 When a payee transfers it to another by signing
NEGOTIABLE
INSTRUMENTS
Rogelio Quevedo
A2015  AGUSTIN BELTEJAR GARCIA MANGALINDAN
INTRODUCTION
Kinds of Negotiable Instruments
Campos Notes
 Promissory note
o Evidences a promise to pay money
o Other forms: certificate of deposit, bond
 Bill of exchange
o An order made by one person to
another to pay money to a third person
o Most common form: CHECK
o A check is always payable on demand
o A DRAFT is a bill of exchange used in
transactions between persons
physically remote from each other. It is
an order made by one person,
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.
Class Notes
 A negotiable instrument is a document used to
facilitate commercial transactions
 Negotiable instruments were created so that the
payor/payee could rely on something to ensure
that payment would be completed
 In a promissory note, the payee relies on the
integrity of the promissor
Parties and the nature of their liabilities
Campos Notes
 Parties to a promissory note
o Maker: the one who promises to pay
o Payee: the person to whom the promise
to pay is made
 Parties to a bill of exchange
o Drawer: the one giving the order to pay
o Drawee: addressee of the order
o Payee: person to whom payment is to
be made
at the back of the instrument, he is said to have
NEGOTIATED or INDORSED it.
o The payee then becomes an INDORSER,
o The person to whom he negotiates it is
the INDORSEE, who becomes the holder
of the instrument.
 Nature of liability
o Primary liability: those parties who are
absolutely and unconditionally required
to pay the instrument (MAKER,
DRAWEE who has already ACCEPTED
the drawer’s order to pay)
o Secondary liability: parties who can be
held responsible should the primary
parties fail to pay, provided there was
demand/presentment on the primary
party and there was a notice of
dishonor (DRAWER, INDORSERS)
 What contracts does an indorser enter into?
o Contract of sale/transfer: the indorser
is selling/transferring the instrument to
the indorsee
o Promise to pay: the indorser warrants
that he will pay the instrument
 A holder can hold any indorser liable if the
maker or drawee who accepted fails to pay.
Class Notes
 The maker is:
o the one signing the instrument
o the one promising that he is to pay a
certain amount on a certain date
o there is no maker in a bill of exchange
 Bills of exchange
o there is no acceptance in promissory
notes
o acceptance: act of drawee where he
acknowledges acceptance of the bill of
exchange made by the drawer
o drawee is liable only from the time of
his acceptance; drawee has options of
paying or accepting the instrument
o when the drawee pays for it, the
instrument is discharged
o when the drawee accepts it, the
instrument is not yet discharged and
may continue to be negotiated further
(but there is already a party primarily
liable on the instrument)
o acceptance does not convert it into a
promissory note
Functions of negotiable instruments
Campos Notes
 A negotiable instrument may be used as
NEGOTIABLE INSTRUMENTS  A2015  PAGE 1 OF 78
 o A substitute for money
o A means of creating and transferring
credit
o A means to facilitate the sale of goods
 Although a negotiable instrument may be used
as a substitute for money, its validity as a means
of payment is conditioned on its being honoured
by the person bound by its terms to pay it.
The concept of negotiability
Campos Notes
 A person to whom a negotiable person is
negotiated may acquire a better title than his
transferor if he fulfills the requirements of a
holder in due course (Sec 52, NIL). The spring
can rise higher than the source.
 A person who takes a negotiable instrument can
rely on its face and need not inquire into past
events which gave rise to its execution.
 The Negotiable Instruments Law aims to
encourage facility, convenience and efficiency in
commercial transactions.
History of the NIL
Campos Notes
 The NIL is a verbatim reproduction of the
Uniform Negotiable Instruments Law of the
United States and has not been amended since it
was enacted in 1911.
Applicability of the NIL
Campos Notes
 The NIL only applies to negotiable instruments,
i.e. those instruments which meet the requisites
of NIL Section 1
 If any of the requisites of negotiability are
absent, the instrument would then be governed
by the law on contracts.
CHAPTER I
REQUISITES OF NEGOTIABILITY
Section 1. Form of negotiable instruments. - An
instrument to be negotiable must conform to the
following requirements:
(a) It must be in writing and signed by the maker or
drawer;
(b) Must contain an unconditional promise or order to
pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty.
Sec. 184. Promissory note, defined. - A negotiable
promissory note within the meaning of this Act is an
unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay on demand,
or at a fixed or determinable future time, a sum certain in
money to order or to bearer. Where a note is drawn to the
maker's own order, it is not complete until indorsed by
him.
Sec. 126. Bill of exchange, defined. - A bill of exchange is
an 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.
Class Notes
 The document must ON ITS FACE comply with
these conditions because certain rights and
privileges attach to the document depending on
WHO HOLDS IT
 a nego instrument in the hands of a holder in
due course confers upon it the "halo of
negotiability"
 if the nego instrument is in the hands of a holder
in due course ---> halo of negotiability --->
confers a right better than an ordinary
contract/instrument
 a nego instrument in the hands of a holder in
due course confers a better title in the hands of
the predecessor --> defects of the instrument are
cured
 even if the contract itself has become void, but
the nego instrument is in the hands of a holder
in due course, the holder acquires a better right
than all his predecessors
 a non-negotiable instrument does not mean it is
invalid. it may be enforced as an ORDINARY
CONTRACT
 THEREFORE, a negotiable instrument is just an
ORDINARY CONTRACT that has A STATUS OF
NEGOTIABILITY
 payment of instrument at a determinable time
 fulfillment of the consideration
 Promissory note
o maker is primarily liable on the
instrument
o characters: PAYOR and PAYEE
 Bill of exchange
o no one is primarily liable on a bill of
exchange
o characters:
1. drawer: person signing instrument
2. payee: any person, even fictitous
NEGOTIABLE INSTRUMENTS  A2015  PAGE 2 OF 78
 3. drawee: need not be a bank, can be
another person to whom the
instrument must be presented
o DRAWER NOT OBLIGED TO PAY THE
PAYEE
1. Written form and signature
Sec. 18. Liability of person signing in trade or assumed
name. - No person is liable on the instrument whose
signature does not appear thereon, except as herein
otherwise expressly provided. But one who signs in a
trade or assumed name will be liable to the same extent
as if he had signed in his own name.
Sec. 19. Signature by agent; authority; how shown. - The
signature of any party may be made by a duly authorized
agent. No particular form of appointment is necessary for
this purpose; and the authority of the agent may be
established as in other cases of agency.
Class Notes
 CAN IT be printed or engraved? yes
 How about writing on the wall, and signed?
o If it's a promissory note, possible; If it’s
a bill of exchange, also possible because
it is valid on its face. The element of
presentment is not your problem. What
about smoke signals? NO. Writing
requires a physical existence
 GR: Only the person who signed is liable
 XPN: Person who has transferred instrument by
mere delivery, where he is liable only to his
immediate transferee
 When a person signs the instrument, then he
becomes liable as a maker/drawer/indorser. if
unclear, held liable as indorser
2. Unconditional order or promise to pay
Campos Notes
 Mere acknowledgment of a debt does not
constitute a promise. There must be an express
promise on the instrument.
 For bills of exchange, words equivalent to an
order are sufficient. A mere request or authority
to pay does not constitute an order.
o E.g.: Pay to the order of X.
a. When unconditional
Sec. 3. When promise is unconditional. - An unqualified
order or promise to pay is unconditional within the
meaning of this Act though coupled with:
(a) An indication of a particular fund out of which
reimbursement is to be made or a particular account to
be debited with the amount; or
(b) A 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.
Campos Notes
 The fact that the promise is absolute and cannot
be defeated by a contingency greatly enhances
its negotiability (i.e. its ability to pass freely from
one person to another.)
 The recital of the transaction for which the
instrument was issued does not make the
promise/order conditional. It merely gives
information that the instrument was issued in
connection with the transaction.
 The fact that the condition appearing on the
instrument has been fulfilled will not convert it
to a negotiable one.
Class Notes
 negotiable instruments = form of payment,
though not necessarily legal tender itself
 does not need to be denominated in legal tender,
only currency (meaning money from everywhere
else)
 In the case of members of the European Union,
those countries who use the euro have waived
their right to issue their own currencies
Cases
Powell & Powell v Greenleaf v Currier
Quick Facts: This involved an action to recover the
balance due on two instruments in writing. Greene and
Currier argued that the instruments were not negotiable
because the consideration for said instruments was an
executory contract (i.e. a promise on the part of the
payee.) Thus, they are bilateral contracts instead of
promissory notes.
Doctrine: The instruments are negotiable despite making
reference to an external contract (the executory contract)
because they still contain an unconditional promise or
order to pay a sum certain in money. The negotiability of
an instrument is destroyed only when it contains a
reference to an external contract in such a way that it
makes it subject to the terms of that contract.
Irving Trust Co v Leff
Quick Facts: Leff executed a promissory note to his own
order, indorsed to Irving Trust. Leff alleged he delivered a
$1000 check to Bragin, but the latter stole it instead. He
also alleged that Irving Trust cashed the check for Bragin
without asking if the suspensive condition he prescribed
had been met.
Doctrine: Irving Trust must repay Leff the $1000 check
because it was not a negotiable instrument – since it had
a suspensive condition, it did not have an unconditional
NEGOTIABLE INSTRUMENTS  A2015  PAGE 3 OF 78
promise or order to pay. A check is not valid until
delivery. Sometimes delivery may be presumed, but only
in the case of NEGOTIABLE instruments. Delivery cannot
be presumed for NON-NEGOTIABLE instruments, more
so if there is an allegation of theft which puts the issue of
delivery into question.
3. Sum payable must be certain
Sec. 2. What constitutes certainty as to sum. - The sum
payable is a sum certain within the meaning of this Act,
although it is to be paid:
(a) with interest; or
(b) by stated installments; or
(c) by stated installments, with a provision that, upon
default in payment of any installment or of interest, the
whole shall become due; or
(d) with exchange, whether at a fixed rate or at the
current rate; or
(e) with costs of collection or an attorney's fee, in case
payment shall not be made at maturity.
Campos Notes
 An instrument cannot function properly as a
substitute for money unless the amount for
which it stands is specified and definite.
 An agreement to pay interest does not render
the sum uncertain.
 A stipulation to pay a higher rate of interest if
the note is not paid at maturity or a lower rate if
it is paid on or before maturity does not render
the instrument non-negotiable.
 A sum payable in installments remains a sum
certain if the installments are fixed and stated in
the instrument.
 An instrument providing for attorney’s fees
which leaves the amount blank amounts to a
promise to pay a reasonable sum as to
attorney’s fees and does not render the
instrument non-negotiable.
Class Notes
 The payee makes the demand.
 if left to the discretion of maker/drawer, payee
will be forced to rely on the whims of the
maker/drawer
 the fact that the event happened does not mean
that the instrument has been converted into a
negotiable instrument (again, because of the "on
its face" principle)
4. Payable in money
Campos Notes
 Because negotiable instruments are intended as
substitutes for money, they must be capable of
being transformed into money
 Money is not limited to legal tender. It includes
any particular kind of current money.
 An instrument which contains an order to do an
act in addition to the payment of money is not
negotiable, except if the order or promise gives
the HOLDER a choice to require something to be
done instead of payment of money.
 If the option to pay money or do an act instead of
paying money is with the MAKER or person
PRIMARILY LIABLE, the instrument is not
negotiable.
Case
Incitti v Ferrante, et al
Quick Facts: Ferrante et al made a promissory note for
15 400 Italian lires payable to Bank Italia. Incitti
demanded payment in Italian lire or the American
currency equivalent. Ferrante et al countered that the
note was non-negotiable since it was payable in lire.
Doctrine: The note is negotiable. The requirement for
negotiability is only “an unconditional promise to pay a
certain sum of money.” It remains that the note was
payable for a sum certain, because any number of Italian
lire (or any other type of currency) will always have an
equivalent in US dollars and vice versa.
5. Certainty of time of payment
Campos Notes
 Certainty of time is important for informing the
holder of the date when he may enforce its
payment
a. When payable on demand
Sec. 7. When payable on demand. - An instrument is
payable on demand:
(a) When it is so expressed to be payable on demand, or
at sight, or on presentation; or
(b) In which no time for payment is expressed.
Where an instrument is issued, accepted, or indorsed
when overdue, it is, as regards the person so issuing,
accepting, or indorsing it, payable on demand.
Campos Notes
 Expressed to be payable on
demand/sight/presentation: “I promise to pay X
or order P100 at sight.”
 No time of payment: “I promise to pay X P100.”
 The holder may call for payment at any time in
the case of a demand instrument.
 In a demand note, the maker has an option to
pay at any time. Refusal of the holder to accept
payment will terminate the running of interest,
although the obligation to pay the note will
remain.
NEGOTIABLE INSTRUMENTS  A2015  PAGE 4 OF 78
b. Payable at a fixed time
Campos Notes
 If the instrument is payable on a fixed date, the
holder can only demand payment on the fixed
date.
 If the holder fails to demand payment, the
instrument becomes overdue but remains valid
and negotiable. (It turns into a demand
instrument.)
c. payable at a determinable future time
Sec. 4. Determinable future time; what constitutes. - An
instrument is payable at a determinable future time,
within the meaning of this Act, which is expressed to be
payable:
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future time
specified therein; or
(c) On or at a fixed period after the occurrence of a
specified event which is certain to happen, though the
time of happening be uncertain.
An instrument payable upon a contingency is not
negotiable, and the happening of the event does not cure
the defect.
Sec. 11. Date, presumption as to. - Where the instrument
or an acceptance or any indorsement thereon is dated,
such date is deemed prima facie to be the true date of the
making, drawing, acceptance, or indorsement, as the case
may be.
Sec. 17. Construction where instrument is ambiguous. -
Where the language of the instrument is ambiguous or
there are omissions therein, the following rules of
construction apply:chanroblesvirtuallawlibrary
(a) Where the sum payable is expressed in words and
also in figures and there is a discrepancy between the
two, the sum denoted by the words is the sum payable;
but if the words are ambiguous or uncertain, reference
may be had to the figures to fix the amount;
(b) Where the instrument provides for the payment of
interest, without specifying the date from which interest
is to run, the interest runs from the date of the
instrument, and if the instrument is undated, from the
issue thereof;
(c) Where the instrument is not dated, it will be
considered to be dated as of the time it was issued;
(d) Where there is a conflict between the written and
printed provisions of the instrument, the written
provisions prevail;
(e) Where the instrument is so ambiguous that there is
doubt whether it is a bill or note, the holder may treat it
as either at his election;
(f) Where a signature is so placed upon the instrument
that it is not clear in what capacity the person making the
same intended to sign, he is to be deemed an indorser;
(g) Where an instrument containing the word "I
promise to pay" is signed by two or more persons, they
are deemed to be jointly and severally liable thereon.
d. Effect of acceleration provisions
Campos Notes
 If the option to accelerate maturity is on the
maker, the negotiability of the instrument is not
affected. This includes acceleration clauses
which affect maturity upon the maker’s failure to
pay an installment when due.
 If the option to accelerate maturity is on the
holder:
o NEGOTIABLE if the option can be
exercised by the holder only upon the
happening of a specified event or act
over which he has no control
o NOT NEGOTIABLE if the right to
exercise of the option is unconditional
(because this would render the time of
payment uncertain)
 Acceleration of maturity by operation of law
does not affect negotiability (e.g.: maker dies
before maturity, or maker is declared insolvent)
Class Notes
 creditor has right to determine which loans will
be paid by the money given by the debtor
 An acceleration clause makes the entire
obligation due and demandable, but it does not
affect the negotiability of the instrument
 "due and demandable": debtor now has the
obligation to pay the entire amount; allows
creditor to use remedies available in civil code
(e.g. rescission)
o Purpose: lessens multiplicity of suits, he
will not have to sue for every
installment
 if the entire loan becomes due and demandable,
the creditor can rescind the contract and
retrieve the object of the contract
 in the case of Henry v Madison Aerie, before the
garnishment by another could be done, the bank
had already applied the amount to its own loans
Cases
Rehabilitation Finance Corp v CA
Quick Facts: Anduiza borrowed money from Agricultural
and Industrial Bank, secured by a promissory note
payable in installments. The last installment was due in
1951. Madrid became Anduiza’s successor and
Rehabilitation Finance became Agricultural and
Industrial’s successor. Madrid fully paid the note in 1944,
but Rehabilitation Finance said it would only release the
mortgaged properties involved in the note in 1951 since
it was the date stipulated.
NEGOTIABLE INSTRUMENTS  A2015  PAGE 5 OF 78
Doctrine: When a note says it is to be paid on or before a
fixed date, the date when it is due and demandable is
considered payable at a future time. Thus, the amount on
the note may validly be paid in full even before the
stipulated date.
Utah State National Bank v Smith
Quick Facts: Utah State Bank bought Smith et al’s
promissory note and tried to enforce payment. The lower
court ruled that the note was non-negotiable because of
the note’s acceleration clause which stated that “the
principal and the interest shall become due at the option
of the holder.”
Doctrine: The note is negotiable. A note payable on or
before a fixed date is considered payable at a
determinable future time. The fact that it contains an
acceleration clause does not negate the nature of the note
as payable at a determinable future time.
Puget Sound State Bank v Washington Paving Co
Quick Facts: Washington Paving executed 2 promissory
notes payable to its own order. The notes contained the
provision that they “shall become due and payable on
demand at the option of the payee when it deems itself
insecure.”
Doctrine: The notes are not negotiable because the
provision gives the holder the unrestricted power to
declare the notes due at any time. This power is not
dependent on any agreement with the maker of the note,
and therefore it is a contingency over which the latter has
no control.
Henry v Madison Aerie No 623
Quick Facts: Henry sued Madison Aerie, who had 2
promissory notes in the Bank of Madison. These notes
contained acceleration clauses which provided that
failure to pay any installments as they become due will
render the entire obligation due and demandable.
Doctrine: The acceleration clauses were valid.
Acceleration clauses in negotiable instruments rendered
the notes due absolutely and not at the unrestricted
option of the holder. An acceleration clause clarifies the
effect of default on the maturity of a note.
e. Provisions extending time of payment
Campos Notes
 NEGOTIABLE IF the note provides that the
maker may extend a note for another year (it is
an acceleration at the option of the maker)
 NEGOTIABLE if the holder is given the option to
extend the time of payment by mere inaction or
indulgence for an indefinite time depending on
his will (the holder always has the option to be
indulgent with or without such provision
anyway)
 NOT NEGOTIABLE if the maker is given the
option to extend the payment until the
happening of a contingency (because the time
for payment may never come at all)
Class Notes
 the negotiability of the instrument is determined
ON THE FACE OF THE INSTRUMENT; if you have
to go beyond the face, it will not affect
negotiability
 XPN: may affect w/n a person can be considered
a holder in due course
o instrument must be negotiable on its
face
o must be in the hands of a holder in due
course
 a tithe cannot pass a valid title to an instrument,
even if it is a negotiable instrument
o enshrined in NIL: price v neil doctrine
(UK case)
 basic principle: a negotiable instrument in the
hands of a holder in due course is free from all
defenses
 Instances that will make the instrument
vulnerable:
o if time of payment left at discretion of
maker/drawer: destroys negotiability
o if left with payee/holder: does not
affect negotiability, but may affect
subsequent indorsers/indorsees (w/n
they can still qualify to become a holder
in due course)
o when an instrument is overdue at time
of its indorsement, such transfer/nego
may affect w/n the transferee/indorsee
can become a holder in due course
o extension of time may affect liability of
2nd parties: it may be possible that
there is a provision discharging liability
of 2nd parties
o an accepted bill of exchange has
enhanced value (because someone is
already primarily liable)
Cases
State Bank of Halstad v Bilstad
Quick Facts: Bilstad et al executed 3 promissory notes.
The notes contained a provision extending time of
payment for one year if a suspensive condition regarding
the harvest of wheat crop was met.
Doctrine: The notes are negotiable instruments. The fact
that they have a provision extending time of payment for
one year does not affect the fact that they are due upon a
fixed or determinable future time. The extension is not
determined by the maker’s whims, it is determined by the
occurrence of the harvest, which is certain to happen.
NEGOTIABLE INSTRUMENTS  A2015  PAGE 6 OF 78

Security National Bank of Sioux City v Gunderson
Quick Facts: The promissory note involved had a clause
which waived the makers’/indorsers’ defenses on the
ground of any extension of time of payment.
Doctrine: The note remains negotiable despite the
clause. The waiver of defenses on the parts of the makers
and/or indorsers only serves as protection for the holder
against any release of indorsers (due to extensions of
time of payment) without said holder’s consent.
6. Must be payable to order or bearer
Campos Notes
 The instrument must contain the “words of
negotiability” to be negotiable. The words of
negotiability serve as an expression of consent
that the instrument may be transferred.
 Consent is important because a maker assumes
greater risks under a negotiable instrument than
under a non-negotiable instrument.
 Bearer instruments may be negotiated by mere
delivery.
 Order instruments require delivery and
indorsement of the transferor.
Class Notes
 Instrument must always say it is payable to
order or to bearer; the instrument is made
negotiable by the words of negotiability (the
trust that the maker or drawee will pay the
instrument)
a. When instrument is payable to order
Sec. 8. When payable to order. - The instrument is
payable to order where it is drawn payable to the order of
a specified person or to him or his order. It may be drawn
payable to the order of:
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must
be named or otherwise indicated therein with reasonable
certainty.
Campos Notes
 There must always be a specified person in the
instrument. The bill or note is to be paid to the
person designated, or to any person to whom he
has indorsed and delivered the same.
 If “to order” is not present on the instrument, it
is only payable to the person designated and is
not negotiable. Anyone who subsequently
purchases such an instrument will not become a
holder. Instead, the purchaser will merely step
into the shoes of the person designated and be
open to all defenses available against the latter.
Class Notes
 Drawee and payee not liable to each other
 XPN: if drawee accepts the instrument
 XPN: if drawer has sufficient funds with drawee,
and drawee refuses to pay the payee ( breach of
contract between drawee and drawer, drawer's
reputation willl be tarnished)
 drawer is only a party secondarily liable, only if
there was due notice and the instrument was
properly presented
b. When instrument is payable to bearer
Sec. 9. When payable to bearer. - The instrument is
payable to
bearer:
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or
bearer; or
(c) When it is payable to the order of a fictitious or non-
existing person, and such fact was known to the person
making it so payable; or
(d) When the name of the payee does not purport to be
the name of any
person; or
(e) When the only or last indorsement is an
indorsement in blank.
Campos Notes
 expressed to be so payable: I promise to pay to
bearer P100
 payable to a person named/bearer: Pay to X or
bearer
 payable to order of a fictitious person: Pay to
John Doe or order
o a note payable to the order of an estate
of a person (w/n this person is living or
dead) remains valid bearer paper
o The maker or drawer MUST be aware
that the person named as payee is
fictitious. Since the payee is not capable
of indorsing and since the
maker/drawer knew this, the latter
must have intended the instrument to
be transferred by mere delivery
 when name of payee does not purport to be any
person’s name: Pay to cash
o gives rise to the presumption that by
using an impersonal payee, the
maker/drawer intends the instrument
to be bearer paper
 A blank indorsement cannot convert a non-
negotiable note to a negotiable one
NEGOTIABLE INSTRUMENTS  A2015  PAGE 7 OF 78
Class Notes
 ANY PERSON WHOSE SIGNATURE DOES NOT
APPEAR IN AN INSTRUMENT IS NOT LIABLE
 indorsements are never supposed to affect the
status of a bearer instrument as a bearer
instrument
Cases
Wettlaufer v Baxter
Quick Facts: Baxter indorsed a note in blank to
Wettlaufer. The note was dishonored, so the latter sued
the former.
Doctrine: The note was not a negotiable instrument
because it did not contain the words of negotiability. To
be negotiable, a note must contain a provision for
payment to order or bearer. Indorsement of a note in
blank cannot convert a non-negotiable instrument into a
negotiable one.
Ang Tek Lian v CA
Quick Facts: Ang Tek Lian presented a check payable to
the order of “cash” to Lee Huan Hong. The check was
dishonored for insufficiency of funds and Lee sued Ang
for estafa. Ang countered that he was not liable for estafa
because he did not indorse the check.
Doctrine: A check payable to the order of “cash” is a valid
negotiable instrument. It is considered a check payable to
bearer. A bank may pay the person presenting it for
payment without the drawer’s indorsement.
7. Parties must be designated with certainty
a. Maker & Drawer
Campos Notes
 MAKERS and DRAWERS usually sign at the lower
right hand corner of the instrument
 The DRAWEE’s name is located on the lower left
hand corner
 The PAYEE and the INDORSEES negotiate the
instrument by signing at the back
 If a party deviates from the usual placing of
signatures, and ambiguity arises, the law
considers the person an INDORSER.
Class Notes
 can you sign on another paper? NO. you can only
do this if the back of the paper is already full.
Refer to “allonge”
b. Payee
Sec. 8. When payable to order. - The instrument is
payable to order where it is drawn payable to the order of
a specified person or to him or his order. It may be drawn
payable to the order of:
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must
be named or otherwise indicated therein with reasonable
certainty.
Campos Notes
 A note payable to the order of the maker is not
complete unless the maker indorses it first
 When there are 2 jointly constituted payees, they
must both indorse.
 Best interpretation when the instrument is
payable to the holder of an office for the time
being: the payee is the person who happens to
hold the position at any particular moment
 If the payee’s name is misspelled or wrongly
designated, the instrument does not lose its
negotiability (Sec 43)
Class Notes
 What if there is more than one payee?
 If there are joint payees, and payment is given to
1 of them, is the bank's obligation discharged?
 Can the drawee require ABC to receive payment
before he makes payment?
 Can payment be made to A alone? NO. payment
has to be made to ABC
 What happens if drawee pays A alone?
instrument still not considered discharged as to
B and C
 Can the drawee require B and C to be present?
YES
 a presentment by A alone is not a valid
presentment. Presentment must be made by ALL
parties to the presentment
c. Drawee
Sec. 128. Bill addressed to more than one drawee. - A bill
may be addressed to two or more drawees jointly,
whether they are partners or not; but not to two or more
drawees in the alternative or in succession.
Sec. 130. When bill may be treated as promissory note. -
Where in a bill the drawer and drawee are the same
person or where the drawee is a fictitious person or a
person not having capacity to contract, the holder may
treat the instrument at his option either as a bill of
exchange or as a promissory note.
Campos Notes
 Drawee must be named or indicated with
reasonable certainty
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  You cannot address a note to two or more
drawees in the ALTERNATIVE (“To X or Y”)
because then there would be uncertainty
 When the drawer and drawee are the same
person, or the drawee is fictitious, or a person
without capacity to contract, the holder may
treat the instrument as a bill or note
8. Provisions not affecting negotiability
Sec. 5. Additional provisions not affecting negotiability. -
An instrument which contains an order or promise to do
any act in addition to the payment of money is not
negotiable. But the negotiable character of an instrument
otherwise negotiable is not affected by a provision which:
(a) authorizes the sale of collateral securities in case
the instrument be not paid at maturity; or
(b) authorizes a confession of judgment if the
instrument be not paid at maturity; or
(c) waives the benefit of any law intended for the
advantage or protection of the obligor; or
(d) gives the holder an election to require something to
be done in lieu of payment of money.
But nothing in this section shall validate any provision or
stipulation otherwise illegal.
Campos Notes
 A provision authorizing the sale of collateral
securities (e.g. mortgage) in case the instrument
is unpaid at maturity does not affect
negotiability.
 An authorization allowing the holder to sell the
collateral BEFORE maturity renders the
instrument non-negotiable.
 A provision waiving the rights of secondary
parties to have the instrument duly presented
for payment and their right to notice of dishonor
and protest does not affect negotiability.
 An instrument bearing a seal or designating a
particular kind of current money in which
payment is to be made does not affect
negotiability.
Class Notes
 An instrument may be considered negotiable if it
includes an option of payment other than money
IF the option is on the part of the holder or
payee:
I promise to pay to the order of B, the
amount of P1000 on or before June 30 2013, or
she will have dinner with me.
Signed,
A but if the words are ambiguous or uncertain, reference
Case
Philippine National Bank v Manila Oil Refining & By
Products Co
Quick Facts: Manila Oil executed a promissory note with
PNB. The promissory note contained a stipulation
allowing any attorney to appear and confess judgment
thereon in case the note was not paid at maturity. Manila
Oil failed to pay. A lawyer associated with PNB
represented Manila Oil and confessed judgment.
Doctrine: Provisions in negotiable instruments which
contain warrants of attorney to confess judgment are void
against public policy because they deprive a person of his
property without due process. However, such provisions
do not affect the note’s negotiability.
9. Omissions not affecting negotiability
Sec. 6. Omissions; seal; particular money. - The validity
and negotiable character of an instrument are not
affected by the fact that:
(a) it is not dated; or
(b) does not specify the value given, or that any value
had been given therefor; or
(c) does not specify the place where it is drawn or the
place where it is payable; or
(d) bears a seal; or
(e) designates a particular kind of current money in
which payment is to be made.
But nothing in this section shall alter or repeal any
statute requiring in certain cases the nature of the
consideration to be stated in the instrument.
Campos Notes
 An undated instrument does not affect
negotiability. In this case, the law considers the
date of issue as the date of the instrument.
 An instrument without a statement that the
value was received does not affect negotiability
because of the presumption that the instrument
was issued for a valuable consideration.
 If there is no place of payment, the law considers
the place of presentment to be the address of the
person supposed to pay. If the address of the
person is not stated, then at his place of business
or residence.
10. Rules of construction
Sec. 17. Construction where instrument is ambiguous. -
Where the language of the instrument is ambiguous or
there are omissions therein, the following rules of
construction apply:
(a) Where the sum payable is expressed in words and
also in figures and there is a discrepancy between the
two, the sum denoted by the words is the sum payable;
may be had to the figures to fix the amount;
(b) Where the instrument provides for the payment of
interest, without specifying the date from which interest
is to run, the interest runs from the date of the
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instrument, and if the instrument is undated, from the
issue thereof;
(c) Where the instrument is not dated, it will be
considered to be dated as of the time it was issued;
(d) Where there is a conflict between the written and
printed provisions of the instrument, the written
provisions prevail;
(e) Where the instrument is so ambiguous that there is
doubt whether it is a bill or note, the holder may treat it
as either at his election;
(f) Where a signature is so placed upon the instrument
that it is not clear in what capacity the person making the
same intended to sign, he is to be deemed an indorser;
(g) Where an instrument containing the word "I
promise to pay" is signed by two or more persons, they
are deemed to be jointly and severally liable thereon.
Campos Notes
 In case of ambiguity between figures and written
words, the written words prevail.
o $1200, “twelve dollars”: instrument is
valid only for twelve dollars
 If the words are ambiguous however, figures are
used to determine the true amount
o $365, “three sixty five dollars”:
instrument is valid for three hundred
sixty five dollars
 An instrument that says “I promise to pay” but
states the name of a drawee allows the holder to
either treat the drawer as a maker of a note or a
drawer of a bill.
 “I promise to pay” signed by two persons make
them solidarily liable. Since the promise is in the
singular, it means that the obligation is
individual as to each signer.
 “We promise to pay” signed by two persons only
creates joint liability because of the presumption
that in absence of any agreement, debtors are
presumed to be bound jointly.
Case
Continental Illinois Bank & Trust Co. v Clement
Quick Facts: Clement and Thorpe both signed a
promissory note worded in the singular. Continental
Illinois sought to recover the value upon Clement.
Clement countered that Continental Illinois cannot
recover if Thorpe is not made a defendant since the
promissory note is a joint obligation.
Doctrine: The bank can recover upon Clement alone.
When executed by several persons, an instrument
worded in the singular creates a joint and several
obligation.
CHAPTER II
TRANSFER
1. Delivery & issuance
Sec. 16. Delivery; when effectual; when presumed. -
Every contract on a negotiable instrument is incomplete
and revocable until delivery of the instrument for the
purpose of giving effect thereto. As between immediate
parties and as regards a remote party other than a holder
in due course, the delivery, in order to be effectual, must
be made either by or under the authority of the party
making, drawing, accepting, or indorsing, as the case may
be; and, in such case, the delivery may be shown to have
been conditional, or for a special purpose only, and not
for the purpose of transferring the property in the
instrument. But where the instrument is in the hands of a
holder in due course, a valid delivery thereof by all
parties prior to him so as to make them liable to him is
conclusively presumed. And where the instrument is no
longer in the possession of a party whose signature
appears thereon, a valid and intentional delivery by him
is presumed until the contrary is proved.
Campos Notes
 Delivery: transfer of possession (actual or
constructive) from one person to another.
 If there is no delivery from the maker to the
payee, there can be no liability on an instrument.
 The delivery must be intended to give effect to
the instrument
o If a maker gives the instrument to
another only for safekeeping, there is
no delivery within the meaning of Sec
16
 There is a rebuttable presumption that there
was a valid delivery if the instrument is no
longer in the possession of the person who
signed it.
o As to a holder in due course, the
presumption is conclusive as long as
the instrument is complete
 The first delivery of a complete instrument to a
holder is called the ISSUE or ISSUANCE of the
instrument.
Class Notes
 In Re Martens: not necessary to determine if
there was delivery in the instrument if the
instrument was not negotiable in the first place
 in the case of Martens, delivery could not be
presumed because the instrument remained in
the safe
 delivery: burden of proof on maker
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Case
In re Marten’s Estate
Quick Facts: Mabel Martens filed a claim based on a
$1500 note against the administrator of her mother’s
estate. The note was discovered in her mother’s safe, after
the latter’s death. The note had instructions to be
delivered to Fisher.
Doctrine: The note was never legally delivered to Fisher
because it was only discovered in Mabel’s mother’s safe
after her death. Every contract on a negotiable
instrument is incomplete and revocable until delivery of
the instrument for the purpose of giving effect thereto.
Since it was never delivered to Fisher, Mabel’s right to the
$1500 was never realized.
2. Negotiation
Sec. 30. What constitutes negotiation. - An instrument is
negotiated when it is transferred from one person to
another in such manner as to constitute the transferee
the holder thereof. If payable to bearer, it is negotiated by
delivery; if payable to order, it is negotiated by the
indorsement of the holder and completed by delivery.
Sec. 191. Definition and meaning of terms. - In this Act,
unless the contract otherwise requires:
"Acceptance" means an acceptance completed by delivery
or notification;
"Action" includes counterclaim and set-off;
"Bank" includes any person or association of persons
carrying on the business of banking, whether
incorporated or not;
"Bearer" means the person in possession of a bill or note
which is payable to bearer;
"Bill" means bill of exchange, and "note" means
negotiable promissory note;
"Delivery" means transfer of possession, actual or
constructive, from one person to another;
"Holder" means the payee or indorsee of a bill or note
who is in possession of it, or the bearer thereof;
"Indorsement" means an indorsement completed by
delivery;
"Instrument" means negotiable instrument;
"Issue" means the first delivery of the instrument,
complete in form, to a person who takes it as a holder;
"Person" includes a body of persons, whether
incorporated or not;
"Value" means valuable consideration;
"Written" includes printed, and "writing" includes print.
Campos Notes
 Negotiation: transfer of an instrument made in
such manner that the transferee becomes a
holder (and possibly a holder in due course)
capable of acquiring a better title to the
instrument than that of his transferor
o If the instrument is payable to ORDER:
the payee/indorsee possessing it is the
HOLDER
o If the instrument is payable to BEARER:
the person possessing it is the BEARER
and HOLDER
 Transfer: a mere assignment which constitutes
the transferee as a mere ASSIGNEE, subject to all
defenses existing among parties
o Broader than negotiation, as its
definition includes ordinary assignment
and negotiation
Class Notes
 order instrument = requires separate delivery
and indorsement, requires negotiation, i.e. the
signature
 legally speaking, negotiation is the signing of the
instrument and is an indorsement of the
instrument
 when the drawer signs the instrument's front,
the drawer is not indorsing it. he is signing AS
DRAWER
 in transfer, X merely steps into the shoes of the
payee; X does not become a valid holder in due
course
 indorsement does not require words of
negotiability (Negotiability of the instrument is
determined on its face. Indorsement is at the
back.)
 Negotiation requires delivery AND signature
(aka indorsement)
3. Methods of negotiation
Campos Notes
 How to negotiate an instrument payable to order
o Indorsement by payee/present holder:
indorser signs the back of the
instrument
 An indorsement constitutes a
transfer or sale of the
instrument to the indorsee or
transferee
 It also signifies the indorser’s
agreement to answer for the
amount represented by the
instrument in case of default of
the parties primarily liable
o Delivery to transferee/indorsee
 An instrument payable to bearer is negotiable by
mere delivery
o A person who negotiates by mere
delivery DOES NOT warrant that he will
pay in case the primary parties default
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4. How indorsement made
Class Notes
 instrument is not completely invalidated if not
indorsed according to NIL, because the
contractual relationship between the parties still
remains
 the law on contracts will apply
a. By signature on instrument or on allonge
Sec. 31. Indorsement; how made. - The indorsement
must be written on the instrument itself or upon a paper
attached thereto. The signature of the indorser, without
additional words, is a sufficient indorsement.
Campos Notes
 allonge: a slip of paper affixed to a negotiable
instrument, as a bill of exchange, for the purpose
of receiving additional indorsements for which
there may not be sufficient space on the bill itself
 an allonge can be validly used only when there is
no longer any room on the instrument for
further indorsements
Case
Clark v Thompson
Quick Facts: Thompson et al bought a note from payee
W.A. Thompson. The note was indorsed on a separate
sheet of paper. Clark and her husband filed for a bill of
cancellation of a mortgage. This bill was cancelled on the
theory that Thompson et al were purchasers for value in
due course.
Doctrine: The bill was not properly indorsed to
Thompson et al. They were not holders in due course. An
indorsement made on a separate sheet of paper, if there is
still room on the back of the note itself, is merely an
assignment and not a valid indorsement. An allonge (a
sheet of paper attached firmly to the instrument) may be
used to write indorsements only if the back of the note
itself has been completely covered with previous
indorsements.
b. in case of joint payees
Campos Notes
 Instrument payable to “A & B”: joint payees,
indorsement by only one of them will not
constitute a valid negotiation, unless the one
negotiator was given authority
 Instrument payable to “A or B”: payees in the
alternative, indorsement by either one will
constitute valid negotiation
c. If name misspelled
Sec. 43. Indorsement where name is misspelled, and so
forth. - Where the name of a payee or indorsee is wrongly
designated or misspelled, he may indorse the instrument
as therein described adding, if he thinks fit, his proper
signature.
Campos Notes
 Indorsement should be made in the manner the
indorser was designated, even if it was
misspelled
o Effect if this is not done: signature will
be a prima facie invalid indorsement
o The indorser with the misspelled
designation may just write his correct
name AFTER the misspelling
Case
Young v Hembree
Quick Facts: Hembree agreed to loan Horn & Faulkner
money for oil drilling. Following Horn & Faulkner’s
instructions, he wrote a check designating “Horn &
Faulkner Oil Trust” as payee. The check was indorsed
“Horn & Faulkner” to Young.
Doctrine: Young is not a holder in due course. “Horn &
Faulkner” is not a sufficient indorsement of “Horn &
Faulkner Oil Trust.” Therefore, on its face, the
indorsement is not that of the payee’s. The instrument
should have been indorsed “Horn & Faulkner Oil Trust”
because there was no evidence that “Horn & Faulkner”
and “Horn & Faulkner Oil Trust” are one and the same
entity.
5. indorsement must be of entire instrument
Sec. 32. Indorsement must be of entire instrument. - The
indorsement must be an indorsement of the entire
instrument. An indorsement which purports to transfer
to the indorsee a part only of the amount payable, or
which purports to transfer the instrument to two or more
indorsees severally, does not operate as a negotiation of
the instrument. But where the instrument has been paid
in part, it may be indorsed as to the residue.
Campos Notes
 The entire instrument has to be indorsed to
protect obligors from multiplicity of suits
 Sec 32 does not affect the negotiability of:
o An instrument which may be negotiated
for its remaining balance, e.g. a note
payable by installments, where some
installments have already been paid
o A discount of the instrument (where
the indorsee pays the indorser less than
the face value of the instrument)
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  An instrument not indorsed in its entirety
becomes merely an assignment which subjects
the holder to all defenses on the instrument
Class Notes
 WHAT IS AN IRREGULAR INDORSER? A person
who is not a party to the instrument but places
his signature on it before delivery
 In the case of an irregular indorser, there is no
partial discharge of the instrument
Case
Blake v Weiden
Quick Facts: Blake sued Weiden for an overdraft in the
latter’s salary. Weiden countered that the overdraft
should be set-off with the amount in 5 promissory notes
indorsed to his order and the two executors of his father’s
estate.
Doctrine: Weiden’s overdraft may be set-off by the notes
since they were constructively indorsed in their entirety.
The notes in this case were instruments indorsed in
separate parts to two or more transferees. Indorsees to
instruments such as this may bring suit provided all the
other indorsees are brought in as parties. In this case,
Weiden tried to bring in the 2 executors, although they
refused to join with him. It may therefore be considered
that there was a constructive delivery to all three
indorsees.
6. Kinds of indorsements
Sec. 33. Kinds of indorsement. - An indorsement may be
either special or in blank; and it may also be either
restrictive or qualified or conditional.
Class Notes
 indorsements can be made on both promissory
notes and bills of exchange
 recall: an instrument that is payable to bearer is
negotiated by mere delivery. an instrument that
is payable to order is negotiated by delivery AND
indorsement
 what determines if an instrument is
order/bearer? its FACE
 when a person indorses an instrument, that
makes him subsequently liable to other
indorsees (not primarily liable though; only
secondarily)
 except in a bill of exchange, if the drawee accepts
the instrument, then someone will be primarily
liable
 an indorsement does not need the words of
negotiability. only the face of the instrument
requires the words of negotiability.
 before a person becomes a holder in due course,
he must first become a holder (i.e. there must be
a valid negotiation of the instrument; this is why
a THIEF cannot pass title, because there is no
valid negotiation, even in a bearer instrument)
 instruments payable to bearer always remain
payable to bearer. not the case in order
instruments
 in bearer instruments, an indorsee cannot
require the signature of an indorser. in order
instruments, even if they have been treated as
bearer instruments, the subsequent indorsee
CAN require the signature of the indorser, in
order to qualify as a holder in due course (if
signature is not asked for, the subsequent
indorser only steps into the shoes of the
indorsee)
 it is the face of the instrument that determines
its negotiability/further negotiability
 a person whose signature does not appear on
the instrument CANNOT be held liable
 a bearer instrument is always a bearer
instrument even if it is indorsed specially
 an order instrument may be converted to a
bearer instrument
 in an order instrument, the current holder may
require the signature of his IMMEDIATE
PREDECESSOR in order to hold ANOTHER
PREDECESSOR liable
 INDORSEMENTS NEVER DETERMINE FURTHER
NEGOTIABILITY
 an order instrument may be converted to a
bearer instrument, but the party may require the
signature of the party by whose title he acquires
his own title.
a. basis of classification
Campos Notes
 indorsements come in different types in order to
modify the rights of subsequent holders or the
liabilities of the indorser
 Indorsements may be classified into
o special or blank: deals with the future
method of negotiation (indorsement
and delivery v delivery alone)
o restrictive or non-restrictive: deals with
the kind of title transferred
o qualified or unqualified: deals with the
scope of liability assumed by the
indorser
o conditional or unconditional: deals with
the presence or absence of express
limitations put by the indorser upon the
obligor’s privileges of paying the holder
 The types are not mutually exclusive. E.g., it is
possible for an indorsement to be special and
qualified at the same time
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b. special & blank indorsements
Sec. 34. Special indorsement; indorsement in blank. - A
special indorsement specifies the person to whom, or to
whose order, the instrument is to be payable, and the
indorsement of such indorsee is necessary to the further
negotiation of the instrument. An indorsement in blank
specifies no indorsee, and an instrument so indorsed is
payable to bearer, and may be negotiated by delivery.
Sec. 40. Indorsement of instrument payable to bearer. -
Where an instrument, payable to bearer, is indorsed
specially, it may nevertheless be further negotiated by
delivery; but the person indorsing specially is liable as
indorser to only such holders as make title through his
indorsement.
Sec. 35. Blank indorsement; how changed to special
indorsement. - The holder may convert a blank
indorsement into a special indorsement by writing over
the signature of the indorser in blank any contract
consistent with the character of the indorsement.
Campos Notes
 A special indorsement SPECIFIES to whom or to
whose order the instrument is payable.
Indorsement of the indorsee is necessary for
further negotiation. Thus, the indorser is liable
to subsequent holders.
 A blank indorsement does not specify any
indorsee and may be negotiated by mere
delivery. Thus, the indorser is liable only to the
immediate transferee.
o Through a blank indorsement, a thief or
finder can give good title to a holder in
due course
o A blank indorsement may be converted
to a special indorsement except if it was
originally a bearer instrument
 What happens if a bearer instrument is specially
indorsed as “Pay to X, (sgd) Y”? Is X’s signature
necessary for further negotiation?
o Sec 34 says yes, but Sec 40 says no.
o Sec 40 also says it may be negotiated by
delivery as long as it was originally a
bearer instrument, ALTHOUGH the
special indorser is liable as indorser
only to the holders who acquired title
through his indorsement
o The SOLUTION is to apply Sec 40 only
to bearer instrument in order to
prevent forged or unauthorized
indorsements of special indorsees, risks
which the obligor did not assume by his
contract to pay the bearer.
 The RULE is that a special indorser is liable to
subsequent indorsers, EXCEPT if the instrument
was originally a bearer instrument (then he is
liable only to those who acquired title through
his indorsement).
 An instrument originally payable to ORDER may
be converted to a BEARER instrument through a
blank indorsement. It may be reconverted into
an ORDER instrument through a special
indorsement. The last indorsement ALWAYS
controls the means of further negotiation.
 An instrument originally payable to BEARER can
never be converted to an ORDER instrument.
c. qualified indorsement
Sec. 38. Qualified indorsement. - A qualified indorsement
constitutes the indorser a mere assignor of the title to the
instrument. It may be made by adding to the indorser's
signature the words "without recourse" or any words of
similar import. Such an indorsement does not impair the
negotiable character of the instrument.
Campos Notes
 An indorser enters into 2 implied contracts
through indorsements
o Contract of sale or assignment of the
instrument
o Contract to pay the instrument if the
primary parties are unable to pay upon
maturity
 An indorser may relieve himself of either of the 2
contracts by clearly expressing such intent.
Liability CANNOT be limited by implication.
 When the words “without recourse” are added
above the indorser’s signature, he rids himself of
the contract to pay upon default of the primary
parties
o In this case, the indorser merely agrees
to transfer legal title to the instrument.
This does not mean that the transferee
is a mere assignee because a qualified
indorsement does not affect the
instrument’s negotiable character.
o The only effect of a qualified
indorsement is to relieve the qualified
indorser of his liability to pay
Cases
Fay v Witte
Quick Facts: Witte indorsed a promissory note to Fay.
The note contained the following consideration: “I hereby
assign all my right and interest in this note to Richard Fay
in full.” The lower court held that Witte rendered himself
an indorser without recourse because he impliedly
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excluded the second condition of indorsement (promise
to pay upon default).
Doctrine: Witte is not an indorser without recourse.
There is no basis in the NIL for an implied qualified
indorsement. To become one, “without recourse” or other
words of similar import must clearly be used on the
instrument.
Copeland v Burke
Quick Facts: Copeland sued Burke for the value of a note
containing the provision “I transfer my right, title and
interest in the same. JM Burke.”
Doctrine: Burke is an indorser in due course since he did
not use words clearly expressing his intention to limit his
personal liability. (e.g. “I am transferring my right, title
and interest to the note to Copeland, without recourse.”)
Hutson v Rankin
Quick Facts: Rankin sued Hutson for the value of a
promissory note, which contained an attorney’s fee
stipulation, an interest and acceleration clause, and a
guarantee stipulation. The lower court ruled in favor of
Hutson and declared the note a negotiable instrument.
Rankin appealed and said that the note was not a
negotiable instrument because of the aforementioned
three clauses.
Doctrine: A negotiable instrument must contain an
unconditional promise to pay a sum certain in money. It
may validly contain a stipulation for attorney’s fees and
an interest/acceleration clause because while they alter
the amount payable, they do so AFTER the maturity of the
instrument. What is only required is that the amount
certain remain that way BEFORE maturity. Similarly, a
guarantee stipulation in a negotiable instrument is also
valid because it acts like an indorsement in blank, which
effectively transfers the instrument.
d. Conditional indorsement
Sec. 39. Conditional indorsement. - Where an
indorsement is conditional, the party required to pay the
instrument may disregard the condition and make
payment to the indorsee or his transferee whether the
condition has been fulfilled or not. But any person to
whom an instrument so indorsed is negotiated will hold
the same, or the proceeds thereof, subject to the rights of
the person indorsing conditionally.
Campos Notes
 There exist TWO IMPLIED CONDITIONS for
every instrument. These deal with the indorser’s
liability to pay:
o That due demand or presentment has
been made on the party primarily liable
on the date of maturity
o That a notice of dishonor has been sent
to the indorser
 A conditional indorsement is one where an
EXPRESS additional condition is annexed to the
indorser’s liability
e. Restrictive indorsement
Sec. 36. When indorsement restrictive. - An indorsement
is restrictive which either:
(a) Prohibits the further negotiation of the instrument;
or
(b) Constitutes the indorsee the agent of the indorser;
or
(c) Vests the title in the indorsee in trust for or to the
use of some other persons.
But the mere absence of words implying power to
negotiate does not make an indorsement restrictive.
Sec. 37. Effect of restrictive indorsement; rights of
indorsee. - A restrictive indorsement confers upon the
indorsee the right:
(a) to receive payment of the instrument;
(b) to bring any action thereon that the indorser could
bring;
(c) to transfer his rights as such indorsee, where the
form of the indorsement authorizes him to do so.
But all subsequent indorsees acquire only the title of the
first indorsee under the restrictive indorsement.
Campos Notes
 Restrictive indorsements
o restrict the right of the indorsee to
further negotiate the instrument
o reserve the beneficial interest in the
indorser/a third person
 Examples
o “Pay to X only”: prevents further
negotiation of the instrument
o “Pay to X for collection”: constitutes
indorsee as an agent to collect in behalf
of the indorser, DOES NOT pass title or
deprive the maker of any defense he
may have on the note
o “Pay to X for Y’s use”: vests title of the
indorsee in trust for or to the use of
some other person; indorsee can
receive payment and sue on the
instrument, but the proceeds he
collects will be held in trust for the
beneficiary
Class Notes
 Re: Sec 37
o A president of a company must sign a
nego instrument as the president,
otherwise he will be held liable
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 personally (i.e. the president must say
he is an agent only)
 A restrictive indorsement only prevents the
further negotiability, but does not render the
instrument non-negotiable
Case
White v National Bank
Quick Facts: White sued National Bank as the indorser of
a draft containing the provision “pay to White or order
for account of National Bank.” White had advanced money
in favor of the bank for the said draft.
Doctrine: By the wording of the provision, White was
constituted an agent of the bank to collect money for it.
Since the bank received and used the money that White
had collected, he is entitled to recover the money he
advanced on the faith of the delivery of the draft.
7. Indorsement to or by collecting bank
Campos Notes
 A holder can, with his check:
o Cash it with the drawee bank: will
discharge the instrument
o Deposit it to his credit in the drawee
bank or another bank (aka the
COLLECTING bank): the bank will
credit the amount of the check to his
account
 But if he deposits it to another
bank, the holder is in effect
negotiating the check to the
bank (he will have to indorse
the check before the bank
accepts it)
 Whatever kind of indorsement made by the
holder, the bank is only a collecting agent
 The indorsement made by the depositor of a
check is generally a blank indorsement
Case
Leonardi v Chase National Bank
Quick Facts: A check made to the order of Leonardi and
his wife was drawn on the Bank of Manhattan. Leonardi
deposited the check with the Bank of Bay Biscayne using
an indorsement that said “for deposit of Florence
Leonardi and John Leonardi.” The Bank of Manhattan
became insolvent. Bay Biscayne and Manhattan set off the
money they owed to each other, including the amount of
the check deposited by the Leonardis.
Doctrine: The indorsement was restrictive because it
said it was specifically for the deposit of the Leonardis at
their Bay Biscayne account. This made the Bank of
Manhattan, the collecting bank, the Leonardis’ agent.
However, the agency between Manhattan and the
Leonardis ended when the former successfully credited
the amount to Bay Biscayne one day before its insolvency.
8. Negotiation by joint or alternative payees or
indorsees
Sec. 41. Indorsement where payable to two or more
persons. - Where an instrument is payable to the order of
two or more payees or indorsees who are not partners, all
must indorse unless the one indorsing has authority to
indorse for the others.
Campos Notes
 If an instrument is payable to joint payees, both
must indorse to constitute negotiation. The joint
payees will be jointly and severally liable.
 If the joint payees are partners, an indorsement
by one partner constitutes a valid indorsement.
o Sec 41 presumes that a partner signing
has authority to sign the other’s name
 If an instrument is intended to be negotiated to
joint payees who are partners doing business
under a firm name, the indorsement must name
the firm as indorsee and not the joint payees.
 If one of several joint payees/indorsees indorses
his own name and the name of another without
the latter’s authorization, the indorsement is not
considered a negotiation.
 If one joint payee indorses the instrument to the
other joint payee, the full title of the instrument
is transferred to the latter.
 If an instrument is payable to alternative payees,
either one possessing the instrument is the
holder
9. Unindorsed instruments
Sec. 49. Transfer without indorsement; effect of. - Where
the holder of an instrument payable to his order transfers
it for value without indorsing it, the transfer vests in the
transferee such title as the transferor had therein, and the
transferee acquires in addition, the right to have the
indorsement of the transferor. But for the purpose of
determining whether the transferee is a holder in due
course, the negotiation takes effect as of the time when
the indorsement is actually made.
Campos Notes
 This section only applies to instruments payable
to the order of the transferor (i.e. the transferor
is a specified payee or a special indorsee of an
order instrument)
 The transferee of an unindorsed instrument
o Acquires legal title to it if his
predecessor also had legal title.
However, he will be subject to defenses
and equities among prior parties and
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 therefore cannot be considered a
holder.
o Cannot make use of the presumption of
ownership in favor of a holder.
o can become a holder by obtaining the
indorsement of his transferor
 Unless there is an agreement
to the contrary, the transferee-
indorsee has a right to an
unqualified indorsement
 A gratutitous transferee of an unindorsed
instrument can acquire title to it, even if it is not
transferred for “value,” since a negotiable
instrument is property which is susceptible of
being the subject of gift by negotiation.
o However, the donee does not have the
right to compel his donor’s
indorsement
Cases
Simpson v First National Bank of Roseburg
Quick Facts: Simpson had $1200 in the Bank of
Roseburg. Roseburg loaned $1000 of this money to
Josephson who executed a promissory note with the
payee left in blank. Roseburg eventually delivered the
blank note to Simpson and the latter filled out the blank
with Roseburg’s name. (i.e. Simpson named Roseburg as
the payee.)
Doctrine: Simpson is entitled to an unqualified
indorsement. As a transferee, Simpson had the right to
compel the transferor Roseburg to indorse the same in
order to attain the result of the transfer and to preserve
the negotiability of the instrument. A transferee of an
unindorsed note is entitled to an unqualified indorsement
unless the parties agree otherwise.
Furbee v Furbee
Quick Facts: The holder of a note, who acquired it by
mere transferral and not by indorsement filed an action
against the maker of the note. The maker countered that
the unindorsed note did not transmit the right of legal
action.
Doctrine: The transferee acquires the same title to the
instrument as the transferor had therein. Thus, if the
transferor had legal title, the transferee will also have
legal title. Therefore, the transferee who has legal title
may also maintain an action against the maker of an
instrument.
Whistler v Forster
Quick Facts: Griffiths fraudulently obtained a check from
Forster. The former then gave the check to Whistler
without indorsing it.
Doctrine: Griffiths had no title over the check as a
transferee because he fraudulently obtained it. Thus he
could pass no rights by merely giving the instrument to
Whistler.
10. Cancellation of indorsements
Sec. 48. Striking out indorsement. - The holder may at
any time strike out any indorsement which is not
necessary to his title. The indorser whose indorsement is
struck out, and all indorsers subsequent to him, are
thereby relieved from liability on the instrument.
Campos Notes
 This section only affects order instruments
 A holder must be able to trace his title to the
instrument back to the original owner (the
payee)
 In an order instrument, if all indorsements
appearing on the back of the instrument are
SPECIAL, all of them are necessary to the
holder’s title
 In an order instrument, the last indorsement
controls the method of further negotiation. (If
the last indorsement is blank, then it can be
negotiated by mere delivery. If the last
indorsement is special, then it must be
negotiated by indorsement and delivery.)
 Cancellation of indorsements is proper when an
instrument is indorsed back to a previous
indorser because the indorsers after such
previous indorser are not necessary to his title.
Class Notes
 the purpose of indorsements is to ensure
(secondary) liability; there is only primary
liability IF the drawee accepts
 the holder of an instrument may strike out
indorsements of prior parties to him, whose
titles are not necessary to his own title
 indorsers cannot be liable to themselves nor to
those parties for those who are liable to him
11. Indorsement by agent
Sec. 44. Indorsement in representative capacity. - Where
any person is under obligation to indorse in a
representative capacity, he may indorse in such terms as
to negative personal liability.
Campos Notes
 Authority of agent need not be in writing
 The agent should make it clear that he is merely
signing in behalf of the principal
o If not, he may be held personally liable
12. Presumption as to indorsements
Sec. 45. Time of indorsement; presumption. - Except
where an indorsement bears date after the maturity of
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the instrument, every negotiation is deemed prima facie
to have been effected before the instrument was overdue
Sec. 46. Place of indorsement; presumption. - Except
where the contrary appears, every indorsement is
presumed prima facie to have been made at the place
where the instrument is dated.
Campos Notes
 Instruments beyond maturity can still transfer
title but they prevent holders from becoming
holders in due course. Thus they are subject to
any existing defenses.
Class Notes
 presumption: issued at time of delivery of
instrument
 a mere agreement between the immediate
parties (maker>payee, drawer>payee) >>> to a
holder in due course, the dating of the
instrument no longer matters
Sec. 42. Effect of instrument drawn or indorsed to a
person as
cashier. - Where an instrument is drawn or indorsed to a
person as "cashier" or other fiscal officer of a bank or
corporation, it is deemed prima facie to be payable to the
bank or corporation of which he is such officer, and may
be negotiated by either the indorsement of the bank or
corporation or the indorsement of the officer.
Campos Notes
 “Pay to X, XYZ Corp:” raises the rebuttable
presumption that an instrument is payable not
to the officer personally, but to his corporation
 This section excludes cities and towns. It does
not give any authority to the town treasurer to
impose the liability of an indorser upon his
town.
13. Continuation of negotiable character
Sec. 47. Continuation of negotiable character. - An
instrument negotiable in its origin continues to be
negotiable until it has been restrictively indorsed or
discharged by payment or otherwise.
Campos Notes
 A negotiable instrument retains its negotiability
until it has been PAID or RESTRICTIVELY
INDORSED so as to prohibit further negotiation.
 The fact that an instrument is overdue does not
affect its negotiability. It merely prejudices the
status of future holders because it bars them
from being considered holders in due course.
Class Notes
 when a maker pays a PN, the instrument is
discharged
 however, even if the PN is paid, there is nothing
to stop the indorser from further negotiating the
instrument again so long as it has yet to be
properly discharged (may be through another
way instead of payment)
CHAPTER III
HOLDER IN DUE COURSE
Sec. 52. What constitutes a holder in due course. - A
holder in due course is a holder who has taken the
instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was
overdue, and without notice that it has been previously
dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no
notice of any infirmity in the instrument or defect in the
title of the person negotiating it.
Campos Notes
 The 4 requisites must CONCUR. Absence of one
requisite will prevent the holder from being a
holder in due course.
Class Notes
 ALL THESE CONDITIONS IN SEC 52 MUST
CONCUR ("
 what happens when an instrument is delivered
to the payee without mention of the amount?
delivery is irregular, violates 52a
 HOWEVER where an instrument is delivered to
the payee with instructions by the
drawer/maker to fill it in accordance with the
latter's instructions, then it is valid
 prima facie presumption that a holder is a
holder in due course. the burden of proof to
prove otherwise is on the person making the
allegation
 BSP circular, "stale checks": checks are only valid
6 months from date of issuance (but only for
commercial checks; GSIS/SSS checks have only 3
months) >>> but this does not mean the check
has been dishonored, it only means that the
holder of the check must return to the issuer to
ask for a fresh one
 treasury bills, postal money orders are not
negotiable instruments
 a negotiable instrument in the hands of a holder
in due course is free from all personal defenses
(but not from real defenses)
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  the holder in due course must therefore prove
that he is a holder in due course and that there
are no real defenses
 a holder in due course can collect payment from
the maker, drawer or any of the indorsers, free
from all personal defenses
 the holder need not look beyond the face of the
instrument
 the holder must have been a holder before the
instrument is overdue
 the instrument becomes due on the date
specified in the instrument
 the fact that the instrument is already being
presented after the date the instrument is
supposed to be due does not automatically mean
that the instrument is already overdue
 when is an instrument overdue? depends on the
nature of the instrument and the customs of the
locality
1. Rights of a holder in due course
Sec. 57. Rights of holder in due course. - A holder in due
course holds the instrument free from any defect of title
of prior parties, and free from defenses available to prior
parties among themselves, and may enforce payment of
the instrument for the full amount thereof against all
parties liable thereon.
Sec. 58. When subject to original defense. - In the hands
of any holder other than a holder in due course, a
negotiable instrument is subject to the same defenses as
if it were non-negotiable. But a holder who derives his
title through a holder in due course, and who is not
himself a party to any fraud or illegality affecting the
instrument, has all the rights of such former holder in
respect of all parties prior to the latter.
Campos Notes
 A holder in due course can acquire a better title
than his predecessors because he takes the
instrument free from any defect of title of prior
parties.
 A holder in due course is free from defenses
available to prior parties among themselves.
 The negotiability of the instrument is not
affected if the holder is not a holder in due
course. What is only affected is the current
holder’s rights. Subsequent holders may still
become holders in due course.
 The issue w/n a holder is one in due course
becomes important only when there is an
existing defense between prior parties
Case
Bank of Philippine Islands v Alfred Berwin & Co
Quick Facts: BPI filed suit against Alfred Berwin. Diaz
was one of the latter’s debtors and he was given notice by
BPI not to deliver the payment of his debt, which was
evidenced by 2 promissory notes. It was unknown
whether Alfred Berwin was still the holder in due course
of such notes. BPI tried to compel Diaz to pay the value of
the notes as a credit in favor of Alfred Berwin.
Doctrine: BPI cannot compel Diaz to pay the value of the
promissory notes to any person except a holder in due
course, who is the person legally entitled to receive such
value.
2. Holder for value
a. what constitutes value
Sec. 24. Presumption of consideration. - Every negotiable
instrument is deemed prima facie to have been issued for
a valuable consideration; and every person whose
signature appears thereon to have become a party
thereto for value.
Sec. 25. Value, what constitutes. — Value is any
consideration sufficient to support a simple contract. An
antecedent or pre-existing debt constitutes value; and is
deemed such whether the instrument is payable on
demand or at a future time.
Campos Notes
 Based on Sec 25 and Sec 191, “value” and
“consideration” are convertible terms, but they
may have different implications.
 CONSIDERATION is the proper term when the
payee sues the maker/drawer, or when an
indorsee sues his immediate indorser
 VALUE is the proper term when a holder sues
any party to the instrument he himself has not
dealt with
 Negotiable instruments given as gifts to the
indorsee/transferee
o Whatever defenses can be set up
against the transferor can also be set up
against the transferee
o When a holder gives valuable
consideration for the note and all the
requisites of Sec 52 are present, such
holder will be free from such defenses
 Value does not need to be full. A holder will be a
holder for value even if he gave less than the
instrument’s value so long as the transferor’s
intention was to transfer the entire amount of
the instrument.
Class Notes
 value is presumed
 the holder himself need not have given any value
Case
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 Elgin National Bank v Goecke
Quick Facts: Elgin Brewing executed 2 demand notes
payable to order and indorsed by it and 5 accommodation
indorsers, including defendant Goecke. The notes were
meant to pay for brewing supplies. Goecke diverted the
proceeds represented by the notes. Elgin Brewing
defaulted and the Bank sued all 5 indorsers.
Doctrine: Although the proceeds represented by the
notes were not used for their intended purpose, the
indorsers remain liable because the Bank was a holder
for value. A holder for value is an indorsee of a negotiable
note who has taken it before its maturity as collateral
security for a pre-existing debt and without notice for
their restricted use and purpose.
b. bank credit for value
Campos Notes
 Situation: holder deposits check with his bank,
bank credits it to his account
o The bank is not yet a holder for value
because the crediting is a mere
bookkeeping entry.
o The bank becomes a holder for value
only when the depositor withdraws the
amount of the deposited instrument
o The bank becomes a holder in due
course when the depositor’s
withdrawal occurs before maturity and
before the bank receives any notice of
defense on the instrument
 How do you determine whether the funds
represented by the deposited instrument have
been withdrawn? Use the first money in, first
money out principle
Class Notes
 ISSUE WITH NBC V MORGAN: what if the person
has a lot of money in the bank? he will always be
penalized because the bank will never be a
holder for value, since he will always have more
money than the actual amount of the negotiable
instrument
 this is why the Merchant's National Bank case's
FIFO method is better
 the NBC case will actually result in absurdity,
especially for people who keep a certain fixed
balance in their accounts
Cases
Merchant’s National Bank of St. Paul v Sta Maria
Sugar Co
Quick Facts: Sta Maria Sugar gave a note payable to the
order of American Hoist & Derrick. The latter deposited
the note to Merchant’s National Bank. Subsequent
deposits and withdrawals were made. The bank did not
know of any of Sta Maria Sugar’s claimed defenses.
Merchant’s National sued Sta Maria Sugar, who countered
that the bank was not a holder for value and
subsequently, not a holder in due course.
Doctrine: Merchant’s National is a holder for value. The
general rule on the application of payments is: first
payments to the oldest debts; first money in is the first
money out. Therefore, in this case, the amount
represented by the note was considered to have been
passed and withdrawn by American Hoist & Derrick prior
to the bank’s knowledge of any claimed defense of the
maker.
National Bank of Commerce v Morgan
Quick Facts: National Hay Company deposited with the
National Bank of Commerce a draft and a bill of lading.
The Bank forwarded the draft to the First National Bank
of Birmingham. Morgan, a creditor of National Hay,
instituted attachment proceedings against it. He sought
the proceeds of National Hay’s draft which was being held
by the First National Bank, although the latter said
National Bank had the right to the proceeds.
Doctrine: National Bank was not a holder for value, it
was a mere collecting agent. National Bank credited the
proceeds of the draft to National Hay’s account and failed
to show that the amount credited was absorbed by
existing debts or that the amount was subsequently
checked out. National Hay consistently had a deposit
balance in excess of the amount of the draft. Since
National Bank failed to show that it had given value for
the instrument, it was not a holder for value.
c. what constitutes holder for value
Sec. 26. What constitutes holder for value. - Where value
has at any time been given for the instrument, the holder
is deemed a holder for value in respect to all parties who
become such prior to that time.
Campos Notes
 The mere fact that the present holder paid
nothing for a note or is not a holder for value
does not preclude recovery, but only lets in all
defenses, if any, that might be urged against the
original payee
d. where holder has a lien on instrument
Sec. 27. When lien on instrument constitutes holder for
value. — Where the holder has a lien on the instrument
arising either from contract or by implication of law, he is
deemed a holder for value to the extent of his lien.
Campos Notes
 When does the holder have a lien on the
instrument? If the instrument is given as a
collateral for a debt
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 o If the amount in the instrument is LESS
THAN the principal debt secured by the
instrument: the pledgee is a holder for
value for the full amount and he can
recover it all
o If the amount on the instrument is
GREATER THAN the principal debt
secured by the instrument: the pledgee
can still recover the entire value, but
the excess amount must be held in trust
for whoever is entitled to it.
o If the amount on the instrument is
GREATER THAN the principal debt
secured by the instrument AND there
are existing defenses among prior
parties of which the pledgee was
unaware: the pledgee can only recover
the amount of the debt.
 A holder with a lien on the instrument can
recover only to the extent of his lien.
e. burden of proof
Sec. 24. Presumption of consideration. - Every negotiable
instrument is deemed prima facie to have been issued for
a valuable consideration; and every person whose
signature appears thereon to have become a party
thereto for value.
Campos Notes
 Sec 28 strengthens Sec 24 by providing that
“absence or failure of consideration is a matter
of defense as against any person not a holder in
due course.”
 Because of the presumption, it is immaterial w/n
“for value received” appears in the instrument.
 The presumption is prima facie only, and is
rebuttable.
3. Holder in good faith
Sec. 55. When title defective. - The title of a person who
negotiates an instrument is defective within the meaning
of this Act when he obtained the instrument, or any
signature thereto, by fraud, duress, or force and fear, or
other unlawful means, or for an illegal consideration, or
when he negotiates it in breach of faith, or under such
circumstances as amount to a fraud.
Sec. 56. What constitutes notice of defect. - To constitutes
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.
Campos Notes
 When should the holder have taken the
instrument in good faith? AT THE TIME it was
negotiated to him.
o At the time of negotiation, he must not
have notice of any infirmity in the
instrument or defect in the title of the
person negotiating it.
o NO EFFECT if and when the holder
acquires notice of infirmity or defect
AFTER negotiation.
 To constitute notice under Sec 56, the holder
must have:
o Actual and not constructive knowledge
of the defect, OR
o Acted in bad faith
 GROSS NEGLIGENCE in itself does not constitute
notice. It is not akin to bad faith or actual
knowledge.
Class Notes
 what will qualify the holder as a holder in good
faith? the actions of the holder
 can bad faith at any stage of the negotiation
prevent the holder from being a holder in due
course? no, if the holder had no actual
knowledge
 "good faith" applicable only to the current
holder; bad faith of other holders does not
prevent current holders from becoming holders
in due course
 good faith attaches only to the person of the
current holder.
 who has the duty to ascertain the title of the
person who is considered the holder? in the case
of Ocampo, it was Ocampo (the payee)
 result of Ocampo case: BSP prohibited second
indorsements
 gross negligence per se does not equal bad faith.
What NIL requires is actual knowledge of the
infirmity of the instrument. In the Ocampo case,
gross negligence was considered as amounting
to absence of good faith (therefore = bad faith)
 main issue: w/n that negligence can be
considered as amounting to bad faith
 gross negligence does not automatically mean
knowledge of infirmity or defect (really needs to
be ACTUAL knowledge)
 in Ocampo: gross negligence amounting to the
absence of good faith amounting to bad faith
a. Notice; bad faith; effect of suspicious circumstances
Campos Notes
 Bad faith can only be proven by circumstantial
evidence because it is a state of mind.
NEGOTIABLE INSTRUMENTS  A2015  PAGE 21 OF 78
  The question of good faith or bad faith is a
question of fact which must be determined on a
case-to-case basis.
 RULE: Negligence in investigating suspicious
circumstances which would put a prudent man
on inquiry is not of itself sufficient to prevent
recovery. However, it may be combined with
other circumstances to constitute evidence of
bad faith.
o EXCEPTION: where the suspicious
circumstances are so cogent and
obvious that to remain passive would
amount to bad faith
 “A blundering fool may, therefore, be found to
have acted in good faith, though under like
circumstances a shrewd businessman might be
deemed to have acted in bad faith.” – (Shintz v
American Trust)
 For the defendant to be in bad faith, it is
sufficient to show that the defendant had notice
that there was something wrong about his
assignor’s acquisition of title, although he did
not have notice of the particular wrong
committed.
o It is enough that the buyer of a note had
notice or knowledge that the note WAS
IN SOME WAY tainted with fraud.
Cases
Unaka National Bank v Butler
Quick Facts: Harris drew a check for $15 on Unaka
National Bank payable to the order of Butler. The payee
indorsed the check in blank and negotiated it to Davis
who lost it on the highway. Davis requested Harris to
order the bank to stop payment. This order was
overlooked and the check was paid to Ward & Fryberg
who had taken it in payment of goods sold to a customer
whom they didn’t know but whom they “supposed to be
the owner.”
Doctrine: Ward & Fryberg were holders for value who
did not have actual knowledge of the infirmity in the title
of the holder. To constitute notice of an infirmity in an
instrument or defect of the title of the person negotiating
the said instrument, 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.
Vicente R de Ocampo & Co v Gatchalian
Quick Facts: Gonzales claimed he was authorized by
Ocampo Clinic to sell her a car. Gatchalian issued a check
for P600 in Ocampo’s name. Gonzales did not bring her
the car, instead, he used the proceeds of the check to pay
for his wife’s outstanding balance with the clinic.
Gatchalian gave the bank a stop payment order on the
check. Ocampo, unaware of the arrangement between
Gatchalian and Gonzales, sued the former.
Doctrine: A payee named in an instrument can become a
holder in due course. However, Ocampo is not a holder in
due course because despite not knowing the defect in
Gonzales’ title, he must also have taken the instrument in
good faith. In this case, suspicious circumstances existed
which should have put Ocampo on guard: Gatchalian had
no obligation to Ocampo Clinic, the check was a crossed
check, the amount on the check did not correspond
exactly to Gonzales’ debt.
State Investment House v IAC
Quick Facts: New Sikatuna entered into a contract of loan
with Chua, whose wife issued 3 postdated crossed checks
payable to Sikatuna, with the condition that deposits
were made to back up the checks. Sikatuna sold the
checks to State Investment; the checks were dishonoured.
State Investment went after the Chuas.
Doctrine: State Investment is not a holder in due course
because there existed a suspicious circumstance which
should have put it on guard: the fact that the checks were
crossed. The act of crossing a check serves as a warning
to the holder that the check has been issued for a definite
purpose. The holder must then inquire if he received the
check in accordance with that purpose.
b. Financing company not a holder in good faith as to
buyer
Campos Notes
 COMMON SITUATION: A buyer issues a note to
pay for property sold by a seller. A finance
company pays the full price of the property sold
and the seller indorses the buyer’s note to the
finance company. The finance company is
subrogated to the right of the seller to collect the
price form the buyer
 The courts tend to protect the buyer against the
finance company in the event that the goods sold
turn out to be defective because the “finance
company is better able to bear the risk of the
dealer’s insolvency than the buyer and in a far
better position to protect his interests against
unscrupulous and insolvent dealers.” (Mutual
Finance v Martin)
Cases
NOTE: Salas v CA represents the minority view
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 Consolidated Plywood Industries Inc v IFC Leasing &
Acceptance Corp
Quick Facts: Atlantic Gulf, through Industrial Products
Marketing, offered to sell Consolidated Plywood 2 used
tractors, warranting that they were fit for the job.
Consolidated Plywood executed a deed of sale with
chattel mortgage with promissory note in favor of the
tractors. Industrial Products Marketing (IPM) assigned
the deed to IFC Leasing. Both tractors broke and
Consolidated refused to pay.
Doctrine: IFC Leasing is not a holder in due course. It had
actual knowledge of the fact that IPM’s right to collect the
purchase price was conditioned upon the warranty that
the tractors were in good working order. Therefore, IFC
Leasing knew that if the tractors were defective, it would
be subject to the defense of failure of consideration. As a
finance company, it is better able to bear the risk of the
dealer’s insolvency than the buyer and is in a far better
position to protect his interests against unscrupulous
dealers.
Salas v CA
Quick Facts: Salas bought a vehicle from Violago Motor
Sales evidenced by a promissory note. The note was
subsequently indorsed to Filinvest Finance and Leasing.
Salas defaulted in payment.
Doctrine: The promissory note is a negotiable
instrument and Filinvest Finance is a holder in due
course. The note contained all the required words of
negotiability and Filinvest Finance took the instrument
under the conditions expressed in Section 52 of the NIL.
Since Violago Motor Sales was never impleaded, the issue
of deception cannot be resolved.
Commercial Credit Corp v Orange County Machine
Works
Quick Facts: Ermac offered to sell Machine Works a
Ferracute press. Commercial Credit financed the
transaction, and thus, the contract of sale between Ermac
and Machine Works was assigned to it. Ermac never
delivered the Ferracute press.
Doctrine: Because Machine Works never received its
press, there was a failure of consideration. Commercial
Credit is not a holder in due course. It actively
participated in the transaction between Ermac and
Machine Works since it was the moving force behind the
sale of the Ferracute press and it knew about Ermac’s
financial status.
c. Effect of purchase at a discount
Campos Notes
 Purchase of a discounted instrument does not
constitute bad faith
 If the instrument is bought at a HEAVY
DISCOUNT, this fact taken with other facts may
be used to determine bad faith
Case
Ham v Meritt
Quick Facts: Meritt executed a $300 note in favor of
Southern Hospital, who assigned it to Brunson, who sold
it to Ham for $100. Ham sued Merrit, who countered that
the former obtained it through fraud.
Doctrine: Ham is a holder in due course. Purchase at a
discount does not of itself amount to fraud. However, if
the fact of the discount was supported by other material
evidence, it may have more probative value.
d. Effect of notice before full payment
Sec. 54. Notice before full amount is paid. - Where the
transferee receives notice of any infirmity in the
instrument or defect in the title of the person negotiating
the same before he has paid the full amount agreed to be
paid therefor, he will be deemed a holder in due course
only to the extent of the amount therefore paid by him.
Campos Notes
 RULE: notice of defenses to a purchaser before
he has acquired title and before he has paid any
part of the purchase price prevents him from
becoming a holder in due course
 EXCEPTION: when the purchaser receives notice
AFTER he has PARTIALLY paid the instrument,
he is a holder in due course as to the AMOUNT
HE ALREADY PAID
 As to the amount NOT YET PAID, he is subject to
any existing defenses
 EXCEPTION: if the holder has given for the
instrument a promise which he must perform
Case
Pennoyer v Dubois State Bank
Quick Facts: Wyoming Live Stock Loan fraudulently sold
its capital shares to Pennoyer, who paid for them using 2
notes. Wyoming Live Stock then negotiated them to
Dubois State Bank, in exchange for the latter’s own notes.
Dubois State learned of the fraud, refused to pay, and
sued Pennoyer.
Doctrine: Dubois State is a holder in due course. It is the
duty of the maker of the notes (Pennoyer) to bring an
action to prevent the transfer of the certificates of
deposit, because it is he who is prepared to assert and
prove the fraud.
e. Constructive notice not sufficient
Campos Notes
 RULE: constructive notice is insufficient. For
example:
o A purchaser of a negotiable instrument
is not put on inquiry for buying it
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 o He is not charged with notice of
defenses or equities disclosed by public
records either.
o Neither is he affected by lis pendens
 EXCEPTION: notice to an agent is chargeable
against the principal
Case
Foster v Augustanna College
Quick Facts: Hopkins delivered an instrument secured by
mortgage to Aurelius-Swanson, who assigned the note
and mortgage to Foster by assignment in a separate
instrument (not by indorsement). Swanson assigned the
note to Augustanna. Swanson became bankrupt, causing
Foster to sue Augustanna.
Doctrine: There was no constructive notice upon Foster
because Augustanna had no actual knowledge of the
assignment to the former. When a mortgage is given to
secure a promissory note, the note imparts its negotiable
character to the mortgage. The mortgage is a mere
incident to the note and an indorsement of the note
automatically assigns the mortgage. Constructive notice
only applies to the person dealing with the land itself.
f. Notice of accommodation not notice of defect
Sec. 29. Liability of accommodation party. - An
accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of
lending his name to some other person. Such a person is
liable on the instrument to a holder for value,
notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation
party.
Campos Notes
 Accommodation party: a surety for the principal
debtor
4. Complete & regular
Campos Notes
 To be a holder in due course, a holder must have
taken the instrument complete and regular on
its face
 What if the instrument is executed in blank and
is subsequently filled up and issued to the first
holder who does not know about the execution
in blank? The holder is a holder in due course
o If the holder KNEW about the execution
in blank, he would not be a holder in
due course
 Taking of an incomplete instrument makes the
holder susceptible to all defenses and equities
 For IRREGULAR INSTRUMENTS: a purchaser
who takes an instrument which is irregular on
its face is NOT A HOLDER IN DUE COURSE
o Not only is he subject to all defenses
and equities related to the irregularity,
he is also subject to those defenses and
equities NOT RELATED to the
irregularity
 APPARENT ALTERATIONS are the most common
type of irregularity.
Sec. 124. Alteration of instrument; effect of. - Where a
negotiable instrument is materially altered without the
assent of all parties liable thereon, it is avoided, except as
against a party who has himself made, authorized, or
assented to the alteration and subsequent indorsers.
But when an instrument has been materially altered and
is in the hands of a holder in due course not a party to the
alteration, he may enforce payment thereof according to
its original tenor.
Campos Notes
 If an unauthorized alteration is both apparent
and material:
o The holder cannot become a holder in
due course
o The instrument is entirely void and
constitutes a real defense in
enforcement
 Completion and regularity on the face of the
instrument is actually NOT separate and distinct
from good faith. Sec 52a (completeness and
regularity) v Sec 52c (good faith and for value )
and 52d (no notice of infirmity/defect):
o 52a deals with matters evidencing bad
faith which are found on the
instrument. The courts say that the
purchaser is put on inquiry as to all
defenses and equities. It is subordinate
to 52c and 52d.
o 52c and 52d deal with issues of bad
faith where the evidence lies in
extrinsic circumstances. Under these
provisions, the courts say the theory of
the purchaser being put in inquiry does
not apply to negotiable paper.
 A purchaser will not be a holder in due course
ONLY IF the instrument is so incomplete or
irregular that the purchaser must have had
actual knowledge of such facts that his action in
taking the instrument amounted to bad faith.
Class Notes
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  when is an alteration material? a change in the
original tenor of an instrument
 e.g. change in price, change from order to bearer,
change in due date
 what is the effect of a material alteration as to
the instrument?
 change in amount: can still be negotiable
 if there is a material alteration
o holder in due course: can enforce
original tenor
o non-holder in due course: cannot
enforce payment
o person who made the alteration: cannot
enforce, he cannot benefit from a crime
he committed
o person who assented or made the
alteration possible: can be the maker or
drawer, he did not make the alteration
himself, but allowed it through
negligence (by leaving the instrument
in blank) >>> still valid
 GR as to drawer/maker: instrument avoided
 GR: holder in due course of a materially altered
instrument may enforce payment
 BUT IN WHAT MANNER MAY PAYMENT BE
ENFORCED? THE ORIGINAL TENOR
 a person who is not a holder in due course
cannot enforce payment. he cannot collect
anything
 GR: a materially altered instrument with a non-
HOLDER IN DUE COURSE: avoided; if with a
HOLDER IN DUE COURSE: can enforce original
tenor, person who made alteration cannot
benefit
 who has the burden of proof to prove that the
alterations were made prior to his obtaining the
instrument: the holder (because there is a
presumption that the instrument is issued in the
regular course of business)
 in a bill of exchange or promissory note, the
instrument must be PRESENTED (even if it
states "without need of presentment")
Cases
Miles City Bank v Askin
Quick Facts: Askin paid his black jack losses to clark
through 2 checks (one for $150 and the other for $1000).
Askin signed his name and wrote the amount in pencil,
while Clark filled out the remaining blanks. Askin was
sued by Miles City Bank on one of the checks, of which the
amount had been obviously changed to $5000.
Doctrine: Miles City Bank is not a holder in due course
because there were suspicious circumstances existing
when the check was presented (Clark had no account
with Miles City Bank, the amount was written in pencil,
apparent alterations of the check). The rule is that
alterations and erasures of instruments are presumed to
have been made at or prior to the time of their execution,
except if an alteration or erasure appears suspicious on
its face, explanation is required.
Bronson v Stetson
Quick Facts: Mears, Bronson’s agent, facilitated the
exchange of Bronson’s land with a farm. Mears
fraudulently represented to Bronson that there was a
$800 mortgage on the land. Bronson made a $800 note
where the name of the payee and mortgagee were left in
blank. Mears was given the authority to fill out the blanks
with the name of Union Trust Savings Bank. Mears wrote
in Stetson’s name as payee and turned the note over to
her, saying that he had authority to do so because he was
a notary public.
Doctrine: Stetson is not a holder in due course because
an instrument in blank must be filled up strictly in
accordance with the authority given and within
reasonable time. Since Mears’ authority was only limited
to filling the blanks with Union Trust Savings Bank,
Stetson did not acquire a better title to the instrument.
5. Holder at or after maturity & without notice of
dishonor
Sec. 53. When person not deemed holder in due course. -
Where an instrument payable on demand is negotiated
on an unreasonable length of time after its issue, the
holder is not deemed a holder in due course.
Campos Notes
 To become a holder in due course, a holder must
become a holder of the instrument before it is
overdue and without notice of previous dishonor
 The fact that an instrument is overdue is a
strong indication of dishonor
 Types of dishonor
o Dishonor by non-acceptance (applies
only to bill of exchange)
 Occurs when the drawee
refuses to accept the order of
the drawer as stated in the bill
 May occur even before the date
of maturity
o Dishonor by non-payment: applies to
both notes and bills of exchange
 Occurs when the party
primarily liable fails to pay on
the date of maturity
 instrument payable “after sight”: date of
maturity is fixed by the date of presentment
o The date of presentment can involve the
occurrence of a specified event certain
to happen (e.g. Easter Sunday, which
NEGOTIABLE INSTRUMENTS  A2015  PAGE 25 OF 78
 does not have a fixed date although it
happens every year)
 Purchase of an overdue instrument
o This occurs when a demand instrument
is bought outside of the reasonable time
after issue
o A “reasonable time” depends on the
nature of the instrument, the usage of
trade or business with respect to the
instrument, and the facts of the case.
(Sec 193)
o It is the function of the instrument
which must be noted in determining
whether reasonable time has elapsed or
not.
o Ideally, certificates of deposit should
circulate longer than notes, which
circulate longer than bills of exchange,
which circulate longer than checks.
 instruments with a fixed maturity but subject to
acceleration: the ultimate date of maturity is the
date for the purpose of determining whether a
purchaser is a holder in due course, unless such
purchaser had knowledge of the earlier maturity
at the time he acquired title.
 The negotiation of an instrument through an
undated indorsement gives rise to the prima
facie presumption that it was negotiated before
it was overdue
 What happens after maturity of an instrument?
o That a purchaser after maturity is not a
holder in due course does not mean
that the instrument is void or that it can
no longer be negotiated.
o A purchaser after maturity merely
acquires the actual right and title of the
transferor.
o After maturity, an instrument is still
negotiable until it is paid
o An instrument continues to be
negotiable until discharged (aka PAID)
or restrictively indorsed
Class Notes
 "overdue" is construed LOOSELY (case to case
basis) > but refer to Section 193
 even if overdue it may still be negotiated,
provided that it has no notice of dishonor (when
can it not be negotiated? when it is LONG
overdue)
 if there is actual knowledge of a notice of
dishonor, even if the instrument is negotiated
before the deadline, then the holder cannot
become a holder in due course
Cases
Bliss v California Cooperative Producers
Quick Facts: California Cooperative furnished facilities to
agricultural producers in exchange for non-bearer notes
payable to it in 10 installments. Three makers created
notes and defaulted in payment of the first installment.
The Cooperative negotiated the three unpaid notes to
Bliss to secure payment of its own note, which was held
by Bliss.
Doctrine: Bliss was not a holder in due course because a
transferee of an installment note is not a holder in due
course as to any part of the note when the transfer has
been made after the maturity of one or more but less than
all the installments.
Barbour v Finke
Quick Facts: Finke issued a note for $3000. This was also
secured by a real estate mortgage. The note and mortgage
were subsequently indorsed to Barbour, who eventually
filed for foreclosure of the mortgage. Finke countered that
Barbour is not a holder in due course because non-
payment of interest amounted to dishonor of the note.
Doctrine: Barbour is a holder in due course of the note
and mortgage. Unpaid interest, when the principal
amount is not yet due, does not result in dishonor of the
note. The transfer of a debt secured by a mortgage carries
with it the security. Since Barbour is a holder in due
course of the note, she is also a holder in due course of
the mortgage.
Le Due v First National Bank of Kasson
Quick Facts: The payee of a draft indorsed it to Edison.
The Bank of Kasson had an offset on the draft. Edison
indorsed the draft to Jordan 4 months and 23 days after
the draft had become due.
Doctrine: The draft is overdue and dishonoured. The rule
is that an instrument, payable on demand, must be
presented for payment within reasonable time, having in
view ordinary business usages and the purposes which
paper of that class is intended to subserve.
Idaho State Bank v Hooper Sugar Company
Quick Facts: Hooper Sugar made a note payable to
Wright, who indorsed it in blank. Wright also renewed a
personal note held by Bank of Salt Lake. The cashier of
Salt Lake altered the renewed personal note by erasing
the name of his bank as payee and replacing it with the
name of a bank in Pocatello, by changing the interest rate
to 7%, and by adding a clause that says the note issued by
Hooper Sugar was deposited as collateral security for the
renewal note. The Pocatello Bank then sold the 2 notes to
Idaho State.
Doctrine: Idaho State cannot claim on Wright’s renewed
personal note. When mere inspection of an instrument
shows it has been altered, a purchaser is not a holder in
due course because the note is not regular on its face.
NEGOTIABLE INSTRUMENTS  A2015  PAGE 26 OF 78
However, Idaho State can claim on the note made by
Hooper payable to Wright, even if it was indorsed past
maturity. When Wright indorsed the note, he gave the
note a second maturity date as to him after the transfer.
Dunn v O’Keefe
Quick Facts: The Dunns drew a bill of exchange on
Ricketts, Thorne, George & Co payable to the order of
Sinclair and issued to the payee for value. The payee
presented the bill to the Ricketts for acceptance, but it
was dishonoured by non-acceptance. The Dunns were not
notified of the dishonor. The payee then negotiated the
bill to O’Keefe, who did not know about the prior
dishonor. Ricketts dishonoured the note once again, and
O’Keefe notified the Dunns immediately.
Doctrine: The Dunns are liable to O’Keefe even though
the payee did not notify them of the initial dishonor. Since
O’Keefe had no knowledge of the prior dishonor, the bill
of exchange does not become avoided in her hands.
6. Effect of postdating or antedating
Sec. 12. Ante-dated and post-dated. - The instrument is
not invalid for the reason only that it is ante-dated or
post-dated, provided this is not done for an illegal or
fraudulent purpose. The person to whom an instrument
so dated is delivered acquires the title thereto as of the
date of delivery.
Campos Notes
 Antedated instrument: an instrument which
bears a date earlier than its actual issuance
 Postdated instrument: an instrument which
bears a date later than its actual issuance.
 Sec 12 means that the instrument is valid and
negotiable despite being antedated or postdated
 EXCEPTION: an instrument antedated in order
to evade the effects of the Usury Law
 A drawer who postdates a check in payment of
an obligation without having sufficient funds in
the bank may be guilty of estafa.
Case
Triphonoff v Sweeney
Quick Facts: Sweeney drew a check on the Bank of
Portland payable to the order of Malcheff and postdated
April 15, 1911. Malcheff negotiated the note to Triphonoff
before April 15. Sweeney stopped payment of the check
because Malcheff acquired it through false and forged
estimates of work. When Triphonoff presented the check
on April 17, it was dishonored.
Doctrine: Just because a check is postdated does not
negate its negotiability so long as on its face, it satisfies
the requirements of Section 1 of the NIL, and that the
note was not executed for an illegal or fraudulent
purpose. Also, postdating does not amount to a notice of
infirmity on the instrument as to disqualify Triphonoff
from becoming a holder in due course because postdating
is a usual business practice.
7. Effect of qualified, conditional and restrictive
indorsements
Campos Notes
 Qualified indorsement: no effect on status of
holder as a holder in due course
o The fact that the previous holder
indorsed without recourse only means
he does not want to assume the full
liability of a general indorser
o This does not necessarily imply there is
a defect in the instrument or in the title
of a prior party
 Conditional indorsement: no effect on status
of holder as a holder in due course
o The fact that a condition is imposed on
the indorsee does not necessarily mean
there is some defect of title or infirmity
in the instrument
o The condition merely subjects the
indorsee to the rights of the conditional
indorser if he receives payment before
the condition is fulfilled
 Restrictive indorsement prohibiting further
negotiation: no effect on status of holder as a
holder in due course
o EXCEPTION: if the holder violates the
prohibition and indorses the
instrument to another, the indorsee
cannot be a holder in due course
because there is no valid negotiation
 Restrictive indorsement constituting the
indorsee as agent of the indorser: depends
w/n the principal is a holder in due course
o If the principal is a holder in due
course, the agent is also a holder in due
course. If not, neither is the agent.
 Restrictive indorsement vesting title in the
indorsee as trust for the use of another:
divergent views
o The better view is that a restrictive
indorsee who is a trustee is a holder in
due course regardless of the status of a
restrictive indorser
o Sec 47 is interpreted to mean that after
a restrictive indorsement, all
subsequent indorsees take subject to
the rights created and disclosed by the
indorsement
NEGOTIABLE INSTRUMENTS  A2015  PAGE 27 OF 78
8. Payee as holder in due course
Campos Notes
 Generally, a payee cannot be a holder in due
course because he has dealt directly with the
maker/drawer and must therefore have
knowledge of facts creating a defense.
 However, there are some situations where he is
insulated from the maker or drawer by a third
party (e.g. a remitter). If he is insulated in this
way and he meets the requirements of Sec 52 =
HOLDER IN DUE COURSE
 Examples of situations where the payee may not
have dealt directly with the maker/drawer
o Where the drawer and payee are in
different locations: Buyer (drawer)
from Location A buys goods from Seller
(payee) in Location B. Buyer obtains a
bank draft payable to Seller and sends it
to the latter through mail. Seller obtains
the draft for value, in good faith, and
without notice.
o Where there are two makers, one of
whom perpetuates fraud and delivers
the instrument to the payee without the
authority of the other: Maker 1
fraudulently induces Maker 2 to jointly
sign a note payable to Payee. Maker 1
delivers the note to Payee without the
authority of Maker 2. Payee takes the
note with all the requisites of Sec 52.
o Where the drawer makes a blank check
and his agent does not follow his
instructions: Drawer makes a blank
check and instructs Agent to fill in the
name of X as payee. Agent disobeys
Drawer and fills in Payee’s name
instead. Agent delivers the check to
Payee, who takes it for value and
without notice.
 Center of discussion: requirement of negotiation
to payee by a third person in the ordinary course
of business
o NEGATIVE VIEW: rights of a holder in
due course may be acquired only by
negotiation. A payee does not acquire
through negotiation because the
instrument is merely issued to him.
o POSITIVE VIEW: the term “holder”
includes the payee because Sec 30 of
the NIL makes use of the word “person”
and not “holder.” Negotiation is not
limited to a transfer by a holder, but
may include a transfer by the maker or
drawer.
 The POSITIVE VIEW is what
the Philippine courts follow
Case
Howard National Bank v Wilson
Quick Facts: Elliot was the president of Howard National
and the owner of a lumber company. He had 2 checking
accounts with the bank: a personal account and an
account as treasurer of his lumber company. He also had
another treasurer’s account with Waterbury Savings
Bank. Wilson signed a note payable to Howard Bank (i.e.
Howard Bank was a PAYEE) so Elliot could Elliot transfer
money from Howard Bank to his Waterbury account.
Elliot was discovered insolvent only after his death.
Doctrine: Howard Bank can recover on the note signed
by Wilson because it is possible for a payee to become a
holder in due course.
9. Rights of a purchaser from a holder in due course
Sec. 58. When subject to original defense. - In the hands of
any holder other than a holder in due course, a negotiable
instrument is subject to the same defenses as if it were
non-negotiable. But a holder who derives his title through
a holder in due course, and who is not himself a party to
any fraud or illegality affecting the instrument, has all the
rights of such former holder in respect of all parties prior
to the latter.
Campos Notes
 A holder who derives title to the instrument
through a holder in due course has all the latter’s
rights although he himself does not satisfy the
requirements of Sec 52. Examples of such
holders are:
o A purchaser with notice of defect in title
who takes it from a holder in due
course
o A purchaser after maturity from a
holder in due course, with or without
notice
o A holder not for value who takes from a
holder in due course, before or after
maturity, with or without notice
 RATIONALE: if a holder in due course cannot
invest his transferee with the rights which come
with his improved position, his status as a holder
in due course will lose its significance and the
marketability of the instrument will be impaired
 Holders who derive title through holders in due
course (HOLDER IN DUE COURSE) WHO DO NOT
HAVE THE LATTER’S RIGHTS:
o A purchaser from a HOLDER IN DUE
COURSE who is a party to the fraud or
illegality affecting the instrument
NEGOTIABLE INSTRUMENTS  A2015  PAGE 28 OF 78
 o A payee whose title was defective at the
time the instrument was issued to him
 This payee cannot “cure” his
title by selling the instrument
to a holder in due course and
reacquiring it
 EXCEPTION: the only
reacquirer of an instrument
who can be considered a
HOLDER IN DUE COURSE is a
donee
 The rights of a holder in due course are granted
only in respect to parties before the HOLDER IN
DUE COURSE from whom the title was acquired
Class Notes
 one who knows defect and acquires instrument
cannot be considered as one in good faith
 GR: HOLDER IN DUE COURSE is able to transfer
his rights to transferee
 2 Situations
o a person can be a HOLDER IN DUE
COURSE in his own right (he acquires a
better right than his predecessor)
o a person cannot become a HOLDER IN
DUE COURSE in his own right, but is
himself not a party to the
fraud/illegality (he may enjoy the rights
of the holder in due course prior to
him)
 you cannot become a HOLDER IN DUE COURSE if
you have actual knowledge of the
fraud/illegality. but if you are not a party to the
fraud/illegality, you can [enjoy the rights] of a
HOLDER IN DUE COURSE if you acquire the
instrument from a holder in due course (but
you're still not a HOLDER IN DUE COURSE)
Cases
Pierce v Carlton
Quick Facts: Carlton et al executed 3 notes payable to
Crawford & Ceas. Crawford & Ceas indorsed the notes in
blank, and Pierce bought them for $1800 without notice
or knowledge of any infirmity. Carlton et al alleged that
the notes were fraudulently obtained by Crawford & Ceas
and that Pierce knew of the fraud and even aided and
abetted the former. The court ruled for Carlton et al.
Doctrine: Pierce cannot recover because Carlton et al
presented sufficient evidence to show he knew of the
fraud. The rule is that a purchaser with notice of infirmity
may acquire title from a holder in due course, except if
the note was invalid between the maker and the payee,
the payee cannot himself, by purchase from a bona fide
holder, become successor to the latter’s rights.
Lill v Gleason
Quick Facts: Gleason made a note payable to Peerless
Machinery in exchange for company stock. Gleason
notified Peerless that he would be returning the stock,
but the latter did not return the note. Peerless then
indorsed the note in blank before maturity, leaving it with
Andale State Bank, provided that a collateral indorsed by
Lill was deposited to the bank. Lill indorsed the note and
cashed it; he was unaware of the contract between
Gleason and Peerless.
Doctrine: The note was not discharged upon Lill’s
payment because the rule is that payment by a party
other than the principal debtor does not discharge
parties prior to the one making the payment. The
payment operates as a transfer to the party paying. Lill
was a holder in due course because he derived his title
from the bank, also a holder in due course.
Fossum v Fernandez
Quick Facts: Fossum, an agent of American Iron, handled
an order for a tail shaft for one of Fernandez’ ships.
American Iron drew a draft upon Fernandez for the
purchase price of the shaft. However, the shaft was not
made according to the specifications of Fernandez so the
latter refused to pay the draft. The draft remained
dishonoured in the possession of PNB, but eventually, it
indorsed the draft in blank to Fossum.
Doctrine: Fossum is not a holder in due course because
he was never a present holder. To be presumed a holder
in due course under Sec 59 of the NIL, a person must be
in possession of the instrument or is a bearer thereof. A
present holder relying on the status of a previous holder
cannot use Sec 59 to give the latter the status of being a
holder for value. He must prove the status of the previous
holder using other means.
10. Presumption in favor of due course holding
Sec. 59. Who is deemed holder in due course. - Every
holder is deemed prima facie to be a holder in due
course; but when it is shown that the title of any person
who has negotiated the instrument was defective, the
burden is on the holder to prove that he or some person
under whom he claims acquired the title as holder in due
course. But the last-mentioned rule does not apply in
favor of a party who became bound on the instrument
prior to the acquisition of such defective title.
Campos Notes
 This provision applies in favor of holders, not to
other transferees.
 The presumption only refers to the present
holder’s status and not of any previous holders.
 A plaintiff must first prove that he is a holder for
the presumption to apply.
NEGOTIABLE INSTRUMENTS  A2015  PAGE 29 OF 78
 o EXCEPTION: the burden of proof is on
the defendant if he became bound on
the instrument prior to the acquisition
of the defective title,
Cases
Asia Banking Corp v Tan Sen Guan
Quick Facts: Tan Sen Guan ordered expensive cloth from
Snow’s Ltd. Asia Banking, Snow’s bank, presented to Tan
Sen Guan a draft drawn Snow’s Ltd for acceptance. The
shipment arrived, and it turned out to be worthless cloth
instead of the expensive cloth agreed upon. Tan Sen Guan
demanded that Asia Banking cancel their acceptance of
the draft.
Doctrine: Asia Banking is not a holder in due course who
can recover on Tan Sen Guan. It failed to present
sufficient evidence that it was indeed such a holder. The
acceptance of the draft by Tan Sen Guan was conditional
upon the assurance of Asia Banking that the right cloth
would arrive. Since this condition did not occur, Asia
Banking cannot claim title to the draft.
Van Syckel v Egg Harbor Coal & Lumber Co
Quick Facts: Egg Harbor executed 3 notes in favor of
Orocofsky with the provision that “four months after date
we promise to pay the order of Orcofscy $2500.” Van
Syckel bought the notes from Ginsburg, an agent of payee
Orocofsky. It was signed by Ginsburg as “Orocofsky by J.G.,
pr. atty (signed), and by Van Syckel as (Van Syckel, atty
(signed).” The note remained unpaid and the lower court
ruled for Van Syckel.
Doctrine: Lower court wrong. Van Syckel was not a
holder in due course because the court and jury had no
evidence that the signature on the back of the note was
truly Van Syckel’s, or that Ginsburg was authorized to
indorse and sign the same. Proof of such authenticity and
authority is necessary before a presumption of a valid
and intentional delivery may arise. A note payable to
order is negotiated by the indorsement of the holder
completed by delivery.
Beacon Trust Co v Ryder
Quick Facts: Robert Ryder allegedly made a promissory
note payable to Rudnick. The note was indorsed in blank
by Charles Ryder, by Rudnick, and by “ES Company Inc,
Rudnick, treasurer.” Rudnick delivered the note to Beacon
Trust for discounting. The note was protested for non-
payment and the Ryders denied their signatures, alleging
there was a fraudulent transfer. They also compelled
Beacon Trust to prove it was a holder in due course.
Doctrine: Beacon Trust cannot be compelled to prove its
status as a HOLDER IN DUE COURSE because of the
presumption that a holder of a negotiable instrument is
deemed prima facie to be a HOLDER IN DUE COURSE. The
only exception is if it is shown that the title of a person
who previously negotiated the instrument was defective.
Farmers’ State Bank v Koffler
Quick Facts: Koffler drew a check on Farmer’s and
Merchant’s Bank payable to Davis. The sum payable was
written “$250.00” but in the body of the check it was
expressed “two hundred and 50/100th dollars” ($200.50).
Davis indorsed the check, which was subsequently stolen.
The check was presented to Farmer’s State who did not
know Davis nor the bearer who presented the check.
Doctrine: The bearer was a HOLDER IN DUE COURSE
because of the last sentence of Sec 59 (“but the last
mentioned rule does not apply in favor of a party who
became bound on the instrument prior to the acquisition
of such defective title.” Since Davis indorsed the check in
blank, it became a bearer instrument and became
negotiable by delivery. There existed a presumption that
Farmer’s State was a HOLDER IN DUE COURSE and that
there was a valid delivery of the instrument by all parties
before it, regardless of the contention that the instrument
was stolen. As to the amount, the sum denoted by the
words ($200.50) is controlling.
11. Transfer of unindorsed instrument
Sec. 49. Transfer without indorsement; effect of. - Where
the holder of an instrument payable to his order transfers
it for value without indorsing it, the transfer vests in the
transferee such title as the transferor had therein, and the
transferee acquires in addition, the right to have the
indorsement of the transferor. But for the purpose of
determining whether the transferee is a holder in due
course, the negotiation takes effect as of the time when
the indorsement is actually made.
Campos Notes
 A transferee who acquires the instrument
without indorsement acquires such title as the
transferor had in the instrument.
 But will the transferee also become a HOLDER
IN DUE COURSE if the transferor was a holder in
due course? THERE ARE DIVERGING VIEWS ON
THIS MATTER.
o On one hand, it can be held that a
transferee cannot become a holder in
due course because Sec 58 involves a
“holder,” and a transferee is not a
holder.
 Sec 49 grants the transferee
the title but not all the rights of
the transferor.
 In order to acquire the rights
of a prior holder in due course,
the transferee must acquire
the holder in due course’s
indorsement
NEGOTIABLE INSTRUMENTS  A2015  PAGE 30 OF 78
 o On the other hand, Sec 49 and 58
combined may be taken to give the
transferee the title of the previous
holder in due course free from defenses
and equities of prior parties.
 The Uniform Commercial Code (not
implemented here) favors the latter view.
According to it, transfer without indorsement
gives the transferee such rights as the transferor
had.
 A non-indorsing transferor who was not a holder
in due course makes his transferee subject to all
defenses as if the instrument were non-
negotiable. The transferee must really obtain the
transferor’s indorsement to become a holder in
due course.
 Can the transferee improve his status if at the
time of indorsement, he knew of the defense, or
he obtained indorsement after maturity? NO,
because being a holder in due course is
determined AT THE MOMENT of indorsement.
Case
Commercial Bank of Lafayette v Trust Co v Barry
Quick Facts: Stockholders of the Bank of Lafayette
wanted to dispose of their shares in the bank. Barry, Bank
of Lafayette president, executed demand notes payable to
the order of the Bank of Lafayette. These notes were used
to repurchase the stocks under the agreement that Barry
would not be personally liable. The Bank of Lafayette sold
all its assets to Commercial Bank, including Barry’s notes.
The notes were not indorsed by the Bank of Lafayette to
Commercial Bank.
Doctrine: Commercial Bank is not a holder in due course
because the notes were never indorsed by the Bank of
Lafayette. A transferee of a note payable to order cannot
obtain legal title thereto except through indorsement of
the payee. A transferee who takes an instrument without
such indorsement is subject to all equities vested in prior
parties.
CHAPTER IV
DEFENSES AND EQUITIES
Defenses and Equities in General
Sec. 57: Rights of holder in due course. A holder in due
course holds the instrument free from any defect of title
of prior parties, and free from defenses available to prior
parties among themselves, and may enforce payment of
the instrument for the full amount thereof against all
parties liable thereon.
Sec. 58. When subject to original defense. In the hands of
any holder other than a holder in due course, a negotiable
instrument is subject to the same defenses as if it were
nonnegotiable. But a holder who derives his title through
a holder in due course, and who is not himself a party to
any fraud or illegality affecting the instrument, has all the
rights of such former holder in respect of all parties prior
to the latter.
Sec. 55. When title defective. The title of a person who
negotiates an instrument is defective within the meaning
of this Act when he obtained the instrument, or any
signature thereto, by fraud, duress, or force and fear, or
other unlawful means, or for an illegal consideration, or
when he negotiates it in breach of faith, or under such
circumstances as amount to a fraud.
Campos Notes
 Liability of signatories to a negotiable
instrument depends on whether there are
existing (1) defenses or (2) claims of ownership.
(1) Defenses
(a) REAL: available against all holders,
including holders in due course.
 Attached to the instrument
itself
 Generally disclose an absence
in one of the essential requites
of a contract or where the
contract is void for being
contrary to public policy.
(b) PERSONAL: available against
holders not in due course only.
 A true contract appears, but
for some reason (e.g. fraud)
the defendant is excused from
obligation to eprform.
(2) Claims of Ownership
(a) LEGAL TITLE: one may recover
possession even from a holder in
due course.
(b) EQUITABLE TITLE: one may
recover possession only from a
holder not in due course.
 Real Defenses:
(1) forgery
(2) incapacity
(3) fraud in the execution
(4) some types of duress
(5) lack of delivery of an incomplete instrument
 Personal Defenses:
(1) Enumeration in Section 55
(2) Want of consideration
(3) Incompleteness of instrument
(4) Lack of delivery of a completed instrument
NEGOTIABLE INSTRUMENTS  A2015  PAGE 31 OF 78
Class Notes
 Remember: negotiable instrument still is a
contract. There’s still an ultimate remedy:
enforce it as a contract in case you cannot
enforce it as a holder in due course.
INCAPACITY (Real Defense)
Sec. 22. Effect of indorsement by infant or corporation.
The indorsement or assignment of the instrument by a
corporation or by an infant passes the property therein,
notwithstanding that from want of capacity, the
corporation or infant may incur no liability thereon.
Campos Notes
 Incapacity is a real defense available only to the
person incapacitated.
 Examples of incapacity:
(1) Minority.
(2) Corporation which has no capacity to
indorse.
(3) Insane/demented persons.
(4) Deaf-mutes who do not know how to write.
 Rationale: contract is lacking an essential
element of consent.
Cases
Murray v. Thompson
Quick Facts: A note for USD 1750 was made with a minor
as payee. The minor-payee then indorsed it to another
person. The minor-payee then filed a case to “disaffirm
and recover” the note.
Doctrine: Minor-payee is entitled to “disaffirm and
recover” the note. Indorsee in this case has the right to
recover payment from the maker of the note since the
defense of incapacity is available only to the minor. The
defense of incapacity of the minor cannot be availed of by
prior parties.
Illegality (Personal Defense)
Campos Notes
 Illegality is a personal defense. Although the
contract lacks an essential element of lawful
cause/consideration, the law treats defect as a
mere personal defense.
 Examples of what is meant by Illegality:
1. Note acquired through gambling.
2. Usurious note.
Cases
Rodriguez v. Martinez
Quick Facts: The note in this case was made for a
gambling debt. Indorsee sued the maker of the note for
collection.
Doctrine: Defense of unlawful consideration cannot be
availed of in this case because the maker deliberately
concealed it from the indorsee.
Forgery
a. In General
Sec. 23. Forged signature; effect of. When a signature is
forged or made without the authority of the person
whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against
any party thereto, can be acquired through or under such
signature, unless the party against whom it is sought to
enforce such right is precluded from setting up the
forgery or want of authority.
Sec. 18. Liability of person signing in trade or assumed
name. No person is liable on the instrument whose
signature does not appear thereon, except as herein
otherwise expressly provided. But one who signs in a
trade or assumed name will be liable to the same extent
as if he had signed in his own name.
Campos Notes
 Forgery is a real defense.
 Rationale: a person whose signature was forged
never consented to the contract.
 2 cases covered by Section 23 which makes the
instrument inoperative:
(1) agent who does not have authority to bind
principal.
(2) forged signature.
 XPN TO THE RULE (cases where defense of
forgery is not available):
1. Estoppel
2. Ratification
 2 situations where a party is precluded from
using the defense of forgery (as specifically
provided for in the NIL):
1. GENERAL INDORSER: he warrants that the
instrument is valid and subsisting, therefore
he is precluded from setting up defense of
forgery.
2. ACCEPTOR: because under Sec 62, he
warrants its genuineness.
 Note: forgery does not avoid the instrument, but
only the forged signature.
NEGOTIABLE INSTRUMENTS  A2015  PAGE 32 OF 78
Class Notes
 When the signature of a drawer/maker is forged,
it is wholly inoperative, even in the hands of a
holder in due course. An exception is when the
party against whom it is sought to enforce such
right is precluded up from setting up the forgery
(“precluded” means either: 1. Estoppel or 2.
Ratification).
 This rule applies to both bearer/order
instrument.
 Who can ratify? The person whose signature is
forged (ie. drawer/maker)
 The corpration can act only through the board of
directors, not stockholders. The board should
authorize the CEO/president to sign. But a board
may be estopped where they ratify their acts.
 Restatement: GR: an instrument in the hands of
a holder in due course is not subject to defenses.
 XPN: drawer/maker’s signature was forged.
XPN to XPN: drawer/maker is precluded.
Cases
Gluckman v. Darling
Quick Facts: Holder in due course sues his prior indorser
for collection on a promissory note.
Doctrine: Prior indorser is estopped from denying
forgery because when the holder previously inquired as
to the validity of the note, the prior indorser said
“everything is all right”. Where the holder of the note has
been willfully misled as to the genuineness of an
indorsement by one who purports to be the inodrser and
sustains damage or is prejudiced thereby, the alleged
indorser will be estopped from denying the validity of the
signature.
Strader v. Haley
Quick Facts: Plaintiff in this case claims that her
signature as drawer of checks were forged by the
defendants.
Doctrine: The plaintiff whose signature was forged as
drawer of her check is precluded from setting up defense
of forgery where she accepts and retains the benefits of
an unauthorized act of an agent with full knowledge of all
the facts. In such case, she thereby ratifies the act. In this
case, since the plaintiff received the proceeds of the
checks in cash and with full knowledge of all the facts, she
is precluded from setting up defense of forery.
San Carlos Milling v. BPI and Chinabank
Quick Facts: The signature of the drawer of a Chinabank
check was forged. The check was then deposited to BPI.
BPI, as collecting bank, indorsed the check to Chinabank.
Chinabank paid BPI and BPI credited the account of the
payee. When drawer discovered the crime, he sued
Chinabank and BPI to recover the amount drawn against
his account through the forged check.
Doctrine: BPI (as indorser of the check that was forged)
is liable to Chinabank (the indorsee) for the amount when
it guaranteed the genuineness of prior indorsements.
PNB vs Quimpo
Quick Facts: Case of the man who left his checkbook with
his friend inside his car, and his “friend” forged a check
and encashed it with the bank on the same day.
Doctrine: The drawer is entitled to recover from the
drawee bank because the latter is negligent. The
comparison of signatures immediately shows the
negligence of the drawee bank. The drawer is not
negligent in leaving his checknbook with a “friend” he
supposedly trusted.
b. Acceptance and payment under mistake
(1) When the drawee accepts or pays a
forged instrument (when the drawer’s
signature is forged)
Sec. 62. Liability of acceptor. The acceptor, by accepting
the instrument, engages that he will pay it according to
the tenor of his acceptance and admits:
(a) The existence of the drawer, the genuineness of his
signature, and his capacity and authority to draw the
instrument; and
(b) The existence of the payee and his then capacity to
indorse.
Campos Notes
 General principle of law: money paid under a
mistake may be recovered.
 Exception: Price v. Neal Doctrine – drawee who
had paid on a forged signature of drawer cannot
recover, and it must bear the loss. (this ruling is
embodied in Sec 62 of NIL)
 Exception to Exception:
(1) Person guilty of fraud/negligence in
obtaining the bill.
(2) One who had not given value therefor.
Class Notes
 If the drawee pays a person other than the
payee, he will be liable for the loss. The drawer
should pay only the payee or his order, as per the
order of the drawer. Therefore the drawee bank
NEGOTIABLE INSTRUMENTS  A2015  PAGE 33 OF 78
 must determine the identity of the payee. For
failure of the drawee to determine the identity of
the payee, the drawee cannot reimburse himself
from the account of the drawer.
Cases
Price v. Neal
Quick Facts: Price in this case was a drawee of 2 bills.
Unfortunately, the signatures of the drawer were forged.
He sued Neal (the person who indorsed the notes to him)
to recover the amount.
Doctrine: Drawee of a forged bill, negligent in not
inquiring, cannot recover from drawer (whose signature
was forged) or indorser (who has no idea of forgery and
equally innocent).
This is the landmark case pinning the burden on drawee
banks in case of forgery of drawer’s signature.
First National Bank of Portland v. US National Bank of
Portland
Quick Facts: This case involves checks in which the
signature of the drawer was forged. The drawee was First
National bank of Portland. The defendant in this case was
the collecting bank.
Doctrine: Drawee bank who paid collecting bank bears
the loss in case both drawee and holder are unaware of
the forgery and drawee bank had already paid the
amount.
PNB v. National City Bank of NY
Quick Facts: A check drawn on PNB was negotiated with
Motor Service Company. The check was then deposited at
National Bank of NY and was paid for by PNB.
Doctrine: Drawee bank (PNB) can recover payment
made by mistake to Motor Service Company (the
indorser) because the latter was negligent in purchasing
the papers in question from unknown persons without
making any inquiry as to the identity and authority of
said persons negotiating and indorsing them. (this is an
exception to the Price v. Neal doctrine).
PNB v. CA
Quick Facts: Drawee bank is trying to recover payment it
made to collecting bank because the signature of the
drawer turned out to be a forgery.
Doctrine: Drawee bank in this case cannot recover
because it paid collecting bank despite knowledge of stop
order from drawer.
Republic of the Philippines v. Equitable Banking Corp
Quick Facts: Government seeks to recover payment it
made to Equitable Banking Corp for the treasury
warrants that it later found to be forged.
Doctrine: The government treasury, like a drawee bank,
bears the loss in accepting and paying a forged treasury
warrant. The government is negligent in clearing the
warrants. The nullity of said warrants was apparent on its
face: it was for over P5,000 which was obviously beyond
the authority of the auditor.
(2) Extensions of Price v. Neal Doctrine
(a) Overdraft
Campos Notes
 Overdraft: when a check is issued for an amount
more than what the drawer has in deposit with
the drawee bank.
 GR: A drawee who pays the holder of the bill
despite the fact that the drawer had no sufficient
funds to cover it cannot recover from said holder
what he paid under mistake.
 XPN: drawee can recover payment it had made if
the holder is not a bona fide purchaser of the
bill.
 The remedy of the drawee in case of overdraft is
to go against the drawer.
Cases
First National Bank of Portland v. Noble
Doctrine: Drawee bank who pays overdraft check cannot
recover from person it had paid.
Liberty Trust Co. v. Haggerty
Doctrine: Drawee bank who pays overdraft check cannot
recover from person it had paid. When the bank decided
to pay, it was bound to know the state of its account with
the drawer. Having exercised its option to pay or not to
pay by honoring the checks, it can't recover the money
back from the payee.
(b) Stop Payment Order
Class Notes
 Stop payment order: order of the drawer to the
drawee bank not to pay the check issued by him.
 Drawee bank is bound to follow the stop
payment order provided it received it prior to its
certification or payment of the check.
NEGOTIABLE INSTRUMENTS  A2015  PAGE 34 OF 78
  HOLDER IN DUE COURSE: The drawee bank who
nevertheless paid a check cannot charge the
amount threof against the drawer’s account
unless such payment discharged a legitimate
debt of the drawer. In the subsequent action of
the drawer against the drawee, the drawee is
subrogated to the rights of the holder in due
course.
 HOLDER NOT IN DUE COURSE: If however the
drawee bank pays a fraudulent payee, or a
holder not in due course, the drawer would be
entitled to a recredit because payment thereof
did not discharge a legitimate obligation on his
part.
(3) Effect of negligence of depositor/drawer
Campos Notes
 It is the duty of the depositor to examine his
bank statements, cancelled checks, check stubs
and other pertinent records within a reasonable
time, and to report any errors without a
unreasonable delay.
 Bank is freed from liability if the proximate
cause of its wrongful payment is the negligence
of the drawer.
 If the drawer’s negligence and delay causes the
bank to honor a forged check or prevent it from
recovering the amount it may have paid on such
check, he cannot later complain should the bank
refuse to recredit his account with the amount of
such check.
(4) Effect of payment under forged
INDORSEMENTS.
Campos Notes
 If only the indorsement has been forged, the
drawee can recover the amount paid from the
holder since he makes no warranty as to the
genuineness of any indorsement.
 Should the drawee fail to recover from the
holder due to the holder’s insolvency:
 Order instrument: drawee cannot debit
drawer’s account.
 Bearer instrument: drawee may debit
drawer’s account.
 The negligence of the drawee bank will be
assessed vis-aà -vis that of the collecting bank, and
the degree of negligence of each will be weighed
accordingly in determining the amount of loss
each should bear.
Class Notes
NEGOTIABLE INSTRUMENTS  A2015  PAGE 35 OF 78
 Q: If drawer makes instrument payable to payee,
then the instrument is stolen by the forger and
the forger forges the instrument and negotiates
the instrument to another person A, and A
deposits the check with the drawee bank? A: The
drawee is bound to know only the signature of
the drawer, it is not bound to know the signature
of the payee. Hence, if the drawee pays the
instrument with the forged signature of the
indorser, he can run after the forger (first
rescourse is always against the forger). After the
forger, he can run after the drawer by debiting
the funds.
 GR: holder not bound to inquire into previous
transactions of a check coming into his
possession. BUT:
1. Forgery of signature of prior indorsers will
break the order in case of an ORDER
instrument. In such case, the drawee can get
back what he has paid the holder. The title
of the holder comes from the person who
indorsed it to him.
2. But forgery of signature of prior indorser is
immaterial in case of a BEARER instrument.
 Distinguish the cases:
1. JAI ALAI: instrument wholly inoperative.
forgery in the case involved the rubber
stamp of the cashier of corporation payee.
Hence, this is an order instrument in which
the signature of the payee was forged.
Forgery of the signature of payee-indorser:
instrument is inoperative (just like the
forged singature of the drawer). XPN: unless
the party whose signature is forged is
precluded from the forgery. Jai-Alai, the
indorsee, is also negligent in this case, hence
IT must bear the loss. Its account must be
debited with the amount of the checks.
2. Republic vs Ebrada: only the portion from
the payee to the indorsee that was held
invalid. Subsequent transactions were
considered as valid. Thus, the drawee can
still get reimbursement from the holder/last
indorser to whom it had paid out the
amount. This is because of section 65 of NIL
on warranty. Because bank is in no position
to know the signature of the payee.
3. Great Eastern Life: payee’s signature is
forged. Bank can go after the forger, but it
cannot go after the person whom it paid.
Bank must know the payee.
4. BDO vs EBC: collecting bank should
reimburse drawee bank in case
indorsement is forged because it made
warranty on indorsements. It is the
collecting bank which has a relationship
with its own customer (ie. the holder of the
instrument), therefore it is bound to know.
Thus, drawing bank is allowed to recover
from collecting bank.
 5. BPI vs CA: case of dual negligence. 60-40
rule split between drawee bank and
collecting bank.
Cases
Great Eastern Life Insurance Co. v. HSBC
Quick Facts: The signature of the payee of an HSBC check
was forged, and the check was the indorsed to PNB (PNB
is the collecting bank).
Doctrine: In case the signature of the payee was forged,
the drawee bank should re-credit the account of the
drawer, and the collecting bank should then pay the
drawee bank.
Jai-Alai Corporation v. BPI
Quick Facts: 10 checks drawn upon various banks,
indorsed allegedly by Inter-Island Gas to Jai-Alai, was
deposited by Jai-Alai to BPI. The indorsement on the
check later turned out to be a forgery. BPI then returned
the money it got from the drawee banks, and debited the
account of Jai-Alai. Jai-Alai is now questioning the right of
BPI to debit its account.
Doctrine: In case indorsement was forged, the drawee
bank has a right to debit the account of the person it had
wrongfully paid.
Canal Bank v. Albany
Quick Facts: This is a case to recover money the drawee
bank paid on a draft. The ground on which the drawee
bank sought to recover the money was that the
endorsement purporting to be that of the payee was a
forgery, which fact was proved during trial.
Doctrine: The holder of a check is bound to pay back
money it received from the drawee bank in case the
indorsement later turned out to be a forgery. Though the
defendants were innocent of any intended wrong, they
had obtained money of the plaintiffs on an instrument to
which they had no title, and were therefore bound to
refund.
Republic Bank v. Ebrada
Quick Facts: Drawee bank seeks to recover payment it
made from the person who encashed the check in which
the payee’s signature was forged.
Doctrine: Drawee bank can recover payment it made to
person who encashed the check in which the signature of
the payee was forged because it was the latter’s
negligence in failing to ascertain whether the check was
genuine that caused the loss.
BDO v. Equitable Banking Corp
Quick Facts: Drawee bank seeks to recover payment it
made to collecting bank when it found out that one of the
indorsements was a forgery.
Doctrine: Drawee bank can recover payment it made to
collecting bank because the latter guaranteed such
indorsement when it stamped “all pior endorsement
guaranteed”. The collecting bank therefore warranted the
endorsement, and is estopped from disclaiming liability
thereon.
BPI v. CA
Quick Facts: Drawee bank seeks to recover payment it
made to collecting bank when it found out that the
signature of the payee was a forgery.
Doctrine: Drawee bank cannot recover from collecting
bank. This is an exception to the general rule that the
drawee may recover. In this case, both drawee and
collecting bank are liable on a ratio of 60-40 because
records show both (1) BPI drawee bank (not calling
Fernando to confirm pretermination; not verifying
Fernando’s signatures; not asking for the promissory note
upon pickup of checks), and (2) CBC, the collecting bank
(opening account for Lopez with only Fernando’s tax
account number as ID, not questioning Lopez’ huge
deposit and withdrawals), were negligent in the
selection/supervision of their employees and thus both
liable.
Note: unlike the cases above (in which the parties are the
drawee and collecting bank), next 3 cases were filed by the
drawer against the drawee bank
Gempsaw v. CA and PBComm
Quick Facts: Drawer in this case brought an action
against the drawee bank because the latter debited her
account for the amount of checks in which the signature
of the payee was forged.
Doctrine: Drawer cannot recover from drawee bank
because she was the proximate cause of the loss. She
should have examined her records with reasonable
diligence whether before she signed the checks or after
receiving her bank statements (particularly the invoice
receipts, cancelled checks, check book stubs) and
compared the sums written as amounts payable 82
checks with the pertinent sales invoices, to discover the
discrepancy. She should’ve taken careful note of the daily
reports made by respondent drawee Bank on her issued
checks, or at least made random scrutiny of her cancelled
checks returned by drawee Bank at the close of each
month.
NEGOTIABLE INSTRUMENTS  A2015  PAGE 36 OF 78
 Tolman v. American National Bank
Quick Facts: Drawer in this case brought an action
against the drawee bank because the latter debited his
account for the amount of checks in which the signature
of the payee was forged.
Doctrine: When a bank receives money to be checked out
by a depositor, it is to be paid only as the depositor shall
order. The bank assumes this duty in receiving the
deposit. If the bank pays money out on a forged signature,
the depositor being free from blame or negligence, it
must bear the loss.
Snyder v. Corn Exchange National Bank
Quick Facts: Drawer in this case brought an action
against the drawee bank because the latter debited his
account for the amount of checks in which the signature
of the payee was forged.
Doctrine: In this case, the drawer bears the loss. Since
the payee in this case was a fictitious person, then this
makes the check payable to bearer. Therefore, the bank is
not liable for guaranteeing the indorsement on the check,
since indorsement is not necessary in checks payable to
bearer.
(5) Effect of negligence of DRAWEE in
informing recipient of forgery
Clearfield Trust Co. v. US
Quick Facts: Drawee bank in this case paid out a check in
which the signature of the payee was forged. The drawee
in this case seeks to recover the amount from the person
it had paid by mistake.
Doctrine: Drawee should be allowed to recover payment
it made by mistake. Lack of prompt notice might be a
defense if it is shown that the drawee, on learning of the
forgery, did not give prompt notice of it, and that damage
resulted, recovery by the drawee is barred. However, in
this case, drawee’s right to recover is not barred because
there is no evidence showing that drawee’s delay in
notifying the person it had paid caused the latter damage.
(6) Effect of negligence of DRAWER in case of
forged indorsement on checks.
Campos Notes
 GR: drawer cannot be charged the amount the
drawee bank paid in case the indorsement has
been forged.
 XPN: when the indorsement was forged by an
employee/agent of the drawer, and drawer was
negligent in not discovering the same, the
drawee may charge the drawer’s account.
Detroit Piston Ring Co. v. Wayne County & Home
Savings Bank
Quick Facts: Clerk of the drawer in this case forged the
signature of the payee. The drawer then sought to recover
from the drawee bank the amount it debited to its
account.
Doctrine: Drawer is not allowed to recover the amount
the drawee bank debited on its account. The estoppel of
the drawer, on the ground of negligence, to recover for an
unauthorized payment, is based on the failure of the
depositor to act as a prudent businessman in issuing his
checks. No comparison of the checks with the time card
was ever made, nor was there an audit of the payroll. It is
perfectly clear that a complete investigation would have
disclosed the fraud at once.
Material Alteration
(a) In General
Sec. 124. Alteration of instrument; effect of. Where a
negotiable instrument is materially altered without the
assent of all parties liable thereon, it is avoided, except as
against a party who has himself made, authorized, or
assented to the alteration and subsequent indorsers. But
when an instrument has been materially altered and is in
the hands of a holder in due course not a party to the
alteration, he may enforce payment thereof according to
its original tenor.
Sec. 125. What constitutes a material alteration. Any
alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of
payment:chanroblesvirtuallawlibrary
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be
made;
(f) Or which adds a place of payment where no place of
payment is specified, or any other change or addition
which alters the effect of the instrument in any respect, is
a material alteration.
Campos Notes
 GR: Material alteration changes the contract of
the parties, avoids the instrument and
discharges all the parties
 XPN: parties who authorized or consented to the
alteration.
NEGOTIABLE INSTRUMENTS  A2015  PAGE 37 OF 78
  XPN to XPN: Subsequent indorser (because by
the indorsement, he warrants, among other
things, that the instrument is in all respects what
it purports to be).
 Material alteration may be a personal/real
defense:
 Personal defense: to deny liability
according to the original tenor.
 Real defense: to deny liability according to
its altered terms.
 Fraudulent intent is irrelevant.
 Note: where the erasure was made before the
issuance of maker/drawer, there being no other
signatures at that time, there is no material
alteration because the instrument has no legal
existence prior to such issuance.
Class Notes:
 Alteration: any change other than in the
signature.
 Correcting a misspelling in the name is not a
material alteration under NIL, but for practical
purposes under Philippine setting, it is
considered as material alteration.
 Holder in due course v. Holder not in due course:
1. HIDC: In case of material alteration, it can
be enforced according to its original tenor
ONLY if it is in the hands of a holder in due
course. Hence, drawee can pay the original
tenor, and he can charge the drawer for that
amount
2. NHIDC: If the instrument is in the hands of a
holder NOT in due course, the instrument is
avoided. The drawer’s account may not be
charged even in the original amount. The
drawee in this case will suffer the total loss
for paying the altered instrument, and he
can only go after the alteror.
 GR: drawee bears the discrepancy in amount;
XPN: drawer is liable if he facilitated the loss (ie.
left spaces in the check, etc). The doctrine in
Price vs Neal that the bank should be made
liable for the loss is now obsolete. In this case,
the drawee can charge the drawer for the full
amount.
Cases
Montinola v. PNB
Doctrine: Addition of the words “agent, PNB” under the
signature of the drawer is a material alteration because it
changes the nature of the parties. Thus, it discharges the
instrument.
Bank of Commerce of Sulphur v. Webster
Quick Facts: Indorsee in this case is trying to recover
against the guarantor on a note. Defense of the guarantor:
material alteration of the note when a party was added to
the note (as additional maker thereof) after its execution
and delivery.
Doctrine: The guarantors of the note are discharged from
liability because an additional party was added to a
negotiable instrument without their knowledge and
consent.
(b) Effect of negligence of drawer of check
Campos Notes
 GR: drawee bank has no right to charge the
account of the drawer the amount of the altered
check.
 XPN: when the drawer is negligent (ex. he leaves
spaces, etc.)
Cases
Foutch v. Alexandria Bank & Trust Co.
Quick Facts: A check was altered from 18 USD to 418
USD. Drawer then seeks to recover the amount drawee
bank debited from its account.
Doctrine: Drawer cannot recover. The general rule is that
the drawee bank bears the loss in case of an altered
check; an exception is when the drawer is guilty of
negligence to facilitate the alteration. In this case, the
drawer is negligent: (1) Drawer authorized the payee to
fill out the check in pencil (which made added
word/figures raising the check particularly easy to insert
and impossible to detect) (2) Payee was authorized to fill
in his own handwriting, rendering additions hard to
detect. (3) With the spaces and blanks left in between the
figures, it was easy to fill in additional figures.
Savings Bank of Richmond v. National Bank of
Goldsboro
Quick Facts: Payee in this case altered the draft (changed
the date and amount). The check was then sold to an
indorsee. The indorsee is now seeking to recover from
the drawer the amount of the altered check.
Doctrine: Indorsee in this case was negligent in
accepting the check. Nonetheless, he is entitled to the
original amount of the check, nothing more.
Critten v. Chemical National Bank
Quick Facts: The employee of the drawer, in charge of
filling up the latter’s checks, stole the same and altered
the name of the payee and the amount. The drawer found
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out and it filed a case against the drawee to recover the
excess sums it had paid on the altered check.
Doctrine: The drawer in this case is liable for the altered
amount for being negligent. A mere comparison of the
returned checks would’ve revealed the alterations. Hence,
he cannot claim reimbursement from the drawee bank.
But he is not estopped from asserting that they are
forgeries, hence, he can go after the person whom the
drawee bank has paid.
(c) Effect of drawee’s payment or acceptance of
altered check
Campos Notes
 The main issue is really: can the drawee bank
recover the money it had paid on an altered
check from the recipient-holder in due course?
 There are 2 conflicting views:
(1) Allows recovery (reflected in the case of
Marine National Bank v. National City Bank)
(2) Does not allow recovery (reflected in the
case of Wells Fargo Bank v. Bank of Italy)
 In the Philippine setting, the court (in 2 cases:
(1) HSBC v. People’s Bank & (2) Republic Bank v.
CA) has adopted the view that drawee bank
cannot recover the amount it had paid. The
reason being that the 24-hour clearing period in
the CB circular bars the banks from recovering
after the expiration of the 24-hour period.
Hence, the drawee bank cannot recover both
from the collecting bank and from the drawer.
 This stringent 24-hour rule was later on found to
be too burdensome for the drawee banks, hence,
a new rule was adopted. The rule as it now
stands provides that a drawee bank can still
recover from the holder the amount it has paid
even beyond the 24-hour period, provided it
does so within 24 hours from discovery of the
alteration and within the usual prescriptive
period of 10 years.
Fraud
Campos Notes
 Fraud can either be a real or personal defense.
 REAL DEFENSE: when there is no real
contract as when a person is tricked into
signing a paper he does not know is a
negotiable instrument.
 PERSONAL DEFENSE: (1) when a person is
tricked only as to its value/terms OR (2)
when the person does not know the nature
of the paper he is signing, but could’ve
discovered it had he exercised ordinary
care.
 Factors to determine negligence of person under
#2 above:
1. legal character of the instrument he thinks
he is signing.
2. Physical condition of the signer and his
ability to read.
3. Whether the signer had opportunity, at the
time of signing, to ascertain the legal nature
of the paper he is executing.
Cases
CLT Corp v. Panac
Quick Facts: Spouses Panac who are makers of the notes
are using the defense of forgery to disclaim liability
thereon. They are illiterates and was told by the payee
that what they are signing are mere contract for repairs
and renovation.
Doctrine: Spouses were relieved from liability. Fraud is a
real defense. A person who cannot read is not always
negligent in not calling a third person to read the
document he is signing to him. The question of negligence
is one for the jury to decide.
Note: Prof Q doesn’t really agree with this case.
Duress
Campos Notes
 Duress can either be a real or personal defense.
 PERSONAL DEFENSE: simple duress.
 REAL DEFENSE: when the duress employed
is so serious that there is lack of contractual
intent.
 *distinction between real/personal is too
subjective. Campos did not elaborate.
Complete instrument which is undelivered
Sec. 16. Delivery; when effectual; when presumed. Every
contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose
of giving effect thereto. As between immediate parties
and as regards a remote party other than a holder in due
course, the delivery, in order to be effectual, must be
made either by or under the authority of the party
making, drawing, accepting, or indorsing, as the case may
be; and, in such case, the delivery may be shown to have
been conditional, or for a special purpose only, and not
for the purpose of transferring the property in the
instrument. But where the instrument is in the hands of a
holder in due course, a valid delivery thereof by all
parties prior to him so as to make them liable to him is
NEGOTIABLE INSTRUMENTS  A2015  PAGE 39 OF 78
conclusively presumed. And where the instrument is no
longer in the possession of a party whose signature
appears thereon, a valid and intentional delivery by him
is presumed until the contrary is proved.
Campos Notes
 Non-delivery of a complete instrument is a
PERSONAL defense.
 Presumption of delivery: when the instrument is
no longer in the possession of a party who has
signed it, it is presumed delivered until the
contrary is proved.
Class Notes:
 Non-delivery does not affect negotiability, the
effect only being there’s a defense.
Cases
Cohn v. City of Taunton
Quick Facts: Maker is seeking to recover value of bonds
payable to bearer which were stolen from its vault, and
had landed in the hands of innocent purchasers for value.
Doctrine: Maker cannot recover anymore. Completed
bonds payable to bearer are valid in the hands of a holder
in due course.
Smith v. Dotterweich
Quick Facts: PN in this case was given as payment for
premiums upon life insurance policies. When the payee
was trying to claim from the PN, the maker interposed the
defense that a condition precedent to the effectivity of the
notes (I.e. that the payee was to procure a loan of money)
was not complied with.
Doctrine: The maker of the note should be alllowed to
show that a condition precedent to the effectivity of the
PN was not complied with. A maker of a PN is allowed to
prove failure of the precise condition to determine the
existence or non-existence of any contract between him
and the payee. (this case is relevant in determining
whether or not there is a valid delivery that can hold the
maker liable)
Incomplete instrument which is undelivered
Sec. 15. Incomplete instrument not delivered. Where an
incomplete instrument has not been delivered, it will not,
if completed and negotiated without authority, be a valid
contract in the hands of any holder, as against any person
whose signature was placed thereon before delivery.
Campos Notes
 Incomplete instrument which is undelivered is a
REAL DEFENSE.
 How to determine whether instrument is
complete: if an instrument contains all the
requisites for making it a negotiable one, it
should be cosidered as complete though in fact
may have blanks as to non-essentials.
 XPN: drawer cannot claim this real defense if its
negligent custody of the checks contributed to its
escape.
Cases
Pavilis v. Farmers Union Livestock Commission
Quick Facts: An employee of the drawer stole the signed
checks from the safe of the drawer and inserted the date,
amount and his own name as payee. The employee then
delivered the checks to a holder in due course. The SC
held in this case that the drawer is not liable.
Doctrine: Drawer is relieved from liability in case a
signed but incomplete note is stolen and comes to the
hands of a holder in due course. This is a real defense,
and cannot be enforced in the absence of conduct on the
part of the drawer creating estoppel.
Weiner v. Pennsylvania Co.
Quick Facts: Drawer signed her name to a check. Except
for her signature, nothing was written on it. The check
was stolen and completed by the thief. The bank then
paid the check to a fictitious payee, who properly
indorsed it. Drawer now sues the drawee bank.
Doctrine: Drawer is liable as against the drawee in case
signed check is stolen and filled up by another person. By
signing a check in blank, it is the drawer’s act which made
the loss possible. Drawer is thus estopped in her suit
against the drawee bank.
Linick v. A.J. Nutting and Co.
Quick Facts: Drawer signed the check in blank.
Thereafter, it was stolen. The thiefs then filled up the
details and presented it to drawee bank for certification.
They then indorsed the check to holder in due course.
Drawer now sued the holder in due course.
Doctrine: Drawer whose signed check was stolen can
recover the value given to a holder in due course because
an undelivered incomplete instrument is a real defense.
Incomplete instrument which has been delivered
NEGOTIABLE INSTRUMENTS  A2015  PAGE 40 OF 78
Sec. 14. Blanks; when may be filled. Where the Quick Facts: Maker of the note left the name of the payee
instrument is wanting in any material particular, the in blank.
person in possession thereof has a prima facie authority
to complete it by filling up the blanks therein. And a Doctrine: Any person in possession of a note in which
signature on a blank paper delivered by the person the name of the payee was left in blank can complete the
making the signature in order that the paper may be instrument by filling the blank within the authority given
converted into a negotiable instrument operates as a by the drawer. Thus, anyone can fill in the name of the
prima facie authority to fill it up as such for any amount. payee, but the name of the payee is limited to that which
In order, however, that any such instrument when the drawer authorized it to be.
completed may be enforced against any person who
Consideration
became a party thereto prior to its completion, it must be
filled up strictly in accordance with the authority given Sec. 28. Effect of want of consideration. Absence or
and within a reasonable time. But if any such instrument, failure of consideration is a matter of defense as against
after completion, is negotiated to a holder in due course, any person not a holder in due course; and partial failure
it is valid and effectual for all purposes in his hands, and of consideration is a defense pro tanto, whether the
he may enforce it as if it had been filled up strictly in failure is an ascertained and liquidated amount or
accordance with the authority given and within a otherwise.
reasonable time.
Campos Notes
Campos Notes
 Consideration is a personal defense.
 Incomplete instrument which is delivered is a
 Every instrument is prima facie presumed to
PERSONAL defense.
have been issued for valuable consideration.
 Note there are 2 kinds of writings covered by the
 Rationale: acceptability of negotiable instrument
provision:
would be greatly restricted if prospective
1. Incomplete instrument
purchasers were burdened with the need of
 Although containing blanks, so far
determining whether such instruments are
completed that it is an instrument (ie.
supported by consideration.
where the writing recites enough of
 3 kinds of want of consideration enumerated by
the formal requisites to make evident
the provision:
the intention to make writing operate
1. Absence of consideration: total lack of
as a negotiable instrument).
consideration
 In such case, any person in
2. Failure of consideration: something was
possession thereof has prima facie
agreed upon as consideration for a contract,
authority to fill it up.
but for some reason the consideration did
2. Blank paper or paper so far incomplete, but
not materialize.
signed.
3. Partial failure of consideration: part of the
 One which is so far incomplete that it
consideration did not materialize.
is not an instrument.
 2 conditions must be present before
Cases
presumption of authority to complete
may arise: Dougherty v. Salt
1. Delivery of the instrument
2. Delivery must have been Doctrine: There was no consideration for the PN in this
for the purpose of case because the note was given as mere gift. Hence, the
converting it into a maker can claim the defense of want of consideration.
negotiable instrument.
 If authority to complete was exceeded: Barco & Son v. Forbes
1. Holder in due course – he may enforce it as
Quick Facts: A PN was executed for the purchase of
if it had been filled up strictly in accordance
fertilizers. When the payee was enforcing payment, the
with the authority given.
maker claimed the defense of want of consideration as
2. Holder not in due course: he cannot recover.
the fertilizer was worthless and had no effect whatever
Cases
on his crop.
Simpson v. National Bank of Roseburg
Doctrine: The maker of a PN cannot claim the defense of
want of consideration if he executed the PN after

NEGOTIABLE INSTRUMENTS  A2015  PAGE 41 OF 78

knowledge of the failure of consideration. (in this case,
since the maker of the PN knew that the fertilizer was
worthless when he executed the PN, he cannot anymore
claim the defense of want of consideration).
CHAPTER V
LIABILITY OF PARTIES
1. Liability of primary parties
a. In general
Sec. 192. Persons primarily liable on instrument. The
person "primarily" liable on an instrument is the person
who, by the terms of the instrument, is absolutely
required to pay the same. All other parties are
"secondarily" liable.
Sec. 70. Effect of want of demand on principal debtor.
Presentment for payment is not necessary in order to
charge the person primarily liable on the instrument; but
if the instrument is, by its terms, payable at a special
place, and he is able and willing to pay it there at
maturity, such ability and willingness are equivalent to a
tender of payment upon his part. But except as herein
otherwise provided, presentment for payment is
necessary in order to charge the drawer and indorsers.
Campos Notes
 2 classifications of parties to a negotiable
instrument:
1. Primary party
a. Maker of a PN.
b. Acceptor of a bill
2. Secondary party
a. Indorsers of PN/bill.
b. Drawer of a bill.
 Main distinction between primary & secondary
party:
 Primary party: unconditionally liable; he is
duty bound to pay the holder at the date of
maturity, whether or not the holder
demands payment from him, and he is not
relieved from liability even if the instrument
should become overdue due to the failure of
the holder to make such demand.
 Secondary party: not bound to pay unless
the following conditions are met: (1) due
presentment/demand to the primary party;
(2) dishonor by the primary party; (3)
taking of proceedings required by law after
dishonor (ie. (a) notice of dishonor and (b)
protest of the bill).
Class Notes:
 When drawee bank PAYS the instrument, the
negotiability of the instrument is terminated.
 When drawee bank ACCEPTS the instrument, the
negotiability of the instrument is not
extinguished, it continues. It is even enhanced.
b. Liability of maker of the PN
Sec. 60. Liability of maker. The maker of a negotiable
instrument, by making it, engages that he will pay it
according to its tenor, and admits the existence of the
payee and his then capacity to indorse.
Campos Notes
 By executing the note, the maker:
1. Warrants that the payee named is existing.
2. Represents to the world that the payee
named has the capacity to indorse.
Cases
First National Bank of Central City v. Utterback
Quick Facts: Payee of a PN in this case is a foreign
corporation who failed to comply with a Kentucky
Statute, therefore unauthorized to do business in the
state. The PN fell to the hands of a holder in due course.
Maker is now trying to disclaim liability on the note.
Doctrine: Maker warrants existence and capacity of
payee. That payee is a corp not authorized to do business
is not a defense available to the maker.
c. Status of drawee prior to acceptance or
payment; effect of stop order
Sec. 127. Bill not an assignment of funds in hands of
drawee. A bill of itself does not operate as an assignment
of the funds in the hands of the drawee available for the
payment thereof, and the drawee is not liable on the bill
unless and until he accepts the same.
Sec. 189. When check operates as an assignment. A check
of itself does not operate as an assignment of any part of
the funds to the credit of the drawer with the bank, and
the bank is not liable to the holder unless and until it
accepts or certifies the check.
Campos Notes
 Drawee is not liable on the instrument until he
accepts/certifies it, and even a holder in due
course cannot sue him on the instrument before
his acceptance.
 Once a bill is accepted/certified, the acceptor
becomes primarily liable. Acceptance is an
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 appropriation of the funds of the drawer in the
hands of the drawee.
 Before payment or certification, the drawer may
make a stop order. If the bank pays
notwithstanding a timely stop order, he cannot
recover what he has paid.
 Drawee may be held liable to drawer for breach
of contract or tort damages for refusal to accept
a check.
Cases
Leopoldo Araneta v. Bank of America
Quick Facts: Bank of America (the drawee), in 2
instances, dishonored the check issued by Araneta (the
drawer) notwithstanding the fact that the latter had
sufficient funds in his account.
Doctrine: Drawee is liable to drawer for damages for
wrongful refusal to pay/honor the check.
Woody v. National Bank of Rocky Mount
Quick Facts: (similar facts to preceding case)
Doctrine: Drawee is liable to drawer for damages (for
breach of contract & tort) for wrongful refusal to
pay/honor the check.
Singson v. BPI
Quick Facts: Singson’s check was dishonored by BPI
because BPI wrongfully froze his account by virtue of a
writ of garnishment which was supposed to pertain to a
different account.
Doctrine: Drawee bank is liable for both tort and breach
of contract in case of wrongful dishonor of check.
Speroff v. First-Central Trust Co.
Quick Facts: Drawer sued the drawee bank to recover the
amount of a check that the latter debited to the former’s
account. According to the drawer, he issued a stop order
for the said check. The drawee bank interposed as
defense a waiver signed by the drawer which says that
the drawer will indemnify the drawee bank against any
loss that will result if the drawee pays the check despite
the stop order.
Doctrine: Drawee bank is liable for the amount it paid
notwithstanding the stop order issued by the drawer. The
alleged waiver procured by bank to release it from
liability is void for want of consideration and for being
contrary to public policy.
Chase National Bank v. Battat
Quick Facts: Drawee bank in this case paid the payee
notwithstanding the stop order issued by the drawer.
Doctrine: In case drawee bank wrongfully pays payee
notwithstanding stop order, he has no cause of action
against both the drawer and the payee. He must bear his
own loss.
d. Liability of acceptor
Sec. 62. Liability of acceptor. The acceptor, by accepting
the instrument, engages that he will pay it according to
the tenor of his acceptance and admits:
(a) The existence of the drawer, the genuineness of his
signature, and his capacity and authority to draw the
instrument; and
(b) The existence of the payee and his then capacity to
indorse.
Campos Notes
 Once the drawee accepts, he becomes primarily
liable on the instrument.
2. Formal requisites of acceptance
Sec. 191. Definition and meaning of terms. In this Act,
unless the contract otherwise requires:
"Acceptance" means an acceptance completed by delivery
or notification
Sec. 132. Acceptance; how made, by and so forth. The
acceptance of a bill is the signification by the drawee of
his assent to the order of the drawer. The acceptance
must be in writing and signed by the drawee. It must not
express that the drawee will perform his promise by any
other means than the payment of money.
Sec. 133. Holder entitled to acceptance on face of bill. The
holder of a bill presenting the same for acceptance may
require that the acceptance be written on the bill, and, if
such request is refused, may treat the bill as dishonored.
Sec. 138. Acceptance of incomplete bill. A bill may be
accepted before it has been signed by the drawer, or while
otherwise incomplete, or when it is overdue, or after it
has been dishonored by a previous refusal to accept, or by
non payment. But when a bill payable after sight is
dishonored by nonacceptance and the drawee
subsequently accepts it, the holder, in the absence of any
different agreement, is entitled to have the bill accepted
as of the date of the first presentment.
Campos Notes
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  Requisites for valid acceptance:
1. In writing
2. Signed by the drawee
3. Must not change the implied promise of the
acceptor to pay only in money.
 In case of refusal of drawee to accept the
instrument, the holder has the option to treat
the bill as dishonored and go against the persons
secondarily liable.
 Drawee’s signature alone is sufficient; no other
words necessary.
 Bill may be accepted even if it is incomplete.
 Bill may be accepted even if overdue/dishonored
Cases
Lawless v. Temple
Quick Facts: Drawee refuses to pay the check and alleged
that its mere signature is not a valid acceptance.
Doctrine: A drawer may be charged as acceptor although
he writes merely his name and that anyone 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 National Bank v. Moore Bros. Lumber Co.
Quick Facts: Drawee in this case refuses to pay a check,
saying that it has not accepted it yet.
Doctrine: A bare oral promise and a mere notation on a
ledger do not constitute as acceptance.
a. Constructive acceptance
Sec. 136. Time allowed drawee to accept. The drawee is
allowed twentyfour hours after presentment in which to
decide whether or not he will accept the bill; the
acceptance, if given, dates as of the day of presentation.
Sec. 137. Liability of drawee returning or destroying bill.
Where a drawee to whom a bill is delivered for
acceptance destroys the same, or refuses within twenty-
four hours after such delivery or within such other period
as the holder may allow, to return the bill accepted or
non accepted to the holder, he will be deemed to have
accepted the same.
Sec. 150. Duty of holder where bill not accepted. Where a
bill is duly presented for acceptance and is not accepted
within the prescribed time, the person presenting it must
treat the bill as dishonored by nonacceptance or he loses
the right of recourse against the drawer and indorsers.
Campos Notes
 Drawee has 24 hours after presentment within
which to make up his mind whether to accept
the bill or not.
 Acceptance, if given, retroacts to the date of
presentation.
Cases
Wisner v. First National Bank of Gallitzin
Quick Facts: Holder of the checks sued drawee bank on
the theory that the drawee’s failure to return the checks
within 24 hours after receipt constitutes acceptance.
Doctrine: The failure of the drawee bank to return the
checks within 24 hours after acceptance constitutes
acceptance. Demand for its return is not anymore
necessary.
Sumcad v. Province of Samar
Quick Facts: Checks were indorsed to its holder, Sumcad.
When the holder presented the check for payment, the
bank requested photostatic copies of checks and asked
that the holder present the check to the provincial
treasurer and auditor for acceptance.
Doctrine: Drawee bank has impliedly accepted the check
when it requested the holder for photostatic copies and
required him to present it to the provincial
treasurer/auditor for payment. (dissent: no implied
acceptance)
3. Acceptance on a separate instrument
Sec. 134. Acceptance by separate instrument. Where an
acceptance is written on a paper other than the bill itself,
it does not bind the acceptor except in favor of a person to
whom it is shown and who, on the faith thereof, receives
the bill for value.
Sec. 135. Promise to accept; when equivalent to
acceptance. An unconditional promise in writing to
accept a bill before it is drawn is deemed an actual
acceptance in favor of every person who, upon the faith
thereof, receives the bill for value.
Campos Notes
 Acceptance on a separate instrument: to be
operative, it must identify the bill to which it
refers and must be clear and unequivocal.
Cases
Coolidge v. Payson
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Doctrine: A promise to accept a bill amounts to an
acceptance to a person who has taken it on the credit of
that promise, although the promise was made before the
existence of the bill, and although it is drawn in favor of a
person who takes it for a pre-existing debt. A letter
written within a reasonable time before or after 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 the person who makes the
promise.
4. Kinds of Acceptance
a. General acceptance
Sec. 139. Kinds of acceptance. An acceptance is either
general or qualified. A general acceptance assents
without qualification to the order of the drawer. A
qualified acceptance in express terms varies the effect of
the bill as drawn.
Sec. 140. What constitutes a general acceptance. An
acceptance to pay at a particular place is a general
acceptance unless it expressly states that the bill is to be
paid there only and not elsewhere.
b. Qualified acceptance
Sec. 141. Qualified acceptance. An acceptance is qualified
which is:chanroblesvirtuallawlibrary
(a) Conditional; that is to say, which makes payment by
the acceptor dependent on the fulfillment of a condition
therein stated;
(b) Partial; that is to say, an acceptance to pay part only of
the amount for which the bill is drawn;
(c) Local; that is to say, an acceptance to pay only at a
particular place;
(d) Qualified as to time;
(e) The acceptance of some, one or more of the drawees
but not of all.
Sec. 142. Rights of parties as to qualified acceptance. The
holder may refuse to take a qualified acceptance and if he
does not obtain an unqualified acceptance, he may treat
the bill as dishonored by non acceptance. Where a
qualified acceptance is taken, the drawer and indorsers
are discharged from liability on the bill unless they have
expressly or impliedly authorized the holder to take a
qualified acceptance, or subsequently assent thereto.
When the drawer or an indorser receives notice of a
qualified acceptance, he must, within a reasonable time,
express his dissent to the holder or he will be deemed to
have assented thereto.
Campos Notes
 Conditional: since condition does not qualify the
order to pay, but only the acceptance, the
instrument is still negotiable and does not
violate Section 1 (b).
 Partial: partial acceptance does not affect the
negotiability of the instrument, unlike a partial
indorsement.
 As to drawee: a holder need not take a qualified
acceptance, and may insist on a general
acceptance. If he agrees to qualified acceptance,
he should give notice to drawers and indorsers,
otherwise the latter will be discharged from
liability. If the drawers/indorsers were notified
and do not express their dissent within a
reasonable time, they remain liable on the
instrument. If the holder took the instrument
after it had been accepted qualifiedly, he is
deemed to have assented to such acceptance.
 Trade acceptance: states upon its face the
transaction from which it arose.
 Banker’s acceptance: accepted by a commercial
bank and specifies the transaction which gave
rise to it; used when the buyer-seller do not
know each other.
Class Notes:
 Note: upon presentment, bank can either (1) PAY
or (2) ACCEPT. Holder has a right to demand
payment in full, and he can refuse payment in
installment. If it is not paid in full, the holder can
treat it as dishonored. If the holder agreed to
payment in installment, parties secondarily
liable are discharged if they are not notified of
the payment in installment. This is because the
obligation is to pay the instrument in full.
 When the holder goes to the bank, the HOLDER
has the option of presenting it for payment OR
acceptance. The holder (not the bank) has the
OPTION to choose either two. Thus, the bank
can’t say “we will accept, but not pay”. While
acceptance may enhance negotiability of
instrument, it’s still up to the holder.
5. Checks
a. Definition, nature and kinds
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Sec. 185. Check, defined. A check is a bill of exchange
drawn on a bank payable on demand. Except as herein
otherwise provided, the provisions of this Act applicable
to a bill of exchange payable on demand apply to a check.
Sec. 63. When a person deemed indorser. A person
placing his signature upon an instrument otherwise than
as maker, drawer, or acceptor, is deemed to be indorser
unless he clearly indicates by appropriate words his
intention to be bound in some other capacity.
Campos Notes
 Check: form of a bill of exhange which is always
payable on demand and always drawn on a bank.
 A check operates only as conditional payment
and will be considered absolute only when the
check has been honored by the bank either by
payment or certification.
 Cashier’s or managers check: drawn on the
bank itself; its issuance has the effect of
acceptance.
 Memorandum check: signifying that the drawer
will pay the holder absolutely, without the need
for presentment.
 Traveler’s check: holder’s signature appears
twice: (1) time of issuance (2) time it is cashed.
Cases
Republic v. PNB
Quick Facts: A complaint for escheat was filed by the
Republic against PNB which prays that credits and
deposit of persons dead or who have not made further
deposits and withdrawals for 10 years be escheated to
the Republic. PNB claimed that certain items are not
subject to escheat because they are not “credits” or
“deposits”.
Doctrine: (1) Demand draft is not subject to escheat
(since it has not been accepted yet); (2)
Cashier’s/manager’s check is credit subject to escheat
(since the issuance of the same is equivalent to
acceptance); (3) telegraphic payment order is credit
subject to escheat (because there is no question that the
bank has to pay them). In accepting, the bank is saying
that it had already segregated the funds of the drawer to
the person supposed to receive the same.
PAL v. CA
Doctrine: Payment in checks (not cash) to sheriff will not
discharge the obligation. A negotiable instrument is only
substitute for money and delivery does not, in itself,
operate as payment.
Fortunado v. CA
Doctrine: Right of redemption in a foreclosure case may
be exercised by tendering checks.
Mesina v. IAC
Quick Facts: Go purchased a cashier’s check which was
subsequently stolen. It landed in the hands of Mesina. Go
was able to make a stop order, hence the bank dishonored
the check upon presentment. Mesina then filed a case for
payment of the check.
Doctrine: Since Mesina is not a holder in due course, he
is not entitled to payment for the check.
b. Certification and its effects
Sec. 187. Certification of check; effect of. Where a check
is certified by the bank on which it is drawn, the
certification is equivalent to an acceptance.
Sec. 188. Effect where the holder of check procures it to
be certified. Where the holder of a check procures it to be
accepted or certified, the drawer and all indorsers are
discharged from liability thereon.
Sec. 189. When check operates as an assignment. A check
of itself does not operate as an assignment of any part of
the funds to the credit of the drawer with the bank, and
the bank is not liable to the holder unless and until it
accepts or certifies the check.
Campos Notes
 Certification: agreement by which a bank
promises to pay the check at any time it is
presented for payment; equivalent to
acceptance.
 Certification must be in writing; may be made on
the check itself or on another instrument; no
particular words are necessary.
 Unlike refusal to accept a bill, refusal to certify a
check does not constitute dishonor.
 Other distinction between certification and
acceptance:
1. Certification: drawer and indorsers are
discharged
2. Acceptance: does not discharge secondary
parties until the acceptor has paid.
 Person who requested acceptance:
1. If DRAWER: any personal defense of the
drawer against the payee would be available
to the certifying bank against holders not in
due course.
2. If HOLDER: personal defense of drawer
against the payee would not be available to
all holders.
 Stop Order:
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  If check was certified at request of holder:
Stop order is inoperative.
 If check was certified at request of drawer:
Stop order is effective.
 Note: release of secondary parties when holder
secures certification applies only to indorsers at
the time of the certification, and not indorsers
subsequent to the certification.
Cases
New Pacific Timber v. Seneris
Quick Facts: A writ of execution was issued against
petitioner for failure to comply with his judgment
obligation. The sheriff levied upon personal properties of
the petitioner. Before the sale, petitioner deposited an
amount to satisfy the judgment obligation in cashier’s
check.
Doctrine: A cashier’s check is deemed as cash, therefore
auction sale should not push through anymore. Since the
check had been certified by the drawee bank, the funds
represented by the checks are transferred from the credit
of the maker to that of the payee or holder.
Wachtel v. Rosen
Doctrine: A check is of right presentable only for
payment, and the bank is under no obligation to certify it.
The refusal of a bank to certify the check is not dishonor.
Roman Catholic Bishop of Malolos v. IAC
Doctrine: A certified personal check is not legal tender
nor the currency stipulated, and therefore, cannot
constitute valid tender of payment.
Bulliet v. Allegheny Trust Co.
Quick Facts: A check was certified by the bank. When it
was presented to the bank, the latter refused to honor the
same by virtue of a stop payment order made by the
drawer.
Doctrine: An acceptor admits everything essential to the
validity of the bill, and on this ground he cannot, for
example, even set up the defense of want of consideration
of the parties.
Sutter v. Security Trust Co.
Quick Facts: X drew a check in favor of his wife. He had
the same certified by the bank. The wife then indorsed
the check to another person. Meanwhile, X made a stop
payment order. When the holder presented the check for
payment, the bank paid the check notwithstanding the
stop payment order.
Doctrine: The Bank was justified and legally called upon
to make payment to Mrs. X upon presentation and
demand as against the notice of the maker of the check to
stop payment, its obligation under the facts was likewise
to make the payment to the holder.
c. Distinction between surrender of check
upon payment therefor and negotiation
Campos Notes
 Delivery of the check by the holder to the
drawee bank upon payment is not
negotiation/indorsement. The holder is not
transferring title to the instrument but is merely
demanding that he bank discharge its obligation
to the holder.
 Delivery of the check by the holder to a bank
other than the drawee bank is
negotiation/indorsement.
d. Clearing of checks
Campos Notes
 Clearing: process of check collection.
 Banks are given by the CB a definite period
within which to return defective checks and any
check not so returned will be considered
cleared.
 Recall from Chapter 4:
1. Forgery of drawer’s signature: bank cannot
recover from both drawer and collecting
bank.
2. Forgery of indorsement: drawee bank
cannot recover from drawer, but may
recover from collecting bank, subject to
clearing house rules.
3. Material alteration: drawee bank cannot
recover from drawer, but can recover from
collecting bank provided it acts within the
period prescribed by the clearing house
rules.
6. Liability of secondary parties
Sec. 70. Effect of want of demand on principal debtor.
Presentment for payment is not necessary in order to
charge the person primarily liable on the instrument; but
if the instrument is, by its terms, payable at a special
place, and he is able and willing to pay it there at
maturity, such ability and willingness are equivalent to a
NEGOTIABLE INSTRUMENTS  A2015  PAGE 47 OF 78
tender of payment upon his part. But except as herein
otherwise provided, presentment for payment is
necessary in order to charge the drawer and indorsers.
Campos Notes
 Parties secondarily liable on the instrument are
the drawers and the indorsers. Their liability is
contingent on (1) presentment and (2) notice of
dishonor.
 Presentment: means that instrument is
presented at maturity to the party primarily
liable thereon for the purpose of obtaining
payment thereof.
a. Liability of drawer
Sec. 61. Liability of drawer. The drawer by drawing the
instrument admits the existence of the payee and his then
capacity to indorse; and engages that, on due
presentment, the instrument will be accepted or paid, or
both, according to its tenor, and that if it be dishonored
and the necessary proceedings on dishonor be duly taken,
he will pay the amount thereof to the holder or to any
subsequent indorser who may be compelled to pay it. But
the drawer may insert in the instrument an express
stipulation negativing or limiting his own liability to the
holder.
Campos Notes
 Liability of drawer is conditional. It agrees to pay
only if the following conditions are met:
1. Presentment
2. Dishonor of instrument
3. Taking of necessary proceedings for
dishonor:
a. Protest (in the case of foreign bills)
b. Notice of dishonor to the drawer
 A drawer, just like the maker of the note,
warrants the:
1. Existence of the payee
2. Payee’s capacity to indorse the instrument
at the time of its issuance. (XPN: where at
the request of a swindler the drawer makes
drafts payable to persons not known by him
to be fictitious, he does not warrant capacity
of swindler to indorse the names of the
fictitious payees).
Cases
PNB v. Picornell
Doctrine: The payee has a right of recourse against the
drawer of the bill after it has sent a notice of dishonor to
the drawer.
Banco Atlantico v. Auditor General
Quick Facts: The collecting bank paid the holder the
value of the checks in question. When the collecting bank
tried to collect from the drawee bank, the latter refused to
honor the check because it was materially altered. The
collecting bank then sued the drawer to recover the
amount it had paid the holder.
Doctrine: Nothwithstanding the dishonor of the check by
the drawee, the drawer cannot be held liable because the
case involved a materially altered check.
It is apparent that the said checks were fraudulently
altered as to their amounts and, therefore, wholly
inoperative. No right of payment thereof against any
party thereto could have been acquired by the collecting
bank.
Mc Cornack v. Central State Bank
Quick Facts: The drawer in this case was defrauded into
issuing a check in favor of a fictitious person. Later on, the
check was withdrawn and the amount thereof was
charged by the drawee to the drawer’s account. The
drawer then sued the drawee bank to recover.
Doctrine: The drawee bank should bear the loss. A check
payable to the order of a fictitious person with the
knowledge of the drawer is payable to bearer. But where
the fact that it is payable to a fictitious person is unknown
to the drawer, that bank upon which it is drawn, or paying
it, is in no different position than where it pays a check
payable to a real party upon a forged instrument. Sec 61
of the NIL is not for the benefit of the drawee, but for the
protection of holders of the paper in case the drawee
refuses to pay. It provides, not only that the drawer
admits the existence of the payee and his capacity to
indorse, but that he engages that upon dishonor and the
necessary proceedings thereon he will pay the amount to
the holder or any subsequent indorser who may be
compelled to pay it. There is here no engagement to pay
the amount to a drawee who has honored the check.
b. Liability of qualified indorser and one negotiating
by delivery.
Sec. 65. Warranty where negotiation by delivery and so
forth.—Every person negotiating an instrument by
delivery or by a qualified indorsement warrants:
(a) That the instrument is genuine and in all
respects what it purports to be;
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 (b) That he has a good title to it;
(c) That all prior parties had capacity to
contract;
(d) That he has no knowledge of any fact which
would impair the validity of the instrument or render it
valueless.
But when the negotiation is by delivery only, the
warranty extends in favor of no holder other than the
immediate transferee.
The provisions of subdivision (c) of this section
do not apply to a person negotiating public or
corporation securities other than bills and notes.
Campos Notes
 A qualified indorsement is made by adding the
words “without recourse” or words of similar
import, to the indorser’s signature, and
constitutes the indorser as mere assignor of the
title to the instrument.
 In negotiation by delivery, even if the negotiator
did not sign the instrument, he would be liable
under Sec. 65. This is an exception to Sec. 18, the
rule which says that no person is liable whose
signature does not appear thereon.
 The qualified indorser and one who negotiates
by delivery do not undertake to pay the
instrument in the event of its dishonor. He only
passes the title, without incurring liability.
 However, he is liable to his transferee is the
instrument is forged, material alteration, even in
case of the real defense of non-delivery of an
incomplete instrument.
 GR: Sec. 65(a) could cover most real defenses
and such personal defenses as would fall within
the meaning of “genuine” and “in all respects
what it purports to be.”
d. Liability of a general or unqualified indorser.
Sec. 66. Liability of general indorser. - Every indorser
who indorses without qualification, warrants to all
subsequent holders in due course:
(a) The matters and things mentioned in
subdivisions (a), (b), and (c) of the next preceding
section; and
(b) That the instrument is, at the time of his
indorsement, valid and subsisting;
And, in addition, he engages that, on due
presentment, it shall be accepted or paid, or both, as the
case may be, according to its tenor, and that if it be
dishonored and the necessary proceedings on dishonor
be duly taken, he will pay the amount thereof to the
holder, or to any subsequent indorser who may be
compelled to pay it.
Sec. 67. Liability of indorser where paper negotiable by
delivery.—Where a person places his indorsement on an
instrument negotiable by delivery, he incurs all the
liability of an indorser.
Sec. 63. When a person deemed indorser. - A person
placing his signature upon an instrument otherwise than
as maker, drawer, or acceptor, is deemed to be indorser
unless he clearly indicates by appropriate words his
intention to be bound in some other capacity.
Campos Notes
 A general indorser makes two contracts: (1) an
assignment or sale of the instrument, and (2) a
special contract of indorsement.
 Hence, he is liable not only as a vendor but also
on his contract of indorsement.
 His liability on the special contract of
indorsement is similar to that of the drawer and
is expressed in the second paragraph of Sec. 66.
He is secondarily liable unlike the qualified
indorser.
Cases
Adolph Ramish, Inc. v. Woodruff (1934)
Quick Facts: Craig and Woodruff exchanged negotiable
notes between them in the amount of $10,000. Craig
negotiated Woodruff’s note to plaintiff Adolph Ramish.
Plaintiff sued the defendant. The defendant claims Craig
only delivered the note to Adolph for inspection and
investigation, and if he has any interest therein, it was
only as a collateral security. It is to be noted that at the
back of the note, the signature of indorser Craig appears.
Doctrine: The signature of the payee is a blank
indorsement which passes title to the transferee and is
also a promise to pay on default of the maker.
Wachovia Bank and Trust Co. v. Crafton (1921)
Quick Facts: Crafton, as indorser, denies liability on the
note alleging that it was for an amount won in gambling.
Doctrine: As a general rule, instruments issued for an
illegal consideration, are void. Being void, no one can
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enforce a claim through such note. However, such
principle cannot extend to an innocent indorsee for value
and a holder in due course claiming against the indorser.
Horowitz v. Wollowitz, et al. (1908)
Quick Facts: After presentment and notice, Horowitz
filed an action against the indorsers. The indorsers raised
the defense that the note was void because of usury.
Doctrine: The rule is that an unqualified indorser
warrants that the instrument that the instrument itself
and all signatures prior to his are genuine.
e. Liability of restrictive indorser.
Campos Notes
 Liability depends on what kind of restrictive
indorsement he made.
 If it prohibits further negotiation, instrument
ceases to be negotiable but he is still liable to his
immediate indorsee as an unqualified indorser.
 If the indorsee is made an agent of the indorser,
an indorsee subsequent to the restrictive
indorsee acquires only the rights of the latter,
and cannot acquire rights antagonistic to the
restrictive indorser, hence the latter cannot be
liable to the indorsees under Sec. 65 or 66.
f. Order of liability among indorsers.
Sec. 68. Order in which indorsers are liable. - As respect
one another, indorsers are liable prima facie in the order
in which they indorse; but evidence is admissible to show
that, as between or among themselves, they have agreed
otherwise. Joint payees or joint indorsees who indorse
are deemed to indorse jointly and severally.
Campos Notes
 Liable prima facie in the order they indorse.
 Example: Instrument is payable to order of A.
Order of indorsement is A > B > C > D > E > F > X.
In case of dishonor, X may go against any
indorser. If X sues D, then D can go after A, B, or
C, but not E and F who are subsequent indorsers.
 Holder is not bound by Sec. 68, he may sue any
of the indorsers regardless of the order of their
indorsements
7. LIABILITY OF ACCOMMODATION PARTY
Sec. 29. Liability of accommodation party. - An
accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of
lending his name to some other person. Such a person is
liable on the instrument to a holder for value,
notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation
party.
Sec. 63. When a person deemed indorser. - A person
placing his signature upon an instrument otherwise than
as maker, drawer, or acceptor, is deemed to be indorser
unless he clearly indicates by appropriate words his
intention to be bound in some other capacity.
Sec. 64. Liability of irregular indorser. - Where a person,
not otherwise a party to an instrument, places thereon
his signature in blank before delivery, he is liable as
indorser, in accordance with the following rules:
(a) If the instrument is payable to the order of a
third person, he is liable to the payee and to all
subsequent parties.
(b) If the instrument is payable to the order of
the maker or drawer, or is payable to bearer, he is liable to
all parties subsequent to the maker or drawer.
(c) If he signs for the accommodation of the
payee, he is liable to all parties subsequent to the payee.
Campos Notes
 An accommodation party is in effect the surety
of the accommodated party.
 He lends his name to enable the accommodated
party to obtain credit or to raise money.
 He receives to part of the consideration but he
assumes liability because he wants to
accommodate the party.
 Since he relationship is that of a surety and a
principal, the accommodation party is entitled to
reimbursement if he pays to the holder.
 Accommodation party’s liability is primary OR
secondary depending on whether he signs as a
maker, acceptor, drawer or indorser.
 Sec. 29 makes him liable to a holder for value
even if the latter knows that he is merely an
accommodation party. “Holder for value”
according to jurisprudence is held to mean only
holder in due course.
 A corporation, unless expressly authorized by its
charter, has no power to sign as accommodation
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 party and cannot be held liable by holder for
value. Officers who acted without authority are
liable personally.
Cases
Ingalls v. Marston, et al. (1922)
Quick Facts: Ingalls sued the defendants. Smith and Foss
denied liability on the ground that they only signed the
back thus they are merely indorsers and are entitled to
notice and demand.
Doctrine: A person who signs at the back of an
instrument and does not specify the manner in which
they intend to be bound is considered an indorser.
Indorsers, whether regular or irregular, are liable to the
payee and to all subsequent parties, and are entitled to
notice and demand.
West Rustland Trust Co. v. Houston (1932)
Quick Facts: Plaintiff bank knew that the defendants
were accommodation makers. Defendants contend their
liability is that of sureties only.
Doctrine: An accommodation maker is liable to a holder
for value, even if such holder at the time of taking of the
instrument knew him to be an accommodation party. An
accommodation maker is primarily and absolutely liable
to a holder for value. The previous rule, that if the holder
knew that a party had signed only as an accommodation
party then he must be treated only as a surety, had been
abolished.
Goodman v. Gaul (1923)
Doctrine: A party for whose accommodation a note is
given cannot enforce it against the accommodator.
Clark v. Sellner (1921)
Quick Facts: Sellner (maker), with two other persons,
signed a promissory note solidarily binding himself to
pay P12,000 to the order of R.N. Clark. The note became
due and was not paid. Sellner alleged that he did not
receive any part of the amount of the debt, and that he
was an accommodation party and was thus not liable
unless the note was negotiated, which was not done.
Doctrine: Sellner, by putting his signature on the note,
lent his name, not to the creditor, but to those who signed
with him placing himself in the same position and with
the same liability as the said signers. The phrase “without
receiving value therefor” in Sec. 29 of the NIL means
“without receiving payment for lending his name.” If, as in
the instant case, a sum of money was received by virtue of
the note, it is immaterial whether one of the signers has,
or has not, received anything in payment for the use of his
name.
Maulini et al. v. Serrano (1914)
Quick Facts: The instrument in question is a note
allegedly indorsed by Serrano to Maulini. Serrano was
never the real owner of the note. His name was only used
as a vehicle by which the naked title to the note passed
from the borrowers to the lender (Maulini who furnished
the money in consideration of the note). Serrano was paid
for his services in negotiating the loan between Maulini
and the makers of the note.
Doctrine: Where an indorsement is made as a favor to
the indorsee, who requests it, not to secure payment, but
to relieve himself from a distasteful situation, and where
the only consideration for such indorsement passes from
the indorser to the indorsee, the situation does not
present one creating an accommodation indorsement,
nor one where there is a consideration sufficient to
sustain an action on the indorsement.
The trial court misunderstood the definition of the
accommodation party in NIL. The accommodation
referred to by the NIL is not one to the person who takes
the note.
PNB v. Maza (1925)
Quick Facts: Maza and Mecenas executed 5 promissory
notes allegedly for the benefit of one Echaus. When the
bank demanded payment they refused saying they did
not negotiate them to the bank. They admit the due
execution of the notes. The Court ruled against them.
Doctrine: The most plausible defense is that they are
merely accommodation parties. However, even then, they
are still primarily liable on the note, as if he were himself
financially interested in the transaction. Even if they did
not receive the value of the promissory notes.
Acuña v. Veloso (1927)
Quick Facts: Veloso undertook to help Xavier to secure a
loan from Gonzales. They solidarily executed a note in
favor of Gonzales. Gonzales negotiated the note to Acunñ a.
Acunñ a sought payment. Can he recover from Veloso, who
only accommodated Xavier?
Doctrine: Yes. Value was given for the note, this is
enough. As between Veloso and Xavier, the former is
entitled to all the rights of a surety, and Xavier is the real
debtor. But as to the creditor (and his transferee) who
gave value for the note, Veloso and Xavier are joint and
several makers.
Ang Tiong v. Ting, et al. (1968)
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Quick Facts: Lorenzo Ting made the note payable to cash
or bearer. Felipe Ang signed the back of the note (blank
indorsement). Ang Tiong received the check and
demanded payment but was refused.
Doctrine: A person placing his signature upon an
instrument otherwise than as a maker, drawer or
acceptor is a general indorser unless he clearly indicates
by appropriate words his intention to be bound in some
other capacity. Even assuming that Felipe Ang is only an
accommodation party he is still primarily liable.
Sadaya v. Sevilla (1967)
Doctrine: (1) A joint and several accommodation maker
of a negotiable promissory note may demand from the
principal debtor reimbursement for the amount that he
paid to the payee; and (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
against the principal debtor provided that (a) he made
the payment by virtue of a judicial demand, or (b) a
principal debtor is insolvent.
Prudencio v. CA (1986)
Doctrine: An accommodation party is liable only to a
holder in due course, and not to every “holder for value.”
8. LIABILITY OF AN AGENT
Sec. 19. Signature by agent; authority; how shown.—The
signature of any party may be made by a duly authorized
agent. No particular form of appointment is necessary for
this purpose; and the authority of the agent may be
established as in other cases of agency.
Sec. 20. Liability of person signing as agent, and so forth.
—Where the instrument contains or a person adds to his
signature words indicating that he signs for or on behalf
of a principal or in a representative capacity, he is not
liable on the instrument if he was duly authorized; but
the mere addition of words describing him as an agent, or
as filling a representative character, without disclosing
his principal, does not exempt him from personal liability.
Sec. 21. Signature by procuration; effect of.—A signature
by "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.
Sec. 69. Liability of an agent or broker. - Where a broker
or other agent negotiates an instrument without
indorsement, he incurs all the liabilities prescribed by
Section Sixty-five of this Act, unless he discloses the name
of his principal and the fact that he is acting only as agent.
Campos Notes
 A principal who is undisclosed in the instrument
cannot be held liable. (cf. Sec. 18)
 The signing agent will be held liable either as a
maker, acceptor, drawer or indorser, as the case
may be.
 Where an agent negotiates an instrument
without indorsing it, and he does not disclose his
principal nor that he is merely an agent, he is
liable like one who negotiates by delivery under
Sec. 65 and not as a general indorser under Sec.
66.
 Four situations:
1. Agent signs his name, nowhere on instrument
does he disclose that he is acting in
representative capacity nor the name of a third
party for whom he acts as agent  no action will
lie against the principal, agent is personally
liable to the holder. Remedy: against principal
who authorized him.
2. Agent signs his name, indicates that he is acting
in a representative capacity, but does not
disclose the name of third party who might be
principal.  parol evidence not admissible to
avoid personal liability. Remedy: against
principal who authorized him. E.g.:
“Pedro Reyes, treasurer”, no name of the firm.
3. Agent signs his name without indicating that he
acted as agent, but somewhere on the
instrument he has disclosed the name of a third
person who might be his principal.  Agent is
presumptively liable, but parole evidence is
admissible to show that he was acting as agent
of such third person.
4. Agent discloses that he is acting in a
representative capacity and he also discloses the
name of third person who might be his principal.
 Parol evidence is admissible to exonerate the
agent from personal liability. Example:
“Manila Publishing Co., by Pedro Reyes,
Treasurer” or “Pedro Reyes, Treasurer, For and
in behalf of Manila Publishing Co.”
 Principal is bound if agent had
authority to sign for it. If no authority exists, and the
principal is not guilty of estoppel, no liability attaches on
the principal; this would have the same effect as forgery,
the agent will be personally liable.
Cases
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 Austin Nichols & Co. v. Gross (1923)
Quick Facts: Gross was being made personally liable by
the payee Austin Nichols for non-payment. The check,
which would show that the signature was not of agent
Gross himself but of the company’s, was excluded.
Doctrine: All that is necessary between the original
parties is that these words should be such as to
reasonably apprise or put on notice the payee that it was
or might be the check of the company, and not of the
agent. By such proof the true contract is revealed, and the
intention of the parties effected. Whether the check
contains words indicating that he signed for and in behalf
of a principal or in a representative capacity, might be
proved by evidence outside the check for the purpose of
carrying out the intention of the parties and establishing
just what the contract was, not to vary it, but to ascertain
it.
New George Natl. Bk. Of Albany v. J&G Lippmann
(1928)
Quick Facts: Plaintiff bank brings the action against
defendant company or in the alternative its president L.J.
Lippmann (as agent).
Doctrine: An agent can only be made personally liable on
the instrument if he signed without authority. No finding
whether he signed with or without authority.
Pratt v. Hopper (1936)
Quick Facts: Mayer signed in his individual capacity and
did not disclose the other interested parties. But Pratt
sued Mayer, Hopper, Payne and Trimble for the deficiency
of the note. Suit against the other parties is dismissed,
they are not liable under the promissory note.
Doctrine: The general rule in civil law is that an
undisclosed principal may be held liable in contracts. In
NIL, an undisclosed principal cannot be held liable in case
of a negotiable instrument.
Insular Drug v. PNB (1933)
Quick Facts: PNB allowed the agent of Insular to
withdraw the checks entrusted to it. They also allowed
the agent’s wife and clerk to withdraw. Hence, PNB is
liable.
Doctrine: The right of an agent to indorse commercial
paper is a very responsible power and will not be lightly
inferred. A salesman with authority to collect money
belonging to his principal does not have the implied
authority to indorse checks received in payment. Any
person taking checks made payable to a corporation,
which can act only by agents does so at his peril, and
must abide by the consequences if the agent who
indorses the same is without authority.
PB Comm v. Aruego (1981)
Quick Facts: To facilitate the payment of the printing of
the publication “World Current Events”, Aruego obtained
credit accommodations from plaintiff bank. The printer
obtained payment through drafts from the bank for its
services, then the bank sent the draft to Aruego for his
acceptance. He is now sought to be made liable for the
drafts.
He argued that he was acting in a representative capacity
as president of Philippine Education Foundation
Company.
Doctrine: The court did not side with him. An inspection
of the drafts show that Aruego did not disclose that he
was signing as a representative, he merely signed his own
name
Sec. 20 of NIL: “Where the instrument contains or a
person adds to his signature words indicating that he
signs for or on behalf of a principal or in a representative
capacity, he is not liable on the instrument if he was duly
authorized; but the mere addition of the words
describing him as an agent of or as filing a representative
character, without disclosing his principal, does not
exempt him from personal liability.”
9. SIGNATURE BY TRADE NAME
Sec. 18. Liability of person signing in trade or assumed
name.—No person is liable on the instrument whose
signature does not appear thereon, except as herein
otherwise expressly provided.
But one who signs in a trade or assumed name
will be liable to the same extent as if he had signed in his
own name.
10. PRESENTMENT FOR ACCEPTANCE
a. When necessary; effect of non-presentment.—
Sec. 143. When presentment for acceptance must be
made.—Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any
other case, where presentment for acceptance is
necessary in order to fix the maturity of the instrument;
or
(b) Where the bill expressly stipulates that it shall be
presented for acceptance; or
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 (c) Where the bill is drawn payable elsewhere than at
the residence or place of business of the drawee.
In no other case is presentment for acceptance
necessary in order to render any party to the bill liable.
Sec. 144. When failure to present releases drawer and
indorser.—Except as herein otherwise provided, the
holder of a bill which is required by the next preceding
section to be presented for acceptance must either
present it for acceptance or negotiate it within a
reasonable time. If he fails to do so, the drawer and all
indorsers are discharged.
Sec. 193. Reasonable time, what constitutes.—In
determining what is a "reasonable time" regard is to be
had to the nature of the instrument, the usage of trade or
business with respect to such instruments, and the facts
of the particular case.
Campos Notes
 Presentment for acceptance refers only to Bills
of Exchange (BoE). It does not apply to
Promissory Notes (PN).
 Presentment means “the production or
exhibition of the BoE to the drawee for the
purpose of obtaining his acceptance or his
assent to the order of the drawer.”
 Sec. 143 enumerates the instances where
presentment is necessary.
 Presentment must be made in a “reasonable
time”, else the drawers and indorsers will be
discharged of liability.
 Bills duly presented or acceptance under this
section and not accepted will be deemed bills
dishonored by non-acceptance.
 T-bills or bills payable at a day certain or at a
fixed time after its date need not be presented
for acceptance. If holder wishes to present, and
the drawee refuses to accept, the bill will be
deemed dishonored by non-acceptance.
 Checks are not meant to be presented for
acceptance or certification. If so presented and
certification refused, they will NOT be deemed
dishonored. Same rule applies to bills payable on
demand.
b. How and when made.—
Sec. 145. Presentment; how made.—Presentment for
acceptance must be made by or on behalf of the holder at
a reasonable hour, on a business day and before the bill is
overdue, to the drawee or some person authorized to
accept or refuse acceptance on his behalf; and
(a) Where a bill is addressed to two or more drawees
who are not partners, presentment must be made to them
all unless one has authority to accept or refuse
acceptance for all, in which case presentment may be
made to him only;
(b) Where the drawee is dead, presentment may be
made to his personal representative;
(c) Where the drawee has been adjudged a bankrupt
or an insolvent or has made an assignment for the benefit
of creditors, presentment may be made to him or to his
trustee or assignee.
Sec. 146. On what days presentment may be made.—A
bill may be presented for acceptance on any day on which
negotiable instruments may be presented for payment
under the provisions of Sections seventy-two and eighty-
five of this Act. When Saturday is not otherwise a holiday,
presentment for acceptance may be made before twelve
o'clock noon on that day.
Campos Notes
 Presentment for acceptance - made by the
proper person to the proper party at the time
and in the manner provided by law; otherwise it
would be irregular and ineffective and the
drawee’s refusal will not be a dishonor of the
bill.
 Must be made at a reasonable hour on a
business day, or before noon on a Saturday, BUT
not on a Sunday or a holiday.
 No prescribed place where presentment for
acceptance must be made.
 If drawee is dead, presentment to his
representative is merely permissive, because
Section 48(a) excuses presentment in such a
case.
 If drawee is insolvent, two alternative methods
of presentment: to insolvent drawee himself OR
his trustee or assignee. Presentment is not
excused.
c. How and when made.—
Sec. 148. Where presentment is excused.—Presentment
for acceptance is excused and a bill may be treated as
dishonored by non-acceptance in either of the following
cases:
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 (a) Where the drawee is dead, or has absconded,
or is a fictitious person or a person not having capacity to
contract by bill.
(b) Where, after the exercise of reasonable
diligence, presentment can not be made.
(c) Where, although presentment has been
irregular, acceptance has been refused on some other
ground.
Sec. 147. Presentment where time is insufficient.—
Where the holder of a bill drawn payable elsewhere than
at the place of business or the residence of the drawee
has no time, with the exercise of reasonable diligence, to
present the bill for acceptance before presenting it for
payment on the day that it falls due, the delay caused by
presenting the bill for acceptance before presenting it for
payment is excused and does not discharge the drawers
and indorsers.
Campos Notes
 Sec. 147 excuses delay in making presentment.
 Example: Delay of the mails is sufficient excuse
for omission to immediately present a bill for
acceptance.
 Sec. 148 excuses non-presentment for
acceptance.
 Example: A bill presented after business hours
(irregular presentment) but drawee refuses to
accept because drawer has no sufficient funds
(refused on some other ground), the bill may be
treated as dishonored.
d. Dishonor and its effects.—
Sec. 149. When dishonored by non-acceptance.—A bill is
dishonored by non-acceptance:
(a) When it is duly presented for acceptance and
such an acceptance as is prescribed by this Act is refused
or can not be obtained; or
(b) When presentment for acceptance is excused
and the bill is not accepted.
Sec. 150. Duty of holder where bill not accepted.—Where
a bill is duly presented for acceptance and is not accepted
within the prescribed time, the person presenting it must
treat the bill as dishonored by non-acceptance or he loses
the right of recourse against the drawer and indorsers.
Sec. 151. Rights of holder where bill not accepted.—
When a bill is dishonored by non-acceptance, an
immediate right of recourse against the drawer and
indorsers accrues to the holder and no presentment for
payment is necessary.
Sec. 89. To whom notice of dishonor must be given.—
Except as herein otherwise provided, when a negotiable
instrument has been dishonored by non-acceptance or
non-payment, notice of dishonor must be given to the
drawer and to each indorser, and any drawer or indorser
to whom such notice is not given is discharged.
Sec. 117. Effect of omission to give notice of non-
acceptance.—An omission to give notice of dishonor by
non-acceptance does not prejudice the rights of a holder
in due course subsequent to the omission.
Campos Notes
 A bill is dishonored if an acceptance “is refused
or cannot be obtained.”
 When a bill is dishonored by non-acceptance
there is no need to present the instrument again
for payment. The holder acquires an “immediate
right of recourse against the persons secondarily
liable,” provided he gives them the notice of
dishonor prescribed by Sec. 89.
 Failure to send notice of dishonor will discharge
the secondary parties without prejudice to
subsequent holders in due course.
11. PRESENTMENT FOR PAYMENT
a. When presentment necessary; effect of non-
presentment.—
Sec. 70. Effect of want of demand on principal debtor.—
Presentment for payment is not necessary in order to
charge the person primarily liable on the instrument; but
if the instrument is, by its terms, payable at a special
place, and he is able and willing to pay it there at
maturity, such ability and willingness are equivalent to a
tender of payment upon his part. But except as herein
otherwise provided, presentment for payment is
necessary in order to charge the drawer and indorsers.
Campos Notes
 Presentment for payment is “the presentation of
the instrument, whether a note or a bill, to the
person primarily liable, for the purpose of
demanding and obtaining payment thereof.”
 Presentment for payment need not be made in
order to charge the primary party.
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  The maker and acceptor are obliged to pay even
though no demand has been made on its due
date; and they remain liable even when it is
already overdue.
 Instruments payable at a special place; the ability
and willingness of primary party to pay at such
special place constitutes a tender of payment.
 This relieves the primary party from payment of
costs in case of suit, or payment of interest
accruing after maturity. It also results in the
discharge of secondary parties.
b. When presentment not necessary.—
(1) As to drawer.
Sec. 79. When presentment not required to charge the
drawer.—Presentment for payment is not required in
order to charge the drawer where he has no right to
expect or require that the drawee or acceptor will pay the
instrument.
Campos Notes
 This section gives an instance when drawer is
not discharged inspite of lack of presentment.
 Right to require payment means that there is a
pre-existing contract between the drawer and
the drawee which makes it the duty of the latter
to pay.
 Example: If drawer has no funds or insufficient
funds, or if he stopped payment, he has no right
to require drawee to pay.
 If drawer and drawee are the same, the bill is
treated as a note. Presentment is not required,
drawer is thus primarily liable, as a maker.
 Right to expect is present if, although there is no
contractual duty of drawee to pay, a course of
dealing between drawer and drawee justifies the
reasonable expectation on the part of the drawer
that the drawee will pay.
 Example: If drawee is insolvent, and the drawer
knows this, the latter has no right to expect that
the former will pay.
(2) As to indorser.
Sec. 80. When presentment not required to charge the
indorser.—Presentment is not required in order to charge
an indorser where the instrument was made or accepted
for his accommodation and he has no reason to expect
that the instrument will be paid if presented.
Campos Notes
 Normally, the primary debtor is the primary
party, but in situation contemplated by this
section, the indorser himself is the primary
debtor.
 The indorser is not entitled to presentment and
has no right to demand payment from the
accommodation maker or acceptor.
 To excuse presentment, two conditions must
concur: (1) the instrument was made or
accepted for the indorser’s accommodation AND
(2) he has no reason to expect its payment.
 Accommodation for his sole benefit is not
necessary, partial benefit is enough.
 This section does not include an indorser for
whom a bill is drawn. Hence, the accommodated
indorser cannot be charged unless presentment
is made to drawee.
(3) As to all secondary parties.
Sec. 82. When presentment may be dispensed with.—
Presentment for payment is dispensed with:
(a) Where, after the exercise of reasonable
diligence, presentment, as required by this Act, cannot be
made;
(b) Where the drawee is a fictitious person;
(c) By waiver of presentment, express or
implied.
Sec. 151. Rights of holder where bill not accepted.—
When a bill is dishonored by non-acceptance, an
immediate right of recourse against the drawer and
indorsers accrues to the holder and no presentment for
payment is necessary.
Sec. 111. Waiver of protest.—A waiver of protest,
whether in the case of a foreign bill of exchange or other
negotiable instrument, is deemed to be a waiver not only
of a formal protest but also of presentment and notice of
dishonor.
Campos Notes
 Example: Drawee bank was closed by the
government = presentment dispensed with.
 Insolvency of drawee = NOT dispensed with.
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  Fictitious person = no presentment can possibly
be made. Sec. 130 allows the holder to treat it as
a bill or a note, and hold the drawer liable as
maker, hence, no presentment necessary.
 Waiver of presentment “may be implied from
any conduct or act of the drawer which misleads
or prevents the holder from treating the bill as
he otherwise would.”
 Examples of waiver: Drawer promises from time
to time to pay the bill, or makes partial payment
knowing the bill has not been presented to
drawee, or indorser gives consent to holder that
the time of payment may be extended to the
maker.
 A tender of renewal note by an indorser implies
a waiver of presentment of the original.
 A waiver of presentment by the maker of a note
does not operate as a waiver by the indorser.
 Waiver of notice of dishonor doesnt include
waiver of presentment & vice versa.These 2 acts
are and independent from each other.Both are
conditions precedent to the liability of 2ndary
parties.
 But waiver of protest carries with it both waiver
of presentment and waiver of notice of dishonor.
c. Date and time of presentment of instrument
bearing fixed maturity.—
Sec. 71. Presentment where instrument is not payable on
demand and where payable on demand.—Where the
instrument is not payable on demand, presentment must
be made on the day it falls due. . . .
Sec. 85. Time of maturity.—Every negotiable instrument
is payable at the time fixed therein without grace. When
the day of maturity falls upon Sunday or a holiday, the
instruments falling due or becoming payable on Saturday
are to be presented for payment on the next succeeding
business day except that instruments payable on demand
may, at the option of the holder, be presented for payment
before twelve o'clock noon on Saturday when that entire
day is not a holiday.
Sec. 86. Time; how computed.—When the instrument is
payable at a fixed period after date, after sight, or after
that happening of a specified event, the time of payment
is determined by excluding the day from which the time is
to begin to run, and by including the date of payment.
Sec. 194. Time, how computed; when last day falls on
holiday.—Where the day, or the last day for doing any act
herein required or permitted to be done falls on a Sunday
or on a holiday, the act may be done on the next
succeeding secular or business day.
Campos Notes
 If instrument has a fixed date of maturity,
presentment must be made on the day the
instrument falls due.
 If made before maturity, not effective. A mere
notice to the makers reminding them of the date
of maturity is not proper presentment.
 If made after maturity, secondary parties will be
discharged, unless delay is excused by law.
 Presentment cannot be made on a Sunday or
holiday. If bill matures on such a day, must be
presented on next business day.
 If it falls due on a Saturday, and it is a time
instrument, then present on Monday or next
business day if Monday is a holiday.
 If it falls due on a Friday which happens to be a
holiday, it “becomes payable” on Saturday, hence
the Saturday rule applies.
 If it is payable on demand, presentment can be
made on any business day, and even on a
Saturday before noon. If Saturday afternoon, the
maker is not in default.
 In determining proper date of presentment, the
date from which the time is to run is excluded
and the date of payment included.
 A suit instituted on the day of maturity is
premature because he has the whole day within
which to pay.
d. Date of presentment of demand notes.—
Sec. 71. Presentment where instrument is not payable on
demand and where payable on demand.—Where the
instrument is not payable on demand, presentment must
be made on the day it falls due. Where it is payable on
demand, presentment must be made within a reasonable
time after its issue, except that in the case of a bill of
exchange, presentment for payment will be sufficient if
made within a reasonable time after the last negotiation
thereof.
Campos Notes
 For demand notes, the time at which reasonable
time begins to run is the date of issue of the note.
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  A note, indorsed after its maturity is, as to the
person so indorsing, payable on demand and
must be presented within a reasonable time to
charge him.
e. Date of presentment of demand bills of exchange.—
Campos Notes
 Unlike demand notes, a demand bill of exchange
must be presented at a reasonable time after the
last negotiation thereof.
 Hence, liability of the drawer and indorsers of
demand bill may be preserved indefinitely
provided presentment is made within
reasonable time from last negotiation.
 But under Sec. 53, where an instrument payable
on demand is negotiated an unreasonable length
of time after its issue the holder is not a holder in
due course, and therefore subject to personal
defenses.
Columbian Banking v. Bowen (1908)
Quick Facts: Bowen indorsed to Trabert, then Trabert
indorsed and sold the “$400 draft” (instrument) to
plaintiff bank. Plaintiff presented the draft for payment to
Banker’s Ntl. Bk. Of Chicago which refused to pay. Notice
of protest was given. One of the defenses was that the
draft was not presented during banking hours, that after
taking its course through the clearing house it was
presented to drawee. However, such is the way of doing
business in Chicago.
Doctrine: What constitutes business hours of a bank has
reference to the general customs at the place of the
particular transaction in question. Judgment for the
plaintiff.
f. Date of presentment of checks.—
Sec. 185. Check, defined.—A check is a bill of exchange
drawn on a bank payable on demand. Except as herein
otherwise provided, the provisions of this Act applicable
to a bill of exchange payable on demand apply to a check.
Sec. 186. Within what time a check must be presented.—
A check must be presented for payment within a
reasonable time after its issue or the drawer will be
discharged from liability thereon to the extent of the loss
caused by the delay.
Campos Notes
 A check is intended for immediate use, hence, it
must be presented within a reasonable time.
 Unlike ordinary BoE, the transfer of a check to
successive holders does not extend the time of
presentment.
 However, the drawer is discharged by delay in
presentment only to the extent of any loss
caused by such delay. If no such loss, he remains
liable despite delay in presentment.
 Example: Loss caused by the insolvency of the
drawee bank which could have been prevented
by prompt payment before the insolvency.
 Sec. 186 only covers drawers. Indorsers are
covered by the general provisions on bills of
exchange.
o For indorsers, the time to be considered
in determining reasonableness of time
of presentment is the date of last
negotiation and not date of issue as in
the case of checks.
 Despite lapse of reasonable time, the check
remains effective as an order of the drawer to
drawee bank to pay the holder. But usually,
banks refuse to honor checks which has
remained outstanding for more than 6 months
(so check is then considered stale).
 A check with the word “memorandum” written
across its face need not be presented to charge
the drawer thereof.
Cases
Fick v. Jones (1936)
Quick Facts: The check in question was not presented to
the bank. It was however presented to the drawer, who
refused to pay it. Respondent contends that failure to
present a check to the drawee does not release the
drawer.
Doctrine: The action against the drawer must fail
because presentment, demand, and notice of dishonor
are essential prerequisites for an action against the
drawer.
Gordon v. Levine (1907)
Quick Facts: A check dated on a Saturday was presented
on the next Monday, but drawee bank told the holder that
there were no funds. The check was indorsed that same
afternoon to Saievitz who then indorsed it to Rootstein,
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who deposited the check in his bank. The depositor’s
bank presented the check on Friday the same week to the
drawee bank but the same was closed.
Doctrine: Where the drawer, the drawee and the 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 close of the banking hours on the day after
issuance. Presentment on Friday is not reasonable time, it
should have been presented the same Monday before
close of banking hours.
Morrison v. McCartney
Quick Facts: Check was indorsed to Morrison on Oct. 2.
When plaintiff Morrison went to drawee for payment on
Oct. 3, the bank was closed or stopped payment. Then the
drawer withdrew all his funds days after. Next
presentment was made only on Jan. 29. Drawee refused
payment. The question is whether the payee is entitled to
recover despite failure to present the day after it was
indorsed to them.
Doctrine: The drawer is at all times liable to pay the
check, if the holder can show that the drawer has
sustained and can sustain no loss or damage from the
omission to demand payment at an earlier date.
PNB v. Seeto (1952)
Quick Facts: Seeto cashed the P5K check and indorsed it
to PNB Surigao. PNB Surigao mailed the check to PNB
Cebu only ten days after it was indorsed to them.
Drawer’s account with PNB Cebu had insufficient funds
therefore the check was dishonored. PNB Surigao sought
to refund the amount paid to Seeto. The court ruled that
Seeto was discharged of liability.
Doctrine: The proposition that an indorser of a check is
not discharged from liability for an unreasonable delay in
presentation for payment is contrary to the negotiability
of negotiable instruments. They are supposed to be
passed on with promptness in the ordinary course of
business transactions; not to be retained or kept for such
time as the holder may want, otherwise the smooth flow
of commercial transactions would be hindered.
Crystal v. Court of Appeals (1976)
Quick Facts: This case is an MR of SC decision holding
petitioner’s redemption of his property, which was
acquired by private respondents in an execution sale,
invalid on the ground that the check used in paying the
redemption price had either been dishonored or stale
(i.e., value unrealized)
Doctrine: The CA below found that the check was
dishonored but at the same time it also found that the
check had become stale. For a check to be dishonored,
and for it to be stale for not being presented at all in time,
are incompatible developments that naturally have
different legal consequences. If the check has been
dishonored, then the redemption is null and void. If it had
become stale, then it is imperative that the circumstances
which had caused its non-presentment be determined.
Case remanded.
g. When delay of presentment excused.—
Sec. 81. When delay in making presentment is excused.—
Delay in making presentment for payment is excused
when the delay is caused by circumstances beyond the
control of the holder and not imputable to his default,
misconduct, or negligence. When the cause of delay
ceases to operate, presentment must be made with
reasonable diligence.
Campos Notes
 Inevitable or unavoidable causes not
attributable to the fault of the holder and making
the presentment morally or physically
impossible may excuse delay in presentment.
 Examples: strong typhoons, malignant disease,
war, suspension of commercial relations by
public enemy, and impracticability of finding the
maker at his place of residence.
 The duty to make presentment is revived after
removal of the cause.
h. Manner of presentment.—
Sec. 74. Instrument must be exhibited.—The instrument
must be exhibited to the person from whom payment is
demanded, and when it is paid, must be delivered up to
the party paying it.
Campos Notes
 Exhibition is inseparable from surrender of
instrument BUT, when the maker has expressly
waived demand, presentment, protest, and
notice of protest and non-payment of the note,
the requirement of exhibition is unnecessary.
 Demand by telephone is not sufficient to charge
indorser, because presentment is inoperative.
 Personal demand by holder, if instrument is not
with him at the time, is not due presentment.
But if he is refused on some other ground, there
is a waiver of the payor’s right to exhibition.
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  If instrument lost or destroyed, holder is
excused from exhibiting; he may recover only if
he executes a sufficient bond.
i. What constitutes sufficient presentment.—
Sec. 72. What constitutes a sufficient presentment.—
Presentment for payment, to be sufficient, must be made:
(a) By the holder, or by some person authorized
to receive payment on his behalf;
(b) At a reasonable hour on a business day;
(c) At a proper place as herein defined;
(d) To the person primarily liable on the
instrument, or if he is absent or inaccessible, to any
person found at the place where the presentment is
made.
(1) By whom.
Campos Notes
 Must be made by holder himself or by a person
authorized by him to receive payment.
 Holder may be the owner in his own right, or a
non-owner as a restrictive indorsee for the
benefit of a third person.
Crossed Checks.
 If two parallel lines are drawn across its face or
across a corner thereof = crossed check.
 If the name of a bank appears between parallel
lines, the check is said to be specially crossed,
and payment should be made only if presented
by the named bank.
 If no name appears between the parallel lines, it
is generally crossed, and payment should be
made only upon presentment by some bank.
 Presentment by anyone else would be improper,
and payment to such person by drawee bank
would be wrongful, so payee or holder must
deposit the crossed check in his bank so that the
latter may make the proper presentment. This
offers a measure of protection to drawer and
drawee bank.
 Negotiability is not affected by being crossed.
 May be negotiated from one person to another,
as long as the one who encashes the check with
the drawee bank is another bank (generally
crossed) or a specific bank (specially crossed).
 If the words “For Payee’s Account Only” are
written between the parallel lines, the bank
cannot credit to anyone else’s account except
only the payee’s account. Bank is liable in case it
is in violation.
Cases
Chan Wan v. Tan Kim
Quick Facts: Chan Wan presented two checks to drawee
bank but were dishonored. These were crossed checks
and thus the Court is of the opinion that they should have
been deposited with the bank mentioned in the crossing.
Doctrine: The drawer, in drawing the check, engaged that
“on due presentment, the check would be paid, and that if
it be dishonored, he will pay the amount thereof to the
holder. Wherefore, in the absence of “due presentment,”
the drawer did not become liable.
Associated Bk. V. CA
Quick Facts: Crossed checks were issued to Melissa’s
RTW. Merle, the proprietor of the RTW business did not
receive the check payments. The checks were apparently
deposited in Associated Bank, and the bank paid it out to
another person. Hence, she sues for recovery. The Court
rules in her favor.
Doctrine: The payee of the illegally encashed checks
should be allowed to recover directly from the bank
responsible for such encashment regardless of whether
or not the checks were actually delivered to the payee.
(2) Time of presentment.
Sec. 72. . . . Presentment for payment, to be sufficient,
must be made: . . .
(b) At a reasonable hour on a business day; . . .
Sec. 75. Presentment where instrument payable at bank.
—Where the instrument is payable at a bank,
presentment for payment must be made during banking
hours, unless the person to make payment has no funds
there to meet it at any time during the day, in which case
presentment at any hour before the bank is closed on that
day is sufficient.
Campos Notes
 Reasonable hour on a business day means office
hours if presentment is made at drawee’s or
maker’s place of business.
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  Usual hours before rest if presentment is place of
residence.
 If presentment made in a bank, during banking
hours.
 Banking hours is different from business hours.
Banking hours is when the bank is open for
transactions with the general public. Business
hours may go beyond banking hours and
involves work which does not involve dealing
with the public.
 If presented before or after the banking hours,
such presentment is ineffective if payment is
refused by the bank.
 But where the maker has no funds with the bank
to meet the instrument at any time on the date of
maturity, then even if presentment is made after
banking hours but during office hours of the
same day, it will be sufficient to charge the
secondary parties.
(3) Place of Presentment.
Sec. 73. Place of presentment.—Presentment for
payment is made at the proper place:
(a) Where a place of payment is specified in the
instrument and it is there presented;
(b) Where no place of payment is specified but
the address of the person to make payment is given in the
instrument and it is there presented;
(c) Where no place of payment is specified and
no address is given and the instrument is presented at the
usual place of business or residence of the person to
make payment;
(d) In any other case if presented to the person
to make payment wherever he can be found, or if
presented at his last known place of business or
residence.
Campos Notes
 General rule: presentment must be at specified
place, or address of payor indicated in
instrument, or usual place of business or
residence of payor.
 If there is no usual place of business or
residence, the holder has three options: (1)
wherever the payor may be found, (2) his last
known place of business, or (3) his last known
residence.
(4) To whom presentment must be made.
Sec. 72. . . . (d) To the person primarily liable on the
instrument, or if he is absent or inaccessible, to any
person found at the place where the presentment is
made.
Sec. 76. Presentment where principal debtor is dead.—
Where the person primarily liable on the instrument is
dead and no place of payment is specified, presentment
for payment must be made to his personal representative,
if such there be, and if, with the exercise of reasonable
diligence, he can be found.
Sec. 77. Presentment to persons liable as partners.—
Where the persons primarily liable on the instrument are
liable as partners and no place of payment is specified,
presentment for payment may be made to any one of
them, even though there has been a dissolution of the
firm.
Sec. 78. Presentment to joint debtors.—Where there are
several persons, not partners, primarily liable on the
instrument and no place of payment is specified,
presentment must be made to them all.
Campos Notes
 For PNs, must be presented to maker as the
primary party.
 For accepted bills, must be presented to acceptor
as the primary party thereon.
 For bills of checks payable on demand, usually
there will be no acceptor, but presentment for
payment will have to be made to the drawee,
although there is no primary party liable.
j. What constitutes dishonor by nonpayment.—
Sec. 83. When instrument dishonored by non-payment.—
The instrument is dishonored by non-payment when:
(a) It is duly presented for payment and
payment is refused or cannot be obtained; or
(b) Presentment is excused and the instrument
is overdue and unpaid.
Campos Notes
 An instrument is dishonored when not paid on
presentment, irrespective of how non-payment
results.
 Example: A promise to pay 5 days after
presentment constitutes a dishonor.
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k. Effect of dishonor by non-payment.—
Sec. 84. Liability of person secondarily liable, when
instrument dishonored.—Subject to the provisions of this
Act, when the instrument is dishonored by non-payment,
an immediate right of recourse to all parties secondarily
liable thereon accrues to the holder.
Campos Notes
 Dishonor is one of the facts which operates as a
condition precedent to the enforcement of the
liability of secondary parties.
 The immediate right of recourse against
secondary parties is further conditioned upon
giving of due notice of dishonor.
12. NOTICE OF DISHONOR
a. When necessary.—
Sec. 89. To whom notice of dishonor must be given.—
Except as herein otherwise provided, when a negotiable
instrument has been dishonored by non-acceptance or
non-payment, notice of dishonor must be given to the
drawer and to each indorser, and any drawer or indorser
to whom such notice is not given is discharged.
Campos Notes
 Notice of dishonor is bringing to the knowledge
of the drawer or the indorser of the instrument
(either verbally or in writing,) the fact that a
specified negotiable instrument, upon proper
proceedings taken, has not been accepted, or has
not been paid, and that the party notified is
expected to pay it.
 Purpose = notify the drawer and/or indorsers
that the holder is enforcing his right against
them.Without this notice, no secondary party
may be held liable, except in case provided by
law.
 To charge the indorser, the complaint must
allege and prove the presentment to the maker
and notice of dishonor, or the same are
dispensed with, or are not required. The burden
is on the holder to prove.
Cases
Gullas v. PNB (1935)
Quick Facts: PNB applied Atty. Gullas’ bank deposits to
cover the treasury warrants which Gullas had indorsed
when the same treasury warrants were dishonored by
the Insular Treasurer. Was PNB right to set off the amount
of the treasury warrants from Gullas’ bank deposits? No,
it was a premature action in the bank’s part.
Doctrine: 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,
notice should actually be given to him, as an indorser in
order that he might protect his interests. The general
indorser of a negotiable instrument engages that if it be
dishonored and the necessary proceedings of dishonor be
duly taken, he will pay the amount thereof to the holder.
Hence, notice of dishonor is necessary in order to charge
an indorser and that the right of action against him does
not accrue until the notice is given.
b. Form and contents of notice.—
Sec. 95. When notice sufficient.—A written notice need
not be signed and an insufficient written notice may be
supplemented and validated by verbal communication. A
misdescription of the instrument does not vitiate the
notice unless the party to whom the notice is given is in
fact misled thereby.
Sec. 96. Form of notice.—The notice may be in writing or
merely oral and may be given in any terms which
sufficiently identify the instrument, and indicate that it
has been dishonored by non-acceptance or non-payment.
It may in all cases be given by delivering it personally or
through the mails.
Campos Notes
 May be orally or in writing.
 Notice must: (1) Identify the instrument, (2)
make known the fact that it has been dishonored
either by non-acceptance or non-payment.
 It must be accompanied by language which will
inform the party addressed that the instrument
was duly presented.
c. Time within which notice must be given.—
Sec. 102. Time within which notice must be given.—
Notice may be given as soon as the instrument is
dishonored and, unless delay is excused as hereinafter
provided, must be given within the time fixed by this Act.
Sec. 103. Where parties reside in same place.—Where
the person giving and the person to receive notice reside
in the same place, notice must be given within the
following times:
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 (a) If given at the place of business of the person
to receive notice, it must be given before the close of
business hours on the day following.
(b) If given at his residence, it must be given
before the usual hours of rest on the day following.
(c) If sent by mail, it must be deposited in the
post office in time to reach him in usual course on the day
following.
Sec. 104. Where parties reside in different places.—
Where the person giving and the person to receive notice
reside in different places, the notice must be given within
the following times:
(a) If sent by mail, it must be deposited in the
post office in time to go by mail the day following the day
of dishonor, or if there be no mail at a convenient hour on
last day, by the next mail thereafter.
(b) If given otherwise than through the post
office, then within the time that notice would have been
received in due course of mail, if it had been deposited in
the post office within the time specified in the last
subdivision.
Sec. 105. When sender deemed to have given due notice.
—Where notice of dishonor is duly addressed and
deposited in the post office, the sender is deemed to have
given due notice, notwithstanding any miscarriage in the
mails.
Sec. 106. Deposit in post office; what constitutes.—
Notice is deemed to have been deposited in the post-
office when deposited in any branch post office or in any
letter box under the control of the post-office
department.
Sec. 107. Notice to subsequent party; time of.—Where a
party receives notice of dishonor, he has, after the receipt
of such notice, the same time for giving notice to
antecedent parties that the holder has after the dishonor.
Campos Notes
 The foregoing provisions apply to all cases of
dishonor (non-acceptance or non-payment).
 Earliest time to send notice: immediately AFTER
dishonor.
 Notice of dishonor because of non-payment
before maturity is premature and ineffective.
 Latest time to give notice: depends on whether
the parties are in the same or different places.
(Secs. 103 and 104)
 Effect of delay in giving notice of dishonor of a
check: A drawer is discharged from liability,
whether drawer of check or ordinary bill.
Cases
State Bk. Of East Moline v. Standaert
Quick Facts: Plaintiff bank claims it had sent a notice of
dishonor to the defendant indorser. But its own witness
testified that she did not recall preparing or sending out
the particular notice of dishonor to defendant indorsers.
Doctrine: When a negotiable instrument has been
dishonored by non-payment, notice of dishonor must be
given to the indorser, otherwise he is discharged.
Arterburn v. Wakefield (1949)
Doctrine: It is not necessary for a petition in an action on
a check to aver that notice was given to the maker that
the instrument was dishonored by the bank on which it
was drawn.
d. Place where notice must be given.—
Sec. 108. Where notice must be sent.—Where a party has
added an address to his signature, notice of dishonor
must be sent to that address; but if he has not given such
address, then the notice must be sent as follows:
(a) Either to the post-office nearest to his place
of residence or to the post-office where he is accustomed
to receive his letters; or
(b) If he lives in one place and has his place of
business in another, notice may be sent to either place; or
(c) If he is sojourning in another place, notice
may be sent to the place where he is so sojourning.
But where the notice is actually received by the party
within the time specified in this Act, it will be sufficient,
though not sent in accordance with the requirement of
this section.
Campos Notes
 Sending notice to the address designated by the
indorser is sufficient even though the address is
incorrect.
 Mailing will not give rise to the presumption of
receipt, either rebuttable or conclusive.
 The burden of proof of actual receipt is on the
party who gave it.
e. By whom notice may be given.—
NEGOTIABLE INSTRUMENTS  A2015  PAGE 63 OF 78
Sec. 90. By whom given.—The notice may be given by or
on behalf of the holder, or by or on behalf of any party to
the instrument who might be compelled to pay it to the
holder, and who, upon taking it up, would have a right to
reimbursement from the party to whom the notice is
given.
Sec. 91. Notice given by agent.—Notice of dishonor may
be given by any agent either in his own name or in the
name of any party entitled to given notice, whether that
party be his principal or not.
Campos Notes
 A holder, whether the owner or not, may give
notice of dishonor. Or a duly authorized person
by the holder.
f. To whom notice must be given.—
(1) If given by agent.
Sec. 94. When agent may give notice.—Where the
instrument has been dishonored in the hands of an agent,
he may either himself give notice to the parties liable
thereon, or he may give notice to his principal. If he gives
notice to his principal, he must do so within the same
time as if he were the holder, and the principal, upon the
receipt of such notice, has himself the same time for
giving notice as if the agent had been an independent
holder.
Campos Notes
 Example of an agent in the above provision is a
bank with whom a check has been deposited by
the holder (principal) for collection. Assuming
the drawee bank dishonors the check, the bank
(agent) must notify either the drawer of the
check or his principal (the holder).
Cases
Simon v. People’s Bk. & Trust Co. (1936)
Quick Facts: The notices of dishonor by the drawee bank
were sent to the plaintiff’s bank where she deposited the
check. Her bank in turn forwarded all the notices to her.
She sought to make her bank and the drawee bank liable
because she failed to recover from the maker and
indorser.
Doctrine: In the absence of specific instructions, the
bank need do no more than promptly report the fact to its
principal, and the principal may then notify those to be
charged. Mailing of notices to the principal is sufficient to
relieve the agent.
(2) To whom in general.
Sec. 97. To whom notice may be given.—Notice of
dishonor may be given either to the party himself or to
his agent in that behalf.
Campos Notes
 An agent to be competent to receive a notice of
dishonor, he must be an agent “in that behalf.”
(3) If party is dead.
Sec. 98. Notice where party is dead.—When any party is
dead and his death is known to the party giving notice,
the notice must be given to a personal representative, if
there be one, and if with reasonable diligence, he can be
found. If there be no personal representative, notice may
be sent to the last residence or last place of business of
the deceased.
Campos Notes
 If party’s death is known to holder, he must find
out if there is a representative.
 If he neglects to inquire, and the representative
could have been found with reasonable
diligence, the notice sent to the last resident or
place of business is ineffective to charge the
estate of the decedent.
 If the fact of death is not known to the holder, no
duty to notify the representative.
(4) to partners.
Sec. 99. Notice to partners.—Where the parties to be
notified are partners, notice to any one partner is notice
to the firm, even though there has been a dissolution.
Campos Notes
 Notice to one partner is notice to the firm
(5) To joint parties.
Sec. 100. Notice to persons jointly liable.—Notice to joint
persons who are not partners must be given to each of
them unless one of them has authority to receive such
notice for the others.
Campos Notes
 This should be interpreted with Sec. 68 under
which joint payees or joint indorsees are
deemed to indorse jointly and severally. A notice
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 to one of them will charge him, failure to notify
the others will discharge them.
 But if parties are not jointly or severally liable,
such as joint drawers, notice to each is required
to charge any of them. Thus if only one joint
party is notified, all are discharged.
(6) To bankrupt.
Sec. 101. Notice to bankrupt.—Where a party has been
adjudged a bankrupt or an insolvent, or has made an
assignment for the benefit of creditors, notice may be
given either to the party himself or to his trustee or
assignee.
g. In whose favor notice operates.—
Sec. 92. Effect of notice on behalf of holder.—Where
notice is given by or on behalf of the holder, it inures to
the benefit of all subsequent holders and all prior parties
who have a right of recourse against the party to whom it
is given.
Sec. 93. Effect where notice is given by party entitled
thereto.—Where notice is given by or on behalf of a party
entitled to give notice, it inures to the benefit of the
holder and all parties subsequent to the party to whom
notice is given.
Campos Notes
 Indorsements: A > B > C > D > E > F
 E is holder, gives notice to B and C. Notice
operates in favor of F who is a subsequent holder.
 Also operates in favor of C, a party prior to the
holder (E) who has a right of recourse against B.
Hence, if C pays E, C can go after B.
 If E notifies C, then C notifies A, such notice of C
to A comes under Sec. 93 and operates in favor
of B, a party subsequent to A, and in favor of E,
the holder. Hence, E can go after A. A is not
discharged by failure of E to notify A. But D is
discharged because E failed to notify him.
 It is submitted that Sec. 93 must also cover
parties subsequent to the holder such as F.
h. When rule requiring notice not applied.—
(1) In general.
Sec. 112. When notice is dispensed with.—Notice of
dishonor is dispensed with when, after the exercise of
reasonable diligence, it cannot be given to or does not
reach the parties sought to be charged.
Campos Notes
 A reiteration of Sec. 105. Reasonable diligence
depends upon the corcumstances.
(2) When notice of non-acceptance already
given.
Sec. 116. Notice of non-payment where acceptance
refused.—Where due notice of dishonor by non-
acceptance has been given, notice of a subsequent
dishonor by non-payment is not necessary unless in the
meantime the instrument has been accepted.
Campos Notes
 Notice of non-payment is not necessary anymore
since immediate right of recourse is conferred
from the moment of dishonor by non-
acceptance.
(3) Waiver.
Sec. 109. Waiver of notice.—Notice of dishonor may be
waived either before the time of giving notice has arrived
or after the omission to give due notice, and the waiver
may be expressed or implied.
Sec. 110. Whom affected by waiver.—Where the waiver is
embodied in the instrument itself, it is binding upon all
parties; but, where it is written above the signature of an
indorser, it binds him only.
Campos Notes
 May be made before or after maturity, may be
express or implied.
 Burden of proof is on the holder to prove there is
waiver of notice; it will not be inferred from
doubtful acts or language of indorser. Must be
proved by clear and convincing evidence.
 Who is affected by the waiver? If words appear
in the instrument, it is deemed embodied in the
instrument under Sec. 110, and hence binds all
parties. Waiver may be so worded as to render it
inapplicable to some parties, or applicable to the
named parties only.
Cases
People’s Natl. Bk. Of Ypsilanti v. Dicks
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Quick Facts: There was no waiver indicated or written
near the signature of Dicks. It was in another part of the
note. He is not liable.
Doctrine: Where a waiver is printed “on the face of
another part of the note” so as to confuse an indorser
who signs the same, said indorser would not be bound by
the instrument. Only waivers on the face of the
instrument bind all parties thereto. Waivers on the back
bind the indorser/s in certain instances.
(4) When not necessary to charge drawer.
Sec. 114. When notice need not be given to drawer.—
Notice of dishonor is not required to be given to the
drawer in either of the following cases:
(a) Where the drawer and drawee are the same person;
(b) When the drawee is fictitious person or a person not
having capacity to contract;
(c) When the drawer is the person to whom the
instrument is presented for payment;
(d) Where the drawer has no right to expect or require
that the drawee or acceptor will honor the instrument;
(e) Where the drawer has countermanded payment.
Campos Notes
 The reason for this rule in the case of par. (a) and
(b) is that Sec. 130 gives the holder an option to
treat the bill as a promissory note, thus the
drawer is the maker who is already primarily
liable.
 The reason for par. (c) is that such demand for
payment is already notice of dishonor.
 For par. (d), no antecedent contractual relation
between drawer and drawee, hence, drawer has
no right to require that drawee accepts or pays.
However, absence of contractual relation
between drawer and drawee will not always
operate to free the holder from duty to give
notice to the drawer, who may have a reason to
expect the drawee to accept or pay. Such
expectation may arise from a course of dealings
between drawer and drawee.
 If drawer countermanded payment, no notice
required, since his own acts caused the dishonor.
Cases
State Investment House v. CA (1993)
Quick Facts: Moulic withdrew her funds from the drawee
bank, hence, the plaintiff could not collect the amounts on
the check Moulic issued. Moulic claims plaintiff cannot
recover because there was no notice to her.
Doctrine: The requirement of Notice of Dishonor is not
absolute. It is subject to exceptions under Sec. 114 of NIL.
Hence, Moulic is liable because she countermanded
payment by withdrawing her account.
(5) When not necessary to charge indorser.
Sec. 115. When notice need not be given to indorser.—
Notice of dishonor is not required to be given to an
indorser in either of the following cases:
(a) When the drawee is a fictitious person or person not
having capacity to contract, and the indorser was aware
of that fact at the time he indorsed the instrument;
(b) Where the indorser is the person to whom the
instrument is presented for payment;
(c) Where the instrument was made or accepted for his
accommodation.
Campos Notes
 Under this section, it has been held that the
insolvency of the maker will not excuse the
notice to the indorser, even if indorser knew of
such fact. The holder must express his intention
to make him liable.
i. Legal effect of failure to give notice.—
Sec. 89. To whom notice of dishonor must be given.—
Except as herein otherwise provided, when a negotiable
instrument has been dishonored by non-acceptance or
non-payment, notice of dishonor must be given to the
drawer and to each indorser, and any drawer or indorser
to whom such notice is not given is discharged.
Sec. 117. Effect of omission to give notice of non-
acceptance.—An omission to give notice of dishonor by
non-acceptance does not prejudice the rights of a holder
in due course subsequent to the omission.
Campos Notes
 If a holder knew of the dishonor, he cannot be a
holder in due course. In such case, he needs to
notify in order to make parties liable.
 A dishonor by non-payment necessarily
presupposes that the instrument has matured,
therefore, no holder subsequent thereto is a
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 holder in due course. Such dishonor will
prejudice all subsequent holders.
13. PROTEST
a. Definition and method.—
Campos Notes
 Protest is the testimony of some proper person,
usually a notary and usually in the form of an
affidavit, that the regular legal steps to fix the
liability of drawer and indorsers have been
taken.
 Its method is for the notary to himself to
properly present the instrument, and demand its
acceptance or payment.
 If these are refused, he makes a minute of the
refusal on the instrument or on his official
record; the minute consisting of his initials, the
year, the month, the day of dishonor, and his
charges. This is done on the day of dishonor.
 On the same day, or afterwards, the notary
extends the protest thus noted by embodying in
a certificate the facts of the protest, and his acts
in making presentment, demand and in giving
notice of dishonor. To this he appends his official
seal.
b. When necessary.—
Sec. 152. In what cases protest necessary.—Where a
foreign bill appearing on its face to be such is dishonored
by non-acceptance, it must be duly protested for non-
acceptance, by non-acceptance is dishonored and where
such a bill which has not previously been dishonored by
nonpayment, it must be duly protested for nonpayment. If
it is not so protested, the drawer and indorsers are
discharged. Where a bill does not appear on its face to be
a foreign bill, protest thereof in case of dishonor is
unnecessary.
Sec. 129. Inland and foreign bills of exchange.—An inland
bill of exchange is a bill which is, or on its face purports to
be, both drawn and payable within the Philippines. Any
other bill is a foreign bill. Unless the contrary appears on
the face of the bill, the holder may treat it as an inland
bill.
Sec. 157. Protest both for non-acceptance and non-
payment.—A bill which has been protested for non-
acceptance may be subsequently protested for non-
payment.
Campos Notes
 Formal protest is required of foreign bills, in
addition to due presentment, dishonor, and
notice of dishonor. These are conditions
precedent for the right of recovery against
secondary parties, else they will be discharged.
 Foreign bill: one which on its face purports to be
drawn in the Philippines and payable in another
country, or drawn in another country and
payable in the Philippines.
c. Forms and contents of certificate of protest.—
Sec. 153. Protest; how made.—The protest must be
annexed to the bill or must contain a copy thereof, and
must be under the hand and seal of the notary making it
and must specify:
(a) The time and place of presentment;
(b) The fact that presentment was made and the
manner thereof;
(c) The cause or reason for protesting the bill;
(d) The demand made and the answer given, if
any, or the fact that the drawee or acceptor could not be
found.
Campos Notes
 Protest, in this section, means the certificate of
the notary.
d. Purpose of the certificate of protest.—
Campos Notes
 It is the same as a deposition. Its admissible as
evidence and does away with the necessity of
proving these facts by witnesses in court.
 The purpose is to furnish to the holder legal
testimony of presentment, demand and notice of
dishonor, to be used in actions against the
drawer or indorsers.
 It is merely prima facie evidence, facts stated
therein may be disproved by competent
evidence.
e. By whom made.—
Sec. 154. Protest, by whom made.—Protest may be made
by:
(a) A notary public; or
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 (b) By any respectable resident of the place
where the bill is dishonored, in the presence of two or
more credible witnesses.
Campos Notes
 The notary acts in a different capacity from that
in which he acts when making
acknowledgments.
 The notary attests to the fact that the affiant
made a statement under oath. He is not
concerned with the truth or falsity of the
statement.
 In making a protest he is making a written
statement of facts which are within his
knowledge.
 He is stating that he himself presented the
instrument for acceptance or payment.
 He must have presented the instrument in
person; presentment by his clerk is ineffective to
make a valid protest.
 If not notary, presence of two witnesses is
required.
f. Time and place of protest.—
Sec. 155. Protest; when to be made.—When a bill is
protested, such protest must be made on the day of its
dishonor unless delay is excused as herein provided.
When a bill has been duly noted, the protest may be
subsequently extended as of the date of the noting.
Sec. 156. Protest; where made.—A bill must be protested
at the place where it is dishonored, except that when a
bill drawn payable at the place of business or residence of
some person other than the drawee has been dishonored
by non-acceptance, it must be protested for non-payment
at the place where it is expressed to be payable, and no
further presentment for payment to, or demand on, the
drawee is necessary.
Campos Notes
 Protest must be made on day of dishonor. No
need to make the formal certificate of protest on
the same day the instrument is protested by him,
if he makes a notation on the bill to show that
the instrument was dishonored and on what
date.
g. Protest for better security.—
Sec. 158. Protest before maturity where acceptor
insolvent.—Where the acceptor has been adjudged a
bankrupt or an insolvent or has made an assignment for
the benefit of creditors before the bill matures, the holder
may cause the bill to be protested for better security
against the drawer and indorsers.
Campos Notes - This practice is obsolete.
h. When delay is excused and protest is dispensed
with.—
Sec. 159. When protest dispensed with.—Protest is
dispensed with by any circumstances which would
dispense with notice of dishonor. Delay in noting or
protesting is excused when delay is caused by
circumstances beyond the control of the holder and not
imputable to his default, misconduct, or negligence. When
the cause of delay ceases to operate, the bill must be
noted or protested with reasonable diligence.
Campos Notes
 Same as those in notice of dishonor. It is believed
that this section incorporates not only Sec. 122,
but also 114 and 115.
Cases
Ellenbogen v. State Bank
Quick Facts: The instrument is a foreign bill on its face. It
was dishonored because Ellenbogen had no money in the
drawee bank in Poland. The complaint did not allege that
the dishonor was protested hence the trial court
dismissed the complaint.
Doctrine: Sec. 185 provides that notice of dishonor is not
required, if the drawer has no right to expect or require
the drawee to honor the instrument. Sec. 267 provides
that protest is dispensed with by any circumstances
which would dispense of notice of dishonor. Sec. 139,
presentment for payment is not required if drawer has
not right to expect or require the drawee. Upon the facts
of the pleading, it appears that presentment and notice of
dishonor was not required, protest is also not required. A
new trial is ordered.
Tan Leonco v. Go Inqui
Quick Facts: Plaintiff sued defendant for non-payment.
Defendant earlier stopped payment of the draft he
delivered to plaintiff. He interposes as defense that
plaintiff did not properly protested the non-payment of
the draft before it instituted the suit.
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Doctrine: Protest for non-payment may be dispensed
because the drawer himself ordered the drawee not to
pay the bill of exchange.
i. Waiver of protest.—
Sec. 111. Waiver of protest.—A waiver of protest,
whether in the case of a foreign bill of exchange or other
negotiable instrument, is deemed to be a waiver not only
of a formal protest but also of presentment and notice of
dishonor.
j. Protest in case of loss of instrument.—
Sec. 160. Protest where bill is lost and so forth.—When a
bill is lost or destroyed or is wrongly detained from the
person entitled to hold it, protest may be made on a copy
or written particulars thereof.
Campos Notes
 Loss of the instrument does not affect the rights
and liabilities of the parties thereto.
14. ACCEPTANCE FOR HONOR
Sec. 161. When bill may be accepted for honor.—When a
bill of exchange has been protested for dishonor by non-
acceptance or protested for better security and is not
overdue, any person not being a party already liable
thereon may, with the consent of the holder, intervene
and accept the bill supra protest for the honor of any
party liable thereon or for the honor of the person for
whose account the bill is drawn. The acceptance for
honor may be for part only of the sum for which the bill is
drawn; and where there has been an acceptance for
honor for one party, there may be a further acceptance by
a different person for the honor of another party.
Sec. 131. Referee in case of need.—The drawer of a bill
and any indorser may insert thereon the name of a
person to whom the holder may resort in case of need;
that is to say, in case the bill is dishonored by non-
acceptance or non-payment. Such person is called a
referee in case of need. It is in the option of the holder to
resort to the referee in case of need or not as he may see
fit.
Campos Notes - This practice is practically obsolete (cf.
Secs. 162-179).
15. PAYMENT FOR HONOR
Sec. 171. Who may make payment for honor.—Where a
bill has been protested for non-payment, any person may
intervene and pay it supra protest for the honor of any
person liable thereon or for the honor of the person for
whose account it was drawn.
 Campos Notes - Also virtually obsolete. (cf. Secs.
171-177)
16. LIABILITY OF PARTY ON INDORSEMENT AFTER
MATURITY
Sec. 7. When payable on demand.—. . . 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.
Campos Notes - codification of the “new bill” doctrine in
common law. The indorser, issuer or acceptor after
maturity is considered to have drawn an entirely new bill.
Cases
Bishop v. Dexter
Quick Facts: Dexter indorsed the note after it was due.
Bishop was the last indorsee who was not able to get
payment from the maker hence he goes after Dexter. The
court ruled that Dexter is not liable because there was no
notice of dishonor, and Bishop cannot assume that since
the note was already past due, that notice of dishonor
were given before hand.
Doctrine: The indorsement of the bill or note after due is
equivalent to drawing a new bill payable at sight; and
demand must be made by the indorsee of the drawer of
the bill, or maker of the note, and notice given to the
indorser, as in cases of bills payable in sight.
17. INSTRUMENTS PAYABLE AT A BANK
Sec. 87. Rule where instrument payable at bank.—Where
the instrument is made payable at a bank, it is equivalent
to an order to the bank to pay the same for the account of
the principal debtor thereon.
Campos Notes
 This situation is similar in case of checks.
 The liability of the maker or acceptor of such
instrument is primary.
 The effect of Sec. 87 on the instrument does not
convert the maker or acceptor into a drawer.
 Therefore, presentment for payment is not
necessary to charge the maker or acceptor.
Cases
Binghampton Pharmacy v. First Natl. Bank
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Quick Facts: The note executed by plaintiff pharmacy
was indorsed to Chiksaw Bank. Chiksaw negotiated it to
First Natl. Bk. The note matured but was not presented to
drawee Chiksaw Bank. Chiksaw Bank subsequently failed.
First Natl. Bk. now seeks to recover from maker
Binghampton Pharmacy.
The maker cites Sec. 87 as defense, that since the making
of the instrument payable at a bank, is equivalent to an
order to the bank and puts upon the holder of a note
payable at a bank the same duties as that which rests
upon the holder of an ordinary check, then presentment
is required, which the First Natl. Bank did not do.
Doctrine: Notwithstanding Sec 87, the maker of an
instrument payable at a bank is still considered a maker
and is primarily liable and presentment is not required.
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 presentment is
named.
18. BILLS IN SET
Sec. 178. Bills in set constitute one bill.—Where a bill is
drawn in a set, each part of the set being numbered and
containing a reference to the other parts, the whole of the
parts constitutes one bill.
Sec. 179. Right of holders where different parts are
negotiated.—Where two or more parts of a set are
negotiated to different holders in due course, the holder
whose title first accrues is, as between such holders, the
true owner of the bill. But nothing in this section affects
the right of a person who, in due course, accepts or pays
the parts first presented to him.
Sec. 180. Liability of holder who indorses two or more
parts of a set to different persons.—Where the holder of a
set indorses two or more parts to different persons he is
liable on every such part, and every indorser subsequent
to him is liable on the part he has himself indorsed, as if
such parts were separate bills.
Sec. 181. Acceptance of bill drawn in sets.—The
acceptance may be written on any part and it must be
written on one part only. If the drawee accepts more than
one part and such accepted parts negotiated to different
holders in due course, he is liable on every such part as if
it were a separate bill.
Sec. 182. Payment by acceptor of bills drawn in sets.—
When the acceptor of a bill drawn in a set pays it without
requiring the part bearing his acceptance to be delivered
up to him, and the part at maturity is outstanding in the
hands of a holder in due course, he is liable to the holder
thereon.
Sec. 183. Effect of discharging one of a set.—Except as
herein otherwise provided, where any one part of a bill
drawn in a set is discharged by payment or otherwise, the
whole bill is discharged.
Campos Notes
 The reason for drawing bills in set was to
obviate the difficulties which would arise in case
of miscarriage of the bill. It was thought that if
drawn in set, and each part sent by different
means, chances that one of the set would reach
the payee would be greater.
 All of the parts of the set from only one bill.
 All rules applicable to bills of exchange is
applicable to bills in set.
19. LIABILITY OF TRANSFERORS OR ASSIGNORS OF
NEGOTIABLE INSTRUMENTS
New Civil Code, Art. 1628. The vendor in good faith shall
be responsible for the existence and legality of the credit
at the time of the sale, unless it should have been sold as
doubtful; but not for the solvency of the debtor, unless it
has been so expressly stipulated or unless the insolvency
was prior to the sale and of common knowledge.
Even in these cases he shall only be liable for the
price received and for the expenses specified in No. 1 of
Article 1616.
The vendor in bad faith shall always be
answerable for the payment of all expenses, and for
damages.
Campos Notes
 A negotiable instrument should be transferred
by negotiation in order that the transferor may
acquire the rights granted by the Negotiable
Instruments Law.
 However, a negotiable instrument may be
transferred without negotiation, in which case
the transferee is a mere vendee or assignee
without being a “holder”.
 His right to recover from the primary party is
subject to existing defenses available to such
party. But his right against his transferor, is all
the rights of a vendee.
CHAPTER VI
DISCHARGE
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1. DISCHARGE OF THE INSTRUMENT
Sec. 119. Instrument; how discharged.—A negotiable
instrument is discharged:
(a) By payment in due course by or on behalf of
the principal debtor;
(b) By payment in due course by the party
accommodated, where the instrument is made or
accepted for his accommodation;
(c) By the intentional cancellation thereof by the
holder;
(d) By any other act which will discharge a
simple contract for the payment of money;
(e) When the principal debtor becomes the
holder of the instrument at or after maturity in his own
right.
Campos Notes
 Discharge = extinguishment of obligations
arising under the negotiable instrument.
 Discharge relieves ALL parties from further
liabilities.
a. By payment in due course.—
Sec. 51. Right of holder to sue; payment.—The holder of a
negotiable instrument may to sue thereon in his own
name; and payment to him in due course discharges the
instrument.
Sec. 88. What constitutes payment in due course.—
Payment is made in due course when it is made at or after
the maturity of the payment to the holder thereof in good
faith and without notice that his title is defective.
(1) Medium of payment.
Campos Notes
 Since a negotiable instrument must contain an
unconditional promise or order to pay a sum
certain in money, payment must be in money
to effect its discharge.
 If parties agree to discharge the instrument by a
renewal note, it would be discharged not by
payment, but by novation or agreement which is
recognized in Sec. 199(d), supra.
Campos Notes
(2) By whom made.
Campos Notes
 Payment must be made BY or ON BEHALF of the
“principal debtor”, otherwise it would constitute
PURCHASE or NEGOTIATION.
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 Principal debtor means MAKER or ACCEPTOR.
 Payment by the accommodated party, if the
instrument is made or accepted for his
accommodation is actual payment by
principal debtor, whether or not he appears in
the instrument.
 Payment by indorser at maturity, not on behalf
of principal debtor but in discharge of his own
liability, does not discharge the instrument. It
constitutes the indorsee (I think this is
“indorser”, but Prof. Campos said indorsee) a
holder of the instrument which remain a
continuing obligation against the primary party.
 Neither does payment by the drawer discharge
the instrument.
 “Principal debtor” is not the same as primary
party, therefore if the primary party is an
accommodation party, since he is not a principal
debtor, payment by him does not discharge the
instrument.
Case
Fox v. Kroeger (1931)
Quick Facts: Surety Kroeger executed and issued his
own note for the amount of the principal note which
was previously executed by his principal Mrs. Fox,
who died before maturity. The payee bank then
assigned the principal note to Kroeger. Kroeger sued
Fox’s estate after two years. The action was on the
note itself and not on the implied contract of
reimbursement, because the latter is barred by a two
year prescriptive period.
Doctrine: Where the surety pays the debt of the
principal, he has his election to either bring an action
for reimbursement from his principal or he can
prosecute an action on the very debt itself. Payment
by the party secondarily liable does not extinguish
the debt. Payment by the surety does not discharge
the obligation on the note.
(3) When check deemed paid by drawee bank.
 A check is paid or discharged as soon as the
holder receives cash from bank counter.
 If the bank credits the check in the account of
the holder-depositor, it is equivalent to paying
the money to holder, then receiving the cash
again for deposit. Check will be discharged.
  When bank charges the check to the account of
the drawer, it shows its intention to honor check
and will be deemed paid whether or not credit
entry has been made to the holder.
 Entry of credit by the clearing house does not
constitute payment. Drawee bank still has the
right to reject the check when it reaches it from
the clearing house.
(4) To whom made.
Campos Notes
 Payment must be made in due course = which
means payment to a holder (whether the
beneficial owner or merely a non-beneficial
owner under a restrictive indorsement).
 Payment to one of several payees or indorsees
in the alternative = discharges instrument.
 Payment to one of several joint payees or joint
indorsees (Campos says “indorser”) is not a
discharge UNLESS party receiving payment had
authority from other to receive on their behalf.
 Payment to a prior holder will not discharge
UNLESS authorized by present holder (expressly,
impliedly, or by estoppel)
Cases
Equitable Banking Corporation v. IAC (1988)
Quick Facts: Seller Nell Co. issued checks payable “to
the order of Equitable Bank A/C of Casville
Enterprises”. Equitable credited to the Casville
account. Casville withdrew the funds and closed the
account, it did not fulfill its agreement with Nell. Nell
sued Equitable Bank and Casville. Did Equitable
properly credit the acct of Casville? YES.
Doctrine: The check was ambiguous. It could be
interpreted as deposit to the account of Casville, with
the bank as agent. It will be construed against the
party who caused the ambiguity.
In re: Harbaugh’s Estate (1936)
Quick Facts: The maker of the note paid the payee
after it had already been indorsed to another.
Doctrine: Payment to the payee of a negotiable
instrument when title and possession of the
instrument has passed to another will not protect the
maker. However, it has been held that if holder
receives payment through an agent or the
surrounding circumstances show that money in
discharge of the instrument actually reached his
hands, he cannot again recover.
(5) At or after maturity.
Campos Notes
 Payment must be made AT or AFTER maturity in
order to operate as a discharge of the
instrument.
 If paid before, then negotiated to a HIDC, the
latter may recover on the instrument.
(6) In good faith and without notice.
Campos Notes
 If the payor at the time he pays knows that the
holder’s title is defective, it will not be
payment in due course and will not discharge the
instrument. Hence, the true owner can make the
payor liable.
 But if payor did not know or did not have
notice of the defect in title, his payment will be
a discharge. As far as the paying maker or
acceptor, the instrument was discharged upon
his payment. The true owner’s recourse is
against the thief.
 On the other hand, if the party demanding
payment is HIDC and the defect in the
instrument or the title does not give to a real
defense, the maker or acceptor is liable, and his
payment is a payment in due course, although the
latter knows of the defect.
 If there is a forged indorsement, no right can
pass, and payment will not effect a discharge.
b. By intentional cancellation.—
Sec. 119. Instrument; how discharged.—A negotiable
instrument is discharged:
(c) By the intentional cancellation thereof by the holder;
Sec. 123. Cancellation; unintentional; burden of proof.—
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 a mistake or without authority.
Campos Notes
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  The holder tears up or throws that note in a
waste basket = discharge.
 Stamping “PAID” on the instrument is
presumptive evidence of discharge, rebuttable
by contrary proof.
 Cancellation through obliteration, erasure or
burning = discharge.
 Cancellation is presumed to be intentional.
Burden of proving that cancellation was made
without authority, or made unintentionally or by
mistake or through fraud is on the one claiming
its effectiveness.
 Cancellation need not be supported by
consideration in order to operate even without
notice to the primary party.
 Cancellation need not take place at or after
maturity.
Jones’ Adm’rs v. Coleman (1917)
Quick Facts: The note was mutilated, no date nor
signature because it was burned. The testimony of the
witness to the note was vague and unsatisfactory.
Doctrine: The presumption is the burning was
unintentional and for the purpose of cancelling the note.
The burden to prove otherwise is on the party alleging it.
c. By any other act which will discharge a contract.—
Campos Notes
 Example: Novation through the issuance of a
renewal note discharges the old note.
 But where the old note is retained, the
presumption is that the new note will not
discharge the old note.
 Other instances of discharge: by rendition of
services, by transfer of property, by foreclosure
of the mortgaged property where the proceeds
thereof are at least equal to the amount of the
instrument, and by acceptance of a part as full
settlement of the note.
 General law on obligations and contracts can
apply whenever proper.
Cases
Manchester v. Parsons (1915)
Quick Facts: Maker Parsons issued note to payee Burton.
Burton negotiated to Manchester for value. Then Parsons
sold and delivered some merchandise to Burton as
payment of the note. Indorsee Manchester now sues
Parsons for payment. But Parsons claims he already paid
the payee Burton thus instrument is discharged. He uses
Sec. 199d: Discharge “by any other act which will
discharge a simple contract for the payment of money.”
Doctrine: That section must be construed in relation to
the rights of a HIDC. Acts which will discharge a simple
contract for payment of money, in order to effect a
discharge of the nego paper, must necessarily be limited
to such acts as relate to and affect the HOLDER of the
paper demanding payment of it.
d. By reacquisition of principal debtor in his own
right.—
Sec. 119. Instrument; how discharged.—A negotiable
instrument is discharged:
(e) When the principal debtor becomes the holder of the
instrument at or after maturity in his own right.
Campos Notes
 This paragraph deals with reacquisition by the
principal debtor of a kind which should result in
discharge, but which is not discharged by
payment or by renunciation governed by Sec.
119 (a) and 122.
 What circumstances would constitute
reacquisition of principal debtor in his own
right?
Cases
Schwartzman v. Post, et al. (1903)
Quick Facts: Post issued a note to Schwartzman. Post
made a partial payment on the condition that
Schwartzman surrender the note, which the latter did.
Schwartzman now sues for the balance.
Doctrine: Post became the holder of the instrument “in
his own right,” because it is without fraud or mistake, and
not in a representative capacity. If a note be surrendered
by the payee to the maker, the whole claim is discharged.
e. By renunciation of holder.—
Sec. 122. Renunciation by holder.—The holder may
expressly renounce his rights against any party to the
instrument before, at, or after its maturity. An absolute
and unconditional renunciation of his rights against the
principal debtor made at or after the maturity of the
NEGOTIABLE INSTRUMENTS  A2015  PAGE 73 OF 78
instrument discharges the instrument. But a renunciation
does not affect the rights of a holder in due course
without notice. A renunciation must be in writing unless
the instrument is delivered up to the person primarily
liable thereon.
Campos Notes
 Two forms of renunciation BY HOLDER: (1)
written declaration, and (2) by surrender of the
instrument to the primary party.
 If made at or after maturity in favor of
principal debtor, the instrument is discharged
if renunciation is absolute and unconditional.
 If made in favor of any party, it will discharge
only such party and parties subsequent to him
but not the instrument.
 In either case, a HIDC is protected in case he
takes without notice of renunciation.
 Renunciation need not be supported by
consideration.
 Renunciation is unilateral act of the holder, as
opposed to novation which requires consent of
both parties.
Case
McGlynn v. Granstrom (1926)
Quick Facts: McGlynn (payee) sues indorser Granstrom.
Granstrom’s defense is that there was an oral agreement
to discharge the maker and consequently the subsequent
parties. McGlynn says under Sec. 122, in order to
renounce the his rights, it should have been written.
Doctrine: Renunciation (Sec. 122) is different from
discharge of prior party (Sec. 120). Renunciation must be
express in writing. Discharge is not required to be
written, it may even be done by cancellation.
f. Material Alteration.—
Sec. 124. Alteration of instrument; effect of.—Where a
negotiable instrument is materially altered without the
assent of all parties liable thereon, it is avoided, except as
against a party who has himself made, authorized, or
assented to the alteration and subsequent indorsers.
But when an instrument has been materially
altered and is in the hands of a holder in due course not a
party to the alteration, he may enforce payment thereof
according to its original tenor.
Sec. 125. What constitutes a material alteration.—Any
alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be
made;
(f) Or which adds a place of payment where no place of
payment is specified, or any other change or addition
which alters the effect of the instrument in any respect, is
a material alteration.
Campos Notes
 See notes on Material Alteration, supra.
 Need not take place at of after maturity.
2. DISCHARGE OF SECONDARY PARTIES
Campos Notes
 SHOULD NOT be confused with discharge of
INSTRUMENT.
 Discharge of instrument necessarily discharges
secondary parties, but not vice versa.
Sec. 120. When persons secondarily liable on the
instrument are discharged.—A person secondarily liable
on the instrument is discharged:
(a) By any act which discharges the instrument;
(b) By the intentional cancellation of his signature by the
holder;
(c) By the discharge of a prior party;
(d) By a valid tender or payment made by a prior party;
(e) By a release of the principal debtor unless the holder's
right of recourse against the party secondarily liable is
expressly reserved;
(f) By any agreement binding upon the holder to extend
the time of payment or to postpone the holder's right to
enforce the instrument unless made with the assent of
the party secondarily liable or unless the right of
recourse against such party is expressly reserved.
a. By discharge of instrument.—
Campos Notes
 Sec. 120 incorporates the sections which deal
with the discharge of the instrument itself.
 Discharge of secondary parties by virtue of
discharge of instrument may be effected by:
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 1. Payment in due course;
2. Intentional cancellation of the instrument;
3. Any act which will discharge the contract;
4. Reacquisition by principal debtor;
5. Renunciation by holder; and
6. Material Alteration.
b. By intentional cancellation of signature.—
Sec. 123. Cancellation; unintentional; burden of proof.—
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 a mistake or without authority.
Sec. 48. Striking out indorsement.—The holder may at
any time strike out any indorsement which is not
necessary to his title. The indorser whose indorsement is
struck out, and all indorsers subsequent to him, are
thereby relieved from liability on the instrument.
McCormick v. Shea, et al. (1906)
Doctrine: 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 a
mistake or without authority.
c. By discharge of prior party.—
Campos Notes
 The reason for also discharging parties
subsequent to the party discharged is that the
act of discharge removes from the subsequent
party a possible source of reimbursement from
the prior party.
 The rule applies only to discharge by the act
of the holder and not to discharge by operation
of law. Hence, discharge by bankruptcy of a prior
party, or by running of the statute of limitations
does not discharge other indorsers.
 But when the note is presented to indorser for
payment, then the indorser writes “without
recourse” after his indorsement, and the holder
by silenced acquiesced thereto and takes back
the note unpaid, the indorser is discharged by an
act of assent of the holder, and all subsequent
holders are discharged as well.
Roberts v. Chappell
Quick Facts: Plaintiff-holder Roberts sued payee-
indorser Chappell because the maker is already dead.
Plaintiff did not file a claim with the estate of the maker.
The defense argues that the discharge of the maker
resulted in the discharge of the subsequent indorser.
Doctrine: The phrase “by the discharge of a prior party”
refers to discharge by some act or neglect of the creditor
and does not contemplate a discharge effected by
operation of law. Therefore, the indorser is not
discharged.
d. By valid tender of payment by prior party.—
Campos Notes
 Where instrument is payable at a bank, the fact
that the maker had money on deposit in the
bank at maturity is not sufficient tender of
payment to discharge indorser if no evidence
of the fact was given to holder.
 There must be evidence not only of ability, but
also of willingness to apply such deposit to the
payment.
Cases
Corley v. French, et al. (1927)
Quick Facts: Holder Corley sought to recover payment
from the subsequent indorsers since the maker became
bankrupt after the note, payable at American Natl Bank,
became due.When the note became due, there waere still
sufficient funds in the maker’s account but holder failed
to present for payment before maker eventually went
bankrupt. Defense argues there was already payment
because there were funds in the account (ability to pay).
Doctrine: For the indorser to be discharged, the maker
must possess BOTH willingness and ability to pay on the
date of maturity. There was no evidence of willingness of
maker to pay, even if there actually were funds.
e. By release of principal debtor.—
Campos Notes
 Sec 120 (e) refers to a release of the debtor by
the creditor NOT by operation of law, such as a
judgment for the maker in an unsuccessful suit
of indorsee against maker.
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  It has been held that reservations of the right of
recourse against the secondary parties cannot
be implied from the acts and conduct of the
holder but should be expressed.
 But some courts refuse to interpret this
subsection literally because it may result in
inequity.
 For instance, the holder may want to seek
consent from the indorser to discharge the
principal debtor with the intention to reserve his
right of recourse against the consenting
indorser. But if after receiving such consent, the
holder fails to expressly reserve his right of
recourse, the indorser will also be discharged
contrary to his intention in the first place.
f. By extension of time of payment.—
Sec. 120. When persons secondarily liable on the
instrument are discharged.—A person secondarily liable
on the instrument is discharged:
(f) By any agreement binding upon the holder to extend
the time of payment or to postpone the holder's right to
enforce the instrument unless made with the assent of
the party secondarily liable or unless the right of
recourse against such party is expressly reserved.
Campos Notes
 The agreement referred to is one between the
holder and principal debtor.
 This is in harmony with the rule than an
extension granted to the debtor by the creditor
without the consent of the guarantor
extinguished the guaranty. Because the drawer
and indorsers are properly the guarantors of the
maker and the acceptor.
 The agreement must be binding on the holder
for it to operate as discharge of secondary
parties.
 Thus, if not supported by consideration,
secondary parties not liable.
 This requirement properly applies to
extension given before due date. Because if
extension is given at or after maturity, there is
a dishonor of the instrument, and unless
notice is given to secondary parties within
time prescribed by law, they will be
discharged from all liability anyway, whether
or not the agreement to extend is binding
upon the holder.
 But if indorser waives presentment and notice,
a binding extension by holder made at or after
presentment, will discharge the indorser,
unless he assents to the extension, or the right
of recourse has been expressly reserved.
 And if despite waiver, a notice of dishonor is
given to him, this should be considered as an
express reservation of the holder’s right of
recourse against him.
 Use of renewal notes to effect an extension is
common.
 If old note is retained and renewal note is
only taken as collateral security for the old
note, the indorser is not discharged.
 If old note is surrendered and the renewal
note bears a future date of payment, there is in
effect an extension of time of payment and
indorsers are discharged.
 Consent to an extension may be given before or
at the time of extension.
Cases
Maglione v. Penta (1929)
Quick Facts: Holder-indorsee Maglione entered into an
agreement with the makers of the note to extend time of
payment. Makers defaulted so Maglione went after
subsequent indorsers.
Doctrine: : An extension of time of payment amounts to a
new and different contract and relieves an indorser or
surety of his obligation.
g. By renunciation.—
Sec. 122. Renunciation by holder.—The holder may
expressly renounce his rights against any party to the
instrument before, at, or after its maturity. An absolute
and unconditional renunciation of his rights against the
principal debtor made at or after the maturity of the
instrument discharges the instrument. But a renunciation
does not affect the rights of a holder in due course
without notice. A renunciation must be in writing unless
the instrument is delivered up to the person primarily
liable thereon.
Campos Notes
 Renunciation in order to discharge secondary
parties may even take place before maturity,
unlike in the case of discharge of instrument
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 which requires the renunciation must take place
at or after maturity.
h. By taking a qualified acceptance.—
Sec. 142. Rights of parties as to qualified acceptance.—
The holder may refuse to take a qualified acceptance and
if he does not obtain an unqualified acceptance, he may
treat the bill as dishonored by non-acceptance. Where a
qualified acceptance is taken, the drawer and indorsers
are discharged from liability on the bill unless they have
expressly or impliedly authorized the holder to take a
qualified acceptance, or subsequently assent thereto.
When the drawer or an indorser receives notice of a
qualified acceptance, he must, within a reasonable time,
express his dissent to the holder or he will be deemed to
have assented thereto.
Campos Notes
 See Qualified Acceptance (Chapter 5), supra.
i. By failure to make due presentment.—
k. Certification of check at instance of holder.—
Sec. 188. Effect where the holder of check procures it to
be certified.—Where the holder of a check procures it to
be accepted or certified, the drawer and all indorsers are
discharged from liability thereon.
Campos Notes
 See Chapter 5, supra.
l. Effect of reacquisition of prior party.—
Sec. 121. Right of party who discharges instrument.—
Where the instrument is paid by a party secondarily
liable thereon, it is not discharged; but the party so
paying it is remitted to his former rights as regard all
prior parties, and he may strike out his own and all
subsequent indorsements and again negotiate the
instrument, except:
(a) Where it is payable to the order of a third
person and has been paid by the drawer; and

Sec. 70. Effect of want of demand on principal debtor.— (b) Where it was made or accepted for
Presentment for payment is not necessary in order to accommodation and has been paid by the party
charge the person primarily liable on the instrument; but accommodated.
if the instrument is, by its terms, payable at a special
Sec. 50. When prior party may negotiate instrument.—
place, and he is able and willing to pay it there at
Where an instrument is negotiated back to a prior party,
maturity, such ability and willingness are equivalent to a
such party may, subject to the provisions of this Act,
tender of payment upon his part. But except as herein
reissue and further negotiate the same. But he is not
otherwise provided, presentment for payment is
entitled to enforce payment thereof against any
necessary in order to charge the drawer and indorsers.
intervening party to whom he was personally liable.
Sec. 144. When failure to present releases drawer and
indorser.—Except as herein otherwise provided, the Campos Notes
holder of a bill which is required by the next preceding
 Sec. 121 refers to payment at or after maturity.
section to be presented for acceptance must either
present it for acceptance or negotiate it within a  If payment before maturity, it is considered
reasonable time. If he fails to do so, the drawer and all “negotiation” or “purchase” and I governed by
indorsers are discharged. Sec. 50. Sec. 50 also governs all other methods of
reacquisition such as by gift.
Campos Notes
 In both cases, instrument not discharged and
 See Presentment (Chapter 5), supra.
may be negotiated by reaquirer. Thus, a regular
j. By failure to give notice of dishonor.— indorser who paid for a note to the holder may
sue the maker or prior parties
Sec. 89. To whom notice of dishonor must be given.—
Except as herein otherwise provided, when a negotiable
instrument has been dishonored by non-acceptance or
non-payment, notice of dishonor must be given to the
drawer and to each indorser, and any drawer or indorser
to whom such notice is not given is discharged.

Campos Notes

 See Chapter 5, supra.

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