NEGOTIABLE INSTRUMENTS LAW (RED NOTES)

REQUISITES OF NEGOTIABILITY [1980, 1989, 1993,1996, 1997, 2000, 2002,

2003]
Rule: The accepted rule is that the negotiability or non-negotiability of an
instrument is determined from the writing, that is, from the face of the instrument
itself. (Caltex Phil. Vs. CA)

1) Q:
Which of the following stipulations or features of a promissory note (PN)
affect or do not affect its negotiability, assuming that the PN is otherwise
negotiable? Indicate your answer by writing the paragraph number of the stipulation
or feature of the PN as shown below and your corresponding answer, either
"Affected" or "Not affected." Explain.
a)
b)

c)
d)

The date of the PN is "February 30, 2002."

The PN bears interest payable on the last day of each calendar quarter
at a rate equal to five percent (5%) above the then prevailing 91-day
Treasury Bill rate as published at the beginning of such calendar
quarter.
The PN gives the maker the option to make payment either in money or
in quantity of palay of equivalent value,
The PN gives the holder the option either to-require payment in money
or to require the maker to serve as the bodyguard or escort of the
holder for 30 days.

specifying the address, which happens to be his residence. TH accepted the

promissory note as payment for services he rendered to SH, who in turn received the
note from Juan Tan as payment for a prepaid cellphone card worth 450 pesos. The
payee acknowledged having received the note on August 1, 2000. A Bar reviewee
had told TH, who happens to be your friend, that TH is not a holder in due course
under Article 52 of Negotiable Instruments Law (Act 2031) and therefore does not
enjoy the rights and protection under the statute. TH ask for your advice specifically
in connection with the note being undated and not mentioning a place of payment
and any consideration. What would your advice be?

A:
The fact that the instrument is undated and does not mention the place of
payment does not militate against its being negotiable. The date and place of
payment are not material particulars required to make an instrument negotiable.
The fact that no mention is made of any consideration is not material.
Consideration is presumed.

3) Q:
A promissory note reads as follows: I promise to pay Gabriela Silangan
P100.00 three years after the unconditional withdrawal of the U.S. of its military
bases in the Philippines.
(a) Discuss the negotiability or non-negotiability of the above note.
(b) Discuss the effect of each of the following upon the note's negotiability:
1) No date is given
2) The places where drawn and where payable are not stated. (1988)

A:
a) Negotiability is "NOT AFFECTED". The date is not one of the requirements
for negotiability.
b) Negotiability is "NOT AFFECTED". The Interest is to be computed at a particular
time and is determinable. It does not make the sum uncertain or the
promise conditional.
c) Negotiability is "AFFECTED". Giving the maker the option renders the promise
conditional.
d) Negotiability is "NOT AFFECTED". Giving the option to the holder does
not make the promise conditional.

2) Q:
TH is an indorsee of a promissory note that simply states: PAY TO JUAN
TAN OR ORDER 400 PESOS. The note has no date, no place of payment and no
consideration mentioned. It was signed by MK and written under his letterhead

A:
(a) The promissory note, is not a negotiable instrument. Section 1 of the
Negotiable instruments Law requires among other things, for an instrument to be
negotiable, that it must be payable to order or to bearer. Without being so payable,
the note is not a negotiable instrument (Consolidated Plywood Industries vs. IFC
Leasing,)
The phrase "unconditional withdrawal of the U.S. of its military bases in
the Philippines" may not be considered as being opposed to the requirement that
the instrument must contain "an unconditional promise or order to pay" since the
presence in the country of the bases is merely temporary and that their ultimate
removal from the Philippines is just a matter of time (See Sec. 4, Negotiable
Instruments Law).

(b) (1) The negotiability of an instrument is not adversely affected by its

being undated. (See. 6(a)) Even if it is needed to determine the maturity of the
instrument, the holder is implicitly authorized to place the date thereof (See.13,
Negotiable Instruments Law) or to consider it dated as of its issue (See. 17, Ibid).
2) For the negotiability of a promissory note it is not necessary that it must
express the place where it is made or where it is payable. All that is required under
the Negotiable Instruments Law is compliance with Section 1 thereof. (Sec. 6(c)).

ACCOMMODATION PARTY [1985, 1995, 1998, 2003]

Rule: In accommodation transactions recognized by the Negotiable Instruments
Law, an accommodating party lends his credit to the accommodated party, by
issuing or indorsing a check which is held by a payee or indorsee as a holder in due
course, who gave full value therefor to the accommodated party. The latter, in
other words, receives or realizes full value which the accommodated party then
must repay to the accommodating party, unless of course the accommodating
party intended to make a donation to the accommodated party. But the
accommodating party is bound on the check to the holder in due course who is
necessarily a third party and is not the accommodated party. Having issued or
indorsed the check, the accommodating party has warranted to the holder in due
course that he will pay the same according to its tenor. (TRAVEL-ON VS. CA)

1) Q:
Susan Kawada borrowed P500,000 from XYZ bank which required her,
together with Rose Reyes, who did not receive any amount from the bank, to
execute a promissory note payable to the bank, or its order, on stated maturities.
The note was executed as so agreed. What kind of liability was incurred by Rose,
that of an accommodation party or that of a solidary debtor? Explain

A:
The liability incurred by Rose Reyes was that of an accommodation party,
as provided for in Section 29 of the NIL. An accommodation party is one who has
signed the instrument as maker, drawer, acceptor or indorser without receiving
value therefor and for the purpose of lending his name to some other person. In this
case, Rose did not receive any amount from the bank when she signed as a comaker of the promissory note. She merely participated therein in order to fulfill the
requirement imposed by the bank. It is presumed that se executed the instrument
for the purpose of lending her name to ensure the approval of the loan.

To settle the case extra-judicially, Juan Sy paid the sum of P20,000.00 and for the
balance of P5,000.00, he executed a promissory note for said amount with Ben
Lopez as an accommodation party. Juan Sy paid the balance.
1)
2)

What is the liability of Ben Lopez as an accommodation party? Explain.

What is the liability of Juan Sy?

A:
1) Ben Lopez, as an accommodation party, is liable as maker to the holder
up to the sum of P5,000.00 even if he did not receive any consideration for the
promissory note. This is the nature of accommodation. But Ben Lopez can ask for
reimbursement from Juan Sy, the accommodated party.

2) Juan Sy is liable to the extent of P5,000.00 in the hands of a holder in

due course (Sec. 14, NIL). If Ben Lopez paid the promissory note, Juan Sy has the
obligation to reimburse Ben Lopez for the amount paid. If Juan Sy pays directly to
the holder of the promissory note, or he pays Ben Lopez for the reimbursement of
the payment by the latter to the holder, the instrument is discharged.

INDORSEMENT BY A MINOR; NON-NEGOTIABLE INSTRUMENT [1989, 1998]

Rule: Only an instrument qualifying as a negotiable instrument under the relevant
statute may be negotiated either by indorsement thereof coupled with delivery, or
by delivery alone where the negotiable instrument is in bearer form. A negotiable
instrument may, however, instead of being negotiated, also be assigned or
transferred. (Sesbreno vs. CA)
1) Q:
X makes a promissory note for P500.00 payable to A, a minor, to help him
buy school books. A indorses the note to B who, in turn, indorses the note to C. C
knows As minority. If C sues X on the note, can X set up the defenses of minority
and lack of consideration?

A:
No. The promissory note not being payable to order or to bearer is not a
negotiable instrument. Accordingly, the transferee merely steps into the shoes of
the transferor and,
being merely a successor-in-interest, has no right greater than that of the
transferor. X may thus set up against C the possible defenses of (without delving
into their merits) minority and lack of consideration (see Consolidated Plywood vs.

2) Q:
Juan Sy purchased from A Appliance Center one (1) generator set on
installment with chattel mortgage in favor of the vendor. After getting hold of the
generator set, Juan Sy immediately sold it without consent of the vendor. Juan Sy
was criminally charged with estafa.

IFC Leasing, G.R. 72593, 30 April 1987).

LIABILITY ON INDORSEMENT IN RELATION TO FORGERY [1983, 1984, 1987,

1997, 1989]

Rule: Where a check is drawn payable to the order of one person and is presented
to a bank by another and purports upon its face to have been duly indorsed by the
payee of the check, it is the duty of the bank to know that the check was duly
indorsed by the original payee, and where the Bank pays the amount of the check to
a third person, who has forged the signature of the payee, the loss falls upon the
bank who cashed the check, and its only remedy is against the person to whom it
paid the money.(Republic Bank vs. Ebrada)

1) Q:
A delivers a bearer instrument to B. B then specially indorses it to C and C
later indorses it in blank to D. E steals the instrument from D and, forging the
signature of D, succeeds in negotiating it to F who acquires the instrument in good
faith and for value.
a) If, for any reason, the drawee bank refuses to honor the check, can F enforce the
instrument against the drawer?
b) In case of the dishonor of the check by both the drawee and the drawer, can F
hold any of B, C and D liable secondarily on the instrument?
A:
a) Yes. The instrument was payable to bearer as it was a bearer instrument.
It could be negotiated by mere delivery despite the presence of special
endorsements. The forged signature is unnecessary to presume the juridical relation
between or among the parties prior to the forgery and the parties after the forgery.
The only party who can raise the defense of forgery against a holder in due course is
the person whose signature is forged.
b) Only B and C can be held liable by F. The instrument at the time of
forgery was payable to bearer, being a bearer instrument. Moreover, the instrument
was indorsed in blank by C to D. D, whose signature was forged by E cannot be held
liable by F.
2) Q:
Alex issued a negotiable promissory note (PN) payable to Benito or order in
payment of certain goods. Benito indorsed the PN to Celso in payment of an
existing obligation. Later Alex found the goods to be defective. While in Celsos
possession the PN was stolen by Dennis who forged Celsos signature and
discounted 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 the PN from Alex, the latter refused to pay. Dennis could no longer be
located.

2) Celso has the right to collect from Alex and Benito. Celso is a party
subsequent to the two. However, Celso has no right to claim against Felix who is a
party subsequent to Celso. (Secs. 60 and 66, NIL)
3) Q:
A issued a promissory note payable to B or bearer. A delivered the note to
B. B indorsed the 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 E
who in turn delivered the note to F, a holder in due course, without indorsement.
Discuss the individual liabilities to F of A, B, and C.

A:
A is liable to F. As the maker of the promissory note, A is directly or
primarily liable to F, who is a holder in due course. Despite the presence of the
special indorsements on the note, these do not detract from the fact that a bearer
instrument, like the promissory note in question, is always negotiable by mere
delivery, until it is indorsed restrictively "For Deposit Only. "
B, as a general endorser, is liable to F secondarily, and warrants that the instrument
is genuine and in all respects what it purports to be; that he has good title to it; that
all prior parties had capacity to contract; that he has no knowledge of any fact which
would impair the validity of the instrument or render it valueless; that at the time of
his indorsement, the instrument is valid and subsisting; and that on due
presentment, it shall be accepted or paid, or both, according to its tenor, and that if
it be dishonored and the necessary proceedings on dishonor be duly taken, he will
pay the amount thereof to the holder, or to any subsequent indorser who may be
compelled to pay.
C is not liable to F since the latter cannot trace his title to the former. The
signature of C in the supposed indorsement by him to D was forged by X. C can raise
the defense of forgery since it was his signature that was forged.

Alternative Answer:
As a general endorser, B is secondarily liable to F.

1)
2)

What are the rights of Felix, if any, against Alex, Benito, Celso and
Edgar? Explain.
Does Celso have any right against Alex, Benito and Felix? Explain.

A:
1) Felix has no right to claim against Alex, Benito and Celso who are parties
prior to the forgery of Celsos signature by Dennis. Parties to the instrument who
are such prior to the forgery cannot be held liable by any party who became such at
or subsequent to the forgery. However, Edgar, who became a party to the
instrument subsequent to the forgery and who indorsed the same to Felix, can be
held liable by the latter. (Sec. 124, NIL)

C is liable to F since it is due to the negligence of C in placing the note in his drawer
that enabled X to steal the same and forge the signature of C relative to the
indorsement in favor of D. As between C and F who are both innocent parties, it is C
whose negligence is the proximate cause of the loss. Hence, C should suffer the loss.

4) Q:
Adam makes a note payable to Bert or to order. Bert indorses the note to
Cora. Douglas steals the note and indorses it to Elvin by forging Coras signature.
Elvin then indorses the note to Felix who is not aware of the forgery. What is the
right of Felix against Adam, Bert, Cora, Douglas and Elvin?

A:
On the assumption that Bert made a blank endorsement, thereby
rendering the instrument payable to bearer in the hands of Cora, the latter's
signature would be unnecessary so as to preserve the juridical relation between
parties prior to the forgery and parties after the forgery. On the further assumption
that Felix had acquired the instrument for value, thus making him a holder in due
course, he may accordingly hold Adam, Bert and Douglas liable. The liability of
Adam, as maker, and Douglas, as forger, is primary and that of Bert, as blank
indorser, secondary. If, however, Felix did not acquire it for value and is not thus a
holder in due course, he then acquires no right greater than that of the immediate
transferor and, Adam; Bert and Cora would he without any liability in favor of Felix.
On the assumption that Bert made a special indorsement, the signature of
Cora would be essential to pass title to the instrument. Her signature, forged by
Douglas would be inoperative, and Elvin, whether a holder in due course which is
forged is required to pass title, all parties prior to the forgery may raise the real
defense of forgery against all parties subsequent thereto (Secs. 23, 40, 52, 65-67,
NIL; see Republic Bank vs. Ebrada, 65 SCRA 680).

LIABILITY OF A DRAWEE BANK VIS--VIS A COLLECTING BANK ON FORGED

OR ALTERED CHECKS [1983, 1987, 1995, 1996, 1999]
Rule: The bank on which a check is drawn, known as the drawee bank, is under
strict liability to pay the check to the order of the payee. The drawer's instructions
are reflected on the face and by the terms of the check. Payment under a forged
indorsement is not to the drawer's order. When the drawee bank pays a person
other than the payee, it does not comply with the terms of the check and violates
its duty to charge its customer's (the drawer) account only for properly payable
items. Since the drawee bank did not pay a holder or other person entitled to
receive payment, it has no right to reimbursement from the drawer. The general
rule then is that the drawee bank may not debit the drawer's account and is not
entitled to indemnification from the drawer. The risk of loss must perforce fall on
the drawee bank. (Associated Bank vs. CA)
1) Q:
B "forged "A's" signature as drawer of a check drawn on Citibank. The
check was purportedly payable to the order of "B". "B" then indorsed the check to
"C", a holder in due course, who deposited the same to his account with Bank of
P.I. The check passed through the normal course of clearing and accordingly the
drawee, Citibank, credited the collecting bank, Bank of P.I., with the amount of the
check which Citibank in turn debited from "A's" deposit account. Upon receiving
his monthly statement from Citibank, together with the cancelled checks debited
from his deposit account, "A" discovered the forgery.

A:
(a) "A"
forged check, he
signature totally
knowledge of the
should suffice).

can compel Citibank to re-credit to his account the amount of the

being not a party to the instrument. Forgery renders the forged
inoperative. Additionally, the drawee bank is charged with
drawer's signature. (Note: Any of the above reasons, it is believed,

(b)Citibank has no right of recourse against Bank of P.I. Having gone

through "the normal course of clearing", the latter can assume that the check was
properly drawn by the drawer. The drawee bank is charged with knowledge of the
drawer's signature. The negligence, if at all, is attributed more to Citibank than with
the Bank of P.I.
Note: An answer stating that such recourse by Citibank may be had against Bank of
P. I. because having gone through "the normal course of clearing" the latter must
be deemed to have warranted or guaranteed previous indorsements, it is believed,
should likewise be given credit. In PNB vs. BPI (G.R. 27838, 4 August 1986), the
Supreme Court had recognized the practice of guaranteeing such indorsements in
accordance with the Bankers' Association's Rules that may have influenced an
examinee to apply the rule to all prior parties.
(c) Recourse may be had by either against "C" as indorser because of his
warranty. In the case particularly of Bank of P.I., its right of recourse may be based
likewise on the agency rule that puts the risk of loss on the principal (Bank of P.I.).

Alternative Answer:
(c) If ever Bank of P.I. is held liable, it can proceed against C as an indorser
under the latter's warranty.
Citibank, as drawee, cannot proceed against C, as indorser, under the doctrine
of comparative negligence. Under the facts, it is the negligence of Citibank, which
had access to the signature specimen of the drawer, which is the proximate cause of
the loss. As between Citibank and C, the former is more negligent than the latter
and it is the former's negligence that gave rise to the loss.

(a) Can "A" compel Citibank to re-credit to his account the amount of the
forged check?
(b) Does Citibank in turn have a recourse against the collecting bank, Bank
of P.I. ? Explain.
(c) Can Citibank or Bank of P. I., as the case may be, proceed against "C as
indorser? Explain.

2) Q:
Mario Guzman issued to Honesto Santos a check for P50,000.00 as
payment for a second-hand car. Without knowledge of Mario, Honesto changed the
amount to P150,000.00 which alteration could not be detected by the naked eye.
Honesto deposited the altered check with Shure Bank which forwarded the same to
Progressive Bank for payment. Progressive Bank without noticing the alteration paid
the check, debiting P150,000.00 from the account of Mario. Honesto withdrew the
amount of P150,000.00 from Shure Bank and disappeared. After receiving his bank

statement, Mario discovered

Progressive Bank.

the alteration and demanded restitution from

Discuss fully the rights and liabilities of the parties.

A:
Yes. A can be held liable to C, assuming that the latter gave notice of
dishonor to A. This is a case of an incomplete instrument but delivered as it was
entrusted to B, the secretary of A. Moreover, under the doctrine of comparative
negligence, it was the negligence of A in entrusting the check to B which is the
proximate cause of the loss.
HOLDER IN DUE COURSE [1986, 1994, 1996, 2000]

A:
The demand of Mario for restitution of the amount of P150,000.00 to his
account is tenable. Progressive Bank has no right to deduct said amount from
Marios account since the order of Mario is different. Moreover, Progressive Bank is
liable for the negligence of its employees in not noticing the alteration which, though
it cannot be detected by the naked eye, could be detected by a magnifying
instrument used by tellers.
As between Progressive Bank and Shure Bank, it is the former that should bear the
loss. Progressive failed to notify Shure that there was something wrong with the
check within the clearing hour rule of twenty-four hours.

3) Q:
Placido, a bank depositor left a checkbook on his house. Unknown to him,
a visitor at the time, noticing the same, took a check therefrom , filled it up in the
amount of P3,000.00 and succeeded in encashing the check the same day.
Placidos account was thereby debited in the same amount.
Discovering the erroneous debit, Placido demanded that the bank credit
him with a like amount. The bank refused on the ground that Placido was negligent
in leaving the checkbook on his desk so that he could not put up the defense of
forgery or want of authority under the Negotiable Instruments Law.
The facts disclose that even to the naked eye, there were marked
differences between Placidos signature and the check forged by the visitor.
As between Placido and the bank, who should bear the loss? Explain
A:
The bank should bear the loss. A drawee bank must exercise the highest
diligence in safeguarding the accounts of its client-depositors. The bank is also
charged with genuiness of the signature of its current account holders. But what
can be made more striking is that there were marked differences between Placidos
signature and the one in the check forged by the visitor. Certainly Placido was not
negligent in leaving the checkbook on his own desk (PNB v. Quimpo 158 SCRA 582)
FORGERY BY AN EMPLOYEE; DOCTRINE OF COMPARATIVE NEGLIGENCE
[1997, 2004]
Rule: The negligence of a depositor which will prevent recovery of an unauthorized
payment is based on failure of the depositor to act as a prudent businessman
would under the circumstances. (GEMPESAW VS. CA)
1) Q:
A, single proprietor of a business concern, is about to leave for a business
trip and, as he often does on these occasions, signs several checks in blank. He
instructs B, his secretary, to safe keep the checks and fill them out when and as
required to pay accounts during his absence. B fills out one of the checks by placing
her name as payee, fills in the amount, endorses and delivers the check to C who
accepts it in good faith as payment for goods sold to B. B regrets her action and tells
A what she did. A directs the Bank in time to dishonor the check. When C encashed
the check, it was dishonored.
Can A be held liable to C?

Rule: As the holder's title was defective or suspicious, it cannot be stated that the
payee acquired the check without knowledge of said defect in holder's title, and for
this reason the presumption that it is a holder in due course or that it acquired the
instrument in good faith does not exist. And having presented no evidence that it
acquired the check in good faith, it (payee) cannot be considered as a holder in due
course. (De Ocampo vs. Gatchalian)

1) Q:
1) PN makes a promissory note for P 5,000.00, but leaves the name of the
payee in blank because he wanted to verify its correct spelling first. He mindlessly
left the note on top of his desk at the end of the workday. When he returned the
following morning, the note was missing. It turned up later when X presented it to
PN for payment. Before X, T, who turned out to have flinched the note from PNs
office, had endorsed the note after inserting his own name in the blank space as the
payee. PN dishonored the note, contending that he did not authorize its completion
and delivery. But X said he had no participation in, or knowledge about, the pilferage
and alteration of the note and therefore he enjoys the rights of a holder in due
course under the Negotiable Instruments Law. Who is correct and why?
2) Can the payee in a promissory note be a holder in due course within the
meaning of the Negotiable Instruments Law (Act 2031)? Explain your answer?

A:
1) PN is right. The instrument is incomplete and undelivered. It did not
create any contract that would bind PN to an obligation to pay the amount thereof.

2) A payee in a promissory note cannot be a holder in due course within

the meaning of the Negotiable Instruments Law, because a payee is an immediate
party in relation to the marker. The payee is subject to whatever defenses, real or
personal, available to the marker of the promissory note.

Alternative Answer:
2) A payee can be a holder in due course. A holder is defined as the
payee or indorsee of the instrument who is in possession of it. Every holder is
deemed prima facie to be a holder in due course.

2) Q:
Eva issued to Imelda a check in the amount of P50,000 post-dated
September 30, 1995, as security for a diamond ring to be sold on commission. On
September 15, 1995, Imelda negotiated the check to MT Investment which paid the
amount of P40,000 to her.
Eva failed to sell the ring, so she returned it to Imelda on September 19, 1995.
Unable to retrieve her check, Eva withdrew her funds from the drawee bank. Thus,
when MT Investment presented the check for payment, the drawee bank
dishonored it. Later on, when MT Investment sued her, Eva raised the defense of
absence of consideration, the check having been issued merely as security for the
ring that she could not sell.
Does Eva have a valid defense? Explain.
A:
No. Eva does not have a valid defense. MT Investment is a holder in due
course and as such, holds the post-dated check free from any defect of title of prior
parties and from defenses available to prior parties among themselves. Eva can
invoke the defense of absence of consideration against MT Investment only if the
latter was privy to the purpose for which the checks were issued and, therefore, not
a holder in due course. Second, it is not a ground for the discharge of the postdated check as against a holder in due course that it was issued merely as a
security. The only grounds for the discharge of a negotiable instrument are those
set forth in Section 119 of the NIL and none of those grounds are available to Eva.
The latter may not unilaterally discharge herself from her liability by the mere
expediency of withdrawing funds from the drawee bank.

Dong holds himself secondarily liable to Emma since the latter derived title
under Dong's special indorsement but not to Fe who acquired the instrument only by
delivery (See. 40, Ibid).
Emma, not being an indorser is not secondarily liable to Fe. Emma's only
possible source of liability to Fe would be for a breach of warranty but the facts in
the problem do not disclose any such breach. (See. 40 Ibid.)
Secondary liability requires due notice of dishonor, unless excused, which
we assume had properly been observed.

CROSSED CHECKS [1985, 1994, 1995, 1996, 1997, 2002]

Rule: In order to preserve the credit worthiness of chocks, jurisprudence has
pronounced that crossing of a check should have the following effects: (a) the check
may not be encashed but only deposited in the bank; (b) the check may be
negotiated only once-to one who has an account with a bank; (c) and the act of
crossing the check serves as warning to the holder that the check has been issued
for a definite purpose so that he must inquire if he has received the check pursuant
to that purpose, otherwise, he is not a holder in due course. (BATAAN CIGAR &
CIGARETTE FACTORY VS. CA)

LIABILITY OF INDORSERS [1982, 1989, 2002]

Rule: The collecting bank or last endorser generally suffers the loss because it has
the duty to ascertain the genuineness of all prior endorsements considering that the
act of presenting the check for payment to the drawee is an assertion that the party
making the presentment has done its duty to ascertain the genuineness of the
endorsements. (BPI vs. CA and Napiza)

1) Q:
Po Press issued in favor of Jose a postdated crossed check in payment of
newsprint which Jose promised to deliver. Jose sold and negotiated the check to
Excel Inc. at a discount. Excel did not ask Jose the purpose of crossing the check.
Since Jose failed to deliver the newsprint, Po ordered the drawee bank to stop
payment on the check.
Efforts of Excel to collect from Po failed. Excel wants to know from you as counsel:

1) Q:
Anna makes a promissory note payable to bearer and delivers it to Bing. In
turn, Bing negotiates it by mere delivery to Carmen, who endorses it specially to
Dong. Dong negotiates it by special indorsement to Emma, who negotiates it to Fe
by mere delivery. Anna did not pay. To whom are Bing, Carmen, Dong, and Emma
liable? Explain your answer fully.

A:
Bing, not being an indorser, may only he held liable for breach of warranty
but the facts in the problem do not disclose any such breach.
Carmen, under her special indorsement, may he held secondarily liable by
Dong and Emma since the latter (Dong and Emma) derived title under Carmen's
special indorsement. Carmen is not secondarily liable to Fe since the latter obtained
it by mere delivery from Emma and therefore did not obtain title through Carmen's
special indorsement (see Sec. 40, Negotiable Instruments Law).

1) What are the effects of crossing a check?

2) Whether as a second indorser and holder of the crossed check, is it a holder in
due course?
3) Whether Pos defense of lack of consideration as against Jose is also available as
against Excel?

A:

1) The effects of crossing a check are:

a) The check is for deposit only in the account of the payee.

b) The check may be indorsed only once in favor of a person who has an account
with a bank.

c)The check is issued for a specific purpose and the person who takes it not in
accordance with said purpose does not become a holder in due course and is not
entitled to payment thereunder.

2) No. It is a crossed check and excel did not take it in accordance with the
purpose for which the check was issued. Failure on its part to inquire as to said
purpose, prevented Excel from becoming a holder in due course, as such failure or
refusal constituted bad faith.

date of the check, Mr. Pablo discounted it with Mr. Noble. On due date, Mr. Noble
deposited the check with his bank. The check was dishonored. Mr. Noble sued Mr.
Pablo. The court dismissed Mr. Nobles complaint. Was courts decision correct?

A:
Yes, the check is crossed. It should have forwarded Mr. Noble that it was
issued for a specific purpose. Hence, Mr. Noble could not be a holder in due course.
He is subject to the personal defense of breach of trust by Mr. Pablo. Such defense
is available in favor of Mr. Carlos against Mr. Noble.

________________________________________________________________________________

3) Yes. Not being a holder in due course, Excel is subject to the personal
defense which Po Press can set up against Jose. (State Investment House v. IAC, 175
SCRA 310)

2) Q:
On 12 October 1993, Chelsea Straights (CHELSEA), a corporation engaged
in the manufacture of cigarettes, ordered from Moises Lim 2,000 bales of tobacco.
CHELSEA issued to Moises Lim two crossed checks postdated 15 March 1994 and 15
April 1994 in full payment therefore. On 19 January 1994 Moises Lim sold to Dragon
Investment House (DRAGON) at a discount the two checks drawn by CHELSEA in his
favor.
Moises Lim failed to deliver the bales of tobacco as agreed despite CHELSEAs
demand. Consequently, on 1 March 1994 CHELSEA issued a stop payment order
on the two checks issued to Moises Lim. DRAGON, claiming to be a holder in due
course, filed a compliant for collection against CHELSEA for the value of the checks.
Rule on the complaint of DRAGON. Give your legal advice.

A:
DRAGON cannot collect from CHELSEA. The instruments are crossed
checks which were intended to pay for the 2,000 bales of tobacco to be delivered by
Moises Lim. It was therefore the obligation of DRAGON to inquire as to the purpose
of the issuance of the two crossed checks before causing them to be discounted.
Failure on its part to make such inquiry, which resulted in its bad faith. Dragon
cannot claim to be a holder in due course. Moreover, the checks were sold, not
endorsed, by him to DRAGON which did not become a holder in due course. Not
being a holder in due course, DRAGON is subject to the personal defense on the part
of CHELSEA concerning the breach of trust on the part of Moises Lim in not
complying with his obligation to deliver the 2,000 bales of tobacco.

3) Q:
Mr. Pablo sought to borrow P200,000.00 from Mr. Carlos. The latter agreed
to loan the amount in the form of a post-dated chech which was crossed (with two
parallel lines diagonally drawn on the top left portion of the check. Before the due

Checks; Liability; Drawee Bank (1995)

Mario Guzman issued to Honesto Santos a check for P50th as payment for a 2nd
hand car. Without the knowledge of Mario, Honesto changed the amount to P150th
which alteration could not be detected by the naked eye. Honesto deposited the
altered check with Shure Bank which forwarded the same to Progressive Bank for
payment. Progressive Bank without noticing the alteration paid the check, debiting
P150th from the account of Mario. Honesto withdrew the amount of P15th from
Shure Bank and disappeared. After receiving his bank statement, Mario discovered
the alteration and demanded restitution from Progressive Bank. Discuss fully the
rights and the liabilities of the parties concerned.
SUGGESTED ANSWER:
The demand of Mario for restitution of the amount of P150,000 to his account is
tenable. Progressive Bank has no right to deduct said amount from Marios account
since the order of Mario is different. Moreover, Progressive Bank is liable for the
negligence of its employees in not noticing the alteration which, though it cannot be
detected by the naked eye, could be detected by a magnifying instrument used by
tellers.
As between Progressive Bank and Shure Bank, it is the former that should bear the
loss. Progressive Bank failed to notify Shure Bank that there was something wrong
with the check within the clearing hour rule of 24 hours.
Checks; Material Alterations; Liability (1999)
A check for P50,000.00 was drawn against drawee bank and made payable to XYZ
Marketing or order. The check was deposited with payees account at ABC Bank
which then sent the check for clearing to drawee bank. Drawee bank refused to
honor the check on ground that the serial number thereof had been altered. XYZ
marketing sued
drawee bank.
A.

Is it proper for the drawee bank to dishonor the check for the reason that it
had been altered? Explain (2%)

B.

In instant suit, drawee bank contended that XYZ Marketing as payee could
not sue the drawee bank as there was no privity between then. Drawee
theorized that there was no basis to make it liable for the check. Is this
contention correct? Explain. (3%)

SUGGESTED ANSWER:
A. No. The serial number is not a material particular of the check. Its alteration
does not constitute material alteration of the instrument. The serial number
is not material to the negotiability of the instrument.

B.

Yes. As a general rule, the drawee is not liable under the check because
there is no privity of contract between XYZ Marketing, as payee, and ABC
Bank as the drawee bank. However, if the action taken by the bank is an
abuse of right which caused damage not only to the issuer of the check but
also to the payee, the payee has a cause of action under quasi-delict.

Defenses; Forgery (2004)

CX maintained a checking account with UBANK, Makati Branch. One of his checks in
a stub of fifty was missing. Later, he discovered that Ms. DY forged his signature and
succeeded to encash P15,000 from another branch of the bank. DY was able to
encash the check when ET, a friend, guaranteed due execution, saying that she was
a holder in due course. Can CX recover the money from the bank? Reason briefly.
(5%)
SUGGESTED ANSWER:
Yes, CX can recover from the bank. Under Section 23 of the Negotiable Instruments
Law, forgery is a real defense. The forged check is wholly inoperative in relation to
CX. CX cannot be held liable thereon by anyone, not even by a holder in due course.
Under a forged signature of the drawer, there is no valid instrument that would give
rise to a contract which can be the basis or source of liability on the part of the
drawer. The drawee bank has no right or authority to touch the drawer's funds
deposited with the drawee bank.
Forgery; Liabilities; Prior & Subsequent Parties (1990)
Jose loaned Mario some money and, to evidence his indebtedness, Mario executed
and delivered to Jose a promissory note payable to his order. Jose endorsed the note
to Pablo. Bert fraudulently obtained the note from Pablo and endorsed it to Julian by
forging Pablos signature. Julian endorsed the note to Camilo.
a. May Camilo enforce the said promissory note against Mario and
Jose?
b. May Camilo go against Pablo?
c. May Camilo enforce said note against Julian?
d. Against whom can Julian have the right of recourse?
SUGGESTED ANSWER:
A. Camilo may not enforce said promissory note against Mario and Jose. The
promissory note at the time of forgery being payable to order, the signature
of Pablo was essential for the instrument to pass title to subsequent
parties. A forged signature was inoperative (Sec 23 NIL).Accordingly, the
parties before the forgery are not juridically related to parties after the
forgery to allow such enforcement.
B. Camilo may not go against Pablo, the latter not having indorsed the
instrument.
C. Camilo may enforce the instrument against Julian because of his special
indorsement to Camilo, thereby making him secondarily liable, both being
parties after the forgery.
D. Julian, in turn, may enforce the instrument against Bert who, by his forgery,
has rendered himself primarily liable.
E. Pablo preserves his right to recover from either Mario or Jose who remain
parties juridically related to him. Mario is still considered primarily liable to
Pablo. Pablo may, in case of dishonor, go after Jose who, by his special
indorsement, is secondarily liable.
Forgery; Liabilities; Prior & Subsequent Parties (1995)

Alex issued a negotiable PN (promissory note) payable to Benito or order in payment

of certain goods. Benito indorsed the PN to Celso in payment of an existing
obligation. Later Alex found the goods to be defective. While in Celsos possession
the PN was stolen by Dennis who forged Celsos signature and discounted 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 the PN from
Alex the latter refused to pay. Dennis could no longer be located.
A.
B.

What are the rights of Felix, if any, against Alex, Benito, Celso and Edgar?
Explain
Does Celso have any right against Alex, Benito and Felix? Explain.

SUGGESTED ANSWER:
A. Felix has no right to claim against Alex, Benito and Celso who are parties
prior to the forgery of Celsos signature by Dennis. Parties to an instrument
who are such prior to the forgery cannot be held liable by any party who
became such at or subsequent to the forgery. However, Edgar, who became
a party to the instrument subsequent to the forgery and who indorsed the
same to Felix, can be held liable by the latter.
B.

Celso has the right to collect from Alex and Benito. Celso is a party
subsequent to the two. However, Celso has no right to claim against Felix
who is a party subsequent to Celso (Sec 60 and 66 NIL)

Incomplete & Delivered (2004)

AX, a businessman, was preparing for a business trip abroad. As he usually did in the
past, he signed several checks in blank and entrusted them to his secretary with
instruction to safeguard them and fill them out only when required to pay accounts
during his absence. OB, his secretary, filled out one of the checks by placing her
name as the payee. She filled out the amount, endorsed and delivered the check to
KC, who accepted it in good faith for payment of gems that KC sold to OB. Later, OB
told AX of what she did with regrets. AX timely directed the bank to dishonor the
check.
Could AX be held liable to KC? Answer and reason briefly. (5%)
SUGGESTED ANSWER:
Yes. AX could be held liable to KC. This is a case of an incomplete check, which has
been delivered. Under
Section 14 of the Negotiable Instruments Law, KC, as a holder in due course, can
enforce payment of the check as if it had been filled up strictly in accordance with
the authority given by AX to OB and within a reasonable time.
Incomplete and Delivered (2005)
Brad was in desperate need of money to pay his debt to Pete, a loan shark. Pete
threatened to take Brads life if he failed to pay. Brad and Pete went to see Seorita
Isobel, Brads rich cousin, and asked her if she could sign a promissory note in his
favor in the amount of P10,000.00 to pay Pete. Fearing that Pete would kill Brad,
Seorita
Isobel acceded to the request. She affixed her signature on a piece of paper with the
assurance of Brad that he will just fill it up later. Brad then filled up the blank paper,
making a promissory note for the amount of P100,000.00. He then indorsed and
delivered the same to Pete, who accepted the note as payment of the debt.
What defense or defenses can Seorita Isobel set up against Pete? Explain. (3%)

SUGGESTED ANSWER:
The defense (personal defense) which Seorita Isobel can set up against Pete is that
the amount of P100,000.00 is not in accordance with the authority given to her to
Brad (in the presence of Pete) and that Pete was not a holder in due course for
acting in bad faith when accepted the note as payment despite his knowledge that it
was only 10,000.00 that was allowed by Seorita Isobel during their meeting with
Brad.
Incomplete Instruments; Incomplete Delivered
Instruments vs. Incomplete Undelivered Instrument (2006)
Jun was about to leave for a business trip. As his usual practice, he signed several
blank checks. He instructed Ruth, his secretary, to fill them as payment for his
obligations. Ruth filled one check with her name as payee, placed P30,000.00
thereon, endorsed and delivered it to Marie. She accepted the check in good faith as
payment for goods she delivered to Ruth. Eventually, Ruth regretted what she did
and apologized to Jun. Immediately he directed the drawee bank to dishonor the
check. When Marie encashed the check, it was dishonored.
A.
B.

Is Jun liable to Marie? (5%)

Supposing the check was stolen while in Ruth's possession and a thief filled
the blank check, endorsed and delivered it to Marie in payment for the
goods he purchased from her, is Jun liable to Marie if the check is
dishonored? (5%)

SUGGESTED ANSWER
A. Yes. This covers the delivery of an incomplete instrument, under Section 14
of the Negotiable Instruments Law, which provides that there was prima
facie authority on the part of Ruth to fill-up any of the material particulars
thereof. Having done so, and when it is first completed before it is
negotiated to a holder in due course like Marie, it is valid for all purposes,
and Marie may enforce it within a reasonable time, as if it had been filled
up strictly in accordance with the authority given.
B.

No. Even though Marie is a holder in due course, this is an incomplete and
undelivered instrument, covered by Section 15 of the Negotiable
Instruments Law. Where an incomplete instrument has not been delivered,
it will not, if completed and negotiated without authority, be a valid
contract in the hands of any holder, as against any person, including Jun,
whose signature was placed thereon before delivery. Such defense is a real
defense even against a holder in due course, available to a party like Jun
whose signature appeared prior to delivery.

Negotiability; Holder in Due Course (1992)

Perla brought a motor car payable on installments from Automotive Company for
P250th. She made a down payment of P50th and executed a promissory note for the
balance. The company subsequently indorsed the note to Reliable Finance
Corporation which financed the purchase. The promissory note read: For value
received, I promised to pay Automotive Company or order at its office in Legaspi
City, the sum of P200,000.00 with interest at twelve (12%) percent per annum,
payable in equal installments of P20,000.00 monthly for ten (10) months starting
October 21, 1991.
Manila September 21, 1991.
(sgd) Perla

Pay to the order of Reliable Finance Corporation. Automotive Company

By: (Sgd) Manager
Because Perla defaulted in the payment of her installments, Reliable Finance
Corporation initiated a case against her for a sum of money. Perla argued that the
promissory note is merely an assignment of credit, a non-negotiable instrument
open to all defenses available to the assignor and, therefore, Reliable Finance
Corporation is not a holder in due course.
a. Is the promissory note a mere assignment of credit or a negotiable
instrument? Why?
b. Is Reliable Finance Corp a holder in due course? Explain briefly.
SUGGESTED ANSWER:
a. The promissory note in the problem is a negotiable instrument,
being in compliance with the provisions of Sec 1 NIL. Neither the
fact that the payable sum is to be paid with interest nor that the
maturities are in stated installments renders uncertain the amount
payable (Sec 2 NIL).
b.

Yes, Reliable Finance Corporation is a holder in due course given

the factual settings. Said corporation apparently took the
promissory note for value, and there are no indications that it
acquired it in bad faith.

Negotiability; Requisites (2000)

1. MP bought a used cell phone from JR. JR preferred cash but MP is a friend so
JR accepted MRs promissory note for P10,000. JR thought of converting the
note into cash by endorsing it to his brother KR. The promissory note is a
piece of paper with the following hand-printed notation: MP WILL PAY JR
TEN THOUSAND PESOS IN PAYMENT FOR HIS CELLPHONE 1 WEEK FROM
TODAY. Below this notation MPs signature with 8/1/00 next to it,
indicating the date of the promissory note. When JR presented MPs note to
KR, the latter said it was not a negotiable instrument under the law and so
could not be a valid substitute for cash. JR took the opposite view, insisting
on the notes negotiability. You are asked to referee. Which of the opposing
views is correct?
SUGGESTED ANSWER:
KR is right. The promissory note is not negotiable. It is not issued to order
or bearer. There is no word of negotiability containing therein. It is not
issued in accordance with Section 1 of the Negotiable Instruments Law.
2.

TH is an indorsee of a promissory note that simply states: PAY TO JUAN

TAN OR ORDER 400 PESOS. The note has no date, no place of payment and
no consideration mentioned. It was signed by MK and written under his
letterhead specifying the address, which happens to be his residence. TH
accepted the promissory note as payment for services rendered to SH, who
in turn received the note from Juan Tan as payment for a prepaid cell phone
card worth 450 pesos. The payee acknowledged having received the note
on August 1, 2000. A Bar reviewee had told TH, who happens to be your
friend, that TH is not a holder in due course under Article 52 of the
Negotiable Instruments Law (Act 2031) and therefore does not enjoy the
rights and protection under the statute. TH asks for our advice specifically

in connection with the note being undated and not mentioning a place of
payment and any consideration. What would your advice be? (2%).
SUGGESTED ANSWER:
The fact that the instrument is undated and does not mention the place of
payment does not militate against its being negotiable. The date and place
of payment are not material particulars required to make an instrument
negotiable.
The fact that no mention is made of any consideration is not material.
Consideration is presumed.
Negotiable Instruments; Bearer Instruments (1997)
A delivers a bearer instrument to B. B then specially indorses it to C and C later
indorses it in blank to D. E steals the instrument from D and, forging the signature of
D, succeeds in negotiating it to F who acquires the instrument in good faith and
for value.
a. If, for any reason, the drawee bank refuses to honor the check, can
F enforce the instrument against the drawer?
b. In case of the dishonor of the check by both the drawee and the
drawer, can F hold any of B, C and D liable secondarily on the
instrument?
SUUGESTED ANSWER:
a. Yes. The instrument was payable to bearer as it was a bearer
instrument. It could be negotiated by mere delivery despite the
presence of special indorsements. The forged signature is unnecessary
to presume the juridical relation between or among the parties prior to
the forgery and the parties after the forgery. The only party who can
raise the defense of forgery against a holder in due course is the
person whose signature is forged.
b.

Only B and C can be held liable by F. The instrument at the time of the
forgery was payable to bearer, being a bearer instrument. Moreover,
the instrument was indorsed in blank by C to D. D, whose signature
was forged by E cannot be held liable by F.

Negotiable Instruments; bearer instruments; liabilities of

maker and indorsers (2001)
A issued a promissory note payable to B or bearer. A delivered the note to B. B
indorsed the 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 Cs signature. D indorsed the note to E
who in turn delivered the note to F, a holder in due course, without indorsement.
Discuss the individual liabilities to F of A, B and C. (5%)
SUGGESTED ANSWER:
A is liable to F. As the maker of the promissory note, A is directly or primarily liable
to F, who is a holder in due course. Despite the presence of the special indorsements
on the note, these do not detract from the fact that a bearer instrument, like the
promissory note in question, is always negotiable by mere delivery, until it is
indorsed restrictively For Deposit Only.
B, as a general indorser, is liable to F secondarily, and warrants that the
instrument is genuine and in all respects what it purports to be; that he has good
title to it; that all prior parties had capacity to contract; that he has no knowledge of

any fact which would impair the validity of the instrument or render it valueless; that
at the time of his indorsement, the instrument is valid and subsisting; and that on
due presentment, it shall be accepted or paid, or both, according to its tenor, and
that if it be dishonoured and the necessary proceedings on dishonour be duly taken,
he will pay the amount thereof to the holder, or to any subsequent indorser who
may be compelled to pay.
C is not liable to F since the latter cannot trace his title to the former. The
signature of C in the supposed indorsement by him to D was forged by X. C can raise
the defense of forgery since it was his signature that was forged.
Negotiable Instruments; incomplete and undelivered
instruments; holder in due course (2000)
PN makes a promissory note for P5,000.00, but leaves the name of the payee in
blank because he wanted to verify its correct spelling first. He mindlessly left the
note on top of his desk at the end of the workday. When he returned the following
morning, the note was missing. It turned up later when X presented it to PN for
payment. Before X, T, who turned out to have filched the note from PNs office, had
endorsed the note after inserting his own name in the blank space as the payee. PN
dishonored the note, contending that he did not authorize its completion and
delivery. But X said he had no participation in, or knowledge about, the pilferage and
alteration of the note and therefore he enjoys the rights of a holder in due course
under the Negotiable Instruments Law.
a.
b.

Who is correct and why? (3%)

Can the payee in a promissory note be a holder in due course within the
meaning of the Negotiable Instruments Law (Act 2031)? Explain your
answer. (2%)

SUGGESTED ANSWER:
a. PN is right. The instrument is incomplete and undelivered. It did not create
any contract that would bind PN to an obligation to pay the amount thereof.
b.

A payee in a promissory note cannot be a holder in due course within

the meaning of the Negotiable Instruments Law, because a payee is an
immediate party in relation to the maker. The payee is subject to whatever
defenses, real of personal, available to the maker of the promissory note.
Negotiable Instruments; Incomplete DeliveredInstruments; Comparative
Negligence (1997)
A, single proprietor of a business concern, is about to leave for a business trip and,
as he so often does on these occasions, signs several checks in blank. He instructs
B, his secretary, to safekeep the checks and fill them out when and as required to
pay accounts during his absence. B fills out one of the checks by placing her name
as payee, fills in the amount, endorses and delivers the check to C who accepts it in
good faith as payment for goods sold to B. B regrets her action and tells A what she
did. A directs the Bank in time to dishonor the check.
When C encashes the check, it is dishonored. Can A be held liable to C?
SUGGESTED ANSWER:
Yes, A can be held liable to C, assuming that the latter gave notice of dishonor to A.
This is a case of an incomplete instrument but delivered as it was entrusted to B, the
secretary of A. Moreover, under the doctrine of comparative negligence, as between
A and C, both innocent parties, it was the negligence of A in entrusting the check to
B which is the proximate cause of the loss.

Parties; Accommodation Party (1990)

To accommodate Carmen, maker of a promissory note, Jorge signed as indorser
thereon, and the instrument was negotiated to Raffy, a holder for value. At the time
Raffy took the instrument, he knew Jorge to be an accommodation party only. When
the promissory note was not paid, and Raffy discovered that Carmen had no funds,
he sued Jorge.
Jorge pleads in defense the fact that he had endorsed the instrument without
receiving value therefor, and the further fact that Raffy knew that at the time he
took the instrument Jorge had not received any value or consideration of any kind
for his indorsement. Is Jorge liable? Discuss.
SUGGESTED ANSWER:
Yes. Jorge is liable. Sec 29 of the NIL provides that an accommodation party is liable
on the instrument to a holder for value, notwithstanding the holder at the time of
taking said instrument knew him to be only an accommodation party.
This is the nature or the essence of accommodation.
Parties; Accommodation Party (1991)
On June 1, 1990, A obtained a loan of P100th from B, payable not later than
20Dec1990. B required A to issue him a check for that amount to be dated
20Dec1990. Since he does not have any checking account, A, with the knowledge of
B, requested his friend, C, President of Saad Banking Corp (Saad) to accommodate
him. C agreed, he signed a check for the aforesaid amount dated 20Dec 1990,
drawn against Saads account with the ABC Commercial Banking Co. The By-laws of
Saad requires that checks issued by it must be signed by the President and the
Treasurer or the Vice-President. Since the Treasurer was absent, C requested the
Vice-President to co-sign the check, which the latter reluctantly did. The check was
delivered to B. The check was dishonored upon presentment on due date for
insufficiency of funds.
a. Is Saad liable on the check as an accommodation party?
b. If it is not, who then, under the above facts, is/are the
accommodation party?
SUGGESTED ANSWER:
a. Saad is not liable on the check as an accommodation party. The act of the
corporation in accommodating a friend of the President, is ultra vires
(Crisologo-Jose v CA GR 80599, 15Sep1989). While it may be legally
possible for the corporation, whose business is to provide financial
accommodations in the ordinary course of business, such as one given by a
financing company to be an accommodation party, this situation, however,
is not the case in the bar problem.
b.

Considering that both the President and Vice-President were signatories to

the accommodation, they themselves can be subject to the liabilities of
accommodation parties to the instrument in their personal capacity.

Parties; Accommodation Party (1996)

Nora applied for a loan of P100th with BUR Bank. By way of accommodation, Noras
sister, Vilma, executed a promissory note in favor of BUR Bank. When Nora
defaulted, BUR Bank sued Vilma, despite its knowledge that Vilma received no part
of the loan. May Vilma be held liable? Explain.

SUGGESTED ANSWER:
Yes, Vilma may be held liable. Vilma is an accommodation party. As such, she is
liable on the instrument to a holder for value such as BUR Bank. This is true even if
BUR Bank was aware at the time it took the instrument that Vilma is merely an
accommodation party and received no part of the loan.
Parties; Accommodation Party (1998)
For the purpose of lending his name without receiving value therefore, Pedro makes
a note for P20,000 payable to the order of X who in turn negotiates it to Y, the latter
knowing that Pedro is not a party for value.
a.
b.

May Y recover from Pedro if the latter interposes the absence of

consideration? (3%)
Supposing under the same facts, Pedro pays the said P20,000 may he
recover the same amount from X? (2%)

SUGGESTED ANSWER:
a. Yes. Y can recover from Pedro. Pedro is an accommodation party. Absence
of consideration is in the nature of an accommodation. Defense of absence
of consideration cannot be validly interposed by accommodation party
against a holder in due course.
b.

If Pedro pays the said P20,000 to Y, Pedro can recover the amount from X. X
is the accommodated party or the party ultimately liable for the instrument.
Pedro is only an accommodation party. Otherwise, it would be unjust
enrichment on the part of X if he is not to pay Pedro.

Parties; Accommodation Party (2003)

Susan Kawada borrowed P500,000 from XYZ Bank which required her, together with
Rose Reyes who did not receive any amount from the bank, to execute a promissory
note payable to the bank, or its order on stated maturities. The note was executed
as so agreed. What kind of liability was incurred by Rose, that of an accommodation
party or that of a solidary debtor? Explain. (4%)
SUGGESTED ANSWER:
Rose may be held liable. Rose is an accommodation party. Absence of consideration
is in the nature of an accommodation. Defense of absence of consideration cannot
be validly interposed by accommodation party against a holder in due course.
Parties; Holder in Due Course (1993)
Larry issued a negotiable promissory note to Evelyn and authorized the latter to fill
up the amount in blank with his loan account in the sum of P1,000. However, Evelyn
inserted P5,000 in violation of the instruction. She negotiated the note to Julie who
had knowledge of the infirmity. Julie in turn negotiated said note to Devi for value
and who had no knowledge of the infirmity.
a. Can Devi enforce the note against Larry and if she can, for how
much? Explain.
b. Supposing Devi endorses the note to Baby for value but who has
knowledge of the infirmity, can the latter enforce the note against
Larry?
SUGGESTED ANSWER:
a. Yes, Devi can enforce the negotiable promissory note against Larry
in the amount of P5,000. Devi is a holder in due course and the
breach of trust committed by Evelyn cannot be set up by Larry

against Devi because it is a personal defense. As a holder in due

course, Devi is not subject to such personal defense.
b.

Yes. Baby is not a holder in due course because she has

knowledge of the breach of trust committed by Evelyn against
Larry which is just a personal defense. But having taken the
instrument from Devi, a holder in due course, Baby has all the
rights of a holder in due course. Baby did not participate in the
breach of trust committed by Evelyn who filled the blank but filled
up the instrument with P5,000 instead of P1,000 as instructed by
Larry (Sec 58 NIL).

Parties; Holder in Due Course (1998)

X makes a promissory note for P10,000 payable to A, a minor, to help him buy
school books. A endorses the note to B for value, who in turn endorses the note to C.
C knows A is a minor. If C sues X on the note, can X set up the defenses of minority
and lack of consideration? (3%)
SUGGESTED ANSWER:
Yes. C is not a holder in due course. The promissory note is not a negotiable
instrument as it does not contain any word of negotiability, that is, order or bear, or
words of similar meaning or import. Not being a holder in due course, C is to subject
such personal defenses of minority and lack of consideration. C is a mere assignee
who is subject to all defenses.
Parties; Holder in Due Course; Indorsement in blank
(2002)

as payee. XL indorsed the note to PN for goods bought by XL. The note mentions the
place of payment on the specified maturity date as the office of the corporate
secretary of PX Bank during banking hours. ON maturity date, RP was at the
aforesaid office 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, plus interest and costs. Will the suit
prosper? Explain. (5%)
SUGGESTED ANSWER:
Yes. The suit will prosper as far as the face value of the note is concerned, but not
with respect to the interest due subsequent to the maturity of the note and the costs
of collection. RP was ready and willing to pay the note at the specified place of
payment on the specified maturity date, but PN did not show up. PN lost his right to
recover the interest due subsequent to the maturity of the note and the costs of
collection.
___________________________________________________________
D. INCOMPLETE DELIVERED INSTRUMENT
20. Larry issued a negotiable promissory note to Evelyn and authorized the latter to
fill up the amount in blank with his loan account in the sum of P1,000.00.
However, Evelyn inserted P5,000.00 in violation of the instruction. She
negotiated the note to Julie who had knowledge of the infirmity. Julie, in
turn, negotiated said note to Devi for value and who had no knowledge of
the infirmity. Can Devi enforce the note against Larry, and if she can,
for how much?Supposing Devi indorses the note to Baby for value but

a.

b.

AB issued a promissory note for P1,000 payable to CD or his order on

September 15, 2002. CD indorsed the note in blank and delivered the same
to EF. GH stole the note from EF and on September 14, 2002 presented it to
AB for payment. When asked by AB, GH said CD gave him the note in
payment for two cavans of rice. AB therefore paid GH P1,00 on the same
date. On September 15, 2002, EF discovered that the note of AB was not in
his possession and he went to AB. It was then that EF found out that AB had
already made payment on the note. Can EF still claim payment from AB?
Why? (3%)
As a sequel to the same facts narrated above, EF, out of pity for AB who
had already paid P1,000.00 to GH, decided to forgive AB and instead go
after CD who indorsed the note in blank to him. Is CD still liable to EF by
virtue of the indorsement in blank? Why? (2%)

SUGGESTED ANSWER:
a. No. EF cannot claim payment from AB. EF is not a holder of the promissory
note. To make the presentment for payment, it is necessary to exhibit the
instrument, which EF cannot do because he is not in possession thereof.
b.

who has knowledge of the infirmity, can the latter enforce the note against
Larry? Explain [1993 Bar Examination].
1) Yes, Devi can enforce the negotiable promissory note against Larry in the amount
of P5,000. Devi is a holder in due course and the breach of trust committed by
Evelyn cannot be set up by Larry against Devi because it is a personal defense. As a
holder in due course, Devi is not subject to such personal defense.
2.Yes. Baby is not a holder in due course because she has knowledge of the breach
of trust committed by Evelyn against Larry which is just a personal defense.
But having taken the instrument from Devi, a holder in due course, Baby
has all the rights of a holder in due course. Baby did not participate in the
breach of trust committed by Evelyn who filled the blank but filled up the
instrument with P5,000 instead of P1,000 as instructed by Larry

No, because CD negotiated the instrument by delivery.

E. INCOMPLETE UNDELIVERED INSTRUMENT

Place of Payment (2000)

PN is the holder of a negotiable promissory note within the meaning of the
Negotiable Instruments Law (Act 2031). The note was originally issued by RP to XL

22. PN makes a promissory note for P5,000.00, but leaves the name of the payee in
blank because he wanted to verify its correct spelling first. He mindlessly
left the note on top of his desk at the end of the workday. When he returned
the following morning, the note was missing. It turned up later when X
presented it to PN for payment. Before X, T, who turned out to have filched
the note from PNs office, had endorsed the note after inserting his own
name in the blank space as the payee. PN dishonored the note, contending
that he did not authorize its completion and delivery. But X said he had no

a) Yes. The instrument was payable to bearer as it was a bearer instrument. It could
be negotiated by mere delivery despite the presence of special indorsements. The
forged signature is unnecessary to presume the juridical relation between or among
the parties prior to the forgery and the parties after the forgery. The only party who
can raise the defense of forgery against a holder in due course is the person whose
signature is forged.
b) Only B and C can be held liable by F. The instrument at the time of the forgery
was payable to bearer, being a bearer instrument. Moreover, the instrument was
indorsed in blank by C to D. D, whose signature was forged by E cannot be held
liable by F.

participation in, or knowledge about, the pilferage and alteration of the

note and therefore he enjoys the rights of a holder in due course under the
Negotiable Instruments Law. Who

is correct and

why? [2000 Bar

INCIDENTS

Examination].
a.PN is right. The instrument is incomplete and undelivered. It did not create any

M. NEGOTIATION

contract that would bind PN to an obligation to pay the amount thereof.

b. A payee in a promissory note cannot be a holder in due course within the
meaning of the Negotiable Instruments Law, because a payee is an
immediate party in relation to the maker. The payee is subject to whatever
defenses, real of personal, available to the maker of the promissory note.

47. Richard Clinton makes a promissory note payable to bearer and deliverrs the
same to Autora Page. The latter, however, endorses it to X in this manner:
Payable to X, Signed: Aurora Page. Later, X, without endorsing the
promissory note, transfers and delivers the same to Napoleon. The note is
subsequently dishonored by Richard Clinton. May Napoleon proceed against
Richard Clinton for the note? [1998 Bar Examinations].

F. FORGERY

27. A delivers a bearer instrument to B. B then specially indorses it to C, and C later

indorses it in blank to D. E steals the instrument from D and, forging the
signature of D, succeeds in negotiating it to F who acquires the
instrument in good faith and for value. If, for any reason, the drawee bank
refuses to honor the check, can F enforce the instrument against the
drawer? In case of the dishonor of the check by both the drawee and the
drawer, can F hold any of B, C and D liable secondarily on the instrument?
[1997 Bar Examinations].

Yes. Richard Clinton is liable to Napoleon under the promissory note. The note made
by Richard Clinton is a bearer instrument. Despite special indorsement made by
Aurora Page thereon, the note remained a bearer instrument and can be negotiated
by mere delivery. When X delivered and transferred the note to Napoleon, the
latter became a holder thereof. As such holder, Napoleon can proceed against Richa