Jack Jimenez Transcript

November 13, 2001 Lecture
(Dear classmates, this is not a transcript. I decided to present Atty. Jimenez’s lecture in bullet points
because it is much easier to read and understand than a transcript. Some parts are paraphrased
because they seem more understandable that way. I also rearranged the sequence of some points.
But I promise that all he said that day are included here. If you want, I can furnish you a copy of
the transcript. – Dot)
(The provisions are in bold.)
§1 – Form of negotiable instruments. An instrument to be negotiable must conform to the

following requirements:
(a) It must be in writing and signed by the maker or drawer;
Must be in writing
 There must be a writing of some kind.
 If the instrument was not in writing, there would be nothing to be negotiated or passed from
hand to hand.
 Example: You cannot tell someone “Well, you know. You owe me ten million due next month.
But I need money very bad and I can’t wait till next month. I’m willing to discount you for 80%
of the amount due.” That someone will say, “Where’s the receipt? Where is the document?” He
will not listen to you because it is merely a verbal promise to pay.
Must be signed
 It is an indication of the party binding himself.
 Valid ‘signatures’: Thumbmarks, chops (?) in the case of the Chinese, Koreans and Japanese and
signatures of corporate officers printed through the use of a check-writing machine which is a
common practice with companies.
 Problem: Mr. Estrada signs the following check:
Pay P10,000 to the order of Charlene Gonzales for services

rendered.
Jose Velarde
Would that be binding? If he intended the name Jose Velarde to be his signature for that
particular transaction, the signature would be binding.
 Remember: Whatever symbol is affixed in the instrument, if the party intended that to be his
signature – that would be binding.
 Usually the signature of the maker and the drawer can be found in the bottom right hand corner.
But the location is not really crucial. Even if the signature is incorporated in the body of the
instrument, it would be valid. Example:
I, Jose Cruz, promise to pay Ruel Santos or bearer P10,000.
(b) Must contain an unconditional promise or order to pay a sum certain in money;
If it is a promissory note, it must contain a promise to pay.

 The words need not be exactly “I promise to pay.” Equivalent words like “I agree to pay” or “I
will pay” will be sufficient. “Good for P10,000” or “Due, Jose Cruz, P10,000” will imply a promise
to pay.
 An acknowledgment of a debt is not a promise to pay. For an acknowledgement is merely proof
of a prior obligation, a promise to pay creates a new obligation.
 However, an acknowledgment of a debt becomes a promise in two instances:
(1) The date of payment is mentioned
Jimenez Transcripts (Negotiable Instruments Law)

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 Jimenez vs. Bucoy:
I acknowledge being indebted to Jose Cruz for P10,000 payable one
month after the end of the war.
Manuel Santos
 Since a date of maturity is mentioned, it is like a promise to pay.
(2) If words of negotiability are mentioned
 Example:
I acknowledge to be indebted to Jose Cruz. Due to Jose Cruz or
order, P10,000.
Manuel Santos
 The use of the words of the words of negotiability would imply a promise to pay.
If it is a bill of exchange, it must contain an order to pay.

 The instrument need not use the exact word “pay”. It could say “I command to pay” or “I order
you to pay” and it will be an equivalent to an order to pay.
 An authority to pay is not an order to pay because it means that the person to whom it is being
given is given only the discretion to pay or not to pay. So he has the option to choose not to
pay.
 A mere request to pay is likewise not an order to pay. Example:
Please give Jose Cruz P10,000.
Manuel Santos
 But the mere use of words of civility would not detract from the nature of the promise.
Example:
Jose Cruz will oblige Manuel Santos by paying Pablo Ramos or order
P10,000.
To Jose Cruz Manuel Santos

This means that Manuel Santos will consider himself indebted and obliged to Jose Cruz
if Jose Cruz will pay Pablo Ramos. This is equivalent to an order to pay.
The promise or order must be unconditional.

 If it is conditional then payment is not certain. If payment is not certain, it would be difficult to
circulate that because people would not want to accept something where payment is unsure.
 A condition is defined in the Civil Code as “an event which may or may not happen or a past
event which is unknown to the parties.”
 Example: “I promise to pay Jose Cruz if he passes the examination for accountants.” This is
conditional. Even if the condition is fulfilled, that will not be negotiable because of the principle
that negotiability is determined merely by the four corners of the instrument without requiring
evidence aliunde.
 If the event is certain to happen but when it will happen is unknown, then that is not a
condition but is a period. Example: Death.
I promise to pay Jose Cruz or order P10,000 ten days after the death of
his mother-in-law.
Manuel Santos
His mother-in-law will surely die because nobody gets out of life alive. (JDJ: Sooner or later,
his mother-in-law will die although he will probably be praying sooner.)
The sum must be certain.

 This is so that people will know how much they will get when the instrument falls due. Because
if the amount is uncertain, people will not be willing to take that instrument.
 This is not a sum certain: “I promise to pay Jose Cruz whatever the balance due him after a
consideration of the records.”

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Must be payable in money
 This is because negotiable instruments are intended to be substitutes for money.
 Money was invented as the medium of exchange because barter is a cumbersome way of doing
business. Example: A is interested in buying a car but his business is manufacturing nails. He
cannot say to the car seller that “I will buy your car and pay you in nails”.
 Money is a common measure of value. In barter, you will have to determine if one car is
equivalent to how many gallons of paint or gasoline, feet of lumber, kilos of rice, centimeters of
textile. Very cumbersome.
 When you say payable in money, the denomination must be specified. “I will pay you 300 in
English currency, 300 bucks, 300 pence, 300 pounds, 300 schillings.”
 R.A. 529 has been repealed by R.A. 8171. It is now valid to stipulate that “I will pay you in
foreign currency”.
(c) Must be payable on demand or at a fixed or determinable future time.
 So people or parties will know when the instrument or payment is due.
(d) Must be payable to order or to bearer
 These are the words of negotiability.

 If it’s payable to a specific person like the Kauffman vs. National Bank case:
Pay to George A Kauffman, New York Philippine Fiber Produce Co.,
$45,000.
(sgd.)
National Bank, Manila
 then that is not negotiable.
 The party need not use the exact word “order”. He could use equivalent words like “pay to
Jose Cruz or his indorsees” or “Pay to Jose Cruz or his assigns.” These are equivalent to “Jose
Cruz or order.”
 It was held that a promise “to pay to order of bearer” is considered “pay to order” but that has
been criticized because if it’s payable to the order of bearer, that’s payable to the bearer because
who the bearer is the one will give the order to pay.
 The word “bearer” need not be used. You could use “holder” or “the possessor”.
 If it says “pay to bearer Jose Cruz” that is not payable to bearer because bearer here is merely
descriptive of Jose Cruz. Same way if you say “pay to the novelist Jose Cruz”, “pay to the doctor
Jose Cruz.”
(e) Where the instrument is addressed to a drawee, he must be named or otherwise

indicated with reasonable certainty.
 This is so that people will know from whom they are supposed to demand payment.
 But if the name of the drawee is left blank, it is an incomplete instrument. It can be remedied
by filling up.
§2 – What constitutes certainty as to sum. The sum payable is a sum certain within the
meaning of this act, although it is to be paid. –
(a) With interest; or
 The sum is certain even if it is with interest.

 Under the Civil Code, there must be a stipulation undertaking to pay interest.
 When the Central Bank circular lifted the ceiling on interest rates, the interest rate that will
govern is that stipulated upon by the parties.

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 Medel case: Interest must not be unconscionable. There the stipulated interest was 5½% per
month. Court said that’s 66% a year and that is unconscionable.
 As a rule, if the interest is not unconscionable, it is the rate stipulated by the parties. If the
instrument provided for payment of interest but did not indicate the rate, then what will apply
will be the legal rate which is 12% under Circular 416.
(b) By stated installments; or
 For the amount to be certain, it must indicate:

(1) The amount of each installment AND
(2) The date when each installment will be due
 If it says:
(1) “I promise to pay 10,000 in installments” – that is not negotiable.
(2) “I promise to pay 10,000 in 10 installments” – that is not negotiable. You don’t know how
much is the installment and when to be paid.
(3) “I promise to pay to Jose Cruz or order in 10 monthly installments” – that is not negotiable.
You don’t know how much each installment will be.
(4) “I promise to pay 10,000 in 10 equal monthly installments starting November 15, 2001 and
every 15th day of the month thereafter” – that is negotiable because you’ll know each
installment will be P1000 and will be paid every 15th day of the month.
(c) By stated installments, with a provision that, upon default in

payment of any installment or of interest, the whole shall become due; or
 When there is a provision for payment in installments with an acceleration clause. That is, if any
installment is not paid then the balance will become due and demandable. Under the law, it is
expressly mentioned that that sum is certain.
(d) With exchange, whether at a fixed rate or at the current rate; or
 Exchange contemplates at least two currencies. That’s why the example given in the book of
Agbayani is wrong because it only mentions one currency. So there must be at least two
currencies.
Example: A client who sells chemicals to a factory in Meycauayan. The buyer was not able to
pay. He sued the buyer. They agreed to compromise and they agreed that they will pay
$60,000 in installments and the parties fixed the rate of exchange at 28:1. and whatever the
rate of exchange, whether it goes up or goes lower, that will be the rate of exchange used for
computing.
 The current rate is the rate of exchange computed daily. The law presupposes that merchants
are familiar with the rate of exchange. So when the instrument says “I will pay Jose Cruz
P10,000 in United States currency on December 15, 2001 according to the rate of exchange on
that day” – that would be valid because supposedly businessmen know what will be the rate of
exchange.
 Gregorio Araneta case:
FACTS: Gregorio Araneta imported equipment from England. To pay for it, he applies for a
letter of credit with the PNB. So PNB paid the seller in English pounds. Araneta had not
yet reimbursed the bank. Meanwhile the English pound was devalued.
ISSUE: What rate of exchange is to be used in paying the PNB – The rate of exchange when
PNB paid the English exporter or the rate of exchange when Gregorio Araneta is paying?
HELD: The letter credit was consummated when PNB paid the English seller. Therefore it is the
rate of exchange at that time that should be used as basis for computing how much GA
will pay.
 The Gregorio Araneta case became relevant again in 1983 when the government went on a
standstill and required the banks to surrender all the dollars. All the banks have no single cent
left. Meanwhile the goods were arriving and the goods are consigned to the banks. The banks

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refused to release the goods to the seller or importers. The rate of exchange rocketed from 11,
14, 18, 21, 23 until it reached 25. The banks were saying that the clients should sign an
undertaking to pay whatever is the rate of exchange. And the clients were saying no because
according to the Gregorio Araneta case, the rate of exchange at the time of the sale should be
followed. The bank said that if you don’t sign we will not release your goods. Hence, the
factories were idle. The raw materials were not being released and storage fees were
accumulating. The clients said that the way the situation developed, it cannot be solved on a
cases to cases basis. The government came out with a solution. It eventually stepped in. The
Central Bank issued a forward exchange cover that said “We will guarantee that when dollars
come in we will sell to you at a fixed rate.” With that assurance, the banks start releasing the
goods. CB we will absorb any exchange loss.
(e) With costs of collection or an attorney’s fee, in case payment

shall not be made at maturity.
 Under Article 2208, as a rule, attorney’s fees cannot be recovered. One exception is when there
is a stipulation. In fact, a party will be more interested in taking an negotiable instrument which
contains a payment for attorney’s fees if it is not paid than one which does not contain such a
stipulation.
 Now suppose the promissory note says “I will pay reasonable attorney’s fees if this is not paid at
maturity.” Will that be a negotiable? Yes, because in determining whether the sum payable is
certain, the reckoning point is the date of maturity. If the amount payable before that or after
that is uncertain, that is irrelevant. Thus, if you know on the date of maturity that this is the
amount due that is negotiable. If the amount will become uncertain afterwards because of the
attorney’s fees, this is irrelevant.
 Anyway, under the Code of Professional Responsibility, agreement on attorney’s fees is always
subject to the control of the court. Even if the parties stipulate “I will pay 20% attorney’s fees”,
the court can always reduce that. That will not be binding on the court. Even if it says I will pay
reasonable attorney’s fees that will be negotiable because if you pay 20% the court will say that
is unreasonable since this is a simple collection case. Court will reduce it to 10%.
§3 – When promise is unconditional. – An unqualified order or promise to pay is

unconditional within the meaning of this Act though coupled with –
(a) An indication of a particular fund out of which reimbursement is to be made or a
particular account to be debited with the amount; or
 A promise to pay is unconditional even if it is coupled with an indication of the particular fund out
of which reimbursement is to be made or account to be debited.
 The fund is not the source of payment but merely the source of reimbursement.
 Example: It says “Pay Jose Cruz P10,000 and reimburse yourself from the proceeds of the sale
of my shares of stock in San Miguel Corporation.” That is negotiable. The particular account to
be debited is merely an instruction on how to make the entries in the books. “Debit my
representation allowance.”
(b) A statement of the transaction which gives rise to the instrument.
 A negotiable instrument is issued when there is an underlying contract – that is the

consideration. So if it mentions the underlying contract which gives rise to its issuance, that will
still be negotiable.
 Example: “I promise to pay Jose Cruz pursuant to our deed of sale.” That is negotiable.
 The reference to the contract will destroy negotiability if the obligation to pay becomes subject to
the terms and conditions of the contract. Then it becomes conditional.
 But suppose if you examine the contract you will find actually that the promise is still
unconditional, will that make it negotiable? No. Because again your basic rule, negotiability is to

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be determined only by looking at the 4 corners of the instrument without looking at evidence
aliunde. There you have to look into evidence aliunde to find out that it is negotiable.
 Elizalde Company vs. Biñan Transportation Company:
FACTS: Biñan Transportation Company bought two motor vehicles. They signed a promissory
note and to secure payment, they mortgaged the motor vehicles. The promissory notes
were negotiated and were not paid. So Elizalde who was holding the promissory note
sued. Biñan’s defense was that the promissory note was not negotiable because it was
mentioned that it was subject to chattel mortgage.
ISSUE: Whether the note was negotiable.
HELD: Yes. For reference to mortgage to destroy negotiability, the promise to pay must be
burdened with the terms and conditions of the chattel mortgage. Since the reference to
the chattel mortgage did not make the promise to pay burdened with the terms and
conditions of the chattel mortgage, the promissory note was still negotiable.
But an order or promise to pay out of a particular fund is not unconditional.
 An order or promise to pay out of a particular fund is conditional because it presupposes and is
subject to the condition that there are sufficient funds in the source of payment.
 Example: “I promise to pay Jose Cruz P10,000 from the proceeds of the sale of my shares in San
Miguel Corporation.” That is not negotiable.
 This is why time and again the court has said that a treasury warrant is not a negotiable
instrument because it is payable out of a particular fund. Under the Constitution, no money shall
be paid out of the treasury unless there is an appropriation for that purpose. That’s why it is not
a negotiable instrument.
 Case of Abubakar (I’m not sure if this is the title, sounds like it, sorry), which was reiterated in
the Metropolitan Bank case:
FACTS: There was a rural bank in Mindoro, somebody deposited treasury warrants. And this
bank in turn deposited it in Metro Bank where they were maintaining an account.
Metrobank will bring it to the clearing house. This depositor kept nagging them whether
the treasury warrants were already cleared. Everytime he will nag the bank in Mindoro,
that bank will in turn nag Metrobank. Because the depositor kept nagging, out of sheer
exasperation, Metrobank allowed him to withdraw the money. Eventually the warrants
were brought to the clearing house where they were dishonored by the National
Treasurer. Metrobank was running after the bank in Mindoro since under §66 it
warranted that the instrument was genuine and in all respects what it purported to be.
It warranted that the signatures were genuine.
ISSUE: Whether Metrobank can invoke §66.
HELD: No, Metrobank cannot invoke §66 because this is a treasury warrant. It is not a
negotiable instrument. Therefore §66 is not applicable. Metrobank must bear the loss
because it allowed him to withdraw the money.
 A reference to the fund which will be the source of payment will not destroy negotiability if
payment is not limited to that particular fund. For instance, the negotiable instruments says
“Pay Jose Cruz or order P10,000. Apply the proceeds from the sale of my shares in San Miguel
Corporation.” From the tenor of that, while there is an instruction to use the proceeds from the
sale of the shares of stocks to pay, payment is not limited to that particular fund.
§4 – Determinable future time; what constitutes. – An instrument is payable at a

determinable future time, within the meaning of this Act, which is expressed to be
payable –
(a) At a fixed period after date or sight; or
 Instrument is payable at a determinable future time if it is paid at a fixed period. If you will
notice the subsequent provisions are elaborations of §1.
 Example: If promissory note, “I promise to pay 30 days from today.” If bill of exchange, “Pay to
Jose Cruz P10,000 or order 30 days after sight or after presentation for acceptance.”

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(b) On or before a fixed or determinable future time specified therein; or
 Example: “I promise to pay Jose Cruz or order P10,000 on or before December 15, 2001.”
 There are different types of acceleration notes:
(1) One that provides that if any installment that is not paid, the balance will automatically
become due.
 By express provision of the law, this is negotiable.
(2) One that says that if the holder feels insecure then the holder can require the maker to put
up securities and if the maker fails to do so, the holder can order the balance be
immediately due and demandable.
 Is this negotiable? There are two views:
(a) One view said it is not negotiable because it refers to an undertaking other than to
pay a sum of money – to put up security. And under the law, the obligation must be
purely to pay a sum certain in money. It also argued that the date of maturity is
uncertain because the holder can accelerate it.
(b) The other view said that it is negotiable because the undertaking to put up security is
merely an accessory obligation – to secure compliance with the principal obligation
to pay a sum of money. Plus, the control is actually with the maker since he can
prevent acceleration by putting up extra security.
(3) One that says that if the holder feels insecure, he can accelerate the date of maturity.
 There is a conflict of views whether that is negotiable or not. Again, there are two views.
One view said it is negotiable other said it is not but according to JDJ, the better view is
that it is not negotiable because the date of maturity is uncertain.
 Here the holder can simply say “I feel insecure” and declare the obligation due. From
the tenor of §4, the option to pay before the maturity – “like I promise to pay on or
before” must be on the maker or the acceptor.
 If it is with the holder, the date of maturity becomes uncertain.
 The two situations are treated different by the law because if the option is with the
maker and he pays before the date of maturity, the instrument is discharged. Under
§119, therefore all parties who are liable are also discharged.
 But if the option is with the holder and he accelerates the date of maturity and the maker
fails to pay, all those not yet liable will become liable joint and severally. Their obligation
will fall due and that in effect is prejudicial to them.
 The first situation where the option is with the maker, payment before the maturity date
is beneficial. The parties are not liable. But the second situation is prejudicial. And
people will not be willing to bind themselves in such a situation. That’s why in such a
case, the date of maturity is considered uncertain.
(c) On or at a fixed period after the occurrence of a specified event which is certain to
happen, though the time of happening be uncertain.
 Take note that it says “on or after.” Thus, the following: “I promise to pay Jose Cruz or order
10 days before the death of Pablo Reyes.” – is not negotiable. Pablo Reyes has to die first
before he can compute the date of maturity. After Pablo Reyes dies, you count backward ten
days. So what will happen? By the time you are able to fix the date of maturity, the
obligation will be overdue. That is not allowed.
An instrument payable upon a contingency is not negotiable, and the happening of the
event does not cure the defect.
 Remember that to determine negotiability, you only look at the four corners and you don’t go
into evidence aliunde.
 Philippine Education Company vs. Soriano:

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FACTS: Montinola bought several postal money orders. He used the money orders to pay for
books he ordered from the Philippine Education Company (JDJ: Philippine Education
Company used to be the biggest bookstore here. Any professional would go there and
find a book he needs there.). PEC took the money orders and deposited it with the
bank. Later, the bank refused to pay, it said that was bought by Montinola who left
without paying. PEC said it was a holder in due course.
HELD: SC said that a money order is not a negotiable instrument. The court gave several
reasons:
(1) Although it said “pay to the order of” in the money order, that is not negotiable
because under postal regulations, the bureau of posts can refuse to pay on
numerous grounds so that the order is not unconditional, therefore that is not
negotiable.
(2) A money order can be indorsed only once.
(3) The post office is not run by the government for commercial profit, but for public
service.
November 14, 2001
Under Section (§) 5, an instrument which contains an order or promise to do any act in
addition to the payment of money is not negotiable because we said for a negotiable
instrument to be a substitute for money, the obligation must be purely pecuniary in character.
However, Section 5 enumerates provisions which do not affect negotiability:
(a)Authorizes the sale of collateral securities in case the instrument be not paid at
maturity; This is common in cases of pledge or mortgage where there will be a stipulation that if
the obligation secured is not paid, then the property pledged or mortgaged can be foreclosed by the
pledgee or mortgagee
(b)Authorizes a confession of judgment if the instrument be not paid at maturity; The

SC has said that this is a void stipulation
(c) Waives the benefit of any law for the advantage or protection of the obligor; for
instance, rule on venue. There may be a provision there that any action arising therefrom shall be
filed exclusively in the courts of competent jurisdiction in Makati and any other proper venue is
hereby waived. It must stipulate that it will be exclusive, otherwise, the SC has said that that will be
merely permissive.
Remember §13, Rule 39 which says certain properties are exempt from execution like
proceeds from life insurance policies, tools of a carpenter, library of a lawyer to the extent of
P100,000.00- there may be a waiver of such.
(d) Gives the holder an election to require something to be done in lieu of payment of
money. If PN says “I promise to pay to the order of Jose Cruz 100 thou or 500 sacks of rice at the
option of the holder” – this is negotiable because the obligation of the maker to pay cash is absolute
since the holder can always choose to demand cash rather than ask for the delivery of rice.
§6 also mentions matters which do not affect negotiability:
(a)the negotiable character of an instrument is not affected if, like an old maid, it is
not dated . this is taken care of by §13: the date may be inserted and §17c: it will be dated as of
the date it was issued
(b) Does not specify the value given because under §24, it is presumed value has been
given.

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(c) Does not specify the place where it is drawn or where it is payable because that’s
taken care of by §73
(d) Bears a seal; This is relevant in common law but not in civil law because in common law,
consideration presumed in a contract. However, if it is sealed, consideration is presumed.
(e) Designates a particular kind of current money in which payment is to be made.

So if it says “payment will be made in US currency,” that will be valid since RA 7181
expressly provides it is now valid to stipulate that payment will be made in foreign currency.
§7 states when an instrument is payable on demand:
(a) when it is expressly payable on demand, or at sight, or on presentation; like “I

promise to pay on demand or at sight” or if it is a bill of exchange “Pay at sight or on presentation.”
(b)In which no time for payment is expressed. In other words, it is simply silent as to when
it will be paid.
Now, the last paragraph says if an instrument is issued, accepted or indorsed when overdue,
it is as regards the person so issuing, accepting or indorsing, payable on demand.
Suppose: a bill of exchange was issued in August 2001 and it is payable on October 15, 2001
and it was indorsed to Jose Cruz by the payee today. It was already overdue. Jose immediately went
to the drawee and presented it for acceptance and the drawee dishonored it. The holder gives the
payee who indorsed it to him notice of dishonor and the payee then claimed he has been discharged
from liability saying because when he presented it for payment, it was too late, it was already
overdue.
NO! because when he indorsed it, it was already overdue. Therefore, as between him and the
indorsee, the date will not be October 15, that will be considered payable on demand. This is only as
between them. The drawer, however, will be discharged. He can claim the presentment for payment
was made out of time and therefore, he has been discharged because that instrument will be
payable on demand only as between the payee who negotiated it out of time and the person to
whom he indorsed it but not with respect to other parties.
§8 says to whom the instrument may be payable to order. How do you make an instrument
payable to order? You make it payable to the order of a specified person or to him or to his order.
“Pay to the order of Jose Cruz” or “Pay to Jose Cruz or his order.”
The law mentions who may be the payee:

(a) someone who is not the maker, like “I promise to pay Jose Cruz.” and I sign the PN; or
someone who is not the drawer or drawee, like Jose Cruz draws a bill of exchange “Pay to Manuel
Santos, addressed to Pablo Reyes.”
(b) Payee may be the drawer, like somebody who has a current account and he wants to
withdraw money from it, so he issues a check payable to the order of himself (Jose Cruz) - “Pay to
the order of Jose Cruz.”
So the banks always advise you that you should avoid issuing checks payable to the order of
cash because these are payable to bearer. If they are lost and somebody else can encash it. May be
payable to the order of the maker; Now, the law provides that if the maker issues a PN payable to
the order of himself, that is not complete until and unless he indorses it. Remember the commentary
of Jose Manresa on contracts, “Although the law does not mention this expressly, it is understood
and implied that there must at least be two parties to a contract because the law says consent is one
of the requisites of a contract.” So if somebody makes a PN payable to the order of himself, that is

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not complete until he indorses it. That is by express provision of the law.
(c) Payee may be the drawee; like here is somebody who borrowed money from the bank and
he’s maintaining his current account in the same bank and now, he’s going to pay for his loan. He
can issue a check payable to the bank from whom he borrowed money and where he is maintaining
his account.
(d) May be payable to Two or more payees jointly; like “Pay to the order of Jose Cruz AND
Manuel Santos.” or “.. to Mr. AND Mrs. Jose Cruz.”
(e) To One or some of several payees; like “Pay to Jose Cruz OR Manuel Santos.”
(f) The holder of an office for the time being. Like here is somebody, say a business firm
which is paying for its license fees in the city. You say “Pay to the Treasurer of the City of Manila.”
Or is paying for taxes, you say “Pay to the Commissioner of Internal Revenue.”
When the instrument is payable to order, the payee must be named or otherwise
indicated with reasonable certainty. You have this case of Equitable Bank. This fellow Cassals is
a swindler, like that in Montinola in that Philippine Education case, I think he’s the same Montinola
involved in the PNB case (88 Phil). So he went to Edward J. Nell (EJN) and said he was interested in
buying a skidder and he said he was going to pay for it with a domestic letter of credit to be issued
by Equitable Bank. So, EJN was interested because that would be sure payment.
Then, Cassals came back and said the bank was requiring him to put up a marginal deposit
for the Letter of Credit. He asked EJN if it could accommodate him by putting up the marginal
deposit to facilitate the release of the L/C. Well, that should have given EJN a warning because
normally, banks don’t ask for marginal deposits anymore. So, if they ask for it, it means your
financial condition is in bad shape.
Anyway, EJN agreed. They issued a check to be used for the marginal deposit. They put there
“Pay to the order of Equitable Banking Corp. A/C Casville Enterprises.” So, Cassals got the skidder,
got the check, deposited it in the account of Casville Enterprises and after the check was cleared,
withdrew the money. He disappeared with the money and the skidder.
EJN became impatient, it followed up the L/C with Equitable Bank. It said “What letter of
credit?” So, they now sued Equitable Bank. They said it issued the check to be used for the marginal
deposit of the L/C. The check was instead deposited in the account of Casville Ent. With Equitable
Bank and the bank allowed the money to be withdrawn. In other words, EJN said “you (the bank)
allowed the money to be diverted to a purpose different from what we intended it to be paid for,
therefore, we’re suing you.” Now, the SC said, under the negotiable Instruments Law, the payee
must be named with reasonable certainty. Here, it wasn’t clear who the payee was. Was it Equitable
Bank or Casville Enterprises? If it is the bank, in what capacity and for what purpose is the check
being issued? Is it as agent? As trustee? Therefore, the Court said the check was not negotiable. It
wasn’t indicated with reasonable certainty.
But, I think if you ask any businessman, they’d understand A/C to mean “for the account of”
Casville Ent. It means that EJN issued this check payable to Equitable Bank to be applied to an
obligation of Casville Ent. to Equitable Bank. That is how a businessman would interpret this.
In fact, now, the BIR requires you when you pay for your income tax return, you just open an
account with the bank and the bank will just debit your account and remit the money to BIR. But
that wasn’t the rule before so sometimes, there were times that I would buy a manager’s check to
pay for my income tax and the bank will put there “Pay to the order of Commissioner of Internal
Revenue” and places there “for the account of Jack Jimenez” because they said that’s for your
protection. “Hindi naman kayo pipila sa BIR office para magbayad e. You will probably just send one
of the messengers in your office to pay for your income tax.” That notation will prevent the
application of that check to pay for the tax liability of somebody else. That means that it can be used
only for your own tax liability. But, anyway, I think the conclusion of the Court here is correct in the

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sense that it is EJN who should bear the loss because it’s their fault. It was the one who made this
possible. They allowed themselves to be sweet- talked by Cassals.
§9 states when the instrument is payable to bearer.

(a)When it is expressed to be so payable; “I promise to pay to the bearer.”
(b)When it is payable to a person named therein or bearer; “I promise to pay to Jose Cruz
or bearer.”
(c) When it is payable to a fictitious or non-existing person, and such fact was known
to the person making it so payable;
(d) When the name of the payee does not purport to be the name of any person;
(e) When the only or last indorsement is an indorsement in blank.
In the last three instances, the instrument on its face appears to be payable to order but the
law makes it payable to bearer.
Subsection (c) does not mean a person who does not exist. There may be such a person. It
means that the maker or drawer did not intend that person to receive the proceeds of the negotiable
instrument. That is exemplified in that case of Mueller(?) and Martin vs. Liberty Bank.
Mueller and Martin, a partnership, was maintaining its account with Liberty Bank. Mueller,
one of the partners, wanted to steal money from the partnership and he was authorized checks in
behalf of the partnership. So he signed a check payable to a corporation of which he was the
secretary and then he indorsed that check in behalf of the corporation to himself and deposited the
money. After it was cleared, of course, he withdrew the money.
When Martin, his partner, discovered it, he sued the bank. The theory was that the
indorsement of the check by the corporation to Mueller was not valid because he was not authorized
as secretary to indorse checks by the corporation. Since that indorsement was not authorized,
Mueller, the indorsee, did not get valid title. Therefore, the payment to him was not valid and the
bank should return the money. In effect, this is forgery.
The Court said “No, because when Mueller signed that check, although it was true—there was
really such a corporation in existence, it was not his intention that such corp. should collect the
proceeds of the check. His intention was to steal the money. He didn’t intend the corp. to get the
money so the payee was a fictitious person. Therefore, the check is payable to bearer and since it is
payable to bearer, no indorsement is needed to negotiate it. Mere delivery is sufficient so that the
so-called ‘unauthorized indorsement’ made by Mueller was not necessary to acquire title. It was
payable to bearer so it transferred title to Mueller so he validly deposited it in his account.”
Now, for corporations, usually, you need two signatories, depending on the amount especially
with the rate of inflation now. Usually, our clients will pass a resolution requiring so may signatories
to sign depending on the amount. Let’s say, 50k or less, 1 signature. If it’s a big amount they’d say
2 signatories. The officers complained, every board meeting, there would be brought to them
hundreds of checks to be signed.
Now, if a check has to be signed by 2 officers, then the intention of both signatories must
concur. In that Mueller case, if the check was to be signed by two parties, if Mueller intended to
steal the money but the other signatory did not know it, and thought it was a legitimate obligation,
that will not be payable to bearer. For that designation of the payee to be fictitious, they must have
the same intention.
On the other hand, you have that American Sash and Door Company case. This is a
factory that makes doors, window jams, and the like. There, a payroll clerk named Shoock(?)
padded the payroll. He placed there a lot of fictitious names. They didn’t have such employees. The
officer signing the checks to pay the salaries did not know. He thought they really had such

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employees so everyday he’d issue the checks for these employees who actually didn’t exist. The
clerk would then get the checks, forge the indorsements of the payees and deposit them in his
account.
When his dishonesty was discovered, the American Sash & Door Co. sued the bank. The
question now is are the indorsements on those checks forged? This is because if they are forged,
then the drawee bank must bear the loss because the bank deposited its contract with the depositor
that it will only pay if the check it issued was validly indorsed to the person to whom it paid.
Remember there were no such employees in the payroll.
The Court said here that this is a case of forgery. It is the intention of the officer signing the
check that is controlling. This officer did not know that those employees/ payees were fictitious. Not
the intention of the unfaithful clerk who mechanically prepared the checks, put there the date, the
amount and the payee. He’s not the one authorized to sign or is not a signatory so he’s not the one
who draws and issues the checks. Since the officer/s didn’t know these employees were fictitious,
when Shoock indorsed in their behalf, that is forgery. So the bank must return the money to the
account of American Sash.
Letter d. The most common example here is a check payable to the order of “Cash.” Unless
the payee is Johnny Cash.
You have that Ang Tek Lian case. Ang Tek Lian issued a check payable to Lee Hua Hong.
Lee Hua Hong presented it to the bank. It was dishonored for lack of funds. He filed a case for estafa
against Ang Tek Lian. The decision of the SC said he was being charged with estafa for issuing a
rubber check, now called the “bouncing check.” After the war they were called “Douglas McArthur
checks’ because McArthur said “I shall return.”
The defense of Ang Tek Lian was that he did not commit fraud because he did not indorse it
at the back and therefore, the bank will not honor that without my indorsement at the back.
Therefore, when Lee Hua Hong took the check, he knew or should have known that that check will
not be paid by the bank. That will not be honored because there’s no indorsement at the back by the
drawer.
The SC said “We don’t know anything about that practice. This is a check payable to the
order of cash therefore it is payable to bearer. No indorsement at the back is needed. To transfer
title to it, mere delivery is sufficient.”
Well, banks now require this signature at the back. Somehow, they believe that by the fact
that it was signed at the back by the drawer is an assurance that the drawer has actually released
and delivered the check and it was not just swiped by somebody who happened to see it on his
desk.
Letter e. This refers to a case where the instrument is payable to order and then it was
indorsed in blank.
I forgot to mention… we have this Caltex case. Angel dela Cruz went to Caltex. He wanted to
buy gasoline products on credit. He applied for a credit line. Caltex said “Sure, but we require
collateral.” Dela Cruz offered his time deposit with Security Bank as collateral. He was given a credit
line so he bought gasoline products to the maximum extent of his credit line.
Then he went to Security Bank and said the time deposit it gave him was lost and sought its
replacement. The bank replaced it. He then borrowed money and gave the time deposit replacement
certificate as collateral hold-out arrangement. Security bank agreed. He disappeared with the
gasoline products and the money he borrowed from Security Bank.
When his loan fell due, Security Bank was going to collect. The issue now is who has a better
right to collect the proceeds of the certificate of time deposit? Caltex said that the collateral was
pledged to them earlier.
The side issue that cropped up was that whether the instrument was negotiable. The
Court said it was. The certificate of time deposit says “This is to certify that bearer has deposited so

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much repayable to the depositor.” It was argued that this was payable to the depositor, not payable
to bearer. The Court said, “But who's is the depositor? The bearer!" Because that’s what the
certificate says. Since the depositor is the bearer, it’s payable to bearer.”
As to the question of who had the better right, the Court said, “There are no provisions in the
NIL regarding pledge of negotiable instruments so we have to apply the Civil Code. The Civil Code
says that if you will pledge a negotiable instrument, for it to bind third parties, the pledge must
appear in a public instrument. It must be notarized and you must indorse it. These two conditions
were not satisfied in the case of Caltex. It was not notarized and dela Cruz did not indorse the
certificate to Caltex. Security Bank has a better right to collect the proceeds of the instrument.”
§10 says you need not use the exact words of the law but other words equivalent to them
which indicate the intention to conform to the requirements hereof are sufficient. Like instead of
saying “bearer,” you can say “possessor” or “holder” or instead of saying “Pay to Jose Cruz or
order,” you can say “Pay to Jose Cruz or his indorsees or assignees.”
Under §11, if an instrument or acceptance is date, that is presumed to be the true date. If
the instrument says “I promise to pay 30 days from today.” And it is dated November 14, 2001. It is
presumed that that is the true date but it can be rebutted.
Under §12, ante-dating or post-dating an instrument does not affect its validity.
Under §13, where an instrument expressed to be payable at a fixed period after

date, like “I promise to pay 30 days from today.” or the acceptance of an instrument payable
at a fixed period after sight is undated, like in a bill of exchange, “Pay 30 days after sight” and it
was accepted and the acceptor did not indicate the date. The holder may insert there the true
date of issuance or acceptance. The holder can put the date it was issued or the date it was
accepted.
The insertion of wrong date does not avoid the instrument in the hands of a
subsequent holder in due course but as to him, the date so inserted shall be regarded as
the true date.
Suppose somebody issued a bill of exchange which says “Pay to the order of Jose Cruz
P10,000.00 30 days after sight.” It was accepted on September 15, 2001 but the acceptance was
not dated. Then it was indorsed to Manuel Santos, a holder in due course. He was told that it was
accepted in November 2nd so he place November 2 as the date of acceptance.
Now he’s trying to collect and the acceptor refuses to pay. If he runs after the drawer, can
the drawer say that he has been discharged because the actual date of acceptance was Sept. 15 and
so Manuel presented it for payment when it was already overdue. No, because he’s a holder in due
course, the law will protect him. November 2 will be considered as to him.
The recurring theme of the law is to protect the holder in due course because it is not his
fault. It is the omission to insert the true date that made it possible to insert the wrong date.
Therefore, the law will protect him. The insertion of a wrong date will not avoid the instrument in the
hands of a holder in due course.
So if the party inserted the wrong date and he held on to it, that will be avoided as to him
because the instrument will remain valid only with respect to a holder in due course. Since here, said
party is the one who knowingly inserted the wrong date, the instrument is void as to him.
§14 refers to incomplete but delivered instruments. If the instrument is wanting in any
material particular, the person in possession is presumed to have authority to fill it up . So
from the fact that there is an omission in the instrument and a person is in possession, the law
presumes he has authority to fill up the blank.
For example, the instrument says “I promise to pay Jose Cruz or order P10,000.00 with
interest at the rate of ______.” The payee can insert there the rate of interest.

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Then, a signature on a blank paper, delivered by the person making the signature in
order that the paper may be converted into a negotiable instrument operates as authority
to fill it up for any amount. So we have that expression “He was given a blank check.” It means
he has been authorized to write there any amount he wants.
But the paper must have been delivered with the intention to convert it into a negotiable
instrument. If somebody approaches Sharon Cuneta and asks for autograph to which Sharon obliged
and then the fellow types a negotiable instrument over it, this will not apply. When she signed it, it
was not with the intention of launching a negotiable instrument.
Now, for that person to enforce it, there are two requirements. He must fill it up in
accordance with the authority given and within a reasonable time. For instance, I’ve been
buying supplies. My supplier with whom I have a running account and I had a dispute as to how
much has been used. I told him “I will send my bookkeeper to meet with you bookkeeper to make a
reconciliation of accounts.”
And then I told him “To show him that I’, in good faith and I’m not simply trying to use this
to delay payment, here’s my check. Fill it up with the right amount resulting from the reconciliation
of accounts but only up to P50,000.00. if it’ more than P50,000.00, I would like to review the
records.”
The two bookkeepers agreed that the balance due is P30,000.00. The supplier placed
P60,000.00 on the check. The check bounced. Can he run after me as drawer? Under Section 61, the
answer is NO. I can raise the defense that he did not fill it up in accordance with the authority I gave
him. But if he indorses that to a holder in due course, that holder in due course can run after me for
P60,000.00. The defense is not available because again, the law will protect the holder in due
course. It is my fault. By leaving the amount blank, I made it possible for the supplier to write there
a bigger amount.
November 19, 2001
SECTION 15
Drawer/Maker or any person who affixes his signature before delivery of an incomplete and
undelivered instrument is not liable to any holder, even a holder in due course. The NIL gives the
phrase “any holder” which covers all types of holders.
Indosers in an incomplete and undelivered instrument are liable under SEC. 66 for breach of
warranty.
Development Bank of Rizal case:

Where no delivery was made, there can be no cause of action since there was no title transferred.
SECTION 16
Refers to complete but undelivered instruments
Ex. A check was issued to Jose Cruz and that he could have the money represented by the
check if he passes the accounting exam. Later, Jose failed the exam and the check was
subsequently dishonored. Jose cannot go against the drawer/maker because the instrument was not
negotiated. The defense in favor of the drawer/maker could not be invoked against a Holder in Due
Course.
SECTION 17
Words shall prevail over numbers. In People v. Romero, the defendant was acquitted from
estafa because the amount in words (a smaller amount) made the check drawn against sufficient
funds. If the amount in numbers ( a bigger amount) were used, there would have been estafa since
the check would have been drawn against insufficient funds.

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If the instrument is ambiguous, the holder may elect to treat such instrument either as a
promissory note or a bill of exchange (e.g. a promissory note with an acceptance). Relate this to
SECTION 130.
Interpret ambiguous signatures to refer to indorsers because they are least liable.
SECTION 18
General Rule: A person whose signature does not appear on the instrument is not liable.
EXCEPT:
1. Duly authorized agent signs for a person whereby such person shall be liable;
2. Forger is liable for the signature he forges;
3. Signature in a separate paper when the original instrument has no more space;
4. Estoppel;
5. Signing under a trade or assumed name; and
6. When the instrument can be negotiated by mere delivery.
SECTION 19/20
To avoid liability, the agent:
1. Must be authorized;
2. Must indicate that he signs as an agent; and
3. Must indicate his principal
A letterhead with the name of the principal appearing thereon is sufficient to indicate the
principal.
The agent, although authorized, must act within the given authority.
SECTION 22
When a negotiable instrument is indorsed by a minor/corporation, the defense of incapacity is
personal only to the said minor/corporation.
However, the minor shall be liable under the following exceptions:
1. The minor actively misrepresents his age and it appears that he is physically of such age
(estoppel);
2. The minor kept the fruits or benefits; and
3. The minor spent the money in good faith (relate to Art. 1427 NCC).
Art. 1427. When a minor between eighteen and twenty-one years of

age, who has entered into a contract without the consent of the parent
or guardian, voluntarily pays a sum of money or delivers a fungible
thing in fulfillment of the obligation, there shall be no right to recover
the same from the obligee who has spent or consumed it in good faith.
The liabilities of the other parties are:

1. Maker – Section 60
2. Drawer – Section 61
3. Acceptor – Section 62
4. Indorsers – Section 66
SECTION 23
Types of Forgery:
1. Fraud amounting to forgery or fraud in factum;
2. Duress amounting to fraud; and
3. Fraudulent impersonation.

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Examples:
Fraud in factum – Jose Cruz obtains the signature of Juan Santos by misleading the latter into
believing that what was signed was only for an autograph. There was no intention to circulate a
negotiable instrument.
Duress – forced to sign or make a negotiable instrument.
Impersonation – there must be an intention that the impersonator is the one who should receive
the instrument.
Case 1:
A -> B -> C-> D-> E (holder in due course)
B forges A’s signature (Pay to B or order)
1. Can E run after A? No, because of the forgery defense.

2. Can E run after B? Yes, because he is the forger.
3. Can E run after C or D? Yes, because, as indorsers, they have a warranty.
Case 2:
A herein makes a note which says: Pay to B or order
D forges C’s signature (D made it appear that C indorsed the note)
1. Can E run after A or B? No, because E has no title.

2. Can E run after C? No, because of the forgery defense.
3. Can E run after D? Yes, because of the warranty as indorser.
Case 3:
A herein makes a note which says: Pay to B or bearer
D forges C’s signature (D made it appear that C indorsed the note)
1. Can E run after A? Yes, but if E was not a holder in due course, A can claim want of delivery of a
complete instrument as a defense under Section 16 NIL.
2. Can E run after B? No, because E has no title.
3. Can E run after C? No, because of the defense of forgery.
4. Can E run after D? Yes, because D is the forger/warranty of indorser.
The forgery of the indorsement is immaterial since the instrument is payable to bearer which makes
it negotiable by mere delivery.
However, if there was an indorsement (although unnecessary), the holder can run after prior parties
if he can trace his title to such prior parties. There should be no break. In Case 3, E can trace only
up to D because there was a break when the forgery was committed.

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20 November 2001
Prefatory Remarks: examples of forged signatures. Photocopied sample passed around.

II. Bill of Exchange
A. Drawer
1. Order
a. Accepted
b. Not Accepted
2. Bearer
a. Accepted
b. Not Accepted
Hypothetical Cases
CASE 1: B FORGED THE SIGNATURE OF A, AS DRAWER ON A BILL OF EXCHANGE PAYABLE TO B OR ORDER. B
INDORSED IT TO C, C TO D, D TO E. E PRESENTED TO X, X ACCEPTED AND PAID.
Q. Can X debit the account of A?
A. No because there is no warranty of ___, because the signature is forged.
Q. Can X get back the money paid to E?

A. No, under Section 62, which is based on the old ruling of Pryce v. Neill. The drawee cannot
get back the money from the payee. Under Section 62, the acceptor by accepting admits the
genuineness of the signature of the drawer. That is why when you open an account you submit
specimen signature.
Q. What is the remedy of X?

A. To run after B, the forger. Sue for reimbursement.
CASE 2: B FORGED THE SIGNATURE OF A, AS DRAWER ON A BILL OF EXCHANGE PAYABLE TO B OR ORDER. B

INDORSED IT TOC, C TO D, D TO E. E PRESENTED TO X, X DISHONORED IT.
Q. Can E run after A?
A. No, because the signature is forged.
Q. Can E run after X?

A. No, because the drawee is not liable unless he accepts.
Q. Can E run after B? C? D?

A. Yes, because as indorsers B, C, and D warrant that the instrument is genuine in all
respects what it purports to be.
CASE 3: B FORGED THE SIGNATURE OF A, AS DRAWER ON A BILL OF EXCHANGE PAYABLE TO B OR BEARER. B

C, C TO D, D TO E. E PRESENTED TO X, X ACCEPTED AND PAID
INDORSED IT TO
Q. Can X debit A’s account?
A. No because the signature is forged
Q. Can X get back the money from E?

A. No because under Section 62, he admits that the signature of drawer is genuine.
Q. What is X’s remedy?

A. To run after B.
CASE 4: B FORGED THE SIGNATURE OF A, AS DRAWER ON A BILL OF EXCHANGE PAYABLE TO B OR BEARER. B

INDORSED IT TOC, C TO D, D TO E. E PRESENTED TO X, X DISHONORED IT.
A. No because signature is forged.

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Q. Can E sue X?
A. No because the drawee is not liable unless he accepts.
Q. Can E run after B, C and D?

A. Yes, because as indorsers B, C and D warrant the genuineness of the instrument in all
respects what it purports to be.
CASE 5: A B OR ORDER. B INDORSED IT TO C. D STOLE IT AND FORGED

DRAWS A BILL OF EXCHANGE PAYABLE TO
C AND INDORSED IT TO E. E PRESENTED TO X, X ACCEPTED AND PAID.
THE INDORSEMENT OF
A. No because A ordered it pay to B or order. C did not order X to pay to D. This is a forged
indorsement.

A. Yes, because X only admits that the signature of the drawer is genuine. He does not
admit the signature of the indorsers are genuine. And since this is payable to order,
a valid indorsement is needed for D to acquire title. But since the indorsement of C
is forged, D did not acquire valid title. So E must return the money to X.

A. No, because the indorsement of C is forged. He did not acquire title.
Q. Can E run after B? C?

A. No, because it is a forged indorsement.
Q. Can E run after D?

A. Yes, because as indorser D warrants that the instrument is genuine in all respects what
it purports to be.
CASE 6: A ISSUES A BILL OF EXCHANGE PAYABLE TO B OR ORDER. B INDORSES IT TO C. D STOLE IT AND FORGED
THE INDORSEMENT OF C AND INDORSED IT TO E. E PRESENTED TO X, X DISHONORED IT.
A. No, X did not pay anything.
Q. Can E hold X liable?

A. No, because X is not liable unless he accepts.
Q. Can E run after A? B? C?

A. No, because forged indorsement

it purports to be.
CASE 7: A ISSUED A BILL OF EXCHANGE PAYABLE TOB OR BEARER. B INDORSES IT TO C. D STOLE IT AND FORGED
THE INDORSEMENT OF C AND INDORSED IT TO E. E PRESENTED TO X, X ACCEPTED AND PAID.
A. Yes, because it is a bearer instrument. The instruction of A to X is “pay to the bearer.”

A. No, because E is the bearer.
Q. What is C’s remedy?

A. Run after D, the thief who stole the bill of exchange.

Page 18 of 68
CASE 8: A ISSUED A BILL OF EXCHANGE PAYABLE TO B OR BEARER. B INDORSES IT TO C. D STOLE IT AND FORGED
THE INDORSEMENT OF C AND INDORSED IT TO E. E PRESENTED TO X, X DISHONORED IT.
A. No, X did not pay anything.
Q. Can E sue X for payment?

A. No, X did not accept.

A. It depends whether E is a holder in due course. Because the defense of A is want of
delivery of a complete instrument, which can be raised against someone who is not a holder in due
course, but it cannot be raised against a holder in due course.

A. Yes, because D is indorser.
Q. Can E run after C?

A. No, because C’s signature is forged.
Q. Can E run after B?

A. No, because E cannot trace his title to the indorsement of B.
CASE 9: B FORGED THE SIGNATURE OF A ON A PROMISSORY NOTE (OR BILL OF EXCHANGE) PAYABLE TO B OR
ORDER. B INDORSES IT TO C. D STOLE IT AND FORGED THE INDORSEMENT OF C AND INDORSED IT TO E.
Q. Can E collect from A?
A. No, because A’s signature is forged.
Q. Can E collect from C?

A. No, because signature is forged
Q. Can E collect from B?

A. No, because indorsement is forged

A. Yes, because D warrants that the instrument is genuine in all respects what it purports to be.
CASE 10: B FORGED THE SIGNATURE OF A ON A BILL OF EXCHANGE PAYABLE TO B OR BEARER. B INDORSES IT TO
C. D STOLE IT, FORGED THE INDORSEMENT OF C AND INDORSED IT TO E.
A. No, because A’s signature is forged, it is not operative, it is not binding.

A. Yes, because D is liable as indorser.

A. No, because C’s signature is forged.

A. No, because E cannot trace his title to B, because of the forged indorsement of C.
CASE 11: B FORGED THE SIGNATURE OF A ON A BILL OF EXCHANGE PAYABLE TO B OR ORDER. B INDORSED TO C. D
STOLE IT, FORGED THE INDORSEMENT OF C AND INDORSED IT TO E. E PRESENTED TO X, X ACCEPTED AND PAID.
A. No, because the signature is forged.

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A. Yes, because there is a forged indorsement. Remember the drawee when he accepts,
admits the signature of the drawer is genuine, but not the signature of the
indorser. And since it is payable to order, the genuine indorsement of C is needed to
___ title. So he can get back the money from E.

Q. Can E run after C? B?


A. Yes, because the indorser warrants that the instrument is genuine in all respects what
it purports to be.
CASE 12: B FORGED THE SIGNATURE OF A ON A BILL OF EXCHANGE PAYABLE TO B OR ORDER. B INDORSED TO C. D
STOLE IT AND FORGED THE INDORSEMENT OF C AND INDORSED IT TO E. E PRESENTED TO X, X DISHONORED IT.
A. No, X has not paid anything.

A. No, X did not accept, drawee not liable unless he accepts

A. No, the signature is forged.

A. No, the signature is forged.

A. No, forged indorsement.

it purports to be.
CASE 13: B FORGED THE SIGNATURE OFA AS DRAWER ON A BILL OF EXCHANGE PAYABLE TO B OR BEARER. B
INDORSED TO C. D STOLE IT, FORGED THE INDORSEMENT OF C AND INDORSED IT TO E. E PRESENTED TO X, X
ACCEPTED AND PAID.
A. No, forged signature

A. No because when X accepted it he admitted the genuineness of the signature of A. And
a forged indorsement is not needed for E to acquire title, when it is payable to
bearer. So the forged indorsement is immaterial to the title of E.
Q. What is X’s remedy?

A. To run after B who forged the bill of exchange.
CASE 14: B FORGED THE SIGNATURE OF A AS DRAWER ON A BILL OF EXCHANGE PAYABLE TO B OR BEARER. B
INDORSED TO C. D STOLE IT, FORGED THE INDORSEMENT OF C AND INDORSED IT TO E. E PRESENTED TO X, X
DISHONORED IT.

Page 20 of 68
A. No, X has not paid anything.

A. No, X has not accepted.
Q. Can E run after A as drawer?

A. No, A’s signature is forged.

A. No, signature is forged.

A. No, E cannot trace his title to the indorsement of B.

it purports to be.
Exceptions to general rules

This ___ points out that there are exceptions to these general rules because of estoppel.
1. In a case of father whose son forged his signature. And when the drawee bank asked the
father, “Did you issue this check?” He said, “Yes.” He will be in estoppel; he cannot tell the bank
“You must reinstate that amount to my account.” Because he told the bank it was genuine, he is
in estoppel.
2. Or the drawer may be asked to bear the loss because of unreasonable delay in informing the
drawee about the forgery. The bank is suppose to send to the drawer regularly a statement
showing the deposit and the drawers of his account. The bank also refers the cancelled check to
the drawer. But the drawer has the obligation owing to the drawee to examine the bank
statement to reconcile it with his own record. Also to examine the checks to see if the signatures
are genuine—his signature and the signatures of the indorsers. But if there was delay, and
because of the delay the bank was prejudiced, then the loss will be shifted to the drawer.
When will the bank be prejudiced? If the bank would have recovered the money if the
drawer had notified promptly the bank of the forgery. For instance, the forger had not yet
withdrawn the money from the bank—the money was still intact—and had the bank been
notified promptly, it could have frozen the account. But if at the time it sent the bank
statements and cancelled checks, the forger had already withdrawn the money and
disappeared, then the __ will not prejudice it, because even if it had been promptly
notified it should no longer recover the money.
Slatter (?) & Co. Case (negligence in the delivery). Slatter & Co., a New York stock broker, had
two customers who happened to have the same name—H.E. Richards, one in Oklahama, the other in
Texas. The one in Texas ordered the company to sell his shares and to send the proceeds from the
sale. The company complied, but in sending the check which was payable to “H.E. Richards” it
erroneously sent it to H.E. Richards in Oklahoma. This fellow deposited the check in his account, and
later withdrew the money. Now the company is suing the bank to get back the money. The court
said, “No. The bank had no way of knowing that the company sent it to the wrong H.E. Richards. So
this was due to you own negligence, so must bear the loss.”
NOVEMBER 21, 2001

CASES ON FORGERY
CALINOG v PNB
 Fr. Calinog was maintaining a current account with PNB
 a certain Andrea was able to encash a check issued by him

Page 21 of 68
 when he received the bank statement, there was a discrepancy of P1 500
 when he confronted the bank, the bank refused to return the amount
 SC: Fr. Calinog’s signature was forged; therefore, the bank was liable to him
PNB v QUIMPO
 Gozon was a depositor of PNB
 he went to the bank with his friend Santos
 Santos was in the car while Gozon transacted business with the bank
 when Santos saw that Gozon left his check book, he took a check and filled it up for P5 000;
forged the signature of Gozon; encashed the check
 Gozon sued PNB; PNB claims that Gozon’s negligence was the proximate cause
 SC: The bank should know the signature of the drawer. Gozon cannot be considered negligent
because he had no reason to suspect that his friend would steal his check. The mere fact that a
negotiable instrument is stolen from you does not constitute negligence.
MWSS v CA
 MWSS was using its own personalized checks printed by its own printer and not the official PNB
checks
 23 checks with forged signatures of MWSS officers were presented with PNB over a period of 3
months; PNB paid the checks
 when MWSS discovered the forgery, it sued PNB for the return of the money
 SC: MWSS was guilty of negligence. It was allowed to have its checks printed by a by a private
printing press. It failed to adopt security measures in the printing of the checks. It did not
reconcile the bank statements with its records.
PRICE v NEAL
 Price was the drawee in 2 bills of exchange
 he indorsed said bills to Neal
 the drawer’s signature turned out to be forged
 Price sued Neal to get back the money on the theory of payment by mistake
 SC: Price cannot recover. As the drawee, it was his obligation to verify the signature of the
drawer. He was guilty of negligence, so he must bear the loss.
PNB v CA
 Lim deposited in his current account with PCI a check issued by GSIS in favor of Pulido who in
turn indorsed to it to Go; Go indorsed it to Lim
 PCI as collecting bank presented the check to PNB; PNB honored the check
 when the forgery was discovered, PNB returned the money to GSIS and sued PCI
 SC: PNB cannot get back the money from PCI. Under Section 62 of the NIL, the acceptor admits
the genuineness of the signature of the drawer and that applies also to payment because
payment implies and presupposes acceptance.
SECURITY BANK v TRIUMPH LUMBER

 Triumph Lumber was maintaining a current account with Security Bank
 when robbers broke into the office, Triumph discovered that some check books were missing; it
did not inform the bank
 checks were forged and presented to the bank; the bank honored them
 SC: A drawer who discovered the loss of its check book and did not notify the bank of the loss
should bear the loss caused by the subsequent payment of the checks in which the signature of
the drawer had been forged.
GEMPESAW v CA
 Gempesaw maintained a current account with PBC
 she used checks to pay the suppliers of the grocery stores she owned
 her bookkeeper was the one who prepared the checks and she merely signed them

Page 22 of 68
 she never examined the sales invoices which supported the payments nor the bank statements
for the canceled check
 in 2 years, the bookkeeper was able to steal about P1 M; the payees never received the checks
 Gempesaw sued PBC
 SC: GENERAL RULE: A bank which pays a check on a forged instrument cannot debit the account
of the drawer.
EXCEPTION: Where over a period of 2 years, a depositor signed checks prepared by her
bookkeeper without ascertaining the correctness of their amounts, did not examine the bank
statements and canceled checks, and discovered later on that the signatures of the payees were
forgeries, the loss should be divided equally between the depositor and the drawee bank, since
her negligence resulted in the payment of the checks.
PROVINCE OF TARLAC
 the province of Tarlac maintained an account with PNB
 it was operating a hospital and to fund its operations, checks were drawn payable to the Chief of
the hospital; the cashier received the checks
 after the cashier retired, he continued to receive checks; he forged the indorsements
 the cashier deposited the forged checks with Associated Bank
 the province sued PNB; PNB filed a 3rd party complaint against AB
 SC: PNB cannot debit Tarlac’s account because the Chief’s signature was forged. However, PNB
can demand reimbursement from AB. Nevertheless, Tarlac should bear ½ of the loss for its
negligence. (Tarlac and AB liable proportionally)
MELLICOR/HSBC v PNB (???)
JAI ALAI v BPI (no discussion)
ASSOCIATED BANK
 Reyes was engaged in the business of selling RTWs to department stores
 the department stores issued cross checks payable to her account only; however, she
never received them
 when she followed up, she discovered that the checks were deposited by a certain Sayson who
was able to withdraw the money
 SC: Reyes could sue the stores for payment and they can in turn sue the collecting banks for
paying the checks; the banks can ran after AB. BUT to avoid circuity, Reyes can sue AB directly
MANILA LIGHTER TRANSPORTATION v CA

 the corporation sent its collector to collect payments from its customers
 collector forged indorsements on 49 checks; indorsed to X and Y
 X and Y deposited the checks with China Bank
 when China Bank presented them for payment, the drawee bank paid
 MLT sued China Bank
 SC: MLT should bear the loss. Where the indorsement of the payee of several checks were forged
by an employee of the payee and the checks were deposited in a bank account and the collecting
bank allowed withdrawals after the checks had been cleared, the payee cannot recover from the
collecting bank, where the payee was guilty of negligence by allowing a condition in which its
employees could appropriate the checks and falsify the indorsement.
CLEARING
 all checks have a magnetic ink recognition to identify upon which bank it is drawn
 once a check reaches the clearing house, the computer will automatically credit bank X account &
debit bank Y account
 this is merely tentative because the check will be delivered to bank Y and bank Y has 24 hours
within which to accept the check from the time it received the same

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 if bank Y rejects it, the check will be returned to the clearing house and the computer will
reverse the entries: it will debit bank X account & credit bank Y account
 if bank Y accepts it, the check is cleared and the amount will be credited to bank X
 the drawee bank can collect from the collecting bank if the indorsement is forged
 however, if the check is not returned to the collecting bank within 24 hours, the drawee bank is
barred from setting up forgery; he is deemed to have accepted the check. This is applicable to
cases involving forgery of indorsement and alteration of amount.
 PING-PONG OF CHECKS: Collecting bank presents to drawee bank  drawee bank rejects
the check and returns it to collecting bank
 if the drawee bank returns the check to collecting bank, the collecting bank cannot return it (it is
allowed to return only once-otherwise, it will be fined), unless the depositor redeposits (allowed
to deposit 2x)
 the drawee bank has appropriate prescriptive period to run after collecting bank after discovery
of fraud  24 hours
 RULES AS INTERPRETED BY CLEARING HOUSE:
1. If the drawee bank fails to return the check, it is barred from requesting the bank to reverse
the entries
2. The drawee bank can sue but the money remains with the collecting bank
3. If the drawee bank returns the check within 24 hours  it can sue and money remains with
drawee bank
FOUR BASIC RULES IN FORGERY
1. A party whose signature was forged is not liable unless he is in estoppel

2. A person negotiating an instrument after forgery is liable because of his warranties
3. A HIDC acquires good title if forged indorsement is not necessary for his title as in the
case of forged indorsement in a bearer instrument.
4. A drawee who pays/accepts a bill with a forged signature of a drawer cannot get back the
payment
November 22, 2001 Thursday
SECTION 24
Every NI is deemed to be issued for a valuable consideration.
Travel Inc. case

There was this fellow bringing in passengers to a travel agency buying tickets. To pay for the tickets,
he issued a check w/c bounced. The travel agency sued him on the basis of the check. CA dismissed
the complaint and said the plaintiff has the burden of proof to show how much is the worth of the
tickets actually purchased from the travel agency and said that there was conflicting and the plaintiff
failed to proved by preponderance the value of the ticket purchased.
SC: Plaintiff sued on the basis of the dishonored check therefore it is presumed that the check was
issued for a valuable consideration and plaintiff need not prove the amount of consideration issued
for the check. The burden was on the defendant to prove the face value of the check is not the
consideration.
Villaluz case
The accused was being prosecuted for issuing a bouncing check. SC said that since consideration
was presumed drawer should be ordered to pay its value because he failed to prove that there was
no consideration.
SECTION 25
In civil law, a consideration may consist an obligation to give like to deliver a car, ring; to do, to sing
in a concert; not to do like in a contract, you may have a provision where somebody selling his

Page 24 of 68
business that there be a stipulation that for the next 5 years the seller will not engage in a
competing line of business. The law says that a pre-existing debt constitutes value. In civil law,
remember that donation is a contract and consideration may be love, affection, generosity,
kindness. Sometimes someone may give something out of hatred.
SECTION 26
If A issued a P/N in favor of B but actually B didn’t give him any consideration. B then indorses it to
C who pays for it and now C negotiates it to D. D is considered a holder for value w/ respect to A, B,
C because C gave value and A and B were parties before who became bound before the value was
given.
SECTION 27
This is common in labor cases. The arbiter decided the case in favor of the employee and employer
wants to appeal. The er will post a bond. Surety Co. will require collateral but they will not accept
real estate. They would insist it would be cash, money market placement, time deposit, T-bills
because this is a very risky undertaking about 95% they will be held liable. They would want
collateral which would be easily converted to cash. If here is an er w/ a certificate of time deposit
w/c is negotiable for P1M and the judgment in favor of the ee is P0.5M so that collateral the surety
co. is asking for is PO.5M but what they have is the negotiable certificate of time deposit, so they
would give it as collateral to the extent of P0.5M. So surety co. can be considered a holder for value
up to P0.5M only because that was the only amount it will be entitled to recover in case it is held
liable to the ee.
SECTION 28
“Absence of consideration is a matter of defense against a person not a HIDC”
Jose Cruz issued a check for a ring but it turned out to be fake but the check was indorsed to a
HIDC. The drawer cannot raise that defense.
“Partial failure of consideration is a defense pro tanto …..”

Somebody issue a check to pay for 2 tons of molasses but the seller delivered only 1 ton. Check
bounced. If he is sued, he can raise the defense that there is partial failure of consideration. Only 1
ton was delivered. He should only be made liable to the extent of ½ of the face value of the check.
Cornell case
Want of consideration between the drawer and acceptor is a defense against the payee. If the
drawee accepted the B/E and the holder returned on the date of maturity to demand payment, the
acceptor cannot raise the defense that the drawer doesn’t have sufficient funds therefore I cannot
pay you. Under sec. 62, the drawee, by accepting the instrument admits the authority of the drawer
to draw the instrument. That means he admits either the drawer has sufficient funds with him or
they have an arrangement wherein to advance his own funds.
SECTION 29
In the play “Merchant of Venice,” A signed a P/N as accommodation maker because B wanted to
borrow money from S but his credit standing was poor. So A signed the P/N as accommodation
maker and the stipulation was that should he fail to pay S can extract 1 lb. of flesh. Because A could
not pay, S now was demanding his 1 lb. of flesh. …
“w/o receiving value therefor”

He didn’t receive any share of the proceeds of the P/N. This is common when you have a co-signer
in a P/N. Take the case of a surety co. Some banks would require a surety co. to co-sign the P/N of
the maker. If maker doesn’t pay, they just run after the surety co.. Surety co will co-sign but it will
charge a fee because it is lending its credit. Still it is an accommodation party because it will not
receive anything from the proceeds of the P/N but it will be paid a consideration for acting as surety.
The same way you have that Phil. Exchange Foreign Loan Guaranty Corp. before. These people

Page 25 of 68
borrowing abroad that govt. formed corp. would bind itself solidarily but then it would charge a
guaranty fee. It’s an accommodation maker. So the accommodation party cannot raise the defense
that he didn’t receive any consideration.
Clark v. Sellner
The consideration that supports the obligation of the accommodation party is the consideration that
supports the obligation of the party accommodated. There need not be an independent consideration
for the obligation of the surety. You find that in civil law.
Prudencio v. CA (Jack doesn’t agree with this)

Concepcion and Tamayo Construction had a project with the govt. They obtained a loan from PNB as
working capital. This is common in the construction business. PNB required CT to assign the
proceeds of the contract to PNB. It wanted to be sure it got paid. It was not satisfied with that. It
asked Prudencio spouses to sign as co-makers and they mortgaged their property as security to the
loan. CT didn’t have sufficient working capital. They could not pay their suppliers and workers so
they pleaded w/ PNB to release a portion of the proceeds of the payment made by the owner of the
project so it could pay its suppliers and workers. But CT didn’t have much working capital so they
eventually abandoned the project. PNB now was forced to foreclose the property of PS. PS filed case
to stop foreclosure and the cancellation of the mortgage.
SC: PS were accommodation makers and for the holder of a NI to be able to collect from
accommodation party, holder must meet all requirements of HIDC except for the fact the holder is
aware for want of consideration on the accommodation party for the accommodation party did not
receive any consideration. PNB didn’t meet those requirements. One of the requirements of a HIDC
is that it acted in GF. PNB didn’t act in GF. Why? PS agreed to co-sign because they learned that
proceeds of the contract were assigned to PNB so they felt they were safe. But what happened was
PNB released a portion of the money. So it acted in BF, thus not meeting requirements of a HIDC
thus can’t recover
JACK: WRONG!
1) Sec. 29 doesn’t say HIDC but holder for value
2) Sec. 52 says to be a HIDC party must have acted in GF a time he took the inst. SC was
talking about something that happened long after PNB to the P/N.
3) Partial release of proceeds cannot make PNB in BF. Probably they have made an error of
judgment. They acted in GF. Had they not released any money, no question CT would be
able to pay its suppliers and workers and the project would grind to a halt. These laborers
are paid on a weekly basis. If you don’t pay them that week, they disappear. Probably
that was the intention of PNB because if they didn’t release, definitely CT will default.
They were hoping by releasing some, it would be able to keep going and finish the project
but apparently that was not the case.
Jose v. CA
Jose was claiming a certain property belonging to the client of Atty. Beltran. There was a settlement.
She agreed to give up his claims for a certain amount and to facilitate the settlement Atty. Beltran
signed a check to pay Jose. Whose check was that? It was the check of the company of which he
was president. So he and the VP co-signed the check representing the amount to be paid to Jose to
give up her claim against the property of client of Atty. Beltran. When Jose tried to collect on the
check. Check bounced for lack f funds. She now sued corp. headed by Atty. Beltran.
SC: NO, the issuance of the check was ultra vires. No biz purpose so far corp. is concerned.
Remember, as a general rule, a corp. cannot be a surety for the obligation another because it has no
business purpose. When Atty. Beltran and the VP signed that check, in behalf of corp. they were
exceeding their authority as agents of corp. The rule is that when the agent exceeds its authority it
becomes personally liable. It is Atty. Beltran who should be sued and held personally liable.

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People v. Maniego
Milagros Pamintuan issued a postdated check and asked disbursing officer of AFP to exchange it w/
cash. Maniego the sister was asked to sign as accommodation indorser. When check fell due, it
bounced for lack of funds. Criminal case was filed against Pamintuan and Maniego. P jumped bail
and disappeared and Maniego was acquitted by the TC. TC said it has not been shown that he acted
w/ conspiracy w/ Pamintuan. but TC held her civilly liable. She appealed. She said that since she
was acquitted TC should not have held her civilly liable.
SC: No it is true that you didn’t incur criminal liability beech it was not shown that you conspired
with P however before it was exchanged for cash by the disbursing officer of AFP you were acting as
accommodation indorser and an accommodation indorser is liable when check bounces.
SECTION 30
That’s why I told you in some decisions one penned by Justice Martin and one penned by
Justice Romero where holder of check w/ a forged indorsement was ordered to return the money. SC
said that under sec 66 the general indorser warrants the instrument what it purports to be. That is
wrong. That is not negotiation because the holder did not transfer the check to the drawee. That was
presentment for payment. The holder signs the check at the back to acknowledge receipt of payment
and not form purpose of transferring title.
Now if the instrument is payable to order, to negotiate sign at the back then deliver. If it’s
payable to bearer, mere delivery is sufficient. But if the party indorses and delivers it, that is also
negotiation.
Caltex case
This is where Angel dela Cruz who had a deposit with Security Bank with a certification. “This is to
certify that bearer has so much of deposit repayable to the depositor. He pledged that to Caltex as
collateral for his credit line. Then he told SB that it got lost and asked for a replacement and gave it
as a collateral for a loan w/c he got from SB. He disappeared. Dispute is who had a better right to
the proceeds of the cert. Caltex said this was pledged to us.
SC: This is a NI. But there are no provisions in NIL governing pledge of NI. So we should fall back
on NIL. NIL says for a pledge of a NI to bind 3 rd parties pledge must appear in a public instrument
and the pledgor must indorse the instrument. These requirements were not complied w/. Pledge
was not notarized. and Dela cruz didn’t indorse certificate. SB had better right.
SECTION 31
To negotiate, to indorse, one mist write on the instrument or a paper attached to it (allonge). That is
sufficient, it works as an indorsement because by operation of law that is what happens. Just like in
your sale. The seller by simply signing the deed of sale warrants that the thing he sells is free from
hidden defects and he also warrants against eviction even though the contract is silent. His mere act
of signing the law imposes those liabilities upon him.
SECTION 32
“Indorsement must be of entire instrument”
Exception: If instrument is paid in part, for example when it is paid on installments. 1 st installment
has been paid then it can be indorsed w/ respect to the balance. The law requires that there must be
indorsement of entire instrument because we said NI are intended to circulate and it would be very
difficult to negotiate that further if you could have partial indorsemenst. You have a check for
100K and payee will indorse 50K of that. who keeps the check. The indorsee now will indorse 30K of
that to another party. That another party will indorse 15K of that. It’s very very difficult. That’s
why law prohibits that. Now if a partial indorsement is made, the effect of that will be an
assignment not negotiation so personal defenses can be raised. Law also prohibits transfer to 2 or
more indorsees. For instance you have a check for 100K to Jose Cruz 50K and Manuel Santos
50K.

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SECTION 33
There are other kinds of indorsement: joint, successive, facultative, irregular.
facultative – waives demand and notice of dishonor.
This classification is not mutually exclusive. You can have indorsement w/c is the combination of
these. You can have an indorsement w/c is conditional and facultative.
SECTION 34
SPECIAL- specifies person to whom it is being indorsed. Like if co-payee writes at the back to Jose
Cruz, then signs it. That’s special indorsement. And to negotiate further Jose Cruz must indorse if
payable to bearer. If payable to bearer it can be negotiated further by mere delivery.
BLANK- does not name any person. The co-payee just signs at the back. That become payable to
bearer under Sec. 9 so it may be negotiated further by mere delivery.
SECTION 35
A holder may convert a blank indorsement into special by writing over signature of the indorser in
blank any contract consistent with the character of indorsement. Because if an order instrument is
indorsed in blank it becomes payable to bearer. Holder may be afraid if he loses that the finder may
be able to collect payment because it is payable to bearer. To protect himself, he can insert his
name to change blank to special so instrument will not be payable to bearer and therefor his
indorsement will be needed to negotiate that further. But the contract must be consistent with the
blank indorsement . It cannot add there notice of dishonor waived .
SECTION 36
Restrictive Indorsement
NEGOTIABILITY TRANSFER CONSIDERATION DEFENSE AVAILABLE

OF TITLE PRESUMED
(a) prohibits X - /- / since there is X - def that could have
further transfer title been raised vs. indorser
negotiation of cant be raised vs.
instrument indorsee since he is an
HIDC
(b) constitutes /- X because X since title / since indorsee merely
the agent of indorsee does not transfer agent whatever defenses
the indorser merely agent that could have been
of indorser raised vs. indorser, can
be raised v. indorsee
(c ) vests title / / / because title X since title transfers
in the indorsee transfers
in trust for or
to the use of
some other
persons
SECTION 38
Such indorsement does not affect negotiability but if it is dishonored because of insolvency of maker
or acceptor the indorser will not be liable especially if instrument will fall due after a long period of
time like 5 yrs. Indorser may be reluctant to indorse that as a general indorser bec if the maker does
not pay I will be solidarly liable and I’m not willing to take that risk. 5 yrs is too long a time. I don’t
know what will happen to him 5 yrs form now. Now however indorser is not completely out of the
woods bec. under sec. 65 he has certain warranties. He warrants that the instrument is genuine in

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all respects what it purports to be. If there’s a forgery or material alteration, he’s liable. He warrants
that he has good title to it ; that all prior parties has capacity to k; that he is not aware of anything
that will make instrument valueless. So if he knows maker is actually insolvent, he is liable.
SECTION 39
If indorsement is conditional, maker or acceptor is given the choice. He may disregard the condition
and pay on the date of maturity or abide with the condition and refuse to pay and wait and see if
condition will be fulfilled. He can disregard bec. he bound himself to pay unconditionally and you
cannot change the contract w/o his consent so you can say disregard condition because you can say
I am very solvent now but I don’t know what will happen in the future so I would rather get it over
w/ and settle this obligation now. If he pays and disregards condition and later condition not fulfilled,
holder cannot run after the acceptor: why did u pay? Bec he has been discharged and law allows him
to disregard. Remedy of conditional indorser is to run after indorsee to get back the money.
SECTION 40
I signed P/N payable to bearer. If payee indorses that by special indorsement to Jose Cruz, JC can
negotiate further by mere delivery. Why? bec he cannot change my contract. I bound myself to pay
to the bearer. Payee cannot change my contract and make that instrument payable to order. I made
that payable to bearer bec I don’t want to assume the risk of forge indorsement. That’s why I agreed
to pay bearer. Bec if I made that payable to order and it turns out that there was a forged
indorsement I pay the wrong person. Person entitled can run after me. If you pay the wrong person
that person has no title. His title is based on a forged indorsement you are still liable. I don’t want to
take the risk. Other parties cannot change my contract bec I don’t want to take that risk. Now that if
that person indorses it. So if bearer inst. A-B-C-D. B indorses it to C by special indorsement but C
merely delivered it to D w/o indorsement D cannot run after B bec. C didn’t indorse it to him so D
cannot raise his title to B
SECTION 41
General Rule: If instrument is payable to 2 or more payees like if payable to Mr. and Mrs. Antonio
Cruz, they must both indorse.
Exceptions: if 1 has POA form another or if they are partners. Theory in partnership, there’s mutual
agency.
November 26, 2001

By Herbert Francisco
SECTION 48
Under Section 48, the holder may at any time strike out any indorsement which is not
necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to
him, are thereby relieved from liability on the instrument. For example,
A B C D E
Because this is payable to order and therefore, the indorsement of B is needed in order to
negotiate that because it’s payable to the order of B. But if this were payable to bearer, then all the
indorsements can be crossed out. Now, the effect of striking out the indorsement is that the
indorsers whose signature was cancelled and all the indorsers subsequent to him would be relieved
from liability. So that if E strikes out the indorsement of C, C will be relieved from liability and also
D. Why? Because D has been prejudiced. Striking out of the signature of C deprived him of his right
of recourse against C. Since he has been prejudiced because he could no longer run after C, the law
will relieve him also.
SECTION 49

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Now under Section 49, if the holder of an instrument transfers it without indorsing it, the
transferee acquires only such title as the transferor had. So, it would be like assignment. So
whatever defenses could been raised against the transferor can be raised against the transferee.
However, the transferee can compel the transferor to indorse the instrument. But for purposes of
determining whether or not he is a holder in due course, the negotiation will deemed to have taken
effect when the indorsement was actually made. So, if let’s say when the instrument was
transferred, this PN was transferred, E was not aware that actually this was issued for a fake ring,
but at the time he was able to get the insorsement, he was now aware of that, he will not be a HDC,
because at the time he got the signature, he was aware of the failure of consideration.
SECTION 50
Now under Section 50, if an instrument is negotiated back to a prior party, he may further
negotiate it, but he cannot enforce it against any intervening party to whom he is personally liable.
A B C D E
So here if this is indorsed to B, under this provision, B can negotiate it further but B in case A
refuses to pay, he cannot run after C,D, E. Why? Because they in turn can run after him, so there
will be compensation. His liability to them will be offset by their liability to him because while they
are liable to him, in turn, he liable to them. SO he will run after C,D,E and in turn, they will run
after him. So, since there will be compensation of liabilities, he cannot run after them. But you see
the law is based on the premise that there will be compensation that’s why he is precluded from
running after them. So if he can run after them, but they cannot run after him, this will not apply,
so he can run after them. For instance, he indorsed this, qualified indorsement, without recourse,
but C, D,E are general indorses, well he can run after them because they cannot run after him. And
the reason of the law which is based on the assumption that there will be offsetting of liabilities will
not apply, that’s why now, he can run after them.
SECTION 51
Section 51 talks of the rights of a holder. A holder may sue in his own name and payment to
him in due course will discharge the instrument. Payment is in due course if it was made at or after
maturity to the holder in good faith and without notice that his title is defective.
SECTION 52
Section 52 deals with an important provision – Holder in Due Course. Well, Section 52 lays
down the requisites to be considered a holder in due course – (1) The inst must be complete and
regular upon its face; (2) He must have become a holder before it was overdue and without notice
that it had been previously dishonored, is such was the fact; (3) He took it in good faith and for
value; (4) That at the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
Subsection (d) is an elaboration of Subsection (c). It explains the meaning of taking the
instrument in good faith. In other words, that the party who took it had no notice of any infirmity in
the instrument or defect in the title of the person negotiating it.
Then, section 55 elaborates on subsection (d). It explains when the title is defective.
Section 56 also elaborates on that. It says when there is notice of defect. If the holder took it on
the day it was due, he’s still a HDC because its not yet overdue.
Now, instruments payable in installments. If an installment was not paid and he was aware
of that, there is no acceleration clause, he will not be a HDC with respect to the installment that was
already overdue but he will be a HDC with respect to the installment which are not yet due. If
there’s an acceleration clause and it is automatic and he was aware that there was a default, then he
will not be a HDC because he is aware that the entire amount is already overdue but if he is not
aware, then he will be a HDC with respect to the installments which are not yet overdue on the face
of the inst.

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Now, the acceleration clause is optional if the holder did not exercise it, and so the … this
holder who is a HDC will respect the installments which are not yet overdue. But if it was exercise
and he aware of that, then he knows that the entire inst is overdue so he will not be a HDC for any
amount. But if he was not aware that it was exercised, the optional accelration clause was
exercised, then he will be a HDC with respect to the installments which on the face of the instrument
are not yet due. But he will not be a HDC with respect to the installment which is already overdue.
To be considered as someone who is not a HDC, it is not enough that the party is negligent.
Negligence is when one is not in good faith. He must know that there is something wrong with the
inst. He need not know what exactly is wrong but so long as he knows that something is wrong then
he is no longer a HDC. This is just like libel where the writer will be liable if he wrote something
derogatory knowing it was false or with reckless disregard of its falsehood. That’s why if he knows
something is wrong but he went ahead and took the inst, he did not investigate, he will not be a
HDC. Because as I said, he need not know what exactly was wrong as long as he knows something
wrong. Bec. If he knowingly chose to be ignorant, he cannot claim to be a HDC. That is not good
faith. In other words, the final analysis test, is : Did he take it? Was it honest for him to take the
instrument under the circumstances?
That’s why if somebody in the middle of the night, offers to negotiate to you a P100,000
check for 20% of its face value. He said, this is due next week but I just need money very badly.
Be suspicious when something is offered for such a trifling amount then that is a warning sign –
something is wrong.
We’ve had a number of cases involving the question of whether or not a person is a holder in
due course.
Well you have that case of Gatchalian. Well, Anita Gatchalian wanted to be a second-hand
car and Manuel Gonzales said he knew somebody who was selling his car but this owner wants to
deal only with serious buyers. He does not want to waste his time with curiosity seekers.
Therefore, to satisfy the owner that you are serious, you must show the color of your money. So he
asked Gatchalian to issue a check and he said that he will return with a certificate of registration.
He never showed up. It was a crossed check. And what did Gonzales do with it, he used it to pay
for the medical expenses of his wife, for the hospitalization expenses of his wife. And since the
amount of the check was greater than the hospital bill of his wife, sinuklian pa siya ng hospital. So
when Gonzales did not return, Gatchalian stopped the payment of the check. So the hospital,
Ocampo Clinic, sued him. Gatchalian said that was issued for the payment of the a car and Gonzales
never returned. So there was failure of consideration. But the clinic said, we are a HDC, so you
cannot invoke that. The Court said no because, the court said when a check is crossed, the crossed
check can only be deposited. That serves as a warning sign that it was issued for a specific purpose
and therefore, to be a HDC, you must make inquiries – for what purposes was it issued, the nature
of the tile of the payee. If one does not make that inquiry, then he cannot claim to be a HDC.
Then you have the case of Banco Atlantico. Banco Atlantico is one of the biggest banks in
Spain. An employee of the Philippine embassy deposited in this bank her paychecks. They were
being paid in dollars but the checks were drawn against the branch of PNB in New York. He told
Banco Atlantico not to present the checks for payment right away. The bank allowed her to
withdraw money although the checks have not yet been cleared. When they eventually presented
the checks, PNB dishonored them bec. the amount have been altered by raising the amounts. Banco
Atlantico sued. The Court said Banco Atlantico was not a HDC because It agreed to take the checks
and not to present them for payment immediately although they were already due and the payee
told them – do not present that for payment right away. And then they also allowed the payee to
withdraw the money right away although the checks have not yet been cleared.
Then you have this case of Mesina. This Jose Go bought a cashier’s check payable to his
order. But he negligently left the check. And another customer who saw it, stole the check. When
Jose Go realized that he had left the check, he asked the bank to stop payment. Now, the customer
who stole it, Alexander Lim, indorsed the check to Marcelo Mesina, who then demanded payment.
When the bank refused, he sued the bank. The Court said he could not recover since he was not a
HDC. The Court said he refused to explain how and why the check was indorsed to him. The Court

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said he had notice that there was a defect in the title of Alexander Lim. I think the better reasoning
here is that the indorsement was forged. Remember that the payee of the check was Jose Go and
the one who indorsed it to Mesina was Alexander Lim. The indorsement was a forgery. But the
Court invoked instead Section 52.
Then you have this case of State Investment House v. IAC. New Sikatuna Wood
Industries wanted to borrow money from the Chua spouses. But the Chua spouses had no money.
The Chua spouses said – we will give you post-dated checks, three of them – and they were all
crossed. But this is on condition that on the date of maturity they will have enough funds in the
bank. But New Sikatuna did not wait for the maturity. It indorsed the check to State Investment
House at a discount. Well, State Investment House deposited the checks. They bounced, so they
sued the Chua spouses. The Court said State Investment House was not a HDC. The checks were
crossed. That is a warning sign that these checks were issued for a definite purpose so they should
inquire what was the purpose for which these checks were issued and what was the nature of the tile
of New Sikatuna Wood Industries. Since they did not make these inquiries, they are not a HDC, just
like the Gatchalian case.
In fact, that was also reiterated in that case of Bataan. Bataan Cigars cigarette factory, a
cigarette manufacturer bought tobacco from a supplier and issued to him crossed checks. He never
delivered the tobacco, so Bataan Cigars cigarette factory stopped payment. Now the supplier
indorsed the checks to State Investment House. SO when State Investment House presented it,
payment was stopped because Bataan Cigars never got the tobacco so they stopped payment. State
Investment House was claiming it was a HDC. The Court said the checks were all crossed. That was
a warning sign. You should have inquired – what was the nature of the tile of the payee and for
what purpose was this check issued.
Then you have this case of Stelco Marketing Corporation. Stelco Marketing Corporation is
a distributor of steel bars. It sold steel bars to RYL Construction who did not pay. RYL Construction
asked Steelwell for financial help. So, Steelwell Corporation issued a check on the understanding
that his will be used only to guarantee your obligation but not to pay for your obligation. But RYL
Cons. gave the check instead to Armstrong Industries, sister company of Stelco Marketing with
Armstrong Indsutries for the manufacturer of steel bars where Stelco Marketing was the one selling
the steel bars. Now, the evidence does not show why they gave the check to Armestrong Industries,
the manufacturer of the steel bars from Stelco Marketing. The check was dishonored for lack of
funds. After it had been dishonored, it came into the possession of Stelco Marketing. The evidence
does not indicate how it came to the possession of Stelco Marketing. Stelco Marketing now sued
Steelwell Corporation, the drawer. The Court said it cannot recover, it was not a HDC. First, the
payee was RYL Construction and the check was not indorsed to it – it was payable to order.
Secondly, when they took it, they were aware that it had been previously dishonored because there
was a stamp at the back by the drawee bank. DAIF – Drawn Against Insufficient Bank. Because
when the bank dishonors that, it will stamp at the back – notice of dishonor – and it will state there
the grounds – DAIF, Drawn Against Insufficient Funds.
Then you have this case of Salas. This has been asked in the bar exams. Salas bought a car
from Violago motors and to pay for it, she obtained a loan from Filinvest. In accordance with the
usual practice, she executed a PN in favor of Violago motors. Violago motors then indorsed the PN
to Filinvest. Salas now refused to pay Filinvest because she said, there’s a discrepancy between the
engine number and the chassis number as indicated in the certificate of registration and the sales
invoice and the actual number – engine number and chassis number. According to the Court,
assuming there is such a discrepancy, she cannot refuse to pay because Filinvest was a HDC and
therefor, she cannot invoke those defects as a ground for not paying the PN.
Then there’s this case of State Investment House v. CA. Corazon Victoriano delivered
some pieces of jewelry to Nora Mulic to be sold on commission and Mulic issued two (2) checks to
Victoriano as security for the expected proceeds from the sale of the jewelry. Well, she was not able
to sell the pieces of jewelry so she returned them to Victoriano but before she returned them,
Vicotriano, meanwhile, rediscounted the checks with State Investment House. So indorsed the
checks to State Investment House. When State Investment House presented the checks for

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payment, they were dishonored for lack of funds, because Mulic did not fund the checks anymore
because she had returned the pieces of jewelry. So State investment House sued Mulic. Her
defense was that she was not liable because the pieces of jewelry were returned to Victoriano. The
Court said that since State Investment House was a HDC, Mulic could not invoke absence of
consideration between her and Victoriano as a defense.
And then you have this Escarte case. Leticia Escarte issued six (6) post-dated checks to
Carmelita Matias. Matias said she would rediscount the checks and deposit the proceeds in the
account of Escarte to pay for the checks. But she did not do that. Since she did not deposit the
proceeds from rediscounting the checks, Escarte topped the payment of the checks. So, when the
checks were presented, they were dishonored because of the stop-payment order. So, Matias went
back to Escarte and pleaded with her to replace the checks and she assured her that she had some
money coming from a jewelry transaction. She said, this time, I will make sure that I will deposit
enough funds to pay for these checks. And Escarte was cajoled into issuing the replacement checks.
But Matias did not deposit the money she promised and so the replacement checks were dishonored
for lack of funds. So when she was sued, Escarte invoked the defense of lack of consideration.
However, the Court said that since the indorsee was a HDC, she could not invoke want of
consideration between her and Matias as a defense for not paying.
Then, this was asked in the bar exams, “May a payee be a HDC?” Well, the better view is
YES, the payee may be a holder in due course from the basis of definition. Because Section 191
defines a holder as the payee or indorsee of a bill or note who is in possession of it or the bearer
thereof. Since by definition, a holder includes the payee. So if the payee satisfies the requirements
of Section 52, that payee can be a HDC.
SECTION 53
Now Section 53 says if an instrument payable on demand is negotiated an unreasonable
length of time after its issuance, the holder is not a HDC. In determining what is a reasonable time,
that is mentioned in the law, Section 193 – you consider the nature of the instrument, customs and
the facts of each particular case.
SECTION 54
Now under Section 54, if a transferee receives notice of any infirmity before he has paid the
full amount agreed, he will be deemed a HDC only to the extent of the amount paid by him. For
instance, here is somebody who is the payee of a post-dated check for over P100,000. And he told
a friend, Jose Cruz, “this is due next month but I need money very badly now. I cannot wait for
next month to get the P100,000. So, I am offering to negotiate this to you at a discount. You pay
me P80,000. I’m willing to indorse this to you.” So, Jose Cruz said, “well, I don’t have P80,000
now. I’ll give you P40,000. Come back three (3) days later. I will give you the balance.” The
following day, he found out that was issued for a fake ring. But then he gave the P40,000 just the
same. The check was presented. It was dishonored because there was a stop-payment order. So,
he now sues the drawer. Can he collect? Partially, YES. How much? P50,000. Because the
agreement was that he will pay P80,000 for the P100,000 check. So the consideration corresponds
to the face value on a ratio of 4:5. For every P5 of the face value, he will give P4 as consideration.
So in determining whether he is a HDC, there should be a proportionate of the amount he paid with
the face value of the check.
SECTION 55
Now Section 55 elaborates on Section 52(d). When is the title defective - The title is
defective when the party obtained by fraud, duress, force and fear, other unlawful means or illegal
consideration, or when he negotiates in breach of faith or under circumstances amounting to fraud.
So he negotiated it by fraud, like he negotiated it for payment for a fake ring. Duress, check as
ransom money. Unlawful means, like it was stolen. Illegal consideration – it was issued to pay for
marijuana.

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I mentioned to you before the case of Ford. Ford, Phil. was going to pay the BIR for the
sales tax on the sale of cars it manufactured. It asked one of its employees, Godofredo Rivera to
pay the tax. So, Ford, Phil. issued a check payable to the order of the Commissioner of Internal
Revenue drawn against Citibank and it was a crossed-check and it was indicated there “for payee’s
account only”. But what did Godofredo do. There was a syndicate. He indorsed this check to a
certain Cascua, who opened an account in Insular Bank of Asia and America and deposited there
another check for exactly the same amount. That other check had no funds at all. But then the
check deposited was supposed to be brought to the clearing house. But what happened, they
switched the checks – that worthless check was not brought to the clearing house. Instead what
was brought was this check issued by Ford, Phil. They switched it on the way to the clearing house.
But in the records, they made it appear that what was brought was that worthless check. The
branch manager was involved in that conspiracy. So, Insular Bank brought the check to the clearing
house and Citibank honored it. So they put now in the record that the check which was deposited
was cleared! It was not returned. That worthless check, as I said was switched. Now, he withdrew
the money. So when Ford found out about this, the BIR asked them to pay taxes all over again. So,
it now sued Insular bank of Asia and America and Citibank. The Court said Insular Bank of Asia was
liable because it did not acquire valid title to the check. This check was payable to the order of the
Commissioner of Internal Revenue and Godofredo Rivera had no authority to negotiate that. So, it
was unlawful for him to negotiate that check. Therefore, Insular Bank should be held liable to Ford,
Phil. But the Court said that Citibank was also negligent because the presenting bank is supposed to
stamp there at the bank – “All indorsements and/or lack of indorsements guaranteed”. Well, the
decision is quite muddled. One part says, the checks were not stamped and another part said there
was a stamp but there was no initial. The Court said that if Citibank had examined the checks, they
would have noticed that there is discrepancy which one portion says it was not stamped but another
portion says it was stamped but it was not initialed by the bank teller who should have received it.
The Court said Citibank and Insular Bank, you’re both at fault, so you share the losses – 50/50.
And then you have this old case of Asia Bank Corporation v. Ten Sen Guan(?). Ten Sen
Guan ordered from Snows limited, 10 cases of “patis” – expensive linen. And to collect payment,
Snows Ltd. drew a bill of exchange. The drawee was Ten Sen Guan, the buyer. Snows Ltd. indorsed
the checks to Asia Banking Corporation. When the crates arrived, they did not contain “patis”, they
contained sack cloth. The Court said that this is negotiation that amounts to fraud. Therefor, Asia
Banking Corporation could not acquire valid title and could not enforce the bill of exchange against
Ten Sen Guan.
SECTION 56
Now, Section 56 elaborates on Section 52. It says when there is notice of defect, the person
to whom it is negotiated must have actual knowledge of the infirmity or defect or knowledge of
such facts that his action in taking it amounts to bad faith. Negligence is not enough. They must
know something is wrong. They must either know exactly what is wrong or knowledge of such facts
that their actions amount to bad faith. They do not know what is wrong but they know something is
wrong and yet the holder still took the instrument. THE END.
November 27, 2001 Rexy
SECTION 57. Rights of a Holder in Due Course.- A holder in due course holds the
instrument free from any defect of title of prior parties, and free from defenses available
to prior parties among themselves, and may enforce payment of the instrument for the
full amount thereof against all parties liable thereon.
 May sue for payment in his own name, may receive payment
 Holds it free from personal defenses
 May enforce payment against all parties liable thereon.
Exception: when he cannot recover full payment, as found in Sections 37, 55 and 124

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 PERSONAL Defenses vs. REAL DEFENSES
PERSONAL DEFENSES REAL DEFENSES

There’s a contract, but there’s a reason which No contract because one of the elements is
makes it inequitable to enforce missing, or void because it is against public
policy
Contract is voidable Contract is void
Examples: absence of consideration, want of Examples: material alteration, want of delivery
delivery of complete instrument, acquisition by of an incomplete instrument, forgery, minority
force or illegal means, illegal consideration,
negotiation in breach of faith, mistake,
ultravires act of a corporation
Not available against HIDC Available against HIDC
 But the fact that real defense is available even against HIDC does not mean that everyone can
invoke it. Recall that an indorser who became a party after the forgery cannot invoke forgery
because of his warranty. He warrants that it is genuine in all respects what it purports to be.
Likewise, an acceptor warrants and admits the authority of the drawer to draw the instrument.
 Under the Civil Code, gambling is a personal defense. So if an instrument is issued to pay for a
gambling debt and such is indorsed, the HIDC will be exempt from that defense
SECTION 58. When subject to original defense – In the hands of any holder other than a
holder in due course, a negotiable instrument is subject to the same defenses as if it were
non-negotiable. But a holder who derives his title through a holder in due course, and
who is not himself a party to any fraud or illegality affecting the instrument, has all the
rights of such former holder in respect of all parties prior to the latter.
 Personal defenses may be raised against someone who is not a HIDC, but it does not mean that
one who is not a HIDC cannot collect. It only means that personal defenses may be raised
against him.
 2nd Sentence - “But the holder who derives his title from a holder in due course…”
 Example: A – B – C – D –E
A issued check for a ring he was buying from B. It turned out that the ring was fake. The
check was indorsed down the line to D who was a HIDC, then indorsed it to E who was aware
that the check was issued for a fake ring.
Under this provision, if the check bounces, A cannot raise the defense that E
knew that the check was issued for a fake ring. The purpose of the provision is to protect
a HIDC (in this example, to protect D.
nd
 If the 2 sentence were not there: If you are D, and you needed money very badly such that
you can no longer wait for the instrument to mature, you have to keep looking for someone
who is a HIDC because no one who is aware of the defect will take the check. So how does
that prejudice D? Simple. Since he has to keep looking for someone who is a HIDC, his
choice of people to whom he can indorse it is limited.
 If D is not a HIDC, he can’t transfer that to E who is a HIDC, and then asks E to negotiate it back
to him. That’s bad faith. If you are not a HIDC, you can’t improve your hand by indorsing it to a
HIDC then getting it back.
SECTION 59. Who is deemed a holder in due course.- Every holder is deemed prima facie
to be a holder in due course; but when it is shown that the title of any person who has
negotiated the instrument was defective, the burden is on the holder to prove that he or
some person under whom he claims acquired the title as holder in due course. But the
last-mentioned rule does not apply in favor of a party who became bound on the
instrument prior to the acquisition of such defective title.
 This is an important presumption. The law realizes that one of the features of a negotiable
instrument is exemption from personal defenses.

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 But the moment it is proven that the title of someone is defective, then the burden shall shift.
He shall prove that he acquired it from a HIDC.
 FOSSUM v. FERNANDEZ-HERMANOS
Facts: Fernandez-Hermanos (FH) covered its vessel for fabrication. To cover for the
cost of the fabrication, the company drew a bill of exchange that was drawn against the
account of FH. The bill was negotiated to a Asia Banking, then to Fossum who was then
aware that there was a failure of consideration (Jack did not elaborate why there was a
failure of consideration, basta meron). So Fossum sued. FH refused to pay and raised a
personal defense of failure of consideration. Fossum argued that he acquired the instrument
from Asia Banking (a HIDC), hence, he should be considered also as a HIDC.
Held: Fossum failed to prove that Asia Banking was a HIDC. The presumption under
Section 59 does not apply because Asia Banking is not a holder anymore.
 Last sentence- “But the last-mentioned rule does not apply…”

Example: A – B – C – D- E
If D swindled C, then D indorsed to E, when E runs after A, he is not required to prove
that he’s a HIDC because A became bound before the defective title occurred.
SECTION 60. Liability of maker – The maker of a negotiable instrument, by making it,
engages that he will pay it according to its tenor, and admits the existence of the payee
and his then capacity to indorse.
 Reason: an instrument is intended to be negotiated, and unless the payee exists and is
capacitated to enter into a contract, the instrument cannot be negotiated
 ARANETA v. PEREZ
Facts: P executed a promissory note in favor of A. P failed to pay. A sued him. P’s defense:
“I used the money that I borrowed from A to pay for the medical expenses for my daughter. My
daughter is the beneficiary of a trust being administered by A. Because of the trust, A should
have paid for the medical expenses, so I don’t have to pay him”
Held: P’s argument is untenable. He signed the promissory note. There is an absolute and
unconditional promise to pay. So he must pay according to the tenor thereof. What he did with
the money is not the concern of the payee.
SECTION 61. Liability of the drawer - The drawer by drawing the instrument admits the
existence of the payee and his then capacity to indorse; and engages that, on due
presentment, the instrument will be accepted or paid, or both, according to its tenor, and
that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will
pay the amount thereof to the holder or to any subsequent indorser who may be
compelled to pay it. But the drawer may insert in the instrument an express stipulation
negativing or limiting his own liability to the holder.
 A drawer is liable to holder and any of the prior indorsers who will be compelled to pay. The
drawes can negate liability by putting “without recourse”, then he can’t be liable.
 The drawee is not liable unless he accepts. Before the bill is accepted. The only parties
primarily liable are the maker and the acceptor. The drawer’s liability is only secondary (liable
only if instrument is dishonored)
 CEBU INTERNATIONAL FINANCE CORP v. CA
Facts: A check was drawn against BPI. When presented for payment, BPI debited the
account of the drawer, but it did not deliver the money to the holder (there were certain
questions about some anomalies, so BPI withheld payment pending investigation). The holder
runs after the drawer.
Drawer’s argument: I’m not liable. Bank already debited my account.
Held: No, D is still liable. As drawer, you warranted that it will be paid. And if not, that
you’ll make good the check.

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SECTION 62. Liability of acceptor. — The acceptor, by accepting the instrument, engages
that he will pay it according to the tenor of his acceptance and admits:
(a) The existence of the drawer, the genuineness of his signature, and his
capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
 What if the bill of exchange is issued for P4,000, and the holder amended it to the amount of
P40,000 and negotiated it. The person to whom it was negotiated presented it for acceptance.
Drawee accepted it. For how much can the bill of exchange be enforced against the acceptor,
P4,000 or P40,000?
1st view: P40,000 because that is the tenor of acceptance.
2nd view: P4,000. If you look at Section 132, acceptance is assent to the order of drawer,
and the order of drawer in this case is to pay P4,000 only. Acceptance is inseparably linked to
the order of the drawer, and consent presupposes knowledge. In fact, under Section 124, even
in the case of a HIDC, if there’s alteration, he can only enforce it for the original amount.
The second view seems to be the BETTER VIEW.
 Acceptor admits the existence of the drawer because unless he admits, the bill of exchange
cannot exist. He admits the authority of the drawer to draw the instrument.
 Acceptor admits the existence of the payee because the instrument is intended to circulate.
Unless he admits such matters, the instrument cannot be circulated.
 The drawer does not admit the signature of the indorser.
SECTION 63. When a person deemed indorser. — A person placing his signature upon an
instrument otherwise than as maker, drawer, or acceptor, is deemed to be indorser unless
he clearly indicates by appropriate words his intention to be bound in some other
capacity.
 If a person places upon the instrument the words “I guarantee the identity of the payee” –
liable only if the payee is an impostor.
 In case of doubt, the person shall be presumed to be an indorser, because among the parties
to the instrument, the indorser has the least liabilities. Doubts are always resolved against the
assumption of liabilities.
SECTION 64. Liability of irregular indorser. — Where a person, not otherwise a party to an
instrument, places thereon his signature in blank before delivery, he is liable as indorser,
in accordance with the following rules:
(a) If the instrument is payable to the order of a third person, he is liable to the payee
and to all subsequent parties.
(b) If the instrument is payable to the order of the maker or drawer, or is payable to
bearer, he is liable to all parties subsequent to the maker or drawer.
(c) If he signs for the accommodation of the payee, he is liable to all parties subsequent
to the payee.
 Irregular indorser – someone who is not a party to the instrument, but signs the same before
delivery
 Example: A ---- B ---- C ----D ---- E (instrument is payable to B)
X indorsed it. X is an irregular indorser because normally, you will see the signature of B as the
1st signature. X is liable to B, C, D, E.
 If payable to order, maker, drawer or bearer, he shall be liable to all parties subsequent
thereto.
 If he signed as an accommodation payee, he shall be liable to all parties subsequent to the
payee.
 Irregular indorser must not be a party because he is signing as an accommodation party to
improve the credit standing. If he is already a party, it will not improve the credit standing of
that instrument because he is already bound.
 If he signs after delivery, he shall be liable as an indorser (Sections 17 (f), 63)

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SECTION 65. Warranty where negotiation by delivery and so forth. — Every person
negotiating an instrument by delivery or by a qualified indorsement warrants:
(a) That the instrument is genuine and in all respects what it purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the validity of the
instrument or render it valueless.
But when the negotiation is by delivery only, the warranty extends in favor of no holder
other than the immediate transferee.
The provisions of subdivision (c) of this section do not apply to a person negotiating
public or corporation securities other than bills and notes.
 So if there’s forgery/ alteration or it was acquired by swindling or fraud, there is a BREACH
OF WARRANTY
 If a prior party was a minor or insane, there’s a breach
 “and he has no knowledge of fact that will impair the validity…” – If the maker is actually
insolvent, but the indorser is not aware of that – no breach. But if he is aware – there’s breach.
 Unlike a general indorser, a qualified indorser does not warrant that the instrument shall be
paid. He is liable only if the maker or the acceptor is insolvent and he is aware of that.
 According to the last paragraph, if negotiation is by delivery, the warranty shall extend only
to the immediate transferee. If C merely delivered to D (bearer instrument), C will be liable to D
only, but not to E.
Principle: similar to the principle underlying the Statute of Frauds. Under the Statute of
Frauds, an undertaking to answer for a debt of another must be in writing to be enforceable.
The undertaking of B and C to answer will not extend to E because it is not in writing.
SECTION 66. Liability of general indorser. — Every indorser who indorses without
qualification, warrants to all subsequent holders in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next
preceding section; and
(b) That the instrument is, at the time of his indorsement, valid and subsisting;
And, in addition, he engages that, on due presentment, it shall be accepted or paid,
or both, as the case may be, according to its tenor, and that if it be dishonored and the
necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the
holder, or to any subsequent indorser who may be compelled to pay it.
 Warrants the same matters mentioned in Section 65. The only difference is the last
subsection – “valid and subsisting”
 If maker is insolvent, even if the general indorser is not aware, he will be liable
 The general indorser engages that the instrument shall be paid or accepted and paid. If not,
he will pay provided that the necessary measures are taken.
 Case of HARAM (?)
Facts: Holder deposited a check with a chartered bank (CB), drawn against the Bank in NY.
He was able to withdraw money although the check was not yet cleared. When the CB
presented the check to the bank in NY, it was dishonored on the ground that the signature was
forged. CB asked the holder to return the money. Holder refused, so CB sued. The holder
argued that CB failed to prove that the signature was forged.
Held: All that the CB has to prove is that it was not paid. When the holder deposited the
check with CB, he indorsed it. He warranted that it will be paid. Hence, holder should pay,
whether or not the reason given by the drawee for the dishonor is false.
 Where the signature of an indorser was forged, the payee must reimburse the drawee
because of Section 66. But according to Jack, that is not correct. Payee did not transfer title to
the drawee bank. Payee presented it for payment, and not for indorsement. Payee’s signature
at the back was to acknowledge payment and not to indorse.
 There is a dispute as to whether the warranties apply only to HIDC. The wording of the law
refers only to all HIDC. But according to Jack, the better view is that espoused by Prof.

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Brannam, that is, the warrantues under Section 66 should apply even to a holder who is not in
due course.
Reasons:
1) Does not say HIDC exclusively
2) To limit warranties to HIDC will result in absurdity, because under Section 65, there’s no
such provision. Under Sec. 65, warranties of a qualified indorser apply even to someone who
is not a HIDC. Hence, a qualified indorsee will be better off than a general indorsee because
a qualified indorsee can run after a qualified indorser, whereas a general indorsee cannot run
after a general indorser.
SEC 70. - Effect of want of demand on principal debtor. Presentment for payment is not
necessary in order to charge the person primarily liable on the instrument; but if the
instrument is, by its terms, payable at a special place, and he is able and willing to pay it
there at maturity, such ability and willingness are equivalent to a tender of payment upon
his part. But except as herein otherwise provided, presentment for payment is necessary
in order to charge the drawer and indorsers.
Meaning of presentment for payment:
 Production of a BOE to the drawee for his acceptance, or to the drawee or acceptor for payment
or the production of a PN to the party liable for the payment of the same
Presentment for Payment consists of:

1. Personal demand for payment at proper place;
2. With the bill or note in readiness to exhibit it if required, and to receive payment and surrender it
if the debtor is willing to pay
 Mere informal talk not accompanied by presentment not sufficient
 Demand on phone not sufficient unless maker waives exhibition (implied or express)
Presentment not necessary to charge persons primarily liable:

 Not needed for acceptors and makers
 Presentment for payment is not the operative act which makes an acceptor liable, before he
accepts, the drawee is a stranger to the bill but from the moment of his acceptance, he becomes
bound a s a party primarily liable, he is bound by the tenor of his acceptance and he cannot
claim as against the payee that he had a previous agreement w/ the drawer modifying the terms
of the acceptance
Payable at a special place:

 Does not mean that the instrument is payable at a specified city
payable at PNB
 The rule is the same, i.e, no need to present for payment, the only difference is that if the
acceptor/maker is able and willing to pay at PNB at maturity, it is equivalent to a tender of
payment on the part of the acceptor and the holder loses his right to recover interest due
subsequent to maturity and costs of collection, but he can still hold the acceptor liable
Rule applicable to demand notes:

 The same rule applies to instruments payable on demand
Presentment necessary to charge persons secondarily liable:

 Otherwise they are charged except as otherwise provided*
Lito -- Paul -- Jong -- Patricia -- Karl
Pia (drawee)

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- if Karl does not make presentment to Pia-- Lito, Paul, Jong and Patricia are discharged, but
he can still go after Pia since there is no need to present payment to her to hold her liable
(kiss na lang)
 Sec 71 read in connection w/ the last sentence of Sec 70 simply means that
the instrument must be presented for payment on the date and period therein mentioned to
charge the persons secondarily liable such as drawers and indorsers. Instrument must be
presented on date of maturity, if it is payable on a fixed date.
- or w/in a reasonable time after issue if its a PN, or w/in a reasonable time after last
negotiation, if its a BOE otherwise drawers and indorsers are discharged.
Necessary steps to charge persons secondarily liable in BOE (drawer and indorsers):
 if one step is omitted, persons secondarily liable are discharged
1. In the 3 cases required by law, presentment for acceptance to the drawee or
negotiation w/in a reasonable time after acquisition (Sec 143 and 144 ) unless excused (Sec
148 ). In other cases aside from the 3 three, there is need for presentment for acceptance.
2. If the bill is dishonored by non acceptance, (a) notice of dishonor by non acceptance
must be given to persons secondarily liable (Sec 80 ) unless excused ( Sec 117 ) and, in
case of foreign bills, (b) protest for dishonor by non acceptance must be made (Sec 152 )
unless excused (Sec 159 and 117 ).
3. If the bill is dishonored by non payment, (a) notice of dishonor by non payment must
also be given to person secondarily liable (Sec 80 ) unless excused and, in case of foreign
bills, (b) protest for dishonor by non acceptance must be made (Sec 152 ) unless excused.
Necessary steps to charge persons secondarily liable on PN (indorsers):

 Same effect
1. Presentment for payment must be made w/in the period required (Sec 71 ) to the person
primarily liable unless excused (Sec 82 ); and
2. is the note is dishonored by nonpayment, notice of dishonor must be given to the persons
secondarily liable (Sec 80 ) unless excused (Sec 117 ).
Necessary steps to charge persons secondarily liable in other cases:

1. Protest for non payment by drawee is necessary to charge an acceptor for honor ( Sec 165 and
167 ) or a referee in case of need (Sec 167 ) and
2. Protest for non payment by the acceptor for honor is also required.
Sec. 71. Presentment where instrument is not payable on demand and where payable
on demand. Where the instrument is not payable on demand, presentment must be made
on the day it falls due. Where it is payable on demand, presentment must be made within
a reasonable time after its issue, except that in the case of a bill of exchange,
presentment for payment will be sufficient if made within a reasonable time after the last
negotiation thereof.
When payable at a fixed or determined future time:

 Note that it depends whether the instrument is payable on demand or not
 If not payable on demand, it must be made on the date of maturity, a presentment before
maturity is not proper
When payable on demand in case of notes:

 Here it depends on whether its a note or a bill
 If a note it must be made w/in a reasonable time after issue
When payable on demand in case of bills:

 It must be presented for payment w/in a reasonable time from last negotiation

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 The last nego means the last transfer for value, and subsequent transfers between banks for
purposes of collection are not negotiations w/in this section
 The requirement of reasonable time starts to run from the last taking for value
What constitutes reasonable time:

 See Sec 193 and 52
 Take into consideration-- the nature of the instrument; usage of trade of the instrument and
the facts of the case
Sec. 72. What constitutes a sufficient presentment. Presentment for payment, to be

sufficient, must be made
(a) By the holder, or by some person authorized to receive payment on his behalf;
(b) At a reasonable hour on a business day;
(c) At a proper place as herein defined;
(d) To the person primarily liable on the instrument, or if he is absent or inaccessible, to
any person found at the place where the presentment is made.
Application of Sec 72:

 If the presentment does not comply w/ any of the these, it is not sufficient and persons
secondarily liable are discharged
Who makes presentment:

 By the holder or someone authorized to receive payment on his behalf
 Bank presenting a note for collection is sufficient
Time for making presentment

 At a reasonable hour on a business day
 Depends upon the general custom at the place of the transaction
 Cannot be made on a Sunday or Holiday (Sec 85 and 194)
Where presentment is made:

 See Sec 73 (susunod na!)
To whom presentment is made:

 To the maker if a note or to the acceptor if a bill, not the person secondarily liable
 Clerk found at the counting room of the acceptor is a competent party w/o special authority
given him
Sec. 73. Place of presentment. Presentment for payment is made at the proper place .
(a) Where a place of payment is specified in the instrument and it is there presented;
(b) Where no place of payment is specified but the address of the person to make
payment is given in the instrument and it is there presented;
(c) Where no place of payment is specified and no address is given and the instrument is
presented at the usual place of business or residence of the person to make
payment;
(d) In any other case if presented to the person to make payment wherever he can be
found, or if presented at his last known place of business or residence.
Place specified, illus:

 Lito makes a note in the ff terms: “I promise to pay at PNB, Tawi Tawi, to Boo or order P5.”
 The proper place for presentment is PNB, Tawi Tawi
 In case the name of the bank in the check has been changed, presentment at the new bank is
sufficient
 But where a note is payable at a designated branch of a trust company, presentment at the
principal office or at any branch of the company is not sufficient

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Address given, illus:
 No place for payment was specified but signed as follows:
“(Sgd.) Jong, 1816 Concepcion St, Reposo, Makati.”
The proper place to present for payment is at his boarding house
Usual place of business, etc., illus:

 No place for payment, or address of person to pay but maker or acceptor resides in 1816 Reposo
or has a business under the Quiapo Bridge, either place is proper for making presentment for
payment.
Any other place, illus:

 When Tolits meets Paul at Mabuhay Sauna Bath, he can make presentment there even while
riding a horse
Sec. 74. Instrument must be exhibited. The instrument must be exhibited to the
person from whom payment is demanded, and when it is paid, must be delivered up to the
party paying it.
Necessity of exhibition of instrument:

 Purposes:
1) To determine the genuineness of the instrument and the right of the holder to receive
payment
2) To enable him to reclaim possession upon payment
 This is an essential requisite for proper presentment unless excused
 Is demand by telephone sufficient? NO
When exhibition is excused:

 Actual exhibition is not necessary in the following cases:
1) When debtor does not demand to see the instrument but refuses on some other grounds, and
2) When the instrument is lost or destroyed,
Sec. 75. Presentment where instrument payable at bank. Where the instrument is
payable at a bank, presentment for payment must be made during banking hours, unless
the person to make payment has no funds there to meet it at any time during the day, in
which case presentment at any hour before the bank is closed on that day is sufficient.

 illus: “Pay to Patty Pat or order P10 at the PNB. (Sgd.) Karl, to China.”
 Banking hours are from 9am to 2:30pm Mon to Fri. No banking hrs on Saturday.
 Person to make paymt has until the close of banking hours to pay it and if before the close of
such hours, he deposits funds there enough to pay it, a demand earlier in the day is premature.
When presentment may be made after banking hrs:

 Where drawee has no funds to meet the bill on the day of presentment, the presentment may
be made before 4 pm which would be sufficient, as at any rate the bill cannot be paid even if
presented during banking hrs.
Sec. 76. Presentment where principal debtor is dead. Where the person primarily
liable on the instrument is dead and no place of payment is specified, presentment for
payment must be made to his personal representative, if such there be, and if, with the
exercise of reasonable diligence, he can be found.

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Sec. 77. Presentment to persons liable as partners. Where the persons primarily
liable on the instrument are liable as partners and no place of payment is specified,
presentment for payment may be made to any one of them, even though there has been a
dissolution of the firm.
Sec. 78. Presentment to joint debtors. Where there are several persons, not partners,
primarily liable on the instrument and no place of payment is specified, presentment must
be made to them all.
Sec 76 to 78 not applicable where place specified:

 Presentment should be made where specified
Where person primarily liable is dead:

 Presentment to executor or administrator,
1) if there be one
2) if he can be found w/ reasonable diligence
 Although the indorser himself be the personal rep, presentment still needed
Where persons primarily liable are partners:

 May be made to anyone even if their partnership has been dissolved. Each partner is an agent of
the partnership. In case of death of one of the partners (maker), presentment must be made to
the surviving partners not to the personal rep.
Where persons primarily liable are joint debtors:

 Must be made to all of them. An informal demand on one of the joint makers is not a basis for
charging the indorsers unless one is duly authorized by the others.
Sec. 79. When presentment not required to charge the drawer. Presentment for
payment is not required in order to charge the drawer where he has no right to expect or
require that the drawee or acceptor will pay the instrument.
Sec. 80. When presentment not required to charge the indorser. Presentment is not
required in order to charge an indorser where the instrument was made or accepted for
his accommodation and he has no reason to expect that the instrument will be paid if
presented.
Application of Sec 79 and 80:

 They give exceptions to the gen rule that if no presentment for payment is made, persons
secondarily liable are discharged. But note that the exceptions are relative. Only the drawer or
indorser referred to is discharged.
When drawer need not be given notice:

 If drawer withdraws his funds from the drawee such that there are no sufficient funds to pay the
bill, he need not be given notice but if he made an arrangement w/ the drawee that the bill shall
be paid, presentment is still needed to charge him.
Illus case:
 Presentment not required to charge the drawer in the ff cases:
1. In case of a check where payment has been stopped.
2. Where the drawer’s balance is less than the amount of the check unless the drawer has
reasonable grounds to believe that the check will still be paid.
3. Where drawer of a bill containing words “Pay from balance” had no money on deposit w/ the
drawee but expected to arrange w/ the broker to cover drafts.

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When indorser need not be given notice:
 A holder need not make presentment to an accommodation party to charge an accommodated
party who has indorsed the instrument to the holder since the accommodated party is the one
primarily liable.
Sec. 81. When delay in making presentment is excused. Delay in making presentment
for payment is excused when the delay is caused by circumstances beyond the control of
the holder and not imputable to his default, misconduct, or negligence. When the cause of
delay ceases to operate, presentment must be made with reasonable diligence.

 What is excused is not the making but the delay.
Excuses for delay:
 Calamity, malignant disease, nego finals, war etc…
Sec. 82. When presentment for payment is excused. Presentment for payment is
excused:
(a) Where, after the exercise of reasonable diligence, presentment, as required by this
Act, cannot be made;
(b) Where the drawee is a fictitious person;
(c) By waiver of presentment, express or implied.

 What is excused is failure to present thus there is no need to present.
Where drawee fictitious:

 Excused since there is no one to present to.
Waiver. Waiver may be expressed or implied:

 Pay to China or order P1
Presentment waived.
To Marco (sgd) Lito
 Where “ demand, presentment, protest and notice of protest and non-payment” is expressly
waived by maker there is no need to exhibit to him the note.
Implied waiver:
1. Declaration, acts or conduct w/c mislead the holder and induce him from taking the necessary
steps to make presentment.
2. Drawer Pat tells holder Miles that she will take care of collecting the bill.
3. Holder failed to make presentment to drawee. Thereafter, drawer paid part of the bill and
promised orally to pay the rest.
4. Where maker, b4 maturity of note, was adjudged a bankrupt partly upon his written admission of
inability to pay the debts w/ willingness that he be adjudged a bankrupt.
5. Where indorsers of a note payable at a bank had assured the holder that it could not be paid at
maturity and knew that the maker, a corporation, had no money to pay for it.
6. Where indorsers assured the holder, before maturity of the note, that a note for the same
amount w/ his indorsement will be given in renewal, such assurance, if relied by the holder.
7. When maker on day of maturity of the note telephoned the holder that he could not then pay the
note and the holder then telephoned the maker consenting in giving further time to the maker.
Summary of rules as to presentment for payment:

1. Presentment not necessary to charge persons primarily liable.
2. But necessary to charge persons secondarily liable except: a) as to drawer under Sec 79; b) as
to indorser under Sec 80; c) when dispensed w/ under Sec 82; and d) when the instrument has
been dishonored by non- acceptance.

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Sec. 83. When instrument dishonored by non-payment. The instrument is dishonored
by non-payment when:
(a) It is duly presented for payment and payment is refused or cannot be obtained; or
(b) Presentment is excused and the instrument is overdue and unpaid.
When payment refused, etc.:

1. Instrument must be duly presented for payment
2. Payment is either refused or cannot be obtained on day of maturity
When presentment excused:

 Under par b, it is necessary that 1) presentment for payment be excused; 2) the instrument be
overdue; and 3) it is unpaid.
 If presentment is not excused, there is no dishonor even if overdue and unpaid.
Sec. 84. Liability of person secondarily liable, when instrument dishonored. Subject
to the provisions of this Act, when the instrument is dishonored by non-payment, an
immediate right of recourse to all parties secondarily liable thereon accrues to the holder.
After dishonor, indorsers, etc, primarily liable:

 Provided notice of dishonor is given to them.
 But as among themselves they are liable as to the order they became parties to the instrument.
Sec. 85. Time of maturity. Every negotiable instrument is payable at the time fixed
therein without grace. When the day of maturity falls upon Sunday or a holiday, the
instruments falling due or becoming payable on Saturday are to be presented for payment
on the next succeeding business day except that instruments payable on demand may, at
the option of the holder, be presented for payment before twelve o'clock noon on
Saturday when that entire day is not a holiday.
Payment where instrument payable at a fixed time:

 No grace period is to be granted.
 But where it falls on a Sunday or a holiday, it must be made on the succeeding business day.
Falling due on Saturday:

 When it is payable on a Saturday.
Becoming payable on a Saturday:

 When Friday is a holiday, the instrument becomes payable on a Satirday.
When presentment to be made:

 It depends if the instrument is payable on demand or not. If it is payable on demand, it may be
presented on Monday or before 12:00 noon on a Saturday. If not payable on demand it must be
made on Monday which is the next succeeding business day.
Sec. 86. Time: how computed. When the instrument is payable at a fixed period after
date, after sight, or after that happening of a specified event, the time of payment is
determined by excluding the day from which the time is to begin to run, and by including
the date of payment.
Sec. 87. Rule where instrument payable at bank. Where the instrument is made
payable at a bank, it is equivalent to an order to the bank to pay the same for the account
of the principal debtor thereon.

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Illus of Sec 87:
 Applies only where the instrument is payable at a particular named bank.
 The drawee bank may charge the amount of the instrument on the account of the drawer w/o
need of further authority from him.
Effect of failure to make presentment for payment:

 Drawer is not discharged because he is primarily liable.
Sec. 88. What constitutes payment in due course. Payment is made in due course
when it is made at or after the maturity of the payment to the holder thereof in good faith
and without notice that his title is
Requisites for payment in due course:

1. Payment must be made at or after maturity
2. Payment must be made to the holder
3. By the debtor in GF and w/o notice that the holder’s title is defective.
 If payment made before maturity, it would constitute a negotiation back to the person primarily
liable and he can renegotiate it. The payment does not discharge the instrument.
 Payment to indorsee who is not in possession of the instrument is not payment in due course, as
he is not a holder.
 Payment by the debtor to a person he knows stole the instrument is not payment in due course
since it is not done in GF.
Payment must be made to possessor of instrument:

 Party paying must insist on the presentment of the instrument. A receipt taken is no protection.
If at the time he makes payment, the instrument is outstanding and held by a HIDC, he will
liable to pay it again.
 The possession of notes by the maker is presumptive evidence that the notes are paid.
 BUT payee’s possession presumes they are not yet paid.
Payment in other than legal tender:

 A new bill or note given in renewal of an old one retained by the payee also constitutes but a
suspension of the old one until the new one is paid. The authorities agree that the taking of a
renewal note is note a payment of the original.
Payments through banks:

 A bank to w/c a note is sent for collection is the agent of the owner. It is immaterial that the
maker has requested the holder to send the note this bank for collection.
Crediting of account constitutes payment
VII - NOTICE OF DISHONOR
Section 89. To whom notice of dishonor must be given. - Except as herein

otherwise provided, when a negotiable instrument has been dishonored by non-
acceptance or non-payment, notice of dishonor must be given to the drawer and to each
indorser, and any drawer or indorser to whom such notice is not given is discharged.
Definition:
 Notice of dishonor - bringing either verbally or by writing, to the knowledge of the drawer or
indorser of an instrument, the fact that a specified negotiable instrument, upon proper
proceedings taken, has not been accepted or has not been paid, and that the party notified is
expected to pay it
Necessity and purpose of notice:

 When an instrument is dishonored, be it by non-acceptance or non-payment, and no notice of

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dishonor is given to persons secondarily liable, such parties are discharged.
Illustration:
 Gossip Guru Litong-litong Lito, aspiring to become 2B’s next president (kaya siguro ang sipag
niyang Treasurer, nangangampanya lang pala siya), makes a note payable to The Naive Ning so
that she would tell him the name of Sweetik Shiela’s boyfriend. The Naive Ning negotiates it to
Alluring Arab, Alluring Arab to Daring Denice, Daring Denice to Bossy Booey. Bossy Booey
makes a presentment for payment to Litong-litong Lito, maker, on the date of maturity. Litong-
litong Lito, kuripot as he is, refuses to pay (kahit na katakut-takot na pagpapa-cute na ang
ginawa ni Bossy Booey. Buti na lang at hindi si Monstrous Maggie ang payee, kung hindi,
nakakatakot na pagpapa-cute ang nangyari). Since Bossy Booey is so tamad, she failed to give
notices of dishonor to The Naive Ning, Alluring Arab, and Daring Denice. Because of that, three
of 2B’s dropdead gorgeous dudettes were discharged from the instrument.
Burden of proof:
 It is on the holder. In other words, it is not presumed.
Persons primarily liable need not be notified:

 This is because they are the very ones who dishonor the instrument.
 Examples of persons who are primarily liable: maker, acceptor, joint maker, accommodation
maker, etc.
Instrument payable in installments:

 no acceleration clause: failure to give notice of dishonor on a previous installment does not
discharge drawers and indorsers as to the succeeding installments. The reason is that each
installment is equivalent to a separate note.
 instrument contains acceleration clause: it depends upon whether the clause is optional or
automatic.
. automatic - failure to give notice of dishonor as to a previous installment will discharge the
persons secondarily liable as to the succeeding installments
ii. optional - if not exercised, the rule would be the same as where there is no acceleration
clause. If it is exercised, the rule would be the same as where the installment contains an
automatic acceleration clause
Section 90. By whom given. - The notice may be given by or on behalf of the
holder, or by or on behalf of any party to the instrument who might be compelled to pay it
to the holder, and who, upon taking it up, would have a right to reimbursement from the
party to whom the notice is given.
By whom notice is given:

1. holder;
2. another in behalf of the holder;
3. any party to the instrument who may be compelled to pay it to the holder (however, such a
party cannot give notice of dishonor to everybody. He can give notice only to another party
against whom he has a right of reimbursement); and
4. another person in behalf of such party.
 A total stranger cannot give notice of dishonor in his own behalf (a party discharged from the
instrument is considered a stranger).
 A maker cannot give a notice of dishonor in his own behalf, but just like a stranger, he can give
notice as an agent in behalf of those who are entitled to give notice.
Section 91. Notice given by agent. - Notice of dishonor may be given by any agent
either in his own name or in the name of any party entitled to give notice, whether that
party be his principal or not.

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Notice of agent:
 Notice of dishonor may be given by an agent and it is not necessary that the agent be authorized
by the principal.
 Notice may be given by him (1) in the name of any party entitled to give notice such as the
holder, or an indorser to whom notice was given; or (2) in his (the agent’s) own name.
Section 92. Effect of notice on behalf of holder. - Where notice is given by or on

behalf of the holder, it inures to the benefit of all subsequent holders and all prior parties
who have a right of recourse against the party to whom it is given.
Definition:
 benefit - the right to charge the person secondarily liable who received notice
 The party to whom this benefit inures can charge the party receiving notice of dishonor, even if
he himself did not give notice.
 Notice of dishonor given by or on behalf of a holder inures to the benefit of (1) all parties prior to
the holder, who have a right of recourse against the party to whom the notice is given; and (2)
all holders subsequent to the holder giving notice.
Section 93. Effect where notice is given by party entitled thereto. - Where notice is
given by or on behalf of a party entitled to give notice, it inures to the benefit of the
holder and all parties subsequent to the party to whom notice is given.
Application of Section 93:

 The notice is given, not by the holder but, by a party entitled to give notice under Section 90,
namely, by a “party to the instrument who might be compelled to pay it to the holder, and who,
upon taking it up, would have a right of reimbursement from the party to whom notice is given.”
 Such notice inures to the benefit of (1) the holder; and (2) all parties subsequent to the party to
whom notice is given.
Section 94. When agent may give notice. - Where the instrument has been
dishonored in the hands of an agent, he may either himself give notice to the parties liable
thereon, or he may give notice to his principal. If he gives notice to his principal, he must
do so within the same time as if he were the holder, and the principal, upon the receipt of
such notice, has himself the same time for giving notice as if the agent had been an
independent holder.
When agent’s notice must be given:

 Where an instrument is dishonored in the hands of an agent, he can do either of the following:
(1) directly give notice to the persons secondarily liable thereon; or (2) give notice to his
principal.
 If the agent chooses to give notice to his principal, he must give notice within the time allowed
by law as if he were a holder. The principal has also the same time to give notice to the parties
secondarily liable.
Illustration:
 Big Mama commissioned Karl “The Nail Cutter Man” to look for a suitable Big Papa. After
introducing Toti to Big Mama, the latter gave The Nail Cutter Man a note in exchange of his
services (delivery of Big Papa [aside from the usual manicure and pedicure fee of course]).
Thereafter, The Nail Cutter Man delivered the note to Chikiti China, who then indorsed it to Big
Boy Ramby. Lito the self-proclaimed “Babe Killer” of 2B and Big Boy Ramby’s agent, makes a
presentment for payment to Big Mama, maker, on 20 October 1998.

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i. Under Section 104, notice must be given within the next day following, 21 October 1998.
Babe Killer can give notice of dishonor to The Nail Cutter Man, and Chikiti China directly, after
dishonor and within 21 October 1998.
ii. But Babe Killer can give notice to his principal Big Boy Ramby. Such notice must be given
after dishonor and within 21 October 1998.
iii. Big Boy Ramby, holder, has in turn until 22 October 1998, the next day following 21 October
1998 (the day he was given notice) to give notice to The Nail Cutter Man, and Chikiti China.
Section 95. When notice sufficient. - A written notice need not be signed and an
insufficient written notice may be supplemented and validated by verbal communication.
A misdescription of the instrument does not vitiate the notice unless the party to whom
the notice is given is in fact misled thereby.
Section 96. Form of notice. - The notice may be in writing or merely oral and may
be given in any terms which sufficiently identify the instrument, and indicate that it has
been dishonored by non-acceptance or non-payment. It may in all cases be given by
delivering it personally or through the mails.
Form and contents of notice:

 Notice of dishonor may be (1) oral, or (2) in writing.
 Whether written or oral, the notice must contain the following: (1) sufficient description of the
instrument to identify it; (2) a statement that it has been presented for payment or for
acceptance, and that it has been dishonored; and (3) a statement that the party giving notice
intends to look for the party addressed for payment.
Effects of defects in notice:

 The fact that a written notice is not signed does not invalidate it.
 If a written notice lacks requirement numbers (2) and (3) above, the insufficiency could be
supplemented by oral communication.
 Failure to state the date of the making and maturity of a note, and the name of the payee does
not invalidate the notice.
 misdescription of the instrument, such as to the date, or to the amount, or the names of some
parties, or the date of maturity, if the person to whom the notice is addressed is not misled
thereby, does not vitiate the notice. But if he is misled, the notice is vitiated.
 A notice which contains a copy of the note and declares that payment has been demanded and
refused is sufficient. But a mere statement that the note was payable and due is insufficient
notice.
Manner of giving notice:

 Notice of dishonor may be given (1) by personal delivery, or (2) by mail.
 In a personal service, the evidence must show either actual personal service, or an ordinary
intelligent, diligent effort to make personal service upon the indorser at his place of business
during business hours or at his residence if he has no place of business. But if he be absent, it is
not necessary to call a second time, and the notice may, in that event, be left with anyone left in
charge, or if there be no one in charge, or no one there, then giving notice is deemed to be
waived.
Section 97. To whom notice may be given. - Notice of dishonor may be given either
to the party himself or to his agent in that behalf.
Parties to be given notice:

 Notice may be given (1) to the party himself, or (2) to his agent in that behalf.
 If notice is to be given to an agent, he must be duly authorized to receive notice of dishonor.

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Section 98. Notice where party is dead. - When any party is dead and his death is
known to the party giving notice, the notice must be given to a personal representative, if
there be one, and if with reasonable diligence, he can be found. If there be no personal
representative, notice may be sent to the last residence or last place of business of the
deceased.
Requisites for notice to representative:

 Relatives are considered as personal representatives.
 When the person to be given notice of dishonor is dead, notice must be given to his personal
representative, provided that (1) his death is known to the party giving notice; (2) there is a
personal representative; and (3) if with reasonable diligence he could be found.
When notice may be sent to last residence or place of business:

 But although the party is dead, (1) if his death is not known to the party giving notice; or (2)
although his death is known to the party giving notice but there is no personal representative; or
(3) if there be one but he cannot be found with reasonable diligence, then notice may be sent to
the last residence or last place of business of the deceased.
Section 99. Notice to partners. - Where the parties to be notified are partners,
notice to any one partner is notice to the firm, even though there has been a dissolution.
Reason for the rule

Each partner is an agent of the partnership of which he is a member. Notice to one is notice to the
others.
Section 100. Notice to persons jointly liable. - Notice to joint persons who are not
partners must be given to each of them unless one of them has authority to receive such
notice for the others.

 This section applies to joint parties other than joint payees and joint indorsees who indorse, such
as, to drawers who sign a bill jointly, or to joint accommodation indorsers who are not jointly and
severally liable under Section 68 as they are neither payees nor indorsees.
 This section do not apply to joint payees or joint indorsees who indorse as, under Section 68 of
the Negotiable Instruments Law, such joint indorsers are deemed jointly and severally liable, and
joint indorsers to whom notice of dishonor has been given are not discharged by reason of failure
to given notice to the other joint indorsers.
Section 101. Notice to bankrupt. - Where a party has been adjudged a bankrupt or
an insolvent, or has made an assignment for the benefit of creditors, notice may be given
either to the party himself or to his trustee or assignee.

 This section contemplates any of the following situations: (1) where the party secondarily liable
has been declared a bankrupt or an insolvent; and (2) where he has made an assignment of his
properties for the benefit of creditors.
 In such case, notice may be given either (1) to the party himself; or (2) to his trustee or
assignee.
Section 102. Time within which notice must be given. - Notice may be given as
soon as the instrument is dishonored and, unless delay is excused as hereinafter provided,
must be given within the time fixed by this Act.
May notice of dishonor be given before the date of maturity?

 No, because an instrument cannot be said to be dishonored for non-payment unless presented,

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and presentment must be made on the date of maturity.
 Notice of dishonor can be given only after the instrument has been actually dishonored, and
notice given before the paper becomes due is premature and insufficient, regardless of the
indorser’s knowledge that the maker was in default.
May notice of dishonor be given on the date of maturity?

 Yes, provided that the instrument has been presented for payment and it has been dishonored.
 But if the instrument is payable at a bank, it is not dishonored if the maker deposits the amount
of the instrument before the close of banking hours. Hence, notice of dishonor must be given
after the close of banking hours on the date of maturity.
Section 103. Where parties reside in same place. - Where the person giving and
the person to receive notice reside in the same place, notice must be given within the
following times:
(a) If given at the place of business of the person to receive notice, it must be given
before the close of business hours on the day following.
(b) If given at his residence, it must be given before the usual hours of rest on the day
following.
(c) If sent by mail, it must be deposited in the post-office in time to reach him in usual
course on the day following.
Section 104. Where parties reside in different places. - Where the persons giving
and the person to receive notice reside in different places, the notice must be given within
the following times:
(a) If sent by mail, it must be deposited in the post-office in time to go by mail the day
following the day of dishonor, or if there be no mail at a convenient hour on last
day, by the next mail thereafter.
(b) If given otherwise than through the post-office, then within the time that notice
would have been received in due course of mail, if it had been deposited in the
post-office within the time specified in the last subdivision.
Definition:
 same place - the corporate limits of a town or city where the presentment is made or where
the holder resides
Notice when parties reside in the same place:

 One time, Tacklessang Trina saw Prim and Proper Pia’s new ballroom dancing shoes and she
liked them. Since Prim and Proper Pia did not want to reveal where she bought them, lest all of
2B’s girls would be wearing the same pair in no time, Prim and Proper Pia just volunteered to buy
the shoes for Tacklessang Trina. For that, Tacklessang Trina issued Prim and Proper Pia a bill,
who in turn indorsed it to Jolly Jo, who then indorsed it to Audacious Aileen. Both Audacious
Aileen and Prim and Proper Pia reside in Quezon City. The instrument was dishonored on 15 July
1998. Under Section 103:
i. If given at the place of business of Prim and Proper Pia, the notice must be given after
dishonor but not later than 16 July 1998, before the close of business hours on that day.
Otherwise, notice would be too late.
ii. If given at Prim and Proper Pia’s residence, notice must be given after dishonor but not later
than 16 July 1998 before the usual hours of rest on that day.
iii. If sent by mail, the notice must be deposited at the mailbox at such time as would enable
Prim and Proper Pia to receive the notice not later than 16 July 1998 in due course of mail.
This means that even if, due to the fault or other acts of postal authorities, the notice does
not reach the party to be given notice on the day following the day of dishonor, the notice
would still be considered on time.

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Notice when parties reside in different places:
 In the above example, if Audacious Aileen lived in Quezon City and Prim and Proper Pia lived in
Manila, and the instrument was dishonored on 15 July 1998, under Section 104:
i. If sent by mail, the notice need not reach Prim and Proper Pia on 16 July 1998, but the notice
must be deposited in the mails not later than 16 July 1998, the day following the day of
dishonor. But if there is no mail at a convenient hour on 16 July 1998, the notice may be
deposited in the mails by the next mail thereafter. Thus, suppose that there is no mail on 16
July 1998, or if there is, it leaves at 3:00 A.M., and the next mail is 3:00 A.M. on 17 July
1998, the notice may be deposited any time of the day on 16 July 1998, in time for the 3:00
A.M. mail on 17 July 1998.
ii. If sent otherwise than by mail, as by personal messenger, the notice must be sent at such
time as to enable Prim and Proper Pia to receive the notice within the time he would have
received it had it been mailed. Suppose that had the notice been mailed to her under
paragraph (i) herein, the notice would have been received by her on 18 July 1998. The
personal messenger must deliver the notice to her not later than 18 July 1998, otherwise, the
notice would be too late.
SHERRYL KHOSIKING
Under Section 111, the waiver of protest is a waiver not only of protest but also of presentment
and notice of dishonor because protest includes all the steps to charge the parties therein liable.
Under Section 112, notice of dishonor is dispensed with if despite reasonable diligence, it cannot be
given, or does not reach the person to be charged, in other words, it is due to a fortuitous event.
And delay in giving the notice is also excused if it is due to a fortuitous event.
Now Section 114, the notice need not be given where the drawer and the drawee are the same
person. For example, a manager’s check. The drawer is a bank. Who is the drawee? The same
bank. So the drawer and the drawee are the same person.
When the drawee is a fictitious person or a person not having the capacity to contract.
Subsection C. When the drawer is the person to whom the instrument was presented for payment.
So the holder went to the office of the drawee, the drawee was not there. And whom did he find?
The drawer who was the office manager. So he made the presentment to the drawer because he
was in charge of the office of the drawee. And the inst. was dishonored.
And when the drawer has no right to expect or require that the drawee or acceptor will honor the
instrument. That’s why in the case of Nora Hulik where she withdrew her funds from the bank.
Remember she was given pieces of jewelry to be sold. When she was not able to sell that, she
returned it to Muntod and then she did not fund the check which she issued to cover the expected
proceeds from the sale. And when the check which was rediscounted by the Sate Investment House
bounced, and she was sued, and her defense was “I was not given a notice of dishonor!” the court
said you had no need because you had no right to expect the check to be paid because you withdrew
your funds from the bank, you knew you did not have funds.
And when the drawer has stopped payment. So here it is an act of the drawer himself which caused
the dishonor. So he knows. So there is not need to notify him.
That’s why if you analyze this provision, notice of dishonor is not required to be given in those cases
where the drawee knows that the instrument has been dishonored. As when the drawee is the same
with the drawer, the drawer is the one to whom he has presented for payment, or he has no right to
expect that he would be paid, or has stopped payment. Then when the drawee is fictitious, then
there is no one to whom it can be presented for payment.

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And under section 115, notice of dishonor need not be given the indorser if the drawee is a
fictitious person and the indorser was aware of that. Cause he knew that he cannot make a
presentment because the drawee does not exist.
Or where the indorser is the person to whom the instrument is to be presented for payment, like the
holder went to the office of the drawee who was absent. And the person who was there was the
indorser who was the office manager.
Or where the instrument was made or accepted for his accommodation. Since here the
accommodated party is the principal debtor, and he is the one who is supposed to make
arrangements to pay this instrument when it falls due.
Under Section 116, when notice of dishonor by non-acceptance is given, notice of dishonor for non-
payment is not necessary unless in the meantime the instrument was accepted. So this should be
correlated with Section 151. It provides that if the bill is dishonored by non-acceptance, the holder
has the immediate right of recourse against the drawer and the indorses. He need not lake a
presentment for payment.
Under section 117, failure to give notice of dishonor, does not prejudice a HIDC who became a
holder after the failure to give notice of dishonor. Here is the holder of an instrument payable on
Feb. 15, 2002. He went to the drawee today to present it for acceptance, and the drawee
dishonored it. Then next week he negotiated it to a HIDC, well the HIDC, then he can still run after
the indorses. So when he presents it fort acceptance and it is dishonored, he can still run after the
drawer and the indorses.
Well under Section 118, protest is not required except in the case of foreign bills of exchange.
Now section 119 says when it is discharged by payment in due course by or on behalf of the
principal debtor or the maker or the acceptor, by payment in due course by the party accommodated
if the instrument is made or accepted for his accommodation. Why? Because if the party
accommodated is the one ultimately liable, he is the one who should make arrangements to pay.
Remember, if the accommodation party is the one who paid, there are still scores to be settled.
Because he is entitled to demand reimbursement from the accommodated party. Now if the
payment is made by a 3rd party, the instrument is not discharged because remember under the civil
code, when payment is made by a third party, he is entitled to demand reimbursement form the
debtor.
By intentional cancellation by the holder. If he tears it up, burns it, or writes, “cancelled”.
By any other act which will discharge a contract for the payment of money. You find that in the Civil
Code. Payment. Well, loss will not apply because remember in civil law, loss does not apply to
pecuniary obligations because the obligation to pay money is generic. ?Et genis … perit?
Condemnation, confusion, compensation, novation, annulment, recission, but not fulfillment of a
resolutory condition because remember, for the instrument to be negotiable, the order or promise to
pay must be unconditional. So fulfillment of a resolutory condition does not apply for the
extinguishment of the obligation.
When the principal debtor becomes holder of the instrument at or after maturity in his own right. It
means, in his personal capacity. Because if you reacquired it as trustee, it will not apply, because it
is in his own right. Now if he required it before maturity, that will be a renegotiation to him, so he
can still renegotiate that further. But if he paid before maturity and he did not renegotiate the
instrument, he held on to it until it became due, the instrument will be discharged under subsection
E. That will then be the case where the principal debtor will be holder at or after maturity in his own
right.

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Now there are other grounds for the discharge of the instrument found in other provisions of the
law. You’ll find them in sections 48, 89, 122, 142, 186, and 188.
Now, section 120 provides when a drawer and an indorser become discharged. First by any act
which discharges the instrument under Section 119.
By intentional cancellation of his signature by the holder.
By the discharge of a prior party: PN. A payable to B indorsed to C. B was discharged. C will also
be discharged because C has lost his right of recourse against B.
By the valid tender of payment of a prior party. So if B offered to pay but D refused it, C will also be
discharged because if that is not the rule, C will be prejudiced, so under the law he will be
discharged.
By release of the principal debtor unless the holder expressly reserves his right of recourse against
the parties in there liable. So if E here discharges A, B and C will be discharged unless he expressly
reserves the right of recourse against them.
Then Subsection F. By any agreement to extend the payment unless made with the assent by the
parties in there liable or the right of recourse against them is expressly reserved. Note that under
section F the parties in there liable are not discharged if the agreed to the extension. Unlike in
Subsection E, where even if the parties liable agree to the release of the principal debtor, they will
be discharged.
Now there are other grounds for discharge of parties in there liable, they are found in sections 89,
142, 144, and 188.
Now under Section 121, if the instrument is paid by parties in there liable, it is not discharged. If
this is paid by B, it is not discharged because there are still scores to be settled. They are still
entitled to demand reimbursement by A. But A will be remitted to his former rights with regard to
prior parties. Suppose C was the one who paid this to B. If at the time he took this inst., he was a
HIDC, he was not aware that this PN was issued to pay for a fake ring. But at the time he is paying
B, he was not aware of that, he will be restored to his rights of a HIDC, so he cannot raise that
defense against him. If that were not the rule, if you were C, you would not pay. “Why will I pay
you? I cannot recover from A because I am not aware. The same way if he were not a HIDC, he
will also remain as one who is not a HIDC. Remember as we said if you are not a HIDC, you cannot
improve your situation by negotiating it to a HIDC and getting it back. And he may strike out his
indorsements and all subsequent indorsements. So here if B paid, he can strike out his indorsement
and the indorsement of C. And he may negotiate the inst. again except id it was payable to a 3rd
person who was paid by the drawer or it was made for his accommodation and was paid by the party
accommodated because the party accommodated was the party ultimately liable.
Now under section 122, a holder may expressly renounce his rights against any party before , at,
or after maturity. Absolute and unconditional renunciation made at or after maturity discharges the
inst. But renunciation does not affect the rights of a HIDC without notice. So if C renounced all his
rights before this PN fell dues. But he indorsed it to D who is a HIDC, D can run after A and B.. The
cannot make the defense that C made the renunciation. IT will not bind D. But the renunciation
must be in writing unless it is delivered to the person primarily liable.
So a verbal renunciation which is not coupled by the surrender of the instrument is not effective.
There was a case in New York where the vice president of a bank told the maker of a PN, “O, never
mind, your debt is condoned.” The court said that is not binding because it was oral and the PN was
not surrendered. And a similar ruling was handed down by the CE of England where the holder said
he was renouncing the right but it was verbal, and the PN was not surrendered. Cancellation made

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unintentionally, or under mistake, or without the holder’s authority is inoperative. But the burden is
on the party to prove that the cancellation was unintentional, under mistake, or without the holder’s
authority.
Unintentional.. well I had a client before who was the cousin of Justice Relova. That cousin of his
had a big parcel of land in Bacoor. He and his brothers owned that vast track of land. He was
telling me there were 2 developers of roads then. They said “Why don’t we from a joint venture.”
Your land is raw land. We will develop it, subdivide it, sell the land to the public, and divide the
profits equally among the four of us. 25% each. … But of course it will take time to develop and sell
the lots to the public. While we are not yet selling the lots to the public, every month, we will five
you and your brother PhP2,000 each drawing allowance, which will be an advance on your share in
the profits. First month, the first developer arrived in a Cadillac and expensive suit and paid the
allowance.. the second month, it was the second developer. The third moth it was the turn of the
fellow who came with the expensive suit. He said “Pare, medyo gipit ako, puwede bang abunuhan
mo?” So this fellow advanced. The fourth moth this fellow paid again, it was his turn. The next
time they had a meeting it was a heated altercation. Cause this fellow who reimbursed the 2 nd
developer issued a bouncing check. He said “pare, yung cheke mo tumalbog, ito ba yung cheke mo?
Ha?” He crumpled it. “Ibukha mo bibig mo! Ipakakain ko saiyo ‘to!”
Although he crumpled the check, there was no cancellation of the obligation. He did not intend to
cancel the obligation, if fact, he crumpled it in an outburst of anger.
Or by mistake like it was included in a batch of paper that was fed to the paper shredder by mistake.
Or without authority. Like there is somebody who was a visitor at the office and saw that lying
around and started doodling. That will not cancel the neg. inst.
Section 124 talks about alteration. If the instrument is materially altered without the assent of all
parties, it is avoided, except as against the party who has himself made, authorized, or assented to
the alteration, and subsequent indorsers.
This is what the rule is saying. A issued a PN to be for 4K and C altered it to 40K.. What the Law is
saying is that since C altered it, the instrument is avoided as against A and B. However, C and D will
be liable for 40F because C was the one who made the alteration and D is an indorser, he warrants
that the instrument is genuine in all respects what it purports to be. So what is the liability of E? It
depends. If he is HIDC, he can enforce it from A and B in the original amount of 4K.. That’s what
the law says. If he is not a HIDC, he cannot collect form A and B. A and B cannot be liable on the
40K, whether or not B is a HIDC because they bound themselves for 4K. You cannot change the
contract without their consent. So the most that he can collect as a HIDC is 4K. But whether or not
he is a HIDC, he can collect from C and D 40K. Because C altered the inst. and D is an indorser.
Remember we said that an indorser is liable whether or not the holder is a HIDC
And Section 125 states when there is material alteration … First when the date is changed.
Second, when the sum payable, either as the principal or interest, is changed. Third when the time
or place of payment is changed. Why? This will affect the swiftness with which indorses can be
notified of dishonor. And that is crucial for indorses because they have potential liability, and they
would want to terminate that potential liability as soon as possible. Then when the number or
relations of the parties is amended. Like when there is only one maker, you added another maker.
The medium or currency of payment to be made. Provides for payment in pesos, it was changed to
dollars. Or which adds a place of payment where none was specified. Or any other change which
alters the effect of the instrument. So that is the test. Does it alter the effect of the inst.? So you
placed a witness where there was no witness. That is not material alteration. It does not change
the effect of the provisions of the instrument. Now in that PNB vs. CA, where the serial number of
the check was changed, and PNB paid it, and when they discovered the changed, the wanted to get
back the money. The court said no, that was not a material alternation.. The change in the serial

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number did not alter the effect of the check. However if the check was lost and the drawee issued a
stop-payment order, and the serial number was changed, yes it will now be material. It will now be
excluded form the stop payment order. Example if the number contains a 3, they will make it 8. So
here is your signature control, they will say “Ah, this is not covered.” That’s material alteration. OR
payable to order, then made payable to bearer. That’s material alteration.
Montinola case: In the old days, the provincial treasurers were the ex officio representatives of
PNB so automatically they had a branch in every province. The government issued a check in favor
of a treasurer for the expenditures of the USSAFE. But Jonathan Wayneright surrendered all the
members of the USSAFE. And so the money was not spent. The treasurer/payee became sick. He
needed money to pay for medicines. So he indorsed the check it part to Montinola. Now Montinola
studied the law. said check. The drawee is not liable unless he accepts, and a partial indorsement is
not valid. He obliterated, he smudged the partial indorsement, and made another indorsement
below that. The indorsement was a forgery. And he know that the indorser is not liable so he made
it appear that it was issued by the provincial treasurer in his capacity as representative of PNB.
Because if so, the drawer and drawee is PNB, the same person. So he can treat it as a promissory
note, so he can sue even if it has not been accepted. But Justice Sanchez said it was forgery,
material alteration. Because it was indorsed in part only. He made it appear as though it were
indorsed again for the whole amount. And he altered the capacity in which the treasure signed it.
He sighed that as treasurer, and not as representative of the PNB. Why, because it was counter-
signed by the auditor. Because if that was signed as representative of the PND, the auditor would
not have counter-signed. That’s why the court said he could not collect, because there was material
alteration.
Section 126 defines a Bill of Exchange.

 Unconditional order in writing addressed by one person to another, signed by the person giving
it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable
future time a sum certain in money to order or to bearer.
Types of bill of exchange:

1. Draft
 Most common type
 Nothing more than a check drawn by a bank against another bank
 “Its like you buy dollars from a bank here, you buy a draft. Basically what they do is that
they will draw a check against the bank in New York where they’re maintaining their account
(usually, most of the banks here maintain their account in Citibank because they have a
branch here). So if you buy a bank draft, they’ll simply issue a check drawn against the
bank in New York where they maintain their account. That’s the bank draft.
2. Trade acceptance
 This is not covered anymore because purchases are usually financed by letters of credit
instead.
 Joson vs. Hernandez Hermanos (???)
o Where the seller would draw a bill of exchange and would be accepted by the buyer.
That is how the payment for the articles bought would be relayed.
3. Treasury warrants and money orders

 NOT negotiable instruments
4. Banker’s acceptance
 Connected with letters of credit
 “Here is a company(XYZ, Corp.) that wants to buy chemicals from let’s say Du
Pont in the United States. So they will say, OK, you apply for a letter of credit (We will take
that up later when we get to the Code of Commerce). Just like the principle of a credit card,

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you walk to a department store, they don’t know you, you’re a total stranger, they will sell to
you their goods on credit, you have to show them your credit card. It’s the bank which
issued the credit card that will pay them. In the example, the company would apply for a
letter of credit. They would go to the Philippine Bank of Commerce (PBC), they apply for a
letter of credit. SO PBC will contact its correspondent in New York. Let’s say Citibank is the
correspondent. They will send a text of the letter of credit by telex (‘di pwede yang fax).
And there will be code numbers, so that when Citibank receives that, they will know that this
came from PBC in Manila (these numbers are periodically revised with secret codes). What
the correspondent bank will do now is they contact the seller, Du Pont. PBC must send a
letter of credit saying that if you ship the chemicals to the company (XYZ), they will pay. So
with that Du Pont would now be willing to ship the chemicals.
 Normally, PBC has not yet been paid by XYZ. So Du Pont will ship the
chemicals to PBC. The bill of lading will be consigned to PBC. When the goods arrive, PBC
will tell the buyer, the goods have arrived. But since you haven’t paid us for the dollars we
will use to pay Du Pont, you sign a trust receipt. So they will now sign a trust receipt. It will
say ‘we are holding these goods in trust for you, in order to pay these goods, we will use the
proceeds to pay it, if we’re not able to sell the goods, we will deliver the goods to you.’
That’s a trust receipt.
 Now, how will Du Pont collect? It will draw a bill of exchange, drawn against
PBC (that’s the BANKER’S ACCEPTANCE). That’s why the letter of credit says they will accept
the bill of exchange which you will draw.
 Now XYZ would want to be sure that to enable them to collect, that they
actually shipped the goods. The letter of credit would specify what documents Du Pont must
submit in order for them to collect. And this would be agreed upon by the parties – what
documents would be required. Normally they will require bill of lading, commercial invoice,
packing list. So when they draw the bill of exchange to collect the proceeds, they will attach
that.
 And basic principle in letters of credit – banks deal with documents only.
Documents needed to prove that they have complied. So when the Philippine Government
sponsored that fight between Muhammad Ali and Joe Frazier here, their purses were paid by
means of a letter of credit which the Philippine National Bank opened. The letter of credit
specified that to collect, they must draw a bill of exchange, and they must submit the
documents to prove that they have complied with the contract. What documents? A
newspaper containing an account of the fight.
5. Clean bill of exchange

 No document is required to be attached.
6. Documentary bill of exchange

 That is what they use for letters of credit
 Seller has to attach certain documents to the bill of exchange in order to collect
7. D/A bills of exchange

 Where the documents to be submitted are upon acceptance
8. D/P bills of exchange

 Upon payment
9. Sight bills
 Payable on demand
10. Usuance bills

 Payable at a fixed or determinable future time
11. Bills in Set

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(To be discussed later on, common with letters of credit)
12. Inland bill

13. Domestic bill
 Drawn and payable in Manila
14. Foreign Bill

 If its drawn here and payable abroad, or drawn abroad and payable here
Section 127
 A bill, does not of itself, operate as an assignment of the funds in the hands of the drawee and
the drawee is not liable unless and until he accepts.
 That’s why the drawer can stop payment
Section 128
 A bill may be addressed to two or more drawees jointly.
 E.g to Jose Cruz and Manuel Santos . BUT NOT in the ALTERNATIVE. You can’t say to Jose Cruz
OR Manuel Santos, or Jose Cruz OR IN HIS ABSENCE, Manuel Santos.
Section 129 – defines an INLAND BILL

 A bill which, on its face, its both drawn and payable within the Philippines.
 If it is drawn in the Philippines but payable abroad, or drawn abroad payable in the Philippines,
it’s a foreign bill of exchange. Also, drawn abroad, payable abroad, that’s a foreign bill here.
Section 130 – if the drawer and the drawee are the same person (e.g. manager’s check/cashier’s
check); or the drawee is a fictitious person or a person not having capacity to contract (e.g minor),
there is no one to whom presentment can be made -- the holder may treat the instrument as a bill
of exchange or a promissory note, at his option.
 In case of drawer and drawee are the same, the holder may treat it as a promissory note or bill
of exchange because there are no two parties who are the drawer and drawee. That’s why he’s
given that option.
 The Supreme Court recently said in a case where a cashier’s check/manager’s check, you don’t
need to present it for acceptance because the drawer and drawee are the same. But they said
that this option is important because in case the holder fails to make a protest, he can still run
after the drawer and indorsers by exercising the option to treat it as a promissory note.
Section 131 – That in case of need, the drawer and indorser may insert the name of a person
whom the holder may go to in case of need. This is when the bill is dishonored by non-acceptance
or non-payment.
 Holder’s option whether to resort to the referee in case of need.
ACCEPTANCE
Section 132 – Definition

 Is the signification by the drawee of his assent to the order of the drawer.
 Must be in writing and signed by the drawee
 Must not express that the drawee will perform his promise by any other means than payment of
money (correlated with Section 5(d) --- if the drawer gives the option to demand something
other than payment of money, and the holder exercised the option, than the acceptance may be
for something other than payment of money (e.g. option to demand rice, and the holder
exercises that option, so the acceptance may be for the delivery of rice, instead of payment of
money)
 Verbal acceptance, or by phone is not sufficient

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 Even though the drawee does not write the word accepted, the fact that he signed on the face,
that is sufficient to indicate that he is accepting the order.
 Drawee must sign because otherwise there is no other indication. Once he accepts, he will
become primarily liable. Bill becomes a note.

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 Types of Acceptance
1. Actual
2. Constructive
3. General
4. Qualified
5. Extrinsic (Sec. 134)
6. Virtual (Sec. 135)
Section 133
Holder is entitled to the acceptance be written on the instrument, and if that is refused, he should
treat the bill as dishonored and give notice of dishonor to the drawer and indorsers.
Section 134
Acceptance may be made on a paper other than the bill.
 the separate piece of paper may refer to a bill that already exists, or may refer to a bill that’s
still to be drawn in the future, it does not yet exist
 the section only applies to bills already existing
 it will not bind the acceptor except in favor of a person to whom it is shown and who, on the faith
of it, receives the bill for value.
 Because if he never saw the acceptance, it cannot be said that he relied on that acceptance for
making the decision to take the bill.
Section 135 - contemplates the situation where an acceptance is made on a bill that has not yet
been drawn.
 it’s an unconditional promise to accept a bill before it is drawn is deemed an actual acceptance in
favor of every person who, upon the faith thereof, receives the bill for value.
 It is not necessary that the holder see the separate acceptance (e.g. letter of credit – that is an
acceptance made by a bank on a separate document for a bill of exchange that has not yet been
drawn.)
 Ochid Manufacturer’s Bank and Trust vs. Marfazan case – this fellow imported riding balls(???)
from Japan, and to pay for that, he applied for a letter of credit with Manufacturer’s Bank. So
the Japanese company drew ________ draft, to collect the proceeds, and the bank paid.
Because he failed to reimburse the bank, he was sued. His defense : I’m not liable because I
never accepted the Bill of Exchange/draft. The court said No, because in your application for the
letter of credit, there’s a stipulation. You said you will accept the draft to be drawn. That is
acceptance on a separate instrument, and so you are liable.
Section 136 – the drawee is allowed 24 hours to decide whether or not he will accept the bill.
if accepted, it will be dated as of the date it was presented.
Suppose a bill of exchange is drawn: pay 30 days after sight. And it was presented for payment
today and it is accepted the following day, the acceptance will be dated as of today. So you count
the 30 days as of today, not from the next day.
Section 137 – when the drawee destroys the bill or refuses within 24 hours or such other period as
the holder may allow to return the bill, it will be deemed accepted.
 this is constructive acceptance.
 The destruction must be intentional. If it was just by accident that it was destroyed (e.g.
included in a batch of papers that was fed to the paper shredder accidentally) that will not be
acceptance. It must be intentional.
 The mere retention of the bill will mean acceptance.
 If the holder demands the return of the bill, in less than 24 hours, he must return. The holder is
the owner of the bill of exchange. He is the one entitled to the possession of the bill. If he
decides to ask for the return, the drawee must return.
 The law gives the drawee 24 hours to make up its mind whether he will accept or not. But he is
not entitled to keep the bill for 24 hours while he is making up his mind. So if that was

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presented at 8 o’clock, at 9 o’clock the holder can say ‘give me back the bill.’ And he must
return, otherwise, he is deemed to have accepted it.
 If he returns it, he will have 23 hours more to make up his mind, whether he will accept or not.
Meanwhile the bill will remain with the holder.
Section 138
 A bill may be accepted before it has been signed by the drawer or while incomplete, or when it is
overdue, or after it’s been dishonored by refusal to accept or by non-payment.
 But, when a bill payable after sight is dishonored by non-acceptance and is later on accepted, the
holder is entitled to have it dated as of the date of the first presentment. (e.g. if it was presented
for payment on a Monday, and the drawee said, the drawer has no funds with me, come back 3
days later, the drawer may have funds with me. And the drawer came back three days later, he
accepted it, the acceptance would be dated as of Monday, not as of Thursday.
Section 139
 Acceptance is either general or qualified.
 General acceptance – assents without qualification to the order of the drawer.
 Qualified acceptance – varies the effect of the bill.
Section 140
 An acceptance to pay at a particular place is general acceptance, unless it says : to be paid there
only and not elsewhere
 e.g. a bill of exchange is drawn as payable at the head office of the Bank of the Philippine Islands
only.
 But if it only says payable at the head office of the Bank of the Philippine Islands, that is not a
general acceptance.
Section 141
When the acceptance is qualified:
1. Conditional – which makes payment dependent on the fulfillment of a condition
 e.g. I’ll accept if you will pass the government examination.
2. Partial – is only for the part of the amount of the bill
 Bill for P50,000, accepted for P40,000 because that’s all the drawer has with me.
3. Local – payable at a particular place only
4. Qualified -- e.g. the instruction is pay 30 days after sight and the acceptor ordered payable 60
days after sight.
 There are several drawees, but only some but not all accepted.
Section 142
 The holder may refuse a qualified acceptance and he may treat the bill as dishonored and give
notice of dishonor to the drawer and indorsers
 If the holder takes a qualified acceptance, the drawer and indorsers are discharged from liability
on the bill (as a rule) because they warranted that will be accepted according to the tenor as
drawn. Thus, if the acceptance was qualified, that would be changing the terms and conditions
of the contract without their consent. And that is not the contract they warranted.
 However, if they expressly or impliedly authorize the holder to take a qualified acceptance, or
subsequently agree to it, they will remain liable.
 When the drawer or indorser receives notice of the qualified acceptance, they must, within a
reasonable time, express their dissent, otherwise they will be deemed to have agreed.

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PRESENTMENT FOR ACCEPTANCE
Section 143
 Presentment for acceptance must be made:
1. If the bill is payable after sight, because otherwise you cannot fix the date of maturity
2. Where the bill stipulates that it should be presented for acceptance
3. Where it is payable at a place other than at the residence or place of business of the
drawee
 So that the drawee will know when the place of payment is not his residence, it’s not his
office.
 E.g. he resides in Paranaque. His office in Makati. The bill is payable in Baguio City.
Since that is not his residence or his place of office, you would not expect him to be there
on the date of maturity.
 Presentment for acceptance is required so that he would have advanced notice. Here is a
bill of exchange, drawn against you, payable at that place, which is not your residence,
not your office, so you better be there on the date of maturity to pay.
 In no other case is presentment for acceptance necessary.
 Prudential Bank vs. IAC
 Involves a letter of credit opened by Prudential Bank to finance an importation
and it paid the draft/bill of exchange drawn by the exporter. When Prudential Bank asked
the importer to pay, he said I’m not liable, I’ve not accepted the draft. Court said,
presentment for acceptance was required where the draft was payable at sight.
 Under Sec. 143, that is required.
Section 144
 The holder must, unless exempted, to present the bill for acceptance or negotiate it within a
“reasonable time”.
 Failure to do so would discharge the drawer and all indorsers
Section 145
How presentment for acceptance must be made:
 by or on behalf of the holder
 at a reasonable hour
 on a business day
 before the bill is overdue
 to the drawee or some other person authorized to accept or refuse
1. Bill addressed to two or more drawees who are not partners – presentment made to
all unless one is authorized to accept or refuse for the others
2. Drawee is dead – presentment may be to his personal representative
3. Drawee declared bankrupt or insolvent, or has made an assignment for the benefit of
creditors – presentment to drawee or his trustee or assignee
Section 146
Days when presentment made
 Any day on which a negotiable instrument may be presented for payment
 If on a Saturday, as long as not a holiday, made before 12:00 noon

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Section 147
Presentment where time is insufficient
 If bill payable elsewhere than at the place of business or the residence of the drawee, and the
holder of the bill has no time to present for acceptance before presenting it for payment even
with the exercise of due diligence, any delay caused by the bill being presented for acceptance is
excused and does not operate to discharge the drawers and indorsers
Section 148
Presentment for acceptance excused and bill treated as dishonored by non-acceptance:
1. If drawee is dead, or has absconded, or is a fictitious person, or a person not having capacity to
contract
 Includes minor, insane, deaf-mute who cannot write, person suffering from civil interdiction
2. Where after exercise of reasonable diligence it cannot be made
3. Where presentment was irregular, acceptance has been refused on some other ground
 E.g., it was presented on a Sunday but the drawee did not reject it on that ground but
because he says the drawer has no funds with me
Section 149
A bill is dishonored by non-acceptance:
1. If it is presented for acceptance and acceptance as prescribed by the law is refused or cannot be
obtained
2. If presentment for acceptance is excused and bill is not accepted
 Contemplates the situation where presentment is required under section 143 but is
excused under section 148
Section 150
 When a bill is presented for acceptance and is not accepted within the prescribed time,
the person presenting it must treat the bill as dishonored or he loses the right of recourse
against the drawer and indorsers
 There must be notice of dishonor
Section 151
 If a bill is dishonored by non-acceptance, an immediate right of recourse against the
drawer/indorsers accrues to the holder
 He need not make any presentment for payment
 E.g. bill payable Feb. 2002. Presentment for acceptance made but was not accepted by drawee
today. Holder need not wait for Feb. 2002, he can immediately run after the drawer/indorsers.
PROTEST
Section 152
 If it is a foreign bill of exchange and it is dishonored, a protest must be made.
 Foreign element present
 Protest is made by a notary public or by a respectable resident of the place where the bill is
dishonored in the presence of two or more credible witnesses (Sec. 154)
 Law requires that there must be somebody who is acceptable internationally to make the protest

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Section 155
 Must be made on the day of its dishonor unless delay is excused
 If it has been noted in the notarial register, he may make the protest at anytime
Section 158
 A protest for better security may be made if the acceptor has been adjudged bankrupt or
insolvent
 Section is merely permissive
 Purpose is to notify drawer/indorsers that the acceptor is insolvent therefore he cannot pay, and
that they should already make arrangements to pay
 If it is not done, they will still not be discharged
Section 159
 Protest is dispensed with under the same circumstances which would dispense with giving a
notice of dishonor
 Delay is also excused if caused by a fortuitous event beyond the control of the holder
Section 160
 When a bill is lost or destroyed or wrongly detained, protest may be made on a copy of it
BILL IN SET
Section 178. Bills in set constitute one Bill. – Where a bill is drawn in a set, each part of
the set being numbered and containing a reference to the other parts, the whole of the
parts constitutes on bill.
This is common in letters of credit. When the exporter of the good will collect from the bank
the proceeds of the letters of credit, for the goods he sold to an importer, he will draw a bill in set
usually in 2 parts, e.g. first of two parts… and then second of two parts. They will be mailed usually
one week apart to provide for contingency that if one is lost, the other part can, most probably, still
be received and thus, there can still be collection. (it’s the main idea behind bill in set: to provide for
the contingency that one part is lost in the event there is miscarriage in the mails).
Section 179. Right of Holders where different parts are negotiated. – Where two or more
parts of a set are negotiated to different holders in due course, the holder whose title first
accrues is, as between such holders, the true owner of the bill. But nothing in this section
affects the right of a person who, in due course, accepts or pays the parts first presented
to him.
If bills in set are negotiated to holders in due course, the one whose title first accrues is the
true owner. But, if the other party is able to get acceptance or payment first, then he is the one
who will be able to collect. In other words…
C ------ E -------- G
A - Draws a Bill in Set payable to B
- Addressed to X D ------ F -------- H
A with a bill in set , addressed X that bill is payable to B. B indorsed one part to C and the other
part to B. If the endorsement was first made to C, as between C and D, C will have a better right.
However, if D was able to go to X first and get the bill accepted, then D will be the one who will be
entitled to collect from X.
Section 180. Liability of holder who indorses two or more parts of a set to different
persons. – Where the holder of a set indorses two or more parts to different person he is

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liable on every such part, and every indorser subsequent to him is liable on the part he
has himself indorsed, as if such parts were separate bills.
The law says that if the holder of the bill in set indorses the parts to different persons, he will
be liable on each part and every endorser subsequent to him, as if each part were separate bills. In
the example, B will be liable to C and D as indorser. If ever C indorses it to E, and E indorses it to
G, C and E will be liable to G as indorsers. D and F will be liable to H as indorsers.
Section 181. Acceptance of bills drawn in sets. – The acceptance may be written on any
part and it must be written on one part only. If the drawee accepts more than one part
and such accepted parts are negotiated to different holders in due course, he is liable on
every such part as if it were a separate bill.
Acceptance may be written on any part, and should be written on one part ONLY. Now if the drawee
ACCEPTS both parts, then he will be liable on both parts. Well, that is his fault if he accepted both
parts.
Section 182. Payment by acceptor of bills drawn in sets. – When the acceptor of a bill
drawn in a set pays it without requiring the part bearing his acceptance to be delivered up
to him, and the part at maturity is outstanding in the hands of a holder in due course, he
is liable to the holder thereon.
If an acceptor of a bill drawn in set pays it without requiring the part, bearing his acceptance,
to be delivered to him, and that part is still out standing at maturity and it falls in the hands of a
holder in due course – then he ( acceptor) can be held liable. It is his fault for paying the holder
although the holder did not surrender to him the part which contains his acceptance.
Section 183. Effect of discharging one of a set. - Except as herein otherwise provided,
where any one part of a bill drawn in a set is discharged by payment or otherwise, the
whole bill is discharged.
Where any one part (of a bill in set) is discharge by payment, the whole bill is discharged
because the different parts constitute only one bill. So that, if the acceptor pays, he cannot require
the holder to produce all the parts. Precisely the bill is in set for the contingency that one party may
be lost so that the holder can still collect in the event one part is lost.
Section 184. Promissory note, defined. A negotiable promissory note within the meaning
of this Act is an unconditional promise in writing made by one person to another, signed
by the maker, engaging to pay on demand, or at a fixed or determinable future time, a
sum certain in money to order or bearer. Where a note is drawn to the maker’s own
order, it is not complete until indorsed by him.
Definition of a promissory note states that it is payable to the order of the maker. It is not
complete until he (maker)indorses it. This is because you need 2 parties to a contract. If the maker
and the payee are the same, you don’t have a contract. It the maker indorses it, he will be liable as
maker and indorser.
The Agbayani book mentions certain types of promissory notes like certificate of deposits...
well, those will be negotiable if it complies with the requisites of the negotiable instruments law.
Remember the case of Caltex. Angel dela Cruz and the negotiable certificate of time deposit with
Security Bank and Trust. It says “ This is to certify that bearer has so much on deposit repayable to
the depositor. “
Bonds are nice looking promissory notes that looks like a diploma. This usually refers to
promissory notes involving huge amounts which will have a long maturity date. You’ll be talking
about hundreds of millions of dollars or pesos with maturity date of 5 years. (This was why Mr.
Villar got into trouble, remember that he floated a dollar bond in Europe when the rate of exchange
was 26:1. Note that he needed to stay in power, otherwise the bank will close in.)

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Due bills
 “Wala naman yang mga due bills na yan!” As I have said earlier, in the clearinghouse, they do
not issue due bills. Instead, the computer will debit the accounts of the collecting bank and the
drawee bank.
Bank Notes
 “Wala na rin iyan” because in the old days these were used. If you were in possession of that
they will replace that in cash. This is just like what they use in Hong Kong as money. The bills
issued by HK Shanghai Bank and Chartered Bank, these are bank notes, and because the bank
will replace it with legal tender and when you surrender it, people will freely accept them – just
like money.
 Today, these notes are prohibited (as stated in the Central Bank Act). One of the phenomenons
of WWII, each country had a central bank for monetary policies. To be able to control the
amount of cash, the government prohibited the use of Bank notes as people would treat them as
cash thus making it difficult to control the money in circulation. Control of money in circulation is
important to be able to respond to times of inflation or deflation. Although now, government
cannot control money as they used to because of credit cards. Even if banks reduce the money
in circulation, people may still use their credit cards. (Tells the story during the U.S. Recession
where people purchase cars on credit, no interest, no down, no monthly installments - 3 zero
scheme)
Section 185. Check defined. – A check is a Bill of Exchange drawn on a bank payable on
demand. Except as herein otherwise provided, the provisions of this Act applicable to a
bill of exchange payable on demand apply to a check.
Checks are spelled by the British people as cheque, it was called as such because
 It is a special type of a Bill of Exchange. It’s a bill of exchange (BOE) , drawn on a bank payable
on demand. So, you don’t need to present them for acceptance, you present them for payment
right away.
 This particular BOE had serial numbers, unlike ordinary BOE. To be able to verify the identity of
this particular type of BOE, you would CHECK the serial number. Most commercial transactions
are done through checks.
Provisions of the law on Bills of Exchange are also applicable to checks. This is why AmJur
says that the rule that - if the drawee retains a BOE for 24 hour that amounts to acceptance, is also
applicable to checks. Therefore, if you don’t return the checks for 24 hours, you have deemed
accepted it.
Agbayani Book mentions different types of checks:

Cashier’s Check, Manager’s Check.
 They are called as such because of the persons who usually draw these checks for the bank.
 In the headoffice, it is the cashier who signs it because it is where the cashier holds office. But
in the branches, it is the manger who signs the check. The process for both is the same. It is
the officer of the bank who issues the check in behalf of the bank payable to the payee drawn
against the bank. This is why the SC says the drawer and the drawee are the same in these
types of checks, thus they are not presented for acceptance.
Certified Checks
 “Hindi na nagse-certify ng cheque ang mga bangko ngayon” if you go to the bank, they will ask
you to buy a cashier’s of manager’s check instead. This is probably because they are afraid of
complications in the event the amount is altered right after they certify the check.
 However, the Rules of Court states that in execution, the sheriff before levying, the debtor can
pay through a CERTIFIED CHECK. And the co-chairman of the committee which drafted that
(ROC) is Justice Feria.

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Memorandum Checks
 Those not intended for payment or encashed (when got goods for credit). It is issued to
evidence a loan and will be redeemed by the drawer in cash. PURPOSE: EVIDENCE OF CREDIT.
Not normally funded.
Traveler’s check
 Not as popular today because of international credit cards. You can still buy these traveler’s
checks in different denomination (i.e. $20, $50 etc). It was American express who started this.
You sign them above or elsewhere indicated. When you use the TC for payment abroad, you
present your passport to show your identity ‘that you are the person whose signature appears on
the traveler’s check’ and then you sign it. The previous signature will be used as a standard of
the signature you are affixing. Now, together with your passport, they will accept your TC as
payment. In order for the entire scheme to work, the establishment must be assured that the
banks will honor it, without any questions ask (just like your credit cards). Anyway, the whole
scheme is insured.
 Means through which you will be able to carry your funds safely
 When lost, bank will replace them up to a certain extent . Am Express guarantee $300 outright,
the rest of the amount will be subject to investigations.
Crossed Checks
 With parallel lines on the upper left-hand corner
 In Bataan Cigar, the court said that the crossing of a check has 3 Effects / Consequences:
1. It cannot be encashed over the counter, but must be deposited in a bank
2. Can be endorsed only once
3. To be a Holder in due course, the holder must inquire:
a. What is the nature of the title of the payee
b. For what purpose did he acquire it
 Actually a precautionary measure to assure that the intended payee is the one who will get the
money. This is true especially if you will mail the check.
 May be
 General
 Special – if you name a specific bank. This will mean that you have to deposit the check to
the named bank and no other bank, this is rare. The idea is to require it to be deposited to
avoid loss by theft. Note that the greatest enemy of THIEVES is TIME ELEMENT. She has to
get away before she is discovered.
Now, if she steals a crossed check for deposit. She still needs to open a bank account
in the name of the payee. She will have to fabricate two I.D.’s; deposit the check; wait for
the check to be cleared before she can withdraw the money. By this time, the owner of the
check would have discovered it was lost, informed the drawer about the loss and there could
have been and order for stop payment in the bank. Therefore, it is a precautionary measure
 A CROSSED CHECK IS STILL NEGOTIABLE. Chang Juan Case: A check was issued to Chang
Juan, it was crossed. He presented it for encashment over the counter, it was dishonored. He
was running after the drawer. SC says that: you cannot hold him (drawer) liable because you
(Chang Juan) did not make the proper presentment of payment. The check is a crossed check, it
cannot be encashed over the counter. It must be deposited.
Section 186. Within what time a check must be presented. – A check must be presented
for payment within a reasonable time after its issue or the drawer will be discharged from
liability thereon to the extent of the loss caused by the delay.

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According to Section 186 A check must be presented for payment within a reasonable time
after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused
by the delay.
The practice of the bank is that they will honor the check for six (6) months. After that, they
will consider it stale. It will not be honored anymore. It is the commercial cut-off.
PNB v. Sito
The SC said, if there is delay in presenting the check for payment, the indorser is discharged.
He need not prove that he is prejudiced. Prejudice is presumed. By the fact that there was undue
delay, the potential liability was unduly prolonged. So long as there is undue delay in the
presentment of check for payment, indorsers are discharged. But the drawer, according to this case
will only be discharged to the extent he suffered the loss because of the delay.
This will only happen if the bank goes bankrupt such that if the check were presented on
time, the check would have been fully paid, but because of the delay, the bank became bankrupt –
hence could only probably get 10 centavo per peso.
If the bank did not go bankrupt, there is no prejudice.
Jamal v. Estacio
Jamal sold ladies underwear to Estacio. Estacio issued a check. However, jamal never
presented the check so it became stale. So now he sued Estacio for payment.
SC: It there was delay in the presentment of the check, under the law Estacio will be
discharged only to the extent of the loss. He has not shown that he has suffered loss because of the
delay. “Hindi naman nabawasan iyong bank account nya e sapagkat walang DINEBIT.”
Therefore, there will be a loss only when the bank is bankrupt. I mentioned this case
because there was an occasion where J. Kapunan said that if there was delay the DRAWER is
discharge from liability/onerous obligation because the civil code provides – when you pay an
obligation with a negotiable instrument. The obligation is deemed paid if the negotiable instrument
is paid OR it is impaired through the fault of the payee – JACK REITERATES: being impaired through
the fault of the payee DOES NOT contemplate a situation where it was not presented for payment.
For example, the payee altered the amount and the bank discovered it, payee cannot go back to the
drawer and ask for another check. This is the penalty that the law imposes upon him.
Now, in a decision this year (still referring to 2001) J. Kapunan this time said “No, although
the check was not presented and became stale, since there was not prejudice or loss cause to the
drawer, the obligation subsists. This is the correct doctrine.
Section 187. Certification of checks; effect of. – Where a check is certified by the bank on
which it is drawn, the certification is equivalent to an acceptance.
Section 188. Effect where the holder of check procures it to be certified. – Where the
holder of a check procures it to be accepted or certified, the drawer and all indorsers are
discharged from liability thereon.
As I have said, banks do not certify checks anymore.
Section 189. When Check operates as assignment. - A check of itself does not operate as
an assignment of any part of the funds to the credit of the drawer with the bank, and the
bank is not liable to the holder unless and until it accepts or certifies the check.
In this section, as I have, said Checks are not certified anymore, they are merely presented
for payment.
There was a decision of J. Mendoza which is not correct.
What happened was that there was a real estate transaction, the seller was supposed to pay
for the Capital Gains Tax. The seller did not pay it so the buyer was the one who paid. The Seller

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issued a check to him, to reimburse him. But later, the sellers issued and order for the stop
payment.
The clerk of Security Bank attached the stop payment order to the ledger of the savings
account because the depositor also had a savings account. So, when the check was presented, he
looked at the ledger (of the current account) and there was not stop payment order as the said
order was attached to the savings account, the check was honored. When the bank discovered that
it had made a mistake in honoring the check although there was a stop payment order, it reinstated
the amount in the account of the depositor and now sued the payee to get the back the money.
The SC said that Security Bank could no longer recover because the seller was really obliged
to reimburse the payee for the capital gains tax . It was an amount due him. When the Security
Bank paid the check, it stepped into the shoes of the drawer of the check and became subrogated to
his rights. And therefore, the payee could invoke against him defenses it could have raised against
the drawer of the check. And since the payee could have invoked against the drawer the defense
that “you really owe me that money for the reimbursement of the capital gains tax ” that could be
raised against the drawee bank and the bank could not recover. – MALI! I Don’t know why He
(referring to the ponente) is applying civil law when this is a negotiable instrument (says Jack).
The law is clear – the CHECK DOES NOT OPERATE AS AN ASSIGNMENT and that there was a
stop payment order which the bank erroneously failed to honor. Now, the court has said that: if the
bank erroneously dishonors a check, time and again they would hold the bank liable for moral
damages to the drawer.
In the Agbayani Book Note: Agbayani says that if the Depositor has a balance of P50,000.00
available to pay for checks. And 3 checks in the amount of P20,000.00, P30,000.00 and P50,000.00
were issued and was presented for payment all at the same time, the bank cannot choose which one
to honor. It should dishonor all the checks – JACKS COMMENT: In practice, banks will not do this.
What it will do is to accommodate as many checks as possible within the outstanding balance, and
only dishonor what cannot be accommodated. “Ayan, so you see, another bright idea of agbayani.”
Suppose you went to the bank to encash a check, they told you that it was DAIF – Draw
against Insufficient Funds (i.e. Check drawn is for P50,000.00 by the outstanding balance of drawer
is less that P50,000.00) the remedy is you deposit money in the account so that there will be
enough balance. JACK’s COMMENT: This is not feasible because the bank will not tell you how
much money is still needed or how much is the deficiency because of the bank secrecy law. The
bank will just tell you insufficient funds, but it will not tell you how much. You will not how much to
deposit.(If you want you can try, piso – piso )
SECTION 190:
Contains definitions like the holder – the payee or indorsee of a bill or note who is in
possession of it, or the bearer thereof. This is why Branan says that the payee can be a holder in
due course.
The person primarily liable is the person absolutely required to pay, that is the maker and the
acceptor. All other are secondarily liable because their liability is conditional on the party primarily
liable failing to pay. These are the drawer, indorsers, persons negotiating by delivery.
Reasonable time – depends on the nature of the instrument, commercial customs (like the
banks here, they honor checks within 6 months), and the facts of each case.
Computing the time – like in civil law, admin code – exclude the first, exclude the last. It
the act falls on a holiday, you have until the next business day to do it.
Any disputes involving negotiable instruments – apply first the law (NIL), if there’s any
deficiency, apply civil law in a suppletory manner. Note that if there’s a provision in NIL, do not
apply other laws. For instance, what is the effect of payment an obligation covered by a negotiable
instrument. This is not provided in NIL, therefore apply Civil Law which states that: the obligation is
deemed paid if the instrument is honored and paid OR impaired through the fault of the payee.

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November 13, 2001 Lecture

(The provisions are in bold.)

§1 – Form of negotiable instruments. An instrument to be negotiable must conform to the

Pay P10,000 to the order of Charlene Gonzales for services

I, Jose Cruz, promise to pay Ruel Santos or bearer P10,000.

If it is a promissory note, it must contain a promise to pay.

Jimenez Transcripts (Negotiable Instruments Law)

If it is a bill of exchange, it must contain an order to pay.

To Jose Cruz Manuel Santos

The promise or order must be unconditional.

The sum must be certain.

Jimenez Transcripts (Negotiable Instruments Law)

(c) Must be payable on demand or at a fixed or determinable future time.

 So people or parties will know when the instrument or payment is due.

(d) Must be payable to order or to bearer

 These are the words of negotiability.

(e) Where the instrument is addressed to a drawee, he must be named or otherwise

 The sum is certain even if it is with interest.

Jimenez Transcripts (Negotiable Instruments Law)

(b) By stated installments; or

 For the amount to be certain, it must indicate:

(c) By stated installments, with a provision that, upon default in

(d) With exchange, whether at a fixed rate or at the current rate; or

Jimenez Transcripts (Negotiable Instruments Law)

(e) With costs of collection or an attorney’s fee, in case payment

§3 – When promise is unconditional. – An unqualified order or promise to pay is

(b) A statement of the transaction which gives rise to the instrument.

 A negotiable instrument is issued when there is an underlying contract – that is the

Jimenez Transcripts (Negotiable Instruments Law)

But an order or promise to pay out of a particular fund is not unconditional.

§4 – Determinable future time; what constitutes. – An instrument is payable at a

Jimenez Transcripts (Negotiable Instruments Law)

Jimenez Transcripts (Negotiable Instruments Law)

November 14, 2001

(b)Authorizes a confession of judgment if the instrument be not paid at maturity; The

§6 also mentions matters which do not affect negotiability:

Jimenez Transcripts (Negotiable Instruments Law)

(e) Designates a particular kind of current money in which payment is to be made.

§7 states when an instrument is payable on demand:

(a) when it is expressly payable on demand, or at sight, or on presentation; like “I

The law mentions who may be the payee:

Jimenez Transcripts (Negotiable Instruments Law)

Jimenez Transcripts (Negotiable Instruments Law)

§9 states when the instrument is payable to bearer.

(e) When the only or last indorsement is an indorsement in blank.

Jimenez Transcripts (Negotiable Instruments Law)

Jimenez Transcripts (Negotiable Instruments Law)

Under §13, where an instrument expressed to be payable at a fixed period after

Jimenez Transcripts (Negotiable Instruments Law)

November 19, 2001

Development Bank of Rizal case:

Jimenez Transcripts (Negotiable Instruments Law)

Art. 1427. When a minor between eighteen and twenty-one years of

The liabilities of the other parties are:

Jimenez Transcripts (Negotiable Instruments Law)

Duress – forced to sign or make a negotiable instrument.

B forges A’s signature (Pay to B or order)

1. Can E run after A? No, because of the forgery defense.

A herein makes a note which says: Pay to B or order

D forges C’s signature (D made it appear that C indorsed the note)

1. Can E run after A or B? No, because E has no title.

A herein makes a note which says: Pay to B or bearer

D forges C’s signature (D made it appear that C indorsed the note)

Jimenez Transcripts (Negotiable Instruments Law)