Methods of transfer

1. Assignment (non-nego) in such manner as to merely place the assignee in the

position of the assignor and acquires the instrument subject to all defenses that
might have been setup against the original payee
- Mode: written either on instrument on a separate paper
- Effect:
o the party holding the right drops out of the contract and another
takes his place (NO accumulation of secondary contracts)
o assignee is substituted in place of the assignor; assignee takes the
contract subject to equities, that is, to defenses to the contract
which would avail in favor of the original party up to the time of
the notice of the assignment is given to the person against whom
the contract is sought to be enforced.
- Equitable assignment: where holder of a bill payable to order transfers it
without indorsement (assignment which does not fulfill statutory criteria
but binding and upheld by the courts due to the intent)
2. Operation of law
- Death of the holder: title vests n his personal representative or thru
succession
- Bankruptcy of holder: title vests in his assignee or trustee
- Death of joint payee or indorsee: GR title vests at once in the surviving
payee or trustee
3. Negotiation

Sec 30 Negotiation = the act of transferring from one person to another in such manner
as to constitute the transferee the holder thereof
- If payable to bearer it is negotiated by delivery(Sec 30)
- If payable to order, it is negotiated by the indorsement of the holder and completed
by delivery (Sec 30)
- Delivery MUST be voluntary

Can there be negotiation to payee? YES 1st delivery: Issue (Sec 191)

Holder: refers to either of the following : (Sec 191)

a. payee
b. indorsee of a bill or a note who is in possession of it (if order instrument)
c. person in possession of a bill or note (if bearer instrument)
Sec 31
Indorsement = a legal transaction effected by writing of one’s own name at the back of
the instrument or upon a paper (allonge) attached thereto and deliver it to the indorsee
- Nature: mode of transfer, a contract
o Every indorser is a new drawer and the terms are found on the its face
o General indorser states to every person that follows him—this instrument
will be paid by the maker/acceptor and that if dishonored, I(the general
indorser) will pay it
- Where: written on the instrument itself or on a separate paper
- Allonge: allowable only when there is physical impossibility of writing the
indorsement on the instrument itself, otherwise mere assignment

Sec 32
GR: must be of the entire instrument
E: instrument PAID IN PART, may be INDORSED AS TO THE RESIDUE
- Otherwise may constitute as a valid ASSIGNMENT

Illustration
P indorsed to X and Y a PN worth P1K, negotiable
P indorsed to X P400 and Y P600, non-negotiable and merely assignment

Parties
 Indorser: one who negotiates (one who signs);
 Indorsee: one to whom the instrument is negotiated (one who is named, if special
indorsement)

Transfer to 2 or more indorsees SEVERALLY(each indorsee will be entitled as to the

whole amount): NOT negotiation UNLESS JOINT(Sec 41)
EX.
M issues to P who indorses to A who indorses to “B or C”- NOT NEGOTIATION
M issues to P who indorses to A who indorses to “B and C”- VALID NEGOTIATION

Sec 33 Kinds of indorsement

A. Method
1. Special – specifies person to whom or to whose order the instrument is to be
payable
2. Blank – specifies no indorsee
B. Limitation
1. Absolute – no condition
2. Conditional – subject to a contingent event
 C. Kind of title
1. Restrictive – either prohibits further negotiation / indorsee as agent / vests title
in indorsee in trust
D. Scope
1. Qualified – indorser as mere assignor
E. Others
1. Joint – payable to 2 or more payees subject to their own proportionate share
2. Successive – Sec 50 reacquirer (may negotiate it further); Sec 68 order of
liability among indorsers
3. Irregular – signed by person who does not hold title (irregular indorse =
accommodating party under sec 64)
4. Facultative – indorser waives right or increases liability on the instrument
under Sec 111

Sec 34 Special and Blank indorsement

Special Indorsement: indorsement which specifies the person to whom or to whose
order, the instrument is to be payable, and the indorsement of such indorsee is necessary
(Sec 34)

Blank Indorsement: indorsement which specifies no indorsee, and an instrument so

indorsed is payable to bearer, and may be negotiated by delivery (Sec 34)

Illustration! IF ORIGINALLY AN ORDER INSTRUMENT

DR executed a BE ordering DE payable to P or order, which had the ff at the back:
Pay to A; (Sgd.) of P----this is a special indorsement
; (Sgd.) of A----this is a blank indorsement

- Indorsement is just the first step and is completed by delivery for an order
instrument
- A is the holder of an ORDER instrument therefore, the negotiation to B must still
be I+D (delivery must be voluntary)
- Indorser has the option to choose what kind of indorsement to make (W blank or
special)
- Since A made a blank indorsement, B is now a holder of a BEARER instrument. B
can now negotiate the instrument by mere delivery
- An order instrument can converted into a bearer instrument when the only or last
indorsement is an indorsement in blank (Sec 9e)
- If B delivered it to C, C can convert it to an order instrument by making a special
indorsement by writing over the signature of the indorser
 - If C does make a special indorsement to D. D is now the holder of an ORDER
instrument. D is now required to I+D
- If D made a blank indorsement to E, E becomes the holder of a BEARER
instrument

Sec 35 Blank indorsement to Special indorsement

- Since A made a blank indorsement, B is now a holder of a BEARER instrument. B

can now negotiate the instrument by mere delivery
- An order instrument can converted into a bearer instrument when the only or last
indorsement is an indorsement in blank (Sec 9e)
- If B delivered it to C, C can convert it to an order instrument by making a special
indorsement by writing over the signature of the indorser
- If C does make a special indorsement to D. D is now the holder of an ORDER
instrument. D is now required to I+D
Limitation upon conversion of blank indorsement: holder must not right any contract not
consistent with the indorsement

Sec 36 Restrictive indorsement = where either

1. prohibits further negotiation (NON-NEGO)
o bars further negotiation to HDC
o EX. “pays to C only” “pays to C and no other person”
2. constitutes indorsee as agent
o acting on behalf of indorser; indorser still has the title; agent-indorsee does
not acquire title—an agency type indorsement
o EX. “pay to A for collection in my behalf” “ pay to A for collection/deposit
only”
o EX. Indorsement for deposit:
3. vests title in indorsee in trust
o legal title is transferred to the transferee/indorsee as trustee for the
beneficial owner (transferor/indorser)

Can maker set up against the indorsee his defenses against the restrictive
indorser? Depends
a. IF agency type, NO cuz indorsee just fills in the shoes of restrictive
indorser
b. IF trust type, YES cuz trust gives notice of such to subsequent
purchasers
Presumption of consideration
 c. Agency-type indorsements have NO presumption of consideration

Effect of omission of words of negotiability: doesn’t make the indorsement restrictive;

BUT will render the instrument non-negotiable

Sec 37 Rights of indorsee as effect of restrictive indorsement

1. R to receive payment
2. R to bring any action
3. R to transfer his rights

Extent of negotiability after Restrictive I: same; some degree of limitation;

indorsement itself discloses the extent of the limitation
Limitation: subsequent indorsees acquire ONLY the title of the 1st indorsee
EX. “ Pay to A for collection: then indorsed as follows: “Pay to B for deposit only Sgd A
and that B owes Y 1K.
- B CANNOT transfer the note to Y for said debt.
- If B transfer the note to another person for 1K, B CANNOT USE the 1k for
anything other than to SAFELY KEEP THE MONEY FOR THE BENEFIT OF A
EX “Pay to A for the account of B”- gives notice that the instrument CANNOT be
negotiated by A for his own debt or benefit

Sec 38 Qualified Indorsement = constitutes the indorser a mere assignor of the title
Why assignor? To transfer title WITHOUT guarantee of payment; to exempt the
indorser from paying in case of default of one primarily liable (not warrant solvency)
How: “without recourse” “at indorsee’s own risk”
Effect:
- STILL negotiable
- indorser as mere assignor
- indorser I still warranting the genuiness of the instrument as the lawful owner,
having legal title to it BUT DO NOT GUARANTEE the financial responsibility
on the instrument but merely hold the title as any other persona property

Liability of Qualified indorser

ONLY liable if instrument is DISHONORED by non-A or non-P due to: (Sec 65)
a. Forgery
b. Lack of good title
c. Lack of capacity to indorse
d. The fact that at the time of indorsement, instrument has no value or not
valid and he KNEW
 Qualified Indorser General Indorser
Does NOT warrant solvency Warrants solvency OF PRIOR PARTIES
NOT liable incase of default of LIABLE in case of default of
maker/acceptor maker/acceptor, provided notified

Sec 39 Conditional Indorsement = indorsement subject to a contingent event

Absolute Indorsement = indorser binds himself to pay upon no other condition than the
failure of prior parties to do so and upon notice to him of such failure

Effect of conditional I:
- As to party required to pay: MAY disregard the condition
- As to subsequent person/Conditional indorsee: MUST hold in TRUST until
condition is fulfilled; upon FULFILLMENT, the ownership over the proceeds of
the note is ABSOLUTELY acquired by the conditional indorsee
- As to negotiability: STILL negotiable cuz what is conditional is the indorsement
and not the promise or order to pay

EX. “ I promise to P or order 10K on dec 25 2023 Sgd M” then indorsed as follows “ Pay
to A if he passes nego Sgd P”
- A as the conditional indorsee holds the note or the proceeds if paid by M subject to
the rights of P
- IF M DISREGARDS the condition and pays A without waiting for the condition to
be fulfilled, A DOESN’T immediately acquire ownership over the 10K
- A MUST hold in trust while the condition is not fulfilled
- If A pass nego, A absolutely acquires ownership over the 10K

Sec 40 Indorsement if payable to bearer

IF ORGINALLY A BEARER INSTRUMENT
M executed a PN payable to P or bearer
- In the hands of P, P can simply deliver them to A ( no need for indorsement)
- If A indorsed it to B (despite not required), A as a special indorser shall be liable as
indorser to B (since it can be traced back A)
- If special indorsers despite bearer, only LIABLE IF there is a series of special
indorsements UNBROKEN
- If there were series of special indorsements from A to B to C then a series of blank
indorsement from C to D to E, then E made a special indorsement to F. F
CANNOT go after E because it cannot be traced back to E since the special
indorsements were CUT
- ALWAYS treated as a BEARER instrument (Sec 40)
Sec 41 payable to two or more persons
Scope: JOINTLY
How
GR: all payees must each indorse in order to negotiate (if only one indorses, he passes
only his part in the instrument which would NOT OPERATE as such Sec 32)
E:
a. Where the payee or person indorsing has AUTHORITY to indorse for the others
b. Where the payee or indorsees are PARTNERS

Sec 42 Effect if drawn or indorsed to cashier (or other fiscal officer of bank or corp)
Prima facie presumption to be payable to the bank or corporation
May be indorsed by any duly authorized officer of the bank or corporation other than the
cashier

Sec 43 Misspelled name of payee or indorsee: may indorse as it is, ADDING, if he

thinks fit, his proper signature

Sec 44 Indorsement in representative capacity

How indorsement by agent
a. Add words describing himself as agent
b. Disclose principal (Sec 20)
c. Duly authorized
Otherwise real defense (personal defense if the authority is apparent)

MAY indorse to such terms as to negative personal liability

Sec 45 Prima facie presumption that time of indorsement is BEFORE it was

overdue
E: indorsement bears date after maturity
(connect to sec 52b)

Sec 46 Prima facie presumption that place of indorsement is where instrument is

dated
E: contrary appears
Place of indorsement is material cuz an indorsement is governed by laws of the state
where it is indorsed, although drawn or made in a different state
Sec 47 Continuation of negotiable character UNTIL
a. Restrictive indorsement which further prohibits further negotiation
b. Discharge by payment or otherwise

2 views
1. Negotiability ceases upon maturity
2. Negotiability continues even after maturity
Reconciliation: the mercantile character and the obligation continue after maturity.
After maturity, continue to be a negotiable instrument BUT ceases to be negotiable in the
sense that a transferee after maturity is NOT HDC and therefore not free from defenses

Sec 48 Striking out indorsement

When holder may strike out I: when I is not necessary to his title
Effect: indorser whose indorsement is struck out & all indorsers subsequent to him are
RELIEVED from liability

If originally payable to bearer

- Always negotiated by mere delivery
- Holder may strike out ALL intervening indrosement or any
- EX M payable to P or bearer, indorsed as follows
Pay to A
Sgd P
Pay to B
Sgd A
Pay to C
Sgd B
C, the present holder may strike out ALL indorsements because they are not necessary to
his title
- IF C cancels P’s indorsement to A: P( whose indorsement is struck out) A & B
(indorsers subsequent to him) are released from liability on the instrument. C
could only claim against M. A & B are also discharged from liability cuz they are
deprived of their right of recourse against P
- IF C strikes out B’s indorsement to C; only B will be freed from liability. C can
claim against P & A

If originally payable to order

- Indorser may not strike out payee’s indorsement because it was an order
instrument
 - If from blank I to Special Is: Special indorsements are not necessary to the
holder’s title as even without any subsequent indorsement he could have acquired
title to the instrument by mere delivery
- EX M payable to P or order, indorsed as follows
(Blank indorsement)
Sgd P
Pay to B
Sgd A
Pay to C
Sgd B
C, the present holder can only strike out A & B because their indorsement is not
necessary to C’s title by virtue of the the blank indorsement of P
- IF C cancels A&B’s indorsements, note would become payable to bearer
- IF C cancels A;s indorsement, B is also relieved from liability being an indorser
subsequent to A. But P’s indorsement is necessary to C’s title since P cannot
validly negotiate the note, which is order
- C can claim against P or M, but not A or B

Sec 49 Effect of transfer without indorsement

Scope: order instrument; there is delivery and payment of value
Rights of transferees for value
- Acquires only the rights of the transferor
- Right to require the transferor to indorse the instrument

Sec 50 Prior party to negotiate instrument

EX. “ I promise to P or order 10K on dec 25 2023 Sgd M” P – A – X – B – C – X
Can X negotiate the note? YES
Effect:
X CANNOT enforce payment against B & C to whom he is liable to avoid circuity of
suits

Holder: refers to either of the following:

a. payee
b. indorsee of a bill or a note who is in possession of it (if order instrument)
c. person in possession of a bill or note (if bearer instrument)
Classes of holders
1. Holder (Sec 51) – subject to any defenses
2. Holder for value (Sec 26) – deemed HDC so as to the defense of lack of
consideration
3. Holder in due course – free from personal defense
Sec 51 Rights of a holder
1. Sue in his own name
o Even if he be a holder only for collection or as a pledge
o If unendorsed, holder mat still sue in his own name if his transferor could
have done so
2. Receive payment
o If payment is in due course, discharges instrument
o If not in due course, reacquisition
o When payment in due course:
a. made at or after maturity of the instrument
b. in good faith
c. without notice that his title is defective

Sec 52 HDC
a. That it is complete and regular upon its face
b. That he became the holder of it before it was overdue and without notice that it has
been previously dishonored, if such was the fact
c. That he took it in good faith and for value
d. That at the time it was negotiated to him, he had no notice of any infirmity of the
instrument or defect in the title of the person negotiating it.

GR: HDC
E: lack of requisite is proven

When overdue
- after the date of maturity
- IF accelerated, at knowledge of the holder that 1 installment or interest or both is
unpaid
- IF interest, GR: upon which interest is overdue E: contrary term

In good faith = doesn’t have any knowledge of fact which would render it dishonest for
him to take a particular piece of negotiable paper (suspicion or mere fear is not enough
basis to inquire)
Holder in good faith = holder without knowledge or notice of equities of any sort which
could be set up against a prior holder of an instrument
Effect of failure to inquire
- Sufficient to cause a person of ordinary prudence to make inquiry as to an
infirmity in a NI and defect in the holder’s title

“for value”
- Acquisition for value
- IF discounting NI, STILL for value
- Discounting is an arrangement in which a bank buys a NI from the payee for
LESS THAN the value shown on it before it is due to be paid
- Effect of inadequacy of the instrument: GR still valid E: fraud, mistake or undue
influence

“without notice of infirmity or defect”

- Defects: ex. Acquisition by fraud, illegal consideration
- Infirmities: things that are wrong with the instrument itself ex. Forgery, material
alteration, wrong date inserted, filling up blank not strictly

May a drawee be HDC? NO not even a holder

May a payee be a HDC? YES provided sec52 as ruled in de Ocampo v Gatchalian,

There can be no doubt that a proper interpretation of NIL as a whole leads to the
conclusion that a payee may be a holder in due course under the circumstances in which
he meets the requirements of Sec. 52. (De Ocampo v. Gatchalian, G.R. No. L-‐15126,
Nov. 30, 1961) Note: There is a contrary view on the matter, wherein it is contended that
under subsection 4 of Sec. 52, the holder in due course must have acquired the instrument
through negotiation and an instrument is issued and not negotiated to a payee.

HDC cases!!!
Ocampo vs. Gatchalian (3 SCRA 596)
FACTS:
Gatchalian was interested in buying a car and for this reason, Gonzales offered and
shown to her the same. He represented himself to be authorized by the owner of the car to
sell the same. After negotiation, Gatchalian agreed to buy the car and wanted Gonzales to
bring the certificate of registration so that her husband could verify it. Gonzales excused
himself from bringing said certificate as allegedly the owner wanted to be secure that the
buyer would be in good faith. This led to him asking Gatchalian to issue a check as
evidence of good faith. He promised that said check wouldn't be deposited but merely
shown to the owner. Relying on this promise, she issued the check but Gonzales failed to
show
up the next day. She ordered the stoppage of payment of the check,
which the plaintiff didn't knew about. The plaintiff accepted the check from
Gonzales as payment for hospitalization later on.

W de Ocampo is a HDC. NO not in good faith due to negligence for lack of inquiry
HELD:
The stipulation of facts would show that De Ocampo wasn't aware of the
circumstances that led to the issuance of the check. Nonetheless, he
should have been placed into inquiry, with the showing that the check was
crossed—that the check could only be deposited and not encashed. He
should have made an inquiry as to why Gonzales had with him the check
and not deposited in account. He had the duty to ascertain that Gonzales
had legal title to the instrument. Having failed in this accord, he was
grossly negligent in not finding out the nature of the title and possession of
Gonzales, amounting to legal absence of good faith.
In taking an instrument with a defect or infirmity, it could not be said that
the holder took it as a holder in due course.

State Investment House, Inc. vs. CA (217 SCRA 32)

FACTS:
Moulic issued checks as security to Victoriano, for pieces of jewelry to be
sold on commission. Moulic failed to sell the pieces of jewelry, so she
returned them to Victoriano. The checks however could not be recovered
by Moulic as these have been discounted already in favor of petitioner.
Consequently, before the maturity dates, Moulic withdrew her funds from
her account. Thereafter, petitioner presented the checks for payment but
these were dishonored. This prompted the petitioner to initiate an action
against Moulic.

W state is a hdc and is therefore not barred by personal defense of Moulic as to

failure or want of consideration. YES

HELD:
A prima facie presumption exists that a holder of a negotiable instrument is a holder in
due course. The burden of proving that State is not a holder in due course is upon Moulic.
In this regard, she failed to do so. The evidence shows that the dated checks were
complete and regular; petitioner bought the checks from Victoriano before their due
dates; it took the checks in good faith and for value; and it was never informed nor made
aware that these checks were merely issued to payee as security.
Consequently, State is a holder in due course. Moulic cannot set up the defense that there
was failure or want of consideration. It can only invoke the defense if State was a privy to
the purpose for which they were issued and therefore is not a holder in due course.
Furthermore, the mere fact that the checks were issued as security is not sufficient ground
to discharge the instrument as against a holder in due course.
And also, Moulic was responsible for the dishonor of her checks. She withdrew her funds
from her account and could not have expected her checks to be honored by then.

Bataan Cigar and Cigarette Factory, Inc. vs. CA (230 SCRA 643)
FACTS:
Bataan Cigar has engaged one of its suppliers, George King, to deliver bales of tobacco
leaves. Petititoner then issued postdated crossed checks in favor of King. This was
continued despite the failure to deliver the bales. Simultaneous to these transactions was
the discounting of King of the checks to State Investment House. Bataan then stopped
payment and SIHI tried to collect.

W SIHU is HDC. NO

HELD:
The negotiability of the check isn’t affected by it being crossed, whether specially or
generally. It may be legally negotiated from one person to another as long as the one who
encashes the check with the drawee bank
or if its specially crossed, by the bank mentioned between the parallel lines.
Jurisprudence provides the following effects of crossing a check:
1. The check may not be encashed but only deposited in the bank
2. The check may be negotiated only once—to one who has an
account with a bank
3. The act of crossing the check serves the warning to the holder
that the check has been issued for a definite purpose so that he
must inquire if he has received the check pursuant to that
purpose, otherwise, he is not a holder in due course.
The check should placed the holder in inquiry and upon him devolves the duty to
ascertain the indorser’s title to the check or the nature of his possession. Failing in this
respect, the holder is declared guilty of gross negligence amount to legal absence of good
faith.
In the present case, petitioner’s defense in stopping payment is as good to SIHI as it is to
King because really the consideration for the checks were the delivery of the bales of
tobacco leaves which King failed to do. There being failure of consideration, SIHI is not
a holder in due course.
Yang vs. CA (GR No. 138074, August 15, 2003)
FACTS:
Yang and Chandimari entered into an agreement that the latter would issue to the former
a manager’s check in exchange for two checks that Yang has payable to the order of
David. The difference in amount would be the profit of the two of them. It was further
agreed upon that Yang would secure a dollar draft, which Chandimari would exchange
with another dollar draft to be secured from a Hong Kong bank. At the agreed time of
rendezvous, it was reported by Yang’s messenger that Chandimari didn't show up and the
drafts and checks were allegedly stolen. This wasn't true however. Chandimari was able
to get hold of the drafts and checks. He was even able to deliver to David the two checks
and was able to get money in return. Consequently, Yang asked for the stoppage of
payment of the checks she believed to be lost, relying on the report of her messenger. The
stoppage order was eventually lifted by the banks and the drafts and checks were able to
be encashed. Yang then filed an action for injunction and damages against the banks,
Chandimari and David. The trial court and CA held in favor of David as a holder in due
course.

W David is HDC. YES presumption is not deferred(?)

HELD:
Every holder of a negotiable instrument is presumed to be a holder in due course. This is
specially true if one is a holder because he is the payee or indorsee of the instrument. In
the case at bar, it is evident that David was the payee of the checks. The prima facie
presumption of him being a holder in due course is in his favor. Nonetheless, this
presumption is disputable. On whether he took the check under the conditions set forth in
Section 52 must be proven. Petitioner relies on two arguments on why David isn’t a
holder in due course—first, because he took the checks without valuable consideration;
and second, he failed to inquire on Chandimari’s title to the checks given to him.
The law gives rise to the presumption of valuable consideration. Petitioner has the burden
of debunking such presumption, which it failed to do so. Her allegation that David
received the checks without consideration is unsupported and devoid of any evidence.

Furthermore, petitioner wasn't able to show any circumstance which should have placed
David in inquiry as to why and wherefore of the possession of the checks by Chandimari.
David wasn't a privy to the transactions between Yang and Chandimari. Instead,
Chandimari and David had the agreement between themselves of the delivery of the
checks. David even inquired with the banks on the genuineness of the checks in issue. At
that time, he wasn't aware of any request for the stoppage of payment. Under these
circumstances, David had no obligation to ascertain from Chandimari what the nature of
the latter’s title to the checks was, if any, or the nature of his possession.
Sec 53 When person not deemed HDC: negotiated at an unreasonable time after its
issue
“unreasonable time” jurisprudence does not state exact period; consider factors which
will affect such length of time; not beyond 1 year

Sec 54 Notice before full amount is paid

- Notice of any infirmity or defect
- Effect: deemed HDC but ONLY to the extent of the amount paid by him

Sec 55 When title is defective

- When person who negotiates, obtained the instrument or any signature BY
o Fraud, duress or force and fear, other unlawful means or for illegal
consideration or with breach of faith
- Defective as to: the acquisition or negotiation

Sec 56 What constitutes notice of defect

- The person to whom it is negotiated must have had actual knowledge of the
(a) infirmity or defect; or
(b) knowledge of such facts that his action in taking the instrument amounted to
bad faith
- Actual Knowledge NOT mere suspicion, surmise or fear
- “amounted to bad faith” : consists in guilty knowledge or willful ignorance,
showing vicious or evil mind (when there is knowledge of suspicious
circumstances, coupled with means of verifying them, taking the instrument may
amount to bad faith)

Sec 57 Rights of HDC

1. Sue in his own name
2. Receive payment, and if payment is in DC, discharges instrument
3. Hold the instrument free from personal/equitable defense (NOT legal/real def)
4. Enforce payment for the full amount against all parties liable

Sec 58 When subject to original defense: if holder NOT in due course

Effect: as if it were non nego
Rights of non HDC
1. Sue in his own name
2. Receive payment, if payment is in due course, instrument may be discharged
3. Holds subject to same defenses as if non nego
 4. Rights of the former holder

GR: if non hdc cannot collect if barred against personal defense

E: Shelter Rule
Shelter Rule: a person who does not qualify as a holder in due course can,
nonetheless, acquire the rights and privileges of a holder in due course if he derives his
title to the instrument through a holder in due course.
EX. A issues PN payable to B or bearer. X stole the note from B.

Note: holder acquiring from hdc had burden of proof to show predecessor is indeed hdc

Personal Defenses Real Defenses

Those defenses which grown out of the
agreement or conduct of a person
HDC is FREE from personal defense
1. Insertion of wrong date where
payable at a fixed period after date
and issued undated; or at a fixed
period after sight and acceptance is
undated (Sec 13)
2. Want of delivery of complete
instrument (Sec 16)
3. Filling up the blanks contrary to
authority given or not within
reasonable time (Sec 14)
4. Absence, failure or illegal
consideration (Sec 28)
5. Fraud in inducement
6. Acquisition of the instrument by
force, duress or fear*
7. Acquisition of the instrument by
unlawful means
8. Acquisition of the instrument for an
illegal consideration
9. Negotiation in breach of faith
10. Negotiation under circumstances
amounting to fraud
11. Mistake
12. intoxication
Those defenses which attach to the
instrument itself
HDC can be SUBJECT to real defense
1. Alteration (Sec 125)
2. Want of delivery of incomplete
instrument
3. Duress amount to forgery
4. Fraud in factum or in esse
contractus (Forgery) 23
5. Minority (Sec 22) if raised by
muinor
6. Marriage in case of wife?
7. Insanity where that insane person
has a guardian appointed by the
court
8. Ultra vires act of a corporation
where its charter or statute,
prohibits from issuing commercial
papers (Sec 22)
9. Want of authority of agent (Sec
20)*
 13. Ultra vires act of corporations
14. Want of authority of the agent
where he has apparent authority
15. Illegality of contract where form of
consideration is illegal
16. Insanity where there is no notice of
insanity

Sec 59 Who is deemed HDC: every holder (must in possession of NI)

When accrues: prove that he is the holder
When burden is shifted: shown as defective

Gr: every holder presumed as hdc

E: where it is shown that the title to any person who has negotiated the instrument is
defective, the burden is on the holder to prove that he is hdc or that a person under whom
he claims is a hdc

LIABILITY OF PARTIES
Sec 60 Liability of maker (primary)p-a
Basis: effect of making the instrument
1. Pay according to the tenor of the instrument
2. Admit existence of payee and his capacity to indorse

- Maker’s liability, nature: primary and unconditional (basis: his written promise to
pay)
- Presumed to have acted with care and to have signed with full knowledge of its
contents, UNLESS fraud is proved
- Payee’s interest is only to see to it that the note is paid according to its terms
- When 2 or more maker sign jointly or severally: EACH is liable for the full
amount even if one did not receive the value given ( a case of accommodated co-
maker)
- Maker is precluded from setting up the defense of
a) Payee is fictional
b) Payee is insane, minor, corpo acting ultra vires

Art 61 Liability of Drawer (secondary) a-p

1. Admit the existence of payee
2. Capacity of payee to indorse
3. Engage that on due presentment, the instrument will be accepted or paid or both
according to it tenor
If dishonored, and necessary proceedings of dishonor are taken
- Will pay the amount thereof to the holder
- Will pay to any subsequent indorser who may be compelled to pay

Note: drawer may insert an express stipulation to negative or limit his liability

Art 62 Liability of Acceptor (primary) pa2

1. Engages that he will pay according to the tenor of his acceptance
2. Admit existence of drawer, the genuineness of his signature and his capacity and
authority to draw the instrument
3. Existence of payee and his then capacity to indorse
- Nature: primary

Art 63 When deemed Indorser: when placing signature as other than maker, drawer or
acceptor
E: unless clearly indicates intention to be bound in some other capacity

Art 64 Liability of Irregular indorser

- Irregular indorser = a person not otherwise a party to the instrument who places
his sgd in blank before delivery
- Liabilities of irregular indorser
1. If payable to the order of 3rd p: liable to payee and to all subsequent parties
2. If payable to order of maker/drawer: liable to all parties subsequent to
maker/drawer
3. If payable to bearer: ^
4. If signs for an accommodation party: liable to all parties subsequent to payee

- 1) “if payable to the order of 3rd person”

- EX. M payable to P or order. P, who has no faith in M’s financial ability and is
only willing to take the note IF X’s financial ability is at the back of it. M secures
X’s indorsement in blank before the note is delivered to P. P negotiates the note to
A. A takes the instrument and X’s name appears as first indorser followed by P’s
name
- X is liable to P, payee and A, a subsequent party but not to M

- 2/3) if payable to order of maker/drawer/bearer

- EX. Payable to the order of M (maker & payee same)
- M cannot circulate the instrument without X’s indorsement so X signs and M,
indorser and delivers to A
 - For A, X is an indorser.
- X is liable to A, M and all subsequent parties

- 4) accommodation of payee
- EX. M: payable to P or order. P wants to discount the note with A in bank so P
secures X to accommodate him
- X is liable to all parties subsequent to P. P as 1st indorser and X as 2nd indorser

Art 65 Warranty where negotiation by delivery or by qualified I

1. That the instrument is genuine and in all respect what it purports to be
2. Indorser has a good title to it
3. All prior parties had capacity to contract
4. Indorser had no knowledge of any fact that would impair the validty or value of
ins
Limitations: only to immediate parties and special indorsers as to sec 40
- Type of warranty/liability: not conditional upon proper presentment and
dishonor of the instrument and giving notice of dishonor
- Liability merely as assignor of credit why: both do not assume to pay upon
dishonor UNLESS dishonor is based on 4 implied warrants under Sec 65
- Whose favor the warranty extends:
o if mere delivery: immediate transferee
o if qualified: all subsequent holders who make title through his indorsement
- Sale of public or corporate securities: do not warrant capacity to contract of prior
parties
- EX. City of Manila issued bonds (borrowed obli to pay after a stated period of
time) X bank bought the bonds and sold to P, an investor
- X bank is not liable for breach of implied warranty. X did not warrant that City of
Manila had capacity to issue the said bonds

Art 66 Liability of General Indorser

1. That the instrument is genuine and in all respect what it purports to be
2. Indorser has a good title to it
3. All prior parties had capacity to contract
4. That the instrument at the time of I was valid and subsisting
5. That it will be paid or accepted or both accdg to its tenor
6. That in case of dishonor with necessary proceedings of such, will pay the amt

- 4th warranty: That instrument is valid and subsisting

 General Qualified
Warrants that it is Valid WON he has Warrants That he has no knowledge
no knowledge which would invalidate instrument
- Crossed check: with 2 parallel lines, effects
o Not encashed but only deposited in the bank
o Negotiated only once to the one who has acct with the bank
o Act of crossing serves as warning that it was for a definite purpose and
MUSt inquire otherwise, non HDC
- Warranties of General indorser extend to
o HDC
o Persons who derive their title from HDC
o Immediate transferees even if non HDC
- Warranties do not extend to drawee
o Drawee is not holder
- In case indorsement s forged or unauthorized
o The bank in paying the check becomes liable to the payee for the value
thereof
- Conditions precedent to make indorser liable
o Due presentment
o Dishonored + necessary proceedings on dishonor
- May be waived? YES
- Indorsement presumed: unqualified only qualified when certain words are present
- General indorser is secondarily liable
o Secondary liability is not confined to 4 warrants
o Liable for any reason the maker/acceptor fails to pay unlike qualified
indorsers ciz GI warrant the solvency of prior parties
o Reason for dishonor need not be established
- Liability of assignor: vendor in good faith must be responsible for the existence
and legality of credit at the time of sale UNLESS it should have been sold as
doubtful BUT NOT for the SOLVENCY of the debtor unless expressly stipulated
or insolvency was prior to sale and of common knowledge

General Indorser Qualified Indorser Negotiating by

mere delivery
Extension of All subsequent All subsequent Immediate
warranty parties parties who acquire transferee
title through their
indorsement
 4th warranty That instrument is Valid and subsisting; that he is ignorant of
valid and subsisting any fact that will impair the validity or
render it without value
When does he pay If dishonored GR: not liable if dishonored E: if arises
from his 4 warranties

Sec 66
Liability of a General Indorser (Section 66)
Metropol (Bacolod) Financing & Investment Corp. vs. Sambok Motors Co. (120
SCRA 864)
PN maker: Dr Javier Villareal payee: Ng Sambok Sons(sambok) holder: Metropol
FACTS:
- Dr. Javier Villareal (maker) issued a promissory note in favor of Ng Sambok Sons
Motors(payee), in the amount of 15, 939 payable in 12 equal monthly installments
with interest at the rate of 1% per month. It is further provided that in case on non-
payment of any of the installments, the total principal sum then remaining unpaid
shall become due and payable with an additional interest equal to twenty-five
percent of the total amount due.
- Sambok Motors Company(sister company of payee and under same management)
negotiated and indorsed to Metropol Financing and Investment Corp as follows:
Pay to the order of Metropol Bacolod Financing & Investment Corporation
with recourse. Notice of Demand; Dishonor; Protest; and Presentment are hereby
waived.
Sambok Motors Co (Bacolod) By Rodolfo Nonillo Asst Gen manager

- The maker, Dr. Villaruel defaulted in the payment of his installments when they
became due, so on October 30, 1969 plaintiff formally presented the promissory
note for payment to the maker. Dr. Villaruel failed to pay the promissory note as
demanded, hence plaintiff notified Sambok as indorsee of said note of the fact that
the same has been dishonored and demanded payment.
- Sambok failed to pay, so on November 26, 1969 plaintiff metropol (holder) filed a
complaint for collection of a sum of money before the Court of First Instance of
Iloilo, Branch I. Sambok did not deny its liability but contended that it could not
be obliged to pay until after its co-defendant Dr. Villaruel, has been declared
insolvent.
- Maker Villareal defaulted payment and this prompted Metropol to run after
Sampol.
 - During the pendency of the case in the trial court, defendant Dr. Villaruel died,
dismissed
- Tc On plaintiff’s motion for summary judgment,: ruled in favor of Metropol
ordering Sambok to pay the sum payable + interest + 25% interest
- In an appeal, Sampol alleged that it is not liable since it was qualified indorser
through the wordings it inserted in its indorsement—with recourse.

W Sambok is liable as a general indorser and not as a qualified indorser. YES The
words added by said appellant do not limit his liability, but rather confirm his obligation
as a general indorser.

HELD:
- Qualified indorsement constitutes the indorser a mere assignor of the title to the
instrument. It may be made by adding to the indorser's signature the words
"without recourse" or any words of similar import. Such an indorsement relieves
the indorser of the general obligation to pay if the instrument is dishonored but not
of the liability arising from warranties on the instrument as provided in Section 65
of the Negotiable Instruments Law already mentioned herein. However, appellant
Sambok indorsed the note "with recourse" and even waived the notice of demand,
dishonor, protest and presentment.
- A "Recourse" means resort to a person who is secondarily liable after the default
of the person who is primarily liable.
- Appellant, by indorsing the note "with recourse" does not make itself a qualified
indorser but a general indorser who is secondarily liable, because by such
indorsement, it agreed that if Dr. Villaruel fails to pay the note, plaintiff-appellee
can go after said appellant. The effect of such indorsement is that the note was
indorsed without qualification. A person who indorses without qualification
engages that on due presentment, the note shall be accepted or paid, or both as the
case may be, and that if it be dishonored, he will pay the amount thereof to the
holder.
- Appellant Sambok's intention of indorsing the note without qualification is made
even more apparent by the fact that the notice of demand, dishonor, protest and
presentment were an waived. The words added by said appellant do not limit his
liability, but rather confirm his obligation as a general indorser.

Art 67 Liability of Indorser, where paper negotiable by delivery

Incurs all the liability of an indorser
- Bearer instrument if nego by delivery- liable to immediate transferor
- Bearer Ins if nego by indorsement-liable to indorsers who make title through his
indorsement if special AND liability of gen indorser if without Q
Art 68 Order in which Indorsers are liable
GR: in the order which they indorse
E: agreed otherwise

If Joint payees/indorsees, deemed to indorse jointly and severally

- Application: only to indorser as against another but NOT against HDC
- Does NOT determine the order of liability of joint indorsement among themselves
- Presumption: every indorser is liable to all indorsers subsequent to him
- E: irregular indorser is NOT liable to accommodated party
joint and several: deemed to indorse solidarily (any is liable for the whole amt)
- Effect of lack of notice of doshonr eetc: one of the joint indorsers cannot excape
liability because proper notice of dishonor wasn’t given to his joint indorser
- EX. PN: M order of P-A-B-C-D(holder)
- D may recover from any of the indorsers.
- IF D sues A, A cannot allege that A and B have agreed that B should be liable first
- A’s remedy: go against P, the prior indorser but not to subsequent

Art 69 Liability of Agent/Broker

GR If without indorsement, incurs all liable as under sec 65
E: discloses name of principal & the fact that he is an agent