INDORSEMENT

• ASSOCIATED BANK V. CA
• 208 SCRA 465
•
FACTS:
• Reyes was engaged in the RTW business and held transactions with different department stores. She was about to collect payments from the department stores when she was
informed that the payments had already been made, through crossed checks issued in her business’ name and the
same were deposited with the bank. The bank consequently allowed its transfer to Sayson who later encashed the checks. This prompted Reyes to sue the bank and its manager
for the return of the money. The trial and appellate court ruled in her favor.
HELD:
• There is no doubt that the checks were crossed checks and for payee’s account only. Reyes was able to show that she has never authorized Sayson to deposit the checks nor
to encash the same; that the bank had allowed all checks to be deposited, cleared and paid to one Sayson in
violation of the instructions in the said crossed checks that the same were for payee’s account only; and that Reyes maintained a savings account with the bank which never cleared
the said checks.
Under accepted banking practice, crossing a check is done by writing two parallel lines diagonally on the top left portion of the checks. The crossing
is special where the name of a bank or a business institution is written between the two parallel lines, which means that the drawee should pay
only with the intervention of the company. The crossing is general where the words written in between are “And Co.” and “for payee’s account only”, as in the case at bar. This means
that the drawee bank should not encash the check but merely accept it for deposit.
The effects of crossing a check are as follows:
1. That the check may not be encashed but only deposited in the bank
2. That the check may be negotiated only once—to one who has an account with a bank
3. That the act of crossing the check 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 the
purpose
The subject checks were accepted for deposit by the bank for the account of Sayson although they were crossed checks and the payee wasn't Sayson
but Reyes. The bank stamped thereon its guarantee that all prior endorsements and/or lack of endorsements guaranteed. By such deliberate and positive act, the bank
had for all legal intents and purposes treated the said checks as negotiable instruments and accordingly assumed the warranty of the endorser.
When the bank paid the checks so indorsed notwithstanding that title has not passed to the endorser, it did so at its peril and became liable to the payee for the value of the checks.
• 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.
APPLICATION OF SECTION 27
• • Suppose that A makes a note in the sum of P1000 payable to the order
of B. B owes C P600. C is said to have a lien on the note to the extent of P600 only, and
to that extent, he is a holder for value.
• Can C as indorsee collect the whole amount of P1000 from A, or only P600? It depends. If A
maker, has defenses against B indorser, such
as absence of consideration, C, even if a holder in due course can collect only P600 from A,
the extent of his lien.
• Reason for the rule: C is actually a holder in due course for P600
only. He is a holder in due course for such as he is a holder for value for only P600. For
the balance of P400 he is not a holder for value, and since being a holder for value is one of the
requisites of a holder in due
course, he cannot be a holder in due course as far as the P400 is concerned.
• If A has personal defenses, he cannot use such as far as the P600 is concerned.
• If A on the other hand has real defenses, C cannot collect anything.
• But if A maker doesn't have any defenses at all against B indorser, then C can collect the
whole amount of P1000 and hold the P400 for
the benefit of B.
• Sec. 26. What constitutes holder for value. -
Where value has at
any time been given for the instrument, the holder is
deemed a holder for value in respect to all parties who
become such prior to
that time.
MEANING OF A HOLDER FOR VALUE
• • One who gives valuable consideration for an
instrument issued or negotiated to him is a holder for value
• • Not limited to one who is known to have given v
aluable consideration for the instrument he holds—it refers
to any holder of an instrument for which value has been
given at any time
• Sec. 25. Value, 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.
• VALUABLE CONSIDERATION, IN GENERAL
• • Consideration is the inducement—
cause or impelling influence which induces a contracting party to enter
into the contract
• • Valuable consideration may in general terms be said to consist either
in some right, interest, profit or benefit accruing to the party who
makes the contract, or some forbearance, detriment, loss or some
responsibility to act, or labor, or service given, suffered, or undertaken by
the other side
• CONSIDERATION
•
Sec. 24. Presumption of consideration. - Every negotiable
instrument is deemed prima facie to have been issued for a valuable consideration; and
every person whose signature appears thereon to have become a party thereto for value.
PRESUMPTION OF CONSIDERATION IS DISPUTABLE
• • One of the disputable presumptions laid down by our Rules of Court is
that a negotiable instrument was given or indorsed for a sufficient consideration
CONSIDERATION NEED NOT ALLEGED OR PROVED
• • In an action based on a negotiable instrument, it is unnecessary to aver or prove
consideration for it is imported and presumed from the fact that it is a negotiable instrument
MERE INTRODUCTION OF INSTRUMENT SUFFICIENT
• • The mere introduction of the instrument sued on in evidence, prima
facie entitles the plaintiff of a recovery and unless such prima facie case is overcome by
evidence produced by the defendant the plaintiff is entitled to recover
EFFECT OF LACK OF CONSIDERATION
• • The same is without legal effect and the payment for the note is not demandable
• NEGOTIATION OF NEGOTIABLE INSTRUMENTS
•
Sec. 30. What constitutes negotiation. -
An instrument is
negotiated when it is transferred from one person
to another 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 indorsement of the holder an
d completed by delivery.
• METHOD OF TRANSFER
• 1. By assignment
2. By operation of law
3. By negotiation, which may be completed
by indorsement completed by delivery or by
mere delivery
• ASSIGNMENT
• • Method of transferring a non-
negotiable instrument whereby the assignee is merely
placed in the position of the assignor and acquires
the instrument subject to all defenses that might have
been setup against the original payee

• MODE OF ASSIGNMENT
• • Differs in no respect from that of any other contract
• Although some sort of written instrument
is customarily employed, it may be written either on the
instrument itself or on a separate piece of paper
• EFFECT OF ASSIGNMENT OF A NON-NEGOTIABLE INSTRUMENT
• • The effect of the assignment is that the party holding the right drops
out of the contract and another takes his place
• The assignee is substituted in place of the assignor
• The assignee and every subsequent person to whom the instrum
ent comes by assignment may be considered as the person who made the
instrument in the first instance and as having said and done
everything in making the instrument which the original assignor did or
said.
• Each assignee takes his chance as to the exact position in which any
party making an assignment of it stands
• And as it is called in law, the assignee takes the contract subjec
t to equities, that is, to defenses to the contract which would avail in favor
of the original party up to the time the notice of the assignment is
given to the person against whom the contract is sought to be
enforced
• ASSIGNMENT OF A NEGOTIABLE
INSTRUMENT
• • A person taking a negotiable instrument
by assignment in a separate piece of paper
takes it subject to the rules applying to
assignment
• And where the holder of a bill payable
to order transfers it without indorsement,
it operates an equitable assignment
• TRANSFER BY OPERATION OF LAW
• 1. By the death of his holder where the t
itle vests in his personal representative, or
2. By the bankruptcy of the holder, where
title vests in his assignee or trustee
3. Upon the death of a joint payee or in
dorsee in which case the general rule is that
the title vests at once in the surviving payee or
trustee
• NEGOTIATION
• • Transfer of the instrument from one p
erson to another in such a manner as to
constitute the transferee the holder thereof
• May either be by indorsement complet
ed by delivery or by mere delivery
• IS DELIVERY TO PAYEE A NEGOTIATION?
• • First view: no because negotiation refe
rs to an existing negotiable
instrument and before delivery to the paye
e, the instrument is incomplete.
• Second or better view: under this secti
on and section 191, an
instrument is negotiated when it is delivere
d to the payee or to an indorsee
LIABILITY OF ACCOMODATION PARTY
IN NEGOTIABLE INSTRUMENTS
• Sec. 29. Liability of accomodation party. -
An accomodation
party is one who has signed the instrument
as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the
purpose of lending his name to some other
person. Such a person is liable on the
instrument to a holder for value,
notwithstanding such holder, at the time of
taking the instrument, knew him to be only an
accomodation party.
• ACCOMODATION PARTY: REQUISITES
• • One who has signed the instrument as m
aker, drawer, indorser, acceptor, without
receiving any value therefore and for the purpose
of lending his name to some other person
• Requisites:
1. He must be a party to the instrument, signing
as maker, acceptor, indorser, or drawer
2. He must not receive any value therefore
3. He must sign for the purpose of lending his
name or credit
• RIGHTS AND LEGAL POSITION OF AN
ACCOMODATION PARTY
• • The accomodation party is generally regar
ded as a surety for the party accomodated
• When the accomodation parties make
payment to the holder of the
notes, they have the right to sue the accomo
dated party for
reimbursement since the relation between the
m is in effect that of a principal and sureties,
the accomodation parties being the sureties
• ACCOMMODATED PARTY CANNOT RECOVER
FROM ACCOMMODATING PARTY
• • Absence of consideration is a defense
• In fact as between them, the understanding
is that the accomodated party either is to
1. To reimburse the amount which the
accomodation party may be obliged to pay
2. To pay the instrument directly to the holder
• LIABILITY OF THE ACCOMODATION PARTY
• • The accomodation party is liable on the instrument to a holder in
value, notwithstanding such holder at any time of the taking of the instrument knew him to
be only an accomodation party
• The accomodation party doesn't receive any valuable consideration for the instrument he
signs but he is liable to a holder for value as if the contract wasn't for accomodation
CORPORATIONS ARE NOT LIABLE AS ACCOMODATION PARTIES EVEN TO HOLDERS FOR VALUE
OFFICERS SIGNING FOR CORPORATION AS ACCOMODATION PARTY
WITHOUT AUTHORITY TO DO SO FOR THEIR INDIVIDUAL DEBTS OR TRANSACTIONS ARE
PERSONALLY LIABLE THEREON
HOLDER MUST OTHERWISE BE A HOLDER IN DUE COURSE
ACCOMODATION PARTY MAY ACCOMODATE ONE WHO IS NOT A PARTY TO THE INSTRUMENT
ACCOMODATION PARTY CAN INTERPOSE DEFENSE OF WANT OF
CONSIDERATION AGAINST ONE NOT HOLDER IN DUE COURSE.
 INDORSEMENT OF NEGOTIABLE
INSTRUMENTS
• Sec. 31. Indorsement; how made. -
The indorsement must be written on the
instrument itself or upon a paper attached
thereto.
The signature of the indorser, without add
itional words, is a sufficient indorsement.
 NATURE OF AN INDORSEMENT
• • It is not only a mode of transfer
• It is also a contract
• Every indorser is a new drawer and the terms are found on the face of
the bill or note
• The indorsement of the bill or not implies an undertaking from
the
indorser to the person in whose favor it is made and to every other
person to whom the bill or note may afterwards be transferred, exactly
similar to that which is implied by drawing a bill except that, in the
case of drawing a bill, the stipulations with respect to the drawer’s
responsibility and undertaking don't apply
• The general indorser in effect, states to every person who
follows him—this instrument will be paid by the maker, if a note, or
accepted the drawee or paid by the acceptor, if a bill. If it is dishonored
by
non-payment or non-acceptance, and you give me notice thereof, I will
pay it.
 WHERE THE INDORSEMENT IS
WRITTEN
• • The indorsement may be written on th
e instrument itself or upon a paper
attached thereto
• Allonge: paper attached to the
instrument
• MAY ALLONGE BE USED WHERE THERE IS RO
OM ON INSTRUMENT FOR INDORSEMENT?
• • It has been held that the use of an allon
ge is allowable only when
there is a physical impossibility of writing the
indorsement on the
instrument itself, and an indorsement on a se
parate piece of paper where there is sufficient
space on the instrument for indorsement will be
considered as a mere assignment and not a
negotiation
• HOW INDORSEMENT WRITTEN?
• • Means must show that there is indorsement
• Sec. 32. Indorsement must be of entire instru
ment. - The indorsement must be an indorsement
of the entire instrument. An indorsement which
purports to transfer to the indorsee a part only
of the amount payable, or which purports to
transfer the instrument to two 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.
• INDORSEMENT MUST BE OF THE WHOLE
INSTRUMENT
• • The general rule is that the instrument
must be of the entire instrument
• Accordingly, an indorsement of a part
of the instrument doesn't operate as a
negotiation thereof
• EFFECT OF PARTIAL INDORSEMENT
• • It doesn't operate as an indorsement
• It may constitute a valid assignment though binding betwe
en the parties
• The person to whom the instrument is indorsed would no
t be
considered an indorsee but merely an assignee and would ther
efore
take the instrument subject to the defenses available between
the original parties

• EXCEPTION
• • But where the instrument has been paid in part, it may be
indorsed as to the residue
• TRANSFER TO TWO OR MORE INDORSEES SEVERALLY
• • An indorsement which purports to transfer the instrument to two or
more indorsees severally, doesn't operate as a negotiation of the instrument

• MONTINOLA V. PNB
• 88 PHIL 178
•
FACTS:
*Remember the case with the Japanese occupation and the mutilated
check.
HELD:
Where the indorsement of the check was only for a part of the amount
payable, it is not legally negotiated within the meaning of Section 32, which provides that the
indorsement must be an indorsement of the entire instrument. An indorsement which purports to
transfer to the indorsee a
part only of the amount payable doesn't operate as a negotiation of the
instrument. Montinola may therefore be not regarded as an indorsee. At most he may be regarded
as a mere assignee of the P30,000 sold to him.
• In which case, as an assignee, he is subject to the defenses available to the drawer Provincial
Treasurer. Sec. 33. Kinds of indorsement. - An indorsement may be either special or in blank;
and it may also be either restrictive or qualified or conditional.
• KINDS OF INDORSEMENT
• 1. Special
2. In blank
3. Absolute
4. Conditional
5. Restrictive
6. Qualified
7. Joint
8. Successive
9. Irregular
10. Facultative
• Sec. 34. Special indorsement; indorsement
in blank. - A special indorsement specifies
the person to whom, or to whose order, the
instrument is to be payable, and the
indorsement of such indorsee
is necessary to the further negotiation of
the instrument. An indorsement in blank
specifies no indorsee, and an instrument so
indorsed is payable to bearer, and may be
negotiated by delivery.
• SPECIAL AND BLANK INDORSEMENT
•
• HOW FURTHER NEGOTIATED
• 1. Where the instrument is originally payable to order and it is
negotiated by the payee by special indorsement, it can be further
negotiated by the indorsee of the instrument completed by delivery
2. Where the instrument is originally payable to order and it is
negotiated by the payee in blank indorsement, it can be further
negotiated by the holder by mere delivery. The reason is that the
effect of a blank indorsement is to make the instrument payable to bearer
• 3. Where the instrument is originally payable to bearer, it can be
further negotiated by mere delivery, even if the original bearer
negotiated it by special indorsement
• Sec. 35. 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.

• APPLICATION OF SECTION 35
• • Suppose that A makes a note with B as payee. It is indo
rsed as follows:
o (Indorsement in blank) (Sgd.) B.
• Delivery was then made to C. C may place above the signature
of B, “Pay to C.” so as to make the indorsement thus:
o Pay to C.
(Sgd.) B.
• This converts the blank indorsement to a special indorsement
• LIMITATION UPON CONVERSION OF BLANK
INDORSEMENT
• • Holder must not write any contract not co
nsistent with the
indorsement, that is, the contract so written must
not change the contract of the blank indorser
• The following has been held to be inconsistent
with the contract of blank indorsement—“pay to X
and Y”, “Demand and notice waived”, “I guaranty
payment”, “Without recourse”
• Sec. 36. When indorsement restrictive. -
An indorsement is restrictive which 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 persons.
But the mere absence of words implying power to
negotiate does not make an indorsement restrictive.
• PROHIBITION OF FURTHER NEGOTIATION
• 1. Pay to C only
2. Pay to C and no other person
INDORSEE AGENT OF THE INDORSER
• Known as the agency-type of indorsement
“Pay to C for collection”
(Sgd.) B
• Hence, any action the indorsee may file is subject to defenses available
against the indorser such as lack of consideration
• Thus, where the proof tends to show that the plaintiff holds the draft
for collection only, and that the acceptance of it by defendants was
conditional, and that after such an acceptance, the defendants refused
to accept the goods evidenced by the draft, which were returned to
and accepted by the plaintiff, who agreed to release the defendants from any
liability, plaintiff thereafter cannot recover
• NDORSEMENTS FOR DEPOSIT
• • An indorsement for deposit constitutes the indorsee the agent of
the indorser
• “Pay to C for deposit (Sgd.) B”—such an indorsement, like an
indorsement for collection, constitutes a relation of title in the
depositor in the absence of any practice or agreement to the contrary
• In any event, a restrictive indorsement of an instrument for collection
or deposit, or to the use of the indorser and for his benefit, in the
absence of any other circumstances, will not divest the indorser of his title
thereto until the money is paid
• Indorsements for deposits are usually informal

• VESTS TITLE IN INDORSEE IN TRUST FOR ANOTHER

• 1. Pay to X in trust for C
2. Pay to X for use of C
• CAN THE MAKER SET UP AGAINST THE INDORSEE HIS DEFENSES AGAINST THE RESTRICTIVE
INDORSER?
• There are two views to this question:
1. Sulbrason-Dickinson v. Hopkins: an indorsement to A for the
benefit of B was held restrictive under Section 47 of the NIL,
making the indorsee and its successors subject to the good defenses against the restrictive
indorser
2. Some learned writers held this view to be unsound. Thus, it has been held that the indorsee of
a check indorsed in trust for a third
person who is a holder in due course could recover from the
drawer who had a defense of failure of consideration, for while the restrictive indorsement creating
a trust gives notice of this trust
to subsequent purchasers, it did not give notice of defenses obtaining between prior
parties.
• TO MAKE IT EASIER TO UNDERSTAND—first, you have to make a
distinction between what kind of restrictive indorsement was made. Was it a trust type or an
agency type? If it was an agency type, the indorsee just fills in the shoes of the restrictive
indorser. And thus, he is susceptible and open to the defenses that the
maker can have against the indorser. It is different if it is trust
type because the indorsee does not step inside the shoes of the
indorser and thus, the maker can no longer set up against the indorsee his defenses against
the indorser.
• SUMPTION OF CONSIDERATION IN RESTRICTIVE INDORSEMENTS
• • As a general rule, an indorsement of a negotiable bill which purports to
pass the title to the bill to the indorsee, imports a consideration and
the burden of proving want of consideration rests upon the party alleging it
• The restrictive indorsements which are held to negative the
presumption of a consideration are such as to indicate that they are intended
to pass title but merely to enable the indorsee to collect for
the benefit of the indorser, such as indorsements “for collection” or others
showing that the indorser is entitled to the proceeds
• But an indorsement to one person for the use or benefit of another,
affords no such indication. The indorser parts with the whole title to the bill and
the presumption is that he done so for a consideration.
• The only effect of such an indorsement, by way of restriction, is to give
notice of the rights of the beneficiary named in the indorsement and protect
him against misappropriation
• EFFECT OF OMISSION OF WORDS OF
NEGOTIABILITY
• • The mere absence of words of negotia
bility doesn't make the indorsement
restrictive
• While the omission of words in the in
dorsement doesn't affect negotiability of the
instrument, such omission in the body thereof
will render the instrument non-negotiable
• Sec. 37. Effect of restrictive indorsement; rights of indo
rsee. - 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 th
e form of the indorsement authorizes him to do so.
But all subsequent indorsees acquire only the title of t
he first indorsee under the restrictive indorsement.
• RESTRICTIVE INDORSEE MAY RECEIVE PAYMENT
• • A restrictive indorsement confers upon the indorsee the right to receive payment of the
instrument

• RESTRICTIVE INDORSEE MAY BRING AN ACTION

• • A restrictive indorsement confers upon the indorsee the right to bring any action thereon that
the indorser could bring
• In a restrictive indorsement “for deposit”, can the indorsee such as B in the illustration, bring
an action against the indorser, such as A? Yes if the indorser received value for said indorsement

• RESTRICTIVE INDORSEE MAY TRANSFER HIS RIGHTS

• • It is stated in the interpretation of the clause in Section 47 declaring a
paper negotiable in its origin to continue negotiable until it has been restrictively indorsed, is
that the words “until it has been restrictively
indorsed” don't contemplate every restrictive indorsement but a
restrictive indorsement that prohibits the further negotiation of the instrument under
subdivision 1 of Section 36
• Section 46 didn't mean to declare the effects of a restrictive indorsement but to preserve
as far as possible the negotiability of an instrument negotiable in its origin and that the implication
of Section
47 should not be taken as destroying negotiability of an instrument heretofore universally
accepted as negotiable
• EXTENT OF NEGOTIABILITY AFTER
RESTRICTIVE INDORSEMENT
• • That all forms of restrictive negotiabilit
y impose some degree of limitation on
negotiability
• That they don't all impose the same
degree of limitation
• That the indorsement itself discloses the
extent of the limitation in the particular case
• LIMITATION ON TRANSFER OF RIGHT: ILLUSTRATION
• • But all subsequent indorsees acquire only title of the first indors
ee under the restrictive indorsement
• Illustrations of this rule:
o In the indorsement, “pay to A for collection,” the rights of the
subsequent indorsees are subject to the restrictive
indorsement—namely, he can collect only for being a
restrictive indorsee, he acquires only the title of the first indorsee
whose right is merely to collect
o Suppose the P1000 note is indorsed as “Pay to B for deposit
only. (Sgd.) A” and that B owes Y P1000, B cannot transfer the note
to Y for said debt. Or suppose B transfers the note to another person for
P1000, B cannot use the P1000 for his own personal expenses. He must
safely keep the money for
the benefit of A.
o “Pay to A for account of B”—gives notice that the instrument cannot
be negotiated by A for his own debt or benefit
• Sec. 38. Qualified indorsement. -
A qualified indorsement
constitutes the indorser a mere assignor o
f the title to the instrument. It may be
made by adding to the indorser's signature
the words "without recourse" or any words
of similar import. Such
an indorsement does not impair the negot
iable character of the instrument.
• HOW QUALIFIED INDORSEMENT IS MADE
• • By adding to the indorser’s signature the words “without recours
e”, “Sans recours”, “indorser not holden”, or “with intent to transfer title
only and not to incur liability as indorser”, “at indorsee’s own risk”

• EFFECT OF QUALIFIED INDORSEMENT

• • Constitutes the indorser a mere assignor of the title to the
instrument
• One who indorses without recourse states that all parties to the
paper are genuine; I am the lawful owner of the paper and I have title to it
and know of no reason why you could not recover on it as a valid
instrument, but on thing I don't guarantee; I don't guarantee the
financial responsibility on that paper but I do say that I hold the title the
same as any other personal property
• QUALIFIED INDORSER HAS LIMITED SECONDARY LIABILITY
• • He is secondarily liable on his warranties as an indorser
under Section
65, that is, the qualified indorser is liable if the instru
ment is dishonored by non-acceptance or non-payment
due to:
1. Forgery
2. Lack of good title on the part of the indorser
3. Lack of capacity to indorse on the part of the prior
parties
4. The fact that, at the time of the indorsement, the
instrument was valueless or not valid and he knew of that
fact
• A QUALIFIED INDORSEMENT DOESN'T IMPAIR T
HE NEGOTIABLE CHARACTER OF THE INSTRUMENT
•
• Sec. 39. Conditional indorsement. -
Where an indorsement is conditional, the party
required to pay the instrument may disregardthe
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 t
he person indorsing conditionally.
• ABSOLUTE INDORSEMENT
• • One by which the indorser binds hims
elf to pay upon no other condition than the
failure of prior parties to do so and upon due
notice to him of such failure
• CONDITIONAL INDORSEMENT
• • An indorsement subject to a contingent e
vent, that is, an event that may or may not
happen, or a past event unknown to the parties
• Suppose a note for P1000 with A maker,
and B payee. It is then indorsed as follows
“Pay to Y if he passes the bar examinations. (Sgd.)
B”—this is a conditional indorsement as Y may or
may not pass the bar examination.
• OBLIGATION OF CONDITIONAL INDORSEE
• • Y indorsee holds the note or the proceeds thereof,
if he is paid by A, subject to the rights of B
• If A disregards the condition and pays Y witho
ut waiting for the
condition to be fulfilled, Y doesn't immediately acq
uire ownership of the sum
• Y must hold in trust while the condition is not
fulfilled
• It is upon the fulfillment of the condition that such
ownership over the proceeds of the note is absolutely
acquired by the conditional indorsee Y
• A CONDITIONAL INDORSEMENT DOESN'T RENDER AN
INSTRUMENT NON-NEGOTIABLE
•
Sec. 40. Indorsement of instrument payable to bearer.
- Where an
instrument, payable to bearer, is indorsed speci
ally, it may
nevertheless be further negotiated by delivery; bu
t the person
indorsing specially is liable as indorser to only suc
h holders as make title through his indorsement.
• APPLICATION OF SECTION 40
• • Section applies only to instruments which
are originally payable to bearer
• Cannot apply where the paper is originally
made payable to order and indorsed in blank; for
by Section 9, a note or bill which is payable to
order becomes payable only when the last in
dorsement is in blank;
and hence, when a blank indorsement is follo
wed by a special indorsement, the instrument is
not within the terms of Section 9.
• NEGOTIATION OF INSTRUMENT PAYABLE T
O BEARER BUT SPECIALLY INDORSED
• • Where an instrument payable to be
arer is indorsed, it may nevertheless be
further negotiated by delivery
• An instrument which is originally payable
to bearer is always payable to bearer
• Hence, even when it has been specially
indorsed, it is still payable to bearer
• EFFECT ON LIABILITY OF SPECIAL INDORSER
• Pay P1000 to bearer
(Sgd.) A
*C is bearer and he delivered to D
*D specially indorsed it to E
*E specially indorsed it to F
*F delivered to G, bearer.
• Is D liable to G being the first who specially indorsed the
instrument? No, because G didn't take title through D’s indorse
ment but through delivery of D
• To whom D is liable? To E and F, because they acquired the title
to the
instrument through the special indorsement of D. Had F mere
ly indorsed the instrument to G, D would be liable also to G for the
same reason.
• Sec. 41. Indorsement where payable to tw
o or more persons. - Where an instrument
is payable to the order of two or more payees
or indorsees who are not partners, all must
indorse unless the one indorsing has
authority to indorse for the others.

APPLICATION OF SECTION 41
• Applies only to instruments payable to
two or more payees jointly
• HOW INDORSEMENT OF JOINT PAYEES MADE
• • Where the instrument is payable to two or mo
re payees, all payees must each indorse in order to
negotiate the instrument
• If only one indorses, he passes only his part of the
instrument—such an indorsement wouldn't operate as
such because it would not be an indorsement of the
whole instrument
• Exceptions to the rule:
1. Where the payee or person indorsing has authority
to indorse for the others
2. Where the payee or indorsees are partners
• Sec. 42. Effect of instrument drawn or indorsed to a person as
cashier. - Where an 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, and may be negotiated by either the
indorsement of the bank or corporation or the indorsement of the
officer.
APPLICATION OF SECTION 42
Pay P1000 to the order of cashier, Lyceum of the Philippines.
(Sgd.) A
• Presumption is that the note is payable to Lyceum, not to the cashier
personally
• And the note may be indorsed by any duly authorized officer of
Lyceum other than the cashier
• DISPUTABLE PRESUMPTION
•
Sec. 43. 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.
APPLICATION OF SECTION 43
• An instrument drawn or indorsed to “Juan Dytuco” whose real
name is “Juan Dyjuco” may be indorsed as follows:
o Pay to Y (Sgd.) Juan Dytuco Juan Dyjuco
o Or (Sgd.) Juan Dyjuco
• Sec. 44. Indorsement in representative capaci
ty. - Where any person is under obligation to
indorse in a representative capacity, he may
indorse in such terms as to negative personal
liability.

• HOW AGENT MUST INDORSE?

• 1. He must add words describing himself as
agent
2. At the same time, disclose his principal
3. He must be duly authorized
• Sec. 45. Time of indorsement; presumption. - Except where an indorsement
bears date after the maturity of the instrument, every negotiation is deemed
prima facie to have been effected before the instrument was overdue.
DISPUTABLE PRESUMPTION

• IMPORTANCE OF THIS PROVISION

• • This provision becomes importance when considered in connection with
Section 52 (b)
• Under the provision, in order that one may become a holder in due
course, the instrument must be negotiated to him before it becomes
overdue
• The indorsement without date establishes a prima facie presumption that
the instrument was indorsed before maturity and one who denies
that the holder of such instrument is a holder in due course has the burden
of proof
• Sec. 46. 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.

• IMPORTANCE OF PLACE OF INDORSEMENT

• • The place of indorsement is sometimes material becau
se an indorsement is governed by the laws of the state where it is
indorsed, although the instrument is drawn or made in a different
state
Sec. 47. Continuation 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.
• WHEN NEGOTIABLE INSTRUMENT RENDERED
NON-NEGOTIABLE
• 1. Restrictive indorsement which further
prohibits the further negotiation of an
instrument
2. By a discharge thereof by payment or
otherwise
• NEGOTIABILITY AFTER DATE OF MATURITY
• • FIRST VIEW: negotiability ceases in the full commercial sense after
maturity and negotiability ceases by default of the maker in his payment
• SECOND VIEW: negotiability continues even after maturity
• RECONCILIATION OF THE TWO: the mercantile character of the
instrument as a negotiable paper and of the contracts of the several parties
to it, continues after maturity and until it is paid except: that an indorsee or a
transferee after maturity takes the instrument subject
to defenses between original parties, because after maturity such subsequent
parties take the instrument after it becomes overdue and
therefore, under paragraph b of Section 52, they are not holders in due
course
• After maturity, an instrument originally negotiable continues to be
negotiable in the sense that the contracts of the parties to it continue and are
governed by the Negotiable Instruments Law
• After maturity the instrument ceases to be negotiable in the sense that a
transferee after maturity is not a holder in due course and therefore not free from
defenses obtaining between prior parties
• LEGAL POSITION OF HOLDER TAKING OVERDUE
INSTRUMENT
• • He is a holder with notice. He may or may
not be a holder for value and his rights will be
regulated accordingly. He takes a bill which on
the face of it, ought to have been paid.
• He is bound to make two inquiries—has
what ought to have been done really have been
done? And if not, why not?
• RIGHT OF HOLDER NOT IN DUE COURSE
• • He can recover checks in his possession
but the only disadvantage is that the
negotiable instrument is subject to the
defenses as if it were non-negotiable
 EFFECTS OF ALTERATION OF A
NEGOTIABLE INSTRUMENT
• 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 pa
rty who has
himself made, authorized, or assented to the alter
ation 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 th
e alteration, he may enforce payment thereof
according to its original tenor.
• RIGHTS OF ONE NOT HOLDER IN DUE COURSE
• • Where an instrument has been materially
altered, it is avoided in the hands of one who
is not a holder in due course as against a prior
party who has not assented to the alteration
• WHERE INSTRUMENT NOT AVOIDED AS TO
HOLDER NOT IN DUE COURSE
• 1. A party who has made the material
alteration
2. A party who has authorized the material
alteration
• 3. A party who has assented to the material
alteration
4. Any subsequent indorsers
• RIGHTS OF HOLDER IN DUE COURSE
• • He may enforce the instrument in its original
tenor
• He could recover the altered tenor to any
party who has made,
authorized or assented the alteration, or any
subsequent indorser of the instrument

NO DISTINCTION BETWEEN FRAUDULENT AND

INNOCENT ALTERATION
• RIGHT TO COLLECT ORIGINAL CONSIDERATION
• • When the alteration wasn't fraudulently done, the
holder may recover the original consideration
WHERE DRAWEE BANK PAYS ALTERED AMOUNT,
DRAWER HAS THE RIGHT TO HAVE HIS ACCOUNT
DEBITED WITH CORRECT AMOUNT ONLY
BANKS ARE BOUND BY THE 24-HOUR CLEARING HOUSE
RULE AND MUST
NOTIFY THE COLLECTING BANKS WITHIN 24 HOURS
OF ALTERATION OF CHECKS