negotin bar exam questions.docx

5/25/2018 negotin bar exam questions.docx

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indorsed it in blank, for consideration, to Pablo Reyes, who, in turn, sold it forP800.00, by delivery to Antonio Gomez. The canned goods were never forwarded toFlores. Gomez presented the check to the bank, but payment was refused becauseReyes had not put his name on it. Is the bank right in so refusing? Why? If Gomezgave due notice to Veraz and Co., may he recover from the latter? May Gomezrecover from Santos? Why? May he recover from Reyes? Why? [1968 BarExamination].

15. Eva issued to Imelda a check in the amount of P50,000.00 post-dated September

19, as security for a diamond ring to be sold on commission. On September 15,Imelda negotiated the check to MT Investment which paid the amount of P40,000.00to her. Eva failed to sell the ring, so she returned it to Imelda on September 19.Unable to retrieve her check, Eva withdrew her funds from the drawee bank. Thus,when MT Investment presented the check for payment, the drawee bank dishonoredit. Later on, when MT Investment sued her, Eva raised the defense of absence ofconsideration, the check having been issued merely as security for the ring that shecould not sell. Does Eva have a valid defense? Explain [1996, Bar Examination].

16. A and B executed and delivered to C a promissory note which reads: I promise topay C or bearer the sum of P2,000.00 with interest at 12% per annum on or beforeJune 30, 1960. Manila, February 1, 1969. SGD A and B. Two months later, for valuereceived, C delivered to D the aforesaid note with the indorsement: Pay to D; and onApril 15, 1969, the said note was indorsed in blank by D and delivered to X, without

consideration. Upon As refusal to pay despite demand, X filed an action to collectfrom A the total amount of the promissory note, with 12% interest per annum fromFebruary 1, 1969, and the costs. As defenses are that the note is null and voidbecause the same was issued to pay a gambling debt and that in any event, hisliability cannot exceed more than one-half of the amount due. Are As defenses valid?Is X entitled to the whole amount of the note? Explain. [1969 Bar Examination].

17. For the purpose of lending his name without receiving value therefor, Pedromakes a note for P20,000.00 payable to the order of X who in turn negotiates it to Y,the latter knowing that Pedro is not a party for value. May Y recover from Pedro if thelatter imterposes absence of consideration? Supposing under the same facts, Pedropays the said P20,000.00, may he recover the same amount from X? Explain [1998Bar Examination].

18. Nora applied for a loan of P100,000.00 with BUR Bank. By way ofaccommodation, Noras sister, Vilma, executed a promissory note in favor of BURBank. When Nora defaulted, BUR Bank sued Vilma, despite its knowledge that Vilmareceived no part of the loan. May Vilma be held liable? Explain [1996 BarExamination].

19. Santos purchased Veras car for P50,000.00. Not having enough cash on hand,Santos offered to pay in check. Vera refused to accept the check unless it is indorsedby Reyes, their mutual friend. Reyes indorsed Santos check and Vera, knowing thatReyes had not received any value for indorsing the check, accepted it. The next day,Vera presented the check to the drawee bank for payment. Payment was refused forlack of funds. Vera gave notice of dishonor to Reyes, but Reyes refused to pay,saying that he indorsed merely as a friend. Is Reyes liable to Vera? In the event

Reyes voluntarily pays Vera, does Reyes have the right to recover from Santos?Explain [1985 Bar Examination].

D. INCOMPLETE DELIVERED INSTRUMENT

20. Larry issued a negotiable promissory note to Evelyn and authorized the latter to fillup the amount in blank with his loan account in the sum of P1,000.00. However,Evelyn inserted P5,000.00 in violation of the instruction. She negotiated the note toJulie who had knowledge of the infirmity. Julie, in turn, negotiated said note to Devi forvalue and who had no knowledge of the infirmity. Can Devi enforce the note against

Larry, and if she can, for how much? Supposing Devi indorses the note to Baby forvalue but who has knowledge of the infirmity, can the latter enforce the note againstLarry? Explain [1993 Bar Examination].21. Maria issued a negotiable promissory note and authorized Pilar to fill-up theamount in blank up to P2,000.00. However, Pilar filled it up to P4,000.00 andnegotiated the note to Pepe. For what amounts are Maria and Pilar liable to Pepe?Explain [1972 Bar Examinations].

E. INCOMPLETE UNDELIVERED INSTRUMENT

22. PN makes a promissory note for P5,000.00, but leaves the name of the payee inblank because he wanted to verify its correct spelling first. He mindlessly left the noteon top of his desk at the end of the workday. When he returned the following morning,

the note was missing. It turned up later when X presented it to PN for payment.Before X, T, who turned out to have filched the note from PNs office, had endorsedthe note after inserting his own name in the blank space as the payee. PN dishonoredthe note, contending that he did not authorize its completion and delivery. But X saidhe had no participation in, or knowledge about, the pilferage and alteration of the noteand therefore he enjoys the rights of a holder in due course under the NegotiableInstruments Law. Who is correct and why? [2000 Bar Examination].

23. Jose makes a negotiable note payable to bearer with the amount in blank anddelivers it to Karen for safekeeping. Marina fills up the note for P20,000.00 andnegotiates it to Adriano, a holder in due course. If you were Jose and Adrianopresented to you the note for payment, what defense or defenses are you going tointerpose to negate liability on the instrument? Explain [1981 Bar Examinations].

24. A entrusted to B, his secretary, a blank check drawn on X bank, signed by him,with instructions to fill up the check in favor of D for the amount of P1,000.00 and tothereafter deliver the said check to D. In breach of trust, B filled up the check bywriting the name of E, and the amount of P2,000.00 on the check and delivered thesame to E, who accepted it in payment of certain goods sold by E to B. Before Ecould encash the check, A learned of the misdeed of B and issued a stop-paymentorder to X bank as a result of which X bank refused to honor the check presented to itby E. Can E now hold X bank and A liable? Reason [1971 Bar Examinations].

25. Jose Reyes signed a blank check, and in his hasted to attend a party, left thecheck on top of his executive desk in his office. Later, Nazareno forced the door toReyes office and stole the blank check. Nazareno immediately filled in the amount ofP50,000.00 and a fictitious name as payee on the said check. Nazareno thenendorsed the check in the payees name and passed it to Roldan. Thereafter, Roldan

endorsed the check to Dantes. Can Dantes enforce the check against Jose Reyes? IfDantes is a holder in due course, will your answer be the same? [1985 Bar


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Examinations].

26. A signed a blank check which he inadvertently left at his desk at his EscoltaOffice. The same was later stolen by B, who filled in the amount of P22,300.00 and afictitious name as payee. B then endorsed the check in the payees name and passedthe check to C; thereafter C passed it to D; then D to E; and E to F. Can F enforce theinstrument against A? Suppose that F is a holder in due course, what will be youranswer? Can F enforce the instrument against B? Against C. Give reasons [1978 BarExaminations].

F. FORGERY

27. A delivers a bearer instrument to B. B then specially indorses it to C, and C laterindorses it in blank to D. E steals the instrument from D and, forging the signature ofD, succeeds in negotiating it toF who acquires the instrument in good faith and forvalue. If, for any reason, the drawee bank refuses to honor the check, can F enforcethe instrument against the drawer? In case of the dishonor of the check by both thedrawee and the drawer, can F hold any of B, C and D l iable secondarily on theinstrument? [1997 Bar Examinations].

28. Juan makes a promissory note payable to his order, signing Pedros namethereon as maker without Pedros knowledge and consent. Juan then indorses the

note to Jose, who, in turn, indorses it to Carlos under circumstances which makeCarlos a holder in due course. May Carlos enforce the note against Pedro? And if thenote is dishonored by Pedro, may Carlos hold Juan and Jose liable on theirrespective indorsements? Reason out your answers [1989 Bar Examinations].

29. Juan makes a promissory note payable to the order of Pedro, who indorses it toJose. Somehow, Roberto obtains possession of the note and, forging the signature ofJose, indorses it to Amado. Amado then indorses the note to Nilo, the holder. Statethe rights and liabilities of the parties [1984 Bar Examinations].30. A makes a negotiable promissory note payable to B or bearer. A delivers the noteto B. B indorses the note to C. C places the note in his wallet, which was stolen by X,who, finding the note, indorses it to D by forcing Cs signature. D indorses the note toE, who in turn, delivers the note to F, a holder in due course, without indorsement.

What are the liabilities of A, B and C to F. Explain briefly [1981 Bar Examinations].

31. Juan de la Cruz signs a promissory note payable to Pedro Lim or bearer, anddelivers it personally to Pedro Lim. The latter somehow misplaces the said note andCarlos Ros finds the note lying around the corridor of the building. Carlos Rosendorses the promissory note to Juana Bond, for value, by forging the signature ofPedro Lim. May Juana Bond hold Juan de la Cruz liable on the note? Explain [1980Bar Examinations].

32. Fernando forged the name of Daniel, manager of a Trading Company, as thedrawer of a check. The Bank of Philippine Islands, the drawee bank, did not detectthe forgery and paid the amount. May the bank charge the amount paid against theaccount of the alleged drawer? Explain [1977 Bar Examinations].

G. FRAUD

33. A succeeded in making B affix his signature on a check without Bs knowing that itwas a check. At the time of signing, the check was complete in all respects. Aintended to cash the check the following morning, but that night, it was stolen by Cwho succeeded in negotiating the same to D, a holder in due course. D cashed thecheck the following morning. B refused to have the amount of the check deductedfrom his bank deposit. Who may properly be charged with the amount of the check?Explain your answer [1961 Bar Examinations].

34. A induces B by fraud to make a promissory note payable on demand to the orderof A in the sum of P5,000.00. Can A file an action successfully against the maker Bfor the amount of the note? Reasons. Going further, A transfers the note to C whopays P5,000.00 therefor and acquires the note under circumstances that make him(C) as holder in due course. Can C file an action successfully against B, the maker ofthe note, for the amount of the note? What defense/defenses can B interpose?Explain [1978 Bar Examinations].

H. MATERIAL ALTERATION

35. A check for P50,000.00 was drawn against drawee bank and made payable toXYZ Marketing or order. The check was deposited with payees account at ABC Bankwhich then sent the check for clearing to drawee bank. Drawee bank refused to honor

the check on the ground that the serial number thereof had been altered. XYZMarketing sued drawee bank. Is it proper for the drawee bank to dishonor the checkfor the reason that it had been altered? In instant suit, drawee bank contended thatXYZ Marketing as payee could not sue the drawee bank as there was no privitybetween them. Drawee theorized that there was no basis to make it liable for thecheck. Is this contention correct? Explain [1999 Bar Examinations].

36. William issued to Albert a check for P10,000.00 drawn on XM Bank. Albert alteredthe amount of the check to P210,000.00 and deposited the check to his account withND Bank. When ND Bank presented the check for payment through the ClearingHouse, XM Bank honored it. Thereafter, Albert withdrew the amount of P210,000.00and closed his account. When the check was returned to him after a month, Williamdiscovered the alteration. XM Bank recredited P210,000.00 to Will iams current

account and sought reimbursement from ND Bank. ND Bank refused, claiming thatXM Bank failed to return the altered check within the 24 hour clearing period. Who, asbetween XM Bank and ND Bank, should bear the loss? Explain [1996 BarExaminations].

37. In consideration of some goods he bought, A issued to B a personal check in theamount of P280.00 which B altered to P2,800.00 without the knowledge of A. Thealteration is not apparent to the naked eye. B then deposited the altered check in hisaccount with PNB, which released it for clearing. The BPI, the drawee bank, did notnotice the alteration and the check therefore cleared. B was able to withdraw theP2,800.00, after which, he closed his account. When A received his bank statementand cancelled checks, he noticed the discrepancy in the amount when he comparedthe altered check with his check stub. He immediately notified BPI and demanded arecredit. BPI, in turn, demanded recredit from PNB which cannot now locate B. Can A

compel BPI to recredit his account? If so, how much? Can PNB be compelled toreimburse BPI of the amount the latter may have recredit to the account of A? Explain


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[1986 Bar Examinations].

38. Pedro writes out a check for P1,000.00 in favor of Jose or order against hiscurrent account with the Bank of America. Juan steals the check, erases the name ofJose and superimposes his own name. Juan deposits the check at Citibank and afterclearing, Juan withdraws the amount and absconds. Upon discovery by Pedro of thematerial alteration, he lodged a complaint at the Bank of America, who debited theamount to Pedro. Bank of America demands reimbursement for Citibank whichrefuses on the ground that it only acted as an agent for collection. Who bears the

loss? Why? [1977 Bar Examinations].

39. Maria issued a negotiable promissory note and authorized Pilar to fill up theamount in blank up to P2,000.00 only. However, Pilar filled it up to P4,000.00 andnegotiated the note to Pepe. For what amount are Maria and Pilar liable to Pepe?Explain [1972 Bar Examinations].

40. A executed a bill of exchange for P500.00 in favor of B, who altered the amount toP5,000.00 and presented the bill to the drawee for acceptance. The drawee, notknowing of the alteration which was neatly done, accepted the bill. Thereafter, Nnegotiated the bill to C, who now seeks to hold the drawee liable for P5,000.00. Thedrawee contends that under the rule on alteration, he can only be liable up toP500.00. Is the drawees contention tenable? Can the drawee debit the amount of A,and if so, to what extent? Reasons [1971 Bar Examinations].

I. MINORITY

41. X makes a promissory note for P10,000.00 payable to A, a minor, to help him tobuy school books. A endorses the note to B for value, who in turn endorses the noteto C. C knows A is a minor. If C sues X on the note, can X set up the defenses ofminority and lack of consideration? Explain [1998 Bar Examinations].

42. X, without receiving consideration therefor, makes a promissory note for P500.00payable to A, a minor, to help him buy school books. A indorses the note to B, who, inturn, indorses the note to C. C knows As minority. If C presents the note to X forpayment, what are the possible defenses to be interposed by X? If C sues X on thenote, can X set up the defense of minority and lack of consideration? Explain [1989

Bar Examinations].

WARRANTIES/LIABILITIES

J. ACCEPTOR

43. X draws a check against his current account with Ortigas Branch of BonifacioBank in favor of B. Although X does not have sufficient funds, the bank honors thecheck when it was presented to payment. Apparently, X has conspired with the banksbookkeeper so that his ledger card would show that he still has sufficient funds. Thebank files an action for recovery of the amount paid to B because the checkpresented has no sufficient funds. Decide the case [1998 Bar Examinations].

K. NEGOTIATOR BY DELIVERY

44. Anna makes a promissory note payable to bearer and delivers it to Bing. In turn,Bing negotiates it by mere delivery to Carmen, who indorses it specially to Dong.Dong negotiates it by special indorsement to Emma, who negotiates it to Fe by meredelivery. Anna did not pay. To whom are Bing and Carmen liable? To whom are Dongand Emma liable? Explain [1988 Bar Examinations].

L. INDORSERS

45. Alex issued a negotiable promissory note (PN) payable to Benito or order inpayment of certain goods. Benito indorsed the PN to Celso in payment of an existingobligation. Later, Alex found the goods to be defective. While in Celsos possession,the PN was stolen by Dennis who forged Celsos signature and discounted it withEdgar, a money lender who did not make inquiries about the PN. Edgar indorsed thePN to Felix, a holder in due course. When Felix demanded payment of the PN fromAlex, the latter refused to pay. Dennis could no longer be located. What are the rightsof Felix, if any, against Alex, Benito, Celso and Edgar? Explain. Does Celso have anyright of action against Alex, Benito and Felix? Explain [1995 Bar Examinations].46. A drew a check for P1,000.00 on B, the Bank payable to the order of C anddelivered the check to the latter for value. C indorsed the check in blank andnegotiated it to D, who lost it. At Ds request, A ordered payment stopped by notifyingB. The stop payment order was overlooked and the check was paid to E, who had

taken the check, without actual knowledge of the loss, in payment of merchandisesold to a st ranger whom he thought owned the check. D now sues the bank. Decidethe case with brief reasons [1979 Bar Examinations].

INCIDENTS

M. NEGOTIATION

47. Richard Clinton makes a promissory note payable to bearer and deliverrs thesame to Autora Page. The latter, however, endorses it to X in this manner: Payableto X, Signed: Aurora Page. Later, X, without endorsing the promissory note, transfersand delivers the same to Napoleon. The note is subsequently dishonored by Richard

Clinton. May Napoleon proceed against Richard Clinton for the note? [1998 BarExaminations].

48. On November 3, as payment for goods received, A gave to B his check drawn onPNB, Manila. B thereafter negotiated the check to C. On November 10, C could notencash the check because the Bangko Sentral had forbidden PNB to do business ongrounds of insolvency. Can C hold A liable on the uncashed check? Can C hold Bliable instead on the uncashed check? Explain. If you were B, how would younegotiate the check to negate future liability thereon? Explain [1987 BarExaminations].

N. DISHONOR

49. When is notice of dishonor not required to be given to the drawer? [1996, BarExaminations].


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50. A issued a promissory note to B dated January 1, 2002, in the following tenor: Ipromise to pay to the order of B P1,000.00 sixty days after date. (Sgd.) A. The notewas subsequently negotiated with proper indorsement by B to C, C to D, and D to E,the holder. When E presented the note for payment to A, the latter refused to pay. Ethen gave a notice of dishonor to C only. May E immediately proceed against B, C orD? What should C do to protect his rights, if any, against A, B and D? Explain [1984Bar Examinations].

51. X draws a bill of exchange against Y in favor of W for P1,000.00, requesting thedrawee to pay on December 24, 1962. W indorses the instrument to P on September1 and on September 15 presents it for acceptance. The bill is dishonored. P promptlysues W for payment. Will the case prosper? Give reasons for your answer [1963 BarExaminations].

2005

(1.) What is a negotiable instrument? Give the characteristics of a negotiableinstrument. (2%)

(2.) Distinguish a negotiable document from a negotiable instrument. (2%)

(3.) State and explain whether the following are negotiable instruments under the

Negotiable Instruments Law:

(i) Postal Money Order;

(ii) A certificate of time deposit which states This is to certify that bearer hasdeposited in this bank the sum of FOUR THOUSAND PESOS (P4,000.00) only,repayable to the depositor 200 days after date.

(iii) Letters of credit;

(iv) Warehouse receipts;

(v) Treasury warrants payable from a specific fund. (5%)

- II -

(1.) Dagul has a business arrangement with Facundo. The latter would lend money toanother, through Dagul, whose name would appear in the promissory note as thelender. Dagul would then immediately indorse the note to Facundo.

Is Dagul an accommodation party? Explain. (2%)

(2.) a) What is a crossed check?

What are the effects of crossing a check? Explain.

b) Distinguish an irregular indorser from a general indorser. (3%)

(3.) Brad was in desperate need of money to pay his debt to Pete, a loan shark. Petethreatened to take Brads life if he failed to pay. Brad and Pete went to see SeoritaIsobel, Brads rich cousin, and asked her if she could sign a promissory note in hisfavor in the amount of P10,000.00 to pay Pete. Fearing that Pete would kill Brad,Seorita Isobel acceded to the request. She affixed her signature on a piece of paperwith the assurance of Brad that he will just fi ll it up later. Brad then fi lled up the blankpaper, making a promissory note for the amount of P100,000.00. He then indorsedand delivered the same to Pete, who accepted the note as payment of the debt.

What defense or defenses can Seorita Isobel set up against Pete? Explain. (3%)

2006

Discuss the legal consequences when a bank honors a forged check. 5%

Jun was about to leave for a business trip. As his usual practice, he signed severalblank checks. He instructed Ruth, his secretary, to fill them as payment for hisobligations. Ruth filled one check with her name as payee, placed P30,000.00thereon, endorsed and delivered it to Marie. She accepted the check in good faith aspayment for goods she delivered to Ruth. Eventually, Ruth regretted what she did andapologized to Jun. Immediately he directed the drawee bank to dishonor the check.When Marie encashed the check. it was dishonored.

1. Is Jun liable to Marie? 5%2. Supposing the check was stolen while in Ruth's possession and a thief filled

the blank check, endorsed and delibvered it to Marie in payment for thegoods he purchased from her, is Jun liable to Marie if the check isdishonored? 5%

2007

I.(10%)

R issued a check for P1M which he used to pay S for killing his political enemy.a. Can the check be considered a negotiable instrument?b. Does S. have a cause of action against R in case of dishonor by the drawee

bank?c. If S negotiated the check to T, who accepted it in good faith and for value,

may R be held secondarily liable by T?Reason briefly in (a), (b) and (c).

II.

(10%)


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Alex deposited goods for which Billy, warehouseman, issued a negotiable warehousereceipt wherein the goods were deliverable to Alex or order. Alex negotiated thereceipt to Caloy. Thereafter, Dario, a creditor secured judgment against Alex andserved notice of levy over the goods on the warehouseman.

a. To whom should the warehouseman deliver the goods upon demand?b. Would you answer be the same if the warehouseman issued a non-

negotiable warehouse receipt

2008

Tom Cruz obtained a loan of P 1 Million from XYZ Bank to finance his purchase of5,000 bags of fertilizer. He executed a trust receipt in favor of XYZ Bank over the5,000 bags of fertilizer. Tom Cruz withdrew the 5,000 bags from the warehouse to betransported to Lucena City where his store was located. On the way, armed robberstook from Tom Cruz the 5,000 bags of fertilizer. Tom Cruz now claims tha t hisobligation to pay the loan to XYZ Bank is extinguished because the loss was not dueto his fault. Is Tom Cruz correct? Explain. (4%)

IIIa. As a rule under the Negotiable Instruments Law, a subsequent party may

hold a prior party liable but not vice-versa. Give two (2) instances where aprior party may hold a subsequent party liable. (2%)

b. How does the "shelter principle" embodied in the Negotiable Instruments

Law operate to give the rights of a holder-in-due course to a holder whodoes not have the status of a holder-in-due course? Briefly explain. (2%)

IVAB Corporation drew a check for payment to XY Bank. The check was given to anofficer of AB Corporation who was instructed to deliver it to XY Bank. Instead, theofficer, intending to defraud the Corporation, filled up the check by making himself asthe payee and delivered it to XY Bank for deposit to his personal account. ABCorporation come to know of the officer's fraudulent act after he absconded. ABCorporation asked XY Bank to recredits its amount. XY Bank refused.

a. If you were the judge, what issues would you consider relevant to resolve thecase? Explain (3%)

b. How would you decide the case? Explain. (2%)VPancho drew a check to Bong and Gerard jointly. Bong indorsed the check and alsoforged Gerard's endorsement. The payor bank paid the check and charged Pancho'saccount for the amount of the check. Gerard received nothing from the payment.

a. Pancho asked the payor bank to recredit his account. Should the bankcomply? Explain fully. (3%)

b. Based on the facts, was Pancho as drawerdischarged on the instrument?Why?(2%)

2009

VI

Lorenzo drew a bill of exchange in the amount of P100,000.00 payable to Barbara ororder, with his wife, Diana, as drawee. At the time the bill was drawn, Diana wasunaware that Barbara is Lorenzos paramour.Barbara then negotiated the bill to her sister, Elena, who paid for it for value, and whodid not know who Lorenzo was. On due date, Elena presented the bill to Diana forpayment, but the latter promptly dishonored the instrument because, by then, Dianahad already learned of her husbands dalliance.

a. Was the bill lawfully dishonored by Diana? Explain. (3%)b. Does the illicit cause or consideration adversely affect the negotiability of the

bill? Explain. (3%)

TRUE OR FALSE:

a. A document, dated July 15, 2009, that reads: "Pay to X or order the sum ofP5,000.00 five days after his pet dog, Sparky, dies. Signed Y."is anegotiable instrument.

b. "A bank is bound to know its depositors signature" is an inflexible rule indetermining the liability of a bank in forgery cases.

XII [NOT SURE]Gaudencio, a store owner, obtained a P1-million loan from Bathala Financing

Corporation (BFC). As security, Gaudencio executed a "Deed of Assignment ofReceivables," assigning 15 checks received from various customers who boughtmerchandise from his store. The checks were duly indorsed by Gaudencioscustomers.The Deed of Assignment contains the following stipulation:

"If, for any reason, the receivables or any part thereof cannot be paid by theobligors, the ASSIGNOR unconditionally and irrevocably agrees to pay thesame, assuming the liability to pay, by way of penalty, three percent (3%) ofthe total amount unpaid, for the period of delay until the same is fully paid."

When the checks became due, BFC deposited them for collection, but the draweebanks dishonored all the checks for one of the following reasons: "account closed,""payment stopped," "account under garnishment," or "insufficiency of funds." BFCwrote Gaudencio notifying him of the dishonored checks, and demanding payment of

the loan. Because Gaudencio did not pay, BFC filed a collection suit.In his defense, Gaudencio contended that [a] BFC did not give timely notice ofdishonor (of the checks); and [b] considering that the checks were duly indorsed, BFCshould proceed against the drawers and the indorsers of the checks.Are Gaudencios defenses tenable? Explain. (5%)

2010 (wasnt able to access 2010 bar exam questions)

2011

(3) A writes a promissory note in favor of his creditor, B. It says: "Subject to myoption, I promise to pay B Php1 Million or his order or give Php1 Million worth ofcement or to authorize him to sell my house worth Php1 Million. Signed, A." Is the

note negotiable?


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(A) No, because the exercise of the option to pay lies with A, the maker anddebtor.(B) No, because it authorizes the sale of collateral securities in case the noteis not paid at maturity.(C) Yes, because the note is really payable to B or his order, the otherprovisions being merely optional.(D) Yes, because an election to require something to be done in lieu ofpayment of money does not affect negotiability.

(5) M makes a promissory note that states: "I, M, promise to pay Php5,000.00 to B orbearer. Signed, M." M negotiated the note by delivery to B, B to N, and N to O. B hadknown that M was bankrupt when M issued the note. Who would be liable to O?

(A) M and N since they may be assumed to know of M's bankruptcy(B) N, being O's immediate negotiator of a bearer note(C) B, M, and N, being indorsers by delivery of a bearer note(D) B, having known of M's bankruptcy

(8) A negotiable instrument can be indorsed by way of a restrictive indorsement,which prohibits further negotiation and constitutes the indorsee as agent of theindorser. As agent, the indorsee has the right, among others, to

(A) demand payment of the instrument only.(B) notify the drawer of the payment of the instrument.(C) receive payment of the instrument.

(D) instruct that payment be made to the drawee.(9) Under the Negotiable Instruments Law, a signature by procuration operates as anotice that the agent has but a limited authority to sign. Thus, a person who takes abill that is drawn, accepted, or indorsed by procuration is duty-bound to inquire intothe extent of the agent's authority by:

(A) examining the agents special power of attorney.(B) examining the bill to determine the extent of such authority.(C) asking the agent about the extent of such authority.(D) asking the principal about the extent of such authority.

(10) Under the Negotiable Instruments Law, if the holder has a lien on the instrumentwhich arises either from a contract or by implication of law, he would be a holder forvalue to the extent of

(A) his successor's interest.

(B) his predecessor's interest.(C) the lien in his favor.(D) the amount indicated on the instrument's face.

(13) X executed a promissory note with a face value of Php50,000.00, payable to theorder of Y. Y indorsed the note to Z, to whom Y owed Php30,000.00. If X has nodefense at all against Y, for how much may Z collect from X?

(A) Php20,000.00, as he is a holder for value to the extent of the differencebetween Y's debt and the value of the note.(B) Php30,000.00, as he is a holder for value to the extent of his lien.(C) Php50,000.00, but with the obligation to hold Php20,000.00 for Y'sbenefit.(D) None, as Z's remedy is to run after his debtor, Y.

(16) P sold to M 10 grams of shabu worth Php5,000.00. As he had no money at thetime of the sale, M wrote a promissory note promising to pay P or his order Php5,000.

P then indorsed the note to X (who did not know about the shabu), and X to Y. Unableto collect from P, Y then sued X on the note. X set up the defense of illegality ofconsideration. Is he correct?

(A) No, since X, being a subsequent indorser, warrants that the note is validand subsisting.(B) No, since X, a general indorser, warrants that the note is valid andsubsisting.(C) Yes, since a void contract does not give rise to any right.(D) Yes, since the note was born of an illegal consideration which is a realdefense.

(18) A holder in due course holds the instrument free from any defect of title of priorparties and free from defenses available to prior parties among themselves. Anexample of such a defense is -

(A) fraud in inducement.(B) duress amounting to forgery.(C) fraud in esse contractus.(D) alteration.

(24) X is the holder of an instrument payable to him (X) or his order, with Y as maker.X then indorsed it as follows: "Subject to no recourse, pay to Z. Signed, X." When Zwent to collect from Y, it turned out that Y's signature was forged. Z now sues X forcollection. Will it prosper?

(A) Yes, because X, as a conditional indorser, warrants that the note isgenuine.

(B) Yes, because X, as a qualified indorser, warrants that the note isgenuine.(C) No, because X made a qualified indorsement.(D) No, because a qualified indorsement does not include the warranty ofgenuineness.

(25) A bill of exchange has T for its drawee, U as drawer, and F as holder. When Fwent to T for presentment, F learned that T is only 15 years old. F wants to recoverfrom U but the latter insists that a notice of dishonor must first be made, theinstrument being a bill of exchange. Is he correct?

(A) Yes, since a notice of dishonor is essential to charging the drawer.(B) No, since T can waive the requirement of notice of dishonor.(C) No, since F can treat U as maker due to the minority of T, the drawee.(D) Yes, since in a bill of exchange, notice of dishonor is at all times

required.(28) X, drawee of a bill of exchange, wrote the words: "Accepted, with promise tomake payment within two days. Signed, X." The drawer questioned the acceptanceas invalid. Is the acceptance valid?

(A) Yes, because the acceptance is in reality a clear assent to the order ofthe drawer to pay.(B) Yes, because the form of the acceptance is really immaterial.(C) No, because the acceptance must be a clear assent to the order of thedrawer to pay.(D) No, because the document must not express that the drawee willperform his promise within two days.

(30) D, debtor of C, wrote a promissory note payable to the order of C. C's brother, M,misrepresenting himself as Cs agent, obtained the note from D, then negotiated it toN after forging C's signature. N indorsed it to E, who indorsed it to F, a holder in duecourse. May F recover from E?


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(A) No, since the forgery of C's signature results in the discharge of E.(B) Yes, since only the forged signature is inoperative and E is bound asindorser.(C) No, since the signature of C, the payee, was forged.(D) Yes, since the signature of C is immaterial, he being the payee.

(31) A material alteration of an instrument without the assent of all parties liablethereon results in its avoidance, EXCEPT against a

(A) prior indorsee.(B) subsequent acceptor.

(C) subsequent indorser.(D) prior acceptor.(33) B borrowed Php1 million from L and offered to him his BMW car worth Php1Million as collateral. B then executed a promissory note that reads: "I, B, promise topay L or bearer the amount of Php1 Million and to keep my BMW car (loan collateral)free from any other encumbrance. Signed, B." Is this note negotiable?

(A) Yes, since it is payable to bearer.(B) Yes, since it contains an unconditional promise to pay a sum certain inmoney.(C) No, since the promise to just pay a sum of money is unclear.(D) No, since it contains a promise to do an act in addition to the payment ofmoney.

(36) If the drawer and the drawee are the same person, the holder may present the

instrument for payment without need of a previous presentment for acceptance. Insuch a case, the holder treats it as a

(A) non-negotiable instrument.(B) promissory note.(C) letter of credit.(D) check.

(37) D draws a bill of exchange that states: "One month from date, pay to B or hisorder Php100,000.00. Signed, D." The drawee named in the bill is E. B negotiated thebill to M, M to N, N to O, and O to P. Due to non-acceptance and after proceedings fordishonor were made, P asked O to pay, which O did. From whom may O recover?

(A) B, being the payee(B) N, as indorser to O(C) E, being the drawee

(D) D, being the drawer(40) The authorized alteration of a warehouse receipt which does not change its tenorrenders the warehouseman liable according to the terms of the receipt

(A) in its original tenor if the alteration is material.(B) in its original tenor.(C) as altered if there is fraud.(D) as altered.

(41) Any agreement binding upon the holder to extend the time of payment or topostpone the holder's right to enforce the instrument results in the discharge of theparty secondarily liable unless made with the latter's consent. This agreement refersto one which the holder made with the

(A) principal debtor.(B) principal creditor.(C) secondary creditor.(D) secondary debtor.

(45) A bill of exchange has D as drawer, E as drawee and F as payee. The bill wasthen indorsed to G, G to H, and H to I. I, the current holder presented the bill to E foracceptance. E accepted but, as it later turned out, D is a fictitious person. Is E freedfrom liability?

(A) No, since by accepting, E admits the existence of the drawer.(B) No, since by accepting, E warrants that he is solvent.(C) Yes, if E was not aware of that fact at the time of acceptance.(D) Yes, since a bill of exchange with a fictitious drawer is void andinexistent.

(46) Due to his debt to C, D wrote a promissory note which is payable to the order ofC. C's brother, M, misrepresenting himself as agent of C, obtained the note from D. Mthen negotiated the note to N after forging the signature of C. May N enforce the noteagainst D?

(A) Yes, since D is the principal debtor.(B) No, since the signature of C was forged.(C) No, since it is C who can enforce it, the note being payable to the orderof C.(D) Yes, since D, as maker, is primarily liable on the note.

(50) M, the maker, issued a promissory note to P, the payee which states: "I, M,promise to pay P or order the amount of Php1 Million. Signed, M." P negotiated thenote by indorsement to N, then N to O also by indorsement, and O to Q, again byindorsement. But before O indorsed the note to Q, O's wife wrote the figure "2" on thenote after "Php1" without O's knowledge, making it appear that the note is for Php12

Million. For how much is O l iable to Q?(A) Php1 Million since it is the original tenor of the note.(B) Php1 Million since he warrants that the note is genuine and in allrespects what it purports to be.(C) Php12 Million since he warrants his solvency and that he has a good titleto the note.(D) Php12 Million since he warrants that the note is genuine and in allrespects what it purports to be.

(59) Which of the following indorsers expressly warrants in negotiating an instrumentthat 1) it is genuine and true; 2) he has a good title to it; 3) all prio r parties havecapacity to negotiate; and 4) it is valid and subsisting at the time of his indorsement?

(A) The irregular indorser.(B) The regular indorser.

(C) The general indorser.(D) The qualified indorser.(63) Forgery of bills of exchange may be subdivided into, a) forgery of an indorsementon the bill and b) forgery of the drawer's signature, which may either be withacceptance by the drawee, or

(A) with acceptance but the bill is paid by the drawee.(B) without acceptance but the bill is paid by the drawer.(C) without acceptance but the bill is paid by the drawee.(D) with acceptance but the bill is paid by the drawer.

(65) X found a check on the street, drawn by Y against ABC Bank, with Z as payee. Xforged Z's signature as an indorser, then indorsed it personally and delivered it toDEF Bank. The latter, in turn, indorsed it to ABC Bank which charged it to the Ysaccount. Y later sued ABC Bank but it set up the forgery as its defense. Will itprosper?

(A) No, since the payee's signature has been forged.


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(B) No, since Ys remedy is to run after the forger, X.(C) Yes, since forgery is only a personal defense.(D) Yes, since ABC Bank is bound to know the signature of Y, i ts client.

(71) Can a drawee who accepts a materially altered check recover from the holderand the drawer?

(A) No, he cannot recover from either of them.(B) Yes from both of them.(C) Yes but only from the drawer.(D) Yes but only from the holder.

(72) The rule is that the intentional cancellation of a person secondarily liable resultsin the discharge of the latter. With respect to an indorser, the holder's right to cancelhis signature is:

(A) without limitation.(B) not limited to the case where the indorsement is necessary to his title.(C) limited to the case where the indorsement is not necessary to his title.(D) limited to the case where the indorsement is necessary to his title.

(75) X executed a promissory note in favor of Y by way of accommodation. It says:"Pay to Y or order the amount of Php50,000.00. Signed, X." Y then indorsed the noteto Z, and Z to T. W hen T sought collection from Y, the latter countered as indorserthat there should have been a presentment first to the maker who dishonors it. Is Ycorrect?

(A) No, since Y is the real debtor and thus, there is no need for presentmentfor payment and dishonor by the maker.

(B) Yes, since as an indorser who is secondarily liable, there must first bepresentment for payment and dishonor by the maker.(C) No, since the absolute rule is that there is no need for presentment forpayment and dishonor to hold an indorser liable.(D) Yes, since the secondary liability of Y and Z would only arise afterpresentment for payment and dishonor by the maker.

(79) T delivers two refrigerators to the warehouse of W who then issues a negotiablereceipt undertaking the delivery of the refrigerators to "T or bearer." T entrusted thereceipt to B for safekeeping only. B negotiated it, however, to F who bought it in goodfaith and for value. Who is entitled to the delivery of the re frigerators?

(A) T, since he is the real owner of the refrigerators.(B) F, since he is a purchaser in good faith and for value.(C) B, since T entrusted the receipt to him.

(D) W, since he has as a warehouseman a lien on the goods.(84) X, creditor of Y, obtained a judgment in his favor in connection with Y's unpaidloan to him. The court's sheriff then levied on the goods that Y stored in T'swarehouse, for which the latter issued a warehouse receipt. A month before the levy,however, Z bought the warehouse receipt for value. Who has a better right over thegoods?

(A) T, being the warehouseman with a lien on the goods(B) Z, being a purchaser for value of the warehouse receipt(C) X, being Ys judgment creditor(D) Y, being the owner of the goods

(85) A promissory note states, on its face: "I, X, promise to pay Y the amount of Php5,000.00 five days after completion of the on-going construction of my house. Signed,X." Is the note negotiable?

(A) Yes, since it is payable at a fixed period after the occurrence of aspecified event.

(B) No, since it is payable at a fixed period after the occurrence of an eventwhich may not happen.(C) Yes, since it is payable at a fixed period or determinable future time.(D) No, since it should be payable at a fixed period before the occurrence ofa specified event.

(86) P sold to M a pair of gecko (tuko) for Php50,000.00. M then issued a promissorynote to P promising to pay the money within 90 days. Unknown to P and M, a law waspassed a month before the sale that prohibits and declares void any agreement to sellgecko in the country. If X acquired the note in good faith and for value, may heenforce payment on it?

(A) No, since the law declared void the contract on which the promissorynote was founded.(B) No, since it was not X who bought the gecko.(C) Yes, since he is a holder in due course of a note which is distinct fromthe sale of gecko.(D) Yes, since he is a holder in due course and P and M were not aware ofthe law that prohibited the sale of gecko.

(87) P authorized A to sign a bill of exchange in his (Ps) name. The bill reads: "Pay toB or order the sum of Php1 million. Signed, A (for and in behalf of P)." The bil l wasdrawn on P. B indorsed the bill to C, C to D, and D to E. May E treat the bill as apromissory note?

(A) No, because the instrument is payable to order and has been indorsedseveral times.

(B) Yes, because the drawer and drawee are one and the same person.(C) No, because the instrument is a bill of exchange.(D) Yes, because A was only an agent of P.

(88) Z wrote out an instrument that states: "Pay to X the amount of Php1 Million forcollection only. Signed, Z." X indorsed it to his creditor, Y, to whom he owed Php1million. Y now wants to collect and satisfy X's debt through the Php1 million on thecheck. May he validly do so?

(A) Yes, since the indorsement to Y is for Php1 Million.(B) No, since Z is not a party to the loan between X and Y.(C) No, since X is merely an agent of Z, his only right being to collect.(D) Yes, since X owed Y Php1 Mill ion.

(91) 002-38-0001 G, a grocery goods supplier, sold 100 sacks of rice to H who

promised to pay once he has sold all the rice. H meantime delivered the goods to W,a warehouseman, who issued a warehouse receipt. Without the knowledge of G andW, H negotiated the receipt to P who acquired it in good faith and for value. P thenclaimed the goods from W, who released them. After the rice was loaded on a shipbound for Manila, G invokes his right to stop the goods in transit due to his unpaidlien. Who has a better right to the rice?

(A) RIGHT ANSWER P, since he has superior rights as a purchaser forvalue and in good faith.(B) P, regardless of whether or not he is a purchaser for value and in goodfaith.(C) G, since as an unpaid seller, he has the right of stoppage in transitu.(D) W, since it appears that the warehouse charges have not been paid.

(92) In a signature by procuration, the principal is bound only in case the agent actedwithin the actual limits of his authority. The signature of the agent in such a caseoperates as notice that he has


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(A) a qualified authority to sign.(B) a limited authority to sign.(C) a special authority to sign.(D) full authority to sign.

(94) A bill of exchange states on its face: "One (1) month after sight, pay to the orderof Mr. R the amount of Php50,000.00, chargeable to the account of Mr. S. Signed, Mr.T." Mr. S, the drawee, accepted the bill upon presentment by writing on it the words " Ishall pay Php30,000.00 three (3) months after sight." May he accept under suchterms, which varies the command in the bill of exchange?

(A) Yes, since a drawee accepts according to the tenor of his acceptance.(B) No, since, once he accepts, a drawee is liable according to the tenor ofthe bill.(C) Yes, provided the drawer and payee agree to the acceptance.(D) No, since he is bound as drawee to accept the bill according to its tenor.

(95) May the indorsee of a promissory note indorsed to him "for deposit" file a suitagainst the indorser?

(A) Yes, as long as the indorser received value for the restrictiveindorsement.(B) Yes, as long as the indorser received value for the conditionalindorsement.(C) Yes, whether or not the indorser received value for the conditionalindorsement.(D) Yes, whether or not the indorser received value for the restrictive

indorsement.(96) X issued a check in favor of his creditor, Y. It reads: " Pay to Y the amount ofSeven Thousand Hundred Pesos (Php700,000.00). Signed, X". What amount shouldbe construed as true in such a case?

(A) Php700,000.00.(B) Php700.00.(C) Php7,000.00.(D) Php700,100.00.

(99) P authorized A to sign a negotiable instrument in his (Ps) name. It reads: "Pay toB or order the sum of Php1 million. Signed, A (for and in behalf of P)." The instrumentshows that it was drawn on P. B then indorsed to C, C to D, and D to E. E thentreated it as a bill of exchange. Is presentment for acceptance necessary in this case?

(A) No, since the drawer and drawee are the same person.

(B) No, since the bill is non-negotiable, the drawer and drawee being thesame person.(C) Yes, since the bill is payable to order, presentment is required foracceptance.(D) Yes, in order to hold all persons liable on the bill.

2012

5. For a fee, X deposited 1,000 sacks of corn in the warehouse owned by Y. Y is inthe business of warehousing. Y issued a warehouse receipt as proof of thepossession of the 1,000 sacks of corn. The warehouse receipt states as follows:"Deliver to X or bearer 1,000 sacks of corn." X wanted to use the warehousereceipt as payment of his debt in favor of Z. How can the ownership of the

goods covered by the warehouse receipt be transferred?a) Negotiate the warehouse receipt by just delivering the warehouse receipt

b) Assign the warehouse receipt to Z to transfer ownership of the goods.c) Negotiate the warehouse receipt by specifically indorsing it to Z.d) The warehouse receipt in this case is non-negotiable.

13. X acted as an accommodation party in signing as a maker of a promissory note.Which phrase best completes the sentenceThis means that X is liable on theinstrument to any holder for value:a) for as long as the holder does not know that X is only an accommodation party.b) even though the holder knew all along that X is only an accommodation party.c) for as long as X did not receive any consideration for acting as accommodationparty.d) provided X received consideration for acting as accommodation party.

14. X issued a promissory note which states, I promise to pay Y or orderP100,000.00 or one (1) unit Volvo Sedan. Which statement is most accurate?a) the promissory note is negotiable because the forms of payment are clearly stated.b) the promissory note is non-negotiable because the option as to which form ofpayment is with the maker.c)The promissory note is an invalid instrument because there is more than one formof payment.d) the promissory note can be negotiated by way of delivery.

15. X issued a promissory note which states, I promise to pay Y or bearer the

amount of HK$50,000.00 on or before December 30, 2013. Is the promissory notenegotiable?a) No, the promissory note becomes invalid because the amount is in foreigncurrency.b) Yes, the promissory note is negotiable even though the amount is stated in foreigncurrency.c) No, the promissory note is not negotiable because the amount is in foreigncurrency.d) Yes, the promissory note is negotiable because the Hong Kong Dollar is a knownforeign currency in the Philippines.

16. X delivered a check issued by him and payable to the order of CASH toY in payment for certain obligations incurred by X in favor of Y. Y then delivered the

check to Z in payment for certain obligations. Which statement is mostaccurate?

a) Z can encash the check even though Y did not indorse the check.b) Z cannot encash the check for lacking in proper endorsement.c) Y is the only one liable because he was the one who deliveredd) The negotiation is not valid because the check is an instrument the check to Z.payable to order.

17. A stale check is a checka) that cannot anymore be paid although the underlying obligation still exists.b) that cannot anymore be paid and the underlying obligation under the check is alsoextinguished.c) that can still be negotiated or indorsed so that whoever is the holder can (cut)

d) which has not been presented for payment within a period of 30 days.


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18. In payment for his debt in favor of X, Y gave X a Managers Check in the amountof P100,000.00 dated May 30, 2012. Which phrase best completes the statementAmanagers check:a) is a check issued by a manager of a bank for his own account.b) is a check issued by a manager of a bank in the name of the bank against the bankitself for the account of the bank.c) is like any ordinary check that needs to be presented for payment also.d) is better than a cashiers check in terms of use and effect.19. Which phrase best completes the statement -- A check which is payable tobearer is a bearer instrument and:a) negotiation can be made by delivery only;b) negotiation must be by written indorsement;c) negotiation must be by specific indorsement;d) negotiation must be by indorsement and delivery.

20. As payment for a debt, X issued a promissory note in favor of Y but thepromissory note on its face was marked non-negotiable. Then Y instead ofindorsing the promissory note, assigned the same in favor of Z to whom heowed some debt also. Which statement is most accurate?a) Z cannot claim payment from X on the basis of the promissory noteb) Z can claim payment from X even though it is marked non-negotiable.c) Z can claim payment from Y because under the Negotiable Instrumentd) Z can claim payment from Y only because he was the endorser of the because it is

marked non-negotiable. Law, negotiation and assignment is one and the same.promissory note.

21. Negotiable instruments are used as substitutes for money, which means---a) that they can be considered legal tender.b) that when negotiated, they can be used to pay indebtedness.c) that at all times the delivery of the instrument is equivalent to delivery ofd) that at all times negotiation of the instruments requires proper the cash.indorsement.

22. The signature of X was forged as drawer of a check. The check was deposited inthe account of Y and when deposited was accepted by AAA Bank, the draweebank. Subsequently, AAA Bank found out that the signature of X was actually

forged. Which statement is most accurate?a) The drawee bank can recover from Y, because the check was depositedb) The drawee bank can recover from X, because he is the drawer even in hisaccount. though his signature was forged.c) The drawee bank is estopped from denying the genuineness of thed) The drawee bank can recover from Y because as endorser he warrants signatureof the X, the drawer of the check. the genuineness of the signature.

23. A issued a check in the amount of Php20,000 payable to B. B endorsed thecheck but only to the extent of Php1 0,000. Which statement is most accurate?a) The partial indorsement is not a valid indorsement, although will result inb) The partial indorsement will invalidate the whole instrument.c) The endorsee will be considered as a holder in due course.d) The partial indorsement is valid indorsement up to the extent of the the

assignment of that part. Php10,000.

24. A promissory note which does not have the words "or order" or "or bearer" willrender the promissory note non-negotiable, and therefore ---a) it will render the maker not liable;b) the note can still be assigned and the maker made liable;c) the holder can become holder in due course;d) the promissory note can just be delivered and the maker will still be liable.

25. A check is---a) a bill of exchange;b) the same as a promissory note;c) is drawn by a maker;d) a non-negotiable instrument.

26. A check was issued to Tiger Woods. But what was written as payee is the word"Tiger Woods". To validly endorse the check---a) Tiger Woods must sign his real name.b) Tiger Woods must sign both his real name and assumed name.c) Tiger Woods can sign his assumed name.d) the check has become non-negotiable.

27. Y, as President of and in behalf of AAA Corporation, as a way to accommodateX, one of its stockholders, endorsed the check issued by X. Which statement ismost acurate?

a) It is an ultra vires act.b) It is a valid indorsement.c) The corporation will be held liable to any holder in due course.d) It is an invalid indorsement.

28. In a negotiable instrument, when the sum is expressed both in numbers andin words and there is discrepancy between the words and the numbers ---a) the sum expressed in words will prevail over the one expressed in numbers.b) the sum expressed in numbers will prevail over the one expressed inc) the instrument becomes void because of the discrepancy.d) this will render the instrument invalid.

29. A promissory note which is undated is presumed to be---

a) dated as of the date of issue;b) dated as of the date of the first indorsement;c) promissory note is invalid because there is no date;d) dated on due date. words.

NEGOTIABLE INSTRUMENTS REVIEW PROBLEMS

1. Borrower took a $10,000 loan from Lender to finance its current operations.The parties agreed that Borrower would repay the loan in one lump-sum payment of$10,450 in 90 days. In exchange for the loan proceeds, Borrower issued a negotiablepromissory note to Lender reflecting their agreement. On the 90th day, Lenderrealized that it had lost the note, and it couldnt recall whether or not it had endorsedthe note.If Borrower pays Lender what it owes on the lost note, is it possible that

someone else might find the note and enforce it later again?


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2. Assume that John Doe is the payee of a negotiable instrument. Give oneexample of how John could give a blank endorsement to the instrument and oneexample of how he could give a special endorsement to the instrument. What is theeffect of each type of endorsement on further negotiation.3. John Jones owes Sam Smith $100, which John says he will pay Sam onSeptember 15, 2009. Draft the one sentence body of a negotiable promissory note toevidence Johns obligation.4. Pawel Lutomski maintains a checking account with Polish Emigrant Savings &Trust (PEST). Pawel lives in Chicago, and his brother, Wladyslaw, has just beenparoled from state prison after serving time for theft. Wladyslaw, having no place tolive, is taken in by Pawel who is happy to have the company. Facing cripplingdiscrimination in the job market due to his felony record, and desperate for money,Wladyslaw rummages through Pawel's desk, locates his check book, and beginsforging Pawel's signature and cashing checks drawn on Pawel's account at PEST.From December 2007 through February 2008, Wladyslaw forged and cashed three$1000.00 checks each month in December, January and February, representing atotal of 9 checks for $9000.00 over this three month period. The forged checks wereall included in the respective monthly statements for January, February and Marchand provided to Pawel by PEST, but Pawel failed to review his statements during thisperiod of time.On April 16, 2008, Pawel received his next monthly bank statement from PEST anddiscovered three recently forged checks, each in the amount of $1000.00, which boreobvious forgeries of his signature and were cashed by Wladyslaw in March. Pawel

contacted PEST that day and learned of the prior 9 checks that were also obviouslyforged by Wladyslaw during the prior months.Pawel now demands that the bank remit payment to him for the $12,000.00representing the money withdrawn from his account based upon his forged signature.PEST believes that it followed standard banking procedures and practices and paidthe checks in good faith. As a result, PEST contacts you to determine what money, ifany, should be returned to Pawel and asks you to answer the following questions:(a) As a general rule, does the bank or the depositor suffer the loss for

payment of an instrument bearing a forged signature? Explain fully.(b) PEST feels that Pawel was negligent in failing to restrict access to his

checkbook and asks you whether or not such negligence is relevant to anydefense the bank could assert against Pawel. Explain fully whether thisargument bears any legal merit and the likely findings of the court on thisissue.

(c) Does PEST have any defenses, other than the one discussed in part (b)above, that it can assert to justify its decision to not reimburse Pawel forthe 12 forged checks that were included in Pawel's monthly bankstatement? Explain fully any available defenses or why such defenses arenot available to PEST.

(d) If Pawel could prove that PEST failed to follow its own internal policy ofreviewing and comparing signature cards for any checks in excess of$500.00, would this help his case? Why or why not?

5. Assuming that a promissory note is negotiable in allother respects, is itrendered nonnegotiable by any of the following elements? Please respondnegotiable or nonnegotiable and explain the reasons for your answer.

a) The note is dated June 1, 2008, and is payable three years from date butalso states that payment shall immediately become due and payable upon

demand if the maker should file bankruptcy before the due date.

b) The note is dated June 1, 2008, and states in part, I promise to pay the sumof $500 Dollars to Jake Jones on July 1, 2009.

c) The note is dated June 1, 2008, and is payable five years from date out ofthe accrued funds generated from the Blackacre timber sales.

d) The note is dated June 1, 2008, and states that it is payable to the order ofChip Donahue or Mona Douglas.

6. For the first time Peter McCallister is allowing his son, Kevin, to shop forschool clothes on his own. Peter McCallister gives Kevin (who is 15) a signedpersonal check for $100 drawn on his account at Friendly Bank and made payable tothe local department store, with instructions to use the money to buy only schoolclothes. Kevin agrees, but as soon as he leaves the house carefully changes theamount of the check to $1000. He then uses the check to purchase school clothes, anadvanced video game system and several new games for the system. Thedepartment store deposits the check at Friendly Bank (where it maintains its ownaccount), and in due course the check is honored. When Peter receives his nextmonthly bank statement, he finds the changed check and immediately demands thatthe bank recredit the $1000 to his account.(a) What if any rights does Peter have against Friendly Bank?(b) Suppose Peter had signed the check, but intentionally left the amount blank

for Kevin to fill in because he did not know what the school clothes wouldcost. What if any rights would Peter then have against the bank?

7. Rhonda Price uses her final salary payment to purchase a $5,000 certificate ofdeposit from the Big & Greedy Bank, which the bank as a security measure stamped

Non-Negotiable in a conspicuous place on its face. Can a transferee of thecertificate of deposit be a holder in due course? Why or why not?8. On May 1, 2007, Joe and Betty Stewart agree to lend $100,000 to theirdaughter, Silvia, and her business partner, Angie. In return, Silvia and Angieexecuted and delivered a promissory note to the Stewarts which read as follows:

For value received, we promise to pay the sum of $100,000 plus10% annual interest to the order of Joe and Betty Stewart on orbefore June 1, 2008.

The note was properly dated and signed by both Silvia and Angie and the loanproceeds were used by Silvia and Angie to fund their start-up consulting services.However, Silvia and Angies consulting venture soon failed and on November 1, 2007,Angie wrote the Stewarts saying:

Silvia and I discussed your loan to us and we have agreed thateach of us will be responsible for one-half of the amount due.Enclosed is my check for $50,000 plus one half of the interest nowdue.

The Stewarts endorsed and deposited Angies check.On April 2, 2008, Bob Profit purchased the promissory note for value and in good faithfrom the Stewarts, who neglected to mention the prior payment by Angie. As part ofthis transaction, the Stewarts properly indorsed the note, without recourse, to Profit.About the same time, Silvia moved to Morocco and became a nun.On June 1, 2008, Profit demanded payment from Angie in the amount of $110,000and Angie refused to pay. In response, Angie raised the following defenses:(i) Angie learns that the Stewarts actually only funded $50,000 of the agreed

$100,000 loan proceeds;(ii) When the note was signed, the Stewarts orally assured Angie that they would

never transfer the note and, without that promise, she would not have signed

the note; and(iii) Angie has already paid $52,250 in satisfaction of the promissory note.


13/13

(a) How should a court rule on Angies defenses (i), (ii) ,and (i ii), above?Explain your answers thoroughly.

(b) If Angie had wanted to be sure that her defenses would survive any transferof the note, how might she have accomplished this?

(c) Would it affect Angies defenses if thepromissory note also contains aclause requiring Angie and Silvia to additionally pay attorneys fees andcourt costs in the event suit is brought to enforce collection? Why or whynot?

(d) Would it affect Angies defenses if Profit had purchased the promissorynote on July 27, 2008, instead of April 2, 2008, and demands payment onJuly 28, 2008? Why or why not?

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