commercial law review jack notes

7/31/2019 Commercial Law Review Jack Notes

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Commercial Law Review

Glenn Tuazon, 4-A

Atty. Jack Jimenez

SY 2010-11

4 Quizzes (50 each) + MT (100) + Finals (100) divided by 4 = Final Grade

Part 1: Negotiable Instruments Law

HISTORY: contrast a negotiable instrument with a non-negotiable PN:

o First objection: a person stepping into the shoes of the seller is

exposed otherwise to the defenses that the buyer may launch

against the seller

Laws solution exempt from personal defenses

o Second objection: I dont know the maker, I just know the one

negotiating it to me. How will I know hes solvent?

Laws solution will make the indorser liable

regardless (Accumulation of secondary contracts)

The more indorsers, the more you can sue

Two general parts in the law:

o 1 what makes an instrument negotiable

o 2 rights and obligations of parties

Two basic forms:

o Promise to pay (PN)

o Order to pay (bill of exchange)

If it does not comply with the requisites of negotiability, it is still a

contract, but not covered by the NIL.

Either:

o Payable to order negotiated by indorsement, and delivery

o Payable to bearer delivery is sufficient

o N.B. If payable to a specific person, it is not negotiable

Four basic contracts involved:

o 1. Making

o 2. Drawing

o 3. Negotiating

o 4. Accepting

To show consent

o N.B. But for all, there must be delivery

Basic principles: NIL is for justice.

o 1. Bad faith: So if a person is in BF, he cannot invoke

defenses. (Ex. Issued a negotiable instrument to pay for a car

that is defective. The indorsee knows that the car is defective,

he is in bad faith.)


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o 2. Estoppel ex. A father allowing a son to steal a check and

forge his signature is estopped from denying i t

o 3. Comparative fault

If a bank honors a check with a forged signature, the

bank is considered negligent too

But if the negligence of the drawer outweighs the

negligence of the bank, the law shifts the fault to the

drawer

o 4. The law will only protect you from personal defenses if you

are a holder in due course (Sec. 52)

Good faith

With value

Before overdue (see below)

With no notice of defenses

o 5. General rule: there must be demand , before an instrument

becomes overdue. Exception: If time is of the essence.

Ex. Reserve requirements of banks must be kept

afloat, so overnight, banks sometimes transact with

each other

An overdue instrument is shouting to the high

heavens I have been dishonored!

Requirements found in Sec 1. 2-9 are elaborations of such.

o 1a. It must be in writing

o 1b. It must be signed symbol of consent

If one signed another name or a symbol, it will bind

him if he intended for it to bind him

Location is immaterial

o 2a. Must contain a promise or order to pay

Need not use exact words, even equivalent words are

fine

Creates a NEW obligation to pay, not a mere

acknowledgement of an old debt

Exception 1: date of payment is mentioned,

or at least, a date of maturity

Exception 2: insertion of or order (words of

negotiability) in the old terms

Authorization to pay or a mere request does notcreate a binding obligation to pay.

o 2b. The promise to pay or order must be unconditional

Do not look into evidence aliunde. You must confine

yourself within the four corners of the instrument to

deem whether it is absolute.


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Fall back on obligations and contracts distinguish

between uncertain events and certain events,

although indeterminate (ex. Moment of death of

mother-in-law)

o 2c. Sum certain, and payable in money

Because it is meant to be a substitute for money

Also, specify the denomination. Cannot just be a

number.

o 3. Payable on demand or on a determinable future time

o 4. Payable to order or bearer

Need not use exact words

But there must be reasonable certainty so people

know from whom they could demand payment

Ex. instead of order pay to X or his indorsees;

pay to X or his assigns

Ex. instead of bearer pay to X or holder; pay to X

or possessor

o 5. Where the instrument is addressed to a drawee, he must be

named or otherwise indicated with reasonable certainty

If name of the drawee is left blank, it is an incomplete

instrument which can be filled up as a remedy

Most cases involve fraud, by taking advantage of the features of the

law.

Sec 2: when a sum is certain

o Even when there is a stipulation of interest. It must be in

writing.

o The stipulated rate controls there is no more ceiling on

interest rate. But it is unconscionable, it is void, and the rate is

reduced to 12% (in circular 416).

o If there is stipulated interest, without a rate, 12% as well.

o If payment is by installment, for the instrument to be valid, the

amount of installments must be indicated and the date of

maturity of each installment is specified.

Promise to pay Jose Cruz or order P100,000 in 10

installments. not negotiable

You have to specify both AMOUNT and WHEN EACH

is due. You cannot just give the starting point (ex.

Nov 2005)

o If there is an acceleration clause failure to pay an installment

will make the entire balance due and demandable.

o It is now valid to stipulate payment in foreign currency.

o If you talk about an exchange rate, you have to talk about at

least 2 currencies. It cannot be just one.


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o Under Civil Code, general rule is attorneys fees are not

recoverable, except when there is written stipulation.

Stipulating such makes the NI more attractive.

Ex. I will pay reasonable attorneys fees in case thereis failure to pay is this a sum certain? Yes.

Because you know how much is due at the date of

maturity (it doesnt matter what you pay after

maturity). This is the reckoning point at the date of

maturity, is the sum certain? ALSO, stipulations on

attorneys fees is always subject to court control

anyway.

Sec 3: promise is unconditional

o Instructions on how payment will be entered into the books of

account does not affect unconditional nature

Neither does reimburse yourself affect

TEST: it must indicate the source of reimbursement,

not source of payment. The latter is not negotiable.

o Statement of how the original obligation came about does not

affect conditionality

But it will become non-negotiable if mention of the

prior contract (ex. deed of sale) makes the NI subject

to the terms and conditions of the contract. This

makes it conditional.

o Elizalde: Person bought cars. He issued a PN, secured with a

CM over vehicles. The PN said that the payment is secured by

the CM. It was negotiated to Elizalde by the car selling

company. Elizalde sought to collect. Issue is whether the

statement of security (CM) made it non-negotiable. HELD:

Negotiable, because the promise to pay is still conditional, and

is not dependent to the CM. Test: does the promise to pay

rely on the terms and conditionsof the security? If so, it is not

negotiable. Else, it is negotiable.

o Abubakar:A Treasury Warrant is not negotiable. It is payable

out of a particular fund, so you do not apply Sec. 66. No

money should be paid out of the Treasury without an

appropriation for that purpose (Constitution).

FACTS here: X deposited treasury warrants with a

rural bank. The rural bank deposited with Metrobank.

Even before the treasury warrants were cleared by

the clearing house, Metrobank allowed withdrawal.

The warrants were spurious. Metrobank is suing the

rural bank to recover, since the rural bank warranted

the treasury warrants by negotiating it to Metrobank.

HELD: Metrobank is wrong, because the treasury

warrants are not negotiable instruments.

o BUT a reference from which fund the obligation would be paid

does not destroy negotiability if payment is not limited to come

from such fund.

Sec 4; payable at determinable future time

o 1st situation: Pay Jose Cruz or order if the holder feels

insecure, he may demand that I post reasonable securities,


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and if I fail to do so, he can declare the entire balance due and

demandable.

One view: non-negotiable because date of maturity

becomes uncertain because holder can acceleratepayment, and there is an additional undertaking other

than payment of money.

Other view: negotiable because the undertaking to

put up a security is merely an accessory obligation.

The date of maturity is not uncertain because

acceleration is within control of the maker; he can

prevent it by complying with the additional security.

(better view)

o 2nd situation: same if the holder feels unsecure, he can

declare the entire balance due and demandable.

It is not negotiable, because here, the holder has the

absolute option to make the obligation due and

demandable.

o Differentiate:

When the maker may choose to pay before a certain

date, it is still negotiable (ex. on or before June 15

maker can pay before June 15 at his option)

Effect: all other secondary contracts are

discharged. It benefits everybody.

When the holder may absolutely choose to have the

obligation due, it is not

Effect: everybody becomes secondarily

liable by ripening their obligation. Thus, this

is not valid.

o

If hinged upon a contingency, non-negotiable even if the eventor condition happens.

o Philippine Education v. Soriano: A money order is not

negotiable, because although it says pay to the order of,

under Postal Regulations, obligation to pay is conditional,

depending on different grounds where the post office can

refuse to pay. Also, it can only be indorsed once.

Sec 5: additional provisions that do not affect negotiability

o GENERAL RULE: Other obligation or undertaking aside from

payment of money makes it non-negotiable (secured by CM

over my car, which I will keep in good condition)

o EXCEPTIONS:

o Authority for holder to foreclose pledge/CM or collateral

securities

o

Authorizes confession of judgment if instrument not paid uponmaturity

N.B. the SC said, however, this is a void stipulation

o Waiver of benefit of law

Waiver of notice of dishonor

Waiver of venue


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Waiver of exemption from execution

o Holder can require something other than payment of money

If option is upon holder to demand either cash or rice,

it is still negotiable because the holder can ALWAYS

demand money

Sec 6: omissions which do not affect

o 1. Not dated

o 2. Failure to mention consideration

It is presumed in this contract

o 3. Does not specify place where it is drawn or payable

o 4. Bears a seal

o 5. Designates currency in which payment will be made

Sec 7: When it is payable on demand

o Upon sight or presentation

o Instrument is silent on when payment is made

o When it is overdue

As to the maker, he is discharged

BUT as to the indorser, it is upon demand

Sec 8: When it is payable to order

o [It may be upon order of]

o 1. Order of payee who is not maker, drawer, or drawee

o 2. Drawer

Ex. Jose Cruz writing a check saying Pay to the

order of Jose Cruz this is better than making a

check paid to cash, which anyone can encash if lost

and found

In this example, it is not complete until Jose indorses

it, because there has to be delivery (at least two

parties to a contract)

o 3. Drawee

o 4. Two or more payees jointly

Ex. Pay to the order of Jose Cruz AND Manuel

Santos

o 5. One or some of several payees

Ex. Pay to the order of Jose Cruz OR Manuel Santos

o 6. Holder of an office for the time being (ex. Treasurer of the

city of Makati)

o If the drawee is not indicated with reasonable certainty, then it

is not negotiable.

Sec 9: When it is payable to bearer


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o 1. Expressed as such

Caltex:[unclear facts] Caltex required collateral for a

credit line. Requestor had as security a time deposit

(Security Bank). Caltex accepted it. [yada yadayada] Bottomline, requestor maxed his credit line and

disappeared. Caltex and Security bank are in

dispute. HELD: It says that the deposit is payable to

the depositor, and the depositor is bearer. It is a

bearer instrument.

[As explained by Phil. Law Library]: The Certificates of

Time Deposit are negotiable instruments. The

documents provide that the amounts deposited shall

be repayable to the depositor. And who, according to

the document, is the depositor? It is the "bearer." The

documents do not say that the depositor is Angel de

la Cruz and that the amounts deposited are repayable

specifically to him. Rather, the amounts are to be

repayable to the bearer of the documents or, for that

matter, whosoever may be the bearer at the time of

presentment. (Caltex)

o 2. To person or bearer

o 3. Order of fictitious person

GENERAL RULE of the following three cases: there

must be intent by the maker or drawer of the NI that

the instrument be issued to a fictitious person

(knowledge is paramount)

Weller and Martin: Either partner can sign or issue

checks. X wanted to steal money from the

partnership. He drew a check payable to a

corporation where he was just the corporate

secretary. He was just the corp. sec., and was not

authorized to indorse; but he indorsed the check to

himself nonetheless. Y, his partner, sued the bank for

restoration of the amount. HELD: it is payable to

bearer. The Drawer did not intend the payee (the

Corporation) to get the proceeds of the check, EVEN

IF the payee actually existed or not. It fell under this

provision.

Assume same facts. If, however, thecompany required two signatories to all

checks, and X signed it with intent to steal,

and Y signed it not knowing Xs intent, then it

does not become payable to bearer. For the

payee to be fictitious, both must have same

intent.

American Sash: Had a payroll clerk, who prepares

checks payable to employees. He then makes the

officers sign the checks. Clerk padded payroll with

ghost employees, had the officers sign the checks

(the officers did not know that the employees didnt

exist), and the clerk collected money. Issue: is this

payable to fictitious persons. These ghost employees

did not actually exist. HELD: [N.B. first, the court

found that there was forgery because the drawer did

not know the payees were fictitious.] It was not a


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bearer instrument. The DRAWERS were the officers

who signed the checks. Their intent controls. So the

checks DID NOT become payable to bearer because

they DID NOT KNOW that the ghost employees were

not part of the payroll.

Rodriguez v. PNB: Employees of PNB formed a

savings and loan association (SLA). Rodriguez

spouses meanwhile, had current accounts with PNB.

Whenever the SLA lends to members, it issues post-

dated checks. But most of the time, the SLA does not

have enough money. The borrowers thus endorse

the checks to Rodriguez; in turn, Rodriguez

rediscounts the checks (issuing checks lower thanface value). The SLA has a policy: when a member

has an outstanding loan, they cannot get another

loan. So the officers who wanted to borrow more, to

circumvent this, they made it appear that it is the

other members who are borrowing. The SLA, in

accordance with the usual procedure, issued post-

dated checks to the supposed borrowers (but really

for the officers). The officers indorsed the checks to

Rodriguez. Rodriguez issued discounted checks.

PNB found out about this and closed the SLA

account. Meanwhile, the checks issued to Rodriguez,

which bounced because the SLA account was shut

down since the checks they issued were cleared,

and the checks issued to them were from a closed

account. Contention of spouses: How can PNB

accept the indorsement of those checks, when the

ones who indorsed were the officers and not the

supposed borrowers. Contention of PNB: it is

intended for fictitious persons, since there was no

intent that they actually get the money (even if the

supposed borrowers really exist). HELD: Rodriguez

spouses won. For the checks to be considered as

payable to fictitious persons, the fact must be known

to the person issuing the negotiable instrument.

Here, the Rodriguez spouses did not know that the

supposed payees were not the real borrowers (when

it fact it was the officers). PNB must reinstate the

amounts to the Rodriguez spouses.

o 4. Name of payee is not name of existing person

Classic example: payable to cash

o 5. Last indorsement is in blank

Sec 12: Ante-dating or post-dating does not affect negotiability

Sec 13:

o When the date of acceptance is not inserted by the drawee,

the holder may insert date of issue or date of acceptance

o What if he places the wrong date?

If negotiated to a holder in due course, that is the

correct date as far as the holder in due course is

concerned even if it is not


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Purpose: the law protects a holder in due course, who

is relying on that date in good faith

o But what if the one who put the wrong date presented it

for payment to the acceptor/drawee?

Not valid. Cannot claim.

o SAMPLE QUESTION:

A check drawn by X says Pay to the order of Y

P10000 thirty days after sight. It was accepted by E

on Sept. 15, but did not date the instrument. Y

negotiated it to Z, telling the latter that the instrument

was accepted November 1. Z placed in theinstrument this date.

Can he collect from E?

o Yes, even if it is more than 30 days

from acceptance. Z is a HIDC and

the Nov 2 date is true as to him.

If Y inserted the wrong date instead and

did not indorse it to Z, can he collect from

E?

o No. He is not a HIDC.

Sec 14:

o When it is wanting of a material particular the person

possessing it has prima facie authority to fill up the blanks

CONTROLLING FACTOR: The blank or incomplete

instrument must have been delivered with intent that

the holder turn it into a negotiable instrument

o

In a case, a person signed an instrument in blank and leftit with the bank. The bank filled it up with an amount.

What happens?

The amount inserted by the bank controls.

o What are the two requirements for this instrument to be

enforceable?

1. It must be filled up in accordance with the authority

given to him

2. It must be filled up within reasonable time

o X gave a check with a blank amount to Y, telling Y that he

should fill it up according to what X ultimately owes Y, but not

over P50000. X owes Y P30000, but Y put P60000.

Can Y collect P60000 from X?

No. It was beyond the authority given him.

Y indorsed the check to Z, a HIDC. Can Z collect

P60000 from X?

Yes. The defense does not apply to him.

o Case: X works abroad, but allows property to be rented out,

and the payments are deposited in an account. The husband

(retired lawyer) however withdraws money from that account


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for his own support, to Xs ire. X asked her inaanak to hire a

lawyer for this purpose. The inaanak hired a lawyer but

subsequently terminated the services so she asked for a return

of the acceptance fee. The lawyer said that he will return the

fee in installments. X asked the inaanak to sign a piece of

paper claiming that it was a witness signature that the lawyer

will pay X back. But X actually made it appear that it was a PN

where the inaanak promised to pay money to her five years

prior, corresponding to the attorneys fees. HELD: The court

believed the contention that the inaanak never intended for the

signature to be for a PN. There must be intent to leave a

signature to make a PN.

Sec 15: incomplete and undelivered instrument

o Will not be a valid contract in the hands of any holder, as

against the person whose signature was placed on the

instrument prior to delivery (real defense)

BUT indorsers are liable

o Ex. Left signed checks, and an employee took them and filled

up amounts. Incomplete and undelivered instrument.

o Ex. Officers of country club went abroad and left signed

checks for payment of checks. Abusive employees put their

own names and signed their own names. HELD: By pre-

signing checks and leaving them with employees, it became

possible for them to do this. The officers were negligent and

shared in the loss (60-40).

Sec 16: Complete but undelivered instruments.

o NI is incomplete until delivered

o Ex. You cannot sue if you hold checks that were not delivered

to you. You never acquired a right over them.

BUT a HIDC will not be subject to this defense (Like

Sec. 14)

o BPI Family Savings: BPI issued a check payable to City

Treasurer of Iloilo to pay for local taxes. They did not deliver it

to the treasurer, and just gave it to the employee. The

employee used it to pay for somebody elses local taxes.

HELD: There was no payment because BPI never delivered it

to the city treasurer, so BPI cannot claim to have paid.

o Associated Bank: Somebody was selling RTW clothes, and

shopping malls (buyers) issued crossed checks. Somehow,

the checks fell into the hands of someone else, who indorsed it

to someone else, and were deposited to Associated Bank.

The seller was wondering why she wasnt being paid. [If you

are legalistic, the RTW seller must sue the shopping malls,

etc., because the checks were not delivered to her. In turn, the

shopping malls, etc. must sue the drawee banks, and then the

drawee banks sue Associated Bank why it cleared the checks.HELD: The SC allowed the RTW seller to sue Associated

Bank directly because it cleared the checks. (Same in

Westmont Bankcase)

o It may be showed that delivery between immediate parties is

conditional, or for a special purpose.


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o Ex. A godson is taking the CPA test, but X is not in the

Philippines. He gave P10,000 check on the condition that he

pass the test. The godson cannot enforce payment on the

check. BUT if the godson negotiates the check to a holder in

due course, the law will protect the HDC.

Sec 17: Rule of interpretation

o Words prevail over figures

Romero: Amount indicated in words is One Million

Two Hundred Pesos. Amount in figures: 1,200,000.

Balance in the account is 1,100,000. The check

bounced. The words prevailed.

o Payment of interest

Runs from date from instrument

Or if none, date of issue

o Not dated assumed to be dated from time of issue

o Written > printed provisions

o If ambiguous whether a bill or note, the holder has the option to

treat it as either

o Ambiguous role of signature deemed an indorser

Because the indorser has the least liability among all

characters in a NI

o If I promise to pay note is signed by two or more persons

deemed solidarily liable

Sec 18

o GENERAL RULE: person whose signature does not appear on

the instrument is not liable

o EXCEPTIONS:

1. Duly authorized agent signing for principal

2. Forger liable for signature he forges

3. Signature in separate paper (allonge) because

the instrument has no more space

4. Estoppel

5. Signing under trade/assumed name

6. Instrument can be negotiated by mere delivery

Sec 19/20

o To avoid liability as signing agent:

A) agent must disclose he is an agent

B) disclose his principal

C) he has authority

Minority/incapacity of corporation


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o Maker of a PN cannot refuse to pay to a holder on the ground

that the indorser is a minor. Neither can he raise the defense

that the prior indorsee is a minor. ONLY the minor can raise

the defense of minority, no one else.

o Can apply this principle by analogy to other incapacitated

persons (Ex. corporation action ultra vires)

o Exceptions:

1. The minor actively misrepresented his age and it

appears that he is physically of such age

2. Minor kept fruits/benefits

3. Minor spent the money in good faith

Sec 23 Forgery

o The person whose signature is forged did not give consent to the

contract

Except when he is estopped

o There are different instances of forgery:

1. Signature is copied

May be done by tracing.

Practices imitating a specimen signature

2. Fraud in esse contractus

Fraud in factum.

Misled to signing instrument, not knowing it was a

negotiable instrument, when he thought it was

something else.

3. Duress amounting to forgery

It must be duress in the execution(ex. Grab the

hand of the intimidated), NOT duress in inducement

4. Fraudulent impersonation

In this case, in general, it is NOT a forgery

The person to whom the note was given is

presumed to be intended to receive the note (because

he knew the intended payee)

o Different situations:

1. Promissory note

A (signature forged by B)-B-C-D-E

o E cannot collect from A

o E can collect from B (forger)

o E can collect from C, D as indorsers

(warranted the instrument)

EVEN if it is a bearer instrument, then A

(signature forged by B)-B-C-D-E


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o Indorsing an instrument that need not be

indorsed leads to a warrant of such

[ORDER INSTRUMENT] A-B-C (signature forged

by D)-D-E

o E cannot collect from A or B (since it is

an order instrument, there is a cut-off to A

and B, since Cs signature is forged)

o E cannot collect from C (no consent)

o E can collect from D as indorser

A B or bearer-C (signature forged by D)-D-E

o NOTE: This is an instrument payable to

bearer; delivery is sufficient, no need for

indorsement.

o Can E collect from A?

Depends. If E is not a holder in

due course, A will claim that there

was no delivery of complete

instrument by B since C stole it

from him

If E is a holder in due course,

he may collect from A since it is

payable to bearer

o Can E run after C?

No, Cs indorsement was

forged.

Neither can he run after A or B,

because he cannot trace his right tothem [cut off by the forgery].

He can run after D, because by

indorsing the instrument (even if

bearer), he warranted it.

o NOTE: if a bearer instrument is indorsed

even if it is not needed, the indorser warrants

the instrument as what it purports to be.

2. Bill of Exchange

A. Drawer

o 1. Order

Accepted

Unaccepted

o 2. Bearer

Accepted

Unaccepted

As signature on an order instrument was

forged by B and then indorsed to C-D-E. X

accepted as drawee. Can E collect from A?


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o No. No consent.

Can E run after X?

o Yes.

o Sec. 62, the acceptor admits the

instrument is genuine when he accepts and

pays.

o What is Xs remedy?

To sue B, the forger.

Can E run after B?

o Yes. Forger

o Can E run after C and D?

Yes. Warranted by

indorsement

NOTE: If X did not accept, then he cannot be

recovered from, because he did not accept.

o But the same answers apply for the

others.

NOTE: Apply the same rules on indorsement of

a bearer instrument if there was indorsement even

if there is no need to do so, there is warrant of the

genuineness of the instrument by the indorsers.

NOTE: If its a bearer instrument, even if Cs

indorsement to D is forged, then the payee can still

collect from A (because he just promised to pay the

bearer). Remedy of the acceptor is to just run after

the thief.

A issued a BOE payable to B or order. B C. D

forged Cs signature D E. X accepted and paid.

X cannot debit As account, because A ordered to

pay B or order. C did not order X to pay D. Bs order

was cut off by forgery.

X can get money back from E because X only

admits As signature is genuine (which it is), and not

the indorsers.

E cannot run after A (cut off) or B or C. He can

run after D, who forged.

A issued BOE payable to B or bearer. Indorsed to C.

Cs signature was forged, indorsed to D, then E. X

accepted the BOE. What happens?

X can debit As account because A promised to

pay bearer.

X cannot get back the money from E. E is the

bearer.

C can run after D, the forger.


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A issued BOE payable to B or bearer. Indorsed to C.

Cs signature was forged, indorsed to D, then E. X did not

accept the BOE. What happens to Es claim?

Cannot go after X, did not accept.

Cannot go after C, no consent.

Can go after D, indorsed (warranted)

Cannot go after B, cannot trace title to him since

Cs signature is forged.

Can go after A if E is a HDC. Cannot go after A if

E is not HDC.

EXCEPTIONS to general rules:

o 1. When there is estoppel (ex. father saying that his sons

forgery of his signature was genuine)

o 2. When there is unreasonable delay by the drawer in

informing the drawee about the forgery

Drawer can check the statements sent by the bank to

him

Test: If the drawer had acted quickly, would the

drawee have been able to stop or freeze payment?

PNB v Quimpo:

o Left check book with his friend, who was in the car. The friend

forged his signature in a check book left lying there. HELD:

Not negligent; no reason to suspect friend of bad faith.

BPI v. Casa Montessori:

o An external auditor was hired to reconcile records. He

managed to forge the signatures of the officers of Casa

Montessori over a long time. Sued bank, which refused to

reinstate the amounts. Bank argued Casa was negligent.

HELD: An external auditor is not an employee. It is an

independent contractor, so you cannot blame Casa for

negligence in hiring an employee.

o Estoppel does not apply, because Casa had no way to know

the auditor was stealing money, because he was precisely the

one tasked with safeguarding the school records and

comparing with bank records.

Cases on Comparative fault principle

Security Bank v. Triumph Lumber:

o Robbers broke into Triumph Lumber. Check book was stolen,

but triumph did not report it to the bank. Robbers were able tocash checks. HELD: Triumph was negligent for not reporting

the theft.

o But JJ believes that the bank should have been held negligent

for authenticating the checks.

MWSS v. CA:


16/71

o MWSS did not have their checks printed by the central bank.

They had a private printing press print their checks. The

signatures of the officers of MWSS were forged. PNB paid

them. HELD: MWSS must bear the loss for failing to exercise

caution did not ask printing press to surrender plates,

account for spoilage, and MWSS did not examine the

signatures in the bank returns.

Ilusorio:

o Ilusorio was leaving for abroad and he left his checkbook with

his secretary, who he asked to reconcile bank statements.

Secretary forged his signature. HELD: Ilusorio should bear the

loss for his negligence. He trusted his secretary.

Gempesaw:

o Gempesaw owes several groceries. She trusted a bookkeeper

blindly. When she ordered supplies, the bookkeeper prepared

the checks, and Gempesaw signed the checks without

verifying the statements. The bookkeeper was able to steal

more than P1M. HELD: Negligent; did not confirm or examine

the invoices, receipts, etc. before signing the checks used to

pay the suppliers.

o Split accountability 50-50

Province of Tarlac:

o Province of Tarlac had account with PNB. Province issues

checks to the physician/head of the clinic. The cashier already

retired, but he was still hanging around. Cashier was able to

forge when he picked up the checks. HELD: Province was

negligent, for allowing the cashier to pick up the checks even

when he was retired, so he was able to indorse the checks

through forgeries.

o Split accountability 50-50

General rule:

o If the indorsement is forged, the collecting bank must return the

money to the drawee bank

Basis: Sec 23 because the payee did not indorse

the check

This is NOT a case of negotiation, but presentment

for payment. So you cannot use the warranty

argument

Mellicor:

o Maasim forged endorsement of Mellicor, and then PNB

presented check to HSBC for payment. The person was able

to withdraw money for HSBC. Great Eastern sued for return.

HELD: HSBC must return, because Mellicor (drawer) never

indorsed the check. [?]

Ford Philippines:

o Before, you file your ITR with the BIR. So the employee of

Ford was tasked to pay sales tax (P18M), made payable to a

payee (for payees account only), which is the Insular Bank of

America, the authorized collecting agent of BIR. The


17/71

employee showed a fake BIR receipt (See, I paid BIR na.) to

Ford. Instead, they deposited a worthless check with Insular

Bank of America (not funded), which they substituted with the

check issued by Ford Philippines. In their internal records,

they made it appear the worthless check was deposited.

Citibank honored the check. The person who deposited

collected from Bank of America. Ford had to pay BIR again.

They sued.

o HELD: Citibank must return the money to Ford, because Ford

ordered it to pay the BIR, which Citibank disobeyed. It says

for payees account only and there was no indorsement from

BIR.

o Citibank was guilty only of negligence.

o The bank manager (who was complicit) was criminally liable.

o JJ doesnt agree with the court as regards Insular Bank of

Americas liability.

o Check: G.R. 121413 29 Jan. 2001

Price v. Neal

o See Jack notes

PNB v. CA

o See Jack notes, too

o Acceptor cannot get back the money, when it paid, because it

admits the genuineness of the signature of the drawer

Four general rules :

o 1. A party whose signature is forged is not liable

Unless hes in estoppel

o 2. An acceptor who pays on a BOE cannot recover the money

because he admits the genuineness of the signature of the

drawer

o 3. A Holder in Due Course acquires good title if forged

indorsement is not necessary for his title

(ex. in a bearer instrument)

o 4. A person negotiating an instrument after forgery is liable

(due to warranties)

Rules on clearing

o Checks are brought to a clearing house and are run through a

clearing house. They check the magnetic strips on the checks.

The amount will then be transferred to the collecting bank.

o Then the checks will be physically given to the drawee bank.

The drawee bank has 24 hours to honor/dishonor the check.

o If it dishonors it, the drawee bank returns the check to the

clearing house. The computer will return the amounts paid.

o Any return beyond 24 hours: time-barred.

Here, the doctrine applies to the forged signature of

the drawer.


18/71

BUT this 24 hour rule SHOULD NOT apply when it is

the payees or indorsees signature that is forged,

because the drawee bank has no way to find out, until

the drawer informs them.

But the SC wrongly applied the 24 hour rule to the

payees forged signature.

o New rules (to prevent ping-pong of checks):

If a check is dishonored, you can only present it one

more time. [Usual reason why one failure is allowed

drawn against insufficient funds]

What is the effect when the drawee does not return

the check within 24 hours?

The drawee cannot ask the computer to

reverse the entries.

BUT you are not precluded from suing to

collect after. But since the computer cannot

reverse, while you are litigating, you do not

have the amount.

Consideration

Under the law, consideration is presumed

o Travel Inc.: Travel agency sued on the basis of a bouncing

check issued by a guy bringing in passengers. The CA was

wrong for asking the agency to prove the value of the ticket

purchased. There is a presumption of valuable consideration,

and that the check was for such amount.

Ex. in BP 22, there is no need to prove the check was issued for

valuable consideration

In civil law, generosity, love, affection, etc. are valid consideration.

o [Glenns note: Sundiang says love and affection, etc.

cannot be considered valuable consideration. But Jack

says that a donation is a simple contract and the law

simply requires consideration sufficient to support a

simple contract. So love and affection is valuable

consideration.]

Rule on holder for value vis--vis prior part ies :

o Rule: Where value is given for the NI, the holder is a holder for

value in respect to all parties who became such prior to [the

time consideration was given]

o A issued a PN to B, but there is no consideration. B

indorsed it to C for consideration. C, then to D. What is

Ds status as holder for value?

D is a holder for value with respect to A, B, and C

because C gave value. A and b are parties who

became bound prior to the value given.

Rule on holder who has a lien on the instrument: He is a holder for

value only to the extent of the lien.


19/71

o Company appealing a lost case posts supersedeas bond (ex.

P500,000). Surety company asks for collateral (ex. cash, time

deposit, money market placement, treasury bills, etc.)

o The surety company is a holder for value to the extent of

P500K, even if the company issued a certificate of time deposit

negotiable for P1M.

Absence of consideration is a matter of defense against a person not a

HIDC (personal defense)

Partial failure of consideration is a proportionate defense. Somebody

issued a check for P20000 for 10 sacks of rice. The check bounced.

The seller however only delivered 5 sacks of rice. HELD: He can only

sue for P10000

Want of consideration between drawer and payee cannot be invoked as

defense of drawee who accepted a BOE (Cornell)

o A drew a BOE for the amount of P10M in favor of B, the

payee, in exchange for 10 cars. B only delivered 5 cars.

o [Same facts] X, the drawee, did not accept. Can A launch

the defense of partial failure of consideration against B?

Yes. Want of consideration is a defense against the

payee.

o [Same facts] X accepted. Can X refuse to pay on account

of partial failure of consideration?

No. The acceptor cannot use want of consideration

as defense. By accepting, he admits authority of the

drawer to draw the instrument, and that he will pay.

Accommodation parties

o Signs as party but does not received consideration or value

therefore, from the underlying contract. Only lends his credit.

Liable to a holder for value, even if the holder for

value knowing him as merely an accommodation

party at the time that holder took the instrument.

o Ex. Some banks try to get borrowers to get surety companies

to sign borrowing agreements. Surety companies charge

premiums for signing as co-makers. The surety company, not

receiving any part of the proceeds, is deemed an

accommodation party.

Clark:But note that independent consideration for the

surety/accommodation is not an absolute prerequisite.

The consideration that supports the surety is the

same consideration for the original obligation.

Jose:

o Dispute over parcel of land. Decided to settle. The other

partys lawyer, Beltran, helped settle by issuing a company

check (check of a corporation, signed by the President, and

countersigned by the VP). Mrs. Jose sued the corporation.

HELD: Here, the issuance of the check was ultra vires. It was

not pursuant to the corporations business. The client of


20/71

Beltran was supposed to pay, not the corporation. Sue agents

for acting in excess of authority. As a general rule: a

corporation cannot be an accommodation party to an

instrument, because there is no business purpose to such

[unless that is the business of the corporation].

Prudencio: (JJ doesnt agree)

o Construction project. Borrowed from PNB for working capital.

The bank required two other signors. The firm got the

Prudencio spouses who issued checks. The project was

failing. PNB agreed to release part of the security money to

help the project. But the project died anyway. PNB sued

Prudencio spouses. HELD: Prudencio spouses are

accommodation parties. The court held that PNB is not a

holder in due course, because it knew that the spouses did not

receive consideration. When PNB released a portion of the

money, it was in BF.

o JJs comment: the law says Holder for value not HIDC. You

cannot claim PNB was in bad faith when it released the money

because the project was already failing. PNB took a risk,

rather than ensure the certain failure of the project, the

released funds could have improved the project.

o Sec. 52: definition of HIDC point in which a person must be is

in GF is when he tookthe instrument. The release of the funds

happened long after.

o SO IF YOU FOLLOW THE IMPORT OF SEC 29, which

makes accommodation parties liable to holders for value,

then the Prudencio spouses should pay PNB because PNB is

a holder for value!!!

Maniego:

o X was exchanging a post-dated check for cash to the

disbursing officer of AFP. AFP asked Y, Xs sister, to sign as

accommodation indorser. The check bounced. Y was

acquitted for conspiracy charges, but was held civilly liable.

Correct? HELD: Yes. Thats what an accommodation party is

tasked to do when the check bounces, she pays.

Negotiation

When a bearer instrument is indorsed although unnecessary, but it still

ultimately negotiated.

o See Caltexcase. When pledging a NI, there are no specific

provisions. Fall back on the NCC. Must comply with

requirements of putting it in a public instrument and

indorsement.

Indorsement must appear on the instrument itself.

o Or to a paper attached to it

Indorsement must be of the entire instrument.

o Indorsing only part of the amount will make it cumbersome.

o Prohibited to indorse to 2 or more indorsees severally. Ex: A

check for P100K is negotiated to Jose Cruz for 50K and

Manuel Santos for P50K.


21/71

o PARTIAL indorsement is treated under law as an assignment.

It is subject to personal defenses.

o EXCEPTION: When it has been paid in part (ex. on

installments)

Types of indorsements:

o Special specified person to whom it is being indorsed

o Blank does not name any person

Indorsement of an order instrument in blank can

convert the indorsement into a special indorsement by

writing his name

This ensures that the order instrument does not

become a bearer instrument

Ex. A issued a PN to B or order for P10K. B

indorses it to C, but in blank. What can C do?

C can insert To C over the signature to

keep it an order instrument.

C CANNOT put To C, waiving notice ofdishonor. The contract must be consistent

with the tenor of the indorsement

Types of restrictive indorsements

Negotiability Passing of

title

Consideration

presumed

Defense

available

Pay to Jose X Yes Yes X, because

Cruz only indorsee is

a HIDC,

defenses

against

indorser

cannot

apply to him

To Jose

Cruz, for

collection

only (as

agent only)

Yes, but

subject to

same

restriction

that he only

holds it for

collection

X, because

the

indorsee is

a mere

agent of the

indorser

X, because

there is no

transfer of title

Yes,

defenses

against

indorser can

be raised

against

indorsee

because he

is just anagent

To Jose

Cruz, as

trustee for

Glenn

Tuazon

(indorsee

named as

trustee)

Yes, but

subject to

same trust

Yes Yes, because

there is

transfer of title

X, because

title

transfers

Rights of indorsee in restrictive indorsement:

o A) collect payment

o B) bring action indorser could bring

o C) transfer rights, if allowed to do so


22/71

Qualified indorsement

o Done by writing without recourse although the instrument is

still negotiable

o This can be done if the instrument will fall due for a long time

(ex. 5 years), and the indorser does not want to be insecure for

such a long time.

o But qualified indorser still has some warranties under Sec. 65;

Genuine as to what it purports to be

(ex. not forged or materially altered)

Warrants his valid title

All prior parties have capacity to contract

That he is not aware of any fact that makes the

instrument valueless

(ex. that the maker is insolvent)

o Ex. A issues a PN to B or order for P50K. B indorses to C,

then C to D. D indorses to E without recourse.

Can E collect from D?

No. The indorsement is qualified.

If As signature turned out to be forged, can E

collect from D?

Yes. Because he warranted that the

instrument is genuine as to what it purports

to be.

If D turned out to have forged Cs indorsement to

him, can E collect from D?

Yes, more so. He warranted his valid title to

E.

Conditional indorsement

o The maker (or acceptor) may disregard the condition because

the maker made an unconditional promise to pay. The

indorser cannot change the original obligation

o The maker can also say lets wait and see if the condition is

fulfilled

o If the maker pays, but the conditioned turned out to be

unfulfilled after, the remedy of the conditional indorser to run

after the indorsee to get back the money. The conditional

indorser cannot run after the maker/acceptor because the M/A

has every right to dispose of his obligation while he feels

solvent.

Signing of an instrument payable to bearer

o [wait for discussion on Sec 65]

o It can still be indorsed through mere delivery


23/71

o But the special indorser is only liable to those who can make

title through his indorsement

Payable to two or more payees

o All must endorse

o But if they are partners, there is mutual agency

Instrument payable to cashier or fiscal officer

o Assumed that the instrument is payable to the corporation he

represents

If name is misspelled

o Must indorse the instrument according to the misspelled name,

because other parties will not know that there was a mistake

made

o If he wants, after signing as the misspelled name, he can sign

his real name, so it will appear wrong name indorsed to real

name

Indorsed as an agent

o Must state that he is negotiating as an agent, and disclose the

principal, and that he is duly authorized

If there is date attached to the negotiation

o Presumed to be correct, but rebuttable

o If no date, the negotiation is presumed to have been done

before it was overdue

Useful to establish HIDC

Indicates a place

o Law of that country will govern as to questions of indorsement

Not every restrictive indorsement will destroy negotiability

o Only that in subsection A will destroy

o Crossed check is still negotiable

Can strike out an indorsement not needed for his title

o Example bearer instrument: can strike out indorsements B to

E

If its an order instrument, can E strike out B?

No. Because it is payable to the order of B.

You cannot take him out, or else, E cannot

draw title to the instrument.

o ABCDE. E cancels the indorsement of C to D. He

loses the right to run after C. D is also discharged, because D

lost his chance to run after C.

o

o RULE: The indorser who is struck out and ALL indorsers after

him are eliminated

Ex. If there is indorsement from A to Z, and you

cancel C, persons C to Y are discharged.


24/71

Instruments transferred without indorsement:

o Transferee will only step into the shoes of the transferor

o So defenses against transferor apply to the transferee too

o But the transferee can compel the transferor to indorse it

BUT in determining whether he is HIDC, the

reckoning point is that time of indorsement

Ex. Did not know necklace was fake at time of

transfer; knew it was fake at time of indorsement = not

HIDC

Indorsement to a prior indorser

o A-B-C-D-E-B

o Can B run after C, D, and E?

No. Because they in turn can run after B too!

There is compensation under law. The law will not

allow them to run around in circles.

Rights of the Holder

Rights of a holder

o Can sue in own name

o Payment in due course discharges the instrument

Payment at or after maturity is in due course, and

without notice his title is defective

Sec 52 Holder in due course [very important]

o Requisites:

1. Instrument is complete and regular on its face

2. Must have become a holder before it was overdue

and without notice of prior dishonor, if so

3. Took it in GF and for value

4. When he took, no notice of infirmity in instrument or

defect in title of the indorser

This elaborates #3

Defect in title of indorser = if he took it

through unlawful means, il legal

consideration, or negotiated it in breach of

faith

Fraud ex. issuing it for a fake ring

Duress ex. ransom money

Unlawful means ex. stolen check

Illegal consideration ex. issued for

marijuana

o Rule on instruments payable on installments:


25/71

Status on payment Knowledge Effect

An installment has not

been paid and there is

no acceleration clause

Holder is aware HDC as to installments

not due on the face of

the instrument

An installment is not

paid and there is an

acceleration clause

(automatic)

Holder is aware Not a HDC



acceleration clause

(automatic)

Holder is not aware HDC as to instal lments


the instrument



optional acceleration

clause

Holder not aware of the

exercise of this option

HDC as to installments


the instrument



optional acceleration

clause

Holder is aware of its

exercise

Not a HDC

A holder must be aware that something is wrong, but chose not to

investigate further as to not be a HDC. The test:

o

Did he take it? Was is honest for him to take the instrumentunder these circumstances?

Gatchalian:

o X issued a crossed check to Y, in order to buy a car from Z.

However, Y took the check and paid it to ABC hospital, and the

value of the check was greater than his bill to ABC hospital

(which gave change). X stopped payment. ABC sued X. X

launched defense of failure of consideration.

o Issue: is ABC a HDC?

o No. Since the check was crossed, it can only be deposited.

ABC should have inquired as to the title of Y, but it did not.

Similar case: State Investment Houseand Bataan

GENERAL RULE: If the checks are crossed, the taker

must inquire as to the nature of the indorsers title

Banco Atlantico:

o X paid Y a check, drawn against ABC bank. Y altered the

amounts. Y deposited it in DEF (her bank). Y told DEF not to

present the check for payment right away, even if it was

already due, and to let Y to draw the amount anyway. The

alteration was discovered. ABC refused to pay. DEF sued to

recover.

o Issue: is DEF a HDC?

o No. The circumstances show that the check was already due

but Y asked DEF not to present it for payment yet. And DEF

allowed Y to withdraw even if the check has not been cleared

yet.

Mesina:


26/71

o X left a cashiers check (issued by ABC bank) payable to Xs

order. Y stole it and indorsed it to Z. ABC refused to pay. Z

sued.

o HELD: Z was not a HIDC because Z refused to explain how

the check was indorsed to him.

o JJ thinks its better to use forgery as the theory of this case. Y

forged Xs indorsement. But the court used HDC anyway.

Stelco:

o The claimant received a check that was not indorsed to it by

the payee, and the check had a notice of prior dishonor due to

DAIF (drawn against insufficient funds). Claimant is not a

HDC.

Salasand State Investment House (2):

o In both cases there was lack or failure of consideration

between the maker/drawer and payee of the NI. In one case, it

was merely issued as security, and in the other, the car

delivered had the wrong chassis number. But in both cases,

the payee already indorsed the check to another person.

Those persons are HDCs and the defense of failure/lack ofconsideration does not vest.

May a payee be a HDC?

o Yes, because the law simply provides holder. A payee is a

holder, too.

(53) Negotiation of an instrument payable on demand after an

unreasonable length of time the holder is not a HDC.

o Consider the nature of the instrument, customs, and particular

facts

(54) A transferee who receives notice of infirmity before he has paid the

amount agreed for the instrument is a HDC only to the extent of the

amount paid by him.

o Ex. X issued a post-dated check to Y with value of P100K,

and X told Y to just pay him P80K right away because X could

not wait for the maturity of the check. Y has only paid P40K so

far. Then Y found out that the check was issued for a fake

ring. The check was presented but it was dishonored. Y suedZ, the drawer. Can he collect?

o HELD: Yes, but only to P50K, since that is half the value of the

check, and Y only paid half of the agreed consideration. He is

a HDC only to the extent of half the check.

Rights of HDC:

o 1. Sue in own name and receive payment

o 2. Free from personal defenses

o 3. May enforce payment against all parties liable thereon

o Exception: when he cannot recover full payment

37 restrictive indorsement [GT: I dont know why.]


27/71

Maybe JJ meant qualified indorsement under

38?

54 notice before full amount is paid

124 when materially altered, a HDC may still

enforce against the maker/drawee according to the

original tenor of the instrument

General rule: the instrument is avoided as to

those not party to the alteration or did not

indorse it

o But not everyone can invoke real defenses against a HDC.

For instance, an indorser warrants an instrument is genuine in

all respects it purports to be. Also, an acceptor warrants the

authority of the drawer to pay.

Personal defenses Real defenses

Theres a contract with some

inequitable or iniquitous fact behind

it

No contract because an element is

missing; or void against public policy

Voidable contract Void contract

Ex: no consideration, undelivered

complete instrument, acquired by

force/i llegal means, i llegal

consideration, negotiation in breach

of faith, mistake, ultra vires act of

corporation

Ex; material alteration (so the

consent is not anymore to this

instrument); undelivered incomplete

instrument (no consent); forgery (no

consent); minority (lack of capacity)

Not applicable to HDC Applicable to HDC

Personal defenses are available against a non-HDC. This does not

mean the non-HDC cannot collect. It just means that personal defenses

may be raised against him.

(58b)IMPT. Shelter Principle (GT)

o What it simply says is that a holder who (1) derives title from a

HDC (2) and is not a party to the illegality or fraud has the

same rights as the HDC as to the prior parties to the indorser,

even if he is not.

o Ex. A was induced by B through fraud to issue a PN to B or

order. B C, who was NOT aware of the fraud (HDC). C

D who was aware of the fraud but not a party to it. What is the

effect?

D is a holder in due course as to the parties prior to

the indorser(A and B)

What if D indorses it to E, who is not an HDC?

Since E derives title from D, who is not an

HDC, E does not have the rights of an HDC.

o There can be no curing. So D cant indorse the instrument to

F, an HDC, and have it re-indorsed back to him to cure his

title. He resumes his position as not a HDC.

PRESUMPTION:

o General rule every holder is a HDC


28/71

o Exception if it is shown that the title of the negotiator is

defective, then the holder has to prove that either the holder or

the negotiator is a HDC

o Exception to the exception the exception does not apply to a

party that has become bound to the instrument prior to the

acquisition of defective title

Ex. A B C D E. D swindled C, then indorsed

to E.

When E runs after A, he is not required to

prove that he is a HDC because A was

bound to the instrument before the defective

title occurred.

Fossum:

o X issued a check to Y, a HIDC. Y negotiated to Z, which was

not a HIDC (it was aware of the failure of consideration

between X and Y). Z sued X to collect. X refused and raised

personal defense of lack of consideration. What is the

implication?

The burden of proof shifts upon Z to prove that eitherZ or Y is a HIDC. In this case, it failed to do so.

In this case, Z loses the presumption of being HDC

because Ys title, as negotiating party, is defective. Y

has no benefit of the presumption because it is not a

holder anymore.

Liabilities of parties

Party Obligations Warranties

Maker Pay according to tenor 1. Existence of payee

2. Capacity of payee to

indorse

Drawer If dishonored, and

process of dishonor

completed: 1. He will

pay the amount to

holder, 2. Or to a

subsequent indorser

who pays for it

1. Existence of payee

2. Capacity of payee to

indorse

3. On due presentment,

it will be accepted/paid

according to its tenor

Acceptor Pay according to tenor

of acceptance

1. Existence of drawer,

2. Genuineness ofdrawers signature

3. Drawers capacity

and authority to draw

4. Existence of payee

and capacity to indorse

Qualified indorser or

indorser by delivery

1. Instrument is

genuine and is what it

purports to be

2. He has good title

3. All prior parties had

capacity to contract

4. Has no knowledge of

any fact that would

impair the instrument


29/71

General indorser Either:

1. Upon due

presentment he will

accept/pay according

to tenor

2. Or if DH, he will pay

the amount to the

holder, or to a

subsequent indorser

compelled to pay it

1. Instrument is

genuine and is what it

purports to be

2. He has good title

3. All prior parties had


4. The instrument is

valid and subsisting at

the time of his

indorsement

Liability of Maker

o Araneta: X issued a PN to Y. Y collected, by X failed to pay.

He lodged the defense that he used the money to pay for hissick daughters expenses, and his daughter is a beneficiary of

a trust administered by Y.

o HELD: X must pay. He made an unconditional promise to

pay. What he did with the money is none of the courts

business.

Liability of drawer

o Is merely secondary liable only if the instrument isdishonored.

o He can put without recourse to limit his liability.

o Cebu International Finance v. CA:

D issued a check to P, drawn against BPI. P

presented for payment, and BPI debited Ds account.

However, P was unable to receive the money

because BPI withheld payment [pending investigation

of some anomalies]. P sought to collect from D.

HELD: D must pay, even if his account has already

been debited. He warranted that P will be paid, and if

not, he will make good the check.

Liability of acceptor

o X issued a check for P4000 to Y. Y indorsed it to Z. Z

altered the amount to P40000, and negotiated to H. H

presented it for acceptance to E. E accepted it. For how

much can the check be enforced against the acceptor?

View 1: P40000 because that is the tenor of the

acceptance.

View 2 (better view): Acceptance is assent to the

order of the drawer (132), which is just P4000. He did

not consent to P40000, since there must be

knowledge. (124) In fact, for a HDC, even if there is

alteration, he can enforce payment according to the

original tenor.

o Acceptor admits existence of drawer because without the

drawer, the BOE cannot exist. He admits authority of the

drawer to draw.

o Acceptor admits existence and capacity of payee to indorse,

because the instrument is meant to circulate.

o Acceptor does not admit signature of indorser.


30/71

Far East Bank:

o Someone wanted to buy jewelry in the amount of 200k. He

had a draft for 300+K from Land bank. The jewelry store

accepted the draft but set aside the jewelry. Deposited the

check with account in FEB. Landbank paid. Being cleared,

the jewelry store guy delivered the jewelry to the buyer, and

even paid the buyer change for the 100K difference. Later,

Landbank told FEB that the amount was altered from 30 pesos

to 300K. FEB returned the 300K to Landbank and debited the

account of the jewelry store. FEB sued for the difference

against Landbank.

o HELD: FEB cannot collect. The provision on acceptance

applies to payment. Since the tenor is that it is for 300K pesos,

Landbank bound itself to pay that amount. FEB should not

have returned the money to Landbank and debited the account

of the jewelry store. [Huh? Read again.]

o JJ: the better view might be that a drawee who pays/accepts a

draft must be bound to pay the higher amount

Acceptance is always inseparably linked to the order.

Sec 61. Sec 139 acceptance assents to the order of

the drawer. There is nothing said that the acceptor

warrantsthat the amount accepted is the same tenor

of the bill, as drawn. Consent should imply

knowledge.

If the acceptor was deceived, it should not be

bound to an amount not in the original tenor.

The acceptor cannot recover the amount from the

payee on the ground that the drawers signature is

forged.

Sec 64 irregular indorser

o He signs in blank before delivery. Is actually an

accommodation party

Must be an additional party (not a regular party

signing again will not increase the credit value of the

check)

o A (X irregular indorser) B C D E:

X is liable to B, C, D and E.

RULE: liable to all subsequent parties. (If payable to

the maker or drawer or bearer, he is liable to all

parties subsequent to the maker or drawer)

What if X indorsed for the accommodation of B?

X is liable to C, D, and E.

If for the accommodation of the PAYEE(example if here, for the accommodation of

B), he is liable to all parties subsequent to

the payee.

o He is called such because you would normally expect the

payee as the first signature there. But here, the irregular

indorsers signature is found there first.


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o P v. Maniego: accused had his sister indorse a stolen check

before the payee did. The law says

Sec 65 warranty where negotiation by delivery

o See the list of warranties in the law [see table]

o Person negotiating by delivery only liable to the person to

whom he delivered the instrument. Not liable to subsequent

parties

o Unlike a general indorser, a qualified indorser does not warrant

that the instrument will be paid. He is liable only if the maker

or acceptor is insolvent and he is aware of that fact (since

here, there is a breach of warranty).

o NOTE: SO IN GENERAL, a qualified indorser or one

negotiating by delivery DOES NOT ANSWER FOR

SOLVENCY. It only warrants the four listed warranties and is

liable for breach of such. Examples:

Breach of warranty 1: the instrument is forged

Breach of W2: He stole the NI

Breach of W3: Prior party is a minor

Breach of W4: Knew that M/D was insolvent; or that

there was failure of consideration

o Underlying this principle same as Statute of Frauds. An

undertaking to answer for the debt of another must be in

writing to be enforceable. He must be only liable to the person

he dealt with

Sec 66 liability of general indorser

o Same as first 3 warranties of qualified indorser

o Last he warrants that the instrument is valid and subsisting

o If maker is insolvent, even if the indorser was not aware, he is

liable.

o Chartered Bank:

X deposited (through indorsement) a check with ABC

bank, drawn against DEF bank. X was able towithdraw money although not cleared. Eventually, the

check bounced. ABC asked for return of money.

HELD: X must pay. When you indorsed, you

warranted. If for any reason (whatever reason) the

drawee does not pay, you are l iable.

o BPI v. CA: Somebody had a managers check purportedly

issued by American bank payable to cash. But he did not have

a dollar account. Asked a friend if he could accommodate him

have the check deposited in the friends dollar account.

Deposited the check there. They agreed that after clearance,

the first friend would withdraw. The friend gave the first guy a

withdrawal slip duly signed. When the first guy returned,

although the check had not been cleared, BPI (deposit bank)

paid. But American bank dishonored it. BPI sued.


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HELD: The proximate cause of the loss is the bank

itself. Why did it allow the first guy to withdraw when

the bank was not cleared. The depositor even kept

the passbook: did not give it to his friend.

o RCBC: There is a 45-day holding period if the check

deposited is drawn abroad. But RCBC accommodates

employees, allowing them to withdraw right away. The

employee, a mother, received a check, and deposited. Bank

required the employee to indorse the check as an irregular

indorser. She was then allowed to withdraw. Some employee

placed below the indorsement: valid up 75,000 pesos only.

The drawee bank dishonored the check, since the indorsement

was irregular. RCBC asked the employee to return the

immediately withdrawn money.

HELD: RCBC cannot collect. The check was

dishonored because of the partial indorsement made

by its employee. This is why the American bank

dishonored.

o Far East Bank:(see the details above)

It is actually a case of restrictive indorsement (only for

collection). Sec 66 (general indorsement) is not

applicable.

o Signature of indorser was forged. Payee presented the

check for payment to the drawee. It was paid. Payee

signed at the back. Then the forgery was discovered.

Must payee reimburse drawee?

No. It did not indorse the check. The signature is to

acknowledge payment.

o The law mentions that warranties of general indorser

apply only to HDC. Should we follow this?

JJ doesnt think so.

Sec 67 indorsed when not required incurs liabilities of an indorser

o Whether general or qualified

Sec 68 indorsers are presumed to be liable in the manner in which

they indorsed

o

Parole evidence however may be accepted to prove otherwise

o For example A B C, C can prove that while Bs signature

appears first, C indorsed it to him

Sec 69 indorsement by agent

o If he fails to disclose that he is just an agent, or fails to disclose

his principal, he will be liable as an indorser

Quiz up to section 69

Presentment for payment

Sec 70

o Presentment for payment not necessary to charge the primarily

liable person

Maker and acceptor


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If the instrument is payable in special place and he is

able and willing to pay there at maturity = such

willingness is equivalent to tender of payment

What does this imply?

o If the person primarily liable is there

on the place where it is payable on

the stated time, holder loses right to

recover interest due subsequent to

maturity + costs of collection

o BUT he does not lose the right to

get paid

o But for those secondarily liable (indorsers and drawer) there

is need for presentment for payment

What if the holder does not make presentment to

the person primarily liable?

Those secondarily liable are discharged

But he can still go after the person primarily

liable

So, the bottomline: the instrument must be

presented for payment on date it is due to

charge the secondarily liable persons see

Sec. 71 for special rules on when an

instrument must be presented

o What is presentment?

Production of BOE to drawee for acceptance or

payment, or acceptor for payment, or of a PN to the

maker for payment

o What constitutes presentment?

1. Personal demand for payment

2. Readiness to present the note and surrender it if

paid

[Step-by-step guide on presentment for payment]

o Step 1: Presentment for acceptance required if

1. BOE is payable after sight, or acceptance isneeded to fix the maturity of the instrument

2. BOE expressly requires presentment for

acceptance

3. BOE payable elsewhere apart from residence or

place of business of drawee

o OTHER OPTION May choose to negotiate it within a

reasonable time

o Consequence: will discharge drawer and all other indorsers

o EXCEPTIONS no need to present if/or treated as dishonored

if:

1. Drawee is dead, has absconded, fictitious, or lacks



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2. Presentment cannot be made even after

reasonable diligence

3. Although presentment is irregular, acceptance was

refused on some other ground

o Step 2: Give notice of dishonor by non-acceptance to

secondarily liable persons

EXCEPT, no need to give notice: if instrument was

made/accepted for his accommodation and he has no

reason to expect the instrument will be paid if

presented

AND will not prejudice rights of HIDC after omission to

give notice of dishonor

IF foreign bill,

Protest for non-acceptance or protest for

non-payment needed

Except

o 1. If instrument was made/accepted

for his accommodation and he has

no reason to expect the instrument

will be paid if presented

o 2. Delay is excused for fortuitous

circumstances

Except: will not prejudice rights of HIDC after

omission to protest

o Step 3: Give notice of dishonor by non-payment to secondarily

liable persons (if dishonored by non-payment)

See notes above

EXCEPT: When presentment for payment is excused

1. Drawee is fictitious person

2. Presentment cannot be made even after

reasonable diligence

3. Waiver of presentment, express or implied

Sec 71

o Instrument not payable on demand

Make presentment on date due

o instrument payable on demand

Must be presented within reasonable time from issue

If its a BOE, you make it after a reasonable time after

last negotiation

What does negotiation here cover?


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o Negotiat ion for value, not

negotiation for collection between

banks

Sec 72 when presentment is sufficient

o REQUISITES:

1. Made by holder or agent

2. Reasonable hour on business day

3. At proper place defined

4. To person primarily liable

Is absent/inaccessible to any person found

in place where presentment is made

o There is a wife who presented a negotiable certificate of time

deposit. Bank refused to pay her because they paid the

husband. HELD: it was not presented by the husband, but the

wife. Bank should pay the wife.

Sec 73 proper place for presentment

o If there is a stipulation where presentment must be made, it

must be made there.

o If none provided, but address of maker is stated, go there

o If none provided, to usual place of business/residence

o Wherever he may be found/last known place of

business/residence

Sec 74

o NI must be exhibited to the person from whom payment is

demanded

o So he can check genuineness

o This is why telephone as demand is not allowed

o First Pacific (?) Check negotiated by car dealer to financing

company. When the instrument not paid, company sued

maker and indorser. Indorser said he was discharged because

there was no proper presentment for payment. HELD: Letter

of demand is not sufficient. Law requires that the instrument

be shown to the maker. Therefore, presentment not valid and

indorsement is discharged.

o Failure excused on two grounds:

1) Instrument was lost

2) payment refused on some other ground

Ex. no funds, and not because it was not

shown

Sec 75

o Presentment where instrument payable at bank must be

made during banking hours. Law assumes that the bank will

be the source of the funds.


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o But if presentment is made beyond banking hours, it is valid if

the funds will not come from the bank, as long as it falls on the

date of maturity.

Sec 76-78

o Applies when principal debtors is:

Dead

Liable as partners

Liable as Joint debtors

o If there is an address stipulated, pay there.

o If dead, give to executor/admin

If there is one, and he can be found with reasonable

diligence

o If partners, to any of the partners

Even if dissolved already

o If joint debtors, to all of them

When presentment is not required to charge those secondarily liable:

o DRAWER presentment not required to charge the drawer

when there is no reasonable expectation that the drawee or

acceptor will pay the instrument

Ex. knows there are no funds or there is stoppage of

payment

o INDORSER when instrument was made/accepted for

indorsers accommodation, and indorser has no reason to

expect it will be paid if presented

Fortuitous event excuses delay in presentment

Presentment for PAYMENT excused if:

o 1. Cannot be done even after reasonable diligence

o 2. Drawee is fictitious person

o 3. Waiver of presentment express or implied

When is an instrument dishonored by non-payment?

o 1. Duly presented for payment and payment is refused or

cannot be obtained

o 2. Presentment is excused and it is overdue and unpaid

What is the effect of dishonor by non-payment?

o Under the law, the moment it is dishonored, there is

immediately a right of recourse against those secondarily

liable. NO NEED to go to the primarily liable.

Sec 85

o If payable in a fixed period, it must be paid on that day

o If on a Sunday or holiday, then go to next business day

o If on a Saturday


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On next business day. Because even if some offices

hold business on Saturday, they are usually half day.

The law wants a whole business day

Except instruments payable on demand can

present before 12 noon, Saturday, if it is not a holiday

o Contrast:

Ex. Payable on Friday. But it was declared a public

holiday. So it becomes Saturday. But the law says

present it on next business day. So Monday.

Ex. BUT if it is payable on demand then the

maker/acceptor MUST pay provided it is presented on

working hours of Saturday.

Sec 86

o Time exclude first day, include last day

Sec 87 when instrument is payable at a bank

o Implied: that it is an order to the bank to pay for account of the

principal debtor

o First National bank:PN payable at FNB. Maker had sufficient

funds. But holder did not show up at day of maturity. Dilly-

dallied then the maker became insolvent. Had he shown up

by then, he would have been paid. HELD: No. The fact

remains that he is the maker, so he is primarily liable, and

should pay.

o N.B. Remember, failure to make proper presentment only

discharges those secondarily liable. The primarily liable

person is still liable, although the holder may not claim interest

subsequent to maturity and costs of collection.

Sec 88 Payment in due course

o 1. At or after maturity

o 2. To the holder

o 3. By the debtor, in GF and w/o notice that the holders title is

defective

Notice of dishonor

Sec 89 dishonor

o Give notice of dishonor

o Any party may be compelled to pay it to the holder with right of

reimbursement

o A B C D E

D giving notice to B will benefit E

o Notice given by a holder benefits all subsequent holders and

prior parties that have right of recourse against the one given

notice against

o Notice may be given by holder himself or agent of the holder.

Sec 90 Who can give notice of dishonor


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o 1. Holder

o 2. Agent of holder

o 3. Party to the instrument who may be compelled to pay the

holder, but only to those other parties he may seek

reimbursement from

o 4. Agent of such party

o What about strangers?

Cannot give notice, except as agents

o Who is considered a stranger?

Party discharged from the instrument

Person primarily liable who dishonored the instrument

Sec 91

o Notice may be given by a party or an agent

o Agent need not be authorized by the party

Because this is beneficial

o If the agent wants to give notice, on a instrument dishonored

on Monday, two options:

A) notify principal

On Tuesday

Principal has until Wednesday to notify

secondarily liable parties

B) notify parties who are secondarily liable

o If agent receives notice of dishonor, he must be authorized

Because this is prejudicial

Form of notice:

o In writing or oral

As long as it sufficiently describes the instrument and

indicates that it has been dishonored

Misdescription does not vitiate notice unless the party

to whom it is given is in fact misled

o Personal or through mail

o If written, need not be signed

In sufficient written notice may be supplemented by

verbal/oral communication

Rule as to jointly liable parties:

o If partners?

Notice to one is notice to all

o If joint payees or joint indorsees who indorse?

Sec 68 treats them as solidarily liable


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o If joint drawers or joint accommodation indorsers, and

others not covered by 68?

Give notice to all

Sec 103 and 104 time within which notice must given

o Know the difference in rules where parties reside in the same

place (103) or different places (104)

o SAME PLACE:

1. If given at place of business before close of

business hours the next day

2. If given at residence before usual hours of restthe next day

3. If by mail sufficient to reach him the next day

o DIFF PLACES:

1. If by post office in time to go by mail the next day;

if no mail at a convenient hour that day, the next mail

2. If not by post office within the time it would have

been received in due course had it been sent by post

office

o N.B. This same time is counted again, after a party receives

notice of dishonor, to give that party a chance to give notice to

antecedent parties

What is the effect of miscarriage in mails?

o Sec 105 if notice was duly addressed and deposited in the

post-office, due notice is deemed given

o What is deposit in the post office?

Deposited in any branch of the P.O.

Deposited in any P.O. box

Sec 108: WHERE notice must be sent

o 1. Post office nearest to residence or where he is accustomed

to receiving letters

o 2. To place of business or residence

o 3. Place where he is sojourning

o If notice is actually received, although not according to

these provisions, what happens?

It is still valid

When can there be waiver of notice of dishonor?

o 1. Before actual time for giving it comes

o 2. Or after failure to give it

o Can waiver be implied?

Yes.

Who is affected by a waiver in an instrument?

o If written on the instrument all the parties


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o If written over a signature just that person

Waiver of protest

o Includes presentment and notice of dishonor (steps to hold a

person secondarily liable)

Sec 114 when notice need not be given

o When the drawer and drawee is the same person

Ex. managers check

o Drawee is fictitious person

When is notice of DH not needed to be given to drawer?

o 1. Drawer and drawee are the same person

o 2. Drawee is fictitious person or has no capacity to contract

o 3. Drawer is the person to whom instrument was presented for

payment

Ex. C went to the office of X, the drawee, but he was

not there. But R, the drawer, who was the office

manager, was there. And the drawer dishonored.

o 4. Drawer has no right to expect that drawee or acceptor will

honor

Ex. X withdrew her money from her bank account and

issued a check to cover for expected proceeds of

jewelry she had to sell. She failed to sell the jewelry.

The check was in the hands of Y who had ABC

investment house rediscount it. The check bounced.

HELD: X had no right to expect the bank will pay

because she withdrew all her funds.

o 5.

commercial law review jack notes

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