Chapter 7 DEFENSES he holder to enforce payment of a negotj, instrument may be defeated by the defenses that may be ae by the person primarily liable or persons secondarily liable. Th e defenses may either be personal or real defenses. Real defenses a be raised against all holders even against a holder in due an Personal or equitable defenses may be raised only against holden who are not holders in due course. ts In his comments to the Uniform Negotiable Instruments Law, Professor William Britton explained the intrinsic difference between real and personal defenses in this wise: The right of th “In the main, real defenses are those wherein the facts disclose an absence of one or more of the essential elements of a contract, or where the admitted contract is vitiated for all purposes for reasons of public policy. ownene defenses should be distinguished from equities of over the oer a a by persons who may have legal claim for different purpos ~ Although they are similar, they are invoked to resist a claim for pe one to claim the instrument and the other a bearer instrume; se For example, the person from whom holder who is not a A as stolen may claim the instrument from & in due course because of his equity of ownership. He may also resi resist the clai an the defense of mondeliver of a holder not in due course by yaisinged PARTI REAL DEFENSES AND LABLE INSTRU rs 7 DEFENSES NS 243, PERSONAL, DEFENS, REAL DEFENSES 1, Minority (available only t the minor) 2. Forgery 3. Non-delivery of Incom- plete Instrument 4. Material Alteration Ultra Vires act of Cor- poration 6. Fraud In factum or Esse Contractus 7. Mlegality — if declared void for any purpose 8, Vicious Force or Violence 9. Want of authority 10. Prescription 11. Discharge in Insolvency 4. MINORITY AND OTHER caus! 1.01, MINORITY. . of the NIL pre to the instrument provid pa the defe negotiates the 1 capacitated perso persons) cannot ra consideration M. make' payable to P or order. } only to & PERSONAL DE, iNSES oO ai | . Failure or Absence of Cons] sideration 2. Illegal Consideration 3. Non-delivery of Complete Instrument = Conditional delivery of complete instrument 5. Fraud in inducement 6. Filling up blank not within authority 7. Duress or Intimidation 8. Filling up blank beyond reasonable time 9. Transfer in breach of faith 10. Mistake Insertion of wrong date Ante-dating or Post-dating for illegal or fraudulent pur} ES OF INCAPACITY. juon by a minor pat Mimself is not Hable and himself, If the minor se eapacitated pemons. the same s(who are equally capacitated sority. Thus, for valuable ble note to a minor P ntoAA es that Be Phe min he minor for considerationNOTES AND vow oa IABLE INSTRUMENTS LAW AND BANKING LAW NEGO! all of legal age- If the secondary liability of to C who are oar eee by C, P can raise the defense of minority. However, the defense of minority of P eannot be used by M, A, and B. PROBLEM: omni .00 payable “to the order of A” X makes a promissory note for P500.00 a 1. enor, to help him buy school books. A indorses the note to B who, in ivn, indorses the note to C. C knows A’s minority. If C sues X on the note, can X set up the defenses of minority and lack of consideration? ‘A: X-cannot set up the defense of minority of A. Although minority js a real defense, such defense is personal to the minor and cannot be invoked by other parties. This is specially true in the case of X, the maker, who warrants that the payee has capacity to contract. X is therefore barred from claiming that the payee is a minor because of his warranties. (1989 Bar) 1.02. ULTRA VIRES ACTS. The rule regarding minors provided for in Section! 22 of the NIL also applies to corporations. A corporation may raise want of authority as a real defense but the negotiation of the corporation may pass title to the instrument. The corporation may claim that the act is an ultra vires act of the corporation and may raise this defense even against a holder in due course. An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the power conferred upon it by law. However; an ultra vires act of the corporation itself is different from an ultra vires act of an officer. The term ultra vires of an officer should also be distinguished from an illegal act for the former is merely voidable which may be enforced by perf ificati while the latter is void and carmen ee atieation, or estopPet *Atrium Management G: i ‘orporation v. Sma 2001, 144 SCAD 390. eM OF Appeals, G.R, No. 10949!PART 1 — NEGOTIABLE INS rRUMENTS CHAPTER 7 — DEFENST CASE: ERNESTINA CRISOLOGO-JOSE v. COURT OF APPEALS 7 {G.R. No. 80599, September 15, 1989] athe parties are substantially agreed on the following facts as found jy both lower courts: “tn 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president. of Mover Enterprises, Inc. in-charge of marketing and sales; and the president. of the said corporation was Atty. Oscar 7. Benares. On April 30, 1980, Atty. Benares, in accommodation of his clients, the spouses Jaime and Clarita Ong, issued Check No. 093553 drawn against Traders Royal Bank, dated June 14, 1980, in the amount ‘of P45,000.00 (Exh. 1’) payable to defendant Ernestina Crisologo-Jose. Since the check was under the account of Mover Enterprises, Inc., the same was to be signed by its president, Atty. Oscar 2. Benares, and the treasurer of the said corporation. However, since at that time, the treasurer of Mover Enterprises was not available, Atty. Benares prevailed upon the plaintiff, Ricardo S. Santos, Jr., to sign the aforesaid theck as an alternate signatory. Plaintiff Ricardo S. Santos, Jr. did sign the check. “It appears that the check (Exh. ‘1’)) was issued to defendant Ernestina Crisologo-Jose in consideration of the waiver or quitclaim by said defendant over a certain property which the Government Service Insurance System (GSIS) agreed to sell to the clients of Atty. Oscar Benares, the spouses Jaime and Clarita Ong, with the understanding that upon approval by the GSIS of the compromise agreement with the spouses Ong, the check will be encashed accordingly. However, since the compromise agreement was not approved within the expected period of time, the aforesaid check for P45,000.00 (Exh. ‘1’) was replaced by Atty. Benares with another Traders Royal Bank check bearing No. 379299 dated August 10, 1980, in the same See 45,000.00 (Exhs. ‘A’ and ‘2), also payable to the defendant ae re replacement check was also signed by Atty. Oscar Z. Benares ied the plaintiff Ricardo S. Santos, Jr. When defendant deposited thi ee check (Bxhs. ‘A’ and ‘2 with her account at Family Savings mie Branch, it was dishonored for insufficiency of funds. A the bank f redepositing of the said check was likewise dishonored by cece the same reason. Hence, defendant through counsel was 22 ein file a criminal complaint for violation of Batas Pambansa and plaintiff tte Quezon City Fiscal’s Office against Atty, Oscar %. Benares a gintiff Ricardo S, Santos, J. ‘The investigating Assistant City Fiscal, charging amet, accordingly filed an amended information with the court Batas Pam Oscar Benares and Ricardo S. Santos, Jr., for violation of art atambansa Big, 22 docketed as Criminal Case No. Q-14867 of then irst Instance of Rizal, Quezon City. Me i . somth as leanwhile, during the preliminary investigation of the criminal char, ; Be agai 5 1 Against Benares and the plaintiff herein, before Assistant CityNOTES AND CASES ON aad NEGOTIABLE INSTRUMENTS LAW AND BANKING Law 5 Jamas, plaintiff Ricardo S. Santos, Jr. ten Fis a Alfonse eC 10152 for P45,000.00 dated April 10, ee Ge defendant Ernestina Crisologo-Jose, the complainant in that criminal case. The defendant refused to receive the cashier's check in Payment of the Gichonored check in the amount of 45,000.00. Hence, plaintiff encashed the aforesaid cashier's check and subsequently deposited said amount of the ago with the Clerk of Court on August 14, 1981 (Exhs. and‘, Incidentally, the cashier's check adverted to above was purchased by Atty, Indep Benares and given to the plaintiff herein to be applied in payment of the dishonored check.” [The trial court dismissed the complaint but the case was revived by the Court of Appeals.) XXX Hence, the instant petition, the assignment of errors wherein are prefatorily stated and discussed seriatim. 1. Petitioner contends that respondent Court of Appeals erred in holding that private respondent, one of the signatories of the check issued under the account of Mover Enterprises, Inc., is an accommodation party under the Negotiable Instruments Law and a debtor of petitioner to the extent of the amount of said check. XXX Assuming arguendo that Mover Enterprises, Inc. is the accommodation party in this case, as petitioner suggests, the inevitable question is whether or not it may be held liable on the accommodation instrument, that is, the check issued in favor of herein petitioner. [The Court] hold{s] in the negative. The aforequoted provision of the Negotiable Instruments Law which holds an accommodation party liable on the instrument to a holder for value, although such holder at the time of taking the instrument knew him to be only an accommodation party, does not include nor apply t0 corporations which are accommodation parties. This is because the isst@ or indorsement of negotiable paper by a corporation without consideration and for the accommodation of another is ultra vires. Hence, one who hae taken the instrument with knowledge of the accommodation nature there?! cannot recover against a corporation where it is only an accommodation party. If the form of the instrument, or the nature of the transaction, is such 2 charge eee with knowledge that the issue or indorsement of oes ore by the corporation is for the accommodation of anothers he ver against the corporation thereon. By way of exception, an officer or agent of a corporation shall have the power to execute or indorse a negotiable paper in the name of the eorporatio® accommodation of a third person only if specifically authorized to 4°Fant 1— NEGOTIABLE INSTRUMEN' CHAPTER 7 — DEFENSES NTS al <0. Corollarily, corporate officers, suc i ‘ have no power to execute for mere acconmelerey ne ne vice president, of the corporation for their individual debts or transaction a in relation to matters in which the corporation has no levitinet Since such accommodation paper cannot thus be enforced ear corporation, especially since it is not involved in any aspect of the come ee business or operations, the inescapable conclusion in law and in logic thay the signatories thereof shall be personally liable therefor, as well as the consequences arising from their acts in connection therewith, 7 The instant case falls squarely within the purview of the aforesaid decisional rules. If we indulge petitioner in her aforesaid postulation, then she is effectively barred from recovering from Mover Enterprises, Inc. the value of the check. Be that as it may, petitioner is not without recourse. ‘The fact that for lack of capacity the corporation is not bound by an accommodation paper does not thereby absolve, but should render personally liable, the signatories of said instrument where the facts show that the accommodation involved was for their personal account, undertaking or purpose and the creditor was aware thereof. Petitioner, as hereinbefore explained, was evidently charged with the knowledge that the check was issued at the instance and for the personal account of Atty. Benares who merely prevailed upon respondent Santos to act as co-signatory in accordance with the arrangement of the corporation with its depository bank. That it was a personal undertaking of said corporate officers was apparent to petitioner by reason of her personal involvement in the financial arrangement and the fact that, while it was the corporation's check which was issued to her for the amount involved, she actually had no transaction directly with said corporation. There should be no legal obstacle, being directed personally against Atty. Oscar Ricardo S, Santos, Jr., president and vice-presi Enterprises, Inc. therefore, to petitioner's claims scar Z. Benares and respondent dent, respectively, of Mover XxX 2. NON-DELIVERY AND CONDITIONAL DELIVERY. 2.01. NON-DELIVERY OF INCOMPLETE INSTRU- MENT. Incomplete instrument Ee ae earetl Where an incomplete instrument ha‘ not bee donor holder, as against it will not, if completed and Lapras be a valid contract in the hands '§ thereon before e any person whose signature was place delivery.NUT BO Aner GOTIABLE INSTRUMENT: 248 LAW AND BANKING LAW NE portant circumstances that are present in situations ction are as follows: 1) The instrument ‘The incomplete instrument has not been The im j contemplated in this s is incomplete; and 2) delivered. Section 14 of t he NIL, there is prima facie authority to fil] up the ee instrument because there was delivery, In Section 15, no stich authority is presumed because there was no delivery, In the example under Section 14, the amount to be paid is missing in a negotiable promissory note signed by Mr. M, the maker. Suppose Mr. M did not deliver the incomplete instrument to Mr. P or to any other person and kept the instrument in his drawer. Mr. P, without the knowledge and consent of Mr. M took the instrument and inserted the amount of P2,000.00 and negotiated the same to Mr. A who is a holder in due course. If Mr. A will try to collect from Mr. M on the maturity date of the instrument, Mr. M can refuse to pay on the ground that the incomplete instrument was not delivered and completed without authority. In other words, it does not matter if Mr. A is a holder in due course or not because S€GtOR|LS provides that it is not a valid contract in the hands of any holder. The defense involved is a real defense, which defense is available against any holder, whether a holder in due course or not. 2.02. UNDELIVERED AND DELIVERED COMPLETE INSTRUMENTS. Seci6: Delivery; when effectual; when presumed.— Every contract ona negotiable instrument is incomplete and revocable until delivery of the instrument for the Purpose of giving effect thereto. As between immediate a and as regards a remote Party other than a holder i eso the delivery, in order to be effectual, must making a ther by or under the authority of the party a ee : eae accepting, or indorsing, as the case a wy be; an : in such case, the delivery may be shown and not for the ational, or for a special Purpose only, the instrugi ‘© purpose of transferring the Property in of aholdnne nt. But where the instrumentis in the hands holder in due course, a valid delivery thereof by all im So as to make them liable to him the instrument is ‘ossession of a party whose signaturePART I — NEGOTIABLE INSTRUME a vs 4 CHAPTER 7 — DEFENSES 249 appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved. a. The Rul section 16 involves a complete but undelivered negotiable instrument. In other words, ithas all the matters specified in Section 1 and other material particulars that are necessary to complete the instrument. The rules in Section 16 are the following: (1) A negotiable instrument must be delivered. If the instrument has not been delivered, the contract concerning the instrument is incomplete and revocable. Thus, there must be delivery whenever the instrument is issued or negotiated. (2) Delivery must be either by or under the authority of the party making, drawing, accepting or indorsing the instrument. (3) Ifthe instrument is no longer in the hands of the maker or the drawer, he is presumed to have already delivered the instrument to another (payee) for the purpose of issuing the same. If the instrument is no longer in the hands of the indorser, he is presumed to have delivered the same to the indorsee for purposes of transferring title. (4) As between immediate parties and remote parties who are not holders in due course, the delivery of a complete instrument may be established to be conditional or for a special purpose and not for the purpose of transferring title. (5) As between immediate parties and remote partie are not holders in due course, it may be established that there was no delivery at all of the complete instrument. (6) As to holders in due course, it cannot be established that There was no delivery. Delivery is conclusive a8 t0 the helder in due course if he is in possession of 8 complete instrument. (7) As to holders in due course, the delivery was conditional him, delivery is conclusively presume: and for the purpose of transferrin reservation or condition. s who it cannot be established that or fora special purpose. As to ‘to be unconditional g title without anyTIABLE ENG Pint te” seu NI b. Need for Delivery: Delivery under 16 (as well as Section 15) meang for of p ssion of the negotiable instrument by one person or with the intention to transfer title to the instrumeny, iment, negotiation of the tran: noth 1 > n ‘This is involved in the issuance of the ins instrument and in other forms of transfer. Ordinarily, the transferee will acquire no right if the instrument was not delivered to him. Thus, if the maker, Mr, M, made a negotiable instrument that is payable “to the order of Mr. P (payee),” Mr. P will have a right over the instrument only if Mr. M or Mr. M’s authorized agent or representative delivered the instrument to him (Mr. P). If Mr. M did not deliver the instrument to Mr. P, his contract over the instrument is incomplete and revocable. If Mr. M did in fact deliver the instrument to Mr. P, Mr. P's title over the instrument is complete and irrevocable. Hence, he is, in effect, already the owner of the instrument and he (Mr. P) may transfer his title to another. For example, Mr. P may transfer the instrument to Mr. A. Mr. P may do so by putting his indorsement on the instrument and thereafter complete the transfer by delivering the instrument to Mr. A. Without the delivery, the transfer is incomplete. ce. Authority to Deliver. The delivery of the negotiable instrument for purposes of issuance or negotiation may be made personally by the person who is supposed to transfer like the maker, drawer or indorser. For example, the maker himself may deliver the instrument to the payee when he issues the instrument. Delivery of the instrument may be made by an authorized agent or representative. For example, the maker may deliver his negotiable instrument to the payee through his lovee. If the employee is not authorized to deliver the instrument. the conttsct Betis instrument is still incomplete. For example, the y of the maker, without the knowledge and consent of the maker, delivered the com i 7 c plete negotiable { The delivery of the « © instrument to the pa elive r wry who was jl iv renders the transfer incomplete, not authorized to deli? d. Presumed Delivery, If the instrument is no longer in the hand the drawer, he is presumed to have already dln ot the maker or he "red the instrumen!PART | — NEGOTIABLE IN: CHAPTER 7 — other (payee) for the purpose of issuing the same.‘ If the instrument a longer in the hands of the indorser, he is presumed to h < delivered the same to the indors ea ‘ec for purposes of transferring title. For example, the maker, Mr. M, made an instrument. ths se payable “to the order of Mr. P." If the negotiable instrament i se with Mr, P but we do not know if Mr. M actually delivered the rument to Mr. P, we should presume that Mr. M delivered the ‘nstrument to Mr. P. Anybody who claims that there was no delivery must establish that there was no such delivery. If there is no proof that there was no delivery, the presumption stands. ins e. Conditional Delivery and Delivery for Special Purpose. Section 16 speaks of immediate parties and remote parties. Immediate parties do not refer to the position of the parties in the chain of negotiation but “immediate” refers to persons who are familiar with the circumstances regarding the transfer. With respect to the holder, the most important thing to consider here is whether or not the holder who is trying to collect based on the negotiable instrument is a holder in due course or not. For example, the payee delivered a bearer instrument to Mr. C for safekeeping. Instead of keeping the instrument, Mr. C delivered the instrument to Mr. D. Mr. D is the present holder who is aware that Mr. C obtained the instrument from the payee only for safekeeping. In this example, Mr. D is considered an immediate party. is an immediate party or a remote n 16 in order to determine if it can f the delivery was conditional or for given above, proof that delivery t© iy can be admitted against Mr D Mr. D is not a holder in due of delivery and all the The fact that the party party is important under Sectio be established as against them i 4 special purpose. In the example Mr. C was for a special purpose om because Mr, D is an immediate party- course, If Mr. D was not aware of the purpos? hereaeaeer other sequisites of a holder in due course are DEES. Te eee 4 prior party like a maker, cannot prove {hat the do avdclivery Was special purpose, In other words, the defense that ee ie a for a special purpose cannot defeat the right of Mr. 0°" due course, “Ubas, Jr. v. Chan, G.R, No. 215910. February 6PROBLEMS: 1 Jose makes a note payable to bearer with the amount blank ang delivers it to Karen for safekeeping. Marina fills up the note for Php20,000.00 and negotiates it to Adriano. Can Jose dishonor the note and refuse payment to Adriano on the ground that the note was incomplete and was originally delivered to Karen for safekeeping eniy and not for negotiating? A: Yes, Jose can dishonor the note. Jose can invoke the defense of non-delivery of an incomplete instrument. Although Jose delivered the instrument to Karen for safekeeping, it is not clear how Marina obtained the instrument. When 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 whose signature was placed thereon before delivery. (Sec. 15, NIL) It does not matter if Adriano is a holder in due course because the defense involved is a real defense. (1997 Bar) Jose Reyes signed a blank check, and in his haste to attend a party, left the check on the top of his executive desk in his office. Later, Nazareno forced open the door to Reyes’ office, and stole the blank check. Nazareno immediately filled in the amount of P50,000.00 and a fictitious name as payee on the said check. Nazareno then endorsed the check in the payee’s name and passed it to Roldan. Thereafter, Roldan endorsed the check to Dantes. A) Can Dantes enforce the check against Jose Reyes? Explain. B) If Dantes is a holder in due course will your answer to question (A) be the same? Explain. A: A) Dantes cannot enforce the instrument against Jose Reyes. Jose Reyes can raise the defense that the incomplete instrument was not delivered since the check was only stolen and filled up by Nazareno, B) My answer will be the same even if Dantes is a holder in due course. If an incomplete instrument has not bee? delivered, it will not, if completed and negotiated without authority be a valid contract against any holder, even & holder in due course. (Sec. 15, NIL) (1985 Bar) A signed a blank check, which he inadvertently es at his Escolta office. The same was latestainionte i a ae the amount of P22,300.00 and a fictitious name ay pee B then endorsed the check in the payee’s name and passe, < payee! a thereafter passed it to D: then D to E, and Eto Fay oy ened the instrument against A? Explain. (6) Suppose that F ban F enfo! " due course, what will be your answer? Explain, (@) Gary s oeoen ge instrument against B? (d) Against C? Give reasons,PART 1 — NEGOTIARL INSTRUMENTS CHAPTER 7 | TRUMENTS INSES 253 A (a) Noy F cannot enforce the e inst o MW instrument Tument a ‘ ist A. The was co an incomplete instrument or not delivered by A. 4 Tikes and was x PLR TEL aan ST a8 hands of any holder. (See. 15, NIL) unmt im the ‘ly (b) My answer is still no even if F is a holder in due course. Non-delivery of an incomplete instrument isa renl defense we that can be raised even against a holder in due course. Ose (©) Yes, F can enforce the instrument a His at wrongdoing prevented the recovery from the maker; a ete wrongdoer should always be made liable for any damage and that was proximately caused thereby. More-over, when the nds thief indorsed the instrument in an assumed (fictitious) aced name, he warranted that the instrument is in all respects er if what it purports to be and that he has good title to it. ved Therefore, he is liable for breach of warranty. (@ __F may enforce the instrument against C if the latter indorsed the instrument provided that the proper a proceedings for dishonor are duly taken and F obtained aay pe title through the indorsement of C. An indorser is lank Ieable for breach of his warranties. (1978 Bar) 0 and orsed 3, FILLING UP BLANKS BEYOND AUTHORITY. after. Sec. 14. Blanks; when may be filled. — Where the instrument is wanting in any material parte 7 the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on 2 blank paper delivered by the person making the signature in order that the paper e i jable instrument operates Rese may be converted into a negotial Se aeat te i to fill it up as pr as a prima facie authority to ee eect ns amount. In order, however, any sinst any person when completed may be Se nis completion, it olde! who became a party there Pr race with the author ty pect must be filled up strictly inaccor’e ae if any such ot out given and within a reasonable time, BN HN oider vivo? aver mont, after completion, IS WAT a1 purposes in oe in due course, itis valid and toca or boon ied dhe may enfor iven and 5 a si ey rH accordance with the authority giv ved og within a reasonable time: BC put delivered instrument. v This section applies © Table against the holders 20 or ‘The defense available toARES Ry nankne LAW ich is available against.a holdey whiel js classified as 8 POTN ieho is not a bolder” 3.01. THERE - Ht enumerate the sep mbodied in Section arate rules © It is we nstrument that is an 1 u 1) A person 10 possession Ot ena facie authority to a 4 jcular has jctly i material partic! 4 stly in accordanc ceantanyg in 2 mat TT Tg there ime. wajete it by Alling UP (Pe ghim a reasonable BNE: » authority giver an with the Ifa person delivers 2 plank paper to eee eraon is ' con" at is si ‘efor the purpose © his signature for ting tint conte instrument, the person to whom the nt is need bas y thority to fill it up for any amount. Cored has prima facie aul a “v If ia holder of the jnstrument, after it was ne up, is a holder in due course: the holder may enforce the HP. sument as ifit has been filled uP strictly in accordance wi the authority given and within a reasonable time. 3.02. MATERIAL PARTI ‘CULAR. In connection with the first rule (a), what should be missing in the instrument is a material particular. For example, an instrument that does not state the amount to be paid is not a complete instrument and a material particular is missing. ‘A material particular is not limited to the matters mentioned as requisites under Section 1 of the NIL. It may include any important detail that affects the tenor of the instrument or the rights of the parties. Material particular includes the matters mentioned in Section 125 of the NIL which states that material alteration includes changes in: (1) That date; (2) The sum payable, either for principal or interest; (3) The time and place of payment; ° ‘The member or the relations of the parties; 5) : The medi . 6) medium or currency in which payment is to be made: Or which ame is ae of payment where no place of ified, or any other changes or addition which alters the eff . fect of the i Fi a material alteration, of the instrument in any respect, }§ tlPARTI y CHAP SOTIABLE Ly: RT py RUME SES 3.03. PRIMA FACIE AUTHORITY ‘omplote If the maker or drawer de although itis wanting in matey have prima facie authority to fl it up with prior authority from the maker or thi di ‘ument was completed con who completed the instrument did not exceed heat eer is up to the maker or the drawer to prove th: t the aaa ae jty to complete the inst; at there was no author- , Tument or fill up the blank porti too t ions or that the person who completed the instrument exceeded his authority. a. Authority to ¢ ia strument, livers an j nstrument to the payee rial particula indeevedts r, the payee is deemed to he authority is onl “co ment. Hence, P ly to “cg ” i there is no authority to i mplete” the instrument. , sert a special agree: i the completeness of the instrument, Rie anna Itwas observed however thatthe authority given by this section to fill up the blanks is not confined to such matters as are barely sufficient to make the paper a complete negotiable instrument.” It extends to such other matters as are proper to, and are usually found in such instruments.’ For instance, where the place the instrument was made was left blank after the word “at,” there is prima facie authority to add the correct place? b. Completed according to authority. Although the first sentence of Section 14 may give the impression that only the authority to complete is presumed, in reality it is also presumed that the instrument was completed in accordance with the authority that was given. For example, if the instrument is incomplete because the amount that is payable is missing but the maker delivered the instrument to the payee just the same, the payee has the prima facie authority to insert an amount. The moment the payee inserted an amount, the burden or proving that there was no authority or that the authority granted was exceeded is placed on the person questioning such authority.” 5See Patrimonio v. Gutierrez, G.R. No. 187769, June 4, 2014, "Crawford, p. 38 citing Weyerhauser v. Dunn, 100 N.Y, 150. "Crawford, ibid. "Crawford, ibid. (Crawford, ibid., citing see tampos, Notes (aw, 8 a ae cing Tn re Gillet’s Estate, M6), v. Hoover, 139 Iowa 143. 1d Selected Cases on Negotiable Instruments 73 Cal. App. 2d 588, 166 P. 2d 870ON ane CASES OY, pANKING LAW wa ND sores AND AIENTS “ pGOTIARLE INSTR 1EN . “« aye holder wt PEON a0, Linup Thus, ifwhat any at a Horde! not i ie en ian anority £0 THT AC ghould have be saan ich he amount pond hw that the can authority. ee ay 00) Se etn pros that the if there Ww" . . Po p500.00 jnatead of 71,000.00, ven te 7500.00. an recover vhaldor not in due course Pe “ee «true only with T ngpect to a h old ee However, this is true OMY WT Course, it is an a holder at the same was not, If the holder fill it up had been rity. Filling personal given a t p blanks not in | defense. course. the authority to necordance with done in excess of autho the authority given is only @ blank piece of pape” states that if a person delivers a ature to another person for the instrument the person to ma facie authority to fill t be present in order for c. Signed Section 14 of the NIL also blank paper containing his sign purpose of converting it into @ negotiable i whom the instrument is delivered has pri it up with any amount. Three things mus s the presumption to operate: a) there must be delivery of a paper to another person; b) the paper that was delivered was a blank paper containing the signature of the person who will deliver; and ©) the delivery was for the purpose of converting the paper into a negotiable instrument. For example, if Mr. M signs his name on a blank paper and delivers the said blank paper to Mr. P for the purpose of providing Mr. P a specimen of signature, Mr. M will not be liable to Mr. P if Mr. P converted the said blank paper into a negotiable instrument. However, if Mr. P negotiated the instrument to Mr. A who in turn negotiated the instrument to Mr. B, the present holder who is not a holder in due course. In such a situation, the purported maker is also not liable to Mr. B because there was no authority to convert the paper into a negotiable instrument. ° d. Holder in due course, If th er i . the last en ri fae aed then there is a view that was a bl]. i 7 applies even if what svered pot at as signed by the person delivering Sresame nvert it j : rail a i into a negotiable instrument. ank piece of paper containingPARTI 267 jgnature to Mr. P but only is : 7 fe . eis (MS) specimen signntira: Mt iece of paper int A jank piece of Paper into a negotiable bata. P's) onder and indorwed thy wi '\ to Mr, B who is a holder in laa Purpose of providing Mr. P thereafter converted the Promissory note payable to said instrument to Mr. A and } algae course, One view i p, the holder in due course, ean still recover fohishistmeeh Pc » purporte ker because under Secti % maker i ction 14 “if any such i i pease such instrument after its cnngtion. is negotiated to a holder in due course, i se valid and offectual for all purposes in his hands and he may enforce it-as if it ad been filled strictly in accordance wi a bal oer ensonable He? with the authority given and It is believed, however, that the better view is that the holder in due course cannot likewise recover from the purported maker, Mr. M, because there was no intention on the part of the said maker to issue a promissory note. Mr. M was therefore the victim of fraud and fraud was in the nature of fraud in factum. Fraud in factum is a real defense which is available even against a holder in due course. PROBLEMS: 1. 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? Explain. ‘A: Yes, Devi can enforce the negotiable promissory note against Larry. The defense of Larry is a mere personal defense under Section 14 of the NIL. The law provides that if an instrument is wanting in any material particular is completed beyond the authority that was given, itis valid and effectual for all purposes in the hands of a holder in due course and he may enforce itas if it had been filled up strictly in accordance with the authority given. Thus, Devi can enforce the instrument against Larry for 5,000.00. (1993 Bar) 2 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 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 and endorses and delivers the check to C whoMENTS apGoTIARLE INETH jd to BB regrets her ‘ein time to dishonor 1. Can Abe held sods #0 a ny gored faith je A what a the check, Whe ded that the appropriate habe to € . a: Yea Accan be hold Hi ate by Cay ‘akon, ‘The instrument in proceeding OF dishonot fe instrument That delivered aa it. was this OM Wary of A: Under Section 14 of the NIL, entrus vee wanting if any material particular, Shen am instrament reat has Pri facie authority to the person 4m OSEERT hore therein. Any instrument that pose py filling up the 7 se valid and effectual poses in the hands e course. complete i for all pur is complet of a holder in dui n if the instrument cannot be considered as when it was Miclivered to the secretary, the Mae negligence also preven’s A from raising the same as defense. As between ‘\ and C, both innocent parties, jt was the negligence of Ain entrusting the check to B which is the proximate cause of the loss. (1997 Bar) es as follows: In fact, eve actually delivered doctrine of compara 3. The instrument stat March 10, 2004 promise to pay Mr. P or order, the sum of on January 5, 2006. Sgd. Mr. M In this instrument, Mr. P, to whom Mr. M deli a , Mr. Fy . elivered the erent has. prima facie authority to fill it up strictly in accordance mit the sotharity given and within a reasonable time. Thus, if Mr. nae a oe eI fill up the note for P10,000.00, Mr. P should fll arene 00.00 as authorized. But supposed Mr. P filled f Sa HA LO) ina of only P10,000.00. Subsequently, Mr. onelisted the sata (OM A, Mr. Ato Mr. Band Mr, B to Me. C Mr. Cis not a holder in due course : ~ a) Can Mr. C collect from Mr, M? b) Can Mr. C coll °) 4) from Mr, P? Can Mr. C collect from Messrs. A and B? Assume that Mr. D ii r. Dis ori Mr. A for how much? holder in due course can he collect fro™PARTI — NEG EGOTIABLE, CHAPTER 7 Dey ‘RUMENTS 259 NSES - : a) No Mr. c . cannot enforce roe collect anything from Mr. M. Mr. C ¢ instrument against Mr. M beenuse the instrument was mn . lot fille stri: the authority given by i ae strictly in accordance with b) Yes. Mr. C Res ME: Gam recover from Ma, P for not strity filling up the instrument in acordance with the autho 66(a) of the NIL thai peites of warranty under Section Ppeeahee oe is genuine and in all © Yes. Mr. 7 ie ie oa likewise collect from Messrs. A and B also frat the ince eurranty wader Section 66(0) of the NIL ment is genuine a : ae Saree iste! genuine and in all respects what it d) Yes. If Mr. C is a holder in due course, he can collect from Mr. M the entire amount of P20,000.00 because under Section 14 of the NIL, in the hands of a holder in due course the instrument will be deemed to have been filled up strictly in accordance with the authority given and within a reasonable time. 4, FRAUD. a. Fraud in Factum and Fraud in Inducement Distinguished. ¢ “fraud in inducement” or “fraud in execution” (fraud in factum or fraud in esse contractus). “Fraud in execution” is present when a person is induced to sign an instrument not knowing its character as a note or a bill. The person who signs the instrument does not know that he is signing a negotiable instrument. In “fraud in jnducement,” the person who signs the instrument intends to sign the same as a negotiable instrument but was induced to do so only through fraud; his consent to issue a negotiable instrument was vitiated by fraud. Fraud in factum is a real defense while fraud in inducement is a personal defense. Thus, if M, maker, issued @ negotiable promissory note because P, the payee, fraudulently represented that what he is delivering to Mis a gold ring instead of a worthless metal, M only has & persona! defense, Fraud in inducement is present in such case. However, i a Was asked to sign what he thought was receipt oa nota ea le instrument, M has a real defense against any sul oe holder. Fraud in factum is also present where the ae a 7 to signa hegotiable note upon the seller’s representation that it was a ¢ Fraud may either bNEGOTIABLE INSTES' accommodatio; * where a ton. sation." It is also present 1”. a os ygactioN was not explained application.” Te is alee Paeureof te traners signature is needed maler war hone was misrepreseneauo” h to him and there was ; ; u only as a character “ne Appts” the petitioner alleged that Sourt of API : ‘ the alleged a uestion based on Be she issued the promissory note ind n of the payee: The note was isrepr’ ‘tatio! . fa fraud and misrepresent Bereta ae suidence of her obligation to PAY the p' ke the truck which was delivered which she purchased from the Pa eased and what was reflected in as different from what was pure! ‘ow the invoice. Unfortunately for the maker-buyer, ee e ea Be negotiated to a holder jn due course. Hence, suck capes instrument free from defenses available to prior pa ng themselves and may enforce payment of the instrument for the full amount thereof. b. Fraud in Collateral Obligation. If fraud is committed in the performance of a collateral obligation, the nature of fraud is similar to fraud in inducement and the defense is likewise a personal defense. Hence, if there was an agreement that was entered into between the drawer and the holder (who is one of those who entered into such an agreement) and the latter failed to comply with such agreement in bad faith, a personal defense may be raised against the said holder." In Salas v. Hon. c. Factors to Consider in Fraud in Factum. _ Ih the defense of fraud in factum, the person who signs the instrument lacks knowledge of the character or essential terms of the instrument. The defense is not available if the party involved re reasonable opportunity to obtain such knowledge. The factors to ; ae ered in determining the presence of reasonable opportunity clude: (1) the age and sex of the obligor, (2) his intelligence, an business experience, (8) his ability to read and him and his reason ta a used, (4) the representations made to 0 rely on them or to have confidence in the erson maki Pp making them, (5) the presence or absence of any third person Heating Acceptance Cor 'P. V. Patter Schaeffer v. United Bank & Trust C> cere Seal 0 "GR. No. 76788, January 22, 1990, anata -_ ‘See Prudencio y, Court of Appeal 7 SCRA 7. GR. No, L-34539, July 14, 1986, 143PART 1— NEGO’ — NEGOTIABLE CHAPTER 7— DEPERE MENTS 261 ight read or explai i who migl Xplain the instrum jaformation, and (6) the apparent necessity, oo emer any other without dela Y, or lack of it, for acting pROBLEM: induces B by fraud to make 1 Tothe order of A in the sum of Pe 000,000.30 Sete clearer an .000,000.00. (a) an acti sucee’ ca against the maker B for the amount of the nota? Ressoes. (b) Going further, A transfers the note to © who pays P5,000.00 therefor and acquires the note under circumstances that ke hi (@ aholder in due course, Can C file sofully against B, e maker an action successfully against B, the maker of the note, for the amount of the note? Explain, : AD a ee may raise the defense of fraud in inducement against 4 who is not a holder in due course. This is specially true in this case where A was the one who fraudulently induced B to issue the note. b. Yes. C can file an action successfully against B. C is presumed to be a holder in due course. Hence, in the absence of proof that he is not, he is a holder in due course who is free from personal defenses including fraud in inducement. 5, MATERIAL ALTERATION. The alteration must be a material alteration before it can be considered a defense. If the alteration is not material, it is not a defense at all, not even a personal defense. However, even a material alteration is only a “partial” real defense because the holder in due course can enforce it according to its original tenor. Thus, Sections 124 and 125 of the NIL provide: S€G0A9A. Alteration of instrument; effect of. — Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a holder in due course "Milton Roberts, Fraud As Defense Against Due Course Holder, 78 ALR3d 1020, 1036-1037.RUMEN NEGOTIABLE! = payment en ty to the alte ation, ne a thoveot3 i ina’ re ot a pay ding to Hts OF verter oS 5 titutes a aterial ons what ¢' 1S? Any alteration which chand® i‘ me either for principal or he sum payables (v) interest; (c) The time or place of payment; _ (d) The number or the relations of the parties; (e) The medium or currency in which payment is to be made; of payment where no Or which adds a place place of payment is specified, any other nee or addition which alters the effect of the instrument in any respect, is a material alteration. 5.01. CONCEPT. The Supreme Court explained the rule on material alteration in Philippine National Bank v. Court of Appeals, et al. “An alteration is said to be material if it alters the effect of the instrument. It means an unauthorized change jn an instrument that purports to modify in any respect the sbligation of a party or an unauthorized addition of words or numbers or other change to an incomplete instrument jal alteration is sclating to the obligation of a party. In other words, @ materi: one which changes the items which are required to be stated under Section 1 of the Negotiable Instruments Law. XXX sont ena beak entitled ‘Pandect of Commercial Law and Jurisprudence: a items pre ee opines that ‘an innocent alteration (generally, changes spoliation falteratio those required to be stated under Sec. 1 NLL) and Pat the holder may es cee ale ctranie peal nat avoid the instrument, y enforce it only according to its original tenor.’” Thus, there i ; in the ay alteration if a person inserts entries instrument, In aia make the drawee the drawer of the lontinola v. Thi aur fs . The Philippine National °G.R. No. 107508, Apri 996, 70 404, 256 Si lo. 08, April 25, 1996, 70 SCAD 404, 256 SC) 256 SCRA 491. par ori dra co}PARTI — Ng GOTT CHAPTER TABI LE INSTRUM — DEFENSES pe 263 py the check in question was si Bagel a8 &X officio agent of signed by the treasurer of Misami: the Philippi of Misamis awee- Later, an alteration wa: Ehilippine rT siaeists ay National Bank, the : ade to make i isthe drawer instead of the drawee of the insitwnoee te Court concluded: strument. The Court “at the beginning of this decisi qreasuret of Misamis Oriental, Ubaldo D we stated that as Provincial Traippine National Bank branch in Meee aya was ex officio agent of the it province. On the fi sh. A), {the Court] now fi ince. On the fact of the check fe nd{s} the words in parenthesis “Agent, Phil. ead i Peel a er the Signature of Laya, purportedly showing that he jae ea : of Philippine National Bank. If this is true, then ie ban ae aa crane but also a drawer of the check, and Montinola evident old the Philippine National Bank liable in that capacity of drawer, because as drawee alone, inasmuch as the bank has not yet accepted or certified the check, it may yet avoid payment. xxx From all the foregoing, (the Court] may safely conclude as {the Court do{es] that the words “Agent, Phil. National Bank now ee on ne face of the check (Exh. A) were added or placed in the instrument after it was issued by Provincial Treasurer Laya to M.V. Ramos. There is no reason known to {the Court] why Provincial Treasurer Laya should issue the check (Exh. A) as agent of the Philippine National Bank. x x x On the basis of the facts above-related there are several reasons why the complaint of Montinola cannot prosper. ‘The insertion of the words “Agent, Phil. National Bank” which converts the bank from a mere drawee to adrawer and therefore changes its liability, constitutes material alteration of the instrument without the consent of the parties liable thereon, and so discharges the instrument. x x x” a. Serial Number. There is no material alteration if only serial numbers were altered" The serial number is not a material particular. 5.02. ALTERATION THAT TOTALLY PREVENTS RE- COVERY. Even if the instrument in the above-cited Montinola v. Philippine National Bank case Was negotiated to a holder in due course, such holder cannot likewise enforce - os against the bank as a drawer. Tf the drawee is made the rawer, TGR No, L280, Febranty 26, 195% 0 aa vis, September 5, 2006, 501 “International Corporate Bank ¥- Court of Appeals, BaeGi SpRUMENTS #0" NEGOTIABLE RUME! j according ' its original teno; » enforced a the instrument cannot be Sea cited to pay he acy Dts the e fee cannot be comPr: PAY pe cannot be made because oe ee instrumen! dishonor it an row instrument. If the pre une is ange of Ti : liable as a drawer en alterabion- v 's the result of & mate . . ; ot est that the situation iD Mon ory ce the i auead when material alteration amounts See Ate a instanerjies if the alteration is 1 the Baye ey tke iteration will totally bar recovery. Te cannot Pe enue ite holder in due course according to its origi 6 original tenor reflects a different payee 5.03, ALTERATION OF AMOUNT. material alteration." The s increased by the payee [Alteration of the amount payable is amount reflected in the negotiable note wa’ from P10,000.00 to 20,000.00 without the assent of the maker, X. The payee, Y, then indorsed the note to A, then A to B, then B to C, the present holder. If C is a holder in due course, C can recover from X the amount of P10,000.00, the original tenor of the instrument. If X will pay, the instrument is discharged only with respect to that amount and the person who made the alteration, Y, and the subsequent indorsers A and B, are liable for the balance. Even if we assume that payment by X is payment in due course that discharges the instrument, X, A and Bare still liable because they are indorsers who warrant that the instrument is genuine and in all respects what it purports to be (Sec. 66, NIL). Section 124 likewise provides that the altered instrument is not avoided “as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers.” If the negotiable instrument involved is a check and the same fas) deposed by the holder in a collecting bank, the collecting bank oee er the loss in case of material alteration because the Se e collecting bank are that of general indorser. This Ee Puili pees ated by the rules on clearing promulgated by ippine Clearing House Corporation (See Chapter 10). Howe ver, the drawee bank cannot debit the account of the drawer. Its onl; Fi . ly recourse is agai . who made the alteration.” gainst the collecting bank on the one Secti ‘Section 125, NIL; 2006, 510 SCRA 2. , See Metrobank v. Cabilzo, G.R. No. 154469, December 6, », G.R. No. , Dec . *Metropolitan Bank and Trust Co, v. ‘abi id. Cabilzo, ibi 20. ilPARTI — NEGOTIARL CHAPTER 7 — p RUMENTS IS aN 265 Effect of Alterati a erat, >, Course! fon on Payee Who in a Holder in Due The Supreme Court ruled in PEATE company” her! the collecting bank cance i payee oe A der in due course if the coll aH the account of a the amount 0 i altered check to the drawe sf ing bank returned tourt ruled in the said case that it is the drawe, aa eee Conte loss and if the collecting bank reimleread cheek Mr amount of the altered check, the collecting hen weld oly bs considered as acting on its own and should be respon would only be Strion. The payee who is a holder in due course should ee ieaais suffer any loss. The Su f a ease preme Court supported its conclusion by v. Gold Palace Jewellery (1) Payment of a check by the dr: i i sxtemplated under Section 62 of the Negotiable Instruments Law. Hi setual payment of the amount in the check implies not only his assent to the order of the drawer and a recognition of his corresponding obligation to pay, but also, his clear compliance with that obligation. Actual payment by the drawee is greater than his acceptance, which is merely a promise in writing to pay. Hence, the payee is protected under Section 62. @ By paying the collecting bank, the drawee, recognized and complied with its obligation to pay in accordance with the tenor of his feceptance. The tenor of the acceptance is determined by the terms of the pill as it is when the drawee accepts. In other words, the drawee bank is liable on its payment of the check according to the tenor of the check at the time of payment, which was the raised amount. (3) The payee of the altered check may be a holder in due course. A payee who is a holder jn due course, who relied on the drawee bank’s dearance and payment of the draft and not being negligent, the payee is amply protected by the Section 62 of the NIL. Commercial policy favors the protection of anyone who, in due course, changes his position on the faith of the drawee bank’s clearance and payment of a check or draft. This is also in line with the sound principle that where one of two (2) innocent parties must suffer a loss, the law will leave the loss where it finds it. bility and currency of ne- (4) It further reasserts the usefulness, stal f gotiable paper without seriously endangering accepted banking practices, =e 2G.R, No, 168274, August 20, 2008 / ‘Bast ‘ 14 Palace Jewellery Co. supra, citing =F ‘Trust Company ¥- Gol : : Pile aa ak ¥. Court of Appeals, 134 Es a Es Kansas Bankers Surety Company ¥- Ford County State Bank, 529, 534 P.24 309, 313 (1959). ___selves AKAINSE HAIL. + aceeptance or certi. inl paper which wil) pat the drawee bank, in Indeed, banking institutions ¢ ity on altered instruments | fication, or by relying on make alterations rrr position, compare to the holder, to verify with the is potter position, CO} o most cases, is ina bet ; paved drawer the matters stated in the instr umen!| , : . sw in common In (5) ‘The Supreme Court believes that the view 1 ante ay 5) ‘ ; ee jurisdic on and the proviste more is that @ amply 7 ae i in this jurisdi tion. The view 11 common law J ie ofan Se aeataerel bank, having paidtoan innocent holder the amo" ‘Seon sontributed to the loss check in good faith and without nese evade as for ee SU emer em th Uni Cm Pad States of America, if an parecepted draft is presented tO craves ays or accepts the draft, the for payment or acceptance and the drawee pays oF 8 — person obtaining payment oF acceptance, at the time 0 presentment, and a previous transferor of the draft, at the time of transfer, warrants to the drawee making payment or accepting the draft in good faith that the draft has not been altered. The Supreme Court argued that absent any similar provision in our law, it cannot extend the same preferential treatment to the paying bank. (6) __ If the collecting bank returned the amount to the drawee, the collecting bank cannot debit the money paid by the drawee bank from the payee’s account, When the payee deposited the check with the collecting bank, the latter, under the terms of the deposit and the provisions of the NIL, became an agent of the former for the collection of the amount in the draft. The subsequent payment by the drawee bank and the collection of the amount by the collecting bank closed the transaction insofar as the drawee and the holder of the check or his agent are concerned, converted the check into a mere voucher, and, as already discussed, foreclosed the recovery by the drawee of the amount paid. This closure of the transaction is a matter of course; otherwise, uncertainty in commercial transactions, delay and eae are if a bank at some future time will call on the payee nine en oe eared sae to him on the check. As the transaction in payee and the collecting es ne paneine eon relationship between the already ceased, the latter in returning the amount to the drawé ee bank was alr i i now be responsible foritgown aononss e ung on Hs own and should (Th i worn tng an como be sre to have ad be when it debited r ., ecause the drawee bank had no right to ena 's account, (8) The collecting bi a depositor who indorsed see ak, cannot invoke the wi | brought upon eerie instrument for collection ae a paaenies 's precisely because the said indorsement is only