negotiable instruments law and anti-bouncing checks …€¦ · 1. definition: negotiable...

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NEGOTIABLE INSTRUMENTS and BP Blg 22

ATTY. NICKO SORIANO, CPA

NEGOTIABLE INSTRUMENTS LAW and ANTI-BOUNCING CHECKS LAW


REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience www.realexcellenceonline.com.ph REAL EXCELLENCE ONLINE CPA REVIEW (074) 665 6774 0916 840 0661 [email protected] MAY 2021 CPA REVIEW SEASON

NEGOTIABLE INSTRUMENTS LAW

INTRODUCTION A. GOVERNING LAWS – ACT No. 2031 effective June 2, 1911 (which amended some of the provisions of the Rules of

the Law Merchant), the Code of Commerce and the Civil Code. B. APPLICABILITY OF THE NEGOTIABLE INSTRUMENTS LAW – the Act applies only to negotiable instruments or

those that meet the requirements under Sec. 1 of Act No. 2031. C. CONCEPT OF NEGOTIABLE INSTRUMENTS

1. DEFINITION: Negotiable Instruments are written statements signed by the maker or drawer containing an unconditional promise or order to pay a sum certain money, payable on demand or at a fixed or determinable future time, to order or to bearer.

2. FUNCTIONS OF NEGOTIABLE INSTRUMENTS

a. Substitute for money - although they are not considered legal tender. One of its distinct characteristics is its negotiability which allows it to go from hand to hand in the commercial markets and to take the part of money in commercial transactions free from all personal defenses available against the original owner.

b. Media of exchange – they thus increase the purchasing medium in circulation. They are a safe and convenient means of doing business that eliminate the risk of dealing in cash.

c. Medium of credit transactions – they allow men of undoubted credit (such as those with illiquid properties) to carry on business enterprise upon their promissory notes, bills of exchange and checks knowing that other businessmen will treat these promises as cash.

Checks are primarily used for immediate payment (substitute for money); while ordinary bill of exchange and the promissory note are intended for the circulation of credits (credit instruments)

3. LEGAL TENDER – Sec. 52 of the New Central Bank Act provides that only notes and coins issued by the BSP are

considered legal tender. Section 60 of the same law provides that checks are not legal tender and its acceptance is at the option of the creditor.

Under Art. 1249 of the Civil Code, the payment through a negotiable instrument produces the effect of payment only when: a. It is encashed; or b. Its value becomes impaired through the fault of the creditor.

D. DETERMINING NEGOTIABILITY To determine whether the instrument is negotiable or not, the following must be considered: 1. The whole of the instrument 2. Those only appear on the face of the instrument 3. Compliance with the requirement under Section 1 of the Act. The instrument need not follow the language of the Negotiable Instruments Law, but any terms are sufficient which clearly indicate an intention to conform to the requirements hereof. E. CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS 1. NEGOTIABILITY – is that quality or attribute of a bill or note whereby it may pass from one person to another similar to

money, so as to give the holder in due course the right to collect on the instrument the sum payable for himself free from any defect in the title of any of the prior parties or defenses available to them among themselves.

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NEGOTIABLE INSTRUMENTS AND BP BLG.22


2. ACCUMULATION OF SECONDARY CONTRACTS – as they are transferred from one person to another. Once an instrument is issued, additional parties can become involved.

F. KINDS OF NEGOTIABLE INSTRUMENTS 1. PROMISSORY NOTES (Sec. 184, NIL) – An unconditional promise in writing made 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.

2. BILLS OF EXCHANGE (Sec. 126, 185, NIL) – An unconditional order in writing addressed by one person to another,

signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or bearer.

G. BILLS AND NOTES DISTINGUISHED

PROMISSORY NOTES BILLS OF EXCHANGE 2 parties – Maker and Payee 3 parties – Drawer, Payee and Drawee There is unconditional PROMISE by the maker There is unconditional ORDER by the drawer to the drawee Presentment for payment without prior acceptance Some Bills need prior acceptance by the drawee before

presentment for payment Liability of the maker is primary and absolute Liability of the drawer is secondary and conditional

H. WHEN BILLS TREATED AS NOTES 1. The drawer and the drawee are the same person 2. The drawee is a fictitious person 3. The drawee has no capacity to contract 4. When the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at

his election SAMPLE QUESTION: D drew a bill of exchange as follows:

To: Aquaman

Pay P or order P100,000 and reimburse yourself from my account with you Sgd. D

Is the instrument negotiable? May it be treated as a promissory note? I. INCIDENTS IN THE LIFE OF NEGOTIABLE INSTRUMENTS

PROMISSORY NOTE BILL OF EXCHANGE Preparation & Signing

Issuance Negotiation

Presentment for Acceptance Acceptance Dishonor by Non-acceptance

Presentment for payment Dishonor by Non-payment

Notice of Dishonor Payment

Discharge J. SOME NON-NEGOTIABLE INSTRUMENTS 1. Document of Title – like a certificate of stock, bill of lading and warehouse receipt (non-negotiable because there is no

unconditional promise or order to pay a certain sum in money); 2. Letter of Credit – a letter from a merchant or bank or banker in one place, addressed to another, in another place or

country, requesting the addressee to pay money or deliver goods to a third party therein named, the writer of the letter undertaking to provide him the money for the goods or to repay him. It is a letter requesting one person to make advances to a third person on the credit of the writer. (It is in favor of a certain person and not to order)







3. Treasury Warrant - it is a government warrant for the payment of money such as that issued in favor of a public officer or employee covering payment or replenishment of cash advances for official expenditures. (It is payable out of a specific fund or appropriation)

4. Postal Money Order – subject to conditions and restrictions imposed by law. 5. Certificate of stock - Not contain an unconditional promise or order to pay a sum certain in money 6. Warehouse receipt - Not contain an unconditional promise or order to pay a sum certain in money. 7. Quedan - Not contain an unconditional promise or order to pay a sum certain in money. 8. Now account - Not payable to order or bearer K. NEGOTIABLE VS. NON-NEGOTIABLE INSTRUMENTS

NEGOTIABLE NON-NEGOTIABLE Requires compliance with Sec. 1 of the NIL Did not comply with the requirements of Sec. 1 of the NIL Transfer can be by negotiation or assignment Transfer can only be made by assignment Holder in due course acquires the instrument free from defenses personal to the prior parties

Transferee does not acquire title better than the transferor. Hence, subject to personal defenses of prior parties

Prior parties have a warranty as to payment Prior parties warrant only that they have legal title Governed by NIL NIL only applies by analogy Only real defenses are available against holder in due course

Both real and personal defenses are available against the assignee

L. INTERPRETATION OF INSTRUMENTS Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply: 1. Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum

denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount;

2. Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof;

3. Where the instrument is not dated, it will be considered to be dated as of the time it was issued; 4. Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail; 5. Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at

his election; 6. Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same

intended to sign, he is to be deemed an indorser; 7. Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be

jointly and severally liable thereon

REQUISITES OF NEGOTIABILITY REQUISITES OF NEGOTIABILITY (WUPOA)

(a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable

certainty. SAMPLE QUESTION: Which of the following requisites of negotiability does not apply to a promissory note? A. It must be in writing and signed by the maker or drawer B. Must contain an unconditional promise or order to pay a sum certain in money C. Must be payable on demand, or at a fixed or determinable future time D. Must be payable to order or to bearer E. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable

certainty. SAMPLE QUESTION: Which of the following is not a requisite of negotiability of a promissory note: A. That the instrument is written and signed by the drawer B. That the instrument contains an unconditional promise to pay a sum certain in money C. That the instrument is payable on demand or at a fixed or determinable future time







D. That the instrument is payable to order or to bearer. (a) It must be in writing and signed by the maker or drawer; “Written” includes printed, and “writing” includes print. (Section 191) Signature of the maker or drawer is usually written, preferably with the full name or at least the surname. However, initials or any mark will be sufficient, provided that such signature be used as a substitute and the maker or drawer intends to be bound by it. Signature is presumed valid, the person denying and to whom the signature operates must provide evidence of its invalidity. General Rule: No person is liable on the instrument whose signature does not appear thereon (Sec. 18) Exceptions: 1. One who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name. (Sec

18, (2)) 2. The principal is bound by the signature of his duly authorized agent (Sec 19) 3. Forgery (Sec 23) 4. Acceptance by the acceptor in a separate paper (Sec 134) 5. Written promise by a person to accept the bill before it is drawn. (Sec 135) (b) Must contain an unconditional promise or order to pay a sum certain in money;

1. Promise or Order to Pay Must be Unconditional Simply, the requirement is that the promise or order to pay is not subject to any condition which may or may not happen.

2. Indication of a Particular Fund:

a. Out of which reimbursement is to be made or to be debited with the amount – does not affect negotiability. b. Out of which payment will be made – is no longer unconditional and makes the instrument non-negotiable.

3. Statement of Transaction: or the absence thereof does not affect negotiability.

4. Provisions which do not affect certainty of sum

The Basic Test: is whether the holder can determine by calculation or computation the amount payable when the instrument is due. The sum payable is a sum certain, although it is to be paid: a. with interest; or b. by stated installments – although as a requirement, both the amount and the due date of each installment must

be stated or determinable. c. by stated installments, with a provision that, upon default in payment of any installment or of interest, the whole

shall become due;

Stated instalments with acceleration clause: i. Acceleration clause – requires the debtor to pay off the balance sooner than the due date if some specified

event occurs, such as failure to pay an instalment. ii. Insecurity clause – allows the creditor to demand immediate and full payment of the loan balance if the

creditor has reason to believe that the debtor is about to default, as when the debtor suddenly loses a significant source of income.

iii. Extension clause – allows additional time for the payment of the loan due.

d. with exchange, whether at a fixed rate or at the current rate; or e. with costs of collection or an attorney's fee, in case payment shall not be made at maturity.

Additional provisions:

General Rule: the performance of an act in addition to the payment of money renders the instrument non-negotiable,







EXCEPT in the following cases: 1. If the doing of the act is at the option of the holder – here the holder can still require the payment of money 2. If the act is to be done after the payment:

i. Authorize the sale of collaterals ii. Authorize confession of judgment

1) Warrant of attorney – to confess judgment, however, are not authorized nor contemplated by our law because under these instruments, the promisor bargains away his right to a day in court. (PNB vs. MANILA OIL REFINING)

2) Cognovit Actionem – “he has confessed the action” 3) Relicta Verificationem – “his pleading being abandoned”; a confession of judgment accompanied by a

withdrawal of the plea. iii. Waiver of benefits under the law intended for the obligor (waiver of notice of dishonor)

SAMPLE QUESTION: Which of the following is not negotiable? A. I promise to pay B or bearer P10,000 in 2 equal installments of P5,000 each. Sgd. A B. I promise to pay B or order P10,000 or deliver 5 sacks of rice, at his option. Sgd. A C. I promise to pay to the order of B P10,000 in 5 equal monthly installments due at the end of each month from

issuance. However, if I miss one installment, the whole remaining amount shall become due and demandable. Sgd. A

D. I promise to pay bearer P10,000, 60 days from issuance, subject to a one month extension at the option of the maker. Sgd. A

(c) Payable on demand or at a fixed or determinable future time

Determinable Future Time: when it is payable a. At a fixed period after date or sight, e.g., 60 days after Feb. 5, 2018 b. On or before a fixed or determinable future time specified, e.g. on or before Feb. 5, 2018 c. On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of the

happening be uncertain, e.g., “upon the death of X” or “20 days after the death of X”

An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect. 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 the person so issuing, accepting,

or indorsing it, payable on demand. (d) Payable to order or bearer

Payable to ORDER: The instrument is payable to order where it is drawn payable to: 1. the order of a specified person (order of P); or 2. to him or his order (P or order).

PAYEE: the payee in an order instrument can be the maker, the drawer, the drawee or a person who is not amongst such parties, it may likewise be an office for the time being (e.g., Commissioner of Internal Revenue)

Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable

certainty. Multiple Payees: whether in the alternative (P1 or P2) or joint (P1 and P2) is allowed.

Payable to BEARER: The instrument is payable to bearer: a. When it is expressed to be so payable; or b. When it is payable to a person named therein or bearer; or c. When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making

it so payable; or d. When the name of the payee does not purport to be the name of any person; or e. When the only or last indorsement is an indorsement in blank







Importance of Distinction: It is important to distinguish a bearer and an order instrument because they are negotiated in different manners. A bearer instrument may be negotiated by mere delivery, while an order instrument requires indorsement coupled with delivery.

ILLUSTRATION: In need of immediate cash, Mr. X delivered a check payable to the order of “cash” to Mr. Y, saying

that the banks are already closed, and that he can just deposit the same. The following day, Mr. Y deposited the check but it was dishonored for insufficient funds. Mr. Y then sued Mr. X for estafa and as a defense, Mr. X claims that Mr. Y should not have deposited the check without his indorsement. Is Mr. X correct?

(e) Identity of the drawee

This requisite pertains only to a Bill of Exchange since a Promissory Note does not have a Drawee.

Purpose: To enable the holder to know to whom the Bill of Exchange shall be presented for acceptance/payment. Multiple Drawees: 1. Two or more drawees jointly – allowed. (e.g., D1 and D2) 2. Two or more drawees in the alternative or succession – not allowed. (e.g., D1 or D2) (Sec. 128)

OMISSIONS; SEAL; PARTICULAR MONEY THAT DO NOT AFFECT NEGOTIABILITY – the negotiability of an instrument is not affected by the fact that: 1. it is not dated; or 2. does not specify the value given, or that any value had been given therefor; or 3. does not specify the place where it is drawn or the place where it is payable; or 4. bears a seal; or 5. designates a particular kind of current money in which payment is to be made. SAMPLE QUESTION: Which of the following is a negotiable instrument? A. Pay P or order P10,000 on 30 days after date sgd. D B. I promise to pay X or bearer P200,000 in two equal installments of P100,000 each sgd. M C. I promise to pay bearer P20,000 on March 20, 2019, sgd. M D. I promise to pay P or bearer P50,000 or sing a song 30 days after the death of X sgd. D

NEGOTIATION A. ISSUANCE/DELIVERY OF NEGOTIABLE INSTRUMENTS "Issue" means the first delivery of the instrument, complete in form, to a person who takes it as a holder “Delivery" means transfer of possession, actual or constructive, from one person to another. B. NEGOTIATION DEFINED 1. Instruments payable to ORDER: two steps are required for negotiation: (a) indorsement and (b) delivery. 2. Instruments payable to BEARER: delivery alone without indorsement. C. ASSIGNMENT AND NEGOTIATION DISTINGUISHED Assignment is the transfer of the title to an instrument, with the assignee generally taking only such title or rights as his assignor has, subject to all defenses available against his assignor. It is the less usual method which may or may not involve an indorsement in the sense of writing on the back of the instrument.

NEGOTIATION ASSIGNMENT Applicable Law Negotiable Instruments Law Civil Code of the Philippines Type of transaction or instrument:

Negotiable instruments only Contracts in general or assignable rights

Nature of the transferee: Transferee is a holder who may be a holder in due course

Transferee is a mere assignee and can never be a holder in due course

Rights acquired: The transferee-holder may acquire more rights than the transferor if he is a holder in due course

Transferee cannot acquire more rights than the transferor because he merely steps into the shoes of the transferor







Availability of personal defenses

Transferee-holder may be free from personal defenses if he is a holder in due course

Transferee is always subject to personal defenses

D. NEGOTIATION OF A BEARER INSTRUMENT Negotiation of a bearer instrument: will only require delivery of the instrument. Liability: The warranties of a person who negotiates by mere delivery extends in favor of no holder other than the immediate transferee. (Sec 65) Special indorsements in a bearer instrument; effects: 1. It is not converted into an order instrument. Thus, it may be further negotiated by mere delivery. That’s why it is

said that bearer instrument is always a bearer instrument. 2. the person indorsing specially is liable as indorser to only such holders as make title through his indorsement.

(Sec 40) 3. The holder may strike-out the special indorsement(s) since such is not necessary to his title. ILLUSTRATION: A made a promissory note payable to B or bearer. B negotiated the note by indorsing it to B specially; C likewise indorsed and delivered the note to D. Can D negotiate it to E by mere delivery? If E negotiated the note to F (additional party), and it was dishonored, who can F go against for the payment of the note? If E paid F, then D paid E, who can D collect from? E. NEGOTIATION OF AN ORDER INSTRUMENT Negotiation of an order instrument: will require an indorsement coupled with delivery. Incomplete negotiation of an order instrument – delivered only without indorsement. This will be subject to the following rules: a. the transferee is a mere assignee b. He acquires the right to have the indorsement of the transferor (Sec. 49) c. For the purpose of determining whether the transferee is a HIDC, the negotiation takes effect as of the time when

indorsement is actually made. Example: M was induced fraudulently by P to make a promissory note payable to his order. P then delivered the instrument to A on Feb. 5, 2020, without indorsing it. A asked for the indorsement of P which was placed on Feb 15, 2020. Can A be considered a holder in due course? F. INDORSEMENTS Indorsement is the writing of the name of the payee on the instrument with the intent either to transfer the title to the same, or to strengthen the security of the holder by assuming a contingent liability for its future payment, or both. 1. Where:

a. On the instrument itself; or b. Separate piece of paper attached to the instrument called allonge.

2. Amount: should be entire instrument. An instrument for P15,000 cannot be indorsed for less like P5,000 only – will be treated as mere assignment.

Except: when there was already partial payment and what is being indorsed is the balance.

3. 2 or more indorsees severally: considered only as an assignment.

Pay to D, Sgd. C

Pay to C, Sgd. B

A B C D E







4. Kinds: a. Blank Indorsement– specifies no indorsee.

Effects: i. The instrument becomes a bearer instrument; ii. But the holder may convert the 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.

b. 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. E.g. Pay to X.

c. Qualified indorsement – may be made by adding to the indorser's signature the words "without recourse" or any

words of similar import. E.g., “Pay to X without recourse”

Effects: i. Such an indorsement does not impair the negotiable character of the instrument. ii. A qualified indorser is generally not liable to subsequent holders except only if there is a breach of any of

the warranties. iii. A qualified indorser is subject to the same warranties as that of a person who negotiates by mere delivery under

Sec. 65.

ILLUSTRATION: M made a promissory note payable to P or order. P negotiated the note to A, A then indorsed the note to B in this manner “Pay to B without recourse”. B then negotiated the note to C. If the note is dishonored in the hands of C, can he collect from A?

d. Conditional indorsement – a condition is placed in the indorsement. “Pay to X if he passes the board exam”

Effects: i. This does not impair the negotiability of the instrument. ii. The 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. iii. 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.

ILLUSTRATION: M made a promissory note payable to P or order. P negotiated the note to A and indorsed in this manner “Pay to A if he passes the CPALE.”. In this case, • A becomes the holder and may negotiate the note further. • M may nevertheless pay A even if the condition has not been fulfilled. • If M paid and the condition is not fulfilled, A (or any subsequent holder) is required to remit the payment received

to P.

e. Restrictive indorsement – an indorsement is restrictive which either. i. Prohibits further negotiation – pay to X only – instrument is no longer negotiable ii. Constitute the indorsee as an agent – pay to X for collection iii. Constitute the indorsee as a trustee – pay to X in trust for Y

In the first type, the instrument will cease to be negotiable. In the other two, the instrument is still negotiable.

Rights of restrictive indorsees: • Receive payment • Bring any action on the instrument that the indorser can bring • Transfer his rights as such indorsee, where authorized. All subsequent indorsees acquire only the title of the

first indorsee under restrictive indorsement.

5. Negotiation by prior party (Successive Indorsement) – when an instrument is negotiated back to a prior party.

Effects: It does not affect negotiability; a. The instrument is not yet discharged, if the prior party is a party secondarily liable; b. Such party may reissue and further negotiable the same; c. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally

liable;







d. Such party may also strike-out the indorsements of the intervening parties since they are no longer necessary for his title.

SAMPLE QUESTION: M issued a promissory note payable to P or order for P10,000. P negotiated the note to A, the A to B then B to P. In this case, A. The note is discharged by confusion or merger B. A and B are no longer liable to P being intervening parties C. P can no longer further negotiate the instrument D. M is not liable to P anymore since he was the payee and now the holder

6. Joint Indorsement: Where an instrument is payable to the order of two or more payees or indorsees:

General Rule: all must indorse

Exceptions: a. If they are partners b. The one indorsing has authority to indorse for the others.

7. Irregular Indorser

Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following rules: a. If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent

parties. b. If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all

parties subsequent to the maker or drawer. c. If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee.

G. SIGNATURE BY PROCURATION A signature by "procuration” operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority. In order for the agent not to be liable in his personal capacity: 1. He must be authorized by the principal; 2. He acts within the bounds of his authority; 3. He discloses the name of his principal. H. STRIKING OUT OF INDORSEMENT The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument as such indorsers.

DEFECTIVE INSTRUMENTS AND MATERIAL ALTERATION

COMPLETENESS DELIVERY Incomplete but delivered X √ Personal Defense Complete but undelivered √ X Personal Defense Incomplete and undelivered X X Real Defense

A. INCOMPLETE BUT DELIVERED INSTRUMENTS: 1. If there are blanks or the instrument is wanting of any material particular – the person in possession has prima facie

authority to complete it 2. Signature of a blank piece of paper – for the purpose of converting it into a negotiable instrument – there is prima facie

authority to fill it up as such for any amount.

But in order to bind parties prior to completion: the instrument must be filled up: a. Strictly in accordance with the authority given b. Within a reasonable time

3. After completion, if negotiated to a holder in due course, valid and effectual for all purposes in his hands and may

enforce it as if it had been filled up in accordance with the authority given and within a reasonable time.







SAMPLE QUESTION: A issued a negotiable promissory note to B with the amount in blank, but with authority given to B to fill up the blank for PhP100,000. B filled it up for P400,000 and negotiated it to C. If C is a holder in due course, how much can he collect from either A or B?

A B

A. P100,000 P400,000 B. P100,000 P100,000 C. P400,000 P400,000 D. P400,000 P100,000

Material Alteration: What constitutes a material alteration. – A material alteration is any alteration which changes: 1. The date; 2. The sum payable, either for principal or interest; 3. The time or place of payment: 4. The number or the relations of the parties; 5. The medium or currency in which payment is to be made; 6. Or which adds a place of payment where no place of payment is specified, or 7. Any other change or addition which alters the effect of the instrument in any respect. Effect: General Rule: 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 SAMPLE QUESTION: Assuming in the preceding question that B filled it up in accordance with the authority given, i.e., P100,000, and negotiated it to C, who changed the amount to P400,000 and later on negotiated the instrument to H who took it in good faith and for value, how much can H collect?

A/B C A. P100,000 P400,000 B. P100,000 P100,000 C. P400,000 P400,000 D. P400,000 P100,000

B. COMPLETE UNDELIVERED INSTRUMENTS Delivery is essential to the validity of any negotiation (whether PN or BOE) (Sec. 30). Moreover, every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. Delivery may be: 1. For the purpose of negotiation; or 2. Conditional, for a specific purpose and not for the purpose of transferring title. However, in the hands of a HIDC, valid delivery by all parties prior to him is conclusively presumed. ILLUSTRATION: M who was bored during a class, made a promissory note payable to P or order for P10,000, his crush. M left for the toilet and P found the note. P, then indorsed the note to A for value, her crush. In this case, can A collect from M? C. Incomplete Undelivered Instruments Sec. 15 provides that if an instrument is both INCOMPLETE (as wanting in any material particular) AND UNDELIVERED, it is not a valid contract in the hands of ANY holder. This is why this constitutes a real defense available even against a holder in due course. ILLUSTRATION: M who was bored during a class, made a promissory note that reads: “I promise to pay _______, my crush, or order, P10,000.” P found the note and assumed she is the crush of M placed her name then negotiated the note to A who took in good faith and for value. Can A collect from M?







HOLDERS

A Holder means the payee or indorsee of a bill or note who is in possession of it or the bearer thereof (Sec. 191), who may sue on his own name (Sec. 51). Holder NOT in due course can still collect on the instrument: The only difference between a holder in due course and a holder not in due course is that the latter is subject even to defenses personal to prior parties. If B purchases an overdue negotiable promissory note signed by A, he is not a holder in due course; but he may recover from A, if the latter has no valid excuse for refusing payment. The only disadvantage of holder who is not a holder in due course is that the negotiable instrument is subject to defense as if it were non- negotiable. (CHAN WAN VS. TAN KIM, G.R. No. L-15380; September 30, 1960) A. HOLDER IN DUE COURSE A holder in due course is a holder who has taken the instrument under the following conditions (COVN): 1. That it is complete and regular upon its face; 2. That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if

such was the fact; 3. That he took it in good faith and for value; 4. That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the

person negotiating it. Holder - the first requisite is that he should be a “holder” as defined under Sec. 191. If a possessor of a negotiable instrument is not a holder (i.e., he is neither payee nor indorsee or bearer of a bearer instrument), he can NEVER be a holder in due course. Example: an order instrument was delivered without any indorsement. In this case, the transferee is a mere assignee and not a holder. It follows that he cannot be a holder in due course. Presumption: General Rule: Every holder is deemed prima facie to be a holder in due course. Except: if he obtained title from a person whose title is defective, the burden is on the holder to prove that he acquired the title as holder in due course. The exception does not apply to parties prior to the acquisition of the defective title. 1. Instrument Complete and Regular Complete - it is complete when it is not wanting of any material particular to be inserted in a negotiable instrument without which the same will not be complete. Regular – It is regular upon its face when it does not contain any material alterations or if there are, they are not apparent or visible on the face of the instrument. A Holder upon receiving an instrument which is incomplete or irregular (containing visible and apparent alterations) must be put on inquiry why it is such. If he fails to do so, he takes the instrument subject to all defenses. 2. Taken Before Overdue and Before Notice of Dishonor Overdue – an instrument is overdue after the date of maturity fixed therein or upon happening of an event certain, and a person taking an overdue instrument must be put on inquiry why the instrument is still in circulation Dishonor may be by non-acceptance (bills of exchange) under Sec. 149 or by non-payment (promissory notes and bills of exchange) under Sec. 83. A holder who has knowledge that the instrument was previously dishonored is not a holder in due course. 3. Good Faith







General Rule: every holder is presumed to be in good faith and no inquiry is required to determine such. EXCEPT: if the holder acquires a negotiable instrument under circumstances which should have put him in inquiry, he should do so. Otherwise, he may not be considered in good faith for gross neglect. Examples of circumstances which may put the holder in inquiry: a. Incomplete instrument b. Irregular instrument on its face c. Crossing of a check 4. Value Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time. Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time. Note that taking the instrument for value is only one requisite for a holder in due course. As such, all Holders in Due Course are Holders for Value; but not all Holders for Value are Holders in Due Course. 5. Notice of Infirmity or Defect Infirmity means any irregularity in the instrument. Thus, notice of an alteration which is apparent is notice of an infirmity in the instrument, as well as notice of forgery in the maker or drawer’s signature. Sec. 56 provides what constitutes notice of defect. Notice before full payment: Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the extent of the amount therefore paid by him. EXAMPLE: M makes a note for P100,000 payable to the order of P, P indorsed it to A, B stole the note, and forged A’s signature, B then indorsed it to C who paid P50,000 before knowing that A’s signature was forged. In this case, C is a holder in due course up to P50,000 only. B. RIGHTS OF A HOLDER IN DUE COURSE – Sec. 57 A holder in due course: 1. holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among

themselves, and 2. may enforce payment of the instrument for the full amount thereof against all parties liable thereon C. 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. The accommodaTED party will be treated as the party ultimately liable on the instrument. Corporations: as a rule, cannot act as an accommodation party since it is not part of its powers. As such, acting as an accommodation party will be considered ultra vires. ILLUSTRATION: Unable to borrow funds, P asked M to make a promissory note payable to him for the amount of P10,000. P then negotiated the note to A. In this case, 1. M is the accommodation party 2. P is the accommodated party 3. A can be considered a holder in due course and M remains liable on the note to A despite knowledge that M is only an

accommodation party. 4. If M is made to pay, M can collect from P since the accommodated party is the one ultimately liable on the instrument. D. PAYEE AS HOLDER IN DUE COURSE







“holder” is defined as a payee or indorsee in possession of the instrument or the bearer thereof. As such, payees can likewise be considered a holder in due course if they obtained the instrument under the four circumstances provided under Sec. 52. E. SHELTER RULE GENERAL RULE: A holder who derives his title through a holder in due course, has all the rights of such former holder in respect of all parties prior to the latter. EXCEPT: he himself is a party to any fraud or illegality affecting the instrument. ILLUSTRATION: M issued a promissory note to P and authorized the latter to fill-up P1,000. However, P inserted P5,000 and indorsed it to A, then to B, then to C. A, B and C had no knowledge that the instrument was filled-up in excess of the authority given. C then issued it to X who had knowledge. Can X enforce payment of P5,000 from M? F. RIGHTS OF HOLDER OF BILLS IN SET Bills in Set involve one bill although drawn in set. The problem arises when different parts of the set are negotiated to separate persons who are holders in due course. Rules Applicable to Bills in Set 1. Each part of the set being numbered and containing a reference to the other parts, the whole of the parts constitutes

one bill. 2. Where two or more parts of a set are negotiated to different holders in due course, the holder whose title first accrues

is, as between such holders, the true owner of the bill. But nothing in this section affects the right of a person who, in due course, accepts or pays the parts first presented to him.

3. Where the holder of a set indorses two or more parts to different persons, he is liable on every such part, and every indorser subsequent to him is liable on the part he has himself indorsed, as if such parts were separate bills.

4. The acceptance may be written on any part and it must be written on one part only. If the drawee accepts more than one part and such accepted parts negotiated to different holders in due course, he is liable on every such part as if it were a separate bill.

LIABILITY OF PARTIES

A. PRIMARY AND SECONDARY LIABLE DISTINGUISHED Primary and Secondary Liability, in general:

Instrument Primary Secondary Promissory Note Maker General Indorsers Bill of Exchange Acceptor Drawer and General Indorsers

B. LIABILITY DISTINGUISHED FROM WARRANTIES The primary and secondary liability makes the parties liable to pay the sum certain in money stated in the instrument. While warranties are affirmations of fact on the part of the parties that impose no direct obligation to pay in the absence of breach thereof. In case of breach of warranties, the person who breached the same may (1) either be liable; or (2) he may be barred from asserting a particular defense. Unlike secondary liability which requires a notice of dishonor, an action based on breach of warranty is not so conditioned, the latter occurring as it does at the time of the transfer, may be brought at any time. C. LIABILITY AND/OR WARRANTIES OF PARTIES 1. Maker – primary and unconditional.

The maker of a negotiable instrument, by making it, engages: a. that he will pay it according to its tenor; and b. admits the existence of the payee and his then capacity to indorse.







2. Drawer – secondary liability. But the drawer may insert in the instrument an express stipulation negating or limiting is

own liability to the holder (see Sec. 61) a. Relationship with Drawee – there is a contractual relation between the drawer and the drawee. Thus, a drawer

may have drawn the bill against the drawee because the latter is holding an amount in trust for the drawer, or the drawee may have extended credit to the drawer and agreed to honor any bill drawn by the drawer against said drawee.

b. Relationship with Collecting Bank – the privity of contract is between the holder-depositor and the collecting bank. There is no privity of contract between the drawer and the collecting bank.

Liability of acceptor. - The acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance and admits: a. The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument;

and b. The existence of the payee and his then capacity to indorse.

3. Indorsers – secondary liability. Order of liability: As respect one another, indorsers are liable prima facie in the order in which they indorse; but evidence is admissible to show that, as between or among themselves, they have agreed otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally Warranties of indorsers:

Qualified Indorser* General Indorser That the instrument is genuine and in all respects what it purports to be;

That the instrument is genuine and in all respects what it purports to be;

That he has a good title to it; That he has a good title to it; That all prior parties had capacity to contract; That all prior parties had capacity to contract; That he has no knowledge of any fact which would

impair the validity of the instrument or render it valueless

That the instrument is, at the time of indorsement, valid and subsisting.

*Person who negotiates by mere delivery: will have the same warranties as a qualified indorser. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. ILLUSTRATION: M made a promissory note for P10,000 payable to P or order. P changed the amount to P40,000 carefully and it was not noticeable before he negotiated the note to A; then A to B. When B presented the note for payment, it was dishonored by M. a. Is A liable to B if he is a qualified or a general indorser? b. Instead of alteration, X stole the note from P and indorsed it to A by forging the signature of P, is A liable to B if the

former is a qualified or a general indorser? c. If it turns out that M is a minor, can A be liable to B if he is a qualified or a general indorser?

ILLUSTRATION: M made a promissory note for P10,000 payable to P or order for the purchase of goods. P negotiated the note to A then A to B. P never delivered the goods. If M dishonors the note, what is the liability of A to B if he is a a. Qualified indorser? b. General indorser? 4. Accommodation Party: He receives no part of the consideration for the instrument but assumes liability to the other

parties thereto. He is liable to a holder for value as if the contract was not for accommodation. It is not a valid defense that the accommodation party did not receive any valuable consideration. Nor is it correct to say that the holder for value is not a holder in due course merely because at the time he acquired the instrument, he knew that the indorser was only an accommodation party.

DEFENSES A. REAL AND PERSONAL DEFENSE DISTINGUISHED Real Defenses may be raised against all holders even against a holder in due course and attaches to the instrument itself.







Personal Defenses (also called equitable defenses) may be raised only against holders who are not holders in due course which are brought out of conduct of persons and makes it inequitable to impose payment. REAL DEFENSES AND PERSONAL DEFENSES

PERSONAL DEFENSES REAL DEFENSES Incomplete but delivered (Sec 14) including breach of faith or authority

Incomplete and undelivered (Sec 15)

Complete but undelivered (Sec 16) Minority and ultra vires acts (Sec 22) Insertion of a wrong date (Sec 13) Forgery (Sec 23) Ante date or post dated (Sec 12) Want of authority, apparent and real (Sec 23) Absence or failure of consideration (Sec 28) Material alteration (Sec 124) – although partial real defense

only Acquisition of instrument for an illegal consideration Prescription Simple fraud or fraud in inducement (Sec 55) Fraud in factum or fraud in esse contractus Acquisition of instrument by unlawful means

B. REAL DEFENSES 1. MINORITY - the defense of minority is real and may be enforced against all holders but is only available to the minor

himself. 2. ULTRA VIRES ACTS - are acts done beyond the power conferred upon a corporation by law and such want of authority

may be raised as a real defense but the negotiation of the corporation may pass title to the instrument. 3. NON-DELIVERY OF INCOMPLETE INSTRUMENT - Where an incomplete instrument has not been delivered, it will

not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery.

4. FRAUD IN FACTUM (or Fraud in execution or Fraud in esse contractus) - It is present when a person is induced to

sign an instrument not knowing its character as a note or a bill. The person signing does not know that he is signing a negotiable instrument and may be used as a defense even against a holder in due course.

Fraud in Inducement: is present when a person was induced by a cause or consideration to make a negotiable instrument when in fact the cause or consideration is defective or non-existing and is considered only a personal defense.

Difference is in the intention: In the former, there is no intention to make a negotiable instrument at all, in the latter, there

is fraud only as to the cause or consideration, but there is intention to make a negotiable instrument. ILLUSTRATION: X a fan of Liza Soberano asked for her autograph. Liza then signed a blank piece of paper. In need

of money, X wrote on the paper “I promise to pay X or order P10,000 on December 31,2020”. Is Liza liable on the note? ILLUSTRATION: B bought a diamond ring from S for P10,000 and paid by issuing a negotiable promissory note. S then

negotiated the note to A. It turns out that the diamond ring was fake. Can A enforce the note against B? 5. FORGERY AND WANT OF AUTHORITY - When a signature is forged or made without the authority of the person

whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority

A forged signature, whether it be that of the drawer, maker, payee or any other party, is wholly inoperative and no one can gain title to the instrument through such forged signature against parties prior to the forgery. Effect: a. As a rule, parties prior to the forgery, whether they be the maker, drawer, payee or indorser, are not liable on the

instrument. b. Except: in case of a bearer instrument, which can be negotiated by mere delivery, the forgery of an indorsement

(even if it is to be treated as wholly inoperative) will not affect the negotiation.







ILLUSTRATION: M made a note payable to the order of P who indorsed it to A. F stole the note and indorsed it to C by forging A’s signature, and indorsed it to D, present holder.

i. Can D recover from M, P or A? ii. Can D enforce the instrument against C? iii. If it is a bearer instrument:

1) Can D collect from M? 2) Can D collect from P or A?

c. Forgery of Drawer’s Signature – barring gross negligence on the part of the drawer where his signature is forged,

he is not liable whether or not the instrument is payable to bearer or order because the drawer was never a party to the instrument – he did not order to pay anybody.

Situation with a COLLECTING BANK i. Drawer and Collecting Bank – the drawer cannot opt to recover from the collecting bank since there is no

privity of contract between him and the collecting bank (Associated Bank vs. CA); ii. Warranty of Collecting Bank - The collecting bank which indorses a check bearing a forged indorsement and

presents it to the drawee bank guarantees all prior indorsements, including the forged indorsement itself, and ultimately should be held liable therefor. (Traders Royal Bank vs. RPN); EXCEPTION is when the issuance of the check itself was attended with negligence.

iii. Recourse of Collecting Bank – the collecting bank may recover from its depositor who had not given value for the money paid to him.

ILLUSTRATION: P, knowing the combination to the lock of DR’s drawer, took a BPI check and indicated his name as payee and forged DR’s signature. If P encashed the check with BPI and BPI pays: 1) DR, absent negligence on his part, is not liable on the check since his forged signature therein is wholly

inoperative. 2) DR can recover the amount from BPI since the Bank is tasked to know the signature of its depositors. 3) BPI’s right of recourse then would be to go after P.

If P deposited the check with PNB where he maintains his account: 1) PNB will be known as the collecting bank, which, through the normal clearing process, would meet with all

other banks in the clearing house. 2) DR, absent negligence on his part, is not liable on the check since his forged signature therein is wholly

inoperative. 3) If BPI pays PNB and debited the account of DR, DR can demand reimbursement from BPI, since it is bound

to know the signature of its depositor. 4) BPI then can seek reimbursement from PNB, since the collecting bank guarantees all prior indorsements.

As such, since the signature of DR is forged, BPI can invoke such guarantee. 5) The remedy of PNB would be to go after P, its own depositor. 6) DR cannot opt to sue PNB directly since there is no privity of contract between them.

6. MATERIAL ALTERATION - A material alteration is only a partial real defense because the holder in due course can

enforce it according to its original tenor.

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.

C. PERSONAL DEFENSES

APM C D

F







1. ANTEDATING OR POST-DATING - The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery.

2. INSERTION OF A WRONG DATE - Where an instrument expressed to be payable at a fixed period after date is issued

undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly.

The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date.

3. DURESS AND/OR INTIMIDATION

a. Generally, duress and/or intimidation exerted against a person gives the latter a personal defense and is available even if there is some form of consideration.

b. To constitute duress, there must be an actual or threatened exercise or power possessed by the party benefited thereby, for the purpose of obtaining the note (or bill), such as to deprive the maker of the quality of mind essential to making of a contract.

c. Duress is relative, hence threats to a feeble and old person might be duress to one while it may not be so to another. d. Duress is a real defense if it is vicious or if it is what is referred to as duress amounting to forgery, like when a

person who exerted the same is practically writing the note itself by holding the hands of another. 4. ILLEGALITY OF CONSIDERATION

a. Generally, illegality of the transaction that gave rise to a particular transaction is only a personal defense. For example, if a check was issued as payment for marijuana, the transaction involved is illegal but the same cannot be raised against a holder in due course.

b. Exception to the rule is when the law which declares the transaction or document issued in connection thereto is void against any party.

ENFORCEMENT OF LIABILITY

A. PARTIES PRIMARILY LIABLE As to persons primarily liable (i.e., maker and acceptor), presentment for payment will be done to enforce liability, unless it is excused. Note that the maker and acceptor have already undertaken that they will pay according to the instrument’s tenor or the tenor of acceptance, respectively. B. GENERAL STEPS IN ENFORCING SECONDARY LIABILITY 1. Promissory Notes

a. Presentment for payment must be made within the required period to the maker (see Bill of Exchange below for rules on presentment for payment);

b. Notice of dishonor should be given, if promissory note is dishonored by non-payment by the maker, unless it is excused;

2. Bills of Exchange

a. Presentment for Acceptance

ACCEPTANCE OF A BILL is the signification by the drawee of his assent to the order of the drawer. The acceptance must be (1) in writing and (2) signed by the drawee. (3) It must not express that the drawee will perform his promise by any other means than the payment of money. When required i. Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in

order to fix the maturity of the instrument; or ii. Where the bill expressly stipulates that it shall be presented for acceptance; or iii. Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.

Kinds of Acceptance: i. Conditional – payment by the acceptor is dependent on the fulfillment of the condition. ii. Partial – acceptance to pay a part only of the amount for which the bill is drawn







iii. Local – acceptance to pay at a particular place. iv. Qualified as to time v. Acceptance of some, on or more of the drawees but not of all

Unqualified acceptance: the holder may refuse to take a qualified acceptance and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance. Where a qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill, EXCEPT: i. They have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent

thereto. ii. Receives a notice of a qualified acceptance he must but did not express dissent within a reasonable time.

When Presentment for Acceptance is Excused - Presentment for acceptance is excused and a bill may be treated as dishonored by non-acceptance in either of the following cases: i. Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to

contract by bill. ii. Where, after the exercise of reasonable diligence, presentment cannot be made. iii. Where, although presentment has been irregular, acceptance has been refused on some other ground.

b. Notice of Dishonor c. Presentment for Payment - In presentment for payment, the holder exhibits the instrument to the maker or the

acceptor to demand payment of the amount reflected in the negotiable instrument or whatever balance that is due.

When Presentment is NOT NECESSARY to charge liability: i. Drawer: where he has no right to expect or require that the drawee or acceptor will pay the instrument ii. Indorser – when the instrument is made or accepted for his accommodation and he has no reason to expect

that the instrument will be paid if presented.

When Presentment for payment is excused: i. Where, after the exercise of reasonable diligence, presentment cannot be made; ii. Where the drawee is a fictitious person; iii. By waiver of presentment, express or implied.

C. DISHONOR Dishonored by Non-Acceptance - A bill is dishonored by non-acceptance: 1. When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or cannot be

obtained; or 2. When presentment for acceptance is excused and the bill is not accepted. Dishonored by Non-Payment - The instrument is dishonored by non-payment when: 1. It is duly presented for payment and payment is refused or cannot be obtained; or 2. Presentment is excused and the instrument is overdue and unpaid. Notice of Dishonor - when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged. Who should give notice: The notice may be given by or on behalf of the holder, or by or on behalf of any party to the instrument who might be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the party to whom the notice is given. Who will benefit in the notice given 1. Given by or in behalf of the holder - it inures to the benefit of all subsequent holders and all prior parties who have a

right of recourse against the party to whom it is given. Example: M to P to A to B to C to H. If H gives notice to P, it inures to the benefit of A, B and C, such that they need not

provide notice to P also. 2. Given by or on behalf of a party who may be compelled to pay – it inures to the benefit of the holder and all parties

subsequent to the party to whom notice is given.







Example: M to P to A to B to C to H. If notice is given by B to A, it inures to the benefit of C and H as well. Waiver of Notice - Notice of dishonor may be waived either before the time of giving notice has arrived or after the omission to give due notice, and the waiver may be expressed or implied. When notice need not be given to drawer. - Notice of dishonor is not required to be given to the drawer in either of the following cases: a. Where the drawer and drawee are the same person; b. When the drawee is fictitious person or a person not having capacity to contract; c. When the drawer is the person to whom the instrument is presented for payment; d. Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; e. Where the drawer has countermanded payment. When notice need not be given to indorser. — Notice of dishonor is not required to be given to an indorser in either of the following cases: a. When the drawee is a fictitious person or person not having capacity to contract, and the indorser was aware of that

fact at the time he indorsed the instrument; b. Where the indorser is the person to whom the instrument is presented for payment; c. Where the instrument was made or accepted for his accommodation. PROTEST is a formal statement in writing made by a notary public at the instance of the holder declaring that the instrument has been presented for payment or for acceptance but the same was dishonored. When Necessary: a. In case of a foreign bill dishonored by non-acceptance or non-payment b. If a stranger to a bill will accept the instrument for honor c. If the bill will be presented for payment to acceptor for honor or referee in case of need; and d. When the bill is dishonored by the acceptor for honor .

DISCHARGE Discharge means release from further liability, obligation, or from the binding effect of the negotiable instrument. 1. As to the paper itself, it puts an end to it as a contractual obligation; 2. As to the parties to the instrument, it operates as a release of some or all of them from further obligation and liability

under the instrument although the instrument may not be discharged, as where only part of the obligors are released. A. HOW INSTRUMENT IS DISCHARGED - A negotiable instrument is discharged:

1. By payment in due course by or on behalf of the principal debtor; 2. By payment in due course by the party accommodated, where the instrument is made or accepted for his

accommodation;

Payment in Due Course - Payment is made in due course when it is made at or after the maturity of the payment to the holder thereof in good faith and without notice that his title is defective.

a. By Whom Made:

1. Primary Party Liable, i.e., a maker or acceptor; 2. Surety for the principal debtor, signing as a secondary party; 3. A person paying “on behalf of the principal debtor” also discharges the instrument under the principles of

the law on agency;

b. Payment by Person Secondarily Liable does not discharge the instrument; EXCEPT Payment done by 1. Drawer; or 2. Accommodated party

3. By the intentional cancellation thereof by the 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.







Unintentional Cancellation: A cancellation made unintentionally or under a mistake or without the authority of the holder, is inoperative but where an instrument or any signature thereon appears to have been cancelled, the burden of proof lies on the party who alleges that the cancellation was made unintentionally or under a mistake or without authority

4. By any other act which will discharge a simple contract for the payment of money; 5. When the principal debtor becomes the holder of the instrument at or after maturity in his own right.

B. Discharge of Persons SECONDARILY LIABLE - A person secondarily liable on the instrument is discharged:

1. By any act which discharges the instrument; 2. By the intentional cancellation of his signature by the holder; 3. By the discharge of a prior party; 4. By a valid tender or payment made by a prior party; 5. By a release of the principal debtor unless the holder's right of recourse against the party secondarily liable is

expressly reserved; 6. 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.

CHECKS AND RELATED CRIMES

CHECKS

A. CHECKS DEFINED - A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise

provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check.

A check is a special kind of bill of exchange, which is unique because: 1. The drawee is a bank 2. It is always payable on demand 3. There is a presumption that the drawer has an account with the bank 4. Death of the drawer, if known to the bank, is a valid ground to dishonor the same.

B. KINDS OF CHECK

1. Cashier’s check – drawn by a bank upon itself, and is acceptance by its issuance. A manager’s check is of the same nature, although instead of being signed by the cashier, it is the manager who signs the same for the bank.

2. Certified check – drawn by a depositor upon funds to his credit in a bank which is certified by the proper officer of the bank will be paid when duly presented for payment. a. Certification is equivalent to acceptance b. When the holder of the check is the one who procures the certification – the drawer and all indorsers are

discharged from liability 3. Crossed check – done by writing 2 parallel lines diagonally on the top left portion of the check

Effect of crossing a check: a. Cannot be encashed and should be deposited only b. may be negotiated only once c. the crossing serves as a warning that the check has been issued for a specific purpose so that the holder

must inquire if he has received the check pursuant to that purpose.

4. Memorandum check – with the words “memorandum”, “memo” or “mem” written across its face, signifying that the maker or drawer engages to pay the bona fide holder absolutely without condition concerning its presentment.

5. Traveler’s checks – purchased from banks, express companies, or the like, which can be used like cash upon second signature by the purchaser.

It requires the signature of the purchaser at the time he buys it and also at the time he uses it – that is when he obtains the check from the bank and also at the time he delivers the same to the establishment that will be paid thereby.

C. COLLECTION OF CHECKS 1. The holder of the check may either present it for payment or he may deposit it in his account with his bank known as

the depositary bank or collecting bank.







2. The depositary bank will then make a provisional credit to his account in the amount of the check. 3. The check thereafter goes through the process of clearing through the “clearinghouse”

The clearinghouse is defined as “an association of banks or other payors for the purpose of settling accounts with each other on a daily basis. Each member of the clearinghouse forwards all deposited checks drawn on other members and receives from the clearinghouse all checks drawn on it. Balances are adjusted and settled each day.”

4. It is only after the check has been cleared and collected from the drawee bank that final credit is made in the payee-depositor’s account.

5. The normal bank policy is to disallow withdrawal from the account of the amount covered by the check. In some cases, the collecting bank may be held liable for damages if it allows withdrawal of deposit even if the check has not yet been cleared by the drawee bank.

CRIMES INVOLVING CHECKS

1. BOUNCING CHECKS LAW Elements of Violation of Bouncing Checks Law (BP 22): 1. The making, drawing, and issuance of any check to apply for account or for value; 2. The knowledge* of the maker, drawer, or issuer that at the time of issue he does not have sufficient funds in or credit

with the drawee bank for the payment of the check in full upon its presentment; and 3. (a) The subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or (b) would have been

dishonored for the same reason had not the drawer, without any valid cause, ordered the bank to stop payment. *Knowledge of the maker/drawer: The making, drawing and issuance of a check payment of which is refused by the drawee because of insufficient funds in or credit with such bank, when presented within ninety (90) days from the date of the check, shall be prima facie evidence of knowledge of such insufficiency of funds or credit. Valid Defense – payment; Requirement of Notice: Such maker or drawer will not be liable if he pays the holder thereof the amount due thereon, or makes arrangements for payment in full by the drawee of such check within (5) banking days after receiving notice that such check has not been paid by the drawee. EFFECT OF ACQUITTAL ON CIVIL LIABILITY: An acquittal does not entail the extinguishment of the civil liability for the dishonored checks. An acquittal based on lack of proof beyond reasonable doubt does not preclude the award of civil damages. (Mateo v. People, GR 200090, March 6, 2013) PENALTY: 1. Imprisonment – not less than 30 days but not more than 1 year 2. Fine – not less than but not more than double the amount of the check, which fine shall not exceed the amount of

P200,000; or 3. Both, at the discretion of the court. Prescriptive period: Prescriptive period of BP 22 Violation of B.P. Blg. 22 prescribes in four (4) years from the commission of the offense or, if the same be not known at the time, from the discovery. thereof 2. DIFFERENCE WITH ESTAFA BY POST-DATING OR ISSUING A CHECK:

a. GOOD FAITH IS A DEFENSE IN ESTAFA: So that when the accused who issued the check believing that he would be able to make the corresponding deposit, informed the complainant, when he sensed that he could not make the deposit, not to present the check to the bank for cancellation, he could not be held liable for Estafa. (See People vs. Villapando) By informing the payee, there is no deceit. (Firestone Tire and Rubber Co. of the Philippines vs. Ines Chavez)

In BP Blg. 22, good faith is NOT a valid defense.

b. PAYMENT OF A PRE-EXISTING OBLIGATION – NO ESTAFA: If the check is in payment of a pre-existing

obligation there is no deceit and hence, the crime of Estafa cannot exist.

In BP Blg. 22, even if the check is issued to pay a pre-existing obligation, there may still be liability.

c. ESTAFA MAY BE COMMITTED BY MERELY ISSUING A WORTHLESS CHECK – unlike in BP Blg. 22 which requires that the accused BOTH drew and issued the check.







d. PERIOD TO MAKE GOOD THE CHECK – is only 3 days in estafa, but 5 banking days in BP Blg. 22.

LIABLE FOR BOTH ESTAFA AND BP 22: Under Sec. 5 of BP Blg. 22, the prosecution thereof shall be without prejudice to any liability for violation of any provision of the RPC. It is now well settled that a single act can give rise to Estafa and at the same time to violation of BP Blg. 22. ILLUSTRATION (ESTAFA AND BP 22): A drew a check for P10,000 and issued the same to B for the payment of a pre-existing obligation. B then issued said check to C representing the same to be a good check. The check was later on dishonored for insufficient funds. A: would not be liable for Estafa since the check was issued for the payment of a pre-existing obligation. But he is liable for BP Blg. 22 for the making and issuance of a worthless check. If, however, C presented the check for cancellation, deposit or encashment on the 91st day from the date indicated thereon, A would not be liable anymore. B: on the other hand, may be liable for estafa but not for BP Blg. 22 since he is the drawer of the check but merely issued it.

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