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WARNING: Do not use these notes as a substitute for your ownnotes, annotations and lectures of our professors because thesecontains typographical errors and were not made under thesupervision or authority of the professor. These can only serve asa guide for the better understanding of the subject matter.SHOWING THAT YOU ARE USING THESE DURING CLASSES(especially during recitations) MIGHT OFFEND THEPROFESSOR, so please be warned about the inherent dangers ofrelying on these notes.

~PS

But if any of you lacks wisdom, he should pray to God, who willgive it to him; because God gives generously and graciously to all.

But when you pray, you must believe and not doubt at all. Whoever

doubts is like a wave in the sea that is driven and blown about bythe wind.

JAMES 1:5-6 ACT 2031THE NEGOTIABLE INSTRUMENTS LAW(Based on the Lectures of Dean Divina)Introduction

The study of Negotiable Instruments Law is basically as studyof the law on assignment of credit except for that one bigdifference.

Negotiable Instruments Law is equivalent to assignment ofcredit, except the rights accorded to a holder and subject to 2essential requisites, that is:

1. Sec. 1 (The instruments must be negotiable); and 2. Sec. 52 (The holder must be a holder in due course)If these two are present then it is governed by Negotiable

Instruments Law. But if one is lacking then it should be governedby the law on assignment of credit.FORMULA: 1. Negotiable Instrument (NI) + Holder in due course (HDC)

= Negotiable Instruments Law (NIL)2. Non Negotiable Instrument (NN) + Holder in due course

(HDC) = Assignment of credit (A/C)3. Negotiable Instrument (NI) + Non-holder in due course

(NHDC) = Assignment of Credit (A/C). This is subject toone exception.

NI + HDC = NILNN + HDC = A/CNI + NHDC = A/CWhat is the only exception here (the instrument is still negotiable

but the holder is not a holder in due course)? If the non-holder in due course acquires the instrument from aholder in due course and he has not taken part in any fraud orillegality, in which case he has all the rights of a holder in duecourse, not just a mere assignee or transferee.Salas vs CA 181 SCRA

Salas (S) purchased a car on installment basis. He paid thedown payment and issued a promissory note for the balance of thepurchase price payable to the car company (C). The car companynegotiated the instrument to the State Investment House

When the car was delivered, there was a discrepancy in the

chassis number in the invoice and the chassis number of the carTherefore there was a breach of contract or failure oconsideration.If there is no transfer of the promissory note from C to StateInvestment House can the company collect the balance of the

promissory note?Can S stop paying because there was a breach of contract or

failure of consideration? Between S and C, S can stop paying because C breached thecontract. It delivered a car different from what was specified by itsclient.

But, in this case the promissory note has been transferred infavor of State Investment House. So can State Investment House enforce payment of thepromissory note against S? Can S raise the defense that the car is defective and thereforehe is not liable for the balance of the promissory note?It will depend on 2 things.

1.

Is the instrument negotiable in the sense that there isconformance to the elements of negotiability under Sec 1of the NIL? And

2. Is the State Investment House a holder in due coursebecause it has all the conditions of a holder in duecourse under Sec 52?

If it is negotiable and holder in due course then StateInvestment House can enforce payment of the promissory notedespite the failure of consideration; despite breach of contractdespite the defect in the vehicle.

But if the instrument is not negotiable then State InvestmentHouse simply steps into the shoes of C. it is governed simply bythe law on assignment of credit. In assignment of credit, theassignee cannot acquire a right better than that of the assignor. So

State Investment House is mere assignee or transferee not aholder, cannot acquire a right, title or interest to the PN better thanthat of the assignor.

(Warning: This is not what Dean actually said) What if theinstrument is negotiable but S was able to overcome the

presumption that SIH is a holder in due course (because if theinstrument is negotiable there is a presumption that the holder is aholder in due course), by showing that the title of C was defective?

If the holder, SIH, was not able to prove that it acquired the title as

a holder in due course, can SIHenforce payment of the PN, or canS invoke the defense of breach of contract as a defense and stop

paying?In this case S can stop paying because if the instrument is

negotiable but the holder is not a holder in due course governed

only by the law on assignment of credit. The assignee simply stepsin to the shoes of the assignor. State Investment House vs CA

D issued checks payable to the order of P as a security foitems of jewelries that D obtained from P to be sold on commissionbasis. P negotiates the checks to State Investment House. D didnot sell the jewelries, so he returned the jewelries to P anddemanded for the return of the checks. Unfortunately the checkswere negotiated already in favor of State Investment House. Dwithdrew his funds from Equitable. So when State InvestmenHouse presented the checks Equitable, the bank dishonored the

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instrument.Can State Investment House collect against D and P assuming

that there was notice of dishonor?Can D say the check has no more consideration? At the outset

there was consideration, but I returned the jewelries so there wasalready a failure of consideration I am not liable to pay anymore.?

In this case the check is negotiable and therefore thepresumption is the holder is a holder in due course. SO thatdefense of failure of consideration is not available against State

Investment House.What if the instrument is not negotiable because it does notconform to the elements of negotiability under Sec 1 or the State

Investment House is not a holder in due course?You apply the law on assignment of credit. The State

Investment House simply steps into the shoes of P as assignorand therefore cannot acquire a right or title better than that of theassignor.The case which almost cost the loss of the bank for P500 M

Two foreigners were in possession of 2 checks worth $10 M(exchange rate at that time was 56:1). These checks were drawn

against a bank in the Fiji Islands, Republic of Vanuatu. Theforeigners told the manager they would like to open an account inthe bank. The manager opened the account and the checks weredeposited.

The foreigners requested for a certificate of deposit madepayable after 1 year. By that time the manager would have knownif the checks are cleared or not because checks drawn abroad willbe subject for clearing after 30 days. In 30 days you will know if thechecks were funded or honored.

The manager tagged along his assistant manager becauseunder the rules of the bank 2 officials must sign the certificate ofthe deposits. So the 2 issued the certificate to the foreigners.

The foreigners left the country. After 2 months the bank got a

call from American Express Company. The certificate of depositwas negotiated to American Express Company.The AmericanExpress Company wanted to collect the $10 M.Is the bank liable to pay?

It depends.Is the instrument negotiable?Can a certificate of deposit be considered as a negotiable

instrument?In the case of Caltex vs IAC 212 SCRA

The certificate of deposit indicates: This certifies that bearer deposited the sum of P5 K and

payable to such depositor in December 31, 2011, with 12% interestper annum. Signed by the manager.Is this negotiable?

In the case of Caltex vs IAC it is negotiable.Who is the depositor?

It is bearer. It is payable to bearer. The depositor being referredto is the bearer therefore it is negotiable.

A certificate of deposit may be a negotiable instrument if itconforms to the elements of negotiability under Sec 1 of NIL, and if

American Express Company is holder in due course the bank wilbe liable to pay for $10 M.

In our case, fortunately, our certificate of deposit was payable toof a specific person. It provides that this certifies that Juan de laCruz deposited of a sum of #. Payable to him in Dec. 31, 2011. What if it says to the order of Juan de la Cruz?

It becomes a negotiable instrument.Take out the two words, order of?

It becomes just payable to Juan de la Cruz. It is a differenstory.So dont take the words of negotiability for granted. Dont take

order or bearer for granted, because they spell a differencebetween a mere assignee and a holder with more rights andprivileges than a mere assignee or transferee.

You will encounter many cases in our book where the SC saidthe instrument is not negotiable therefore dont apply thewarranties of an indorser.There is one case, Golden Savings Bank vs CA (Metrobank vs CA1991)

D deposited with ABC Rural Bank of Mindoro treasury warrants

and then ABC in turn deposited the same in its account withMetrobank. So ABC was a Rural Bank and ABC has no clearing facilities. Iis not a universal bank or a commercial bank.

D came to follow it up with ABC, Have the warrants cleared?ABC as soon as D makes the follow up have makes a call withMetrobank, Have the warrants been cleared? Not yet. Therewere series of follow ups by D to ABC, ABC to Metrobank to thepoint that Metrobank got exasperated and cleared the warrantsand allowed ABC to withdraw from the proceeds of the warrants.

After clearing the warrants of ABC, ABC credited the account oD allowing D to make withdrawals from his own account.

After a month, the warrants were dishonored by the clearinghouse (in the case Bureau of Treasury).

So Metrobank now wants to enforce the warranties of ABCAccording to Metrobank, ABC signed the warrants. That amountsto indorsement. When you signed at the back of the check oinstrument that signature goes with it all the warrants of anindorser under the negotiable instruments law.

But, the SC said that the warrants are not negotiable thereforethe warranties of an indorser do not apply in this case.NIL_2What is the TEST to determine NEGOTIABILITY (1989)?

There is only one test, that is, if on its FACE it conforms to theREQUISITES of negotiability under SEC 1 of NIL.May an INSTRUMENT be negotiable even if it is VOID?May an instrument be negotiable even though the MAKER isINSOLVENT?May the instrument be negotiable even though it is VOIDABLE orUNENFORCEABLE? Yes because the test is conformity with Sec 1 of the NIL.

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Can the parties STIPULATE that the instrument is NEGOTIABLEeven though it is not?

BETWEEN THE PARTIES they can stipulate that theinstrument is negotiable even though it is not, in the sense that itdoes not conform to Sec 1. That is by ESTOPPEL. But thatarrangement does not bind 3rd persons.What are the FUNCTIONS of a negotiable instrument?

1. substitute for money2. medium of exchange3. medium of credit transactions

What are the CHARACTERISTICS/FEATURES of negotiableinstruments?1. negotiability 2. accumulation of secondary contracts

What are the KINDS/TYPES of negotiable instruments?1. promissory notes2. bill of exchange3. checks (Sec 185) although a special kind of bill of

exchange drawn on a bank payable on demand, it isconsidered as special type of negotiable instrument

The NIL provides for these 3. But, there are other instrumentswhich are considered negotiable if they conform to Sec 1 and they

will fall under the specie of promissory note, bill of exchange, orcheck.Examples of a PROMISSORY NOTE:

Certificates of deposit, due bills, bonds, commercial paperExamples of a BILL OF EXCHAGE:

Trade acceptances (an instrument drawn by the buyeragainst the seller and accepted by the latter); bankersacceptances

Drafts - in LC, it is used to facilitate the payment of thebeneficiary

Kinds of drafts are: 1. sight drafts (being payable at sight) and 2. usance (payable after 60 days after sight) What are the TYPES of CHECK?

1. PERSONAL and impersonal or corporate check2. CASHIERS check or MANAGERS check3. TRAVELLERS check

One that must be SIGNED TWICE (once upon PURCHASE[at the time of issuance] and upon NEGOTIATION [in the presenceof the payee before it is paid])4. MEMORANDUM check5. CROSSED check

There are 2 PARALLEL LINES on the left hand corner of the

check, which MEANS that:1) It is only for DEPOSIT, it cannot be encashed; 2) It can be NEGOTIATED only ONCE in favor of one whohas an account with the bank;3) It serves as a WARNING that the check was issued forSPECIFIC PURPOSES and the holder must acquire thatcheck consistent with those purposes, otherwise he will notqualify as a holder in due courseThe holder in due course acquires title to instrument free from

all personal defenses, like lack of consideration or failure ofconsideration. The SC said that would change if the check is

crossed.If the check is crossed then the lack or failure of consideration

becomes a defense.WHICH of these provisions AFFECT the NEGOTIABILTY of the

instrument?Payable in two installments

Non-negotiablePayable in equal installments Non-negotiable

These are non-negotiable because the law says statedinstallments the due dates of the installments must be indicated.Payable in stated installments coupled with acceleration clause

NegotiablePayable in dollars computed in Philippine currency at the

prevailing rate at the time of payment.Negotiable

With interest but silent as to rateNegotiable

I promise to pay to the order of Juan de la Cruz the amount of

P100 K with interestNegotiable.

Is it still sum certain within the meaning of the NIL Sec 2 if it says

with interest only?Yes because if it is silent as to rate, it means that the legal rate

applies.What is the legal rate 6% or 12%? The fact that it is susceptible to two rates, does it affect the

certainty of the sum payable?No because the presumption of the law comes in, that is 12% i

it arose from a loan, forbearance of money, goods or credit and 6%

if it did not arise from a loan, forbearance of money, goods, ocredit. So the legal rate is 6% or 12% depending upon theobligation.Payable out of a particular fund

Non-negotiable because the fund may or may not existWhat if it indicates the fund from which reimbursement is to bemade after payment?

NegotiableWhat if it includes a statement which gave rise to the transaction

and the statement is long?I promise to pay to the order of Juan de la Cruz the amount oP500 K with interest of 12% per annum on or before Dec. 31 2011.

This promissory note is issued in payment of the purchase price oa vehicle

NegotiablePayable before the death of A

Non negotiable because it is not certainAfter the death of A

NegotiablePay a sum of money or to pay taxes:I promise to pay to the order of Juan de la Cruz the amount o

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P100 K or to pay his taxesNon-negotiable

What will make it negotiable?It should be at the option of the holder

Payable on demand at the option of the makerNon-negotiable

Payable on demand at the option of the holderNegotiable

Payable on demand. Silent as to whose optionNegotiableDecember 31 ___I promise to pay to the order of Juan de la Cruz the amount ofP100K on December 31 ____.

Non-negotiableWhat is the FICTITIOUS-PAYEE rule?

The instrument is payable to bearer when it is payable to theorder of a fictitious person or non-existing person and such factwas known to the person making it so payable (Sec 9c).It says there that payable to a fictitious person or NON-EXISTING

person. That is considered payable to bearer. Can you have aninstrument payable to bearer if the person really exists? If the payee really exists can it still be covered by the fictitiouspayee rule and therefore payable to bearer?

This is very important specially if it is a check which is payableto order of a person who really exists because if it is payable toorder it requires the indorsement of the payee or indorsee totransfer title. But if it is covered by the fictitious-payee rule thatmeans it can be negotiated by mere delivery because it isconsidered a bearer instrument. Can you have a fictitious-payee if the person really exists?

Yes as held in the case of PNB vs Spouses Rodriguez, and thatis, if the maker DID NOT INTEND him to be the real payee of the

instrument.NIL_1bTest of Negotiability

Negotiability cannot be determined by agreement exceptbetween the parties. But that arrangement does not bind 3 rdpersons.Negotiable instrument serves as:

1. Substitute for money2. Medium for commercial transaction3. An instrument of credit

First Function: Substitute for moneyYou could use a check in the payment of an obligation and thecreditor, if he accepts the check, we can therefore consider thecheck as same as money. Any action to collect should be held inabeyance until the check is dishonored. But is check good as cash?

We simply said that an instrument may be a substitute formoney but a check is not necessarily money, with the exception ofcashiers check or managers check.

There are conflicting decisions on whether or not cashiers

check is of legal tender.Cashiers check and managers check are the same in terms o

being a check issued by the bank against itself. The onlydifference is that a cashiers check is issued by the cashier of thebranch against the bank itself, while managers check is issued bythe manager against the bank itself.What do you mean by a check issued by the bank against itself?

It may be the drawer and the drawee are both the bank.In an ordinary check there are three parties: the drawer, thedrawee, and the payee.

In an ordinary check the drawer is always the bank. The drawermay either be a natural or juridical person.

If the drawer and the drawee are one, it means it is just like apromissory note. So the bank is ordering itself to pay somebodyThat is why in many cases SC said it is good as cash, because thebank has presumably the assets to back up that the check that iissued.Survey of cases on cashiers check ending with the 2009 decision:New Pacific Timber vs Seneris 101 SCRA (1980)

A compromise agreement was entered into by the plaintiff and

the defendant. Under the terms of the agreement the defendanagreed to pay the plaintiff. The compromise agreement wassubmitted by the court for approval and that rendered judgment onthe basis of the compromise agreement.

Unfortunately, the defendant, judgment debtor, breached theterms of the compromise agreement. He did not pay the plaintiff aspromised under the compromise agreement. So the plaintiff, the

judgment creditor, moved for the issuance of writ of execution (ajudgment based on a compromise agreement is immediatelyexecutory. In case of breach you can immediately move for anissuance of a writ of execution). It was granted by the court.

The judgment creditor levied on the properties of the judgmendebtor and set the date of sale. But before the sale of the leviedpersonal properties, the judgment debtor tendered payment in the

form of a cash and check drawn against Equitable Bank. The sheriff consulted the lawyer of the judgment creditor. Thelawyer said that a cashiers check is not good as cash so dontaccept it. It has to be cash so continue with the auction sale.

So the sheriff conducted the auction sale.The judgment debtor took the case all the way to the SC

arguing that the sheriff should not have proceeded with the salebecause the tender of a cashiers check is payment in cash.HELD: A cashiers check issued by a bank of good standing isgood as cash. This means that for as long as the bank is operatingin good condition, not insolvent, not closed, not distressed.PAL vs CA (1990)A check was issued in favor of judgment creditor covering a

judgment debt. Unfortunately, it was supposedly for the creditor bumade payable to the sheriff for the account of the judgmencreditor. The sheriff instead of giving the payment to the judgmencreditor pocketed the money.ISSUE: Whether or not the issuance of a check payable to thesheriff for the account of the judgment creditor is good as cash. Did it extinguish the obligation of the judgment debtor?

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HELD: The majority (CJ Narvasa dissented) of the SC held acheck whether ordinary check or cashiers check is not legaltender. It does not produce the effect of cash.

A cashiers check simply proves the affirmative capacity of theobligor to pay, because you buy/purchase a cashiers check from abank. You dont issue a cashiers check. It only proves that theobligor/buyer has the affirmative capacity to pay but the check isnot legal tender.

The SC reiterated its ruling PAL vs CA in the case of Roman

Catholic Church vs CA.Tibajia vs CA, 223 SCRA This has the same facts as in the case of New Pacific Timbers

vs Seneris, except for the parties. A cashiers check was tenderedin payment of a debt, but the SC ruled otherwise.

HELD: SC held that cashiers check is not legal tender withoutsaying that the ruling in new Pacific Timber vs Seneris isabrogated.Tan vs CA, 239 SCRA(1994)

A cashiers check was purchased from Puerto Prinsesa Branchof PCI Bank. The cashiers check was brought to Manila depositedin an account with RCBC Manila.

The depositor accomplished a deposit slip for local check not adeposit slip for regional check.

A check bought from a provincial bank is a provincial check as adistinguished from a check drawn from a Metro Manila branchwhich is a local check. If it is provincial check you must accomplisha deposit slip for regional check. If it is local check accomplish acheck for local check.

As a consequence the local check which was deposited for hisaccount was misrouted. It was not credited to his account. Sowhen he issued a check in payment of an obligation thinking thatthe cashiers check purchased had been credited to his account,the checks were dishonored.

He sued the bank for damages. HELD: If there is any mistake, it is the obligation of the bank tocall the attention of the client.

In the commercial world/parlance, the cashiers check is goodas cash and therefore that cashiers check should have been givenoutright credit regardless of the kind of deposit slip signed oraccomplished by the client. Pabugais vs Sahijiwani (2004)

A cashiers check is not legal tender. However, if the creditoraccepts without objection it becomes legal tender by estoppel. Inother words, the creditor has the option to refuse to accept thecashiers check because it is not legal tender but once he accepts

it becomes legal tender.Security Bank and Trust Company vs Rizal Commercial BankingCorporation (2009)

SC held it was legal tenderManagers check was made payable to cash and there was a

stop payment order made by the purchaser, because the one whointended to encash the check was not the intended payee.

Despite the stop payment order the drawee bank allowed theencashment.

Is the drawee bank liable for allowing the encashment despite the

stop payment order?HELD: The rural bank is not liable because a managers check

payable to cash is good as cash.Another thing we learned from this case is that a managers

check or cashier is not subject to stop payment. The buyer cannotask the bank for a stop payment order.Who can issue a stop payment order?

It is the drawer only. In a cashiers check or managers checkthe drawer is the bank, so only the bank can issue a stop paymenagainst itself, not the purchaser.

The only exception, the only time when a managers check or acashiers check may be subject to a stop payment order - In thecase of People vs Misina that is if the cashiers check was lost. Inthat case the purchaser issued the stop payment order to thebank.Given all these rulings, what is the better view?

When you become lawyers it depends on what side you wouldargue.But technically:

Under Sec 60 of RA 7653, Central Bank Act of 1990provides that the debtor cannot compel the creditor toaccept a check in payment of a debt. If the debtor cannocompel the creditor to accept a check in payment of adebt it means it is not legal tender, because legal tendeis a currency which the debtor may compel the creditor toaccept when tendered in the right amount. The lawmakes no distinction between ordinary checks andcashiers check. If the law makes no distinction, whyshould we distinguish?

Under Art 1249 of the NCC a check and other mercantiledocuments do not produce the effect of payment untiencashed or when through the fault of the creditor theyhave been impaired.

Therefore the creditor should be given the discretion not toaccept or to accept it. But if he accepts then it becomes legatender by estoppel following the ruling in Pabugais vs Sajihiwani.2nd Function: Medium or instrument of credit transactionWhat does medium of obtaining or extending credit mean?

Lets say you need to raise funds, you can issue bonds to thepublic. In our discussion in banking and quasi banking, an entitymay issue debt instruments with recourse. So these are nodeposits instruments but instruments as alternative to deposits likebonds and commercial papers.

Lets say ABC Co. needs funding or money but it does not wan

to go to the bank, because it is expensive and the banks requiresmortgage on properties or collaterals. So instead of going to thebank the company just issues bonds to the public. So the bondsnow are used as an instrument of credit to obtain funds from thepublic.FEATURES of Negotiable Instruments

1. Negotiability the capability to be transferred from one person to

another2. Accumulation of secondary contracts

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if the instrument is negotiated you get secondary contractI.e. Promissory not from M to P, that is one contract. If Pnegotiated to A, that is another contract.A to B, anothercontract.

3 KINDS of Negotiable Instruments under Negotiable InstrumentsLaw1) Promissory Notes2) Bill of Exchange3) ChecksThere are various TYPES of PROMISSORY NOTES Bonds

Commercial papers Certificates of Deposit

Caltex vs IAC, where despite the phraseology of theinstruments the SC still considered it a negotiable instrument.Certificates of Deposit when it conforms to the elements of

negotiability may be considered a negotiable instrument it fallsunder the specie of promissory notes a promise to pay by thecompany that issued it.BILLS OF EXCHANGE

DraftsThe beneficiary of an LC may issue a draft against the issuingbank or confirming bank as a mode of payment.2 KINDS:

1) Sight drafts payable on demand2) Usance drafts payable after sight,

60 days after sight payable to the order of Juan de la Cruz the amount of P100 K which means that the maturity of the instrument is fixed only upon acceptance of the drawee.

After sight payable to the order of so and soThat means you have to present the instrument for the

acceptance of the drawee. If the drawee accepts then that isthe only time that you can fix the maturity of the instrument Traders AcceptanceIt is a draft drawn by seller against the buyer.Pay to the order of myself the amount of P100 K on or beforethis day. Drawn against the buyer. If the buyer accepts thatmeans he is liable.

What is so special about this?What the payee or the seller can do is to negotiate the trade

acceptance in favor of a bank.Example:

Coca-Cola (buyer) buys sugar from Central Azucarrera (seller).So the seller will issue a draft against the buyer, pay to the order ofmyself. If the buyer accepts it is already liable.

So what payee-seller will do is to negotiate the draft/tradeacceptance in favor of a bank. Since it was already accepted byCoca-Cola presumably with plenty of resources being the topcorporation in the Philippines, the bank will buy it from the seller.Instrument considered NON-NEGOTIABLE

Warehouse ReceiptsIt does not represent an unconditional promise or order to

pay a sum certain in money.It is a promise to deliver goods not to pay money. Real Estate Mortgage

As held in GSIS vs CA Postal Money Order

As held in Phil. Education Co. vs Soriano, because thereare many restrictions which make them incompatible withconcepts of a negotiable instruments. And besides, when thegovernment engages in postal service it is not engaged in aproprietary function but a governmental function.I.e. Post Office of Manila will instruct Post Office of DapitanZamboanga to pay to the order of the holder.

Treasury WarrantsAs held in Metrobank vs CA, because treasury warrantsrequire appropriations from the national government whichmeans the funds may or may not exist. It is payable out or a particular fund which means the promiseto pay is unconditional. Stock Certificates

There is no payment of sum of money. It is simply an acknowledgement by the corporation that theperson named therein owns X number of shares.

It is considered quasi-negotiable because it can only betransferred by indorsement plus delivery.

Withdrawal slipsFirestone vs CA. Usually you issue a check in payment of an obligation. Drawe

has an account with the drawee bank. The drawer will issue acheck to its creditor in payment of an obligation. That check will bepresented to the drawee bank. That is how it goes.Typical ordinary check transaction:

Drawer issue a check payable to the order of payee drawnagainst the bank. The payee has two options, either to encash tothe drawee bank or deposit the check to his bank, which is calledthe collecting or presenting bank, who will collect from the draweebank.

Collecting bank will send the check for clearing through

Philippine Clearing House Corporation. If the check clears(meaning that if the check is not returned) then the account of thecollecting bank will be credited and account of drawee bank will bedebited and the collecting bank can now credit it to the account ofP and the Drawee bank will debit the account of the drawer.

Supposing D instead of issuing check to P issued withdrawaslips. Withdrawal slips will be deposited to his collecting bank. Thecollecting bank will send it to the drawee bank. Drawee bankclears.Are they negotiable?Supposing one of those withdrawal slips was dishonored by the

drawee bank. Is the drawee bank required to send notice odishonor to the parties?

No. SC said withdrawal slips are not negotiable instruments. Sothe obligation of giving notice of dishonor to the drawer, indorser innego does not apply despite the fact that withdrawal slips aretreated like checks. TITLE INegotiable Instrument in GeneralCHAPTER IForm and InterpretationELEMENTS

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1. must be in WRITING

You can use any kind of instrument as long as the promise ororder is in writing. You can use ball pen, pencil.

Lets say you are in a restaurant, you got a napkin, you forgotyour money, you can issue a promissory note in that napkin to thewaiter or to the owner of the bar. I promise to pay to the order ofthe owner the sum of so much, on or before this day and this wassigned voluntarily, not under the influence of liquor.

2) SIGNED by the maker or drawerWhere should the maker or drawer sign?

In the instrument. Usually at the right hand corner, below.If the signature is placed elsewhere, not in the customary place?

As long as he intends to be bound as a drawer or maker3) Must contain an UNCONDITIONAL PROMISE or ORDER TOPAY

When you say unconditional we follow the same test ofcondition under the Civil Code, which means that it does notdepend upon the happening of a future and uncertain event. Itmust not depend upon a contingent event.Examples:

I promise to pay to the order of Juan de la Cruz if I pass the BarExamination; flat 1 in special commercial law or mercantile lawreview.

The happening of the event does cure the defect. It does notmake the instrument negotiable.

Of course, when we say unconditional promise or order is notsubject to any condition EXCEPT the implied conditions under theNegotiable Instruments Law.What are the IMPLIED CONDITIONS?

1. To make the drawer and the indorser liable you have topresent the instrument for payment; and

2. The maker or the drawee should dishonor. 3. If it is dishonored you should give notice to the drawer or

the indorser. Otherwise they are not liable.Is it necessary to use the word I promise all the time?

Words of similar import are acceptable like I bind myself to pay,I guarantee to pay.In the case Traders Royal Bank vs CA

The SC said that a mere acknowledgment of a debt is not apromise to pay therefore it is not a negotiable instrument.4) SUM CERTAIN in money

Sum payable is determined from the face of the instrument

without making any reference from the any document orinstrument.On the very face of the instrument one should know how muchexactly is the obligation to be paid. Sec 2. The sum payable is sum certain within the meaning of this

Act, although it is to be paid is - b) With stated installments.Stated installments means that the due date of the installmentpayments must be indicated.

Example:Maker has to say payable in 2 installments. First one payable onthis date, second one due on this datec) With acceleration clause

Meaning default of one installment renders the entire obligationdue and demandable. d) With rate of exchangeExample:Dollars computed in Philippine Currency at prevailing rate oexchange, because you know the prevailing rate of exchange isprovided for by BSP. It is not something which is uncertainbecause there is a way of determining.e) With cost of collection or an attorneys fees

If the cost of collection or attorneys fees are to be determinedafter the maturity of the instrument. The law says it will not affectthe negotiability. It is still a sum certain because by that time theinstrument ceases to be negotiable in its commercial sense.

If the attorneys fees are payable at the outset and does nocontain any amount like reasonable attorneys fees then it is nosum certain.

If it is payable before the maturity, then the cost of collection oattorneys fees must be clear as to amount. Otherwise, it is not asum certain within the meaning of the Negotiable Instruments Law

If it is after maturity, reasonable attorneys fees it is consideredsomething which will not affect the certainty of the sum payableReasonable attorneys fee is something which will not affect thecertainty of the sum payable, because the court anyway will fix it.If the cost of collection or attorneys fee is payable after maturityeven though the instrument will just say plus cost of collection andattorneys fees silent as to amount, it will not affect the certainty othe sum payable because the court will be the one to fix it.a) With interest

The sum is certain because the presumption of the law comes

in, and that is, the legal rate of interest.It doesnt matter also if there are 2 options of legal rate (6 or 12

because the law applies.The legal rate is fixed by law 6% if the obligation does not topertain loan, forbearance of money, goods or credit. It is 12% if ipertains to a loan, forbearance of money, goods or credit.Sec 3 What if it indicates a fund to be reimbursed or a fund to be debited

after payment, like pay to the order of Juan de la Cruz the amount

of so much and thereafter debit the account or reimburse yourselfrom the account of Pedro Reyes in Equitable PCI Bank or Banco

de Oro?The order or promise to pay is unconditional within the meaning

the law though coupled with an indication of a particular fund out o

which reimbursement is to be made, or a particular account to bedebited with the amount. This is because the debiting comes aftethe payment.

But, if its payable out of a particular fund, like a treasurywarrant, the instrument is non-negotiable because the order opromise to pay is no longer unconditional. The fund may or maynot exist.4) Payable on DEMANDSec 7

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When is the instrument payable on demand?1. where it is expressed to be payable on demand, or at sight,

or on presentation; or2. where no time of payment is expressed; or3. if issued, accepted, or indorsed when overdue, it is

considered payable on demand as regards the person soissuing, accepting, or indorsing it

5) Payable at a FIXED or DETERMINABLE FUTURE timeSec 4If the instrument is expressed to be payablea. at FIXED period AFTER date or sightb. ON or BEFORE a fixed or determinable future time

specified thereinc. ON or AT a fixed period AFTER the occurrence of a

specified event, which is certain to happen although thetime of the happening is uncertain

It is not on or before the occurrence of a specified event whichis certain to happen

In our example earlier it is payable before the death of A. This isnot negotiable because we do not know when A will die.

If it is payable after the death of A, then it is negotiable becauseit is certain to happen.6. Payable to ORDER or BEARERSec 8When is an instrument considered payable to ORDER?

Where the instrument is drawn payable to the order of aspecified person or to him or his order, like pay to the order ofJuan de la Cruz; orPayable to him or to his order, like Juan or order Can it be payable to the order of the maker or drawer, meaning the

drawer is also the payee?Bank of America vs CA. The draft issued by Inter Resin, the

drawer is also the payee. This is possible because the Sec 8(b)

says so.What about an instrument payable to two or more persons jointlylike, Pay to order of A and B?

This is allowed under Sec 8 (c).What if the instrument is payable to order of A and B? Both of them

signed at the back; you have a check payable to order of A and Bboth of them signed at the back of the check. A alone went to the

bank. Can the bank allow the encashment even though B was not

around?Yes, because the last indorsement is in blank. It is a blank

indorsement which converts the order instrument into a bearerinstrument. So anyone in possession may actually encash it.

So A alone can go to the bank and encash it because by thattime by virtue of the indorsement at the back, by virtue of thesignature at the back it becomes now payable to bearer under Sec9, when the only and last indorsement is in blank.Sec 9Payable to BEARER

a. expressed to be so payable, like pay to bearerb. payable to a person named therein or bearer, like pay to

Juan or bearerc. payable to the order of a fictitious person or non-existing

person and such fact was known to the person making it

so payablei.e. pay to the order of King Neptune, pay to theorder of Superman.

d. when the name of the payee does not purport to be thename of any person, like an instrument payable to Cash

In the US it is possible that you have a person with the name oMr. Cash. But, in the Philippines when you say payable to cash it ispayable to bearer. The reason is that it does not purport to be thename of any person.

What if in the Philippines you have a person with the name of MrCash?Is that still payable to Bearer? Is that still covered by the fictitious

payee rule?That is the ruling in the case of Spouses Rodriguez vs PNB 566

SCRASo even if the person really exists as long as the maker or the

drawer did not intend him to be the payee of the instrument, that isstill considered to be payable to bearer.Lets say you have an instrument payable to the order of Juan de

la Cruz. Juan de la Cruz really exists, but the drawer did not intend

him to be the payee. Then Juan de la Cruz went to the Bank. Can

the bank allow the encashment?Can the drawer say you should not have allowed him because hedid not sign at the back?

Not necessarily, because if it is payable to the order of a personalthough existing but not intended by the maker or the drawer tobe the payee it is considered payable to bearer. An instrumenpayable to bearer can be negotiated without indorsement

e. when the only or last indorsement is an indorsement inblank

NIL_2Sec 9

It is very important to determine when an instrument isconsidered payable to bearer, because if it is payable to bearer ican be negotiated by mere delivery, unlike an order instrumenwhich cannot be negotiated by mere delivery, but requires theindorsement plus delivery.When is an instrument payable to BEARER?When -1. EXPRESSED to be so payable2. payable to a person NAMED therein OR BEARER

- like Payable to Juan or bearer 3. payable to the ORDER of a FICTITIOUS or NON-EXISTING

PERSON, and such FACT was KNOWN to the person makingit so payable

- Like Payable to the order of King Neptune; or Superman, Catwoman

4. name of the PAYEE does NOT purport to be the NAME of anyPERSON

- Like Pay to Cash5. ONLY or LAST INDORSEMENT is an indorsement IN BLANK

3. i.e. I promise to pay to the order of Juan de la CruzJuan de la Cruz indorsed, lets say Pay to PedroReyes and then signed, that is a speciaindorsement.

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But, if Juan de la Cruz simply affixed his signaturein the instrument, then that is considered aspayable to bearer the only indorsement is in blank.

Fictitious-Payee RuleAs held in PNB vs Rodriguez, the instrument is payable to

bearer even though the person really exists.

The fictitious-payee rule does not only cover a fictitious-payeeor a non-existing person. It also includes an existing person aslong as it is not intended to be a payee of the instrument. The

maker or drawer did not intend him to be the payee of theinstrument. That is considered payable to bearer.

However, the fictitious-payee rule is subject to an exception,that is, the COMMERCIAL BAD FAITH exception. If there is badfaith on the part of the drawee-bank, that will not be covered by theso called fictitious-payee rule.Example:

You have a check payable to the order of Juan de la Cruz andthere is a person with the name of Juan de la Cruz. So the maker,however, did not intend him to be the payee of the check. That isconsidered payable to bearer. It does not require therefore theindorsement of the payee before he can transfer title.

However, if there is bad faith on the part of the drawee bank,then this commercial bad faith exception would make theinstrument no longer payable to bearer but payable to order. So inthis case it will require the indorsement of the payee or indorsee. 30% of the questions in Nego are based on abnormal instruments.What are the 5 ABNORMAL INSTRUMENTS under NegotiableInstruments Law

1. Incomplete but delivered (Sec 14)2. Incomplete and undelivered (Sec 15)3. Complete but undelivered (Sec 16)4. Forged signature or made without authority (Sec 23)5. Material Alteration (Sec 124)

Sec 14What is the rule on INCOMPLETE but DELIVERED1. The SIGNATURE of the maker or drawer has to be GENUINE;and2. Given for the PURPOSE of GIVING EFFECT to a negotiableinstrument1st requirement:

If the SIGNATURE is NOT GENUINE then you apply the rule onforgery under Sec 23. 2nd requirement:

It is given for the purpose of giving effect on the negotiableinstrument.If the signature is given for autograph purposes, that may be

genuine. But is that covered by the rule on incomplete butdelivered?Example:

You are a fan of Lady Gaga and you watched her concert. Afterthe concert you got her signature. Lady Gaga obliged. Then youmade a promissory note under that signature, I, Lady Gaga,promise to pay to the order of Bruno Mars. Signed Lady Gaga.Is that covered by the rule on incomplete but delivered?

It is not. The signature may have been genuine but is not givenfor the purpose of giving effect to the instrument. The section to

apply is Sec 23, the rule on forgery. So FORGERY is not limited to the counterfeit-making o

signature, it also includes a situation where the signature isgenuine but given for the purpose other than to be bound by theinstrument, in this case, for autograph purposes.

A signature on a negotiable instrument without any otheparticulars operates as a PRIMA FACIE authority on the part of theHOLDER to fill it up.

In other words, if there is a signature on a negotiable instrumengiven for the purpose of giving effect to that instrument and all therest are blank then the one in possession, the payee, has theprima facie authority to fill it up. So it can be the amount, date, theinterest rate, place of payment. So he has the prima facie authorityto fill up the blanks.

It is incumbent upon the maker or drawer to prove that thepayee filled up the instrument not in accordance with the authoritygiven by the drawer and within a reasonable time. If he failed to overcome the presumption then the prima facieauthority obviously stands. So the maker or drawer is liable asfilled up, as completed.

But, that is only prima facie between the maker or the drawe

and payee. However, if the instrument is negotiated after completion to aholder in due course (HDC), there is now CONCLUSIVE

presumption that the instrument was filled up in accordance withthe instruction of the maker or drawer and within a reasonabletime.

So that prima facie presumption in the hands of the payeewhen negotiated to a holder under the conditions making theholder a HDC, the presumption becomes conclusive, that theinstrument was filled up in accordance with the instructions of themaker or drawer and within reasonable time. That means thainsofar as the HDC is concerned, he can enforce the instrument asfilled, as completed. And that presumption of authority cannot beovercome by any evidence to the contrary. So that is the beauty o

being a holder in due course. So this kind of infirmity, INCOMPELETE but DELIVERED doesNOT AFFECT the rights of a HDC.Example:

M signed on a negotiable instrument, intended for the P but theamount left in blank.P has the prima facie authority to fill it up. So P filled it up forP100K. Lets say that P was only authorized only up to P10K.

In favor of P there is a prima facie presumption that theinstrument is payable for P100K.It is incumbent upon M to prove that authority accorded by M is noP100K. That is the price he should pay for simply affixing hissignature on the instrument without completing all the materia

particulars. Lets say P negotiates in favor of X, under conditions making Xa HDC. For how much can X enforce the instrument against the maker?

As completed, as filled up for P100K. So from a mere prima facie presumption from the payee, when

it goes to the HDC after completion it is now conclusive. No waycan M disprove that the amount is for P100K.

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If the maker dishonors, how much is P liable to X?Also for P100K, because under Sec 65 under NIL he warrants

that the instrument is genuine and in all respects what it purportsto be.Sec 124How do you distinguish Sec 14 from this one M issued a

promissory note payable to order of P for P10K. Everything

complete for P10K. Now P ALTERED it to P100K.How much is M liable to P?The law says in cases of material alteration, the one whoaltered it cannot enforce it. It is AVOIDED insofar as he isconcerned.However, if it is negotiated to A, a holder under the conditionsmaking the holder a HDC, how much can A enforce the instrument

against M? Under Sec 124 of the NIL A may enforce the instrument for

P10K, only in accordance with the original tenor of the instrument.So as distinguished from Sec 14 where the HDC can enforce

the instrument as completed, as filled up, for material alteration thelaw says (Sec 124), the HDC can only enforce it in accordancewith the original tenor of the instrument which is P10K.If M dishonors for how much is P liable to A?For P100K because, again, as indorser he warrants that theinstrument is genuine and in all respects what it purports to be.Sec 15INCOMPLETE and UNDELIVERED

If the instrument is incomplete and undelivered the PAYEECANNOT ENFORCE it against the maker or drawer.

And if it is negotiated in favor of a HDC, the law says that kindof instrument (incomplete and undelivered) is NOT a VALIDcontract in the hands of ANY HOLDER only against a PARTYPRIOR to its completion and delivery.Example:

M signed a promissory note but left the amount in blankintended for P, the payee.M left the promissory note on top of his table, left his office. P wasable to obtain possession of that promissory note. Can P enforce that promissory note against the Maker?

NO, because it is both incomplete and undelivered. So there isno prima facie presumption or authority in favor of the payeebecause the instrument is both incomplete and undelivered.

The prima facie authority applies only to incomplete butdelivered instruments, but not in incomplete and undelivered.Supposing P completes the instrument, filled up the amount and

then negotiated the instrument to A under conditions making A aHDC. Can A enforce the instrument against M, the maker?

Law says no, because an incomplete and undeliveredinstrument is not a valid contract in the hands of any holder.

So whether or not he is a HD, it does not really matter if it isincomplete and undelivered. It becomes a defense available evenagainst a holder in due course.Can A, the HDC, enforce instrument against P, the one who

enforced or negotiated it?Yes because the law say it is not a valid contract in the hands of

any holder only against a party prior to completion and deliverySince P is a party after such completion and delivery therefore heis not covered by that rule. So he is liable as an indorser underSec 65, he warrants that the instrument is genuine and in alrespects what it purports to be.

So if it is Sec 14, Incomplete but delivered, it is only a personadefense, not available against a holder in due course.

Material alteration (Sec 124) is partly real, partly personal, inthe sense that if the instrument is enforced beyond the origina

tenor, it is a real defense. But, to the extent the instrument is beingenforced only according to its original tenor, it is only a personadefense not available against the holder in due course.

If it is Sec 15, Incomplete and undelivered, it is a real defenseavailable even against a HDC.Sec 16COMPLETE but UNDELIVERED

The maker or drawer may sign an instrument, a promissorynote, or check for that matter, it may be complete in all materiaparticulars but unless he delivers it then that contract is revocableThat means it can be withdrawn at anytime. So no right can be

given in favor of the intended payee. However, the law says if the instrument which is complete is inthe hands of the payee there is a prima facie presumption of valid

and intentional delivery. But that is only prima facie in favor of thepayee or any immediate party. When we say immediate party imeans one who knows the limitations of the instrument.

If the payee, however, negotiates to a holder under theconditions making a holder a HDC there is now a conclusivepresumption of a valid and intentional delivery for the purpose ofgiving effect to the instrument.

Similarly, it can be established also by the maker and thedrawer, as the case maybe, that instrument was delivered for aspecific purpose, like for safe-keeping or custodianship. So there

can be limitations or conditions placed on the delivery. Take note that the limitations or conditions are not on thepromise or order to pay; otherwise it is not a negotiable instrumentThe limitations or conditions are placed on the delivery, like deliveto P only for sake-keeping, or deliver to P but not to be enforcedagainst M.

All the limitations or conditions do not exist on a prima faciebasis insofar as the payee is concerned. One who is inpossession, the presumption is, although prima facie, there is validand intentional delivery and there are no conditions in the deliveryIt is now incumbent upon the maker or drawer to prove that thereare conditions or limitations to the delivery.

If the instrument is delivered in the hands of the HDC thoselimitations, those conditions on delivery do not apply, because inthe hands of a HDC it is not just a prima facie presumption but aconclusive presumption of valid and intentional delivery to make alprior parties liable to him.Example:

M made a promissory note, complete in all material particularsHe placed it on top of his table, not for delivery to the intendedpayee, but the payee got hold of it.

In the favor of the payee is a presumption that there was valid

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delivery. P, on a prima facie basis, can enforce the instrumentagainst M.

It is incumbent upon M to prove that there was no valid delivery. OR lets say M made a promissory note complete in all material

particular but only for safe-keeping, therefore not to be enforced.But again, because there is a prima facie presumption in favor ofP, it is incumbent upon the maker or drawer to prove that it is onlyfor safe-keeping.

But if the instrument is negotiated to A, a HDC, then the HDCcan enforce the instrument against M despite the fact that it is onlyfor safe-keeping, despite the fact that it should not be delivered tothe payee, because of the conclusive presumption in favor of theHDC to make all prior parties liable on the instrument.

Regarding CHECKS there are conflicting decisions.In a check transaction, there are 3 parties the drawer, payee,

and the drawee.Supposing the D (drawer) filled up a check complete in all materialparticulars in payment of the services that P (payee) rendered toD, But D did not deliver it to P. It was drawn against the ABC(drawee bank).

For whatever reason the check did not end up to P, but insteaddeposited in the account of X, with XYZ bank. XYZ bank sent thecheck for clearing, with the drawee. The check clears. So theclearing account of XYZ was credited, and the clearing account ofthe drawee bank was debited. So XYZ credits to X, and draweedebits D.

Take note that the check is payable to Ps order and therefore itcould not transfer title without his indorsement plus delivery. Itcould not have been transferred in favor of X, because it waswithout Ps indorsement or delivery or both. But X was able todeposit it to XYZ and XYZ credited it to the account of X.Does P have a cause of action against all of the parties, especially

against the collecting bank? There are 2 conflicting SC decisions; 2 conflicting schools of

thought:1. DBP of Rizal vs Sim Wei 219 SCRA2. Westmont Bank vs Ong, 375 SCRA

DBP of Rizal vs Sim Wei 219 SCRAThe SC said that the payee has ho cause of action against the

collecting bank because there is no delivery to him. Since there isno delivery he does not acquire title to the instrument. If he has notitle to the instrument he has no cause of action arising from thatparticular instrument.Westmont Bank vs Ong, 375 SCRA

The SC said that the payee may proceed directly against thecollecting bank because in case of forged indorsement or noindorsement, like in this case, then the payee may proceed directlyagainst the collecting bank under the so called, SHORT-CUTROUTE of determining the chain of liability for forgery of thepayees indorsement.There are 2 ROUTES in determining the chain of liability in case of

forgery of the payees indorsement:1. Circuitous and 2. Short-cut

What is the LONG ROUTE or CIRCUITOUS ROUTE?Circuitous route was applied in cases of:

Banco de Oro vs Equitable Bank 157 SCRA China Bank vs CA 182 SCRA Associated Bank vs CA 25 SCRALets say D is issued a check payable to the order of P in

payment for legal services. It was handed over to X the messengeof P. (As you know lawyers dont go to the clients to get theicheck. Instead, they sent their messengers. So the messenger issent there and the messenger should be familiar with the signature

of his boss). Suppose X, the messenger of P, forged Ps signature and then

deposited it to his account with XYZ Bank.

XYZ is called the collecting bank or the presenting bank becauseit collects the proceeds of the check from the drawee-bank throughthe Philippine Clearing House Corp. (PCHC), and after collectingthe proceeds credits the account of the depositor. All banks haveclearing accounts with PCHC. The members, which are banks, ofPCHC have clearing accounts.

PCHC is not BSP. It is not controlled by BSP. It is a privatecorporation. The members are banks. So the checks are clearedthrough the PCHC. So every morning or afternoon, as the case

maybe, messengers go to the PCHC to pick up the checks drawnagainst the respective branches. That check will be presented tothe drawee and the drawee now will examine if it is genuine, if it isok.

Take note in this case that the drawee has no way odetermining the forgery of the payees indorsement, because thepayee does not have an account with the drawee. The one whohas an account with the drawee is the drawer, but not the payeeThats why in case of forgery of the Payees indorsement thedrawee will not be able to return the check right away. It will take awhile before he can discover the forgery and return it.

In this case the check was sent for clearing, if the check clearsthat means the clearing account of the collecting bank will becredited and the account of the drawee-bank is debited. If the

account the drawee-bank is debited, drawee bank will debit theaccount of the drawer and the collecting bank will credit theaccount of the depositor X.

Under the circuitous route P has to proceed against the drawerbecause the check does not produce the effect of payment untiencashed. What about the DRAWER?

The drawer can proceed against the drawee, because theinstruction of the drawer to the drawee is to pay to the order of Pnot to any person who acquires title by virtue of Ps indorsementThat instruction was contravened. That instruction was breachedTherefore the drawer has the right to seek reimbursement from thedrawee.What about the DRAWEE?The drawee can proceed against the collecting bank, becausewhen the collecting bank sent the check for clearing it assumes althe warranties of an indorser under the NIL. That means theinstrument is genuine, and in all respects what it purports to beThat warranties, obviously, has been breached because of theforgery of Ps indorsment. Since there is a breach of warranty thencollecting bank is liable to reimburse the drawee-bank the amounof the check.

In fact when a check is sent for clearing there is a stamp mark

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which says, All prior indorsement and/or lack of indorsementguaranteed. It is the duty of the collecting bank to stamp mark thecheck with all prior indorsement and/or lack of indorsementguaranteed, at the back of the check. That means all thewarranties of an indorser under Sec 65.

In fact there is one case where the SC said that the mere act ofsending the check for clearing already amounts to indorsment. Andan indorsement carries with it all the warranties of an indorserunder the NIL.What about the collecting bank?If X still has an account with the collecting bank, then thecollecting bank may debit the account of the depositor, as held inthe case of Jai-Alai vs BPI 66 SCRA, even without the consent ofthe depositor, because when the depositor makes a check deposit,he signs at the back of the check twice. That signature istantamount to all the warranties of an indorser under the NIL.Because there is a breach of warranty, there being forgery, thecollecting bank can debit the account of the depositor even withouthis consent.What about the forger, does he have a right?Of course. He has the right to love, the right to vote, the right tohear, to listen to lectures.But under the NIL, he has no right.

What about SHORT-CUT ROUTE?This was applied in the cases of:

Associated Bank vs CA (208 SCRA) Westmont Bank vs Ong (375 SCRA)

So short-cut route, SC said that lets cut chase, lets make itshorter. Who is the one liable ultimately in case of forgedindorsement? The collecting bank. So why go to the circuitousroute? Lets allow the payee to proceed directly against thecollecting bank, because after all he has the last touch. He was thelast one at fault. So the presumption is he was the one whocaused all the problem. He has the obligation to ascertain that thegenuiness of the indorsement. Failing which he is liable.

So the GENERAL RULE is that in case of forgery of the payees

indorsement, whether circuitous route or short-cut route, the oneliable is the collecting bank.NIL_3 1241FORGERYWhat is FORGERY?

Forgery is not limited to the counterfeit making of a signature. Forgery includes: counterfeit making of signature; or signature given without authority; or signature given for the purpose other than to be bound

on the negotiable instrument The one which we are most familiar with is the counterfeit of thesignature. When you say forged, that means that the signature isa fake. That is what we commonly associate forgery with.

But as we said, it includes a signature given without authority.So if an agent signs in behalf of the principal without authority ofthe principal, then the effects are similar to forgery.

And the 3rd one is that the signature may be genuine but givenfor the purpose other than to be bound on the negotiableinstrument. The example given above is the signature given for

autograph purposes. The signature may be genuine but it iscovered by the rule on forgery because it was not given for thepurpose of being bound on the instrument.What is the basic RULE on forgery?

Lets simplify Sec 23 by simply saying that NO RIGHT can beacquired under a FORGED SIGNATURE or one made withouauthority. So by this statement we are clear that it is merely thesignature which is inoperative. It is only the signature that has noeffect, but not the instrument itself.

So despite a forged signature certain rights may be acquired onthat instrument even though it bears a forged signature of one ofthe parties to the transaction.Example:

P forged the drawers signature on a check. The check wassupposedly drawn against ABC Bank, but the payee forged thedrawers signature. Because the signature of the payee is forgedthere is no order to pay given to the drawee.What if P, after forging the signature, negotiates the check in favor

of A and under conditions making him a holder in due course? Agoes to the drawee bank. The bank dishonors.

The drawer is not liable because his signature is forged.What about P?

He is liable, because his signature is genuine and he is liable

as an indorser under the NIL. So he warrants that the instrument isgenuine and in all respects what it purports to be.

When the signature of the maker or the drawer is forged, then iis as if there is no promise to pay.What are the EXCEPTIONS, where a right may be acquired unde

a forged signature or one made without authority?The person against whom the instrument shall be enforced is

barred or precluded from invoking the defense of forgery.What are the CASES or instances where a party is BARRED frominvoking the defense of forgery?

1. Those who by their ACTION, OMISSION, o

NEGLIGENCE are estopped from denying genuiness othe signature

2. Those who WARRANT the genuiness of the signature3. If the forger is NOT NECESSARY to the TITLE of the

holderExample:1. M issues a promissory note to the order of P. P forged Ms

signature and then negotiated to A. Then A to B. B goes to MM dishonored because the signature is forged

B can go against P or A because of their warranties as indorser

2. M issued a promissory note payable to the order of P. Aforged Ps signature and made it payable to him. So pay to A signed P. Ps indorsement was forged by A. Afteforging Ps indorsement, A negotiated to B. Then B to C.

Can C enforce the promissory note against M? Is it an order instrument or bearer instrument?If it is a bearer instrument can C enforce payment of thepromissory note to M?Can M reason that there is forgery of the instrument in this case?

No, because the forgery is not necessary to the title of the

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holder. With or without the indorsement this instrument can benegotiated by mere delivery.What if it is an order instrument?

Under Sec 30 an order instrument can be negotiated only by 2steps indorsement plus delivery. So if the indorsement is forgedthen no title transferred in favor of the subsequent holder.

But in this case, the forgery is not on the signature of themaker. The forgery is on the indorsement and the rule is thatparties subsequent to the forgery cannot enforce the instrument

against parties prior to the forgery. So virtue of the forgery therelationship between the parties prior to the forgery and after theforgery is cut-off. So the juridical tie is cut-off by virtue of theforged indorsement.So therefore can C enforce the instrument against M?

No, because there was forged indorsement. Title cannot betransferred to AA to BB to C.Can C enforce the instrument against P, assuming M dishonors?

NoCan C enforce the instrument against A or B?

Yes, because they are parties subsequent to the forgery.In drawing a check there are 3 parties the drawer, thedrawee, and the payee.

The difference between a check and a bill of exchange is that acheck is drawn against the bank and payable on demand.Example:

The signature of the drawer (D) is forged. P forged Dssignature. P has the option either to go to the drawee-bank andencash the check or to deposit the check to his account.

Lets say P goes to the drawee-bank to encash the check overthe counter. The drawee-bank is supposed to know the signatureof the drawer. The drawer maintains an account with the drawee.

When you open an account you are asked to give a specimensignature or a specimen signature card. And every time a check is

drawn against your account the signature verifier or the cashier asthe case may be compares the signature on the check andspecimen signature of the signature card. It they dont match thenthe drawee must dishonor the check because of the forgery.What if the drawee honors the check because the forgery was

perfectly done?What are the rights of D?

The SC held in many cases that the drawee has the obligationto restore the account of the drawer, because no right can beacquired from this forged signature.When will you know that the signature is forged?

When you receive a statement of account, it contains all thechecks that the drawer has supposedly issued. So when you maintain a checking account every month youreceive a statement of account from the drawee-with the checkstubs you have issued. So you have to compare, check each andevery check that you have issued to recall if you indeed issued acheck in favor of a particular person.

So once you received the statement account, you noticed that ithas been debited for so much cannot recall having issued suchcheck in favor of somebody else. It was paid to the bank and thedrawee-bank. So the drawee-bank has the obligation to restore the

account.That is simple. Lets complicate it a little bit

P instead of the going to bank over the counter deposited thecheck to his account with ABC. As we said last time, in this kind otransaction the bank that presents the check for clearing is calledthe presenting bank or colleting bank. Presenting bank because ipresents the check to the drawee and at the same time a collectingbank because it is supposed to collect the check proceeds fromthe drawee.

All banks, universal banks, commercial banks, thrift banksmaintain a clearing account with the Philippine Clearing HouseCorporation. Now those banks without clearing accounts openaccounts with those banks with clearing accounts. Example, aRural Bank has no clearing facility. So a rural bank will have anaccount with Metrobank. Metrobank will be the one to send thecheck for clearing of all accounts drawn against Rural Bank. So ithas a tie-up with a bank which has clearing facilities.

Banks which are universal, commercial and thrift are required tohave a clearing account with PCHC. All of them are consideredmembers of PCHC. This is very important because in many casesthe SC said that if it issues or executes rules or matters whichconcerns clearing items then the banks are bound by the rulesissued by the PCHC. The 24 hour clearing rule, for instance isnot a court mandated rule or legislation. It is a rule issued byPCHC but banks are bound because they are consideredmembers-participants of the PCHC. When you become a membeyou adhere to the rules and regulations that PCHC will issue.

Now the PCHC is not the BSP. It is not an agency of the BSP. Itis not a government corporation. It is a private corporation thafacilitates the clearing of checks.

Everyday all banks send their messengers to PCHC. Thesemessengers pick up the checks drawn against their respectivebranches and then they deliver the checks to their respectivebranches for the branch manager to see if the checks are genuineor not.

So it is not a question of ABC Bank as the collecting bankasking the drawee-bank, Hey! There is a check being depositedwith my account, can you please confirm if it is valid or not?Obviously, that kind of thinking will never work because there aremany branches of banks in the country. So they just pick it up thechecks at the PCHCdelivered to their respective branches focomparison, whether or not it is genuine or forged.

If the signature is forged. P deposited the check with thecollecting bank. The collecting bank sent the check to the drawee-bank through the PCHC. The drawee picks up the check fromPCHC and the check goes back to the drawee. The draweecompares the signature of on the check with the signature of the

drawer. The drawee must dishonor the check, because the draweeis supposed to know the signature of the drawer. So if there is anindication of forgery, it must right there and then dishonor. This iswhere the 24 HOUR RULE applies.

Under the 24 HOUR RULE, in case of forgery of the signaturethe drawee must return the check to the collecting bank within 24hours not within the following day.What happens if the drawee did not return the check to thecollecting bank? Under the PCHC rules the account of the drawee will be

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debited and the account of the collecting bank will be credited. Soonce the account of the collecting bank has been credited then thecollecting bank can now credit the account of P. And the account ofthe drawer with the drawee-bank will be debited.What if the signature of the drawer is genuine, and instead what is

forged is the signature or indorsement of the payee?Example:

D, drawer, issued a check in favor of P for payment of legalservices. The check and the signature of the drawer are genuine.

D handed over the check to X, messenger of D. X forged thesignature of P and deposited the check in his account with ABCBank. ABC Bank sent the check to the drawee-bank through thePCHC.Is the drawee-bank expected to return the check within 24 hours?

No, because the payee does not have an account with thedrawee bank, unlike in the first situation it is the signature of thedrawer which was forged and the drawer maintains an accountwith the drawee.

In case of forgery of the payees indorsement, the payee maynot have an account with the drawee bank. So the drawee-bankhas no way of ascertaining whether the signature of the payee isgenuine or forged. So if the check is sent for clearing, in all

likelihood, the account of the drawee-bank will be debited and theaccount of the collecting bank will be credited. So the collectingbank will now credit the account of the depositor-forger and theaccount of the drawer will be debited.

Once P starts complaining with the drawer, You havent paidme my attorneys fees. P starts to investigate and then realizes that his account has beendebited and yet no payment has been made. What are the rights and obligations of the parties?

There are 2 ways to determine the chain of liability - thecircuitous route and the short-cut route. Whether circuitous routeor the short-cut route, generally it is the INDORSER or collectingbank which bears the liability.

So in case of forgery (this was asked twice in the bar already)of the payees indorsement it is the indorser that generally bearsthe liability.

If it is under the CIRCUITOUS route, the explanation of the SCin the 2009 case of Bank of America the reasons are these:1. With respect to the payee he has the right to seek for

payment against the drawer, because insofar as he isconcerned, the check does not have the effect of paymentuntil encashed.

2. On the other hand the drawer may seek reimbursementfrom the drawee, because the instruction of the drawer to thedrawee was contravened or violated. The drawer instructedthe drawee to pay the payee or any person who acquires

title by virtue of his indorsement. That was contravened orbreached by the drawee-bank. So the drawee-bank is duty-bound to reimburse the drawer.

3. The drawee-bank has the right to proceed against thecollecting bank because when the collecting-bank sent thecheck for clearing it assumes all the warranties of anindorser. The stamp mark, all prior and/or lack ofindorsement guaranteed, that is tantamount to indorsement.

And an indorsement carries with it all the warranties of ageneral indorser under Sec 65 of the NIL.

In fact there is one case where the SC held that the mere act

of sending the check for clearing even without the stamp markall prior and/or lack of indorsment guaranteed, is tantamount toan indorsment. So therefore the collecting bank assumes all thewarranties of an indorser. And since there is a forgery this case, iis deemed to have breached that warranty and therefore liable toreimburse the drawee-bank.

3. The collecting bank has the right to debit the account ofthe depositor-forger, in the case of Jai-Alai vs BPI 66

SCRA, because when the depositor deposits a check tohis account with the collecting bank he signs at the backof the check. That signature is tantamount toindorsement. So it goes with it the warranty that theinstrument is genuine and in all respects what it purportsto be. That was breached or violated; therefore thecollecting bank can debit the account with or without hisconsent.

On the other hand, the SHORT-CUT route is based on thispremise: The one who is ultimately liable is the collecting bank. Heis the one who is supposed to ascertain the genuiness of theindorsement. So why go to the circuitous route, if you knowanyway the party ultimately responsible.

In the case of Associated Bank vs CA 208 SCRA the payee wasallowed to proceed against the collecting bank because of theprinciple of quasi-delict, for negligence.

But, in recent cases, Westmont Bank vs Ong in particular, itwas not based on quasi-delict. It was based on the NIL. Thecollecting bank has the obligation to ascertain the genuiness of theindorsement. Failing which, it is liable.EXCEPTIONS

There are parties who warrant the genuiness of the signatureSo those who warrant the signature are precluded or are notallowed to invoke forgery.Who are these parties who are PRECLUDED from denying forgeryby admitting the genuiness of the signature?

4. the ACCEPTOR 5. the INDORSER3. Negligence

INDORSERThe indorser warrants that the instrument is genuine and in al

respects what it purports to be. So when the indorser negotiateshe admits the signatures of the previous parties.

ACCEPTORDoes the drawee admit the genuiness of the drawers signature? He does not. It is the acceptor that admits the genuiness o

drawers signature. So if the drawee accepts the order to pay, thais tantamount to admitting that the signature of the drawer isgenuine, otherwise he should not have accepted.

So the drawee is not liable unless and until he accepts theinstrument. The liability of the drawee is premised on hisacceptance. Being a mere drawee per se does not make him liableto the instrument. It is the act of acceptance that makes him liableon the negotiable instrument.

If the drawee dishonors the check without valid reason, he isnot liable under the NIL, meaning the payee cannot proceed

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against the drawee for the dishonor of the check.But the SC held, in so many cases, that the drawee, however,

is liable to the drawer for breach of contract. So the drawer hasfunds with the drawee bank, the signature is genuine, but thedrawee dishonors the check issued by the drawer, in so manycases, the SC said that the drawer can proceed against thedrawee for breach of contract.

But take note that under the NIL the drawee is not liable on thenegotiable instruments unless and until the drawee accepts the

same.Therefore can the payee file a case against the drawee bank fordishonoring the check or the instrument?

No. The cause of action pertains to the drawer. The drawer canproceed against the drawee, but the payee has no cause of actionagainst the drawee because the liability of the drawee is premisedon acceptance of the check. Once he accepts then he is barredfrom denying the genuiness of the drawers signature.Bar Question:

Romeo fearful for his life issued a check payable to the order ofhis girlfriend Juliet. He instructed her that if something happens tohim, present the check to the drawee to get the money for her

sustenance. The threat on the life of Romeo was aborted so hesurvived. Juliet, however, presented the check to the drawee-bank.The drawee bank dishonors. Due to the dishonor Juliet broke upwith Romeo.Does Juliet, payee, have a cause of action against the drawee?

Juliet has no cause of action because the drawee is not liableunless and until he accepts the check. The payee has no cause ofaction against the drawee because the liability of the liability of thedrawee is premised on acceptance.

There is one author who said that the drawee-bank is liablebecause if the drawee-bank did not dishonor the check Julietwould not have broken up with Romeo. The liability is based onquasi-delict. But how can you answer a question in nego based onquasi-delict? It doesnt make sense. The question is on

Commercial Law, not on Civil Law. You have to answer it based onthe principles of nego, not under the principle of quasi-delict.NEGLIGENCE

Unless the party against whom the instrument is sought to beenforced is precluded from invoking the defense of forgery.

These are those by their action, omission, negligence, estoppelare barred from invoking the defense of forgery.Example:

Even though the signature is forged, but if the person claims it tobe genuine then he is estopped from denying forgery.

In case of NEGLIGENCE, the negligent party is precluded or

barred from invoking forgery.Who can be the NEGLIGENT PARTY?You can have the negligence of the:

drawer drawee collecting bank

Negligence of the DRAWERPNB vs Quimpo 158 SCRA

D and A are best friends. A accompanied D to the bank to

transact business, but then D left his checkbook inside his car. Asaw the checkbook of his best friend, got a piece and because hewas the best friend he knew As signature and he forged thesignature of his best friend. A went to the bank and the bankallowed the encashment. After that D, upon receiving his statemenof account noticed that he issued a check to his friend, A. But henever issued that check, so he went to the bank and cried forgery.

The bank said that you are negligent, because if you did notleave the checkbook inside your car then your friend would nohave obtained a piece and could not have committed forgery. You

negligence facilitated the commission of the forgery.Is that the kind of negligence contemplated by law?It has to be gross negligence not the kind of negligence referred

to by PNB. The SC said that PNB it is your negligence thatfacilitated the forgery, because you are supposed to know thesignature of the drawer. And you are supposed to dishonor thecheck containing the forged signature. Failing which you are dutybound to restore the account of the drawer.How do you distinguish this with the case of Security Bank vs

Triump Lumber Co? It involves LOST CHECKBOOK, but this time the drawer wasconsidered negligent. The DRAWER KNEW already that thecheckbook was lost but did NOT NOTIFIED security BANK.MWSS vs CA 140 SCRA

The signatures of authorized signatories of MWSS were forgedBut despite the fact that the account was debited, the SC did nomade the drawee-bank liable to restore the account of the drawerbecause of the following reasons:

MWSS customized its own checks. So it does not usethe checks of PNB. It prints its own checks. And anyonecan access to the printing press. So there are noappropriate security measures.

MWSS would not bother to check ____All these things taken together, the SC says, amounted to

negligence on the part of the drawer. That is why it was barredfrom invoking the defense of forgery.Gempesaw vs CA

This involves trust on ones accountant.Gempesaw owned a Sari-sari store in Caloocan. He

accountant for 8 years would just prepare the checks for thesignature of Gempesaw. The Checks were supposed to be issuedin favor to the supplier of Gempesaw. But all the entries in thecheck (the amount, the payee), the transactions, the invoices wereall prepared by the accountant. Gempesaw blindedly just signedthe check prepared by the accountant. It turns out the some othese cases resulted in the forgery of the signature.

The SC said that too much trust in ones accountant and failureto set-up an accounting system, where you can monitor and trackthe checks that you issued amounted to negligence. With all youbusiness, you are supposed to have an accounting procedura

system so that you can compare the checks you have supposedlyissued with the checks duly returned by the drawee-bank. And youare supposed to act right away if there is a forgery on yousignature.BPI vs MontessoriWhat about a statement or a provision in the statement of accoun

which says that if there is no complaint in 10 days from receipt o

the statement of account, then the transactions are conclusivelypresumed to be valid? The stipulation does not prevent the invocation of forgery ifthats what really happened.

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Ilusorio vs CA

Trust in ones secretary.Every time the bank will call-up, it will be picked-up by the

secretary. Secretary said that yes my boss issued a check, yes forthat amount, yes as dated, yes to that payee. So true enough theforgery was committed. So in that case Ilusorio, the drawer, wasbarred from invoking the defense of forgery. Republic vs Equitable Bank

There is a limit on the authority of the drawers authorized

signatories. Lets say the authorized signatory can only sign up toP5K, but the amount is beyond P5K but despite the fact thatamount is beyond the authorized limit, the drawer did notcomplain. So therefore the drawer is barred, likewise from invokingforgery.Negligence of the DRAWEE

Almost all the cases in the negligence of the drawee pertain tothe inability or FAILURE TO DETECT the forgery of the drawerssignature.Negligence of the COLLECTING BANK

Collecting banks liability is based on its warranty as an

indorser. There are cases, however, where the liabilities of the draweeand the collecting bank were fixed. In the case of:

Gempesaw vs CA it was 50:50 BPI vs CA it was 60:40. 60% drawee-bank; 40%

collecting bank. That is the only case in the history of theNIL where the liability of that is fixed at 60:40.

Why? What is the basis of the 60:40? There was more negligence on the part the drawee rather than

the collecting bank, but the SC did not explain why 60:40. It madeits own allocation. But it can be deduced that it has something todo with the negligence on the part of the drawee-bank.BPI vs CA An impostor was able to claim the proceeds of a pre-terminatedmoney market placement with BPI.

Lets say that PhilAm has a money market placement with BPIand the authorized investor of PhilAm is X. Y pretended to be Xand he gave instructions to BPI as drawee to pre-terminate themoney market placement. And through the series of instructiongiven, the BPI personnel believed that he is dealing with the real X.It turned out that Y was not really the investor but the impostor.

The impostor was able to claim the proceeds of the pre-terminated the market placement. So BPI issued a check in favorof the impostor. The impostor went to China Bank and opens anaccount and deposited the check representing the proceeds of the

money-market placement. China Bank, the collecting bank in that case, did not conduct athorough investigation of the background of the investor. It allowedthe opening of an account with a mere strength of the Taxpayer

Account Number (TAN). Later on the impostor withdrew proceedsof the check.

After that the real investor instructed BPI to terminate theinvestment. BPI said you already terminated it.

The drawer conducted an investigation and he discovered that

the impostor was the one who obtained the proceeds. Who is liable to pay? BPI, the drawee-bank, did not require the surrender or return othe instrument evidencing the money market placement. It wasnegligent.What about China Bank, collecting bank?

Negligent because it allowed the opening of the account withouconducting a thorough background investigation and allowed thewithdrawal of the proceeds.

In this case there was more negligence on the part of BPI thatis why it has to share more of the burden than that of the collectingbank.NIL_4bFictitious-Payee Rule

If an instrument is payable to the order of a 3rd person, like payto the order of John, that is an order instrument. And thereforethat instrument cannot be negotiated without the indorsement oJohn plus delivery.Is it possible for an order instrument to be considered payable tobearer?

Yes, if it is payable to the order of a fictitious person or a nonexisting person, and such fact is known to the person issuing ormaking it.

Under the fictitious-payee rule, which is a principle borrowed bythe SC from the US SC, even though the person really exists, buhe is not intended payee of the maker or drawer then he isconsidered, likewise a fictitious-payee. And therefore theinstrument is considered payable to bearer.Example:

If you have an instrument payable to the order of John, andJohn really exists but he is not the intended payee of the drawer othe maker. In that case it is considered payable to bearer still.How is this applied in the Philippine setting?Spouses Rodriguez vs PNB

Spouses A and B (Spouses Rodriguez) have an account withPNB. And then you have the Philippine National Bank Employees

Association (PNBEA) also with an account with PNB. PNBEA and A and B have a discounting arrangement, that is

PNBEA issues checks payable to its members, X and Y, membersemployees of the association.

If the account of PNBEA is not funded, A and B will discount thechecks, meaning X and Y will negotiate the checks to A and Bthen A and B will issue replacements payable to X and Y. That wi

be spouses A and B payable to X and Y, employees or members othe association.

Certain officers of the association committed fraud. They madeit appear t

nil transcribed

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