NEGOTIABLE INSTRUMENTS LAW | SECOND EXAM POINTERS | RM SANTIAGO 1

NEGOTIABLE INSTRUMENTS III. NEGOTIATION

MEMORY AID AND POINTERS

SECOND EXAM SECTION 30. What constitutes negotiation

An instrument is negotiated
• When it is transferred from one person to
II. CONSIDERATION
another
• In such manner as to constitute
SECTION 24. Presumption of consideration • The transferee the holder thereof.
Every negotiable instrument If payable to bearer, it is negotiated
Is deemed prima facie: • By delivery;
• To have been issued for a valuable If payable to order, it is negotiated
consideration • By the indorsement of the holder
• And every person whose signature appears • And completed by delivery
thereon
o To have become a party thereto for SECTION 40. Indorsement of instrument
value. payable to bearer
Where an instrument
SECTION 25. Value, what constitutes
Payable to bearer
Value is any consideration Is indorsed specially
• Sufficient to support a simple contract. • It may nevertheless be
An o Further negotiated by delivery
• Antecedent, or But the person indorsing specially
• Pre-existing debt • Is liable as indorser
Constitutes value • To only such holders
And is deemed such o As make title
Whether the instrument is ▪ Through his indorsement
• Payable on demand or
• At a future time
IV. RIGHTS OF THE HOLDER
SECTION 28. Effect of want of consideration
Absence or KINDS OF HOLDERS
1. Holders strictly (51)
Failure of consideration
2. Holder for value (26)
• Is a matter of defense
3. Holder in due course (52)
• As against any person NOT a holder in due
course,
SECTION 51. Right of holder to sue; payment
And partial failure of consideration
• Is a defense pro tanto The holder of a negotiable instrument
• Whether the failure • May sue thereon in his own name
o Is an ascertained or liquidated And payment to him in due course
amount • Discharges the instrument
o Or otherwise
Section 52. What constitutes a
SECTION 29. Liability of holder in due course
accommodation party A holder in due course
An accommodation party is one Is a holder who has taken the instrument
• Who has signed the instrument as Under the following conditions
o Maker (a) That it is complete and regular upon its face;
o Drawer (b) That he became the holder of it
o Acceptor • Before it was overdue,
o Or indorser • And without notice
• Without receiving value therefor o That it had been previously
• And for the purpose of lending his name to dishonored
some other person. o If such was the fact;
Such a person is liable on the instrument to a (c) That he took it in good faith and for value;
• Holder for value (d) That at the time it was negotiated to him
o Notwithstanding such holder, • He had no notice of
o At the time of taking the instrument o Any infirmity on the instrument
o Knew him only to be an o Or defect in the title of the person
accommodation party negotiating it.
 NEGOTIABLE INSTRUMENTS LAW | SECOND EXAM POINTERS | RM SANTIAGO 2

SECTION 58. When subject to original defense SECTION 61. Liability of Drawer
In the hands of any holder The drawer
• Other than a holder in due courses By drawing the instrument
A negotiable instrument • Admits the existence of the payee
• Is subject to the same defense o And his then capacity to indorse;
o As if it were non-negotiable. • And engages that,
But the holder o On due presentment,
• Who derives his title through a holder in due o The instrument will be
course ▪ Accepted or
• And who is not himself a party ▪ Paid, or
o To any fraud or illegality affecting ▪ Both,
the instrument • According to its
• Has all the rights of such former holder tenor
o In respect of all parties prior to the • And that if it be dishonored
latter o And the necessary proceedings on
dishonor be duly taken,
SECTION 59. Who is deemed a o He will pay the amount thereof
holder in due course ▪ To the holder
Every holder is deemed prima facie to be a holder in ▪ Or to any subsequent
due course indorser who may be
But when it is shown that compelled to pay it.
• The title of any person • But the drawer may insert in the
o Who has negotiated the instrument instrument
o Was defective o An express stipulation
The burden is on the holder o Negativing or
• To prove that o Limiting
o He or ▪ His own liability to the
o Some person under whom he claims holder.
▪ Acquired the title
▪ As holder in due course Section 62. Liability of Acceptor
But the last mentioned rule does not apply The acceptor
• In favor of a party By accepting the instrument:
• Who became bound on the instrument • Engages that he will pay it
o Prior to the acquisition o According to the tenor of
▪ Of such defective title ▪ His acceptance
• And admits:
• (a) The existence of the drawer,
IV. LIABILITIES OF PARTIES
o The genuineness of his signature,
o And his capacity and authority to
LIABILITIES draw the instrument; and
The terms liability refers to the obligation of a party to • (b) The existence of the payee
a negotiable instrument to pay the same. o And his then capacity to indorse.

1. Primarily Liable
KINDS OF INDORSERS
a. Maker of a promissory note (60)
1. Irregular indorser (64)
b. Acceptor of a bill of exchange (62)
2. Indorser delivery or qualified indorsement (65)
c. Certifier of a check
3. General indorser (unqualified) (66)
4. Indorser of bearer instruments (67) (65/66)
2. Secondarily Liable
a. Drawer of a bill of exchange (61)
Section 65. Warranty where negotiation by
b. Indorser of a note or bill
delivery and so forth
3. Not Liable Every person negotiating an instrument
a. Drawee who does not accept the bill of • By delivery [in case of bearer instruments]
exchange • Or by a qualified indorsement
Warrants:
SECTION 60. Liability of Maker (a) That the instrument is genuine and in all
The maker of a negotiable instrument respects what it purports to be;
By making it (b) That he has good title to it;
• Engages that he will pay it (c) That all prior parties had capacity to contract;
o According to its tenor; (d) That he has no knowledge of any fact which
• And admits the existence of the payee; would impair the validity of the instrument or
o And his then capacity to indorse. render it valueless
 NEGOTIABLE INSTRUMENTS LAW | SECOND EXAM POINTERS | RM SANTIAGO 3

But when the negotiation is by delivery only [2] A holder with rights
• The warranty extends in favor of no holder A collecting bank’s practice of guaranteeing “all prior
• Other than the immediate transferee indorsements or lack of it” is a clearing house
The provisions of subdivision (c) of this section indorsement under Section 17 of PCHC Rules and not
one under the Negotiable Instruments Law under
• Do not apply to a person
Section 65 or 66. A collecting bank then is a holder for
• Negotiating public or corporation securities
value (BPI v. Roxas, GR 157833, October 15, 2007).
• Other than bills and notes
[3] Agent for purposes of collection
Section 66. Liability of general indorser Under the US Uniform Commercial Code Section 4-205,
Every indorser who indorses without qualification it defines a collecting bank as “a bank handling an item
• Warrants to all subsequent holders in due for collection except the payor bank. Section 4-201
course: states that “unless contrary intent clearly appears and
(a) That matters and things mentioned in before the time that a settlement given by a collecting
subdivisions (a), (b), and (c) of the next preceding bank for an item is or becomes final, the bank, with
section; respect to the item, is an agent or sub-agent of the
• 65(a): That the instrument is genuine and in all owner of the item and any settlement given for the item
respects what it purports to be; is provisions. A collecting bank is then neither holder nor
• 65(b): That he has good title to it; indorser but an agent or sub-agent of the owner of the
• 65(c): That all prior parties had capacity to item.
contract; and
(b) That the instrument is, In Far East Bank v. Gold Palace GR 168274,
• at the time of his indorsement, August 20, 2008), the court ruled that when Gold Palace
• valid and subsisting deposited the check with Far East, the bank became an
And in addition, agent of the former for the collection of the amount in
He engages that the draft. The subsequent payment by the drawee bank
• On due presentment, and the collection of the amount by the collecting bank
closed the transaction insofar as the drawee and the
• It shall be
holder of the check or his agent are concerned and
o Accepted or
converted the check into a mere voucher, and as
o Paid, or
already discussed, foreclosed the recovery by the
o Both as the case may be
drawee of the amount paid.
▪ According to its tenor
• And that if it be dishonor This closure of the transaction is a matter of course;
o And the necessary proceedings on otherwise, uncertainty in commercial transactions,
dishonor be duly taken delay and annoyance will arise if a bank at some future
o He will pay the amount thereof time will call on the payee for the return of the money
▪ To the holder, paid to him on the check.
▪ Or to any subsequent
indorser who may be As the transaction in this case had been closed, and the
compelled to pay it. principal-agent relationship between the payee and the
collecting bank had already ceased, the latter in
STATUS OF A COLLECTING BANK returning the amount to the drawee bank was already
acting on its own and should now be held responsible
for its own actions. Neither can the petitioner be
MAIN QUESTION
considered to have acted as the representative of the
drawee bank when it debited the respondent’s account,
Is a collecting bank a holder with rights or a party
because as already explained, the drawee bank had no
with liabilities?
right to recover what it paid.
Suggested Answer:
Likewise, Far East cannot invoke the warranty of the
payee/depositor who indorsed the instrument for
A collecting bank:
collection to shift the burden it brought upon itself. This
1. Is an indorser with liabilities
is precise because the said indorsement is only for the
2. A holder with rights
purposes of collection which under Section 36 of the
3. Agent for purposes of collection
NIL, is a restrictive indorsement.
[1] An indorser with liabilities
It did not in any way transfer the title of the instrument
The collecting bank or last endorser generally suffers
to the collecting bank. Far East did not own the draft, it
the loss because it has the duty to ascertain the
merely presented it for payment. Considering that the
genuineness of all prior indorsements considering that
warranties of a general indorser as provided in Section
the act of presenting the check for payment to the
66 of the NIL are based upon a transfer of title and are
drawee is an assertion that the party making the
available only in holders in due course, these warranties
presentment has done its duty to ascertain the
did not attach to the indorsement for deposit and
genuineness of the indorsement (Associated Bank v.
collection made by Gold Palace to Far East.
CA, GR 107382, January 31, 1996).
 NEGOTIABLE INSTRUMENTS LAW | SECOND EXAM POINTERS | RM SANTIAGO
Without any legal right to do so, the collecting bank,
therefore, could not debit respondent’s account for the
amount it refunded to the drawee bank. Thus, as a
summary the collecting bank then can be considered as:
1. Indorser with liabilities are discussed in
Associated Bank v. CA;
2. Holder with rights under BPI v. Roxas; and as
3. Agent for purposes of collection in Far East v.
Golden Palace
BAR EXAM QUESTIONS
[NOTE: Except the general suggested answers, the rest of the
answers are personal, thus not definitive.]
BAR EXAMINATION 1995
Question No. 7
Alex issued a negotiable promissory note
payable to Benito or order in payment of certain goods.
Benito indorsed the promissory note to Celso in
payment of an existing obligation. Later Alex found the
goods defective. While in Celso’s possession, the
promissory note was stolen by Dennis who forged
Celso’s signature and discounted it with Edgar, a money
lender who did not make inquiries about the promissory
note. Edgar indorsed the promissory note to Felix, a
holder in due course. When Felix demanded payment of
the promissory note from Alex, the latter refused to pay.
Dennis could no longer be located.
Illustration:
ORDER Forger
ALEX BENITO CELSO DENNIS EDGAR FELIX
M >P >A >B >HDC
[1] What are the rights of Felix, if any, against
Alex, Benito, Celso and Edgar?
A: Felix has not right to claim against Alex,
Benito and Celso. If there is a forged indorsement in
order instruments, then all prior parties may raise the
real defense of forgery against all parties subsequent
thereto (Associated Bank v. CA).
But Felix has a claim against Edgar who became a party
to the instrument subsequent to the forgery, and as
indorser he warrants those stated under Section 66,
especially Section 66 that Edgar as indorser has liability
to Felix, a holder in due course to pay the amount
thereof in case of dishonor.
[2] Does Celso have any right against Alex, Benito
and Felix?
A: Celso has the right to collect from Alex and
Benito being a party subsequent thereto. However,
Celso has no right to claim against Felix who is a party
subsequent to Celso, under Section 68, as respect to
one another, indorsers are liable prima facie to the order
to which they indorse.
4
BAR EXAMINATION 1990
Question No. 5
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 Pablo’s signature. Julian then endorsed the
note to Camilo.
Illustration:
ORDER Forger
MARIO JOSE PABLO BERT JULIAN CAMILO
M >P >A >B >H
[1] May Camilo enforce the said promissory note
against Mario and Jose?
A: No. Being an order instrument, the signature
of Pablo was essential for the instrument to pass title to
subsequent parties. A forged signature is inoperative
under Section 23. The parties before the forgery are not
juridically related to the parties after the forgery to allow
such enforcement.
[2] May Camilo go against Pablo?
A: No. Under Section 23, Pablo can set up the
defense of forgery him not having indorsed such.
[3] May Camilo enforce said note against Julian?
A: Yes, because of his indorsement to Camilo,
making him secondarily liable and being a party after
the forgery. Julian warrants those mentioned under
Section 66.
[4] Against whom can Julian have the right of
recourse?
A: Julian can enforce against Bert who by his
forgery rendered himself primarily liable.
[5] May Pablo recover from either Mario or Jose?
A: Yes, they are still juridically related to him.
Mario as maker is still primarily liable to Pablo and in
case of dishonor, Jose as indorser is secondarily liable
as instructed by Sections 60 and 66.
BAR EXAMINATION 1989
Question No. 6
Adam makes a note payable to Bert or order.
Bert indorses the note to Cora. Douglas steals the note
and indorses it to Elvin by forging Cora’s signature. Elvin
then indorses the note to Felix, not aware of the forgery.
 NEGOTIABLE INSTRUMENTS LAW | SECOND EXAM POINTERS | RM SANTIAGO 5

Illustration: B. If the indorsement is special, then the NI remains

payable to order (Section 8) and indorsement of the
ORDER Forger indorsee is necessary to further negotiate (Section 34)
ADAM BERT CORA DOUGLAS ELVIN FELIX 1. Maker (M); and Payee-indorser (P) are not liable
M >P >A >B >H
to H being parties prior to the forgery of an
order instrument (Association Bank, id.).
2. A is not liable on the instrument as it is his
[1] What is the right of Felix against Adam, Bert, signature which was forged.
Cora, Douglas and Elvin? 3. B however, is liable to H due to his indorsement
regardless whether special or in blank.
• Similar to Bar Exam 1995, Question No. 7 4. Holder is not liable, he has rights.
• Cite the rules on forgery with respect to order
instruments and prior parties. C. In both [A] and [B], the forger is criminally liable
with A as private complainant under Article 172, RPC.
BAR EXAMINATION 1984
Question No. 2

BAR EXAMINATION 2001

Juan makes a promissory note payable to the
Question No. XIII
order of Pedro, who indorses it to Jose. Somehow,
Roberto obtains possession of the note and, forging the
A issued a promissory note payable to B or
signature of Jose, indorses it to Amado. Amado then
bearer. A delivered the note to B. B indorsed the note
indorses the note to Nilo, the holder.
to C, C placed the note in his drawer, which was stolen
by janitor X. X indorsed the note to D by forging C’s
Illustration:
signature. D indorsed the note to E who in turn delivered
the note to F, a holder in due course, without
ORDER Forger
JUAN PEDRO JOSE ROBERTO AMADO NILO indorsement.
M >P >A >B >H
Illustration:
NOTE: Same rules applies as it was an order instrument
forged and was indorsed by B to H. BEARER FORGER

A B C X D E F
[IMPORTANT] In the following questions note that M >P >A >B >C >HDC
Deliver Indorse Forgery Indorse Deliver
there was no emphasis of whether or not the
indorsement from P to A (or others) was either in special
Discuss the individual liabilities to F of A, B and C.
or in blank.
• Thus, it may be the intention of the examiner to
A: Only A and B are liable to F. C is not liable to
ask the different effects in case the last or only
F due to the forgery. As discussed in Associated Bank
indorsement was an indorsement in blank under
v. CA, in bearer instruments, the signature of the payee
Section 9(e) for if the instrument shall be
or holder is unnecessary to pass title to the instrument.
payable to bearer.
Hence, when the indorsement is a forgery, only the
• If it was payable to bearer and was forged, then
person whose signature is forged can raise the defense
only the party whose signature was forged can
of forgery against a holder in due course. In this case,
set up the defense of forgery and the prior
only C can set up the defense of forgery against F. A is
parties cannot set up such defense unlike in an
liable as maker under Section 60 and B is liable as
order instrument (Associated Bank v. CA)
general indorser for indorsing specially under Section 66
as provided in Section 40 and Section 67.
GENERAL SUGGESTED ANSWERS
BAR EXAMINATION 1998
A. If the indorsement is in blank, the NI is payable Question No. VIII
to bearer until it specially indorsed. Signature then is
not necessary to pass title.
Richard Clinton makes a promissory note
1. The maker is liable to the holder (60)
payable to bearer and delivers the same to Aurora Page.
2. The payee-indorser is liable to the holder due to
Aurora Page, however, endorses it to X in this manner:
his blank indorsement that makes the
“Payable to X. Signed: Aurora Page.”
instrument payable to bearer (65)
3. A whose signature was forged can set up the
Later, X, without endorsing the promissory note,
defense of forgery (Associated Bank, id.).
transfers and delivers the same to Napoleon. The note
4. B is liable to H regardless of indorsement.
is subsequently dishonored by Richard Clinton.
5. Holder is not liable, he has rights.
 NEGOTIABLE INSTRUMENTS LAW | SECOND EXAM POINTERS | RM SANTIAGO 6

Illustration: May Good Bank claim reimbursement from Alfred?

BEARER Explain your answer. (4%)
Clinton Page X Napoleon
M >P >A >H Illustration:
Deliver to Indorse to Deliver to CHECK FORGER
ALFRED BENJ CESAR DEX FELIX SBANK
The note is subsequently dishonored by Richard Clinton. DR >P >A >B >CB
↓ S.Indorse Blank indorse to Deposit
May Napoleon proceed against Richard Clinton for
the note? ↓
G.BANK
DW
A: Yes. Under Section 60 of Act 2031, the maker
of a negotiable instrument, by making it, engages that
A: The figure being a material alteration, the
he will pay it according to its tenor. The instrument
instrument can be enforced according to its original
being payable to bearer need only delivery for it to be
tenor, which is P1,000 only, on Alfred. However,
negotiated. Despite Page’s indorsement, Section 40
considering that there was an indorsement by Solar
states that where an instrument, payable to bearer is
Bank, Good Bank, in case of dishonor of the check by
indorsed specially it may nevertheless be further
Alfred, can collect from Solar Bank the sum of P91,000.
negotiated by delivery. Thus, X’s delivery to Napoleon
Solar Bank acted as an indorser and thus warrants,
sufficiently negotiated to note making him a holder
among others, the genuineness of the instrument (from
giving the rights given by the law.
Academicus Review Center).

GENERAL SUGGESTED ANSWERS

A. If an instrument is originally payable to bearer,
Section 9 (a) to (d), it remains payable to bearer
regardless of the type of indorsement (Section 40). It
can be negotiated by delivery. Signature is not
necessary to pass title.
1. The maker, payee-indorser and indorsers whose
signatures are not forged are liable to the
holder. (Section 23).
2. The indorser whose signature is forger is not
liable to the holder as forgery is a defense
(Associated Bank, id.).
3. The holder is not liable, he has rights.
B. The forger is criminally liable (Article 172, RPC).
C. Parties have recourse against prior parties in
accordance with the liabilities earlier stated.
BAR EXAMINATION 2017
Question No. IX
Alfred issued a check for ₱1,000.00 to
Benjamin, his friend, as payment for an electronic
gadget. The check was drawn against Alfred's account
with Good Bank. Benjamin then indorsed the check
specially in favor of Cesar. However, Cesar misplaced
the check. Dexter, a dormmate of Cesar, found the
check, altered its amount to ₱91,000.00, and forged
Cesar's indorsement by way of a blank indorsement in
favor of Felix, a known jeweler. Felix then caused the
deposit of the check in his account with Solar Bank. As
collecting bank, Solar Bank stamped "all previous
indorsements guaranteed" on the check. Seeing such
stamp of the collecting bank, Good Bank paid the
amount of ₱91,000.00 on the check.
BAR EXAMINATION 2018
Question No. II
Yolanda executed and signed a promissory note
with all the requisites for negotiability being present,
except for the amount which was left blank. She kept
the promissory note in her desk and decided to place
the amount at a later date. The indicated payee,
Yohann, managed to obtain the promissory note from
Yolanda's desk and filled out the amount for the sum of
PhP 10 million, which was the amount actually lent by
him to Yolanda, but excluding the agreed interest.
Yohann later endorsed and delivered the check to
Yvette, under circumstances that would constitute the
latter to be a holder in due course.
Illustration:
YOLANDA YOHANN YVETTE
M >P >H
Incomplete and Indorsed to
undelivered
(a) May Yvette hold Yolanda liable on the note?
(2.5%)
A: [Sir V] No. Yvette may not hold Yolanda
liable. The instruments is incomplete and undelivered.
When an incomplete instrument has not been delivered
it will not be a valid contract in the hands of any holder
(Yvette) as against any person (Yolanda) whose
signature was placed thereon before delivery if
completed and negotiated without authority (Section
15, NIL; Ching v. Nicdao and CA, GR 141181, 2007).
(b) Would your answer be the same if the
promissory note was actually completed by
Yolanda (including the amount of PhP 10 million),
but stolen from her desk by Yohann? Can Yvette
enforce the note against Yolanda? (2.5%)
 NEGOTIABLE INSTRUMENTS LAW | SECOND EXAM POINTERS | RM SANTIAGO 7

A: [Sir V] No. The answer would not be the Section 26. What constitutes holder for value
same. This time the instrument is complete and Where value has
undelivered. Where the instrument is in the hands of a • At any time been given for the instrument
holder in due course (Yvette), a valid delivery thereof The holder is deemed
by all parties (Yolanda) prior to him as to make them • A holder for value
liable to him is conclusively presumed (Section 16). • In respect to all parties who become such
prior to that time
This reflects the Blondeau Doctrine which suggests
that where one of the two persons must suffer by the [8] Who is an accommodation party? (Section 29).
bad faith of another, the loss must fall upon the one who
first reposed confidence and made it possible for the loss [9] What constitutes negotiation? (Section 30)
to occur. Thus, Yvette can enforce it against Yolanda.
[10] Distinguish negotiation from assignment.
FREQUENTLY ASKED QUESTIONS From De Leon:
NEGOTIATION ASSIGNMENT
[1] DR issued a check to P, which P indorsed to A. When
Refers only to negotiable Refers generally to an
A presented the check for encashment to DW Bank,
instruments ordinary contract
however the check was uncashed.
Transferee is a holder Transferee is an
assignee
a. Illustrate the transactions.
Holder in due course is Assignee is subject to
b. Can A hold DR liable for the uncashed check?
subject only to real both personal and real
c. Can A hold P liable for the uncashed check?
defenses defense
d. If DW bank is insolvent, can A still collect from
May acquire a better Assignee merely steps
P the amount?
title or greater rights into the shoes of the
under the instrument assignor
[2] A issued a promissory to note to B or bearer. B then
than the transferor or
indorsed the note to C but through X’s forgery the note
was indorsed to D and was indorsed to E and was prior party
delivered without indorsement to F. General indorser Assignor does not
warrants solvency of warrant solvency
a. Illustrate the following transactions. prior parties generally
b. Is A (maker), liable to F for the promissory Indorser not liable until Assignor is liable even
note? Can A set up the defense of forgery? there is notice of without notice of
c. Is B liable to F for the promissory note? Can B dishonor dishonor
set up the defense of forgery? Governed by NIL Governed by Civil Code
d. Is C liable to F for the promissory note? Can C
set up the defense of forgery? [11] What is the effect if the instrument payable to
order is delivered but not indorsed?
B and C: Forgery is a personal defense by one whose
signature is forged; Warranties of drawer and indorser. Section 49. Transfer without indorsement; effect
Where the holder of an instrument payable to his
D: Forgery can be raised by C as his signature was the order
one which was forged thus C can raise the defense of Transfers it for value without indorsing it
forgery to relieve himself of liability. • The transfer vests in the transferee such title
as the transferor had therein,
Under Section 23 of the Negotiable Instrument Law, a • And the transferee acquires in addition, the
forged signature whether it be that of the drawer or right to have the indorsement of the
payee is wholly inoperative and no one can gain title to transferor
the instrument through it. But for the purpose of determining whether
transferee is a holder in due course,
[3] Is a collecting bank a holder for value with rights or • The negotiation takes effect
a last indorser with liability?
o As of the time when the indorsement
is actually made.
[4] Presumption of consideration and concept of
consideration under Negotiable Instruments Law.
[12] When is an indorsement restrictive?
[5] Defense of absence or failure of consideration in
case DR had no capacity to make good the checks. Section 36. When indorsement restrictive.
An indorsement is restrictive which either:
[6] Can checks be used to pay for pre-existing (a) Prohibits further negotiation of the instrument;
obligations? or
(b) Constitutes the indorsee the agent of the
[7] Who is a holder for value? (Section 26 in toto). indorser; or
(c) Vests the title in the indorsee
 NEGOTIABLE INSTRUMENTS LAW | SECOND EXAM POINTERS | RM SANTIAGO 8

• In trust for 8. Bond

• Or to the use It is a written contractual obligation usually under a
o Of some other persons seal, issued by a corporation or government that
But the mere absence of words contains a promise to pay a sum certain at a fixed or
determinable future time. It can be a coupon bond or a
• Implying power to negotiate
registered bond.
o Does not make an indorsement
restrictive.
9. Coupon Bond
This is when interest payments that will become due on
NOTE: Also read the definition of terms as provided for the bond are represented by detachable individual
by Atty. Villarente: coupons to be presented for payment when due. They
are usually payable to bearer.
INTERNATIONAL AND LOCAL TERMINOLOGIES
10. Registered Bond
I. SECTION 1 AND ALLIED SECTIONS It is a bond payable to a named person. It is recorded
under that name by the organization issuing it to guard
against its loss or destruction.
1. Extensions Clauses
Reverse of an acceleration clause, it allows date of
11. Collateral Note
maturity to be extended into the future, to keep the
It is a note secured by personal property, usually
instrument negotiable, the interval of extensions must
consists of stock, bonds and other written evidences of
be specified.
debt, or a security interest in tangible personal property
given by the debtor to the payee-creditor.
2. Drafts
A three-party instrument which is an unconditional
12. Debentures
written order by drawer ordering the drawee to pay
It is an unsecured bond or note issued by a business
money to payee. It can be:
firm. It is nothing more or less than a promissory note
a. Time draft payable on a date
usually under a seal. It may be embellished and is
b. Sight draft payable on sight (or demand drafts)
usually negotiable in form.
Note also bank drafts and draft usage to pay
13. Certified Check
merchandise ordered.
It is an ordinary check accepted by an official of the
drawee bank by writing across the face of the check the
3. Trade Acceptance
word certified and signing it. Certification has the same
It is a sight draft that arises when credit is extended
effect as an acceptance – making the bank liable for the
with the sale of goods. The seller is both the drawer and
payment of the check and binds it by the warranties of
the payee. The buyer to whom credit is extended is
an acceptor.
extended is the drawee.
14. Cashier’s Check
4. Certificates of Deposit
It is a check that a bank draws on its own funds and that
It is a special form of note that is created when depositor
the cashier or some other official of the bank signs. It is
deposits money at a financial institution in exchange for
used by a bank in paying its own obligations.
its promise to pay back the amount of the deposit plus
interest upon expiration of a time period agreed upon.
15. Voucher Checks
• It is a promise made by a bank to pay a payee
It is a check with a voucher attached which lists the
a certain amount of money at a future time.
items of an invoice for which the check is the means of
payment with notations.
5. Permanency and Portability
The permanency requirement is a requirement of Nis
16. Bad Check
that says that they must be in a permanent state such
It is check that the holder sends to the drawee bank and
as written on ordinary paper. The portability
the bank refuses to pay normally for insufficient funds.
requirement is a requirement of negotiable instruments
Usually, if check is not made good within a specified
that says they must be able to be easily transported
period, such as ten days, a presumption arises that the
between areas.
drawer originally issued the check with intent to
defraud.
6. Nonnegotiable Contract
It does not meet the requirements of negotiability but it
17. Stale Check
does not mean that it is not nontransferable or that it is
It is a check presented more than 6 months after its
nonenforceable for it can be enforced under normal
date. A bank acts in good faith may pay it. However,
contract law.
unless the check is certified, the bank is not required to
pay it.
7. Law Merchant
In England, prior to AD 1400, all disputes between
18. Teller’s Check
merchants were settled on the spot by special courts set
It is dawn by a bank on another bank or when drawn on
up by the merchants. The rules applied by these courts
a nonbank, it is payable at or through a bank.
became known as law merchant.
 NEGOTIABLE INSTRUMENTS LAW | SECOND EXAM POINTERS | RM SANTIAGO
19. Traveler’s Check
It is an instrument that is payable on demand, drawn on
or payable at a bank designated as a traveler’s check.
It requires as condition to payment, a countersignature
by a person whose specimen signature appears on the
instrument.
20. Fixed Amount of Money Requirement
A holder of NI must know how much money is to be
received – a sum certain in money.
21. Demand Instruments
The payee or subsequent holder can demand actual
payment at any time. (See Section 7, NIL).
22. Discharge of Liability on Instrument
This is when liability is terminated or released. (See
Page I of Chart; Section 119 and related provisions and
Article 1231 of Civil Code).
• Discharge of impairment by recourse – when
holder has impaired indorser’s ability to seek
recourse from any of these parties.
• Discharge of impairment of collateral – if holder
of the collateral impairs the value of the
collateral, released as to extent of damage.
23. The Truth in Savings Act (TISA)
Requires that depositary institutions disclose the terms
and conditions of their account.
• PH – Truth in Lending Act – disclose interest as
well as penalties applied.
II. SECTIONS 14, 15, 16 & INDORSEMENT
1. Unqualified Indorsement
An indorsement whereby the indorser promises to pay
the holder or any subsequent indorser the amount of
the instrument, if the maker, drawer or accepter
defaults on it.
2. Red Light Doctrine
A holder cannot qualify as a holder in due course, if he
or she has notice that the instrument contains an
unauthorized signature or has been altered or that there
is any adverse claim against or defense to its payment.
3. Trailing Edge
Banks require that indorsement on a check be on the
back and within one and half inches of the trailing edge
which is the left side of a check when looking at it from
the front.
4. Allonge
It is a paper so firmly attached to an instrument as to
become a part of it. If there is no room on the
instrument, the indorsement can be written on a
separate piece of paper – the allonge.
5. Blank Indorsement
It specifies no indorsee and an instrument so indorsed
is payable to bearer and may be negotiated by deliver
(Section 34).
9
6. Special Indorsement
Specifies the person to whom or to whose order the
instrument is to be payable, and the indorsement of
such indorsee is necessary to the further negotiation of
the instrument (Section 34).
7. Qualified Indorsement
It has the effect of limiting the liability of the indorser
usually used when payee of an instrument is merely
collecting the funds of another. The notation “without
recourse” is commonly used. However, there is still
warranty of indorser under Sec. 65. (See Section 38).
8. Restrictive Indorsement
It is an indorsement that attempts to prevent the use of
the instrument for anything except the sated use. [Cite
Section 36 on Restrictive Indorsement]
8a. Conditional Indorsement
The indorser can put a condition on payment upon the
occurrence of some event, but does not affect the ability
of the instrument to be further negotiated.
9. Incomplete or Inchoate Bill
This is a bill lacking in some material particulars.
10. Bills in a Set
Usually applied when bills from abroad are drawn in set
of two, three or more “parts” (copies) to avoid delays
arising from loss of the sole copy of the bill.
11. Transfer
In order for NI to flow the instrument needs to be
transferred from person to person, the form of transfer
determines the rights that can be asserted.
12. Negotiation
Section 30. What constitutes negotiation.
III. FORGERY AND MATERIAL ALTERATION
1. Unauthorized Signatures
It is one made without any authority, express or implied
and includes forgery. It is wholly inoperative against the
person whose name was signed unless that persons
later ratifies the signing.
2. Imposter Rule
This is when an imposters impersonates a payee
through use of mails, telephones, or personal
appearance to induce maker or drawer to issue an
instrument in the name of an impersonated payee.
Since the maker did issue and intend the imposter to
receive the instrument, the indorsement by the
imposter is not treated as unauthorized when
instrument is transferred to an innocent party.
3. Fictitious Payee Rule
It deals with an instrument issued in the name of the
payee with the intention that the payee have no
interest on the instrument. The payee need not be
fictitious the determining factor is that the payee is not
intended to be the party to receive proceeds when
payment is made.
 NEGOTIABLE INSTRUMENTS LAW | SECOND EXAM POINTERS | RM SANTIAGO
4. Material Alteration
It is an unauthorized change in an instrument that
purports to modify in any respect the obligation of a
party, or unauthorized addition of words or numbers
relating to the obligation of a party.
IV. RIGHTS AND LIABILITIES OF PARTIES
1. Shelter Principle
A person who does not qualify as a holder in due course
but who derives his or her title through a holder in due
course can acquire the rights and privileges of a holder
in due course. As provided under Section 58: xxx But if
a holder derives his title through a holder in due, who is
not himself a party to any fraud or illegality affecting the
instrument, has all the rights of such former holder [in
due course] in respect of all parties prior to the latter.
• Party to Fraud Exception. – The shelter rule
does not apply if one is involved in any fraud or
illegality with respect to the instrument.
2. Wrongful Dishonor
This happens when a bank does not honor a check even
if its sufficiently funded. The payer bank is liable to the
drawer for damages caused by the wrongful dishonor.
• Properly Payable Rule – a bank has the duty
to pay checks from customer’s account as long
as the check is “properly payable” – which is
authorized by drawer and does not violate the
agreement between bank and customer.
3. Jus Tertii
The contract of the obligor is to pay the holder. This
doctrine concerns claims and defenses of a person other
than the obligor. Under the doctrine, the rights of a third
party cannot be used even against a mere holder.
4. The Collection Process/Types of Banks
• Depositary bank is the first bank accepting a
check for payment;
• Payor bank is the bank ultimately responsible
for granting funds for the check;
• Collecting bank is a bank, other than a payor
bank, handling the check at any point from the
time the check is deposited from the time it
reaches the payor bank;
• Intermediary bank bank receiving transferred
check during the collection process.
5. Good Faith
It is honesty in fact in the transaction usually measured
by a negative test. The holder acted in good faith if bad
faith is not present – good faith is presumed.
6. “On Us” Checks
If the DR, P or H have accounts at the same bank, the
depositary bank is also the payer bank. The check is
called an “on us” item it is presented for payment by P
or H. The bank has until the opening of business on the
second banking day following the receipt of the check to
dishonor it – failure means check is considered paid.
7. “On Them” Checks
If the DR and P or H have accounts at different banks,
the payor and depositary banks are not same bank.
10
8. Electronic Fund Transfer System (EFTS)
It is a transfer of money made with the use of an
electronic terminal, telephone, computer or magnetic
tape. Automatic payments, direct deposits and other
fund transfer are now made electronically.
• It eliminates float time that the drawer of a
check currently enjoys by retaining the use of
funds during the period between check issuance
and final payment.
9. Automated Teller Machines (ATM)
These are machines that are connected to a bank’s
computer located in convenient places so that
customers may conduct banking transactions without
actually going to a bank. It may allow deposit or
withdraw of money as well as balance inquiry.
10. Point-of-Sale Systems (POS)
It allow consumers to transfer funds to merchant to pay
for purchases. On-line terminals are located at checkout
counters in, for example, grocery stores. Instead of
receiving cash or a check from the customer, the
checkout person inserts the customer’s card into a
terminal which reads the data and computer verifies if
there are enough funds to cover the purchase and is
thereafter debited.
11. Pay-by-Telephone System
Telephone Transaction. Allows the customer to access
the institution’s computers by telephone and direct a
transfer of funds. Here, customer calls the bank and
using the buttons or a touch-tone telephone can
designate preselected payees who will be paid.
12. The Bank Statement Rule
This duty is where the customer must exercise
reasonable care in examining the bank statement or
items to discover an unauthorized signature or
alteration and must notify the bank promptly or
irregularities.
12a. Check Truncation this is the system of
shortening the trip a check makes from P to DW bank
and then to the DR. Instead of returning the canceled
checks it is now revised to a list o check numbers. The
customer can easily reconcile the amount without
having the canceled checks. But legible copies of the
checks must be available upon request.
13. Uncured Default
A purchaser who has reason to know that any part of
the principal is overdue, that an uncured default exists
in payment of an instrument in the same series, or that
acceleration of the instrument has been made has notice
that the instrument is overdue.
14. Digital Cash
New forms of electronic payment (e-payments) have
the potential to replace physical cash with virtual cash
in the form of electronic impulses.
15. E-money
Electronic money are emerging, like digital cash and
stored-value cards similar to ATM cards containing data
regarding the value of the card.
 NEGOTIABLE INSTRUMENTS LAW | SECOND EXAM POINTERS | RM SANTIAGO 11

16. Smart Cards

Another form of e-money which are plastic cards
containing computer microchips that can hold more
information that a magnetic strip.

17. Clearing House

It is an association of banks and financial institutions
which “clears” items between banks.

18. Debit/ATM Cards

The bank customer insert his or her card in the machine,
enters his personal identification number (PIN) and
selects a transaction – deposit, withdrawal, transfer,
payment and a number of other banking transactions.

19. Preauthorized Transaction

Preauthorized automatic payment and preauthorized
direct deposits. In both cases, regular amount are
deducted from, or added to customer’s account balance
on designated dates to ensure payment or credit is
received without any worries about forgetting to send in
the check or drive to the bank to make deposit.

20. Money Laundering

The false reporting of income from criminal activity as
income from legitimate business.