. The investment grew tremendously on account of Y Corp.’s excellent business judgment. But a minority stockholder in X Corp. assails the investment as ultra vires. Is he right and, if so, what is the status of the investment? A. Yes, it is an ultra vires act of the corporation itself but voidable only, subject to stockholders’ ratification. B. Yes, it is an ultra vires act of its Board of Directors and thus void. C. Yes, it is an ultra vires act of its Board of Directors but voidable only, subject to stockholders’ ratification. D. Yes, it is an ultra vires act of the corporation itself and, consequently, void. 52. Notice of dishonor is not required to be made in all cases. One instance where such notice is not necessary is when the indorser is the one to whom the instrument is suppose to be presented for payment. The rationale here is that the indorser A. already knows of the dishonor and it makes no sense to notify him of it. B. is bound to make the acceptance in all cases. C. has no reason to expect the dishonor of the instrument. D. must be made to account for all his actions. 53. “Eagleson Refillers, Co.,” a firm that sells water to the public, opposes theVtrade name application of “Eagleson Laundry, Co.,” on the ground that such trade name tends to deceive trade circles or confuse the public with respect to the water firm’s registered trade name. Will the opposition prosper? A. Yes, since such use is likely to deceive or confuse the public.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

B. Yes, since both companies use water in conducting their business. C. No, since the companies are not engaged in the same line of business. D. No, since the root word “Eagle” is a generic name not subject to registration. 54. For a constructive total loss to exist in marine insurance, it is required that the person insured relinquish his interest in the thing insured. This relinquishment must be A. actual. B. constructive first and if it fails, then actual. C. either actual or constructive. D. constructive. 55. The Corporation Code sanctions a contract between two or more corporations which have interlocking directors, provided there is no fraud that attends it and it is fair and reasonable under the circumstances. The interest of an interlocking director in one corporation may be either substantial or nominal. It is nominal if his interest: A. does not exceed 25% of the outstanding capital stock. B. exceeds 25% of the outstanding capital stock. C. exceeds 20% of the outstanding capital stock. D. does not exceed 20% of the outstanding capital stock. 56. X, an amateur astronomer, stumbled upon what appeared to be a massive volcanic eruption in Jupiter while peering at the planet through his telescope. The following week, X, without notes, presented a lecture on his findings before the Association of Astronomers of the Philippines. To his dismay, he later read an article in a science journal written by Y, a professional astronomer, repeating exactly what X discovered without any attribution to him. Has Y infringed on X’s copyright, if any?

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A. No, since X did not reduce his lecture in writing or other material form. B. Yes, since the lecture is considered X’s original work. C. No, since no protection extends to any discovery, even if expressed, explained, illustrated, or embodied in a work. D. Yes, since Y’s article failed to make any attribution to X. 57. In case of disagreement between the corporation and a withdrawing stockholder who exercises his appraisal right regarding the fair value of his shares, a threemember group shall by majority vote resolve the issue with finality. May the wife of the withdrawing stockholder be named to the three member group? A. No, the wife of the withdrawing shareholder is not a disinterested person. B. Yes, since she could best protect her husband’s shareholdings. C. Yes, since the rules do not discriminate against wives. D. No, since the stockholder himself should sit in the three-member group. 58. Apart from economic rights, the author of a copyright also has moral rights which he may transfer by way of assignment. The term of these moral rights shall Last A. during the author’s lifetime and for 50 years after his death. B. forever. C. 50 years from the time the author created his work. D. during the author’s lifetime. 59. Which of the following indorsers expressly warrants in negotiating an instrument that 1) it is genuine and true; 2) he has a good title to it; 3) all prior parties have capacity

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to negotiate; and 4) it is valid and subsisting at the time of his indorsement? A. The irregular indorser. B. The regular indorser. C. The general indorser. D. The qualified indorser. 60. Where the insurer was made to pay the insured for a loss covered by the insurance contract, such insurer can run after the third person who caused the loss through subrogation. What is the basis for conferring the right of subrogation to the insurer? A. Their express stipulation in the contract of insurance. B. The equitable assignment that results from the insurer’s payment of the insured. C. The insured’s formal assignment of his right to indemnification to the insurer. D. The insured’s endorsement of its claim to the insurer. 61. X invented a device which, through the use of noise, can recharge a cellphone battery. He applied for and was granted a patent on his device, effective within the Philippines. As it turns out, a year before the grant of X’s patent, Y, also an inventor, invented a similar device which he used in his cellphone business in Manila. But X files an injunctive suit against Y to stop him from using the device on the ground of patent infringement. Will the suit prosper? A. No, since the correct remedy for X is a civil action for damages. B. No, since Y is a prior user in good faith. C. Yes, since X is the first to register his device for patent registration. D. Yes, since Y unwittingly used X’s patented invention.

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62. P, a sales girl in a flower shop at the Ayala Station of the Metro Rail Transit (MRT) bought two tokens or tickets, one for her ride to work and another for her ride home. She got to her flower shop where she usually worked from 8 a.m. to 5 p.m. At about 3 p.m., while P was attending to her duties at the flower shop, two crews of the MRT got into a fight near the flower shop, causing injuries to P in the process. Can P sue the MRT for contractual breach as she was within the MRT premises where she would shortly take her ride home? A. No, since the incident took place, not in an MRT train coach, but at the MRT station. B. No, since P had no intention to board an MRT train coach when the incident occured. C. Yes, since she already had a ticket for her ride home and was in the MRTs premises at the time of the incident. D. Yes, since she bought a round trip ticket and MRT had a duty while she was at its station to keep her safe for her return trip. 63. Forgery of bills of exchange may be subdivided into, a) forgery of an indorsement on the bill and b) forgery of the drawer ’s signature, which may either be with acceptance by the drawee, or A. with acceptance but the bill is paid by the drawee. B. without acceptance but the bill is paid by the drawer. C. without acceptance but the bill is paid by the drawee. D. with acceptance but the bill is paid by the drawer. 64. If an insurance policy prohibits additional insurance on the property insured without the insurer’s consent, such provision being valid and reasonable, a violation by the insured A. reduces the value of the policy. B. avoids the policy.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

C. offsets the value of the policy with the additional insurances’s value. D. forfeits premiums already paid. 65. X found a check on the street, drawn by Y against ABC Bank, with Z as payee. X forged Z’s signature as an indorser, then indorsed it personally and delivered it to DEF Bank. The latter, in turn, indorsed it to ABC Bank which charged it to the Y’s account. Y later sued ABC Bank but it set up the forgery as its defense. Will it prosper? A. No, since the payee’s signature has been forged. B. No, since Y’s remedy is to run after the forger, X. C. Yes, since forgery is only a personal defense. D. Yes, since ABC Bank is bound to know the signature of Y, its client. 66. The rule is that no stock dividend shall be issued without the approval of stockholders representing at least 2/3 of the outstanding capital stock at a regular or special meeting called for the purpose. As to other forms of dividends: A. a mere majority of the entire Board of Directors applies. B. a mere majority of the quorum of the Board of Directors applies. C. a mere majority of the votes of stockholders representing the outstanding capital stock applies. D. the same rule of 2/3 votes applies. 67. X, at Y’s request, executed a Real Estate Mortgage (REM) on his (X’s) land to secure Y’s loan from Z. Z successfully foreclosed the REM when Y defaulted on the loan but half of Y’s obligation remained unpaid. May Z sue X to enforce his right to the deficiency? A. Yes, but solidarily with Y.

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B. Yes, since X’s is deemed to warrant that his land would cover the whole obligation. C. No, since it is the buyer at the auction sale who should answer for the deficiency. D. No, because X is not Z’s debtor. 68. May a publicly listed universal bank own 100% of the voting stocks in another universal bank and in a commercial bank? A. Yes, if with the permission of the Bangko Sentral ng Pilipinas. B. No, since it has no power to invest in equities. C. Yes, as there is no prohibition on it. D. No, since under the law, the 100% ownership on voting stocks must be in either bank only. 69. Perils of the ship, under marine insurance law, refer to loss which in the ordinary course of events results from A. natural and inevitable actions of the sea. B. natural and ordinary actions of the sea. C. unnatural and inevitable actions of the sea. D. unnatural and ordinary actions of the sea. 70. Under the Intellectual Property Code, lectures, sermons, addresses or dissertations prepared for oral delivery, whether or not reduced in writing or other material forms, are regarded as A. non-original works. B. original works. C. derivative works. D. not subject to protection. 71. Can a drawee who accepts a materially altered check recover from the holder and the drawer? A. No, he cannot recover from either of them.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

B. Yes from both of them. C. Yes but only from the drawer. D. Yes but only from the holder. 72. The rule is that the intentional cancellation of a person secondarily liable results in the discharge of the latter. With respect to an indorser, the holder’s right to cancel his signature is: A. without limitation. B. not limited to the case where the indorsement is necessary to his title. C. limited to the case where the indorsement is not necessary to his title. D. limited to the case where the indorsement is necessary to his title. 73. X, in the hospital for kidney dysfunction, was about to be discharged when he met his friend Y. X told Y the reason for his hospitalization. A month later, X applied for an insurance covering serious illnesses from ABC Insurance, Co., where Y was working as Corporate Secretary. Since X had already told Y about his hospitalization, he no longer answered a question regarding it in the application form. Would this constitute concealment? A. Yes, since the previous hospitalization would influence the insurer in deciding whether to grant X’s application. B. No, since Y may be regarded as ABC’s agent and he already knew of X’s previous hospitalization. C. Yes, it would constitute concealment that amounts to misrepresentation on X’s part. D. No, since the previous illness is not a material fact to the insurance coverage. 74. Several American doctors wanted to set up a group clinic in the Philippines so they could render modern medical services. If the clinic is to be incorporated under our laws,

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what is the required foreign equity participation in such a corporation? A. 40% B. 0% C. 60% D. 70% 75. X executed a promissory note in favor of Y by way of accommodation. It says: “Pay to Y or order the amount of Php50,000.00. Signed, X.” Y then indorsed the note to Z, and Z to T. When T sought collection from Y, the latter countered as indorser that there should have been a presentment first to the maker who dishonors it. Is Y correct? A. No, since Y is the real debtor and thus, there is no need for presentment for payment and dishonor by the maker. B. Yes, since as an indorser who is secondarily liable, there must first be presentment for payment and dishonor by the maker. C. No, since the absolute rule is that there is no need for presentment for payment and dishonor to hold an indorser liable. D. Yes, since the secondary liability of Y and Z would only arise after presentment for payment and dishonor by the maker. 76. The Board of Directors of XYZ Corp. unanimously passed a Resolution approving the taking of steps that in reality amounted to willful tax evasion. On discovering this, the government filed tax evasion charges against all the company’s members of the board of directors. The directors invoked the defense that they have no personal liability, being mere directors of a fictional being. Are they correct? A. No, since as a rule only natural persons like the members of the board of directors can commit corporate crimes.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

B. Yes, since it is the corporation that did not pay the tax and it has a personality distinct from its directors. C. Yes, since the directors officially and collectively performed acts that are imputable only to the corporation. D. No, since the law makes directors of the corporation solidarily liable for gross negligence and bad faith in the discharge of their duties. 77. T is the registered trademark owner of “CROCOS” which he uses on his ready-to-wear clothes. Banking on the popularity of T’s trade mark, B came up with his own “CROCOS” mark, which he then used for his “CROCOS” burgers. T now sues B for trademark infringement but B argues that his product is a burger, hence, there is no infringement. Is B correct? A. No, since the owner of a well-known mark registered in the Philippines has rights that extends even to dissimilar kinds of goods. B. Yes, since the right of the owner of a well-known mark registered in the Philippines does not extend to goods which are not of the same kind. C. Yes, as B was in bad faith in coming up with his own “CROCOS” mark. D. No, since unlike T, he did not register his own “CROCOS” mark for his product. 78. A, the proprietor of a fleet of ten taxicabs, decides to adopt, as his business name, “A Transport Co., Inc.” May this be allowed? A. No, it would be deceptive since he is a proprietor, not a corporation. B. No, since “A” is a generic name, not suitable for registration. C. Yes, since his line of business is public transportation. D. Yes, since such name would give his business a corporate identity.

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79. T delivers two refrigerators to the warehouse of W who then issues a negotiable receipt undertaking the delivery of the refrigerators to “T or bearer.” T entrusted the receipt to B for safekeeping only. B negotiated it, however, to F who bought it in good faith and for value. Who is entitled to the delivery of the refrigerators? A. T, since he is the real owner of the refrigerators. B. F, since he is a purchaser in good faith and for value. C. B, since T entrusted the receipt to him. D. W, since he has as a warehouseman a lien on the goods. 80. The Articles of Incorporation must be accompanied by a Treasurer’s Affidavit certifying under oath, among others, that the total subscription paid is: A. not less than P25,000.00. B. not more than P5,000.00. C. not less than P5,000.00. D. not more than P25,000.00. 81. In a special meeting called for the purpose, 2/3 of the stockholders representing the outstanding capital stock in X. Co. authorized the company’s Board of Directors to amend its By-laws. By majority vote, the Board then approved the amendment. Is this amendment valid? A. No since the stockholders cannot delegate their right to amend the By-laws to the Board. B. Yes since the majority votes in the Board was sufficient to amend the By-laws. C. No, because the voting in the Board should have been by majority of a quorum. D. Yes since the votes of 2/3 of the stockholders and majority of the Board were secured. 82. A group of Malaysians wanted to invest in the Philippines’ insurance business. After negotiations, they agreed to

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

organize “FIMA Insurance Corp.” with a group of Filipino businessmen. FIMA would have a PhP50 Million paid up capital, PhP40 Million of which would come from the Filipino group. All corporate officers would be Filipinos and 8 out of its 10-member Board of Directors would be Filipinos. Can FIMA operate an insurance business in the Philippines? A. No, since an insurance company must have at least PhP75 Million paid-up capital. B. Yes, since there is substantial compliance with our nationalization laws respecting paid-up capital and Filipino dominated Board of Directors. C. Yes, since FIMA’s paid up capital more than meets the country’s nationalization laws. D. No, since an insurance company should be 100% owned by Filipinos. 83. Under the Public Service Act, an administrative agency has the power to approve provisionally the rates of public utilities without a hearing in case of urgent public needs. The exercise of this power is A. supervisory. B. absolute. C. discretionary. D. mandatory. 84. X, creditor of Y, obtained a judgment in his favor in connection with Y’s unpaid loan to him. The court’s sheriff then levied on the goods that Y stored in T’s warehouse, for which the latter issued a warehouse receipt. A month before the levy, however, Z bought the warehouse receipt for value. Who has a better right over the goods? A. T, being the warehouseman with a lien on the goods B. Z, being a purchaser for value of the warehouse receipt C. X, being Y’s judgment creditor D. Y, being the owner of the goods

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85. A promissory note states, on its face: “I, X, promise to pay Y the amount of Php 5,000.00 five days after completion of the on-going construction of my house. Signed, X.” Is the note negotiable? A. Yes, since it is payable at a fixed period after the occurrence of a specified event. B. No, since it is payable at a fixed period after the occurrence of an event which may not happen. C. Yes, since it is payable at a fixed period or determinable future time. D. No, since it should be payable at a fixed period before the occurrence of a specified event. 86. P sold to M a pair of gecko (tuko) for Php50,000.00. M then issued a promissory note to P promising to pay the money within 90 days. Unknown to P and M, a law was passed a month before the sale that prohibits and declares void any agreement to sell gecko in the country. If X acquired the note in good faith and for value, may he enforce payment on it? A. No, since the law declared void the contract on which the promissory note was founded. B. No, since it was not X who bought the gecko. C. Yes, since he is a holder in due course of a note which is distinct from the sale of gecko. D. Yes, since he is a holder in due course and P and M were not aware of the law that prohibited the sale of gecko. 87. P authorized A to sign a bill of exchange in his (P’s) name. The bill reads: “Pay to B or order the sum of Php1 million. Signed, A (for and in behalf of P).” The bill was drawn on P. B indorsed the bill to C, C to D, and D to E. May E treat the bill as a promissory note? A. No, because the instrument is payable to order and has been indorsed several times.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

B. Yes, because the drawer and drawee are one and the same person. C. No, because the instrument is a bill of exchange. D. Yes, because A was only an agent of P. 88. Z wrote out an instrument that states: “Pay to X the amount of Php1 Million for collection only. Signed, Z.” X indorsed it to his creditor, Y, to whom he owed Php1 million. Y now wants to collect and satisfy X’s debt through the Php1 million on the check. May he validly do so? A. Yes, since the indorsement to Y is for Php1 Million. B. No, since Z is not a party to the loan between X and Y. C. No, since X is merely an agent of Z, his only right being to collect. D. Yes, since X owed Y Php1 Million. 89. X Shipping, Co., insured its vessel MV Don Teodoro for Php100 Million with ABC Insurance, Co. through T, an agent of X Shipping. During a voyage, the vessel accidentally caught fire and suffered damages estimated at Php80 Million. T personally informed ABC Insurance that X Shipping was abandoning the ship. Later, ABC insurance denied X Shipping’s claim for loss on the ground that a notice of abandonment through its agent was improper. Is ABC Insurance right? A. Yes, since X Shipping should have ratified its agent’s action. B. No, since T, as agent of X Shipping who procured the insurance, can also give notice of abandonment for his principal. C. Yes, since only the agent of X Shipping relayed the fact of abandonment. D. No, since in the first place, the damage was more than ¾ of the ship’s value.

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90. A law was passed disqualifying former members of Congress from sitting in the Board of Directors of government-owned or controlled corporations. Because of this, the Board of Directors of ABC Corp., a government-owned and controlled corporation, disqualified C, a former Congressman, from continuing to sit as one of its members. C objected, however, insisting that under the Corporation Code members of the board of directors of corporations may only be removed by vote of stockholders holding 2/3 of its outstanding capital stock in a regular or special meeting called for that purpose. Is C correct? A. Yes, since the new law cannot be applied to members of the board of directors already elected prior to its passage. B. No, since the disqualification takes effect by operation of law, it is sufficient that he was declared no longer a member of the board. C. Yes, since the provisions of the Corporation Code applies as well to government-owned and controlled corporations. D. No, since the board has the power to oust him even without the new law. 91. 002-38-0001 G, a grocery goods supplier, sold 100 sacks of rice to H who promised to pay once he has sold all the rice. H meantime delivered the goods to W, a warehouseman, who issued a warehouse receipt. Without the knowledge of G and W, H negotiated the receipt to P who acquired it in good faith and for value. P then claimed the goods from W, who released them. After the rice was loaded on a ship bound for Manila, G invokes his right to stop the goods in transit due to his unpaid lien. Who has a better right to the rice? A. P, since he has superior rights as a purchaser for value and in good faith. B. P, regardless of whether or not he is a purchaser for value and in good faith.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

C. G, since as an unpaid seller, he has the right of stoppage in transitu. D. W, since it appears that the warehouse charges have not been paid. 92. In a signature by procuration, the principal is bound only in case the agent acted within the actual limits of his authority. The signature of the agent in such a case operates as notice that he has A. a qualified authority to sign. B. a limited authority to sign. C. a special authority to sign. D. full authority to sign. 93. In return for the 20 years of faithful service of X as a househelper to Y, the latter promised to pay Php100,000.00 to X’s heirs if he (X) dies in an accident by fire. X agreed. Is this an insurance contract? A. Yes, since all the elements of an insurance contract are present. B. Yes, since X’ services may be regarded as the consideration. C. No, since Y actually made a conditional donation in X’s favor. D. No, since it is in fact an innominate contract between X and Y. 94. A bill of exchange states on its face: “One (1) month after sight, pay to the order of Mr. R the amount of Php50,000.00, chargeable to the account of Mr. S. Signed, Mr. T.” Mr. S, the drawee, accepted the bill upon presentment by writing on it the words “I shall pay Php30,000.00 three (3) months after sight.” May he accept under such terms, which varies the command in the bill of exchange? A. Yes, since a drawee accepts according to the tenor of his acceptance. B. No, since, once he accepts, a drawee is liable according to the tenor of the bill.

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C. Yes, provided the drawer and payee agree to the acceptance. D. No, since he is bound as drawee to accept the bill according to its tenor. 95. May the indorsee of a promissory note indorsed to him “for deposit” file a suit against the indorser? A. Yes, as long as the indorser received value for the restrictive indorsement. B. Yes, as long as the indorser received value for the conditional indorsement. C. Yes, whether or not the indorser received value for the conditional indorsement. D. Yes, whether or not the indorser received value for the restrictive indorsement. 96. X issued a check in favor of his creditor, Y. It reads: “Pay to Y the amount of Seven Thousand Hundred Pesos (Php700,000.00). Signed, X”. What amount should be construed as true in such a case? A. Php700,000.00. B. Php700.00. C. Php7,000.00. D. Php700,100.00. 97. Shipowner X, in applying for a marine insurance policy from ABC, Co., stated that his vessel usually sails middle of August and with normally 100 tons of cargo. It turned out later that the vessel departed on the first week of September and with only 10 tons of cargo. Will this avoid the policy that was issued? A. Yes, because there was breach of implied warranty. B. No, because there was no intent to breach an implied warranty. C. Yes, because it relates to a material representation. D. No, because there was only representation of intention.

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Basic Principles and Jurisprudence on the Negotiable Instruments Law

98. The Articles of Incorporation of ABC Transport Co., a public utility, provides for ten (10) members in its Board of Directors. What is the prescribed minimum number of Filipino citizens in its Board? A. 10 B. 6 C. 7 D. 5 99. P authorized A to sign a negotiable instrument in his (P’s) name. It reads: “Pay to B or order the sum of Php1 million. Signed, A (for and in behalf of P).” The instrument shows that it was drawn on P. B then indorsed to C, C to D, and D to E. E then treated it as a bill of exchange. Is presentment for acceptance necessary in this case? A. No, since the drawer and drawee are the same person. B. No, since the bill is non-negotiable, the drawer and drawee being the same person. C. Yes, since the bill is payable to order, presentment is required for acceptance. D. Yes, in order to hold all persons liable on the bill. 100. The corporate term of a stock corporation is that which is stated in its Articles of Incorporation. It may be extended or shortened by an amendment of the Articles when approved by majority of its Board of Directors and: A. approved and ratified by at least 2/3 of all stockholders. B. approved by at least 2/3 of the stockholders representing the outstanding capital stock. C. ratified by at least 2/3 of all stockholders. D. ratified by at least 2/3 of the stockholders representing the outstanding capital stock.