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The issuance, negotiation and acceptance of a negotiable But if the gift check was issued by a bank, it is considered as a
instrument is not an exception to the law that there must be manager’s check. If the gift check is not a personal check but
consideration. In writing and issuing a negotiable instrument, one issued by the bank, it is unlikely to be dishonored because
consideration is presumed. the check was drawn by the bank against itself. This gift check,
when delivered, while there may not be any value that you
WHAT CONSTITUTES “VALUE”
paid for them, the party who is obligated under the gift will pay the amount of your deposit. Thus, there is consideration
check is the issuing bank itself. Therefore, can the issuing when you deposit the check (i.e. the promise of the bank to pay
bank cannot raise the defense of want of consideration you back). While checks are negotiable instrument, the
when it is encahsed becaudr it received full value for the relationship between depositor and bank, it is governed by
amount of the check when it was issued. Article 1980 of Civil Code.
Consideration for an instrument can be insufficient because When instrument is received and value was given for it, the
Inadequacy does not create a defect of the contract. Lesion holder is holder for value. Once a holder pay for consideration
is not a ground to set it aside except in Article 1361 of the for an instrument, he is a for value for all parties.
Civil Code. Other than that, inadequacy of consideration
does not create a defect in the contract.
HOLDER FOR VALUE Lien Holder
Sec. 26. What constitutes holder for value. - Where value has at any Sec. 27. When lien on instrument constitutes holder for value. - Where the
time been given for the instrument, the holder is deemed a holder holder has a lien on the instrument arising either from contract or by
for value in respect to all parties who become such prior to that time. implication of law, he is deemed a holder for value to the extent of his lien.
Agbayani: One who gives valuable consideration for an Agbayani: The reason for this seems to be that the holder who
instrument issued or negotiated to him is a holder for value. But has a lien on the instrument is a holder in due course only up to
the term is not limited to the one who is known to have given the extent of his lien. Thus, a holder who has a lien on the
valuable consideration for the instrument he holds. It refers also instrument can only up to the extent of his lien if there are
to any holder of an instrument for which value has been given at personal defenses (i.e. lack of consideration) against him but he
any time. cannot collect at all if there are real defenses available against
him. However, he can still collect the whole amount of the
instrument if there are no defenses at all.
Sebastian: When a holder deposits and indorses a check, the
bank did not become holder for value because when it received Sebastian: Person who has a lien is considered to be a holder for
the check, it did not have to pay for the check. However, in the value to the extent of his lien over the instrument. This is
Philippines, this is wrong. Because of Article 1980 of the Civil important because the consideration for the negotiation of the
Code, when a depositor deposit money in the bank, he is note does not have to be paid simultaneously with the delivery
lending the bank. The bank is the borrower and the depositor of the note. The person who has a lien is only a holder for value
is the lender. This is why all deposits are mutuum. If the bank up to the extent of his lien because he was never meant to be the
and depositer is related within the context of borrower and owner of the instrument.
lender, the bank who receives deposit becomes owner of the
money. In exchange, the bank promises that upon demand, it
Failure of consideration means that something was agreed
WANT OF CONSIDERATION VS FAILURE OF CONSIDERATION
upon as consideration for a contract but for some reason the
Sec. 28. Effect of want of consideration. - Absence or failure of consideration did not materialize. For example, A enters into
consideration is a matter of defense as against any person not a a contract to sell certain merchandise to B. In consideration of
holder in due course; and partial failure of consideration this merchandise, B makes a promissory note payable to A as
is a defense pro tanto, whether the failure is an advance payment thereof. A fails to deliver the merchandise.
ascertained and liquidated amount or otherwise.
There is a failure of consideration, so that A cannot recover
Agbayani: 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
Lack of Consideration Failure of Consideration such defense and is a holder in due course, C can recover from
total lack of any valid consideration neglect or failure of one of the parties
to give, to do or to perform the
A.
consideration agreed upon
embraces transactions where no implies that the giving of valuable Partial failure of consideration means simply that part of the
consideration was intended to pass consideration was contemplated but consideration did not materialize. In the example above, if A
that it failed to pass
delivered part of the merchandise and failed to deliver the
remedy is to annul the instrument Remedies are (1) rescission of the
instrument as to value that was failed rest, there is a partial failure of consideration which may be
to receive or (2) specific performance 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
Campos: This provision reiterates the rule laid down by undelivered portion).
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 Sebastian: In lack of consideration, there is no considration at
negotiable character of an instrument is not affected by the all. While in failure of consideration, there was meant to be a
fact that it does not specify that any value has been given consideration but it was never fulfilled. In the latter, there was
therefor. Under these rules, the defendant has the burden intent to consummate a contract and there was an instrument
of proving that there was no consideration for the issued for the fulfillment of the contract.
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.
Osorio v Montenegro vda. de Papa – Sebastian: There was no consideration in this case because the
check was meant to be a gift. Even if the note said that it was
Agbayani: When it is shown that a promissory note is issued for valuable consideration, this was merely a disputable
executed without just, real or legal consideration, and “that it presumption. This case is a clear case of want of consideration.
was executed so that the supposed creditor may help the
supposed debtor protect the latter’s properties in the event of William Barco & Sons v Forbes – One who gives a note in
an expected litigation to be commenced by a third person renewal of another note, with knowledge at the time of partial
against said debtor, the same is without any effect and the failure of the consideration for the original note, or of false
payment of said note is not demandable.” representations by the payee, waives such defense and cannot set
it up to defeat or to reduce the discovery on the renewal note.
Sebastian: In this case, it was proven that there was no
valuable consideration other than to protect the person from Sebastian: In this case, the note was issued for the purchase of
the claims of other persons. Thus, the instrument was void for fertilizers. Also, there was no actual finding of failure of
lack of vlauable consideration. consideration and this was only assumed.
However, failure of consideration was not necessary to prove
Elgin National Bank v Goecke – Plaintiffs in error, as since the holder cannot renegotiate the note.
accommodation parties and indorsers of the notes in
question, indorsed the same for purpose of lending their There was only failure of consideration in this case.
names and credit to the brewing company. They are therefore
liable to the defendant in error on the notes, although the NATURE OF DEFENSE
defendant in error at the time of taking the instrument knew
plaintiffs in error to be accommodation parties, if the Agbayani: Whether total or partial, can be interposed as a
defendant in error is a holder for value, as the notes were defense only against persons not holders in due course but not
indorsed to it before maturity and without notice of their against holders in due course. Therefore, Want or failure of
restricted use and purpose. consideration are only personal defenses.
An indorsee of a negotiable note who has taken it, before its Campos: Section 28 goes farther for it in effect provides that
maturity, as collateral security for a pre-existing debt and absence or failure of consideration is a personal defense
without any express agreement, is deemed a holder for a available only against holders not in due course. In the hands
valuable consideration, and that he holds it free from latent of a holder in due course therefore, the presumption of
defenses on the part of the maker. consideration is conclusive. The acceptability of negotiable
instrument would be greatly restricted if prospective
Dougherty v Salt – The note was the voluntary and purchasers were burdened with the need of determining
unenforceable promise of an executory gift. whether such instruments are supported by consideration.
LIABILITY OF AN ACCOMMODATION PARTY indorsement, the indorser makes the indorsement for the
Sec. 29. Liability of accommodation party. - An accommodation accommodation of the maker. Such an indorsement is generally
party is one who has signed the instrument as maker, drawer, for the purpose of better securing the payment of the note – that
acceptor, or indorser, without receiving value therefor, and for the is, he lends his name to the maker, not to the holder. An
purpose of lending his name to some other person. Such a person is
liable on the instrument to a holder for value, notwithstanding such accommodation note is one to which the accommodation party
holder, at the time of taking the instrument, knew him to be only an has put his name, without consideration, for the purpose of
accommodation party. accommodating some other party who is to use it and is expected
to pay it. The credit given to the accommodation party is
Agbayani: The following are the requisites for an sufficient consideration to bind the accommodation maker.
accommodation party: (1) he must be a party to the Where, however, an indorsement is made as a favor to the
instrument; (2) he must not receive value therefor; and (3) indorsee, who requests it, not the better to secure payment, but
he must sign for the purpose of lending his name or credit. to relieve himself from a distasteful situation, and where the only
consideration for such indorsement passes from the indorser to
It should be noted that the phrase ‘without value thereof’ the indorsee, the situation does not present one creating an
means without receiving value by virtue of the instrument accommodation indorsement, nor one where there is a
and not without receiving payment for lending his name. consideration sufficient to sustain an action on the indorsement.
An accommodation note showing on the face in express
terms that it has been issued for no consideration would be Sebastian: The broker was not an accommodating party because
of little or not use to the payee, and for that reason, he never lent his credit line to the borrower so that the latter can
practically all accommodation notes are so drawn as to borrow money from the lender.
either express or imply a valuable consideration prima
facie. Ang Tiong v Ting – An accommodation party liable to a holder
for value as if the contract was not for accomodation. It is not a
Sebastian: An accommodation party does not lend his valid defense that the accommodation party did not receive any
name but lends his credit because he exposes himself to valuable consideration when he executed the instrument. Nor is
liability so the accommodated party can get credit. it is not correct to say that the holder for value is not a holder in
due course merely because at the time he acquired the
Maulini v Serrano – An accommodation party is one who instrument, he knew that the indorser was only an
has signed an instrument as maker, drawer, acceptor or accommodation party.
indorser without receiving value therefor and for the
purpose of lending his name to some other person. The
Agbayani: (1) The accommodation party is generally If any of the guarantors should be insolvent, his share shall be borne by the others,
regarded as a surety for the party accommodated. including the payer, in the same proportion.
(2) When “the accommodation parties make payment to the The provisions of this article shall not be applicable, unless the payment has been
made by virtue of a judicial demand or unless the principal debtor is insolvent. (Art.
holder of the notes, they have the right to sue the 2073, Civil Code)
accommodated party fore reimbursement since the relation
between them is in effect that of principal and sureties, the In case an accommodating party cannot recover
accommodation parties being the sureties. reimbursement from his co- accomodating parties, he can still
recover from the accommodated party because he is the
The accommodated party cannot recover from the principal debtor.
accommodation party. As between them, the understanding is
that he accommodation party either is (1) to reimburse the Sadaya v Sevilla – (1) A joint and several accommodation
amount which the accommodation party may be obliged to maker of a negotiable promissory note may demand from the
pay, or principal debtor reimbursement for the amount that he paid
(2) to pay the instrument directly to the holder. The real to the payee; and (2) a joint and several accommodation
debtor is the accommodated party. As between the maker who pays on the said promissory note may directly
accommodated party and accommodation party, the latter is demand reimbursement from his co-accomodation maker
secondary liable. without first directing his action against the principal debtor
provides that (a) he made the payment by virtue of a judicial
Sebastian: For accommodation makers, each of them is the demand, or (b) a principal debtor is insolvent.
maker and each of them made a warranty. Each
APPLICATION OF “HOLDER FOR VALUE”
accommodation maker is individually liable for the
instrument. The accommodation party who paid for the
Agbayani: In instruments which are not accommodation
whole instrument cannot seek reimbursement from the
papers, the effect of this notice of want of consideration is to
other accommodation parties.
render the holder for value not a holder in due course because
he has notice of a defense of prior parties, namely, want of
Reimbursement rights of accommodating parties are not
consideration, which is a defense under Section 28. However,
governed by the Negotiable Instruments Law because the
because of the provisions of Section 29, an accommodation subject to all defenses existing among prior parties.
party cannot interpose the defense of want of consideration Transfer thus includes both an ordinary assignment
between him and the accommodated party against a holder and a negotiation.
for value even if the holder for value has notice of the fact
that he is an accommodation party and therefore, has A negotiation may be for value as in a sale, or by way
notice that he did not receive any consideration for the of a gift. In either case, there will be a valid transfer.
instrument which he signed. However, the rights acquired by the transferee in
each case may be different.
Campos: An allonge can be validly used only when Clark v Thompson – A written transfer of a note,
there is no longer any room on the instrument for made on a separate paper to which it was pinned,
further indorsements, otherwise the transfer will there being room on the back of the note itself of the
not be sufficient to constitute the transferee a transfer, was an assignment merely, not a
holder. He will thus be subject to defenses such as commercial indorsement. Whether the note was
failure of consideration. A contrary rule would pinned not, we are constrained to treat its transfer as
open the door to fraud. a common-law assignment merely, and to hold that
respondent was not a holder in due course.
Sebastian: If the instrument no longer has space
for indorsements, signatures may be placed on an
allonge. An allonge is a paper attached to a
document for receiving indorsements too
numerous to be written on the bill itself. It only
relates to an instrument payable to order because
Sebastian: Subrogation happens when a creditor is face amount of the instrument, title transferring to the
substituted through novation. indorsee. This is what is called a “discount” of the
instrument. The discount is given in consideration of
INDORSEMENT FOR THE FULL INSTRUMENT the period during which the purchaser has to wait
before he can cash the instrument with the maker or
Sec. 32. Indorsement must be of entire instrument. - The indorsement
must be an indorsement of the entire instrument. An indorsement acceptor, which can be done only at the maturity of the
which purports to transfer to the indorsee a part only of the amount instrument.
payable, or which purports to transfer the instrument to two or more
indorsees severally, does not operate as a negotiation of the
instrument. But where the instrument has been paid in part, it may be When an indorsement does not comply with Sec. 32, the
indorsed as to the residue. transfer is not necessarily void. It remains valid, not as
a negotiation, but as a mere assignment which subjects
Agbayani: An indorsement of a part of the the holder to all defenses on the instrument.
instrument does not operate as negotiation. But it
may constitute a valid assignment binding between Sebastian: An instrument must be indorsed in full in
the parties. The person to whom the instrument is order to determine the holder of the instrument.
indorsed would not be considered an indorsee but
merely an assignee and would therefore take the Blake v Weiden – When there has been a purported
instrument subject to the defenses available between indorsement of the whole instrument, in separate parts
the original parties. to two or more trasferees, the purported indorsees take
legal title to their several shares and may sue together,
Campos: The purpose of this provision is to protect or any one or more may sue provided all the other
the obligors from more than one action on the indorsees are brought in as parties.
instrument. The maker and all the prior parties, in
assuming liability, took the risk of only one cause of
action against them.
The provision does not cover a situation where part
of the amount of the instrument has been paid, in
which case, it may be negotiated for the balance.
Thus, in a note payable by installments, where some
installments have been paid, the instrument may still
be negotiated for the remaining unpaid installments.
But all subsequent indorsees acquire only the title of the first Effects of Qualified Indorsement
indorsee under the restrictive indorsement.
Agbayani: A qualified indorsement constitutes the
Agbayani: The indorsement passes the legal title indorser as a mere assignor of the title to the
over the note to the indorsee so as to enable him to instrument. ‘Without recourse’ means without resort
demand and receive payment of the value of the to a person who is secondarily liable after the default
instrument. This is true under any of the forms of of the person who is primarily liable. In effect, any
restrictive indorsement. one who indorses without recourse states that “all
parties to the paper are genuine; I am the lawful
In a restrictive indorsement “for deposit,” the holder of that paper, and I have title to it and know of
indorsee can bring an action against the indorser no reason why you could not recover on it as a valid
if the indorser received value for said indorsement. instrument; but I do not guarantee the financial
responsibility of the parties on that paper but I do say
The words ‘until it has been restrictively indorsed’ that I hold title to it just the same as any other
in Section 47 do not contemplate every restrictive personal property.”
indorsement but a restrictive indorsement that
prohibits the further negotiation of the instrument Liability of Qualified Indorser
under Section 36(a).