PART I THE NEGOTIABLE INSTRUMENTS LAW (ACT NO

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INTRODUCTION

Historical Background

US Uniform Negotiable Instruments Act - our NIL was patterned after this; this was based upon the English Bill of Exchange Act of 1882 US Uniform Commercial Code seeks to simplify & modernize the law of commercial transactions Act No. 2031 Negotiable Instruments Law took effect on June 2, 1911; this law was intended to facilitate transactions in commercial paper & to promote free flow of credit

Code of Commerce all articles relevant to negotiable instruments have been repealed, except of those on crossed checks

Application of the NIL1. Applies only to negotiable instruments (NIs)2. Excludes non-negotiable instruments from its application as they are governed by the provisions of the Civil Code and special laws3. The NIL can be applied but only by analogy if the instrument is not negotiable if there is no law that can be applied

Function & Importance1. Substitute for money2. Means of creating and transferring credit

3. Medium of exchange for most commercial transactions

4. Facilitates the sale of goods

5. Increases the purchasing medium in circulation

6. to allow men of undoubted credit to carry on a business enterprise upon their promissory notes, bills of exchange and checks knowing that other businessmen will treat these promises as cash

Doubt resolved in favor of negotiability Purpose: to encourage the free circulation of the negotiable papers because of the admittedly indispensable function they perform in mercantile business transactions in any given country & the world

NIs Not Legal Tender Since a NI is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized. e.g. a check, whether a managers check or an ordinary check is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the oblige or creditor

RA 7653 (New Central Bank Act)

1. Sec. 52 only notes and coins issued by the BSP are considered legal tender

2. Sec. 60 checks are not legal tender

a. GR: 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

b. E: a check w/c has been cleared & credited to the account of the creditor shall be equivalent to delivery to the creditor of cash in an amount equal to the amount credited to his account

Coins as Legal Tender (RA 7653 & BSP Circular 537) the maximum amount of coins to be considered as legal tender is:

1. P1000 for denominations of 1-peso, 5-peso, and 10-peso coins2. P100 for denomination of 1-centavo, 5-centavo, 10-centavo and 25-centavo

Characteristics/Features1. Negotiability

a. 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

b. It is the ability to transfer to another a title and right better than what the transferor hadc. Through negotiation, the instrument could pass to a holder in due course who acquires the instrument free from any defect of prior parties, and free from defenses available to prior partiesd. note: a bona fide holder, while free from personal defenses available to prior parties among themselves, is subject to real defenses that might have obtained between them2. Accumulation of Secondary Contractsa. In the course of the negotiation of a NI, a series of juridical ties between the parties thereto arises either by law or by privity

b. The more debts are added, the more advantageous it will be to the holder as he can proceed not only against the maker but also against all transferorsThe Theory of Negotiable Instruments1. Rests upon the proposition that they appear to belong to the person having them in possession and to no one else2. The maker of an NI is estopped from urging, as against a bona fide holder who has received it from anyone in possession, a defect of title.

3. The holder, though w/o title, has capacity to give a title because he is the apparent owner of the instrumentNEGOTIABLE INSTRUMENTSNON-NEGOTIABLE INSTRUMENT

governed by the NILNIL does not apply; application of the NIL to non-negotiable instruments is only by analogy

can be transferred by negotiation or by assignment can be transferred only by assignment

a transferee of a negotiable instrument can be a HDC if all the requirements under Sec. 52 are complied withthe transferee of a non-negotiable instrument can never be a HDC but remains to be an assignee, thus all defenses available to prior parties may be raised

FORMS OF NEGOTIABLE INSTRUMENTS

COMMON FORMS

SPECIAL TYPES OF

PROMISSORY NOTESSPECIAL TYPES OF

BILLS OF EXCHANGE

1. Promissory note

2. Bill of exchange

3. Bank check (they are really a special form or kind of bill of exchange)1. Certificates of deposits

2. Bank notes

3. Due bills

4. Bonds1. drafts

2. trade acceptances

3. bankers acceptance

Negotiable instruments vs. Contracts

NIs - capable of being cast in such form as to have the quality of negotiability

NIs have their foundation in the law merchant -> NIL

Negotiability vs. assignability

NIs are not in force until it is delivered

The peculiarities of the NIL relate to a holder who has taken by negotiation, and not as an original party

Commercial Papers w/ Limited Negotiability

1. Crossed Check: usually negotiable as it normally complies w/ the requirements under Sec. 1, NIL, but issued for a special purpose and can be negotiated only once

2. Trade Acceptance: negotiable, it is a bill of exchange addressed by the seller of the goods to the buyer. But Sec. 1 must be complied with.

Commercial Papers w/c are Non-Negotiable

1. Documents of title: a receipt/order for the delivery of goods; it is w/o an unconditional promise/order to pay a sum certain in money

2. Letter of credit: it is in favor of a specified person & not to order

3. Bill of lading: it represents goods, not money

4. Trust receipt: a document of security pursuant to w/c a bank acquires a security interest in the goods under trust receipt; it is an evidence of ownership of goods, not money

5. Warehouse receipt: it represents goods, no money6. Certificate of stock: a muniment of title to a given share in the assets of a corporation; its w/o an unconditional promise/order to pay a sum certain

7. Pawn ticket: it does not represent money but pawned articles8. Money order: it is governed by postal rules & regulations w/c may be inconsistent w/ the NIL and it can only be negotiated once9. Treasury warrant: it is payable out of a particular fundCHAPTER 1 FORM AND INTERPRETATION

Section 1. Form of negotiable instrumentsNegotiable Instrument A contractual obligation to pay money

Either promises or orders to pay money

W/N an instrument is negotiable depends on form & content A valid instrument is not necessarily negotiable

Considerations in determining the negotiability of an instrument:

1. The whole of the instrument2. Determined from the writing -- only what is on the face of the instrument3. No other words are to be added to it or substituted in its stead

4. Provisions of the NIL (especially Sec. 1 requirements of negotiability)

Requisites in Sec. 1

deemed essential for the security of commercial transactions

they enable one to tell at a glance w/n an instrument is negotiable

they enable one to gauge the risks involved in taking it as security

KINDS OF NEGOTIABLE INSTRUMENTS

PROMISSORY NOTE (PN)BILL OF EXCHANGE (BILL)

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 bearerAn 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

A promise to pay a sum of moneyAn order made by one person to another to pay money to a 3rd person

1. must be in writing & signed by the maker

2. must contain an unconditional promise to pay a sum certain in money

3. must be payable on demand or determinable future time

4. must be payable to order or to bearer1. must be in writing & signed by the drawer

2. must contain an unconditional order to pay a sum certain in money

3. must be payable on demand or determinable future time

4. must be payable to order or to bearer

5. the drawee must be named or otherwise indicated therein w/ reasonable certainty

Maker: the one who makes the promise & signs the instrument

Payee: the party to whom the promise is made or the instrument is payable

Holder: every person to whom an instrument is delivered

Drawer: the person who draws up the bill; he gives the order to pay money to a 3rd party

Drawee: the party to whom the bill is drawn; the person to whom the bill is addressed & who is ordered to pay

Acceptor: the drawee who indicates a willingness to accept responsibility for the payment of the bill

Payee: the party in whose favor the bill is drawn or is payable

(The parties need not all be distinct persons.)

the one who issues the instrument (maker) is primarily liablethe one who issues the instrument (drawer) is only secondarily liable

A note drawn payable to the makers own order is not complete until indorsed by himA bill drawn payable to the drawers own order is complete w/o indorsement, provided it has been accepted by the drawee

There is no need of presentment for acceptanceMust be presented for acceptance in certain cases (sec. 143) & the drawee is not liable unless & until he accepts the same

A note payable on demand must be presented for payment w/in a reasonable time from its issueA bill payable on demand must be presented for payment w/in reasonable time from its last negotiation

the maker of a note may not do the samethe drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder

Non-negotiable Instrument

An instrument which is not negotiable as it does not meet the requirements laid down to qualify an instrument as a negotiable one

An instrument w/c in its inception was negotiable but has lost its quality of negotiability

It may not be negotiated but it may be assigned or transferred, absent an express prohibition against assignment or transfer

FORMAL REQUIREMENTS

1) Must be in writinga. it may be written in pencil or pen, lithographed, engraved or printed

b. it may be written upon parchment, leather, cloth, or any other substitute for paper as long as it is movable in nature

c. it must be written on something that may be transferred from 1 person to another; where it cannot be transferred from 1 person to another, it could not be considered negotiable

d. there is no such thing as an oral negotiable instrument

e. no other words may be added to it or substituted in its stead

f. duty of the court is to ascertain what is the meaning of the words they used

2) Must be signed by the maker/drawer

a. a party may sign a bill or note by using an abbreviation, mark or assumed name

b. Preferable that the full name or at least surname should appear

c. Initials or any mark (thumbmark) is sufficient, provided that such signature be used as a substitute and the maker or drawer intends to be bound by it

d. The name may be written w/ a pen, or pencil, or made by a rubber stamp by one having authority

e. May be printed, type-written, engraved, photographed, lithographed

f. Important: the signer has intended to adopt the signature on the instrument as his own and to obligate himself for its payment

g. Where the signature of the maker/drawer is denied, the burden of proof is on the holder to show it

h. GR: the signature of the maker/drawer is placed at the lower right hand corner of the instrument

i. but it may be placed in any part top, middle bottom, or at the marginj. it is immaterial where a person signs, since the intent of the signer ordinarily governs the nature of his liability; but departure from the usual place of signature is liable to misconstruction and should be avoided

k. A handwritten statement on the body of the instrument (I, _____, promise to pay) will be considered as a that persons signature

l. His signature is prima facie evidence of his intention to be bound as maker/drawer

m. Indorser: if the signature is placed upon the instrument that is not clear in what capacity the person intended to sign3) Must contain an unconditional promise/order to pay

a. The promise/order to pay must be absolute, unconditional and certain

b. Must not be dependent upon a contingent event that is not certain to happen

c. Period an event w/c is certain to happen although it may not be known when (e.g. death of a person); NI subject to a period NEGOTIABLEd. Condition a future & uncertain event, or a past event unknown to the parties (e.g. passing the bar exam); NI subject to a condition NON-NEGOTIABLE

4) Must be payable in a sum certain in money

a. NIs acquire a uniform standard of value enabling them to pass freely in lieu of money in the business world

b. Money: includes all legal tenderc. Legal tender: that sort of money in w/c a debt or other obligation calling for money may be lawfully paid, if the contract doesnt specify the medium of payment5) Must be payable at a fixed or determinable future time6) Must be payable to order or bearer7) The drawee must be named

a. Applies only to bills and checksb. The drawee may be identified by his official or representative title

c. An order w/c is not addressed to any person cannot be a bill

Money

1. Cash

2. Includes all legal tender

3. What is coined/stamped by public authority and has its value fixed by public authority

4. A medium of exchange authorized/adopted by government as part of its currency

Paper Money

1. A negotiable instrument

2. NIL is not applicable to it

3. Questions w/n an instrument constitutes money, payment, or proper tender is not governed by the Act

Idea & Purpose of a Bill of Exchange

1. Drawers funds in hands of draweea. The office of the instrument is to collect for the drawer from the drawee money to w/c the former may be entitled2. Liability of drawee for non-payment

a. If the drawee refuses to accept when he has funds for that purpose, he becomes liable to the drawer for the resulting damages & the harm done to his creditb. If the drawer has no funds in the hands of the drawee, it is at least presumed that the former must have made arrangements w/ the latter so that he will honor the bill

Section 2. What constitutes certainty as to sum

NEGOTIABLE

Certainty of sum payable- payment of a fixed amount of money

- may be ascertained upon its face by computation, independent of all extrinsic evidence

- permissible clauses or stipulations

NON-NEGOTIABLE:

- an instrument for a specified sum of money & also for the payment of something else, the value of w/c is not ascertained

- PN giving the maker the right to ascertain the amount rightly payable

Sum to be paid w/ interest- interest at a fixed rate

- interest at increased or reduced rate

- the total sum due on the instrument must be capable of accurate computation at any time from the instrument itself

- accrual/rate of interest not specified (computed from the date of the instrument, & if the instrument isnt dated, from the issue thereof; interest due: legal rate)

- interest usurious (remains valid as to the principal)

Sum to be paid by stated installments- the number of installments, the maturity of each installment, and the amount of each installment must be specified

- acceleration must be dependent on maker

NON-NEGOTIABLE:

- an instrument payable in 2 installments

- acceleration at the option of holder

Sum to be paid w/ exchangeExchange: the difference in value of the same amount of money between different countries

- Rate of exchange may be a:

1. fixed rate stated in the instrument

2. current rate prevailing at a given date & place

- payment w/ exchange rate

- exchange not applicable to inland or domestic bill so the stipulation may be disregarded

Sum to be paid w/ costs of collection and/or attys fee- increase in amount due effective after maturity

- uncertainty of sum payable only after maturity

- the stipulation for attorneys fees may be reduced by the courts if found unconscionable or unreasonable

Acceleration Clauses

The negotiability of the instrument is not affected even if it is to be paid by stated installments, w/ a provision that, upon default in payment of any installment or of interest, the whole shall become due.

Negotiable - Acceleration at the option of the MAKER, not holder.

Insecurity Clauses

Provisions in the contract w/c allow the holder to accelerate payment if he deems himself insecure.

The instrument is rendered non-negotiable.

Extension Clauses

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 of automatically upon or after a specified act or event.

Section 3. When promise is unconditional

When promissory note contains a promise to pay

Implied promise to pay

payable

to be paid

I agree to pay

I guaranty to pay

M obliges himself to pay

good for

due on demand

this is to certify that I am to pay

Bare acknowledgement of indebtedness NON-NEGOTIABLE I.O.U

due P1000

for value received

Use of words of negotiability

due P or order

due P or bearer

When bill of exchange contains an order to pay

Words equivalent to an order to pay let the bearer

drawee will much oblige drawer to pay P or order

Mere request to pay NON-NEGOTIABLE Order: command or imperative direction

A mere request w/c merely asks a favor doesnt constitute an order

Note: the insertion of the word please does not alter the character of the instrument as the use of the usual term of civility does not necessarily imply that a favor is asked

Liability of drawer

Its immaterial w/n the drawee obeys the order to pay

When Promise to pay is conditional

1. An order or promise to pay out of a particular fund

2. An instrument payable upon a contingency (the happening of the event does not cure the defect)

When promise to pay unconditional

Instrument payable absolutely Must be unconditional & not subject to any condition/contingency

If the instrument is payable on a contingency, it is not negotiable, and it is immaterial that the contingency afterward actually happens, it does not cure the defect

Rationale: No one would accept a paper for debt if the right to recover werent absolute

Terms not affecting unconditional liability

Statement of the purpose for w/c the instrument is issued

The collateral securing the instrument

Indication of a particular fund out of w/c REIMBURSEMENT is to be made: NEGOTIABLE The drawee pays the payee from his own funds, then afterwards the drawee pays himself from the particular fund indicated

The fund indicated is not the direct source of payment but only the source of reimbursement w/c is an act subsequent to the payment Payment of the instrument is not contingent on the sufficiency of the fund indicated

e.g. Pay to A or order P10,000 and debit the amount paid from my Account No. 1234

Indication of a particular account to be DEBITED w/ the amount: NEGOTIABLE

Indication of a particular fund out of w/c PAYMENT is to be made: NON-NEGOTIABLE The amount to be paid is made to depend upon the adequacy or existence of the fund designated The fund specified is the direct source of payment & the measure of liability

e.g. pay to A or order P10,000 out of my Account No. 1234

e.g. Treasury Warrants payable out of Fund 501

Test of negotiability: w/n the instrument carries the general personal credit of the maker or drawer

If it does negotiable

If it carries only the credit of a particular fund non-negotiable

Statement of transaction w/c gives rise to instrument

Mere recital of consideration for instrument/origin of transaction - NEGOTIABLE, provided it imposes no other liability on any party thereto other than that for the payment of a sum therein specified and does not qualify the promise or obligation

per contract

in accordance with the contract

per memorandum of agreement

e.g. a note reciting that it is for rent, or for a certain policy of insurance, or given as payment of the price of a land

Terms & conditions contained in another paper - NON-NEGOTIABLE If the promise/order is subject to the terms & conditions of our contract executed by us this date

It is non-negotiable because the promise to pay is conditioned upon or subject to the performance of a collateral agreement referred to therein

Section 4. Determinable future time; what constitutes

Certainty of time of payment1) Instrument payable at all events2) When time of payment certain

The payment will certainly come, though it may be uncertain when that time will come

Payable at a fixed time

Payable at a fixed period after date

Payable at a fixed period after sight; after sight after it is presented to the person supposed to make payment Payable on or before a fixed time; holder cannot require payment or maintain an action until the expiration of the time fixed Payable on or before a determinable future time; date of payment must be at least determinable otherwise, it is non-negotiable, e.g. there is a day and month but no year of maturity Payable on the occurrence of a specified event

Payable after the occurrence of a specified event

Non-negotiable

Payable upon a contingency

Payable when able

Payable w/in a reasonable time

A note containing a provision that it may be renewed at maturity is non-negotiable

Section 5. Additional provisions not affecting negotiability Acts in addition to payment of MoneyGR: the instrument is non-negotiable if it contains a promise/order to do any act in addition to the payment of money

Exceptions:

1) Sale of collateral securities the additional act is to be performed after the date of maturity when the instrument is not longer negotiable in the full commercial sense; until the date of maturity the promise is to pay money only

2) Confession of judgment enables the holder to obtain a judgment w/o the delay usually incident to a law suit, as it eliminates the necessity of a trial Warrants of attorney to confess judgment are void as against public policy for the enlarge the field for fraud

3) Waiver of benefit granted by law neither does waiver of protest, presentment for payment, or demand, or exemption from attachment or execution, destroy the negotiability of an instrument4) Election of holder to require some other act the holder must have the choice; if the option is w/ the maker/drawee, the instrument is non-negotiable because the holder cannot compel him to make the payment in money

Cognavit Actiomen

he has confessed actionRelicta verificationem

his pleading being abandoned

A written confession of action by the defendant acknowledging his indebtedness to the plaintiff after the action has been filed. (valid)It is a confession of judgment by withdrawal of defense. (valid)

Section 6. Omissions; seal; particular money

Effect of omission of date- the omission of the date will not make the instrument non-negotiable

- instrument will be considered to be dated as of the time it was issued- if there is a date stated, but there is no such date in the calendar, the law will deem the nearest date of the month the date intended

Effect of omission of value- its not necessary to state the value that has been received for the instrument because consideration is presumed

Effect of omission of place- an instrument is presumed to have been made where it was date- a note that doesnt specify the place of payment is presumed to be payable at the place of residence of the maker

- if the place of execution or payment is not stated, it is presumed to be the makers/drawers place of business or his home

(Sec. 73 specifies where presentment for payment should be made when the place of payment is not specified)

Effect of presence of seal- the fact that the instrument bears a seal doesnt destroy its negotiability- its advisable to have a bill/note appear in a public instrument so that it will be included among the preferred credits w/ respect to other property of the debtor

Seal a particular sign, made to attest in the most formal manner the execution of an instrument; when an instrument is acknowledged before a notary public, it bears the signature & seal of a notary, w/c have the effect of confirming the authenticity of the signature

Effect of designation of particular kind of current money payable- law doesnt require that payment be made in legal tender- Money is not necessarily limited to legal tender

- the parties may agree that the obligation/transaction be settled in any other currency at the time of payment

Money: includes any kind of current money or foreign money w/c has fixed value in relation to our money

Section 7. When instrument payable on demand

Expressed to be payable on demand- due & payable immediately after delivery

- an overdue instrument is necessarily a demand paperon demand

at sight

on presentation

on call

at any time called for

at such times as the payee may requireat the holders convenience

No time for payment is expressedPay to P or order P1000

Payable on demand as regards the makerA note payable at the makers convenience is payable on demand (but is an incomplete instrument)A note dated July 3, 2004 and payable 30 days after date was issued August 4, 2004 (when it was already overdue)

Payable on demand as regards the acceptorA bill payable on July 20, 2004 was accepted by the drawee on July 21, 2004

Payable on demand as regards the indorserAn indorsement after maturity creates a new instrument payable on demandA note payable 30 days after July 1, 2004 and indorsed on August 1, 2003.

Section 8. When payable to order

To the order of / or order / or bearer / to bearer

Expression of consent

Consent is indispensable since a maker/drawer assumes greater risks under a negotiable instrument than under a non-negotiable one

When instrument payable to order To the order of a specified person

I promise to pay to the order of P P1000

To him or to his order

I promise to pay to P or order P1000

Payable to the order of the drawer complete even w/o indorsement of A

Pay to A or order P10,000. To: X. (Sgd.) A.

Payable to the order of the maker not complete until it is indorsed by him

I promise to pay A or order P10,000. (Sgd.) A.Effect where payee not named/described

In an order instrument, a specified person must always be named therein either before or after the word order

If there is no payee, there is nobody who could give the order/authority to collect

There would be nobody who could indorse the instrument

to the administrator of the estate of P valid

The trade name of the payee may be used

Section 9. When payable to bearerInstruments payable to bearer

May be transferred by delivery w/o indorsement & payment to any person in possession thereof in good faith & w/o notice that his title is defective, at or after maturity, discharges the instrument

When instrument payable to bearer

Expressed to be payable to bearer

I promise to pay to bearer P1000

pay to holder

Payable to person named therein or bearer

Pay to P or bearer P1000

Pay to P or holder P1000

pay to bearer or P not negotiable

pay to P, bearer not negotiable (bearer is merely a description of P)

Payable to order of a fictitious person

Fictitious person one who, though named as payee in an instrument, has no right to it because the maker/drawer so intended & it matters not, whether the name of the payee used by him be that one living or dead, or on who never existed

Its essential that the payee is known to the maker/drawer to be a fictitious or non-existing person

Payable to order of a non-existing person

The payee named is one who does not exist & had never existed in the sense that he was not intended to be a payee by the drawer or maker Payable to a person who is already dead

Payable to the order of a fictitious person

Fictitious name feigned or pretended

Fictitious person one who, although named payee in a check, has no right to it, or the proceeds of it, because the drawer of it so intended, and it therefore matters not whether the name of the payee used by him be that of one living or dead, or one who never existed; Fictitious person not necessarily a non-existing person; an instrument may be payable to a fictitious payee although there is an existing person corresponding to the name by w/c the payee is designated & known to the parties, where it was not intended by the maker/drawer of the instrument that he should have any beneficial interest in the instrument

Note: such an instrument is payable to bearer only if the fictitious or non-existent character of the payee is known to or intended by the party who actually drew the instrument Name of payee not name of any person

pay to cash

To the order Ps estate

Only indorsement in blank Last indorsement in blank

Note: the word indorsement as used in the law, refers only to negotiable instruments

Section 10. Terms, when sufficient

Substance Criterion of Negotiability Clear intention of the parties Use of foreign language

Mere defect in language or grammatical error

Section 11. Date, presumption as toPresumption as to date If the instrument bears a date, its presumed that said date is the date when it was made or drawn If the acceptance in a bill is dated, said date is considered the date of such acceptance or indorsement

He who claims that some other date is the true date has the burden to establish such claim

GR: a date is not essential to make an instrument negotiable

Exceptions:

1. theres a stipulation as to interest

2. the maturity date has reference to the date of issuance

3. installments (when due)

When date is necessary to determine maturity (not negotiability)

Where instrument is payable at a fixed period after date Date of issue is material to determine the date from w/c to start counting the number of days specified Where instrument is payable at a fixed period after sight or presentment The date of site is necessary to determine when the specified period will commence to runSection 12. Ante-dated and post-datedANTE-DATEDPOST-DATED

It contains a date EARLIER than the true date of its issuance.It contains a date LATER than the true date of its issuance.

e.g. the instrument was issued on July 30, 2004, but is dated July 15, 2004.e.g. the instrument was issued on July 15, 2004, but bears a date of July 30, 2004.

Effect of Ante-Dating & Post-Dating

Valid: provided this is not done for an illegal/fraudulent purpose

Invalid: if its done for an illegal/fraudulent purpose

Date when instrument takes effect

The person to whom the instrument is delivered acquires title/ownership over it, not as of the date it bears, but as of the date it is delivered

Section 13. When date may be inserted

When date may be inserted1. instrument is payable at a fixed period after date but is issued undated2. instrument is payable at a fixed period after sight but the acceptance is undated

Note: Any holder may insert therein the true date of issuance or acceptance & the instrument shall be payable accordinglyImportance of date of Issuance/Acceptance

to determine the date of maturity

unless the true date is inserted, one will not now when the instrument is due

this is not applicable to instruments payable on demand although undated

its maturity is already fixed, being due immediately

this doesnt authorize the insertion of the date of issue in an undated bill of exchange payable at a fixed period after sight (e.g. 30 days after sight)

date of issue is not necessary to fix the maturity of the bill

but if acceptance is undated, the insertion of the true date of such acceptance is necessary (the 30 days is to be counted not from the date of issue but from sight/acceptance)

Effect of insertion of wrong date

The insertion of a wrong date in an undated instrument by one having knowledge of the true of issue/acceptance will avoid the instrument as to him or anyone claiming under him But as to the subsequent holder in due course, he may enforce the same despite the improper date; In the hands of the holder in due course, the date inserted, even if wrong, is to be regarded as the true date

If the wrong date was inserted by mistake/clerical error, the validity or negotiability of the instrument is not affected; in such a case, the date intended will be taken as the true date

One who signs such an instrument furnishes the means of fraud and is estopped from denying his liability there The insertion of a wrong date constitutes material alterationSection 14. Blanks; when may be filled

Steps in issuance of negotiable instrument1. mechanical act of writing the instrument completely & in accordance w/ the requirements of Section 1

2. the delivery of the complete instrument by the maker or the drawer to the payee or holder w/ the intention of giving effect to it

Obvious blanks are left at the time they are made/indorsed, of such a character as to manifestly indicate that the instruments are incomplete until such blanks shall be filled upApparently complete, containing blanks only because the written matter doesnt so fully occupy the entire paper as to preclude the insertion of additional words or figures, or both

Doctrine of Implied authority: One who signs/indorses is liable to bona fide holders thereofDoctrine of Negligence: the liability for the amount of the instrument w/c as been increased by filling up unoccupied space therein

Requisites for a person to have prima facie authority to convert a signature on a blank paper into a NI and fill it up for any amount:

1. the blank paper bears the signature of the maker/drawer

2. it was delivered by the person making the signature

3. it was delivered in order that the paper may be converted into a NI

SECTION 14SECTION 15SECTION 16

IncompleteIncompleteCOMPLETE

DELIVEREDUndeliveredundelivered

Personal defenseREAL defensePersonal defense

NOT a Holder in Due CourseGR: he can go against parties SUBSEQUENT to the completion but not against parties prior to completion of the instrument

Exception: (requisites)

1. he filled it up strictly in accordance w/ authority given

2. completion was made w/in reasonable time after its issue- can be set up as a defense against ANY holder (the law didnt distinguish)

- a person whose signature was placed on the instrument PRIOR to its delivery cannot be held liable- If its in the possession of a party other than a holder in due course: PRIMA FACIEpresumption of delivery but subject to rebuttal

Holder in Due Course- can go against ALL parties to the NI- the instrument is valid & effectual for all purposes- he may enforce the instrument as if it was filled up strictly in accordance w/ the authority given & w/in reasonable time- can go against persons whose signature is placed on the instrument AFTER its delivery- Indorsers: they warrant that the instrument is valid & subsisting, thus they are estopped from denying its validityIf a complete instrument is in the hands of a holder in due course, a valid delivery is CONCLUSIVELY presumed (admits of no evidence to the contrary)

Other NotesMaterial Particular:- essential to complete the instrument

- material necessary

- e.g. blanks for date, due date, name of payee, amount, rate of interest, name of drawer - authority to complete authority to alterReasonable Time:

- nature of instrument

- usage of trade/business

- facts of the case

Signature on Blank Paper: depends on the intention of the person who signed it if its to be converted to a NI- prima facie authority to fill it up for any amountDelivery:- no rights can arise until the instrument is delivered

- essential to the consummation as an obligation

- until delivery, it is revocable, inoperative

- mailing a NI to the payee is sufficient delivery

Delivery may be:

- conditional

- for a special purpose

- not for the purpose of transferring the title of the instrumentDelivery: transfer possession from 1 person to another, actual or constructiveIssue: 1st delivery of instrument, complete in form, to a person who takes it as a holder

Holder/bearer: payee/indorsee of a bill/note who is in possession of it

Immediate Parties: - has knowledge of the conditions or limitations placed upon the delivery of instrument (privity and not proximity)- transferees w/ notice that delivery was unauthorized, conditional, or for a special purpose only & not for the purpose of transferring the property in the instrument Remote Parties: - has no knowledge of any defect or condition in the delivery of the instrument

- not in direct contractual relation to each other

Section 17. Construction where instrument is ambiguousRules of Construction in case of ambiguity or omission

1. Where the sum payable is expressed in words & also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount2. Where the instrument provides for the payment of interest, w/o 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

3. Where the instrument is not dated, it will be considered to be dated as of the time it was issued4. Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail5. 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 election6. 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 (indorsers assume the least liability only secondarily liable)7. 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 thereonSection 18. Liability of Person signing in trade or assumed nameGR: No person can be held liable on the instrument if his signature does not appear thereonExceptions:

1. a person who signs in his assumed name or trade name2. the signature of a party made by a duly authorized agent

3. the forger, in cases of forgery, who forges the signature of another person

4. acceptor makes acceptance by a separate instrument

5. unconditional promise in writing to accept a bill before it is drawn6. the holder who negotiates an instrument payable to bearer by mere delivery

7. a party who indorses in a paper attached to the instrument called an allonge

8. a drawee who destroys the bill, or refuses w/in 24 hours to return the bill accepted or non-accepted

9. a person who participated in an illegal scheme and conspiracy w/ the person who signed the instrument

Section 19. Signature by agent; authority; how shownGR: the authority of the agent may be given verbally or in writing as no form is required by law

Exceptions:

1. those covered by the statute of frauds2. those that require a Special Power of AttorneySection 20. Liability of person signing as agent, and so forthWhen Agent is NOT Personally Liable: Requisites1. must be duly authorized2. must act w/in scope of his authority

3. must indicate in the instrument that he is signing merely as agent4. must disclose his principal (not merely descriptive words)

GR: where an instrument is executed by an agent and the principal is undisclosed and his signatures does not appear thereon, the principal cannot be held liable on the instrument

E: where the principal has adopted the agents name as his own name, in w/c case the principal will be bound by such contracts and this has been held to be signing in a trade/assumed name and therefore, the principal is liable as if he signed in his own name

Section 21. Signature by procuration; effect ofSignature by Procuration (per pro. | per proc | P.P. | P.p. |PP) a notice that the agent has limited authority, and the principal is bound on the instrument only if the agent signed w/in the limits of his authority Exceeding authority - acts outside the authority

Abusing authority theres authority, but used in unjust/improper mannerSection 22. Effect of indorsement by infant or corporationMinority/Insanity/Imbecility/Deaf-Mutes who do not know how to write ( real defense

GR: A minor does not have the capacity to contract, and any contract entered into by him is considered voidable

E: when the minor represents himself to be of age (principle of estoppel)GR: a minor is not bound to restore anything he received

E: to the extent that he benefited thereby

Corporation ( can only perform acts w/c are w/in the scope of its powersNote: all acts done outside the corps primary clause are considered ultra vires Section 23. Forged signature; effect of.Forgery Sec. 23 applies only to forgery of a signature, and NOT alteration of the instrument w/c is covered Sec. 124 & 125

Counterfeit-making or fraudulent alteration of a writing

It is not necessary that the signature should bear any resemblance to that of the person whose signature it purports to be Presence of intent to defraud/deceive E.g. the signing of anothers name or the alteration of an instrument in the name, amount, description of the person and the like w/ the intent to defraud

A real defense, even against a holder in due course

Must be proven clearly and convincingly

The forged signature is wholly inoperative

No right can be acquired through the forged signature

Payment made through or under such forged signature is ineffectual and does not discharge the Instrument

A person whose signature was forged was never a party or never gave his consent to the contract w/c gave rise to the instrument

Kinds of Forgery under the NIL

1. Simple forgery when a person signs the name of another w/o the authority of the person whose signature it purports to be

2. Fraudulent impersonation leading to forgery when the person to whom the instrument was been delivered impersonated the real person named as payee and signs his name

a. NO FORGERY if the intention of the person making the instrument is to pay to the person before him, no forgery is committed when the latter signs the name of the payee

3. Fraud in factum/fraud in esse contractus fraud on the very nature of the paper signed such that the person signing it had no intention of signing a NI

4. Signature on a blank paper w/c was converted into a promissory note or other apparently valid instrument w/o authority

CASES OF FORGERY IN GENERAL

Forgery of Promissory NotesForgery of Bills of Exchange

a) forgery of an indorsement on the note

b) forgery of the makers signaturea) forgery of an indorsement on the bill

b) forgery of the drawers signature

- w/ acceptance by the drawee

- w/o such acceptance but the bill is paid by the drawee

Application of Sec. 23

1. the signature on the instrument is affixed by one who does not claim to act as an agent & who has no authority to bind the person whose signature he has forged

2. the signature is affixed by one who purports to be an agent but has no authority to bind the alleged principal

GR: Effects of Forgery

1. the forged signature (and not the instrument itself nor the genuine signatures) is wholly inoperative

2. no right against the party whose signature was forged nor parties prior to such person can be acquired through or under such signature:

a. to retain such instrument

b. to give discharge therefor

c. to enforce payment thereon

Exception: when the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority as a defense

Extent of the Effect of Forgery

the whole instrument is not totally void the genuine signatures arent rendered inoperative

it is only the forged/unauthorized signature that is declared to be inoperative

rights may still exist and be enforced by virtue of such instrument as to those whose signatures thereto are found to be genuine

A forged indorsement prevents any subsequent party from acquiring any right against any party whose name appears prior to the forgery

GR: No right/title can be acquired to a negotiable instrument through or under a forged or unauthorized signatureExceptions:

1. if the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority

2. where the signature is not necessary to the holders title in w/c case the forgery may be disregarded

Persons Precluded/Estopped from Setting Up the Defense of Forgery

1. those estopped by their acts, silence, or negligencea. the forger as he cannot raise his own malfeasance as a defense

b. others who admit the genuineness of the signature expressly or impliedly, such as those who failed to deny specifically under oath the genuineness of an actionable document

2. those who warrant/admit the genuineness of the signatures in question

a. indorsers

b. acceptors

c. persons negotiating by deliveryRight of Drawee to Recover Payment Where DRAWERS Signature was Forged

1) Rule founded on estoppel and principle of natural justice Drawee has obligation to know the signature of the drawer and it is presumed that he does

Drawee (and not the indorsee/holder) has the best means of knowing/learning whether the signature of the drawer is genuine

2) Rule founded on ground of public policy

Policy of maintaining confidence in the security of negotiable paper by making the time and place of acceptance or payment the time and place for the final settlement, as between the drawer and the holder, of the question of the genuineness of the drawers signature3) Responsibility of drawee bank When a bank receives money to be checked out by a depositor, it is to be paid only as the depositor shall order If the bank pays out money otherwise than according to such order, it is liable to the depositor for the amount paid

The bank assumes responsibility of seeing that the money gets to the party authorized to receive it

If the bank pays money out on forged signature of the, depositor being free from blame or negligence, it must bear the loss

Exception: if the payee was not a client of the bank and there was not way of ascertaining the authenticity of the payees indorsement on the checks

4) Allocation of loss between drawee bank and collecting bank

The courts must consider the comparative negligence of the 2 banks

Right of Drawee to Recover Payment Where PAYEES/INDORSERS Signature was Forged

1. From the encasher/last indorser

Drawee Bank: does not have the duty to ascertain whether the signatures of the payee or indorsers are genuine or not

Note: the unqualified indorsement of the collecting bank on the check should be read together w/ the 24-hour regulation on clearing house operation; when the drawee bank fails to return a forged check or altered check to the collecting bank w/in the 24-hour clearing period, the collecting bank is absolved from liability

Indorser: supposed to warrant to the drawee that the signatures of the payee & previous indorsers are genuine, warranty not extending only to holders in due courseEncasher: impliedly asserts that he has performed his duty to satisfy himself that the paper is genuine, and the drawee who has paid the forged check may recover the money from such negligent purchasers

Rationale: anyone would accept a check only because he has proofs that it is genuine, or because he has sufficient confidence in the honesty and financial responsibility of the person who vouches for it2. From the drawer/depositor

GR: a drawee bank who has paid a check on w/c an indorsement has been forged cannot debit/charge the drawers account for the amount of said check & is not entitled to indemnification from the drawer

E: where the drawer is guilty of negligence w/c causes the bank to honor such a check

RIGHTS OF PARTIES IN CASES OF FORGED INDORSEMENTS

NOTEBILL

PAYABLE TO ORDER The party whose indorsement is forged is not liable to any holder even a holder in due course The indorsement being forged, it is inoperative Other parties, including the maker prior to the party whose signature is forged are also not liable to any holderPAYABLE TO ORDER The party whose indorsement is forged, is not liable to any holder, even a holder in due course The forged indorsement is wholly inoperative

PAYABLE TO BEARER The party whose indorsement is forged is liable to a holder in due course, but not to the one who is not a holder in due course

Other parties, including the maker, prior to the party whose signature is forged, may also be held liable by one who is not a holder in due course

Reason: the instrument being originally payable to bearer, it can be negotiated by mere delivery; indorsement is not necessary to the title of the holder; even if the indorsement is forged, the forgery may be disregarded

Sec. 48 the forged indorsement does not prevent the transfer of title since the holder may just strike out the forged indorsement

Sec. 16 the only defense available is want of delivery, but this can be raised only against a holder not in due coursePAYABLE TO BEARER The drawee may debit the drawers account in spite of the forged indorsement Reason: the forged indorsement is not necessary to the title of the holder

The drawee cannot recover from the holder

EFFECTS OF PAMENT OF A BILL/CHECK UNDER A FORGED INSTRUMENT:

GR: One who acts on an indorsement of negotiable paper must ascertain its genuineness at his own risk as it is his duty before accepting from 1 person a check payable to another to investigate & determine whether it bears the genuine indorsement of that other

Drawee Bank

GR: If the drawee pays under a forged indorsement, the drawer is not liable on the bill and the drawee may not debit the drawers account E: when the drawers negligence is the proximate cause of the loss.

But the drawee can recover the amount paid from the person to whom payment was made since the drawee makes no warranty as to the genuineness of any indorsement. Duties:

1. to verify the genuineness of the drawers signature and not of the indorsement because the drawer is its client

2. to promptly inform the presentor of the forgery upon discovery

3. it must be free of any negligence in failing to discover the alteration or forgery in order that it may claim reimbursement from the collecting bank.

Drawer A bank is bound to know the signature of its customers (drawers), and if it pays a forged check it must be considered as making the payment out of its own funds

Reasonable Diligence: If the drawer exercises reasonable diligence in investigating forgeries, and after the discovery of a particular forgery notifies, w/ reasonable promptness, the bank on w/c the instrument was drawn, a subsequent holder under a forged instrument cannot recover from the drawer.

Drawers Negligence: If due to the drawers negligence, the forgery is not discovered until it is too late for the bank to recover from the holder or the forger, the drawee may properly charge the amount paid against the drawers account. The drawee may likewise recover from the drawer when the latters negligence is the proximate cause of the loss or has contributed thereto.

However, the drawer may generally pass liability back to the party who took from the forger and the forger himself.

Both Drawer & Drawee Negligent: They should share in the loss suffered even if the drawers negligence is the proximate cause of the loss or has contributed thereto.

Indorser

An indorser subsequent to the forgery of an instrument could be made liable on the instrument because by negotiating the instrument, he warrants it to be genuine and in all respects what it purports to be.

Payee

The payee of a check whose signature has been forged may recover from:1. the drawer, if the payee is not negligent & if there is no estoppels on his part

2. an indorsee to whom the check was paid by the drawee bank

3. the drawee who paid the amount of the check to one claiming under a forged instrument

4. the collecting bank responsible for the encashment of the check

The liability of the bank to the payee for the value of the checks attaches w/n the bank was aware of the forged/unauthorized indorsement If the check was never delivered to the payee, he does not acquire any right or interest therein and cannot assert any cause of action, founded on the checksCollecting Bank

A collecting bank that guarantees all prior indorsements shall be laible to the drawee for money paid on such indorsements should they prove to be forgeries.

By stamping on checks accepted by it for deposit its guarantee that all prior endorsements and/or lack of endorsements guaranteed, a collecting bank thereby makes the assurance that it has ascertained the genuineness of all prior indorsements

The collecting bank is bound by its warranties as an indorser and cannot set up the defense of forgery as against the drawee-bank (principle of estoppel)

The collecting bank or last indorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements

The collecting bank has privity w/ its depositors who are its clients; hence it is in a better position to detect forgery, fraud or irregularity in the indorsement

Even if the collecting bank was not negligent, it would still be liable to the drawee bank because of its indorsement. GR: the collecting bank may recover from the person who forged the indorsement on the check & deposited or enchased the same

E: if the collecting bank is guilty of negligence, it cannot recover from the innocent person who deposited/encashed the check.

If both the collecting bank & drawee bank are both guilty of negligence, such that said banks contributed equally to the success of the forger in enchasing the proceeds of the forged checks, both banks shall share in the loss.

II. CONSIDERATIONSec. 24. Presumption of consideration.Consideration

An inducement to a contract

The cause, price or impelling influence w/c induces a contracting party to enter into the contract

The essential or more proximate purpose a party has in view at the time of entering into a contract

Some right, interest, benefit or advantage conferred upon a promissor, to which he is otherwise not entitled Any detriment, prejudice, loss or disadvantage suffered or undertaken by the promisee other than to such as he is at the time of consent bound to suffer

Motive: the personal/private reasons of a party in entering into a contract

Presumption of Consideration

It is not necessary that the consideration be expressly stated in the instrument Presumption: the negotiable instrument has been issued for a valuable consideration & that every person whose signature appears thereon has become a party thereto for value, whether the words value received appear in it or not

Consideration being presumed, it need not be alleged and proved.

Presumption is only prima facie. It may be rebutted by evidence to the contrary. But whoever alleges absence of consideration has the burden of proof to show the contrary.

Sec. 25. Value, what constitutes.

Value: Any consideration sufficient to support a simple contractValuable Consideration

Some right, interest, profit or benefit to the party who makes the contract

Some forbearance, detriment, loss, responsibility, etc. on the other side

Any prestation sufficient to support any contract in favor of the party to a instrument

Obligation of contracting parties to give, to do, or not to do as the cause for the contract or its reason for being The consideration must be VALUABLE, as distinguished from GOOD consideration. Thus, love, affection, or gratitude is NOT sufficient to sustain an action on a note or bill

Need not be adequate. It is sufficient that it is valuable.SUFFICIENCYADEQUACY

Whether or not the value given is enoughWhether the value given by one to the other is equivalent to each other

Antecedent or Pre-existing Debt

A valuable consideration The debt may be that of a 3rd person and the discharge of such debt is a valuable consideration for a negotiable instrument, whether such instrument is payable on demand or at a future time

It must be shown that the holder has given up the pre-existing debt or the right to sue

Sec. 26. What constitutes holder for value

Holder for Value

One who has given valuable consideration for the instrument issued or negotiated to him

The holder is deemed as such not only as regards the party to whom the value has been given by him but also in respect to all those who became parties prior to the time when value was given

GR: a holder of a NI is presumed to be a holder for value

E: the contrary is proven

Sec. 27. When lien on instrument constitutes holder for value.Where a Holder has a Lien on Instrument

One who has taken a negotiable instrument as collateral security for a debt has a lien on the instrument As such holder of collateral security, he would be a pledge but the requirements shall be governed by the provisions on pledge of incorporeal rights

RULES ON PLEDGE OF INCORPOREAL RIGHTS

Amount of instrument > debtThe pledgee is a holder for value to the extent of his lien

Amount of instrument debtThe pledgee is a holder for value or full amount & may recover all

Defenses exist bet. pledgor & party liable on the instrumentPledgee can collect on the instrument only to the extent of amount of the debt

The defenses of the party liable are real defensesPledgee can recover nothing upon the instrument

Sec. 28. Effect of want of consideration

ABSENCE/WANT OF CONSIDERATIONFAILURE OF

CONSIDERATION

No valuable consideration has been agreed upon or it is illegal and therefore voidA valid consideration was agreed upon but there was failure/refusal to execute/give the consideration agreed upon.

it is a defense against any person not a holder in due coursea defense pro tanto (to that extent) against a person not a holder in due course

Both are only PERSONAL defenses. It is a good defense only as against a holder not in due course. It cannot be put up as a defense against a holder in due course.

Sec. 29. Liability of accommodation party.

Accommodation Bill/Note One to w/c the accommodation party has put his name, w/o consideration, for the purpose of accommodating some other party who is to use it, & is expected to pay it A loan of ones credit Creates no obligation upon delivery to the accommodated party & is of no legal efficacy and creates no obligation until delivered or negotiated to a holder for value

Accommodation Party: Requisites

1. the party to the instrument signs as maker, drawer, acceptor, or indorser

2. w/o receiving value therefore

3. for the purpose of lending his name to some other person

Accommodation Party

he lends his name to enable the accommodated party to obtain credit or to raise money

usually expects that not he, but the accommodated party will provide payment of the bill/note when it falls due

in lending his name to the accommodated party, the accommodation party is, in effect, a surety for the former

he receives no part of the consideration for the instrument but he assumes liability to the other parties thereto because he wants to accommodated another

permitted to show parol evidence w/c party he accommodated

Accommodated Party

one to whom the credit of the accommodation party is loaned

one in whose favor a person, w/o receiving value therefor, signs an instrument for the purpose of lending his credit & enabling said party to raise money upon it he need not be a party to the instrument, provided it was signed by one for his accomodation

impliedly agrees to take up the instrument at maturity & to indemnify the accommodation party against the consequences of non-payment

Liability of Accommodation Party to a Holder

1. absence of consideration not a defense

the absence of consideration between the accommodation party and the accommodated party does not itself constitute a valid defense against a holder for value even though he knew of it when he became a holder

an accommodation party is ONLY liable to a HOLDER FOR VALUE notwithstanding that such holder, at the time of taking the instrument knew him to be only an accommodation party

an accommodation party is liable to a holder for value ONLY if he is also a HOLDER IN DUE COURSE; he must meet al the requirements of a HDC under Sec. 52 except notice of want of consideration

2. accommodation party in effect a surety

unlike a contract of suretyship, the liability of the accommodation party remains not only primary but also unconditional to a holder for value

even if the accommodated party receives an extension of the period w/o the consent of the accommodated party, the latter is still liable for the whole obligation & such extension doesnt release him because as far as a holder for value is concerned, he is a solidary-debtor3. rule not applicable to corporations the indorsement of negotiable paper by a corporation w/o consideration & for the accommodation of another is ultra vires lack of capacity does not absolve the signatories, but they are rendered personally liable where facts show that the accommodation involved was for their personal account, undertaking or purpose & the creditor was aware thereof4. where instrument vitiated by illegality of cause there can be no recovery against an accommodation party in an instrument vitiated by an illegality of cause5. liability of solidary accommodation makers

e.g. 3 accommodation makers executed a promissory note jointly and severally in favor of a bank, any of the solidary accommodation makers may be held liable when the principal debtor who received from the bank the full value of the note failed to pay the sameRight of Accommodation Party

1. to revoke accommodation

since a signature for accommodation is gratuitous, it may be revoked or rescinded by cancellation or by notice to those interested anytime before it has been negotiated for value

but once the NI has been negotiated for value, the accommodation party is liable accdg. to the face of his undertaking, the same as if he were financially interested in the transaction

2. to reimbursement from accommodated party

the relation between the accommodated party & the accommodation party is that of a principal and a surety. It is the accommodated party who is expected to pay the NI directly to the holder as he is the real debtor. If the accommodation party has been compelled to pay the instrument, the party accommodated becomes a debtor of the accommodation party, & the latter has a right of action against the former.

3. to contribution from other solidary accommodation maker

where a solidary accommodation maker paid to the bank, the balance due on a promissory note, he make seek contribution from the other solidary accommodation makers in the absence of a contrary agreement between them, & subject to conditions imposed by law this right springs from an implied promise bet. the accommodation makers to share equally the burden resulting from the execution of the note.

ACCOMMODATION PARTYREGULAR PARTY

Signs an instrument w/o receiving value thereforSigns the instrument for value

Signs an instrument for the purpose of lending his name to some other personDoes not sign for that purpose

May always show parol evidence that he is only suchCannot disclaim/limit his personal liability as appearing on the instrument by parol evidence

Cannot avail of the defense of absence/failure of consideration against a holder not in due courseMay avail of said defense against a holder not in due course

After paying the holder, may sue for reimbursement the accommodated partyMay not sue any subsequent party for reimbursement

Without Receiving Value therefore no value has been received for the NI & not w/o receiving payment for lending his name

III. NEGOTIATIONSec. 30. What constitutes negotiation

Transfer: the process by w/c property is delivered by 1 person to anotherNote: The law does not prescribe an exclusive method of transferring negotiable instruments but only the manner in w/c their independence of equities or defenses that might obtain between the original parties may be preserved.

Holder the payee or indorsee of a bill or not who is in possession of it, or the bearer thereof

Requisites to be a Holder

1. he must be the payee or indorsee of a bill or note

2. he must be in possession of it or the bearer thereof

Methods of Transferring a Negotiable Instrument

Issue the 1st delivery of the instrument, complete in its form, to a person who takes it as a holder it is the 1st transfer of an instrument to a payeeNegotiation Makes it possible for the transferee to acquire a better right to a negotiable instrument than the transferor had

Ordinarily involves indorsement so that negotiation & indorsement are used interchangeably

Negotiation may be:

Indorsement AND delivery, or

Mere delivery w/o indorsement where the instrument is payable to bearer

Assignment The assignee takes only the title of the assignor

The less usual method, w/c may or may not involve indorsement in the sense of a writing on the back of the instrument

Absent an express prohibition against assignment or transfer writing on the face of the non-negotiable instrument, the same may be assigned or transferred

The assignee who acquired the instrument is subject to the rules applicable to non-negotiable paper

Negotiation: the transfer of a negotiable instrument from 1 person to another made in such a manner as to constitute the transferee the holder thereof.

It is the mode & effect of the transfer of a negotiable instrument. There is no negotiation if the transfer does not make the transferee the holder of the instrument

Methods of Negotiation1. Instrument Payable to Order

a. 2 steps required

i. 1st indorsement by the payee of present holder

ii. 2nd delivery to the next holder

b. The instrument must be exhibited when presented for payment to the person from whom payment is demanded. The party paying may thus judge the genuineness of the indorsements & of the right of the holder to receive payment2. Instrument Payable to Bearer

a. Negotiated by mere delivery w/o indorsementb. Any person in possession of an instrument payable to bearer is always the bearer thereof, although he may have no legal right thereto

Payment of Instrument by Drawee not Negotiation

The bank is neither the payee nor indorsee The check is extinguished & cannot be put in circulation again as to bind the drawee/indorsee

The writing of the name of the holder on the back of the check before surrendering it for payment to the drawee-bank is not an indorsement.

Such signature merely serves as a receipt for the money

Upon payment, the check merely becomes a voucher

Payment effects a discharge of the instrument, not a transfer of title thereto

Assignment: a transfer of the title to the instrument, w/ the assignee generally taking only such title as his assignor has, subject to all defenses available against his assignorNEGOTIATIONASSIGNMENT

Refers only to negotiable instrumentsRefers generally to an ordinary contract

The transferee is a holderThe transferee is an assignee

negotiation may be done even w/o notice to the debtorNotice must be given to the debtor

A holder in due course is subject only to real defensesAn assignee is subject to both real & personal defenses

A holder in due course may acquire a better title than that of a prior partyAn assignee merely steps into the shoes of the assignor and merely acquires whatever rights the assignor may have

A general indorser warrants the solvency of prior partiesAn assignor does not warrant the solvency of prior parties, unless expressly stipulated or the insolvency is known to him

May be done even w/o notice to debtorNotice must be given to the debtor (Art.1626)

An indorser isnt liable unless there be presentment & notice of dishonorAn assignor is liable even w/o notice of dishonor

Governed by the NILGoverned by Arts. 1624-1635 of the CC

Note: the distinction is not material if there is no defense to the obligation & only the maker is sought to be hold

Payment by Means of Instrument Merely Conditional

payment by means of promissory notes, bills of exchange & other NIs is subject to the condition that they be converted into cash at maturity

Effect of Delivery of Order Instrument w/o Indorsement

The transfer operates as an ordinary assignment & the assignee merely placed in the position of the assignor, the former acquiring the instrument subject to all defenses, real & personal, available against the latter.

w/o the indorsement, the transferee wouldnt be the holder of the instrument, he not being the payee, indorsee, or bearer thereof

but the assignee acquires the right to have the indorsement of the assignor

when indorsement is subsequently obtained, the transfer operates as a negotiation only as of the time the indorsement is actually made

Can there be a Negotiation to a Payee?

1. 1st Delivery of Instrument to Payeea. The payee, as 1st holder, acquires title to the instrument not by negotiation but by issue or issuance.b. If negotiation refers to an instrument already completely executed/issued, then only the holders subsequent to the payee can acquire title by negotiation.

2. 1st Delivery of Instrument to other than Payee

c. Where the delivery by the maker or drawer is made to a person other than the payee such as an agent of the maker or drawee, the payee acquired title by negotiation.3. Delivery of instrument to Payee as Last Holder

d. In such a case, the indorsement of the last holder is not necessary because the payee is remitted to his former rights & all intervening parties are discharged from liability.Delivery of Negotiable Instrument

1. Kinds Delivery is the transfer of ownership, actual or constructive, from 1 person to another.2. Necessity Delivery is an essential part of every negotiation. Indorsement means an indorsement completed by delivery.3. Presumption Delivery is presumed from possession. Except as against a holder in due course, the maker/drawer may overcome this prima facie presumption of proof that the instrument was lost or stolen Where Delivery Conditional

1. Condition Precedent Parol evidence is admissible to show that the instrument was to become operative as a contract only upon the happening of a future, contingent even, since this is a condition precedent to the attaching of any obligation under the written instrument2. Condition Subsequent where an instrument is unconditionally delivered as an operative contract, parol evidence is not admissible to show a parol condition attached to the obligation of the contractSec. 31. Indorsement; how made

Indorsement1. the writing of the name of the indorser on the instrument w/ the intent either to transfer the title to the same, or to strengthen the security of the holder by assuming a contingent liability for its future payment, or both Indorsement alone w/o delivery conveys no title & creates no holder

Indorsement means an indorsement completed by delivery

2. Involves a new contract & an obligation on the part of the indorser an implied guaranty that the instrument will be duly paid according to the terms thereof. By his indorsement, the indorser becomes a party to the instrument, & may be held liable for its payment even w/o receiving any consideration thereofIndorsement Involves Certainty of:

1. the identity of the indorser (as being the payee or true owner)

2. the genuineness of his signature

Note: It is the duty of the person cashing/paying on an instrument to ascertain both before paying. But the acceptor doesnt admit the genuineness of the indorsers signature.

Q: Who has the power to indorse?

A: the payee, or the legal holder, or by his agent

If the instrument is payable to JOINT PAYEES (e.g. A and B)

GR: an indorsement of only one of them will NOT constitute a valid indorsement

E: the one indorseing has the authority of the other

If the instrument is payable to PAYEES IN THE ALTERNATIVE (e.g. A or B)

Rule: either one of them may negotiate the instrument

IndorsementAssignment

Sometimes included in the term assignmentBroader term

The indorsement of negotiable instrumentThe assignment of non-negotiable instrument

Necessity of Indorsement

1. Essential to the execution of an instrument payable to the order of the maker/drawer2. Essential to the negotiation of an order instrument but not of a bearer instrument

3. Not necessary to a mere assignment of a negotiable or non-negotiable instrument. One may acquire title to such instrument w/o indorsement but w/o indorsement of an order instrument, he cannot be a holder in due course even though he is entitled to have the indorsement made4. An estoppel may take the place of an indorsement to uphold the transfer of a bill or note such as where the indorsement is forged/unauthorized & the party against whom the instrument is sought to be enforced is precluded from setting up the defense of forgery or want of authority

Form of Indorsement

The law doesnt require an exclusive form by w/c an indorsement may be accomplished

It must be written writing includes print

Place of Indorsement

1. On the instrument itself

a. Latin word indorsa = writing on the back

b. While indorsement is usually written on the back, it may be written on the face of the instrument

c. The place is not essential

d. The law looks to the intention of the parties rather than to the form as to indorsement

e. When it is not clear in what capacity a person intended to sign, he shall be deemed an indorser

2. Upon a paper attached thereto

a. Where the indorsement is on a slip of paper physically attached to the instrument so as to become part of it, the paper is known as ALLONGEQ: May indorsement be written on an allonge where there is still a space at the back of the instrument where indorsement can be made?

1st view: The use of the alonge was allowable only when the back of the instrument itself was so covered w/ previous indorsements that convenience or necessity required additional space for further indorsements.

2nd view: Indorsement may be made on an allonge even if there is still space at the back of the instrument. An indorsement made at the back of the instrument is not invalid simply because there is still a space above the said indorsement, then why should space be material when indorsements are on an attached piece of paper? In neither case does the leaving of a blank space facilitate fraud, since nobody would gain any advantage by inserting his name in the space & rendering himself liable to those who indorsed below him upon the note or allonge.

Sec. 32. Indorsement must be of entire instrument

GR: Indorsement must be an indorsement of the entire instrumentE: Partial indorsement is allowed if part of the amount has already been paid, the unpaid balance may be indorsed as this is expressly authorized by lawIndorsement to 2 or More Indorsees Severally

An indorsement purporting to transfer the instrument to 2 or more persons severally doesnt operate as a negotiation of the instrument for the cause of action is split. But the negotiation is valid where the indorsees are joint.Sec. 33. Kinds of indorsement

CLASSIFICATION OF INDORSEMENT

As to the methods of negotiationSpecial

Blank

As to the kind of title transferredRestrictive

Non-restrictive

As to scope of liability of indorserQualified

Unqualified/general

As to presence or absence of limitationsConditional

Unconditional

Other kinds of indorsementsJoint

Successive

Irregular/anomalous

Facultative

Sec. 34. Special indorsement; indorsement in blankSpecial Indorsement/Specific Indorsement/Indorsement in Full the name of the payee is specifiedForms of Special Indorsement1. one that specifies the person to whom the instrument is payable

a. Pay to A

2. one that specifies the person to whose order the instrument is to be payable

a. Pay to the order of Ab. Pay to A or to order

Blank Indorsement one w/c specifies no indorsee generally consists only of the signature of the indorser

an instrument so indorsed is payable to bearer & may be negotiated by the indorser by delivery alone regardless of whether the instrument is originally payable to bearer or not

a thief/finder could negotiate the instrument by mere delivery & if payment were made in good faith, the real owner wouldnt have the right to recover from the maker/drawer

Sec. 35. Blank indorsement; how changed to special indorsementConversion of Blank Indorsement to Special Indorsement

an instrument payable to order on its face becomes payable to bearer if the only or last indorsement is in blank the holder may protect himself from liability by changing the blank indorsement to a special indorsement

an instrument made payable to bearer by indorsement in blank may be converted into an order instrument by writing over the signature of the indorser in blank any contract NOT INCONSISTENT w/ the character of the indorsement

a bearer instrument always remains a bearer instrument negotiable by mere delivery whether the last indorsement is a blank of special one

Sec. 36. When indorsement restrictiveRestrictive Indorsement: 1. prohibits entirely the further negotiation of an instrument 2. restricts its further negotiation to a particular person or for a particular purpose

3. modifies the rights of the holders or the liabilities of the indorser1. Limits Rights of Indorsee

by means of a restrictive indorsement, an indorser notifies all prospective holders that the indorsee has only the authority to deal w/ the instrument as thereby directed & that the indorsee has only a restrictive title thereto by such indorsement, an indorser can safeguard his interests by limiting the rights of the indorsee whenever he should find it necessary to entrust negotiable paper to another2. Destroys Negotiability of Instrument

Such indorsement destroys the negotiability of the instrument & bars further negotiation to a holder in due course

A restrictive indorsee is not a holder in due course, & defenses available against the indorser are not cut off by the transfer of the instrument under such an indorsement, in the absence of waiver or estoppel All subsequent indorsees acquire only the title of the 1st indorsee under the restrictive indorsement3 CLASSES OF RESTRICTIVE INDORSEMENT

1. Prohibits Further NegotiationPay to A only

Pay to A and no other person

2. Constitutes Indorsee Agent of IndorserPay to A for collection

Pay to A for collection & remittance

Pay to A for collection only

Pay to A for deposit

3. Vests Title in Indorsee in Trust for AnotherPay to A in trust for B

Pay to A as trustee for B

Pay to A for my use

Pay to A for the use of B

Effect of Absence of Words of Negotiability

The instrument, originally negotiable continues to be negotiable inspite of absence of such words in an indorsement

Pay to A = Pay to the order of A or Pay to A or order

But if in their place a restrictive word such as only is employed so as to prevent further negotiation, the instrument is not only restrictively indorsed but it also ceases to be negotiable

Sec. 37. Effect of restrictive indorsement; rights of indorseeRights of Indorsee in Restrictive Indorsement

1. receive payment on the instrument2. sue thereon in his name

3. negotiate the instrument,

a. except when it is prohibited in the indorsement

Note: the rights of the indrosees subsequent to the 1st indorsee are subject to the terms of the restrictive indorsementRevocation of a Restrictive Indorsement

a restrictive indorsement may be revoked by a later indorsement by the previous restrictive indorser title over the instrument has been held to pass where the indorser, after his restrictive indorsement, takes the paper and delivers it to another w/o striking out the restrictive indorsement, or reindorsing the paper

where the indorsement is for collecting such restrictive indorsement is revocable at the pleasure of either party and is revoked by a return of the paper uncollected or by a recall of the paper by the indorser, before collection, or by the restrictive indorsers subsequent indorsement to other indorsees for value, but is not revoked by the indorsers death.

Sec. 38. Qualified indorsement

Qualified Indorsement: one w/c constitutes the indorser a mere assignor of the title to the instrument

1. Words used clearly express intention

An indorsement may be qualified by adding to the indorsers signature the words: w/o recourse, san recourse, at indorsees own risk, indorser not holder to be enjoyed in the same manner as may have been by me to either a blank or special indorsement.

Examples:

Pay to the order of A w/o recourse on me. (Sgd.) P

Pay to A, indorser not holder. (Sgd.) P

2. Words used do not clearly express intention

There is conflict of opinion as to whether the words I hereby transfer and assign all my right, title & interest and other similar words of assignment or transfer constitute an indorsement w/o recourse.

By the weight of authority, they have been held to constitute a negotiation & render the writer liable to an innocent holder as an indorser & not as an assignor

It is not enough that words are used w/c simply express an assignmentwhen an indorser intends to qualify his indorsement & instead of using the words w/o recourse he attempts to avail of others of similar import, those other words must be such as to clearly express that intention.

Recourse: resort to a person who is secondarily liable after the default of the person who is primarily liable

An Indorsement w/o Recourse does not affect the negotiable quality of an instrument

shows only an unwillingness to be answerable for the solvency of prior parties a prudent precaution particularly where the note has a long time to run before it matures

Effects of a Qualified Indorsement

1. Indorser, a mere assignor the purpose of an indorsement w/o recourse is to transfer title w/o guaranteeing payment by the primary party

2. Indorsers liability limited it doesnt mean that the qualified indorser incurs no liability at all; He is still secondarily liable for breach of his warranties as an indorser under Sec. 65.3. Negotiability of instrument not effected it is a good precaution to indorse w/o recourse where the instrument has a long period of maturity so that there is danger that the principal debtor might become insolvent

Qualified Indorser Liable if the Instrument is Dishonored by Non-Acceptance or Non-Payment Due to:

1. forgery2. lack of good title to the instrument indorsed

3. lack of capacity to contract on the part of prior parties

4. the fact that the instrument was valueless or not valid at the time of the indorsement w/c fact was known to himNote: the qualified indorser is not liable to the indorsee if the instrument is dishonored for some other reason like the insolvency of the person primarily liable

Sec. 39. Conditional indorsement

ABSOLUTE INDORSEMENTCONDITIONAL INDORSEMENT

One by w/c the indorser binds himself to pay, upon no other condition than the failure of prior parties to do so, & of due notice to him of such failure.One by w/c the indorser adds some other conditions to his liability; that is, where there is some condition in the indorsement.

Conditional Indorsement

has no effect on the further negotiation of the instrument while a condition in the indorsement doesnt destroy negotiability, a condition appearing on the face of the instrument (in the promise to pay or order to pay) renders the instrument non-negotiableCOMBINATIONS OF INDORSEMENTSEXAMPLES

1. Special & RestrictivePay to A only. (Sgd.) P

2. Special & QualifiedPay to A without recourse. (Sgd.) P

3. Special & ConditionalPay to A if he marries before

he reaches the age of 25. (Sgd.) P

4. Blank & RestrictiveFor collection only. (Sgd.) A

5. Blank & QualifiedWithout recourse. (Sgd.) A

6. Blank & ConditionalPayable upon completion of

House in Pateros, M.M. (Sgd.) A

7. Special, Unrestrictive, UnqualifiedPay to B. (Sgd.) A

Sec. 40. Indorsement of instrument payable to bearer

Effect of Special Indorsement Where Instrument Originally Payable to Bearer An instrument payable to bearer is not converted into an instrument payable to order by being indorsed specially, and therefore, the indorsee may further negotiate the instrument by mere delivery The person indorsing specially is liable only to those holders who can trace their title to the instrument by a series of unbroken indorsements from such