Basic Principles and Jurisprudence on Negotiable Instruments Law 2012 Edition - Piad-libre

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CONCEPTUAL FRAMEWORK

l. Birth/Creation of Negotiable Instruments (sec. 10-29)II. Life (sec. 30-69)

Negotiability Holder in due course Parties

III. Death (sec. 70-189) Proceedings Defenses Discharge

ACT NO. 2031February 03, 1911

THE NEGOTIABLE INSTRUMENTS LAW

IntroductionHistory and Development

The term commercial paper refers to written promises orobligations to pay sums of money that arise from the use of suchinstruments as drafts, promissory notes, checks and tradeacceptances. (The most common instruments are checks andpromissory notes.)4 However, the term commercial paper in itsbroadest sense may refer to either negotiable or non-negotiableinstruments.

During the early part of the Middle Ages, merchants andtraders had to carry gold and silver to pay for the goods theypurchased at the various international fairs. Obviously theseprecious metals were continually subject to loss or theft throughthe perils of travel.5

To eliminate the dangers of this sort, merchants began todeposit their gold and silver with bankers. When they needed

4 Business Law Text and Cases, Second Edition, Howell, Allison, Henley,1981, page 400

5 Ibid.

Basic Principles and Jurisprudence on the Negotiable Instruments Law2

funds to pay for goods they had purchased, they “drew” on themby giving the seller a written order addressed to the bank, tellingit to deliver part of the gold or silver to the seller. These orders,called bills of exchange, were thus substitutes for money. Today,checks and the drafts and promissory notes that are payable ondemand serve this same basic purpose.6

The second major purpose of commercial paper is to serveas credit device; this came about as a logical extension of theinitial use of commercial paper. Soon after bills of exchangebecame established as substitutes for money, merchants whowished to purchase goods on credit discovered that sellers weresometimes willing to accept bills of exchange that were not payableuntil a stated time in the future—such as “ninety days after date.”If the seller was satisfied as to the commercial reputation of thebill’s drawer (the purchaser), he would take such an instrument(called a time bill or draft) and wait until the maturity date to collectit. In this way the seller/payee extended credit to the buyer/drawer.7

Soon thereafter ways were devised by which payees couldsell these instruments to third parties, usually banks, and receiveimmediate cash in return. Since the banks would then have towait for the maturity dates before receiving payment, the payeeswould have to sell them the paper at a discount—that is, perhapsfive or ten percent less than the face amount. This meant, ineffect, that the purchasing banks were charging the sellers interestin advance as compensation for their role in the transaction.8

Today, because of the widespread use of time notes anddrafts, the credit aspect of commercial paper is as important tothe business community as its “substitute for money” aspect.9

The negotiability of bills of exchange and promissory notes

originated in the customs of merchants. The statute of Anne, which

is declaratory of the common law, established the negotiability of

promissory notes.10

6 Ibid. (italics supplied)7 Ibid, pages 401-402.8 Ibid.9 Ibid.10 Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 1

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Negotiable Instrument; definition

A negotiable instrument is a special contract which on itsface is signed by the maker or drawer, making an unqualifiedpromise or order to pay on demand or at a fixed or determinablefuture time, a sum certain in money, to order or bearer, and whenit is addressed to a drawee, the latter must be named or otherwiseindicated therein with reasonable certainty.

Or simply stated: It is a special contract which complieswith the requirements laid down under Section 1 of the NegotiableInstruments Law.

Purpose of the enactment of the Negotiable Instruments Law

The Negotiable Instruments Law was enacted for thepurpose of facilitating, not hindering or hampering transactions incommercial paper. Thus, the said statute should not be tamperedwith haphazardly or lightly. Nor should it be brushed aside inorder to meet the necessities in a single case.11

Functions of a Negotiable Instrument

1. Substitute for money—merchants often do not want tocarry cash for fear of loss or theft.

2. Credit device—some forms of negotiable instrumentsextend credit from one party to another.

3. Recordkeeping device—these records are used forfinancial statements, tax returns, and the like.

Negotiable Instrument as a substitute for money

The essence of negotiability which characterizes anegotiable paper as a credit instrument lies in its freedom tocirculate freely as a substitute for money.12 (Firestone Tire &

Rubber Company of the Philippines vs. Court of Appeals and

Luzon Development Bank, G.R. No. 113236, March 5, 2011,

[Quisumbing, J.])

11 State Investment House, Inc. v. Court of Appeals, 217 SCRA 32 (1993),cited in Osmeña vs. Citibank, March 23, 2004

12 Traders Royal Bank vs. Court of Appeals, 269 SCRA 15, 26 (1997)


Since a negotiable instrument is only a substitute for moneyand not money, the delivery of such an instrument does not, byitself, operate as payment (See. 189, Act 2031 on Neg. Inst..; Art.1249, Civil Code; Bryan Landon Co. v. American Bank, 7 Phil.255; Tan Suncor v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check,whether a manager’s check or ordinary cheek, is not legal tender,and an offer of a check in payment of a debt is not a valid tenderof payment and may be refused receipt by the obligee or creditor.Mere delivery of checks does not discharge the obligation undera judgment. The obligation is not extinguished and remainssuspended until the payment by commercial document is actuallyrealized (Art. 1249, Civil Code, par. 3).13

Words of Negotiability

The language of negotiability which characterize anegotiable paper as a credit instrument is its freedom to circulateas a substitute for money. Hence, freedom of negotiability is thetouchstone relating to the protection of holders in due course,and the freedom of negotiability is the foundation for the protectionwhich the law throws around a holder in due course (11 Am. Jur.2d, 32).

As held in Caltex (Philippines), Inc vs. Court of Appeals,14

“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 theconstruction of a bill or note, the intention of the parties is tocontrol, if it can be legally ascertained. While the writingmay be read in the light of the surrounding circumstance inorder to more perfectly understand the intent and meaningof the parties, yet as they have constituted the writing to bethe only outward and visible expression of their meaning,no other words are to be added to it or substituted in itsstead. The duty of the court in such case is to ascertain,not what the parties may have secretly intended ascontradistinguished from what their words express, but whatis the meaning of the words they have used. What theparties meant must be determined by what they said.”

13 Philippine Airlines, Inc. vs. Court of Appeals, G.R. No. L-49188, Jan. 30,1990, [Gutierrez, J.]

14 G.R. No. 97753, August 10, 1992, 212 SCRA 448, emphasis ours

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Quasi-Negotiable Instruments

In one case, that of Capco vs. Macaset15, the Supreme Courthad an occasion to rule that: “[c]ertificates of stocks are consideredas “quasi-negotiable” instruments. When the owner or shareholderof these certificates signs the printed form of sale or assignmentat the back of every stock certificate without filling in the blanksprovided for the name of the transferee as well as for the name ofthe attorney-in-fact, the said owner or shareholder, in effect,confers on another all the indicia of ownership of the said stockcertificates. (Campos and Lopez-Campos, Notes and Cases onNegotiable Instruments Law, 1971 ed., p 605)”

The phrase quasi-negotiable has been termed as unhappyone; and certainly it is far from satisfactory, as it conveys noaccurate, well-defined meaning. But still it described better thanany other short-hand expression the nature of those instrumentswhich, while not negotiable in the sense of the law merchant, areso framed and so dealt with, as frequently to convey as good atitle to the transferee as it they were negotiable. (Daniel, TheElements of Negotiable Instruments Law, page 27)

Very frequently by application of the principles of estoppels,and to effectuate the ends of justice and the intention of the parties,the courts decree a better title to the transferee than actuallyexisted in his transferrer; and the result reached in many cases isthe same as would be reached if the instrument were negotiable.16

Types of Negotiable Instruments.

The Philippine Negotiable Instruments Law was basicallylifted from the provisions of the United States Uniform CurrencyAct, in which Secs. 13-104 thereof specified four types ofinstruments (e.g. drafts, checks, certificates of deposit, and notes).In the Philippine setting, however, Act 2031 (NegotiableInstruments Law) provides for three (e.g., promissory notes, billsof exchange, checks), noteworthy is the inclusion of Drafts andCertificates of Time Deposit through the decisions of the SupremeCourt interpreting our law on negotiable instruments.

15 G.R. No. 90888, September 13, 199016 Railroad Co. v. Howard, 7 Wall. 415


At present, in Philippine jurisdiction, we generally recognizefive types of negotiable instruments, to wit:

1. Promissory Notes17

2. Bills of Exchange18

3. Check19

4. Draft20

5. Certificates of Time Deposit21

2002 Bar Question:

A. Define the following: (1) a negotiable promissorynote, (2) a bill of exchange and (3) a check. (3%)

B. You are Pedro Cruz. Draft the appropriate contractlanguage for (1) your negotiable promissory note and(2) your check, each containing the essentialelements of a negotiable instrument. (2%)

ANSWER:

A. (1) Sec. 184, Act. 2031—it is an unconditional promisein writing made by one person to another, signed bythe maker, engaging to pay on demand, or at a fixedor determinable future time, a sum certain in moneyto order or to bearer.

(2) Sec. 126, Act 2031—is an unconditional order inwriting addressed by one person to another, signedby the person giving it, requiring the person to whomit is addressed to pay on demand or at a fixed ordeterminable future time a sum certain in money toorder or to bearer.

(3) Sec. 185, Act 2031—it is a bill of exchange drawnon a bank payable on demand.

17 Sec. 184, Act 2031, Negotiable Instruments Law.18 Sec. 126, ibid.19 Sec. 185, ibid.20 BPI vs. Commissioner of Internal Revenue,21 Caltex (Philippines), Inc. vs. Court of Appeals, G.R. No. 97753, August 10,

1992.

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B. (1) September 1, 2002

I promise to pay Pancho Dela Torre, or order,ONE HUNDRED THOUSAND PESOS (Php100,000.00), on December 25, 2002.

(Sgd)Pedro Cruz

(2) Bank of the Philippine Islands-Malate, ManilaSeptember 1, 2002

Pay to the order of Pancho Dela Torre, theamount of ONE HUNDRED THOUSAND PESOS(Php 100,000.00).

(Sgd)Pedro Cruz

1. What is a Promissory Note?

It is an unconditional promise in writing made by one personto another, signed by the maker, engaging to pay on demand, orat a fixed or determinable future time, a sum certain in money toorder or to bearer. (Sec. 184, Negotiable Instruments Law)

In the case of Pentacapital Investment Corporation vs.

Makilito B. Mahinay,22 citing Sierra vs. Court of Appeals,23 it washeld that:

“A promissory note is a solemn acknowledgment of a debtand a formal commitment to repay it on the date and underthe conditions agreed upon by the borrower and the lender.A person who signs such an instrument is bound to honor itas a legitimate obligation duly assumed by him through thesignature he affixes thereto as a token of his good faith. Ifhe reneges on his promise without cause, he forfeits thesympathy and assistance of this Court and deserves insteadits sharp repudiation.”

22 G.R. No. 171736, July 5, 2010, [Nachura, J.:]23 G.R. No. 90270, July 24, 1992, 211 SCRA 785, 795


Test to determine a promissory note

“To constitute a good promissory note, no precise words ofcontract are necessary, provided they amount, in legal effect, to apromise to pay. In other words, if over and above the mereacknowledgment of the debtor there may be collected from thewords used a promise to pay it, the instrument may be regardedas a promissory note. (Jimenez vs. Bucoy, G.R. No. L-10221,

February 28, 1958, [Bengzon, J.])

“Due A. B. $325, payable on demand,” or “I acknowledgemyself to be indebted to A in $ 109, to be paid on demand, forvalue received,” or “I.O.U. $85 to be paid on May 5th,” are held tobe promissory notes, significance being given to words of paymentas indicating a promise to pay. (1 Daniel Neg. Inst., see 39 and

cases cited [Cowan vs. Hallack, (Colo.) 13 Pacific Reporter 700,

703) (Supra)

“An acknowledgment may become a promise by the additionof words by which a promise of payment is naturally implied, suchas, “payable”, “payable on a given day”, “payable on demand”,“paid…when called for,”…(10 Corpus Juris Secundump p. 523.)(supra)

Who are the parties to a Promissory Note?

The maker, he is the person who drafted and issued thepromissory note, and made a promise that upon demand or at afixed or determinable future time, he will pay a sum certain inmoney to order or to bearer to the holder of the instrument or to aholder in due course.

The payee, is the person in whose favor the promissorynote was issued.

Intimidation, vitiation of consent in promissory notes

Carmela Brobio Mangahas vs. Eufrocina BrobioG.R. No. 183852, October 20, 2010

NACHURA, J.:

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FACTS: On January 10, 2002, Pacifico S. Brobio (Pacifico) diedintestate, leaving three parcels of land. He was survivedby his wife, respondent Eufrocina A. Brobio, and fourlegitimate and three illegitimate children; petitionerCarmela Brobio Mangahas is one of the illegitimatechildren.

On May 12, 2002, the heirs of the deceased executeda Deed of Extrajudicial Settlement of Estate of the LatePacifico Brobio with Waiver. In the Deed, petitioner andPacifico’s other children, in consideration of their loveand affection for respondent and the sum ofP150,000.00, waived and ceded their respective sharesover the three parcels of land in favor of respondent.According to petitioner, respondent promised to giveher an additional amount for her share in her father’sestate. Thus, after the signing of the Deed, petitionerdemanded from respondent the promised additionalamount, but respondent refused to pay, claiming thatshe had no more money.

A year later, while processing her tax obligations withthe Bureau of Internal Revenue (BIR), respondent wasrequired to submit an original copy of the Deed. Leftwith no more original copy of the Deed, respondentsummoned petitioner to her office on May 31, 2003and asked her to countersign a copy of the Deed.Petitioner refused to countersign the document,demanding that respondent first give her the additionalamount that she promised. Considering the value ofthe three parcels of land (which she claimed to be worthP20M), petitioner asked for P1M, but respondentbegged her to lower the amount. Petitioner agreed tolower it to P600, 000.00. Because respondent did nothave the money at that time and petitioner refused tocountersign the Deed without any assurance that theamount would be paid, respondent executed apromissory note. Petitioner agreed to sign the Deedwhen respondent signed the promissory note whichread —


31 May 2003

This is to promise that I will give [a] (sic) FinancialAssistance to CARMELA B. MANGAHAS the amountof P600,000.00 Six Hundred Thousand only on June15, 2003.

(SGD)EUFROCINA A. BROBIO

When the promissory note fell due, respondent failedand refused to pay despite demand. Petitioner madeseveral more demands upon respondent but the latterkept on insisting that she had no money.

ISSUES: Was intimidation used to execute the promissory notesubject of the case?

RULING: Contracts are voidable where consent thereto is giventhrough mistake, violence, intimidation, undueinfluence, or fraud. In determining whether consent isvitiated by any of these circumstances, courts are givena wide latitude in weighing the facts or circumstancesin a given case and in deciding in favor of what theybelieve actually occurred, considering the age, physicalinfirmity, intelligence, relationship, and conduct of theparties at the time of the execution of the contract andsubsequent thereto, irrespective of whether the contractis in a public or private writing.

Nowhere is it alleged that mistake, violence, fraud, orintimidation attended the execution of the promissorynote. Still, respondent insists that she was “forced” intosigning the promissory note because petitioner wouldnot sign the document required by the BIR. In one case,the Court – in characterizing a similar argument byrespondents therein – held that such allegation istantamount to saying that the other party exerted undueinfluence upon them. However, the Court said that thefact that respondents were “forced” to sign thedocuments does not amount to vitiated consent.

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There is undue influence when a person takes improperadvantage of his power over the will of another,depriving the latter of a reasonable freedom of choice.For undue influence to be present, the influence exertedmust have so overpowered or subjugated the mind ofa contracting party as to destroy his free agency,making him express the will of another rather than hisown.

Respondent may have desperately needed petitioner’ssignature on the Deed, but there is no showing thatshe was deprived of free agency when she signed thepromissory note. Being forced into a situation does notamount to vitiated consent where it is not shown thatthe party is deprived of free will and choice. Respondentstill had a choice: she could have refused to executethe promissory note and resorted to judicial means toobtain petitioner’s signature. Instead, respondent choseto execute the promissory note to obtain petitioner’ssignature, thereby agreeing to pay the amountdemanded by petitioner.

Contrary to the CA’s findings, the situation did notamount to intimidation that vitiated consent. There isintimidation when one of the contracting parties iscompelled to give his consent by a reasonable andwell-grounded fear of an imminent and grave evilupon his person or property, or upon the personor property of his spouse, descendants, orascendants. Certainly, the payment of penalties fordelayed payment of taxes would not qualify as a“reasonable and well-grounded fear of an imminentand grave evil.” (emphasis supplied) We join the RTCin holding that courts will not set aside contracts merelybecause solicitation, importunity, argument,persuasion, or appeal to affection was used to obtainthe consent of the other party. Influence obtained bypersuasion or argument or by appeal to affection is notprohibited either in law or morals and is not obnoxiouseven in courts of equity.


Question:

Does the reference to the penalty charges in thepromissory note constitute substantial compliance withthe disclosure requirement of the Truth in Lending Act?

ANSWER:

Yes.

The Court has affirmed that financial charges are amplydisclosed if stated in the promissory note.

In the case of Development Bank of the Philippines vs.

Arcilla, Jr. The Court there said, “Under Circular 158 of the CentralBank, the lender is required to include the information requiredby R.A. 3765 in the contract covering the credit transaction or anyother document to be acknowledged and signed by the borrower.In addition, the contract or document shall specify additionalcharges, if any, which will be collected in case certain stipulationsin the contract are not met by the debtor.” In this case, thepromissory notes signed by the Yus contained data, includingpenalty charges, required by the Truth in Lending Act. They cannotavoid liability based on a rigid interpretation of the Truth in LendingAct that contravenes its goal. (Bank of the Philippine Islands, Inc.

vs. Sps Yu, G.R. No. 184122 January 20, 2010, [Abad, J.])

2. Bill of Exchange defined.

A Bill of Exchange is an unconditional order in writingaddressed by one person to another, signed by the person givingit, requiring the person to whom it is addressed to pay on demandor at a fixed or determinable future time a sum certain in moneyto order or to bearer. (Sec. 126, Negotiable Instruments Law)

In the once celebrated case of Manuel Bastida vs. The Acting

Commissioner of Customs and The Court of Tax Appeals,24 it washeld that:

“[A]s bills exchange they are, fundamentally, negotiableinstruments. And a negotiable instrument “is more like

24 G.R. No. L-24011, October 24, 2970, [Castro, J:]

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money than a contract right or chose in action.”25 Assuch, it may be the “subject of conversion (Knight vs. Seney290 Ill. 11) or of replevin (Rothwell vs. Taylor 303 Ill. 263.)26

it may also be the “subject of sale, like any other goods orwares.”27 As the Tax Court aptly observed, “checks may bebought and sold like a commodity. As a matter of fact in theUnited States the deposit of a check with a bank isconsidered a sale (Helvering vs. Stein [CA 4] 115 F 2d 468;Burton vs. United States, 196 US 283, 49 L ed 482).” Moneyorders, also considered as bills of exchange of limitednegotiability, possess the same attributes as othernegotiable instruments. Thus, they may, be bought and soldlike checks.” (emphasis supplied)

As long as a commercial paper conforms with the definitionof a bill of exchange, that paper is considered a bill of exchange.The nature of acceptance is important only in thedetermination of the kind of liabilities of the parties involved,but not in the determination of whether a commercial paperis a bill of exchange or not. (Philippine Bank of Commerce vs.

Aruego, G.R. No. L-25836-37, January 31, 1981, [Fernandez, J.])(emphasis supplied)

Illustrative Case:

Philippine Bank of Commerce vs. Jose M. AruegoG.R. Nos. L-25836-37, January 31, 1981

FERNANDEZ, J.:

FACTS: On December 1, 1959, the Philippine Bank ofCommerce instituted an action against Jose M. AruegoCivil Case No. 42066 for the recovery of the total sumof about P35, 000.00 with daily interest thereon fromNovember 17, 1959 until fully paid and commissionequivalent to 3/8% for every thirty (30) days or fractionthereof plus attorney’s fees equivalent to 10% of thetotal amount due and costs. The complaint filed by thePhilippine Bank of Commerce contains Twenty-Two

25 Ludwig Teller, Bills and Notes, p. 6 (1948)26 Ibid., pp. 6-727 Ibid., p. 7


(22) causes of action referring to Twenty-Two (22)transactions entered into by the said Bank and Aruegoon different dates covering the period from August 28,1950 to March 14, 1951. The sum sought to berecovered represents the cost of the printing of “WorldCurrent Events”, a periodical published by thedefendant. To facilitate the payment of the printing thedefendant obtained a credit accommodation from theplaintiff. Thus, for every printing of the “World CurrentEvents”, the printer Encal Press and Photo Engraving,collected the cost of printing by drawing a draft againstthe plaintiff, said draft being sent later to the defendantfor acceptance. As an added security for the paymentof the amounts advanced to Encal Press and PhotoEngraving, the plaintiff bank also required thedefendant Aruego to execute a trust receipt in favor ofsaid bank wherein said defendant undertook to hold intrust for plaintiff the periodicals and to sell the samewith the promise to turn over to the plaintiff the proceedsof the sale of said publication to answer for the paymentof all obligations arising from the draft.

Defendant contends that the drafts signed by him werenot really bills of exchange but mere pieces of evidenceof indebtedness because payments were made beforeacceptance.

ISSUE: Is his contention tenable?

RULING: The contention is without merit.Under the NegotiableInstruments Law, a bill of exchange is an unconditionalorder in writing addressed by one person to another,signed by the person giving it, requiring the person towhom it is addressed to pay on demand or at a fixed ordeterminable future time a sum certain in money toorder or to bearer. As long as a commercial paperconforms with the definition of a bill of exchange, thatpaper is considered a bill of exchange. The nature ofacceptance is important only in the determination ofthe kind of liabilities of the parties involved, but not inthe determination of whether a commercial paper is abill of exchange or not.

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From the definition, does the bill of exchange operate as anassignment of funds in the hands of the drawee?

A bill in itself does not operate as an assignment of thefunds in the hands of the drawee available for the payment thereof.(Sec. 127, Negotiable Instruments Law)

Doctrine of Equitable Assignment

The doctrine of equitable assignment is the creature of courtsof equity, and the phrase “equitable assignment” is used because,by the technicalities of pleadings at law, no legal assignment canbe effectuated.28 It is contended that the bill, whether for the wholeof the fund or debt, or only a part, may be evidence to show anassignment; and that with other circumstances indicating that suchwas the intention, will vest in the holder an exclusive claim to thedebt or fund, and bind it in the hands of the drawee after notice.29

The bill for the entire amount of debt or fund should operate as anequitable assignment thereof.30

Moreover, it may be regarded as a settled doctrine that anorder founded upon a good consideration, given for a specificdebt or fund owing by or in the hands of a third person, operatesas, or rather is evidence of, an equitable assignment of the demandto the holder.31

Who are the parties to a bill of exchange?

The drawer, is the person drawing an instrument makingan unconditional order in writing to the drawee, requiring him topay on demand or at a fixed or determinable future time a sumcertain in money to order or to bearer.

The drawee, is the person being required by the drawerto pay on demand or at a fixed or determinable future time asum certain in money to the payee, or his order, or to the bearerof the instrument.

28 Bank of Commerce v. Bogy, 44 Mo. 15; Grammel v. Cramer, 55 Mich. 20129 Daniel on Negotiable Instruments, page 18; Mandeville v. Welch, 5 Whaet.

277; Buckner v. Sayre, 17 B. Monroe, 754, cited in the Elements ofNegotiable Instruments Law, Daniel, page 8

30 Supra31 The Elements of Negotiable Instruments Law, Daniel, page 9


The payee, is the person in whose favor the bill of exchangewas issued.

What is the rule if the Bill of Exchange is addressed to morethan one drawee?

A bill may be addressed to two or more drawees jointly,whether they are partners of not.

But not to two or more drawees in the alternative or insuccession.

Example:

To: Lancelot Borja and/or Margaux BorjaBo. Obrero, Iloilo City

In the above instance, the drawee is addressed to two ormore persons jointly, whether they are partners or not. Thus,payment of any one of them extinguishes the entire obligation.

To: Lancelot Borja, and in his incapacity or insolvency,Margaux Borja;

Lancelot Borja, Margaux Borja, or Mizpah Borja insuccession.

In the second instance, the bill was addressed to two ormore drawees in the alternative or in succession, such is notallowed under the law.

Bills of exchange are either foreign or inland

Foreign Bill of Exchange—when drawn in one State orcountry, and made payable in another State or country;32

Inland Bill of Exchange—when drawn, and made payable,in the same State or country.33

32 The Elements of Negotiable Instruments Law, Daniel, page 533 Ibid

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Difference between bills and notes

In their original structure, a bill of exchange and a promissorynote do not strongly resemble each other. In a bill, there arethree original parties: drawer, drawee, and payee; in a note onlytwo: maker and payee. In a bill the acceptor is the primary debtor.In a note the maker is the only debtor. But if the note be transferredto a third party by the payee, it becomes strikingly similar to a bill.The indorser becomes then, as it were, the drawer; the maker,the acceptor; and the indorsee, the payee.34 (The Elements of theLaw of Negotiable Instruments, by: John W. Daniel, 1908)

Bank notes or bank bills

Bank notes or bank bills (as they are equally as often called)are the promissory notes of incorporated banks, designed tocirculate like money, and payable to bearer on demand.35

The terms “bank notes” and “bank bills” are of the likesignification, and for the purposes of interpretation, both in criminaland civil jurisprudence, are equivalent and interchangeable.36

In form and substance they are promissory notes, and theyare governed by very many of the principles which apply to thenegotiable notes of individuals given in the course of trade. Butthey are designed to constitute a circulating medium, and thiscircumstance imparts to them peculiar characteristics, andessentially varies the rules which govern promissory notes ingeneral. They have been held not securities for money, but moneyitself.37

Chief Characteristics of—

Bank Bills

� Always payable on demand;38

34 Daniel on Negotiable Instruments, page 2935 The Elements of Negotiable Instruments Law, Daniel, page 15 (Bold

supplied)36 Ibid37 Soutcot v. Watson, 3 Atk. 226; Daniel on Negotiable Instruments, page

1664, ibid38 Daniel on Negotiable Instruments, page 1666


� Usually payable to bearer, though sometimes expressedto be payable to a person named or bearer;39

� A lawful tender in payment of debts, unless objected tobecause they are not money.40

Bank Notes

� Are not, legally speaking, money, but in a popular senseare often spoken of as money, and are conventionallyused in its stead with the like effect.41

3. Draft, defined.

A draft is a form of a bill of exchange used mainly intransactions between persons physically remote from each other,an order made by one person, say the buyer of goods, addressedto a person having in his possession funds of such buyer orderingthe addressee to pay the purchase price to the seller of the goods,and where the order is made by one bank to another, it is referredto as a bank draft. (Bank of the Philippine Islands vs. Commission

of Internal Revenue, 496 SCRA 601)

In order for a draft to work, one of two general conditionsmust exist. Either the drawee must owe the drawer a debt (inwhich case the drawer is simply telling the drawee to pay the debtor a portion of it to a third party) or some kind of agreement orrelationship must exist between the parties under which thedrawee has consented to the drawing of the draft upon him orher. If neither of these conditions existed, obviously the draweewould not obey the order to pay the amount of the draft to thepayee or to any subsequent holder of the instrument.42

A trade acceptance is a draft or bill of exchange drawn bythe seller of the goods on the purchaser of those goods andaccepted (signed) by the purchaser. The purpose of thetransaction is to enable the seller to raise money on the paperbefore the purchaser’s obligation matures under the salescontract.43

39 Ibid, page 166540 Ibid, page 1672a41 Ibid, page 167242 Business Law Text and Cases, Second Edition, Howell, Allison, Henley,

1981, page 402

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To illustrate, X corporation has sold goods to Y company.Due to the fact that Y company still wishes to utilize the cashinstead of paying in cash, X corporation (drawer) draws a tradeacceptance on Y company for the purchase of the goods. Theinstrument orders Y company to pay the amount due to the orderof X corporation on a particular future time. It is then presented toan officer of Y company who accepts it by signing the same andreturns it to X corporation. The acceptance in effect, would be apromise of Y company to pay X corporation when the samebecomes due. It can now be negotiated to a third person, say Xcorporation’s bank and receives cash immediately.

Nature of Draft, as distinguished from Bill of Exchange

The case of Republic of the Philippines vs. Philippine

National Bank, et al44, laid down a detailed discussion of thenature of Drafts, to wit:

“To begin with, we may say that a demand draft is a bill ofexchange payable on demand (Arnd vs. Aylesworth, 145 Iowa

185; Ward vs. City Trust Company, 102 N.Y.S. 50; Bank of

Republic vs. Republic State Bank, 42 S.W. 2d, 27). Consideredas a bill of exchange, a draft is said to be, like the former, an openletter of request from, and an order by, one person on another topay a sum of money therein mentioned to a third person, ondemand or at a future time therein specified (13 Words and

Phrases, 371). As a matter of fact, the term “draft” is often used,and is the common term, for all bills of exchange. And the words“draft” and “bill of exchange” are used indiscriminately (Ennis vs.

Coshoctan Nat. Bank, 108 S.E., 811; Hinnermann vs. Rosenback,

39 N.Y. 98, 100, 101; Wilson vs. Bechenau, 48 Supp. 272, 275).

On the other hand, a bill of exchange within the meaning ofour Negotiable Instruments Law (Act No. 2031) does not operateas an assignment of funds in the hands of the drawee who is notliable on the instrument until he accepts it. This is the clear importof Section 127. It says: “A bill of exchange of itself does not operateas an assignment of the funds in the hands of the drawee availablefor the payment thereon and the drawee is not liable on the billunless and until he accepts the same.” In other words, in order

43 Ibid.44 G.R. No. L-16106, December 30, 1961


that a drawee may be liable on the draft and then becomeobligated to the payee it is necessary that he first acceptsthe same. In fact, our law requires that with regard to drafts orbills of exchange there is need that they be presented whetherfor acceptance or for payment within a reasonable time after theirissuance or after their last negotiation thereon as the case maybe (Section 71, Act 2031). Failure to make such presentment willdischarge the drawer from liability or to the extent of the losscaused by the delay (Section 186, Ibid.) (emphasis supplied)

Since it is admitted that the demand drafts herein involvedhave not been presented either for acceptance or for payment,the inevitable consequence is that the appellee bank never hadany chance of accepting or rejecting them. Verily, appellee banknever became a debtor of the payee concerned and as such theaforesaid drafts cannot be considered as credits subject to escheatwithin the meaning of the law.”

Demand Draft distinguished from a cashier’s or manager’scheck

In the very same case of Republic of the Philippines vs.

Philippine National Bank, et al, it has been held that: “a demanddraft is very different from a cashier’s or manager’s check, contraryto appellant’s pretense, for it has been held that the latter is aprimary obligation of the bank which issues it and constitutes itswritten promise to pay on demand. Thus, a cashier’s check hasbeen clearly characterized In Re Bank of the United States, 277

N.Y.S. 96, 100, as follows:

A cashier’s check issued by a bank, however, is not anordinary draft. The latter is a bill of exchange payable ondemand. It is an order upon a third party purporting to drawnupon a deposit of funds. (Drinkall vs. Movious State Bank,

11 N.D. 10, 88 N.W. 724, 57 L.R.A. 341, 95 Am. St. Rep.

693; State vs. Tyler County State Bank (Tex. Com. App.)

277 S.W. 625, 42 A.L.R. 1347). A cashier’s check is of avery different character. It is the primary obligation of thebank which issues it (Nissenbaum vs. State, 38 Ga. App.

253, S.E. 776) and constituted its written promise to payupon demand (Steinmetz vs. Schultz, 59 S.D. 603, 241

N.W. 734)

21

The following definitions cited by the appellant also confirmthis view:

A cashier’s check is a check of the bank’s cashier on his oranother bank. It is in effect a bill of exchange drawn by abank on itself and accepted in advance by the act of issuance(10 C.J.S. 409)

A cashier’s check issued on request of a depositor is thesubstantial equivalent of a certified check and the depositrepresented by the check passes to the credit of thecheckholder, who is thereafter a depositor to that amount.(Lummus Cotton Gin Co. vs. Walker, 70 So. 754, 756, 195

Ala. 552)

A cashier’s check, being merely bill of exchange drawn bya bank on itself, and accepted in advance by the act ofissuance, is not subject to countermand by the payee afterindorsement, and has the same legal effects as a certificatedeposit or a certified check. (Walker vs. Sellers, 77 So. 715;

201 Ala. 189)

A demand draft is not therefore of the same category as acashier’s check which should come within the purview of the law.”

4. Certificates of Time Deposit; Negotiable Instrument.

A certificate of deposit is a receipt of a bank or banker for acertain sum of money received upon deposit, and it is generallyframed in such a form as to constitute a promissory note, payableto the depositor, or to the depositor or order, or to bearer. (TheElements of Negotiable Instruments Law, Daniel, page 16)

In order, however, to be negotiable, a certificate of depositmust possess the requisite features of certainty in respect toparties, and time and mode of payment and the same causeswhich deprive bills and notes of negotiability would affect it in likemanner. (ibid)

Illustrative case:

Caltex (Philippines), Inc. vs. Court of Appeals and SecurityBank and Trust Company


G.R. No. 97753, August 10, 1992

REGALADO, J.:

Facts: On various dates Security Bank and Trust Company(SBTC) issued 280 certificates of time deposit (CTD)in favor of one Angel dela Cruz who deposited withSBTC the aggregate amount of Php 1,200,000.00. Asample text of the certificates of time deposit isreproduced below:

SECURITY BANKAND TRUST COMPANY6778 Ayala Ave., Makati No. 90101Metro Manila, PhilippinesSUCAT OFFICEP 4,000.00CERTIFICATE OF DEPOSITRate 16%

Date of Maturity FEB. 23, 1984 FEB 22,1982, 19____.

This is to Certify that BEARER has depositedin this Bank the sum of PESOS: FOURTHOUSAND ONLY, SECURITY BANK SUCATOFFICE P4,000 & 00 CTS Pesos, PhilippineCurrency, repayable to said depositor 731 days.after date, upon presentation and surrender ofthis certificate, with interest at the rate of 16%per cent per annum.

(Sgd. Illegible) (Sgd. Illegible)___________ ___________AUTHORIZED SIGNATURES

Angel dela Cruz delivered the said CTDs to Caltex(Philippines) Inc. (Caltex) in connection with hispurchased of fuel products from the latter. Sometimein March 1982, Angel dela Cruz informed SBTC thathe lost all the certificates of time deposit in dispute.On March 25, 1982, Angel dela Cruz negotiated andobtained loan from defendant bank in the amount ofPhp 875,000.00. On the same date, said depositor

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executed a notarized Deed of Assignment of TimeDeposit stated, among others, that dela Cruzsurrenders to SBTC “full control of the indicated timedeposits from and after date” of the assignment andfurther authorizes said bank to pre-terminate, set-offand “apply the said time deposits to the payment ofwhatever amount or amounts may be due” on the loanupon its maturity.

Sometime in 1982, plaintiff’s agent went to thedefendant bank and presented for verification the CTDdeclared lost by Angel dela Cruz alleging that the samewere delivered to herein plaintiff “as security forpurchases made with Caltex. On November 26 1982,defendant received a letter from herein plaintiff formallyinforming it of its possession of the CTD’s in questionand of its decision to pre-terminate the same.Accordingly, defendant bank rejected the plaintiff’sdemand and claim for payment of value of the CTDs.In April 1983, the loan in the amount of Php 875,000.00with defendant bank matured and fell due, and the latterset-off and applied the time deposits in question to thepayment of the matured loan.

Plaintiff filed the instant complaint praying that thedefendant bank be ordered to pay it the aggregate valueof the certificates of time deposit of Php 1,120,000.00plus interest and compounded interest therein at 16%per annum, moral and exemplary damages as well asattorney’s fees.Trial court rendered its decisiondismissing the instant complaint.

Issue: Whether or not the Certificates of Time Deposit areconsidered as negotiable instruments?

Ruling: The CTDs in question are negotiable instruments.Section 1 Act No. 2031, otherwise known as theNegotiable Instruments Law, enumerates the requisitesfor an instrument to become negotiable.

The CTDs in question undoubtedly meet therequirements of the law for negotiability. The parties’


bone of contention is with regard to requisite (d) setforth above. x x x

The documents provide that the amounts depositedshall be repayable to the depositor. And who, accordingto the document, is the depositor? It is the “bearer”.The documents do not say that the depositor is Angeldela Cruz and that the amounts deposited arerepayable specifically to him. Rather, the amounts areto be repayable to the bearer of the documents or, forthat matter, whosoever may be the bearer at the timeof presentment.

x x x

On this score, the accepted rule is that the negotiabilityor non-negotiability of an instrument is determined fromthe writing, that is, from the fact of the instrument itself45.In the construction of a bill or note, the intention of theparties is to control, if it can be legally ascertained.46

While the writing may be read in the light of thesurrounding circumstances in order to prove perfectlyunderstanding the intent and meaning of the parties,yet as they have constituted the writing to be the onlyoutward and visible expression of their meaning, noother words are to be added to it or substituted instead.The duty of the court in such case is to ascertain, notwhat the parties may have secretly intended ascontradistinguished from what their words express, butwhat is the meaning of the words they have used. Whatthe parties meant must be determined by what theysaid.47

Certificates of Time Deposit; Issued without ValuableConsideration; Not Covered by the Philippine DepositInsurance Corporation.

45 11 Am. Jur. 2d, Bills and Notes, 79.46 Ibid, 86.47 Ibid, 87-88.

25

Illustrative Case:

Philippine Deposit Insurance Corporation vs.Court of Appeals and John Francis Cotaoco

G.R. No. 118917, December 22, 1997

KAPUNAN, J:

Petitioner Philippine Deposit Insurance Corporation (PDIC)seeks the reversal of the decision of the Court of Appeals affirmingwith modification the decision of the Regional Trial Court holdingpetitioner liable for the value of thirteen (13) certificates of timedeposit (CTDs) in the possession of private respondents.

The facts, as found by the Court of Appeals, are as follows:

On September 22, 1983, plaintiffs-appellees invested inmoney market placements with the Premiere FinancingCorporation (PFC) in the sum of P10,000.00 each for whichthey were issued by the PFC corresponding promissorynotes and checks. On the same date (September 22, 1983),John Francis Cotaoco, for and in behalf of plaintiffs-appellees, went to the PFC to encash the promissory notesand checks, but the PFC referred him to the Regent SavingBank (RSB). Instead of paying the promissory notes andchecks, the RSB, upon agreement of Cotaoco, issued thesubject 13 certificates of time deposit with Nos. 09648 to09660, inclusive, each stating, among others, that the samecertifies that the bearer thereof has deposited with the RSBthe sum of P10,000.00; that the certificate shall bear 14%interest per annum; that the certificate is insured up toP15,000.00 with the PDIC; and that the maturity date thereofis on November 3, 1983 (Exhs. “B”, “B-1 to “B-12”).

On the aforesaid maturity dated (November 3, 1983),Cotaoco went to the RSB to encash the said certificates.Thereat, RSB Executive Vice President Jose M. Damianrequested Cotaoco for a deferment or an extension of afew days to enable the RSB to raise the amount to pay forthe same (Exh. “D”). Cotaoco agreed. Despite saidextension, the RSB still failed to pay the value of thecertificates. Instead, RSB advised Cotaoco to file a claimwith the PDIC.


Meanwhile, on June 15, 1984, the Monetary Board of theCentral Bank issued Resolution No. 788 (Exh. “2”, Records,p. 159) suspending the operations of the RSB. Eventually,the records of RSB were secured and its deposit liabilitieswere eventually determined. On December 7, 1984, theMonetary Board issued Resolution No. 1496 (Exh. “1”)liquidating the RSB. Subsequently, a masterlist or inventoryof the RSB assets and liabilities was prepared. However,the certificates of time deposit of plaintiffs-appellees werenot included in the list on the ground that the certificateswere not funded by the PFC or duly recorded as liabilitiesof RSB.

On September 4, 1984, plaintiffs-appellees filed with thePDIC their respective claims for the amount of the certificates(Exhs. “C,” “C-1” to “C-12”). Sabina Yu, James Ngkaion,Elaine Ngkaion and Jeffrey Ngkaion, who have similarclaims on their certificates of time deposit with the RSB,likewise filed their claims with the PDIC. To their dismay,PDIC refused the aforesaid claims on the ground that theTraders Royal Bank Check No. 299255 dated September22, 1983 for the amount of P125,846.07 (Exh. “B”) issuedby PFC for the aforementioned certificates was returned bythe drawee bank for having been drawn against insufficientfunds; and said check was not replaced by the PFC, resultingin the cancellation of the certificates as indebtedness orliabilities of RSB.48

Consequently, on March 31, 1987, private respondents filedan action for collection against PDIC, RSB and the Central Bank.

On September 14, 1987, the trial court, declared the CentralBank in default for failing to file an answer.

On May 29, 1989, the trial court rendered its decisionordering the defendants therein to pay plaintiffs, jointly andseverally, the amount corresponding to the latter’s certificates oftime deposit.

Both PDIC and RSB appealed. The Central Bank, on theother hand, filed a petition for certiorari, prohibition and mandamus

48 Rollo, pp. 30-31.

27

before the Court of Appeals praying that the writ of executionissued by the trial court against it be set aside.

On February 8, 1995, the Court of Appeals rendered itsdecision granting the Central Bank’s petition but dismissing theappeals of PDIC and RSB. Hence, this petition by PDIC assigningthe following errors:

I

THE CA ERRED IN HOLDING THAT THE SUBJECT CTDSARE NEGOTIABLE INSTRUMENTS

II

THE CA ERRED IN HOLDING THAT THE CTDS WEREACQUIRED FOR VALUE AND CONSIDERATION

III

THE CA ERRED WHEN IT HELD THAT BECAUSE THE CTDSSTATE THAT THESE WERE INSURED PETITIONER

SHOULD BE HELD LIABLE FOR THE SAME.

We deal jointly with petitioner’s first and third assignederrors.

Relying on this Court’s ruling in Caltex (Philippines), Inc. v.Court of Appeals and Security Bank and Trust Company,49 theCourt of Appeals concluded that the subject CTDs are negotiable.Petitioner, on the other hand, contends that the CTDs are non-negotiable since they do not contain an unconditional promise ororder to pay a sum certain in money nor are they made payableto order or bearer, as required by Section 1 of the NegotiableInstruments Law.

Whether the CTDs in question are negotiable or not is,however, immaterial in the present case. The Philippine DepositInsurance Corporation was created by law and, as such, isgoverned primarily by the provisions of the special law creatingit.50 The liability of the PDIC for insured deposits therefore is

49 212 SCRA 448 (1992).50 Section 4, Corporation Code.


statutory and, under Republic Act No. 3591,51 as amended, suchliability rests upon the existence of deposits with the insured bank,not on the negotiability or non-negotiability of the certificatesevidencing these deposits.

The authority for this conclusion finds support in decisionsby American state courts applying their respective bank guarantylaws. Invariably, the plaintiffs in these cases argued that thenegotiability of the certificates of deposit in their possessionentitled them to be paid out of the bank guaranty fund, a contentionthat the courts uniformly rejected.

Thus, the plaintiffs in Fourth Nat. Bank of Wichita v. Wilson52

argued that:

. . . the court should hold the certificates to be guaranteedbecause they are negotiable instruments, and were acquiredby the present holders in due course; otherwise it is saidcertificates of deposit will be deprived of the quality ofcommercial paper. Certificates of deposit have beenregarded as the highest form of collateral. They are of widecurrency in the banking and business worlds, and areparticularly useful to persons of small means, because theybear interest, and may be readily cashed; therefore todeprive them of the benefit of the guaranty fund would be acalamity. . . .

The Supreme Court of Kansas, however, found the plaintiffs’contention to be without merit, ruling thus:

. . . The argument confuses negotiability of commercial paperwith statutory guaranty of deposits. The guaranty issomething extrinsic to all forms of evidence of bankobligation; and negotiability of instruments has nodependence on existence or nonexistence of the guaranty.

. . . Whatever the status of the plaintiffs may be as holdersin due course under the Negotiable Instruments Law, theycannot be assignees of a deposit which was not made, and

51 Entitled “An Act Establishing The Philippine Deposit Insurance Corporation,Defining Its Powers And Duties And For Other Purposes.”

52 204 Pac. 715 (1992), 110 Kan. 380.

29

cannot be entitled to the benefit of a guaranty which did notcome into existence. . . .

In arriving at the above decision, the Kansas Supreme Courtrelied on its earlier ruling in American State Bank v. Foster,53 whicharose from the same facts as the Fourth National Bank case.There, the Court held:

. . . Even if the plaintiff were to be regarded as an innocentpurchaser of the certificates as negotiable instruments, itssituation would be in no wise bettered so far as relate to aclaim against the guaranty fund. The fund protects depositsonly. And if no deposit is made, or no deposit within theprotection of the guaranty law, the transfer of a certificatecannot impose a liability on the fund. . . . where a certificateof deposit is given under such circumstances that it is notprotected by the guaranty fund, although that fact is notindicated by anything on its face, its indorsement to aninnocent holder cannot confer that quality upon it.

In like fashion did the Supreme Court of Nebraska brushaside a similar contention in State v. Farmers’ Stale Bank:54

In this contention we think the appellants fail to distinguishbetween the liability of the maker of a negotiable instrument,which rests upon the law pertaining to negotiable paper,and the liability of the guaranty fund, which is purely statutory.The circumstances under which the guaranty fund may beliable are entirely apart from the law pertaining to negotiablepaper. A holder of a certificate of deposit in a bank whoseeks to hold the guaranty fund liable for its payment mustshow that the transaction leading up to the issuance of thecertificate was such that the law holds the guaranty fundliable for its payment. . . .

The Farmers’ State Bank ruling was reiterated by theNebraska Supreme Court in State v. Home State Bank of Dunning55

and in State v. Kilgore State Bank.56 The same ruling was adoptedby the Supreme Court of South Dakota in Mildenstein v. Hirning.57

53 204 Pac. 709, 110 Kan. 520 (1922).54 196 N.W. 908, 111 Neb. 117 (1923).55 201 N.W. 971, 113 Neb. 93 (1925).56 205 N.W. 297 (1925).


In the case at bar, the Court of Appeals initially found thesubject CTDs to be negotiable. Subsequently, however,respondent court deemed the issue immaterial, albeit for entirelydifferent reasons.

. . . Besides, whether the certificates are negotiable or notis of no moment. The fact remains that the certificatescategorically state that their bearer [sic] have a deposit inthe RSB; that the same will mature on November 3, 1993;and that the certificates are insured by PDIC.58

We disagree with respondent court’s rationale. The fact thatthe certificates state that the certificates are insured by PDIC doesnot ipso facto make the latter liable for the same should thecontingency insured against arise. As stated earlier, the depositliability of PDIC is determined by the provisions of R.A. No. 3519,and statements in the certificates that the same are insured byPDIC are not binding upon the latter.

. . . The mere fact that a certificate recites on its face that acertain sum has been deposited, or that officers of the bankmay have stated that the deposit is protected by the guarantylaw, does not make the guaranty fund liable for payment, ifin fact a deposit has not been made . . . . The banks havenothing to do with the guaranty fund as such. It is a fundraised by assessments against all state banks, administeredby officers of the state to protect deposits in banks. . . .59

We come now to petitioner’s second assigned error.

In order that a claim for deposit insurance with the PDICmay prosper, the law requires that a corresponding deposit beplaced in the insured bank. This is implicit from a reading of thefollowing provisions of R.A. 3519:

Sec. 1. There is hereby created a Philippine DepositInsurance Corporation . . . which shall insure, as provided,the deposits of all banks which are entitled to the benefitsof insurance under this Act . . . . (Emphasis supplied).

57 207 N.W. 979 (1926).58 Rollo, p. 38.59 State v. Farmers’ State Bank, supra, note 6.

31

xxx xxx xxx

Sec. 10(a) . . .

xxx xxx xxx

(c) Whenever an insured bank shall have been closed onaccount of insolvency, payment of the insured depositsin such bank shall be made by the Corporation as soonas possible . . . .(Emphasis supplied.)

A deposit as defined in Section 3(f) of R.A. No. 3591, maybe constituted only if money or the equivalent of money is receivedby a bank:

Sec. 3. As used in this Act —

(f) The term “deposit” means the unpaid balance of moneyor its equivalent received by a bank in the usual courseof business and for which it has given or is obliged togive credit to a commercial, checking, savings, time orthrift account or which is evidenced by passbook, checkand/or certificate of deposit printed or issued inaccordance with Central Bank rules and regulations andother applicable laws, together with such otherobligations of a bank which, consistent with bankingusage and practices, the Board of Directors shalldetermine and prescribe by regulations to be depositliabilities of the Bank . . . . (Emphasis ours.)

Did RSB receive money or its equivalent when it issued thecertificates of time deposit? The Court of Appeals, in resolvingwho between RSB and PFC issued the certificates to privaterespondents, answered this question in the negative. A perusal ofthe impugned decision, however, reveals that such finding isgrounded entirely on speculation, and thus, cannot bind thisCourt:60

Equally unimpressive is the contention of PDIC and RSBthat the certificates were issued to PFC which did not acquire

60 Cuizon vs. Court of Appeals, G.R. No. 102096, August 22, 1996.


the same for value because the check issued by the latterfor the certificates bounced for insufficiency of funds. First,granting arguendo that the certificates were originally issuedin favor of PFC, such issuance could only give rise to thepresumption that the amount stated in the certificates havebeen deposited to RSB. Had not PFC deposited the amountstated therein, then RSB would have surely refused to issuethe certificates certifying to such fact. Second, why did notRSB demand that PFC pay the certificates or file a claimagainst PFC on the ground that the latter failed to pay forthe value of the certificates? It could very well be that thereason why RSB did not run after PFC for payment of thevalue of the certificates was because the instruments wereissued to the latter by RSB for value or were already paid toRSB by plaintiffs-appellees. Third, if it is true that at thetime RSB issued the certificates to PFC, the instrumentswere paid for with checks still to be encashed, then why didnot RSB specifically state in the certificates that the validitythereof hinges on the encashment of said check? Fourth,even if it is true that PFC did not deposit with or pay theRSB the amount stated in the certificates, the latter is notbe such reason freed from civil liability to plaintiffs-appellees.For, by issuing the certificates, RSB bound itself to pay theamount stated therein to whoever is the bearer upon itspresentment for encashment. Truly, there is no reason todepart from the established principle that where a bankissues a certificate of deposit acknowledging a deposit madewith a third person or an officer of the bank, or with anotherbank representing it to be the certificate of the bank, uponwhich assurance the depositor accepts it, the bank is liablefor the amount of the deposit (Michis, Banks and Banking,Vol. 5A, pp. 48-49, as cited in the Decision on p. 3 thereof).61

Moreover, such finding totally ignores the evidencepresented by defendants. Cardola de Jesus, RSB DeputyLiquidator, testified that RSB received three (3) checks inconsideration for the issuance of several CTDs, including the onesin dispute. The first check amounted to P159,153.93, the second,P121,665.95, and the third, P125,846.07 In consideration of thethird check, private respondents received thirteen (13) certificatesof deposit with Nos. 09648 to 09660, inclusive, with a value of

61 Id., at 39-40.

33

P10,000.00 each or a total of P130,000.00. To conform with thevalue of the third check, CTD No. 09648 was “chopped,” and onlythe sum of P5,846.07 was credited in favor of private respondents.The first two checks “made good in the clearing” while the thirdwas returned for being “drawn against insufficient funds.”

The check in question appears on the records as Exhibit“3” (for Regent),62 and is described in RSB’s offer or evidence as“Traders Royal Bank Check No. 292555 dated September 22,1983 covering the amount or P125,846.07 . . . issued by PremiereFinancing Corporation.”63 At the back of said check are the words“Refer to Drawer,”64 indicating that the drawee bank (Traders RoyalBank) refused to pay the value represented by said check. Byreason of the check’s dishonor, RSB cancelled the correspondingas evidence by an RSB “ticket” dated November 4, 1983.65

These pieces of evidence convincingly show that the subjectCTDs were indeed issued without RSB receiving any moneytherefor. No deposit, as defined in Section 3 (f) of R.A. No. 3591,therefore came into existence. Accordingly, petitioner PDIC cannotbe held liable for value of the certificates of time deposit held byprivate respondents.

ACCORDINGLY, the instant petition is hereby GRANTEDand the decision of the Court of Appeals REVERSED. Petitioneris absolved from any liability to private respondents.

SO ORDERED.

Davide, Jr., Bellosillo and Vitug, JJ., concur.

5. Check defined.

A check is a bill of exchange drawn on a bank payable ondemand. (Sec. 185, Negotiable Instruments Law)

A check is (1) a draft or order (2) upon a bank or bankinghouse, (3) purporting to be drawn upon a deposit of funds (4) forthe payment at all events of a certain sum of money, (5) to a

62 Records, p. 161.63 Id., at 155.64 Exhibit 3-1 (Regent).65 Exhibits “5” and “5-A” (Regent); records, p. 163.


certain person therein named, or to him or his order, or to bearer,and (6) payable instantly on demand.66

Except as herein otherwise provided, the provisions of thisAct applicable to a bill of exchange payable on demand apply toa check.

A check which has been cleared and credited to the accountof the creditor shall be equivalent to a delivery to the creditor ofcash in an amount equal to the amount credited to his account.(Equitable PCI Bank vs. Ong, 502 SCRA 119)

Check and Inland Bills of Exchange, distinguished

The Supreme Court of the United States, in the leading caseof Merchants Bank v. State Bank, says of checks when contrastedwith bills of exchange: “Bank checks are not inland bills ofexchange, but have many of the properties of such commercialpaper, and many of the rules of the law merchants are alikeapplicable to both. Each is for a specified sum, payable inmoney—in both cases, there is a drawer, a drawee, and payee.Without acceptance, no action can be maintained by the holder,upon either, against drawee. The chief points of difference arethat (1) a check is always drawn on a bank or banker; (2) thedrawer is not discharged by the laches of the holder inpresentment, unless he can show that he has sustained someinjury by the default; (3) it is not due until payment is demanded,and the statute of limitations runs only from that time; (4) it is, byits fact, the appropriation of so much money of the drawer, in thehands of the drawee, to the payment of an admitted liability of thedrawer; (5) it is not necessary that the drawer of a bill shouldhave funds in the hands of the drawee—a check in such casewould be a fraud.”67

A check is a draft or order

A bill is also a draft or order; and it is often said that a checkis, in legal effect, a bill of exchange drawn on a bank or banking

66 Blair & Hoge v. Wilson, 28 Gratt. 170; Ridgely Bank v. Patton, 109 Ill, 484,cited in Daniel, page 17

67 Merchants’ Bank v. State Bank, 10 Wall. 647, cited in Daniel, page 18(italics supplied)

35

house, with some peculiarities.68 In some cases it is called a billpayable on demand,69 and in others an inland bill, or in the natureof an inland bill, payable on demand;70 and the expression that acheck is “like a bill” has been criticized on the ground that “nihil

simile est idem,” whereas “checks are bills, or rather bill is thegenus, and check is a species,”71 In form a check is a bill on abanking house, and it is perfectly correct to say that it is a bill withsome peculiarities, or in other words, a species of bill of exchange.(Daniel, page 18)

Characteristics of a check

A check has the character of negotiability and at the sametime it constitutes an evidence of indebtedness. By mutualagreement of the parties, the negotiable character of a check maybe waived and the instrument may be treated simply as proof ofan obligation. (Sps. Pacheco vs. Court of Appeals, G.R. No.

126670, December 2, 1999, [Ynares-Santiago, J.])

A check is a negotiable instrument that serves as a substitutefor money and as a convenient form of payment in financialtransactions and negotiations. The use of checks as paymentallows commercial and banking transactions to proceed withoutthe actual handling of money, thus, doing away with the need tophysically count bills and coins whenever payment is made. Itpermits commercial and banking transactions to be carried outquickly and efficiently. But the convenience afforded by checksis damaged by unfunded checks that adversely affect confidencein our commercial and banking activities, and ultimately injurepublic interest. (Mitra vs. People of the Philippines, G.R. No.

191404, July 5, 2010)

As a general rule, checks and other papers deposited in abank for collection remain the property of the depositor, and thebank performs the service of collection as his agent, even thoughit is authorized to apply the proceeds on a debt of the owner.” (7

68 Billgerry v. Branch, 19 Gratt. 418; Cruger v. Armstrong, 3 Johns. Cas. 5;State v. Crawford, 13 La. Ann. 301, ibid

69 Harker v. Anderson, 21 Wend. 372; Edwards on Bills, 396, ibid70 Merchant’s Bank v. Spicer, 6 Wend. 445; Purell v. Allemong, 22 Gratt. 742,

ibid71 Matter of Brown, 2 Story, 502, ibid


C. J., sec. 245, pp. 597, 598; Richardson vs. New Orleans CoffeeCo., 102 Fed., 785; Philadelphia vs. Eckles, 98 Fed., 485;Commercial Nat. Bank vs. Armstrong, 148 U. S., 50; St. Louis,etc. R. Co. vs. Johnston, 133 U. S., 566; Ward vs. Smith, 19 Lawed., 207; Carpenter vs. National Shawmut Bank, 187 Fed., 1.)72

Is Check considered a ‘legal tender’?

A check, whether a manager’s check or ordinary check, isnot legal tender, and an offer of a check in payment of a debt isnot a valid tender of payment and may be refused receipt by theobligee or creditor. (Tibajia vs. CA, G.R. No. 100290, June 4, 1993,

[Padilla, J.]) However, in the case of Fortunado vs. Court of

Appeals73 the Supreme Court stressed that, “We are not, by thisdecision, sanctioning the use of a check for the payment ofobligations over the objections of the creditor.”

In Cebu International Finance Corporation vs. Courts

of Appeals, Vicente Alegre74, the High Court ruled that: “[i]n aloan transaction, the obligation to pay a sum certain in moneymay be paid in money, which is the legal tender or, by the use ofa check. A check is not a legal tender, and therefore cannotconstitute valid tender of payment. In Philippine Airlines, Inc. vs.

Court of Appeals75, this Court held that: “[s]ince a negotiableinstrument is only a substitute for money and not money, thedelivery of such an instrument does not, by itself, operate aspayment (citation omitted).”

Moreover, the following provisions support the ruling of theTibajia case, to wit:

a. Article 1249 (NCC) The payment of debts in money shallbe made in the currency stipulated, and if it is not possibleto deliver such currency, then in the currency which islegal tender in the Philippines.

The delivery of promissory notes payable to order, orbills of exchange or other mercantile documents shall

72 Chinese Grocer’s Association vs. American Apothecaries Co., G.R. No. L-43667, March 31, 1938, [Villa-Real, J.:]

73 G.R. No. 78556, 25 Paril 1991, 196 SCRA 269.74 G.R. No. 123031, October 12, 199975 18 SCRA 557 (1990)

37

produce the effect of payment only when they have beencashed, or when through the fault of the creditor theymay have been impaired.

In the meantime, the action derived from the originalobligation shall be held in abeyance.

b. Section 1 (R.A. 529) Every provision contained in, ormade with respect to, any obligation which purports togive the obligee the right to require payment in gold orin any particular kind of coin or currency other thanPhilippine currency or in an amount of money of thePhilippines measured thereby, shall be as it is herebydeclared against public policy null and void, and of noeffect, and no such provision shall be contained in, ormade with respect to, any obligation thereafter incurred.Every obligation heretofore and hereafter incurred,whether or not any such provision as to paymentcontained therein or made with respect thereto, shall bedischarged upon payment in any coin or currency whichat the time of payment is legal tender for public andprivate debts.

c. Section 63 (R.A. 265, Central Bank Act) Legal

Character—Checks representing deposit money do nothave legal tender power and their acceptance in thepayment of debts, both public and private, is at the optionof the creditor: Provided, however, that a check whichhas been cleared and credited to the account of thecreditor shall be equivalent to a delivery to the creditorof cash in an amount equal to the amount credited to hisaccount.

However, noteworthy is the fact that the prohibition inSection 1 of R.A. 529 does not apply when:

a. Transactions were the funds involved are the proceedsof loans or investments made directly or indirectly,through bona fide intermediaries or agents, by foreigngovernments, their agencies and instrumentalities, andinternational financial and banking institutions so longas the funds are Identifiable, as having emanated fromthe sources enumerated above;


b. Transactions affecting high priority economic projectsfor agricultural industrial and power development as maybe determined by the National Economic Council whichare financed by or through foreign funds;

c. Forward exchange transactions entered into betweenbanks or between banks and individuals or juridicalpersons;

d. Import-export and other international banking financialinvestment and industrial transactions.

With the exception of the cases enumerated in items (a),(b), (c) and (d) in the foregoing provision, in, which cases theterms of the parties’ agreement shall apply, every other domesticobligation heretofore or hereinafter incurred whether or not anysuch provision as to payment is contained therein or made withrespect thereto, shall be discharged upon payment in any coin orcurrency which at the time of payment is legal tender for publicand private debts: Provided, that if the obligation was incurredprior to the enactment of this Act and required payment in aparticular kind of coin or currency other than Philippine currency,it shall be discharged in Philippine currency measured at theprevailing rates of exchange at the time the obligation wasincurred, except in case of a loan made in foreign currencystipulated to be payable in the currency in which case the rate ofexchange prevailing at the time of the stipulated date of paymentshall prevail. All coins and currency, including Central Bank notes,heretofore and hereinafter issued and drawn by the Governmentof the Philippines shall be legal tender for all debts, public andprivate. (As amended by RA 4100, Section 1, approved June 19,

1964)

Under the above-quoted provision of Republic Act 529, ifthe obligation was incurred prior to the enactment of the Act andrequire payment in a particular kind of coin or currency other thanthe Philippine currency the same shall be discharged in Philippinecurrency measured at the prevailing rate of exchange at the time

the obligation was incurred. As we have adverted to, RepublicAct 529 was enacted on June 16, 1950. In the case now beforeus the obligation of the appellant to pay the appellee the 20% of $140,000.00, or the sum of $ 28,000.00, accrued on August 25,

39

1961, or after the enactment of Republic Act 529. It follows thatthe provision of Republic Act 529 which requires payment at theprevailing rate of exchange when the obligation was incurredcannot be applied. Republic Act 529 does not provide for the rateof exchange for the payment of the obligation incurred after theenactment of said Act. The logical conclusion, therefore, is thatthe rate of exchange should be that prevailing at the time ofpayment. This view finds support in the ruling of this Court in thecase of Engel vs. Velasco & Co.76 where this Court held that evenif the obligation assumed by the defendant was to pay the plaintiffa sum of money expressed in American currency, the indemnityto be followed should be expressed in Philippine currency at therate of exchange at the time of judgment rather than at the rate ofexchange prevailing on the date of defendant’s breach. This isalso the ruling of American court as follows:

The value of domestic money of a payment made in foreignmoney is fixed with respect to the rate of exchange at the time ofpayment. (70 CJS p. 228)

According to the weight of authority the amount of recoverydepends upon the current rate of exchange, and not the par valueof the particular money involved. (48 C.J. 605-606)

The value in domestic money of a payment made in foreignmoney is fixed in reference to the rate of exchange at the time ofsuch payment. (48 C.J. 605)77

It is to be noted that while an agreement to pay in dollars isdeclared as null and void and of no effect, what the law specificallyprohibits is payment in currency other than legal tender. It doesnot defeat a creditor’s claim for payment, as it specifically providesthat “every other domestic obligation…whether or not any such

provision as to payment is contained therein or made with respect

thereto, shall be discharged upon payment in any coin or currency

which at the time of payment is legal tender for public and private

debts.” A contrary rule would allow a person to profit or enrichhimself inequitable at another’s expense. (Ponce vs. Court of

Appeals, G.R. No. L-49494, May 31, 1979, [Melencio-Herrera,

J.])

76 47 Phil 115, 142.77 Kalalao vs. Luz, G.R. No. L-27782, July 31, 1970.


As held in Eastbound Navigation, Ltd. vs. Juan Ysmael &

Co., Inc., 102 Phil 1 (1957), and Arrieta vs. National Rice & Corn

Corp.78, if there is any agreement to pay an obligation in a currencyother than Philippine legal tender, the same is null and void ascontrary to public policy, pursuant to Republic Act No 529, andthe most that could be demanded is to pay said obligation inPhilippine currency. In other words, what is prohibited by RA No.529 is the payment of an obligation in dollars, meaning that acreditor cannot oblige the debtor to pay him in dollars, even if theloan were given in said currency. In such a case, the indemnity tobe allowed should be expressed in Philippine currency on thebasis of the current rate of exchange at the time of payment.79

(supra)

Exception to the Rule; check not a legal tender.

In the case of Salvacion F. Vda. De Eduque vs. Jose M.

Ocampo80, the Supreme Court already upheld that Japanesemilitary notes were legal tender during Japanese occupation. Butappellant argues, further, that the consignation of a cashier’scheck, which is not legal tender, is not binding upon him. Thisquestion, however, has never been raised in the lower court. Uponthe contrary, defendant accepted impliedly in the consignation ofthe cashier’s check when he himself asked the court that out ofthe money thus consigned he be paid the amount of the secondloan of P15,000. It is a rule that “a cashier’s check mayconstitute a sufficient tender where no objection is made onthis ground.”81

If effect, when there is implied acceptance, it thus operatesas a waiver on the part of the person receiving it to later questionthe same. He is estopped by virtue his act of implied acceptance.

What is a crossed-check?

This is a check with two parallel lines in the upper left handcorner. (Bank of America, NT & SA, vs. Associated Citizens Bank,

G.R. No. 141001, 141018, May 21, 2009, [Carpio, J.])

78 10 SCRA 79 (1964)79 Kalalo vs. Luz, 34 SCRA 337 (1970)80 G.R. No. L-222, 26 April 1950, penned by Chief Justice Moran81 62 C.J., p. 670; see also 40 Amer. Jur. P. 764 (emphasis supplied)

41

Under usual practice, crossing a check is done by placingtwo parallel lines diagonally on the left portion of the check. Thecrossing may be special wherein between the two parallel lines iswritten the name of a bank or a business institution, in which casethe drawee should pay only with the intervention of that bank orcompany, or crossing may be general wherein between twoparallel diagonal lines are written the words “and Co.” or none atall as in the case at bar, in which case the drawee should notencash the same but merely accept the same for deposit. (State

Investment House vs. Intermediate Appellate Court, G.R. No.

72764, July 13, 1989, [Fernan, C.J:])

Illustrative Case:

CHAN WAN vs. TAN KIM and CHEN SOG.R. No. L-15380, Sept. 30, 1960

BENGZON, J:

This suit to collect eleven checks totaling P4,290.00 is herefor decision because it involves no issue of fact.

Such checks payable to “cash or bearer” and drawn bydefendant Tan Kim (the other defendant is her husband) uponthe Equitable Banking Corporation, were all presented for paymentby Chan Wan to the drawee bank, but they “were all dishonoredand returned to him unpaid due to insufficient funds and/or causesattributable to the drawer.”

At the hearing of the case, in the Manila court of firstinstance, the plaintiff did not take the witness stand. His attorney,however, testified only to identify the checks — which are ExhibitsA to K — plus the letters of demand upon defendants.

On the other hand, Tan Kim declared without contradictionthat the checks had been issued to two persons named Pinongand Muy for some shoes the former had promised to make and“were intended as mere receipts”.

In view of such circumstances, the court declined to orderpayment for two principal reasons: (a) plaintiff failed to prove hewas a holder in due course, and (b) the checks being crossed


checks should not have been deposited instead with the bankmentioned in the crossing.

It may be stated in this connection, that defendants asserteda counterclaim, the court dismissed it for failure of proof, and fromsuch dismissal they did not appeal.

The only issue is, therefore, the plaintiff’s right to collect onthe eleven commercial documents.

The Negotiable Instruments Law regulating the issuance ofnegotiable checks, the rights and the liabilities arising therefrom,does not mention “crossed checks”. Art. 541 of the Code ofCommerce refers to such instruments.82 The bills of ExchangeAct of England of 1882, contains several provisions about them,some of which are quoted in the margin.83

In the case of Philippine National Bank vs. Zulueta, 101Phil., 1071; 55 Off. Gaz., 222, we applied some provisions of saidBills of Exchange Act because the Negotiable Law, originating

82 SEC. 541. — The maker or any legal holder of a check shall be entitled toindicate therein that it be paid to certain banker or institution, which heshall do by writing across the face the name of said banker or institution,or only the words “and company.”

The payment made to a person other than the banker or institutionshall not exempt the person on whom it is drawn, if the payment was notcorrectly made.

83 76. [General and Special Crossing Defined.] — (1) Where a check bearsacross its face an addition of —(a) The words “and company” or any abbreviation thereof between twoparallel transverse lines, either with or without the words “not negotiable;”or(b) Two parallel transverse lines simply, either with or without the words“not negotiable;” that addition constitutes a crossing, and the cheque iscrossed generally.(2) Where a cheque bears across its face an addition of the name of abanker, either with or without the words “not negotiable,” that additionconstitutes a crossing, and the cheque is crossed specially and to thatbanker.79. . . . (2) Where the banker on whom a cheque is drawn which is socrossed nevertheless pays the same, or pays the same, or pays a chequecrossed generally otherwise than to a banker, or if crossed speciallyotherwise than to the banker to whom it is crossed, or his agent forcollection being a banker, he is liable to the true owner of the cheque forany loss he may sustain owing to the cheque having been so paid. (Takenfrom Brannan’s Negotiable Instruments Law, 60th Ed. 1250-1251.)

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from England and codified in the United States, permits resortthereto in matters not covered by it and local legislation.84

Eight of the checks here in question bear across their facetwo parallel transverse lines between which these words arewritten: non-negotiable — China Banking Corporation. Thesechecks have, therefore, been crossed specially to the ChinaBanking Corporation, and should have been presented forpayment by China Banking, and not by Chan Wan.85 Inasmuchas Chan Wan did present them for payment himself — the Manilacourt said — there was no proper presentment, and the liabilitydid not attach to the drawer.

We agree to the legal premises and conclusion. It must beremembered, at this point, that the drawer in drawing the checkengaged that “on due presentment, the check would be paid, andthat if it be dishonored . . . he will pay the amount thereof to theholder”.86 Wherefore, in the absence of due presentment, thedrawer did not become liable.

Nevertheless we find, on the backs of the checks,endorsements which apparently show they had been depositedwith the China Banking Corporation and were, by the latter,presented to the drawee bank for collection. For instance, on theback of the check Exhibit A (same as in Exh. B), this endorsementappears:

For deposit to the account of White House Shoe Supplywith the China Banking Corporation and then this:

Cleared through the clearing office of Central Bank ofthe Philippines. All prior endorsements and/or lack ofendorsements guaranteed. China BankingCorporation.

And on the back of Exh. G:

84 Sec. 196, Negotiable Instruments Law.85 If it is not presented by said Bank for payment, the drawee runs the risk, in

case of payment to persons not entitled thereto. So the practice is for thedrawee to refuse when presented by individuals. The check is generallydeposited with the bank mentioned in the crossing, so that the latter maytake charge of the collection.

86 Sec. 61. Negotiable Instruments Law.


For deposit to the credit of our account. Viuda e Hijosde Chua Chiong Pio. People’s Shoe Company.

followed by the endorsement of China Banking Corporationas in Exhibits A and B. All the crossed checks have the“clearance” endorsement of China Banking Corporation.

These circumstances would seem to show deposit of thechecks with China Banking Corporation and subsequentpresentation by the latter through the clearing office; but as draweehad no funds, they were unpaid and returned, some of themstamped “account closed”. How they reached his hands, plaintiffdid not indicate. Most probably, as the trial court surmised, — thisis not a finding of fact — he got them after they had been thus

returned, because he presented them in court with such “accountclosed” stamps, without bothering to explain. Naturally and rightly,the lower court held him not to be a holder in due course underthe circumstances, since he knew, upon taking them up, that thechecks had already been dishonored.87

Yet it does not follow as a legal proposition, that simplybecause he was not a holder in due course Chan Wan could notrecover on the checks. The Negotiable Instruments Law doesnot provide that a holder88 who is not a holder in due course,may not in any case, recover on the instrument. If B purchasesan overdue negotiable promissory note signed by A, he is not aholder in due course; but he may recover from A,89 if the latter hasno valid excuse for refusing payment. The only disadvantage ofholder who is not a holder in due course is that the negotiableinstrument is subject to defense as if it were non- negotiable.90

(emphasis supplied)

Now what defense did the defendant Tan Kim prove? Thelower court’s decision does not mention any; evidently His Honorhad in mind the defense pleaded in defendant’s answer, but thoughit [is] unnecessary to specify, because the “crossing” andpresentation incidents sufficed to bar recovery, in his opinion.

87 Sec. 52 (b), Negotiable Instruments Law.88 He was a holder all right, because he had possession of the checks that

were payable to bearer.89 Sec. 51. Negotiable Instruments Law.90 SEC. 58 Negotiable Instruments Law.

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Tan Kim admitted on cross-examination either that thechecks had been issued as evidence of debts to Pinong and Muy,and/or that they had been issued in payment of shoes whichPinong had promised to make for her.

Seeming to imply that Pinong had to make the shoes, sheasserted Pinong had “promised to pay the checks for me”. Yetshe did not complete the idea, perhaps because she was justanswering cross- questions, her main testimony having referredmerely to their counter-claim.

Needless to say, if it were true that the checks had beenissued in payment for shoes that were never made and delivered,Tan Kim would have a good defense as against a holder who isnot a holder in due course.91

Considering the deficiency of important details on which afair adjudication of the parties’ right depends, we think the recordshould be and is hereby returned, in the interest of justice, to thecourt below for additional evidence, and such further proceedingsas are not inconsistent with this opinion. With the understandingthat, as defendants did not appeal, their counterclaim must beand is hereby definitely dismissed. So ordered.

Paras, C.J., Padilla, Bautista Angelo, Labrador, Concepcion,

Reyes, J.B.L., Barrera, Gutierrez David, Paredes and Dizon,

JJ., concur.

What are the effects of crossing a check?

It means that it could only be deposited and could not beconverted into cash. Thus, the effect of crossing a check relatesto the mode of payment, meaning that the drawer had intendedthe check for deposit only by the rightful person, i.e., the payeenamed therein. (Bank of America, NT & SA, vs. Associated Citizens

Bank, G.R. No. 141001, 141018, May 21, 2009, [Carpio, J.])

In Bataan Cigar v. Court of Appeals, the Supreme Courtenumerated the effects of crossing a check as follows:

a.) The check may not be encashed but only deposited inthe bank;

91 Lack of consideration is a defense. (Sec. 28, Negotiable Instruments Law.)


b.) The check may be negotiated only once—to one whohas an account with a bank; and

c.) The act of crossing the check serves as a warning to theholder that the check has been issued for a definitepurpose so that he must inquire if he has received thecheck pursuant to that purpose; otherwise, he is not aholder in due course.

The effect therefore of crossing a check relates to the modeof its presentment for payment. Under Section 72 of theNegotiable Instruments Law, presentment for payment to besufficient must be made (a) by the holder, or by some personauthorized to receive payment on his behalf…As to who the holderor authorized person will depend on the instructions stated on theface of the check. (State Investment House vs. Intermediate

Appellate Court, G.R. No. 72764, July 13, 1989, [Fernan, C.J:])

The act of crossing a check serves as a warning to the holderthat the check has been issued for a definite purpose so that theholder thereof must inquire if he has received the check pursuantto that purpose; otherwise, he is not a holder in due course. (Dino

vs. Loot, G.R. No. 170912, April 19, 2010, [Carpio, J.])

Duty of the collecting bank when dealing with crossed checks

In Philippine Commercial International Bank vs. Court of

Appeals and Ford Phils., Inc.,92 it was held that: “the crossing ofthe check with the phrase “Payee’s Account Only,” is a warningthat the checks should be deposited only in the account of theCIR. Thus, it is the duty of the collecting bank PCIBank to ascertainthat the check be deposited in payee’s account only. Therefore,it is the collecting bank (PCIBank) which is bound to scrutinizethe check and to know its depositors before it could make theclearing indorsement “all prior indorsements and/or lack ofindorsement guaranteed.

In Banco de Oro and Mortgage Bank vs. Equitable Banking

Corporation,93 we ruled:

92 G.R. Nos. 121413, 121479, 128604, January 29, 201193 157 SCRA 188 (1988)94 Id. at 194

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“Anent petitioner’s liability on said instruments, this court isin full accord with the ruling of the PCHC’s Board of Directorsthat:

‘In presenting the checks for clearing and for payment, thedefendant made an express guarantee on the validity of“all prior endorsements.” Thus, stamped at the back of thechecks are the defendant’s clear warranty: ALL PRIORENDORSEMENTS AND/OR LACK OF ENDORSEMENTSGUARANTEED. Without such warranty, plaintiff would nothave paid on the checks.’

No amount of legal jargon can reverse the clear meaning ofdefendant’s warranty. As the warranty has proven to befalse and inaccurate, the defendant is liable for any damagearising out of the falsity of its representation.”94

What may be the ways of crossing a check?

The crossing may be “special” wherein between the twoparallel lines is written the name of a bank or business institution,in which case the drawee should pay only with the intervention ofthat bank or company.

It may also be “general” wherein between two paralleldiagonal lines are written the words “and Co.” or none at all, inwhich case the drawee should not encash the same but merelyaccept the same for deposit. (Bank of America, NT & SA, vs.

Associated Citizens Bank, G.R. No. 141001, 141018, May 21,

2009, [Carpio, J.])

Liability of depository bank for allowing the deposit ofcrossed checks which were issued in favor of and payableto one person, and without being indorsed by the former, tothe account of another person

Vicente Go vs. Metropolitan Bank and Trust Co.G.R. No. 168842, August 11, 2010

NACHURA, J.:


FACTS: Petitioner (Vicente Go) alleged that he was doingbusiness under the name “Hope Pharmacy” which sellsmedicine and other pharmaceutical products in the Cityof Cebu. Petitioner had in his employ Chua as hispharmacist and trustee or caretaker of the business;Tabañag, on the other hand, took care of the receiptsand invoices and assisted Chua in making depositsfor petitioner’s accounts in the business operations ofHope Pharmacy.

Petitioner claimed that there were unauthorizeddeposits and encashments made by Chua andTabañag in the total amount of One Hundred NineThousand Four Hundred Thirty-three Pesos and ThirtyCentavos (P109,433.30).

Petitioner also averred that there were thirty-two (32)checks with Hope Pharmacy as payee, for varyingsums, amounting to One Million Four Hundred Ninety-Two Thousand Five Hundred Ninety-Five Pesos andSix Centavos (P1,492,595.06), that were not endorsedby him but were deposited under the personal accountof Chua with respondent bank.

Petitioner claimed that the said checks were crossedchecks payable to Hope Pharmacy only; and thatwithout the participation and connivance of respondentbank (which was the depository of said crossed-checks), the checks could not have been accepted fordeposit to any other account, except petitioner’saccount.

ISSUE: May the depository bank (Metrobank) be liable forallowing the deposit of crossed checks which wereissued in favor of and payable to herein petitioner(Vicente Go) and without being indorsed by the latter,to the account of Maria Teresa Chua (one of therespondents)?

RULING: A check is a bill of exchange drawn on a bank payableon demand. There are different kinds of checks. Inthis case, crossed checks are the subject of the

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controversy. A crossed check is one where two parallellines are drawn across its face or across the cornerthereof. It may be crossed generally or specially.

A check is crossed specially when the name of aparticular banker or a company is written between theparallel lines drawn. It is crossed generally when onlythe words “and company” are written or nothing iswritten at all between the parallel lines, as in this case.It may be issued so that presentment can be madeonly by a bank.

In order to preserve the credit worthiness of checks,jurisprudence has pronounced that crossing of a checkhas the following effects: (a) the check may not beencashed but only deposited in the bank; (b) the checkmay be negotiated only once — to one who has anaccount with a bank; and (c) the act of crossing thecheck serves as warning to the holder that the checkhas been issued for a definite purpose so that he mustinquire if he has received the check pursuant to thatpurpose, otherwise, he is not a holder in due course.

The Court has taken judicial cognizance of the practicethat a check with two parallel lines in the upper lefthand corner means that it could only be deposited andnot converted into cash. The effect of crossing a check,thus, relates to the mode of payment, meaning thatthe drawer had intended the check for deposit only bythe rightful person, i.e., the payee named therein. Thecrossing of a check is a warning that the check shouldbe deposited only in the account of the payee. Thus, itis the duty of the collecting bank to ascertain that thecheck be deposited to the payee’s account only.

In the instant case, there is no dispute that the subject32 checks with the total amount of P1,492,595.06 werecrossed checks with petitioner as the named payee. Itis the submission of petitioner that respondent bankshould be held accountable for the entire amount ofthe checks because it accepted the checks for depositunder Chua’s account despite the fact that the checks


were crossed and that the payee named therein wasnot Chua.

In its defense, respondent bank countered thatpetitioner is not entitled to reimbursement of the totalsum of P1,492,595.06 from either Maria Teresa Chuaor respondent bank because petitioner was notdamaged thereby.

Respondent bank’s contention is meritorious.Respondent bank should not be held liable for the entireamount of the checks considering that, as found bythe RTC and affirmed by the CA, the checks wereactually given to Chua as payments by petitioner forloans obtained from the parents of Chua. Furthermore,petitioner’s non-inclusion of Chua and Tabañag in thepetition before this Court is, in effect, an admission bythe petitioner that Chua, in representation of herparents, had rightful claim to the proceeds of thechecks, as payments by petitioner for money heborrowed from the parents of Chua. Therefore,petitioner suffered no pecuniary loss in the deposit ofthe checks to the account of Chua.

However, we affirm the finding of the RTC thatrespondent bank was negligent in permitting the depositand encashment of the crossed checks without theproper indorsement. An indorsement is necessary forthe proper negotiation of checks specially if the payeenamed therein or holder thereof is not the onedepositing or encashing it. Knowing fully well that thesubject checks were crossed, that the payee was notthe holder and that the checks contained noindorsement, respondent bank should have takenreasonable steps in order to determine the validity ofthe representations made by Chua. Respondent bankwas amiss in its duty as an agent of the payee.Prudence dictates that respondent bank should nothave merely relied on the assurances given by Chua.

xxx xxx

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Negligence was committed by respondent bank inaccepting for deposit the crossed checks withoutindorsement and in not verifying the authenticity of thenegotiation of the checks. The law imposes a duty ofextraordinary diligence on the collecting bank toscrutinize checks deposited with it, for the purpose ofdetermining their genuineness and regularity. As abusiness affected with public interest and because ofthe nature of its functions, the banks are underobligation to treat the accounts of its depositors withmeticulous care, always having in mind the fiduciarynature of the relationship. The fact that thisarrangement had been practiced for three years withoutMr. Go/Hope Pharmacy raising any objection does notdetract from the duty of the bank to exerciseextraordinary diligence. Thus, the Decision of the RTC,as affirmed by the CA, holding respondent bank liablefor moral damages is sufficient to remind it of itsresponsibility to exercise extraordinary diligence in thecourse of its business which is imbued with publicinterest.

WHEREFORE, the Decision dated May 27, 2005 andthe Resolution dated August 31, 2005 of the Court ofAppeals in CA-G.R. CV No. 63469 are herebyAFFIRMED.

Within what time should a check be presented for payment?

A check must be presented for payment within a reasonableperiod after its issue or the drawer will be discharged from liabilitythereon to the extent of the loss caused by the delay. (Sec. 186,Negotiable Instruments Law)

The present banking practice requires that a check mustbe issued within six (6) months from the date of issuance,otherwise, the check becomes stale, and the drawer will bedischarged from liability thereon to the extent of the loss causedby the delay.


A stale check is valueless

A stale check is one which has not been presented forpayment within a reasonable time after its issue. It is valuelessand, therefore should not be paid. Under the negotiableinstruments law, an instrument not payable on demand must bepresented for payment on the day it falls due. When the instrumentis payable on demand, presentment must be made within areasonable time after its issue. In the case of a bill of exchange,presentment is sufficient if made within a reasonable time afterthe last negotiation thereof.95 (International Corporate Bank vs.

Sps. Gueco, G.R. No. 141968, February 12, 2001, [Kapunan, J.])

Moreover, in Crystal vs. Court of Appeals96, “it has beenheld that, if the check had become stale, it becomes imperativethat the circumstances that caused its non-presentment bedetermined.”

What constitutes reasonable time?

In determining what is a reasonable time, regard is to behad to the nature of the instrument, the usage of trade or businesswith respect to such instruments, and the facts of the particularcase. (Sec. 193, Negotiable Instruments Law)

The test is whether the payee employed such diligence asa prudent man exercises in his own affairs.97 This is because thenature and theory behind the use of a check points to itsimmediate use and payability. (International Corporate Bank vs.

Sps. Gueco, G.R. No. 141968, February 12, 2001) (emphasissupplied)

‘Acceptance’ not required in checks; ‘Acceptance’synonymous with ‘Certification of Checks’

A comprehensive discussion was laid down by the SupremeCourt in the case of Philippine National Bank vs. The National

City Bank of New York and Motor Service Company, Inc., G.R.

No. L-43596, October 31, 1936, wherein it was held that: “[a] checkis a bill of exchange payable on demand and only the rules

95 Section 71, Negotiable Instruments Law96 71 SCRA 443 (1976)97 Jeff Bras, Stones vs. McCullough (1934) 188 Ark. 1108, 69 S.W. (2d) 863

53

governing bills of exchange payable on demand are applicable toit, according to Section 185 of the Negotiable Instruments Law.In view of the fact that acceptance is a step unnecessary, in so faras bills of exchange payable on demand are concerned (Sec.143), it follows that the provisions relative to “acceptance” arewithout application to checks. Acceptance implies, in effect,subsequent negotiation of the instrument, which is not true in caseof the payment of a check because from the moment the check ispaid it is withdrawn from circulation. The warranty established bysection 62, is in favor of holders of the instrument after itsacceptance. When the drawee bank cashes or pays a check, thecycle of negotiation is terminated, and it is illogical thereafter tospeak of subsequent holders who can invoke the warrantyprovided in section 62 against the drawee. Moreover, accordingto section 191, “acceptance” means “an acceptance completedby delivery or notification” and this concept is entirely incompatiblewith payment, because when payment is made the check isretained by the bank, and there is no such thing as delivery ornotification to the party receiving the payment. Checks are not tobe accepted, but presented at once for payment. (1 Bouvier’sLaw Dictionary, 476) There can be no such thing as “acceptance”in the ordinary sense of the term. A check being payableimmediately and on demand, the bank can fulfill its duty to thedepositor only by paying the amount demanded. The holder hasno right to demand from the bank anything but payment of thecheck, and the bank has no right, against the drawer, to doanything but to pay it. (5 R.C.L., p. 516, par. 38) A check is not aninstrument which in the ordinary course of business calls foracceptance. The holder can never claim acceptance as his legalright. He can present for payment, and only for payment. (1 Morseon Banks and Banking, 6th ed., pp. 898, 899.)

There is, however, nothing in the law or in, business practiceagainst the presentation of checks for acceptance, before theyare paid, in which case we have a “certification” equivalent to“acceptance” according to section 187, which provides that “wherea check is certified by the bank on which it is drawn, the certificationis equivalent to an acceptance”, and it is then that the warrantyunder section 62 exists. This certification or acceptance consistsin the signification by the drawee of his assent to the order of thedrawer, which must not express that the drawee will perform hispromise by any other means than the payment of money. (Section


132) When the holder of a check procures it to be accepted orcertified, the drawer and all indorsers are discharged from liabilitythereon (sec. 188), and then the check operates as an assignmentof a part of the funds to the credit of the drawer with bank. (sec.189) There is nothing in the nature of the check which intrinsicallyprecludes its acceptance, in like manner and with like effect as abill of exchange or draft may be accepted. The bank may acceptif it chooses; and it is frequently induced by convenience, by theexigencies of business, or by the desire to oblige customers,voluntarily to incur the obligation. The act by which the bank placesitself under obligation to pay to the holder the sum called for by acheck must be the expressed promise or undertaking of the banksignifying its intent to assume the obligation, or some act fromwhich the law will imperatively imply such valid promise orundertaking. The most ordinary form which such an act assumesis the acceptance by the bank of the check, or, as it is perhapsmore often called, the certifying of the check. (1 Morse on Banksand Banking, pp. 898, 899; 5 R.C.L., p. 520)

No doubt a bank may by an unequivocal promise in writingmake itself liable in any event to pay the check upon demand, butthis is not an “acceptance” of the check in the true sense of thatterm. Although a check does not call for acceptance, and theholder can present it only for payment, the certification of checksis a means in constant and extensive use in the business ofbanking, and its effects and consequences are regulated by thelaw merchant. Checks drawn upon banks or banker, thus markedor certified, enter largely into the commercial and financialtransactions of the country; they pass from hand to hand, in thepayment of debts, the purchase of property, and in the transfer ofbalances from one house and one bank to another. x x x Thecheck becomes a basis of credit—any easy mode of passingmoney from hand to hand, and answers the purposes of money.(5 R.C.L., pp. 516, 517)

What is the effect of a check being certified by the draweebank?

Where a check is certified by the bank on which it is drawnthe certification is equivalent to an acceptance. (Sec. 187,Negotiable Instruments Law)

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The purpose of procuring a check to be certified is toimpart strength and credit to the paper by obtaining anacknowledgment from the certifying bank that the drawer hasfunds therein sufficient to cover the check and securing theengagement of the bank that the check will be paid uponpresentation. A certified check has a distinctive character as aspecies of commercial paper, and performs important functionsin banking and commercial business. When a check is certified,it ceases to possess the character, or to perform thefunctions, of a check, and represents so much money ondeposit, payable to the holder on demand. (Philippine National

Bank vs. The National City Bank of New York, October 31, 1936)(emphasis supplied)

In the case of New Pacific Timber & Supply Co., Inc. vs.

Seneris98, “[s]ince the check had been certified by the draweebank, by the certification, the funds represented by the check aretransferred from the credit of the maker to that of the payee orholder, and for all intents and purposes, the latter becomes thedepositor of the drawee bank, with rights and duties of one insuch situation. Where a check is certified by the bank on which itis drawn, the certification is equivalent to acceptance. Saidcertification “implies that the check is drawn upon sufficient fundsin the hands of the drawee, that they have been set apart for itssatisfaction, and that they shall be so applied whenever the checkis presented for payment. It is an understanding that the check isgood then, and shall continue good, and this agreement is asbinding on the bank as its notes on circulation, a certificate ofdeposit payable to the order of depositor, or any other obligationit can assume. The object of certifying a check, as regardsboth parties, is to enable the holder to use it as money.” Whenthe holder procures the check to be certified, “the check operatesas an assignment of a part of the funds to the creditors.” Hence,the exception to the rule enunciated under Section 63 of theCentral Bank to the effect “that a check which has been clearedand credited to the account of the creditor shall be equivalent to adelivery to the creditor in cash in an amount equal to the amountcredited to his account” x x x (Equitable PCI Bank vs. Rowena

Ong, G.R. No. 156207 [September 15, 2006]) (emphasis supplied)

98 G.R. No. L-41764, 19 December 1980, 101 SCRA 686, 693


All the authorities, both English and American, hold that acheck may be accepted, though acceptance is not usual. By thelaw merchant, the certificate of the bank that a check is good isequivalent to acceptance. It implies that the check is drawn uponsufficient funds in the hands of the drawee, that they have beenset apart for its satisfaction, and that they shall be so appliedwhenever the check is presented for payment. It is an undertakingthat the check is good then, and shall continue good, and thisagreement is as binding on the bank as its notes of circulation, acertificate of deposit payable to the order of the depositor, or anyother obligation it can assume. The object of certifying a checkas regards both parties is to enable the holder to use it as money.The transferee takes it with the same readiness and sense ofsecurity that he would take the notes of the bank. It is availablealso to him for all purposes of money. Thus it continues to performits important functions until in the course of business it goes backto the bank for redemption, and is extinguished by payment. Itcannot be doubted that the certifying bank intended theseconsequences, and it is liable accordingly. To hold otherwisewould render these important securities only a snare and adelusion. A bank incurs no greater risk in certifying a check thanin giving a certificate of deposit. In well- regulated banks thepractice is at once to charge the check to the account of the drawer,to credit in a certified check account, and, when the check is paid,to debit that account in the amount. Nothing can be simpler orsafer than this process. (Merchants’ Bank vs. States Bank, 10

Wall., 604, at p. 647; 19 Law. Ed., 1008, 1009, cited in PNB vs.

National City Bank of New York, id.)

Ordinarily the acceptance or certification of a check isperformed and evidenced by some word or mark, usually thewords “good”, “certified” or “accepted” written upon the check bythe banker or bank officer. (1 Morse, Banks and Banking, 915; 1

Bouvier’s Law Dictionary, 476.) The bank virtually says, that checkis good; we have the money of the drawer here ready to pay it.We will pay it now if you receive it. The holder says, No, I will nottake the money; you may certify the check and retain the moneyfor me until this check is presented. The law will not permit acheck, when due, to be thus presented, and the money to be leftwith the bank for the accommodation of the holder withoutdischarging the drawer. The money being due and the checkpresented, it is his own fault if the holder declines to receive the

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pay, and for his own convenience has the money appropriated tothat check to its future presentment at any time within the statuteof limitations. (1 Morse on Banks and Banking, p. 920.)

What happens if the holder of the check procures it to becertified?

Where the holder of a check procures it to be accepted orcertified, the drawer and all indorsers are discharged from liabilitytherefrom. (Sec. 188, Negotiable Instruments Law)

‘Payment’ and ‘Certification of Checks’ distinguished

In the PNB case, the Supreme Court laid down a detaileddiscussion and held that: “[w]ith few exceptions, the weight ofauthority is to the effect that “payment” neither includes nor implies“acceptance”.

In National Bank vs. First National Bank ([19101, 141 Mo.

App., 719; 125 S.W., 513), the court asks, if a mere promise topay a check is binding on a bank, why should not the absolutepayment of the check should have the same effect? In response,it is submitted that the two things, —that is acceptance andpayment, —are entirely different. If the drawee accepts the paperafter seeing it, and then permits it to go into circulation as genuine,on all the principles of estoppel, he ought to be prevented fromsetting up forgery to defeat liability to one who has taken the paperon the faith of the acceptance, or certification. On the other hand,mere payment of the paper at the termination of its course doesnot act as an estoppel. The attempt to state a general rule coveringboth acceptance and payment is responsible for a large part ofthe conflicting arguments which have been advanced by the courtswith respect to the rule. (Annotation at 12 A.L.R., 1090 1921.])

In First National Bank vs. Brule National Bank ([1917], 12

A.L.R., 1079, 1085), the Court said:

We are of the opinion that “payment is not acceptance”.Acceptance, as defined by Section 131, cannot beconfounded with payment…

Acceptance, certification, or payment of a check, by theexpress language of the statute, discharges the liability only


of the persons named in the statute, to wit, the drawer andall indorsers, and the contract of indorsement by thenegotiator if the check is discharged by acceptance,certification, or payment. But clearly the statute does notsay that the contract or warranty of the negotiator, createdby Section 65, is discharged by these acts.

The rule supported by the majority of the cases (14 A.L.R.764), that payment of a check on a forged or unauthorizedindorsement of the payee’s name, and charging the same to thedrawer’s account, do not amount to an acceptance so as to makethe bank liable to the payee, is supported by all of the recentcases in which the question is considered. (cases cited, Annotationat 69 A.L.R., 1076, 1077 [1930])

Merely stamping a check “paid” upon its payment on a forgedor unauthorized indorsement is not an acceptance thereof so asto render the drawee bank liable to the true payee. (Anderson vs.

Tacoma National Bank [1928], 146 Wash., 520 520; Pac., 8;

Annotation at 69 A.L.R., 1077, [1930])

In State Bank of Chicago vs. Mid-City Trust & Savings Bank

(12 A.L.R., 989; 991, 992), the Court said:

The defendant in error contends that the payment of thecheck shows acceptance by the bank, urging that there can beno more definite act by the bank upon which a check has beendrawn, showing acceptance than the payment of the check.Section 184 of the Negotiable Instruments Act (Sec. 202) providesthat the provisions of the act applicable to bills of exchange applyto a check, and section 131 (sec. 149), that the acceptance of abill must be in writing signed by the drawee. Payment is the finalact which extinguishes a bill. Acceptance is a promise to pay inthe future and continues the life of the bill. It was held in the First

National Bank vs. Whitman (94 U.S., 343; 24 L. ed., 229), thatpayment of a check upon a forged indorsement did not operateas an acceptance in favor of the true owner. The contrary washeld in Pickle vs. Muse (Fickle vs. People’s Nat. Bank, 88 Tenn.,

380; 7 L.R.A., 93; 17 Am. St. Rep., 900; 12 S.W., 919), and Seventh

National Bank vs. Cook (73 Pa., 483; 13 Am. Rep. 751) at a timewhen the Negotiable Instruments Act was not in force in thosestates. The opinion of the Supreme Court of the United States

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seems more logical, and the provision of the NegotiableInstruments Act now require an acceptance to be in writing. Underthis statute the payment of a check on a forged indorsement,stamping it “paid”, and charging it to the account of the drawer, donot constitute an acceptance of the check or create a liability ofthe bank to the true holder or the payee. (Elyria Sav. & Bkg. Co.

vs. Walker Bin Co., 92 Ohio St., 406; L.R.A. 1916 D, 433; 111

N.E., 147; Ann. Cas. 1917 D, 1055; Baltimore & O.R. Co. vs. First

National Bank, 102 Va., 753; 47 S.E., 837; State Bank of Chicago

vs. Mid-City Trust & Savings Bank 12 A.L.R., pp. 989, 991, 992.)

Before drawee’s acceptance of check there is no privity ofcontract between drawee and payee. Drawee’s payment of checkon unauthorized indorsement does not constitute “acceptance”of check. (Sinclair Refining Co. vs. Moultrie Banking Co., 165

S.E., 860 [1932])

The great weight of authority is to the effect that the paymentof a check upon a forged or unauthorized indorsement and thestamping of it “paid” does not constitute an acceptance. (Dakota

Radio Apparatus Co. vs. First Nat. Bank of Rapid City, 244 N.W.,

351, 352 [1932].)

Paying of the check, cashing it on presentment is notacceptance. (South Boston Trust Co. vs. Levin, 249 Mass., 45,

48, 49; 143 N.E., 816; Blocker, Shepard Co. vs. Granite Trust

Company, 187 Me., 53, 54 [1933].)

In Rauch vs. Bankers National Bank of Chicago (143 III.

App. 625, 636, 637 [1908]), the language of the decision was asfollows:

“…The plaintiffs say that this acceptance was made by thevery unauthorized payments of which they complain. Thissuggestion does not seem forceful to us. It is the contentionwhich was made before the Supreme Court of the UnitedStates in First National Bank vs. Whitman (94 U.S., 343),and repudiated by that court. The language of the opinionin that case is so apt in the present case that we quote it:

“It is further contended that such an acceptance of a checkas creates a privity between the payee and the bank is


established by the payment of the amount of this check inthe manner described. This argument is based upon theerroneous assumption that the bank has paid this check. Ifthis were true, it would have discharged all of its duty, andthere would be an end to the claim against it. The banksupposed that it had paid the check, but this was an error.The money it paid was upon a pretended and not a realindorsement of the name of the payee…We cannotrecognize the argument that payment of the amount of thecheck or sight draft under such circumstances amounts toan acceptance creating a privity of contract with the realowner.

“It is difficult to construe a payment as an acceptance underany circumstances…A banker or individual may be readyto make actual payment of a check or draft when presented,while unwilling to make a promise to pay than to meet thepromise when required. The difference between thetransactions is essential and inherent.”

And in Wharf vs. Seattle National Bank (24 Pac. [2d], 120,

123 [1933]):

It is the rule that payment of a check on unauthorized orforged indorsement does not operate as an acceptance ofthe check so as to authorize an action by the real owner torecover its amount from the drawee bank. (Michie on Banks

and Banking, vol. 5, sec. 278, p. 521.) (See also, Federal

Land Bank vs. Collings, 156 Miss., 893; 127 So., 570; 69

A.L.R., 1068.)

In a very recent case, Federal Land Bank vs. Collins (69

A.L.R., 1068, 1072-1074), this question was discussed atconsiderable length. The court said:

In the light of the first of these statutes, counsel for appellantis forced to stand upon the narrow ledge that the payment of thecheck by the two banks will constitute an acceptance. The draweebank simply marked it “paid” and did not write anything else exceptthe date. The bank first paying the check, the Commercial NationalBank and Trust Company, simply wrote its name as indorser andpassed the check on to the drawee bank; does this constitute

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acceptance? The precise question has not been presented tothis court for decision. Without reference to authorities in otherjurisdictions it would appear that the drawee bank had never writtenits name across the paper and therefore, under the strict terms ofthe statute, could not be bound as the acceptor, in the secondplace, it does not appear to us to be illogical and unsound to saythat the payment of a check by the drawee, and the stamping of it“paid”, is equivalent to the same thing as acceptance of a check;however, there is a variety of opinions in the various jurisdictionson this question. Counsel correctly states that the theory uponwhich numerous courts hold that the payment of a check createsprivity between the holder of the check and the drawee bank istantamount to a pro tanto assignment of that part of the funds. Itis most easily understood how the payment of the check, whennot authorized to be done by the drawee bank, might under suchcircumstances create liability on the part of the drawee to thedrawer. Counsel cites the case of Pickle vs. Muse (88 Tenn, 380;

12 S.W., 919; 7 L.R.A., 93; 17 Am. St. Rep., 900), wherein JudgeLurton held that the acceptance of a check was necessary orderto give the holder thereof a right of action thereon against thebank, and further held in a case similar to this, so far as thequestion is concerned, that the acceptance of a check by the bankand its subsequent charge of the amount to the drawer, althoughit was presented by, and payment made, an unauthorized person.Judge Lurton cited the case of National Bank of the Republic vs.

Millard (10 Wall., 152; 19 L.ed., 897), wherein the Supreme Courtof the United States, not having such a case before it, threw outthe suggestion that, if it was shown that a bank had charged thecheck on its books against the drawer and made settlement withthe drawee that the holder could recover on account of moneyhad and received, invoking the rule of justice and fairness, it mightbe said there was an implied promise to the holder to pay it ondemand. (See National Bank of the Republic vs. Millard, 10 Wall.

[77 U.S.], 152; 19 L.ed., 899.) The Tennessee court then arguedthat it would be inequitable and unconscionable for the ownerand payee of the check to be limited to an action against aninsolvent drawer and might thereby lose the debt. They recognizedthe legal principle that there is no privity between the drawer bankand the holder, or payee, of the check, and proceeded to holdthat no particular kind of writing was necessary to constitute anacceptance and that it became a question of fact, and the bankbecame liable when it stamped it “paid” and charged it to the


account of the drawer, and cites, in support of its opinion, Seventh

National Bank vs. Cook (73 Pa., 483; 13 Am. Rep. 751); Saylor

vs. Bushong (100 Pa., 23; 45 Am. Rep., 353); and Dodge vs.

Bank (20 Ohio St., 234; 5 Am. Rep., 648.)

This decision was in 1890, prior to the enactment of theNegotiable Instruments Law by the State of Tennessee.However, in this case Judge Snodgrass points out that theMillard Case, supra, was dicta. The Dodge case, from theOhio court, held exactly as the Tennessee court, butsubsequently in the case of Elyria Bank vs. Walker Bin Co.

(92 Ohio St., 406; 111 N.E., 147; L.R.A. 1916 D, 433; Ann.

Cas. 1917 D, 1055), the court held to the contrary, calledattention to the fact that the Dodge case was no longer thelaw, and proceeded to announce that, whatever might havebeen the law before the passage of the NegotiableInstrument Act in that state, it was no longer the law; andthe rule announced in the Dodge case had been “discarded”.The court, in the latter case, expressed its doubts that thecourts of Tennessee and Pennsylvania would adhere to therule announced in the Pickle case, quoted supra, in the factof the Negotiable Instrument Law. Subsequent to the Millard

case, the Supreme Court of the United States, in the caseof First National Bank of Washington vs. Whitman (94 U.S.,

343, 347; 24 L.ed., 229), where the bank, without anyknowledge that the indorsement of the payee wasunauthorized, paid the check, and it was contended that bythe payment the privity of contract existing between thedrawer and drawee was imparted to the payee, said:

“It is further contended that such an acceptance of the checkas creates a privity between the payee and the bank isestablished by the payment of the amount of this check inthe manner described. This argument is based upon theerroneous assumption that the bank has paid this check. Ifthis were true, it would have discharged all of its duty, andthere would be an end of the claim against it. The banksupposed that it had paid the check; but this was an error.The money it paid was upon a pretended and not a realindorsement of the name of the payee. The real indorsementof the payee was as necessary to a valid payment as thereal signature of the drawer; and in law the check remainsunpaid. Its pretended payment did not diminish the funds

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of the drawer in the bank, or put money in the pocket of theperson entitled to the payment. The state of the accountwas the same after the pretended payment as it was before.”

“We cannot recognize the argument that a payment of theamount of a check or sight draft under such circumstancesamounts to an acceptance, creating a privity of contract withthe real owner. It is difficult to construe a payment as anacceptance under any circumstances. The two things areessentially different. One is a promise to perform at, theother an actual performance. A banker or an individual maybe ready to make actual payment of a check or draft whenpresented, while unwilling to make a promise to pay than tomeet the promise when required. The difference betweenthe transactions is essential and inherent.”

Nature of a manager’s check.

A manager’s check is one drawn by a bank’s manager uponthe bank itself. It stands on the same footing as a certified check,which is deemed to have been accepted by the bank that certifiedit. As the bank’s own check, a manager’s check becomes theprimary obligation of the bank and is accepted in advance by theact of its issuance. (Security Bank and Trust Company vs. Rizal

Commercial Banking Corporation, G.R. No. 170984, 170987,

January 30, 2009, [Quisumbing, J.])

A manager’s check is an order of the bank to pay, drawnupon itself, committing in effect its total resources, integrity andhonor behind its issuance, and by its peculiar character andgeneral use in commerce, a manager’s check is regardedsubstantially to be as good as the money it represents. (Citibank

N.A. (Formerly First National City Bank) vs. Sabeniano, 504 SCRA

378)

[It] stands on the same footing as a certified check.99 Theeffect of certification is found in Section 187, NegotiableInstruments Law.100 The effect of issuing a manager’s check was

99 Supra note 21 at 411 [Soler v. Court of Appeals, G.R. No. 123892, 21 May2011, 358 SCRA 57, 64]

100 Sec. 187. Certification of check; effect of.—Where a check is certified bythe bank on which it is drawn, the certification is equivalent to anacceptance


incontrovertibly elucidated when [we] it was declared that [a]manager’s check is one drawn by the bank’s manager upon thebank itself. It is similar to a cashier’s check both as to the effectand use. A cashier’s check is a check of the bank’s cashier onhis own or another check. In effect, it is a bill of exchange drawnby the cashier of a bank upon the bank itself, and accepted inadvance by the act of its issuance. It is really the bank’s owncheck and may be treated as a promissory note with the bank asa maker. The check becomes the primary obligation of the bankwhich issued it and constitutes its written promise to pay upondemand. The mere issuance of it is considered an acceptancethereof. x x x.101 (Equitable PCI Bank vs. Rowena Ong, G.R. No.

156207, September 15, 2006, [Chico-Nazario, J.])

Given that a check is more than just an instrument of creditused in commercial transactions for it also serves as a receipt orevidence for the drawee bank of the cancellation of the said checkdue to payment, then, the possession by the drawee bank of thesaid Manager’s Checks (MC’s), duly stamped “Paid” gives rise tothe presumption that the said Manager’s Checks (MC’s) werealready paid out to the intended payee. (supra)

Cashier’s Check deemed as cash

In the case of New Pacific Timber & Supply Company, Inc.

vs. Hon. Alberto Seneris,102 it was held that:

“It is to be emphasized in this connection that the checkdeposited by the petitioner in the amount of P50, 000.00 is not anordinary check but a Cashier’s Check of the Equitable BankingCorporation, a bank of good standing and reputation. As testifiedto by the Ex-Officio Sheriff with whom it has been deposited, it isa certified crossed check.103 It is a well-known and acceptedpractice in the business sector that a Cashier’s Check is deemedas cash. Moreover, since the said check had been certified by thedrawee bank, by the certification, the funds represented by thecheck are transferred from the credit of the maker to that of thepayee or holder, and for all intents and purposes, the latterbecomes the depositor of the drawee bank, with rights and duties

101 International Corporate Bank vs. Gueco, G.R. No. 141968, 12 February2001

102 G.R. No. L-41764, December 19, 1980, [Concepcion, Jr., J.:]103 p. 35, t.s.n., May 24, 1975

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of one in such situation.104 Where a check is certified by the bankon which it is drawn, the certification is equivalent to acceptance.105

Said certification “implies that the check is drawn upon sufficientfunds in the hands of the drawee, that they have been set apartfor its satisfaction, and that they shall be so applied whenever thecheck is presented for payment. It is an understanding that thecheck is good then, and shall continue good, and this agreementis as binding on the bank as its notes in circulation, a certificate ofdeposit payable to the order of the depositor, or any otherobligation it can assume. The object of certifying a check, asregards both parties, is to enable the holder to use it as money.”106

When the holder procures the check to be certified, “the checkoperates as an assignment of a part of the funds to the creditors.”107

Hence, the exception to the rule enunciated under Section 63 ofthe Central Bank Act to the effect “that a check which has beencleared and credited to the account of the creditor shall beequivalent to a delivery to the creditor in cash in an amount equalto the amount credited to his account” shall apply in this case.”

Problem:

X delivered stocks of vegetable oil to Y sometime onMarch 1993. As payment therefor, Y issued a personalcheck in the amount of Php 348, 805.50. However, whenthe check was encashed, it was dishonored by thedrawee bank. Y then assured X that he would replacethe bounced check with a cashier’s check from the Bankof the Philippine Islands (BPI). Thereafter, BPI cashier’scheck no. 14428 in the amount of Php 348, 805.50 wasissued, drawn against the account of Y. The followingday, X returned to drawee bank to encash the checkbut it was dishonored, the bank then informed X thatY’s account was closed on that date.

104 Gregorio Araneta, Inc. vs. Paz Tuazon de Paterno and Jose Vidal, L-2886, August 22, 1952, 49 O.G. No. 1, p. 59

105 Section 187. Certification of check; effect of. — Where a check is certifiedby the bank on which it is drawn, the certification is equivalent toacceptance. (Negotiable Instruments Law)

106 PNB vs. Nat. City Bank of New York, 63 Phil. 711, 718-719107 PNB vs., Nat. City Bank of New York, supra, 711-717; Sec. 189. When

check operates as an assignment. — A cheek of itself does not operateas an assignment of any part of the funds to the credit of the drawer withthe bank. and the bank, is not liable to the holder unless and until it acceptsor certifies it. (Negotiable Instruments Law) [Emphasis supplied]


X then filed a complaint for collection of sum of moneyagainst BPI. In it’s answer, BPI claimed that it issuedthe check by mistake in good faith; that its dishonorwas due to lack of consideration; and that X’s remedywas to sue Y who purchased the check.a. Is X a holder in due course despite BPI’s contention

that there was lack of consideration?

b. Is BPI liable to X for the amount of the cashier’scheck?

c. What is the nature of a cashier’s check?

ANSWER:

a. YES. X is a holder in due course.

Sec. 52. (NIL)—a holder in due course is a holder whohas taken the instrument under the following conditions:

a. That it is complete and regular upon it’s face;

b. That he became the holder of it before it wasoverdue and without notice that it had beenpreviously dishonored;

c. That he took it in good faith and for value;

d. That at the time it was negotiated to him, hehad no notice of any infirmity in the instrumentor defect in the title of the person negotiatingit.

Value in general terms may be some right, interest, profitor benefit to the party who makes the contract or someforbearance, detriment, loan, responsibility, etc., on theother side. Here, there is no dispute that X received Y’scashier’s check as payment for the former’s vegetableoil. The fact that it was Y who purchased the cashier’scheck from BPI will not affect X’s status as a holder forvalue since the check was delivered to him as paymentfor the vegetable oil he sold to Y. (Bank of the Philippine

Islands vs. Gregorio C. Roxas, G.R. No. 157833, October

15, 2007 [Sandoval-Gutierrez, J.]).

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b. YES. BPI is liable for the amount of the cashier’s check.

A cashier’s check is really the bank’s own check andmay be treated as a promissory note with the bank as amaker. The check becomes the primary obligation ofthe bank which issues it and constitutes a written promiseto pay upon demand. (BPI vs. Roxas)

c. It is a well known and accepted practice in the businesssector that a cashier’s check is deemed as cash. Thisis because the mere issuance of a cashier’s check isconsidered acceptance thereof. (BPI vs. Roxas).

What is a Memorandum check?

A memorandum check is in the form of an ordinary check,with the word “memorandum”, or “memo” or “mem” written acrossits face, signifying that the maker or drawer engages to pay thebona fide holder absolutely, without any condition concerning itspresentment.108 (People of the Philippines vs. Hon. David Nitafan,

et al, G.R. No. 75954, October 22, 1992)

Such a check is an evidence of debt against the drawerand although may not be intended to be presented,109 has thesame effect as an ordinary check,110 and if passed to the thirdperson, will be valid in his hands like any other check.111 (Ibid.)

Feature of a Memorandum Check

A memorandum check may carry with it the understandingthat it is not [to] be presented at the bank but will be redeemed bythe maker himself when the loan falls due. This understandingmay be manifested by writing across the check “Memorandum”,“Memo”, or “Mem.” (People vs. Nitafan, supra)

It presents all the features of other negotiable instrumentswhen transferred or indorsed to a bona fide holder for value. It isa contract by which the maker engages to pay the bona fide holderabsolutely, and not upon a condition to pay if the bank upon which

108 Franklin Bank v. Freeman, 16 Pick 535109 Cushing v. Gore, 15 Mass. 69.z110 Dykes v. Leather Manufactures Bank, 11 Page 612111 Franklin Bank v. Freeman, supra


it be drawn should not pay upon presentation at maturity, and ifdue notice of the presentation and nonpayment should be given.112

Liabilities of a drawee bank

The bank of which a check is drawn, known as the draweebank, is under strict liability, based on the contract between thebank and its customer (drawer), to pay the check only to the payeeor the payee’s order. The drawer’s instructions are reflected onthe face and by the terms of the check.

When the drawee bank pays a person other than the payeenamed on the check, it does not comply with the terms of thecheck and violates its duty to charge the drawer’s account onlyfor properly payable items.

Thus, the Supreme Court ruled in Philippine National Bank

vs. Rodriguez, that a drawee should charge to the drawer’saccount only the payables authorized by the latter; otherwise, thedrawee will be violating the instructions of the drawer and shallbe liable for the amount charged to the drawer’s account.(Bank of America, NT & SA, vs. Associated Citizens Bank, G.R.

No. 141001, 141018, May 21, 2009, [Carpio, J.])

Liability of an endorser bank under Section 66 of theNegotiable Instruments Law

In check transactions, the collecting bank or last endorsergenerally suffers the loss because it has the duty to ascertain thegenuineness of all prior endorsements considering that the act ofpresenting the check for payment to the drawee is an assertionthat the party making the presentment has done its duty toascertain the genuineness of the endorsements. (Bank of America,

NT & SA, vs. Associated Citizens Bank, G.R. No. 141001, 141018,

May 21, 2009, [Carpio, J.])

If a bank refuses to pay a check, can the payee-holder thereofsue the bank?

No. If a bank refuses to pay a check (notwithstandingsufficiency of funds), the payee-holder cannot sue the bank—the

112 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,1900, p. 407, citations omitted

69

payee-holder should instead sue the drawer who might in turnsue the bank. (Villanueva vs. Nite, 496 SCRA 459 [2006]). Section189113 is sound law based on logic and established legal principles:no privity of contract between the drawee-bank and the payee.(supra)

Is there any difference between a Check and a PromissoryNote?

A check is a form of a bill of exchange wherein it is anunconditional order in writing addressed by one person to another(usually a bank), signed by the person giving it, requiring theperson to whom it is addressed to pay on demand or at a fixed ordeterminable future time a sum certain in money to order or tobearer, whereas, a promissory note is an unconditional promiseto pay made by one person addressed to another, on demand oralso at a fixed or determinable future time, a sum certain in moneyto order or to bearer.

A check necessarily involves three individuals, the drawer,the payee, and the drawee (bank), whereas, a promissory noteonly involves two persons, the maker and the payee.

In checks, liability of the drawee bank arises from themoment the latter accepts the check being presented either foracceptance or payment, whereas in promissory notes, liability ofthe maker attaches from the moment the instrument was deliveredto the payee for the purpose of giving effect thereto.

Questions:

Does a collecting bank, over the objections of thedepositor, have the authority to withdraw unilaterallyfrom such depositor’s account the amount it hadpreviously paid upon certain unindorsed orderinstruments deposited by the depositor to anotheraccount that she later closed?

113 SEC. 189. When check operates as an assignment. – A check of itselfdoes not operate as an assignment of any part of the funds to the creditof the drawer with the bank, and the bank is not liable to the holder, unlessand until it accepts or certifies the check. (emphasis ours)


ANSWER:

This was the query poised by Justice Azcuna in the case ofBank of the Philippine Islands vs. Court of Appeals, et

al, where it was held that:

The collecting bank, had the right to debit the depositor’saccount for the value of the checks it previously credited in herfavor. It is of no moment that the account debited by the collectingbank was different from the original account to which the proceedsof the check were credited because both admittedly belonged todepositor.114

The right to set-off was explained in Associated Bank vs.

Tan.115

A bank generally has a right of set-off over the depositstherein for the payment of any withdrawals on the part of adepositor. The right of a collecting bank to debit a clients accountfor the value of a dishonored check that has previously beencredited has fairly been established by jurisprudence. To beginwith, Article 1980 of the Civil Code provides that “[f]ixed, savings,and current deposits of money in banks and similar institutionsshall be governed by the provisions concerning simple loan.”

Hence, the relationship between banks and depositors hasbeen held to be that of creditor and debtor. Thus, legalcompensation under Article 1278 of the Civil Code may take place“when all the requisites mentioned in Article 1279 are present.”

x x x

While, however, it is conceded that petitioner had the rightto set-off the amount it paid to Templonuevo against the depositof Salazar, the issue of whether it acted judiciously is an entirelydifferent matter.116 As businesses affected with public interest,and because of the nature of their functions, banks are underobligation to treat the accounts of their depositors with meticulous

114 Bank of the Philippine Islands vs. Court of Appeals, et al, January 25,2007, G.R. No. 136202

115 G.R. No. 156940, December 14, 2004, 446 SCRA 282116 Id

71

care, always having in mind the fiduciary nature of theirrelationship.117 In this regard, petitioner was clearly remiss in itsduty to private respondent Salazar as its depositor.

To begin with, the irregularity appeared plainly on the faceof the checks. Despite the obvious lack of indorsement thereon,petitioner permitted the encashment of these checks three timeson three separate occasions. This negates petitioner’s claim thatit merely made a mistake in crediting the value of the checks toSalazar’s account and instead bolsters the conclusion of the CAthat petitioner recognized Salazar’s claim of ownership of thechecks and acted deliberately in paying the same, contrary toordinary banking policy and practice. It must be emphasized thatthe law imposes a duty of diligence on the collecting bank toscrutinize checks deposited with it, for the purpose of determiningtheir genuineness and regularity. The collecting bank, beingprimarily engaged in banking, holds itself out to the public as theexpert on this field, and the law thus holds it to a high standard ofconduct.118 The taking and collection of a bank without the properindorsement amount to a conversion of the check by the bank.119

In depositing the check under his name, the depositor doesnot automatically become the owner of the amount deposited

In Bank of the Philippine Islands vs. Court of Appeals

and Benjamin Napiza120: “as correctly held by the Court ofAppeals, in depositing the check in his name, private respondentdid not become the outright owner of the amount stated therein.Under the above rule, by depositing the check with petitioner,private respondent was, in a way, merely designating petitioneras the collecting bank. This is in consonance with the rule that anegotiable instrument, such as a check, whether a manager’scheck or ordinary check, is not legal tender.121 As such, afterreceiving the deposit, under its own rules, petitioner shall credit

117 Prudential Bank v. CA, G.R. No. 125536, March 16, 2000, 328 SCRA 264;Simex International [Manila], Inc. v. CA, G.R. No.88013, March 19, 1990,183 SCRA 360; BPI v. IAC, G.R. No. 69162, February 21, 1992, 206 SCRA408

118 Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corp.,G.R. No. L-74917, January 20,1988, 157 SCRA 188

119 Associated Bank v. CA, G.R. No. 89802, May 7, 1992, 208 SCRA 465;City Trust Banking Corp. v. IAC, G.R. No. 84281, May 27, 1994, 232 SCRA559

120 February 29, 2000


the amount in private respondent’s account or infuse value thereononly after the drawee bank shall have paid the amount of thecheck or the check has been cleared for deposit. Again, this is inaccordance with ordinary banking practices and with this Court’spronouncement that “the collecting bank or last endorser generallysuffers the loss because [it] has the duty to ascertain thegenuineness of all prior endorsements considering that the act ofpresenting the check for payment to the drawee is an assertionthat the party making the presentment has done its duty toascertain the genuineness of the endorsements.”122 The rule findsmore meaning in this case where the check involved is drawn ona foreign bank and therefore collection is more difficult than whenthe drawee bank is a local one even though the check in questionis a manager’s check.123"

Distinguish between ‘Drawn Against Insufficient Funds”(DAIF) and “Drawn Against Uncollected Deposit” (DAUD).

ANSWER:

121 Philippine Airlines, Inc. v. Court of Appeals, L-49188, 181 SCRA 557, 568(1990) citing Sec. 189 of the Negotiable Instruments Law; Art. 1249, CivilCode; Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan Sunco v.Santos, 9 Phil. 44 and 21 R.C.L. 60, 61

122 Associated Bank v. Court of Appeals, 322 Phil. 677, 699-700 citing Bankof the Philippines Islands v. Court of Appeals, G.R. No. 102383, 216 SCRA51, 63 (1992), Banco de Oro v. Equitable Banking Corporation, G.R. 74917,157 SCRA 188 (1988) and Great Eastern Life Insurance Co. v. Hongkongand Shanghai Banking Corporation, 43 Phil. 678

123 A manager’s check is like a cashier’s check which, in the commercialworld, is regarded substantially to be as good as the money it represents(Tan v. Court of Appeals, G.R. No. 108555, 239 SCRA 310, 322 (1944)

DAIF DAUD

Is a condition in whicha depositor’s balanceis inadequate for thebank to pay a check.

It means that the accounthas, on its face, sufficientfunds but not yet available tothe drawer because thedeposit, usually a check, hadnot yet been cleared.

It subjects thedepositor to possibleprosecution for estafa

and Bouncing ChecksLaw (BP 22)

It does not expose thedepositor the estafa andBP 22

73

(Bank of the Philippine Islands vs. Suarez, G.R. No.

167750, March 15, 2010, [Carpio. J.])

Prescriptive Period to bring action

The statute of limitations begins to run when the bank givesthe depositor notice of the payment, which is ordinarily when thecheck is returned to the alleged drawer as a voucher with astatement of his account,124 and an action upon a check isordinarily governed by the statutory period applicable to theinstruments in writing.125 (Philippine Commercial International Bank

vs. Court of Appeals and Ford Philippines, Inc., January 29, 2001)

Our laws on the matter provide that the action upon a writtencontract must be brought within ten years from the time the rightof action accrues.126 Hence, the reckoning time for the prescriptiveperiod begins when the instrument was issued and thecorresponding check was returned by the bank to its depositor(normally a month thereafter). Applying the same rule, the causeof action for the recovery of the proceeds of Citibank Check No.SN 04867 would normally be a month after December 19, 1977,when Citibank paid the face value of the check in the amount ofP4,746,114.41. Since the original complaint for the cause of actionwas filed on January 20, 1984, barely six years had lapsed. Thus,we conclude that Ford’s cause of action to recover the amount ofCitibank Check No. SN 04867 was seasonably filed within theperiod provided by law. (supra)

PHILIPPINE CLEARING HOUSE ACT

What is the purpose of the creation of the Philippine ClearingHouse Corporation?

ANSWER:

The Philippine Clearing House Corporation was created tofacilitate the clearing of checks among member banks. (Insular

Savings Bank vs. Far Eastern Bank and Trust Company, G.R. No.

141818, June 22, 2006, [Ynares-Santiago, J.])

124 Supra note 20 at Section 605, Vda De Bataclan, et al vs. Medina, 102Phil. 181, 186 (1957)

125 Ibid126 Civil Code, Art. 1144


Under its Articles of Incorporation, the PCHC provides “aneffective, convenient, efficient, economical and relevant exchangeand facilitate services limited to check processing and sorting byway of assisting member banks, entities in clearing checks andother clearing items as defined and existing in future Central Bankof the Philippines Circulars, memoranda, circular letters rules andregulations and policies in pursuance of Section 107 of RA 265.“Pursuant to its function involving the clearing of checks and otherclearing items, the PCHC has adopted rules and regulationsdesigned to provide member banks with a procedure wherebydisputes involving the clearance of checks and other negotiableinstruments undergo a process of arbitration prior to submissionto the courts below. This procedure not only ensures a uniformityof rulings relating to factual disputes involving checks and othernegotiable instruments but also provides a mechanism for settlingminor disputes among participating and member banks who wouldotherwise go directly to the trial courts. While the PCHC Rulesand Regulations allow appeal to the Regional Trial Courts onlyon questions of fact already decided by the PCHC arbitration whenwarranted and appropriate.”127

In Banco de Oro Savings and Mortgage Banks vs. Equitable

Banking Corporation128, this Court had the occasion to rule on thevalidity of these rules as well as the jurisdiction of the PCHC as aforum for resolving disputes and controversies involving checksand other clearing items when it held that “the participation of twobanks…in the Clearing Operations of the PCHC (was) amanifestation of its submission to its jurisdiction.”129

What is the extent of the jurisdiction of the Philippine ClearingHouse Corporation (PCHC)?

Among the member banks of the PCHC exists acompromissoire or an arbitration agreement embedded in theircontract wherein they consent that any future dispute orcontroversy between its PCHC participants involving any checkwould be submitted to the Arbitration Committee for arbitration.

127 Associated Bank vs. Court of Appeals, et al., G.R. No. 107918, June 14,1994

128 157 SCRA 188 (1988)129 Ibid., page 196, cited in Associated Bank vs. Court of Appeals, June 14,

1994

75

The PCHC has its own Rules and Procedure for Arbitration(PCHC Rules). However, this is governed by Republic Act No.876, also known as the Arbitration Law and supplemented by theRules of Court. (Insular Savings Bank vs. Far Eastern Bank and

Trust Company, G.R. No. 141818, June 22, 2006, [Ynares-

Santiago, J.])

Moreover, take note that, since the PCHC Rules came aboutonly as a result of an agreement between and among memberbanks of PCHC and not by law, it cannot confer jurisdiction to theRTC. Thus, the portion of the PCHC Rules granting jurisdictionto the RTC review arbitral awards, only on questions of law, cannotbe given effect. (ibid.)

In the case of Associated Bank vs. Court of Appeals, et al.,130

it was held that: “[u]nder the rules and regulations of the PhilippineClearing House Corporation (PCHC), the mere act of participationof agreement by the parties to abide by its rules and regulations.131

And as a consequence of such participation, a party cannot invokethe jurisdiction of the courts over disputes and controversies whichfall under the PCHC Rules and Regulations without first goingthrough the arbitration processes laid out by the body. Sinceclaims relating to the regularity of checks cleared by bankinginstitutions are among those claims which should first be submittedfor resolution by the PCHC’s Arbitration Committee, petitionerAssociated Bank, having voluntarily bound itself to abide by suchrules and regulations, is estopped from seeking relief from theRegional Trial Court on the coattails of a private claim and in theguise of a third party complaint without first having obtained adecision adverse to its claim from the said body. It cannot bypassthe arbitration process on the basis of its averment that its thirdparty complaint is inextricably linked to the original complaint inthe Regional Trial Court.

The applicable PCHC provisions on the question ofjurisdiction provide:

Sec. 3—AGREEMENT TO THESE RULES

It is the general agreement and understanding, thatany participant in the PCHC MICR clearing operations,by the mere act of participation, thereby manifests its


agreement to these Rules and Regulations, and itssubsequent amendments.

xxx xxx xxx

Sec. 36—ARBITRATIONS

36.1 Any dispute or controversy between two or moreclearing participants involving any check/item thruPCHC shall be submitted to the Arbitration Committee,upon written complaint of any involved participant byfiling the same with the PCHC serving the same uponthe other party or parties, who shall within fifteen (15)days after receipt thereof, file with the ArbitrationCommittee its written answer to such written complaintand also within the same period serve the same uponthe complaining participant. This period of fifteen (15)days may be extended by the Committee not morethan once for another period of fifteen (15) days, butupon agreement in writing of the complaining party,said extension may before such period as the lattermay agree to.

Section 36.6 is even more emphatic:

26.6 The fact that a bank participates in the clearingoperations of PCHC shall be deemed its written andsubscribed consent to the binding effect of thisarbitration agreement as if it had done so inaccordance with Section 4 of the Republic Act No.876 otherwise known as the Arbitration Law.

Thus, not only do the parties manifest by mere participationtheir consent to these rules, but such participation is deemed (their)written and subscribed consent to the binding effect of arbitrationagreements under the PCHC rules. Moreover, a participantsubject to the Clearing House Rules and Regulations of the PCHCmay go on appeal to any Regional Trial Courts…where the headoffice of any of the parties is located only after a decision or award

130 G.R. No. 107918, June 14, 1994, [Kapunan, J.]131 PCHC Rules and Regulations, Sec. 3 9hereinafter cited as Rules)

77

has been rendered by the arbitration committee or arbitrator onquestions of law.132

Clearly therefore, petitioner Associated Bank, by its voluntaryparticipation and its consent to the arbitration rules cannot godirectly to the Regional Trial Court when it finds it convenient todo so. The jurisdiction of the PCHC under the rules andregulations is clear, undeniable and is particularly applicable toall the parties in the third party complaint under their obligation tofirst seek redress of their disputes and grievances with the PCHCbefore going to the trial court.”

Third-Party Complaints

As a general rule, a trial court that has establishedjurisdiction over the main action also acquires jurisdiction over athird-party complaint, even if it could not have done so had thelatter been filed as an independent action. This rule, however,does not apply to banks that have agreed to submit their disputesover check clearings to arbitration under the rules of the PhilippineClearing House Corporation. In that event, primary recourseshould be to the PCHC Arbitration Committee, without prejudiceto an appeal to the trial courts. In other words, without first resortingto the PCHC, the third-party complaint would be premature. (Allied

Banking Corporation vs. Court of Appeals and Bank of the

Philippine Islands, Inc., G.R. No. 123871, August 31, 1998,

[Panganiban, J.:])

Illustrative Case:

Allied Banking Corporation vs. Court of Appealsand Bank of the Philippine Islands, Inc.

G.R. No. 123871, August 31, 1998

PANGANIBAN, J.:

Hyatt Terraces Baguio issued two crossed checks drawnagainst Allied Banking Corp. (hereinafter, ALLIED) in favor ofappellee Meszellen Commodities Services, Inc. (hereinafter,MESZELLEN). Said checks were deposited on August 5, 1980and August 18, 1980, respectively, with the now defunct

132 Rules, Sec. 13


Commercial Bank and Trust Company (hereinafter, COMTRUST).Upon receipt of the above checks, COMTRUST stamped at theback thereof the warranty “All prior endorsements and/or lack ofendorsements guaranteed.” After the checks were cleared throughthe Philippine Clearing House Corporation (hereinafter, PCHC),ALLIED BANK paid the proceeds of said checks to COMTRUSTas the collecting bank.

On March 17, 1981, the payee, MESZELLEN, sued thedrawee, ALLIED BANK, for damages which it allegedly sufferedwhen the value[s] of the checks were paid not to it but to someother person.

Almost ten years later, or on January 10, 1991, beforedefendant ALLIED BANK could finish presenting its evidence, itfiled a third party complaint against Bank of the Philippine Islands(hereinafter, BPI, appellee herein) as successor-in-interest ofCOMTRUST, for reimbursement in the event that it would beadjudged liable in the main case to pay plaintiff, MESZELLEN.The third party complaint was admitted [in] an Order dated May16, 1991 issued by the Regional Trial Court of Pasig, Branch 162.On July 16, 1991, BPI filed a motion to dismiss said third partycomplaint grounded on the following: 1) that the court ha[d] nojurisdiction over the nature of the action; and 2) that the cause ofaction of the third party plaintiff ha[d] already prescribed.

On September 16, 1991, the trial court issued an orderdismissing the third party complaint. Defendant-third partyplaintiff’s motion for reconsideration of this order was subsequentlydenied.133

Petitioner raises the following issues:134

I. The Respondent Honorable Court of Appeals erred inholding that the cause of action of the third-partycomplaint ha[d] already prescribed.

II. The Respondent Honorable Court of Appeals erred inholding that the filing of the third party complaint shouldbe disallowed as it would only delay the resolution ofthe case.

133 CA Decision, pp. 1-2; rollo, pp. 24-25134 Petition, p. 6; rollo, p. 16

79

The Court’s Ruling

The petition is bereft of merit.

Critical Issue: Mandatory Recourse to PCHC

To buttress its claim, private respondent contends thatpetitioner’s remedy rests with the PCHC, of which both Allied andBPI are members, in consonance with the Clearing House Rulesand Regulations which, in part, states:

Sec. 38 — Arbitration

Any dispute or controversy between two or more clearingparticipants involving any check/item cleared thru PCHCshall be submitted to the Arbitration Committee, upon writtencomplaint of any involved participant by filing the same withthe PCHC serving the same upon the other party or parties,who shall within fifteen (15) days after receipt thereof filewith the Arbitration Committee its written answer to suchwritten complaint and also within the same period serve thesame upon the complaining participant, . . . .

Private respondent cites Banco de Oro Savings and

Mortgage Bank v. Equitable Banking Corporation135 andAssociated Bank v. Court of Appeals,136 which upheld the right ofthe PCHC to settle and adjudicate disputes between memberbanks. In Banco de Oro, the Court ruled:

The participation of the two banks, petitioner and privaterespondent, in the clearing operations of PCHC is amanifestation of their submission to its jurisdiction. Secs. 3and 36.6 of the PCHC-CHRR clearing rules and regulationsprovide:

Sec. 3. AGREEMENT TO THESE RULES. — It is thegeneral agreement and understanding that anyparticipant in the Philippine Clearing HouseCorporation, MICR clearing operations[,] by the mere

135 157 SCRA 188, January 20, 1988, per Gancayco, J136 233 SCRA 137, June 14, 1994, per Kapunan, J


fact of their participation, thereby manifests itsagreement to these Rules and Regulations and itssubsequent amendments.

Sec. 36.6. (ARBITRATION) — The fact that a bankparticipates in the clearing operations of the PCHCshall be deemed its written and subscribed consentto the binding effect of this arbitration agreement as ifit had done so in accordance with section 4 of (the)Republic Act. No. 876, otherwise known as theArbitration Law.

Further[,] Section 2 of the Arbitration Law mandates:

Two or more persons or parties may submit to thearbitration of one or more arbitrators any controversyexisting between them at the time of the submissionand which may be the subject of any action, or theparties of any contract may in such contract agree tosettle by arbitration a controversy thereafter arisingbetween them. Such submission or contract shall bevalid and irrevocable, save upon grounds as exist atlaw for the revocation of any contract.

Such submission or contract may include questionarising out of valuations, appraisals or othercontroversies which may be collateral, incidental,precedent or subsequent to any issue between theparties. (Emphasis supplied.)

Associated Bank also disallowed a similar third-partycomplaint, ruling thus:

Under the rules and regulations of the Philippine ClearingHouse Corporation (PCHC), the mere act of participation ofthe parties concerned in its operations in effect amounts toa manifestation of agreement by the parties to abide by itsrules and regulations. As a consequence of suchparticipation, a party cannot invoke the jurisdiction of thecourts over disputes and controversies which fall under thePCHC Rules and Regulations without first going throughthe arbitration processes laid out by the body. Since claims

81

relating to the regularity of checks cleared by bankinginstitutions are among those claims which should first besubmitted for resolution by the PCHC’s ArbitrationCommittee, petitioner Associated Bank, having voluntarilybound itself to abide by such rules and regulations, isestopped from seeking relief from the Regional Trial Courton the coattails of a private claim and in the guise of a thirdparty complaint without first having obtained a decisionadverse to its claim from the said body. It cannot bypass thearbitration process on the basis of its averment that its thirdparty complaint is inextricably linked to the original complaintin the Regional Trial Court.

xxx xxx xxx

Clearly therefore, petitioner Associated Bank, by its voluntaryparticipation and its consent to the arbitration rules cannotgo directly to the Regional Trial Court when it finds itconvenient to do so. The jurisdiction of the PCHC under therules and regulations is clear, undeniable and is particularlyapplicable to all the parties in the third party complaint undertheir obligation to first seek redress of their disputes andgrievances [from] the PCHC before going to the trial court.

Finally, the contention that the third party complaint shouldnot have been dismissed for being a necessary andinseparable offshoot of the main case over which the courta quo had already exercised jurisdiction misses thefundamental point about such pleading. A third partycomplaint is a mere procedural device which under the Rulesof Court is allowed only with the court’s permission. It is anaction “actually independent of, separate and distinct fromthe plaintiffs’ complaint” (s)uch that, were it not for the Rulesof Court, it would be necessary to file the action separatelyfrom the original complaint by the defendant against thethird party. (Emphasis supplied.)

Banco de Oro and Associated Bank are clear andunequivocal: a third-party complaint of one bank against anotherinvolving a check cleared through the PCHC is unavailing, unlessthe third-party claimant has first exhausted the arbitral authorityof the PCHC Arbitration Committee and obtained a decision fromsaid body adverse to its claim.


Recognizing the role of the PCHC in the arbitration ofdisputes between participating banks, the Court in Associated

Bank further held: “Pursuant to its function involving the clearingof checks and other clearing items, the PCHC has adopted rulesand regulations designed to provide member banks with aprocedure whereby disputes involving the clearance of checksand other negotiable instruments undergo a process of arbitrationprior to submission to the courts below. This procedure not onlyensures a uniformity of rulings relating to factual disputes involvingchecks and other negotiable instruments but also provides amechanism for settling minor disputes among participating andmember banks which would otherwise go directly to the trialcourts.”

We defer to the primary authority of PCHC over the presentdispute, because its technical expertise in this field enables it tobetter resolve questions of this nature. This is not prejudicial tothe interest of any party, since primary recourse to the PCHCdoes not preclude an appeal to the regional trial courts onquestions of law. Section 13 of the PCHC Rules reads:

Sec. 13. The findings of facts of the decision or awardrendered by the Arbitration Committee or by the soleArbitrator as the case may be shall be final and conclusiveupon all the parties in said arbitration dispute. The decisionor award of the Arbitration Committee or of the Sole Arbitratorshall be appealable only on questions of law to any of theRegional Trial Courts in the National Capital Judicial Regionwhere the Head Office of any of the parties is located. Theappellant shall perfect his appeal by filing a notice of appealto the Arbitration Secretariat and filing a Petition with theRegional Trial Court of the National Capital Region . . . .

Furthermore, when the error is so patent, gross andprejudicial as to constitute grave abuse of discretion, courts mayaddress questions of fact already decided by the arbitrator.137

137 Asia Construction and Development Corporation v. Construction IndustryArbitration Commission, 218 SCRA 529, February 8, 1993; Sime Darby v.Deputy Administrator, 180 SCRA 177, December 15, 1989

138 Regalado, Remedial Law Compendium, Vol. 1, 5th revised ed., p. 95;Republic v. Central Surety and Insurance Co., 25 SCRA 641, October 26,1968; Eastern Assurance & Surety Corporation v. Cui, 105 SCRA 622,July 20, 1981; Talisay-Silay Milling Co. Inc. and J. Amado Araneta v. CIRand Central Azucarera del Danao, 18 SCRA 894, November 29, 1966

83

We are not unaware of the rule that a trial court, which hasjurisdiction over the main action, also has jurisdiction over thethird-party complaint, even if the said court would have had nojurisdiction over it had it been filed as an independent action.138

However, this doctrine does not apply in the case of banks, whichhave given written and subscribed consent to arbitration underthe auspices of the PCHC.

By participating in the clearing operations of the PCHC,petitioner agreed to submit disputes of this nature to arbitration.Accordingly, it cannot invoke the jurisdiction of the trial courtswithout a prior recourse to the PCHC Arbitration Committee.Having given its free and voluntary consent to the arbitrationclause, petitioner cannot unilaterally take it back according to itswhim. In the world of commerce, especially in the field of banking,the promised word is crucial. Once given, it may no longer bebroken.

Upon the other hand, arbitration as an alternative methodof dispute resolution is encouraged by this Court. Aside fromunclogging judicial dockets, it also hastens solutions especiallyof commercial disputes.

In view of the foregoing, a discussion of the issues raisedby the petitioners is unnecessary.

WHEREFORE, the petition is DENIED for lack of merit.Costs against petitioner.

SO ORDERED.

Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.

Does PCHC’s jurisdiction extend to non-negotiable checks?

As provided in the articles of incorporation of PCHC itsoperation extend to “clearing checks and other clearing items.”No doubt transactions on non-negotiable checks are within theambit of its jurisdiction. x x x The term check as used in the saidArticles of Incorporation of PCHC can only connote checks ingeneral use in commercial and business activities. It cannot beconceived to be limited to negotiable checks only. Checks areused between banks and bankers and their customers, and are


designed to facilitate banking operations. It is of the essence tobe payable on demand, because the contract between the bankerand the customer is that the money is needed on demand.139

(Banco de Oro Savings and Mortgage Bank vs. Equitable Banking

Corporation, G.R. No. 74917, January 20, 1988, [Gancayco, J.])

Viewing these provisions (Sec. 3 and 36.6 PCHC-CHRRclearing rules and regulations; Sec. 2 Arbitration Law; Sec. 21 ofthe same rules), the conclusion is clear that the PCHC Rules andRegulations should not be interpreted to be applicable only tochecks which are negotiable instruments but also to non-negotiable instruments and that the PCHC has jurisdiction overthis case even as the checks subject of this litigations areadmittedly non-negotiable. (supra)

What may be some of the judicial remedies available to thelosing party in case the Philippine Clearing HouseCommission Arbitration Committee denies its motion forreconsideration?

ANSWER:

a. It may petition the proper Regional Trial Court to issuean order vacating the award on the grounds providedfor under Section 24 of the Arbitration Law;

b. File a petition for review under Rule 43 of the Rules ofCourt with the Court of Appeals on questions of fact, oflaw, or mixed questions of fact and law; or

c. File a petition for certiorari under Rule 45 of the Rules ofCourt on the ground that the Arbitrator Committee actedwithout or in excess of jurisdiction or with grave abuseof discretion amounting to lack or excess of jurisdiction.

(Insular Savings Bank vs. Far Eastern Bank and Trust Company,

G.R. No. 141818, June 22, 2006, [Ynares-Santiago, J.])

What are the grounds under Section 24 of the Arbitration Lawfor the issuance of the Regional Trial Court of an order tovacate the award granted by the Philippine Clearing HouseCorporation Arbitration Committee?

85

ANSWER:

SEC. 24. Grounds for vacating award. – In any one of thefollowing cases, the court must make an order vacating theaward upon the petition of any party to the controversy whensuch party proves affirmatively that in the arbitrationproceedings:

(a) The award was procured by corruption, fraud orother undue means; or

(b) That there was evident partiality or corruption in thearbitrators or any of them; or

(c) That the arbitrators were guilty of misconduct inrefusing to postpone the hearing upon sufficientcause shown, or in refusing to hear evidencepertinent and material to the controversy; that oneor more of the arbitrators was disqualified to act assuch under section nine hereof, and willfullyrefrained from disclosing such disqualification or ofany other misbehavior by which the rights of anyparty have been materially prejudiced; or

(d) That the arbitrators exceeded their powers, or soimperfectly executed them, that a mutual, final anddefinite award upon the subject matter submittedto them was not made.

x x x x

(Insular Savings Bank vs. Far Eastern Bank and

Trust Company, G.R. No. 141818, June 22, 2006,

[Ynares-Santiago, J.])

BATAS PAMBANSA BILANG 22(BOUNCING CHECKS LAW)

Reason for the law

BP 22 or the Bouncing Checks Law was enacted for thespecific purpose of addressing the problem of the continuedissuance and circulation of unfunded checks by irresponsiblepersons. To stem the harm caused by these bouncing checks tothe community, BP 22 considers the mere act of issuing anunfunded check as an offense not only against property but also


against public order.140 The purpose of BP 22 in declaring themere issuance of a bouncing check as malum prohibitum is topunish the offender in order to deter him and others fromcommitting the offense, to isolate him from society, to reform andrehabilitate him, and to maintain social order.141 The penalty isstiff. BP 22 imposes the penalty of imprisonment for at least 30days or a fine of up to double the amount of the check or bothimprisonment and fine. (Mitra vs. People, G.R. No. 191404, July

5, 2010, [Mendoza, J.:])

Elements of violation of Section 1 of Batas PambansaBilang 22

a) The making, drawing, and issuance of any check to applyfor account or for value;

b) The knowledge of the maker, drawer, or issuer that atthe time of issue he does not have sufficient funds in orcredit with the drawee bank for the payment of the checkin full upon its presentment; and

c) The subsequent dishonor of the check by the draweebank for insufficiency of funds or credit or dishonor forthe same reason had not the drawer, without any validcause, ordered the bank to stop payment.

(Ting vs. CA, 398 Phil. 481 (2000); Sycip, Jr. vs. CA,

G.R. No. 125059, March 17, 2000, 328 SCRA 447. See

Batas Pambansa Bilang 22 (1979), Section 1, cited in

Lunaria vs. People of the Philippines, G.R. No. 160127,

November 11, 2008)

Illustrative Case:

Eumelia Mitra vs. People of the Philippines and FelicisimoTarcelo

G.R. No. 191404, July 5, 2010

MENDOZA, J.:

FACTS: Petitioner Eumelia R. Mitra (Mitra) was the Treasurer,and Florencio L. Cabrera, Jr. (now deceased) was thePresident, of Lucky Nine Credit Corporation (LNCC),a corporation engaged in money lending activities.

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Between 1996 and 1999, private respondent FelicisimoS. Tarcelo (Tarcelo) invested money in LNCC. As theusual practice in money placement transactions,Tarcelo was issued checks equivalent to the amountshe invested plus the interest on his investments.

When Tarcelo presented these checks for payment,they were dishonored for the reason “account closed.”Tarcelo made several oral demands on LNCC for thepayment of these checks but he was frustrated.Constrained, in 2002, he caused the filing of seveninformations for violation of Batas Pambansa Blg. 22(BP 22) in the total amount of P925, 000.00 with theMTCC in Batangas City.

ISSUES: Whether or not the elements of violation of BatasPambansa Bilang 22 must be proved beyondreasonable doubt as against the corporation who ownsthe current account where the subject checks weredrawn before liability attaches to the signatories?

RULING: A check is a negotiable instrument that serves as asubstitute for money and as a convenient form ofpayment in financial transactions and obligations. Theuse of checks as payment allows commercial andbanking transactions to proceed without the actualhandling of money, thus, doing away with the need tophysically count bills and coins whenever payment ismade. It permits commercial and banking transactionsto be carried out quickly and efficiently. But theconvenience afforded by checks is damaged byunfunded checks that adversely affect confidence inour commercial and banking activities, and ultimatelyinjure public interest.

BP 22 or the Bouncing Checks Law was enacted forthe specific purpose of addressing the problem of thecontinued issuance and circulation of unfunded checksby irresponsible persons. To stem the harm caused bythese bouncing checks to the community, BP 22considers the mere act of issuing an unfunded checkas an offense not only against property but also against


public order. The purpose of BP 22 in declaring themere issuance of a bouncing check as malumprohibitum is to punish the offender in order to deterhim and others from committing the offense, to isolatehim from society, to reform and rehabilitate him, and tomaintain social order. The penalty is stiff. BP 22imposes the penalty of imprisonment for at least 30days or a fine of up to double the amount of the checkor both imprisonment and fine.

Mitra posits in this petition that before the signatory toa bouncing corporate check can be held liable, all theelements of the crime of violation of BP 22 must firstbe proven against the corporation. The corporationmust first be declared to have committed the violationbefore the liability attaches to the signatories of thechecks.

The Court finds itself unable to agree with Mitra’sposture. The third paragraph of Section 1 of BP 22reads: “Where the check is drawn by a corporation,company or entity, the person or persons who actuallysigned the check in behalf of such drawer shall be liableunder this Act.” This provision recognizes the realitythat a corporation can only act through its officers.Hence, its wording is unequivocal and mandatory - thatthe person who actually signed the corporate checkshall be held liable for a violation of BP 22. Thisprovision does not contain any condition, qualificationor limitation.

In the case of Llamado v. Court of Appeals,142 the Courtruled that the accused was liable on the unfundedcorporate check which he signed as treasurer of thecorporation. He could not invoke his lack of involvementin the negotiation for the transaction as a defensebecause BP 22 punishes the mere issuance of abouncing check, not the purpose for which the checkwas issued or in consideration of the terms andconditions relating to its issuance. In this case, Mitra

142 337 Phil. 153, 160 (1997)

89

signed the LNCC checks as treasurer. FollowingLlamado, she must then be held liable for violating BP22.

Another essential element of a violation of BP 22 isthe drawer’s knowledge that he has insufficient fundsor credit with the drawee bank to cover his check.Because this involves a state of mind that is difficult toestablish, BP 22 creates the prima facie presumptionthat once the check is dishonored, the drawer of thecheck gains knowledge of the insufficiency, unlesswithin five banking days from receipt of the notice ofdishonor, the drawer pays the holder of the check ormakes arrangements with the drawee bank for thepayment of the check. The service of the notice ofdishonor gives the drawer the opportunity to make goodthe check within those five days to avert his prosecutionfor violating BP 22.

Mitra alleges that there was no proper service on herof the notice of dishonor and, so, an essential elementof the offense is missing. This contention raises afactual issue that is not proper for review. It is not thefunction of the Court to re-examine the finding of factsof the Court of Appeals. Our review is limited to errorsof law and cannot touch errors of facts unless thepetitioner shows that the trial court overlooked facts orcircumstances that warrant a different disposition ofthe case or that the findings of fact have no basis onrecord. Hence, with respect to the issue of the proprietyof service on Mitra of the notice of dishonor, the Courtgives full faith and credit to the consistent findings ofthe MTCC, the RTC and the CA.

The defense postulated that there was no demandserved upon the accused, said denial deserves scantconsideration. Positive allegation of the prosecutionthat a demand letter was served upon the accusedprevails over the denial made by the accused.Though, having denied that there was no demand letterserved on April 10, 2000, however, the prosecutionpositively alleged and proved that the questioned


demand letter was served upon the accused on April10, 2000, that was at the time they were attending Courthearing before Branch I of this Court. In fact, theprosecution had submitted a Certification issued by theother Branch of this Court certifying the fact that theaccused were present during the April 10, 2010 hearing.With such straightforward and categorical testimonyof the witness, the Court believes that the prosecutionhas achieved what was dismally lacking in the three(3) cases of Betty King, Victor Ting and Caras -evidence of the receipt by the accused of the demandletter sent to her. The Court accepts the prosecution’snarrative that the accused refused to sign the same toevidence their receipt thereof. To require theprosecution to produce the signature of theaccused on said demand letter would be imposingan undue hardship on it. As well, actual receiptacknowledgment is not and has never been requiredof the prosecution either by law or jurisprudence.[emphasis supplied]

With the notice of dishonor duly served anddisregarded, there arose the presumption that Mitraand Cabrera knew that there were insufficient funds tocover the checks upon their presentment for payment.In fact, the account was already closed.

To reiterate the elements of a violation of BP 22 ascontained in the above-quoted provision, a violationexists where:

1. a person makes or draws and issues a check to applyon account or for value;

2. the person who makes or draws and issues the checkknows at the time of issue that he does not havesufficient funds in or credit with the drawee bankfor the full payment of the check upon itspresentment; and

3. the check is subsequently dishonored by the draweebank for insufficiency of funds or credit, or wouldhave been dishonored for the same reason had not

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the drawer, without any valid reason, ordered thebank to stop payment.

There is no dispute that Mitra signed the checksand that the bank dishonored the checks becausethe account had been closed. Notice of dishonorwas properly given, but Mitra failed to pay thechecks or make arrangements for their paymentwithin five days from notice. With all the aboveelements duly proven, Mitra cannot escape the civiland criminal liabilities that BP 22 imposes for itsbreach.

Ways of violating B.P. Blg. 22

There are two (2) ways of violating B.P. Blg. 22: (1) by makingor drawing and issuing a check to apply on account or for valueknowing at the time of issue that the check is not sufficientlyfunded; and (2) by having sufficient funds in or credit with thedrawee bank at the time of issue but failing to keep sufficientfunds therein or credit with said bank to cover the full amount ofthe check when presented to the drawee bank within a period ofninety (90) days.143 (Wong vs. Court of Appeals, G.R. No. 117857,

February 2, 2001)

Failure of the drawer to maintain funds in his bank to coverthe check for 90 days

Nowhere in the said provision does the law require a makerto maintain funds in his bank account for only 90 days. Rather,the clear import of the law is to establish a prima facie presumptionof knowledge of such insufficiency of funds under the followingconditions (1) presentment within 90 days from date of the check,and (2) the dishonor of the check and failure of the maker to makearrangements for payment in full within 5 banking days after noticethereof. That the check must be deposited within ninety (90) daysis simply one of the conditions for the prima facie presumption ofknowledge of lack of funds to arise. It is not an element of theoffense. Neither does it discharge petitioner from his duty tomaintain sufficient funds in the account within a reasonable timethereof. (Wong vs. Court of Appeals, G.R. No. 117857, February

2, 2001)

143 Section 1, B.P. Blg. 22


Lack of criminal intent irrelevant; gravamen of the offense

It bears repeating that the lack of criminal intent of the partof the accused is irrelevant.144 The law has made the mere act ofissuing a worthless check a malum prohibitum, an act proscribedby legislature for being deemed pernicious and inimical to publicwelfare.145 In fact, even in cases where there had been payment,through compensation or some other means, there could still beprosecution for violation of B.P. 22. The gravamen of the offenseunder this law is the act of issuing a worthless check that isdishonored upon its presentment for payment, not thenonpayment of the obligation.146 (Lunaria vs. People of the

Philippines, G.R. No. 160127, November 11, 2008) (emphasissupplied)

Congress, in the exercise of police power, enacted BP 22in order to maintain public confidence in commercialtransactions.147 (Spouses Yap vs. First e-Bank Corporation, G.R.

No. 169889, September 29, 2009, [Corona, J.], citing Lozano vs.

Martinez)

Intention of the parties in the issuance of the checkimmaterial; criminal intent of the issuer of the checkimmaterial

In Abarquez vs. Court of Appeals148, it was held that: “[t]hefact that petitioner issued the subject checks knowing the

144 People v. Lo Ho Wing, G.R. No. 88017, 21 January 1991, 193 SCRA 122,130. See Macalalag v. People, G.R. No. 164358, December 20, 2006,511 SCRA 400; Tan v. Mendez, 432 Phil. 760 (2002); People v. Laggui,G.R. Nos. 76262-63, March 16, 1989, 171 SCRA 305, 311; People v.Manzanilla, G.R. Nos. L-66003-04, 11 December 1987, 156 SCRA 279,283

145 Macalalag v. People, G.R. No. 164358, December 20, 2006, 511 SCRA400; Tan v. Mendez, 432 Phil. 760 (2002); People v. Laggui, G.R. Nos.76262-63, March 16, 1989, 171 SCRA 305, 311; People v. Manzanilla,G.R. Nos. L-66003-04, December 11, 1987, 156 SCRA 279, 283

146 Macalalag v. People, G.R. No. 164358; December 20, 2006, 511 SCRA400; Tan v. Mendez, 432 Phil. 760 (2002); Lozano v. Martinez, G.R. No. L-63419, December 18, 1986, 146 SCRA 323, 338

147 The gravamen of the offense punishable by BP 22 is the act of makingand issuing a worthless check or a check that is dishonored upon itspresentation for payment. It is not the nonpayment of an obligation whichthe law punishes. The law

148 G.R. No. 148557, August 7, 2003

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inadequacy of his funds in the bank to cover said checks makeshim liable under B.P. 22. As elaborated in Meriz vs. People149

“The Court has consistently declared that the cause orreason for the issuance of the check is inconsequential indetermining criminal culpability under B.P. 22. The Courthas since said that a check issued as an evidence of a debt,although not intended for encashment, has the same effectlike any other check and must thus be held to be within thecontemplation of B.P. 22. Once a check is presented forpayment, the drawee bank gives it the usual course whetherissued in payment of an obligation or just as a guaranty ofan obligation. B.P. 22 does not concern itself with whatmight actually be envisioned by the parties, its primordialintention being instead to ensure the stability andcommercial value of checks as being virtual substitutes forcurrency. It is a policy that can easily be eroded if one hasyet to determine the reason for which checks are issued, orthe terms and conditions for their issuance, before anappropriate application of legislative enactment can bemade. The gravamen of the offense under B.P. 22 is theact of making or issuing a worthless check or a check thatis dishonored upon presentment for payment. The acteffectively declares the offense to be one of malum

prohibitum. The only valid query then is whether the lawhas been breached, i.e., by the mere act of issuing a badcheck, without so much regard as to the criminal intent ofthe issuer.”

More so, in the case of Cruz vs. Court of Appeals,150 whereit was held that:

When a check is presented for payment, the drawee bankwill generally accept the same regardless of whether it wasissued in payment of an obligation or merely to guaranteethe said obligation. What the law punishes is the issuanceof a bouncing check151 not the purpose for which it wasissued nor the term and conditions relating to its issuance.

149 Pp. 531-532150 G.R. No. 108738, June 17, 1994, [Kapunan, J.:]151 Lozano vs. Martinez, 146 SCRA 523; People vs. Veridiano II, 132 SCRA

523


The mere act of issuing a worthless check is malum

prohibitum.152 This point has been made clear by this Court,thus:

It is now settled that Batas Pambansa Bilang 22applies even in cases where dishonored checks areissued merely in the form of a deposit or a guarantee.The enactment in question does not make anydistinction as to whether the checks within itscontemplation are issued in payment of an obligationor merely to guarantee the said obligation. Inaccordance with the pertinent rule of statutoryconstruction, inasmuch as the law has not made anydistinction in this regard, no such distinction can bemade by means of interpretation or application.Furthermore, the history of the enactment of subjectstatute evinces the definite legislative intent to makethe prohibition all-embracing, without making anyexception from the operation thereof in favor of aguarantee. This intent may be gathered from thestatement of the sponsor of the bill (Cabinet Bill No.9) which was enacted later into Batas PambansaBilang 22, when it was introduced before the BatasanPambansa, that the bill was introduced to discouragethe issuance of bouncing checks, to prevent checksfrom becoming “useless scraps of paper” and torestore respectability to checks, all without distinctionas to the purpose of the issuance of the checks. Thelegislative intent as above said is made all the moreclear when it is considered that while the original textof Cabinet Bill No. 9, supra, had contained a provisoexcluding from the coverage of the law a check issuedas a mere guarantee, the final version of the bill asapproved and enacted by the Committee on theRevision of Laws in the Batasan deleted theabovementioned qualifying proviso deliberately for thepurpose of making the enforcement of the act moreeffective (Batasan Record, First Regular Session,December 4, 1978, Volume II, pp.1035-1036).

152 Que vs. People, 154 SCRA 160

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Consequently, what are important are the facts thatthe accused had deliberately issued the checks inquestion to cover accounts and that the checks inquestion to cover accounts and that the checks weredishonored upon presentment regardless of whetheror not the accused merely issued the checks as aguarantee. (pp. 4-5, Dec. IAC) [pp. 37-38, Rollo].153

The importance of arresting the proliferation of worthlesschecks need not be underscored. The mischief created byunfunded checks in circulation is injurious not only to thepayee or holder, but to the public as well. This harmfulpractice “can very well pollute the channels of trade andcommerce, injure the banking system and eventually hurtthe welfare of society and the public interest.”154"

Knowledge of the payee of the insufficiency or lack of fundsof the drawer immaterial

The knowledge of the payee of the insufficiency or lack ofmaterial funds of the drawer with the drawee bank is immaterialas deceit is not an essential element of an offense penalizedby B.P. 22. The gravamen of the offense is the issuance of a badcheck, hence, malice and intent in the issuance thereof isinconsequential.155 (Ty vs. People of the Philippines, G.R. No.

149275, September 27, 2004) (emphasis supplied)

An essential element of the offense is “knowledge” on thepart of the maker or drawer of the check of the insufficiency of hisfunds in or credit with the bank to cover the check upon itspresentment. Since this involves a state of mind difficult toestablish, the statute itself creates a prima facie presumption ofsuch knowledge where payment of the check “is refused by thedrawee because of insufficient funds in or credit with such bankwhen presented within ninety (90) days from the date of the check.”To mitigate the harshness of the law in its application, the statuteprovides that such presumption shall not arise if within five (5)banking days from receipt of the notice of dishonor, the maker ordrawer makes arrangements for payment of the check by the bank

153 Id., pp. 164-165154 Lozano vs. Martinez, supra, p. 340155 Cruz v. Court of Appeals, G.R. No. 108738, 17 June 1994, 233 SCRA 301


or pays the holder the amount of the check.156 (Wong vs. Court of

Appeals, G.R. No. 117857, February 2, 2001)

No independent civil action

There is no independent civil action to recover civil liabilityarising from the issuance of an unfunded check prohibited andpunished under Batas Pambansa Bilang 22 (BP 22). (Heirs of

Eduardo Simon vs. Chan and Court of Appeals, G.R. No. 157547,

February 23, 2011, [Bersamin, J.])

“The Supreme Court has settled the issue of whether or nota violation of BP 22 can give rise to civil liability in Banal v. Judge

Tadeo, Jr.,157 holding:

x x x

Article 20 of the New Civil Code provides:

Every person, who contrary to law, willfully or negligentlycauses damage to another, shall indemnify the latter for thesame.

Regardless, therefore, of whether or not a special law soprovides, indemnification of the offended party may be hadon account of the damage, loss or injury directly sufferedas a consequence of the wrongful act of another. Theindemnity which a person is sentenced to pay forms anintegral part of the penalty imposed by law for thecommission of a crime (Quemel v. Court of Appeals, 22

SCRA 44, citing Bagtas v. Director of Prisons, 84 Phil. 692).Every crime gives rise to a penal or criminal action for thepunishment of the guilty party, and also to civil action for therestitution of the thing, repair of the damage, andindemnification for the losses (United States v. Bernardo,

19 Phil. 625)x x x

Civil liability to the offended party cannot thus be denied.The payee of the check is entitled to receive the payment of money

156 Lozano vs. Martinez, 146 SCRA 323, 330-331 (1986)157 G.R. No. L-78911, December 11, 1987, 156 SCRA 325

97

for which the worthless check was issued. Having been causedthe damage, she is entitled to recompense.

Surely, it could not have been the intendment of the framerof Batas Pambansa Blg. 22 to leave the offended party defraudedand empty-handed by excluding the civil liability of the offender,giving her only the remedy, which in many cases results in a PyrrhicVictory, of having to file a separate civil suit. To do so may leavethe offended party unable to recover even the face value of thecheck due her, thereby unjustly enriching the errant drawer at theexpense of the payee. The protection which the law seeks toprovide would, therefore, be brought to naught.” (supra)

Notice of dishonor essential

Both the spirit and letter of the Bouncing Checks Law require,for the act to be punished under said law, not only that theaccused issued a check that was dishonored, but thatlikewise the accused was actually notified in writing of thefact of dishonor. The consistent rule is that penal statutes haveto be construed strictly against the State and liberally in favor ofthe accused.158 (Abarquez vs. Court of Appeals, G.R. No. 148557,

August 7, 2003, published in The New Philippine Law Report,

Vol. XXXI, No. 8, August 2003, page 21) (emphasis supplied)

Proof of receipt of the notice of dishonor of drawer must beclearly established

In James Svendsen vs. People of the Philippines,159 citingRico v. People of the Philippines,160 this Court held:

“x x x [I]f x x x notice of non-payment by the drawee bank isnot sent to the maker or drawer of the bum check, or if thereis no proof as to when such notice was received by thedrawer, then the presumption of knowledge as provided inSection 2 of B.P. 22 cannot arise, since there would simplybe no way of reckoning the crucial five-day period.

158 Domagasang vs. CA, G.R. No. 139292, 5 December 2000, 347 SCRA 75,83

159 G.R. No. 175381, February 26, 2008160 440 Phil. 540 (2002)


x x x In recent cases, we had the occasion to emphasizethat not only must there be a written notice of dishonor ordemand actually received by the drawer of a dishonoredcheck, but there must also be proof of receipt thereof that isproperly authenticated, and not mere registered receipt and/or return receipt.

Thus, as held in Domagsang vs. Court of Appeals, whileSection 2 of B.P. 22 indeed does not state that the notice ofdishonor be in writing, this must be taken in conjunctionwith Section 3 of the law, i.e., “that where there is no sufficientfunds in or credit with such drawee bank, such fact shall

always be explicitly stated in the notice of dishonor or

refusal”. A mere oral notice or demand to pay would appearto be insufficient for conviction under the law. In our view,both the spirit and letter of the Bouncing Checks Law requirefor the act to be punished thereunder not only that theaccused issued a check that is dishonored, but also thatthe accused has actually been notified in writing of the factof dishonor. This is consistent with the rule that penalstatutes must be construed strictly against the state andliberally in favor of the accused. x x x

In fine, the failure of the prosecution to prove the existenceand receipt by petitioner of the requisite written notice ofdishonor and that he was given at least five banking dayswithin which to settle his account constitutes sufficientground for his acquittal.161 (Italics in the original; underscoringand emphasis omitted)

The evidence for the prosecution failed to prove the secondelement. While the registry receipt,162 which is said to cover theletter-notice of dishonor and of demand sent to petitioner, waspresented, there is no proof that he or a duly authorized agentreceived the same. Receipts for registered letters including returnreceipts do not themselves prove receipt; they must be properlyauthenticated to serve as proof of receipt of the letters.163 Thus inTing v. Court of Appeals,164 this Court observed:

161 Id. At 554-555162 MeTC records, p. 49163 Supra note 440 Phil. 540 (2002) at 540-555164 398 Phil. 481 (2000)

99

x x x All that we have on record is an illegible signature onthe registry receipt as evidence that someone received theletter. As to whether this signature is that of one of thepetitioners or of their authorized agent remains a mystery.From the registry receipt alone, it is possible that petitionersor their authorized agent did not receive the demand letter.Possibilities, however, cannot replace proof beyondreasonable doubt.165

However, apparently, a contrary ruling was laid down in thesubsequent case of Eumelia Mitra vs. People of the Philippines

(G.R. No. 191404, July 5, 2010), wherein it was held that: “positiveallegation of the prosecution that a demand letter was served uponthe accused prevails over the denial made by the accused. x x xThe court accepts the prosecution’s narrative that the accusedrefused to sign to evidence their receipt thereof. To require theprosecution to produce the signature of the accused on saiddemand letter would be imposing an undue hardship on it. x x xAs well, actual receipt acknowledgment is not and has never beenrequired of the prosecution either by law or jurisprudence.”

As the rule now stands, the Mitra case is controlling.

Payment as a matter of defense in B.P. 22 cases

In the Abarquez case, the Supreme Court laid down thefollowing doctrines:

The prima facie presumption that the drawer has knowledgeof the insufficiency of funds or credit at the time of the issuance,or on the payment for presentment, of the check may be rebuttedby payment of the value of the check either by the drawer or bythe drawee bank within five banking days from notice of thedishonor given by the drawer. The payment thus becomes acomplete defense regardless of the strength of the evidenceoffered by the prosecution. It must be presupposed, then, thatthe issuer received a notice of dishonor and that, within five daysfrom receipt thereof, he failed to pay the amount of the check orto make arrangement for its payment.166

165 Id. At 494166 Meriz vs. People, p. 533


In Caras vs. Court of Appeals167, we note that the lawprovides for a prima facie rule of evidence. Knowledge ofinsufficiency of funds in or credit with the bank is presumed fromthe act of making, drawing, and issuing a check payment of whichis refused by the drawee bank for insufficiency of funds whenpresented within 90 days from the date of issue. However, thispresumption is rebutted when it is shown that the maker or drawerpays or makes arrangements for the payment of the check withinfive banking days after receiving notice that such check had beendishonored. Thus, it is essential for the maker or drawer to benotified of the dishonor of her check, so he could pay the valuethereof or make arrangements for its payment within the periodprescribed by law.

In Griffith vs. Court of Appeals168, we held that:

“While we agree with the private respondent that thegravamen of violation of B.P. 22 is the issuance of worthlesschecks that are dishonored upon their presentment for payment,we should not apply penal laws mechanically. We must find if theapplication of the law is consistent with the purpose and the reasonfor the law. Ratione cessat lex, et cessat lex (When the reasonfor the law ceases, the law ceases.) It is not the letter alone butthe spirit of the law also that give it life. This is especially so inthis case where a debtor’s criminalization would not serve theends of justice but in fact subvert it. The creditor having collectedalready more than a sufficient amount to cover the value of thechecks for payment of rentals, via auction sale, we find that holdingthe debtor’s president to answer for a criminal offense under B.P.22 two years after said collection, is no longer tenable nor justifiedby law or equitable consideration.”

Matters to be proved by the prosecution in BP 22 cases

Under Batas Pambansa Bilang 22 (BP 22), the prosecutionmust prove not only that the accused issued a check that wassubsequently dishonored. It must also [be] established that theaccused was actually notified that the check was dishonored, andthat he or she failed, within five banking days from receipt of notice,

167 G.R. No. 129900, 2 October 2001, 366 SCRA 371, 380168 G.R. No. 129764, 12 March 2002

101

to pay the holder of the check the amount due therein or to makearrangement for its payment. Absent proof that the accusedreceived such notice, a prosecution for violation of the BouncingCheck Law cannot prosper. (Betty King vs. People of the

Philippines, G.R. No. 131540, December 2, 1999, [Panganiban,

J.])

I. FORM AND INTERPRETATION

Section 1. Form of negotiable instruments. - An instrumentto be negotiable must conform to the following requirements:

(a) It must be in writing and signed by the maker ordrawer;

(b) Must contain an unconditional promise or order topay a sum certain in money;

(c) Must be payable on demand, or at a fixed ordeterminable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, hemust be named or otherwise indicated therein withreasonable certainty.

Notes:

Parties to Negotiable Instruments:

In sum, parties to negotiable instruments may be primary,or secondary or incidental.

Primary parties are those which are the primary participantsto the creation of a negotiable instrument (e.g., maker, drawer,payee, drawee/acceptor).

Secondary or incidental parties are those which came in orbecome involved only after the instrument is negotiated ortransferred to a third person (e.g., indorsers, indorsees).

They may also be classified as parties primarily liable andparties secondarily liable.


The person “primarily” liable on an instrument is the personwho, by the terms of the instrument, is absolutely required to paythe same. All other parties are “secondarily” liable. (Sec. 192)

Parties to a Promissory Note, include:

a) Maker;

b) Payee

Parties to a Bill of Exchange, include:

a) Drawer;

b) Drawee;

c) Payee

At the onset, it ought to be proper for us to define the termsthat the reader would encounter throughout the entire study ofthis subject matter, as specified in Section 191—that unless thecontract otherwise requires:

“Acceptance” means an acceptance completed by deliveryor notification;

”Action” includes counterclaim and set-off;

”Bank” includes any person or association of personscarrying on the business of banking, whether incorporatedor not;

”Bearer” means the person in possession of a bill or notewhich is payable to bearer;

”Bill” means bill of exchange, and “note” means negotiablepromissory note;

”Delivery” means transfer of possession, actual orconstructive, from one person to another;

”Holder” means the payee or indorsee of a bill or note whois in possession of it, or the bearer thereof;

”Indorsement” means an indorsement completed by delivery;

103

”Instrument” means negotiable instrument;

”Issue” means the first delivery of the instrument, completein form, to a person who takes it as a holder;

”Person” includes a body of persons, whether incorporatedor not;

”Value” means valuable consideration;

”Written” includes printed, and “writing” includes print.

The law does not require any particular form, either as to abill of exchange or promissory note, or other negotiable instrument,and while it would be unwise to depart from the approved formsin vogue amongst merchants, yet the law respects substance morethan form; and where the intention appears to assume theobligations which devolve upon drawers and makers of negotiableinstruments, it will be enforced, although not evidenced in theusual commercial form. Thus, an order written under a note,“Please pay the above note, and hold it against me in oursettlement,” signed by the drawer and accepted by the drawee,has been held a good bill;169 and so, also, it has been held that alike order written under an account is a bill of exchange.170 Andwhere an indorsement was made on a bond, ordering the contentsto be paid to order for value received, it was held a good bill.171

(Daniel, Elements of the Law of Negotiable Instruments Law,page 35)

Must be in Writing

As a substitute for money, a negotiable instrument, similarto money, must be written or contained in a medium, in such away that it could by physically transferrable from hand to hand.Strictly speaking, there are no verbal negotiable instruments.

It may be written on any paper, cloth, board, parchment,wood, plastic, so long as it has a semi-permanent character, soas to manifest the intent of the maker or drawer to create a

169 Leonard v. Mason, 1 Wend. 252170 Hoyt v. Lynch, 2 Sandf. 328171 Bay v. Frazer, 1 Bay, 66


negotiable instrument, capable of being negotiated or transferredfrom one person to another. Otherwise, if such is incapable ofbeing physically transferred its negotiable character would bedefeated.

“[T]his “writing” can be handwritten, printed, or typewritten,or it can consists of “any other intentional [method of] reduction totangible form.” (Business Law, Howell, p. 412)

For a negotiable instrument to operate practically as eithera substitute for cash or a credit device, or both, it is essential thatthe instrument can be easily transferable without danger of being

uncollectible.172

The whole of the bill or note must be expressed in writing.Whether the instrument be a bill of exchange or a promissorynote, or otherwise, and whether or not it be negotiable, must bedetermined by its face, without reference to any other source.173

Signed by the Maker or Drawer

Section 1 requires that the instrument be signed either bythe maker or drawer. This is in line with the provision that ‘Noperson is liable on the instrument whose signature does not appearthereon’.174 Moreover, a negotiable instrument being essentiallya contract requires that there be consent of the maker or drawer,since they are the ones who start with the creation and initialdelivery of an instrument. Consent is thus, manifested by theiraffixing their signature on the instrument.

The term signed means “any symbol executed or adoptedby a party with [the] present intention to authenticate a writing.”Thus a signing can occur through the use of one’s initials, a rubberstamp, or some other type of “signature”, such as the mark X, solong as it is made with the intention of giving assent to the writing’sterms. (ibid, p. 413)

It does not matter upon what portion of the instrument, themaker or drawer affixes his name, so long that he signs as drawer

172 Miller & Jentz, Business Law Today, 9th Edition, 2011, page 391173 Daniel on Negotiable Instrument, 77; Gibbon v. Scott, 2 Stark, 268174 Sec. 18, NIL

105

or maker.175 It is not material whether the writing is in pencil orink,176 although as matter of permanence and security, ink is, ofcourse, preferable. And the name may be printed a well as written,though, in such cases, it cannot prove itself, and must be shownto have been adopted and used by the party as his signature.177

If another sign the name of the party in his presence and at hisrequest, it is the same as if he did it himself;178 and if another signthe party’s name by verbal or other authority, it is sufficient.179

The full name may be written; and at least the surname shouldappear, and generally does. But this is not indispensable—theinitials are sufficient,180 and any mark which the party uses toindicate his intention to bind himself will be as effectual as hissignature,181 whether there be a certificate of witnesses on theinstrument or not.182 But, of course, a mark does not prove itselflike a signature, although it is an adminicle of proof.183 Anypeculiarity in it may be shown as evidence of proof;184 but, unlessthere be an attesting witness, or one who saw it written, or isfamiliar with its characteristics, the plaintiff cannot recover.185 Norit is necessary that the substance upon which the instrument iswritten should be paper—parchment, cloth, leather, or any othersubstitute for paper will suffice.186 (Daniel, Elements of the Law ofNegotiable Instruments, page 35-36)

Must Contain Unconditional Promise or Order

In perspective, a negotiable instrument operates as anundertaking of a person, be it a maker, who promises to pay, or adrawer, which in turn, orders another person to pay on his behalf,that is made without any condition to another person, identifiedas the payee, and receiving anything of value in exchange thereof.

175 Clason v. Bailey, 14 Johns, 484; Schmidt v. Schmaeller, 45 Mo. 502176 Reed v. Roark, 14 Tex. 329; Closson v. Stearns, 4 Vt. 11177 Brown v. Butchers’ Bank, 6 Hill, 443; Schneider v. Norris, 2 Maule & S.

286178 Sager v. Tupper, 42 Mich. 605179 Daniel on Negotiable Instruments, page 274, 299180 Merchants’ Bank v. Spicer, 6 Wend. 443; 1 Parsons on Notes and Bills,

36181 Lyons v. Holmes, 11 S.C. 429182 Willoughby v. Moulton, 47 N.H. 205; Shank v. Butach, 28 Ind. 19183 Hilborn v. Alford, 22 Cal. 482; Flowers v. Billing, 45 Ala. 488184 George v. Surrey, 1 Moody & M. 516; 2 Parsons on Notes and Bills, 480185 Thompson on Bills, 30, 31, 33186 Daniel on Negotiable Instruments, 77


Vital is the requirement that the promise or order to pay must beunconditional. Since, a negotiable instrument is intended as asubstitute for money, the payee and the subsequent holder thereofmust be assured that they would be able to receive the amountindicated on the face of the instrument without any other conditionor additional burden.

If a bill, it must contain a certain direction to pay—if a note,a certain promise to pay. A bill is, in its nature, the demanding ofa right, not the mere asking of a favor, and therefore a supplicationmade or authority given to pay an amount is not a bill. (Daniel,Elements of the Law of Negotiable Instruments, page 45)

A promissory note must contain a certain promise to pay. “Ipromise to pay, or cause to be paid,” would suffice, because theundertaking that the payment be made is definite and certain.187

It is said by Story, that “it seems that to constitute a goodpromissory note, there must be an express promise upon the factof the instrument to pay the money; for a mere promise impliedby law, founded upon an acknowledged indebtedness, will not besufficient.”188 But we think the better language is used by Byles,who says: “No precise words of contract are necessary, providedthey amount, in legal effect, to a promise to pay,”189 In other words,if over and above the mere acknowledgment of debt, there maybe collected from the words used a promise to pay it, theinstrument may be regarded as a promissory note.190

The instrument must be payable unconditionally and at allevents in order to be negotiable.191 To be unconditional, thepayment of the instrument must not be made to depend upon afuture uncertain event, which may, or may not happen.

A promise is unconditional, although it is coupled with (a)an indication of a particular fund out of which reimbursement is tobe made or a particular account to be debited with the amount; or(b) a statement of the transaction which gives rise to theinstrument. (Sec. 2, NIL)

187 Lovell v. Hill, 6 Car. & P. 238; Caviness v. Rushton, 101 Ind. 500188 Story on Promissory Notes, 14189 Byles on Bills, 8190 Daniel on Negotiable Instruments, 36; Cowan v. Hallack, 9 Colo. 578191 Daniel, Elements of the Law of Negotiable Instruments, 46

107

And an instrument payable upon a contingency is notnegotiable, and the happening of the event does not cure thedefect.192 The contingency implied deprives the instrument of itsnegotiable character, as the events named may never happen.193

If the time must certainly come, although the particular dayis not mentioned, the instrument is regarded as negotiable, asthe fact of payment is certain.194 If the instrument is payable at, orwithin a certain time after, a man’s death, it is sufficient, becausethe event must occur;195 and a promise to pay “on demand, aftermy decease, $850,” signed by the promissory, is a good note,negotiable as any other, and binding on the promissor’s estate athis death.196 So a note payable “one day after date or at mydeath,”197 and if the day of payment must come at some time, ithas been said that the distance is immaterial.198 (Daniel, Elementsof the Law of Negotiable Instruments, page 48)

However, an order or promise to pay out of a particular fundis not unconditional. (Sec. 2, N.I.L.) In accordance with theseprinciples the negotiable character of the instrument is destroyedif it be made payable expressly or impliedly out of a particularfund.199 Illustrations: The insertion in an order to pay a certainsum “on account of brick work done on a certain building”200 or“out of rents,”201 or “out of my growing substance,”202 or “out of acertain claim,”203 or “out of my part of the estate of A,”204 or “out ofthe amount due on contract.”205 On the same principle, receivers’certificates are not regarded as negotiable, although framed withthe negotiable words usual in promissory notes.206 (Daniel,Elements of the Law of Negotiable Instruments, page 50)

192 Sec. 4, NIL193Daniel, Elements of the Law of Negotiable Instruments, 47194 Daniel on Negotiable Instruments, 43195 Cooke v. Colehan, 2 Stra. 1217; Conn v. Thornton, 46 Ala. 587; Price v.

Jones, 105 Ind. 544.196 Bristol v. Warner, 19 Conn. 7197 Conn v. Thornton, 46 Ala. 588198 Worth v. Case, 42 N.Y. 362199 Daniel, Elements of the Law of Negotiable Instruments, 50200 Pitman v. Crawford, 3 Gratt. 127201 J Parsons on Notes and Bills, 43202 Josselyn v. Lacier, 10 Mod. 294203 Richardson v. Carpenter, 46 N.Y.661204 Mills v. Kuykendale, 2 Black., 47205 Hoagland v. Erck, 11 Neb. 580206 Staunton v. Railroad Co., 31 Fed. 587; McCurdy v. Bowes, 88 Ind.583


An order to pay A, or order, “$300.00 or what may be dueon my deposit book”, is conditional.207 Therefore, the same innon-negotiable.

2011 Bar Question:

A writes a promissory note in favor of his creditor, B. Itsays: “Subject to my option, I promise to pay B Php1Million or his order or give Php1 Million worth of cementor to authorize him to sell my house worth Php1 Million.Signed, A.” Is the note negotiable?

A. No, because the exercise of the option to pay lies withA, the maker and debtor.

B. No, because it authorizes the sale of collateral securitiesin case the note is not paid at maturity.

C. Yes, because the note is really payable to B or his order,the other provisions being merely optional.

D. Yes, because an election to require something to be donein lieu of payment of money does not affect negotiability.

To Pay a sum certain in Money

The sum or amount which is promised or ordered to be paidby the maker or drawer as the case may be must be certain. Thiswould enable to payee or any subsequent holder to be able toknow how much they are going to claim from the person primarilyliable thereon.

Thus, if an instrument is to be a substitute for money andhave an equivalent degree of acceptability, the necessity that theamount be a sum certain is obvious. This requirement of certaintyis met if the holder can determine from the terms of the instrumentitself the amount he or she is entitled to receive at maturity. (Ibid,

Howell, p. 417)

The amount which the debtor promises or engages to paymust either be stated in the instrument itself, in figures or words,or must be ascertainable from data somewhere on the paper.

207 The Negotiable Instruments Law Annotated, by Joseph DoddridgeBrannan, Second Edition 1911, page 3, citing National Sav. Bank v. Cable,73 Conn. 568 Atl. 428.

109

Illustrations: A note to pay a certain sum, “and all other sumswhich may be due” is not negotiable, as the aggregate amount isnot capable of definite ascertainment.208 So, if it be for a certainsum “and whatever sum you may collect of me for C,;”209 or if it befor “the proceeds of a shipment of goods, value about £2,000,consigned by me to you;”210 or “the demands of the sick club inpart of interest;”211 or “a certain sum, the same to go as set-off;”212

or if it be expressed, “deducting all advances and expenses;”213

or if it be due for “$800 and such additional premium as may bedue on policy No. 218,171.”214 But a promise to pay bearer acertain sum per acre for so many acres as a certain tract containedwas held to be negotiable as soon as the number of acres wasindorsed upon it.215 (Daniel, Elements of the Law of NegotiableInstruments, page 51)

It is essential to the negotiability of the bill or note that itpurports to be only for the payment of money. Such at least maybe stated to be the general rule, for if any other agreement of adifferent character be engrafted upon it, it becomes a specialcontract clogged and involved with other matters, and has beendeemed to lose thereby its character as a commercialinstrument.216 (ibid, page 55)

Payable on Demand or at a Fixed or Determinable Future Time

This requirement recognizes that the holder of an instrumentwants to know with certainty when he or she will be entitled topayment. Any appreciable uncertainty as to time of paymentmakes the instrument commercially unacceptable and defeatsthe concept that a negotiable instrument is a substitute for money.(Howell, p. 418)

An instrument is payable on demand: (a) when it is soexpressed to be payable on demand, or at sight, or on

208 Smith v. Nightinglare, 2 Stark, 375209 Legro v. Staples, 16 Me. 252; Lime Rock F. & M. Ins. Co. v. Hewitt, 60 Me.

407210 Jones v. Simpson, 2 B & C, 318211 Bolton v. Dugdale, 4 B & Ad. 619212 Clarke v. Percival, 2 B & Ad. 660213 Cashman v. Haynes, 20 Pick, 132214 Marret v. Equitable Ins. Co., 54 Me. 537215 Smith v. Clopton, 4 Tex. 109216 Fletcher v. Thompson, 55 N.H. 308; Ingham v. Dudley, 60 Iowa 16


presentation; or (b) in which no time for payment is fixed. (Sec. 7,

NIL)

Where an instrument is issued, accepted, or indorsed whenoverdue, it is, as regards the person so issuing, accepting, orindorsing it, payable on demand. (ibid)

An instrument may also be payable on a fixed future time,as on its face, the holder can clearly discern the date and timewhen the instrument shall become due. Example: April 8, 2012;or April 3, 2007.

When an instrument is payable at a determinable future time,the holder thereof would be able to know the date and time wheninstrument would become due by referring to a fixed or knownfuture event. Example: 10-days after Christmas this year; or 15-days after New Year of next year.

Payable to Order or Bearer

The requirement that an instrument be made payable toOrder or Bearer are what we call “words of negotiability”, thisimplies that an instrument, provided it complies with all otherrequisites of Section 1 of the Negotiable Instruments Law, can benegotiated or transferred to other persons, in the manner providedfor under the law.

Without these so-called words of negotiability, an instrumentwould not be negotiable, as on its face it would be intended onlyto be payable to the person named therein, thus, preventing it tobe further negotiated.

An instrument is payable to Order where it is drawn payableto the order of a specified person or to him or his order. (Sec. 8,

NIL)

It may be drawn payable to the order of217:

a) A payee who is not maker, drawer, or drawee; or

b) The drawer or maker; or

c) The drawee; or

d) Two or more payees jointly; or

111

e) One or some of several payees; or

f) The holder of an office for the time being.

Where the instrument is payable to order, the payee mustbe named or otherwise indicated therein with reasonablecertainty.218

On the other hand, an instrument is payable to Bearer219:

a) When it is expressed to be so payable; or

b) When it is payable to a person named therein orbearer; or

c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to theperson making it so payable; or

d) When the name of the payee does not purport tobe the name of any person; or

e) When the only or last indorsement is anindorsement in blank.

2000 Bar Question:

MP bought a used cellphone from JR. JR preferred cashbut MP is a friend so JR accepted MP’s promissory notefor P10,000.00. JR thought of converting the note intocash by endorsing it to his brother KR. The promissorynote is a piece of paper with the following hand-printednotation: “MP WILL PAY JR TEN THOUSAND PESOS INPAYMENT FOR HIS CELLPHONE 1 WEEK FROMTODAY”. Below this notation MP’s signature with “8/1/00” next to it, indicating the date of the promissory note.When JR presented MP’s note to KR, the latter said itwas not a negotiable instrument under the law and socould not be a valid substitute for cash. JR took theopposite view, insisting on the note’s negotiability. Youare asked to referee. Which of the opposing views iscorrect? Explain. (3%)

ANSWER:

KR’s view is correct. The promissory note does not meetthe requirements of Sec. 1, Act 2031, which requires that


the instrument be payable to bearer or order, therefore it isnon-negotiable.

Drawee must be named or otherwise Indicated therein withreasonable certainty

It should be noted that the requirement on Sec. 1 (e) appliesonly if the instrument is a Bill of Exchange, wherein, the Drawerorders a Drawee to pay the payee or his Order, or Bearer thereof,in which case, the drawee, who becomes subsequently theacceptor thereof is the person primarily liable to pay the instrument.

As for the requirements of a Promissory Note, Sec. 1 (a) to(d) would suffice.

Whether the Bill is payable on demand or at a fixed ordeterminable future time, so long as the holder would be able toknow or identify the person to whom he would be demanding orenforcing payment of the instrument.

The requisite is that the drawee must be Named.

Example:Pepito Aguilar1002, Santos Avenue, Sta. Cruz, Manila

Or

Luis Lustriano of Luzurriaga & AssociatesOrtigas Center, Pasig City

Drawee may also be Indicated with Reasonable Certainty.

Example:Brgy. CaptainBrgy. Sto Domingo, Laguna

Or

Hon. Municipal MayorMunicipality of Oton, Iloilo

113

The instrument can only be negotiable if it complies withSection 1

A document will only become a Negotiable Instrument if itcomplies with the requisites of Section 1 of the NegotiableInstruments law, unconditionally and in a single document.

It should be noted that the existence of a negotiableinstrument is different on ‘who’ is liable on the instrument. Theexistence of a negotiable instrument is answered if the paperstrictly complies with Section 1 of the Negotiable Instruments Law,liability, on the other hand may be addressed taking intoconsideration certain factors, like, proper negotiation, existenceof a consideration, holder in due course, and the like.

Thus, if what we have is a mere innominate contract, withoutcomplying with Section 1 of the said law, then, it may be governedby the Civil Code, or other pertinent provisions of the Code ofCommerce, but it cannot avail of the provisions of Act 2031.

Distinction between a negotiable and non-negotiableinstrument

In the case of Consolidated Plywood Industries, Inc. vs. IFC

Leasing and Acceptance Corp.,220 this Court had the occasion toclearly distinguish between a negotiable and non-negotiableinstrument.

Among others, the instrument in order to be considerednegotiable must contain the so-called “words of negotiability—i.e. must be payable to “order” or “bearer”. Under Section 8 of theNegotiable Instruments Law, there are only two ways by which aninstrument may be made payable to order. There must alwaysbe a specified person named in the instrument and the bill ornote is to be paid to the person designated in the instrument or toany person to whom he has indorsed and delivered the same.Without the words “or order or “to the order of”, the instrument ispayable only to the person designated therein and is thereforenon-negotiable. Any subsequent purchaser thereof will not enjoythe advantages of being a holder of a negotiable instrument, butwill merely “step into the shoes” of the person designated in theinstrument and will thus be open to all defenses available against

220 149 SCRA 459 (1987).


the latter. (Juanita Salas vs. Court of Appeals, G.R. No. 76788,

January 22, 1990, [Fernan, C.J.:])

In the above-mentioned case of Juanita Salas vs. Court of

Appeals, the pertinent portion of the note reads:

PROMISSORY NOTE(MONTHLY)

P58,138.20San Fernando, Pampanga, PhilippinesFeb. 11, 1980

For value received, I/We jointly and severally, promise to payViolago Motor Sales Corporation or order, at its office in San

Fernando, Pampanga, the sum of FIFTY EIGHT THOUSAND ONE

HUNDRED THIRTY EIGHT & 201/100 ONLY (P58,138.20)

Philippine currency, which amount includes interest at 14% per

annum based on the diminishing balance, the said principal sum,to be payable, without need of notice or demand, in installments ofthe amounts following and at the dates hereinafter set forth, to wit:P1,614.95 monthly for “36” months due and payable on the 21stday of each month starting March 21, 1980 thru and inclusive ofFebruary 21, 1983. P_________ monthly for ______ months dueand payable on the ______ day of each month starting_____198__ thru and inclusive of _____, 198________ providedthat interest at 14% per annum shall be added on each unpaidinstallment from maturity hereof until fully paid.

xxx xxx xxx

Maker; Co-Maker:

(SIGNED) JUANITA SALAS _________________

Address: ____________________ ________________________

WITNESSES

SIGNED: ILLEGIBLE SIGNED: ILLEGIBLETAN # TAN #

PAY TO THE ORDER OFFILINVEST FINANCE AND LEASING CORPORATION

VIOLAGO MOTOR SALES CORPORATIONBY: (SIGNED) GENEVEVA V. BALTAZAR

Cash Manager

115

A careful study of the questioned promissory note showsthat it is a negotiable instrument, having complied with therequisites under the law as follows: [a] it is in writing signed bythe maker Juanita Salas; [b] it contains an unconditional promiseto pay the amount of P58,138.20; [c] it is payable at a fixed ordeterminable future time which is “p1,614.95 monthly for 36months due and payable on the 21st day of each month startingMarch 21, 1980 thru and inclusive of Feb. 21, 1983”; [d] it ispayable to Violago Motor Sales Corporation, or order and as such,[e] the drawee is named or indicated with certainty. (supra)

The case of Narcisa Buencamino, et. al., vs. Hernandez, et

al.1 talks about the negotiability of Government negotiable landcertificates, which provide as follows, to wit:

AMOUNT: P10,000.00NEGOTIABLE LAND CERTIFICATE

THE GOVERNMENT OF THE REPUBLIC OFTHE PHILIPPINESis indebted unto the

BEARER

in the sum of TEN THOUSAND PESOS. This certificate is issued inaccordance with the provisions of Section 9, Republic Act No. 1400,entitled “AN ACT DEFINING A LAND TENURE POLICY, PROVIDINGFOR AN INSTRUMENTALITY TO CARRY OUT THE POLICY, ANDAPPROPRIATING FUNDS FOR ITS IMPLEMENTATION”, approvedSeptember 9, 1955, and is due and payable to BEARER on demandand upon presentation at the Central Bank of the Philippines withoutinterest, if presented for payment within five years from the date ofissue; with interest at the rate of 4 per centum per annum, if presentedfor payment after five years from the date of issue; with interest atthe rate of 4-½ per centum per annum, if presented for paymentafter ten years from the date of issue; and, with interest at the rate of5 per centum per annum, if presented for payment after fifteen yearsfrom the date of issue. Both principal and interest are payable by theTreasurer of the Philippines, through the Central Bank of thePhilippines, in legal tender currency of the Philippines.

This land certificate is part of the total negotiable land certificatesissued and limited to the aggregate principal sum of SIXTY MILLIONPESOS a year, to be issued during the first two years from September9, 1955 when Republic Act No. 1400 was approved, and P30 millioneach year during the succeeding years, for the purchase of private

221 G.R. No. L-14883, July 31, 1963, [Regals, J.:]


agricultural lands for resale at cost to bona-fide tenants or occupants,or, in the case of estates abandoned by the owners for the last fiveyears, to private individuals who will work the lands themselves andwho are qualified to acquire or own lands, but who do not own morethan six hectares of lands in the Philippines.Manila, Philippines, August 9, 1957.

Encashment of this certificate may not be made until after five (5)years from the date of execution of the Deed of Sale of Hacienda deLeon, pursuant to the conditions under Paragraph “b” of theMemorandum Agreement executed between the Land TenureAdministration and the owners of Hacienda de Leon on May 11, 1957,acknowledged before Marcelo Lagramada, Notary Public for Manila,as Doc. No. 324, Page 66, Book No. 6, Series of 1957.

(Sgd.) JUAN CAÑIZARESRegistrar of the CentralBank of the Philippines

(Sgd.) CARLOS P. GARCIAPresident of the Phil.

(Sgd.) VICENTE GELLATreasurer of the Phil.

Date of issue: August 9, 1957Recorded: IllegibleExamined: Illegible

Under Republic Act No. 1400, the land certificates, as inthis case, “shall be payable to bearer upon demand.” “The oneissued, however, were, payable to bearer only after the lapse offive years from a given period. Obviously then, the requirementthat they should be payable on demand was not met since aninstrument payable on demand is one which is (a) expressed tobe payable on demand, or at sight, or on presentation; or (b)expresses no time for payment (Sec. 7, Negotiable InstrumentsLaw), the five-year period within which the certificates could notbe encashed was an expression of the time for the paymentcontrary to the paragraph (b) of the last law cited.”

In another significant case, that of Consolidated Plywood

Industries, Inc., et al vs. IFC Leasing and Acceptance

Corporation222, “[t]he pertinent portion of the note is as follows:

117

FOR VALUE RECEIVED, I/we jointly and severallypromise to pay to the INDUSTRIAL PRODUCTSMARKETING, the sum of ONE MILLION NINETY THREETHOUSAND SEVEN HUNDRED EIGHTY NINE PESOS& 71/100 only (P 1,093,789.71), Philippine Currency, thesaid principal sum, to be payable in 24 monthlyinstallments starting July 15, 1978 and every 15th of themonth thereafter until fully paid. ...

Considering that paragraph (d), Section 1 of the NegotiableInstruments Law requires that a promissory note “must be payableto order or bearer,” it cannot be denied that the promissory notein question is not a negotiable instrument.

The instrument in order to be considered negotiable-i.e.must contain the so-called ‘word of negotiability’, must bepayable to ‘order’ or ‘bearer’. These words serve as anexpression of consent that the instrument may betransferred. This consent is indispensable since a makerassumes greater risk under a negotiable instrument thanunder a non-negotiable one…

xxx xxx xxx

When instrument is payable to order.

SEC. 8 WHEN PAYABLE TO ORDER.—the instrument ispayable to order where it is drawn payable to the order of aspecified person or to him or his order…

xxx xxx xxx

These are the only two ways by which an instrument maybe made payable to order. There must always be a specifiedperson named in the instrument. It means that the bill ornote is to be paid to the person designated in the instrumentor to any person to whom he has indorsed and deliveredthe same. Without the words “or order” or “to the order of,”

222 G.R. No. 72593, April 30, 1987.


the instrument is payable only to the person designated

therein and is therefore non-negotiable. Any subsequent

purchaser thereof will not enjoy the advantages of being a

holder of a negotiable instrument but will merely “step intothe shoes” of the person designated in the instrument andwill thus be open to all defenses available against the latter.”(Campos and Campos, Notes and Selected Cases on

Negotiable Instruments Law, Third Editions, page 38).(Emphasis supplied)

Therefore, considering that the subject promissory note isnot a negotiable instrument, it follows that the respondent cannever be a holder in due course but remains a mere assignee ofthe note in question. Thus, the petitioner may raise against therespondent all defenses available to it as against the seller-assignor Industrial Products Marketing.”

Treasury warrant; not a Negotiable Instrument.

Treasury warrants do not fall within the purview of theNegotiable Instruments Law. Treasury warrants are payable froma particular appropriation of an order “payable out of a particularfund”, and is not unconditional.

Postal Money Orders; not a Negotiable Instrument.

It is not disputed that our postal statues were patterned afterstatutes in force in the United States. For this reason, ours aregenerally construed in accordance with the construction given inthe United States to their own postal statutes, in the absence ofany special reason justifying a departure from this policy orpractice. The weight of authority in the United States is that postalmoney orders are not negotiable instruments (Bolognesi vs. U.S.

189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed.

912), the reason behind this rule being that, in establishing andoperating a postal money order system, the government is notengaging in commercial transactions but merely exercises agovernmental power for the public benefit. (Philippine Education

Co., Inc., vs. Soriano, G.R. No. L-22405, June 30, 1971, [Dizon,

J.])

It is to be noted in this connection that some of therestrictions imposed upon money orders by postal laws and

119

regulations are inconsistent with the character of negotiableinstruments. For instance, such laws and regulations usuallyprovide for not more than one endorsement; payment of moneyorders may be withheld under a variety of circumstances. (49 C.J.

1153, supra)

Central Bank Certificate of Indebtedness; not a NegotiableInstrument

In the case of Traders Royal Bank vs. Court of Appeals,

Filriters Guaranty Assurance Corporation and Central Bank

of the Philippines223, it was held that: “the subject CBCI is not anegotiable instrument in the absence of words of negotiabilitywithin the meaning of the negotiable instruments law (Act 2031).

The pertinent portions of the subject CBCI read:

xxx xxx xxx

The Central Bank of the Philippines (the Bank) for value received,hereby promises to pay bearer, of if this Certificate of indebtednessbe registered, to FILRITERS GUARANTY ASSURANCECORPORATION, the registered owner hereof, the principal sumof FIVE HUNDRED THOUSAND PESOS.

xxx xxx xxx

Properly understood, a certificate of indebtedness pertainsto certificates for the creation and maintenance of a permanentimprovement revolving fund, is similar to a “bond” (82 Minn. 202).Being equivalent to a bond, it is properly understood asacknowledgment of an obligation to pay a fixed sum of money, itis usually used for the purpose of long term loans.

Problem:

What is the nature and characteristic of a NOW account?Is it Negotiable within the ambit of the NegotiableInstruments Law?

223 G.R. No. 93397, March 3, 1997, [Torres, J.]


ANSWER:

Negotiable Orders of Withdrawals (NOW Accounts) isdefined as savings accounts from which funds may bewithdrawn by means of negotiable orders of withdrawal.They shall be kept and maintained separately from theregular savings deposits subject to withdrawal through thepresentation of withdrawal slips and passbooks. Onlynatural persons shall be eligible to maintain NOW Accounts.The authority to offer NOW Accounts shall be granted onlyto thrift banks that meet the requirements laid down by theCentral Bank Regulations.

They are not negotiable within the provisions of theNegotiable Instruments Law because of certain limits andrestrictions, to wit:

(a.) The order of withdrawal shall be payable only to aspecific person, natural or juridical, and not to bearernor to the order of a specified person;

Only the payee can encash this order of withdrawal withdrawee bank, or deposit it in his account with the drawee bank orwith any other bank.

When is an instrument considered to be complete? When isit incomplete?

An instrument is complete if it complies with therequirements of Section 1 of the Negotiable Instruments Law,embodied in a single document or medium, and that there mustbe no other conditions imposed for its validity or compliance.

An instrument is incomplete if it lacks any material particularessential for its completion.

Essentials of a Bill or Note224

To be a negotiable bill of exchange or promissory note, theinstrument must have the following essential characteristics:

a) The bill must contain an order

224 Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 26

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b) The note must contain a promise

c) The order or promise must be unconditional

d) It must be an absolute order or promise for thepayment of money alone

e) The amount of money must be certain

f) The time of payment must be a time certain to arrive

g) The instrument must be specific as to all its parties

h) The instrument must be delivered

What are the effects if the instrument is incomplete?

Strictly speaking, we do not have any negotiable instrument.An instrument only comes within the purview of the NegotiableInstruments Law if it complies with the requisites of Section 1 ofthe Negotiable Instruments Law, in the absence thereof, we onlyhave a private document or contract, in which the NegotiableInstruments Law has no application.

Sec. 2. What constitutes certainty as to sum. - The sumpayable is a sum certain within the meaning of this Act,although it is to be paid:

(a) With interest; or

(b) By stated installments; or

(c) By stated installments, with a provision that, upondefault in payment of any installment or of interest,the whole shall become due; or

(d) With exchange, whether at a fixed rate or at thecurrent rate; or

(e) With costs of collection or an attorney’s fee, in casepayment shall not be made at maturity.

Notes:

When sum is considered certain.

The sum becomes certain if the maker, drawee, or holderof the instrument would be able to discern with exact certaintyhow much would he pay or collect, as the case may be, on thevalue of the negotiable instrument.


With Interest

The sum is considered certain although coupled with thepayment of interest. It should be borne in mind that the paymentof the interest is only in addition to the principal sum to be paid,thus, the sum payable is still certain.

Example:

P30,000.00 plus 2% monthly interest; orPay 10% of P100,000.00

By stated installments

Though coupled with payment in stated installments, thesum is still considered certain. The main reason is that saidinstallment, is only a mode of payment of the main obligation,certainly entire sum due or payable could still be identified.

Example:

Promise to pay bearer P10,000.00 in 2 equalinstallments; orPromise to pay bearer five installments of P2,000.00each.

By stated installments, with a provision that, upon default inpayment of any installment or of interest, the whole shallbecome due

This is similar to payment by stated installments aspreviously mentioned, but this one contains an acceleration clause,where, default in the payment of any installment or of interest, thewhole sum or amount becomes due.

In Acceleration Clauses: Instruments due at a fixed futuredate sometimes have clauses providing that the date of maturityshall be moved ahead if a specified event occurs prior to the stateddue date. An instrument issued this year with a maturity date [of]two years hence might contain, for example, either of theseacceleration clauses: (1) “This instrument shall becomeimmediately due and payable upon the maker’s (or acceptor’s)bankruptcy; or (2) for a note payable in monthly installments: “If

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any instrument is not paid when due, the entire instrument is dueand demandable.” (Howell, p. 421)

With exchange, whether at a fixed rate or at the current rate

The sum is still certain, though it is made coupled withexchange whether fixed rate or at current rate. In this instance, areasonable prudent person would still be able to determine thesum payable.

Example:

Pay to bearer an amount equivalent to $100.00; orPay to bearer an amount equivalent to the prevailingrate of $100.00; orPay to bearer an amount equivalent to $100.00 at anexchange rate of Php 43.50 per dollar.

With costs of collection or an attorney’s fee, in case paymentshall not be made at maturity

This would be self-explanatory. Again the most importantfact to determine is whether or not the holder would be able todetermine the amount due, despite the additional cost of collectionor attorney’s fee.

The attorney’s fee is due if the unpaid note is placed in thehands of an attorney for collection, although no suit is brought. Astipulation in a mortgage securing the note for fees in case of suiton the mortgage securing the note for fees in case of suit on themortgage is cumulative and not restrictive of the provision of thenote. (Brannan, page 5, citing, Morrison v. Ornbaun, 30 Mont.111, 75 Pac. 953.)

A provision in a promissory note for attorney’s fees “ifcollected by attorney, or if suit is brought on this note,” is a promiseto pay attorney’s fees for collection only after dishonor, and doesnot impair the negotiability of the note. (Ibid, citing First Natl. Bankof Shawano v. Miller, 139 Wis. 126, 120 N.W. 820, S.C. sec. 104.)

Likewise, “[a] provision in a note for an attorney’s fee, butleaving blank the amount thereof, amounts to a promise to pay areasonable sum as an attorney’s fee, and does not render the


note non-negotiable. Where the plaintiff employed an attorney, itis sufficient to show what is a reasonable fee, and it is notnecessary to prove an express agreement as to fees, or thatplaintiff paid the attorney before the suit.” (Brannan, page 6, citingMcCormick v. Swem (Utah) 102 Pac. 626)

Example:

For value received, I promise to pay David Lancelot, ororder, the amount of Php 100,000.00, ten days after sight. Itis understood that an amount equivalent to the cost ofcollection would be made payable in addition to the principalamount, and an amount equivalent to Twenty-Five Per Cent(25%) of the amount due as Attorney’s Fees, should there bedefault in the payment after demand.

(sgd)

Abigail Margaux

In the case of H.R. Andreas vs. B.A. Green225, the promissorynote was worded as follows:

P15,000.00 MANILA, P. IAug. 19th, 1921

On or before the 19th day of November, 1921, or onthirty (30) days written demand notice, for value received, Ipromise to pay to Harry Bridge, at Manila, P.I., the sum offifteen thousand pesos (P15, 000) with interest thereon atthe rate of twelve per cent (12%) per annum. If not paidwhen due after thirty days written demand notice, this noteshall bear interest at the rate of 12 per cent per annum untilpaid; and a further sum equal to 10 per cent of the totalamount due as and for expenses of collection for attorney’sfees whether actually incurred or not and in addition to allcosts as provided for in the Code of Civil Procedure.

This note is secured by real-estate mortgage of even date.

(Sgd.) B. A. GREEN

225 G.R. No. L-24322, December 16, 1925

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The Supreme Court in the above-mentioned case held that:“[s]tipulations in negotiable instruments for the payment ofcollection and attorney’s fees are not forbidden by lay in thisjurisdiction. x x x The purpose of a stipulation in a note for areasonable attorney’s fees is not to give the lender a largercompensation for the loan than the law allows, but is to safeguardthe lender against future loss or damage by being compelled toretain counsel to institute judicial proceedings to collect his debt.”

Sec. 3. When promise is unconditional. - An unqualified orderor promise to pay is unconditional within the meaning of thisAct though coupled with:

(a) An indication of a particular fund out of whichreimbursement is to be made or a particular accountto be debited with the amount; or

(b) A statement of the transaction which gives rise tothe instr ument.

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

Notes:

When is promise to pay unconditional?

A promise to pay is unconditional if no other requirement orqualification or condition is needed for its payment.

Moreover, an unqualified order or promise to pay isunconditional, though coupled with:

a. An indication of a particular fund out of whichreimbursement is to be made or a particular account tobe debited with the amount; or

b. A statement of the transaction which gives rise to theinstrument.

An indication of a particular fund out of which reimbursementis to be made or a particular account to be debited with theamount


In this instance, the promise or order to pay is stillunconditional because payment is not premised upon anycondition, or subject to the availability of funds of a particularaccount. The holder of the instrument is assured that he be paidupon presentment of the instrument. It should be taken intoconsideration that the law uses the word reimbursement, whichimplies that payment is to be advanced by the person primarilyliable and merely reimburse the same from a particular account.Thus, regardless of the availability of funds in that account, theholder receives payment.

Example:

To: Maria Santos1020 Licauco Drive, Ortigas Center, PasigThis 26th day of October 2011

Please pay, Mario Delos Santos, or order, P10,000.00five (5) days after sight, and reimburse said amount frommy savings account with PSBank account number 01-092837-99.

(sgd) Jose Santos

An order drawn by the X company directing payment of acertain sum, “on account of contract between you (the drawee)and the X Company” held negotiable, the words “on account of”not having the same effect as “out of the proceeds of.” (Brannan,page 6, citing First Nat. Bank v. Lightner, 74 Kans. 736, 88 Pac.59, 8 L.R.A. (N.S.) 231, 118 Am. St. Rep. 353.)

An order to pay on or before a fixed day and “charge thesame to the $1,800 payment,” is not conditional. (Ibid, citingShepard v. Abbott, 179 Mass. 300, 60 N.E. 782)

A bill of exchange is not made non-negotiable because itcontains the words “charge to my account and credit according toa registered letter I have addressed to you.” These words do notmean according to the conditions mentioned in the letter, butmerely charge my account and credit according to the letter. (Ibid,citing In re Boyse, 33 Ch. Div. 612)

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A statement of the transaction which gives rise to theinstrument

Though an instrument may contain the reason for theissuance thereof, it does not in any way impose a condition uponthe payment of the instrument. What is important is that thestatement of transactions must not be made as the condition forpayment of the instrument.

Examples:

As payment for the 10 crates of apple, I promise to payMario Santos, or his order, Php 100,000.00 five (5) daysafter sight.

(sgd)Maria Delos Santos

Note that in the example above, the statement of thetransaction which gave rise to the instrument did not render theinstrument conditional, thus, the same is negotiable.

However, what if, say for instance that in the same example,the 10 crates of apple were not delivered to Maria, but she hadalready parted with her promissory note, will that make theinstrument non-negotiable?

The answer is no, it should be remembered that aninstrument is negotiable the moment it complies with Section 1 ofthe negotiable instruments law. However, if the question pertainsto Maria’s liability on the promissory note, then we have a differentanswer, which will be later on discussed in the succeeding pagesof this work.

It should be remembered that the existence of a negotiableinstrument differs from the question of “who?” is liable on thenegotiable instrument. The former merely requires compliancewith Section 1 of the law, while the latter takes into considerationother aspects of liability, e.g., holder in due course, not a holder indue course, transfer or negotiation, etc.


What about if the order or promise is to pay out of a particularfund, is it still unconditional?

No. An order or promise to pay out of a particular fund is notunconditional. (Sec. 3, Negotiable Instruments Law) It isconditional because from the phrase itself, pay out of a particular

fund, makes the payment of the instrument dependent upon theavailable funds on the account, thus, the same is conditional,therefore, non-negotiable. It is of no moment if there are indeedactual available funds on the account, what matters is what is theimplication of the written words on the face of the paper.

Treasury warrants, which, by their nature are payable out ofparticular funds which are the subject of appropriations for whichthese treasury warrants were issued are non-negotiable, simplybecause the repayment of which is dependent upon the availabilityof a particular fund.

Sec. 4. Determinable future time; what constitutes. - Aninstrument is payable at a determinable future time, withinthe meaning of this Act, which is expressed to be payable:

(a) At a fixed period after date or sight; or

(b) On or before a fixed or determinable future timespecified therein; or

(c) On or at a fixed period after the occurrence of aspecified event which is certain to happen, thoughthe time of happening be uncertain.

An instrument payable upon a contingency is not negotiable,and the happening of the event does not cure the defect.

Notes:

What constitutes a determinable future time?

An instrument to be negotiable must be made either payableon a fixed date or at a determinable future time, the latter phrasemeans a period of time which could be determined with referenceto another particular time, or event which is certain to happenthough the time of happening is uncertain.

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Fixed period after date or sight

This refers to a fixed or definite time after seeing, oraccepting the instrument, or on the date specified on theinstrument.

Example:

Ten days after sight; orTen days after date of the instrument

On or before a fixed or determinable future time specifiedtherein

This provision is self-explanatory.

Example:

Pay bearer P1, 000.00 on or before January 9, 2012Pay bearer P1, 000.00 on or before Christmas day of 2012

If the instrument is made payable upon a contingency, is itnegotiable? What if the contingency occurred?

An instrument payable upon a contingency is not negotiable,and the happening of the event does not cure the defect. (Sec. 4,Negotiable Instruments Law)

What is a contingency?

Contingency refers to future uncertain events, or past eventsunknown to parties, or circumstances which may or may nothappen.

Example:

I promise to pay bearer, or order, P1, 000.00 after passingthe bar examsPay bearer, P500.00 to buy umbrella when it rains onDecember 25, 2011

Notes, payable at a certain time, but secured by a mortgageexecuted as part of the same transaction, and reciting that thewhole debt shall be due in case of sale or removal of the property


by the mortgagor without the consent of the mortgagee, or in casethe mortgagee deems himself insecure, are uncertain as to timeand amount of payment and are therefore not negotiable.(Brannan, page 8, citing Iowa Nat. Bank v. Carter (Iowa), 123N.W. 237, S.C. secs. 25, 26)

Reason for the rule

As a substitute for money, payment of the negotiableinstrument must never be subject to any uncertainties, orcontingency, to do so would create a situation where the holder ofthe instrument could not enforce payment on the person primarilyliable by reason of the event or contingency upon which anobligation to pay would arise never occurred. This, entirely defeatsthe purpose for the creation of the negotiable instrument.

2011 Bar Question:

A promissory note states, on its face: “I, X, promise topay Y the amount of Php 5,000.00 five days aftercompletion of the on-going construction of my house.Signed, X.” Is the note negotiable?

A. Yes, since it is payable at a fixed period after theoccurrence of a specified event.

B. No, since it is payable at a fixed period after theoccurrence of an event which may not happen.

C. Yes, since it is payable at a fixed period or determinablefuture time.

D. No, since it should be payable at a fixed period beforethe occurrence of a specified event.

Sec. 5. Additional provisions not affecting negotiability. - Aninstrument which contains an order or promise to do any actin addition to the payment of money is not negotiable. Butthe negotiable character of an instrument otherwisenegotiable is not affected by a provision which:

(a) Authorizes the sale of collateral securities in casethe instrument be not paid at maturity; or

(b) Authorizes a confession of judgment if theinstrument be not paid at maturity; or

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(c) Waives the benefit of any law intended for theadvantage or protection of the obligor; or

(d) Gives the holder an election to require something tobe done in lieu of payment of money.

But nothing in this section shall validate any provision orstipulation otherwise illegal.

Notes:

If an act is imposed in addition to the order or promise to paya sum certain in money, is the instrument still negotiable?

No. An instrument which contains an order or promise todo any act in addition to the payment of money is not negotiable.(Sec. 5, Negotiable Instruments Law)

This would impose additional burden to the person primarilyliable on the instrument.

2011 Bar Question:

B borrowed Php1 million from L and offered to him hisBMW car worth Php1 Million as collateral. B thenexecuted a promissory note that reads: “I, B, promiseto pay L or bearer the amount of Php1 Million and tokeep my BMW car (loan collateral) free from any otherencumbrance. Signed, B.” Is this note negotiable?

A. Yes, since it is payable to bearer.

B. Yes, since it contains an unconditional promise to pay asum certain in money.

C. No, since the promise to just pay a sum of money isunclear.

D. No, since it contains a promise to do an act in additionto the payment of money.

2002 Bar Question:

Which of the following stipulations or features of apromissory note (PN) affect or do not affect its


negotiability, assuming that the PN is otherwisenegotiable? Indicate your answer by writing theparagraph number of the stipulation or feature of thePN as shown below and your corresponding answer,either “Affected” or “Not affected.” Explain. (5%)

(1) The date of the PN is “February 30, 2002.”

(2) The PN bears interest payable on the last day ofeach calendar quarter at a rate equal to five percent(5%) above the then prevailing 91-day Treasury Billrate as published at the beginning of such calendarquarter.

(3) The PN gives the maker the option to make paymenteither in money or in quantity of palay of equivalentvalue.

(4) The PN gives the holder the option either to requirepayment in money or to require the maker to serveas the bodyguard or escort of the holder for 30 days.

ANSWER:

(1) Not affected; Sec. 12, Negotiable Instruments Law, theinstrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for anillegal or fraudulent purpose. Thus, date is not essentialfor its negotiability.

(2) Not affected; Sec. 2, Act 2031, the sum payable is asum certain within the meaning of this Act, although it isto be paid with installments, or with exchange, whetherat a fixed rate or at the current rate.

(3) Affected; it makes the payment of the instrumentconditional by giving the maker an option to pay in moneyor other palay.

(4) Not Affected; Sec. 5 (d), Act 2031, the negotiablecharacter of an instrument otherwise negotiable is notaffected by a provision which gives the holder an electionto require something to be done in lieu of payment ofmoney.

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What may be some provisions added to the instrument whichwould not affect its negotiability?

The negotiable character of an instrument otherwisenegotiable is not affected by a provision which:

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

b. Authorizes a confession of judgment if the instrumentbe not paid at maturity; or

c. Waives the benefit of any law intended for the advantageor protection of the obligor; or

d. Gives the holder an election to require something to bedone in lieu of payment of money.

Authorization of sale of collateral securities in case theinstrument be not paid at maturity

A note, reciting that the title to property for which it is givenshall remain in the payee, and that he shall have the right to declarethe money due and take possession of the property whenever hemay deem himself insecure, “even before the maturity of the note,”is not negotiable. (Brannan, page 9, citing Kimpton v. StudebakerBros. Co., 14 Idaho, 552, 94 Pac. 1039, 125 Am. St. Rep. 185)

Warrants of Attorney to Confess Judgment

In the case of Philippine National Bank vs. Manila Oil

Refining & By-Products Company, Inc.226 the written instrumentread as follows:

RENEWALP61,000.00

MANILA, P.I., May 8, 1920.

On demand after date we promise to pay to the order ofthe Philippine National Bank sixty-one thousand only pesosat Philippine National Bank, Manila, P.I.

226 G.R. No. L-18103, June 8, 1922, [Malcom, J.:].


Without defalcation, value received; and to herebyauthorize any attorney in the Philippine Islands, in casethis note be not paid at maturity, to appear in my nameand confess judgment for the above sum with interest, costof suit and attorney’s fees of ten (10) per cent for collection,a release of all errors and waiver of all rights to inquisitionand appeal, and to the benefit of all laws exemptingproperty, real or personal, from levy or sale. Value received.No. ____ Due ____

MANILA OIL REFINING & BY-PRODUCTS CO., INC.,

(Sgd.) VICENTE SOTELO, Manager.

MANILA OIL REFINING & BY-PRODUCTS CO., INC.,(Sgd.) RAFAEL LOPEZ,

Treasurer

The question raised in reference to the aforementionedPromissory Note concerns the validity of one of its provisionswhereby in case the same is not paid at maturity, the makerauthorizes any attorney to appear and confess judgment thereonfor the principal amount, with interest, costs, and attorney’s fees,and waives all errors, rights to inquisition, and appeal, and allproperty exceptions.

The attorney for the appellee contends that the NegotiableInstruments Law (Act No 2031) expressly recognizes judgmentnotes, and that they are enforceable under the regular procedure.The Negotiable Instruments Law, in Section 5, provides that “Thenegotiable character of an instrument otherwise negotiable is notaffected by a provision which”. . . (b) Authorizes a confession ofjudgment if the instrument be not paid at maturity.” We do notbelieve, however, that his provision of law can be taken to sanctionjudgments by confession, because it is a portion of a uniform lawwhich merely provides that, in jurisdiction where judgment notesare recognized, such clauses shall not affect the negotiablecharacter of the instrument. Moreover, the same section of the

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Negotiable Instruments Law concludes with these words. “Butnothing in this section shall validate any provision or otherwiseillegal.”

Judgments by confession as appeared at common law wereconsidered an amicable, easy, and cheap way to settle and securedebts. They are a quick remedy and serve to save the court’stime. They also save the time and money of the litigants and thegovernment the expenses that a long litigation entails. In onesense, instruments of this character may be considered as specialagreements, with power to enter up judgments on them, bindingthe parties to the result as they themselves viewed it.

On the other hand, there are disadvantages to thecommercial world which outweigh the considerations justmentioned. Such warrants of attorney are void as against publicpolicy, because they enlarge the field of fraud, because underthese instruments the promissory bargains away his right to aday in court, and because the effect of the instrument is to strikedown the right of appeal accorded by statute. The recognition ofsuch a form of obligation would bring about a completereorganization of commercial customs and practices, withreference to short-term obligations. It can readily be seen thatjudgment notes, instead of resulting to the advantage ofcommercial life in the Philippines might be the source of abuseand oppression, and make the court involuntary parties thereto.

We are of the opinion that warrants of attorney to confessjudgment are not authorized nor contemplated by our law. Weare further of the opinion that provisions in notes authorizingattorneys to appear and confess judgments against makers shouldnot be recognized in this jurisdiction by implication and shouldonly be considered as valid when given express legislativesanction. (supra)

In the Memoranda of Amici Curiae in the case of PNB,Professor Jose A. Espiritu, of the University of the Philippines,states:

1. Confession of judgment has been defined as “a voluntarysubmission to the jurisdiction of the court, giving consentand without the service of process, what could otherwise


be obtained by summons and complaint, and otherformal proceedings, an acknowledgment ofindebtedness, upon which it is contemplated that ajudgment may and will be rendered.” (8 Cyc., pp. 563,

564)

2. As to the general effects of confession of judgment, thefollowing statements may be mentioned: “A warrant toconfess judgment does not destroy the negotiability ofthe note. Such a note is commonly called a “judgmentnote.” Decisions to the contrary in the States where theNegotiable Instruments Law is now in force areabrogated thereby, since it expressly provides that thenegotiable character of an instrument otherwisenegotiable is not affected by a provision which authorizesa confession of judgment, if the instrument is not paid atmaturity. However, this statutory provision does not applyto stipulations for the confession of judgment “prior” tomaturity.” (8 C.J., p. 128, sec. 222)

3. Nature of Requisites. “A judgment may be renderedupon the confession of defendant, either in an actionregularly commenced against him by the issuance andservice of process, in which case the confession maybe made by his attorney of record, or, without theinstitution of a suit, upon a confession by defendant inperson or by his attorney in fact. It implies somethingmore than a mere admission of a debt to plaintiff, inaddition, it is defendant’s consent that a judgment shallbe entered against him…..” (23 cyc., 699)

4. Statutory Provisions, “Statutes regulating the confessionof judgments without action, or otherwise than accordingto the course of the common law, are strictly construed,and a strict compliance with their provisions must beshown in order to sustain the validity of the judgment.”(Chapin vs. Tompson, 20 Cla., 681) “And this appliesalso to statutory restriction upon the right to confessjudgment, as that authority to confess judgment shallnot be given in the same instrument which contains thepromise or obligation to pay the debt, or that suchconfession shall not be authorized by any instrumentexecuted prior to suit brought.” (23 Cyc., 699, 700)

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5. Warrant or Power of Attorney—Validity and Necessity.“A judgment by confession may be entered upon a writtenauthority, called a warrant or letter of attorney, by whichthe debtor empowers an attorney to enter an appearancefor him, waive process, and confess judgment againsthim for a designated sum, except where this method ofproceeding is prohibited by statute. The warrant as thebasis of judgment is generally required to be placed onfile in the clerk’s office, and no judgment can be soentered until it is so filed.” (23 Cyc., 703)

6. Requisites and Sufficiency. “A warrant or power ofattorney to confess judgment should be in writing andshould conform to the requirements of the statute in forceat the time of its execution, although in the absence ofspecific authority directions it is sufficient, without muchregard to its form, if it contains the essential of a goodpower and clearly states its purpose. It must be signedby the person against whom the judgment is to beentered…..” (23 Cyc., 704)

How about illegal provisions or stipulations?

Nothing in this section (Sec. 5) shall validate any provisionor stipulation otherwise illegal.

Sec. 6. Omissions; seal; particular money. - The validity andnegotiable character of an instrument are not affected by thefact that:

(a) It is not dated; or

(b) Does not specify the value given, or that any valuehad been given therefor; or

(c) Does not specify the place where it is drawn or theplace where it is payable; or

(d) Bears a seal; or

(e) Designates a particular kind of current money inwhich payment is to be made.

But nothing in this section shall alter or repeal any statuterequiring in certain cases the nature of the consideration tobe stated in the instrument.


Notes:

This provision thus rejects the possible view that suchomissions cause an instrument to be incomplete and thereforenonnegotiable.227 These Omissions does not in any way affectthe validity and negotiable character of an instrument so long asthe same adheres with the requirements of Sec. 1.

Undated instrument

Negotiability of an instrument is not affected by an omissionof the date. Sec. 7 (b) of the N.I.L. provides that where no timefor payment is expressed on the face of the instrument, the sameshall be presumed to be payable on demand.

Also, Sec. 11, makes a presumption on instrument dates,where the instrument or an acceptance or any indorsementthereon is dated, such date is deemed prima facie to be the truedate of the making, drawing, acceptance or indorsement, as thecase may be.

Moreover, Sec. 12, N.I.L. also recognizes that an instrumentis not invalid by reason only that it is post-dated or ante-dated, solong as it is not done for an illegal or fraudulent purpose.Subsequently, Sec. 13 thereof also declares that a proper datemay be inserted on an undated instrument.

Thus, date is not an essential requirement for the validity ornegotiability of a Bill or Note.

No mention of the value given in exchange of the Bill of Note

The validity and negotiability of a Bill or Note is not affectedby the mere fact that the instrument does not specify the valuegiven, or that any value had been given therefor.228 This is becausethe law presumes that every negotiable instrument is deemedprima facie to have been issued for a valuable consideration; andevery person whose signature appears thereon to have becomea party thereto for value.229

227 Business Law, Second Edition, Rate A. Howell, 1981, p. 425228 Sec. 6 (b), N.I.L.229 Sec. 24, N.I.L.

139

Designation of a particular kind of current money in whichpayment is made

Note that the law makes mention of a current money,referring to a particular currency. Thus, “[a] check payable “incurrent funds” is not payable in money and is not negotiable.”(Brannan, page 9, citing Dille v. White, 132 Iowa, 327, 109 N.W.909, 10 L.R.A. (N.S.) 510, following former Iowa cases, but notciting the N.I.L. S.C. sec. 65, emphasis supplied)

Payment in current money is different from current funds, inas much as the latter implies that payment of the instrument ispremised upon the availability of the current fund, eventuallymaking it conditional.

Sec. 7. When payable on demand. - An instrument is payableon demand:

(a) When it is so expressed to be payable on demand,or at sight, or on presentation; or

(b) In which no time for payment is expressed.

Where an instrument is issued, accepted, or indorsed whenoverdue, it is, as regards the person so issuing, accepting, orindorsing it, payable on demand.

Notes:

When note is expressed to be payable on demand

A note payable on demand after date is a demand note,and presentment need not be made the day after date, but onlywithin a reasonable time to hold an indorser. (Brannan, page 11,citing Hardon v. Dixon, 77 App. Div. 241, 78 N.Y.S. 106), holdingthat the Statute of Limitations did not begin to run on such a noteuntil the day after its date, said to have no application. (Ibid, citingSchlesinger v. Schultz, 110 App. Div. 356, 96 N.Y.S. 383, S.C.secs. 71, 73)

What would be the effect if the instrument is dated and wasissued, accepted, or indorsed when already overdue?

Where an instrument is issued, accepted, or indorsed whenoverdue, it is, as regards the person so issuing, accepting, or


indorsing it, payable on demand. (Sec. 7, Negotiable InstrumentsLaw)

Sec. 8. When payable to order. - The instrument is payable toorder where it is drawn payable to the order of a specifiedperson or to him or his order. It may be drawn payable to theorder of:

(a) A payee who is not maker, drawer, or drawee; or

(b) The drawer or maker; or

(c) The drawee; or

(d) Two or more payees jointly; or

(e) One or some of several payees; or

(f) The holder of an office for the time being.

Where the instrument is payable to order, the payee must benamed or otherwise indicated with reasonable certainty.

Notes:

“Pay to —— order” means “pay to my order,” and a bill soreading and indorsed by the drawer is a valid bill of exchange.(Brannan, page 12, citing Chamberlain v. Young [1893], 2 Q.B.206)

An order means any form of words implying a right on thepart of the drawer to command, and a corresponding duty on thepart of the drawee to make, the payment specified.230

The order to pay must be distinguished from a mere requestto pay—

Prof. Norton said: “[o]ur purpose here is to illustrate thedifference between a mandatory form of words directing paymentand a mere request. The theory of a bill of exchange is thatthe drawer has funds in the hands of the drawee, which heorders or directs to be delivered or paid over to the payee orindorsee of the bill. Hence, where the instrument is so written


141

as to show that the drawee has or attempts to exercise no right toorder the money paid, it is not a bill of exchange. To determinewhether or not the instrument is so written is, of course, a questionpurely of the construction of the instrument. Parol evidence cannotbe admitted, since, if the bill is to operate as money, the instrumentmust be pronounced to be a bill or note according to its face. Thepoint to be determined is whether the terms of the instrument, onthe one hand, leave compliance or refusal optional, or, on theother hand, amount to an imperative direction. In the former caseit is a mere request; in the latter it is a demand, with which thedrawee must in common honesty comply, and amount to the orderwhich is a necessary constituent of a bill of exchange.”231

(emphasis supplied)

The payee must be named or otherwise indicated therein withreasonable certainty

In the case of Equitable Banking Corporation vs.

Intermediate Appellate Court232, the subject check reads:

Pay to the EQUITABLE BANKING CORPORATION Orderof A/C OF CASVILLE ENTERPRISES, INC.

The said check was declared by the Supreme Court to beequivocal and patently ambiguous. x x x the payee ceased to beindicated with reasonable certainty in contravention of Section 8of the Negotiable Instruments Law.233 As worded, it could beaccepted as deposit to the account of the party named after thesymbols “A/C” or payable to the Bank as trustee, or as an agent,for Casville Enterprises, Inc., with the latter being the ultimatebeneficiary.

Sec. 9. When payable to bearer. - The instrument is payableto bearer:

(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein orbearer; or

231 Id., footnotes omitted.232 G.R. No. 74451, May 25, 1988233 Section 8, Negotiable Instruments Law


(c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to theperson making it so payable; or

(d) When the name of the payee does not purport to bethe name of any person; or

(e) When the only or last indorsement is an indorsementin blank.

Notes:

When the payee of the check is not intended to be the truerecipient of its proceeds, is it payable to order or bearer?

As a rule, when the payee is “fictitious” or not intended tobe the true recipient of the proceeds, the check is considered asa BEARER instrument.

The distinction between bearer and order instruments liesin their manner of negotiation. Under Section 30 of the NIL, anorder instrument requires an indorsement from the payee or holderbefore it may be validly negotiated. A bearer instrument, on theother hand, does not require an indorsement to be validlynegotiated. It is negotiable by delivery. (Philippine National Bank

vs. Erlando T. Rodriguez and Norma Rodriguez, G.R. No. 170325,

September 26, 2008, Reyes, R.T., J.])

When instrument is payable to the order of a fictitious or non-existing person

A check that is payable to a specified payee is an orderinstrument. However, under Section 9 (c) of the NIL, a checkpayable to a specified payee may nevertheless be considered asa bearer instrument if it is payable to the order of a fictitious ornon-existing person, and such fact is known to the person makingit so payable. Thus, checks issued to “Prinsipe Abante” or “SiMalakas at si Maganda,” who are well-known characters inPhilippine mythology, are bearer instruments because the namedpayees are fictitious and non-existent. (Philippine National Bank

vs. Erlando T. Rodriguez and Norma Rodriguez, supra)

143

Term “Fictitious” as used under Section 9 (c)

We have yet to discuss a broader meaning of the item“fictitious” as used in the NIL. It is for this reason that we looksomewhere for guidance. Court rulings in the United States are alogical starting point since our law on negotiable instruments wasdirectly lifted from the Uniform Negotiable Instruments Law of theUnited States.234

A review of the US jurisprudence yields that an actualexisting and living payee may also be “fictitious” if the maker ofthe check did not intent for the payee to receive the proceeds ofthe check. This usually occurs when the maker places a name ofan existing payee on the check for convenience or to cover up anillegal activity.235 Thus, a check made expressly payable to a non-fictitious and existing person is not necessarily an order instrument.If the payee is not the intended recipient of the proceeds of thecheck, the payee is considered a “fictitious” payee and the checkis a bearer instrument. (Philippine National Bank vs. Erlando T.

Rodriguez and Norma Rodriguez, supra)

FICTITIOUS-PAYEE RULE; Who is liable under it; exceptions.

When a person making the check so payable did not intendfor the specified payee to have any part in the transaction, thepayee is considered as fictitious payee. (Mueller & Martin vs.

Liberty Insurance Bank). Fictitious-payee rule extends protectioneven to non-bank transferee of the checks. (Getty Petroleum Corp.

vs. American Express Travel Related Services Company, Inc, 90

NY 2d 322 (1997), citing the Uniform Commercial Code, Sec. 3-

405)

In a fictitious-payee situation, the drawee bank is absolvedfrom liability and the drawer bears the loss. When faced with acheck payable to a fictitious payee, it is treated as a bearerinstrument that can be negotiated by delivery. The underlyingtheory is that one cannot expect a fictitious payee to negotiatethe check by placing his indorsement thereon. And since the

234 Campos, J.C., Jr. and Lopez-Campos, M.C., Notes and Selected Caseson Negotiable Instruments Law (1994), 5th ed, pp.8-9

235 Bourne v. Maryland Casualty, 192 SE 605 (1937); Norton v. City Bank &Trust Co., 294 F.839 (1923); United States v. Chase Nat. Bank, 250 F.105 (1918)


maker knew this limitation, he must have intended for theinstrument to be negotiated by mere delivery. Thus, in case ofcontroversy, the drawer of the check will bear the loss. This ruleis justified for otherwise, it will be most convenient for the makerwho desires to escape payment of the check to always deny thevalidity of the indorsement. This despite the fact that the fictitiouspayee was purposely named without any intention that the payeeshould receive the proceeds of the check.236 (Philippine National

Bank vs. Erlando T. Rodriguez and Norma Rodriguez, supra)

The rule protects the depositary bank and assigns the lossto the drawer of the check who was in a better position to preventthe loss in the first place. (Getty Petroleum Corp. vs. American

Express Travel Related Services Company, Inc.)

However, there is a ‘commercial bad faith’ exception to thefictitious-payee rule. A showing of commercial bad faith on thepart of the drawee bank, or any transferee of the check for thatmatter, will work to strip it of its defense. The exception will causeit to bear the loss. Commercial bad faith is present if the transfereeof the checks acts dishonestly, and is a party to the fraudulentscheme. (Philippine National Bank vs. Erlando T. Rodriguez, et

al, G.R. No. 170325, September 26, 2008 [Reyes, R.T., J.])

The payee in an order instrument was not properly identifiedwith reasonable certainty, what would be the effect thereofto the instrument?

Where the instrument is payable to order, the payee mustbe named or otherwise indicated therein with reasonable certainty,otherwise, it would be considered as a bearer instrument.

Knowledge of the drawer of the fictitious and non-existingcharacter of the payee controls

A requested a bank to draw a draft to the order of C Bros.,an existing firm who were ignorant of the transaction. A indorsedthe draft in the name of C Bros., and the indorsee collected itfrom the drawee. Held, that the knowledge of the drawer of thefictitious or non-existing character of the payee controls, not theknowledge of the person at whose request the draft is drawn.

236 Mueller & Martin v. Liberty Insurance Bank, 187 Ky. 44, 218 SW 465(1920)

145

That the draft was not payable to bearer and that the draweecould recover the money from the indorsee. (Brannan, pages 13-14, citing, Seaboard Nat. Bank v. Bank of America, 193 N.Y. 26,85 N.E. 829; Jordan Marsh Co. v. Nat. Shawmut Bank, 201 Mass.397, 87 N.E. 740 accord, italics supplied)

Illustrative cases:

A clerk had a power of attorney to draw checks on hisemployer’s bank account. The clerk fraudulently drew checks toX, an existing person, but who had no interest in the checks andwas not intended by the clerk to receive them. The clerk indorsedthe name of X and negotiated the checks for his own purposes,and the drawee bank paid them in good faith. Held, that the payeewas a fictitious person within the section, that the checks werepayable to bearer and that the payment by the bank was rightful.(Brannan, page 14, citing Snyder v. Corn Exch. Nat. Bank, 221Pa. 599, 70 Atl. 876, S.C. sec. 124)

The name of the drawer was forged to checks made payableto real persons. It did not appear who the forger was, but heknew that the payees would never have any interest in the checks.The drawee bank paid the checks to defendant, a holder in duecourse, on the forged indorsement of the payee. Held, that thepayees were fictitious, that the checks were payable to bearer,and that the drawer could not recover the money from defendant.(Ibid, citing Trust Company of America v. Hamilton Bank, 127 App.Div. 515, 112 N.Y. Supp. 84)

An instrument knowingly made payable to the order of afictitious or non-existing person is negotiable without indorsement,but to recover upon the instrument as payable to bearer, it mustbe shown that the maker had knowledge of the fiction, and if theplaintiff declares only upon the instrument as payable to order, itis not necessary to decide whether there is evidence of suchknowledge, as the issue is not open. (Ibid, citing Boles v. Harding,201 Mass. 103, 87 N.E. 481)

A bill payable to a real person not intended by the drawer tohave any interest in it is payable to a fictitious person, and is to betreated as payable to bearer, and the acceptor’s ignorance of thefiction is immaterial. (Ibid, citing Bank of England v. Vagliano[1891], A.C. 107)


The drawer’s ignorance that the payee is non-existing isalso immaterial. (Ibid, citing Clutton v. Attenborough [1897], A.C.9). But if the payee is a real person intended by the drawer to bethe payee, he is not a fictitious person, and the drawer is notliable to one claiming under a forged indorsement of the payee’sname, although the payee really had no interest in the instrument.(Brannan, page 15, citing Bank of England v. Vagliano and Cluttonv. Attenborough, distinguished. Vinden v. Huges [1905], 1 K.B.795; North & South Wales Bank v. Macbeth [1908], App. Cas.137)

When the only or last indorsement is an indorsement in blank

A promissory note indorsed in blank by the payee is payableto bearer. (Brannan, page 16, citing Mass. Nat. Bank v. Snow,187 Mass. 159, 72 N.E. 959, S.C. secs. 16, 56, 124, 191; UnakaNat. Bank v. Butler, 113 Tenn. 574, 83 S.W. 655 (a check), S.C.sec. 56)

The indorsement in blank of a non-negotiable promissorynote does not make it negotiable, and the indorser is liable onlyas an assignor. (Ibid, citing Wettlaufer v. Baxter (Ky.), 125 S.W.741)

Sec. 10. Terms, when sufficient. - The instrument need notfollow the language of this Act, but any terms are sufficientwhich clearly indicate an intention to conform to therequirements hereof.

Notes:

Substantial compliance with the requirements of negotiability

The law does not require that the Bill or Note have to literallyfollow the language of the Negotiable Instruments Law, it is enoughthat looking at the face of the instrument, substantial compliancefrom Sec. 1 of the said law can be inferred.

Illustrative case:

A certificate of deposit reciting that “X has deposited in theY bank three thousand dollars to the credit of himself, payable incurrent funds on return to this certificate properly indorsed on July1, 1909” is a negotiable instrument under the N.I.L. (Brannan,

147

page 16, citing, Forest v. Safety Banking & Trust Co. (E.D. Pa.),174 Fed. 345)

Sec. 11. Date, presumption as to. - Where the instrument oran acceptance or any indorsement thereon is dated, suchdate is deemed prima facie to be the true date of the making,drawing, acceptance, or indorsement, as the case may be.

Notes:

A Date in a bill or note is not essential to its validity

The date of an instrument is not necessary to it in law, thatits absence avoids the instrument. It is not an essentialcharacteristic of the instrument, as other qualities are characteristicof the instrument or of its negotiability. For this reason the datemay be supplied by parol, the date of delivery being the day ofdate; or it may be antedated or postdated, or, if the date be leftblank, all parties are deemed to consent that the holder may fillup the blank with a date. Legally speaking, the chief importanceof a date is that it is presumptive evidence of the time of its actualexecution, a presumption, however, which may be contradictedby parol evidence.5

Sec. 12. Ante-dated and post-dated. - The instrument is notinvalid for the reason only that it is ante-dated or post-dated,provided this is not done for an illegal or fraudulent purpose.The person to whom an instrument so dated is deliveredacquires the title thereto as of the date of delivery.

Notes:

An indorsee of a post-dated check is not put upon inquirymerely because of its negotiation prior to its date. (Brannan, page17, citing Albert v. Hoffman, 64 Misc. Rep. 87; 117 N.Y. Supp.1043, S.C. sec. 25.)

A post-dated check is not invalid, and may be properlystamped as a bill payable on demand. (Ibid, citing, Royal Bank v.Tottenham, [1894] 2 Q.B. 715; Hitchcock v. Edwards, 60 L.T. Rep.636.)

A post-dated check is not irregular x x x so as to charge theholder with equities. (Ibid)


Sec. 13. When date may be inserted. - Where an instrumentexpressed to be payable at a fixed period after date is issuedundated, or where the acceptance of an instrument payableat a fixed period after sight is undated, any holder may inserttherein the true date of issue or acceptance, and theinstrument shall be payable accordingly. The insertion of awrong date does not avoid the instrument in the hands of asubsequent holder in due course; but as to him, the date soinserted is to be regarded as the true date.

Notes:

If the instrument is issued undated, is it a negotiableinstrument?

ANSWER:

Yes.

Where—a. an instrument expressed to be payable at a fixed

date is issued undated or

b. where the acceptance of an instrument payable ata fixed period after sight is undated

Then any holder may insert therein the true date ofissue or acceptance, and the instrument shall bepaid accordingly. (Sec. 13, Negotiable InstrumentsLaw)

The validity and negotiable character of aninstrument is not affected by the fact that it is notdated. (Sec. 5, Negotiable Instruments Law)

What if a wrong date was inserted by the holder?

The insertion of a wrong date does not avoid the instrumentin the hands of a subsequent holder in due course but it is as tohim, the date so inserted is to be regarded as the true date. (Sec.13, Negotiable Instruments Law)

149

Illustrative case:

An undated note, payable four months after date, wasdelivered to the payee by an accommodation indorser onDecember 1st. The payee, without authority, filled in the dateDecember 30th. Held, that in the absence of other authority thepayee could only fill in the blank with the date of issue and thatthe indorser was discharged. (Brannan, page 17, citing Bank ofHouston v. Day, (Mo. App.), 122 S.W. 756.)

Sec. 14. Blanks; when may be filled. - Where the instrumentis wanting in any material particular, the person in possessionthereof has a prima facie authority to complete it by filling upthe blanks therein. And a signature on a blank paper deliveredby the person making the signature in order that the papermay be converted into a negotiable instrument operates as aprima facie authority to fill it up as such for any amount. Inorder, however, that any such instrument when completedmay be enforced against any person who became a partythereto prior to its completion, it must be filled up strictly inaccordance with the authority given and within a reasonabletime. But if any such instrument, after completion, isnegotiated to a holder in due course, it is valid and effectualfor all purposes in his hands, and he may enforce it as if ithad been filled up strictly in accordance with the authoritygiven and within a reasonable time.

Notes:

What happens when there are blanks on the instrument?

When there are blanks on the instrument, so long as theyare material to the completion of the instrument, it may be filledup by the person in possession thereof.

Illustrative case:

Defendant signed a note in blank on the statement that itwas to be used to borrow money for a co-defendant who wasjointly liable with the plaintiff to a bank. The note was filled up inthe presence of plaintiffs, who were made payees, and deliveredthem, and they paid the co-defendant’s share of the debt to the


bank. Held, that the note was filled up in accordance with theauthority given, that the payees were holders for value and couldrecover on the note. (Brannan, page 19, citing Hermann’s Ex’r. v.Gregory (Ky.), 115 S.W. 809, S.C.sec. 25.)

General Rule: When there are blanks on the instrument,consisting of material particulars, the person in possession thereofhas a prima facie authority to fill it up. Provided, that he fills it upstrictly in accordance with the authority given and within areasonable time.

We have here an instance, where a paper, which has yet tocomply with Sec. 1, there being wanting of any material particular,may be filled up by the person in possession thereof. But in orderto bind any person who became a party to the instrument prior toits completion, such blanks must be filled up strictly in accordancewith the authority given to the person in possession thereof.However, if the instrument, after completion, regardless of whetheror not he complied with the authority given him, is negotiated to aholder in due course, it is valid and effectual for all purposes inhis hands, irrespective of how the blank was filled up, as the lawgives a presumption that it had been filled up strictly in accordancewith the authority given and within a reasonable time.

What if the instrument which was irregularly filled up wasnegotiated to a person not a holder in due course? Will the answerbe the same?

No. The answer will not be the same. If it was negotiatedto a person not a holder in due course, he cannot enforce theinstrument, as it was not filled up strictly in accordance with theauthority given and within a reasonable time.

How must the blanks to the instrument be filled up?

They must be filled up:

a) Strictly in accordance with the authority give; AND

Ex. If the authority was for the payment of bills due andit was filled up strictly for that purpose.

b) Within a reasonable time.

151

Ex. In the above example, it was filled up almostimmediately thereafter the knowledge of the billsdue.

Materiality of the blanks to the completion of the instrument

The word “material” in this section is not synonymous with“necessary” so as to restrict the right of filling a blank to somethingessential to a complete negotiable instrument. Therefore the nameof a place may be written after delivery in a blank space after theword “at” and the instrument will not be thereby avoided in thehands of a holder in due course. (Brannan, page 18, citingJohnston v. Hoover, 139 Iowa, 143; 117 N.W. 277)

Where the maker of a note signed and delivered it, leavinga blank after the amount between the words “at” and “valuereceived,” the payee or any subsequent holder was authorized tofill the blank with a place of payment either without or without theState, and such act was not an alteration avoiding the note. (Ibid,citing Diamond Distilleries Co. v. Gott (Ky.), 126 S.W. 131.)

Presumption of authority to sign

Hence, the law merely requires that the instrument be inthe possession of a person other than the drawer or maker. Fromsuch possession, together with the fact that the instrument iswanting in a material particular, the law presumes agency to fillup the blanks.238 Because of this, the burden of proving want ofauthority or that the authority granted was exceeded, is placed onthe person questioning such authority.239 (John Dy vs. People of

the Philippines, et al, G.R. No. 158312, November 14, 2008,

[Quisumbing, Acting C.J.])

Suppose a person signed a blank instrument and deliveredit to the payee, would the holder still have the authority toconvert it into a negotiable instrument?

Yes. A signature on a blank paper delivered by the personmaking the signature in order that the paper may be converted

238 I.A.F. Agbayani, Commentaries and Jurisprudence on the CommercialLaws of the Philippines, 168 (1987 ed)

239 J.C. Campos, Jr. and M.C. Lopez-Campos, Notes and Selected Caseson Negotiable Instruments Law, 351 (3rd ed., 1971)


into a negotiable instrument operates as a prima facie authorityto fill it up as such for any amount. (Sec. 14, NegotiableInstruments Law)

Burden to prove authority

The burden is on the plaintiff, a party prior to the completionof an instrument signed in blank, to prove that the blanks werefilled up within a reasonable time. From October to the followingJune 9 is, if unexplained, more than a reasonable time. (Brannan,page 19, citing Madden v. Gaston, 121 N.Y. Supp. 951, semble,S.C. sec. 16)

Sec. 15. Incomplete instrument not delivered. - Where anincomplete instrument has not been delivered, it will not, ifcompleted and negotiated without authority, be a validcontract in the hands of any holder, as against any personwhose signature was placed thereon before delivery.

Notes:

Incomplete and undelivered instruments

A class of cases, illustrative of want of consent, arises whenin an incomplete instrument has been signed and stolen, withoutany delivery to an agent in trust, or otherwise, intervening. Insuch cases no trust for any purpose has been created. Noinstrument has been perfected. No appearance of validity hasbeen given it. No negligence can be imputed. Therefore if theblank be filled, it is sheer forgery, in which the maker is in no wiseinvolved, and he is not therefore bound, even to a bona fide holderwithout notice.240 (Daniel, Elements of the Law of NegotiableInstruments, page 140)

What is required in order that the completed blank instrumentmay be enforceable against any person?

In order that any such instrument when completed may beenforced against any person who became a party thereto prior toits completion, it must be filled up strictly in accordance with theauthority given and within a reasonable time.

240 1 Parsons on Notes and Bills, 114; Daniel on Negotiable Instruments, 839

153

What if the above-indicated instrument was negotiated to aholder in due course?

If such instrument, after completion, is negotiated to a holderin due course, it is valid and effectual for all purposes in his hands,and he may enforce it as if it had been filled up strictly inaccordance with the authority given and within a reasonable time.

What is the rule in incomplete and undelivered instruments?

Where an incomplete instrument has not been delivered, itwill not, if completed and negotiated without authority, be a validcontract in the hands of any holder, as against any person whosesignature was placed thereon before delivery. (Sec. 15, NegotiableInstruments Law)

Does Section 15 include a holder in due course?

Yes. There was no intention of the part of the person whosesignature was placed before delivery to make or draw a negotiableinstrument, thus, it will not be binding upon him.

What if the instrument is later on completed, but not delivered

While it cannot be said that the authorities are uniform, itmay be stated to be safely settled that if a negotiable instrumenthas been fully completed in form and signed by the drawer ormaker, and, before delivery, is stolen from the possession of theparty who has signed it, and passed by the thief to a bona fide

holder for value in the usual course of business, it would affordhim no defense against such bona fide holder. Whether theinstrument be payable to bearer, or to the order of the thief, if it beindorsed by him, we can see no reason why the bona fide holdershould not be entitled to recover. The want of delivery is a defectnot apparent on the face of the bill or note. That party has giventhe appearance of validity to his paper. His signature is itself anassurance that his obligation has been perfected by delivery; andit being necessary that the loss should fall upon one of two innocentparties, it should fall upon the one whose act had opened thedoor for it to enter.241 (Daniel, Elements of the Law of NegotiableInstruments, page 129)

241 Daniel on Negotiable Instruments, 837; Kinyon v. Wohlford, 17 Minn. 239


Where the maker has perfected the instrument, and left itundelivered in a safe, desk, or other receptacle, it should then beat his hazard. Such papers are made for use, and not forpreservation. The maker creates the risk of their being eloignedby keeping them on hand, and places them on the same basis asnegotiable papers which have been put upon the market. Whenonce issued the purchaser is protected and the owner loses, eventhough he had guarded his property with bolt and bar; and ifbankers and others who must necessarily be in possession ofnegotiable securities in the course of trade are not protected, wecan discover no principle which can be invoked to protect onewho holds his own paper contrary to the ordinary wants and usagesof trade.242 (Ibid)

Illustrative Case:

Bank of America NT & SA vs. Philippine Racing ClubG.R. No. 150228, July 30, 2009

LEONARDO-DE CASTRO, J.:

FACTS: Philippine Racing Club Inc. (PRCI) maintained aCurrent Account with Bank of America. The authorizedjoint signatories with respect to said account were thePresident (Antonia Reyes) and Vice-President forFinance (Gregorio Reyes).On or about the 2nd week ofDecember 1988, the President and Vice President werescheduled to go out of the country in connection withthe corporation’s business. In order not to disruptoperations in their absence, they pre-signed severalchecks relating to said account. The intention was toinsure continuity of the corporation’s operations bymaking available cash/money especially to settleobligations that might become due. These checks wereentrusted to the accountant with instruction to makeuse of the same as the need arose. The internalarrangement was, in the event there was need to makeuse of the checks, the accountant would prepare thecorresponding voucher and thereafter complete theentries on the pre-signed checks.

242 Thompson on Bills (Wilson’s ed.), 92; 1 Parsons on Notes and Bills, 114

155

On December 16, 1988, a John Doe presented two (2)checks to the bank for encashment a couple of thepre-signed checks worth Php 110,000.00 each.

The two (2) checks had similar entries with similarinfirmities and irregularities. Despite the highly irregularentries on the face of the checks, the bank, without asmuch as verifying and/or confirming the legitimacy ofthe checks considering the substantial amount involvedand the obvious infirmity/defect of the check on theirfaces, encashed said checks. A verification process,even by way of a telephone call to PRCI office, wouldhave taken less than ten (10) minutes. But this wasnot done by the bank. Investigation conducted by PRCIyielded the fact that there was no transaction involvingPRCI that call for the payment of Php 220,000.00 toanyone. The checks appeared to have come into thehands of any employee of PRCI who eventuallycompleted without authority the entries on the pre-signed checks. PRCI’s demand for the bank to payfell on deaf ears. Hence, complaint was filed.

ISSUE: Whether the proximate cause of the wrongfulencashment of the checks in question was due to (a)petitioner’s failure to make a verification regarding thesaid checks with the respondent in view of themisplacement of entries on the face of the checks.

RULING: It is well-settled that banks are engaged in a businessimpressed with public interest, and it is their duty toprotect in return their many clients and depositors whotransact business with them. They have the obligationto treat their client’s account meticulously and with thehighest degree of care, considering the fiduciary natureof their relationship. The diligence required of banks,therefore, is more than of a good father of a family.243

In the case at bar, extraordinary diligence demandsthat petitioner should have ascertained from the

243 Samsung Construction Company Philippines, Inc. v. Far East Bank andTrust Company, Inc., G.R. No. 129015, August 13, 2004, 436 SCRA 402,421


respondent the authenticity of the subject checks orthe accuracy of the entries therein not only because ofthe presence of highly irregular entries on the face ofthe checks but also of the decidedly unusualcircumstances surrounding their encashment. x x x theconfluence of the irregularities on the face of the checksand circumstances that depart from the usual bankingpractice of respondent should have put petitioner’semployees on guard that the checks were possibly notissued by the respondent in due course of its business.Petitioner’s subtle sophistry cannot exculpate it frombehavior that fell extremely short of the highest degreeof care and diligence required of it as a bankinginstitution.

In defense of its cashier/teller’s questionable action,petitioner insists that pursuant to Sections 14244 and16245 of the NIL, it could validly presume, uponpresentation of the checks, that the party who filled upthe blanks had authority and that a valid and intentionaldelivery to the party presenting the checks had taken

244 Sec. 14. Blanks, when may be filled. – Where the instrument is wanting inany material particular, the person in possession thereof has a prima facieauthority to complete it by filling up the blanks therein. And a signature ona blank paper delivered by the person making the signature in order thatthe paper may be converted into a negotiable instrument operates as aprima facie authority to fill it up as such for any amount. In order, however,that any such instrument when completed may be enforced against anyperson who became a party thereto prior to its completion, it must befilled up strictly in accordance with the authority given and within areasonable time. But if any such instrument, after completion, is negotiatedto a holder in due course, it is valid and effectual for all purposes in hishands, and he may enforce it as if it had been filled up strictly in accordancewith the authority given and within a reasonable time.

245 Sec. 16, Delivery; when effectual; when presumed. – Every contract on anegotiable instrument is incomplete and revocable until delivery of theinstrument for the purpose of giving effect thereto. As between immediateparties, and as regards a remote party other than a holder in due course,the delivery in order to be effectual, must be made either by or under theauthority of the party making, drawing, accepting, or indorsing as the casemay be; and in such case the delivery may be shown to have beenconditional, or for a special purpose only, and not for the purpose oftransferring the property in the instrument. But where the instrument is inthe hands of a holder of a due course, a valid delivery thereof by all partiesprior to him so as to make them liable to him is conclusively presumed.And where the instrument is no longer in the possession of a party whosesignature appears thereon, a valid and intentional delivery by him ispresumed until the contrary is proved

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place. Thus, in petitioner’s view, the sole blame forthis debacle should be shifted to respondent for havingits signatories pre-sign and deliver the subjectchecks.246 Petitioner argues that there was indeeddelivery in this case because, following Americanjurisprudence, the gross negligence of respondent’saccountant in safekeeping the subject checks whichresulted in their theft should be treated as a voluntarydelivery by the maker who is estopped from claimingnon-delivery of the instrument.247

Petitioner’s contention would have been correct if thesubject checks were correctly and properly filled outby the thief and presented to the bank in good order.In that instance, there would be nothing to give noticeto the bank of any infirmity in the title of the holder ofthe checks and it could validly presume that there wasproper delivery to the holder. The bank could not befaulted if it encashed the checks under thosecircumstances. However, the undisputed facts plainlyshow that there were circumstances that should havealerted the bank to the likelihood that the checks werenot properly delivered to the person who encashed thesame. In all, we see no reason to depart from thefinding in the assailed CA Decision that the subjectchecks are properly characterized as incomplete andundelivered instruments this making Section 15248 ofthe NIL applicable in this case.

2000 Bar Question:

PN makes a promissory note for P5, 000.00, but leavesthe name of the payee in blank because he wanted toverify its correct spelling first. He mindlessly left thenote on top of his desk at the end of the workday. Whenhe returned the following morning, the note wasmissing. It turned up later when X presented it to PN

246 Rollo, p. 304247 Id. at 306248 Sec. 15. Incomplete instrument not delivered. – Where an incomplete

instrument has not been delivered it will not, if completed and negotiated,without authority, be a valid contract in the hands of any holder, as againstany person whose signature was placed thereon before delivery


for payment. Before X, T, who turned out to have filchedthe note from PN’s office, had endorsed the note afterinserting his own name in the blank space as the payee.PN dishonored the note, contending that he did notauthorize its completion and delivery. But X said hehad no participation in, or knowledge about, thepilferage and alteration of the note and therefore heenjoys the rights of a holder in due course under theNegotiable Instruments Law. Who is correct and why?(3%)

ANSWER:

A. PN is correct. Sec. 15, Act 2031, provides that wherean incomplete instrument has not been delivered, it willnot, if completed and negotiated without authority be avalid contract in the hands of any holder, as against anyperson whose signature was placed thereon beforedelivery. Therefore PN is correct when he dishonoredthe note.

Sec. 16. Delivery; when effectual; when presumed. - Everycontract on a negotiable instrument is incomplete andrevocable until delivery of the instrument for the purpose ofgiving effect thereto. As between immediate parties and asregards a remote party other than a holder in due course, thedelivery, in order to be effectual, must be made either by orunder the authority of the party making, drawing, accepting,or indorsing, as the case may be; and, in such case, thedelivery may be shown to have been conditional, or for aspecial purpose only, and not for the purpose of transferringthe property in the instrument. But where the instrument isin the hands of a holder in due course, a valid delivery thereofby all parties prior to him so as to make them liable to him isconclusively presumed. And where the instrument is nolonger in the possession of a party whose signature appearsthereon, a valid and intentional delivery by him is presumeduntil the contrary is proved.

Notes:

Delivery is the final step necessary to perfect the existenceof any written contract; and, therefore, as long as a bill or note

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remains in the hands of the drawer or maker, it is a nullity.249

(Daniel, Elements of the Law of Negotiable Instruments,page 42)

The inception of a note is defined by Judge Platt to mean“when it was first given, or when it first became the evidence ofan existing contract.” It has no legal inception until it is deliveredas evidence of a subsisting debt. The mere writing and signing ofa bill or note, which the drawer or maker retains in his hands,forms no contract. No person has then a right of action upon itany more than if it were blank paper. The inception of the paperis when there came into existence a right of action upon it. This isbecause while the note or bill is in the maker’s hands, it can beerased, canceled, or revoked. It cannot, therefore, be an evidenceof indebtedness until it is beyond such possibility. The decisivestep for this is the delivery.250

So essential is delivery that it has been held that where apromissory note, the existence of which was unknown to thegrantee, lay in the grantor’s possession, and was found amongsthis papers after death, the payee could not claim or sue uponit;251 and though such a note should be found, accompanied withwritten directions to deliver it to the payee, the payee will still haveno right of action, unless the directions be valid as a testament.252

(Ibid)

When can there be Delivery?

Two things must concur in a delivery. The first is the transfer,actual or constructive, of the possession of the instrument; thesecond an intent to transfer the title on the part of the transferrer.The minds of both parties, to this extent, must concur.253

On the other hand, such acts as handing completed notesto the payee, who, though objecting to the form, retained them; ordepositing completed notes, properly addressed, in the post office;

249 Devries v. Shumate, 53 Md. 216; Purviance v. Jones, 120 Ind. 164250 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,

1900, p. 68, citations omitted251 Disher v. Disher, 1 P. Wms. 204252 Gough v. Findon, 7 Exch. 48253 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,

1900, p. 69, citations omitted


or giving a duplicate bill in place of one lost, which the payeetreated as an original,—have been held to constitute sufficientdeliveries. It is to be noted, however, that the delivery needs tobe to the payee, nor need the intent of the transferrer to transfertitle be communicated to him. For, as will be seen, a bill or notemay be delivered in escrow, and take effect on performance ofthe condition, without knowledge or actual assent of the payee,and a note delivered in a sealed envelope, to be opened after themaker’s death, is operative, although the payee does not becomeaware of the existence of the note until after the death occurs.The outward and visible indication of delivery is possession.254

Types of Delivery

Delivery may be constructive a well as actual. (Ibid)

There is actual delivery, when it is effected by the manualpassing of the instrument itself to the payee or his agent.255

There is constructive delivery, when it is effected by directionto a third person in actual possession of the instrument to deliverit to, or to hold it for, the payee.256

Delivery may also be upon conditions. Deliveries uponconditions are of two classes: delivery as an escrow, and deliveryto the other party to the instrument upon a condition. Delivery asan escrow is defined as a delivery to a third person, made toawait the happening of an event, or performance of a condition,or some affirmative action on the part of the other party, before heis entitled to the absolute delivery of the instrument, asdistinguished from the affirmative action of the party who deliversthe instrument in escrow. The authorities agree that a delivery inescrow has two elements: It must be to some person not ultimatelyentitled to receive it; and the delivery must take effect and the titleto the instrument pass the instant condition of the escrow is fulfilled,even though the depositary has not formally delivered it to theperson entitled to the possession. In these respects it is like theescrow of a deed, from the analogy of which it is in fact drawn.There are, however, these distinctions: A deed once delivered to

254 Id., pp. 69-70255 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,

1900, p. 67256 Id.

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be held in escrow by a third party, and wrongly passed on by him,is subject to defenses, even in the hands of a purchaser for valuewithout notice, but a negotiable instrument is not. A deed beingdelivered conditionally to the obligee, parol evidence that it wasconditional is admissible.257

A delivery upon a condition is where the instrument isdelivered to the payee, to be held by him pending some futureevent.258

A direction to a third person, who is in actual custody of theinstrument, to hold it subject to the payee’s or transferee’s order,or an order to the depositary to deliver it, or a delivery to a thirdperson for the payee without condition is sufficient in legalcontemplation. In either of the cases suggested the delivery wouldbe constructive.259 (Elements of the Law of Negotiable Instruments,page 42)

Without delivery there can be no valid and binding contract

Every contract on a negotiable instrument is incomplete andrevocable until delivery of the instrument to the payee for thepurposes of giving effect thereto.260 The first delivery of theinstrument, complete in form, to the payee who takes it as a holder,is called issuance of the instrument.261 Without the initial deliveryof the instrument from the drawer of the check to the payee, therecan be no valid and binding contract and no liability on theinstrument. (Gempesaw vs. Court of Appeals, G.R. No. 92244,

February 9, 1993)

This is further explained in People vs. Yabut262, “the placewhere the bills were written, signed, or dated does not necessarilyfix or determine the place where they were executed. What is ofdecisive importance is the delivery thereof. The delivery of the

254 Id., pp. 69-70255 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,

1900, p. 67256 Id.257 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,

1900, pp. 70-71, citations, omitted258 Id., p. 71259 Gordon v. Adams, 127 Ill. 225; Howe v. Ould, 28 Gratt. 7260 NIL, Sec. 16261 Ibid., Sec. 191, par. 10262 No. L-42902, 29 April 1977, 76 SCRA 624


instrument is the final act essential to its consummation as anobligation. An undelivered bill or note is inoperative. Until delivery,the contract is revocable. And the issuance as well as the deliveryof the check must be to a person who takes it as a holder, whichmeans “(t)he payee or indorsee of a bill or note, who is inpossession of it, or the bearer thereof.” Delivery of the checksignifies transfer of possession, whether actual or constructive,from one person to another with intent to transfer title thereto.”

Delivery denotes physical transfer

Significantly, delivery is the final act essential to thenegotiability of an instrument. Delivery denotes physical transferof the instrument by the maker or drawer coupled with an intentionto convey title to the payee and recognize him as a holder.263 Itmeans more than handing over to another; it imports such transferof the instrument to another as to enable the latter to hold it forhimself.264 (John Dy vs. People of the Philippines, et al, G.R. No.

158312, November 14, 2008, [Quisumbing, Acting C.J.])

In the case of Development Bank of Rizal vs. Sima Wei,

et al,265 it was ruled by the High Court that “it had had long beenrecognized the business custom of using printed checks whereblanks are provided for the date of issuance, the name of thepayee, the amount payable and the drawer’s signature. All thedrawer has to do when he wishes to issue a check is to properlyfill up the blanks and sign it. However, the mere fact that he hasdone these does not give rise to any liability on his part, until and

unless the check is delivered to the payee or his representative.A negotiable instrument, of which a check is, is not only a writtenevidence of a contract right but also a species of property. Justas a deed to a piece of land must be delivered in order to conveytitle to the grantee, so must a negotiable instrument be deliveredto the payee in order to evidence its existence as a bindingcontract. (emphasis supplied)

263 De la Victoria vs. Burgos, G.R. No. 111190, June 27, 1995, 245 SCRA374, 379

264 Lewis County et al. v. State Bank of Peck, 170 Pacific Reporter 98, 100(1918), citing Bigelow, Bills, Notes and Checks, 2nd Ed., p. 13

265 G.R. No. 85419, March 9, 1993, [Campos, Jr., J.:]266 In re Martens’ Estate, 226 Iowa 162, 283 N.W. 885 (1939); Shriver vs.

Danby, 113 A. 612 (1921).267 Negotiable Instruments Law, Sec. 191, par. 6.

163

Thus, the payee of a negotiable instrument acquires nointerest with respect thereto until its delivery to him.266 Delivery ofan instrument means transfer of possession, actual or constructive,from one person to another.267 Without the initial delivery of theinstrument from the drawer to the payee, there can be no liabilityon the instrument. Moreover, such delivery must be intended togive effect to the instrument.” (supra)

When does the instrument become effectual between theparties?

Every contract on a negotiable instrument is incomplete andrevocable until delivery of the instrument for the purpose of givingeffect thereto.

And where the instrument is no longer in the possession ofa party whose signature appears thereon, a valid and intentionaldelivery by him is presumed until the contrary is proved.

As ordinarily understood, delivery means the transfer of thepossession of the instrument by the maker or drawer with intent

to transfer title to the payee and recognize him as the holder

thereof. (Dela Victoria vs. Burgos, G.R. No. 111190, June 27, 1995,

[Bellosillo, J.])

A bill of exchange payable to the order of the drawer doesnot come into existence until it is delivered as well as indorsed bythe payee. (Brannan, page 19, citing Stouffer v. Curtis, 198 Mass.560, 85 N.E. 180)

Intention essential

It is essential to delivery that the minds of both parties shouldassent, in order to bind them; and if, through inattention, infirmity,or otherwise, one does not assent, the act of the other isnugatory.268 Therefore, leaving a check on the desk of a clerk ofa bank, and without knowledge of such clerk of an officer of thebank, does not constitute delivery.269

268 Daniel on Negotiable Instruments, 67269 Chicopee Bank v. Philadelphia Bank, 8 Wall. 641; Kinney v. Ford, 52 Barb.

194


Delivery must be for purposes of giving effect thereto

Note however that delivery as the term is used in theaforementioned provision means that the party delivering did sofor the purpose of giving effect thereto.270 Otherwise, it cannot besaid that there has been delivery of the negotiable instrument.Once there is delivery, the person to whom the instrument isdelivered gets the title to the instrument completely and irrevocably.(San Miguel Corporation vs. Puzon, G.R. No. 167567, September

22, 2010, [Del Castillo, J.:])

San Miguel Corporation vs. Bartolome Puzon, Jr.G.R. No. 167567, September 22, 2010

DEL CASTILLO, J.:

Puzon was a dealer of beer products of San MiguelCorporation (SMC). He purchased products on credit. To ensurepayment and as a business practice, SMC required him to issuepost-dated checks equivalent to the value of the productspurchased on credit before the same were released to him. Saidchecks were returned to Puzon when the transactions coveredby these checks were paid or settled in full. On December 31,2000, Puzon purchased products on credit amounting toP11,820,327.00 for which he issued, and gave to SMC, BPI CheckNos. 27904 (for P309,500.00) and 27903 (for P11,510,827.00) tocover the said transaction. On January 23, 2001, Puzon, togetherwith his accountant, visited the SMC Sales Office to reconcile hisaccount with SMC. During that visit Puzon allegedly requestedto see BPI Check No. 17657. However, when he got hold of BPICheck No. 27903 which was attached to a bond paper togetherwith BPI Check No. 17657 he allegedly immediately left the officewith his accountant, bringing the checks with them. SMC sent aletter to Puzon demanding the return of the said checks. Puzonignored the demand hence SMC filed a complaint against him fortheft with the City Prosecutor’s Office.

The High Court held that: “[t]he essential elements of thecrime of theft are the following: (1) that there be a taking of personalproperty; (2) that said property belongs to another; (3) that thetaking be done with intent to gain; (4) that the taking be donewithout the consent of the owner; and (5) that the taking be

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accomplished without the use of violence or intimidation againstpersons or force upon things.271

Considering that the second element is that the thing takenbelongs to another, it is relevant to determine whether ownershipof the subject check was transferred to petitioner. On this pointthe Negotiable Instruments Law provides:

Sec. 12. Antedated and Postdated—the instrument is notinvalid for the reason only that it is antedated or postdated,provided this is not done for an illegal or fraudulent purpose. Theperson to whom an instrument so dated is delivered acquires thetitle thereto as of the dated of delivery. (underscoring supplied)

Note however that delivery as the term is used in theaforementioned provision means that the party delivering did sofor the purpose of giving effect thereto.272 Otherwise, it cannot besaid that there has been delivery of the negotiable instrument.Once there it delivery, the person to whom the instrument isdelivered gets the title to the instrument completely and irrevocably.

If the subject check was given by Puzon to SMC in paymentof the obligation, the purpose of giving effect to the instrument isevident thus title to or ownership of the check was transferredupon delivery. However, if the check was not given as payment,there being no intent to give effect to the instrument, thenownership of the check was not transferred to SMC.

The evidence of SMC failed to establish that the check wasgiven in payment of the obligation of Puzon. There was noprovisional receipt or official receipt issued for the amount of thecheck. What was issued was a receipt for the document, a“POSTDATED CHECK SLIP.”273

Furthermore, the petitioner’s demand letter sent torespondent states “As per company policies on receivables, all

270 Sec. 16 of the Negotiable Instruments Law271 Aoas v. People, G.R. No. 155339, March 3, 2008; 547 SCRA 311, 317-

318; People v. Puig, G.R. Nos. 173654-765, August 28, 2008, 563 SCRA564, 570; Cruz v. People, G.R. No. 176504, September 3, 2008, 564 SCRA99, 110.

272 Sec. 16 of the Negotiable Instruments Law273 Rollo, p. 76


issuances are to be covered by post-dated checks. However,you have deviated from this policy by forcibly taking away thecheck you have issued to us to cover the December issuance.”274

Notably, the term “payment” was not issued instead the terms“covered” and “cover” were used.

When taken in conjunction with the counter-affidavit ofPuzon—where he stated that “As the [liquid beer] contents arepaid for, the SMC return[s] to me the corresponding PDCs orrequest[s] me to replace them with whatever was the unpaidbalance.”275—it becomes clear that both parties did not intend forthe check to pay for the beer products. The evidence proves thatthe check was accepted, not as payment, but in accordance withthe long-standing policy of SMC to require its dealers to issuepostdated checks to cover its receivables. The check was onlymeant to cover the transaction and in the meantime Puzon wasto pay for the transaction by some other means other than thecheck. This being so, title to the check did not transfer to SMC; itremained with Puzon. The second element of the felony of theftwas therefore not established. Petitioner was not able to showthat Puzon took a check that belonged to another. Hence, theprosecutor and the DOJ were correct in finding no probable causefor theft.”

How must the delivery of the instrument be made for it to beeffectual?

The delivery, in order to be effectual as between immediateparties and as regards a remote party other than a holder in duecourse, must be made either by or under the authority of the partymaking, drawing, accepting, or indorsing, as the case may be.

Illustrative Case:

Loreto Dela Victoria vs. Hon. Jose P. Burgos and Raul H.Sesbreño

G.R. No. 111190, June 27, 1995

BELLOSILLO, J:

274 Demand letter. Id. At 79.275 Id. At 113.

167

FACTS: Raul H. Sesbreño filed a complaint for damages againstAssistant City Fiscals Bienvenido N. Mabanto, Jr., andDario D. Rama, Jr., before the Regional Trial Court ofCebu City. After trial judgment was rendered orderingthe defendants to pay P11, 000.00 to the plaintiff, privaterespondent herein. The decision having become finaland executory, on motion of the latter, the trial courtordered its execution. A notice of garnishment wasserved on petitioner Loreto dela Victoria as City Fiscalof Mandaue City where defendant Mabanto, Jr. wasthen detailed. The notice directed petitioner not todisburse, transfer, release or convey to any otherperson except to the deputy sheriff concerned the salarychecks or other checks, monies, or cash due orbelonging to Mabanto, Jr., under penalty of law.Petitioner moved to quash the notice of garnishmentclaiming that he was not in possession of any money,funds, credit, property or anything of value belongingto Mabanto, Jr., except his salary and RATA checks,but that said checks were not yet properties of Mabanto,Jr., until delivered to him. He further claimed that, assuch, they were still public funds which could not besubject of garnishment.

ISSUE: Whether a check still in the hands of the maker or itsduly authorized representative is owned by the payeebefore physical delivery to the latter?

RULING: Garnishment is considered as a species of attachmentfor reaching credits belonging to the judgment debtorowing to him from a stranger to the litigation. Emphasisis laid on the phrase “belonging to the judgment debtor”since it is the focal point in resolving the issues raised.

As Assistant City Fiscal, the source of the salary ofMabanto, Jr., is public funds. He received hiscompensation in the form of checks from theDepartment of Justice through petitioner a City Fiscalof Mandaue City and head of office. Under Sec. 16 ofthe Negotiable Instruments Law, every contract on anegotiable instrument is incomplete and revocable untildelivery of the instrument for the purpose of giving effectthereto. As ordinarily understood, delivery means the


transfer of the possession of the instrument by themaker or drawer with intent to transfer title to the payee

and recognize him as the holder thereof.

According to the trial court, the checks of Mabanto, Jr.,were already released by the Department of Justiceduly signed by the officer concerned through petitionerand upon service of the writ of garnishment by thesheriff petitioner was under obligation to hold them forthe judgment creditor. It recognized the role of thepetitioner as custodian of the checks. At the same timehowever it considered the checks as no longergovernment funds and presumed delivered to thepayee based on the last sentence of Sec. 16 of theNegotiable Instruments Law which states: “And wherethe instrument is no longer in the possession of a partywhose signature appears thereon, a valid andintentional delivery by him is presumed.” Yet, thepresumption is not conclusive because the last portionof the provision says “until the contrary is proved.”However this phrase was deleted by the trial court forno apparent reason. Proof of the contrary is its ownfinding that the checks were in the custody of thepetitioner. Inasmuch as said checks had not yet beendelivered to Mabanto, Jr., they did not belong to him

and still had the character of public funds. In Tiro v.

Hontanosas276 we ruled that-

The salary check of a government officer of employeesuch as a teacher does not belong to him before it isphysically delivered to him. Until that time the checkbelongs to the government. Accordingly, before thereis actual delivery of the check, the payee has no powerover it; he cannot assign it without the consent of theGovernment.

What if the instrument is in the hands of a holder in duecourse, is delivery conclusively presumed?

Where the instrument is in the hands of a holder in duecourse, a valid delivery thereof by all the parties prior to him so asto make them liable to him is conclusively presumed.

276 No. L-32312, 25 November 1983, 125 SCRA 697.

169

But the presumption both as to the fact and the time ofdelivery may be rebutted.277 As a bill or note takes effect only bydelivery, so it takes effect only on delivery; and if this be subsequentto its date, it will be binding only from the day of actual delivery.278

If the bill or note bears no date, the time must be computedfrom its delivery; and if the day of actual delivery cannot be proved,it will be computed from the earliest day on which it appears tohave been in the hands of the payee or any holder.279

Burden of proving delivery

Under the last clause of section 16 and section 14, theburden is on the defendant to show the agreement under which anegotiable instrument signed in blank was delivered and that theterms have been violated. (Brannan, page 22, citing Madden v.Gaston (Misc. Rep.) 121 N.Y. Supp. 951 S.C. sec. 14)

Sec. 17. Construction where instrument is ambiguous. -Where the language of the instrument is ambiguous or thereare omissions therein, the following rules of constructionapply:

(a) Where the sum payable is expressed in words andalso in figures and there is a discrepancy betweenthe two, the sum denoted by the words is the sumpayable; but if the words are ambiguous or uncertain,reference may be had to the figures to fix the amount;

(b) Where the instrument provides for the payment ofinterest, without specifying the date from whichinterest is to run, the interest runs from the date ofthe instrument, and if the instrument is undated, fromthe issue thereof;

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

(d) Where there is a conflict between the written andprinted provisions of the instrument, the writtenprovisions prevail;

277 Woodford v. Dorwin, 3 Vt. 82; Scaife v. Byrd, 39 Ark. 568278 Lovejoy v. Whipple, 18 Vt. 379279 Clark v. Sigourney, 17 Conn. 511; Richardson v. Lincoln, 5 Metc. (Mass.)

201


(e) Where the instrument is so ambiguous that there isdoubt whether it is a bill or note, the holder may treatit as either at his election;

(f) Where a signature is so placed upon the instrumentthat it is not clear in what capacity the person makingthe same intended to sign, he is to be deemed anindorser;

(g) Where an instrument containing the word “I promise

to pay” is signed by two or more persons, they aredeemed to be jointly and severally liable thereon.

Notes:

Where sum payable is written in words or figures

The law mandates that where the sum payable is expressedin words and also in figures and there is a discrepancy betweenthe two, the sum denoted by the words is the sum payable.

Example:

Sum payable is Eleven Million Seven Hundred SixThousand Pesos (Php 11,706.00); in this instance wefollow the sum expressed in words.

But if the words are ambiguous or uncertain, reference maybe had to the figures to fix the amount.

Example:

Sum payable is Six Million Seven Fifty Pesos (Php6,000,750.00); in this instance there is ambiguity in thesum payable in words, thus, reference may be had to thefigures to fix the amount.

In another illustration, the instrument provides that the sumpayable is Eleven Million Six Hundred Fifty Seven Thousad NineHundred Fifty Pesos (Php 6,750,980.00). What should be theconstruction of the instrument?

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The instrument is not negotiable, the sum payable isuncertain. The sum payable in words and figures must bereconciled in order for Sec. 17 (a) to apply, otherwise, we have anon-negotiable instrument for being uncertain as to the amountpayable.

2011 Bar Question:

X issued a check in favor of his creditor, Y. It reads:“Pay to Y the amount of Seven Thousand HundredPesos (Php700, 000.00). Signed, X”. What amountshould be construed as true in such a case?

A. Php700, 000.00.

B. Php700.00.

C. Php7, 000.00.

D. Php700, 100.00.

Where the instrument provides for the payment of interest

Where the instrument provides for the payment of interest,without specifying the date from which the interest is to run, theinterest runs from the date of the instrument.

Example:

For value received I promise to pay David Lancelot,or his order, Php 1,000.00 with 10% interest per annum.

(Sgd) Abigail Margaux

(January 1, 2011)

In the above-cited example, there was no date specified asto when the interest will start to run, applying Sec. 17 (b), the rateof interest will start to run on January 1, 2011, which is the date ofthe instrument.

However, where the said instrument is undated, interest runsfrom the time of issuance thereof.


In the above example, assuming the instrument is undated,the 10% interest shall commence from the time of the actualissuance or delivery thereof, as the holder of an undatedinstrument has a prima facie authority to insert the proper date asmay be necessary.

Undated Instrument

This provision is self-explanatory. The same rule as above-mentioned shall be followed. This manifests that date is notessential to the validity of the instrument, but only as with regardsto liability.

Conflict between the Written and Printed provisions

Printed provisions here would mean those printed by theuse of a typewriter, risograph, or any other mark which came aboutas a result of a mechanical process. Whereas, written provisionsare those writings made by hand. And in case of conflict, writtenprovisions prevail over the printed ones.

Ambiguity of whether a Bill or a Note

An instrument in the following form:

$1000 New York 190

Pay to the order of Rosario DidatoValue received and charge on account to 38 Stanton Street

Lansa Rosalia

May be declared upon as a promissory note. (Brannan, page24, citing Didato v. Coniglio, 50 Misc. R. 280, 100 N.Y. Supp. 466)Where there is ambiguity whether the instrument is a bill or anote, the holder may treat it as either at his election. (Sec. 17 (e),N.I.L.)

Where signature is placed in such a way that the capacity ofthe signatory is uncertain; signature may be treated as anindorser

173

This provision applies only to cases of doubt arising out ofthe location of the signature. Therefore one who signed in theplace of the maker’s name is not an indorser. (Ibid, citing GermaniaNatl. Bank v. Mariner, 129 Wis. 544, 109 N.W. 574, S.C. secs. 63,64.)

Joint and Several Liability

A promissory note reads:

I/We hereby consent to any extension which may be

requested by anyone of us

for the payment of the note.

It was held that said promissory note expressly providesthat the signatories engaged to pay, jointly and severally, theamount specified therein. And that this did not guarantee thepayment of one signatory by the other signatories, but in fact boundthemselves solidarily to pay the said amount. (China Banking

Corporation vs. Court of Appeals, G.R. No. L-59887, August 31,

1982, [Relova, J.:])

In another case, that of Republic Planters Bank vs. Court

of Appeals and Fermin Canlas280, defendant Shozo Yamaguchiand private respondent Fermin Canlas were President/ChiefOperating Officer and Treasurer respectively, of WorldwideGarment Manufacturing, Inc., by virtue of Board Resolution No. 1dated August 1, 1979, defendant Shozo Yamaguchi and privaterespondent Fermin Canlas were authorized to apply for creditfacilities with the petitioner Republic Planters Bank in the formsof export advances and letters of credit/trust receiptsaccommodations, worded in the following manner:

___________, after date, for value received, I/we, jointlyand severally promise to pay to the ORDER of theREPUBLIC PLANTERS BANK, at its office in Manila,Philippines, the sum of ___________ PESOS(....)Philippine Currency...

280 G.R. No. 93073, December 21, 1992, [Campos, J.]


“Please credit proceeds of this note to:

________ Savings Account ______XX CurrentAccount No. 1372-00257-6of WORLDWIDE GARMENT MFG. CORP.

The only issue material to the resolution of the HonorableCourt is whether private respondent Fermin Canlas is solidarilyliable with the other defendants, on the promissory notes?

It was held by the Supreme Court that: “private respondentFermin Canlas is solidarily liable on each of the promissory notesbearing his signature for the following reasons:

The promissory notes are negotiable instruments and mustbe governed by the Negotiable Instruments Law.281

Under the Negotiable Instruments Law, persons who writetheir names on the face of promissory notes are makers and areliable as such.282 By signing the notes, the maker promises topay to the order of the payee or any holder283 according to thetenor thereof.284 Based on the above provisions of law, there isno denying that private respondent Fermin Canlas is one of theco-makers of the promissory notes. As such, he cannot escapeliability arising therefrom.

Where an instrument containing the words “I promise to pay”is signed by two or more persons, they are deemed to be jointlyand severally liable thereon.285 An instrument which begins “I”,“We”, or “Either of us” promise to pay, when signed by two ormore persons, makes them solidarily liable.286 The fact that thesingular pronoun is used indicates that the promise is individualas to each other; meaning that each of the co-signers is deemedto have made an independent singular promise to pay the notesin full.

281 Act 2031, enacted on February 3, 1911282 Negotiable Instruments Law, section 184; H.D. Lee Mercantile Co. vs.

Mercantile Co., 275 P. 807 (1929)283 Ibid, Section 1284 Ibid, Section 60285 Ibid, Section 17 (g).286 Powell vs- Mobley, 142 S.E. 678 (1928); Keenig vs. Curran’s Restaurant,

159 Atl. 553 (1932)

175

In the case at bar, the solidary liability of private respondentFermin Canlas is made clearer and certain, without reason forambiguity, by the presence of the phrase “joint and several” asdescribing the unconditional promise to pay to the order ofRepublic Planters Bank. A joint and several note is one in whichthe makers bind themselves both jointly and individually to thepayee so that all may be sued together for its enforcement, or thecreditor may select one or more as the object of the suit.287 A jointand several obligation in common law corresponds to a civil lawsolidary obligation; that is, one of several debtors bound in suchwise that each is liable for the entire amount, and not merely forhis proportionate share.288 By making a joint and several promiseto pay to the order of Republic Planters Bank, private respondentFermin Canlas assumed the solidary liability of a debtor and thepayee may choose to enforce the notes against him alone or jointlywith Yamaguchi and Pinch Manufacturing Corporation as solidarydebtors.

As to whether the interpolation of the phrase “and (in) hispersonal capacity” below the signatures of the makers in the noteswill affect the liability of the makers, we do not find it necessary toresolve and decide, because it is immaterial and will not affect tothe liability of private respondent Fermin Canlas as a joint andseveral debtor of the notes. With or without the presence of saidphrase, private respondent Fermin Canlas is primarily liable as aco-maker of each of the notes and his liability is that of solidarydebtor”.289

Philippine National Bank vs. Concepcion MiningCompany, Inc., et al

G.R. No. L-16968, July 31, 1962

LABRADOR, J:

Appeal from a judgment or decision of the Court of FirstInstance of Manila, Hon. Gustavo Victoriano, presiding, sentencingdefendants Concepcion Mining Company and Jose Sarte to payjointly and severally to the plaintiff the amount of P7, 197.26 with

287 Rice vs.Gove, 22 pick Mass 158; 33 AM Dec. 724288 Black’s Law Dictionary, p. 1249 (5th ed., 1979289 Republic Planters Bank vs. Court of Appeals, G.R. No. 93073, December

21, 1992, [Campos, Jr., J]


interest up to September 29, 1959, plus a daily interest of P1.3698thereafter up to the time the amount is fully paid, plus 10% of theamount as attorney’s fees, and costs of this suit.

The present action was instituted by the plaintiff to recoverfrom the defendants the face of a promissory note the pertinentpart of which reads as follows:

Manila, March 12, 1954

NINETY DAYS after date, for value received, I promiseto pay to the order of the Philippine National Bank . . .

In case it is necessary to collect this note by or through anattorney-at-law, the makers and indorsers shall pay ten percent(10%) of the amount due on the note as attorney’s fees, which inno case shall be less than P100.00 exclusive of all costs and feesallowed by law as stipulated in the contract of real estate mortgage.Demand and Dishonor Waived. Holder may accept partial paymentreserving his right of recourse again each and all indorsers.

(Purpose — mining industry)

CONCEPCION MINING COMPANY, INC.,

By:(Sgd.) VICENTE LEGARDA

President(Sgd.) VICENTE LEGARDA

(Sgd.) JOSE S SARTE

“Please issue check to —

Mr. Jose S. Sarte”

Upon the filing of the complaint the defendants presentedtheir answer in which they allege that the co-maker the promissorynote Don Vicente L. Legarda died on February 24, 1946 and hisestate is in the process of judicial determination in SpecialProceedings No. 29060 of the Court of First Instance of Manila.On the basis of this allegation it is prayed, as a special defense,

177

that the estate of said deceased Vicente L. Legarda be includedas party-defendant. The court in its decision ruled that the inclusionof said defendant is unnecessary and immaterial, in accordancewith the provisions of Article 1216 of the Civil Code and section17 (g) of the Negotiable Instruments Law.

A motion to reconsider this decision was denied andthereupon defendants presented a petition for relief, asking thatthe effects of the judgment be suspended for the reason that thedeceased Vicente L. Legarda should have been included as aparty-defendant and his liability should be determined inpursuance of the provisions of the promissory note. This motionfor relief was also denied, hence defendant appealed to this Court.

Section 17 (g) of the Negotiable Instruments Law providesas follows:

SEC. 17. Construction where instrument is ambiguous. —Where the language of the instrument is ambiguous or thereare omissions therein, the following rules of constructionapply:

x x x x x x x x x

(g) Where an instrument containing the word “I promiseto pay” is signed by two or more persons, they aredeemed to be jointly and severally liable thereon.

And Article 1216 of the Civil Code of the Philippines alsoprovides as follows:

ART. 1216. The creditor may proceed against any one ofthe solidary debtors or some of them simultaneously. Thedemand made against one of them shall not be an obstacleto those which may subsequently be directed against theothers so long as the debt has not been fully collected.

In view of the above quoted provisions, and as thepromissory note was executed jointly and severally by the sameparties, namely, Concepcion Mining Company, Inc. and VicenteL. Legarda and Jose S. Sarte, the payee of the promissory notehad the right to hold any one or any two of the signers of the


promissory note responsible for the payment of the amount of thenote. This judgment of the lower court should be affirmed.

Our attention has been attracted to the discrepancies in theprinted record on appeal. We note, first, that the names of thedefendants, who are evidently the Concepcion Mining Co., Inc.and Jose S. Sarte, do not appear in the printed record on appeal.The title of the complaint set forth in the record on appeal doesnot contain the name of Jose Sarte, when it should, as twodefendants are named in the complaint and the only defense ofthe defendants is the non-inclusion of the deceased Vicente L.Legarda as a defendant in the action. We also note that the copyof the promissory note which is set forth in the record on appealdoes not contain the name of the third maker Jose S. Sarte.Fortunately, the brief of appellee on page 4 sets forth said nameof Jose S. Sarte as one of the co-maker of the promissory note.Evidently, there is an attempt to mislead the court into believingthat Jose S. Sarte is not one of the co-makers. The attorney forthe defendants Atty. Jose S. Sarte himself and he should be heldprimarily responsible for the correctness of the record on appeal.We, therefore, order the said Atty. Jose S. Sarte to explain why inhis record on appeal his own name as one of the defendantsdoes not appear and neither does his name appear as one of theco-signers of the promissory note in question. So ordered.

Bengzon, C.J., Padilla, Bautista Angelo, Concepcion,Barrera, Paredes, Dizon, Regala andMakalintal, JJ., concur.Reyes, J.B.L., J., took no part.

2001 Bar Question:

X, Y, and Z signed a promissory note in favor of A stating:“We promise to pay A on December 31, 2001 the sum ofP5, 000.00.” When the note fell due, A sued X and Ywho put up the defense that A should have impleadedZ. Is the defense valid?

ANSWER:

No. Sec. 17 (g), Act 2031, where an instrument containingthe word “I promise to pay” is signed by two or more persons,they are deemed to be jointly and severally liable thereon.

179

Sec. 18. Liability of person signing in trade or assumed name.

- No person is liable on the instrument whose signature doesnot appear thereon, except as herein otherwise expresslyprovided. But one who signs in a trade or assumed namewill be liable to the same extent as if he had signed in hisown name.

Notes:

Who may be liable on the negotiable instrument?

Only persons signing under their name are liable on theinstrument. No person is liable on the instrument whose signaturedoes not appear thereon, except as herein otherwise expresslyprovided.

Since a negotiable instrument is a special form of contract,the signature of the parties is needed as a manifestation of theirconsent to be bound the said instrument.

What may be the liability of a person signing under a trade orassumed name?

A person who signs in under a trade or assumed name willbe liable to the same extent as if he had signed in his own name.(Sec. 18, Negotiable Instrument Law)

Example:

Alex Cruz issued a promissory note to the order of NicoSantos, but instead of using the name Alex Cruz, he signed underhis trade-name Curzifix Radio Works, thus, under the law he willbe treated as if he signed as Alex Cruz.

Indication of a maker

Under the Negotiable Instruments Law, persons who writetheir names on the face of the promissory notes are makers andare liable as such.290 By signing the notes, the maker promises topay to the order of the payee or to any holder291 according to the

290 Negotiable Instruments Law, section 184; H.D. Lee Mercantile Co. vs.Mercantile Co., 276 P. 807 (1929).

291 Ibid, Section 1.


tenor thereof292. (Republic Planters Bank vs. Court of Appeals,

G.R. No. 93073, December 21, 1992, [Campos, Jr., J])

No application to an oral guaranty by the payee

This section has no application to an oral guaranty by thepayee upon transferring a note for value without indorsement,the guaranty being an original and absolute obligation to whichthe note is collateral. (Brannan, page 25, citing Swenson v. Stoltz,Wash. 318, 78 Pac. 999, S.C. sec. 49.)

Sec. 19. Signature by agent; authority; how shown. - Thesignature of any party may be made by a duly authorizedagent. No particular form of appointment is necessary forthis purpose; and the authority of the agent may beestablished as in other cases of agency.

Notes:

May the signature be made through an agent? How shouldthe authority be shown?

Yes, the signature of any party may be made by a dulyauthorized agent. For this purpose, no particular form ofappointment is necessary.

A person may become a party to, or transfer, a bill or noteby the hand of an agent. Whether one whose name purports tohave been signed by another as drawer, acceptor, maker, orindorser is liable as such depends upon the authority express orimplied, of the person who wrote the signature. If such authorityexisted, the principal, and he alone, is bound. No particular formof appointment is necessary, and the authority of the agent maybe established as in other cases of agency.293

The best mode for an agent to sign or indorse a negotiableinstruments for his principal, so that it may clearly appear that heis “the mere scribe” who applies the executive hand as theinstrument of another, is as follows: “A.B. by his attorney or agent,C.D.;” or “A.B. by C.D., agent;” or, “C.D., for A.B.;” or, “C.D., agent

292 Ibid, Section 60.293 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,

1900, p. 65

181

for A.B.”294 (Daniel, Elements of the Law of Negotiable Instruments,page 79)

When an instrument payable to X, was indorsed “X by Ywith power of attorney” plaintiff, in order to prove his title, mustshow the authority of the agent to indorse. (Ibid, citing ScotlandCounty Nat. Bank v. Hohn (Mo. App.), 125 S.W. 539, S.C.sec. 30.)

What are particular cases or instances which establishesagency?

In a contract of agency, one binds oneself to render someservice or to do something in representation or on behalf ofanother, with the latter’s consent or authority. The following arethe elements of agency: (1) the parties’ consent, express orimplied, to establish the relationship; (2) the object, which is theexecution of a juridical act in relation to a third person; (3) therepresentation, by which the one who acts as agent does so, notfor oneself, but as a representative; (4) the limitation that the agentacts within the scope of his or her authority. As the basis of agencyis representation, there must be, on the part of the principal, anactual intention to appoint, an intention naturally inferable fromthe principal’s words or actions. In the same manner, there mustbe an intention on the part of the agent to accept the appointmentand act upon it. Absent such mutual intent, there is generally noagency. (Dominion Insurance Corp. vs. CA, 426 Phil. 620 [2002];

Tuazon, et al. vs. Heirs of Bartolome Ramos, G.R. No. 156262,

July 14, 2005, cited in Civil Law Reviewer, Albano, Albano, Jr.,

Albano-Pua, Albano III, 2008 Edition, page 836)

Agency may be express or implied from the acts of theprincipal, from his silence or lack of action, or his failure torepudiate the agency knowing that another person is acting onhis behalf without authority. (Ibid, p. 837)

Agency may be oral, unless the law requires a specific form.(Ibid, Art. 1869, NCC)

294 Bradlee v. Boston Glass Co., 46 Pick. 347; Weaver v. Carnall, 35 Ark.198; 1 Parsons on Notes and Bills, 91; Tannant v. Rocky Mountain Nat.Bank, 1 Colo. 278


General Rule:

The power of persons to incur liability as parties to, and totransfer, negotiable instruments by the hands of others is governedby the general rules applicable to principals and agents.295

EXCEPTION—

An undisclosed principal cannot sue or be sued as a partyto a negotiable instrument.296

Sec. 20. Liability of person signing as agent, and so forth. -Where the instrument contains or a person adds to hissignature words indicating that he signs for or on behalf of aprincipal or in a representative capacity, he is not liable onthe instrument if he was duly authorized; but the mereaddition of words describing him as an agent, or as filling arepresentative character, without disclosing his principal,does not exempt him from personal liability.

Notes:

All persons who are themselves competent to becomeparties to a negotiable contract, in their own individual right, cando so through the instrumentality of an agent. (Daniel, Elementsof the Law of Negotiable Instruments, page 75)

If the agent signs a note with his own name, and disclosesno principal, he is personally bound. The party so signing musthave intended to bind somebody upon the instrument, and nopromissor but himself thereon appearing, it must be construed ashis note or as a nullity.297 And although he term himself “agent,”such suffix to his name will be regarded as a mere description

personae, or as an earmark of the transaction, and may be rejectedas surplusage.298 (ibid, page 80)

Three things are essential to the creation of an obligationon the part of one individual by and through the act of another,

295 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,1900, p. 65

296 Ibid.297 Arnold v. Stackpole, 11 Mass. 27; Sharpe v. Bellis, 61 Pa. St. 71; Finan v.

Babcock, 58 Mich. 305298 Toledo Iron & Agr. Works v. Heisser, 51 Mo. 128; Arnold v. Sprague, 34

Vt. 409

183

viz: (1) The principal himself must be competent; (2) The agentmust be competent to act as such; (3) Authority, express or implied,verbal or in writing, must be conferred by the principal upon theagent. (ibid, page 75)

If the agent exceeded his authority in signing his principal’sname, or sign his own professedly as binding his principal, who isnamed, he is not bound as a party to the paper itself, but only inan action of tort for falsely assuming authority to bind another.(ibid, page 80)

What is the liability of a person signing as an agent?

He is not liable on the instrument, where he adds to hissignature words indicating that he signs for or on behalf of aprincipal or in a representative capacity if he was duly authorized.

However, the mere addition of words describing him as anagent, or as filling a representative character, without disclosinghis principal, does not exempt him from personal liability. (Sec.20, Negotiable Instruments Law)

Illustrative Case:


FERNANDEZ, J.:

FACTS: On December 1, 1959, the Philippine Bank ofCommerce instituted an action against Jose M. AruegoCivil Case No. 42066 for the recovery of the total sumof about P35,000.00 with daily interest thereon fromNovember 17, 1959 until fully paid and commissionequivalent to 3/8% for every thirty (30) days or fractionthereof plus attorney’s fees equivalent to 10% of thetotal amount due and costs. The complaint filed by thePhilippine Bank of Commerce contains Twenty-Two(22) causes of action referring to Twenty-Two (22)transactions entered into by the said Bank and Aruegoon different dates covering the period from August 28,1950 to March 14, 1951. The sum sought to berecovered represents the cost of the printing of “World


Current Events”, a periodical published by thedefendant. To facilitate the payment of the printing thedefendant obtained a credit accommodation from theplaintiff. Thus, for every printing of the “World CurrentEvents”, the printer Encal Press and Photo Engraving,collected the cost of printing by drawing a draft againstthe plaintiff, said draft being sent later to the defendantfor acceptance. As an added security for the paymentof the amounts advanced to Encal Press and PhotoEngraving, the plaintiff bank also required thedefendant Aruego to execute a trust receipt in favor ofsaid bank wherein said defendant undertook to hold intrust for plaintiff the periodicals and to sell the samewith the promise to turn over to the plaintiff the proceedsof the sale of said publication to answer for the paymentof all obligations arising from the draft.

Aruego contends that he signed the bills of exchangereferred to in the plaintiff’s complaint in a representativecapacity, as the then President of the PhilippineEducation Foundation Company, publisher of “WorldCurrent Events and Decision Law Journal,” printed byEncal Press and Photo-Engraving, drawer of the saidbills of exchange in favor of the plaintiff bank;


RULING: Section 20 of the Negotiable Instruments Law providesthat “Where the instrument contains or a person addto his signature words indicating that he signs for or onbehalf of a principal or in a representative capacity, heis not liable on the instrument if he was duly authorized;but the mere addition of words describing him as anagent or as filing a representative character, withoutdisclosing his principal, does not exempt him frompersonal liability.”

An inspection of the drafts accepted by the defendantshows that nowhere has he disclosed that he wassigning as a representative of the Philippine EducationFoundation Company. He merely signed as follows:“JOSE ARUEGO (Acceptor) (SGD) JOSE ARUEGO.

185

For failure to disclose his principal, Aruego is personallyliable for the draft he has accepted.

Principal must be disclosed

It is a general principle of commercial law that a negotiableinstrument must wear no mask, but must reveal its character uponits face. And it extends to the liability of parties thereto, who mustappear as distinctly as the terms of the instrument itself, in orderto be bound thereby. It follows, therefore, that no party can becharged as principal upon a negotiable instrument unless his nameis disclosed therein. The reason for this rule is that each partywho takes a negotiable instrument makes his contracts with theparties who appear on its face to be bound for its payment; it is “acourier without luggage,” whose countenance is its passport; andin suits upon negotiable instruments, no evidence is admissibleto charge any person as a principal party thereto, unless his namein some way is disclosed upon the instrument itself;299 althoughupon other written contracts, not negotiable, it is often competentto show that, although signed in the name of the agent only, theywere executed in the business of the principal, and with the intentthat he should be bound. (Daniel, Elements of the Law ofNegotiable Instruments, page 79-80)

A note was written on a lithographed receipt form, with thename of a corporation at the head, and the impressed seal of thecompany upon the paper, but not referred to in the note, and thedefendants added the word “president” and “secretary”respectively to their signatures. Held, not such disclosure of aprincipal as will exempt the signers from personal liability.(Brannan, page 27, citing Daniel v. Glidden, 38 Wash. 556, 80Pac. 811, sub nom. Daniel v. Buttner.)

Where defendant signed a note as a “trustee,” held, that asto holders in due course the principal must be disclosed on theface of the note in order to relieve defendant of personal liability(semble), but as between defendant and the payee the disclosuremight be made aliunde, and is a question of fact x x x. (Ibid, citingMegowan v. Peterson, 173 N.Y. 1, 65 N.E. 738.)

299 Cragin v. Lovell, 109 U.S. 194; Texas Land Co. v. Carroll, 63 Tex. 51;Brown v. Baker, 7 Allen, 339


If the payee knows the nature and object of the trust, andthat the maker of the note was acting in his capacity as trustee,the maker is not individually liable to the payee, although none ofsuch information appears on the note. (Ibid, citing Kerby v.Ruegamer, 107 App. Div. 491, 95 N.Y. Supp. 408.)

Effect of non-disclosure

Where the agent signs his name but nowhere in theinstrument has he disclosed the fact that he is acting in arepresentative capacity or the name of the third party for whomhe might have acted as agent, the agent is personally liable totake holder of the instrument and cannot be permitted to provethat he was merely acting as agent of another and parol or extrinsicevidence is not admissible to avoid the agent’s personal liability.(Republic Planters Bank vs. Court of Appeals, G.R. No. 93073,

December 21, 1992, [Campos, Jr., J:], citing, Crocker National

Bank vs. Say, 209 Cal 436; 288 P 69 (1930); Dayries vs. Lindsly,

54 So. 791 (1911); Granada vs. PNB, 18 SCRA 1 (1966)

As a general rule, officers or directors under the oldcorporate name bear no personal liability for acts done or contractsentered into by officers of the corporation, if duly authorized.Inasmuch as such officers acted in their capacity as agent of theold corporation and the change of name meant only thecontinuation of the old juridical entity, the corporation bearing thesame name is still bound by the acts of its agents if authorized bythe Board.300

Certainly an agent who actually makes a contract, and whohas notice of all equities emanating therefrom, can stand on nobetter footing that his principal with respect to commercial papergrowing out of the transaction. To place him on any higher planewould be incompatible with the fundamental conception underlyingthe relation of the principal and agent. (Fossum vs. Hermanos,

G.R. No. L-19461, March 28, 1923, [Street, J:])

It is a well-known rule of law that if the original payee of anote unenforceable for lack of consideration repurchase theinstrument after transferring it to a holder in due course, the paperagain becomes subject in the payee’s hands to the same defenses

300 Ibid.

187

to which it would have been subject if the paper had never passedthrough the hands of a holder in due course. (Fossum vs.

Hermanos, G.R. No. L-19461, March 28, 1923, [Street, J:], citing

Kost vs. Bender, 25 Mich., 515; Shade vs. Hayes, L.R.A. [1915

D], 271; 8 C.J., 470.) The same is true where the instrument isretransferred to an agent of the payee. (supra, citing Battersbee

vs. Calkins, 128 Mich., 569)

In Dollarhide vs. Hopkins (72 III. App., 509), the plaintiff, asagent of a corporation engaged in manufacturing agriculturalimplements, sold to the defendant a separator for threshing smallgrain, with a general warranty that the machine, properly handled,would thresh and clean grain as well as any other separator oflike size. The notes in suit were executed by the defendant inpayment of the separator, and were assigned to the plaintiff beforematurity. They were then indorsed by the plaintiff bank whichbecame holder in due course; but afterwards, and before thecommencement of the action, the notes were retransferred bythe bank to the plaintiff. In an action upon the notes the defendantalleged and proved breach of warranty and showed that the plaintiffknew of the defect in the separator at the time he purchased thenotes. It was held that the plaintiff could not recover,notwithstanding the fact that the notes had passed through a bank,in whose hands they would not have been subject to the defensewhich had been interposed (54 L.R.A., 678)

Ratification

A corporation, as well as an individual, may ratify the actsof another, when such acts are done and performed in the nameof the alleged principal; and the ratification may be by expressconsent, or by conduct of the alleged principal inconsistent withany other hypothesis than that he approved and intended to adoptwhat had been done in his name. Intelligent acquiescenceamounts to a binding ratification.301

Three things are essential to a ratification: (1) The partymust have the capacity to have made the contract in the particularmode adopted; (2) The principal must have known all of the factsattending the transaction; (3) The contract must have been

301 Knox County v. Aspinwall, 32 How. 544; Supervisors v. Schenck, 5 Wall.782; Bissell v. Jeffersonville, 24 How. 299; Daniel on NegotiableInstruments, 317


originally lawful.302 (Daniel, Elements of the Law of NegotiableInstruments, page 81)

Revocation of agency

A general authority to an agent is presumed to continueuntil its revocation is generally known. And if A is the agent of Bto draw bills in his name, B will be liable as drawer to ignorantindorsees, who had no knowledge of the change in the relationshipof the parties, or of the revocation of the agency.303 (Ibid)

Other Illustrative cases:

A note reading “six months after demand I promise to pay”and signed “J.H.S. Laundry and Dye Works, J.H.S. ManagingDirector” is the note of the company and J.H.S. is not personallyliable. (Brannan, page 26, citing, Chapman v. Smethurst [1909],1 K.B. 927)

However, in a different case, A check was drawn in favor ofplaintiff was stamped near the top with the words “B. Marcus &Co. (Limited)” and signed by the two defendants as follows: “B.Marcus, Director, S.H. David’s, Director—Secretary,” the spacefor the signature of the secretary left blank. The name of thecompany appeared only at the top of the check. Held, that thedefendants were personally liable on the check. (Ibid, citingLandes v. Marcus and Davids (K.B. Div. Mar. 31, 1909), 25 T.L.Rep. 478)

Sec. 21. Signature by procuration; effect of. - A signature by“procuration” operates as notice that the agent has but alimited authority to sign, and the principal is bound only incase the agent in so signing acted within the actual limits ofhis authority.

Notes:

Whenever an authority purports to be derived from a writteninstrument, or the agent signs the paper with the words “byprocuration,” in such a case the party dealing with him is bound to

302 Daniel on Negotiable Instruments, 318-320303 Chitty on Bill [32]. 42; Story on Agency, 470, 473; Smith v. Stranger, Peake

Add. 116

189

take notice that there is a written instrument of procuration, andhe ought to call for and examine the instrument itself to seewhether it justifies the act of the agent. Under such circumstances,he is chargeable with inquiry as to the extent of the agent’sauthority; and if, without examining into it when he knows of itsexistence—and especially if he has it in his possession—heventures to deal with the agent, he acts at his peril, and mustbear the loss if the agent transcended his authority.304 But noduty exists to make inquiry respecting private instructions to theagent from his principal, whether written or oral, for they may wellbe presumed to be of a secret and confidential nature.305 (Daniel,Elements of the Law of Negotiable Instruments, page 77)

What is a signature by procuration? What is the effectthereof?

Signature by procuration operates as notice that the agenthas but a limited authority to sign, and the principal is bound onlyin case the agent in so signing acted within the actual limits of hisauthority. (Sec. 21, Negotiable Instruments Law)

Illustrative Cases:

The manager of a company in order to obtain a guaranteefor the company’s business, without authority, gave a note signed“for myself and in representation of the company.” This was notnecessary or in the ordinary course of the company’s business.Held. That the company was not liable on the note. (Brannan,page 27, citing Re Cunningham & Co., 36 Ch. D. 532.)

An agent of a company drew a check “per proc.,” in excessof his authority. The company is not liable on the check to onewho cashed it in good faith, but must account for any money whichcame into its possession and was employed for its benefit. (Ibid,citing Reid v. Rigby & Co. [1984] 2 Q.B. 40. See also Bissel v.Fox, 53 L.T.R. 193, S.C. infra, p. 309.)

Directors of a company which had no power to accept bills,accepted a bill “per proc.” The company. Held, that they were

304 Stainback v. Bank of Virginia, 11 Gratt. 259; North River Bank v. Aymar, 3Hill, 262

305 North River Bank v. Aymar, 3 Hill, 262; Story on Agency, 73


personally liable in an action for false representations. (Ibid, citingWest London Commercial Bank v. Kitson, 13 Q.B.D. 360.)

Where an agent accepts or indorses “per proc.,” the takerof a bill or note so accepted or indorsed is bound to inquire as tothe extent of the agent’s authority. But when the agent has theauthority to do the act in question, his abuse of such authority willnot affect bona fide holder for value. (Ibid, citing Bryant, Powis &Bryant v. Quebec Bank, [1893] A.C. 170, 179.)

2011 Bar Question:

Under the Negotiable Instruments Law, a signature byprocuration operates as a notice that the agent has buta limited authority to sign. Thus, a person who takes abill that is drawn, accepted, or indorsed by procurationis duty-bound to inquire into the extent of the agent’sauthority by:

A. examining the agent’s special power of attorney.

B. examining the bill to determine the extent of suchauthority.

C. asking the agent about the extent of such authority.

D. asking the principal about the extent of suchauthority.

In a signature by procuration, the principal is boundonly in case the agent acted within the actual limits ofhis authority. The signature of the agent in such a caseoperates as notice that he has

A. a qualified authority to sign.

B. a limited authority to sign.

C. a special authority to sign.

D. full authority to sign.

Sec. 22. Effect of indorsement by infant or corporation.- Theindorsement or assignment of the instrument by acorporation or by an infant passes the property therein,

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notwithstanding that from want of capacity, the corporationor infant may incur no liability thereon.

Notes:

What is the effect of an indorsement by an infant or acorporation?

ANSWER:

The indorsement or assignment of the instrument by acorporation or by an infant passes the property therein,notwithstanding that from want of capacity, the corporationor infant may incur no liability. (Sec. 22, NegotiableInstruments Law)

Indorsements made by infant or corporations

Infant, as being referred to by Sec. 22 meansunemancipated minors, who lack the capacity to act with legaleffect. Under Sec. 22, their indorsement, notwithstanding the factof their want of legal capacity to act transfers title of the instrumentto another, without incurring any liability thereafter.

Same rule is applied to a corporation, who, in this instance,may have acted ultra vires.

This provision deals with the lack of legal capacity of theinfant or corporation, which, despite their incapacity may validlytransfer title over the instrument without incurring any liability.

The capacity of parties is in general governed by the samerules as their power to make a contract. It is of two kinds:306 (31)

a) Capacity to incur liability.

b) Capacity to transfer the instrument.

The following classes of persons incur no liability, thoughthey may make a valid transfer of the instrument:307 (32)

a) A person non compos mentis.


307 Id.


b) An infant.

c) In some jurisdictions, a married woman.

d) A corporation, when the act is ultra vires.

Sec. 23. Forged signature; effect of. - When a signature isforged or made without the authority of the person whosesignature it purports to be, it is wholly inoperative, and noright to retain the instrument, or to give a discharge therefor,or to enforce payment thereof against any party thereto, canbe acquired through or under such signature, unless the partyagainst whom it is sought to enforce such right is precludedfrom setting up the forgery or want of authority.

Notes:

Forgery

The counterfeiting of any writing, consisting in the signingof another’s name with intent to defraud, is forgery.308 (Bank of

the Philippine Islands vs. CASA Montessori Internationale, G.R.

Nos. 149454, 149507, May 28, 2004, [Panganiban, J.]) The mostusual species of forgery is fraudulently writing the name of anexisting person; but where one is in possession of a papercontaining a genuine signature, and fraudulently fills it up so asto make it appear to be signed as maker, or indorser, or otherparty to a bill or note, it is as much a forgery as if the signatureitself had been forged.309

Intent to defraud, and “uttering,” essential

An intent to defraud is essential to constitute forgery, andalthough a bill or note will not be binding upon those whom itpurports to bind if their names have been signed to it, or it hasbeen altered without authority, the party who has ignorantly orinnocently executed or altered it under a supposed authority, willnot be deemed guilty of forgery.310 (Elements of the Law ofNegotiable Instruments, Daniel, 285)

308 Agbayani, Commentaries and Jurisprudence on the Commercial Laws ofthe Philippines, Vol I (1989 ed.), page 191

309 Rex V. Hales, 17 St. Trials; Powell v. Commonwealth, 1T Gratt. 822310 Roscoe’s Cr. Ev. 505

193

The delivery of a bill or note, or other written contract, isnecessary to its validity; and so the “uttering,” which is the termused to describe the delivery by a forger or counterfeiter to someperson of the forged instrument, is necessary in order to completethe crime of forgery. Giving the bill or note to a confederate toutter is an uttering thereof.311 (Ibid)

What is the effect of forgery to the instrument?

When a signature is forged or made without the authority ofthe person whose signature it purports to be, -

� It is wholly inoperative,

� And no right to retain the instrument, or to give adischarge therefor, or to enforce payment thereof againstany party thereto can be acquired through or under suchsignature.

The case of Natividad Gempesaw vs. The Honorable

Court of Appeals and Philippine Bank of Communications312,the Supreme Court, speaking through Justice Campos laid downa detailed discussion on the nature and effect of forgery, to wit:

“Under the aforecited provision, forgery is a real or absolutedefense by the party whose signature was forged. A partywhose signature to an instrument was forged was never aparty and never gave his consent to the contract which gaverise to the instrument. Since his signature does not appearin the instrument, he cannot be held liable thereon byanyone, not even by a holder in due course. Thus, if aperson’s signature is forged as a maker of a promissorynote, he cannot be made to pay because he never madethe promise to pay. Or where a person’s signature as adrawer of a check is forged, he cannot charge the amountthereof against the drawer’s account because he never gavethe bank the order to pay. And said section does not referonly to the forged signature of the maker of a promissorynote and of the drawer of a check. It covers also a forgedindorsement, i.e., the forged signature of the payee orindorsee of a note or a check. Since under said provision a

311 Chitty on Bills [785]312 G.R. No. 92244, February 9, 1993


forged signature is “wholly inoperative”, no one can gaintitle to the instrument through such forged indorsement.Such an indorsement prevents any subsequent party fromacquiring any right as against any party whose nameappears prior to the forgery. Although rights may existbetween and among parties subsequent to the forgedindorsement, not one of them can acquire rights againstparties prior to the forgery. Such forged indorsement cutsoff the rights of all subsequent parties as against partiesprior to the forgery. However, the law makes an exceptionto these rules where a party is precluded from setting upforgery as a defense.”

Types of forgeries:

1. Where forgery was accomplished by a person notassociated with the drawer—for example a mailrobbery; and

2. Where the indorsement was forged by an agent ofthe drawer.

This difference in situations would determine the effect ofthe drawer’s negligence with respect to forged indorsements.While there is no duty resting on the depositor to look for forgedindorsements on his cancelled checks in contrast to a dutyimposed upon him to look for forgeries of his own name, adepositor is under a duty to set up an accounting system and abusiness procedure as are reasonably calculated to prevent orrender difficult the forgery of indorsements, particularly by thedepositor’s own employees. And if the drawer (depositor) learnsthat a check drawn by him has been paid under a forgedindorsement, the drawer is under duty promptly to report suchfact to the drawee bank.313 For his negligence or failure either todiscover or to report promptly the fact of such forgery to thedrawee, the drawer losses his right against the drawee who hasdebited his account under a forged indorsement.314 In other words,he is precluded from using forgery as a basis for his claim for re-crediting of his account. (Gempesaw vs. Court of Appeals, [1993])

313 Britton, Bills and Notes, Sec. 143, pp. 663-664314 City of New York vs. Bronx County Trust Co., 261 N.Y. 64, 184 N.E. 495

(1933); Detroit Piston Ring Co. vs. Wayne County & Home Savings Bank,252 Mich. 163, 233 N.W. 185 (1930); C.E. Erickson Co. vs. Iowa Nat.Bank 211 Iowa 495, 230 N.W. 342 (1930)

195

Illustrative case:

The Great Eastern Life Assurance Co., vs. HongKong & Shanghai Banking Corporation and Philippine

National BankG.R. No. L-18657, August 23, 1922

JOHNS, J.:

FACTS: May 3, 1920, the plaintiff drew its check for P2,000 onthe Hongkong and Shanghai Banking Corporation withwhom it had an account, payable to the order of LazaroMelicor.

E. M. Maasim fraudulently obtained possession of thecheck, forged Melicor’s signature, as an endorser, andthen personally endorsed and presented it to thePhilippine National Bank where the amount of thecheck was placed to his credit.

After having paid the check, and on the next day, thePhilippine national Bank endorsed the check to theHongkong and Shanghai Banking Corporation whichpaid it and charged the amount of the check to theaccount of the plaintiff. In the ordinary course ofbusiness, the Hongkong Shanghai BankingCorporation rendered a bank statement to the plaintiffshowing that the amount of the check was charged toits account, and no objection was then made to thestatement.

About four months after the check was charged to theaccount of the plaintiff, it developed that Lazaro Melicor,to whom the check was made payable, had neverreceived it, and that his signature, as an endorser, wasforged by Maasim, who presented and deposited it tohis private account in the Philippine National Bank. Withthis knowledge, the plaintiff promptly made a demandupon the Hongkong and Shanghai Banking Corporationthat it should be given credit for the amount of the forgedcheck, which the bank refused to do, and the plaintiffcommenced this action to recover the P2,000 which


was paid on the forged check. On the petition of theShanghai Bank, the Philippine National Bank wasmade defendant. The Shanghai Bank denies anyliability, but prays that, if a judgment should be renderedagainst it, in turn, it should have like judgment againstthe Philippine National Bank which denies all liabilityto either party.

ISSUES: Who is responsible for the refund to the drawer of theamount of the check drawn and payable to order, whenits value was collected by a third person by means offorgery of the signature of the payee?Is it the draweeor the last indorser, who ignored the forgery at the timeof making the payment, or the forger?

RULING: Plaintiff’s check was drawn on Shanghai Bank payableto the order of Melicor. In other words, the plaintiffauthorized and directed the Shanghai Bank to payMelicor, or his order, P2,000. It did not authorize ordirect the bank to pay the check to any other personthan Melicor, or his order, and the testimony isundisputed that Melicor never did part with his title orendorse the check, and never received any of itsproceeds. Neither is the plaintiff estopped or boundby the banks statement, which was made to it by theShanghai Bank. This is not a case where the plaintiff’sown signature was forged to one of its checks. In sucha case, the plaintiff would have known the forgery, andit would have been its duty to have promptly notifiedthe bank of any forged signature, and any failure on itspart would have released the bank from any liability.That is not this case. Here, the forgery was that ofMelicor, who was the payee of the check, and the legalpresumption is that the bank would not honor the checkwithout the genuine endorsement of Melicor. In otherwords, when the plaintiff received its bank statement,it had a right to assume that Melicor had personallyendorsed the check, and that, otherwise, the bankwould not have paid it.

x x x

The money was on deposit in the Shanghai Bank, andit had no legal right to pay it out to anyone except the

197

plaintiff or its order. Here, the plaintiff ordered theShanghai Bank to pay the P2,000 to Melicor, and themoney was actually paid to Maasim and was neverpaid to Melicor, and he never paid to Melicor, and henever personally endorsed the check, or authorized anyone to endorse it for him, and the alleged endorsementwas a forgery. Hence, upon the undisputed facts, itmust follow that the Shanghai Bank has no defense tothis action.

It is admitted that the Philippine National Bank cashedthe check upon a forged signature, and placed themoney to the credit of Maasim, who was a forger. Thatthe Philippine National Bank then endorsed the checkand forwarded it to the Shanghai Bank by whom it waspaid. The Philippine National Bank had no license orauthority to pay the money to Maasim or anyone elseupon a forge[d] signature. It was its legal duty to knowthat Melicor’s endorsement was genuine beforecashing the check. Its remedy is against Maasim towhom it paid the money.

Adopting of forged signature

If one’s signature is forged, it is, as a general rule, a merenullity as to him. It is legally accurate to say that he did not makethe instrument. But if the person whose signature has been forgedpronounces it genuine, or the instrument valid, the question ariseswhether or not such declaration renders him liable as if he were aparty to a genuine instrument; and a variety of circumstances affectits just solution. (Elements of the Law of Negotiable Instruments,Daniel, 285)

In the first place, when third parties buy the paper on hisassurances or representations of the genuineness of his signature,or of the validity of the instrument, or are induced to act uponsuch assurances or representations, and would suffer loss if hewere permitted to set up forgery as a defense, it is quite clearupon principles of estoppel that such defense cannot be made.315

(Ibid)

315 Workman v. Wright, 33 Ohio St. 405; Woodruff v. Monroe, 33 Md. 158;Beeman v. Duck, 11 M & W 251


In the second place, if no principle of estoppel applies, andif through mistake a party stated that a signature is genuine, andafterward he discovers his error, and speedily corrects it, andbefore the holder has changed his relation to the paper, or anyonehas dealt with it upon the faith of his admission, forgery can besuccessfully pleaded.316 (Ibid, pp. 285-286)

In the third place, it may be stated that where the party,knowing his signature to be a forgery, deliberately andunderstandingly adopts it as his own, he would be bound, becauseratification thus made is equivalent to a previous authority,provided, however, that an innocent third party has been inducedto act upon the faith of the adoption in such a way as to sufferloss by its repudiation. This is based upon the familiar principlesof estoppel. But whether such deliberate adoption of a forgery,without the consequent loss to a third party, acting on the faiththereof, would be binding is a mooted question, both in Englandand America.317 (Ibid, p. 286)

2011 Bar Question:

Due to his debt to C, D wrote a promissory note whichis payable to the order of C. C’s brother, M,misrepresenting himself as agent of C, obtained the notefrom D. M then negotiated the note to N after forgingthe signature of C. May N enforce the note against D?

A. Yes, since D is the principal debtor.

B. No, since the signature of C was forged.

C. No, since it is C who can enforce it, the note beingpayable to the order of C.

D. Yes, since D, as maker, is primarily liable on thenote.

Forgery committed by an agent having authority to indorse

An agent having authority to indorse checks payable to hisprincipal and to deposit them in a certain bank for collection,indorsed his principal’s name and transferred the checks to a third

316 Daniel on Negotiable Instruments, 1352; Woodruff v. Monroes, 33 Md.158

317on Negotiable Instruments, 1352a, 1352b, and cases cited

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person who deposited them in defendant’s bank, which collectedand paid the amount to such third person in good faith. Held, thatthe indorsement by the agent was not a forgery and the defendantwas not liable to the principal for a conversion of the checks.(Brannan, page 29, citing Salen v. Bank, 110 App. Div. 636, 97N.Y. Supp. 361.)

Is there any exception to the forgery rule?

Yes. Section 23 of the Negotiable Instruments Law furtherprovides that, unless the party against whom the instrument issought to enforce such right is precluded from setting up theforgery or want of authority.

Who are these persons that are precluded from setting upthe defense of forgery?

Those persons who warrant or admit the genuineness ofthe signature in question (e.g., indorsers, persons negotiating bydelivery, acceptors of bills of exchange)

Those who, by their acts, silence or negligence, areestopped from setting up the defense of forgery. (estoppel)

When the forged signature is unnecessary to the title of theholder as when the indorsement is forged on an instrumentpayable to bearer.

When one party is estopped to deny the genuineness ofanother’s signature

The relation of one party to a negotiable instrument is oftensuch that he cannot deny the genuineness of another’s signature,for, having treated it himself as genuine, it would be fraud to permithim to assert the contrary. Having issued or transferred theinstrument as genuine in all respects, he would not only be boundby his guaranty that it is genuine, but it would be unjust to andfraudulent upon other to permit him to deny it; and proof of hishaving so issued or used it would be sufficient to entitle the holderto recover against him.318 (Elements of the Law of NegotiableInstruments, Daniel, p. 286)

318 Hortsman v. Henshaw, 11 How. 177; Meacher v. Fort, 3 Hill (S.C.) 227;Alleman v. Wheeler, 101 Ind. 144


If a bank pays out on a forged check, is it liable to reimbursethe drawer from whose account the funds were paid out?

General rule remains that the drawee who has paid uponthe forged signature bears the loss. The exception to this rulearises only when negligence can be traced on the part of thedrawer whose signature was forged, and the need arises to weighthe comparative negligence between the drawer and the draweeto determine who should bear the burden of loss. x x x

The general rule is to the effect that a forged signature is“wholly inoperative”, and payment made ‘through or under such

signature’ is ineffectual or does not discharge the instrument. Ifpayment is made, the drawee cannot charge it to the drawer’saccount. The traditional justification for the result is that the draweeis in a superior position to detect a forgery because he has themaker’s signature and is expected to know and compare it. Therule has a healthy cautionary effect on banks by encouraging carein the comparison of the signatures against those on the signaturecards they have on file. Moreover, the very opportunity of thedrawee to insure and to distribute the cost among its customerswho use checks makes the drawee an ideal party to spread therisk to insurance. (Samsung Construction Company Philippines,

Inc. vs. Far East Bank and Trust Company, G.R. No. 129015,

August 13, 2004 [Tinga, J.])

Moreover, the same case held that:

“Under Section 23 of the Negotiable Instruments Law,forgery is a real or absolute defense by the party whose signatureis forged.

x x x

Still, even if the bank performed with utmost diligence, thedrawer whose signature was forged may still recover from thebank as long as he or she is not precluded from setting up thedefense of forgery. After all, Section 23 of the NegotiableInstruments Law plainly states that no right to enforce the paymentof check can arise out of a forged signature. x x x Consequently,if a bank pays a forged check, it must be considered as payingout its funds and cannot charge the amount so paid to the accountof the depositor. A bank is liable, irrespective of its good faith, inpaying a forged check.

201

x x x

Judicial notice can be taken that it is highly unusual inpractice for a business establishment to draw a check for close toa million pesos and make it payable to cash or bearer, and not toorder.

x x x

The Court recently emphasized that the highest degree ofcare and diligence is required of banks.

Banks are engaged in a business impressed with publicinterest, and it is their duty to protect in return their manyclients and depositor who transact business with them. Theyhave the obligation to treat their client’s account meticulouslyand with the highest degree of care, considering the fiduciarynature of their relationship. The diligence required of banks,therefore, is more than that of a good father of a family.

Given the circumstances, extraordinary diligence dictatesthat FEBTC should have ascertained from Jong personally thatthe signature in the questionable check is his.

A bank is bound to know the signatures of its customers;and if it pays a forged check, it must be considered as making thepayment out of its own funds, and cannot ordinarily charge theamount so paid to the account of the depositor whose name wasforged. (7 C.J., 683, cited in San Carlos Milling Co., Ltd. vs. Bank

of the Philippine Islands and China Banking Corporation, G.R.

No. L-37467, December 11, 1933, [Hull, J.])

Forgery committed by drawer-payor’s confidential employee;liability

In Philippine Commercial International Bank vs. Court

of Appeals and Form Philippines, Inc., “[t]he mere fact that theforgery was committed by a drawer-payor’s confidential employeeor agent, who by virtue of his position had unusual facilities forperpetrating fraud and imposing the forged paper upon the bank,does not entitle the bank the shift the loss to the drawer-payor, inthe absence of some circumstance raising estoppel against thedrawer.39 This rule likewise applies to the checks fraudulently

319 Am Jur 2d, Volume 10, Banks Section 604 (1963 Edition)


negotiated or diverted by the confidential employees who holdthem in their possession.

x x x

On this point, jurisprudence regarding the imputednegligence of employer in a master-servant relationship isinstructive. Since a master may be held for his servant’s wrongfulact, the law imputes to the master the act of the servant, and ifthe act is negligent or wrongful and proximately results in an injuryto a third person, the negligence or wrongful conduct is thenegligence or wrongful conduct of the master, for which he isliable.320 The general rule is that if the master is injured by thenegligence of a third person and the concurring contributorynegligence of his own servant or agent, the latter’s negligence isimputed to his superior and will defeat the superior’s action againstthe third person, assuming, of course that the contributorynegligence was the proximate cause of the injury of whichcomplaint is made.321

Duty of the encashing bank

In the same case of Philippine Commercial International

Bank vs. Court of Appeals and Form Philippines, Inc., it wasruled that: “[l]astly, banking business requires that the one whofirst cashes and negotiates the check must take some precautionsto learn whether or not it is genuine. And if the one cashing thecheck through indifference or other circumstance assists the forgerin committing the fraud, he should not be permitted to retain theproceeds of the check from the drawee whose sole fault was thatit did not discover the forgery or the defect in the title of the personnegotiating the instrument before paying the check. For thisreason, a bank which cashes a check drawn upon another bank,without requiring proof as to the identity of the persons presentingit, or making inquiries with regard to them, cannot hold theproceeds against the drawee when the proceeds of the checkswere afterwards diverted to the hands of a third party. In suchcases the drawee bank has a right to believe that the cashingbank (or the collecting bank) had, by the usual proper investigation,satisfied itself of the authenticity of the negotiation of the checks.Thus, one who encashed a check which had been forged or

320 Am Jur 2d, Volume 58, Negligence, Section 458321 Am Jur 2d, Volume 58, Negligence Section 464

203

diverted in turn received payment thereon from the drawee, isguilty of negligence which proximately contributed to the successof the fraud practiced on the drawee bank. The latter may recoverfrom the holder the money paid on the check.322”

Depositor owes a duty to the drawee bank to examine hiscancelled checks for forgery of his own signature; his failureto do so is tantamount to his negligence which bar hisrecovery; however, he has no similar duty as to forgedindorsements

As held by the Supreme Court in the case of Gempesaw

vs. Court of Appeals323, “[a]s a rule, a drawee bank who haspaid a check on which an indorsement has been forged cannotcharge the drawer’s account for the amount of said check. Anexception to this rule is where the drawer is guilty of suchnegligence which causes the bank to honor such a check orchecks. If a check is stolen from the payee, it is quite obviousthat the drawer cannot possibly discover the forged indorsementby mere examination of his cancelled check. This accounts forthe rule that although a depositor owes a duty to his drawee bankto examine his cancelled checks for forgery of his own signature,he has no similar duty as to forged indorsements. A differentsituation arises where the indorsement was forged by an employeeor agent of the drawer, or done with active participation of thelatter. Most of the cases involving forgery by an agent or employeedeal with the payee’s indorsement. The drawer and the payeeoften time shave business relations of long standing. Thecontinued occurrence of business transactions of the same natureprovides the opportunity for the agent/employee to commit thefraud after having developed familiarity with the signatures of theparties. However, sooner or later, some leak will show on thedrawer’s books. It will then be just a question of time until thefraud is discovered. This is especially true when the agentparticipates a series of forgeries as in the case at bar.”

The fact that forgery was committed by an employee of theparty whose signature was forged cannot necessarily implythat such party’s negligence was the cause for the forgery

322 Supra note 20 at Section 611, (Vda De Bataclan et al, vs. Medina, 102Phil. 181, 186 (1957)

323 February 9, 1993, G.R. No. 92244


The discussion laid down by the Supreme Court in the caseof Samsung Construction Co. Phils., Inc. vs. Far East Bank &

Trust Company324 is extensive on the matter, to wit:

“We recognize that Section 23 of the Negotiable InstrumentsLaw bars a party from setting up the defense of forgery if it isguilty of negligence. Yet, we are unable to conclude that SamsungCorporation was guilty of negligence in this case. The appellatecourt failed to explain precisely how the Korean accountant wasnegligent or how more care and prudence on his part would haveprevented the forgery. We cannot sustain this “tar and feathering”resorted to without any basis.

The bare fact that the forgery was committed by an employeeof the party whose signature was forged cannot necessarily implythat such party’s negligence was the cause for the forgery.Employers do not possess the preternatural gift of cognition as tothe evil that may lurk within the hearts and minds of theiremployees. The Court’s pronouncement in PCI Bank v. Court of

Appeals, applies in this case, to wit:

[T]he mere fact that the forgery was committed by a drawer-payor’s confidential employee or agent, who by virtue of hisposition had unusual facilities for perpetrating fraud andimposing the forged paper upon the bank, does not entitlethe bank to shift the loss to the drawer-payor, in the absenceof some circumstance raising estoppels against the drawer.

Still, in the absence of evidence to the contrary, we canconclude that there was no negligence on Samsung Construction’spart. The presumption remains that every person takes ordinarycare of his concerns, and that the ordinary course of businesshas been followed. Negligence is not presumed, but must beproven by him who alleges it. While the complaint was lodged atthe instance of Samsung Construction, the matter it had to provewas the claim it had alleged—whether the check was forged. Itcannot be required as well to prove that it was not negligent,because the legal presumption remains that ordinary care wasemployed.

324 August 13, 2004, published in The New Philippine Law Report, Vol. XXXIINo. 8, August 2004, pages 30-31

205

Thus, it was incumbent upon FEBTC, in defense, to provethe negative fact that Samsung Construction was negligent. Whilethe payee, as in this case, may not have the personal knowledgeas to the standard procedures observed by the drawer, it well hasthe means of disputing the presumption of regularity. Proving anegative fact may be a “difficult office”, but necessarily so, as itseeks to overcome a presumption in law. FEBTC was unable todispute the presumption of ordinary care exercised by SamsungConstruction, hence we cannot agree with the Court of Appeals’finding of negligence.

The assailed Decision replicated the extensive efforts whichFEBTC devoted to establish that there was no negligence on thepart of the bank in its acceptance and payment of the forged check.However, the degree of diligence exercised by the bank would beirrelevant if the drawer is not precluded from setting up the defenseof forgery under Section 23 by his own negligence. The rule ofequity enunciated in PNB v. National City Bank of New York, asrelied upon by the Court of Appeals, deserves careful examination.

The point in issue has sometimes been said to be that ofnegligence. The drawee who has paid upon the forgedsignature is held to bear the loss, because he has beennegligent in failing to recognize that the handwriting is notthat of his customer. But it follows obviously that if the payee,holder, or presenter of the forged paper has himself been indefault, if he was himself been guilty of a negligence priorto that of the banker, or if any act of his own he has at allcontributed to induce the banker’s negligence, then he maylose his right to cast the loss upon the banker.

Quite palpably, the general rule remains that the draweewho has paid upon the forged signature bears the loss. Theexception to his rule arises only when negligence can be tracedon the part of the drawer whose signature was forged, and theneed arises to weigh the comparative negligence between thedrawer and the drawee to determine who should bear the loss.The Court finds no basis to conclude that Samsung Constructionwas negligent in the safekeeping of checks. For one, the settledrule is that the mere fact that the depositor leaves his check booklying around does not constitute such negligence as will free thebank from liability to him, where a clerk of the depositor or other


persons taking advantage of the opportunity, abstract some ofthe check blanks, forges the depositor’s signature and collect onthe checks from the bank. And for another, in point of factSamsung Construction was not negligent at all since it reportedthe forgery almost immediately upon discovery.”

Forged Indorsement; effect thereof

In the case of Republic Bank vs. Mauricia Ebrada325, aquestion was poised by the ponente, Justice Martin in this wise,“[i]t is clear from the provision that where the signature on anegotiable instrument if forged, the negotiation of the checkis without force or effect. But does this mean that theexistence of one forged signature therein will render void allthe other negotiations of the check with respect to the otherparties whose signature are genuine?”

The Court held that: “[i]n the case of Beam vs. Farrel, (135

Iowa 670, 113 N.W. 590), where a check has several indorsementson it, it was held that it is only the negotiation based on the forgedor unauthorized signature which is inoperative. Applying thisprinciple to the case before us, it can be safely concluded that itis only the negotiation predicated on the forged indorsement thatshould be declared inoperative. This means that the negotiationof check in question from Martin Lorenzo (who died seven (7)

years before the issuance of the instrument in question), theoriginal payee, to Ramon R. Lorenzo, the second indorser, shouldbe declared of no effect, but the negotiation of the aforesaid checkfrom Ramon R. Lorenzo to Adelaida Dominguez, the third indorser,and from Adelaida Dominguez to the defendant-appellant whodid not know of the forgery, should be considered valid andenforceable, barring any claim of forgery.326

A subsequent question was then again raised by JusticeMartin, when he asked: “What happens then, if, after the draweebank has paid the amount of the check to the holder thereof,it was discovered that the signature of the payee was forged?Can the drawee bank recover from the one who encashedthe check?”

325 G.R. No. L-40796, July 31, 1975, [Martin, J.], bold supplied326 Since endorsers are precluded from setting up the defense of forgery

207

The High Court answered this query citing the case of State

vs. Broadway Mut. Bank327, wherein it was held that: “the draweeof a check can recover from the holder the money paid to him ona forged instrument. It is not supposed to be its duty to ascertainwhether the signatures of the payees or indorsers are genuine ornot. This is because the indorser is supposed to warrant to thedrawee that the signatures of the payee and pervious indorsersare genuine, warranty not extending only to holders in due course.One who purchases a check or draft is bound to satisfy himselfthat the paper is genuine and that by indorsing it or presenting itfor payment or putting it into circulation before presentation heimpliedly asserts that he has performed his duty and that draweewho has paid the forged check, without actual negligence on hispart, may recover the money paid from such negligent purchasers.In such cases the recovery is permitted because although thedrawee was in a way negligent in failing to detect the forgery, yetif the encasher of the check had performed his duty, the forgerywould in all probability, have been detected and the fraud defeated.The reason for allowing the drawee bank to recover from theencahser is:

Every one with the least experience in business knows thatno business man would accept a check in exchange formoney or goods unless he is satisfied that the check isgenuine. He accepts it only because he has proof that it isgenuine, or because he has sufficient confidence in thehonesty and financial responsibility of the person whovouches for it. If he is deceived he has suffered a loss ofhis cash or goods through his own mistake. His owncredulity or recklessness, or misplaced confidence was thesole cause of his loss. Why should he be permitted to shiftthe loss due to his own fault in assuming the risk, upon thedrawee, simply because of the accidental circumstance thatthe drawee afterwards failed to detect the forgery when thecheck was presented?328

327 282 S.W. 196, 197328 Gloucester Bank v. Salem Bank, 17 Mass. 33; Bank of U.S. Bank of

Georgia, 10 Wheat 333, 6 L. Ed. 384; National Bank of America v. Bangs,196 Mass. 441, 8 Am. Rep. 349; First National Bank of Danvers v. FirstNational Bank of Salem, 151 Mass. 280, 24 N.E. 44, 21 Am. St. Rep. 450;First National Bank v. Ricker, 71 Ill. 439, 22 Am. Rep. 104; Rouvant v.Bank, 63 Tex. 610; Bank v. Bank, 30 Ill. 96 Am. Dec. 554; People’s Bankv. Franklyn Bank, 88


Similarly, in the case before us, the defendant-appellant,upon receiving the check in question from Adelaida Dominguez,was duty-bound to ascertain whether the check in question wasgenuine before presenting it to the plaintiff-bank for payment. Herfailure to do so makes her liable for the loss and the plaintiff-bankmay recover from her the money she received for the check. Asreasoned out above, had she performed the duty of ascertainingthe genuineness of the check, in all probability the forgery wouldhave been detected and the fraud defeated.”

Moreover, in the same case, the court held that: “[i]n ourjurisdiction, we have a case of similar import329 The Great EasternLife Insurance Company drew its check for P2000.00 onHongkong and Shanghai Banking Corporation payable to the orderof Lazaro Melicor. A certain E.M. Maasin fraudulently obtainedthe check and forged the signature of Melicor, as an indorser,and then personally indorsed and presented the check to thePhilippine National Bank where the amount of the check wasplaced to his (Maasin’s) credit. On the next day, the PhilippineNational Bank indorsed the check to the Hongkong and ShanghaiBanking Corporation which paid it and charged the amount of thecheck to the insurance company. They Court held that theHongkong and Shanghai Banking Corporation was liable to theinsurance company for the amount of the check and that thePhilippine National Bank was in turn liable to the Hongkong andShanghai Banking Corporation. Said the Court:

Where a check is drawn payable to the order of one personand is presented to a bank by another and purports upon itsface to have been duly indorsed by the payee of the check,it is the duty of the bank to know that the check was dulyindorsed by the original payee, and where the bank paysthe amount of the check to a third person, who has forgedthe signature of the payee, the loss falls upon the bank whocashed the check, and its only remedy is against the personto whom it paid the money.

Tenn. 299, 12 S.W. 716, 6 L.R.A. 724, 17 Am St. Rep. 884; Ellis & Mortonv. Trust Co., 4 Ohio St. 628, 64 Am. Dec. 610; Bank v. Bank, 58 Ohio St.207, 50 N.E. 723; Bank v. Bank, 22 Neb. 769, 36 N.W. 289, 3 Am. St.Rep. 294; Canadian Bank v. Bingham, 20 Wash. 484, 71 Pac. 43, 60L.R.A. 955

329 Great Eastern Life Insurance Company vs. Hongkong and ShanghaiBanking Corporation, 43 Phil. 678

209

2011 Bar Question:

D, debtor of C, wrote a promissory note payable to theorder of C. C’s brother, M, misrepresenting himself asC’s agent, obtained the note from D, then negotiated itto N after forging C’s signature. N indorsed it to E, whoindorsed it to F, a holder in due course. May F recoverfrom E?

A. No, since the forgery of C’s signature results in thedischarge of E.

B. Yes, since only the forged signature is inoperativeand E is bound as indorser.

C. No, since the signature of C, the payee, was forged.

D. Yes, since the signature of C is immaterial, he beingthe payee.

Exception to the Rule; Payment made upon a check to whichthe name of the drawer has been forged; comparativenegligence

The Supreme Court in the case of Philippine National Bank

vs. The National City Bank of New York330, speaking throughJustice Recto held:

“[T]he rule is perfectly well settled that in determining therelative rights of a drawee who, under a mistake of fact, haspaid, and a holder who has received such payment, upon acheck to which the name of the drawer has been forged, itis only fair to consider the question of diligence or negligenceof the parties in respect thereto. (Woods and Malone vs.

Colony Bank [1902[, 56 L.R.A., 929, 932.)

The responsibility of the drawee who pays a forged check,for the genuineness of the drawer’s signature, is absoluteonly in favor of one who has not, by his own fault ornegligence, contributed to the success of the fraud or tomislead the drawee. (National Bank of America vs. Bangs,

106 Mass., 441; 8 am. Rep., 349; Woods and Malone vs.

330 October 31, 1936


Colony Bank, supra, de Fereit vs. Bank of America, 23 La.,

Ann., 310; B.B. Ford & Co. vs. People’s Bank of Orangeburg,

74 S.C., 180; 180 L.R.A. [N.S.], 63.)

If it appears that the one to whom payment was made wasnot an innocent sufferer, but was guilty of negligence in notdoing something, which plain duty demanded, and which, ifit had been done would have avoided entailing loss on anyone, he is not entitled to retain the money’s paid through amistake on the part of the drawee bank. (First Nat. Bank of

Danvers vs; First Nat. Bank of Salem, 151 Mass., 280; 24

N.E., 44; 21 A. S. R., 450; First Nat. Bank of Orleans vs.

State Bank of Alma, 22 Neb., 769; 36 N. W., 289; 3 A. S. R.,

294; American Exp. Co. vs. State Nat. Bank, 27 Okla., 824;

113 Pac., 711; 33 L. R. A. [N. S.], 188; B. B. Ford & Co. vs.

People’s Bank of Orangeburg, 74 S. C., 180; 54 S. E., 204;

114 A. S. R., 986; 7 Ann. Cas., 744; 10 L. R. A. [N. S.], 63;

People’s Bank vs. Franklin Bank, 88 Tenn. 299; 12 S. W.,

716; 17 A. S. R.) 884; 6 L. R. A., 724; Canadian Bank of

Commerce vs. Bingham, 30 Wash., 484; 71 Pac., 43; 60 L.

R. A., 955.)

In other words, to entitle the holder of a forged check toretain the money obtained he must be able to show that thewhole responsibility of determining the validity of thesignature was upon the drawee, and that the negligence ofsuch drawee was not lessened by any failure of anyprecaution which, from his implied assertion in presentingthe check as a sufficient voucher, the drawee had the rightto believe he had taken. (Ellis vs. Ohio Life Insurance &

Trust Co., 4 Ohio St., 628; Rouvant vs. Bank, 63 Tex., 610;

Bank vs. Ricker, 71 Ill., 429; First National Bank of Danvers

vs. First Nat. Bank of Salem, 24 N. E., 44, 45; B. B. Ford &

Co. vs. People’s Bank of Orangeburg, supra.)

The recovery is permitted in such case, because, althoughthe drawee was constructively negligent in failing to detectthe forgery, yet if the purchaser had performed his duty, theforgery would in all possibility have been detected and thefraud defeated. (First National Bank of Lisbon vs. Bank of

Wyndmere, 15 N. D., 209; 10 L. R. A. [N. S.], 49.)

211

In the absence of actual fault on the part of the drawee, hisconstructive fault in not knowing the signature of the drawerand detecting the forgery will not preclude his recovery fromthe one who took the check under circumstances ofsuspicion without proper precaution, or whose conduct hasbeen such as to mislead the drawee or induce him to paythe check without the usual scrutiny or other precautionsagainst mistake or fraud. (National Bank of America vs.

Bangs, supra; First National Bank vs. Indiana National Bank,

30 N. E., 808-810; Woods and Malone vs. Colony Bank,

supra; First National Bank of Danvers vs. First Nat. Bank of

Salem, 151 Mass., 280.)

Where a loss, which must be borne by two parties alikeinnocent of forgery, can be traced to the neglect or fault ofeither, it is unreasonable that it would be borne by him, evenif innocent of any intentional fraud, through whose means ithas succeeded. (Gloucester Bank vs. Salem Bank, 17

Mass., 33; First Nat. Bank of Danvers vs. First National Bank

of Salem, supra; B. B. Ford & Co. vs. People’s Bank of

Orangeburg, supra.)

Again if the indorser is guilty of negligence in receiving andpaying the check or draft, or has reason to believe that theinstrument is not genuine, but fails to inform the drawee ofhis suspicions the indorser according to the reasoning ofsome courts will be held liable to the drawee upon his impliedwarranty that the instrument is genuine. (B. B. Ford & Co.

vs. People’s Bank of Orangeburg, supra; Newberry Sav.

Bank vs. Bank of Columbia, 93 S. C., 294; 38 L. R. A. [N. S],

1200.)

Most of the courts now agree that one who purchases acheck or draft is bound to satisfy himself that the paper isgenuine; and that by indorsing it or presenting it for paymentor putting it into circulation before presentation he impliedlyasserts that he has performed his duty, the drawee, whohas, without actual negligence on his part, paid the forgeddemand, may recover the money paid from such negligentpurchaser. (Lisbon First National Bank vs. Wyndmere Bank,

supra.) Of course, the drawee must, in order to recover


back the holder, show that he himself was free from fault.(See also 5 R. C. L., pp. 556-558.)

So, if a collecting bank is alone culpable, and, on accountof its negligence only, the loss has occurred, the draweemay recover the amount it paid on the forged draft or check.(Security Commercial & Sav. Bank vs. Southern Trust & C.

Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)

But we are aware of no case in which the principle that thedrawee is bound to know the signature of the drawer of abill or check which he undertakes to pay has been held tobe decisive in favor of a payee of a forged bill or check towhich he himself given credit by his indorsement. (See also,

Mckleroy vs. Bank, 14 La. Ann., 458; Canal Bank vs. Bank

of Albany, 1 Hill, 287; Rouvant vs. Bank, supra, First Nat.

Bank vs. Indiana National Bank; 30 N. E., 808-810.)

In First Nat Bank vs. United States National Bank331, thecourt declared: “A holder cannot profit by mistake which hisnegligent disregard of duty has contributed to induce thedrawee to commit…The holder must refund, if by hisnegligence he has contributed to the consummation of themistake on the part of the drawee by misleading him…If theonly fault attributable to the drawee is the constructive faultwhich the law raises from the bald fact that he has failed todetect the forgery, and if he is not chargeable with factualfault in addition to such constructive fault, then he is notprecluded from recovery from a holder whose conduct hasbeen such as to mislead the drawee or induce him to paythe check or bill of exchange without the usual securityagainst fraud. The holder must refund to a drawee who isnot guilty of actual fault if the holder was negligent in notmaking due inquiry concerning the validity of the checkbefore he took it, and if the drawee can be said to havebeen excused from making inquiry before taking the checkbecause of having had a right to, presume that the holderhad made such inquiry.”

“Where a bank, without inquiry or identification of the personpresenting a forged check, purchases it, indorses it, generally,

331 ([1921], 100 Or., 264; 14 A. L. R., 479; 197 Pac., 547)

213

and presents it to the drawee bank, which pays it, the latter mayrecover if its only negligence was its mistake in having failed todetect the forgery, since its mistake, did not mislead the purchaserto bring about a change in position.” (Security Commercial &

Savings Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App.,

734; 241 Pac., 945.)

Also, a drawee could recover from another bank the portionof the proceeds of a forged check cashed by the latter anddeposited by the foreigner in the second bank and neverwithdrawn, upon the discovery of the forgery three months later,after the drawee had paid the check and returned the voucher tothe purported drawer, where the purchasing bank was negligentin taking the check, and was not injured by the drawee’snegligence in discovering and reporting the forgery as to theamount left on deposit, since it was not a purchaser for value.(First State Bank & T. Co. vs. First Nat. Bank [1924], 314 Ill., 269;

145 N. E., 382.)

Similarly, it has been held that the drawee of a check couldrecover the amount paid on the check, after discovery of theforgery, from another bank, which put the check into circulationby cashing it for the one who had forged the signature of both thedrawer and payee, without making an inquiry as to who he wasalthough he was a stranger, after which the check reached, andwas paid by, the drawee, after going through the hands of severalintermediate indorsees. (71 A. L. R., p. 340.)

It has been held by many courts that a drawee of a check,who is deceived by forgery of the drawer’s signature may recoverthe payment back, unless his mistake has placed an innocentholder of the paper in a worse position than he would have beenin if the discovery of the forgery had been made on presentation.(5 R.C.L., p. 559; 2 Daniel on Negotiable Instruments, 1538.)Forgeries often deceived the eye of the most cautious experts;and when a bank has been deceived, it is a harsh rule whichcompels it to suffer although no one has suffered by its beingdeceived. (17 A.L.R. 891; 5 R.C.L., 559.)

Daniel, in his treatise on Negotiable Instruments, has thefollowing to say:


“In all the cases which hold the drawee absolutely estoppedby acceptance or payment from denying genuineness of thedrawer’s name, the loss is thrown upon him on the ground ofnegligence on his part in accepting or paying, until he hasascertained the bill to be genuine. But the holder has precededhim in negligence, by himself not ascertaining the true characterof the paper before he received it, or presented it for acceptanceor payment. And although, as a general rule, the drawee is morelikely to know the drawer’s handwriting than a stranger is, if he isin fact deceived as to its genuineness, we do not perceive that heshould suffer more deeply by mistake than a stranger, who, withoutknowing the handwriting, has taken the paper without previouslyascertaining its genuineness. And the mistake of the draweeshould always be allowed to be corrected, unless the holder, actingupon faith and confidence induced by his honoring the draft, wouldbe placed in a worse position by according such privilege to him.This view has been applied in a well considered case, and isimitated in another, and is forcefully presented by Mr. Chitty, whosays it is going a great way to charge the acceptor with knowledgeof his correspondent’s handwriting, “unless some bona fide holderhas purchased the paper on the faith of such an act.” Negligencein making payment under a mistake of fact is not now deemed abar to recovery of it, and we do not see why any exception shouldbe made to the principle, which would apply as well as to releasean obligation not consummated by payment. (Vol. 2, 6th edition,

pp. 1537-1539.)

Forged Signature of the drawer differs in treatment than aforged signature of the indorser

Further, in the case of Samsung Construction332, it was statedthat: “[i]t is also worth noting that the forged signatures in PNB v.

National City Bank of New York were not of the drawer, but ofindorsers. The same circumstance attends PNB v. Court of

Appeals (25 SCRA 693 [1968]), which was also cited by the Courtof Appeals. It is accepted that a forged signature of the drawerdiffers in treatment than a forged signature of the indorser.

The justification for the distinction between forgery of thesignature of the drawer and forgery of an indorsement is

332 Samsung Construction vs. FEBTC [2004], published in The New PhilippineLaw Reports Vol. No. XXXVII, No. 8, August 2004, page 31

215

that the drawee is in a position to verify the drawer’ssignature by comparison with one in his hands, but hasordinarily no opportunity to verify an indorsement.

Thus, a drawee bank is generally liable to his depositor inpaying a check which bears either a forgery of the drawer’ssignature or a forged indorsement. But the bank may, as ageneral rule, recover back the money which it has paid on acheck bearing a forged indorsement, whereas it has notthis right to the same extent with reference to a checkbearing a forgery of the drawer’s signature.”

2011 Bar Question:

Forgery of bills of exchange may be subdivided into, a)forgery of an indorsement on the bill and b) forgery ofthe drawer’s signature, which may either be withacceptance by the drawee, or

A. with acceptance but the bill is paid by the drawee.

B. without acceptance but the bill is paid by the drawer.

C. without acceptance but the bill is paid by the drawee.

D. with acceptance but the bill is paid by the drawer.

Forged signature of the Payee; effects thereof

In the case of Westmont Bank vs. Ong333, it was held that:“[s]ince the signature of the payee, in the case at bar, was forgedto make it appear that he had made an endorsement in favor ofthe forger, such signature should be deemed as inoperative andineffectual. Petitioner, as the collecting bank, grossly erred inmaking payment by virtue of said forged signature. The payee,herein respondent, should therefore be allowed to recover fromthe collecting bank.

The collecting bank is liable to the payee and must bear theloss because of its legal duty to ascertain that the payee’sendorsement was genuine before cashing the check. As a generalrule, a bank or corporation who has obtained possession of a

333 G.R. No. 132560, January 30, 2002, published in Philippine Law ReportVol. XXX, No. 1, January 2002, page 9


check upon an unauthorized or forged indorsement of the payee’ssignature and who collects the amount of the check from thedrawee, is liable for the proceeds thereof to the payee or otherowner, notwithstanding that the amount has been paid to theperson from whom the check was obtained.

The theory of the rule is that the possession of the checkon the forged or unauthorized indorsement is wrongful, and whenthe money had been collected on the check, the bank or otherperson or corporation can be held as for moneys had and received,and the proceeds are held for the rightful owners who may recoverthem. The position of the bank taking the check on the forged orunauthorized indorsement is the same as if had taken the checkand collected the money without indorsement at all and the act ofthe bank amount to conversion of the check.”

2011 Bar Question:

X found a check on the street, drawn by Y against ABCBank, with Z as payee. X forged Z’s signature as anindorser, then indorsed it personally and delivered it toDEF Bank. The latter, in turn, indorsed it to ABC Bankwhich charged it to the Y’s account. Y later sued ABCBank but it set up the forgery as its defense. Will itprosper?

A. No, since the payee’s signature has been forged.

B. No, since Y’s remedy is to run after the forger, X.

C. Yes, since forgery is only a personal defense.

D. Yes, since ABC Bank is bound to know the signatureof Y, its client.

Doctrines Laid down in the case of Philippine National Bank

v. The National City Bank of New York on the Rule on Forgery

1. That where a check is accepted or certified by the bankon which it is drawn, the bank is estopped to deny thegenuineness of the drawer’s signature and his capacityto issue the instrument;

2. That if a drawee bank pays a forged check which waspreviously accepted or certified by the said bank it cannot

217

recover from a holder who did not participate in theforgery and did not have actual notice thereof;

3. That the payment of a check does not include or implyits acceptance in the sense that this would be used insection 62 of the Negotiable Instruments Law;

4. That in case of the payment of a forged check, evenwithout former acceptance, the drawee cannot recoverfrom a holder in due course not chargeable with any actof negligence or disregard of duty;

5. That to entitle the holder of a forged check to retain themoney obtained thereon, there must be a showing thatthe duty to ascertain the genuineness of the signaturerested entirely upon the drawee, and that the constructivenegligence of such drawee in failing to detect the forgerywas not affected by any disregard of duty on the part ofthe holder, or by failure of any precaution which, fromhis implied assertion in presenting the check as asufficient voucher, the drawee had the right to believehe had taken;

6. That in the absence of actual fault on the part of thedrawee, his constructive fault in not knowing thesignature of the drawer and detecting the forgery willnot preclude his recovery from the one who took thecheck under circumstances of suspicion and withoutproper precaution, or whose conduct has been such asto mislead the drawee or induce him to pay the checkwithout the usual scrutiny or other precautions againstmistake or fraud;

7. That one who purchases a check or draft is bound tosatisfy himself that the paper is genuine, and that byindorsing it or presenting it for payment or putting it intocirculation before presentation he impliedly asserts thathe performed his duty;

8. That while the foregoing rule, chosen from a welter ofdecisions on the use as the correct one, will not hinderthe circulation of two recognized mediums of exchangeby which the great bulk of business is carried on, namely,drafts and checks, on the other hand, it will encourageand demand prudent business methods on the part ofthose receiving such mediums of exchange;


9. That it being a matter of record in the present case, thatthe appellee bank in no more chargeable with theknowledge of the drawer’s signature that the appellantis, as the drawer was as much the customer of theappellant as of the appellee, the presumption that thedrawee bank is bound to know more than any indorserthe signature of its depositor does not hold;

10.That according to the undisputed facts of the case theappellant in purchasing the papers in question fromunknown persons without making any inquiry as to theidentity and authority of the said persons negotiating andindorsing them, acted negligently and contributed to theappellee’s constructive negligence in failing to detect theforgery;

11. That under the circumstances of the case, if the appelleebank is allowed to recover, there will be no change ofposition as to the injury or prejudice of the appellant.

II. CONSIDERATION

Sec. 24. Presumption of consideration. - Every negotiableinstrument is deemed prima facie to have been issued for avaluable consideration; and every person whose signatureappears thereon to have become a party thereto for value.

Notes:

By consideration, is meant a benefit or gain of some kind tothe party making the promise, or a loss or injury of some kind tothe party to whom it is made. By the common law a promisemade without consideration was invalid, and in order to enforceany contract it was necessary to aver and prove a consideration.(Daniel, Elements of the Law of Negotiable Instruments, page56)

What is the rule on presumption of consideration innegotiable instruments?

Every negotiable instrument is deemed prima facie to havebeen issued for a valuable consideration; and every person whosesignature appears thereon to have become a party thereto forvalue. (Sec. 24, Negotiable Instruments Law)

219

However, “[t]he presumption that a negotiable instrument isissued for a valuable consideration is only prima facie. It can berebutted by proof to the contrary.” (Bank of the Philippine Islands

vs. Laguna Coconut Oil Co., et al, 48 Phil 5, cited in Pineda vs.

Dela Rama, G.R. No. L-31831, April 28, 1983, [Gutierrez, Jr., J.:])

If the Act establishes this presumption for the case wherethere might be doubt with respect to the existence of a valuableconsideration, in order to avoid taking of evidence in the matter,when the consideration appears from the instrument itself by theexpression of the value, the introduction of evidence is entirelyunnecessary and improper. (concurring opinion, Justice Torres,

in the case of Maulini, et al vs. Serrano, December 16, 1914.)

Moreover, it has been stated that: “[t]he omission of thewords “for value received” does not weaken the presumption ofvaluable consideration. (Brannan, page 32, citing McLeod v.Hunter, 29 Misc. R. 558, 61 N.Y. Supp. 73.)

Burden of proof is shifted to the party alleging the absenceof consideration

Where the maker pleads want of consideration, plaintiff(payee) may recover in the absence of evidence in support of theplea. But if defendant gives evidence tending to show want ofconsideration the burden is on the plaintiff to show by a fair ofpreponderance of evidence upon the whole case that there wasconsideration. (Brannan, page 31, citing Bringman v. Van Glahn,71 App. Div. 537, 75 N.Y. Supp. 845, semble.)

In Cely Yang vs. Court of Appeals, et al334, “with respect toconsideration, Section 24 of the Negotiable Instruments Lawcreated a presumption that every party to an instrument acquiredthe same for a consideration or for value. Thus, the law itselfcreates a presumption in David’s favor that he gave valuableconsideration for the checks in question. In alleging otherwise,the petitioner has the onus to prove that David got hold of thechecks absent said consideration. In other words, the petitionermust present convincing evidence to overthrow the presumption.”

334 G.R. No. 138074, August 15, 2003, published in The New Philippine LawReport, Vol. XXXI, No.8, August 2003, page 17, citations omitted


Negotiable Instrument, Issued for an Illegal Consideration

The Supreme Court held in the case of Pineda vs. Dela

Rama335, “[w]hether or not the supposed cash advance reachedthe destination is of no moment. The consideration for thepromissory note—to influence public officers in the performanceof their duties—is contrary to law and public policy. The promissorynote is void ab initio and no cause of action for the collectioncases can arise from it.”

Sec. 25. Value, what constitutes. — Value is any considerationsufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whetherthe instrument is payable on demand or at a future time.

Notes:

What is value?

Value is any consideration sufficient to support a simplecontract.

A promise to forbear suing on an antecedent debt is value.(Brannan, page 34, citing Milius v. Kauffmann, 104 App. Div. 442,93 N.Y. Supp. 669.)

The surrender of a non-negotiable note is sufficientconsideration for a negotiable note. (Ibid, citing Petrie v. Miller,57 App. Div. 17, 67 N.Y. Supp. 1042, affirmed 173 N.Y. 596 withoutreport.)

How about pre-existing debts? Are they considered as value?

Yes. An antecedent or pre-existing debt constitutes value;and is deemed such whether the instrument is payable on demandor at a fixed or at a future time. (Sec. 25, Negotiable InstrumentsLaw)

According to section 25 of the same Act, value is anyconsideration sufficient to support a simple contract, and so broadis the scope the law gives to the meaning of “value” in this kind ofinstruments that it considers as such a prior of preexistent debt,

335 G.R. No. L-31831 April 28, 1983

221

whether the instrument be payable on demand or at some futuredate. (concurring opinion, Justice Torres, in the case of Maulini,

et al vs. Serrano, December 16, 1914.)

Payment or part payment of a pre-existing debt is value.(Brannan, page 33, citing Bigelow Co. v. Automatic Gas Co., 56Misc. R. 389, 107 N.Y. Supp. 894; other citations omitted)

An antecedent or pre-existing debt is value, even thoughthe instrument is transferred merely as collateral security for suchdebt. (Brannan, page 33, citing Brewster v. Sharder, 26 Misc. R.480, 57 N.Y. Supp. 606, S.C. sec. 112; other citations omitted)

There is no doubt that a pre-existing debt of the drawer,maker, or acceptor is a valid consideration for his drawing oraccepting a bill or executing a note, and indeed is as frequentlythe consideration of negotiable paper as a debt contracted at thetime,336 and it is equally as valid and sufficient consideration forthe indorsement and transfer to the creditor of the bill or note of athird party which is in his hands. (Daniel, Elements of the Law ofNegotiable Instruments, page 61)

What includes a valuable consideration

Valuable consideration may in general terms, be said toconsist either in some right, interest, profit or benefit accruing tothe party who makes the contract, or some forbearance, detriment,loss or some responsibility, to act, or labor, or service given,suffered or undertaken by the other aide. Simply defined, valuableconsideration means an obligation to give, to do, or not to do infavor of the party who makes the contract, such as the maker orindorser.337 (Ty vs. People of the Philippines, G.R. No. 149275,

September 27, 2004)

In an exchange of checks each check is a consideration forthe other; each is an independent obligation and not conditionalon the payment of the other. Hence, one who bona fide gives hischeck for that of a third person without notice of the illegality ofsuch check is not bound to stop payment of his own check upon

336 Swift v. Tyson, 16 Pet. 1; Townsley v. Sumrall, 2 Pet. 170; McIntyre v.Yates, 104 Ill. 500

337 Agbayani, Aguedo, Commentaries and Jurisprudence on the CommercialLaws of the Philippines, 1992 Edition, p. 235; Citations omitted


receiving notice of the illegality of the check exchanged for his,and he may recover against the drawer of such check. (Brannan,page 33, citing Matlock v. Scheuerman, 51 Oregon 49, 93 Pac.823, 17 L.R.A. (N.S.) 747, S.C. secs. 53, 56, 186.)

Consideration sufficient, even if it benefited a third person

The case of Bridges vs. Vann, et al,338 tells us that “it is nodefense to an action on a promissory note for the maker to saythat there was no consideration which was beneficial to himpersonally; it is sufficient if the consideration was a benefitconferred upon a third person, or a detriment suffered by thepromise, at the instance of the promissory. It is enough if theobligee foregoes some right or privilege or suffers some detrimentand the release and extinguishment of the original obligation ofGeorge Vann, Sr., for that of appellants meets the requirement.Appellee accepted one debtor in place of another and gave up avalid, subsisting obligation for the note executed by the appellants.This, of itself, is sufficient consideration for the new notes.” (supra)

Consequently, “a sale of goods to the maker of a note is aconsideration for the indorsement of a third person before thedelivery of the note.” (Brannan, page 32, citing, Mohlman v.McKane, 60 App. Div. 546, 69 N.Y. Supp. 1046.)

Consideration must be absolute

In one case, “a bank receiving a certificate of deposit andcrediting the same to the depositor, does not give value wherethe credit was not absolute but conditional upon the collection ofthe certificate. (Brannan, page 32, citing Commercial Nat. Bankv. State Bank, 132 Iowa 706, 109 N.W. 198.)

Effect of absence of valuable consideration

In one case, “[d]efendant, by mistake, gave a check to thepayee who indorsed it to a plaintiff as a loan. Held, that plaintiffwas not a holder in due course, having given no value. (Brannan,page 33, citing Rosenthal v. Parson, 110 N.Y. Supp. 223.)

338 88 Kan 98, 127 Pacific Reporter 604, 9 November 1912; Citations omitted

223

Sec. 26. What constitutes holder for value. - Where value hasat any time been given for the instrument, the holder isdeemed a holder for value in respect to all parties whobecome such prior to that time.

2011 Bar Question:

X executed a promissory note with a face value of Php50,000.00, payable to the order of Y. Y indorsed the noteto Z, to whom Y owed Php 30,000.00. If X has no defenseat all against Y, for how much may Z collect from X?

A. Php 20,000.00, as he is a holder for value to theextent of the difference between Y’s debt and thevalue of the note.

B. Php 30,000.00, as he is a holder for value to theextent of his lien.

C. Php 50,000.00, but with the obligation to hold Php20,000.00 for Y’s benefit.

D. None, as Z’s remedy is to run after his debtor, Y.

Sec. 27. When lien on instrument constitutes holder for value.

— Where the holder has a lien on the instrument arising eitherfrom contract or by implication of law, he is deemed a holderfor value to the extent of his lien.

Notes:

What constitutes a holder for value?

ANSWER:

A holder for value is a holder which has given anything ofvalue for the instrument. Thus, where value has at anytime beengiven for the instrument, the holder is deemed a holder for valuein respect to all parties who became such prior to that time. (Sec.26, Negotiable Instruments Law).

Moreover, where the holder has a lien on the instrumentarising either from contract or by implication of law, he is deemeda holder for value to the extent of his lien. (Sec. 27, NegotiableInstruments Law)


In the case of Maulini, et al vs. Serrano339, Supreme CourtAssociate Justice Torres wrote the foregoing concurring opinion,to wit: “[s]ection 26 provides that where value has at any timebeen given for the instrument, the holder is deemed a holder forvalue, both in respect to the maker and to the defendant indorser,it is immaterial whether he did so directly to the person whoappears in the promissory note as the maker or whether hedelivered the sum to the defendant in order that this latter mightin turn deliver it to the maker.”

Illustrative case:

The holder of a note for $2,000, surrendered it for a paymentof $500, and a new note for $1,500 executed by the maker andindorsed by defendant. Held, that the holder of the note was aholder for value. (Brannan, page 35, citing Van Norden Trust Co.v. L. Rosenburg, 62 Misc. R. 285, 114 N.Y. Supp. 1025.)

2011 Bar Question:

Under the Negotiable Instruments Law, if the holder hasa lien on the instrument which arises either from acontract or by implication of law, he would be a holderfor value to the extent of

A. his successor’s interest.

B. his predecessor’s interest.

C. the lien in his favor.

D. the amount indicated on the instrument’s face.

Sec. 28. Effect of want of consideration. - Absence or failureof consideration is a matter of defense as against any personnot a holder in due course; and partial failure of considerationis a defense pro tanto, whether the failure is an ascertainedand liquidated amount or otherwise.

Notes:

Want, failure, or illegality of consideration

339 supra

225

Prof. Daniel said: “[w]hile consideration is presumed in allcases of negotiable contracts, and the plaintiff can rely upon thispresumption, and thus cast the burden of showing its absenceupon the defendant, the presumption is rebuttable, and when thewant or failure of a sufficient consideration is attacked andsubstantial evidence is offered to sustain this defense, the burdenshifts, and it rests with the plaintiff upon the whole case to showby a preponderance of evidence a consideration sufficient tosupport the instrument sued on. The defense of absence or failureof consideration is good only between immediate parties. Theconsideration is presumed to be legal, and, so far as presumptionsand burden of proof are concerned, is governed by the sameprinciples that apply to want or failure of consideration; but if inconsequence of the illegality of consideration, the instrument isby law declared void, thus defense avails not only as betweenthe immediate parties, but also against the bona fide holder forvalue.” (Elements of the Law of Negotiable Instruments, Daniel,p. 304)

What is the effect of lack of consideration?

The absence or failure of consideration is a matter ofdefense as against any person not a holder in due course; andpartial failure of consideration is a defense pro tanto, whether thefailure is ascertained and liquidated amount or otherwise. (Sec.28, Negotiable Instruments Law)

The defense that there was failure or absence ofconsideration can only be invoked by the drawer if the holder wasa privy to the purpose for which the instrument were issued andtherefore is not a holder in due course. (State Investment House

vs. Court of Appeals and Nora B. Moulic, G.R. No. 101163, January

11, 1993, [Bellosillo, J:])

The drawee by acceptance becomes liable to the payee orhis indorsee, and also to the drawer himself. But the drawer andacceptor are the immediate parties to the consideration, and ifthe acceptance be without consideration, the drawer cannotrecover from the acceptor. The payee holds a different relation;he is a stranger to the transaction between the drawer and theacceptor, and is, therefore, in a legal sense a remote party. In asuit by him against the acceptor, the question of considerationbetween the drawer and the acceptor cannot be inquired into.


The payee or holder gives value to the drawer, and if he is ignorantof the equities between the drawer and the acceptor, he is in theposition of a bona fide indorsee. Hence, it is no defense to a suitagainst the acceptor of a draft which has been discounted, andupon which money has been advanced by the plaintiff, that thedraft was accepted or the accommodation of the drawer.(Philippine National Bank vs. Bartolome Picornell, et al, G.R. No.

L-18751, 18915, September 26, 1922, [Romualdez, J:], citing 3

R.C.L., pp. 1143, 1144, par, 358.)

It is a well-known rule of law that if the original payee of anote unenforceable for lack of consideration repurchase theinstrument after transferring it to a holder in due course, the paperagain becomes subject in the payee’s hands to the same defensesto which it would have been subject if the paper had never passedthrough the hands of a holder in due course. (Fossum vs.

Hermanos, G.R. No. L-19461, March 28, 1923, [Street, J:], citing

Kost vs. Bender, 25 Mich., 515; Shade vs. Hayes, L.R.A. [1915

D], 271; 8 C.J., 470.) The same is true where the instrument isretransferred to an agent of the payee. (supra, citing Battersbee

vs. Calkins, 128 Mich., 569)

Illustrative Case:

A check was made by A to the order of B to be used to payC for withdrawing a charge of rape against B, alleged to be afalse charge, and to prevent his re-arrest on said charge. Thecheck was indorsed by B to C and by C to the plaintiff, withoutconsideration, and upon payment being stopped plaintiff sued A.Held, that A could not defend on the ground of duress which wasnot exercised on him, but that he could defend on the ground ofwant of consideration. (Brannan, page 36, citing Weiss v. Reiser,62 Misc. Rep. 292, 114 N.Y. Supp. 983.)

In a suit between remote parties to a bill of exchange, asthe payee or indorsee and the acceptor, to sustain the defense ofno consideration, there must have been no consideration receivedby the defendant and plaintiff must have been given noconsideration. (Ibid, citing National Park Bank v. Saitta, 127 App.Div. 624, 111 N.Y. Supp. 927, S.C. sec. 133.)

227

Partial Want of Consideration

Whenever the defendant is entitled to go into the questionof consideration, he may set up the partial as well as the totalwant of consideration.340

So, where a father gives his son a note partly for servicesand partly as a gratuity, the partial want of consideration might bepleaded as to such portion of the amount as was gratuitous; andit would be no objection that no distinct amount was fixed uponas compensation for the services, but it would be for the jury [judge]to settle what amount was founded on the one consideration, andwhat on the other.341 If a note be given by mistake on settlementof account for an amount greater than that actually due, there iswant of consideration as to the excess, and between the parties itmay be pleaded.342 (Daniel, Elements of the Law of NegotiableInstruments, page 66-67)

Total and Partial failure of consideration

The total failure of consideration is a good defense to a suitupon a bill or note as the original want of it, and is confined to thelike parties. If the contract is rescinded, the consideration of thebill or note totally fails, and payment of it cannot be enforced.343

And a partial failure of the consideration is a good defensepro tanto.344 But such part as is alleged to have failed must bedistinct and definite, for only a total failure, or the failure of a specificand ascertained part, can be availed of by way of defense; and ifit be an unliquidated claim the defendant must resort to his cross-action.345 Thus, where bills have been accepted in considerationof the payee giving the acceptor the lease of a house, and he lethim into possession, but gave no lease, it was held no defense toan action on the bill, but that there was merely a counter-claim fordamages.346 So where the bill was given for work to be done, andthe work when done was bungled in part, and not worth the amount

340 McGregor v. Bishop, 14 Ont. 10; Daniel on Negotiable Instruments, 201341 Parish v. Stone, 14 Pick. 198342 Seeley v. Engell, 13 N.Y. 542; Claxon v. Demaree, 14 Bush. 173343 Hacker v. Brown, 81 Mo. 68; Maltz v. Fletcher, 52 Mich. 484344 Agnew v. Aldem, 84 Ala. 502; Torinus v. Buckham, 29 Minn. 128345 Elminger v. Drew, 4 McLean, 388; Stobe v. Peake, 16 Vt. 213; Pulsifer v.

Hotchkiss, 12 Conn. 234346 Moggridge v. Jones, 14 East, 485


of the bill.347 (Daniel, Elements of the Law of NegotiableInstruments, page 68)

Partial Illegality of consideration

When the defense is founded on illegality of consideration,it is to be distinguished from a defense on the ground of a want orfailure of consideration by this peculiarity—that a partial illegalityvitiates the bill or note in too, while the partial want of considerationonly vitiates it pro tanto.348 (ibid)

Who are parties privy in negotiable instruments

The same rule which admits inquiry into the considerationof negotiable paper between the original payor and payee extendsto admit such inquiry in any suit between parties between whomthere is privity. That is to pay, between immediate parties to anycontract evidenced by the drawing, accepting, making or indorsinga bill or note, or may be shown that there was no consideration(as, that it was for accommodation);349 or that consideration hasfailed, or a set-off may be pleaded; but as between other partiesremote to each other, none of these defenses are admissible. Itbecomes important then to determine who are to be regarded asthe immediate parties, or parties between whom there is a privity,to a negotiable instrument, and who are remote. Among the formermay be classed: (1) The drawer and acceptor of a bill;350 or (2)The drawer and payee351 of a bill as a general rule; (3) The makerand payee of a note;352 and (4) The indorser and immediateindorsee of a bill or note.353 (ibid, page 69)

Who are remote parties to negotiable instruments

But want of consideration, or the failure thereof, cannot bepleaded in a suit brought: (1) By an indorsee against the maker ofa note;354 (2) By an indorsee against a prior, but not his immediate

347 Trickey v. Larne, 6 M & W 278348 Hanauer v. Doane, 12 Wall. 342; Hyslop v. Clark, 14 Johns 465; Mn Namra

v. Gargett, 68 Mich. 454349 Murphy v. Keyes, 39 N.Y. Sup. Ct. 18; Wilson v. Ellsworth, 25 Nebr. 246350 Thomas v. Thomas, 7 Wis. 476; Spurgeon v. McPheeters, 42 Ind. 527351 McCulloch v. Hoffman, 10 Hun, 133; Spurgeon v. McPheeters, 42 Ind.

527352 Kennedy v. Goodman, 14 Nebr. 585; Flaun v. Wallace, 9 S.E. 571353 Barnett v. Offerman, 7 Watts, 130; Klein v. Keyes, 17 Mo. 326; Platt v.

Snipe, 43 Ark. 23354 Price v. Keen, 40 N.J.L 332; Brunes v. Scott, 117 U.S. 582

229

indorser;355 (3) By the indorsee against the acceptor of a bill, as ageneral rule.356 They are regarded as remote parties to each other,and between such parties two distinct considerations must beinquired into in order to perfect a defense against the holder: (1)The consideration which the defendant received for his liability;and (2) That which the plaintiff gave for his title.357 And if anyimmediate holder gave value for the instrument, that interveningconsideration will sustain the plaintiff’s title.358 (ibid)

Want, Failure, or Fraudulency of consideration

If the original consideration were tainted with fraud orillegality, or has failed in whole, or in part, and the bill or note haspassed into the hands of a bona fide holder for value without notice,yet if returned for a valuable consideration to the payee who is aprivy to the original consideration, he could stand upon no betterfooting than if the instrument had remained in his hands.359 (ibid)

Defenses between privy parties

1. That the bill or note has been lost or stolen;360

2. Was executed under duress;361

3. Under fraudulent misrepresentations;362

4. Fraudulent consideration;363

5. Illegal consideration;364

6. Fraudulently obtained from an immediate holder;365

7. Been in any way the subject of fraud or felony;366

355 Ethridge v. Gallagher, 55 Miss. 464; 1 Parsons on Notes and Bills, 176356 Flower v. Sadler, 10 Q.B. Div. 572357 Laflin & Rand Power Co. v. Sinsheimer, 48 Md. 411; Hoffman & Co. v.

Bank of Milwaukee, 12 Wall. 181358 United States v. Bank of Metropolis, 15 Pwt. 393; Swift v. Tyson, 16 Pet.

1; Goetz v. Bank of Kansas City, 119 U.S. 556359 Swayner v. Wiswell, 9 Allen, 42; Kost v. Bender, 25 Mich. 516; Cline v.

Templeton, 78 Ky. 550360 Mills v. Barner, 1 M & W, 425361 Clark v. Peace, 41 N.H. 414; Griffith v. Sitgreaves, 90 Pa. St. 161362 Vathir v. Zane, 6 Gratt. 246; Hutchinson v. Bogg, 28 Pa. St. 294363 Rogers v. Morton, 12 Wend. 484364 Shirley v. Howard, 53 Ill. 455; Holden v. Cosgrove, 12 Gray, 216365 1 Parsons on Notes and Bills, 188366 Holden v. Cosgrove, 12 Gray, 216; Western Bank v. Mills, 7 Cush. 546


How illegality may be purged—renewal of instrument

If the consideration of the original bill or note be illegal, arenewal of it will be open to the same objection and defense;367

and if the original instrument was obtained by fraud, a renewal ofit by the original parties without knowledge of the fraud, wouldstand in the same footing.368 But if at the time the renewal wasexecuted the parties signing knew of the fraud in the original,they will be regarded as purging the contract of the fraud, andcannot then plead it.369 So if the maker of a note held by anindorsee who knew that the consideration between the makerand the payee had failed when he took it, executes to him a newnote, it had been held to be a waiver of the defense, and thepayee of the new note can recover.370 (ibid, page 71-72)

Partial Illegality of the instrument

If a note or bill be given for a consideration which is in partillegal, a new note for the same, or in renewal of the first, is equallyvoid.371 But a new note for that part of the consideration which islegal is good and valid. And if several new notes are given for theold one, some of the new one may be taken for the legal part, andso be valid, especially if they are only adequate to their part or ifthe deduction be otherwise favored by circumstances.372 (Ibid,page 72)

Sec. 29. Liability of accommodation party. - Anaccommodation party is one who has signed the instrumentas maker, drawer, acceptor, or indorser, without receivingvalue therefor, and for the purpose of lending his name tosome other person. Such a person is liable on the instrumentto a holder for value, notwithstanding such holder, at the timeof taking the instrument, knew him to be only anaccommodation party.

Notes:

367 Schutt v. Evans, 109 Pa. St. 627; Wegner v. Biering, 65 Tex. 511; Sawyerv. Wiswell, 9 Allen, 39

368 Sawyer v. Wiswell, 9 Allen, 39369 Sawyer v. Wiswell, 9 Allen, 39; Calvin v. Sterrett, 41 Kan, 220370 Gil v. Morris, 11 Heisk, 614; Keyes v. Mann, 63 Iowa, 560371 Chapman v. Black, 2 B & Ald. 588; Seeligson v. Lewis, 65 Tex. 115; Preston

v. Jackson, 2 Stark. 237372 Daniel on Negotiable Instruments, 206; Crookshank v. Rose, 5 Car. & P.

19

231

Who is an accommodation party?

An accommodation party is one who has signed theinstrument as maker, drawer, acceptor, or indorser, withoutreceiving value therefor, and for the purpose of lending his nameto some other person. (Sec. 29, Negotiable Instruments Law)

In lending his name to the accommodated party, theaccommodation party is in effect a surety for the latter. He lendshis name to enable the accommodated party to obtain credit or toraise money. He receives no part of the consideration for theinstrument but assumes liability to the other parties theretobecause he wants to accommodate another. (Philippine Bank of

Commerce vs. Aruego, G.R. No. L-25836-37, January 31, 1981,

[Fernandez, J.]; Ang vs. Associated Bank, G.R. No. 146511,

September 5, 2007, 532 SCRA 244, 272-273, cited in Claude P.

Bautista vs. Auto Plus Traders, Inc., G.R. No. 166405, August 6,

2008, [Quisumbing, J:])

In accommodation transactions recognized by theNegotiable Instruments Law, an accommodation party lends hiscredit to the accommodated party, by issuing or indorsing a checkwhich is held by a payee or indorsee as a holder in due course,who gave full value therefor to the accommodated party. Thelatter, in other words, receives or realizes full value which theaccommodated party then must repay to the accommodating party,unless of course the accommodating party intended to make adonation to the accommodated party. But the accommodating

party is bound on the check to the holder in due course who

necessarily a third party and is not the accommodated party.Having issued or indorsed the check, the accommodating partyhas warranted to the holder in due course that he will pay thesame according to its tenor. (Travel-On, Inc. vs. Court of Appeals

and Arturo Miranda, G.R. No. L-56169, June 26, 1992, [Feliciano,

J:])

Nature of the relationship between the accommodation partyand the accommodated party

“[T]he relation between an accommodation party and theaccommodated party is one of principal and surety—theaccommodation party being the surety.373 As such, he is deemedan original promissors and debtor from the beginning,374 he is


considered in law as the same party as the debtor in relation towhatever is adjudged touching the obligation of the latter sincetheir liabilities are interwoven as to be inseparable.375 Although acontract of suretyship is in essence accessory or collateral to avalid principal obligation, the surety’s liability to the creditor isimmediate, primary and absolute; he is directly and equally boundwith the principal.376 As an equivalent of a regular party to theundertaking, a surety becomes liable to the debt and duty of theprincipal obligor even without possessing a direct or personalinterest in the obligations nor does he receive any benefittherefrom.377 (Eusebio Gonzales vs. Philippine Commercial and

International Bank, et. al., G.R. No. 180257, February 23, 2011,

[Velasco, J.:])

An accommodation bill or note is not considered a realsecurity, but a mere blank, until it has been negotiated, and itthen becomes binding upon all of the accommodation indorsersin like manner and to the like effect as if they were successiveindorsers,378 but until it has been negotiated any party maywithdraw his indorsement, acceptance, or other liability upon it,and rescind his engagement;379 and that right is not impaired bythe circumstance that he may be indemnified by an assignment,or other security.380 (Daniel, Elements on the Law of NegotiableInstruments, page 59)

373 Garcia v. Llamas, supra at 305; Agro Conglomerates, Inc. v. Court ofAppeals, 401 Phil. 644, 654- 655 (2000); Spouses Gardose v. Tarroza,supra at 807; Caneda, Jr. v. Court of Appeals, G.R. No. 81322, February5, 1990, 181 SCRA

762, 772; Crisologo-Jose v. Court of Appeals, supra at 598; Prudencio v.Court of Appeals, 227 Phil. 7, 12 (1986); and Philippine Bank of Commercev. Aruego, supra at 539

374 Garcia v. Llamas, supra at 305375 Trade & Investment Development Corp. v. Roblett Industrial Construction

Corp., G.R. No. 139290, November 11, 2005, 474 SCRA 510, 531376 International Finance Corporation v. Imperial Textile Mills, Inc., G.R. No.

160324, November 15, 2005, 475 SCRA 149, 160; Trade & InvestmentDevelopment Corp. v. Roblett Industrial Construction Corp., id. at 531;Garcia v. Llamas, supra at 305; Agro Conglomerates, Inc. v. Court ofAppeals, supra at 655; and Philippine Bank of Commerce v. Aruego, supraat 540

377 International Finance Corporation v. Imperial Textile Mills, Inc., id. at 160-161 and Trade & Investment Development Corp. v. Roblett IndustrialConstruction Corp., id. at 531

278 Withworth v. Adams, 5 Rand. 342; May v. Boisseau, 8 Leigh, 164379 Second Nat. Bank v. Howe, 40 Minn, 390380 May v. Boisseau, 8 Leight, 164

233

To whom does the accommodation refer to?

The accommodation to which reference is made in thesection quoted is not the person who takes the note—that is, thepayee or indorsee, but one to the maker or indorser of the note.(Maulini, et al vs. Serrano, G.R. No. L-8844, December 16, 1914,

[Moreland, J.])

What are the requisites of an accommodation party?

An accommodation party is one who meets all the threerequisites:

(a) He must be a Party to the instrument, signing as a maker,drawer, acceptor, or indorser;

(b) He must not receive value therefor; and

(c) And he must sign for the purpose of lending his name orcredit to some other person. (Claude P. Bautista vs. Auto

Plus Traders, Inc., G.R. No. 166405, August 6, 2008,

[Quisumbing, J.]; Ernestina Crisologo-Jose vs. Court of

Appeals, G.R. No. 80599, September 15, 1989 )

Without receiving value therefor.

Based on the foregoing requisites, it is not a valid defensethat the accommodation party did not receive any valuableconsideration when he executed the instrument. From thestandpoint of contract law, he differs from the ordinary concept ofa debtor therein in the sense that he has not received any valuableconsideration for the instrument he signs. Nevertheless, he isliable to a holder for value as if the contract was not foraccommodation381 in whatever capacity such accommodationparty signed the instrument, whether primary or secondarily. Thus,it has been held that in lending his name to the accommodatedparty, the accommodation party is in effect a surety for the latter.382

(Ernestina Crisologo-Jose vs. Court of Appeals, et al, G.R. No.

80599, September 15, 1989, [Regalado, J.])

As to whether or not the defendant is an accommodationparty, it should be taken into account that by putting his signature

381 Ang Tiong vs. Ting, et al., 22 SCRA 713 (1968)382 Philippine Bank of Commerce vs. Aruego, 102 SCRA 530 (1981)


to the note, he lent his name, not to the creditor, but to those whosigned with him placing himself with respect to the creditor in thesame position and with the same liability as the said signers. Itshould be noted that the phrase “without receiving valuetherefor,” as used in Section 29 of the foresaid Act, means“without receiving value by virtue of the instrument” and not,as it apparently is supposed to mean, “without receiving paymentfor lending his name.” If, as in the instant case, a sum of moneywas received by virtue of the note, it is immaterial, so far as thecreditor is concerned, whether one of the signers has, or has not,received anything in payment of the use of his name. In realitythe legal situation of the defendant in this case may properly beregarded as that of a joint surety rather than of an accommodationparty. The defendant, as a joint surety, may, upon the maturity ofthe note, pay the debt, demand the collateral security and disposeof it to his benefit; but there is no proof whatever that this wasdone. As to the plaintiff, he is the “holder for value”, under thephrase of said Section 29, for he had paid the money to the signersat the time the note was executed and delivered to him. (R.N.

Clark vs. George C. Sellner, G.R. No. L-16477, November 22,

1921, [Romualdez, J:]) (emphasis supplied)

The phrase “without receiving value therefor” used in Sec.29 of the NIL means “without receiving payment value by virtue ofthe instrument” and not as it is apparently supposed to mean,“without receiving payment for lending his name.”383 Stateddifferently, when a third person advances the face value of thenote to the accommodated party at the time of its creation, theconsideration for the note as regards its makers is the moneyadvanced to the accommodated party. It is enough that valuewas given for the note at the time of its creation.384 (Tomas Ang

vs. Associated Bank and Antonio Ang Eng Liong, G.R. No. 146511,

September 5, 2007, [Azcuna, J.])

In the words of Joseph Doddridge Brannan: “the words“value therefor” in section 29 mean value for the negotiableinstrument, not value for the use of the name, and that one maybe an accommodating party although he is paid nothing for the

383 Clark v. Sellner, 42 Phil. 384, 386 (1921)384 Caneda, Jr. v. Court of Appeals, supra at 772

235

use of his name.” (citing Morris County Brick Co. v. Austin (N.J.)75 Atl. 550.)385

The Rule on Accommodation party does not apply tocorporations

The aforequoted provision of the Negotiable InstrumentsLaw which holds an accommodation party liable on the instrumentto a holder for value, although such holder at the time of takingthe instrument knew him to be only an accommodation party, doesnot include nor apply to corporations which are accommodationparties.386 This is because the issue or indorsement of negotiablepaper by a corporation without consideration and for theaccommodation of another is ultra vires.387 Hence, one who hastaken the instrument with knowledge of the accommodation naturethereof cannot recover against a corporation where it is only anaccommodation party. If the form of the instrument, or the natureof the transaction, is such as to charge the indorsee withknowledge that the issue or indorsement of the instrument by thecorporation is for the accommodation of another, he cannotrecover against the corporation thereon.388 (Ernestina Crisologo-

Jose vs. Court of Appeals, et al, G.R. No. 80599, September 15,

1989, [Regalado, J.])

In other relevant and older cases, it was held that: “amanufacturing corporation has no power to bind itself as anaccommodation party. Therefore in such a case the plaintiff mustshow both that he paid value and also that he did not know of theaccommodation character of the instrument. (Brannan, page 38,citing Nat. Bank v. Snyder Co., 117 App. Div. 370, 102 N.Y. Supp..478; Bradley Engineering Co., v. Heyburn (Wash.), 106 Pac. 170,S.C. sec. 119; Cf. In re Troy & Cohoes Shirt Co., infra, sec. 56.)The possession and negotiation by the maker of a note with theindorsement of the payee imports that the indorsement was foraccommodation, and neither sec. 29 nor sec. 22 give power to acorporation to make accommodation indorsements. (Ibid, citingOppenheim v. Simon Reigel Cigar Co., 90 N.Y. Supp. 355.)

385 Cited in the Negotiable Instruments Law Annotated, Joseph DoddridgeBrannan, second edition, 1911, page 38

386 11 C.J.S. 309387 14A C.J. 732388 Oppenheim vs. Simon Reigel Cigar Co., 90 N.Y.S. 355, cited in 11 C.J.S.

309


Exception—

By way of exception, an officer or agent of a corporationshall have the power to execute or indorse a negotiable paper inthe name of the corporation for the accommodation of a thirdperson only if specifically authorized to do so.389 Corollarily,corporate officers, such as the president and vice-president, haveno power to execute for mere accommodation a negotiableinstrument of the corporation for their individual debts ortransactions arising from or in relation to matter in which thecorporation has no legitimate concern. Since such accommodationpaper cannot thus be enforced against the corporation, especiallysince it is not involved in any aspect of the corporate business oroperations, the inescapable conclusion in law and in logic is thatthe signatories thereof shall be personally liable therefor, as wellas the consequences arising from their acts in connectiontherewith. x x x The fact that for lack of capacity the corporation isnot bound by an accommodation paper does not thereby absolve,but should render personally liable, the signatories of saidinstrument where the facts show that the accommodation involvedwas for their personal account, undertaking and the creditor wasaware thereof. (supra)

Does the accommodation party have any liability?

Yes, such a person is liable on the instrument to a holderfor value, notwithstanding such holder, at the time of taking theinstrument, knew him to be only an accommodation party. (Sec.29, Negotiable Instruments Law)

To paraphrase, the accommodation party is liable to a holderfor value as if the contract was not for an accommodation. It isnot a valid defense that the accommodation party did not receiveany valuable consideration when he executed the instrument. Noris it correct to say that the holder for value is not a holder in duecourse merely because at the time he acquired the instrument,he knew that the indorser was only an accommodation party.390

389 In re Wrentham Mfg. Co., 2 Low. 119; Hall vs. Auburn Turnp. Co., 27 Cal.255, cited in 14A C.J. 461

390 Beutel’s Brannan Negotiable Instruments Law, 7th ed., pp. 568-569; Stuartdel Rosario, Treatise on Negotiable Instruments, 1961 ed., 165, 242-243;Alvendia, The Negotiable Instruments Law, pp 55, 57-58; National Bankvs. Maza, et al, 48 Phil. 210.

237

(Ang Tiong vs. Lorenzo Ting, G.R. No. L-26767, February 22, 1968,

[Castro, J:])

Illustrative Case:


FERNANDEZ, J.:

FACTS: On December 1, 1959, the Philippine Bank ofCommerce instituted an action against Jose M. AruegoCivil Case No. 42066 for the recovery of the total sumof about P35,000.00 with daily interest thereon fromNovember 17, 1959 until fully paid and commissionequivalent to 3/8% for every thirty (30) days or fractionthereof plus attorney’s fees equivalent to 10% of thetotal amount due and costs. The complaint filed by thePhilippine Bank of Commerce contains Twenty-Two(22) causes of action referring to Twenty-Two (22)transactions entered into by the said Bank and Aruegoon different dates covering the period from August 28,1950 to March 14, 1951. The sum sought to berecovered represents the cost of the printing of “WorldCurrent Events”, a periodical published by thedefendant. To facilitate the payment of the printing thedefendant obtained a credit accommodation from theplaintiff. Thus, for every printing of the “World CurrentEvents”, the printer Encal Press and Photo Engraving,collected the cost of printing by drawing a draft againstthe plaintiff, said draft being sent later to the defendantfor acceptance. As an added security for the paymentof the amounts advanced to Encal Press and PhotoEngraving, the plaintiff bank also required thedefendant Aruego to execute a trust receipt in favor ofsaid bank wherein said defendant undertook to hold intrust for plaintiff the periodicals and to sell the samewith the promise to turn over to the plaintiff the proceedsof the sale of said publication to answer for the paymentof all obligations arising from the draft.


Aruego contends that he signed the bills of exchangenot as principal obligor, but as accommodation oradditional party obligor, to add to the security of saidplaintiff bank. His reason is that unlike real bills ofexchange, where payment of the face value isadvanced to the drawer only upon acceptance of thesame by the drawee, in the case in question, paymentfor the supposed bill of exchange were made beforeacceptance; so that in effect, although these documentsare labeled bills of exchange, legally they are not billsof exchange but mere instruments evidencingindebtedness of the drawee of who received the facevalue thereof, with the defendant as only a additionalsecurity of the same.


RULING: Defendant contends that he signed the drafts only asan accommodation party and as such, should be madeliable only after showing that the drawer is incapableof paying. This contention is without merit.

An accommodation party is one who has signed theinstrument as maker, drawer, indorser, without receivingvalue therefor and for the purpose of lending his nameto some other person. Such person is liable on theinstrument to a holder for value, notwithstanding suchholder, at the time of the taking of the instrument knewhim to be only an accommodation party. In lending hisname to the accommodated party, the accommodationparty is in effect a surety for the latter. He lends hisname to enable the accommodated party to obtaincredit or to raise money. He receives no part of theconsideration for the instrument but assumes liabilityto the other parties thereto because he wants toaccommodate another. In the instant case, thedefendant signed as a drawee/acceptor. Under theNegotiable Instrument Law, a drawee is primarily liable.Thus, if the defendant who is a lawyer, he should nothave signed as an acceptor/drawee. In doing so, hebecame primarily and personally liable for the drafts.

239

Prudencio vs. Court of Appeals391, held that: “In the caseof Philippine Bank of Commerce v. Aruego (102 SCRA 530, 539),we held that “…in lending his name to the accommodated party,the accommodation party is in effect a surety…” However, unlikein a contract of suretyship, the liability of the accommodation partyremains not only primary but also unconditional to a holder forvalue such that even if the accommodated party received anextension of the period for payment without the consent of theaccommodation party, the latter is still liable for the wholeobligation and such extension does not release him because asfar as the holder for value is concerned, he is a solidary co-debtor.

Expounding on the nature of the liability of anaccommodation party under the aforequoted section, we ruled inAng Tiong v. Ting (22 SCRA 713, 716):

“[3.] That the appellant, again assuming him to be anaccommodation indorser, may obtain security from themaker to protect himself against the danger of insolvencyof the latter, cannot in any manner affect his liability to theappellee, as the said remedy is a matter of concernexclusively between the accommodation indorser andaccommodated party. So that the appellant stands only asa surety in relation to the maker, granting this to be true forthe sake of argument, is immaterial to the claim of theappellee, and does not a whit diminish nor defeat the rightsof the latter who is a holder for value. The liability of theappellant remains primary and unconditional. To sanctionthe appellant’s theory is to give unwarranted legalrecognition to the patent absurdity of a situation where anindorser, when sued on an instrument by a holder in duecourse and for value, can escape liability on his indorsementby the convenient expedient of interposing the defense thathe is a mere accommodation indorser.

There is, therefore, no question that as accommodationmakers, petitioners would be primarily and unconditionally liableon the promissory note to a holder for value, regardless of whetherthey stand as sureties or solidary co-debtors since such distinctionwould be entirely immaterial and inconsequential as far as a holder

391 G.R. No. L-34539, July 14, 1986.


for value is concerned. Consequently, the petitioners cannot claimto have been released from their obligation simply because thetime of payment of such obligation was temporarily deferred byPNB without their knowledge and consent. There has to beanother basis for their claim of having been freed from theirobligation. The question which should be resolved in this instantpetition, therefore, is whether or not PNB can be considered aholder for value under Section 29 of the Negotiable InstrumentsLaw such that the petitioners must be necessarily barred fromsetting up the defense of want of consideration or some otherpersonal defenses which may be set up against a party who isnot a holder in due course.

A holder for value under Section 29 of the NegotiableInstruments Law is one who must meet all the requirements of aholder in due course under Section 52 of the same law expectnotice of want of consideration. (Agbayani, Commercial Law ofthe Philippines, 1964, p.208). If he does not qualify as a holder indue course then he holds the instrument subject to the samedefenses as if it were non-negotiable. (Section 58, NegotiableInstruments Law).”

Problem:

Mr. B, in his capacity as President and Presiding Officerof BB Bus Lines, Inc., purchased various spare tires from AAAuto Supply, and issued two (2) post-dated checks to coverhis purchases. The checks were subsequently dishonored.

Thereafter, two counts of violation of BP 22 were filedagainst Mr. B. The criminal cases were eventually dismissedon a demurrer to evidence filed by Mr. B, but the latter wasdirected to pay AA Auto Supply the value of the checks withinterest of 12% per annum and cost. Mr. B through a petitionfor review on certiorari with the Supreme Court raised theissue that he being an officer of the corporation, he shouldnot be personally and civilly held liable for the value of thechecks.

AA Auto Supply, on the other hand, contends that, Mr.B, by issuing his check to cover the obligation of thecorporation, became an accommodation party, thus, he isliable on the instrument to a holder for value.

241

Is Mr. B liable?

ANSWER:

No.

Judicial entities have personalities separate and distinct fromits officers and the persons composing it. Generally, thestockholders and officers are not personally liable for theobligations of the corporations except only when the veil ofcorporate fiction is being used as a cloak or cover for fraud orillegality, or to work injustice. These situations, however, do notexist in this case. The evidence shows that it is BB Bus Lines,Inc. that has obligations to AA Auto Supply for tires. There is noagreement that Mr. B shall be held liable for the corporation’sobligations in his personal capacity. Hence, he cannot be heldliable for the value of the checks.

Likewise, Mr. B cannot be considered liable as anaccommodation party. An accommodation party lends his nameto enable the accommodated party to obtain credit or to raisemoney; he received no part of the consideration for the instrumentbut assumes liability to the other party/ies thereto. The first twoelements are present here, however there is insufficient evidencepresented in the instant case to show the presence of the thirdrequisite. All that the evidence shows is that Mr. B signed thecheck corresponding to the spare tires received by BB Bus Lines,Inc. There is no showing of when petitioner issued the check andin what capacity. In the absence of concrete evidence it cannotjust be presumed that Mr. B intended to lend his name to thecorporation. Hence, Mr. B cannot be considered as anaccommodation party. (Claude P. Bautista vs. Auto Plus Traders,

Inc., G.R. No. 166405, August 6, 2008, [Quisumbing, J.])

Extent of liability of the Accommodation Party

In Ang vs Associated Bank,392, the High Court held that: “theliability of an accommodation party remains not only primary butalso unconditional to a holder for value, even if the accommodatedparty received an extension of the period for payment without theconsent of the accommodation party, the latter is still liable for the

392 supra


whole obligation and such extension does not release himbecause as far as a holder for value is concerned, he is a solidaryco-debtor.393 In Clark v. Sellner,394 this Court held:

“x x x The mere delay of the creditor in enforcing the guarantyhas not by any means impaired his action against thedefendant. It should not be lost sight of that the defendant’ssignature on the note is an assurance to the creditor thatthe collateral guaranty will remain good, and that otherwise,he, the defendant, will be personally responsible for thepayment.

True, that if the creditor had done any act whereby theguaranty was impaired in its value, or discharged, such anact would have wholly or partially released the surety, but itmust be born in mind that it is a recognized doctrine in thematter of suretyship that with respect to the surety, thecreditor is under no obligation to display any diligence inthe enforcement of his rights as a creditor. His mere inaction,indulgence, passiveness, or delay in proceeding against theprincipal debtor, or the fact that he did not enforce theguaranty or apply on the payment of such funds as wereavailable, constitute no defense at all for the surety, unlessthe contract expressly requires diligence and promptnesson the party of the creditor, which is not the case in thepresent action. There is in some decisions a tendencytoward holding that the creditor’s laches may discharge thesurety, meaning by laches a negligent forbearance. Thistheory, however, is not generally accepted and the courtsalmost universally consider it essentially inconsistent withthe relation of the parties to the note. (21 R.C.L., 1032-1034)395"

Solidary Accommodation Maker

On principle, a solidary accommodation maker—who madepayment—has the right to contribution, from his co-accommodation maker, in the absence of agreement to thecontrary between them, and subject to conditions imposed by law.

393 Prudencio v. Court of Appeals, supra at 12-13394 42 Phil. 384 (1921)395 Id. at 387-388

243

This right springs from an implied promise between theaccommodation makers to share equally the burdens that mayensue from their having consented to stamp their signatures onthe promissory note.396 For having lent their signatures to theprincipal debtor, they clearly placed themselves—in so far aspayment made by one may create liability on the other—in thecategory of mere joint grantors of the former.397 This is as it shouldbe. Not one of them benefited by the promissory note. Theystand on the same footing. In misfortune, their burdens shouldbe equally spread. (Intestate Estate of Victor Sevilla, et al vs.

Francisco Sevilla, G.R. No. L-17845, April 27, 1967, [Sanchez,

J:])

The rule is that: (1) A joint and several accommodationmaker of a negotiable promissory note may demand from theprincipal debtor reimbursement for the amount that he had paidto the payee; and (2) a joint and several accommodation makerwho pays on the promissory note may directly demandreimbursement from his co-accommodation maker without firstdirecting his action against the principal debtor provided that (a)he made the payment by virtue of a judicial demand, or (b) aprincipal debtor is insolvent. (supra)

In the case of Ernestina Crisologo-Jose vs. Court of

Appeals, et al398, it was held: “[t]he fact that he was only a co-signatory does not detract from his personal liability. A co-makeror co-drawee under the circumstances in this case is as much anaccommodation party as the other co-signatory or, for that matter,as a lone signatory in an accommodation instrument. Under thedoctrine in Philippine Bank of Commerce vs. Aruego, supra, he isin effect a co-surety for the accommodated party with whom heand his co-signatory, as the other co-surety, assume solidaryliability ex lege for the debt involved.”

On the other hand, “an accommodation maker of a note isliable to one whom it was indorsed in payment of an antecedentdebt, the use of the note having been restricted by the maker.

396 Daniel on Negotiable Instruments, id., p. 1597.397 Daniel on Negotiable Instruments, id., p. 1595; and Footnote 65…: “The

liability of co-sureties to each other for contribution is not joint [joint andseveral] but several”, citing Vansant vs. Gardner, 240 Ky. 318, 42 S.W.(2nd) 300; Voss vs. Lewis, 126 Ind. 155, 25 N.E. 892.

398 G.R. No. 80599, September 15, 1989


(Brannan, page 39, citing English v. Schlesinger, 55 Misc. R. 584,105 N.Y. Supp. 989.)

Accommodation Indorser

In case of accommodation indorsement the indorser makesthe indorsement for the accommodation of the maker. Suchindorsement is generally for the purpose of better securing thepayment of the note—that is, he lend his name to the maker,not the holder. Putting it another way: An accommodation noteis one to which the accommodation party has put his name, withoutconsideration, for the purpose of accommodating some other partywho is to use it and is expected to pay it. The credit given to theaccommodation party is sufficient consideration to bind theaccommodation maker. Where, however, an indorsement is madeas a favor to the indorsee, who requests it, not the better to securepayment, but to relieve himself from a distasteful situation, andwhere the only consideration for such indorsement passes fromthe indorser to the indorsee, the situation does not present onecreating an accommodation indorsement, nor one where there isa consideration sufficient to sustain an action on the indorsement.(Maulini, et al vs. Serrano)

Right of the Accommodation Party to sue the AccommodatedParty

“[I]t may be properly remarked that when the accommodationparties make payment to the holder of the notes, they have theright to sue the accommodated party for reimbursement, sincethe relation between them is in effect that of principal and sureties,the accommodation parties being the sureties.” (Philippine

National Bank vs. Ramon Maza and Francisco Mecenas, G.R.

No. L-24224, November 3, 1925)

Extinction of an Accommodation Note

If an accommodation note has once been negotiated andpaid at maturity it is extinguished and cannot be re-issued so asto bind the accommodating party. A repeated use of the instrumentis not within the authority given. (Brannan, page 38, citingComstock v. Buckley, (Wis.), 124 N.W. 414, S.C. sec. 58.)

245

Knowledge of an indorsee for value that the note was givenfor the accommodation payee is not a defense

Knowledge of an indorsee for value that the note was givenfor the accommodation of the payee is not a defense to an actionby the indorsee against the accommodating maker. Nor is anagreement between the payee and maker that the note shouldbe deposited in a bank as collateral security for advances to bemade to the payee (and which were made) and that the bankshould hold and not negotiate the note, although the indorsee ofthe bank had knowledge of the agreement. The bank being aholder in due course could transfer its rights to the plaintiff.(Brannan, page 38, citing Black v. Bank of Westminster, 96 Md.399, 54 Atl. 88, S.C. sec. 56.)

Illustrative Cases:

Where it was agreed between the maker and the payee ofa note that each should receive one-half the proceeds of thediscount and pay one-half of the note, the maker was not anaccommodation maker. (Brannan, page 38, citing, Reyburn v.Queen City Savings Bank & Trust Co., 171 Fed. 609, 96 C.C.A.373.)

An accommodation note may be negotiated after maturityeven though it be the first negotiation and to one having knowledgeof the accommodation so as to make the accommodation makerliable. (Ibid, citing Marling v. Jones, 138 Wis. 82, 119 N.W. 931;Mersick v. Alderman, 77 Conn. 634, 60 Atl. 109, semble, S.C.sec. 52.)

III. NEGOTIATION

Sec. 30. What constitutes negotiation. - An instrument isnegotiated when it is transferred from one person to anotherin such manner as to constitute the transferee the holderthereof. If payable to bearer, it is negotiated by delivery; ifpayable to order, it is negotiated by the indorsement of theholder and completed by delivery.

Notes:


What constitutes negotiation?

An instrument is negotiated when it is transferred from oneperson to another in such manner as to constitute the transfereethe holder thereof. (Sec. 30, Negotiable Instruments Law)

It is important to bear in mind that the negotiation of anegotiable instrument must be distinguished from the assignment

or transfer of an instrument whether that be negotiable or non-negotiable. Only an instrument qualifying as a negotiableinstrument under the relevant statute may be negotiated either byindorsement thereof coupled with delivery, or by delivery alonewhere the negotiable instrument is in bearer form. A negotiableinstrument may, however, instead of being negotiated, also beassigned or transferred. The legal consequences of negotiationas distinguished from assignment of a negotiable instrument are,of course, different. A non-negotiable instrument may, obviously,not be negotiated; but it may be assigned or transferred, absentan express prohibition against assignment or transfer written inthe face of the instrument. (Sesbreño vs. CA, G.R. No. 89252,

May 24, 1993, [Feliciano, J.])

The words “not negotiable”, stamped on the face of the billof lading, did not destroy its assignability, but the sole effect wasto exempt the bill from the statutory provisions relative thereto,and a bill, though not negotiable, may be transferred by

assignment, the assignee taking subject to the equities betweenthe original parties. (supra)

Distinction between Assignability and Negotiability399

1. Assignability pertains to contracts in general.

2. An assignment is the legal method of transferringproperty or rights evidenced by a contract.

3. An assignment is an impracticable method, as regardscirculating medium, because:

a. Title created by assignment, as against the debtor,is not complete without notice to the debtor.


247

b. No subsequent purchaser of the property or rightscan acquire better title than that of his immediateassignor.

4. Negotiability pertains to a special class of contracts.

5. Negotiability facilitates their transfer as a circulatingmedium, because:

a. The bona fide purchaser for value is presumed to bethe true owner, and has good title.

b. Transfer is effected by indorsement or delivery.

c. In general, a consideration for the contractual relationis conclusively presumed as between parties notimmediate.

Purpose of Negotiability400

Negotiable bills and notes in some respects play the part of

money in business affairs. The fundamental purpose of

negotiability is to endow them with all the qualities necessary for

a limited commercial medium.401

Professor Charles Norton goes on to say that: “[p]robablythe primary object of negotiability is to give bills or notes the effectwhich money, in the shape of government bills or notes, plays incommercial transactions. These last are an unquestioned mediumof payment for debts or for the transfer of property rights. Theyare such an unquestioned medium because the credit or solvencyof the government, which has caused them to be issued, is behindthem. It is the distinct promise of a whole nation to exchange forthe bill or note itself, in precious metal, a sum of money intrinsicallyworth its face. x x x A man’s credit is rated at the amount of propertyor valuable rights he has or can procure. He makes this creditavailable in his bill or note because his credit is its guaranty offuture payment. The elements of credit may be either his earningcapacity or the accumulated property he owns. Business menrely upon these as the source of probable future payment. Andso the merchant sells goods, and the bank discounts for the sellerthe buyer’s note or draft. And business men who have no propertyin cash are by means of credit enabled to conduct and carry to

400 Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 17401 Id.


completion business and commercial enterprises. Other businessmen will take these promises of men of undoubted credit, andtreat them as cash. Thus we see bills and notes going from handto hand in commercial markets, and credit taking the part of moneyin commercial transactions. And here, perhaps, as a part of thistheory of negotiability, it is well to show how far and under whatcircumstances courts have treated negotiable instruments asliquidation of indebtedness.”402

If an instrument is payable to bearer, how is it negotiated?

If the instrument is payable to bearer, it is negotiated bydelivery.

How about if the instrument is payable to order?

If payable to order, it is negotiated by the indorsement ofthe holder and completed by delivery.

Effect of a defective negotiation; Legal title to instrument notvested in plaintiff

According to Prof. Daniel: “[a]s has been seen, the transfereeof a non-negotiable contract must bring action in the name of theoriginal payee, to the use of the transferee. This is upon the theorythat, notwithstanding the assignment, the legal title remains inthe original owner. But the transfer of a negotiable contract carrieswith it the legal title thereto, and the owner thereof must bringaction in his own name. It follows that if the plaintiff is not thelegal owner of the instrument, he cannot maintain suit thereon inhis own name. Any defense which attacks the method and mannerof transferring the legal title to a negotiable instrument, or thatwould invalidate the transfer, or any denial of the existence of atransfer to the plaintiff, either by delivery, or by indorsement anddeliver, as the case may be, would, if made out, constitute a legalbar to an action brought thereon. What has been heretofore saidon the subject transfer by indorsement and deliver, and of thesteps that may be necessary in detail to effectuate a change oflegal ownership from one person to another, need not be repeatedhere. x x x It is generally sufficient here to say that if the plaintiff isnot the owner or the agent or trustee of the owner, a defense

402 Id.

249

successfully setting up the fact will defeat recovery.” (Elements ofthe Law of Negotiable Instruments, Daniel, p. 305-306)

Illustrative Case:

The plaintiff made a note to the order of X, who was tonegotiate it for plaintiff’s benefit. About three months later afterseveral unsuccessful attempts to negotiate the note, plaintiff askedX for the note and was falsely told that it had been destroyed.About six months thereafter but before its maturity X deliveredthe note, without indorsing it, to defendant as collateral for a loanto himself. Plaintiff sued to restrain defendant from disposing ofthe note and for its cancellation. Held, that the relief should notbe granted, that although defendant was not a holder in due courseunder the Negotiable Instruments Law, yet plaintiff was liable tohim on the ground that X was his agent to borrow money fromhim. (Brannan, page 40, citing Sublette v. Brewington (Mo. App.),122 S.W. 1150.)

In another case, “the cashier of a bank sold certain notes,indorsed in blank by the payee, to defendant who deposited themin his private box in the bank. The cashier had a key to the boxand was authorized by defendant to collect the notes. The cashierabstracted the notes from the box and sold them to plaintiff, abona fide purchaser. Plaintiff deposited them in his private box,authorizing the cashier to collect them. When the notes weredue the cashier got new notes from the maker, payable to theorder of the defendant, forged defendant’s indorsement anddeposited the notes in plaintiff’s box where they were found afterthe suicide of the cashier. Held, that there was sufficient deliveryof the original notes to plaintiff to complete a valid transfer, whetherthey were deposited in his box by him or by the cashier, and thatplaintiff was entitled to impress a trust on the new notes taken inplace thereof. (Ibid, citing Irwin v. Deming, 142 Iowa, 299; 120N.W. 645.)

Sec. 31. Indorsement; how made. - The indorsement must bewritten on the instrument itself or upon a paper attachedthereto. The signature of the indorser, without additionalwords, is a sufficient indorsement.

Notes:


Meaning of term “indorsement”

INDORSEMENT—Is the writing of the name of the indorseron the instrument with the intent wither to transfer the title to thesame, or to strengthen the security of the holder by assuming acontingent liability for its future payment, or both. It strictly appliesonly to negotiable instruments.403

Indorsing an instrument, in its literal sense means writingone’s name on the back thereof; and, in its technical sense, itmeans writing one’s name thereon with intent to pass title theretoand to incur the liability of a party who warrants payment of theinstrument, provided it is duly presented to the principal at maturity,not paid by him, and such fact is duly notified to the indorser.Indorsement, strictly speaking, is applicable only to negotiablepaper, and the term includes delivery for value to the indorsee,but it is otherwise as to an instrument not negotiable.404 (Daniel,Elements of the Law of Negotiable Instruments, page 107-108)

The formal requisites of an indorsement are:405

a) Though usually on the back of the instrument, anindorsement is on its face, but it must be somewhereupon it. When by reason of rapid circulation theinstrument becomes filled with indorsements, the lawmerchant permits the holder to paste on a slip of paperfor his own and subsequent indorsements. This is calledan allonge.406

b) The usual form of indorsement is the signature of theindorser, with or without a direction to pay the indorseedescribed or to him or order. Any form of words with thesignature from which the intent of the holder to incur theliability of an indorser may be gathered is a sufficientindorsement.407

By an indorsement, therefore, a party not only passes hisinterest in the bill to another, but also pledges his credit for the


404 Daniel of Negotiable Instruments, 666405 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,

1900, p. 106406 Id.407 Id.

251

honor of the bill. In other words, an indorsement is at once atransfer and a contract.408

Nature of Indorsement

The nature of an indorsement is a follows: It is

a) A contract which the indorser assumes with his indorseeand subsequent holder that, if the drawee, acceptor, ormaker fails to honor the bill or note, he will, upon theperformance of certain conditions imposed by the lawmerchant, indemnify the holder for all loss incurred byreason of the dishonor of the bill or note.409

b) A transfer of the title to the instrument.410

The student must fully grasp this idea,—that the indorsementis a contract, and a contract to which the law merchant and thecommon law have appended very peculiar conditions. It is contractsomething in the nature of a guaranty, something in the nature ofa warranty, and to the liability under which the laws have attachedthe very unusual conditions of presentment, demand, and noticeof dishonor. It is, to be sure, an evidence of a transfer of title, butit is principally a development of a form of contract at the handsof the creators of the body of rules of the law merchant.411

The last general element of an indorsement is that it is atransfer of the title to the instrument. It is sufficient here to say, ingeneral terms, that by this is meant nothing more than that it is amere purchase and sale of a piece of property. The indorser ortransferrer is viewed in many respects as a vendor, and theindorsee or transferee as a vendee. It is, of course, not tangibleproperty, but a chose in action, and as such transferee or vendeethe indorsee merely purchases the rights of the indorser.412

Requisites of indorsement

The requisites of an indorsement are as follows:413

408 Id., p. 107, citations omitted409 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,

1900, p. 128410 Id.411 Id., citations omitted412 Id., p. 132413 Id.


a) It must follow the tenor of the bill or note.

b) It must be by the payee or a subsequent holder.

c) It is only complete upon delivery.

It must follow the tenor of the bill or note.

The indorser, as well as the acceptor, may not alter theamount of money obligated in the instrument to be paid, nor thetime, place, or manner of payment. If, for instance, the indorserordered payment of part of the sum called for in the originalinstrument to one person, and part to another, it would amount toan apportionment of the contract, and the acceptor or maker wouldthus, by the indorser’s act, be liable to two actions where, by theterms of the original contract, he was liable to but one. Were therule otherwise, the indorser would be empowered to make acontract for the maker or acceptor without his assent,—a reductionad absurdum. But this does not mean that, when an instrumenthas been paid in part, a receipt for the amount paid may not bewritten on its back, and the indorser may not transfer the balance,nor that the note may not be transferred to two or more persons,who hold it on co-ownership as a joint right, nor that an instrumentmay not be indorsed to a third person as collateral security for aclaim equaling but part of the amount called for in the instrumentitself. All these are perfectly proper courses, because they transferbut one right of action. The test is, does the transfer cut up theright of action, or vary it, or invest different persons with differentrights of action against different parties to the instrument? If itdoes, the indorsement is void as such.414

Who may indorse.

The sense of this rule is, however, restricted. x x x [A] personwho is not a holder or owner of the instrument in any sense, butwho puts his name upon it merely to support its circulation by hiscredit, may incur liability as a so-called “irregular indorser.” Allthat we would here say is that in case of instruments payable toorder the payee must be in the first instance the first indorser.415

414 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,1900, pp. 131-132

415 Id., p. 134

253

This is because of several reasons. The first is that theproperty of the instrument is in the payee. Until he indorses it, thelegal title is not transferred. Mere possession by someone elseof the instrument unendorsed does not entitle that other personto the full rights of a bona fide purchaser, and if the maker oracceptor pays it to such person, it is at the risk of possible re-payment.416

But this rule is not universal in its application. Anindorsement is only necessary to transfer the legal asdistinguished from the equitable title to the paper. If by mistake,accident, or fraud, the indorsement has been omitted, when itwas intended that the indorsement should be made, the payeemay be compelled by a court of equity to make the indorsement.Meantime the transferee holds the bill or note under the samerights that he would have acquired under the assignment of papernot negotiable. In other words, he is the beneficial owner, andhas those rights and only those rights against prior parties whichthe payee or his assignor must have,—and every equitabledefense available against them is available against him. Thisrule applies to subsequent holders. In cases of indorsements infull, the indorsee in such indorsement named must for the samereasons himself indorse the instrument. In no other way will thetransfer convey the legal title to the holder, so that he can at lawhold the other parties liable to him.417

The second reason rests upon the theory that the liability ofindorsers to each other is regulated by the position of their names.This reason also is restricted in its application. To this rule, too,the irregular indorser, who has not owned the paper, and to whomno such transfer has been made, is also an exception; although,of course, where the second accommodation indorser of aninstrument has paid and taken it up, he becomes a holder forvalue, and may compel the first accommodation indorser to payhim, although both are accommodation indorsers.418

[T]he contract which each indorser makes when he indorsesthe paper is that he is liable to every subsequent indorsee, just as

416 Id.417 Id., pp. 134-135418 Id., p. 135


every antecedent party is liable to him. The liability is several. Itis successive. And the object of the rule is only to maintain theseindorsements in the regular order of their liability. It does not gofurther than this.419

Thus where A made a note payable to B or order, and Bafterwards indorsed the note to C, who afterwards indorsed it toB again, the court, upon suit by B against C, refused a recoverybecause it was a prior indorser calling upon a subsequent one;and the inference of the decision is that this course was not allowedbecause it involved circuitry of action. One who has indorsed abill or note, and become liable as indorser, cannot, as a rule, onhaving the instrument reindorsed to him by the other, bring anaction against him on the indorsement, for the intermediateindorsee would have his remedy over, and the result of the actionwould be to place the parties in precisely the same situation asbefore any action at all. But if such prior indorser had indorsedwithout recourse, or if the circumstances otherwise negative theright of his intermediate indorsee to sue upon the indorsement,the objection as to circuitry of action would be removed, and theprior indorser could recover under the indorsement back asindorsee.420

Necessity for Delivery.

As in the case of the inception of the original contract rightsunder the principal terms of the instrument, and also under theacceptance, an indorsement requires delivery. And the rules andreasons relating to the delivery of an indorsed instrument by thepayee or indorser are in most respects the same as those alreadygiven relating to the delivery of bills and notes and of acceptances.The negotiation of the instrument begins with the act ofindorsement as distinguished from the intention of the parties toindorse, and is consummated by the delivery of the instrumentand its acceptance with the intention to pass and vest title. Onthese simple acts the whole contract rests. The law prima faciepresumes the other elements of contract. For example, deliveryonce being made and the title having once passed, these facts ofthemselves import a consideration. Possession of the instruments

419 Id.420 Id., citations omitted

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obviates the necessity of pleading delivery, non-delivery beingwholly a matter of affirmative defense. And the terms “indorsed”in pleading includes delivery for value to the indorsee. But bothindorsement and delivery must concur in the transfer. Theindorsement without delivery is nothing, although the indorser hasin fact signed his name and the indorsee knows that it is signed.Still the contracts so far as it has gone may be revoked by theindorser, and the indorsement countermanded, unless somecontract right other than that of the indorsement itself exists in theindorsee. The delivery must be made by the indorser, otherwisethe transfer of the instrument is not by his order. His executor oradministrator even cannot make delivery, although the payeebefore his decease has written a name upon it. So, too, if atransferee of a bill or note send it back to his indorser, refusing toaccept it, this is a refusal of an offer, and his subsequent gettingpossession of the instrument without assent of the indorser willnot invest him with title, because there was then no intention tocontract present between them, and hence no contract.421

How should the indorsement be made?

The indorsement must be written on the instrument itself orupon a paper attached thereto.

Moreover, the signature of the indorser, without additionalwords, is sufficient indorsement. (Sec. 31, Negotiable InstrumentsLaw)

An indorsement is necessary for the proper negotiation ofcheck specially if the payee named therein or holder thereof isnot the one depositing or encashing it. (Vicente Go vs. Metropolitan

Bank and Trust Co., G.R. No. 168842, August 11, 2010)

Thus, it was held that “stamping the name of the payee onthe back with a rubber stamp with his authority and with intent toindorse the instrument, is a valid indorsement.” (Brannan, page41, citing Mayers v. McRimmon, 140 N.C. 640, 53 S.E. 447, 111Am. St. Rep. 879, S.C. sec. 49.)

421 Id., pp. 136-137


Where shall an indorsement be written?

While an indorsement, as its derivation and meaning wouldindicate, should be, and generally is, placed on the back of theinstrument, it may be written—although unusual and irregular—on any other portion of it, even on the face, and under the maker’sname.422 (Daniel, Elements of the Law of Negotiable Instruments,page 111)

At any rate, the indorsement must, as a general rule, besomewhere on the paper itself, or attached thereto, and unless itis, the party cannot be held liable as an indorser,423 but a promisemade on a sufficient consideration will sustain an action upon itsbreach.424 (ibid, page 112)

Allonge

It is not necessary, however, that the indorsement shouldbe upon the original bill or note, in order to constitute it such, inthe full sense of the term. It sometimes happens that by rapidcirculation from hand to hand, the back of the paper is completelycovered by indorsements; and in such cases the holder may tackor paste on a piece of paper sufficient to bear his own andsubsequent indorsements, and thereon the indorsements maybe made. Such addition of the original instruments is called andan allonge, and it becomes for the purposes above named,incorporated as a part of it.425 (ibid, page 112)

What is the effect of transfer without indorsement?

Where the holder of an instrument payable to his ordertransfers it for value without indorsing it, the transfer vests in thetransferee such title as the transferor had therein. (Sec. 49,Negotiable Instruments Law)

In the case of banks, they are deemed to be negligent whenthey accept for deposit crossed checks without indorsement andin not verifying the authenticity of the negotiation of the checks.426

422 Partridge v. Davis, 20 Vt. 449; Bigelow on Bills and Notes, 135423 Fenn v. Harrison, 3 T.R. 757; Daniel on Negotiable Instruments, 748424 Moxon v. Pulling, 4 Campb. 51; French v. Tunrner, 15 Ind. 59425 Crosby v. Roub, 16 Wis. 622; Folger v. Chase, 18 Pick. 63426 Vicente Go vs. Metropolitan Bank and Trust Co., G.R. No. 168842

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Irregular Indorsements

A person whose name is on the back of a bill or note payable

to the order of the maker or drawer, or payable to bearer, is deemed

to be a indorser.427

If an instrument is payable to bearer, or to order of the makeror drawer, and indorsed in blank, so that it passes by delivery, aperson, not otherwise a party to the instrument, whose nameappears on the back of the instrument, is deemed to be an indorseronly. In such case the name of the indorser appears in its regularplace upon the instrument, and is treated, as in fact it appears tobe, as if it had been made by one to whom the instrument hadbeen delivered, and who, before himself transferring it by delivery,had indorsed it in order to incur the liability of indorser to histransferee and subsequent holders. The effect of the indorsementcannot be varied by parol proof.428

Indorsement in full

It is one which mentions the name of the person in whosefavor it is made; and to whom or to whose order, the sum is to bepaid. For instance: “Pay to B, or order,” signed A, is anindorsement in full by A, the payee or holder of the paper to B. Anindorsement in full prevents the bill or note from being indorsedby anyone but the indorsee.429 (Daniel, Elements of the Law ofNegotiable Instruments, page 112)

Can the transferee force the transferor to make hisindorsement?

Yes, the transferee acquires in addition, the right to havethe indorsement of the transferor. (Sec. 49, Negotiable InstrumentsLaw)

But for the purpose of determining whether the transfereeis a holder in due course, the negotiation takes effect as of thetime when the indorsement is actually made. (ibid)



429 Mead v. Young, 4 T.R. 28


Can there be partial indorsement?

As a general rule, no, there can be no partial indorsementof the instrument. The indorsement must be an indorsement ofthe entire instrument.

As an exception to the rule, however, where the instrumenthas been paid in part, it may indorsed as to the residue.

Sec. 32. Indorsement must be of entire instrument. - Theindorsement must be an indorsement of the entire instrument.An indorsement which purports to transfer to the indorsee apart only of the amount payable, or which purports to transferthe instrument to two or more indorsees severally, does notoperate as a negotiation of the instrument. But where theinstrument has been paid in part, it may be indorsed as tothe residue.

Notes:

What is the effect of partial indorsement?

ANSWER:

An indorsement which purports to transfer to the indorsee apart only of the amount payable, or which purports to transfer theinstrument to two or more indorsees severally, does not operateas a negotiation of the instrument. (Section 32, NegotiableInstruments Law)

Example:

An instrument reads:

Pay to David Lancelot, or order, Php 1,000.00 upondemand.

Applying Sec. 32, the instrument must be indorsed in itsentirety to a subsequent holder, if for instance, the instrument isindorsed only to the extent of Php 500.00, said indorsement doesnot operate as a negotiation of the instrument. But, if there waspayment made by the maker to the extent of Php 750.00, the

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instrument may be further indorsed, only to the extent of theresidue which in this case is Php 250.00

Sec. 33. Kinds of indorsement. - An indorsement may be eitherbe special or in blank; and it may also be either restrictive orqualified or conditional.

Notes:

What are the different kinds of indorsements?

ANSWER:

1. Special indorsement;

2. Indorsement in blank;

3. Restrictive indorsement;

4. Qualified indorsement.

Sec. 34. Special indorsement; indorsement in blank. - Aspecial indorsement specifies the person to whom, or towhose order, the instrument is to be payable, and theindorsement of such indorsee is necessary to the furthernegotiation of the instrument. An indorsement in blankspecifies no indorsee, and an instrument so indorsed ispayable to bearer, and may be negotiated by delivery.

Notes:

What constitutes a special indorsement?

ANSWER:

A special indorsement specifies the person to whom, or towhose order, the instrument is to be payable, and the indorsementof such indorsee is necessary to the further negotiation of theinstrument. (Sec. 34, Negotiable Instruments Law)

An instrument which is originally payable to bearer, or whichhas been indorsed in blank, though afterwards specially indorsed,is still payable to bearer; except as to the special indorser, who,


on such an instrument, after such an indorsement, is only liableon his indorsement to such parties as make title through it.430

Where an instrument is specially indorsed, title can only betransferred from the indorsee by his indorsement. In the veryoutset, this principle must be sharply contrasted with the case ofbills or notes payable to bearer or indorsed in blank. With bills ornotes payable to bearer or indorsed in blank, the holder ispresumed to be the true owner. Possession and title are one andthe same thing and this though the party possession it is in nowise a party to the instrument. But where the direction in thecontract is to pay specially to some person, that person and noother can direct that the money is to be paid in its turn. No otherperson can personate this indorsee, and by forgery satisfy thecondition of this contract. And it does not avail even that the billsis paid under a forged indorsement. Such payment or transferwas not in contemplation of the parties making the contract, andis utterly void.431

What constitutes indorsement in blank?

ANSWER:

Indorsement in blank specifies no indorsee, and aninstrument so indorses is payable to bearer, and may be negotiatedby delivery. (Sec. 34, Negotiable Instruments Law)

It is one which does not mention the name of the indorsee,and generally consists simply of the name of the indorser writtenon the back of the instrument. When the bill or note is indorsed inblank, it is, as has been said, transferable by mere delivery to thetransferee; but one indorsed in full must be indorsed again by theindorsee, in order to render it transferable to every intent—for hewho indorses to a particular person, declares his intention not tobe made liable except by that person’s indorsement over. (Daniel,Elements of the Law of Negotiable Instruments, page 113)

The student must keep in mind that this relates only to aninstrument held by a bona fide holder. Where the instrument is


431 Id., p. 117

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not in the possession of a bona fide holder, but of the finder or thethief, this extreme rule does not apply. The instrument is, then,like all other property. It cannot be enforced by the wrongful holder.But, when once it is in the hands of the bona fide holder, then it istreated as money in the ordinary course of business. Alike incase of money and of paper indorsed in blank, where either hasbeen stolen or found, the true owner cannot recover it after it hasbeen paid away fairly and honestly upon a valuable consideration,because it is necessary for the purpose of commerce that itscurrency should be established and secured.432

Illustrative Cases:

An indorsement in blank is not nullified by a guarantyfollowing it and guaranteeing the payment of a greater rate ofinterest, and costs of collection, and waiving demand and noticeof non-payment. (Brannan, page 42,citing Elgin City Banking,Co. v. Hall, 119 Tenn. 548, 108 S.W. 1068, S.C. secs. 38, 52-3.)

Sec. 35. Blank indorsement; how changed to special

indorsement. - The holder may convert a blank indorsementinto a special indorsement by writing over the signature ofthe indorser in blank any contract consistent with thecharacter of the indorsement.

Notes:

The receiver of a negotiable instrument indorsed in blank,or any bona fide holder of it, may write over it an indorsement infull to himself, or to another, or any contract consistent with thecharacter of an indorsement;433 but he cannot enlarge the liabilityof the indorser in blank by writing over it a waiver of any of hisrights, such as demand and notice;434 and he cannot fill it up soas to make the instrument payable in part to one person and inpart to another. The indorser’s contract is single and entire, andthe obligation created thereby cannot be broken into fragments,and the indorser required to pay in fractions to different persons.435

432 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,1900, pp. 111-112, citations omitted

433 Evans v. Gee, 11 Pet. 80; Condon v. Pearce, 43 Mid. 83; Johnson v.Mitchell, 50 Tex. 212

434 Daniel on Negotiable Instruments, 694435 Erwin v. Lynn, 16 Ohio (N.S.), 547


(Daniel, Elements of the Law of Negotiable Instruments, page113)

Combination of the rules

In case of the combination of the two classes,—indorsements in blank and in full,—the application of the rules issomewhat confusing to the student. For example, let us assumethat there are indorsed upon an instrument some blankindorsements, then some special indorsements, and after theseagain some indorsements in blank. The special indorser will beliable only to those “who can make their title through his specialindorsement.” The rule is well settled that if a note or bill be onceindorsed in blank, though afterwards indorsed in full, it will still, asagainst the drawer, the payee, and prior indorsers, by payable tobearer, though, as against the special indorser himself, title mustbe made through his indorsee.436

Can a blank indorsement be changed to a specialindorsement?

ANSWER:

Yes. The holder may convert a blank indorsement into aspecial indorsement by writing over the signature of the indorserin blank any contract consistent with the character of indorsement.(Sec. 35, Negotiable Instruments Law)

Sec. 36. When indorsement restrictive. - An indorsement isrestrictive which either:

(a) Prohibits the further negotiation of the instrument;or

(b) Constitutes the indorsee the agent of the indorser;or

(c) Vests the title in the indorsee in trust for or to theuse of some other persons.

But the mere absence of words implying power to negotiatedoes not make an indorsement restrictive.

436 Id., p. 118

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Notes:

A RESTRICTIVE INDORSEMENT—Means that theindorsee is deputed by the indorser to be his agent in collectingthe bill or note, or else that the title is vested in the indorsee as atrustee or for the use or for the benefit of a third person.437

An indorsement may be so worded as to restrict the furthernegotiability of the instrument; and it is then called a restrictiveindorsement. Thus, “pay the contents to J.S. only,” or “to J.S. formy use,” or “to order for my use,” or “for me,” are restrictiveindorsements, and put an end to the negotiability of the paper.438

Of the like character is an indorsement, “credit my account,” or“pay J.S. or order for account or on account of C.D.,” or “forcollection,” or “for collection and immediate returns.”439 Theseand similar restrictive words indicate that the indorsee is merelyan agent to receive the money, and that he paid no considerationfor the paper, as a purchaser would not intelligently accept suchan indorsement. The indorsee in such a case can only collect themoney; he cannot sell or hypothecate the instrument for his ownbenefit, nor can he hold the indorser liable to himself. Therestrictive words of the indorsement give notice of the trustengrafted upon it, and if the indorsee passes it off for his owndebt, or in any other manner violate the trust, the transferee wouldtake it subject to the trust.440 (Daniel, Elements of the Law ofNegotiable Instruments, page 114)

2011 Bar Question:

Z wrote out an instrument that states: “Pay to X theamount of Php1 Million for collection only. Signed, Z.”X indorsed it to his creditor, Y, to whom he owed Php1million. Y now wants to collect and satisfy X’s debtthrough the Php1 million on the check. May he validlydo so?

A. Yes, since the indorsement to Y is for Php1 Million.

437 Id., p. 119438 Wilson v. Holmes, 5 Mass. 543; Williams v. Potter, 72 Ind. 354439 First Nat. Bank v. Reno County, 3 Fed. 257; White v. National Bank, 102

U.S. 658; Continental Nat. Bank v. Weems, 69 Tex. 489440 Hook v. Pratt, 78 N.Y. 371; Claflin v. Wilson, 51 Iowa, 15; Daniel on

Negotiable Instrument, 698


B. No, since Z is not a party to the loan between X andY.

C. No, since X is merely an agent of Z, his only rightbeing to collect.

D. Yes, since X owed Y Php1 Million.

When is indorsement considered restrictive?

ANSWER:

An indorsement is considered restrictive which either:

1. Prohibits the further negotiation of the instrument; or

2. Constitutes the indorsee the agent of the indorser; or

3. Vests the title in the indorsee in trust for or to the use ofsome other persons.

What if on the face of the instrument, there is the absence ofwords implying the power to negotiate, does it make theindorsement restrictive?

ANSWER:

No. The mere absence of words implying power to negotiatedoes not make an indorsement restrictive. (Sec. 36, NegotiableInstruments Law)

Only after complying with Sec. 36 (a) to (c) will there be arestrictive indorsement. The law does not presume it from themere absence of words implying the power to negotiate.

Must be written in express words at the back of the instrument

In this kind of restrictive indorsement, the prohibition totransfer or negotiate must be written in express words at theback of the instrument, so that any subsequent party may beforewarned that it ceases to be negotiable. However, the restrictiveindorsee acquires the right to receive payment and bring any actionthereon as any indorser, but he can no longer transfer his rightsas such indorsee where the form of the indorsement does not

265

authorize him to do so.441 (Gempesaw vs. Court of Appeals, G.R.

No. 92244, February 9, 1993, bold supplied)

Sec. 37. Effect of restrictive indorsement; rights of indorsee.

- A restrictive indorsement confers upon the indorsee theright:

(a) To receive payment of the instrument;

(b) To bring any action thereon that the indorser couldbring;

(c) To transfer his rights as such indorsee, where theform of the indorsement authorizes him to do so.

But all subsequent indorsees acquire only the title of the firstindorsee under the restrictive indorsement.

Notes:

What are the effects of restrictive indorsement?

ANSWER:

A restrictive indorsement confers upon the indorsee the right:

1. To receive payment of the instrument;

2. To bring any action thereon that the indorser couldbring;

3. To transfer his rights as such indorsee, where the formof the indorsement authorizes him to do so.

But all subsequent indorsees acquire only the title ofthe first indorsee under the restrictive indorsement.

Indorsee for collection can sue in his own name

An indorsee for collection can sue in his own name, but hetakes the instrument subject to all equities existing between hisindorser and the maker. Payment by the maker to the indorserafter the indorsement is a good defense, and parol evidence toshow that the indorsee was the actual owner of part of the note is

441 NIL, Sec. 37


inadmissible as tending to contradict the indorsement. (Brannan,page 44, citing Smith v. Bayer, 46 Or. 143, 79 Pac. 497, 114 Am.St. Rep. 858.)

Kinds of restrictive indorsement

The first and the commonest variety, and the one which isgenerally spoken of by some text writers as restrictiveindorsement, is that where the holder deputes to some personthe business of collecting the bill; the other where the holderindorses the instrument to one person for the use or benefitof, or as the trustee of, another. Upon an indorsement of thefirst kind the instrument is no longer negotiable; the second varietyof indorsement does not, however, restrict its circulation.Examples of the first species of indorsement are indorsements“For collection,” the indorsement for collection meaning that theholder takes no title to it and can transfer to none, but can merelypresent it and receive the money upon it. In construing these andother cases like them, such as “Pay to A only,” or “Pay to A for myuse,” or “Pay to A for me,” or “Pay to my steward and no otherperson,” or “Pay to my servant for my use,” the courts have beengoverned by two principles. The first and most important is thereason that the natural construction of such a form of words isthat it implies a mere authority to receive the money called for inthe instrument for the use of the indorser himself, or according tohis directions. It therefore vests a mere agency in the indorsee,and shows that he, at least, did not give a valuable considerationfor the bill or note and is not therefore its absolute owner. It followsfrom this that the restrictive indorser, in creating such agency, didnot intend to pass the title to the indorsee, but rather to retain it inhimself. And hence, there being no intention to transfer, theinstrument cannot be negotiated through the indorsement. Thesecond is the reason that the restrictive indorsement, like theconditional indorsement, operates as notice both to the personscalled upon to pay the instrument and those who might acquire itafter the indorsement as purchasers. No subsequent purchasercould take the instrument in good faith, because whoever readsthe indorsement, as it would be every purchaser’s legal duty toread it, must see that its operation was limited. Such a purchasermust see that the object of the indorser was to prevent the moneyreceived from being applied to the use of any other person thanhimself. And therefore, whomsoever the money might be paid, it

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would be paid in trust for the indorser, and wheresoever theinstrument traveled it carried that trust on the face of it.442

2011 Bar Question:

A negotiable instrument can be indorsed by way of arestrictive indorsement, which prohibits furthernegotiation and constitutes the indorsee as agent ofthe indorser. As agent, the indorsee has the right,among others, to

A. demand payment of the instrument only.

B. notify the drawer of the payment of the instrument.

C. receive payment of the instrument.

D. instruct that payment be made to the drawee.

May the indorsee of a promissory note indorsed to him“for deposit” file a suit against the indorser?

A. Yes, as long as the indorser received value for therestrictive indorsement.

B. Yes, as long as the indorser received value for theconditional indorsement.

C. Yes, whether or not the indorser received value forthe conditional indorsement.

D. Yes, whether or not the indorser received value forthe restrictive indorsement.

Sec. 38. Qualified indorsement. - A qualified indorsementconstitutes the indorser a mere assignor of the title to theinstrument. It may be made by adding to the indorser’ssignature the words “without recourse” or any words ofsimilar import. Such an indorsement does not impair thenegotiable character of the instrument.

Notes:

AN INDORSEMENT WITHOUT RECOURSE—means that



the indorser exempts himself from liability to indemnify the holderupon the dishonor of the bill or note.443

An indorsement qualified by the words “without recourse,”“sans recourse,” or “at the indorsee’s own risk,” renders theindorser a mere assignor of the title of the instrument, and relieveshim of all responsibility for its payment,444 though not from certainliabilities which have been already enumerated.445 But such anindorsement does not throw any suspicion upon the character ofthe paper.446 (Daniel, Elements of the Law of NegotiableInstruments, pages 114-115)

The indorsement without recourse is in form of words,“Without recourse,” or “Sans recourse,” or “At the indorsee’s ownrisk,” or “I hereby indorse and transfer my right and interest in thisbill to C D, or order, but with this express condition: that I shall notbe liable to him or to any subsequent holder for the acceptanceor payment of the bill.” Such indorsements throw no discredit onthe bill. Such an indorser does not escape from the effect of thewarranties, as explained hereafter. The promise of a negotiablebill or note indorses it to a third person, merely stipulating that, asindorser, he is not to be responsible if the acceptor or maker doesnot pay it. This he may do, because he has the property in the billor note, and he may dispose of it on what terms he pleases. Suchand indorsement does not render the negotiable security no longernegotiable. The bill or note remains negotiable in the hands ofthe indorsee, although he has no remedy against the indorserwithout recourse. And, into whose hands so ever the bill or notemay come, the maker is still liable according to the terms of hisoriginal contract. The question with the courts in construingindorsements without recourse is whether the words ofindorsement are such that they clearly express an intention onthe part of the indorser not to be bound, and a correspondingintention on the part of the immediate subsequent indorsees,evidenced by their acceptance of the instrument with such anindorsement, to exempt the indorser from his liability. Thepresumption is rather that the usual liability of an indorser is


444 Wilson v. Codman’s Exr., 3 Cranch, 192; Borden v. Clark, 26 Mich. 410445 See ante, 173446 Lomax v. Picot, 2 Rand. 260; Kelley v. Whitnet, 45 Wis. 117

269

intended to be incurred. And, to overcome this, it must clearlyappear that the transfer of the instrument was only to transfer thetitle to it, and not to indemnify the indorsee against loss in case itwas not paid by the acceptor or maker. (Handbook of the Laws ofBills and Notes, Charles P. Norton, Third Edition, 1900, pp. 120-121, citations omitted)

Act No. 2031, known as the Negotiable Instruments Law, xx x establishes various kinds of indorsements by means of whichthe liability of the indorser is in some manner limited, distinguishingit from that of the regular or general indorser, and among thosekinds is that of the qualified indorsement which, pursuant to section38 of the same Act, constitutes the indorser a mere assignor ofthe title to the instrument, and may be made by adding to theindorser’s signature the words “without recourse” or any words ofsimilar import. (concurring opinion, Torres, J., in (Maulini, et al vs.

Serrano [1914])

If it was not its purpose or intent to assume and agree topay the notes, it should have indorsed them “without recourse”,or in such a manner as to disclaim any personal liability. When aperson makes an unqualified indorsement of a promissory note,the Negotiable Instruments Law specifies and defines his liability,and parol testimony is not admissible to explain or defeat suchliability. (Jose Velasco vs. Tan Liuan & Co., G.R. No. 17230, March

17, 1922, [Johns, J;])

Such an indorsement relieves the indorser of the generalobligation to pay if the instrument is dishonored but not of theliability arising from the warranties on the instrument as providedin Section 65 of the Negotiable Instruments Law. (Metropol

(Bacolod) Financing & Investment Corporation vs. Sambok Motors

Company, G.R. No. L-39641, February 28, 1983, [De Castro, J.])

“Recourse” means resort to a person who is secondarilyliable after the default of the person who is primarily liable.447

Appellant by indorsing the note “with recourse” does not makeitself a qualified indorser but a general indorser who is secondarilyliable, because by such indorsement, it agreed that if Dr. Villaruelfails to pay the note, plaintiff-appellee can go after said appellant.

447 Ogden, the Law of Negotiable Instruments, p.200 citing Industrial Bankand Trust Company vs. Hesselberg, 195 S.W. (2d) 470


The effect of such indorsement is that the note was indorsedwithout qualification. A person who indorses without qualificationengages that on due presentment, the note shall be accepted orpaid, or both as the case may be, and that if it be dishonored, hewill pay the amount thereof to the holder.448 (Ibid)

Liability of indorser “without recourse”

When the indorsement is “without recourse” the indorserspecially decline to assume any responsibility as a party to thebill or note; but the very act of transferring it, he engages that it iswhat it purports to be—the valid obligation of those whose namesare upon it. He is like a drawer who draws without recourse; butis nevertheless liable if he draws upon a fictitious party, or onewithout funds. And, therefore, the holder may recover againstthe indorser “without recourse,” (1) if any of the prior signatureswere not genuine; or (2) if the note was invalid between the originalparties, because of the want, or illegality of, the consideration; orif (3) prior party was incompetent, or (4) the indorser was withouttitle.449 (Daniel, Elements of the Law of Negotiable Instruments,page 109)

2011 Bar Question:

X is the holder of an instrument payable to him (X) orhis order, with Y as maker. X then indorsed it as follows:“Subject to no recourse, pay to Z. Signed, X.” When Zwent to collect from Y, it turned out that Y’s signaturewas forged. Z now sues X for collection. Will it prosper?

A. Yes, because X, as a conditional indorser, warrantsthat the note is genuine.

B. Yes, because X, as a qualified indorser, warrantsthat the note is genuine.

C. No, because X made a qualified indorsement.

D. No, because a qualified indorsement does notinclude the warranty of genuineness.

448 Ang Tiong vs. Ting, 22 SCRA 715449 Dumont v. Williamson, 18 Ohio (N.S.) 515; Seeley v. Reed, 28 Fed. 167;

Challiss v. McCrum, 22 Kan. 127

271

What is a qualified indorsement? How is it made?

ANSWER:

A qualified indorsement constitutes the indorser a mereassignor of the title of the instrument. It may be made by addingto the indorser’s signature the words “without recourse” or anywords of similar import. (Sec. 38, Negotiable Instruments Law)

Does a qualified indorsement impair the negotiable characterof the instrument?

ANSWER:

No. Such an indorsement does not impair the negotiablecharacter of the instrument.

Illustrative case:

The payee wrote on the back of the instrument the words, “Ihereby transfer and assign all my rights, title, and interest to andin within the note.” Held, that this is a qualified indorsement andequivalent to an indorsement without recourse. (Brannan, page45, citing Evans v. Freeman, 143 N.C. 61, 54 S.E. 847.)

The fact that an indorsement is “without recourse” is notenough to put a purchaser upon notice of equities. (Ibid, citingElgin City Banking Co. v. Hall, 119 Tenn. 548, 108 S.W. 1068,S.C. secs. 34, 52-3.)

Sec. 39. Conditional indorsement. - Where an indorsementis conditional, the party required to pay the instrument maydisregard the condition and make payment to the indorseeor his transferee whether the condition has been fulfilled ornot. But any person to whom an instrument so indorsed isnegotiated will hold the same, or the proceeds thereof,subject to the rights of the person indorsing conditionally.

Notes:

A CONDITIONAL INDORSEMENT—Means an indorsementby which the title to the instrument does not pass until the conditionmentioned in the indorsement is fulfilled.450


Rationale of the provision

The conditional indorsement is a device by which a payeeor an indorsee may part with the possession of an instrument, butnot with the legal title to it. Mr. Daniel instances “Pay to A B, ororder, if he arrives at 21 years of age,” or “Pay to A B, or order,unless before payment I give you notice to the contrary,” asexamples of conditional indorsement, the former being anindorsement upon a condition precedent, and the latter one upona condition subsequent. These conditional indorsement have notcome very often before the courts, but they are recognized asdistinct class. It may be said, by way of criticism, that in themcommercial convenience has overridden the strict theory ofnegotiability. This theory would not permit to exist a conditionwhich charged every subsequent indorsee with the duty of seeingwhether the condition had been fulfilled before he could legallyown the instrument. For, certainly, with the conditionalindorsement, as well as with the conditional bill or note, it wouldbe a most effective restriction to circulation as a medium ofpayment.451

[I]t is well to note the authority usually referred to as theleading case upon the subject,—ROBERTSON v.KENSINGTON.452 There is this indorsement was made upon anordinary draft: “Pay the within sum of Messrs. Clerk & Ross, ororder, upon my name appearing in the ‘Gazette’ as ensign in anyregiment of the line, between the 1st and 64th, if within two monthsfrom this date.” This was transferred to bona fide holders, andthe acceptors paid the bill on its maturity to one of these. In themeantime the indorser’s name had never appeared in the Gazetteas an ensign, and he brought suit as the payee of the bill againstthe acceptors who had accepted the bill after this indorsementhad been written upon it. And it is to be inferred from the report ofthe case that the court decided that such an indorsement wasonly a conditional transfer of the absolute interest in the bill, and,its condition never having been performed, the transfer wasdefeated. As appears from the cases, the point emphasized isthat the condition operates as notice, and, being merely a notice,



452 ROBERTSON v. KENSINGTON, 4 Taunt. 30

273

it does not destroy the negotiability of the bill or note. Thus, wherea note in usual form had these words upon it, signed by the makers,“The within obligation is to be delivered to the payees of the noteas a consideration for a judgment which has to be assigned tothe makers,” the court properly said the words were no part of thenote. Their effect is only to show the consideration, and to operateas a notice to any person who might purchase the note. By thiswas meant that it was the intention of the parties that it was not toaffect the original contract. And in cases of conditionalindorsement, when it is not the intention of the original partiesthat the main instrument should be contingent, the act of theconditional indorser is not to be understood as operating to changethe main instrument. The terms of the face of the instrument stillremain an absolute negotiable order or promise of payment tosomeone. That someone might in turn negotiate the bill or noteto someone else, who in his turn might continue his negotiationuntil it came to the conditional indorser. But he, on parting with it,having the right of property himself, might make a special contractwhich would be distinct from the contract embodied on the faceof the instrument. And the only purpose and result of this contractwould be to notify every holder subsequent to himself, and themaker or acceptor, when the time for the payment of the instrumentarrived, that he as an indorser parted with the instrument uponthe understanding that his ownership of it was not to cease untilsome stated condition was fulfilled. As between the immediateindorser and indorsee, there can be little doubt that this is a correctand proper rule. As to them the contract of indorsement is but anordinary contract, open to all objections and defenses to whichother contracts are open. Some of these objections and defensesmay even be shown by parol evidence. This is because thecontract consists partly of written indorsement, partly of the act ofdelivery of the bill to the indorsee, and partly of the mutual intentionwith which the delivery is made by the indorser and received bythe indorsee. But when the question is not one between theimmediate indorser and indorsee, but between the indorser orindorsee and third parties holding in good faith and for value, itbecomes much more embarrassing. It is clear that parol evidenceor evidence of intention cannot be allowed to engraft a conditionupon the instrument such that it will affect third parties. But wherethe indorsement is in writing, the rule is so far settled that themaker or acceptor and probably prior parties are bound to takenotice of the title of the indorsee, and, having such notice, they


pay the instrument to him or to subsequent parties at the risk ofrepayment to the conditional indorser, if the condition is unfulfilled.But, on the other hand, the conditional indorser cannot restrictthe negotiability of the instrument and prevent its furtherindorsement by his indorsee. The terms of the original instrumentmaking it negotiable prevail, and persons other than the conditionalindorsee may take it subject to the notice of the condition. Andthough there is little, if any, authority upon the point, still it may beassumed that in the absence of an express warranty no otherthan a conditional warranty of title in the subsequent indorser wouldbe implied. There seems to be no reason why the other impliedwarranties should not remain a part of the contract. But the noticeof a conditional title with which the subsequent purchaser of theinstrument would be charged would seem to expressly exceptwarranty of title from the obligations of the indorser. (Handbookof the Laws of Bills and Notes, Charles P. Norton, Third Edition,1900, pp. 121-124)

Absolute and Conditional indorsements

An absolute indorsement is one by which the indorser bindshimself to pay, upon no other condition than the failure of priorparties to do so, and of due notice to him of such failure (protestpreceding it when necessary, as in the case of a foreign bill). Aconditional indorsement is one by which the indorser annexessome other condition to his liability. Sometimes the condition isprecedent, and sometimes subsequent. Thus, “Pay to A.B. ororder, of he arrives at twenty-one years of age,” or, “if he is livingwhen it becomes due,” is an indorsement upon a conditionprecedent. “Pay A.B. or order, unless, before payment, I give younotice to the contrary,” is upon a condition subsequent. Thecondition attached to the indorsement in no manner affect thenegotiability of the paper.453 (Daniel, Elements of the Law ofNegotiable Instruments, pages 113-144)

In conditional indorsements, can the fact that the conditionhad not yet been fulfilled be disregarded by the party requiredto pay?

453 Story on Notes, 140; Daniel on Negotiable Instruments, 697

275

ANSWER:

Yes. Where an indorsement is conditional, the party requiredto pay the instrument may disregard the condition and makepayment to the indorsee or his transferee whether the conditionhas been fulfilled or not.

What if the aforementioned instrument was indorsed toanother person?

ANSWER:

Any person to whom an instrument so indorsed is negotiatedwill hold the same, or the proceeds thereof, subject to the rightsof the person indorsing conditionally. (Sec. 39, NegotiableInstruments Law)

Sec. 40. Indorsement of instrument payable to bearer. - Wherean instrument, payable to bearer, is indorsed specially, it maynevertheless be further negotiated by delivery; but the personindorsing specially is liable as indorser to only such holdersas make title through his indorsement.

Notes:

What is the effect of an indorsement made on an instrumentwhich is payable to bearer?

ANSWER:

Where an instrument, payable to bearer, is indorsedspecially it may nevertheless be further negotiated by delivery;but the person indorsing specially is liable as indorser to onlysuch holders as make title through his indorsement. (Sec. 40,Negotiable Instruments Law)

Furthermore, the holder may at any time strike out anyindorsement which is not necessary to his title. The indorserwhose indorsement is struck out, and all indorsers subsequent tohim, are thereby relieved from liability on the instrument. (Sec.48, Negotiable Instruments Law)


Illustration:

The instrument reads:

Pay to Margaux, or bearer, Php 1,000.00.

(sgd) Lance

The instrument was thereafter negotiated by delivery fromMargaux to Karl, but Karl indorsed it and delivered it to Kate.

In this instance, Kate can further negotiate the note bydelivery to a subsequent holder, and Karl then becomes liable asan indorser to Kate and to subsequent holders.

Sec. 41. Indorsement where payable to two or more persons.

- Where an instrument is payable to the order of two or morepayees or indorsees who are not partners, all must indorseunless the one indorsing has authority to indorse for theothers.

Notes:

If a bill or note be made payable to several persons notpartners, the transfer can only be made by a joint indorsement ofall of them; and as Chitty says, “If a bill has been transferred toseveral persons not in partnership, the right to transfer is in allcollectively, and not in any one individually.”454 Where, however,one of two or more joint payees or transferees undertake to transferthe instrument, the extent of the transfer will depend upon thenature of his interest. Such interest, whatever it is, passes to hisindorsee or assignee; but nothing beyond that, as against his co-party, unless indeed there be some other element in the transactionin the nature of fraud, agency, or other circumstance, modifyingthe rights of the parties.455 No action could be maintained on theindorsement of one of the joint parties,456 the interest passingthereby being equitable merely. (Daniel, Elements of the Law ofNegotiable Instruments, page 115)

454 Chitty on Bills [201], 232; Daniel on Negotiable Instruments, 701a455 Brown v. Dickinson, 27 Gratt. 693456 Caverick v. Vickery, 2 Dough. 652

277

An assignment by one joint payee of his interest to anotherpayee carries with it authority to indorse instrument for him.(Brannan, page 47, citing Kaufman v. State Sav. Bank, 151 Mich.65, 114 N.W. 863, 18 L.R.A. (N.S.) 630, 123 Am. St. Rep. 259.)

How can an instrument be indorsed if it is payable to two ormore persons?

Where an instrument is payable to the order of two or morepayees or indorsees who are not partners, all must indorse unlessthe one indorsing has authority to indorse for the others. (Sec.41, Negotiable Instruments Law)

Illustrative Case:

Metropolitan Bank and Trust Company (formerlyAsianbank Corporation)

vs. BA Finance Corporation and Malayan InsuranceCo., Inc.

G.R. No. 179952, December 4, 2009

CARPIO-MORALES, J.:

Bitanga obtained from BA Finance a loan in the amount ofPhp 329, 280 secured by a chattel mortgage. As required by themortgage agreement, Bitanga insured his car with MalayanInsurance Co., Inc. Policy contains a stipulation that: “Loss, if

any shall be payable to BA FINANCE CORP. as its interest may

appear. It is hereby expressly understood that his policy or any

renewal thereof, shall not be cancelled without prior notification

and conformity by BA FINANCE CORPORATION.” The car wasstolen, and on Bitanga’s claim, Malayan Insurance issued a checkpayable to the order of “B.A. Finance Corporation and LambertoBitanga.” For Php 224, 500, drawn against China BankingCorporation. The check was crossed with the notation “ForDeposit Payee’s Account Only.” Without the indorsement orauthority of his co-payee BA Finance, Bitanga deposited the checkto his account with the Asianbank Corporation, now merged withMetropolitan Bank and Trust Company. Bitanga subsequentlywithdrew the entire proceeds of the check. BA Finance uponknowing of the same instituted a complaint for sum of money anddamages.


The Court held that: “[w]here an instrument is payable tothe order of two or more payees or indorsees who are not partners,all must indorse unless the one indorsing has authority to indorsefor the others.457 Bitanga alone endorsed the crossed check, andpetitioner allowed the deposit and release of the proceeds thereof,despite the absence of authority of Bitanga’s co-payee BA Financeto endorse it on its behalf…The payment of an instrument over amissing indorsement is the equivalent of payment on a forgedindorsement458 or an unauthorized indorsement in itself in the caseof joint payees.459 Clearly, petitioner, through its employee, wasnegligent when it allowed the deposit of the crossed check, despitethe lone endorsement of Bitanga, ostensibly ignoring the fact thatthe check did not, it bears repeating, carry the indorsement of BAFinance.460

As has been repeatedly emphasized, the banking businessis imbued with public interest such that the highest degree ofdiligence and highest standards of integrity and performance areexpected of banks in order to maintain the trust and confidenceof the public in general in the banking sector.461 Undoubtedly, BAFinance has a cause of action against petitioner.”

Subsequently, this question was raised therein on whetheror not petitioner Metrobank is liable to BA Finance for the fullvalue of the check?

The Court held that” “provisions of the NegotiableInstruments Law and underlying jurisprudential teachings on theblack-letter law provide definitive justification for petitioner’s fullliability on the value of the check.

To be sure, a collecting bank, Asianbank in this case, wherea check is deposited and which indorses the check upon

457 Sec. 41, Act 2031458 Kelly v. Central Bank and Trust Co. (Colo App), 794 P2d 1037, 12

UCCRS2d 1089; Humberto Decorators, Inc. v. Plaza Nat’l Bank, 180 NJSuper 170, 434 A2d 618, 32 UCCRS 494; Vide: 11 Am Jur 2d, Bills andNotes, §224, at p. 557

459 Beyer v. First Nat’l Bank, 188 Mont 208, 612 P2d 1285, 29 UCCRS 563;Vide: 11 Am Jur 2d, Bills and Notes, §224, at p. 557

460 Gempesaw v. Court of Appeals, G.R. No. 92244, Feb. 9, 1993, 218 SCRA682, 695

461 Philippine Commercial International Bank v. Court of Appeals, G.R. No.121413, January 29, 2001, 350 SCRA 446

279

presentment with the drawee bank, is an indorser.462 This isbecause in indorsing a check to the drawee bank, a collectingbank stamps the back of the check with the phrase “all priorendorsements and/or lack of endorsement guaranteed”463 and,for all intents and purposes, treats the check as a negotiableinstrument, hence, assumes the warranty of an indorser.464

Without Asianbank’s warranty, the drawee bank (China Bank inthis case) would not have paid the value of the subject check.

Petitioner, as the collecting bank or last indorser, generallysuffers the loss because it has the duty to ascertain thegenuineness of all prior indorsements considering that the act ofpresenting the check for payment to the drawee is an assertionthat the party making the presentment has done its duty toascertain the genuineness of prior indorsements.465 Sections 65and 66 of the Negotiable Instruments Law state that:

Accordingly, one who credits the proceeds of a check to theaccount of the indorsing payee is liable in conversion to the non-indorsing payee for the entire amount of the check.466"

465 Sections 65 and 66 of the Negotiable Instruments Law state that:Sec. 65.– Every person negotiating an instrument by delivery or by aqualified indorsement warrants:(a) That the instrument is genuine and in all respects what it purports to

be;(b) That he has good title to it;(c) That all prior parties had capacity to contract;(d) That he has no knowledge of any fact which would impair the validity

of the instrument or render it valueless.But when the negotiation is by delivery only, the warranty extends in favorof no holder other than the immediate transferee.The provisions of subdivision (c) of this section do not apply to a personnegotiating public or corporation securities other than bills and notes.Sec. 66. Liability of general indorser. –Every indorser who indorses withoutqualification, warrants to all subsequent holders in due course:(a) The matters and things mentioned in subdivisions (a), (b), and (c) of

the next preceding section; and(b) That the instrument is, at the time of his indorsement, valid and

subsisting;And in addition, he engages that, on due presentment, it shall be acceptedor paid, or both, as the case may be, according to its tenor, and that if itbe dishonored and the necessary proceedings on dishonor be duly taken,he will pay the amount thereof to the holder, or to any subsequent indorserwho may be compelled to pay it

466 Vide Peoples Nat. Bank v. American Fidelity Fire Ins. Co., 39 Md. App.614, 386 A.2d 1254, 24 U.C.C. Rep. Serv. 362 (1978); Middle StatesLeasing Corp. v. Manufacturers Hanover Trust Co., 62 A.D.2d 273, 404N.Y.S.2d 846, 23 U.C.C. Rep. Serv. 1215 (1st Dep’t 1978); Vide 11 AmJur 2d, Bills and Notes, §225, at p. 557


Sec. 42. Effect of instrument drawn or indorsed to a person

as cashier. - Where an instrument is drawn or indorsed to aperson as “cashier” or other fiscal officer of a bank orcorporation, it is deemed prima facie to be payable to thebank or corporation of which he is such officer, and may benegotiated by either the indorsement of the bank orcorporation or the indorsement of the officer.

Notes:

Where the president of a bank by authority of the directorsdischarges the duties ordinarily performed by a cashier, a draftdrawn payable to the president by name with the addition of “pt”is payable to the bank. (Brannan, page 48, citing Griffin v. Erskine,131 Iowa, 444, 109 N.W. 13.)

S was cashier of the C bank. A certificate of deposit issuedby the C bank to the order of “S Cashier” was indorsed “S Cashier”and came to the plaintiff, a holder in due course. Held, that theindorsement was that of the bank, and that it was not competentof the bank to show that S acted in his own interest and in violationof his duty to the bank. (Ibid, citing Johnson v. Buffalo Bank, 134Iowa, 731, 112 N.W. 165.)

Where a note was indorsed to A, parol evidence is notadmissible to show that a bank was intended as indorsee, eventhough A is, in fact, cashier of such bank. If A delivers the note tothe bank without indorsement, the bank may sue upon it, butsubject to equities. (Ibid, citing First Nat. Bank v. McCullough, 50Oregon, 508, 93 Pc. 366, 17 L.R.A. (N.S.) 1105, 126 Am. St. Rep.758.)

Sec. 43. Indorsement where name is misspelled, and so forth.

- Where the name of a payee or indorsee is wronglydesignated or misspelled, he may indorse the instrument astherein described adding, if he thinks fit, his proper signature.

Notes:

What is the remedy if the name of the payee or indorsee iswrongly misspelled?

281

ANSWER:

Where the name of the payee or indorsee is wronglydesignated or misspelled, he may endorse the instrument astherein described adding, if he thinks fit, his proper signature.(Sec. 43, Negotiable Instruments Law)

This is an instance where a bill or note is indorsed speciallydesignating the name of the person to be indorsed, and his nameis wrongly designated or misspelled. The remedy here is for thatperson whose name was misspelled to indorse using his propername or signature.

Sec. 44. Indorsement in representative capacity. - Where anyperson is under obligation to indorse in a representativecapacity, he may indorse in such terms as to negativepersonal liability.

Notes:

How could an instrument be indorsed in a representativecapacity?

ANSWER:

Where any person is under obligation to indorse in arepresentative capacity, he may indorse in such terms as tonegative personal liability. (Sec. 44, Negotiable Instruments Law)

He may do so by disclosing his principal and signing for orin behalf of said principal. Otherwise, if he signs without disclosinghis principal, he may be personally liable as an indorser of the billor note.

Sec. 45. Time of indorsement; presumption. - Except wherean indorsement bears date after the maturity of theinstrument, every negotiation is deemed prima facie to havebeen effected before the instrument was overdue.

Notes:


What is the presumption regarding the time of theindorsement of the instrument? Is there any exception tothe presumption?

ANSWER:

Every negotiation is deemed prima facie effected beforethe instrument was overdue.

Except where an indorsement bears date after the maturityof the instrument. (Sec. 45, Negotiable Instruments Law)

The presumption is grounded upon good faith and soundbusiness practices, and only applies when there is no dateindicated for the maturity of the instrument, otherwise, the writtendate will govern.

Sec. 46. Place of indorsement; presumption. - Except wherethe contrary appears, every indorsement is presumed primafacie to have been made at the place where the instrument isdated.

Notes:

What is the presumption regarding the place of indorsementof the instrument?

ANSWER:

Every instrument is presumed prima facie to have beenmade at the place where the instrument is dated. Except wherethe contrary appears. (Sec. 46, Negotiable Instruments Law)

Sec. 47. Continuation of negotiable character. - An instrumentnegotiable in its origin continues to be negotiable until it hasbeen restrictively indorsed or discharged by payment orotherwise.

Notes:

What is the rule on the continuity of a negotiable instrument?

283

ANSWER:

An instrument negotiable in its origin continues to benegotiable until it has been restrictively indorsed or dischargedby payment or otherwise. (Sec. 47, Negotiable Instruments Law)

However, the same rule is subject to the statute of limitations.

Overdue note still negotiable

An overdue promissory note is still negotiable within a statuteexempting from attachment debts secured by bills of exchangeor negotiable promissory notes, and hence the amount duethereon is exempt from foreign attachment. (Brannan, page 49,citing Oaskdale Mfg. Co. v. Clarke, 29 R.I. 192, 69 Atl. 681.)

After maturity, negotiable paper circulates, but transferee onlyacquires the right and title of the transferrer

After maturity negotiable paper still passes from hand tohand ad infinitum until paid. Moreover, the indorser, after maturity,writes in the same form, and is bound only upon the samecondition of demand upon the drawer and notice of nonpaymentas any other indorser. The paper retains its commercial attributes,and circulates as such in the community; but there is this vitaldistinction between the rights of a transferee who received thepaper before, and of one who received it after maturity. Thetransferee of negotiable paper to whom it is transferred aftermaturity, acquires nothing but the actual right and title of thetransferrer;467 and the like rule applies to the transferee who takesthe paper after a refusal to accept by the drawee, provided hehad notice of such refusal.468 In other words, the transferee ofnegotiable paper refused acceptance (with notice thereof), oroverdue, takes it subject to all the equities with which it wasencumbered in the hands of the party from whom he received it;for it comes, to use Lord Ellenborough’s words, “disgraced to him.”Thus, if he took it from a thief, or finder, or from a bankruptincapacitated by law to make the transfer, he could not recoveron it, inasmuch as the thief, finder, or bankrupt could not.469

467 Texas v. Hardenburg, 10 Wall. 68; Morgan v. United States, 113 U.S. 500468 O’Keefe v. Dunn, 6 Taunt. 305; Bartlett v. Benson, 14 M & W 733469 Byles on Bills [161], 284; Ashurst v. Royal Bank, 27 Law Times, 168


(Daniel, Elements of the Law of Negotiable Instruments, pages126-127)

Sec. 48. Striking out indorsement. - The holder may at anytime strike out any indorsement which is not necessary tohis title. The indorser whose indorsement is struck out, andall indorsers subsequent to him, are thereby relieved fromliability on the instrument.

Notes:

Where an indorsement is not necessary to the title of theholder of the bill or note, he may, as a rule, strike it out and allindorsers subsequent to him are relieved from their liability. Itshould be taken into consideration that indorsers incur liabilityonce they indorse the bill or note. And once that indorsement isstricken off, all subsequent indorsers are relieved from liability.

Illustrative cases:

An indorsee indorsed the note to a bank for collection, andupon its dishonor received it back. Held, such indorsee inpossession of the note was a “holder” under sec. 191, and that hecould sue upon it without striking out his indorsement. Merepossession was sufficient evidence of ownership to support thesuit (sec. 51). (Brannan, page 49, citing New Haven Mrg. Co. v.New Haven Pulp Co., 76 Conn. 126, 55 Atl. 604.)

One in possession of negotiable paper, indorsed in blankby the payee, is prima facie the owner thereof, and the mereerasure of subsequent indorsements does not destroy thispresumption. (Ibid, citing King v. Bellamy (Kan.), 108 Pac. 117.)

Plaintiff sued the maker and the payee on a note indorsedby the payee in blank, under which indorsement appeared thewords “to acc’t of B.F.E.” Held, that even if these words constituteda subsequent restrictive indorsement, it was not necessary toplaintiff’s title, and he could strike it out at the trial and recover asbearer. (Ibid, citing Jerman v. Edwards, 29 App. D.C. 535.)

Sec. 49. Transfer without indorsement; effect of. - Where theholder of an instrument payable to his order transfers it for

285

value without indorsing it, the transfer vests in the transfereesuch title as the transferor had therein, and the transfereeacquires in addition, the right to have the indorsement of thetransferor. But for the purpose of determining whether thetransferee is a holder in due course, the negotiation takeseffect as of the time when the indorsement is actually made.

Notes:

Section 49 of the Negotiable Instruments Law contemplatesa situation whereby the payee or indorsee delivers a negotiableinstrument for value without indorsing it.470 It bears stressing thatthe above transaction is an equitable assignment and thetransferee acquires the instrument subject to defenses andequities available among prior parties. Thus, if the transferor hadlegal title, the transferee acquires such title and, in addition, theright to have the indorsement of the transferor and also the right,as holder of the legal title, to maintain legal action against themaker or acceptor or other party liable to the transferor. Theunderlying premises of this provision, however, is that a validtransfer of ownership of the negotiable instrument in question hastaken place.471

Transferees in this situation do not enjoy the presumptionof ownership in favor of holders since they are neither payees norindorsees of such instruments. The weight of authority is that themere possession of a negotiable instrument does not in itselfconclusively establish neither the right of the possessor to receivepayment, or of the right of one who has made payment to bedischarged from liability. Thus, something more than merepossession by persons who are not payees or indorsers of theinstruments is necessary to authorize payment to them in theabsence of any other facts from which the authority to receivepayment may be inferred.472

It is an exception to the general rule for a payee of an orderinstrument to transfer the instrument without indorsement.

470 Bank of the Philippine Islands vs. Court of Appeals, et al, G.R. No. 136202,January 25, 2007, [Azcuna, J.]

471 Ibid.472 11 Am Jur 2d, § 988, citing Doubleday v. Kress, 50 NY 410, Hoffmaster v.

Black, 84 NE 423, and First Nat. Bank v. Gorman, 21 P2d 549


Precisely because the situation is abnormal, it is but fair to themaker and to prior holders to require possessors to prove withoutthe aid of an initial presumption in their favor, that they came intopossession by virtue of a legitimate transaction with the lastholder.473

“It has been held in Scotland that under the Bills of ExchangeAct, section 31 (4) which is the same as section 49, N.I.L., thetransferee for value, but without indorsement, of a bill acceptedfor the accommodation of the drawer-payee gets the title of thetransferor and may hold the acceptor without first getting anindorsement. (Hood v. Stewart, 17 Session Cases (4th Series)749. x x x Section 49 seems to change the law to the extent thattransfer for value, even without indorsement, of an instrument,payable to order, passes the legal title, although subject to equities.But accommodation, as against a transferee for value, is not,properly speaking, an equity but only a defense against theaccommodated party and transferees without value.” (cited inBrannan, pages 50-51)

“This section vests the title in the transferee withoutindorsement, and is not affected by secs. 30, 31. (Swenson v.Stoltz, 36 Wash. 318, 78 Pac. 999, S.C. sec. 18; Meuer v. PhoenixNat. Bank, 94 App. Div. 331, 88 N.Y. Supp. 83, S.C. sec. 187.)But the transferee without indorsement of a note payable to ordercannot be a holder in due course, notwithstanding sec. 59, forunder sec. 191 he is neither “holder,” because not a payee orindorsee, nor “bearer,” because the instrument is not payable tobearer.” (Mayers v. McRimmon, 140 N.C. 640, 53 S.E. 447, 111Am. St. Rep. 879, S.C. sec. 31, cited in Brannan, page 51)

Illustrative Cases:

“Plaintiff sued the maker on a note, on the back of whichappeared an indorsement of the name of the payee, but gave noproof of genuineness of the indorsement. Held, that plaintiff couldrecover as the equitable owner of the note, subject to any defensesagainst the payee.” (Johnson County Savings Bank v. ScogginDrug Co. (N.C.), 67 S.E. 253.)

473 Campos Jr. and Lopez Campos, “Notes and Selected Cases on NegotiableInstruments Law,” p. 108, (1994)

287

“Defendant, to accommodate C, drew a bill to his own orderon C, who accepted the bill and transferred it to plaintiff for aloan. Defendant neglected to indorse the bill, which was notnoticed by plaintiff when he made the advance. Held, thatdefendant was the “holder” of the bill within sec. 2 (N.I.L. sec.191), that he transferred it by means of C to the plaintiff, and thatplaintiff was entitled to have the indorsement of defendant and torecover against him on the bill.” (Walters v. Neary, 21 T.L.R. 146;cf. Day v. Longhurst, Weekly notes (1893), 3, S.C. sec. 191., citedin Brannan, page 52)

Sec. 50. When prior party may negotiate instrument. - Wherean instrument is negotiated back to a prior party, such partymay, subject to the provisions of this Act, reissue and furthernegotiable the same. But he is not entitled to enforce paymentthereof against any intervening party to whom he waspersonally liable.

Notes:

Can a prior party further negotiate the instrument?

ANSWER:

Yes. Where an instrument is negotiated back to a priorparty, such party may, subject to the provisions of the NegotiableInstruments Law, reissue and further negotiate the same. (Sec.50, Negotiable Instruments Law)

Are there limitations on the reissuance or further negotiationof the instrument?

ANSWER:

Yes. The prior party is not entitled to enforce payment ofthe instrument against any intervening party to whom he waspersonally liable. (Sec. 50, Negotiable Instruments Law)

Illustration:

A indorsed the note to B, B to C, C to D, then D back to B.Applying this rule, B can still further reissue or negotiate said note,


however, the limitation is that he cannot enforce payment againstC and D (hereto referred as intervening parties), in case the noteis dishonored by the maker, this is because B is also liable to Cand D as an indorser, before the note was negotiated back tohim.

IV. RIGHTS OF THE HOLDER

It is a general principle of the law merchant that, as betweenthe immediate parties to a negotiable instrument—parties betweenwhom there is a privity—the only superiority of such an instrumentover other unsealed evidences of debt is that it prima facie importsa consideration. But a bona fide holder for value of such aninstrument takes it discharged of all the equities existing betweenantecedent parties, and may recover it although it be without anyvalidity as between the parties prior to himself, as, for example, ifit was without consideration originally, or the consideration hasfailed, or the instrument was subsequently released or paid, oreven through it was originally obtained by fraud, theft, or robbery.474

This general rule is subject to certain exceptions, treated of in thesucceeding sections. (Daniel, Elements of the Law of NegotiableInstruments, page 122)

It should be observed, however, that as between him andhis immediate predecessor, or party between whom and himselfa privity exists, he stands upon the same footing as the payee ofa note against the maker. Fraud, illegality, want or failure ofconsideration may be pleaded against him by such immediateparty as freely as if the instrument were not negotiable.475 (Ibid)

Sec. 51. Right of holder to sue; payment. - The holder of anegotiable instrument may to sue thereon in his own name;and payment to him in due course discharges the instrument.

Notes:

Holder with legal title may sue

Any holder of a bill or note who can trace a clear legal titleto it, is entitled to sue upon it in his own name, whether hepossesses the beneficial interest in its contents or not.476 If the

474 Daniel on Negotiable Instruments, 169a, and cases cited475 Daniel on Negotiable Instruments, 810476 Caldwell v. Lawrence, 84 Ill. 161; Harpending v. Daniel, 80 Ky. 456

289

note by payable to A or B, it may be sued upon by them jointly orby either one of them.477 If there be a special indorsement, orassignment to a particular person, he is the proper person to sue;and if he is in possession he may sue although his name beindorsed on the paper, after the special indorsement orassignment. For in such case his indorsement will be presumedto be a mere memorandum, or evidence that he had negotiatedthe paper and then taken it up.478 (Ibid, page 268)

Agents, receivers, assignees, trustees, or personalrepresentatives, may sue on a note or bill payable to bearer, orindorsed in blank.479 And the done cause mortis of a note payableto the donor ’s order may use the name of his personalrepresentative, even against his protest.480 But a mere depositaryof such a note cannot maintain suit.481 If the paper be indorsedspecially to a particular person, none but such person or hisrepresentative can sue.482 A party for accommodation who paysthe bill may sue prior parties, but not subsequent ones. If anacceptor or maker for accommodation pays the bill he cannotsue drawer or indorser upon the bill, because, according to itsterms, he is liable to them. But he may sue the accommodationparty for money paid at his request.483 (Ibid, page 269)

Cause of action indivisible

It is a general principle of law that a party cannot divide anentire demand or cause of action, and maintain several suits forits recovery; and a recovery for part of an entire demand will baran action for the remainder, if due at the time that the first actionwas brought. (Ibid, page 271)

When instrument payable to bearer

An action on a bill or note payable to bearer, or indorsed inblank, may be maintained in the name of the nominal holder who

477 Westgate v. Healy, 4 R.I. 524478 Humphreyville v. Culver, 73 Ill. 485479 Law v. Parnell, 7 C.B. (N.S.) 282; Bowman v. Wood, 15 Mass, 534; Haxtun

v. Bishop, 3 Wend. 13; Daniel on Negotiable Instruments, 264; 2 Parsonson Notes and Bills, 446

480 Grover v. Grover, 24 Pick. 261; Sessions v. Mosley, 4 Cush. 87481 Sherwood v. Roys, 14 Pick. 172482 Daniel on Negotiable Instruments, 692, 1181a483 Stark v. Alford, 49 Tex. 260


is not the owner by the owner’s consent; and that possession bysuch nominal holder is prima facie sufficient evidence of his rightto sue, and cannot be rebutted by proof that he has no beneficialinterest, or by anything else but proof of mala fides.484 If it wereshown that the plaintiff upon suing upon a note payable to beareror indorsed in blank, has no interest in it, and in addition that he issuing against the will of the party beneficially interested, he couldnot recover, and his conduct would be in bad faith.485 It mattersnot that such nominal holder will receive the amount as trustee,agent, or pledge.486 The suit by him holding the paper shows histitle to recover; and it cannot matter to the defendant whodischarges the debt that the plaintiff is accountable over to a thirdparty. Evidence, however, that the plaintiff has no interest in theinstrument will be competent when foundation has been laid forits introduction by offer to prove offset, or other defense, availableagainst a third person who is its true owner.487 (Ibid, page 273)

Rights of a holder under a blank indorsement

The holder of a note blank as to the payee may fill it up withhis own name and sue upon it.488 If payable to a fictitious person,it may be sued on as payable to bearer.489 The holder of such apaper, in transferring it, should not use the fictitious name, butpass it by delivery only, or by indorsement,490 and even after thetrial, where judgment has gone for the plaintiff under theimpression that the indorsement had been filled up, the correctionbeing made nunc pro tunc.491 (Ibid, page 274)

But the filling up of the blank indorsement is formal merely,and not necessary that it should be filled up at all, for the mereact of suing upon it by the holder evidences his intention to treatthe indorser as a transferrer and indorser to himself.492 And if theplaintiff omit to state in his declaration all the indorsements after

484 Demuth v. Cutler, 50 Me. 300; Rubelman v. McNichol, 13 Mo. App. 584485 Tonne v. Wasson, 128 Mass. 517486 Nicolay v. Fritschle, 40 Mo. 67; King v. Fleece, 7 Heisk. 67; Bowman v.

Wood, 15 Mass. 534487 Logan v. Cassell, 88 Pa. St. 290488 Crutchley v. Clarence, 2 Maule & S 90489 Parsons on Notes and Bills, 448490 Maniort v. Roberts, 4 E.D. Smith, 83491 Whitter v. Hayden, 9 Allen, 408492 Rees v. Conococheague Bank, 5 Rand. 329; Poorman v. Mills, 35 Cal.

118

291

the first indorsement in blank, he may strike out the interveningindorsements, and aver that the first blank indorser indorsedimmediately to himself.493 (Ibid)

When indorsement is in full

If the bill or note be not payable to bearer or indorsed inblank, or indorsed specially to himself, the holder cannot (unlessauthorized by statute) sue in his own name, for although he maypossess the entire beneficial interest, the legal title is stilloutstanding in his transferrer, and he must use his name in orderto maintain the suit.494 By leaving the instrument unendorsed, thetransferrer necessitates and authorizes the use of his name tothe recovery of the amount; and he cannot object to its use, orrelease the action when instituted.495 If the transferrer indorsesthe paper, then his name cannot be used save by his own consent;for then the legal title and right to sue is vested in his indorsee.496

But if the suit is commenced without his consent, he maysubsequently assent to it.497 (Ibid, pages 274-275)

Possession is prima facie evidence of ownership

Possession is in itself prima facie evidence of the right ofthe party to sue and receive money when he holds under a legaltitle, and also that the title, although not expressly, is actually vestedin him. And therefore in order to defeat his suit, it must be shownthat he is a mala fide holder.498 As said in a Maryland case byChambers, J.: “A bill payable to bearer, or a bill payable to orderand indorsed in blank, will pass by delivery, and bare possessionis prima facie evidence of title, and for that reason possession ofsuch a bill would entitle the holder to sue.”499 And possession ofthe note or bill is prima facie evidence that the same was indorsedby the person by whom it purports to be indorsed;500 and production

493 Rand. V. Dovey, 83 Pa. St. 281; Merz v. Kaiser, 20 La. Ann. 379; Byles onBills [149], 268

494 Allen v. Newbury, 8 Iowa 65; Robinson v. Wilkinson, 38 Mich. 301; Marshv. Hayford, 80 Mc. 97

495 Paese v. Hirst, 10 B & C 123; Amherst Academy v. Cowles, 6 Pick, 427;Royce v. Nye, 52 Vt. 372

496 Bowie v. Duval, 1 Gill & J 175; Mosher v. Allen, 16 Mass. 451497 Golder v. Foss, 43 Me, 364498 Wheeler v. Johnson, 97 Mass. 39; Wilson Sewing Machine Co. v. Spears,

50 Mich, 534; Union Nat. Bank v. Barber, 56 Iowa, 562499 Whiteford v. Burckmyer, 1 Gill, 127500 Bank v. Mallan, 37 Minn. 404


at the trial is prima facie evidence that it remains unpaid. Butpossession of the instrument is not always necessary in order toinstitute a suit. If the holder has indorsed a note in blank andpledged it as collateral security, he may negotiate it to a thirdperson, while still pledged, and such person may sue as indorseewhile it is still in pledge, and maintain an action by dischargingthe lien and producing the note at the trial.501 (Ibid, page 275)

Who may be sued? General Principle

As a general rule, the holder may sue all the prior partieson the bill or note, but not any subsequent party. Thus a payeemay sue the acceptor or maker. An indorsee may sue the acceptoror maker, and all prior indorsers. (Ibid, page 276)

When indorser can sue acceptor or maker

The indorser of a bill or note cannot sue the acceptor ormaker until he has paid or satisfied it. But as soon as he doesthis he may sue the acceptor or maker.502 And if one indorsersues a prior party, it is not necessary for him to show that he hadreceived notice, provided it was duly received by such prior party.503

Where there are a number or indorsers, any one may sue, byarrangement between them, all indorsers subsequent to his beingstricken out.504 (Ibid)

When drawer can sue acceptor and vice versa

“The drawer,” says Mr. Chitty, “may maintain an action onthe bill against the acceptor, in case of a refusal to pay a bill alreadyaccepted, but not on a refusal to accept, in which latter case theaction must be special on the contract to accept.”505 Certainly thedrawer may sue the acceptor if he had to pay the bill, or mayleave it in the hands of the indorsee to sue for his benefit;506 but ishas been held that he cannot recover without evidence that hehas paid the bill.”507 (Ibid, page 277)

501 Fisher v. Bradford, 7 Greenl. 28502 Hoyt v. Wilkinson, 10 Pick. 31; McDonald v. Magruder, 3 Pet. 470503 Ellsworth v. Brewer, 11 Pick, 316504 Walwyn v. St. Quintin, 1 Bos & P 652505 Chitty on Bills [537], 608506 Louviere v. Laubray, 10 Mod. 36; Thurman v. Van Brunt, 19 Barb. 410;

Williams v. James, 15 Ad & El (N.S.) 69507 Thompson v. Flower, 1 Mart. N.S. (La) 301; 2 Parsons on Notes and Bills,

453

293

Where the acceptance is for the drawer’s accommodation,and the acceptor pays the bill, he cannot sue the drawer upon thebill, for it imports no liability to him, but he may sue for moneypaid at his request.508 But an acceptor for honor of the drawer orindorser may sue such drawer or indorser upon the bill itself.509

(Ibid)

Sec. 52. What constitutes a holder in due course. - A holderin due course is a holder who has taken the instrument underthe following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue,and without notice that it has been previouslydishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him, he had nonotice of any infirmity in the instrument or defect inthe title of the person negotiating it.

Notes:

The act of crossing a check serves as a warning to the holderthat the check has been issued for a definite purpose so that theholder thereof must inquire if he has received the check pursuantto that purpose; otherwise, he is not a holder in due course. (Dino

vs. Loot, G.R. No. 170912, April 19, 2010, [Carpio, J.])

However, the fact that respondents are not holders in duecourse does not automatically mean that they cannot recover onthe check. The Negotiable Instruments Law does not providethat holder who is not a holder in due course may not in any caserecover on the instrument. The only disadvantage of a holderwho is not in due course is that the negotiable instrument is subjectto defenses as if it were non-negotiable. Among such defensesis the absence or failure of consideration, which petitionersufficiently established in this case. Petitioner issued the subjectcheck supposedly for a loan in favor of Consing’s group, whoturned out to be a syndicate defrauding gullible individuals. Since

508 Bell v. Norwood, 7 La. 95; Stark v. Alford, 49 Tex. 260509 2 Parsons on Notes and Bills, 455


there is in fact no valid loan to speak of, there is no considerationfor the issuance of the check. Consequently, petitioner cannotbe obliged to pay the face value of the check. (supra)

“An allegation in an answer that plaintiff is not a holder indue course is a conclusion of law and insufficient to show whichof the conditions named in sec. 52 has not been complied with.”(Rogers v. Morton, 46 Misc. R. 494, 95 N.Y. Supp. 49, S.C. secs.26, 30, cited in Brannan, page 54)

“A woman delivered to her husband a check made payableto a certain creditor, with instructions to pay her debt with it. Thehusband handed the check to the creditor as payment upon adebt of his own to the same creditor who accepted it as such ingood faith. Held, the creditor was a holder in due course of thecheck.” (Boston Steel & Iron Co. v. Steuer, 183 Mass. 140, 66N.E. 646, 97 Am. St. Rep. 426, S.C. sec. 14, Ibid)

“A note payable to the maker’s order was indorsed in blankto a bank. The note was afterwards altered by inserting “payablewith interest.” The bank made a deed of trust of all its propertyincluding the note to secure its creditors. Held, that in Virgina apre-existing debt is a valuable consideration for a deed of trust tosecure it, and that the trustee was a holder in due course andcould recover on the note according to its original tenor, undersec. 124.” (Trustees of American Bank v. McComb, 105 Va. 473,54 S.E. 14, S.C. secs. 25, 52-1, cited in Brannan, pages 54-55)

“The payee of a note agreed with the accommodation makerthat it should not be negotiated to one R, of which fact R wasaware. The payee offered to sell the note to R, who lent the moneyto S, who bought the note. Before maturity S sold the note toplaintiff, who was ignorant that it was an accommodation noteand of the agreement, and who paid for it by his own note to S,who still held it. Held, plaintiff could recover of the maker the fullamount of the latter’s note.” (Mehlinger v. Harriman, 185 Mass.245, 70 N.E. 51., cited in Brannan, page 55)

Complete and Regular upon its Face

“The fact that the words “payable with interest” are writtenon a blank space after the words “value received” in the same

295

handwriting as the other written parts of the note, does not preventthe note being complete and regular on its face.” (Trustees ofAmerican Bank v. McComb, 105 Va. 473, 54 S.E. 14, sec. 25, 52,cited in Brannan, page 55)

“A partner in a firm which had dissolved, but without givingnotice thereof, signed notes in blank payable to X and sent themto X or to a bank where they were filled up as to date, amount,and maturity by the cashier as occasion required, and the proceedsplaced to the credit of X. Held, that the bank was not a holder indue course, and could not recover against the retired partnerwithout proof that he had authorized or ratified the issue of thenotes.” (Hunder v. Allen, 127 App. Div. 572; 111 N.Y. Supp. 820,ibid)

“A post-dated check is valid and negotiable, and is completeand regular on its face, notwithstanding it is stamped as a check,and not as a bill of exchange payable on time.” (Hitchcock v.Edwards, 60 L.T. Rep. 636, cited in Brannan, page 56.)

“The defendant accepted a bill otherwise complete, but theplace for the drawer’s signature was left blank and under it waswritten, “Drawn to the order of X.” The bill was sent to X to beused for a certain purpose. X instead of using the bill for suchpurpose transferred it to plaintiff, who paid value bonafide. Xindorsed the bill, but neglected to sign it was drawer until after itwas overdue and dishonored. Held, that the bill was not completeand regular when plaintiff took it and that he could not recover.”(South Wales, etc., Co. v.. Underwood (Q.B. Div. 1899), 15 T.L.Rep. 157, ibid)

Became Holder before Overdue

“A note providing that any delinquency in the payment ofinterest “shall cause the note to immediately become due andcollectible” is made overdue by the failure to pay the interest whendue, and a subsequent taker cannot be a holder in due course.”(Hodge v. Wallace, 129 Wis. 84, 108 N.W. 212, 116 Am. St. Rep.938, cited in Brannan, page 56)

“A note payable one day after date is not overdue at anytime on the day after its date.” (Wilkins v. Usher, 123 Ky. 696, 97S.W. 37, S.C. sec. 25, Brannan, page 56)


“A bill drawn for the acceptor’s accommodation but whichhad never been negotiated was in the hands of the drawer aftermaturity, and having come into the possession of the drawer’ssolicitors, the latter claimed a lien on it for services previouslyrendered the drawer in an action to recover the bill from aconverter, and sued the acceptor on the bill. Held, that plaintiffstaking the bill overdue could acquire no rights against theacceptor.” (Redfern v. Rosenthal, 86 L.T. Rep. 855, cited inBrannan, page 56)

“In his own right” is used merely in contradistinction to aright in a representative capacity, but indicates a right not subjectto that of another person, and good against all the world. x x x Agave a demand note payable to B or order on the understandingthat it would not be negotiated. B, however, indorsed the note forvalue to C. Afterwards A paid B the amount of the note. B thenobtained the note from C by fraud and gave it to A. Held, that Awas not a holder for value, the previous payment not being aconsideration given when he received back the note, and he isstill liable to C on the note.” (Nash v. DeFreville [1900] 2 Q.B. 72,cited in Brannan, page 56)

Meaning of term “before maturity”

The holder in order to acquire a better right and title to thepaper than his transferrer, must have possessed of it before it isoverdue. For if it were already paid by the maker or acceptor,and had been left outstanding, it would be already discharged,and they would not be bound to pay it again to anyone whoacquired if after the period when payment was due. And if it werenot paid at maturity, it is then considered as dishonored; andalthough still transferable in like manner and form as before, yetthe fact of its dishonor, which is apparent from its face, is equivalentto notice to the holder that he takes it subject to its infirmities, andcan acquire no better title than his transferrer.510 The doctrineapplicable to this subject has been admirably stated by ChiefJustice Shaw, who says: “Where a negotiable note is found incirculation after it’s due, it carries suspicion on the fact of it. Thequestion instantly arises: Why is it in circulation? Why is it notpaid? There is something wrong. Therefore, although it does not

510 Morgan v. United States, 113 U.S. 500; Speck v. Pullman Car Co., 121 Ill.57

297

give the indorsee notice of any specific matter of defense, suchas set-off payment, or fraudulent acquisition, yet it puts him oninquiry; he takes only such title as the indorser himself has, andsubject to any defense which might be made if the suit werebrought by the indorser.”511 But there is this limitation to thisdoctrine: that if the holder acquired the paper after maturity, fromone who became a bona fide holder for value and without noticebefore maturity, he is then protected by the strength of histransferrer’s title.512 (Daniel, Elements of the Law of NegotiableInstruments, pages 151-152)

Took it in Good Faith and for Value

“A bank discounting a note and obtaining credit in favor ofthe seller in another solvent bank for the amount, is a holder forvalue. But the mere statement that such credit was given, whenit does not appear how it was given or that it was ever used, is notenough to enable the court to determine whether the credit wasreal or substantial.” (Elgin City Banking Co. v. Hall, 119 Tenn.548 S.W. 1068, S.C. secs, 34, 38, cited in Brannan, page 57)

“The manager of a bank stole negotiable securities fromthe bank and pledged them with A. He afterwards got them back,with other negotiable securities from A by fraud and replaced themin the bank. The bank knew nothing of the transaction. Held,that the bank was a holder in due course and entitled to keep thesecurities.” (Brannan, page 58 citing London & County BankingCo. v. London & River Plate Bank, 21 Q.B.D. 535.)

The purchaser must have acquired the instrument for avaluable consideration.513 In some cases it is said that the holdermust have parted with “full value,” sometimes “fair value,” andsometimes the expression “for value” is used. And if he does soat any price, the holder acquires full rights and interests in theinstrument as against all parties, unless he had notice of defects,or willfully abstained from inquiry under circumstances which justifythe imputation of bad faith. (Daniel, Elements of the Law ofNegotiable Instruments, page 145)

511 Fisher v. Leland, 4 Cush. 456512 Ante, 201513 See ante 90-115 (Murray v. Lardner, 2 Wall. 710)


Without notice of fraud or defect of title, and illegality

In order to stand upon a better footing than his transferrer,the holder must acquire the instrument without notice of fraud,defect of title, illegality of consideration, or other fact whichimpeaches its validity in his tranferrer’s hands; and word notice inthis connection signifies the same as knowledge. Knowledge offraud or illegality impeaches the bona fides of the holder, or atleast destroys the superiority of his title, and leaves him in theshoes of the transferrer.514 And any fraud upon the transferrerincapacitates the transferee or one acquiring from him with noticefrom recovering against the transferrer.515 (Daniel, Elements ofthe Law of Negotiable Instruments, page 155)

Illustrative Case:

Crossed Checks; Holder in Due Course.

State Investment House vs.Intermediate Appellate Court, Anita Chua and Harris

ChuaG.R. No. 72764, July 13, 1989

FERNAN, C.J:

Petitioner State Investment House seeks a review of thedecision of respondent Intermediate Appellate Court (now Courtof Appeals) in AC-G.R. CV No. 04523 reversing the decision ofthe Regional Trial Court of Manila, Branch XXXVII dated April 30,1984 and dismissing the complaint for collection filed by petitioneragainst private respondents Spouses Anita Peña Chua and HarrisChua.

It appears that shortly before September 5, 1980, NewSikatuna Wood Industries, Inc. requested for a loan from privaterespondent Harris Chua. The latter agreed to grant the samesubject to the condition that the former should wait until December1980 when he would have the money. In view of this agreement,

514 Hanauer v. Doane, 12 Wall. 342; Crampton v. Perkins, 65 Md. 24; Macev. Kennedy, 68 Mich. 70

515 Lenheim v. Fay, 27 Mich. 70

299

private respondent-wife, Anita Peña Chua issued three (3) crossedchecks payable to New Sikatuna Wood Industries, Inc. allpostdated December 22, 1980 as follows:

DRAWEE BANK CHECK NO. DATE AMOUNT

1. China Banking 589053 Dec. 22, 1980 P98,750.00Corporation

2. International 04045549 Dec. 22, 1980 102,313.00CorporateBank

3. Metropolitan 036512 Dec. 22, 1980 98,387.00Bank &Trust Co.

The total value of the three (3) postdated checks amountedto P 299,450.00.

Subsequently, New Sikatuna Wood Industries, Inc. enteredinto an agreement with herein petitioner State Investment House,Inc. whereby for and in consideration of the sum of Pl,047,402.91under a deed of sale, the former assigned and discounted withpetitioner eleven (11) postdated checks including theaforementioned three (3) postdated checks issued by hereinprivate respondent-wife Anita Peña Chua to New Sikatuna WoodIndustries, Inc.

When the three checks issued by private respondent AnitaPeña Chua were allegedly deposited by petitioner, these checkswere dishonored by reason of “insufficient funds”, “stop payment”and “account closed”, respectively. Petitioner claims that despitedemands on private respondent Anita Peña to make good saidchecks, the latter failed to pay the same necessitating the formerto file an action for collection against the latter and her husbandHarris Chua before the Regional Trial Court of Manila, BranchXXXVII docketed as Civil Case No. 82-10547.

Private respondents-defendants filed a third party complaintagainst New Sikatuna Wood Industries, Inc. for reimbursementand indemnification in the event that they be held liable to


petitioner-plaintiff. For failure of third party defendant to answerthe third party complaint despite due service of summons, thelatter was declared in default.

On April 30, 1984, the lower court516 rendered judgmentagainst herein private respondent’s spouses, the dispositiveportion of which reads:

WHEREFORE, judgment is hereby rendered in favor of theplaintiff or against the defendants ordering the defendantsto pay jointly and severally to the plaintiff the followingamounts:

1. P 229,450.00 with interest at the rate of 12% perannum from February 24,1981 until fully paid;

2. P 29,945.00 as and for attorney’s fees; and

3. the costs of suit.

On the third party complaint, third party defendant NewSikatuna Wood Industries, Inc. is ordered to pay third partyplaintiffs Anita Peña Chua and Harris Chua all amounts saiddefendants’ thirdparty plaintiffs may pay to the plaintiff onaccount of this case.517

On appeal filed by private respondents in AC-G.R. CV No.04523, the Intermediate Appellate Court518 (now Court of Appeals)reversed the lower court’s judgment in the now assailed decision,the dispositive portion of which reads:

WHEREFORE, finding this appeal meritorious, We Reverseand Set Aside the appealed judgment, dated April 30, 1984and a new judgment is hereby rendered dismissing thecomplaint, with costs against plaintiff-appellee.519

Hence, this petition.

516 Presided over by then Judge (now Court of Appeals Justice) BienvenidoC. Ejercito.

517 Petition, Annex “A”, RTC Decision, Rollo, pp. 42- 43.518 Penned by Justice Eduardo P. Caguioa, concurred in by Presiding Justice

Ramon G. Gaviola, Jr., Justices Ma. Rosario Quetulio-Losa and LeonorInes-Luciano.

519 Rollo, p. 51.

301

The pivotal issue in this case is whether or not petitioner isa holder in due course as to entitle it to proceed against privaterespondents for the amount stated in the dishonored checks.

Section 52(c) of the Negotiable Instruments Law defines aholder in due course as one who takes the instrument “in goodfaith and for value”. On the other hand, Section 52(d) providesthat in order that one may be a holder in due course, it is necessarythat “at the time the instrument was negotiated to him he had nonotice of any x x x defect in the title of the person negotiating it.”However, under Section 59 every holder is deemed prima facie tobe a holder in due course.

Admittedly, the Negotiable Instruments Law regulating theissuance of negotiable checks as well as the rights and liabilitiesarising therefrom, does not mention “crossed checks”. But thisCourt has taken cognizance of the practice that a check with twoparallel lines in the upper left hand corner means that it couldonly be deposited and may not be converted into cash.Consequently, such circumstance should put the payee on inquiryand upon him devolves the duty to ascertain the holder’s title tothe check or the nature of his possession. Failing in this respect,the payee is declared guilty of gross negligence amounting tolegal absence of good faith and as such the consensus of authorityis to the effect that the holder of the check is not a holder in goodfaith.520

Petitioner submits that at the time of the negotiation andendorsement of the checks in question by New Sikatuna WoodIndustries, it had no knowledge of the transaction and/orarrangement made between the latter and private respondents.

We agree with respondent appellate court.

Relying on the ruling in Ocampo v. Gatchalian (supra), theIntermediate Appellate Court (now Court of Appeals), correctlyelucidated that the effects of crossing a check are: the check maynot be encashed but only deposited in the bank; the check maybe negotiated only once to one who has an account with a bank;and the act of crossing the check serves as a warning to the holder

520 Ocampo & Co. v. Gatchalian, 3 SCRA 603 (1961).


that the check has been issued for a definite purpose so that hemust inquire if he has received the check pursuant to that purpose,otherwise he is not a holder in due course. Further, the appellatecourt said:

It results therefore that when appellee rediscounted thecheck knowing that it was a crossed check he was knowinglyviolating the avowed intention of crossing the check.Furthermore, his failure to inquire from the holder, partydefendant New Sikatuna Wood Industries, Inc., the purposefor which the three checks were cross despite the warningof the crossing, prevents him from being considered in goodfaith and thus he is not a holder in due course. Being not aholder in due course, plaintiff is subject to personal defenses,such as lack of consideration between appellants and NewSikatuna Wood Industries. Note that under the facts thechecks were postdated and issued only as a loan to NewSikatuna Wood Industries, Inc. if and when deposits weremade to back up the checks. Such deposits were not made,hence no loan was made, hence the three checks arewithout consideration (Sec. 28, Negotiable InstrumentsLaw).

Likewise New Sikatuna Wood Industries negotiated thethree checks in breach of faith in violation of Article (sic) 55,Negotiable Instruments Law, which is a personal defenseavailable to the drawer of the check.521

In addition, such instruments are mentioned in Section 541of the Negotiable Instruments Law as follows:

Sec. 541. The maker or any legal holder of a check shall beentitled to indicate therein that it be paid to a certain bankeror institution, which he shall do by writing across the facethe name of said banker or institution, or only the words“and company.”

The payment made to a person other than the banker orinstitution shall not exempt the person on whom it is drawn,if the payment was not correctly made.

521 Petition, Annex “B”, IAC Decision, Rollo, pp. 50- 51.

303

Under usual practice, crossing a check is done by placingtwo parallel lines diagonally on the left top portion of the check.The crossing may be special wherein between the two parallellines is written the name of a bank or a business institution, inwhich case the drawee should pay only with the intervention ofthat bank or company, or crossing may be general whereinbetween two parallel diagonal lines are written the words “andCo.” or none at all as in the case at bar, in which case the draweeshould not encash the same but merely accept the same fordeposit.

The effect therefore of crossing a check relates to the modeof its presentment for payment. Under Section 72 of the NegotiableInstruments Law, presentment for payment to be sufficient mustbe made (a) by the holder, or by some person authorized to receivepayment on his behalf ... As to who the holder or authorized personwill be depends on the instructions stated on the face of the check.

The three subject checks in the case at bar had beencrossed generally and issued payable to New Sikatuna WoodIndustries, Inc. which could only mean that the drawer hadintended the same for deposit only by the rightful person, i.e., thepayee named therein. Apparently, it was not the payee whopresented the same for payment and therefore, there was noproper presentment, and the liability did not attach to the drawer.

Thus, in the absence of due presentment, the drawer didnot become liable.522 Consequently, no right of recourse isavailable to petitioner against the drawer of the subject checks,private respondent wife, considering that petitioner is not theproper party authorized to make presentment of the checks inquestion.

Yet it does not follow as a legal proposition that simplybecause petitioner was not a holder in due course as found bythe appellate court for having taken the instruments in questionwith notice that the same is for deposit only to the account ofpayee named in the subject checks, petitioner could not recoveron the checks. The Negotiable Instruments Law does not providethat a holder who is not a holder in due course may not in any

522 Chan Wan v. Tan Kim and Chen So, L-15380, September 30, 1960,109Phil. 706 (1960).


case recover on the instrument for in the case at bar, petitionermay recover from the New Sikatuna Wood Industries, Inc. if thelatter has no valid excuse for refusing payment. The onlydisadvantage of a holder who is not in due course is that thenegotiable instrument is subject to defenses as if it were non-negotiable.523

That the subject checks had been issued subject to thecondition that private respondents on due date would make thebackup deposit for said checks but which condition apparentlywas not made, thus resulting in the non-consummation of theloan intended to be granted by private respondents to NewSikatuna Wood Industries, Inc., constitutes a good defense againstpetitioner who is not a holder in due course.

WHEREFORE, the decision appealed from is herebyAFFIRMED with costs against petitioner.

SO ORDERED.

Gutierrez, Jr., Bidin and Cortes, JJ., concur.

Feliciano, J., is on leave.

Bataan Cigar and Cigarette Factory vs.The Court of Appeals and State Investment House,

Inc.G.R. No. 93048, March 3, 1994

NOCON, J:

For our review is the decision of the Court of Appeals in thecase entitled “State Investment House, Inc. v. Bataan Cigar &Cigarette Factory Inc.,”524 affirming the decision of the RegionalTrial Court525 in a complaint filed by the State Investment House,Inc. (hereinafter referred to as SIHI) for collection on three unpaidchecks issued by Bataan Cigar & Cigarette Factory, Inc.(hereinafter referred to as BCCFI). The foregoing decisionsunanimously ruled in favor of SIHI, the private respondent in thiscase.

523 Chan Wan v. Tan Kim and Chen So, supra.524 CA-G.R. CV No. 03032, Justice Jorge R. Coquia, ponente, Justices Josue

N. Bellosillo and Venancio D. Aldecoa, Jr., concurring, November 13, 1987.525 Judge Agusto E. Villarin, presiding, Branch XL, National Capital Region,

Manila.

305

Emanating from the records are the following facts.Petitioner, Bataan Cigar & Cigarette Factory, Inc. (BCCFI), acorporation involved in the manufacturing of cigarettes, engagedone of its suppliers, King Tim Pua George (herein after referredto as George King), to deliver 2,000 bales of tobacco leaf startingOctober 1978. In consideration thereof, BCCFI, on July 13, 1978issued crossed checks post dated sometime in March 1979 inthe total amount of P820,000.00.526

Relying on the supplier’s representation that he wouldcomplete delivery within three months from December 5, 1978,petitioner agreed to purchase additional 2,500 bales of tobaccoleaves, despite the supplier’s failure to deliver in accordance withtheir earlier agreement. Again petitioner issued post dated crossedchecks in the total amount of P1,100,000.00, payable sometimein September 1979.527

During these times, George King was simultaneouslydealing with private respondent SIHI. On July 19, 1978, he soldat a discount check TCBT 551826528 bearing an amount ofP164,000.00, post dated March 31, 1979, drawn by petitioner,naming George King as payee to SIHI. On December 19 and 26,1978, he again sold to respondent checks TCBT Nos. 608967 &608968,529 both in the amount of P100,000.00, post datedSeptember 15 & 30, 1979 respectively, drawn by petitioner in favorof George King.

In as much as George King failed to deliver the bales oftobacco leaf as agreed despite petitioner’s demand, BCCFI issuedon March 30, 1979, a stop payment order on all checks payableto George King, including check TCBT 551826. Subsequently,stop payment was also ordered on checks TCBT Nos. 608967 &608968 on September 14 & 28, 1979, respectively, due to GeorgeKing’s failure to deliver the tobacco leaves.

Efforts of SIHI to collect from BCCFI having failed, itinstituted the present case, naming only BCCFI as party defendant.The trial court pronounced SIHI as having a valid claim being a

526 Exhibit “1”, Folder of Exhibits, p. 11.527 Exhibit “4”, Folder of Exhibits, p. 14.528 Annex “A”, Folder of Exhibits, p. 3.529 Annexes “B” and “C”, Folder of Exhibits, pp. 4-5.


holder in due course. It further said that the non-inclusion of KingTim Pua George as party defendant is immaterial in this case,since he, as payee, is not an indispensable party.

The main issue then is whether SIHI, a second indorser,a holder of crossed checks, is a holder in due course, to beable to collect from the drawer, BCCFI.

The Negotiable Instruments Law states what constitutes aholder in due course, thus:

Sec. 52 — A holder in due course is a holder who has takenthe instrument under the following conditions:


(b) That he became the holder of it before it was overdue,and without notice that it had been previously dishonored,if such was the fact;


(d) That at the time it was negotiated to him he had no noticeof any infirmity in the instrument or defect in the title ofthe person negotiating it.

Section 59 of the NIL further states that every holder isdeemed prima facie a holder in due course. However, when it isshown that the title of any person who has negotiated theinstrument was defective, the burden is on the holder to provethat he or some person under whom he claims, acquired the titleas holder in due course.

The facts in this present case are on all fours to the case ofState Investment House, Inc. (the very respondent in this case) v.

Intermediate Appellate Court530 wherein we made a discourse onthe effects of crossing of checks.

As preliminary, a check is defined by law as a bill ofexchange drawn on a bank payable on demand.531 There are avariety of checks, the more popular of which are the memorandumcheck, cashier’s check, traveler’s check and crossed check.

530 G.R. No. 72764, 175 SCRA 310.531 Sec. 185, Negotiable Instruments Law.

307

Crossed check is one where two parallel lines are drawn acrossits face or across a corner thereof. It may be crossed generally orspecially.

A check is crossed specially when the name of a particularbanker or a company is written between the parallel lines drawn.It is crossed generally when only the words “and company” arewritten or nothing is written at all between the parallel lines. Itmay be issued so that the presentment can be made only by abank. Veritably the Negotiable Instruments Law (NIL) does notmention “crossed checks,” although Article 541532 of the Code ofCommerce refers to such instruments.

According to commentators, the negotiability of a check isnot affected by its being crossed, whether specially or generally.It may legally be negotiated from one person to another as longas the one who encashes the check with the drawee bank isanother bank, or if it is specially crossed, by the bank mentionedbetween the parallel lines.533 This is specially true in England wherethe Negotiable Instrument Law originated.

In the Philippine business setting, however, we used to bebeset with bouncing checks, forging of checks, and so forth thatbanks have become quite guarded in encashing checks,particularly those which name a specific payee. Unless one is avalued client, a bank will not even accept second indorsementson checks.

In order to preserve the credit worthiness of checks,jurisprudence has pronounced that crossing of a check shouldhave the following effects: (a) the check may not be encashedbut only deposited in the bank; (b) the check may be negotiatedonly once — to one who has an account with a bank; (c) and theact of crossing the check serves as warning to the holder that thecheck has been issued for a definite purpose so that he must

532 Article 541 — The maker of any legal holder of a check shall be entitled toindicate therein that it be paid to a certain banker or institution, which heshall do by writing across the face the name of said banker or institution,or only the words “and company”.

533 CAMPOS AND LOPEZ-CAMPOS, Negotiable Instruments Law, p. 574-575; AGBAYANI, AGUEDO, Commercial Laws of the Philippines, Vol. 1,1987 Ed., p. 446.


inquire if he has received the check pursuant to that purpose,otherwise, he is not a holder in due course.534

The foregoing was adopted in the case of SIHI v. IAC, supra.In that case, New Sikatuna Wood Industries, Inc. also sold at adiscount to SIHI three post-dated crossed checks, issued by AnitaPeña Chua naming as payee New Sikatuna Wood Industries,Inc. Ruling that SIHI was not a holder in due course, we thensaid:

The three checks in the case at bar had been crossedgenerally and issued payable to New Sikatuna WoodIndustries, Inc. which could only mean that the drawer hadintended the same for deposit only by the rightful person,i.e. the payee named therein. Apparently, it was not thepayee who presented the same for payment and therefore,there was no proper presentment, and the liability did notattach to the drawer. Thus, in the absence of duepresentment, the drawer did not become liable.Consequently, no right of recourse is available to petitioner(SIHI) against the drawer of the subject checks, privaterespondent wife (Anita), considering that petitioner is notthe proper party authorized to make presentment of thechecks in question.

xxx xxx xxx

That the subject checks had been issued subject to thecondition that private respondents (Anita and her husband)on due date would make the backup deposit for said checksbut which condition apparently was not made, thus resultingin the non-consummation of the loan intended to be grantedby private respondents to New Sikatuna Wood Industries,Inc., constitutes a good defense against petitioner who isnot a holder in due course.535

It is then settled that crossing of checks should put the holderon inquiry and upon him devolves the duty to ascertain the

534 Ocampo v. Gatchalian, G.R. No. L-15126, 3 SCRA 603 (1961); AssociatedBank v. Court of Appeals, G.R. No. 89802, 208 SCRA 465; SIHI v. IAC,supra.

535 Id. at pp. 316-317.

309

indorser’s title to the check or the nature of his possession. Failingin this respect, the holder is declared guilty of gross negligenceamounting to legal absence of good faith, contrary to Sec. 52(c)of the Negotiable Instruments Law,536 and as such the consensusof authority is to the effect that the holder of the check is not aholder in due course.

In the present case, BCCFI’s defense in stopping paymentis as good to SIHI as it is to George King. Because, really, thechecks were issued with the intention that George King wouldsupply BCCFI with the bales of tobacco leaf. There being failureof consideration, SIHI is not a holder in due course. Consequently,BCCFI cannot be obliged to pay the checks.

The foregoing does not mean, however, that respondentcould not recover from the checks. The only disadvantage of aholder who is not a holder in due course is that the instrument issubject to defenses as if it were non-negotiable.537 Hence,respondent can collect from the immediate indorser, in this case,George King.

WHEREFORE, finding that the court a quo erred in theapplication of law, the instant petition is hereby GRANTED. Thedecision of the Regional Trial Court as affirmed by the Court ofAppeals is hereby REVERSED. Cost against private respondent.

SO ORDERED.

Narvasa, C.J., Regalado and Puno, JJ., concur.

Padilla, J., took no part.

Security Checks; Holder in Due Course.

State Investment House, Inc. vs. Court of Appeals andNora B. Moulic

G.R. No. 101163, January 11, 1993

BELLOSILLO, J:

536 quoted supra.537 Chan Wan v. Tan Kim and Chen So, L-15380, 109 Phil., 706 (1960); SIHI

v. IAC, supra.


The liability to a holder in due course of the drawer of checksissued to another merely as security, and the right of a real estatemortgagee after extrajudicial foreclosure to recover the balanceof the obligation, are the issues in this Petition for Review of theDecision of respondent Court of Appeals.

Private respondent Nora B. Moulic issued to CorazonVictoriano, as security for pieces of jewelry to be sold oncommission, two (2) post-dated Equitable Banking Corporationchecks in the amount of Fifty Thousand Pesos (P50,000.00) each,one dated 30 August 1979 and the other, 30 September 1979.Thereafter, the payee negotiated the checks to petitioner StateInvestment House. Inc. (STATE).

MOULIC failed to sell the pieces of jewelry, so she returnedthem to the payee before maturity of the checks. The checks,however, could no longer be retrieved as they had already beennegotiated. Consequently, before their maturity dates, MOULICwithdrew her funds from the drawee bank.

Upon presentment for payment, the checks were dishonoredfor insufficiency of funds. On 20 December 1979, STATE allegedlynotified MOULIC of the dishonor of the checks and requestedthat it be paid in cash instead, although MOULIC avers that nosuch notice was given her.

On 6 October 1983, STATE sued to recover the value of thechecks plus attorney’s fees and expenses of litigation.

In her Answer, MOULIC contends that she incurred noobligation on the checks because the jewelry was never sold andthe checks were negotiated without her knowledge and consent.She also instituted a Third-Party Complaint against CorazonVictoriano, who later assumed full responsibility for the checks.

On 26 May 1988, the trial court dismissed the Complaint aswell as the Third-Party Complaint, and ordered STATE to payMOULIC P3,000.00 for attorney’s fees.

STATE elevated the order of dismissal to the Court ofAppeals, but the appellate court affirmed the trial court on theground that the Notice of Dishonor to MOULIC was made beyond

311

the period prescribed by the Negotiable Instruments Law and thateven if STATE did serve such notice on MOULIC within thereglementary period it would be of no consequence as the checksshould never have been presented for payment. The sale of thejewelry was never effected; the checks, therefore, ceased to servetheir purpose as security for the jewelry.

We are not persuaded.

The negotiability of the checks is not in dispute. Indubitably,they were negotiable. After all, at the pre-trial, the parties agreedto limit the issue to whether or not STATE was a holder of thechecks in due course.538

In this regard, Sec. 52 of the Negotiable Instruments Lawprovides —

Sec. 52. What constitutes a holder in due course. — A holderin due course is a holder who has taken the instrument underthe following conditions: (a) That it is complete and regularupon its face; (b) That he became the holder of it before itwas overdue, and without notice that it was previouslydishonored, if such was the fact; (c) That he took it in goodfaith and for value; (d) That at the time it was negotiated tohim he had no notice of any infirmity in the instrument ordefect in the title of the person negotiating it.

Culled from the foregoing, a prima facie presumptionexists that the holder of a negotiable instrument is a holderin due course.539 Consequently, the burden of proving that STATEis not a holder in due course lies in the person who disputes thepresumption. In this regard, MOULIC failed.

The evidence clearly shows that: (a) on their faces the post-dated checks were complete and regular: (b) petitioner boughtthese checks from the payee, Corazon Victoriano, before theirdue dates;540 (c) petitioner took these checks in good faith and forvalue, albeit at a discounted price; and, (d) petitioner was never

538 Rollo, pp. 13-14.539 State Investment House, Inc. v. Court of Appeals, G.R. No. 72764, 13 July

1989; 175 SCRA 310, bold supplied540 Per Deeds of Sale of 2 July 1979 and 25 July 1979, respectively; Rollo, p.

13.


informed nor made aware that these checks were merely issuedto payee as security and not for value.

Consequently, STATE is indeed a holder in due course. Assuch, it holds the instruments free from any defect of title of priorparties, and from defenses available to prior parties amongthemselves; STATE may, therefore, enforce full payment of thechecks.541

MOULIC cannot set up against STATE the defense that therewas failure or absence of consideration. MOULIC can only invokethis defense against STATE if it was privy to the purpose for whichthey were issued and therefore is not a holder in due course.

That the post-dated checks were merely issued as securityis not a ground for the discharge of the instrument as against aholder in due course. For the only grounds are those outlined inSec. 119 of the Negotiable Instruments Law:

Sec. 119. Instrument; how discharged. — A negotiableinstrument is discharged: (a) By payment in due course byor on behalf of the principal debtor; (b) By payment in duecourse by the party accommodated, where the instrumentis made or accepted for his accommodation; (c) By theintentional cancellation thereof by the holder; (d) By anyother act which will discharge a simple contract for thepayment of money; (e) When the principal debtor becomesthe holder of the instrument at or after maturity in his ownright.

Obviously, MOULIC may only invoke paragraphs (c) and(d) as possible grounds for the discharge of the instrument. But,the intentional cancellation contemplated under paragraph (c) isthat cancellation effected by destroying the instrument either bytearing it up,542 burning it,543 or writing the word “cancelled” on theinstrument. The act of destroying the instrument must also bemade by the holder of the instrument intentionally. Since MOULIC

541 Salas v. Court of Appeals, G.R. No. 76788, 22 January 1990; 181 SCRA296.

542 Montgomery v. Schwald, 177 Mo App 75, 166 SW 831; Wilkins v. Shaglund,127 Neb 589, 256 NW 31.

543 See Henson v. Henson, 268 SW 378.

313

failed to get back possession of the post-dated checks, theintentional cancellation of the said checks is altogether impossible.

On the other hand, the acts which will discharge a simplecontract for the payment of money under paragraph (d) aredetermined by other existing legislations since Sec. 119 does notspecify what these acts are, e.g., Art. 1231 of the Civil Code544

which enumerates the modes of extinguishing obligations. Again,none of the modes outlined therein is applicable in the instantcase as Sec. 119 contemplates of a situation where the holder ofthe instrument is the creditor while its drawer is the debtor. In thepresent action, the payee, Corazon Victoriano, was no longerMOULIC’s creditor at the time the jewelry was returned.

Correspondingly, MOULIC may not unilaterally dischargeherself from her liability by the mere expediency of withdrawingher funds from the drawee bank. She is thus liable as she has nolegal basis to excuse herself from liability on her checks to a holderin due course.

Moreover, the fact that STATE failed to give Notice ofDishonor to MOULIC is of no moment. The need for such noticeis not absolute; there are exceptions under Sec. 114 of theNegotiable Instruments Law:

Sec. 114. When notice need not be given to drawer. —Notice of dishonor is not required to be given to the drawerin the following cases: (a) Where the drawer and the draweeare the same person; (b) When the drawee is a fictitiousperson or a person not having capacity to contract; (c) Whenthe drawer is the person to whom the instrument is presentedfor payment: (d) Where the drawer has no right to expect orrequire that the drawee or acceptor will honor the instrument;(e) Where the drawer had countermanded payment.

Indeed, MOULIC’S actuations leave much to be desired.She did not retrieve the checks when she returned the jewelry.She simply withdrew her funds from her drawee bank and

544 Art. 1231. Obligations are extinguished: (1) By payment or performance;(2) By the loss of the thing due; (3) By the condonation or remission of thedebt; (4) By the confusion or merger of the rights of creditor and debtor;(5) By compensation; (6) By novation . . . . .


transferred them to another to protect herself. After withdrawingher funds, she could not have expected her checks to be honored.In other words, she was responsible for the dishonor of her checks,hence, there was no need to serve her Notice of Dishonor, whichis simply bringing to the knowledge of the drawer or indorser ofthe instrument, either verbally or by writing, the fact that a specifiedinstrument, upon proper proceedings taken, has not beenaccepted or has not been paid, and that the party notified isexpected to pay it.545

In addition, the Negotiable Instruments Law was enactedfor the purpose of facilitating, not hindering or hamperingtransactions in commercial paper. Thus, the said statute shouldnot be tampered with haphazardly or lightly. Nor should it bebrushed aside in order to meet the necessities in a single case.546

The drawing and negotiation of a check have certain effectsaside from the transfer of title or the incurring of liability in regardto the instrument by the transferor. The holder who takes thenegotiated paper makes a contract with the parties on the face ofthe instrument. There is an implied representation that funds orcredit are available for the payment of the instrument in the bankupon which it is drawn.547 Consequently, the withdrawal of themoney from the drawee bank to avoid liability on the checks cannotprejudice the rights of holders in due course. In the instant case,such withdrawal renders the drawer, Nora B. Moulic, liable toSTATE, a holder in due course of the checks.

Under the facts of this case, STATE could not expectpayment as MOULIC left no funds with the drawee bank to meether obligation on the checks,548 so that Notice of Dishonor wouldbe futile.

The Court of Appeals also held that allowing recovery onthe checks would constitute unjust enrichment on the part ofSTATE Investment House, Inc. This is error.

545 Martin v. Browns, 75 Ala 442.546 Reinhart v. Lucas, 118 W Va 466, 190 SE 772.547 11 Am Jur 589.548 See Agbayani, Commercial Laws of the Philippines, Vol. 1, 1984 Ed.,

citing Ellenbogen v. State Bank, 197 NY Supp 278.

315

The record shows that Mr. Romelito Caoili, an AccountAssistant, testified that the obligation of Corazon Victoriano andher husband at the time their property mortgaged to STATE wasextrajudicially foreclosed amounted to P1.9 million; the bid priceat public auction was only P1 million.549 Thus, the value of theproperty foreclosed was not even enough to pay the debt in full.

Where the proceeds of the sale are insufficient to cover thedebt in an extrajudicial foreclosure of mortgage, the mortgagee isentitled to claim the deficiency from the debtor.550 The step thustaken by the mortgagee-bank in resorting to an extra-judicialforeclosure was merely to find a proceeding for the sale of theproperty and its action cannot be taken to mean a waiver of itsright to demand payment for the whole debt.551 For, while Act 3135,as amended, does not discuss the mortgagee’s right to recoversuch deficiency, it does not contain any provision either, expresslyor impliedly, prohibiting recovery. In this jurisdiction, when thelegislature intends to foreclose the right of a creditor to sue forany deficiency resulting from foreclosure of a security given toguarantee an obligation, it so expressly provides. For instance,with respect to pledges, Art. 2115 of the Civil Code552 does notallow the creditor to recover the deficiency from the sale of thething pledged. Likewise, in the case of a chattel mortgage, or athing sold on installment basis, in the event of foreclosure, thevendor “shall have no further action against the purchaser torecover any unpaid balance of the price. Any agreement to thecontrary will be void”.553

It is clear then that in the absence of a similar provision inAct No. 3135, as amended, it cannot be concluded that the creditorloses his right recognized by the Rules of Court to take action forthe recovery of any unpaid balance on the principal obligationsimply because he has chosen to extrajudicially foreclose the real

549 TSN, 25 April 1985, pp. 16-17.550 Philippine Bank of Commerce v. de Vera, No. L-18816, 29 December

1962; 6 SCRA 1029.551 Medina v. Philippine National Bank, 56 Phil 651.552 Art. 2115. The sale of the thing pledged shall extinguish the principal

obligation, whether or not the proceeds of the sale are equal to the amountof the principal obligation, interest and expenses in a proper case. . . . Ifthe price of the sale is less, neither shall the creditor be entitled to recoverthe deficiency, notwithstanding any stipulation to the contrary.

553 Art. 1484 [3] of the Civil Code.


estate mortgage pursuant to a Special Power of Attorney givenhim by the mortgagor in the contract of mortgage.554

The filing of the Complaint and the Third-Party Complaintto enforce the checks against MOULIC and the VICTORIANOspouses, respectively, is just another means of recovering theunpaid balance of the debt of the VICTORIANOs.

In fine, MOULIC, as drawer, is liable for the value of thechecks she issued to the holder in due course, STATE, withoutprejudice to any action for recompense she may pursue againstthe VICTORIANOs as Third-Party Defendants who had alreadybeen declared as in default.

WHEREFORE, the petition is GRANTED. The decisionappealed from is REVERSED and a new one entered declaringprivate respondent NORA B. MOULIC liable to petitioner STATEINVESTMENT HOUSE, INC., for the value of EBC Checks Nos.30089658 and 30089660 in the total amount of P100,000.00,P3,000.00 as attorney’s fees, and the costs of suit, withoutprejudice to any action for recompense she may pursue againstthe VICTORIANOs as Third-Party Defendants. Costs againstprivate respondent.

SO ORDERED.

Cruz and Griño-Aquino, JJ., concur.Padilla, J., took no part.

Holder in due Course; Holder in good faith and for value

Vicente R. De Ocampo & Co., vs. Anita Gatchalian, et alG.R. No. L-15126, November 30, 1961

LABRADOR, J:

Appeal from a judgment of the Court of First Instance ofManila, Hon. Conrado M. Velasquez, presiding, sentencing thedefendants to pay the plaintiff the sum of P600, with legal interestfrom September 10, 1953 until paid, and to pay the costs.

554 See Note 14.

317

The action is for the recovery of the value of a check forP600 payable to the plaintiff and drawn by defendant Anita C.Gatchalian. The complaint sets forth the check and alleges thatplaintiff received it in payment of the indebtedness of one MatildeGonzales; that upon receipt of said check, plaintiff gave MatildeGonzales P158.25, the difference between the face value of thecheck and Matilde Gonzales’ indebtedness. The defendants admitthe execution of the check but they allege in their answer, asaffirmative defense, that it was issued subject to a condition, whichwas not fulfilled, and that plaintiff was guilty of gross negligencein not taking steps to protect itself.

At the time of the trial, the parties submitted a stipulation offacts, which reads as follows:

Plaintiff and defendants through their respectiveundersigned attorney’s respectfully submit the followingAgreed Stipulation of Facts;

First. — That on or about 8 September 1953, in the evening,defendant Anita C. Gatchalian who was then interested inlooking for a car for the use of her husband and the family,was shown and offered a car by Manuel Gonzales who wasaccompanied by Emil Fajardo, the latter being personallyknown to defendant Anita C. Gatchalian;

Second. — That Manuel Gonzales represented to defendAnita C. Gatchalian that he was duly authorized by the ownerof the car, Ocampo Clinic, to look for a buyer of said carand to negotiate for and accomplish said sale, but whichfacts were not known to plaintiff;

Third. — That defendant Anita C. Gatchalian, finding theprice of the car quoted by Manuel Gonzales to hersatisfaction, requested Manuel Gonzales to bring the carthe day following together with the certificate of registrationof the car, so that her husband would be able to see same;that on this request of defendant Anita C. Gatchalian, ManuelGonzales advised her that the owner of the car will not bewilling to give the certificate of registration unless there is ashowing that the party interested in the purchase of saidcar is ready and willing to make such purchase and that for


this purpose Manuel Gonzales requested defendant AnitaC. Gatchalian to give him (Manuel Gonzales) a check whichwill be shown to the owner as evidence of buyer’s goodfaith in the intention to purchase the said car, the said checkto be for safekeeping only of Manuel Gonzales and to bereturned to defendant Anita C. Gatchalian the following daywhen Manuel Gonzales brings the car and the certificate ofregistration, but which facts were not known to plaintiff;

Fourth. — That relying on these representations of ManuelGonzales and with his assurance that said check will beonly for safekeeping and which will be returned to saiddefendant the following day when the car and its certificateof registration will be brought by Manuel Gonzales todefendants, but which facts were not known to plaintiff,defendant Anita C. Gatchalian drew and issued a check,Exh. “B”; that Manuel Gonzales executed and issued areceipt for said check, Exh. “1”;

Fifth. — That on the failure of Manuel Gonzales to appearthe day following and on his failure to bring the car and itscertificate of registration and to return the check, Exh. “B”,on the following day as previously agreed upon, defendantAnita C. Gatchalian issued a “Stop Payment Order” on thecheck, Exh. “3”, with the drawee bank. Said “Stop PaymentOrder” was issued without previous notice on plaintiff notbeing know to defendant, Anita C. Gatchalian and whofurthermore had no reason to know check was given toplaintiff;

Sixth. — That defendants, both or either of them, did notknow personally Manuel Gonzales or any member of hisfamily at any time prior to September 1953, but thatdefendant Hipolito Gatchalian is personally acquainted withV. R. de Ocampo;

Seventh. — That defendants, both or either of them, had noarrangements or agreement with the Ocampo Clinic at anytime prior to, on or after 9 September 1953 for thehospitalization of the wife of Manuel Gonzales and neitheror both of said defendants had assumed, expressly or

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impliedly, with the Ocampo Clinic, the obligation of ManuelGonzales or his wife for the hospitalization of the latter;

Eight. — That defendants, both or either of them, had noobligation or liability, directly or indirectly with the OcampoClinic before, or on 9 September 1953;

Ninth. — That Manuel Gonzales having received the checkExh. “B” from defendant Anita C. Gatchalian under therepresentations and conditions herein above specified,delivered the same to the Ocampo Clinic, in payment of thefees and expenses arising from the hospitalization of hiswife;

Tenth. — That plaintiff for and in consideration of fees andexpenses of hospitalization and the release of the wife ofManuel Gonzales from its hospital, accepted said check,applying P441.75 (Exhibit “A”) thereof to payment of saidfees and expenses and delivering to Manuel Gonzales theamount of P158.25 (as per receipt, Exhibit “D”) representingthe balance on the amount of the said check, Exh. “B”;

Eleventh. — That the acts of acceptance of the check andapplication of its proceeds in the manner specified abovewere made without previous inquiry by plaintiff fromdefendants:

Twelfth. — That plaintiff filed or caused to be filed with theOffice of the City Fiscal of Manila, a complaint for estafaagainst Manuel Gonzales based on and arising from theacts of said Manuel Gonzales in paying his obligations withplaintiff and receiving the cash balance of the check, Exh.“B” and that said complaint was subsequently dropped;

Thirteenth. — That the exhibits mentioned in this stipulationand the other exhibits submitted previously, be consideredas parts of this stipulation, without necessity of formallyoffering them in evidence;

WHEREFORE, it is most respectfully prayed that this agreedstipulation of facts be admitted and that the parties heretobe given fifteen days from today within which to submit


simultaneously their memorandum to discuss the issues oflaw arising from the facts, reserving to either party the rightto submit reply memorandum, if necessary, within ten daysfrom receipt of their main memoranda. (pp. 21-25,Defendant’s Record on Appeal).

No other evidence was submitted and upon said stipulationthe court rendered the judgment already alluded above.

In their appeal defendants-appellants contend that the checkis not a negotiable instrument, under the facts and circumstancesstated in the stipulation of facts, and that plaintiff is not a holder indue course. In support of the first contention, it is argued thatdefendant Gatchalian had no intention to transfer her property inthe instrument as it was for safekeeping merely and, therefore,there was no delivery required by law (Section 16, NegotiableInstruments Law); that assuming for the sake of argument thatdelivery was not for safekeeping merely, delivery was conditionaland the condition was not fulfilled.

In support of the contention that plaintiff-appellee is not aholder in due course, the appellant argues that plaintiff-appelleecannot be a holder in due course because there was no negotiationprior to plaintiff-appellee’s acquiring the possession of the check;that a holder in due course presupposes a prior party from whosehands negotiation proceeded, and in the case at bar, plaintiff-appellee is the payee, the maker and the payee being originalparties. It is also claimed that the plaintiff-appellee is not a holderin due course because it acquired the check with notice of defectin the title of the holder, Manuel Gonzales, and because underthe circumstances stated in the stipulation of facts there werecircumstances that brought suspicion about Gonzales’ possessionand negotiation, which circumstances should have placed theplaintiff-appellee under the duty, to inquire into the title of theholder. The circumstances are as follows:

The check is not a personal check of Manuel Gonzales.(Paragraph Ninth, Stipulation of Facts).

Plaintiff could have inquired why a person would use thecheck of another to pay his own debt. Furthermore, plaintiffhad the “means of knowledge” inasmuch as defendant

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Hipolito Gatchalian is personally acquainted with V. R. deOcampo (Paragraph Sixth, Stipulation of Facts.).

The maker Anita C. Gatchalian is a complete stranger toManuel Gonzales and Dr. V. R. de Ocampo (ParagraphSixth, Stipulation of Facts).

The maker is not in any manner obligated to Ocampo Clinicnor to Manuel Gonzales. (Par. 7, Stipulation of Facts.)

The check could not have been intended to pay the hospitalfees which amounted only to P441.75. The check is in theamount of P600.00, which is in excess of the amount dueplaintiff. (Par. 10, Stipulation of Facts).

It was necessary for plaintiff to give Manuel Gonzaleschange in the sum P158.25 (Par. 10, Stipulation of Facts).Since Manuel Gonzales is the party obliged to pay, plaintiffshould have been more cautious and wary in accepting apiece of paper and disbursing cold cash.

The check is payable to bearer. Hence, any person whoholds it should have been subjected to inquiries. EVEN INA BANK, CHECKS ARE NOT CASHED WITHOUTINQUIRY FROM THE BEARER. The same inquiries shouldhave been made by plaintiff. (Defendants-appellants’ brief,pp. 52-53)

Answering the first contention of appellant, counsel forplaintiff-appellee argues that in accordance with the best authorityon the Negotiable Instruments Law, plaintiff-appellee may beconsidered as a holder in due course, citing Brannan’s NegotiableInstruments Law, 6th edition, page 252. On this issue Brannanholds that a payee may be a holder in due course and says that tothis effect is the greater weight of authority, thus:

Whether the payee may be a holder in due course underthe N. I. L., as he was at common law, is a question uponwhich the courts are in serious conflict. There can be nodoubt that a proper interpretation of the act read as a wholeleads to the conclusion that a payee may be a holder in due


course under any circumstance in which he meets therequirements of Sec. 52.

The argument of Professor Brannan in an earlier edition ofthis work has never been successfully answered and is hererepeated.

Section 191 defines “holder” as the payee or indorsee of abill or note, who is in possession of it, or the bearer thereof.Sec. 52 defendants defines a holder in due course as “aholder who has taken the instrument under the followingconditions: 1. That it is complete and regular on its face. 2.That he became the holder of it before it was overdue, andwithout notice that it had been previously dishonored, if suchwas the fact. 3. That he took it in good faith and for value. 4.That at the time it was negotiated to him he had no notice ofany infirmity in the instrument or defect in the title of theperson negotiating it.”

Since “holder”, as defined in sec. 191, includes a payeewho is in possession the word holder in the first clause ofsec. 52 and in the second subsection may be replaced bythe definition in sec. 191 so as to read “a holder in duecourse is a payee or indorsee who is in possession,” etc.(Brannan’s on Negotiable Instruments Law, 6th ed., p. 543).

The first argument of the defendants-appellants, therefore,depends upon whether or not the plaintiff-appellee is a holder indue course. If it is such a holder in due course, it is immaterialthat it was the payee and an immediate party to the instrument.

The other contention of the plaintiff is that there has beenno negotiation of the instrument, because the drawer did notdeliver the instrument to Manuel Gonzales with the intention ofnegotiating the same, or for the purpose of giving effect thereto,for as the stipulation of facts declares the check was to remain inthe possession Manuel Gonzales, and was not to be negotiated,but was to serve merely as evidence of good faith of defendantsin their desire to purchase the car being sold to them. Admittingthat such was the intention of the drawer of the check when shedelivered it to Manuel Gonzales, it was no fault of the plaintiff-appellee drawee if Manuel Gonzales delivered the check or

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negotiated it. As the check was payable to the plaintiff-appellee,and was entrusted to Manuel Gonzales by Gatchalian, the deliveryto Manuel Gonzales was a delivery by the drawer to his own agent;in other words, Manuel Gonzales was the agent of the drawerAnita Gatchalian insofar as the possession of the check isconcerned. So, when the agent of drawer Manuel Gonzalesnegotiated the check with the intention of getting its value fromplaintiff-appellee, negotiation took place through no fault of theplaintiff-appellee, unless it can be shown that the plaintiff-appelleeshould be considered as having notice of the defect in thepossession of the holder Manuel Gonzales. Our resolution of thisissue leads us to a consideration of the last question presentedby the appellants, i.e., whether the plaintiff-appellee may beconsidered as a holder in due course.

Section 52, Negotiable Instruments Law, defines holder indue course, thus:

A holder in due course is a holder who has taken theinstrument under the following conditions:


(b) That he became the holder of it before it was overdue,and without notice that it had been previously dishonored,if such was the fact;


(d) That at the time it was negotiated to him he had no noticeof any infirmity in the instrument or defect in the title ofthe person negotiating it.

The stipulation of facts expressly states that plaintiff-appelleewas not aware of the circumstances under which the check wasdelivered to Manuel Gonzales, but we agree with the defendants-appellants that the circumstances indicated by them in their briefs,such as the fact that appellants had no obligation or liability to theOcampo Clinic; that the amount of the check did not correspondexactly with the obligation of Matilde Gonzales to Dr. V. R. de


Ocampo; and that the check had two parallel lines in the upperleft hand corner, which practice means that the check could onlybe deposited but may not be converted into cash — all thesecircumstances should have put the plaintiff-appellee to inquiry asto the why and wherefore of the possession of the check by ManuelGonzales, and why he used it to pay Matilde’s account. It waspayee’s duty to ascertain from the holder Manuel Gonzales whatthe nature of the latter’s title to the check was or the nature of hispossession. Having failed in this respect, we must declare thatplaintiff-appellee was guilty of gross neglect in not finding out thenature of the title and possession of Manuel Gonzales, amountingto legal absence of good faith, and it may not be considered as aholder of the check in good faith. To such effect is the consensusof authority.

In order to show that the defendant had “knowledge of suchfacts that his action in taking the instrument amounted tobad faith,” it is not necessary to prove that the defendantknew the exact fraud that was practiced upon the plaintiffby the defendant’s assignor, it being sufficient to show thatthe defendant had notice that there was something wrongabout his assignor’s acquisition of title, although he did nothave notice of the particular wrong that was committed.Paika v. Perry, 225 Mass. 563, 114 N.E. 830.

It is sufficient that the buyer of a note had notice orknowledge that the note was in some way tainted with fraud.It is not necessary that he should know the particulars oreven the nature of the fraud, since all that is required isknowledge of such facts that his action in taking the noteamounted bad faith. Ozark Motor Co. v. Horton (Mo. App.),196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz.621, 229 Pac. 391.

Liberty bonds stolen from the plaintiff were brought by thethief, a boy fifteen years old, less than five feet tall, immaturein appearance and bearing on his face the stamp adegenerate, to the defendants’ clerk for sale. The boy statedthat they belonged to his mother. The defendants paid theboy for the bonds without any further inquiry. Held, theplaintiff could recover the value of the bonds. The term ‘badfaith’ does not necessarily involve furtive motives, but means

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bad faith in a commercial sense. The manner in which thedefendants conducted their Liberty Loan departmentprovided an easy way for thieves to dispose of their plunder.It was a case of “no questions asked.” Although grossnegligence does not of itself constitute bad faith, it isevidence from which bad faith may be inferred. Thecircumstances thrust the duty upon the defendants to makefurther inquiries and they had no right to shut their eyesdeliberately to obvious facts. Morris v. Muir, 111 Misc. Rep.739, 181 N.Y. Supp. 913, affd. in memo., 191 App. Div. 947,181 N.Y. Supp. 945.” (pp. 640-642, Brannan’s NegotiableInstruments Law, 6th ed.).

The above considerations would seem sufficient to justifyour ruling that plaintiff-appellee should not be allowed to recoverthe value of the check. Let us now examine the express provisionsof the Negotiable Instruments Law pertinent to the matter to findif our ruling conforms thereto. Section 52 (c) provides that a holderin due course is one who takes the instrument “in good faith andfor value;” Section 59, “that every holder is deemed prima facie tobe a holder in due course;” and Section 52 (d), that in order thatone may be a holder in due course it is necessary that “at thetime the instrument was negotiated to him “he had no notice ofany . . . defect in the title of the person negotiating it;” and lastlySection 59, that every holder is deemed prima facie to be a holderin due course.

In the case at bar the rule that a possessor of the instrumentis prima facie a holder in due course does not apply becausethere was a defect in the title of the holder (Manuel Gonzales),because the instrument is not payable to him or to bearer. On theother hand, the stipulation of facts indicated by the appellants intheir brief, like the fact that the drawer had no account with thepayee; that the holder did not show or tell the payee why he hadthe check in his possession and why he was using it for thepayment of his own personal account — show that holder’s titlewas defective or suspicious, to say the least. As holder’s title wasdefective or suspicious, it cannot be stated that the payee acquiredthe check without knowledge of said defect in holder’s title, andfor this reason the presumption that it is a holder in due course orthat it acquired the instrument in good faith does not exist. Andhaving presented no evidence that it acquired the check in good


faith, it (payee) cannot be considered as a holder in due course.In other words, under the circumstances of the case, instead ofthe presumption that payee was a holder in good faith, the fact isthat it acquired possession of the instrument under circumstancesthat should have put it to inquiry as to the title of the holder whonegotiated the check to it. The burden was, therefore, placed uponit to show that notwithstanding the suspicious circumstances, itacquired the check in actual good faith.

The rule applicable to the case at bar is that described inthe case of Howard National Bank v. Wilson, et al., 96 Vt. 438,120 At. 889, 894, where the Supreme Court of Vermont made thefollowing disquisition:

Prior to the Negotiable Instruments Act, two distinct lines ofcases had developed in this country. The first had its originin Gill v. Cubitt, 3 B. & C. 466, 10 E. L. 215, where the rulewas distinctly laid down by the court of King’s Bench thatthe purchaser of negotiable paper must exercise reasonableprudence and caution, and that, if the circumstances weresuch as ought to have excited the suspicion of a prudentand careful man, and he made no inquiry, he did not standin the legal position of a bona fide holder. The rule wasadopted by the courts of this country generally and seem tohave become a fixed rule in the law of negotiable paper.Later in Goodman v. Harvey, 4 A. & E. 870, 31 E. C. L. 381,the English court abandoned its former position and adoptedthe rule that nothing short of actual bad faith or fraud in thepurchaser would deprive him of the character of a bona fidepurchaser and let in defenses existing between prior parties,that no circumstances of suspicion merely, or want of propercaution in the purchaser, would have this effect, and thateven gross negligence would have no effect, except asevidence tending to establish bad faith or fraud. Some ofthe American courts adhered to the earlier rule, while othersfollowed the change inaugurated in Goodman v. Harvey.The question was before this court in Roth v. Colvin, 32 Vt.125, and, on full consideration of the question, a rule wasadopted in harmony with that announced in Gill v. Cubitt,which has been adhered to in subsequent cases, includingthose cited above. Stated briefly, one line of cases includingour own had adopted the test of the reasonably prudent

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man and the other that of actual good faith. It would seemthat it was the intent of the Negotiable Instruments Act toharmonize this disagreement by adopting the latter test. Thatsuch is the view generally accepted by the courts appearsfrom a recent review of the cases concerning whatconstitutes notice of defect. Brannan on Neg. Ins. Law, 187-201. To effectuate the general purpose of the act to makeuniform the Negotiable Instruments Law of those stateswhich should enact it, we are constrained to hold (contraryto the rule adopted in our former decisions) that negligenceon the part of the plaintiff, or suspicious circumstancessufficient to put a prudent man on inquiry, will not ofthemselves prevent a recovery, but are to be consideredmerely as evidence bearing on the question of bad faith.See G. L. 3113, 3172, where such a course is required inconstruing other uniform acts.

It comes to this then: When the case has taken such shapethat the plaintiff is called upon to prove himself a holder indue course to be entitled to recover, he is required toestablish the conditions entitling him to standing as such,including good faith in taking the instrument. It devolves uponhim to disclose the facts and circumstances attending thetransfer, from which good or bad faith in the transaction maybe inferred.

In the case at bar as the payee acquired the check undercircumstances which should have put it to inquiry, why the holderhad the check and used it to pay his own personal account, theduty devolved upon it, plaintiff-appellee, to prove that it actuallyacquired said check in good faith. The stipulation of facts containsno statement of such good faith, hence we are forced to theconclusion that plaintiff payee has not proved that it acquired thecheck in good faith and may not be deemed a holder in due coursethereof.

For the foregoing considerations, the decision appealed fromshould be, as it is hereby, reversed, and the defendants areabsolved from the complaint. With costs against plaintiff-appellee.

Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera,

Paredes, Dizon and De Leon, JJ., concur.


Bengzon, C.J., concurs in the result.

Non-applicability of lack of notice or infirmity in theinstrument, to accommodation party transaction

To be sure, as regards an accommodation party (suchas STEELWELD), the fourth condition, i.e., lack of notice of anyinfirmity in the instrument or defect in the title of the personsnegotiating it, has no application. This is because Section 29of the law above quoted preserves the right of recourse of a“holder in due course” against the accommodation partynotwithstanding that “such holder, at the time of taking theinstrument knew him to be only an accommodation party.”(Stelco Marketing Corporation vs., Court of Appeals and Steelweld

Corporation of the Philippines, Inc., G.R. No. 96160, June 17,

1992, [Narvasa, C.J:], citing Agbayani, Commercial Laws of the

Philippines, 1975 ed., Vol. I, citing Prudential Bank and Trust Co.

vs. Ramesh Trading Co., C.A. 32908-R, Sept. 10, 1964, boldsupplied)

Financing Company, not a holder in good faith as to the buyer

In the case of Consolidated Plywood Industries, Inc. et al

vs. IFC Leasing and Acceptance Corporation555, the High Courtheld, subscribing to the view of Campos and Campos, that: “afinancing company is not a holder in good faith as to the buyer, towit:

In installment sales, the buyer usually issues a note payableto the seller to cover the purchase price. Many times, inpursuance of a previous arrangement with the seller, afinance company pays the full price and the note is indorsedto it, subrogating it to the right to collect the price from thebuyer, with interest. With the increasing frequency ofinstallment buying in this country, it is most probable thatthe tendency of the courts in United States to protect thebuyer against the finance company will, the finance companywill be subject to the defense of failure of consideration andcannot recover the purchase price from the buyer. Asagainst the argument that such a rule would seriously affect

555 G.R. No. 72593, April 30, 1987.

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“a certain mode of transacting business adopted throughoutthe State,” a court in one case stated:

It may be that our holding here will require somechanges in business methods and will impose agreater burden on the finance companies. We thinkthe buyer—Mr. & Mrs. General Public –should havesome protection somewhere along the line. Webelieve the finance company is better able to bear therisk of the dealer’s insolvency than the buyer and in afar better position to protect his interests againstunscrupulous and insolvent dealers…

If this opinion imposes great burdens on financecompanies it is a potent argument in favor of a rulewhich will afford public protection to the general publicbuying against unscrupulous dealers in personalproperty…(Mutual Finance Co. v. Martin, 63 So. 2d649, 44 ALR 2d 1 [1953]) (Campos and Campos,Notes and Selected Cases on Negotiable InstrumentsLaw, Third Edition, p. 128).

In the case of Commercial Credit Corporation v. Orange

County Machine Works (34 Cal. 2d 766) involving similar facts, itwas held that in a very real sense, the finance company was amoving force in the transaction from its very inception and actedas a party to it. When a finance company actively participates ina transaction of this type from its inception, it cannot be regardedas a holder in due course of the note given in the transaction.

In like manner, therefore, even assuming that the subjectpromissory note is negotiable, the respondent, a financingcompany which actively participated in the sale on installment ofthe two subject Allis Crawler tractors, cannot be regarded as aholder in due course of said note. If follows that the respondent’srights under the promissory note involved in this case are subjectto all defenses that the petitioner have against the seller-assignor,Industrial Products Marketing. For Section 58 of the NegotiableInstruments Law provides that “in the hands of any holder otherthan a holder in due course, a negotiable instrument is subject tothe same defenses as if it were non-negotiable…”


Whether or not payee is deemed a holder in due course

On this note, the ruling of the Supreme Court in the case ofPrudencio vs. Court of Appeals, G.R. No. L-34539, July 14, 1986,is controlling, wherein it was held that: “[a]lthough as a generalrule, a payee may be considered a holder in due course we thinkthat such a rule cannot apply with respect to the respondent PNB.Not only was PNB an immediate party or in privy to the promissorynote, that is, it had dealt directly with the petitioners knowing fullywell that the latter only signed as accommodation makers butmore important, it was the Deed of Assignment executed by theConstruction Company in favor of PNB which principally movedthe petitioners to sign the promissory note also in favor of PNB.Petitioners were made to believe and on that belief entered intothe agreement that no other conditions would alter the termsthereof and yet, PNB altered the same…From the foregoingcircumstances, PNB cannot be regarded as having acted in goodfaith which is also one of the requisites of a holder in due courseunder Section 52 of the Negotiable Instruments Law. The PNBknew that the promissory note which it took from theaccommodation makers was signed by the latter because of fullreliance of the Deed of Assignment, which, PNB had no intentionto comply with strictly…We, therefore, hold that respondent PNBis not a holder in due course.”

In those cases where a payee was considered a holderin due course, such payee either acquired the note fromanother holder or has not directly dealt with the maker thereof.As was held in the case of Bank of Commerce and Savings v.

Randell (186 NorthWestern Reporter 71) (emphasis supplied):

We conclude, therefore, that a payee who receives anegotiable promissory note, in good faith, for value,before maturity, and without any notice of any infirmity,from a holder, not the maker to whom it was negotiatedas a completed instrument, is a holder in due coursewithin the purview of [a] Negotiable Instruments Law,so as to preclude the defense of fraud and failure ofconsideration between the maker and the holder towhom the instrument, was delivered. (supra) (emphasissupplied)

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Similarly, in the case of Stone v. Goldberg & Lewis (60Southern Reporter 748) on rehearing and quoting Daniel onNegotiable Instruments, it was held:

It is a general principle of the law merchant that, as betweenthe immediate parties to a negotiable instrument-the partiesbetween whom there is a privity-the consideration may beinquired into; and as to them the only superiority of a bill ornote over other unsealed evidence of debt is that it prima

facie imports a consideration. (supra)

2000 Bar Question:

Can the payee in a promissory note be a “holder in duecourse” within the meaning of the NegotiableInstruments Law (Act 2031) Explain your answer. (2%)

ANSWER:

Yes. Provided, such payee acquired the note from anotherholder or has not directly dealt with the maker thereof. Sec. 191,Act 2031, defines a holder as the payee or indorsee of a bill ornote who is in possession of it, or the bearer thereof, and in Sec.59, every holder is deemed prima facie to be a holder in duecourse.

Sec. 53. When person not deemed holder in due course. -

Where an instrument payable on demand is negotiated onan unreasonable length of time after its issue, the holder isnot deemed a holder in due course.

Illustrative cases:

“Sixteen months is not an unreasonable time wherepayments of monthly interest were made to the payee and also toplaintiff after he took the instrument.” (Brannan, page 59, citingMcLean v. Bryer, 24 R.I. 599, 54 Atl. 378, S.C. sec. 64-1.)

“Five days between the issue and negotiation of a cashier’scheck is not an unreasonable time, such a check, whether certifiedor not, being a bill of exchange payable on demand.” (Mfg. Co. v.Summers, 143 N.C. 102, 55 S.E. 522, S.C. sec. 59, cited inBrannan, page 59)


“A check dated and issued on one day and negotiated atnoon the next day is not overdue so as to convey notice to theindorsee of its illegality or of its previous dishonor.” (Ibid, citingMatlock v. Scheuerman, 51 Oregon, 49, 93 Pac. 823, 17 L.R.S.(N.S.) 747, S.C. secs. 25, 56, 186.)

Sec. 54. Notice before full amount is paid. - Where thetransferee receives notice of any infirmity in the instrumentor defect in the title of the person negotiating the same beforehe has paid the full amount agreed to be paid therefor, he willbe deemed a holder in due course only to the extent of theamount therefore paid by him.

Illustrative case:

“Where a bank discounted a note and placed the proceedsto the credit of the debtor, quaere whether the mere fact that thenote was not paid when due is such notice of defect of title of thedepositor as to make the subsequent payment of the balance ofthe proceeds a wrongful payment.” (Albany County Bank v.People’s Ice Co., 92 Ap. Div. 47, 86 N.Y. Supp. 773, Ibid)

Sec. 55. When title defective. - The title of a person whonegotiates an instrument is defective within the meaning ofthis Act when he obtained the instrument, or any signaturethereto, by fraud, duress, or force and fear, or other unlawfulmeans, or for an illegal consideration, or when he negotiatesit in breach of faith, or under such circumstances as amountto a fraud.

Notes:

Breach must be committed by the perpetrator

Pursuant to this provision, it is vital to show that thenegotiation is made by the perpetrator in breach of faith amountingto fraud. The person negotiating must have gone beyond theauthority given by his principal. If the principal could prove thatthere was no negligence in the performance of his duties, he mayset up the personal defense to escape liability and recover fromother parties who, through their own negligence, allowed thecommission of the crime. (Philippine Commercial International

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Bank vs. Court of Appeals and Ford Philippines, Inc., G.R. Nos.

121413, 121479, 128604, January 29, 2011, [Quisumbing, J.])

Reason for the Rule

Justice Street, in his dissent in the case of Asia Banking

Corporation vs. Ten Sen Guan, G.R. No. L-19397, February 16,

1923, explained that “[t]he reason for this statutory rule given bythe courts in innumerable decisions is that the guilty maker of aninstrument vitiated by fraud or illegality will naturally seek to put itin the hands of some other person in order to cut off the defenseto which the instrument is subject, and a presumption arisesagainst the bona fides of the transfer. The law therefore requiresthe holder of such paper to manifest the most complete can doand show exactly the circumstances under which the paper wasacquired.

This fraud having been set up in the defendant’s answerand established by the proof, it became incumbent upon theplaintiff in this case to prove that it occupies the position of abona fide purchaser of said draft for value and without notice.”

Illustrative Cases:

“The title of the payee of a note is defective where the onlyconsideration is accrued interest on a loan previously made at anunlawful rate of interest.” (Keene v. Behan, 40 Wash. 505, 82Pac. 884, cited in Brannan. Page 60)

“If one of the signatures of several makers is obtained byfraud so as to make the title of the payee defective as to him, itwill be defective as to the other makers also, since the equality ofburden is thus disturbed and increased as to them.” (Hodge v.Smith, 130 Wis. 326, 110 N.W. 192, S.C. secs. 16, 52-3, cited inBrannan, page 60). “But a holder in due course can recoveragainst those who signed.” (First Nat. Bank of Durand v. Shaw,157 Mich. 192, 121 N.W. 811, ibid) “The fraud consisted in thefact that the signatures of some of the makers were forged.” (Ibid)

“X owed plaintiff. In order to provide funds to pay the debt,defendant at X’s request drew a check payable to X or order,which X was to pay into his bank to meet his check for the sameamount to plaintiff. X indorsed the defendant’s check, paid it into


his bank and gave his own check to plaintiff. Defendant changedhis mind and stopped his check, whereupon X stopped his checkand indorsed and delivered defendant’s check to plaintiff who hadnotice of its dishonor. Held, that as the check was anaccommodation bill and plaintiff, even assuming that he gaveconsideration for it, not being a holder in due course, since hetook the check with notice that it had been dishonored, took itsubject to any defect of title at the time of dishonor, and as X hadnegotiated it to plaintiff in breach of faith, there was a defect oftitle attaching to it and the plaintiff could not recover.” (Hornby v.McLaren (C.A., March 31, 1908). 24 T.L. Rep. 494, cited inBrannan, page 60)

Sec. 56. What constitutes notice of defect. - To constitutenotice of an infirmity in the instrument or defect in the title ofthe person negotiating the same, the person to whom it isnegotiated must have had actual knowledge of the infirmityor defect, or knowledge of such facts that his action in takingthe instrument amounted to bad faith.

Notes:

This provision is self-explanatory. That in order to constitutea notice of defect in the instrument or defect in the title of theperson negotiating the same, the person to whom it is negotiatedmust have actual knowledge of the infirmity or defect, orknowledge of such facts that his action in taking the instrumentamounted to bad faith. The same is a matter of evidentiary factwhich must be established by actual knowledge.

Sec. 57. Rights of holder in due course. - A holder in duecourse holds the instrument free from any defect of title ofprior parties, and free from defenses available to prior partiesamong themselves, and may enforce payment of theinstrument for the full amount thereof against all parties liablethereon.

Notes:

A holder in due course, as established in Sec. 52, has theright to:

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a) Hold the bill or note free from any defect of title of priorparties,

b) Be free from defenses available to prior parties, and

c) Enforce payment of the instrument for the full amountthereof against parties liable thereon.

Right to hold the bill or note free from any defect of title ofprior parties

A holder in due course holds the instrument free from anydefect of title of prior parties; thus, they acquire better title overthe bill or note than their predecessors in interest. It does notmatter if the title of the previous holder is tainted with irregularities,so long as the holder qualifies as a holder in due course, he ipso

facto acquires a valid and effectual title over the instrument andsupersedes any defect of title of prior parties.

Be free from defenses available to prior parties

As a consequence of the right to hold the instrument freefrom any defect of title of prior parties, a holder in due course isalso free from any defenses available to prior parties. So that themaker of a promissory note cannot raise a defense of absence ofconsideration, because it only affects the title of the transferor,but never the validity and enforceability of the note when it isacquired by a holder in due course.

Enforce payment of the instrument for the full amount thereofagainst parties liable thereon

Ultimately, as indicated under Sec. 51, the holder has theright to sue for the payment of the instrument. Corollary, the holderin due course has the right to enforce payment of the instrumentfor the full amount thereof against parties liable thereon. In asmuch as the holder has the right to hold the instrument free fromany defect of title of prior parties, and free from any defensesavailable against them, as a consequence, he has the absoluteright to enforce payment to its full amount.

2011 Bar Question:

A holder in due course holds the instrument free fromany defect of title of prior parties and free from defenses


available to prior parties among themselves. Anexample of such a defense is –

A. fraud in inducement.

B. duress amounting to forgery.

C. fraud in esse contractus.

D. alteration.

Sec. 58. When subject to original defense. - In the hands ofany holder other than a holder in due course, a negotiableinstrument is subject to the same defenses as if it were non-negotiable. But a holder who derives his title through a holderin due course, and who is not himself a party to any fraud orillegality affecting the instrument, has all the rights of suchformer holder in respect of all parties prior to the latter.

Notes:

Owner, though not himself bona fide holder, acquires title ofhis transferor

A transferee can generally get as good a title as histransferrer possesses, and it is, therefore, a settled principle thatif the party who transferred the instrument to the holder acquiredthe note before maturity, and was himself unaffected by anyinfirmity in it, the holder acquires as good a title as he held,although it were overdue and dishonored at the time of transfer.556

Thus, it has been held that in an action by a second indorsee of abill given for a smuggling debt, he could recover against theacceptor, although he took it overdue, his indorser having acquiredit bona fide, without notice before it fell due.557 And, therefore,even if he have notice that there was fraud in the inception of thepaper, or that it was lost or stolen, or that the consideration hasfailed between some anterior parties, or the paper be overdueand dishonored, he is, nevertheless, entitled to recover, providedhis immediate indorser was a bona fide holder for value unaffectedby any of these defenses. As soon as the paper comes into thehands of a holder, unaffected by any defect, its character as a

556 Woodman v. Churchill, 52 Me. 58; Bassett v. Avery, 15 Ohio St. 209557 Chalmers v. Lanion, 1 Campb. 383

337

negotiable security is established; and the power of transferring itto others, with the same immunity which attached in his own hands,is incident to his legal right, and necessary to sustain the characterand value of the instrument as property, and to protect the bona

fide holder in its enjoyment. To prohibit him from selling as gooda right and title as himself has, would destroy the very object forwhich they are secured to him—would indeed be paradoxical.And it has been justly said that this doctrine “is indispensable tothe security and circulation of negotiable instruments, and isfounded on the most comprehensive and liberal principles of publicpolicy.558

But this rule is subject to the single exception that if thenote were invalid as between maker and payee, the payee couldnot himself by purchase from a bona fide holder become asuccessor to his rights; it not being essential to such bona fide

holder’s protection to extend the principle so far.559 (Daniel,Elements of the Law of Negotiable Instruments, pages 124-125)

Illustrative Cases:

“A payee whose title is defective cannot better it by sellingthe instrument to a holder in due course and buying it back again.”(Andrews v. Robertson, 111 Wis. 334, 87 N.W. 190, 87 Am. St.Rep. 870, cited in Brannan, page 68)

“A note, made or indorsed by defendants for theaccommodation of a third person, was delivered to an agent tobe negotiated and the proceeds paid to such third person. Theagent sold the note to a bona fide purchaser but appropriated theproceeds to his own use. At maturity the note was protested fornon-payment, and the agent paid it and afterwards sold it to theplaintiff, who had notice of the dishonor and agreed with the agentto extend the time. Held, that the agent having fraudulently soldthe note could not acquire a good title by payment to or purchasefrom the bona fide purchaser and could not give a good title toplaintiff.” (Comstock v. Buckley, (Wis.) 124 N.W. 414, S.C. sec.29, ibid)

558 Scotland County v. Hill, 132 U.S. 117; Porter v. Pittsburg Steel Co., 122U.S. 267

559 Todd v. Wick, 38 Ohio St. 387; Sawyer v. Wiswell, 9 Allen, 42


Sec. 59. Who is deemed holder in due course. - Every holderis deemed prima facie to be a holder in due course; but whenit is shown that the title of any person who has negotiatedthe instrument was defective, the burden is on the holder toprove that he or some person under whom he claims acquiredthe title as holder in due course. But the last-mentioned ruledoes not apply in favor of a party who became bound on theinstrument prior to the acquisition of such defective title.

Notes:

Meaning of term “bona fide holder;” presumption

Two presumptions may be considered as settled principlesof commercial law—principles which have been, for the most part,reiterated by the Supreme Court of the United States, and prevailthroughout the Union:

First. That to entitled one to the rights and protection of apurchase of holder of a negotiable instrument, as set out in thepreceding paragraphs of this chapter, the paper must have beenacquired (1) bona fide, (2) for a valuable consideration, (3) in theusual and ordinary course of business, (4) before maturity, or ratherwhen it was not overdue, and (5) without notice of facts whichimpeach its validity as between antecedent parties.560

Second. The mere possession of a negotiable instrument,produced in evidence by the indorsee, or by the assignee whereno indorsement is necessary, imports prima facie that he acquiredit bona fide for full value, in the usual course of business, beforematurity, and without notice of any circumstance impeaching itsvalidity; and that he is the owner thereof, entitled to recover thefull amount against all prior parties. In other words, the productionof the instrument and proof that it is genuine (where indeed suchproof is necessary), prima facie establishes his case; and he maythere rest it.561 (Daniel, Elements of the Law of NegotiableInstruments, page 123)

Culled from the foregoing, a prima facie presumptionexists that the holder of a negotiable instrument is a holder

560 Daniel on Negotiable Instruments, 769a561 Daniel on Negotiable Instruments, 812, and cases cited

339

in due course. Consequently, the burden of proving that [theholder] is not a holder in due course lies in the person whodisputes the presumption. (State Investment House vs. Court

of Appeals and Nora B. Moulic, G.R. No. 101163, January 11,

1993, [Bellosillo, J:], bold supplied)

The presumption expressed in [this] section arise onlyin favor of a person who is a holder in the sense defined inSection 191 of the same Law, that is, a payee or indorseewho is in possession of the draft, or the bearer thereof. Underthis definition, in order to be a holder, one must be inpossession of the note or the bearer thereof. (Night & Day

Bank vs. Roseenbaum, 191 Mo. App., 559, 574.) If this actionhad been instituted by the bank itself, the presumption that thebank was a holder in due course would have arisen from the tenorof the draft and the fact that it was in the bank’s possession; butwhen the instrument passed out of the possession of the bankand into the possession of the present plaintiff, no presumptionarises as to the character in which the bank held the paper. Thebank’s relation to the instrument became past history when itdelivered the document to the plaintiff; and it was incumbent uponthe plaintiff in this action to show that the bank had in fact acquiredthe instrument for value and under such conditions as wouldconstitute it a holder in due course. In the entire absence of proofon this point, the action must fail. (Fossum vs. Hermanos, G.R.

No. L-19461, March 28, 1923, [Street, J:], bold supplied)

The defendant being the holder of the instrument, he is alsounquestionably the holder in due course. In the first place, inorder to avoid doubts with respect to this matter which mightrequire the introduction of evidence, the Act before mentionedhas provided, in section 59, that every holder is deemed prima

facie to be a holder in due course, and such is the weight it givesto this presumption and to the consequences derived therefrom,that it imposes upon the holder the burden to prove that he orsome person under whom he claims acquired the title in duecourse, only when it is shown that the title of any person who hasnegotiated the instrument was defective. This rule, however,pursuant to the said section, does not apply in favor of a partywho became bound on the instrument prior to the acquisition ofsuch defective title, in which case the defendant Serrano is notincluded, because, in the first place, he was not bound on the


instrument prior to the acquisition of the title by the plaintiff, but itwas the maker of the promissory note who was bound on theinstrument executed in favor of the defendant or indorser prior tothe acquisition of the title by the plaintiff, and, in the second place,it does not appear, nor was it proved, as will be seen hereinafter,that the title in question was defective. (concurring opinion, Justice

Torres, in the case of Maulini, et al vs. Serrano, December 16,

1914.)

“This section is declaratory of the common law. TheNegotiable Instrument Act is in the main a codification of thecommon law rules. Where it lays down a new rule it controls; butwhere its language is consistent with the rule previouslyrecognized, it should be construed as simply declaratory of thelaw as it was before the adoption of the Act.” (Cambell v. FourthNat. Bank (Ky.), 126 S.W. 114, S.C. sec. 25, cited in Brannan,page 69)

Illustrative Cases:

“In an action by an indorsee against the maker, wheredefendant admits that the note was made for a valuableconsideration, but denies, on information and belief, theindorsements, it was sufficient for the plaintiff to introduce thenote in evidence with the indorsements thereon.” (Beck v. Maller,131 App. Div. 243, 115 N.Y. Supp. 596, Ibid)

“When defendant has proved fraud, the further inquiry isnot whether defendant has shown that plaintiff took with notice ofthe fraud, but whether plaintiff had shown that he took in goodfaith and without notice.” (Cox v. Cline, 139 Iowa 128, 117 N.W.48, Ibid)

“Where the evidence establishes that the title of the partynegotiating the instrument was defective, the holder claiming tobe a purchaser in good faith for value and without notice mustmake his claim good by the greater weight of evidence.” (Mfg.Co. v. Summers, 143 N.C. 102, 55 S.E. 522, S,C. sec. 53; otherAmerican cases omitted, Ibid)

“Proof that plaintiff gave value before maturity is not enoughto show good faith.” (Natl Bank v. Foley, 54 Misc. R. 126, 103N.Y. Supp. 553, S.C. secs. 25, 52-3, Ibid)

341

Bona fides essential

The holder, in order to be entitled to protection against offsetsand equities and defenses based upon frauds, pleaded by priorparties, must have acquired the paper in good faith from hispredecessor. “Fraud cuts down everything,”562 and although theholder may pay value, yet, if his acquisition of the paper be in anyrespect fraudulent—as where it is made or transferred to givehim preference over other parties to a compromise of creditors—he cannot claim the position of a bona fide holder.563 In pleading,mala fides must be distinctly alleged, and an allegation that theparty is not the bona fide holder is not sufficient.564 It is the bona

fides of the holder alone that is to be considered, not that of histransferrer, and the fact that the payee had interest to part withthe paper, is not a circumstance which affects the rights of hisindorsee.565 (Ibid, 142)

V. LIABILITIES OF PARTIES

Defenses; Classification

The defenses that may be interposed to an action upon anegotiable contract may be grouped or arranged into five classes:

1. That the defendant did not make the instrument.

a. Forgery (Sec. 23);

b. Material Alterations (Sec. 125)

2. That the contract sued upon is in law unenforceable

a. Incapacity of the party;

b. Want, failure, or illegality of the consideration

c. That the paper was obtained by fraud;

d. That it was obtained by duress

3. That the plaintiff is not entitled to sue thereon

a. That the legal title to the instrument is not vested inthe plaintiff

562 Rogers v. Hadley, 32 L.J. Exch. 248563 Daniel on Negotiable Instruments, 193 et seq564 Uther v. Rich, 10 Ad & El 784565 Helmer v. Krolick, 36 Mich. 373


4. That the obligation created has been discharged:

a. By payment;

b. By bankruptcy, or assignment under insolvent laws;

c. By accord and satisfaction;

d. By release;

e. By covenant not to sue;

f. By substitution of another obligation;

g. By set-off;

h. Under what circumstances a surety or guarantor isdischarged when the principal is not

5. That the action upon the instrument is barred by statuteof limitations

Defenses available against a bona fide holder for value, andwithout notice, as against any other party

They are those which go to show that the instrument wasabsolutely and utterly void, and not merely voidable

1. By reason of the incapacity of the party assuming tocontract;

2. By reason of some positive interdiction of law; or

3. By reason of the want of consent of the party sought tobe bound to the particular contract.566

Real and Personal Defenses

Mr. Norton, in his treatise on the subject of Bills and Notes,adopts the classification of Professor Ames in his work on thatsubject, and classifies defenses into real and personal,—groupingall defenses that are good against a bona fide holder for valueunder the class described by him as “real defenses,” and all thedefenses good as between immediate parties, but not availableagainst a bona fide holder, he groups under class denominatedas “personal defenses.” He thus defines the two classes ofdefenses:

566 Daniel on Negotiable Instruments, 806

343

“(a) Real—Or those that attach to the instrument itself,and are good against all persons.

“(b) Personal—Or those that grow out of the agreementor conduct of a particular person in regard to the instrument, whichrenders it inequitable for him, though holding the legal title, toenforce it against the defendant, but which are not available againstbona fide purchasers for value without notice.”567 (Daniel, Elementsof the Law of Negotiable Instruments, page 142)

In general, this classification shows that a bona fide holdercan recover when the defense interposed is a personal defense,but cannot recover when the defense is real. In the case ofimmediate parties, all defenses are available, because eachindependent contract is governed by the general laws of contract.In the case of remote parties, where the holder enforcing theinstrument is a purchaser for value without notice, a personaldefense cannot be successfully interposed, and only the realdefenses are allowed by the courts.568

With real defenses the right sought to be enforced hasnever existed, or has ceased to exist. They are called “realdefenses” because they attach to the res or the thing, irrespectiveof the conduct or agreement of the parties to it. It cannot beenforced by the holder because there is no contract to enforce.Personal defenses, in contrast to this, are founded upon the act,conduct, or agreement of the parties with reference to theinstrument.569

Personal Defenses:

Lack or Failure of Consideration—is essentially a breach ofcontract. It exists in a commercial paper where a maker or drawerof an instrument issues it to the payee in any case where thepayee does not give “consideration” under ordinary contract lawprinciples. In such situations “want of consideration” can beasserted by the maker or drawer against an ordinary holder. Toillustrate: D, a distant relative of P, drafts a check and makes agift of it to P so that P can attend college. P negotiates the check

567 Norton on Bills and Notes, 216568 Norton on Bills and Notes, page 217569 Id.


to H. P does not go to college, and D, in disgust, stops paymentof the check. If H sues D on the instrument, D can successfullyassert the defense of “want of consideration”—but only if H failsto qualify as an HDC (holder in due course).570

Fraud in the inducement—where a person signs a negotiableinstrument (knowing it to be such) has been induced to sign bysome intentional misrepresentation of the other party.571 Forinstance, X agrees to buy Y’s car for Php 120,000.00 after theassurance that the latter brought it brand-new and is only eightmonths old, X issues a check for Php 70,000.00 as downpaymentand a post-dated check for Php 50,000.00, thereafter he learnedthat said car was brought by Y second-hand from a junkshop foronly Php 20,000.00. Y’s intentional misrepresentation constitutesfraud in the inducement, and X can assert his defense against Yand against any subsequent holder who does not qualify as anHDC.572

Illegality—like the general defense of fraud, some types ofillegality constitute personal defenses and other constitute realdefenses. This is so because although certain transactions areillegal (prohibited) under state statutes or ordinances, theapplicable statutes do not always provide that the prohibitedtransactions are void. If a statute voids the transaction, the defenseis real; if it does not, the defense is merely personal.573

Nondelivery of an instrument—sometimes and instrument findsits way into the hands of a subsequent holder through loss ortheft. In such a case the maker or drawer of the instrument hasavailable the defense of nondelivery. To illustrate: M is the makerof a bearer instrument that is stolen from her home by X andnegotiated to H. If H is merely an ordinary holder, he takes theinstrument subject to the defense of nondelivery and thereforecannot enforce it against M.574

Unauthorized completion of an incomplete but deliveredinstrument—In Sec. 14 of Act 2031, where an instrument islacking in any material particular or where a person placed his

570 Business Law, Howell, page 455-456 with notation571 Id.572 Id., page 457573 Id.574 Id.

345

signature on a blank paper, the holder thereof has the prima facie

authority to fill it up, strictly in accordance with the authority grantedand within a reasonable time. Thus, where said holder filled upthe blanks in the instrument but not in accordance with the authoritygiven, this, in effect can be set up as a defense, however, thesame does not apply against a holder in due course.

Prior payment—If for instance the bill or note is already paid bythe person primarily liable, but, for some reason the instrument isnot physically surrendered to him, and said instrument is furthernegotiated to another person, the maker or named drawee, asthe case may be, may set-up the defense of prior payment, whichalready extinguishes their liability on the instrument. Thus, it is apersonal defense as it can be availed only by the person whoalready made the prior payment, but not by the person whosubsequently negotiated it to the subsequent holder.

When instrument which is materially altered and is in thehands of a holder in due course not a party to the alteration—In such a case, the holder in due course may enforce the paymentof the instrument, but only up to the extent of its original tenor,before it was materially altered.

Real Defenses:

Forgery—In Sec. 23, Act 2031, where the signature of a personis forged or made without the authority of the person it purports tobe, it is wholly inoperative and no right to retain the instrument, orgive a discharge thereof against any party thereto, can be acquiredthrough or under such signature, unless the party against whomit is sought to enforce such right is precluded from setting up theforgery or want of authority.

Fraud in the execution (Fraud in factum)—in this case, a personis caused to sign a negotiable instrument under circumstances inwhich he or she honestly and reasonably believes it to besomething other than a negotiable instrument.575

Material Alteration (Deliberate)—Sec. 124, Act 2031 states thatwhere a negotiable instrument is materially altered without theassent of all parties liable thereon, it is avoided, except as against

575 Business Law, Howell, page 459


a party who has himself made, authorized, or assented to thealteration and subsequent holders.

Illegality (When declared by the statute)—When a law is passeddeclaring void any contract on which the negotiable instrumentmay be based, it will in effect invalidate any negotiable instrumentissued as consideration for such an illegal act. It should be takeninto consideration that the freedom to enter into contracts andconduct trade and commerce is always subject to the qualificationthat the same should not be contrary to any law, duly passed andenacted by the State.

Incapacity—where the maker or drawer is a minor, or is insane,or his capacity to act is prevented by civil interdiction, strictlyspeaking, he cannot act with any valid or legal effect, thus, if aminor makes a promissory note, his minority can be raised as areal defense, as being a minor, he cannot enter into contracts,much more issue a promissory note. The minor cannot be heldliable for the note he issued, but his parents or guardian may beheld subsidiarily liable for civil indemnity, for they exercise parentalauthority over him.

2011 Bar Question:

P sold to M a pair of gecko (tuko) for Php50,000.00. Mthen issued a promissory note to P promising to paythe money within 90 days. Unknown to P and M, a lawwas passed a month before the sale that prohibits anddeclares void any agreement to sell gecko in thecountry. If X acquired the note in good faith and forvalue, may he enforce payment on it?

A. No, since the law declared void the contract onwhich the promissory note was founded.

B. No, since it was not X who bought the gecko.

C. Yes, since he is a holder in due course of a notewhich is distinct from the sale of gecko.

D. Yes, since he is a holder in due course and P andM were not aware of the law that prohibited the saleof gecko.

347

Types of Fraud

Two kinds of fraud are recognized in the area of commercialpaper; one creates a personal defense and the other a realdefense. Fraud in the inducement falls into the personal category.It arises where a person who signs a negotiable instrument(knowing it to be such) has been induced to sign by somemisrepresentation from the other party.576 Unlike fraud in theinducement, in the case of Fraud in the execution (fraud in factum)a person is caused to sign a negotiable instrument undercircumstances in which he or she honestly and reasonablybelieves it to be something other than a negotiable instrument.577

Sec. 60. Liability of maker. - The maker of a negotiableinstrument, by making it, engages that he will pay it accordingto its tenor, and admits the existence of the payee and histhen capacity to indorse.

Notes:

Liabilities and warranties of the maker

By making the note, the maker—

a) Engages that he will pay it according to the tenor ofthe note;

b) Admits the existence of the payee; and

c) Admits the payee’s capacity to indorse.

In effect, the maker is estopped or precluded from makinga stand in contrary to the foregoing.

Sec. 61. Liability of drawer. - The drawer by drawing theinstrument admits the existence of the payee and his thencapacity to indorse; and engages that, on due presentment,the instrument will be accepted or paid, or both, accordingto its tenor, and that if it be dishonored and the necessaryproceedings on dishonor be duly taken, he will pay theamount thereof to the holder or to any subsequent indorserwho may be compelled to pay it. But the drawer may insert in

576 Business Law, Howell, page 457577 Id., with notations, page 459


the instrument an express stipulation negativing or limitinghis own liability to the holder.

Notes:

Liabilities and warranties of the drawer

The drawer, by drawing the bill—

a) Admits the existence of the payee;

b) Admits the payees capacity to indorser;

He further engages that—

c) On due presentment, the instrument will beaccepted or paid, or both, according to its tenor;and

d) If it be dishonored and the necessary proceedingson dishonor be duly take, he will pay the amountthereof to the holder or to any subsequent indorserwho may be compelled to pay it.

Limitation of liability

The drawer may insert in the written instrument an expressstipulation negativing or limiting his own liability to the holder.

Liability of drawer before acceptance

The drawer of a bill undertakes that when it is presented tothe drawee be will accept it; and by acceptance is meant anundertaking on the acceptor’s part to pay the bill according to itstenor.578 Until the bill has been accepted, the drawer is theprimary debtor, and his liability is contingent and conditionedupon a strict compliance with the law as to presentment ofthe bill for acceptance (if the bill be of such a character that it isnecessary to present it for acceptance), and due protest and noticeof dishonor. After acceptance, the drawer becomessecondarily liable, and his position is that of the first indorserupon a promissory note.579 (Daniel, Elements of the Law ofNegotiable Instruments, page 172) (emphasis supplied)

578 Story on Bills, 272; Cox v. National Bank, 100 U.S. 712579 Daniel on Negotiable Instruments, 479

349

Relation of drawee to bill before acceptance

Until he has accepted the bill, so entirely is the drawee astranger to it, that he may himself discount it. And he may thentransfer it as the bona fide holder to another, who may sue andcharge the drawer.580 He may discount it either for the drawer,the payee, or an indorsee. “If the acceptor discounts the bill forthe drawer, and then indorses it away, the drawer will be liableupon it to the holder, and the transfer by the drawer to the acceptorwill operate as an indorsement, although, at the time, the drawerdoes not intend to transfer by way of indorsement, being underthe impression that the bill is discharged by coming into the handsof the acceptor. Nor will the payment of the amount, less thediscount, be deemed a payment of the bill by the acceptor.”581

(Daniel, Elements of the Law of Negotiable Instruments, pages172-173)

The effect of acceptance of a bill

Is to constitute the acceptor the principal debtor.582 The billbecomes by the acceptance very similar to a promissory note—the acceptance being the promissory, and the drawer standing inthe relation of an indorser. (Ibid)

But in respect to the acceptor’s position with regard to thedrawer, and the amount for which he renders himself liable byaccepting the bill, it is well to observe that the acceptance doesnot entitle the acceptor to charge it in account against the drawerfrom the date of acceptance, unless he pays the whole amount atthe time, or discharges the drawer from all responsibility.583 (Ibid)

Like the maker of a note, the acceptor is bound by all theterms of the instrument, and if it contains a stipulation for paymentof attorney’s fees, he is bound by it.584 (Ibid)

If the acceptance be for the drawer’s accommodation, theacceptor does not thereby become entitled to sue the drawer upon

580 Desha v. Stewart, 6 Ala. 852; Swope v. Ross, 40 Pa. St. 186581 Swope v. Ross, 40 Pa. St. 186582 Heutematte v. Morris, 101 N.Y. 63; Capital City Ins. Co. v. Quinn, 73 Ala.

560583 Bracton v. Willing, 4 Call, 288584 Smith v. Muncie Nat. Bank, 29 Ind. 158


the bill; but when he has paid the bill, and not before, he mayrecover back the amount from the drawer in an action for moneyhad and received.585 If the acceptor put the bill in circulation, heis estopped from showing it was then paid.586 (Ibid)

2011 Bar Question:

D draws a bill of exchange that states: “One month fromdate, pay to B or his order Php100,000.00. Signed, D.”The drawee named in the bill is E. B negotiated the billto M, M to N, N to O, and O to P. Due to non-acceptanceand after proceedings for dishonor were made, P askedO to pay, which O did. From whom may O recover?

A. B, being the payee

B. N, as indorser to O

C. E, being the drawee

D. D, being the drawer

Sec. 62. Liability of acceptor. - The acceptor, by acceptingthe instrument, engages that he will pay it according to thetenor of his acceptance and admits:

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

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

Notes:

Comment of Dean James Barr Ames587: “Since an acceptor,by section 62, engages to pay the bill “according to the tenorof his acceptance,” he must pay to the innocent payee orsubsequent holder the amount called for by the amountordered by the drawer. A bank certifying a raised check is in the

585 Christian v. Keen, 80 Va. 377; Martin v. Muncy, 40 La. Ann. 190586 Hinton v. Bank of Columbus, 9 Port. (Ala.) 463587 Dean, Harvard Law School, cited in The Negotiable Instruments Law

Annotated, by Joseph Doddridge Brannan, Second Edition, 1911, page74, citing 4 Harvard Law Review, 306, 307, bold supplied.

351

same case, since section 187 assimilates a certification to anacceptance. If an acceptor or certifying bank must honor hisacceptance or certification in such a case, a fortiori a drawee whopays a raised bill or check, without acceptance or certification,should not recover the money paid from an innocent holder. Theseare changes for the better, and, so far as adopted, bring the lawof this country into harmony with the law of nearly, if not indeedall, of the European States.”

“Defendant bank, without negligence cashed a forged checkon plaintiff bank, indorsed it, “Indorsement guaranteed. Pay anynational or state bank or order,” and sent it for collection and itwas paid by plaintiff, who upon discovery of the forgery, sued torecover the money. Held, that plaintiff could not recover; thatsection 62 was intended to adopt the doctrine of Price v. Neal, 3Burrow 1354, and applied as well to payment as to an acceptanceby the drawee of a forged bill or check. Also, that the indorsementof the defendant bank was not a guaranty to the drawee, but onlyto indorsees, Semble, that such an indorsement is only forcollection and does not transfer title to an indorsee.” (NationalBank of Rolla v. First Nat. Bank of Salem (Mo. App.) 125 S.W.513; National Bank of Commerce v. Mechanics’ Am. Nat. Bank(Mo. App.), 127 S.W. 429 accord, cited in Brannan, page 74)

Section 62 does not apply to instruments acquired withoutconsideration

“Some unknown person forged a check on plaintiff bankand paid the same to the city to discharge a street assessmenton defendant’s land, which defendants subsequently sold. Theplaintiff bank having paid the check and charged the account ofits depositor, upon discovery of the forgery, credited the sum backto the depositor and sued defendants for the amount.

Held, that section 62, N.I.L. has no application in behalf ofone who has acquired the paper without consideration. That theplaintiff was entitled to be subrogated to the lien of the city asagainst the proceeds of the sale of the land in the hands ofdefendants, if it should appear upon a new trial that the paymentof the assessments were purely gratuitous and not in dischargeof a real or supposed obligation on the part of the depositor or theunknown forger.” (Title Guarantee & Trust Co., v. Haven, 196N.Y. 487, 89 N.E. 1082, cited in Brannan, page 74)


Diligence required of the collecting bank

The case of Banco de Oro vs. Equitable Bank588, citing thecase of American Exchange National Bank vs. Yorkville Bank589,

held that: “the drawer owes no duty of diligence to the collectingbank (one who had accepted an altered check and had paid overthe proceeds to the depositor) except of seasonably discoveringthe alteration by a comparison of its returned checks and checkstubs or other equivalent record, and to inform the drawee thereof.”In this case it was further held that:

“The real and underlying reasons why negligence of thedrawer constitutes no defense to the collecting bankare that there is no privity between the drawer and thecollecting bank (Corn Exchange Bank vs. Nassau Bank,

204 N.Y.S. 80) and the drawer owe to that bank no dutyof vigilance (New York Produce Exchange Bank vs. Twelfth

Ward Bank, 204 N.Y.S. 54) and no act of the collectingbank is induced by any act or representation oradmission of the drawer (Seaboard National Bank vs.

Bank of America (supra) and it follows that negligenceon the part of the drawer cannot create any liability fromit to the collecting bank, and the drawer thus is neithera necessary nor a proper party to an action by thedrawee bank against such bank. It is quite true thatdepositors in banks are under the obligation of examiningtheir passbooks and returned vouchers as a protectionagainst the payment by the depositary bank against forgedchecks, and negligence in the performance of that obligationmay relieve that bank of liability for the repayment ofamounts paid out on forged checks, which but for suchnegligence it would be bound to repay. A leading case onthat subject is Morgan vs. United States Mortgage and Trust

Col. 208 N.Y. 218, 101 N.E. 871 Amn. Cas. 1914D, 462,

L.R.A. 1915D, 74.”

“Thus we hold that while the drawer generally owes no dutyof diligence to the collecting bank, the law imposes a duty ofdiligence on the collecting bank to scrutinize checks depositedwith it for the purpose of determining their genuineness and

588 January 20, 1988, bold supplied589 204 N.Y.S. 621 101 N.E. 87l Anm. Cas. 1914D, 462, L.RA. 191D, 74

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regularity. The collecting bank being primarily engaged in bankingholds itself out to the public as the expert and the law holds it to ahigh standard of conduct.” (supra)

Problem:

Sometime on June 1998, Samuel Tagoe, a foreigner,purchased from a Jewelry Store several pieces ofjewelry valued at Php 258, 000.00. In payment of thesame, he offered a Foreign Draft issued in favor ofUnited Overseas Bank (Malaysia)-UOB, addressed toLand Bank of the Philippines (LBP), payable to theJewelry Store for Php 380, 000.00. Subsequently saiddraft was cleared and the collecting bank, Far East Bankwas credited with the amount. Three (3) weeksthereafter, LBP informed Far East that the amount inthe Foreign Draft had been materially altered from Php300.00 to Php 380, 000.00 and it was returning the same.Far East Bank then refunded the amount and debitedthe same from the account of the Jewelry Store,however, there is a deficiency of Php 211, 946.64, thusFar East Bank demanded for the payment thereof, andwhen the same went futile, they filed a case for sum ofmoney against the Jewelry Store. RTC ruled in favor ofFar East Bank, however, on appeal, the CA reversed theruling that Far East Bank could not charge the JewelryStore on its secondary liability as an indorser. Bankappealed the ruling to the SC.

Is the petition for review on certiorari under rule 45,meritorious?

ANSWER:

No.

Act No. 2031, or the Negotiable Instruments Law (NIL),explicitly provides that the acceptor, by accepting the instrument,engages that he will pay it according to the tenor of his acceptance.This provision applies with equal force in case the drawee pays abill without having previously accepted it. His actual payment ofthe amount in the check implies not only his assent to the order of


the drawer and a recognition of his corresponding obligation topay the aforementioned sum, but also, his clear compliance withthat obligation. Actual payment by the drawee is greater than hisacceptance, which is merely a promise in writing to pay. Thepayment of a check includes its acceptance.

Unmistakable herein is the fact that the drawee bank clearedand paid the subject foreign draft and forwarded the amountthereof to the collecting bank. The latter then credited to theJewelry Store’s account the payment it received. Following theplain language of the law, the drawee, by said payment, recognizedand complied with its obligation to pay in accordance with thetenor of his acceptance. The tenor of his acceptance isdetermined by the terms of the bill as it is when the draweeaccepts. Stated simply, LBP was liable on its payment of thecheck according to the tenor of the check at the time of payment,which was the raised amount.

Because of that engagement, LBP could no longer repudiatethe payment it erroneously made to a due course holder. Wenote at his point that Gold Palace (Jewelry Store) was not aparticipant in the alteration of the draft, was not negligent, andwas a holder in due course—it received the draft complete andregular on its face, before it became overdue and without noticeof any dishonor, in good faith and for value, and absent anyknowledge of any infirmity in the instrument or defect in the titleof the person negotiating it. Having relied on the drawee bank’sclearance and payment of the draft and not being negligent,respondent Store is amply protected by the said Section 62.Commercial policy favors the protection of anyone who, in duecourse, changes his position on the faith of the drawee bank’sclearance and payment of a check or draft. (Far East Bank &

Trust Company vs. Gold Palace Jewelry Company, G.R. No.

168274, August 20, 2008 [Nachura, J.])

2011 Bar Question:

A bill of exchange has D as drawer, E as drawee and Fas payee. The bill was then indorsed to G, G to H, and Hto I. I, the current holder presented the bill to E foracceptance. E accepted but, as it later turned out, D isa fictitious person. Is E freed from liability?

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A. No, since by accepting, E admits the existence ofthe drawer.

B. No, since by accepting, E warrants that he is solvent.

C. Yes, if E was not aware of that fact at the time ofacceptance.

D. Yes, since a bill of exchange with a fictitious draweris void and inexistent.

Can a drawee who accepts a materially altered checkrecover from the holder and the drawer?

A. No, he cannot recover from either of them.

B. Yes from both of them.

C. Yes but only from the drawer.

D. Yes but only from the holder.

A bill of exchange states on its face: “One (1) monthafter sight, pay to the order of Mr. R the amount ofPhp50,000.00, chargeable to the account of Mr. S.Signed, Mr. T.” Mr. S, the drawee, accepted the bill uponpresentment by writing on it the words “I shall payPhp30,000.00 three (3) months after sight.” May heaccept under such terms, which varies the commandin the bill of exchange?

A. Yes, since a drawee accepts according to the tenorof his acceptance.

B. No, since, once he accepts, a drawee is liableaccording to the tenor of the bill.

C. Yes, provided the drawer and payee agree to theacceptance.

D. No, since he is bound as drawee to accept the billaccording to its tenor.

Sec. 63. When a person deemed indorser. - A person placinghis signature upon an instrument otherwise than as maker,drawer, or acceptor, is deemed to be indorser unless heclearly indicates by appropriate words his intention to bebound in some other capacity.


Notes:

Justice Torres, in his concurring opinion in the case ofFernando Maulini, et al vs. Antonio G. Serrano590, stated that:“[s]ection 63 of the Act above-cited says that a person placing hissignature upon an instrument otherwise than as maker, drawer,or acceptor is deemed to be an indorser, unless he clearlyindicated by appropriate words his contention to be bound in someother capacity. This provision of the law clearly indicates thatin every negotiable instrument it is absolutely necessary tospecify the capacity in which the person intervenes who ismentioned therein or takes part in its negotiation, becauseonly by so doing can it be determined what liabilities arisefrom that intervention and from whom, how and when theymust be exacted. And if, in the event of a failure to expressthe capacity in which the person who signed the negotiableinstrument intended to be bound, he should be deemed tobe an indorser, when the very words of the instrument expresslyand conclusively show that such he is, as occurs in the presentcase, and when the indorsement contains no restriction,modification, condition or qualification whatsoever, there cannotbe attributed to him, without violating the provisions of the saidAct, any other intention than that of being bound in the capacity inwhich he appears in the instrument itself, not can evidence beadmitted or, if already admitted, taken into consideration, for thepurpose of proving such other intention, for the simple reasonthat if the law has already fixed and determined the capacity inwhich it must be considered that the person who signed thenegotiable instrument intervened and the intention of his beingbound in a definite capacity, for no other purpose, undoubtedly,than that there shall be no other evidence given in the matter,when the capacity appears in the instrument itself and the intentionis determined by the very same capacity as occurs in this case,the admission of evidence in reference thereto is entirelyunnecessary, unless, and contrary to the purposes of the law,which is clear and precise in its provisions and admits of nosubterfuges or evasions for escaping obligations contracted uponthe basis of credit, with evident and sure detriment to those whointervened or took part in the negotiation of the instrument.”

590 G.R. No. L-8844, December 16, 1914, bold supplied

357

Illustrative Cases:

“Where defendant’s signature appeared with another in theplace for the maker’s name, he is not deemed an indorser althoughthe body of the instrument names the other signer as a promissorwithout mention of defendant’s name.” (Germania Nat. Bank v.Mariner, 129 Wis. 544, 109 N.W. 574, S.C. secs. 17-6, 64, citedin Brannan, page 75)

“The payee of a note, who indorsed it to enable the makerto negotiate it for his own benefit, is liable merely as anaccommodation indorser and is discharged if no notice of dishonoris given.” (Ibid, citing Mechanics’ & Farmers’ Savings Bank v.Katterjohn (Ky.), 125 S.W. 1071, S.C. secs. 109, 196.)

“Upon a sale of property the seller required the buyer toprocure an indorser to a note to be given for part of the price. Thebuyer executed a note to the seller with the blank indorsement ofthe defendant. Held, that defendant was liable as an indorserand not as a maker.” (Roesale v. Lancaster, 130 App. Div. 1, 114N.Y. Supp. 387, cited in Brannan, pages 75-76)

Sec. 64. Liability of irregular indorser. - Where a person, nototherwise a party to an instrument, places thereon hissignature in blank before delivery, he is liable as indorser, inaccordance with the following rules:

(a) If the instrument is payable to the order of a thirdperson, he is liable to the payee and to all subsequentparties.

(b) If the instrument is payable to the order of the makeror drawer, or is payable to bearer, he is liable to allparties subsequent to the maker or drawer.

(c) If he signs for the accommodation of the payee, heis liable to all parties subsequent to the payee.

Notes:

If instrument is payable to the order of a third person, he isliable to the payee and all subsequent parties

“This section has no application to a case where thesignature was placed on the instrument after its delivery to the


payee.” (Kohn v. Consolidated Bank Co., 30 Misc. R. 725, 63N.Y. Supp. 265.)

If the instrument is payable to the order of the maker ordrawer, or is payable to bearer, he is liable to all partiessubsequent to the maker or drawer

Professor Ames, a legal scholar in the field of NegotiableInstruments made the following comment on this provision, onthe following wise: “[t]his section (referring to Section 64 (2) is anotherwise excellent piece of codification, but defective becauseunder subsection 2 a party signing as indorser for theaccommodation of an acceptor would not be liable to a drawer-payee, but only to subsequent parties..” However, the U.S.Supreme Court held in the case of Haddock, Blanchard & Co. v.

Haddock591, that “[o]ne who endorsed a bill in blank before deliveryfor the purpose of backing the acceptor is liable to the drawer-payee, who had indorsed and transferred the instrument and wascompelled to take it up.” “In this case the court reached thedesirable result advocated by Professor Ames without anamendment of the section, by holding that sections 63 and 64-2merely established a presumption and that parol evidence wasadmissible to show an intention that the indorser should be liableto the drawer.”592

“In Jenkings v. Coomber [1898] 2 Q.B. 168, it was held that,where A drew a bill on B, payable to his own order, which Baccepted, and C, in accordance with a previous agreement toguarantee its payment, wrote his name on the back, and the billwas delivered to A, C was not liable as indorser, as the bill hadnot been indorsed by A before C put his name on the back.”593

Illustrative Cases:

“A note recited “The A.B. Co. promise to pay to the order ofC,” and was signed by A. B. Co., E.R.S. Treasurer, J.W.M.” Held,section 64 was not applicable, because J.W.M. did not place “hissignature in blank” on the note and he was therefore not liable asindorser. That there was a plain ambiguity on the face of the

591 192 N.Y. 499, 85 N.E. 682, S.C. secs. 29, 64-3, 68.592 Brannan, page 78593 Ibid, page 79

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note, and that evidence was admissible even against a holder indue course to show that J.W.M. was secretary of the A.B. Co. andintended to sign as such but omitted his title by mistake.”(Germania Nat. Bank v. Mariner, 129 Wis. 544, 109 N.W. 574,S.C. secs. 17-6, 63, cited in Brannan, page 77)

“This section deals only with the liability of an irregularindorser to the payee and subsequent parties and does not definethe rights and liabilities of several irregular indorsers as betweenthemselves. This is done by section 68.” (Wilson v. Hendee, 74N.J. Law 640, 66 Atl. 413, S.C. secs. 63, 64-1, 68, Ibid)

“One who endorses under this section is entitled to the samedefenses as to legality or consideration as the maker for whoseaccommodation he signed.” (Leonard v. Drapper, 187 Mass, 536,73 N.E. 644, semble S.C. sec. 66, ibid)

Sec. 65. Warranty where negotiation by delivery and so forth.

— Every person negotiating an instrument by delivery or bya qualified indorsement warrants:

(a) That the instrument is genuine and in all respectswhat it purports to be;

(b) That he has a good title to it;

(c) That all prior parties had capacity to contract;

(d) That he has no knowledge of any fact which wouldimpair the validity of the instrument or render itvalueless.

But when the negotiation is by delivery only, thewarranty extends in favor of no holder other than theimmediate transferee.

The provisions of subdivision (c) of this section do notapply to a person negotiating public or corporation securitiesother than bills and notes.

Notes:

That the instrument is genuine and in all respects what itpurports to be


The warranty “that the instrument is genuine and in allrespects what it purports to be” covers all the defects in theinstrument affecting the validity thereof, including a forgedindorsement. Thus, the last indorser will be liable for the amountindicated in the negotiable instrument even if a previousindorsement was forged. We held in a line of cases that “acollecting bank which indorses a check bearing a forgedindorsement and presents it to the drawee bank guarantees allprior indorsements, including forged indorsement itself, andultimately should be held liable therefor.”594 (Allied Banking

Corporation vs. Lim Sio Wan, et al, G.R. No. 133179, March 27,

2008)

Exception

However, this general rule is subject to exceptions. Onesuch exception is when the issuance of the check itself wasattended with negligence. Thus, in the cases cited above wherethe collecting bank is generally held liable, in two of the caseswhere checks were negligently issued, this Court held theinstitution issuing the check just as liable as or more liable thanthe collecting bank. (supra)

Illustrative Cases:

The payee of a note secured by chattel mortgage transferredthe note and mortgage, indorsing the note as follows: “Byagreement with recourse after all security has been exhaustedwaiving protest.” Held, that the indorser was liable only for thebalance due after the security has been exhausted, and as nocause of action accrues against him until the security is exhaustedhe cannot be joined as a defendant in the action to foreclose themortgage. (Smith v. Bradley, 16 N. Dak. 306, 112 N.W. 1062, citedin Brannan, page 81)

594 Traders Royal Bank v. Radio Philippines Network, Inc., G.R. No. 138510,October 10, 2002, 390 SCRA 608, 617; Associated Bank v. Court ofAppeals, G.R. No. 107382, January 31, 1996, 252 SCRA 620, 633; Bankof the Philippine Islands v. Court of Appeals, G.R. No. 102383, November26, 1992, 216 SCRA 51, 63; Banco de Oro Savings and Mortgage Bankv. Equitable Banking Corporation, G.R. No. 74917, January 20, 1988, 157SCRA 188, 198; Republic Bank v. Ebrada, No. L-40796, July 31, 1975,65 SCRA 680, 687-688

361

An action for cancellation of a note because cashier’s checksreceived therefor were worthless is not an action for breach ofwarranty in negotiation of the checks, and is therefore not governedby this section. (Dille v. White, 132 Iowa, 327, 109 N.W. 909, 10L.R.A. (N.S.) 510, S.C. supra, sec. 6-5, ibid)

The transferor by delivery of a forged note is not releasedfrom liability as warrantor by the act of the transferee in receivinginterest from the alleged maker and extending the note, withoutthe consent of the transferor, all the parties still in ignorance ofthe forgery. (Cluseau v. Wagner (La.), 52 So. 547, ibid)

Sec. 66. Liability of general indorser. - Every indorser whoindorses without qualification, warrants to all subsequentholders in due course:

(a) The matters and things mentioned in subdivisions(a), (b), and (c) of the next preceding section; and

(b) That the instrument is, at the time of his indorsement,valid and subsisting;

And, in addition, he engages that, on due presentment,it shall be accepted or paid, or both, as the case may be,according to its tenor, and that if it be dishonored and thenecessary proceedings on dishonor be duly taken, he willpay the amount thereof to the holder, or to any subsequentindorser who may be compelled to pay it.

Notes:

Matters mentioned in subdivisions (a), (b) and (c) of Section65 are the following:

(a)That the instrument is genuine and in all respects what itpurports to be;

(b) That he has a good title to it;

(c) That all prior parties had capacity to contract

2011 Bar Question:

Which of the following indorsers expressly warrants innegotiating an instrument that 1) it is genuine and true;


2) he has a good title to it; 3) all prior parties havecapacity to negotiate; and 4) it is valid and subsistingat the time of his indorsement?

A. The irregular indorser.

B. The regular indorser.

C. The general indorser.

D. The qualified indorser.

Liabilities of an indorser

In People v. Maniego,595 this Court described the liabilitiesof an indorser as follows:

Appellant’s contention that as a mere indorser, she may notbe liable on account of the dishonor of the checks indorsedby her, is likewise untenable. Under the law, the holder orlast indorsee of a negotiable instrument has the right “toenforce payment of the instrument for the full amountthereon against all parties liable thereon. Among the “partiesliable thereon” is an indorser of the instrument, i.e., “a personplacing his signature upon an instrument otherwise than asa maker, drawer or acceptor x x x unless he clearly indicatedby appropriate words his intention to be bound by someother capacity.” Such an indorser “who indorses withoutqualification, inter alia “engages that on due presentment,x x x (the instrument) shall be accepted or paid, or both, asthe case may be, according to its tenor, and that if it bedishonored, and the necessary proceedings of dishonor beduly taken, he will pay the amount thereof to the holder, orany subsequent indorser who may be compelled to pay it.”Maniego may also be deemed an “accommodation party”in the light of the facts, i.e., a person “who has signed theinstrument as maker drawer, acceptor, or indorser, withoutreceiving value thereof, and for the purpose of lending hisname to some other person.” As such, she is under the law“liable on the instrument to a holder for value,notwithstanding such holder at the time of taking theinstrument knew x x x (her) to be only an accommodation

595 L-30910, 148 SCRA 30, 25 (1987), cited in Bank of the Philippine Islandsvs. Court of Appeals and Benjamin C. Napiza, February 29, 2000

363

party,” although she has the right, after paying the holder, toobtain reimbursement from the party accommodated, “sincethe relation between them is in effect that of principal andsurety, the accommodation party being a surety.

It is thus clear that ordinarily private respondent may beheld liable as an indorser of the check or even as anaccommodation party.596

2011 Bar Question:

M, the maker, issued a promissory note to P, the payeewhich states: “I, M, promise to pay P or order the amountof Php1 Million. Signed, M.” P negotiated the note byindorsement to N, then N to O also by indorsement, andO to Q, again by indorsement. But before O indorsedthe note to Q, O’s wife wrote the figure “2” on the noteafter “Php1” without O’s knowledge, making it appearthat the note is for Php12 Million. For how much is Oliable to Q?

A. Php1 Million since it is the original tenor of the note.

B. Php1 Million since he warrants that the note isgenuine and in all respects what it purports to be.

C. Php12 Million since he warrants his solvency andthat he has a good title to the note.

D. Php12 Million since he warrants that the note isgenuine and in all respects what it purports to be.

Notice of dishonor necessary to charge all indorsers

The Negotiable Instruments Law contains provisionsestablishing the liability of a general indorser and giving theprocedure for a notice of dishonor. The general indorser ofnegotiable instrument engages that if it be dishonored and thenecessary proceedings of dishonor be duly taken, he will pay the

596 In Town Savings and Loan Bank, Inc. v. Court of Appeals, G.R. No. 106011,223 SCRA 459 (1993), the Court held that the accommodation parties toa promissory note are liable for the amount of the loan notwithstandingthat they were not the actual beneficiaries of such loan as they merelysigned the promissory note in order that the party accommodated couldbe granted the full amount of the loan


amount thereof to the holder. (Sec. 66, Negotiable Instruments

Law) In this connection, it has been held in a long line of authoritiesthat notice of dishonor is in order to charge all indorser andthat the right of action against him does not accrue until thenotice is given. (Paulino Gullas vs. Philippine National Bank,

G.R. No. L-43191, November 13, 1935, [Malcom, J:]; citing Asia

Banking Corporation vs. Javier [1923] 44 Phil., 777, bold supplied)

Section 66 cannot be used by a party which introduced adefect in the instrument

In Melva Theresa Alviar Gonzales vs. Rizal Commercial

Banking Corporation597, petitioner is an employee of therespondent bank, the former’s mother was issued a foreign checkin the amount of $7,500, her mother then endorsed the check.Since respondent bank gives special accommodations to itsemployees to receive the check’s value without awaiting theclearing period, petitioner presented the foreign check torespondent bank’s Head of Retail Banking. After examinationthe head of retail banking requested petitioner to endorse it whichthe latter did. Olivia Gomez (Head of Retail Banking) acquiescedto the early encashment of the check and signed the check butindicated thereon her authority of “up to P17,500.00 only”.Afterwards, Olivia Gomez directed Gonzales to present the checkto RCBC employee Carlos Ramos and procure his signature. Afterinspecting the check, Carlos Ramos also signed it with an “ok”annotation. After getting the said signatures Gonzales presentedthe check to Rolando Zornosa, Supervisor of the Remittancesection of the Foreign Department of the RCBC Head Office, whoafter scrutinizing the entries and signatures therein authorized itsencashment. Gonzales then received its peso equivalent of P155,270.85. Thereafter respondent bank tried to collect the amountof the check with the foreign drawee bank, however, the checkwas twice dishonored by reason of irregular endorsement andagain dishonored due to account closed. Respondent RCBC fileda case against petitioner for the collection of the amount.

The Supreme Court held that: “[t]he foreign drawee bank,Wilkshire Center Bank N.A., refused to pay the bearer of this dollar-check drawn against it because of the defect introduced byrespondent RCBC, through its employee, Olivia Gomez. It is,

597 G.R. No. 156294, November 29, 2006

365

therefore, a useless piece of paper if returned in that state to itsoriginal payee, Eva Alviar.

There is no doubt in the mind of the Court that a subsequentparty which caused the defect in the instrument cannot have anyrecourse against any of the prior endorsers in good faith.

x x x

This provision (Sec. 66, NIL), however, cannot be used bythe party which introduced a defect on the instrument, such asrespondent RCBC in this case, which qualifiedly endorsed thesame, to hold prior endorsers liable on the instrument x x x resultsin the absurd situation whereby a subsequent party may renderan instrument useless and inutile and let innocent parties bearthe loss while he himself gets away scot-free.

Section 66 of the Negotiable Instruments Law which furtherstates that the general endorser additionally engages that, on duepresentment, the instrument shall be accepted or paid, or both,as the case may be, according to its tenor, and that if it bedishonored and the necessary proceedings on dishonor be dulytaken, he will pay the amount thereof to the holder, or to anysubsequent endorser who may be compelled to pay it, it must beread in the light of the rule in equity requiring that those who cometo court should come with clean hands. The holder or subsequentendorser who tries to claim under the instrument which had beendishonored for “irregular endorsement” must not be the irregularendorser himself who gave cause for the dishonor. Otherwise, aclear injustice results when any subsequent party to the instrumentmay simply make the instrument defective and later claim fromprior endorsers who have no knowledge or participation in causingor introducing said defect to the instrument, which thereby causedits dishonor.”

Refusal of the Bank to pay the check drawn upon it.

As a general rule, a bank has a right to set-off the depositsin its hands for the payment of any indebtedness to it on the partof a depositor. In Louisiana, however, a civil law jurisdiction, therule is denied, and it is held that a bank has no right, without anorder from or special assent of the depositor to retain out of hisdeposit an amount sufficient to meet his indebtedness. The basis


of the Louisiana doctrine is the theory of confidential contractsarising from irregular deposits, e.g., the deposit of money with abanker. With freedom of selection and after full preference to theminority rule as more in harmony with modern banking practice.(1 Morse on Banks and Banking, 5th ed., Sec. 324; Garrison vs.

Union Trust Company [1905], 111 A.S.R, 407; Louisiana Civil Code

Annotated, Arts. 2207 et seq.; Gordon & Gomila vs. Muchler

[1882], 34 L. Ann., 604; 8 Manrea, Comentarios al Codigo Civil

Español, 4th ed., 359 et seq., 11 Manresa pp. 694 et seq.)

Starting, therefore, from the premise that the PhilippineNational Bank had with respect to the deposit of Gullas a right ofset-off, we next consider if that remedy was enforced properly.The fact we believe is undeniable that prior to the mailing of noticeof dishonor, and without waiting for any action by Gullas, the bankmade use of the money standing in his account to make good forthe treasury warrant. At this point recall that Gullas was merelyan indorser and had issued in good faith.

As to a depositor who has funds sufficient to meet paymentof a check drawn by him in favor of a third party, it has been heldthat he has a right of action against the bank for its refusal to paysuch a check in the absence of notice to him that the bank hasapplied the funds so deposited in extinguishment of past dueclaims held against him. (Callahan vs. Bank of Anderson [1904],

2 Ann. Cas., 203). The decision cited represents the minoritydoctrine, for on principle it would seem that notice is not necessaryto a maker because the right is based on the doctrine that therelationship is that of creditor and debtor. However this may be,as to an indorser the situation is different, and notice shouldactually have been given him in order that he might protect hisinterests. (Paulino Gullas vs. Philippine National Bank, G.R. No.

L-43191, November 13, 1935, [Malcom, J:])

Endorser is estopped from claiming that the check is non-negotiable

In the case of Banco de Oro Savings and Mortgage Bank

vs. Equitable Banking Corporation, Philippine Clearing House

Corporation, and Regional Trial Court of Quezon City, Branch

XCII (92)598, the plaintiff (BDO) drew six (6) crossed Manager’s

598 G.R. No. 74917, January 20, 1988

367

Check payable to certain member establishments of Visa Card,deposited with the defendant. Following normal procedures, andafter stamping at the back of the Checks the usual endorsements.All prior and/or lack of endorsement guaranteed the defendantsent the checks for clearing through the Philippine Clearing HouseCorporation. Accordingly, plaintiff paid the checks, thereafter itwas discovered that the endorsements appearing at the back ofthe Checks and purporting to be that of the payees were forgedand/or unauthorized or otherwise belong to persons other thanthe payees.

The Supreme Court ruled: “petitioner (BDO) is estoppedfrom raising the defense of non-negotiability of the checks inquestion. It stamped its guarantee on the back of the checks andsubsequently presented these checks for clearing and it was onthe basis of these endorsements by the petitioner that the proceedswere credited in its clearing account.

The petitioner by its own acts and representation cannotnow deny liability because it assumed the liabilities of an endorserby stamping its guarantee at the back of the checks.

The petitioner having stamped its guarantee of “all priorendorsements and/or lack of endorsements” is now estopped fromclaiming that the checks under consideration are not negotiableinstruments. The checks were accepted for deposit by thepetitioner stamping thereon its guarantee, in order that it can clearthe said checks with the respondent bank. By such deliberateand positive attitude of the petitioner it has for all intents andpurposes treated the said checks as negotiable instruments andaccordingly assumed the warranty of the endorser when it stampedits guarantee of prior endorsements at the back of the checks. Itled the said respondent to believe that it was acting as endorserof the checks and on the strength of its guarantee said respondentcleared the checks in question and credited the account of thepetitioner. Petitioner is now barred from taking an opposite postureby claiming that the disputed checks are not negotiable instrument.

A commercial bank cannot escape the liability of an endorserof a check and which may turn out to be a forged endorsement.Whenever any bank treats the signature at the back of the checksas endorsements and thus logically guarantees the same as such


there can be no doubt said bank has considered the checks asnegotiable.

Apropos the matter of forgery in endorsements, this Courthas succinctly emphasized that the collecting bank or last endorsergenerally suffers the loss because it has the duty to ascertain thegenuineness of all prior endorsements considering that the act ofpresenting the check for payment to the drawee is an assertionthat the party making the presentment has done its duty toascertain the genuineness of the endorsements. This is laid downin the case of PNB vs. National City Bank599. In another case,this court held that if the drawee-bank discovers that the signatureof the payee was forged after it has paid the amount of the checkto the holder thereof, it can recover the amount paid from thecollecting bank600.

We made clear in Our decision in Philippine National Bank

vs. The National City Bank of NY & Motor Service Co., that:

1. Where a check is accepted or certified by the bank onwhich it is drawn, the bank is estopped to deny thegenuineness of the drawers signature and his capacityto issue the instrument;

2. If a drawee bank pays a forged check which waspreviously accepted or certified by the said bank, it canrecover from a holder who did not participate in theforgery and did not have actual notice thereof;

3. The payment of a check does not include or imply itsacceptance in the sense that this word is used in Section82 of the Negotiable Instruments Act.601

Reason for the rule—

In the same case, “This Court enunciated in Philippine

National Bank vs. Court of Appeals602, a point relevant to the issuewhen it stated the doctrine of estoppels is based upon the groundsof public policy, fair dealing, good faith and justice and its purposeis to forbid one to speak against his own act, representations or

599 63 Phil. 711600 Republic Bank vs. Ebrada, 65 SCRA 680601 Supra (10 Saura Import & Export Co., 24 SCRA 974)602 94 SCRA 357

369

commitments to the injury of one whom they were directed andwho reasonably relied thereon.”

A truism stated by this Court is that—”The doctrine ofestoppels precludes a party from repudiating an obligationvoluntarily assumed after having accepted benefits therefrom. Tocountenance such repudiation would be contrary to equity andput premium on fraud or misrepresentation.603"

Illustrative Case:

A made a note to the order of B, forged B’s indorsement,then procured C’s indorsement for A’s accommodation, andnegotiated the note. Held, C by his indorsement, guaranteed thegenuineness of B’s signature, and was liable to a holder in duecourse. (Packard v. Windholz, 88 App. Div. 365, 84 N.Y. Supp.666, cited in Brannan, page 83)

An indorser of a check does not warrant the genuinenessof the drawer’s signature to the drawee who pays it. The draweeis not a holder in due course under Sec. 52, nor a holder underthe definition in Sec. 191. The drawee when he accepts a checkbecomes the guarantor thereof. (Farmer’s Bank v. Bank ofRutherford, 115 Tenn. 64, 88 S.W. 939, 112 Am. St. Rep. 817)But the drawee may recover back the money when the draweewas without fault and the indorser was guilty of negligence in notdiscovering the forgery. (Williamsburgh Trust Co. v. Tum Suden,120 App. Div. 518, 105 N.Y. Supp. 335)

A note made by a corporation was indorsed by defendantsbefore its delivery to the payee. The consideration was known toall parties to be an illegal purchase by the corporation of its owncapital stock. Held, that the payee was not a holder in due coursebecause he knew of the illegality and want of consideration, andcould not hold the indorsers upon their warranty. (Burke v.Smith,(Md.), 75 Atl. 114)

2011 Bar Question:

P sold to M 10 grams of shabu worth Php 5,000.00. Ashe had no money at the time of the sale, M wrote a

603 10 Saura Import & Export Co., 24 SCRA 974


promissory note promising to pay P or his order Php5,000. P then indorsed the note to X (who did not knowabout the shabu), and X to Y. Unable to collect from P,Y then sued X on the note. X set up the defense ofillegality of consideration. Is he correct?

A. No, since X, being a subsequent indorser, warrantsthat the note is valid and subsisting.

B. No, since X, a general indorser, warrants that thenote is valid and subsisting.

C. Yes, since a void contract does not give rise to anyright.

D. Yes, since the note was born of an il legalconsideration which is a real defense.

Sec. 67. Liability of indorser where paper negotiable by

delivery. — Where a person places his indorsement on aninstrument negotiable by delivery, he incurs all the liability ofan indorser.

Notes:

See, cross-reference comments and notes on Sec. 48.

Sec. 68. Order in which indorsers are liable. - As respect oneanother, indorsers are liable prima facie in the order in whichthey indorse; but evidence is admissible to show that, asbetween or among themselves, they have agreed otherwise.Joint payees or joint indorsees who indorse are deemed toindorse jointly and severally.

2011 Bar Question:

M makes a promissory note that states: “I, M, promiseto pay Php5,000.00 to B or bearer. Signed, M.” Mnegotiated the note by delivery to B, B to N, and N to O.B had known that M was bankrupt when M issued thenote. Who would be liable to O?

A. M and N since they may be assumed to know ofM’s bankruptcy

371

B. N, being O’s immediate negotiator of a bearer note

C. B, M, and N, being indorsers by delivery of a bearernote

D. B, having known of M’s bankruptcy

Sec. 69. Liability of an agent or broker. - Where a broker orother agent negotiates an instrument without indorsement,he incurs all the liabilities prescribed by Section Sixty-five ofthis Act, unless he discloses the name of his principal andthe fact that he is acting only as agent.

VI. PRESENTATION FOR PAYMENT

Obligations of maker, acceptor, drawer, and indorser,respectively, as to payment; general rule

The engagement entered into by the acceptor of a bill andthe maker of a note is, that it shall be paid at its maturity—that is,on the day that it falls due, and at the place specified for payment,if any place be designated—upon its presentment. Thisengagement is absolute, but that of the drawer of a bill and theindorser of a bill or note is conditional, and contingent upon thetrue presentment at maturity, and notice in case it is not paid.The maker and acceptor are bound, although the bill or note benot presented on the day it falls due;604 but the drawer and indorsersare discharged if such presentment be not made, unless somesufficient cause excuses the holder for failure to perform thatduty.605 It is important, therefore, to ascertain how the presentmentshould be provided for by the holder of the bill or note, lest byfailure to observe the necessary precautions, the drawer andindorsers may be discharged, and the solvency of his debtdestroyed or impaired. We shall consider, therefore, in order:

(1) The person by and whom the instrument should bepresented.

(2) The time of presentment.

(3) The place of presentment.

(4) The mode of presentment.

604 Sims v. National Com. Bank, 73 Ala. 251605 Magruder v. Bank of Washington, 3 Pet. 92; Cox v. National Bank, 100

U.S. 712; Harvey v. Girard Nat. Bank, 119 Pa. St. 212


Sec. 70. Effect of want of demand on principal debtor. -Presentment for payment is not necessary in order to chargethe person primarily liable on the instrument; but if theinstrument is, by its terms, payable at a special place, and heis able and willing to pay it there at maturity, such ability andwillingness are equivalent to a tender of payment upon hispart. But except as herein otherwise provided, presentmentfor payment is necessary in order to charge the drawer andindorsers.

Illustrative Case:

Presentment for payment is unnecessary to charge theperson primarily liable whether the instrument is payable on timeor on demand, although it is made payable at a particular place.(Farmer’s Nat. Bank v. Venner, 192 Mass. 531, 78 N.E. 540;Hyman v. Doyle, 53 Misc. R. 597, 103 N.Y. Supp. 778, cited inBrannan, page 88)

Where a note names no place of payment, it is generallypayable at the maker’s residence or place of business. Where anote, payable on or before a given date with the option to theholder to declare the whole due on default as to monthlyinstallments of interest, did not fix a place of payment and themaker had a place of business in the city where the note waspayable and was able and willing to make interest payments asthey matured, the holder could not declare the note due for failureto pay installments of interest, without presentment, demand andrefusal at the maker’s place of business, although the note maynot be, under section 70 N.I.L., “By its terms payable at a specialplace.” (Bradley v. Washington Mill Co. (Wash.), 103 Pac. 822,ibid)

Sec. 71. Presentment where instrument is not payable on

demand and where payable on demand. - Where theinstrument is not payable on demand, presentment must bemade on the day it falls due. Where it is payable on demand,presentment must be made within a reasonable time after itsissue, except that in the case of a bill of exchange,presentment for payment will be sufficient if made within areasonable time after the last negotiation thereof.

373

Notes:

Under this section and section 193 the burden is on theholder to prove presentment without a reasonable time, and thedefendant indorser need not plead failure to make duepresentment. Where the facts are ascertained and not in disputereasonable time is a question of law. Circumstances held to makethree and a half years an unreasonable time. (Commercial Nat.Bank v. Zimmerman, 185 N.Y., 210 77 N.E. 1020, cited in Brannan,page 89)

Bills payable on demand or at sight without grace (whichare immediately payable in presentment), or payable at a certainnumber of days after date, need not be presented, for acceptanceat all, but only for payment. And the fact that such bills are payableat a bank, or other particular place, does not alter the rule on thesubject.606 But it is usual and best, when the bill is payable at afuture day, to present it for acceptance, in order to ascertainwhether it will certainly be honored, and to procure the assuranceof the acceptor’s liability.607 And in such cases, if acceptance berefused, the holder must make protest, and give notice in the samemanner as if the bill were payable at so many days after sight.There are, however, three exceptions to this general rule that isnot necessary to present a bill payable at a fixed time foracceptance, but only at maturity for payment: First, when there isan express direction to the payee or holder of a bill; second, whenit is put into the hands of an agent for negotiation; and, third,where the drawer and drawer are either the same person, or thedrawer is a member of the firm or connected with the corporationwhich is the drawee. (Daniel, Elements of the Law of NegotiableInstruments, pages 163-164)

Bills payable at sight, or at so many days after sight, or afterdemand, or after any other event not absolutely fixed, must bepresented to the drawee for acceptance and payment, or foracceptance only, without unreasonable delay, or the drawer andindorsers will be discharged, for they have an interest in havingthe bills accepted immediately in order to shorten the time ofpayment, and thus put a limit to the period of their liability andalso enable them to protect themselves by other means before it

606 Bank of Washington v. Triplett, 1 Pet. 25; Townley v. Sumrall, 2 Pet. 170607 United Stated v. Barker, 4 Wash. C.C. 464; Story on Bills, 288


is too late, if the bill is not accepted and paid within the timeoriginally contemplated by them.608 When the words “acceptancewaived” are embodied in a bill, the ordinary proceedings inacceptance are dispensed with, and merged into those of paymentor nonpayment.609 (Ibid, page 164)

Presentment to the drawee, it has been held, is necessaryeven though the drawer has requested him not to accept;610 butthe holder is not bound to present again after refusal to acceptand notice given, even though the drawer requests him to do so,and promises that the bill shall be honored.611 (Ibid)

The only cases in which the holder of a bill which, accordingto its tenor, should be presented for acceptance, can charge thedrawer without presenting it for acceptance, arise when therelations between the drawer and drawee are such as to constitutethe drawing of the bill a fraud upon the holder.612 When the bill ispresented the acceptance must be according to its tenor to pay inmoney. If it be to pay another bill, it is no acceptance, and the billshould be protested.613

What constitutes a reasonable time?

No hard and fast demarcation line can be drawn betweenwhat may be considered as a reasonable or unreasonable time,because “reasonable time” depends upon the peculiar facts andcircumstances in each case. (Tolentino, Comments and

Jurisprudence on Commercial Laws of the Philippines, Vol. I, Eight

Edition, p. 327)

“Reasonable time” has been defined as so much time as isnecessary under the circumstances for a reasonable prudent anddiligent man to do, conveniently, what the contract or duty requiresshould be done, having a regard for the rights, and possibility ofloss, if any, to the other party. (Far East Realty Investment Inc. vs.

608 Bell v. First Nat. Bank, 115 U.S. 379; Mitchell v. De Grand, 1 Mason, 176;Robinson v. Ames, 20 Johns, 146

609 Carson v. Russel, 26 Tex. 472; English v. Wall, 12 Rob. (La.) 132; Webbv. Mears, 9 Wright, 222

610 Hill v. Heap, Dowl. & R.N.P. 57; 1 Parsons on Notes and Bills, 388611 Hickligg v. Hardey, 7 Taunt. 312612 Bank of Washington v. Triplett. 1 Pet. 25; Smith’s Mercantile Law

(Holcombe & Gholson’s ed.), 304613 Russel v. Phillips, 14 Q.B. 891

375

Court of Appeals, Dy Hian Tat, et al, G.R. No. L-36549, October 5,

1988, citing Citizens’ Bank Bldg. v. L& E. Werthiermer 189 S.W.

361, 362, 126 Ark, 38, Ann. Cas. 1917 E, 520)

Sec. 72. What constitutes a sufficient presentment. -Presentment for payment, to be sufficient, must be made:

(a) By the holder, or by some person authorized toreceive payment on his behalf;

(b) At a reasonable hour on a business day;

(c) At a proper place as herein defined;

(d) To the person primarily liable on the instrument, orif he is absent or inaccessible, to any person foundat the place where the presentment is made.

Notes:

Presentment by the Holder or his authorized agent

The bill must be presented by the holder or his authorizedagent, and to the drawee or his authorized agent. The party inpossession of the bill is with ostensible legal title thereto, presumedto be the holder, and to have the right to make presentment foracceptance of payment.614 The drawee may accept without risk,and if he refuse, the protest will inure to the benefit of the rightfulholder.615 If the drawee cannot be found, and any person hasbeen indicated to be resorted to in case of need (au besoin), thebill should be presented to that person.616 (Daniel, Elements ofthe Law of Negotiable Instruments, page 165)

Any bona fide holder of a negotiable instrument, or anyonelawfully in possession of it for the purpose of receiving payment,may present it for payment at maturity.617 (supra, page 200)

The mere possession of a negotiable instrument which ispayable to the order of the payee, and is indorsed by him in blank,or of a negotiable instrument payable to bearer, is in itself sufficient

614 Bank of Utica v. Smith, 18 Johns. 230; Freemen v. Boynton, 7 Mass. 483;Agnew v. Bank of Gettysburg, 2 Harr & Groll, 478

615 Chitty on Bills (13th Am. Ed.), 311616 Story on Bills, 229; Edwards on Bills, 402617 Leftly v. Mills, 4 T.R. 170; Bachellor v. Priest, 12 Pick. 399


evidence of his right to present it, and to demand paymentthereof.618 And payment to such person will always be valid, unlesshe is known to the payor to have acquired possession wrongfully.And if the party holding possession of a negotiable instrumentwhich is not indorsed by the payee, or has been indorsed by himspecially, to another, and has not been indorsed over by suchindorsee but has been placed in the holder’s hands as agent, forthe purpose of receiving payment to him will be valid; even, as ithas been held, although made in a manner different from thatprovided for in the instructions to the agent. The fact that theinstrument is not indorsed by the owner is, as has been held,under such circumstances, of no importance. Such indorsementwould be necessary to the negotiation of the instrument, but wouldnot be necessary to the validity of the payment. (Ibid)

As has been indicated, the presentment may be made bythe holder or owner himself, or by his duly authorized agent, andhis authority need not be in writing, although possibly the makeror acceptor may insist upon a written authorization or indorsementto the agent before being required to make payment.619 (Ibid)

To whom; general rule

Presentment for payment must be made to the drawee oracceptor of the bill, or maker of the note, or to an authorized agent.A personal demand is not necessary, and it is sufficient to makethe demand at his usual residence or place of business of hiswife, or other agent; for it is the duty of an acceptor or promissory,if he is not present himself, to leave provision for the payment ofhis bills or notes.620 (Supra, page 203)

Sec. 73. Place of presentment. - Presentment for payment ismade at the proper place:

(a) Where a place of payment is specified in theinstrument and it is there presented;

(b) Where no place of payment is specified but theaddress of the person to make payment is given inthe instrument and it is there presented;

618 Weber v. Orten, 91 Mo. 680; Jackson v. Love, 82 N.C. 405619 Tiedeman on Bills and Notes, 311, note 2620 Matthews v. Haydon, 2 Esp. 509; Brown v. McDermott, 5 Esp. 265

377

(c) Where no place of payment is specified and noaddress is given and the instrument is presented atthe usual place of business or residence of theperson to make payment;

(d) In any other case if presented to the person to makepayment wherever he can be found, or if presentedat his last known place of business or residence.

Notes:

Presentment to person on premises

If presentment be made at the place specified in theinstrument, or in the case of one payable generally at the place ofbusiness of the acceptor or maker during business hours, or athis domicile during a reasonable hour of the day, it is sufficient ifit be made to any person to be found upon the premises, especiallyif the maker be absent or inaccessible.621 Where presentmentwas made to the wife of the maker, she informing the holder thather husband was out of town, it was held sufficient.622 And so itwas deemed sufficient to charge the indorser where the holderpresented the bill to an inmate of the maker’s house, who wascoming out, and who stated that the acceptor had removed—theholder leaving a card containing notice for the acceptor of thematurity of the bill.623 Where there is no one to answer,presentment at the maker’s dwelling is sufficient.624 (Daniel,Elements of the Law of Negotiable Instruments, page 204)

Illustrative Cases:

A note payable at a bank is properly presented for paymentat the bank although the bank is in the hands of a receiver andclosed. Presentment need not be made to the receiver personally,he having no authority to pay. (Schlesinger v. Schultz, 110 App.Div. 356, 96 N.Y. Supp. 383, S.C. secs. 7-1, 71, cited in Brannan,page 92)

621 Cromwell v. Hynson, 2 Campb. 596; Phillips v. Astberg, 2 Taunt. 206;Draper v. Clemons, 4 Mo. 52

622 Moodie v. Morrall, 1 Const. Rep. 367623 Buxton v. Jone, 1 M & G 83; Story on Bills (Bennett’s ed.), 350, note 1624 Stivers v. Prentice, 3 B. Mon. 461


Where a note is payable at a certain store, presentment forpayment at such store to a person connected therewith is sufficientand no personal demand on the maker is necessary. (Nelson v.Grondahl, 13 N.D. 363, 100 N.W. 1093, ibid)

Where a note is payable at a designated branch of a trustcompany, presentation at the original office of the company onthe date of maturity and at the branch after banking hours on theday following is not sufficient as against an indorser. (IroncladMfg. Co. v. Sackin, 129 App. Div. 555, 114 N.Y. Supp. 43, cited inBrannan, page 93)

A note was made payable at the home of the maker and atmaturity he was called up by telephone and asked what he wasgoing to do about it, and answered that he could not pay, and wastold that the note would be protested. Held, that the right of themaker under section 74 to the exhibition of the note was waived,and that the demand over the telephone was a sufficientpresentment to charge the indorser. (Gilpin v. Savage, 60 Misc.Rep. 605, 112 N.Y. Supp. 802, ibid)

Sec. 74. Instrument must be exhibited. - The instrument mustbe exhibited to the person from whom payment is demanded,and when it is paid, must be delivered up to the party payingit.

Notes:

Must be actually exhibited

Presentment of the bill or note, and demand of payment,should be made by an actual exhibition of the instrument itself; orat least the demand of payment should be accompanied by someclear indication that the instrument is at hand, ready to bedelivered, and such must really be the case.625 This is requisite inorder that the drawee or acceptor may be able to judge (1) of thegenuineness of the instrument; (2) of the right of the holder toreceive payment; and (3) that he may immediately reclaimpossession of it upon paying the amount. If, on demand ofpayment, the exhibition of the paper is not asked for, and the

625 Musson v. Laek, 4 How. 262; Nailor v. Bowie, 3 Md. 251; Crandall v.Schroeppel, 1 Hun, 557; Etheridge v. Ladd, 44 Barb. 69

379

party to whom demand is made declines to pay on other grounds,a more formal presentment by actual exhibition of the paper willbe considered as waived.626 x x x The demand of payment shouldnot vary from the tenor of the paper; and if it be payable simply inmoney, without specifying the kind, a demand for gold coin wouldbe insufficient to charge and indorser.627 (Daniel, Elements of theLaw of Negotiable Instruments, page 220)

Presentment by mail

Bills of exchange are most frequently drawn on parties atdistant places, and it is undoubtedly legal, customary, and properto forward them by mail to correspondents or other agents at theplace where the drawee is addressed, to -be by them presented,in due course. (Ibid, pages 220-221)

Leaving instrument in debtor’s hands

A bill or note, when presented for payment, cannot be left inthe debtor’s hands as when presented for acceptance; and if it isso left, presentment cannot be considered as made until paymentis demanded. (Ibid)

Sec. 75. Presentment where instrument payable at bank. -Where the instrument is payable at a bank, presentment forpayment must be made during banking hours, unless theperson to make payment has no funds there to meet it at anytime during the day, in which case presentment at any hourbefore the bank is closed on that day is sufficient.

Notes:

As to mode of presentment of negotiable paper payable at abank

When a bill or note is made payable at a bank, it isconsidered a sufficient presentment of it if it is actually in the bankat maturity, read to be delivered up to any party who may be entitledto it on payment of the amount due; and if, at the close of businesshours, the bill or note remains unpaid, it is considered asdishonored, and notice should be immediately given to the proper

626 Lockwood v. Crawford, 18 Conn. 361; King v. Crowell, 61 Me. 244627 Langenberger v. Kroeger, 48 Cal. 147


parties.628 Such also is the case when the instrument is payableat a particular place.629 Sometimes a formal presentment of thebill or note, in such cases, at the bank, or upon the maker, ismade; and the cases are uniform in holding that such apresentment at the bank is sufficient, even when the place ismentioned in the memorandum;630 but it is settled that nothingmore than the presence of the paper there is necessary.631 (Daniel,Elements of the Law of Negotiable Instruments, page 222)

The person to make payment has until the close of bankinghours of the bank where the instrument is made payable in whichto pay it, and if before the close of such hours he deposits moneyenough to pay it, a demand earlier in the day is premature.(German-American Bank v. Milliman, 31 Misc. R. 87, 65 N.Y. Supp.242, cited in Brannan, page 94)

Sec. 76. Presentment where principal debtor is dead. - Wherethe person primarily liable on the instrument is dead and noplace of payment is specified, presentment for payment mustbe made to his personal representative, if such there be, andif, with the exercise of reasonable diligence, he can be found.

Notes:

When acceptor or maker is dead

If the acceptor or maker be dead at the time of the maturityof the bill or note, it should be presented to his personalrepresentative, if one be appointed, and his place of residencecan, by reasonable inquiries, be ascertained.632 If there be nopersonal representative, the presentment should be made, andpayment demanded, at the dwelling-house of the deceased, ifthe instrument were payable generally.633 But if it was drawn

628 Chicopee Bank v. Philadelphia Bank, 8 Wall. 641; People’s Bank v. Brooks,31 Md. 7; Folger v. Chase, 18 Pick. 63

629 Hunt v. Maybee, 7 N.Y. 266630 Bank of Utica v. Smith, 18 Johns 230; Woodbridge v. Brigham, 13 Mass

556; Saunderson v. Judge, 2 H. Bl. 509631 Fullerton v. Bank of United States, 1 Pet. 604; Merchant’s Bank v. Elderkin,

25 N.Y. 178632 Magruder v. Union Bank, 3 Pet. 87; Juniata Bank v. Hale, 16 Serg. & R.

167633 Magruder v. Union Bank, 3 Pet. 87; Juniata Bank v. Hale, 16 Serg. & R.

167; Story on Notes, 253

381

payable at a particular place, then it will be sufficient that it waspresented at such place.634 (Daniel, Elements of the Law ofNegotiable Instruments, page 204)

Illustrative case:

Calling two or three times at the banking office of theadministrator of a deceased maker, and again seeking him at arailroad station near the seat of his other business interests at atime when he might be expected to be there, warrants a finding ofreasonable diligence to present a note for payment. (Reed v.Spear, 107 App. Div. 144, 94 N.Y. Supp. 1007, S.C. secs. 89, 96,ibid)

Sec. 77. Presentment to persons liable as partners. - Wherethe persons primarily liable on the instrument are liable aspartners and no place of payment is specified, presentmentfor payment may be made to any one of them, even thoughthere has been a dissolution of the firm.

Sec. 78. Presentment to joint debtors. - Where there areseveral persons, not partners, primarily liable on theinstrument and no place of payment is specified, presentmentmust be made to them all.

Notes:

Where there are several promissors

When the note is executed by several joint promissors whoare not partners, but liable only as joint and several promissors, ithas been held, and, as we think correctly, that presentment shouldbe made to each, in order to fix the liability of an indorser.635 Butpresentment of a bill drawn upon or accepted by, and of a noteexecuted by, a co-partnership firm, is sufficient, if made to anyone of the members of such firm.636 And if the signature of theparties entitled to presentment be apparently that of a partnership,

634 Boyd’s Admr. V. City Sav. Bank, 15 Gratt. 501; Holtz v. Boppe, 37 N.Y.634; Philport v. Bryant, 1 Moore & P. 754

635 Blake v. McMillen, 33 Iowa, 150; Union Bank v. Willis, 8 Metc. (Mass.)504; Arnold v. Dresser, 8 Allen, 435

636 Branch of State Bank v. McLeran, 26 Iowa, 306; Shedd v. Brett, 1 Pick.401


as, for instance, if signed “Walter & Burr,” presentment to either issufficient.637 (Daniels, Elements of the Law of NegotiableInstruments, page 205)

Even after the dissolution of the firm, presentment to anyone of the partners is sufficient, for as to the bill or note uponwhich they are liable, the liability continues until duly satisfied ordischarged.638 (Ibid)

In the event of the death of one of the members of the firmto which presentment should be made before the maturity of thebill or note, the presentment should be made to the survivors,and not to the personal representative of the deceased, becausethe liability devolves upon the surviving partner.639 The same ruleobtains in the event of the death of one of two or more joint makersnot partners.640 (Ibid)

Sec. 79. When presentment not required to charge the drawer.

- Presentment for payment is not required in order to chargethe drawer where he has no right to expect or require thatthe drawee or acceptor will pay the instrument.

Sec. 80. When presentment not required to charge the

indorser. -Presentment is not required in order to charge anindorser where the instrument was made or accepted for hisaccommodation and he has no reason to expect that theinstrument will be paid if presented.

2011 Bar Question:

X executed a promissory note in favor of Y by way ofaccommodation. It says: “Pay to Y or order the amountof Php50,000.00. Signed, X.” Y then indorsed the noteto Z, and Z to T. When T sought collection from Y, thelatter countered as indorser that there should have beena presentment first to the maker who dishonors it. Is Ycorrect?

637 Erwin v. Downs, 15 N.Y. 375638 Crowley v. Barry, 4 Gill, 194; Hubbard v. Matthews, 4 N.Y. 50639 Cayuga Bank v. Hunt, 2 Hill, 635; Story on Bills, 346-362640 Daniel on Negotiable Instruments, 596

383

A. No, since Y is the real debtor and thus, there is noneed for presentment for payment and dishonor bythe maker.

B. Yes, since as an indorser who is secondarily liable,there must first be presentment for payment anddishonor by the maker.

C. No, since the absolute rule is that there is no needfor presentment for payment and dishonor to holdan indorser liable.

D. Yes, since the secondary liability of Y and Z wouldonly arise after presentment for payment anddishonor by the maker.

Sec. 81. When delay in making presentment is excused. -Delay in making presentment for payment is excused whenthe delay is caused by circumstances beyond the control ofthe holder and not imputable to his default, misconduct, ornegligence. When the cause of delay ceases to operate,presentment must be made with reasonable diligence.

Sec. 82. When presentment for payment is excused. -Presentment for payment is excused:

(a) Where, after the exercise of reasonable diligence,presentment, as required by this Act, cannot bemade;

(b) Where the drawee is a fictitious person;

(c) By waiver of presentment, express or implied.

Sec. 83. When instrument dishonored by non-payment. - Theinstrument is dishonored by non-payment when:

(a) It is duly presented for payment and payment isrefused or cannot be obtained; or

(b) Presentment is excused and the instrument isoverdue and unpaid.

Sec. 84. Liability of person secondarily liable, when

instrument dishonored. - Subject to the provisions of thisAct, when the instrument is dishonored by non-payment, an


immediate right of recourse to all parties secondarily liablethereon accrues to the holder.

Notes:

For Section 84 to apply, the check must be presented forpayment within a reasonable period of time after its issue

The applicability of this provision is subject to the conditionimposed under Sec. 186, to the effect that the check must bepresented for payment within a reasonable period of time after itsissue. (Philippine National Bank vs., Benito Seeto, G.R. No. L-

4388, August 13, 1952, [Labrador, J:]) It must however be notedthat Sec. 186 explicitly provides for the discharge of the drawer.The silence of Section 186 as to the indorser is due to the factthat his discharge is already expressly covered by the provisionof Section 84, the indorser being a person secondarily liable onthe instrument. The reason for the difference between the liabilityof the indorser and that of the drawer in case of dishonor is thatthe drawer is not probably or necessarily prejudiced thereby, whilean indorser is, actually or by legal presumption. (supra)

When does liability arise?

After an instrument is dishonored by nonpayment, indorserscease to be merely secondarily liable; they become principaldebtors whose liability becomes identical to that of the originalobligor. The holder of a negotiable instrument need not evenproceed against the maker before suing the indorser.641 (Tuazon

vs. Heirs of Bartolome Ramos, G.R. No. 156262, July 14, 2005)

Sec. 85. Time of maturity. - Every negotiable instrument ispayable at the time fixed therein without grace. When the dayof maturity falls upon Sunday or a holiday, the instrumentsfalling due or becoming payable on Saturday are to bepresented for payment on the next succeeding business dayexcept that instruments payable on demand may, at the optionof the holder, be presented for payment before twelve o’clocknoon on Saturday when that entire day is not a holiday.

641 Metropol (Bacolod) Financing & Investment Corp. v. Sambok MotorsCompany, 205 Phil. 758, 762, February 28, 1983

385

Notes:

The third sentence of this section presents the anomaly thatwhile an instrument falling due on Saturday must be presentedon Monday in order to hold drawers and indorsers, yet if theinstrument is payable at a special place and the person primarilyliable is able and willing to pay it there at maturity (see section70), it must be presented on Saturday in order to charge the partiesliable for such payment with interest after Saturday. This questionhas arisen in a practical way in Boston, and counsel for both partiesagreed upon this construction of the sentence, but the questionhas not been submitted to a court. It seems also that if a bank orother collecting agent should fail to present the instrument onSaturday such agent might be chargeable with negligence andliable for any loss thereby caused to the principal. (Brannan, page99)

General rule as to time

In respect to the maker of a note and the acceptor of a bill,it is not important upon what day the presentment is made,provided it be made at some time before the statute of limitationsbar action against them.642 In respect, however, to the drawer ofa bill and the indorser of a bill or note, it is essential to the fixing oftheir liability that the presentment should be made on the day ofmaturity, provided it is within the power of the holder to make it.643

If the presentment be made before the bill or note is due, it isentirely premature and nugatory, and, so far as it affects the draweror indorser, a perfect nullity.644 (Daniel, Elements of the Law ofNegotiable Instruments, page 206)

When instrument payable on demand

All bills of exchange payable on demand are closelyassimilated to checks, and contemplate the immediate paymentof the amount called for. They are payable immediately onpresentment, without grace, and if the drawee and the payee orindorsee reside in the same place, it is laid down by a number ofthe authorities that they must be presented within business hours

642 Chitty on Bills [354], 396; Metzger v. Waddell, 1 N. Mex. 409643 1 Parsons on Notes and Bills, 373; Pendleton v. Knickerbocker Life Ins.

Co., 7 Fed. 170644 Griffin v. Goff, 12 Johns, 423; Jackson v. Newton, 8 Watts, 401; Farmer’s

Bank v. Duvall, 7 Gill & J 78


of the day on which they are drawn in order to holder the drawerin the event of the failure of the drawee to honor them.645 And ifthe drawee resides in a different place they must be forwarded bythe regular post of the day after they were received.646 But theserules are not inflexible. What is reasonable time must dependupon circumstances and in many cases upon the time, the mode,and the place of receiving bills, and upon the relations of the partiesbetween whom the question arises.647 Where the draft requiredindorsement by a school board, which had to be convened, delayof a week to forward it was held justifiable.648 (Supra, page 208)

Sec. 86. Time; how computed. - When the instrument ispayable at a fixed period after date, after sight, or after thathappening of a specified event, the time of payment isdetermined by excluding the day from which the time is tobegin to run, and by including the date of payment.

Sec. 87. Rule where instrument payable at bank. - Where theinstrument is made payable at a bank, it is equivalent to anorder to the bank to pay the same for the account of theprincipal debtor thereon.

Notes:

A bank has no authority to pay notes of a depositor madebefore the adoption of the Negotiable Instruments Law ad payableat another bank. (Elliot v. Worcester Trust Co., 189 Mass. 542,75 N.E. 944) When the depositor sues the bank, the bank cannotclaim the rights of a bona fide purchaser for value before maturitywhen it simply pleads a general denial and payment and files noclaim in set-off. (Ibid, cited in Brannan, page 101)

Sec. 88. What constitutes payment in due course. - Paymentis made in due course when it is made at or after the maturityof the payment to the holder thereof in good faith and withoutnotice that his title is defective.

645 Kampmann v. Williams, 70 Tex. 571; McMonigal v. Brown, 45 Ohio St.504

646 Chitty on Bills (13th Am. Ed.), 432; Parker v. Reddick, 65 Miss. 246647 Morgan v. United States, 113 U.S. 501; Marbourg v. Brinkman, 23 Mo.

App. 513648 Muncy Borough School Dist. V. Commonwealth, 84 Pa. St. 464

387

Notes:

The payee of a demand note held a mortgage to secure thedebt. He sold and transferred the mortgage to one person for fullvalue and afterwards indorsed the note to a holder in due course.Held, that the note was not paid by the sale of the mortgage.(Glasscock v. Balls, 24 Q.B.D. 13, S.C. sec. 119-1, ibid)

VII. NOTICE OF DISHONOR

Necessity of notice; general rule

When a negotiable bill or note is dishonored by non-acceptance on presentment for acceptance, or by nonpayment atits maturity, it is the duty of the holder to give immediate notice ofsuch dishonor to the drawer, if it be a bill, and to the indorser,whether it be a bill or note. The party primarily liable is not entitledto notice, for it was his duty to have provided for payment of thepaper; and the fact that he is the maker or acceptor foraccommodation does not change the rule.649 (Daniel, Elementsof the Law of Negotiable Instruments, page 234)

Notice is not due to any party of a bill or note not negotiable,the rules of the law merchant concerning notice and protestapplying to none but strictly commercial instruments.650 (Supra)

It is regarded as entering a condition in the contract of thedrawer and indorser of a bill, and of the indorser of a note, that heshall only be bound in the event that acceptance or payment isonly demanded; and he notified if it is not made. And in default ofnotice of non-acceptance or nonpayment, the party entitled tonotice is at once discharged, unless some excuse exist whichexonerates the holder.651 (Supra)

Failure to notify party entitled to notice discharges debt forwhich bill was drawn or indorsed

So absolute is the necessity for notice to an indorser, inorder to charge him, that if a note has been indorsed to the holderin conditional payment of a debt, the failure to give notice to the

649 Hays v. N.W. Bank, 9 Gratt. 127650 Pitman v. Breckinridge, 3 Gratt. 129651 Rothschild v. Currie, 41 Eng. C.L. 43; Musson v. Lake, 4 How. 262


indorser will not only discharge the indorser as a party to the notice,but also a debtor upon the original consideration, even though itbe secured by a mortgage or deed of trust. The notes, then, ismade an absolute discharge of his liability, and the indorsee mustlook solely to prior parties.652 (Supra, page 234-235)

Sec. 89. To whom notice of dishonor must be given. - Exceptas herein otherwise provided, when a negotiable instrumenthas been dishonored by non-acceptance or non-payment,notice of dishonor must be given to the drawer and to eachindorser, and any drawer or indorser to whom such notice isnot given is discharged.

Notes:

Professor Ames states: “By section 89, if the drawer of acheck is not notified of the dishonor, he will be absolutelydischarged, although he has suffered no loss by the failure togive him notice. Yet by section 186 the drawer is only dischargedto the extent of loss caused by delay in presentment of the checkfor payment within a reasonable time.”653

Where notice of dishonor to the drawer of a check is requiredit must be alleged in the complaint. (Ewald v. Faulhaber Co., 105N.Y. Supp. 114, cited in Brannan, page 102)

Judgment for the payees of a check against the drawercannot be sustained in the absence of proof that notice of dishonorwas given to the drawer. (Kuflick v. Glasser, 114 N.Y. Supp. 870,ibid)

The drawer of a check is discharged by failure to give himnotice of dishonor, the bank refusing to pay because it was shortof funds, and subsequently proving to be insolvent. (Bacigalupov. Parrillo, 112 N.Y. Supp. 1040, ibid)

In an action against the indorser of a note it is not sufficientto allege that upon maturity the note was duly presented forpayment, and the indorser duly notified of non-payment. Theallegation and evidence must show the demand and note to have

652 Shipman v. Cook, 1 Green, 251; Peacock v. Purcell, 14 C.B. (N.S.) 728653 Cited in Brannan, page 101

389

been upon such a day as will charge the defendant. (Hoyland v.National Bank of Middlesborough (Ky.), 126 S.W. 356, Brannan,page 102-103)

An allegation that due notice of the protest of a note wasduly given to an indorser is sufficient allegation of notice ofdishonor; the term “protest” including a popular sense all the stepstaken to fix the liability of an indorser, and the word “duly”, in legalparlance, meaning “according to law,” and relating not to formonly, but including both form and substance. (Sherman v. Ecker,59 Misc. Rep. 216, 110 N.Y. Supp. 265, cited in Brannan, page103)

Failure to notify an indorser of an installment note of thenon-payment of previous installments does not affect his liabilityfor later installments of the non-payment of which he has beenduly notified. (Hopkins v. Merrill, 79 Conn. 626, 66 Atl. 174, S.C.sec. 66, ibid)

A joint maker, though a surety, is not an indorser and isprimarily liable, and, therefore, is not entitled to notice of dishonor.(Rouse v. Wooten, 140 N.C. 557, 53 S.E. 430, 111 Am. St. Rep.875, ibid)

Although presentment is excused because no administratorhad been appointed (sec. 76), yet if the instrument is dishonored(sec. 83) notice of dishonor must be given to the indorser incompliance with sec. 89. (Reed v. Spear, 107 App. Div. 144, 94N.Y. Supp. 1007, S.C. secs. 76, 96, ibid)

An action against an indorser after legal notice of dishonoris not barred because judgment was rendered in his favor in aprevious action solely for the reason that he had not been notifiedbefore that action was brought. (Peck v. Eston, 74, Conn. 456,51 Atl. 134, S.C. sec. 64-1, ibid)

Illustrative Case:

Asian Banking Corporation vs. Juan JavierG.R. No. L-19051, April 4, 1923

AVANCEÑA, J:


On May 10, 1920, Salvador B. Chaves drew a check on thePhilippine National Bank for P11,000 in favor of La Insular, aconcern doing business in this city. This check was indorsed bythe limited partners of La Insular, and then deposited by SalvadorB. Chaves in his current account with the plaintiff, Asia BankingCorporation. The deposit was made on July 14, 1920.

On June 25, 1920, Salvador B. Chaves drew another checkfor P18,785.30 on the Philippine National Bank, in favor of theaforesaid La Insular. This check was also indorsed by the limitedpartners of La Insular, and was likewise deposited by Salvador B.Chaves in his current account with the plaintiff, Asia BankingCorporation, on July 6, 1920.

The amount represented by both checks was used bySalvador B. Chaves after they were deposited in the plaintiff bank,by drawing checks on the plaintiff. Subsequently these checkswere presented by the plaintiff to the Philippine National Bank forpayment, but the latter refused to pay on the ground that thedrawer, Salvador B. Chaves, had no funds therein.

The plaintiff now brings this action against the defendant,as indorser, for the payment of the value of both checks.

The lower court sentenced the defendant to pay the plaintiffP11,000, upon the check of May 10, 1920, with interest thereonat 9 per cent per annum from July 10, 1920, and P18,778.34 onthe check of June 25, 1920, with interest thereon at 9 per cent perannum from August 5, 1920. From this judgment the defendantappealed.

One of the contentions of the appellant in support of thisappeal is, that at all events its liability as indorser of the checks inquestion was extinguished. We may say in connection with thisassignment of error that the liability of the defendant never arose.

Section 89 of the Negotiable Instruments Law (Act No. 2031)provides that, when a negotiable instrument is dishonored for non-acceptance or non-payment, notice thereof must be given to thedrawer and each of the indorsers, and those who are not notifiedshall be discharged from liability, except where this act providesotherwise. According to this, the indorsers are not liable unless

391

they are notified that the document was dishonored. Then,under the general principle of the law of procedure, it will beincumbent upon the plaintiff, who seeks to enforce the defendant’sliability upon these checks as indorser, to establish said liabilityby proving that notice was given to the defendant within the time,and in the manner, required by the law that the checks in questionhad been dishonored. If these facts are not proven, the plaintiffhas not sufficiently established the defendant’s liability. There isno proof in the record tending to show that plaintiff gave any noticewhatsoever to the defendant that the checks in question had beendishonored, and there it has not established its cause of action.(bold supplied)

For the foregoing, the judgment appealed from is reversedand the defendant is absolved from the complaint without specialpronouncement as to costs.

So ordered.

Araullo, C. J., Street, Malcolm, and Ostrand., concur.

Effect of Notice of Dishonor; required only to preserve theright of the payee to recover on the check

A notice of dishonor is required only to preserve theright of the payee to recover on the check. It preserves theliability of the drawer and the indorsers on the check. Otherwise,if the payee fails to give notice to them, they are discharged fromtheir liability thereon, and the payee is precluded from enforcingpayment on the check. (Bank of the Philippine Islands vs. Spouses

Royeca, G.R. No. 176664, July 21, 2008, bold supplied)

Sec. 90. By whom given. - The notice may be given by or onbehalf of the holder, or by or on behalf of any party to theinstrument who might be compelled to pay it to the holder,and who, upon taking it up, would have a right toreimbursement from the party to whom the notice is given.

Sec. 91. Notice given by agent. - Notice of dishonor may begiven by any agent either in his own name or in the name ofany party entitled to given notice, whether that party be hisprincipal or not.


Illustrative Case:

A note made by A to the order of B, indorsed by B and alsoby A, was protested for non-payment. Notice addressed to B wassent to A, who forwarded it to B. Held, that although A could notgive notice in his own behalf to B under Sec. 90, since B waspresumptively an accommodation indorser for A and not liable,yet A could forward it to B, on behalf of the holder, and as hisagent. (Trader’s Royal Bank v. Jones, 104 App. Div. 433, 93 N.Y.Supp. 768, cited in Brannan, page 104)

Sec. 92. Effect of notice on behalf of holder. - Where notice isgiven by or on behalf of the holder, it inures to the benefit ofall subsequent holders and all prior parties who have a rightof recourse against the party to whom it is given.

Sec. 93. Effect where notice is given by party entitled thereto.

- Where notice is given by or on behalf of a party entitled togive notice, it inures to the benefit of the holder and all partiessubsequent to the party to whom notice is given.

Sec. 94. When agent may give notice. - Where the instrumenthas been dishonored in the hands of an agent, he may eitherhimself give notice to the parties liable thereon, or he maygive notice to his principal. If he gives notice to his principal,he must do so within the same time as if he were the holder,and the principal, upon the receipt of such notice, has himselfthe same time for giving notice as if the agent had been anindependent holder.

Notes:

Illustrative Case:

A branch of a country banking company sent to a Londonbank for collection a bill bearing several indorsements. Upondishonor the London bank sent notice by post on the next day toanother branch of the forwarding bank. The next day notice wassent by telegraph to the right branch, and the subsequent noticesof sufficient notice of dishonor were given in due time. Held, thatsufficient notice of dishonor was given and the first indorser was

393

liable. (Fielding v. Corry [1898] 1 Q.B. 268, cited in Brannan,page 105)

Sec. 95. When notice sufficient. - A written notice need notbe signed and an insufficient written notice may besupplemented and validated by verbal communication. Amisdescription of the instrument does not vitiate the noticeunless the party to whom the notice is given is in fact misledthereby.

Illustrative Case:

Where the notice of protest described the note correctly andthe envelope was correctly addressed and was received andopened by the indorser, the notice was sufficient, although thenotice was on its face by mistake addressed to the maker. (Wilsonv. Peck, 121 N.Y. Supp. 344, S.C. secs. 103-3, 106) But it washeld otherwise where both the notice and the envelope containingit were addressed to another party. (Marshall v. Sonneman, 216Pa. 65, 64 Atl. 874, S.C. sec. 97, cited in Brannan, page 105)

Sec. 96. Form of notice. - The notice may be in writing ormerely oral and may be given in any terms which sufficientlyidentify the instrument, and indicate that it has beendishonored by non-acceptance or non-payment. It may in allcases be given by delivering it personally or through themails.

Notes:

Form of notice

No particular phrase or form is necessary. The object of itis to inform the party to whom it is sent: (1) That the bill or notehas been presented; (2) That it has been dishonored by non-acceptance, or nonpayment; and (3) That the holder considershim liable, and looks to him for payment. And in framing the notice,all that is necessary to appraise the party of the dishonor of theinstrument is, to intimate that he is expected to pay it. (Daniel,Elements of the Law of Negotiable Instruments, page 236)


In order that a notice should answer these conditions, andduly intimate dishonor to the drawer or indorser, it should therefore,either expressly or by just and natural implication, comprise thefollowing elements: (1) A sufficient description of the bill or noteto ascertain its identity. (2) That it has been duly presented foracceptance or payment to the drawee, acceptor, or maker. (3)That it has been dishonored by non-acceptance or nonpayment.(4) That the holder looks to the party notified for payment.654 (Ibid)

Notice may be verbal or written

The notice need not be in writing; it is sufficient if it be givenverbally;655 but for precision and safety written notice is preferable.Verbal notice must be necessarily confined to those cases in whichnotice is directly given to the party in person, or is sent by amessenger to his place of business or residence. It seems that averbal notice is less strictly construed than a written one, especiallywhen its sufficiency is impliedly admitted by the party’s response.656

Mere knowledge of dishonor does not constitute notice.657 Noticesignifies more; but when the fact of dishonor is communicated byone entitled to call for payment, it becomes notice, as it is then tobe inferred that the intention is to hold the party notifiedresponsible.658 (Daniel, Elements of the Law of NegotiableInstruments, page 235-236)

Description of the bill or note dishonored

The notice should describe the bill or note in unmistakableterms; should state where the note is, that the party notified mayfind it; should state who the holder is, and who gives the notice,or at whose request it is given. Such, at least in theory, are therequisites of a proper notice; and a good business man shouldnever neglect to comply with them. But the courts are not strict inrequiring this thorough description of the dishonored instrument;and the requirements of the law are considered as satisfied byany description which, under all the circumstances of the case,

654 Bank of Old Dominion v. McVeigh, 29 Gratt. 558; Thompson v. Williams,14 Cal. 162; Story on Notes, 348; Daniel on Negotiable Instruments, 973

655 Boyd’s Admr. V. City Sav. Bank, 15 Gratt. 501; First Nat. Bank v. Ryerson,23 Iowa, 508; Stanley v. McElrath, 25 Pac. 16

656 Phillips v. Gould, 8 C & P 355; Byles on Bills [264], 211, 212657 Juniata Bank v. Hale, 16 Serg & R 157; Bank of Old Dominion v. McVeigh,

29 Gratt. 559658 Caunt v. Thompson, 7 C.B. 400; Miers v. Brown, 11 M & W 372

395

so designates the bill or note as to leave no doubt in the mind ofthe party, as a reasonable man, what bill or note was intended.659

Story says that “the description of the note should be sufficientlydefinite to enable the indorser to know to what one in particularthe notice applies; for an indorser may have indorsed many notesof very different dates, sums, and times of payment, and payableto different persons, so that he may be ignorant, unless thedescription in the note is special, to which it properly applies orwhich it designates.”660 But no misdescription of the amount, orof the date, or of the names of the parties, or of the time the paperfell due, or other defect will vitiate the notice, unless it misleadsthe party to whom sent.661 (Supra, page 236-237)

By whom notice given

The notice of dishonor should emanate from the holder ofthe instrument at the time of its dishonor, and should becommunicated to all the parties whom he means to hold liable forits payment. But it is not absolutely necessary that it should comefrom him, for the holder is entitled to the benefit of notice given indue time by any party to the instrument who would be liable tohim if he, the holder, had himself given him notice of dishonor.147

(Ibid)

Illustrative Cases:

After several efforts to find an indorser, notice of the dishonorwas delivered at his store to his wife, who acted as his assistant.Held, a sufficient service, especially when the indorser actuallyreceived the notice upon the same day. (Reed v. Spear, 107 App.Div. 144, 94 N.Y. Supp. 1007, S.C. secs. 76, 89, cited in Brannan,page 106)

The certificate of protest being (by statute) prima facie

evidence of the facts therein stated, the burden is on the indorser

659 Gilbert v. Dennis, 3 Metc. (Mass.) 495; Shelton v. Braithwaite, 7 M & W436; Glickman v. Early, 47 N.W. 272

660 Story on Notes, 349661 Bank of Alexandria v. Swan, 9 Pet. 33; Mills v. Bank of United States, 11

Wheat 431; Dennistoun v. Stewart, 17 How. 606; Smith v. Whiting, 12Mass, 6

662 Chapman v. Keene, 3 Ad. & El. 193; Bank of United States v. Goddard, 5Mason, 366; Stafford v. Yates, 18 Johns, 327


to show that he did not receive notice either personally or throughthe mails, where the certificate alleges that he was duly notifiedof the dishonor. (ibid)

A notice which contained a copy of the note and declaredthat payment had been demanded and refused, is sufficient.(Marshall v. Sonneman, 216 Pa. 65, 65 Atl. 874 infra, S.C. sec.97, ibid)

Sec. 97. To whom notice may be given. - Notice of dishonormay be given either to the party himself or to his agent inthat behalf.

Notice:

To whom notice should be given; general rule

Each indorser of a bill or note is entitled to notice, and soalso is the drawer of a bill payable to a third party, as bill generallyare.663 The acceptor of a bill and the maker of a note are notentitled to notice, the being the primary debtors, nor are thosewho, from their irregular execution of the instrument, are adjudgedjoint makers or sureties, their contract being to pay in default ofthe principal, at all events.664 Where there are several successiveindorsers, the holder may, and ordinarily does, give notice to all,with a view to preserve his recourse upon all. But he is not boundto give notice to all, in order to bind those to whom he does giveit. He may, if he please, give notice to any one or more of theindorsers, who are then made liable to him; and the indorserreceiving notice must then notify antecedent indorsers in order toassure himself.665 It is not, therefore, necessary for the notary totake any notice of the residence of the maker of the note, or makeany inquiry as to the residence of any of the indorsers except thelast. A different rule would obstruct business, and is not required.666

(Daniel, Elements of the Law of Negotiable Instruments, page240-241)

663 Joseph v. Salomon, 19 Fla. 623; Sweet v. Swift, 65 Mich. 91664 Fitch v. Citizens’ Nat. Bank, 97 Ind. 212; Hofheimer v. Losen, 24 Mo. App.

657665 Cardwell v. Allen, 33 Gratt. 167; Wood v. Callaghan, 61 Mich. 402666 Lawson v. Farmers’ Bank, 1 Ohio St. 206; Warren v. Gilman, 17 Me. 360

397

Notice to agent

Notice to the agent of the part for the general conduct of hisbusiness is the same as if given to the principal in person.667 Butnotice to the party’s attorney or solicitor, unless he is speciallyauthorized to receive it, is insufficient.668 If an agent draws a billin his own name, notice should be given to him, and if given to hisprincipal it will be insufficient, he being no party to the paper.669 Ifthe paper be signed by a duly authorized agent in the principal’sname, notice should be given to the principal, who is the partyliable.670 If a note be payable by installments, demand and noticeas to the last installment binds the indorser as to that.671 (Ibid,page 241)

Illustrative Case:

Leaving the notice at the window of the cashier of a hotelcorporation is not sufficient service, it not appearing that any one’sattention was drawn to the notice, or that any one was present,and the president and managers having testified that it was notbrought to their attention. (Am. Exch. Nat. Bank v Am. HotelVictoria Co., 103 App. Div. 372, 92 N.Y. Supp. 1006, cited inBrannan, page 106)

But the notice of dishonor and the envelope containing itwere addressed to the second indorser and delivered by a notarypublic to the first indorser. Held, that this did not fix the liability ofthe first indorser, even though he read the notice; it did not informhim that he was looked to for payment. (Marshall v. Sonneman,ibid)

Sec. 98. Notice where party is dead. - When any party is deadand his death is known to the party giving notice, the noticemust be given to a personal representative, if there be one,and if with reasonable diligence, he can be found. If there beno personal representative, notice may be sent to the lastresidence or last place of business of the deceased.

667 Crosse v. Smith, 1 Maule & S. 545; Lake Shore Nat. Bank v. Colliery Co.,58 N.Y.S.C. 68

668Louisiana State Bank v. Ellery, 16 Mart. 87; Crosse v. Smith, 1 Maule & S.545

669 Grosvenor v. Stone, 8 Pick. 79670 Clay v. Oakley, 17 Mart. 137671 Eastman v. Turman, 24 Cal. 383


Illustrative Case:

Notice to the representative of a deceased indorser of anote, made and payable in Canada, must be given in accordancewith the laws of Canada, although the indorser’s residence hasbeen in New York. (Merchant’s Bank v. Brown, 86 App. Div. 599,83 N.Y. Supp. 1037, cited in Brannan, page 107)

Sec. 99. Notice to partners. - Where the parties to be notifiedare partners, notice to any one partner is notice to the firm,even though there has been a dissolution.

Sec. 100. Notice to persons jointly liable. - Notice to jointpersons who are not partners must be given to each of themunless one of them has authority to receive such notice forthe others.

Sec. 101. Notice to bankrupt. - Where a party has beenadjudged a bankrupt or an insolvent, or has made anassignment for the benefit of creditors, notice may be giveneither to the party himself or to his trustee or assignee.

Sec. 102. Time within which notice must be given. - Noticemay be given as soon as the instrument is dishonored and,unless delay is excused as hereinafter provided, must begiven within the time fixed by this Act.

Sec. 103. Where parties reside in same place. - Where theperson giving and the person to receive notice reside in thesame place, notice must be given within the following times:

(a) If given at the place of business of the person toreceive notice, it must be given before the close ofbusiness hours on the day following.

(b) If given at his residence, it must be given before theusual hours of rest on the day following.

(c) If sent by mail, it must be deposited in the post officein time to reach him in usual course on the dayfollowing.

399

Notes:

What is meant by expression “same place”

According to once class of cases, all persons are to beregarded as of the same place who receive their mails throughthe same post-office. (Daniel, Elements of the Law of NegotiableInstruments, page 246)

Illustrative Case:

A notice placed in a small chute on the day of protest, butnot postmarked until the next day at noon, is mailed in time and itwill be presumed, in the absence of evidence to the contrary thatthe notice reached its destination by 5 o’clock, which would bebefore the close of business hours, both parties residing inManhattan. The indorser swore that he did not get the noticeuntil the following day, but did not testify that he was at his officeon the day that it was mailed. This was not enough to show thatthe notice was not received on time. (Wilson v. Peck (Misc. Rep.)121, N.Y. Supp. 344, S.C. secs. 95, 106, cited in Brannan, page108)

Sec. 104. Where parties reside in different places. - Wherethe person giving and the person to receive notice reside indifferent places, the notice must be given within the followingtimes:

(a) If sent by mail, it must be deposited in the post officein time to go by mail the day following the day ofdishonor, or if there be no mail at a convenient houron last day, by the next mail thereafter.

(b) If given otherwise than through the post office, thenwithin the time that notice would have been receivedin due course of mail, if it had been deposited in thepost office within the time specified in the lastsubdivision.

Sec. 105. When sender deemed to have given due notice. -Where notice of dishonor is duly addressed and depositedin the post office, the sender is deemed to have given duenotice, notwithstanding any miscarriage in the mails.


Illustrative Case:

Although non-receipt of a duly mailed notice of dishonordoes not discharge an indorser, evidence of such non-receipt iscompetent on the question whether the note was actually mailed.(Union Bank of Brooklyn v. Deshel (App. Div.), 123 N.Y. Supp.585, cited in Brannan, page 109)

Sec. 106. Deposit in post office; what constitutes. - Notice isdeemed to have been deposited in the post-office whendeposited in any branch post office or in any letter box underthe control of the post-office department.

Sec. 107. Notice to subsequent party; time of. - Where a partyreceives notice of dishonor, he has, after the receipt of suchnotice, the same time for giving notice to antecedent partiesthat the holder has after the dishonor.

Illustrative Case:

When the answer alleged that the indorser had no notice ofdishonor, the burden is on the holder to show that due notice wasgiven. It is not shown by testimony of a notary that, not knowingthe address of the indorser, he enclosed the notice of dishonor toa subsequent indorser with postage for forwarding the notice tothe prior indorser. (Fuller Buggy Co. v. Waldorn, 112 App. Div.814, 99 N.Y. Supp, 920, cited in Brannan, page 110)

Plaintiff indorsed and deposited a check for collection inbank on the 28th. On the 29th he was notified of the dishonor ofthe check, and on the 30th he notified the defendant indorser bytelegraph. Held, that the notice was in due time. (Jurgens vWichmann, 124 App. Div. 531, 108 N.Y. Supp. 881, ibid)

Sec. 108. Where notice must be sent. - Where a party hasadded an address to his signature, notice of dishonor mustbe sent to that address; but if he has not given such address,then the notice must be sent as follows:

(a) Either to the post-office nearest to his place ofresidence or to the post-office where he isaccustomed to receive his letters; or

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(b) If he lives in one place and has his place of businessin another, notice may be sent to either place; or

(c) If he is sojourning in another place, notice may besent to the place where he is so sojourning.

But where the notice is actually received by the partywithin the time specified in this Act, it will be sufficient, thoughnot sent in accordance with the requirement of this section.

Notes:

Illustrative Cases:

Notice of protest addressed merely “C.H., N.Y.,” is notsufficient where there is no evidence that the indorser lived orever had lived, or was sojourning in New York, or that any inquirywas made to ascertain the fact. (Fonesca v. Hartman, 84 N.Y.Supp. 131, cited in Brannan, page 111)

The indorser lived at the place where the note was dated,but moved from said place at some time not stated. Held, thatnotice of dishonor mailed to said place was sufficient, the courtassuming that there had been no change of residence up to thattime. (Mohlman v. McKane, 60 App. Div. 546, 69 N.Y. Supp. 1046,ibid)

Notice to an indorser, who has added no address to hissignature, mailed to the post office of his place of residence isgood, but not if addressed to a house where the indorser doesnot reside or do business or receive his letters, even though heowned the house and his sons did business there. (Ebling BrewingCo. v. Reinheimer, 32 N.Y. Misc. R. 594, 66 N.Y. Supp. 458, ibid)

Where a notary inquired of several persons as to the postoffice address of an indorser, all of whom seemed to have someinformation and stated their belief that a certain town was thenearest town to the farm where the indorser lived, and a muchlarger place than the town where the indorser actually receivedhis mail, a notice of dishonor sent to such nearest town wassufficient, although the indorser did not received it within areasonable time. (Vogel v. Starr, 132 Mo. App. 430, 112 S.W. 27,ibid)


Plaintiff, the payee of a dishonored note, knew that thedefendant indorser lived in New York City, but claimed that he didnot know his address. Defendant testified that plaintiff hadfrequently corresponded with defendant at his New York address.The notice of dishonor was mailed to defendant in the care of themaker, but not delivered to defendant. Held, that this was notsufficient notice, and that defendant was discharged. (E.I. Dupont,etc., Power Co. v. Rooney, 63 Rep. 344, 117 N.Y. Supp. 220, ibid)

Sec. 109. Waiver of notice. - Notice of dishonor may be waivedeither before the time of giving notice has arrived or after theomission to give due notice, and the waiver may be expressedor implied.

Illustrative Cases:

If presentment for payment be waived (see secs. 82 and83) notice of dishonor is dispensed with. (Baumeister v. Kuntz,53 Fla. 340, 42 So. 886, S.C. sec. 64-1, cited in Brannan, page112)

Defendant was one of several payees and indorsers of anote. Some days before its maturity defendant indorsed a renewalnote having also several payees. The maker struck out the nameof one of the payees in the renewal note and substituted his ownname as payee, and several day after maturity of the original notetook it up by the renewal note. Held, that defendant had not waivednotice of dishonor of the original note and was not liable on it.(First Nat. Bank v. Gridley, 112 App. Div. 398, 98 N.Y. Supp. 445,S.C. secs. 66, 119-4, ibid)

A mere oral promise to renew a note, made after its maturityby an accommodation indorser, is not a waiver of the failure togive notice of dishonor; such promise is not an acknowledgmentof liability. (Mechanics’ and Farmers’ Savings Bank v. Katterjohn(Ky.), 125 S.W. 1071, S.C. secs. 63, 196, ibid)

Plaintiff, an indorser of a check deposited by him withdefendant bank, was not given due notice of its dishonor. Withknowledge thereof, plaintiff gave his own check for the dishonoredcheck and sued defendant for its failure to give him due notice ofsuch dishonor. Held, that plaintiff had waived the bank’s laches

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and could not recover. (Weil v. Corn Exchange Bank, 63 Misc.Rep. 300, 116 N.Y. Supp. 665, ibid)

A bill was drawn by A Company to its own order on the BCompany and accepted and indorsed to the C Company. All threecompanies knew that the bill would be dishonored. No notice ofdishonor was given to the drawer, because the secretary of the CCompany, who was also secretary of the other two companies,knew it never was intended to make the drawer liable. Held, thatit was not the duty of the secretary of the C Company tocommunicate his knowledge of the dishonor to the drawer, thathis knowledge was therefore not notice to the drawer, and thatthe latter was discharged. (In re Fenwick [1902] 1 Ch. 507, ibid)

Sec. 110. Whom affected by waiver. - Where the waiver isembodied in the instrument itself, it is binding upon all parties;but, where it is written above the signature of an indorser, itbinds him only.

Sec. 111. Waiver of protest. - A waiver of protest, whether inthe case of a foreign bill of exchange or other negotiableinstrument, is deemed to be a waiver not only of a formalprotest but also of presentment and notice of dishonor.

Sec. 112. When notice is dispensed with. - Notice of dishonoris dispensed with when, after the exercise of reasonablediligence, it cannot be given to or does not reach the partiessought to be charged.

Illustrative Case:

Failure, after the exercise of reasonable diligence, to findthe drawer of a dishonored bill at the address given by him, doesnot dispense with notice if an address at which he is to be foundcomes to the holder’s knowledge before action brought. (Studdyv. Beesty, 60 T.L. Rep. 647, cited in Brannan, page 113)

Sec. 113. Delay in giving notice; how excused. - Delay in givingnotice of dishonor is excused when the delay is caused bycircumstances beyond the control of the holder and notimputable to his default, misconduct, or negligence. When


the cause of delay ceases to operate, notice must be givenwith reasonable diligence.

Notes:

Delay in giving notice of dishonor caused by the necessityof making inquiries as to the address of the party to be notified isexcusable, the holder being ignorant of the address. (The Elmville,[1904], P. 319, ibid)

Sec. 114. When notice need not be given to drawer. - Noticeof dishonor is not required to be given to the drawer in eitherof the following cases:

(a) Where the drawer and drawee are the same person;

(b) When the drawee is fictitious person or a person nothaving capacity to contract;

(c) When the drawer is the person to whom theinstrument is presented for payment;

(d) Where the drawer has no right to expect or requirethat the drawee or acceptor will honor theinstrument;

(e) Where the drawer has countermanded payment.

Illustrative Cases:

Defendant gave a check which was duly presented to thedrawee bank and dishonored, for what reason did not appear.Notice of dishonor was not given to defendant for fourteen daysthereafter. Held, that the failure to give notice is dispensed withonly under defined circumstances, and that the burden is on theholder of the check, or one claiming under him, to excuse thefailure to give notice. (Cassel v. Regierer, 114 N.Y. Supp. 601,cited in Brannan, page 114)

Sec. 115. When notice need not be given to indorser. — Noticeof dishonor is not required to be given to an indorser in eitherof the following cases:

(a) When the drawee is a fictitious person or person nothaving capacity to contract, and the indorser was

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aware of that fact at the time he indorsed theinstrument;

(b) Where the indorser is the person to whom theinstrument is presented for payment;

(c) Where the instrument was made or accepted for hisaccommodation.

Notes:

Neither the receipt by defendant, with other of property ofthe maker of a note on an agreement to take care of the note atmaturity, nor an admission that defendant, with others, wasresponsible for the note, will support an action against defendantalone on the ground that such receipt of property or suchadmission is a waiver of presentment and notice of dishonor oran excuse therefrom. (Jordan v. Reed (N.J.), 71 Atl. 280, cited inBrannan, page 115)

Illustrative Cases:

A stockholder of a corporation, who endorsed, beforedelivery, a note made by another stockholder, to raise money forthe corporation is not entitled to notice of dishonor, because theinstrument was really for his benefit. (Mercantile Bank v. Busby(Tenn.), 113 S.W. 390, S.C. supra, sec. 64, ibid)

2011 Bar Question:

Notice of dishonor is not required to be made in allcases. One instance where such notice is not necessaryis when the indorser is the one to whom the instrumentis suppose to be presented for payment. The rationalehere is that the indorser

A. already knows of the dishonor and it makes nosense to notify him of it.

B. is bound to make the acceptance in all cases.

C. has no reason to expect the dishonor of theinstrument.

D. must be made to account for all his actions.


Sec. 116. Notice of non-payment where acceptance refused.

- Where due notice of dishonor by non-acceptance has beengiven, notice of a subsequent dishonor by non-payment isnot necessary unless in the meantime the instrument hasbeen accepted.

Sec. 117. Effect of omission to give notice of non-acceptance.

- An omission to give notice of dishonor by non-acceptancedoes not prejudice the rights of a holder in due coursesubsequent to the omission.

Sec. 118. When protest need not be made; when must be

made. - Where any negotiable instrument has beendishonored, it may be protested for non-acceptance or non-payment, as the case may be; but protest is not requiredexcept in the case of foreign bills of exchange.

Notes:

There mere fact of a protest is not conclusive upon thedishonor of the instrument and due notice to the indorser; otherevidence is competent on these questions and they must be leftto the jury. Where no formal protest is necessary, and defendantadmitted having received notice of dishonor, and did not ask tohave the questions of presentment and payment submitted to thejury, he was not aggrieved by the court allowing the notary toamend his certificate of protest by annexing his seal or by theadmission of his certificate in evidence. (Demelman v. Brazier,198 Mass. 458, 84 N.E. 856, S.C. sec. 55, cited in Brannan, page115)

VIII. DISCHARGE OF NEGOTIABLE INSTRUMENTS

Sec. 119. Instrument; how discharged. - A negotiableinstrument is discharged:

(a) By payment in due course by or on behalf of theprincipal debtor;

(b) By payment in due course by the partyaccommodated, where the instrument is made oraccepted for his accommodation;

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(c) By the intentional cancellation thereof by the holder;

(d) By any other act which will discharge a simplecontract for the payment of money;

(e) When the principal debtor becomes the holder of theinstrument at or after maturity in his own right.

Notes:

Enumeration is exclusive

The modes of discharge of a person primarily liablementioned in this section are exclusive. Hence a plea that one ofthe makers to the knowledge of the payee-holder signed a noteas surety only and had been discharged by an extension of timeby the payee to the principal debtor is bad. (Vanderford v. Farmers’Bank, 105 Md. 164, 66 Atl. 47, 10 L.R.A. (N.S.), 129, S.C. sec.120-6, cited in Brannan, page 117) An accommodating makerwho placed the word “surety” after his signature is not dischargedby an extension of time given without his consent to the co-maker.(Cellers v. Mecham, 49 Oregon 186, 89 Pac. 426, 10 L.R.A. (N.S.),133, ibid). So also where time was given to an accommodatedpayee by a holder, with knowledge of the accommodation, it washeld that the accommodation maker was not discharged. (NationalCitizens’ Bank v. Toplitz, 81 App. Div. 593, 81 N.Y. Supp. 422,ibid)

A demand note is discharged when the holder upon paymentof a part surrenders the note to the maker, although the makerpromised at the time to pay the balance. (Schwartzman v. Post,84 N.Y. Supp. 922, 94 App. Div. 474, 87 N.Y. Supp. 872, cited inBrannan, page 118)

A note is discharged when it is surrendered to the makerand cancelled by him after maturity in exchange for a renewalnote, although the maker had altered the renewal note by strikingout the name of one of the payees and substituting his own name.(First Nat. Bank v. Gridley, 112 N.Y. App. Div. 398, 98 N.Y. Supp.445, S.C. secs. 66, 109, cited in Brannan, pages 118-119)

“In his own right” is not used merely in contradistinction to aright in a representative capacity, but indicates a right not subject


to that of another person, and good against all the world. (ibid,page 119)

Payment, nature of

By payment is meant the discharge of a contract to paymoney by giving to the party entitled to receive it, the amountagreed to be paid by one of the parties who entered into theagreement. Payment is not a contract. It is the discharge of acontract in which the party of the first part has a right to demandpayment, and the party of the second part has a right to makepayment. (Elements of the Law of Negotiable Instruments, Daniel,p. 306)

A sale is altogether different. It is a contract which does notextinguish a bill or note, but continues it in circulation as a validsecurity against all parties. And it is necessary to constitute atransaction a sale that both parties should then expressly orimpliedly agree, the one to sell, and the other to purchase thepaper.672 (Ibid, pp. 306-307)

Credit given by the drawee of a bill, or by a party to a bill ornote, who is liable for its payment to the holder at his request, isequivalent to payment.673 But if a bill accepted for the drawer’saccommodation be sent to bank for collection, and be credited tothe holder at maturity, it has been held that the bank, as its holder,may sue the acceptor.674 (Ibid)

“Payment of a debt is not necessarily a payment of money;but that is payment which the parties contract shall be acceptedas payment,” or which the law recognizes as such.675 When aparty to the instrument pays to the holder the amount due upon it,he cannot show that he was acting as the secret agent of another,and convert the payment thus made into a purchase. (Ibid)

Sec. 88 is controlling as to what constitutes payment in duecourse

Sec. 88 of the Negotiable Instruments Law mandates as towhat constitutes payment in due course, it states that, payment is

672 Lancey v. Clark, 64 N.Y. 209; Eastman v. Plumer, 32 N.H. 238673 Savage v. Merle, 5 Pick. 83674 Pacific Bank v. Mitchell, 9 Metc. (Mass.) 297675 Huffmanns v. Walker, 29 Gratt. 315; Lionberger v. Kinealy, 13 Mo. App. 4

409

made in due course when it is made at or after the maturity of the

payment to the holder thereof in good faith and without notice

that his title is defective.

It therefore follows that, when there is notice or knowledgethat there is indeed a defect in the title of the holder of the bill ornot, yet despite which, payment was made, it will not dischargethe instrument.

Who may make payment

Any party to a bill or note may pay it, and an indorser whohas been discharged by failure of notice may still sue a priorindorser or other parties who were not discharged, because,although not compelled to pay it, he acquires the right of the holderfrom whom he took the instrument, or is remitted to his own rightsas indorsee.676 But it seems that if the indorser has another notegiven to secure and indemnify him for his indorsement, and, notbeing notified, waives the defense, and voluntarily pays the bill ornote, he cannot enforce the note given him as indemnity.677 Anda stranger has no right to pay or discharge the contract of another,and cannot pay a bill or note so as to acquire the rights of a holder,except supra protest, as hereinafter indicated.678 But a strangermay always purchase a bill or note with the consent of the holder.Where the drawer, when discharged by the failure of the collectingagent of the holder to present in due time, nevertheless took upand paid his draft, but under protest, to protect his credit, he washeld a mere volunteer with no right to recover against the collectingagent of the holder through whose default he was dischargedfrom payment.679 (Supra, p. 308)

Payment under mistake of law or fact

It is a general principle that money paid with knowledge offact, but under a mistake of law, cannot be recovered back.680

But a party paying money under a mistake of the real facts mayrecover it back.681 Therefore, where a bank paid a post-dated

676 Ellsworth v. Brewer, 11 Pick. 316677 Bachelor v. Priest, 12 Pick. 399678 Edwards on Bills; Burton v. Slaughter, 26 Gratt. 919679 Harvey v. Girard Nat. Bank, 119 Pa. St. 212680 Adams v. Reeves, 68 N.C. 134681 National Bank of the Commonwealth, 139 Mass. 513


check to a holder who knew that the drawer was insolvent, andthat the drawee has no funds, but was in expectation of them thatday, and none were received by the bank, it was held that theamount might be recovered back.682 So an indorser, dischargedby laches, who pays a bill to the holder under a misrepresentationof fact, may recover back the amount, and so if such indorserpays the bill, relying on the notarial certificate of due presentment,when in fact no such presentment was made.683 (Supra, p. 309)

Surrender of instrument and giving receipt as evidence ofpayment

The party making payment should insist on the presentmentof the paper by the party demanding payment, in order to makesure that it is at the time of his possession, and not outstanding inanother. And if at the time he makes payment it is outstanding,and held by a bona fide holder for value, he will be liable to pay itagain, and a receipt taken will be no protection.684 The partymaking payment of the bill or note should also not fail to insistupon its being surrendered up, as a voucher that the party receivingthe money was entitled to do so, and also that he has paid it tohim.685 The possession of the note by the maker is presumptiveevidence that he has paid it;686 and so, likewise, is the possessionof the bill by the acceptor, provided it can be shown that it passedout of his hands after he accepted it, though otherwise it wouldseem not.687 (Supra, pp. 309-310)

In addition to the surrender of the instrument, the fact that ithas been paid should be indorsed upon the paper itself. This isat once advertises the fact of payment to every person who mightsubsequently come into possession of the instrument by accidentor fraud. This precaution is especially wise and necessary if theinstrument has been paid before maturity. When an indorsermakes payment, it is especially desirable that he should take areceipt as well as require delivery of the instrument.688 If there bea general receipt of payment on the back of the instrument, it willbe presumed that it was made by the maker or acceptor, who

682 Martin v. Morgan, 3 Moore, 635683 Milnes v. Duncan, 6 B & C 671; Talbot v. National Bank, 129 Mass. 67684 Wheeler v. Guild, 20 Pick. 545; Davis v. Miller, 14 Gratt 1685 Otisfield v. Mayberry, 63 Me. 197686 Dugan v. United States, 3 Wheat. 172; Norris v. Badger, 6 Cow. 449687 Pfiel v. Vanbatenberg, 2 Campb. 439; Barring v. Clark, 19 Pick. 220688 Story on Notes, 452

411

was primarily liable; and this presumption would exist even whenthe drawer had possession and sued the acceptor upon a billindorsed with such a receipt.689 (Supra, p. 310)

To whom payment may be made

Payment of a bill or note should be made to the legal owneror holder thereof, or someone authorized by him to receive it.690

If it be payable to bearer or indorsed in blank, any person havingit in possession may be presumed to be entitled to receivepayment, unless the payor have notice to the contrary;691 and apayment to such person will be valid, although he may be a thief,finder, or fraudulent holder.692 (Ibid)

Payment in due course by the party accommodated

In accommodation instruments, the instrument is notdischarged by the payment of the accommodation party to theholder of the bill or note, but rather, it is the payment of theaccommodated party to the accommodation party which willdischarge the instrument.

Intentional cancellation by the holder

The intentional cancellation contemplated under paragraph(c) is that cancellation effected by destroying the instrument eitherby tearing it up,693 burning it,694 or writing the word “cancelled” onthe instrument. The act of destroying the instrument must also bemade by the holder of the instrument intentionally. (State

Investment House vs. Court of Appeals, January 11, 1993)

To discharge the instrument, cancellation must beintentionally made by the holder. On the contrary, any cancellationmade by the holder which is unintentional or was caused throughnegligence will not discharge the instrument, as there is no clear

689 Scholey v. Walsby, Peake Cas. 24; Jones v. Fort, 9 B & C 764690 Stevenson v. Woodhull, 19 Fed. 575; Draper v. Rice, 56 Iowa, 114691 Chappelear v. Martin, 45 Ohio St. 132; Brennan v. Merchant’s Bank, 62

Mich. 343692 Bank of the United States v. United States, 2 How. 711; Dugan v. United

States, 3 Wheat. 172; Bank of Utica v. Smith, 18 Johns. 230693 Montgomery v. Schwald, 177 Mo App 75, 166 SW 831; Wilkins v. Shaglund,

127 Neb 589, 256 NW 31.694 See Henson v. Henson, 268 SW 378.


indicia that the holder intended to waive any person’s liabilitythereon.

Moreover, similar to ordinary contracts, intentionalcancellation is an expressed action of the holder to condone orcancel a debt.

Other acts which will discharge a simple contract for thepayment of money

Art. 1231 of the New Civil Code enumerates the modeshow an obligation is extinguished:

1) By payment or performance;

2) By loss of the thing due;

3) By the condonation or remission of the debt;

4) By the confusion or merger of rights of the creditor anddebtor;

5) By compensation;

6) By novation.

Novation; as a ground to discharge the instrument

In the case of Anamer Salazar vs. J.Y. Brothers Marketing

Corporation695, Anamer Salazar was approached by IsaganiCalleja and Jess Kallos, if she knew a supplier of rice. Answeringin the positive, Salazar accompanied the two to J.Y. Bros. As aconsequence, Salazar, with Calleja and Kallos procured from J.Y.Bros. 300 cavans of rice worth P214,000.00. As payment, Salazarnegotiated and indorsed to J.Y. Bros. Prudential Bank Check No.067481 dated October 15, 1996 issued by Nena Jaucia Timarioin the amount of P214,000.00 with the assurance that the checkgood as cash. On that assurance, J.Y. Bros. parted with 300cavans of rice to Salazar. However, upon presentment, the checkwas dishonored due to “closed account.”

Informed of the dishonor of the check, Calleja, Kallos andSalazar delivered to J.Y. Bros. a replacement cross Solid BankCheck No. PA365704 dated October 29, 1996 again issued by

695 G.R. No. 171998, October 20, 2010, [Peralta, J.:]

413

Nena Jauican Timario in the amount of P214,000.00 but which,just the same, bounced due to insufficient funds.

Petitioner contends that the issuance of the Solid Bankcheck and the acceptance thereof by the respondent, inreplacement of the dishonored Prudential Bank check, amountedto novation that discharged the latter check, notwithstanding itseventual dishonor by the drawee bank, had the effect of erasingwhatever criminal responsibility, under Article 315 of the RevisedPenal Code, the drawer or indorser of the Prudential Bank checkwould have incurred in the issuance thereof in the amount ofP214,000.00; and that a check is a contract which is susceptibleto a novation just like any other contract.

The Supreme Court held that Novation as a ground forextinguishing an obligation, “is done by the substitution or changeof the obligation by a subsequent one which extinguishes the first,either by changing the object or principal conditions, or bysubstituting the person of the debtor, or by subrogating a thirdperson in the rights of the creditor. Novation may:

[E]ither be extinctive or modificatory, much being dependenton the nature of the change and the intention of the parties.Extinctive novation is never presumed, there must be an expressintention to novate; in cases where it is implied, the acts of theparties must clearly demonstrate their intent to dissolve the oldobligation as the moving consideration for the emergence of thenew one. Implied novation necessitates that the incompatibilitybetween the old and the new obligation be total on every pointsuch that the old obligation is completely superseded by the newone. The test of incompatibility is whether they can stand together,each one having an independent existence; if they cannot andare irreconcilable, the subsequent obligation also extinguishesthe first.

An extinctive novation would thus have the twin effects of,first, extinguishing an existing obligation and, second, creating anew one in its stead. This kind of novation presupposes aconfluence of four essential requisites: (1) a previous validobligation, (2) an agreement of all parties concerned to a newcontract, (3) the extinguishment of the old obligation, and (4) thebirth of a valid new obligation. Novation is merely modification,


where the change brought about by any subsequent agreementis merely incidental to the main obligation (e.g., a change in interestrates or an extension of time to pay; in this instance, the newagreement will not have the effect of extinguishing the first butwould merely supplement some but not all of its provisions.)

The obligation to pay a sum of money is not novated by aninstrument that expressly recognizes the old, changes only theterms of payment, adds other obligations not incompatible withthe old one or the new contract merely supplements the old one.696

In this case, respondent’s acceptance of the Solid Bankcheck, which replaced the dishonored Prudential Bank check,did not result to novation as there was no express agreement toestablish that petitioner was already discharged from his liabilityto pay respondent the amount of P214,000.00 as payment for the300 bags of rice. As we said, novation is never presumed, theremust be an express intention to novate. In fact, when the SolidBank check was delivered to respondent, the same was alsoindorsed by petitioner which shows petitioner’s recognition of theexisting obligation to respondent to pay P214,000.00 subject ofthe replaced Prudential Bank check.

Moreover, respondent’s acceptance of the Solid Bank checkdid not result to any incompatibility, since the two checks—Prudential and Solid Bank checks—were precisely for the purposeof paying the amount of P214,000.00, i.e., the credit obtainedfrom the purchase of the 300 bags of rice from respondent.Indeed, there was no substantial change in the object or principalcondition of the obligation of the obligation of petitioner as indorserof the check to pay the amount of P214,000.00. It would appearthat respondent accepted the Solid Bank check to give petitionerthe chance to pay her obligation.”

In a similar case of Nyco Sales Corporation vs. BA Finance

Corporation,697 “[t]here are only two ways which indicate thepresence of novation and thereby produce the effect ofextinguishing an obligation by another which substitutes the same.

696 Foundation Specialists, Inc. vs. Betnoval Ready Concrete, Inc., andStronghold Insurance Co., Inc., G.R. No. 170674, August 24, 2009, 596SCRA 697.

697 G.R. No. 71694, August 16, 1991, 200 SCRA 637

415

First, novation must be explicitly stated and declared inunequivocal terms as novation is never presumed. Secondly, theold and the new obligation must be incompatible on every point.The test of incompatibility is whether or not the two obligationscan stand together, each one having its independent existence.If they cannot, they are incompatible and the latter obligationnovates the first.”

Upon payment of the bank, as drawee, the check ceased tobe a negotiable instrument, and became a mere voucher or proofof payment. (National Bank of Commerce of Seattle v. Seattle

Nat. Bank, 187 P. 342, 346, cited in Philippine National Bank vs.

Court of Appeals and Philippine Commercial and Industrial Bank,

G.R. No. L-26001, October 29, 1968, [Concepcion, J:])

Principal debtor becomes the holder in his own right

This pre-supposes that the principal debtor, became theholder of the instrument in his own right, thereby creating ascenario that he is at the same the creditor and debtor of himself.The instrument ought to be discharged as it would be absurd fora person to be a creditor and a debtor of himself all at the sametime.

For instance, A executed a promissory note in favor of B orhis order, B endorsed and delivered it to C, C further negotiated itto D, and D to A. In this case, assuming that the instrument isdue for payment, this circumstance discharges the promissorynote. However, if A got hold of it before it was overdue, he canstill negotiate it to a subsequent party, and this provision will findno application.

Illustrative Cases:

The plaintiff, the second indorser of a note, was requestedby the defendant, the maker, on the day of maturity, to take up thenote and defendant promised to pay him. Plaintiff paid the holder,but in some way defendant got possession of the note withouthaving paid it. Held, that defendant was not a holder in his ownright, that the instrument was not discharged and defendant wasliable to plaintiff. (Korkemas v. Macksoud, 131 App. Div. 728, 116N.Y. Supp. 85, cited in Brannan, page 119)


A gave a demand note payable to B or order on theunderstanding that it should not be negotiated. Afterwards A paidB the amount of the note. B then obtained the note from C byfraud and gave it to A. Held, that A was not a holder for value, theprevious payment not being a consideration given when hereceived back the note, and he is still liable to C on the note.(Nash v. De Freville [1900] 2 Q.B. 72, ibid)

Sec. 120. When persons secondarily liable on the instrument

are discharged. - A person secondarily liable on theinstrument is discharged:

(a) By any act which discharges the instrument;

(b) By the intentional cancellation of his signature bythe holder;

(c) By the discharge of a prior party;

(d) By a valid tender or payment made by a prior party;

(e) By a release of the principal debtor unless theholder ’s right of recourse against the partysecondarily liable is expressly reserved;

(f) By any agreement binding upon the holder to extendthe time of payment or to postpone the holder’s rightto enforce the instrument unless made with theassent of the party secondarily liable or unless theright of recourse against such party is expresslyreserved.

Notes:

Innumerable decisions have already been rendered in thestate courts of the United States to the effect that although thedrawer of a check is discharged only to the extent of loss causedby unreasonable delay in presentment, an indorser is whollydischarged thereby irrespective of any question of loss or injury.(Swift & Co. vs. Miller, 62 Ind. App. 312, 113 N.E. 447, cited in

Brannan’s Negotiable Instruments Law, p. 1134, Nuzum vs.

Sheppard, 87 W. Va. 243, 104 S.E. 587, 11 A.L.R. 1024, Ibid.,cited in Philippine National Bank vs., Benito Seeto, G.R. No. L-

4388, August 13, 1952, [Labrador, J:])

417

The proposition maintained in the reported case (Nuzman

vs. Sheppard, ante. 1024) that the indorser of a check, unlike thedrawer, is relieved of liability thereon by an unreasonable delayin presenting the same for payment, whether or not he is injuredby the delay, is supported by the great weight of authority. (Casescited)

The Court, in Gough v. Staats (N.Y.) supra, says: “Upon thequestion of due diligence to charge an indorser, whether he hasbeen prejudiced or not by the delay is perfectly immaterial. It isnot inquired into. The law presumes he has been prejudiced.”According to the Court in Caroll v. Sweet (1891) 128 N.Y. 19, 13

L.R.A. 43, 27 N.E. 763, “presentment to due time as fixed by thelaw merchant was a condition upon performance of which theliability of the defendant, as indorser, depended, and this delaywas not excused although the drawer of the check had no funds,or was insolvent, or because presentment would not beenunavailing as a means of procuring payment.” Only where thereis affirmative proof that the indorsers knew when he cashed thecheck that there would be no funds in the bank to meet it can therule be avoided. Otherwise, the failure to present the check indue course of payment will discharge the indorser even thoughsuch presentment would have been unavailing. Start v. Tupper

(Vt.) supra (11 A.L.R. Annotation, pp. 1028-1029)

We have been unable to find any authority sustaining theproposition that an indorser of a check is not discharged fromliability for an unreasonable delay in presentment for payment.This is contrary to the essential nature and character of negotiableinstruments—their negotiability. They are supposed to be passedon with promptness in the ordinary course of businesstransactions; not to be retained or kept for such time as the holdermay want, otherwise the smooth flow of commercial transactionswould be hindered. (Philippine National Bank vs., Benito Seeto,

G.R. No. L-4388, August 13, 1952, [Labrador, J:])

No consideration is necessary to support a discharge bythe intentional cancellation of a party’s signature by the holder.(McCormick v. Shea, 50 Misc. R. 592, 99 N.Y. Supp. 467, cited inBrannan, page 120)


An agreement by the holder of a note not to press a suitbegun against the maker while certain monthly payments continueto be made, discharges non-assenting indorsers. (Deahy v.Choquet, 28 R.I. 338, 67 Atl. 421, 14 L.R.A. (N.S.), 847, S.C. sec.64-1, cited in Brannan, page 121)

An offer to prove a change by the cashier of a bank holdinga note, on which defendant claimed to be a surety, by altering to alater a marginal notation of the due date made by the cashierwhen the note was discounted, and making a lie change in theentry as to the maturity of the note in the bank’s index book ofnotes, was rightly refused in the absence of evidence to who thatthese acts of the cashier were within his authority or were ratifiedby the bank. (Vanderford v. Farmers’ Bank, ibid, page 122)

The negotiable quality of a promissory note, payable on orbefore a fixed day, is not destroyed by a provision that the makerand indorsers severally waive presentment and notice of protest,and consent that the time of payment may be extended withoutnotice. (First Nat. Bank of Pomeroy v. Buttery, (N.D.), 116 N.W.341, 16 L.R.A. (N.S.), 878, ibid)

Defendant indorsed a note, payable to plaintiff, for theaccommodation of the maker. Before maturity, the maker gave aseries of notes, falling due weekly, and agreed that the plaintiffmight hold the old notes as collateral until the new notes werepaid. The old note was protested when due, and charged to theaccount of the maker, and the new notes were discounted, andcredited to his account. Held, that this was not as a matter of lawan unconditional extension releasing the indorser, but presenteda question of fact whether a right to sue the indorser was reserved.Defendant could have paid the old note, and demanded the notesheld by the plaintiff for the debt, and proceeded at once againstthe maker on them. (National Park Bank v. Koheler, 121 N.Y.Supp. 640, ibid)

2011 Bar Question:

Any agreement binding upon the holder to extend thetime of payment or to postpone the holder’s right toenforce the instrument results in the discharge of theparty secondarily liable unless made with the latter’s

419

consent. This agreement refers to one which the holdermade with the

A. principal debtor.

B. principal creditor.

C. secondary creditor.

D. secondary debtor.

The rule is that the intentional cancellation of a personsecondarily liable results in the discharge of the latter.With respect to an indorser, the holder’s right to cancelhis signature is:

A. without limitation.

B. not limited to the case where the indorsement isnecessary to his title.

C. limited to the case where the indorsement is notnecessary to his title.

D. limited to the case where the indorsement isnecessary to his title.

Sec. 121. Right of party who discharges instrument. - Wherethe instrument is paid by a party secondarily liable thereon,it is not discharged; but the party so paying it is remitted tohis former rights as regard all prior parties, and he may strikeout his own and all subsequent indorsements and againstnegotiate the instrument, except:

(a) Where it is payable to the order of a third personand has been paid by the drawer; and

(b) Where it was made or accepted for accommodationand has been paid by the party accommodated.

Notes:

In an action by the indorsee of a promissory note againstan indorser, payment by a subsequent indorser is not a defenseunless defendant can show that the payment was made for him.(Twelfth Ward Bank v. Brooks, 63 App. Div. 220, 71 N.Y. Supp.388, cited in Brannan, page 123)


Payment by an anomalous indorser extinguishes the note,and neither he nor his transferee can hold the maker on the note,for the anomalous indorser had no former rights on the instrument.(Quimby v. Varnum, 190 Mas. 211, 76 N.E. 671, ibid)

Sec. 122. Renunciation by holder. - The holder may expresslyrenounce his rights against any party to the instrumentbefore, at, or after its maturity. An absolute and unconditionalrenunciation of his rights against the principal debtor madeat or after the maturity of the instrument discharges theinstrument. But a renunciation does not affect the rights of aholder in due course without notice. A renunciation must bein writing unless the instrument is delivered up to the personprimarily liable thereon.

Notes:

An agreement for immediate payment of part of a promissorynote is sufficient consideration for the release of a surety fromobligation to pay the residue. But under section 122 N.I.L. suchrelease must be in writing, “renunciation” being used in the senseof “release.” (Baldwin v. Daly, 41 Wash. 416, 83 Pac. 724; Pitt v.Little (Wash.), 108 Pac. 491, cited in Brannan, page 123)

A holder may covenant not to sue the maker and reservehis rights against an indorser even though the note is made by afirm and indorsed by members of the firm individually. (FaneuilHall Nat. Bank v. Meloon, 183 Mass. 66, 66 N.E. 410, 97 Am. St.Rep. 416, ibid)

Illustrative Cases:

After the death of the payee of a promissory note was foundenclosed in an envelope with a writing addressed to his executorsstating that he wished the note cancelled in case of his death,and if the law did not allow this to notify his heirs that it was hiswish and orders. Held, not a valid renunciation. (Leak v. Dew,102 App. Div. 529, 92, N.Y. Supp. 891, Brannan, page 123)

The holder of a demand note, being in articulo mortis,instructed his nurse to write a memorandum to the effect that thenote should be destroyed as soon as it could be found. Held, that

421

this was not a renunciation within the statute, but merely anexpression of an intention or desire to renounce. (In re George,44 Ch. D. 627, cited in Brannan, page 123)

C, the holder of a note made by B, delivered the note to X,a devisee under the will of B, and verbally renounced his rights.The real estate in X’s hands was charged with payment of thetestator’s debts. Held, that the note was not discharged, foralthough the word “maker” could not probably includes hisdevisees. (Edwards v. Walters, [1896] 2 Ch. 157, cited in Brannan,page 124)

Sec. 123. Cancellation; unintentional; burden of proof. - Acancellation made unintentionally or under a mistake orwithout the authority of the holder, is inoperative but wherean instrument or any signature thereon appears to have beencancelled, the burden of proof lies on the party who allegesthat the cancellation was made unintentionally or under amistake or without authority.

Illustrative Case:

An agent for collection, without authority, accepted from theacceptor less than the amount claimed by the holder, and allowedthe acceptor to cancel his signature. The holder refused to ratifythe agent’s act, returned the money to the acceptor, and receivedback the bill. Held, that the cancellation was inoperative.(Dominion Bank v. Anderson, 15 Cas. (1888) 408, cited in Brannan,page 124)

Sec. 124. Alteration of instrument; effect of. - Where anegotiable instrument is materially altered without the assentof all parties liable thereon, it is avoided, except as against aparty who has himself made, authorized, or assented to thealteration and subsequent indorsers.

But when an instrument has been materially altered and is inthe hands of a holder in due course not a party to thealteration, he may enforce payment thereof according to itsoriginal tenor.


Notes:

Alterations on the serial number of a check, not materialalterations; reasons thereto—

The High Court held in the case of International Corporate

Bank, Inc. vs. Court of Appeals and Philippine National Bank698,that: “[t]he question on whether an alteration of the serial numberof a check is a material alteration under the Negotiable InstrumentsLaw is already a settled matter. In Philippine National Bank v.

Court of Appeals, this Court ruled that the alteration on the serialnumber of a check is not a material alteration. Thus:

“An alteration is said to be material if it alters the effectof the instrument. It means an unauthorized change inan instrument that purports to modify in any respectthe obligation of a party or an unauthorized addition ofwords or number or other change to an incompleteinstrument relation to the obligation of a party. In otherwords, a material alteration is one which changes theitem which are required to be stated under Section 1 ofthe Negotiable Instrument[s] Law.”

x x x x

In his book entitled “Pandect of Commercial Law andJurisprudence”, Justice Jose C. Vitug opines that “aninnocent alteration (generally, changes on items other thanthose required to be stated under Sec. 1, N.I.L.) andspoliation (alterations done by a stranger) will not avoid theinstrument, but the holder may enforce it only according toits original tenor.

x x x x

The case at bench is unique in the sense that what wasaltered is the serial number of the check in question, anitem which, it can readily be observed, is not an essentialrequisite for negotiability under Section 1 of the NegotiableInstruments Law. The aforementioned alteration did notchange the relations between the parties. The name of the

698 G.R. No. 129910, September 5, 2006, [Carpio, J.]

423

drawer and the drawee were not altered. The intendedpayee was the same. The sum of money due to the payeeremained the same. x x x

x x x x

The check’s serial number is not the sole indication of itsorigin. As succinctly found by the Court of Appeals, thename of the government agency which issued the subjectcheck was prominently printed therein. The check’s issuerwas therefore sufficiently identified, rendering the referralto the serial number redundant and inconsequential. x x x

x x x x

Petitioner, thus cannot refuse to accept the check in questionon the ground that the serial number was altered, the samebeing immaterial or innocent one.699

Illustrative Cases:

This section applies to the physical alteration of theinstrument. An extension of time, given by the holder of a note tothe principal maker, without the consent of a surety co-maker isnot an alteration. (Richards v. Market Exch. Bank Co. (Ohio), 90N.E. 1000, S.C. sec. 119, cited in Brannan, page 127)

Where the mere inspection of a check showed that it hadbeen altered (in date), a purchaser cannot recover on it accordingto its original tenor. He cannot be a holder in due course becauseit was not regular on its face (section 52). (Elias v. Whitney, 50Misc. R. 326, 98 N.Y. Supp. 667, cited in Brannan, page 125)

Where the alteration is material and suspicious, it isincumbent upon the party offering it to give some evidence toexplain its condition. Whether the alteration is suspicious is aquestion of law for the court, but when the instrument has beenadmitted, the question whether the alteration was made before orafter delivery or with consent of the parties is for the jury. (Ofensteinv. Bryan, 20 App. D.C. 1; Towles v. Tanner, 21 App. D.C. 530,semble, ibid)

699 326 Phil. 504 (1996), 511-516


The proper practice when a note is offered which appearsto have been altered is for the court to determine, upon inspectionand in view of the state of the evidence, whether the instrumentshould be admitted without further proof to explain the alterations,and to the exercise of the court’s sound discretion no exceptionlies. (Wood v Skelly, 196 Mass. 114, 81 N.E. 872, ibid)

The payee of a check represented that it was lost andreceived another check from the drawer, and collected it, and thenchanged the first check by dating it ten days later, and transferredit to plaintiff, a holder in due course. Held, that the drawer’s losswas not caused by delay in presentment, but by reliance on thepayee’s false representations, and the plaintiff could recover fromthe drawer of the check according to its original tenor. (Moekowitzv. Deutsch, 46 Misc. Rep., 603, 92 N.Y. Supp. 721, cited inBrannan, page 126)

A written agreement, securely glued to an accepted bill ofexchange, is a part thereof, and if it be detached therefrom, withoutthe acceptor’s consent, this is a fraudulent material alteration.But a holder in due course may recover on the instrumentaccording to its original terms. (Bothell v. Schweitzer (Neb.), 120N.W. 1129, cited in Brannan, page 127)

2011 Bar Question:

A material alteration of an instrument without the assentof all parties liable thereon results in its avoidance,EXCEPT against a

A. prior indorsee.

B. subsequent acceptor.

C. subsequent indorser.

D. prior acceptor.

Sec. 125. What constitutes a material alteration. - Anyalteration which changes:

(a) The date;

(b) The sum payable, either for principal or interest;

(c) The time or place of payment:

425

(d) The number or the relations of the parties;

(e) The medium or currency in which payment is to bemade;

(f) Or which adds a place of payment where no place ofpayment is specified, or any other change or additionwhich alters the effect of the instrument in anyrespect, is a material alteration.

Notes:

Material alteration; general rule

Any change in the terms of a written contract which variesits original legal effect and operation, whether in respect to theobligation it imports, or its force as matter of evidence, when madeby any party to the contract, is an alteration thereof, unless all theother parties to the contract gave their express or implied consentto such change. And the effect of such alteration is to nullifyand destroy the altered instrument as a legal obligation,whether made with fraudulent intent or not.700 (Elements ofthe Law of Negotiable Instruments, Daniel, pp. 289-290, emphasisours)

In what material alteration consists

Prof. Daniel said: “In order to constitute an alterationmaterial, it must have the legal effect of changing the legalstatus or relationship of the parties to the instrument. This istrue, without regard to the question whether it injures or benefitseither the debtor or creditor. Hence, a material alteration mayconsist in changing its date, or the time or place of payment, orthe amount of principal or interest to be paid, or the medium orcurrency in which payment is to be made, or the number or therelations of parties, or the character and effect of the instrumentas matter of obligation or evidence.701 And the alteration mayeffected by adding to the instrument some new provision, or bysubstituting one provision for another, or by obliterating orsubtracting from it some provision incorporated in it. As has beenindicated, it will be no answer to a plea of alteration that its

700 Daniel on Negotiable Instruments, 1375, Drexler v/ Smith, 30 Fed. 757701 Weir v. Walmsley Ind. 246; Warden v. Ryan, 37 Mo. App. 566; Wager v.

Brooks, 37 Minn. 392


operation is favorable to the parties affected by it, whether inlessening or increasing the amount to be paid, or in enlarging orabbreviating the time of payment, or otherwise. No man has aright to vary another’s obligation at his discretion, whether for hisgood or ill. It ceases, when thus varied, to be that other’s act, andit is sufficient for him to say: “This is not my contract.”702 Even adecrease of the amount destroys the identity, and confuses andtraces of his obligation, and every reason of policy and principleforbid that the laws should tolerate tampering with the rights andengagements of others. (supra, emphasis supplied, pp. 290-291)

In the Philippine setting, the case of Philippine National

Bank vs. Court of Appeals703, laid down distinctively as to whatconstitutes material alteration. The ponente Justice Kapunan

wrote: “[a]n alteration is said to be material if it alters the effect ofthe instrument.704 It means an unauthorized change in aninstrument that purports to modify in any respect the obligation ofa party or an unauthorized addition of words or numbers or otherchange to an incomplete instrument relating to the obligation of aparty.705 In other words, a material alteration is one which changesthe items which are required to be stated under Section 1 of theNegotiable Instruments Law…In his book entitled “Pandect ofCommercial Law and Jurisprudence,” Justice Jose C. Vitug opinesthat “an innocent alteration (generally, changes on items otherthan those required to be stated under Sec. 1, N.I.L.) and spoliation(alterations done by a stranger) will not avoid the instrument, butthe holder may enforce it only according to its original tenor.”706

“Reproduced hereunder are some examples of material andimmaterial alterations:

A. Material Alterations:

(1) Substitution the words “or bearer” for “order.”

(2) Writing “protest waived” above blank indorsements.

(3) A change in the date from which interest is to run.

702 G.R. No. 107508, April 25, 1996.703 Agbayani, Commentaries and Jurisprudence of the Commercial Laws of

the Philippines, Vol. 1, 1992 ed., p. 403.704 Nicklees, Negotiable Instruments and other related Commercial Paper,

1993 2nd ed., p. 168.705 Vitug, Pandect of Commercial Law and Jurisprudence, 1990 ed., p. 55

427

(4) A check was originally drawn as follows: “Iron CountyBank, Crystal Falls, Mich. Aug. 5, 1901. Pay to G.L.or order $9 fifty cents CTR” The insertion of the figure5 before the figure 9, the instrument being otherwiseunchanged.

(5) Adding the words “with interest” with or without afixed rate.

(6) An alteration in the maturity of a note, whether thetime for payment is thereby curtailed or extended.

(7) An instrument was payable “First Nat’l Bank” theplaintiff added the word “Marion”.

(8) Plaintiff, without consent of the defendant, struck outthe name of the defendant as payee and insertedthe name of the maker of the original note.

(9) Striking out the name of the payee and substitutingthat of the person who actually discounted the note.

(10) Substituting the address of the maker for the nameof a co-maker.707

B. Immaterial Alterations:

(1) Changing “I promise to pay” to “We promise to pay”,where there are two makers.

(2) Adding the word “annual” after the interest clause.

(3) Adding the date of maturity as a marginal notation.

(4) Filling in the date of actual delivery where the makersof a note gave it with the date in blank, “July________.”

(5) An alteration of the marginal figures of a note wherethe sum stated in words in the body remainedunchanged.

(6) The insertion of the legal rate of interest where thenote had a provision for “interest at ___________per cent.”

(7) A printed form of promissory note had on the marginthe printed words: “Extended to ____________.”

707 Agbayani, Commentaries and Jurisprudence on the Commercial Laws ofthe Philippines, Vol. 1, 1992 ed., pp. 403-404.


The holder on or after maturity wrote in the blankspace the words: “May 1, 1913,” as a referencememorandum of a promise made by him to theprincipal maker at the time the words were written toextend the time of payment.

(8) Where there was a blank for the place of payment,filling in the blank with the place desired.

(9) Adding to an indorsee’s name the abbreviation“Cash” when it had been agreed that the draftsshould be discounted by the trust company of whichthe indorsee was cashier.

(10) The indorsement of a note by a stranger afterits delivery to the payee at the time the note wasnegotiated to the plaintiff.

(11) An extension of time given by the holder of a note tothe principal maker, without the consent of a suretyco-maker.708

The case at bench is unique in the sense that what wasaltered is the serial number of the check in question, an item which,it can readily be observed, is not an essential requisite fornegotiability under Section 1 of the Negotiable Instruments Law.The aforementioned alteration did not change the relationsbetween the parties. The name of the drawer and the draweewere not altered. The intended payee was the same. The sum ofmoney due to the payee remained the same.

Changing date of instrument and time of payment

Any change in the date imparts a new legal effect andoperation to it, and is a material alteration, which avoids it asagainst prior parties and sureties even in the hands of a bona fide

holder without notice.709 The time the instrument became asubsisting contract, and the time when the contract is to beperformed in many cases, and a thousand circumstances mayarise which may add consequence to the question when theinstrument was issued. It matter not that the time of payment byrelation to the date, may be prolonger, for suffice it to say it was

708 Id., at 404-405.709 Master v. Miller, 4 T.R. 320; Crawford v. West Side Bank, 100 N.Y. 56;

Britton v. Dierker, 46 Mo. 592

429

not the time agreed on. (Daniel, Elements of the Law of NegotiableInstruments, Daniel, p. 291)

The alteration may be in the year, or the month, or the dayof the monthly, or in all three.710 (Ibid,pp. 291-292)

A change in the time of payment is obviously of the samenature as a change in the date, identical in principle and effect;and whether such change delays, accelerates, or preserves inlegal effect the time specified, or implied for payment, it constitutesa material alteration.711 (Ibid)

Changing place of payment

When the instrument has been drawn payable at a particularplace, the obliteration of such place, so as to make it payablegenerally, constitutes a material alteration as against all the partiesnot consenting;712 and likewise where no place is designated, it isa material alteration to insert one.713 (Supra, p. 292)

Even a bona fide holder cannot recover upon an acceptanceso altered, nor upon a note so altered against parties prior to theone making the alteration.714 Changing the place of date wouldchange the rights of the parties, and hence is an alteration.715

(Ibid, pp. 292-293)

Change in amount of principal or interest

Any change in the amount of the principal for which theinstrument is executed is a material alteration, whether it beincreased or lessened. (Supra, p. 293)

Any addition of words making the bill or note bear interestis of the same character as if it changed the principal.716 (Ibid)

710 Thompson on Bills, 111; Jacob v. Hart, 2 Stark. 45; Outhwaite v. Luntley, 4Campb. 179; Walton v. Hastings, 4 Campb. 223

711 Bathe v. Taylor, 15 East, 412; Miller v. Gilleland, 19 Pa. St. 119712 McCurbin v. Turnbull, Thompson on Bills, 112713 Nazro v. Fuller, 24 Wend. 374; Townsend v. Star Wagon Co., 10 Nebr.

615; Whitesides v. Northern Bank, 10 Bush, 501714 Nazro v. Fuller, 24 Wend. 374; Sudler v. Collins, 2 Houst. 538715 Mahaiwe Bank v. Douglass, 31 Conn. 170716 Harsh v. Klepper, 28 Ohio St. 200; Woodworth v. Anderson, 63 Iowa, 503;

Davis v. Henry, 13 Nebr. 500


Change as to parties

Any alteration in the personality, number, or relations of theparties is, as a general rule, a material alteration. Thus, whereC., member of the firm of C. & Co., obtained an accommodationindorsement to his individual note, and then added “& Co.” to hissignature, thus making it his firm’s note, it was held a materialalteration.717 (Supra, p. 295)

[T]he erasure of the name of one of two drawers or makers,or payees, who have indorsed the paper, or of one of several co-sureties, or the name of the payee and inserting another, is likewisea material alteration.718 So the substitution of one drawer ordrawee, or maker or co-maker for another, is of like effect.719

(Supra, pp. 295-296)

However, “[w]hether or not the addition of another name tothat of the maker (when there is but one) is a material alteration,which discharges him, is a question upon which authorities aredivided. Applying sound principle to the controversy, it would seemthat the alteration should be regarded as immaterial. The additiondoes not vary the original maker’s liabilities in any respect. Therecould be no motive of fraud upon him or others to induce theaddition. And while it would come within the letter of thosedeclarations of courts that maintain anything which affects theintegrity of the instrument to be a material alteration, it does notseem to come within their spirit.720 (Supra, p. 296)

Change affecting the character of the obligation

A change in the character or effect of the instrument, whetherin respect to its obligation or to its weight in evidence, is a materialalteration. Thus, the addition of a seal to the signature of themaker of a note converts it into a bond, against which no plea ofwant of consideration can be made, and thus invests his contractwith attributes which he decline to impart to it.721 Consequently

717 Haskell v. Champion, 30 Miss. 136718 Mason v. Bradley, 11 M & W 590; Cumberland Bank v. Hall, 1 Hals. 215;

McCramer v. Thompson, 21 Iowa, 244; Robinson v. Berryman, 22 Mo.App. 510; Horn v. Bank, 32 Kan. 521

719 Davis v. Coleman, 7 Ired. 424; Swtate v. Polk, 7 Black. 27720 Daniel on Negotiable Instruments, 1388, 1389, and cases cited721 United States v. Linn, 1 How. 104; Marshall v. Gougler, 10 Serg. & R. 164

431

the note is avoided. So a bond is avoided by detaching the seal.722

As when a seal is added to the name of one of several co-makersof a note, all are discharged, because the holder could not havethe same recourse against the three which he held before; onewould be estopped from denying a want of consideration whichmight inure to the benefit of all, and new relations and obligationswould be created. (Ibid, pp. 296-297)

[T]he changing of a note from “I promise” to “We promise”is material, because it changes a joint and several note into onejoint only.723 (Supra, p. 297)

The addition of the name of a witness to an instrumentrequired by law to be witnesses is a material alteration, but if theinstrument need not be witnesses or if it already has on it thenumber of witness required by law, the alteration is immaterial.(Ibid)

Change in consideration

It has been held that if a bill be expressed generally “forvalue received,” and words are added describing suchconsideration as “for the good-will and lease in trade” of a certainperson, or “for a certain tract of land,” it is materially altered andavoided.724 The reasons assigned are, first, that it makes thenote a confession in evidence of a fact which might otherwiserequires extraneous proof; and, second, that it puts the holderupon inquiry whether that consideration passed.725(Ibid)

Change in words of negotiability

The addition of the negotiable words, “or order,” or “bearer,”is not an alteration when there were intended to have beeninserted, and were accidentally left out.726 Where the effect ofsuch addition is to impart negotiability to an instrument notdesigned to be negotiable, it is a most material alteration in thenature of the contract, and the bill or note is thereby avoided.727

722 Piercy v. Piercy, 5 W. Va. 199723 Humphreys v. Guillow, 13 N.H. 385; Hemmenway v. Stone, 7 Mass. 58724 Knill v. Williams, 10 East, 413; Low v. Argrove, 30 Ga. 129725 2 Parsons on Notes and Bills, 562; Daniel on Negotiable Instruments,

1394726 Kershaw v. Cox, 3 Esp. 246; Byrom v. Thompdon, 11 Ad. & El. 31727 Bruce v. Westcott, 3 Barb. 274; Johnson v. Bank of the United States, 2

B. Mon. 310


So the interlineations of “or bearer” in a negotiable note, payableto a certain person or order, is an alteration of it, because itmaterially changes the manner of its negotiability.728 (Supra, pp.297-298)

Rights of bona fide holder of altered instrument

As a general rule, the material alteration of an instrumentwill vitiate it, even in the hands of a bona fide holder without notice.But when the drawer of the bill or the maker of the note has himself,by careless execution of the instrument, left room for any alterationto be made, wither by insertion or erasure, without defacing it, orexciting the suspicions of a careful man, he will be liable upon itto any bona fide holder without notice when the opportunity whichhas afforded has been embraced, and the instrument filled upwith a larger amount or different terms than those which it bore atthe time he signed it.729 (Supra, pp. 299-300)

The true principle applicable to such cases is that the partywho puts his paper in circulation, invites the public to receive it ofanyone having it in possession with apparent title, and he isestopped to urge an actual defect in that which, through his act,ostensibly has none.730 “It is the duty of the maker of the note toguard not only himself, but the public, against frauds and alterationby refusing to sign negotiable paper made on such a form as toadmit of fraudulent practices upon them with ease, and withoutready detection.”731 The inspection of the paper itself furnishesthe only criterion by which a stranger to whom it is offered cantest its character, and when the inspection reveals nothing toarouse the suspicions of a prudent man, he will not be permittedto suffer when there has been an actual alteration, to which thepayor by his negligence contributed.732 (Ibid)

If the alteration were made without any fault on the part ofthe maker, drawer, or acceptor, neither will then be bound, althoughthe alteration were so skillfully made as to escape notice uponcareful observation. Thus, where a banker’s check had been

728 Booth v. Powers, 56 N.H. 30; Union Nat. Bank v. Roberts, 45 Wis. 373729 Garrard v. Haddan, 67 Pa. St. 82; Johnston Harvester Co. v. McLean, 57

Wis. 258; Lowden v. National Bank, 38 Kan. 533730 Van Duzer v. Howe, 21 N.Y. 538731 Zimmerman v. Rote, 75 Pa. St. 188; Brown v. Reed, 79 Pa. St. 370732 Daniel on Negotiable Instruments, 1405; Blakey v. Johnson, 13 Bush,

204

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dexterously altered by a chemical process, the original sum beingexpunged, and a larger inserted, the banker was not allowed torecover of the drawer more than the sum for which the draft actuallycalled when he drew it.733 (Ibid)

Effect of material alteration fraudulently made

When a party to a bill or note fraudulently alters its legaleffects he not only destroys it’s the instrument by thus destroyingits legal identity, but he also extinguishes the debt for which it wasgiven. And it cannot afterward be made the basis of, or evidencefor, a recovery in any form of action. (Ibid, pp. 300-301)

Effect of material alteration innocently made

If the alteration is material, and was made innocently, theinstrument, notwithstanding, is vitiated, and no suit thereon canbe maintained.734 But the holder may sue upon the original causeof action;735 but he could not sue any party whose remedy, aftermaking payment, would be impaired by the alteration.736 (Supra,pp. 301)

Can the drawee bank still recover the value of the check evenif it failed to return the check within 24-hour clearing periodbecause the check was tampered?

In the same case of PNB vs. CA, “whether or not the draweebank may still recover the value of the check from the collectingbank even if it failed to return the check within the twenty-four(24) hours clearing period because the check was tampered—suffice it to state that since there is no material alteration in thecheck, petitioner has no right to dishonor it and return it to PBCom,the same being in all respects negotiable.”

Illustrative Cases:

Defendant signed a note payable to her own order whichwas delivered unendorsed to plaintiff in renewal of another note

733 Hall v. Fuller, 5 B & C 750734 Angle v. N.W., etc, Inc. Co., 92 U.S. 342; Harsh v. Klepper, 20 Ohio St.

200; Booth v. Powers, 56 N.Y. 31; Moore v. Hutchinson, 69 Mo. 429735 Atkinson v. Hawden, 2 Ad. & El. 169; Owen v. Hall, 70 Md. 100; Sloman v.

Cox, 1 Cromp., M & R 471736 Alderson v. Langdale, 3 B & Ald. 660


on which defendant was an indorser. Plaintiff without the consentof defendant struck out the name of defendant as payee andinserted the name of the maker of the original note, who thenindorsed the new note. Held, that the alteration was material andthe note was avoided as to the defendant. (Hoffman v. Planters’Nat. Bank, 99 Va. 480, 39 S.E. 134, cited in Brannan, page 129)

It is not material alteration to add an indorsee’s name theabbreviation “Cash” when it had been agreed that the draft shouldbe discounted by the trust company of which the indorsee wascashier. (Brimingham Trust Co. v. Whitney, 95 App. Div. 280, 88N.Y. Supp. 578, cited in Brannan, page 129)

BILLS OF EXCHANGE

IX. FORM AND INTERPRETATION

Sec. 126. Bill of exchange, defined. - A bill of exchange is anunconditional order in writing addressed by one person toanother, signed by the person giving it, requiring the personto whom it is addressed to pay on demand or at a fixed ordeterminable future time a sum certain in money to order orto bearer.

Illustrative Cases:

An order by a contractor, directing the owner of the buildingto pay another a certain sum of money and deduct it from anyamount due on final payment, is not a bill of exchange. (ButtrickLumber Co. v. Collins, 202 Mass. 413, 89 N.E. 138, cited inBrannan, page 130)

An order for the payment of money, addressed to no one inparticular but generally to any one for whom the drawer might beemployed or who owed him money, is too indefinite and uncertainto be binding on any one. (Dugane v. Hvezda Pokroku No. 4(Iowa), 119 N.W. 141, ibid)

Sec. 127. Bill not an assignment of funds in hands of drawee.

- A bill of itself does not operate as an assignment of thefunds in the hands of the drawee available for the payment

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thereof, and the drawee is not liable on the bill unless anduntil he accepts the same.

Illustrative Cases:

A having a certain sum on deposit with a bank, gave a checkfor a larger sum. Held, that the check on presentation operatedas an intended assignation of the amount of the deposit. (BritishLinen Co. Bank v. Carruthers, 10 Sess. Case. 923, cited inBrannan, page 131)

A bill accepted payable at a banker’s operates onpresentment as an intended assignation of the hands of theacceptor in the banker’s hands. (British Linen Co. v. Rainey, 12Sess. Cas. 825, ibid)

Sec. 128. Bill addressed to more than one drawee. - A billmay be addressed to two or more drawees jointly, whetherthey are partners or not; but not to two or more drawees inthe alternative or in succession.

Sec. 129. Inland and foreign bills of exchange. - An inland billof exchange is a bill which is, or on its face purports to be,both drawn and payable within the Philippines. Any other billis a foreign bill. Unless the contrary appears on the face ofthe bill, the holder may treat it as an inland bill.

Sec. 130. When bill may be treated as promissory note. -Where in a bill the drawer and drawee are the same personor where the drawee is a fictitious person or a person nothaving capacity to contract, the holder may treat theinstrument at his option either as a bill of exchange or as apromissory note.

2011 Bar Question:

A bill of exchange has T for its drawee, U as drawer,and F as holder. When F went to T for presentment, Flearned that T is only 15 years old. F wants to recoverfrom U but the latter insists that a notice of dishonormust first be made, the instrument being a bill ofexchange. Is he correct?


A. Yes, since a notice of dishonor is essential tocharging the drawer.

B. No, since T can waive the requirement of notice ofdishonor.

C. No, since F can treat U as maker due to the minorityof T, the drawee.

D. Yes, since in a bill of exchange, notice of dishonoris at all times required.

If the drawer and the drawee are the same person, theholder may present the instrument for payment withoutneed of a previous presentment for acceptance. In sucha case, the holder treats it as a

A. non-negotiable instrument.

B. promissory note.

C. letter of credit.

D. check.

P authorized A to sign a bill of exchange in his (P’s)name. The bill reads: “Pay to B or order the sum ofPhp1 million. Signed, A (for and in behalf of P).” Thebill was drawn on P. B indorsed the bill to C, C to D,and D to E. May E treat the bill as a promissory note?

A. No, because the instrument is payable to order andhas been indorsed several times.

B. Yes, because the drawer and drawee are one andthe same person.

C. No, because the instrument is a bill of exchange.

D. Yes, because A was only an agent of P.

P authorized A to sign a negotiable instrument in his(P’s) name. It reads: “Pay to B or order the sum of Php1million. Signed, A (for and in behalf of P).” Theinstrument shows that it was drawn on P. B thenindorsed to C, C to D, and D to E. E then treated it as abill of exchange. Is presentment for acceptancenecessary in this case?

437

A. No, since the drawer and drawee are the sameperson.

B. No, since the bill is non-negotiable, the drawer anddrawee being the same person.

C. Yes, since the bill is payable to order, presentmentis required for acceptance.

D. Yes, in order to hold all persons liable on the bill.

Sec. 131. Referee in case of need. - The drawer of a bill andany indorser may insert thereon the name of a person towhom the holder may resort in case of need; that is to say, incase the bill is dishonored by non-acceptance or non-payment. Such person is called a referee in case of need. Itis in the option of the holder to resort to the referee in caseof need or not as he may see fit.

X. ACCEPTANCE

Sec. 132. Acceptance; how made, by and so forth. - Theacceptance of a bill is the signification by the drawee of hisassent to the order of the drawer. The acceptance must be inwriting and signed by the drawee. It must not express thatthe drawee will perform his promise by any other means thanthe payment of money.

Notes:

Section 132, requiring the acceptor of a bill of exchange tobe in writing, does not apply to a foreign bill, payable in anotherState; the law of such State not having been proved, the commonlaw, according to such acceptance may be oral will be held toapply. (Bank of Laddonia v. Bright-Coy Commission Co. (Mo..App.), 120 S.W. 648, cited in Brannan, page 133)

“Acceptance”, in the sense in which this term is used in theNegotiable Instruments Law is not required for checks, for thesame are payable on demand.737

737 Sections 143 and 185, Act No 2031; Phil Nat. Bank vs. Nat. City Bank ofNew York, 63 Phil 711; I Morse on Banks and Banking, 6th ed. 898, 899;Watchel v. Rosen, 249 N.Y. 386, 164 N.E. 326.


Promise and Acceptance of check; distinguished.

“Acceptance” and “payment” are, within the purview of saidLaw, essentially different things, for the former is “a promise to

perform an act”, whereas the latter is the “actual performance”

thereof.738 In the words of the Law,739 “the acceptance of a bill isthe signification by the drawee of his assent to the order of thedrawer”, which, in the case of checks, is payment, on demand, ofa given sum of money. Upon the other hand, actual payment ofthe amount of a check implies not only an assent to said order ofthe drawer and recognition of the drawer’s recognition of thedrawer’s obligation to pay the aforementioned sum, but, also, acompliance with said obligation. (Philippine National Bank vs.

Court of Appeals and Philippine Commercial and Industrial Bank,

G.R. No. L-26001, October 29, 1968, [Concepcion, C.J:])

2011 Bar Question:

X, drawee of a bill of exchange, wrote the words:“Accepted, with promise to make payment within twodays. Signed, X.” The drawer questioned theacceptance as invalid. Is the acceptance valid?

A. Yes, because the acceptance is in reality a clearassent to the order of the drawer to pay.

B. Yes, because the form of the acceptance is reallyimmaterial.

C. No, because the acceptance must be a clear assentto the order of the drawer to pay.

D. No, because the document must not express thatthe drawee will perform his promise within two days.

Sec. 133. Holder entitled to acceptance on face of bill. - Theholder of a bill presenting the same for acceptance mayrequire that the acceptance be written on the bill, and, if suchrequest is refused, may treat the bill as dishonored.

738 First Natioal Bank of Washington v. Whitman, 94 U.S. 343, 347, 24 L. ed.229.

739 Section 132, Act No. 2031.

439

Notes:

This section is not confined to sight bills but is applicable toall bills of exchange. Presentment for acceptance of a bill, payableat a fixed time is not necessary to charge the drawer or indorser,but it may be presented for acceptance at any time. (NationalPark Bank v. Saitta, 127 App. Div. 624, 111 N.Y. Supp. 927, S.C.sec. 28, cited in Brannan, page 134)

Sec. 134. Acceptance by separate instrument. - Where anacceptance is written on a paper other than the bill itself, itdoes not bind the acceptor except in favor of a person towhom it is shown and who, on the faith thereof, receives thebill for value.

Sec. 135. Promise to accept; when equivalent to acceptance.

- An unconditional promise in writing to accept a bill beforeit is drawn is deemed an actual acceptance in favor of everyperson who, upon the faith thereof, receives the bill for value.

Sec. 136. Time allowed drawee to accept. - The drawee isallowed twenty-four hours after presentment in which todecide whether or not he will accept the bill; the acceptance,if given, dates as of the day of presentation.

Sec. 137. Liability of drawee returning or destroying bill. -Where a drawee to whom a bill is delivered for acceptancedestroys the same, or refuses within twenty-four hours aftersuch delivery or within such other period as the holder mayallow, to return the bill accepted or non-accepted to theholder, he will be deemed to have accepted the same.

Notes:

It was held that under section 137 N.I.L., the presentationfor acceptance is a demand for acceptance which, if the bill isretained by the drawee, implies a demand for its return ifacceptance is declined, and that the mere failure to return the billwithin twenty-four hours is acceptance. And it was further heldthat under section 185 a check was subject to the same rules,and that failure to return within twenty-four hours a check sent to


a drawee band for payment was an acceptance of a check uponwhich the holder could recover against the bank, although thedelay was due to the neglect of a notary public to whom the checkwas handed by the drawee bank to protest on the day of its receiptby the bank. (Brannan, page 136)

The delivery of a check by a bank to a notary public forprotest is not a compliance with this section and does not relievethe drawee from liability, following Wisner v. First Nat. Bank;

Provident S. & B. Co. v. First Nat. Bank, 37 Pa. Super. Ct. 17.(ibid)

In order to hold a drawee as acceptor under this section,the burden is upon the plaintiff to show that the instrument wasnegotiable paper of the nature and kind that could be presentedfor acceptance or that it was actually delivered to the drawee foracceptance and not for payment. (First Nat. Bank of Omaha v.Whitmore, 177 Fed. Rep. 397, ibid)

Sec. 138. Acceptance of incomplete bill. - A bill may beaccepted before it has been signed by the drawer, or whileotherwise incomplete, or when it is overdue, or after it hasbeen dishonored by a previous refusal to accept, or bynonpayment. But when a bill payable after sight is dishonoredby non-acceptance and the drawee subsequently accepts it,the holder, in the absence of any different agreement, isentitled to have the bill accepted as of the date of the firstpresentment.

Sec. 139. Kinds of acceptance. - An acceptance is eithergeneral or qualified. A general acceptance assents withoutqualification to the order of the drawer. A qualified acceptancein express terms varies the effect of the bill as drawn.

Sec. 140. What constitutes a general acceptance. - Anacceptance to pay at a particular place is a general acceptanceunless it expressly states that the bill is to be paid there onlyand not elsewhere.

Sec. 141. Qualified acceptance. - An acceptance is qualifiedwhich is:

441

(a) Conditional; that is to say, which makes payment bythe acceptor dependent on the fulfillment of acondition therein stated;

(b) Partial; that is to say, an acceptance to pay part onlyof the amount for which the bill is drawn;

(c) Local; that is to say, an acceptance to pay only at aparticular place;

(d) Qualified as to time;

(e) The acceptance of some, one or more of the draweesbut not of all.

Sec. 142. Rights of parties as to qualified acceptance. - Theholder may refuse to take a qualified acceptance and if hedoes not obtain an unqualified acceptance, he may treat thebill as dishonored by non-acceptance. Where a qualifiedacceptance is taken, the drawer and indorsers are dischargedfrom liability on the bill unless they have expressly orimpliedly authorized the holder to take a qualified acceptance,or subsequently assent thereto. When the drawer or anindorser receives notice of a qualified acceptance, he must,within a reasonable time, express his dissent to the holderor he will be deemed to have assented thereto.

XI. PRESENTMENT FOR ACCEPTANCE

Sec. 143. When presentment for acceptance must be made. -Presentment for acceptance must be made:

(a) Where the bill is payable after sight, or in any othercase, where presentment for acceptance isnecessary in order to fix the maturity of theinstrument; or

(b) Where the bill expressly stipulates that it shall bepresented for acceptance; or

(c) Where the bill is drawn payable elsewhere than atthe residence or place of business of the drawee.

In no other case is presentment for acceptancenecessary in order to render any party to the bill liable.


Notes:

Sight Drafts do not require presentment for acceptance

Bills payable on demand or at sight without grace (whichare immediately payable on presentment), or payable at a certainnumber of days after date, or after any other certain event, orpayable on a day certain, need not be presented, for acceptanceat all, but only for payment. (Elements of the Law of NegotiableInstruments, Daniel, page 163)

Bills payable at sight, or at so many days after sight, or afterdemand, or after any other event not absolutely fixed, must bepresented to the drawee for acceptance and payment, or foracceptance only, without unreasonable delay, or the drawer andindorsers will be discharged, for they have an interest in havingthe bills accepted immediately in order to shorten the time ofpayment, and thus put a limit to the period of their liability; andalso enable them to protect themselves by other means before itis too late, if the bill is not accepted and paid within the timeoriginally contemplated by them.740 (Ibid)

When the words “acceptance waived” are embodied in abill, the ordinary proceedings in acceptance are dispensed with,and merged into those of payment or nonpayment.741 (Ibid)

Exception to the Rule—

There are, however, three exceptions to this general rulethat it is not necessary to present a bill payable at a fixed time foracceptance, but only at maturity for payment:

First, when there is an express direction to the payee orholder of a bill;

Second, when it is into the hands of an agent for negotiation;and

740 Bell v. First Nat. Bank, 115 U.S. 379; Mitchell v. De Grand, 1 Mason, 176;Robinson v. Ames, 20 Johns, 146

741 Carson v. Russel, 26 Tex. 472; English v. Wall, 12 Rob. (La.) 132; Webbv. Mears, 9 Wright, 222.

443

Third, where the drawer and drawee are either the sameperson, or the drawer is a member of the form or connected withthe corporation which is the drawee. (Ibid)

Significance of Acceptance

The acceptance of a bill is the signification by the draweeof his assent to the order of the drawer;742 this may be done inwriting by the drawee in the bill itself, or in a separate instrument.743

(Prudential Bank vs. Intermediate Appellate Court, G.R. No. 74886,

December 8, 1992, [Davide, Jr., J.])

The effect of the acceptance of a bill

Is to constitute the acceptor the principal debtor.744 The billsbecomes by the acceptance very similar to a promissory note—the acceptor being the promissor, and the drawer standing in therelation of an indorser. (Daniel, Elements of the Law of NegotiableInstruments, page 173)

But in respect to the acceptor’s position with regard to thedrawer, and the amount for which he renders himself liable byaccepting the bill, it is well to observe that the acceptance doesnot entitle the acceptor to charge it in account against the drawerfrom the date of acceptance, unless he pays the whole amount atthe time or discharges the drawer from all responsibility.745 (Ibid)

Like the maker of a note, the acceptor is bound by all theterms of the instrument, and if it contain a stipulation for paymentof attorney’s fees, he is bound by it.746 (Ibid)

If the acceptance be for the drawer’s accommodation, theacceptor does not thereby become entitled to sue the drawer uponthe bill; but when he has paid the bill, and not before, he mayrecover back the amount from the drawer in an action for moneyhad and received.747 If the acceptor put the bill in circulation, he isestopped from showing it was then paid.748

742 Section 132, NIL743 Sections 133 and 34, Id.744 Heurtematte v. Morris, 1Y. 63; Capital City Ins. Co. v. Quinn, 73 Ala. 560745 Bracton v. Willing, 4 Call, 288746 Smith v. Muncie Nat. Bank, 29 Ind. 158747 Christian v. Keen, 80 Va. 377; Martin v. Muncy, 40 La. Ann. 190748 Hinton v. Bank of Columbus, 9 Port. (Ala.) 463


When drawer of bill requiring presentment for acceptancebound without such presentment

Presentment to the drawee, it has been held, is necessary,even though the drawer has requested him not to accept;749 butthe holder is not bound to present again after refusal to acceptand notice given, even though the drawer requests him to do so,and promises that the bill shall be honored.750 (Daniel, Elementsof the Law of Negotiable Instruments, pages 164 to 165)

The only cases in which the holder of a bill which, accordingto its tenor, should be presented for acceptance, can dischargethe drawer without presenting it for acceptance, arise when therelations between the drawer and drawee are such as to constitutethe drawing of the bill a fraud upon the holder.751 When the bill ispresented the acceptance must be according to its tenor to paymoney. If it be to pay another bill, it is not acceptance, and the billshould be protested.752 (Ibid)

Acceptance admits

1. Signature of drawer—It follows from the fact that theacceptor assumes to pay the bill, and becomes theprincipal debtor for the amount specified, that acceptanceis an admission of everything essential to the existenceof such liability. Therefore, acceptance, is, in the first

place, an admission of the signature of the drawer, thedrawee being supposed to know his correspondent’shandwriting, and, by accepting, to acknowledge it; andin a suit against the acceptor he would not be permittedto plead or show that the handwriting was not thedrawer’s and would be bound by his acceptance eventhough the drawer’s name were forged.753 (Daniel,Elements of the Law of Negotiable Instruments, page174)

2. Admission of funds of drawer in drawee’s hands—In the second place, acceptance admits that the acceptor

749 Hill v. Heap, Dowl. & R.N.P. 57; 1 Parsons on Notes and Bills, 388750 Hickligg v. Hardey, 7 Taunt. 312751 Bank of Washington v. Triplett, 1 Pet. 25; Smith’s Mercantile Law

(Holcombe & Gholson’s ed.), 304752 Russell v. Phillips, 14 Q.B. 891753 Jenys v. Fawler, 2 Stra. 946; Hoffman & Co. v. Bank of Milwaukee, 12

Wall. 193; Goetz v. Bank, 119 U.S. 556

445

had funds of the drawer in his hands, for the drawing ofthe bill implies this, and acceptance in the usual courseof business only follows when it is the fact. Therefore,the acceptor cannot deny that he was in funds when suitis brought by a holder of the bill;754 though as betweenhimself and the drawer it is only prima facie evidencethat the drawer had funds in his hands, and he may rebutthis presumption by showing that the acceptance wasfor the drawer’s accommodation, or otherwise undercircumstances which place him under no obligation topay the bill to him.755 (Ibid)

3. Admission of drawer’s capacity to draw—In the third

place, the acceptor admits the capacity of the drawer todraw the bill, for otherwise, it would not be valid;756 andtherefore he cannot set up a plea, that the drawer of abill, which he had accepted, was a body corporate havingno legal authority to draw the bill, or was a bankrupt,infant, or fictitious person.757 When the bill is drawn inthe name of a firm, acceptance admits that there is sucha firm, and if it be drawn by a person as executor, itadmits his right to sue in that character.758 (Ibid)

4. Admission of payee’s capacity to indorse—In thefourth place, the acceptor admits the capacity of thepayee to indorse the bill when it is drawn payable to thepayee’s order, for by the very act of acceptance he agreesto pay to his order;759 and, therefore, he cannot showthat at the time of acceptance the payee was an infant,an insane person, a bankrupt, or a corporation withoutlegal existence.760 It is a general principle, applicable toall negotiable securities, that a person shall not dispute

754 Raborg v. Peyton, 2 Wheat. 385; Hortsman v. Henshaw, 11 How. 177;Heurtematte v. Morris, 101 N.Y. 63

755 Daniel on Negotiable Instruments, 174-176; Park v. Nichols, 20 Ill. App.143; Klopfer v. Levi, 33 Mo. App. 322

756 Story on Bills, 113; Byles on Bills [193], 325757 Halifax v. Lyle, 3 Welsb., Hurl & Gord. (Exch.) 466; Braithwaite v. Gardiner,

8 Q.B. 473; Taylor v. Croker, 4 Esp. 187; Cowton v. Wickersham, 54 Pa.St. 302; Cooper v. Meyer, 10 B & C 468

758 Bass v. Clive, 4 Maule & S. 13; Aspinwall v. Wake, 10 Bing. 51 (portionsomitted)

759 Daniel on Negotiable Instruments, 93, 242760 Jones v. Darch, 4 Price, 300; Smith v. Marsack, 6 C.B. 486; Drayton v.

Dale, 2 B & C 293; Daniel on Negotiable Instruments, 93 et seq. (portionsomitted)


the power of another to indorse such instrument, whenhe asserts by the instrument which he issued to the world,that the other has such power.761 Indeed, there could beno reason why the acceptor should be interested to showthat the payee was incompetent to make the order; forhe has been guaranteed in that regard by the drawer,and may charge the amount in account against himwhether the payee were competent or not. (Ibid, pages175-176)

5. Admission of agent’s handwriting and authority—Inthe fifth place, if the bill be drawn by one professing toact as agent of the drawer, the acceptance admits hishandwriting and authority as agent to draw.762 (Ibid)

Acceptance does not admit

1. Signature of payee—In the first place, it does not admitthe genuineness of the signature of the payee when itpurports to bear his indorsement, or that any otherindorser, for with their handwriting he is not presumedto be familiar; and, therefore, if the signature of the payeeor other indorser be forged, the acceptor will not be boundto pay the bill to anyone who is compelled to trace titlethrough such indorsements.763 And if he has gone sofar as to pay the bill to any one holding it under suchforged indorsement, he may, as a general rule, recoverback the amount.764 The rule would not apply, however,where the drawer had issued the bill with the forgedindorsement upon it, for then the acceptor could chargethe amount in account against him, and as the forgedindorsement could in such case subject him to no loss,he would not be entitled to recover back the amount.765

The acceptance does not admit the signature of theindorser, even when the bill is payable to the drawer’sorder, and purports to be indorsed by him in the same

761 Daniel on Negotiable Instruments, chap. 42, section 3762 Robinson v. Yarrow, 7 Taunt 455; 1 Parsons on Notes and Bills, 322763 Holt v. Ross, 54 N.Y. 474; Edwards on Bills, 432764 Holt v. Ross, 54 N.Y. 474; Dick v. Leverich, 11 La. 573; Williams v. Drexel,

14 Md. 586765 Hortsman v. Henshaw, 11 How. 177; Cogill v. American Exchange Bank,

1 N.Y. 113

447

handwriting as the drawer’s.766 But if the drawer is afictitious person, and the bill is payable to the drawer’sorder, the acceptor’s undertaking is that he will pay tothe signature of the same person that signed for thedrawer; and in such case the holder may show, asagainst the acceptor, that the signature of the fictitiousdrawer and of the first indorser are in the samehandwriting.767 (Daniel, Elements of the Law ofNegotiable Instruments, page 177)

2. No admission of agency to indorse—In the second

place, acceptance does not admit agency to indorse,which must be proved by the holder in order to recoveragainst the acceptor, even though the acceptoracknowledges agency to draw the bill, and theindorsement was upon it at the time of acceptance. (Ibid)

3. No admission of genuineness of terms in body ofthe bill—In the third place, the acceptance does notadmit the genuineness of the terms contained in the bodyof that bill at the time of the acceptance; and, therefore,if at that time they had been altered so as to purport tobind the drawer for a larger sum, or in a different mannerthan that in the original bill, he will not be bound by hisacceptance to pay the amount, unless the drawer hadby his own carelessness afforded opportunity for thealteration, and the acceptor could therefore charge himin account with the whole amount.768 But where thedrawer alters it himself, or acquiesces in an alteration,before acceptance, it binds him, and therefore theacceptor.769 (Ibid, page 178)

Sec. 144. When failure to present releases drawer and

indorser. - Except as herein otherwise provided, the holderof a bill which is required by the next preceding section to bepresented for acceptance must either present it foracceptance or negotiate it within a reasonable time. If he failsto do so, the drawer and all indorsers are discharged.

766 Robinson v. Yarrow, 7 Taunt 455; Williams v. Drexel, 14 Md. 566767 Cooper v. Meyer, 10 B & C 468; Beeman v. Duck, 11 M & W 251768 Young v. Grote, 4 Bing 253; Young v. Lehman, 63 Ala. 519; White

Continental Nat. Bank, 64 N.Y. 320769 Langton v. Lazarus, 5 M & W 628; Ward v. Allen, 2 Metc. (Mass.) 57


Sec. 145. Presentment; how made. - Presentment foracceptance must be made by or on behalf of the holder at areasonable hour, on a business day and before the bill isoverdue, to the drawee or some person authorized to acceptor refuse acceptance on his behalf; and

(a) Where a bill is addressed to two or more draweeswho are not partners, presentment must be made tothem all unless one has authority to accept or refuseacceptance for all, in which case presentment maybe made to him only;

(b) Where the drawee is dead, presentment may bemade to his personal representative;

(c) Where the drawee has been adjudged a bankrupt oran insolvent or has made an assignment for thebenefit of creditors, presentment may be made tohim or to his trustee or assignee.

Notes:

To whom should the bill be presented for acceptance?

The drawing of a bill imports a contract on the part of thedrawer that the drawee is a person competent to accept and,therefore, if the holder upon presentment of the bill ascertainsthat the drawee is incapable of contracting. (Ibid, page 178-179)

It follows, therefore, as a general rule, that the bill shouldand can be accepted only by the party on whom drawn or hisauthorized agent, except in the cases of acceptance for honor;770

and if a bill addresses to one be accepted by two persons, it hasbeen thought that the acceptance of the first will be vitiated byhaving been altered in an essential part,771 unless made with theacceptor’s consent. But if any other person, after an acceptance,subsequently accepts the bill for the purpose of guaranteeing itscredit, at the acceptor’s request, in the usual form of an acceptance,then, if there is a sufficient consideration, he may be bound therebyas a guarantor; but he is not liable as an acceptor.772 And theaddition will not be a material alteration.773 (Ibid)

770 Polhill v. Walter, 3 B & Ad 114; May v. Kelly, 27 Ala. 497; Keenan v. Nash,8 Minn. 409

771 Thompson on Bills, 112, 212772 Story on Bills, 254; Jackson v. Hudson, 2 Campb. 447773 Smith v. Lockridge, 425

449

How presentment for acceptance should be made

The holder of the bill should have it in his possession, makean actual exhibit of it to the drawee, and request its acceptance.774

“The term presentment imports not a mere notice of existence ofa draft which the party has in his possession, but the exhibiting ofit to the person on whom it is drawn, that he may see the same,and examine his accounts or correspondence, and judge whathe shall do; whether he shall accept the draft or not.”775 (Daniel,Elements of the Law of Negotiable Instruments, page 169)

If the holder does not produce the bill, the drawee mayrequire him to do so, and decline accepting, save in the properform by writing his name on its face; and then unless the holderproduces it the drawer cannot be charged with the penalties ofnon-acceptance; but if the drawee makes no such requirementand does what is equivalent to acceptance he cannot afterwardrefuse to be held on the ground that he did not see the bill.776

(Ibid)

Sec. 146. On what days presentment may be made. - A billmay be presented for acceptance on any day on whichnegotiable instruments may be presented for payment underthe provisions of Sections seventy-two and eighty-five of thisAct. When Saturday is not otherwise a holiday, presentmentfor acceptance may be made before twelve o’clock noon onthat day.

Notes:

Within what period of time presentment for acceptance mustbe made

It seems to be the general commercial law of the civilizedworld, that when a bill is payable at a day certain—as, for instance,on a day named, or a fixed day after date—it need not be presenteduntil the day of payment, in order to charge the drawer or anindorser.777 The reason for this is that the drawer, by fixing a date

774 1 Parsons on Notes and Bills, 348775 Fall River Union Bank v. Willard, 5 Metc. (Mass.) 216; Edwards on Bills,

505776 Fall River Union Bank v. Willard, 5 Metc. (Mass.)216777 Townsley v. Sumrall, 2 Pet. 178; Bachellor v. Priest, 12 Pick. 399


certain for payment, assumes the responsibility of providing fundsat that time, whatever may have been his previous credit with thedrawee. And as to the indorser, by the very act of indorsement,he draws a new bill on the same terms; and, besides, he waiveshis right of immediate acceptance by not enforcing it himself, butputting his bill into circulation without acceptance.778 If payable atsight, or at a certain time after sight, or on demand, the only rulewhich can be laid down is that it must be presented within areasonable time,779 unless there be some well-established usageof trade which fixes a definite time for such payment, in whichcase such usage would control.780 If the bill be not presentedwithin a reasonable time, the drawee is discharged, although allthe parties continue solvent, and there is no damage caused bythe delay.781 (Daniel, Elements of the Law of NegotiableInstruments, page 170 to 171)

Sec. 147. Presentment where time is insufficient. - Where theholder of a bill drawn payable elsewhere than at the place ofbusiness or the residence of the drawee has no time, withthe exercise of reasonable diligence, to present the bill foracceptance before presenting it for payment on the day thatit falls due, the delay caused by presenting the bill foracceptance before presenting it for payment is excused anddoes not discharge the drawers and indorsers.

Sec. 148. Where presentment is excused. - Presentment foracceptance is excused and a bill may be treated asdishonored by non-acceptance in either of the followingcases:

(a) Where the drawee is dead, or has absconded, or isa fictitious person or a person not having capacityto contract by bill.

(b) Where, after the exercise of reasonable diligence,presentment cannot be made.

(c) Where, although presentment has been irregular,acceptance has been refused on some other ground.

778 Allen v. Suydam, 17 Wend. 368779 Wallace v. Agry, 4 Mason, 336; Bridgeport Bank v. Dyer, 19 Conn. 136780 Mellish v. Rawdon, 9 Bing. 416781 Carter v. Flower, 16 M & W 743; Thornburg v. Emmons, 23 W. Va. 333

451

Sec. 149. When dishonored by non-acceptance. - A bill isdishonored by non-acceptance:

(a) When it is duly presented for acceptance and suchan acceptance as is prescribed by this Act is refusedor cannot be obtained; or

(b) When presentment for acceptance is excused andthe bill is not accepted.

Sec. 150. Duty of holder where bill not accepted. - Where abill is duly presented for acceptance and is not acceptedwithin the prescribed time, the person presenting it must treatthe bill as dishonored by non-acceptance or he loses the rightof recourse against the drawer and indorsers.

Notes:

Liability of drawer before acceptance

The drawer of a bill undertakes that when it is presented tothe drawee he will accept it; any by acceptance is meant anundertaking on the acceptor’s part to pay the bill according to itstenor.782 Until the bill has been accepted, the drawer is the primarydebtor, and his liability is contingent and conditioned upon a strictcompliance with the law as to presentment of the bill foracceptance (if the bill be of such a character that it is necessaryto present it for acceptance), and due protest and notice ofdishonor. After acceptance, the drawer becomes secondarilyliable, and his position is that of the first indorser upon a promissorynote.783 (Daniel, Elements of the Law of Negotiable Instruments,page 172)

Relation of drawee to bill before acceptance

Until he has accepted the bill, so entirely is the drawee astranger to it, that he may himself discount it. And he may thentransfer it as the bona fide holder to another, who may sue andcharge the drawer.784 (Daniel, Elements of the Law of NegotiableInstruments, page 173)

782 Story on Bills, 272; Cox v. National Bank, 100 U.S. 712783 Daniel on Negotiable Instruments, 479784 Desha v. Stewart, 6 Ala. 852; Swope v. Ross, 40 Pa. St. 186


Sec. 151. Rights of holder where bill not accepted. - When abill is dishonored by non-acceptance, an immediate right ofrecourse against the drawer and indorsers accrues to theholder and no presentment for payment is necessary.

XII. PROTEST

Meaning of term “Protest”

The term includes, in a popular sense, all the steps taken tofix the liability of a drawer or indorser, upon the dishonor ofcommercial paper to which he is a party. More accuratelyspeaking, it is the solemn declaration on the part of the holderagainst any loss to be sustained by him by reason of the non-acceptance, or even nonpayment, as the case may be, of the billin question; and a calling of the notary to witness that due stepshave been taken to prevent it. The word “protest” signifies totestify before; and the testimony before the notary that propersteps were taken to fix the drawer’s liability is the substance, andthe certificate of the notary the formal evidence, to which the termsprotest is legally applicable.785 (Daniel, Elements of the Law ofNegotiable Instruments, page 225)

What instruments must or may be protested

When a foreign bill of exchange is presented for acceptanceor payment, and acceptance or payment is refused, the holdermust take what is called a protest, in order to charge the draweror any indorser. According to the law of most foreign nations, aprotest is essential in the case of the dishonor of any bill.786 Soindispensable is the protest of a foreign bill in case of its dishonor,that no other evidence will supply the place of it, and no part ofthe facts requisite to the protest can be proved by extraneoustestimony, and it has been said, that it is a part of the constitutionof a foreign bill.787 (Ibid, page 226)

By whom the protest should be made and how authenticated

As to the person by whom the protest should be made, it isnecessary, as a general rule, that it should be made by a notary

785 Daniel on Negotiable Instruments, 929786 Thompson on Bills (Wilson’s ed.), 307787 Union Bank v. Hyde, 6 Wheat. 572; Borough v. Perkins, 1 Salk. 121

453

public in person, and by the same notary who presented and notedthe bill.788 The notary is a public officer, commissioned by theState, and possessing an official seal, and full faith and credit aregiven to his official acts, in foreign countries as well as his own.789

But when no notary can be conveniently found, the protest maybe made by any respectable private individual residing in the placewhere the bill is dishonored.790 If, however, the protest is madeby a notary, the official seal of the notary attached to the certificateof protest is everywhere received as a sufficient prima facie proofof its authenticity. The courts take judicial notice of the seal, andit proves itself by its appearance upon the certificate. But may becontroverted as false, fictitious, or improperly annexed.791 But ifthe protest is made by a notary, and the certificate is notauthenticated by the notary’s seal, or if it is made by a privateperson, it does not prove itself, and there must be extraneousevidence to show that it was duly made by the person officiating.792

(Supra, page 227-228)

Place of protest

It is usually made at the place where the dishonor occurs.793

If the protest be for non-acceptance, the place of protest shouldbe the place where the bill is presented for acceptance, and a likerule obtains if the protest be for nonpayment;794 but when the billis drawn upon the drawee in one place, and by its terms madepayable in another, there is eminent authority for the statementthat the protest for non-acceptance may be made at either place.795

(Supra, page 228)

The presentment and demand of payment; notary must havepersonal knowledge of

The first step taken is the presentment of the instrument to

788 Ocean Nat. Bank v. Williams, 102 Mass. 141; Sacriber v. Brown. 3 McLean,481; Commercial Bank v. Varnum, 49 N.Y. 269; Commercial Bank v.Barksdale, 36 Mo. 563

789 Daniel on Negotiable Instruments, 579, 587790 Burke v. McKay, 2 How. 66; Read v. Bank of Kentucky, 1 T.B. Mon. 91791 Pierce v. Indseth, 106 U.S. 549; Nichols v. Webb, 8 Wheat. 326; Bradley

v. Northern Bank, 60 Ala. 258792 Carter v. Burley, 9 N.H. 558; Chanoine v. Fowler, 3 Wend. 173793 Benjamin’s Chalmer’s Digest, 175; Ames on Bills and Notes, 450; Edwards

on Bills, 580794 Story on Bills, 282795 Chitty on Bills, [334], 374


the drawee, or acceptor, or maker, by the notary, and a demandof payment. By the law merchant, it is absolutely necessary thatthe notary himself should make his formal presentment anddemand. And, although the holder may have already presentedthe bill and demanded acceptance or payment, and been refused,it is still necessary that the presentment and demand, which areto be made the basis of the notary’s certificate, should be madeby him in person. For otherwise his testimony contained in theprotest would be hearsay and secondary, and would lack the veryelement of certainty which the protest is especially designed toassure. Not even his clerk, nor, unless authorized by law, hisdeputy, can perform these functions for the notary, as it is to hisofficial character that the law imputes the solemnity and sanctionwhich are accorded his certificate.796 (Supra, page 228-229)

What certificate must contain

The protest, or, more strictly speaking, the notarial certificatethereof, should set forth: (1) The time of presentment; (2) Theplace of presentment; (3) The fact and manner of presentment;(4) The demand of payment; (5) The fact of dishonor; (6) Thename of the party by whom presentment was made; and (7) Thename of the person to whom presentment was made.797 (Supra,page 229)

Protest; evidence only of facts that are and should be stated

The admission of the certificate of protest as evidence onlymakes it evidence of such facts as it should and does distinctlystate.798 The purpose of the certificate, as it has been seen, is toenable the plaintiff, by this species of documentary evidence, toprove all of the essential requirements of a formal and legalpresentment of the instrument for acceptance or payment, andthat due demand was made and that the bill or note was in factdishonored. It follows, therefore, that the certificate of protestcan be taken as evidence only as to the essentials stated, andhence the certificate is not evidence of any collateral facts whichmay be stated in it. (Supra, page 233)

796 Daniel on Negotiable Instruments, 579, 587, 938797 Daniel on Negotiable Instrument, 950798 Duchess County Bank v. Ibbottaon, 5 Den. 110

455

Sec. 152. In what cases protest necessary. - Where a foreignbill appearing on its face to be such is dishonored by non-acceptance, it must be duly protested for non-acceptance,by non-acceptance is dishonored and where such a bill whichhas not previously been dishonored by nonpayment, it mustbe duly protested for nonpayment. If it is not so protested,the drawer and indorsers are discharged. Where a bill doesnot appear on its face to be a foreign bill, protest thereof incase of dishonor is unnecessary.

Notes:

Contract of an indorser and Contract of a guarantor/suretydistinguished.

The distinction was laid down in the case of Allied Banking

Corporation vs. Court of Appeals, et al799, to wit:

1. The contract of indorsement is primarily that of transfer,while the contract of guaranty is that of personalsecurity.800

2. The liability of a guarantor/surety is broader than that ofan indorser.

3. Unless the bill is promptly presented for payment atmaturity and due notice of dishonor given to the indorserwithin a reasonable time, he will be discharged fromliability thereon.801 On the other hand, except whererequired by the provisions of the contract of suretyship,a demand or notice of default is not required to fix thesurety’s liability.802

Sec. 153. Protest; how made. - The protest must be annexedto the bill or must contain a copy thereof, and must be underthe hand and seal of the notary making it and must specify:

(a) The time and place of presentment;

799 G.R. No. 125851, July 11, 2006, [Quisumbing, J.]800 Acme Shoe, Rubber & Plastic Corp. v. Curt of Appeals, G.R. No. 103576,

August 22, 1996, 260 SCRA 714, 719801 Supra note 5 (Sec. 152. NIL)802 Umali v. Court of Appeals, G.R. No. 126490, March 31, 1998, 288 SCRA

422, 439


(b) The fact that presentment was made and the mannerthereof;

(c) The cause or reason for protesting the bill;

(d) The demand made and the answer given, if any, orthe fact that the drawee or acceptor could not befound.

Sec. 154. Protest, by whom made. - Protest may be made by:

(a) A notary public; or

(b) By any respectable resident of the place where thebill is dishonored, in the presence of two or morecredible witnesses.

Sec. 155. Protest; when to be made. - When a bill is protested,such protest must be made on the day of its dishonor unlessdelay is excused as herein provided. When a bill has beenduly noted, the protest may be subsequently extended as ofthe date of the noting.

Illustrative Case:

A bill was protested on the 25th September, but nothing onthe bill was 24th September. The extended protest dated 25th

September contained 25th September was date of noting. Theprotest was held invalid. (M’Pherson v. Wright, 12 Secs, Cas.942, cited in Brannan, page 143)

Sec. 156. Protest; where made. - A bill must be protested atthe place where it is dishonored, except that when a bill drawnpayable at the place of business or residence of some personother than the drawee has been dishonored by non-acceptance, it must be protested for non-payment at the placewhere it is expressed to be payable, and no furtherpresentment for payment to, or demand on, the drawee isnecessary.

Sec. 157. Protest both for non-acceptance and non-payment.

- A bill which has been protested for non-acceptance may besubsequently protested for non-payment.

457

Sec. 158. Protest before maturity where acceptor insolvent. -Where the acceptor has been adjudged a bankrupt or aninsolvent or has made an assignment for the benefit ofcreditors before the bill matures, the holder may cause thebill to be protested for better security against the drawer andindorsers.

Sec. 159. When protest dispensed with. - Protest is dispensedwith by any circumstances which would dispense with noticeof dishonor. Delay in noting or protesting is excused whendelay is caused by circumstances beyond the control of theholder and not imputable to his default, misconduct, ornegligence. When the cause of delay ceases to operate, thebill must be noted or protested with reasonable diligence.

Sec. 160. Protest where bill is lost and so forth. - When a billis lost or destroyed or is wrongly detained from the personentitled to hold it, protest may be made on a copy or writtenparticulars thereof.

XIII. ACCEPTANCE FOR HONOR

There is a peculiar kind of acceptance called acceptancefor honor, or supra protest. This most frequently happens whenthe original drawee (and the drawee au besoin, if any) refuses toaccept the bill, in which case a stranger may accept the bill forthe honor of some one of the parties thereto, which acceptancewill inure to the benefit of all the parties subsequent to him forwhose honor it was accepted.803 (Daniel, Elements of the Law ofNegotiable Instruments, page 183-184)

An acceptance for honor is only allowable when acceptanceby the drawee has been refused, and then the bill has beenprotested, and hence it is called acceptance supra protest.804

The reason assigned for this is that the drawers andindorsers have a right to say that the bill was not primarily drawnon the acceptor for honor; and the only proof of the refusal of the

803 Konig v. Bayard, 1 Pet 250; Hoare v. Cazenove, 16 East, 391; Story onBills, 255, 256

804 Bailey on Bills, 177; Story on Bills, 255, 256


original drawee is by protest, that being the known instrument, bythe customs of merchants, to establish the facts.805 The usualform used in such acceptance is, “Accepted supra protest, for thehonor of A.B.” Another approved form is, “Accepted under protest,for the honor of A.B., and will be paid for his account, if regularlyprotested and refused when due.” It is essential that the acceptorfor honor appear before a notary public and declare that he acceptsthe protested bill in honor of the drawer or indorser, as the casemay be, and that he will pay it at the appointed time.806 (Ibid)

It is the duty of the acceptor supra protest, as soon as hehas made the acceptance, to notify the fact to the party for whosehonor it is done;807 and the party paying a bill under protest forhonor must give reasonable notice to the person for whose honorhe pays, otherwise he will not be bound to refund.808 (Ibid)

Who may be an acceptor for honor?

A stranger may undoubtedly accept for honor; and by theword stranger in this connection is meant any third person not aparty to the bill. It seems that acceptance for honor may also bemade by the drawee, who, if he does not choose to accept the billdrawn generally on account of the person in whose favor, or onwhose account, he is advised it is drawn, he may accept it forhonor of the drawer, or of the indorsers, or of all or any of them.809

(Ibid, page 185)

But if the drawee were bound in good faith to accept thebill, he cannot change his relations to the parties, and accept itsupra protest for the honor of an indorser; he must either acceptor refuse.810 (Ibid)

An acceptor supra protest for the honor of an indorser may,however, recover against such indorser, though he accepted atthe instance of the drawee, and as his agent, provided the indorserwere not thereby damnified. The indorser might avail himself ofany defense which he could have made, and the drawee accepted

805 Story on Bill, 256806 Gazzam v. Armstrong, 3 Dana, 554807 Story on Bills, 259; Edwards on Bills, 441808 Wood v. Pugh, 7 Ohio, Pt. II, 156809 Story on Bills, 259810 Schimmelpennich v. Bayard, 1 Pet. 264

459

for his honor, and then sued upon the acceptance.811 It isimmaterial, indeed, as to the defenses which a drawer or indorsermay make against an acceptor for honor, whether such acceptoracted at the instance of the drawer, or as the agent of the drawee.812

(Ibid)

Several acceptors for honor of different parties

While there cannot be successive acceptors of a bill,generally speaking, there may be several acceptors supra protest

for the honor of different parties—that is, one may accept for thehonor of the drawer, another for the honor of the first indorser,and another for the honor of the second indorser, and so on.813

(Ibid, page 185)

And the acceptor supra protest may accept for the honor ofany one, or all, of the parties to the bill; and his acceptance shoulddesignate for whose honor it was made, in which case it could beat once perceived for who benefit it inured.814 If the acceptancedo not specify for whose honor it was made, it will be construed tobe for the honor of the drawer;815 and if for the honor of the bill, orof all the parties, it should be so expressed.816 (Ibid, pages 185-186)

Sec. 161. When bill may be accepted for honor. - When a billof exchange has been protested for dishonor by non-acceptance or protested for better security and is not overdue,any person not being a party already liable thereon may, withthe consent of the holder, intervene and accept the bill supra

protest for the honor of any party liable thereon or for thehonor of the person for whose account the bill is drawn. Theacceptance for honor may be for part only of the sum forwhich the bill is drawn; and where there has been anacceptance for honor for one party, there may be a furtheracceptance by a different person for the honor of anotherparty.

811 Konig v. Bayard, 1 Pet, 250812 Gazzam v. Armstrong, 3 Dana, 554; Wood v. Pugh, 7 Ohio, 156813 Story on Bills, 260; Byles on Bills [255], 403; 1 Parsons on Notes and

Bills, 315814 Hussey v. Jacob, 1 Ld. Raym. 88; 1 Parsons on Notes and Bills, 313815 Gazzam v. Armstrong, 3 Dana, 552816 Goodall v. Polhill, 1 C.B. 233; Byles on Bills [259], 406


Sec. 162. Acceptance for honor; how made. - An acceptancefor honor supra protest must be in writing and indicate thatit is an acceptance for honor and must be signed by theacceptor for honor.

Sec. 163. When deemed to be an acceptance for honor of the

drawer. - Where an acceptance for honor does not expresslystate for whose honor it is made, it is deemed to be anacceptance for the honor of the drawer.

Sec. 164. Liability of the acceptor for honor. - The acceptorfor honor is liable to the holder and to all parties to the billsubsequent to the party for whose honor he has accepted.

Notes:

Liability of the acceptor for honor

The acceptance for honor or supra protest is not an absoluteengagement like an ordinary acceptance for value. It is aconditional engagement, and to render it absolute, theperformance of several acts as conditions precedent are essential.Such an acceptance, says Lord Tenterden, C.J., “is to beconsidered not as absolutely such, but in the nature of a conditionalacceptance. It is equivalent to saying to the holder of the bill,‘keep this bill, don’t return it, and when the time arrives at which itought to be paid, if it be not paid by the party to whom it wasoriginally drawn, come to me and you shall have your money.’”817

The nature of such an acceptor’s undertaking is more analogousto that of an indorser818 than that of an ordinary acceptor, and torender him absolutely liable it is necessary:

First. To present the bill at maturity to the original drawee,notwithstanding his prior refusal, because between the time ofsuch refusal and the time of maturity, effects may have reachedthe drawee, out of which he might, if the bill were again presented,pay it; and the drawer and other parties are entitled to the chanceof any benefit which might arise from such second demand. Andif it were not made (except in the case of a bill made payable at a

817 Williams v. Germaine, 7 B & C 457818 1 Parsons on Notes and Bills, 315

461

place not being the residence of the drawee), the drawer andindorsers would be discharged; and as the acceptor supra protest

would thereby lose recourse against him, he is also discharged.819

Second. Upon refusal by the original drawee to pay the billwhen it is presented at maturity, it must be again protested fornonpayment, and such protest and presentment must be allegedin the declaration against the acceptor supra protest. And third, itis then necessary to present the bill in due time to the acceptorsupra protest.820

If on such presentment the acceptor supra protest refusesto pay, there must be another formal protest, stating thepresentment for payment to the drawee, the protest for hisnonpayment, the presentment of the bill and acceptance to theacceptor supra protest, and demand of payment of him, and theprotest for his nonpayment; and notice thereof must be forthwithforwarded to the drawer and indorsers.821 (Daniel, Elements ofthe Law of Negotiable Instruments, page 187)

Admissions of acceptor for honor

The rule has been broadly stated to be that he does notadmit the genuineness of the signature of any party for whosehonor the acceptance is given, not even the drawer’s and thereforehe could recover money paid to the holder if the bill should proveto be a forgery;822 but the rule stated is certainly subject to themodification that one who accepts for the honor of the drawer isestopped from denying that the bill is a valid bill; and, consequently,it would not be competent for him to set up a defense to an actionby an indorsee that the payee is a fictitious person, and that hewas ignorant of the fact at the time he accepted the bill.823 (Supra,page 188)

Holder not bound to take acceptance for honor

The holder is in no case bound to take an acceptance forhonor;824 but if he receives it, and it is for the honor of a particular

819 Barry v. Clark, 19 Pick. 220; Story on Bills, 261820 Chitty on Bills [350, 351], 392; Story on Bills, 261821 Chitty on Bills [352], 393; 1 Parsons on Notes and Bills, 320822 1 Parsons on Notes and Bills, 323823 Phillips v. Thurn, 18 C.B. (N.S.) 694824 Mitford v. Walcott, 12 Mod. 410; Chitty on Bills [345], 387


party, he cannot sue such party until the maturity of the bill, andits dishonor by the acceptor supra protest.825 And if the acceptanceis for the honor of all the parties to the bill, he cannot sue any ofthem until it has matured and been dishonored.826 (Supra, page188)

Sec. 165. Agreement of acceptor for honor. - The acceptorfor honor, by such acceptance, engages that he will, on duepresentment, pay the bill according to the terms of hisacceptance provided it shall not have been paid by the draweeand provided also that is shall have been duly presented forpayment and protested for non-payment and notice ofdishonor given to him.

Sec. 166. Maturity of bill payable after sight; accepted for

honor. - Where a bill payable after sight is accepted for honor,its maturity is calculated from the date of the noting for non-acceptance and not from the date of the acceptance for honor.

Notes:

Professor Ames explains that: “[s]ection 166 enacts that thematurity of an acceptance for honor of a bill payable after sightshall be calculated from the date of the noting for non-acceptance,and not, as was erroneously decided in Williams v. Germaine827,from the date of the acceptance for honor.” (Brannan, page 146)

Sec. 167. Protest of bill accepted for honor, and so forth. -Where a dishonored bill has been accepted for honor supraprotest or contains a referee in case of need, it must beprotested for non-payment before it is presented for paymentto the acceptor for honor or referee in case of need.

Sec. 168. Presentment for payment to acceptor for honor,

how made. - Presentment for payment to the acceptor forhonor must be made as follows:

(a) If it is to be presented in the place where the protestfor non-payment was made, it must be presented notlater than the day following its maturity.

825 Williams v. Germaine, 7 B & C, 468826 Story on Bills, 258827 7 B & C, 408

463

(b) If it is to be presented in some other place than theplace where it was protested, then it must beforwarded within the time specified in Section onehundred and four.

Sec. 169. When delay in making presentment is excused. -The provisions of Section eighty-one apply where there isdelay in making presentment to the acceptor for honor orreferee in case of need.

Sec. 170. Dishonor of bill by acceptor for honor. - When thebill is dishonored by the acceptor for honor, it must beprotested for non-payment by him.

XIV. PAYMENT FOR HONOR

Sec. 171. Who may make payment for honor. - Where a billhas been protested for non-payment, any person mayintervene and pay it supra protest for the honor of any personliable thereon or for the honor of the person for whoseaccount it was drawn.

Sec. 172. Payment for honor; how made. - The payment forhonor supra protest, in order to operate as such and not as amere voluntary payment, must be attested by a notarial actof honor which may be appended to the protest or form anextension to it.

Sec. 173. Declaration before payment for honor. - The notarialact of honor must be founded on a declaration made by thepayer for honor or by his agent in that behalf declaring hisintention to pay the bill for honor and for whose honor hepays.

Sec. 174. Preference of parties offering to pay for honor. -Where two or more persons offer to pay a bill for the honorof different parties, the person whose payment will dischargemost parties to the bill is to be given the preference.

Sec. 175. Effect on subsequent parties where bill is paid for

honor. - Where a bill has been paid for honor, all parties


subsequent to the party for whose honor it is paid aredischarged but the payer for honor is subrogated for, andsucceeds to, both the rights and duties of the holder asregards the party for whose honor he pays and all partiesliable to the latter.

Sec. 176. Where holder refuses to receive payment supra

protest. - Where the holder of a bill refuses to receive paymentsupra protest, he loses his right of recourse against any partywho would have been discharged by such payment.

Sec. 177. Rights of payer for honor. - The payer for honor, onpaying to the holder the amount of the bill and the notarialexpenses incidental to its dishonor, is entitled to receive boththe bill itself and the protest.

XV. BILLS IN SET

Notes:

In order to avoid delay and inconvenience which may resultfrom the loss or miscarriage of a foreign bill, and to facilitate andexpedite its transmission for acceptance or payment, the customhas prevailed from an early period for the drawer to draw anddeliver to the payee several parts of the same bill of exchange,which may be forwarded by different conveyances, and any oneof them being paid, the others are to be void. These several partsare called a set, and constitute in law one and the same bill.828

Sometimes there are four, but usually three parts.829 And if anyperson undertakes to draw or deliver a foreign bill to anotherperson, it seems that he is bound to deliver the usual number ofparts,830 and it has been thought that the promise may, in such acase, demand as many parts as he pleases.831 (Daniel, Elementsof the Law of Negotiable Instruments, page 39)

It is usual for the drawer, and to his protection it is essential,to incorporate in each part of the set a condition that it shall only

828 Daniel on Negotiable Instruments, 113; Story on Bills, 66829 Daniel on Negotiable Instruments, 113; Story on Bills, 66830 Kearney v. West Granada Mining Co., 1 H & N, 412831 Chitty on Bills [154], 178; Byles on Bills [376], 556

465

be payable provided the other remains unpaid. This operates asnotice to the world that all the parts constitute one bill, and if draweepay any part, the whole is extinguished.832

The drawee should accept but one part of the set. Andhaving accepted one part, he should not pay another part, for hewould still be liable on the accepted part.833 When, however, hepays the part he accepts, the whole bill is extinguished.834 For itis the duty of the person taking one part to inquire after the others;and he is advertised by their absence they, or one of them, maybe outstanding in the hands of a prior bona fide holder.835

Sec. 178. Bills in set constitute one bill. - Where a bill is drawnin a set, each part of the set being numbered and containinga reference to the other parts, the whole of the partsconstitutes one bill.

Sec. 179. Right of holders where different parts are

negotiated. - Where two or more parts of a set are negotiatedto different holders in due course, the holder whose title firstaccrues is, as between such holders, the true owner of thebill. But nothing in this section affects the right of a personwho, in due course, accepts or pays the parts first presentedto him.

Sec. 180. Liability of holder who indorses two or more parts

of a set to different persons. - Where the holder of a setindorses two or more parts to different persons he is liableon every such part, and every indorser subsequent to him isliable on the part he has himself indorsed, as if such partswere separate bills.

Sec. 181. Acceptance of bill drawn in sets. - The acceptancemay be written on any part and it must be written on one partonly. If the drawee accepts more than one part and suchaccepted parts negotiated to different holders in due course,he is liable on every such part as if it were a separate bill.

832 Daniel on Negotiable Instruments, 114; Ingraham v. Gibbs, 2 Dall 134833 Holdsworth v. Hunter, 10 B & C, 449; Chitty on Bills [155], 178834 Ibid835 Lang v. Smyth, 7 Bing, 284, 294; 5 M & P, 7


Sec. 182. Payment by acceptor of bills drawn in sets. - Whenthe acceptor of a bill drawn in a set pays it without requiringthe part bearing his acceptance to be delivered up to him,and the part at maturity is outstanding in the hands of a holderin due course, he is liable to the holder thereon.

Sec. 183. Effect of discharging one of a set. - Except as hereinotherwise provided, where any one part of a bill drawn in aset is discharged by payment or otherwise, the whole bill isdischarged.

XVI. PROMISSORY NOTES AND CHECKS

Sec. 184. Promissory note, defined. - A negotiable promissorynote within the meaning of this Act is an unconditionalpromise in writing made by one person to another, signed bythe maker, engaging to pay on demand, or at a fixed ordeterminable future time, a sum certain in money to order orto bearer. Where a note is drawn to the maker’s own order, itis not complete until indorsed by him.

Notes:

A complaint on a note payable to the maker’s order whichfails to allege indorsement by the maker is defective. (Simon v.Mintz, 51 Misc. Rep. 670, 101 N.Y. Supp. 86; Edelman v. Rams,58 Misc. Rep. 561, 109 N.Y. Supp. 816, cited in Brannan, page150)

Illustrative Cases:

An instrument reading “Having been cause of a money lossto my friend X, I have given her three hundred dollars. I hold thisamount in trust for her and one year after date or thereafter, ondemand, I promise to pay to the order of X, her heirs or assigns,three hundred dollars with interest” is a valid promissory note. Asit does not appear upon the fact that there was no considerationor an invalid consideration, it will be presumed that there was avalid consideration. In the absence of evidence to the contrarythe court must assume that the money loss referred to was legallychargeable to the maker. (Hickok v. Bunting, 92 App. Div. 167, 86N.Y. Supp. 1059, cited in Brannan, page 151)

467

A stipulation in a promissory note that “no extension of timeof payment, with or without our knowledge, by the recipient ofinterest or otherwise, shall release us or either of us from theobligation of payment” is an express contract that the time ofpayment may be extended to any one or all of the sureties,guarantors, indorsers, or makers of the note without notice to allor any one of them and renders the note non-negotiable. (UnionStockyards Nat. Bank v. Bolan, 14 Idaho 87, 93 Pac. 508, 125Am. St. Rep. 146, ibid)

Sec. 185. Check, defined. - A check is a bill of exchange drawnon a bank payable on demand. Except as herein otherwiseprovided, the provisions of this Act applicable to a bill ofexchange payable on demand apply to a check.

Notes:

The provision that a check is a bill of exchange is declaratory.(M’Lean v. Clydesdale Banking Co., 9 App. Cas. 95, cited inBrannan, page 152)

An order on a bank to pay “provided the receipt form at thefoot hereof is duly signed, stamped, and dated,” is not anunconditional order to pay and is therefore not a check. (Bavinsv. London & S.w. Bank, [1900] 1 Q.B. 270, ibid)

But a check which bore at the foot the words “The receipt atthe back hereof must be signed, which signature will be taken asan indorsement of the check,” and on the check of which was areceipt form, is negotiable, since the order to pay is unconditional,the words at the foot not being addressed to the bankers and notaffecting the order to them. (Nathan v. Ogdens, 21 T.L.R., 775(semble), ibid)

Illustrative Case:

A deposit in the A bank by the drawer of a certified check ofthe B bank is not the same as a deposit of cash, although theamount is credited to the depositor, and if the B bank fails thedepositor cannot hold the A bank, no negligence in failing topresent the check for payment being shown. (Gaden v.Newfoundland Savings Bank [1899] A.C. 281, Privy Council, ibid)


Sec. 186. Within what time a check must be presented. - Acheck must be presented for payment within a reasonabletime after its issue or the drawer will be discharged fromliability thereon to the extent of the loss caused by the delay.

Notes:

This refers only to delay in the presentment of checks but issilent on delay in giving notice of dishonor. (Great Asian Sales

Center Corporation vs. Court of Appeals, G.R. No. 105774, April

25, 2002, [Carpio, J.])

Where the payee of a check indorsed and deposited it inhis own bank, which credited him with the amount as cash to bedrawn against, the bank became prima facie the owner of thecheck and not a mere agent to collect, and in order to charge thepayee as indorser the bank must present the check to the draweebank within a reasonable time. (Aebi v. Bank of Evansville, 124Wis. 73, 102 N.W. 329, 68 L.R.A. 964, 109 Am. St. Rep. 925,cited in Brannan, page 153)

The indorser of a check does not waive delay in presentmentand renew his obligation by procuring and indorsing a duplicateof a lost check from liability upon which he has been dischargedby such delay. (ibid)

Although under sec. 185 a check is a bill of exchangepayable on demand, it is intended for immediate use and not tocirculate as a promissory note. Therefore the transfer of a checkto successive holders, where it is drawn and delivered in the placewhere the drawee bank is located, does not extend the time forpresentment. If the check is delivered on one day and is notpresented before the close of banking hours the next businessday, the drawer is discharged to the extent of the loss sufferedfrom the failure to present. (Gordon v. Levine, 194 Mass. 418, 80N.E. 505, 120 Am. St. Rep. 565; Matlcok v. Scheuerman, 51Oregon 49, 93 Pac. 823, 17 L.R.A. (N.S.) 747, S.C. secs. 25, 53,56; Dehoust v. Lewis, 128 App. Div. 131, 112 N.Y. Supp. 559,ibid)

In an action on a check unpaid because of the payee’s failureto present within a reasonable time and until after the closing of

469

the drawee bank, the burden is on the plaintiff to show that thedrawer has suffered no loss by said delay. (Dehouset v. Lewis,supra)

Sec. 187. Certification of check; effect of. - Where a check iscertified by the bank on which it is drawn, the certification isequivalent to an acceptance.

Notes:

The holder has no right to demand from the bank anythingbut payment of the check. And the bank has no right, as againstthe drawer, to do anything else but pay it. Consequently, there isno such thing as acceptance of checks in the ordinary sense ofthe term. For acceptance ordinarily implies that the drawerrequests the drawee to pay the amount at a future day, and thedrawee “accepts” to do so, thereby becoming the principal debtor,and the drawer being his surety. But still, by consent of the holder,the bank may enter into an engagement quite similar to that ofacceptance, by certifying the check to be “good” instead of payingit.836

Where the drawer of a check before delivery to the payeeprocuress its certification and the bank fails before presentationfor payment, the bank is not liable on the check of the drawer, butonly to the holder, and therefore the drawer on receiving the checkfrom the payee cannot set it off against a debt to the bank.(Schlesinger v. Kurzok, 47 Misc. R. 634, 94 N.Y. Supp. 442, citedin Brannan, page 154)

Notice to a bank by a depositor that his certified check,indorsed in blank, had been lost and to stop payment would notjustify the bank in refusing payment to a holder in due course.(Poess v. Twelfth Ward Bank, 43 Misc. R. 45, 86 N.Y. Supp. 857,semble, S.C. secs. 16, 51., ibid)

Illustrative Case:

The payee of a check given to him for value transferred it,also for value, to plaintiff, but without indorsing it. The payee diedthe next day, and the drawer, although having no equities against

836 Daniel on Negotiable Instruments, 1601


the check, stopped payment. Plaintiff subsequently sent the checkto the drawee bank, and the teller certified it without asking anyquestions. Held, that under sec. 49 N.I.L. the title of the payeevested in the plaintiff, and that the bank was liable to him upon itscertification. (Meuer v. Phoenix Nat. Bank, 94 App. Div. 331, 88N.Y. Supp. 83, S.C. sec. 49, ibid)

Sec. 188. Effect where the holder of check procures it to be

certified. - Where the holder of a check procures it to beaccepted or certified, the drawer and all indorsers aredischarged from liability thereon.

Notes:

By certifying a check (1) the bank becomes the principaland only debtor; (2) the holder by taking a certificate of the checkfrom the bank, instead of requiring payment, discharges thedrawer;837 (3) and the check then circulates as the representativeof so much cash in bank, payable on demand to the holder. Suchin brief is the effect of the certification of a check. It has beensaid to be, and obviously is, “equivalent to acceptance”838 in respectto the obligation it creates upon a bank; but it would be confoundingterms to regard it as altogether the same thing in its effect uponthe relations of parties. (Daniel, page 22)

The certification by a bank of an acceptance made payableat its counter by one of its customers, has the same effect andimports the same obligation on the part of the bank as the likecertification of a check drawn upon it.839 It is a short-hand certificateof deposit.840 (ibid)

No particular words are essential to a legal certification of acheck—it is usual to use the word “good”841—it is sufficient if thename or initials of the proper officer is written on, or across, thefact of the check.842

837 Boyd v. Nasmith, 17 Ont. 42, citing Daniel on Negotiable Instruments,1601a

838 Merchants’ Bank v. State Bank 10 Wall. 647839 Flour City Nat. Bank v. Traders’ Nat. Bank, 42 Hun, 244840 Thomas v. Bank of British North America, 82 N.Y. 1; Farmers’ Bank v.

Bank of Allen County (Tenn.), 12 S.W. 545841 Barnet v. Smith, 10 Fost. 256842 Morse on Banking, 284

471

The mere acceptance by the payee of a check certified bythe procurement of the drawer is not a discharge of the drawer,even though the bank at the time the check was certifiedtransferred the amount to the credit of the payee, such transferbeing without the knowledge or acquiescence of the payee.(Cullinan v. Union Surety & Guaranty Co., 79 App. Div. 409, 80N.Y. Supp. 58, cited in Brannan, page 105)

But where the holder procures certification of a check, thisis payment to the amount of the check, and where the checkcontained a statement on the back that it was to be in full payment,such procuring of certification is an acceptance of the check infull payment. (St. Regis Paper Co. v. Tonawanda Co., 107 App.Div. 90, 94, N.Y. Supp. 946, ibid)

When the holder procures certification of a check, the draweris discharged and the bank becomes a debtor to the holder andcannot avoid payment by showing that the holder obtained thecheck from the drawer by false pretenses. The certification hasthe same effect as if the holder had drawn the money, re-depositedit and taken a certificate of deposit of it. (Brannan, page 155)

Sec. 189. When check operates as an assignment. - A checkof itself does not operate as an assignment of any part of thefunds to the credit of the drawer with the bank, and the bankis not liable to the holder unless and until it accepts or certifiesthe check.

Notes:

Before its payment or certification by the bank the drawerof a check may countermand the order, and payment thereafterto the payee by the bank is wrongful. (Pease & Dwyer v. StateNat. Bank, 114 Tenn. 693, 88 S.W. 172, cf. Unaka Bank v. Butler,supra, sec. 56; Poess v. Twelfth Ward Bank, supra, sec. 187.) Abank is under no legal obligation to the holder of an unacceptedand uncertified check. Payment is therefore voluntary and cannotbe recovered back from a bona fide holder on the ground that thedrawer had previously countermanded payment of the check.(National Bank v. Berrall, 70 N.J.L. 757, 58 Atl. 189, 103 Am. St.Rep. 821, cited in Brannan, page 156)


A drawee bank paid and charged to the account of thedrawer checks indorsed by an agent of the payee who had noauthority to indorse or collect the checks, and who appropriatedthe money. Held, that the bank was not liable to the payee inassumptsit for money had and received. (B & O. Ry. Co. v. FirstNat. Bank, 102 Va. 753, 47 S.E. 837, ibid)

A bank being asked to cash a check on another bank,telephones to the drawee bank and was informed that the checkwas “good” or “all right,” and thereupon cashed the check, butbefore presentment for payment the drawer notified the draweebank not to pay the check. Held, the drawee bank was not liableon the check, because it was not acceptor or certified in writing.(Van Buskirk v. State Ban, 35 Colo. 142, 83 Pac. 778, 117 Am. St.Rep. 182, ibid)

Notwithstanding section 189, an action in equity will lie bythe payee of a check to whom an assignment of the fund wasalso given, and such assignment will be upheld againstsubsequent claimants. (Hope v. Stanhope State Bank, 138 Iowa,39, 115 N.E. 476, cited in Brannan, page 156)

XVII. GENERAL PROVISIONS

Sec. 190. Short title. - This Act shall be known as theNegotiable Instruments Law.

Sec. 191. Definition and meaning of terms. - In this Act, unlessthe contract otherwise requires:

“Acceptance” means an acceptance completed bydelivery or notification;

”Action” includes counterclaim and set-off;

”Bank” includes any person or association of personscarrying on the business of banking, whetherincorporated or not;

”Bearer” means the person in possession of a bill ornote which is payable to bearer;

473

”Bill” means bill of exchange, and “note” meansnegotiable promissory note;

”Delivery” means transfer of possession, actual orconstructive, from one person to another;

”Holder” means the payee or indorsee of a bill or notewho is in possession of it, or the bearer thereof;

”Indorsement” means an indorsement completed bydelivery;

”Instrument” means negotiable instrument;

”Issue” means the first delivery of the instrument,complete in form, to a person who takes it as a holder;

”Person” includes a body of persons, whetherincorporated or not;

”Value” means valuable consideration;

”Written” includes printed, and “writing” includes print.

Notes:

BEARER

The maker of a note who has obtained possession of it bytheft after it has been indorsed in blank by the payee is the bearerwithin the meaning indorsed in bank by the aye is the bearer withinthe meaning of the statute. (Mass Nat. Bank. v. Snow, 187 Mass.159 , 72 N.E, 959, S.C., secs. 9-5, 16, 56, 124, cited in Brannan,page 158)

INDORSEMENT

The possessor of an undisclosed bill payable to order, whois not the payee is neither a “holder” not a “bearer”. (Day v.Longhurst, W.N. (1893), cited in Brannan, page 158)


Sec. 192. Persons primarily liable on instrument. - The person“primarily” liable on an instrument is the person who, by theterms of the instrument, is absolutely required to pay thesame. All other parties are “secondarily” liable.

Note:

An accommodation maker is a person primarily liable eventhough he add the word “surety” to his signature or the fact thathe signed for accommodation is otherwise known to the holder.(Cited in Brannan, page 159)

Sec. 193. Reasonable time, what constitutes. - In determiningwhat is a “reasonable time” regard is to be had to the natureof the instrument, the usage of trade or business with respectto such instruments, and the facts of the particular case.

Sec. 194. Time, how computed; when last day falls on holiday.

- Where the day, or the last day for doing any act hereinrequired or permitted to be done falls on a Sunday or on aholiday, the act may be done on the next succeeding secularor business day.

Sec. 195. Application of Act. - The provisions of this Act donot apply to negotiable instruments made and delivered priorto the taking effect hereof.

Sec. 196. Cases not provided for in Act. - Any case notprovided for in this Act shall be governed by the provisionsof existing legislation or in default thereof, by the rules of thelaw merchant.

Sec. 197. Repeals. - All acts and laws and parts thereofinconsistent with this Act are hereby repealed.

Sec. 198. Time when Act takes effect. - This Act shall takeeffect ninety days after its publication in the Official Gazetteof the Philippine Islands shall have been completed.

Enacted: February 3, 1911

475

APPENDIX A

SUMMARY OF DOCTRINES843

Origin on Negotiability844

1. The negotiability of bills of exchange and promissorynotes originated in the custom of merchants. The statuteof Anne, which is declaratory of the common law,established the negotiability of promissory notes.845

Distinction between Assignability and Negotiability846

2. Assignability pertains to contracts in general.847

3. An assignment is the legal method of transferringproperty or rights evidenced by contract.848

4. It is an impracticable method, as regards a circulatingmedium, because:849

a. Title created by assignment, as against the debtor,is not complete without notice to the debtor.

b. No subsequent purchaser of the property or right canacquire better title than that of his immediateassignor.

5. Negotiability pertains to a special class of contracts.850

6. Negotiability facilitates their transfer as a circulatingmedium, because:851 (No. 6-7)

a. The bona fide purchaser for value is presumed tobe the true owner, and has good title.

b. Transfer is effected by indorsement or delivery.

843 As found on the pages of the bookHandbook of Laws of Bills and Notes, Charles P. Norton, Third Edition,1900

844 Id., p. 1845 Id.846 Id., p. 9847 Id., p. 9848 Id.849 Id.850 Id.851 Id.


c. In general, a consideration for the contractual relationis conclusively presumed as between parties notimmediate.

Indicia of Negotiability852

7. The instrument must contain express words ofnegotiability, although there is no set form of suchexpression. It is enough if the intention of the parties tomake it negotiable can be fairly construed from the termsof the contract.853 (8)

8. The usual form of making an instrument negotiable ismaking it payable either854 (9)

a. To order, or

b. To bearer

Purpose of Negotiability855

9. Negotiable bills and notes in some respects play the partof money in business affairs. The fundamental purposeof negotiability is to endow them with all qualitiesnecessary for a limited commercial medium.856 (10)

Payment by Negotiable Instrument857

10. The common rules regarding a negotiable instrumentas a medium of payment are as follows:858 (11)

a. Where a negotiable instrument to which the debtoris a party as drawer, acceptor, maker, or indorser isreceived for a debt, whether precedent orcontemporaneous, in the absence of agreement tothe contract a presumption arises in mostjurisdictions that the instrument is received inconditional, and not in absolute, payment.

852 Id., p. 14853 Id.854 Id.855 Id., p. 17856 Id.857 Id., p. 19858 Id.

477

b. Where a negotiable instrument to which the debtoris not a party is received for a debt, in the absenceof agreement to the contrary a presumption arisesin most jurisdictions that the instrument is receivedin conditional payment if the debt was precedent;but that it is in absolute payment if the debt becontemporaneous.

Definition and Forms of Bills of Exchange859

11. A bill of exchange is an unconditional order in writingupon one person by another for the payment of a sum ofmoney absolutely and at all events.860

Bills of exchange are classified as foreign bills and inlandbills.861 (12)

Definition and Form of Note862

12.A promissory note is an unconditional written promise,signed but not sealed by the maker, to pay absolutelyand at all events a sum certain in money, either to thebearer or to a person therein designate or to his order.863

(13)

Essentials of Bill or Note864

13.To be a negotiable bill of exchange or promissory note,the instrument must have the following essentialcharacteristics:865 (14)

a. The bill must contain an order.

b. The note must contain a promise.

c. The order or promise must be unconditional.

d. It must be an absolute order or promise for thepayment of money alone.

859 Id., p. 22860 Id.861 Id.862 Id., p. 25863 Id.864 Id., p. 26865 Id., p. 26


e. The amount of money must be certain.

f. The time of payment must be a time certain to arrive.

g. The instrument must be specific as to all its parties.

h. The instrument must be delivered.

Order contained in Bill866

14. An order means any form of words implying a right onthe part of the drawer to command, and a correspondingduty on the part of the drawee to make, the paymentspecified.867 (15)

Promise contained in Note868

15. A promise means any form of words from which an intentof the maker to pay can be construed.869 (16)

Certainty as to the Terms of the Order or Promise870

16. A bill or note must be payable absolutely and at a timecertain.871 (17)

EXCEPTIONS—(a) If the instrument be payable uponthe happening of an event which is certain to happen,though the time when it will happen be uncertain, theinstrument is negotiable.872

(b) Bills and notes are subject to the implied conditionsof presentment and notice of dishonor.873

17. The instrument must not be payable out of any particularfund.874 (18)

DISTINCTION—Indicating to a drawee a source or fundout of which he may be reimbursed is not chargingpayment upon a particular fund.875

866 Id., p. 27867 Id.868 Id., p. 29869 Id.870 Id., p. 31871 Id.872 Id.873 Id., p. 32874 Id., p. 32875 Id.

479

18. The following are absolute promises to pay money, andare negotiable instruments:876 (19)

Instruments payable

(a) On demand, or

(b) At sight, or on a fixed period after sight or one inwhich no time is expressed which is equivalent toan instrument payable on demand.

19. An instrument payable in installments, even though itprovides that upon non-payment of an installment thewhole becomes due, is a negotiable instrument.877 (20)

Payment of Money Only878

20. The instrument must be for payment in money only.879

(21)

21. A negotiable instrument must be for the payment ofmoney without connected promise, whether disjunctiveor conjunctive, for the performance of some other act.880

(22)

22. (a) A negotiable instrument may contain an additionalagreement, which is not of the essence of the order orpromise, but is merely incidental or collateral to it.881 (23)

23. (b) A negotiable instrument may give the holder an optionbetween payment of money and some other thing.882 (24)

24. The amount of money to be paid out must be certain.883

(25)

EXCEPTIONS—(a) That the instrument is payable withinterest does not destroy its negotiability.884

(b) That the instrument is payable with current exchangedoes not destroy its negotiability.885

876 Id., p. 32877 Id.878 Id., p. 42879 Id.880 Id.881 Id.882 Id.883 Id.884 Id.885 Id.


Specification of Parties886

25. The instrument must be specific as to all its parties.887

(26)

26. By signature is meant any written emblem made by aperson with the intent of entering into a contractobligation.888 (27)

27. The note or bill must contain the signature of the makeror maker, drawer or drawers.889 (28)

28. The bill must be addressed to some person.890 (29)

EXCEPTIONS—(a) If the drawee can be otherwisesufficiently identified from the bill it is sufficient.891

(b) An unaddressed bill accepted or a bill accepted,where the drawer and acceptor are one and the sameperson, is to be treated as a promissory note, and isnegotiable.892

29. The bill or note must point out some person to whomthe money is to be paid.893 (30)

The following are the common rules concerning thenomination of payees:894

a) The payee of an instrument, except one payable tobearer, must be a person in being, natural or legal,and ascertainable, at the time of issue.

b) Where the payee and maker or drawer are the sameperson, the instrument is not issued until after itsindorsement and delivery.

c) The payee may be a fictitious or non-existing person,but the instrument is then construed as payable tobearer, and title thereto is made by estoppel.

886 Id., p. 54887 Id.888 Id.889 Id.890 Id.891 Id.892 Id.893 Id.894 Id.

481

Capacity of Parties895

30. The capacity of parties is in general governed by thesame rules as their power to make a contract. It is oftwo kinds:896 (31)

a) Capacity to incur liability.

b) Capacity to transfer the instrument.

31. The following classes of persons incur no liability, thoughthey may make a valid transfer of the instrument:897 (32)

a) A person non compos mentis.

b) An infant.

c) In some jurisdictions, a married woman.

d) A corporation, when the act is ultra vires.

32. The following persons may transfer, but can incur onlypersonal liability:898 (33)

a) Executors.

b) Administrators.

c) Guardians.

d) Trustees.

Authority of Agent899

33. The power of persons to incur liability as parties to, andto transfer, negotiable instruments by the hands of othersis governed by the general rules applicable to principalsand agents.900 (34)

EXCEPTION—An undisclosed principal cannot sue orbe sued as a party to a negotiable instrument.901

895 Id., p. 63896 Id.897 Id.898 Id., p. 64899 Id., p. 65900 Id.901 Id.


Delivery of Instruments902

34. A bill or note is inoperative as against the drawer ormaker until delivery.903 (35)

35. Delivery means transfer of possession with intent totransfer title, and is of two kinds:904 (36)

a) Actual delivery, which is effected by the manualpassing of the instrument itself to the payee or hisagent.

b) Constructive delivery, which is effected by directionto a third person in actual possession of theinstrument to deliver it to, or to hold it for, the payee.905

36. Delivery in escrow means delivery to a third person tohold until a certain event happens, or a certain conditionis fulfilled. A bill or note delivered in escrow becomesabsolute in the hands of a bona fide purchaser for value,whether or not the event happens or the condition isfulfilled.906 (37)

Date907

37. A date in a bill or note is not necessary to its validity.908

(38)

Value Received909

38. Value received is not necessary to be expressed in anegotiable instrument.910 (39)

Days of Grace911

39. Days of grace are days added to the nominal time ofpayment of all bills or notes except those impliedly or

902 Id., p. 67903 Id.904 Id.905 Id.906 Id., pp. 67-68907 Id., p. 72908 Id.909 Id., 73910 Id.911 Id., p 75

483

expressly payable on demand, and are computed byexcluding the day of date and including the day ofpayment.912 (40)

Acceptance of Bills of Exchange; Definition913

40. An acceptance is an undertaking by the drawee to paythe bill when due.914 (41)

Acceptance According to Tenor915

41. The acceptance must be absolute and according to thetenor of the bill to bind all the parties to it.916 (42)

42. THE TENOR OF THE BILL—Is the request in the bill topay the money at the time and place and in the mannermentioned in it. A change in the acceptance in any oneof these respects renders the acceptance “qualified.”917

(43)

43. The payment of the bill by the acceptor may be madedependent on a condition. It is then called “conditional”acceptance.918 (44)

44. A qualified acceptance is only valid—919 (45)

a) As to all parties subsequent to the acceptance.

b) As to all prior parties who, upon due notice, assent.

Who may Accept920

45. The only person permitted by the law merchant to be anacceptor is the person to whom the bill is addressed.Another person is liable only upon a collateralundertaking.921 (46)

EXCEPTION—An acceptor for honor.922

912 Id.913 Id., p. 78914 Id.915 Id., p. 82916 Id.917 Id.918 Id.919 Id.920 Id., p. 86921 Id.922 Id.


Delivery923

46. An acceptance is probably complete only upondelivery.924 (47)

Forms and Varieties of Acceptance925

47. An acceptance, if in writing, is constituted by any wordsfrom which an intention to accept can be gathered.926

(48)

48. An acceptance, if verbal, is constituted by any wordswhich evidence such intention clearly and unequivocally,if they addressed to the drawer or holder, and he waivehis right to a written acceptance. An acceptance mayalso be implied from conduct evidencing suchintention.927 (49)

Same; Implied Acceptance928

49. AN IMPLIED ACCEPTANCE—Is any act which clearlyindicates an intention to comply with the request of thedrawer, or any conduct of the drawee from which theholder is justified in drawing the conclusion that thedrawee intended to accept the bill, and intended to beso understood.929 (50)

Same; Acceptance on Separate Paper930

50. If the bill is in existence, for the convenience of businessthe acceptance may be on a separate paper, but thepromise must be clear and unequivocal.931 (51)

51. If the bill is not in existence, for the convenience ofbusiness the acceptance may be on a separate paper.932

923 Id., p. 88924 Id.925 Id., p. 89926 Id.927 Id.928 Id., p. 93929 Id.930 Id., p. 95931 Id.932 Id.

485

Its elements are:933

a) That the contemplated drawee shall described thebill to be drawn, and promise to accept it.

b) That the bill shall be drawn in a reasonable time aftersuch promise is written.

c) That the holder shall take the bill upon the credit ofthe promise.

Parol Acceptance of a Bill934

52. In the absence of statute to the contrary, an unequivocalparol promise to accept a specific existing bill is binding.But a promise to accept a future bill, even though the billbe taken by the holder upon the faith and credit of suchpromise, is not binding as an acceptance.935 (53)

Acceptance for Honor or Supra Protest936

53. DEFINITION—An acceptance supra protest is anundertaking by a stranger to the bill, after protest, for thebenefit of all parties subsequent to him for whose honorit is made, ad conditioned to pay the bill when it becomesdue if the original drawee does not.937 (54)

54. An acceptance supra protest may be made—938 (54a)

a) After dishonor by non-acceptance.

b) After protest for better security after acceptance.

Time Allowed for Acceptance939

55. The drawee is allowed a reasonable time, generally heldto be 24 hours, within which to accept a bill ofexchange.940

933 Id.934 Id., p. 99935 Id.936 Id., p. 101937 Id., pp 101-102938 Id.939 Id., p. 103940 Id.


Indorsement; definition941

56. INDORSEMENT—Is the writing of the name of theindorser on the instrument with the intent wither totransfer the title to the same, or to strengthen the securityof the holder by assuming a contingent liability for itsfuture payment, or both. It strictly applies only tonegotiable instruments.942

Formal Requisites943

57. The formal requisites of an indorsement are:944

a) Though usually on the back of the instrument, anindorsement is on its face, but it must be somewhereupon it. When by reason of rapid circulation theinstrument becomes filled with indorsements, the lawmerchant permits the holder to paste on a slip ofpaper for his own and subsequent indorsements.This is called an allonge.945

b) The usual form of indorsement is the signature ofthe indorser, with or without a direction to pay theindorsee described or to him or order. Any form ofwords with the signature from which the intent of theholder to incur the liability of an indorser may begathered is a sufficient indorsement.946

Indorsement in Blank947

58. AN INDORSEMENT IN BLANK.—Specifies no indorsee,and the instrument so ordered is payable to bearer, andmay be negotiated by delivery.948

59. The holder may convert a blank indorsement into aspecial indorsement by writing over the signature of theindorser any contract consistent with the character ofthe indorsement.949

941 Id., p. 105942 Id.943 Id., p. 105944 Id.945 Id.946 Id.947 Id., p. 110948 Id.949 Id.

487

Special Indorsement950

60. A SPECIAL INDORSEMENT.—Specifies the person towhom, or to whose order, the instrument is payable; andthe instrument of such indorsee is necessary to thefurther negotiation of the instrument.951

61. An instrument which is originally payable to bearer, orwhich has been indorsed in blank, though afterwardsspecially indorsed, is still payable to bearer; except asto the special indorser, who, on such an instrument, aftersuch an indorsement, is only liable on his indorsementto such parties as make title through it.952

Indorsement Without Recourse, Conditional andRestrictive Indorsement953

62. AN INDORSEMENT WITHOUT RECOURSE—Meansthat the indorser exempts himself from liability toindemnify the holder upon the dishonor of the bill ornote.954

63. A CONDITIONAL INDORSEMENT—Means anindorsement by which the title to the instrument doesnot pass until the condition mentioned in the indorsementis fulfilled.955

64. A RESTRICTIVE INDORSEMENT—Means that theindorsee is deputed by the indorser to be his agent incollecting the bill or note, or else that the title is vestedin the indorsee as a trustee or for the use or for the benefitof a third person.956

Nature of Indorsement957

65. The nature of an indorsement is as follows: It is958

950 Id., p. 116951 Id.952 Id.953 Id., p. 119954 Id.955 Id.956 Id.957 Id., p. 128958 Id.


a) A contract which the indorser assumes with hisindorsee and subsequent holders that, if the drawee,acceptor, or maker fails to honor the bill or note, hewill, upon the performance of certain conditionsimposed by the law merchant, indemnify the holderfor all loss incurred by reason of the dishonor of thebill or note.

b) A transfer of the title to the instrument.

Requisite of Indorsement959

66. The requisites of an indorsement are as follows:960

a) It must follow the tenor of the bill or note.

b) It must be by the payee or a subsequent holder.

c) It is only complete upon delivery.

Irregular Indorsements961

67. A person whose name is on the back of a bill or notepayable to the order of the maker or drawer, or payableto bearer, is deemed to be a indorser.962

68. Where a person signs his name on the back of anegotiable bill or note payable to order of third person,before the signature of the payee, different rules prevailin different jurisdictions as to the liability of the irregularindorser.963

a) In some jurisdictions he is prima facie presumed toassume no liability to the payee, and to be a secondindorser; but this presumption may be rebutted byshowing that the indorsement was made to give themaker credit with the payee, and the irregularindorser then becomes liable as first indorser, uponthe theory that the payee may indorse to him withoutrecourse, and fill up the blank indorsement of theirregular indorser to himself.

959 Id., p. 131960 Id.961 Id., p. 138962 Id.963 Id.

489

b) In other jurisdictions the irregular indorser ispresumed to be a joint maker.

c) In other jurisdictions he is presumed to be aguarantor.

d) In other jurisdictions he is presumed to be anindorser.

e) In other jurisdictions the liability of the irregularindorser is regulated by statute.

Acceptor and Maker964

69. The acceptor ad maker each promises the payee andsubsequent holder that he will pay the bill or noteaccording to its tenor at the time of signing.965

Facts which the Acceptor Admits966

70. The acceptor of a bill of exchange, by acceptance, admitsas against a bona fide holder:967

a) The genuineness of the drawer’s signature.

b) The existence of the drawer.

c) The capacity of the drawer to make the draft.

d) His authority to draw for the sum named.

e) Where the bill is to the payee’s order, that the payeewas competent to make the indorsement.

Facts which the Acceptor Does Not Admit968

71. An acceptance does not admit:969

a) That the payee’s or subsequent indorsements aregenuine.

b) That all the terms contained in the bill at the time ofacceptance are genuine.

964 Id., p. 144965 Id.966 Id., p. 146967 Id.968 Id., p. 151969 Id.


Acceptor Supra Protest970

72. The undertaking of the acceptor supra protest isanalogous to that of the indorser.971

73. To consummate the liability of the acceptor supra protest,it is necessary to take three steps:972

a) To present the bill at maturity to the original drawee.

b) Upon refusal of the original drawee to pay, to protestfor nonpayment.

c) To present the bill for payment to the acceptor supraprotest.

Drawer and Indorser973

74. Every drawer promises the payee and subsequentholders, and every indorser promises his indorsee andsubsequent holders, that if the bill or note is presentedfor payment to the drawee, acceptor, or maker, andpayment demanded and refused, and the necessaryproceedings on dishonor be taken, he will indemnify theholder for loss.974

75. The drawer of a bill of exchange promises the payeeand subsequent holder, and the indorsers beforeacceptance promise subsequent holder, that if on duepresentment the bill be not accepted, and necessaryproceedings on dishonor be taken, he will indemnifythem for loss.975

76. The liability of the drawer and of each indorser is severalfrom that of all the other parties to the instrument.976

Undertaking of Drawer977

77. The drawer of a bill before acceptance undertakes withthe payee and subsequent holders:978

970 Id., p. 152971 Id.972 Id.973 Id., p. 156974 Id.975 Id.976 Id.977 Id., p. 159978 Id.

491

a) That there is a drawee, and that he is capable ofaccepting.

b) That he will accept.

Warranties of Indorser979

78. Every indorser who indorses without qualificationwarrants to his indorsee and to all subsequent holders:980

a) That the bill or note is, in every respect and as to allprior parties, genuine, and neither forged, fictitiousnor altered.

b) That the bill or note is a valid and subsistingobligation, and that the contract obligations of all priorparties are valid.

c) That the prior parties were competent to bindthemselves, whether as drawer, acceptor, maker, orindorser.

d) That he, as indorser, has good title to the bill or note,and also a right to transfer it.

Warranties of Indorser Without Recourse—OfTransferror by Delivery981

79. Every person who negotiates a bill or note byindorsement without recourse or by delivery warrants:982

a) That the instrument is, in every respect and as to allprior parties, genuine, and neither forged, fictitious,not altered.

b) That he has good title to the instrument, and also aright to transfer it.

c) That he has no knowledge of any fact which wouldimpair the validity of the instrument or render itvalueless.

d) That all prior parties were competent to bindthemselves, although the authorities are notunanimous upon this point.

979 Id., p. 162980 Id.981 Id., p. 167982 Id.


e) That the instrument is a valid and subsistingobligation, although the authorities are notunanimous upon this point, and in states which haveadopted the Negotiable Instruments Law thiswarranty is not implied.

But when the negotiation is by delivery only, thewarranty extends in favor of no holder other thanthe immediate transferee.983

Damages Against the Acceptor, Maker, Drawer, andIndorsers

Upon the Bill or Note and Upon the Warranties984

80. The acceptor of a bill of exchange and the maker of apromissory note is liable, upon its dishonor, for theamount of the bill or note and legal interest, and alsonotarial expenses where they are allowed by law.985

Where the drawee of a bill of exchange has agreed fora valuable consideration to accept it, he is liable, uponits dishonor, for his breach of promise to accept, in alldamages which are the immediate consequences ofsuch breach.986

The measure of damages to be recovered against adrawer or indorser upon his indorsement is—987

a) On an inland bill: the amount of the bill and interest,and also protest fees where they are allowed.

b) On a foreign bill: the amount of the bill, interest,protest fees, re-exchange, or damages in lieuthereof.

The measure of damages to be recovered againstthe drawer or indorser in case of a breach of warrantyis the original consideration.988

Accommodation Parties and Persons Accommodated989

983 Id.984 Id., p. 170985 Id.986 Id.987 Id.988 Id.989 Id., p. 176

493

81. AN ACCOMMODATION PARTY—Means a person whohas signed a bill or note as acceptor or drawer, maker,or indorser, without recompense, and for the purpose oflending his name to some other person as a means ofcredit.990

82. The accommodated party impliedly contracts:991

a) That he will pay the bill or note.

b) That he will repay the accommodation party for allloss incurred, if that party is compelled to pay in caseof his default.

83. The accommodation party is liable to all parties exceptthe party accommodated.992

Conflict of Laws993

84. The validity of the contract of the acceptor, maker, drawer,and indorser of a bill or note is determined generally bylaw of the place where the contract is made.994 (83a)

85. The interpretation and obligation of the contract of theacceptor, maker, drawer, and indorser of a bill or noteare determined by the law of the place where the contractis made, unless the contract is to be performed in anotherplace, in which case the law of the place of performancegoverns.995 (83b)

Transfer; definition996

86. The transfer of a bill or note is either the assignment ordevolution of the right to its enforcement.997 (84)

Validity between Immediate Parties998

990 Id.991 Id.992 Id.993 Id., p. 183994 Id.995 Id.996 1 Id., p. 191997 Id.998 Id., p. 192


87. As between immediate parties or parties privy, any causewhich would invalidate an ordinary contract will invalidatethe contract created by the transfer.999 (85)

Methods of Transfer1000

88. There are three methods of transfer:1001 (86)

a) By assignment.

b) By operation of law.

c) By negotiation.

Same; by Assignment1002

89. A bill or note may be transferred by assignment, or sale,distinguished from negotiation, subject to the sameconditions that would be requisite in the case of anordinary chose in action.1003 (87)

Same; by Operation of Law1004

90. The full title to a bill or note passes, without assignmentor negotiation, by operation of law, in following cases:1005

(88)

a) Upon the death of the holder, when the title vests inhis personal representative, or

b) Upon the bankruptcy of the holder, when the titlevests in his assignee, or

c) At common law, if the holder is an unmarried woman,upon her subsequent marriage, when the title vestsin her husband, or

d) At common law, if a bill or note be made payable orbe transferred to a married woman, when the titlevests in her husband, or

999 Id.1000Id., p. 1961001Id.1002Id., p. 1961003Id.1004Id., p. 1981005Id.

495

e) Upon the death of a joint payee or indorsee, whenthe title vests at once in the survivor or survivors.

Same; by Negotiation1006

91. “Negotiation” means transfer of a bill or note in the formand manner prescribed by the law merchant, with theincidents and privileges annexed thereby.1007 (88a)

92. There are two modes of negotiation: (a) Negotiation byindorsement, and (b) negotiation by delivery. The formof the instrument determines which mode isapplicable.1008 (89)

Negotiation by Indorsement1009

93. A bill or note which is in legal effect payable to order isnegotiated by indorsement.1010 (90)

94. The transferee of an instrument made payable to orderwithout indorsement is the equitable owner, and takes itsubject to all the equities vested in prior parties.1011 (90a)

Same; by Delivery1012

95. A bill or note which is in legal effect payable to bearer isnegotiated by delivery without legal indorsement.1013 (91)

Overdue Paper1014

96. Negotiable paper may be transferred by indorsement ordelivery when overdue.1015 (92)

1006Id., p. 2001007Id.1008Id.1009Id., p. 2001010Id.1011 Id.1012Id., p. 2041013Id.1014Id., p. 2071015Id.


Right to Sue1016

97. The person to whom a bill or note is negotiated, or towhom it is transferred by operation of law, acquires theright to sue thereon in his own name.1017 (92a)

Defenses Commonly Interposed Against a Purchaser ForValue Without Notice;1018

Real and Personal Defenses1019

98. The defenses interposed by a party to a bill or note in asuit brought by a holder against him are commonly oftwo classes:1020 (93)

a) REAL—Or those that attach to the instrument itselfand are good against all persons.

b) PERSONAL—Or those that grow out of theagreement or conduct of a particular person in regardto the instrument which renders it inequitable for him,though holding the legal title, to enforce it againstthe defendant, but which are not available againstbona fide purchasers for value without notice.

Same; Real Defenses1021

99. Common real defenses are-—(94)

a) The incapacity of the defendant to make the contract.

b) Illegality, when the contract is declared void by thestatute.

c) The discharge of the instrument by alteration.

The incapacity of the defendant is usually due toinfancy, x x x lack of understanding, or incapacity ofa corporation to contract.1022

1016Id., p. 2121017Id.1018Id., p. 2161019Id.1020Id.1021Id., p. 2181022Id.

497

INFANCY—A negotiable instrument or itsindorsement made by an infant is voidable, notvoid.1023

100. CORPORATIONS—In the United States privatecorporations, unless restrained by charter, have capacityto draw, accept, make, and indorse bills and notes.1024

(96)

101. The bill or note of a corporation, and its indorsementthereon, although it has capacity to issue negotiablepaper, is unenforceable, except in favor of a bona fidepurchaser, unless made or transferred for the purposesof its incorporation.1025 (97)

102. The indorsement or assignment of the instrument by acorporation passes the property therein, notwithstandingthat from want of capacity the corporation may incur noliability thereon.1026 (98)

103. PERSONS NON COMPOS MENTIS—Total lack ofunderstanding in persons non compos mentis or drunkenis a defense to the enforcement of a bill or note, both asbetween immediate parties and as against bona fideholder, when the party sought to be charged was anadjudged incompetent. It is doubtful whether in itself itis such a defense to an instrument sought to be enforcedby a holder if the holder was one in good faith for value,and without notice. It is in itself a defense between theimmediate parties, unless, perhaps, the contract was fairand the other party had no knowledge of the lunatic’sincompetency.1027 (99)

104. STATUTES.—Statutes which avoid instruments are ofthe following varieties:1028 (100)

a) Those which in words declare the contract void.

b) Those which annex a penalty to the considerationor performance of the act for which the bill, note, orindorsement is given.

1023Id.1024Id., p. 2221025Id.1026Id.1027Id., pp. 226-2271028Id., p. 234


105. In many states the holder of a bill or note, even if he bea purchaser for value without notice, cannot recover theamount of the instrument from persons who were partiesto the instrument at its inception, when the instrumentwas negotiated in its inception at a rate greater than thelegal rate of interest.1029 (102)

106. Where an indorsee acquires a bill or note by way ofdiscount at a rate greater than the legal rate of interest,such transfer is a sale by the indorser and a purchaseby the indorsee, for which the indorsee may recover thefull amount of the maker, acceptor, or other prior parties,but (in some jurisdiction) only the amount paid for thebill of his prior indorser.1030 (103)

107. FAILURE TO STAMP.—Failure to affix a revenue stampto a negotiable instrument is sometimes by statute madea real defense.1031 (104)

108. ALTERATION.—Where a negotiable instrument ismaterially altered without the assent of all parties liablethereon, it is avoided, except as against a party who hashimself made, authorized, or assented to the alteration,and subsequent indorsers.1032 (105)

109. Alterations are material1033 (106)

a) Which purports to lessen or place an additionalburden on any of the parties. Such are changes inthe date, time, place, amount, or medium of paymentand the rate of interest.

b) Which purport to change the liabilities and obligationsof all or any of the parties. Such are the addition orremoval of the signature of a maker, drawer, indorser,payee, or co-surety.

c) Which purport to change the operation of theinstrument, or its effect in evidence. Such are addingwords of negotiability or of a special considerationafter value received, or changing the form of theindorsement, or changing the liability from joint to

1029Id.1030Id.1031Id., 2441032Id., p. 2461033Id., p. 248

499

several, or from joint to joint and several, as the casemay be.

110. FORGERY.—Forgery of a negotiable instrument, or theindorsement thereon, except in case of ratification orestoppel, nullifies the instrument as to all parties againstwhom the forgery is committed.1034 (107)

111. Common personal defenses are:1035 (108)

a) Fraud.

b) Duress.

c) Want or failure of consideration.

d) Illegality, unless the contract is declared void bystatute.

e) Payment, or renunciation or release, before maturity.

f) Discharge of party secondarily liable by release ofprior party.

112. FRAUD.—Where a person is induced by fraud toexecute a bill or note, he is liable thereon as against abona fide purchaser for value.1036 (109)

113. Where a person is induced by fraud to sign a bill or noteunder the belief that he is signing a different instrument,his signature is null and void, and he is not liable thereon,even as against a bona fide purchaser for value, providedthat in so signing he acted without negligence.1037 (110)

114. CONSIDERATION.—Any consideration which willsupport a simple contract is sufficient to support anegotiable bill or note, or the transfer or indorsementthereof.1038 (111)

In case of negotiable instruments consideration ispresumed, but this presumption may be rebutted.1039

115. Defenses interposed by reason of some defect in theconsideration are usually want or failure of consideration,

1034Id., p. 2541035Id., p. 2601036Id., p. 2621037Id.1038Id., p. 2701039Id.


and illegality of consideration, where it does not avoidthe instrument.1040 (112)

116. As between immediate parties, a partial want or failureof consideration is a defense pro tanto, but the partalleged to have failed must be clearly ascertained. Butthese are not defenses to an action brought by apurchaser of the instrument for value without notice.1041

(113)

117. Where there is a total want of consideration betweenimmediate parties, or the consideration of the note,though good in the first instance, entirely fails, this is adefense between immediate parties. But these are notdefenses to an action brought by a purchaser of theinstrument for value without notice.1042 (114)

118. ILLEGAL CONSIDERATION.—A consideration may berendered illegal by statute, or by the rules of commonlaw, or because it is against public welfare to treat theconsideration as a valid consideration. An illegalconsideration, whether total or partial, renders theinstrument unenforceable, as between immediateparties, but it is not in general a defense to the action ofthe purchaser for value without notice.1043 (115)

119. DISCHARGE OF THE INSTRUMENT—A negotiableinstrument may be discharged by payment, or by act ofthe holder, or by operation of law.1044 (116)

120. When the instrument has been discharged, it ceases tobe negotiable.1045 (117)

121. PAYMENT—A bill or note is discharged by payment ator after maturity by or on behalf of the acceptor or makerto the holder, in good faith and without notice that histitle is defective.1046 (118)

122. DISCHARGE BY ACT OF HOLDER—The holder maydischarge the instrument by1047 (119)

1040Id., p. 2761041Id.1042Id.1043Id., p. 2831044Id., p. 2941045Id.1046Id., p. 2951047Id., p. 302

501

a) Renunciation or release at or after maturity;

b) Cancellation.

123. DISCHARGE BY PARTIES SECONDARILY LIABLE.—Where the holder of a negotiable instrument does anyact which will impair any right of the drawee or of anyindorser against other parties to the instrument liable tohim, it operates as a discharge of the obligation of thedrawer or indorser. This does not apply if, subsequentto such discharge, a purchaser for value without noticebefore maturity acquires the instrument.1048 (120-121)

SUMMARY OF DEFENSES1049

Real Defenses

1) Incapacity to contract:

a) Infancy;

b) Insanity;

c) Intoxication;

d) Corporate incapacity.

2) Illegality, when the contract is declared void by statute

3) The discharge of the instrument by

a) Alteration;

b) Cancellation;

c) Payment, or renunciation or release, at or aftermaturity

Personal Defenses

1) Fraud, whereby the defendant was induced to executethe instrument;

2) Duress;

3) Want or failure of consideration;

4) Illegality, unless the contract is declared void by thestatute;

1048Id., p. 3041049Id., p. 308


5) Payment, or renunciation or release, before maturity;

6) Discharge of party secondarily liable by discharge of priorparty.

Purchaser for Value Without Notice1050

What Constitutes1051

124. To constitute a purchaser of a negotiable instrument apurchaser for value without notice, the purchase mustbe:1052 (122)

a) For a valuable consideration.

b) Without notice of facts which impeach its validitybetween antecedent parties.

Value1053

125. Value, as a consideration for transfer, means any legalconsideration sufficient to support a contract. Anantecedent or pre-existing debt in most jurisdictionsconstitutes value sufficient for a consideration for anegotiable bill or note or the transfer thereof.1054 (123)

126. THE TRANSFER.—A bill or note transferred as collateralto an indebtedness is in most jurisdictions transferredfor value and upon sufficient consideration.1055 (124)

Notice1056

127. Notice is either actual or constructive.1057 (125)

128. ACTUAL NOTICE—Means either knowledge or meansof knowledge to which the purchaser dishonestly shutshis eyes.1058 (126)

1050Id., p. 3091051Id.1052Id., p. 3091053Id., p. 3101054Id.1055Id.1056Id., p. 3171057Id.1058Id.

503

129. CONSTRUCTIVE NOTICE—Means knowledge to bederived from the face of the instrument. The purchaseris charged with notice of whatever appears thereon.1059

(127)

Presumption and Burden of Proof—Order of Proof1060

130. The holder of a bill or note is, in the first instance,presumed to be a holder for value and without notice;but if it is proved on the trial that the bill or note, in itsissue or negotiation, was affected by the defenseshereinafter specified, it is incumbent for the holder toprove that he is such a purchaser.1061 (128)

131. The usual order of proof on a trial is:1062 (129)

a) To produce the paper sued on.

b) To prove the signatures of the defendant and of allpersons whose indorsement is necessary toestablish the plaintiff’s title.

c) To prove, as against the drawee or indorsers,presentment, demand, dishonor, and notice ofdishonor to them, or circumstances to excuse theseacts.

132. Upon proof of the facts specified in the foregoing section,the holder may rest for his recovery until evidence isadduced showing:1063 (130)

a) That the holder when he took the paper had noticeof the equities.

b) Or that there was fraud, duress, or illegality in theissue or subsequent negotiation of the instrument.

133. Upon proof of facts specified last above, the purchasermust show that he or some person under whom heclaims was a purchaser for value without notice.1064 (131)

1059Id.1060Id., p. 3271061Id.1062Id.1063Id.1064Id.


Presentment and Notice of Dishonor1065

In General1066

134. To charge the drawer and indorsers, presentment foracceptance or for the payment, as the case may be, tobe followed in case of refusal by notice of dishonor isnecessary.1067 (132)

Presentment1068

135. The presentment of a bill or note is commonly asfollows:1069 (133)

a) Of a bill for acceptance.

b) Of a bill or note for payment.

136. A bill or note is presented by exhibiting it and requestingits acceptance or payment. When presented, theinstrument must be in the possession of the personpresenting the same.1070 (134)

137. Presentment for acceptance is necessary in the case ofbills payable at or after sight, or after demand. In othercases, in the absence of express stipulation, it isoptional.1071 (134a)

138. Presentment for acceptance may be made at any timebefore maturity, except in cases of bills payable at orafter sight, or after demand.1072 (135)

139. Bills payable at or after sight, or on or after demand, orafter any other uncertain event, must be presented withina reasonable time.1073 (136)

140. Presentment for payment must be made on the day whenthe bill or note is due. A bill or note properly presentmentfor payment must be paid forthwith.1074 (137)

1065Id., p. 3361066Id.1067Id.1068Id., p. 3371069Id.1070Id.1071Id.1072Id.1073Id.1074Id.

505

141. Presentment should be made during usual andreasonable hours.1075 (138)

142. The presentment for acceptance, if the bill is addressedto the drawee at a particular place, should be made atthat place. If the bill is not addressed to any particularplace, presentment should be made either to the draweepersonally, or at his dwelling or place of business at thetime of presentment.1076 (139)

143. It is not necessary that a presentment for payment shouldbe personal. It is sufficient if made at the place specifiedin the instrument, or personally if the maker or acceptorwaives his right of having it made at the place stipulatedin the contract; and, if no place is specified in theinstrument, then if made at the place of business orresidence of the maker or acceptor.1077 (140)

Same; By Whom and To Whom Made; Effect of Failure toPresent; Notice of Dishonor; Protest1078

144. Presentment must be made by the lawful holder, or hisauthorized agent, to the drawee, acceptor, or maker, orhis authorized agent.1079 (141)

145. A failure to make due presentment for acceptance, whenit is incumbent on the holder to make the same, depriveshim of his remedy both on the bill itself and on theconsideration for which it was given.1080 (142)

146. A failure to present a bill or note for payment at the properplace or time—1081 (143)

a) Relieves the acceptor or maker from payment offurther interest and costs of suit, if he was ready withfunds to meet the bill or note at the stipulated timeand place of payment, but not from the principal sumof the bill or note.

b) It discharges the drawer and indorses from liability.

1075Id.1076Id., p. 337-3381077Id., p. 3381078Id., p. 3601079Id.1080Id.1081Id.


147. Upon presentment of a bill for acceptance, or of a bill ornote for payment, and a refusal to accept the bill or topay the bill or note, notice of its dishonor must be givento the drawer of the bill, and to the indorsers of the bill ornote. It is usual to protest it, though this is necessaryonly with foreign bills.1082 (144)

Notice of Dishonor1083

148. NOTICE OF DISHONOR—Is bringing, either verbally orby writing, to the knowledge of the drawer or the indorserof an instrument, the fact that a specified negotiableinstrument, upon proper proceedings taken, has not beenaccepted, or has not been paid, and that the party notifiedis expected to pay it.1084 (145)

149. Notice must be given as follows:1085 (146)

a) By the holder of the instrument, or by any personupon whom a liability is fixed to any person uponwhom it is sought to fix a liability.

b) Between parties residing in the same place, eitherby giving it personally, verbal or in writing, or byleaving a written notice at the residence or place ofbusiness of the party to be charged; between partiesresiding in different places, by depositing in the postoffice, postage paid, a written notice properlyaddressed to the person to be charged.

c) Within one day after an unqualified refusal to acceptthe bill or pay the instrument, or by an indorser withinone day after he has received notice of his ownliability. This means in proper hours of a businessday between co-residents, by or before the last post,if there be one the next day, if not, in the firstpracticable mail thereafter.

Excuses for Failure to Present or Give Notice1086

150. Presentment and notice of dishonor are dispensed within the case of a drawer or indorser whose duty is, as

1082Id.1083Id., p. 3721084Id.1085Id.1086Id., p. 394

507

between himself and the prior parties to the instrument,to pay it at maturity.1087 (147)

151. Presentment is dispensed with when, after the exerciseof reasonable diligence, it cannot be made; and noticeof dishonor is dispensed with when, after the exerciseof reasonable diligence, it cannot be given, or does notreach the parties to be charged.1088 (147a)

152. Presentment and notice of dishonor may be dispensedwith by waiver, express or implied.1089 (147b)

Checks1090

In General1091

153. A check is a draft or order on a bank or banker, purportingto be drawn on a deposit of funds, for the payment, at allevents, of a certain sum of money to a certain persontherein named, or to him or his order, or to bearer, andpayable instantly on demand.1092 (148)

154. A check resembles an inland bill or exchange payableon demand, except that it is always drawn on a banker;and many, but not all, of the rules governing a bill, areapplicable to it.1093 (149)

155. In some, but not all, states, an instrument, in the form ofa check, drawn in one state on a banker in another state,is held to be a foreign bill of exchange, and not acheck.1094 (150)

Checks as Negotiable Instruments1095

156. A check is not a bill of exchange, but it is in the nature ofa bill of exchange payable on demand, and is governedby most of the rules applicable to such an instrument. It

1087Id.1088Id.1089Id.1090Id., p. 4041091Id.1092Id.1093Id.1094Id.1095Id., p. 408


is subject to the same rules as regards transfer,indorsement, and negotiability.1096 (151)

Presentment and Notice of Dishonor; Effect of Delay1097

157. The drawer of a check is not discharged from hisobligation by unreasonable delay in presentment of thecheck for payment, or in giving him notice of dishonor,in case of presentment and dishonor, unless he has beenactually prejudiced thereby; but if he has suffered a lossthereby, as by failure of the bank, he is discharged tothe extent of his loss.1098 (152)

158. In determining what is a reasonable time, regard mustbe had to the nature of the instrument, the usage of tradeand of banker, and the effect of the particular case. Acheck is deemed to have been presented within areasonable time when presented according to thefollowing rules:1099 (153)

a) If the person who received it and the banker are inthe same place, it must, in the absence of specialcircumstances, be presented during business hoursof the next secular day after it is received.

b) If the person who received it and the banker are indifferent places, it must, in the absence of specialcircumstances, be forwarded for presentment on thenext secular day after it is received, and the agent towhom it is sent must present it during business hoursof the next secular day after it is received by him.

159. STATUS OF “STALE” CHECK—If the delay in presentinga check is so unreasonable as to make the check “stale”(a year and a half, for instance, or perhaps five months,or even less), the bank will be put in inquiry as to theequities of the drawer, and will pay at its peril; and thecheck will perhaps be treated like and overdue bill, andcease to be negotiable.1100 (154)

1096Id.1097Id., p. 4121098Id.1099Id.1100 Id.1101 Id., p. 418

509

Rights of Holder Against Bank1101

160. By the weight of authority, though there are decisions tothe contrary, which are controlling in the particularjurisdictions, the holder of a check has no right of actionagainst the bank on which it is drawn for refusal to payit, unless the bank has assumed an obligation to him bycertifying or accepting it; his only remedy is such a casebeing against the drawer, and against the indorsers, ifthere are any.1102 (155)

Certification and Acceptance of Checks1103

161. By certifying a check to be good, the bank assumes anunconditional obligation to the holder presenting it, andto every subsequent holder, to pay it on demand; andthis obligation may be enforced by the holder againstthe bank. And a delay in presentment will not dischargethe obligation.1104 (156)

162. The certification of a check at the instance of the holderdischarges the drawer and indorsers from liability, butthe drawer is not discharged where he himself has itcertified, and put it in circulation. The drawer will alsobe discharged if the holder takes the parol acceptanceof the bank instead of payment.1105 (157)

163. Where the drawer of a check has no funds in a bankand the bank verbally promises the holder to honor thecheck, this, it has been held (though there are decisionsapparently to the contrary), is a mere parol promise toanswer for the debt of another, within the statute offrauds, and cannot be enforced. But such a promisewhere the bank has funds of the drawer, whether expressor implied, is clearly binding as a promise to pay its owndebt.1106 (158)

164. Where a bank pays a check to a holder under anunauthorized indorsement, and charges the amount tothe account of the drawer, it is liable for the amount of

1102 Id.1103 Id., p. 4191104 Id., pp. 419-4201105 Id.1106 Id.


the check to the true holder on demand. The action, itwould seem, should be brought, not on the check, buton the promise implied in law from its receipt of themoney from the drawer for the true holder’s use.1107 (159)

Failure of Bank to Honor Check1108

165. A bank having funds of a depositor isbound to honor its checks to the amount of those funds,and, for a failure to do so, is liable for damages. Thebank, however, must have had a reasonable time sincethe deposit in which to make proper entries on its booksso as to show the amount to the depositor’s credit.1109 (160)

1107 Id.1108 Id., p. 4271109 Id.

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APPENDIX B

2011 Bar Examination Questionnaire for Commercial LawSet A

1. P rode a Sentinel Liner bus going to Baguio from Manila.At a stop-over in Tarlac, the bus driver, the conductor,and the passengers disembarked for lunch. P decided,however, to remain in the bus, the door of which was notlocked. At this point, V, a vendor, sneaked into the busand offered P some refreshments. When P rudelydeclined, V attacked him, resulting in P suffering frombruises and contusions. Does he have cause to sueSentinel Liner?

A. Yes, since the carrier’s crew did nothing to protect apassenger who remained in the bus during the stop-over.

B. No, since the carrier’s crew could not have foreseenthe attack.

C. Yes, since the bus is liable for anything that goeswrong in the course of a trip.

D. No, since the attack on P took place when the buswas at a stop-over.

2. A cargo ship of X Shipping, Co. ran aground off the coastof Cebu during a storm and lost all its cargo amountingto Php50 Million. The ship itself suffered damagesestimated at Php80 Million. The cargo owners filed a suitagainst X Shipping but it invoked the doctrine of limitedliability since its vessel suffered an Php80 Million damage,more than the collective value of all lost cargo. Is XShipping correct?

A. Yes, since under that doctrine, the value of the lostcargo and the damage to the ship can be set-off.

B. No, since each cargo owner has a separate andindividual claim for damages.

C. Yes, since the extent of the ship’s damage was greaterthan that of the value of the lost cargo.


D. No, since X Shipping neither incurred a total lossnor abandoned its ship.

3. A writes a promissory note in favor of his creditor, B. Itsays: “Subject to my option, I promise to pay B Php1Million or his order or give Php1 Million worth of cementor to authorize him to sell my house worth Php1 Million.Signed, A.” Is the note negotiable?

A. No, because the exercise of the option to pay lieswith A, the maker and debtor.

B. No, because it authorizes the sale of collateralsecurities in case the note is not paid at maturity.

C. Yes, because the note is really payable to B or hisorder, the other provisions being merely optional.

D. Yes, because an election to require something to bedone in lieu of payment of money does not affectnegotiability.

4. ABC Corp. increased its capital stocks from Php10 Millionto Php15 Million and, in the process, issued 1,000 newshares divided into Common Shares “B” and CommonShares “C.” T, a stockholder owning 500 shares, insistson buying the newly issued shares through a right of pre-emption. The company claims, however, that its By-lawsdeny T any right of pre-emption. Is the corporationcorrect?

A. No, since the By-Laws cannot deny a shareholderhis right of pre-emption.

B. Yes, but the denial of his pre-emptive right extendsonly to 500 shares.

C. Yes, since the denial of the right under the By-lawsis binding on T.

D. No, since pre-emptive rights are governed by thearticles of incorporation.

5. M makes a promissory note that states: “I, M, promise topay Php5,000.00 to B or bearer. Signed, M.” M negotiated

513

the note by delivery to B, B to N, and N to O. B had knownthat M was bankrupt when M issued the note. Who wouldbe liable to O?

A. M and N since they may be assumed to know of M’sbankruptcy

B. N, being O’s immediate negotiator of a bearer note

C. B, M, and N, being indorsers by delivery of a bearernote

D. B, having known of M’s bankruptcy

6. S delivered 10 boxes of cellphones to Trek Bus Liner, fortransport from Manila to Ilocos Sur on the following day,for which S paid the freightage. Meanwhile, the boxeswere stored in the bus liner’s bodega. That night,however, a robber broke into the bodega and stole S’sboxes. S sues Trek Bus Liner for contractual breach butthe latter argues that S has no cause of action based onsuch breach since the loss occurred while the goodsawaited transport. Who is correct?

A. The bus liner since the goods were not lost whilebeing transported.

B. S since the goods were unconditionally placed withT for transportation.

C. S since the freightage for the goods had been paid.

D. The bus liner since the loss was due to a fortuitousevent.

7. X Corp. operates a call center that received orders forpizzas on behalf of Y Corp. which operates a chain ofpizza restaurants. The two companies have the same setof corporate officers. After 2 years, X Corp. dismissed itscall agents for no apparent reason. The agents filed acollective suit for illegal dismissal against both X Corp.and Y Corp. based on the doctrine of piercing the veil ofcorporate fiction. The latter set up the defense that theagents are in the employ of X Corp. which is a separatejuridical entity. Is this defense appropriate?


A. No, since the doctrine would apply, the twocompanies having the same set of corporate officers.

B. No, the real employer is Y Corp., the pizza company,with X Corp. serving as an arm for receiving itsoutside orders for pizzas.

C. Yes, it is not shown that one company completelydominates the finances, policies, and businesspractices of the other.

D. Yes, since the two companies perform two distinctbusinesses.

8. A negotiable instrument can be indorsed by way of arestrictive indorsement, which prohibits furthernegotiation and constitutes the indorsee as agent of theindorser. As agent, the indorsee has the right, amongothers, to

A. demand payment of the instrument only.

B. notify the drawer of the payment of the instrument.

C. receive payment of the instrument.

D. instruct that payment be made to the drawee.

9. Under the Negotiable Instruments Law, a signature byprocuration operates as a notice that the agent has but alimited authority to sign. Thus, a person who takes a billthat is drawn, accepted, or indorsed by procuration isduty-bound to inquire into the extent of the agent’sauthority by:

A. examining the agent’s special power of attorney.

B. examining the bill to determine the extent of suchauthority.

C. asking the agent about the extent of such authority.

D. asking the principal about the extent of suchauthority.

10. Under the Negotiable Instruments Law, if the holder hasa lien on the instrument which arises either from a

515

contract or by implication of law, he would be a holderfor value to the extent of

A. his successor’s interest.

B. his predecessor’s interest.

C. the lien in his favor.

D. the amount indicated on the instrument’s face.

11. The liability of a common carrier for the goods ittransports begins from the time of

A. conditional receipt.

B. constructive receipt.

C. actual receipt.

D. either actual or constructive receipt.

12. On X’s failure to pay his loan to ABC Bank, the latterforeclosed the Real Estate Mortgage he executed in itsfavor. The auction sale was set for Dec. 1, 2010 with thenotices of sale published as the law required. The salewas, however, cancelled when Dec. 1, 2010 was declareda holiday and re-scheduled to Jan. 10, 2011 withoutrepublication of notice. The auction sale then proceededon the new date. Under the circumstances, the auctionsale is

A. rescissible.

B. unenforceable.

C. void.

D. voidable.

13. X executed a promissory note with a face value ofPhp50,000.00, payable to the order of Y. Y indorsed thenote to Z, to whom Y owed Php30,000.00. If X has nodefense at all against Y, for how much may Z collect fromX?

A. Php20,000.00, as he is a holder for value to theextent of the difference between Y’s debt and thevalue of the note.


B. Php30,000.00, as he is a holder for value to theextent of his lien.

C. Php50,000.00, but with the obligation to holdPhp20,000.00 for Y’s benefit.

D. None, as Z’s remedy is to run after his debtor, Y.

14. Under the Anti-Money Laundering Law, a coveredinstitution is required to maintain a system of verifyingthe true identity of their clients as well as personspurporting to act on behalf of

A. those doing business with such clients.

B. unknown principals.

C. the covered institution.

D. such clients.

15. It is settled that neither par value nor book value is anaccurate indicator of the fair value of a share of stock ofa corporation. As to unpaid subscriptions to its sharesof stock, as they are regarded as corporate assets, theyshould be included in the

A. capital value.

B. book value.

C. par value.

D. market value.

16. P sold to M 10 grams of shabu worth Php 5,000.00. As hehad no money at the time of the sale, M wrote a promissorynote promising to pay P or his order Php 5,000. P thenindorsed the note to X (who did not know about theshabu), and X to Y. Unable to collect from P, Y then suedX on the note. X set up the defense of illegality ofconsideration. Is he correct?

A. No, since X, being a subsequent indorser, warrantsthat the note is valid and subsisting.

B. No, since X, a general indorser, warrants that thenote is valid and subsisting.

517

C. Yes, since a void contract does not give rise to anyright.

D. Yes, since the note was born of an il legalconsideration which is a real defense.

17. In a contract of carriage, the common carrier is liable forthe injury or death of a passenger resulting from itsemployee’s fault although the latter acted beyond thescope of his authority. This is based on the

A. rule that the carrier has an implied duty to transportthe passenger safely.

B. rule that the carrier has an express duty to transportthe passenger safely

C. Doctrine of Respondeat Superior.

D. rule in culpa aquiliana.

18. A holder in due course holds the instrument free fromany defect of title of prior parties and free from defensesavailable to prior parties among themselves. An exampleof such a defense is –

A. fraud in inducement.

B. duress amounting to forgery.

C. fraud in esse contractus.

D. alteration.

19. In elections for the Board of Trustees of non-stockcorporations, members may cast as many votes as thereare trustees to be elected but may not cast more thanone vote for one candidate. This is true –

A. unless set aside by the members in plenary session.

B. in every case even if the Board of Trustees resolvesotherwise.

C. unless otherwise provided in the Articles ofIncorporation or in the By-laws.

D. in every case even if the majority of the membersdecide otherwise during the elections.


20. The rule is that the valuation of the shares of a stockholderwho exercises his appraisal rights is determined as ofthe day prior to the date on which the vote was taken.This is true –

A. regardless of any depreciation or appreciation in theshare’s fair value.

B. regardless of any appreciation in the share’s fairvalue.

C. regardless of any depreciation in the share’s fairvalue.

D. only if there is no appreciation or depreciation in theshare’s fair value.

21. T Shipping, Co. insured all of its vessels with R Insurance,Co. The insurance policies stated that the insurer shallanswer for all damages due to perils of the sea. One ofthe insured’s ship, the MV Dona Priscilla, ran aground inthe Panama Canal when its engine pipes leaked and theoil seeped into the cargo compartment. The leakage wascaused by the extensive mileage that the ship hadaccumulated. May the insurer be made to answer for thedamage to the cargo and the ship?

A. Yes, because the insurance policy covered any orall damage arising from perils of the sea.

B. Yes, since there appears to have been no fault onthe part of the shipowner and shipcaptain.

C. No, since the proximate cause of the damage wasthe breach of warranty of seaworthiness of the ship.

D. No, since the proximate cause of the damage wasdue to ordinary usage of the ship, and thus not dueto a peril of the sea.

22. X has been a long-time household helper of Z. X’shusband, Y, has also been Z’s long-time driver. May Zinsure the lives of both X and Y with Z as beneficiary?

A. Yes, since X and Y render services to Z.

519

B. No, since X and Y have no pecuniary interest on thelife of Z arising from their employment with him.

C. No, since Z has no pecuniary interest in the lives ofX and Y arising from their employment with him.

D. Yes, since X and Y are Z’s employees.

23. X, Co., a partnership, is composed of A (capitalist partner),B (capitalist partner) and C (industrial partner). If you werepartner A, who between B and C would you have aninsurable interest on, such that you may then insure him?

A. No one, as there is merely a partnership contractamong A, B and C.

B. Both B and C, as they are your partners.

C. Only C, as he is an industrial partner.

D. Only B, as he is a capitalist partner.

24. X is the holder of an instrument payable to him (X) or hisorder, with Y as maker. X then indorsed it as follows:“Subject to no recourse, pay to Z. Signed, X.” When Zwent to collect from Y, it turned out that Y’s signaturewas forged. Z now sues X for collection. Will it prosper?

A. Yes, because X, as a conditional indorser, warrantsthat the note is genuine.

B. Yes, because X, as a qualified indorser, warrantsthat the note is genuine.

C. No, because X made a qualified indorsement.

D. No, because a qualified indorsement does notinclude the warranty of genuineness.

25. A bill of exchange has T for its drawee, U as drawer, andF as holder. When F went to T for presentment, F learnedthat T is only 15 years old. F wants to recover from U butthe latter insists that a notice of dishonor must first bemade, the instrument being a bill of exchange. Is hecorrect?

A. Yes, since a notice of dishonor is essential tocharging the drawer.


B. No, since T can waive the requirement of notice ofdishonor.

C. No, since F can treat U as maker due to the minorityof T, the drawee.

D. Yes, since in a bill of exchange, notice of dishonor isat all times required.

26. An insured, who gains knowledge of a material factalready after the effectivity of the insurance policy, is notobliged to divulge it. The reason for this is that the test ofconcealment of material fact is determined

A. at the time of the issuance of the policy.

B. at any time before the payment of premium.

C. at the time of the payment of the premium.

D. at any time before the policy becomes effective.

27. T, the captain of MV Don Alan, while asleep in his cabin,dreamt of an Intensity 8 earthquake along the path of hisship. On waking up, he immediately ordered the ship toreturn to port. True enough, the earthquake and tsunamistruck three days later and his ship was saved. Was thedeviation proper?

A. Yes, because the deviation was made in good faithand on a reasonable ground for believing that it wasnecessary to avoid a peril.

B. No, because no reasonable ground for avoiding aperil existed at the time of the deviation.

C. No, because T relied merely on his supposed gift ofprophecy.

D. Yes, because the deviation took place based on areasonable belief of the captain.

28. X, drawee of a bill of exchange, wrote the words:“Accepted, with promise to make payment within twodays. Signed, X.” The drawer questioned the acceptanceas invalid. Is the acceptance valid?

521

A. Yes, because the acceptance is in reality a clearassent to the order of the drawer to pay.

B. Yes, because the form of the acceptance is reallyimmaterial.

C. No, because the acceptance must be a clear assentto the order of the drawer to pay.

D. No, because the document must not express thatthe drawee will perform his promise within two days.

29. X came up with a new way of presenting a telephonedirectory in a mobile phone, which he dubbed as the “iTel”and which uses lesser time for locating names andtelephone numbers. May X have his “iTel” copyrightedin his name?

A. No, because it is a mere system or method.

B. Yes, because it is an original creation.

C. Yes, because it entailed the application of X’sintellect.

D. No, because it did not entail any application of X’sintellect.

30. D, debtor of C, wrote a promissory note payable to theorder of C. C’s brother, M, misrepresenting himself as C’sagent, obtained the note from D, then negotiated it to Nafter forging C’s signature. N indorsed it to E, whoindorsed it to F, a holder in due course. May F recoverfrom E?

A. No, since the forgery of C’s signature results in thedischarge of E.

B. Yes, since only the forged signature is inoperativeand E is bound as indorser.

C. No, since the signature of C, the payee, was forged.

D. Yes, since the signature of C is immaterial, he beingthe payee.

31. A material alteration of an instrument without the assentof all parties liable thereon results in its avoidance,EXCEPT against a


A. prior indorsee.

B. subsequent acceptor.

C. subsequent indorser.

D. prior acceptor.

32. X constituted a chattel mortgage on a car (valued at Php1Million pesos) to secure a P500,000.00 loan. For themortgage to be valid, X should have

A. the right to mortgage the car to the extent of half itsvalue.

B. ownership of the car.

C. unqualified free disposal of his car.

D. registered the car in his name.

33. B borrowed Php1 million from L and offered to him hisBMW car worth Php1 Million as collateral. B then executeda promissory note that reads: “I, B, promise to pay L orbearer the amount of Php1 Million and to keep my BMWcar (loan collateral) free from any other encumbrance.Signed, B.” Is this note negotiable?

A. Yes, since it is payable to bearer.

B. Yes, since it contains an unconditional promise topay a sum certain in money.

C. No, since the promise to just pay a sum of money isunclear.

D. No, since it contains a promise to do an act in additionto the payment of money.

34. A bank can be placed under receivership when, if allowedto continue in business, its depositors or creditors wouldincur

A. probable losses

B. inevitable losses

C. possible losses

D. a slight chance of losses

523

35. EFG Foundation, Inc., a non-profit organization,scheduled an election for its six-member Board ofTrustees. X, Y and Z, who are minority members of thefoundation, wish to exercise cumulative voting in orderto protect their interest, although the Foundation’sArticles and By-laws are silent on the matter. As to eachof the three, what is the maximum number of votes thathe/she can cast?

A. 6

B. 9

C. 12

D. 3

36. If the drawer and the drawee are the same person, theholder may present the instrument for payment withoutneed of a previous presentment for acceptance. In sucha case, the holder treats it as a

A. non-negotiable instrument.

B. promissory note.

C. letter of credit.

D. check.

37. D draws a bill of exchange that states: “One month fromdate, pay to B or his order Php100,000.00. Signed, D.”The drawee named in the bill is E. B negotiated the bill toM, M to N, N to O, and O to P. Due to non-acceptance andafter proceedings for dishonor were made, P asked O topay, which O did. From whom may O recover?

A. B, being the payee

B. N, as indorser to O

C. E, being the drawee

D. D, being the drawer

38. T, an associate attorney in XYZ Law Office, wrote anewspaper publisher a letter disputing a columnist’s claimabout an incident in the attorney’s family. T used the law


firm’s letterhead and its computer in preparing the letter.T also requested the firm’s messenger to deliver the letterto the publisher. Who owns the copyright to the letter?

A. T, since he is the original creator of the contents ofthe letter.

B. Both T and the publisher, one wrote the letter to theother who has possession of it.

C. The law office since T was an employee and he wroteit on the firm’s letterhead.

D. The publisher to whom the letter was sent.

39. E received goods from T for display and sale in E’s store.E was to turn over to T the proceeds of any sale and returnthe ones unsold. To document their agreement, Eexecuted a trust receipt in T’s favor covering the goods.When E failed to turn over the proceeds from his sale ofthe goods or return the ones unsold despite demand, hewas charged in court for estafa. E moved to dismiss onthe ground that his liability is only civil. Is he correct?

A. No, since he committed fraud when he promised topay for the goods and did not.

B. No, since his breach of the trust receipt agreementsubjects him to both civil and criminal liability forestafa.

C. Yes, since E cannot be charged with estafa overgoods covered a trust receipt.

D. Yes, since it was merely a consignment sale andthe buyer could not pay.

40. The authorized alteration of a warehouse receipt whichdoes not change its tenor renders the warehousemanliable according to the terms of the receipt

A. in its original tenor if the alteration is material.

B. in its original tenor.

C. as altered if there is fraud.

D. as altered.

525

41. Any agreement binding upon the holder to extend the timeof payment or to postpone the holder’s right to enforcethe instrument results in the discharge of the partysecondarily liable unless made with the latter’s consent.This agreement refers to one which the holder made withthe

A. principal debtor.

B. principal creditor.

C. secondary creditor.

D. secondary debtor.

42. Upon execution of a trust receipt over goods, the partywho is obliged to release such goods and who retainssecurity interest on those goods, is called the

A. holder.

B. shipper.

C. entrustee.

D. entrustor.

43. X, warehouseman, sent a text message to Y, to whom Xhad issued a warehouse receipt for Y’s 500 sacks of corn,notifying him of the due date and time to settle the storagefees. The message stated also that if Y does not settlethe warehouse charges within 10 days, he will advertisethe goods for sale at a public auction. When Y ignoredthe demand, X sold 100 sacks of corn at a public auction.For X’s failure to comply with the statutory requirementof written notice to satisfy his lien, the sale of the 100sacks of corn is

A. voidable.

B. rescissible.

C. unenforceable.

D. void.

44. On June 1, 2011, X mailed to Y Insurance, Co. hisapplication for life insurance, with payment for 5 years of


premium enclosed in it. On July 21, 2011, the insurancecompany accepted the application and mailed, on thesame day, its acceptance plus the cover note. It reachedX’s residence on August 11, 2011. But, as it happened, onAugust 4, 2011, X figured in a car accident. He died a daylater. May X’s heirs recover on the insurance policy?

A. Yes, since under the Cognition Theory, the insurancecontract was perfected upon acceptance by theinsurer of X’s application.

B. No, since there is no privity of contract between theinsurer and X’s heirs.

C. No, since X had no knowledge of the insurer’sacceptance of his application before he died.

D. Yes, since under the Manifestation Theory, theinsurance contract was perfected upon acceptanceof the insurer of X’s application.

45. A bill of exchange has D as drawer, E as drawee and F aspayee. The bill was then indorsed to G, G to H, and H to I.I, the current holder presented the bill to E for acceptance.E accepted but, as it later turned out, D is a fictitiousperson. Is E freed from liability?

A. No, since by accepting, E admits the existence ofthe drawer.

B. No, since by accepting, E warrants that he is solvent.

C. Yes, if E was not aware of that fact at the time ofacceptance.

D. Yes, since a bill of exchange with a fictitious draweris void and inexistent.

46. Due to his debt to C, D wrote a promissory note which ispayable to the order of C. C’s brother, M, misrepresentinghimself as agent of C, obtained the note from D. M thennegotiated the note to N after forging the signature of C.May N enforce the note against D?

A. Yes, since D is the principal debtor.

B. No, since the signature of C was forged.

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C. No, since it is C who can enforce it, the note beingpayable to the order of C.

D. Yes, since D, as maker, is primarily liable on the note.

47. T Corp. has a corporate term of 20 years under its Articlesof Incorporation or from June 1, 1980 to June 1, 2000. OnJune 1, 1991 it amended its Articles of Incorporation toextend its life by 15 years from June 1, 1980 to June 1,2015. The SEC approved this amendment. On June 1,2011, however, T Corp decided to shorten its term by 1year or until June 1, 2014. Both the 1991 and 2011amendments were approved by majority vote of its Boardof Directors and ratified in a special meeting by itsstockholders representing at least 2/3 of its outstandingcapital stock. The SEC, however, disapproved the 2011amendment on the ground that it cannot be made earlierthan 5 years prior to the expiration date of the corporateterm, which is June 1, 2014. Is this SEC disapprovalcorrect?

A. No, since the 5-year rule on amendment of corporateterm applies only to extension, not to shortening, ofterm.

B. Yes, any amendment affecting corporate term cannotbe made earlier than 5 years prior to the corporation’sexpiration date.

C. No, since a corporation can in fact have a corporatelife of 50 years.

D. Yes, the amendment to shorten corporate termcannot be made earlier than 5 years prior to thecorporation’s expiration date.

48. B, while drunk, accepted a passenger in his taxicab. Bthen drove the taxi recklessly, and inevitably, it crashedinto an electric post, resulting in serious physical injuriesto the passengers. The latter then filed a suit for tortagainst B’s operator, A, but A raised the defense of havingexercised extraordinary diligence in the safety of thepassenger. Is his defense tenable?


A. Yes, as a common carrier can rebut the presumptionof negligence by raising such a defense.

B. No, as in tort actions, the proper defense is duediligence in the selection and supervision of theemployee by the employer.

C. No, as B, the common carrier’s employee, wasobviously negligent due to his intoxication.

D. Yes, as a common carrier can invoke extraordinarydiligence in the safety of passengers in tort cases.

49. X is a director in T Corp. who was elected to a 1-year termon Feb. 1, 2010. On April 11, 2010, X resigned and wasreplaced by R, who assumed as director on May 17, 2010.On Nov. 21, 2010, R died. S was then elected in his place.Until which time should S serve as director?

A. April 11, 2011.

B. Feb. 1, 2011.

C. May 17, 2011.

D. Nov. 21, 2011.

50. M, the maker, issued a promissory note to P, the payeewhich states: “I, M, promise to pay P or order the amountof Php1 Million. Signed, M.” P negotiated the note byindorsement to N, then N to O also by indorsement, andO to Q, again by indorsement. But before O indorsed thenote to Q, O’s wife wrote the figure “2” on the note after“Php1” without O’s knowledge, making it appear that thenote is for Php12 Million. For how much is O liable to Q?

A. Php1 Million since it is the original tenor of the note.

B. Php1 Million since he warrants that the note isgenuine and in all respects what it purports to be.

C. Php12 Million since he warrants his solvency andthat he has a good title to the note.

D. Php12 Million since he warrants that the note isgenuine and in all respects what it purports to be.

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51. X Corp., whose business purpose is to manufacture andsell vehicles, invested its funds in Y Corp., an investmentfirm, through a resolution of its Board of Directors. Theinvestment grew tremendously on account of Y Corp.’sexcellent business judgment. But a minority stockholderin X Corp. assails the investment as ultra vires. Is he rightand, if so, what is the status of the investment?

A. Yes, it is an ultra vires act of the corporation itselfbut voidable only, subject to stockholders’ ratification.

B. Yes, it is an ultra vires act of its Board of Directorsand thus void.

C. Yes, it is an ultra vires act of its Board of Directorsbut voidable only, subject to stockholders’ ratification.

D. Yes, it is an ultra vires act of the corporation itselfand, consequently, void.

52. Notice of dishonor is not required to be made in all cases.One instance where such notice is not necessary is whenthe indorser is the one to whom the instrument is supposeto be presented for payment. The rationale here is thatthe indorser

A. already knows of the dishonor and it makes no senseto notify him of it.

B. is bound to make the acceptance in all cases.

C. has no reason to expect the dishonor of theinstrument.

D. must be made to account for all his actions.

53. “Eagleson Refillers, Co.,” a firm that sells water to thepublic, opposes theVtrade name application of “EaglesonLaundry, Co.,” on the ground that such trade name tendsto deceive trade circles or confuse the public with respectto the water firm’s registered trade name. Will theopposition prosper?

A. Yes, since such use is likely to deceive or confusethe public.


B. Yes, since both companies use water in conductingtheir business.

C. No, since the companies are not engaged in thesame line of business.

D. No, since the root word “Eagle” is a generic namenot subject to registration.

54. For a constructive total loss to exist in marine insurance,it is required that the person insured relinquish hisinterest in the thing insured. This relinquishment mustbe

A. actual.

B. constructive first and if it fails, then actual.

C. either actual or constructive.

D. constructive.

55. The Corporation Code sanctions a contract between twoor more corporations which have interlocking directors,provided there is no fraud that attends it and it is fair andreasonable under the circumstances. The interest of aninterlocking director in one corporation may be eithersubstantial or nominal. It is nominal if his interest:

A. does not exceed 25% of the outstanding capitalstock.

B. exceeds 25% of the outstanding capital stock.

C. exceeds 20% of the outstanding capital stock.

D. does not exceed 20% of the outstanding capitalstock.

56. X, an amateur astronomer, stumbled upon what appearedto be a massive volcanic eruption in Jupiter while peeringat the planet through his telescope. The following week,X, without notes, presented a lecture on his findingsbefore the Association of Astronomers of the Philippines.To his dismay, he later read an article in a science journalwritten by Y, a professional astronomer, repeating exactlywhat X discovered without any attribution to him. Has Yinfringed on X’s copyright, if any?

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A. No, since X did not reduce his lecture in writing orother material form.

B. Yes, since the lecture is considered X’s original work.

C. No, since no protection extends to any discovery,even if expressed, explained, illustrated, orembodied in a work.

D. Yes, since Y’s article failed to make any attributionto X.

57. In case of disagreement between the corporation and awithdrawing stockholder who exercises his appraisalright regarding the fair value of his shares, a three-member group shall by majority vote resolve the issuewith finality. May the wife of the withdrawing stockholderbe named to the three member group?

A. No, the wife of the withdrawing shareholder is not adisinterested person.

B. Yes, since she could best protect her husband’sshareholdings.

C. Yes, since the rules do not discriminate againstwives.

D. No, since the stockholder himself should sit in thethree-member group.

58. Apart from economic rights, the author of a copyright alsohas moral rights which he may transfer by way ofassignment. The term of these moral rights shall Last

A. during the author’s lifetime and for 50 years after hisdeath.

B. forever.

C. 50 years from the time the author created his work.

D. during the author’s lifetime.

59. Which of the following indorsers expressly warrants innegotiating an instrument that 1) it is genuine and true;2) he has a good title to it; 3) all prior parties have capacity


to negotiate; and 4) it is valid and subsisting at the timeof his indorsement?

A. The irregular indorser.

B. The regular indorser.

C. The general indorser.

D. The qualified indorser.

60. Where the insurer was made to pay the insured for a losscovered by the insurance contract, such insurer can runafter the third person who caused the loss throughsubrogation. What is the basis for conferring the right ofsubrogation to the insurer?

A. Their express stipulation in the contract of insurance.

B. The equitable assignment that results from theinsurer’s payment of the insured.

C. The insured’s formal assignment of his right toindemnification to the insurer.

D. The insured’s endorsement of its claim to the insurer.

61. X invented a device which, through the use of noise, canrecharge a cellphone battery. He applied for and wasgranted a patent on his device, effective within thePhilippines. As it turns out, a year before the grant of X’spatent, Y, also an inventor, invented a similar device whichhe used in his cellphone business in Manila. But X filesan injunctive suit against Y to stop him from using thedevice on the ground of patent infringement. Will the suitprosper?

A. No, since the correct remedy for X is a civil actionfor damages.

B. No, since Y is a prior user in good faith.

C. Yes, since X is the first to register his device for patentregistration.

D. Yes, since Y unwittingly used X’s patented invention.

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62. P, a sales girl in a flower shop at the Ayala Station of theMetro Rail Transit (MRT) bought two tokens or tickets,one for her ride to work and another for her ride home.She got to her flower shop where she usually worked from8 a.m. to 5 p.m. At about 3 p.m., while P was attending toher duties at the flower shop, two crews of the MRT gotinto a fight near the flower shop, causing injuries to P inthe process. Can P sue the MRT for contractual breachas she was within the MRT premises where she wouldshortly take her ride home?

A. No, since the incident took place, not in an MRT traincoach, but at the MRT station.

B. No, since P had no intention to board an MRT traincoach when the incident occured.

C. Yes, since she already had a ticket for her ride homeand was in the MRTs premises at the time of theincident.

D. Yes, since she bought a round trip ticket and MRThad a duty while she was at its station to keep hersafe for her return trip.

63. Forgery of bills of exchange may be subdivided into, a)forgery of an indorsement on the bill and b) forgery ofthe drawer’s signature, which may either be withacceptance by the drawee, or

A. with acceptance but the bill is paid by the drawee.

B. without acceptance but the bill is paid by the drawer.

C. without acceptance but the bill is paid by the drawee.

D. with acceptance but the bill is paid by the drawer.

64. If an insurance policy prohibits additional insurance onthe property insured without the insurer’s consent, suchprovision being valid and reasonable, a violation by theinsured

A. reduces the value of the policy.

B. avoids the policy.


C. offsets the value of the policy with the additionalinsurances’s value.

D. forfeits premiums already paid.

65. X found a check on the street, drawn by Y against ABCBank, with Z as payee. X forged Z’s signature as anindorser, then indorsed it personally and delivered it toDEF Bank. The latter, in turn, indorsed it to ABC Bankwhich charged it to the Y’s account. Y later sued ABCBank but it set up the forgery as its defense. Will itprosper?

A. No, since the payee’s signature has been forged.

B. No, since Y’s remedy is to run after the forger, X.

C. Yes, since forgery is only a personal defense.

D. Yes, since ABC Bank is bound to know the signatureof Y, its client.

66. The rule is that no stock dividend shall be issued withoutthe approval of stockholders representing at least 2/3 ofthe outstanding capital stock at a regular or specialmeeting called for the purpose. As to other forms ofdividends:

A. a mere majority of the entire Board of Directorsapplies.

B. a mere majority of the quorum of the Board ofDirectors applies.

C. a mere majority of the votes of stockholdersrepresenting the outstanding capital stock applies.

D. the same rule of 2/3 votes applies.

67. X, at Y’s request, executed a Real Estate Mortgage (REM)on his (X’s) land to secure Y’s loan from Z. Z successfullyforeclosed the REM when Y defaulted on the loan but halfof Y’s obligation remained unpaid. May Z sue X to enforcehis right to the deficiency?

A. Yes, but solidarily with Y.

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B. Yes, since X’s is deemed to warrant that his landwould cover the whole obligation.

C. No, since it is the buyer at the auction sale whoshould answer for the deficiency.

D. No, because X is not Z’s debtor.

68. May a publicly listed universal bank own 100% of thevoting stocks in another universal bank and in acommercial bank?

A. Yes, if with the permission of the Bangko Sentral ngPilipinas.

B. No, since it has no power to invest in equities.

C. Yes, as there is no prohibition on it.

D. No, since under the law, the 100% ownership onvoting stocks must be in either bank only.

69. Perils of the ship, under marine insurance law, refer toloss which in the ordinary course of events results from

A. natural and inevitable actions of the sea.

B. natural and ordinary actions of the sea.

C. unnatural and inevitable actions of the sea.

D. unnatural and ordinary actions of the sea.

70. Under the Intellectual Property Code, lectures, sermons,addresses or dissertations prepared for oral delivery,whether or not reduced in writing or other material forms,are regarded as

A. non-original works.

B. original works.

C. derivative works.

D. not subject to protection.

71. Can a drawee who accepts a materially altered checkrecover from the holder and the drawer?

A. No, he cannot recover from either of them.


B. Yes from both of them.

C. Yes but only from the drawer.

D. Yes but only from the holder.

72. The rule is that the intentional cancellation of a personsecondarily liable results in the discharge of the latter.With respect to an indorser, the holder’s right to cancelhis signature is:

A. without limitation.

B. not limited to the case where the indorsement isnecessary to his title.

C. limited to the case where the indorsement is notnecessary to his title.

D. limited to the case where the indorsement isnecessary to his title.

73. X, in the hospital for kidney dysfunction, was about to bedischarged when he met his friend Y. X told Y the reasonfor his hospitalization. A month later, X applied for aninsurance covering serious illnesses from ABC Insurance,Co., where Y was working as Corporate Secretary. SinceX had already told Y about his hospitalization, he no longeranswered a question regarding it in the application form.Would this constitute concealment?

A. Yes, since the previous hospitalization wouldinfluence the insurer in deciding whether to grantX’s application.

B. No, since Y may be regarded as ABC’s agent andhe already knew of X’s previous hospitalization.

C. Yes, it would constitute concealment that amountsto misrepresentation on X’s part.

D. No, since the previous illness is not a material factto the insurance coverage.

74. Several American doctors wanted to set up a group clinicin the Philippines so they could render modern medicalservices. If the clinic is to be incorporated under our laws,

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what is the required foreign equity participation in such acorporation?

A. 40%

B. 0%

C. 60%

D. 70%

75. X executed a promissory note in favor of Y by way ofaccommodation. It says: “Pay to Y or order the amountof Php50,000.00. Signed, X.” Y then indorsed the note toZ, and Z to T. When T sought collection from Y, the lattercountered as indorser that there should have been apresentment first to the maker who dishonors it. Is Ycorrect?

A. No, since Y is the real debtor and thus, there is noneed for presentment for payment and dishonor bythe maker.

B. Yes, since as an indorser who is secondarily liable,there must first be presentment for payment anddishonor by the maker.

C. No, since the absolute rule is that there is no needfor presentment for payment and dishonor to holdan indorser liable.

D. Yes, since the secondary liability of Y and Z wouldonly arise after presentment for payment anddishonor by the maker.

76. The Board of Directors of XYZ Corp. unanimously passeda Resolution approving the taking of steps that in realityamounted to willful tax evasion. On discovering this, thegovernment filed tax evasion charges against all thecompany’s members of the board of directors. Thedirectors invoked the defense that they have no personalliability, being mere directors of a fictional being. Are theycorrect?

A. No, since as a rule only natural persons like themembers of the board of directors can commitcorporate crimes.


B. Yes, since it is the corporation that did not pay thetax and it has a personality distinct from its directors.

C. Yes, since the directors officially and collectivelyperformed acts that are imputable only to thecorporation.

D. No, since the law makes directors of the corporationsolidarily liable for gross negligence and bad faith inthe discharge of their duties.

77. T is the registered trademark owner of “CROCOS” whichhe uses on his ready-to-wear clothes. Banking on thepopularity of T’s trade mark, B came up with his own“CROCOS” mark, which he then used for his “CROCOS”burgers. T now sues B for trademark infringement but Bargues that his product is a burger, hence, there is noinfringement. Is B correct?

A. No, since the owner of a well-known mark registeredin the Philippines has rights that extends even todissimilar kinds of goods.

B. Yes, since the right of the owner of a well-knownmark registered in the Philippines does not extendto goods which are not of the same kind.

C. Yes, as B was in bad faith in coming up with his own“CROCOS” mark.

D. No, since unlike T, he did not register his own“CROCOS” mark for his product.

78. A, the proprietor of a fleet of ten taxicabs, decides toadopt, as his business name, “A Transport Co., Inc.” Maythis be allowed?

A. No, it would be deceptive since he is a proprietor,not a corporation.

B. No, since “A” is a generic name, not suitable forregistration.

C. Yes, since his line of business is publictransportation.

D. Yes, since such name would give his business acorporate identity.

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79. T delivers two refrigerators to the warehouse of W whothen issues a negotiable receipt undertaking the deliveryof the refrigerators to “T or bearer.” T entrusted thereceipt to B for safekeeping only. B negotiated it, however,to F who bought it in good faith and for value. Who isentitled to the delivery of the refrigerators?

A. T, since he is the real owner of the refrigerators.

B. F, since he is a purchaser in good faith and for value.

C. B, since T entrusted the receipt to him.

D. W, since he has as a warehouseman a lien on thegoods.

80. The Articles of Incorporation must be accompanied by aTreasurer’s Affidavit certifying under oath, among others,that the total subscription paid is:

A. not less than P25,000.00.

B. not more than P5,000.00.

C. not less than P5,000.00.

D. not more than P25,000.00.

81. In a special meeting called for the purpose, 2/3 of thestockholders representing the outstanding capital stockin X. Co. authorized the company’s Board of Directors toamend its By-laws. By majority vote, the Board thenapproved the amendment. Is this amendment valid?

A. No since the stockholders cannot delegate their rightto amend the By-laws to the Board.

B. Yes since the majority votes in the Board wassufficient to amend the By-laws.

C. No, because the voting in the Board should havebeen by majority of a quorum.

D. Yes since the votes of 2/3 of the stockholders andmajority of the Board were secured.

82. A group of Malaysians wanted to invest in the Philippines’insurance business. After negotiations, they agreed to


organize “FIMA Insurance Corp.” with a group of Filipinobusinessmen. FIMA would have a PhP50 Million paid upcapital, PhP40 Million of which would come from theFilipino group. All corporate officers would be Filipinosand 8 out of its 10-member Board of Directors would beFilipinos. Can FIMA operate an insurance business inthe Philippines?

A. No, since an insurance company must have at leastPhP75 Million paid-up capital.

B. Yes, since there is substantial compliance with ournationalization laws respecting paid-up capital andFilipino dominated Board of Directors.

C. Yes, since FIMA’s paid up capital more than meetsthe country’s nationalization laws.

D. No, since an insurance company should be 100%owned by Filipinos.

83. Under the Public Service Act, an administrative agencyhas the power to approve provisionally the rates of publicutilities without a hearing in case of urgent public needs.The exercise of this power is

A. supervisory.

B. absolute.

C. discretionary.

D. mandatory.

84. X, creditor of Y, obtained a judgment in his favor inconnection with Y’s unpaid loan to him. The court’s sheriffthen levied on the goods that Y stored in T’s warehouse,for which the latter issued a warehouse receipt. A monthbefore the levy, however, Z bought the warehouse receiptfor value. Who has a better right over the goods?

A. T, being the warehouseman with a lien on the goods

B. Z, being a purchaser for value of the warehousereceipt

C. X, being Y’s judgment creditor

D. Y, being the owner of the goods

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85. A promissory note states, on its face: “I, X, promise topay Y the amount of Php 5,000.00 five days aftercompletion of the on-going construction of my house.Signed, X.” Is the note negotiable?

A. Yes, since it is payable at a fixed period after theoccurrence of a specified event.

B. No, since it is payable at a fixed period after theoccurrence of an event which may not happen.

C. Yes, since it is payable at a fixed period ordeterminable future time.

D. No, since it should be payable at a fixed period beforethe occurrence of a specified event.

86. P sold to M a pair of gecko (tuko) for Php50,000.00. Mthen issued a promissory note to P promising to pay themoney within 90 days. Unknown to P and M, a law waspassed a month before the sale that prohibits and declaresvoid any agreement to sell gecko in the country. If Xacquired the note in good faith and for value, may heenforce payment on it?

A. No, since the law declared void the contract on whichthe promissory note was founded.

B. No, since it was not X who bought the gecko.

C. Yes, since he is a holder in due course of a notewhich is distinct from the sale of gecko.

D. Yes, since he is a holder in due course and P and Mwere not aware of the law that prohibited the sale ofgecko.

87. P authorized A to sign a bill of exchange in his (P’s) name.The bill reads: “Pay to B or order the sum of Php1 million.Signed, A (for and in behalf of P).” The bill was drawn onP. B indorsed the bill to C, C to D, and D to E. May E treatthe bill as a promissory note?

A. No, because the instrument is payable to order andhas been indorsed several times.


B. Yes, because the drawer and drawee are one andthe same person.

C. No, because the instrument is a bill of exchange.

D. Yes, because A was only an agent of P.

88. Z wrote out an instrument that states: “Pay to X theamount of Php1 Million for collection only. Signed, Z.” Xindorsed it to his creditor, Y, to whom he owed Php1million. Y now wants to collect and satisfy X’s debtthrough the Php1 million on the check. May he validly doso?

A. Yes, since the indorsement to Y is for Php1 Million.

B. No, since Z is not a party to the loan between X andY.

C. No, since X is merely an agent of Z, his only rightbeing to collect.

D. Yes, since X owed Y Php1 Million.

89. X Shipping, Co., insured its vessel MV Don Teodoro forPhp100 Million with ABC Insurance, Co. through T, anagent of X Shipping. During a voyage, the vesselaccidentally caught fire and suffered damages estimatedat Php80 Million. T personally informed ABC Insurancethat X Shipping was abandoning the ship. Later, ABCinsurance denied X Shipping’s claim for loss on theground that a notice of abandonment through its agentwas improper. Is ABC Insurance right?

A. Yes, since X Shipping should have ratified its agent’saction.

B. No, since T, as agent of X Shipping who procuredthe insurance, can also give notice of abandonmentfor his principal.

C. Yes, since only the agent of X Shipping relayed thefact of abandonment.

D. No, since in the first place, the damage was morethan ¾ of the ship’s value.

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90. A law was passed disqualifying former members ofCongress from sitting in the Board of Directors ofgovernment-owned or controlled corporations. Becauseof this, the Board of Directors of ABC Corp., agovernment-owned and controlled corporation,disqualified C, a former Congressman, from continuingto sit as one of its members. C objected, however,insisting that under the Corporation Code members ofthe board of directors of corporations may only beremoved by vote of stockholders holding 2/3 of itsoutstanding capital stock in a regular or special meetingcalled for that purpose. Is C correct?

A. Yes, since the new law cannot be applied tomembers of the board of directors already electedprior to its passage.

B. No, since the disqualification takes effect byoperation of law, it is sufficient that he was declaredno longer a member of the board.

C. Yes, since the provisions of the Corporation Codeapplies as well to government-owned and controlledcorporations.

D. No, since the board has the power to oust him evenwithout the new law.

91. 002-38-0001 G, a grocery goods supplier, sold 100 sacksof rice to H who promised to pay once he has sold all therice. H meantime delivered the goods to W, awarehouseman, who issued a warehouse receipt.Without the knowledge of G and W, H negotiated thereceipt to P who acquired it in good faith and for value. Pthen claimed the goods from W, who released them. Afterthe rice was loaded on a ship bound for Manila, G invokeshis right to stop the goods in transit due to his unpaidlien. Who has a better right to the rice?

A. P, since he has superior rights as a purchaser forvalue and in good faith.

B. P, regardless of whether or not he is a purchaser forvalue and in good faith.


C. G, since as an unpaid seller, he has the right ofstoppage in transitu.

D. W, since it appears that the warehouse charges havenot been paid.

92. In a signature by procuration, the principal isbound only in case the agent acted within the actual limits ofhis authority. The signature of the agent in such a caseoperates as notice that he has

A. a qualified authority to sign.B. a limited authority to sign.C. a special authority to sign.D. full authority to sign.

93. In return for the 20 years of faithful service of X asa househelper to Y, the latter promised to pay Php100,000.00to X’s heirs if he (X) dies in an accident by fire. X agreed. Isthis an insurance contract?

A. Yes, since all the elements of an insurance contractare present.

B. Yes, since X’ services may be regarded as theconsideration.

C. No, since Y actually made a conditional donation inX’s favor.

D. No, since it is in fact an innominate contract betweenX and Y.

94. A bill of exchange states on its face: “One (1) monthafter sight, pay to the order of Mr. R the amount ofPhp50,000.00, chargeable to the account of Mr. S. Signed,Mr. T.” Mr. S, the drawee, accepted the bill upon presentmentby writing on it the words “I shall pay Php30,000.00 three (3)months after sight.” May he accept under such terms, whichvaries the command in the bill of exchange?

A. Yes, since a drawee accepts according to the tenorof his acceptance.

B. No, since, once he accepts, a drawee is liableaccording to the tenor of the bill.

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C. Yes, provided the drawer and payee agree to theacceptance.

D. No, since he is bound as drawee to accept the billaccording to its tenor.

95. May the indorsee of a promissory note indorsedto him “for deposit” file a suit against the indorser?

A. Yes, as long as the indorser received value for therestrictive indorsement.

B. Yes, as long as the indorser received value for theconditional indorsement.

C. Yes, whether or not the indorser received value forthe conditional indorsement.

D. Yes, whether or not the indorser received value forthe restrictive indorsement.

96. X issued a check in favor of his creditor, Y. It reads:“Pay to Y the amount of Seven Thousand Hundred Pesos(Php700,000.00). Signed, X”. What amount should beconstrued as true in such a case?

A. Php700,000.00.B. Php700.00.C. Php7,000.00.D. Php700,100.00.

97. Shipowner X, in applying for a marine insurancepolicy from ABC, Co., stated that his vessel usually sailsmiddle of August and with normally 100 tons of cargo. Itturned out later that the vessel departed on the first week ofSeptember and with only 10 tons of cargo. Will this avoidthe policy that was issued?

A. Yes, because there was breach of implied warranty.B. No, because there was no intent to breach an implied

warranty.C. Yes, because it relates to a material representation.D. No, because there was only representation of

intention.


98. The Articles of Incorporation of ABC Transport Co., apublic utility, provides for ten (10) members in its Boardof Directors. What is the prescribed minimum number ofFilipino citizens in its Board?

A. 10

B. 6

C. 7

D. 5

99. P authorized A to sign a negotiable instrument in his (P’s)name. It reads: “Pay to B or order the sum of Php1 million.Signed, A (for and in behalf of P).” The instrument showsthat it was drawn on P. B then indorsed to C, C to D, andD to E. E then treated it as a bill of exchange. Ispresentment for acceptance necessary in this case?

A. No, since the drawer and drawee are the sameperson.

B. No, since the bill is non-negotiable, the drawer anddrawee being the same person.

C. Yes, since the bill is payable to order, presentmentis required for acceptance.

D. Yes, in order to hold all persons liable on the bill.

100. The corporate term of a stock corporation is that whichis stated in its Articles of Incorporation. It may beextended or shortened by an amendment of the Articleswhen approved by majority of its Board of Directors and:

A. approved and ratified by at least 2/3 of allstockholders.

B. approved by at least 2/3 of the stockholdersrepresenting the outstanding capital stock.

C. ratified by at least 2/3 of all stockholders.

D. ratified by at least 2/3 of the stockholdersrepresenting the outstanding capital stock.

Documents

Basic Principles and Jurisprudence on Negotiable Instruments Law 2012 Edition - Piad-libre