Negotiable Instruments Law by Atty. George Ortha ii.pdf

Jurists Bar Review Center ™ NEGOTIABLE INSTRUMENTS LAW BAR REVIEW 2016

NEGOTIABLE INSTRUMENTS LAW (Act No. 2031) I. GENERAL CONCEPTS Negotiable Instrument (2005 Bar Exam) - a written contract for the payment of money which complies with the requirements of Sec. 1 of the NIL, which by its form and on its face, is intended as a substitute for money and passes from hand to hand as money, so as to give the holder in due course (HDC) the right to hold the instrument free from defenses available to prior parties. (Reviewer on Commercial Law, Sundiang and Aquino) Functions of Negotiable Instrument: 1. Substitute for money 2. Medium of exchange 3. Credit instrument which increases credit circulation 4. Increase purchasing medium in circulation 5. Evidence of transaction Two Distinctive Features/Characteristics of NI: (2005 Bar Exam) 1. Negotiability - it is that attribute or property whereby a bill or note or check may pass from hand to hand similar to money, so as to give the holder in due course the right to hold the instrument and to collect the sum payable for himself free from defenses. 2. Accumulation of Secondary Contracts secondary contracts are picked up and carried along with Negotiable Instruments as they are negotiated from one person to another; or in the course of negotiation of negotiable instruments, a series of juridical ties between the parties thereto arise either by law or by privity. The indorsers become secondarily liable to the holder. Distinctions between Negotiable Instruments and Non-Negotiable Instruments NEGOTIABLE INSTRUMENTS 1. Must contain all requisites of Sec.1 2. Transferable by negotiation and assignment 3. HDC can have rights better than his transferor 4. Prior parties warrant payment. 5. Governed by NIL 6. Transferee can be a HDC.

NON-NEGOTIABLE INSTRUMENTS 1. Does not contain all requisites of Sec.1 2. Transferable by assignment only 3. A transferee acquires no better right than his transferor 4. Prior parties do not warrant payment but merely the legality of his title 5. NIL applies only by analogy 6. Transferee is assignee only and cannot be a HDC

7. A HDC takes the NI free from personal defenses.

7. All defenses available to prior parties may be raised against the last transferee.

Kinds of Negotiable Instruments: (2002 Bar Exam) 1. Promissory Note (PN) – 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). 2. Bill of Exchange (BE) - 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). 3. Check - a bill of exchange drawn on a bank payable on demand (Sec. 185). Kinds: • Manager’s / Cashier’s Check – drawn by a bank on itself and therefore, it is a primary obligation of the bank. o It is accepted in advance by the act of its issuance and is not subject to countermand by the payor after indorsement. o The bank’s manager signs manager’s check while cashier’s check is signed by the bank cashier. • Memorandum Check – it is like an ordinary check except that the word “memorandum,” “mem” or “memo” is written upon the face of the check, signifying that the drawer engages to pay the bona fide holder absolutely, and not upon a condition to pay upon presentment at maturity and if due notice of the presentment and non-payment should be given. This check is not to be presented for payment, but will be redeemed by the drawer himself. • Certified Check – one drawn by a depositor upon funds to his credit in a bank which a proper officer of the bank certifies will be paid when duly presented for payment • Traveler’s check – one upon which the purchaser’s signature must appear twice – at the time he buys it and also at the time he uses it. It has the characteristics of a cashier’s check of the issuer. • Crossed check (1995, 1996, 2004, 2005 Bar Exams) – when 2 parallel lines are drawn across its face or across a corner thereof. If the name of a bank appears between the parallel lines, the check is said to be specially crossed, and payment should be made only if presented by the named bank. If no name appears between

We may not know what the future holds, but we can trust the One who holds the future. 2016 Notes on Negotiable Instruments Law by Prof. George Ortha II for Jurists Bar Review Center ™

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•

the parallel lines, the check is said to be generally crossed, and payment should be made only upon presentment by some bank. • Effects of crossing a check: a. That the check may not be encashed but only deposited in the bank; b. That the check may be negotiated only once to one who has an account with a bank; and c. That 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. Stale check – one which has not been presented for payment within a reasonable time after its issue.

Iron Clad Rule: Prohibits the countermanding of payment of certified checks (Republic of the Philippines v. PNB. GR No. 16106. December 1, 1961). But the holder must be a HIDC (Mesina v. IAC, 145 SCRA 497) Bills in Set: one composed of several parts, each part numbered and containing a reference to the other parts, the whole of the parts constituting but one bill. Rights of holders where parts are negotiated separately: 1. If both are HIDC, the holder whose title first accrues is considered the true owner of the bill. 2. But the person who accepts or pays in due course shall not be prejudiced. Obligations of holder who indorses 2 or more parts of the Bill in Set: 1. The person shall be liable on every such part. 2. Every indorser subsequent to him is liable on the part he has himself indorsed, as if such parts were separate bills. Distinctions between a Negotiable Instrument and a Negotiable Document of Title (2005 Bar Exam) NEGOTIABLE INSTRUMENT 1. Subject is money 2. Is itself the property with value

3. Has all the requisites of Sec. 1 of NIL

NEGOTIABLE DOCUMENT OF TITLE 1. Subject is goods 2. The document is a mere evidence of title – the things of value being the goods mentioned in the document 3. Does not have these requisites

4. A holder of NI may run after the secondary parties for payment if dishonored by the party primarily liable

4. Intermediate parties are not secondarily liable if the document is dishonored

PROMISSORY NOTE 1.Unconditional promise 2. Involves 2 parties on its face 3. Person who issues is the maker 4. Maker is primarily liable 5. Party primarily liable is the maker 6. One presentment only: for payment

BILL OF EXCHANGE 1.Unconditional order 2.Involves 3 parties on its face 3. Person who issues is the drawer 4. Drawer is only secondarily liable 5. Party primarily liable is the acceptor 4. Could be two presentments: for acceptance and for payment

When a BILL may be treated as a NOTE: 1. Drawer and drawee are the same person. 2. Drawee is a fictitious person. 3. Drawee has no capacity to contract. 4. When instrument is so ambiguous, the holder may treat it either as a BILL or a NOTE. BILLOF EXCHANGE 1.Not necessarily drawn on a deposit. The drawee need not be a bank. 2.Death of a drawer of a BOE, with the knowledge of the bank, does not revoke the authority of the drawee to pay 3. May be presented for payment within a reasonable time after its last negotiation because it may be further negotiated 4.May be payable on demand or at a fixed or determinable future time 5. Presentment for acceptance may be required (Sec. 143)

CHECK 1.It is necessary that a check is drawn on a bank deposit. The drawee is always a bank. 2.Death of the drawer of a check, with the knowledge of the bank, revokes the authority of the banker to pay 3. Must be presented for payment within a reasonable time after its issue. 4. Always payable on demand 5. Need presented acceptance

not

be for

Other Forms of Negotiable Instruments 1. Certificate of deposit issued by banks, payable to the depositor or his order, or to bearer 2. Trade acceptance 3. Bonds, which are in the nature of promissory notes 4. Drafts, which are bills of exchange drawn by one bank upon another § All of these must comply with Sec. 1, NIL

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Note: Postal Money Order, Treasury Warrant, Certificate of Stock, Letter of Credit, Bill of Lading and Warehouse Receipts are not negotiable instruments. Legal Tender That kind of money that the law compels a creditor to accept in payment of a debt when tendered by the debtor in the right amount. Under Sec. 52 of RA 7653, all notes and coins issued by the BSP shall be legal tender in the Philippines. Legal Tender Power of: Notes – no limit as to amount Coins – a. P1, P5 & P10 – up to P1,000 b. P0.25, P0.10, P0.05 & P0.01 – up to P100 (BSP Circular No. 537, Series of 2006) Note: A negotiable instrument (including check) although intended to be a substitute for money, is not legal tender. SEC. 60. Legal Character. _ Checks representing demand deposits do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor: Provided, however, That a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account. (RA 7653) Incidents in “Life” of Negotiable Instrument 1. Preparation and signing 2. Issue 3. Negotiation 4. Presentment for acceptance, in certain kinds of bills of exchange 5. Acceptance 6. Dishonor by non-acceptance 7. Presentment for payment 8. Dishonor by non-payment 9. Notice of dishonor 10. Protest, in some cases 11. Discharge Issue - the first delivery of the instrument, complete in form, to a person who takes it as a holder.

II. NEGOTIABILITY Requisites of Negotiability (Sec. 1, NIL) (1996 Bar Exam) 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. Note: Do not be confused with the word “order” under “b” and “d” 1. Must be in writing, signed by the maker or drawer; - Otherwise it cannot be a substitute for money. - Signature may be in any form like initial or mark. No particular location. 2. Must contain an unconditional promise or order to pay a sum certain in money; Certainty of sum payable The sum payable is a sum certain 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. (sec. 2) Ø Ø Ø

Interest stipulated but not specified – legal interest. Interest not stipulated – legal interest will be paid when the debtor incurs in delay (Art. 2209, NCC) Interest due shall earn legal interest from the time it is judicially demanded (Art. 2212, NCC)

Note: NI need not be payable in legal tender.

Holder – refers to the: a. If ORDER instrument - The payee or indorsee of a bill or note who is in possession of it, or b. If BEARER instrument - The bearer thereof (sec.191)

When promise or order unconditional 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.

Bearer - the person in possession of a bill or note which is payable to bearer.

Ø Ø

Delivery - transfer of possession, actual or constructive, from one person to another

Mere acknowledgment insufficient. An order or promise to pay out of a particular fund is not unconditional because, in effect, it is subject to the condition that the fund is sufficient.

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FUND FOR REIMBURSEMENT 1. Drawee pays the payee from his own funds; afterwards, the drawee pays himself from the particular fund indicated. 2.

Particular fund indicated is NOT the direct source of payment but only the source of reimbursement.

3. Payable on demand determinable future time;

PARTICULAR FUND FOR PAYMENT 1. There is only one act-the drawee pays directly from the particular fund indicated. Payment is subject to the condition that the fund is sufficient. 2. Particular fund indicated is the direct source of payment.

or

at

a

fixed

or

Certainty of time of payment An instrument is payable at a determinable future time 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. Ø Ø Ø Ø

After sight means after the drawee has seen the NI upon presentment for acceptance. The event must necessarily happen. If conditional, not negotiable. An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. (Sec. 4) A promise to pay “when able,” “as soon as I can”, etc., without specification of an absolute date is not negotiable. However, there is a difference of opinion as to whether it is a conditional promise or an absolute promise to pay at an unreasonable time: a. Under the first view, negotiability is destroyed both by the condition and by want of a fixed time for payment; b. Under the second view, by the general principle that a promise to pay within a reasonable time is not so certain as to render an instrument negotiable.

Aftersight Draft - payable only after the expiration of the stipulated period from acceptance (legal sight). Acceleration Notes - provisions which make it possible for the maker to pay the NI at an earlier date or make it possible for the holder to require payment of the NI at an earlier date. st

1 Class – On or before a certain date nd 2 Class – a. renders whole debt due and demandable upon failure of obligor to comply with certain conditions (Acceleration Clause)

b. Maker shall supply additional collateral in case of depreciation of the value of the original deposit, and upon default, the note shall become due. c. Contains provisions for acceleration where holder deems himself insecure (Insecurity Clause) Extension Clause - Clause in NI that extend the maturity dates. “An instrument is payable at a definite time if by its terms it is payable at a definite time subject to extension at the option of the holder, or to extension to a further definite time at the option of the maker or acceptor or automatically upon or after a specified act or event.” (Subsection 3109(1)(d) of the Uniform Commercial Code of the United States; Aquino, Timoteo B., Notes and Cases on Banking Law and Negotiable Instruments Law Vol. I, 2009, p. 50.) - Different from Sec. 120(f) When payable on demand (Sec. 7): 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. Note: 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. 4. Payable to order or to bearer When payable to order (Sec. 8) The instrument is drawn payable: a. To the order of a specified person or b. To him or his order. Ø The payee must be named or otherwise indicated therein with reasonable certainty. Ø 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 (“AND”); or e. One or some of several payees (“OR”); or f. The holder of an office for the time being. When payable to bearer (Sec. 9) 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 non-existing 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. Fictitious Payee Rule - If an actual, existing and living 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.

We may not know what the future holds, but we can trust the One who holds the future. 2016 Notes on Negotiable Instruments Law by Prof. George Ortha II for Jurists Bar Review Center ™

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Hence, even if the signature of the payee was forged, the collecting bank and drawee bank are relieved of liability. - Theory: One cannot expect a fictitious payee to indorse. Hence, the issuer must have intended for the NI to be negotiated by mere delivery. - The loss falls on the drawer. - Burden: The check is presumed to be an order instrument and it is up to the person making the contrary allegation to prove otherwise. (PNB v. Rodriguez, et al. G.R. No. 170325, 26 September 2008) - In the US, the rule is used to counteract the effect of forged indorsements on the right of the holder to enforce payment against the drawer or maker. - The rule intends to remove the group of cases involving a dishonest employee from the tradition “forged indorsement doctrine” and imposes the loss on the employer who hires and fails to properly control the dishonest agent, rather than on banks which collect and pay checks with forged indorsement. - Bad Faith Exception: A showing of commercial bad faith on the part of the drawee bank, or any transferee will work to strip it of this defense. 5. Identification of the drawee Ø Where the instrument is addressed to a drawee (meaning in a bill of exchange), he must be named or otherwise indicated with reasonable certainty. The holder must know to whom he should present it for acceptance and/or payment; otherwise, the purpose of negotiable instrument as a tool in commercial dealings will be greatly hampered. (Reviewer on Commercial Law, Sundiang and Aquino) Ø

A bill may be addressed to more than one drawee jointly, whether they are partners or not; but not to two or more drawees in the alternative or in succession. (Sec. 128)

d. gives the holder an election to require something to be done in lieu of payment of money. §

Confession of judgment – a written statement signed by the defendant, setting forth the basis of liability and authorizing the entry of judgment thereon. § Kinds of confession of judgment a. cognivit actionem – literally means “he has confessed action”. It is a written confession of action by the defendant acknowledging his indebtedness to the plaintiff after the action has been filed. It is given after the action is brought to save expenses. b. relicta verificationem – literally means “his pleadings being abandoned.” It is confession of judgment by withdrawal of the defense.

Note: However, warrants of attorney to confess judgment before action is begun, are not authorized nor contemplated by our law. They are void as against public policy because: [i] they enlarge the field for fraud; [ii] the promisor bargains away his right to a day in court; and [iii] the effect is to strikedown the right of appeal accorded by statute. The NIL does not sanction nor validated any provision otherwise illegal. Omissions and Provisions that do not affect Negotiability (Sec. 6) 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 therefore; 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. if it is not dated, the instrument will be considered to be dated as of the time it was issued. Cases where date is important: a. If necessary to fix the date of maturity of NI b. If NI is payable on demand – to determine W/N the NI was presented within a reasonable period of time from issue/last negotiation c. If NI is interest bearing Ø

Factors that Determine Negotiability: 1. The whole instrument itself 2. Only what appears on the face of the instrument 3. Provisions of the NIL, Sec.1 Additional provisions not affecting negotiability. General Rule: the instrument is non-negotiable if it contains a promise or order to do any act in addition to the payment of money. Test: If the promise would give rise to a cause of action for breach of contract if the additional act is not done, the instrument is not negotiable. Exceptions: a. authorizes the sale of collateral securities in case the instrument be not paid at maturity; b. authorizes a confession of judgment if the instrument be not paid at maturity; c. waives the benefit of any law intended for the advantage or protection of the obligor; or

Ø Ø Ø

consideration for the instrument is presumed. (Art. 154 NCC & Sec. 25 NIL) Sec. 73 specifies where presentment for payment should be made when the place of payment is not specified In common law, a sealed instrument is not negotiable & is governed contracts under seal

Rules of construction: 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

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b.

c. d. e. f.

g.

ambiguous or uncertain, reference may be had to the figures to fix the amount; 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; Where the instrument is not dated, it will be considered to be dated as of the time it was issued; Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail; 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; 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; 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.

Consideration Ø 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. Ø Value - 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. Ø Holder for value – one who has given a valuable consideration for the instrument issued or negotiated to him. •

•

Ø

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. 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.

Effect of want of consideration: 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. Absence of consideration – total lack of any valid consideration for the contract is only a personal defense. Failure of consideration – failure or refusal or one party to do, perform or comply with the consideration agreed upon is also only a personal defense.

III. TRANSFER AND NEGOTIATION Types of transfers: 1. Assignment - transfer of title to the instrument, with the assignee generally taking only such title as his assignor has, subject to all defenses available against his assignor; 2. Negotiation - transfer of a negotiable instrument from one person to another made in such a manner as to constitute the transferee the holder thereof 3. By Operation of Law – such as by succession, by insolvency. Distinctions Assignment

between

NEGOTIATION 1. Refers only to negotiable instruments; 2. The transferee is a holder; 3. A holder in due course is subject only to real defenses; 4. A holder in due course may acquire a better right than that of a prior party 5. A general indorser warrants the solvency of prior parties;

6. An indorser is not liable unless there be presentment and notice of dishonor; 7. Negotiation is governed by the NIL.

Negotiation

and

ASSIGNMENT 1. Refers generally to an ordinary contract; 2. The transferee is an assignee; 3. An assignee is subject to both real and personal defenses; 4. Generally, an assignee merely steps into the shoes of the assignor; 5. An assignor does not warrant the solvency of prior parties unless expressly stipulated or the insolvency is known to him; 6. An assignor is liable even without notice of dishonor; 7. Governed by Arts. 1624 to 1635 (on assignment of credits) of the Civil Code.

Methods of negotiation 1. Order Instrument –Indorsement AND Delivery. 2. Bearer Instrument – Delivery only. Indorsement - legal transaction effected by the writing of one's own name at the: a. back of the instrument or b. upon a paper (allonge) attached thereto. Ø General Rule: indorsement must be of the entire instrument (but partial indorsement may constitute a valid assignment binding between the parties). Exception: where instrument has been paid in part, it may be indorsed as to the residue. Negotiable: Pay to X AND Y; Pay to X OR Y Not Negotiable: Pay to X P600 and to Y P400

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Ø

Kinds of indorsement: a. Special - specifies the person to whom or to whose order, the instrument is to be payable (sec. 34) b. Blank - specifies no indorsee: • Instrument is payable to bearer and may be negotiated by delivery (sec. 34) • May be converted to special indorsement by writing over the signature of indorser in blank any contract consistent with character of indorsement. c. Restrictive - when the indorsement either: i. Prohibits further negotiation of the instrument; or ii. Constitutes the indorsee the agent of the indorser; or iii. Vests the title in the indorsee in trust for or to the use of some other persons. But mere absence of words implying power to negotiate does not make an indorsement restrictive. § All subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement. (sec. 37) d. Qualified - constitutes the indorser a mere assignor of the title to the instrument. (sec. 38) • made by adding to the indorser's signature words like "sans recourse,” “without recourse", "indorser not holden", "at the indorser's own risk", etc. • The purpose of this kind of indorsement is to transfer title without guaranteeing payment by the primary party. • It does not mean, however, that the qualified indorser incurs no liability at all. The effect is merely to limit his liability. He is liable for breach of is warranties as an indorser under Sec. 65. Thus, he is liable if the instrument is dishonored by NON-ACCEPTANCE or NON-PAYMENT due to: a. forgery; b. lack of good title to the instrument indorsed; c. lack of capacity to contract on the part of prior parties; or d. the fact that the instrument was valueless or not valid at the time of the indorsement which fact was known to him. e. Conditional - right of the indorsee is made to depend on the happening of a contingent event • Party required to pay may disregard the conditions. • This kind of indorsement has no effect on the further negotiation of the instrument. The party required to pay, if he chooses, may make payment, disregarding the condition without incurring any liability because he is expressly authorized to do so under Sec. 39. But the person who received

payment will hold the proceeds subject to the right of the conditional indorser. f. Absolute - one by which indorser binds himself to pay: i. upon no other condition than failure of prior parties to do so; and ii. upon due notice to him of such failure. g. Joint - indorsement of instrument payable to 2 or more persons; all must indorse in order for the transaction to operate as a negotiation. • Pay to X AND Y; Both must indorse • Pay to X OR Y: any one • Exceptions to the rule requiring joint indorsement: a. Where the payees or indorsees are partners; and b. Where the payee or indorsee indorsing has authority to indorse for the others. h. Irregular - a person who, not otherwise a party to an instrument, places thereon his signature in blank before delivery. Ø

Rules on Indorsements:

•

Effect of transfer without indorsement: a. transfer vests in the transferee such title as the transferor had therein (assignment), and b. the right to have the indorsement of the transferor. ú 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. ú Applicable only to order instruments

•

Indorsement of a bearer instrument: 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. Note: The rule only applies to originally bearer instruments. If it is originally a BEARER instrument, it will always be a BEARER instrument. As opposed to an original order instrument becoming payable to bearer, if the same is indorsed specially, it can NO LONGER be negotiated further by mere delivery, it has to be indorsed. •

ú

Striking out indorsements: 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. If the instrument is payable to bearer on its face, then whether or not there are indorsements on the back of the instrument would be immaterial to the title of the bearer, who is presumptively the

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owner and holder by his mere possession of such instrument. None of the indorsement would be necessary to it’s title since mere delivery would have been sufficient to transfer title from one holder to another. ú Where the instrument is payable to order on its face, the situation is different. First, the indorsement of a special indorsee is necessary for the further negotiation of the instrument. Second, the last indorsement controls the method of further negotiation. When prior party (reacquirer) may negotiate: where an instrument is negotiated back to a prior party, such party may reissue and further negotiate the same. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable. ú In the following cases, a prior party cannot further negotiate the instrument: 1. Where it is payable to the order of a third person, and has been paid by the drawer; 2. Where it was made or accepted for accommodation and has been paid by the party accommodated; 3. In other cases, where the instrument is discharged when acquired by a prior party.

Ø

Ø

Ø

IV. HOLDERS Classes of holders: 1. simple holder (sec. 51) 2. holder for value (sec. 26) 3. holder in due course (sec.52, 57) Holder in Due Course (1996, 1998, 2000 Bar Exams) 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. Ø When title defective - The title of a person who negotiates an instrument is defective when he: I. obtained the instrument or any signature thereto, by/for (manner of acquisition): a. fraud b. duress, or force and fear c. other unlawful means d. illegal consideration II. negotiates the NI (manner of negotiation) e. in breach of faith f. under such circumstances amounting to fraud. Ø

What constitutes notice of defect. - The person to whom it is negotiated must have:

Ø

a. actual knowledge of the infirmity or defect, or b. knowledge of such facts that his action in taking the instrument amounted to bad faith. (sec. 56) 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, he will be deemed a holder in due course only to the extent of the amount paid by him. When person not deemed a 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. • Reasonable time, what constitutes. regard is to be had to the a. nature of the instrument, b. the usage of trade or business with respect to such instruments, and the c. facts of the particular case. • Effect: 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 General Rule: every HOLDER is deemed prima facie to be a holder in due course. But holder must prove first that he is a holder. Exception: 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 (shifting of burden of proof). Limitation: 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 (Burden not Shifted) (Sec. 59). Rights of a holder in due course: a. he may sue on the instrument in his own name; b. he may receive payment and if payment is in due course, the instrument is discharged. c. holds the instrument free from any defect of title of prior parties, d. holds the instrument free from defenses available to prior parties among themselves, and e. may enforce payment of the instrument for the full amount thereof against all parties liable thereon.

Ø

Payment in due course is payment made: a. at or after the maturity of the instrument b. to the holder thereof c. in good faith and without notice that his title is defective.

Ø

Shelter Rule: a. A HNIDC who derives his title from a HIDC, AND

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b. 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. Ø

Rights of a Holder NOT in Due Course 1. He may sue on the instrument in his own name; 2. He may receive payment and if the payment is in due course, the instrument is discharged; 3. He is entitled to the instrument but holds it subject to the same defenses as if it were non-negotiable; and 4. He has all the rights of the holder in due course from whom he derived his title in respect of all parties prior to such holder, provided he is not himself a party to any fraud or illegality affecting the instrument.

Can a finance company be a HIDC?

“ARTICLE 4. Definition of Terms. — For purposes of this Act, the term: “xxx xxx xxx “n) ‘Consumer’ means a natural person who is a purchaser, lessee, recipient or prospective purchaser, lessor or recipient of consumer products, services or credit. “o) ‘Consumer credit’ means any credit extended by a creditor to a consumer for the sale or lease of any consumer product or service under which part or all of the price or payment therefor is payable at some future time, whether in full or in installments. “xxx

No – Great Asian Sales Center Corporation v. Court of Appeals, G.R. No. 105774, 25 April 2002 (The SC said the solution is for FC to make the consumer sign a separate contract and to enforce the obligation based on contract instead of the NI) (Effectively) No – Art. 146, RA 7394 (Consumer Act, 1992), at least insofar as consumer loans are concerned “ARTICLE 146. Sale of Consumer Products On Installment Payment. — In a consumer credit sale other than one pursuant to an open-end credit plan, the obligation of the consumer to whom credit is being extended shall be evidenced by a single instrument which shall include, in addition to the disclosures required by this act, the signature of the seller and the person to whom credit is extended, the date it was signed, a description of the property sold and a description of any property transferred as a trade-in. The instrument evidencing the credit shall contain a clear and conspicuous typewritten notice to the person to whom credit is being extended that: “a) he should not sign the instrument if it contains any blank space; “b) he is entitled to a reasonable return of the precomputed finance charge if the balance is prepaid; and “c) he is entitled to an exact, true copy of the agreement. “In cases where the instrument will be sold at a discount to a bank, financing company or other lender, the said transferee shall be subject to all claims and defenses which the debtor could assert against the seller of consumer products obtained hereto or with the proceeds thereof.” (emphasis supplied.)

xxx

“q) ‘Consumer products and services’ means goods, services and credits, debts or obligations which are primarily for personal, family, household or agricultural purposes, which shall include but not limited to food, drugs, cosmetics, and devices.

No – Consolidated Plywood & Industries, Inc. v. IFC Leasing and Acceptance Corporation, 149 SCRA 448 (1987) Yes – Juanita Salas v. CA, 181 SCRA 296 (1990)

xxx

“xxx

xxx

xxx

“s) "Consumer transaction" means (1) (i) a sale, lease, assignment, award by chance, or other disposition of consumer products, including chattels that are intended to be affixed to land, or of services, or of any right, title, or interest therein, except securities as defined in the Securities Act and contracts of insurance under the Insurance Code, or (ii) a grant of provision of credit to a consumer for purposes that are primarily personal, family, household or agricultural, or (2) a solicitation or promotion by a supplier with respect to a transaction referred to in clause (1).” V. LIABILITIES OF PARTIES Persons primarily liable on instrument: the person who, by the terms of the instrument, is absolutely required to pay the same. All other parties are "secondarily" liable.

1.

LIABILITY Conditioned on presentment & notice of dishonor.

2. Action accrues only upon maturity/ dishonor.

WARRANTY 1. Not conditioned.

2.

Action accrues once there is breach.

1. Parties Primarily Liable a. Maker (Sec. 60) • engages to pay according to the tenor of the instrument; and • admits the existence of the payee and his then capacity to indorse at the time of the making of the note. • A person placing his name on the face of a note is prima facie a maker and liable as such; and he is presumed to have acted with care and to have signed the instrument with full knowledge of its contents.

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b. Acceptor (Sec. 62) • engages to pay according to the tenor of his acceptance; • admits: 1. the existence of the drawer, 2. the genuineness of his signature and 3. his capacity and authority to draw the instrument; and 4. the existence of the payee and his then capacity to indorse. Important: The drawee is not liable to the payee or holder until he accepts the instrument, or certifies the check (Secs. 127 & 189). Exception: In HSBC v. Catalan, 440 SCRA 498 (2004), the Supreme Court ruled that although the payee may not sue the drawee based on the check, the payee may sue the drawee based on tort under Art. 19 of the NCC. The payee may sue for abuse of right so long as he can prove: (a) that there is a legal right or duty; (b) which is exercised in bad faith; and (c) for the sole intent of prejudicing or injuring another. According to the Supreme Court, the allegations in Catalan’s amended complaint warrant an action for tort, particularly: a. the unwarranted failure of the bank to pay the checks despite the repeated assurance of the drawer as to the authenticity of the checks and frequent directives to pay the value thereof to Catalan; and b. the bank failed to inform the payee of the reasons for its continued inaction and non-payment. Note: The bank was not sued on the value of the checks, but for how it acted in relation to Catalan’s claim for payment. • •

•

Acceptor admits the genuineness of drawer’s signature, not indorsers’. Where a check is certified by a bank, it is equivalent to an acceptance. Since certification is equivalent to acceptance, a bank which has certified a check whether at the request of the holder or of a drawer, has the same liabilities and makes the same warranties as an acceptor. It cannot, after certification, question the genuineness of the drawer’s signature. If it discovers that such signature is forged subsequent to certification but prior to payment, it cannot refuse to pay on the check. If its discovery comes after it has paid the check, it cannot recover back what it paid on the ground of mistaken payment unless the holder is guilty of fraud or negligence. If a drawee-bank accepts or pays a check despite a stop payment order from the drawer, through oversight or

•

otherwise, it cannot refuse to pay the holder or recover what has been paid; neither may it debit the drawer’s account unless the acceptance or payment was made prior to the receipt of the order. The liabilities of an acceptor applies to a drawee who pays without accepting the instrument.

2. Parties Secondarily Liable a. Drawer (Sec. 61) • admits the existence of the payee and his capacity to indorse; • engages that the instrument will be accepted or paid or both according to its tenor; and • engages that if the instrument is dishonored and proper proceedings are brought, he will pay to the party entitled to be paid. b. General Indorser (Sec. 66) • Warrants: 1. genuineness of the instrument; 2. his good title to it; 3. capacity to contract of prior parties; and 4. instrument is valid and subsisting. • engages that the instrument will be accepted or paid or both according to its tenor; and • engages that if the instrument is dishonored and proper proceedings are taken, he will pay to the party entitled to be paid. c.

Irregular Indorser – a person, not otherwise a party to an instrument, places his signature thereon in blank before delivery. Rules: • If instrument payable to the order of a rd 3 person, he is liable to the payee and subsequent parties. • If instrument payable to order of maker or drawer, he is liable to all parties subsequent to the maker or drawer. • If he signs for accommodation of the payee, he is liable to all parties subsequent to the payee.

d. Acceptor for Honor GENERAL INDORSER 1. Makes either a blank or special indorsement; 2. Indorses the instrument after its delivery to the payee; 3. Liable only to parties subsequent to him

IRREGULAR INDORSER 1. Always makes a blank indorsement; 2. Indorses before its delivery; 3. Liable to the payee and subsequent parties unless he signs for the accommodation of the payee in which case he is liable only

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to all subsequent payee.

parties to the

3. Parties with Limited Liability (sec. 65; Metropol Financing v. Sambok, 120 SCRA 864) c. Qualified Indorser - warrants that: ú instrument is genuine and in all respects what it purports to be; ú he has good title to it; ú all prior parties had capacity to contract; ú he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. d. Persons Negotiating by Delivery ú warranties same as those of qualified indorsers, but extend to immediate transferee only. Negotiating by Mere delivery or by Qualified Indorsement 1. No secondary liability; 2. Warrants that he has no knowledge of any fact, which would impair the validity of the instrument or render it valueless.

General Indorser 1. With secondary liability; 2. Warrants that the instrument is, at the time of his indorsement, valid and subsisting.

4. Other parties who may be liable General Rule: One whose signature does not appear on the instrument shall not be liable thereon (Sec. 18). Parties who may be liable although his signature does not appear on the NI: 1. The principal who signs through an agent 2. One who signs his assumed or trade name is liable 3. The forger 4. Persons whose signatures were forged, but are precluded from setting up the defense of forgery 5. One who indorses in a separate instrument (allonge) 6. A person negotiating by delivery (as in the case of a bearer instrument) is liable to his immediate indorsee. 7. In the case of constructive acceptance Parties who are not liable although his signature appear on the NI: 1. Persons covered by Sec. 15 (Incomplete and undelivered NI) 2. Minor or incapacitated persons 3. Agent 4. Person whose signature was forged. Requisites for an Agent to escape liability: 1. must be duly authorized;

2. add words to his signature indicating that he signs as an agent, that is, for or on behalf of a principal, or in a representative capacity; and 3. disclose his principal. Ø

Ø

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. (sec. 21) Indorsement or assignment of the NI 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 thereon. (sec. 22)

Accomodation Party (1996, 1998, 2005 Bar Exams) 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. Ø Can receive payment for lending his name. Ø Indorser must lend his name to the maker, and not to the holder (Maulini v. Serrano, 28 Phil. 640) Ø Liability: 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. Ø Effects: 1. accommodation party is generally regarded as a surety for the party accommodated; 2. When accommodation party makes payment to holder of the note, he has the right to sue the accommodated party for reimbursement. Ø

Rights of accommodation parties as against each other: the other may demand contribution from his co-accommodation party without first directing his action against the principal debtor provided: 1. he made the payment by virtue of judicial demand; or 2. the principal debtor is insolvent. (Sadaya v. Sevilla, 19 SCRA 924; Art. 2073, NCC)

Note: A corporation cannot act as an accommodation party. The issuance or indorsement of negotiable instrument by a corporation without consideration and for the accommodation of another is ultra vires. (Crisologo v. CA, 117 SCRA 594). Order of liability of indorsers: 1. among themselves – 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 (sec. 68) 2. The holder – indorsers are liable in any order

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VI. DEFENSES 1. Real/Absolute Defenses - those that attach to the instrument itself and are available against all holders, whether in due course or not. Examples: 1. Alteration 2. Non-delivery of incomplete instrument 3. Duress amounting to forgery (when signature is acquired by duress) 4. Fraud in factum or fraud in esse contractus 5. Minority 6. Marriage in the case of a wife 7. Insanity where the insane person has a guardian appointed by the court (Ogden) 8. Ultra vires acts of a corporation, where the corporation is absolutely prohibited by its charter or statute from issuing any commercial paper under any circumstances (Foreign case) 9. Want of authority of agent 10. Execution of instrument between public enemies (Ogden) 11. Illegality of contract where it is the contract or instrument itself which is expressly made illegal by statute 12. Forgery 13. Prescription 14. Discharge in insolvency 2. Personal/Equitable Defenses – those which are available only against a person not a holder in due course or a subsequent holder who stands in privity with him. Examples: 1. Absence or failure of consideration 2. Want of delivery of complete instrument 3. Insertion of wrong date in an instrument, where it is payable at a fixed period after date and it is issued undated or where it is payable at a fixed period after sight and the acceptance is undated 4. Filling up of blank contrary to authority given or not within reasonable time, where the instrument is delivered 5. Fraud in inducement 6. Acquisition of instrument by force, duress, or fear 7. Acquisition of the instrument by unlawful means 8. Acquisition of the instrument for an illegal consideration 9. Negotiation in breach of faith 10. Negotiation under circumstances that amount to fraud 11. Mistake 12. Intoxication (according to better authority); 13. Ultra vires acts of corporations where the corporation has the power to issue negotiable paper but the issuance was not authorized for the particular purpose for which it was issued 14. Want of authority of agent where he has apparent authority 15. Insanity where there is no notice of insanity on the part of the one contracting with the insane person

16. Illegality of contract where the form or consideration is illegal Ø

Defenses available to solidary debtor (Art. 1222, NCC): a. Those derived from the nature of the obligation b. Those that are personal to him c. Those that personally belong to the others (partial defense)

Ø

Fraud in factum v. Fraud in inducement

Ø

Effects of Defenses:

1. Minority if a real defense, but personal to the minor 2. Incomplete but delivered instrument (Sec. 14; 1997, 2004 Bar Exams) • Situations contemplated: a. 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. Material particular: those that can or cannot affect negotiability b. A signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a NI operates as a prima facie authority to fill it up as such for any amount • To hold parties prior to completion liable by a HNIDC: NI must be filled up strictly in accordance with the authority given AND within a reasonable time • If requisites not met, can HNIDC enforce the NI against a party prior to completion? b. No (better view) c. Yes, according to authorized tenor • if any such instrument, after completion, is negotiated to a HIDC, 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 3. Incomplete and undelivered instrument (Sec. 15) • 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. • However, subsequent indorsers are liable. • In the hands of a HIDC, there is prima facie presumption of delivery 4. Complete and undelivered instrument (Sec. 16) • as between immediate parties and as regards a remote party other than a holder in due course, the delivery must be authorized in order to be effectual • “Immediate” means privity, not proximity

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•

As against a HNIDC, it may be proved that: a. No delivery was made b. Delivery was not authorized c. Delivery was conditional or for a special purpose

Rules on delivery of NI (Sec. 15 & 16) 1. Delivery is essential to the validity of any NI 2. Delivery must have been with the intention of passing title 3. An incomplete and undelivered NI is invalid as to any party before delivery in the hands of ANY holder, even a HIDC 4. NI mentioned in #3, there is prima facie presumption of delivery (if HIDC) 5. Delivery to the agent is sufficient (if HIDC) 6. There is a prima facie presumption of delivery of a complete NI (if HNIDC) 7. There is conclusive presumption of delivery of a complete instrument (if HIDC) 8. Delivery of the NI may be made on a parol condition or for a special purpose (only against a HNIDC) 5. Prescription • Under the NCC, 10 years from accrual of the cause of action • In the case of checks, the action of the depositor against his drawee bank commences to run from the time he is given notice of payment (PCIB v. CA, 350 SCRA 446 [2001]) • In Papa v. Valencia, 284 SCRA 643 (1998), the SC said that the failure of the payee to encash the check for more than 10 years ”undoubtedly resulted in the impairment of the check through his unreasonable and unexplained delay.” This is contrary to NAMARCO v. F.U.N.D., 49 SCRA 238 (1973) where it was held that the rule that delivery of a mercantile document shall produce the effect of payment when impaired by the creditor’s fault has no application to a check issued by the debtor himself. There will be no prejudice to the drawer-debtor because he is supposed to maintain his funds in his account. Nonetheless, it is submitted that the SC could have arrived at the same conclusion reached in the Papa Case if it relied on prescription. 6. Alteration (1995, 1996, 1999 Bar Exams) • The instrument is avoided • Exceptions: 1. against a party who has himself made, authorized, or assented to the alteration 2. subsequent indorsers 3. holder in due course not a party to the alteration - he may enforce payment according to its original tenor • Changes constituting material alteration: a. date; b. sum payable, either for principal or interest; c. time or place of payment

d. number or relations of the parties; e. medium or currency in which payment is to be made; f. that which adds a place of payment where no place of payment is specified; and g. any other change or addition which alters the effect of the instrument in any respect. Note: a material alteration is one that alters the effect of the instrument; one which changes the items required to be stated under Sec. 1, NIL. •

Spoliation – alteration made by a stranger to the instrument. Sec. 124 is the American doctrine of spoliation.

•

The general rule denies the drawee bank’s right to charge against the drawer’s account the amount of an altered check. However, the latter’s negligence, before or after the alteration, may estop him from setting such alteration as against an innocent drawee bank who has paid the check.

Note: Alteration is only a partial real defense because a holder in due course can still enforce it according to its original tenor. Original Tenor is altered before acceptance st

1 View: Altered tenor is tenor of acceptance nd 2 View: Original tenor is tenor of acceptance. Acceptance is the signification by the drawee of his assent to the order of the drawer. The order of the drawer is the original tenor, not the altered tenor. What “tenor of his acceptance” means is whether the same is general or qualified acceptance (Sec. 139). FEBTC v. Gold Palace Jewelry Co., 562 SCRA 604 (2008) The collecting bank cannot debit the account of the payee who is a holder in due course if the collecting bank returned the amount of the altered check to the drawee bank. It is the drawee bank that should bear the loss. If collecting bank reimbursed the drawee bank, it is considered as acting on its own because: - Payment of check by the drawee includes acceptance under Sec. 62, NIL. - Tenor of acceptance is determined by the terms of the bill as it is when the drawee accepts. - HIDC who relied on the drawee’s clearance and payment is protected by Sec. 62. - Drawee, compared to the HIDC, is in a better position to verify with the drawer the matters stated in the bill. - The view in common law that drawee bank may recover from the person to whom payment was made by mistake is not applicable since our laws have no similar provision. - The principal-agent relationship between the payee and collecting bank had ceased.

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- The collecting bank cannot be considered to have acted as representative of the drawee bank when it debited payee’s account. - The collecting bank cannot invoke the warranty of payee who indorsed the NI for collection since it’s restrictive under Sec. 36 (no transfer of title to collecting bank). The warranties under Sec. 66 are based upon a transfer of title. Comments on the FEBTC Case - The protection of a HIDC should be in accordance with Sec. 124; hence, entitled to the original amount. - When the collecting bank returned the amount to the drawee bank, it was not a mere voluntary act, but dictated by law and jurisprudence. The obligation of the collecting bank is based on the doctrine that it has warranties of a general indorser, and Rules of the Philippines Clearing House Corporation and BSP Supplementary Rules on Regional Clearing. - The warranties of the collecting bank, as agent of the payee, extends in favor of the drawee. The act of the agent is the act of the principal. - The principal will not escape liability upon termination of the principal-agent relationship for acts done when the agency was still in existence. - There are SC decisions that support the view that the payee will shoulder the loss since he has the same warranties of a general indorser. - Payment by mistake is recognized under Art. 2154, NCC (solutio indebiti). (Aquino, Timoteo B., Notes and Cases on Banking Law and Negotiable Instruments Law, Vol. I, 2014.) 7. Forgery (1995, 2006, 2010 Bar Exams) •

Effects: 1. signature is wholly inoperative 2. 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 3. Some parties are precluded from setting up the defense of forgery

•

Extent of Effects: 1. Only the forged signature is inoperative, not the NI, not the genuine ones 2. The NI can be enforced by holders whose title does not depend on the forged signature (bearer instruments) 3. Can be enforced against those who are precluded from setting up the forgery, like: a. Those who by their acts, silence, or negligence, are estopped from setting up the defense of forgery b. Those who warrant or admit the genuineness of the signature in

question. These include acts or omissions that amount to ratification, express or implied (indorser, acceptor, person negotiating by mere delivery. Note: Persons precluded from setting up the defense of forgery may still recover damages under the NCC provisions on quasi-delicts. Cut-Off Rule General Rule: Parties prior to the forged signature are cut-off from the parties after the forgery in the sense that prior parties cannot be held liable and can raise the defense of forgery. The holder can only enforce the instrument against parties who became such after the forgery. Exception: When the prior parties are precluded from setting up the defense of forgery. Forgery of Indorsement A. PN payable to order - The party whose signature was forged and parties prior to him are not liable B. PN or Bill payable to bearer - Only the person whose signature was forged can raise forgery - To HIDC: Liable. Indorsement is not necessary to pass title - To HNIDC: Not liable. Defense is want of delivery of a mechanically complete instrument (the instrument must be complete before the forgery) C. Bill Payable to order - Drawee cannot charge the account of the drawer - Drawer cannot recover from the collecting bank - Drawee can recover from the collecting bank (BUT if it is the drawer’s signature which was forged, drawee cannot recover from the collecting bank) - Payee can recover from the drawer - Payee can recover from recipient of payment - Payee cannot recover from the drawee - Collecting bank bear’s the risk of loss, but can recover from the person to whom it is paid Forgery of Drawer’s Signature - Drawee bank that paid is liable. It cannot go after the collecting bank. Recourse is against the forger Double Intent in Fraudulent Impersonation 1. Maker or drawer intends to make the instrument payable to the person before him 2. He intends to make the instrument payable to the person whom he believes the stranger to be. st Note: The 1 is not forgery, but signature of an assumed name.

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Loss is thrown upon the issuer: 1. Theory of actual intent 2. Theory of estoppel/negligence

VII. PRESENTMENT FOR PAYMENT Presentment for payment – the presentation of an instrument to the person primarily liable for the purpose of demanding and receiving payment. General Rules: • presentment for payment is not necessary to charge persons primarily liable • presentment for payment is necessary to charge persons secondarily liable; otherwise, they are discharged. Exceptions: a. drawer - where he has no right to expect or require that the drawee or acceptor will pay the instrument (sec. 79) b. 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. c. when dispensed: - where, after the exercise of reasonable diligence, presentment as required cannot be made; - where the drawee is a fictitious person; - by waiver of presentment, express or implied. (sec. 82) d. when the instrument has been dishonored by non-acceptance (sec. 151) Sufficiency of presentment It must be: 1. made by the holder or any person authorized to receive payment on his behalf; 2. at a reasonable hour on a business day; 3. at a proper place; 4. to the person primarily liable or if he is absent or inaccessible, to any person found at the place where the presentment is made. How made: 1. personal demand for payment at the proper place; and 2. readiness to exhibit the instrument if required, and to receive payment and to surrender the instrument if the debtor is willing to pay. • Purpose of exhibition: To enable the debtor to: 1. determine the genuineness of the instrument and the right of the holder to receive payment; and 2. to enable him to reclaim possession upon payment. •

When exhibition excused: 1. when debtor does not demand to see the instrument but refuses payment on some other grounds, and 2. when the instrument is lost or destroyed.

When made: • where the instrument is payable at a fixed or determinable future time, presentment must be made on the day it falls due • where it is payable on demand: a. promissory note: presentment must be made within a reasonable time after its ISSUE b. bill of exchange: presentment for payment will be sufficient if made within a reasonable time after the LAST NEGOTIATION thereof • 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 (but indorsers are discharged W/N they suffered any loss). Time of maturity: • every negotiable instrument is payable at the time fixed therein without grace • when the day of maturity falls upon a Sunday or a holiday, the instruments are to be presented for payment on the next succeeding business day • when the day of maturity falls upon a Saturday: § Instrument is payable at a fixed or determinable future time (time instrument) - presented for payment is on the next succeeding business day § instrument is payable on demand - at the option of the holder, be presented for payment: a. before 12:00 noon on Saturday when that entire day is not a holiday or b. the next succeeding business day. How computed: § excluding the day from which the time is to begin to run, and by including the date of payment § applies to instruments which are payable at a fixed period after date, after sight, or after that happening of a specified event. Proper place for presentment (In order): 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; 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. When delay in presentment excused – 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.

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Principal debtor is dead (Sec. 76) • Must be made to his Executor or administrator if there be one and can be found. Otherwise presentment is excused Persons liable as partners (Sec. 77) • To any one of them, even if there’s dissolution • Mutual agency principle Joint Debtor (Sec 78) • To all of them. They are not partners • Except: when one is authorized Note: Sec. 76-78 do not apply if there is a place specified. VIII. PRESENTMENT FOR ACCEPTANCE Presentment for acceptance – the production or exhibition of a bill of exchange to the drawee for his acceptance General Rule: presentment for acceptance is not necessary to render any party to the bill liable. Exception: presentment for acceptance must be made: a. Where the bill is payable after sight, or 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. (Sec. 143) Note: in all the above cases, the holder must either present the bill for acceptance or negotiate it within a reasonable time; otherwise, the drawer and all indorsers are discharged. How made: 1. made by or on behalf of the holder; 2. at a reasonable hour; 3. on a business day; 4. before the bill is overdue and within reasonable time; 5. to the drawee or some person authorized to accept or refuse acceptance on his behalf. If addressed to 2 or more drawees: - Must be made to all of them, except: a. They are partners b. One is authorized Where drawee is dead - to his personal representative - merely permissive (under presentment is excused)

Sec.

148,

Drawee adjudged insolvent: - To him, or to his trustee or assignee Days presentment may be made. If date of presentment is: a. Sunday or a holiday – must be made on the next succeeding business day

b. Saturday – before 12:00 noon on Saturday provided that it is not a holiday. (In Sec 146, presentment on a Saturday is not limited to demand NI, unlike in Sec. 85) When delay for presentment excused: - A bill is drawn payable elsewhere than at the place of business or the residence of the drawee, and holder 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. Effect: does not discharge the drawers and indorsers. Where presentment is excused: 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 presentment can not be made after the exercise of reasonable diligence c. Where, although presentment has been irregular, acceptance has been refused on some other ground. Note: bill may be treated as dishonored by nonacceptance. Duty of holder where bill not accepted. - where a bill is duly presented for acceptance and is not accepted within the prescribed time (24 hours – Sec. 136), 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 (Sec. 150). Right of holder where bill not accepted - an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary - No need to wait for maturity date IX. ACCEPTANCE Acceptance: the signification by the drawee of his assent to the order of the drawer. How made : 1. must be in writing 2. signed by the drawee 3. must not express that the drawee will perform his promise by any other means than the payment of money. • the holder of the 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. • 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. Period for drawee to accept - 24 hours after presentment in which to decide whether or not he will accept the bill; if acceptance is given, it dates as of the day of presentation (Sec. 136).

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Constructive/Implied acceptance 1. If the drawee destroys the instrument 2. Where the drawee refuses to return the bill accepted or non-accepted to the holder within 24 hours after delivery, or within such other period as the holder may allow (Sec. 137) - Drawee must return NI if holder demands even within 24 hours. Reconcile Sec 136, 137 and 150 Kinds: 1. General - assents without qualification to the order of the drawer. 2. Qualified - which in express terms varies the effect of the bill as drawn. a. Conditional - makes payment by the acceptor dependent on the fulfillment of a condition therein stated. b. Partial - an acceptance to pay part only of the amount for which the bill is drawn. c. Local - 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. 3. Constructive

party liable thereon or for the honor of the person for whose account the bill is drawn which acceptance inures also to the benefit of all parties subsequent to the person for whose honor it is accepted, and conditioned to pay the bill when it becomes due if the original drawee does not pay it. § Requisites: 1. the bill must have been protested for dishonor by non-acceptance or for better security; 2. the acceptor for honor must be a stranger and not a party already liable on the instrument; 3. bill must not be overdue; 4. acceptance for honor must be with the consent of the holder of the instrument. § Formalities: 1. must be in writing; 2. must indicate that it is an acceptance for honor; 3. signed by the acceptor for honor; 4. must contain an express or implied promise to pay money; 5. the accepted bill for honor must be delivered to the holder. §

Rights of parties as to qualified acceptance. • Holder: he 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. • Drawer or indorser: when he 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 (implied assent). Effect of taking a qualified acceptance: 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. Other rules on acceptance: • 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 non payment • 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 • 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 • where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance Acceptance for Honor - an undertaking by a stranger to a bill after protest for the benefit of any

§ §

§

§

When the 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. Acceptor for honor is liable to the holder & all parties subsequent to the party for whose honor the acceptor has accepted. Liability: SECONDARY. He agrees to pay if: a. Presentment for payment is made b. Drawee does not pay c. Bill is protested for non-payment d. Notice of dishonor is given to him The maturity date of a bill payable after sight is calculated from the date of the noting for nonacceptance and not from the date of the acceptance for honor When the bill is dishonored by the acceptor for honor, it must be protested for non-payment by him (to fix the liabilities of indorsers) X. NOTICE OF DISHONOR AND PROTEST

Notice of Dishonor - bringing, either verbally or in writing, to the knowledge of the drawer and indorser the fact that a NI, upon proper proceedings taken, has not been accepted or paid and the party notified is expected to pay it. Ø Ø Ø

Effect of failure to give notice: parties secondarily liable are discharged Not necessary for qualified indorser or person who negotiated the NI by delivery. Requisites: 1. Given by holder (or his agent), or by any party who may be compelled by the holder to pay (or his agent); 2. Given to secondary party or his agent; 3. Given within the periods provided by law; 4. Given at the proper place.

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Ø

When notice of dishonor dispensed with: 1. when party to be notified knows about the dishonor, actually or constructively; 2. if waived; and 3. when after due diligence, it cannot be given.

Ø

Notice of dishonor given by or on behalf of a holder inures to the benefit of: a. all parties prior to the holder, who have a right of recourse against the party to whom the notice is given; and b. all holders subsequent to the holder giving notice.

Ø

Notice of dishonor given by or on behalf of a party entitled to give notice inures to the benefit of: a. the holder; and b. all parties subsequent to the party to whom notice is given.

Ø

Where an instrument is dishonored in the hands of an agent, he can do either of the ff.: a. directly give notice to persons secondarily liable thereon; or b. give notice to his principal.

Ø

A party giving notice is deemed to have given due notice where: a. the notice of dishonor is duly addressed, and b. deposited in the post-office, even when there is miscarriage of mail.

Ø

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.

Ø

Notice may be waived either before the time of giving notice, or after the omission to give due notice. Waiver may be expressed or implied.

Ø

As to who are affected by an express waiver depends on where the waiver is written: a. if it appears in the body or on the face of the instrument, it binds all parties; but b. if it is written above the signature of an indorser, it binds him only.

Ø

Ø

Notice of dishonor is not required to be given to the drawer in any of the ff. cases: 1. drawer and drawee are the same; 2. drawee is a fictitious person or not having the capacity to contract; 3. drawer is the person to whom the instrument is presented for payment; 4. the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; 5. where the drawer has countermanded payment. Notice of dishonor is not required to be given to an indorser in the ff. cases: 1. drawee is a fictitious person or does not have the capacity to contract, and indorser

was aware of that fact at the time he indorsed the instrument; 2. indorser is the person to whom the instrument is presented for payment; 3. instrument was made or accepted for his accommodation. Ø

In Sec. 73 (place of presentment for payment), there is a particular order to follow. In Sec. 108 (where notice of dishonor must be sent) there is no particular order. What is important is that notice is actually received on time.

Ø

If an instrument is not accepted by the drawee, there is no sense presenting it again for payment, and notice of dishonor must at once be given. If there was acceptance, presentment for payment is still required and if payment is refused, there is a need for notice of dishonor.

Ø

An omission to give notice of dishonor by nonacceptance does not prejudice the rights of a holder in due course subsequent to the omission.

Dishonor by Non-Payment When instrument dishonored by non-payment: 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. Effect of dishonor: an immediate right of recourse to all parties secondarily liable thereon accrues to the holder. Dishonor by Non-Acceptance Instances: a. When it is duly presented for acceptance and such an acceptance is refused or can not be obtained; or b. When presentment for acceptance is excused and the bill is not accepted (sec. 149) Effect: an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary. Protest – a formal statement in writing made by a notary under his seal of office at the request of the holder of a bill or note, in which it is declared that the same was presented for payment or acceptance and that it was refused, whereupon the notary protests against all parties to the instrument & declares that they shall be held responsible for all loss or damage arising from its dishonor. Ø

Effect of waiver: where protest is waived, presentment and notice of dishonor are also deemed waived. But where the notice of dishonor is waived, presentment is not waived.

Ø

Applicability: protest is necessary only in case of foreign bills of exchange which have been

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dishonored by non-acceptance or nonpayment, as the case may be. If it is not so protested, the drawer and indorsers are discharged. Ø

Foreign Bill of Exchange: 1. Drawn in the Philippines but payable outside the Philippines. 2. Payable in the Philippines but drawn outside the Philippines. (On the face of the instrument)

Ø

When protest necessary in inland bills: 1. In case of protest for better security (protest is actually optional; Sec. 158) 2. A bill that is supposed to be accepted for honor should first be protested for dishonor by non-acceptance or protested for better security (Sec. 161) 3. 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. 167) 4. When the bill is dishonored by the acceptor for honor, it must be protested for non-payment by him. 5. In case of payment for honor, prior protest for non-payment is required (Sec. 171)

Ø

Protest may be made by:: 1. a notary public; or 2. any respectable resident of the place where the bill is dishonored, in the presence of 2 or more credible witnesses.

Protest for better security is one made by the holder of a bill after it has been accepted but before it matures, against the drawer and indorsers, where the acceptor has been adjudged a bankrupt or an insolvent, or has made an assignment for the benefit of the creditors. (But protest is optional). XI. DISCHARGE Discharge of instrument - a release of all parties, whether primary or secondary, from the obligations arising thereunder. It renders the instrument without force and effect and, consequently, it can no longer be negotiated. Instances: 1. By payment in due course by or on behalf of the principal debtor; 2. Payment by accommodated party, where the instrument is made or accepted for his accommodation; 3. Intentional cancellation by the holder; 4. By any act which will discharge a simple contract for the payment of money; 5. When the principal debtor becomes the holder of the instrument at or after maturity in his own right.

By any act which would discharge a simple contract: 1. Payment or performance; 2. Loss of the thing due; 3. Condonation or remission; 4. Confusion or Merger; 5. Compensation; 6. Novation; 7. Annulment or Rescission; 8. Fulfillment of a resolutory condition; 9. Prescription. When persons secondarily liable on the instrument are discharged: 1. By any act which discharges the instrument; 2. By the intentional cancellation of his signature by the holder; 3. By the discharge of a prior party; 4. By a valid tender or payment made by a prior party; 5. By the release of the principal debtor, unless the holder’s right of recourse against the party secondarily liable is expressly reserved; 6. By any agreement binding upon the holder to extend the time of payment or to postpone the holder’s right to enforce the instrument. Ø

In the following cases, the agreement to extend the time of payment does not discharge a party secondarily liable: a. where the extension of time is consented to by such party; b. where the holder expressly reserves his right of recourse against such party.

Ø

Payment at or after maturity by a party secondarily liable does not discharge the instrument. It only cancels his own liability and that of the parties subsequent to him.

Effects of Renunciation: 1. A renunciation in favor of a secondary party may be made by the holder before, at or after maturity of the instrument. Effect: only such secondary party is discharged and all parties subsequent to him but the instrument itself remains in force. 2. A renunciation in favor of the principal debtor may be effected at or after maturity. Effect: the instrument is discharged and all parties thereto provided the renunciation is made unconditionally and absolutely. Note: In either case, renunciation does not affect the rights of a holder in due course without notice. Ø

Cancellation of an instrument includes tearing, erasure, obliteration, or burning. It is not limited to writing of the word ‘cancelled”, or “paid”, or drawing of criss-cross lines across the instrument.

Payment for Honor - payment made by a person, whether a party to the bill or not, after it has been protested for non-payment, for the benefit of any party liable thereon or for the benefit of the person for whose account it was drawn.

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Requisites: the bill has been dishonored by non-payment; it has been protested for non-payment; payment supra protest (another term for payment for honor because prior protest for non-payment is required) is made by any person, even by a party thereto; 4. the payment is attested by a notarial act of honor which must be appended to the protest or form an extension of it; 5. the notarial act must be based on the declaration made by the payor for honor or his agent of his intention to pay the bill for honor and for whose honor he pays. Ø 1. 2. 3.

Note: If the above formalities are not complied with, payment will operate as a mere voluntary payment and the payor will acquire no right to full reimbursement against the party for whose honor he pays. Ø

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

Ø

The payor for honor is given the right to receive both the bill and the protest obviously to enable him to enforce his rights against the parties who are liable to him. —oOo—

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