Negotiable Instruments Law Case Doctrines

Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque

NEGOTIABLE INSTRUMENTS LAW (ACT NO. 2031) PRELIMINARY CONSIDERATIONS AND GENERAL PRINCIPLES Negotiable Instruments - written contracts for the payment of money; by its form, intended as a substitute for money and intended to pass from hand to hand, to give the holder in due course the right to hold the same and collect the sum due. History of the Negotiable Instruments Law Cases: Philippine National bank v. Zulueta, G.R. No. L-7271, August 30, 1957 Held: “Our Negotiable Instruments Law, practically copied the American Uniform Negotiable Instruments Law, which in turn was based largely on the Bills of Exchange Act of England of 1882.” Applicability of the Negotiable Instruments Law Cases: Metropolitan Bank & Trust Company v. Court of Appeals, et.al, G.R. No. L88866, July 31, 1962 (5 SCRA 745, 747) “The provisions of the Negotiable Instruments Law are not applicable if the instrument involved is not negotiabe.” Kauffman v. Philippine National Bank, G.R. No. 16454, September 21, 1921 “Before the Negotiable Instruments Law can come into operation there must be a document in existence of the character described in section 1 of that Law; and no rights properly speaking arise in respect to said instrument until it is delivered.” Characteristics of Negotiable Instruments: a. Negotiability - right of transferee to hold the instrument and collect the sum due b. Accumulation of secondary contracts - instrument is negotiated from person to person

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Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque Functions of Negotiable Instruments a. They are substitute for money; b. They serve as credit instruments. *Negotiable Instruments are not mere contracts but are substitutes for money. Difference between Instruments:

Negotiable

Instruments

Negotiable Instruments

from

Non-Negotiable

Non-negotiable Instruments

Contains all the requisites of Sec. 1 of Does not contain all the requisites of the NIL Sec. 1 of the NIL Transferred by negotiation

Transferred by assignment

Holder in due course may have better Transferee acquires rights only of his rights than transferor transferor Prior parties warrant payment Transferee has right of against intermediate parties

Prior parties merely warrant legality of title recourse Transferee has no right of recourse

Promissory Note - unconditional promise to pay in writing made by one person to anther, signed by the maker, engaging to pay on demand or a fixed determinable future time a sum certain in money to order or bearer. When the note is drawn to maker’s own order, it is not complete until indorse by him. (Sec. 184 NIL) Parties: a. Maker b. Payee Cases: Consolidated Plywood, Inc., et.al. v. IFC Leasing and Acceptance Corporation [G.R. No. 72593. April 30, 1987.] Facts: The complaint was filed by the respondent against the petitioners for the recovery of the principal sum of One Million Ninety Three Thousand Seven Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued interest of One Hundred Fifty One Thousand Six Hundred Eighteen Pesos & 86/100 (P151,618.86) as of August 15, 1979, accruing interest there after at the rate of 2

Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque twelve (12%) percent per annum, attorney's fees of Two Hundred Forty Nine Thousand Eighty One Pesos & 71/100 (P249,081.71) and costs of suit. The petitioners filed their amended answer praying for the dismissal of the complaint and asking the trial court to order the respondent to pay the petitioners damages in an amount at the sound discretion of the court, Twenty Thousand Pesos (P20,000.00) as and for attorney's fees, and Five Thousand Pesos (P5,000.00) for expenses of litigation. The petitioners likewise prayed for such other and further relief as would be just under the premises. Trial Court rendered the decision: "WHEREFORE, judgment is hereby rendered: 1. Ordering defendants to pay jointly and severally in their official and personal capacities the principal sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED NINETY EIGHT PESOS & 71/100 (P1,093,798.71) with accrued interest of ONE HUNDRED FIFTY ONE THOUSAND SIX HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.86) as of August 15, 1979 and accruing interest thereafter at the rate of 12% per annum; "2) Ordering defendants to pay jointly and severally attorney's fees equivalent to ten percent (10%) of the principal and to pay the costs of the suit. "Defendants' counterclaim is disallowed." Petitioners filed a Motion for Reconsideration but it was denied. Thus, they appealed to the Intermediate Appellate Court. The following errors were assigned: THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC GULF AND PACIFIC COMPANY OF MANILA DID NOT APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY. THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF-APPELLEE IS A HOLDER IN DUE COURSE OF THE PROMISSORY NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE COURSE. The Appellate Court affirmed the decision of the lower court in toto; hence, this petition. 3

Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque The grounds of the petition were: I. ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE INSTRUMENT AS DEFINED UNDER THE LAW SINCE IT IS NEITHER PAYABLE TO ORDER NOR TO BEARER. II. THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE ASSIGNEE OF THE SUBJECT PROMISSORY NOTE. III. SINCE THE INSTANT CASE INVOLVES A NONNEGOTIABLE INSTRUMENT AND THE TRANSFER OF RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT AS AGAINST THE SELLER-ASSIGNOR, INDUSTRIAL PRODUCTS MARKETING. IV. THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY NOTE BECAUSE: A)THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE LAW; B)IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR OF THE PROMISSORY NOTE. V. THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER-ASSIGNOR IN FAVOR OF THE RESPONDENT DOES NOT CHANGE THE NATURE OF THE TRANSACTION FROM BEING A SALE ON INSTALLMENTS TO A PURE LOAN. VI. THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN ANY COURT BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON OR CANCELLED.

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Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque Issue: Whether or not the promissory note in question is a negotiable instrument so as to bar completely all the available defenses of the petitioner against the respondent-assignee. Held: No, the Promissory note in question is not a negotiable instrument. 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 must contain the so called 'words of negotiability' — i.e., 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 . . .. Section 8 of the Negotiable Instrument Law provides: "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 . . . "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,' 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." “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 seller-assignor, Industrial Products Marketing.” Bill of Exchange - unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is

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Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. (Sec. 126 NIL) Parties: a. Drawer b. Payee c. Draweree/ acceptor Check - bill of exchange drawn on a bank and payable on demand. (Sec. 185 NIL) Difference between Promissory Note and Bill of Exchange Promissory Note

Bill of Exchange

Unconditional promise Involves 2 parties Maker primarily liable Only 1 presentment - for payment

Unconditional order Involves 3 parties Drawer only secondarily liable Generally 2 presentments - for acceptance and for payment

Distinctions between a Check and Bill of Exchange CHECK - always drawn upon a bank or banker

BOE - may or may not be drawn against a bank - always payable on demand - may be payable on demand or at a fixed or determinable future time - not necessary that it be presented for - necessary that it be presented for acceptance acceptance - drawn on a deposit - not drawn on a deposit - the death of a drawer of a check, with - the death of the drawer of the knowledge by the banks, revokes the ordinary bill of exchange does not authority of the banker pay - must be presented for payment within - may be presented for payment within a reasonable time after its issue (6 a reasonable time after its last months) negotiation. Distinctions between a Promissory Note and Check PN - there are two (2) parties, the maker and the payee - may be drawn against any person, not necessarily a bank

CHECK - there are three (3) parties, the drawer, the drawee bank and the payee - always drawn against a bank

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Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque - may be payable on demand or at a -always payable on demand fixed or determinable future time - a promise to pay - an order to pay Other Forms of Negotiable Instruments: a. b. c. d. e.

Certificates of deposits Trade acceptances Bonds in the nature of promissory notes Drafts which are bills of exchange drawn by 1 bank to another Letters of credit

Trust Receipt - a security transaction intended to aid in the financing of importers and retailers who do not have sufficient funds to finance their transaction and acquire credit except to use as collateral the merchandise imported 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. Requisites of a Negotiable Note (PN): (SUDO) It must: a. be in writing signed by the drawer b. contains an unconditional promise or order to pay a sum certain in money c. be payable on demand or at a fixed determinable future time d. be payable to order or to bearer (Sec. 1 NIL) Case Doctrines: Pacifica Jimenez vs. Dr. Jose Bucoy, G.R. No. L-10221, February 28, 1958 Facts: In this intestate of Luther Young and Pacita Young who died in 1954 and 1952 respectively, Pacifica Jimenez presented for payment four promissory notes signed by Pacita for different amounts totalling twenty-one thousand pesos (P21,000).

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Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque Acknowledging receipt by Pacita during the Japanese occupation, in the currency then prevailing, the administrator manifested willingness to pay provided adjustment of the sums be made in line with the Ballantyne schedule. The claimant objected to the adjustment insisting on full payment in accordance with the notes. Applying doctrines of this Court on the matter, the Hon. Primitivo L. Gonzales, Judge, held that the notes should be paid in the currency prevailing after the war, and that consequently plaintiff was entitled to recover P21,000 plus attorneys fees for the sum of P2,000. Issue: When is an acknowledgement of debt becomes a promise to pay? Held: An acknowledgment of a debt becomes a promise to pay by the addition of words implying a promise of payment, such as, "payable," "payable on a given day," "payable on demand". "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 debt there may be collected from the words used a promise to pay it, the instrument may be regarded as a promissory note.” Juanita Salas vs. Honorable Court of Appeals and Filinvest Finance and Leasing Corporation, G.R. No. 76788, January 22, 1990 Facts: Records disclose that on February 6, 1980, Juanita Salas (hereinafter referred to as petitioner) bought a motor vehicle from the Violago Motor Sales Corporation (VMS for brevity) for P58,138.20 as evidenced by a promissory note. This note was subsequently endorsed to Filinvest Finance & Leasing Corporation (hereinafter referred to as private respondent), which financed the purchase. Petitioner defaulted in her installments beginning May 21, 1980 allegedly due to a discrepancy in the engine and chassis numbers of the vehicle delivered to her and those indicated in the sales invoice, certificate of registration and deed of chattel mortgage, which fact she discovered when the vehicle figured in an accident on 9 May 1980. This failure to pay prompted private respondent to initiate Civil Case No. 5915 for a sum of money against petitioner before the Regional Trial Court of San Fernando, Pampanga. Ruling of the Trial Court: The counterclaim of the defendant is dismissed with costs against defendant.” Hence, the case was elevated to the Court of Appeals.

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Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque The Appellate Court ruled: "WHEREFORE, considering the foregoing, the appealed decision is hereby modified ordering the defendant to pay the plaintiff the sum of P54,908.30 at 14% per annum from October 2, 1980 until full payment. The decision is AFFIRMED in all other respects. With costs to defendant." Petitioner’s Motion for Reconsideration was denied; hence, this case. Held: “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 and 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.” Requisites of a Negotiable Bill (BOE): (SUDOC) It must: a. Be in writing signed by the drawer b. Contains an unconditional promise or order to pay a sum certain in money c. Be payable on demand or at a fixed determinable future time d. Be payable to order or to bearer e. The drawee must be named or otherwise indicated with reasonable certainty (Sec. 1 NIL) Case Doctrines: Caltex Philippines, Inc. v. Court of Appeals, et.al, G.R. No. 97753, August 10, 1992 “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 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 surrounding circumstances 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.” *The factors that affect the determination of negotiability of instruments are:

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Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 1) The whole of the instrument shall be considered; 2) Only what appears on the face of the instrument shall be considered; 3) The provisions of the NIL, especially Section 1 thereof, shall be applied. Philippine Bank of Commerce v. Jose Aruego, 102 SCRA 530 [January 31, 1981]) Facts: Respondent Aruego signed drafts as drawee-acceptor but later claimed that he was not liable under the drafts. One of the arguments that he raised was 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: Was his contention correct? Held: No. The court ruled that, “Where 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, and he merely signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE ARUEGO", he is personally liable for the drafts accepted by him and he may not interpose as a defense that he signed the drafts merely as an agent of the Philippines Education Foundation Company of which he is president. As to the nature of the acceptance, the Supreme Court further held, “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 determination of whether a commercial paper is a bill of exchange or not. Thus, in the case at bar, defendant's contentions 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, is not meritorious.” Section 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 The common feature of the provisions specified in Section 2 is the fact that the principal amount to be paid by the maker or drawee is unaffected. There is an absolute obligation to pay a sum certain in money although certain amounts may be added, as in the case where interest or attorney’s fees will be paid. Indeed, 10

Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque the promise to do an act or to pay another item in addition to the payment of money that will render the note not negotiable must be a promise that conflicts with some or one of the essential characteristics of a negotiable instrument (Finley v. Smith, 165 Ky. 445, 177 S.W. 262 [1915]). Section 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 instrument. But an order or promise to pay out of a particular fund is not unconditional. Section 3 of the NIL deals with the requirement, under Section 1(b) of the NIL, that the promise or order stated in the instrument must be unconditional. Furthermore, Section 3 further provides that a statement of the transaction that gave rise to the obligation covered by the note or the bill does not destroy the negotiability of the instrument. However, reference to another transaction or document must be descriptive rather than restrictive. In other words, the instrument must only give information that it was issued in connection with a particular transaction or document. It must not make the order or promise dependent on or burdened by the other transaction. If the instrument is restricted by terms and conditions of another transaction, contract or agreement, by incorporating the agreement or a portion thereof as part of the other, the said instrument is non-negotiable. Consequently, a note that is “subject to” the provisions of another contract or document is not negotiable. A note is also negotiable under the same principle if the amount is payable “as set forth in that certain agreement dated March 12, 2004” (Salomonsky v. Kelly, 349 S.E. 2d 358 [1986]). Moreover, the negotiability of the instrument is affected if what is specified is the account or fund out of which payment is to be made. Hence, if the instrument states, “Pay to the order of Juan de la Cruz P10,000.00 out of my account with you”, it is not negotiable because the instrument is conditional. The obligation to pay is subject to the condition that the funds in the account are sufficient. The order to pay is not absolute because no payment will be made if the amount in the account is less than P10,000.00. Cases: Metropolitan Bank & Trust Company v. Court of Appeals G.R. No. 88866, February 18, 1991 11

Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 194 SCRA 169 Facts: Person A deposited Treasury Warrants in Golden Savings (respondent). Golden Savings deposited the Treasury Warrants in Metrobank and the warrants were sent for clearing. Golden Savings made repeated inquiries if the warrants had been cleared. Exasperated, Metrobank allowed Golden Savings to withdraw from the warrant’s proceeds before clearance. Afterwards, Person A withdrew the cleared warrants’ proceeds. It turns out however the warrants had been dishonored and Metrobank demanded a refund from Golden Savings. Golden Savings refused. Issue: Are the Treasury Warrants negotiable instruments? Held: No. The warrant have stamped on their face the word ‘non-negotiable’ and is payable from a particular fund, namely Fund 501. The promise to pay is conditional on the availability of funds in Fund 501. The Treasury Warrants aren’t negotiable instruments and the Negotiable Instruments Law doesn’t apply to it. Abubakar vs Auditor General G.R. No. L-1405, July 31, 1948, 31 Phil. 359 Facts: The Auditor General refused to authorize payment of a Treasury warrant which was issued in favor of a 3rd person but is now in Abubakar’s hands. Issue: Is the Treasury warrant a negotiable instrument? Held: No. The Treasury warrant isn’t a negotiable instrument. The Treasury warrants indicate on its face ‘payable from the appropriation for food administration’ meaning there is a particular fund out of which payment must be made. The Treasury warrant isn’t an unconditional promise to pay. Philippine Education Company, Inc. v. Mauricio A. Soriano, et.al G.R. No. L-22405, June 30, 1971; 39 SCRA 587 Issue: Is a postal money order negotiable? Held: No, a postal money order is not negotiable. It does not contain an unconditional promise or order to pay required in Section 1(b) of the NIL. Regulations and restrictions are imposed on postal money orders, which are inconsistent with the character of negotiable instruments. Section 4. Determinable future time; what constitutes. – An instrument is payable at a determinable future time, within the meaning of this Act, which expressed to be payable: (a) At a fixed period after date or sight; or 12

Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque (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. ACCELERATION CLAUSE

INSECURITY CLAUSE

EXTENSION CLAUSE

A clause that renders whole debt due and demandable upon failure of obligor to comply with certain conditions.

Provisions in the contract which allows the holder to accelerate payment if he deems himself insecure.

Clauses in the face of the instrument that extend the maturity dates; a. At the option of the holder; b. Extension to a further definite time at the option of the maker or acceptor c. Automa –tically upon or after a specified act or event.

Instrument is still negotiable

Instrument is rendered nonnegotiable because the holder’s whim and caprice prevail without the fault and control of the maker

Instrument is still negotiable (Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino)

EXTENSION CLAUSE

EXTENSION UNDER SEC. 120(f)

Stated on the face of the instrument

Agreement binding the holder; a. To extend the time of payment or b. Postpone the holder’s right to enforce the instrument

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Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque Parties are bound because they took the instrument knowing that there is an extension clause

Binds the person secondarily liable (and therefore cannot be discharged from liabilities if: a. He consents or b. Right of recourse is expressly reserved. (Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino)

PAYABLE ON DEMAND

PAYABLE AT A FIXED OR DETERMINABLE FUTURE TIME

a. Where expressed to be payable on demand, at sight or on presentation; b. Where no period of payment is stated; c. Where issued, accepted, or indorsed after maturity (only as between immediate parties). (Sec. 7)

a. At a fixed period after date or sight; 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 is uncertain. (Sec. 4)

Section 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 (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. 14

Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque A statement of the transaction that gave rise to the obligation does not make the instrument non-negotiable. In the same manner, a statement in the instrument that the same is secured by a collateral does not make the promise or order conditional. Apparently, Section 5(a) even declares that the instrument is still negotiable even if it authorizes the sale of collateral securities in case of default. Thus, an instrument is still negotiable even if it states that it is “secured by a chattel mortgage which can be foreclosed pursuant to pertinent law if the maker defaults in payment of his obligation.” ADDITONAL PROVISONS NOT AFFECTING NEGOTIABILITY

þGENERAL RULE: If some other act is required other than or in addition to payment of money, the instrument is not negotiable. (Sec. 5) þEXCEPTIONS: a. Authorizes the sale of collateral securities on default; b. Authorizes confession of judgment on default; c. Waives the benefit of law intended to protect the debtor; or d. Allows the creditor the option to require something in lieu of money.

Notes on Section 5: 1. Limitation on the provision: it cannot require something illegal. 2. There are two kinds of judgments by confession: a. cognovit actionem b. relicta verificatione c. Confessions of judgment in the Philippines are void as against public policy. d. If the choice lies with the debtor, the instrument is rendered nonnegotiable. SECTION 6.Omission; 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 has been given therefor; or

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Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 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. f) 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. OMISSIONS & PROVISIONS THAT DO NOT AFFECT NEGOTIABILITY a. It is not dated; b. It does not specify the value given or that any value has been given; c. It does not specify the place where it is drawn or where it is payable; d. It bears a seal; e. It designates a particular kind of current money in which payment is to be made. (Sec. 6)

Section 5 versus Section 6 OMISSIONS & PROVISIONS THAT DO NOT AFFECT NEGOTIABILITY

ADDITONAL PROVISONS NOT AFFECTING NEGOTIABILITY

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Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque

(a) It is not dated; (b) It does not specify the value given or that any

(c) value has been given; (d) It does not specify the place where it is drawn or where it is payable; (e) It bears a seal; (f) It designates a particular kind of current money in which payment is to be made. (Sec. 6)

þGENERAL RULE: If some other act is required other than or in addition to payment of money, the instrument is not negotiable. (Sec. 5) þEXCEPTIONS: e. Authorizes the sale of collateral securities on default; f. Authorizes confession of judgment on default; g. Waives the benefit of law intended to protect the debtor; or h. Allows the creditor the option to require something in lieu of money.

Sec. 7 An instrument is payable on demand — (a) (b)

Where it is expressed to be payable on demand, or at sight, or on presentation; or 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. Section 8. When payable to order. – The instrument is payable to order where it is drawn payable to the order of a specific 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) Two or more payees jointly; or (d) One or some of several payees; or (e) 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.

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Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque There are two (2) views regarding the nature of instruments that it is “payable to the order of bearer.” 1. Prof. Simplicio Guevarra believed that the same is a bearer instrument. He explains that an order instrument is one that is “payable to the order of a specified persons” or “payable to a specified person or his order.” The view is that there must always be a specified person named in the instrument and the instrument must always be paid to the person designated in the instrument or to any person to whom he has indorsed and delivered the same (Salas vs. CA, et.al, G.R. No. 76788, January 22, 1980). 2. The other view is that the instrument that is “payable to the order of bearer” is an order instrument. Writers citing the ruling in American National Bank vs. Joe Kerley often support this view. However, reliance thereon without fully explaining the rationale behind the ruling may tend to mislead those who do not know the background thereof. The ruling thereon tat the instrument involved therein is considered an “order instrument” was made because the intent of the makers to make it an “order instrument” was apparent on the face of the instrument. The court did not foreclose the possibility that although the instrument is payable “to the order of bearer,” it may still be considered a bearer instrument whenever the same intent is apparent on the face of the instrument. 3. The instrument involved in the above mentioned case was considered an order instrument because the intent of the maker to make it so was apparent. 4. Section 8 of the Negotiable Instruments Law must be read in conjunction with Section 30 thereof which provides that 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. Clearly, an instrument payable to order has two requisites namely: (a) it must first be indorsed by the holder; (b) it must be delivered. Case Doctrines: Ang Tek Lian v. Court of Appeals G.R. No. L-2516, September 25, 1950, 87 Phil. 383 “Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the order of "cash" is a check payable to bearer, and the bank may pay it to the person presenting it for payment without the drawer's indorsement.”

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Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque “A check payable to the order of cash is a bearer instrument. Bacal vs. National City Bank of New York (1933), 146 Misc., 732; 262 N. Y. S., 839; Cleary vs. Da Beck Plate Glass Co. (1907), 54 Misc., 537; 104 N. Y. S., 831; Massachusetts Bonding & Insurance Co. vs. Pittsburgh Pipe & Supply Co. (Tex. Civ. App., 1939), 135 S. W. (2d), 818. See also H. Cook & Son vs. Moody (1916), 17 Ga. App., 465; 87 S. E., 713. "Where a check is made payable to the order of 'cash', the word cash 'does not purport to be the name of any person', and hence the instrument is payable to bearer. The drawee bank need not obtain any indorsement of the check, but may pay it to the person presenting it without any indorsement. . . ." (Zollmann, Banks and Banking, Permanent Edition, Vol. 6, p. 494.) “Of course, if the bank is not sure of the bearer's identity or financial solvency, it has the right to demand identification and/or assurance against possible complications, — for instance, (a) forgery of drawer's signature, (b) loss of the check by the rightful owner, (c) raising of the amount payable, etc. The bank may therefore require, for its protection, that the indorsement of the drawer — or of some other person known to it — be obtained. But where the Bank is satisfied of the identity and/or the economic standing of the bearer who tenders the check for collection, it will pay the instrument without further question; and it would incur no liability to the drawer in thus acting.” Payable to Bearer Section 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 to 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. Note: An instrument originally payable to bearer can be negotiated by mere delivery even if it is indorsed especially. 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. A check that is payable to the order of cash is payable to bearer. Reason: The name of the payee does not purport to be the name of any person. (Ang Tek Lian vs. CA, 87 Phil. 383)

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Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque III. INTERPRETATION OF NEGOTIABLE INSTRUMENTS (Sec. 17) a. Discrepancy between the amount in figures and that in words – the words prevail, but if the words are ambiguous, reference will be made to the figures to fix the amount. b. Payment for interest is provided for – interest runs from the date of the instrument, if undated, from issue thereof. c. Instrument undated – consider date of issue. d. Conflict between written and printed provisions – written provisions prevail. i. When 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; j. If one signs without indicating in what capacity he has affixed his signature, he is considered an indorser. k. If two or more persons sign “We promise to pay,” their liability is joint (each liable for his part) but if they sign “I promise to pay,” the liability is solidary (each can be compelled to comply with the entire obligation). (Sec. 17) IV. TRANSFER AND NEGOTIATION INCIDENTS IN THE LIFE OF A NI (1 Agbayani, 1992 ed.) a. Issue b. Negotiation c. Presentment for acceptance, in certain kinds of Bills of Exchange d. Acceptance l. Dishonor by non-acceptance m.Presentment for payment n. Dishonor by non-payment o. Notice of dishonor p. Discharge MODES OF TRANSFER a. Negotiation – the transfer of the instrument from one person to another so as to constitute the transferee as holder thereof. (Sec.30) b. Assignment – The transferee does not become a holder and he merely steps into the shoes of the transferor. Any defense available against the transferor is available against the transferee. (Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino) ? Assignment may be effected whether the instrument is negotiable or nonnegotiable. (Sesbreño vs. CA, 222 SCRA 466) HOW NEGOTIATION TAKES PLACE

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Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque a. Issuance – first delivery of the instrument complete in form to a person who takes it as a holder. (Sec. 191) FSteps: 1. Mechanical act of writing the instrument completely and in accordance with the requirements of Section 1; and 2. The delivery of the complete instrument by the maker or drawer to the payee or holder with the intention of giving effect to it. (The Law on Negotiable Instruments with Documents of Title, Hector de Leon, 2000 ed.) c. Subsequent Negotiation 1. If payable to bearer, a negotiable instrument may be negotiated by mere delivery. 2. If payable to order, a NI may be negotiated by indorsement completed by delivery Note: In both cases, delivery must be intended to give effect to the transfer of instrument. (Development Bank vs. Sima Wei, 219 SCRA 736) d. Incomplete negotiation of order instrument 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 and he also acquires 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 made. (Sec. 49) e. Indorsement Legal transaction effected by the affixing one's signature at the: a. Back of the instrument or b. Upon a paper (allonge) attached thereto with or without additional words specifying the person to whom or to whose order the instrument is to be payable whereby one not only transfers legal title to the paper transferred but likewise enters into an implied guaranty that the instrument will be duly paid (Sec. 31)

þGENERAL RULE: Indorsement must be of the entire instrument. þEXCEPTION: Where instrument has been paid in part, it may be indorsed as to the residue. (Sec. 32) F Kinds of Indorsement: 21

Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque A. SPECIAL – Specifies the person to whom or to whose order, the instrument is to be payable (Sec. 34) B. BLANK – Specifies no indorsee: 1. Instrument becomes payable to bearer and may be negotiated by delivery (Sec. 34) 2. May be converted to special indorsement by writing over the signature of indorser in blank any contract consistent with character of indorsement (Sec. 35) C. ABSOLUTE – One by which indorser binds himself to pay: 1. Upon no other condition than failure of prior parties to do so; 2. Upon due notice to him of such failure. D. CONDITIONAL – Right of the indorsee is made to depend on the happening of a contingent event. Party required to pay may disregard the conditions. (Sec. 39) E. RESTRICTIVE – An indorsement is restrictive, when it either: a. Prohibits 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 mere absence of words implying power to negotiate does not make an indorsement restrictive. (Sec. 36) F. QUALIFIED – Constitutes the indorser a mere assignor of the title to the instrument. (Sec. 38) a. It is made by adding to the indoser's signature words like "sans recourse,” “without recourse", "indorser not holder", "at the indorser's own risk", etc. G. JOINT – Indorsement payable to 2 or more persons (Sec. 41) H. IRREGULAR – A person who, not otherwise a party to an instrument, places thereon his signature in blank before delivery (Sec. 64) Other rules on indorsement; 1. Negotiation is deemed prima facie to have been effected before the instrument is overdue except if the indorsement bears a date after the maturity of the instrument. (Sec. 45) 22

Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 2. Presumed to have been made at the place where the instrument is dated except when the place is specified. (Sec. 46) 3. Where an instrument is payable to the order of 2 or more payees who are not partners, all must indorse unless authority is given to one. (Sec. 41) 4. Where a person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability. (Sec. 44) RENEGOTIATION TO PRIOR PARTIES (Sec. 50) 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. Reason: To avoid circuitousness of suits. 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. (Sec. 48) CONSIDERATION FOR THE ISSUANCE AND SUBSEQUENT TRANSFER Every NI is deemed prima facie to have been issued for a valuable consideration. Every person whose signature appears thereon is presumed to have become a party thereto for value. (Sec. 24) What constitutes value: a. An antecedent or pre-existing debt b. Value previously given c. Lien arising from contract or by operation of law. (Sec. 27) HOLDERS HOLDER - A payee or endorsee of a bill or note who is in possession of it or the bearer thereof. (Sec. 191) RIGHTS OF HOLDERS IN GENERAL (Section 51 of the NIL) Section 51. Right of holder to sue payment. – The holder of a negotiable instrument may sue thereon in his own name; and payment to him in due course discharges the instrument. a. May sue thereon in his own name

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Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque b. Payment to him in due course discharges the instrument c. The only disadvantage of a holder who is not a holder in due course is that the negotiable instrument is subject to defenses as if it were nonnegotiable. (Chan Wan vs. Tan Kim, 109 Phil. 706) Case: Atrium Management Corporation v. Court of Appeals, et.al G.R. No. 109491 (2001) Issue: Whether Atrium was not a holder in due course and for value. Held: No. In the instant case, the checks were crossed checks and specifically indorsed for deposit to payee's account only. From the beginning, Atrium was aware of the fact that the checks were all for deposit only to payee's account, meaning E.T. Henry. Clearly, then, Atrium could not be considered a holder in due course. Furthermore, the Court said: “However, it does not follow as a legal proposition that simply because petitioner Atrium was not a holder in due course for having taken the instruments in question with notice that the same was for deposit only to the account of payee E.T. Henry that it was altogether precluded from recovering on the instrument. The Negotiable Instruments Law does not provide that a holder not in due course can not recover on the instrument.” Lastly, Court ruled, “The disadvantage of Atrium in not being a holder in due course is that the negotiable instrument is subject to defenses as if it were nonnegotiable. One such defense is absence or failure of consideration.” Holder In Due Course (HDC) A holder who has taken the instrument under the following conditions: KEY: C O V I Section 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) Instrument is complete and regular upon its face; (b) Became a holder before it was overdue and without notice that it had been previously dishonored; (c) For value and in good faith; and (d) At the time he took it, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

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Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque

Notes: 1. It is indispensable that a person who claims to be a holder in due course must be a holder. If he is not a holder, he can never be a holder in due course. Hence, a possessor of a check payable to the order of a different person is not a holder in due course if the said payee did not endorse it to him. The holding suffers from the infirmity of not having been properly negotiated (Mesina, et.al. vs. The Hon. Court of Appeals, et.al, G.R. No. L-70145; November 13, 1986). Case: Mesina et.al. vs. IAC G.R. No. 70145; November 13, 1986 Facts: Jose Go purchased from Associated Bank a cashier's check for P800,000.00. Unfortunately, he left said check on the top of the desk of the bank manager when he left the bank. The bank manager entrusted the check for safekeeping to a bank official, a certain Albert Uy. While Uy went to the men's room, the check was stolen by his visitor in the person of Alexander Lim. Upon discovering that the check was lost, Jose Go accomplished a "STOP PAYMENT" order. Two days later, Associated Bank received the lost check for clearing from Prudential Bank. After dishonoring the same check twice, Associated Bank received summons and copy of a complaint for damages of Marcelo Mesina who was in possession of the lost check and is demanding payment. Petitioner claims that a cashier's check cannot be countermanded in the hands of a holder in due course. ISSUE: Whether or not petitioner can collect on the stolen check on the ground that he is a holder in due course. RULING: No. Petitioner failed to substantiate his claim that he is a holder in due course and for consideration or value as shown by the established facts of the case. Admittedly, petitioner became the holder of the cashier's check as endorsed by Alexander Lim who stole the check. He refused to say how and why it was passed to him. He had therefore notice of the defect of his title over the check from the start. The holder of a cashier's check who is not a holder in due course cannot enforce such check against the issuing bank which dishonors the same. 2. An instrument is not complete and regular on its face if it contains material alteration. A holder cannot be a holder in due course if he took the instrument at the time when the amount to be paid appears to have been altered by increasing the same. 25

Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 3. A holder who takes an overdue instrument is put on inquiry although he is not actually aware of any existing defense of a prior party. A person taking an overdue instrument should certainly question why the instrument is still in circulation even if it is overdue. 4. Notice of any infirmity in the instrument or defect in the title of a prior party will destroy due course holding. 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 takin the instrument amounted to bad faith” (Section 56 of the NIL). Infirmity in the instrument means any irregularity in the instrument. Thus, notice of an alteration, which is apparent, is notice of an infirmity in the instrument. Notice of forgery in the maker or the drawer’s signature is also notice of infirmity in the instrument. 5. Insofar as good faith is concerned, the Supreme Court ruled that although good faith on the part of the holder is presumed, such presumption is destroyed if the payee or indorsee “acquired possession of the instrument under circumstnces that should have put it to inquiry as to the title of the holder who negotiates the instrument” (Vicente R. De Ocampo & Co. v. Anita Gatchalian, et.al., G.R. No. L-15126, November 30, 1961 (3 SCRA 596). Rights of a Holder in Due Course Rights of a HDC (Section 51 in conjunction with Section 57 of the NIL) 1. May sue on the instrument in his own name; 2. May receive payment and if payment is in due course, the instrument is discharged; 3. Holds the instrument free from any defect of title of prior parties and free from defenses available to parties among themselves; and 4. May enforce payment of the instrument for the full amount thereof against all parties liable thereon. (Secs. 51 and 57) Every holder of a negotiable instrument is deemed prima facie a holder in due course. However, this presumption arises only in favor of a person who is a holder as defined in Section 191 of the NIL. The weight of authority sustains the view that a payee may be a holder in due course. Hence, the presumption that he is a prima facie holder in due course applies in his favor. (Cely Yang vs. Court of Appeals, G.R. No. 138074, August 15, 2003)

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Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque Holder Not In Due Course F One who became a holder of an instrument without any, some or all of the requisites under Sec. 52 of the NIL. F With respect to demand instruments, if it is negotiated an unreasonable length of time after its issue, the holder is deemed not a holder in due course. (Sec.53)

þ GENERAL RULE: Failure to make inquiry is not evidence of bad faith. þ EXCEPTIONS: 1. Where a holder’s title is defective or suspicious that would compel a reasonable man to investigate, it cannot be stated that the payee acquired the check without the knowledge of said defect in the 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. (De Ocampo vs. Gatchalian, 3 SCRA 596) 2. Holder to whom cashier’s check is not indorsed in due course and negotiated for value is not a holder in due course. (Mesina v. IAC) Rights of a holder not in due course: 1. It can enforce the instrument and sue under it in his own name. 2. Prior parties can avail against him any defense among these prior parties and prevent the said holder from collecting in whole or in part the amount stated in the instrument 3. Note: If there are no defenses, the distinction between a HDC and one who is not a HDC is immaterial. (Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino) SHELTER RULE F 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 prior parties to the latter. (Sec. 58) ACCOMMODATION F A legal arrangement under which a person called the accommodation party, lends his name and credit to another called the accommodated party, without any consideration.

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Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque Accommodation Party (AP) F Requisites: 1. The accommodation party must sign as maker, drawer, acceptor, or indorser; 2. He must not receive value therefor; and 3. The purpose is to lend his name or credit. (Sec. 29) Note: “without receiving value therefor,” means without receiving value by virtue of the instrument. (Clark vs. Sellner, 42 Phil. 384) F Effects: The person to whom the instrument thus executed is subsequently negotiated has a right of recourse against the accommodation party in spite of the former’s knowledge that no consideration passed between the accommodation and accommodated parties. (Sec. 29) F Rights & Legal Position: 1. AP is generally regarded as a surety for the party accommodated; 2. When AP makes payment to holder of the note, he has the right to sue the accommodated party for reimbursement. (Agro Conglomerates, Inc. vs. CA, 348 SCRA 450) F Liability: 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. Hence, As regards, an AP, the 4th condition, i.e., lack of notice of infirmity in the instrument or defect in the title of the persons negotiating it, has no application. (Stelco Marketing Corp. vs. Court of Appeals, 210 SCRA 51) F Rights of APs as against each other: May demand contribution from his coaccommodation party without first directing his action against the principal debtor provided: a. He made the payment by virtue of judicial demand; or b. The principal debtor is insolvent. ? The relation between an accommodation party is, in effect, one of principal and surety – the accommodation party being the surety. It is a settled rule that a surety is bound equally and absolutely with the principal and is deemed an original promissory and debtor from the beginning. The liability is immediate and direct. (Romeo Garcia vs. Dionisio Llamas, G.R. No. 154127, December 8, 2003) ? Well-entrenched is the rule that the consideration necessary to support a surety obligation need not pass directly to the surety, a consideration need not pass directly to the surety, a consideration moving to the principal alone being

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Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque sufficient. (Spouses Eduardo Evangelista vs. Mercator Finance Corp, G.R. No. 148864, August 21, 2003) VII. PARTIES WHO ARE LIABLE PRIMARY AND SECONDARY LIABILITY OF PARTIES Makes the parties liable to pay the sum certain in money stated in the instrument. Conditioned on presentment and notice of dishonor (Campos and Lopez-Campos, Negotiable Instruments Law, 1994 ed.)

WARRANTIES OF PARTIES Impose no direct obligation to pay in the absence of breach thereof. In case of breach, the person who breached the same may either be liable or barred from asserting a particular defense. Does not require presentment and notice of dishonor. (Campos and Lopez-Campos, Negotiable Instruments Law, 1994 ed.)

1. Primarily Liable (Sec. 60 and 62, NIL) MAKER

ACCEPTOR OR DRAWEE

A. Engages to pay according to the tenor of the instrument; and B. Admits the existence of the payee and his capacity to indorse.

A. Engages to pay according to the tenor of his acceptance; B. Admits the existence of the drawer, the genuineness of his signature and his capacity and authority to draw the instrument; and C. Admits the existence of the payee and his capacity to indorse. ? A bill of itself does not operate as an assignment of funds in the hands of the drawee available for the payment thereof and the drawee is not liable unless and until he accepts the same (Sec.127)

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Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 2. Secondarily Liable (Sec. 61, 64 and 66, NIL)

DRAWER

A. Admits the existence of the payee and his capacity to indorse;

GENERAL INDORSER A. Warrants all subsequent HDC a. That the instrument is genuine and in all respect what it purports to be

B. Engages that the instrument will be accepted or paid by the party b. He has good title primarily liable; and to it; C. Engages that if c. All prior parties the instrument is had capacity to dishonored and contract proper proceedings are brought, he will d. The instrument is, at the time of pay to the party entitled to be paid. endorse-ment, valid and subsisting. B. Engages that the instrument will be accepted or paid, or both, as the case may be, according to its tenor; and C. If the instrument is dishonored and necessary proceedings on dishonor be duly taken, he will pay to the party entitled to be paid.

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IRREGULAR INDORSER

A person, not otherwise a party to an instrument, places his signature thereon in blank before delivery. (Sec. 64) A. If instrument payable to the order of a 3rd person, he is liable to the payee and subsequent parties. B. If instrument payable to order of maker or drawer or to bearer, he is liable to all parties subsequent to the maker or drawer. C. If he signs for accommo-dation of the payee, he is liable to all parties subsequent to the payee.

Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 3. Limited Liability (Sec. 65; Metropol Financing v. Sambok, 120 SCRA 864)

QUALIFIED INDORSER

PERSON NEGOTIATING BY DELIVERY

Every person negotiating instrument A. Warranties same as those of by delivery or by a qualified qualified indorsers; and endorsement warrants that: B. Warranties extend to A. Instrument is genuine and in all immediate transferee only. respects what it purports to be; B. He has good title to it; C. All prior parties had capacity to contract; D. He has no knowledge of any fact which would impair the validity of the instrument or render it valueless.

PERSON NEGOTIATING BY MERE DELIVERY OR BY QUALIFIED INDORSEMENT

GENERAL INDORSER

No secondary liability; but is liable There is secondary liability, and for breach of warranty warranties Warrants that he has no knowledge Warrants that the instrument is, of any fact which would impair the at the time of his indorsement, validity of the instrument or render it valid and subsisting valueless

ORDER OF LIABILITY F There is no order of liability among the indorsers as against the holder. He is free to choose to recover from any indorser in case of dishonor of the instrument. 31

Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque (Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino) F As respect one another, indorsers are liable prima facie in the order in which they indorse unless the contrary is proven (Sec.68)

þGENERAL RULE: One whose signature does not appear on the instrument shall not be liable thereon. þEXCEPTIONS: 1. The principal who signs through an agent is liable; 2. The forger is liable; 3. One who indorses in a separate instrument (allonge) or where an acceptance is written on a separate paper is liable; 4. One who signs his assumed or trade name is liable; and 5. A person negotiating by delivery (as in the case of a bearer instrument) is liable to his immediate indorsee. Sources: Banking Laws and Negotiable Instruments Laws by Timoteo Aquino Other reviewers posted on the internet

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