evidence midterm reviewer(2)

8/3/2019 Evidence Midterm Reviewer(2)

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INTRODUCTION

i. Kinds of negotiable instrumentsInstruments are N when they conform to all the reqs in the NIL2 main grps:

o Promissory note: promise to pay money

Other forms:

Certificate of deposit: issued by a bank reciting a deposit

of a certain sum of money, payable at a fixed time or ondemand to the depositor

Bond: evidence of indebtedness issued by a corp, pub orpriv, payable at a definite date in the future, usually for along term

o Bill of exchange: order made by 1 person to anthr to pay money to a 3 rd

person

Check: most commonly used; payable on demand Draft: used in transaxns btwn persons physically remote fromeach other

Order made by 1, addressed to a person having in hispossession funds of such person, ordering the addressee topay the purchase price to another

Bank draft: If made by 1 bank to another

ii. Parties & nature of their liability PN: usually 2 parties

o Maker: prom issor

o Payee: person to whom the promise is made

BOE:o Drawer: person who gives the order

o Drawee: addressee of the order

o Payee: person to whom payment is to be made

Negotiatied/indorsed: when the payee transfers the instrument to anthr bysigning it at the back

o Payee becomes the indorser

o Indorsee: person whom he negotiated it to

Becomes the holder of the instrument

Nature of their liability Primary party: 1 whos absolutely & unconditionally reqd to pay

o PN: maker

o BOE: no person primarily liable to pay until & unless the drawee

accepts the order of the drawer to pay

B4 acceptance, drawee isnt liable & cant be compelled to pay If accepts: drawee becomes an acceptor whos bound to pay

Secondarily liable:o BOE: the drawer & the indorsers

o PN: indorsers

o Liability is conditioned on:

Demand/presentment duly made on the primary party

Primary party dishonors the instrument, & notice of dishonor

given to the 2ndary party

o Indorser enters into 2 contracts:

Hes selling/transferring the instrument to the indorsee

He warrants that hell pay for such when the 2 conds takeplace

iii. Functions of Negotiable instruments

Fxns:o Substitute for money in payment for prop or services

But its validity as a means of payment is conditioned on itsbeing honored

o Means for creating & transferring credito Facilitate the sale of goods

NI: X constitute legal tender, but often take the place of money as a means forpayment

Intl trade: facilitated by the use of a draft

iv. The concept of negotiability

Holder in due course: 1 who took the note in GF & wo knowledge of a failure inconsideration

Possible for a person who acquired a NI to acquire a btr title than his transferorif he fulfills the reqs of a holder in due course (s52)

1 can rely on the face of a NI & need not inquire into past events

NIL aims to encourage facility, convenience & efficiency in commercialtransactions

v. The origin of negotiable instruments

From merchants & traders of the Middle Ages, amng the Florentine & Venetianmerchants

vi. History of the negotiable instruments law

NIL: verbatim reproduction of the Uniform Negotiable Instruments Law of USapproved (in the US) in 1896

This statute was patterned after the English Bill of Exchange Act 1882

vii. Applicability of the negotiable instruments law

NIL applies only to negotiable instruments conform to s1

If any req is absent, governed by the gen law on contracts S196: Cases not provided for in act. - Any case not provided for in this Act

shall be governed by the provs of existing legislation, or in default thereof, bythe rules of the Law Merchant.

Law Merchant: Sys of law wc consists of certain principles of equity & usages of

trade wc gen convenience & a common sense of justice have established, toregulate the dealings of merchants & mariners in all commercial countries

CHAP1: REQUISITES OF NEGOTIABILITY

S1: FORM OF NEGOTIABLE INSTRUMENTS An instrument to be negotiablemust conform to the ff reqs:

a) It must be in writing & signed by the maker or drawer;b) Must contain an unconditional promise or order to pay a sum

certain in money;c) Must be payable on demand, or at a fixed or determinable future

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d) Must be payable to order or to bearer; ande) Where the instrument is addressed to a drawee, he must be named

or otherwise indicated therein w reasonable certainty.

S184: PROMISSORY NOTE DEFINED. A negotiable promissory note w/inthe meaning of this Act is an unconditional promise in writing made by 1person to another, signed by the maker, engaging to pay on demand, or ata fixed or determinable future time, a sum certain in money to order or tobearer. Where a note is drawn to the makers own order, it is not completeuntil indorsed by him.

S126: BILL OF EXCHANGE DEFINED. A bill of exchange is an unconditionalorder in writing addressed by 1 person to another, signed by the persongiving it, requiring the person to whom its addressed to pay on demand orat a fixed or determinable future time a sum certain in money to order or tobearer.

Fact that an instrument dsnt meet the reqs in s1 wont affect its validityo Just not governed by the NIL

1. Written form & signature

s.18: LIABILITY OF PERSON SIGNING IN TRADE OR ASSUMED NAME. Noperson is liable on the instrument whose signature dsnt appear thereon,

except as herein otherwise provided. But one who signs in a trade orassumed name will be liable to the same extent as if he had signed in hisown name.

s19: SIGNATURE BY AGENT; AUITHORITY; HOW SHOWN. The signature ofany party may be made by a duly authorized agent. No particular form ofappointment is necessary for this purpose & the authority of the agent maybe established as in other cases of agency.

In writing:o Includes print written w pen/pencil or typed

Signature: binding whether in 1s handwriting, printed, engraved, lithographed,photographed

o So long as intended/adopted as the signature, made w his authority

o May appear on any part of the instrumento Valid & binding so long as the intention to make the instrument the

makers or drawers is shown

o If placement dsnt show in what capacity the person intended to sign =

indorser

2. Unconditional order or promise to pay

Express promise on the face of the instrument

Mere acknowledgement of a debt = X a promise BOE: words equivalent to an order = sufficient

o Order: command or imperative direction

o Mere request/auth to pay = X an order

o Use of polite words dnt detract from its being an order

When unconditional

S3: WHEN PROMISE IS UNCONDITIONAL. An unqualified order or promiseto pay is unconditional within the meaning of this Act though coupled with

a) An indication of a particular fund out of wc reimbursementis to be made, or a particular accnt to be debited w the amnt; orb) A statement of the transaxn wc gives rise to theinstrument.

But an order or promise to pay out of a particular fund is notunconditional.

To be unconditional: it shld be unqualified When the right is absolute & cant be defeated by a contingency = facilitates the

NIs ability to pass freely from one to another

FUND

Mere indication of a particular fund out of wc reimbursement is to be made, oran indication of a particular accnt to be debited w the amnt = X make the orderconditional

o Refers to BOE: reimbursement & debiting presupposes that an order to

pay has been made

Reimbursement presupposes previous disbursemento If Xstatement of where the disbursement is to be taken from appears,

then the order to pay is unconditional tho the drawee is authorized toreimburse himself from a particular fund, or is ordered to debit the

disbursement to a particular accnt

TRANSACTION Recital of the transaxn dsnt make the promise/order conditional

Info is merely given that the instrument was issued in connection w thetransaxn

Merely identifies the transaxn wc gave rise to the instrument

Fact that the cond appearing on the instrument has been fulfilled won convert itinto a negotiable one

Powell & Powell v Greenleaf & Currier

N isnt affected by a reference wc is:o A recital of the consideration for wc the paper was given

o Statement of the origin of the transaxn; or

o Statement that is given in accordance w the terms of a contract ofeven date btwn the same parties

To destroy negotiability, the reference to a collateral contract must show thatthe oblig to pay is burdened w the conds of that contract

3. Sum payable must be certain

S2: CERTAINTY AS TO SUM; WHAT CONSTITUTES. The sum payable is asum certain w/in the meaning of this Act, although it is to be paid

a) With interest; orb) By stated installments; orc) By stated installments w a prov that upon default in payment of

any installment or of interest, the whole shall become due; ord) With exchange, whether at a fixed rate or at the current rate;

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e) With costs of collection or an attys fee, in case payment shallnot be made at maturity.

An agreement to pay interest dsnt render the sum uncertaino The exact amnt can be computed wo looking beyond the instrument

Certain tho payable in installmentso So long as its stated

o The amnt of ea installment & its due date are fixed in the instrument

4. Payable in money NI are intended to be substitutes for money, so they shld be capable of being

transformed into money

X N if payable in personal prop, shares of stock or gold

Money: X limited to legal tendero Includes any particular kind of money

Instrument contains an order or promise to do an act in addtn to payment ofmoney = X N

o Shld maintain the simplicity of form = necessary for the free use of NI

Order or promise gives the holder an election to req smthng to be dne in lieu ofpayment of money = N

o But if the option to pay money or smthn in lieu thereof is w the

maker/person primarily liable = X N

Incitti v Ferrante N charac of an instrument isnt affected by the fact that it designates a

particular kind of current money in wc payment is to be made

5. Certainty of time of payment

Purpose: to inform the holder of the date when he may enforce payment

B4 such time, he cant compel the maker or acceptor of the bill to pay, unlesstheres a valid acceleration prov

a) When payable on demand

s.7:WHEN PAYBLE ON DEMAND. An instrument is payable on demand -a) where it is expressed to be payable on demand, or at sight, or on

presentation; or

b) in wc no time for payment is expressed.Where an instrument is issued, accepted or indorsed when

overdue, it is, as regards, the person so issuing, accepting or indorsing it,payable on demand.

Ex) I promise to pay Juan Reyes or order the sum of P100 at sight

Ex) I promise to pay Juan Reyes or order the sum of P100

Demand: holder can call for payment anytime

Maker: can pay at any time, refusal of the holder to accept will terminate therunning of interest if any is provided

o But still has to pay the oblig

b) Payable at a fixed time

Ex) I promise to pay Cat or order the sum of P1k on Dec 1, 2007

Only on the date can payment be demanded

If holder fails to demand payment, the instrument is overdue but is still valid &N

o Just becomes a demand instrument

c) Payable at a determinable future time

S4: DETERMINABLE FUTURE TIME; WHAT CONSTITUTES. An instrument ispayable at a determinable future time, w/in the meaning of this Act, wc isexpressed to be payable

a) At a fixed period after date or sight; orb) On or before a fixed or determinable future time spcfd therein;

orc) On or at a fixed pd after the occurrence of a spcfd event wc is

certain to happen, though the time of happening by uncertain.An instrument payable upon a contingency is not negotiable, and thehappening of the even does not cure the defect.

S11: DATE, PRESUMPTION AS TO.- Where the instrument or anacceptance or any indorsement thereon is dated, such date is deemedprima facie to be the true date of the making, drawing, acceptance orindorsement, as the case may be.

S17: CONTRUCTION WHERE INSTRUMENT IS AMBIGUOUS. Where the

language of the instrument is ambiguous, or there are omissions therein,the ff rules of construction apply:

d) Where the instrument is not dated, it will be considered to bedated as of the time it was issued.

d) Effect of acceleration provisions

Option to accelerate the maturity is on the maker

N isnt affected, whether such option is absolute or conditional

Acceleration at the option of the holdero Whether it renders the instrument non-N depends on the nature of the

provo Can be exerd only by the holder upon the happening of a spcfd event

or act over wc he has no control = N

o If right to exer is uncond, the time of payment becomes uncertain =non-N

Acceleration of maturity of the instrument by operation of law dsnt affect itsnegotiability

If maker dies b4 maturity, due date is disregarded bec the holder shld file hisclaim against the makers estate

Utah State National Bank v Smith

Law merchant: clause accelerating due date does nt destroy N

Puget Sound State Bank v Washington Paving Co The making of the notes payable at a certain time, w the reserved power to the

payee to declare them due b4 the stated time of maturity if he deems himselfinsecure, dsnt make them demand notes

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c) The drawee; ord) 2 or more payees jointly; ore) 1 or some of several payees; orf) The holder of an office for the time being/

Where the instrument is payable to order the payee must be named orotherwise indicated therein w reasonable certainity.

A) I promise to pay Cat or order the sum of P100 (Sgd) Phil

B)

o Ex) Pay to the order of myself the sum of P100 (sgd) Cat

To: Phil

o Ex) I promise to pay myself or order the sum of P100 (sgd) Cat

* the payee is the maker but the note payable to the order of themaker isnt complete unless indorsed by the maker 1st

C) Pay to the order of yourself the sum of P100 (sgd) Cat

To: Phil*payee is the drawee & the drawer of the bill is ordering him topay himself

D) Pay to the order of Cat & Phil the sum of P100o Payees are constituted jointly & not in the alternatice

o When N the instrument, bth of them must indorse

E) Pay to the order of Cat or Phil the sum of P100o Payees are in the alternativeo Law dsnt consider the payee as uncertain

o Only 1 may demand payment for the amnt

o Only 1 needs to indorse the instrument

o If payable to the order of A &/or B = alternative

F) I promise to pay to the order of Sec of X Assoc the sum of P100o Payee is certain

o 3 diff interpretations:

Payee is the person wholl be Sec at maturity

Not isnt N, bec until maturity, 1 cant be certain whothe payee is

Payee may be the Sec at the time of the issuance of the note

X desirable bec person conts to be the payee tho no

longer Sec Payee may be the person who is the Sec at any particularmoment

The instrument is a floating promise

Most acceptable since the payee is certain &determinable

If payees name is misspelled or wrongly designatedo Instrument dsnt lose its negotiability

o S43: where the name of the payee is wrongly designated or

misspelled, he may indorse the instrument as therein described,adding, if he thinks fit, his proper signature

o If he can indorse it, this means that even if his name is misspelled, he

can still be regarded as having been otherwise indicated w reasonablecertainty

c. DraweeS128: BILL ADDRESSED TO MORE THAN ONE DRAWEE A bill may beaddressed to 2 or more drawees jointly, whether they are partners or not;but not 2 or more drawees in the alternative or in succession.

A bill may be addressed to 2 or more drawees jointlyo But it cant be addressed to 2 or more drawees in the alternative or in

succession

Bec therell be no certainty as the person to whom the billshld be presented for payment/acceptance

S130: WHEN BILL MAY BE TREATED AS A PROMISSORY NOTE Where in abill the drawer & drawee are the same person, or where the drawee is afictitious person, or a person not having capacity to contract, the holdermay treat the instrument, at his option, either as a bill of exchange or apromissory note.

Holder can treat the instrument as a bill or note

Otherwise, no 1 can ever be made primarily liable on the bill Since the drawer is resp for naming the drawee, its assumed he intended to be

primarily liable Bill names no drawee

o If accepted by a 3rd party: the issuer of the bill cant be held liable but

the acceptor shld be held as a makero The instrument is treated as a note

8. Provisions not affecting negotiability

S5: ADDITIONAL PROVISIONS NOT AFFECTING NEGOTIABITLIY Aninstrument wc contains an order or promise to do any act in addtn to thepayment of money is not negotiable. But the negotiable character of aninstrument otherwise negotiable is not affected by a provision wc

a) Authorizes the sale of collateral securities in case theinstrument be not paid at maturity; or

b) Authorizes a confession of judgment if the instrument be notpaid at maturity; or

c) Waives the benefit of any law intended for the advantage orprotection of the obligor; or

d) Gives the holder an election to require something to be done inlieu of the payment of money.

But nothing in this section shall validate any provision or stipulationotherwise illegal.

An authorization empowering the holder to sell the collateral b4 the maturity ofthe note = non-N

o Bec this in effect grants the holder an option to accelerate the maturity

of the instrument = renders time of payment uncertain

PNB v Manila Oil Refining & By-products Co, Inc

Neither the Code of Civ Procedure nor any other remedial statute expressly ortacitly recognizes a confession of judgment = judgment note

Judgments by confession appeared at common law were considered amicable,

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Disadvs to the commercial world outweigh these considerationso Such warrants of atty are void as against pub policy bec they enlarge

the field for fraudo This is bec the promissory bargains away his right to a day in Ct & bec

the instrument strikes dwn the right of appeal given by lawo Recog of this will brng abt a complete reorganization of commercial

customs & practices & may be a source of abuse & oppression

2 kinds of judgments at common law:o Judgment by cognovits actionem

o Confession relicta verification

Unless auth by statute, warrants of atty to confess judgment are void asagainst pub policy

9. Omissions not affecting negotiabilityS6: OMISSIONS; SEAL; PARTICULAR MONEY The validity & negotiablecharacter of an instrument arent affected by the fact that

a) It is not dated; orb) Does not specify the value given, or that any value has been

given therefor; orc) Does not specify the place where it is drawn or the place where

it is payable; ord) Bears a seal; ore) Designates a particular kind of current money in wc payment is

to be made.

But nothing in this section shall alter or repeal any statute requiring incertain cases the nature of the consideration to be stated in theinstrument.

Bonds issued by a Corp usually bear its corp sealo Forms part of its signature

Date in a bill/note isnt essential to negotiabilityo If not dated & date is necessary to fix the maturity, the law considers

the date of issue as the date of the instrument & allows the holder toinsert the true date

Not necessary to express that the value was rcvd, bec the instrument ispresumed to have been issued for a valuable consideration

Place of payment:o Fixed the place where the holder shld present the instrument for

paymento Impt but not essential

o If no place stated: law says it shld be made at the address of the

person whos to pay if stated

If not state, the place of business/residence of the person tomake payment

10. Rules of constructionS17: COSNTRUCTION WHERE INSTRUMENT IS AMBIGUOUS Where thelanguage of the instrument is ambiguous, or there are omissions therein,the ff rules of construction apply:

a) Where the sum payable is expressed in words & also in figures& there is a discrepancy btwn the 2, the sum denoted by thewords is the sum payable; but if the words are ambiguous or

uncertain, reference may be had to the figures to fix the amnt;

b) Where the instrument provides for the payment of interest, wospecifying the date from wc interest is to rune, the interestruns from the date of the instrument, & if the instrument isundated, from the issue thereof;

c) Where the instrument is not dated, it will be considered to bedated as of the time it was issued;

d) Where there is a conflict btwn the written & printed provs ofthe instrument, the written provs prevail;

e) Where the instrument is so ambiguous that there is doubtwhether it is a bill or note, the holder may treat it as either at

his election;f) Where a signature is so placed upon the instrument that it is

not clear in what capacity the person making the sameintended to sign, he is to be deemed an indorser;

g) Where an instrument containing the words I promise to payis signed by 2 or more persons, they are deemd to be jointly &severally liable thereon.

I, we or either of us, promise to payo When signed by 2 persons, make them solidarily liable

o Fact that the promise is worded in the singular indicates that its indiv

as to ea signer

WE promise to payo Signed by 2 makers creates joint liability

o Rule in Law: in absence of an agreement, debtors are presumed to bebound jointly

Continental Illinois Bank & Trust Co. v Clement

If an instrument worded in the singular is executed by several, the oblig is ajoint & several one

CHAPTER 2: TRANSFER1. Delivery and issuance

S16: DELIVERY; WHEN EFFECTUAL; WHEN PRESUMED - Every contract on anegotiable instrument is incomplete & revocable until delivery of theinstrument for the purpose of giving effect thereto

Delivery: transfer of possession, actual or constructive, from 1 to anthr Wo initial delivery of the instrument from maker to payee = no liab

Delivery shld be intended to give effect to the instrumento Ex) given for safekeeping = X delivery

Valid delivery presumedo Once the inst is no longer in the possession of the person who has

signed it

Can be proved by contrary evidenceo If its w a holder in due course:

Presumption is conclusive, so long as the inst is complete

Issuance of the instrument/issue = 1st delivery

In re Martens Estate

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Note here cant be the basis of a valid claim against the estate unless there wasleg delivery of the sme, during the lifetime of the decedent

2. Negotiation

S30: WHAT CONSTITUTES NEGOITATION An instrument is negotiatedwhen it is transferred from 1 person to anthr in such manner as toconstitute the transferee the holder thereof. If payable to bearer it isnegotiated by delivery; if payable to order it is negotiated by theindrosement of the holder completed by delivery.

S191: DEFINITIONS & MEANINGS OF TERMS - Bearer means the person in possession of a bill or note wc is payable

to bearer;Holder means the payee or indorsee of a bill or note, who is in

possession of it, or the bearer thereof;

Negotiationo The transfer of a NI made in such manner that the transferee becomes

a holder & thus possibly a holder in due course capable of acquiring abtr title to the inst than that of his transferor

o May be for value or by way of gift

o Payable to order: Payee or indorsee in possession of it is the holder

o Payable to bearer: Person in possession of it is the bearer & holder

Transfero Broader term than negotiation

o Includes ordinary assignment & negotiation

o Inst transferred wo negotiation = mere assignment

Transferee is an assignee

3. Method of negotiation

Inst payable to order reqs:o Indorsement by payee/holder

o Delivery to transferee/indorsee

Becomes the holder

Indorsement:o Consists of the sig of the indorser on the back of the inst

o Double significance:

It constitutes a transfer or sale of the instrument to theindorsee/transferee

It signifies the agreement of the indorser to ans for the amntrepresented by the instrument in case of default of the makeror the party primarily liable

Inst payable to bearer:o Can be negotiated by mere delivery

o Common practice: indorse a bearer inst when transferred

o Dsnt impair the negotiation but serves as an addtl secu to the

transferee, since he can hold the indorser liable

4. How indorsement made

a) By signature on instrument or on allongeS31: INDORSEMENT; HOW MADE The indorsement must be written on theinstrument itself or upon a paper attached thereto. The signature of theindorser, wo addtnl words, is a sufficient indrosement.

Allonge: indorsement made on a sep paper

Common law rule:o Allonge can be validly used only when there is no longer any room on

the instrument for further indorsement

Otherwise, the transfer wont be sufficient to constitute the

transferee a holder Shld be attached to the inst

Clark v Thompson, et al

NIL: indorsement must be written on the inst itself or upon a paper attachedthereto

o Law merchant: indorsements to be made upon an allonge, upon a slip

of paper tacked or pasted on the instrument so as to become a part ofit

A written transfer of a note, made on a sep paper to wc it was pinned, therebeing room on the back of the note itself for the transfer, was an assignmentmerely, and not a commercial indorsement

b) In case of joint payees

Inst payable/indorsed to A and Bo Joint payees

o Indorsement by either A or B only wont constitute a valid N

o Unless the 1 indorsing is authorized by the other

Inst payable to A or Bo Payees are merely in the alternative

o Either 1 may validly negotiate the same

c) If name misspelled S43: INDORSEMENT WHERE NAME IS MISSPELLED, AND SO FORTH Wherethe name of a payee or indorsee is wrongly designated or misspelled, hemay indorse the instrument as therein described, adding, if he thinks fit,his proper signature.

Indorsement shld be made by the holder in the manner he was designatedo Otherwise the signature = not a valid indorsement of the inst

5. Indorsement must be of entire instrumentS32: INDORSEMENT MUST BE OF ENTIRE INSTRUMENT The indorsementmust be an indorsement of the entire instrument. An indorsement wcpurports to transfer to the indorsee a part only of the amnt payable, or wcpurports to transfer the instrument to 2 or more indorsees severally, doesnot operate as a negotiation of the instrument. But where the instrumenthas been paid in part, it may be indorsed as to the residue.

Purpose of the prov:o To protect the obligors from more than 1 axn on the instrument

Ex) bill for P100; indorsed P50 to A & P50 to B

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o No valid negotiation

o Neither is a holder but are assignees

o Neither can sue on the inst wo bringing the other as a party

Where the payees or indorsees are joint (Pay to A & B), the negotiation is valido The inst is indorsed in its entirety to both A & B

Discount of the inst:o Neither ds the prov prohibit a transaxn where the indorsee pays the

indorser less than the face amnt of the instrument, title transferring tothe indorsee

o Discount is given in consideration of the pd during wc the purchaser

has to wait b4 he can cash the inst

Indorsement wc dsnt compy w s32o Transfer isnt void, its valid but is an assignment only

Blank v Weiden

When there has been a purported indorsement of the whole inst, in sep parts to2 or more transferees, the purported indorsees take leg title to their severalshares & may sue together, or any one or more may sue provided all the otherindorsees are brought in as parties

S60 & 62: intent of s62 is only to deprive the several indorsees of the spclrights wc the Act fives to holders of properly negotiated instruments

o S62 dsnt deprive such indorsees of the rights of ordinary assigness &

the irregular indorsement may be treated as an assignmento Purpose of the restrictions in s62 was to prevent a multiplicity of suits

6. Kinds of IndorsementsS33: KINDS OF INDORSEMENTS

An indorsement may be either special or in blank; and it may also beeither restrictive or qualified or conditional

a. Basis of classification

Sig is sufficient, but addtl words may be added wc may modify the rights ofsubsequent holders or the liabilities of the indorsers

Blank indorsement: Only the sig of the indorser appears

ALL indorsements are either:o Spcl or in blank

Refers to the future method of N

Whether its by indorsement & delivery or deliveryalone

o Restrictive or non-restrictive

Refers to the title transferredo Qualified or unqualified

Refers to the scope of liab assumed by the indorsero Conditional or uncond

Refers to the presence/absence of express limitations madeby the indorser in the primary obligors privileges of payingthe holder

b. Special and blank indorsementsS34: SPECIAL INDORSEMENT; INDORSEMENT IN BLANK

A special indorsement specifies the person to whom, or to whoseorder, the instrument is to be payable; & the indorsement in blank specifies

no indorsee, & an instrument so indorsed is payable to bearer, & may benegotiated by delivery

S40: INDROSEMENT OF INSTRUMENT PAYABLE TO BEARER Where are instrument, payable to bearer, is indorsed specially, it may

nevertheless be further negotiated by delivery; but the person indorsingspecially is liable as indorser to only such holders as make title through hisindorsement.

S35: BLANK INDORSEMENT; HOW CHANGED TO SPECIAL INDORSEMENT

The holder may convert a blank indorsement into a special indorsementby writing over the signature of the indorser in blank any contractconsistent with the character of the indorsement.

I need not contain words of negotiability

2 forms of spcl I:

o Pay X or Pay X or order

o I of the spcl indorsee is necessary for future N

o Bearer inst: Pay to X, (sgd)Y

is Xs sig is necessary for further N?

S40: NO its not needed = applies to originally bearer inst

Bec to allow a subsequent holder to control themethod of further N casts risks on the obligor(forgery, unauth I) wc he dddnt assume by his

contract to pay the bearer N by mere delivery: person who negotiated is liable to his IMMEDIATE

transferee N thru spcl I: liable to subsequent holders, unless the inst is an originally

bearer inst where hes liable only to those who take title thru his I I in blank:

o Specifies no indorsee

o Payable to bearer

o May be N by delivery

o May be converted into a spcl I

Write holders name abve the sig of the indorser in blank

Blank I followed by spcl I, payable to order:o Spcl I controls due to s34

Further N can only be done thru I of the spcl indorsee

S40 dsnt apply

S9(3) such an inst ins no longer a bearer inst bec the last Iisnt a blank I

o Inst payable to order MAY be converted to a bearer inst thru a blank I

Wc may be converted to an order inst by spcl I

The last I is always controlling for further No Inst payable to bearer, always REMAINS as bearer inst

Regardless of whether the I is in blank or spcl

c. Qualified indorsementS38: QUALIFIED INDORSEMENT

A qualified indorsement constitutes the indorser a mere assignor ofthe title to the inst. It may be made by adding to the indorsers signature

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the words wo recourse or any words of similar import. Such anindorsement does not impair the negotiable character of the instrument.

Thru I, the indorser enters into 2 contracts:o Contract of sale or assignment of the inst

o Contract to pay if the maker is unable to pay on maturity

To relive himself of either contract, he shld state so in clear & express terms

Adding wo recourse/sans recourse/at indorsees own risk

o The indorser relieves himself of the 2nd contract

A Qualified indorser merely assumes the 2st contract & agrees to merelytransfer leg title to the inst

o Hes a mere assignor of the title of the inst

o He dsnt guaranty the solvency of the maker but merely his legal title

to the inst

Fay v Witte

The words wo recourse or similar words must be used to make the indorser aqualified indorser

The exclusion of liability must be expressed by appropriate words & not impliedfrom the transaction

Liability of an indorser is implied wo words expressly creating ito To be negative, words shld be used to negate the implication

Copeland v Burke

Ds the writing over a sig of an express assignment, wc the law imports fromthe signature per se, exclude & negative the idea of condtional liability, wc thelaw also imports, if such assignment were not expressed in full? NO

Not a qualified I, payee/D may be made liable as an ordinary indorser

Those engaged in business transactions are familiar w the term wo recourse

If D didnt intend to be bound by this I, he shldve used some words wc clearlyindicate that hes not an ordinary indorser

Hutson v Rankin

N of a note isnt destroyed by a prov that upon default in payment of interest,the whole shall become due

d. Conditional indorsement Indorser is liable to pay on 2 conds:

o Demand on the party primarily liable & failure to payo Notice of dishonor promptly sent to indorser

Conditional I = cond must be expresso X affect negotiability since the orig promise/order remains uncond

o All holders after the conditional I take subj to the cond

S39: CONDITIONAL INDORSEMENT Where an indorsement is conditional, a party required to pay the

instrument may disregard the condition, and make payment to the indorseeor his transferee, whether the condition has been fulfilled or not. But anyperson to whom an instrument so indorsed is negotiated, will hold thesame, or the proceeds thereof, subject to the rights of the person indorsingconditionally.

Pay 100 by Dec1,2005 if A marries b4 hes 25

o Valid but conditional I

o If A dsnt get married, holder can compel maker to pay him

o But maker, may disregard the cond & pay the holder

Bec makers have the right to terminate his liability on thedate agreed to by him & cant be burdened w conds wcwerent part of his contract

o If maker pays, the holder shld hold the money subj to the rights of the

conditional indorsero If A dns tmarry, then A will have to deliver the money to the

conditional indorser

e. Restrictive indorsementS36: WHEN INDORSEMENT RESTRICTIVE An indorsement is restrictive, wc either:

A) Prohibits the further negotiation of the instrument; orB) Constitutes the indorsee the agent of the indorser; orC) Vests the title in the indorsee in trust for or to the use ofsome other person.

But the mere absence of words implying power to negotiate does not makean indorsement restrictive.

S37: EFFECT OF RESTRICTIVE INDORSEMENT; RIGHTS OF INDORSEE A restrictive indorsement confers upon the indorsee the right:

a) To receive payment of the instrument;b) To bring any action thereon that the indorser could bring;c) To transfer his rights as such indorsee, where the form ofthe indorsement authorizes him to do so.

But all subsequent indorsees acquire only the title of the 1 s indorseeunder the restrictive indorsement.

A restrictive I either:o Restricts the right of the indorsee to further negotiate the inst; or

o Reserves beneficial interest therein in the indorser or in a 3rd person

Tho the inst may be further N, all subsequent indorsees takesubj to the rights of the restrictive indorser or the 3 rd person

Pay to X only

o Prohibits the further N of the inst, full title passing to Xo Pay to X = X a restrictive I for mere absence of words wc imply the

power to negotiate wont render the I restrictive

Pay to X for collection; Pay to X for my use; Pay to X for my accnto Commonly used

o Constitutes the indorsee an agent to collect in behalf of the indorser

o X can rcve payment & sue in his own name

o Dsnt pass title nor deprive the maker of any defense he may have on

the noteo Indorsee may negotiate the inst

Subsequent indorsees merely become subsequent agents tocollect

Pay to X for Ys useo Vests the title of the indorsee in trust for or to the use of sme other

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o X can rcve payment & sue but he only holds it in trust for Y

7. Indorsement to or by collecting bank I for collection

o A restrictive I , bank will merely be an agent

I for deposito Restrictive I bec it makes the bank an agent to collect & credit them as

a deposit to the customers accnto Non-restrictive I, transaxn is a purchse of the check by the bank in

cash & a deposit of the cash to the credit of the depositor

Whatever kind of I it is = bank is only a collecting agent I made by the depositor wld be in blank

o The inst wont therefore show any restriction to the collecting banks

title & it seems that title has transferred

Deposit slip: usually states that the bank is a mere collecting agent In forwarding NI for collection, banks usually use I

o prior Is &/or lack of indorsements guaranteed

o Bank has guaranteed the validity of all prior Is as well as the lack of

any necessary I

for payees account onlyo Means the check shld be deposited in a bank where the payee has an

accnto Payee has to indorse the check & the bank wld be a collecting agent

8. Negotiation by joint or alternative payees or indorseesS41: INDORSEMENT WHERE PAYABLE TO TWO OR MORE PERSONS

Where an instrument is payable to the order of 2 or more payees orindorsees who are not partners, all must indorse, unless the one indorsinghas authority for the others.

S8d: an inst payable to 2 or more payees jointly is No A & B = joint & several liability

S8e: payable to one or some several payees is N S41: partners

o Any one of the partners of his own name or that of his partner (if

auth), who s a co-payee/indorsee may constitute a valid I & effect N

Phils: partnership is a juridical persono if intend to negotiate to a partnership, the firm name shld be indicated

& not the partnerso if partners are named, the proceeds belong to them & not the

partnershipo for a partnership to negotiate the inst, the person signing FOR the

partnership must have implied or express auth to do so (ex. NatlBkstre Inc. By: A)

2 joint payees:o If 1 indorses & delivers the inst to the co-payee = this transfers full

title

If payable to alternative payees oro Either may negotiate the inst

9. Unindorsed instrumentsS49: TRANSFER WO INDORSEMENT; EFFECT OF

Where the holder of an instrument payable to his order transfers itfor value wo indorsing it, the transfer vests in the transferee such title asthe transferor had therein, and the transferee acquires, in addition, theright to have the indorsement of the transferor. But for the purpose ofdetermining whether the transferee is a holder in due course, thenegotiation takes effect as of the time when the indorsement is actuallymade.

A transferee of an unendorsed inst acquires the legal title of h is predecessoro Subj to defenses & equities of available to prior parties

o Can sue in his own nameo Cant be considered a holder since hes neither a payee or indorsee

if sues, needs to prove that hes the owner as a condprecedent to his right to introduce the inst in evidence & torecover

Transferee may become a holder by obtaining an I from the transferoro Only then is the inst negotiated

Section applies only to an inst payable to the order of the transferoro Hes the spcfd payee or spcl indorsee

o Dnst apply to bearer inst

Gratuitous transferee: NI being prop may be given as a gift by negotiation

o Law says for value

Donee can sue on the inst, but doesnt have the right to

compel the I of his donor

Simpson v First Natl Bank of Roseburg

Where 1 person agrees to transfer a note to another, the law implies that thetransfer is to be made by I, unless a diff agreement is made, & that in theabsence of an agreement to the contrary, transferee is entitled to a simple oran unqualified indorsement

10. Cancellation of indorsementsS48: STRIKING OUT INDORSEMENTS

The holder may at any time strike out any indorsement which is notnecessary to his title. The indorser whose indorsement is struck out & allindorsers subsequent to him are thereby relieved from liability on theinstrument.

Payable to bearer:

o Indorsements may be cancelled= unnecessary to his title

o If so any indorser whose sig is cancelled & all subsequent indorsers are

discharged

Payable to order:

o Contains Spcl Is: all are necessary to holders title bec

I of a spcl indorsee is necessary for further negotiation

And the last indorsement controls the method of furthernegotiation

o Cancellation is proper where the inst is indorsed back to a previous

owner

The reacquirer may strike out his own I

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11. Indorsement by agentS44: INDORSEMENT IN REPRESENTATION

Where any person is under obligation to indorse in representativecapacity, he may indorse in such terms as to negative personal liability.

Auth of the agent need not be in writing

In signing, the agent shld make it plain that hes signing in behalf of theprincipal, otherwise hes personally liable

12. Presumption as to indorsements

S45: TIME OF INDORSEMENT; PRESUMPTION Except wher an indorsement bears date after the maturity of the

instrument, every negotiation is deemd prima facie to have been effectedbefore the instrument is overdue.

S46: PLACE OF INDORSEMENT; PRESUMPTION Except where the contrary appears, every indorsement is presumed

prima facie to have been made at the place where the instrument is dated.

Indorsements after maturity are good to transfer title, but they prevent aholder from becoming a holder in due course

Presumption that every negotiation was effected b4 the inst was overdue isimpt, since Is are usually not dated

S42: EFFECT OF INSTRUMENT DRAWN OR INDORSED TO A PERSON ASCASHIER Where are instrument is drawn or indorsed to a person as cashier

or other fiscal officer of a bank or corporation, it is deemed prima facie tobe payable to the bank or corporation of which he is such officer & may benegotiated by either the indorsement of the bank or corporation, or theindorsement of the officer.

Inst for a corp: corp is usually named as the indorsee

corp: dnst include cities or towns

13. Continuation of negotiable characterS47: CONTITNUATION OF NEGOTIABLE CHARACTER

An instrument negotiable in its origin continues to be negotiable

until it has been restrictively indorsed or discharged by payment orotherwise.

NI tho overdue, retains its negotiabilityo Unless paid or restrictively indorsed to prohibit further negotiation

CHAP3: HOLDER IN DUE COURSE

S52: WHAT CONSTITUTES A HOLDER IN DUE COURSE A holder in due course is a holder who has taken the instrument

under the ff conditions:a) That it is complete & regular upon its face;b) That he became the holder of it before it was overdue, and wo

notice that it had been previously dishonored, if such was the

fact;

c) That he took it in GF and for value;d) That at the time it was negotiated to him he had no notice of

any infirmity in the instrument or defect in the title of theperson negotiating it.

*all must concur

1. Rights of a holder in due courseS57: RIGHTS OF A HOLDER IN DUE COURSE

A holder in due course holds the instrument free from any defect oftitle of prior parties, and free from defenses available to prior parties

among themselves, and may enforce payment of the instrument for the fullamount thereof against all parties liable thereon.

S58: WHEN SUBJECT TO ORIGINAL DEFENSES In the hands of any holder other than a holder in due course, a

negotiable instrument is subject to the same defenses as if it were non-negotiable

HDC can acquire btr title than his predecessors since he takes the inst free fromany defect of title of prior parties

Holder not in due course = transferee

o this dsnt affect the N of the inst only affects the Hs rights

2. Holder for value

a. What constitutes value S24: PRESUPTION OF CONSIDERATION

Every negotiable instrument is deemed prima facie to have beenissued for valuable consideration; and every person whose signatureappears thereon to have become a party thereto for value.

S25: CONSIDERATION; WHAT CONSTITUTES Value is any consideration sufficient to support a simple contract.

An antecedent or pre-existing debt constitutes value; and is deemed suchwhether the instrument is payable on demand or at a future time.

S191: value means valuable consideration

NI may be given as a gifto Subj to all defenses

But if the holder gave valuable consideration & s52 is complied w = HDC Value need not be full: can give less than the face value of the inst

Whats impt its the intent to transfer the full amntrepresented by the inst

Elgin National Bank v Goecke

Replacement of collateral is sufficient value

b. Bank credit as value When a holder of a check deposits it w his bank (not the drawee bank) & the

bank credits it to his accnt, the bank becomes a holder for value ONLY whenthe depositor w/draws the amnt of the deposited inst

o Whether w/drawal is b4 maturity or b4 the bank rcves notice of any

defense = the bank is a HDC

To det if the amtn has been w/drawn:11


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o Follow the 1st money in is presumed to be the 1st money out

Merchants National Bank vs. Sta Maria Sugar

Mere discounting of note and placing amount to credit of holder would NOThave constituted a transfer for value

If sum subsequently checked out, value would have passed

Rule: First money in is the first money outo First payments to the oldest debts

o First debits charged against the first credits

National Bank of Commerce vs. Morgan Bank has a right to apply all unchecked deposits against the debts due it by the

depositor

c. What constitutes a holder for value Sec 26: WHAT CONSTITUTES A HODLER FOR VALUE

Where value has at anytime been given for the instrument, theholder is deemed a holder for value in respect to all parties who becamesuch prior to that time.

A (no consideration) B (no consideration) - C (given value by D) D

o D is a HFV as regards to A, B, C

A (no consideration) B (given value) C (given by way of gift) Do D is a HFV as against A & B, but not C

Mere fact that the present holder paid nthng for a note or isnt a HFV dsntpreclude recovery

o Result is that its subj only to defenses against the orig payee

d. Where holder has a lien on instrument Sec. 27 WHEN LIEN ON INSTRUMENT CONSTITUTES HOLDER FOR VALUE

Where the holder has a lien on the instrument, arising either fromcontract or by implication of law, he is deemed a holder for value to theextent of his lien.

A NI given as collateral for a debt, the holder has a lien on the inst

If the amnt of the inst is less than the principal debt secured by the inst, thepledge is HFV for the full amnt debt secured by the inst is less than the sum ofthe isnt, pledgee can still recover everything, but the excess is held in trust to

whoever is entitled to ito HFV only to the extent of his lien

If the secured debt is less than the amnt of the inst & there are exitingdefenses wc the pledgee had no knowledge of, hes a HDC

o But since hes a HFV only to the extent of his lien, can only recover the

amnt of the debt

Diff from 1 who buys on a discount: He can recover the full amnt tho he paid

less

e. Burden of proof Sec.24: PRESUMPTION OF CONSIDERATION

Every negotiable instrument is deemed prima facie to have beenissued for a valuable consideration; and every person whose signature

appears thereon to have become a party thereto for value.

S28 says: absence or failure of consideration is a matter of defense as againstany person not a HDC

WON the words for value rcvd appear in the inst is immtl

o Presumption fills the gap prima facie presumption (can be rebutted)

But presence of the words preclude evidence to show lack of consideration

3. Holder in good faith

Due course holding isnt affected by the holders acquisition of knowledge afterhe has taken the inst

Sec.55: WHEN TITLE DEFECTIVE The title of a person who negotiates an instrument is defective

within the meaning of this act when he obtained the instrument, or anysignature thereto, by fraud, duress, or force and fear, or other unlawfulmeans, or for an illegal consideration, or when he negotiates it in breach offaith, or under such circumstances as amount to fraud.

Sec.56: WHAT CONSTITUTES NOTICE OF DEFECT To constitute notice of an infirmity in the instrument or defect in the

title of the person negotiating the same, the person to whom it isnegotiated must have had actual knowledge of the infirmity or defect, orknowledge of such facts that his action in taking the instrument amounts tobad faith.

Gross negligence on its own = X constitute notice, since not the equivalent ofBF or actual knowledge

Notice = actual knowledge or bf

a. Notice; bad faith; effect of suspicious circumstances

Test in s56 is subjective Bf: can only be proven by circumstantial evidence

Gen principle: a person who has knowledge of certain facts is put on inquirydsnt operate to its full extent in the law of NI

Neg in tracking dwn a suspicious circums wc wld put a prudent man on inquiryis not of itself sufficient to prevent recovery

If suspicious circums are so obvious = holder is subj to defenses

To show: def had knowledge of such facts that his axn in taking the inst amntd

to bfo Xnecessary to prove that the def knew the exact fraud

o Sufficient if the def had notice that there was smthng wrng abt the

assignors acquisition of title

X necessary that the person knows the particulars or the nature of the frau

Unaka National Bank v Butler The purchaser of a negotiable instrument owes no duty to the former holders to

actively inquire into the title of the party in possessiono The circumstances of suspicion and gross negligence are not of

themselves bad faith, but only evidence tending to establish it

Vincent R. De Ocampo & Co v Gatchalian, et al

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Although gross negligence doesnt itself constitute bad faith, it is evidence fromwhich bad faith may be inferred.

State Investment House v Intermediate Appellate Ct, et al

Court takes cognizance of CROSSED checkso 2 parallel lines in the upper left hand corner means that it can only

be deposited and not converted into casho Should put payee on inquiry

o Payees duty to ascertain the holders title to check or the nature of his

possession

o Failing, payee is declared guilty of gross negligence amounting to legalabsence of GF not a holder in GF

Ocampo vs. Gatchalian: effects of crossing a checko Check may be negotiated only once

o To one who has an account with the bank

o Serves as a warning to the holder that the check has been issued for a

definite purpose so that he must inquire if he has received the checkpursuant to that purpose, otherwise, he is not a holder in due course

Types of Crossed check:o Special

Between 2 lines is written the name of a bank or company

Drawee should pay only with the intervention of that banko General

Between 2 lines are written the words and Co. or none at all

Drawee should not encash but merely deposit Effect of crossing a check relates to mode of its presentment for payment

o NIL 72: presentment for payment to be sufficient must be made

The holder or some other person authorized to receive in hisbehalf - depends on instruction stated on the face of thecheck

Bataan Cigar & Cigarrette Factory, Inc v CA

NIL dsnt mention crossed checks

Negotiability of a check isnt affected by its being crossed, specially or generally It may be legally negotiated from 1 person to anthr as long as the 1 who

encashes the check w the drawee bank is anthr bank, or if its specially crossed,by the bank mentioned btwn the parallel lines

To preserve credit worthiness of checks, jurisprudence states that crossing acheck has the ff effects:

o The check may NOT be encashed but only deposited in the bank

o The check may be negotiated ONLY once to one who has an accnt w

the banko The act of crossing the check serves as a WARNING to the holder that

the check has been issued for a DEFINITE PURPOSE so tha the mustinquire if he has rcvd the check pursuant to that purpose, otherwise,he is not a HDC

Crossing of checks shld put the holder on inquiry & upon him devolves the dutyto ascertain the indorsers title to the check or the nature of his possession

Traders Royal Bank v Radio Phils Networko "A collecting bank where a check is deposited and which indorses the check

upon presentment with the drawee bank, is such an indorser. So even if theindorsement on the check deposited by the banks client is forged, the

collecting bank is bound by his warranties as an indorser and cannot set up thedefense of forgery as against the drawee bank."

b. Financing company not a holder in good faith as to buyer

Usually, a finance Co pays the full price of the prop sold & the note is indorsedto it by the seller, subrogating it to the right to collect the price from the buyer

Cts usually protects the buyer against the finance Co if the goods are defective

Finance Co: X subj to the defense of failure of consideration & cant recover thepurchase price from the buyer

Ct: finance Co is better able to bear the risk of the dealers insolvency than the

buyer & is in a far btr position to protect his interests against unscrupulous &insolvent dealers

Commercial Credit Corp v Orange County Machine Works

When a finance company actively participates in a transaction of this type frominception, counseling, and aiding the future payee, it cant be regarded as aHDC of the note given in the transaction defense of failure of considerationcan be maintained

c. Effect of purchase at a discount

Purchase at a discount, on its own, dsnt constitute BF If offered at a large discount = though the maker is known to be solvent, or the

note is secured, or taken from a stranger = might prove bf

Ham v Merritt Mere fact that the purchaser takes the note at a large discount is not sufficient,

standing alone, to deprive him of its protection

d. Effect of notice before full payment Sec.54: NOTICE BEFORE FULL AMOUNT PAID

Where the transferee receives notice of any infirmity in theinstrument or defect in the title of the person negotiating the same beforehe has paid the full amount agreed to be paid therefor, he will be deemed aholder in due course only to the extent of the amount theretofore paid byhim.

Notice of defenses b4 acquiring title or b4 paying part of the purchase price =prevents the buyer from becoming a HDC

If rcves notice AFTER paying part of the purchse price = HDC as to the amtnpaid

o If he pays the remainder, cant recover bec will be subj to the defenses

paido Any perfm by the purchaser of the inst

o Applies only where the oblig incurred is such that, on discovering the

infirmity thereof, hes relived of from all leg oblig to make furtherpayment

o X apply if he has given a promise to perf at the time of the transfer

e. Constructive notice not sufficient Purchaser of NI isnt charged w notice of defenses or equities disclosed by pub

records

Nor is he affected by the doctrine of lis pendens

notice to an agent is chargeable against the principal13


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f. Notice of accommodation not notice of defect Sec 29: LIABILITY OF ACCOMODATION PARTY

An accommodation party is one who has signed the instrument asmaker, drawer, acceptor, or indorser, without receiving value therefor, andfor the purpose of lending his name to some other person. Such person isliable on the instrument to a holder for value, notwithstanding such holderat the time of taking the instrument knew him to be only anaccommodation party.

Accommodation party: is a surety for the principal debtor, the accommodatedparty to whom the same is lent

Fact that a holder knew that 1 was only an accommodation party, dsnt preventthe holder from being aHDC

4. Complete and regular

Mere failure to affix revenue stamps as reqd by law dsnt render the instincomplete

NOT complete & reg on its faceo Inst payable w/in days after date =

o Spcfs the date but not the yr of maturity

o Blank as to the payee

Although the holder can sue on the inst wo filling in thepayees name

Inst executed in blank & subsequently filled up & issued to the 1st holder whohas no knowledge of the execution in blank = HDC

But if the 1st holder takes the inst complete in form w knowledge of the orig

execution in blank = X a HDC

Irreg inst on its face: purchaser isnt a HDC

o Subj to ALL defenses & equities (relatd to the irreg or not)

Sec 124: ALTERATION OF INSTRUMENT; EFFECT OF Where a negotiable instrument is materially altered without the

assent of all parties liable thereon, it is avoided, except as against a partywho has himself made, authorized or assented to the alteration andsubsequent indorsers. But when an instrument has been materially alteredand is in the hands of a holder in due course, not a party to the alteration,

he may enforce payment thereof according to its original tenor.

If alteration is apparent = inst is irreg

o Even if the change may have been authorized or assented to by all the

parties concernedo Purchaser shld be put on inquiry as to all the defenses & equities WON

connected w the alteration

Unauth alteration is apparent & matl: X a HDC, inst is void

Miles City Bank v Askin

Meffert v Lawson: The ancient rule of evidence, was that alterations & erasuresor written instruments were presumed to have been made at or prior to thetime of their execution

5. Holder before or at maturity wo notice of dishonor S52(b) shldve become a holder b4 its overdue & wo notice that it was

previously dishonored

Overdue ints = strong indication that it was dishonoredo Person shld be put to inquiry

Dishonored inst bec of:

o Non-acceptance: Refers to a BOE

Takes place when the drawee refuses to accept the order ofthe drawer as stated in the bill

May occur b4 date of maturity

o Non-payment: Occurs at time of maturity

an inst isnt overdue on the day of its maturity

s53: WHERE PERSON NOT DEEMED A HDC Where an instrument payable on demand is negotiated to an

unreasonable length of time after its issue, the holder is not deemed aholder in due course.

Purchse of a demand inst made outside of reasonable time after issue =purchase of an overdue inst

Reasonable time:o S193: regard is to be had to the nature of the inst, the usage of trade

or business wrt such inst and the facts of the particular caseo Nature of the inst

Gen rule: demand notes are intended to circulate longer than checks

Demand BOE runs for a pd of time longer than checks but not as lng as demandnotes

Demand certs of deposit: primarily investment paper, circulate longer thandemand notes

Evidence of usage of trade or business is admissible to show lapse of

reasonable time (usage shld be general & local)

Payment of interest may be an impt factor in determining reasonable time

Wrt to inst w a fixed maturity but subj to acceleration either automatically or atthe option of the holder

o Date of maturity is the date for the purpose of determining whether a

purchaser is a HDC, unless such purchaser had knowledge of theearlier maturity at the time he acquired the inst

o Eg) inst payable in 10 annual installments subj to acceleration Date of maturity: for the purpose of det a HDC, is at the end

of the 10yr pd

Only effect of taking after maturity: subj to all the defenses & equities

Bliss v California Co-Op Producers

Possession of the payee or holder of an instl note b4 all instlments are due = Xsignify dishonor

o Holder wld necessarily retain it for collection of the balance

RULE: a transferee of an intl note is a HDC as to the instl to mature in thefuture when the transfer is made, after 1 or more but not all instl are due on itsfact unless the past due instl havent been paid & he had no notice of such

Le Due v 1st National Bank of Kasson

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Bill/check/note payable on demand = no exact day of payment is fixed in theinst

o Gen rule: it shld be presented for payment w/in reasonable time

having in view ordinary business usages and the purposes wc thepaper is intended to subserve

A bill is overdue when it has come into the hands of an indorser, long after itsissue as to charge him w notice of its dishonor, and thus subj it in his hands tothe defenses the drawer has

Idaho State Bank v Hooper Sugar Co

The matl, intentional & fraudulent alteration of a bill or note by the payee orholder wont only be a defense to an axn on the inst as altered, but also to anaxn on the orig indebtedness; and the rule also applies to an indorsee aftermaturity as he stands in the sme position as his indorser in respect to such

Dunn v Okeefee

An innocent indorsee isnt barred of his axn by any latent defect in the transferor concoction of the bill

6. Effect of postdating or antedating

Antedated: inst bears a date earlier than the date of its issuance Postdated: inst contains a date later than the date of its issuance

S12: ANTEDATED OR POSTDATED

The instrument is not valid for the reason only that it is antedatedor postdated, provided this is not done for an illegal or fraudulent purpose.The person to whom an instrument so dated is delivered, acquires the titlethereto as of the date of delivery.

Holder can be a HDC, hes not put on inquiry merely bec its ante/postdated

Postdated: still payable either at the fixed or determinable future time spcfdtherein, or if no time of payment is expressed on demand or after the date ofthe inst

o If postdates wo having sufficient funds in the bank may be estafa

Antedated: if dne to evade the effects of Usury law = illegal

Triphonoff v Sweeney

A postdated check isnt a NI if taken b4 the date on wc demand can be made for

payment, but is simply an assignment of the rights of the payee & opens thecheck to all the equity

It makes no diff whether a check is ante/postdated its still payable accdg to itsexpress terms

7. Effect of qualified, conditional and restrictive indorsements

A QI dnst affect the status of a HDCo Fact that the previous holder I it wo recourse, only means he dsnt

want to assume full liabilityo X imply that theres a defect in the inst or title

A CI dsnt, by itself, deprive the holder of the status of a HDCo If s52 is complied w = hes free from defenses

o Fact that thers a cond dnst meant theres an infirmity or defect

o It just subjs him to the rights of the conditional indorser shld he rcve

payment b4 the cond is fulfilled

A RI wc prohibits further N, dsnt prevent a holder from being a HDCo But if he violates the prohib & indorses it, the latter cant be HDC

Theres no valid N

RI serves as a notice to a buyer of the prohib to No RI wc constitutes the indorsee as an agent of the indorser, can vest

the form w the rights of a HDC, if his principal, the restrictive indorser,is a HDC

o If the principal isnt a HDC, neither is the restrictive indorsee bec hes

only an agent of the indorser Any subsequent holder will have the sme rights as the latter

Subsequent holders can never acquire rights wc areantagonistic to the indorser-principal since hes merely sub-agent of the latter

8. Payee as holder in due course

Normally, payee cant be a HDC bec he has dealt directly w the maker or drawer

& must have knowledge of facts wc may create a defense, there may becircums under wc hes insulated from the maker/drawer by a 3rd party, such asa remitter

Only if s52 is complied w, can he be a HDC

Req of negotiation to the payee by a 3 rd person in the course of business

o Negative view:The rights of a HDC can only be acquired thru N A payee acquires not by N bec the inst inst indorsed but

issued to him

Thus hes not a HDCo Answer to this:

S191: holder includes payee

S30: inst is N from 1 person to anthr

Law says person & not holder, in referring to thetransferor so that N isnt limited to transfer by aholder, but may include a transfer by the maker ordrawer

And since holder includes payee, then a transfer from themaker to the payee constitutes N

Howard National Bank v Wilson It is dangerous to cast doubt even upon a payees right to recover when he has

taken commercial paper complete & regular on its face, honestly & for value. Assuch, he is entitled to protection as a HDC.

2 tests based on the rulings of the Ct:o Test of a reasonably prudent man

That one tk the inst for value, b4 maturity and under circumswc ddnt operate to charge him w notice of the defense

o Test of gf

One shld prove affirmatively that he had no notice of thedefense

9. Rights of a purchaser from a holder in due course

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Sec. 58. WHEN SUBJECT TO ORIGINAL DEFENSE. - In the hands of anyholder other than a holder in due course, a negotiable instrument is subjectto the same defenses as if it were non-negotiable. But a holder who deriveshis title through a holder in due course, and who is not himself a party toany fraud or illegality affecting the instrument, has all the rights of suchformer holder in respect of all parties prior to the latter.

Holder who takes title to an inst thru a HDC acquires all his rights evn tho thenew holder dsnt satisfy any of the reqs of a HDC

o Applies even if the purchaser had notice of the defect in title = still

free from defenseso Applies even to a purchaser after maturity, WON he tk it w notice

o Still applies to a HFV who takes from a HDC, WON he tk it b4 maturity,

w/wo notice

Reason: if a HDC cant invest his transferee w the rights wc come w hisimproved position, his status as a HDC wld lose its significance bec themarketability of the inst is seriously hampered

Buyer was party to the fraud or illegality affecting the inst, he dsnt acquire the

rights of the transferor even if its a HDC

Person not an orig party to the inst, but party to the fraud, cant recover even ifhe bought it from a HDC

Holder who reacquires from a HDC & who, when he 1st held title had knowledge

of the defense of a prior party, cant obtain the rights of the HDC even tho hewasnt party to the fraud/illegality

Effect if person not a party to the fraud or illegality:o If purchaser had notice & takes frm a HDC = hes a HDC

Bec he ds not act wc harms the makero If purchaser was a prior party, acquires the inst from a HDC = Xa HDC

A reacquirer, in negotiating it to a HDC, cuts off the defenseof the maker he therefore becomes a party of the fraud thrunegotiation = amnts to fraud under s55

But a reacquirer not party to the fraud or illegality of the inst, even if wsnt a

HDC the 1st time he had title = may still be a HDC

1 who acquires title from a HDC, even wo paying value & not being part of thefraud/illegality = still a HDC

Defenses: X limited to fraud or illegality

Lill v Gleason NI is kept negotiable as far as possible until the principal debtor has discharged

his obligo Gen rule: payment by a party other than the principal debtor dsnt

discharge the parties prior to the 1 making the payment, and thepayment, instead of extinguishing the inst, operates as a transfer of itto the party paying

Contract of an indorser for accommodation of the payee is indep of that of themaker

Fossum v Fernandez Hermanos, et al

Rule: if the orig payee of a note unenforceable for lack of considerationrepurchases the inst after transferring it to a HDC, the paper against becomessubj in the payees hands to the sme defenses to wc it wldve been subj if the

paper never passed thru a HDC

10. Presumption in favor of due course holding

Sec. 59. WHO IS DEEMED HOLDER IN DUE COURSE. - Every holder isdeemed prima facie to be a holder in due course; but when it is shown thatthe title of any person who has negotiated the instrument was defective,the burden is on the holder to prove that he or some person under whomhe claims acquired the title as holder in due course. But the last-mentionedrule does not apply in favor of a party who became bound on theinstrument prior to the acquisition of such defective title.

Presumption here applies to HOLDERS only

Need to prove:o Genuineness of the makers or drawers sig to estab the existence of

the obligo Genuineness of all indorsements necessary to his title, to estab his link

to the maker & his status as a holder

Presumption works only to the status of the PRESENT holdero If his rights depend on the previous holders status, he must prove this

When presumption applies and holder is deemed a HDC, def will have to provehis defenses if any

o If def ds prove it, plaintiff has to prove hes a HDC

o Exception: if defs defense is not his own (X a personal defense)

Last sentence of s59

Def, aside from proving the defense, will have to prove thatthe holder isnt a HDC

Van Syckel v Egg Harbor Coal & Lumber Co

Common law:

1 who sues on a written contract is obliged, in the absence of admission, toprove the sig of the def b4 the inst can be rcvd in evidence

Farmers State Bank v Koffler

Prouty v. Robers: No defense to an axn on a note by an indorsee against themaker that the note was obtained from the payee by means of fraudulentrepresentations of wc the indorsee had knowledge when he rcved the note

Kinney v. Ruse: Fraud in putting a note in circ w/c will operate as adefense/charge the burden of proof must be a fraud against the def

11. Transferee of unendorsed instrument

Sec. 49. TRANSFER WITHOUT INDORSEMENT; EFFECT OF. - Where theholder of an instrument payable to his order transfers it for value withoutindorsing it, the transfer vests in the transferee such title as the transferorhad therein, and the transferee acquires in addition, the right to have theindorsement of the transferor. But for the purpose of determining whetherthe transferee is a holder in due course, the negotiation takes effect as ofthe time when the indorsement is actually made.

Under this sec, a transferee wo I acquires whatever title the transferor had

Ds he acquire the rights of a HDC under s58? Diff opinionso S58 favors a holder so cant apply to 1not a H, like a transferee wo

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S49 grants the transferee title but not the rights of a HDC

To acquire the rights of the HDC, proper I is necessaryo S49 & 58 taken together give title of the previous HDC

If transferor isnt a HDC, the transferee is subj to all defenses as if the inst wasnon-N

o This applies even tho the transferee satisfies s52, unless he obtains

the formers Io But if at the time of I, the transferee had knowledge of the defense, or

obtains I after maturity = cant be a HDC

Status as a HDC is determined at the time of the I

Commercial Bank of Lafayette & Trust Co v Barry

Endorsement alone cant constitute 1 a HDC of a note payable to order,notwithstanding s59, for under s191 hes neither a holder bec not a payee orindorsee, nor bearer, bec the inst isnt payable to bearer

CHAPTER 4: DEFENSES AND EQUITIES

1. Defenses and equities in general Liabs of signatories to a NI depends on whether there are existing defenses or

claims of ownership thereto

2 kinds of defenses:

Real defenses Personal defenses

Available against all Hs even a HDC can be raised only against Hs not in due

courseAttaches to the inst itself & generallydiscloses an absence of 1 of theessential elems of a contract or wherethe admitted contract is void for allpurposes of, for reasons of pub policy

Those wherein a true contract appears,but for some reason (ie. Fraud), the defis excused from the oblig to perf

Examples: Forgery

Incapacity

Fraud in execution

Sme types of duress

Lack of delivery of an incompleteinst

Examples: Those in s55

Want of consideration

Incompleteness of the inst

Lack of delivery of a completed inst

Claims of ownership = equities 2 kinds:Legal equity Equitable equity

1 who possesses leg title to the inst mayrecover possession thereof even from aHDC

1 w equitable title may not recoverpossession from a HDC, but can recoverfrom other Hs

Sec. 57. RIGHTS OF HOLDER IN DUE COURSE. - A holder in due courseholds the instrument free from any defect of title of prior parties, and freefrom defenses available to prior parties among themselves, and mayenforce payment of the instrument for the full amount thereof against allparties liable thereon.

Sec. 58. WHEN SUBJECT TO ORIGINAL DEFENSE. - In the hands of anyholder other than a holder in due course, a negotiable instrument is subjectto the same defenses as if it were non-negotiable. But a holder who deriveshis title through a holder in due course, and who is not himself a party toany fraud or illegality affecting the instrument, has all the rights of suchformer holder in respect of all parties prior to the latter.

Sec. 55. WHEN TITLE DEFECTIVE. - The title of a person who negotiates aninstrument is defective within the meaning of this Act when he obtainedthe instrument, or any signature thereto, by fraud, duress, or force and

fear, or other unlawful means, or for an illegal consideration, or when henegotiates it in breach of faith, or under such circumstances as amount to afraud.

S55: circums wc renders title defective & implies the right of the real owner,who was deprived of the inst, to get it back from the guilty holder or anysubsequent H, not a HDC

o X recover from a HDC

Equities refers to claims of O, but term defenses usually includes equities

2. Incapacity

Sec. 22. EFFECT OF INDORSEMENT BY INFANT OR CORPORATION.- Theindorsement or assignment of the instrument by a corporation or by an

infant passes the property therein, notwithstanding that from want ofcapacity, the corporation or infant may incur no liability thereon.

A contract entered into by a minor is voidable & the minor can be held liable

thereon unless he ratifies it upon reaching maj

o cant be made to restore what he rcved by virtue of the contract,

except to the extent hes benefitted S22: if a minor indorses a NI, tho hes not liable on the contract of I, title to the

inst passes to his indorsee & the indorsee can recover from the maker free fromthe defense of minority & free from all personal defenses, if hes a HDC

o Also, under s60 if the maker makes a note payable to a minor, he

warrants the capacity of the payee to indorse

If the indorsee cant collect from the maker & sues the minor (who indorsed thenote), the minor can set up the defense of minority

o Bec his contract of I is voidable under the lawo If the indorsee sues the indorser (person who tk the inst AFTER the

minor), indorsee can collect from him bec of s22 & s66 wc says theindorser warrants the capacity of all prior parties

o Even if the indorsee knew that a minor was involved, he can still be a

HDC

Bec knowledge of minority wont constitute notice of defect orinfirmity

S22 cures this defect/infirmity by allowing title to pass to theminors indorsee

Minority: is a real defense available only to the minor & isnt a personal defenseavailable to other parties

sme rules apply to a corp wc has no capacity to indorse under its charter persons w no capacity to give consent (insane, demented, deaf-mutes, etc)

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o such incapacity is a real defense as far as the incapacitated person is

concerned since his contract lacks the essential elem of consento under s60,61,62,65,66: the maker/drawer/acceptor/indorser admit

the capacity of the payee to indorse & therefore they cant set up suchincapacity as a defense

3. Illegality Generally a personal defense not available against HDC

A1406, CC: contracts w an illegal cause are void, inexistent & incapable of

ratification

Since theres no contract, its illegality shld normally be a real defense available Result: contract lacks the essential elem of a lawful cause/consideration, but

the law says the defect is a defense available only against Hs not in due course

CC: spcfs the contracts wc a void & inexistent

NIL: provides that tho a NI may have been issued/negotiated for an illegalconsideration, only parties involved in the illegality & subsequent parties whoarent HDC are adversely affected by the defect

o Ex) gambling note unenforceable btwn the orig parties but valid &

enforceable w a HDC

Defense of usury: personal

o S7, UL: Nothing herein contained shall be construed to prevent the

purchase by an inn purchaser of a nego mercantile paperusurious/otherwise, for valuable consid, before matrutiy when theresbeen no intention on the part of said purchaser to evade the provs ofthis Act and said purchase wasnt part of the orig usurious transaxn.In cany case, however, the maker of said note shall have the rt torecover fr said orig H the whole int paid by him thereon and, in case oflit, also the costs and such attys fees as may be allowed by the ct.(Act 2655 as amended)

A statute may declare a contract void for all purposes, in wc case the defenseof illegality becomes real

4. Forgerya. In general

Sec. 23. FORGED SIGNATURE; EFFECT OF. - When a signature is forged ormade without the authority of the person whose signature it purports tobe, it is wholly inoperative, and no right to retain the instrument, or to give

a discharge therefor, or to enforce payment thereof against any partythereto, can be acquired through or under such signature, unless the partyagainst whom it is sought to enforce such right is precluded from settingup the forgery or want of authority.

Sec. 18. LIABILITY OF PERSON SIGNING IN TRADE OR ASSUMED NAME. -No person is liable on the instrument whose signature does not appearthereon, except as herein otherwise expressly provided. But one who signsin a trade or assumed name will be liable to the same extent as if he hadsigned in his own name.

S23: forgery is a real defense

Person whose sig was forged was NVR a party & nvr consented to the contractwc gave rise to the inst

o His sig isnt on the inst, thus he cant be held liable even by a HDC

o Fact that 1 is a HDC is immatl since theres no true maker/drawer of

the inst

the sig is wholly inoperative = No1 gains title to the inst

Any party subsequent to the forgery wld be unable to acquire any rights againstany party prior to the forgery

Exception: Where the party against whom its sought to enforce a right isprecluded from setting up the forgery or want of auth

o WON estoppel is present, will depend on the facts

o Whether precluded includes ratification differing views

1 view: a forged sig cant be ratified since ratification involvesa rel of agency & a forger dsnt assume to act for anthr

Other: theres diff btwn forgery wc amnts to a crime & 1 wcdsnt

Ratification is allowed only if it dsnt amnt to a crime

Others: 1 whose sig has been forged & who, knowing all thecircums, acknowledges the sig is bound as if he signed thenote (regardless of WON the acknowledgment amtns toestoppel)

2 sits when a party is precluded to use the defense of forgery:o General indorser subsequent to the forgery warrants amng other

things, that the inst is genuine & that its valid & subsisting at the timeof the I

His warranty prevents him from setting up the defenseo An acceptor is precluded from claiming that the drawers sig is forged

bec under s62 he warrants its genuineness

If a sig of an indorser is forged, a HDC may not go against parties bound to theinst, BEFORE the forgery, for enforcement (since rights of the HDC againstthem have been cut off by the forged sig)

o Neither can he collect from the person whose sig is forged since theres

no privity w him unless such person is guilty of estoppelo But the HDC may go after the gen indorser who warranted that the

inst is genuine & valid

The person whose sig is forged may go after prior parties since hes the realowner of the note& his rights against them arent affected by the forgery

o Their sigs are genuine & theyre bound by their contract & are liable

S23 DSNT avoid the inst, but only the forged sigo Rights & obligs may exist bec of the inst

Person whose sig is forged may recover the inst from the HDC since the H hasno right to retain such & shld surrender it to the rightful owner

Inst originally payable to bearer:o H of the inst who ddnt know of the forgery can enforce it against the

drawer/maker bec he can cancel the forged I it being not necessaryto his title

o He ddnt acquire his right thru the forged I

o But if theres an I after the forged 1, if the H cant recover from the

maker, he has a right of recourse agianst the subsequent indorser (becof his warranty, s62)

Unless sig is deemed admitted by the pleadings, burden of proving genuinenessof a sig is on the person basing his claim thereon

b. Acceptance and Payment under mistake

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i. When the drawee accepts or pays a forgedinstrument

Where the drawers sig is forged on a bill or checko If drawee who pays it wo having detected the forgery cant charge the

amnt to the drawers accnto Forged sig is inoperative & dsnt give him the right to discharge it

Gen rule: Money paid under mistake may be recoveredo Exception: Price v Neal

Drawee who has paid an accepted/non-accepted bill, ea of wcbore the forged sig of the drawer, cldnt recover the money

paid He shld bear the loss

Adhered to by some to uphold the stability of commercialtransaxns

Bec its essential that there be final settlement btwnthe drawee & recipient

Sec. 62. LIABILITY OF ACCEPTOR. - The acceptor, by accepting theinstrument, engages that he will pay it according to the tenor of hisacceptance and admits:

(a) The existence of the drawer, the genuineness of his signature,and his capacity and authority to draw the instrument; and

(b) The existence of the payee and his then capacity to indorse.

Since the A admits the genuineness of the drawers sig, hes precluded by sec23from denying liab based on its forgery

o Learns of forgery after acceptance, b4 payment = has to pay

o Learns of forgery after payment = cant recover bec of s62 warranty

Opinions on s62:o Applies only to an accepted bill, dsnt cover 1 paid wo acceptance

Payment & acceptance are diff things

Payment: discharges the inst

Acceptance: implies a continued existence & possiblenegotiation

o Prevailing view: Price v Neal

Payment is more than acceptance bec while acceptance ismerely an oblig to pay, payment is the discharge of such oblig

One who pays necessarily accepts

Bec intention of the drafters to codify & make uniform theexisting common law or law merchant

Bth views prevent a drawee who has paid a forged bill, w/wo acceptance, fromrecovering

Exceptions: from Price v Nealo Person whos guilty of fraud or neg in obtaining a bill, or who hadnt

given value therefor, has no right to retain the money paid to him bythe drawee by virtue of a forged bill

Thus, A can recover from the forger or from 1 who boughtfrom a known forger

o Person who takes from a stranger wo making inquiries, wc wldve

revealed the forgery guilty of neg & precludes him from retaining theproceeds

Price v Neal

Axn brought by Price against Neal

Price says Neal was indebted to him for L80 for money he used & rcvd

Bill was drawn:

o Leicester, 22nd Nov 1760. Sir, 6 wks after date pay Mr. Ruding or order

40 pounds, value rcvd for Mr. Ploughfor; as advised by, sir, yourhumble servant Bejamin Sutton. Mr Price in Bush-Lane Cannot-Street,London

o Indorsed R.Ruding, Anthony Topham, Hammon and Laroche

o Received the contents, James Watson & son: witness Edward Neal

Bill was I to def, Neal, for valuable consideration

Notice of the bill left at Ps hse on the day it became due P sent his servant to call on def to pay the L40 & take up the bill wc was done

Anthr bill was drawn:

o Leicester, 1st Feb, 1761. Sir, 6 wks after date pay Mr Ruding or order

40pounds, value rcvd fo

evidence midterm reviewer(2)

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