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.

Sec. 13. When date may be inserted. - Where an instrument expressed to be payable at a fixed period after date
is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any
holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly.
The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course;
but as to him, the date so inserted is to be regarded as the true date.

Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material particular, the person in
possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on
a blank paper delivered by the person making the signature in order that the paper may be converted into a
negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however,
that any such instrument when completed may be enforced against any person who became a party thereto prior
to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable
time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual
for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the
authority given and within a reasonable time.

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.

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.

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.

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

Sec. 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. 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.

A. here are 2 kinds of defenses in negotiable instruments: personal and real

Real Defenses

1
1.) Minority
2.) Forgery
3.) Non-delivery of an incomplete instrument
4.) Material alteration
5.) Ultra vires act of the corporation
6.) Fraud in factum/esse contractus
7.) illegality (if declared void for any purpose)
8.) Force/violence
9.) Lack of authority
10.) Prescription
11.) Discharge in insolvency

Personal Defenses

1.) Failure/absence of consideration

2.) Illegal consideration
3.) Non-delivery of a complete instrument
4.) Conditional delivery of a complete instrument
5.) Fraud in inducement
6.) Filling up blank not within authority
7.) Duress/intimidation
8.) Filling up blank beyond reasonable time
9.) Transfer in breach of faith
10.) Mistake
11.) Insertion of wrong date
12.) Ante-dating or post-dating for illegal/fraudulent purposes

Agbayani: The defenses referred to in Section 57, from which the holder in due course is free, are equitable
(personal) defenses only, not legal (real) defenses, which latter class of defenses can be set up against a holder in
due course.

Personal defenses are those which grow out of the agreement or conduct of a particular person in regard to the
instrument which renders it inequitable for him, though holding legal title, to enforce it against the defendant,
but which are not available against bona fide purchases for value without notice. They can be set up against
persons not holders in due course but not against holders in due course. They are called personal defenses
because they are available only against that person or a subsequent holder who stands in privity with him.

In real defenses, the right sought to be enforced has never existed or ceased to exist. It is a defense against
everybody. The case of the real defense is presented where (1) the contract was void, not voidable only, as to the
defendant in its
inception, as where:
1) his signature was forged or unauthorized;
2) he was legally incapable of making the contract;
3) his signature was secured by misrepresentation of the kind of paper he was signing;
4) the contract was void under an invalidating statute;
or (2) the contract has lost its vitality by the occurrence of a subsequent event by:
1) material alteration without defendant’s consent;
2) lapse of time or
3) discharge by payment in due course;
4) bankcruptcy proceedings or otherwise.

An instrument subject to real defense cannot be enforced against the person to whom the legal defense is available but it
can be enforced against those to whom such a defense is not available.

Where the action is against joint makers, a defense belong personally to one of them will not be available to the other co-
makers; but where the defense of the defendant goes to the merits of the case defeating plaintiff’s right to recover, it is
available to the benefit of the other defendant. The last statement seems to mean defenses which are derived from the
nature of the obligation.
Personal Defenses Real Defenses

2
 1) absence or failure of consideration
2) want of delivery of complete
instrument
3) insertion of wrong date when
necessary
4) filling up of a blank contrary to
authority given or not within reasonable
time
5) fraud in inducement
6) acquisition of instrument by force,
duress, fear, fraud, mistake,
intoxication, unlawful means or for an
illegal consideration
7) negotiation in breach of faith or
under circumstances amounting to
fraud
8) ultra vires acts of corporations
9) want of authority of agent where he
has apparent authority
10) insanity where there is no notice of
insanity on the part of the one
contracting with insane person
11) form or consideration is illegal
1) forgery
2) want of delivery of incomplete
instrument
3) duress amounting to forgery
4) fraud in factum or fraud in esse
contractus
5) minority
6) marriage in case of a wife
7) insanity where the insane person
has a guardian appointed by court
8) ultra vires act of corporation where
there is an absolute prohibition
9) want of authority of agent
10) execution between public enemies
11) illegality of contract

Campos: It should be kept in mind that the question of whether a holder is a holder in due course or not is
significant only when there is an existing defense between prior parties.

Sebastian: Alteration is neither a real or personal defense. It is better to say neither than to say it is both. Niether
means it can be real or personal, or something totally different.

The defesne of minority can only be used by the minor and other indorsers may not claim minority of the indorser.
But if there was misrepresentation of the minor’s age, the minor will be held liable.

Between the parties to the underlying transaction, illegality of the underlying transaction is a real defense. But as
to remote parties, the instrument is valid. A holder unaware of the nature of the note may be a holder in due course.

If the illegality of the instrument is by virtue of a statutory provision, it is a real defense. Otherwise, it is only a
personal defense.

Sebastian: A real defense is one raised against all persons, including holders in due course. While a personal defense is
one that can be raised except against a holder in due course.

KINDS OF DEFENSES

real defense – attaches to instrument; on the principle that the right sought to be enforced never existed/there was no
contract at all
personal defense – growing out of agreement; renders it inequitable to be enforced vs. defendant
DEFENSES

INCAPACITY: real; indorsement/assign by corp/infant: passes property but corp/infant no liability

ILLEGALITY: personal, even if no K because void under CC 1409
FORGERY: real (lack of consent):
forged
made without authority of person whose signature it purports to be.
General Rule:

wholly inoperative
no right to retain instrument, or give discharge, or enforce payment vs. any party, can be acquired through or under such
signature (unless forged signature unnecessary to holder’s title)
Exception:

unless the party against whom it is sought to enforce such right is precluded from setting up forgery/want of authority

precluded:

parties who make certain warranties, like a general indorser or acceptor

estopped/negligent parties
* note rules on Acceptance/Payment Under Mistake as applied to:

1. overdraft
2. stop payment order
3. forged indorsements

3
MATERIAL ALTERATION
Where NI materially altered w/o assent of all parties liable thereon, avoided, except as vs. a
party who has himself made, authorized or assented to alteration
and subsequent indorsers.
But when an instrument has been materially altered and is in the hands of a HDC not a party to the alteration, HDC may
enforce payment thereof according to orig. tenor
Material Alteration
change date
sum payable, either for principal or interest
time of payment
number/relations of parties
medium/currency of payment, adds place of payment where none specified, other change/addition altering effect of
instrument in any respect.
*material alteration a personal defense when used to deny liability according to org. tenor of instrument, but real defense
when relied on to deny liability according to altered terms.

FRAUD
fraud in execution: real defense (didn’t know it was NI)
fraud in inducement: personal defense (knows it’s NI but deceived as to value/terms)
DURESS
Personal, unless so serious as to give rise to a real defense for lack of contractual intent
COMPLETE, UNDELIVERED INSTRUMENT
Personal defense (sec. 16)
If instrument not in poss. Of party who signed, delivery prima facie presumed
If holder is HDC, delivery conclusively presumed
INCOMPLETE, UNDELIVERED INSTRUMENT
Real defense (sec. 15)
Instrument will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against
any person whose signature was placed thereon before delivery
10. INCOMPLETE, DELIVERED

Personal defense (sec. 14)

2 Kinds of Writings:
Where instrument is wanting in any material particular: person in possession has prima facie authority to complete it by
filing up blanks therein
Signature on blank paper delivered by person making the signature in order that the paper may be converted into a NI:
prima facie authority to fill up as such for any amount
In order that any such instrument, when completed, ma be enforced vs. any person who became a party thereto prior to
its completion:
must be filled up strictly in accordance w/ authority given
within a reasonable time
but if any such instrument after completion is negotiated to HDC, it’s valid for all purposes in his hands, he may enforce it
as if it had been filled up properly.

B. EXAMPLES OF REAL AND PERSONAL DEFENSES

c.WRONG DATE

WHEN DATE NECESSARY

Under Section 6, the insertion of date is unnecessary
However, it may be necessary to determine the date of maturity
In the following cases, the date is also necessary:
o Where interest is stipulated, to determine when interest is to run, but not to make the instrument negotiable
o To determine where a party has acted within a reasonable time, but not make the instrument negotiable

EFFECT OF INSERTION OF WRONG DATE

Knowingly inserting the wrong date in an undated instrument will avoid it as to the party so inserting the wrong
date
It is implied that the instrument void as to the person who knowingly inserted the wrong date

4
 Also, under Section 12, it is void for ante-dating an instrument for fraudulent purposes
To a holder in due course, the instrument is not void, after the instrument is indorsed to him. The insertion
of the wrong date doesn’t avoid the instrument in the hands of a holder in due course.

SERENO, C.J.:

This is a Petition[2] for Review on Certiorari seeking to set aside the Decision[3] and Resolution[4] rendered by the Court
of Appeals (CA) Manila, Fifth Division, in CA-G.R. SP No. 110680.
ANTECEDENT FACTS

The facts as summarized by the CA are as follows:

Sometime in 1991, [Evangelista] obtained a loan from respondent Screenex, Inc. which issued two (2) checks to
[Evangelista]. The first check was UCPB Check No. 275345 for P1,000,000 and the other one is China Banking
Corporation Check No. BDO 8159110 for P500,000. There were also vouchers of Screenex that were signed by the
accused evidencing that he received the 2 checks in acceptance of the loan granted to him.

As security for the payment of the loan, [Evangelista] gave two (2) open dated checks: UCPB Check Nos. 616656 and
616657, both pay to the order of Screenex, Inc. From the time the checks were issued by [Evangelista], they were held in
safe keeping together with the other documents and papers of the company by Philip Gotuaco, Sr., father-in--law of
respondent Alexander Yu, until the former's death on 19 November 2004.

Before the checks were deposited, there was a personal demand from the family for [Evangelista] to settle the loan and
likewise a demand letter sent by the family lawyer.[5]

On 25 August 2005, petitioner was charged with violation of Batas Pambansa (BP) Blg. 22 in Criminal Case Nos. 343615-
16 filed with the Metropolitan Trial Court (MeTC) of Makati City, Branch 61.[6] The Information reads:

That sometime in 1991, in the City of Makati, Metro Manila, Philippines, a place within the jurisdiction of this Honorable
Court, the above-named accused, did then and there, willfully, unlawfully and feloniously make out, draw, and issue to
SCREENEX INC., herein represented by ALEXANDER G. YU, to apply on account or for value the checks described
below:

Check No.
Date
Amount
United Coconut AGR 616656
12-22-04
P1,000,000.00
Planters Bank AGR 616657
12-22-04
500,000.00
said accused well knowing that at the time of issue thereof, said accused did not have sufficient funds in or credit with the
drawee bank for the payment in full of the face amount of such check upon its presentment which check when presented
for payment within ninety (90) days from the date thereof, was subsequently dishonored by the drawee bank for the reason
"ACCOUNT CLOSED" and despite receipt of notice of such dishonor, the said accused failed to pay said payee the face
amount of said checks or to make arrangement for full payment thereof within five (5) banking days after receiving notice.

CONTRARY TO LAW.[7]
Petitioner pleaded not guilty when arraigned, and trial proceeded.[8]

THE RULING OF THE MeTC

The MeTC found that the prosecution had indeed proved the first two elements of cases involving violation of BP 22: i.e.
the accused makes, draws or issues any check to apply to account or for value, and the check is subsequently dishonored
by the drawee bank for insufficiency of funds or credit; or the check would have been dishonored for the same reason had
not the drawer, without any valid reason, ordered the bank to stop payment. The trial court pointed out, though, that the
prosecution failed to prove the third element; i.e. at the time of the issuance of the check to the payee, the latter did not
have sufficient funds in, or credit with, the drawee bank for payment of the check in full upon its presentment.[9] In the
instant case, the court held that while prosecution witness Alexander G. Yu declared that the lawyer had sent a demand
letter to Evangelista, Yu failed to prove that the letter had actually been received by addressee. Because there was no
way to determine when the five-day period should start to toll, there was a failure to establish prima facie evidence of
knowledge of the insufficiency of funds on the part of Evangelista.[10] Hence, the court acquitted him of the criminal
charges.

Ruling on the civil aspect of the cases, the court held that while Evangelista admitted to having issued and delivered the
checks to Gotuaco and to having fully paid the amounts indicated therein, no evidence of payment was presented.[11] It
further held that the creditor's possession of the instrument of credit was sufficient evidence that the debt claimed had not
yet been paid.[12] In the end, Evangelista was declared liable for the corresponding civil obligation.[13]

The dispositive portion of the Decision[14] reads:

WHEREFORE, judgment is rendered acquitting the accused BENJAMIN EVANGELISTA for failure of the prosecution to
establish all the elements constituting the offense of Violation of B.P. 22 for two (2) counts. However, accused is hereby

5
ordered to pay his civil obligation to the private complainant in the total amount of ONE MILLION FIVE HUNDRED
THOUSAND PESOS (P1,500,000) plus twelve (12%) percent interest per annum from the date of the filing of the two sets
of Information until fully paid and to pay the costs of suit.

SO ORDERED.[15]

THE RULING OF THE RTC

Evangelista filed a timely Notice of Appeal[16] and raised two errors of the MeTC before the Regional Trial Court (RTC)
of Makati City, Branch 147. Docketed therein as Criminal Case Nos. 08-1723 and 08-1724, the appeal posed the following
issues: (1) the lower court erred in not appreciating the fact that the prosecution failed to prove the civil liability of
Evangelista to private complainant; and (2) any civil liability attributable to Evangelista had been extinguished and/or was
barred by prescription.[17]

After the parties submitted their respective Memoranda,[18] the RTC ruled that the checks should be taken as evidence
of Evangelista's indebtedness to Gotuaco, such that even if the criminal aspect of the charge had not been established,
the obligation subsisted.[19] Also, the alleged payment by Evangelista was an affirmative defense that he had the burden
of proving, but that he failed to discharge.[20] With respect to the defense of prescription, the RTC ruled in this wise:

As to the defense of prescription, the same cannot be successfully invoked in this appeal. The 10-year prescriptive period
of the action under Art. 1144 of the New Civil Code is computed from the time the right of action accrues. The terms and
conditions of the loan obligation have not been shown, as only the checks evidence the same. It has not been shown
when the loan obligation was to mature such that there is no basis to show or from which to infer, when the cause of action
(non-payment of the loan) which would give the obligee the right to seek redress for the non-payment of the obligation,
accrued. In other words, the reckoning point of prescription has not been established.

Prosecution witness Alexander G. Yu was not competent to state that the loan was contracted in 1991 as in fact, Yu
admitted that it was a few months before his father-in-law (Philip Gotuaco) died when the latter told him about accused's
failure to pay his obligation. That was a few months before November 19, 2004, date of death of his father-in-law.

At any rate, the right of action in this case is not upon a written contract, for which reason, Art. 1144, New Civil Code, on
prescription does not apply.[21]

In a Decision[22] dated 18 December 2008, the RTC dismissed the appeal and affirmed the MeTC decision in toto.[23]
The Motion for Reconsideration[24] was likewise denied in an Order[25] dated 19 August 2009.

THE RULING OF THE CA

Evangelista filed a petition for review[26] before the CA insisting that the lower court erred in finding him liable to pay the
sum with interest at 12% per annum from the date of filing until full payment. He further alleged that witness Yu was not
competent to testify on the loan transaction; that the insertion of the date on the checks without the knowledge of the
accused was an alteration that avoided the checks; and that the obligation had been extinguished by prescription.[27]

Screenex, Inc., represented by Yu, filed its Comment.[28] Yu claimed that he had testified on the basis of his personal
dealings with his father-in- law, whom Evangelista dealt with in obtaining the loan. He further claimed that during the trial,
petitioner never raised the competence of the witness as an issue.[29] Moreover, Yu argued that prescription set in from
the accrual of the obligation; hence, while the loan was transacted in 1991, the demand was made in February 2005,
which was within the 10-year prescriptive period.[30] Yu also argued that while Evangelista claimed under oath that the
loan had been paid in 1992, he was not able to present any proof of payment.[31] Meanwhile, Yu insisted that the material
alteration invoked by Evangelista was unavailing, since the checks were undated; hence, nothing had been altered.[32]
Finally, Yu argued that Evangelista should not be allowed to invoke prescription, which he was raising for the first time on
appeal, and for which no evidence was adduced in the court of origin.[33]

The CA denied the petition.[34] It held that (1) the reckoning time for the prescriptive period began when the instrument
was issued and the corresponding check returned by the bank to its depositor;[35] (2) the issue of prescription was raised
for the first time on appeal with the RTC;[36] (3) the writing of the date on the check cannot be considered as an alteration,
as the checks were undated, so there was nothing to change to begin with;[37] (4) the loan obligation was never denied
by petitioner, who claimed that it was settled in 1992, but failed to show any proof of payment.[38] Quoting the MeTC
Decision, the CA declared:

[t]he mere possession of a document evidencing an obligation by the person in whose favor it was executed, merely raises
a presumption of nonpayment which may be overcome by proof of payment, or by satisfactory explanation of the fact that
the instrument is found in the hands of the original creditor not inconsistent with the fact of payment.[39]

The dispositive portion reads:

WHEREFORE, premises considered, the petition is DENIED. The assailed August 19, 2009 Order of the Regional Trial
Court, Branch 147, Makati City, denying petitioner's Motion for Reconsideration of the Court's December 18, 2008 Decision
in Crim. Case Nos. 08-1723 and 08-1724 are AFFIRMED.

SO ORDERED.[40]

Petitioner filed a Motion for Reconsideration,[41] which was similarly denied in a Resolution[42] dated 27 February 2014.

Hence, this Petition,[43] in which petitioner contends that the lower court erred in ordering the accused to pay his alleged
civil obligation to private complainant. In particular, he argues that the court did not consider the prosecution's failure to

6
prove his civil liability to respondent, and that any civil liability there might have been was already extinguished and/or
barred by prescription.[44]

Meanwhile, respondent filed its Comment,[45] arguing that the date of prescription was reckoned from the date of the
check, 22 December 2004. So when the complaint was filed on 25 August 2005, it was supposedly well within the
prescriptive period of ten (10) years under Article 1144 of the New Civil Code.[46]

OUR RULING

With petitioner's acquittal of the criminal charges for violation of BP 22, the only issue to be resolved in this petition is
whether the CA committed a reversible error in holding that petitioner is still liable for the total amount of P1.5 million
indicated in the two checks.

We rule in favor of petitioner.

A check is discharged by any other act which will discharge a simple contract for the payment of money.
In BP 22 cases, the action for the corresponding civil obligation is deemed instituted with the criminal action.[47] The
criminal action for violation of BP 22 necessarily includes the corresponding civil action, and no reservation to file such
civil action separately shall be allowed or recognized.[48]

The rationale for this rule has been elucidated in this wise:

Generally, no filing fees are required for criminal cases, but because of the inclusion of the civil action in complaints for
violation of B.P. 22, the Rules require the payment of docket fees upon the filing of the complaint. This rule was enacted
to help declog court dockets which are filled with B.P. 22 cases as creditors actually use the courts as collectors. Because
ordinarily no filing fee is charged in criminal cases for actual damages, the payee uses the intimidating effect of a criminal
charge to collect his credit gratis and sometimes, upon being paid, the trial court is not even informed thereof. The inclusion
of the civil action in the criminal case is expected to significantly lower the number of cases filed before the courts for
collection based on dishonored checks. It is also expected to expedite the disposition of these cases. Instead of instituting
two separate cases, one for criminal and another for civil, only a single suit shall be filed and tried. It should be stressed
that the policy laid down by the Rules is to discourage the separate filing of the civil action. The Rules even prohibit the
reservation of a separate civil action, which means that one can no longer file a separate civil case after the criminal
complaint is filed in court. The only instance when separate proceedings are allowed is when the civil action is filed ahead
of the criminal case. Even then, the Rules encourage the consolidation of the civil and criminal cases. We have previously
observed that a separate civil action for the purpose of recovering the amount of the dishonored checks would only prove
to be costly, burdensome and time-consuming for both parties and would further delay the final disposition of the case.
This multiplicity of suits must be avoided.[49] (Citations omitted)

This notwithstanding, the civil action deemed instituted with the criminal action is treated as an "independent civil liability
based on contract."[50]

By definition, a check is a bill of exchange drawn on a bank 'payable on demand.[51] It is a negotiable instrument - written
and signed by a drawer containing an unconditional order to pay on demand a sum certain in money.[52] It is an
undertaking that the drawer will pay the amount indicated thereon. Section 119 of the NIL, however, states that a negotiable
instrument like a check may be discharged by any other act which will discharge a simple contract for the payment of
money, to wit:

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. (Emphasis supplied)

A check therefore is subject to prescription of actions upon a written contract. Article 1144 of the Civil Code provides:

Article 1144. The following actions must be brought within ten years from the time the right of action accrues:

1) Upon a written contract;

2) Upon an obligation created by law;
3) Upon a judgment. (Emphasis supplied)

Barring any extrajudicial or judicial demand that may toll the 10-year prescription period and any evidence which may
indicate any other time when the obligation to pay is due, the cause of action based on a check is reckoned from the date
indicated on the check.

If the check is undated, however, as in the present petition, the cause of action is reckoned from the date of the issuance
of the check. This is so because regardless of the omission of the date indicated on the check, Section 17[53] of the
Negotiable Instruments Law instructs that an undated check is presumed dated as of the time of its issuance.

7
While the space for the date on a check may also be filled, it must, however, be filled up strictly in accordance with the
authority given and within a reasonable time.[54] Assuming that Yu had authority to insert the dates in the checks, the fact
that he did so after a lapse of more than 10 years from their issuance certainly cannot qualify as changes made within a
reasonable time.

Given the foregoing, the cause of action on the checks has become stale, hence, time-barred. No written extrajudicial or
judicial demand was shown to have been made within 10 years which could have tolled the period. Prescription has indeed
set in.

Prescription allows the court to dismiss the case motu proprio.

We therefore have no other recourse but to grant the instant petition on the ground of prescription. Even if that defense
was belatedly raised before the RTC for the first time on appeal from the ruling of the MeTC, we nonetheless dismiss the
complaint, seeking to enforce the civil liability of Evangelista based on the undated checks, by applying Section 1 of Rule
9 of the Rules of Court, to wit:

Section 1. Defenses and objections not pleaded. - Defenses and objections not pleaded either in a motion to dismiss or
in the answer are deemed waived. However, when it appears from the pleadings or the evidence on record that the court
has no jurisdiction over the subject matter, that there is another action pending between the same parties for the same
cause, or that the action is barred by a prior judgment or by statute of limitations, the court shall dismiss the claim.

While it was on appeal before the RTC that petitioner invoked the defense of prescription, we find that the pleadings and
the evidence on record indubitably establish that the action to hold petitioner liable for the two checks has already
prescribed.

The delivery of the check produces the effect of payment when through the fault of the creditor they have been impaired
It is a settled rule that the creditor's possession of the evidence of debt is proof that the debt has not been discharged by
payment.[55] It is likewise an established tenet that a negotiable instrument is only a substitute for money and not money,
and the delivery of such an instrument does not, by itself, operate as payment.[56] Thus, in BPI v. Spouses Royeca,[57]
we ruled that despite the lapse of three years from the time the checks were issued, the obligation still subsisted and was
merely suspended until the payment by commercial document could actually be realized.[58]

However, payment is deemed effected and the obligation for which the check was given as conditional payment is treated
discharged, if a period of 10 years or more has elapsed from the date indicated on the check until the date of encashment
or presentment for payment. The failure to encash the checks within a reasonable time after issue, or more than 1 0 years
in this instance, not only results in the checks becoming stale but also in the obligation to pay being deemed fulfilled by
operation of law.

Art. 1249 of the Civil Code specifically provides that checks should be presented for payment within a reasonable period
after their issuance, to wit:

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such
currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the
effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in the abeyance. (Emphasis supplied)

This rule is similarly stated in the Negotiable Instruments Law as follows:

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.
(Emphasis supplied)

These provisions were the very same ones we cited when we discharged a check by reason of the creditor's unreasonable
or unexplained delay in encashing it. In Papa v. Valencia,[59] the respondents supposedly paid the petitioner the purchase
price of the lots in cash and in check. The latter disputed this claim and argued that he had never encashed the checks,
and that he could no longer recall the transaction that happened 10 years earlier. This Court ruled:

Granting that petitioner had never encashed the check, his failure to do so for more than ten (10) years undoubtedly
resulted in the impairment of the check through his unreasonable and unexplained delay.

While it is true that the delivery of a check produces the effect of payment only when it is cashed, pursuant to Art. 1249 of
the Civil Code, the rule is otherwise if the debtor is prejudiced by the creditor's unreasonable delay in presentment. The
acceptance of a check implies an undertaking of due diligence in presenting it for payment, and if he from whom it is
received sustains loss by want of such diligence, it will be held to operate as actual payment of the debt or obligation for
which it was given. It has, likewise, been held that if no presentment is made at all, the drawer cannot be held liable
irrespective of loss or injury unless presentment is otherwise excused. This is in harmony with Article 1249 of the Civil
Code under which payment by way of check or other negotiable instrument is conditioned on its being cashed, except
when through the fault of the creditor, the instrument is impaired. The payee of a check would be a creditor under this
provision and if its no-payment is caused by his negligence, payment will be deemed effected and the obligation for which
the check was given as conditional payment will be discharged.[60] (Citations omitted and emphasis supplied)

Similarly in this case, we find that the delivery of the checks, despite the subsequent failure to encash them within a period
of 10 years or more, had the effect of payment. Petitioner is considered discharged from his obligation to pay and can no
longer be pronounced civilly liable for the amounts indicated thereon.

8
WHEREFORE, the instant Petition is GRANTED. The Decision dated 1 October 2013 and Resolution dated 27 February
2014 in CA-G.R. SP No. 110680 are SET ASIDE. The Complaint against petitioner is hereby DISMISSED.

SO ORDERED.

D. INCOMPLETE BUT DELIVERED

Agbayani: Bills and notes are sometimes executed in blank and delivered to another to fill in and negotiate either for
his own benefit or that of the maker. Such instruments are, therefore, incomplete but delivered.

Sebastian: The missing element here must be a material particular. Either one of the missing material particulars
may be corrected by Section 14. An instrument that is non-negotiable at inception may become negotiable because
of Section 14. However, the correction of the missing date cannot be corrected by Section 14, but may be corrected
by Section 13.

Authority to Complete the Instrument

Agbayani: The material particular referred to here may be: (1) a particular omission of which will render the instrument
non-negotiable (e.g. name of the payee or the name of the drawer); or (2) a particular omission of which will not render
the instrument non-negotiable (e.g. date, rate of interest, place of payment).

The law presumes from two facts: (1) want of a material particular in the instrument, and (2) possession thereof by a
person, a third fact (3) that such person had authority to fill up the blank.

It will be noted that the law does not seem to require the delivery of the instrument with intent to have it converted into a
negotiable paper. The law merely requires that it be in the possession of a person other than the drawer or maker, and
from such possession, together with the fact that the instrument is wanting in a material particular, the law presumes
agency to fill up the blanks.

The law thus presumes the existence of the authority to fill the instrument up to any amount from the following two facts:
(1) a signature on a blank paper and (2) that the person signing in blank delivers it in order that the paper may be converted
into a negotiable instrument. Mere possession by a person is not enough.

Sebastian: The holder is presumably given the authority to fill the missing element. What is presumed is given that the
instrument is incomplete, the maker or drawer made a delivery. Consequently, the person to who it is delivered is presumed
given the authority to fill it up.

Rights of a Holder in Due Course

Agbayani: Under this section, the defense of parties prior to completion is that it is not filled up within a reasonable time.
However, such defense is available only against holders who are not holders in due course. The defense is not available
against a holder in due course because under the law, in the hands of

such a holder, the complete but delivered instrument is “valid and effective for all purposes in his hands, and he may
enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time.” The
defense is, therefore, a personal or equitable defense.

Sebastian: A holder in due course can enforce the instrument against parties prior to completion regardless of the validity
of the elements filled up by the prior holders. Thus, this is a personal defense.

Instruments Delivered in Blank

Agbayani: One who is not a holder in due course cannot enforce the instrument against a party prior to the completion of
the instrument if the instrument is not filled up strictly in accordance with the authority given and within reasonable time.
The law provides that in order that one who is not a holder in due course may enforce mechanically incomplete but
delivered instrument, the two requisites must exist. The implication is that when one or both of the requisites are absent,
the instrument may not be enforced.

Although an instrument was completed not in accordance with the authority given, the parties negotiating after completion
are liable on the completed instrument because they are estopped or precluded from claiming that the note was not filled
up strictly in accordance with the authority given.

In determining what is a “reasonable time” or an “unreasonable time,” regard is had to the nature of the instrument, the
usage of trade or business (if any) with respect to such instrument and the facts of the particular case. In other words, the
term is very relative.

Sebastian: Another incomplete instrument in this section is a blank piece of paper that is signed. It may be filled up in
accordance with the instructions and within a reasonable time. After which, the instrument may be enforced againt prior
parties; otherwise, the instrument cannot be enforced.

9
The requirements for a blank sheet to become a negotiable instrument is that (1) the maker must sign a blank sheet of
paper, (2) with intent to convert to a negotiable instrument, and (3) must deliver the sheet.

E.INCOMPLETE AND UNDELIVERED

Agbayani: An incomplete instrument is not valid against the party before its delivery. The non-delivery of an
incomplete instrument is a valid defense, not only between the original parties but also against a holder in due
course. The law does not make any distinction between a holder in due course and who is not because the law used
the phrase “any holder” which includes a holder in due course. The defense of “want of delivery of a mechanically
incomplete instrument” is, thus, a real defense.

However, the invalidity of the instrument is only with reference to the parties whose signatures appear on the
instrument prior to delivery. As to parties whose signatures appear on the instrument after delivery, the instrument
may be valid.

Under Section 16, the delivery is conclusively presumed where an instrument is in the hands of the holder in due
course. The provision of Section 16 that a valid delivery is in the hands of a holder in due course must be read in
connection with Section 15, and Section 16 does not apply in the case of an incomplete instrument completed and
negotiated without authority. Section 16 applies to a mechanically completed instrument not delivered, while
Section 15 applies to a mechanically incomplete instrument not delivered.

But where an incomplete and undelivered instrument is in the hands of a holder in due course, there is a prima
facie presumption of delivery which the maker may rebut by proof of non-delivery. This presumption must,
however, be distinguished from the presumption where an undelivered mechanically complete instrument is in the
hands of a holder in due course, in which the presumption of valid delivery is note merely prima facie but conclusive.
Furthermore, where the custody of the incomplete instrument has been entrusted to another, who wrongfully
completes and negotiates it to a holder in due course, delivery to the agent or custodian is a sufficient delivery to
bin the drawer or maker.

Campos: This contemplates an instrument which is not only undelivered but also incomplete. In this case, a real
defense exists and not even a holder in due course can recover on the instrument, for the law is specific that it is not
a valid contract in the hands of any holder. The conclusive presumption of delivery under Sec. 16 cannot apply,
although possession of an incomplete instrument raises prima facie presumption of delivery.

If an instrument contains all the requisites for making it a negotiable one, it should be considered as complete
though it in fact may have blanks as to non- essentials, so as to give rise to a conclusive presumption of delivery in
favor of a holder in due course.
Sebastian: This is a real defense. s a rule, one cannot enforce the instrument whose signature appeared before
delivery. But if the incompleteness is cured by the authority given by the maker to an agent, Section 15 will not be
applicable.

Also, there are cases where Section 15 is not applied where the doctrine of estoppel is involved.

F. COMPLETE BUT UNDELIVERED

Agbayani: The law provides that every contract on a negotiable instrument is incomplete and revocable until
delivery of the instrument for the purpose of giving effect thereto. And no rights, properly speaking, arise in respect
to an instrument until it is delivered.

10
 Issue is the first delivery of the instrument, complete in form, to a person who takes it as a holder. Delivery and
issuance are used interchangeably. Delivery and issuance may be made either by the maker or drawer himself or
through a duly authorized agent, and may be made either to the payee himself or to his duly authorized agent.

Before delivery, the maker or drawer can revoke, cancel or tear up the instrument. The payee named in the
instrument acquires no right until the instrument is delivered to him.

The term immediate parties is confined to those who are immediate, in the sense of knowing or being held to know the
conditions or limitations placed upon the delivery of the instrument. It means privity, not proximity. In other words,
the criterion is whether or not the party in question knows of the conditions or limitations placed upon the delivery or
the fact that the instrument was notdelivered but stolen. If the party in question knows, he is an immediate party even
if he is physically remote. On the other hand, if he does not know, he is not an immediate party even if he is the next
party physically.

Under the law 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. However, as against an immediate party who
is not a holder in due course, the presumption will exist in his favor only until the contrary is proven. In other words,
the presumption is rebuttable as against an immediate party or a remote party who is not a holder in due course and,
as against him, it may proved that:
1) no delivery was made;
2) if the delivery was made, it was not authorized;
3) if the delivery was made or authorized, the delivery was conditional or for a special purpose and not for the purpose of
transferring the property in the instrument.

Campos: Non-delivery of a complete instrument is only a personal defense.

Delivery of an instrument is a prerequisite for liability. If the instrument is complete in all its particulars, but is not
delivered, there is no contract. However, if the instrument is no longer in the possession of a party who has signed it, a
delivery is presumed until the contrary is proved. If the holder is a holder in due course, the instrument is not merely
prima facie deemed delivered, but this fact is conclusively presumed. Thus, if a complete instrument is stolen from the
maker or drawer, and negotiated to a holder in due course, such maker or drawer cannot set up a defense of non-
delivery because it is a personal defense available only between immediate parties and as regards remote parties who
are not holders in due course.

Sebastian: Delivery is the transfer of possession, actual or constructive, from one person to another. For delivery to
be effectual, must be done by making or endorsing under the authority of the person making, endorsing, drawing or
accepting. When a person delivers an instrument, the delivery can be conditional, unconditional or for a specific
purpose only.

As a general rule, when the instrument is no longer in the possession of the party who signed, there is a prima facie
presumption that the party who signed it intentionally delivered it. In respect to a holder in due course, there is
already a conclusive presumption of delivery. However, for immediate and remote parties, to be effectual, delivery
must be made by the drawer, maker, acceptor or endorser, or under their authority. Immediate parties are those
parties who has knowledge of the circumstances surrounding the delivery of the instrument. They are remote when
they have no knowledge and there is no privity of contract. The presumption may be raised against remote parties
because of the guaranties made under Section 65 and 66. In so far as this provision protects the holder in due
course, it is a personal defense. What is conclusive is only the delivery. It does not preclude the maker from
interposing any other defenses.

This provision is subject to the application of estoppel.

DEVELOPMENT BANK OF RIZAL (DBR), plaintiff-petitioner,

vs.
SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON TUNG, ASIAN INDUSTRIAL PLASTIC
CORPORATION and PRODUCERS BANK OF THE PHILIPPINES, defendants-respondents.

FACTS:

Sima Wei executed a promissory note in consideration of a loan secured from DBR in the
amount of P1,820,000. Sima Wei was able to pay partially for the loan but failed to pay the

11
balance. Subsequently, Sima Wei issued two crossed checks payable to DBR. These two checks
however were not delivered to the DBR but instead came into the possession of respondent Lee Kian
Huat, who deposited the checks without DBR's indorsement to the account of respondent Plastic
Corporation with Producers Bank. Inspite of the fact that the checks were crossed and payable to
DBR and bore no indorsement of the latter, the Branch Manager of Producers Bank authorized the
acceptance of the checks for deposit and credited them to the account of said Plastic Corporation.
DBR instituted actions against the Sima Wei and the other defendants. The trial court dismissed
the case stating that DBR had no cause of action against the defendants-respondents.
CA affirmed this decision.

ISSUE:
Whether petitioner Bank has a cause of action against any or all of the defendants-respondents.

RULING:

A negotiable instrument, of which a check is, is not only a written evidence of a contract right but is
also a species of property. Just as a deed to a piece of land must be delivered in order to convey
title to the grantee, so must a negotiable instrument be delivered to the payee in order to
evidence its existence as a binding contract. Section 16 provides that every contract on a
negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose
of giving effect
thereto. Thus, the payee of the negotiable instrument acquires no interest with respect
thereto until its delivery to him. Without the initial delivery of the instrument from the drawer to
the payee, there can be no liability on the instrument. Moreover, such delivery must be intended
to give effect to the instrument.

Since petitioner Bank never received the checks on which it based its action against said respondents,
it never owned them (the checks) nor did it acquire any interest therein. Thus, anything which the
respondents may have done with respect to said checks could not have prejudiced petitioner Bank.
It had no right or interest in the checks which could have been violated by said respondents.
Petitioner Bank has therefore no cause of action against said respondents, in the alternative or
otherwise. If at all, it is Sima Wei, the drawer, who would have a cause of action against her co-
respondents, if the allegations in the complaint are found to be true.

G. FORGERY

Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust and CA
Facts:
Samsung Construction maintained a current account with Far East Bank and Trust Bank (FETBC) in
its Bel-Air Makati Branch, with Jong Kyu Lee who is the Project Manager as the sole signatory and Kyu
Yong Lee having the checks in his custody as the company’s accountant. A certain Roberto Gonzaga
presented an FETBC Check on the same branch. The check was payable to cash and drawn against the
account of Samsung Construction amounting to P995, 500.00. The teller and the bank officers were
satisfied with the genuineness of the signature in the check and confirmed the identity of Gonzaga with
the assistant accountant of Samsung Construction who was also familiar and known to them, the latter
being present at the bank premises at that time. In the end, the check was authorized to be encashed.
The Project Manager and the Accountant of the company found out the next day that the last blank
check was missing and that the check was encashed with Jong’s signature being forged. Samsung
Construction demanded reimbursement of the amount encashed and when it was not heeded
immediately, it filed a Complaint against the bank for violation of Sec. 23 of Negotiable Instruments
Law.
In the RTC, it held that Jong’s signature on the check was forged and ordered the bank to pay company
for the amount plus interest. During appeal in CA, this decision was reversed by stating that even
assuming there was forgery, it occurred due to the negligence of Samsung Construction specifically
the accountant for lack of care in keeping the checks. The decision was appealed to SC, based on the
grounds that the CA misapprehended the facts and erred when it said that the company has been

12
negligent in safekeeping the check.

Issue:
Is bank liable to reimburse the amount encashed through forgery?

Ruling:
Yes, the bank is liable to pay Samsung Construction. Therefore, the decision of CA is set aside.
Under Sec. 23 of Negotiable Instruments Law, forgery is a real or absolute defense by the party whose
signature is forged. The general rule remains that the drawee who has paid upon the forged signature
bears the loss. The exception to this rule arises only when negligence can be traced on the part of the
drawer whose signature was forged, and the need arises to weigh the comparative negligence between
the drawer and the drawee to determine who should bear the burden of loss. The Court finds no basis
to conclude that Samsung Construction was negligent in the safekeeping of its checks especially that
Samsung Construction reported the forgery almost immediately upon discovery. The general rule
imputing liability on the drawee who paid out on the forgery holds in this case.
The circumstances should have aroused the suspicion of the bank, as it is not ordinary business
practice for a check for such large amount to be made payable to cash or to bearer, instead of to the
order of a specified person. Extraordinary diligence dictates that FEBTC should have ascertained from
Jong personally that the signature in the questionable check was his. Still, even if the bank performed
with utmost diligence, the drawer whose signature was forged may still recover from the bank as long
as he or she is not precluded from setting up the defense of forgery. After all, Section 23 of the
Negotiable Instruments Law plainly states that no right to enforce the payment of a check can arise
out of a forged signature. Since the drawer, Samsung Construction, is not precluded by negligence
from setting up the forgery, the general rule should apply. Consequently, if a bank pays a forged check,
it must be considered as paying out of its funds and cannot charge the amount so paid to the account
of the depositor. A bank is liable, irrespective of its good faith, in paying a forged check.

The Province of Tarlac was disbursing funds to Concepcion Emergency Hospital via checks drawn against its account
with the Philippine National Bank (PNB). These checks were drawn payable to the order of Concepcion Emergency
Hospital. Fausto Pangilinan was the cashier of Concepcion Emergency Hospital in Tarlac until his retirement in 1978.
He used to handle checks issued by the provincial government of Tarlac to the said hospital. However, after his
retirement, the provincial government still delivered checks to him until its discovery of this irregularity in 1981. By
forging the signature of the chief payee of the hospital (Dr. Adena Canlas), Pangilinan was able to deposit 30 checks
amounting to P203k to his account with the Associated Bank.

When the province of Tarlac discovered this irregularity, it demanded PNB to reimburse the said amount. PNB in turn
demanded Associated Bank to reimburse said amount. PNB averred that Associated Bank is liable to reimburse because
of its indorsement borne on the face of the checks:

“All prior endorsements guaranteed ASSOCIATED BANK.”

ISSUE: What are the liabilities of each party?

HELD: The checks involved in this case are order instruments.

Liability of Associated Bank

Where the instrument is payable to order at the time of the forgery, such as the checks in this case, the signature of its
rightful holder (here, the payee hospital) is essential to transfer title to the same instrument. When the holder’s
indorsement is forged, all parties prior to the forgery may raise the real defense of forgery against all parties subsequent
thereto.

A collecting bank (in this case Associated Bank) where a check is deposited and which indorses the check upon
presentment with the drawee bank (PNB), is such an indorser. So even if the indorsement on the check deposited by
the banks’s client is forged, Associated Bank is bound by its warranties as an indorser and cannot set up the defense of
forgery as against the PNB.

EXCEPTION: If it can be shown that the drawee bank (PNB) unreasonably delayed in notifying the collecting bank
(Associated Bank) of the fact of the forgery so much so that the latter can no longer collect reimbursement from the
depositor-forger.

Liability of PNB

The bank on which a check is drawn, known as the drawee bank (PNB), is under strict liability to pay the check to the
order of the payee (Provincial Government of Tarlac). Payment under a forged indorsement is not to the drawer’s order.
When the drawee bank pays a person other than the payee, it does not comply with the terms of the check and violates
its duty to charge its customer’s (the drawer) account only for properly payable items. Since the drawee bank did not
pay a holder or other person entitled to receive payment, it has no right to reimbursement from the drawer. The general
rule then is that the drawee bank may not debit the drawer’s account and is not entitled to indemnification from the
drawer. The risk of loss must perforce fall on the drawee bank.

EXCEPTION: If the drawee bank (PNB) can prove a failure by the customer/drawer (Tarlac Province) to exercise
ordinary care that substantially contributed to the making of the forged signature, the drawer is precluded from
asserting the forgery.

In sum, by reason of Associated Bank’s indorsement and warranties of prior indorsements as a party after the forgery,

13
it is liable to refund the amount to PNB. The Province of Tarlac can ask reimbursement from PNB because the Province
is a party prior to the forgery. Hence, the instrument is inoperative. HOWEVER, it has been proven that the Provincial
Government of Tarlac has been negligent in issuing the checks especially when it continued to deliver the checks to
Pangilinan even when he already retired. Due to this contributory negligence, PNB is only ordered to pay 50% of the
amount or half of P203 K.

BUT THEN AGAIN, since PNB can pass its loss to Associated Bank (by reason of Associated Bank’s warranties), PNB
can ask the 50% reimbursement from Associated Bank. Associated Bank can ask reimbursement from Pangilinan but
unfortunately in this case, the court did not acquire jurisdiction over him.

Agbayani: By forgery is meant the counterfeit making or fraudulent alteration of any writing. It may consist in the
signing of another’s name, or the alteration of an instrument in the name, amount, description of the person and the
like, with intent to defraud. The intent to defraud distinguishes forgery from innocent alterations and spoliation.
Section 23 applies only to forged signatures or signatures made without the authority of the person whose signature
purports to be. Consequently, if the forgery consists of alteration in the amount, Section 23 does not apply. Such
alterations are covered by Section 124.

It is not necessary that the forger attempt to imitate or simulate the signature being forged.

Campos: Forgery is a real defense. A person whose signature to an instrument was forged was never a party and never
consented to the contract which allegedly gave rise to such instrument. Since his signature does not appear on the
instrument, he cannot be held liable thereon by anyone, not even by a holder in due course.

Section 23 deals with two sets of situations:

1) Where the signature on the instrument is affixed by one who purports to be an agent, but who does not have the
authority to bind the alleged principal; and
2) Where the signature is affixed by one who does not claim to act as an agent and who has no authority to bind the
apparent signer.

The signature in both cases is “wholly inoperative” and no one can gain title to the instrument through it.

Sebastian: Forgery is the affixing of the counterfeit signature of maker, drawer, indorser, or drawee; or a material
alteration of an instrument, particularly to the amount or name of the payee. In some cases, alteration of date can be a
forgery as when making it appear that the instrument is not yet past due. Material alteration are those alterations made
to material elements or those that are important to an instrument.

Fraudulent alteration is merely one of the two forms of forgery. Although, generally, what is usually forged is the
signature. The maker/drawer, drawee and indorser are the only people who can sign in the negotiable instrument. Any
other person’s signature that is forged is irrelevant.

The two general types of forgeries are the (1) counterfeiting of signature, and (2) material alteration under Section 124.
Material alteration is a form of forgery.

The counterfeiting of the signature may be done (1) by an authorized agent of the person whose signature is forged, or
(2) by a person who is a total stranger. If it is done by an authorized agent, it must be determined if the agent acted
within or outside the scope of his authority. When an agent affixes the signature of the person to an instrument without
being empowered to do so, then there is forgery by an agent. This is a functional equivalent of unenforceable contract
in Civil Law. If it is not done by an agent, the person does not even represent himself to be the agent of the person
whose signature is forged. Thus, such person cannot claim any authority to affix any signature.

Forgery can be invoked even if the signature is authentic.

EFFECTS OF FORGERY

Agbayani: Section 23 lays down three fundamental rules as to the effect of a forged signature:
1) that the signature forged or made without authority is wholly inoperative;
2) that no right (1) to retain the instrument, (2) to give discharge therefore or (3) to enforce payment thereof against
any party thereto, can be acquired through or under such signature forged or made without authority; and
3) that, nevertheless, as against a party precluded from setting up the forgery or want of authority, the signature
forged or made without authority:
a) the signature forged or made without authority is operative, and
b) rights can be acquired trough or under the signature forged or made without authority.

Sebastian: When there is forgery, the signature becomes wholly inoperative and there can be no right to retain, no right
to discharge the instrument or right to enforce payment, except if the party is precluded from interposing the defense
of forgery.

The person whose signature is forged, incurs no liability under that instrument because the signature is wholly
inoperative. A negotiable instrument is a contract between 2 or more people. It is axiomatic that one does not become
a party unless consent is given to a contract; thus, no rights or liabilities are incurred. If the signature is completely
inoperative, then the intended beneficiary of the instrument does not acquire anything under the counterfeit signature.

There must be an unbroken chain of legitimate transactions and any forgery breaks the legitimate transactions. When
the signature is wholly inoperative, anybody whose signature appears prior to the forgery cannot be held liable by the
last person who holds the instrument.

14
A holder in due course can then enforce payment under breach of warranties under Section 66 against the indorsers
after the forgery. His action is one for specific performance. A holder in due course’s action against the forger is not
limited to Section 66.

EXTENT OF EFFECTS OF FORGERY

Agbayani: It must be noted, however, that:

1) Only the signature forged or made without authority is stated by law to be inoperative but neither the instrument
itself is, nor the genuine signatures are, rendered inoperative.
2) The instrument can be enforced by holders to whose title over the instrument the forged signature is not
necessary, such as, an indorsement of an instrument which on its face is payable to bearer.
3) The instrument can be enforced against those who are precluded from setting up the defense of forgery, even
against those whose signatures are forged.

Sebastian:
1) Only the forged signature or made without authority is wholly inoperative and the other signatures are vaild.
2) The insturment can be enforced by the holder whose title to the instrument does not require the forged signature.
Meaning, the holder can enforce the instrument against a person whose signature is not neessary for the instrument.
Remember that to a holder in due course, a valid delivery to all prior parties is conclusively presumed.

Forgery of an irrelevant signature is not a defense, while forgery of a relevant signature is a real defense.

3) While a forged signature is wholly inoperative, the person against whom it is sought to be enforced must not be
precluded from claiming forgery, such as,
(1) the forgery was committed thru their negligence or (2) they delayed in notifying the forgery to the parties
involved.

PARTIES BARRED FROM SETTING UP THE DEFENSE OF FORGERY

Sebastian: Persons who are precluded from setting up the defense of forgery are (1) those who warrant or admit the
instrument’s genuineness and (2) those who are barred on account of silence, acts or negligence.

The common rule to all is that he who made the loss happen should bear the risk and loss.

Indorsers

Agbayani: Indorsers, whether qualified or general, warrant that the instrument indorsed by them is genuine in all
respects what it purports to be.

Campos: A general indorser subsequent to the forgery warrants among other things that the instrument is genuine, and
that it is valid and subsisting at the time of his indorsement.

Sebastian: By merely affixing your signature, one becomes a general indorser and warrants that the instrument is
genuine in all respect what it purports to be under Section 66.

Persons Negotiating by Delivery

Agbayani: Persons negotiating by mere delivery also warrant the instrument negotiated by them is genuine in all
respects what it purports to be.

Sebastian: Unlike an indorser, the warranties made are under Section 65 or warranties made by a qualified indorser.
These warranties are given by persons negotiating the instrument by mere delivery (i.e. bearer instruments).

Acceptors

Agbayani: Under Section 62, a drawee, by accepting the bill, admits the genuineness of the signature of the drawer.

Campos: An acceptor is precluded from claiming that the drawer’s signature is forged because under Sec. 62, he
warrants its genuineness.

A bank is bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making
the payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of the depositor
whose name was forged.

Sebastian: By way of Section 62, an acceptor admits the genuineness of the signature.

Representations and warranties enhance the acceptability of the instrument. By making them, the instrument becomes
more like money and more acceptable. Warranties need not to be stated in the instrument.

Persons in Estoppel

Agbayani: The rule of estoppel as stated in the New Rules of Court, applied to forgery in negotiable instruments may
be stated thus: Whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led
another to believe that his or another’s signature in an instrument is genuine, and to act upon such belief, he cannot,
in any litigation arising out of such declaration, act, or omission, be permitted to set up the forgery of such signature or
signatures.

15
Unreasonable delay, after his discovery of the forgery, uon the part of one having the opportunity and duty to speak, in
disclosing the forgery upon commercial paper to the one who ought to be apprised thereof, estops the former from

thereafter asserting the forgery as against the latter where the latter is prejudiced by such delay or failure. The requisites
are (1) that the delay be unreasonable and
(2) that the one who ought to be apprised of the forgery must have been prejudiced.

Sebastian: Estoppel may arise from declaration, act or omission. Because of these, you are precluded from using forgery
as a defense.

The basis of the rule of estoppel is that one cannot lead another to believe that his or another’s signature in an
instrument is genuine, and to act upon such belief, he cannot deny in any litigation arising out of such declaration. Not
every declaration puts a person in estoppel. It must be meant to be relied upon for the person to make the declaration
to be “estoppable.” In this case, the declaration was suppose to make the instrument more acceptable and negotiable.

Estoppel may also apply when there is unreasonable delay on the part of the person who suffered the loss due to forgery
and failed to report that the instrument was forged. It is the responsibility of the person who incurred the loss due to
forgery to report it within reasonable time because had the forgery been reported as early as possible, the transfer of
the instrument could have been prevented.

Persons Guilty of Negligence in Delivery

Agbayani: The omission may consist in negligence in the delivery of the instrument. Thus, a drawer may be precluded
from a defense of forgery of the payee’s indorsement if delivery by him to the payee is negligent.

Sebastian: Negligence in delivery may also result to estoppel.

FORGERY OF NOTES

Agbayani: Forgery of promissory notes may be further subdivided into forgery of an indorsement in the note and
forgery the maker’s signature.

Forgery of Maker’s Signature

Agbayani: Where the maker’s signature is forged, he cannot be held liable by any holder, whether the holder is in due
course or not. The reason is that the purported maker is not a party to the instrument as his forged signature is
inoperative and no right to retain, enforce or discharge the note, may be acquired against him.

Forged Indorsement of Note Payable to Order

Agbayani: Where the indorsement is forged and the note is payable to order, the party whose indorsement is forged
and parties prior to him including the maker cannot be held liable by the holder, whether that holder is a holder in due
course or not.

Sebastian: Normally, the holder must first collect from his immediate indorser and the latter must first collect from his
immediate indorser and so on and so forth until it reaches the forger. However, because of the forgery, the law allows
a shortcut where the holder can go after forger. His cause of action would be enforcement of warranites under Section
66 or a criminal action for falsification of commercial document. In fact, the holder can file an action to all parties after
the forgery in one suit.

Forged Indorsement of Note Payable to Bearer

Agbayani: In case the note is originally payable to bearer, the party whose indorsement is forged and parties prior to
him including the maker, may be held liable by a holder in due course provided that the note was mechanically complete
before the forgery.

Sebastian: A bearer instruments need not be signed because they only need to be delivery to be negotiated. Warranties
under Section 65 will apply. By mere delivery a holder is already a holder in due course even if there was no
indorsement. Thus, the holder can enforce the note against the maker because an indorsement is irrelevant in a bearer
instrument.

However, when the check is stolen the holder cannot make a claim against the maker because the instrument was not
properly discharged. But theft is only a personal defense and cannot be used against a holder in due course. Instead,
the holder can go after forger civilly for recovery of sum of money and/or criminally for theft or qualified theft.

FORGERY OF BILLS OF EXCHANGE

Forged Indorsement of a Bill Payable to Order

Agbayani: Where the indorsement is forged and the bill is payable to order, in the absence of preclusion from setting
up forgery by warranty as in the case of indorserers or by estoppel as in the case of negligence, the following are the
rights and liabilities of the parties:

drawer’s account cannot be debited

Agbayani: In an action by the drawee against the drawer for the amount charged by the drawee against the account of
the drawer where the drawee paid a check on a forged indorsement, the drawee has no defense against the drawer, and

16
the drawer may recover from the drawee for an instrument paid on a forged instrument.

This is on the theory that the drawer owes the drawee an absolute and contractual duty to pay the check only to the
person to whom it is made payable or upon his genuine indorsement. And the depository cannot relieve himself of this
duty by an amount or degree of care he may have exercised to determine the indorsement is the genuine indorsement
of the payee. In such cases, the drawer authorizes and directs the drawee to pay only to the payee or to the order of
payee. It does not authorize or direct the drawee to pay the check to any other person. The drawee bank has no legal
right to pay the money of the drawer on deposit with it to anyone except the drawer or its order.

Sebastian: Drawee has an obligation to pay payee or order only. There is breach of contract if drawee does not. In this
case, drawee cannot even raise the defense that he exercised extraordinary diligence because the cause of action of the
drawer against the drawee is breach of contract, not negligence.

drawer cannot recover from collecting bank

Agbayani: The drawer has no right to recover the amount paid from the collecting bank because the duty of the
collecting bank to exercise care in collection is due only to the payee and the drawer suffers no damage since it can
recover the amount paid from the drawee bank.

Sebastian: The drawer cannot recover from the collecting bank because there is no privity of contract between them.

drawee can recover from collecting bank

Agbayani: The drawee may recover from the recipient of the payment, such as the collecting bank, under a forged
indorsement. The reason for this is the same as for the rule allowing the payee to recover from the recipient of the
payment under a forged indorsement.

Sebastian: The drawee can recover from the collecting bank if the latter was the forger’s bank because the collecting
bank is the agent of the forger. Since the drawee can also run after the forger, he can also run after the collecting bank
because the legal standing of the agent cannot stand higher that that of the principal. However, if the collecting bank’s
principal was a holder in due course, the drawee cannot collect from collecting bank because the former is already a
party after the forgery.

On this same ground, the payee can also recover from the forger. Since theft of the check is a criminal offence, the thief
is required to make restitution.

payee can recover from drawer

Agbayani: Payee can still recover from the drawer on the basis of his claim of debt upon which the check in the first
place had been issued.

Sebastian: Since the payee did not receive the proceeds of the check because of the forged indorsement, his claim
against the drawee subsists and he can recover from the latter. It must be remembered that when payment is made by
way of a negotiable instrument, the debt is not extinguished until the instrument is encashed except if the instrument
lost its value on account of the creditor’s fault.

payee can recover from recipient of payment

Agbayani: According to the general rule, a bank or other corporation or an individual, who has obtained possession of
a check, upon an unauthorized or forged indorsement of the payee’s signature and who collects the amount of the check
from the drawee, is liable for the proceeds thereof to the payee or other owner, notwithstanding that they have been
paid to the person whom the check was obtained.

collecting bank is liable to payee

Agbayani: The possession of the check on the forged or unauthorized indorsement is wrongful, and when the money
had been collected on the check, the bank or other person or corporation, can be held as for the moneys had and
received, and the proceeds are held for the rightful owners of the payment and may be recovered by them. The position
of the bank or other corporation or person taking the check on the forged or unauthorized indorsement is the same as
if he had taken the check and collected the money without indorsement at all, and the act of the bank amounts to
conversion of the check.

Payment to depositor of forged signature of the payee, or the drawee bank on the same forged signature gave rise to an
obligation to return the amounts received.

Sebastian: The collecting bank is liabile to the payee because when the collecting bank collected the instrument, it had
no authority to do so. It’s authority to collect the check is based on the validity of the instrument.

payee cannot recover from drawee

Agbayani: The general rule is that an action cannot be maintained by a payee of the check against the drawee bank it is
drawn unless the check has been certified or accepted by the drawee bank. Without acceptance or certification, there is
no privity of contract between the drawee bank and the payee, or holder of the check. Neither is there an assignment
pro tanto of the funds where the check is not drawn on a particular fund, or does not show on its face that it is an
assignment of a particular fund.

Sebastian: Payee cannot recover from the drawee because there is no privity of contract. But there can be one created

17
if the drawee bank certified the check. By certification the drawee undertakes to pay the check but does not accept it,
the bank debits from drawers account and the drawer becomes liable to pay the bank. Through certification, the check
becomes a promissory note of the drawee because it makes an undertaking to pay the instrument.

Campos: No exception lies in the case of the drawee’s acceptance or payment of a genuine bill where only an
indorsement has been forged. The drawee can recover the amount paid out by him since he makes no warranty as to
the genuineness of any indorsement. However, when he learns about the forgery, he should notify the holder to whom
he paid as promptly as possible. Should he do so his right of recovery will not be affected by his subsequent knowledge
of the forgery. But should he fail to act promptly, he may lose his right to recover against the holder if his negligent
delay operates to the latter’s prejudice.

Where the negligence of the drawee bank is the proximate cause of a collecting bank’s payment of a check with a forged
indorsement, the former may be held liable to the latter bank.

The real and underlying reasons why negligence of the drawer constitutes no defense to the collecting bank are that
there is no privity between the drawer and the collecting bank and the drawer owes to that bank no duty of vigilance.

While the drawer generally owes no duty of diligence to the collecting bank, the law imposes a duty of diligence on the
collecting bank to scrutinize checks deposited with if for the purpose of determining their genuineness and regularity.
The collecting bank, being primarily engaged in banking holds itself out to the public as the expert and the law holds it
to a high standard of conduct.

Forged Indorsement of Bill Payable to Bearer

Agbayani: The rules are the same as in forged indorsements of promissory notes.

Sebastian: In this case, if the drawee pays a forged bearer instruent, he is not liable for breach of contract with drawer
because the instruction was pay to bearer. If drawee dishonors, a holder in due course can sue drawer, the
forger/indorser under warranties in Section 65 and the drawee bank.

The only defense of the drawer, if ever, is that the instrument was not delivered. However, this defense is only a personal
defense; thus, not available against a holder in due course. A holder in due course can claim against the drawee because
delivery is conclusively presumed.

Forged Signature of Drawer with Acceptance

Agbayani: The drawee cannot set up the defense of forgery because when he accepted the bill, he admitted the
genuineness of the signature of the drawer, and therefore, he cannot be thereafter be heard to say that the signature is
a forgery. Consequently, he stands to bear the loss and his remedy is against the forger.

The purported drawer is not liable as his signature is inoperative and, therefore, he is not a party to the bill. No right to
retain the bill, give discharge therefor or enforce payment thereon may be acquired against him by any holder. Further
more, since his signature is inoperative, his signature does not really appear on the bill, and, therefore, he is not liable
thereon.

Campos: Where the drawer’s signature is forged on a bill or check, the drawee who pays it without having detected the
forgery cannot charge the amount thereof to the drawer’s account. The forged signature is wholly inoperative and does
not give the drawee the right to discharge it.

We do not think that he who accepts a forged signature of a payee deserves that preferred treatment. It is his neglect or
error in accepting the forger’s signature which occasions the loss. He should be allowed to shift that loss to the drawee
only on a clear showing that the drawee’s delay in notifying him of the forgery caused him damage.

Sebastian: By acceptance, drawee becomes liable to pay. Until the drawee accepts, the liability is determined under
Section 66. Once drawee accepts, a holder can collect from him since an acceptor cannot raise the defense of forgery
being a party after the forgery. A holder can also claim from the forger.

Forgery of the drawer’s signature is not a defense available to the drawee bank. Likewise, the drawee bank cannot run
after parties subsequent to the forgery. Instead, the drawee bank may run after the forger.

Forged Signature of Drawer without Acceptance

Agbayani: As between equally innocent persons, the drawee, who pays money on a check or draft the signature to which
is forged, cannot recover from the one who received it.

The drawee so paying is considered as being constructively negligent. This rule is absolutely necessary to the circulation
of drafts and checks and is based upon the P resumed negligence of the drawee in failing to meet its obligation to know
the signature of its correspondent. Conditions would be intolerable if the retiring of commercial paper, through its
payment by the drawee, did not close the transaction but it was possible at an indefinite time in the future to reopen
the matter and recover the money, if the paper proved to have been forged. No one would dare handle it, and it would
pass out of use regardless of its convenience or necessity as a part of the life of business. There is nothing inequitable
in such rule. If the paper comes to the opportunity of ascertaining its character, pronounces it valid and pays it, it is
not only a question of payment under mistake but payment in neglect of duty which the commercial law places upon
him, and the result of his negligence must rest upon him.

The basis of the general rule is not that the drawee is precluded from setting up forgery because, by paying the check,
it has accepted the check and therefore admitted the genuineness of the drawer’s signature. The basis is that by paying
the check, the drawee is presumed negligent or deemed constructively negligent.

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 Campos: The drawee who had paid an accepted bill as well as a non-accepted bill, each of which bore the forged
signature of the drawer, could not recover the money paid out on either bill. The drawee is bound to know the signature
of the drawer and must therefore bear the loss in case it turns out to be forged.

“Acceptance” and “payment” are essentially different things, for the former is a promise to perform an act, whereas the
latter is the actual performance thereof. The acceptance of a bill is the signification by the drawee of his assent to the
order of the drawer. Actual payment of the amount of a check implies not only an assent to said order of the drawer
and recognition of the drawee’s obligation to pay the aforementioned sum, but also, a compliance with such obligation.

When one or two innocent persons must suffer by the wrongful act of a third person, the loss must be borne by the one
whose negligence was the proximate cause of the loss or who put it into the power of the third person to perpetrate the
wrong.

The rule creating an exception to the doctrine of payment under mistake, has been extended by the courts to cover the
drawee of a bill who honors an overdraft. An overdraft occurs when a check is issued for an amount more than what
the drawer has in deposit with the drawee bank.
The test which determines whether a recover may be had is whether the defendant in equity and good conscience is
entitled to retain the money to which the plaintiff asserts claim. It is also a general rule that the failure of the payor to
exercise ordinary care to avoid mistake will not as a matter of law defeat his recovery.
If the stop order comes after the bank has certified or accepted the check, the bank is under legal duty to pay the holder
and will not be liable to the drawer for doing so.

Sebastian: Drawee here is a party after the forgery. Drawee does not have a liability to pay but he paid.

Agbayani: Where the drawee bank encashed a check in which the drawer’s signature is forged which shows marked
variations from the genuine signature of the supposed drawer, said bank is negligent, and should return to the drawer
what it has debited the latter’s account.

Sebastian: In this case, we should focus on which party should the effect of negligence fall.

H. MATERIAL ALTERATION
METROPOLITAN BANK AND TRUST CO. v CABILZO
(Kristel)510 SCRA 259
FACTS:
Renato Cabilzo was one of Metrobank’s clients who maintaineda current account with the bank’s
Pasong Tamo Branch.
OnN o v . 1 2 , 1 9 9 4 , h e i s s u e d a c h e c k p a y a b l e t o c a s h a n d postdated on Nov.
24, 1994 for the amount of P1,000. Thecheck was presented to Westmont Bank for payment and
thelatter indorsed it to Metrobank. Metrobank cleared the checkand debited Cabilzo’s account. It was found out later
by Cabilzothat the check’s amount was altered to P91,000 and the datechanged to Nov. 14. Cabilzo
demanded that Metrobank re-credit the 90,000 to his account. Metrobank refused.
Cabilzof i l e d a c i v i l a c t i o n f o r d a m a g e s a g a i n s t M e t r o b a n k . I n i t s defense, Metrobank
said that it exercised due diligence inexamining the genuineness of the signature and the
technicalentries including the amount in figures and in words to see if there were alterations and found that there
was none. It furtherstated that Cabilzo was partly responsible for leaving spaceson the check which made the
fraudulent insertion possible. TheRTC and the Court of Appeals ruled in favor of Cabilzo sayingthat Metrobank was
liable

ISSUE: W / N M e t r o b a n k s h o u l d b e h e l d l i a b l e f o r d a m a g e s f o r i t s negligence

HELD: YES. The degree of diligence required of a reasonable man in theexercise of his tasks and the
performance of his duties hasbeen faithfully complied with by Cabilzo. In fact, he was waryenough that
he filled with asterisks the space between andafter the amounts, not only those stated in
words but alsothose in numerical figures in order to prevent any fraudulentinsertion.Metrobank cannot rely
on the doctrine of equitable estoppelwhich states that “when one of the two innocent persons, eachguiltless
of any intentional or moral wrong, must suffer a loss,it must be borne by the one whose erroneous conduct,
eitherb y o m i s s i o n o r c o m m i s s i o n , w a s t h e c a u s e o f i n j u r y . ” Metrobank did not prove
that Cabilzo was negligent or that thisnegligence was the proximate cause of the loss. Negligence isnot
presumed but it must be proven by the one who alleges it.Banking is a business affected with public interest and
becauseof the nature of its functions, the bank is under obligation
totreat the accounts of its depositors with meticulous care,always having in mind the fiduciary
nature of their relationship. The appropriate degree of diligence required of a bank must abe a high degree of
diligence, if not the utmost diligence.Here, the alterations on the check are visible to the naked eyebut Metrobank
failed to detect the alterations which could
note s c a p e t h e a t t e n t i o n o f e v e n a n o r d i n a r y p e r s o n . T h i s negligence is further
exacerbated by the fact that it was the cash custodian who examined the check when his functions
donot involve the examining of checks. Obviously, the custodianwas not versed and competent in handling
such duty. Banks
are expected to exercise the highest degree of diligence in theselection and supervision of employees

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2. Give examples of material alteration in an instrument:
- Unauthorized change in an instrument that purports to modify in any respect the obligation of a party;
- Unauthorized addition of words or numbers;
- Other change to an incomplete instrument relating to the obligations of a party;
- Substitution of the words: “or bearer” for “or order” (Builders Lime & Cement Co. v. Weymer, 151 N.W. 100);
- Writing the words “protest waived” above a blank indorsement (Sawyer State Bank v. Sutherland, 162 N.W. 966);
and
- Erasure of the words “without recourse” above the signature of the indorser (Waltham State Bank v. Tuttle, 199
N.W. 970)
- The insertion of the words "Agent, Phil. National Bank," which converts the bank from a mere drawee to a drawer
and therefore changes its liability, constitutes a material alteration of the instrument (Montinola v. PNB, GR No. L-
2861, February 26, 1951)
- One which changes the items which are required to be stated under Sec. 1 of NIL (PNB v. CA, 256 SCRA 491).
3. Provide examples when alteration is NOT material to the instrument.
- Adding words implied by law or making marginal figures to make them correspond to the sum written in words
(Smith v. Smith, 1 R.I. 398.)
- A serial number is an item which is not an essential requisite for negotiability under Sec. 1 of NIL, and which does
not affect the rights of the parties, hence its alteration is not material. (PNB vs. CA, 256 SCRA 491)
- An extension of time given by the holder of a note to the principal maker without the consent of a surety co-
maker, because alteration refers to physical alteration.
4. Section 125 provides for material alterations in the instrument sufficient to avoid the instrument as against those
who did not consent thereto. Is the list exclusive?
NO. The enumerated instances are not exclusive in view of the last part of the above section which reads “any other
change or addition which alters the effect of the instrument in any respect.”
5. Is material alteration a personal defense or a real defense?
Material alteration is a personal defense when it is used to deny liability according to the original tenor of the
instrument. It can also be a real defense when relied on to deny liability according to altered terms.

EFFECTS OF MATERIAL ALTERATION:

6. Generally, what is the effect of any material alteration in the instrument?
(A) When alteration is made by a party, it avoids the instrument except as against the party who made, authorized
or assented to the alteration, and subsequent indorsers.
- In other words, the effect of a material alteration by the holder is to discharge the instrument and all prior parties
thereto who did not give their consent to such alteration. Since no distinction is made, it does not matter whether it is
favorable or unfavorable to the party making the alteration (Franklin Ins. Co. v. Courtney, 60 Ind. 134) or the interests
of prior parties (Keller v. State Bank, 24 N.E. 94), or whether it is innocently or fraudulently made. (First Nat. Bank of
Sparta v. Yowell, 294 S.W. 1101). So that where the instrument has been altered although innocently, it is discharged
but the innocent party can sue upon the original debt for which it has been given. (First Nat. Bank of Sparta v. Yowell,
294 S.W. 1101).
What is the exception to the above general rule?
When the altered instrument is in the hands of a holder in due course (HDC), not a party to the alteration, he may
enforce payment thereof according to its original tenor (Section 124, NIL).

i. Fraud in inducement and in factum/esse contracts

FRAUD IN INDUCEMENT

Agbayani: Fraud in inducement does not amount to forgery and is only a personal defense. The following is an
illustration of fraud in inducement: A sells to B what he represents to be as a diamond ring, which in fact is only glass.
B issues to A a check. The check is not a forgery. The fraud here is in inducing B to issue the check. Here, there is an
intention of B to issue an instrument.

FRAUD IN CIVIL LAW

There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to
enter into a contract which, without them, he would not have agreed to. (Art. 1338, Civil Code)

DURESS AMOUNTING TO FORGERY

Agbayani: Ordinarily, duress is merely a personal defense. But where it amounts to forgery, it is a real defense, as where
A takes B’s hand and forces him to sign his name.

Sebastian: There must be violence or intimidation that results in the affixing of a genuine signature to an instrument.
While the signature was genuine, it was surrounded by circumstances with violence or intimidation. In this case, there
was want of intention to execute an instrument or to indorse.

FRAUDULENT IMPERSONATION

Agbayani: Suppose that X represents himself to be Juan Cruz, when in fact he is not. By this misrepresentation, X
obtains from Y a note payable to the order of Juan Cruz. Then X indorses the note, signing “Juan Cruz.” This is forgery
depending upon whom Y intended to pay. If Y intended that proceeds of the note will go to X, the person dealing with
him, named at that time Juan Cruz, then X’s signature of the name “Juan Cruz” is not a forgery. But if Y intended that
the proceeds of the note will go to the real Juan Cruz and not X, but to whom Y issued the note on the belief that X
was Juan Cruz, then X’s signature of “Juan Cruz” would be a forgery.

Sebastian: In fraudulent impersonation, there is no intention to issue the instrument to the person to who it was given
to. Thus, what is controlling is that one though the person in front of him is the person entitled to the instrument.

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The person raising this defense must demonstrate that he is not guilty of negligence or that it was not his negligence
that allowed the commission of the forgery.

Theory of Double Intent

Agbayani: In these fraudulent impersonation cases, the maker or drawer of the instrument may be said to have a double
intent. First, he intends to make the instrument payable to the person before him or to the person writing at the other
end of the line, in case the negotiation is by correspondence. Second, he intends to make the instrument payable to the
person who he believes the stranger to be. To use the illustration, Y here may be said to have a double intent. First, he
intends to make the instrument payable to X, the person before him. And, second, he intends to make the instrument
payable to Juan Cruz who he believes X, the stranger, to be.

The first is the controlling intent except where the name of the payee was already known to the maker or drawer, or
was more particularly identified, by some designation, description or title, in which case the second becomes the
controlling intent. Consequently, in the illustration, it would ordinarily be held that X is the indented payee, and
therefore, X’s signature of “Juan Cruz” would ordinarily not constitute a forgery but the signature of an assumed name.

The theory commonly invoked in throwing the loss on the drawer is that the drawee, in paying the paper, or the holder,
in taking it upon the indorsement of the impostor in the name of which the payee was described, carries out the
intention that the drawer entertained at the time of the delivery of the paper to the impostor, although that intention
was conceived in consequence of fraud of the impostor as to his identity and ownership of the property which
represented the consideration. (Theory of Actual Intent)

Another theory invoked is the maxim that as between two innocent persons, the one whose act was the cause of the loss
should bear the consequences. (Theory of Estoppel)

There is a distinction between cases where the paper is delivered to the impostor as payee and cases where the paper is
delivered to the impostor upon his representation, in the belief that he is agent of the person named as payee, although
the latter is a fictitious person, or at least a person who has no connection with the transaction. In the absence of
negligence on the drawer’s part, as between the drawer and drawee or between the drawer and a holder in due course,
the loss falls on the drawee or the purchaser, as the case may be, ratherthan on the drawer, where the impostor
represented himself to be the agent of the payee, and not the payee himself. The doctrine of actual intent does not
apply because the drawer did not regard the individual to whom he delivered the check as the payee but merely as the
agent of the payee.

Sebastian: Fraudulent inducement is not a form of forgery and is merely a personal defense.

Procedural Requirement in Proving Forgery

Sebastian: The person raising the defense of forgery must deny the document under oath. If he forgets to deny it under
oath, the genuineness of the instrument is conclusively admitted.

FRAUD IN FACTUM

Agbayani: Fraud in factum or fraud in esse contractus amounts to forgery and is a real defense. The following is an
illustration of fraud in factum: B obtains the signature of A by telling A that it is only for autograph instrument. The
fraud here amounts to fraud. Here, there is no intention to issue an instrument.

Sebastian: There is fraud in factum if there was no intention to issue an instrument. Although the signature is
mechanically genuine, there is want of intent. Fraud in factum, however, will never apply to a check because when you
sign a check, you know for what purpose is that signature.

Fraud in factum is a real defense. However, one cannot raise this defense if he is charged with negligence. Thus, an
essential element is that the person whose signature appears on the instrument should have exercised ordinary
diligence and did not contribute to the imposition of the forgery. The test is whether or not the signature is procured in
such manner as to be voluntary by the maker. If it is, then there is liability. The person raising the defense must present
competent proof that the signature affixed was without negligence on his part.

An indorsee is not obliged to ask the genuineness of the note because his protection is the warranty of an indorser. The
indorser can also claim under this. He is not primarily laible but will still be covered under the warranties under Section
66.

Where a signature is affixed on a blank paper w/o intent to create an instrument, and something is written to make it
appear that the signatory is a drawer, maker, indorser, or payee, there is fraud in factum.

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 Lack of Consideration
total lack of any valid consideration
embraces transactions where no
consideration was intended to pass
remedy is to annul the instrument
Failure of Consideration
neglect or failure of one of the parties
to give, to do or to perform the
consideration agreed upon
implies that the giving of valuable
consideration was contemplated but
that it failed to pass
Remedies are (1) rescission of the
instrument as to value that was failed
to receive or (2) specific performance

Campos: This provision reiterates the rule laid down by Section 24 that every instrument is deemed prima facie to have
been issued for a valuable consideration. It is also consistent with the provision that the validity and negotiable
character of an instrument is not affected by the fact that it does not specify that any value has been given therefor.
Under these rules, the defendant has the burden of proving that there was no consideration for the instrument.

Absence of consideration means total lack of consideration. For example, A makes a promissory note payable to B as a
gift; there is absence of consideration. As between A and B, there can be no recovery on the note. But if B negotiates it
to C, a holder in due course, C can recover against A, because A’s defense of absence of consideration is personal.

Failure of consideration means that something was agreed upon as consideration for a contract but for some reason
the consideration did not materialize. For example, A enters into a contract to sell certain merchandise to B. In
consideration of this merchandise, B makes a promissory note payable to A as advance payment thereof. A fails to
deliver the merchandise. There is a failure of consideration, so that A cannot recover from B. If B negotiates the note to
C, who knew that A failed to deliver, neither can C recover from A. If C were ignorant of such defense and is a holder in
due course, C can recover from A.

Partial failure of consideration means simply that part of the consideration did not materialize. In the example above,
if A delivered part of the merchandise and failed to deliver the rest, there is a partial failure of consideration which may
be set up as a defense pro tanto by B against A or a holder not in due course (i.e. B is not liable to the extent of the price
of the undelivered portion).

In lack of consideration, there is no considration at all. While in failure of consideration, there was meant to be a
consideration but it was never fulfilled. In the latter, there was intent to consummate a contract and there was an
instrument issued for the fulfillment of the contract.

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 k. MINORITY OR INCAPACITY

A minor or incapacitated person can invoke minority or incapacity, as the case may
be, as a real defense. It's personal only to the minor/incapacitate. Others can't
invoke it. Transfer, however, by the minor constitutes effective negotiation.

If the issuance of the instrument constitutes an ultra vires act of a corporation, it is

a real defense.
MINORITY IS A LEGAL DEFENSE ONLY AVAILABLE TO THE MINOR

WHERE THE CORPORATION IS ABSOLUTELY PROHIBITED FROM ISSUING ANY NEGOTIABLE

INSTRUMENT, THE PAPER CANNOT BE ENFORCED EVEN BY A HOLDER IN DUE COURSE

WHERE THE CONTRACT OR INSTRUMENT ITSELF IS MADE VOID BY STATUTE, THE ILLEGALITY OF
THE INSTRUMENT IS A REAL DEFENSE

Agbayani: Ordinarily, a minor cannot give consent to contracts and a contract entered to him is voidable. In the
case of corporations, [directors and officers] cannot perform acts beyond the scope of their authority. Such acts
would be ultra vires acts. Nevertheless, if a minor or a corporation indorses an instrument, the indorsee acquires
title to it and can enforce it against the maker or acceptor or other parties prior to the minor. Such prior parties
cannot escape liability by setting up a defense the incapacity of the indorser.

This section is also applicable to indorsements by lunatics, imbeciles, and other incapacitated persons.

Sebastian: An indorsement by corporations or minors pass property regardless of lack of capacity but there will
be no liability incurred. They may give ownership, but no liability.

Murray v. Thompson – In stipulating that the indorsement of the instrument by an infant “passes property
therein,” it was meant to provide that the contract of indorsement is not void, and that his indorsee has the right to
enforce payment from all parties prior to the infant indorser. Incapacity of the minor cannot be availed of by prior
parties.

l. prescription

The prescriptive period for the filing of a claim based no negotiable instruments is ten years from the time the cause
of action accrued (Pay vs. Vda. De Palanca). With respect to CHECKS, the action of the depositor against his drawee
bank commences to run from the time he is given notice of payment
> By prescription, one acquires ownership and other real rights through the lapse of time in the manner and under
the action laid down by law
> All things within the commerce of men are susceptible of prescription, unless otherwise provided
> Acquisitive prescription—ordinary or extraordinary
> Ordinary prescription—requires possession of things in good faith and with just title for the time fixed by law;
possession of 10 years
> Extraordinary prescription—uninterrupted adverse possession thereof within 30 years without need of title or of
good faith
> Good faith—consists in the reasonable belief that the person from whom he received the thing was the owner
thereof, and he could transmit his ownership

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