Professional Documents
Culture Documents
Abelardo Dumaguing
Important provisions Sec. 1 Elements of Negotiable Instrument Sec. 2 certainty of the amount payable Sec. 3 in rel. to Sec. 47 unconditional character of instrument Sec. 4 determinable future time, fixed future time, contingency Sec. 5 provisions that do not affect the negotiability of the instrument Sec. 6 omissions and additions Sec. 7 payable on demand Sec. 8 payable to order Sec. 9 payable to bearer Sec. 11 presumption of date (date is presumed correct) Sec. 12 antedate and postdate Sec. 13 insertion of date Sec. 14 incomplete instrument but delivered Sec. 15 incomplete and undelivered Sec. 16 complete instrument but undelivered Sec. 23 forgery Sec. 124 material alteration Sec. 125 material alteration Sec. 24 presumption of valuable consideration Sec. 28 want of consideration and failure of consideration Sec. 29 accommodation party Sec. 30 negotiation (referring to transfer of instrument) Sec. 33-39 kinds of indorsement eg. Blank, special, restrictive (36), qualified, conditional Sec. 48 striking out indorsement Sec. 52 what constitutes a holder in due course Sec. 59 Sec. 57 rights of a holder in due course Sec. 60 liability of a maker Sec. 61 liability of a drawer Sec. 62 liability of an acceptor Sec. 65 & 66 warranties of an indorser Sec. 70-73 presentment for payment Sec. 89 notice of dishonor Sec. 126 definition of bill of exchange Sec. 184 definition of a promissory note Sec. 185 definition of a check
What is a negotiable instrument? It is a written contractual obligation that requires payment of money with the following essential elements: 1. in writing and signed a. by the maker (if a promissory note) b. by the drawer (if a check) 2. contains unconditional a. promise (for promissory note), or b. order (for check or bill of exchange[BOE]) 3. must be payable on a. demand b. fixed future time, or c. determinable future time 4. payable to a. order, or b. bearer 5. Drawee (element required in check or bill of exchange) drawee must be NAMED or be INDICATED with a REASONABLE CERTAINTY (if he cant be named) WRITTEN AND SIGNED Kinds of signature: 1. Conventional signature 2. Personalized signature
Instrument is OVERDUE Ex: At the outset bill of exchange/promissory note was issued at 1 May 2001 and payable on 7 August 2001.
Baguio City 1 May 2001 P8,000.00 I promise to pay to Ana or bearer the sum of eight thousand pesos on 7 August 2001. (Sgd) Pablo - Overdue and yet it was endorsed payable on demand - When you indorsed an overdue instrument then it is payable on demand Sec. 47 An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise. (ex: destroying the instrument) STALE CHECK (when not presented for payment within 6 months) Stale check can still be negotiated but it needs the replacement of new one. (nb: check cannot be overdue because it is payable on demand) STALE DEMAND (by laches) FIXED FUTURE TIME Ex: Christmas day of 2001 DETERMINABLE FUTURE TIME Day certain How to determine with reference to the happening of a specified event that is sure to happen but it cannot be known when. Ex: Death of any being P50,000.00 I promise to pay to the order of Berto fifty thousand pesos 1 week after his only carabao will die. (Sgd) Harry Potter Carabao will die specified event P80,000.00 I promise to pay to the order of Claro eighty thousand pesos 1 month after his only cow will die of syphilis. (Sgd) Harry Potter Cow will die of syphilis not sure to happen Payable upon a contingency Under last paragraph of Sec. 4, an instrument payable upon a contingency is not negotiable and the happening of the event does not cure the defect. Q: What if the only cow of Claro will die of syphilis? A: The instrument is still not negotiable because the happening of the contingent event does not cure the defect. (Sec. 4 last par.) *Day certain PAYABLE TO ORDER Sec. 8 Payable to i. the ORDER of a specified person or ii. a specified person or his order.
BLANK INDORSEMENT - signature affix, written at the back of the instrument - made by the payee who is first to indorse CLASSIFICATIONS OF INDORSEMENT 1. Blank indorsement - an indorsement that does not specify the indorsee Ex: Baguio City 22 November 2001 P50,000.00 I promise to pay to the order of Ruby the sum of fifty thousand pesos. (Sgd) Harry Potter At the back To: Ruby (Sgd)
2. Special indorsement - one that specifies the indorsee Ex: Face of instrument (same as above) At the back
UNCONDITIONAL PROMISE OR ORDER TO PAY A SUM CERTAIN IN MONEY Sec.2 the amount payable remains a sum certain although it is to be paid with an interest by stated installments with an acceleration clause although it is to be paid with exchange with cost of collection or an attorneys fee. (keyword: CESIA Cost, Exchange, Stated, Interest, Acceleration) 1. with an INTEREST -must be in writing to be binding on the debtor (Art. 1956, NCC) Ex: bill of exchange/Promissory Note -obligor bound himself to pay interest as written on the face of the instrument. 1. 22 November 2001 P10,000.00 I promise to pay to the order of Pedro ten thousand pesos with an interest of 2% per month on 22 January 2002. (Sgd) Harry Potter -amount is payable in sum certain although it is with interest -P10, 400.00 due on 22 January 2002 2. P12,000.00 I promise to pay to Maria or bearer the sum of twelve thousand pesos with an interest on 22 April 2002. (Sgd) Harry Potter -even if rate of interest is not specified, the legal rate of interest shall be applied. (Central Bank Circular #416 the legal rate of interest is 12% per annum) Bill of Exchange/Promissory note representing balance of installment sales (6% pa interest) -obligation arises from a sale Sec. 1 amount payable sum certain Sec. 2. sum certain but to pay by stated installment, with an interest, acceleration clause, exchange, cost of collection/attorneys fee (CESIA)
Nb: 1) It must be EXPRESSLY STATED that there is payment of interest (Art. 1956, NCC) 2) If there is stipulation but no rate then legal rate of interest applies. 2. STATED INSTALLMENT The following must be specified: a. Amount of each installment and b. Due date for each installment If there is not amount and due date specified the it is NOT NEGOTIABLE because the amount will be uncertain. PAYABLE BY INSTALLMENT Ex: Negotiable; amount sum certain P20,000.00 Pay to Adquilen or bearer the sum of twenty thousand pesos by installment as follows: a) P3,000.00 due on 1 January 2002 b) P4,000.00 due on 2 February 2002
Negotiable; amount sum certain P16,000.00 Pay to the order of Indong the sum of sixteen thousand pesos on two(2) equal installments the first to b due on 6 July 2002 and the other to be due on 16 July 2002. (Sgd) Harry Potter To: Reynaldo (or with reasonable certainty) NOT NEGOTIABLE P12,000.00 I promise to pay to the order of Gandeza the sum of twelve thousand pesos by stated installments on 1 January 2002 and 2 February 2002. (Sgd) Harry Potter
3. ACCELERATION CLAUSE Definition: with a provision that upon default the whole amounts shall become due. Stated installment but in default the whole shall become due. Ex: NEGOTIABLE P20,000.00 Pay to Adquilen or bearer the sum of twenty thousand pesos by installment as follows: a) P3,000.00 due on 1 January 2002 b) P4,000.00 due on 2 February 2002 c) P5,000.00 due on 3 March 2002 d) P2,000.00 due on 4 April 2002 e) P6,000.00 due on 5 May 2002 In the event there is failure to pay anyone of the foregoing installments then the entire remaining obligation as of the time of default shall immediately become due. To: Clara Potter (Sgd) Harry
4. EXCHANGE -difference in value of same amount of money by different countries Ex US$1 and Canadian$1 (here, the US dollar is more valuable. Their difference is called EXCHANGE) Exchange must be at: 1. Fixed rate -by agreement of the parties 2. Current rate -average rate that will be prevailing at the time of the transaction during a particular date. Ex: of an instrument payable with an EXCHANGE California USA 26 November 2001 US$2,000.00 Pay to the order of Jose the sum of two thousand US
US$2,000.00 Pay to the order of Juan de la Cruz the sum of two thousand US dollar in Philippine peso at the current rate of exchange. To: Clara (Sgd) Harry Potter -here, the instrument is payable on demand because no time of payment is made -current rate at the time of the payment prevails (Ponce vs CA, 90 SCRA 332) 5. COST OF COLLECTION OR/AND ATTORNEYS FEE -does not include any other expenses Ex: P50,000.00 I promise to pay to the order of Juan de la Cruz fifty thousand pesos on 16 January 2002. In the event I fail to pay and as a consequence a case will be filed against me, I bind myself to pay an additional amount equivalent to 20% of the principal obligation to pay cost of collection or attorneys fee. (Sgd) Harry Potter
SECTION 3 -Promise is unconditional ORDER/PROMISE to pay remains UNCONDITIONAL although couple with: 1. An indication of particular fund -for reimbursement 2. Statement of the transaction which gave rise to the instrument. -a mere statement on how come the instrument was issued in ONLY a statement stating WHAT TRANSPIRED between the parties as a consequence of it the instrument was issued. P50,000.00 I promise to pay to the order of Reynaldo the sum of fifty thousand pesos on 5 May 2002. This promissory note was executed by me because of the fact that I purchased from the payee a Mitshubishi Lancer car model 1964 with plate number ADB398 and the aforesaid amount represents my balance on that sale. (Sgd) Harry Potter -In the first paragraph, the promise to pay is absolute -In the second paragraph, mere statement of what transpired. Q: What prompted Harry to issue the promissory note? A: There was a sale/transaction
P50,000.00 I promise to pay to the order of Reynaldo fifty thousand pesos after he will sell to me his car with plate number ADB 398. (Sgd) Harry Potter Q: Is this negotiable? A: It is NOT because the condition is unconditional.
INDICATION OF PARTICULAR FUND OUT OF WHICH THE REIMBURSEMENT IS TO BE MADE FUND is a source of reimbursement i. It can be where the drawee can be reimbursed, or ii. Where the drawee may be able to compensate for what he will pay Last paragraph of Sec. 3 -but an order or promise to pay out of a particular fund is not unconditional. (here, the FUND means the actual source of payment) Fund as source of payment vs. Fund as source of reimbursement Fund as source of payment Ex: P10,000,000.00 Pay to the order of the DPWH the sum of ten million pesos on 15 January 2002 out of the fund in the National Government Treasury. (Sgd) Auditor General To: The Treasurer of the Philippines -fund is mentioned -this is NOT NEGOTIABLE (but valid) because the order to pay is conditional for it is payable out of particular fund. -it is conditional because payment depends on a condition that the fund indicated is sufficient (Payment is based in contingency, that is the availability of funds. A TREASURY WARRANT is not negotiable because it is payable out of a particular fund.
-DRAWEE IS REQUIRED TO PAY BUT WHETHER HE CAN BE REIMBURSED OR NOT IS BESIDE THE POINT P90,000.00 Pay to the order of Pedro or bearer the sum of ninety thousand pesos and reimburse yourself out of money which is in your custody. (Sgd) Harry Potter (drawer) To: Marlon (drawee) -here, the fund is the money of the drawer in the possession of the drawee. (the fund here is the source of payment) -The drawee will pay whether the fund indicated is sufficient or not. SEC. 5 (provisions that do not affect the negotiability of the instrument) They are the following: 1. Sale of collateral securities 2. Confession of Judgment 3. Waives the benefit of any law 4. Gives the holder an election/(option) to require something to be done in lieu of payment of money. (keyword: COWS: Confession, Option, Waives, Sale) Sec. 5(d) Holder: 1. May demand MONEY or 2. Something to be done (ie: performance of an act) Sec. 5 Par. 1 (where it adds act) NOT NEGOTIABLE ACT + MONEY = NOT NEGOTIABLE Ex: P20,000.00 I promise to pay to the order of Ruby the sum of twenty thousand pesos and deliver two(2) cows to the holder. (Sgd) Harry Potter -NOT NEGOTIABLE because it will be hard to determine the liability of the indorser.
Sec. 5 (a) Sale of Collateral Security -maker makes assurance of payment (ex: execution of mortgage) Collateral Security -refers to a property constituted to guarantee satisfaction or payment of obligation. Ex: P50,000.00 I promise to pay to the order on 5 May 2002. This obligation is secured by a mortgage involving my car, a Mitshubishi Lancer with plate numbe ADB 398 which may be sold by the holder in a public auction sale and the proceeds thereof may be applied to satisfy the aforesaid obligation, in the event this note is not paid at maturity. For this purpose, I hereby appoint the holder as my attorney in fact to undertake the public auction sale in my behalf. (Sgd) Harry Potter -Any holder can make the auction -in the event this note is not paid at maturity this is not a condition -The car can be sold at public auction sale if note is not paid at maturity. -Selling the car here is not a condition; it is only an option of the holder. -Source of payment does not come from the proceed of the sale. -Here, there is authority of the holder to sell collateral security Ex: P50,000.00 I promise to pay to the order of Ruby fifty thousand pesos on 5 May 2002 after I am able to sell my Mitshubishi Lancer Car with plate number ABD 398 in a public auction sale to be undertaken by me or my attorney in face. (Sgd) Harry Potter -NOT NEGOTIABLE because there is a condition. Payment depends on the sale of the car.
Sec. 5 (b) 3 forms of Confession of Judgment 1. WARRANT of Attorney 2. Cognovit Actionem 3. Relicta verificationem Warrant of attorney -Confession of judgment made before an action filed in the court In this jurisdiction this form of judgment is VOID because: 1. It enlarges the field of fraud; 2. It denies a party his day in court; and, 3. It deprives a party his statutory right to appeal. If warrant of attorney is made as if note warrant of attorney is made at all Confession of judgment means that the obligor acknowledge his liability that may arise from the instrument.
Cognovit actionem -one that is made after a case has been filed in court. *This is VALID in this jurisdiction. Relicta actionem -similar to cognovit actionem, valid also in this jurisdiction, but here, the defendant or the respondent initially raise a defense against a claim but later on abandons this defense. Ex: Defendant denying that he paid the liability, but the abandonment is tantamount to a liability.
P50,000.00 I promise to pay to the order of Ruby fifty thousand pesos on 6 June 2002. In the event I failed to pay the aforesaid obligation and as a consequence thereof a case should be filed against me in court for collection of sums of money, I hereby authorize Pedro as my attorney in fact to acknowledge in my behalf the liability that may arise from the issuance of this note. (Sgd) Harry Potter If warrant of attorney is made as if no warrant of attorney is made at all.
Sec. 5 (c) -obligor = drawer/indorser in relation to Sec. 89 Sec. 89 -person secondarily liable (referring to the drawer/indorser) is entitled to a notice of dishonor. Q: What is the advantage of the person secondarily liable? A: He can be discharged/relieved from liability. NOTICE OF DISHONOR -notice to be made by the holder informing the person secondarily liable the fact that the instrument was refused payment or acceptance. Q: What is the form of the notice? A: It must be in writing (for convinience). BP 22 is not the same with Sec. 89 of NIL Ex: Bill of Exchange P20,000.00 Pay to the order of Ruby twenty thousand pesos on 3 March 2002. Notice of Dishonor is hereby waived. (Sgd) Harry Potter (drawer) To: Reynaldo (drawee) -even if one does not receive a NOTICE, he is still liable.
Sec. 6 1. Omissions (may be intentional or not) 2. Additions INTENTIONAL OMISSION: the instrument: 1. is not dated 2. does not specify the value given 3. does not specify the place where it is issued or drawn ADDITIONS 1. seal 2. particular kind of current money which payment is to be made (ie: designating of denomination) NOT DATED -When the promissory note is not dated, and one does not know when it was executed, then he can put the date of issue [Sec. 17 (c)]
DOES NOT SPECIFY THE VALUE GIVEN -There is a presumption that it is in exchange of a valuable consideration (Sec. 24 Presumption of Consideration) PLACE (issued/drawn) See: Sec. 17 in relation to Sec. 73 (Place of presentment) In his (obligors) 1. residence 2. place of business, or 3. in any other place where he could be found.
Promissory note vs Bill of Exchange PROMISSORY NOTE BILL OF EXCHANGE -Unconditional promise -Unconditional order -4 essential elements -5 elements 1. Unconditional promise 1. Unconditional order in writing 2. Signed by maker 2. Addressed by one person to another 3. Payable on demand or at a fixed or 3. Signed by the person issuing it determinable future time 4. Order to pay on demand or at a fixed or 4. Payable to bearer or order determinable future time a sum certain in money 5. Order to pay must be to order or to bearer. -drawee must be named -may be presented for acceptance -three parties -drawer is secondarily liable
-need not be presented for acceptance -two parties (originally) -maker is primarily liable
PRESENTMENT FOR ACCEPTANCE -drawer may be liable under Sec. 62 once the bill of exchange has been accepted.
Sec. 60: liability of the maker -maker is the person to whom you should present the instrument first -maker is principally liable *In a bill of exchange, the one primarily liable is the drawee. Bill of Exchange vs Check Bill of Exchange Check -payable on demand or at a fixed or determinable -always payable on demand future time -drawee may not be a bank -drawee is always a bank -act of issuing without sufficient fund is NOT -act is CRIMINAL CRIMINAL -may be presented for acceptance -need not be presented for acceptance
CROSSED CHECK [Generally] Baguio City 6 December 2001 P80,000. Pay to the order of CASH the amount of eighty thousand pesos. (Sgd) Harry Potter To: PNBank CROSSED CHECK 1. Generally crossed by 2 diagonal parallel lines at the upper left corner of the check or instrument. 2. Specially
SPECIALLY CROSSED CHECK Ex: Baguio City 6 December 2001 P80,000. Pay to the order of CASH the amount of eighty thousand pesos. (Sgd) Harry Potter To: PNBank -specific name of a bank is written in between the 2 diagonal parallel lines. -named bank merely becomes a drawee bank
PURPOSE OF CROSSED CHECK 1. It will be for deposit 2. Negotiated only once by the payee -drawee has issued that crossed check to see to it that the particular objective will be achieved. DRAFT/BANK DRAFT -a check drawn by one bank against another bank. Addenda: 1) Sec. 184 Promissory Note: Unconditional promise in writing Sec. 126 Bill of Exchange: Unconditional order 2) Promissory Note 4 Elements 3) PN not presented -maker, when he presents PN = payment BOE presented for acceptance or payment Upon acceptance drawee becomes primarily liable under Sec. 62 4) PN 2 parties (maker and payee) BOE 3 parties (1. drawer issues instrument; 2. payee; 3. drawee whom the instrument is addressed [required to pay]) Sec. 126 5) Maker liable -pay instrument according to the tenor of Sec. 60. -person directly responsible to pay to whom instrument should be presented first If he refuses to pay then go to the person who indorse it. BOE: drawer secondarily liable Drawee primarily liable -Any indorser is also secondarily liable. Check drawn for specific amount but not sufficiently funded with the drawee and is subsequently dishonored (bouncing check) by the drawee.
Sec. 6 Addendum: A. Seal, not essential 1) For advertisement 2) For identification 3) For embellishment B. Designation of particular kind of current money in which payment is to be made -denomination
P100,000.00 Marlon promised to pay to the order of Reynaldo one hundred thousand pesos with use of 100 pieces of P100 bills. (Sgd) Harry Potter -payment of P100,000 with the use of P100 bills -specify denomination but not condition simply a designation of the denomination used. As differentiated with: Sec. 2 amount payable is to be made in exchange (speaks of two kind of currency)
Sec. 184 To pay on 1. Demand 2. Fixed future time, or 3. Determinable future time A sum certain in money to order or a bearer CASHIERS CHECK -check drawn by a cashier of a particular bank against the same bank where he is employed as a cashier. Effect: as good as cash, but not a legal tender Date of payment -takes the effect of payment when encashed MANAGERS CHECK -check drawn by a manager of a particular bank against the same bank where he is employed as manager -as good as cash, but not a legal tender -takes effect when encashed BLANK CHECK -incomplete instrument (Secs. 14 and 15) -the amount is not yet written MEMORANDUM CHECK -contains memorandum to the effect that this will be followed before encashing -not condition -guidelines -written at the back on another paper attach to the check.
GUARANTEE CHECK -issued to simply guarantee payment of an existing obligation. ACCOMMODATION CHECK -issued by drawer who did not receive any valuable consideration for drawing it from the payee or bearer. Sec. 12 ANTE-DATED -date earlier than the actual date of drawing or issuance POST-DATED -date later than the actual date of issuance or drawing the instrument effect: before encashing, wait for the arrival of post date
NEGOTIATION -refers to transfer of instrument -purpose: makes the transferee becomes holder of the instrument as: 1. Bearer, or 2. Endorser But, NOT if the transferee if for depositary only. Q: How to negotiate a BEARER INSTRUMENT? A: By delivery. Q: How to negotiate an ORDER INSTRUMENT?
INDORSEMENT (Secs. 39 and 40) -signature affixed at the back of the instrument by the person negotiating it. Face: signature of the drawer/maker Back: signature of the person negotiating it Ex: FACE Payable to the order of Juan.
Sec. 36 RESTRICTIVE INDORSEMENT 1. Prohibits further negotiation ex: To: Maria only (-negotiable but ceases to be because further negotiation is prohibited. 2. When it constitutes the indorsee being an agent of indorser ex: To: Maria for collection only (Sgd) Harry Potter 3. When it vests title to the indorsee in trust of for the benefit of other persons ex: To: Maria in trust for my son (Sgd) Juan CONDITIONAL INDORSEMENT -nothing to do with promise or order to pay ex: To: Maria if she tops the 2001 Bar Exams (not referring with the promise to pay) Suspensive condition happening of event gives rise to the obligation. -however, the payee may disregard such condition or vice versa he may not be required to pay without the happening of the event.
QUALIFIED INDORSEMENT -indorsee is only an assignee of the indorser ex: To: Maria sans (without) recourse indorser indorses the instrument to indorsee for payment from payee, but if drawee is insolvent, indorsee has not recourse against indorser.(but not for other reason than insolvency) Sec. 13 INSERTION OF DATE Purpose: to determine the maturity of the instrument or the amount of interest INSTANCES WHERE DATE MAY BE INSERTED 1. Instrument is payable at a fixed period after date but the instrument is undated. 2. Instrument is payable at fixed period after sight but the acceptance is undated. A. Example of fixed period after date (no date)___________ 8,000.00
Q: Who is a holder in due course? A: Under Sec. 52, he who: (the conditions) 1. Takes the instrument complete and regular upon its face 2. Takes the instrument before it is overdue 3. Takes the instrument in good faith 4. Takes the instrument without knowledge of the infirmity or defect of the instrument. (keyword: COGI: Complete, Overdue, Good faith, Infirmity) Complete and regular upon its face -all the essential elements are present, including all matters like date. regular upon its face no suspicion of alteration before overdue Ex: Suppose the check was issued on 1 January 2002, today is 7 January 2002, the check is already overdue for value and in good faith for value in exchange for valuable consideration without knowledge of the infirmity or defect Sec. 59 Presumption: Every holder is a holder in due course (this is a disputable presumption the adverse party may prove the insufficiency of the conditions)
See: Sec. 52 vs Sec. 59 Sec. 57 Rights of a holder in due course 1. Hold the instrument free form defect (Sec. 13 vs Sec. 57) 2. To enforce the payment in its full amount See: Sec. 13 B. after sight after is shown/presented for payment and there is acceptance. Ex: Bill of Exchange 1 January 2002 P10,000.00 Pay to the order of Jose ten thousand pesos six days after sight. (Sgd) Pablo To: Maria -Jose presented it to Maria for her acceptance -Maria accepted it with her signature (but no date) So, the holder must insert the date Sec. 14 speaks of incomplete instrument however, it was delivered INCOMPLETE means an essential element is lacking Ex: NOT SUM CERTAIN IN MONEY P.00 Pay to the order of Jose the sum of ..
(Sgd) Pedro Land Bank Facts: Pedro instructed Juan to put any amount but not exceeding P40,000.00. However, Juan placed P47,000.00. Subsequently, Juan indorsed the check to Marta. BACK (Special Indorsement) To: Marta (indorsee) (Sgd) Juan
Question #1 Q: As a holder (indorsee), what can Marta do with the check? A: Marts may: 1. Indorse it further, or 2. Present the check to the drawee bank for payment Question #2 Q: If Marta chose to present the check for payment but the bank dishonors the check, what must Marta do so that she can recover from the persons who are secondarily liable? A: Marta should give notice of dishonor to the persons secondarily liable [ie: 1) the drawer and 2) the drawee] Q: What if Marta did not give any notice of dishonor? A: Then the persons secondarily liable are DISCHARGED from liability. NO form of notice but it must be in writing for purposes of convinience. Question #3 Q: If Marta is not a holder in due course (ex: she knew of the infirmity/defect), can she enforce the check against Pedro?
Question #4 Q: Will your answer be the same as in the preceding question if Marta is a holder in due course (ie: she did not know that there was infirmity/defect and if she knew, she was not a party thereor)? A: NO. My answer will not be the same as in the preceding question. Marta can enforce the instrument as if it was strictly filled up in accordance with the authority given and within a reasonable time. (see: last sentence of Sec. 14, NIL) [Sec. 57 Rights of holder in due course] Marta can enforce the instrument free from defect and in its full amount of P47,000.00 Question #5 Q: Can Marta require Juan to pay P47,000.00 if the bank and Pedro do not pay? A: YES. Juan warrants Marta that: 1. The check is genuine and in all respect what it purports to be (ie: the amount is correct even if it was written not strictly in accordance of the authority given) SEC. 15 INCOMPLETE instrument and UNDELIVERED undelivered means NO VALID DELIVERY -no essential particular and no valid delivery See: Sec 8 payee must be named -instrument is INCOMPLETE -COMPLETED and NEGOTIATED without authority -Effect of signing: the instrument is NOT a valid contract in the hands of ANY HOLDER -the instrument cannot be enforced by the holder ( nb: even holder in due course) against the person who became the party thereto prior to delivery
ILLUSTRATION: FACE P80,000.00 Pay to the order of Mr. ____________________ the sum of eighty thousand pesos . (Sgd) RUA To: PNBank
Facts: Because of his gross negligence, RUA lost his incomplete instrument. (Amado) placed his name as payee unknown to RUA. Thereafter, Amado negotiated the check to Lito. BACK (after completion) To: Lito (Sgd) Amado (indorser) Amado was the finder. He
Nb: from Amado to Lito = there is a valid delivery BUT from RUA to Amado = no valid delivery. -Lito cannot enforce the instrument against RUA if the instrument is dishonored by the bank.
the
sum
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(Sgd) Amado To: Land Bank Facts: Amado placed this incomplete instrument in his cabinet. Rey took it without the consent of Amado. Subsequently, Rey put the amount of ninety thousand pesos. Later, Rey indorsed it to Bartolo. Bartolo presented the instrument to the bank but it was dishonored. He gave a notice of dishonor to Rey and Amado. BACK (after completion) To: Bartolo (Sgd) Rey
Read: Sec. 40 in relation to Sec. 30 In instrument payable to bearer = it can be negotiated by DELIVERY only, NO NEED TO INDORSE Sec. 40: Payable to bearer can be indorsed but it may not be necessary because Sec. 30 payable to bearer is negotiated by delivery. - the instrument must be incomplete and undelivered Question #1 Q: Can Bartolo require Amado to pay P90,000.00 A: NO. Reason: The check is not a valid contract in the hands of any holder. Bartolo cannot enforce against Amado because Amado is the person who placed his signature before delivery.
Question #2 (use Sec. 65 in relation to Sec. 66: WARRANTY) Q: Can Bartolo require Rey to pay P90,000.00? [additional facts: Rey made a SPECIAL INDORSEMENT (this made Amado a general indorser) and since Rey indorsed it, Sec. 66 applies, otherwise, Sec. 65 applies] A: YES. Bartolo can require Rey to pay the P90,000.00. As an indorser Rey warrants to Bartolo that the instrument is genuine and in all respects what it purports to be. [Rey incurred his warranty when he indorsed the check/instrument to Bartolo; nb: Amado is a drawer and he has NO WARRANTY, it is only the INDORSER who warrants] Even if Rey has no valid title, as far as Bartolo is concern Rey has a valid/good title because Rey warrants this. Amado has a real defense (ie: the instrument is NOT a valid contract in the hands of any holder) under Sec. 15. Sec. 14 is only a PERSONAL DEFENSE (that the instrument was filled up not strictly in accordance with the authority given) USE Sec. 65 when:
SEC. 16 (here, no problem about the instrument for it is COMPLETE but it is UNDELIVERED) undelivered means NO EFFECTUAL DELIVERY (ie: no legal effect) *There must have been a delivery BUT not effectual (eg: delivery was made by a person not authorized) Q: When will the delivery be considered effectual? A: If the delivery is made by the drawer/maker (indorser/acceptor or anyone who is authorized by him). [it must be made either BY THE AUTHORITY or UNDER THE AUTHORITY of the person making, drawing, indorsing, accepting]
-The instrument is COMPLETE but CONTRACT involving the complete instrument is INCOMPLETE if there is NO DELIVERY. -Any time before delivery the complete instrument does not produce any legal effect. KINDS OF DELIVERY 1. Conditional delivery 2. Delivery for a special purpose 3. Delivery not intended to transfer title (it may transfer physical possession but not the title) Conditional delivery -happening of the suspensive condition the delivery becomes effectual Delivery for a special purpose -to make the person to whom it is delivered a trustee or depositary (ie: special purpose of safekeeping) Q: What is the consequence if there is NO EFFECTUAL DELIVERY but it is in the hands of a holder in due course? A: There is a conclusive presumption that there is a valid and intentional delivery by all parties prior to him (holder in due course). [All these prior parties can be liable to a holder in due course]
TERMS in Sec. 16 1. IMMEDIATE PARTY refers to the one who knows the defect/infirmity of the instrument (this does not mean proximity) 2. REMOTE PARTY OTHER THAT HOLDER IN DUE COURSE refers to a party who is not aware of the defect/infirmity of the instrument (eg: one who received an instrument after overdue) P80,000.00 Pay to the order of Juan eighty thousand pesos. (Sgd) Pedro To: Land Bank Facts: Pedro signed this instrument, put it in his cabinet and the sister of Juan took it without Pedros consent. The sister of Juan delivered the instrument to Juan but she is not authorized by Pedro. Later, Juan indorsed the instrument to Harry. BACK To: Harry (Sgd) Juan
Harry is still an IMMEDIATE PARTY as long as he is aware that the instrument was not deliverd by Pedro (NOT PROXIMITY)
ANOTHER ILLUSTRATION OF SEC. 16 P80,000.00 Pay to the order of Juan eighty thousand pesos. (Sgd) Pedro T: Land Bank Facts: Pedro instructed Juan to indorse this check until such time the latter will be able to complete the construction of Pedros house. Construction has never started when Juan indorsed the check to Ruby. Subsequently, Ruby indorsed the check to Clara.
Question #1 Q: If Clara is not a holder in due course can she require Pedro to pay after giving him notice of dishonor? A: NO. Pedro has a personal defense that there was no effectual delivery of the instrument considering that delivery was conditional and the suspensive condition was not fulfilled. (Juan was not acting under the authority of Pedro). Question #2 Q: Will your answer be the same as in the preceding question if Clara is a holder in due course?
Sec. 15 1. INCOMPLETE instrument but UNDELIVERED. 2. A Real Defense (can be availed of even as against a holder in due course) 3. DEFENSE: That the instrument is NOT A VALID CONTRACT in the hands of any holder.
Sec. 16 1. COMPLETE instrument but UNDELIVERED 2. A Personal Defense (can be awaited of only against a holder who is not a holder in due course). 3. DEFENSE: That there is NO EFFECTUAL DELIVERY of the instrument because: a) The delivery was conditional and the suspensive condition was not fulfilled. OR b) The delivery was special purpose only and the instrument was not intended to be negotiated.
4. Cannot be enforced by one who in not a holder in due course. Against whom? Against a person who placed his signature thereon prior to the completion. 5. In the hands of a holder in due course, the instrument is AS IF it was filled up strictly in accordance with the authority given.
4. Cannot be enforced even by one who is a holder in due course. Against whom? Any person who became a party prior to completion or delivery. 5. In the hands of any holder, the instrument is not a valid contract.
4. Cannot be enforced by one who is NOT A HOLDER IN DUE COURSE. Against whom? Person who placed his signature before delivery of instrument. 5. In the hands of a holder in due course, a valid and intentional delivery by all parties prior to a holder in due course is conclusively presumed. All such prior parties may be liable to the holder in due course.
FORGERY Payable to ORDER Forgery in the signature of the drawer is a real defense by the DRAWER. Drawers defense: that the forged signature is rendered wholly inoperative (ie. He [the drawer] will never be liable in that forged signature) Forgery in the signature of the payee is a real defense by BOTH the drawer and payee (or original indorser). Drawers defense: that he is not liable because of lack of valid indorsement by the payee. (NB: In an instrument that is payable to order, a valid indorsement by the payee is necessary to negotiate the instrument, sec. 30) Payees defense: that the forged signature is rendered wholly inoperative. Face P80,000.00 Pay to theORDER of Amado eighty thousand pesos. (Sgd) Pedro To: PNBank This instrument was forged by Amado. Back To: Bella (Sgd) Amado To: Harry (Sgd) Bella
QUESTIONS: 1) If the bank dishonors the check and H gives notice of dishonor to Pedro, is the latter liable? Ans: No. The forged signature is wholly inoperative. (real defense) Pedro will never be liable for that signature because Harry did not acquire any right to enforce payment of the instrument, based on that signature, against the person whose signature was forged. (NB: even if you are a holder in due course) 2) If Harry gives notice of dishonor to Amado, can Harry recover from the former? Ans: Yes. Reason: he is a forger and as such he is precluded from setting up forgery or want of authority as a defense. As a general indorser, he warrants under Art. 66 that the signature is genuine and in all respects what it purports to be 3) If Harry gives notice of dishonor to Bella, will Bella be liable to pay? Ans: Yes. Reason: She is a subsequent indorser and precluded from setting forgery as a defense. And by indorsing the check, she warrants to Harry that the instrument is genuine and in all respects what it purports to be. Forged instrument in hands of a HOLDER IN DUE COURSE cant be enforced for payment. Forged signature does not make you liable to the instrument NB: When the payees signature was ONLY forged, the payee and the drawer can still avail of the real defense. Reason: No valid indorsement by the payee. (see: sec. 30 indorsement + delivery) Illustration (forgery in the signature of the PAYEE) Face P80,000.00 Pay to theORDER of Juan eighty thousand pesos. (Sgd) Berto To: Land Bank Back To: Pablo (Sgd) Juan To: Harry (Sgd) Pablo This payees (aka orginal indorser) signature is forged by Pablo. QUESTIONS: 1) If The bank does not pay Harry and Harry gives notice of dishonor (NOD) to Berto, is the latter liable? Ans: NO. Berto can set up the real defense that the forged signature of Juan (payee) is wholly inoperative (that is using the payees forged signature as a real defense). Berto is not made liable even to a HOLDER IN DUE COURSE bec. of lack of valid indorsement by the payee. 2) If Harry gives NOD to Juan, is the latter liable? Ans: NO. Reason: Forged signature is rendered wholly inoperativ e. Juan cant be made liable on the basis of that forged signature. As a holder (even HDC), Harry did not acquire any right to enforce the instrument against Juan. 3) If Harry gives a NOD to Pablo, is the latter liable? Ans: YES. Reason: Pablo is the FORGER and SUBSEQUENT INDORSER. As such, he is precluded from setting up forgery or want of authority. And he warrants that the instrument is genuine and in all respects what it purports to be. Face P60,000.00 Pay to REY or BEARER sixty thousand pesos. (Sgd) Pablo To: PNBank Back To: Pedro (Sgd) REY To: Harry
2) GELAC vs HK and Shanghai Bank, 43 Phil 711 Face P2,000.00 Pay to the order of MELICOR (Sgd) GELAC To: PNBank Back To: Maasim (Sgd) MELICOR To: HSB (Sgd) Maasim This was forged by Maasim this check was drawn by GELAC involving payment of insurance proceeds for MELICOR. This check was lost and Maasim had possession of the check and tried to make it appear that it was indorsed to him by MELICOR. The practice of GELAC is to send the check by mail. 8: order instrument payee must be named. Maasim deposited the check to HSB and the amount was allowed to be credited in Maasims account, and so he was allowed to withdraw amount. HSB presented to PNB. PNB paid. Now, PNB wants to debit against the deposit account of GELAC. DOCTRINE: When a check is payable to the order of a person and it is presented for payment BY ANOTHER it is the duty of the bank to see to it that the check was duly indorsed by the original payee. (Reason: no valid indorsement) So, PNB should see to it that MELICOR made a valid indorsement. It cannot debit against the account of GELAC. ***Forgery in the signature of the payee is a real defense by the drawer. PNB can go against HSB; HSB can go against Maasim.
3) PNB vs Motor Service, 63 Phil 693 Face Pay to the order of International Auto-repair Shop (IARS) or ORDER. (Sgd) Klar in behalf of the PANTRANCO To: PNB This was forged Back To: Motor Service (Sgd) IARS by unknown person To: Natl City Bank of New York (NCBNY) J.
4) PNB vs CA, 25 SCRA Face Pay to the order of Mariano Pulido (Sgd) GSIS To: PNBank Back To: Manuel Go (Sgd) M. Pulido To: Lim (Sgd) M. Go To: PCIB (Sgd) Lim PCIB said: all prior indorsements guaranteed Signatories of GSIS check are manager and auditor Managers and Auditors signature were forged (this check was lost) 2 months before PCIB went to PNB. GSIS has already notified PNB to stop payment bec. GSIS said that the check was forged (lost). But PNB still paid bec. of the ANNOTATION: PCIB guaranteed that the indorsement were GENUINE but not the signature. SO, GSIS is not liable bec. its signature is wholly inoperative. There was GREATER or ACTUAL NEGLIGENCE by PNB. DOCTRINE OF JUS TERTIIS When one of the two innocent persons must suffer from a wrongful act of a third person, the one guilty of actual rd negligence or who put it into the power of a 3 person to perpetrate the wrong shall bear the loss. Here, the 3 person is the GSIS.
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5) Republic Bank vs. Mauricia Ebrada, 65 SCRA 693 Signature of payee (original indorser) was forged. Ebrada also raised the issue that she was only an accommodation pary (29)
MATERIAL ALTERATION It is any unauthorized change in the instrument. It includes: a) Change in the amount payable. b) Change in the maturity date. c) Change in the number or relation. d) Change in the nature of the instrument. e) Adds interest when in fact not stipulated. EFFECTS OF MATERIAL ALTERATION 1. The instrument is AVOIDED. 2. The instrument cannot be enforced against the party who did not authorize nor assented to the alteration. 3. A HDC can enforce the instrument according to its original tenor. [but not as altered; only the original] 4. Material alteration is a REAL DEFENSE. Q: Who may be liable in case of alteration? A: 1) The party who: a)made, b) authorized, c) assented to the alteration. 2) A subsequent indorser bec. of his warranty that the instrument is genuine and in all respects what it purports to be. Alteration distinguished from forgery Alteration Forgery 1. It refers to any 1. It pertains to unauthorized change. unauthorized signature. 2. The forged signature is rendered INOPERATIVE. 3. The recover instances. HDC in cannot some
Secs 124 and 125 AVOIDED, except as to the person who assented or authorized to the alteration. AVOIDED void as far as the person who did not make or authorized or has assented to the alteration is concern.
Real defense You cannot use your unlawful act as a defense Assented eg. First you did not know the alteration then later you knew, so, you assented. Illustration (material alteration) As a drawer Danny issued a check to Pablo in the amount of P69,000.00. Without any authority from Danny, Pablo (the payee) changed the amount of P69,000.00 to P77,000.00. Pablo indorsed the check to Indong. Later, Indong indorsed it to Harry. Subsequently, Harry presented the check for payment by PNBank (the drawee bank. The bank dishonored it. QUESTIONS: 1) If Harry will give NOD to Danny, is the latter liable to pay P77,000.00? Ans: NO. Danny is not liable to pay the P77K bec. as far as he is concern the instrument is AVOIDED. He did not authorize or assent to the alteration. 2) Will there be a difference in your answer if Harry is a HDC? Ans: NONE, bec. material alteration is real defense. 3) If Harry gives NOD to Pablo, is the latter liable to pay P77K? Ans: YES. Pablo is liable bec. he is the one who made the material alteration and he was not authorized by Danny to make the material alteration. Primary reason: Pablo is liable to pay P77K bec. the law provides that the instrument can be enforced against the party who made the alteration. The general rule is that the instrument is avoided except to the one who made or is not authorized to make the alteration. Here, Pablo falls under the exception. Pablo as an indorser warrants to all subsequent holders that the instrument is genuine and in all respects what it purports to be. 4) What if Harry gives NOD to Indong, is the latter liable to pay P77K? Ans: YES. Indong is liable to pay P77K bec. under the law a subsequent indorser is liable in material alteration. YES. Indong is liable to pay P77K. As a subsequent indorser, Indong is liable bec. he warrants that the instrument is genuine and in all respects what it purports to be. 5) Assuming that Indong and Pablo are not in the country and Harry badly needs money and wants to recover from the drawer, can Harry as HDC recover the amount other than P77K from Danny? Ans: YES. As HDC Harry can recover the amount of P69K ONLY from Danny bec. the HDC can enforce the instrument according to its original tenor.
Banco Atlantico vs Auditor General, 81 scra 335 - 3 checks involved; 1 check payment for a living quarter; a check is payable in the amount of US$79 for one living quarter; the US$79 became US$375,000 (alteration in the amount); Azucena Pace deposited the check after altering it.