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
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
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
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 INDORSER
Pay 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
THE 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 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
AN
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 described
adding, if he thinks fit, his proper signature.
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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 Dyjuco
Sec. 44. Indorsement in representative capacity. - Where any
person is under obligation to indorse in a representative capacity, he
may indorse in such terms as to negative personal liability.
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.
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-NEGOTIABLE
1. 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?
2
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. 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 VALUE
1. 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
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 the instrument.
RIGHTS OF A HOLDER IN GENERAL
1. 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
Holder in Due Course - Negotiable Instruments
Sec. 52. What constitutes a holder in due course. - A holder in due
course is a holder who has taken the instrument under the following
conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and
without notice that it has been previously dishonored, if such was the
fact;
 (c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any
infirmity in the instrument or defect in the title of the person negotiating
it.
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 the instrument 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 the instrument 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
• 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
3
• 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 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 material
alteration
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 GENERAL
To 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, 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 instrument free from any defect of title of prior parties, and
free from defenses available to prior parties among themselves,
and may enforce payment of the instrument for the full amount thereof
against all parties liable thereon.
RIGHTS OF A HOLDER IN DUE COURSE
1. 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
4
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 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 COURSE
1. 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.
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 exists
o 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
5
indorse; and engages that, on due presentment, the instrument will be
accepted or paid, or both, according to its tenor, and that if it be
dishonored and the necessary proceedings on dishonor be duly
taken, he will pay the amount thereof to the holder or to any subsequent
indorser who may be compelled to pay it. But the drawer may
insert in the instrument an express stipulation negativing or
limiting his own liability to the holder.
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 LIABLE
1. 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 allows 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
• 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 an instrument otherwise than as maker, drawer, or
acceptor, is deemed to be indorser unless he clearly indicates by
appropriate words his intention to be bound in some other capacity.
WHEN PERSON DEEMED INDORSER
• In the absence of any indication in what capacity a person
whose signature is written on the instrument 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 the bank 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.
6
(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
Warranty where negotiation is by delivery
Sec. 65. Warranty where negotiation by delivery and so forth. —
Every person negotiating an instrument by delivery or by a qualified
indorsement warrants:
(a) That the instrument is genuine and in all respects what it
purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the
validity of the instrument or render it valueless.
But when the negotiation is by delivery only, the warranty extends in
favor of no holder other than the immediate transferee.
The provisions of subdivision (c) of this section do not apply to a person
negotiating public or corporation securities other than bills and notes.
APPLICATION OF SECTION 65
1. 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
Liability of general indorser - Negotiable Instruments
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 INDORSER
1. 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 the
instrument 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
FOLLOWING
1. 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
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.
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.
Order in which indorsers are liable
Sec. 68. Order in which indorsers are liable. - As respect one
another, indorsers are liable prima facie in the order in which they
indorse; but evidence is admissible to show that, as between or
among themselves, they have agreed otherwise. Joint payees or
joint indorsees who indorse are deemed to indorse jointly and
severally.
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.
7
• One of the joint indorsers cannot escape liability because proper
notice of dishonor wasn’t given to his joint indorser
Liability of an agent or broker in negotiable instruments
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
People v. Maniego
Facts:
A case was filed against Lt. Rizalino Ubay, Milagros Pamintuan and her
sister Julia Maniego for the crime of malversation of public funds. Ubay,
an officer of the AFP, was then the duly appointed Disbursing Officer in
the Office of the Chief of Finance in the General Headquarters of Camp
Murphy in QC. He conspired with Pamintuan and Maniego by giving
them P66,434.50 from the public funds entrusted and controlled by him
as the consideration of the several personal checks issued by
Pamintuan, and indorsed by Maniego. Ubay received and accepted the
personal checks despite knowing that they are worthless and not
covered by funds in both BPI and PNB.
The checks were later presented and subsequently dishonored and
rejected by the said banks which was prejudicial and damaging to the
Republic of the Philippines. Ubay and Maniego were the only ones
arraigned because Pamintuan already fled to the US. Ubay and Maniego
pleasded not guilty.
The trial court rendered its decision convicting Ubay for the crime of
Malversation of public funds but acquitting Maniego because of absence
of evidence against her. Nonetheless, they were both ordered to pay
jointly and severally the amount of P57, 434.50 to the government.
Maniego sought reconsideration praying that she be absolved from civil
liability or at the very least reduce it to P46,934.50. The court did not
absolve her from the liability but approved the reduction thereof.
On appeal she contended that the trial court committed errors which are
the issues before the Court.
Issues/Held:
1. W/N the trial court erred in holding Maniego civilly liable to
indemnify the Government for the value of the checks after she had been
found not guilty of the crime out of which the civil liability arises. –– NO.
2. W/N the trial court erred for adjudging her liable as an indorser
to indemnify the government for the amount of the checks. –– NO.
Ruling:
1. Well known is the principle that “Any person criminally liable
for felony is also civilly liable." But a person adjudged not criminally
responsible may still be held to be civilly liable. A person's acquittal of a
crime on the ground that his guilt has not been proven beyond
reasonable doubt does not bar a civil action for damages founded on the
same acts involved in the offense. Extinction of the penal action does
not carry with it extinction of the civil unless the extinction proceeds from
a declaration in a final judgment that the fact from which the civil might
arise did not exist.
2. Based on the evidence before the trial court, it established that
Maniego was an indorser of the subject checks. Appellant contended
that as mere indorser, she may not be made liable on account of the
dishonor of the checks indorsed by her.
Under the law, the holder or last indorsee of a negotiable instrument has
the right to "enforce payment of the instrument for the full amount thereof
against all parties liable thereon." Among the "parties liable thereon" is
an indorser of the instrument i.e., "a person placing his signature upon
an instrument otherwise than as maker, drawer, or acceptor ** unless
he clearly indicates by appropriate words his intention to be bound in
some other capacity.
Such an indorser "who indorses without qualification," inter alia
"engages that on due presentment, ** the instrument shall be accepted
or paid, or both, as the case may be, according to its tenor, and that if it
be dishonored, and the necessary proceedings on dishonor be duly
taken, he will pay the amount thereof to the holder, or to any subsequent
indorser who may be compelled to pay it." (Sec 66, NIL)

NOT THE TOPIC BUT MAY BE ASKED:

Maniego may also be deemed an "accommodation party” An
accommodation party is a person "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."

As such, she is under the law "liable on the instrument to a holder for
value, notwithstanding such holder at the time of taking the instrument
knew that [she] only an accommodation party.” But she has the right,
after paying the holder, to obtain reimbursement from the party
accommodated, "since the relation between them is in effect that of
principal and surety, the accommodation party being the surety."

Doctrine:
Such an indorser "who indorses without qualification," inter alia
"engages that on due presentment, ** the instrument shall be accepted
or paid, or both, as the case may be, according to its tenor, and that if it
be dishonored, and the necessary proceedings on dishonor be duly
taken, he will pay the amount thereof to the holder, or to any subsequent
indorser who may be compelled to pay it." (Sec 66, NIL)