POINTERS & CASES

NEGOTIABLE INSTRUMENTS LAW

larry p. ignacio ©

NEW CASES

HSBC v. CIR, GR Nos. G.R. Nos. 166018 & 167728, June 4, 2014

HSBC performs custodial services in behalf of its investor-clients as regards their passive
investments in the Philippines mainly involving shares of stocks in domestic corporations.
These investor-clients maintain Philippine peso and/or foreign currency accounts with
HSBC. Should they desire to purchase shares of stock and other investments securities in
the Philippines, the investor-clients send their instructions and advises via electronic
messages from abroad to HSBC directing the latter to debit their local or foreign currency
account and to pay the purchase price upon receipt of the securities.

Are the electronic messages negotiable instruments?

NO. The electronic messages are not signed by the investor-clients as supposed drawers
of a bill of exchange; they do not contain an unconditional order to pay a sum certain in
money as the payment is supposed to come from a specific fund or account of the investor-
clients; and, they are not payable to order or bearer but to a specifically designated third
party. Thus, the electronic messages are not bills of exchange.

PATRIMONIO v. GUTIERREZ & MARASIGAN, GR No. 187769, 14 June 2014

Alvin entrusted several pre-signed blank checks to Nap Gutierrez to answer for the
expenses of a business venture (Slam Dunk) co-owned between them. Further, that
Gutierrez could only use the checks upon prior approval of Alvin. Gutierrez, without the
knowledge and consent of Alvin, however delivered one of the checks to Marasigan as
security for a loan in the amount of P200,000.00. Gutierrez misrepresented that the loan is
for the construction of Alvin’s house. The blank portions of the check were filled out with the
words “Cash” “Two Hundred Thousand Pesos Only,” the amount of “P200,000.00” and the
date “May 23, 1994.” When Marasigan deposited the check, it was dishonored or the
reason “ACCOUNT CLOSED.”

Is Alvin liable?
Is Marasigan a holder in due course (HDC)?

Alvin is NOT liable and Marasigan is not a HDC.

The check is incomplete but delivered. It was not completed strictly under the authority
given by Alvin to Gutierrez.
Gutierrez was limited to the authority to fill up the blank pre-signed checks to be used in the
operation of their business and on the condition that Alvin’s prior approval be first secured.
The authority does not extend to its use (i.e., subsequent transfer or negotiation) once the
check is completed.

Gutierrez exceeded his authority. He used the check to pay the loan he supposedly
contracted for the construction of Alvin’s house.

Marasigan is NOT a HDC.

The rule that a possessor of the instrument is prima facie a holder in due course is
inapplicable. Marasigan is aware that Alvin is not a party or privy to the loan. The inaction
and failure to verify, despite knowledge that Alvin was not a party to the loan, may be
construed as gross negligence amounting to bad faith. Alvin had no obligation or liability to
him, rendered him dishonest, hence, in bad faith.

*ESSENTIAL REQUISITES (Sections 1-10)

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Requisites of a Negotiable Note (PN): (WUDO)

It must: a.  be in writing signed by the maker

b. contains an unconditional promise or order to pay a sum certain money
c.   be payable on demand or at a fixed determinable future time
d.   be payable to order or to bearer (Sec. 1 NIL)

Requisites of a Negotiable Bill (BOE): (WUDON)

It must: a) be in writing signed by the drawer

b) contains an unconditional promise or order to pay a sum certain in money
c) be payable on demand or at a fixed determinable future time
d) be payable to order or to bearer
e) the drawee must be named or otherwise indicated with
reasonable certainty (Sec. 1 NIL)

Determination of negotiability

1. by the provisions of the Negotiable Instrument Law, particularly Section 1 thereof

2. by considering the whole instrument
3. by what appears on the face of the instrument and not elsewhere

The requirements must be on the face of the instrument for it to be a negotiable

instrument. (Caltex v. CA, 212 SCRA 448 [10 Aug. 1992] ). If it appears on the instrument that
it lacks one of the requirements, it is not negotiable and the provisions of the NIL do not
govern the instrument. The lacking requirement cannot be supplied by using a separate
instrument where the requirement that is lacking appears.

To be considered negotiable, the instrument must contain the “words of negotiability”—i.e.,

must be payable to “order” or “bearer.” Without the words of negotiability, the instrument is
payable only to the person designated therein and is therefore, non-negotiable.
(Consolidated Plywood Ind. v. IFC Leasing, 149 SCRA 448)

A check payable to the order of “cash” is a check payable to bearer. (Ang Tek Lian v. CA, 87
Phil 383 [25 Sept. 1950])

An instrument providing that the amount therein stated shall be payable to bearer on
demand” and that the “encashment of this certificate may not be made until after five (5)
years from date of the execution of the Deed of Sale of Hacienda de Leon” is NOT payable
on demand. It is payable only after the lapse of five years from a given period. ( Buencamino
v. Hernandez, 8 SCRA 483)

The negotiability of the instrument is not affected by the stipulations of the parties.
(PNB v. Manila Oil, 43 Phil 444)

An acknowledgment of debt becomes a promise to pay by addition implying a promise of

payment, such as “payable,” “payable on a given day,” “payable on demand,” “paid when
called for,” “I.O.U.” (Jimenez v. Bucoy, 103 Phil 40 [1958])

When the parties stipulate payment in foreign currency, the rate of exchange is determined
not at the time of making of the instrument but at the time of payment, and not the rate at
the time the obligation is secured. (Kalalo v. Luz, 34 SCRA 337 [1970])
A check that is payable to a specified payee is an order instrument. However, under
Section 9(c) of the NIL, a check payable to a specified payee may nevertheless be
considered as a bearer instrument if it is payable to the order of a fictitious or non-
existing person, and such fact is known to the person making it so payable. Thus,
checks issued to Prinsipe Abante or Si Malakas at si Maganda, who are well-known
characters in Philippine mythology, are bearer instruments because the named payees are
fictitious and non-existent. (PNB v. Rodriguez, 566 SCRA 513 [2008])
The fictitious payee rule (PNB v. Rodriguez, 566 SCRA 513 [2008])

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 As a rule, when the payee is fictitious or not intended to be the true recipient of the
proceeds, the check is considered as a bearer instrument.

An actual, existing, and living payee may also be fictitious if the maker of the check
did not intend for the payee to in fact receive the proceeds of the check. This usually
occurs when the maker places a name of an existing payee on the check for
convenience or to cover up an illegal activity. Thus, a check made expressly
payable to a non-fictitious and existing person is not necessarily an order
instrument. If the payee is not the intended recipient of the proceeds of the
check, the payee is considered a fictitious payee and the check is a bearer
instrument.

In a fictitious-payee situation, the drawee bank is absolved from liability and the
drawer bears the loss. When faced with a check payable to a fictitious payee, it is
treated as a bearer instrument that can be negotiated by delivery. The underlying
theory is that one cannot expect a fictitious payee to negotiate the check by placing
his indorsement thereon. And since the maker knew this limitation, he must have
intended for the instrument to be negotiated by mere delivery.

When the person making the check so payable did not intend for the specified
payee to have any part in the transactions, the payee is considered as a fictitious
payee. The check is then considered as a bearer instrument to be validly negotiated
by mere delivery.

The fictitious-payee rule extends protection even to non-bank transferees of the

checks.

However, there is a commercial bad faith exception to the fictitious-payee

rule. A showing of commercial bad faith on the part of the drawee bank, or any
transferee of the check for that matter, will work to strip it of this defense. The
exception will cause it to bear the loss. Commercial bad faith is present if the
transferee of the check acts dishonestly, and is a party to the fraudulent scheme.

*COMPLETION & DELIVERY

Delivery is defined as the transfer of possession of the instrument by the maker or drawer
with the intention to transfer title to the payee and recognize him as holder thereof. ( de la
Victoria v. Burgos, 245 SCRA 374)

Delivery as the term is used in Section 12 of the negotiable Instruments law means that the
party delivering did so for the purpose of giving effect thereto. ( San Miguel Corporation v.
Puzon, Jr., 631 SCRA 48, 22 September 2010).

The salary of a government officer or employee in the form of a check does not belong to
him before it is physically delivered to him. Until that time the check belongs to the
government. Accordingly, before the actual delivery of the check, the payee has no power
over it; he cannot assign it without the consent of the Government. ( de la Victoria v. Burgos,
245 SCRA 374)

It is no defense in an action to enforce a negotiable promissory note that it was signed in

blank as Section 14 of the NIL concedes prima facie authority of the person in possession
of negotiable instruments to fill in the blanks. (Quirino Gonzalez Logging Concessionaire, et al.
v. CA, GR No. 126568, 30 April 2003)

Where the debtor who drew two checks payable to his creditor but never delivered them,
but that a third party was able to collect the proceeds of the checks by forging the
endorsement of the creditor-payee, the creditor did not gain standing against any person to
recover on the checks since he acquired no interest over them by reason of delivery. ( DBP
v. Sim Wei, 219 SCRA 736 [1993])
*SIGNATURE /FORGERY

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A person who participated in an illegal scheme and conspiracy with the person who signed
the instrument is liable on the instrument even if his signature does not appear thereon.
(Tiaoqui v. Cu Unjieng, 104 Phil 775)

A person who is alleged to be the real debtor but was not stated or mentioned in the
promissory note cannot be made liable thereon. It is the signatory who shall be liable. ( del
Rosario v. CA, 114 SCRA 159)

Any person taking checks payable to a corporation, which can act only by agents does so
at his peril, and must abide by the consequences if the agent who indorses the same is
without authority. When a bank accepts the indorsements on checks made out to a
salesman of the drug company and the indorsement of the salesman’s wife and clerk, and
credits the checks to the personal account of the salesman and his wife, permitting them to
make withdrawals, the bank makes itself responsible to the drug company for the amounts
represented by the checks unless it is pleaded and proved that after the money was
withdrawn from the bank, it passed to the drug company which thus suffered no loss.
(Insular Drug v. PNB, 58 Phil 684)

A bank is bound to know the signatures of its customers, and if it pays a forged check, it
must be considered as making the payment out of its own funds, and cannot ordinarily
charge the amount so paid to the account of the depositor whose name was forged. ( San
Carlos Milling v. BPI, 50 Phil 59)

The contention that payment of a check is equivalent to acceptance so as to preclude the

drawee bank from setting up forgery is without merit. A check unlike a bill of exchange is
not presented for acceptance. Acceptance implies subsequent negotiation of the
instrument, which is not true in the case of payment of a check because from the moment a
check is paid, it is withdrawn from circulation. When the drawee bank cashes or pays a
check, the cycle of negotiation is terminated, and it is illogical thereafter to speak of
subsequent holders who can invoke the warranty of an acceptor. Such being the case,
the drawee bank is not precluded from setting up forgery. (PNB v. National City Bank of New
York, 63 Phil 711)

*Employers not necessarily liable for forgery of employees

The bare fact that the forgery was committed by an employee of the party whose signature
was forged can not necessarily imply that such party’s negligence was the cause of the
forgery in the absence of some circumstances raising estoppel against the drawer.
(Samsung Construction Co. v. Far East Bank and Trust Company, G.R. No. 129015, Aug. 13, 2004;
PCI Bank v. CA, 350 SCRA 446 [2001])

Indorser is liable on the instrument although the signature of the payee is forged because
the indorser by his indorsement guaranteed that the instrument is genuine, therefore,
impliedly, that the instrument is valid, otherwise, there would be nothing for the indorser to
guarantee. (Republic v. Ebrada, 65 SCRA 680 [1975])

*MATERIAL ALTERATION

A material alteration is defined in Sec. 125 of the NIL to be one which changes the date,
sum payable, the time or place of payment, the number or relations of the parties, the
currency of which payment is to be made or one which adds a place of payment where no
place of payment is specified, or any change or addition which alters the effect of the
instrument in any respect. (Bank of America NT v. Phil. Racing Club, 594 SCRA 301 [2009] )

The alteration of the serial number of a check is an immaterial or innocent one. (PNB v. CA,
256 SCRA 491 [25 April 1996])

Immaterial alteration and spoliation do not avoid instrument but holder may enforce it only
according to its original tenor. (ibid.)

An alteration is said to be material if it alters the effect of the instrument. It means an

unauthorized change in an instrument that purports to modify in any respect the obligation
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of a party or an unauthorized addition of words or numbers or other changes to an
instrument relating to the obligation of a party. In other words, a material alteration is one
which changes the items which are required to be stated under Section 1 of the NIL. (ibid.)

**Spoliation: an act of alteration made by a stranger to the instrument. ( Walsh v. Hunt, 52 P.

115, 120 Cal. 46, 39 L.R.A. 697, cited in Perez, Quizzer and Reviewer on Negotiable Instruments
Law and Related Laws, 2001 ed, p. 174).

*Accommodation Party

**The relation between an accommodation party and the party accommodated is one of
principal and surety.
**The liability of the accommodation party is primary and unconditional.
(Aglibot v. Santia, GR No. 185945, 05 December 2012)

*NEGOTIATION (Secs. 30-50)

As a rule, when the payee is fictitious or not intended to be the true recipient of the
proceeds, the check is considered as a bearer instrument. ( PNB v. Rodriguez, 566 SCRA 513
[2008])

*Kinds of indorsement

A person who signs for the purpose of identifying a person only and not for the purpose of
incurring any liability as to the payment of a promissory note or bill of exchange and clearly
indicating that it is for the purpose of identification only, is not an indorser. ( American Bank
v. Macondray, 4 Phil 695)

One who only guarantees prior indorsements does not become an indorser. (PNB v. CA, 25
SCRA 693)

*RIGHTS OF A HOLDER (Secs. 51-59)

** A payee can be a holder in due course. Section 191 defines “holder” as the payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof. Hence, the word
“holder” in the first clause of Section 52 and in the second subsection thereof “may be
replaced by the definition in Section 191 so as to read a holder in due course is a payee or
an indorsee in possession, etc.” (de Ocampo v. Gatchalian, 3 SCRA 596 [1961]; Prudencio v.
CA, 143 SCRA 7 [1986]). This applies to crossed checks where the payee was not involved in
the underlying transaction (Yang v. CA, GR No. 138074, 15 Aug. 2003).

Real defense may be raised against a holder in due course. The prescriptive period for the
filing of a claim based on negotiable instruments is ten (10) years from the time the cause
of action accrued. In case of checks, the action of the depositor against his drawee bank
commences to run from the time he is given notice of payment. ( PCIB v. CA, 350 SCRA 446
[2001])

Where the holder received an instrument 2 years after it became overdue, the holder
cannot be considered a holder in due course. (Montinola v. PNB, 88 Phil. 178 [26 Feb. 1951])

The fact that the drawer had no account with the payee; that the person using the check as
payment did not show or tell the payee why he had the check in his possession and why he
is using it for the payment of his own personal account—show that the title of the transferor
is defective or suspicious, to say the least. In such case, it cannot be said that the payee
acquired the check without knowledge of said defective title, and for this reason, he is not a
holder in due course. (Vicente R. de Ocampo and Co. v. Gatchalian, 3 SCRA 596 )
A person who takes a crossed check without making further inquiries is not a holder in due
course. The act of crossing a check serves as warning to the holder that the check has
been issued for a definite purpose so that he must inquire if he has received the check
pursuant to that purpose. (Bataan Cigar & Cigarette Factory v. CA, 230 SCRA 643 [1994] )

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Holder in due course

Section 52(c) of the NIL states that a holder in due course is one who takes the instrument
"in good faith and for value." Acquisition in good faith means taking without knowledge or
notice of equities of any sort which could be set up against a prior holder of the instrument.
It means that he does not have any knowledge of fact which would render it dishonest for
him to take a negotiable paper. The absence of the defense, when the instrument was
taken, is the essential element of good faith.

**The Shelter Rule: A holder who is not in due course but derives his title through a holder
in due course, and who is no himself a party to any fraud or illegality affecting the
instrument, has all the rights of such former holder in respect of all parties prior to the latter
(Sec. 58, NIL).

REAL AND PERSONAL DEFENSES

Personal (or equitable) defenses: Refer to acts or circumstances leading to the issuance of
the instrument rather than to the instrument itself. They affect the agreement for which the
instrument was issued; they do not affect the validity of the instrument which is
acknowledged to be valid.

Examples: a) Insertion of a wrong date (Sec. 13)

b) Want or lack of authority to complete an instrument (Sec. 14)
c) Want or lack of delivery of a complete instrument, or that the delivery of
the instrument was conditional or for a special purpose only (Sec. 16)
d) Absence or failure of consideration (Sec. 28)
e) Acquisition of the instrument or a signature thereon by fraud, duress, force
and fear, or other unlawful means, or for an illegal consideration (Sec. 55)
f) Negotiation of the instrument in breach of faith or under such circumstance
as will amount to amount (Sec. 55)
g) Fraud in inducement (e.g. M was made to issue a check to P as payment
for a ring which P represents as a diamond ring which in reality is only made
of glass)
h) Discharge by payment or renunciation or release before maturity.
i) Illegality of contract (refers to the manner of its execution or because of
unlawful consideration)

Real (or legal or absolute) defenses: Those that attach to the instrument itself and be used
as reasons against payment of a negotiable instrument to any holder, including a HDC or a
person who has the rights of a holder in due course.

Examples: a) Want of delivery of an incomplete instrument (Sec. 15)

b) Minority or other form of incapacity (Sec. 22)
c) Forgery (Sec. 23)
d) Fraud in factum (fraud in fact) or in esse contractus (fraud in the essence
of the contract (e.g. B obtains the signature of M for autograph purposes but
B converts the same into a negotiable instrument)
e) Discharge at or after maturity
f) Illegality of contract (the instrument of contract itself must be expressly
declared illegal by statute)
g) Duress amounting to forgery (e.g. a person takes the hand of another and
forces the latter to sing his name)
h) Material alteration (Sec. 124) (to the extent of the material alteration)

Presentment

When it is not the payee who presented the check for payment and therefore, there was no
proper presentment, the liability did not attach to the drawer. In the absence of due

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presentment, the drawer does not become liable. (Hi-Cement Corp. v. IBAA, 534 SCRA 269
[2007])

NOTICE OF DISHONOR (Secs. 89-118)

**Reason for dishonor must be stated in the notice of dishonor or refusal: Where there are
no sufficient funds in or credit with the drawee bank, such fact shall always be explicitly
stated in the notice of dishonor or refusal, a mere oral notice or demand to pay would
appear to be insufficient for conviction under the law. (Resterio v. People, 681 SCRA 592, 24
September 2012).

Notice of dishonor is not required if the drawer has no right to expect or require the bank to
honor the check, or if the drawer has countermanded payment. In the instant case, all
the check were dishonored for any of the following reasons: “account closed,” “account
under garnishment,” “insufficiency of funds,” or “payment stopped.” In the first three
instances, the drawers had no right to expect or require the bank to honor the checks, and
in the last instance, the drawers had countermanded payment. ( Great Asian Sales Center v.
CA, 381 SCRA 557 [25 April 2002])

It is incumbent upon those seeking to hold the indorsers and drawer liable to prove that
notice of dishonor was given to the said indorsers and drawer within the time and in the
manner required by law. If this is not proven, the indorsers and drawer cannot be made
liable on the instrument. (Asia Banking Corp. v. Javier, 44 Phil 778)

If the drawer is an officer of a corporation, the notice of dishonor to the said corporation is
not notice to the employee or officer who drew or issued the check and in its behalf.
(Marigomen v. People, 459 SCRA 169)

*DISCHARGE OF INSTRUMENTS (Secs. 119-125)

A delay in notice of dishonor, where notice is required, discharges the drawer to the extent
caused by the delay. (Great Asian Sales Center v. CA, 381 SCRA 557 [25 April 2002] )

An indorser will be wholly discharged irrespective of any question of loss or injury caused
by delay in presentment. (PNB v. Seeto, 91 Phil. 756 [13 Aug. 1952])

A person cannot be both the primary debtor and the guarantor of his own debt—this is
inconsistent with the very purpose of a guarantee which is for the creditor to proceed
against a third person if the debtor defaults in his obligation. ( Velasquez v. Solidbank, 550
SCRA 119 [2008])

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