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GAYLE ANGELI RECTO  Acts within the scope of his

Negotiable Instruments authority

Dean Jose Sundiang  Discloses his principal
Audio Lecture Summary  Indicates through appropriate
words that he is only acting in a
representative capacity
Memorize  SECS 1-9
 Secs 2-9 are elaboration of Sec 1
Sec 22 – speaks of an infant
Elements:  If the payee is an infant or a corporation
 Negotiability  Submission by Dean Sundiang: the proper term is “incapacitated”
 Accumulation of Secondary Contracts because an infant cannot act
 If the payee happens to be an infant / corporation  instrument is
Illustrations: thereafter negotiated to a holder for value without notice or malice of
 If: the incapacity of the payee
o MAKER  PAYEE o The holder for value can enforce payment from the party
 P does not negotiate the instrument and primarily liable BUT NOT against the infant or the
presents it for payment corporation
 M does not pay o Hence, while this is a real defense (to wit, it can be raised
 M is the only one liable even against a holder in due course), it is personal as to
o MAKER  PAYEE  A  B  C the infant/ corporation
 C (the holder in due course) presents the
instrument to M Illustration:
 M dishonors  Maker  order of I/C  A (innocent purchaser for value)
 C must provide a notice of dishonor to P, A, B  A presented it for payment to M
>> P, A, B shall become liable for payment  Can M raise as a defense against A the incapacity of I/C?  NO!
also o It’s only I/C who can raise that defense against A
 But if no notice of dishonor is made upon P, A, although such defense is a real defense
B  they are discharged from liability (Sec  Why? >> BECAUSE under Sec 60, 61, 62, the Maker/ Drawer,
115) Acceptor  they all admit the existence of the payee and his then
capacity to indorse
Indorsement  a contract in itself (Sec 40) o Because of that admission, they cannot raise this defense
 It is an accumulation of secondary contract
 Here, more parties become liable
Sec 17 – rules on construction
What constitutes negotiability?  Sec 1  Only applies if there is any ambiguity in the terms and conditions on
a. Writing and signed by M/D the instrument
 Not necessarily the usual signature of the M/D  Same rules as in statutory construction
 Enough that there is intent to be bound by such signature  Like when the amounts stated in words and numbers DIFFER  the
b. Unconditional promise – sum certain amount stated in words shall prevail
 BSP (Sec 52 of New Central Bank Act) RE coins  o BECAUSE it’s easier to alter the amount in numbers than
amended by virtue of a Resolution that in words
 1, 5, 10 peso coins  up to P 1,000 o SMC case  SMC issued in payment of dividends
 1, 5, 10, 25 centavo coins  up to P 100  Don’t leave a space between Peso sign and
 If higher than that  NOT legal tender first number on checks
 Legal tender  a kind of currency which the law compels  Last par in Sec 17  “I promise to pay” signed by 2 or more persons
the creditor to accept as payment of a debt, be public or o They are jointly and solidarily liable
private, provided it’s tendered in the right amount

 Consideration is presumed
Illustration:  Instrument must be supported by a valuable consideration
 If a PN was issued payable to the order of the debtor  Does not mean that the amount paid must be the exact amount
o M  order of D  But must not be so insignificant so small
o Amount in PN = P 50,000  Question in the Bar:
o B owes C = P30,000 o Love and affection  may be a “valuable consideration”
 Article 2195 CC  incorporeal rights may be pledged
o In this case  it’s evidence by a nego instrument
o Hence, it must be indorsed
 Sec 27  although the note is for P 50,000 and the debt was P
 Must be read together with Secs 124 and 125 (Material alterations)
30,000, B cannot make a partial negotiation unless there has been
 Occurs when a signature is made without authorization from the
partial payment
person whose signature it purports to be  it is wholly inoperative
o It must be the entire amount
 What the law declares to be wholly inoperative is NOT the instrument
 D  C (negotiated the entire amount)
 Sec 27  C shall have a lien arising from the contract of pledge only
o The law uses the term “antecedent” (pertaining to what’s
up to P 30,000
wholly inoperative)
o C shall be a holder for value
o Otherwise, if what the law intends to make wholly
 Art 2118  became due
inoperative is the instrument itself  nobody can be held
o C can collect from the Maker
o If M does not have a defense, even if C is not a holder in
 There are parties who are precluded from setting up as defense
due course  C can collect the P50, 000 from M
forgery or want of authority
 C must return the P20,000 to D
o Sec 23 – those who are estopped to do so
o If M has a personal/ equitable defense and C is a holder
o Indorsers  BECAUSE of the warranties under
in due course C can only recover P30,000
 Sec 65
 Sec 66
o Acceptor
 Under Sec 62 – acceptor is deemed to have
accepted the existence of the drawer and the
 Some instruments may be negotiable under other laws but NOT genuineness of his signature by the act of
under Section 1 of the Negotiable Instruments Law “accepting”
 GR: one whose signature does not appear on the instrument cannot  The cut-off rule an instrument is payable to order and if indorser’s
be held liable as he is not a party thereto (Sec 18) signature was the one forged while maker’s signature was genuine
 XPNs: o “parties prior to the indorser whose signature was forged
o One who signs through an agent (Law on Agency) cannot be held liable”
 The acts of the agent shall be considered the o Shall also apply even if instrument is payable to bearer,
act of the principal if: but only as between the immediate parties (Justice Vitug)
 He is duly authorized by the o But since it is payable to bearer, hence signature is not
principal necessary in negotiating the instrument, such rule should
not be applied (Dean Sundiang)
o There was gross negligence on the part of D for intrusting
Illustrations (if instrument is payable to order) the check to a person who was no longer connected with
 M  P (forged the signature)  A  B  C (holder) D
o Sec 23: M’s signature is wholly inoperative
o Hence, M cannot be held liable ** In the case of Illusorio (not agreed with by Dean Sundiang)
o P liable  because he is the forger  Illusorio (D), a businessman handling many companies intrusted his
o A and B liable  because of warranties checkbook to his secretary, including his credit card
 The secretary took one of the checks and forged the signature of
If instrument is PAYABLE TO ORDER Illusorio and encashed the same
 M (signature is genuine)  P  stolen by A  B  C  Bank (DB) paid the check
 Even if facts do not state that P’s signature was not forged  one  Who should bear the loss? SC ruled that it should be D as there
can assume that P’s signature was forged because, it being an was gross negligence on his part as he intrusted the check and the
instrument payable to order, an indorsement is needed for the same cards to his secretary
to be negotiated
 A could not have negotiated the instrument to B without forging the ** Illusorio ruling was later on abandoned in Samsung Construction and Supply
signature of P (Sec 23) Company
 C cannot hold M liable under the cut-off rule  The checks were intrusted to an officer of the corporation (D), where
o Reason: M only promised payment to P or upon the there was an authorized signatory
order of P o In the case of corporations  there must be a Resolution
 Since P never indorsed the instrument (as it of the Board authorizing the opening of a bank account,
was merely stolen), M can never be held liable including the authorized signatories
 Someone, however, was able to get a check, forged the signature
In a BoE and encashed the same
 D (signature was forged)  X (drawee)  P  A  B  C  The teller of the DB examined the signature, compared with
 Assuming it was dishonored by X for non-payment specimen signatures and was convinced that the signature was
 A notice of dishonor was given to C and the indorsers genuine
 D cannot be held liable because his signature was wholly inoperative  Check was paid by DB
 But the indorsers (P,A,B) can be held liable  Who should bear the loss?  SC ruled that it should be DB as there
o P – because he forged the signature was no gross negligence on the part of D
o A,B – because of the warranties
** A man (D) and his friend were inside the car. Man left his friend in the car with
In a BoE his checkbook. Friend tore a check and was then able to encash it
 D (genuine signature this time)  X (drawee)  P  A (stole the  Friend forged the signature
instrument)  B  C  Who should bear the loss?  SC ruled it should be DB because
 Dishonored by X there was no gross negligence on the part of D
 Although D’s signature was genuine, the instrument being payable to
order  D cannot be held liable
o D – not liable under the cut-off rule  In determining the negotiability of an instrument  you only
 It was P’s signature that was forged because A stole the instrument consider what appears on the face of the instrument (as
 Suppose that X accepted submitted by Dean Sundiang)
o Under Sec 62 – X cannot raise the same as defense  But in the case of BDO SC applied doctrine of estoppel where,
because he is deemed to have accepted the genuineness notwithstanding the non-negotiability of an instrument, a party who
of the signature has alleged the negotiability of an instrument, and having received
benefits therefrom, cannot assail the same.
In case drawee bank pays the check and it later on turns out that the drawer’s  Under the law, the Phil. Deposit Insurance Corp. has jurisdiction even
signature had been forged : if it is non-negotiable
 Determine WON there was gross negligence on the part of the
 If not stated in the problem  assumption is that drawer did not act
with gross negligence ** D issued a check payable to the order of P. Before it was delivered P, it was
 ANSWER/ RULE: The drawee bank should bear the loss, barring stolen by T from D. The DB is PNB and BDO is the collecting bank
gross negligence on the part of the drawer  T deposited the check to BDO, the collecting bank
 In other words, if the drawer has not acted with gross negligence, he  BDO forwarded the check to PNB and it was paid.
must bear the loss  T was able to withdraw the amount from BDO
 Reason: the nature of business of banks is fiduciary  Who should bear the loss?  SC ruled that it should be BDO
 Reason: the nature of the relationship is Art 1980 CC  mutuum o When a collecting bank forwards a check to DB, there is
 The rule that one has to rely on the four corners of the title/ the guaranty of indorsements
instrument does not apply to banks because of the nature of the o SC adopted US ruling  although the check was not
business of banks delivered to P, even assuming if D had sufficient funds in
o Banks do not just grant loans; they do investigations the bank but through negligence of the teller/employee of
the bank, it was dishonored  P has no CoA against DB
** The power to collect does not carry with it to negotiate. unless the latter has certified the check as there as
 In the case involving Jai Alai Corporation, it was ruled that the latter there is no privity of contract
acted with gross negligence when it accepted a check payable to the  Certification is equivalent to acceptance
order of the adverse party but was indorsed by a mere collector,  P’s remedy now is to go after D based on the
hence, Jai Alai Corporation should bear the loss herein. original obligation that gave rise to the
 Hence, it cannot be deemed that Jai Alai Corporation was a holder in issuance of the checks
due course  D has right of action against DB if D has
sufficient funds
** A check was paid by the bank and the latter later on discovered the signature  DB can be held liable for damages in favor of
of the alleged drawer was forged. D
 D (alleged drawer whose signature was forged)  P  A  DB  DB (PNB) now can go after BDO because of
(drawee bank who paid) the warranty at the back of the check  lack
 DB then demanded return of what it has paid of indorsements are fully guaranteed
 A refused, contending that she merely acted as an accommodation  Therefore  P can go after BDO, the
party (Sec 29) collecting bank to achieve a desirable
 It turned out then that D had been dead for 10 years shortcut
 Hence, there was gross negligence on the part of A  Dean Sundiang does not agree with this ruling  if this were
 SC ruled that A should bear the loss as she was the one who followed, then D should also have a CoA against PNB (no matter how
encashed it complete the form is as to its negotiability, as long as it is not
delivered, under Sec 16  it will not produce any effect)
** In the case of Associated Bank (DB)  Province of Tarlac (D) issued a check  Dean Sundiang: The instrument was never delivered to P, therefore,
payable to the order of the Hospital of Tarlac (P) as donation, which was he acquired to right. The remedy of P is to go after the drawer. A
intrusted to a former employee (FE) of D so that he may deliver the same to P shortcut cannot be used.
 FE then forged the signature of the authorized signatory of D  Summary of Ruling:
 FE then was able to encash the check with DB o PD
 Who should bear the loss? o Assuming D has sufficient funds, D  DB
 The Court adopted the Solomonic Solution o DB  CB
o ½ to be borne by D and ½ by DB o Hence, using the doctrine of desirable shortcut, P  CB
Material Alteration (Secs 124 and 125)  A paid P30,000 to P
 A type of forgery  Hence, A becomes a holder for value
 The instrument becomes wholly inoperative  But when P negotiated it to A, P told A that M is merely an
 No right can be acquired from that instrument accommodation party
o EXCEPT as against the parties who:  Upon maturity date, A presented it for payment for M
 Made the alteration  Can M raise as a defense against A want/absence of consideration?
 Authorized the alteration (can M refuse to pay?)  NO. (Sec 29)
 Subsequent indorsers o 2 sets of relationships:
 However, under the last par Sec 124  if the instrument falls into the  Between M (accommodation party) and A
hands of a holder in due course, he can enforce payment according (holder for value)  want of consideration is
to its original tenor NOT a valid defense
o Sec 62  acceptor is liable according to the tenor of his  Suppose M dishonored it and P paid A, can P ask for reimbursement
acceptance from M?  GR: Sec 68 the indorsers are liable in the order that they
o Would there be a difference between tenor of bill when indorse. Prior parties are liable to subsequent parties  this rule
drawn and tenor of acceptance? IT DEPENDS only applies insofar as indorsers are concerned
 If acceptor makes an unqualified/ general o This rule does not apply to a holder.
acceptance  no difference o The holder can hold anyone liable in the order that he
 If qualified/ conditional/ partial acceptance  wants
there is difference (Sec 139 in relation o ANSWER: of course not.  ingratitude (how can you ask
with149) for reimbursement if there was no disbursement
 But holder here has the option of o Hence, between the immediate parties  want of
not accepting such acceptance by consideration is a valid defense
the drawee o Sec 119  payment in due course made by the
 He can treat the bill as having accommodated party will discharge the instrument
been dishonored for non- (because the accommodated party cannot ask for
acceptance reimbursement from the accommodation party)
o The accommodation party’s liability depends
 D issued a BoE payable to order of P  If he signed as an accommodation maker/
o Original Tenor: P20,000 accommodation acceptor  he is primarily
o Altered Tenor: P200,000 (P made the alteration upon liable
delivery to him)  If he signed as an accommodation drawer/
o After making the alteration, P presented it for acceptance accommodation indorser he is only
to DB secondarily liable
o DB, not noticing the alteration, accepted it as altered
o Thereafter, P  A  B C ** In the case of Crisologo Jose  a corporation may not be an accommodation
o Before C could present it for payment to DB, DB was party
informed re material alteration  Some of the officers thereof made it appear that the corporation was
o Sec 2  acceptor is liable depending on the tenor of his merely an accommodation party
acceptance  They signed it on behalf of the corporation
o Sec 124 however  acceptor is liable according to its  Sec 45 – such was an ultra vires act
original tenor o Hence, those who signed shall be held liable
o For how much can C enforce it against DB? Original
or altered tenor? HANGING QUESTION ** In the case of Sevilla  co-maker sets up a mortgage, pledge, etc.
o How do you reconcile?  Co-maker does not receive any consideration
 The principal debtors is liable
 What constitutes? (Sec 125)  But if co-maker pays, he can ask for reimbursement from the principal
o PNB case  alteration of the serial number of a check debtor
does not constitute material alteration, under the last sub  Can he ask for payment from other co-makers? IT DEPENDS
par Sec 125 o As ruled in Sevilla  in accordance with the Insolvency
 Does not affect negotiability under Sec 1 Law, the co-maker can run after the other co-makers only
o Change in the name of the payee is also not a material if he has been declared insolvent OR
alteration as the instrument here cannot be enforced  under the CC, if there has been a prior judgment
according to its material alteration

** M issued a PN payable to order of P for P10,000  original tenor
 P altered the amount and made it P100,000  altered tenor
 P  A  B  C (holder)
 For how much can C enforce the instrument against M?  Under
Sec 124, when an instrument is materially altered, it is avoided
EXCEPT as to the one who made the alteration and subsequent
o If C is a holder in due course  he can enforce payment
according to its original tenor, not according to its altered
o P,A,B  can enforce payment according to its altered
o If M has no defense as a matter of fact and C is a holder
in due course  original tenor (Sec 52 and Sec 124)

Sec 29  accommodation party

 One who is signs the instrument as a M,D,A,I without receiving any
value therefor
 But he is liable to a holder for value even if the holder for value knew
him to be an accommodation party only
 XPN to the GR on presumption that every contract is presumed to be
entered into for a valuable consideration
 The purpose is just to lend his name on the instrument without
receiving any valuable consideration

M signed a PN as an accommodation maker payable to the order of P, the
accommodated party; amount = P30,000
 P did not give any valuable consideration to M
 M signed it only to lend his name to P, maybe because M has a
better credit standing than P
 To help P, M signed it
 PA