Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 1 NEGOTIABLE INSTRUMENTS LAW (ACT NO. 2031) PRELIMINARY CONSIDERATIONS ANDGENERAL PRINCIPLES NegotiableInstruments-writtencontractsforthepaymentofmoney;byits form,intendedasasubstituteformoneyandintendedtopassfromhandto hand, to give the holder in due course the right to hold the same and collect the sum due. History of the Negotiable Instruments Law Cases: Philippine National bank v. Zulueta, G.R. No. L-7271, August 30, 1957 Held:Our Negotiable Instruments Law, practically copied the American Uniform NegotiableInstrumentsLaw,whichinturnwasbasedlargelyontheBillsof Exchange Act of England of 1882. Applicability of the Negotiable Instruments Law Cases: Metropolitan Bank & Trust Company v. Court of Appeals, et.al, G.R. No. L-88866, July 31, 1962 (5 SCRA 745, 747) TheprovisionsoftheNegotiableInstrumentsLawarenotapplicableifthe instrument involved is not negotiabe. Kauffman v. Philippine National Bank, G.R. No. 16454, September 21, 1921 Before the Negotiable Instruments Law can come into operation there must be a document in existence of the character described in section 1 of that Law; and no rights properly speaking arise in respect to said instrument until it is delivered. Characteristics of Negotiable Instruments: a. Negotiability-rightoftransfereetoholdtheinstrumentandcollectthe sum due b. Accumulationofsecondarycontracts-instrumentisnegotiatedfrom person to person Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 2 Functions of Negotiable Instruments a.They are substitute for money; b.They serve as credit instruments. *Negotiable Instruments are not mere contracts but are substitutes for money. DifferencebetweenNegotiableInstrumentsfromNon-Negotiable Instruments: Negotiable InstrumentsNon-negotiable Instruments ContainsalltherequisitesofSec.1of the NIL Doesnotcontainalltherequisitesof Sec. 1 of the NIL Transferred by negotiation Transferred by assignment Holderinduecoursemayhavebetter rights than transferor Transfereeacquiresrightsonlyofhis transferor Prior parties warrant paymentPriorpartiesmerelywarrantlegalityof title Transfereehasrightofrecourse against intermediate parties Transferee has no right of recourse PromissoryNote - unconditional promise to pay in writing made by one person toanther,signedbythemaker,engagingtopayondemandorafixed determinablefuturetimeasumcertaininmoneytoorderorbearer.Whenthe note is drawn to makers own order, it is not complete until indorse by him. (Sec. 184 NIL) Parties: a.Maker b.Payee Cases: ConsolidatedPlywood,Inc.,et.al.v.IFCLeasingandAcceptance Corporation [G.R. No. 72593. April 30, 1987.] Facts:The complaint was filed by the respondent against the petitioners for the recoveryoftheprincipalsumofOneMillionNinetyThreeThousandSeven HundredEightyNinePesos&71/100(P1,093,789.71),accruedinterestofOne HundredFiftyOneThousandSixHundredEighteenPesos&86/100 (P151,618.86) as of August 15, 1979, accruing interest there after at the rate of Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 3 twelve(12%)percentperannum,attorney'sfeesofTwoHundredFortyNine Thousand Eighty One Pesos & 71/100 (P249,081.71) and costs of suit. Thepetitionersfiledtheiramendedanswerprayingforthedismissalofthe complaint and asking the trial court to order the respondent to pay the petitioners damagesinanamountatthesounddiscretionofthecourt,TwentyThousand Pesos(P20,000.00)asandforattorney'sfees,andFiveThousandPesos (P5,000.00)forexpensesoflitigation.Thepetitionerslikewiseprayedforsuch other and further relief as would be just under the premises. Trial Court rendered the decision: "WHEREFORE, judgment is hereby rendered: 1. Ordering defendants to pay jointly and severally in their official andpersonalcapacitiestheprincipalsumofONEMILLION NINETYTHREETHOUSANDSEVENHUNDREDNINETY EIGHT PESOS & 71/100 (P1,093,798.71) with accrued interest of ONEHUNDREDFIFTYONETHOUSANDSIXHUNDRED EIGHTEENPESOS&86/100(P151,618.86)asofAugust15, 1979andaccruinginterestthereafterattherateof12%per annum; "2)Orderingdefendantstopayjointlyandseverallyattorney's feesequivalenttotenpercent(10%)oftheprincipalandtopay the costs of the suit. "Defendants' counterclaim is disallowed." PetitionersfiledaMotionforReconsiderationbutitwasdenied.Thus,they appealed to the Intermediate Appellate Court. The following errors were assigned: THATTHELOWERCOURTERREDINFINDINGTHATTHE SELLERATLANTICGULFANDPACIFICCOMPANYOF MANILADIDNOTAPPROVEDEFENDANTS-APPELLANTS CLAIM OF WARRANTY. THATTHELOWERCOURTERREDINFINDINGTHAT PLAINTIFF-APPELLEEISAHOLDERINDUECOURSEOF THE PROMISSORY NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE COURSE. TheAppellateCourtaffirmedthedecisionofthelowercourtintoto;hence,this petition.Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 4 The grounds of the petition were: I. ONITSFACE,THEPROMISSORYNOTEISCLEARLY NOT A NEGOTIABLE INSTRUMENT AS DEFINED UNDER THELAWSINCEITISNEITHERPAYABLETOORDER NOR TO BEARER. II. THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: ATBEST,ITISAMEREASSIGNEEOFTHESUBJECT PROMISSORY NOTE. III. SINCETHEINSTANTCASEINVOLVESANON-NEGOTIABLEINSTRUMENTANDTHETRANSFEROF RIGHTSWASTHROUGHAMEREASSIGNMENT,THE PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALLDEFENSESTHATAREAVAILABLETOITAS AGAINSTTHESELLER-ASSIGNOR,INDUSTRIAL PRODUCTS MARKETING. IV. THEPETITIONERSARENOTLIABLEFORTHE PAYMENT OF THE PROMISSORY NOTE BECAUSE: A)THESELLER-ASSIGNORISGUILTYOFBREACHOF WARRANTY UNDER THE LAW; B)IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-ASSIGNOR OF THE PROMISSORY NOTE. V. THEASSIGNMENTOFTHECHATTELMORTGAGEBY THESELLER-ASSIGNORINFAVOROFTHE RESPONDENTDOESNOTCHANGETHENATUREOF THETRANSACTIONFROMBEINGASALEON INSTALLMENTS TO A PURE LOAN. VI. THEPROMISSORYNOTECANNOTBEADMITTEDOR USEDINEVIDENCEINANYCOURTBECAUSETHE REQUISITEDOCUMENTARYSTAMPSHAVENOTBEEN AFFIXED THEREON OR CANCELLED. Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 5 Issue: Whether or not the promissory note in question is a negotiable instrument soastobarcompletelyalltheavailabledefensesofthepetitioneragainstthe respondent-assignee. Held:No,thePromissorynoteinquestionisnotanegotiableinstrument. Paragraph(d),Section1oftheNegotiableInstrumentsLawrequiresthata promissorynote"mustbepayabletoorderorbearer,"itcannotbedeniedthat the promissory note in question is not a negotiable instrument. The instrument in order to be considered negotiable must contain the so called 'words of negotiability' i.e., must be payable to 'order' or 'bearer'. These words serveasanexpressionofconsentthattheinstrumentmaybetransferred.This consent is indispensable since a maker assumes greater risk under a negotiable instrument than under a non-negotiable one . . .. Section 8 of the Negotiable Instrument Law provides: "When instrument is payable to order. "SEC.8.WHENPAYABLETOORDER.Theinstrumentis payabletoorderwhereitisdrawnpayabletotheorderofa specified person or to him or his order . . . "These are the only two ways by which an instrument may be made payable to order. There must always be a specified person named intheinstrument.Itmeansthatthebillornoteistobepaidtothe persondesignatedintheinstrumentortoanypersontowhomhe hasindorsedanddeliveredthesame. Withoutthewords'ororder' or'totheorderof,'theinstrumentispayableonlytotheperson designatedthereinandisthereforenon-negotiable.Any subsequentpurchaserthereofwillnotenjoytheadvantagesof being a holder of a negotiable instrument, but will merely 'step into the shoes' of the person designated in the instrument and will thus be open to all defenses available against the latter." Therefore,consideringthatthesubjectpromissorynoteisnotanegotiable instrument, it follows that the respondent can never be a holder in due course but remains a mere assignee of the note in question. Thus, the petitioner may raise against the respondent all defenses available to it as against the seller-assignor, Industrial Products Marketing. BillofExchange-unconditionalorderinwritingaddressedbyonepersonto another,signedbythepersongivingit,requiringthepersontowhomitis Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 6 addressedtopayondemandoratafixedordeterminablefuturetimeasum certain in money to order or to bearer. (Sec. 126 NIL) Parties: a.Drawer b.Payee c.Draweree/ acceptor Check-billofexchangedrawnonabankandpayableondemand.(Sec.185 NIL) Difference between Promissory Note and Bill of Exchange Promissory NoteBill of Exchange Unconditional promiseUnconditional order Involves 2 partiesInvolves 3 parties Maker primarily liableDrawer only secondarily liable Only 1 presentment - for paymentGenerally 2 presentments - for acceptance and for payment Distinctions between a Check and Bill of Exchange CHECKBOE - always drawn upon a bank or banker-mayormaynotbedrawnagainsta bank - always payable on demand-maybepayableondemandorata fixed or determinable future time - not necessary that it be presented for acceptance -necessarythatitbepresentedfor acceptance - drawn on a deposit- not drawn on a deposit - the death of a drawer of a check, with knowledgebythebanks,revokesthe authority of the banker pay -thedeathofthedrawerofthe ordinary bill of exchange does not - must be presented for payment within areasonabletimeafteritsissue(6 months) -maybepresentedforpaymentwithin areasonabletimeafteritslast negotiation. Distinctions between a Promissory Note and Check PNCHECK -therearetwo(2)parties,themaker and the payee - there are three (3) parties, the drawer, the drawee bank and the payee -maybedrawnagainstanyperson, not necessarily a bank - always drawn against a bank Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 7 -maybepayableondemandorata fixed or determinable future time -always payable on demand - a promise to pay- an order to pay Other Forms of Negotiable Instruments: a. Certificates of deposits b. Trade acceptances c. Bonds in the nature of promissory notes d. Drafts which are bills of exchange drawn by 1 bank to another e. Letters of credit TrustReceipt-asecuritytransactionintendedtoaidinthefinancingof importersandretailerswhodonothavesufficientfundstofinancetheir transactionandacquirecreditexcepttouseascollateralthemerchandise imported Section1.FormofNegotiableInstruments.aninstrumenttobe negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Mustbepayableondemand,oratafixedordeterminablefuture time; (d) Must be payable to order or to bearer; and (e) Wheretheinstrumentisaddressedtoadrawee,hemustbenamed or otherwise indicated therein with reasonable certainty. Requisites of a Negotiable Note (PN): (SUDO) It must: a. be in writing signed by the drawer b. contains an unconditional promise or order to pay a sum certain in money c. be payable on demand or at a fixed determinable future time d. be payable to order or to bearer(Sec. 1 NIL) Case Doctrines: Pacifica Jimenez vs. Dr. Jose Bucoy, G.R. No. L-10221, February 28, 1958 Facts:In this intestate of Luther Young and Pacita Young who died in 1954 and 1952respectively,PacificaJimenezpresentedforpaymentfourpromissory notes signed by Pacita for different amounts totalling twenty-one thousand pesos (P21,000).Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 8 Acknowledging receipt by Pacita during the Japanese occupation, in the currency thenprevailing,theadministratormanifestedwillingnesstopayprovided adjustment of the sums be made in line with the Ballantyne schedule. The claimant objected to the adjustment insisting on full payment in accordance with the notes. Applying doctrines of this Court on the matter, the Hon. Primitivo L. Gonzales, Judge, held that the notes should be paid in the currency prevailing after the war, and that consequently plaintiff was entitled to recover P21,000 plus attorneys fees for the sum of P2,000. Issue: When is an acknowledgement of debt becomes a promise to pay? Held: An acknowledgment of a debt becomes a promise to pay by the addition of wordsimplyingapromiseofpayment,suchas,"payable,""payableonagiven day," "payable on demand". "Toconstituteagoodpromissorynote,noprecisewordsofcontractare necessary,providedtheyamount,inlegaleffect,toapromisetopay.Inother words,ifoverandabovethemereacknowledgmentofthedebttheremaybe collectedfromthewordsusedapromisetopayit,theinstrumentmaybe regarded as a promissory note. JuanitaSalasvs.HonorableCourtofAppealsandFilinvestFinanceand Leasing Corporation, G.R. No. 76788, January 22, 1990 Facts:RecordsdisclosethatonFebruary6,1980,JuanitaSalas(hereinafter referredtoaspetitioner)boughtamotorvehiclefromtheViolagoMotorSales Corporation(VMSforbrevity)forP58,138.20asevidencedbyapromissory note.ThisnotewassubsequentlyendorsedtoFilinvestFinance&Leasing Corporation(hereinafterreferredtoasprivaterespondent),whichfinancedthe purchase. Petitioner defaulted in her installments beginning May 21, 1980 allegedly due to a discrepancy in the engine and chassis numbers of the vehicle delivered to her andthoseindicatedinthesalesinvoice,certificateofregistrationanddeedof chattelmortgage,whichfactshediscoveredwhenthevehiclefiguredinan accident on 9 May 1980. This failure to pay prompted private respondent to initiate Civil Case No. 5915 for asumofmoneyagainstpetitionerbeforetheRegionalTrialCourtofSan Fernando, Pampanga. RulingoftheTrialCourt:Thecounterclaimofthedefendantisdismissedwith costs against defendant. Hence, the case was elevated to the Court of Appeals. Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 9 TheAppellateCourtruled:"WHEREFORE,consideringtheforegoing,the appealeddecisionisherebymodifiedorderingthedefendanttopaytheplaintiff thesumofP54,908.30at14% perannum fromOctober2,1980untilfull payment.ThedecisionisAFFIRMEDinallotherrespects.Withcoststo defendant." Petitioners Motion for Reconsideration was denied; hence, this case. Held:The questioned promissory note shows that it is a negotiable instrument, havingcompliedwiththerequisitesunderthelawasfollows:[a]itisinwriting and signed by the maker Juanita Salas; [b] it contains an unconditional promise topaytheamountofP58,138.20;[c]itispayableatafixedordeterminable futuretimewhichis"P1,614.95monthlyfor36monthsdueandpayableonthe 21stdayofeachmonthstartingMarch21,1980thruandinclusiveofFeb.21, 1983;" [d] it is payable to Violago Motor Sales Corporation, or order and as such, [e] the drawee is named or indicated with certainty. Requisites of a Negotiable Bill (BOE): (SUDOC) It must: a.Be in writing signed by the drawer b.Contains an unconditional promise or order to pay a sum certain in money c.Be payable on demand or at a fixed determinable future time d.Be payable to order or to bearer e.Thedraweemustbenamedorotherwiseindicatedwithreasonable certainty(Sec. 1 NIL) Case Doctrines: CaltexPhilippines,Inc.v.CourtofAppeals,et.al,G.R.No.97753,August 10, 1992 On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face of the instrument itself. In the construction of a bill or note, the intention of the parties is to control, ifitcanbelegallyascertained.Whilethewritingmaybereadinthelightof surroundingcircumstancesinordertomoreperfectlyunderstandtheintentand meaningoftheparties,yetastheyhaveconstitutedthewritingtobetheonly outward and visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the court in such case is to ascertain, notwhatthepartiesmayhavesecretlyintendedascontradistinguishedfrom what their words express, but what is the meaning of the words they have used. What the parties meant must be determined by what they said. *The factors that affect the determination of negotiability of instruments are: Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 10 1)The whole of the instrument shall be considered;2)Only what appears on the face of the instrument shall be considered; 3)The provisions of the NIL, especially Section 1 thereof, shall be applied. PhilippineBankofCommercev.JoseAruego,102SCRA530[January31, 1981]) Facts:RespondentAruegosigneddraftsasdrawee-acceptorbutlaterclaimed that he was not liable under the drafts. One of the arguments that he raised was that the drafts signed by him were not really bills of exchange but mere pieces of evidence of indebtedness because payments were made before acceptance. Issue: Was his contention correct? Held:No.Thecourtruledthat,Whereaninspectionofthedraftsacceptedby thedefendantshowsthatnowherehashedisclosedthathewassigningasa representativeofthePhilippineEducationFoundationCompany,andhemerely signedasfollows:"JOSEARUEGO(Acceptor)(SGD)JOSEARUEGO",heis personallyliableforthedraftsacceptedbyhimandhemaynotinterposeasa defense that he signed the drafts merely as an agent of the Philippines Education Foundation Company of which he is president. As to the nature of the acceptance, the Supreme Court further held, As long as a commercial paper conforms with the definition of a bill of exchange, that paper is consideredabillofexchange.Thenatureofacceptanceisimportantonlyin determination of whether a commercial paper is a bill of exchange or not. Thus, in the case at bar, defendant's contentions that the drafts signed by him were not reallybillsofexchangebutmerepiecesofevidenceofindebtednessbecause payments were made before acceptance, is not meritorious. Section2.Whatconstitutescertaintyastosum.Thesumpayableisa sum certain within the meaning of this Act, although it is to be paid: (a) With interest; or (b) By stated installments; or (c) Bystatedinstallments,withaprovisionthat,upondefaultin paymentofanyinstallmentorofinterest,thewholeshallbecome due; or(d) With exchange, whether at a fixed rate or at the current rate; or (e) Withcostsofcollectionoranattorneysfee,incasepaymentshall not be made at maturity ThecommonfeatureoftheprovisionsspecifiedinSection2isthefactthatthe principalamounttobepaidbythemakerordraweeisunaffected.Thereisan absolute obligation to pay a sum certain in money although certain amounts may beadded,asinthecasewhereinterestorattorneysfeeswillbepaid.Indeed, Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 11 thepromisetodoanactortopayanotheriteminadditiontothepaymentof moneythatwillrenderthenotenotnegotiablemustbeapromisethatconflicts withsomeoroneoftheessentialcharacteristicsofanegotiableinstrument (Finley v. Smith, 165 Ky. 445, 177 S.W. 262 [1915]). Section3.Whenpromiseisunconditional.Anunqualifiedorderor promisetopayisunconditionalwithinthemeaningofthisActthough coupled with: (a) Anindicationofaparticularfundoutofwhichreimbursementisto be made or a particular account to be debited with the amount; or (b) Astatementofthetransactionwhichgivesrisetotheinstrument. Butanorderorpromisetopayoutofaparticularfundisnot unconditional. Section3oftheNILdealswiththerequirement,underSection1(b)oftheNIL, thatthepromiseororderstatedintheinstrumentmustbeunconditional. Furthermore,Section3furtherprovidesthatastatementofthetransactionthat gaverisetotheobligationcoveredbythenoteorthebilldoesnotdestroythe negotiabilityoftheinstrument.However,referencetoanothertransactionor document must be descriptive rather than restrictive. Inotherwords,theinstrumentmustonlygiveinformationthatitwasissuedin connection with a particular transaction or document. It must not make the order or promise dependent on or burdened by the other transaction. Iftheinstrumentisrestrictedbytermsandconditionsofanothertransaction, contractoragreement,byincorporatingtheagreementoraportionthereofas partoftheother,thesaidinstrumentisnon-negotiable.Consequently,anote thatissubjecttotheprovisionsofanothercontractordocumentisnot negotiable.Anoteisalsonegotiableunderthesameprincipleiftheamountis payableassetforthinthatcertainagreementdatedMarch12,2004 (Salomonsky v. Kelly, 349 S.E. 2d 358 [1986]). Moreover, the negotiability of the instrument is affected if what is specified is the accountorfundoutofwhichpaymentistobemade.Hence,iftheinstrument states,PaytotheorderofJuandelaCruzP10,000.00outofmyaccountwith you, it is not negotiable because the instrument is conditional. The obligation to payissubjecttotheconditionthatthefundsintheaccountaresufficient.The ordertopayisnotabsolutebecausenopaymentwillbemadeiftheamountin the account is less than P10,000.00. Cases: Metropolitan Bank & Trust Company v. Court of Appeals G.R. No. 88866, February 18, 1991 Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 12 194 SCRA 169 Facts:PersonAdepositedTreasuryWarrantsinGoldenSavings(respondent). Golden Savings deposited the Treasury Warrants in Metrobank and the warrants weresentforclearing.GoldenSavingsmaderepeatedinquiriesifthewarrants had been cleared. Exasperated, Metrobank allowed Golden Savings to withdraw fromthewarrantsproceedsbeforeclearance.Afterwards,PersonAwithdrew theclearedwarrantsproceeds.Itturnsouthoweverthewarrantshadbeen dishonoredandMetrobankdemandedarefundfromGoldenSavings.Golden Savings refused. Issue: Are the Treasury Warrants negotiable instruments? Held: No. The warrant have stamped on their face the word non-negotiable and ispayablefromaparticularfund,namelyFund501.Thepromisetopayis conditional on the availability of funds in Fund 501. The Treasury Warrants arent negotiable instruments and the Negotiable Instruments Law doesnt apply to it. Abubakar vs Auditor General G.R. No. L-1405, July 31, 1948, 31 Phil. 359 Facts: The Auditor General refused to authorize payment of a Treasury warrant which was issued in favor of a 3rd person but is now in Abubakars hands. Issue: Is the Treasury warrant a negotiable instrument? Held:No.TheTreasurywarrantisntanegotiableinstrument.TheTreasury warrantsindicateonitsfacepayablefromtheappropriationforfood administration meaning there is a particular fund out of which payment must be made. The Treasury warrant isnt an unconditional promise to pay. Philippine Education Company, Inc. v. Mauricio A. Soriano, et.al G.R. No. L-22405, June 30, 1971; 39 SCRA 587 Issue: Is a postal money order negotiable? Held:No,apostalmoneyorderisnotnegotiable.Itdoesnotcontainan unconditionalpromiseorordertopayrequiredinSection1(b)oftheNIL. Regulationsandrestrictionsareimposedonpostalmoneyorders,whichare inconsistent with the character of negotiable instruments. Section4.Determinablefuturetime;whatconstitutes.Aninstrumentis payable at a determinable future time, within the meaning of this Act, which expressed to be payable: (a) At a fixed period after date or sight; or Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 13 (b) On or before a fixed or determinable future time specified therein; or (c) Onoratafixedperiodaftertheoccurrenceofaspecifiedevent whichiscertaintohappen,thoughthetimeofhappeningbe uncertain. ACCELERATION CLAUSE INSECURITY CLAUSE EXTENSION CLAUSE A clause that renders whole debt due and demandable upon failure of obligor to comply with certain conditions. Provisions in the contract which allows the holder to accelerate payment if he deems himself insecure. Clauses in the face of the instrument that extend the maturity dates; a. At the option of the holder; b. Extension to a further definite time at the option of the maker or acceptor c. Automa tically upon or after a specified act or event. Instrument is still negotiable Instrument is rendered non-negotiable because the holders whim and caprice prevail without the fault and control of the maker Instrument is still negotiable (Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino) EXTENSION CLAUSEEXTENSION UNDER SEC. 120(f) Stated on the face of the instrument Agreement binding the holder; a. To extend the time of payment or b. Postpone the holders right to enforce the instrument Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 14 Parties are bound because they took the instrument knowing that there is an extension clause Binds the person secondarily liable (and therefore cannot be discharged from liabilities if: a. He consents or b. Right of recourse is expressly reserved. (Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino) PAYABLE ON DEMAND PAYABLE AT A FIXED OR DETERMINABLE FUTURE TIME a.Where expressed to be payableondemand,at sight or on presentation; b.Wherenoperiodof payment is stated; c.Whereissued, accepted, or indorsed after maturity(onlyasbetween immediateparties).(Sec. 7) a.Atafixedperiodafterdateor sight; b.Onorbeforeafixedor determinablefuturetimespecified therein; or c.Onoratafixedperiodafterthe occurrenceofaspecifiedevent, whichiscertaintohappen,though thetimeofhappeningisuncertain. (Sec. 4) Section5.Additionalprovisionsnotaffectingnegotiability.An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. But the negotiable character of an instrument otherwise negotiable is not affected by a provision which (a) Authorizes the sale of collateral securities in case the instrument be not paid at maturity; or (b) Authorizes a confession of judgment if the instrument be not paid at maturity; or (c) Waives the benefit of any law intended for the advantage or protection of the obligor; or (d) Gives the holder an election to require something to be done in lieu of payment of money. Butnothinginthissectionshallvalidateanyprovisionorstipulation otherwise illegal. Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 15 A statement of the transaction that gave rise to the obligation does not make the instrumentnon-negotiable.Inthesamemanner,astatementintheinstrument thatthesameissecuredbyacollateraldoesnotmakethepromiseororder conditional. Apparently, Section 5(a) even declares that the instrument is still negotiable even if it authorizes the sale of collateral securities in case of default. Thus,aninstrumentisstillnegotiableevenifitstatesthatitissecuredbya chattel mortgage which can be foreclosed pursuant to pertinent law if the maker defaults in payment of his obligation. ADDITONAL PROVISONS NOT AFFECTING NEGOTIABILITY !GENERAL RULE: If some other act is required other than or in addition to payment of money, the instrument is not negotiable. (Sec. 5) !EXCEPTIONS:a.Authorizes the sale of collateral securities on default; b.Authorizes confession of judgment on default; c.Waives the benefit of law intended to protect the debtor; or d.Allows the creditor the option to require something in lieu of money. Notes on Section 5: 1.Limitation on the provision: it cannot require something illegal. 2.There are two kinds of judgments by confession: a.cognovit actionem b.relicta verificationec.Confessions of judgment in the Philippines are void as against public policy.d.If the choice lies with the debtor, the instrument is rendered non-negotiable. SECTION6.Omission; Seal; ParticularMoney.Thevalidityand negotiable character of an instrument are not affected by the fact that a)It is not dated; or b)Doesnotspecifythevaluegiven,orthatanyvaluehasbeen given therefor; or Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 16 c)Doesnotspecifytheplacewhereitisdrawnortheplace where it is payable; or d)Bears a seal; or e)Designatesaparticularkindofcurrentmoneyinwhich payment is to be made. f)But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument. OMISSIONS & PROVISIONS THAT DO NOT AFFECT NEGOTIABILITY a.It is not dated; b.It does not specify the value given or that any value has been given; c.It does not specify the place where it is drawn or where it is payable; d.It bears a seal; e.It designates a particular kind of current money in which payment is to be made. (Sec. 6) Section 5 versus Section 6 OMISSIONS & PROVISIONS THAT DO NOT AFFECT NEGOTIABILITY ADDITONAL PROVISONS NOT AFFECTING NEGOTIABILITY Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 17 (a)It is not dated; (b)It does not specify the value given or that any (c)value has been given; (d)It does not specify the place where it is drawn or where it is payable; (e)It bears a seal; (f)It designates a particular kind of current money in which payment is to be made. (Sec. 6) !GENERAL RULE: If some other act is required other than or in addition to payment of money, the instrument is not negotiable. (Sec. 5) !EXCEPTIONS:e.Authorizes the sale of collateral securities on default; f.Authorizes confession of judgment on default; g.Waives the benefit of law intended to protect the debtor; or h.Allows the creditor the option to require something in lieu of money. Sec. 7 An instrument is payable on demand (a)Whereitisexpressedtobepayableondemand,oratsight,oron presentation; or (b)In which no time for payment is expressed. Whereaninstrumentisissued,accepted,orindorsedwhenoverdue,itis, asregardsthepersonsoissuing,accepting,orindorsingit,payableon demand. Section8.Whenpayabletoorder.Theinstrumentispayabletoorder where it is drawn payable to the order of a specific person or to him or his order. It may be drawn payable to the order of: (a) A payee who is not maker, drawer, or drawee; or (b) The drawer or maker; or (c) Two or more payees jointly; or (d) One or some of several payees; or(e) The holder of an office for the time being. Wheretheinstrumentispayabletoorder,thepayeemustbenamedor otherwise indicated therein with reasonable certainty. Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 18 There are two (2) views regarding the nature of instruments that it is payable to the order of bearer. 1.Prof. Simplicio Guevarra believed that the same is a bearer instrument. He explains that an order instrument is one that is payable to the order of a specifiedpersonsorpayabletoaspecifiedpersonorhisorder.The viewisthattheremustalwaysbeaspecifiedpersonnamedinthe instrumentandtheinstrumentmustalwaysbepaidtotheperson designatedintheinstrumentortoanypersontowhomhehasindorsed anddeliveredthesame(Salasvs.CA,et.al,G.R.No.76788,January 22, 1980). 2.Theotherviewisthattheinstrumentthatispayabletotheorderof bearerisanorderinstrument.WriterscitingtherulinginAmerican NationalBankvs.JoeKerleyoftensupportthisview.However,reliance thereon without fully explaining the rationale behind the ruling may tend to misleadthosewhodonotknowthebackgroundthereof.Theruling thereontattheinstrumentinvolvedthereinisconsideredanorder instrumentwasmadebecausetheintentofthemakerstomakeitan orderinstrumentwasapparentonthefaceoftheinstrument.Thecourt did not foreclose the possibility that although the instrument is payable to theorderofbearer,itmaystillbeconsideredabearerinstrument whenever the same intent is apparent on the face of the instrument. 3.The instrument involved in the above mentioned case was considered an orderinstrumentbecausetheintentofthemakertomakeitsowas apparent. 4.Section 8 of the Negotiable Instruments Law must be read in conjunction withSection30thereofwhichprovidesthataninstrumentisnegotiated whenitistransferredfromonepersontoanotherinsuchmannerasto constitutethetransfereetheholderthereof.Ifpayabletobearer,itis negotiatedbydelivery;ifpayabletoorder,itisnegotiatedbythe indorsementoftheholderandcompletedbydelivery.Clearly,an instrument payable to order has two requisites namely: (a) it must first be indorsed by the holder; (b) it must be delivered. Case Doctrines: Ang Tek Lian v. Court of Appeals G.R. No. L-2516, September 25, 1950, 87 Phil. 383 Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the orderof"cash"isacheckpayabletobearer,andthebankmaypayittothe person presenting it for payment without the drawer's indorsement. Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 19 A check payable to the order of cash is a bearer instrument. Bacal vs. National City Bank of New York (1933), 146 Misc., 732; 262 N. Y. S., 839; Cleary vs. Da BeckPlateGlassCo.(1907),54Misc.,537;104N.Y.S.,831;Massachusetts Bonding&InsuranceCo.vs.PittsburghPipe&SupplyCo.(Tex.Civ.App., 1939), 135 S. W. (2d), 818. See also H. Cook & Son vs. Moody (1916), 17 Ga. App., 465; 87 S. E., 713. "Where a check is made payable to the order of 'cash', the word cash 'does not purporttobethenameofanyperson',andhencetheinstrumentispayableto bearer. The drawee bank need not obtain any indorsement of the check, but may pay it to the person presenting it without any indorsement. . . ." (Zollmann, Banks and Banking, Permanent Edition, Vol. 6, p. 494.) Of course, if the bank is not sure of the bearer's identity or financial solvency, it hastherighttodemandidentificationand/orassuranceagainstpossible complications,forinstance,(a)forgeryofdrawer'ssignature,(b)lossofthe check by the rightful owner, (c) raising of the amount payable, etc. The bank may thereforerequire,foritsprotection,thattheindorsementofthedrawerorof some other person known to it be obtained. But where the Bank is satisfied of the identity and/or the economic standing of the bearer who tenders the check for collection, it will pay the instrument without further question; and it would incur no liability to the drawer in thus acting. Payable to Bearer Section 9. When payable to bearer. - The instrument is payable to bearer: a.When it is expressed to be so payable; or b.When it is payable to a person named therein or to bearer; or c.When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; ord.When the name of the payee does not purport to be the name of any person; ore.When the only or last indorsement is an indorsement in blank. Note:Aninstrumentoriginallypayabletobearercanbenegotiatedbymere delivery even if it is indorsed especially. If it is originally a BEARER instrument, it will always be a BEARER instrument. Asopposedtoanoriginalorderinstrumentbecomingpayabletobearer,ifthe sameisindorsedspecially,itcanNOLONGERbenegotiatedfurtherbymere delivery, it has to be indorsed. Acheckthatispayabletotheorderofcashispayabletobearer.Reason:The name of the payee does not purport to be the name of any person. (Ang Tek Lian vs. CA, 87 Phil. 383) Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 20 III. INTERPRETATION OF NEGOTIABLE INSTRUMENTS (Sec. 17) a.Discrepancybetweentheamountinfiguresandthatinwordsthewords prevail, but if the words are ambiguous, reference will be made to the figures to fix the amount. b.Paymentforinterestisprovidedforinterestrunsfromthedateofthe instrument, if undated, from issue thereof. c. Instrument undated consider date of issue. d. Conflict between written and printed provisions written provisions prevail. i.When the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; j.If one signs without indicating in what capacity he has affixed his signature, he is considered an indorser. k. IftwoormorepersonssignWepromisetopay,theirliabilityisjoint(each liable for his part) but if they sign I promise to pay, the liability is solidary (each can be compelled to comply with the entire obligation). (Sec. 17) IV. TRANSFER AND NEGOTIATION INCIDENTS IN THE LIFE OF A NI (1 Agbayani, 1992 ed.) a.Issue b. Negotiation c. Presentment for acceptance, in certain kinds of Bills of Exchange d. Acceptance l.Dishonor by non-acceptance m. Presentment for payment n. Dishonor by non-payment o. Notice of dishonor p. Discharge MODES OF TRANSFER a.Negotiation the transfer of the instrument from one person to another so as to constitute the transferee as holder thereof. (Sec.30) b.AssignmentThetransfereedoesnotbecomeaholderandhemerely stepsintotheshoesofthetransferor.Anydefenseavailableagainstthe transferor is available against the transferee. (Notes and Cases on Banks, NegotiableInstrumentsandotherCommercialDocuments,TimoteoB. Aquino) !Assignmentmaybeeffectedwhethertheinstrumentisnegotiableornon-negotiable. (Sesbreo vs. CA, 222 SCRA 466) HOW NEGOTIATION TAKES PLACE Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 21 a.Issuancefirstdeliveryoftheinstrumentcompleteinformtoapersonwho takes it as a holder. (Sec. 191) "Steps: 1.Mechanical act of writing the instrument completely and in accordance with the requirements of Section 1; and 2.The delivery of the complete instrument by the maker or drawer to the payeeorholderwiththeintentionofgivingeffecttoit.(TheLawon Negotiable Instruments with Documents of Title, Hector de Leon, 2000 ed.) c.Subsequent Negotiation 1.Ifpayabletobearer,anegotiableinstrumentmaybenegotiatedby mere delivery. 2.If payable to order, a NI may be negotiated by indorsement completed by delivery Note:Inbothcases,deliverymustbeintendedtogiveeffecttothetransferof instrument. (Development Bank vs. Sima Wei, 219 SCRA 736) d.Incomplete negotiation of order instrument Wheretheholderofaninstrumentpayabletohisordertransfersitforvalue without indorsing it, the transfer vests in the transferee such title as the transferor hadthereinandhealsoacquirestherighttohavetheindorsementofthe transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is made. (Sec. 49) e.Indorsement Legal transaction effected by the affixing one's signature at the: a.Back of the instrument or b.Uponapaper(allonge)attachedtheretowithorwithoutadditionalwords specifyingthepersontowhomortowhoseordertheinstrumentistobe payable whereby one not only transfers legal title to thepaper transferred but likewise enters into an implied guaranty that the instrument will be duly paid (Sec. 31) !GENERAL RULE: Indorsement must be of the entire instrument. !EXCEPTION: Where instrument has been paid in part, it may be indorsed as to the residue. (Sec. 32) " Kinds of Indorsement: Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 22 A.SPECIALSpecifiesthepersontowhomortowhoseorder,the instrument is to be payable (Sec. 34) B.BLANK Specifies no indorsee: 1.Instrument becomes payable to bearer and may be negotiated by delivery (Sec. 34) 2.May be converted to special indorsement by writing over the signature of indorserinblankanycontractconsistentwithcharacterofindorsement (Sec. 35) C.ABSOLUTE One by which indorser binds himself to pay: 1.Upon no other condition than failure of prior parties to do so; 2.Upon due notice to him of such failure. D.CONDITIONALRightoftheindorseeismadetodependonthe happening of a contingent event. Party required to pay may disregard the conditions. (Sec. 39) E.RESTRICTIVE An indorsement is restrictive, when it either: a.Prohibits further negotiation of the instrument; or b.Constitutes the indorsee the agent of the indorser; or c.Veststhetitleintheindorseeintrustforortotheuseofsomeother persons. But mere absence of words implying power to negotiate does not make an indorsement restrictive. (Sec. 36) F.QUALIFIEDConstitutestheindorseramereassignorofthetitletothe instrument. (Sec. 38) a.Itismadebyaddingtotheindoser'ssignaturewordslike"sans recourse,withoutrecourse","indorsernotholder","atthe indorser's own risk", etc. G.JOINT Indorsement payable to 2 or more persons (Sec. 41) H.IRREGULARApersonwho,nototherwiseapartytoaninstrument, places thereon his signature in blank before delivery (Sec. 64) Other rules on indorsement; 1.Negotiationisdeemedprimafacietohavebeeneffectedbeforethe instrumentisoverdueexceptiftheindorsementbearsadateafterthe maturity of the instrument. (Sec. 45) Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 23 2.Presumed to have been made at the place where the instrument is dated except when the place is specified. (Sec. 46) 3.Where an instrument is payable to the order of 2 or more payees who are not partners, all must indorse unless authority is given to one. (Sec. 41) 4.Where a person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability. (Sec. 44) RENEGOTIATION TO PRIOR PARTIES (Sec. 50) Where an instrument is negotiated back to a prior party, such party may reissue and further negotiate the same. But he is not entitled to enforce payment thereof againstanyinterveningpartytowhomhewaspersonallyliable.Reason:To avoid circuitousness of suits. STRIKING OUT INDORSEMENT The holder may at any time strike out any indorsement which is not necessary to histitle.Theindorserwhoseindorsementisstruckout,andallindorsers subsequent to him, are thereby relieved from liability on the instrument. (Sec. 48) CONSIDERATION FOR THE ISSUANCE AND SUBSEQUENT TRANSFER Every NI is deemed prima facie to have been issued for a valuable consideration. Everypersonwhosesignatureappearsthereonispresumedtohavebecomea party thereto for value. (Sec. 24) What constitutes value: a.An antecedent or pre-existing debt b.Value previously given c.Lien arising from contract or by operation of law. (Sec. 27) HOLDERS HOLDER - A payee or endorsee of a bill or note who is in possession of it or the bearer thereof. (Sec. 191) RIGHTS OF HOLDERS IN GENERAL (Section 51 of the NIL) Section51.Rightofholdertosuepayment.Theholderofanegotiable instrumentmaysuethereoninhisownname;andpaymenttohimindue course discharges the instrument. a.May sue thereon in his own name Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 24 b.Payment to him in due course discharges the instrument c.The only disadvantage of a holder who is not a holder in due course is that thenegotiableinstrumentissubjecttodefensesasifitwerenon-negotiable. (Chan Wan vs. Tan Kim, 109 Phil. 706) Case: Atrium Management Corporation v. Court of Appeals, et.al G.R. No. 109491 (2001) Issue: Whether Atrium was not a holder in due course and for value. Held:No.Intheinstantcase,thecheckswerecrossedchecksandspecifically indorsedfordeposittopayee'saccountonly.Fromthebeginning,Atriumwas awareofthefactthatthecheckswereallfordepositonlytopayee'saccount, meaningE.T.Henry.Clearly,then,Atriumcouldnotbeconsideredaholderin due course. Furthermore,theCourtsaid:However,itdoesnotfollowasalegalproposition that simply because petitioner Atrium was not a holder in due course for having taken the instruments in question with notice that the same was for deposit only totheaccountofpayeeE.T.Henrythatitwasaltogetherprecludedfrom recovering on the instrument. The Negotiable Instruments Law does not provide that a holder not in due course can not recover on the instrument. Lastly,Courtruled,ThedisadvantageofAtriuminnotbeingaholderindue course is that the negotiable instrument is subject to defenses as if it were non-negotiable. One such defense is absence or failure of consideration. Holder In Due Course (HDC) A holder who has taken the instrument under the following conditions: KEY: C O V I Section52.Whatconstitutesaholderinduecourse.Aholderindue courseisaholderwhohastakentheinstrumentunderthefollowing conditions: (a)Instrument is complete and regular upon its face; (b) Became a holder before it was overdue and without notice that it had been previously dishonored; (c)For value and in good faith; and (d) Atthetimehetookit,hehadnonoticeofanyinfirmityinthe instrument or defect in the title of the person negotiating it.Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 25 Notes: 1.It is indispensable that a person who claims to be a holder in due course mustbeaholder.Ifheisnotaholder,hecanneverbeaholderindue course. Hence, a possessor of a check payable to the order of a different person is not a holder in due course if the said payee did not endorse it to him.Theholdingsuffersfromtheinfirmityofnothavingbeenproperly negotiated(Mesina,et.al.vs.TheHon.CourtofAppeals,et.al,G.R. No. L-70145; November 13, 1986). Case: Mesina et.al. vs. IAC G.R. No. 70145; November 13, 1986 Facts:JoseGopurchasedfromAssociatedBankacashier'scheckfor P800,000.00. Unfortunately, he left said check on the top of the desk of the bank managerwhenheleftthebank.Thebankmanagerentrustedthecheckfor safekeepingtoabankofficial,acertainAlbertUy.WhileUywenttothemen's room, the check was stolen by his visitor in the person of Alexander Lim.Upon discoveringthatthecheckwaslost,JoseGoaccomplisheda"STOP PAYMENT"order.Twodayslater,AssociatedBankreceivedthelostcheckfor clearingfromPrudentialBank.Afterdishonoringthesamechecktwice, AssociatedBankreceivedsummonsandcopyofacomplaintfordamagesof MarceloMesinawhowasinpossessionofthelostcheckandisdemanding payment.Petitionerclaimsthatacashier'scheckcannotbecountermandedin the hands of a holder in due course. ISSUE:Whether or not petitioner can collect on the stolen check on the ground that he is a holder in due course. RULING: No.Petitioner failed to substantiate his claim that he is a holder in due courseandforconsiderationorvalueasshownbytheestablishedfactsofthe case.Admittedly,petitionerbecametheholderofthecashier'scheckas endorsed by Alexander Lim who stole the check. He refused to say how and why itwaspassedtohim.Hehadthereforenoticeofthedefectofhistitleoverthe check from the start. The holder of a cashier's check who is not a holder in due course cannot enforce such check against the issuing bank which dishonors the same. 2.An instrument is not complete and regular on its face if it contains material alteration.Aholdercannotbeaholderinduecourseifhetookthe instrument at the time when the amount to be paid appears to have been altered by increasing the same. Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 26 3.A holder who takes an overdue instrument is put on inquiry although he is not actually aware of any existing defense of a prior party. A person taking an overdue instrument should certainly question why the instrument is still in circulation even if it is overdue. 4.Notice of any infirmity in the instrument or defect in the title of a prior party willdestroyduecourseholding.Toconstitutenoticeofaninfirmityinthe instrumentordefectinthetitleofthepersonnegotiatingthesame,the person to whom it is negotiated must have had actualknowledgeofthe infirmity or defect, or knowledge of such facts that his action in takin the instrument amounted to bad faith (Section 56 of the NIL). Infirmity in the instrument means any irregularityin the instrument. Thus, notice ofanalteration,whichisapparent,isnoticeofaninfirmityintheinstrument. Notice of forgery in the maker or the drawers signature is also notice of infirmity in the instrument. 5.Insofarasgoodfaithisconcerned,theSupremeCourtruledthatalthough goodfaithonthepartoftheholderispresumed,suchpresumptionis destroyedifthepayeeorindorseeacquiredpossessionoftheinstrument undercircumstncesthatshouldhaveputittoinquiryastothetitleofthe holderwhonegotiatestheinstrument(VicenteR.DeOcampo&Co.v. AnitaGatchalian,et.al.,G.R.No.L-15126,November30,1961(3SCRA 596). Rights of a Holder in Due Course Rights of a HDC (Section 51 in conjunction with Section 57 of the NIL) 1.May sue on the instrument in his own name; 2.Mayreceivepaymentandifpaymentisinduecourse,theinstrumentis discharged; 3.Holds the instrument free from any defect of title of prior parties and free from defenses available to parties among themselves; and 4.May enforce payment of the instrument for the full amount thereof against all parties liable thereon. (Secs. 51 and 57) Every holder of a negotiable instrument is deemed primafacieaholderindue course.However,thispresumptionarisesonlyinfavorofapersonwhoisa holder as defined in Section 191 of the NIL. The weight of authority sustains the viewthatapayeemaybeaholderinduecourse.Hence,thepresumptionthat heisaprimafacieholderinduecourseappliesinhisfavor.(CelyYangvs. Court of Appeals, G.R. No. 138074, August 15, 2003) Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 27 Holder Not In Due Course "Onewhobecameaholderofaninstrumentwithoutany,someorallofthe requisites under Sec. 52 of the NIL. "Withrespecttodemandinstruments,ifitisnegotiatedanunreasonable lengthoftimeafteritsissue,theholderisdeemednotaholderinduecourse. (Sec.53) ! GENERAL RULE: Failure to make inquiry is not evidence of bad faith. ! EXCEPTIONS: 1.Whereaholderstitleisdefectiveorsuspiciousthatwouldcompela reasonable man to investigate, it cannot be stated that the payee acquired the check without the knowledge of said defect in the holders title and for thisreasonthepresumptionthatitisaholderinduecourseorthatit acquiredtheinstrumentingoodfaithdoesnotexist.(DeOcampovs. Gatchalian, 3 SCRA 596) 2.Holdertowhomcashierscheckisnotindorsedinduecourseand negotiated for value is not a holder in due course. (Mesina v. IAC) Rights of a holder not in due course: 1.It can enforce the instrument and sue under it in his own name. 2.Prior parties can avail against him any defense among these prior parties and prevent the said holder from collecting in whole or in part the amount stated in the instrument 3.Note:Iftherearenodefenses,thedistinctionbetweenaHDCandone who is not a HDC is immaterial. (Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino) SHELTER RULE " A holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all prior parties to the latter. (Sec. 58) ACCOMMODATION "Alegalarrangementunderwhichapersoncalledtheaccommodationparty, lendshisnameandcredittoanothercalledtheaccommodatedparty,without any consideration. Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 28 Accommodation Party (AP) " Requisites: 1.The accommodation party must sign as maker, drawer, acceptor, or indorser; 2.He must not receive value therefor; and 3.The purpose is to lend his name or credit. (Sec. 29) Note:without receiving value therefor, means without receiving value by virtue of the instrument. (Clark vs. Sellner, 42 Phil. 384) "Effects:Thepersontowhomtheinstrumentthusexecutedissubsequently negotiatedhasarightofrecourseagainsttheaccommodationpartyinspiteof theformersknowledgethatnoconsiderationpassedbetweenthe accommodation and accommodated parties. (Sec. 29) " Rights & Legal Position: 1. AP is generally regarded as a surety for the party accommodated; 2. WhenAPmakespaymenttoholderofthenote,hehastherighttosuethe accommodated party for reimbursement. (Agro Conglomerates, Inc. vs. CA, 348 SCRA 450) "Liability:Liableontheinstrumenttoaholderforvaluenotwithstandingsuch holderatthetimeofthetakingoftheinstrumentknewhimtobeonlyan accommodationparty.Hence,Asregards,anAP,the4thcondition,i.e.,lackof notice of infirmity in the instrument or defect in the title of the persons negotiating it,hasnoapplication.(StelcoMarketingCorp.vs.CourtofAppeals,210 SCRA 51) "RightsofAPsasagainsteachother:Maydemandcontributionfromhisco-accommodation party without first directing his action against the principal debtor provided: a.He made the payment by virtue of judicial demand; or b.The principal debtor is insolvent. !Therelationbetweenanaccommodationpartyis,ineffect,oneofprincipal and surety the accommodation party being the surety. It is a settled rule that a suretyisboundequallyandabsolutelywiththeprincipalandisdeemedan original promissory and debtor from the beginning. The liability is immediate and direct.(RomeoGarciavs.DionisioLlamas,G.R.No.154127,December8, 2003) !Well-entrenchedistherulethattheconsiderationnecessarytosupporta suretyobligationneednotpassdirectlytothesurety,aconsiderationneednot passdirectlytothesurety,aconsiderationmovingtotheprincipalalonebeing Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 29 sufficient.(SpousesEduardoEvangelistavs.MercatorFinanceCorp,G.R. No. 148864, August 21, 2003) VII. PARTIES WHO ARE LIABLE PRIMARY AND SECONDARY LIABILITY OF PARTIES WARRANTIES OF PARTIES Makes the parties liable to pay the sum certain in money stated in the instrument. Impose no direct obligation to pay in the absence of breach thereof. In case of breach, the person who breached the same may either be liable or barred from asserting a particular defense. Conditioned on presentment and notice of dishonor (Campos and Lopez-Campos, Negotiable Instruments Law, 1994 ed.) Does not require presentment and notice of dishonor. (Campos and Lopez-Campos, Negotiable Instruments Law, 1994 ed.) 1. Primarily Liable (Sec. 60 and 62, NIL) MAKERACCEPTOR OR DRAWEE A. Engages to pay according to the tenor of the instrument; and B. Admits the existence of the payee and his capacity to indorse. A. Engages to pay according to the tenor of his acceptance; B. Admits the existence of the drawer, the genuineness of his signature and his capacity and authority to draw the instrument; and C. Admits the existence of the payee and his capacity to indorse. ! A bill of itself does not operate as an assignment of funds in the hands of the drawee available for the payment thereof and the drawee is not liable unless and until he accepts the same (Sec.127) Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 30 2.Secondarily Liable (Sec. 61, 64 and 66, NIL) DRAWER GENERAL INDORSER IRREGULAR INDORSER A. Admits the existence of the payee and his capacity to indorse; B. Engages that the instrument will be accepted or paid by the party primarily liable; and C. Engages that if the instrument is dishonored and proper proceedings are brought, he will pay to the party entitled to be paid. A. Warrants all subsequent HDC - a. That the instrument is genuine and in all respect what it purports to be b. He has good title to it; c. All prior parties had capacity to contract d. The instrument is, at the time of endorse-ment, valid and subsisting. B. Engages that the instrument will be accepted or paid, or both, as the case may be, according to its tenor; and C. If the instrument is dishonored and necessary proceedings on dishonor be duly taken, he will pay to the party entitled to be paid. A person, not otherwise a party to an instrument, places his signature thereon in blank before delivery. (Sec. 64) A. If instrument payable to the order of a 3rd person, he is liable to the payee and subsequent parties. B. If instrument payable to order of maker or drawer or to bearer, he is liable to all parties subsequent to the maker or drawer. C. If he signs for accommo-dation of the payee, he is liable to all parties subsequent to the payee. Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 31 3.LimitedLiability(Sec.65;MetropolFinancingv.Sambok,120SCRA 864) QUALIFIED INDORSER PERSON NEGOTIATING BY DELIVERY

Every person negotiating instrument bydeliveryorbyaqualified endorsement warrants that: A.Instrumentisgenuineandinall respects what it purports to be; B. He has good title to it; C.Allpriorpartieshadcapacityto contract; D. He has no knowledge of any fact whichwouldimpairthevalidityof theinstrumentorrenderit valueless. A.Warrantiessameasthoseof qualified indorsers; and B.Warrantiesextendto immediate transferee only. PERSON NEGOTIATING BY MERE DELIVERY OR BY QUALIFIED INDORSEMENT GENERAL INDORSER Nosecondaryliability;butisliable for breach of warranty Thereissecondaryliability,and warranties Warrantsthathehasnoknowledge ofanyfactwhichwouldimpairthe validity of the instrument or render it valueless Warrantsthattheinstrumentis, atthetimeofhisindorsement, valid and subsisting ORDER OF LIABILITY " There is no order of liability among the indorsers as against the holder. He is free to choose to recover from any indorser in case of dishonor of the instrument. Negotiable Instruments Law Case Doctrines Denn Reed B. Tuvera Jr. and Antoinette Valerie Y. Yap Duque 32 (NotesandCasesonBanks,NegotiableInstrumentsandotherCommercial Documents, Timoteo B. Aquino) " As respect one another, indorsers are liable prima facie in the order in which they indorse unless the contrary is proven (Sec.68) !GENERALRULE:Onewhosesignaturedoesnotappearontheinstrument shall not be liable thereon. !EXCEPTIONS:1. The principal who signs through an agent is liable; 2. The forger is liable; 3.Onewhoindorsesinaseparateinstrument(allonge)orwherean acceptance is written on a separate paper is liable; 4. One who signs his assumed or trade name is liable; and 5. Apersonnegotiatingbydelivery(asinthecaseofabearerinstrument)is liable to his immediate indorsee. Sources: Banking Laws and Negotiable Instruments Laws by Timoteo Aquino Other reviewers posted on the internet