Commercial Law

Bar 2011 Notes

Roland Glenn T. Tuazon

Ateneo de Manila University

TABLE OF CONTENTS:

1. NEGOTIABLE INSTRUMENTS LAW

2. MERCANTILE INSTRUMENTS:

a. LETTERS OF CREDIT

b. TRUST RECEIPTS LAW

c. WAREHOUSE RECEIPTS LAW

d. CHATTEL MORTGAGE LAW

e. REAL ESTATE MORTGAGE/FORECLOSURE

f . SECURITIES REGULATION CODE

g. FOREIGN INVESTMENTS ACT

3. INSURANCE

4. INTELLECTUAL PROPERTY LAW

5. BANKING LAWS

a. TRUTH IN LENDING ACT

b. ANTI-MONEY LAUNDERING ACT

c. PHIL. DEPOSIT INSURANCE LAW

d. CONFIDENTIALITY OF DEPOSITS

e. GENERAL BANKING LAW

f . CENTRAL BANK ACT

6. CORPORATION LAW

7. TRANSPORTATION LAW

ANNEX 1: IN-DEPTH DISCUSSION ON LATTER PART OF NIL

Negotiable Instruments Law HISTORY: contrast a negotiable instrument with a non-negotiable PN:

o First objection: a person stepping into the shoes of the seller is exposed otherwise to the defenses that the buyer may launch against the seller

Laws solution exempt from personal defenses

o Second objection: I dont know the maker, I just know the one negotiating it to me. How will I know hes solvent?

Laws solution will make the indorser liable regardless (Accumulation of secondary contracts)

The more indorsers, the more you can sue

Two general parts in the law:

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o 1 what makes an instrument negotiable

o 2 rights and obligations of parties

Two basic forms:

o Promise to pay (PN)

o Order to pay (bill of exchange)

What If it does not comply with requisites of negotiability?

o If it does not comply with the requisites of negotiability, it is still a contract, but not covered by the NIL.

Either:

o Payable to order negotiated by indorsement, and delivery

o Payable to bearer delivery is sufficient

o N.B. If payable to a specific person, it is not negotiable

What are the four basic contracts involved?

o 1. Making

o 2. Drawing

o 3. Negotiating

o 4. Accepting

To show consent

o N.B. But for all, there must be delivery

What are the basic principles of the NIL?

o 1. Bad faith

If a person is in BF, he cannot invoke defenses.

Ex. Issued a negotiable instrument to pay for a car that is defective. The indorsee knows that the car is defective, he is in bad faith.

o 2. Estoppel

Ex. A father allowing a son to steal a check and forge his signature is estopped from denying it

o 3. Comparative fault

If a bank honors a check with a forged signature, the bank is considered negligent too

But if the negligence of the drawer outweighs the negligence of the bank, the law shifts the fault to the drawer

o 4. The law will only protect you from personal defenses if you are a holder in due course (Sec. 52)

Good faith

With value

Before overdue (see below)

With no notice of defenses

o 5. General rule: there must be demand , before an instrument becomes overdue. Exception: If time is of the essence.

Ex. Reserve requirements of banks must be kept afloat, so overnight, banks sometimes transact with each other

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An overdue instrument is shouting to the high heavens I have been dishonored!

Requisites and kinds of negotiable instruments

What are the requirements for a negotiable instrument?

o 1a. It must be in writing

o 1b. It must be signed symbol of consent

If one signed another name or a symbol, it will bind him if he intended for it to bind him

Location is immaterial

o 2a. Must contain a promise or order to pay

Need not use exact words, even equivalent words are fine

Creates a NEW obligation to pay, not a mere acknowledgement of an old debt

Exception 1: date of payment is mentioned, or at least, a date of maturity

Exception 2: insertion of or order (words of negotiability) in the old terms

Authorization to pay or a mere request does not create a binding obligation to pay.

o 2b. The promise to pay or order must be unconditional

Do not look into evidence aliunde. You must confine yourself within the four corners of the instrument to deem whether it is absolute.

Distinguish between uncertain events and certain events, although indeterminate (ex. Moment of death)

o 2c. Sum certain, and payable in money

Because it is meant to be a substitute for money

Specify the denomination; cannot just be a number.

o 3. Payable on demand or on a determinable future time

o 4. Payable to order or bearer

Need not use exact words, but there must be reasonable certainty so people know from whom they could demand payment

Ex. instead of order pay to X or his indorsees; pay to X or his assigns

Ex. instead of bearer pay to X or holder; pay to X or possessor

o 5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated with reasonable certainty

If name of the drawee is left blank, it is an incomplete instrument which can be filled up as a remedy

When is a sum certain:

o Does a stipulation of interest still make it a sum certain?

Yes. It must be in writing.

N.B. Remember the rules on unconscionable interest rates

o When does the interest become 12% by default?

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1. Unconscionable interest

2. Stipulated an interest but no rate

o What is required for the instrument to be valid?

1. Amount of installments must be indicated

2. Date of maturity of each installment specified

Ex. Promise to pay Jose Cruz or order P100,000 in 10 installments. not negotiable

N.B. You have to specify both AMOUNT and WHEN EACH is due. You cannot just give the starting point (ex. Nov 2005)

o Does the stipulation of an acceleration clause make it a sum certain?

Yes. An acceleration clause: failure to pay an installment will make the entire balance due and demandable.

o Is it valid to stipulate payment in foreign currency?

Yes. If you talk about an exchange rate, you have to talk about at least two currencies. It cannot be just one.

o Is I will pay reasonable attorneys fees in case there is failure to pay a sum certain?

Yes. Because you know how much is due at the date of maturity. This is the reckoning point at the date of maturity, the sum is still certain.

N.B. Stipulations on attorneys fees are always subject to court control anyway.

When is a promise is unconditional:

o Do instructions on how payment will be entered in the books of account affect unconditionality?

No.

o Does reimburse yourself from X fund affect unconditionality?

No.

o What is the test?

It must indicate the source of reimbursement, not source of payment. The latter is not negotiable.

What about treasury warrants?

It is not negotiable because it is payable out of a particular fund.

When does reference to a particular fund not destroy negotiability?

Payment must not be limited to come from such fund.

o What is the rule on how the original obligation came about?

In general, it does not affect unconditionality

But not if mention of the original contract makes the instrument subject to the formers terms and conditions

o Does mention of a CM securing the original obligation make it non-negotiable?

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Negotiable, because the promise to pay is still conditional, as long as it is not dependent to the CM.

When is it payable at a determinable future time:

o Distinguish between various insecurity clauses:

1st situation: Pay Jose Cruz or order; if the holder feels insecure, he may demand that I post reasonable securities, and if I fail to do so, he can declare the entire balance due and demandable.

One view: non-negotiable date of maturity becomes uncertain because holder can accelerate payment, and there is an additional undertaking other than payment of money.

Other view: negotiable the undertaking to put up a security is merely an accessory obligation. The date of maturity is not uncertain because acceleration is within control of the maker; he can prevent it by giving the additional security. (better view)

2nd situation: same if the holder feels unsecure, he can declare the entire balance due and demandable.

It is not negotiable, because here, the holder has the absolute option to make the obligation due and demandable.

o Differentiate:

When the maker may choose to pay before a certain date, it is still negotiable (ex. on or before June 15)

Why?

o It benefits everyone because all other secondary contracts are discharged.

When the holder may absolutely choose to have the obligation due, it is not negotiable.

Why?

o Everybody becomes secondarily liable by ripening their obligation.

o What if its hinged upon a contingency?

Non-negotiable even if the condition occurs.

o Philippine Education v. Soriano: A money order is not negotiable, because although it says pay to the order of, under Postal Regulations, obligation to pay is conditional, depending on different grounds where the post office can refuse to pay. Also, it can only be indorsed once.

o Does an extension clause affect negotiability?

No, if the extension is for a definite time too.

Ex. Payable within 2 years from date, subject to one year extension

Option to extend belongs to holder or maker/acceptor.

What additional provisions do not affect negotiability:

o What is the general rule?

Other obligation or undertaking aside from payment of money makes it non-negotiable (secured by CM over my car, which I will keep in good condition)

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o What are the exceptions?

1. Authority for holder to foreclose pledge, CM, or collateral securities

2. Authorizes confession of judgment if instrument not paid upon maturity

N.B. the SC said, however, this is a void stipulation

3. Waiver of benefit of law

4. Waiver of notice of dishonor

5. Waiver of venue

6. Waiver of exemption from execution

o What if the holder has the option to require something other than payment of money?

It is valid, as long as the other option is money.

Ex. If option is upon holder to demand either cash or rice, it is still negotiable because the holder can ALWAYS demand money

If the maker has the option, not valid.

What omissions do not affect negotiability?

o 1. Not dated

o 2. Failure to mention consideration

It is presumed in this contract

o 3. Does not specify place where it is drawn or payable

o 4. Bears a seal

o 5. Designates currency in which payment will be made

When it is payable on demand?

o 1. Upon sight or presentation

o 2. Instrument is silent on when payment is made

o 3. When it is overdue

As to the maker, he is discharged

BUT as to the indorser, it is upon demand

Upon whose order may an order instrument be paid?

o 1. Payee (who is not maker, drawer, or drawee)

o 2. Drawer

Ex. Jose Cruz writing a check saying Pay to the order of Jose Cruz (better than making a check paid to cash)

In this example, it is not complete until Jose indorses it, because there has to be delivery (at least two parties to a contract)

o 3. Drawee

o 4. Two or more payees jointly

Ex. Pay to the order of Jose Cruz AND Manuel Santos

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o 5. One or some of several payees

Ex. Pay to the order of Jose Cruz OR Manuel Santos

Contra: For drawees, it CANNOT be alternative or successive, but it can be jointly.

Ex. drawee can be drawn against A and B but not A or B

o 6. Holder of an office for the time being

Ex . Treasurer of the city of Makati

o What if the drawee is not indicated with reasonable certainty?

It is not negotiable.

When it is payable to bearer?

o 1. To bearer

Caltex: The Certificates of Time Deposit [in this case] are negotiable instruments. The documents provide that the amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is the bearer.

o 2. To person or bearer

o 3. Order of fictitious person

What is the general rule?

There must be intent by the maker or drawer of the NI that the instrument be issued to a fictitious person (knowledge is paramount)

Weller and Martin: Either partner can sign or issue checks. X wanted to steal money from the partnership. He drew a check payable to a corporation where he was just the corporate secretary. He was just the corp. sec., and was not authorized to indorse; but he indorsed the check to himself nonetheless. Y, his partner, sued the bank for restoration of the amount. HELD: it is payable to bearer. The Drawer did not intend the payee (the Corporation) to get the proceeds of the check, EVEN IF the payee actually existed or not. It fell under this provision.

If, however, the company required two signatories to all checks, and X signed it with intent to steal, and Y signed it not knowing Xs intent, then it does not become payable to bearer. For the payee to be fictitious, both must have same intent.

American Sash: Had a payroll clerk, who prepares checks payable to employees. He then makes the officers sign the checks. Clerk padded payroll with ghost employees, had the officers sign the checks (the officers did not know that the employees didnt exist), and the clerk collected money. Issue: is this payable to fictitious persons. These ghost employees did not actually exist. HELD: It was not a bearer instrument. The DRAWERS were the officers who signed the checks. Their intent controls. So the checks DID NOT become payable to bearer because they DID NOT KNOW that the ghost employees were not part of the payroll.

Rodriguez v. PNB: Employees of PNB formed a savings and loan association (SLA). Rodriguez spouses meanwhile, had current accounts with PNB. Whenever the SLA lends to members, it issues post-dated checks. But most of the time, the SLA does not

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have enough money. The borrowers thus endorse the checks to Rodriguez; in turn, Rodriguez rediscounts the checks (issuing checks lower than face value). The SLA has a policy: when a member has an outstanding loan, they cannot get another loan. So the officers who wanted to borrow more, to circumvent this, they made it appear that it is the other members who are borrowing. The SLA, in accordance with the usual procedure, issued post-dated checks to the supposed borrowers (but really for the officers). The officers indorsed the checks to Rodriguez. Rodriguez issued discounted checks. PNB found out about this and closed the SLA account. Meanwhile, the checks issued to Rodriguez, which bounced because the SLA account was shut down since the checks they issued were cleared, and the checks issued to them were from a closed account. Contention of spouses: How can PNB accept the indorsement of those checks, when the ones who indorsed were the officers and not the supposed borrowers. Contention of PNB: it is intended for fictitious persons, since there was no intent that they actually get the money (even if the supposed borrowers really exist). HELD: Rodriguez spouses won. For the checks to be considered as payable to fictitious persons, the fact must be known to the person issuing the negotiable instrument. Here, the Rodriguez spouses did not know that the supposed payees were not the real borrowers (when it fact it was the officers). PNB must reinstate the amounts to the Rodriguez spouses.

o 4. Payee is not name of existing person

Classic example: payable to cash

o 5. Last indorsement is in blank

Completion and delivery

What is the effect of ante-dating or post-dating?

o Does not affect negotiability

When can the holder insert a date in the instrument?

o When the date of acceptance is not inserted by the drawee, the holder may insert date of issue or date of acceptance

o What if he places the wrong date?

If negotiated to a holder in due course, that is the correct date as far as the holder in due course is concerned even if it is not

Purpose: the law protects a holder in due course, who is relying on that date in good faith

o But what if the one who put the wrong date presented it for payment to the acceptor/drawee?

Not valid. Cannot claim because he was not in GF.

o A check drawn by X says Pay to the order of Y P10000 thirty days after sight. It was accepted by E on Sept. 15, but did not date the instrument. Y negotiated it to Z, telling the latter that the instrument was accepted November 1. Z placed in the instrument this date.

Can he collect from E?

Yes, even if it is more than 30 days from acceptance. Z is a HIDC and the Nov 1 date is true as to him.

If Y inserted the wrong date instead and did not indorse it to Z, can he collect from E?

No. He is not a HIDC.

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What is the rule for incomplete but delivered instruments?

o When it is wanting of a material particular the person possessing it has prima facie authority to fill up the blanks

CONTROLLING FACTOR: The blank or incomplete instrument must have been delivered with intent that the holder turn it into a negotiable instrument

o In a case, a person signed an instrument in blank and left it with the bank. The bank filled it up with an amount. What happens?

The amount inserted by the bank controls.

o What are the two requirements for this instrument to be enforceable?

1. It must be filled up in accordance with the authority given to him

2. It must be filled up within reasonable time

o X gave a check with a blank amount to Y, telling Y that he should fill it up according to what X ultimately owes Y, but not over P50000. X owes Y P30000, but Y put P60000.

Can Y collect P60000 from X?

No. It was beyond the authority given him.

Y indorsed the check to Z, a HIDC. Can Z collect P60000 from X?

Yes. The defense does not apply to him.

o X asked Y to sign a piece of paper claiming that it was a witness signature that the Z will pay X what Z owes. But X actually made it appear that it was a PN where Y promised to pay money to her. HELD: The court believed the contention

that Y never intended for the signature to be for a PN. There must be intent to leave a signature to make a PN.

What about incomplete and undelivered instruments?

o Will not be a valid contract in the hands of any holder, as against the person whose signature was placed on the instrument prior to delivery (real defense)

BUT indorsers are liable

o Ex. X left signed checks, and an employee took them and filled up amounts. This is an incomplete and undelivered instrument.

o Ex. X went abroad and left signed checks for payment of debts. Abusive employees put their own names and signed their own names. HELD: By pre-signing checks and leaving them with employees, it became possible for them to do this. The officers were negligent and shared in the loss (60-40).

What about complete but undelivered instruments?

o The NI is incomplete until delivered, but this does not prejudice a HIDC

o Ex. You cannot sue if you hold checks that were not delivered to you. You never acquired a right over them.

BUT a HIDC will not be subject to this defense it is a personal defense

o BPI Family Savings: BPI issued a check payable to City Treasurer of Iloilo to pay for local taxes. They did not deliver it to the treasurer, and just gave it to the employee. The employee used it to pay for somebody elses local taxes. HELD: There was no payment because BPI never delivered it to the city treasurer, so BPI cannot claim to have paid.

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o Associated Bank: Somebody was selling RTW clothes, and shopping malls (buyers) issued crossed checks. Somehow, the checks fell into the hands of someone else, who indorsed it to someone else, and were deposited to Associated Bank. The seller was wondering why she wasnt being paid. [If you are legalistic, the RTW seller must sue the shopping malls, etc., because the checks were not delivered to her. In turn, the shopping malls, etc. must sue the drawee banks, and then the drawee banks sue Associated Bank why it cleared the checks. HELD: The SC allowed the RTW seller to sue Associated Bank directly because it cleared the checks.

o It may be shown that delivery between immediate parties is conditional, or for a special purpose.

o Ex. A godson is taking the CPA test, but X is not in the Philippines. He gave P10,000 check on the condition that he pass the test. The godson cannot enforce payment on the check. BUT if the godson negotiates the check to a holder in due course, the law will protect the HDC.

Rules of interpretation

1. Words prevail over figures

o Romero: Amount indicated in words is One Million Two Hundred Pesos. Amount in figures: 1,200,000. Balance in the account is 1,100,000. The check bounced. The words prevailed.

2. Payment of interest

o Runs from date from instrument

o Or if none, date of issue

3. If not dated, assumed to be dated from time of issue

4. Written > printed provisions

5. If ambiguous whether a bill or note, the holder has the option to treat it as either

6. Ambiguous role of signature deemed an indorser

o Because the indorser has the least liability among all characters in a NI

7. If I promise to pay note is signed by two or more persons deemed solidarily liable

Signature

What is the general rule as to signatures?

o A person whose signature does not appear on the instrument is not liable

What are the exceptions?

o 1. Duly authorized agent signing for principal

o 2. Forger liable for signature he forges

o 3. Signature in separate paper (allonge) because the instrument has no more space

o 4. Estoppel

o 5. Signing under trade/assumed name

o 6. Instrument can be negotiated by mere delivery

What must an agent write to avoid personal liability?

o 1. Agent must disclose he is an agent

o 2. Disclose his principal

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3. He has authority

What if the party is a minor or a corporation without capacity?

o Maker of a PN cannot refuse to pay to a holder on the ground that the indorser is a minor. Neither can he raise the defense that the prior indorsee is a minor.

o ONLY the minor can raise the defense of minority, no one else.

o Can apply this principle by analogy to other incapacitated persons (Ex. corporation action ultra vires)

o Exceptions:

1. The minor actively misrepresented his age and it appears that he is physically of such age

2. Minor kept fruits/benefits

3. Minor spent the money in good faith

Forgery

What if a persons signature is forged?

o Did not give consent to the contract

o Except when he is estopped

What are the kinds of forgery?

o 1. Signature is copied

o 2. Fraud in esse contractus (fraud in factum)

Misled to signing instrument, not knowing it was a negotiable instrument

o 3. Duress amounting to forgery

It must be duress in the execution (ex. Grab the hand of the intimidated), NOT duress in inducement

o 4. Fraudulent impersonation

In general, it is NOT a forgery

The person to whom the note was given is presumed to be intended to receive the note (because he knew the intended payee)

Four general rules for forgeries:

o 1. A party whose signature is forged is not liable unless hes estopped

o 2. An acceptor who pays on a BOE cannot recover the money because he admits the genuineness of the signature of the drawer

o 3. A Holder in Due Course acquires good title if forged indorsement is not necessary for his title

Ex. in a bearer instrument

o 4. A person negotiating an instrument after forgery is liable (due to warranties)

Forgery of promissory note:

o A. Order instrument: A (signature forged by B)-B-C-D-E

E cannot collect from A (not bound)

E can collect from B (forger)

E can collect from C, D as indorsers (warranted the instrument)

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o B. Bearer instrument: A (signature forged by B)-B-C-D-E

Indorsing an instrument that need not be indorsed leads to a warrant of such

o C. Order instrument: A-B-C (signature forged by D)-D-E

E cannot collect from A or B (since it is an order instrument, there is a cut-off to A and B, since Cs signature is forged)

E cannot collect from C (no consent)

E can collect from D as indorser/forger

o D. Bearer instrument: A -B or bearer-C (signature forged by D)-D-E

N.B. This is an instrument payable to bearer; delivery is sufficient, no need for indorsement.

Can E collect from A?

Depends. If E is not a holder in due course, A will claim that there was no delivery of complete instrument by B since C stole it from him

If E is a holder in due course, he may collect from A since it is payable to bearer

Can E run after C?

No, Cs indorsement was forged

Neither can he run after B, because he cannot trace his right to him [cut off by the forgery].

He can run after D, because by indorsing the instrument (even if bearer), he warranted it.

o N.B. if a bearer instrument is indorsed even if it is not needed, the indorser warrants the instrument as what it purports to be.

Forgery of Bill of Exchange:

o A. Order instrument: A (signature forged by B) and then indorsed to C-D-E. X accepted as drawee.

Can E collect from A?

No. No consent.

Can E run after X?

Yes. By accepting, X admits the instrument is genuine.

What is Xs remedy?

o Sue B, the forger.

Can E run after B?

o Yes (forger)

Can E run after C and D?

Yes. Warranted by indorsement

o B. Same, but X did not accept.

How does the answer change?

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Same for everyone, except E cannot run after X because he did not accept.

o C. Same as A, but bearer instrument.

How does the answer change?

Same rules on indorsement of a bearer instrument if there was indorsement even if there is no need to do so, there is warrant of the genuineness of the instrument by the indorsers.

o D. Bearer instrument, but an indorsers signature was forged

Even if Cs indorsement to D is forged, the payee can still collect from A (because he just promised to pay the bearer). Remedy of the acceptor is to just run after the thief.

o E. BOE issued by A payable to B or order C (signature forged by D)-D-E. X accepted and paid.

Can X debit As account?

No, because it went against As order to pay B or order, which was cut off by the forgery of Cs signature.

Can X get money back from E?

Yes, because X only admits As signature as genuine (it was) and not the indorsers signatures.

Can E run after A, B, or C?

No. They were all cut off by the forgery.

Can E run after D?

Yes, he forged.

o F. BOE issued by A payable to B or bearer C (signature forged by D)-D-E. X accepted and paid.

Can X debit As account?

Yes, because A promised to pay the bearer.

Can X get money back from E?

No. E is the bearer.

What is the remedy?

C can run after D, the forger.

o G. BOE issued by A payable to B or bearer C (signature forged by D)-D-E. X did not accept.

Can E run after X?

No, X did not accept.

Can E run after C?

No, did not consent.

Can E run after D?

Yes (warranted and forged)

Can E run after B?

No, cut off by the forgery.

Can E run after A?

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Yes, can go after A if E is a HDC. BUT cannot go after A if E is not HDC. N.B. (reason: complete but undelivered instrument is a personal defense)

What are the exceptions to these general rules?

o 1. When there is estoppel (ex. father saying that his sons forgery of his signature was genuine)

o 2. When there is unreasonable delay by the drawer in informing the drawee about the forgery

Drawer can check the statements sent by the bank to him

Test : If the drawer had acted quickly, would the drawee have been able to stop or freeze payment?

X left a check book with his friend, who was in the car. The friend forged his signature in a check book left lying there.

o HELD: Not negligent; no reason to suspect friend of bad faith.

An external auditor was hired to reconcile records. He managed to forge the signatures of the officers of Casa Montessori over a long time. Sued bank, which refused to reinstate the amounts. Bank argued Casa was negligent.

o HELD: An external auditor is not an employee. It is an independent contractor, so you cannot blame Casa for negligence in hiring an employee.

o Estoppel does not apply, because Casa had no way to know the auditor was stealing money, because he was precisely the one tasked with safeguarding the school records and comparing with bank records.

Effect of comparative fault?

o Split accountability for the loss (usually 50-50 but can adjust depending on level of negligence)

Illustrate comparative fault principle:

o Robbers broke into Triumph Lumber. Check book was stolen, but Triumph did not report it to the bank. Robbers were able to cash checks.

HELD: Triumph was negligent for not reporting the theft. The bank should also be held negligent for authenticating the checks.

o MWSS did not have their checks printed by the central bank. They had a private printing press print their checks. The signatures of the officers of MWSS were forged. PNB paid.

HELD: MWSS must bear the loss for failing to exercise caution did not ask printing press to surrender plates, account for spoilage, and MWSS did not examine the signatures in the bank returns.

o Ilusorio was leaving for abroad and he left his checkbook with his secretary, who he asked to reconcile bank statements. Secretary forged his signature.

HELD: Ilusorio should bear the loss for his negligence. He trusted his secretary.

o Gempesaw owes several groceries. She trusted a bookkeeper blindly. When she ordered supplies, the bookkeeper prepared the checks, and Gempesaw signed the checks without verifying the statements. The bookkeeper was able to steal more than P1M.

HELD: Negligent; did not confirm or examine the invoices, receipts, etc. before signing the checks used to pay the suppliers.

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o Province of Tarlac had account with PNB. Province issues checks to the physician/head of the clinic. The cashier already retired, but he was still hanging around. Cashier was able to forge when he picked up the checks.

HELD: Province was negligent, for allowing the cashier to pick up the checks even when he was retired, so he was able to indorse the checks through forgeries. Split accountability 50-50.

What is the general duty of the collecting bank when the indorsement is forged?

o The collecting bank must return the money to the drawee bank, because the payee did not indorse the check.

o N.B. This is NOT a case of negotiation, but presentment for payment. So the collecting bank cannot claim there was warranty.

X, employee of Ford, was tasked to pay sales tax (P18M), made a check payable to Insular Bank (for payees account only), the authorized collecting agent of BIR. X showed a fake BIR receipt to Ford. Instead, X deposited a worthless check with Insular Bank, which X substituted for the check issued by Ford. In their internal records, X made it appear the worthless check was deposited. X stole the real check, and Citibank honored it. X collected from Bank of America. Ford had to pay BIR again. They sued.

o HELD: Citibank must return the money to Ford, because Ford ordered it to pay the BIR, which Citibank disobeyed. It says for payees account only and there was no indorsement from BIR. Citibank was guilty only of negligence.

o Citibank manager (who was complicit) was criminally liable.

o JJ doesnt agree with the court as regards Insular Banks liability.

o Check: G.R. 121413 29 Jan. 2001

Rules on clearing

o Checks are brought to a clearing house and are run through a clearing house. They check the magnetic strips on the checks. The amount will then be transferred to the collecting bank.

o Then the checks will be physically given to the drawee bank. The drawee bank has 24 hours to honor/dishonor the check.

o If it dishonors it, the drawee bank returns the check to the clearing house. The computer will return the amounts paid.

o Any return beyond 24 hours: time-barred.

Here, the doctrine applies to the forged signature of the drawer.

This 24 hour rule SHOULD NOT apply when it is the payees or indorsees signature that is forged, because the drawee bank has no way to find out, until the drawer informs them.

(But the SC has at times wrongly applied the 24 hour rule to the payees forged signature.)

o New rules (to prevent ping-pong of checks):

If a check is dishonored, you can only present it one more time. [Usual reason why one failure is allowed drawn against insufficient funds]

What is the effect when the drawee bank does not return the check within 24 hours?

The drawee cannot ask the computer to reverse the entries.

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BUT you are not precluded from suing to collect after. But since the computer cannot reverse, while you are litigating, you do not have the amount.

Consideration and Holders for Value

IMPT THINGS TO REMEMBER:

o 1. Failure of consideration is a personal defense. This usually applies when X and Y have a transaction and Xs instrument bounces, but Ys prestation is only partially fulfilled.

o 2. But if you bring in a third party (HIDC), then failure of consideration is not a defense anymore.

o 3. As discussed in the next section, an accommodation party is liable to a Holder for Value.

Under the law, consideration is presumed

o Travel Inc.: Travel agency sued on the basis of a bouncing check issued by a guy bringing in passengers. The CA was wrong for asking the agency to prove the value of the ticket purchased. There is a presumption of valuable consideration, and that the check was for such amount.

o Ex. in BP 22, there is no need to prove the check was issued for valuable consideration

In civil law, generosity, love, affection, etc. are valid consideration.

o [N.B. Sundiang says love and affection, etc. cannot be considered valuable consideration. But Jack says that a donation is a simple contract and the law simply requires consideration sufficient to support a simple contract. So love and affection is valuable consideration.]

Rule on holder for value vis--vis prior parties :

o Rule: Where value is given for the NI, the holder is a holder for value in respect to all parties who became such prior to [the time consideration was given]

o A issued a PN to B, but there is no consideration. B indorsed it to C for consideration. C, then to D. What is Ds status as holder for value?

D is a holder for value with respect to A, B, and C because C gave value. A and b are parties who became bound prior to the value given.

What is the rule on holder who has a lien on the instrument?

o He is a holder for value only to the extent of the lien.

o Ex. Company appealing a lost case posts supersedeas bond (ex. P500000). Surety Company asks for collateral. The surety company is a holder for value to the extent of P500K, even if the company issued a certificate of time deposit negotiable for P1M.

What is the nature of absence of consideration?

o 1. Defense against a person not a HIDC (personal defense)

o 2. Partial failure of consideration is a proportionate defense.

Ex. Somebody issued a check for P20000 for 10 sacks of rice. The check bounced. The seller however only delivered 5 sacks of rice. HELD: He can only sue for P10000

Want of consideration between drawer and payee cannot be invoked as defense of drawee who accepted a BOE

o A drew a BOE for the amount of P10M in favor of B, the payee, in exchange for 10 cars. B only delivered 5 cars. X, the drawee, did not accept. Can A launch the defense of partial failure of consideration against B?

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Yes. Want of consideration is a defense against the payee.

o [Same facts] X accepted. Can X refuse to pay on account of partial failure of consideration?

No. The acceptor cannot use want of consideration as defense. By accepting, he admits authority of the drawer to draw the instrument, and that he will pay.

Accommodation party

Who is an accommodation party?

o Signs as party but does not received consideration or value therefore, from the underlying contract. Only lends his credit.

What is the accommodation partys liability?

o Liable to a holder for value, even if the holder for value knew him as merely an accommodation party at the time that holder took the instrument.

Ex. Some banks try to get borrowers to get surety companies to sign borrowing agreements. Surety companies charge premiums for signing as co-makers. The surety company, not receiving any part of the proceeds, is deemed an accommodation party.

Must there be independent consideration for the accommodation?

o No, it is not an absolute prerequisite. The consideration that supports the surety is the same consideration for the original obligation.

May a corporation be an accommodation party?

o As a general rule: a corporation cannot be an accommodation party to an instrument, because there is no business purpose to such [unless that is the business of the corporation].

Prudencio: Construction project. The constructor borrowed from PNB working capital. The bank required two other signors. The firm got the Prudencio spouses who issued checks. The project was failing. PNB agreed to release part of the security money to help the project. But the project died anyway. PNB sued Prudencio spouses. HELD: Prudencio spouses are accommodation parties. The court held that PNB is not a holder in due course, because it knew that the spouses did not receive consideration. When PNB released a portion of the money, it was in BF.

o JJs comment: the law says Holder for value not HIDC. You cannot claim PNB was in bad faith when it released the money because the project was already failing. PNB took a risk, rather than ensure the certain failure of the project, the released funds could have improved the project.

o Sec. 52: definition of HIDC point in which a person must be is in GF is when he took the instrument. The release of the funds happened long after.

o SO IF YOU FOLLOW THE IMPORT OF SEC 29, which makes accommodation parties liable to holders for value, then the Prudencio Spouses should pay PNB because PNB is a holder for value!

X was exchanging a post-dated check for cash to the disbursing officer of AFP. AFP asked Y, Xs sister, to sign as accommodation indorser. The check bounced. Y was acquitted for conspiracy charges, but was held civilly liable. Correct?

o HELD: Yes. Thats what an accommodation party is tasked to do when the check bounces, she pays.

Negotiation

Can bearer instruments be negotiated?

o Yes. When a bearer instrument is indorsed although unnecessary, it is still ultimately negotiated.

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o See Caltex case. When pledging a NI, there are no specific provisions. Fall back on the NCC. Must comply with requirements of putting it in a public instrument and indorsement.

Where must the indorsement appear?

o On the instrument itself or to a paper attached to it

What must be indorsed?

o The entire instrument. Indorsing only part of the amount will make it cumbersome.

o 1. Prohibited to indorse to 2 or more indorsees severally.

Ex: A check for P100K is negotiated to Jose Cruz for 50K and Manuel Santos for P50K.

Ratio: This in effect is two indorsements of 50K each (two partial indorsements)

o 2. PARTIAL indorsement is treated under law as an assignment. It is subject to personal defenses.

EXCEPTION: When it has been paid in part (ex. on installments)

Types of indorsements:

o Special specified person to whom it is being indorsed

o Blank does not name any person

Indorsement of an order instrument in blank can convert the indorsement into a special indorsement by writing his name

This ensures that the order instrument does not become a bearer instrument

Ex. A issued a PN to B or order for P10K. B indorses it to C, but in blank. What can C do?

C can insert To C over the signature to keep it an order instrument.

C CANNOT put To C, waiving notice of dishonor. The contract must be consistent with the tenor of the indorsement

Types of restrictive indorsements:

Negotiability Passing of title

Consideration presumed

Defense available

Pay to Jose Cruz only

X Yes Yes X, because indorsee is a HIDC, defenses against indorser cannot apply to him

To Jose Cruz, for collection only (as agent only)

Yes, but subject to same restriction that he only holds it for collection

X, because the indorsee is a mere agent of the indorser

X, because there is no transfer of title

Yes, defenses against indorser can be raised against indorsee because he is just an agent

To Jose Cruz, as trustee for Glenn Tuazon (indorsee named as

Yes, but subject to same trust

Yes Yes, because there is transfer of title

X, because title transfers

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trustee)

Rights of indorsee in restrictive indorsement:

o A) collect payment

o B) bring action indorser could bring

o C) transfer rights, if allowed to do so

What is a qualified indorsement?

o Done by writing without recourse although the instrument is still negotiable

o This can be done if the instrument will fall due for a long time (ex. 5 years), and the indorser does not want to be insecure for such a long time.

o But qualified indorser still has some warranties under Sec. 65;

1. Genuine as to what it purports to be

(ex. not forged or materially altered)

2. Warrants his valid title

3. All prior parties have capacity to contract

4. That he is not aware of any fact that makes the instrument valueless

(ex. that the maker is insolvent)

o Ex. A issues a PN to B or order for P50K. B indorses to C, then C to D. D indorses to E without recourse.

Can E collect from D?

No. The indorsement is qualified.

If As signature turned out to be forged, can E collect from D?

Yes. Because he warranted that the instrument is genuine as to what it purports to be.

If D turned out to have forged Cs indorsement to him, can E collect from D?

Yes, more so. He warranted his valid title to E.

What is the effect of a conditional indorsement?

o 1. The maker (or acceptor) may disregard the condition because the maker made an unconditional promise to pay. The indorser cannot change the original obligation

o 2. The maker can also say lets wait and see if the condition is fulfilled

o 3. If the maker pays, but the conditioned turned out to be unfulfilled after, the remedy of the conditional indorser is to run after the indorsee to get back the money. The conditional indorser cannot run after the maker/acceptor because the M/A has every right to dispose of his obligation while he feels solvent.

What is the effect of an indorser signing of an instrument payable to bearer?

o It can still be indorsed through mere delivery

o But the special indorser is only liable to those who can make title through his indorsement

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o Rule: a bearer instrument is always a bearer instrument

o Contra: a WHR can be converted from a bearer to an order instrument by a special indorsement

What if the instrument is payable to two or more payees?

o All must endorse

o But if they are partners, there is mutual agency

What if the instrument payable to a cashier or fiscal officer?

o Assumed that the instrument is payable to the corporation he represents

What is the effect if the name is misspelled?

o Must indorse the instrument according to the misspelled name, because other parties will not know that there was a mistake made

o If he wants, after signing as the misspelled name, he can sign his real name, so it will appear wrong name indorsed to real name

What if there is date attached to the negotiation?

o The date is presumed to be correct, but rebuttable.

o If there is no date, the negotiation is presumed to have been done before it was overdue

Useful to establish HIDC

What if it indicates a place?

o Law of that country will govern as to questions of indorsement

N.B. Not every restrictive indorsement will destroy negotiability

o Only that in subsection A (Pay to X only) will destroy

o Crossed check is still negotiable

Can strike out an indorsement not needed for his title:

o Ex. bearer instrument: can strike out indorsements B to E

o If its an order instrument, can E strike out B?

No. Because it is payable to the order of B. You cannot take him out, or else, E cannot draw title to the instrument.

o ABCDE. E cancels the indorsement of C to D. He loses the right to run after C. D is also discharged, because D lost his chance to run after C.

o RULE: The indorser who is struck out and ALL indorsers after him are eliminated

Ex. If there is indorsement from A to Z, and you cancel C, persons C to Y are discharged.

What about Instruments transferred without indorsement?

o Transferee will only step into the shoes of the transferor

o So defenses against transferor apply to the transferee too

o But the transferee can compel the transferor to indorse it

o What is the time period to determine if he is a HIDC?

The reckoning point is that time of indorsement, not the initial transfer

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Ex. Did not know necklace was fake at time of transfer; knew it was fake at time of indorsement = not HIDC

Indorsement to a prior indorser:

o Ex. A-B-C-D-E-B

o Can B run after C, D, and E?

No. Because they in turn can run after B too!

There is compensation under law. The law will not allow them to run around in circles.

Rights of the Holder

What are the rights of a holder?

o 1. Can sue in own name

o 2. Payment in due course discharges the instrument

Payment at or after maturity is in due course, and without notice his title is defective

Holder in due course (Sec 52)

o Requisites:

1. Instrument is complete and regular on its face

2. Must have become a holder before it was overdue and without notice of prior dishonor, if so

3. Took it in GF and for value

4. When he took, no notice of infirmity in instrument or defect in title of the indorser

This elaborates #3

When is there defect in the title of the indorser?

If he took it through unlawful means (ex. stole it), illegal consideration (ex. issued for marijuana), or negotiated it in breach of faith, fraud (ex. issued for fake ring), or duress (ex. issued as ransom money)

o Rule on instruments payable on installments and HIDC:

Status on payment Knowledge EffectAn installment has not been paid and there is no acceleration clause

Holder is aware HDC as to installments not due on the face of the instrument

An installment is not paid and there is an acceleration clause (automatic)

Holder is aware Not a HDC

An installment is not paid and there is an acceleration clause (automatic)

Holder is not aware HDC as to installments not due on the face of the instrument

An installment is not paid and there is an optional acceleration clause

Holder not aware of the exercise of this option

HDC as to installments not due on the face of the instrument

An installment is not paid and there is an optional acceleration clause

Holder is aware of its exercise

Not a HDC

What is the test to know whether or not he is a HIDC?

o A holder must be aware that something is wrong, but chose not to investigate further as to not be a HDC.

o Check: was it honest for him to take the instrument under these circumstances?

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X issued a crossed check to Y, in order to buy a car from Z. However, Y took the check and paid it to ABC hospital, and the value of the check was greater than his bill to ABC hospital (which gave change). X stopped payment. ABC sued X. X launched defense of failure of consideration. Issue: is ABC a HIDC?

o No. Since the check was crossed, it can only be deposited. ABC should have inquired as to the title of Y, but it did not.

o If the checks are crossed, the taker must inquire as to the nature of the indorsers title

X paid Y a check, drawn against ABC bank. Y altered the amounts. Y deposited it in DEF (her bank). Y told DEF not to present the check for payment right away, even if it was already due, and to let Y to draw the amount anyway. The alteration was discovered. ABC refused to pay. DEF sued to recover. Is DEF a HDC?

o No. The circumstances show that the check was already due but Y asked DEF not to present it for payment yet. And DEF allowed Y to withdraw even if the check has not been cleared yet.

The claimant received a check that was not indorsed to it by the payee, and the check had a notice of prior dishonor due to DAIF (drawn against insufficient funds).

o HELD: Claimant is not a HIDC.

In two cases, there was lack or failure of consideration between the maker/drawer and payee of the NI. In one case, it was merely issued as security, and in the other, the car delivered had the wrong chassis number. But in both cases, the payee already indorsed the check to another person.

o HELD: Those persons are HIDCs and the defense of failure/lack of consideration does not vest.

May a payee be a HIDC?

o Yes, because the law simply provides holder. A payee is a holder, too.

What about negotiation of an instrument payable on demand after an unreasonable length of time?

o Holder is not a HIDC.

o Consider the nature of the instrument, customs, and particular facts

What about a transferee who receives notice of infirmity before he has paid the full amount agreed upon as consideration for the instrument?

o He is a HIDC only to the extent of the amount paid by him.

o Ex. X issued a post-dated check to Y with value of P100K, and X told Y to just pay him P80K right away because X could not wait for the maturity of the check. Y has only paid P40K so far. Then Y found out that the check was issued for a fake ring. The check was presented but it was dishonored. Y sued Z, the drawer. Can he collect?

HELD: Yes, but only to P50K, since that is half the value of the check, and Y only paid half of the agreed consideration. He is a HIDC only to the extent of half the check.

What are the rights of a HIDC?

o 1. Sue in own name and receive payment

o 2. Free from personal defenses

o 3. May enforce payment against all parties liable thereon

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o Exception: when he cannot recover full payment

37 restrictive indorsement [GT: I dont know why.]

Maybe JJ meant qualified indorsement under 38?

54 notice before full amount is paid

124 when materially altered, a HDC may still enforce against the maker/drawee according to the original tenor of the instrument

General rule: the instrument is avoided as to those not party to the alteration or did not indorse it

o But not everyone can invoke real defenses against a HDC. For instance, an indorser warrants an instrument is genuine in all respects it purports to be. Also, an acceptor warrants the authority of the drawer to pay.

Personal defenses Real defensesTheres a contract with some inequitable or iniquitous fact behind it

No contract because an element is missing; or void against public policy

Voidable contract Void contractEx: no consideration, undelivered complete instrument, acquired by force/illegal means, illegal consideration, negotiation in breach of faith, mistake, ultra vires act of corporation

Ex; material alteration (so the consent is not anymore to this instrument); undelivered incomplete instrument (no consent); forgery (no consent); minority (lack of capacity)

Not applicable to HDC Applicable to HDC

Personal defenses are available against a non-HDC. This does not mean the non-HDC cannot collect. It just means that personal defenses may be raised against him.

(58b) IMPT. Shelter Principle (GT)

o What it simply says is that a holder who (1) derives title from a HDC (2 ) and is not a party to the illegality or fraud has the same rights as the HDC as to the prior parties to the indorser, even if he is not.

o Ex. A was induced by B through fraud to issue a PN to B or order. B C, who was NOT aware of the fraud (HDC). C D who was aware of the fraud but not a party to it. What is the effect?

D is a holder in due course as to the parties prior to the indorser (A and B)

What if D indorses it to E, who is not an HDC?

Since E derives title from D, who is not an HDC, E does not have the rights of an HDC.

o There can be no curing. So D cant indorse the instrument to F, an HDC, and have it re-indorsed back to him to cure his title. He resumes his position as not a HDC.

PRESUMPTION:

o General rule every holder is a HDC

o Exception if it is shown that the title of the negotiator is defective, then the holder has to prove that either the holder or the negotiator is a HDC

o Exception to the exception the exception does not apply to a party that has become bound to the instrument prior to the acquisition of defective title

Ex. A B C D E. D swindled C, then indorsed to E.

When E runs after A, he is not required to prove that he is a HDC because A was bound

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to the instrument before the defective title occurred.

Fossum:

o X issued a check to Y, but there was failure of consideration. Y negotiated to Z, who was not a HIDC (he was aware of the failure of consideration between X and Y). Z sued X to collect. X refused and raised personal defense of lack of consideration. What is the implication?

The burden of proof shifts upon Z to prove that either Z or Y is a HIDC. In this case, it failed to do so.

In this case, Z loses the presumption of being HDC because Ys title, as negotiating party, is defective. Y has no benefit of the presumption because it is not a holder anymore.

Liabilities of parties

Obligations WarrantiesMaker Pay according to tenor 1. Existence of payee

2. Capacity of payee to indorse

Drawer If dishonored, and process of dishonor completed:

1. He will pay the amount to holder,2. Or to a subsequent indorser who pays for it

1. Existence of payee2. Capacity of payee to indorse3. On due presentment, it will be accepted/paid according to its tenor

Acceptor Pay according to tenor of acceptance

1. Existence of drawer, 2. Genuineness of drawers signature3. Drawers capacity and authority to draw

4. Existence of payee and capacity to indorse

Qualified indorser or indorser by delivery

1. Instrument is genuine and is what it purports to be2. He has good title3. All prior parties had capacity to contract4. Has no knowledge of any fact that would impair the instrument

General indorser Either:1. Upon due presentment he will accept/pay according to tenor2. Or if dishonored, he will pay the amount to the holder, or to a subsequent indorser compelled to pay it

1. Instrument is genuine and is what it purports to be2. He has good title3. All prior parties had capacity to contract4. The instrument is valid and subsisting at the time of his indorsement

Liability of Maker:

o X issued a PN to Y. Y collected, by X failed to pay. He lodged the defense that he used the money to pay for his sick daughters expenses, and his daughter is a beneficiary of a trust administered by Y.

HELD: X must pay. He made an unconditional promise to pay. What he did with the money is none of the courts business.

Liability of drawer:

o What is the nature of the drawers liability?

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Merely secondary liable only if the instrument is dishonored.

He can put without recourse to limit his liability.

o D issued a check to P, drawn against BPI. P presented for payment, and BPI debited Ds account. However, P was unable to receive the money because BPI withheld payment, pending investigation of some anomalies. P ran after D.

HELD: D must pay, even if his account has already been debited. He warranted that P will be paid, and if not, he will make good the check.

Liability of acceptor:

o X issued a check for P4000 to Y. Y indorsed it to Z. Z altered the amount to P40000, and negotiated to H. H presented it for acceptance to E. E accepted it. For how much can the check be enforced against the acceptor?

View 1: P40000 because that is the tenor of the acceptance.

View 2 (better view): Acceptance is assent to the order of the drawer (132), which is just P4000. He did not consent to P40000, since there must be knowledge. (124) In fact, for a HDC, even if there is alteration, he can enforce payment according to the original tenor

o Acceptor admits existence of drawer because without the drawer, the BOE cannot exist. He admits authority of the drawer to draw.

o Acceptor admits existence and capacity of payee to indorse, because the instrument is meant to circulate.

o N.B. Acceptor does not admit signature of indorser.

What is an irregular indorser?

o He signs in blank before delivery. He is called such because you would normally expect the payee as the first signature there. But here, the irregular indorsers signature is found there first.

o What is his liability?

He is actually an accommodation party

Must be an additional party (not a regular party signing again will not increase the credit value of the check)

o A (X irregular indorser) B C D E:

X is liable to B, C, D and E.

RULE: liable to all subsequent parties. (If payable to the maker or drawer or bearer, he is liable to all parties subsequent to the maker or drawer)

What are the warranties where negotiation is by delivery?

o See the list of warranties in the law [see table]

o Person negotiating by delivery: only liable to the person to whom he delivered the instrument. Not liable to subsequent parties

o Unlike a general indorser, a qualified indorser does not warrant that the instrument will be paid. He is liable only if the maker or acceptor is insolvent and he is aware of that fact (since here, there is a breach of warranty).

o N.B. In general, a qualified indorser or one negotiating by delivery DOES NOT ANSWER FOR SOLVENCY. It only warrants the four listed warranties and is liable for breach of such. Examples:

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Breach of W1 (genuine) : the instrument is forged

Breach of W2 (good title) : He stole the NI

Breach of W3 (prior parties had capacity to contract) : Prior party is a minor

Breach of W4 (no knowledge of fact that would impair the instrument): Knew that M/D was insolvent; or that there was failure of consideration

o What is the underlying principle behind this?

Same as Statute of Frauds. An undertaking to answer for the debt of another must be in writing to be enforceable. He must be only liable to the person he dealt with

What is the liability of a general indorser?

o 1. Same as first 3 warranties of qualified indorser

o 2. Last warranty he warrants that the instrument is valid and subsisting

o If maker is insolvent, even if the indorser was not aware, he is liable.

o X deposited (through indorsement) a check with ABC bank, drawn against DEF bank. X was able to withdraw money although not cleared. Eventually, the check bounced. ABC asked for return of money.

HELD: X must pay. When he indorsed, he warranted. If for any reason (whatever reason) the drawee does not pay, he is liable.

o There is a 45-day holding period if the check deposited is drawn abroad. But RCBC accommodates employees, allowing them to withdraw right away. An employee X, received a check, and deposited. Bank required X to indorse the check as an irregular indorser. She was then allowed to withdraw. Some employee (Y) placed below the indorsement: valid up 75,000 pesos only. The drawee bank dishonored the check, since the indorsement was irregular. RCBC asked X to return the immediately withdrawn money.

HELD: RCBC cannot collect. The check was dishonored because of the partial indorsement made by Y. This is why the American bank dishonored.

o Signature of indorser was forged. Payee presented the check for payment to the drawee. It was paid. Payee signed at the back. Then the forgery was discovered. Must the payee reimburse drawee?

No. It did not indorse the check. The signature is to acknowledge payment, not to indorse.

o The law mentions that warranties of general indorser apply only to HDC. Should we follow this?

JJ doesnt think so.

What if it is indorsed when not required?

o He incurs liabilities of an indorser, whether general or qualified

What is the presumption?

o Indorsers are presumed to be liable in the manner in which they indorsed. But parole evidence however may be accepted to prove otherwise.

o Ex. A B C, C can prove that while Bs signature appears first, C indorsed it to him

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What if the rule for indorsement by agent?

o If he fails to disclose that he is just an agent, or fails to disclose his principal, he will be liable as an indorser

Click here for longer discussion on presentment, acceptance, and dishonor and some parts not included in the syllabus

How to enforce liability (presentment, dishonor)

How do you enforce liability to those primarily liable?

o 1. No need to do anything to hold a maker liable because he already promised to pay.

o 2. A drawee is liable once he accepts the instrument.

How do you charge those secondarily liable?

o In a PN:

1. Presentment for payment made within required period to the maker (and then dishonored by non-payment)

2. Notice of dishonor is given to the secondarily liable party

o In a BOE:

1. Presentment for acceptance to the drawee OR negotiation within reasonable time after it was acquired in the following instances:

A. Bill payable after sight or acceptance needed to fix maturity of instrument

B. Bill expressly requires acceptance

C. Bill is payable elsewhere than residence or place of business of drawee

2. If dishonored by non-acceptance:

A. Give notice of dishonor to the indorsers and drawer

B. (If foreign bill, protest for dishonor by non-acceptance)

3. If the bill is accepted:

A. Presentment for payment to the acceptor

o If dishonored by non-payment, give notice of dishonor to those secondarily liable

B. (If foreign bill, protest for dishonor by non-payment)

When is presentment for payment necessary?

o For primary persons never necessary

o For secondary persons, generally needed to make presentment except:

1. To drawer who has no right to expect that the drawee or acceptor will pay

2. Indorser where the instrument was made or accepted for his accommodation and he has no reason to expect instrument will be paid if presented

3. Dispensed with under Sec. 82:

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A) after exercise of reasonable diligence, presentment cannot be made

B) drawee is fictitious person

C) waiver or presentment

4. Instrument dishonored by non-acceptance

What are the requisites for presentment for payment?

o 1. Presented by the holder or some person authorized by him

o 2. Made at reasonable hour on business day on proper date

o 3. At proper place

o 4. To person primarily liable, or if absent, to any person found at the place where presentment is made

o 5. Person must exhibit the instrument and surrender it

X drew a check in 1990. The holder, Y, presented the check to the drawee bank only in 1994. It was dishonored by the bank. Y gave notice of dishonor to X. What is the ruling?

o The dishonor was proper because it was presented beyond reasonable time. Reasonable time is relative, depending on circumstances. But for checks, they become stale in 6 months.

o X is no longer liable based on the check. But if there is an underlying contract between X and Y, X is still liable contractually just not through that particular check.

What is the implication of failure to make proper presentment for payment? Does it discharge the person primarily liable?

o It discharges those secondarily liable on the instrument.

o It does not discharge the person primarily liable (maker or drawee/acceptor) because its their obligation. But the payee or holder cannot demand interest subsequent to maturity and costs of collection.

When is a bill required to be presented for acceptance?

o [See enumeration above payable after sight etc., expressly required, payable elsewhere]

o Note that a check does not fall under this enumeration

When is presentment for acceptance excused or dispensed with?

o 1. DELAY EXCUSED for bill payable elsewhere than place of business or residence of drawee and the holder failed to present for acceptance even after reasonable diligence

The delay thats excused is the delay in presenting it for payment due to the delay in presentment for acceptance

o 2. Drawee is dead, has absconded, is fictitious, or has no capacity to contract

o 3. Presentment cannot be made even after exercise of reasonable diligence

o 4. Although presentment has been irregular, acceptance refused on some other ground

Requisites for valid acceptance?

o 1. In writing

o 2. Signed by the drawee

o 3. Drawee must assent to the promise to pay a sum certain in money and not any other means

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o What is proof of acceptance?

It must be written on the instrument itself

If there is acceptance and the holder requests that it be written on the bill, but the drawee refuses treat it as dishonored by non-acceptance

o What if it is written on another paper?

It only binds the acceptor to persons to whom it is shown to and on faith thereof, accepted the bill for value

o What is the rule on future bills?

If there is an unconditional promise in writing to accept a bill before it is drawn, and a person on faith thereof took a bill for value

When is a bill deemed accepted?

o 1. Bill delivered to the drawee and he destroys the same

o 2. Bill delivered to the drawee but he refuses within 24 hours or within other period allowed by the holder to return the bill

What are the kinds of acceptance?

o 1. Conditional payment dependent on a condition

o 2. Partial only for part of the amount

o 3. Local only on a particular place

o 4. Qualified as to time

o 5. Acceptance of some of the drawees but not all

What is the rule on qualified acceptances?

o The holder has a right to refuse a qualified acceptance and deem it as dishonor by non-acceptance.

o If he accepts qualified acceptance, the drawer and indorsers are discharged from liability on the bill.

Unless they assent to the qualified acceptance

They must express dissent to the holder within reasonable time from receipt of notice of the qualified acceptance

Who should give notice of dishonor?

o 1. The holder

o 2. His agent or representative

o 3. Any party who may be compelled to pay (e.g. indorsers)

o 4. Agent of #3

Who benefits from the notice?

o If given by the holder, benefits all subsequent holders and all prior parties who have a right of recourse against the party to whom it was given

Ex. M P or order A B C D (holder). M dishonors:

D may notify C since C may be compelled to pay D. C may then notify any person who may be liable to him (P, A, or B). And so on.

If D notified B straight up, C benefits because he need not notify B.

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o If given by indorser who may be compelled to pay, it benefits the holder and all parties subsequent to the party to whom notice was given

Same example:

If D notified C, and C notified P, then D benefits through the notice of C, an indorser.

It also benefits A and B.

What is the effect of valid notice of dishonor?

o Immediate right of recourse against the secondarily liable party arises. He becomes primarily liable.

How must notice be given?

o Parties reside in same place:

1. If at place of business, given before close of business hours the next day

2. If at residence, given before usual hours of rest the next day

3. If sent by mail, deposited in post office in time to reach him in usual course the next day

o Parties reside in different places

1. If sent by mail, deposited in post office in time to go by mail the day follow day of dishonor. If there is no mail then, on the next mail thereafter

2. If given through other means, within time that it would be received in due course of mail in the same time frame as above

When is notice of dishonor not required in general?

o In general: when after exercise of reasonable diligence, it cannot be given or it does not reach the parties

When is notice of DH not needed to be given to drawer?

o 1. Drawer and drawee are the same person

o 2. Drawee is fictitious person or has no capacity to contract

o 3. Drawer is the person to whom instrument was presented for payment

Ex. C went to the office of X, the drawee, but he was not there. But R, the drawer, who was the office manager, was there. And the drawer dishonored.

o 4. Drawer has no right to expect that drawee or acceptor will honor

Ex. X withdrew her money from her bank account and issued a check to cover for expected proceeds of jewelry she had to sell. She failed to sell the jewelry. The check was in the hands of Y who had ABC investment house rediscount it. The check bounced. HELD: X had no right to expect the bank will pay because she withdrew all her funds.

o 5. Drawer countermanded payment

Meaning, drawer stopped payment.

o N.B. In all these cases, the drawer KNEW that there was or would be dishonor.

When is notice of DH not needed to be given to indorser?

o 1. Drawee is fictitious person or has no capacity to contract and the indorser is aware of this fact upon indorsement

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o 2. Indorser is the person to whom presentment for payment was made

o 3. Instrument was made or accepted for his accommodation

Drawer IndorserDrawer and drawee same personDrawee fictitious or no capacity Drawee is fictitious or no capacity,

and indorser knowsDrawer is to whom instrument was presented for payment

Indorser is to whom instrument was presented for payment

Drawer has no right to expect it will be paid by drawee

Made or accepted for indorsers accommodation (same principle: no right to expect it will be paid)

Drawer countermanded

When can there be waiver of notice of dishonor?

o 1. Before actual time for giving it comes

o 2. Or after failure to give it

o Can waiver be implied?

Yes.

o Who is affected by a waiver in an instrument?

If written on the instrument all the parties

If written over a signature just that person

o Waiver of protest

Includes presentment and notice of dishonor (steps to hold a person secondarily liable)

Failure to give notice of dishonor by non-acceptance does not prejudice rights of a HIDC subsequent to the omission.

o Ex. A drew a BOE payable to B. B indorsed to C. C presented the BOE for acceptance to X. X dishonored the instrument. C did not give notice of dishonor to A or B. C indorsed the instrument to D, a HIDC. D will not be precluded by Cs failure to give notice of DH to A and B.

Discharge

How is a negotiable instrument discharged?

o 1. Payment in due course by holder

o 2. Payment in due course by accommodated party

o 3. Intentional cancellation by holder

o 4. Any other act that discharges simple contract for money

o 5. Principal debtor becomes holder of instrument in his own right

How those secondarily liable are discharged:

o 1. Discharge of instrument

o 2. Intentional cancellation of his signature by the holder

o 3. Discharge of a prior party

o 4. Valid tender of payment by prior party

o 5. Release of principal debtor, unless holders right of recourse against secondarily liable party is expressly reserved

o 6. By extension of time of payment or right to enforce instrument

Except if secondarily liable party assents

Or right to recourse is expressly reserved

What is the effect of an absolute and unconditional renunciation?

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o A holder renouncing against prior parties terminates recourse to that party

o If against primarily liable person discharges the instrument

o But it does not affect subsequent HIDC . So if C renounces all claims against A and B, then negotiates it to D, who is a HIDC, D is not prejudiced by the prior renunciation.

What is the form of renunciation?

o It must be absolute and unconditional

o If it is merely oral and the instrument is not surrendered, the renunciation is not effective.

o It is not effective if unintentional or by mistake

OTHER methods of discharge:

o 48 striking out indorsements (relieves that person and all those subsequent to him)

o 89 those secondarily liable to whom notice was not given

o 122 renunciation by holder

o 142 qualified acceptance by drawee discharges those secondarily liable

Unless they assent to it. Failure to dissent within reasonable time is an assent

o 186 stale check

o 188 holder of a check procures it to be accepted or certified

Material Alteration

What is the effect of a material alteration?

o Discharges all parties not party to the alteration

o Binds the one who made the alteration, those who assented, and subsequent indorsers

What is the right of a HIDC?

o If he is not party to the alteration, he may enforce it according to the instruments original tenor

What is a material alteration?

o 1. Date goes into the obligation

o 2. Sum payable, principal or interest into amount

o 3. Time or place of payment into enforcement

o 4. Number or relations of parties into obligation

o 5. Medium or currency of payment into amount

A issued a PN to B for 4K. B indorsed to C. C changed the amount to 40K and indorsed to D. D indorsed to E. E is a HIDC. What is Es right?

o Enforce the instrument for 4K against A or B

o Enforce the instrument for 40K against C (made the alteration) or D (indorsed and warranted)

BOE

Can a BOE be addressed to more than one drawee?

o Depends. If joint drawees, yes.

o If alternative or successive, no.

When can a BOE be considered a PN?

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o 1. Drawer and drawee are the same person

o 2. Drawee is fictitious person or has no capacity to contract

o But can the holder treat it as a BOE still?

Yes.

Promissory notes and checks

What is the nature of a check?

o Special kind of BOE.

o No need to present for acceptance you can present them for payment immediately

o Rules on BOE apply to checks too, such as the 24 hour acceptance rule. If you dont return it in 24 hours, it is deemed accepted

What are cashiers and managers checks?

o Drawer and drawee is the same

What are memorandum checks?

o Its just usually used as evidence of credit, by a drawer who received goods. He usually redeems it for cash

What is a travelers check?

o You sign it twice (first as a specimen signature, and second when paying. You present your passport too)

Crossing a check has three consequences:

o 1. Can be negotiated only once

o 2. Cannot be encashed; must be deposited

General can be deposited in any bank

Special must be deposited only in that bank

o 3. To be a HIDC, the holder must inquire as to what purpose the check was issued for

o But is it still negotiable?

Yes, it is still negotiable.

o What if you try to encash a crossed check?

It will be denied. You cannot run after the drawer because there is no proper presentment for payment

Payee of a check presented a check in the morning; the bank said the drawer had insufficient funds. Presented again in the afternoon, but the computers are offline, so the bank accepted it. Bank found out after and chased after the payee to recover.

o HELD: By accepting, the bank admitted authority of drawer to draw.

Customer bought a managers check and asked that his account be debited to purchase it. The bank realized that it made a mistake because the account was actually closed. The customer already used the check to buy goods.

o HELD: It was a managers check so the store owner was a HIDC.

Certified checks:

o Banks usually do not do this anymore

Check must be presented for payment within reasonable amount of time

o Banking practice: 6 months, or else stale

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o What happens when the check goes stale?

View one (2 cases): the obligation is discharged. Payment of an obligation with an NI the obligation is discharged when there is encashment or the value is impaired due to the fault of the holder.

View two: the obligation remains because the drawers bank account was not prejudiced. And there was no loss caused by the delay. This will only happen if the bank becomes insolvent, that if the payee didnt dilly-dally, he would have received money.

Sito: When the payee delays in presenting a check for payment, the indorsers are discharged, because they have an interest to discharge their potential secondary liability. Unreasonable delay will discharge them.

o So contrast the rules: the drawer will not be discharged; the indorsers will be discharged

MERCANTILE INSTRUMENTS

Letters of credit

What is a Letter of Credit (LOC)?

o An instrument issued by banks on behalf of a customer authorizing a beneficiary to draw a draft/drafts which will be honored upon presentation to the bank

o Must be drawn in accordance with the terms and conditions specified in the letter of credit

o Purpose : to ensure certainty of payment

Illustrate the nature of a LOC:

o ABC Company wants to buy chemicals from Dupont. But Dupont has no assurance that when it ships chemicals, it will be paid. So ABC gets a letter of credit (LOC) with PBC. PBC then corresponds with a bank in the US (ex. Citibank) PBC will transmit to Citibank the text of the LOC, through SWIFT. Dupont then finds out that when it delivers the chemicals, the bank will pay him. Since the bank is more trustworthy, Dupont is now willing to sell the materials.

o Dupont ships the chemicals to PBC. So when the bill of lading arrives, PBC will tell ABC Company that the goods arrived. PBC tells ABC Company that it will release the goods if there is a trust receipt arrangement between them. So the proceeds of the goods can be used to pay PBC if ABC does not pay.

o Dupont will not collect directly from PBC. Dupont will issue a BOE addressed to PBC, to pay Dupont. Dupont then submits the bill of lading, delivery receipt, etc. to PBC as proof of delivery so that Dupont will be paid.

What is the nature of a LOC?

o A contract between the customer who applied for it and the bank, with a stipulation in favor of a third person

o An LOC is a primary, absolute, and unconditional obligation. It cannot be affected by defects in the underlying obligation

Philamlife: X took a loan from ABC. ABC required X to open a standby LOC from Z bank. Z bank issued the LOC, payable when ABC shows documents proving that X defaulted on the loan. ABC gave this document. Z bank, however, refused to pay the whole amount stating that X informed it that X had already made some payments, so these have to be deducted. HELD: Cannot do this! The LOC is a primary,

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absolute, and unconditional obligation. It is not an accessory obligation, so the defect in the underlying contract cannot affect it. If there really was overpayment, X just has to run after ABC.

o Purposes:

1. Safe mode of importing goods

2. Reduce risk of nonpayment

3. Substitute for and support the agreement of purchase (although not necessary to perfect it)

Types of LOC?

o 1. Commercial LOC

issued as payment pursuant to contract of sale

The seller will be paid if the seller gives proof that he complied with obligation to deliver

o 2. Stand-by LOC

Secondary payment mechanism, where a seller is paid upon certification of a partys non-performance of an agreement

Show proof that the applicant has not performed his contract

o 3. Confirmed LOC

Beneficiary stipulates that the obligation of the issuing bank should also be the obligation of another bank to himself (usually the notifying bank)

o 4. Back-to-back LOC

Credit with identical documentary requirements and covering the same merchandise as another LOC except for a difference in the price of the merchandise as shown by the invoice and the draft

The second LOC can be negotiated only after the first is negotiated

When is it considered a consummated contract?

o When the bank pays the creditor (seller-exporter), and not when the debtor-buyer pays the bank because the bank can give an extension of payment to the debtor.

What is the governing law?

o 1. Governed now by UCP 600 (Uniform Customs and Practice for Documentary Credits). This is revised every 10 years or so.

The observance of UCP is justified by Art. 2 of the Code of Commerce, which provides that in the absence of a particular provision in the COC, commercial transactions are governed by usages and customs.

o 2. Code of Commerce, Art. 568:

LOC must be issued in favor of a definite person and not to order

Limited to fixed or specific amount or to an undetermined amount but with maximum limit stated exactly

Who are the parties to a letter of credit (essential) and their obligations?

o 1. Buyer (applicant)

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procures LOC

obliges to reimburse the bank upon receipt of documents title

o 2. Issuing bank

undertakes to pay seller upon receipt of draft and proper documents needed

and to surrender the documents to the buyer upon reimbursement

Obligation is solidary with the buyer. It is a primary obligation (unlike a guaranty, which requires default by the obligor)

o 3. Seller (beneficiary)

ships goods to the buyer

delivers documents of title and draft to the issuing bank to recover payment

o Who are the optional parties?

1. Advising (notifying) bank

May be utilized to convey to the seller the existence of the credit

BUT does not assure that the issuing bank will pay and may refuse to accept the drafts without being liable

2. Confirming bank

Lends credence to the LOC issued by a lesser known issuing bank

Is directly liable to pay the seller-beneficiary

3. Paying bank

Undertakes to encash drafts drawn by the seller-exporter

4. Negotiating bank

Instead of going to the place of the issuing bank to claim payment, the buyer may approach another bank to have the draft discounted

There are 3 underlying contracts in a LOC:

o 1. Application of customer for LOC

where customer-buyer undertakes that he will reimburse the bank when it pays the draft, and also pays for bank charges

o 2. LOC

bank tells beneficiary-seller that if it draws the draft, it will pay him after submitting documents

o 3. Underlying contract of sale between buyer and seller

Independence principle (always asked in Bar)

o Basic principle: cannot invoke defect in one of the other 3 contracts to avoid compliance with obligation

o A bank which issued a LOC is obliged to pay the draft so long as the beneficiary submits the documents required by the LOC, without verifying if he actually complied with the obligation in the underlying contract

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o Banks deal with documents only! They do not deal with goods nor are they required to examine them.

Ex. Seller-beneficiary submitted the documents required, so the bank must pay, even if the goods delivered turned out to be fake.

o PBC v. Chua Tiep Seng: The bank does not guarantee the genuineness of the documents submitted to