NIL Reviewer

Negotiable Instruments REVIEWER Page 1 of 86
I.
INTRODUCTION
NEGOTIABLE INSTRUMENT Written contract for the payment of money, by its form intended as substitute for money and intended to pass from hand to hand to give the holder in due course the right to hold the same and collect the sum due Although considered as medium for payment of obligations, negotiable instruments are not legal tender (see Sec. 60, New Central Bank Act, R.A. 7653); but that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash. Negotiable instruments shall produce the effect of payment only when they have been encashed or when through the fault of the creditor they have been impaired. (Art. 1249, CC) PROMISSORY NOTE unconditional promise in writing made by one person to another signed by the maker engaging to pay on demand, or at a fixed or determinable future time a sum certain in money to order or to bearer where a note is drawn to the makers own order, it is not complete until indorsed by him BILL OF EXCHANGE unconditional order in writing addressed by one 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 check: bill of exchange drawn on a bank payable on demand. Kinds of checks: 1. personal check 2. managers/cashiers check drawn by a bank on itself. Issuance has the effect of acceptance 3. memorandum check memo is written across its face, signifying that
drawer will pay holder absolutely without need of presentment 4. crossed check effects: a. check may not be encashed but only deposited in bank b. may be negotiated only once, to one who has an acct. with a bank c. warning to holder that check has been issued for a definite purpose so that he must inquire if he received check pursuant to such purpose, otherwise not HDC kinds: a. general (no word between lines, or co between lines) b. special (name of bank appearing between parallel lines) BEARER Person in possession of a bill/note payable to bearer HOLDER Payee or indorsee of a bill or note who is in possession of it, or the bearer thereof.
THE LIFE OF A NEGOTIABLE INSTRUMENT: 1. issue 2. negotiation 3. presentment for acceptance in certain bills 4. acceptance 5. dishonor by on acceptance 6. presentment for payment 7. dishonor by nonpayment 8. notice of dishonor 9. protest in certain cases 10. discharge 1. Kinds of Negotiable Instruments Negotiable instrument written contract for the payment of money, by its form intended as a substitute for money and intended to pass from hand to hand to give the holder in due course the right to hold the same and collect the sum due.
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Instruments are negotiable when they conform to all the requirements prescribed by the NIL (Act 2031, 03 February 1911). Most familiar forms: check, promissory notes Two main groups: 1. Promissory note - evidences a promise to pay money - unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer; where it is drawn to the maker's own order, it is not complete until indorsed by him (Sec. 184, NIL). - Examples: a. Certificate of deposit instrument issued by the bank reciting a deposit of a certain sum of money, payable either at a fixed time or on demand, to the depositor named therein. b. Bond - an evidence of indebtedness issued by a corporation, payable at a definite date in the future, usually for a long term. 2. Bill of exchange - an order made by one person to another to pay money to a third person. - unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer (Sec. 126, NIL). - Examples: a. Check - one who issues it orders his bank to pay the
person named on the check; always payable on demand. b. Draft - used mainly in transactions between persons physically remote from each other; an order made by one person, like a buyer of goods, addressed to a person having in his possession funds of such buyer, ordering the addressee to pay the purchase price to the seller of the goods; if made by a bank to another bank, it is called a bank draft. 2. Parties and the Nature of their Liability As regards promissory note: Parties: 1. Promissor/maker 2. Payee - person to whom the promise to pay is made. As regards bill of exchange: Parties: 1. Drawer - person who gives the order to pay. 2. Drawee - addressee of the order. 3. Payee - person to whom the payment is to be made. When the payee of an instrument transfers it to another by signing it at the back thereof, he is said to have negotiated or indorsed the same, and thereby becomes an indorser. Indorsee - person to whom he negotiates it, who, by such negotiation, becomes the holder of the instrument. Primary party primarily liable; absolutely and unconditionally required to pay the instrument when it falls due. Promissory note: Maker Bill of exchange: No person primarily liable until and unless the drawee accepts the order of the drawer to pay;
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if he accepts, he becomes the acceptor and thus, primarily liable. Secondary party - secondarily liable Bill of exchange: Drawer and indorsers - if primary parties fail to pay; liability is conditioned on two factors: 1. presentment on the primary party 2. dishonor and notice of dishonor Implied contracts by indorsers: 1. Selling/transferring the instrument to his indorsee 2. Warrants that he will pay the instrument when the two conditions for his liability mentioned above has been fulfilled of Negotiable
gave rise to its execution. Any inquiry would entail delay in commercial transactions where profitability depends on the briskness with which they are consummated. The NIL aims to encourage facility, convenience, and efficiency in commercial transactions. Origin of Negotiable
5. The Instruments
Originated from the merchants and traders of the Middle Ages (Florentine and Venetian merchants). Avoid the risk of transporting money. History of Negotiable Instruments
3. Functions Instruments
6. Law
Substitute for money Means of creating and transferring credit Facilitate the sale of goods Although negotiable instruments do not constitute legal tender, they often take the place of money as a means of payment. Article 1249, Civil Code: The delivery of promissory notes payable to order or bills of exchange and other mercantile documents shall produce the effect of payment only when they have been cashed or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original action shall be held in abeyance. Validity of negotiable instruments as a means of payment is conditioned on its being honored by the person bound by their terms to pay them. The Concept of Negotiability Feature which greatly enhances the free circulation of negotiable instruments as commercial papers. A person who takes a negotiable instrument can rely on its face and need not inquire into past events that
Verbatim reproduction of the US Uniform NIL. One of the more stable statutes in RP. No amendment since enactment in 1911. 7. Applicability of Negotiable Instruments Law Applies only to negotiable instruments (instruments which conform with the requisites in Section 1, NIL). Law merchant - suppletory to NIL.
II.
REQUISITES OF NEGOTIABILITY
REQUISITES 1. in writing and signed by maker or drawer no person liable on the instrument whose signature does not appear thereon (subject to exceptions) one who signs in a trade or assumed name liable to the same extent as if he had signed in his own name signature of any party may be made by a duly authorized agent, no particular form of appt. necessary
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4.
2. unconditional promise or order to pay unqualified order or promise to pay is unconditional though coupled with a. an indication of a particular fund out of which reimbursement to be made, or a particular account to be debited with amount, or b. a statement of the transaction which gives rise to the instrument an order or promise to pay out of a particular fund is not unconditional a sum certain in money even if stipulated to be paid--a. with interest, or b. by stated installments, or c. by stated installments with a provision that upon default in payment of any installment/interest, the whole shall become due, or d. with exchange, whether at a fixed rate or at the current rate, or e. with costs of collection or an attorneys fee, in case payment not made at maturity 3. payable on demand, when expressed to be payable on demand, or at sight, or on presentation; when no time for payment expressed, or 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 or at a fixed or determinable future time when its expressed to be payable at a fixed period after date or sight, or on or before a fixed or determinable future time fixed therein, or on or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain an instrument payable upon a contingency not negotiable, and happening of event doesnt cure it
* relate to sec. 11 ( presumption as to date) and sec. 17 (construction where instrument ambiguous) * note effect of acceleration provisions, p. 30 Campos * note effect of provisions extending time of payment, p. 40 Campos 4. payable to order where it is drawn payable to the order of a specified person or to him or his order. May be drawn payable to order of --a. a payee not the maker/drawer/drawee, or b. drawer or maker, or c. drawee, or d. two or more payees jointly, or e. holder of an office for time being when the instrument is payable to order the payee must be named or otherwise indicated therein with reasonable certainty or bearer, when expressed to be so payable when payable to person named therein or bearer when payable to order or fictitious/nonexistent person, and such fact known to the person making it so payable, or when name of payee doesnt purport to be the name of any person, or when the only/last indorsement is in blank
5. where addressed to drawee: such drawee named/ indicated therein with reasonable certainty bill may be addressed to two or more drawees jointly, whether partners or not, but not to two or more drawees in the alternative or in succession bill may be treated as a PN, at option of holder, where a. drawer and drawee are same person b. drawee is fictitious/incapacitated
EFFECT OF ADDITIONAL PROVISIONS

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Gen. Rule: order/promise to do any act in addition to the payment of money renders instrument non-negotiable. Exception: negotiability not affected by provisions w/c 1. authorize sale of collateral security if instrument not paid at maturity 2. authorize confession of judgment 3. waives benefit of any law intended for advantage/protection of obligor 4. give holder election to require something to be done in lieu of money
No person liable on the instrument whose signature does not appear thereon. One who signs in a trade or assumed name liable to the same extent as if he had signed in his own name. Signature of any party may be made by a duly authorized agent; no particular form of appointment necessary. Unconditional Order or Promise to
2. Pay
CONTINUATION OF NEGOTIABLE CHARACTER Until 1. restrictively indorsed 2. discharged by payment or otherwise Form of negotiable instruments (Sec. 1, NIL): In writing and signed by the maker or the drawer; Unconditional promise or order to pay a sum certain in money; Payable on demand, or at a fixed or determinable future time; Payable to order or to bearer; and Where the instrument is addressed to a drawee, he must be named or otherwise indicated with reasonable certainty. Writing and Signed by the
Mere acknowledgment of a debt does not constitute a promise. There should be an express promise on the face of the instrument to pay money. Word "promise" is not absolutely necessary. Any expression equivalent to a promise is sufficient. As regards bills of exchange, words which are equivalent to an order are sufficient. Order - command or imperative direction; the instrument, by its nature, demanding a right. A mere request or authority to pay does not constitute an order. Although the mere use of polite words like "please" does not of itself deprive the instrument of its characteristics as an order, its language must clearly indicate a demand upon the drawee to pay. When unconditional If coupled with (Sec. 3, NIL): 1. Indication of a particular fund out of which reimbursement is to be made, or a particular account to be debited with the amount; or 2. Statement of the transaction which gives rise to the instrument. But an order or promise to pay out of a particular fund is not unconditional. The promise or order to pay, to be unconditional, must be unqualified. Mere indication of the particular fund out of which reimbursement is to be made, or
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1. In Maker
a.
"In writing" - includes print; written or typed The negotiability of an instrument must be determined only from the face of the document itself and not elsewhere. Signature, binding so long it is intended or adopted as the signature of the signer or made with his authority. Any inscription or even stamping will suffice provided that it is meant to function as the signature of the party.
an indication of a particular account to be debited with the amount will not render the order conditional. Neither does the recital of the transaction for which the instrument was issued make the promise or order conditional. The fact that the condition appearing on the instrument has been fulfilled will not convert it into a negotiable one.
show that the obligation is burdened with the conditions of that contract. IRVING TRUST CO. V. LEFF (1930) HELD: A check has no valid inception until delivery. Delivery - transfer of possession, actual or constructive, from one person to another. Where the negotiable 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. 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. But as regards non-negotiable instruments, said rule does not apply. For instance, a thief has no title and can give none. An allegation of theft puts in issue the delivery of the check. 3. Sum Payable must be Certain Still sum certain, even if (Sec. 2, NIL): With interest; By stated installments; By stated installments with acceleration clause; With exchange, whether at a fixed rate or at the current rate; or With costs of collection or attorney's fee. A stipulation to pay a higher rate of interest if the note is not paid or a lower rate if it is paid on or before maturity does not render the instrument non-negotiable. A sum is certain if from the face of the instrument it can be mathematically computed. Where the parties stipulate payment in foreign currency, the rate of exchange is determined not at the time of making of the instrument but at the time of payment, and not the rate at the time the
POWELL & POWELL V. GREENLEAF & CURRIER (1932) HELD: An instrument to be negotiable must contain, among other things, an unconditional promise or order to pay a sum certain in money. An unqualified order or promise to pay is unconditional within the meaning of the statute, though coupled with a statement of the transaction which gives rise to the instrument. Whether these instruments were negotiable must be determined from the language of the instruments themselves, unaided by an inspection of the extrinsic agreements to which they refer. It is the general rule that whenever a bill of exchange or promissory note contains a reference to some extrinsic contract in such a way as to make it subject to the terms of that contract, as distinguished from a reference importing merely that the extrinsic agreement was the origin of the transaction, or constitutes the consideration of the bill or note, the negotiability of the paper is destroyed. But it is equally well-settled that the negotiability of a bill or note is not affected by a reference which is simply a: 1. recital of the consideration for which the paper is given; 2. statement of the origin of the transaction; or 3. statement that is given in accordance with the terms of a contract of even date between the same parties. In short, to destroy negotiability, the reference to a collateral contract must
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obligation was incurred. (Kalalo v. Luz, 34 SCRA 337) 4. Payable in Money Capable of being transformed into money. An instrument which contains an order or promise to do an act in addition to the payment of money is not negotiable. But if the order or promise gives the holder an election to require something to be done in lieu of payment of money, an instrument otherwise negotiable would not be affected thereby. But if the option is with the maker or person primarily liable, instrument is not negotiable. INCITTI V. FERRANTE (1933) HELD: The negotiable character of an instrument is not affected by the fact that it designates a particular kind of current money in which payment is to be made. Money is purely a legal institution; it is impossible without law. Money is what the law or custom makes receivable for payments of taxes and debts. It has value only by law and not by nature. An instrument payable in the money of any country is negotiable for in this case the sum of money is fixed by the par exchange on the known denomination of the currency with reference to the par. Where a note is made payable in a country in the money or coins of another country, which money or coins have a value fixed by the law or under the authority of the law of the country where the note is payable, and which value can by a simple mathematical computation be expressed in the value of the lawful money of the latter country, such a note by the law merchant and under the NIL is negotiable. 5. Certainty of Time of Payment
Purpose: Informing the holder of the instrument of the date when he may enforce payment thereof. An instrument may be payable: On demand; At a fixed time; or At a determinable future time.
a. When payable on demand (Sec. 7. NIL) 1. Expressed to be payable on demand, or at sight, or on presentation; or 2. No time for payment is expressed. Demand instruments: Holder may call for payment any time; maker has an option to pay at any time, and the refusal of the holder to accept payment will terminate the running of interest, if any, but the obligation to pay the note remains. Payable at a fixed time Only on the stipulated date, and not before, may the holder demand its payment. Should he fail to demand payment, the instrument becomes overdue but remains valid and negotiable. It is merely converted to a demand instrument. Payable at a determinable future
b.
c. time
Determinable future time, if expressed to be payable (Sec. 4, NIL): At a fixed period after date of sight; On or before a fixed or determinable future time specified therein; On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening is uncertain. If payable upon a contingency, not negotiable, and the happening of the event does not cure the defect. Effect of acceleration provisions
d.
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If option (absolute or conditional) to accelerate maturity is on the maker, negotiability not affected. Maker may pay earlier than the date fixed but this option, if exercised, would be a payment in advance of a legal liability to pay. It is still payable on the date fixed, and holder has no right to enforce payment against the maker before such date. If option to accelerate is on the holder: If option can be exercised only after the happening of a specified event/act over which he has no control (conditional), negotiability not affected. If option is unconditional, time of payment is rendered uncertain, and instrument becomes not negotiable. Other instances where negotiability not affected: When option given to the holder to accelerate the maturity of an installment note upon failure of the maker to pay any installment when due. Acceleration, automatic upon default. Acceleration by operation of law.
The Court rules that the said provision did not convert the instrument into a non-negotiable one; it did not destroy the negotiability of the instrument. A note is negotiable if payable at a determinable future time. A matter is determinable that may be accurately found out, settled, or determined. A future determinable time could be one determinable at some time in the future, as well as one determinable at present, or in advance. An instrument payable at a fixed period after sight is payable at a determinable future time, the exact date of payment being ascertainable at the date of the presentation, but not before. A note payable on or before a fixed date is payable at a determinable future time. If the instrument expressly states that it is payable on or before a fixed date, it is payable at the date in question or, at the option of the payor, at any earlier date selected by him for payment. PUGET SOUND STATE BANK WASHINGTON PAVING CO. (1917) V.
REHABILITATION FINANCE CORP. V. CA (1954) HELD: If an instrument provides for the time when payment is to be made on or before a fixed or determinable future time (ex: on or before 25 December 2000), makers or debtors are entitled to make a complete settlement of the obligation at any time before said date. UTAH STATE NAT'L BANK V. SMITH (1919) HELD: In this case, the instrument provides that "if interest is not paid when due, then both principal and interest shall become due at the option of the holder of the note."
HELD: In this case, the instrument contains the following provision: "This note shall become due and payable on demand at the option of the payee when it seems itself insecure." The Court noted that said provision gave the payee an unrestricted power to declare the note due at any time before maturity, and that the right to exercise such power possessed by the payee is not dependent upon nor does it grow out of any act, promise, or agreement of the payor/maker. In other words, it is a contingency over which the maker has no control. As such, the note was declared not negotiable. Said provision has made the question of the time of payment of the note absolutely dependent upon the will and election of the payee. HENRY V. MADISON (1933)
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HELD: In this case, the note provides: "Failure to pay any installment as the same becomes due shall render the entire obligation then due and payable." The Court ruled that upon default, the whole note became immediately due absolutely. This is not a case whereby it became payable at the option of the holder. e. Provisions payment extending time of
Flexibility in fixing the time of payment, provided only that there shall certainly come a time when the note is, by its terms, due. This rule recognizes the right of the parties to an instrument to contract for their mutual benefit; if the contract made is certainly to be performed at some definite time in the future, its negotiability is not destroyed. A determinable future time (as used in the foregoing points) is a time that can be determined after the execution of the note. SECURITY NAT'L BANK, SIOUX CITY V. GUNDERSON (1927) HELD: In this case, the note provides that the makers of the note waive notice as regards extension of time of payment. The Court ruled that said provision did not render the note non-negotiable. Said provision did not alter the date of maturity.
General rule: Negotiability not affected. Effect is similar with that of an acceleration clause at the option of the maker. Negotiability not affected, even if the holder is given the option to extend time of payment by mere inaction or indulgence for an indefinite time depending on his will, because with or without this provision, the holder may always choose to be indulgent. But, where a note with a fixed maturity provides that the maker has the option to extend time of payment until the happening of contingency, instrument not negotiable. The time for payment may never come at all.
6. Must be Payable to Order or to Bearer Must contain words of negotiability serve as an expression of consent that the instrument may be transferred. But the instrument need not follow the language of the law; any term which clearly indicates an intention to conform to the legal requirements is sufficient. Postal money order, not negotiable, because it does not contain words of negotiability. Where words "or bearer" printed on a check are cancelled by the drawer, instrument not negotiable. Bearer instrument may be negotiated by mere delivery. Order Instrument, negotiation requires delivery and indorsement of the transferor.
STATE BANK OF HALSTAD V. BILSTAD (1912) HELD: A note made payable at a fixed time, or at an earlier fixed time at the option of the maker, would be negotiable, because there could be no just distinction drawn between such a case and one where the instrument was to be paid on or before. A note that is payable at a determinable future time, or that is payable on or before a fixed period after the occurrence of a specified event which is certain to happen, is negotiable.
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a. When instrument is payable to order Drawn payable to the order of a specified person or to him or his order ( Sec. 8, NIL). Without the words "to order" or "to the order of," the instrument is payable only to the person designated therein and is therefore non-negotiable.
which were available between the original parties; and if it was originally non-negotiable, as against the original parties, it will not be rendered negotiable by subsequent transfer in negotiable form. ANG TEK LIAN V. CA (1950) HELD: A check drawn payable to the order of cash is a check payable to bearer, and the bank may pay it to the person presenting it for payment without the drawer's indorsement. A check payable to bearer is authority for payment to the holder. Where the check is in the ordinary form and is payable to bearer, so that no indorsement is required, a bank, to which it is presented for payment, need not have the holder identified, and is not negligent in failing to do so. 7. Parties must be designated with Certainty a. Maker and drawer Sign the instrument at the lower righthand corner. Payee When negotiating, sign at the back; same with indorsers. Drawee Name usually at the lower left-hand corner, or across the top. If instrument addressed to drawee, he must be named or indicated with reasonable certainty. not Affecting
b. When instrument is payable to bearer Payable to bearer when (Sec. 9, NIL): Expressed to be so payable; ex: "I promise to pay the bearer the sum." Payable to a person named therein or bearer; ex: "Pay to A or bearer." Payable to the order of a fictitious person or non-existing person, and such fact was known to the person making it so payable; ex: "Pay to John Doe or order." Name of payee does not purport to be the name of any person; or ex: "Pay to cash;" "Pay to sundries." Only or last indorsement is an indorsement in blank. WETTLAUFER V. BAXTER (1910) HELD: The usual form of negotiable paper is a provision for payment to order or to bearer. These or similar words are in general necessary to its negotiability and are often required by the statute, but a note which is non-negotiable for want of such words is still a valid note and may be declared as such. For instance, bills payable to bearer were formerly held to be non-negotiable, as being without words of transfer; but they are now recognized as negotiable and transferable by mere delivery. Without words of negotiability, purchasers take the bill or note subject to all defenses
b.
c.
8. Provisions Negotiability
Negotiability not affected, even if (Sec. 5, NIL): Authorizes the sale of collateral securities;
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Authorizes a confession of judgment if the instrument be not paid at maturity; Waives the benefit of any law intended for the advantage or protection of the obligor; or Gives holder as election to require something to be done in lieu of payment of money. Negotiability affected, when instrument contains a promise or order to do any act in addition to the payment of money. PNB V. MANILA OIL REFINING (1922)
Non-specification of value given, or that any value had been given Non-specification of place where it is drawn or place where it is payable Bears a seal Designation of particular kind of currency in which payment is to be made Rules of Construction The sum expressed in words takes precedence over the sum expressed in numbers; except where the words are so ambiguous or uncertain, then reference to the figures should be made Where interest is stipulated, without specification of the starting date, the interest runs from the date of the instrument, and if undated, from the issue thereof An undated instrument is considered dated as of time issued. Written provisions prevail over printed provisions of the instrument Where the instrument is ambiguous as to whether it is a note or a bill, the holder may treat it as either at his election When the capacity of signatory is not clear, he is to be deemed an endorser I promise to pay when signed by two or more persons is deemed to be jointly and severally signed
10.
HELD: In this case, the note contains a provision that in case that it would not be paid at maturity, the "maker authorizes any attorney to appear and confess judgment thereon." The Court ruled that said judgment note is illegal and inoperative as such is against public policy. It noted that it is in derogation of the constitutional safeguards (a day in court). Such judgment note can only be valid if given express legislative sanction. In common law, two kinds of judgment by confession: Judgment by cognovit actionem Confession relicta verificatione 9. Omissions Negotiability not Affecting
Negotiability not affected by the following (Sec. 5 & 6, NIL): Authorizes the sale of collateral securities in case the instrument be not paid at maturity Authorizes a confession of judgment if the instrument be not paid at maturity Waives the benefit of any law intended for advantage or protection of the obligor Gives holder an election to require something to be done in lieu of payment of money Non-dating of the instrument
CONTINENTAL ILINOIS BANK V. CLEMENT HELD: Where an instrument containing the words "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon. If an instrument worded in the singular is executed by several, the obligation is joint and several one.
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c. If payable to BEARER, negotiated by TRANS delivery; if payable to ORDER, negotiated FE by indorsement of holder + delivery R INDORSEMENT The indorsement must be written on the DELIVERY instrument itself or on a paper attached NI incomplete and revocable until delivery thereto. for the purpose of giving effect thereto as between Indorser generally enters into two a. immediate parties contracts: b. a remote party other than holder in 1. sale or assignment of instrument due course 2. to pay instrument in case of default of delivery, to be effectual, must be maker made by or under the authority of the Sec. 31 (how indorsement made) party making/drawing/accepting/indorsing Sec. 41 (where payable to two or more) in such case delivery may be shown to Sec. 43 (indorsement where name have been conditional, or for a special misspelled) purpose only, and not for the purpose of Sec. 48 (cancellation of indorsement) transferring the property in the instrument Sec. 45, 46 (presumptions) Delivery means transfer of possession of Indorsement must be of entire instrument. instrument by the maker or drawer, with (cant be indorsement of only part of intent to transfer title to the payee and amount payable, nor can it be to two or recognize him as holder thereof. (de la more indorsees severally. But okay to Victoria v. Burgos 245 SCRA 374) indorse residue of partially paid instrument) PRESUMPTION OF DELIVERY Sec. 67 (liability of indorser where paper Where the instrument is no longer in the negotiable by delivery) possession of a party whose signature Sec. 63 (when person deemed indorser) appears thereon, a valid and intentional delivery by him is presumed until the KINDS OF INDORSEMENT contrary is proved (*if in the hands of a HDC, presumption conclusive) A. as to manner of future method of negotiation PRESUMPTION AS TO DATE 1. special specifies the person to Importance of the date of the instrument whom/to whose order the instrument is Determining when the instrument, to be payable; indorsement of such endorsement or acceptance is due indorsee is necessary to further Determining prescription of cause of negotiation. action 2. Blank specifies no indorsee, Date is not an essential element of instrument so indorsed is payable to negotiability bearer, and may be negotiated by An undated instrument is considered to be delivery dated as of the time it was issued the holder may convert a blank indorsement into a special indorsement NEGOTIATION by writing over the signature of the When an instrument is transferred from indorser in blank any contract consistent one person to another as to constitute the with the character of the indorsement transferee the holder thereof.
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B. as to kind of title transferred 1. restrictive prohibits further negotiation of instrument, constitutes indorsee as agent of indorser, or vests title in indorsee in trust for another rights of indorsee in restrictive ind.: receive payment of inst. Bring any action thereon that indorser could bring Transfer his rights as such indorsee, but all subsequent indorsees acquire only title of first indorsee under restrictive indorsement 2. non-restrictive C. as to kind of liability assumed by indorser 1. qualified-constitutes indorser as mere assignor of title (eg. without recourse) 2. unqualified D. as to presence/absence of express limitations put by indorser upon primary obligors privileges of paying the holder 1. conditional additional condition annexed to indorsers liability. 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 condition has been fulfilled or not Any person to whom an instrument so indorsed is negotiated will hold the same/proceeds subject to rights of person indorsing conditionally 2. unconditional INDORSEMENT OF BEARER INST. Where an instrument payable to bearer is indorsed specially, it may nevertheless be further negotiated by delivery Person indorsing specially liable as indorser to only such holders as make title through his indorsement
UNINDORSED INSTRUMENTS Where holder of instrument payable to his order transfers it for value without indorsing, transfer vests in transferee 1. such title as transferor had therein 2. right of transferee to have indorsement of transferor for purposes of determining HDC negotiation effective upon actual indorsement 1. Delivery & Issuance
IN RE MARTENS CASE (1939) FACTS: The decedent Martens had executed a promissory note in favor of his daughter, but he never delivered the same to her. After his death, an envelope containing the note was discovered in his safe. HELD: The court held that there could be NO delivery, as contemplated by the Negotiable Instruments Law, in this case. It was immaterial whether or not the decedent really wanted to pay his daughter, and in fact intended the note to be the payment. Without delivery, the contract on the note was incomplete and revocable. 2. 3. 4. Negotiation Methods of Negotiation How Indorsement Made
a. By signature on instrument or on allonge CLARK V. THOMPSON, ET AL. (1915) HELD: A mortgage was held not to be an allonge because: 1. it was not fastened to the note and 2. there was room in the instrument for further indorsements
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b. c.
In case of joint payee If name misspelled (1937)
YOUNG V.HEMBREE
HELD: In this case, the payee of the check being Horn and Faulkner Oil Trust, the indorsement which reads : Horn and Faulkner by L.H. Horn is prima facie insufficient on its face, the indorsement is NOT that of the payee. Without a showing that the two are one and the same form or legal entity, the indorsement cannot be considered a negotiation. 5. Indorsement must be of Entire Instrument BLAKE V. WEIDEN (1943) FACTS: The promissory notes on which Charles Weiden based his counterclaim was indorsed as follows : pay to the order of Charles R. Weiden and Frank J. Weiden, share alike as tenants in common. HELD: 1. The court held that such indorsement did NOT operate as a negotiation of the instrument, as per Sec. 32 of the Uniform Negotiable Instruments Law: An indorsementwhich purports to transfer the instrument to two or more indorsees severally, does NOT operate as a negotiation of the instrument. 2. However, though indeed there was no negotiation of the instrument, it does not necessarily mean that the Weiden brothers have no rights under the instrument (and purported indorsement) at all. The court held that the irregular indorsement could be treated as an ORDINARY ASSIGNMENT. RULE When there has been a purported indorsement of the whole instrument, in separate parts to two or more transferees, the purported indorsees take LEGAL TITLE to their
SEVERAL SHARES and may sue provided all the other indorses are brought in as parties. Applied in the CAB, Charles therefore has legal title to one third of the value of the PNs, and, as he did bring in the two other indorsees (Hermann and Frank) as parties to the action, he may use such one third as basis for his counterclaim. 6. a. Kinds of Indorsements Basis of classification
b. Special & blank indorsements Special It qualifies the person to whom or to whose order the instrument is payable, and the indorsement of such endorsee is necessary to the further negotiation of the instrument Blank It specifies no endorsee, and the instrument so endorsed is payable to bearer and may be negotiated by mere delivery. The holder may convert a blank indorsement into a special indorsement by writing over the signature of the endorser in clank any contract consistent with the character of the endorsement c. Qualified indorsement Qualified Constitutes endorser as a mere assignor of the title to the instrument. It is made by adding the words without recourse or sans recourse.
FAY V. WITTE (1933) FACTS: Witte, the payee in the promissory note executed by Witte Inc. had indorsed the note to Fay in the following manner: I hereby assign all my right and interest in this note to Richard Fay, in full. ISSUE: Was Witte an unqualified or qualified indorser? HELD:
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Witte was an UNQUALIFIED INDORSER. It must be emphasized that liability as an indorser attaches automatically to him who signs at the back of the instrument, at the moment of signing. The placing of ones name on the note constitutes one as an indorser., without need of express terms setting forth such relation. It is when he wishes to negate his liability that words are imperative. As per the NIL, such words as: without recourse or words of similar import should be used. An indorser is presumed to be an unqualified indorser. For him to be a qualified indorser, he must indorse without recourse or words of similar import. Indorsers liability cannot be limited (qualified) by implication. Words expressing assignment of title to the instrument cannot by implication exclude his second contract (i.e., to be liable in case primary party does not pay). COPELAND V. BURKE (1916) FACTS: I transfer my right, title and interest in the same. HELD: To limit the indorsers personal liability, an endorser must indorse with words clearly expressing such intent. HUTSON V. RANKIN (1922) HELD: 1. In case this note is collected by an attorney, either with or without suit, the makers agree to pay a reasonable attorneys fee. No effect on negotiability because amount payable is certain up to the time of maturity. 2. Interest will increase from 8% to 10% if instrument is not paid when due. Plus : acceleration clause at payees option to declare the whole amount due in case of default. No effect on negotiability. Sec 1 still met.
3. Notation at the back of the note: For value received, we hereby guarantee the within not including interest and costs at maturity or any time thereafter demanded. RULE: An indorsement written on the back of the note in the form of a guaranty of the payment thereof, and signed by the payee, passes title to the paper the same as on an indorsement in blank. In this case then, the notation operates as a transfer of the note, and as an indorsement thereof with enlarged liability. d. Conditional indorsement Conditional The party required to pay the instrument may disregard the condition and make payment to the endorsee or his transferee whether the condition has been fulfilled or not. But any person to whom an instrument se endorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of the person endorsing conditionally e. Restrictive indorsement Such indorsement either: Prohibits further negotiation of the instrument Constitutes endorsee the agent of endorser Vest title in endorsee in trust for or to the use of some other person f. Absolute indorsment One by which the endorser bids himself to pay, upon no other condition than the failure of prior parties to do so, and of due notice to him of such failure
g. Joint indorsement Where an instrument 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 endorse for the others h. Irregular indorsement
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Where a person, not otherwise a party to the instrument, places thereon his signature in blank before delivery, he is liable as indorser
WHITE V. NATIONAL BANK (1880) FACTS: Payee indorsed: Pay White for account of Miners Bank. HELD: White does not have personal right to the payment. He is a mere agent of the bank to collect money. Indorsement means that the acceptor of the draft is to pay White (indorsee) for the use of Miners Bank (indorser). 7. Indorsement by Collecting Bank Where the holder deposits the check with a bank other than the drawee, he would in effect be negotiating the check to such bank, since he would have to indorse the check before the bank will accept it for deposit. In most cases, the bank is acting as a mere collecting agent. LEONARDI V. CHASE NATIONAL BANK (1942) FACTS: Leonardi endorsed the check to Bank of Biscayne (for deposit). BBB mailed it to Chase National bank OF NY (its NY correspondent) to collect from drawee bank of Manhattan Trust Co. Amount was collected. But Chase Manhattan now wants to claim set-off vis--vis the amount collected and a larger amount owed by BBB to them. ISSUE: If the amount collected, upon collection, still belonged to Leonardi as indorser of the check, then Chase Manhattan is guilty o conversion because it cannot claim set-off against Leonardi who did not owe them anything. On the other hand, if the money because it had been collected, now belongs to BBB,
Chase Manhattan can rightly claim set-off and would therefore not be guilty of conversion. HELD: Upon the collection of the money, the agency relationship between the Leonardi and the BBB by virtue of the restrictive indorsement on the check was extinguished. A new relationship then arose, that of debtor (BBB) and coeditor (Leonardi). Such is the relation between bank and depositor. Thus, BBB was then, as debtor, the owner of the proceeds and Chase Manhattan rightly claimed set-off against it. 8. Negotiation by Joint or Alternative Payees or Indorsees Where an instrument 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 endorse for the others 9. Unindorsed instruments If his predecessor had legal title, the transferee of an unindorsed instrument acquires such, subject however to the defenses and equities available to prior parties. He has to prove that he is the owner of the instrument before he can recover. He may, however, become a holder by obtaining the indorsement of the transferor SIMPSON V. FIRST NATIONAL BANK OF ROSEBURG (1919) HELD: 1. When an unendorsed negotiable instrument is transferred, the transferee acquires the legal title to the instrument, and in addition the right to have the indorsement of the transferor. The purpose of this is to preserve the negotiability of the instrument. 2. The transferee is entitled to an UNQUALIFIED IBNDORSEMENT. This is the type of indorsement most used in the commercial world and the one generally expected by the transferee unless the parties
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have agreed to the contrary. The burden of proof is upon the party who alleges that the transferee is entitled only to a qualified indorsement. The court is careful to note though that it does NOT follow that the law requires an unqualified indorsement in every case. The transferee will be granted the kind of indorsement to which he is entitled, according to the circumstances of the particular case. Transferee may compel transferor (Bank of Roseburg) to indorse the instrument and this implies an UNQUALIFIED indorsement. FURBEE V. FURBEE (1936) HELD: Payee transferred the instrument to plaintiff without indorsing it. The rights of the indorsee: (a) transferee can sue the transferor such transfer vests in the transferee such title as the transferor had therein. YET, transferee not a Holder in Due Course. WHISTLER V. FORSTER (1863) FACTS: Griffiths gave the check to Whistler for value but did not indorse it : Whistler at the time he received the check, had no notice of the fraudulent manner in which Griffiths obtained it from the defendant Forster. But before Whistler obtained the indorsement of Griffiths, he had notice of such fraud. HELD: Before Griffith indorse the check, Whistler had the same rights as if ordinary chattel had passed to him by an equitable assignment. He had all the rights which Griffiths could convey to him. However, Griffiths, being guilty of fraud, could not pass any right by merely handing the instrument to another. Thus, before the instrument was indorsed to him, he has not title as transferee of the bill. RULE: The transfer/delivery of a negotiable instrument passes to the transferee all the rights which the transferor could convey to
him. If in addition to the delivery, the instrument is also indorsed, the transferee acquires GOOD AND CLEAN TITLE regardless of his predecessors title, PROVIDED he (transferee) acquires the instrument for value and without notice of fraud. NOTE : In BOTH Whistler and Simpson, the indorsement obtained subsequently has no curative effect because when it was made, holders already knew of the defect in title and of the dishonor. Sec. 52 must be met at the time of the negotiation, i.e., when indorsement is actually made. 10. Cancellation of Indorsements Holder may strike out indorsements not necessary to his title. The endorsers whose endorsement struck out, and all endorsers subsequently to him, are thereby, relieved from liability on the instrument 11. Indorsement by Agent The agent should make it plain that he is signing in behalf of a principal otherwise he may be made personally liable 12. Presumption as to Indorsement (Secs. 45, 46 & 42) 13. Continuation of Negotiable Character An NI, although overdue, retains its negotiability unless it has been paid or restrictively indorsed to prevent further negotiation
IV.
HOLDER IN DUE COURSE
HOLDER Sec. 191 RIGHTS OF HOLDER 1. sue thereon in his own name 2. payment to him in due course discharges instrument
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HOLDER IN DUE COURSE: REQUISITIES 1. complete and regular upon its face sec. 124 (effect of alteration) sec. 125 (what constitute material alterations) An instrument is incomplete when it is wanting in any material particular or particular proper to be inserted in a NI without which the same will not be complete. But if the omission is not an important particular, such omission will not deprive the holder of the right of a holder in due course 2. holder became such before it was overdue, without notice of any previous dishonor sec. 53 (demand inst. nego after unreasonable length of time: not HDC) sec. 12 (effect antedating/postdating) An instrument is overdue after the date of maturity An overdue instrument is still negotiable, but it is subject to the defense existing at the time of the transfer 3. taken in good faith and for value sec. 24 (presumption of consideration) sec 25 (definition. of value) sec. 26 (definition. holder for value) sec. 27 (lien as value) bad faith does not require actual knowledge of the exact truth; it is sufficient that the facts within the knowledge tend to show that there was something wrong with the transaction 4. at time negotiated to him, he had no notice (sec. 56-def; 54-notice before full amt. paid) of: a. infirmity in instrument b. defect in title of person negotiating 1. instrument/signature obtained through fraud, etc., illegal consideration/means, or 2. instrument negotiated in breach of faith, or fraudulent circumstances
RIGHTS OF HOLDER IN DUE COURSE 1. to sue on the instrument 2. to receive payment on the instrument 3. holds instrument free of any defect of title of prior parties 4. free from defenses available to prior parties among themselves 5. may enforce payment of instrument for full amount, against all parties liable * if in the hand of any holder (note definition of holder) other than a HDC, vulnerable to same defenses as if nonnegotiable RIGHTS OF PURCHASER FROM HOLDER IN DUE COURSE General Rule: in the hands of any holder other than a HDC, NI is subject to same defenses as if it were non-negotiable. Exception: holder who derives title through HDC and who is not himself a party to any fraud or illegality has all rights of such former holder in respect to all parties prior to the latter.
WHO DEEMED HDC prima facie presumption in favor of holder but when shown that title of any person who has negotiated instrument was defective (sec. 55when title defective): burden reversed (now with holder) but no reversal if party being made liable became bound prior to acquisition of defective title (i.e., where defense is not his own) 1. Rights of a Holder in Due Course
BANK OF THE PHILIPPINE ISLANDS v. ALFRED BERWIN & CO. (1928) FACTS: Judgment had been rendered in favor of BPI [B] against A. Berwin & Co [A] [B] wants to satisfy such judgment by executing on a certain property of [A] Said property is in relation with [A]s credit against Anselmo Diaz [D]; evidenced by a promissory note [PN] by [D] in favor of [A]
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HELD: Only a holder in due course [HDC] may enforce payment on the PN. It is not clear whether [A] is still the HDC since [D] believed that [A] may have negotiated it. Thus, to compel [D] to pay would expose him to pay a second time to the HDC (in case [A] was no longer one). 2. Holder for Value Where value has at any time been given for the instrument, the holder is deemed to be a holder for value in respect to all parties who become such prior to that time The term holder for value is not limited to one who is known to have given valuable consideration, but includes also any holder of the instrument for which value has been given at any time Value is any consideration sufficient to support a simple contract a. What constitutes value
HELD: [G], as indorser, liable to [E] on the notes if [E] is a holder for value [HFV]. As to the $2,000, [E] was a HFV. The consideration paid by [E] for this note was the cancellation and surrender by it of the several other notes executed by [B] to other parties and indorsed to [E] and the payment in cash to [B] of the difference between the notes so cancelled and the face value of the $2,500 note. As to the $3,000, [E] was also a HFV. An indorsee of a negotiable note who has taken it, before its maturity, as a collateral security for a pre-existing debt1 and without any express agreement, is deemed a holder for a valuable consideration, and that he holds it free from latent defenses on the part of the maker. Therefore, [G], et. al. are liable to [E] on the notes. Judgment affirmed. b. Bank credit as value When the holder of a check deposits it with his bank (assuming it is not the drawee bank) and the bank credits it to his account, is the bank at this stage a HFV? Majority View first money in is presumed to be the first money paid out Minority View as long as the balance in the depositors account equals or exceeds the amount of the instrument deposited, the latter cannot be considered as withdrawn for the purpose of treating the bank as a HFV. (So far, there has been no decision by the SC on this issue.) MERCHANTS NATIONAL BANK OF ST. PAUL v. STA. MARIA SUGAR CO. (1914)2 FACTS: Sugar Co. [S] maker; American Hoist & Derrick Co. [A] payee
ELGIN NATIONAL BANK v. GOECKE, ET. AL. (1920) FACTS: Goecke [G], maker of the note, manager of the brewing company [B] borrowed $3,000 from the Elgin National Bank [E] Henry Schmidt [S] acted as guarantor $3,000 was used to pay operating expenses of [B] [B] executed 2 demand notes ($3,000; $2,500); endorsed by [G], et.al.; to be used to pay supplies for [B] Both notes were diverted by [G]; [E] not aware of diversion $3,000 collateral security for the note by [G] & [S] $2,000 endorsed to [B] in payment of 5 other notes [B] defaulted on both notes [E] sued indorsers Judgment by lower court for [E]; appellate court affirmed
1 2
Sir JD: Sec. 25, an antecedent debt constitutes value. Majority view.
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[A] deposited note with Merchants National Bank [M] Note was for $2,340; credit given to depositor was $2,427.36 (principal + interest) Deposit prior $20,233.77 Less: credit given 2,427.36 --------------$22,661.13 + addl deposits $129,547.60 - withdrawals $110,999.58 Smallest balance (March 29 April 26) $6,294.04 (April 18) [M] sued [S] [S] claimed that [M] was not a HFV, therefore, not a HDC Trial court dismissed complaint
National Hay Co. [H] deposited draft on WM Cosby Flour & Grain Co. [W] with the National Bank of Commerce [C] Account of [H] credited with the full amount of the deposit Draft forwarded by [C] to the First National Bank [F] for collection and remittance to [C] Draft paid by drawee to [F] Prior to remittance to [C] Attachment proceedings by Morgan [M] against [H] Garnishment directed to [F] [C] propounded its claim to said fund Circuit court judgment for [M]
ISSUE: WON by discounting the note and by the subsequent transactions on the account it can be considered that value passed therefore. HELD: The mere discounting of the note and placing the amount of said discount to the credit of the HFV would not then have constituted a transfer for value. But if the sum had subsequently been checked out, then value would have passed. The general rule as to the application of payments, there being no special facts to interfere, is that the first payments to the oldest debts. The first debits are to be charged against the first credits. It follows therefore, upon the facts as found, that the bank was a bona fide HFV without notice, and, in accordance with the stipulation, judgment should be entered for the plaintiff upon the note. Judgment reversed. NATIONAL BANK MORGAN (1921)3 FACTS:
3
HELD : Evidence failed to show that [C] was a bona fide purchaser for value. [C] credited the amount of the draft to the deposit account of the drawer, [H], and did not become a bona fide purchaser of the same as against [M], a creditor of [H], unless it showed that the amount so credited was absorbed by existing debts or subsequently checked out, but affirmatively shows the contrary, by establishing a balance on deposit to the credit of [H], in excess of the amount of the draft, continuously from the negotiation for same to the service of the garnishment. Judgment affirmed. c. What value Illustration I A B C constitutes a holder for
maker w/o consideration indorses w/o consideration indorses
OF
COMMERCE
v.
D gives value to C; D holder for value as regards A, B and C Illustration II A maker w/o consideration
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Minority view.
B C D
negotiates for value negotiates by way of gift HFV vs. A & B, but not vs. C holder has a lien on
d. Where instrument
Sir JD: Note Sec. 27 is this not, in effect, a partial transfer? (bear in mind that partial transfer is prohibited by law) e. Burden of proof Every NI is deemed prima facie to have been issued for valuable consideration 3. Holder in Good Faith effect of
a. Notice; bad faith; suspicious circumstances
UNAKA NATIONAL BANK v. BUTLER FACTS: Harris [H] maker; Unaka National Bank [U] drawee; Butler [B] payee [H] delivered check for value to [B] [B] indorsed in blank and negotiated to Thomas David [D] [D] lost the check [H] ordered payment stopped, as per request by [D]; [H] gave notice to [U] Stop order overlooked; check paid to Ward & Fryberg [W] [B] sued [U] Judgment for [B] HELD : Original rule protected the purchaser for value, in due course of trade, unless he had actual knowledge of the defects in the title of the holder, or of the facts which convicted him of bad faith in the transaction. Rule was changed in 1824, but in 1834 a return to the original rule was made. In 1899, with the Negotiable Instruments Law, the ruling in Gill v. Cubit (the 1824 case) was abrogated.
Rule under the NIL To constitute notice of an infirmity in an instrument, or defect of the title of the p[erson 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 amounted to bad faith. The purchaser of a negotiable instrument owes no duty to the former holders to actively inquire into the title of the party in possession, and that circumstances of suspicion and gross negligence are not of themselves bad faith, but only evidence tending to establish it. [W] purchased the check for value, in due course of trade, and without actual knowledge of the infirmity of the title of the holder. There was no bad faith in the transaction. Hence, they acquired a perfect title to the check by their purchase, and had the right to collect it. [D] lost his title, and is not entitled to recover its proceeds from the bank. Judgment reversed; suit dismissed. VICENTE R. DE OCAMPO & GATCHALIAN, ET. AL. (1961) CO. v.
FACTS: Gatchalian [G] maker; De Ocampo [D] payee [D] received check in payment of debt of Matilde Gonzales [M] [D] gave [M] difference between face value of check and debt of [M] [G] alleged that the check was issued subject to a condition (this involved the sale of [D]s car) which was not fulfilled and that [D] was guilty of gross negligence in failing to take steps to protect itself. HELD: In order to show that the defendant had knowledge of such facts that his action in taking the instrument amounted to bad faith, it is not necessary to prove that the defendant knew the exact fraud that was practiced upon the plaintiff by the defendants assignor, it being sufficient to show that the defendant had notice that there was something wrong
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about the assignors acquisition of title, although he did not have notice of the particular wrong that was committed. Under the circumstances of the CAB, instead of the presumption that payee was a holder in good faith, the fact is that it acquired possession of the instrument under circumstances that should have put it to inquiry as to the title of the holder who negotiated the check to it. The burden was, therefore, placed upon it to show that notwithstanding the suspicious circumstances, it acquired the check in actual good faith. One line of cases had adopted the test of the reasonably prudent man and the other that of actual good faith. It would seem that it was the intent of the Negotiable Instruments Act to harmonize this disagreement by adopting the latter test. Negligence on the part of the plaintiff, or suspicious circumstances sufficient to put a prudent man on inquiry, will not of themselves prevent a recovery, but are to be considered merely as evidence bearing on the question of bad faith. Defendants absolved from the complaint. STATE INVESTMENT HOUSE v. INTERMEDIATE APPELLATE COURT, ET. AL. (1989) FACTS: New Sikatuna Wood Industries, Inc. [W] requested loan from Harris Chua [C] [C] agreed on the condition that [W] should wait until December 1980 when he would have the money [C]s wife issued 3 postdated checks payable to [W] [W] entered into an agreement with [S] in consideration of $1M+, [W] assigned/discounted with [S] 11 checks (including the 3 checks) 3 checks were dishonored Action for collection by [S] against [C] Lower court judgment for [S]; IAC reversed ISSUE: WON petitioner is a HDC as to entitle it to proceed against private respondents for the amount stated in the dishonored checks.
HELD: A check with 2 parallel lines in the upper left hand corner means that it could only be deposited and may not be converted to cash. Consequently, such circumstance should put the payee on inquiry and upon him devolves the duty to ascertain the holders title to the check or the nature of his possession. Failing in this respect, the payee is declared guilty of gross negligence amounting to legal absence of good faith and as such the consensus of authority is to the effect that the holder of the check is not a holder in good faith. Effects of crossing a check: the check may be negotiated only once to one who has an account with a bank; and 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 that purpose, otherwise he is not a HDC. The NIL does not provide that a holder who is not a HDC may not in any case recover from [W] if the latter has no valid excuse for refusing payment. The only disadvantage of a holder who is not in due course is that the negotiable instrument is subject to defenses as if it were non-negotiable. Judgment affirmed; [S] however may recover from [W]. b. Financing company noy a holder in good faith as to buyer In installment sales, the buyer usually issues a note payable to the seller to cover the purchase price. Many times, pursuant to a previous arrangement with the seller, a finance company pays the full price of the property sold and the note is indorsed to it by the seller, subrogating it to the right to collect the price from the buyer. RULE In such cases, the tendency of the courts is to protect the buyer against the finance company in the event that the goods sold turn out to be defective. The finance company will be subject to the defense of failure of consideration and
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cannot recover the purchase price from the buyer. Consolidated Plywood v. IFC rule applied Salas v. CA rule not applied CONSOLIDATED PLYWOOD INDUSTRIES, INC. v. IFC LEASING & ACCEPTANCE CORP. (1987) FACTS: Consolidated Plywood Industries, Inc. [P] needed tractors Industrial Products Marketing [I] offered to sell 2 tractors; warranty by [I] 90 days [P] purchased tractor on installment; deed of sale with chattel mortgage with promissory note was executed [I] executed deed of assignment, in relation to the CM, in favor of IFC Leasing [L] 14 days after tractor 1 broke down; 9 days later tractor 2 also broke down [P] unilaterally rescinded the contract case filed by [L] vs. [P] Trial court judgment for [L]; IAC affirmed HELD: There was breach of warranty on the part of [I]. Liability extends to assignee, unless one is a HDC (assuming the CM/PN to be negotiable). The PN was not negotiable since there were no words of negotiability. Thus, [L] was not a HDC but a mere assignee. Furthermore, even if it was negotiable, [L] knew of the condition (note that [L] actually participated in the sale), thus [L] could not have been a HDC. Decision annulled and set aside; complaint dismissed. SALAS v. CA (1990) FACTS: Juanita Salas [J] bought car from Violago Motors [V]; PN executed PN: [J], maker of the PN [V] indorsed to Filinvest Finance & Leasing Corp. [F] [F] financed the purchase
[J] defaulted in payment due to discrepancy [F] sued for sum of money vs. [J] RTC found in favor of [F]; CA affirmed HELD : Unlike in the Consolidated Plywood case, words of negotiability can be found in the PN, thus negotiable (note that other requirements for negotiability were also present). The PN was negotiated by indorsement. [F] was therefore a HDC, having taken the instrument under the following conditions: (1) it is complete and regular upon its face; (2) it became the holder thereof before it was overdue; (3) it took the same in good faith and for value; and (4) when it was negotiated to [F], the latter had no notice of any infirmity in the instrument or defect in the title of VMS Corporation. Accordingly, [F] 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. Thus, [J] cannot set up against [F] the defense of nullity of the contract of sale between her and [V]. Decision affirmed. COMMERCIAL CREDIT CORP v. ORANGE COUNTY MACHINE WORKS (1950) FACTS: Orange County Machine Works [M] wanted to buy a press Ermac Co. [E] offered to sell to [M] Commercial Credit [C] was asked by [E] to finance the transaction; [C] agreed provided that an assignment of the contract of sale between [M] and [E] be made A blank form suuplied by [C], to which the PN was attached, was used as the contract [C] gave [E] check for $4,261; the press was for $5,000; [M] paid $1,512.50 [E] deposited check from [C] and [M] [E] sent to Precooling Corp. [P] check for $5,000
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Check of [E] dishonored, thus, [P] did not deliver the press [C] sued [E] (defaulted) and [M] (counterclaim vs. [E]) Judgment for [C] & [M] vs. [E]; and for [M] as regards [C], since [C] was not a HDC because [C] knew that [E] was not the owner of the press and that there was no delivery yet made to [M] HELD: There is no good reason why the concurrent execution of a note and a conditional sales contract should deprive an otherwise negotiable instrument of the characteristics which give it commercial value. That factor alone should not defeat negotiability. Nor in the absence of fraudulent misrepresentation, not here present, is there reason to hold that the physical attachment of a note and a conditional sales contract at the time of execution renders the note non-negotiable where the contract clearly shows the facts in regard to it. When a finance company actively participates in a transaction of this type from its inception, counselling and aiding the future vendeepayee, it cannot be regarded as a HDC of the note given in the transaction and the defense of failure of consideration may be properly be maintained. Machine works never obtained the press for which it bargained and, as against [C], there is no more obligation upon it to pay the note than there is to pay the installments specified in the contract. Judgment affirmed. c. Effect of purchase at a discount Purchase of an instrument at a discount does not, of itself, constitue bad faith. However, if the instrument is pruchased at a heavy discount, this fact together with other facts, mey be taken into account in deciding the issue of purchase in good faith HAM v. MERITT (1912) FACTS: [M] [S] assigned [B] sold [H]
Note was for $300; [B] sold note to [H] for $100 [H] sued [M] [M] alleged fraud; [H] contends HDC Judgment for [M] HELD: The evidence is clear and conclusive that [H], in fact, paid [B] $100 for the note, and there is an entire want of any other evidence to show that he had notice of any infirmity in the note, except the fact that [B] sold the note for $100. While the fact that the note was sold for so small an amount might, with some other evidence, be of great weight, standing alone, it is not sufficient to show that [H] is not a bona fide purchaser. To constitute notice of infirmity or defect, the person tow whom the note is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith. Under this statute the mere fact that the purchaser takes the note at a large discount is not sufficient, standing alone, to deprive him of its protection. Judgment reversed, cause remanded for new trial. d. Effect of notice before full payment Notice of defenses to a purchaser before he has acquired title and before he has paid any protion of the purchase price isfully operativ to prevent him fromeing a holder in due course PENNOYER v. DUBOIS BANK (1926) FACTS: [W] sold stocks to [P]; [P] paid by way of 2 notes (July 21, 1920) [W] negotiated noted to [D]; [D] issued certificate of deposit to [W] [D] no knowledge of fraud (July 22, 1920) [W] negotiated certificate of deposit to [F] [D] presented notes for payment; [P] refused [D] had knowledge of fraud (January 21, 1921)
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Certificate of deposit due (April 22, 1921) [D] made payment on the certificate of deposit (April 28, 1921) [D] sued [P] [P] claimed that [D] not a HDC, hence, personal defense of fraud available vs. [D] Court judgment for [D] HELD: Where the holder has given for the negotiable paper his promise which he must perform, as for instance, when he has incurred liability to a third person, it is quite clear that he is in the same position, and is entitled to the same protection as one who paid for the paper in money/property at the time of the transfer. Plaintiff was a HDC. Judgment affirmed. e. Constructive notice not sufficient Just as a purchaser of a negotiable instrument is not put on inquiry, neither is he charged with notice of defenses or equities disclosed by public records, nor is he affected by the doctrine of lis pendens. However, notice to an agent is chargeable against the principal.
assigns the mortgage, and the attempted assignment of the mortgage without a transfer of the debt it secures is a nullity. The doctrine of constructive notice is applicable only to aperson who is dealing with the land itself, and since the purchaser of a negotiable PN, secured by a mortgage, is not dealing in land, there is no field for operation of the registry laws in cases of this kind. The doctrine of constructive notice has never been applied to commercial paper; the true test as to negotiable paper being that of good or bad faith. 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 amounted to bad faith. Judgment affirmed. f. Notice of accomodation not notice of defect An accomodation party is one who has signed the instrument as maker, drawer, acceptor or endorser, without receiveing value therefor, and for the purpose of lending his name to some other person. He is liable on the instrument, notwthstanding the fact that the holder knwe him to be an accomodation party. 4. Complete and Regular The most common type of irregularity is alteration upon the face of th instrument. The alteration must be apparenton the face of the instrumnt, for if it isnot apparent, the matter is goverened solely by Sec. 124, which renders it void MILES CITY BANK v. ASKIN (1947) FACTS: [A] issued 2 checks ($150 & $1,000) to [C] [A] signed his own name and inserted the numerals in lead pencil; [C] filled in the remaining blanks including his own name [C] indorsed check to [M]
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FOSTER v. AGUSTANNA COLLEGE (1932) FACTS: [H], maker; [A] payee [H] executed note with mortgage [A] assigned note and mortgage for full value [F] [F] redelivered to [A] as custodian [A] assigned note and mortage to [C] [C] had no knowledge re: assignment to [F] [A] became bankrupt [F], 1st assignee, sued [C], 2nd assignee Judgment for [C] HELD: Where a mortgage is given to secure a negotiable PN, the note imparts its negotiable character to the mortgage, and both are brought within the purview of the statutes dealing with commercial paper, and that the mortgage is a mere incident to the note, and an indorsement of the note automatically
[A] stopped payment [M] sued [A]; check now amounts to $5,000 Court found evidence of alteration; jury found for plaintiff HELD: It will not be presumed that any alteration was made prior to delivery, and with assent of the maker. The ancient rule of alterations and erasures or written instruments were presumed to have been made at or prior to the time of their execution. The trend of authority is still in favor of the rule as thus declared. However when an alteration or erasure appears suspicious on its face, it demands explanation. In the presence of this, or equally cogent circumstances of a suspicious nature, the law presumes nothing, and the question as to the time when the person by whom, or the interests for which, the alteration was made are matters of fact to be found by the jury upon proof adduced by the party offering the instrument in evidence. Should the jury find that the instrument had been materially altered after its execution and delivery, but nevertheless the plaintiff was a holder in due course, not a party to the alteration, then the plaintiff should be allowed recovery according to its original tenor. Should the jury find that the alteration was so obvious as to impart notice thereof to plaintiff, it might well conclude that plaintiffs action amounted to bad faith toward the defendant; certainly in such event, it must conclude that cashing the check amounted, at the least, to gross negligence. Judgment reversed; remaded for new trial. BRONSON v. STETSON (1930) HELD: Under Section 16, if defendant is a HDC, the note is good in her hands, although it was not filled by Mears strictly in accordance with the authority given by the plaintiffs to him. If defendant is not a HDC, then, as plaintiffs became parties before completion, the note may not for reasons stated be endorsed against them.
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 within a reasonable time. Defendant not HDC. The note (and mortgage) in her hands is open to the plaintiffs equities which must prevail. 5. Holder Before or At Maturity and Without Notice of Dishonor BLISS v. CALIFORNIA COOP. PRODUCERS (1947) FACTS: Marketing contracts were entered into by the cooperative [C] with many producers Agricultural producers executed noninterest bearing negotiable notes, payable to [C], in 10 annual installments Each of the 3 makers defaulted in the first installment [C] negotiated notes to Bliss [B] to secure payment of [C]s note for $5,000 held by [B] [B] sued 3 makers; judgment for [B] HELD: The transferee of an installment note is not a HDC as to any part of the note when the transfer has been made after the maturity of one or more but less than all of the installments. A transferee of a note is a HDC as to the installments to mature in the future when the transfer is made after one or more but not all of the installments are due on its face unless the past due installments have not in fact been paid and he had notice of that fact. Judgment reversed. BARBOUR v. FINKE (1924) HELD: The mere fact that interest due is unpaid, the principal not being due, does not render the note dishonor. Therefore, even if plaintiff had notice of such non-payment, which does not
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amount to dishonor, it would not prevent plaintiff from becoming a HDC. LE DUE v. FIRST NATIONAL BANK OF KASSON (1883) HELD: The general rule is that a bill must be presented for payment within a reasonable time, having in view ordinary business usages, and the purposes which paper of that class is intended to subserve. OVERDUE A right of action against drawer or indorser; OR a bill which has come into the hands of an indorser so long after its issue as to charge him with notice of its dishonor, and thus subject it in his hands to the defenses which the drawer had against it in the hands of the assignor. In the CAB, it may be said to be overdue, although it has never been in fact presented to the drawee for payment. The draft in the CAB was, without any explanation of the reason, found outstanding nearly 5 months after its date. IDAHO STATE BANK v. HOOPER SUGAR CO. (1929) HELD: When a mere inspection of an instrument shows that it has been altered, a purchaser is not a HDC because sucha note is not regular on its face. The material, intentional and fraudulent alteration of a bill or note by the payee or holder will not only be defense to an action on the instrument as altered, but also to an action on the original indebtedness; and the rule also applies to an indorsee after maturity, as he stands in the same position as his indorser in respect to such alteration. While a material alteration of a note is a defense to an action on the instrument itself, in order that such an alteration may be a bar to recovery on the original debt or
consideration, it must appear that the alteration was made with fraudulent intent. The instrument takes a new lease of life with respect to an indorser after maturity, and his equitable defenses are not let in until a reasonable time after he indorses, although the paper is apparently overdue. The same is true of a drawer or even a maker or acceptor who becomes bound after the date of payment. The promise is to pay on demand. A contract after maturity has a special maturity of its own, i.e., a reasonable time after execution, and bona fide purchasers within that time will be protected from all equities of the party who signed, even equitable defenses. Judgment reversed. DUNN v. OKEEFE (1816) FACTS: [D] [S] [S] presented bill to [R]; dishonored no notice to [D] [S] negotiated to [K]; [K] no knowledge of dishonor [K] presented bill to [R]; dishonored [K] notice to [D] [K] sued [D]; judgment for [K] HELD: The drawer who issued his bill into the world, without procuring its acceptance, is not without some degree of blame. Upon the whole, it appears that no authority has pronounced that a bill of exchange shall be void security, in the hands of an innocent indorsee, who has knowledge that the bill has ever been dishonored, because a former holder has omitted to give notice to the drawer that the drawee has refused acceptence. Judgment affirmed. 6. Effect of Postdating or Antedating The instrument is not invalid for the reason only that it is ante-dated or postdated, provided this is not done for an illegal or fraudulent purpose. The person to whom the instrument so dated is
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delivered acquires title thereto as of the date of delivery. An instrument is ante-dated if it bears a date earlier than the date of its actual issuance. It is post-dated if it bears a date later that the date of issuance.
TRIPHONOFF v. SWEENEY (1913) FACTS: Sweeney [S], drawer; National Bank [N], drawee; Malcheff [M], payee Check delivered March 25; postdated April 15 April 15, [M] negotiated check to Triphonoff [T] for value and in good faith [S] stopped payment; defense vs. [M] [T] presented check, April 17; dishonored by [N] [T] sued [S]; JM for [T] HELD: However we may designate the instrument in suit, there can be no question but that it complies with all the necessary requirements of the law as to a negotiable instrument. It is full and complete upon its face. The instrument is not invalid 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 title thereto as of the date of delivery. Independent of any statutory regulation, it makes no difference whether a check be postdated or antedated, it is still payable according to its express terms. Judgment affirmed. 7. Effect of Qualified, Conditional and Restrictive Indorsements The status of a holder as a holder in due course is not affectedby his taking under a qualified indorsement. A conditional indorsement does not deprive the conditional indorsee or subsequent holderof the rights of a holder in due course. If he fulfills all the
requisites in Sec. 52 then he is immune from all the personal defense. A restrictive indorsement which prohibits further negotiation will not prevent the indorsee from being a holder in due course. However, should he further indorse the instrument, then the subsequent indorsee will not be a due course holder. Payee as Holder in Due Course
8.
HOWARD NATIONAL BANK v. WILSON (1923) FACTS: [E] transferred funds from one account to the other in order to hide the fact that his accounts were already overdrawn. It was only after he died that this was discovered. HELD: That a payee is capable of being a HDC at common law has been held almost without dissent. This is the well recognized doctrine of our own cases. The plaintiff was not an immediate party to the signing of the note, in contemplation of section 16. The payee of a note is in proximity to the maker, but he may or may not be in privity with him, or immediate to the maker. Immediate means privity not proximity. The payee named in a note may be so separated from the consideration thereof as to have the rights of a purchaser for value; and on the other hand a transferee may be so associated with the transaction in which the note was given as not to be within the intended protection of the NIL. Judgment for [H] affirmed. 9. Rights of a Purchaser from a Holder in Due Course A holder who dervies title to the instrument through a holder in due cours has all the rights of the latter even though he himself satisfis non of the requirements of a due course holder.
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However, if the pruchaser from a due course holder is party to the fraud or illegality affecting the NI, then he does not acquire the rights of his predecessor
PIERCE v. CARLTON (1922) FACTS: Carlton [CL], maker; Crawford [CR], payee CL (3 PNs; $2,100) CR indorsed in blank to Pierce [P] bought notes for $1,800; sold for $2,100 to Thos. B. Pierce [T] indorsed [P] bought back notes for $2,100 [CL] alleged fraud on the part of [CR]; and that [P] had notice and even aided [CR] in committing fraud Judgment for [CL] HELD: The principle that one who acquires title from a HDC may recover, though he himself may not have had notice of the infirmty when he acquired the instrument from such holder, was recognized before the enactment of the NIL. But this rule is subject to the single exception that, if the note were invalid as between the maker and the payee, the payee could not himself, by purchase from a bona fide holder, become successor to his rights, it not being essential to such bona fide holders protection to extend the principle so far. Affirmed. LILL v. GLEASON (1914) FACTS: PN - $1,000 for stock in Peerless Machinery & Supply Co. [P]; Nelson Gleason [G], maker [P], payee Written contract: [G] may return stock; [P] to return cancelled PN, upon notice by [G] Notice given by [G] but PN was not returned [P] indorsed in blank, before maturity, PN to Andale Stae Bank [A]; as security for $3,500 to be advanced by [A] to [P] Michael Lill [L] wrote his name at the back of the note [A] cashed the note
[L] and [A] had no notice of the contract between [G] and [P] [G] refused to pay upon demand of bank, [L] took up the note without indorsement from [A] Action by [L] vs. [G] Judgment for [G]; [L] not a HDC HELD: General Rule payment by a party other than the principal debtor does not discharge parties prior to the one making the payment, and the payment, instead of extinguishing the instrument, operates as a transfer of it to the party paying. The contract of an indorser for the accomodation of the payee is wholly independent of that of the maker, and such indorser, upon making payment, succeeds to the title and rights of the holder as against the maker. Having derived title from the bank, which was a HDC, and not having been a party to any fraud or illegality affecting the instrument, [L] became possessed of all the rights of the bank against the maker. When a negotiable instrument once passes into the hands of a holder by indorsement in due course, the makers right to interpose defenses good against the payee is cut off as to all subsequent holders not parties to fraud or illegality affecting the instrument. Judgment reversed. FOSSUM v. FERNANDEZ (1923) FACTS: Fossum [F], agent of American Iron [A] [F] acting as agent of [A] procured order from [H] Draft ([A] maker; PNB [P] payee; Fernandez hermanos [H] drawee) presented to [H] for acceptance; was accepted Shaft not in conformity with specifications; thus, [H] refused to pay the draft; remained dishonored for a time in the hands of [P] [P] indorsed in blank, without consideration, to [F]
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[F] filed action vs. [H] Judgment for [H] HELD: [F] was not a HDC. In the first place, he himself was a party to the contract which supplied the consideration for the draft, albeit he there acted in a representative capacity. In the second place, he procured the instrument to be indorsed by the bank and delivered to himself without the payment of value, after it was overdue, and with full notice that, as between the original parties, the consideration had completely failed. His attorney, however, calls attention to the familiar rule that a person who himself not a HDC may yet recover against the person primarily liable where it appears that such holder derives his title through a HDC. However, there is not a line of proof in the record tending to show as a fact that the bank itself was ever a holder of this draft in due course. In this connection it was incumbent upon the plaintiff to show, as an independent matter of fact, that the person under whom the plaintiff claims, i.e. the bank was a HDC. Judgment affirmed. 10. Presumption Course Holding in Favor of Due
explain the terms and conditions of the acceptance. That would specially be true where the plaintiff held the draft for collection. It also found, in legal effect, that the plaintiff released and discharged the defendants from any liability upon the draft, and the evidence sustains the finding. Judgment affirmed. VAN SYCKEL v. EGG HARBOR COAL AND LUMBER CO. (1932) HELD: The CAB is barren of any proof of the genuineness of the signature of the payee, which was an essential part of the plaintiffs case. At common law, one who sues upon a written contract is obliged, in the absence of admission, to prove the signature of the defendant before the instrument can be received in evidence. The presumption in favor of due course holding should be viewed in relation to other pertinent provisions of the negotiable instruments law. The rule is: the holder is deemed a HDC, only upon his presentation of proof of the genuineness of the makers and the payees signatures. What is the reason for such a prerequisite? In the absence of such proof, there would be nothing to indicate that the instruments had in fact been negotiated, or that the person possessed of the physical paper had title thereto, or the proceeds thereof. BEACON TRUST CO. v. RYDER (1931) FACTS: R. Ryder [R], maker; C. Ryder [C], indorser Morris Rudnick [M], payee; [M] & ES Co. [E] ([M] was treasurer of [E]) indorsed to Beacon Trust Co. [B] Action of contract brought vs. [R], et. al. Defense no consideration; fraud; [B] not HDC (presumption not applicable) Judgment in favor of [B] HELD :
ASIA BANKING CORP. v. TAN SEN GUAN (1923) FACTS: Draft of $10,475.51; Snows Ltd. [S], maker; Asia Bank [A], payee; Ten Sen Guan [T], drawee HELD : If it be a fact, as the evidence tends to show, that the plaintiff is not a bona fide holder of the draft, and that it was held for collection only, it follows that the defendants would have a right to make any defense to the draft which they would have a right to make against [S]. The trial court found and the evidence sustains the finding that the acceptance of the draft by the defendants was conditional, and that oral evidence was admissible to
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Mere testimony not enough to rebut presumption. Burden of proving that [B] was not a HDC was on [R]. Exceptions overruled. FARMERS (1930) STATE BANK v. KOFFLER
FACTS: Koffler [K], maker; Farmers and Merchants Bank [F], drawee; Kenneth Davis [D], payee [D] lost check [K] not informed of loss Check encashed by unknown person Trial court found in favor of [F] ISSUE: WON [F] can recover from [K] HELD: The fraudulent putting in circulation of a negotiable instrument which operates to change the burden of proof and call upon the plaintiff to prove his title as a bona fide holder, is where this is done fraudulently as to the defendant or maker, and not where it is so done as to the payee or some intermediate holder or party to the paper. Section 6944 (Every holder is deemed prima facie to be HDC xxx) considered as a whole, does not have the effect of shifting to the plaintiff the burden of proving that he is a HDC of the note on which he sues merely by a showing on the part of the defendant that the title to the instrument was defective as against some intermediate indorsee. It follows then that in the instant case the presumption that the plaintiff had received the instrument in due course operated in his favor and was sufficient to make his case and entitle him to a recovery, unless the stipulated facts had the effect of affirmatively establishing notice of the defect in the title or lack of good faith. Judgment affirmed. 11. Transferee Instrument of Unindorsed
HELD: A transferee of a note payable to order cannot obtain legal title thereto, except by indorsement of the payee; a holder without such indorsement takes it subject to all the equities vested in prior parties. In the CAB, since the note was acquired by the Commercial Bank of La Fayette unindorsed, no title on indorsement is vested in the former. V. DEFENSES & EQUITIES
KINDS OF DEFENSES 1. real defense attaches to instrument; on the principle that the right sought to be enforced never existed/there was no contract at all. Real defenses are those available against all holders; they attach to the res regardless of the merits or demerits of the holder. 2. personal defense growing out of agreement; renders it inequitable to be enforced vs. defendant. Personal defenses are those which grow out of the agreement or conduct of a particular person in regard to the to the instrument which renders it inequitable for him, tough holding the legal title, to enforce it against the party sought to be made liable but which are not available against a holder in due course. DEFENSES 1. INCAPACITY: real defense Although the negotiation of the instrument by an infant or a corporation can pass title to the instrument, their indorsements, for want of capacity, however, will not create the usual consequential liability of an indorser, and this defense may be raised by them against the holder 2. ILLEGALITY: Personal, even if no K because void under CC 1409 As a general rule, illegality is a personal defense that is not available against a
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COMMERCIAL BANK OF TRUST CO. v. BARRY (1934)
LAFAYETTE
holder in due course. The exception is when the law expressly provides for illegality as a real defense 3. FORGERY: real (lack of consent): a. forged b. made without authority of person whose signature it purports to be General Rule: a. wholly inoperative b. no right to retain instrument, or give discharge, or enforce payment vs. any party, can be acquired through or under such signature (unless forged signature unnecessary to holders title) Exception: unless the party against whom it is sought to enforce such right is precluded from setting up forgery/want of authority precluded: a. parties who make certain warranties, like a general indorser or acceptor b. estopped/negligent parties * note rules on Acceptance/Payment Under Mistake as applied to: 1. overdraft 2. stop payment order 3. forged indorsements 4. MATERIAL ALTERATION Where NI materially altered w/o assent of all parties liable thereon, avoided, except as vs. a 1. party who has himself made, authorized or assented to alteration 2. and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a HDC not a party to the alteration, HDC may enforce payment thereof according to orig. tenor Material Alteration 1. change date 2. sum payable, either for principal or interest 3. time of payment
4. number/relations of parties 5. medium/currency of payment, adds place of payment where none specified, other change/addition altering effect of instrument in any respect *material alteration a personal defense when used to deny liability according to org. tenor of instrument, but real defense when relied on to deny liability according to altered terms. 5. FRAUD a. fraud in execution: real defense (didnt know it was NI) b. fraud in inducement: personal defense (knows its NI but deceived as to value/terms) 6. DURESS Personal, unless so serious as to give rise to a real defense for lack of contractual intent 7. COMPLETE, UNDELIVERED INSTRUMENT Personal defense (sec. 16) If instrument not in poss. Of party who signed, delivery prima facie presumed If holder is HDC, delivery conclusively presumed 8. INCOMPLETE, UNDELIVERED INSTRUMENT Real defense (sec. 15) Instrument 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 9. INCOMPLETE, DELIVERED Personal defense (sec. 14) 2 Kinds of Writings: 1. Where instrument is wanting in any material particular: person in possession has prima facie authority to complete it by filing up blanks therein
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2. Signature on blank paper delivered by person making the signature in order that the paper may be converted into a NI: prima facie authority to fill up as such for any amount In order that any such instrument, when completed, ma be enforced vs. any person who became a party thereto prior to its completion: 1. must be filled up strictly in accordance w/ authority given 2. within a reasonable time but if any such instrument after completion is negotiated to HDC, it's valid for all purposes in his hands, he may enforce it as if it had been filled up properly 1. Defenses & Equities in General
CAMPOS : Liability of signatories to a negotiable instrument depends on whether there are existing defenses or claims of ownership thereto. The 2 kinds of defenses are: 1. Real Defenses - are available against all holders, including holders in due course. They are those which attach to the instrument itself and, generally, disclose an absence of one of the essential elements of a contract. 2. Personal Defenses can be raised only against holders not on due course. Here, the true contract appears, but for some reason, the defendant is excused from the obligation to perform. Equities or claims of ownership are of 2 kinds: 1. Legal one who has legal title to the instrument may recover possession thereof even from holder in due course 2. Equitable may only recover from a holder not in due course What Are These Defenses? Incapacity Illegality Forgery
Material alteration Fraud Duress Complete instrument which is undelivered Incomplete instrument which is undelivered Incomplete instrument which is delivered Lack of consideration Real defenses Incapacity as available only to the incapacitated person Statutory declaration of illegality of a contract Forgery Material alteration when relied on to deny liability according to the altered terms Where fraud is of such a nature as one is tricked into signing a paper which he did not know to be a negotiable inst. So serious a duress that leads to lack of contractual intent Incomplete instrument which is undelivered Personal Defenses Illegality (in general) Material alteration, when used to deny liability according to the original tenor of the instrument Fraud (in general) Duress (in general) Non-delivery of a complete instrument Incomplete instrument which has been delivered Absence or failure of consideration Incapacity Who are incapacitated Minors Insane or demented persons Deaf-mutes who do not know how to read and write Effect of INDORSEMENT or ASSIGNMENT by a CORPORATION or by an INFANT
2.
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Property is passed even if the INFANT or CORPORATION may incur no liability for want of capacity (SEC 22)
before the purchase that the note was good and that he would pay it at a discount. 4. Forgery
MURRAY v THOMPSON (1916) HELD: In stipulating in Section 22 of the NIL that the indorsement of the instrument by the infant passes the property therein, it was meant to provide that the contract of indorsement is not void, and that his indorsee has the right to enforce payment from all parties prior to the INFANT indorser. The incapacity of the minor cannot be availed by prior parties. The said section was not intended to provide that the indorsee shall become the owner of the instrument by title indefeasible as against the infant, or to make the act of indorsement an irrevocable one. 3. Illegality CAMPOS: When: A signature is forged A signature is made without the authority of the person whose signature it purports to be Effects The signature is wholly inoperative (Camposes :and no one can gain title to the instrument through the forged signature ) No subsequent party can acquire the right to Retain the instrument Give a discharge there for Enforce payment thereof Against: any party thereto (prior to the forgery) Exception to these effects: Where the party against whom the right is sought to be enforced is precluded from setting up the forgery as when there is A general indorser after forgery who warrants that the instrument is genuine An acceptor who warrants genuineness (Sec 62) Estoppel Ratification* *There are conflicting views as to whether precluded includes ratification. One view holds that a forged signature cannot be ratified because ratification involves the relation of agency and a forger does not assume to act for another. Special effect to a bearer instrument Where an instrument is generally payable to bearer, the holder who did not know of the forgery can still enforce it against the drawer or maker because he can cancel
CAMPOS : Although 1409 of Civil Code provides that a contract with an illegal cause is void , by virtue of Sec 55 of NIL , illegality is merely a personal defense which provides that only the parties involved in the illegality and subsequent parties who are not holders in due course can be adversely affected by the defect. RODRIGUEZ v MARTINEZ (1905) HELD: Maker cannot be relieved from the obligation of paying the holder the amount of the note alleged to have been executed for an unlawful consideration. (Illegality is personal, so defense only against a holder not in due course) The holder paid the value of the note to its former holder. He did so without being aware of the fact that the note had an unlawful origin. He accepted note in good faith, believing the note was valid and absolutely good. The maker even assured the holder
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the forged indorsement as not being necessary to his title. (Sec 48) What happens when there is acceptance and payment of a forged instrument The rights and liabilities of the parties depend on whether the forgery pertains to the drawer/makers signature or merely of an indorsement.
FORGED SIGNATURE OF MAKER/DRAWER When the drawers signature is forged on a bill or a check, the drawee who pays it without having detected the forgery cannot charge the amount to drawers account. From whom can the drawee recover? Drawee cannot recover Does the bar to recovery apply to a drawee who has paid the bill without accepting it? MAJORITY VIEW: The drawee who had paid an accepted or even a non-accepted bill which bore the forged signature of the drawer COULD NOT RECOVER the money paid out on the bill(Price v Neal doctrine) MINORITY VIEW: Payment is different from acceptance. Payment discharges the instrument and converts it to a mere voucher. Acceptance implies its continued existence and its possible negotiation. The bar to recovery (Price v Neal doctrine) is extended to overdrafts and stop payment orders. An overdraft occurs when a check is issued for an amount more than what the drawer has in his deposit with the drawee bank. In this case, the drawee who pays the holder cannot recover from said holder the amount paid. The drawee may recover from the drawer. The drawee who paid even when a stop payment order was received prior, cannot recover from the bona fide holder who cashed the instrument .
Some exceptions: If the payment to holder is a legitimate debt of the drawer which the holder in due course could have recovered from the drawer anyway. If stop order comes after the bank has certified or accepted the check, the bank is under the legal duty to pay the holder and will not be liable to the drawer for doing so. It is the duty of the depositor/drawer to carefully examine banks statements, cancelled checks, his check stubs, and other pertinent records within a reasonable time and to report any errors without unreasonable delay. If a drawer/depositors negligence and delay should cause a bank to honor a forged check, drawer cannot later complain should bank refuse to recredit his account. FORGED INDORSEMENT The drawee can recover the amount paid by him in cases where only an indorsement has been forged. This is because drawee makes no warranty as to the genuineness of any indorsement. Generally, the drawee may only recover from the holder. Should he fail to do so (for instance due to insolvency) he cannot recoup his loss by charging it to the drawers account Although a depositor/drawer owes a duty to his drawee bank to examine his cancelled checks, he has no similar duty as to forged indorsements. The drawer, as soon as he comes to know of the a forged indorsement should promptly notify the drawee bank When drawee may recover from DRAWER Where the instrument is originally a bearer instrument, because the indorsement can be disregarded as being unnecessary to the holders title Indorsement forged by an employee or agent of the drawer
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If due to the drawers negligence /delay, the forgery is not discovered until it is too late for the bank to recover from the holder or the forger When drawee may not recover from holder If drawee fails to act promptly, if he delays in informing the holder whom he paid Where the instrument is originally a bearer instrument, because the indorsement can be disregarded as being unnecessary to the holders title Between Drawee Bank and Collecting Bank Where the negligence of the drawee bank is the proximate cause of the collecting banks payment of a check with a forged indorsement, the drawee bank may be held liable to the collecting bank . When both are guilty of negligence, the degree of negligence of each will be weighed in considering the amount of loss which each should bear. In general
ratification and negligence. Checks were allegedly indorsed by the maker herself with directions to cash them, to purchase supplies for her and to return the balance to her. ISSUE: Can a maker set up the defense of forgery? HELD: SC adopted the view that precluded includes ratification. A party may be precluded by a ratification under NIL Sec 23. Ratification can be substitute for a precedent authority. Ratification occurs when a party with full knowledge of the material facts confirms, approves or sanctions the others acts. Where a principal (maker) accepts and retains benefits of the unauthorized agent , he thereby ratifies the act. Only forgery not amounting to a crime (those without intent to defraud) may be ratified. SAN CARLOS MILLING CHINABANK (1933) v BPI &
a.
GLUCKMAN v DARLING (1914) HELD: It is true that silence and acquiescence alone does not estop a defendant upon an alleged forged instrument from proving the forgery, where the plaintiff had not been prejudiced or damaged thereby. But where the holder of the note has been willfully misled as to the genuineness of an indorsement thereon by one who purports to be the indorser and sustains damage , the alleged indorser will be estopped from denying the validity of the signature. STRADER v HALEY (1943) FACTS: Maker claims that her signature on several checks had been forged. Defendants interposed the defenses of estoppel,
FACTS: A collecting bank honored a managers check in which the signature/indorsement of the agent for the payee/corporation was forged HELD: The signatures of the check being forged, under Sec 23 of the NIL they are not a charge against the payee nor are the checks of any value to the collecting bank The proximate cause of the loss was the negligence of the collecting bank. PNB v QUIMPO (1988) FACTS: Person forged the signature of the drawer and encashed check in drawee bank. Drawee debited the account of drawer. Drawer/depositor demanded that the amount be returned to his account. HELD:
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A bank is bound to know the signatures of its depositors. If bank pays a forged check it must be considered as making the payment out of its own funds and cannot charge the account of the depositor whose signature was forged. The prime duty of a bank is to ascertain the genuineness of the signature of its depositors. It is expected to use reasonable business prudence In accepting and cashing a check. b. Acceptance mistake and payment under
(1) When the drawee accepts or pays a forged instrument WHAT HAPPENS WHEN THERE IS ACCEPTANCE AND PAYMENT OF AN INSTRUMENT WITH FORGED SIGNATURE OF DRAWER/MAKER Can drawee recover?
Where a holder for value in due course presents to the drawee a bill of exchange to which the drawers name has been forged, the holder and drawee being ignorant, the drawee cannot recover payment to the holder. This rule rests upon the grounds of 1. estoppel 2. principles of negligence 3. principle of natural justice 4. convenience and commercial necessity There are a few jurisdictions in which it is held that the drawee can recover from the innocent holder. The doctrine of Price v Neal is not available to 1. holder guilty of bad faith - The holder is guilty of bad faith towards the drawee if he participated in the forgery or if he knew the check was forged, or knew of circumstances causing the suspicion 2. has been negligent - A holder cannot profit by mistake which his negligent disregard of duty has contributed to induce the drawee to commit. PNB v NATIONAL CITY BANK OF NEW YORK (1936)4 HELD: 1. That were a check is accepted or certified by the bank on which it is drawn , the bank is estopped to deny the genuineness of the drawers signature and his capacity to issue the instrument 2. That if the drawee bank pays a forged check which was previously accepted or certified, it cannot recover from the holder who did not participate in the forgery and did not have actual notice thereof. 3. That the payment of a check does not imply its acceptance (Sec 62) 4. That in the case of payment of a forged check, even without former acceptance, the drawee cannot recover from the holder in due course NOT CHARGEABLE with any act of negligence or disregard of duty5 PNB v CA (1968)
4
PRICE v NEAL (1972) FACTS: Drawee paid holder of 2 bills which were forged without the knowledge of alleged indorsee. Indorsee, however acted innocently and without the least suspicion of the forgeries. Drawee seeks to recover the amount he paid. HELD: Drawee who had paid an accepted bill as well as a non-accepted bill, each of which was forged, could not recover the money paid out on the bill. The neglect was on the part of the drawee. The holder had actual encouragement from the drawee himself for negotiating the second, from the drawees having no hesitation in paying the first.
FIRST NATIONAL BANK v US NATIONAL BANK OF PORTLAND (1921) HELD:
confusing minority view Camposes
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FACTS: Drawee paid amount of the check to the collecting bank and debited it against the account of the drawer. Check had not been accepted. Subsequent discovery of forgery of the signature of officers of the drawer resulted in the re-crediting of the said amount. HELD: Drawee cannot recover from collecting agent. Acceptance and payment under the NIL are essentially different things. Acceptance is a promise to perform an act. It is the signification by the drawee of his assent to the order of the drawer. Payment is the actual performance of the act. It is the compliance with the obligation itself. Upon payment the check ceased to become a negotiable instrument and has become a mere voucher or proof of payment. The warranty guaranteed only all prior indorsements, not the authenticity of the signatures of the drawer. RP v EQUITABLE, BPI (1964) HELD: Where a loss, which must be borne by one of two parties alike, innocent of forgery ,can be traced to the neglect or fault of either; it is reasonable that it would be borne by him through whose means the fraud succeeded. Generally, where a drawee bank, otherwise would have a right of recovery against a collecting or indorsing bank for its payment of a forged check , its action will be barred if it is guilty of an unreasonable delay in discovering the forgery and in giving notice thereof. (2) Extensions of the Price v. Neal doctrine (a) Overdraft An overdraft occurs when a check is issued for an amount more than what the
drawer has in deposit with the drawee bank The drawer who pays the holder of the bill despite the fact that the drawer had no sufficient funds to cover it, cannot recover from the holder what he paid under mistake
FIRST NATIONAL BANK OF PORTLAND v NOBLE (1946) FACTS: A teller mistook the rejection symbol on the check for a symbol authorizing payment. Drawee bank paid on check of depositor who had no enough funds to cover the amount of the instrument HELD: Drawee cannot recover. The representative of the drawee should have been put to an inquiry concerning the meaning of the symbol and the state of its depositors account LIBERTY TRUST CO. v HAGGERTY FACTS: Depositor who had insufficient funds conspired with drawee banks employee to manipulate books so that checks drawn by him can be paid out. Depositor issued checks as payment for a loan even if he had actually no funds to his credit. Drawee bank paid. Can drawee recover? HELD: No, drawee cannot recover. Creditor became a bona fide holder for value. As holder, the creditor had no legal right to exact payment on the drawee because there is no contract between them. The drawee has the right to determine whether to pay the checks or not. Having exercised its option to pay, the drawee cannot recover the money back from the payee. The payment of a check by a bank upon which it is drawn, under the mistaken belief that the maker has sufficient funds to his credit to pay the check, is FINALITY. The reasons for the rule are:
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Camposes claim No 4 is almost similar to the majority view upheld in Price v Neal
1) because there is no privity between the payee and the drawee bank 2) because the bank always has the means of knowing the state of the depositors account by an examination of its books . 3) because to permit the bank to repudiate the payment would destroy the certainty that must pertain to commercial transactions and give way to uncertainty, delay and annoyance (b) Stop payment order A stop payment order is one issued by the drawer of a check countermanding his first order to the drawee bank to pay the check The drawee bank is bound to follow the order, provided it is received prior to its certification or payment of the check (3) Effect of negligence of depositor If it is the proximate cause of the loss, the bank is not liable Each time a person uses the check, he should fill out the check stub and carefully examine the banks statement to determine and report any errors (4) Effect of payment under forged indorsements Although an exception to the doctrine of payment under mistake is made in the case of a drawee who accepts or pays a bill on which the drawers signature is forged, no exception lies in the case of the drawees acceptance or payment of a genuine bill where only an indorsement is forged The drawer can recover against the holder GREAT EASTERN LIFE v HONGKONG & SHANGHAI BANK (1922) FACTS: Drawee debited the depositor-drawers account the amount it paid to collecting agent upon whom a check with forged indorsement was presented and deposited HELD:
The legal presumption is that the drawee bank would not honor the check without the genuine indorsement of the payee. The drawee bank had no legal right to pay except as to the drawer or to its order The collecting bank also had no license or authority to pay money to forger or to anyone upon a forged indorsement. It was its legal duty to know that the indorsement was genuine before cashing the check. Where a check is drawn payable to the order of one person and is presented to a bank by another and purports upon its face to have been duly indorsed by the payee of the check, it is the duty of the bank to know that the check was duly indorsed by the original payee and where the bank pays the amount of the check to a 3rd person, who has forged the signature of the payee , the loss falls upon the bank who cashed the check , and its remedy is against the person to whom it paid the money. JUDGMENT: 1) in favor of the drawer against the drawee 2) in favor of the drawee against collecting bank 3) remedy of collecting bank against the holder/forger JAI-ALAI v BPI (1975) FACTS: Various drawers issued checks payable to company. A sales agent of the payeecompany forged indorsements on the checks and negotiated it to Jai-Alai. Jai-Alai deposited checks with a collecting bank which provisionally credited the amount to its account. Upon discovery of the forgery, collecting bank informed Jai-Alai that it would debit its account. Drawers demanded from drawees. Drawees demanded from collecting bank. Collecting bank paid the drawees. Collecting bank, now debited Jai-Alais account. Jai-Alai drew a check against its account with the collecting bank. Check was
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dishonored for insufficiency of funds (collecting bank having debited this account). HELD: A collecting bank which indorsed the checks to the drawee for clearing should be liable to the drawee for reimbursement. The payments made by the drawee to the collecting bank were ineffective and so the relationship of creditor and debtor between the holder (JaiAlai) and the collecting bank had not been validly effected. The holder-depositor (Jai-Alai) must shoulder the loss of the amounts which the collecting agent had to reimburse to the drawee-banks. Holder depositor is also general indorser who warrants that the instrument is genuine and in all respect what it purports to be . The collecting bank which relied on the warranty should not be held liable for the resulting loss. JUDGMENT: 1) In favor of the drawee against collecting bank (reimbursement) 2) In favor of the collecting bank against the holder-depositor CANAL BANK v BANK OF ALBANY (1841) FACTS: Drawee bank paid a holder upon a forged indorsement of the payee. There were several other prior holders. HELD: Neither acceptance nor payment is an admission that the indorsers name is genuine The remedy is by action over each against his respective indorser. REPUBLIC v EBRADA (1975) FACTS: Holder successfully encashed a back-pay check in which the indorsement of the payee was forged, as he was already dead. There were two other holders before Ebrada. Drawee bank refunded the amount upon the discovery of the forgery
and upon the request of the drawer. Drawee demanded for the return of the amount from the holder. HELD: In a case where the check has several indorsements, it is only the negotiation based on the forged or unauthorized signature which is inoperative. The drawee can recover from the holder the money paid to him on a forged instrument. It is not supposed to be the duty of the drawee to ascertain whether the signatures of the payee or indorsers are genuine or not. This is because the indorser is supposed to warrant to the drawee that the signatures of the payee and previous indorsers are genuine. The holder- as last indorser was duty bound to ascertain whether the check was genuine before presenting it to the drawee. Failure of the holder to do so makes her liable for the loss. JUDGMENT: In favor of the drawee against the holder-last indorser BANCO (1988) DE ORO v EQUITABLE BANK
FACTS: Drawer-drawee bank seeks to be reimbursed by the collecting bank for the value of the checks with forged indorsement which was debited from the drawer-drawees clearing account and credited to the collecting agents. HELD: Philippine Clearing House Rules are applicable both to negotiable and non-negotiable instruments. In presenting the checks for clearing the collecting agent, made an express guarantee on the validity of all the prior endorsements. The collecting bank having stamped its warranty led the drawee-drawer bank to believe that it was acting as an indorser.
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Collecting bank or last indorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements The negligence of the drawer cannot constitute a defense on the part of the collecting bank because there is no privity of contract between them. JUDGMENT: In favor of the drawee-drawer bank against collecting bank BPI v CA (1992) FACTS: Drawer-Drawee issued checks on the basis of misrepresentation of a woman who preterminated a money market placement. This same woman opened a current account and deposited the checks with the collecting bank. Collecting bank paid the two checks on the basis of the verification of the signature with the specimen signature on file. The guaranty of prior indorsements was stamped to the checks. Collecting bank sent the checks for clearing. The drawee bank cleared checks on the same day. Upon discovery of the forgery, drawee bank returned the checks to the collecting agent for the reason of forged indorsements.
negligence in the selection and supervision of their employees Considering the comparative negligence of the parties, thedemands of substantive justice are satisfied by allocating the loss and the costs on a 60-40 ratio. GEMPESAW v CA, PBC (1993) FACTS: Drawer seeks to recover the money value of 82 checks (most of which were crossed checks) on the ground that the signature of the payees thereon were forgeries. (After 2 years the forgeries were found to have been perpetrated with the help of the trusted bookkeeper of the drawer). The said amount was debited against the drawers account in the drawee bank. HELD: [Note: This is not a suit by the party whose signature was forged . The payees are not parties to the case rather, it is the drawer, whose signature is genuine, who instituted this action to recover from the drawee bank .] Problems arising from forged indorsements may be broken into 2 types: 1. where forgery was accomplished by a person not associated with the drawer (ex. Mail robbery) 2. where the indorsement was forged by an agent of the drawer. This difference in situations would determine the effect of the drawers negligence with respect to forged indorsements. While there is no duty resting on the drawer depositor to look for forged indorsements on his cancelled checks, in contrast to the duty imposed upon him to look for forgeries in his own name, a depositor is under a duty to set up an accounting system and business procedure as are reasonably calculated to prevent or render the forgery of indorsements difficult, particularly by the depositors own employees. And if the drawer learns that a check drawn by him has been forged , he is under the duty to report such to the drawee.
HELD: Section 23 of the NIL has 2 parts. The first part states the general rule that a forged signature is wholly inoperative and payment made through or under such signature is ineffectual. The second part admits of exception. In this jurisdiction, the negligence of the party invoking the forgery is an exception to the general rule. Both drawee and collecting bank were negligent in the selection and supervision of their employees resulting in the encashment of the checks by the impostor. Both banks were not able to overcome the presumption of
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As a rule the drawee bank who has paid the check with forged indorsement , cannot charge the drawers account for the amount of the said check. An exception to this rule is where the drawer is guilty of such negligence which causes the bank to honor the check. The drawer, in the CAB, failed to examine her records with reasonable diligence whether before she signed her checks or after receiving her bank statements. Drawer is precluded from raising the defense of forgery by reason of her gross negligence. At the same time , the drawee bank failed to exercise the standard of diligence required of it . Drawee bank and drawer must share the loss on a 50-50 ratio in accordance with Art 1172 of the Civil Code allowing the courts to regulate liabilities of parties according to the circumstances. TOLMAN v AMERICAN NATIONAL BANK (1901) HELD: It is a fundamental rule of banking that, when a bank receives money to be checked out by a depositor, it is to be paid only as the depositor shall order. If the bank pays money out of a forged signature, the depositor being free from blame or negligence, the bank must bear the loss. It is a perversion of words to say that the check was intended for the impostor simply because he impersonated the true payee. SNYDER v CORN EXCHANGE (1908) FACTS: Maker authorized an employee to draw checks in his name, against his deposit for special purposes. Agent drew checks in favor of a payee who turned out to be a non-existent person. The checks were subsequently indorsed, the first indorsement is now being questioned as a forgery. Drawee paid these checks to the last indorser upon the guarantee of the
previous indorsements. The amount was charged to the account of maker HELD: A check is payable to bearer when it is payable to the order of a fictitious or nonexisting person, and such fact was known to person making it so payable. (The drawer shall bear the loss and the drawee is without any liability with respect to originally bearer instruments. In such cases the forged indorsement can be easily cancelled as it is not necessary to the title of the holder.) (5) Effect of negligence of drawee in informing recipient of forgery CLEARFIELD TRUST v US (1943) FACTS: The collecting bank received notice of the forged indorsement 2 months after the drawee bank came to know of such. Drawee bank seeks reimbursement of the amount it had paid against the collecting bank based on the express warranty of prior indorsements made by the collecting bank. HELD: The last indorser (collecting bank) should not deserve a preferred treatment. It is his neglect or error in accepting the forgers signature which occasions the loss. The collecting agent is allowed to shift the loss to the drawee only on a clear showing that the drawees delay in notifying him of the forgery caused damage . No such damage has been shown by the collecting bank who so far can still recover from its prior indorser. (6) Effect of negligence of drawer in case of forged indorsements on checks DETROIT PISTON v WAYNE (1930) HELD: It is a well settled rule that a bank is not warranted in paying out the money of its
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depositor except in strict accordance with drawers order. If payment is made on a check on which the indorsement of the payee is forged , no amount of care on the part of the drawee bank in identifying the person receiving or in examining the indorsement , will entitle it to charge the payment against the account of the depositor. The drawee bank may justify such payment by showing that the drawer was negligent in carrying out some duty which it owed to the drawer. JUDGMENT: 1. having a new trial 2. allowing the question of the drawers negligence submitted to the jury Basic rule in estoppel by negligence where the loss, which must be borne by one of the two parties alike innocent of forgery can be traced to the neglect or fault of either, it is reasonable that the one through whose name the fraud was committed must bear the loss Material Alteration
Effects of Material Alteration : 1. the instrument is avoided when the alteration is without the assent of all parties 2. except that, the instrument is not avoided as against a party who has himself made, authorized or assented to the alteration 3. the holder in due course who has the altered instrument and not a party to the alteration, may enforce the payment according to the instruments original tenor Alteration must not be apparent on the face of the instrument for the holder then would not be a holder in due course When alteration is of the amount, the holder can recover the original amount Drawee bank can likewise charge the drawers account with the original amount Where the interest rate is altered, the holder in due course can recover the principal sum with the original rate of interest Who is excepted from this rule? A subsequent indorser, because by the indorsement he warrants that the instrument is in all respects what it purports to be and that it was valid and subsisting at the time of his indorsement (Sec 65 and 66) What happens when drawee accepts or pays on the altered check? Can the drawee bank recover the money it paid? Can drawee bank recover the difference between the original amount and the amount it paid to the holder in due course?
5. a.
In general
CAMPOS: MATERIAL ALTERATION - any alteration that changes: 1. the date 2. the sum payable , either for principal or interest 3. the time or place for payment 4. the number or the relations of parties 5. medium or currency for payment, 6. adds place of payment where none is indicated 7. any other change or addition which alters the instrument in any respect The enumeration seems to be exclusive. Camposes say any other alteration would be non-material and would not affect the liability of any prior party. Note that #7 is a catch-all provision such that 125 may still have broad applicability.
PREVAILING VIEW The drawee bank can recover because 1. The amount was paid under mistake 2. Under Sec 124 the holder in due course is only entitled to the original amount
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3. Sec 62 should be related to the definition of acceptance under Sec 132 as the signification of the drawee of his assent to the order of the drawer. In this case, assent to the drawer means assent to the actual not the apparent order of the drawer 4. Sec 124 avoids the instrument except as against the party who has himself made, authorized and assented to the alteration. An acceptor has not assented to the alteration because assent can only mean assent with knowledge of the facts MINORITY VIEW The drawee bank cannot recover because 1. Estoppel under Sec 62, the acceptor (drawee-bank) engages to pay according to the tenor of his acceptance 2. Denying recovery to the drawee bank would tend to give stability to checks 3. Between the holder and the drawee bank, the bank is in a better position to shoulder the loss, since it can and probably should insure itself against such eventualities MONTINOLA v PNB (1951) HELD: The insertion of the words Agent Philippine National Bank converted the bank from a mere drawee to a drawer and therefore changes its liability, constitutes material alteration of the instrument without consent of the parties liable thereon and so discharges the instrument. Drawee bank is not liable. BANK OF COMMERCE v WEBSTER (1918) FACTS: The addition of the name of the wife of the maker to the note, payment of which was guaranteed, changed the identity of said note and its effect and operation , and such alteration being made without the assent and knowledge of the guarantors operated to discharge them from any liability on their guaranty.
HELD: The reason why the addition of name to a note , as a joint maker , after its issuance , materially alters it, is because it changes the rate of contribution and it changes the character and description of the instrument. The original obligor may be subjected to a suit in a county other than that of his residence and suffer inconveniences and injury. b. Effect of the negligence drawer of the check of the
CAMPOS: The general rule is that the drawee cannot charge against the drawers account the amount of an altered check. But the drawers negligence, before or after the alteration, may estop him from setting up alteration as a defense. An Instance of the Drawers Negligence Drawer leaves spaces on a check making it possible for others to alter amount by inserting figures and numbers Where the negligence of the drawer consists in failing to discover alterations previously made which he could have discovered by a comparison of the cancelled checks and check stubs or by diligent observation of his records and could thus have prevented the drawee bank from subsequently cashing other altered checks, the drawee can charge the subsequent check against the negligent drawers account. FOUTCH v ALEXANDRIA BANK (1941) FACTS: Drawer has the practice of having checks which he gave filled out by the parties to whom his checks were made. Payee filled out wholly the check with pencil, which the drawee bank cashed upon the apparent order. HELD: The great weight of authority recognizes the exception to the general rule that the drawee
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bank must suffer the loss where it cashes a check which has been altered. This exception is where the drawer of the check has been guilty of such negligence in its issuance as to facilitate and induce its alteration so as to proximately cause its payment in altered form. SAVINGS (1925) BANK v NATIONAL BANK
FACTS: Drawer issued a draft on non-sensitized paper and without the impression thereof of any safety device. HELD: Under Sec 124, recovery could be only had against the drawer by the holder in due course for the original face value of the draft. Where a negotiable note was delivered in completed form, the possibility that it might be raised or altered by the willful fraud or forgery of another was too remote to afford the basis of an action either in tort or in contract. The suit as upon a contract could not be maintained upon a note in its forged and altered state, because it was not the contract of the maker of the instrument. In case at bar, the issuing of the note could not be construed as the proximate cause of the loss. It arose from a supervening cause viz. the forging and altering of the draft CRITTEN v CHEMICAL NATIONAL BANK (1902) FACTS: Drawers clerk obliterated by acids the name of the payee and amount specified in the checks, then made the check payable to cash and raised its amount. Clerk would draw the money from the drawee and pocket all the excesses. Drawer brought action to recover the difference between the altered and the original checks. HELD:
While the drawer of the check may be liable where he draws the instrument in such an incomplete state as to facilitate or invite the fraudulent alterations, it is not the law that he is bound to so prepare the check that nobody else can successfully tamper with it. In the present case, the fraudulent alteration was the obliteration and substitution of the word cash which the drawer could not have been expected to guard against. The drawer owes his bank the duty of reasonable verification of the returned checks. It would not prevent a loss by the bank in the case of the payment of a single forged check but it would prevent the successful commission of continuous frauds by exposing the first forgeries. The liability of the depositor for the neglect of his duty to examine and verify his account with the bank is limited to the damages sustained by the bank in consequence of such neglect C. Effect of drawees payment acceptance of altered checks or
MARINE NATIONAL BANK v NATIONAL CITY BANK (1874)6 FACTS: A check was altered by erasing the date, payee and amount but still the drawee bank paid to the collecting bank. Drawee bank requested for repayment upon the discovery of the alteration. HELD: An acceptor of the bill (drawee) only admits the genuineness of the signature of the drawer and does not admit the genuineness of the indorsements, whether of the drawee of the same bill or of any other person whose name appears on it. Money paid upon checks and drafts which have been forgeries, either in the body of the instrument or in the indorsements or in any respect, except the name of the drawer, have uniformly been held recoverable as money paid by mistake.
6
Majority View: Drawee can recover.
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There is no ground for presuming the body of the bill to be in the drawers handwriting or in any handwriting known to the acceptor. This demand is unreasonable and would be requiring the impossible. WELLS FARGO BANK v BANK OF ITALY (1931)7 FACTS: Wthout the consent of the drawer the name of the payee was erased and another name substituted. The check was certified by the drawee and there was after wards indorsed thereon the name of another. It was presented to a collecting bank which was paid the amount therein indicated. Alteration was discovered and drawee seeks to recover from the collecting bank.
HELD: The drawee by its certification admitted the genuineness of the body of the check, that the payee named therein had capacity to indorse and that the collecting bank was a holder in due course. According to Sec 62, the acceptor by accepting the instrument engages that he will pay it according to the tenor of his acceptance and admits the (1) existence of the drawer, the genuineness of his signature and his capacity and authority to draw the instrument and (2) the existence of the payee and his then capacity to indorse. The words according to the tenor of his acceptance must be construed as referring to the instrument as it was the time it came to the hands of the acceptor for acceptance, for he accepts no other instrument than the one presented him-the altered form- and it alone he engages to pay.
FACTS: Drawee paid the collecting bank on the basis of the guarantee the latter made of all prior indorsements. It turns out an alteration has been made in the name of the payee. The drawee bank advised the collecting bank as to the alteration 27 days after the clearing. HELD: As both banks are part of the banking system, they are bound by the regulations of the Central Bank. The Supreme Court has already held that the 24-hour clearing house rule is valid and that if the banks feel that said period is unwise, they should make proper representations with the Central Bank. But until they do so they are bound by the 24hour rule. The failure of the drawee bank to call the attention of the collecting bank as to such alteration until after the lapse of 27 days would negate whatever right it might have had. Where both collecting and drawee banks are equally at fault, the court will leave the parties where it finds them. The remedy of the drawee bank that negligently clears a forged and/or altered check for payment is against the party responsible for the forgery or alteration.
REPUBLIC BANK v CA (1991) FACTS: Drawee bank informed the collecting bank of the alteration almost 2 months after the check was paid and cleared. The check had already been cleared before the drawee knew of the alteration. HELD: The collecting bank is protected by the24hour clearing house rule from the liability to refund the amount paid by the drawee bank. [Note: A much recent Circular changed the point of reckoning for the return of the altered check from within 24 hours from the clearing
HONGKONG & SHANGHAI PEOPLES BANK (1970)8

7 8
BANK
Minority View: Drawee cannot recover. Affirmed the minority view that drawee cannot recover
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to within 24 hours from the discovery of the alteration ] 6. Fraud
one of whom was the friend of the spouses, were present during the signing. A holder in due course in whose favor the alleged payee indorsed the note now demanded from the spouses as makers.
CAMPOS: As a general rule fraud is merely a personal defense. This is usually called fraud in the inducement and is referred to in Sec 55. In this case, the signer or maker knew that the instrument is negotiable but is deceived as to its value or its terms. Even where the signer did not know of the negotiability but could have known by the exercise of ordinary care, there is only a personal defense. But where the signer is tricked into signing an instrument which he did not or could not have known to be negotiable, the defense becomes real. This type of fraud is also known as fraud in factum or fraud in the execution. There now arises a question of negligence on the part of the maker or signer (in determining what type of fraud had been done). Three factors are typically used in determining the existence of negligence: 1. legal character of the instrument which the signer thinks he is signing 2. the physical condition of the signer and his ability to read 3. whether the signer had the opportunity at the time of signing, to ascertain the legal nature of the paper he is executing CLT CORPORATION v PANAC (1944)9 [1st Case]
HELD: As between the original parties, the makers could have pleaded the defense of fraud. Notwithstanding the possession of some knowledge of English, their neglect to call upon others who were present to read them the documents and their failure to insist on seeking independent legal advice, the makers were still free from negligence. But as to a holder in due course to whom the note was indorsed, the makers were not in a position to set up as a defense any equities existing between them and the payee even if found to be free from negligence in executing the notes. Freedom from negligence has never been regarded in California or made by a statute as a defense, real or personal, against the claim of a holder in due course. If the legislature had intended to do so, it would have so provided in no uncertain terms. DISSENT: The type of fraud here involved is fraud in factum or fraud in the execution, which is a real defense. When a party, without negligence, signs a document by reason of fraud and believing the document to be other than a negotiable instrument, the document is not merely voidable but it is void. Fraud of this type is not merely defect in title under Sec 55 but is a factor which renders the instrument as a nonbinding obligation. The document comes into this world stillborn. Negotiation alone cannot breathe life into it. CLT CORPORATION v PANAC [2nd case] (1944)10 HELD: The defense of the makers who signed a document not knowing it was a negotiable
10
FACTS: Spouses who were supposedly illiterate claimed fraud in that they thought they were signing a contract for repairs but in truth were signing promissory notes. The agent of the payee in those notes perpetrated the fraud knowing that the spouses knew no English. Three persons,
9
Superseded by decision in second case
The SC overturned its prior decision
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instrument is a real defense (i.e. it can be raised even against holders in due course). A person who cannot read is not always negligent in not calling on a third person to read the instrument to him. In this case the persons present were also friends of the person perpetrating the fraud. 7. Duress
CAMPOS: Normally, fraud is a personal defense as it is considered as a defect in title under Sec 55. There may be cases where the duress employed is so serious that it will give rise to a real defense because of the lack of contractual intent. Although the signer may know what he is signing, there may want the intent or willingness to be bound. Then it becomes a real defense. 8. Complete delivered Instrument which is
Or for a special purpose only and not for the purpose of transferring the property There is a conclusive presumption of delivery where the instrument is in the hands of a holder in due course. Camposes: Should an undelivered instrument come into the hands of a holder in due course, the maker is liable to him regardless of any proof of the lack of valid delivery. The instrument is prima facie deemed delivered, where the instrument is no longer in the possession of the party whose signature appears thereon.
COHN v CITY OF TAUNTON (1939) FACTS: Bearer bonds which were uncancelled and were without any notation upon them had been stolen. A holder in due course, to whom they were negotiated, demands from the maker. HELD: Maker is liable to holder in due course. A valid delivery is conclusively presumed in favor of a holder in due course. An instrument that has once been issued, returned, discharged and then stolen would stand no differently in the hands of the holder in due course than an instrument that has been prepared and stolen before being issued. SMITH v DOTTERWEICH (1911) FACTS: Renewal notes executed by the maker were not paid at maturity. The payee now claims for recovery. Payee claims that the original note, which were renewed by the ones in dispute, was for the payment of premium for life insurance policies taken by the maker. The maker alleged an oral agreement to the effect that the notes and the policies would not become valid and enforceable obligations, unless the payee (an
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CAMPOS: What is a complete instrument? If an instrument contains all the requisites for making it a negotiable one, it should be considered as complete even if it may have blanks as to non-essentials. Generally, this is a personal defense (Sec 16) Every contract on a negotiable instrument is: Incomplete And revocable until delivery of the instrument for the purpose of giving effect thereto. Between immediate parties and as regards remote parties (not holders in due course), the delivery to be effectual must be Made by or under the authority of the party making, drawing, accepting or indorsing But the delivery can be shown to be: Conditional
insurance agent) would secure for the maker a loan of money. This was never made. HELD: The oral agreement plainly imports a condition which was to be performed before the transaction and the delivery of the policies and the receipts are to be regarded as consummated and binding. In this case, there is a failure of the precise condition which must determine the existence or nonexistence of any contract between the maker and the payee. 9. Incomplete Undelivered11 Instrument which is
of conduct on the part of the drawer creating an estoppel. While there can be no question that the provisions of the NIL do not prevent an inquiry into the question of the negligent custody of the incomplete instrument, and that if as a result of such negligence the instrument came to be in the hands of a holder in due course, the holder may recover, YET based on the circumstances in the present case, the maker is not negligent. The loss did not result from the completion and negotiation of the check by one entrusted with its possession. WEINER v PENNSYLVANIA CO. (1947) FACTS: The drawer signed her name on a check. except for her signature nothing was written on it. The check was stolen and completed by filling in the amount, the date and the name of the payee. This fictitious payee indorsed it. Drawer sued drawee bank. HELD: As between two innocent parties, the bank and the depositor, liability should be borne by one who made the loss possible. This is estoppel in pais. In the instant case, the depositor-drawer signed the check in blank, thus putting it in the power of an unauthorized person to fill it in and present it for payment. The depositors act made the loss possible and enabled the thief to commit the fraud. CAMPOS : The court seems to hold here that the mere signing of check in blank is negligence itself. Is this inconsistent with the Pavilis case. Note, however, that Pavilis was between a holder and make, the Weiner is between drawer and drawee. LINICK v A.J. NUTTING (1910) FACTS:
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CAMPOS: Where an incomplete instrument has not been delivered it will not be a valid contract in the hands of any holder: If completed and negotiated without authority And against any person whose signature was placed thereon before delivery (Sec 15) Who may be estopped from raising the real defense under Sec 15? a drawee bank whose negligent custody of the checks, after partial execution, contributed to its escape PAVILIS v FARMERS UNION FACTS: Maker claims that he signed an instrument in blank which was stolen by his bookkeeper and clerk prior to its delivery. The thief, without makers knowledge or express consent, inserted the date, amount and payee. The said check was transferred to a holder by the payee named thereon. Holder wants to recover from maker. HELD: The check is an incomplete instrument when stolen and cannot be enforced in the absence
11
This is a real defense.
Drawer signed his name to a blank check. Thereafter, it was stolen and thieves filled in the name of payee , the amount and then presented it to the drawee bank for certification. Thieves then indorsed it to the holder who took it for value. HELD: The delivery of an instrument by the drawer/maker is necessary to a valid inception of the contract. The possession of the note/bill by the payee or indorsee is prima facie proof of delivery; but if it appears that the note has never been actually delivered and that without any confidence, or negligence, or fault of the maker, but by force or by fraud, it was put into circulation, there can be no recovery upon it, even when in the hands of an innocent holder. 10. Incomplete Instrument which has been Delivered12 CAMPOS: Sec 14 contemplates two instruments: incomplete instruments a blank paper or a paper as so far incomplete that it does not constitute an instrument The person in possession of the instrument has the prima facie authority to complete it when wanting in any material particular, by filling up the blanks therein. This provision contemplates delivered instruments, so the person in possession cannot be a thief or a finder but a person in lawful possessionone to whom the instrument has been delivered. 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 to amount. The authority to fill up is limited by the following: When completed, it may be enforced upon the parties thereto only if it was
12
filled strictly in accordance with the authority given The filling up must be within a reasonable time This is a personal defense only because provision states that if any instrument so completed is negotiated to a holder in due course, it is valid and effectual for all purposes. In determining what is reasonable time, regard is to be had to the nature of the instrument, usage of trade or business (if any) with respect to such instruments, and the facts of the particular case
Note: If the signature on a paper is given only for autograph purposes and the same is converted into a NI, this will amount to forgery, constituting thus a valid defense even against a holder in due course What details may be filled up? 1. Amount, as to a signed blank paper 2. Date (Sec 13 The insertion of a wrong date does not void the instrument in the hands of a subsequent holder in due course) 3. Place of payment 4. Name of payee BANK OF
SIMPSON v NATIONAL ROSEBURG (1919)
FACTS: The note was executed with the name of the payee left blank. The note was still in that condition when the holder received it. HELD: When the maker of the note leaves the name of payee blank and delivered the instrument to another person for value, then the person to whom the note was delivered or any subsequent holder could insert his own name or that of a transferee , as payee. 11.
13
Consideration13
This is merely a personal defense.
This is a personal defense.
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Every NI is deemed prima facie to be issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value
CAMPOS: Absence or failure of consideration is a matter of defense as against any person not a holder in due course. Partial failure of consideration is a defense pro tanto whether the failure is an ascertained and liquidated amount or otherwise (Sec. 28) DOUGHERTY v. SALT (1919) FACTS: An aunt filled out and signed a note in favor of her nephew for $ 3,000 payable at her death or before . The printed form contained the words value received. The issue is whether said note has consideration. HELD: The inference of consideration to be drawn from the form of the note has been overcome and rebutted. The note was merely a voluntary and unenforceable promise of an executory gift. The child was not a creditor nor was the aunt a debtor. The promise was also neither offered nor accepted. WILLIAM BARCO & SON v FORBES (1927) FACTS: Vendee issued a note in favor vendor in consideration of fertilizer for sweet potato. The vendeemaker claimed the fertilizer delivered was worthless and had no effect on the crops. Despite the partial failure, so to speak, the maker-vendee still executed a renewal note. ISSUE: WON maker liable still liable for the renewal note? HELD:
One who gives a note in renewal of another, with knowledge at the time of the partial failure of the consideration for the original note, or of the false representations by the payee, waives such defense and cannot set it up to defeat or to reduce the liability on the renewal note.
VI.
LIABILITY OF PARTIES
A. PRIMARY PARTIES Person primarily liable: person who by the terms of the instrument is absolutely required to pay the same. Sec. 70 (effect of want of demand on principal debtor) 1. Liability of Maker a. promises to pay it according to its tenor b. admits existence of payee and his then capacity to indorse he is precluded from setting up the following defenses: the payee is a fictitious person the payee was insane, a minor, or a corporation acting ultra vires
2. Status of drawee prior to acceptance or payment sec. 127 (bill not an assignment of funds in hands of drawee) sec. 189 (when check operates as assignment) 3. Liability of Acceptor Promises to pay inst according to its tenor Admits the following: a. existence of drawer b. genuineness of his signature c. his capacity and authority to draw the instrument d. existence of payee and his then capacity to endorse sec. 191, 132, 133, 138 --- formal requisites of acceptance sec. 136, 137, 150 --- constructive acceptance
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sec. 134, 135 --- acceptance on a separate instrument Kinds of Acceptance: 1. general 2. qualified a. conditional b. partial c. local d. qualified as to time e. not all drawees * sec. 142 (rights of parties as to qualified acceptance)
a. b. c. d.
Certification: Principles 1. when check certified by bank on which its drawn, equivalent to acceptance 2. where holder of check procures it to be accepted/certified, drawer and all indorsers discharged from al liability 3. check not operate as assignment of any part of funds to credit of drawer with bank, and bank is not liable to holder, unless and until it accepts or certifies check 4. certification obtained at request of drawer: secondary parties not released 5. bank which certifies liable as an acceptor 6. checks cannot be certified before payable B. SECONDARY PARTIES 1. Liability of Drawer a. Admits existence of payee and his then capacity to endorse b. Engages that on due presentment instrument will be accepted, or paid, or both, according to its tenor and that c. If it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to an subsequent indorser who may be compelled to pay it drawer may insert in the instrument an express stipulation negativing / limiting his own liability to holder
indicates by appropriate words his intention to be bound in some other incapacity Qualified Indorser and one Negotiating by Delivery Instrument genuine, in all respects what it purports to be good title all prior parties had capacity to contract he had no knowledge of any fact w/c would impair validity of instrument or render it valueless in case of negotiation by delivery only, warranty only extends in favor of immediate transferee where a person places his signature on an instrument negotiable by delivery he incurs all the liabilities of an indorser
3. Liability of a General or Unqualified Indorser a. instrument genuine, good title, capacity of prior parties b. instrument is at time of indorsement valid and subsisting c. on due presentment, it shall be accepted or paid, or both, according to tenor d. if it is dishonored, and necessary proceedings on dishonor be duly taken, he will pay the amt. To holder, or to any subsequent indorser who may be compelled to pay it Order of Liability among Indorsers 1. among themselves: liable prima facie in the order they indorse, but proof of another agreement admissible 2. but holder may sue any of the indorsers, regardless of order of indorsement 3. joint payees/indorsees deemed to indorse jointly and severally
2. Liability of Indorsers: Indorser - A person placing his signature upon an instrument other than as a maker, drawer, or acceptor unless he
4. Liability of an Accomodation Party Definition: one who signed instrument as maker/drawer/acceptor/ indorser w/o receiving value thereof, for the purpose of lending his name to some other person
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AP liable on the instrument to holder for value even if holder, at time of taking instrument, knew he was only an AP Liability of Irregular Indorser Where a person not otherwise a party to an instrument, places thereon his signature in blank before delivery, hes liable as an indorser, in accordance w/ these rules: 1. Instrument payable to order of 3rd person: liable to payee and to all subsequent parties 2. Instrument payable to the order of maker/drawer, or payable to bearer: liable to all parties subsequent to maker/drawer 3. Signs for accommodation of payee, liable to all parties subsequent to payee Sadaya v Sevilla Rules: 1. a joint and several accommodation maker of a negotiable promissory note may demand from the principal debtor reimbursement for the amt. That he paid to the payee 2. a joint and several accommodation maker who pays on the said promissory note may directly demand reimbursement from his co-accommodation maker without first directing his action vs. the principal debtor provided: a. he made the payment by virtue of a judicial demand b. or the principal debtor is insolvent 5. Liability of an Agent Signature of any party may be made by duly authorized agent, establish as in ordinary agency Where instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal, he is not liable on the instrument if he was duly authorized, but the mere addition of words describing him as an agent without disclosing his principal, does not exempt from personal liability. Signature per procuration operates as notice that the agent has but a limited
authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority Where a broker or agent negotiates an instrument without indorsement, he incurs all liabilities in Sec. 65, unless he discloses name of principal and fact that hes only acting as agent I. Presentment For Acceptance
What is presentment? It means: (a) the production of a bill of exchange to the drawee for his acceptance, or to the drawer or acceptor for payment; or (b) the production of a promissory note to the party liable for payment When presentment for acceptance must be made 1. bill payable after sight, or in other cases where presentment for acceptance necessary to fix maturity 2. where bill expressly stipulates that it shall be presented for acceptance 3. where bill is drawn payable elsewhere than at residence / place of business of drawee When failure to present releases drawer/indorser Failure to present for acceptance of negotiate bill of exchange within reasonable time Reasonable Time Must consider: 1. nature of instrument 2. usage of trade or business with respect to instrument 3. facts of each case How and When Made Sec. 145, 146, 147 When Excused Sec. 148
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Dishonor and Effects sec. 149 (when dishonored by nonacceptance) sec. 150 (duty of holder where bill not accepted) sec. 151 (rights of holder where bill not accepted) sec. 89 (to whom notice of dishonor must be given) sec. 117 (effect of omission to give notice of non-acceptance) II. For Payment Where necessary Sec. 70 Where not necessary Sec. 79, 80, 82, 151, 111 Date and time of presentment of instrument bearing fixed maturity Sec. 71, 85, 86, 194 Date of presentment Where instrument not payable on demand: presentment must be made on date it falls due Where payable on demand: presentment must be made within reasonable time after issue, except that in case of a bill of exchange, presentment for payment will be sufficient if made within a reasonable time after last negotiation (but note: though reasonable time from last negotiation, it may be unreasonable time from issuance thus holder may not be HDC under sec. 71) Check must be presented for payment within reasonable time after its issue or drawer will be discharged from liability thereon to extent of loss caused by delay Delay excused Sec. 81 Manner Sec. 74, 72, 75 Place Sec. 73 To Whom Sec. 72, 76, 77, 78
Dishonor by nonpayment Sec. 83, 84 Notice of Dishonor Notice of dishonor bring either verbally or by writing, to the knowledge of the drawer or indorser of an instrument, the fact that a specified NI, upon proper proceedings taken, has not been accepted or has not been paid, and that the party notified is expected to pay it General rule: to drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged Form, Contents, Time Sec. 95, 96, 102, 103, 104, 105, 106, 108, 113 By Whom Given By or on behalf of the holder or any party to the instrument who may be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the party to whom the notice is given Notice of dishonor may be given by an agent either in his own name or in the name of any party entitled to give notice, whether that party be his principal or not Where instrument has been dishonored in hands of agent, he may either himself give notice to the parties liable thereon, or he may give notice to his principal (as if agent an independent holder) In whose favor notice operates 1. when given by/on behalf of holder: insures to benefit of a. all subsequent holders and b. all prior parties who have a right of recourse vs. the party to whom its given 2. where notice given by/on behalf of a party entitled to give notice: insures for benefit of a. holder , and a. all parties subsequent to party to whom notice given
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Waiver Sec. 109, 110 Where not necessary to charge drawer 1. drawer/drawee same person 2. drawee fictitious, incapacitated 3. drawer is person to whom instrument is presented for payment 4. drawer has no right to expect/require that drawee/acceptor will honor instrument 5. drawer countermanded payment Where not necessary to charge indorser 1. drawee fictitious, incapacitated, and indorser aware of the fact at time of indorsement 2. indorser is person to whom instrument presented for payment 3. instrument made/accepted for his accommodation Protest Definition: testimony of some proper person that the regular legal steps to fix the liability of drawer and indorsers have been taken When necessary: sec. 152,
1. a.
Liability of Primary Parties In general Parties primarily liable: Maker of promissory note Acceptor of bill of exchange Parties secondarily liable: Indorsers, both note and bill Drawer of bill Primary liability - unconditionally liable; duty bound to pay the holder at date of maturity, whether or not holder demands payment from him, and he is not relieved from liability even if the instrument should become overdue due to failure of holder to make such demand. Secondary liability - conditionally liable; not bound to pay unless the following has been fulfilled: Due presentment or demand from primary party for payment or acceptance; Dishonor by such party; and Taking of proceedings required by law after dishonor. Liability of maker "Maker" applies only to note. By executing note, maker warrants that payee named is existing; by signing the note, maker represents to the world that payee named has capacity to indorse and thus can transfer and valid title to note by indorsement.
b. Form and contents: sec. 153 By whom made: sec. 154 Time and Place: sec. 155, 156
For better security: sec. 158 Excused: sec. 159 Waiver: sec. 111 Acceptance for Honor: Sec. 161, 131, 171 Bills in Set: Sec. 178-183 A bill in set is one composed of various parts being numbered, and containing a reference to the other parts, all of which parts constitute one bill of lading
FIRST NAT'L BANK V. UTTERBACK (1917) HELD: The maker cannot deny either the existence of payee or its capacity to indorse and cannot claim the defense of the failure of the payee to comply with a statute in the making of a contract for which the note was executed. c. Status of drawee prior to acceptance or payment; effect of stop order
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Drawee - person on whom a bill of exchange or check is drawn and who is ordered to pay it. not liable on the instrument until he accepts it; once accepted, becomes primarily liable under Sec. 62, NIL. Before payment or certification by the drawee bank, drawer of the check may countermand the order, and payment thereafter to the payee by the bank is wrongful.
HELD: Obtaining from the plaintiff of a purported release from liability for inadvertency or oversight as a condition of the order to stop payment of the check is contrary to public policy and did not relieve the defendant from its duty to act in good faith and exercise reasonable care. CHASE V. BATTAT (1948) HELD: In the absence of ratification, the drawee has no cause of action against the drawer if the former paid the payee by mistake. d. Liability of acceptor Drawee is not liable unless he accepts the bill and in doing so, he engages to pay the bill according to the tenor of his acceptance. Question as to the meaning of "according to the tenor of his acceptance" and "the admission of existence of payee:" Majority and prevailing view: Where alteration consists in raising the amount payable under the instrument, the acceptor would be liable to a holder in due course only as to its original amount; if the alteration is of the payee's name, paying banks cannot charge drawer's account with the amount of the check because its duty is to pay only according to the order of the drawer. Common law rule: Acceptor of an altered check was not liable thereon to innocent holder except for the original amount, and a paying acceptor or paying drawee was allowed to recover the excess.
ARANETA (1971)
V.
BANK
OF
AMERICA
HELD: In an action by a depositor against a bank for damages resulting from the wrongful dishonor of the depositor's checks, the financial credit of a businessman is a prized and valuable asset, it being a significant part of the foundation of his business. Any adverse reflection thereon constitutes material loss to him. Thus, Araneta's claim for temperate damages is legally justified. WOODY V. NAT'L BANK (1927) HELD: Notwithstanding the relation of the bank to its depositors is that of a debtor and creditor, a bank may be held liable in tort to its depositor whose check is has wrongfully refused or failed to pay.
SINGSON V. BPI (1968) HELD: The existence of a contract between the parties does not bar the commission of a tort by the one against the other and the consequent recovery of damages therefor. 2. SPEROFF V. FIRST CENTRAL (1948)
Formal Requisites of Acceptance Requisites for a valid acceptance: In writing

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Signed by the drawee Not change the implied promise of acceptor to pay only in money No valid oral acceptance or implied acceptance except under Sec. 137, NIL. Sec. 138, NIL allows acceptance to be made while the bill is incomplete. LAWLESS V. TEMPLE (1926)
URWILLER v. PLATTE (1908) HELD: The failure or neglect of a drawee to whom a bill is delivered for acceptance to return the bill, accepted or not accepted to the holder within the 24 hours after delivery makes the drawee an acceptor of the bill. SUMCAD v. PROVINCE OF SAMAR (1956)
HELD: Drawee may be charged against acceptor although he writes merely his name upon the bill and that any one taking the bill has the right to fill up a blank acceptance on the same principle that any holder may fill up a blank indorsement. KILGORE V. MOORE BROS. (1937) HELD: An oral promise to pay, standing alone, is insufficient to charge the bank with liability to pay. a. Constructive acceptance Drawee has 24 hours after presentment within which to make up his mind whether or not to accept the bill, counted from the delivery and not from demand for the return of the bill. If there is not demand for the return of the bill and the drawee keeps it until after the expiration of said period without expressly accepting or refusing it; two views: Constitutes constructive notice Constitutes dishonor because Sec.137, NIL uses the word "refuses" Under the clearinghouse rules, the failure to return within the prescribed time will be deemed payment or acceptance of the check. Acceptance, if given, will retroact to date of presentation.
HELD: There was implied acceptance in view of the circumstances of the case (furnishing of photostatic copies, presentment for certification) by voluntary assuming the obligation of holding so much deposit as would be sufficient to cover the amount of the check.
3. Acceptance Instrument
on
Separate
Two kinds: Extrinsic acceptance - acceptance of an existing bill Virtual acceptance - acceptance of future bill In both cases, the acceptance must clearly and unequivocally identify the bill to which the acceptance refers. COOLIDGE V. PAYSON (1817)
HELD: A letter written within a reasonable time before or after the date the bill of exchange, describing it in terms not to be mistaken, and promising to accept it, is, if shown to the person who afterwards takes the bill on the credit of the letter, a virtual acceptance binding on the person who makes the promise. 4. Kinds of Acceptance General acceptance (Sec. 139, 140, NIL)
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WISNER v. FIRST NATIONAL BANK OF GALLITZIN (1908)
Qualified acceptance (Sec. 141, 142, NIL) Trade acceptance - a draft or bill of exchange with a definite maturity, drawn by a seller on a buyer for the purchase price of goods, bearing across its face the acceptance of the buyer; always states upon its face the transaction from which it arose. Banker's acceptance - a negotiable time draft or bill of exchange drawn on and accepted by a commercial bank. Checks
5.
when it is issued, and again when it is cashed. Crossed check When the name of a particular banker or a company is written between the parallel lines drawn. Effects of a crossed check: (a) the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once to one who has an account with the bank; and (c) the act 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 RP V. PNB (1961)
a. Definition, nature, and kinds A check is an instrument which is in the form and nature of a bill of exchange, but an unlike an ordinary bill, it is always payable on demand and always drawn on a bank. It is a written order addressed to a bank or persons carrying on the business of banking, by a party having money in their hands, requesting them to pay on presentment, to a person named therein or to bearer of order, a named sum of money Postdating a check means that on the date indicated on its face, the check would be properly funded, not that the checks should be deemed as issued only then. It is deemed issued at the time of actual issuance and not the date indicated therein Cashier's or manager's check - one drawn by a bank on itself and its issuance has the effect of acceptance; since the drawer and drawee are the same, the holder may treat it is either a bill of exchange or promissory note. Memorandum check - one where the word "memorandum" or "memo" is written across its face, signifying that the drawer will pay the holder absolutely, without need of presentment. Traveler's check - negotiable instrument upon which the holder's signature must appear twice on the instrument -- first
HELD: Demand drafts have not been presented either for acceptance or for payment, thus the bank never had any chance of accepting or rejecting them; as such, these cannot be subject of escheat. Cashier's check is the substantial equivalent of a certified check and is thus subject to escheat. Telegraphic transfers are likewise subject to escheat because upon making payment complete the transaction insofar as he is concerned, though insofar as the remitting bank is concerned, the contract is executory until the credit is established.
PAL V. CA (1990) HELD: A check, whether a manager's check or ordinary check, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. The issuance of the check to a person authorized to receive it operates to release the judgment debtor from any further obligations on the judgment.
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FORTUNADO V. CA (1991) HELD: The tender of a check is sufficient to compel redemption but it is not in itself payment that relieves the redemptioner from his liability to pay the redemption price. MESINA V. IAC (1986) HELD: The holder of a cashier's check who is not a holder id due course cannot enforce such check against the issuing bank which dishonors the same. b. Certification and its effects Certification - an agreement by which a bank promises to pay the check at any time it is presented for payment; must be in writing which may be made on the check or on another instrument. The refusal to certify a check does not constitute dishonor and the holder cannot at that stage exercise his right of recourse against the drawer and the indorsers. Where the check is certified at the request of the holder, the bank becomes the solidary debtor and the drawer and indorsers are discharged. Where certification is obtained at the request of the drawer, secondary parties are not released. NEW (1980) PACIFIC TIMBER V. SENERIS
HELD: When the bank certifies a check at the request of the holder, the drawer and all the indorsers are discharged from liability thereon. When a bill of exchange is accepted, the drawer is not discharged. ROMAN (1990) CATHOLIC BISHOP V. IAC
HELD: A certified personal check is not legal tender nor is it the currency stipulated, and therefore cannot constitute valid tender of payment. BULLIET V. ALLEGHENY TRUST (1925) HELD: The effect of the bank's certifying a check at the request of the holder is to create a new obligation on the part of the bank to that holder, the amount of the check passes to the credit of the holder, who is thereafter a depositor to that amount. SUTTER V. SECURITY TRUST (1924) HELD: A drawer of a check, which had been certified at his request before delivery, may recall the same and require the certifying bank to refuse payment to the payee named therein if such payee is not a bona fide holder for value, but has obtained the check by fraud perpetuated by him upon the maker. e. Distinction between surrender of check upon payment thereof and negotiation The delivery of the check by the holder to the drawee bank upon its payment is not negotiation. By paying the check, the drawee bank extinguishes it as a negotiable instrument and converts it into a mere voucher. In the case of a deposit of a check by the holder thereof in a bank other than the drawee bank, the signature at the back of
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HELD: Since the check had been certified by the drawee bank, by the certification, the funds represented by the check are transferred from the credit of the maker to that of the payee or holder, and for all intents and purposes, the latter becomes the depositor of the drawee bank, with rights and duties of one in such a situation. WACHTEL V. ROSEN (1928)
the check would constitute an indorsement, unless otherwise indicated. The holder in negotiating the check to the depositary bank, which in turn will collect on the check from the drawee bank, through the clearinghouse. d. Clearing of checks Clearing - check collection process Clearing house - where representatives of different banks meet every afternoon of every business day to receive the envelopes containing checks drawn against the bank he represents for examination and clearance. Liability of secondary parties Liability of drawer
As drawer of the bill, he warranted that it would be accepted upon proper presentment & paid in due course. As it was not paid, he became liable to the payment of its value to PNB. The fact that Picornell was an agent of HTV in the purchase of the tobacco does not necessarily make him an agent of HTV in drawing the bill of exchange. These are 2 different contracts. He cannot claim exemption from liability by invoking the existence of agency. Drawer received notice of protest in fulfillment of the condition set by law for his liability to arise. Drawer's liability is only secondary as the liability of the acceptor is primary.
6. a.
BANCO ATLANTICO v AUDITOR GENERAL (1978) FACTS: Embassy official Boncan fraudulently altered checks payable to her drawn by the embassy by increasing the amounts. Boncan negotiated these checks by indorsement to Bco Atlantico. Bco Atlantico paid the full amount of the checks without first clearing with the drawee bank, contrary to normal banking practice. The drawee bank (PNB) dishonored the checks on the ground that the drawer had issued stop payment orders. Boncan and the Phil. embassy refused to pay the indorsee (Bco Atlantico). RATIO: Drawer (embassy) not liable Bco Atlantico is guilty of negligence in giving Boncan special treatment as a privileged client, in disregard of elementary principles of prudence that should attend banking transactions. Hence, it should suffer the loss. It is doubtful if Bco Atlantico would qualify as holder in due course. In one instance, the bank had knowledge of the infirmity or defect in the check when they were asked to present it for collection at a later date, although it was a demand note.
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PNB v. PICORNELL (1922) FACTS: Picornell obtained money from PNB Cebu to purchase tobacco to be shipped to Manila. Picornell then drew a bill of exchange drawn against his principal, Hyndman, Tavera & Ventura (HTV), in favor of PNB or his order. Upon presentation of the bill, HTV accepted it. However, HTV subsequently refused to pay the bill because some of the tobacco shipped were damaged. RATIO: A. Liability of Acceptor (HTV) PNB is a holder in due course and the partial want of consideration does not exist with respect to the bank who paid full value for the bill of exchange. The want of consideration between the acceptor and drawer does not affect the rights of the payee who is a remote party. The payee or holder gives value to the drawer, and if he is ignorant of the equities between the drawer and acceptor, his is in the position of a bona fide indorsee. B. Liability of Drawer (Picornell)
As the 3 checks were fraudulently altered by Boncan, they are wholly inoperative. No right of payment against any party thereto could have been acquired by the holder. The Camposes note that the drawer was not held liable because the decision was based on 23 on forgery instead of 124 on material alteration. If Bco Atlantico had been a holder in due course, the Phil Embassy could have been held liable for the original amount of the checks. MCCORNACK v CENTRAL STATE BANK FACTS: Through the misrepresentations of Halverson, McCornack consented to loan money to Kutsman, who turned out to be a fictitious person. McCornack drew a check payable to the order of Kutsman, Halverson indorsed the name Kutsman and his own name on the check & deposited it in his bank account. The check was paid upon presentment by the drawee bank, Central State Bank. The drawee bank sent statements of account to the drawer. Only 4 years after the transaction was the fraud discovered. The drawer (McCornack) now seeks recovery from the drawee bank. RATIO: While the drawer admits the existence of the payee & his capacity to indorse, it cannot be construed in the ff manner: 1. As rendering an instrument payable to bearer when it is payable to the order of a fictitious person & the maker is in ignorance of that fact; 2. As imposing on the drawer an admission of the validity & genuineness of an indorsement if the payee's name by one to whom it cannot be said he intended payment to be made; or 3. As relieving the drawee of the duty to ascertain the identity of the indorser & the genuineness of the indorsement.
Drawer did not know payee was a fictitious person. Therefore, the check is not payable to bearer. In the absence of estoppel or negligence on the part of the drawer, the drawee bank bears the loss where the agent of a fictitious person fraudulently secures payment of the check. The obligation of a bank is absolute that it will pay only in the manner directed by the depositor. Liability for payment is not dependent upon negligence but upon a violation of its implied contract with depositor. The question on the drawee's negligence may arise only where the drawer is also guilty of negligence, resulting in estoppel, in issuing the check. But such estoppel will not prevail if the paying bank is also negligent in not discovering the alterations & forged indorsements. In CAB, drawee bank is not shown to have taken any precautions to ascertain the genuineness of the indorsements on the check. Drawer is not guilty of negligence in failing to ascertain the existence of the payee. Halverson could just as easily have forged the indorsement upon a check payable to the order of a real person. The duty of determining forgery of the indorsement upon any check rests primarily with the bank. The drawee cannot invoke as a defense that the drawer warrants the existence of the payee & his capacity to indorse because the statute is designed for the protection of holders, in case the drawee refuses to pay, and not the drawees. Statute was not intended to relieve the drawee of the duty to ascertain the genuineness of the payee's indorsement. Neither does it confer any authority upon the purchaser to indorse the name of the payee & negotiate the instrument. There is no application of the doctrine that, as between 2 innocent parties, he who by his act makes the loss possible must bear it. In CAB, parties are not equally innocent. While the drawer had a right to draw a check payable to the order of a fictitious person, the bank had the duty to know at its peril before it pays the
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check that the indorsement of the payee is genuine. b. Criminal checks (1) (2) liability for bouncing
Under BP 22 Estafa under the RPC
LOZANO v MARTINEZ (1986) FACTS: Questions constitutionality of BP 22 RATIO: A. Non-imprisonment for debt This provision was intended to prevent commitment of debtors to prison for liabilities arising from actions ex contractu. It was never meant to include damages arising in actions ex delicto. The gravamen of the offense is the act of making & issuing a worthless check or a check that is dishonored upon its presentation for payment. Any practice tending to destroy the confidence on checks as currency substitutes should be deterred, for the proliferation of worthless checks can only create havoc in trade circles & the banking community. B. Non-impairment of contract Checks cannot be categorized as mere contracts as they have become convenient substitutes for money. It forms part of the banking system & therefore not entirely free from the regulatory power of the state. C. Equal protection of the law The clause does not preclude classification of individuals & the law may validly accord different treatment to the drawer from the payee. D. Undue delegation of legislative power What cannot be delegated is the power to legislate, the power to define the offense. PEOPLE v NITAFAN (1992) FACTS:
Lim issued a memorandum check which was subsequently dishonored for insufficiency of funds. RATIO: A memorandum check has the same effect as an ordinary check and within the ambit of BP 22. What the law punishes is the issuance itself of a bouncing check & not the purpose for which it was issued nor the terms & conditions relating to its issuance. c. Liability of qualified indorser & one negotiating by delivery d. Liability of unqualified indorser a general or
RAMISH v WOODRUFF (1934) FACTS: Craig indorsed Woodruff's note to Ramish. At the back of the note, the indorsement contained a waiver & guaranteed payment incurred in enforcing the guaranty. The maker claims that the inscription at the back was a guaranty not an indorsement which operates as a transfer cutting off the defenses of the maker.
RATIO: The test of whether the undertaking constitutes a general indorsement is the intention of the transferor to assume the obligations of a general indorser. Words of guaranty being words of enlargement rather than words of limitation, it may fairly be inferred that the transferor's intent was to assume the burdens of indorsement and, in addition, the unconditional liability of one who guarantees payment. WACHOVIA BANK v CRAFTON (1921) FACTS: Carver gave a promissory note to Crafton for money won by the latter in a gambling
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transaction. Crafton indorsed the note Wachovia Bank. Crafton denies liability claiming the note is void. RATIO: Wachovia Bank is a holder in due course. The contract of indorsement is a substantive contract, separable & independent of the instrument on which it appears, which guarantees to a holder in due course that the instrument, at the time of the indorsement, is a valid & subsisting obligation. A holder in due course can recover from the indorser, though the instrument is rendered void by statute. HOROWITZ v WOLLOWITZ (1908) FACTS: Cohen gave a promissory note to Jormack which was subject to usurious rates. Wollowitz was an irregular indorser. Jormack subsequently indorsed the note to Horowitz. The note was not paid at maturity. Wollowitz denies liability claiming the note as void for usury. RATIO: Every indorser who indorses without qualification warrants to all subsequent holder in due course that the instrument is at the time of his indorsement valid & subsisting. In indorsing the note the indorser warranted its validity, & he cannot be heard now to assert that it is void for usury, any more than forger or any other cause. It is an established rule that the obligation of an indorser is a new & independent contract, separate & distinct from the contract evidenced by the note. JAI-ALAI CORP. v BPI supra e. f. 7. Liability of restrictive indorser Order of liability among indorsers Liability as Accommodation Party
FACTS: Marston made a promissory note payable to Ingalls. Before the delivery of the note to the payee, Smith & Foss placed their signatures on the back of the note. There was no demand at maturity nor notice of dishonor given to Smith & Foss. Ingalls seeks to recover from Smith & Foss as original promissors. RATIO: Smith & Foss placed their signatures at the back of the note & are deemed as indorsers. Both regular & irregular indorsers are entitled to have demand made upon the maker & due notice of dishonor given to them. WEST RUSTLAND TRUST v HOUSTON (1932) FACTS: Buck Lumber Co. gave a promissory note as collateral security for its indebtedness with West Rustland Trust. Jones, the treasurer of the bank, asked Buck to execute a renewal note signed also by Houston, promising to return it after the examination of the bank books by the bank examiner. This action was brought to recover on the renewal note. RATIO: It is against public policy to permit the parties to rely upon the illegality of the transaction as a defense. Notwithstanding the fact that the holder knew a party had signed for accommodation only, the accommodation party remains liable to a holder for value. He is not to be treated as a surety (guarantor in Phils). The liability of the accommodation parties on the note is primary & absolute. GOODMAN v GAUL (1923) FACTS: Gaul indorsed the promissory note for the accommodation of the payee, Goodman, not the maker. RATIO:
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INGALLS v MARSTON (1922)
The party for whose accommodation a note is given cannot enforce it against the accommodator as it is a mere gratuity. Since the indorser signed for the accommodation of the payee, the latter cannot recover from the former. CLARK v SELLNER (1921) FACTS: Sellner signed a promissory note as joint maker but only as an accommodation party. He received no part of the amount of the debt. Payee now seeks recovery on the note although the instrument was not presented for payment to Sellner. RATIO: The liability of a joint maker is not dependent on whether or not he has received any part of the amount of the debt. Presentment for payment is not necessary to charge the person primarily liable on the note, i.e. maker. He lent his name to his co-makers placing himself with respect to the creditor in the same position & with the same liability as the other signers. "Without receiving value" means "without receiving payment for lending his name." It is immaterial, so far as the creditor is concerned, whether one of the signers has, or has not, received anything in payment of the use of his name. Payee is a "holder for value" for he had paid the money to the signers at the time the note was executed & delivered to him. As such, he has the right to demand payment of the debt from the signer of the note, even though he knows that the person is merely an accommodation party.
borrow money. Maulini agreed to lend money to Moreno but did not want to appear on the books of the borrowing company as a lender of money. Maulini asked that the promissory note of Moreno be made to the order of Serrano to be indorsed to Maulini eventually. RATIO: There never was a moment when Serrano was the real owner of the note. Serrano was not an accommodation indorser. In accommodation indorsement, the indorser makes the indorsement for the accommodation of the maker. Such an indorsement is generally for the purpose of better securing the payment of the note, i.e. he lends his name to the maker not to the holder. An accommodation note is one which the accommodation party has put his name, without consideration, for the purpose of accommodation some other party who is to use it and is expected to pay it. Campos disagrees with this ruling, referring to the case of Goodman v Gaul, supra, where an accommodation indorsement may be made for the accommodation of the payee or holder. PNB v MAZA (1925) FACTS: Mecenas & Maza executed promissory notes to the order of PNB. They claim that Echaus requested them to sign blank promissory notes so that he might negotiate them with PNB. RATIO: As accommodation parties, the defendants having signed the instruments without receiving value therefore & for the purpose of lending their names to some other person, are still liable on the instruments. It is not necessary that any consideration should move to the accommodation maker. The consideration which supports the promise of the accommodation maker is that parted with by the person taking the note & received by the person accommodated.
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MAULINI v SERRANO (1914) FACTS: Serrano is a broker in the business of acting as a mediary between those who had money to loan & those who desired to
Accommodation parties have a right of reimbursement against the accommodated party, since the relation between them is that of principal & sureties. ACUA v VELOSO(1927) FACTS: Xavier asked Veloso to become a comaker of a note to obtain a loan in order to purchase a piece of real estate. Payee negotiated the note to Acua after it fell due. RATIO: Acua is not a holder in due course but merely acquired the rights of his transferor, the payee of the note. However, the payee paid in full value for the note at the time of its creation. Therefore Acua is entitled to enforce the note. Where the accommodation maker draws a note payable to the accommodated payee & the payee negotiates the note after the date of maturity, the accommodation party cannot be held liable. But in CAB, the accommodating party & the accommodated party unite in making the joint & several note to a person who advances the face value of the note to one of its makers at the time of the note's creation. The consideration for the note was the money which the payee advanced to one of the makers. It cannot be said that the note was lacking in consideration as to Veloso because he received none of the money. Value was given for the note & this was enough. ANG TIONG v TING (1968) FACTS: Ting issued a check payable to cash with Ang's signature appearing at the back. Ang Tiong presented it to the drawee bank who dishonored it. Both Ting & Ang refused to pay upon demand by the holder. RATIO: Ang is a general indorser.
Assuming arguendo that Ang is a mere accommodation party, he is still liable on the instrument to a holder for value. The accommodation party is liable to a holder for value as if the contract was not for accommodation. It is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument. Nor is it correct to say that the holder for value is not a holder in due course merely because at the time he acquired the instrument, he knew that the indorser was only an accommodation party. The fact that the accommodation party stands only as a surety in relation to the maker is a matter of concern exclusively between accommodation indorser & accommodated party. It is immaterial to the claim of a holder for value. The liability of the accommodation party remains primary & unconditional. SADAYA v SEVILLA (1967) FACTS: Sevilla, Varona, & Sadaya executed, jointly & severally, in favor of BPI a promissory note. The proceeds of the note were received by Varona alone. Sevilla & Sadaya signed the note as co-makers only as a favor to Varona. BPI collected from Sadaya the balance of the note. Varona failed to reimburse Sadaya despite repeated demands. Sevilla died. Sadaya filed a creditors' claim upon the estate of Sevilla for the amount paid to BPI. RATIO: The solidary accommodation maker who made payment has the right of contribution from his co-accommodation maker. This right springs from an implied promise between the accommodation makers to share equally the burdens that may ensue from their having consented to stamp their signatures on the promissory note. Following are the rules on reimbursement: 1. A solidary accommodation maker of a note may demand from the principal debtor reimbursement for the amount he paid to the payee; and
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2. A solidary accommodation maker who pays on the note may directly demand reimbursement from his coaccommodation maker without first directing his action against the principal debtor provided that : (a) he made the payment by virtue of a judicial demand or (b) the principal debtor is insolvent.
Since PNB is not a holder in due course, Prudencio can validly set up their personal defense of release form the real estate mortgage against PNB. The sureties (accommodation makers) were released due to the extension of the term of payment without their consent. The mortgage cannot be separated from the promissory note for it is the latter which is the basis for determining whether the mortgage should be foreclosed. 8. Liability of an Agent
PRUDENCIO v CA (1986) FACTS: Upon request of a relative, Prudencio agreed to mortgage their property to secure the loan of CTC with PNB. They likewise signed the promissory note covering the loan. A Deed of Assignment was executed assigning all payments to be made by the Bureau of Public Works to CTC in favor of PNB. Notwithstanding the assignment of credit, PNB approved 3 payments to CTC instead. The Bureau of Public Works subsequently rescinded the contract with CTC. Prudencio seeks to be released from obligation on the note due to the violation of the deed of assignment. RATIO: Unlike in a contract of suretyship, the liability of the accommodation party remains not only primary but also unconditional to a holder for value such that even if the accommodated party receives an extension of the period for payment without the consent of the accommodation party, the latter is still liable for the whole obligation & such extension does not release him because as far as a holder for value is concerned, he is a solidary co-debtor. However, the accommodation party is discharged because PNB is not a holder for value. A holder for value is one who must meet all the requirements of a holder in due course. PNB did not act in good faith when it allowed the violation of the Deed of Assignment which principally moved Prudencio to sign the promissory note.
AUSTIN v GROSS (1923) FACTS: Gross was the principal stockholder of State Grocery Co. Gross signed a check payable to the order of Austin. The name of State Grocery appears upon the note but not on its body. Gross seeks to introduce parol evidence to show that the check was State Grocery's check. RATIO: 5 classes of cases: 1. Where one adds to his signature words indicating that he signs in a representative capacity, he is not liable if he was duly authorized; 2. Where one adds to his signature words indicating that he signs in a representative capacity, he is liable if he was not duly authorized; 3. Where one adds to his signature words describing him as an agent but does not disclose his principal, he is personally liable; 4. Where one adds to his signature words describing him as an agent & discloses his principal, he will not be personally liable; and 5. Where the negotiable instrument contains words that the party signs in a representative capacity, he is not liable if duly authorized. In cases 1 & 2, the authority of the agent to sign must necessarily be proved outside the instrument. In cases 3 & 4, parol evidence is
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admissible to show the relations between the parties to the instrument & all that was said & done at & preceding the delivery of the instrument. CAB falls within the 5th class. Parol evidence is admissible to prove that Gross was authorized to sign the check. The fact of authorization could not be proved except by extraneous evidence. As to the whether or not the check contains words that the party signs in a representative capacity, the law does not say that the words indicating the relation in which Gross signed must appear on the body of the check. If words appear on any part of the check, such as at the head or on its margin, indicating that the party signed in behalf of a principal, it will be sufficient.
NEW GEORGIA LIPPMANN (1928)
NATIONAL
BANK
FACTS: Pratt conveyed to Mayer a tract of land. Mayer subsequently transferred the property to Hopper & Payne. As payment, Mayer signed a note in his individual capacity, not designating himself an agent & not disclosing in the note the names of any other interested parties. Pratt sued to recover a deficiency on the note including as defendants Hopper & Payne. RATIO: In negotiable instruments, an undisclosed principal cannot be charged at any time. Parol evidence cannot be introduced to charge the principal although the agent executed the instrument as an agent. This exception to the rule is based upon the reason that each party who takes a negotiable instrument makes his contract with the parties who appear on its face to be bound for its payment. INSULAR DRUG v PNB (1933) FACTS: Foerster acted as collector of the drug company. He deposited the checks collected with PNB with whom he maintained a personal account. The indorsements on the check were made by Foerster, his wife, & stenographer, all in behalf of the drug company. PNB credited the amounts to Foerster's personal account. RATIO: The right of an agent to indorse commercial paper is a very responsible power & will not be lightly inferred. A salesman with authority to collect money does not have the implied authority to indorse checks received in payment. Any person taking checks made payable to a corporation does so at his peril & must abide by the consequences if the agent who indorses the same is without authority. PBC v ARUEGO (1981) FACTS:
FACTS: Bank is the owner through indorsement of a promissory note signed "J&G Lippmann, LJ Lippmann, Pres." Bank seeks to make the president personally liable if he signed the note without authority. RATIO: Whenever the form of the paper is such as fairly to indicate to the eye of common sense that the maker signs as agent or in a representative capacity, he is relieved of personal liability if duly authorized. Prior to the NIL, the remedy against an agent signing a note without authority was not upon the note itself but for breach of implied warranty. But under the NIL, if the party signs without authority, he is liable on the instrument, even though he did not mean to contract as an individual. Food for thought: Disini asks how else could Lippmann's signature have been construed as to render it ambiguous? Is it not clear that he signed it in a representative capacity? PRATT v HOPPER(1936)
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Aruego obtained a credit accommodation from PBC. For every printing of the publication, the printer collected the cost of printing by drawing a draft against PBC, which will later be sent to Aruego for acceptance. PBC seeks recovery on these drafts. Aruego invokes the defense that he signed the document in his capacity as President of the Phil. Education Foundation & only as an accommodation party. RATIO: Aruego is personally liable because nowhere in the draft did he disclose that he was signing as a representative of the Phil Education Foundation. Neither did he disclose his principal. As an accommodation party, Aruego is liable on the instrument to a holder for value, notwithstanding such holder, at the time of the taking of the instrument knew him to be only an accommodation party. Aruego signed as a drawee/acceptor. As drawee, he is primarily liable for the drafts. The contention that the drafts are not bills of exchange but mere pieces of evidence of indebtedness because they were payments were made before acceptance is untenable. As long as a commercial paper conforms with the definition of a bill of exchange, that paper is considered a bill of exchange. The nature of acceptance is determinative of liabilities of the parties but not of the character of a commercial paper. 9. 10. Signature by trade name
e. Date of presentment of demand bills of exchange COLUMBIAN BANKING v BOWEN (1908) FACTS: On 10 June, Farmer's Merchant Bank sold to Bowen a draft dated on that day. Bowen then indorsed it to Trabert, to whom it was forwarded by mail on 16 June & received on 20 June. As Trabert had been traveling, he was able to indorse the draft to Columbian Banking only on 14 July. Columbian Banking sent the draft by mail to the drawee bank which received it on 28 July. Upon presentment, the draft was dishonored. RATIO: As regards the indorsers, presentment for payment is sufficient if made within a reasonable time after the last negotiation. The delay in presenting the paper for payment between its date & the negotiation to the bank is immaterial. The fact that Trabert was a traveler sufficiently explained the lapse of time between his reception of the paper & his negotiation, preserving its circulating character. Presentment for payment must be made at a reasonable hour on a business day. What constitutes business hours of a bank has reference to the general custom at the place of the particular transaction. f. Date of presentment of checks
Presentment for acceptance FICK v JONES (1936)
11.
Presentment for payment
a. When presentment necessary; effect of non-presentment b. When presentment not necessary c. Date & time of presentment of instrument bearing fixed maturity d. Date of presentment of demand notes
FACTS: Jones drew a check payable to the order of Fick. It was not alleged or proven that Fick presented the check to the bank for payment. Drawer Jones refused to pay the check when Fick presented it to him. RATIO:
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Presentment, demand, & notice of dishonor are essential prerequisites to an action against the drawer on a check.
GORDON v LEVINE (1907) FACTS: Levine drew a check dated on a Saturday. Despite the drawer's request not to present the check for a couple of days, payee Gordon presented it on Monday & was told there were no funds. On the same day, the check was indorsed to Saievitz. On Tuesday, it was indorsed to Rootstein who deposited it for collection on Thursday. The collecting bank attempted to present it on Friday but the drawee bank had already failed. RATIO: A check must be presented for payment within a reasonable time after it is issued. If it is not so presented & the drawer sustains a loss by reason of the failure of the drawee he will be discharged from liability to the extent of such loss. This results from the nature of the instrument which is intended for immediate use & not to circulate as a promissory note. Where the drawer & drawee & payee are all in the same city or town a check to be presented within a reasonable time should be presented at some time before the close of banking hours on the day after it is issued & that its circulation from hand to hand will not extend the time of presentment to the detriment of the drawer.
RATIO: The drawer of a check is not a surety, but the principal debtor, as much as the maker of a promissory note. It is an absolute appropriation of money in the hands of his banker to the holder of the check. The drawer of a check will at all times be liable to pay the check, if the holder can show that the drawer has sustained & can sustain no loss or damage from the omission to demand payment at an earlier date. PNB v SEETO (1952) FACTS: On 13 March, Seeto indorsed to PNBSurigao a bearer check dated 10 March drawn against PBC-Cebu. PNB-Surigao mailed the check to its Cebu branch on 20 March & was presented to the drawee bank on 09 April. The check was dishonored for insufficient funds because the delay in presentment cause the exhaustion of the drawer's funds. Indorser Seeto asked that the suit be deferred while he made inquiries. He assured PNB that he would refund the value in case of dishonor. RATIO: The indorser is discharged from liability by reason of the delay in the presentment for payment, under 84. Drawer had enough funds when he issued the check because his subsequent checks drawn against the same bank had been encashed. The assurances of refund by the indorser are the ordinary obligation of an indorser which are discharged by the unreasonable delay in presentation of the check. Camposes note that the discharge of the indorser should have been based on 66 & 71 on presentment as a condition to the indorser's liability & presentment for payment of a demand bill made within a reasonable time from its last negotiation. CRYSTAL v CA (1976)
MORRISON v MC CARTNEY FACTS: McCartney drew a check on 02 Oct which was indorsed to Morrison. The check was not presented until 29 Jan. Payment was refused because the drawee closed on 03 Oct. McCartney was able to withdraw his deposits on 06 Oct.
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FACTS: Crystal used a check in paying the redemption price of the property sold at an execution sale. The value of the check had never been realized because it had either been dishonored or become stale. The validity of the redemption is in question RATIO: If the check had been dishonored, the redemption is void. But if it had only become stale through no fault of the redemptioner, then it would be unfair to deprive him of the rights he had acquired as redemptioner, particularly if the value of the check has otherwise been received or realized. There is a strong showing that the party had already been paid in full. g. When delay in presentment excused h. Manner of presentment i. What constitutes sufficient presentment (1) By whom
be a holder in due course who can still recover on the checks but subject to personal defenses, such as lack of consideration. Camposes note that despite the addition of the words "non-negotiable" on the specially crossed checks, the Court considered the checks as negotiable instruments. A check on its face normally has all the requisites of negotiability, and the addition of the above words should not change its character as a negotiable instrument. ASSOCIATED BANK v CA & REYES (1992) FACTS: Different department stores issued crossed checks bearing "for payee's account only" payable to Melissa's RTW. Sayson, acting without authority, deposited & encashed the checks with Associated Bank. RATIO: Citing State Invt House v IAC, the effects of crossing a check are: 1. check may not be encashed but only deposited in the bank; 2. check may be negotiated only one -- to one who has an account with a bank; and 3. 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 that purpose. The effects of crossing a check relate to the mode of presentment for payment. The law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it, for the purpose of determining their genuineness & regularity. (2) (3) (4) made Time of presentment Place of presentment To whom presentment must be
CHAN WAN v TAN KIM(1960) FACTS: Tan Kim drew specially crossed checks payable to bearer. Chan Wan presented the checks for payment to the drawee bank but they were dishonored due to insufficient funds. Chan Wan seeks recovery on these checks. RATIO: Checks crossed specially to China Banking should have been presented for payment by that bank, not by Chan Wan. Inasmuch as Chan Wan presented them for payment himself, there was no proper presentment & the liability did not attach to the drawer. But there was due presentment as clearance endorsements by China Bank can be found at the back of the checks. However, some of the checks were stamped account closed. As Chan Wan filed to indicate how the checks reached his hands, the court held him not to
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j. What constitutes dishonor by nonpayment k. Effect of dishonor by non-payment 12. a. Notice of dishonor When necessary
given on the date of maturity, provided that the instrument has been presented for payment and it has been dishonored PNB v PICORNELL supra STATE BANK STANDAERT OF EAST MOLINE v
GULLAS v PNB (1935) FACTS: Gullas indorsed the treasury warrant which was sold to PNB. Gullas also maintained an account with the bank. The warrant was subsequently dishonored by the Insular Treasurer. The bank sent notices of dishonor to by mail to Gullas which could not be delivered to him at that time because he was in Manila. The bank set off Gullas' deposits as payment of the warrant. This resulted in the nonpayment of checks he had issued. RATIO: A notice of dishonor is necessary to charge an indorser & that the right of action against him does not accrue until the notice is given. As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any indebtedness to it on the part of a depositor. However, prior to the mailing of notice of dishonor & without awaiting any action by Gullas, the bank made use of the money standing in his account to make good for the treasury warrant. Gullas was merely an indorser & notice should actually have been given to him in order that he might protect his interests. b. Form & contents of notice Notice may be in writing or merely oral and may be given in any term which sufficiently identify the instrument and indicate that it has been dishonored by non-acceptance of non-payment c. Time within which notice must be given Notice may not be given before the maturity of the instrument. Notice may be
FACTS: Spouses Standaert made a promissory note to the spouses De Vos who subsequently sold the note to the bank before maturity. The note was not paid at maturity. Bank claims it was its unswerving custom to send notice on the date of maturity. The teller-bookkeeper testified on the existence of the bank custom but not on the preparation nor sending out of the particular notice of dishonor to the indorser De Vos. RATIO: To charge an indorser with the payment of a note, the holder must establish that the notice of dishonor was addressed & actually mailed. There is a liberalizing tendency with reference to the proof required to establish the posting of the letter. While the courts may not require a distinct recollection of the particular letter, there must be some evidence on the part of the person whose general practice it was to post the mail that the custom was complied with on the date in question. In CAB, there was a failure to establish, either by direct or circumstantial evidence, that the holder mailed the notice of dishonor to the indorser when the obligation was due which discharged the latter from his obligation. Disini claims that the testimony of the teller would have been sufficient to establish notice. However, her faulty memory weakened her credibility which prompted the Court to look for other evidence supporting the allegation that notice was indeed sent. ARTERBURN v WAKEFIELD (1949) FACTS:
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Arterburn drew a check payable to the order of Wakefield. The check was dishonored upon presentment. The payee sued the drawer. Drawer alleges that there was a failure to state a cause of action as the petition filed by plaintiff did not allege that notice of dishonor had been given.
RATIO: One of the distinctions between a bill of exchange and a check is the effect of failure to give a notice of dishonor to the drawer. When notice of dishonor of a bill of exchange is not given to the drawer, he is released; but when there is delay in presenting a check for payment, the maker is only released to the extent of the loss caused by the delay. The law places the drawer of a bill of exchange & the maker of a check on a different plane since the maker of a check is regarded as the principal debtor & the check supports to be drawn upon a fund deposited to meet it. Failure to give notice to the maker of the nonpayment of the check should be required to set out in his answer the damage which has resulted to him by reason of such failure. d. e. f. (1) Place where notice must be given By whom notice may be given To whom notice may be given If given by agent
collect against the maker & indorser. Ruth brought this action against the Passaic Bank & the Paterson Bank alleging negligence. RATIO: Passaic Bank was a mere agent of Paterson Bank for effecting collection. Its duty was to give due notice of dishonor to Paterson Bank. It knew nothing concerning the indorsers or their residences. Paterson Bank was a mere agent of Ruth Simon & presumably knew nothing concerning the indorsers or their residences. The bank's duty was fully performed when it gave timely notice of the dishonor to its principal so that the principal could notify the prior parties to be charged. Where the instrument has been dishonored in the hands of an agent, he may either himself give notice to the parties liable thereon or he may give notice to his principal. If he gives notice to his principal, he must do so within the same time as if he were holder, and the principal upon the receipt of such notice has himself the same time for giving notices as if the agent had been an independent holder. (2) (3) (4) (5) (6) To whom in general If party is dead To partners To joint partners To bankrupt
SIMON v PEOPLES BANK AND TRUST COMPANY OF PASSAIC (1936) FACTS: Robert Simon made a note payable at the Passaic Bank. This note was indorsed by Frucht & held by Ruth Simon. Ruth left the note with the Paterson Bank for collection. The Paterson Bank forwarded the note to Passaic Bank. Upon presentment, the note was dishonored. The notices of dishonor for all parties liable on the instrument were received by Paterson Bank. Paterson Bank mailed all the notices to Ruth Simon. Ruth failed to
g. In whose favor notice operates h. When rule requiring notice not applied (1) In general (2) When notice of non-acceptance already given (3) Waiver
PEOPLES NATIONAL BANK OF YPSILANTI v DICKS (1932) FACTS: Ives & Dick signed on the face of a promissory note. Directly opposite Dicks'
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name was the word "indorsed" stamped thereon. A waiver of demand & notice of non-payment or protest was on the face of another part of the note (presumably at the back). There was no presentment of the note for payment to Ives, no demand of payment made of him, no dishonor by Ives, no notice of dishonor to Dicks, no protest of the note. Bank sued Dicks & Ives on the note. RATIO: Dicks is deemed merely an indorser as his signature was so placed upon the instrument that it is not clear in what capacity he intended to sign. The law distinguishes between a waiver embodied in the instrument itself & a waiver upon the back thereof above the signature of an indorser. An indorser is bound by a waiver that is embodied in the body of the instrument. 'Embodied in the instrument' means 'embodied in the original contract.' Detached words on the back of the instrument at the time it is issued are not embodied in the contract expressed on the face of the instrument. (4) drawer When not necessary to charge
the dishonor of her checks. After withdrawing her funds, she could not have expected her checks to be honored. (5) When not necessary to charge indorser i. Legal notice 13. effect of failure to give
Protest
a. Definition & method b. When necessary c. Form & contents of certificate of protest d. Purpose of the certificate of protest e. By whom made f. Time & place of protest g. Protest for better security h. When delay is excused & protest is dispensed with ELLENBOGEN v STATE BANK (1922) FACTS: State Bank drew a draft to the order of Ellenbogen's agent upon the Polish Natl Loan Bank. The check was duly presented but was refused payment on the ground of insufficient funds. An action was filed to recover on the draft but was dismissed for failure to plead that the draft was protested. RATIO: Neither presentment nor notice of dishonor is required to be given to the drawer where the drawer has no right to expect or require that the drawee or acceptor will pay or honor the instrument. Since neither presentment nor notice of dishonor was necessary, therefore protest was also not required.
STATE INVESTMENT HOUSE v CA (1993) FACTS: Moulic issued 2 checks to Victoriano as security for pieces of jewelry to be sold on commission. Victoriano negotiated these checks to State Investment. As Moulic failed to sell the jewelry, she returned them to Victoriano. However, she failed to retrieve her checks. Moulic withdrew her funds from the drawee bank. Upon presentment, the checks were dishonored. RATIO: State Investment is a holder in due course & is not subject to the personal defense of lack of consideration. There is no need to serve the drawer a notice of dishonor because she was responsible for
TAN LEONCO v GO INQUI(1907) FACTS:
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In exchange for the abaca from Tan Leonco's plantations, Go Inqui drew a bill of exchange against Lim Uyco. Upon presentment of the draft, it was refused payment due to a stop order from the drawer. The bill was not protested.
demand or give notice to enable him to recover of the first indorser. This is repugnant to the principle that the indorsement after due is equivalent to drawing a new bill. 17. Instruments payable at bank v FIRST
RATIO: The action is not brought upon the bill of exchange which was used only as evidence of the indebtedness. Under these conditions, protest & notice of nonpayment are unnecessary in order to render the drawer liable. The ruling of the Court on protest is merely obiter dictum. i. Waiver of protest j. Protest in case instrument 14. 15. 16. after
BINGHAMPTON PHARMACY NATIONAL BANK (1915)
of
loss
of
Acceptance for honor Payment for honor Liability of party on indorsement maturity
BISHOP v DEXTER (1817) FACTS: Dexter, as payee of a note against Whittlesey, indorsed it to Converse after it was due. The note was further indorsed until it reached the hands of Bishop. Bishop seeks to recover on the note although no demand was ever made of the maker, Whittlesey, nor notice ever given to Dexter. RATIO: The indorsement of a bill or note after due is equivalent to drawing a new bill payable at sight. Demand must be made by the indorsee of the drawer or maker & notice given to the indorser, otherwise the indorser will be discharged of his liability. One cannot rightly presume that a proper demand had been made & notice given when the note fell due & is not bound to make
FACTS: Binghampton executed a note payable at the Chickasaw Bank. The holder of the note (First Natl Bank) did not present the note for payment when it matured on 29 December although the maker had a sufficient amount in their account with Chickasaw Bank. On 01 January, the Chickasaw Bank failed. The holder seeks recovery on the note while maker claims it was discharged from liability due to the delay in presentment. RATIO: There is a distinction between the drawer of a check & the maker of a note payable at a bank: 1. The maker of a note is primarily liable on the instrument while the drawer of a check is only liable after dishonor. 2. The law excuses presentment of the instrument as to the maker of the note but requires presentment within a reasonable time in the case of a check at the peril of discharging the drawer. 3. Breach of the duty of the holder of a check to present for payment at the place where it is payable at a reasonable time discharges the drawer from liability to the extent he is damaged by the breach. In contrast, the obligation of the maker of a note is not a conditional promise to pay only at a special place, but is a promise to pay generally, even though a place of payment is name. 18. Bills in set 19. Liability of transferors assignors of negotiable instruments
or
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VII. DISCHARGE Discharge it is the release of all parties, whether primary or secondary, from the obligation on the instrument; discharge renders the instrument non-negotiable
A. Of the Instrument 1. payment in due course by or on behalf of principal debtor Payment in due course: 1. made at or after maturity 2. to the holder thereof 3. in good faith and without notice that his title is defective 2. payment in due course by party accommodated where party is made/ accepted for accommodation 3. intentional cancellation by holder if unintentional or under mistake or without authority of holder, inoperative. Burden of proof on party which alleges it was unintentional, etc. 4. any other act which discharges a simple contract 5. principal debtor becomes holder of instrument at or after maturity in his own right 6. renunciation of holder: holder may expressly renounce his rights vs. any party to the instrument, before or after its maturity absolute and unconditional renunciation of his rights vs. principal debtor made at or after maturity discharges the instrument renunciation does not affect rights of HDC w/o notice. Renunciation must be in writing unless instrument delivered up to person primarily liable thereon 7. material alteration (sec. 124: material alteration w/o assent of all parties liable avoids instrument except as against party to alteration and subsequent indorsers)
1. any act which discharges the instrument 2. intentional cancellation of signature by holder 3. discharge of prior party 4. valid tender of payment made by prior party 5. release of principal debtor, unless holders right of recourse vs. 2ndary party reserved 6. any agreement binding upon holder to extend time of payment, or to postpone holders right to enforce instrument, unless made with assent of party secondarily liable, or unless right of recourse reserved. 8. Failure to make due presentment (sec. 70, 144) 9. failure to give notice of dishonor 10. certification of check at instance of holder 11. reacquisition by prior party where instrument negotiated back to a prior party, such party may reissue and further negotiate, but not entitled to enforce payment vs. any intervening party to whom he was personally liable where instrument is paid by party secondarily liable, its not discharged, but a. the party so paying it is remitted to his former rights as regard to all prior parties b. and he may strike out his own and all subsequent indorsements, and again negotiate instrument, except where its payable to order of 3rd party and has been paid by drawer where its made/accepted for accommodation and has been paid by party accommodated 1. a. (1) (2) Discharge of the Instrument By payment in due course Medium of payment By whom made
B. Of secondary parties
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FOX v. KROEGER (1931) FACTS : Mrs. Fox was the principal and Kroeger was the surety of a note executed and payable to Levi State bank. Mrs. Fox died before the note matures. Upon maturity, Kroeger execute4d and delivered his own note to the payee for the amount of the principal note. The principal note was assigned to Kroeger. Kroeger sued the plaintiff herein, B. Fox who was the executor of the estate of Mrs. Fox. The action was on the NOTE and NOT on the implied contract of REIMBURSEMENT. B.J. Fox argues that the 2 year period of limitations has already set in (this governs the implied reimbursement between the surety and the principal debtor. ISSUE : WON the principal debtor was discharged HELD : YES. Where a surety pays the debt of the principal, he is subrogated all the rights remedies, equities, and securities of the principal and can bring an action on the very debt itself. In such a case, the surety has an election of remedies. In the promissory note in this case, Kroeger was compelled to pay the note and on doing so took an assignment thereof, and brings this action on the note itself. (3) When check drawee bank (4) To whom made deemed paid by
EQUITABLE BANK vs. IAC (1988) FACTS : Liberato Casals went to defendant company, Edward J. Nell Co. (hereinafter Nell) to ask about the skidders which Nell was selling. As payment, instead of cash, Casals said he would be able to pay by using his credit line with the petitioner bank. Nell agreed. However, before the letters of credit of Casals were approved
by the bank, he had to give P300, 000 to stand as collateral deposit in favor of the bank, plus and additional P100, 000 to clear the title of the (Estrada) property belonging to Casals which had been approved as security for the trust receipts to be issued by the bank (which would cover the payment for the skidders). It was Nell who produced the amount needed and thus produced a check payable to Equitable bank. Written in these checks was a notation explaining the purpose of the issuance. A cover letter saying that such amount was for the amount of the marginal deposit and the balance needed for the Estrada property was also included. The application for letters of credit was approved and Casals informed Nell about such. Casals also said that the checks should be made payable to Equitable bank for the account of Casville Enterprises, Inc. the notation included a cover letter explaining that such Casals then sent Nell three postdated checks to cover the amount for the new batch of checks (the ones designated for the account of Casville). These new checks were given and were postdated. Casals deposited these checks to the Casville account, which the teller accepted, and thereafter Casals withdrew the amount. When the three checks which were given by Casals to Nell were dishonored since the account was already closed, defendant filed this instant action against the bank. TC held that Equitable erroneously credited the amount to the account of Casals and Casville. ISSUE : WON petitioner Bank is liable for the value of the second batch of checks which Nell issued (the ones payable to Equitable for the account of Casville) HELD : NO. It was Nells own acts and omissions, which caused the drawing, issuance and delivery of the checks which was the proximate cause of its own defraudation.
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Thus, it must be Nell which should bear the loss. The subject check was also ambiguous and equivocal. By making the check read, payable to Equitable bank Order of A/C Casville Enterprises, Inc., the payee ceased to be indicated with reasonable certainty and thus in contravention of sec. 8 of the NIL. It could be accepted as deposit to the account of the party named after the symbols A/C or payable to the bank as trustee or as an agent for Casville, with the latter being the ultimate beneficiary. This ambiguity should be construed against Nell. TC and CA reversed.14 IN RE: HARBAUGHS ESTATE (1936) FACTS : A claim was being put forward form the estate of Harbaugh. A check made by the decedent which was indorsed to Jessie Harbaugh before it matured. Three days after, Flora was given by the decedent a check which covered the amount of the previous indorsed note. Claimant was alleging that the obligation for the 1 st note was still demandable. HELD : Payment to a payee of a negotiable instrument when the title and possession of the instrument has passed to another before maturity will not protect the maker. If the maker thinks that it should be right to pay the payee, without the production of the note, he does so in his own peril, and the holder who has legal title to said instrument may recover payment form him. In the CAB, It was found by the auditor that payment was made to the assignor/indorser and such was given to indorsee/holder. Thus, such would operate as a discharge of the instrument.
(6)
In good faith and without notice
b.
By intentional cancellation
JONES ADMINISTRATORS v. COLEMAN (1917) FACTS: A claim was made against the estate of Reps Jones upon a promissory note which appeared to be mutilated (the note was burned). There was neither the date nor the signature of the decedent maker because it appeared to have been destroyed by the burning. Evidence tended to show that the handwritten name of the payee, Coleman, was made in the handwriting of the decedent. HELD: A cancellation made unintentionally or under a mistake, or without the authority of the holder is inoperative; but where the instrument, or any signature thereon, appears to have been cancelled, the burden of proof lies on the party who alleges that the cancellation was made unintentionally or under mistake or without authority. c. By any other discharge a contract act which will
MANCHESTER v. PARSONS (1915) FACTS: Parsons executed a note payable to Burton for value, 18 months from the date it was executed. The note was negotiated to plaintiff about two months after it was executed. After 11 months, Colts were delivered to Burton with the understanding that these Colts would pay the note and the difference of the value of the Colts and the note would have to be paid by Burton. Plaintiff-indorsee now sues Defendant-maker who argues that he has already paid the obligation. HELD:
(5)
At or after maturity
14
For our purpose, payment to one of several payees or indorsees in the alternative discharges the instrument(see p. 826 of Campos)
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Evidence shows that the note was indorsed to plaintiffs for value, thus payment to the original holders (Burton) by the maker (Parsons) did not discharge the instrument. The acts which will discharge a simple contract for payment of money, in order to effect a discharge of the instrument within the contemplation of the law, must therefore be limited to such acts as relate to and affect the holder of a paper demanding payment thereof. It does not include a holder in due course. d. By reacquisition of principal debtor in his own right SCHWARTZMAN v. POST (1903) FACTS: Post executed a note (for $5,000) payable to his order on demand, indorsed by hem, his father and by defendant Postalwalsky. This was delivered to Schwartzman in payment of his interest in a partnership of which plaintiff and defendant are members. The defendant and a third party paid ($3,250) on the condition that the note be surrendered to him. This was done. Plaintiff now sues defendant for the difference. Defendant argues that the surrender is tantamount to discharge. HELD: When a principal debtor becomes the holder of the instrument at or after maturity in his own right, then the note is discharged. Post was the maker of the note, and primarily liable thereon. It was surrendered to him, and he became the holder thereof without fraud or mistake in his own right. Thus, under the law (during this time in 1899, pre-NIL), the note would be discharged. e. By renunciation of holder
contract where the maker was to be discharged. Since it was an oral contract, the plaintiff invokes Sec. 122 of the NIL where it is required that a renunciation by the holder of an instrument of his rights therein must be made in writing. HELD : The defendant, contrary to the plaintiffs argument, is no longer liable. This is a case where the indorser is discharged because the maker is discharged (under Sec. 120 not, as argued by plaintiff, under sec.122). Schwartzman Under section 122, there cannot be a renunciation without writing or delivery back. There is a change of designation from secs. 119 and 10 to 122 where the terminology was changed from discharge to renunciation. f. 2. a. Material alteration Discharge of secondary parties By discharge of instrument intentional cancellation of
b. By signature
MCCORMICK v. SHEA (1906) FACTS: This action was brought on the promissory note by Thomas Shea as maker and Defendant Annie Shea as Indorser. Before the maturity of the note, Annie was cancelled by a representative of the defendants attorney in the presence of plaintiff. Plaintiff argues he never authorized such cancellation. HELD: A cancellation made unintentionally or under a mistake or without the authority of the holder is inoperative; but where an instrument or any signature thereon appears to have been cancelled, the burden of proof lies on the party who alleges that the cancellation was made unintentionally, or under mistake or without authority.
MCGLYNN v. GRANSTROM (1926) FACTS: Plaintiff-payee sues defendant-indorser on a promissory note. The defense alleged that the plaintiff was party to an oral
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c.
By discharge of prior party
ROBERTS v. CHAPELL FACTS: The Dailys executed a note payable to the order of Chappell which the latter indorsed to Roberts one year before the maturity date. Upon due presentment, the note was dishonored. This was made known to Chappell. The holder sued the indorser who argued that one of the makers was solvent at the time of his death and had he presented the note to the administratrix, the note would have been paid. For the reason of the plaintiffs failure, the indorser was thereafter discharged. HELD: The mere failure of a creditor to present his claim against the estate of a deceased principal will not release the surety, even though the claim against the estate may be barred by reason of such omission. The liability of the surviving party is not discharged by mere delay on the part of the creditor to prosecute his suit against the estate of the principal within the prescribed statute. d. By valid tender of payment by prior party CORLEY v. FRENCH (1927) FACTS: Coley was the payee-holder of a note for $2500 sued French and the other indorsers thereon. The note contained a waiver of presentment and notice and was made payable to the American National Bank. At the day of maturity, the note was not presented to the bank. The corporate maker had refunds on the deposit in the bank at the date of maturity of the note sufficient to pay it. The defendants argue that there was constructive tender of payment and laches. HELD:
The effect of the waiver was to make the indorser liable absent presentment. He continues to be secondarily liable but without the right to interpose the defense of lack of presentment. As regards the liability of the maker, it must be shown that the maker was able to pay at the time the note matured and that there was willingness on the part of the maker to apply the funds in deposit to such obligation. e. f. By release of principal debtor By extension of time of payment
MAGLIONE v. PENTA (1929) FACTS: A payee(defendant) of a note secured by a mortgage indorsed the note and assigned the mortgage to plaintiff who paid the amount therefor. The indorser waived presentment and notice. Plaintiff wanted to foreclose but the mortgagor paid $300. Defendant-indorser then asked plaintiff whether the note and the mortgage had been paid and the plaintiff told him that they had an arrangement with the mortgagor-maker. Because of the default of the mortgagor subsequently, the holder sued the indorser. The TC found that there was an extension of the time of payment agreed upon by the makers and the plaintiff. HELD: If the plaintiff made a valid and binding agreement with the makers of the note extending the time of the payment without the knowledge and consent of the surety, the surety is thereby discharged. In these circumstances, the defendant (indorser) appears to have been discharged). g. By renunciation h. By taking a qualified acceptance i. By failure to make due presentment j. By failure to give notice of dishonor
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k. Certification of check at instance of holder l. Effect of reacquisition by prior party
VIII.
OTHER FORMS OF COMMERCIAL PAPER
1.
Commercial papers which are also negotiable instruments because they are merely special forms of either promissory notes or bills of exchange. also governed by the NIL Quasi-negotiable Those which include commercial paper which though not governed by the NIL, have certain attributes of negotiability. Negotiable Documents of Title Certificate of Deposit
they are issued by the government (municipal & other public corporations) & private corporations; funds generated by such bonds are used to finance corporate projects and public works; usually accompanied by a mortgage of the property of the issuer; though not to mature for a long time, bonds assure some regular income to bondholders in the form of interest*, usually payable annually bonds and interest coupons (evidences interest obligations)* may be negotiable in form, therefore governed by NIL (Sec 65); both are actually promissory notes there is no warranty on the part of such indorser or negotiator that prior parties had capacity to contract. The qualified indorser & negotiator by delivery of a bond do not warrant therefore that the corporation which issued the bonds has any judicial capacity to act. A general indorser thereof however would be liable for such want of capacity.
Certificate of Deposit a receipt of a bank for certain sum of money received upon deposit and is generally framed in such form as to constitute a promissory note, payable to the depositor, or to the depositor or order, or to bearer. it is taken when depositor does not need his money for some extended period of time and wants it to earn interest; it is more of is more of an investment paper than a commercial paper because it is not attendant to a commercial transaction the way a check or a promissory note is. it is negotiable if it meets all the requirements of Sec 1 NIL
Debentures similar to bonds except that they are usually for a shorter tem and may or may not be accompanied by a mortgage. they are often issued on the general credit of the issuer corporation
MERCER COUNTY v HACKETT (1863) HELD: When a corporation covenants by means of bonds and obtains funds for the accomplishment of the useful enterprises of the day, it cannot be allowed to evade the payment by parading some obsolete judicial decision that a bond cannot be made payable to bearer. Despite the atrocious frauds in issuing and obtaining bonds, this cannot prevail to
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2. Bonds and Debentures Bonds are evidences of indebtedness, in the nature of a promissory notes, promising to pay a sum of money on a day certain in the future; they run for long periods of time, and are often sold to the public in general;
authorize their repudiation, after they have been negotiated and have come into the possession of bona fide holders. MANKER v AMERICAN SAVINGS BANK (1924) HELD: Bonds in this case provide that the payment is to be made only out of a particular fund (funds raised by a special assessment in local improvement district). They do not contain an unconditional promise to pay, therefore, non-negotiable and appellant from whom they were stolen would be entitled to the bonds as against the respondent bank which came into possession of them through a chain of transfers from the thief. ENOCH v BRANDON (1928) HELD: References in the bond to the trust mortgage do not constitute modification of the promise to pay, hence the bonds are negotiable. References to the trust mortgage is made to determine the terms and conditions under which the bonds are issued and secured. A possibility of the acceleration of the date when the bonds are due, if there is default under the mortgage does not make the bonds non-negotiable.
making the advancement, or accept bills drawn upon himself for the like amount. must be issued in favor of a definite person, and not to order. under our law, a letter of credit cannot be a negotiable instrument because (a) it may not contain the words of negotiability; (b) may be issued for an undetermined amount. See Art 568 Code of Commerce. The draft and the letter of credit are generally used together to effect payment in international transactions.
Pertinent Code of Commerce provisions: Art 567. Letters of credit are those issued by one merchant to another for the purpose of attending to a commercial transaction. Art 568. The essential conditions of letter of credit shall be: 1. To be issued in favor of a definite person, and not to order. 2. To be limited to a fixed and specified amount, or to one or more undetermined amount, but all within a maximum the limit of which has to be stated exactly. Note: Those which do not have any of these last circumstances shall be considered as mere letters of recommendation. Art 569. The drawer of a letter of credit shall be liable to the person on whom it was issued, for the amount paid by virtue thereof, within the maximum fixed therein. Letters of credit may not be protested even should hey not be paid, nor shall the bearer thereof acquire any right of action by reason of such non-payment against the person who issued it. The person paying shall have the right to demand the proof of the identity of the person in whose favor the letter of credit was issued. Art 570. The drawer of a letter of credit may annul it, informing the bearer and
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3.
Drafts and Letters of Credit
Draft a form of bill of exchange generally used to facilitate the transactions between persons physically remote from each other.
Letters of Credit one whereby one person requests some other person to advance money or give credit to a third person, and promises that he will repay the same to the person
the parson to whom it is addressed of such revocation. Art 571. The bearer of a letter or credit shall pay the amount received to the drawer without delay. Should he not do so, an action involving execution may be brought to recover it, with legal interest and the current exchange in the place where it is repaid. Art 572. If the bearer of a letter of credit does not make use thereof within the period agreed upon with the drawer, or in default of a period fixed, within 6 months, counter from its date, in any point in the Philippines, and within 12 months anywhere outside thereof, it shall be void in fact and in law. GREGORIO ARANETA INC. v PNB (1954) HELD: An alleged banking custom whereby a draft should be paid at the rate exis1ting on the date of its maturity is immaterial since there is an express contract between the parties embodied in the application for commercial letter of credit. The application specifically provides that what is to be paid at maturity in Philippine currency is the equivalent of the amount or such portion thereof as may be drawn or paid upon the faith of the plaintiffs credit; and it is admitted that the defendant bank actually paid for the draft the amount of P33,727.92. There is also an agreement of the plaintiff to reimburse the defendant bank a term that requires the return of something paid. NATL RICE SHIPPING & CORN v PAN-PHIL
ground of violation with conditions of the sales contract) cannot be force majeure within the meaning of the law Natl Rice could not have used that letter of credit for some other purpose because it is an irrevocable letter of credit in favor of a specified party (NG&S), the same could not be changed by Natl Rice or the bank without the consent of the beneficiary (NG&S). BPI v DE RENY FABRIC (1970) HELD: The company and its officers cannot shift the burden of loss to the bank because of the terms of their Commercial Letter of Credit Agreement with the bank provides that latter shall not be responsible for the any difference in character or condition of the property. Furthermore, the bank was able to prove the existence of a custom in international banking and financing circles negating any duty of the bank to verify whether what has been described in letters of credits or drafts or shipping documents actually tallies with what was loaded aboard ship. Banks, in providing financing in international business transactions do not deal with the property to be exported or shipped to the importer, but deal only with documents. 4. Certificate of Stock
HELD: The letter of credit is in strict accord with the terms of Natl Rices contract with PanPhilippine. Accordingly, the mere refusal of the beneficiary (NG&Ss which relinquished its interest in the letter of credit upon alleged
Certificate of Stock or share certificate is the customary and convenient evidence of the holders interest in the corporation which issues it. not a negotiable instrument, but is included in the term securities because it does not contain any promise or order to pay money; Share certificates are described as QuasiNegotiable because oftentimes, by the application of the principles of estoppel, and to effectuate the ends of justice and the intention of the parties, the courts decree a better title to the transferee than actually existed in his transferor, and is
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the same as would be reached if the certificate were negotiable. When the shareholder signs the back of certificates of stock without filling in the blanks (for the name of the transferee and attorney-in-fact) and the certificate is delivered to another, the latter appears to be the owner thereof. A bona fide purchaser of value without notice from the third person entrusted with such certificate by the true owners, will be protected in his acquisition, although such third person has diverted the certificate from the purpose for which he was entrusted therewith. (Principle of Estoppel) The same rule is applicable if the certificate is in bearer form. The rule is applicable where the certificate is lost or stolen while signed in blank. Even a purchaser in good faith cannot acquire title as against the true owner. At common law, stock certificates are given the attributes of negotiability only where the owner thereof has entrusted the wrongdoer with the possession of such certificate and clothed him with apparent ownership thereof.
SANTAMARIA v HONGKONG & SHANGHAI BANK (1951) HELD: Plaintiff, in failing to take the necessary precaution upon delivering the certificate of stock to her broker, was chargeable with negligence in the transaction which resulted to her own prejudice, and as such, she is estopped from asserting title to it as against the defendant bank. A certificate of stock, indorsed in blank, is deemed quasi-negotiable, and as such the transferee thereof is justified in believing that it belongs to the holder and transferor. DE LOS SANTOS, McGRATH (1955) HELD: A share of stock may be transferred by endorsement of the stock certificate, coupled with its delivery. However, the transfer shall
not be valid except as between the parties, until it is entered and noted upon the books of the corporation (Sec 35 Corporation Law). No such entry in the name of the plaintiffs having been made, it follows that the transfer effected by Campos and Hess in their favor is not valid, except as between themselves. It does not bind Madrigal or the Mitsuis who are not parties to the transactions. Although a stock certificate is sometimes regarded as quasi-negotiable, in the sense that it may be transferred by endorsement, coupled with delivery it is well settled that the instrument is non-negotiable, because the holder thereof takes it without prejudice to such rights or defense as the registered owner or credit may have under the law, except in so far as such rights or defenses are subject tot eh limitations imposed by the principles governing estoppel. In the case at bar, the certificates of stock were in the name of Madrigal. Therefore, the alleged sellers (Campos and Hess) were not registered owners. Plaintiffs must have been conscious of the infirmities in the title of the supposed vendors. Therefore, plaintiffs assumed those risks and hence, cannot validly claim, against the registered stockholder, the status of purchasers in good faith. CAPCO v MACASAET (1990) HELD: Certificates of stocks are considered as quasinegotiable instruments. When the owner or shareholder signs the printed form of sale or assignment at the back of every stock certificates without filling in the blanks provided for the name of the transferee as well as for the name of the attorney-in-fact, the said owner or shareholder, in effect, confers on another all the indicia of ownership of the said stock certificates. In this case, the petitioner signed the printed from at the back of both stock certificates and without filling in the blanks at the time the said stock certificates were delivered to Macasaet. Hence, the petitioners acts of indorsement
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and delivery conferred on Macasaet the right to hold them as thought they were his own. It was not irregular of Macasaet to deliver the stock certificates to Feliciano for consideration. 5. a. Negotiable Documents of Title In General
The negotiable bill of lading is useful not only as evidence of the receipt of the goods by the carrier but as evidencing title to goods covered by it. It also facilitates the purchase of goods by one person from another who is physically remote and probably unknown to him.
Negotiable Documents of Title as distinguished from negotiable instruments, refer to goods and not to money. they are called documents of title because as a rule, the sale of goods covered is effected by the transfer of said document. valuable in commerce because it facilitates the sale and delivery of goods. not governed by the NIL but by the Civil Code. includes any bill of lading, dock warrant, quedan, or warehouse receipt or order for the delivery of goods, or any other document used in the ordinary course of business in the sale or transfer of goods, as proof of the possession or control of the goods, or authorizing or purporting to authorize the possessor of the document to transfer or receive, either by indorsement or by delivery, goods represented by such document. Documents of title is negotiable when goods represented thereby are deliverable to a specified person , to order or to bearer. b. Kinds and Functions
straight bill where the goods are to be delivered to a specified person, it is not negotiable and is called a straight bill. Otherwise, it is referred to as an order bill. c. Negotiation The means of negotiating a document of title are the same as those used in negotiable instruments. If by the terms of the document, the goods are deliverable to the order of a specified person, then it should be indorsed by such person, either specially or in blank. If the goods are deliverable to bearer, or the document has been indorsed in blank, then negotiation may be by mere delivery.
d. (1)
Rights of a Holder When free from personal defenses Under Art 1518 Civil Code, a holder of a negotiable document of title in good faith, for value and without notice is placed on the same level as a holder in due course of a negotiable instrument i.e., personal defenses enumerated in said article are not available against him. Personal defenses include: negotiation was a breach of duty on the part of the person making the negotiation, owner of the document was deprived of the possession of the same by loss, theft, fraud, accident, mistake, duress or conversion. Note Art 1518s conflict with Art 1512. (see p 915) What title acquired
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Warehouse receipts an agreement by a warehouseman to store goods and deliver them to a named person or his order or to bearer. Bill of Lading a similar contract by a carrier to ship goods and deliver them to the person named therein or his order or to bearer.
(2)
Note: see Arts 1513, 1514 and 1519 Civil Code e.
The bailees delivery to the legal holder of the document would relieve him of any further responsibility for the goods. Liability of Indorser The indorsement of a negotiable document of title carries with it certain implied warranties by the indorser. As to the document, his warranty covers its genuineness, his legal right to negotiate it and his lack of knowledge of any fact which would impair its validity. As to the goods, he warrants that he has the right to transfer title thereto and that they are merchantable. However, unlike the indorser of a negotiable instrument who is liable if the primary party fails to pay, the indorser of a negotiable document of title is not liable for the failure of the bailee to fulfill his obligation to deliver the goods.
(a) A person to whom a negotiable document of title has been duly negotiated acquires the title of the person negotiating it as well as the title of the original bailor or depositor of the goods. those used in negotiable instruments. Thus, if the original bailor or depositor of the goods was not the owner thereof or had no authority from such owner to deposit the goods, then the holder of the negotiable document, even if the negotiation to him was valid, cannot acquire title to the goods. On the other hand, even if the original bailor or depositor was the owner or had authority from the owner, if the negotiation to the present holders transferor was not valid, such holder, even if in good faith and for value, does not acquire any right to the goods. In both cases, the holders remedy if any, is against his transferor and/or the guilty party. (b) The person to whom the document has been negotiated acquires the obligation of the bailee to make delivery to him, as if they had contracted directly with each other. By issuing a negotiable document of title, such bailee had given in advance his consent to hold the goods for any person to whom such document is negotiated. If the document is non-negotiable, notice of any transfer thereof should be given to the bailee and until such time, the transfer will not bind the bailee or any person other than the transferor. Thus, the transferees rights may be defeated by a levy of attachment on the goods or by a notification to the bailee of a sale of the goods to another purchaser. A sale of the goods without the document will not prejudice a subsequent purchaser who takes the document in good faith and for value.
ROMAN v ASIA BANKING CORP. (1922) HELD: A warehouse receipt must be interpreted according to its evident intent and it is obvious that the deposit evidenced by the receipt in this case was intended to be made subject to the order of the depositor and therefore negotiable. The indorsement in blank of the receipt with its delivery which took place on the date of the issuance of the receipt demonstrate the intent to make the receipt negotiable. Furthermore, the receipt was not marked non-negotiable. JOHN S. HALE CO. v BELEY COTTON CO. (1927) HELD: 1. One without title to cotton could not pass title thereto by depositing the cotton in a warehouse and undertaking to sell nonnegotiable clearance certificates issued on account of the same. 2. Receipts, being order receipts and none of them bearing the indorsement of the
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depositor to whom they were issued, the receipts were not negotiable. Warehouse receipts in such form can only be transferred, not negotiated. SOUTHERN PAC. CO v BANK OF AMERICA (1928) HELD: Here, by its fraudulent representations, the vendee persuaded the delivering carrier to surrender the goods. It follows that the purchaser from the vendee stands in the position of the purchaser from any fraudulent vendee, whose rights by virtue of the doctrine of estoppel are well recognized as being superior to those of the vendor or parties in privity with him. In this situation, it would be contrary to the established law to allow the plaintiff, who has purchased its title with full knowledge of the facts, to prevail against the bona fide purchaser, for its act, through its agent, made possible the procurement of the negotiable warehouse receipts and the sale thereof by the vendee. W.S. BROWN v YIELDING BROS. (1917) HELD: The expression or had ability to convey to a purchaser in good faith for value clearly means providing such person was a purchaser in good faith for value. If the purchaser had actual notice, he is not a purchaser in good faith. Registration laws were enacted for the purpose of giving notice, and the mortgage here, having been duly recorded, gave the purchaser a constructive notice so as to prevent him from being a purchaser in good faith.
intervener of the warehouse receipt, pass any better title to the beer than he had in it. It follows that the intervener acquired no better right or title to the goods than Whitehead had when he stored them. LUHRS v VALLEY RANCH CO HELD: The Uniform Warehouse Receipts Acts purpose is to protect the warehouseman who comes into possession of the property and issues a negotiable receipt therefore from being liable to two parties. But this protection only applies to the warehouseman when the goods are delivered by the owner or by a person whose act in conveying the title to them to a purchaser in good faith, would bind the owner. SIY CONG BIENG v HONGKONG & SHANGHAI BANK (1932) HELD: If the owner of the goods permits another to have the possession or custody of negotiable warehouse receipts running to the order of the latter, or to bearer, it is a representation of title upon which bona fide purchasers for value are entitled to reply, despite breaches of trust or violations of agreement on the part of the apparent owner.
DUNAGAN v GRIFFIN (1941) HELD: Whitehead (in possession by virtue of contract to haul) could not, by negotiation to
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EFFECT OF ADDITIONAL PROVISIONS

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In case of joint payee If name misspelled (1937)

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HOLDER IN DUE COURSE

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maker w/o consideration indorses w/o consideration indorses

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a. Notice; bad faith; suspicious circumstances

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COMMERCIAL BANK OF TRUST CO. v. BARRY (1934)

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FIRST NATIONAL BANK v US NATIONAL BANK OF PORTLAND (1921) HELD:

confusing minority view Camposes

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Majority View: Drawee can recover.

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HONGKONG & SHANGHAI PEOPLES BANK (1970)8

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to within 24 hours from the discovery of the alteration ] 6. Fraud

Superseded by decision in second case

The SC overturned its prior decision

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This is a real defense.

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