NEGOTIABLE INSTRUMENTS LAW
REVIEWER FOR LONG QUIZ
A. Absence or Failure of Consideration (Sec. 24; Art. 1354 of Civil Code)
Sec. 24 Presumption of consideration Every negotiable instrument is deemed prima facie
to have been issued for a valuable consideration; and every person whose signature appears
thereon to have been become a party thereto for value.
Article 1254 (Civil Code) - When the payment cannot be applied in accordance with the
preceding rules, or if application cannot be inferred from other circumstances, the debt
which is most onerous to the debtor, among those due, shall be deemed to have been
satisfied.
If the debts due are of the same nature and burden, the payment shall be applied to all of
them proportionately. (1174a)
DE LEON:
Consideration means an inducement to a contract, that is, the cause, price or impelling
influence which induces a contracting party to enter into the contract. It is the essential or
more proximate purpose a party has in view at the time of entering into a contract.
The presumption is only prima facie. It may, therefore, be rebutted by evidence to the
contrary by the one on whom the demand of payment is made. The evidence to prove that
there was no consideration must be convincing to overthrow the presumption. It is not
overcome by a mere denial of receipt of the consideration.
PEREZ:
What is the effect of want of consideration?
Absence or failure of consideration is a matter of defense against any person not a holder in
due course; and partial failure of consideration is a defense pro tanto (to such extent),
whether the failure is an ascertained and liquidated amount or otherwise (Sec. 28)
What is the difference between absence of consideration and failure of consideration?
Want of consideration embraces transactions or instances where none was intended to pass,
while failure of consideration implies that valuable consideration, moving from obligee to
obligor, was contemplated.
Thus, in case of absence of consideration, no valuable consideration has been agreed upon or
it is illegal and therefore void. Absence of consideration is also manifested by the presence of
immoral, or fraudulent consideration like a note given for future illicit cohabitation.
Example: A made a promissory note for 100k payable to B or order in consideration for killing
As wife. The consideration is illegal and therefore, there is absence of consideration.
On the other hand, there is failure of consideration when a valid consideration has been
agreed upon but there was failure to execute or give the consideration contemplated by the
parties.
Example: Where a note is given to a payee in consideration of his undertaking to surrender
prior notes given by the maker to the payee, failure of the payee to surrender prior notes
established a failure of consideration for the new note, regardless of whether there was any
consideration for the prior notes. Likewise, there is failure of consideration for a note given in
consideration of an agreement to construct works which were not constructed.
What kind of defense is absence or failure of consideration?
It is a personal defense because it is not available against a holder in due course. Thus, a
holder in due course may recover thereon regardless of the consideration which may or may
not have passed between the original maker or drawer and the payee, and therefore as
against a holder in due course, want or failure of consideration in the original execution of a
bill, note, or other negotiable instrument is not a defense.
What is the effect of a partial failure of consideration? (Sec. 28)
As against a person not a holder in due course, a partial failure of consideration may work
As a pro tanto or proportionate avoidance or discharge of an undertaking on a bill or note
Example: A issued a PN payable to B or order for 100k in consideration of a loan being
obtained by A. Instead of giving the full amount of the loan of 100k, only 60k was released by
B to A. B indorsed the instrument to C, a person who is not a holder in due course so that he
will be liable for only 60k. But if C is a holder in due course, A will be liable for the full amount
of 100k as the defense of partial or total failure of consideration cannot be raised against a
holder in due course.
B. Accommodation Party (Sec. 29)
Sec. 29 - Liability of accommodation party An accommodation party is one who has signed
the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and
for the purpose of lending his name to some other person. Such a person is liable on the
instrument to a holder for value, notwithstanding such holder at the time of taking the
instrument knew him to be only an accommodation party.
DE LEON:
Definition
Accommodation note or bill one to which the accommodation party has put his name,
without consideration, for the purpose of accommodating some other party who is to use it,
and is expected to pay it. It creates no obligation upon delivery to the accommodated party
and is of no legal efficacy and creates no obligation until delivered or negotiated to a holder
for value.
Accommodation Party (Sec. 29) He usually expected that not he, but the accommodated
party, will provide payment of the bill or note when it falls due. He actually lends his credit to
the party to whom the accommodation is made. He is classified according to the
accommodated partys status. If the accommodated party is the maker, for example, he is
liable on the instrument to subsequent parties as if he were the maker.
Accommodated Party is one in whose favor a person, without receiving value therefor, signs
an instrument for the purpose of lending his credit and enabling said party to raise money
upon it (Sec. 29). He impliedly agrees to take up the instrument at maturity and to indemnify
the accommodation party against the consequences of non-payment.
PEREZ:
Who is the accommodated party? Must he be a party to the instrument?
An accommodated party is one to whom the credit of the accommodation party is loaned.
The accommodation party need not be a party to the instrument, provided, it was signed by
one for his accommodation.
What are the requisites in order that a party may be considered as an accommodation
party?
The ff. are the requisites in order that a party may be considered as an accommodation party:
a. He must have signed the instrument as maker, drawer, acceptor, or
indorser;
b. He signed without receiving value therefor;
c. He signed for the purpose of lending his name to some other party (Sec.
29)
What is the purpose of the accommodation party in lending his name?
An accommodation party lends his name to enable the accommodated party to obtain credit
or to raise money. He receives no part of the consideration for the instrument but he
assumes liability to the other parties thereto because he wants to accommodate another.
His liability shall depend whether he signs as maker, drawer or indorser:
Maker = he is primarily liable on the note and the fact that a party is an accommodation
maker gives rise to a duty on his part to a holder for value, no greater or less from that
imposed on a maker who received value.
Drawer/Acceptor = he is likewise primarily liable on the bill
Indorser = he is only secondarily liable thereon. Furthermore, accommodation indorsers are
entitled to the rights and immunities of indorsers and are liable for the amount of the
instrument if the legal requisite steps are taken by the holder. Thus, indorsers must be given
notice of dishonor, otherwise, he shall not be liable thereon.
Can an accommodation party be liable to a person who is not a holder for value?
An accommodation party is only liable to a holder for value notwithstanding that such
holder, at the time of taking, the instrument knew him to be only an accommodation pary.
Can an accommodation party be made liable by a person who is a holder for value but not a
holder in due course?
While Sec. 29 makes an accommodation party liable to a holder for value, it has been held
that such liability exists only in favor of a holder in due course. A holder for value under Sec.
29 is one who must meet all the requirements of a holder in due course under Sec. 52 except
notice of want of consideration. If he does not qualify as a holder in due course, then he
holds the instrument subject to the same defenses as if it were non-negotiable. The
accommodation party, is therefore bound on the check to the holder in due course. Having
issued or indorsed the check, the accommodation party has warranted to the holder in due
course that he will pay the same according to its tenor.
Can an accommodation party can raise the defense of absence or failure of consideration?
An accommodation party cannot raise the defense of absence or failure of consideration
because such kind of party does not really receive value for lending his name. He shall be
liable to be only and accommodation party.
Between the accommodation party and the party accommodated, who is the real debtor?
What right does one have over the other?
As between the party accommodated and the accommodation party, whatever may be the
obligations which the latter assumes toward third persons, the relation is that of principal
and surety, the former being the principal and the latter, the surety. Hence between these
two parties, the party accommodated is the debtor and accommodation party is the creditor.
Where the accommodation party has been compelled to pay the instrument, the party
accommodated becomes, in consequence of the implied contract of indemnity, a debtor of
the accommodation party, and the latter has a right of action against the former.
C. Kinds of Indorsements (Sec. 33; Sec. 34-39)
(Rely onto the provisions themselves for the right answers)
Sec. 33 Kinds of indorsement An indorsement may be either special or in blank (Sec. 34);
and it may also be either restrictive or qualified, or conditional.
Sec. 34 Special Indorsement; indorsement in blank A special indorsement specifies the
person to whom, or to whose order, the instrument is to be payable; and the indorsement of
such indorsee is necessary to the further negotiation of the instrument. An indorsement in
blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be
negotiated by delivery.
DE LEON:
A special indorsement is one where the name of the payee is specified. It is also known as
specific indorsement or indorsement in full. Special and blank indorsements are unqualified
indorsements.
2 Forms: 1.) Specifies the person to whom the instrument is payable (Pay to A); and 2.)
Specifies the person to whose order the instrument is payable (Pay to the order of A; Pay to A
or order)
In either case, the indorsement must be followed by the signature of the indorser.
A blank indorsement is one which specifies no particular indorsee. Such an indorsement
generally consists only of the signature of the payee or indorser on the back of the
instrument.
PEREZ:
Distinguish special indorsement from blank indorsement.
A special indorsement specifies the person to whom, or to whose order the instrument is to
be payable, and the indorsement of such indorsee is necessary to the further negotiation of
the instrument. While an indorsement in blank specifies no indorsee, and an instrument so
indorsed is payable to bearer, and may be negotiated by delivery.
Sec. 35 Blank indorsement; how changed to special indorsement The holder may convert a
blank indorsement into a special indorsement by writing over the signature of the indorser in
blank any contract consistent with the character of the indorsement.
PEREZ:
An instrument was indorsed by A in blank and delivered to B. B wrote above the signature
of A the following: To B. Thereafter, is the indorsement still a blank indorsement?
The indorsement is no longer a blank indorsement since it was converted into a special
indorsement when B inserted To B, which is consistent with the character of the
indorsement (Sec. 35). The holder of a bill or note indorsed in blank may write over the
indorsement any contract not inconsistent with the undertaking of the indorser or the
intention of the parties.
Sec. 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 the indorser; or;
c.) Vests the title in the indorsee in trust for or to the use of some other person.
DE LEON:
A restrictive indorsement is one so worded that it either prohibits entirely the further
negotiation of an instrument or restricts its further negotiation to a particular person or for a
particular purpose; or modifies the rights of the holders or the liabilities of the indorser.
But the mere absence of words implying power to negotiate does not make an indorsement
restrictive.
PEREZ:
Sample for each type of restrictive indorsement:
a.) Prohibits further negotiation of the instrument
To B only. (Signed X). Such indorsement restricts payment or transfer to a particular person
b.) Constitutes the indorsee the agent of the indorser.
To B, for collection on my behalf (Signed X). It does not vest title in the indorsee as it
merely makes him an agent of the indorser to collect the amount of the instrument.
c.) Vests the title in the indorsee in trust for or to the use of some other person.
To B, in trust for C (Signed X). It vests title in B in trust for another person, C. However,
naming such person and therefore the indorsement of a negotiable note to a corporation or
person with words as trustee after the name of the indorsee is not a restrictive
indorsement
d.) Absence of words implying power to negotiate.
To B. (Signed X). does not include the words or order, or or bearer but such indorsement authorizes him to do so. Thus, where the restrictive indorsement prohibits
indorsement is not restrictive by the mere fact that words of negotiability are not included in
the indorsement.
Sec. 37 Effect of restrictive indorsement; rights of indorsee A restrictive indorsement
confers upon the indorsee the right
a.) To receive payment of the instrument;
b.) To bring any action thereon that the indorser could bring;
c.) To transfer his rights as such indorsee, where the form of the indorsement
authorizes him to do so.
But all subsequent indorsees acquire only the title of the first indorsee under the restrictive
indorsement.
PEREZ:
Explain the effects of restrictive indorsement, or the rights of the indorsee in a restrictive
indorsement.
a.) To receive payment of the instrument
If the instrument prevents further negotiation of the instrument, it is treated as a mere
restriction as to the person to receive payment by restricting payment to a specific person
but the indorsee has the right to receive payment on his own behalf. However, where the
indorsee is a mere agent of the indorser or a trustee of another person, the indorsee is liable
to his principal or the beneficiary of the trust, for the proceeds of the instrument when
collected.
b.) To bring any action thereon that the indorser could bring
A person to whom an instrument has been restrictively indorsed for collection only may
nevertheless sue thereon in his own name, subject to defenses might have been imposed
against the indorser.
But where the indorsee is made as a mere agent of the indorser, the indorsee cannot sue the
indorser on his indorsement. But he may sue other parties to enforce payment although such
action is open to the same defenses as could have been made in the hands of the indorser.
c.) To transfer his rights as such indorsee, where the form of the indorsement
authorizes him to do so.
A restrictive indorsee may transfer his rights as much as indorsee where the form of the
further negotiation of the instrument, it may no longer be negotiated since his form of
indorsement does not authorize him to do so.
On the other hand, where the restrictive indorsement constitutes the indorsee as an agent of
the indorser, or as a trustee for the benefit of another person, the indorsee may transfer his
rights but all subsequent indorsees acquire only the title of the first indorsee under the
restrictive indorsement.
Sec. 38 Qualified indorsement A qualified indorsement constitutes the indorser a mere
assignor of the title to the instrument. It may be made by adding to the indorsers signature
the words without recourse or any words of similar import. Such an indorsement does not
impair the negotiable character of the instrument.
Sec. 39. Conditional Indorsement Where an indorsement is conditional, a party required to
pay the instrument may disregard the condition and make payment to the indorsee or his
transferee whether the condition has been fulfilled or not. But any person to whom an
instrument so indorsed is negotiated, will hold the same. Or the proceeds thereof, subject to
the rights of the person indorsing conditionally.
D. Holder in Due Course (Sec. 52*)
[MEMORIZE]
Sec. 52 What constitutes a holder in due course A holder in due course is a holder who has
taken the instrument under the following conditions:
a.) That it is complete and regular upon its face;
b.) That he became the holder of it before it was overdue, and without notice that it
had been previously 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 the
instrument or defect in the title of the person negotiating it.

E. Persons negotiating by delivery or qualified indorsements (Sec. 65)
[MEMORIZE]
Sec. 65 Warranty where negotiation by delivery, and so forth Every person negotiating an
instrument by delivery or by a qualified indorsement warrants
a.) That the instrument is genuine and in all respects what it purports to be;
b.) That he has good title to it;
c.) That all prior parties had capacity to contract;
d.) That he has no knowledge of any fact which would impair the validity of the
instrument or render it valueless.
But when the negotiation is by delivery only, the warranty extends in favor of no holder other
than the immediate transferee.
The provisions of subdivision (c) of this section do not apply to persons negotiating public or
corporation securities, other than bills and notes.
F. General Indorser (Sec. 66)
[MEMORIZE]
Sec. 66 Liability of General Indorser every indorser who indorses without qualification
warrants to all subsequent holders in due course
a.) That matters and things mentioned in subdivision (a), (b), and (c) of the next
preceding section; and
b.) That the instrument is at the time of his indorsement, valid and subsisting.
And, in addition, he engages that on due presentment, it shall be accepted or paid, or both,
as the case may be, according to its tenor, and that if it be dishonored and the necessary
proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to
any subsequent indorser who may be compelled to pay it.
G. Notice of Dishonor given on behalf of the holder (Sec. 92)
Sec. 92 Effect of notice on behalf of holder Where notice is given by or on behalf of the
holder, it inures to the benefit of all subsequent holders and all prior parties who have right
of recourse against the party to whom it is given
DE LEON:
In other words, a party can charge a prior party who has received notice of dishonor although
he himself has not given said prior party any notice. The reason for this is that a party entitled
to a notice of dishonor need to be notified only once.
Example:
M makes a note payable to P or order. The following are the indorsers of the note in the
order of their indorsements:
P -> A -> B -> C -> D (holder) -> E (subsequent holder)
The above note is dishonored in the hands of D, who notifies P, A, B, and C
The notice given by D to P operates to the benefit of A, B, and C, parties subsequent to P, and
E, a subsequent holder, although they themselves have not notified P.
The notice to A inures to the benefit of B, C, and E; the notice to B, to the benefit of C and E;
and the notice to C, to the benefit of E. Therefore, should B, for example, pay C, B may go
against P or A on the basis of the notice given to P or A although B has not himself given
notice of dishonor.
But the notice to A does not operate in favor of P because P has no right of recourse against
A. It is A who can hold P liable.
H. Discharge of Negotiable Instruments (Sec. 119-123)
Sec 119. Instrument; how discharged. A negotiable instrument is discharged
a.) By payment in due course by on or behalf of the principal debtor;
b.) By payment in due course by the party accommodated, where the instrument is
made or accepted for accommodation;
c.) By the intentional cancellation thereof by the holder;
d.) By any other act which will discharge simple contract for the payment of money;
e.) When the principal debtor becomes the holder of the instrument at or after
maturity in his own right. xx
Discharge of an instrument means a release of all parties, whether primary or secondary,
from the obligations arising thereunder. It renders the instrument without force and effect
and, consequently, it can no longer be negotiated. (Young v. Carr, 26 [2d] 555.)
Sec. 120. When person secondarily liable on the instrument are discharged. A person
secondarily liable on the instrument is discharged:
a.) By any act which discharges the instrument;
b.) By the intentional cancellation of his signature by the holder;
 c.) By the discharge of a prior party;
d.) By a valid tender of payment made by a prior party;
e.) By a release of the principal debtor, unless the holder's right of recourse against the
party secondarily liable is expressly reserved;
f.) By any agreement binding upon the holder to extend the time of payment, or to
postpone the holder's right to enforce the instrument, unless made with the assent
of the party secondarily liable, or unless the right of recourse against such party is
expressly reserved. xx
Sec. 121. Right of party who discharges instrument. Where the instrument is paid by a
party secondarily liable thereon, it is not discharged; but the party so paying it is remitted to
his former rights as regards all prior parties, and he may strike out his own and all subsequent
indorsements, and again negotiate the instrument, except
(a) Where it is payable to the order of a third person, and has been paid by the drawer; and
(b) Where it was made or accepted for accommodation, and has been paid by the party
accommodated.
Sec. 122. Renunciation by holder; The holder may expressly renounce his rights against any
party to the instrument, before, at, or after its maturity. An absolute and unconditional
renunciation of his rights against the principal debtor made at or after the maturity of the
instrument discharges the instrument. But a renunciation does not affect the rights of a
holder in due course without notice. A renunciation must be in writing, unless the instrument
is delivered up to the person primarily liable thereon.
PEREZ
Q: What are the effects of the renunciation by the holder of his rights?
A: The holder may expressly renounce his rights against any party to the instrument before,
at, or after its maturity. An absolute and unconditional renunciation of his rights against the
principal debtor made at or after the maturity of the instrument discharges the instrument.
But a renunciation does not affect the rights of a holder in due course without notice. A
renunciation must be in writing, unless the instrument is delivered up to the person primary
liable thereon.
I. Alteration of an Instruments (Sec. 124)
Sec. 124. Alteration of instrument; effect of. Where a negotiable instrument is materially
altered without the assent of all parties liable thereon, it is avoided, except as against a party
who has himself made, authorized, or assented to the alteration and subsequent indorsers.
But when an instrument has been materially altered and is in the hands of a holder in due
course, not a party to the alteration, he may enforce payment thereof according to its
original tenor.
Meaning of material alteration.
Material alteration is defined to be any change in the instrument which affects or changes
the liability of the parties in any way (Foxworthy v. Colby, 89 N.W. 800.), as specified in
Section 125 or changes the contract of the parties in any respect.
Any other alteration is immaterial and, therefore, inoperative to affect the liability of any
party to the instrument prior to the alteration. Thus, adding words implied by law or making
marginal figures to make them correspond to the sum written in words is not a material
alteration. (Smith v. Smith, 1 R.1.398.)
Sec. 125. What constitutes a material alteration. Any alteration which changes
The date;
The sum payable, either for principal or interest;
The time or place of payment;
The number or the relations of the parties;
The medium or currency in which payment is to be made;
Or which adds a place of payment where no place of payment is specified, or any other
change or addition which alters the effect of the instrument in any respect, is a material
alteration.
PEREZ:
Q: What is the effect of alteration of an instrument?
A: Where a negotiable instrument is materially altered without the assent or all parties liable
thereon, it is avoided, except as against a party who has himself made, authorized, or
assented to the alteration and subsequent indorsers.
But when an instrument has been materially altered and is in the hands of a holder in due
course, not a party to the alteration, he may enforce payment thereof according to its
original tenor.
The effect of material alteration of a NI without the assent of all parties liable thereon, may
be summarized as follows:
In the hands of a person who is not a holder in due course, the instrument is avoided except
as against the following who are liable on the altered tenor of the instrument:
(a) Person who made the alteration;
(b) Person who authorizes the alteration;
(c) Person who assented to the alteration; and
(d) Subsequent indorsers;
(2) In the hands of a holder in due course, not a party to the alteration. the instrument may
be enforced according to its original tenor except as against the following who are liable:
 (a) Person who made the alteration; (6) The insertion of the legal rate of interest where the note had a provision for interest at _
(b) Person who authorizes the alteration; per cent.
(c) Person who assented to the alteration; and (7) A printed form of promissory note had on the margin the printed words, Extended to
(d) Subsequent indorsers; __. The holder on or after maturity wrote in the blank space the words May 1, 1913, as a
reference memorandum of a promise made by him to the principal maker at the time the
Q: What constitute material alteration? words were written to extend the time of payment.
A: Any alteration which changes: (8) Where there was a blank for the place of payment, filling in the blank with the place
(a) The date; desired.
(b) The sum payable, either for principal or interest; (9) Adding to an indorsees name the abbreviation Cash. when it had been agreed that the
(c) The time or place of payment; draft should be discounted by the trust company of which the indorsee was cashier.
(d) The number or the relations of the parties; (10) The indorsement of a note by a stranger after its delivery to the payee at the time the
(e) The medium or currency in which payment is to be made note was negotiated to the plaintiff.
(11) An extension of time given by the holder of a note to the principal maker, without the
Q: Examples of material alterations consent of a surety co-maker.
A: The following are the example of material alterations:

(1) Substituting the words or bearer for order;

(2) Writing protest waived above blank indorsements.
(3) A change in the date from which interest is to run.
(4) A check was originally drawn as follows: Iron County Bank, Crystal Falls, \Mich. Aug. 5,
1901. Pay to G.L. or order $9 fifty cents CTR. The insertion of the figure 5 before the figure 9,
the instrument being otherwise unchanged.
(5) Adding the words "with interest with or without a fixed rate.
(6) An alteration in the maturity of a note, whether the time for payment is thereby curtailed
or extended.
(7) An instrument was payable First Natl. Bank, the plaintiff added the word Marion. (idk
what is this)
(8) Plaintiff, without consent of the defendant, struck out the name of the defendant as
payee and inserted the name of the maker of the original note.
(9) Striking out the name of the payee and substituting that of the person who actually
discounted the note.
(10) Substituting the address of the maker for the name of a co-maker.

Q: Examples of immaterial alterations

A: The following are examples of immaterial alterations .

(1) Changing I promise to pay to We promise to pay, where there are two makers;
(2) Adding the word annual after the interest clause;
(3) Adding the date of maturity as a marginal notation;
(4) Filling in the date of actual delivery where the makers of a note gave it with the date in
blank, July __;
(5) An alteration of the marginal figures of a note where the sum stated in words in the body
remained unchanged;