Negotiable Instruments Law July 28 WWW

FORGERY (BILL OF EXCHANGE)

DRAWERS SIGNATURE IS FORGED

Q: How about other parties?

Q: Will it matter if its a bearer or order instrument? So you have the

Drawer whose signature is forged by F, payable to order of his
name(drawer), had the instrument accepted by the drawee, B
returned to F, accepted-negotiated to A B C (current holder). C
went to B but refuses to pay. Is the act of B valid? [ Parties: B
(drawee); F (forger); C (current holder) ]

Drawer will not be held liable, because it is his signature which is

forged. His not a party to the instrument and can raise the real
defense of forgery( prior parties)

A: No, the drawee has the duty to ascertain the genuiness of the
drawers signature. When he accepted it from F, he is liable because
Under Sec 62, The acceptor by accepting the instrument, engages
that he will pay it according to the tenor of his acceptance and
admits:
a. The existence of the drawer, the genuiness of his signature
and his capacity and authority to draw the instrument ; and
b. The existence if the payee and his then capacity to indorse.

Subsequent parties:
Indorsers - shall be liable to C since it warranted the
genuiness of the instrument.
Negotiated by delivery liable only if immediate transferor.
Perpetrator - the forger is ultimately liable since forgery is
punishable by law.

IF INDORSERS SIGNATURE IS FORGED

Q: Can the drawee-acceptor be held liable?

Q: Why can the drawee-accpeptor be liable if the drawers signature

is forged?

A: No, because the forgery was made after his acceptance and can
raise real defense of forgery.

A: By accepting, he then warranted the signature of the drawer. So

he cant claim forgery in the signature of the drawer because he
already accepted the instrument. The drawee-acceptor will be liable
because he warrants the signature of the drawer.

If forgery was before acceptance, the drawee bank is not liable if ever
there is forgery in the indorsers because its most likely that the
indorsers are not clients of the banks. And the banks are not bound
to inquire nor expected to know the signatures of non-clients. SC:
Drawee-bank cant debit the account of the drawer because it paid
as if they paid with their own money for who is their payee. So they
go to the person whom they paid, or to the forger. Drawee acceptor
would not be held to pay although it promised to pay as an acceptor
according to their tenor of acceptance. The tenor of the acceptance
is in the order of the person. So if it pays to the person not to the

Q: If hes a drawee not acceptor? If he pays the instrument? What is

the effect if he pays?
A: He will be liable. Payment of instrument is deemed acceptance for
one. (Golden Palace Case)
Davad | Mejica | Montero | Navarro | Padao | Regalado | Rudela |

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order of the drawer then, they are not paying according to the tenor
of its acceptance of the instrument. Their acceptance was only to the
tenor of its acceptance from that of a drawer.
Drawee acceptpr cant be held liable even if accepted before or after
the forgery. If before, you can always raise the real defense of
forgery. If after, not still precluded to raise the defense because
after all, they have to pay according to the tenor of its acceptance.
They never warranted genuineness. So drawee cant be made liable.
Always deemed a person prior to the forgery. Unless, negligence.

Drawer - will not be liable because of the real defense of forgery.

Drawer can be considered an indorser because he allowed the
transfer of the instrument but because he is a prior party, he is not
liable by reason of the personal defense of non delivery.
Subsequent parties
Indorsers liable because of the warranty
Negotiated bydelivery only ifmmediate transferor.
Forger ultimately liable.

Q: How about other parties?

Drawer is not liable because as a prior party, he can raise the real
defense of forgery. Sunsequent parties
Indorsers - liable because they warrant the genuineness.
Negotiating by delivery only liable if immediate transferor
Perpetrator ultimately liable.

BEARER INSTRUMENT
NOT a HDC - No one is precluded from writing at the back of the
instrument. He can still be an indorser but not necessary that it
transfers title.
As a general rule, acceptor can be held liable but they can raise the
personal defense of non delivery. Consequently, cannot be held
liable.
Q: How about other parties?

Gempesaw VS CA:
FACTS:
Gempesaw owned grocery stores
82 checks amounting to P1,208, 606 were issued to suppliers of
Gempesaw, these never got to the payees
Gempesaw's book keeper Alicia Galang prepares the checks and
gives them to Natividad together with the invoices of the purchases
for signature
the checks were deposited to the account of Alfredo Romero and
Benito Lam by Chief accountant of Buendia Branch, Ernesto Boon
through forged indorsements of payees
Gempesaw found out about the fraud only 2 years later when she
finally checked her bank account and noticed it was depleted more

ATTY AMAGO: in a span of 2 years the payees never questioned

since they were really paid; it is just that the amount written in the

Davad | Mejica | Montero | Navarro | Padao | Regalado | Rudela |

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checks were more than the invoices, so what Galang got was the
excess of the amount payable to the suppliers

Whether or not petitioner may recover from the drawee bank.

HELD
Parties:

Gempesaw (drawer)
suppliers (payees)
Galang (forger)
PBC (drawee- acceptor)

GENERAL RULE: is that the drawee-acceptor who pays the instrument

not in accordance to the order of the drawer, cannot debit the
account of the drawer. HOWEVER as an exception, if there is
negligence on the part of drawer, the drawer becomes liable.
-since Gempesaw was negligent by not looking at the invoices before
signing the checks and for failing to keep track of her account for 2
years = 50% liability
-since PBC violated its internal rules by allowing only the Chief
Accountant to accept instead of the Branch Manager, also 50%
liability
-they can go after Galang for reimbursement.
SAMSUNG CONSTRUCTION CO. V. FEBTC
FACTS
A check with forged signature payable to cash was drawn against
petitioners account. Petitioner demands credit of the amount
debited by encashment.
ISSUE:
Davad | Mejica | Montero | Navarro | Padao | Regalado | Rudela |

YES. The drawer whose signature was forged may still recover from
the bank as long as he or she is not precluded from setting up the
defense of forgery. Here, the drawer, Samsung Construction, is not
precluded by negligence from setting up the forgery. The general
rule should apply. Consequently, if a bank pays a forged check, it
must be considered as paying out of its funds and cannot charge the
amount so paid to the account of the depositor. A bank is liable,
irrespective of its good faith, in paying a forged check.

ATTY AMAGO: Why were they not able to prove it? How did the SC
discuss the matter? First, they were not able to present evidence
that there is a violation of the rules of procedure by Samsung. SC
said that even if its your employee who will do the forgery, it
doesnt automatically mean that there is negligence on the part of
the employer. SC also said that even if you placed the check on your
table, it doesnt right away mean that you are negligent. So unsa
naman gyud diay negligent? Gibutang sa lamisa, ma-agian sa tanan
tao pwede kawaton, di na sya negligent? Its because FEBTC was not
able to prove WHAT DEGREE OF CARE SHOULD HAVE BEEN
EXERCISED. So in this case, the presumption stands that Samsung
was diligent in taking care of its check.
Another issue also is, why is it that in this case, the drawer is not
negligent and so the general rule applies that the drawee is liable. SC
said that the drawer is not negligent and in fact, it is the drawee that
is negligent. Velez(?) said that they called the drawer but he was not
able to answer and that should have been extraordinary diligence on
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their part already because calling the drawer is not part of their
ordinary procedure. But SC said they should have verified even if
they called. It is so unusual also that a check for 1M is just payable to
cash. So all in all, there is negligence on the part of the drawee.

All prior endorsements guaranteed ASSOCIATED BANK.

So again here, SC said that the general rule should apply. That in case
there is forgery in the signature of the drawer, it should be the
drawee who should be liable because the exception will not apply.
The exception would have been if the drawer was negligent. But
here, it was not proved so general rule applies.

HELD

ASSOCIATED BANK V. CA
FACTS
The Province of Tarlac was disbursing funds to Concepcion
Emergency Hospital via checks drawn against its account with the
Philippine National Bank (PNB). These checks were drawn payable to
the order of Concepcion Emergency Hospital. Fausto Pangilinan was
the cashier of Concepcion Emergency Hospital in Tarlac until his
retirement in 1978. He used to handle checks issued by the
provincial government of Tarlac to the said hospital. However, after
his retirement, the provincial government still delivered checks to
him until its discovery of this irregularity in 1981. By forging the
signature of the chief payee of the hospital (Dr. Adena Canlas),
Pangilinan was able to deposit 30 checks amounting to P203k to his
account with the Associated Bank.
When the province of Tarlac discovered this irregularity, it
demanded PNB to reimburse the said amount. PNB in turn
demanded Associated Bank to reimburse said amount. PNB averred
that Associated Bank is liable to reimburse because of its
indorsement borne on the face of the checks:
Davad | Mejica | Montero | Navarro | Padao | Regalado | Rudela |

ISSUE: What are the liabilities of each party?

The checks involved in this case are order instruments.

Liability of Associated Bank
Where the instrument is payable to order at the time of the forgery,
such as the checks in this case, the signature of its rightful holder
(here, the payee hospital) is essential to transfer title to the same
instrument. When the holders indorsement is forged, all parties
prior to the forgery may raise the real defense of forgery against all
parties subsequent thereto.
A collecting bank (in this case Associated Bank) where a check is
deposited and which indorses the check upon presentment with the
drawee bank (PNB), is such an indorser. So even if the indorsement
on the check deposited by the bankss client is forged, Associated
Bank is bound by its warranties as an indorser and cannot set up the
defense of forgery as against the PNB.
EXCEPTION: If it can be shown that the drawee bank (PNB)
unreasonably delayed in notifying the collecting bank (Associated
Bank) of the fact of the forgery so much so that the latter can no
longer collect reimbursement from the depositor-forger.
Liability of PNB
The bank on which a check is drawn, known as the drawee bank
(PNB), is under strict liability to pay the check to the order of the
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payee (Provincial Government of Tarlac). Payment under a forged

indorsement is not to the drawers order. When the drawee bank
pays a person other than the payee, it does not comply with the
terms of the check and violates its duty to charge its customers (the
drawer) account only for properly payable items. Since the drawee
bank did not pay a holder or other person entitled to receive
payment, it has no right to reimbursement from the drawer. The
general rule then is that the drawee bank may not debit the drawers
account and is not entitled to indemnification from the drawer. The
risk of loss must perforce fall on the drawee bank.
EXCEPTION: If the drawee bank (PNB) can prove a failure by the
customer/drawer (Tarlac Province) to exercise ordinary care that
substantially contributed to the making of the forged signature, the
drawer is precluded from asserting the forgery.
In sum, by reason of Associated Banks indorsement and warranties
of prior indorsements as a party after the forgery, it is liable to
refund the amount to PNB. The Province of Tarlac can ask
reimbursement from PNB because the Province is a party prior to
the forgery. Hence, the instrument is inoperative. HOWEVER, it has
been proven that the Provincial Government of Tarlac has been
negligent in issuing the checks especially when it continued to
deliver the checks to Pangilinan even when he already retired. Due
to this contributory negligence, PNB is only ordered to pay 50% of
the amount or half of P203 K.
BUT THEN AGAIN, since PNB can pass its loss to Associated Bank (by
reason of Associated Banks warranties), PNB can ask the 50%
reimbursement from Associated Bank. Associated Bank can ask
reimbursement from Pangilinan but unfortunately in this case, the
court did not acquire jurisdiction over him.
Davad | Mejica | Montero | Navarro | Padao | Regalado | Rudela |

ATTY AMAGO: The defect here is forgery. Where is the forgery? In

the indorsement. Whats the general rule if there is forgery in the
signature of the indorser? The drawer and the drawee are not liable.
And the subsequent parties are the ones liable instead. In this case
the subsequent party is the collecting bank. The collecting bank is
just like an indorser but they just dont sign the instrument, they put
at the back of the instrument a stamp to signify that they indorse
and they warrant all prior indorsements.
So here, because there is negligence of some parties, the general
rule cannot apply. We then go to the exception. First exception is
NEGLIGENCE ON THE PART OF THE DRAWER. So the drawer is
precluded from raising the defense of forgery in this case even if the
general rule is that theyre not supposed to be liable. The drawer
here is considered negligent because its been 3 years since he
retired from the Province of Tarlac and he continued to allow this
person to do the processing of their checks.
Then, whats the defense of the Associated Bank why they shouldnt
be held liable? That the 24-hour clearing rule was violated because
they were informed of the forgery only 21 days after. The SC said
that the purpose of the 24-hour regulation is to give time to the
collecting bank to go after the forger. But SC said that even if PNB
was able to inform Associated Bank within 24 hours, would they
have been able to go after Pangilinan in this case? No, because his
account has already been depleted, meaning he has already
withdrawn the amount from which they can supposedly go after the
forger. SC said that it would have been useless; yes you could have
followed the 24-hour rule but even if they complied with that, the
Associated Bank would still not be able to collect from the forger. So
PNB here cannot be considered negligent.

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Take note class that a drawee can be considered negligent if they

violate the 24-hour clearing rule but in this case, while it is true that
they violated that, the SC did not give it any bearing because the
Associated Bank would still not have been able to pursue the forger.

Students Question: Sir, in that case (Associated Bank vs. CA),

if theres no collecting bank and its only the Province of Tarlac
that is negligent, would the 50-50 also apply to the Province of
Tarlac and PNB?

For me class ha, thats a but stiff. PNB should have been asked to
share an amount here. Kay the 24-hour rule says man nga regardless
you can go after the forger or not. But again, this is the SC. We are
not the SC so its their decision which matters and not ours.

ATTY AMAGO: No. Because PNB is not negligent. The general

rule will have to apply here. So the general rule is that the
drawee and the drawer is not liable. And because the drawer
here is negligent, only the drawer will be held liable because
only that party is precluded from raising the defense of
forgery.

So SC decided that the drawer and the collecting bank shall share in
50-50 the losses so PNB is entitled to give 50% of the amount to the
drawer and collect 50% of the amount from the collecting bank. PNB
is rendered not liable at all. Ang ni share sa liability kay ang
Associated Bank and ang Province of Tarlac for being negligent.
Thus, if there is negligence on one party, they are deemed precluded
from raising the defense of forgery and so he can be held liable.
STUDENT: Sir, so in the exam..
SIR: If you can point out that it is this case that the problem is
referring to, then just remember that PNB was not held liable but be
sure that you can establish that the facts are the same. But as a rule,
if there is violation of the 24-hour clearing rule, then the drawee is
considered negligent and so should be held liable.

ATTY AMAGO: Just read the rest of the cases. It has the same
theme that in case there is negligence, that party is always
held liable because negligence can preclude the party from
raising the defense of forgery.

Davad | Mejica | Montero | Navarro | Padao | Regalado | Rudela |

Students Question: Diba, Sir, the bank is supposedly liable

even if they exercise prudence in the acceptance?
ATTY AMAGO: Because theyre supposed to take care of the
account; exercise extraordinary diligence in dealing with the
account of their depositor? But then if you are a depositor and
you allow the forgery to happen, then you are more liable
than the bank, and the bank should not be held liable in that
case because you are the one who allowed the forgery to
ensue. In fact theres a doctrine there doctrine of
comparative negligence. Thats mentioned in the case.
Students Question: Its confusing man gud Sir kay in the case,
the Supreme Court only said that the justification that there
was no negligent delay on PNB because it gave prompt notice.
ATTY AMAGO: Its not just prompt notice. They said that given
the circumstances, it is already deemed prompt. But more
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than that is because the spirit for setting the 24-hour clearing
rule would still be rendered useless had it been followed by
PNB.

A: No. The instrument was really rendered blank. What

applies then is not Sec. 124, but insertion of a date under Sec.
13.

MATERIAL ALTERATION (Sec. 124 & 125)

Q: What is material alteration?
A: Material alteration refers to any change in the instrument
which affects the liabilities of the parties in any way as
specified in Sec. 125, or changes the contract of the parties in
any respect.

Q: If you change the serial number of a check, is that material

alteration?
A: No. Theres actually a case on that mentioned in your book.
The Supreme Court said that that is not material alteration so
Sec. 124 should not apply because it would not change the
liability of the parties. Yes, there is probably defect on the
check, but it will not amount to material alteration.

Q: What has to be altered for it to be considered material?

Q: What are the rules in case there is material alteration?
A: Sec. 125. What constitutes a material alteration. Any
alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be
made;
(f) Or which adds a place of payment where no place of
payment is specified, or any other change or addition
which alters the effect of the instrument in any
respect, is a material alteration.
Q: If there is a blank on the instrument and you place a date
there, is that considered material alteration?
Davad | Mejica | Montero | Navarro | Padao | Regalado | Rudela |

A: In case of material alteration, if the alteration is made by a

holder of the instrument or a stranger, it will discharge the
instrument and all prior parties thereto who did not give their
consent to such alteration.
ATTY AMAGO: Theres actually no distinction in the
Philippines if the alteration was made by a holder of the
instrument or a stranger. It matters in England, because there,
they have the so-called spoliation (alteration made by a
stranger). But in our country, under the Negotiable
Instruments Law, it did not make any distinction, for as long as
there is material alteration, then the rule under Sec. 124 will
apply.

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Q: What type of defense is material alteration?

A: Material alteration is a real defense. Legal basis: Sec. 124
par. 2.
Sec. 124. Alteration of instrument; effect of. Where a
negotiable instrument is materially altered without the assent
of all parties liable thereon, it is avoided, except as against a
party who has himself made, authorized, or assented to the
alteration and subsequent indorsers.
But when an instrument has been materially altered and is in
the hands of a holder in due course not a party to the
alteration, he may enforce payment thereof according to its
original tenor.
Q: So was he able to enforce the instrument according to how
it was stated in the instrument?
A: No.
ATTY AMAGO: So thats why its not considered a personal
defense because when the person who may be held liable on
the instrument pays on the instrument is not based on what
the instrument actually states, so they can still raise the
defense of material alteration against a holder in due course.
But the effect is not similar with all the other defenses that we
mentioned that theres no payment at all. At most, there is no
payment based on what the instrument states, but only based
on the original tenor of the instrument. This is considered a

Davad | Mejica | Montero | Navarro | Padao | Regalado | Rudela |

real defense because you cannot still enforce the instrument

according to what it really is as stated in that piece of paper.
Authors deemed it a real defense, but for me, it should be
hybrid. Its not similar to all other real defenses. Because it
cannot be enforced against a holder not in due course that
alone will tell you that this is a defense. But against a holder in
due course, you can enforce the instrument, its not lang what
is stated on the instrument, its just that its based on the
original tenor. So it should have been separate from all the
other defenses.
Rules in Case of Material Alteration
If Holder in Due Couse
Prior parties liable but only as to the original tenor
Subsequent parties
o Indorser liable because he warrants that the
instrument is genuine and in all respects what it
purports to be
o Person negotiating by delivery liable if he is the
immediate transferor
o Perpetrator of the alteration liable
If Holder Through a Holder in Due Course
The same rules apply since a holder through a holder in
due course acquires the rights of a holder in due course.
If Holder Not in Due Course

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Prior parties not liable because they can raise the

defense of material alteration
Subsequent parties
o Indorser liable because he warrants that the
instrument is genuine and in all respects what it
purports to be
o Person negotiating by delivery liable if he is the
immediate transferor
o Perpetrator of the alteration liable

Illustration: M made an instrument for the amount of P100.

The instrument was delivered to P, who in turn delivered it to
A, who altered the amount before delivering to B, then
ultimately to C.

MPABC

Q: If this is an order instrument, will your answer change?

C can go after P but only as to the original tenor of the
instrument. That is if M will not pay again. If M already
paid, P would still not be held liable.
C can go after B for the excess amount.
C can ultimately go to A, who perpetrated the
alteration since alteration should be penalized under
the law.
Q: If instead the amount is originally P100,000, but was
altered to P100, will your answer change?
A: No. C can go after M, but as to the original tenor of the
instrument which is P100,000. If M will not pay, C can also go
to P who will also be liable for P100,000. If C goes after B, his
immediate transferor, he will only be made liable for P100(?)
because the instrument was already altered when indorsed to
B.

Altered the amount from P100 to P100,000

In this case:
C cannot enforce the entire payment of P100,000
against M, only P100 because M can raise the real
defense of material alteration and in effect he is only
required to pay the original tenor of the instrument.
B can be compelled to pay P100,000, being a
subsequent indorser, if M will not pay at all. But if M
will pay P100, B will only be liable for the difference
which is P99,900.
Davad | Mejica | Montero | Navarro | Padao | Regalado | Rudela |

Q: Does it matter if the alteration is for the benefit for the

holder or not?
A: No. It will not matter.
ATTY AMAGO: The law did not distinguish. Whether its bad
faith or good faith, it will not matter, for as long as there is
alteration. But this situation will never happen. Why will you
change from P100,000 to P100?

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Far East Bank & Trust Company v. Gold Palace Jewellery Co.
PARTIES:
UOB (Drawer)
Samuel Tagoe Gold Palace (Holder)
FEBTC (Collecting Bank)
LBP (Drawee Bank)
Facts: The instant controversy traces its roots to a transaction
consummated sometime in June 1998, when a foreigner,
identified as Samuel Tagoe, purchased from the respondent
Gold Palace Jewellery Co.'s (Gold Palace's) store at SM- North
EDSA several pieces of jewelry valued at P258,000.00. In
payment of the same, he offered Foreign Draft No. M-069670
issued by the United Overseas Bank (Malaysia) BHD Medan
Pasar, Kuala Lumpur Branch (UOB), addressed to the Land
Bank of the Philippines, Manila (LBP), and payable to the
respondent company for P380,000.00.
Before receiving the draft, respondent Judy Yang, the assistant
general manager of Gold Palace, inquired from petitioner Far
East Bank & Trust Company's (Far East's) SM North EDSA
Branch, its neighbor mall tenant, the nature of the draft. The
teller informed her that the same was similar to a manager's
check, but advised her not to release the pieces of jewelry
until the draft had been cleared. Following the bank's advice,
Yang issued Cash Invoice No. 1609 to the foreigner, asked him
to come back, and informed him that the pieces of jewelry
would be released when the draft had already been cleared.
Respondent Julie Yang-Go, the manager of Gold Palace,
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consequently deposited the draft in the company's account

with the aforementioned Far East branch on June 2, 1998.
When Far East, the collecting bank, presented the draft for
clearing to LBP, the drawee bank, the latter cleared the sameUOB's account with LBP was debited, and Gold Palace's
account with Far East was credited with the amount stated in
the draft.
The foreigner eventually returned to respondent's store on
June 6, 1998 to claim the purchased goods. After ascertaining
that the draft had been cleared, respondent Yang released the
pieces of jewelry to Samuel Tagoe; and because the amount in
the draft was more than the value of the goods purchased,
she issued, as his change, Far East Check No. 1730881 for
P122,000.00. This check was later presented for encashment
and was, in fact, paid by the said bank.
Around three weeks, LBP informed Far East that the amount in
Foreign Draft No. M-069670 had been materially altered from
P300.00 to P380,000.00 and that it was returning the same.
Attached to its official correspondence were Special Clearing
Receipt No. 002593 and the duly notarized and consulauthenticated affidavit of a corporate officer of the drawer,
UOB. It is noted at this point that the material alteration was
discovered by UOB after LBP had informed it that its funds
were being depleted following the encashment of the subject
draft. Intending to debit the amount from respondent's
account, Far East subsequently refunded the P380,000.00
earlier paid by LBP.
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On August 12, 1998, petitioner demanded from respondents

the payment of P211,946.64 or the difference between the
amount in the materially altered draft and the amount
debited from the respondent company's account. Because
Gold Palace did not heed the demand, Far East consequently
instituted Civil Case No. 99-296 for sum of money and
damages before the Regional Trial Court (RTC), Branch 64 of
Makati City.
RTC ordered Gold Palace to pay Far East on the basis of its
warranties as a general indorser. CA reversed the RTC, stating
that Far East failed to undergo the proceedings on the protest
of the foreign draft or to notify Gold Palace of the drafts
dishonor, so Far East could not charge Gold Palace on its
secondary liability as an indorser.
Issue: WON CA erred in reversing the RTC.
Held: No. Act No. 2031, or the Negotiable Instruments Law
(NIL), explicitly provides that the acceptor, by accepting the
instrument, engages that he will pay it according to the tenor
of his acceptance. This provision applies with equal force in
case the drawee pays a bill without having previously
accepted it. His actual payment of the amount in the check
implies not only his assent to the order of the drawer and a
recognition of his corresponding obligation to pay the
aforementioned sum, but also, his clear compliance with that
obligation. Actual payment by the drawee is greater than his

Davad | Mejica | Montero | Navarro | Padao | Regalado | Rudela |

acceptance, which is merely a promise in writing to pay. The

payment of a check includes its acceptance.
Unmistakable herein is the fact that the drawee bank cleared
and paid the subject foreign draft and forwarded the amount
thereof to the collecting bank. The latter then credited to Gold
Palace's account the payment it received. Following the plain
language of the law, the drawee, by the said payment,
recognized and complied with its obligation to pay in
accordance with the tenor of his acceptance. The tenor of the
acceptance is determined by the terms of the bill as it is when
the drawee accepts. Stated simply, LBP was liable on its
payment of the check according to the tenor of the check at
the time of payment, which was the raised amount.
Because of that engagement, LBP could no longer repudiate
the payment it erroneously made to a due course holder. At
this point that Gold Palace was not a participant in the
alteration of the draft, was not negligent, and was a holder in
due course-it received the draft complete and regular on its
face, before it became overdue and without notice of any
dishonor, in good faith and for value, and absent any
knowledge of any infirmity in the instrument or defect in the
title of the person negotiating it. Having relied on the drawee
bank's clearance and payment of the draft and not being
negligent (it delivered the purchased jewelry only when the
draft was cleared and paid), respondent is amply protected by
the said Section 62. Commercial policy favors the protection
of any one who, in due course, changes his position on the

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faith of the drawee bank's clearance and payment of a check

or draft.
This construction and application of the law gives effect to the
plain language of the NIL and is in line with the sound principle
that where one of two innocent parties must suffer a loss, the
law will leave the loss where it finds it. It further reasserts the
usefulness, stability and currency of negotiable paper without
seriously endangering accepted banking practices. Indeed,
banking institutions can readily protect themselves against
liability on altered instruments either by qualifying their
acceptance or certification, or by relying on forgery insurance
and special paper which will make alterations obvious. This is
not to mention, but we state nevertheless for emphasis, that
the drawee bank, in most cases, is in a better position,
compared to the holder, to verify with the drawer the matters
stated in the instrument. As we have observed in this case,
were it not for LBP's communication with the drawer that its
account in the Philippines was being depleted after the
subject foreign draft had been encashed, then, the alteration
would not have been discovered. What we cannot understand
is why LBP, having the most convenient means to correspond
with UOB, did not first verify the amount of the draft before it
cleared and paid the same. Gold Palace, on the other hand,
had no facility to ascertain with the drawer, UOB Malaysia, the
true amount in the draft. It was left with no option but to rely
on the representations of LBP that the draft was good.
In arriving at this conclusion, the Court is not closing its eyes
to the other view espoused in common law jurisdictions that a
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drawee bank, having paid to an innocent holder the amount of

an uncertified, altered check in good faith and without
negligence which contributed to the loss, could recover from
the person to whom payment was made as for money paid by
mistake. However, given the foregoing discussion, we find no
compelling reason to apply the principle to the instant case.
The Court is also aware that under the Uniform Commercial
Code in the United States of America, if an unaccepted draft is
presented to a drawee for payment or acceptance and the
drawee pays or accepts the draft, the person obtaining
payment or acceptance, at the time of presentment, and a
previous transferor of the draft, at the time of transfer,
warrant to the drawee making payment or accepting the draft
in good faith that the draft has not been altered. Nonetheless,
absent any similar provision in our law, we cannot extend the
same preferential treatment to the paying bank.
Thus, considering that, in this case, Gold Palace is protected by
Section 62 of the NIL, its collecting agent, Far East, should not
have debited the money paid by the drawee bank from
respondent company's account. When Gold Palace deposited
the check with Far East, the latter, under the terms of the
deposit and the provisions of the NIL, became an agent of the
former for the collection of the amount in the draft. The
subsequent payment by the drawee bank and the collection of
the amount by the collecting bank closed the transaction
insofar as the drawee and the holder of the check or his agent
are concerned, converted the check into a mere voucher, and,
as already discussed, foreclosed the recovery by the drawee of
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the amount paid. This closure of the transaction is a matter of

course; otherwise, uncertainty in commercial transactions,
delay and annoyance will arise if a bank at some future time
will call on the payee for the return of the money paid to him
on the check.
As the transaction in this case had been closed and the
principal-agent relationship between the payee and the
collecting bank had already ceased, the latter in returning the
amount to the drawee bank was already acting on its own and
should now be responsible for its own actions. Neither can
petitioner be considered to have acted as the representative
of the drawee bank when it debited respondent's account,
because, as already explained, the drawee bank had no right
to recover what it paid. Likewise, Far East cannot invoke the
warranty of the payee/depositor who indorsed the instrument
for collection to shift the burden it brought upon itself. This is
precisely because the said indorsement is only for purposes of
collection which, under Section 36 of the NIL, is a restrictive
indorsement. It did not in any way transfer the title of the
instrument to the collecting bank. Far East did not own the
draft, it merely presented it for payment. Considering that the
warranties of a general indorser as provided in Section 66 of
the NIL are based upon a transfer of title and are available
only to holders in due course, these warranties did not attach
to the indorsement for deposit and collection made by Gold
Palace to Far East. Without any legal right to do so, the
collecting bank, therefore, could not debit respondent's
account for the amount it refunded to the drawee bank.

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Far East's remedy under the law is not against Gold Palace but
against the drawee-bank or the person responsible for the
alteration. That, however, is another issue which we do not
find necessary to discuss in this case.
Section 22. Effect of indorsement by infant or corporation.
The indorsement or assignment of the instrument by a
corporation or by an infant passes the property therein,
notwithstanding that from want of capacity the corporation or
infant may incur no liability thereon.
ATTY AMAGO: What happens if the instrument is in the hands
of the minor and that minor further indorsed the instrument
to another person?
A: The instrument passes through. However, the minor will
not be held liable.
ATTY AMAGO: How will you classify this defense?
A: This is a real defense because it says in the provision that
the infant cannot incur any liability.
Example:
You have an instrument in the hands of M, who negotiated it
to P, who negotiated it to A, who happens to be a minor. The
minor negotiated it to B and then to C. Lets just say that C
went to M and M refused to pay and that all procedures for

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dishonoring were complied with. Can C go after A and demand

payment on the instrument?

purposes mentioned in the Articles, that act may be

considered ultra vires.

M to P to A (minor) to B to C

It can also be ultra vires when the act is in accordance with the
purpose of the corporation but it did not acquire the required
number of votes from the board.

A: No, C cannot go to A and successfully demand payment

because A can raise the real defense of minority.
Q: Can C go after P and demand payment on the instrument?
A: Yes, C can go after P and enforce payment against him
because he cannot raise a defense the minority of A because
only the minor can raise the defense of minority. The book
says it is a defense personal to the minor because only the
minor can raise that defense and it is a real defense.
Q: So the minor can never be held liable. However, there is an
exception and that is when a minor is guilty of actual fraud in
specifically stating that he is of legal age when in fact he is not.
In other words, the minor pretends that he is of legal age in
order to deceive somebody to transact with him. In this case,
the minor committed fraud.
Q: Is this the same for ultra vires acts of a corporation?
Ultra vires acts are when a corporation does acts which are
not authorized under its charter. For example, I have a
corporation with Articles of Incorporation to be registered
with SEC. I am supposed to present in the Articles the purpose
of the corporation. And if I do an act which is not within the

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Q: For example, buying a real property. That requires at least a

majority vote of a corporation based on its constitution and by
laws. The act of buying real property was not authorized by
the corporation but here is A, the president, who signed a
negotiable instrument and then presented it to the seller of
the land. So we have Corp. X who issued a negotiable
instrument to seller A, who negotiated it to B, who also
negotiated to C. Can C successfully demand payment from
Corp. X?
A: No, C cannot go to Corp. X and enforce payment because
according to Section 22, there is no liability on the part of the
corporation if ever it is an ultra vires act of a corporation.
Besides, the reason why it is provided under the law is that
when you are dealing with a corporation, it is presumed and
incumbent upon you to ask the authority of the person
representing the corporation. When you deal with a
corporation, you do not expect for a corporation to appear
before you, you do not see a corporation because it is just an
artificial being just like your partnership. So it is represented
by a group of persons or by a certain person as long as that
person is authorized by the governing board. So if you deal
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with a representative of a corporation, you should ask for his

authority. At most, what you should ask for is a secretarys
certificate containing the notarized board resolution.

A: If it is a bearer instrument, C can only go after B because he

is the immediate transferor and the warranty extends only to
the immediate transferee.

If it turns out that you did not ask for the authority of that
representative and that person turns out to be not authorized
then you cannot expect payment from the corporation.

Sec. 17. Construction where instrument is ambiguous. Where the language of the instrument is ambiguous or there
are omissions therein, the following rules of construction
apply:

Q: Will the principle of estoppel not apply to a corporation?

A: It will apply if the corporation accepted the real property.
For example, there was no authority coming from the
corporation but it allowed the registration of the land in its
name. Clearly, it seems that there was ratification of the act
made by the representative.
Take note: It is the same for minority and ultra vires acts of a
corporation. It is considered a real defense but it is a real
defense available only to the minor or the corporation. All
other parties are liable.
Q: In the example, can C go after A?
A: Yes, C can go after A and successfully demand payment
because he warrants that the instrument is genuine and in all
respects what it purports to be or that he has good title to it.
C can also go after B because B has the same warranty.
Q: What if it is a bearer instrument?

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(a) Where the sum payable is expressed in words and also in

figures and there is a discrepancy between the two, the sum
denoted by the words is the sum payable; but if the words are
ambiguous or uncertain, reference may be had to the figures
to fix the amount;
(b) Where the instrument provides for the payment of
interest, without specifying the date from which interest is to
run, the interest runs from the date of the instrument, and if
the instrument is undated, from the issue thereof;
(c) Where the instrument is not dated, it will be considered to
be dated as of the time it was issued;
(d) Where there is a conflict between the written and printed
provisions of the instrument, the written provisions prevail;
(e) Where the instrument is so ambiguous that there is doubt
whether it is a bill or note, the holder may treat it as either at
his election;

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(f) Where a signature is so placed upon the instrument that it

is not clear in what capacity the person making the same
intended to sign, he is to be deemed an indorser;
(g) Where an instrument containing the word "I promise to
pay" is signed by two or more persons, they are deemed to be
jointly and severally liable thereon.

used to reconcile it. After all, they are not inconsistent. If you look
at it, it can still be considered as 1k.
Q: If you are in doubt whether the instrument is a bill of exchange
or a promissory note. How will you construe it?
A: It is up to the holder whether he would consider it as a bill of
exchange or a promissory note.

Q: When does Section 17 apply?

A: The rules set forth in Sec. 17 are applicable only when the
instrument in question is ambiguous or uncertain or when
there are omissions. If there is no ambiguity, then Sec. 17 will
not apply and there is no need to construe the instrument.

Q: If there are two or more persons who signed the instrument,

how will you construe the liability of such parties?

INTERPRETATION

Pay to the order of X or bearer Php 1 million How will you

construe this instrument?

Q: So if it says I promise to pay one million pesos but the figures

only says Php 1,000? How will you construe it?
A: In this case, it would be the wordings that should be prefered
because here, figures are easy to alter.
Q: If the figure is the one which is written by the maker and the Php
1 million is the one which is printed?
A: It would be the one which is printed. It is more prone for you to
commit a mistake when it is printed than when it is written.
Q: So if says, I promise to pay ten hundred pesos, and the figure is
Php 1,000 how will it be construed?
General rule: what applies is the words rather than the figures. In
this case, if there is ambiguity in the words then the figures can be
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A: They will be held solidarily liable.

EXAMPLE:

A: It is a bearer instrument. (bearer is not a name of a person)

CONSIDERATION
What is consideration?
Sec. 24. Presumption of consideration. - Every negotiable
instrument is deemed prima facie to have been issued for a
valuable consideration; and every person whose signature appears
thereon to have become a party thereto for value.

It should be a valuable consideration- sufficient to support a

simple contract
Love, affection, friendship while good consideration are nor
sufficient to support a simple contract
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Q: If a widow writes a negotiable instrument for an estate which is

already insolvent for an obligation in payment for her husbands
debt. Can it be considered an instrument with a valid consideration?
A: The estate is already insolvent, therefore there is no valuable
consideration. Obligation is not extingusihed by death of a person. It
will go to the estate of the deceased but since the estate here is
insolvent, then no valuable consideration exists.
Case of EBRADA
When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instruments, or to give a discharge thereof
against any party thereto, can be acquired through or under such
signature unless the party against whom it is sought to enforce such
right is precluded from setting up the forgery or want of authority.
An accommodation party is one who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some other
person. Such a person is liable on the instrument to a holder for
value, notwithstanding such
holder at the time of taking the instrument knew him to be only an
accommodation party.
Drawee bank is liable because it failed to inform the bureau of
treasury about the forgery of the signature.

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