III.

Negotiable Instruments Law

5. P sold to M a pair of gecko (tuko) for P50,000. M
A.Forms, Interpretation and other General Principles issued a promissory note to P promising to pay the
money within 90 days. Unknown to P and M, a law was
1. How do you treat a negotiable instrument that is passed a month before the sale that prohibits and
so ambiguous that there is doubt whether it is a bill or a declares void any agreement to sell gecko in the country.
note? If X acquired the note in good faith and for value, may
he enforce payment on it?
Answer:
Where a negotiable instrument is so ambiguous that a.No, since the law declared void the contract on which
there is doubt whether it is a bill or note, the holder may the promissory note was founded.
treat is either as a bill of exchange or a promissory note b.No, since it was not X who bought the gecko.
at his election. (BAR 1998) c.Yes, since he is a holder in due course of a note which
is distinct from the sale of gecko.
2. Distinguish a negotiable document from a d.Yes, since he is a holder in due course and P and M
negotiable instrument. were not aware of the law that prohibited the sale of
gecko.
Answer:
A negotiable document is governed by the Civil Code, Answer:
while a negotiable instrument is governed by the NIL. a. No, since the law declared void the contract on
The subject matter of a negotiable document is things or which the promissory note was founded. (BAR 2011)
goods, while that of a negotiable instrument is capable of
accumulating secondary contracts resulting from 6. Negotiable instruments are used as substitutes
indorsements at the back thereof, while a negotiable for money, which means—
document is not, especially considering that
indorsement of the latter does not result in liability of a) That they can be considered legal tender.
the indorser when the depositary, like the b) That when negotiated, they can be used to pay
warehouseman, fails to comply with his duty to deliver indebtedness;
the things or goods deposited and covered by the c) That at all times the delivery of the instrument is
warehouse receipt by the depositary. (BAR 2005) equivalent to delivery of the case;
d) That at all times negotiation of the instruments
3. What is a negotiable instrument? Give the requires proper indorsement.
characteristics of a negotiable instrument?
Answer:
Answer: b) That when negotiated, they can be used to pay
A negotiable instrument is an instrument in writing, indebtedness; (BAR 2012)
signed by the maker or drawer, containing an
unconditional promise or order to pay a sum certain in 7. In a negotiable instrument, when the sum is
money, on demand, or at a fixed or determinable future expressed both in numbers and in words and there is
time. It must be payable to order or bearer. When in the discrepancy between the words and numbers—
form of a bill of exchange, the drawee to whom the order
to pay is addressed must be named or otherwise a) The sum expressed in words will prevail over
indicated therein with reasonable certainty. Otherwise the one expressed in numbers;
stated, to be negotiable, the instrument must comply b) The sum expressed in numbers will prevail over
with Section 1 of the NIL. the one expressed in words;
c) The instrument becomes void because of the
It must be capable of being transferred from one person discrepancy;
to another, thereby transferring the title thereof to the d) This will render the instrument invalid.
latter so as to make him a holder who is entitled to
payment thereof. Another characteristic is that the Answer:
instrument is capable of accumulating contracts a) The sum expressed in words will prevail over
resulting from indorsements at the back thereof. (BAR the one expressed in numbers. (BAR 2012)
2005)
1. Requisites of Negotiability
4. X issued a check in favor of his creditor, Y. It
reads: “Pay to Y the amount of Seven Thousand 1. A postal money order was received by a
Hundred Pesos (Php700,000.00). Signed, X.” What bookstore as part of its sales receipts, and was later
amount should be construed as true in such case? deposited with a bank. The bank cleared the money
order with the Bureau of Posts, and received its value of
a. Php 700,000.00. P200.00. about five months later, the Manila Post Office
b. Php 700.00. notified the bank that said money order had been
c. Php 7,000.00. irregularly issued (in the sense that the money order had
d. Php 700,100.00. not been duly paid for), and accordingly, the P200.00
value of the money order was deducted from the bank’s
Answer: clearing account. The bank on its part debited the
a. Php 700,000.00. (BAR 2011) bookstore with the same amount, and gave the store
advise thereof by means of a debit memo. The bookstore a) The promissory note is not a negotiable
sued the proper officials of the Bureau of Posts stating instrument. Section of the NIL requires, among other
under the Negotiable Instruments Law, the bookstore things, for an instrument to be negotiable, that it must be
must be properly redressed or indemnified. Rule on the payable to order or to bearer. Without being so payable,
bookstore’s contention, with reasons. the note is not a negotiable instrument.

Answer: b) 1) The negotiability of an instrument is not

A postal money order as usually issued is not a adversely affected by its being undated. Even if it is
negotiable instrument because it imposes conditions on needed to determine the maturity of the instrument, the
the obligation to pay. Therefore, the Negotiable holder is implicitly authorized to place the date thereof
Instruments Law is not applicable. Any defense of the or to consider it dated as of its issue.
Post office against the purchase is available against any 2) For the negotiability of a promissory note it is not
subsequent party, although the latter may be in good necessary that it must express the place where it is made
faith. Thus, the bookstore’s contention is untenable. or where it is payable. All that is required under the NIL
is compliance with Section 1 thereof. (BAR 1988)
Assuming however that the postal money order in this
case is Negotiable Instrument Law, absence or failure of 4. (1) What is the test to determine whether an
consideration is a defense available only against holders instrument is negotiable or not?
not in due course. Therefore, the Post Office is liable to
it. (BAR 1975) (2) X bought a jeep from Reliable Motors Company for a
consideration of P50,000. He paid P25,000 in cash and
2. A bookstore received 5 postal money orders executed the following promissory note on the balance:
totaling P1,000 as part of its sales receipts, and deposited
the same with a bank. A day after, the bank tried to clear September 1, 1989
them with the Bureau of Posts. It turned out, however, I promise to pay the sum of P25,000 to Reliable Motors
that the postal money orders were irregularly issued Company on or before December 31, 1989.
thereby prompting the Bureau of Posts to serve notice Sgd. X
upon all banks not to pay the money orders if presented
for payment. The Bureau of Posts further informed the At the bottom of the note, X wrote in his own
bank that the amount of P1,000 had been deducted from handwriting the following: “I will not sell the jeep until I
the bank’s clearing account. For its part, the bank shall have paid it in full.” Is the note negotiable?
debited the book store’s account with the same amount. Reasons.

A complaint was filed by the bookstore against the Answer:

Bureau of Posts and the bank for the recovery of the sum 1) In determining whether an instrument is
of P1,000, which, however, was dismissed by the trial negotiable or not, the sole test is whether or not the
court. The bookstore appealed contending that the postal requisites of negotiability expressed in Sec. 1 of the NIL
money orders are negotiable instruments and that their are met on the face of the instrument itself. The intrinsic
nature could not have been affected by the notice sent by validity of the instrument is of no moment. Even the
the Bureau of Post to the banks. acceptance or non-acceptance by the drawee of the
instrument would be irrelevant.
How would you resolve the controversy? Answer:
2)The promissory note is not negotiable since the same is
The contention of the bookstore that postal money payable to Reliable Motors merely and not “to order or
orders are negotiable instruments cannot be sustained. to bearer” or words of similar import. (BAR 1989)
Postal money orders, being under the restrictions and
limitations of the postal laws, do not contain 5. Perla brought a motor car payable in
unconditional promise or order, as required by the installments from Automotive Company for P250,000.
Negotiable Instruments Law. (Sec. 1 & 3; also Bolognesi She made a down payment of P50,000 and executed a
v. U.S., 189 Feb. 335; 7 Am. Jur. 921; also Philippine promissory note for the balance. The company
Education Co., Inc. v. Soriano, 39 SCRA 587.) (BAR 1980) subsequently indorsed the note to Reliable Finance
Corporation which financed the purchase. The
3. A promissory note read as follows: “I promise to promissory note read:
pay Gabriela Silangan P100 three years after the
unconditional withdrawal of the U.S. of its military “For value received, I promise to pay Automotive
bases in the Philippines.” Company or order at its office in Legaspi City, the sum
of P200,000.00 with interest at twelve (12%) per cent per
a) Discuss the negotiability or non-negotiability of annum, payable in equal installments of P20,000.00
the above note. monthly for ten (10) months starting October 21, 1991.
b) Discuss the effect of each of the following upon
the note’s negotiability: Manila September 21, 1991. (Sgd.) Perla
1) No date is given Pay to the order of Reliable Finance Corp.
2) The places where drawn and where payable are
not stated. Automotive Company By:
(Sgd.) Manager
Answer:
Because Perla defaulted in the payment of her b) The day and month, but not the year of its
installments, Reliable Finance Corporation initiated a maturity, is given; or
case against her for a sum of money. Perla argued that c) It is payable to “cash”; or
the promissory note is merely open to all defenses d) It names two alternatives drawees.
available to the assignor and, therefore, Reliable Finance
Corporation is not a holder in due course. Answer:
a) Yes. Date is not a material particular required by
a) Is the promissory note a mere assignment of Sec. 1, NIL, for the negotiability of an instrument.
credit or a negotiable instrument? Why? b) No. The time for payment is not determinable in
this case. The year is not stated
Answer: c) Yes. Sec. 9(d), NIL, makes the instrument
The promissory note in the problem is a negotiable payable to bearer because the name of the payee does
instrument, being in compliance with the provisions of not purport to be the name of any person.
Section 1 of the NIL. Neither the fact that the payable d) A bill may not be addressed to two or more
sum is to be paid with interest nor that the maturities are drawees in the alternative or in succession, to be
in stated installments render uncertain the amount negotiable. To do so makes the order conditional. (BAR
payable. (BAR 1992) 1997)

6. Discuss the negotiability or non-negotiability of 9. a) MP bought a used cellphone from JR. JR

the following notes: preferred cash but MP is a friend so JR accepted MP’s
promissory note for P10,000. JR thought of converting
1. Manila, September 1, 1993 P2,500.00 the note into cash by endorsing it to his brother KR. The
I promise to pay Pedro San Juan or order the sum of promissory note is a piece of paper with the following
P2,500.00 (Sgd.) NOEL CASTRO hand-printed notation: “MP WILL PAY JR TEN
THOUSAND PESOS IN PAYMENT FOR HIS
2. Manila, June 3, 1993 P10,000.00 CELLPHONE 1 WEEK FROM TODAY”. Below this
For value received, I promise to pay Sergio Dee or order notation MP’s signature with “8/1/00” next to it,
the sum of P10,000.00 in five (5) installments, with the indicating the date of the promissory note. When JR
first installment payable on October 5, 1993 and the presented MP’s note to KR, the latter said it was not a
other installments on or negotiable instrument under the law and so could not be
before the fifth day of the succeeding month thereafter. a valid substitute for cash. JR took the opposite view,
(Sgd.) LITO VILLA insisting on the note’s negotiability. You are asked to
referee. Which of the opposing views is correct? Explain.
Answer:
1. The promissory note is negotiable as it complies b) TH is an indorsee of a promissory note that simply
with Sec. 1, NIL. Firstly, it is in writing and states: “PAY TO JUAN TAN OR ODER 400 PESOS.” The
signed by the maker, Noel Castro. Secondly, the note has no date, no place of payment and no
promise is unconditional to pay a sum certain in consideration mentioned. It was signed by MK and
money, that is, P2,500.00 Thirdly, it is payable on written under his letterhead specifying the address,
demand as no date of maturity is specified. which happens to be his residence. TH accepted the
Fourth, it is payable to order. promissory note as payment for services he rendered to
SH, who in turn received the note from Juan Tan as
2. The promissory note is not negotiable. All the payment for a prepaid cellphone card worth 450 pesos.
requirements of Sec. 1, NIL, are complied with. The payee acknowledged having received the note on
The sum to be paid is still certain despite that August 1, 2000. A Bar reviewee had told TH, who
the sum is to be paid by installments. (BAR happens to be your friend, that TH is not a holder in due
1993) course under Article 52 of the NIL and therefore does
not enjoy the rights and protection under the statute. TH
7.What are the requisites of a negotiable instrument? asks for your advice specifically in connection with the
note being undated and not mentioning a place of
Answer: payment and any consideration. What would your
The requisites of a negotiable instrument are as follows: advice be?

1. It must be in writing and signed by the maker or Answer:

drawer; a) KR is right. The promissory note is not
2. It must contain an unconditional promise or negotiable. It is not issued to order or bearer. There is no
order to pay a sum certain in money; word of negotiability contained therein. It is not issued
3. It must be payable to order or to bearer; and in accordance with Section 1 of the NIL.
4. Where the instrument is addressed to a drawee,
he must be named or otherwise indicated therein with b) The fact that the instrument is undated and does
reasonable certainty. (BAR 1996) not mention the place of payment does not militate
against its being negotiable. The date and place of
8. Can a bill of exchange or a promissory note payment are not material particulars required to make
qualify as a negotiable instrument if— an instrument negotiable.

a) It is not dated; or
The fact that no mention is made of any consideration is 13. Lorenzo drew a bill of exchange in the amount
not material. Consideration is presumed. (BAR 2000) of P100,000 payable to Barbara or order, with his wife,
Diana, as drawee. At the time the bill was drawn, Diana
10. Which of the following stipulations or feature of was unaware that Barbara is Lorenzo’s paramour.
a promissory note (PN) affect or do not affect its
negotiability, assuming that the PN is otherwise Barbara then negotiated the bill to her sister, Elena, who
negotiable? Indicate your answer by writing the paid for it for value, and who did not know who
paragraph number of the stipulation or feature of the PN Lorenzo was. On due date, Elena presented the bill to
as shown below and explain your corresponding Diana for payment, but the latter promptly dishonored
answer, either “Affected” or “Not affected”. Explain. the instrument because, by then, Diana had already
learned of her husband’s dalliance.
1) The date of the PN is “February 30, 2002”
2) The PN bears interest payable on the last day of a) Does the illicit cause or consideration adversely affect
each calendar quarter at a rate equal to 5% above the the negotiability of the bill? Explain.
then prevailing 91-day Treasury Bill rate as published at
the beginning of such calendar quarter. Answer:
3) The PN gives the maker the option to make No. The illicit cause or consideration does not adversely
payment either in money or in quantity of palay of affect the negotiability of the bill, especially in the hands
equivalent value. of a holder in due course. Under Sec. 1 of the NIL, the
4) The PN gives the holder the option either to bill of exchange is a negotiable instrument. Every
require payment in money or to require the maker to negotiable instrument is deemed prima facie to have
serve as the bodyguard or escort of the holder for 30 been issued for valuable consideration, and every person
days. whose signature appears thereon is deemed to have
become a party thereto for value. (BAR 2009)
Answer:
1)Paragraph 1—negotiability is “NOT AFFECTED”. The 14. A promissory note states, on its face: “I, X,
date is not one of the requirements for negotiability. promise to pay Y the amount of P5,000.00 five days after
completion of the on-going construction of my house.
2) Paragraph 2—negotiability is “NOT Signed, X.” Is the note negotiable?
AFFECTED”. The interest is to be computed at a
particular time and is determinable. It does not make the a. Yes, since it is payable at a fixed period after the
sum uncertain or the promise conditional. occurrence of a specified event.
b. No, since it is payable at a fixed period after the
3)Paragraph 3—negotiability is “AFFECTED”. Giving occurrence of an event which may not happen.
the maker the option renders the promise conditional. c. Yes, since it is payable at a fixed period or
determinable future time.
4) Paragraph 4—negotiability is “NOT d. No, since it should be payable at a fixed period
AFFECTED”. Giving the option to the holder does not before the occurrence of a specified event.
make the promise conditional. (BAR 2002)
Answer:
11. R issued a check for P1 M which he used to pay b. No, since it is payable at a fixed period after the
S for killing his political enemy. Can the check be occurrence of an event which may not happen. (BAR
considered a negotiable instrument? 2011)

Answer: 15. AA writes a promissory note in favor of his

Yes, the check can be considered a negotiable instrument creditor, B. it says: Subject to my option, I promise to pay
even if it was issued to pay S to kill his political enemy. B P1 M or his order to give P1 M worth of cement or to
The validity of the consideration is not one of the authorize him to sell my house worth P1 M. signed,
requisites of a negotiable instrument (Section 1, NIL). It AA.” Is the note negotiable?
merely constitutes a defect of title. (Section 55, NIL)
(BAR 2007) a. No, because the exercise of the option to pay lies
with A, the maker and debtor.
12. TRUE or FALSE. Answer TRUE if the statement b. No, because it authorizes the sale of collateral
is true, or FALSE if the statement is FALSE. Explain your securities in case the note is not paid at maturity.
answer in not more than 2 sentences. c. Yes, because the note is really payable to B or his
order, the other provisions being merely optional.
A document, dated July 15, 2009, that reads: “Pay to X or d. Yes, because an election to require something to
order the sum of P5,000.00 five days after his pet dog, be done in lieu of payment of money does not affect
Sparky, dies. Signed Y.” is a negotiable instrument. negotiability.

Answer: Answer:
True. The document is subject to a term and not a a. No, because the exercise of the option to pay lies
condition. The dying of the dog is a day which is certain with A, the maker and debtor. (BAR 2011)
to come. Therefore, the order to pay is unconditional, in
compliance with Section 1 of the NIL. (BAR 2009) 16. B borrowed P1 M from L and offered to him his
BMW car worth P1 M as collateral. B then executed a
promissory note that reads: “I, B, promise to pay L or
bearer the amount of P1 M and to keep my BMW car a) The promissory note is negotiable because the
(loan collateral) free from any other encumbrance. forms of payment are clearly stated;
Signed, B.” Is this note negotiable? b) The promissory note is non-negotiable because
the option as to which form of payment is with the
a. Yes, since it is payable to bearer. maker;
b. Yes, since it contains an unconditional promise c) The promissory note is an invalid instrument
to pay a sum certain in money. because there is more than one form of payment;
c. No, since the promise to just pay a sum of d) The promissory note can be negotiated by way
money is unclear. of delivery.
d. No, since it contains a promise to do an act in
addition to the payment of money. Answer:
b) The promissory note is non-negotiable because the
Answer: option as to which form of payment is with the maker
d. No, since it contains a promise to do an act in addition (BAR 2012)
to the payment of money. (BAR 2011)

17. Indicate and explain whether the promissory 19. X issued a promissory note which states
note is negotiable or non-negotiable. “I promise to pay Y or bearer the amount of HK$50,000
on or before December 30, 2013.” Is the promissory note
a) I promise to pay A or bearer P100,000 from my negotiable?
inheritance which I will get after the death of my father.
b) I promise to pay A or bearer P100,000 plus the a) No, the promissory note becomes invalid
interest rate of 90—day treasury bills. because the amount is in foreign currency;
c) I promise to pay A or bearer P100,000 if A passes b) Yes, the promissory note is negotiable even
the 2012 bar exams. though the amount is stated in foreign currency;
d) I promise to pay A or bearer P100,000 on or c) No, the promissory note is not negotiable
before December 30, 2012. because the amount is in foreign currency;
e) I promise to pay A or bearer P100,000. d) Yes, the promissory note is negotiable because
the Hong Kong dollar is a known foreign currency in the
Answer: Philippines.
a) Not negotiable. There is no unconditional
promise to pay a sum certain in money as the promise is Answer:
to pay the amount out of a particular funds, i.e., the a) Yes, the promissory note is negotiable even though
inheritance from the father of the promisor. the amount is stated in foreign currency (BAR 2012)

b) Not negotiable. There is no unconditional

promise to pay a sum certain in money. The promise to 20. As payment for a debt, X issued a promissory
pay “the interest rate of 90—day treasury bills” is vague note in favor of Y but the promissory note on its face
because, first, there are no 90—day treasury bills; was marked non-negotiable. Then Y instead of indorsing
second, the promise does not specify whether the so- the promissory note, assigned the same in favor of Z to
called “interest rate” is that established at the primary whom he owed some debt also. Which statement is most
market (where new T-bills are sold for the first time by accurate?
the Bureau of Treasury) or at the secondary market
(where T bill can be bought and sold after they 0have a) Z cannot claim payment from X on the basis of
been issued in the primary market); and third, T-bills are the promissory note because it is marked non-
conventionally quoted in terms of their discount rate, negotiable;
rather than their interest rate. They do not pay any b) Z can claim payment from X even though it is
interest directly; instead, they are sold at a discount of marked non-negotiable;
their face value and thus “earn” by selling at face value c) Z can claim payment from Y because under the
upon maturity. NIL, negotiation and assignment is one and the same;
d) Z can claim payment from Y only because he
c) Not negotiable. The promise to pay is subject to was the endorser of the promissory note.
a condition, i.e., that A will pass the 2012 bar exams.
Answer:
d) Negotiable. It conforms fully with the b) Z can claim payment from X even though it is marked
requirements of negotiability under Section 1 of NIL. non-negotiable; (BAR 2012)

e) Negotiable. It conforms fully with the 21. Antonio issued the following instrument:
requirements of negotiability under Section 1 of NIL. It
is payable on demand because the note does not express August 10, 2013
a time for its payment. (BAR 2012) Makati City

18. X issued a promissory note which states, “I P100,000.00

promise to pay Y or order P100,000 or 1 unit Volvo
Sedan.” Which statement is most accurate?
Sixty days after date, I promise to pay Bobby or his The forged signature is unnecessary to presume the
designated representative the sum of ONE HUNDRED juridical relation between or among the parties prior to
THOUSAND PESOS (P100,000.00) from my BPI Acct. the forgery and the parties after the forgery. The only
No. 1234 if, by this due date, the sun still sets in the west party who can raise the defense of forgery against a
to usher in the evening and rises in the east the holder in due course is the person whose signature is
following morning to welcome the day. forged.

(Sgd.) Antonio Reyes b) Only B and C can be held liable by F. the

instrument at the time of the forgery was payable to
Explain each requirement of negotiability present or bearer, being a b
absent in the instrument. earer instrument. Moreover, the instrument was
indorsed in blank by C to D. D, whose signature was
Answer: forged by E cannot be held liable by F. (BAR 1997)
The instrument contains a promise to pay and was
signed by the maker, Antonio Reyes. 2. Richard Clinton makes a promissory note
payable to bearer and delivers the same to Aurora Page.
The promise to pay is unconditional insofar as the Aurora Page, however, endorses it to X in this manner:
reference to the setting of the sun in the west in the
evening and its rising in east in the morning are “Payable to X. Signed: Aurora Page.”
concerned. These are certain to happen. The promise to
pay is conditional, because the money will be taken from Later, X, without endorsing the promissory note,
a particular fund, BPI Acct. No. 1234. transfers and delivers the same to Napoleon. The note is
subsequently dishonored by Richard Clinton. May
The instrument contains a promise to pay a sum certain Napoleon proceed against Richard Clinton for the note?
in money, P100,000.00. The money is payable at a
determinable future time, 60 days after August 10, 2013. Answer:
The instrument is not payable to order or to bearer. Yes. Richard Clinton is liable to napoleon under the
(BAR 2013) promissory note. The note made by Richard Clinton is a
bearer instrument. Despite special indorsement made by
22. Which of the following instruments is negotiable Aurora Page thereon, the note remained a bearer
if all the other requirements of negotiability are met? instrument and can be negotiated by mere delivery.
When X delivered and transferred the note to Napoleon,
a. A promissory note with promise to pay out of the latter became a holder thereof. As such holder,
the U.S. Dollar account of the maker in XYZ Bank. Napoleon can proceed against Richard Clinton. (BAR
b. A promissory note which designates the U.S. 1998)
Dollar currency in which payment is to be made.
c. A promissory note which contains in addition a 3. M makes a promissory note that states: “I, M,
promise to paint the portrait of the bearer. promise to pay P5,000.00 to B or bearer. Signed, M.” M
d. A promissory note made payable to the order of negotiated the note by delivery to B, B to N, N to O. B
Jose Cruz or Josefa Cruz. had known that M was bankrupt when M issued the
note. Who would be liable to O?
Answer:
c. A promissory note which contains in addition a a. M and N sine they may be assumed to know of
promise to paint the portrait of the bearer. (BAR 2014) M’s bankruptcy.
b. N, being O’s immediate negotiator of a bearer
2. Order Instrument note.
3. Bearer Instrument c. B, M, and N, being indorsers by delivery of a
bearer note.
1. A delivers a bearer instrument to B. B then d. B, having known of M’s bankruptcy.
specially indorses it to C and C later indorses it in blank
to Answer:
D. E steals the instrument from D and, forging the a. N, being O’s immediate negotiator of a bearer
signature of D, succeeds in “negotiating” it to F who note. (BAR 2011)
acquires the instrument in good faith and for value.
4. X delivered a check issued by him and payable
a) If, for any reason, the drawee bank refuses to to the order of CASH to Y in payment for certain
honor the check, can F enforce the instrument against the obligations incurred by X in favor of Y. Y then delivered
drawer? the checks to Z in payment for certain obligations.
b) In case of the dishonor of the check by both the Which statement is most accurate?
drawee and the drawer, can F hold any of B, C and D
liable secondarily on the instrument? a) Z can encash the check even though Y did not
indorse the check;
Answer: b) Z cannot encash the check for lacking in proper
a) Yes. The instrument was payable to bearer as it endorsement;
was a bearer instrument. It could be negotiated by mere c) Y is the only one liable because he was the one
delivery despite the presence of special indorsements. who delivered the check to Z;
d) The negotiation is not valid because the check is person giving it, requiring the person to whom it is
an instrument payable to order. addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to
Answer: order or bearer. (BAR 2002)
a) Z can encash the check even though Y did not indorse
the check. (BAR 2012) b. Promissory Note

5. Which phrase best completes the statement— A 1. A. Define the following: (1) a negotiable
check which is payable to bearer is a bearer instrument promissory note
and:
B. You are Pedro Cruz. Draft the appropriate contract
a) Negotiation can be made by delivery only; language for (1) your negotiable promissory note
b) Negotiation must be by written indorsement; containing the essential elements of a negotiable
c) Negotiation must be by specific indorsement; instrument.
d) Negotiation must be by indorsement and
delivery. Answer:
A. A negotiable promissory note is an
Answer: unconditional promise in writing made by one person to
b) Negotiation can be made by delivery only; (BAR 2012) another, signed by the maker, engaging to pay on
demand or at a fixed determinable future time, a sum
4. Kinds of Negotiable Instruments certain in money to order or bearer.

1. State and explain whether the following are B. Negotiable promissory note—
negotiable instruments under the NIL: “September 15, 2002

a. Postal Money Order; “For value received, I hereby promise to pay Juan Santos
b. A certification of time deposit which states “This or order the sum of TEN THOUSAND PESOS
is to certify that bearer has deposited in this bank the (P10,000.00) thirty (30) days from date hereof.
sum of FOUR THOUSAND PESOS (P4,000.00) only,
repayable to the depositor 200 days after date”. (Signed) Pedro Cruz” (BAR 2002)
c. Letters of credit;
d. Warehouse receipts; 2. P authorized A to sign a bill of exchange in hi
e. Treasury warrants payable from a specific fund. (P’s) name. the bill reads: “Pay to B or order the sum of
P1
Answer: M. Signed, A (for and in behalf of P).” The bill was
a. A Postal Money Order is not a negotiable drawn on P. B indorsed the bill to C, C to D, and D to E.
instrument because of the condition appearing at the May E treat the bill as a promissory note?
back thereof, thereby making the order conditional,
contrary to Section 1 of the NIL. a. No, because the instrument is payable to order
and the same person.
b. A certificate of time deposit is a negotiable b. Yes, because the drawer and the drawee are one
instrument, because it is an acknowledgment in writing and the same person.
by the bank of the amount of deposit with a promise to c. No, because the instrument is a bill of exchange.
repay the same to the depositor or bearer thereof at a d. Yes, because A was only an agent of P.
specific time.
Answer:
c. A letter of credit is not a negotiable instrument, b. Yes, because the drawer and the drawee are one and
because it is not payable to order or bearer and is the same person. (BAR 2011)
generally conditional; therefore, it does not comply with
Section 1 of the NIL. 3. If the drawer and the drawee are the same
person, the holder may present the instrument for
d. Warehouse receipts are not negotiable payment without need of a previous presentment for
instruments, because their subject matter is things or acceptance. In such case, the holder treats it as a
goods, and not a sum certain in money as required by
Section 1 of the NIL. a. Non-negotiable instrument.
b. Promissory note.
e. Treasury warrants payable from a specific fund c. Letter of credit.
are not negotiable instruments as they are payable out of d. Check.
a particular fund which may or may not exist, thereby
making the order conditional, in contravention of Answer:
Section 1 of the NIL. (BAR 2005) a. Promissory note. (BAR 2011)

a. Bill of Exchange 4. A promissory note which is undated is

1. Define the following: (1) a bill of exchange Answer: presumed to be—
A bill of exchange is an unconditional order in writing
addressed by one person to another, signed by the a) Dated as of the date of issue;
b) Dated as of the date of the first indorsement; fraudulent act after he absconded. AB Corporation
c) Promissory note is invalid because there is no asked XY Bank to recredit its amount. XY Bank refused.
date;
d) Dated on due date. a) If you were the judge, what issues would you
consider relevant to resolve the case? Explain.
Answer:
a) Dated as of the date of issue. (BAR 2012) b) How would you decide the case? Explain.

B. Completion and Delivery Answer:

a) If I were the judge, I will consider the following
1. Insertion of Date issues: (1) whether the check was a complete instrument;
2. Completion of Blanks (2) whether the check has been delivered; and (3)
whether AB Corporation can be held liable for the
1. A, single proprietor of a business concern, is amount of the check.
about to leave for a business trip and, as he so often does
on these occasions, signs several checks in blank. He b) The check was an incomplete
instructs B, his secretary, to safekeep the checks and fill instrument in as much as the name of the payee as not
them out when and as required to pay accounts during written by the drawer, AB Corporation. However, the
his absence. B fills out one of the checks by placing her said instrument has been delivered by AB Corporation
name as payee, fills in the amount, endorses and delivers to its officer. Thus, the check became binding on AB
the check to C who accepts it in good faith as payment Corporation as drawer thereof. An incomplete
for goods sold to B. B regrets her action and tells A what instrument, if delivered, as in this case, creates liability
she did. A directs the Bank in time to dishonor the check. on the part of the drawer. Therefore, AB Corporation
When C encashes the check, it is dishonored. cannot ask XY Bank to recredit the amount of the check
Can A be held liable to C? to his account. (BAR 2008)
Answer:
Yes. A can be held liable to C, assuming that the latter 3. Incomplete and Undelivered Instruments
gave notice of dishonor to A, this case of an incomplete
instrument but delivered as it was entrusted to B, the 1. A signed a blank check which he inadvertently
secretary of A. Moreover, under the doctrine of left on his desk at his Escolta Office. The same was later
comparative negligence, as between A and C, both stolen by B, who filled in the amount of P22,300.00 and a
innocent parties, it was the negligence of A in entrusting fictitious name as payee. B then endorsed the check in
the check to B which is the proximate cause of the loss. the payee’s name and passed the check to C; thereafter C
(BAR 1997) passed it to D; then D to E, and E to F.

2. AX, a businessman, was preparing for a 1) Can F enforce the instrument against A?
business trip abroad. As he usually did in the past, he Explain.
signed several checks in blank and entrusted them to his 2) Suppose that F is a holder in due course, what
secretary with instruction to safeguard them and fill will be your answer? Explain.
them out only when required to pay accounts during his 3) Can F enforce the instrument against B? Against
absence. OB, his secretary, filled out one of the checks by C? Give reasons.
placing her name as the payee. She filled out the
amount, endorsed and delivered the check to KC, who Answer:
accepted it in good faith for payment of gems that KC 1) No. An incomplete instrument (of A) which has
sold to OB. Later, OB told AX of what she did with not been delivered, it will not, if completed and
regrets. AX timely directed the bank to dishonor the negotiated without authority (by B), be a valid contract
check. Could AX be held liable to KC? Answer and in the hands of any holder (F), as against any person (A)
reason briefly. whose signature was placed thereon before delivery.
2) No also, for the same reason as indicated above.
Answer: The law says “in the hands of any holder”, meaning,
Yes. AX could be held liable to KC. This is a case of an whether a holder in due course or not.
incomplete check, which has been delivered. Under 3) Yes, if F can enforce the said instrument against
Section 14 of the NIL, KC, as a holder in due course, can B, the thief who, having no good title on the instrument,
enforce payment of the check as if it had been filled up endorsed it in an assumed (fictitious) name, thereby
strictly in accordance with the authority given by AX to making a breach of his warranty.
OB and within a reasonable time. (BAR 2004)
F may not enforce the instrument against C, unless there
3. AB Corporation drew a check for payment to XY had been due presentment, and dishonor, of the
Bank. The check was given to an officer of AB instrument, and notice of dishonor given to C. (BAR
Corporation who was instructed to deliver it to XY Bank. 1978)
Instead, the officer, intending to defraud the
Corporation, filled up the check by making himself as 2. Jose makes a note payable to bearer with the
the payee and delivered it to XY Bank for deposit to his amount blank and delivers it to Karen for safekeeping.
personal account. XY Bank debited AB Corporation’s Marina fills up the note for P20,000 and negotiates it to
account. AB Corporation came to know of the officer’s Adriano. Can Jose dishonor the note and refuse payment
to Adriano on the ground that the note (A) was
incomplete and (B) was originally delivered to Karen for PN is right. The instrument is incomplete and
safekeeping only and not for negotiating? Reason. undelivered. It did not create any contract that would
bind PN to an obligation to pay the amount thereof.
Answer: (BAR 2000)
Yes, Jose can dishonor the note. This is a case of
incomplete and not delivered instrument. When an 5. Jun was to leave for a business trip. As his usual
incomplete instrument has not been delivered it will not, practice, he signed several blank checks. He instructed
if completed and negotiated without authority, be a Ruth, his secretary, to fill them as payment for his
valid contract in the hands of any holder (whether obligations. Ruth filled one check with her name as
Adriano is a holder in due course or not), as against any payee, placed P30,000 thereon, endorsed and delivered it
person (Jose) whose signature was placed thereon to Marie. She accepted the check in good faith as
before. (Sec. 15, N.I.L.) (BAR 1982) payment for goods she delivered to Ruth. Eventually,
Ruth regretted what she did and apologized to Jun.
3. Jose Reyes signed a blank check, and in his haste immediately, he directed the drawee bank to dishonor
to attend a party, left the check on top of his executive the check. When Marie encashed the check, it was
desk in his office. Later, Nazareno forced open the door dishonored.
to Reyes’ office, and stole the blank check. Nazareno
immediately filled in the amount of P50,000 and a Supposing the check was stolen while in Ruth’s
fictitious name as payee on the said check. Nazareno possession and a thief filled the blank check, endorsed
then endorsed the check in the payee’s name and passed and delivered it to Marie in payment for the goods he
it to Roldan. Thereafter, Roldan endorsed the check to purchased from her, is Jun liable to Marie if the check is
Dantes. dishonored?

a) Can Dantes enforce the check against Jose Answer:

Reyes? Explain. No. section 15 of the NIL provides that “where an
incomplete instrument has not been delivered, it will
b) If Dantes is a holder in due course, will your not, if completed and negotiated without authority, be a
answer to question a) be the same? Explain. valid contract in the hands of any holder, as against any
c) Can Dantes enforce the check against Roldan? person whose signature was placed thereon before
Explain. delivery.” The want of delivery of an incomplete
instrument is a real defense available against any holder,
Answer: including a holder in due course. (BAR 2006)
a) Dantes cannot enforce the check against Jose
Reyes, who can raise the defense that the check as 4. Complete but Undelivered Instruments
incomplete and not delivered, when only stolen and
filled up by Nazareno. 1. Jun was to leave for a business trip. As his usual
practice, he signed several blank checks. He instructed
b) If Dantes is a holder in due course, my answer Ruth, his secretary, to fill them as payment for his
will be the same, because such a check, being incomplete obligations. Ruth filled one check with her name as
and not delivered originally, although later on payee, placed P30,000 thereon, endorsed and delivered it
completed and negotiated without authority from Jose to Marie. She accepted the check in good faith as
Reyes, cannot be valid contract in the hands of any payment for goods she delivered to Ruth. Eventually,
holder in due course. Ruth regretted what she did and apologized to Jun.
immediately, he directed the drawee bank to dishonor
c) Yes, Dantes, however, may enforce the check the check. When Marie encashed the check, it was
against Roldan, provided there would be presentment of dishonored.
the check to the drawee bank, dishonor by the bank, and
notice of dishonor given to Roldan. (BAR 1985) Is Jun liable to Marie?

4. PN makes a promissory note for P5,000, but Answer:

leaves the name of the payee in blank because he wanted Yes. Jun is liable to Marie, as she is a holder in due
to verify its correct spelling first. He mindlessly left the course. Pursuant to Sec. 14 of the NIL, in order that an
note on top of his desk at the end of the workday. When incomplete instrument, when completed, may be
he returned the following morning, the note was enforced against any person who became a party thereto
missing. It turned up later when X presented it to PN for prior to its completion, it must be filled up strictly in
payment. Before X, T, who turned out to have filched the accordance with the authority given and within a
note from PN’s office, had endorsed the note after reasonable time. However, if any such instrument, after
inserting his own name in the blank space as the payee. completion, is negotiated to a holder in due course, it is
PN dishonored the note, contending that he did not valid and effectual for all purposes in his hands, and he
authorize its completion and delivery. But X said he had may enforce it in accordance with the authority given
no participation in, or knowledge about, the pilferage and within a reasonable time. Considering that Marie
and alteration of the note and therefore he enjoys the accepted the check in good faith and for value, she is a
rights of a holder in due course under the NIL. Who is holder in due course, who has the right to enforce
correct and why? payment of the check for the full amount thereof against
Jun. That the blank check was filled-up not in
Answer: accordance with the authority given is only a personal
defense that cannot be used against a holder in due The promissory note not being payable to order or to
course. (BAR 2006) bearer, is not a negotiable instrument. Accordingly, the
C. Signature transferee merely steps into the shoes of the transferor
and, being merely a successor-in-interest, has no right
1. Signing in Trade Name greater than that of the transferor. X may thus set up
against C the possible defenses of minority and lack of
1. A check was issued to Tiger Woods. But what consideration. (BAR 1989)
was written as payee is the word “Tiger Woods”. To
validly endorse the check— 2. X makes a promissory note for P10,000 payable
to A, a minor, to help him buy school books. A endorses
a) Tiger Woods must sign his real name; the note to B for value, who in turn endorses the note to
b) Tiger Woods must sign both his real name and C. C knows A is a minor. If C sues X on the note, can X
assumed name; set up the defenses of minority and lack of
c) Tiger Woods can sign his assumed name; consideration?
d) The check has become non-negotiable.
Answer:
Answer: Yes. C is not a holder in due course. The promissory note
c) Tiger Woods can sign his assumed name. (BAR 2012) is not a negotiable instrument as it does not contain any
word of negotiability, that is, order or bearer, or words
2. Signature of Agent of similar meaning or import. Not being a holder in due
course, C is to subject such personal defenses of minority
1. In a signature by procuration, the principal is and lack of consideration. C is a mere assignee who is
bound only in case the agent acted within the actual subject to all defenses. (BAR 1998)
limits of his authority. The signature of the agent in such
a case operates as notice that he has 3. A bill of exchange has T for its drawee, U as
drawer, and F as holder. When F went to T for
a. A qualified authority to sign. presentment, F learned that T is only 15 years old. F
b. A limited authority to sign. wants to recover from U but the latter insists that a
c. A special authority to sign. notice of dishonor must first be made the instrument
d. A full authority to sign. being a bill of exchange. Is he correct?

Answer: a. Yes, since a notice of dishonor is essential to

a. A limited authority to sign. (BAR 2011) charging the drawer.
b. No, since T can waive the requirement of notice
2. Under the NIL, a signature by the procuration of dishonor.
operates as a notice that the agent has but a limited c. No, since F can treat U as maker due to minority
authority to sign. Thus, a person who takes a bill that is of T, the drawee.
drawn, accepted, or indorsed by procuration is duty- d. Yes, since in a bill of exchange, notice of
bound to inquire into the extent of the agent’s authority dishonor is at all times required.
by:
Answer:
a. Examining the agent’s special power of attorney. a. No, since F can treat U as maker due to minority
b. Examining the bill to determine the extent of of T, the drawee. (BAR 2011)
such authority.
c. Asking the agent about the extent of such 4. Y, as President of and in behalf of AAA
authority. Corporation, as a way to accommodate X, one of its
d. Asking the principal about the extent of such stockholders, endorsed the check issued by X. Which
authority. statement is most accurate?

Answer: a) It is an ultra vires act;

b) It is a valid indorsement;
b. Examining the bill to determine the extent of such c) The corporation will be held liable to any holder
authority. (BAR 2011) in due course;
d) It is an invalid indorsement.

Answer:
3. Indorsement by Minor or Corporation a) It is an ultra vires act.
b) It is a valid indorsement. (BAR 2012)
1. X makes a promissory note for P500 payable to
A, a minor, to help him buy school books. A indorses the 4. Forgery
note to B who, in turn, indorses the note to C. C knows
A’s minority. If C sues X on the note, can X set up the 1. Monsato, Inc drew a check for P5,000.00 payable
defense of minority and lack of consideration? to Daez, Inc. drawn against the Manila Bank. The check
was indorsed and delivered to Martel and Co., which in
Answer: turn deposited the check in its current account with the
PNB. The check was cleared in due course, and Manila
Bank paid PNB the amount of the check. Twenty days of the Philippine Islands, the drawee bank, did not
later, it was discovered that the signature of Daez, Inc. detect the forgery and paid the amount.
was forged. PNB paid Manila Bank and notified Martel May the bank charge the amount paid against the
and Co. that it had debited its account with the account of the alleged drawer? Reasons. Answer:
corresponding amount. Who, as between Martel and Co. No. a bank that cashes a check must know to whom it
and PNB, should bear the loss? pays. It is an elementary principle both of banking and
of the NIL that a bank is bound to know the signature of
Answer: its customers; and if it pays a forged check, it must be
Martel and Co. should bear the loss for two reasons. considered as making the payment out of its funds, and
First, in depositing the check in its account with the cannot ordinarily charge the amount so paid to the
PNB, it must have indorsed the check to the PNB. account of the depositor whose name was forged. (BAR
Assuming that the endorsement was a general one, 1977)
Martel as endorser warranted that the instrument is
genuine, and valid and subsisting at the time of his 4. Hernan issued a check payable to the order of
endorsement. It is therefore liable for breach of its Fernando in the sum of P12,000, and drawn on “X”
warranties. Second, by depositing the check with the Bank. The check was delivered to Matilde by Adriano
PNB, as between it and the PNB, the latter merely for encashment. At the time, the check had the
became a collecting agent of Martel. Any liability arising indorsements of (1) Fernando and (2) Rosa. When
out of the check is therefore chargeable by the agent, Matilde encashed it with “X” Bank, she affixed her
PNB, to the principal, Martel and Co. (Great Eastern Life
Insurance Co. v. Hongkong & Shanghai Bank, 43 Phil. signature on the check. Upon Matilde’s receipt of the
679 and Republic v. Ebrada, 65 SCRA 680) (BAR 1976) cash proceeds of the check, she turned over the amount
to Adriano. “X” Bank was informed by Hernan that the
2. Pedro writes out a check for P1,000.00 in favor of alleged indorsement of the payee Fernando was a
Jose or order against his current account with Bank of forgery, since the latter had died 2 years ago. “X” Bank,
America. Juan steals the check, erases the name of Jose having refunded the amount to Hernan, sued Matilde,
and superimposes his own name. Juan deposits the who refused to return the money.
check at Citibank and after clearing, Juan withdraws the Was “X” Bank correct in paying Hernan? Answer:
amount and absconds. Upon discovery by Pedro of the Yes. X Bank was correct in paying Hernan. It is the duty
material alteration, he lodged a complaint at the Bank of of X bank to know that the check was only endorsed by
America, who debited the amount to Pedro. Bank of the original payee, and when it pays the check to a third
America demands reimbursement for Citibank which person, the loss falls upon the bank which cashed the
refuses on the ground that it only acted as an agent for check, and not on the drawer, Hernan. (Great Eastern
collection. Who bears the loss? Why? Life Ins. Co. v. Hongkong & Shanghai Bank & P.N.B., 43
Phil. 678) (BAR 1982)
Answer:
The Bank of America shall bear the loss. Undisputedly, it 5. To cover his medical bill, A issued a check
is liable to Pedro (drawer) for the amount of the check, payable to Dr. Prospero Fuego. He put the check in a
for the simple reason that his order on the check was to sealed envelope and gave it to X, his trusted messenger
pay “Jose or order,” and Jose or his order” was not paid. for 8 years, for delivery to Dr. Fuego. X, suspecting that
Barring a case of notorious negligence on his part, Pedro the envelope contained a check, opened it, forged Dr.
has a right to be credited or reimbursed for the amount Fuego’s signature on the back of the check, and
taken from his account. deposited the check in his own savings account with the
PNB. The PNB credited the amount of the check to X’s
On the other, Citibank is not liable. First, the check was account after it had been cleared by the drawee, the
cleared by the Bank of America, in view of which the PCIB. When A asked X for Dr. Fuego’s receipt, X replied
former credited the corresponding amount to the that Dr. Fuego was out of town but his secretary
depositor of the check (Juan) and then honored his check received the check.
for said amount. Thus, the Bank of America had not only
been negligent in clearing its own check, but had, also, One week later, A called Dr. Fuego and was surprised to
thereby, induced Citibank to pay the amount thereof to discover that the latter never got the check. X feigning
said depositor. Second, although when Citibank sent the illness, had been absent for the last 2 days and, therefore,
check to the Bank of America for clearing it stamped could not be questioned, A immediately went to the
thereon “all prior endorsement guaranteed” (as may be PCIB and found that his check had been cleared 4 days
reasonably presumed being a used banking practice) it before. Upon PCIB’s immediate inquiry from the PNB,
does not, however, include the guarantee that the check the latter informed the former that X had already been
had not been materially altered. It must be noted at this paid the amount of the check and had in fact closed his
point that the signature of Pedro, although he is not the account 2 days before.
real payee, is genuine. There was no breach, therefore, of
Citibank’s guarantee. Reason dictates that its guarantee A demands that the PCIB recredit his account with the
cannot be enlarged to include that prior endorsements amount of the check. PCIB, in turn, demands that PNB
had not been materially altered. (BAR 1977) reimburse it.

3. Fernando forged the name of Daniel, manager of Decide with reasons.

a Trading Company, as the drawer of a check. The Bank
Answer:
As against the PCIB, A is entitled to a recredit of the
amount of the check. Under the NIL, a forged signature 7. “B” forged “A’s” signature as drawer of a check
is wholly inoperative to give any right to any party to drawn on Citibank. The check was purportedly payable
enforce payment thereof or to give a discharge thereof, to the order of “B”. “B” then endorsed the check to “C”,
unless the party against whom such right is being a holder in due course, who deposited the same to his
enforced is precluded from setting up forgery. Under account with Bank of P.I. The check passed through the
this provision, the PCIB, the drawee bank, because of the normal course of clearing and accordingly the drawee,
forged signature of Dr. Fuego, did not obtain any right Citibank, credited the collecting bank, Bank of P.I., with
to discharge the instrument by clearing/paying it and the amount of the check which Citibank in turn debited
must therefore account to A for doing so. A bank is duty from “A’s” deposit account. Upon receiving his monthly
bound to pay only according to the order of the drawer. statement from Citibank, together with the cancelled
Here the order of A was to pay Dr. Fuego or anyone checks debited from his deposit account, “A” discovered
who legally obtains his indorsement. The PCIB did not the forgery.
follow A’s order and must therefore account to him.
a) Can “A” compel Citibank to re-credit to his
On the other hand, the PNB must also account to the account the amount of the forged check?
PCIB because it paid to X the forger who had no right to b) Does Citibank in turn have recourse against the
enforce payment of the check, by clearing the check, the collecting bank, Bank of P.I.? Explain.
PCIB cannot be said to be in estoppels as it was not c) Can Citibank or Bank of P.I., as the case may be,
aware of the forgery. Unlike the case of the forgery of proceed against “C” as indorser? Explain.
the drawer’s signature where the drawee by
paying/clearing admits the genuineness of such Answer:
signature, the PCIB by paying or clearing the check had a) “A” can compel Citibank to re-credit to his
not impliedly warranted that any indorsement on the account the amount of the forged check, he being not a
check is genuine. It was incumbent on the PNB to satisfy party to the instrument. Forgery renders the forged
itself that Dr. Fuego’s signature was genuine before signature totally inoperative. Additionally, the drawee
paying or receiving the check, and as between two bank is charged with knowledge of the drawer’s
innocent banks, the PNB which made the loss possible, signature.
must suffer the burden of such loss. Its remedy lies
against X the forger, who is legally liable not only civilly b) Citibank has no right of recourse against Bank of
but criminally. P.I. having gone through “the normal course of
clearing”, the latter can assume that the check was
6. Juan makes a promissory note payable to the properly drawn by the drawer. The drawee bank is
order of Pedro, who indorses it to Jose. Somehow, charged with knowledge of the drawer’s signature. The
Roberto obtains possession of the note and, forging the negligence, if at all, is attributed more to Citibank than
signature of Jose, indorses it to Amado. Amado then with the bank of P.I.
idorses the note to Nilo, the holder.
c) Recourse may be had by either against “C” as
Sate the rights and liabilities of the parties. indorser because of his warranty. In the case particularly
of Bank of P.I., its right of recourse may be based
Answer: likewise on the agency rule that puts the risk of loss on
a) Nilo cannot enforce the note against the maker, the principal (Bank of P.I.) (BAR 1987)
Juan, and the payee, Pedro, because Nilo’s rights against
them are cut off by the forged signature of Jose, which is 8. Adam makes a note payable to Bert or order.
wholly inoperative. Bert indorses the note to Cora. Douglas steals the note
and indorses it to Elvin by forging Cora’s signature.
When a signature is forged or made without authority of Elvin then indorses the note to Felix who is not aware of
the person whose signature it purports to be, it is wholly the forgery. What is the right of Felix against Adam,
inoperative, and no right to enforce payment thereof Bert, Cora, Douglas and Elvin?
against any party thereto can be acquired through or
under such signature. (Sec. 23, NIL) Answer:
On the assumption that Bert made a blank endorsement,
b) Nilo cannot enforce the note against Jose thereby rendering the instrument payable to bearer in
because Jose’s signature, which has been forged, is the hands of Cora, the latter’s signature would be
wholly inoperative. unnecessary so as to preserve the juridical relation
between
c) Nilo may proceed against Amado, whose
signature is genuine and, therefore, operative. Amado is parties prior to the forgery and parties after the forgery.
a general indorser who has warranted to the holder that On the further assumption that Felix had acquired the
the instrument is genuine and in all respects what it instrument for value, thus making him holder in due
purports to be and that the instrument is at the same course, he may accordingly hold Adam, Bert and
time of his indorsement valid and subsisting. (Sec. 66, Douglas liable. The liability of Adam, as maker, and
NIL) Douglas, as forger, is primary and that of Bert, as blank
indorser, secondary. If, however, Felix did not acquire it
d) Jose or Amado have a right of recourse against for value and is not thus a holder in due course, he then
Roberto, the forger. (BAR 1984) acquires no right greater than that of the immediate
transferor and Adam, Bert and Cora would be without the PN from Alex the latter refused to pay. Dennis could
any liability in favor of Felix. no longer be located.

On the assumption that Bert made a special 1. What are the rights of Felix, if any, against Alex.
indorsement, the signature of Cora would be essential to Bento, Celso and Edgar? Explain.
pass title to the instrument. Her signature, forged by
Douglas would be inoperative, and Elvin, whether a 2. Does Celso have nay right against Alex, Benito
holder in due course which is forged is required to pass and Felix? Explain.
title, all parties prior to the forgery may raise the real
defense of forgery against all parties subsequent thereto. Answer:
(BAR 1989) 1. Felix has no right to claim against Alex, Benito
and Celso who are parties prior to the forgery of Celso’s
9. Jose loaned Mario some money and, to evidence signature by Dennis. Parties to an instrument who are
his indebtedness, Mario executed and delivered to Jose a such prior to the forgery cannot be held liable by any
promissory note payable to his order. party who became such at or subsequent to the forgery.
However, Edgar, who became a party to the instrument
Jose endorsed the note to Pablo. Bert fraudulently subsequent to the forgery and who indorsed the same to
obtained the note from Pablo and endorsed it to Julian Felix, can be held liable by the latter.
by forging Pablo’s signature. Julian then endorsed the
note to Camilo. 2. Celso has the right to collect from Alex and
Benito. Celso is a party subsequent to the two. However,
a) May Camilo enforce the said promissory note Celso has no right to claim against Felix who is a party
against Mario and Jose? subsequent to Celso. (BAR 1995)
b) May Camilo go against Pablo?
c) May Camilo enforce said note against Julian? 11. “A” issed a promissory note payable to “B” or
d) Against whom can Julian have the right of bearer. “A” delivered the note to “B”. “B” indorsed the
recourse? note to “C”. “C” placed the note in his drawer, which
e) May Pablo recover from either Mario or Jose? was stolen by the janitor “X”. “X” indorsed the note to
Explain your answers. Answer: “D” by forging “C’s” signature. “D” indorsed the note to
a) Camilo may not enforce said promissory note “E” who in turn delivered the note to “F”, a holder in
against Mario and jose. The promissory note at the time due course, without indorsement. Discuss the individual
of liabilities to “F” of “C”.
forgery being payable to order, the signature of Pablo
was essential for the instrument to pass title to Answer:
subsequent parties. A forged signature is inoperative. “C” is not liable to “F” since the latter cannot trace his
Accordingly, the parties after the forgery are not title to the former. The signature of “C” in the supposed
juridically related to parties after the forgery to allow indorsement by him to “D” was forged by “X”. “C” can
such enforcement. raise the defense of forgery since it was his signature
that was forged. (BAR 2001)
b) Camilo may not go against Pablo, the latter not
having indorsed the instrument. 12. CX maintained a checking account with
UBANK, Makati Branch. One of his checks in a stub of
c) Camilo may enforce the instrument against 50 was missing. Later, he discovered that Ms. DY forged
Julian because of his special indorsement to Camilo, his signature and succeeded to encash P15,000 from
thereby making him secondarily liable, both being another branch of the bank. DY was able to encash the
parties after the forgery. check when ET, a friend, guaranteed due execution,
saying that she was a holder in due course.
d) Julian, in turn, may enforce the instrument Can CX recover the money from the bank? Reason
against Bert who, by his forgery, has rendered himself briefly. Answer:
primarily liable. Yes, CX can recover from the bank. Under Section 23 of
the NIL, forgery is a real defense. The forged check is
e) Pablo preserves his right to recover from either wholly inoperative in relation to CX. CX cannot be held
Marion or Jose who remain parties juridically related to liable thereon by anyone, not even by a holder in due
him. Mario is still considered primarily liable to Pablo. course. Under a forged signature of the drawer, there is
Pablo may, in case of dishonor, go after Jose who, by his no valid instrument that would give rise to a contract
special indorsement, is secondarily liable. (BAR 1990) which can be the basis or source of liability on the part of
the drawer. The drawee bank has no right or authority
10. Alex issued a negotiable promissory note (PN) to touch the the drawer’s funds deposited with the
payable to Benito or order in payment of certain goods. drawee bank. (BAR 2004)
Benito indorsed the PN to Celso in payment of an
existing obligation. Later Alex found the goods to be 13. TRUE or FALSE. Answer TRUE if the statement
defective. While in Celso’s possession the PN was stolen is true, or FALSE if the statement is FALSE. Explain your
by Dennis who forged Celso’s signature and discounted answer in not more than 2 sentences.
it with Edgar, a money lender who did not make
inquiries about the PN. Edgar indorsed the PN to Felix, a
holder in due course. When Felix demanded payment of
“A bank is bound to know its depositor’s signature” is
an inflexible rule in determining the liability of a bank in a) Can the check be considered a negotiable
forgery cases. instrument?
b) Does S have a cause of action against R in case of
Answer: dishonor by the drawee bank?
False. In cases of forgery, the forger may not necessarily c) If S negotiated the check to T, who accepted it in
be a depositor of the bank, especially in the case of a good faith and for value, may R be held secondarily
drawee bank. Yet in many cases of forgery, it is the liable by T?
drawee that is held liable for the loss. (BAR 2009) Reason briefly in a, b, and c. Answer:
a) Yes, the check can be considered a negotiable
14. Forgery of bills of exchange may be subdivided instrument even if it was issued to pay S to kill his
into, a) forgery of an indorsement on the bill and b) political enemy. The validity of the consideration is not
forgery of the drawer’s signature, which may either be one of the requisites of a negotiable instrument (Section
with acceptance by the drawee, or 1, NIL). It merely constitutes a defect of title. (Section 55,
NIL)
a. With acceptance but the bill is paid by the
drawee. b) No, S does not have a cause of action against R
b. Without acceptance but the bill is paid by the in case of dishonor of the check by the drawee bank. S is
drawer. not a holder in due course, thus, R can raise the defense
c. Without acceptance but the bill is paid by the that the check was issued for an illegal consideration.
drawee. (Section 58, NIL)
d. With acceptance but the bill is paid by the
drawer. c) Yes, R may be held secondarily liable by T who
took the check in good faith and for value. T is a holder
Answer: in due course. R cannot raise the defense of illegality of
a. Without acceptance but the bill is paid by the the consideration, because T took the check free from the
drawee. (BAR 2011) defect of title of S (Section 57, NIL) (BAR 2007)

15. Due to his debt to C, D wrote a promissory note E. Accommodation Party

which is payable to the order of C. C’s brother, M,
misrepresenting himself as agent of C, obtained the note 1. To accommodate M, drawer of a promissory
from D. M then negotiated the note to N after forging note, A signed as indorser thereon, and the instrument
the signature of C. May N enforce the note against D? was negotiated to H, a holder for value. At the time H
took the instrument, he knew A to be only an
a. Yes, since D is the principal debtor. accommodation party. When the promissory note was
b. No, since the signature of C was forged. not paid, and H discovered M to be without funds, he
c. No, since it is C who can enforce it, the note sued A. A pleads in defense the fact that he had
being payable to the order of C. indorsed the instrument without receiving value
d. Yes, since D, as maker, is primarily liable on the therefor, and the further fact that H knew at the time he
note. took the instrument that A had not received any value or
consideration of any kind for his indorsement. Is A
Answer: liable? Reasons.
a. No, since the signature of C was forged. (BAR
2011) Answer:
Assuming that there has been due presentment and
16. X found a check on the street, drawn by Y notice of dishonor, A is liable to H. Under the Negotiable
against ABC Bank, with Z as payee. X forged Z’s Instruments Law, an accommodation party shall be
signature as an indorser, then indorsed it to ABC Bank liable to a holder for value although the latter may have
which charged it to the Y’s account. Y later sued ABC known that he was merely an accommodation party.
Bank but it set up the forgery as its defense. Will it Lack or absence of consideration is not defense available
prosper? to an accommodation party. (BAR 1975)

a. No, since the payee’s signature has been forged. 2. A purchased some merchandise from B for
b. No, since Y’s remedy is to run after the forger, X. P1,000.00. Not having any cash, A offered to pay in
c. Yes, since forgery is only a personal defense. check. B refused to accept the check unless it is indorsed
d. Yes, since ABC Bank is bound to know the by X. X endorsed A’s check, and B, knowing that X had
signature of Y, its client. not received value for indorsing the check, accepted it.
Upon maturity, B presented the check for payment.
Answer: Payment was refused for lack of funds. B gave notice of
d. Yes, since ABC Bank is bound to know the signature dishonor, in accordance with law to X. X refused to pay.
of Y, its client. (BAR 2011) Is X liable to B? Reasons.

D. Consideration Answer:
Yes, X is liable to B. X, as accommodation indorser, is
1. R issued a check for P1 M which he used to pay liable to a holder for value although the latter may know
S for killing his political enemy. that he is a mere accommodation party. B is a holder for
value. X as indorser agreed to pay should the check be requires that checks issued by it must be signed by the
dishonored upon due presentment, provided he is given President and the Treasurer or the Vice-President. Since
a notice of dishonor. X is therefore liable to B. (Secs. 29 the Treasurer was absent, C requested the Vice-President
and 66, NIL and Ang Tiong v. Ting, 22 SCRA 713) (BAR to co-sign the check, which the latter reluctantly did. The
1976) check was delivered to B. the check was dishonored
upon presentment on due date for insufficiency of
3. Santos purchased Vera’s car for P50,000. Not funds.
having enough cash on hand, Santos offered to pay in
check. Vera refused to accept the check unless it is a) Is the SAAD liable on the checks as an
endorsed by Reyes, their mutual friend. Reyes endorsed accommodation party?
Santos’ check and Vera, knowing that Reyes had not
received any value for endorsing the check, accepted it. Answer:
The next day, Vera presented the check to the drawee No. SAAD is not liable on the checks as an
bank for payment. Payment was refused for lack of accommodation party. The act of the corporation in
funds. Vera gave notice of dishonor to Reyes, but Reyes accommodating a friend of the President, is ultra vires.
refused to pay, saying that he endorsed merely as a While it may be legally possible for a corporation, whose
friend. business is to provide financial accommodation in the
ordinary course of business, such as one given by a
a) Is Reyes liable to Vera? Explain. financing company, to be an accommodation party, this
b) In the event Reyes voluntarily pays Vera, does situation, however, is not the case in the bar problem.
Reyes have the right to recover from Santos? Explain.
b) If it is not, who then, under the above facts,
Answer: is/are the accommodation party?
a) Yes, Reyes is liable to Vera. Reyes is an irregular
indorser, but an accommodation indorser for Santos, and Answer:
liable as a regular indorser, provided there is Considering that both the President and the Vice-
presentment, dishonor, and notice of dishonor to Reyes. President were signatories to the accommodation, they
themselves can be subject to the liabilities of
b) Yes, Reyes, after voluntarily paying Vera can accommodation parties to the instrument in their
recover from Santos, since the relation between Santos personal capacity. (BAR 1991)
and Reyes is in effect that of principal and surety, the
accommodation party, Reyes, being the surety. (BAR 6. Juan Sy purchased from “A” Appliance center 1
1985) generator set on installment with the chattel mortgage in
favor of the vendor. After getting hold of the generator
4. To accommodate Carmen, drawer (sic- should set, Juan Sy immediately sold it without consent of the
be maker) of a promissory note, Jorge signed as indorser vendor. Juan Sy was criminally charged with estafa.
thereon, and the instrument was negotiated to Raffy a
holder for value. At the time Raffy took the instrument, To settle the case extra-judicially, Juan Sy paid the sum
he knew Jorge to be an accommodation party only. of P20,000 and for the balance of P5,000, he executed a
When the promissory note was not paid, and Raffy promissory note for said amount with Ben Lopez as an
discovered that Carmen had no funds, he sued Jorge. He accommodation party. Juan Sy failed to pay the balance.
pleads in defense the fact the he had endorsed the
instrument without receiving value therefor, and the 1. What is the liability of Ben Lopez as an
further fact that Raffy knew that accommodation party? Explain.
2. What is the liability of Juan Sy?
at the time he took the instrument Jorge had not received
any value or consideration of any kind for his Answer:
instrument. 1. Ben, as an accommodation party, is liable as
Is Jorge liable? Discuss with reasons. Answer: maker to the holder up to the sum of P5,000 even if he
Yes, Jorge is liable. Section 29 of the NIL provides that an did not receive any consideration for the promissory
accommodation party is liable on the instrument to a note. This is the nature of accommodation. But Ben can
holder for value, notwithstanding the holder at the time ask for reimbursement from Juan, the accommodated
of taking said instrument knew him to be only an party.
accommodation party. This is the nature or the essence
of accommodation. (BAR 1990) 2. Juan is liable to the extent of P5,000 in the hands
of a holder in due course. If Ben paid the promissory
5. On June 1, 1990, A obtained a loan of P100,000 note, Juan has the obligation to reimburse Ben for the
from B, payable not later than December 20, 1990. B amount paid. If Juan pays directly to the holder of the
required A to issue him a check for that amount to be
dated December 20, 1990. Since he does not have any promissory note, or he pays Ben for the reimbursement
checking account, A, with the knowledge of B, requested of the payment by the latter to the holder, the instrument
his friend, C, President of the Saad Banking Corp. is discharged. (BAR 1993)
(SAAD), to accommodate him. C agreed, he signed a
check for the aforesaid amount, dated December 20, 7. Nora applied for loan of P100,000 with BUR
1990, drawn against SAAD’s account with the ABC Bank. By way of accommodation, Nora’s sister, Vilma,
Commercial Banking Corp. the By-laws of SAAD executed a promissory note in favor of BUR Bank. When
Nora defaulted, BUR Bank sued Vilma, despite its subrogated to the rights of the holder as regards the
knowledge that Vilma received no part of the loan. party for whose honor he paid and all parties liable to
May Vilma be held liable? Explain. Answer: the latter. (BAR 2008)
Yes, Vilma may be held liable. Vilma is an
accommodation party. As such, she is liable on the 11. X acted as an accommodation party in signing as
instrument to a holder for value such as BUR Bank. This a maker of a promissory note. Which phrase best
is true even if BUR Bank was aware at the time it took completes the sentence—This means that X is liable on
the instrument that Vilma is merely an accommodation the instrument to any holder for value:
party and received no part of the loan. (BAR 1996)
a) For as long as the holder does not know that X is
8. For the purpose of lending his name without only an accommodation party;
receiving value therefor, Pedro makes a note for P20,000 b) Even though the holder knew all along that X is
payable to the order of X who in turn negotiates it to Y, only an accommodation party;
the latter knowing that Pedro is not a party for value. c) For as long as X did not receive any
consideration for acting as accommodation party;
a) May Y recover from Pedro if the latter d) Provided X received consideration for acting as
interposes the absence of consideration? accommodation party.
b) Supposing under the same facts, Pedro pays the
said P20,000, may he recover the same amount from X? Answer:
a) Even though the holder knew all along that X is only
Answer: an accommodation party. (BAR 2012)
a) Yes. Y can recover from Pedro. Pedro is an
accommodation party. Absence of consideration is in the F. Negotiation
nature of an accommodation. Defense of absence of
consideration cannot be validly interposed by 1. Distinguished from Assignment
accommodation party against a holder in due course.
1. Gaudencio, a store owner, obtained a P1 M loan
b) If Pedro pays the said P20,000 to Y, Pedro can from Bathala Financing Corporation (BFC). As security,
recover the amount from X. X is the accommodated Gaudencio executed a “Deed of Assignment of
party or the party ultimately liable for the instrument. Receivables,” assigning 15 checks received from various
Pedro is only an accommodation party. Otherwise, it customers who bought merchandise from his store. The
would be unjust enrichment on the part of X if he is not checks were duly indorsed by Gaudencio’s customers.
to pay Pedro. (BAR 1998)
The Deed of Assignment contains the following
9. Dagul has a business arrangement with stipulation:
Facundo. The latter would lend money to another,
through Dagul, whose name would appear in the “If, for any reason, the receivables or any part thereof
promissory note as the lender. Dagul would then cannot be paid by the obligors, the ASSIGNOR
immediately indorse the note to Facundo. unconditionally and irrevocably agrees to pay the same,
Is Dagul an accommodation party? Explain. Answer: assuming the liability to pay, by way of a penalty, 3% of
Dagul is not an accommodation party. An the total amount unpaid, for the period of delay until the
accommodation party is one who signs the instrument same is fully paid.”
as maker,
drawer, or indorser, without receiving any valuable When the checks became due, BFC deposited them for
consideration and for the purpose of lending his name or collection, but the drawee banks dishonored all the
credit to another. (BAR 2005) checks for one of the following reasons: “account
closed,” “payment stopped,” “account under
10. As a rule under the NIL, a subsequent party garnishment,” or “insufficiency of funds”. BFC wrote
may hold a prior party liable but not vice-versa. Give 2 Gaudencio notifying him of the dishonored checks, and
instances where a prior party may hold a subsequent demanding payment of the loan. Because Gaudencio did
party liable. not pay, BFC filed a collection suit.

Answer: In his defense, Gaudencio contended that: (a) BFC did

A party may hold a subsequent party liable in the not give timely notice of dishonor of the checks; and (b)
following instances: (1) in case of an accommodated considering that the checks were duly indorsed, BFC
party; and (2) in case of an acceptor for honor. should proceed against the drawers and the indorsers of
the checks.
An accommodation party may hold the party Are Gaudencio’s defenses tenable? Explain. Answer:
accommodated liable to him, even if the party No. Gaudencio’s defenses are untenable. The cause of
accommodated is a subsequent party. The relation action of BFC was really on the contract of loan, with the
between them is that of principal and surety. For the checks merely serving as collateral to secure the
same reason, an acceptor for honor may hold the party payment of the loan. By virtue of the Deed of
for whose honor he accepted a bill of exchange liable to Assignment which he signed, Gaudencio undertook to
him. A payer for honor is pay for the receivables if for any reason they cannot be
paid by the obligors. (BAR 2009)
2. A issued a check in the amount of P20,000 a) The liability of Humimok would depend on how
payable to B. B endorsed the check but only to the extent he negotiated the check to Kahusayan. If it was
of P10,000. Which statement is most accurate? negotiated by delivery (as when it is payable to “cash”),
Humimok would not be secondarily liable; if, however,
a) The partial indorsement is not a valid Humimok endorsed the check as a general endorser then
indorsement, although will result in the assignment of Kahusayan could hold Humimok secondarily liable. A
that part; qualified indorsement by Humimok would, upon the
b) The partial indorsement will invalidate the other hand, preclude Kahusayan from holding the
whole instrument; former secondarily liable. (BAR 1986)

c) The endorsee will be considered as a holder in 3. Kinds of Indorsements

due course;
d) The partial indorsement is valid indorsement up 1. A makes a promissory note payable to bearer
to the extent of the P10,000. and delivers it to B. In turn, B negotiates it by mere
delivery to C, who indorses it specially to D. D
Answer: negotiates it by special indorsement to E, who negotiates
a) The partial indorsement is not a valid indorsement, it to F my delivery. A did not pay. To whom are B, C, D,
although will result in the assignment of that part. and E liable? Explain your answer.
(BAR 2012)
Answer:
3. A promissory note which does not have the
words “or order” or “or bearer” will render the B, C, D, and E are not liable. B and E being negotiators
promissory note non-negotiable and, therefore— by mere delivery are not liable unless they made a
breach of their warranties, and it appeared that they had
a) It will render the maker not liable; not. On the other hand, C and D are also not liable to F,
b) The note can still be assigned and the maker since the latter did not make title through the special
made liable; indorsements of C and D. (BAR 1979)
c) The holder can become holder in due course;
d) The promissory note can just be delivered and 2. Anna makes a promissory note payable to
the maker will still be liable. bearer and delivers it to Bing. In turn, Bing negotiates it
by mere delivery to Carmen, who endorses it especially
Answer: to Dong. Dong negotiates it by special indorsement to
b) The note can still be assigned and the maker made Emma, who negotiates it to Fe by mere delivery. Anna
liable. (BAR 2012) did not pay. To whom are Bing, Carmen, Dong and
Emma liable? Explain your answer fully.
2. Modes of Negotiation
Answer:
1. X makes a promissory note payable to bearer, Bing, not being an indorser, may only be held liable for
and delivers the same to Y. Y indorses it to Z in this breach of warranty but the facts in the problem do not
manner: “Pay to Z, sgd. Y”. Later, Z without indorsing disclose any such breach.
the promissory note transfers and delivers the same to R.
the note is subsequently dishonored by X. May R hold X Carmen, under her special indorsement, may be held
liable? secondarily liable by Dong and Emma since the latter
(Dong and Emma) derived title under Carmen’s special
Answer: indorsement. Carmen is not secondarily liable to Fe since
Yes, R may hold X liable. Since the instrument is payable the latter obtained it by mere delivery from Emma and
to bearer on its face, the special indorsement of Y did not therefore did not obtain title through Carmen’s special
affect the right of the holder to negotiate it by mere indorsement.
delivery. The transfer and delivery to R by Z, therefore
constituted a valid negotiation, vesting in R all the rights Dong holds himself secondarily liable to Emma since the
of a holder. R can therefore hold Y liable. (BAR 1975) latter derived title under Dong’s special indorsement but
not to Fe who acquired the instrument only by delivery.
2. As payment for good received, Masikap gave to
Humimok on November 3, his check drawn on the Emma, not being an indorser, is not secondarily liable to
Eternal Bank of Manila. On November 11, Kahusayan Fe. Emma’s only possible source of liability to Fe would
went to Eternal bank to encash the check. He could not be for a breach of warranty but the facts in the problem
cash the check because on November 10, Central Bank do not disclose any such breach.
forbidden Eternal Bank to do business in the Philippines
on grounds of insolvency. Masikap, Humimok, and Secondary liability requires due notice of dishonor,
Kahusayan all reside in Manila. unless excused, which we assume had properly been
observed. (BAR 1988)
a) Can Kahusayan hold Humimok liable on the
uncashed check? Explain briefly. 3. “A” issed a promissory note payable to “B” or
bearer. “A” delivered the note to “B”. “B” indorsed the
Answer: note to “C”. “C” placed the note in his drawer, which
was stolen by the janitor “X”. “X” indorsed the note to
“D” by forging “C’s” signature. “D” indorsed the note to b. Yes, because X, as a qualified indorser, warrants that
“E” who in turn delivered the note to “F”, a holder in the note is genuine. (BAR 2011)
due course, without indorsement. Discuss the individual
liabilities to “F” of “A”, “B” and “C”. 6. P sold to M 10 grams of shabu worth P5,000. As
he had no money at the time of the sale, M wrote a
Answer: promissory note promising to pay P or his order P5,000.
“A” is liable to “F” as the maker of the promissory note, P then indorsed the note to X (who did not know about
“A” is directly or primarily liable to “F”, who is a holder the shabu), and X to Y. Unable to collect from P, Y then
in due course. Despite the presence of the special sued X on the note. X set up the defense of illegality of
indorsements on the note, these do not detract from the consideration. Is he correct?
fact that a bearer instrument, like the promissory note in
question, is always negotiable by mere delivery, until it a. No, since X, being a subsequent indorser,
is indorsed restrictively “For Deposit Only”. warrants that the note is valid and subsisting.
b. No, since X, a general indorser, warrants that the
“B”, as a general endorser, is liable to “F” secondarily, note is valid and subsisting.
and warrants that the instrument is genuine and in all c. Yes, since a void contract does not give rise to
respects what it purports to be; that he has good title to any right.
it; that all prior parties had capacity to contract; that he d. Yes, since the note was born of an illegal
has no knowledge of any fact which would impair the consideration which is real defense.
validity of the instrument or render it valueless; that at
the time of his indorsement, the instrument is valid and Answer:
subsisting; and that on due presentment, it shall be b. No, since X, a general indorser, warrants that the note
accepted or paid, or both, according to its tenor, and that is valid and subsisting. (BAR 2011)
if it be dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount thereof G. Rights of the Holder
to the holder, or to any subsequent indorser who may be
compelled to pay. 1. Under the NIL, if the holder has a lien on the
instrument which arises either from a contract or by
“C” is not liable to “F” since the latter cannot trace his implication of law, he would be a holder for value to the
title to the former. The signature of “C” in the supposed extent of
indorsement by him to “D” was forged by “X”. “C” can
raise the defense of forgery since it was his signature a. His successor’s interest.
that was forged. (BAR 2001) b. His predecessor’s interest.
c. The lien in his favor.
4. A negotiable instrument can be indorsed by way d. The amount indicated on the instrument’s face.
of a restrictive indorsement, which prohibits further
negotiation and constitutes the indorsee as agent of the Answer:
ondorser. As agent, the indorsee has the right, among c. The lien in his favor. (BAR 2011)
others, to:
1. Shelter Principle
a. Demand payment of the instrument only.
b. Notify the drawer of the payment of the 1. How does the “shelter principle” embodied in
instrument. the NIL operate to give the rights of a holder in due
c. Receive payment of the instrument. course to a holder who does not have the status of a
d. Instruct that payment be made to the drawee. holder in due course?

Answer: Answer:
c. Receive payment of the instrument. (BAR 2011) The “shelter principle” provides that in the hands of a
holder other than a holder in due course, a negotiable
5. X is the holder of an instrument payable to him instrument is subject to the same defenses as if it were
(X) or his order, with Y as maker. X then indorsed it as non-negotiable. This principle is extended to a holder
follows: “Subject to no recourse, pay to Z. Signed, X.” who is not himself a holder in due course but derives
When Z went to collect from Y, it turned out that Y’s title from a holder in due course, provided he himself is
signature was forged. Z now sues X for collection. Will it not a party to any fraud or illegality affecting the
prosper? instrument. Section 58 of the NIL provides:

a. Yes, because X, as a conditional indorser, “Sec. 58. When subject to original defense. In the hands
warrants that the note is genuine. of any holder other than a holder in due course, a
b. Yes, because X, as a qualified indorser, warrants negotiable instrument is subject to the same defenses as
that the note is genuine. if it were non-negotiable. But a holder who derives his
c. No, because X made a qualified indorsement. title through a holder in due course, and who is not
d. No, because a qualified indorsement does not himself a party to any fraud or illegality affecting the
include the warranty of genuineness. instrument, has all the rights of such former holder in
respect of all parties prior to the latter”. (BAR 2008)
Answer:
2. Holder in Due Course 2) Yes. C can file an action successfully against B,
since C is a holder in due course, against whom absence
1. Rolando intending to buy a car, saw an old of consideration is not a defense.
friend, Roger, who is an agent to sell the car belonging to
Delgado Clinic. After negotiation, Rolando decided to 3) As against A, being not a holder in due course,
buy the said car. He drew upon request of Roger a all defenses, real or absolute and personal or equities,
crossed check for P600.00 payable to Delgado Clinic as may be interposed by B. But as against C, being a holder
evidence of his good faith, but which will merely be in due course, only real or absolute defenses can be
shown to Delgado Clinic by Roger who received the interposed. (BAR 1978)
check. The check would then be returned when Roger
brings the car and its registration certificate for 3. Sumabod issued a promissory note payable to
Rolando’s inspection. the order of Panloob as consideration for the textiles
purchased from the latter. The promissory note recites
For failure of Roger to bring the car and its certificate of that the amount of P100,000 is payable in 5 monthly
registration, and return the check, Rolando issued a installments of P20,000 each, beginning on December 1,
“stop payment order” to the drawee bank. In the 1986 and every first day of the month thereafter until
meantime, Roger paid the check to Delgado Clinic for fully paid, provided that the holder may declare the
the hospital bill of his wife and was given P158.25 as entire amount due and demandable in the event the
change. Delgado Clinic filed suit against Rolando to maker fails to pay on time any installment in full, or
recover the value of the check. May Delgado Clinic be whenever the holder for valid reasons finds his claim
considered a holder in due course, hence, entitled to insecure. Panloob indorsed and delivered the note for
recover? Decide with reasons. value to Humabol who acted in good faith.

Answer: Panloob’s factory burns down and he is unable to

Delgado Clinic may not be considered a holder in due deliver the textiles. Sumabod did not pay as promised.
course, hence, not entitled to recover. It is not disputed Can Humabol as an innocent purchaser for value hold
that Delgado Clinic was not aware of the circumstance Sumabol liable on the promissory note? Explain.
under which the check was delivered to Roger. But the Answer:
circumstances—such as the fact that Rolando had no Humabol can hold Suamabod liable on the promissory
relation with it; that the amount of the check did not note. The statement in the instrument providing for
correspond exactly with the obligation of Roger to the installment payment and an acceleration clause did not
clinic; and that the check is a crossed check, which adversely affect the negotiability of the instrument.
means that the check could only be deposited but could Humabol, being a holder in due course, may hold the
not be converted into cash—should have put the clinic to maker liable under the note. Personal defenses that
inquiry as to why’s and wherefore’s of the possession of Sumabod may raise against an immediate party may not
the check by Roger, and why he used it to pay his be raised against a holder in due course. (BAR 1986)
accounts. It was payee’s duty to ascertain from Roger
what the nature of the latter’s title to the check was or 4. Perla brought a motor car payable in
the nature of his possession. Having failed in this installments from Automotive Company for P250,000.
respect, Delgado Clinic was guilty of gross neglect She made a down payment of P50,000 and executed a
amounting to the legal absence of good faith, and it may promissory note for the balance. The company
not be considered as a holder of the check in good faith. subsequently indorsed the note to Reliable Finance
The rule that a possessor of the instrument is a prima Corporation which financed the purchase. The
facie a holder in due course does not apply because there promissory note read:
was a defect in the title of the holder (Roger) because the
instrument is not payable to him or to bearer. (BAR “For value received, I promise to pay Automotive
1977) Company or order at its office in Legaspi City, the sum
of P200,000.00 with interest at twelve (12%) per cent per
2. A induces B by fraud to make a promissory note annum, payable in equal installments of P20,000.00
payable on demand to the order of A in the sum of monthly for ten (10) months starting October 21, 1991.
P5,000.00.
Manila September 21, 1991. (Sgd.) Perla
1) Can A file an action successfully against the Pay to the order of Reliable Finance Corp.
maker B for the amount of the note?
2) Going further, A transfers the note to C who Automotive Company By:
pays P5,000.00 therefore and acquires the note under (Sgd.) Manager
circumstances that make C a holder in due course. Can C
file an action successfully against B, the maker of the Because Perla defaulted in the payment of her
note, for the amount of the note? Explain. installments, Reliable Finance Corporation initiated a
3) What defense/s can B interpose? Reasons. case against her for a sum of money. Perla argued that
the promissory note is merely open to all defenses
Answer: available to the assignor and, therefore, Reliable Finance
1) No. B may raise the defense of absence of Corporation is not a holder in due course.
consideration against A who is not a holder in due
course. b) Is Reliable Finance Corporation a holder in due
course? Explain briefly.
 Second, it is not a ground for the discharge of the post-
Answer: dated check as against a holder in due course that it was
issued merely as security. The only grounds for the
Yes, Reliable Finance Corporation is a holder in due discharge of negotiable instruments Law and none of
course given the factual settings. Said corporation those grounds are available to Eva. The latter may not
apparently took the promissory note for value, and there unilaterally discharge herself from her liability by mere
are no indications that it acquired it in bad faith. (BAR expediency of withdrawing her funds from the drawee
1992) bank. (BAR 1996)

5. Larry issued a negotiable promissory note to 7. What constitutes a holder in course?

Evelyn and authorized the latter to fill up the amount in
blank with his loan account in the sum of P1,000. Answer:
However, Evelyn inserted P5,000 in violation of the A holder in due course is one who has taken the
instruction. She negotiated the note to Julie who had instrument under the following conditions:
knowledge of the infirmity. Julie in turn negotiated said
note to Devi for value and who had no knowledge of the 1. That it is complete and regular upon its face;
infirmity.
2. That he became a holder of it before it was
1. Can Devi enforce the note against Larry and if overdue and without notice that t had been previously
she can, for how much? Explain. dishonored, if such was the fact;
2. Supposing Devi endorses the note to Baby for 3. That he took it in good faith and for value;
value but who has knowledge of the infirmity, can the 4. That at the time it was negotiated to him, he had
latter enforce the note against Larry? no notice of any infirmity in the instrument or defect in
the title of the person negotiating it. (BAR 1996)
Answer:
1. Yes. Devi can enforce the negotiable promissory 8. PN makes a promissory note for P5,000, but
note against Larry in the amount of P5,000. Devi is a leaves the name of the payee in blank because he wanted
holder in due course and the breach of trust committed to verify its correct spelling first. He mindlessly left the
by Evelyn cannot be set up by Larry against Devi note on top of his desk at the end of the workday. When
because it is a personal defense. As a holder in due he returned the following morning, the note was
course, Devi is not subject to such personal defense. missing. It turned up later when X presented it to PN for
payment. Before X, T, who turned out to have filched the
2. Yes. Baby is not a holder in due course because note from PN’s office, had endorsed the note after
she had knowledge of the breach of trust committed by inserting his own name in the blank space as the payee.
Evelyn against Larry which is just a personal defense. PN dishonored the note, contending that he did not
But having taken the instrument from Devi, a holder in authorize its completion and delivery. xxx
due course, Baby has all the rights of a holder in due Can the payee in a promissory note be a “holder in due
course. Baby did not participate in the breach of trust course” within the NIL? Explain your answer. Answer:
committed by Evelyn who filled the blank but filled up A payee in a promissory note cannot be a “holder in due
the instrument with P5,000 instead of P1,000 as course” within the meaning of the NIL, because a
instructed by Larry. (BAR 1993) payee is an immediate party in relation to the maker.
The payee is subject to whatever defenses, real or
6. Eva issued to Imelda a check in the amount of personal, available to the maker of the promissory note.
P50,000 post-dated September 30, 1995, as security for a (BAR 2000)
diamond ring to be sold on commission. On September
15, 1995, Imelda negotiated the check to MT Investment 9. Lorenzo drew a bill of exchange in the amount
which paid the amount of P40,000 to her. of P100,000 payable to Barbara or order, with his wife,
Diana, as drawee. At the time the bill was drawn, Diana
Eva failed to sell the ring, so she returned it to Imelda on was unaware that Barbara is Lorenzo’s paramour.
September 19, 1995. Unable to retrieve her check, Eva
withdrew her funds from the drawee bank. Thus, when Barbara then negotiated the bill to her sister, Elena, who
MT Investment presented the check for payment, the paid for it for value, and who did not know who
drawee bank dishonored it. Later on, when MT Lorenzo was. On due date, Elena presented the bill to
Investment sued her, Eva raised the defense of absence Diana for payment, but the latter promptly dishonored
of consideration, the check having been issued merely as the instrument because, by then, Diana had already
security for the ring that she could not sell. learned of her husband’s dalliance.
Does Eva have a valid defense? Explain. Answer:
No, Eva does not have a valid defense. First, MT b) Was the bill lawfully dishonored by Diana? Explain.
Investment is a holder in due course and, as such, holds
the Answer:
post dated check free from any defect of title of prior No, the bill was not lawfully dishonored by Diana.
parties and from defenses available to prior parties Elena, to whom the instrument was negotiated, was a
among themselves. Eva can invoke the defense of holder in due course inasmuch as she paid value
absence of consideration against MT only if the latter therefor in good faith. (BAR 2009)
was a privy to the purpose for which the checks were
issued and, therefore, not a holder in due course.
10. A holder in due course holds the instrument free On April 1, 1996, Pentium stopped payment of the check
from any defect of title of prior parties and free from for failure of CD Bytes to deliver the computer. Thus,
defenses available to prior parties among themselves. when Fund House deposited the check, the drawee bank
An example of such defense is- dishonored it.

a. Fraud in inducement. If Fund House files a complaint against Pentium and CD

b. Duress amounting to forgery. Bytes for the payment of the dishonored check will the
c. Fraud in esse contractus. complaint prosper? Explain.
d. Alteration.
Answer:
Answer: The complaint filed by Fund House against Pentium will
a. Fraud in inducement. (BAR 2011) not prosper but the one against CD Bytes will. Fund
House is not a holder in due course and, therefore,
11. X borrowed money from Y in the amount of P1 Pentium can raise the defense of failure of consideration
M and as payment, issued a check. Y then endorsed the against it. The check in question was issued by Pentium
check to his sister Z for no consideration. When Z to pay for a computer that it ordered from CD Bytes. The
deposited the check to her account, the check was computer not having been delivered, there was a failure
dishonored for insufficiency of funds. of consideration. The check discounted with Fund
House by CD Bytes is a crossed check and this should
Is Z a holder in due course? Explain your answer. have put Fund House on inquiry. It should have
Answer: ascertained the title of CD Bytes to the check or the
nature of the latter’s possession. Failing in this respect,
Z is not a holder in due course. She did not give any Fund House is deemed guilty of gross negligence
valuable consideration for the check. To be a holder in amounting to legal absence of good faith and, thus, not a
due course, the holder must have taken the check in holder in due course. Fund House can collect from CD
good faith and for value. (BAR 2012) Bytes as the latter was the immediate indorser of the
check. (BAR 1996)
12. Arnold, representing himself as an agent of
Brian for the sale of Brian’s car, approached Dennis who 2. X, Y and Z signed a promissory note in favor of
appeared interested in buying the car. At Arnold’s A stating: “We promise to pay A on December 31, 2001
prodding, Dennis issued a crossed check payable to the sum of P5,000. “When the note fell due, A sued X
Brian for P25,000 on the understanding that the check and Y who put up the defense that A should have
would only be shown to Brian as evidence of Dennis’ impleaded Z. is the defense valid? Why?
good faith and interest in buying the car. Instead,
Arnold used the check to pay for the medical expenses Answer:
of his wife in Brian’s clinic after Brian, a doctor, treated
her. The defense is not valid. The liability of X, Y and Z
under the promissory note is joint. Such being the case,
Is Brian a holder in due course? Z is not an indispensable party. The fact that A did not
implead Z will not prevent A from collecting the
a) Yes, Brian is a HIDC because he was the payee proportionate share of X and Y in the payment of the
of the check and he received it for services rendered; loan. (BAR 2001)
b) Yes, Brian is a HIDC because he did not need to
go behind the check that was payable to him; 3. Brad was in desperate need of money to pay his
c) No, Brian is not a HIDC because Dennis issued debt to Pete, a loan shark. Pete threatened to take Brad’s
the check only as evidence of good faith and interest in life if he failed to pay. Brad and Pete went to Senorita
buying the car; Isobel, Brad’s rich cousin, and asked her if she could sign
d) No, Brian is not a HIDC because Brian should a promissory note in his favor in the amount of P10,000
have been placed on notice: the check was crossed in his to pay Pete. Fearing that Pete would kill Brad, Senorita
favor and Arnold was not the drawer; Isobel acceded to his request. She affixed her signature
e) No, Brian is not a HIDC because the requisite on a piece of paper with the assurance of Brad that he
consideration to Dennis was not present. will just fill it up later. Brad then filled up the blank
paper, making a promissory note for the amount of
Answer: P100,000. He then indorsed and delivered the same to
d) No, Brian is not a HIDC because Brian should Pete, who accepted the note as payment of the debt.
have been placed on notice: the check was crossed in his What defense/s can Senorita Isobel set up against Pete?
favor and Arnold was not the drawer. (BAR 2013) Explain. Answer:
Senorita Isobel can raise the personal defense of breach
3. Defenses Against the Holder of trust against Pete that Brad’s authority to fill up the
amount of the promissory note was limited o P10,000.
1. On March 1, 1996, Pentium Company ordered a Pete is not a holder in due course as he was present
computer from CD Bytes, and issued a crossed check in when Brad asked Senorita Isobel to sign the promissory
the amount of P30,000 post-dated March 31, 1996. Upon note for P10,000. Hence, Pete was aware of the infirmity
receipt of the check, CD Bytes discounted the check with of the instrument. (BAR 2005)
Fund House.
4. R issued a check for P1 M which he used to pay As to “A’s” liability: Since “A” is the maker of the
S for killing his political enemy. promissory note, he is primarily liable, and therefore
liable on
d) Can the check be considered a negotiable the same to “F”, a holder in due course of said
instrument? instrument. (Sec. 60, N.I.L.)
e) Does S have a cause of action against R in case of
dishonor by the drawee bank? As to “B’s” liability: B being an indorser is secondarily
f) If S negotiated the check to T, who accepted it in liable on said promissory note. First Alternative Answer
good faith and for value, may R be held secondarily —If “A” would pay the instrument, thereby discharging
liable by T? it, all, including “B”, are no longer liable. Second
Reason briefly in a, b, and c. Answer: Alternative Answer—If “A” would dishonor it, and “F”
d) Yes, the check can be considered a negotiable would have given notice of dishonor to “B”, the latter is
instrument even if it was issued to pay S to kill his liable to “F”.
political enemy. The validity of the consideration is not
one of the requisites of a negotiable instrument (Section As to “C’s” liability: “C” is also a party secondarily liable
1, NIL). It merely constitutes a defect of title. (Section 55, on said promissory note. First Alternative Answer—If
NIL) “A” would pay the instrument, thereby discharging it,
all, including “C”, are no longer liable. Second
e) No, S does not have a cause of action against R Alternative Answer—If “A” would dishonor it, and “F”
in case of dishonor of the check by the drawee bank. S is would have given notice of dishonor to “C”, the latter
not a holder in due course, thus, R can raise the defense would be liable to “F”. But “C” may raise the defense
that the check was issued for an illegal consideration. that his said instrument was stolen from him and his
(Section 58, NIL) signature in the indorsements was a forgery, which
defense, being real or absolute one, can be raised even
f) Yes, R may be held secondarily liable by T who against a holder in due course. (BAR 1981)
took the check in good faith and for value. T is a holder
in due course. R cannot raise the defense of illegality of 3. Juan makes a promissory note payable to the
the consideration, because T took the check free from the order of Pedro, who indorses it to Jose. Somehow,
defect of title of S (Section 57, NIL) (BAR 2007) Roberto obtains possession of the note and, forging the
signature of Jose, indorses it to Amado. Amado then
H. Parties And Their Liabilities idorses the note to Nilo, the holder.
Sate the rights and liabilities of the parties. Answer:
1. Maker e) Nilo cannot enforce the note against the maker,
Juan, and the payee, Pedro, because Nilo’s rights against
1. Juan de la Cruz signs a promissory note payable them are cut off by the forged signature of Jose, which is
to Pedro Lim or bearer, and delivers it personally to wholly inoperative.
Pedro Lim. The latter somehow misplaces the said note
and Carlos Ros finds the note lying around the corridor When a signature is forged or made without authority of
of the building. the person whose signature it purports to be, it is wholly
inoperative, and no right to enforce payment thereof
Carlos Ros endorses the promissory note to Juana Bond, against any party thereto can be acquired through or
for value, by forging the signature of Pedro Lim. under such signature. (Sec. 23, NIL)

May Juana Bond hold Juan de la Cruz liable on the note? f) Nilo cannot enforce the note against Jose
because Jose’s signature, which has been forged, is
Answer: wholly inoperative.
It depends. A promissory note payable to Pedro Lim or
bearer is a bearer negotiable instrument, being payable g) Nilo may proceed against Amado, whose
to a person named therein or bearer. It is negotiated by signature is genuine and, therefore, operative. Amado is
mere delivery, and no need to indorse it to Juana Bond, a general indorser who has warranted to the holder that
in order to make the latter a holder. However, Carlos the instrument is genuine and in all respects what it
Ros, who found it, endorsed it by forging the signature
of Pedro Lim. Therefore, Juana Bond may hold Juan de purports to be and that the instrument is at the same
la Cruz liable on the note, if the former is a holder in due time of his indorsement valid and subsisting. (Sec. 66,
course; but no, if Juana Bond is not a holder in due NIL)
course. (BAR 1980)
h) Jose or Amado have a right of recourse against
2. “A” makes a promissory note payable to “B” or Roberto, the forger. (BAR 1984)
bearer. “A” delivers the note to “B”. “B” indorses the
note to “C”. “C” places the note in his wallet, which was 4. As payment for good received, Masikap gave to
stolen by “X”, who, finding the note, indorses it to “D”, Humimok on November 3, his check drawn on the
by forging “C’s” signature. “D” indorses the note to “E”, Eternal Bank of Manila. On November 11, Kahusayan
who in turn delivers the note to “F”, a holder in due went to Eternal bank to encash the check. He could not
course, without indorsement. cash the check because on November 10, Central Bank
What are the liabilities of “A”, “B”, and “C” to “F”? forbidden Eternal Bank to do business in the Philippines
Explain briefly. Answer:
on grounds of insolvency. Masikap, Humimok, and Can Kahusayan hold Masikap liable on the uncashed
Kahusayan all reside in Manila. check? Explain briefly.

Assume that Eternal Bank was not closed by Central Answer:

Bank but simply refused to honor and encash the check. Kahusayan can hold Masikap secondarily liable on the
Can Kahusayan hold Masikap liable? Explain briefly. uncashed check. A drawer of a negotiable instrument
assumes secondary liability under the NIL, which is to
Answer: say that an immediate right of recourse ensues in favor
The secondary liability of Masikap to Kahusayan, as of the holder once the instrument is dishonored. (BAR
expressed in letter a) above, is not dependent on the 1986)
ability or capability of the drawee to honor the
instrument. Accordingly, Kahusayan can still hold 2. Mr. Pablo sought to borrow P200,000 from Mr.
Masikap liable. (BAR 1986) Carlos. The latter agreed to loan the amount in the form
of a post-dated check which was crossed (i.e., two
5. PN is the holder of a negotiable promissory note parallel lines diagonally drawn on the top left portion of
within the meaning of the NIL. The note was originally the check). Before the due date of the check, Mr. Pablo
issued by RP to XL as payee. XL indorsed the note to PN discounted it with Mr. Noble. On due date, Mr. Noble
for goods bought by XL. The note mentions the place of deposited the check with his bank. The check was
payment on the specified maturity date as the office of dishonored. Mr. Noble sued Mr. Pablo. The court
the corporate secretary of PX bank during banking dismissed Mr. Noble’s complaint. Was the court’s
hours. On maturity date, RP was at the aforesaid office decision correct?
ready to pay the note but PN did not show up. What PN
later did was to sue XL for the face value of the note, Answer:
plus interest and costs. Will the suit prosper? Explain. The court’s decision was incorrect. Mr. Pablo and Mr.
Carlos, being immediate parties to the instrument, are
Answer: governed by the rules of privity. Given the factual
Yes. The suit will prosper as far as the face value of the circumstances of the problem, Mr. Pablo has no valid
note is concerned, but not with respect to the interest excuse from denying liability. Mr. Pablo undoubtedly
due subsequent to the maturity of the note and the costs had benefited in the transaction. To hold otherwise
of collection. RP was ready and willing to pay the note at would also contravene the basic rules of unjust
the specified place of payment on the specified maturity enrichment. Even in negotiable instruments, the Civil
date, but PN did not show up. PN lost his right to Code and other laws of general application can still
recover the interest due subsequent to the maturity of apply suppletorily. (BAR 1991)
the note and the cost of collection. (BAR 2000)
3. Pancho drew a check to Bong and Gerard
6. X executed a promissory note with a face value jointly. Bong indorsed the check and also forged
of P50,000, payable to the order of Y. Y indorsed the note Geread’s indorsement. The payor bank paid the check
to Z, to whom Y owed P30,000. If X has no defense at all and charged Pancho’s account for the amount of the
against Y, for how much may Z collect from X? check. Gerard received nothing from the payment.
Based on the facts, was Pancho as drawer discharged on
a. P20,000, as he is a holder for value to the extent the instrument? Why? Answer:
of the difference between Y’s debt and the value of the Pancho was not discharged on the instrument, because
note. the payment was not in due course. (BAR 2008)
b. P30,000, as he is a holder for value to the extent
of his lien. 4. D draws a bill of exchange that states: “One
c. P50,000, but with the obligation to hold P20,000 month from date, pay to B or his order P100,000. Signed,
for Y’s benefit. D.” The drawee named in the bill is E. B negotiated the
d. None, as Z’s remedy is to run after his debtor, Y. bill to M, M to N, N to O, and O to P. Due to non-
acceptance and after proceedings for dishonor were
Answer: made, P asked O to pay, which O did. From whom may
c. P50,000, but with the obligation to hold P20,000 for Y’s O recover?
benefit. (BAR 2011)
a. B, being the payee.
b. N, as indorser to O.
2. Drawer c. E, being the drawee.
d. D, being the drawer.
1. As payment for good received, Masikap gave to
Humimok on November 3, his check drawn on the Answer:
Eternal Bank of Manila. On November 11, Kahusayan d. D, being the drawer. (BAR 2011)
went to Eternal bank to encash the check. He could not
cash the check because on November 10, Central Bank 5. X borrowed money from Y in the amount of P1
forbidden Eternal Bank to do business in the Philippines M and as payment, issued a check. Y then endorsed the
on grounds of insolvency. Masikap, Humimok, and check to his sister Z for no consideration. When Z
Kahusayan all reside in Manila. deposited the check to her account, the check was
dishonored for insufficiency of funds.
Who is liable on the check? The drawer or the indorser? acceptance. E accepted but, as it later turned out, D is a
Explain your answer. Answer: fictitious person. Is E freed from liability?
X, the drawer, will be liable. As drawer, X engaged that
on due presentment the check would be paid according a.No, since by accepting, E admits the existence of the
to its tenor and that if it is dishonored and he is given drawer.
notice of dishonor, he will pay the amount to the holder. b.No, since by accepting, E warrants that he is solvent.
No notice of dishonor need be given to X if he is aware c.Yes, if E was not aware of that fact at the time of
that he has insufficient funds in his account. Under acceptance.
d.Yes, since a bill of exchange with a fictitious drawer is
Section 114(d) of the NIL, notice of dishonor is not void and inexistent.
required to be given to the drawer where he has no right
to expect that the drawee will honor the instrument. Answer: b. No, since by accepting, E admits the
existence of the drawer. (BAR 2011)
Z cannot hold Y, the endorser, liable as the latter can
raise the defense that there was no valuable 4. Indorser
consideration for the endorsement of the check. (BAR
2012) 1. A negotiable warehouse receipts was indorsed
by X in favor of Y presents the receipt to W, the
3. Acceptor warehouse man, but W refuses to turn over the goods to
Y, would X be liable? Would your answer be the same if
1. A drew a check for P1,000 on B, the Bank, the goods are actually given but they turn out to be unfit
payable to the order of C and delivered the check to the for the particular purpose intended? Explain.
latter for value. C indorsed the check in blank and
negotiated it to D, who lost it. At D’s request, A ordered Answer:
payment stopped by notifying B. The stop order was X is not liable to Y if W should refuse to turn over the
overlooked and the check was paid to E, who had taken goods to Y. an indorser of a negotiable warehouse
the check, without actual knowledge of the loss, in receipt does not warrant that the warehouseman will
payment of merchandise sold to a stranger whom he perform his obligation.
thought owned the check. D now sues the bank, B, for
the amount of the check. Decide the case with brief However, such an indorser makes some warranties,
reasons. among which is that the goods are merchantable and fit
for the particular purpose intended. Therefore, X would
Answer: be liable to Y if W delivers the good but such goods are
D may not sue the bank. A check of itself does not found unfit for the particular purpose intended.
operate as an assignment of any part of the funds to the
credit of drawer with the bank, and the bank is not liable Alternative Answer:
to the holder, unless and until it accepts or certifies the An indorser of a negotiable, X is not liable to Y if W
check, and D was not even the holder of the check in should refuse to turn over the goods to Y. An indorser of
question, he having lost the same. (BAR 1979) a negotiable warehouse receipt is only liable for breach
of his warranties which does not include this particular
2. X draws a check against his current account with case. If the goods are actually given by the warehouse
the Ortigas branch of Bonifacio Bank in favor of B. man to Y, but said goods turn out to be unfit for the
Although X does not have sufficient fund, the bank particular purpose intended, X will not be liable to Y, in
honors the check when it is presented to payment. as much as there is a warranty on the part of X regarding
Apparently, X has conspired with the bank’s bookkeeper this matter in which the goods turn out to be unfit for
so that his ledger card would show that he still has the particular purpose intended. Although there is such
sufficient funds. a warranty in the law regarding goods, yet that warranty
applies exclusively to a case where the warranty would
The bank files an action for recovery of the amount paid be present if the goods were directly sold without any
to B because the check presented has no sufficient funds. warehouse receipt. (BAR 1975)
Decide the case.
2. Juan makes a promissory note payable to the
Answer: order of Pedro, who indorses it to Jose. Somehow,
The bank cannot recover the amount paid to B for the Roberto obtains possession of the note and, forging the
check. When the bank honored the check, it became an signature of Jose, indorses it to Amado. Amado then
acceptor. As acceptor, the bank became primarily and idorses the note to Nilo, the holder.
directly liable to the payee/holder B.
Sate the rights and liabilities of the parties.
The recourse of the bank should be against X and its
bookkeeper who conspired to make X’s ledger show that Answer:
he has sufficient funds. (BAR 1998) i) Nilo cannot enforce the note against the maker,
Juan, and the payee, Pedro, because Nilo’s rights against
3. A bill of exchange has D as drawer, E as drawee them are cut off by the forged signature of Jose, which is
and F as payee. The bill was then indorsed to G, G to H, wholly inoperative.
and H to I, the current holder presented the bill to E for
When a signature is forged or made without authority of While an irregular indorser signs for valuable
the person whose signature it purports to be, it is wholly consideration. (BAR 2005)
inoperative, and no right to enforce payment thereof
against any party thereto can be acquired through or 5. Pancho drew a check to Bong and Gerard
under such signature. (Sec. 23, NIL) jointly. Bong indorsed the check and also forged
Geread’s indorsement. The payor bank paid the check
j) Nilo cannot enforce the note against Jose and charged Pancho’s account for the amount of the
because Jose’s signature, which has been forged, is check. Gerard received nothing from the payment.
wholly inoperative. Pancho asked the payor bank to recredit his account.
Should the bank comply? Explain fully. Answer:
k) Nilo may proceed against Amado, whose Yes, the bank should recredit the full amount of the
signature is genuine and, therefore, operative. Amado is check to the account of Pancho. Considering that the
a general indorser who has warranted to the holder that check
the instrument is genuine and in all respects what it was payable to the account of Pancho. Considering that
purports to be and that the instrument is at the same the check was payable to Bong and Gerard jointly, the
time of his indorsement valid and subsisting. (Sec. 66, indorsement of Gerard was necessary to negotiate the
NIL) check pursuant to Sec. 41 of the NIL, to wit:

l) Jose or Amado have a right of recourse against “Sec. 41. Indorsement where payable to two or more
Roberto, the forger. (BAR 1984) persons.—Where an instrument is payable to the order
of 2 or more payees or indorsees who are not partners,
3. Anna makes a promissory note payable to all must indorse unless the one indorsing has authority
bearer and delivers it to Bing. In turn, Bing negotiates it to indorse for the others”
by mere delivery to Carmen, who endorses it especially
to Dong. Dong negotiates it by special indorsement to Since Bong forged the signature of Gerard without
Emma, who negotiates it to Fe by mere delivery. Anna authority, the indorsement was wholly inoperative.
did not pay. To whom are Bing, Carmen, Dong and (BAR 2008)
Emma liable? Explain your answer fully.
6. May the indorsee of a promissory note indorsed
Answer: to him “for deposit” file a suit against the indorser?

Bing, not being an indorser, may only be held liable for a. Yes, as long as the indorser received value for
breach of warranty but the facts in the problem do not the restrictive indorsement.
disclose any such breach. b. Yes, as long as the indorser received value for
the conditional indorsement.
Carmen, under her special indorsement, may be held c. Yes, whether or not the indorser received value
secondarily liable by Dong and Emma since the latter for the conditional indorsement.
(Dong and Emma) derived title under Carmen’s special d. Yes, whether or not the indorser received value
indorsement. Carmen is not secondarily liable to Fe since for the restrictive indorsement.
the latter obtained it by mere delivery from Emma and
therefore did not obtain title through Carmen’s special Answer:
indorsement. a. Yes, as long as the indorser received value for
the restrictive indorsement. (BAR 2011)
Dong holds himself secondarily liable to Emma since the
latter derived title under Dong’s special indorsement but 7. Z wrote out an instrument that states: “Pay to X
not to Fe who acquired the instrument only by delivery. the amount of P1 M for collection only. Signed, Z.” X
indorsed it to his creditor, Y, to whom he owed P1 M. Y
Emma, not being an indorser, is not secondarily liable to now wants to collect and satisfy X’s debt through the P1
Fe. Emma’s only possible source of liability to Fe would M on the check. May he validly do so?
be for a breach of warranty but the facts in the problem
do not disclose any such breach. a. Yes, since the indorsement to Y is for P1 M.
b. No, since Z is not a party to the loan between X
Secondary liability requires due notice of dishonor, and Y.
unless excused, which we assume had properly been c. No, since X is merely an agent of Z, his only
observed. (BAR 1988) right being to collect.
d. Yes, since X owed Y P1 M.
4. Distinguish an irregular indorser from a general
indorser. Answer:
c. No, since X is merely an agent of Z, his only
Answer right being to collect. (BAR 2011)
An irregular indorser, not otherwise a party to the
instrument, places his signature thereon in blank before 8. Which of the following indorsers expressly
delivery to add credit thereto. A general indorser is a warrants in negotiating a instrument that 1) it is genuine
regular party to the instrument like a maker, drawer or and true; 2) he has a good title to it; 3) all prior parties
acceptor and he signs upon delivery of the instrument. have capacity to negotiate; and 4) it is valid and
subsisting at the time of his indorsement?
a. The irregular indorser. Answer:
b. The regular indorser. b. Yes, because X, as a qualified indorser, warrants
c. The general indorser. that the note is genuine. (BAR 2011)
d. The qualified indorser.
12. P sold to M 10 grams of shabu worth P5,000. As
Answer: he had no money at the time of the sale, M wrote a
c. The general indorser. (BAR 2011) promissory note promising to pay P or his order P5,000.
P then indorsed the note to X (who did not know about
9. M, the maker, issued a promissory note to P, the the shabu), and X to Y. Unable to collect from P, Y then
payee which states: “I, M, promise to pay P or order the sued X on the note. X set up the defense of illegality of
amount of Php1 Million. Signed, M.” P negotiated the consideration. Is he correct?
note by indorsement to N, then N to O also by
indorsement, and O to Q, again by indorsement. But e. No, since X, being a subsequent indorser,
before O indorsed the note to Q, O’s wife wrote the warrants that the note is valid and subsisting.
figure “2” on the note after “Php1” without O’s f. No, since X, a general indorser, warrants that the
knowledge, making it appear that the note is for Php12 note is valid and subsisting.
Million. For how much is O liable to Q? g. Yes, since a void contract does not give rise to
any right.
a. Php 1 Million since it is the original tenor of the h. Yes, since the note was born of an illegal
note. consideration which is real defense.
b. Php 1 Million since he warrants that the note is
genuine and in all respects what it purports to be. Answer:
c. Php 12 Million since he warrants his solvency b. No, since X, a general indorser, warrants that the note
and that he has a good title to the note. is valid and subsisting. (BAR 2011)
d. Php 12 Million since he warrants that the note is
genuine and in all respects what it purports to be. 5. Drawee

Answer: 1. Romeo has P100,000 in his current account at the

d. Php 12 Million since he warrants that the note is Matatag Banking Corporation. Romeo learned that his
genuine and in all respects what it purports to be. (BAR enemy had hired a contract killer to liquidate him.
2011) Fearful for his life, he mailed to his fiancée, Juliet, a
check for P100,000 in the bank. The check was payable to
10. D, debtor of C, wrote a promissory note payable Juliet or order and was accompanied by a letter stating
to the order of C. C’s brother, M, misrepresenting that he was giving her his money out of his great love
himself as C’s agent, obtained the note from D, then for her and because something would happen to him
negotiated it to N after forging C’s signature. N indorsed anytime now.
it to E, who indorsed it to F, a holder in due course. May
F recover from E? a) Juliet presented the check for payment but the
bank refused to honor it. Does Juliet have any right of
a. No, since the forgery of C’s signature results in action against the bank? Explain.
the discharge of E. b) The hit contract was called off by Romeo’s
b. Yes, since only the forged signature is enemy. Meanwhile, Juliet broke off her engagement to
inoperative and E is bound as indorser. Romeo because of the humiliation she suffered at the
c.No, since the signature of C, the payee, was forged. bank. Does Romeo have a right of action against the
d. Yes, since the signature of C is immaterial, he bank? Explain.
being the payee.
Answer:
Answer: a) Juliet has no cause of action against the bank.
a. Yes, since only the forged signature is Under the NIL, a drawee has no liability to the holder
inoperative and E is bound as indorser. (BAR 2011) under an instrument until and after it has been accepted
by such drawee.
11. X is the holder of an instrument payable to him
(X) or his order, with Y as maker. X then indorsed it as b) Romeo has a right of action against the bank.
follows: “Subject to no recourse, pay to Z. Signed, X.” The juridical relation between the drawer and drawee is
When Z went to collect from Y, it turned out that Y’s not governed solely by the NIL. The relationship
signature was forged. Z now sues X for collection. Will it between the bank and the drawer is governed primarily
prosper? by their own agreement and by the applicable provisions
of the Civil Code under which a possible breach of
e. Yes, because X, as a conditional indorser, obligation is likely under the factual setting in the
warrants that the note is genuine. problem. (BAR 1986)
f. Yes, because X, as a qualified indorser, warrants
that the note is genuine. 2. Mr. Lim issued a check drawn against BPI Bank
g. No, because X made a qualified indorsement. in favor of Mr. Yu as payment for certain shares of stock
h. No, because a qualified indorsement does not which he purchased. On the same day that he issued the
include the warranty of genuineness. check to Mr. Yu, Mr. Lim ordered BPI to stop payment.
Per standard banking practice, Mr. Lim was made to Yes. As a general rule, the drawee is not liable under the
sign a waiver of BPI’s liability in the event that it should check because there is no privity of contract between
pay Mr. Yu through oversight or inadvertence. Despite XYZ Marketing, as payee, and ABC Bank as the drawee
the stop order by Mr. Lim, bank. However, if the action taken by the bank is an
abuse of right which caused damage not only to the
BPI nevertheless paid Mr. Yu upon presentation of the issuer of the check but also to the payee, the payee has a
check. Mr. Lim sued BPI for paying his order. Decide the cause of action under quasi-delict. (BAR 1999)
case.
5. Discuss the legal consequences when a bank
Answer: honors a forged check.
In the event that Mr. Lim, in fact, had sufficient legal
reasons to issue the stop payment order, he may sue BPI Answer:
for paying against his order. The waiver executed by Mr.
Lim did not mean that it need not exercise due diligence A bank, which honors a check wherein the drawer’s
to protect the interest of its account holder. It is not signature was forged, must bear the loss, because it has
amiss to state that the drawee, unless the instrument had the legal duty to ascertain that the drawer’s signature is
earlier been accepted by it, is not bound to honor genuine before encashing a check. The liability chain
payment to the holder of the check that thereby excludes ends with the drawee bank.
it from any liability if it were to comply with the stop
payment order. (BAR 1991) On the other hand, if the drawee bank pays under
forged indorsement, the drawee bank is still liable to the
3. Placido, a bank depositor, left his checkbook on payee as it has guaranteed the genuineness of all prior
his desk at his house. Unknown to him, a visitor at the indorsements. However, the drawee bank may generally
time, noticing the same, took a check therefrom, filled it pass liability back through the collection chain to the
up in the amount of P3,000 and succeeded in encashing party who obtained the check from the forger and from
the check on the same day. Placido’s account was the forger himself. (BAR 2006)
thereby debited in the same amount.
6. Marlon deposited with LYRIC bank a money
Discovering the erroneous debit, Placido demanded that market placement of P1 M for a term of 31 days. On
the bank credit him with a like amount. The bank maturity date, one claiming to be Marlon called up the
refused on the ground that Placido was negligent in LYRIC Bank account officer and instructed him to give
leaving his checkbook on his desk so that he could not the manager’s check representing the proceeds of the
put up the defense of forgery or want of authority under money market placement to Marlon’s girlfriend, Ingrid.
the NIL.
The check, which bore the forged signature of Marlon,
The facts disclose that even to the naked eye, there were was deposited in Ingrid’s account with YAMAHA Bank.
marked differences between Placido’s signature and the YAMAHA Bank stamped a guaranty on the check
one in the check forged by the visitor. reading: “All prior endorsements and/or lack of
As between Placido and the bank, who should bear the endorsement guaranteed.”
loss? Explain. Answer:
The bank should bear the loss. A drawee bank must Upon presentment of the check, LYRIC Bank funds the
exercise the highest diligence in safeguarding the check. Days later, Marlon goes to LYRIC Bank to collect
accounts of its client-depositors. The bank is also his money market placement and discovers the
charged with genuineness of the signatures of its current foregoing transactions.
account holders. But what can be more striking is that
there were marked differences between Placido’s Marlon thereupon sues LYRIC Bank which in turn files a
signature and the one in the check forged by the visitor. third-party complaint against YAMAHA Bank. Discuss
Certainly, Placido was not negligent in leaving his the respective rights and liabilities of the two banks.
checkbook on his desk. (BAR 1992)
Answer:
4. A check for P50,000 was drawn against drawee Since the money market placement of Marlon is in the
bank and made payable to XYZ Marketing or order. The nature of a loan to Lyric Bank, and since he did not
check was deposited with payee’s account at ABC Bank authorize the release of the money market placement to
which then sent the check for clearing to drawee bank. Ingrid, the obligation of Lyric Bank to him has not been
paid. Lyric Bank still has the obligation to pay him.
Drawee bank refused to honor the check on ground that
the serial number thereof had been altered. XYZ Since Yamaha Bank indorsed the check bearing the
Marketing sued drawee bank. forged endorsement of Marlon and guaranteed all
In instant suit, drawee bank contended that XYZ endorsements, including the forged endorsement, when
Marketing as payee could not sue the drawee bank as it presented the check to Lyric Bank, it should be held
there was no privity between them. Drawee theorized liable to it.
that there was no basis to make it liable for the check. Is
this contention correct? Explain. However, since the issuance of the check was attended
with the negligence of Lyric Bank, it should share the
Answer: loss with Yamaha Bank on a 50% basis. (BAR 2010)
7. A bill of exchange states on its face: “One (1) she has good title to it even if in fact she does not have,
month after sight, pay to the order of Mr. R the amount because the payee was already dead 2 years ago, before
of P50,000.00, chargeable to the account of Mr. S. Signed, the check was issued. The fact that immediately after
Mr. T.” Mr. S, the drawee, accepted the bill upon receiving the cash proceeds of the check in question, she
presentment by writing on it the words “I shall pay immediately turned over the said amount to Adriano,
P30,000.00 three (3) months after sight.” May he accept would not exempt her from liability, because by doing
under such terms, which varies the command in the bill so, she acted as an accommodation party in the check,
of exchange? for which she is also liable as an accommodation party.
(Sec.. 29 & 66, N.I.L.; Republic v. Ebrada, July 31, 1975,
a. Yes, since a drawee accepts according to the 665 SCRA 680) (BAR 1982)
tenor of his acceptance.
b. No, since, once he accepts, a drawee is liable I. Presentment for Payment
according to the tenor of the bill.
c. Yes, provided the drawer and the payee agree to 1. Necessity of Presentment for Payment
the acceptance.
d. No, since he is bound as drawee to accept the 1. Gemma drew a check on Septmeber 13, 1990.
bill according to its tenor. The holder presented the check to the drawee bank only
on March 5, 1994. The bank dishonored the check on the
Answer: same date. After dishonor by the drawee bank, the
a. Yes, since a drawee accepts according to the holder gave a formal notice of dishonor to Gemma
tenor of his acceptance. (BAR 2011) through a letter dated April 27, 1994.

8. The signature of X was forged as drawer of a 1. What is meant by “unreasonable time” as

check. The check was deposited in the account of Y and applied to presentment?
when deposited was accepted by AAA Bank, the drawee 2. Is Gemma liable to the holder?
bank. Subsequently, AAA Bank found out that the
signature of X was actually forged. Which statement is Answer:
most accurate? 1. As applied to presentment for payment,
“reasonable time” is meant not more than 6 months from
a) The drawee bank can recover from Y, because the date of issue. Beyond said period, it is “unreasonable
the check was deposited in his account; time” and the check becomes stale.
b) The drawee bank can recover from X, because he
is the drawer even though his signature was forged; 2. No. Aside from the check being already stale,
c) The drawee bank is estopped from denying the Gemma is also discharged from liability under the
genuiness of the signature of the X, the drawer of the check, being a drawer and a person whose liability is
check; secondary, this is due to the giving of the notice of
d) The drawee bank can recover from Y because as dishonor beyond the period allowed by law. The giving
endorser he warrants the genuiness of the signature. of notice of dishonor on April 27, 1994 is more than 1
month
Answer:
c) The drawee bank is estopped from denying the from March 5, 1994 when the check was dishonored.
genuiness of the signature of the X, the drawer of the Since it is not shown that Gemma and the holder resided
check. (BAR 2012) in the same place, the period within which to give notice
of dishonor must be the same time that the notice would
6. Warranties reach Gemma if sent by mail. (BAR 1994)

1. Hernan issued a check payable to the order of 2. A. AB issued a promissory note for P1,000 payable to
Fernando in the sum of P12,000, and drawn on “X” CD or his order on September 15, 2002. CD indorsed the
Bank. The check was delivered to Matilde by Adriano note in blank and delivered the same to EF. GH stole the
for encashment. At the time, the check had the note from EF and on September 14, 2002 presented it to
indorsements of (1) Fernando and (2) Rosa. When AB for payment. When asked by AB, GH said CD gave
Matilde encashed it with “X” Bank, she affixed her him the note in payment for 2 cavans of rice. AB
signature on the check. Upon Matilde’s receipt of the therefore paid GH P1,000 on the same date. On
cash proceeds of the check, she turned over the amount September 15, 2002, EF discovered that the note of AB
to Adriano. “X” Bank was informed by Hernan that the was not in possession and he went to AB. It was then
alleged indorsement of the payee Fernando was a that EF found out that AB had already made payment on
forgery, since the latter had died 2 years ago. “X” Bank, the note. Can EF still claim payment from AB? Why?
having refunded the amount to Hernan, sued Matilde,
who refused to return the money. B. As a sequel to the same facts narrated above, EF, out
Does “X” Bank have a cause of action against matilde? of pity for AB who had already paid P1,000 to GH,
Answer: decided to forgive AB and instead go after CD who
Yes. X Bank has a cause of action against Matilde. indorsed the note in blank to him. Is CD still liable to EF
Although Matilde, to whom the plaintiff Bank paid the by virtue of the indorsement in blank? Why?
check,
was not proven to be the author of the supposed forgery, Answer:
yet as last indorser of the check, she has warranted that
A. No. EF cannot claim payment from AB. EF is not When a negotiable instrument has been dishonored by
a holder of the promissory note. To make presentment non-payment, notice of dishonor must be given to each
for payment, it is necessary to exhibit the instrument, indorser, and any indorser to whom such notice is not
which EF cannot do because he is not in possession given is discharged.
thereof.
To protect his rights, C, who received notice of dishonor
B. No, because CD negotiated the instrument by from E, must give notice of dishonor within the time
delivery. (BAR 2002) fixed by the NIL to B to preserve his right of recourse
against prior parties.
2. Parties to Whom Presentment for Payment Should Be
Made C cannot give notice of dishonor to A, who has directly
refused to pay.
1. X executed a promissory note in favor of Y by
way of accommodation. It says: “Pay to Y or order the C cannot give notice of dishonor to D, because C has no
amount of P50,000.00. Signed, X.” Y then indorsed the right to reimbursement from D, who is a subsequent
note to Z, and Z to T. When T sought collection from Y, party who is discharged. (BAR 1984)
the latter countered as indorser that there should have
been a presentment first to the maker who dishonors it. 2. Parties Who May Give Notice and Dishonor
Is Y correct?
1. A issued a promissory note to B in the following tenor:
a. No, since Y is the real debtor and thus, there is “I promise to pay to the order of B P1,000 sixty days
no need for presentment for payment and dishonor by after date. (Sgd.) A”. The note was subsequently
the maker. negotiated with proper indorsement by B to C, C to D,
b. Yes, since as an indorser who is secondarily and D to E, the holder. When E presented the note for
liable, there must first be presentment for payment and payment to A, the latter refused to pay. E then gave a
dishonor by the maker. notice of dishonor to C only.
c. No, since the absolute rule is that there is no
need for presentment for payment and dishonor to hold May E immediately proceed against B, C or D? What
an indorser liable. should C do to protect his rights, if any, against A, B,
d. Yes, since the secondary liability of Y and Z and D?
would only arise after presentment for payment and
dishonor by the maker. Answer:
E may immediately proceed to demand payment only
Answer: from C, to whom notice of dishonor was previously
a. No, since Y is the real debtor and thus, there is given. As notice of dishonor was not given to B and D,
no need for presentment for payment and dishonor by who are parties secondarily liable as indorsers, they are
the maker. (BAR 2011) considered discharged and E may not proceed against
them.
3. Dispensation with Presentment for Payment
4. Dishonor by Non-Payment When a negotiable instrument has been dishonored by
non-payment, notice of dishonor must be given to each
J. Notice of Dishonor indorser, and any indorser to whom such notice is not
given is discharged.
1. Parties to Be Notified
To protect his rights, C, who received notice of dishonor
1. A issued a promissory note to B in the following from E, must give notice of dishonor within the time
tenor: “I promise to pay to the order of B P1,000 sixty fixed by the NIL to B to preserve his right of recourse
days after date. (Sgd.) A”. The note was subsequently against prior parties.
negotiated with proper indorsement by B to C, C to D,
and D to E, the holder. When E presented the note for C cannot give notice of dishonor to A, who has directly
payment to A, the latter refused to pay. E then gave a refused to pay.
notice of dishonor to C only.
C cannot give notice of dishonor to D, because C has no
May E immediately proceed against B, C or D? What right to reimbursement from D, who is a subsequent
should C do to protect his rights, if any, against A, B, party who is discharged. (BAR 1984)
and D?
3. Effect of Notice
Answer:
E may immediately proceed to demand payment only 1. A issued a promissory note to B in the following
from C, to whom notice of dishonor was previously tenor: “I promise to pay to the order of B P1,000 sixty
given. As notice of dishonor was not given to B and D, days after date. (Sgd.) A”. The note was subsequently
who are parties secondarily liable as indorsers, they are negotiated with proper indorsement by B to C, C to D,
considered discharged and E may not proceed against and D to E, the holder. When E presented the note for
them. payment to A, the latter refused to pay. E then gave a
notice of dishonor to C only.
May E immediately proceed against B, C or D? What a. Already knows of the dishonor and it makes no
should C do to protect his rights, if any, against A, B, sense to notify him of it. (BAR 2011)
and D?
7. Effect of Failure to Give Notice
Answer:
E may immediately proceed to demand payment only 1. A issued a promissory note to B in the following tenor:
from C, to whom notice of dishonor was previously “I promise to pay to the order of B P1,000 sixty days
given. As notice of dishonor was not given to B and D, after date. (Sgd.) A”. The note was subsequently
who are parties secondarily liable as indorsers, they are negotiated with proper indorsement by B to C, C to D,
considered discharged and E may not proceed against and D to E, the holder. When E presented the note for
them. payment to A, the latter refused to pay. E then gave a
notice of dishonor to C only.
When a negotiable instrument has been dishonored by
non-payment, notice of dishonor must be given to each May E immediately proceed against B, C or D? What
indorser, and any indorser to whom such notice is not should C do to protect his rights, if any, against A, B,
given is discharged. and D?

To protect his rights, C, who received notice of dishonor Answer:

from E, must give notice of dishonor within the time E may immediately proceed to demand payment only
fixed by the NIL to B to preserve his right of recourse from C, to whom notice of dishonor was previously
against prior parties. given. As notice of dishonor was not given to B and D,
who are parties secondarily liable as indorsers, they are
C cannot give notice of dishonor to A, who has directly considered discharged and E may not proceed against
refused to pay. them.

C cannot give notice of dishonor to D, because C has no When a negotiable instrument has been dishonored by
right to reimbursement from D, who is a subsequent non-payment, notice of dishonor must be given to each
party who is discharged. (BAR 1984) indorser, and any indorser to whom such notice is not
given is discharged.
4. Form of Notice
5. Waiver To protect his rights, C, who received notice of dishonor
6. Dispensation with Notice from E, must give notice of dishonor within the time
fixed by the NIL to B to preserve his right of recourse
1. When is notice of dishonor not required to be against prior parties.
given to the drawer?
C cannot give notice of dishonor to A, who has directly
Answer: refused to pay.
Notice of dishonor not required to be given to the
drawer in any of the following cases: C cannot give notice of dishonor to D, because C has no
right to reimbursement from D, who is a subsequent
1. Where the drawer and the drawee are the same party who is discharged. (BAR 1984)
person;
2. When the drawee is a fictitious person or a K. Discharge of Negotiable Instrument
person not having capacity to contract;
3. When the drawer is the person to whom the 1. Discharge of Negotiable Instrument
instrument is presented for payment;
4. Where the drawer has no right to expect or 1. Bong bought 300 bags of rice from Ben for
require that the drawee or acceptor will honor the P300,000. As payment, Bong indorsed to Ben a BPI check
instrument; issued by Baby in the amount of P300,000. Upon
5. Where the drawer has countermanded payment presentment for payment, the BPI check was dishonored
(BAR 1996) because Baby’s account from which it was drawn has
been closed. To replace the dishonored check, Bong
2. Notice of dishonor is not required to be made in indorsed a crossed DBP check issued also by Baby for
all cases. One instance where such notice is not P300,000. Again, the check was dishonored because of
necessary is when the indorser is the one to whom the insufficient funds. Ben sued Bong and Baby on the
instrument is suppose to be presented for payment. The dishonored BPI check. Bong interposed the defense that
rationale here is that the indorser the BPI check was discharged by novation when Ben
accepted the crossed DBP check as replacement for the
a. Already knows of the dishonor and it makes no BPI check. Bong cited Section 119 of the NIL which
sense to notify him of it. provides that a negotiable instrument is discharged “by
b. Is bound to make the acceptance in all cases. any other act which will discharge a simple contract for
c.Has no reason to expect the dishonor of the the payment of money.” Is Bong correct?
instrument.
d. Must be made to account for all his actions. Answer:
No. Bong is not correct. While Section 119 of the NIL in
Answer: relation to Article 1231 of the Civil Code provides that
one of the modes of discharging a negotiable instrument 1. A check for P50,000 was drawn against drawee
is by any other act which will discharge a simple bank and made payable to XYZ Marketing or order. The
contract for the payment of money, such as novation, the check was deposited with payee’s account at ABC Bank
acceptance by the holder of another check which which then sent the check for clearing to drawee bank.
replaced the dishonored bank check did not result to
novation. Drawee bank refused to honor the check on ground that
the serial number thereof had been altered. XYZ
There are only 2 ways which indicate the presence of Marketing sued drawee bank.
novation and thereby produce the effect of extinguishing Is it proper for the drawee bank to dishonor the check
an obligation by another which substitutes the same. for the reason that it had been altered? Explain. Answer:
First, novation must be explicitly stated and declared in
unequivocal terms as novation is never presumed. No. The serial number is not a material particular of the
Secondly, the old and the new obligation must be check. Its alteration does not constitute material
incompatible on every point. alteration of the instrument. The serial number is not
material to the negotiability of the instrument. (BAR
In the instant case, there was no express agreement that 1999)
the holder’s acceptance of the replacement check will
discharge the drawer and endorser from liability. 2. Effect of Material Alteration
Neither is there incompatibility because both checks
were given precisely to terminate a single obligation 1. In consideration of some goods he bought, A
arising from the same transaction. (BAR 2014) issued to B a personal check in the amount of P280.
Without the knowledge of A, B raised the amount to
P2,800. The alteration is not apparent to the naked eye. B
then deposited the altered check in his account with the
2. Discharge of Parties Secondarily Liable PNB, which released it for clearing. The Bank of P.I.,
which is the drawee bank, did not notice the alteration
1. The rule is that the intentional cancellation of a and the check was therefore cleared.
person secondarily liable results in the discharge of the
latter. With respect to an indorser, the holder’s right to B was able to withdraw the P2,800. After which he
cancel his signature is: closed his account. When A received his bank statement
and cancelled checks for that month, he noticed the
a. Without limitation. discrepancy in the amount when he compared the
b. Not limited to the case where the indorsement is altered check with his check stub. He immediately
necessary to his title. notified the Bank of P.I. in turn demanded recredit from
c. Limited to the case where the indorsement is not the PNB, which cannot now locate B.
necessary to his title. Discuss the rights and liabilities of the parties under the
d. Limited to the case where the indorsement is circumstances. Answer:
necessary to his title. A is entitled to have the Bank of P.I. recredit his account
with P2,520. Under the NIL, a material alteration avoids
Answer: the instrument, except as to those who made, authorized
b. Limited to the case where the indorsement is not or assented to the alteration and subsequent indorsers.
necessary to his title. (BAR 2011) However, where such altered instrument is in the hands
of a holder in due course, not a party to the alteration, he
2. Any agreement binding upon the holder to may enforce payment thereof according to its original
extend the time of payment or to postpone the holder’s tenor. The PNB is a holder in due course as it was not
right to enforce the instrument results in the discharge of aware of the alteration and had paid value for the
the party secondarily liable unless made with the latter’s instrument by virtue of B’s withdrawal of his deposit.
consent. This agreement refers to one which the holder However, under the above provision, material alteration
made with the is a real defense to which even a holder in due course is
subject, except only as to the original tenor. The original
a. Principal debtor tenor of the check was only P280, so as to this amount
b. Principal creditor the PNB cannot be made to pay back the Bank of P.I., it
c. Secondary creditor has no right however to the difference of P2,520 because
d. Secondary debtor of the material alteration. It must therefore pay back to
or recredit the Bank of P.I. this latter amount, and the
Answer: Bank of P.I. on the other hand, must in turn recredit A’s
a. Principal debtor (BAR 2011) account with the same amount. (BAR 1983)

2. Mario Guzman issued to Honesto Santos a check

3. Right of Party Who Discharged Instrument for P50,000 as payment for a second-hand car. Without
4. Renunciation by Holder the knowledge of Mario, Honesto changed the amount
to P150,000 which alteration could not be detected by the
L. Material Alteration naked eye. Honesto deposited the altered check with
Shure Bank which forwarded the same to Progressive
1. Concept Bank for payment. Progressive Bank without noticing
the alteration paid the check, debiting P150,000 from the
account of Mario. Honesto withdrew the amount of
P150,000 from Shure Bank and disappeared. After a. No, he cannot recover from either of them.
receiving his bank statement, Mario discovered the b. Yes from both of them.
alteration and demanded restitution from Progressive c. Yes but only from the drawer.
Bank. d. Yes but only from the holder.
Discuss fully the rights and liabilities of the parties
concerned. Answer: Answer:
The demand of Mario for restitution of the amount of a.No, he cannot recover from either of them. (BAR 2011)
P150,000 to his account is tenable. Progressive Bank has
no right to deduct said amount from Mario’s account 5. A material alteration of an instrument without
since the order of Mario is different. Moreover, the assent of all parties liable thereon results in its
Progressive Bank is liable for the negligence of its avoidance, EXCEPT against a
employees in not noticing the alteration which, though it
cannot be detected by the naked eye, could be detected a. Prior indorsee.
by a magnifying instrument used by tellers. b. Subsequent acceptor.
c. Subsequent indorser.
As between Progressive Bank and Shure Bank, it is the d. Prior acceptor.
former that should bear the loss. Progressive Bank failed
to notify Shure Bank that there was something wrong Answer:
with the check within the clearing hour rule of 24 hours. c. Subsequent indorser. (BAR 2011)
(BAR 1995)
M. Acceptance
3. William issued to Albert a check for P100,000
drawn on XM Bank. Albert alerted the amount of the 1. Definition
check to P210,000, and deposited the check to his 2. Manner
account with ND Bank. When ND Bank presented the
check for payment through the Clearing House, XM 1. X, drawee of a bill of exchange, wrote the words:
Bank honored it. Thereafter, Albert withdrew the “Accepted, with promise to make payment within two
P210,000, and closed his account. day. Signed, X.” The drawer questioned the acceptance
as invalid. Is the acceptance valid?
When the check was returned to him after a month,
William discovered the alteration. XM Bank recredited a. Yes, because the acceptance is in reality a clear
P210,000 to William’s current account, and sought assent to the order of the drawer to pay.
reimbursement from ND Bank. ND Bank refused, b. Yes, because the form of the acceptance is really
claiming that XM Bank failed to return the altered check immaterial.
to it within the 24-hour clearing period. c. No, because the acceptance must be a clear
Who, as between, XM Bank and ND Bank, should bear assent to the order of the drawer to pay.
the loss? Explain. Answer: d. No, because the document must not express that
ND Bank should bear the loss if XM Bank returned the the drawee will perform his promise within two days.
altered check to ND Bank within 24 hours after its
discovery of the alteration. Under the given facts, Answer:
William discovered the alteration when the altered check a. Yes, because the acceptance is in reality a clear
was returned to him after a month. It may safely be assent to the order of the drawer to pay. (BAR 2011)
assumed that William immediately advised XM Bank of
such fact and that William immediately advised XM 3. Time for Acceptance
Bank of such fact and that the latter promptly notified 4. Rules Governing Acceptance
ND Bank thereafter. CB Circular No. 9, as amended, on
which the decisions of the Supreme Court, in the N. Presentment for Acceptance
Hongkong & Shanghai Banking Corporation v. People’s
Bank & Trust Co. and Republic Bank v. CA, et al. were 1. P authorized A to sign a negotiable instrument
based was expressly cancelled and superseded by the CB in his (P’s) name. It reads: “Pay to B or order the sum of
Circular No. 317, dated December 23, 1970. The latter P1 M. Signed, A (for and in behalf of P).” The instrument
was in turn amended by CB Circular No. 580, dated shows that it was drawn on P. B then indorsed to C, C to
September 19, 1977. As to the altered checks, the new D, and D to E. E then treated it as a bill of exchange. Is
rules provide that the drawee bank can still return them presentment for acceptance necessary in this case?
even after 4:00pm of the next day provided it does so
within 24 hours from discovery of the alteration but in a. No, since the drawer and the drawee are the
no event beyond the period fixed or provided by law for same person.
filing of a legal action by the returning bank against the b. No, since the bill is non-negotiable, the drawer
bank sending the same. Assuming that the relationship and drawee being the same person.
between the drawee bank and the collecting bank is c. Yes, since the bill is payable to order,
evidenced by some written document, the prescriptive presentment is required for acceptance.
period would be 10 years. (BAR 1996) d. Yes, in order to hold all persons liable on the
bill.
4. Can the drawee who accepts a materially altered
check recover from the holder and the drawer? Answer:
a. No, since the drawer and the drawee are the asserting that they had never approached Pua to borrow
same person. (BAR 2011) money in 1988 or in 1996. They assert, instead, that Pua
is simply acting at the instance of his sister, Lilian, to file
1. Time/Place/Manner of Presentment a false charge against them using a check left to fund a
2. Effect of Failure to Make Presentment gambling business previously operated by Lilian and
3. Dishonor by Non-Acceptance Caroline. Decide.

O. Promissory Notes Answer:

P. Checks The 17 original checks, completed and delivered to Pua,
are sufficient by themselves to prove the existence of the
1. As payment for good received, Masikap gave to loan obligation of Spouses James to Pua. In Pacheco v.
Humimok on November 3, his check drawn on the Court of Appeals, the Court has expressly recognized
Eternal Bank of Manila. On November 11, Kahusayan that a check “constitutes an evidence of indebtedness”
went to Eternal bank to encash the check. He could not and is a veritable “proof of an obligation.” Hence, it can
cash the check because on November 10, Central Bank be used “in lieu of and for the same purpose as a
forbidden Eternal Bank to do business in the Philippines promissory note.” In fact, in the seminal case of Lozano
on grounds of insolvency. Masikap, Humimok, and v. Martinez, the Court pointed out that a check functions
Kahusayan all reside in Manila. more than a promissory note since it not only contains
an undertaking to pay an amount of money but is an
b) Can Kahusayan still collect from Humimok for the “order addressed to a bank and partakes of a
dental work done on the latter? Explain briefly. representation that the drawer has funds on deposit
against which the check is drawn, sufficient to ensure
Answer: payment upon its presentation to the bank.” The Court
reiterated this rule in Lim v. Mindanao Wines and
b) Kahusayan can still collect from Humimok what may Liquour Galleria stating that “a check, the entries of
be due for the dental work done, since payment by which are in writing, could prove a loan transaction.”
means of check will only produce the effect of payment This is the very same principle underpin Section 24 of
once the instrument is encashed or, by the fault of the the NIL which provides that “every negotiable
holder, it is impaired. (BAR 1986) instrument is deemed prima facie to have been issued
for a valuable consideration; and every person whose
2. A stale check is a check— signature appears thereon to have become a party for
value.” Consequently, the case should be decided in
a) That cannot anymore be paid although the favor of Pua and against Spouses James. (BAR 2014)
underlying obligation still exists;
b) That cannot anymore be paid and the 4. A criminal complaint for violation of BP22 was
underlying obligation under the check is also filed by Foton Motors (Foton), an entity engaged in the
extinguished; business of car dealership, against Pura Felipe (Pura)
c) That can still be negotiated or indorsed so that with the office of the City Prosecutor of Quezon City.
whoever is the holder can claim payment therefrom; The office found probable cause to indict Pura and filed
d) Which has not been presented for payment an information before the MeTC of Quezon City, for her
within a period of 30 days. issuance of a postdated check in the amount of
P1,020,000.00 which was subsequently dishonored upon
Answer: presentment due to “Stop Payment”.
a) That cannot anymore be paid although the underlying
obligation still exists (BAR 2012) Pura issued the check because her son, Freddie, attracted
by a huge discount of P220,000, purchased a Foton
3. Paul George Pua (Pua) filed a complaint for a Blizzard 4x2 from Foton. The term of the transaction was
sum of money against the spouses Benito and Caroline Cash-on-Delivery and no down payment was required.
James (Spouses James). In the complaint, Pua prayed The car was delivered on May 14, 1997, but Freddie
that the defendants pay Pua the amount of P8.5 M failed to pay upon delivery. Despite non-payment,
covered by a check. Pua asserts that defendants owed Freddie took possession of the vehicle.
him a sum of money way back in 1988 for which the
Spouses James gave him several checks. The checks, Pura was eventually acquitted of the charge of violating
however, had all been dishonored and Pua has not been BP 22 but was found civilly liable for the amount of the
paid the amount of the loan plus the agreed interest. In check plus legal interest. Pura appealed the decision as
1996, the Spouses James approached Pua to get the regards the civil liability, claiming that there was no
computation of their liability including the 2% privity of contract between Foton and Pura. No civil
compounded interest. After bargaining to lower the liability could be adjudged against her because of her
amount of their liability, the Spouses James gave Pua a acquittal from the criminal charge. It was Freddie who
postdated check bearing the discounted amount of P8.5 was civilly
M. Like the 1988 checks, the drawee bank likewise
dishonored this check. To prove his allegations, Pua liable to Foton, Pura claimed. Pura added that she could
submitted the original copies of the 17 checks issued by not be an accommodation party either because she only
Caroline in 1988 and the check issued in 1996, came in after Freddie failed to pay the purchase price, or
Manilatrust Check No. 750. The Spouses James, on the 6 months after the execution of the contract between
other hand, completely denied the existence of the debt Foton and Freddie. Her liability was limited to her act of
issuing a worthless check, but by her acquittal in the a) Is a check issued by a manager of a bank for his
criminal charge, there was no more basis for her to be own account;
held civilly liable to Foton. Pura’s act of issuing the b) Is a check issued by a manger of a bank in the
subject check did not, by itself, assume the obligation of name of the bank against the bank itself for the account
Freddie to Foton or automatically make her a party to of the bank;
the contract. Is Pura liable? c) Is like any ordinary check that needs to be
presented for payment also;
Answer: d) Is better than a cashier’s check in terms of use
Yes. Pura is liable. The rule is that every act or omission and effect.
punishable by law has its accompanying civil liability.
The civil aspect of every criminal case is based on the Answer:
principle that every person criminally liable is also b) Is a check issued by a manger of a bank in the name of
civilly liable. If the accused however, is not found to be the bank against the bank itself for the account of the
criminally liable, it does not necessarily mean that she bank. (BAR 2012)
will not likewise be held civilly liable because extinction
of the penal action does not carry with it extinction of b. Cross Check
civil action. Although Pura was not an accommodation
party, she cannot escape civil liability. In cases of 1. Po Press issued in favor of Jose a postdated
violation of BP 22, a special law, the intent in issuing a crossed check, in payment of newsprint which Jose
check is immaterial. Pura issued the bouncing check. promised to deliver. Jose sold and negotiated the check
Thus, regardless of her intent, she remains civilly liable to Excel Inc. at a discount. Excel did not ask Jose the
because the act or omission, the making and issuing of purpose of crossing the check. Since Jose failed to deliver
the subject check, from which her civil liability arises. the newsprint, Po ordered the drawee bank to stop
(BAR 2014) payment on the check.

1. Definition Efforts of Excel to collect from Po failed. Excel wants to

know from you as counsel:
1. A. Define the following: (1) a check.
1. What are the effects of crossing a check?
B. You are Pedro Cruz. Draft the appropriate contract 2. Whether as second indorser and holder of the
language for (1) your check, containing the essential crossed check, is it a holder in due course?
elements of a negotiable instrument. 3. Whether Po’s defense of lack of consideration as
against Jose is also available as against Excel?
Answer:
(A) A check is a bill of exchange drawn on a bank Answer:
payable on demand. 1. The effects of crossing a check are:

(B) Check— a)The check is for deposit only in the account of the
“September 15, 2002 payee.
b) The check may be indorsed only once in favor of
“Pay to the order of Juan Santos the sum of TEN a person who has an account with the bank.
THOUSAND PESOS (P10,000.00), Philippine currency. c) The check is issued for a specific purpose and
the person who takes it not in accordance with said
(Signed) Pedro Cruz purpose does not become a holder in due course and is
not entitled to payment thereunder.
To: Philippine National Bank
Escolta, Manila Branch” (BAR 2002) 2. No. It is a crossed check and Excel did not take it
in accordance with the purpose for which the check was
2. A check is— issued. Failure on its part to inquire as to said purpose,
prevented Excel from becoming a holder in due course,
a) A bill of exchange; as such failure or refusal constituted bad faith.
b) The same as a promissory note;
c) Is drawn by a maker; 3. Yes. Not being a holder in due course, Excel is
d) A non-negotiable instrument subject to the personal defense which Po Press can set up
against Jose. (BAR 1994)
Answer:
a) A bill of exchange. (BAR 2012) 2. On October 12, 1993, Chelsea Straights
(CHELSEA), a corporation engaged in the manufacture
2. Kinds of cigarettes, ordered from Moises Lim 2,000 bales of
a. Manager’s Check tobacco. CHELSEA issued to Moises Lim 2 crossed
checks postdated March 15, 1994 and April 15, 1994 in
1. In payment for his debt in favor of X, Y gave X a full payment therefor. On January 19, 1994 Moises Lim
Manager’s Check in the amount of P100,000 dated May sold to Dragon Investment House (DRAGON) at a
30, 2012. Which phrase best completes the statement—A discount the 2 checks drawn by CHELSEA in his favor.
Manager’s Check:
Moises Lim failed to deliver the bales of tobacco as warning to the drawee bank that payment must be made
agrees despite CHELSEA’s demand. Consequently, on to the right party, otherwise the bank has no authority to
March 1, 1994 CHELSEA issued a “stop payment” order use the drawer’s funds deposited with the bank. To be
on the 2 checks issued to Moises Lim. DRAGON, assured that it will avoid any mistake in paying to the
wrong party, banks adopted the policy that crossed
claiming to be a holder in due course, filed a complaint checks must be deposited in the payee’s account. When
for collection against CHELSEA for the value of the withdrawal is made, the banks can be sure that they are
checks. paying to the right party. Later, jurisprudence added to
Rule on the complaint of DRAGON. Give your legal the development of crossed checks in that the crossing
basis. Answer: becomes a warning also to whoever deals with the said
DRAGON cannot collect from CHELSEA. The instrument to inquire as to the purpose of its issuance.
instruments are crossed checks which were intended to Otherwise, if something wrong happens to the payment
pay for the thereof, that person cannot claim to be a holder in due
2,000 bales of tobacco to be delivered by Moises Lim. It course. Hence, he is subject to the personal defense on
was therefore the obligation of DRAGON to inquire as the part of the drawer that there is breach of trust
to the purpose of the issuance of the 2 crossed checks committed by the payee in not complying with the
before causing them to be discounted. Failure on its part drawer’s instruction. (BAR 2005)
to make such inquiry, which resulted in its bad faith,
DRAGON cannot claim to be a holder in due course. 3. Stopping Payment
Moreover, the checks were sold, not endorsed, by him to
DRAGON which did not become a holder in due course. 1. Mr. Lim issued a check drawn against BPI Bank
Not being a holder in due course, DRAGON is subject to in favor of Mr. Yu as payment for certain shares of stock
the personal defense on the part of CHELSEA which he purchased. On the same day that he issued the
concerning the breach of trust on the part of Moises Lim check to Mr. Yu, Mr. Lim ordered BPI to stop payment.
in not complying with his obligation to deliver the 2,000 Per standard banking practice, Mr. Lim was made to
bales of tobacco. (BAR 1995) sign a waiver of BPI’s liability in the event that it should
pay Mr. Yu through oversight or inadvertence. Despite
3. What are the effects of crossing a check? the stop order by Mr. Lim, BPI nevertheless paid Mr. Yu
upon presentation of the check. Mr. Lim sued BPI for
Answer: The effects of crossing a check are as follows: paying his order. Decide the case.

1. The check may not be encashed but only Answer:

deposited in a banks; In the event that Mr. Lim, in fact, had sufficient legal
2. The check may be negotiated only once to one reasons to issue the stop payment order, he may sue BPI
who has an account with a bank; for paying against his order. The waiver executed by Mr.
3. The act of crossing a check serves as a warning Lim did not mean that it need not exercise due diligence
to the holder thereof that the check has been issued for a to protect the interest of its account holder. It is not
definite purpose so that the holder must inquire if he has amiss to state that the drawee, unless the instrument had
received the check pursuant to that purpose, otherwise earlier been accepted by it, is not bound to honor
he is not a holder in due course. (BAR 1996) payment to the holder of the check that thereby excludes
it from any liability if it were to comply with the stop
4. Distinguish clearly (1) crossed checks from payment order. (BAR 1991)
cancelled checks; and (2) cash bond from surety bond.
4. Presentment for Payment
Answer: a. Time
A crossed check is one with two parallel lines drawn b. Effect of Delay
diagonally across its face or across a corner thereof. On
the other hand, a cancelled check is one marked or
stamped “paid” and/or “cancelled” by or on behalf of a
drawee bank to indicate payment thereof.

A surety bond is issued by a surety or insurance

company in favor of a designated beneficiary, pursuant
to which such company acts as a surety to the debtor or
obligor of such beneficiary.

A cash bond is a security in the form of cash established

by a guarantor or surety to secure the obligation of
another. (BAR 2004)

5. What is a crossed check? What are the effects of

crossing a check? Explain.

Answer:
A crossed check is a check with 2 parallel lines, written
diagonally on the upper right corner thereof. It is a