Part I

Question 1

What law governs negotiable instruments?

Answer 1

Act No. 2031, otherwise known as the “Negotiable Instruments Law.”

Before NIL, negotiable instruments were governed by Articles 439-566 of the Code of Commerce.

Sec. 197 repealed inconsistent acts and laws.

The New Civil Code (RA 386) has suppletory effect in case of deficiency of NIL provisions.

Question 2

The provisions of the NIL are not applicable if the instrument involved is not negotiable. T or F.

Answer 2

True.

Question 3

Where were the provisions of NIL copied from?

Answer 3

American Uniform Negotiable Instruments Law. This was based largely on the Bills of Exchange Act of 1882.

Question 4

What law shall apply if such a case does not fall under any of the cases provided for in NIL?

Answer 4

Lex Mercatoria or the Law Merchant.

Question 5

Functions of Negotiable Instruments

Answer 5

1. substitute for money
2. medium of exchange
3. credit instrument which increases credit circulation
4. increases purchasing power in circulation
5. proof of transactions
   * promissory and bill are more on circulation of credit only

Question 6

Is negotiable instrument a contract?

Answer 6

No, they are substitutes for money or a medium of exchange.

Question 7

Were negotiable instruments used in primitive times?

Answer 7

Not really. Men were self-sufficient. Minimal trade was carried on by barter.

Question 8

What led to the need of negotiable instruments?

Answer 8

Commercial demand for money

Question 9

Are negotiable instruments legal tender? Why?

Answer 9

No. Only notes and coins issued by the Bangko Sentral ng Pilipinas are considered legal tender.

Question 10

Coins as legal tender

Answer 10

1. Max 1,000
   1, 5, 10
2. Max 100
   1, 5, 10, 25 centavos

Question 11

Are checks legal tender?

Answer 11

No. Even if the delivery of check is accepted by the creditor, obligation is deemed paid only when the instrument is encashed.

Question 12

Does a negotiable instrument operate as money?

Answer 12

Not really. It is merely a substitute.

Question 13

When can checks be considered to have extinguished an obligation?

Answer 13

Cases where the check is impaired due to the fault of the creditor (even if the cash is not encashed).

Question 14

Delivery of checks may be sufficient in the exercise of certain rights or privileges. T or F.

Answer 14

True.

Delivery of checks is sufficient in the exercise of the right of redemption. It is a privilege and is not an ordinary obligation.

Question 15

Features or Characteristics of Negotiable Instruments

Answer 15

1. Negotiability
   - allows negotiable instruments to be transferred from one person to another so as to constitute the transferee a holder
   - gives it freedom to circulate as a substitute for money
2. Accumulation of secondary contracts
   - greater security
   - more people are liable

Question 16

Kinds of Negotiable Instruments

Answer 16

1. Promissory note
   - 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. Where a note is drawn to the maker’s own order, it is not complete until indorsed by him.
   - maker and payee
   - y promises to pay x
   - maker is the one who makes the note
   - maker is primarily liable
2. Bill of exchange
   - 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 to bearer.
   - drawer na yung gagawa
   - drawer is directing drawee to pay the payee
   - y orders z to pay x
   - drawer is y - executes written order to pay
   - drawer is secondarily liable
   - drawer may limit liability by express stipulation
   - payee is x
   - drawee is z, party to whom bill is addressed and who is ordered to pay
   - named but not yet a party (z) so wala pa liability. mag-aassume lang sya liability once the bill is accepted and signed – acceptor
   - drawee has to be an acceptor first
   - no person primarily liable yet

Question 17

Are promissory notes and bills of exchange always negotiable?

Answer 17

No.

Question 18

Other term for bill of exchange

Answer 18

Draft - signed order by one party, the drawer, addressed to another, the drawee, directing the drawee to pay a specified sum of money to the order of a third person, the payee (American Institute of Banking)

Question 19

Types of bill of exchange

Answer 19

(1)

a. inland bill - both drawn and payable within the Philippines
b. foreign bill

(2)

a. time draft - one that is payable at a fixed date
b. sight or demand draft - one that is payable when the holder presents it for payment

(3)

a. trade acceptance - the seller as drawer orders the buyer (as drawee) to pay a sum certain to the same seller (payee).
b. banker’s acceptance - time draft across the face of which the drawee bank has written the word accepted

Question 20

Most common form of bill of exchange

Answer 20

Check

A check is a bill of exchange drawn on a bank payable on demand.

Bank as drawee.

Question 21

Other bills of exchange

Answer 21

1. Clean Bill of Exchange - a bill to which no document is attached when presentment for payment or acceptance is made
2. Documentary Bill of Exchange - a bill of exchange to which a document/s is/are attached when presented for payment or acceptance

Question 22

Certificate of deposit

Answer 22

A form of promissory note which is a written acknowledgment of a bank of its receipt of a certain sum with a promise to repay the same.

A written acknowledgment by a bank or banker of the receipt of a sum of money on deposit which the bank or banker promises to pay to the depositor, to the order of the depositor, or to some other person or his order, whereby the relation of debtor and creditor between the bank and the depositor is created.

Question 23

Bonds

Answer 23

*may also partake the nature of negotiable promissory note

A certificate or evidence of a debt on which the issuing company or governmental body promises to pay the bondholders a specified amount of interest for a specified length of time, and to repay the loan on the expiration date.

Question 24

Debenture

Answer 24

A promissory note or bond backed by the general credit of a corporation and usually not secured by a mortgage or lien on any specific property.

Question 25

Bank notes

Answer 25

Promissory notes of the issuing bank which are payable to bearer on demand.

Question 26

Kinds of Bonds

Answer 26

1. Bottomry bonds - bonds secured by mortgage of ships
2. Chattel mortgage bonds - bonds secured by mortgage on chattels of business
3. Collateral trust bonds - bonds secured by collateral deposited with a trustee
4. Convertible bonds - bonds that can, at the option of the holder, be converted into stocks
5. Coupon bonds - bonds with interest coupons attached
6. Guaranteed bond - a bond which has interest or principal or both guaranteed by a company other than the issuer
7. Income bond - bond on which interest is payable only when earned after payment of interest upon prior mortgages
8. Joint and several bond - a bond the principal and interest of which is guaranteed by 2 or more persons
9. Joint bond - bond secured by 2 or more obligors who must be joined in any action on such bond
10. Mortgage bond - bond secured by a mortgage on a property

Question 27

When may a bill be treated as a promissory note?

Answer 27

1. When the drawer and the drawee are the same person
2. When the drawee is a fictitious person
3. When the drawee has no capacity to contract

Question 28

An instrument may be treated either as a bill or a note at the election of the holder when the instrument is so ambiguous that there is doubt whether it is a bill or a note. T or F.

Answer 28

True.

Question 29

Promissory note v. Bill of exchange

Answer 29

(1)
pn - contains an unconditional promise
boe - contains an unconditional order

(2)
pn - 2 parties on its face
boe - 3 parties on its face

(3)
pn - the person who signs it is the maker
boe - the person who signs it is the drawer

(4)
pn - the maker is primarily liable
boe - the drawer is secondarily liable

(5)
pn - the person primarily liable is the maker
boe - the person primarily liable is the drawee-acceptor

(6)
pn - there is only one presentment: for payment
boe - there are 2 presentments: a) for acceptance and b) for payment

Question 30

Parties to Negotiable Instruments

Answer 30

a. promissory note - maker and payee
b. bill of exchange - drawer, drawee and payee

*indorsers - persons who transfer or negotiate an instrument by indorsement completed by delivery
holders - payee or indorsee of a bill or note who is in possession of it or the bearer thereof
bearer - the person in possession of a bill or note which is payable to bearer

Question 31

Referee in case of need

Answer 31

May be designated by the parties in bills of exchange in case the bill is dishonored by non-acceptance or non-payment. A person to whom the holder may resort in case of need.

Question 32

The requirements of negotiability are concerned with the validity of the instrument. T or F.

Answer 32

False.

Question 33

The contract represented by or out of which the negotiable instrument arose may be invalid, voidable or rescissible or unenforceable but the instrument may remain negotiable. T or F.

Answer 33

True.

Question 34

Negotiable instruments v. Non-negotiable instruments

Answer 34

(1)
NIL only applicable to negotiable instruments
Application of the NIL to non-negotiable instruments is only by analogy

(2)
NINS can be transferred by negotiation or by assignment
Non-NINS can be transferred only by assignment

(3)
Transferee of a non-NINS can never be a holder in due course but remains to be an assignee
Transferee of a NINS can be a holder in due course if all the reqs under Sec 52 of the NIL are complied with

(4)
Since the transferee of a non-NINS cannot be a holder in due course, all defenses available to prior parties may be raised against the last transferee

Question 35

Incidents/Stages in the Life of a NINS

Answer 35

1. Preparation and signing - complete with all the requisites provided for in Sec 1 of the NIL and signature
2. Issuance - 1st delivery of the instrument to the payee (from maker to payee/bearer or from the drawer to the payee/bearer) sec. 191
3. Negotiation - transfer from one person to another so as to constitute the transferee a holder
4. Presentment for acceptance
5. Acceptance - written assent of the drawee to the order
6. Dishonor by non-acceptance - refusal to accept by the drawee
7. Presentment for payment - the instrument is shown to the maker or drawee/acceptor so that the said maker or drawee/acceptor will pay
8. Dishonor by non-payment - refusal to pay the maker or drawee/acceptor
9. Notice of Dishonor - notice to the persons secondarily liable that the maker or the drawee/acceptor refused to pay or to accept the instrument
10. Protest (in some cases)
11. Discharge

Question 36

Requisites of Negotiability (memorize)

Answer 36

1. It must be in writing and signed by the maker or drawer
   - any material, any ink, any manner
   - intended to be bound by the signature
   - deemed to be an indorser if hindi clear yung role sa signature
2. Must contain an unconditional promise or order to pay a sum certain in money
3. Must be payable on demand, or at a fixed or determinable future time
   - holder may call for payment any time (on demand) – when expressed (demand, sight, presentation) can apply to subholders; if there is no time expressed on the instrument (applicable only to immediate parties); when it is overdue (holder has immediate right to demand payment)
   - fixed or determinable time - only when the term or period arrives
   - what if may date pero walang year? - non-negotiable kasi uncertain yun
   - if kunyari 2 installments tapos 2nd lang may date, valid padin kasi the 1st installment will be assumed payable on demand
4. Must be payable to order or to bearer
   - Juan Dela Cruz OR HIS ORDER (otherwise, not negotiable kasi malilimit yung promise to pay to that person)
   - - instrument may be drawn payable to payee who is not the drawer or drawee or maker
   - may also be to the drawer or maker
   - pay to the order of myself (valid)
   - in case of a promissory note, it shall be indorsed by the maker (otherwise, incomplete) pag incomplete and undelivered (sec. 15) – not a valid contract in the hands of any holder as against any person whose signature appeared before the delivery BUT IN A BILL OF EXCHANGE, if drawee becomes acceptor, ok lang
   - made payable to drawee (made payable to yourself)
   - to 2 or more payees jointly, 1 or some of several payees
   - 2 order of a holder of an office for the time being
   - payable to order, payee must be indicated with reasonable certainty. if wala, di sya maiindorse so magiging non-negotiable.
   - payable to bearer
   - can be to any person who is in possession of the instrument (in good faith and that his title is not defective)
   - when it is expressly stipulated (to bearer, kahit wala name)
   - it should not be (bearer, x) because the bearer will describe x who is a specific person and it will render the note non-negotiable
   - pay to x or bearer pwede
   - payable to a fictitious or non-existing person - and is known to the person who made that instrument - the law will presume that the instrument be transferred by mere delivery - bearer instrument so it can still be negotiable
   - name of payee is not purported to be the name of any person (pay to cash, pay to money) negotiable by delivery
   - only or last indorsement is an indorsement in blank (signature lang of the indorser) then it is a bearer instrument
   - order instrument can be converted to bearer by merely signing indorsement in blank, so walang name to whom the instrument is being negotiated
   - sec. 40 - once a bearer instrument, always a bearer instrument
   - order - must be indorsed and delivered
   - bearer - can be just delivered
5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty (bills of exchange)
   - only applicable to bill of exchange
   - may be addressed to 2 or more drawees jointly
   - cannot apply to 2 drawees in the alternative (x or y)
   - cannot apply in succession (to x, and in his absence, to y) - drawees lang ah
   - difficult to determine the exact day of dishonor pag ganun kasi madedetermine lang yun pag nadishonor na ng lahat ng drawees
   - trust receipt - not negotiable, subject to sale
   - negotiable documents of title - non-negotiable instruments, governed by law on sales

Question 37

Do acceptance and indorsement affect the negotiability of the instrument?

Answer 37

No.

Question 38

What makes negotiable instruments effective substitutes for money?

Answer 38

Their indispensable formalities

Question 39

If an instrument does not contain all the requisites of negotiability specified in Section 1 of the NIL, can the instrument still be considered negotiable as between the parties on the basis of estoppel?

Answer 39

Yes.

Question 40

How is negotiability determined?

Answer 40

If all the requisites appear on the face of the instrument.

1. Construction of the bill or note
2. Intention of the parties
3. If it can be legally ascertained

Question 41

Why do negotiable instruments need to be in writing?

Answer 41

Requiring the promise to be on paper provided tangible property and made it possible to satisfy the demand that transfer of rights be effectuated by physical delivery of some thing.

Question 42

What material should be used in writing?

Answer 42

Not specified. Can be by ink or print.

Question 43

Type of signature needed

Answer 43

Any. Can be handwritten, printed, engraved, lithographed or photographed.

Signature - any symbol executed or adopted by a party with present intention to authenticate a writing - Uniform Commercial Code in US

Question 44

Is it necessary that the signature is the usual signature of the maker?

Answer 44

No, as long as the intention to authenticate it is there.

Question 45

Is it necessary that the signature appear at the end of the document?

Answer 45

No. As long as his or her name is written by him or her in any part of the contract with the intention of authenticating the said instrument.

Question 46

Do the words “promise” or “order” need to appear in the instrument to satisfy the requirements of Section 1(b) of the NIL?

Answer 46

No.

Question 47

Does a receipt comply with the requirement of promise to pay?

Answer 47

No.

Question 48

Is a cash disbursement voucher a negotiable instrument?

Answer 48

No, it is nothing more than a receipt evidencing payment by borrowers of the loans previously extended to them.

Question 49

Is a withdrawal slip addressed to a drawee bank that is needed for the withdrawal of funds from a bank account negotiable?

Answer 49

No.

Question 50

Condition

Answer 50

A future and uncertain event or a past event unknown to the parties

Question 51

Estoppel

Answer 51

the principle which precludes a person from asserting something contrary to what is implied by a previous action or statement of that person or by a previous pertinent judicial determination

Question 52

Can a negotiable instrument have a resolutory or suspensive condition?

Answer 52

No. Promise or order to pay must be unconditional.

Question 53

When else is a promise unconditional?

Answer 53

Even:

1. When there is an indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount
2. When there is a statement of the transaction which gives rise to the instrument. But an order or promise to pay out of a particular fund is not unconditional.

Question 54

Will reference to an extrinsic agreement or document make the instrument non-negotiable?

Answer 54

Not necessarily. Only when the instrument is to be burdened with the conditions of the agreement.

“Reference to transaction” is okay but not “subject to transaction.”

Question 55

Is postal money order negotiable?

Answer 55

No, it does not contain an unconditional promise to pay.

Question 56

Letter of credit

Answer 56

A written instrument whereby a person requests another and the latter agrees to advance money or give credit to a third person and promises to repay the person making the advancement

Question 57

Are letters of credit negotiable?

Answer 57

No, they do not contain an unconditional promise or order to pay.

Question 58

Certificate of stock

Answer 58

It is the written evidence of shareholdings of a person in a corporation, hence, it does not represent an obligation to pay a sum certain in money.

Question 59

Is a certificate of stock negotiable?

Answer 59

Not really. There is no promise or order to pay. It is sometimes considered quasi-negotiable because they can be transferred through indorsement.

Question 60

Bill of lading

Answer 60

A form of document of title issued by the carrier whereby receipt of goods is acknowledged and the carrier promises to deliver the goods to whoever is validly holding it and who can present the bill of lading.

Question 61

Is a bill of lading negotiable?

Answer 61

No. It represents goods rather than money.

Question 62

Warehouse receipt

Answer 62

A document issued by a warehouseman acknowleding receipt of goods that were deposited by another promising to deliver to whoever is validly holding it and who can present the same.

Question 63

Is a warehouse receipt negotiable?

Answer 63

No, because it represents goods than money.

It is quasi-negotiable because it is considered negotiable under the Civil Code.

Question 64

Aval

Answer 64

A guarantee for the payment of drafts that were already accepted by the drawee.

Question 65

Is an aval negotiable?

Answer 65

No.

Question 66

When the holder is given the option to accept payment that is not money, is this negotiable?

Answer 66

Yes.

Question 67

When is a sum certain?

Answer 67

When it can be determined on the face of the instrument.

Question 68

Instances that won’t affect sum certain requisite of negotiability of instrument

Answer 68

Even

1. with interest
2. by stated installments
3. by stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due
4. with exchange, whether at a fixed rate or at the current rate
5. with costs of collection or an attorney’s fee, in case payment shall not be made at maturity.

Question 69

When is an instrument payable on demand?

Answer 69

1. When it is so expressed to be payable on demand, or at sight, or on presentation; or
2. In which no time for payment is expressed
3. 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.

Question 70

Determinable future time

Answer 70

1. at a fixed period after date or sight
2. on or before a fixed or determinable future time specified therein
3. on or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain

Question 71

Insecurity clauses

Answer 71

Those which allow the holder to accelerate payment if he feels that there is a danger that maker will not be able to pay on the due date.

Question 72

If an instrument is payable to a specified person and not to order or bearer, is it negotiable?

Answer 72

No.

Question 73

Holder

Answer 73

A person who is in possession of an instrument that is payable to bearer.

Question 74

In what instances is an instrument payable to bearer?

Answer 74

1. When it is expressed to be so payable
2. When it is payable to a person named therein or bearer
3. 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
4. When the name of the payee does not purport to be the name of any person
5. When the only or last indorsement is an indorsement in blank

Question 75

To whom can an instrument be made payable to order?

Answer 75

1. A payee who is not a maker, drawer, or drawee
2. The drawer or maker
3. The drawee
4. 2 or more payees jointly
5. One or some of several payees
6. The holder of an office for the time being

Question 76

Drawee

Answer 76

The person being commanded by the drawer to pay the payee.

Question 77

Omissions that do not affect negotiability

Answer 77

1. It is not dated
2. Does not specify the value given, or that any value had been given therefor
3. Does not specify the place where it is drawn or the place where it is payable
4. Bears a seal
5. Designates a particular kind of current money in which payment is to be made

Question 78

Additional provisions not affecting negotiability

Answer 78

Provision that

1. authorizes the sale of collateral securities in case the instrument be not paid at maturity
2. authorizes a confession of judgment if the instrument be not paid at maturity
3. waives the benefit of any law intended for the advantage or protection of the obligor
4. gives the holder an election to require something to be done in lieu of payment of money

Question 79

Negotiation

Answer 79

The transfer of the instrument from one person to another so as to constitute the transferee the holder thereof.

Question 80

If an instrument is not negotiable, can it still be transferred?

Answer 80

Yes, but only through assignment.

Question 81

Maker issued a non-negotiable promissory note to Payee promising to pay the latter P10,000. The note was issued because P promised to deliver a television set to M. Before the maturity date, P discounted the note with A for P9,500. Without A’s knowledge, P failed to deliver the television set that was agreed upon. There is nothing in the note which indicates that there was non-delivery. Can M still refuse to pay A?

Answer 81

Yes. Since the seller (P) did not deliver what was agreed upon, the buyer (M) can also refuse to pay the price agreed upon. M can still claim that he is not liable because P failed to deliver the television set. He can raise this as a defense against A because A merely stepped into the shoes of P.

Question 82

If the instrument is negotiable, how is voluntary transfer effected?

Answer 82

Either through negotiation or through assignment

Question 83

When the instrument is assigned, what role does the assignee take place?

Answer 83

Transferor, not a holder

Question 84

Other mode of transfer

Answer 84

through intestate succession

Question 85

Negotiation v. Assignment

Answer 85

(1) applicable law
n: NIL
a: Civil code

(2) type of transaction/instrument
n: negotiable instruments ONLY
a: contracts in general/assignable rights

(3) nature of transferee
n: transferee is a holder who may be a holder in due course
a: transferee is a mere assignee

(4) possibility to become a holder in due course
n: in proper cases
a: never

(5) rights acquired
n: transferee-holder may acquire more rights than the transferor if he is a holder in due course
a: transferee cannot acquire more rights than the transferor because he merely steps into the shoes of the transferor

(6) availability of personal defenses
n: transferee-holder may be free from personal defenses if he is a holder in due course
a: transferee is always subject to personal defenses

Question 86

How negotiation takes place

Answer 86

a. issuance
- preparation
- transfer/delivery

b. subsequent negotiation
c. incomplete negotiation of order instrument

Question 87

Issue

Answer 87

First delivery of the instrument complete in form to a person who takes it as a holder

Question 88

Why is issuance negotiation?

Answer 88

The transfer constitutes the payee the holder of the instrument.

Question 89

Delivery

Answer 89

The transfer of possession of the instrument by the maker or drawer with the intention to transfer title to the payee and recognize him as holder thereof.

Question 90

Is delivery mere handing over?

Answer 90

No. Such transport shall imply the enabling of the another person to hold it for himself.

Question 91

What constitutes negotiation?

Answer 91

An instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder completed by delivery.

Question 92

A negotiable instrument that is payable to bearer may be negotiated by mere delivery. T or F.

Answer 92

True. Delivery must be intended to give effect to the transfer of the instrument.

Question 93

An order instrument may be negotiated by indorsement completed by delivery. Without indorsement, the negotiation is incomplete and the transferee does not become a holder. T or F.

Answer 93

True. Delivery must be intended to give effect to the transfer of the instrument.

Question 94

Other purposes of transfer

Answer 94

It could be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. (Sec. 16)

Question 95

Effect of transfer without indorsement

Answer 95

The transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made.

The instrument is in effect merely assigned to the transferee. It is only at the time of indorsement that the transferee acquires all the rights of a holder.

Question 96

How is indorsement made

Answer 96

It must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is sufficient indorsement. (Sec. 31)

Question 97

Rules on Indorsement

Answer 97

1. the attachment at the back shall not be one that can be easily detached (i.e. by paperclip)
2. a promissory note which states that the maker promises to pay a certain amount should be indorsed for the same amount (otherwise, it will be an assignment) - indorsement must be of entire instrument
3. negotiation to 2 or more indorsees severally is not allowed

Question 98

Kinds of Indorsement

Answer 98

(1) as to identification of person to whom the indorser intends to make the instrument payable
blank: no indorse is specified and it is done by affixing the indorser’s signature
special: designates the indorsee

(2) conversion of blank to special
(3) qualified
(4) conditional
(5) restrictive

Question 99

When is indorsement restrictive?

Answer 99

a. prohibits the further negotiation of the instrument
b. constitutes the indorsee the agent of the indorser
c. vests the title in the indorsee in trust for or to the use of some other persons

*the mere absence of words implying power to negotiate does not make an indorsement restrictive

Question 100

Effect of restrictive indorsement

Answer 100

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

Question 101

Value

Answer 101

Any consideration sufficient to support a simple contract

Question 102

Holder

Answer 102

The payee or indorsee of a bill or note who is in possession of it or the bearer thereof.

Question 103

Rights of holders in general

Answer 103

May sue thereon in his own name

Question 104

Requisites of holders in due course

Answer 104

(Sec 52)

1. the instrument 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

Question 105

Rights of holders in due course

Answer 105

Free from personal defenses. The person primarily or secondarily liable cannot refuse payment if his defense is only a personal defense.

Not free from real defenses.

Question 106

Shelter rule

Answer 106

Exception to the general rule on the rights of a holder in due course. Sec. 58

Question 107

Repurchase by prior party

Answer 107

Sec. 58

Question 108

Rights of a holder in bills in set

Answer 108

Bills in set - involve one bill although drawn in set

Sec. 179, 180, 181

Question 109

Difference between Bill of Exchange Act and American Uniform NIL

Answer 109

Bill of Exchange Act was the first law on negotiable instruments while American Uniform NIL was created to have uniformity on negotiable instruments laws.

Question 110

In what year was NIL created?

Answer 110

1911

Question 111

What law shall govern if the case does not fall under the NIL?

Answer 111

Law of merchant

Civil Code - suppletory

Question 112

NIL is no longer used as much because a lot of other options for payment are already available. T or F.

Answer 112

True.

Question 113

The assignee has the rights of the creditor. T or F.

Answer 113

True.

Question 114

Indorser is not liable unless there is notice. T or F.

Answer 114

True.

Question 115

Assignee has no liability. T or F.

Answer 115

False.

Question 116

A creditor can be compelled to accept a negotiable instrument. T or F.

Answer 116

False. They can only be credited when encashed.

Question 117

Effect of acceptance by drawee

Answer 117

1. proves existence of drawer
2. acceptor admits existence of x (payee) also and capacity to indorse payment
3. does not admit genuineness of signature of indorser or payee

Question 118

Bills of exchange can also be a promissory note at the option of the holder. T or F.

Answer 118

True.

Question 119

In which cases can a bill of exchange be a promissory note?

Answer 119

1. If the drawee is a fictitious person or is legally absent
2. There is nobody who can accept the bill of exchange
3. Payee can go directly after drawer
4. If drawee has no capacity to contract (minor, insane)
5. If drawer and drawee are the same person
6. Drawee can be a corporation or a person or a bank

Question 120

Kinds of indorser

Answer 120

1. General Indorser
2. Qualified Indorser
3. Irregular Indorser

Question 121

Indorsement

Answer 121

The writing of the name of the indorser on the instrument with the intent to transfer the title to the instrument or to strengthen the security.

Question 122

Steps a holder must do if he/she wants to negotiate the instrument to someone else

Answer 122

1. Write his/her name and sign at the back (indorsement)
2. Signature at the back shall be with the intent to transfer the title or serve as security of holder to assume contingent liability

Question 123

General Indorser

Answer 123

a. indorses instrument without qualification
b. secondarily liable to the holder or any subsequent indorser
c. warrants that all prior parties have capacity to contract
d. to admit validity and subsistence

Question 124

Irregular Indorser

Answer 124

Liable as general indorser in a blank signed instrument

Question 125

Person negotiating by indorsement v. person negotiating by delivery

Answer 125

Person negotiating by delivery

• has no secondary liability
• liable for breach of warranty only
• liable only to his immediate parties

Question 126

Agents can also be liable unless the agent discloses the name of the principal and discloses that he only acts as an agent. T or F.

Answer 126

True.

Question 127

Accommodation party

Answer 127

a. must be a party to the instrument
b. does it gratuitously
c. signs only for the purpose of lending his name and credit accommodation (lends his name and credit to another or the accommodated person)

Question 128

Things that do not affect negotiability

Answer 128

a. acceptance
b. indorsement (EXCEPT promissory note payable to order of the maker, maker must indorse the note otherwise it is non-negotiable; restrictive indorsement prohibits further negotiation)
c. provision which authorizes the sale of collateral securities in case instrument is not paid on maturity date (ex: selling of ring - valid but does not affect negotiability of instrument)

d. provision which authorizes confession of judgment if not paid at maturity
- confession of debt or liability
- eliminates need for trial
- confession for judgment is void
- if after mafile ng case, valid

e. provision that waives the benefits and security of debtor
f. provision that gives the holder an election or option to require an act to be done in lieu of payment of money

g. omissions
- undated instrument (considered dated at the time of issuance)
- ante-dated instrument (unless fraudulent)
- in case the instrument says, 30 days from date pero walang date – any holder may insert the true date and the insertion of a wrong date will only be void to the party who made the wrong date. a subsequent holder can make it valid
- omission to specify that value was given; no specific value was put in the instrument
- consideration is presumed
- in case the instrument does not specify place where it is drawn or payable (sec. 73)
- if no place is specified but the address of the payee is there, instrument can be paid there. if wala, place of business of person who will make payment (maker or drawer) or wherever the person bound to pay is found
- if it bears a seal or none
- designation of a particular kind of currency in which payment is to be made

h. acceleration of payment unless acceleration clause is at the option of the holder; also not affected by provision of exchange (applicable to foreign bills - exchange rate) kasi certain padin yun
i. statement saying by cost of attorney’s fees, etc. because the increase in amount will only take place after maturity of instrument

Question 129

Condition

Answer 129

Future and uncertain event

Question 130

There is acknowledgement, authority, or request in the instrument. Does this make it negotiable?

Answer 130

No. It is not an unconditional promise or order.

Question 131

Does the instrument carry the general credit of the maker? Or of a particular fund?

Answer 131

General credit. If particular fund, it becomes conditional because it will depend on the sufficiency of such fund.

Question 132

An instrument’s negotiability is not affected by statement of transaction that gives rise to instrument. T or F.

Answer 132

True. It should only be used to identify or describe the transaction or contract - in accordance with a contract but not subject to a contract

Question 133

Why does subjecting an instrument to a contract affect its negotiability?

Answer 133

It becomes conditional and the said contract is not on the face of the instrument.

Question 134

Does acceleration of payment affect negotiability?

Answer 134

No. Certainty of sum is not affected by acceleration of payment unless acceleration clause is at the option of the holder; also not affected by provision of exchange (applicable to foreign bills - exchange rate) kasi certain padin yun.

Question 135

The right of the holder to enforce payment of a negotiable instrument may be defeated by the defenses that may be raised by the person primarily liable or persons secondarily liable. T or F.

Answer 135

True

Question 136

Kinds of defenses

Answer 136

a. Real
- may be raised against all holders even against a holder in due course
- those wherein the facts disclose an absence of one or more of the essential elements of a contract, or where the admitted contract is vitiated for all purposes for reasons of public policy

b. Personal
- equitable defense
- may be raised only against holders who are not holders in due course
- those wherein the facts present a true contract but where, for various reasons, such as fraud, duress, mistake, prior breach of contract by the holder, discharge before maturity, and the like, the defendant is excused from his obligation to perform.

Question 137

Equities of ownership v. Defenses for negotiable instruments

Answer 137

Equities of ownership are raised by persons who may have legal claim over the instrument.

One is invoked to claim the instrument and the other to resist a claim for payment.

Question 138

The person from whom a bearer instrument was stolen may claim the instrument from a holder who is not in due course. T or F.

Answer 138

True. Because of his equity of ownership. He may also resist the claim of a holder not in due course by raising the defense of non-delivery.

Question 139

Real defenses

Answer 139

1. Minority (available only to the minor)
2. Forgery
3. Non-delivery of Incomplete Instrument
4. Material Alteration
5. Ultra Vires act of Corporation
6. Fraud in Factum or Esse Contractus
7. Illegality - if declared void for any purpose
8. Vicious Force or Violence
9. Want of authority
10. Prescription
11. Discharge in Insolvency

Question 140

Personal defenses

Answer 140

1. Failure or Absence of Consideration
2. Illegal
   consideration
3. Non-delivery of complete instrument
4. Conditional delivery of complete instrument
5. Fraud in inducement
6. Filling up blank not within authority
7. Duress or intimidation
8. Filling up blank beyond reasonable time
9. Transfer in breach of faith
10. Mistake
11. Insertion of wrong date
12. Ante-dating or post-dating for illegal or fraudulent purpose

Question 141

Section 22 of NIL

Answer 141

Negotiation by a minor passes title to the instrument.

Question 142

If the minor negotiates the instrument to other capacitated persons, the latter can raise the defense of minority. T or F.

Answer 142

False

Question 143

X makes a promissory note for P500 payable to the order of A, a minor, to help him buy school books. A indorses the note to B who, in turn, indorses the note to C. C knows A’s minorit. If C sues X on the note, can X set up the defenses of minority and lack of consideration?

Answer 143

X cannot set up the defense of minority of A. Although minority is a real defense, such defense is personal to the minor and cannot be invoked by other parties. This is specially true in the case of X, the maker, who warrants that the payee has capacity to contract. X is therefore barred from claiming that the payee is a minor because of his warranties.

Question 144

The rule regarding minors provided for in Section22 of the NIL also applies to corporations. T or F.

Answer 144

True. A corporation may raise want of authority as a real defense but the negotiation of the corporation may pass title to the instrument.

The corporation may claim that the act is an ultra vires act of the corporation and may raise this defense even against a holder in due course.

Question 145

Ultra vires act

Answer 145

One committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the power conferred upon it by law.

Question 146

Is ultra vires illegal?

Answer 146

No. It is merely voidable which may ne enforced by performance, ratification, or estoppel. An illegal act is void and cannot be validated.

Question 147

Is the issuance of checks by an officer of a corporation considered an ultra vires act if the same was done for the purpose of securing a loan to finance the activities of the corporation?

Answer 147

No.

Question 148

Ernestina Crisologo-Jose v. Court of Appeals

Answer 148

p. 213

Question 149

Sec. 15

Answer 149

Non-delivery and conditional delivery

Incomplete instrument not delivered. 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.

Question 150

The amount to be paid is missing in a negotiable promissory note signed by Mr. M, the maker. Suppose Mr. M did not deliver the incomplete instrument to Mr. P or any other person and kept the instrument in his drawer. Mr. P, without the knowledge and consent of Mr. M took the instrument and inserted the amount of P2,000 and negotiated the same to Mr. A who is a holder in due course. If Mr. A will try to collect from Mr. M on the maturity date of the instrument, can Mr. M refuse to pay?

Answer 150

Yes, on the ground that the incomplete instrument was not delivered and completed without authority.

It does not matter if Mr. A is a holder in due course or not because Sec. 15 provides that it is not a valid contract in the hands of any holder. The defense involved is a real defense, which defense is available against any holder, whether a holder in due course or not.

Question 151

Sec. 16

Answer 151

Undelivered and delivered complete instruments

Delivery; when effectual; when presumed. Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved.

Question 152

Rules in section 16

Answer 152

1. A negotiable instrument must be delivered. If the instrument has not been delivered, the contract concerning the instrument is incomplete and revocable. Thus, there must be delivery whenever the instrument is issued or negotiated.
2. Delivery must be either by or under the authority of the party making, drawing, accepting or indorsing the instrument.
3. If the instrument is no longer in the hands of the maker or the drawer, he is presumed to have already delivered the instrument to another (payee) for the purpose of issuing the same. If the instrument is no longer in the hands of the indorser, he is presumed to have delivered the same to the indorsee for purposes of transferring title.
4. As between immediate parties and remote parties who are not holders in due course, the delivery of a complete instrument may be established to be conditional or for a special purpose and not for the purpose of transferring title.
5. As between immediate parties and remote parties who are not holders in due course, it may be established that there was no delivery at all of the complete instrument.
6. As to holders in due course, it cannot be established that there was no delivery. Delivery is conclusive as to the holder in due course if he is in possession of a complete instrument.
7. As to holders in due course, it cannot be established that the delivery was conditional or for a special purpose. As to him, delivery is conclusively presumed to be unconditional and for the purpose of transferring title without any reservation or condition.

Question 153

Delivery (under sections 15 and 16)

Answer 153

Transfer of possession of the negotiable instrument by one person to another with the intention to transfer title to the instrument. This is involved in the issuance of the instrument, negotiation of the instrument and in other forms of transfer.

Question 154

Who are authorized to deliver?

Answer 154

a. maker
b. drawer
c. indorser
d. authorized agent or representative

Question 155

If the instrument is no longer in the hands of the maker or the drawer, he is presumed to have already delivered the instrument to another (payee) for the purpose of issuing the same. T or F.

Answer 155

True.

Likewise, if the instrument is no longer in the hands of the indorser, he is presumed to have delivered the same to the indorsee for purposes of transferring title.

Question 156

Mr. M, the maker, made an instrument that is payable to the order of Mr. P. If the negotiable instrument is now with Mr. P but we do not know if Mr. M actually delivered the instrument to Mr. P, shall delivery be presumed?

Answer 156

Yes. Anybody who claims that there was no delivery must establish that there was no such delivery. If there is no proof that there was no delivery, the presumption stands.

Question 157

Immediate party (sec. 16)

Answer 157

Persons who are familiar with the circumstances regarding the transfer. (won the holder who is trying to collect based on the negotiable instrument is a holder in due course or not)

Question 158

Payee delivered a bearer instrument to Mr. C for safekeeping. Instead of keeping the instrument, Mr. C delivered the instrument to Mr. D. Mr. D is the present holder who is aware that Mr. C obtained the instrument from the payee only for safekeeping. Who is the immediate party?

Answer 158

Mr. D

Question 159

Jose makes a note payable to bearer with the amount blank and delivers it to Karen for safekeeping. Mariana fills up the note for P20,000 and negotiates it to Adriano. Can Jose dishonor the note and refuse payment to Adriano on the ground that the note was incomplete and was originally delivered to Karen for safekeeping only and not for negotiating?

Answer 159

Yes, Jose can dishonor the note. Jose can invoke the defense of non-delivery of an incomplete instrument. Although Jose delivered the instrument to Karen for safekeeping, it is not clear how Marina obtained the instrument. When 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 (sec. 15). It does not matter if Adriano is a holder in due course because the defense involved is a real defense.

Question 160

Jose Reyes signed a blank check, and in his haste to attend a party, left the check on the top of his executive desk in his office. Later, Nazareno forced open the door to Reyes’ office, and stole the blank check. Nazareno immediately filled in the amount of P50,000 and a fictitious name as payee on the said check. Nazareno then endorsed the check in the payee’s name and passed it to Roldan. Thereafter, Roldan endorsed the check to Dantes.

a. Can Dantes enforce the check against Jose Reyes? Explain.
b. If Dantes is a holder in due course, will your answer to question A be the same? Explain.

Answer 160

a. Dantes cannot enforce the instrument against Jose Reyes. Jose Reyes can raise the defense that the incomplete instrument was not delivered since the check was only stolen and filled up by Nazareno.
b. Answer will be the same even if Dantes is a holder in due course. If an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority be a valid contract against any holder, even a holder in due course.

Question 161

A signed a blank check, which he inadvertently left on his desk at his Escolta office. The same was later stolen by B, who filled in the amount of P22,300 and a fictitious name as payee. B then endorsed the check in the payee’s name and passed the check to C; thereafter passed it to D; then D to E, and E to F.

a. Can F enforce the instrument against A? Explain.
b. Suppose that F is a holder in due course, what will be your answer? Explain.
c. Can F enforce the instrument against B?
d. Against C? Give reasons.

Answer 161

a. No, F cannot enforce the instrument against A. The instrument was not an incomplete instrument and was not delivered by A. It was likewise not completed with authority of A. Hence, it is not a valid contract in the hands of any holder.
b. Answer is still no even if F is a holder in due course. Non-delivery of an incomplete instrument is a real defense that can be raised even against a holder in due course.
c. Yes, F can enforce the instrument against B. His wrongdoing prevented the recovery from the maker; a wrongdoer should always be made liable for any damage that was proximately caused thereby. Moreover, when the thief indorsed the instrument in an assumed (fictitious) name, he warranted that the instrument is in all respects what it purports to be and that he has good title to it. Therefore, he is liable for breach of warranty.
d. F may enforce the instrument against C if the latter indorsed the instrument provided that the proper proceedings for dishonor are duly taken and F obtained his titile through the indorsement of C. An indorser is liable for breach of his warranties.

Question 162

Sec. 14

Answer 162

Filling up blanks beyond authority

Blanks; when may be filled. Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authourity given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time.

Question 163

Sec. 14 vs. 15 vs. 16

Answer 163

Sec 14: incomplete but delivered

Sec. 15: incomplete and undelivered

Sec. 16: complete but undelivered

Question 164

Who can raise the defense in section 14?

Answer 164

The defense available to parties primarily liable against the holders is classified as a personal defense whoch is abailable against a holder who is not a holder in due course.

Question 165

Rules in section 14

Answer 165

1. A person in possession of an instrument that is wanting in a material particular has prima facie authority to complete it by filling up the blanks therein strictly in accordance with the authority given and within a reasonable time.
2. If a person delivers a blank paper to another person containing his signature for the purpose of converting it into a negotiable instrument, the person to whom the instrument is delivered has prima facie authority to fill it up for any amount.
3. If the holder of the instrument, after it was filled up, is a holder in due course, the holder may enforce the instrument as if it has been filled up strictly in accordance with the authority given and within a reasonable time.

Question 166

A material particular is limited to the matters mentioned as requisites under Section 1. T or F.

Answer 166

False. It may include any important detail thst affects the tenor of the instrument or the rights of the parties. It includes the matters mentioned in section 125 of the NIL which states that material alteration includes changes in:

a. That date
b. The sume payable; either for principal or interest;
c. The time and place of payment;
d. The member or the relations of the parties;
e. the medium or currency in which payment is to be made
f. or which adds a place of payment where no place of payment is specified, or any other changes or addition which alters the effect of the instrument in any respect, is a material alteration

Question 167

If the maker or drawer delivers an instrument to the payee although it is wanting in material particular, the payee is deemed to have prima facie authority to fill it up. T or F.

Answer 167

True.

Question 168

If a holder placed P1,000, it is up to the maker or drawer to prove against a holder not in due course that there was no such authority to insert any amount or even if there was such an authority, the amount that should have been inserted is less (for example, only P500). If there is proof that the authority is to insert the amount of P500 instead of P1,000, can the holder recover the P500?

Answer 168

No.

If the holder is a holder in due course, it is conclusive that the authority to fill it up had been given and that the same was not done in excess of authority. Filling up blanks not in accordance with the authority given is only a personal defense.

Question 169

If Mr. M signs his name on a blank paper and delivers the said blank paper to Mr. P for the purpose of providing Mr. P a specimen of signature. Mr. M will not be liable to Mr. P if Mr. P converted the said blank paper into a negotiable instrument. T or F.

Answer 169

True.

However, if Mr. P negotiated the instrument to Mr. A who in turn negotiated the instrument to Mr. B, the present holder who is not a holder in due course. In such a situation, the purported maker is also not liable to Mr. B because there was no authority to convert the paper into a negotiable instrument.

Question 170

Mr. M delivered a blank piece of paper containing his signature to Mr. P but only for the purpose of providing Mr. P of his specimen signature. Mr. P thereafter converted the blank piece of paper into a negotiable promissory note payable to his order and indorsed the same instrument to Mr. A and Mr. A to Mr. B who is a holder in due course. Can Mr. B still recover from the purported maker?

Answer 170

Yes, as per Sec. 14.

Alternative answer: No. There was no intention on the part of the said maker to issue a promissory note. Mr. M was therefore the victim of fraud and fraud was in the nature of fraud in factum. Fraud in factum is a real defense which is available even against a holder in due course.

Question 171

Larry issued a negotiable promissory note to Evelyn and authorized the latter to fill up the amount in blank with his loan account in the sum of P1,000. However, Evelyn inserted P5,000 in violation of the instruction. She negotiated the note to Julie who had knowledge of the infirmity. Julie in turn negotiated said note to Devi for value and who had no knowledge of the infirmity.

Can Devi enforce the note against Larry and if she can, for how much? Explain.

Answer 171

Yes, Devi can enforce the negotiable promissory note against Larry. The defense of Larry is a mere personal defense under Section 14 of the NIL. The law provides that if an instrument is wanting in any material particular is completed beyond the authority that was given, it is valid and effectual for all purposes in the hands of a holder in due course and he may enforce it as if it had been filled up strictly in accordance with the authority given. Thus, Devi can enforce the instrument against Larry for P5,000.

Question 172

A single proprietor of a business concern, is about to leave for a business trip and, as he often does on these occasions, signs several checks in blank. He instructs B, his secretary, to safekeep the checks and fill them out when and as required to pay accounts during his absence. B fills out one of the checks by placing her name as payee, fills in the amount and endorses and delivers the check to C who accepts it in good faith as payment for goods sold to B. B regrets her action and tells A what she did. A directs the bank in time to dishonor the check. When C encashes the check, it is dishonored. Can A be held liable to C?

Answer 172

Yes, provided that the appropriate proceeding for dishonor was duly taken.

p. 226

Question 173

Types of fraud

Answer 173

a. fraud in inducement
- the person who signs the instrument intends to sign the same as a negotiable instrument but was induced to do so only through fraud; his consent to issue was vitiated
- personal defense

b. fraud in execution (fraud in factum or fraud in esse
contractus)
- present when a person is induced to sign an instrument not knowing its character as a note or a bill. The person who signs instrument does not know that he is signing a negotiable instrument
- real defense

Question 174

Fraud in factum is also present where the maker was made to sign a negotiable note upon the seller’s representation that it was a credit application. T or F.

Answer 174

True

Question 175

An accommodation party was illiterate. The nature of the transaction was not explained to him and there was misrepresentation that his signature is needed only as a character witness. What type of fraud?

Answer 175

Fraud in factum.

Question 176

If fraud is committed in the performance of a collateral obligation, what is the nature of the fraud?

Answer 176

Fraud in inducement

Question 177

Factors to be considered in determining the presence of reasonable opportunity

Answer 177

1. age and sex of obligor
2. his intelligence, education, and business experience
3. his ability to read and understand the language used
4. the representations made to him and his reason to rely on them or to have confidence in the person making them
5. the presence or absence of any third person who might read or explain the instrument to him, or any other information
6. the apparent necessity or lack of it for acting without delay

Question 178

A induces B by fraud to make a promissory note payable on demand to the order of A in the sum of P5,000,000.

a. Can A file an action successfully against the maker B for the amount of the note? Reasons.
b. Going further, A transfers the note to C who pays P5,000 therefor and acquires the note under circumstances that make him a holder in due course. Can C file an action successfully against B, the maker of the note, for the amount of the note? Explain.

Answer 178

a. No, B may raise the defense of fraud in inducement against A who is not a holder in due course. This is specially true in this case where A was the one who fraudulently induced B to issue the note.
b. Yes, C can file an action successfully against B. C is presumed to be a holder in due course. Hence, in the absence of proof that he is not, he is a holder in due course who is free from personal defenses including fraud in inducement.

Question 179

Sec. 124

Answer 179

Effect of alteration of instrument.
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.

Question 180

What constitutes a material alteration

Answer 180

Sec. 125

Any alteration which changes

a. the date
b. the sum payable, either for principal or interest
c. the time or place of payment
d. the number or the relations of the parties
e. the medium or currency in which payment is to be made
f. 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

Question 181

If the serial numbers were altered, is there material alteration?

Answer 181

No.

Question 182

Effect of alteration on payee who is a holder in due course

Answer 182

The collecting bank cannot debit the account of a payee who is a holder in due course if the collecting bank returned the amount of the altered check to the drawee bank. It is the drawee bank that should bear the loss and if the collecting bank reimbursed the drawee bank the amount of the altered check, the collecting bank would only be considered as acting on its own and should be responsible for its own action. The payee who is a holder in due course should not be made to suffer any loss.

p. 232

Question 183

Mario de Guzman issued to Honesto Santos a check for P50,000 as payment for the second-hand car. Without the knowledge of Mario, Honesto changed the amount to P150,000 which alteration could not be detected by the naked eye. Honesto deposited the altered check with Shure Bank which forwarded the same to Progressive Bank for payment. Progressive Bank without noticing the alteration paid the check, debiting P150,000 from the account of Mario. Honesto withdrew the amount of P150,000 from Shure Bank and disappeared. After receiving his bank statement, Mario discovered the alteration and demanded restitution from progressive Bank.

Discuss fully the rights and liabilities of the parties concerned.

Answer 183

Progressive Bank, the drawee, should comply with the demand of Mario for restitution of the amount of P150,000 to his account. PB has no right to deduct such amount from Mario’s account. The order of Mario is to pay P50,000 and material alteration avoids the instrument (sec. 124). PB is also responsible for the negligence of its employees in not noticing the alteration.

As between PB and Shure Bank, the latter is liable provided no negligence can be ascribed to PB. As a collecting bank, SB warrants the genuineness of the check and that the check is in all respects what it purports to be.

Question 184

In consideration of some goods he bought, A issued to B a personal check in the amount of P280. Without the knowledge of A, B raised the amount of P2,800. B then deposited the altered check in his account with the PNB, which released it for clearing. The Bank of PI which is the drawee bank did not notice the alteration and the check was therefore cleared.

B was able to withdraw the P2,800. After which he closed his account. When A received his bank statement and cancelled checks for that month, he noticed the discrepancy in the amount when he compared the altered check with his check stub. He immediately noticed then in turn demanded recredit from the BPI, which cannot locate B now.

Discuss the right and liabilities of the parties under the circumstances.

Answer 184

BPI should recredit the account of A. BPI can collect whatever amount that it returned to A from the collecting bank, PNB. The alteration is covered by the warranties of the collecting bank. If the clearing was done through the PCHC, the drawee can file a claim against the collecting bank within the period prescribed by law.

Whatever amount that may be paid by the collecting bank can be recovered from B.

Question 185

The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided that this is not done for an illegal or fraudulent purpose. T or F.

Answer 185

True. Sec. 12

If the post-dating or ante-dating is for an illegal or fraudulent purpose, a personal defense is available against the holder.

p. 244

Question 186

Insertion of a wrong date is not a personal defense. T or F.

Answer 186

False. It may be a personal defense. Sec. 13

Question 187

On Feb. 10, 2003, A issued an instrument payable to the order of B within 10 months after date. The instrument provides for payment of interest from the date of issuance. If B inserted October 10, 2002 in order to gain more interest and thereafter negotiated the same to C, is the instrument avoided?

Answer 187

Yes as to C if he is aware of the fraudulent insertion of a wrong date by B. If C is a holder in due course, the instrument is not avoided and as to him, October 10, 2002 is the true date.

Question 188

Absence or failure of consideration is a matter of defense as against any person not a holder in due course. Partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise. Hence, the personal defense of failure of consideration is present if the seller who received the the negotiable instrument because of his promise to deliver goods, failed to comply with such promise.

Answer 188

ok. p. 245

Question 189

NM issued 2 post-dated checks to CV, as security for pieces of jewelry to be sold. Each check has a face value of P50,000. Thereafter, CV negotiated the check to SH Inc. without the knowledge of NM. NM returned the jewelries to CV and tried to retrieve the checks. Having failed to do so, NM withdrew her funds from the drawee bank and the checks were consequently dishonored when presented for payment. SIH sued NM who interposed the defense that the checks do not have any consideration. However, NM did not present proof that SIH is not a holder in due course. Will the defense of absence of consideration prosper against SIH?

Answer 189

NM cannot invoke the defense of absence of consideration against SIH. There is no showing that SIH is not a holder in due course, hence, the presumption on due course holding stands. As a holder in due course, SIH is free from personal defenses of prior parties.

Question 190

On March 1, 1996, Pentium Company ordered a computer from CD Bytes and issued a crossed check in the amount of P30,000 post-dated March 31, 1996. Upon receipt of the check, CD Bytes discounted the check with Fund House.

On April 1, 1996, Pentium stopped payment of the check for failure of CD Bytes to deliver the computer, thus, when Fund House deposited the check, the drawee bank dishonored it.

If Fund House files a complaint against Pentium and CD Bytes for the payment of the dishonored check, will the complaint prosper? Explain.

Answer 190

Yes but only against CD Bytes but not against Pentium Company. Fund House is not a holder in due course because it took crossed checks that were meant for Pentium. A person who takes crossed checks is deemed warned of the purpose of the checks and he is bound to inquire from the original parties regarding the circumstances with respect to its issuance. Had it inquired from the parties, it would have discovered that there was non-delivery of the computer. Consequently, such non-delivery or failure of consideration can be raised as a defense by Pentium against Fund House.

The complaint against CD Bytes will prosper because Fund House can enforce its contract. An immediate party is liable to his contracting party.

Question 191

Duress and/or intimidation exerted against a person gives the latter a personal defense. T or F.

Answer 191

True.

Question 192

Duress

Answer 192

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 that quality of mind essential to making of a contract.

Question 193

Duress is relative. T or F.

Answer 193

True.

Question 194

When is duress considered a real defense?

Answer 194

If it is vicious or if it is what is referred to as duress amounting to forgery.

Question 195

What kind of defense is illegality of transaction that gave rise to a particular transaction?

Answer 195

Personal defense. p 250

Question 196

What kind of defense is prescription?

Answer 196

Real defense. p. 250

Question 197

Forgery of a signature and the placing of a signature in behalf of another without authority are ____ defenses.

Answer 197

Real

Question 198

Effect of forged signature

Answer 198

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.

Sec. 23
p. 252

Question 199

Xpn to general rule under Sec. 23

Answer 199

Where a party against whom it is sought to enforce a right is precluded from setting up the forgery or want of authority. These persons are precluded from setting up forgery:

a. parties who warrant or admit the genuineness of the signature in question; and
b. those who, by their acts, silence or negligence are estopped from setting up the defense of forgery. These include acts or omission that amount to ratification, express or implied.

Question 200

Indorsers, persons negotiating by delivery and acceptors are warrantors of the genuineness of certain signature on the instrument. Hence, they are percluded from setting up the defense of forgery in certain cases. T or F.

Answer 200

True.

Question 201

A drawer who can otherwise recover from the drawee may be barred from doing so because of its negligence or may have to suffer reduction of the amount because of his (drawer’s) negligence. T or F.

Answer 201

True. p. 254

Question 202

Is the drawee barred from raising the defense of forgery of endorsement against the collecting bank if it did not comply with the rules or agreement on the return of checks?

Answer 202

Yes. p. 256

Question 203

Ratification by the party whose signature was forged precludes the said party from raising the defense. T or F.

Answer 203

True.