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INTRODUCTION i.

Kinds of negotiable instruments Instruments are N when they conform to all the reqs in the NIL 2 main grps: o Promissory note: promise to pay money Other forms: Certificate of deposit: issued by a bank reciting a deposit of a certain sum of money, payable at a fixed time or on demand to the depositor Bond: evidence of indebtedness issued by a corp, pub or priv, payable at a definite date in the future, usually for a long term o Bill of exchange: order made by 1 person to anthr to pay money to a 3 rd person

Indorser enters into 2 contracts: Hes selling/transferring the instrument to the indorsee He warrants that hell pay for such when the 2 conds take place

iii. Functions of Negotiable instruments Fxns: o Substitute for money in payment for prop or services But its validity as a means of payment is conditioned on its being honored o Means for creating & transferring credit o Facilitate the sale of goods NI: X constitute legal tender, but often take the place of money as a means for payment Intl trade: facilitated by the use of a draft iv. The concept of negotiability Holder in due course: 1 who took the note in GF & wo knowledge of a failure in consideration Possible for a person who acquired a NI to acquire a btr title than his transferor if he fulfills the reqs of a holder in due course (s52) 1 can rely on the face of a NI & need not inquire into past events NIL aims to encourage facility, convenience & efficiency in commercial transactions v. The origin of negotiable instruments From merchants & traders of the Middle Ages, amng the Florentine & Venetian merchants vi. History of the negotiable instruments law NIL: verbatim reproduction of the Uniform Negotiable Instruments Law of US approved (in the US) in 1896 This statute was patterned after the English Bill of Exchange Act 1882 vii. Applicability of the negotiable instruments law NIL applies only to negotiable instruments conform to s1 If any req is absent, governed by the gen law on contracts S196: Cases not provided for in act. - Any case not provided for in this Act shall be governed by the provs of existing legislation, or in default thereof, by the rules of the Law Merchant. Law Merchant: Sys of law wc consists of certain principles of equity & usages of trade wc gen convenience & a common sense of justice have established, to regulate the dealings of merchants & mariners in all commercial countries

Check: most commonly used; payable on demand Draft: used in transaxns btwn persons physically remote from each other Order made by 1, addressed to a person having in his possession funds of such person, ordering the addressee to pay the purchase price to another Bank draft: If made by 1 bank to another ii. Parties & nature of their liability PN: usually 2 parties o Maker: prom issor o Payee: person to whom the promise is made BOE: o Drawer: person who gives the order o Drawee: addressee of the order o Payee: person to whom payment is to be made Negotiatied/indorsed: when the payee transfers the instrument to anthr by signing it at the back o Payee becomes the indorser o Indorsee: person whom he negotiated it to Becomes the holder of the instrument

Nature of their liability Primary party: 1 whos absolutely & unconditionally reqd to pay o PN: maker o BOE: no person primarily liable to pay until & unless the drawee accepts the order of the drawer to pay B4 acceptance, drawee isnt liable & cant be compelled to pay If accepts: drawee becomes an acceptor whos bound to pay Secondarily liable: o BOE: the drawer & the indorsers o PN: indorsers o Liability is conditioned on: Demand/presentment duly made on the primary party Primary party dishonors the instrument, & notice of dishonor given to the 2ndary party

CHAP1: REQUISITES OF NEGOTIABILITY S1: FORM OF NEGOTIABLE INSTRUMENTS An instrument to be negotiable must conform to the ff reqs: a) It must be in writing & signed by the maker or drawer; b) Must contain an unconditional promise or order to pay a sum certain in money; c) Must be payable on demand, or at a fixed or determinable future time; 1

d) e)

Must be payable to order or to bearer; and Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein w reasonable certainty.

S184: PROMISSORY NOTE DEFINED. A negotiable promissory note w/in the meaning of this Act is an unconditional promise in writing made by 1 person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a note is drawn to the makers own order, it is not complete until indorsed by him. S126: BILL OF EXCHANGE DEFINED. A bill of exchange is an unconditional order in writing addressed by 1 person to another, signed by the person giving it, requiring the person to whom its addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. 1. Fact that an instrument dsnt meet the reqs in s1 wont affect its validity o Just not governed by the NIL Written form & signature

S3: 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 wc reimbursement is to be made, or a particular accnt to be debited w the amnt; or b) A statement of the transaxn wc gives rise to the instrument. But an order or promise to pay out of a particular fund is not unconditional. To be unconditional: it shld be unqualified When the right is absolute & cant be defeated by a contingency = facilitates the NIs ability to pass freely from one to another FUND Mere indication of a particular fund out of wc reimbursement is to be made, or an indication of a particular accnt to be debited w the amnt = X make the order conditional o Refers to BOE: reimbursement & debiting presupposes that an order to pay has been made Reimbursement presupposes previous disbursement o If Xstatement of where the disbursement is to be taken from appears, then the order to pay is unconditional tho the drawee is authorized to reimburse himself from a particular fund, or is ordered to debit the disbursement to a particular accnt TRANSACTION Recital of the transaxn dsnt make the promise/order conditional Info is merely given that the instrument was issued in connection w the transaxn Merely identifies the transaxn wc gave rise to the instrument Fact that the cond appearing on the instrument has been fulfilled won convert it into a negotiable one

s.18: LIABILITY OF PERSON SIGNING IN TRADE OR ASSUMED NAME. No person is liable on the instrument whose signature dsnt appear thereon, except as herein otherwise provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name. s19: SIGNATURE BY AGENT; AUITHORITY; HOW SHOWN. The signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose & the authority of the agent may be established as in other cases of agency. In writing: o Includes print written w pen/pencil or typed Signature: binding whether in 1s handwriting, printed, engraved, lithographed, photographed o So long as intended/adopted as the signature, made w his authority o May appear on any part of the instrument o Valid & binding so long as the intention to make the instrument the makers or drawers is shown o If placement dsnt show in what capacity the person intended to sign = indorser Unconditional order or promise to pay Express promise on the face of the instrument Mere acknowledgement of a debt = X a promise BOE: words equivalent to an order = sufficient o Order: command or imperative direction o Mere request/auth to pay = X an order o Use of polite words dnt detract from its being an order

Powell & Powell v Greenleaf & Currier N isnt affected by a reference wc is: o A recital of the consideration for wc the paper was given o Statement of the origin of the transaxn; or o Statement that is given in accordance w the terms of a contract of even date btwn the same parties To destroy negotiability, the reference to a collateral contract must show that the oblig to pay is burdened w the conds of that contract 3. Sum payable must be certain

2.

When unconditional

S2: CERTAINTY AS TO SUM; WHAT CONSTITUTES. The sum payable is a sum certain w/in the meaning of this Act, although it is to be paid a) With interest; or b) By stated installments; or c) By stated installments w a prov that upon default in payment of any installment or of interest, the whole shall become due; or d) With exchange, whether at a fixed rate or at the current rate; or 2

e)

With costs of collection or an attys fee, in case payment shall not be made at maturity.

An agreement to pay interest dsnt render the sum uncertain o The exact amnt can be computed wo looking beyond the instrument Certain tho payable in installments o So long as its stated o The amnt of ea installment & its due date are fixed in the instrument Payable in money NI are intended to be substitutes for money, so they shld be capable of being transformed into money X N if payable in personal prop, shares of stock or gold Money: X limited to legal tender o Includes any particular kind of money Instrument contains an order or promise to do an act in addtn to payment of money = X N o Shld maintain the simplicity of form = necessary for the free use of NI Order or promise gives the holder an election to req smthng to be dne in lieu of payment of money = N o But if the option to pay money or smthn in lieu thereof is w the maker/person primarily liable = X N

Only on the date can payment be demanded If holder fails to demand payment, the instrument is overdue but is still valid & N o Just becomes a demand instrument c) Payable at a determinable future time

4.

S4: DETERMINABLE FUTURE TIME; WHAT CONSTITUTES. An instrument is payable at a determinable future time, w/in the meaning of this Act, wc is expressed to be payable a) At a fixed period after date or sight; or b) On or before a fixed or determinable future time spcfd therein; or c) On or at a fixed pd after the occurrence of a spcfd event wc is certain to happen, though the time of happening by uncertain. An instrument payable upon a contingency is not negotiable, and the happening of the even does not cure the defect. S11: DATE, PRESUMPTION AS TO.Where the instrument or an acceptance or any indorsement thereon is dated, such date is deemed prima facie to be the true date of the making, drawing, acceptance or indorsement, as the case may be. S17: CONTRUCTION WHERE INSTRUMENT IS AMBIGUOUS. Where the language of the instrument is ambiguous, or there are omissions therein, the ff rules of construction apply: d) Where the instrument is not dated, it will be considered to be dated as of the time it was issued. d) Effect of acceleration provisions

Incitti v Ferrante N charac of an instrument isnt affected by the fact that it designates a particular kind of current money in wc payment is to be made 5. Certainty of time of payment Purpose: to inform the holder of the date when he may enforce payment B4 such time, he cant compel the maker or acceptor of the bill to pay, unless theres a valid acceleration prov a) When payable on demand

s.7:WHEN PAYBLE ON DEMAND. An instrument is payable on demand a) where it is expressed to be payable on demand, or at sight, or on presentation; or b) in wc no time for payment is expressed. Where an instrument is issued, accepted or indorsed when overdue, it is, as regards, the person so issuing, accepting or indorsing it, payable on demand. Ex) I promise to pay Juan Reyes or order the sum of P100 at sight Ex) I promise to pay Juan Reyes or order the sum of P100 Demand: holder can call for payment anytime Maker: can pay at any time, refusal of the holder to accept will terminate the running of interest if any is provided o But still has to pay the oblig b) Payable at a fixed time

Option to accelerate the maturity is on the maker N isnt affected, whether such option is absolute or conditional Acceleration at the option of the holder o Whether it renders the instrument non-N depends on the nature of the prov o Can be exerd only by the holder upon the happening of a spcfd event or act over wc he has no control = N o If right to exer is uncond, the time of payment becomes uncertain = non-N Acceleration of maturity of the instrument by operation of law dsnt affect its negotiability If maker dies b4 maturity, due date is disregarded bec the holder shld file his claim against the makers estate

Utah State National Bank v Smith Law merchant: clause accelerating due date does nt destroy N Puget Sound State Bank v Washington Paving Co The making of the notes payable at a certain time, w the reserved power to the payee to declare them due b4 the stated time of maturity if he deems himself insecure, dsnt make them demand notes 3

Ex) I promise to pay Cat or order the sum of P1k on Dec 1, 2007

e)

Provisions extending the time of payment

e)

When the only or last indorsement is an indorsement in blank.

Smtyms the extension prov is just anthr form of an acceleration prov The effect is the sme as a note payable on or b4 Its an acceleration at the option of the maker This wont affect negotiability Note w fixed maturity, where the maker has the option to extend the payment until the happening of a contingency = Non-N o Time for payment may never come at all

Security National Bank of Sioux City, Iowa v Gunderson Holders of notes dnt make an extension of the time of payment secretly, but such extension if made, is made by an agreement btwn the principal debtor & the holder of the paper, either w or wo the consent of the indorsers. o The prov in law was inserted to protect the holder against any release of indorsers, or others, by an extension wo their assents o This phrse dsnt express an agreement to extend time, but leaves the matter of extension optional w the holder & not obligatory upon him The holder & maker may at any time agree upon an extension = this dnst affect N 6. Must be payable to order or bearer words of negotiability payable to order or bearer They are expression of consent that the instrument may be transferred Consent is indispensable S10: the instrument need not follow the lang of the law o Any term wc clearly indicates an intention to conform to the leg reqs is sufficient

or bearer o If these words are cancelled by the drawer = X NI Bearer instrument Order instrument May be negotiated by mere delivery Reqs delivery & indorsement a) When instrument is payable to order S8: WHEN PAYABLE TO ORDER The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order There must always be a spcfd person named in the instrument Wo the words to order or to the order of = instrument is payable only to the person designated therein & is not N o Purchaser of the non-NI just steps into the shoes of the person named in the instrument = subj to all the defenses available against the latter

payable to the bearer, Cat = non-N o bearer just describes the person Any terms wc clearly indicate an intention to conform w the leg reqs is sufficient Ex) o A) I promise to pay to bearer the sum P100 o B) pay to Cat or bearer o C) pay to john doe or order Name is fictitious when its feigned or pretended Payable to the order of the estate of a person still alive at the time of execution of the note valid bearer paper Since payable to a non-existing person Payable to order of the estate of a dead person bearer note Since name of the payee dsnt purport to be the name of any person Payee as fictitious shld be known to the maker/drawer Since the payee isnt capable of indorsing & since the maker knew of this fact, he mustve intended the instrument to be transferred by mere delivery If maker/drawer dsnt know: its not a bearer instrument but an order instrument No one can indorse such, thus it cant be validly negotiated o D) pay to cash/pay to sundries Presumed that the maker/drawer intended the instrument to be payable to bearer o E) indorsement in blank Payable to bearer even if originally payable to the order of a spcfd person Blank indorsement cant convert a non-N note to a N one

Ang Tek Lian v CA Where a check is made payable to order of cash, the word cash dsnt purport to be the name of any person & hence the instrument is payable to bearer o The drawee bank ddnt obtain any indorsement of the check, but may pay it to the person presenting it wo any indorsement 7. Parties must be designated with certainty a. Maker & drawer Must sign the instrument if a party deviates from the commercial usage wrt the place of sig, & its not clear in what capacity he signed = considered an indorser

b) When instrument is payable to bearer S9: WHEN PAYABLE TO BEARER The instrument is payable to bearer a) When it is expressed to be so payable; or b) When it is payable to a person named therein or bearer; or c) When it is payable to the order of a fictitious or non-existing person, & such fact was known to the person making it so payable; or d) When the name of the payee dsnt purport to be the name of any person; or

b. Payee S8: WHEN PAYABLE TO ORDER. The instrument is payable to order where it is drawn to the order of a specified person or to him or his order. It may be drawn payable to the order of a) A payee who is not maker, drawer or drawee; or b) The drawer or maker; or 4

c) The drawee; or d) 2 or more payees jointly; or e) 1 or some of several payees; or f) The holder of an office for the time being/ Where the instrument is payable to order the payee must be named or otherwise indicated therein w reasonable certainity.

c. Drawee S128: BILL ADDRESSED TO MORE THAN ONE DRAWEE A bill may be addressed to 2 or more drawees jointly, whether they are partners or not; but not 2 or more drawees in the alternative or in succession. A bill may be addressed to 2 or more drawees jointly o But it cant be addressed to 2 or more drawees in the alternative or in succession Bec therell be no certainty as the person to whom the bill shld be presented for payment/acceptance

A) I promise to pay Cat or order the sum of P100 (Sgd) Phil B) o Ex) Pay to the order of myself the sum of P100 (sgd) Cat To: Phil o Ex) I promise to pay myself or order the sum of P100 (sgd) Cat * the payee is the maker but the note payable to the order of the maker isnt complete unless indorsed by the maker 1st C) Pay to the order of yourself the sum of P100 (sgd) Cat To: Phil *payee is the drawee & the drawer of the bill is ordering him to pay himself D) Pay to the order of Cat & Phil the sum of P100 o Payees are constituted jointly & not in the alternatice o When N the instrument, bth of them must indorse E) Pay to the order of Cat or Phil the sum of P100 o Payees are in the alternative o Law dsnt consider the payee as uncertain o Only 1 may demand payment for the amnt o Only 1 needs to indorse the instrument o If payable to the order of A &/or B = alternative F) I promise to pay to the order of Sec of X Assoc the sum of P100 o Payee is certain o 3 diff interpretations: Payee is the person wholl be Sec at maturity Not isnt N, bec until maturity, 1 cant be certain who the payee is Payee may be the Sec at the time of the issuance of the note X desirable bec person conts to be the payee tho no longer Sec Payee may be the person who is the Sec at any particular moment The instrument is a floating promise Most acceptable since the payee is certain & determinable If payees name is misspelled or wrongly designated o Instrument dsnt lose its negotiability o S43: where the name of the payee is wrongly designated or misspelled, he may indorse the instrument as therein described, adding, if he thinks fit, his proper signature o If he can indorse it, this means that even if his name is misspelled, he can still be regarded as having been otherwise indicated w reasonable certainty

S130: WHEN BILL MAY BE TREATED AS A PROMISSORY NOTE Where in a bill the drawer & drawee are the same person, or where the drawee is a fictitious person, or a person not having capacity to contract, the holder may treat the instrument, at his option, either as a bill of exchange or a promissory note. Holder can treat the instrument as a bill or note Otherwise, no 1 can ever be made primarily liable on the bill Since the drawer is resp for naming the drawee, its assumed he intended to be primarily liable Bill names no drawee o If accepted by a 3rd party: the issuer of the bill cant be held liable but the acceptor shld be held as a maker o The instrument is treated as a note Provisions not affecting negotiability

8.

S5: ADDITIONAL PROVISIONS NOT AFFECTING NEGOTIABITLIY An instrument wc contains an order or promise to do any act in addtn to the payment of money is not negotiable. But the negotiable character of an instrument otherwise negotiable is not affected by a provision wc a) Authorizes the sale of collateral securities in case the instrument be not paid at maturity; or b) Authorizes a confession of judgment if the instrument be not paid at maturity; or c) Waives the benefit of any law intended for the advantage or protection of the obligor; or d) Gives the holder an election to require something to be done in lieu of the payment of money. But nothing in this section shall validate any provision or stipulation otherwise illegal. An authorization empowering the holder to sell the collateral b4 the maturity of the note = non-N o Bec this in effect grants the holder an option to accelerate the maturity of the instrument = renders time of payment uncertain

PNB v Manila Oil Refining & By-products Co, Inc Neither the Code of Civ Procedure nor any other remedial statute expressly or tacitly recognizes a confession of judgment = judgment note Judgments by confession appeared at common law were considered amicable, easy & cheap way to settle & secure debts 5

Disadvs to the commercial world outweigh these considerations o Such warrants of atty are void as against pub policy bec they enlarge the field for fraud o This is bec the promissory bargains away his right to a day in Ct & bec the instrument strikes dwn the right of appeal given by law o Recog of this will brng abt a complete reorganization of commercial customs & practices & may be a source of abuse & oppression 2 kinds of judgments at common law: o Judgment by cognovits actionem o Confession relicta verification Unless auth by statute, warrants of atty to confess judgment are void as against pub policy

b)

c) d) e) f) g)

9. Omissions not affecting negotiability S6: OMISSIONS; SEAL; PARTICULAR MONEY The validity & negotiable character of an instrument arent affected by the fact that a) It is not dated; or b) Does not specify the value given, or that any value has been given therefor; or c) Does not specify the place where it is drawn or the place where it is payable; or d) Bears a seal; or e) Designates a particular kind of current money in wc payment is to be made. But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument. Bonds issued by a Corp usually bear its corp seal o Forms part of its signature Date in a bill/note isnt essential to negotiability o If not dated & date is necessary to fix the maturity, the law considers the date of issue as the date of the instrument & allows the holder to insert the true date Not necessary to express that the value was rcvd, bec the instrument is presumed to have been issued for a valuable consideration Place of payment: o Fixed the place where the holder shld present the instrument for payment o Impt but not essential o If no place stated: law says it shld be made at the address of the person whos to pay if stated If not state, the place of business/residence of the person to make payment

Where the instrument provides for the payment of interest, wo specifying the date from wc interest is to rune, the interest runs from the date of the instrument, & if the instrument is undated, from the issue thereof; Where the instrument is not dated, it will be considered to be dated as of the time it was issued; Where there is a conflict btwn the written & printed provs of the instrument, the written provs prevail; Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser; Where an instrument containing the words I promise to pay is signed by 2 or more persons, they are deemd to be jointly & severally liable thereon.

I, we or either of us, promise to pay o When signed by 2 persons, make them solidarily liable o Fact that the promise is worded in the singular indicates that its indiv as to ea signer WE promise to pay o Signed by 2 makers creates joint liability o Rule in Law: in absence of an agreement, debtors are presumed to be bound jointly

Continental Illinois Bank & Trust Co. v Clement If an instrument worded in the singular is executed by several, the oblig is a joint & several one CHAPTER 2: TRANSFER 1. Delivery and issuance S16: DELIVERY; WHEN EFFECTUAL; WHEN PRESUMED - Every contract on a negotiable instrument is incomplete & revocable until delivery of the instrument for the purpose of giving effect thereto Delivery: transfer of possession, actual or constructive, from 1 to anthr Wo initial delivery of the instrument from maker to payee = no liab Delivery shld be intended to give effect to the instrument o Ex) given for safekeeping = X delivery Valid delivery presumed o Once the inst is no longer in the possession of the person who has signed it Can be proved by contrary evidence o If its w a holder in due course: Presumption is conclusive, so long as the inst is complete Issuance of the instrument/issue = 1st delivery

10. Rules of construction S17: COSNTRUCTION WHERE INSTRUMENT IS AMBIGUOUS Where the language of the instrument is ambiguous, or there are omissions therein, the ff rules of construction apply: a) Where the sum payable is expressed in words & also in figures & there is a discrepancy btwn the 2, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amnt;

In re Martens Estate 6

Note here cant be the basis of a valid claim against the estate unless there was leg delivery of the sme, during the lifetime of the decedent 2. Negotiation

a) By signature on instrument or on allonge S31: INDORSEMENT; HOW MADE The indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, wo addtnl words, is a sufficient indrosement. Allonge: indorsement made on a sep paper Common law rule: o Allonge can be validly used only when there is no longer any room on the instrument for further indorsement Otherwise, the transfer wont be sufficient to constitute the transferee a holder Shld be attached to the inst

S30: WHAT CONSTITUTES NEGOITATION An instrument is negotiated when it is transferred from 1 person to anthr in such manner as to constitute the transferee the holder thereof. If payable to bearer it is negotiated by delivery; if payable to order it is negotiated by the indrosement of the holder completed by delivery. S191: DEFINITIONS & MEANINGS OF TERMS - Bearer means the person in possession of a bill or note wc is payable to bearer; Holder means the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof; Negotiation o The transfer of a NI made in such manner that the transferee becomes a holder & thus possibly a holder in due course capable of acquiring a btr title to the inst than that of his transferor o May be for value or by way of gift o Payable to order: Payee or indorsee in possession of it is the holder o Payable to bearer: Person in possession of it is the bearer & holder Transfer o Broader term than negotiation o Includes ordinary assignment & negotiation o Inst transferred wo negotiation = mere assignment Transferee is an assignee 3. Method of negotiation Inst payable to order reqs: o Indorsement by payee/holder o Delivery to transferee/indorsee Becomes the holder Indorsement: o Consists of the sig of the indorser on the back of the inst o Double significance: It constitutes a transfer or sale of the instrument to the indorsee/transferee It signifies the agreement of the indorser to ans for the amnt represented by the instrument in case of default of the maker or the party primarily liable Inst payable to bearer: o Can be negotiated by mere delivery o Common practice: indorse a bearer inst when transferred o Dsnt impair the negotiation but serves as an addtl secu to the transferee, since he can hold the indorser liable 4. How indorsement made

Clark v Thompson, et al NIL: indorsement must be written on the inst itself or upon a paper attached thereto o Law merchant: indorsements to be made upon an allonge, upon a slip of paper tacked or pasted on the instrument so as to become a part of it A written transfer of a note, made on a sep paper to wc it was pinned, there being room on the back of the note itself for the transfer, was an assignment merely, and not a commercial indorsement b) In case of joint payees Inst payable/indorsed to A and B o Joint payees o Indorsement by either A or B only wont constitute a valid N o Unless the 1 indorsing is authorized by the other Inst payable to A or B o Payees are merely in the alternative o Either 1 may validly negotiate the same

c) If name misspelled S43: INDORSEMENT WHERE NAME IS MISSPELLED, AND SO FORTH Where the name of a payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described, adding, if he thinks fit, his proper signature. Indorsement shld be made by the holder in the manner he was designated o Otherwise the signature = not a valid indorsement of the inst

5. Indorsement must be of entire instrument S32: INDORSEMENT MUST BE OF ENTIRE INSTRUMENT The indorsement must be an indorsement of the entire instrument. An indorsement wc purports to transfer to the indorsee a part only of the amnt payable, or wc purports to transfer the instrument to 2 or more indorsees severally, does not operate as a negotiation of the instrument. But where the instrument has been paid in part, it may be indorsed as to the residue. Purpose of the prov: o To protect the obligors from more than 1 axn on the instrument Ex) bill for P100; indorsed P50 to A & P50 to B 7

o No valid negotiation o Neither is a holder but are assignees o Neither can sue on the inst wo bringing the other as a party Where the payees or indorsees are joint (Pay to A & B), the negotiation is valid o The inst is indorsed in its entirety to both A & B Discount of the inst: o Neither ds the prov prohibit a transaxn where the indorsee pays the indorser less than the face amnt of the instrument, title transferring to the indorsee o Discount is given in consideration of the pd during wc the purchaser has to wait b4 he can cash the inst Indorsement wc dsnt compy w s32 o Transfer isnt void, its valid but is an assignment only

no indorsee, & an instrument so indorsed is payable to bearer, & may be negotiated by delivery S40: INDROSEMENT OF INSTRUMENT PAYABLE TO BEARER Where are instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement. S35: BLANK INDORSEMENT; HOW CHANGED TO SPECIAL INDORSEMENT The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement. I need not contain words of negotiability 2 forms o o o of spcl I: Pay X or Pay X or order I of the spcl indorsee is necessary for future N Bearer inst: Pay to X, (sgd)Y is Xs sig is necessary for further N? S40: NO its not needed = applies to originally bearer inst Bec to allow a subsequent holder to control the method of further N casts risks on the obligor (forgery, unauth I) wc he dddnt assume by his contract to pay the bearer N by mere delivery: person who negotiated is liable to his IMMEDIATE transferee N thru spcl I: liable to subsequent holders, unless the inst is an originally bearer inst where hes liable only to those who take title thru his I I in blank: o Specifies no indorsee o Payable to bearer o May be N by delivery o May be converted into a spcl I Write holders name abve the sig of the indorser in blank Blank I followed by spcl I, payable to order: o Spcl I controls due to s34 Further N can only be done thru I of the spcl indorsee S40 dsnt apply S9(3) such an inst ins no longer a bearer inst bec the last I isnt a blank I o Inst payable to order MAY be converted to a bearer inst thru a blank I Wc may be converted to an order inst by spcl I The last I is always controlling for further N o Inst payable to bearer, always REMAINS as bearer inst Regardless of whether the I is in blank or spcl

Blank v Weiden When there has been a purported indorsement of the whole inst, in sep parts to 2 or more transferees, the purported indorsees take leg title to their several shares & may sue together, or any one or more may sue provided all the other indorsees are brought in as parties S60 & 62: intent of s62 is only to deprive the several indorsees of the spcl rights wc the Act fives to holders of properly negotiated instruments o S62 dsnt deprive such indorsees of the rights of ordinary assigness & the irregular indorsement may be treated as an assignment o Purpose of the restrictions in s62 was to prevent a multiplicity of suits 6. Kinds of Indorsements S33: KINDS OF INDORSEMENTS An indorsement may be either special or in blank; and it may also be either restrictive or qualified or conditional a. Basis of classification Sig is sufficient, but addtl words may be added wc may modify the rights of subsequent holders or the liabilities of the indorsers Blank indorsement: Only the sig of the indorser appears ALL indorsements are either: o Spcl or in blank Refers to the future method of N Whether its by indorsement & delivery or delivery alone o Restrictive or non-restrictive Refers to the title transferred o Qualified or unqualified Refers to the scope of liab assumed by the indorser o Conditional or uncond Refers to the presence/absence of express limitations made by the indorser in the primary obligors privileges of paying the holder

b. Special and blank indorsements S34: SPECIAL INDORSEMENT; INDORSEMENT IN BLANK A special indorsement specifies the person to whom, or to whose order, the instrument is to be payable; & the indorsement in blank specifies

c. Qualified indorsement S38: QUALIFIED INDORSEMENT A qualified indorsement constitutes the indorser a mere assignor of the title to the inst. It may be made by adding to the indorsers signature 8

the words wo recourse or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument. Thru I, the indorser enters into 2 contracts: o Contract of sale or assignment of the inst o Contract to pay if the maker is unable to pay on maturity To relive himself of either contract, he shld state so in clear & express terms Adding wo recourse/sans recourse/at indorsees own risk o The indorser relieves himself of the 2nd contract A Qualified indorser merely assumes the 2st contract & agrees to merely transfer leg title to the inst o Hes a mere assignor of the title of the inst o He dsnt guaranty the solvency of the maker but merely his legal title to the inst

Pay 100 by Dec1,2005 if A marries b4 hes 25 o Valid but conditional I o If A dsnt get married, holder can compel maker to pay him o But maker, may disregard the cond & pay the holder Bec makers have the right to terminate his liability on date agreed to by him & cant be burdened w conds werent part of his contract o If maker pays, the holder shld hold the money subj to the rights of conditional indorser o If A dns tmarry, then A will have to deliver the money to conditional indorser

the wc the the

Fay v Witte The words wo recourse or similar words must be used to make the indorser a qualified indorser The exclusion of liability must be expressed by appropriate words & not implied from the transaction Liability of an indorser is implied wo words expressly creating it o To be negative, words shld be used to negate the implication Copeland v Burke Ds the writing over a sig of an express assignment, wc the law imports from the signature per se, exclude & negative the idea of condtional liability, wc the law also imports, if such assignment were not expressed in full? NO Not a qualified I, payee/D may be made liable as an ordinary indorser Those engaged in business transactions are familiar w the term wo recourse If D didnt intend to be bound by this I, he shldve used some words wc clearly indicate that hes not an ordinary indorser Hutson v Rankin N of a note isnt destroyed by a prov that upon default in payment of interest, the whole shall become due d. Conditional indorsement Indorser is liable to pay on 2 conds: o Demand on the party primarily liable & failure to pay o Notice of dishonor promptly sent to indorser Conditional I = cond must be express o X affect negotiability since the orig promise/order remains uncond o All holders after the conditional I take subj to the cond

e. Restrictive indorsement S36: WHEN INDORSEMENT RESTRICTIVE An indorsement is restrictive, wc either: A) Prohibits the further negotiation of the instrument; or B) Constitutes the indorsee the agent of the indorser; or C) Vests the title in the indorsee in trust for or to the use of some other person. But the mere absence of words implying power to negotiate does not make an indorsement restrictive. S37: EFFECT OF RESTRICTIVE INDORSEMENT; RIGHTS OF INDORSEE A restrictive indorsement confers upon the indorsee the right: a) To receive payment of the instrument; b) To bring any action thereon that the indorser could bring; c) To transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so. But all subsequent indorsees acquire only the title of the 1 s indorsee under the restrictive indorsement. A restrictive I either: o Restricts the right of the indorsee to further negotiate the inst; or o Reserves beneficial interest therein in the indorser or in a 3rd person

Tho the inst may be further N, all subsequent indorsees take subj to the rights of the restrictive indorser or the 3rd person

S39: CONDITIONAL INDORSEMENT Where an indorsement is conditional, a party required to pay the instrument may disregard the condition, and make payment to the indorsee or his transferee, whether the condition has been fulfilled or not. But any person to whom an instrument so indorsed is negotiated, will hold the same, or the proceeds thereof, subject to the rights of the person indorsing conditionally.

Pay to X only o Prohibits the further N of the inst, full title passing to X o Pay to X = X a restrictive I for mere absence of words wc imply the power to negotiate wont render the I restrictive Pay to X for collection; Pay to X for my use; Pay to X for my accnt o Commonly used o Constitutes the indorsee an agent to collect in behalf of the indorser o X can rcve payment & sue in his own name o Dsnt pass title nor deprive the maker of any defense he may have on the note o Indorsee may negotiate the inst Subsequent indorsees merely become subsequent agents to collect Pay to X for Ys use o Vests the title of the indorsee in trust for or to the use of sme other person 9

X can rcve payment & sue but he only holds it in trust for Y

7. Indorsement to or by collecting bank I for collection o A restrictive I , bank will merely be an agent I for deposit o Restrictive I bec it makes the bank an agent to collect & credit them as a deposit to the customers accnt o Non-restrictive I, transaxn is a purchse of the check by the bank in cash & a deposit of the cash to the credit of the depositor Whatever kind of I it is = bank is only a collecting agent I made by the depositor wld be in blank o The inst wont therefore show any restriction to the collecting banks title & it seems that title has transferred Deposit slip: usually states that the bank is a mere collecting agent In forwarding NI for collection, banks usually use I o prior Is &/or lack of indorsements guaranteed o Bank has guaranteed the validity of all prior Is as well as the lack of any necessary I for payees account only o Means the check shld be deposited in a bank where the payee has an accnt o Payee has to indorse the check & the bank wld be a collecting agent

Where the holder of an instrument payable to his order transfers it for value wo indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires, in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made. A transferee of an unendorsed inst acquires the legal title of his predecessor o Subj to defenses & equities of available to prior parties o Can sue in his own name o Cant be considered a holder since hes neither a payee or indorsee if sues, needs to prove that hes the owner as a cond precedent to his right to introduce the inst in evidence & to recover Transferee may become a holder by obtaining an I from the transferor o Only then is the inst negotiated Section applies only to an inst payable to the order of the transferor o Hes the spcfd payee or spcl indorsee o Dnst apply to bearer inst Gratuitous transferee: NI being prop may be given as a gift by negotiation o Law says for value

8. Negotiation by joint or alternative payees or indorsees S41: INDORSEMENT WHERE PAYABLE TO TWO OR MORE PERSONS Where an instrument is payable to the order of 2 or more payees or indorsees who are not partners, all must indorse, unless the one indorsing has authority for the others. S8d: an inst payable to 2 or more payees jointly is N o A & B = joint & several liability S8e: payable to one or some several payees is N S41: partners o Any one of the partners of his own name or that of his partner (if auth), who s a co-payee/indorsee may constitute a valid I & effect N Phils: partnership is a juridical person o if intend to negotiate to a partnership, the firm name shld be indicated & not the partners o if partners are named, the proceeds belong to them & not the partnership o for a partnership to negotiate the inst, the person signing FOR the partnership must have implied or express auth to do so (ex. Natl Bkstre Inc. By: A) 2 joint payees: o If 1 indorses & delivers the inst to the co-payee = this transfers full title If payable to alternative payees or o Either may negotiate the inst

Donee can sue on the inst, but doesnt have the right to compel the I of his donor

Simpson v First Natl Bank of Roseburg Where 1 person agrees to transfer a note to another, the law implies that the transfer is to be made by I, unless a diff agreement is made, & that in the absence of an agreement to the contrary, transferee is entitled to a simple or an unqualified indorsement 10. Cancellation of indorsements S48: STRIKING OUT INDORSEMENTS The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out & all indorsers subsequent to him are thereby relieved from liability on the instrument. Payable to bearer: o Indorsements may be cancelled= unnecessary to his title o If so any indorser whose sig is cancelled & all subsequent indorsers are discharged Payable to order: o Contains Spcl Is: all are necessary to holders title bec I of a spcl indorsee is necessary for further negotiation And the last indorsement controls the method of further negotiation o Cancellation is proper where the inst is indorsed back to a previous owner The reacquirer may strike out his own I 10

9. Unindorsed instruments S49: TRANSFER WO INDORSEMENT; EFFECT OF

11. Indorsement by agent S44: INDORSEMENT IN REPRESENTATION Where any person is under obligation to indorse in representative capacity, he may indorse in such terms as to negative personal liability. Auth of the agent need not be in writing In signing, the agent shld make it plain that hes signing in behalf of the principal, otherwise hes personally liable

That he took it in GF and for value; 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. *all must concur 1. Rights of a holder in due course S57: 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. S58: WHEN SUBJECT TO ORIGINAL DEFENSES 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 nonnegotiable HDC can acquire btr title than his predecessors since he takes the inst free from any defect of title of prior parties Holder not in due course = transferee o this dsnt affect the N of the inst only affects the Hs rights 2.

c) d)

12. Presumption as to indorsements S45: TIME OF INDORSEMENT; PRESUMPTION Except wher an indorsement bears date after the maturity of the instrument, every negotiation is deemd prima facie to have been effected before the instrument is overdue. S46: PLACE OF INDORSEMENT; PRESUMPTION Except where the contrary appears, every indorsement is presumed prima facie to have been made at the place where the instrument is dated. Indorsements after maturity are good to transfer title, but they prevent a holder from becoming a holder in due course Presumption that every negotiation was effected b4 the inst was overdue is impt, since Is are usually not dated

S42: EFFECT OF INSTRUMENT DRAWN OR INDORSED TO A PERSON AS CASHIER Where are instrument is drawn or indorsed to a person as cashier or other fiscal officer of a bank or corporation, it is deemed prima facie to be payable to the bank or corporation of which he is such officer & may be negotiated by either the indorsement of the bank or corporation, or the indorsement of the officer. Inst for a corp: corp is usually named as the indorsee corp: dnst include cities or towns

Holder for value a. What constitutes value S24: PRESUPTION OF CONSIDERATION Every negotiable instrument is deemed prima facie to have been issued for valuable consideration; and every person whose signature appears thereon to have become a party thereto for value. S25: CONSIDERATION; WHAT CONSTITUTES Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time. S191: value means valuable consideration NI may be given as a gift o Subj to all defenses But if the holder gave valuable consideration & s52 is complied w = HDC Value need not be full: can give less than the face value of the inst Whats impt its the intent to transfer the represented by the inst full amnt

13. Continuation of negotiable character S47: CONTITNUATION OF NEGOTIABLE CHARACTER An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise. NI tho overdue, retains its negotiability o Unless paid or restrictively indorsed to prohibit further negotiation

CHAP3: HOLDER IN DUE COURSE S52: WHAT CONSTITUTES A HOLDER IN DUE COURSE A holder in due course is a holder who has taken the instrument under the ff conditions: a) That it is complete & regular upon its face; b) That he became the holder of it before it was overdue, and wo notice that it had been previously dishonored, if such was the fact;

Elgin National Bank v Goecke Replacement of collateral is sufficient value b. Bank credit as value When a holder of a check deposits it w his bank (not the drawee bank) & the bank credits it to his accnt, the bank becomes a holder for value ONLY when the depositor w/draws the amnt of the deposited inst o Whether w/drawal is b4 maturity or b4 the bank rcves notice of any defense = the bank is a HDC To det if the amtn has been w/drawn: 11

Follow the 1st money in is presumed to be the 1st money out

Merchants National Bank vs. Sta Maria Sugar Mere discounting of note and placing amount to credit of holder would NOT have constituted a transfer for value If sum subsequently checked out, value would have passed Rule: First money in is the first money out o First payments to the oldest debts o First debits charged against the first credits National Bank of Commerce vs. Morgan Bank has a right to apply all unchecked deposits against the debts due it by the depositor c. What constitutes a holder for value Sec 26: WHAT CONSTITUTES A HODLER FOR VALUE Where value has at anytime been given for the instrument, the holder is deemed a holder for value in respect to all parties who became such prior to that time. A (no consideration) B (no consideration) - C (given value by D) D o D is a HFV as regards to A, B, C A (no consideration) B (given value) C (given by way of gift) D o D is a HFV as against A & B, but not C Mere fact that the present holder paid nthng for a note or isnt a HFV dsnt preclude recovery o Result is that its subj only to defenses against the orig payee

S28 says: absence or failure of consideration is a matter of defense as against any person not a HDC WON the words for value rcvd appear in the inst is immtl o Presumption fills the gap prima facie presumption (can be rebutted) But presence of the words preclude evidence to show lack of consideration 3. Holder in good faith Due course holding isnt affected by the holders acquisition of knowledge after he has taken the inst

Sec.55: WHEN TITLE DEFECTIVE The title of a person who negotiates an instrument is defective within the meaning of this act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to fraud. Sec.56: WHAT CONSTITUTES NOTICE OF DEFECT To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounts to bad faith. Gross negligence on its own = X constitute notice, since not the equivalent of BF or actual knowledge Notice = actual knowledge or bf a. Notice; bad faith; effect of suspicious circumstances Test in s56 is subjective Bf: can only be proven by circumstantial evidence Gen principle: a person who has knowledge of certain facts is put on inquiry dsnt operate to its full extent in the law of NI Neg in tracking dwn a suspicious circums wc wld put a prudent man on inquiry is not of itself sufficient to prevent recovery If suspicious circums are so obvious = holder is subj to defenses To show: def had knowledge of such facts that his axn in taking the inst amntd to bf o Xnecessary to prove that the def knew the exact fraud Sufficient if the def had notice that there was smthng wrng abt the assignors acquisition of title X necessary that the person knows the particulars or the nature of the frau

d. Where holder has a lien on instrument Sec. 27 WHEN LIEN ON INSTRUMENT CONSTITUTES HOLDER FOR VALUE Where the holder has a lien on the instrument, arising either from contract or by implication of law, he is deemed a holder for value to the extent of his lien. A NI given as collateral for a debt, the holder has a lien on the inst If the amnt of the inst is less than the principal debt secured by the inst, the pledge is HFV for the full amnt debt secured by the inst is less than the sum of the isnt, pledgee can still recover everything, but the excess is held in trust to whoever is entitled to it o HFV only to the extent of his lien If the secured debt is less than the amnt of the inst & there are exiting defenses wc the pledgee had no knowledge of, hes a HDC o But since hes a HFV only to the extent of his lien, can only recover the amnt of the debt Diff from 1 who buys on a discount: He can recover the full amnt tho he paid less

e. Burden of proof Sec.24: PRESUMPTION OF CONSIDERATION Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value.

Unaka National Bank v Butler The purchaser of a negotiable instrument owes no duty to the former holders to actively inquire into the title of the party in possession o The circumstances of suspicion and gross negligence are not of themselves bad faith, but only evidence tending to establish it Vincent R. De Ocampo & Co v Gatchalian, et al 12

Although gross negligence doesnt itself constitute bad faith, it is evidence from which bad faith may be inferred.

collecting bank is bound by his warranties as an indorser and cannot set up the defense of forgery as against the drawee bank." b. Financing company not a holder in good faith as to buyer Usually, a finance Co pays the full price of the prop sold & the note is indorsed to it by the seller, subrogating it to the right to collect the price from the buyer Cts usually protects the buyer against the finance Co if the goods are defective Finance Co: X subj to the defense of failure of consideration & cant recover the purchase price from the buyer Ct: finance Co is better able to bear the risk of the dealers insolvency than the buyer & is in a far btr position to protect his interests against unscrupulous & insolvent dealers

State Investment House v Intermediate Appellate Ct, et al Court takes cognizance of CROSSED checks o 2 parallel lines in the upper left hand corner means that it can only be deposited and not converted into cash o Should put payee on inquiry o Payees duty to ascertain the holders title to check or the nature of his possession o Failing, payee is declared guilty of gross negligence amounting to legal absence of GF not a holder in GF Ocampo vs. Gatchalian: effects of crossing a check o Check may be negotiated only once o To one who has an account with the bank o Serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course Types of Crossed check: o Special Between 2 lines is written the name of a bank or company Drawee should pay only with the intervention of that bank o General Between 2 lines are written the words and Co. or none at all Drawee should not encash but merely deposit Effect of crossing a check relates to mode of its presentment for payment o NIL 72: presentment for payment to be sufficient must be made The holder or some other person authorized to receive in his behalf - depends on instruction stated on the face of the check Bataan Cigar & Cigarrette Factory, Inc v CA NIL dsnt mention crossed checks Negotiability of a check isnt affected by its being crossed, specially or generally It may be legally negotiated from 1 person to anthr as long as the 1 who encashes the check w the drawee bank is anthr bank, or if its specially crossed, by the bank mentioned btwn the parallel lines To preserve credit worthiness of checks, jurisprudence states that crossing a check has the ff effects: o The check may NOT be encashed but only deposited in the bank o The check may be negotiated ONLY once to one who has an accnt w the bank o The act of crossing the check serves as a WARNING to the holder that the check has been issued for a DEFINITE PURPOSE so tha the must inquire if he has rcvd the check pursuant to that purpose, otherwise, he is not a HDC Crossing of checks shld put the holder on inquiry & upon him devolves the duty to ascertain the indorsers title to the check or the nature of his possession Traders Royal Bank v Radio Phils Network o "A collecting bank where a check is deposited and which indorses the check upon presentment with the drawee bank, is such an indorser. So even if the indorsement on the check deposited by the banks client is forged, the

Commercial Credit Corp v Orange County Machine Works When a finance company actively participates in a transaction of this type from inception, counseling, and aiding the future payee, it cant be regarded as a HDC of the note given in the transaction defense of failure of consideration can be maintained c. Effect of purchase at a discount Purchase at a discount, on its own, dsnt constitute BF If offered at a large discount = though the maker is known to be solvent, or the note is secured, or taken from a stranger = might prove bf

Ham v Merritt Mere fact that the purchaser takes the note at a large discount is not sufficient, standing alone, to deprive him of its protection d. Effect of notice before full payment Sec.54: NOTICE BEFORE FULL AMOUNT PAID Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the extent of the amount theretofore paid by him. Notice of defenses b4 acquiring title or b4 paying part of the purchase price = prevents the buyer from becoming a HDC If rcves notice AFTER paying part of the purchse price = HDC as to the amtn paid o If he pays the remainder, cant recover bec will be subj to the defenses paid o Any perfm by the purchaser of the inst o Applies only where the oblig incurred is such that, on discovering the infirmity thereof, hes relived of from all leg oblig to make further payment o X apply if he has given a promise to perf at the time of the transfer e. Constructive notice not sufficient Purchaser of NI isnt charged w notice of defenses or equities disclosed by pub records Nor is he affected by the doctrine of lis pendens notice to an agent is chargeable against the principal 13

f. Notice of accommodation not notice of defect Sec 29: LIABILITY OF ACCOMODATION PARTY An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party. Accommodation party: is a surety for the principal debtor, the accommodated party to whom the same is lent Fact that a holder knew that 1 was only an accommodation party, dsnt prevent the holder from being aHDC 4. Complete and regular Mere failure to affix revenue stamps as reqd by law dsnt render the inst incomplete NOT complete & reg on its face o Inst payable w/in days after date = o Spcfs the date but not the yr of maturity o Blank as to the payee Although the holder can sue on the inst wo filling in the payees name Inst executed in blank & subsequently filled up & issued to the 1st holder who has no knowledge of the execution in blank = HDC But if the 1st holder takes the inst complete in form w knowledge of the orig execution in blank = X a HDC Irreg inst on its face: purchaser isnt a HDC o Subj to ALL defenses & equities (relatd to the irreg or not)

5. Holder before or at maturity wo notice of dishonor S52(b) shldve become a holder b4 its overdue & wo notice that it was previously dishonored Overdue ints = strong indication that it was dishonored o Person shld be put to inquiry Dishonored inst bec of: o Non-acceptance: Refers to a BOE Takes place when the drawee refuses to accept the order of the drawer as stated in the bill May occur b4 date of maturity o Non-payment: Occurs at time of maturity an inst isnt overdue on the day of its maturity

s53: WHERE PERSON NOT DEEMED A HDC Where an instrument payable on demand is negotiated to an unreasonable length of time after its issue, the holder is not deemed a holder in due course. Purchse of a demand inst made outside of reasonable time after issue = purchase of an overdue inst Reasonable time: o S193: regard is to be had to the nature of the inst, the usage of trade or business wrt such inst and the facts of the particular case o Nature of the inst Gen rule: demand notes are intended to circulate longer than checks Demand BOE runs for a pd of time longer than checks but not as lng as demand notes Demand certs of deposit: primarily investment paper, circulate longer than demand notes Evidence of usage of trade or business is admissible to show lapse of reasonable time (usage shld be general & local) Payment of interest may be an impt factor in determining reasonable time Wrt to inst w a fixed maturity but subj to acceleration either automatically or at the option of the holder o Date of maturity is the date for the purpose of determining whether a purchaser is a HDC, unless such purchaser had knowledge of the earlier maturity at the time he acquired the inst o Eg) inst payable in 10 annual installments subj to acceleration Date of maturity: for the purpose of det a HDC, is at the end of the 10yr pd Only effect of taking after maturity: subj to all the defenses & equities

Sec 124: ALTERATION OF INSTRUMENT; EFFECT OF Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized or assented to the alteration and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a holder in due course, not a party to the alteration, he may enforce payment thereof according to its original tenor. If alteration is apparent = inst is irreg o Even if the change may have been authorized or assented to by all the parties concerned o Purchaser shld be put on inquiry as to all the defenses & equities WON connected w the alteration Unauth alteration is apparent & matl: X a HDC, inst is void

Miles City Bank v Askin Meffert v Lawson: The ancient rule of evidence, was that alterations & erasures or written instruments were presumed to have been made at or prior to the time of their execution

Bliss v California Co-Op Producers Possession of the payee or holder of an instl note b4 all instlments are due = X signify dishonor o Holder wld necessarily retain it for collection of the balance RULE: a transferee of an intl note is a HDC as to the instl to mature in the future when the transfer is made, after 1 or more but not all instl are due on its fact unless the past due instl havent been paid & he had no notice of such Le Due v 1st National Bank of Kasson 14

Bill/check/note payable on demand = no exact day of payment is fixed in the inst o Gen rule: it shld be presented for payment w/in reasonable time having in view ordinary business usages and the purposes wc the paper is intended to subserve A bill is overdue when it has come into the hands of an indorser, long after its issue as to charge him w notice of its dishonor, and thus subj it in his hands to the defenses the drawer has

Idaho State Bank v Hooper Sugar Co The matl, intentional & fraudulent alteration of a bill or note by the payee or holder wont only be a defense to an axn on the inst as altered, but also to an axn on the orig indebtedness; and the rule also applies to an indorsee after maturity as he stands in the sme position as his indorser in respect to such Dunn v Okeefee An innocent indorsee isnt barred of his axn by any latent defect in the transfer or concoction of the bill 6. Effect of postdating or antedating Antedated: inst bears a date earlier than the date of its issuance Postdated: inst contains a date later than the date of its issuance

It just subjs him to the rights of the conditional indorser shld he rcve payment b4 the cond is fulfilled A RI wc prohibits further N, dsnt prevent a holder from being a HDC o But if he violates the prohib & indorses it, the latter cant be HDC Theres no valid N RI serves as a notice to a buyer of the prohib to N o RI wc constitutes the indorsee as an agent of the indorser, can vest the form w the rights of a HDC, if his principal, the restrictive indorser, is a HDC o If the principal isnt a HDC, neither is the restrictive indorsee bec hes only an agent of the indorser Any subsequent holder will have the sme rights as the latter Subsequent holders can never acquire rights wc are antagonistic to the indorser-principal since hes merely subagent of the latter o 8. Payee as holder in due course

Normally, payee cant be a HDC bec he has dealt directly w the maker or drawer & must have knowledge of facts wc may create a defense, there may be circums under wc hes insulated from the maker/drawer by a 3rd party, such as a remitter Only if s52 is complied w, can he be a HDC Req of negotiation to the payee by a 3rd person in the course of business o Negative view:The rights of a HDC can only be acquired thru N A payee acquires not by N bec the inst inst indorsed but issued to him Thus hes not a HDC o Answer to this: S191: holder includes payee S30: inst is N from 1 person to anthr Law says person & not holder, in referring to the transferor so that N isnt limited to transfer by a holder, but may include a transfer by the maker or drawer And since holder includes payee, then a transfer from the maker to the payee constitutes N

S12: ANTEDATED OR POSTDATED The instrument is not valid for the reason only that it is antedated or postdated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered, acquires the title thereto as of the date of delivery. Holder can be a HDC, hes not put on inquiry merely bec its ante/postdated Postdated: still payable either at the fixed or determinable future time spcfd therein, or if no time of payment is expressed on demand or after the date of the inst o If postdates wo having sufficient funds in the bank may be estafa Antedated: if dne to evade the effects of Usury law = illegal

Triphonoff v Sweeney

A postdated check isnt a NI if taken b4 the date on wc demand can be made for payment, but is simply an assignment of the rights of the payee & opens the check to all the equity It makes no diff whether a check is ante/postdated its still payable accdg to its express terms 7. Effect of qualified, conditional and restrictive indorsements A QI dnst affect the status of a HDC o Fact that the previous holder I it wo recourse, only means he dsnt want to assume full liability o X imply that theres a defect in the inst or title A CI dsnt, by itself, deprive the holder of the status of a HDC o If s52 is complied w = hes free from defenses o Fact that thers a cond dnst meant theres an infirmity or defect

Howard National Bank v Wilson It is dangerous to cast doubt even upon a payees right to recover when he has taken commercial paper complete & regular on its face, honestly & for value. As such, he is entitled to protection as a HDC. 2 tests based on the rulings of the Ct: o Test of a reasonably prudent man That one tk the inst for value, b4 maturity and under circums wc ddnt operate to charge him w notice of the defense o Test of gf One shld prove affirmatively that he had no notice of the defense 9. Rights of a purchaser from a holder in due course

15

Sec. 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. Holder who takes title to an inst thru a HDC acquires all his rights evn tho the new holder dsnt satisfy any of the reqs of a HDC o Applies even if the purchaser had notice of the defect in title = still free from defenses o Applies even to a purchaser after maturity, WON he tk it w notice o Still applies to a HFV who takes from a HDC, WON he tk it b4 maturity, w/wo notice Reason: if a HDC cant invest his transferee w the rights wc come w his improved position, his status as a HDC wld lose its significance bec the marketability of the inst is seriously hampered Buyer was party to the fraud or illegality affecting the inst, he dsnt acquire the rights of the transferor even if its a HDC Person not an orig party to the inst, but party to the fraud, cant recover even if he bought it from a HDC Holder who reacquires from a HDC & who, when he 1 st held title had knowledge of the defense of a prior party, cant obtain the rights of the HDC even tho he wasnt party to the fraud/illegality Effect if person not a party to the fraud or illegality: o If purchaser had notice & takes frm a HDC = hes a HDC Bec he ds not act wc harms the maker o If purchaser was a prior party, acquires the inst from a HDC = Xa HDC A reacquirer, in negotiating it to a HDC, cuts off the defense of the maker he therefore becomes a party of the fraud thru negotiation = amnts to fraud under s55 But a reacquirer not party to the fraud or illegality of the inst, even if wsnt a HDC the 1st time he had title = may still be a HDC 1 who acquires title from a HDC, even wo paying value & not being part of the fraud/illegality = still a HDC Defenses: X limited to fraud or illegality

10. Presumption in favor of due course holding Sec. 59. WHO IS DEEMED 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. Presumption here applies to HOLDERS only Need to prove: o Genuineness of the makers or drawers sig to estab the existence of the oblig o Genuineness of all indorsements necessary to his title, to estab his link to the maker & his status as a holder Presumption works only to the status of the PRESENT holder o If his rights depend on the previous holders status, he must prove this When presumption applies and holder is deemed a HDC, def will have to prove his defenses if any o If def ds prove it, plaintiff has to prove hes a HDC o Exception: if defs defense is not his own (X a personal defense) Last sentence of s59 Def, aside from proving the defense, will have to prove that the holder isnt a HDC

Van Syckel v Egg Harbor Coal & Lumber Co Common law: 1 who sues on a written contract is obliged, in the absence of admission, to prove the sig of the def b4 the inst can be rcvd in evidence Farmers State Bank v Koffler Prouty v. Robers: No defense to an axn on a note by an indorsee against the maker that the note was obtained from the payee by means of fraudulent representations of wc the indorsee had knowledge when he rcved the note Kinney v. Ruse: Fraud in putting a note in circ w/c will operate as a defense/charge the burden of proof must be a fraud against the def 11. Transferee of unendorsed instrument Sec. 49. TRANSFER WITHOUT INDORSEMENT; EFFECT OF. - Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made. Under this sec, a transferee wo I acquires whatever title the transferor had Ds he acquire the rights of a HDC under s58? Diff opinions o S58 favors a holder so cant apply to 1not a H, like a transferee wo I 16

Lill v Gleason NI is kept negotiable as far as possible until the principal debtor has discharged his oblig o Gen rule: payment by a party other than the principal debtor dsnt discharge the parties prior to the 1 making the payment, and the payment, instead of extinguishing the inst, operates as a transfer of it to the party paying Contract of an indorser for accommodation of the payee is indep of that of the maker Fossum v Fernandez Hermanos, et al Rule: if the orig payee of a note unenforceable for lack of consideration repurchases the inst after transferring it to a HDC, the paper against becomes subj in the payees hands to the sme defenses to wc it wldve been subj if the paper never passed thru a HDC

S49 grants the transferee title but not the rights of a HDC To acquire the rights of the HDC, proper I is necessary o S49 & 58 taken together give title of the previous HDC If transferor isnt a HDC, the transferee is subj to all defenses as if the inst was non-N o This applies even tho the transferee satisfies s52, unless he obtains the formers I o But if at the time of I, the transferee had knowledge of the defense, or obtains I after maturity = cant be a HDC Status as a HDC is determined at the time of the I

Sec. 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. Sec. 55. WHEN TITLE DEFECTIVE. - The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud. S55: circums wc renders title defective & implies the right of the real owner, who was deprived of the inst, to get it back from the guilty holder or any subsequent H, not a HDC o X recover from a HDC Equities refers to claims of O, but term defenses usually includes equities 2. Incapacity

Commercial Bank of Lafayette & Trust Co v Barry Endorsement alone cant constitute 1 a HDC of a note payable to order, notwithstanding s59, for under s191 hes neither a holder bec not a payee or indorsee, nor bearer, bec the inst isnt payable to bearer CHAPTER 4: DEFENSES AND EQUITIES 1. Defenses and equities in general Liabs of signatories to a NI depends on whether there are existing defenses or claims of ownership thereto 2 kinds of defenses: Real defenses Personal defenses Available against all Hs even a HDC can be raised only against Hs not in due course Attaches to the inst itself & generally Those wherein a true contract appears, discloses an absence of 1 of the but for some reason (ie. Fraud), the def essential elems of a contract or where is excused from the oblig to perf the admitted contract is void for all purposes of, for reasons of pub policy Examples: Examples: Forgery Those in s55 Incapacity Want of consideration Fraud in execution Incompleteness of the inst Sme types of duress Lack of delivery of a completed inst Lack of delivery of an incomplete inst

Sec. 22. EFFECT OF INDORSEMENT BY INFANT OR CORPORATION.- The indorsement or assignment of the instrument by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon.

Claims of ownership = equities 2 kinds: Legal equity Equitable equity 1 who possesses leg title to the inst may 1 w equitable title may not recover recover possession thereof even from a possession from a HDC, but can recover HDC from other Hs
Sec. 57. RIGHTS OF 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.

A contract entered into by a minor is voidable & the minor can be held liable thereon unless he ratifies it upon reaching maj o cant be made to restore what he rcved by virtue of the contract, except to the extent hes benefitted S22: if a minor indorses a NI, tho hes not liable on the contract of I, title to the inst passes to his indorsee & the indorsee can recover from the maker free from the defense of minority & free from all personal defenses, if hes a HDC o Also, under s60 if the maker makes a note payable to a minor, he warrants the capacity of the payee to indorse If the indorsee cant collect from the maker & sues the minor (who indorsed the note), the minor can set up the defense of minority o Bec his contract of I is voidable under the law o If the indorsee sues the indorser (person who tk the inst AFTER the minor), indorsee can collect from him bec of s22 & s66 wc says the indorser warrants the capacity of all prior parties o Even if the indorsee knew that a minor was involved, he can still be a HDC Bec knowledge of minority wont constitute notice of defect or infirmity S22 cures this defect/infirmity by allowing title to pass to the minors indorsee Minority: is a real defense available only to the minor & isnt a personal defense available to other parties sme rules apply to a corp wc has no capacity to indorse under its charter persons w no capacity to give consent (insane, demented, deaf-mutes, etc) 17

o o

such incapacity is a real defense as far as the incapacitated person is concerned since his contract lacks the essential elem of consent under s60,61,62,65,66: the maker/drawer/acceptor/indorser admit the capacity of the payee to indorse & therefore they cant set up such incapacity as a defense

o o

His sig isnt on the inst, thus he cant be held liable even by a HDC Fact that 1 is a HDC is immatl since theres no true maker/drawer of the inst

3. Illegality Generally a personal defense not available against HDC A1406, CC: contracts w an illegal cause are void, inexistent & incapable of ratification Since theres no contract, its illegality shld normally be a real defense available Result: contract lacks the essential elem of a lawful cause/consideration, but the law says the defect is a defense available only against Hs not in due course CC: spcfs the contracts wc a void & inexistent NIL: provides that tho a NI may have been issued/negotiated for an illegal consideration, only parties involved in the illegality & subsequent parties who arent HDC are adversely affected by the defect o Ex) gambling note unenforceable btwn the orig parties but valid & enforceable w a HDC Defense of usury: personal o S7, UL: Nothing herein contained shall be construed to prevent the purchase by an inn purchaser of a nego mercantile paper usurious/otherwise, for valuable consid, before matrutiy when theres been no intention on the part of said purchaser to evade the provs of this Act and said purchase wasnt part of the orig usurious transaxn. In cany case, however, the maker of said note shall have the rt to recover fr said orig H the whole int paid by him thereon and, in case of lit, also the costs and such attys fees as may be allowed by the ct. (Act 2655 as amended) A statute may declare a contract void for all purposes, in wc case the defense of illegality becomes real 4. Forgery a. In general

Sec. 23. FORGED SIGNATURE; EFFECT OF. - When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. Sec. 18. LIABILITY OF PERSON SIGNING IN TRADE OR ASSUMED NAME. No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise expressly provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name. S23: forgery is a real defense Person whose sig was forged was NVR a party & nvr consented to the contract wc gave rise to the inst

the sig is wholly inoperative = No1 gains title to the inst Any party subsequent to the forgery wld be unable to acquire any rights against any party prior to the forgery Exception: Where the party against whom its sought to enforce a right is precluded from setting up the forgery or want of auth o WON estoppel is present, will depend on the facts o Whether precluded includes ratification differing views 1 view: a forged sig cant be ratified since ratification involves a rel of agency & a forger dsnt assume to act for anthr Other: theres diff btwn forgery wc amnts to a crime & 1 wc dsnt Ratification is allowed only if it dsnt amnt to a crime Others: 1 whose sig has been forged & who, knowing all the circums, acknowledges the sig is bound as if he signed the note (regardless of WON the acknowledgment amtns to estoppel) 2 sits when a party is precluded to use the defense of forgery: o General indorser subsequent to the forgery warrants amng other things, that the inst is genuine & that its valid & subsisting at the time of the I His warranty prevents him from setting up the defense o An acceptor is precluded from claiming that the drawers sig is forged bec under s62 he warrants its genuineness If a sig of an indorser is forged, a HDC may not go against parties bound to the inst, BEFORE the forgery, for enforcement (since rights of the HDC against them have been cut off by the forged sig) o Neither can he collect from the person whose sig is forged since theres no privity w him unless such person is guilty of estoppel o But the HDC may go after the gen indorser who warranted that the inst is genuine & valid The person whose sig is forged may go after prior parties since hes the real owner of the note& his rights against them arent affected by the forgery o Their sigs are genuine & theyre bound by their contract & are liable S23 DSNT avoid the inst, but only the forged sig o Rights & obligs may exist bec of the inst Person whose sig is forged may recover the inst from the HDC since the H has no right to retain such & shld surrender it to the rightful owner Inst originally payable to bearer: o H of the inst who ddnt know of the forgery can enforce it against the drawer/maker bec he can cancel the forged I it being not necessary to his title o He ddnt acquire his right thru the forged I o But if theres an I after the forged 1, if the H cant recover from the maker, he has a right of recourse agianst the subsequent indorser (bec of his warranty, s62) Unless sig is deemed admitted by the pleadings, burden of proving genuineness of a sig is on the person basing his claim thereon b. Acceptance and Payment under mistake 18

When the drawee accepts or pays a forged instrument Where the drawers sig is forged on a bill or check o If drawee who pays it wo having detected the forgery cant charge the amnt to the drawers accnt o Forged sig is inoperative & dsnt give him the right to discharge it Gen rule: Money paid under mistake may be recovered o Exception: Price v Neal Drawee who has paid an accepted/non-accepted bill, ea of wc bore the forged sig of the drawer, cldnt recover the money paid He shld bear the loss Adhered to by some to uphold the stability of commercial transaxns Bec its essential that there be final settlement btwn the drawee & recipient

i.

Sec. 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. Since the A admits the genuineness of the drawers sig, hes precluded by sec23 from denying liab based on its forgery o Learns of forgery after acceptance, b4 payment = has to pay o Learns of forgery after payment = cant recover bec of s62 warranty Opinions on s62: o Applies only to an accepted bill, dsnt cover 1 paid wo acceptance Payment & acceptance are diff things Payment: discharges the inst Acceptance: implies a continued existence & possible negotiation o Prevailing view: Price v Neal Payment is more than acceptance bec while acceptance is merely an oblig to pay, payment is the discharge of such oblig One who pays necessarily accepts Bec intention of the drafters to codify & make uniform the existing common law or law merchant Bth views prevent a drawee who has paid a forged bill, w/wo acceptance, from recovering Exceptions: from Price v Neal o Person whos guilty of fraud or neg in obtaining a bill, or who hadnt given value therefor, has no right to retain the money paid to him by the drawee by virtue of a forged bill Thus, A can recover from the forger or from 1 who bought from a known forger o Person who takes from a stranger wo making inquiries, wc wldve revealed the forgery guilty of neg & precludes him from retaining the proceeds

P:

Axn brought by Price against Neal Price says Neal was indebted to him for L80 for money he used & rcvd Bill was drawn: o Leicester, 22nd Nov 1760. Sir, 6 wks after date pay Mr. Ruding or order 40 pounds, value rcvd for Mr. Ploughfor; as advised by, sir, your humble servant Bejamin Sutton. Mr Price in Bush-Lane Cannot-Street, London o Indorsed R.Ruding, Anthony Topham, Hammon and Laroche o Received the contents, James Watson & son: witness Edward Neal Bill was I to def, Neal, for valuable consideration Notice of the bill left at Ps hse on the day it became due P sent his servant to call on def to pay the L40 & take up the bill wc was done Anthr bill was drawn: o Leicester, 1st Feb, 1761. Sir, 6 wks after date pay Mr Ruding or order 40pounds, value rcvd for Mr Ploughfor; as advised by, sir, your humble servant, Sutton. To Mr Price in Bush-Lane, Cannot-Street, London o Indorsed: R Ruding, Thomas Watson & son o Witness for Smith, Right & Co P accepted the bill, writing: o Accepted John Price o Back: Messieurs Freame & Barclay, pray pay 40 pound for John Price Bill being accepted, was I by def for valuable consideration & left at this bankers for payment & was paid by order of P, & taken up Bth bills forged by Lee Def Neal acted innocently & bona fide, wo privity or suspicion of the forgeries & paid the whole value of the bills He shld recover his money since it was paid by mistake, on the supposition that they were true genuine bills He cn never recover against the drawer bec there is none & he cant against the forger bec hes hanged Forgery here has been proven, thus it stands even upon the accepted bill Also, 1 bill wasnt accepted consideration was paid by the def b4 P had seen it o Therefore, def tk it upon the credit of the indorsers, not upon the credit of P

Def: P wsnt entitled to recover the money from def Denied payment by mistake; P was negligent & he shldve inquired whether the bill was really drawn on upon him by Sutton or not Theres no fraud w def who acted innocently & bona fide wo privity or suspicion of the forgery & paid value for the bills Issue: Whether the P, under the cirucms of the case can recover back, from def, the money paid on the bills. NO Axn upon the case, for money had & rcvd to the Ps use P cant recover the money, unless it be against conscience in the def to retain it Not unconscientious for def to retain the money, when he has once rcvd it upon a BOE indorsed to him for a fair & valuable consideration, wc he had bona fide paid, wo the least privity or suspicion of any forgery No fraud, no wrong 19

Price v Neal

Incumbent on P to satisfied himself that the bill drawn on him was the drawers hand b4 he accepted & paid for it It wsnt incumbent on def to inquire into this Notice given by def to P of a bill drawn upon him & he sends his servant to pay & take it up The other bill, he actually accepts after wc acceptance, the def innocently & bona fide discounts it P made no objection to the bill at the time of payment P was negligent Def had actual encouragement from P, for negotiating the 2nd bill, from the Ps having wo any scruple or hesitation paid the 1st & he paid the whole value, bonafide If there was neglect in the P, yet theres no reason to throw off the loss from 1 innocent man upon anthr innocent man Extensions of the Price v Neal doctrine 1. Overdraft Rule in Price v Neal creating an exception to the doctrine of payment under mistake has been extended by the Cts to cover the drawee of a bill who honors an overdraft Overdraft: occurs when a check is issued for an amnt mre than what the drawer has in deposit w the drawee bank o Here, the drawee who pays the H of the bill despite the fact tha the drawer has no sufficient funds to cover it, cant recover from the H what he paid under mistake H shld be a bona fide purchaser of the bill otherwise, drawee can recover Drawee has no leg right to recover from the H but has a claim from the drawer for the same 2. Stop payment order ii.

Depositor shld examine his bank statement, cancelled checks, stubs & other records w/in reasonable time to report errors wo delay If neg & delay causes the bank to honor a forged check/prevent it from recovering the amnt it paid on a check, bank is freed from liab 4. Effect of payment indorsements under forged

Here, the drawee can recover the amnt paid since he makes no warranty as to the genuineness of any I But when he learns of the forgery, he shld notify the H to whom he paid promptly if not, may lose his right to recovery if it operates to the latters prejudice If the drawee fails to recover from the H who rcvd payment due to the latters insolvency, he cant recoup his loss by charging it to the drawers accnt o S23:sig is inoperative, therefore the drawee acquired no right to discharge the inst by payment If the inst is originally a bearer isnt, the drawee may debit the drawers accnt inspite of the forged I o Bec its not necessary to 1s title & may be disregarded If the neg of drawee bank is the proximate cause of the collecting banks payment of a forged inst, the former may be held liable But if bth banks are guilty of neg, ea will be weighed considering the amnt floss wc ea shld bear 5. Effect of negligence of drawee in informing recipient of forgery

Issued by the drawer of a check countermanding his 1st order to the drawee bank to pay said check Drawers funds are involved, therefore drawee bank is bound to follow the order provided its rcvd b4 its certification/payment of the check Price v Neal rule: o Extended to cover the sit where the drawee bank, thru oversight/otherwise, pays the check despite the stop order o Bank cant later claim mistake/oversight & recover the money paid to a bona fide H who cashed it o Payment was voluntary bec of the stop order, it had no leg oblig to pay negligence precludes it from recovering If stop order isnt followed & drawee bank paid, this cant be debited to the drawers accnt unless payment discharged a legit debt of the drawer o if drawee bank pays to a fraudulent payee or any subsequent H not in due course, drawer is entitled to a recredit (no legit oblig here) Stop order after certification/acceptance of a check o Bank is under a leg duty to pay & istn liable to the H for dng so 3. Effect of negligence of depositor Banks send a monthly statement re 1s accnt together w cancelled & cashed checks

Clearfield Trust Co v US US v Natl Exchange Bank: US can recover as drawee from 1 who presented for payment a pension check on wc the name of the payee had been forged, inspite of a protracted delay on the US in giving notice o He who presents a check for payment warrants the he has title to it & the right to rcve payment o If he acquired it thru a forged endorsement, the warranty is breached at the time the check is cashed Leather Mfrs bank v Merchants Bank: o Right of the drawee against 1 who presented a check w a forged endorsement of the payees name accrued at the date of payment & wasnt dependent on notice or demand Right to recover is a quasi contractual right, resting on the doctrine that 1 who confers a benefit in misreliance upon a right or duty is entitled to restitution Drawees right to recover accrues when the payment is made Theory of the drawees resp where the drawers sig is forged (Price v Neal) is inapplicable here o The drawee, isnt chargeable w the knowledge of the sig of the payee Prompt notice of the forgery wsnt a cond precedent to suit But lack of prompt notice is a defense o If its shown that the drawee, on learning of the forgery ddnt give prompt notice of it & that damage resulted, drawee cant recover Burden is on the drawee to give prompt notice of the forgery inj to the def being presumed by the mere fact of delay Act 1 who pays forged sig of a payee, is the reason for the loss 20

He can only shift that loss to the drawee only on a clear showing that the drawees delay in notifying him of the forgery caused him damaged 6.

Effect of negligence of drawer in case of forged indorsements on checks Drawer cant be charged by the drawee bank who has paid a check on wc an I has been forged If a check is stolen from a payee/spcl indorsee, the drawer can discover the forged I by mere examination of the cancelled checks o Thus, the reason for the rule that tho a depositor owes a duty to the drawee bank to examine his cancelled checks for forgery of his sig, no such duty as to forged Is If forgery is due to the drawers neg, the forgery isnt discovered until its too late for the bank to recover from the H/forger, then the drawee may properly charge the amnt against the drawers accnt o Drawer, as sn as he knows abt the forged I, shld promptly notify the drawee bank 5.

Alteration of date of payment orig date of maturity controls in determining WON a H is a HDC Matl alteration: o personal def when used to deny liab accdg to the orig tenor of the inst o real def when relied on to deny liab accdg to the altered term s124: makes no distinction wrt presence/absence of fraudulent intent & whether it proves beneficial/prejudicial to the interests of prior parties o inst is avoided in any case s125: spcfs & defines what a matl alteration is o any other alteration wld be non-malt & dsnt affect the liability of any prior party on the inst ex) addtn of words implied by law, changing marginal figures to make them conform to the sum expressed in words they dnt change the leg effect of the inst if erasure is made b4 the issuance by the maker/drawer, no other sigs yet, = no matl alteration bec the inst has no leg existence prior to its issuance o payees name altered after issuance = no buyer (Gf/Bf) can derive title as regards the payee & prior parties addnt of a name malt alteration NIL: apply the common law rule = spoliation dsnt affect the inst, provided the orig meaning can be ascertained b. Effect of negligence of drawer of check GR: denies the drawee banks right to charge against the drawers accnt the amnt of the altered check But drawers neg (b4/after alteration) may estop him from setting up such alteration against an innocent drawee bank who paid it WON such estoppel can apply in favor of a HDC o Sm Cts refuse to apply such estoppel against the drawer in favor of a HDC who despite the drawers neg, is allowed to recover only the orig amnt Since the bank has the duty of honoring checks drawn against it by its depositors, the drawer owes a corresponding duty to his bank to fill in his checks carefully

Material Alteration a. In general Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce payment thereof according to its original tenor. Sec. 125. What constitutes a material alteration. - Any alteration which changes: (a) The date; (b) The sum payable, either for principal or interest; (c) The time or place of payment: (d) The number or the relations of the parties; (e) The medium or currency in which payment is to be made; Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration. A matl alteration changes the contract of the parties o Thus it avoids the inst & discharges all the parties, unless they authorized or consented to the alteration Subsequent indorser is excepted from this rule o Bec by the I, he warrants that the inst is in all respects what it purports to be & that its valid & subsisting at the time of his I HDC may enforce the altered inst accdg to its orig tenor o This presupposes that the alteration ISNT apparent on its face o If apparent, its irreg & no H can be a HDC Alteration of the amnt HDC can recover the orig amnt Alteration of the interest rate HDC can recover the principal sum w the orig rate of interest

On the other hand, 1 to whom a check is negotiated is under no duty to take it the drawer therefore owes him no duty of diligence

neg of the drawer: If drawer cldve discovered the alterations wc cldve prevented the drawee bank from paying such checks, drawee bank can charged the checks against the drawers accnt c. Effect of drawees payment or acceptance of altered check Drawee can recover the diff btwn the orig & altered amnt Ground/reason: o the amnt is paid under mistake; & o s124: a HDC can recover only accdg to the orig & not the altered tenor of the inst expressly provides that a HDC can only recover accdg to the orig tenor of the inst Acceptance: s132 o A signification of the drawee of his assent to the order of the drawer 21

Relating s62: assent to the order of the drawer means assent to the actual, not apparent order of the drawer S139; gen & qualified acceptance o A gen acceptance assents wo qualification to the order of the drawer. A qualified acceptance in express terms varies the effect of the bill as drawn o accdg to the tenor of his acceptance o Means: the kind of acceptance- qualified or general S124: avoids the inst except as against a party whyo has himself made, auth or assented to its alteration & subsequent indorsers o Acceptor: HASNT assented to the alteration bec assent can only mean assent w knowledge of the fact Neither is he a subsequent indorser minority view: s62: the acceptor engages to pay accdg to the tenor of his acceptance & is therefore estopped from recovering o denying such recovery will give stability to checks o and btwn the H & drawee bank, the bank is in a btr financial position to shoulder the loss since it can insure itself against such sits Altered check GR: cant hold the drawee bank responsible for non-apparent alterations o Its bound to know the drawers sig, but unfair to burden it w knowledge of the drawers handwriting Payment by the bank of the altered check is a mistake & shld be effective only to the extent of the orig & NOT the altered tenor of the inst SC has the same conclusion as the minority view but for a diff reason o Drawee bank denied recovery bec of a CB Circular regulating clearing of checks & limiting the pd w/in wc the drawee bank may return spurious checks o No mention of s62 or s124 or NIL

for return shall be sealed in special red envelopes and shall be considered & accounted for as debits to the demanding banks/branches, institutions or entities. Nothing in this section shall prevent direct settlement of returned items btwn the parties concerned Items wc have been the subj of mat alteration or items bearing a forged endorsement when such endorsement is necessary for negotiation shall be returned w/in 24 hrs after discovery of the alteration or the forgery but in no event beyond the pd fixed or provided by law for filling a legal action by the returning bank/branch, institution or entity against the bank/branch, institution or entity sending the same CB circular states that the defective item shld be presented not later than the nxt clearing for local exchanges S1 CB Circular: clearing is conducted at 4pm every business day Thus, defective items shld be returned by the drawee bank not later than 4pm the nxt business day after the check was presented for clearance Exception for Altered check/checks w indorsements Drawee bank can return them after 4pm the nxt day so long as it ds so w/in 24 hrs from discover of the alteration/forgery Cant be returned beyond the prescriptive pd prescribed by law = 10yrs (axn on a written docum; contract btwn the drawee & collecting bank) Thus, drawee bank wc pays only suffers the loss if its neg in returning the check promptly from discovery Circular dsn tpreven trecover from the collecting bank of the amnt paid, but merely prescribes the pd w/in wc recovery may be had o Is amnt is altered: drawee bank can recovery the diff btwn the orig & altered amnt o If any other thing is altered: can recovery in full CB Circular not inconsistent w s124 S124 voids the inst wc is materially latered Circular assumes its nullity & prescribes a pd w/in wc the drawee bank can protect itself from the effects of such nullity

HSBC v Ppls Bank & Trust Co & Rep Bank v CA, place the loss of the altered check on the drawee bank Cant charge the drawers accnt bec of s124 & it cant recover from the collecting bank under these decisions Alteration of the payees name or other matl terms of the check: Alteration not apparent on the face, drawee bank wldnt discover the alteration until informed by the depositor when it has rcvd the cancelled check

Minority view that the drawee cant recover bec of s62 is inconsistent w the clearing house rule 6. Fraud S55: fraud renders a partys title defective o This defective title cant be used as a defense against a HDC & is a personal defense Fraud in factum/fraud in the execution o where the fraud done on the maker/signer to a NI is of such a nature that hes tricked into signing a paper wc he dsnt know is a NI, he cant be held liable to any H, not even a HDC o there was no real consent to be bound bec of lack of knowledge of certain facts o Real defense Fraud in the inducement = found in s55 o If the signer knows its a NI, but is deceived as to its value/terms o Personal defense, available only against H not in due course Signer dsnt know the nature of the inst he signs but cldve discovered fraud here is only a personal defense o Q of WON there was neg is one of fact o 3 factors to det neg: (Am Cts) 22

Bec of s124 it has to recredit the drawer w the amnt of the check When it rcvs the check from the clearing hse, check looks reg on tits face = nthng to warn abt the defect thus, all the bank shld do is check the sufficiency of the drawers accnt Impractical to req the bank to check w the drawer the correctness of the terms of the check But this is the doctrine from HSBC New CB issued bec of the unfair effect of the old circular on drawee banks: Items wc shld be returned for any reason whatsoever shall be presented not later than the next regular clearing for local exchanges. Out of town exchanges shall be returned w/in the pd specified in the Memorandum to Authorized Agent Banks announcing the opening of clearing centers. Items

The leg charac of the inst wc the signer thinks hes signing The physical cond of the signer & his ability to read Whether the signer had the opp at the time of signing, to ascertain the leg nature of the paper hes execution Inability to read = X neg But circums may show that liability to a HDC may exist

Sec. 15. Incomplete instrument not delivered. Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. Real defense & not even a HDC can recover on the inst since the law says its not a valid contract in the hands of ANY H S16s conclusive presumption dsnt apply But possession of an incomplete inst raises a prima facie presumption of delivery If an inst contains all the requisites for making it a negotiable 1, it shld be considered complete tho in fact may have blanks as to non-essentials, so as to give rise to a conclusive presumption of delivery in favor of a HDC Maj of Cts: as against a drawee bank, drawer is estopped to rely on s15 if his negligent custody of the checks, after partial execution, contributed to its escape S15 says any H thus, those not Hs under NIL arent included o Drawee isnt a H 10. Incomplete instrument wc has been delivered Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. its a personal defense contemplates a delivered inst Covers 2 kinds of writings: o Incomplete instruments Writing wc tho containing blanks, is so far completed that its an inst Ex) writing recites enuf of the formal reqs to make evident the intention to make the writing operate as a NI Here, any person in possession thereof has prima facie auth to complete it by filling up the blanks Person in possession = X apply to a thief or finder Means lawful possession 1 to whom it was delivered Blank paper or paper so far incomplete that it dsnt constitute an inst w/in the meaning of the defn of the term, but signed 23

Ex) if a 3rd party is present & he ddnt request such person to read the paper to him & just relies on the statements of the person hes dealing w

o 7.

But no neg if the 3rd person is associated w the person inducing the signing Person who can read = generally neg But there may be circums wc will release him from liab

Duress

s55: makes title defective Normally, merely a personal defense wc cant be used to defeat the rights of a HDC Exception: where duress employed is so serious that it will give rise toa real defense o Bec of the lack of contractual intent o Tho signer may know what hes signing, he may be wanting the intent/willingness to be bound If signer dsnt act in accordance w his own will but w that of anthr, bec of a well-founded fear of an imminent & serious inj = duress is a real defense

8. Complete inst wc is undelivered Sec. 16. Delivery; when effectual; when presumed. Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved. Non-delivery of a complete inst = personal defense available only btwn immediate parties & as regards remote parties who arent HDC o Applies even if the inst is payable to bearer Delivery: pre-req for liability o Complete inst, no delivery = no contract Delivery presumed: If inst is no longer w the signor o If its w a HDC, its not merely prima facie deemed delivered but conclusively presumed 9. Incomplete instrument wc is undelivered

2 conds shld be present b4 the presumption of auth to complete may arise: Delivery of the inst Delivery for the purpose of converting it into a NI o If no such intention is present, subsequent conversion into a NI wont render the person signing liable to any1 not even a HDC Burden on proving that there was no auth or auth granted ws exceeded on the person questioning such o But, even if the auth is exceeded, if the inst is in the hands of HDC he can enforce it as if it was filled up strictly in accordance w the auth given o If not a HDC, since it wsnt filled up in accdrnce w the auth = no recovery Signed blank paper: law says theres prima facie auth to fill it up for any amnt o includes auth to fill in other blanks Esp as to all missing reqs necessary to make it a NI o S14: broad enuf to include filling in blanks for time of payment o S13: When date may be inserted. - Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a 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 is to be regarded as the true date. Insertion of the wrong date, by 1 who knows the true date of issue = avoids the inst as to him Innocent party can enforce the inst still o Issued blank as to payees name 1st or subsequent H can insert his own name or the name of the person he negotiates the inst, unless theres express auth to the contrary Auth to fill in blanks/complete the inst is limited as to time o To be enforceable against a party b4 completion, it shld be filled in w/in reasonable time o Reasonable time: from the time of the issuance of the inst o S193: regard is to be had to the nature of the inst, the usage of trade/business wrt such insts, & the facts of the particular case Whether unreasonable time has elapsed or not wld be immatl, if the user had expressly fixed the time w/in wc completion may be made

Reiterates sec 241 rule: every instrument is deemed prima facie to have been issued for a valuable consideration. Also consistent w/ sec 6(b)2: validity & negotiable character of an instrument is NOT affected by the fact that it does not specify that any value has been given therefore Sec 24 and sec6(b) place burden of proving that there was no consideration for the instrument on the defendant Sec 28 goes farther: in EFFECT, it makes absence or failure of consideration only a PERSONAL defense available ONLY against holders NOT in DUE COURSE. (personal defense + NOT available against HDCs) In the hands of HDC = Presumption of consideration CONCLUSIVE Policy: ACCEPTABILITY of negotiable instruments would greatly be restricted if prospective purchasers were burdened w/ the need of determining whether such instruments are supported by consideration FAILURE OF CONSIDERATION = something was agreed upon as consid for a contract but for some reason the consid did not materialize In a contract of sale, A engages to sell merchandize to B; in consid thereof, B makes a PN payable to A as advance pymt; A fails to deliver merchandise = failure of consid 1. A (seller-payee) cant recover from B (maker) 2. A negos PN to C 3. If C=knew that A failed to deliver = X recover fr B 4. If C = ignorant of such defense + HDC = recover fr B PARTIAL FAILURE OF CONSIDERATION = part of the consideration did not materialize

ABSENCE OF CONSIDERATION = TOTAL LACK of consid

A makes a PN payable to B as a GIFT; there is absence of consid - NO recovery bet A & B - if B negotiates to C - C=HDC - As defense=absence of consid=personal = C can recover vs A

Same contract of sale example; A delivered PART of the merchandise and failed to deliver the rest = partial failure of consideration; - may be set up as a defense pro tanto by B (maker) vs A (sellerpayee) or a holder NOT in due course = B not liable to the extent of the price of the undelivered portion

11. Consideration Sec. 28. Effect of want of consideration. - Absence or failure of consideration is a matter of defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise.

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

2 Sec. 6. Omissions; seal; particular money. - The validity and negotiable character of an
instrument are not affected by the fact that: (b) does not specify the value given, or that any value had been given therefor;

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