NEGOTIABLE INSTRUMENT

*Requisites of Negotiable Instrument: (WUDON) 1. It must be in writing and signed by the maker or drawer; 2. It must contain an unconditional promise or order to pay in a sum certain in money; 3. It must be payable on demand or at a fixed or determinable future time; 4. It must be payable to order or to payer; 5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. *Functions: 1. To supplement the currency of the government; 2. To substitute for money and increase the purchasing medium. *Characteristics: 1. Negotiability- the right of transferees to hold the instrument and to collect the sum payable; 2. Accumulation of secondary contracts- secondary contracts are picked up and carried along by the instrument as it is negotiated from person to person. *Distinction between Negotiable and Non-Negotiable Instrument: Negotiable Non-Negotiable 1.Contains all the req. of -does not have any or some Sec. 1 of the Nego Ins. Law. of the req. 2.Transferred by negotiation. -transferred by assignment 3.A holder in due course of -a transferee acquires right a nego instrument can have no better than his transferor. rights better than his transferor. 4.Prior parties to a nego -a prior party does not instrument warrants warrant payment but payment. merely the legality of his title. *Promissory Note- an unconditional promise in writing; -by one person to another; -signed by the maker; -engaging to pay on demand or at a fixed or determinable future time; -a sum certain in money; -to order or to bearer. Example: Manila P500,000.00 Five years after date, I promise to pay to the order of XYZ Bank the sum of Five Hundred Thousand Pesos, with interest at 12% per annum, secured by a bond attached to this note. MY FIRM By: Sgd. AB President and Representative

*Bill of Exchange- an unconditional order in writing; -addressed by one person to another; -signed by the drawer; -requiring the drawee; -to pay on demand or at a fixed determinable future time; -a sum certain in money; -to order or to bearer. *Check- a special form of a bill of exchange; -drawn on a bank; -payable on demand. Example: Account No. 6789 Check No.12345 September 21, 2002 P500,000.00 Pay to the order of XYZ Bank FIVE HUNDRED THOUSAND PESOS. (sgd.) AB President and Representative BPI Family Savings Bank Roces Avenue Branch *Distinction between a Promissory Note and a Bill of Exchange: Note Bill 1.Contains an -contains an unconditional unconditional promise. order. 2.There are 2 original -there are three (drawer, parties. (maker or drawee, payee) bearer/indorsee) 3.The original issuer -the original issuer (drawer) is (maker) is primarily liable. secondarily liable. 4.Only one presentment -two presentments are generally needed (for for payment us needed. acceptance and payment). *Money General Rule: If some other act besides payment of money is promised or ordered, the instrument becomes nonnegotiable. Exceptions: 1. Authorizes the sale of collateral securities on default. 2. Authorizes confession of judgment on default. 3. Waives the benefit of law intended to protect the debtor. 4. Allows the creditor the option to require something in lieu of money. *Payable on Demand: 1. Where expressed to be payable on demand, at sight or on presentation. 2. Where no period of payment is stated. 3. Where issued, accepted, or indorsed after maturity. *Payable to Bearer: 1. When expressed to be so payable. 2. When payable to a person named therein or bearer. 3. When payable to the order of a fictitious or non-existing person and such fact is known to the drawer or maker. 4. When the name of the payee is not the name of a person. 5. When the only and last indorsement is an indorsement in blank. Authorized

Authorized

*If a promissory note is non-negotiable, subsequent holders can never be holders in due course, but are mere assignees against whom defenses may be raised by prior parties. OR ORDER- an important word of negotiability which must always be present in a promissory note to indicate the intent to transfer title to subsequent holders. *A promissory note which is payable to a specified person renders the instrument non-negotiable. It must be payable to bearer or to order.

*A bill may be addressed to two or more drawees jointly, whether they are partners or not, but not to two or more drawees in the alternative or in succession. *A holder acquired the rights of a holder of the bearer note by the mere fact of its deliver to him/her, although the note might be forged by the indorser. As bearer notes are negotiable by mere delivery, the holder had a perfect right to assume that the indorser was the lawful previous holder of the note at the time of its negotiation to him/her. Thus, he/she may hold the maker liable on the promissory note for the reason that the note is a bearer note, and enforcement is sought against the maker whose signature is admittedly genuine. *Rules as to Dates: - Date is important if: 1. If payable within a specified period after date; 2. If payable after acceptance. Note: In such a case, the date of instrument and the date of acceptance are needed to determine the maturity date. -An antedating or postdating of an instrument does not affect the validity or negotiability, unless done for illegal or fraudulent purposes. *Rules on Interpretation of Instruments 1. Discrepancy between the amount in figures and in words, the amount in words prevails. 2. Instrument not dates, considered dated on date of issuance. 3. Conflict between written and printed provisions, the written provisions prevail. 4. Interest provided for, but no starting date specified, the starting date is the date of instrument, in the absence of which, from the date of issue. *If the instrument is so ambiguous that there is doubt whether it is a bill or a note, the holder may treat it as a note or bill at his option. *Where it cannot be determined in what capacity a person affixed his signature to a negotiable instrument, he is deemed to have signed as an indorser. We promise to pay indicates joint liability. I promise to pay made by two or more debtor (maker), indicates solidary liability. *Incomplete but Delivered Negotiable Instrument -Holder in due course not affected by abnormality or deficiency A person in possession of a check has a prima facie authority to complete it by filling up the blanks therein. Problem: Maria issued a negotiable promissory note and authorized Pilar to fill out the amount in blank up to P2,000 only. However, Pilar filled it out to P4,000 and negotiated the note to Pepe. For what amount are Maria and Pilar liable to Pepe? Answer: Maria is liable to Pepe for P4,000. If Maria dishonors the note, Pilar as a secondary party is liable to Pepe for the full amount of P4,000. *Complete but Delivered Negotiable Instrument -If a negotiable instrument, although complete but undelivered and someone negotiated (e.g by stealing), once it reaches a holder in due course, the law conclusively presumes that all prior deliveries are valid.

*Complete and Delivered Negotiable Instrument Issued Without Consideration, or With a Consideration Consisting of a Promise Which the Payee Failed to Comply -Example of an Instrument Without ConsiderationM makes a bearer promissory note and delivers without consideration the same to P, a long lost friend which P subsequently negotiates. -Example of an Instrument Where There is a Failure of ConsiderationM makes a promissory note payable to P in the amount of P1,000 on Ps promise to deliver merchandise to M in five days. The note was negotiated by P, who failed to comply with his promise to deliver the merchandise. *Both absence and failure of consideration are defenses personal to the prejudiced party, and available against any person not a holder in due course. *Maker cannot invoke the abnormality or deficiency as a defense against holder in due course, because the abnormalities (incomplete and undelivered) and the deficiencies (absence or failure of consideration) are personal or equitable defenses. *Sec.58 of NIL: A transferee from a holder in due course of a negotiable instrument suffering from any of the above stated abnormalities and deficiencies (inspite of his knowledge of such abnormality and deficiency) acquires all of the rights of the transferee, including the right to enforce the instrument against the maker, according to its tenor. *Holder in Due Course Affected by the Abnormality or Deficiency -GENERAL RULEThe abnormality (incomplete and undelivered note) or deficiency (forged signature of the maker) creates a real defense which the maker can invoke against all holders whether the holder is in due course or not. -EXCEPTIONWhere the forgery consists of an alteration of a material particular in the instrument, such instrument is null and void, unless it reaches the hands of a holder in due course, who can enforce it according to the tenor of the instrument before it was altered. -ExampleWhere a promissory note made for P5,000 payable to P was altered in amount by P or subsequent holder to P9,000. Unless it reaches the hands of a holder in due course who enforced it for P5,000 (the original tenor of the instrument) instead of P9,000. *Forgery- the counterfeit making or fraudulent alteration of any writing. It may consist of: 1. Signing of anothers name with the intent to defraud; 2. Alteration of an instrument in the name, amount, description of payee, etc. with intent to defraud. *A forged signature is wholly inoperative and cannot vest any right to the forger or any person who derived his right from the forged signature (subsequent indorsers), as against those who became parties to the instrument before the forgery was committed. Thus, parties before the forgery can hold the maker liable. *Material Alteration of Instrument -GENERAL RULEA material alteration avoids the instrument. -EXCEPTIONExcept as against the party who made, authorized, or assented to the alteration, and subsequent indorsers.

*Rule of Alteration With Regards to Bills of Exchange A holder in due course can only enforce payment from the drawee only according to the original tenor of the instrument. *Forged Signature of Indorsers The collecting bank which presents for clearing a check containing the forged signature of the payee or any subsequent indorser will bear the loss because of its guarantees, as a prerequisite for clearing of all prior indorsement. Where said check is cleared by the drawee bank and payment thereof made to the collecting bank, said payment thereof is a case of solution indebiti entitling the drawee bank to get back from the collecting bank, the amount thus paid even if the collecting bank allowed its depositor to draw from the deposit of said check. Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the check. The bank knows him, his address and history because he is a client. It has taken a risk on deposit. *The drawee bank is not similarly situated as the collecting bank because the former makes no warranty as to the genuineness of any indorsement. The drawee banks duty is but to verify the genuineness of the drawers signature and not the indorser because the drawer is the client of the drawee. *Accomodation -Requisites1. The accommodation party must sign as maker, drawer, acceptor, or indorser; 2. No value is received by the accommodation party from the accommodated party; 3. The purpose is to lend his name. *The accommodation party is a surety He has the right, after paying the holder, to obtain reimbursement from the party accommodated since the relation between them is that of principal and surety. *Liability The liability of the accommodation party does not extend to corporate accommodation because the act of the corporate officer is ultra vires. However, these officers are personally liable. *Execution and Negotiation by Agents and Others -Requisites1. The agent must be authorized. 2. He must disclose his principal. 3. He must sign for and in behalf of his principal. *An agent when signing, should indicate that he is merely signing in behalf of the principal and must disclose the latters name, otherwise he shall be held liable. *Signature per Procuration- one made by an agent; -with a limited authority to sign; -and the principal is bound only if the agent acts within the limits of the authority. *Indorsements by Minors and Discqualified Corporations Minors and disqualified corporations, although incapacitated to make or draw instruments, can negotiate instruments, transferring valid titles thereto, but are not liable as indorsers under the said signatures. *Distinction between Irregular Indorser from General Indorser Irregular General 1.Not otherwise a party to -regular party to the the instrument, but places instrument like a maker, his signature thereon in drawer, acceptor; blank; 2. Signs prior to delivery to -signs upon delivery; add credit thereto;

3.Signs for accommodation.

-signs for valuable consideration.

*Incidents in the Life of an Instrument AFTER Issue -Negotiation- is the transfer of a negotiable instrument from one person to another as to constitute the transferee the holder thereof. a. A negotiation to be valid under the law must be of the whole instrument. *Rights Transferred by Negotiation A holder is entitled to the following rights: 1. To collect the instrument from those primarily and secondarily liable; 2. To sue in court on the instrument. *Holder in Due Course -Rights1. He takes the instrument free from defects of title of prior parties; 2. Free from defenses of prior parties among themselves; 3. He can enforce the instrument for the full amount thereof against all parties liable thereon. -Requisites1. He must take the instrument in good faith and for value;(Sec.52 [c]) 2. At the time of negotiation, he had no notice of any defect in the title of the person negotiating it; (Sec.52 [d]) 3. Every holder is deemed prima facie holder in due course. (Sec.59) *Blank Indorsement- an indorsement which does not specify the name of the indorsee, and usually consists of the indorsers signature, and nothing else, found at the bank of the instrument. *Regular Indorsement- one placed after the issue of the instrument. *Irregular Indorsement- one placed in blank before the issue of the instrument. *Qualified Indorsement- one where the indorser places under his signature the words without recourse or the like. The qualified indorser does not become liable secondarily under his indorsement. *Real Defense- or absolute defense, a defense which attaches to the instrument; -irrespective of the parties (whether a holder in due course or not); -and is predicated on the principle that -the right sought to be enforced has never existed or has ceased to exist. -Example1. Forgery or unauthorized signature 2. Void contract 3. Material alteration 4. Incomplete and undelivered instrument *Personal Defense- or equitable defense, a defense growing out of an agreement or conduct of a particular person; -in regard to an instrument which renders it inequitable for him, although owner of it; -to enforce it against the defendant. -Example1. Complete but undelivered instrument 2. Delivered but incomplete instrument 3. Absence or failure of consideration 4. Defect of title

*Presentment of Payment Presentment for payment is not necessary to make the maker liable. It is only necessary to make secondary parties liable. -Requisites1. Presentment must be made within a reasonable time after issue; 2. By the holder or his agent; 3. To the party liable under it (maker if promissory note, drawee if bill of exchange); 4. At a reasonable hour on a business day; 5. At the proper place. 6. In cases of bills of exchange, the instrument must be exhibited to the acceptor and surrendered to him when he pays. -When MadeWhen the instrument is payable NOT on demand, presentment must be made on the day it falls due. When it is payable ON demand, within a reasonable time after issue. *Reasonable time depends upon the peculiar facts and circumstances in each case. *Presentment in Bills of Exchange -Purpose1. To get acceptance of the drawee for the purpose of making him liable primarily as an acceptor. 2. It is also a prerequisite to the accrual of secondary liability against the drawer and the indorsers. *Acceptance is the signification by the drawee of his assent to the order of the drawer. *The drawee if he wants to dishonor the instruments, he must do so expressly within 24 hours from presentment to him. If he refuses to act, tears the bill, or refuses to return the bill within the said period of 24 hours, he is deemed to have accepted the bill. -When ExcusedPresentment for acceptance is excused: 1. Where the drawee is dead, hides, or is fictitious or incapacitated person; 2. When after due diligence, presentment cannot be made; 3. When acceptance is refused on another ground although presentment is irregular. *Dishonor by Non-acceptance- where the bill is presented for acceptance and is returned dishonored, or within the 24 hours from presentment is not returned accepted or unaccepted. *Dishonor by Non-payment- if the bill, after it has been accepted, is not paid when presented for payment, or presentment is excused, is not paid on the date of maturity.