negotiable instrument
TRANSCRIPT
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CHAPTER II - CONSIDERATION Sec. 24. Presumption of consideration. - Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value.
PRESUMPTION OF CONSIDERATION IS DISPUTABLE• One of the disputable presumptions laid down by our Rules of Court is that a negotiable instrument was given or indorsed for a sufficient consideration
CONSIDERATION NEED NOT ALLEGED OR PROVED• In an action based on a negotiable instrument, it is unnecessary to aver or prove consideration for it is imported and presumed from the fact that it is a negotiable instrument
MERE INTRODUCTION OF INSTRUMENT SUFFICIENT• The mere introduction of the instrument sued on in evidence, prima facie entitles the plaintiff of a recovery and unless such prima facie case is overcome by evidence produced by the defendant the plaintiff is entitled to recover
EFFECT OF LACK OF CONSIDERATION• The same is without legal effect and the payment for the note is not demandable
Sec. 25. Value, what constitutes. — Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time.
VALUABLE CONSIDERATION, IN GENERAL• Consideration is the inducement—cause or impelling influence which induces a contracting party to enter into the contract• Valuable consideration may in general terms be said to consist either in some right, interest, profit or benefit accruing to the party who makes the contract, or some forbearance, detriment, loss or some responsibility to act, or labor, or service given, suffered, or undertaken by the other side
Sec. 26. What constitutes holder for value. - Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time.
MEANING OF A HOLDER FOR VALUE• One who gives valuable consideration for an instrument issued or negotiated to him is a holder for value• Not limited to one who is known to have given valuable consideration for the instrument he holds—it refers to any holder of an instrument for which value has been given at any time
Sec. 27. When lien on instrument constitutes holder for value. — Where the holder has a lien on the instrument arising either from contract or by implication of law, he is deemed a holder for value to the extent of his lien.
APPLICATION OF SECTION 27
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• Suppose that A makes a note in the sum of P1000 payable to the order of B. B owes C P600. C is said to have a lien on the note to the extent of P600 only, and to that extent, he is a holder for value. • Can C as indorsee collect the whole amount of P1000 from A, or only P600? It depends. If A maker, has defenses against B indorser, such as absence of consideration, C, even if a holder in due course can collect only P600 from A, the extent of his lien. • Reason for the rule: C is actually a holder in due course for P600 only. He is a holder in due course for such as he is a holder for value for only P600. For the balance of P400 he is not a holder for value, and since being a holder for value is one of the requisites of a holder in due course, he cannot be a holder in due course as far as the P400 is concerned. • If A has personal defenses, he cannot use such as far as the P600 is concerned. • If A on the other hand has real defenses, C cannot collect anything. • But if A maker doesn't have any defenses at all against B indorser, then C can collect the whole amount of P1000 and hold the P400 for the benefit of B.
Section 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. 29. Liability of accomodation party. - An accomodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accomodation party.
ACCOMODATION PARTY: REQUISITES• One who has signed the instrument as maker, drawer, indorser, acceptor, without receiving any value therefore and for the purpose of lending his name to some other person • Requisites: 1. He must be a party to the instrument, signing as maker, acceptor, indorser, or drawer 2. He must not receive any value therefore 3. He must sign for the purpose of lending his name or credit
RIGHTS AND LEGAL POSITION OF AN ACCOMODATION PARTY• The accomodation party is generally regarded as a surety for the party accomodated • When the accomodation parties make payment to the holder of the notes, they have the right to sue the accomodated party for reimbursement since the relation between them is in effect that of a principal and sureties, the accomodation parties being the sureties
ACCOMMODATED PARTY CANNOT RECOVER FROM ACCOMMODATING PARTY• Absence of consideration is a defense • In fact as between them, the understanding is that the accomodated party either is to 1. To reimburse the amount which the accomodation party may be obliged to pay 2. To pay the instrument directly to the holder
LIABILITY OF THE ACCOMODATION PARTY• The accomodation party is liable on the instrument to a holder in value, notwithstanding such holder at any time of the taking of the instrument knew him to be only an accomodation party • The accomodation party doesn't receive any valuable consideration for the instrument he signs
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but he is liable to a holder for value as if the contract wasn't for accomodation CORPORATIONS ARE NOT LIABLE AS ACCOMODATION PARTIES EVEN TO HOLDERS FOR VALUE OFFICERS SIGNING FOR CORPORATION AS ACCOMODATION PARTY WITHOUT AUTHORITY TO DO SO FOR THEIR INDIVIDUAL DEBTS OR TRANSACTIONS ARE PERSONALLY LIABLE THEREON HOLDER MUST OTHERWISE BE A HOLDER IN DUE COURSE ACCOMODATION PARTY MAY ACCOMODATE ONE WHO IS NOT A PARTY TO THE INSTRUMENT ACCOMODATION PARTY CAN INTERPOSE DEFENSE OF WANT OF CONSIDERATION AGAINST ONE NOT HOLDER IN DUE COURSE.
NEGOTIATION Sec. 30. What constitutes negotiation. - An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder and completed by delivery.
METHOD OF TRANSFER1. By assignment 2. By operation of law 3. By negotiation, which may be completed by indorsement completed by delivery or by mere delivery
ASSIGNMENT• Method of transferring a non-negotiable instrument whereby the assignee is merely placed in theposition of the assignor and acquires the instrument subject to all defenses that might have been setup against the original payee
MODE OF ASSIGNMENT• Differs in no respect from that of any other contract • Although some sort of written instrument is customarily employed, it may be written either on the instrument itself or on a separate piece of paper
EFFECT OF ASSIGNMENT OF A NON-NEGOTIABLE INSTRUMENT• The effect of the assignment is that the party holding the right drops out of the contract and another takes his place • The assignee is substituted in place of the assignor • The assignee and every subsequent person to whom the instrument comes by assignment may be considered as the person who made the instrument in the first instance and as having said and done everything in making the instrument which the original assignor did or said. • Each assignee takes his chance as to the exact position in which any party making an assignment of it stands • And as it is called in law, the assignee takes the contract subject to equities, that is, to defenses to the contract which would avail in favor of the original party up to the time the notice of
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the assignment is given to the person against whom the contract is sought to be enforced
ASSIGNMENT OF A NEGOTIABLE INSTRUMENT• A person taking a negotiable instrument by assignment in a separate piece of paper takes it subject to the rules applying to assignment • And where the holder of a bill payable to order transfers it without indorsement, it operates an equitable assignment
TRANSFER BY OPERATION OF LAW1. By the death of his holder where the title vests in his personal representative, or 2. By the bankruptcy of the holder, where title vests in his assignee or trustee 3. Upon the death of a joint payee or indorsee in which case the general rule is that the title vests at once in the surviving payee or trustee
NEGOTIATION• Transfer of the instrument from one person to another in such a manner as to constitute the transferee the holder thereof • May either be by indorsement completed by delivery or by mere delivery
IS DELIVERY TO PAYEE A NEGOTIATION?• First view: no because negotiation refers to an existing negotiable instrument and before delivery to the payee, the instrument is incomplete. • Second or better view: under this section and section 191, an instrument is negotiated when it is delivered to the payee or to an indorsee
Indorsement of Negotiable Instruments Sec. 31. Indorsement; how made. - The indorsement must be written on the instrumentitself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement.
NATURE OF AN INDORSEMENT• It is not only a mode of transfer • It is also a contract • Every indorser is a new drawer and the terms are found on the face of the bill or note • The indorsement of the bill or not implies an undertaking from the indorser to the person in whose favor it is made and to every other person to whom the bill or note may afterwards be transferred, exactly similar to that which is implied by drawing a bill except that, in the case of drawing a bill, the stipulations with respect to the drawer’s responsibility and undertaking don't apply• The general indorser in effect, states to every person who follows him—this instrument will be paid by the maker, if a note, or accepted the drawee or paid by the acceptor, if a bill. If it is dishonored by non-payment or non-acceptance, and you give me notice thereof, I will pay it.
WHERE THE INDORSEMENT IS WRITTEN• The indorsement may be written on the instrument itself or upon a paper attached thereto • Allonge: paper attached to the instrument
MAY ALLONGE BE USED WHERE THERE IS ROOM ON INSTRUMENT FOR INDORSEMENT?• It has been held that the use of an allonge is able only when there is a physical impossibility of writing the indorsement on the instrument itself, and an indorsement on a
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separate piece of paper where there is sufficient space on the instrument for indorsement will be considered as a mere assignment and not a negotiation
HOW INDORSEMENT WRITTEN?• Means must show that there is indorsementSec. 32. Indorsement must be of entire instrument. - The indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the instrument. But where theinstrument has been paid in part, it may be indorsed as to the residue.
INDORSEMENT MUST BE OF THE WHOLE INSTRUMENT• The general rule is that the instrument must be of the entire instrument • Accordingly, an indorsement of a part of the instrument doesn't operate as a negotiation thereof
EFFECT OF PARTIAL INDORSEMENT• It doesn't operate as an indorsement • It may constitute a valid assignment though binding between the parties • The person to whom the instrument is indorsed would not be considered an indorsee but merely an assignee and would therefore take the instrument subject to the defenses available between the original parties
EXCEPTION• But where the instrument has been paid in part, it may be indorsed as to the residue
TRANSFER TO TWO OR MORE INDORSEES SEVERALLY• An indorsement which purports to transfer the instrument to two or more indorsees severally, doesn't operate as a negotiation of the instrument
MONTINOLA V. PNB88 PHIL 178
FACTS: *Remember the case with the Japanese occupation and the mutilated check. HELD: Where the indorsement of the check was only for a part of the amount payable, it is not legally negotiated within the meaning of Section 32, which provides that the indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable doesn't operate as a negotiation of the instrument. Montinola may therefore be not regarded as an indorsee. At most he may be regarded as a mere assignee of the P30,000 sold to him. In which case, as an assignee, he is subject to the defenses available to the drawer Provincial Treasurer. Sec. 33. Kinds of indorsement. - An indorsement may be either special or in blank; and it may also be either restrictive or qualified or conditional.
KINDS OF INDORSEMENT1. Special 2. In blank 3. Absolute 4. Conditional 5. Restrictive 6. Qualified
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7. Joint 8. Successive 9. Irregular 10. Facultative Sec. 34. Special indorsement; indorsement in blank. - A special indorsement specifies the person to whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further negotiation of the instrument. An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery.
SPECIAL AND BLANK INDORSEMENT
HOW FURTHER NEGOTIATED1. Where the instrument is originally payable to order and it is negotiated by the payee by special indorsement, it can be further negotiated by the indorsee of the instrument completed by delivery 2. Where the instrument is originally payable to order and it is negotiated by the payee in blank indorsement, it can be further negotiated by the holder by mere delivery. The reason is that the effect of a blank indorsement is to make the instrument payable to bearer 3. Where the instrument is originally payable to bearer, it can be further negotiated by mere delivery, even if the original bearer negotiated it by special indorsement Sec. 35. Blank indorsement; how changed to special indorsement. - The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement.
APPLICATION OF SECTION 35• Suppose that A makes a note with B as payee. It is indorsed as follows: o (Indorsement in blank) (Sgd.) B. • Delivery was then made to C. C may place above the signature of B, “Pay to C.” so as to make the indorsement thus: o Pay to C. (Sgd.) B. • This converts the blank indorsement to a special indorsement
LIMITATION UPON CONVERSION OF BLANK INDORSEMENT• Holder must not write any contract not consistent with the indorsement, that is, the contract so written must not change the contract of the blank indorser • The following has been held to be inconsistent with the contract of blank indorsement—“pay to X and Y”, “Demand and notice waived”, “I guaranty payment”, “Without recourse” Sec. 36. When indorsement restrictive. - An indorsement is restrictive which either: (a) Prohibits the further negotiation of the instrument; or (b) Constitutes the indorsee the agent of the indorser; or (c) Vests the title in the indorsee in trust for or to the use of some other persons. But the mere absence of words implying power to negotiate does not make an indorsement restrictive.
PROHIBITION OF FURTHER NEGOTIATION
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1. Pay to C only 2. Pay to C and no other person INDORSEE AGENT OF THE INDORSER • Known as the agency-type of indorsement “Pay to C for collection” (Sgd.) B • Hence, any action the indorsee may file is subject to defenses available against the indorser such as lack of consideration • Thus, where the proof tends to show that the plaintiff holds the draft for collection only, and that the acceptance of it by defendants was conditional, and that after such an acceptance, the defendants refused to accept the goods evidenced by the draft, which were returned to and accepted by the plaintiff, who agreed to release the defendants from any liability, plaintiff thereafter cannot recover
INDORSEMENTS FOR DEPOSIT• An indorsement for deposit constitutes the indorsee the agent of the indorser • “Pay to C for deposit (Sgd.) B”—such an indorsement, like an indorsement for collection, constitutes a relation of title in the depositor in the absence of any practice or agreement to the contrary • In any event, a restrictive indorsement of an instrument for collection or deposit, or to the use of the indorser and for his benefit, in the absence of any other circumstances, will not divest the indorser of his title thereto until the money is paid • Indorsements for deposits are usually informal
VESTS TITLE IN INDORSEE IN TRUST FOR ANOTHER1. Pay to X in trust for C 2. Pay to X for use of C
CAN THE MAKER SET UP AGAINST THE INDORSEE HIS DEFENSES AGAINST THE RESTRICTIVE INDORSER?There are two views to this question: 1. Sulbrason-Dickinson v. Hopkins: an indorsement to A for the benefit of B was held restrictive under Section 47 of the NIL, making the indorsee and its successors subject to the good defenses against the restrictive indorser 2. Some learned writers held this view to be unsound. Thus, it has been held that the indorsee of a check indorsed in trust for a third person who is a holder in due course could recover from the drawer who had a defense of failure of consideration, for while the restrictive indorsement creating a trust gives notice of this trust to subsequent purchasers, it did not give notice of defenses obtaining between prior parties. • TO MAKE IT EASIER TO UNDERSTAND—first, you have to make a distinction between what kind of restrictive indorsement was made. Was it a trust type or an agency type? If it was an agency type, the indorsee just fills in the shoes of the restrictive indorser. And thus, he is susceptible and open to the defenses that the maker can have against the indorser. It is different if it is trust type because the indorsee does not step inside the shoes of the indorser and thus, the maker can no longer set up against the indorsee his defenses against the indorser.
PRESUMPTION OF CONSIDERATION IN RESTRICTIVE INDORSEMENTS• As a general rule, an indorsement of a negotiable bill which purports to pass the title to the bill to the indorsee, imports a consideration and the burden of proving want of consideration rests upon
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the party alleging it • The restrictive indorsements which are held to negative the presumption of a consideration are such as to indicate that they are intended to pass title but merely to enable the indorsee to collect for the benefit of the indorser, such as indorsements “for collection” or others showing that the indorser is entitled to the proceeds • But an indorsement to one person for the use or benefit of another, affords no such indication. The indorser parts with the whole title to the bill and the presumption is that he done so for a consideration. • The only effect of such an indorsement, by way of restriction, is to give notice of the rights of the beneficiary named in the indorsement and protect him against misappropriation
EFFECT OF OMISSION OF WORDS OF NEGOTIABILITY• The mere absence of words of negotiability doesn't make the indorsement restrictive • While the omission of words in the indorsement doesn't affect negotiability of the instrument, such omission in the body thereof will render the instrument non-negotiable Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A restrictive indorsement confers upon the indorsee the right: (a) to receive payment of the instrument; (b) to bring any action thereon that the indorser could bring; (c) to transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so. But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement.
RESTRICTIVE INDORSEE MAY RECEIVE PAYMENT• A restrictive indorsement confers upon the indorsee the right to receive payment of the instrument
RESTRICTIVE INDORSEE MAY BRING AN ACTION• A restrictive indorsement confers upon the indorsee the right to bring any action thereon that the indorser could bring • In a restrictive indorsement “for deposit”, can the indorsee such as B in the illustration, bring an action against the indorser, such as A? Yes if the indorser received value for said indorsement
RESTRICTIVE INDORSEE MAY TRANSFER HIS RIGHTS• It is stated in the interpretation of the clause in Section 47 declaring a paper negotiable in its origin to continue negotiable until it has been restrictively indorsed, is that the words “until it has been restrictively indorsed” don't contemplate every restrictive indorsement but a restrictive indorsement that prohibits the further negotiation of the instrument under subdivision 1 of Section 36 • Section 46 didn't mean to declare the effects of a restrictive indorsement but to preserve as far as possible the negotiability of an instrument negotiable in its origin and that the implication of Section 47 should not be taken as destroying negotiability of an instrument heretofore universally accepted as negotiable
EXTENT OF NEGOTIABILITY AFTER RESTRICTIVE INDORSEMENT• That all forms of restrictive negotiability impose some degree of limitation on negotiability • That they don't all impose the same degree of limitation • That the indorsement itself discloses the extent of the limitation in the particular case
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LIMITATION ON TRANSFER OF RIGHT: ILLUSTRATION• But all subsequent indorsees acquire only title of the first indorsee under the restrictive indorsement • Illustrations of this rule: o In the indorsement, “pay to A for collection,” the rights of the subsequent indorsees are subject to the restrictive indorsement—namely, he can collect only for being a restrictive indorsee, he acquires only the title of the first indorsee whose right is merely to collect o Suppose the P1000 note is indorsed as “Pay to B for deposit only. (Sgd.) A” and that B owes Y P1000, B cannot transfer the note to Y for said debt. Or suppose B transfers the note to another person for P1000, B cannot use the P1000 for his own personal expenses. He must safely keep the money for the benefit of A. o “Pay to A for account of B”—gives notice that the instrument cannot be negotiated by A for his own debt or benefit Sec. 38. Qualified indorsement. - A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument.
HOW QUALIFIED INDORSEMENT IS MADE• By adding to the indorser’s signature the words “without recourse”, “Sans recours”, “indorser not holden”, or “with intent to transfer title only and not to incur liability as indorser”, “at indorsee’s own risk”
EFFECT OF QUALIFIED INDORSEMENT • Constitutes the indorser a mere assignor of the title to the instrument • One who indorses without recourse states that all parties to the paper are genuine; I am the lawful owner of the paper and I have title to it and know of no reason why you could not recover on it as a valid instrument, but on thing I don't guarantee; I don't guarantee the financial responsibility on that paper but I do say that I hold the title the same as any other personal property
QUALIFIED INDORSER HAS LIMITED SECONDARY LIABILITY• He is secondarily liable on his warranties as an indorser under Section 65, that is, the qualified indorser is liable if the instrument is dishonored by non-acceptance or non-payment due to: 1. Forgery 2. Lack of good title on the part of the indorser 3. Lack of capacity to indorse on the part of the prior parties 4. The fact that, at the time of the indorsement, the instrument was valueless or not valid and he knew of that fact
A QUALIFIED INDORSEMENT DOESN'T IMPAIR THE NEGOTIABLE CHARACTER OF THE INSTRUMENT Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the party required to pay the instrument may disregardthe condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or not. But any person to whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of the person indorsing conditionally.
ABSOLUTE INDORSEMENT• One by which the indorser binds himself to pay upon no other condition than the failure of prior parties to do so and upon due notice to him of such failure
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CONDITIONAL INDORSEMENT• An indorsement subject to a contingent event, that is, an event that may or may not happen, or a past event unknown to the parties • Suppose a note for P1000 with A maker, and B payee. It is then indorsed as follows “Pay to Y if he passes the bar examinations. (Sgd.) B”—this is a conditional indorsement as Y may or may not pass the bar examination.
OBLIGATION OF CONDITIONAL INDORSEE• Y indorsee holds the note or the proceeds thereof, if he is paid by A, subject to the rights of B • If A disregards the condition and pays Y without waiting for the condition to be fulfilled, Y doesn't immediately acquire ownership of the sum • Y must hold in trust while the condition is not fulfilled • It is upon the fulfillment of the condition that such ownership over the proceeds of the note is absolutely acquired by the conditional indorsee Y
A CONDITIONAL INDORSEMENT DOESN'T RENDER AN INSTRUMENT NON-NEGOTIABLE Sec. 40. Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement.
APPLICATION OF SECTION 40• Section applies only to instruments which are originally payable to bearer • Cannot apply where the paper is originally made payable to order and indorsed in blank; for by Section 9, a note or bill which is payable to order becomes payable only when the last indorsement is in blank; and hence, when a blank indorsement is followed by a special indorsement, the instrument is not within the terms of Section 9.
NEGOTIATION OF INSTRUMENT PAYABLE TO BEARER BUT SPECIALLY INDORSED• Where an instrument payable to bearer is indorsed, it may nevertheless be further negotiated by delivery • An instrument which is originally payable to bearer is always payable to bearer • Hence, even when it has been specially indorsed, it is still payable to bearer
EFFECT ON LIABILITY OF SPECIAL INDORSERPay P1000 to bearer (Sgd.) A *C is bearer and he delivered to D *D specially indorsed it to E *E specially indorsed it to F *F delivered to G, bearer. • Is D liable to G being the first who specially indorsed the instrument? No, because G didn't take title through D’s indorsement but through delivery of D • To whom D is liable? To E and F, because they acquired the title to the instrument through the special indorsement of D. Had F merely indorsed the instrument to G, D would be liable also to G for the same reason. Sec. 41. Indorsement where payable to two or more persons. - Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse
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unless the one indorsing has authority to indorse for the others. APPLICATION OF SECTION 41 • Applies only to instruments payable to two or more payees jointly
HOW INDORSEMENT OF JOINT PAYEES MADE• Where the instrument is payable to two or more payees, all payees must each indorse in order to negotiate the instrument • If only one indorses, he passes only his part of the instrument—such an indorsement wouldn't operate as such because it would not be an indorsement of the whole instrument • Exceptions to the rule: 1. Where the payee or person indorsing has authority to indorse for the others 2. Where the payee or indorsees are partners Sec. 42. Effect of instrument drawn or indorsed to a person as cashier. - Where an instrument is drawn or indorsed to a person as "cashier" or other fiscal officer of a bank or corporation, it is deemed prima facie to be payable to the bank or corporation of which he is such officer, and may be negotiated by either the indorsement of the bank or corporation or the indorsement of the officer. APPLICATION OF SECTION 42 Pay P1000 to the order of cashier, Lyceum of the Philippines. (Sgd.) A • Presumption is that the note is payable to Lyceum, not to the cashier personally • And the note may be indorsed by any duly authorized officer of Lyceum other than the cashier
DISPUTABLE PRESUMPTION Sec. 43. Indorsement where name is misspelled, and so forth. - Where the name of a payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as therein describedadding, if he thinks fit, his proper signature. APPLICATION OF SECTION 43 • An instrument drawn or indorsed to “Juan Dytuco” whose real name is “Juan Dyjuco” may be indorsed as follows: o Pay to Y (Sgd.) Juan Dytuco Juan Dyjuco o Or (Sgd.) Juan DyjucoSec. 44. Indorsement in representative capacity. - Where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability.
HOW AGENT MUST INDORSE?1. He must add words describing himself as agent 2. At the same time, disclose his principal 3. He must be duly authorized Sec. 45. Time of indorsement; presumption. - Except where an indorsement bears date after the maturity of the instrument, every negotiation is deemed prima facie to have been effected before the instrument was overdue.
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DISPUTABLE PRESUMPTION
IMPORTANCE OF THIS PROVISION• This provision becomes importance when considered in connection with Section 52 (b) • Under the provision, in order that one may become a holder in due course, the instrument must be negotiated to him before it becomes overdue • The indorsement without date establishes a prima facie presumption that the instrument was indorsed before maturity and one who denies that the holder of such instrument is a holder in due course has the burden of proof Sec. 46. Place of indorsement; presumption. - Except where the contrary appears, every indorsement is presumed prima facie to have been made at the place where the instrument is dated.
IMPORTANCE OF PLACE OF INDORSEMENT• The place of indorsement is sometimes material because an indorsement is governed by the laws of the state where it is indorsed, although the instrument is drawn or made in a different state Sec. 47. Continuation of negotiable character. - An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise.
WHEN NEGOTIABLE INSTRUMENT RENDERED NON-NEGOTIABLE1. Restrictive indorsement which further prohibits the further negotiation of an instrument 2. By a discharge thereof by payment or otherwise
NEGOTIABILITY AFTER DATE OF MATURITY• FIRST VIEW: negotiability ceases in the full commercial sense after maturity and negotiability ceases by default of the maker in his payment • SECOND VIEW: negotiability continues even after maturity • RECONCILIATION OF THE TWO: the mercantile character of the instrument as a negotiable paper and of the contracts of the several parties to it, continues after maturity and until it is paid except: that an indorsee or a transferee after maturity takes the instrument subject to defenses between original parties, because after maturity such subsequent parties take the instrument after it becomes overdue and therefore, under paragraph b of Section 52, they are not holders in due course • After maturity, an instrument originally negotiable continues to be negotiable in the sense that the contracts of the parties to it continue and are governed by the Negotiable Instruments Law • After maturity the instrument ceases to be negotiable in the sense that a transferee after maturity is not a holder in due course and therefore not free from defenses obtaining between prior parties
LEGAL POSITION OF HOLDER TAKING OVERDUE INSTRUMENT• He is a holder with notice. He may or may not be a holder for value and his rights will be regulated accordingly. He takes a bill which on the face of it, ought to have been paid. • He is bound to make two inquiries—has what ought to have been done really have been done? And if not, why not?
RIGHT OF HOLDER NOT IN DUE COURSE• He can recover checks in his possession but the only disadvantage is that the negotiable instrument is subject to the defenses as if it were non-negotiable
Sec. 48. Striking out indorsement. - The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all
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indorsers subsequent to him, are thereby relieved from liability on theinstrument.
WHEN HOLDER MAY OR MAY NOT STRIKE OUT INDORSEMENT• But where the instrument is transferred by special indorsement, the holder has no right to strike out the name of the person mentioned in such indorsement and insert his own name in place thereof; nor can he strike out such name and convert such special indorsement into a blank indorsement• The holder who acquires title subsequent to the succeeding special indorsement must trace his title not only through the blank indorsement but through the special indorsement as well
EFFECT OF STRIKING OUT1. The indorser whose indorsement is struck out is relieved from his liability on the instrument 2. All subsequent indorsers are also relieved from their liability on the instrument
Sec. 49. Transfer without indorsement; effect of. - Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made. APPLICATION OF SECTION 49 • Applies only to instruments payable to order • Contemplates a case wherein delivery and payment of value but there was no indorsement • One element lacking for the negotiation of the instrument
RIGHTS OF TRANSFEREES FOR VALUE1. The transferee acquires only the rights of the transferor. This means that if a defense is available against the transferor, that defense is also available against the transferees 2. The transferee has also the right to require the transferor to indorse the instrument
BPI V. COURT OF APPEALSGR 136202, JANUARY 25, 2007
FACTS: Templonuevo demanded payment from petitioner of a sum of money representing the aggregate value of three checks which were allegedly payable to him but which were deposited with the petitioner to Salazar’s account, without his knowledge and corresponding endorsement. Finding merit in the demands of Templonuevo, the bank then froze the account of the engineering firm as the account of Salazar was already closed or had insufficient funds. Failure of any settlement between Templonuevo and Salazar, this prompted the bank to debit the account of Salazar and give back the money to Templonuevo through cashier’s check. The account of Salazar was also debited for whatever charges incurred for the issuance of the cashier’s check. The trial court held in favor of Salazar. ISSUE: Does a collecting bank, over the objections of its depositor, have the authority to withdraw unilaterally from such depositor’s account the amount it had previously paid upon certain unendorsed order instruments deposited by the depositor to another account that she later closed? HELD: In the present case, the records do not support the finding made by the CA and the trial court that a prior
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arrangement existed between Salazar and Templonuevo regarding the transfer of ownership of the checks. This fact is crucial as Salazar’s entitlement to the value of the instruments is based on the assumption that she is a transferee within the contemplation of Section 49 of the Negotiable Instruments Law. Transferees in this situation do not enjoy the presumption of ownership in favor of holders since they are neither payees nor indorsees of such instruments. The weight of authority is that the mere possession of a negotiable instrument does not in itself conclusively establish either the right of the possessor to receive payment, or of the right of one who has made payment to be discharged from liability. Thus, something more than mere possession by persons who are not payees or indorsers of the instrument is necessary to authorize payment to them in the absence of any other facts from which the authority to receive payment may be inferred. Even if the delay in the demand for reimbursement is taken in conjunction with Salazar’s possession of the checks, it cannot be said that the presumption of ownership in Templonuevo’s favor as the designated payee therein was sufficiently overcome. This is consistent with the principle that if instruments payable to named payees or to their order have not been indorsed in blank, only such payees or their indorsees can be holders and entitled to receive payment in their own right. The presumption that a negotiable instrument was given for a sufficient consideration will not inure to the benefit of Salazar because the term “given” does not pertain merely to a transfer of physical possession of the instrument. The phrase “given or indorsed” in the context of a negotiable instrument refers to the manner in which such instrument may be negotiated. It is an exception to the general rule for a payee of an order instrument to transfer the instrument without indorsement. Precisely because the situation is abnormal, it is but fair to the maker and to prior holders to require possessors to prove without the aid of an initial presumption in their favor, that they came into possession by virtue of a legitimate transaction with the last holder. Salazar failed to discharge this burden, and the return of the check proceeds to Templonuevo was therefore warranted under the circumstances despite the fact that Templonuevo may not have clearly demonstrated that he never authorized Salazar to deposit the checks or to encash the same. Noteworthy also is the fact that petitioner stamped on the back of the checks the words: "All prior endorsements and/or lack of endorsements guaranteed," thereby making the assurance that it had ascertained the genuineness of all prior endorsements. Having assumed the liability of a general indorser, petitioner’s liability to the designated payee cannot be denied. Consequently, petitioner, as the collecting bank, had the right to debit Salazar’s account for the value of the checks it previously credited in her favor. However, the issue of whether it acted judiciously is an entirely different matter. As businesses affected with public interest, and because of the nature of their functions, banks are under obligation to treat the accounts of their depositors with meticulous care, always having in mind the fiduciary nature of their relationship. In this regard, petitioner was clearly remiss in its duty to private respondent Salazar as its depositor. To begin with, the irregularity appeared plainly on the face of the checks. Despite the obvious lack of indorsement thereon, petitioner permitted the encashment of these checks three times on three separate occasions. This negates petitioner’s claim that it merely made a mistake in crediting the value of the checks to Salazar’s account and instead bolsters the conclusion of the CA that petitioner recognized Salazar’s claim of ownership of checks and acted deliberately in paying the same, contrary to ordinary banking policy and practice. It must be emphasized that the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it, 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 on
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this field, and the law thus holds it to a high standard of conduct. The taking and collection of a check without the proper indorsement amount to a conversion of the check by the bank. More importantly, however, solely upon the prompting of Templonuevo, and with full knowledge of the brewing dispute between Salazar and Templonuevo, petitioner debited the account held in the name of the sole proprietorship of Salazar without even serving due notice upon her. This ran contrary to petitioner’s assurances to private respondent Salazar that the account would remain untouched, pending the resolution of the controversy between her and Templonuevo. For the above reasons, the Court finds no reason to disturb the award of damages granted by the CA against petitioner. This whole incident would have been avoided had petitioner adhered to the standard of diligence expected of one engaged in the banking business. A depositor has the right to recover reasonable moral damages even if the bank’s negligence may not have been attended with malice and bad faith, if the former suffered mental anguish, serious anxiety, embarrassment and humiliation
Sec. 50. When prior party may negotiate instrument. - Where an instrument is negotiated back to a prior party, such party may, subject to the provisions of this Act, reissue and further negotiable the same. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable.
RIGHTS OF THE HOLDER Sec. 51. Right of holder to sue; payment. - The holder of a negotiable instrument may to sue thereon in his own name; and payment to him in due course discharges theinstrument.
RIGHTS OF A HOLDER IN GENERAL1. He may sue on the instrument in his own name 2. He may receive payment and if the payment is in due course, the instrument is discharged
RIGHT TO SUE• Holder of a negotiable instrument may sue on his own name, even if he be a holder only for collection or as a pledge of the instrument
RIGHT OF TRANSFEREE OF UNINDORSED INSTRUMENT• Such possessor may sue in his own name if his transferor could have done so • Under Section 49, a transfer for value, but without indorsement, of an instrument is payable to order vests in the transferee such title as the transferor had therein.
EFFECT OF PAYMENT TO THE HOLDER• The payment in due course to the holder of the instrument discharges the instrument • It is in due course if it is made at or after the maturity of the instrument; or to the holder thereof; in good faith and without notice that his title is defective
ec. 52. What constitutes a holder in due course. - A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face;
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(b) That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him, he had no notice of any infirmity in theinstrument or defect in the title of the person negotiating it.
PRESUMPTION HOLDER IN DUE COURSE• Generally, every holder is prima facie a holder in due course • Any one, therefore, who claims otherwise must prove that the holder in question acquired theinstrument with one or more of the conditions lacking • Any holder proved to have taken an instrument with one of the conditions enumerated lacking is not a holder in due course
ACQUISITION BEFORE THE INSTRUMENT IS OVERDUE• The holder of the instrument must have become the holder before the instrument has become overude• Illustrations— o One who has purchased 2 promissory notes without the necessary indorsement on the part of the holder after payment thereof had already been one year overdue and without having made inquiries about the solvency of the makers cannot be considered as a holder in due course o One taking past due paper is chargeable with notice of all equities between the original parties but nbt with equities between intermediate indorsers o If the instrument is overdue, it is also a notice that it has been dishonored
WHEN INSTRUMENT IS OVERDUE• When it after the date of maturity • On the date of maturity, the instrument is not overdue and a holder who acquires theinstrument on that date is a holder in due course • If the instrument is overdue, there might be something wrong with the instrument
AS TO ACCELERATED INSTRUMENTS• When the instrument contains an acceleration clause, knowledge of the holder at the time of acquisition thereof that one installment or interest, or both, as the case may be, is unpaid, is notice that the instrument is overdue
AS TO INTEREST• One who purchases in good faith an instrument upon which the interest is overdue is a holder in due course • But where by the terms of the instrument, the principal was to become due upon default of the payment of instrument, then one who takes the instrument upon which the interest is overdue is not a holder in due course
WHAT IS AN ACQUISITION IN GOOD FAITH?• Good faith refers to the indorsee or transferee and not to the seller of the paper• Taking in good faith means that he doesn't have any knowledge of fact which would render it dishonest for him to take a particular piece of negotiable paper
MEANING OF HOLDER IN GOOD FAITH
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• Holder without knowledge or notice of equities of any sort which could be set up against a prior holder of an instrument
EFFECT OF FAILURE TO MAKE INQUIRY• Ordinarily, failure to inquire after notice merely sufficient to cause a person of ordinary prudence to make inquiry as to an infirmity in a negotiable instrument and defect in the holder’s title, is not evidence of purchaser’s bad faith so as to bar him from recovery • TEST OF HONESTY—whether or not his purpose is dishonest?
WHEN FAILURE TO MAKE INQUIRY IS INDICIA OF BAD FAITH?• Failure to make inquiry when circumstances strongly indicate defect, renders the holder not a holder in due course
ACQUISITION FOR VALUE• Where the holder gave no valuable consideration for the transfer of the instrument to him, he cannot be a holder in due course • Discounting of a negotiable instrument is still considered to be taking for value
EFFECT OF INADEQUACY OF INSTRUMENT• Generally, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influence • It may be an evidence of fraud • An amount paid for an instrument if a trifling sum should be a red flag and may by itself establish notice
ACQUISITION WITHOUT NOTICE OF DEFECT OF TITLE OR OF INFIRMITY• The following may be chargeable with notice—one taking an instrument which is overdue; and one acquiring an instrument for a grossly inadequate consideration GOOD FAITH MEANS LACK OF NOTICE OF DEFECT OR INFIRMITY
DEFECTS OF TITLE• All those situations which at common law were known as equitable defenses and also to cover those equities of ownership where there was breach of faith in negotiation • Examples? o Acquisition of the instrument by fraud o Acquisition of the instrument by force, duress or fear o Acquisition of the instrument by unlawful means o Acquisition of the instrument by for an illegal consideration o Negotiation of the instrument in breach of faith o Negotiation of the instrument under circumstances which amount to fraud
DEFENSES• Include those common law defenses outside those covered in Section 55 • These include mistake, absence and failure of consideration covered in Section 28, minority and other forms of incapacity, lack of authority of an agent
INFIRMITIES• Things that are wrong with the instrument itself • What are these? o Wrong date inserted where the instrument is expressed to be payable at a fixed period after sight is
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undated o Filling up a blank instrument not strictly in accordance with the authority given or not within authority given or not within the reasonable time, where it was delivered wanting in a materialalteration o Filling up without authority an incomplete and undelivered instrument o Lack of valid and intentional delivery o Forgery o Material alteration
MAY A PAYEE BE A HOLDER IN DUE COURSE?• Yes, if he satisfies the requirements as set forth in Section 52
MAY A DRAWEE BE A HOLDER IN DUE COURSE?• A holder refers to one who has taken the instrument as it passes along in the course of negotiation towards the drawee and not the drawee, who, on the acceptance and payment of the instrument, thereby strips the instrument of all negotiability and reduces it to a mere voucher or proof of payment Sec. 53. When person not deemed holder in due course. - Where an instrument payable on demand is negotiated on an unreasonable length of time after its issue, the holder is not deemed a holder in due course.
WHAT CONSTITUTES UNREASONABLE LENGTH OF TIME?• Jurisprudence doesn't state an exact period, nonetheless, there is practically no authorities hold that a reasonable time for negotiating a demand note could be extended beyond a year Sec. 54. Notice before full amount is paid. - Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the extent of the amount therefore paid by him. 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.
DEFECTIVE TITLE IN GENERAL• In the acquisition or negotiation thereof Sec. 56. What constitutes notice of defect. - To constitutes notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith.
NOTICE OF DEFECT IN GENERALTo constitute a notice of defect or infirmity, the holder must have actual knowledge either: 1. Of the defect or infirmity 2. Or of facts that his action in taking the instrument amounts to bad faith
ACTUAL KNOWLEDGE• Actual knowledge is required and not mere suspicion, surmise or fear
TAKING AMOUNTING TO BAD FAITH• Bad faith consists in guilty knowledge, or willful ignorance, showing a vicious or evil mind • While mere suspicion is not enough, where there is knowledge of suspicious circumstances,
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coupled with means of verifying them, taking the instrument may amount to bad faith Sec. 57. Rights of holder in due course. - A holder in due course holds the instrumentfree from any defect of title of prior parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon.
RIGHTS OF A HOLDER IN DUE COURSE1. He may sue on the instrument in his won name 2. He may receive payment and if the payment is in due course, the instrument is discharged 3. He holds the instrument free from any defect of title of prior parties and free from defenses available to prior parties among themselves 4. And he may enforce payment of the instrument for the full amount thereof against all parties liable thereto
LEGAL AND EQUITABLE DEFENSES• The holder in due course is free from equitable defenses only
AN ALTERATION MAY BE A REAL OR PERSONAL DEFENSE. WHY?• An alteration irrespective of original tenor, it can be enforced—real • Irrespective of difference between original and altered tenor, can collect only limited amount—personal
EQUITABLE OR PERSONAL DEFENSES• 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 purchasers for value without notice
LEGAL OR REAL DEFENSE• Attach to the instrument itself and can be set up against the whole world, including a holder in due course • The right sought to be enforced has never existed or ceased to exist • Defense against everybody THE INSTRUMENT SUBJECT TO A REAL DEFENSE CAN STILL BE ENFORCED. IT CANNOT BE ENFORCED WITH REGARD THE PERSON TO WHOM THE LEGAL DEFENSE IS AVAILABLE.
BETWEEN WHOM DEFENSE CAN BE RAISED IN NOTES• In general, the defense of want of consideration may only be raised between immediate parties • But this could be raised in the instance that the holder has notice of the want in consideration
BETWEEN WHOM DEFENSE MAY BE RAISED IN BILLS• The want or failure of consideration may be interposed in an action brought by the payee against the drawer or by the indorsee against the payee indorsing, or by the drawer against the acceptor, but not in an action between the payee and acceptor • In the latter case, the defense is available only if there is no consideration received by the defendant for his liability and plaintiff must have given no consideration for his title
WANT OF DELIVERY OF COMPLETE INSTRUMENT• Where the instrument is mechanically complete and is not wanting in any material particular, want of delivery is an equitable defense • As against holders not in due course, it can be shown that no delivery was made, or that the delivery
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was conditional or for a special purpose • Where the instrument is stolen, the defense is also equitable • But where the instrument is payable to order, it is a real defense—for the person would have to commit forgery on the instrument
FRAUD IN INDUCEMENT IS A PERSONAL OR EQUITABLE DEFENSE• Relates to the quantity, quality, value or character of the consideration of the instrument
FOR MISTAKE TO INVALIDATE CONSENT• It should refer to the substance of the thing which is the object of the contract, or those conditions which have principally moved one or both parties to enter into the contract
FRAUD IN FACTUM OR FRAUD IN ESSE CONTRACTUS IS A LEGAL DEFENSE• This fraud exists in those cases which a person without negligence has signed an instrument which was in fact a negotiable instrument but was deceived as to the character of the instrument and without knowledge of it • Essential element is that the maker or indorser, as the case may be, must have exercised ordinary diligence and in no manner contributed negligently to the imposition 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 Sec. 58. When subject to original defense. - In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. But a holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter.
RIGHTS OF A HOLDER NOT IN DUE COURSE1. He may sue on his own name 2. He may receive payment and if the payment is in due course, the instrument is discharged 3. He holds the instrument subject to the same defenses as if it were non-negotiable 4. But a holder not in due course who derives his title from a holder in due course and who isn’t a party himself to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of parties prior to the latter THE HOLDER ACQUIRING FROM A HOLDER IN DUE COURSE HAS THE BURDEN OF PROOF TO SHOW PREDECESSOR IS INDEED A HOLDER IN DUE COURSE Sec. 59. Who is deemed holder in due course. - Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in due course. But the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title.
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IN WHOSE FAVOR PRESUMPTION ARISES• In order to be a holder, he must be in possession of the note or the bearer thereof
WHEN PRESUMPTION ACCRUES• It is presumed that the holder acquired the note under all the circumstances required under Section 52 • Before the presumption arises, he must prove that he is the holder of the instrument, that is, that he is the indorsee in possession of the instrument, as it is payable to order
WHEN BURDEN IS SHIFTED• When it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some under whom he claims, acquired the title as holder in due course THE PRESUMPTION IS NOT APPLICABLE WHEN THE HOLDER’S TITLE WAS DEFECTIVE OR SUSPICIOUS
LIABILITIES OF PARTIES IN NEGOTIABLE INSTRUMENTS Sec. 60. Liability of maker. - The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse.
MAKER PRIMARILY LIABLE• Engagement of the maker is to pay absolutely for the note according to its tenor • His liability is primarily and unconditional • One who has signed an instrument as a maker is presumed to have acted with care and to have signed the instrument with full knowledge of its contents, unless of course, if fraud is proved
MAKER MUST PAY ACCORDING TO THE TERMS OF THE NOTE• The maker bound himself to pay personally. He cannot shift the obligation without the consent of the payee. He cannot allege that he spend the money on expenses which should be charged to a trust administered by a creditor because it is not the payee’s concern to know how the proceeds should be spent. That is the sole concern of the maker. The payee’s interest is merely to see that the note is paid according to its term.
LIABILITY OF 2 OR MORE MAKERS• When 2 or more makers sign jointly or severally, each of them is individually liable for the payment of the full amount of their obligation even if one of them didn’t receive part of the value given therefor, as he would be considered as an accommodation party
PAYEE’S EXISTENCE, ETC.• The maker also admits of the existence of the payee and his then capacity to indrose • He is precluded from setting up the following defenses: o That the payee is a fictitious person because by making the note, he admits that the payee existso That the payee was insane, a minor, or a corporation acting ultra vires because by making the note, he admits the then capacity of the payee to indorse Sec. 61. Liability of drawer. - The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount
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thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder.
DRAWER SECONDARILY LIABLE• He engages merely that the bill will be accepted or paid or both, according to its tenor, and that he will pay only when 1. It is dishonored 2. And the necessary proceedings of dishonor are duly taken • The liability of the drawer is subject to the two conditions and attaches only upon their fulfillment • The drawer, by merely drawing the bill and signing his name in the bill as such drawer, without more, impliedly engages to be so secondarily liable, as if he has incorporated the provisions of Section 61 in the bill • If the bill is not paid, accordingly, if a bill is not paid, the drawer becomes liable for the payment of its value to the holder provided that notice of dishonor is given
TO WHOM DRAWER IS SECONDARILY LIABLE1. The holder 2. Or if any of the indorsers intervening between the holder and the drawer is compelled to pay by the holder, the drawer, will be liable to that indorser so compelled to pay
IS DRAWER OF UNACCEPTED BILL PRIMARILY LIABLE?• Yes • It was held that until the bill has been accepted, the drawer is the principal debtor and after acceptance, the drawee or acceptor is the principal debtor and the drawer becomes secondarily liable
PAYEE’S EXISTENCE• Like the maker, the drawer admits to the existence of the payee and his capacity to indorse
NEGATIVES HIS LIABILITY• The law s the drawer to negative or limit his liability by express stipulation • By adding words such as “without recourse” or “I shall not be liable in case of non-payment or non-acceptance” Sec. 62. Liability of acceptor. - The acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance and admits: (a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee and his then capacity to indorse.
ACCEPTOR PRIMARILY LIABLE• Acceptor engages to pay absolutely according to the tenor of its acceptance • His liability is not subject to any condition • The acceptor is the drawee who accepts the bill • His acceptance immediately places a legal liability on him for the payment of the bill in favor of one who became a holder thereof after acceptance, and if he wants to escape liability, it is up to him to show that he is a mere agent of the drawer, or allege and prove any other defense which he has to the liability
EFFECT OF MORTGAGE EXECUTED BY ACCEPTOR
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• Where being unable to pay certain bills of exchange which the drawee has accepted, the latter makes a mortgage in favor of the holder of said bills upon certain merchandise the value of which is sought to be collected through said bills, in order to secure the payment of said amount if the merchandise is sold and the integrity thereof while the sale is not effected, the execution of said mortgage doesn’t constitute a Novation of the obligation represented by said accepted bills unless it is expressly stated in the mortgage
ACCEPTOR TO PAY ACCORDING TO TENOR OF HIS ACCEPTANCE• While the maker of a note engages to pay according to the tenor of the note, an acceptor engages to pay according to the tenor of his acceptance, not of the bill he accepts • Tenor of his acceptance may be different from the tenor of the bill, as the acceptor may accept the bill with qualifications • If his acceptance is general, the tenor of then bill is the same tenor as the tenor of his acceptance
WHERE ORIGINAL TENOR IS ALTERED BEFORE ACCEPTANCE• Suppose the bill is originally for P1000. Before the drawee X accepts it, it is altered by the payee B to P4000. Then X accepts it. How much is X liable to a holder in due course? • According to one view, X is liable for P4000 and not P1000. The reason is that the tenor of X’s acceptance is for P4000.
EFFECT OF SECTION 124• Under the first view, what is the effect of Section 124 which provides that a holder in due course can recover only the original tenor of the instrument? • It seems that this refers to the original tenor of instrument taken from the standpoint of the person primarily liable, in X’s standpoint. In other words, the original tenor of the instrument is P4000, which is the tenor of X’s acceptance. • If after his acceptance, a subsequent indorsee alters the bill to read P9000, then X could be liable for P4000 only, the original tenor of his acceptance, even as to a holder of due course.
ADMISSION OF DRAWER’S EXISTENCE, ETC.• Drawer’s existence • The genuineness of the drawer’s signature • The capacity and authority of the drawer to draw the instrument • He doesn’t admit the genuineness of the indorser’s signatures
EFFECT OF ACCEPTOR’S ADMISSIONS 1. Acceptor consequently precluded from setting up the defense that the drawer is non-existent or fictitious because of his admission of the drawer’s existence 2. Neither can he claim the drawer’s signature is a forgery because he admits the genuineness of the drawer’s signature 3. Neither can the drawee escape liability by alleging want of consideration between him and the drawer as by accepting the bill, he admits the capacity and authority of the drawer to draw the bill
Sec. 63. When a person deemed indorser. - A person placing his signature upon aninstrument otherwise than as maker, drawer, or acceptor, is deemed to be indorser unless he clearly indicates by appropriate words his intention to be bound in some other capacity.
WHEN PERSON DEEMED INDORSER
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• In the absence of any indication in what capacity a person whose signature is written on theinstrument intends to be bound, he shall be deemed as an indorser
INDICATION TO BE BOUND OTHERWISE THAN INDORSER• Will not be deemed as an indorser if he indicates by appropriate words his intention to be bound in some other capacity • But anyone who assumes the responsibility of identifying the payee of a check is answerable to thebank cashing the check if the bank pays its amount to such payee so identified
ADMISSIBILITY OF PAROL EVIDENCE• The statutory command that the legal effect of a blank instrument cannot be changed by parol proof or by evidence from other source • The intent to be bound in some other capacity than as an indorser must be indicated in the indorsement or on the face of the instrument and cannot be shown by parol
Sec. 64. Liability of irregular indorser. - Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following rules: (a) If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties. (b) If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all parties subsequent to the maker or drawer. (c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee.
IRREGULAR INDORSEMENT• An irregular indorser is one who not otherwise a party to an instrument, places his signature thereon his signature in blank before delivery
IRREGULAR INDORSEMENT• Its an indorsement in an unusual, peculiar, or singular manner • His name appears where he would naturally expect another name
BEFORE DELIVERY• It means the initial delivery • Provision doesn’t apply if the signature was placed after delivery
Sec. 65. Warranty where negotiation by delivery and so forth. — Every person negotiating an instrument by delivery or by a qualified indorsement warrants: (a) That the instrument is genuine and in all respects what it purports to be; (b) That he has a good title to it; (c) That all prior parties had capacity to contract; (d) That he has no knowledge of any fact which would impair the validity of the instrumentor render it valueless.
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But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision (c) of this section do not apply to a person negotiating public orcorporation securities other than bills and notes.
APPLICATION OF SECTION 651. A person negotiating by mere delivery 2. A person negotiating by qualified indorsement
LIABILITY OF PERSON NEGOTIATING BY DELIVERY • A person negotiating by mere delivery becomes liable to the holder only when the holder cannot obtain payment by reason of the fact that any of the warranties of the person negotiating by delivery is or becomes false
Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification, warrants to all subsequent holders in due course: (holders in good faith) (a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and (b) That the instrument is, at the time of his indorsement, valid and subsisting; And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. APPLICATION OF SECTION 66• Deals with the liability or warranties of one negotiating by general indorsement, as distinguished from qualified indorsers or persons negotiating by mere delivery • It has been held that this section includes an indorser for collection
LIABILITY OF GENERAL INDORSER1. That the instrument is genuine and in all respects what it purports to be 2. That he has a good title to it 3. That all prior parties had capacity to contract 4. And that the instrument is, at the time of his indorsement, valid and subsisting
FOURTH WARRANTY OF GENERAL INDORSER AND QUALIFIED INDORSER, DISTINGUISHED• While the qualified indorser or person negotiating by delivery warrants that he is ignorant of any fact that will render the instrument valueless or impair its validity, the general indorser warrants that theinstrument he is indorsing is valid and subsisting regardless of whether he is ignorant of that fact or not
THE WARRANTIES OF A GENERAL INDORSER EXTEND TO THE FOLLOWING1. Holders in due course 2. Persons who derive their title from holders in due course 3. Immediate transferees even if they are not holders in due course
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WARRANTIES DON’T EXTEND TO DRAWEE• The indorser of a check doesn’t warrant the genuineness of the drawer’s signature to the drawee who pays it since the drawee is not a holder in due course • The warranties provided do not run in favor of the drawee in respect to the genuineness of the drawer’s signature but only in favor of subsequent holders in due course
OTHER LIABILITY OF GENERAL INDORSER• He engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings of dishonor be duly taken, he will pay the amount to the holder, or to any subsequent indorser who may be compelled to pay it
GENERAL INDORSER IS SECONDARILY LIABLE• Secondary liability not confined to the four warranties • He is liable if for any reason, the person primarily liable cannot pay, as distinguished from the limited secondary liability of the qualified indorser or of the person negotiating by mere delivery • The reason for dishonor need not be established. As long as there was dishonor, this is sufficient.
LIABILITY OF ASSIGNOR• The vendor in good faith shall be responsible for the existence and legality of the credit at the time of the sale unless it should have been sold as doubtful but not for the solvency of the debtor unless it has been so expressly stipulated or unless the insolvency was prior to the sale and of common knowledge
Sec. 67. Liability of indorser where paper negotiable by delivery. — Where a person places his indorsement on an instrument negotiable by delivery, he incurs all the liability of an indorser. CASE DIGESTS: SECTION 67
JAI ALAI V. BPI66 SCRA 29
FACTS:Checks were deposited by petitioner in its current account with the bank. These checks were from a certain Ramirez, a consistent better in its games, who was a sales agent from Inter-Island Gas. Inter-Island later found out that of the forgeries committed in the checks and thus, it informed all the parties concerned. Upon the demands on the bank as the collecting bank, it debited the account of petitioner. Thereafter, petitioner tried to issue a check for payment of shares of stock but such was dishonored for insufficient funds. It filed a complaint against the bank.
HELD:Considering that the petitioner indorsed the said checks when it deposited them with the respondent, the petitioner as an indorser guaranteed the genuineness of all prior indorsements thereon. The respondent which relied upon the petitioner’s warranty should not be held liable for the resulting loss. Furthermore, the provision in the deposit slip on the right of reservation by the bank applies only when there is actual receipt of current funds or solvent credits. But as earlier on indicated, the transfer on account of the checks were ineffectual because it was made under the mistaken and valid assumption that the indorsements of the payee thereon were genuine.
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Sec. 68. Order in which indorsers are liable. - As respect one another, indorsers are liableprima facie in the order in which they indorse; but evidence is admissible to show that, as between or among themselves, they have agreed otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally.
APPLICATION OF SECTION• Applies only with respect to an indorser as against another but not as against a holder in due course • Every indorser is liable to all indorsers subsequent to him but not those prior to him whom he in turn makes liable
JOINT AND SEVERAL LIABILITY OF JOINT PAYEES• Joint payees or joint indorsees are deemed to indorse solidarily
EFFECT OF LACK OF NOTICE OF DISHONOR, ETC.• One of the joint indorsers cannot escape liability because proper notice of dishonor wasn’t given to his joint indorser
Sec. 69. Liability of an agent or broker. - Where a broker or other agent negotiates an instrument without indorsement, he incurs all the liabilities prescribed by Section Sixty-five of this Act, unless he discloses the name of his principal and the fact that he is acting only as agent.
APPLICATION OF SECTION 69• Instruments payable to bearer • To escape personal liability as a party negotiating by delivery, the agent must disclose his principal and state that he is acting only as an agent
Sec. 70. Effect of want of demand on principal debtor. - Presentment for payment is not necessary in order to charge the person primarily liable on the instrument; but if theinstrument is, by its terms, payable at a special place, and he is able and willing to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part. But except as herein otherwise provided, presentment for payment is necessary in order to charge the drawer and indorsers.
MEANING OF PRESENTMENT FOR PAYMENT• Production of a bill of exchange to the drawee for his acceptance, or to the drawee or acceptor for payment or the production of the promissory note to the person liable for payment of the same 1. Personal demand for payment at the proper place 2. With the bill or note in readiness to exhibit it as required and to receive payment and surrender it if the debtor is willing to pay
PRESENTMENT FOR PAYMENT NOT NECESSARY TO CHARGE PERSONS PRIMARILY LIABLE• It cannot be validly claimed that it is presentment of the bill which is the operative act that makes the acceptor liable under his acceptance
PAYABLE AT A SPECIAL PLACE• If the bill is payable at the PNB, is it necessary to make presentment for payment to X in order to charge him? No, the rule is the same. The only effect is that if, X is able and willing to pay the bill at the PNB at maturity, it is equivalent to a tender of payment on the part of drawee X. PRESENTMENT NECESSARY TO CHARGE PERSONS SECONDARILY LIABLE
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NECESSARY STEPS TO CHARGE PERSONS SECONDARILY LIABLE IN BILLS OF EXCHANGE1. In the three steps required by law, presentment for acceptance to the drawee or negotiation within reasonable time after acquisition unless excused 2. If the bill is dishonored by non-acceptance, notice of dishonor by non-acceptance must be given to persons secondarily liable unless excused and in case of foreign bills, protest for dishonor by non-acceptance must be made unless excused3. But if the bill is accepted, or if the bill isn’t required to be presented for acceptance, it must be presented for payment to the persons primarily liable unless excused 4. If the bill is dishonored by non-payment, notice of dishonor by non-payment must be also be given to person secondarily liable unless excused, and in case of foreign bills, protest for dishonor by non-pay7ment must be made unless excused
NECESSARY STEPS TO CHARGE PERSONS SECONDARILY LIABLE• Presentment for payment must be made within the period required to the person primarily liable unless excused • If the note is dishonored by non-payment, notice of dishonor by non-payment must be given to the person secondarily liable unless excused