Campos Notes

7/30/2019 Campos Notes

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INTRODUCTION

1. Kinds of negotiable instrumentPurpose: facilitate commercial transactions

Two Main Groups under Negotiable

Instruments Law (NIL)

1.PROMISSORY NOTE evidence of promise topay

2.BILLS OF EXCHANGE an order made by oneperson to another to pay money to 3rdperson

Ex:Checks one issues it and orders bank to

pay the person named on the checkDrafts form of BOE used mainly in

transactions between personsphysically remote from each other. Anorder made by one person (buyer of

goods), addressed to person having inhis possession the funds of the buyerordering the addressee to pay thepurchase price to the seller of goods

Other forms1.CERTIFICATE OF DEPOSIT instrument issued

by bank reciting deposit of a certain sum ofmoney, payable either at a fixed time or ondemand to the depositor named therein

2.BOND evidence of indebtedness issued bycorporation (public or private) payable at adefinite date in the future, usually for a longterm

- written promise by a corporation topay a definite sum of money on theday named

NOTE: when a certificate of deposit or a bondconforms with the requirements of the NIL,then it is a negotiable instrument

2. Parties and the nature of their liabilitya. Maker the promissorb. Payee person to whom the promise to pay

is made

For promissory note:Drawer person who gives the order to pay

Drawee addressee of the orderPayee to whom payment is made

For bills of exchange:negotiated or indorsed - When the payee

transfers it the instrument to another bysigning it at the bank

Indorser the one who indorsed / signsIndorsee to whom he negotiates and becomes

the holderof the instrument

As to nature of liability1. Primary one who is absolutely or

unconditionally required to pay wheninstrument falls due

PN - the makerBOE no one is primarily liable unless

drawee accepts order of the drawer,

if drawee accepts he becomes anacceptorwho is absolutely bound topay

2. Secondary drawer of bill of exchange or theindorser of the bill or note

Conditions of their liability:1. Demand is made on the primary

party2. If the primary dishonor (fail to pay),

notice be given to secondary party

2 contracts entered into by indorser2. Selling or transferring the instrument3. Warrants the he will pay in case

conditions above are satisfied

4. Functions of negotiable instrumenta. Substitute for money in payment for

property or service> payment by check

b. Means of creating and transferring creditand facilitate sale of goods> car paid on installment with promissory

note

For international trade: DRAFT

> letter of creditEx:A buyer from Manila B seller from USB draw a draft on A ordering the latter to pay the

price of machine to Bs agent (bank). Draftwith the Bill of lading are sent to Manilaagent who will collect from A on the draftbefore delivering to B.

NOTE: even if used as substitute for money, itsvalidity as means for payment is conditionedon it being honored by person bound to pay

Art. 1249. X x x

The delivery of promissory notes payable toorder, or bills of exchange or othermercantile documents shall produce theeffect of payment only when they have beencashed, or when through the fault of thecreditor they have been impaired.

In the meantime, the action derived from theoriginal obligation shall be held in theabeyance.


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Note: tender of check sufficient to redeemforeclosed property since redemption is notan obligation but a right. Redemptioner,however, is not relieved from his liability topay the redemption price

5. Concept of negotiabilityIllustration:A buys a car. He makes a downpayment andsigns a PN for balance payable in a year.

Seller converts note to cash before its due dateand sells it at a discount with a bank.

If car has defect, A may refuse to pay the bankwhen the latter demands payment. Bank onlysteps on shoes of seller who cannot compel A topay in full because of the defect on the car.

Theory: Title of subsequent holder of the note

can be no better than the title of the transferor.

HOWEVER, if note is in form specified by NIL,bank may demand payment from A despitefailure of consideration (defective car). Defenseof A would be against seller not the bank.

Theory: person to whom NI is negotiated mayacquire better rights than its transferor.

Note:> A person who takes a NI can rely on its faceand need not inquire itno past events which gaverise to its execution. Inquiry would entail delayin commercial transactions.

Two contracts involved:a) Contract of saleb) Promise to pay

6. Origin of negotiable instruments> Florentine and venetian merchants> facilitate the contract ofcambium

7. History of negotiable instruments> English Bill of Exchange (1882)> Uniform Negotiable Instruments Law of the US

(1896)> Uniform Commercial code (1958)

Philippines: 1911

8. Applicability of negotiable instrument law> ONLY to negotiable instruments those which

conform with the requisites laid down bySec. 1 of the law

> Otherwise, it is governed by general law oncontracts

Sec. 196. Cases not provided for in Act. -Anycase not provided for in this Act shall begoverned by the provisions of existinglegislation or in default thereof, by the rules

of the law merchant.


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CHAPTER IREQUISITES OF NEGOTIABILITY

Section 1. Form of negotiable instruments. -Aninstrument to be negotiable must conformto the following requirements:

a)It must be in writing and signed by the makeror drawer;

b)Must contain an unconditional promise ororder to pay 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; ande)Where the instrument is addressed to a

drawee, he must be named or otherwiseindicated therein with reasonable certainty.

Sec. 184. Promissory note, defined. - Anegotiable promissory note within themeaning of this Act is an unconditionalpromise in writing made by one person toanother, signed by the maker, engaging to

pay on demand, or at a fixed ordeterminable future time, a sum certain inmoney to order or to bearer. Where a note isdrawn to the maker's own order, it is notcomplete until indorsed by him.

Sec. 126. Bill of exchange, defined. - A bill ofexchange is an unconditional order inwriting addressed by one person to another,signed by the person giving it, requiring theperson to whom it is addressed to pay ondemand or at a fixed or determinable futuretime a sum certain in money to order or tobearer.

Note: if instrument did not meet the requisites,its validity will not be affected. But insteadof being governed by NIL, it will be governedby general law on contracts

1. Written from and signatureSec. 18. Liability of person signing in trade or

assumed name. - No person is liable on theinstrument whose signature does not appearthereon, except as herein otherwiseexpressly provided. But one who signs in atrade or assumed name will be liable to the

same extent as if he had signed in his ownname.

Sec. 19. Signature by agent; authority; howshown. - The signature of any party may bemade by a duly authorized agent. Noparticular form of appointment is necessaryfor this purpose; and the authority of theagent may be established as in other cases ofagency.

In writing includes print, what is written bypen, what is typed.

Signature is binding: printed, engraved,lithographed or photographed so long as itis intended to be adopted as such withsigners authority and it may appear on anypart of the instrument

2. Unconditional order or promise to pay Express promise on face of instrument Contain promise and order to pay Any expression equivalent to promise

or order is sufficient

Mere acknowledgment of debt Word promise is not absolutely

necessary

Order command, imperative direction Mere request or authority to pay

please does not itself deprive theinstrument of its characteristic as anorder

Language must clearly indicate demandto pay

a. When unconditionalSec. 3. When promise is unconditional. -An

unqualified order or promise to pay isunconditional within the meaning of this Actthough coupled with:

a) An indication of a particular fund out ofwhich reimbursement is to be made or aparticular account to be debited with theamount; or

b) A statement of the transaction which givesrise to the instrument.

But an order or promise to pay out of aparticular fund is not unconditional.

Must be unqualified Absolute right cannot be defeated by

contingency Indication of particular fund out of

which reimbursement is to be made oran account from which payment is to bedebited will not render an orderconditional

No statement where disbursement is tobe taken from, although drawee isauthorized to reimburse himself fromparticular fund

Fact that condition has been fulfilled willstill not make instrument negotiable


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3. Sum payable must be certainSec. 2. What constitutes certainty as to sum. -

The sum payable is a sum certain within themeaning of this Act, although it is to bepaid:

a)with interest; orb)by stated installments; orc)by stated installments, with a provision that,

upon default in payment of any installmentor 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, incase payment shall not be made at maturity.

Agreement to pay an interest does notmake the sum uncertain, exact amountcan be computed without lookingbeyond the instrument

Payable in installment as long as it isstated (amount is fixed) Acceleration provision Sum in foreign currency payable in

Philippine currency at fixed rate ofexchange or the rate prevailing at timepayment is made

Payment of attorneys fees although theamount is unspecified can be fixed bythe court

4. Payable in money

Capable of being transformed to money Gives holder an election to requiresomething to be done in lieu of paymentof money (right to repossess property)

Payable in personal property(merchandise, shares of stock, gold, etc.)

Payable partly in money and partly byrendering service

Agreeing to pay taxes assessed upon thenote

Option is with the makerMoney not necessarily the legal tender but any

particular kind of current money

Note: if payable in currency other than Philcurrency, such stipulation is ineffective andobligation can discharged only in legaltender but negotiability is still unaffected.

5. Certainty of time of paymentMust be payable:

1. On demand

2. At fixed time3. Determinable future time

a. On demandSec. 7. When payable on demand. - An

instrument is payable on 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 when overdue, it is, as regards theperson so issuing, accepting, or indorsing it,payable on demand.

Demand instruments: Holder may call forpayment any time; maker has an option topay at any time, and the refusal of theholder to accept payment will terminate therunning of interest, if any, but the obligationto pay the note remains.

b. At fixed timeo Only on the stipulated date, and not

before, may the holder demand itspayment.

o Should he fail to demand payment, theinstrument becomes overdue but remainsvalid and negotiable. It is merelyconverted to a demand instrument.

c. Determinable future timeSec. 4. Determinable future time; what

constitutes. - An instrument is payable at adeterminable future time, within themeaning of this Act, which is expressed tobe payable:

(a) At a fixed period after date or sight; or(b) On or before a fixed or determinable future

time specified therein; or(c) On or at a fixed period after the occurrence of

a specified event which is certain to happen,though the time of happening be uncertain.

An instrument payable upon a contingency isnot negotiable, and the happening of theevent does not cure the defect.

Sec. 11. Date, presumption as to. - Where theinstrument or an acceptance or anyindorsement thereon is dated, such date isdeemed prima facie to be the true date ofthe making, drawing, acceptance, orindorsement, as the case may be.

Sec. 17. Construction where instrument isambiguous. - Where the language of theinstrument is ambiguous or there are


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omissions therein, the following rules ofconstruction apply:

(c) Where the instrument is not dated, it will beconsidered to be dated as of the time it wasissued;

1.) At a fixed period after date of sight;2.) On or before a fixed or determinable

future time specified therein;3.) On or at a fixed period after the

occurrence of a specified event which iscertain to happen, though the time ofhappening be uncertain.

d. Effect of acceleration provisionso If option (absolute or conditional) to

accelerate maturity is on the maker, stillNEGOTIABLE. Maker may pay earlier than the date

fixed but this option, if exercised, wouldbe a payment in advance of a legalliability to pay. It is still payable on thedate fixed, and holder has no right toenforce payment against the makerbefore such date.

o If optionto accelerate is on the holder: If option can be exercised onlyafter the

happeningof a specified event/act overwhich he has no control (conditional),still NEGOTIABLE.

If option is unconditional, time ofpayment is rendered uncertain, NOTnegotiable.

o Other instances where instrument stillNEGOTIABLE: When option given to the holder to

accelerate the maturity of an installmentnote upon failure of the maker to payany installment when due.

Acceleration, automatic upon default. Acceleration by operation of law.

Death before maturity filedagainst makers estate

Insolvent claim duringinsolvency proceeding

e. Provisions extending time of paymento General rule: Negotiability not affected.

Effect is similar with that of an accelerationclause at the option of the maker. (same asnote payable on or before __ years from___) Negotiability not affected, even if the

holder is given the option to extend timeof payment by mere inaction orindulgence for an indefinite time

depending on his will, because with orwithout this provision, the holder mayalways choose to be indulgent.

Should the holder not demand paymentupon maturity, the note simply becomesoverdue and is payable upon demand.

o Exception: Where a note with a fixedmaturity provides that the maker has theoption to extend time of payment until thehappening ofcontingency, instrument NOTnegotiable. The time for payment may nevercome at all.

6. Must be payable to order or to bearerwords of negotiability - serve as an

expression of consent that the instrumentmay be transferred.

Consent is indispensable since the makerassumes greater risks under a negotiableinstrument.

But the instrument need not follow thelanguage of the law; any term which clearlyindicates an intention to conform with thelegal requirements is sufficient.

Note:2.A postal money order is not a negotiable

instrument. Although it may be indorsedonce, such indorsement does NOT covnert itto a negotiable instrument because words ofnegotiability must appear ON THE FACE ofthe instrument as part of the originalcontract.

3.or bearer printed on a check are cancelled bydrawer NON-NEGOTIABLE

a. When instrument is payable to orderSec. 8. When payable to order. - The instrument

is payable to order where it is drawn payableto the order of a specified person or to himor his order.

Illustrations: (ONLY 2 ways by which aninstrument may be made payable to order)

1. (I promise to) Pay to the order of Juan2. (I promise to) Pay to Juan or order

Note: There must be a specified person

named. Bill or note is to be paid to the

designated person or to any person towhom he has indorsed or delivered thesame.


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Without to order or to order of, theinstrument is payable only to the persondesignated therein = NON NEGOTIABLE

b. When instrument is payable tobearer

Sec. 9. When payable to bearer. - Theinstrument is payable to bearer:

(a) When it is expressed to be so payable; or

(b) When it is payable to a person named thereinor bearer; or

(c) When it is payable to the order of a fictitiousor non-existing person, and such fact wasknown to the person making it so payable;or

(d) When the name of the payee does not purportto be the name of any person; or

(e) When the only or last indorsement is anindorsement in blank.

Illustrations:9(a): I promise to pay to bearer the sum of

P100 Pay to the holder (bec holder = bearer) bearer, Jose (merely describe Jose)

9(b): Pay to Jose or bearer

9(c): Pay to John Doe or order A name is fictitious when it is feigned or

pretended. That payee is a fictitious or non-existing

person must be known to the maker ordrawer (latter mustve intended theinstrument to be transferred by meredelivery)

If maker/drawer is NOT aware = ORDER Payable to bearer not to order because

John Doe is a fictitious person Payable to estate = payable to bearer

(bec it is payable to non-existing person)

9(d): pay to cash or pay to sundries Maker intends an impersonal payee =

intends to be payable to BEARER

9(e): blank BEARER even if originally ORDER Blank indorsement cannot covert non-

nego note to a nego one.

7. Parties must be designated with certaintya. Maker and Drawer

Maker/Drawer: Lower right handDrawee: lower left handPayee/Indorsee: back

Clear in what capacity they sign if theyfollow the long established andrecognized custom

DEVIATION not clear in what capacityhe signs: law considers him as anINDORSER

b. PayeeSec. 8. When payable to order. - The instrument

is payable to order where it is drawn payableto the order of a specified person or to himor 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, thepayee must be named or otherwise indicatedtherein with reasonable certainty.

An instrument may be made payable to anyoneof the following payees: (examples page 53)

a. Order of the payee; not themaker/drawer/drawee

b. Order of the maker or drawerc. Order of the draweed. 2 or more payees jointlye. One or more several payees jointly

When negotiating, both of themmust indorse

f. Holder of office for time being Payee is certain with 3

interpretations:i. Person holding the position at

maturityii. Person holding the position at

time of issuanceiii. Person holding the position at any

particular moment floatingpromise

3rd view is the most acceptable andwhat the lawmakers have in mindwhen they used the words for timebeing

If name is spelled wrongly:Sec. 43: Indorsement where name is misspelled,

and so forth. - Where the name of a payee orindorsee is wrongly designated ormisspelled, he may indorse the instrument


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as therein described adding, if he thinks fit,his proper signature.

c. DraweeSec. 128. Bill addressed to more than one

drawee. -A bill may be addressed to two or

more drawees jointly, whether they arepartners or not; but not to two or moredrawees in the alternative or in succession.

Sec. 130. When bill may be treated aspromissory note. - Where in a bill the drawerand drawee are the same person or wherethe drawee is a fictitious person or a personnot having capacity to contract, the holdermay treat the instrument at his option eitheras a bill of exchange or as a promissorynote.

If instrument addressed to drawee,he must be named or indicated with

reasonable certainty Bill may be addressed to 2 or more

drawees jointly, NOT in thealternative = no certainty as towhom the bill should be presented

8. Provisions not affecting negotiabilitySec. 5. Additional provisions not affecting

negotiability. - An instrument whichcontains an order or promise to do any actin addition to the payment of money is notnegotiable. But the negotiable character of

an instrument otherwise negotiable is notaffected by a provision which:(a) authorizes the sale of collateral securities in

case the instrument be not paid at maturity;or

(b) authorizes a confession of judgment if theinstrument be not paid at maturity; or

(c) waives the benefit of any law intended for theadvantage or protection of the obligor; or

(d) gives the holder an election to requiresomething to be done in lieu of payment ofmoney.

But nothing in this section shall validate any

provision or stipulation otherwise illegal.

1.Authorizes sale of collateral securities;2.Authorizes confession of judgment if

instrument not paid at maturity;

3.Waives the benefit of any law intended for theadvantage or protection of the obligor; or

4.Gives holder election to require something tobe done in lieu of payment of money. (if inaddition to money not NI)

Negotiability affected, wheninstrument contains a promise ororder to do any act in addition tothe payment of money.

In common law, two kinds of judgment byconfession:

Judgment by cognovit actionem Confession relicta verificationeRule on judgment by confession:GR: void (against public policy)E: authorized by statute

9. Omissions not affecting negotiabilitySec. 6. Omissions; seal; particular money. -The

validity and negotiable character of an

instrument are not affected by the fact that:(a) it is not dated; or

(b) does not specify the value given, or that anyvalue had been given therefor; or

(c) does not specify the place where it is drawnor the place where it is payable; or

(d) bears a seal; or

(e) designates a particular kind of current moneyin which payment is to be made.

But nothing in this section shall alter or repealany statute requiring in certain cases thenature of the consideration to be stated inthe instrument.

Bonds issued by corporation would bearits corporate seal which forms part of itssignature.

Validity and negotiability of instrumentnot affected by fact that it is not dated.Remedy: law fills in the gap andconsiders the date of issuance as thedate of the instrument and allows holderto insert the true date

NO need to express that value isreceived it is presumed to have beenissued for a valuable consideration

Place important (to know where theholder must present for payment) butnot essential


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10. Rules of constructionSec. 17. Construction where instrument is

ambiguous. - Where the language of theinstrument is ambiguous or there areomissions therein, the following rules ofconstruction apply:

(a) Where the sum payable is expressed in wordsand also in figures and there is adiscrepancy between the two, the sumdenoted by the words is the sum payable;but if the words are ambiguous or uncertain,reference may be had to the figures to fixthe amount;

(b) Where the instrument provides for thepayment of interest, without specifying thedate from which interest is to run, theinterest runs from the date of theinstrument, and if the instrument is

undated, from the issue thereof;(c) Where the instrument is not dated, it will beconsidered to be dated as of the time it wasissued;

(d) Where there is a conflict between the writtenand printed provisions of the instrument,the written provisions prevail;

(e) Where the instrument is so ambiguous thatthere is doubt whether it is a bill or note, theholder may treat it as either at his election;

(f) Where a signature is so placed upon theinstrument that it is not clear in whatcapacity the person making the sameintended to sign, he is to be deemed anindorser;

(g) Where an instrument containing the word "Ipromise to pay"is signed by two or morepersons, they are deemed to be jointly andseverally liable thereon.

1. Sum expressed in words takesprecedence over sum in numbers;BUT where words are so ambiguousor uncertain, reference to the figuresshould be made

2. Where interest is stipulated, withoutspecification of the starting date, theinterest runs from the date of theinstrument, and if undated, from theissue thereof

3. An undated instrument isconsidered dated as of time issued.

4. Written provisions prevail overprinted provisions

5. Where the instrument is ambiguousas to whether it is a note or a bill,the holder may treat it as either athis election

6. When the capacity of signatory isnot clear, he is to be deemed anindorser

7. I promise to pay when signed bytwo or more persons is deemed tobe jointly and severally signed


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CHAPTER IITRANSFER

1. Delivery & IssuanceSec. 16. Delivery; when effectual; whenpresumed. -Every contract on a negotiable

instrument is incomplete and revocable untildelivery of the instrument for the purpose ofgiving effect thereto. As between immediateparties and as regards a remote party other thana holder in due course, the delivery, in order tobe effectual, must be made either by or underthe authority of the party making, drawing,accepting, or indorsing, as the case may be; and,in such case, the delivery may be shown to havebeen conditional, or for a special purpose only,and not for the purpose of transferring theproperty in the instrument. But where theinstrument is in the hands of a holder in duecourse, a valid delivery thereof by all parties

prior to him so as to make them liable to him isconclusively presumed. And where theinstrument is no longer in the possession of aparty whose signature appears thereon, a validand intentional delivery by him is presumeduntil the contrary is proved.

Delivery means transfer of possession, actual orconstructive, from one person to another. Itmay be accomplished by manual transfer orby any other acct manifesting intent totransfer right of possession.

Issuance of instrument first delivery of theinstrument complete in form to a personwho takes it as a holder.

No initial deliver = no liability on saidinstrument

With intent to give effect to the instrument Instrument is no longer in possession of

person who signed it (presumed) Holder in due course (conclusive

presumption if instrument is complete) Given merely for safekeeping

2. NegotiationSec. 30. What constitutes negotiation. - An

instrument is negotiated when it istransferred from one person to another insuch manner as to constitute the transfereethe holder thereof. If payable to bearer, it isnegotiated by delivery; if payable to order, itis negotiated by the indorsement of theholder and completed by delivery.

Sec. 191. Definition and meaning of terms. - Inthis Act, unless the contract otherwiserequires:

"Bearer"means the person in possession of abill or note which is payable to bearer;

Holder"means the payee or indorsee of a bill ornote who is in possession of it, or the bearer

thereof;

Negotiation transfer of NI made in such amanner that the transferee becomes theholder and thus possibly a holder in duecourse capable of acquiring a better title tothe instrument that that of his transferor.

For value as in a sale or gift rights acquiredmay be different.

Transfer broader term than negotiation.Transferred without Nego = assignment

Assignee not a holder

3. Methods of negotiationsPayable to order:

a. Indorsement by payee or presentholder

b. Delivery to the transferee orindorsee who now becomes theholder

> Consist of signature of the indorser (usually onthe back)

Significance:

a.

Transfer or sale of the instrumentb. Signifies agreement of indorser toanswer for the amount represented bythe instrument in case of default of themaker or party primarily liable

Payable to bearer> negotiated by mere delivery> common practice: indorse before delivery

>> serve as security: indorser be liablenot just as seller of the note but also in caseof default of the primay liable.

Assignmenta. Order instrument is delivered to payee

without indorsementb. OI is delivered with improper

indorsement>> assignee takes the place of assignor subject

to defenses which may be existing betweenprior parties


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4. How indorsement madeAllonge indorsement on a separate paper

Common law practice: allonge is valid only ifthere is no longer room on the instrumentfor futher indorsement.

Uniform Commercial code: paper must be firmlyattached a to become part thereof

a. By signature on instrument or on allongeSec. 31. Indorsement; how made. -The

indorsement must be written on theinstrument itself or upon a paper attachedthereto. The signature of the indorser,without additional words, is a sufficientindorsement.

b. In case of joint payeesInstrument is payable or indorse to:

A and B, they are joint payees and anindorsement by either A or B will notconstitute a valid negotiation unless the oneindorsing is authorized by the other.

A or B they are alternative payees and eitherone may validly negotiate the same.

c. If name misspelledSec. 43. Indorsement where name is misspelled,

and so forth. - Where the name of a payee orindorsee is wrongly designated ormisspelled, he may indorse the instrumentas therein described adding, if he thinks fit,his proper signature.

Indorsement should be in the manner he wasdesignated, otherwise, signature will primafacie not be valid. After indorsement he maysign his correct name.

5. Indorsement must be of entire instrumentSec. 32. Indorsement must be of entire

instrument. -The indorsement must be anindorsement of the entire instrument. Anindorsement which purports to transfer tothe indorsee a part only of the amountpayable, or which purports to transfer theinstrument to two or more indorseesseverally, does not operate as a negotiationof the instrument. But where the instrument

has been paid in part, it may be indorsed asto the residue.

Purpose: to protect the obligors from more thanone action on the instrument because themaker and all the prior parties, in assumingthe liability, took the risk of only one causeof action against them. L

Example of invalid insdorsements:1. Indorsement of P50 only to 1 person

partial transfer, no valid delivery2. Bill for 100 indorsed by the payee to

A for P50 and to B for P50purports to transfer instrument to 2 person

severally,thus no valid negotiation, mere assignees,

cannot sue on instrument without bringingthe other as part in the actionExample of valid indorsements:

1. Joint indorsees, Pay to A & Binstrument indorsed in its entirety to BOTH A

and B who can negotiate the instrument onlyby BOTH their indorsementsSec. 32 does not contemplate situation:1. INSTALLMENT PAYMENT: where

there is partial payment oninstrument such as in instalmentpayment instrument may still benegotiated for remaining unpaid(residue)

2. DISCOUNTING of the instrument:where indorsee pays the indorserless than face amount of instrument(no splitting of cause of action sinceIt belongs wholly to purchaser whobought it at discount; discount is in

consideration for waiting timebefore maturity of instrument)

Effect of failure to comply: mereassignment, instrument does notbecome void

6. Kinds of indorsementSec. 33. Kinds of indorsement. - An indorsement

may be either special or in blank; and it mayalso be either restrictive or qualified orconditional.

Although signature is sufficient,additional words may be added whichmodifies rights of subsequent holders orliabilities of indorserBLANK indorsement when onlysignature of INDORSER appearsSpecial and Blank future negotiationsRestrictive or Nonrestrictive kind oftitle transferredQualified or nonqualified scope ofliability assumed by the indorser


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Conditional or unconditional presenceor absence of express limitations put byindorser upon the primary obligorsprivileges of paying the holder

1. Basis of classificationAlthough signature is sufficient,

additional words may be added whichmodifies rights of subsequent holders orliabilities of indorserBLANK indorsement when onlysignature of INDORSER appearsSpecial and Blank future negotiationsRestrictive or Nonrestrictive kind oftitle transferredQualified or nonqualified scope ofliability assumed by the indorserConditional or unconditional presenceor absence of express limitations put byindorser upon the primary obligorsprivileges of paying the holder

2. Special & Bank indorsementsSec. 34. Special indorsement; indorsement in

blank. - A special indorsement specifies theperson to whom, or to whose order, theinstrument is to be payable, and theindorsement of such indorsee is necessaryto the further negotiation of the instrument.An indorsement in blank specifies noindorsee, and an instrument so indorsed ispayable to bearer, and may be negotiated bydelivery.

Sec. 35. Blank indorsement; how changed tospecial indorsement. - The holder mayconvert a blank indorsement into a specialindorsement by writing over the signature ofthe indorser in blank any contract consistentwith the character of the indorsement.

Sec. 40. Indorsement of instrument payable tobearer. - Where an instrument, payable tobearer, is indorsed specially, it maynevertheless be further negotiated bydelivery; but the person indorsing speciallyis liable as indorser to only such holders asmake title through his indorsement.

Special Indorsement specifies to whom orto whose order, the instrument is to bepayable

o indorsement of such INDORSEE isnecessary for further negotiation

Blank Indorsement specifies NO INDORSEE,and

o an instrument so indorsed isPAYABLE TO BEARER and may benegotiated by delivery

2 forms of special indorsement:a. Pay X, followed by

signature of indorserb. Pay X or order, followed

by signature of indorserBoth require indorsement of SPECIALINDORSEE for further negotiationProblem:

o Bearer instrument is speciallyindorsed thus: Pay to X, (sgd) Y

o Is Xs signature necessary for furthernegotiation?

o Sec. 34: Yeso Sec. 40: No, may nevertheless be

negotiated by delivery as long as itwas first a bearer instrument(caveat: but person indorsingspecially is liable as indorser to only

such holders as make title throughhis indorsement)o Conflict solved by applying Sec. 40

only to bearer instruments.Rationale: to permit subsequentholder of an originally bearer paperto control the method of furthernegotiation would cast upon theobligor the risk of forged orunauthorized indorsements ofspecial indorsees, a risk which hedid not assume by his contract topay the bearer.

Negotiation by mere deliver indorserliable only to IMMEDIATE transferee

Negotiation by special indorsement indorser is liable to SUBSEQUENT holders

General Rule: Special indorser liable tosubsequent holders

Exception: Unless, the instrument is originally abearer instrument in which case he is liableonly to those who take title through hisindorsement.

Sec. 40 illustrated:A (ME) bearer B (no indorsement) C, Payto D, (sgd) C D, Pay to E, (sgd) D E noindorsement F

B: liable only to C, and not to D, E, and FC and D (special indorsers): not liable to Fwho does not take his title through theirindorsementC: liable to both D and E since they take theirtitle through his indorsementD: liable only to E since latter is the only onewho takes through his indorsementE: liable to F


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o Note to self: taking title throughindorsement indorser liable to allwhom indorsement was madethrough special indorsement

Indorsement in blankspecifies no indorsee, only signature of

indorser appearsis payable to bearermay be negotiated by delivery

Illustriation: only signature of indorserappears may be negotiated further bymere delivery regardless of whether theinstrument is on its face payable tobearer or not.Its not as SAFE: being negotiated bymere delivery, a thief or finder can give agood title to a holder in due course.

Blank indorsement may be CONVERTEDto special indorsement

HOW: by writing over the signature of theindorser in blank ANY CONTRACTINCONSISTENT WITH THE CHARACTER OFTHE INDORSEMENT.

EXCEPT: it was originally a bearer instrumentAn instrument PAYABLE TO ORDER onits face, may be CONVERTED into abearer instrument by means of a blankindorsement, and may later beRECONVERTED into an order instrumentby a subsequent special indorsement,the last indorsement always controllingthe means of further negotiation.

On the other hand, instrument PAYABLETO BEARER on its face always remains abearer instrument (negotiated bydelivery alone). A special indorsement ofbearer instrument does not convert it toan instrument payable to order

3. Qualified indorsementSec. 38. Qualified indorsement. - A qualified

indorsement constitutes the indorser a mereassignor of the title to the instrument. Itmay be made by adding to the indorser'ssignature the words "without recourse" or

any words of similar import. Such anindorsement does not impair the negotiablecharacter of the instrument.

Indorsement:1. Contract of sale of assignment of

instrument2. Contract to pay instrument if maker

is unable to pay on maturity

If he wants to relieve himself of 2ndobligation (holder would have no recourseagainst him should maker fail to pay on duedate), indorser must do so in clear andexpress terms

o Ex. Adding without recourse, sansrecourse or at indorsees own

risko Ex. of words used which does not

make indorsement qualified: wordsexpressing assignment of title to theinstrument cannot by implicationexclude 2nd contract; wordsguaranteeing makers payment onmaturity will not impliedly exclude1st contract

mere assignor of title of instrumentdoes not mean that transferee merely has

rights of assignee because law itself statesthat a qualified indorsement does not affectthe negotiable character of the instrument

means indorser agrees on first contract andagrees merely to transfer legal titletransfer would still be a negotiation and

transferee would still be holder capable ofacquiring a title free from defences of priordates

4. Conditional indorsementSec. 39. Conditional indorsement. -Where an

indorsement is conditional, the partyrequired to pay the instrument maydisregard the condition and make paymentto the indorsee or his transferee whether thecondition has been fulfilled or not. But any

person to whom an instrument so indorsedis negotiated will hold the same, or theproceeds thereof, subject to the rights of theperson indorsing conditionally.

Indorser liable to pay on 2 conditions(implied, need not be expressed):

1. Due demand or presentment madeon party primarily liable on the dateof maturity

2. (If latter fails to pay) Notice ofDishonor sent to indorser

Unconditional no other conditions uponwhich liability is based

Conditional additional condition annexed toindorsers liability (must be expressed)

o It is only liability of particularindorser which is unconditional, butall subsequent holders toconditional indorsement takesubject to such condition

Sec. 39 illustrated1. Instrument payable on Dec. 1


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2. Indorsed by payee to A if hemarries before he is 25

failure to get married before 25, A or anyholder after him, cannot compel payment bymaker to pay him on Dec. 1

however, Maker may disregard condition andpay holder

Rationale: maker has right to terminate hisliability on the date agreed to by him andcannot be burdened with conditions whichwere not part of his contract.

Should he pay A or the holder who receivedpayment will hold the money subject to therights of the conditional indorser

5. Restrictive indorsementSec. 36. When indorsement restrictive. - An

indorsement is restrictive which either:

(a) Prohibits the further negotiation of the

instrument; or(b) Constitutes the indorsee the agent of theindorser; or

(c) Vests the title in the indorsee in trust for orto the use of some other persons.

But the mere absence of words implying powerto negotiate does not make an indorsementrestrictive.

Sec. 37. Effect of restrictive indorsement; rightsof indorsee. - A restrictive indorsementconfers upon the indorsee the right:

(a) to receive payment of the instrument;(b) to bring any action thereon that the indorser

could bring;(c) to transfer his rights as such indorsee, where

the form of the indorsement authorizes himto do so.

But all subsequent indorsees acquire only thetitle of the first indorsee under therestrictive indorsement.

Either restricts the right of theindorsee to further negotiate the instrument,or

reserves beneficial interest in the indorser or3rd person (although instrument may be

further negotiated, all subsequent indorseestake subject to the rights of the restrictiveindorser or 3rd person as the case mat be)3 classes of restrictive indorsements:

1. Pay to X onlyprohibits further negotiation

2. Pay to X for collection / Pay A formy use / Pay A for my account

constitutes INDORSEE AN AGENT to collect inBEHALF OF INDORSER; indorsee becomessubagents to collect

X receive payment on the instrument and maysue thereon in his own name

However, no title passes to indorsee, nor is themaker deprived of any defense he might

otherwise haverestrictive indorsee may negotiate the

instrument since no prohibition to do so isstate in the instrument

3. Pay to X for Ys use vests title of indorsee in trust for or to the use

of some other person X may receive payment and may sue, but

whatever he collect he holds IN TRUST orFOR USE OF Y

7. Indorsement to or by collecting bankHolder of check may either

1.

cash it with drawee bank or2. deposit it to his credit either in thedrawee bank or in another bank

effect of payment in both if in 2nd he deposits it in another

bank: in effect indorsee isnegotiating the check to that banksince he would have to indorsecheck before bank accepts

for deposit1. Restrictive indorsement because it

merely makes bank an AGENT tocollect funds and credit them as adeposit to customers account frommoment of collection

2. Nonrestrictive by treatingtransaction as a PURCHASE of thecheck by the bank in cash and aDEPOSIT of such cash to the creditof the depositer

In most cases, whatever kind of indorsementis made by indorser, bank is treated asCOLLECTING AGENT

o Indorsement made by depositorusually a check in blank (signaturewithout any words)

o Would thus not show anyrestrictions to collecting banks titleexcept that DEPOSIT SLIP usually

states that bank is mere collectingagent

Prior indorsements and/or lack ofindorsements guaranteed used whenforwarding negotiable instruments forcollection, indorsement by bank

1. Non-restrictive: does not preventholder from acquiring unlimited title


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2. Restrictive: bank is collecting agentif such phrase appears in depositslip

however, with respect to drawee bank to whomit forwarded check, it (collecting bank) hasguaranteed validity of all prior indorsementsas well as the lack of any necessary

indorsementsthus if collecting bank received check from

forger, it must return to drawee bankwhatever it collected from the latterFor payees account only on left handcorner

check should be deposited in bank whichpayee has an account (also collecting agent)

8. Negotiation by joint or alternative payeesor indorsee

Sec. 41. Indorsement where payable to two ormore persons. - Where an instrument is

payable to the order of two or more payeesor indorsees who are not partners, all mustindorse unless the one indorsing hasauthority to indorse for the others.

Sec. 8(d)(e) payable to the order of two ormore payees jointly one or more severalpayees

valid and negotiablePayable to A and B

both must indorse in order for it to bea valid negotiationjoint and severally liable and an action

will lie against any of them

individuallyif one should pay, the other is primafacie liable to constribute his shareto paying indorser

if only one indorses, his indorsee cangave no right of action (against nosplitting of action rule)

Partners: indorsement by 1 in his own nameand that of his partner is validIndorsement TO partnership: must beindorsed to name of FIRM, not of A and B (ifotherwise, proceeds belong to A and B andnot to partnershipOne of two joint payees, by indorsement anddelivery TO CO-PAYEE, may transfer full title

to the latterIndorsed to alternative payees (A or B): either

one in possession is a HOLDER, he maytherefore negotiate ALONE without prejudiceto his obligation if any to account of thealternative co-payee

9. Unendorsed instrumentSec. 49. Transfer without indorsement; effect

of. - Where the holder of an instrumentpayable to his order transfers it for valuewithout indorsing it, the transfer vests in thetransferee such title as the transferor had

therein, and the transferee acquires inaddition, the right to have the indorsementof the transferor. But for the purpose ofdetermining whether the transferee is aholder in due course, the negotiation takeseffect as of the time when the indorsementis actually made.

1. Holder of instrument2. Payable to order 3. Transfers for value 4. Without indorsement

1. Transfers vests in transfereesuch title as transferor had therein

2. Transferee acquires right tohave indorsement of the transferor

Applies only to instruments payable toorder of transfer (i.e. when there is aspecified payee or special indorsee)Thus transferor has right to sue in hisown name, but he cannot be considereda HOLDER since he is not indorsee (noindorsement), bearer (since payable toorder) not holder so no presumptionof ownership, has to prove he is ownerof instrument as condition precedent tosue

But transferee becomes holder if heobtains indorsementDoes it apply to gratuitous transferee?a. Transferee does not acquire title

Since a negotiable instrument is a species ofproperty, it is subject of gift by negotiation,However, such done does not have the rightto compel indorsement

10. Cancellation of indorsementSec. 48. Striking out indorsement. - The holder

may at any time strike out any indorsementwhich is not necessary to his title. Theindorser whose indorsement is struck out,and all indorsers subsequent to him, arethereby relieved from liability on theinstrument.

If payable to bearer on its facethen WON there are indorsements on the back

of the instrument would be immaterial tothe title of the bearer, who is presumptivelythe owner and holder by possession


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none of the indorsements would be necessaryto his title since delivery is sufficient

holder would have right to strike out any or allindorsements thus relieving those cancelledout of liability

If instrument is payable to order on itsface

if all indorsements are special, then all wouldbe necessary to holders title

Situation where A specially indorsed toB indorsed in blank to C C cannotcancel Bs indorsementFurther negotiated specially to D andagain specially to E Ruling: lastindorser may STRIKE OUT allindorsements SUBSEQUENT TO THEBLANK INDORSEMENT and sue asholder under the blank indorsement

o Note to self: blank indorsementbecomes cut-off point and all

subsequent to it may be struckoutNot consistent with NIL:

1. Indorsement of special indorsee isnecessary for further negotiation ofthe instrument; Ds indorsement istherefore necessary for a validnegotiation to E and cannot bestruck out

2. In an order instrument, the lastindorsement controls the method offurther negotiation; although in thehands of C it was payable to bearerbecause of Bs blank indorsement,Cs special indorsement to D

converted the paper to an order one,making Ds indorsement necessaryto Es title

Suppose instrument still in Ds handsafter Cs indorsement to him, may Dcancel Cs indorsement? YES because itis not necessary to his titleStriking out proper in order instrumentswhen after several negotiations,instrument is indorsed to a previousindorser

11. Indorsement by agentSec. 44. Indorsement in representative

capacity. - Where any person is underobligation to indorse in a representativecapacity, he may indorse in such terms as tonegative personal liability

Instrument may be indorsed eitherpersonally or by agent whose authorityneed not be in writing

Agent who signs must make it plain thathe is merely signing in behalf of theprincipal, otherwise he may be heldpersonally liableCommon form: Pedro Reyes by JoseSantos, agent

12. Presumption as to indorsementsSec. 45. Time of indorsement; presumption. -

Except where an indorsement bears dateafter the maturity of the instrument, everynegotiation is deemed prima facie to havebeen effected before the instrument wasoverdue.

Sec. 46. Place of indorsement; presumption. -Except where the contrary appears, everyindorsement is presumed prima facie tohave been made at the place where the

instrument is dated.

Sec. 42. Effect of instrument drawn or indorsedto a person ascashier. - Where aninstrument is drawn or indorsed to a personas "cashier"or other fiscal officer of a bankor corporation, it is deemed prima facie tobe payable to the bank or corporation ofwhich he is such officer, and may benegotiated by either the indorsement of thebank or corporation or the indorsement ofthe officer.

Indorsements after maturity

although are good to transfer title, theyprevent a holder from becoming a holder indue course, thus subjecting him to defencesif any.

presumption that every negotiation madebefore instrument was overdue is thereforesignificant since indorsements are usuallynot dated

In case of conflict of laws, law of placeof dating governs

(Sec. 42)

Pay to ABC Corp usual indorsement

when made to corporationPay to Cashier, ABC Corporation

rebuttable presumption that instrument ispayable to corporation

indorsement should be made by officer assuch or by the usual way the corporationsigns,

i.e. Juan Cruz, Cashier, ABC Corporation orABC Corporation, by Juan Cruz, Cashier


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Juan Cruz may prove indorsement wasmade for him personally in which casehis personal indorsement would be theproper one.corporation in Sec. 42 does notinclude cities and towns and confers noauthority upon the town treasurer

13. Continuation of negotiable characterSec. 47. Continuation of negotiable character. -

An instrument negotiable in its origincontinues to be negotiable until it has beenrestrictively indorsed or discharged bypayment or otherwise.

Overdue negotiable instrument retainsnegotiability unless1. Paid or2. Restrictively indorsed so as to

prohibit further negotiation (otherforms of restrictive indorsement donot destroy negotiability)

Effect of negotiating overdueinstrument:1. Still negotiable2. Merely prejudices status of

subsequent holders as they cannotbe considered holder in due course


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CHAPTER IIIHOLDER IN DUE COURSE

Sec. 52. What constitutes a holder in duecourse. - A holder in due course is a holderwho has taken the instrument under thefollowing conditions:

(a) That it is complete and regular upon itsface;

(b) That he became the holder of it before it wasoverdue, and without notice that it has beenpreviously dishonored, 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 no notice of any infirmity in theinstrument or defect in the title of theperson negotiating it.

HOLDER (Sec. 191, NIL) - Payee or indorsee of abill or note who is in possession of it, or thebearer thereof.

1. Rights of a Holder in Due courseSec. 57. Rights of holder in due course. - A

holder in due course holds the instrumentfree from any defect of title of prior parties,and free from defenses available to priorparties among themselves, and may enforcepayment of the instrument for the fullamount thereof against all parties liablethereon.

Sec. 58. When subject to original defense. -Inthe hands of any holder other than a holder

in due course, a negotiable instrument issubject to the same defenses as if it werenon-negotiable. But a holder who derives histitle through a holder in due course, andwho is not himself a party to any fraud orillegality affecting the instrument, has all therights of such former holder in respect of allparties prior to the latter.

Significance of holder in due course:1. Acquire better title2. Free from any defect of title of prior

parties3. Free from defenses available to prior

parties among themselves (Except: realdefenses which attach to the instrumentitself)

It will not affect the negotiability justthe rights of the holder

Significant only when there is an existingdefense between prior parties,otherwise, it will not matter whether aholder is a holder in due course

2. Holder for valuea. What constitutes value

Sec. 24. Presumption of consideration. - Everynegotiable instrument is deemed primafacie to have been issued for a valuable

consideration; and every person whosesignature appears thereon to have become aparty thereto for value.

Sec. 25. Value, what constitutes. Value is anyconsideration sufficient to support a simplecontract. An antecedent or pre-existing debtconstitutes value; and is deemed suchwhether the instrument is payable ondemand or at a future time.

Value v. ConsiderationGeneral Rule: convertible termsException: (when more accurate to use one and

not the other)Consideration payee sues the maker orpayee sues the drawer or indorser suesimmediate indorserValue holder sues any party to theinstrument with whom he has not dealt

Be given as a gift any defense againstthe transferor can be set up againsttransferee

For valuable consideration free fromany defense

Holder may give less than the face value,it need not be full.

b. Bank credit for valueHolder deposits check with bank and bank

credits it to the account of the holder:1. Mere bookkeeping2. Becomes holder when holder withdraws

the amount, before maturity and beforebank receives notice of any defense oninstrument

What if theres continuous flow of deposit andwithdrawal? First money in, first money out As long as balance exceeds/equals the

amount of instrument considered NOTwithdrawn

c. What constitutes holder for valueSec. 26. What constitutes holder for value. -

Where value has at any time been given forthe instrument, the holder is deemed aholder for value in respect to all parties whobecome such prior to that time.


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Mere fact that present holder paid nothing for avalue or is not a holder for value does notpreclude recovery, but only lets in alldefenses, if any, that might be urged againstthe original payee.

A B : issues without consideration

B C : indorses without considerationC D : indorses for value

D is holder for value as regards to A, B, C

A B : signs a note without considerationB C : negotiates for valueC D : as a gift

D is holder for value against A, B but not C

d. Where holder has a lien on instrumentSec. 27. When lien on instrument constitutes

holder for value. Where the holder has alien on the instrument arising either from

contract or by implication of law, he isdeemed a holder for value to the extent ofhis lien.

When pledgee may recover all:1. Amount < principal debt secured by

instrument2. Debt < amount of instrument, no

existing defenses; but only as trustee forwhomsoever is entitled

When pledgee may only recover amt of debt:1. Debt < amount of instrument, with

defenses which pledge has noknowledge = HFV but only to extent oflien

e. Burden of proofSec. 24. Presumption of consideration. - Every

negotiable instrument is deemed primafacie to have been issued for a valuableconsideration; and every person whosesignature appears thereon to have become aparty thereto for value.

Sec. 28. Effect of want of consideration. -Absence or failure of consideration is amatter of defense as against any person nota holder in due course; and partial failure ofconsideration is a defense pro tanto,whether the failure is an ascertained andliquidated amount or otherwise.

This is a rebuttable presumption.Presence of words for value received will not

preclude evidence to show lack ofconsideration.

3. Holder in good faithSec. 55. When title defective. -The title of a

person who negotiates an instrument isdefective within the meaning of this Actwhen he obtained the instrument, or anysignature thereto, by fraud, duress, or force

and fear, or other unlawful means, or for anillegal consideration, or when he negotiatesit in breach of faith, or under suchcircumstances as amount to a fraud.

Sec. 56. What constitutes notice of defect. - Toconstitutes notice of an infirmity in theinstrument or defect in the title of theperson negotiating the same, the person towhom it is negotiated must have had actualknowledge of the infirmity or defect, orknowledge of such facts that his action intaking the instrument amounted to badfaith.

Actual and not merely constructive Gross negligence not equivalent to bad

faith nor actual knowledge Knowledge after taking the instrumenta. Notice; bad faith effect of suspicious

circumstances

Bad faith is a state of mind that can only beproven by circumstantial evidence. It is aquestion of fact which must be determinedin accordance with the particularcircumstances of the case.

Rule that purchaser is put on inquiry is notapplicable in full extent to NIL.> time is of the essence and investigationwould hamper the functions of NI tofacilitate exchange

Bad faith:1. Suspicious circumstances are so cogent

and obvious that to remain passivewould amount to bad faith.

2. He suspects but did not make aninvestigation

3. Had notice that there was somethingwrong about assignors acquisition oftitle

4. Had knowledge of other suspicioustransactions


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b. Financing company not a holder in goodfaith as to buyer

Situation: installment sales.> Buyer issues PN to seller to cover price> finance company pays the full price> seller indorsed the note to finance company

> FC subrogated in to rights of seller

In such cases, the tendency of the court is toprotect the buyer, not the financingcompany such that when the item isdefective, FC cannot recover the purchaseprice

Ratio: FC is better able to bear the risk of thedealers insolvency than the buyer and in afar better position to protect his interestsagainst unscrupulous and insolvent dealers.

c. Effect of purchase at a discountGeneral rule: purchase at a discount is not, in

itself, constitute bad faithReason: influenced by financial condition ofthe issuer rather than the possibility that itwas obtained subject to a defense

Exceptions: tantamount to bad faith1. purchased at a heavy discount when

maker is known to be solvent, or if noteis amply secured or is taken from a totalstranger

d. Effect of notice before full paymentSec. 54. Notice before full amount is paid. -

Where the transferee receives notice of anyinfirmity in the instrument or defect in thetitle of the person negotiating the samebefore he has paid the full amount agreed tobe paid therefor, he will be deemed a holderin due course only to the extent of theamount therefore paid by him.

Rules:1. NOT HIDC = notice of defense before

acquisition of title and before payment ofany portion

2. HIDC = receives notice after partially payingthe instrument (but only to that extent)

paid:1. Payment of money2. Giving of credit3. Assumption of obligation4. Rendition of service5. Transfer of title of property6. Performance of any other promise

> HIDC has the right to stop payment and isreleased from obligation upon discovery ofinfirmity.

> this does not apply to holder who has given apromise which he must perform = sameposition as one who paid money or propertyat time of transfer

Example:A B : payable to orderB borrows from C on the condition that X signs

the note too.X agrees to sign the note but on condition that

As note be given as collateral.B X : indorses the note of AA refused to pay alleging that it was procured by

fraud.Debt to C falls due and B defaulted.X paid full amount to C.A invokes Sec. 54

Held: Sec. 54 does not apply. X signed the noteand become unconditionally obligated to Cand cannot be released from such obligationby mere fact that the collateral (As note) is aresult a fraud.

X is a holder in due course at time it wasnegotiated to him by B.

X can recover from A.

e. Constructive notice not sufficientPurchaser of NI is not put on inquiry. He is also

not charged with notice of defenses orequities disclosed by public records such aslis pendens. This is chargeable to the

principal.

f. Notice of accommodation not notice ofdefect

Sec. 29. Liability of accommodation party. - Anaccommodation party is one who has signedthe instrument as maker, drawer, acceptor,or indorser, without receiving value therefor,and for the purpose of lending his name tosome other person. Such a person is liableon the instrument to a holder for value,notwithstanding such holder, at the time oftaking the instrument, knew him to be only

an accommodation party.

Accommodation party is a surety for theprincipal debtor.

Example: A borrower B lender C- A.P.B X : indorse (X knew that C is an A.P.)Upon maturity, C cannot refuse to pay X. X is a

holder in due course and his title is notrendered defective by his knowledge that Cis just an A.P.


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4. Complete and regularSec. 124. Alteration of instrument; effect of. -

Where a negotiable instrument is materiallyaltered without the assent of all partiesliable thereon, it is avoided, except asagainst a party who has himself made,

authorized, or assented to the alteration andsubsequent indorsers.

But when an instrument has been materiallyaltered and is in the hands of a holder in duecourse not a party to the alteration, he mayenforce payment thereof according to itsoriginal tenor.

Not HIDC, Not Complete Purchaser takes prior to completion or

contemporaneously with the act ofcompletion

Payable within ___ days after date Specifies date but not year Blank as to the payee holder can sue

without filling the payees name

Complete, HIDC Failed to affix revenue stamps as required by

law Executed in blank, subsequently filled up

and issued to first holder who has noknowledge of execution in blank

If holder has knowledge of originalexecution in blank

Effect of taking of incomplete instrument1. Lets in all defenses and equities, WON

connected with the execution in blank.> inconsistent with the rule that purchaser of NIis not put to inquiry> same effect as irregular instruments

Alteration most common type of irregularity

Irregular: alteration is apparent on its face evenif change is authorized or assented to by theparties

> purchaser is put to inquiry as to all defensesand equities, WON connected to thealteration.

> Unauthorized alteration is apparent and

material = VOID = real defense againstenforcement

* Requirement of completion is separate anddistinct from general good faith rule

DifferencesSec. 52 (a) Sec. 52 (c) and (d)Matters evidencing BFfound on theinstrument

Deals with issues of BFwhen evidence is noton the face of theinstrument

Purchaser put to

inquiry as to alldefenses and equity

General rule that

purchaser is put toinquiry does not applyon NI because it wouldhamper the mainfunction of such kind

Subordinate to (c) and (d) such that purchaserwill be deemed not HIDC only if instrument isincomplete/irregular that the purchaser must

have had actual knowledge and action in takinginstrument amounted to BF

5. Holder at or after maturity & withoutnotice of dishonor

* The fact that the instrument is overdue is astrong indication that it was dishonored andthe law puts the potential holder on inquiryas to whether it was dishonored and thereason therefor.

Dishonored:1. Non-acceptance

- can refer only to BOE and takes placewhen drawee refuses to accept theorder of the drawer before the dateof maturity of the bill

- possible for a bill to be dishonoredbefore maturity

2. Non-payment- occurs at time of maturity- when party primarily liable (maker of

note or acceptor of bill, fails to payat maturity

- not overdue at time of maturity

Payable after sight: maturity is fixed at time ofpresentment

Payable on occurrence of specified event certainto happen: maturity fixed by happening ofsuch event

Sec. 53. When person not deemed holder in duecourse. -Where an instrument payable ondemand is negotiated on an unreasonablelength of time after its issue, the holder isnot deemed a holder in due course.


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Purchaser of overdue instrument purchase of demand instrument made outside

of the reasonable time after issue

Reasonable timeSec. 193: nature of the instrument, usage of

trade or business and facts of particular case

1. Nature = function of the instrument demand notes circulate longer than

checks demand BOE longer than checks but

not longer than demand notes demand certificate of deposits

(primarily investment papers) longerthan demand notes

Checks < BOE < Notes < Cert. of Deposits

2. Usage of trade or business = show lapse ofreasonable time

Must not only be general, but alsolocal

3. Facts of particular case = vary in each case Payment of interest may be a factor

in determining reasonableness

For instruments with acceleration clause:Ultimate date of maturity is the date of

maturity unless purchaser has priorknowledge of earlier maturity at the time heacquired title.

Undated indorsementestablishes prima facie that it was negotiated

before it was overdue and one who denies

that the holder of such instrument is a HIDChas the burden of proving his allegation

Effect: not void still negotiable an instrument remains

negotiable and may pass from hand to handad infinitum until it is paid, since instrumentcontinues to be negotiable until dischargedor restrictively indorsed.

Transferee beforematurity

Transferee aftermaturity

Not Takes instrument

subject to all defensesand equities

Better right than thetransferor

Acquires only theactual right and title ofthe transferor

6. Effect of postdating and ante datingSec. 12. Ante-dated and post-dated. -The

instrument is not invalid for the reason onlythat it is ante-dated or post-dated, providedthis is not done for an illegal or fraudulentpurpose. The person to whom an instrument

so dated is delivered acquires the titlethereto as of the date of delivery.

Effect: still negotiable and valid holder is still HIDC and not put to inquiry by

the mere fact of its being antedated orpostdated

Postdated check payable either at the fixed or determinable

future time specified therein or if not timeof payment is expressed, on demand or onafter the date of the instrument

bank has no right to debit the amount of apostdated check against the depositoraccount before the date of the check

Illegal if: antedated to evade the effects of Usury Law postdates check in payment of an obligation

without having sufficient funds in the bank(estafa)

7. Effect of qualified, conditional andrestrictive indorsements

Qualified indorsement status as HIDC not affected previous holder does not want to assume full

liability of a general indorser because hemay have doubts as to the solvency of theprimary party

holder is free from any defense base on defectif:1. Not aware of any defect2. Took the instrument for value3. Good faith4. Before instrument was overdue

Conditional indorsement status as HIDC not affected if Sec. 52 is

complied with immune to all personal defenses between

prior parties fact that condition is imposed does not

necessarily mean that there is some defectof title or infirmity in the instrument.

merely subjects him to the rights ofthe conditional indorser should he receivepayment before the condition was fulfilled


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Restrictive indorsement prohibits further negotiation

Pay to A onlyGR: not affect status as HIDCE: if he violates the prohibition and indorse the

instrument to another. The latter cannot be aholder in due course.

1. there is no valid negotiation, hence,transferee is not a holder.2. RI serves as notice to any prospective

purchaser of the prohibition to negotiate

RI which constitutes an indorsee as an agent ofthe indorser can vest the former with therights of HIDC if his principal is a HIDC.

if principal is not HIDC, agent is alsonot HIDC

if indorsee sued the maker, he will beimmune from personal defenses if hisprincipal was a HIDC.

all subsequent indorsees will have thesame rights as the latter but suchsubsequent holders can never acquire rightswhich are antagonistic to the indorser-principal (for he is merely a subagent)

RI vests title for indorsee in trust or for theuse of another

One POV: Sec. 47 negotiability continuesuntil it is restrictively indorsed

>> R.I. for the benefit of a 3rd partycannot be a HIDC as regards to defenses towhich the R.Indorser was subject

Better view: R.Indorsee who holds

instrument in trust may be a HIDCregardless of the status of the R.Indorser

>> after the R.I., all subsequentindorsees take subjects to the rights createdand disclosed by the indorsement. To thisextent negotiability has been interfered with,but not otherwise.

8. Payee as holder in due courseGeneral Rule: Payee cannot be HIDC

he dealt directly with the maker or drawerand thus must have knowledge of the facts

which may create the defense

Exception: circumstances under which he isinsulated from the maker or the drawer by a3rd party, such as a remittermeets requirements of Sec. 52

Examples:1. A(manila) buys goods from B(zamboanga)

A obtains a bank draft payable to B.A sends the draft to B.B took it for value and without notice.Drawee bank is liable to payee-seller B

despite any defense it may have against

remitter-buyer, A.

2. A induces B to sign as co-maker (fraud)Note is payable to C.A delivers the note C contrary to authority

given by B.If C took it for value, he is protected from

defenses of B.

3. A draws check with payees name in blank.A gave it to his agentA instructed agent to fill in name of B.Agent wrote name of C instead.Agent delivers the note to C.C took it for value and without notice.C is free from As defenses.

Main center of discussion: requirement ofnegotiation to the payee by a 3rd person in theordinary course of business Negative view: rights of HIDC may be

acquired only by negotiation. Payee acquiresthe instrument not by negotiation as it isissued and not indorsed to him.

Positive view: Holder includes payee. Sec. 30uses person and not holder. Hence,negotiation includes not just transfer by theholder but also include transfer by themaker or drawer.

last sentence of Sec. 30 = understood toapply to negotiation after the instrument hascome to possession of payee view adopted by Phil. Supreme Court

9. Rights of a purchaser from a holder in duecourse

Sec. 58. When subject to original defense. -Inthe hands of any holder other than a holderin due course, a negotiable instrument issubject to the same defenses as if it werenon-negotiable. But a holder who derives his

title through a holder in due course, andwho is not himself a party to any fraud orillegality affecting the instrument, has all therights of such former holder in respect of allparties prior to the latter.


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Rule: holder who derives title from HIDC has allthe rights of the latter even though hehimself satisfies none of the requirements ofdue course holding

Applied to:1. One with notice of defect2. Purchaser after maturity3. Not holder for value

Rationale for the rule: if a HIDC cannot invest his transferee the

rights which come with his improvedposition, his status as HIDC wouldoftentimes lose its significance because themarketability of the instrument would beseriously hampered.

Exception:1. Purchaser from HIDC is party to the fraud or

illegality> payee who knows of the defect cannotsell the instrument and buy it back again

2. Not a party to the instrument but is party tothe fraud

3. Party who reacquires from HIDC but hadknowledge of the defense of the prior party

Purchaser withnotice

Not prior party

Acquires from HIDCPrior party

Both not a party to the illegality or fraud

His act does notharm the maker

His act of negotiating theinstrument to HIDC isindispensable to the cuttingoff ofthe makers defense

Becomes party to the fraudby his negotiationSee Sec. 55

Still HIDC: reacquirer is a holder who at the time he first

held title was not a HIDC solely because hewas a done

Transferor not HIDC + Transferee not forvalue:

transferee not a party to the fraud/illegality transferee acquires title through HIDC

Fraud & illegality not be construed literally to exclude other

personal defenses should be taken as mere illustration of

defenses which may preclude the operationof the rule if the holder were a party thereto

Note: rights of HIDC are granted only in respectto parties prior to the HIDC through whomtitle is acquired

10. Presumption in favor of due courseholding

Sec. 59. Who is deemed holder in due course. -Every holder is deemed prima facie to be aholder in due course; but when it is shownthat the title of any person who has

negotiated the instrument was defective, theburden is on the holder to prove that he orsome person under whom he claimsacquired the title as holder in due course.But the last-mentioned rule does not applyin favor of a party who became bound on theinstrument prior to the acquisition of suchdefective title.

Application:1. only to the holder and not any other kind of

transferees2. only to present holder

if present rights depends on previous

holders status as HIDC, must provesuch fact as the presumption would notapply

Required to be proved:1. That he is a holder2. Genuineness of makers or drawers

signature to establish the existence ofobligation

3. Genuineness of the indorsements necessaryto his title

to establish his link to the maker andstatus as holder

Rules of Court: if defendants wants to deny genuineness of adocument he must do so specifically underoath otherwise, deemed to admit due executionand genuineness of the documents

Effect relieved from proving genuineness ofmakers signature but NOT the indorsements

Effect of presumptiondefendant must prove personal claims

if able to do so, BOP shifts to -holder

Exception:

s defense is not his own BOP of due courseholding will not be on the if the became

bound on the instrument prior to the acquisitionof the defective title relied on by him as adefense


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Example:A issues NP to the order of B.B C (special indorsement)C D (blank + deliver)D loses the note.X finds the note.X Y (delivery)

Y sued A.

Assumption: Y establishes status as a holderEffect:As evidence must be such that itconvinces the court not only that there was novalid delivery to X but also, since he is a partyprior to Xs defective title, and the defenses heuses is not his, that Y does satisfy therequirements of Sec. 52

11. Transfer of unendorsed instrumentSec. 49. Transfer without indorsement; effect

of. - Where the holder of an instrument

payable to his order transfers it for valuewithout indorsing it, the transfer vests in thetransferee such title as the transferor hadtherein, and the transferee acquires inaddition, the right to have the indorsementof the transferor. But for the purpose ofdetermining whether the transferee is aholder in due course, the negotiation takeseffect as of the time when the indorsementis actually made.

Rights of a transferee without indorsement:1. Sec. 49 title as the transferor had in

the instrument2. Sec. 58 rights of HIDC*

* different viewsa. Sec. 58 favors a holder and not to transferees

without indorsement. Indorsement is neededto acquire rights of HIDC.

b. Sec. 49/58 must be taken together transfereeacquires title from previous HIDC free fromdefenses.

Uniform Commercial Code favorsinterpretation (b)

transfer without indorsement vests in thetransferee the rights as the transferor hadtherein

If transferor is not HIDC, no indorsement transferee subject to all defenses as if

instrument is not negotiable although he,himself, satisfies the requirements of Sec. 52UNLESS he obtains an indorsement IF transferee knew of the defense at timeof such indorsement >> indorsement will notimprove his status as status of being HIDC isdetermined at time of indorsement.


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CHAPTER IVDEFENSES AND EQUITIES

1. In General Liability of signatories to a NI depends on

WON there are existing defenses or claims of

ownership thereto

2 kinds of defenses:1. Real - available against all HIDC

Attach to instrument itself andgenerally disclose absence of one ofthe essential elements of a contractWhere contract is void for allpurposes for reason of public policy

2. Personal available only against H(not)IDC A true contract appears, but where

for some reason, such as fraud, thedefendant is excused from the

obligation to perform

2 kinds of claim of ownership (equities)1. Legal one who has legal title may recover

possession even from HIDC

2. Equitable may not recover its possessionfrom HIDC but may do so from a H(not)IDC

Sec. 57. Rights of holder in due course. - Aholder in due course holds the instrumentfree from any defect of title of prior parties,and free from defenses available to priorparties among themselves, and may enforcepayment of the instrument for the fullamount thereof against all parties liablethereon. robles virtual law library

Sec. 58. When subject to original defense. - Inthe hands of any holder other than a holderin due course, a negotiable instrument issubject to the same defenses as if it werenon-negotiable. But a holder who derives histitle through a holder in due course, andwho is not himself a party to any fraud orillegality affecting the instrument, has all therights of such former holder in respect of allparties prior to the latter.

Sec. 55. When title defective. - The title of aperson who negotiates an instrument isdefective within the meaning of this Actwhen he obtained the instrument, or anysignature thereto, by fraud, duress, or forceand fear, or other unlawful means, or for anillegal consideration, or when he negotiatesit in breach of faith, or under suchcircumstances as amount to a fraud.

Sec. 58

H(not)IDC = GR on contracts would apply no distinction is necessary for real orpersonal defenses assignee cannot acquire better right thanhis transferor

Sec. 55

enumerates circumstances which render aholders title defective and implies right ofthe real owner of the instrument who wasdeprived of his possession through any ofthe circumstance to get the instrument backfrom the guilty holder or any subsequentholder who is not HIDC if in hands of HIDC, HIDC is free from thedefect of title of any prior party and trueowner will not have the right to recover itspossession from him

Real defenses:1. forgery2. incapacity3. fraud in execution4. some types of duress5. lack of delivery of incomplete

instrument

Personal defenses1. Sec. 552. Want of consideration3. Incompleteness of instrument4. Lack of delivery of completed

instrument

2. IncapacitySec. 22. Effect of indorsement by infant or

corporation.- The indorsement orassignment of the instrument by acorporation or by an infant passes theproperty therein, notwithstanding that fromwant of capacity, the corporation or infantmay incur no liability thereon.

not change rule on minors Contracts entered into by minors are

voidable Minor not liable unless he ratifies it

upon reaching age of majority

Not required to restore except toextent he benefits

Rule: minority is a real defense available only tothe minor and is not a personal defensewhich may be availed by parties other thanthe minor.

same rule with corporation that has nocapacity to indorse under its charter


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applies to those who have no capacity to giveconsent

a. Insaneb. Dementedc. Deaf mute who does not know how

to read or write maker, drawer, acceptor and indorser admit

the capacity of the payee to indorse andtherefor cannot set up such incapacity as adefense

Required:Indorser minorIndorsee - HIDC title passes to indorsee indorsee can recover from maker free from

defense of minority and free from personaldefenses

Example:A B ; B is a minorB CC DD sues AA cant set up defense of minority against D

A cannot pay. D sues B. B may set up defense of minority

contract is voidable

D sues C insteadC cant set up defense of minority

like A, he warrants the capacity of allprior parties

D knew that B is a minor at time of indorsement

D can still be a HIDC his knowledge would not constitute adefect or infirmity, sec. 22 cures that defect

3. IllegalityGR: personal defense not available against HIDCE: Sec. 55: Illegal consideration is only a personal

defense although contract lacks the essential element

of a lawful cause or consideration, law treatsthe defect only a defense against a H(not)IDC

CC and NIL not inconsistent

different situations CC: specifies what are void and inexistent NIL: provides that though a NI may havebeen issued or negotiated for an illegalconsideration, only parties involved in theillegality and subsequent parties who areH(not)IDC can be adversely affected by suchdefect

defense of usury PERSONAL

statute may declare a contract void for allpurposes, in which case the defense ofillegality becomes real

Art. 1409, CC

Art. 1409. The following contracts are inexistentand void from the beginning:

(1) Those whose cause, object or purpose iscontrary to law, morals, good customs,public order or public policy;

(2) Those which are absolutely simulated orfictitious;

(3) Those whose cause or object did not exist atthe time of the transaction;

(4) Those whose object is outside the commerceof men;

(5) Those which contemplate an impossibleservice;

(6) Those where the intention of the partiesrelative to the principal object of thecontract cannot be ascertained;

(7) Those expressly prohibited or declared voidby law.

4. Forgerya. In general

Sec. 23. Forged signature; effect of. - When asignature is forged or made without theauthority of the person whose signature itpurports to be, it is wholly inoperative, andno right to retain the instrument, or to give adischarge therefor, or to enforce payment

thereof against any party thereto, can beacquired through or under such signature,unless the party against whom it is sought toenforce such right is precluded from settingup the forgery or want of authority.

Sec. 18. Liability of person signing in trade orassumed name. - No person is liable on theinstrument whose signature does not appearthereon, except as herein otherwiseexpressly provided. But one who signs in atrade or assumed name will be liable to thesame extent as if he had signed in his ownname.

a REAL defenseperson who didnt sign was never a party and

never consented to the contract. since his signature does not appear on theinstrument, he cannot be held liable thereon

fact that the holder is a HIDC is immaterialsince there is not true maker or drawer ofthe instrument

2 situations in Sec. 23


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1) Signature is affixed by one who purports tobe an agent but who does not have authorityto bind the alleged principal

2) Signature is affixed by one who does notclaim to be an agent and who has noauthority to bind the apparent signer

in BOTH cases, signature is WHOLLYINOPERATIVE and NO ONE can gain titlefrom the instrument

GR: any party subsequent to the forgerywould be unable to acquire rights againstany party prior to the forgery

E: party against whom it is sought to enforce aright is precluded from setting up forgery orwant of authority

Precluded estoppels or ratificationFor ratification: 2 views1. Forged signature cannot be ratified because

ratification involves relation of agency andforger does not assume to act for another

2. Distingui

Campos Notes

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