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1968 Bar Exam Question and Answer

Negotiable Instruments Law


By: Buenaventura, Marie Melanie O.

Topic: General Principles

Question no. 1: What are the requisites of a negotiable instruments?

Suggested answer:
An instrument to be negotiable must conform to the following requirements/the requisites of a negotiable
instrument are as follows:
a. It must be in writing and signed by the maker or drawer;
b. It must contain an unconditional promise or order to pay a sum certain in money;
c. It must be payable on demand or at a fixed or determinable future time;
d. It must be payable to order or bearer;
e. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein
with reasonable certainty. (Section 1, Negotiable Instruments Law)
1995 Bar Examination Question
Negotiable Instruments Law
By: Buenaventura, Marie Melanie O.
Topic: Crossed Check

Question no. 1:
On Oct. 12, 1993, Chelsea Straights (CHELSEA), a corporation engaged in the manufacture
of cigarettes, ordered from Moises Lim 2,000 bales of tobacco. CHELSEA issued to Moises two
crossed checks postdated 15 March 1994 and 15 April1994 in full payment thereof. On 19 January
1994 Moises sold to Dragon Investment House (DRAGON) at a discount the two checks drawn by
CHELSEA in his favor.
Moises Lim failed to deliver the bales of tobacco as agreed despite CHELSEA’S demand.
Consequently, on 1 March 1994 CHELSEA issued a “stop payment” order on the two checks issued
to Moises Lim. DRAGON, claiming to be a holder in due course, filed a complaint for collection
against CHELSEA for the value of the checks.

Rule on the complaint of DRAGON. Give your legal basis.

Suggested answer:

DRAGON cannot collect from CHELSEA. Under the law, the act of crossing a check serves a
warning to the holder that the check has been issued for a definite purpose so that he must inquire if he
has received the check pursuant to that purpose; otherwise, he is not a holder in due course. Hence, the
present holder is subject to personal defenses. In this case, the instruments, which are crossed checks,
were intended to pay for the 2,000 bales of tobacco to be delivered to CHELSEA. It was therefore the
obligation of DRAGON to inquire as to the purpose of the issuance of the subject checks before accepting
them. For DRAGON’s failure to do so, it cannot claim to be a holder in due course. DRAGON, not being a
holder in due course, is subject to the personal defense on the part of CHELSEA concerning the breach of
trust on the part of Moises Lim in not complying with his obligation to deliver the 2000 bales of tobacco.
Therefore, DRAGON cannot collect from CHELSEA.
Topic: Liability; Drawee Bank

Question no. 2:
Alex issued a negotiable promissory note payable to Benito or order in payment of certain
goods. Benito indorsed the PN to Celso in payment of an existing obligation. Later, Alex found the
goods to be defective. While in Celso’s possession, the PN was stolen by Dennis who forged
Celso’s signature and discounted it with Edgar, a money lender who did not make inquiries about
the PN. Edgar indorsed the PN to Felix, a holder in due course. When Felix demanded payment of
the ON from Alex, the latter refused to pay. Dennis could no longer be located.
1. What are the rights of Felix, if any, against Alex, Benito, Celso, and Edgar? Explain.
2. Does Celso have any right against Alex, Benito and Felix? Explain.

Suggested answer:

1. Felix has no right to claim against Alex, Benito and Celso. However, he has a right to claim the
amount of the promissory note from Edgar. Under the law, a forged indorsement prevents any
subsequent party from acquiring any right as against any party whose name appears prior to the
forgery. In this case, Alex, Benito and Celso were already parties to the instrument before it was
forged by Dennis. Hence, they are not liable to Felix since Felix became a party to the instrument
after the forgery. Nevertheless, Felix can recover the amount of the promissory note from Edgar,
who became a party to the instrument subsequent to the forgery and who indorsed the same to
Felix.

2. Celso has the right to collect from Alex and Benito but not against Felix. Section 60 of the
Negotiable Instruments Law provides that the maker of a negotiable instrument by making it
engages that he will pay it according to its tenor. Also, Section 66 of the Negotiable Instruments
Law states that a general indorser engages that on due presentment of the instrument, it shall be
accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored,
he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled
to pay it. In this case, Alex, as the maker, and Benito, as the general indorser, is liable to Celso
who is a party subsequent to the two. However, Celso has no right to claim against Felix who is a
party subsequent to Celso.
Topic: Liabilities; Prior and Subsequent parties.

Question no. 3:
Mario Guzman issued to Honesto Santos a check for 50,000 as payment for a second-hand
car. Without the knowledge of Mario, Honesto changed the amount to 150,000, which alteration
could not be detected by the naked eye. Honesto deposited the altered check with the bank which
forwarded he same to Progressive Bank for payment. Progressive Bank without noticing the
alteration paid the check, debiting 150,000 from the account of Mario. Honesto withdrew the amount
of 150,000 from Shure Bank and disappeared. After receiving his bank statement, Mario discovered
the alteration and demanded restitution from the Progressive Bank.

Discuss fully the rights and obligations of the parties concerned.

Suggested answer:
Mario can demand the restitution of the 150,000 unlawfully debited from his account from
Progressive Bank. Under the law, it states that a material alteration by the holder has the effect of
discharging the instrument and all prior parties thereto who did not give their consent to such alteration. In
this case, the alteration of the amount of the instrument is a material alteration by Honesto, the present
holder, as such, the instrument, as well as Mario, was discharged. Thus, Progressive Bank has no right to
deduct said amount from Mario‘s account since the order of Mario is different. In addition to that,
Progressive Bank is liable for the negligence of its employees in not noticing the alteration which, though it
cannot be detected by the naked eye, could be detected by a magnifying instrument used by tellers. As
between Progressive Bank and Shure Bank, it is the Progressive Bank that should bear the loss.
Progressive Bank failed to notify Shure Bank that there was something wrong with the check within the
clearing hour rule of 24 hours. Therefore, Mario may demand the return of the amount unlawfully debited
from his account by Progressive Bank.