Nego - Midterms - Reviewer - Jacinto

NEGOTIABLE INSTRUMENTS • PROF.
JACINTO • CAROLINO, COSTALES, DELA CRUZ & ORACION • E2018
INTRODUCTION
Kinds of negotiable instruments
Promissory an instrument that evidences a promise to pay money

note
Bill of an order made by one person to another to pay money to a third person
exchange
Check a form of bill of exchange wherein the one who issues it orders his bank to pay the person named on the
check, which is always payable on demand
Certificate of a form of promissory note issued by a bank reciting a deposit of a certain sum of money, payable either
deposit at a fixed time or on demand, to the depositor named therein
Bond a form of promissory note issued by a corporation, public or private, payable at a definite date in the
future, usually for a long term
Draft a form of bill of exchange that evidences an order made by one person (e.g. the buyer of the goods)
addressed to a person having in his possession funds of such buyer, ordering the addressee to pay the
purchase price to the seller of the goods
Bank draft a type of draft wherein the order is made by one bank to another bank
Parties and the nature of their liabilities
PARTY DEFINITION LIABILITY
maker the promissor in a promissory note primary
payee the person to whom the promise is made in a

promissory note, or the person to whom the
payment is made in a bill of exchange
drawer the person who gives the order to pay in a bill of secondary -- liability is conditioned upon two factors:
exchange (1) demand or presentment duly made on the primary
party, and (2) notice of dishonor
drawee the addressee of the order in a bill of exchange primary, once he accepts the order of the drawer to
pay, in which case he becomes an acceptor
indorser the person who transfers an instrument to another (1) liability as a seller or transferor of personal
by signing the back of the instrument property, and (2) liability when the two conditions
mentioned above have been fulfilled
indorsee the person to whom the instrument is negotiated or

indorsed, who then becomes the holder
Astro Electronics v. Phil. Export Guarantee

Philtrust granted loans to Astro amounting to P3M, secured by three promissory notes. These PNs were signed by
petitioner Roxas twice, as President of Astro and in his personal capacity. Roxas denied any liability on the PNs and
argued that he signed them in blank and the phrases “personal capacity” and “official capacity” were fraudulently
inserted. The Court disregarded his self-serving allegations and concluded that he already became a co-maker of the PN.
Under the NIL, persons who write their names on the face of promissory notes are makers [Sec. 184], promising that
they will pay to the order of the payee or any holder according to its tenor [Sec. 60]. Thus, even without the phrase
“personal capacity,” a person who affixes his signature on each of the promissory notes twice implies that he is
undertaking the obligation in two different capacities, official and personal.
Functions of negotiable instruments

● As a substitute for money in payment for property or services. Note, however, that its validity is conditioned on its
being honored by the person bound by its terms to pay it.
● As a means of creating or transferring credit.
● As a means to facilitate the sale of goods (i.e. drafts used for international trade).
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NEGOTIABLE INSTRUMENTS • PROF. JACINTO • CAROLINO, COSTALES, DELA CRUZ & ORACION • E2018
The concept of negotiability

The important distinction between negotiable instruments and non-negotiable instruments may be seen in the concept of
the holder in due course. The person to whom an instrument following the form specified by the NIL is negotiated
acquires a better right than his transferor if he fulfills the requirements of a holder in due course. Under Sec. 52 of the
NIL, a holder in due course is a holder who has taken the instrument under the following conditions:
(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 in the instrument or defect in the
title of the person negotiating it.
Firestone Tire & Rubber Company v. CA and Luzon Development Bank

As payment for its purchases, Fojas-Arca delivered to Firestone special withdrawal slips drawn upon LDB, which were
then deposited by Firestone with Citibank, and in turn Citibank forwarded it to LDB for payment and collection.
However, because some were dishonored, Citibank debited Firestone’s account for their sum. SC ruled that LDB should
not be held liable for damages suffered by Firestone. These slips were non-negotiable as they lacked the essence of
negotiability (the freedom to circulate freely as a substitute for money). Hence, the rules governing the giving of
immediate notice of dishonor of negotiable instruments do not apply. Citibank was not bound to accept the withdrawal
slips as a valid mode of deposit. Firestone as account-holder must bear the risks attendant to the acceptance of these
instruments.
Applicability of the NIL

Act No. 2031, or the Negotiable Instruments Law, only applies to instruments which conform to the requirements laid
down in Sec. 1. Otherwise, the instrument is governed by the general law on contracts.
Metrobank v. CA
Gomez deposited treasury warrants in his account with Golden Savings, who deposited them with Metrobank.
Metrobank allowed Golden Savings to withdraw on the value of the warrants before they had been cleared, and
consequently Golden Savings allowed Gomez to withdraw too. The warrants were subsequently dishonored, and
Metrobank demanded Golden Savings to be paid for their value. However, the Court said that Metrobank was negligent.
Moreover, the warrants were not negotiable instruments, thus Golden Savings could not be held liable as an indorser.
The Negotiable Instruments Law (NIL) does not apply to documents that are not negotiable instruments. The document
in question was not a negotiable instrument because it did not contain an unconditional promise or order to pay a sum
certain in money. Therefore, when Golden Savings “indorsed” said non-negotiable instruments to Metrobank for
clearing, and not to guarantee their genuineness, liability could not be imposed upon the former.
CHAPTER I
REQUISITES OF NEGOTIABILITY
Sec. 1. Form of negotiable instruments. - An instrument to be negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.
Sec. 184. Promissory note, defined. - A negotiable promissory note within the meaning of this Act is an unconditional
promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or
determinable future time, a sum certain in money to order or to bearer. Where a note is drawn to the maker's own order,
it is not complete until indorsed by him.
Sec. 126. Bill of exchange, defined. - A bill of exchange is an unconditional order in writing addressed by one person to
another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to bearer.
HKSBC v. CIR
HSBC filed administrative claims for refund of erroneously paid DST to the BIR pursuant to BIR Ruling No. 132-99,
which provides that instruction made through an electronic message by a non-resident payor-client to debit his local or
foreign current account maintained in the PH and to pay a certain named recipient also residing in the PH is not subject
to DST imposed under Sec. 181 of the Tax Code. The Tax Code imposes DST on either (a) the acceptance or (b) the
payment of a foreign BOE, or order for the payment of money drawn abroad but payable in the PH. The court held that
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the electronic messages are not BOE. As there was no BOE or order for the payment drawn abroad and made payable
here in the PH, there could have been no acceptance or payment.
1. Written form & signature
Sec. 18. Liability of person signing in trade or assumed name. - No person is liable on the instrument whose signature
does not appear thereon, except as herein otherwise expressly provided. But one who signs in a trade or assumed name
will be liable to the same extent as if he had signed in his own name.
Sec. 19. Signature by agent; authority; how shown. - The signature of any party may be made by a duly authorized
agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be
established as in other cases of agency.
Written form includes handwritten words, printed words, and typewritten words
Signature binding whether handwritten, printed, engraved, lithographed, or photographed, as long as it is

intended or authorized by the signer
though usually found at the lower right hand corner, it may appear on any part of the instrument, as
long as the maker’s or drawer’s intention is shown
in case of ambiguity as to what capacity the person intended to sign, the assumption is that he is an
indorser
2. Unconditional order or promise to pay
Examples for promissory notes Unconditional promise to pay?
Mere acknowledgment of a debt (e.g. “I.O.U”) No, there must be an express promise to pay
Statement of a certain time to pay (e.g. “on demand”) Yes
Examples for bills of exchange Unconditional order to pay?
Mere request or authority to pay No, the instrument must be clearly demanding a right
A demand upon the drawee to pay, but using polite Yes

language (e.g. “please”)
(a) When unconditional
Sec. 3. When promise is unconditional. - An unqualified order or promise to pay is unconditional within the meaning of
this Act though coupled with:
(a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be
debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument.
But an order or promise to pay out of a particular fund is not unconditional.
Powell & Powell v. Greenleaf & Currier

Plaintiff filed a suit to recover the balance due on two instruments in writing from defendant. The issue was whether the
instruments were negotiable, which the court ruled in the affirmative. An instrument to be negotiable must contain an
unconditional promise or order to pay a sum certain in money, which means that the order or promise must be
unqualified despite any references to extrinsic contracts. Negotiability will only be destroyed if the reference to the
collateral contract shows that the obligation to pay is burdened with the conditions of that contract. In this case, phrases
such as "for and in consideration of a contract and agreement," "whereby we are entitled to the use of said company's
system of collections," and "we hereby acknowledge the receipt of a true copy of this entire agreement" did not destroy
the negotiability.
3. Sum payable must be certain
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Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum certain within the meaning of this Act,
although it is to be paid:
(a) with interest; or Note: There can be a stipulation to pay higher or lower
interest depending on whether the instrument was paid on
or before maturity.
(b) by stated installments; Note: The due date and amount of each installment must
be mentioned.
(c) by stated installments, with a provision that, upon

default in payment of any installment or of
interest, the whole shall become due; or
(d) with exchange, whether at a fixed rate or at the Note: An instrument expressed in foreign currency may
current rate; or contain a provision that the same is payable in Philippine
currency at a fixed rate or at the current rate.
(e) with costs of collection or an attorney's fee, in case Note: If such provision for attorney’s fees is blank, it
payment shall not be made at maturity. amounts to a promise to pay reasonable fees, which may be
determined by the court.
4. Payable in money
Thus, an instrument is not negotiable if it is payable in personal property, services, shares of stock, or even gold. The
term “money” includes any kind of current money such as foreign currency, and is not just limited to “legal tender.”
5. Certainty of time of payment [Sec. 1(c)]

● Purpose: To inform the holder of the instrument of the date when he may enforce payment thereof
(a) When payable on demand

● In the case of a demand instrument, the holder may call for payment at any time.
Sec. 7. When payable on demand. - An instrument is payable on demand:

(a) When it is so expressed to be payable on demand, or at E.g., I promise to pay Juan Reyes or order the sum of P100
sight, or on presentation; or at sight
(b) In which no time for payment is expressed. E.g., I promise to pay Juan Reyes or order the sum of P100
Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or
indorsing it, payable on demand.
(b) Payable at a fixed time

● Only on said date, and not before, may the holder demand its payment.
● Should he fail to demand payment, the instrument becomes overdue but remains valid and negotiable. It is merely
converted to a demand instrument.
(c) Payable at a determinable future time
Sec. 4. Determinable future time; what constitutes. - An instrument is payable at a determinable future time, within the
meaning of this Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or E.g., I promise to pay Juan Reyes or order the sum of P100
thirty days after date
(b) On or before a fixed or determinable future time E.g., I promise to pay Juan Reyes or order the sum of P100
specified therein; or on or before December 1, 2016
(c) On or at a fixed period after the occurrence of a E.g., I promise to pay Juan Reyes or order the sum of P100
specified event which is certain to happen, though the time sixty days after the death of Jose Cruz
of happening be uncertain.
An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect.
Note:
● Sec. 11. Date, presumption as to. - Where the instrument or an acceptance or any indorsement thereon is dated,
such date is deemed prima facie to be the true date of the making, drawing, acceptance, or indorsement, as the case
may be.
● Sec. 17. Construction where instrument is ambiguous. - Where the language of the instrument is ambiguous or there
are omissions therein, the following rules of construction apply: xxx (c) Where the instrument is not dated, it will be
considered to be dated as of the time it was issued; xxx
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RFC v. CA
A promissory note executed by Anduiza against RFC contained the provision that the loan may be paid, “on or before
October 31, 1951.” During the interim period prior to the indicated time of maturity, a certain Madrid paid the loan in
behalf of Anduiza, which RFC duly accepted. When Madrid’s demand for payment from Anduiza remained unheeded, he
filed a suit against RFC and Anduiza, for the former to cancel the mortgages on the loan, and for Anduiza to
acknowledge the debt he owed Madrid. The bank argued that the payment made by Madrid did not constitute valid
payment for the loan of Anduiza since the payment was made prematurely. The court held that since the promissory
note contained the phrase “on or BEFORE [date of maturity],” Madrid’s payment was valid. Hence, Anduiza should
acknowledge the debt he owed Madrid, and the bank should release the mortgages as the debt was considered paid.
(d) Effect of acceleration provisions
Who has the option to What is the effect on the negotiability of

accelerate the maturity of the instrument?
the instrument?
Maker Whether option is absolute or conditional: This is the situation covered by Sec. 4(b): “on
Not affected or before a fixed or determinable future time
specified therein.”
Holder If option is unconditional: Instrument The time of payment is rendered uncertain.
becomes non-negotiable
If option is conditional (i.e., the option can
be exercised by the holder only upon the
happening of a specified event or act over
which he has no control): Not affected
If option is given upon failure of the This is expressly allowed by Sec. 2(c): “by
maker to pay any installment when due: stated installments, with a provision that,
Not affected upon default in payment of any installment
or of interest, the whole shall become due.”
If acceleration is Not affected
automatic upon default
If acceleration is by Not affected E.g., the due date is disregarded should the
operation of law maker die before maturity because the holder
should file his claim against the maker’s
estate; where the maker is declared insolvent
and the holder proves his claims in the
insolvency proceedings
Puget State Bank v. Washington Paving

The Olympia Bank extended a deposit credit account to Washington Paving Company, which simultaneously issued four
notes amounting to $20,000 payable to the order of the former. The parties agreed that the notes should not be
transferred without notice to the paving company. Because of an overdraft Olympia owed to Puget Sound Bank, the
latter retained one of the four notes issued by the paving company to settle the overdraft and also purchased another
note. The two notes were not indorsed by Olympia and were only transferred to Puget by delivery. Thereafter, Olympia
was declared insolvent, and the notes matured, causing Puget to file the present claim against the paving company. The
Court held that the notes were non-negotiable instruments because they were declared payable on demand of the payee
even before the maturity date. Since they are non-negotiable, the maker (the paving company) remains entitled to the
defenses available in its favor before the transfer, which is to set-off its deposit credit that it has in the Olympia bank
against the value of the notes.
(e) Provisions extending time of payment
Who has the option to What is the effect on the negotiability of

extend time of payment? the instrument?
Maker Generally: Not affected Sometimes the extension provision is just
another form of an acceleration provision.
E.g., where a note due one year after date
provide that the maker may extend it for
another year
Exception: If maker has the option to The time of payment is rendered uncertain.
extend the payment until the happening
of a contingency then, instrument becomes
non-negotiable
Holder Not affected Should the holder not demand payment at
the end of maturity, the instrument merely
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Note: With or without such provision, the becomes overdue and thus payable on
holder may still choose to be indulgent demand. (Sec. 7)
6. Must be payable to order or bearer [Sec. 1(d)]

● The instrument in order to be considered negotiable must contain the so-called “words of negotiability,” i.e., must be
payable to “order” or “bearer.” These words serve as an expression of consent that the instrument may be
transferred.
Note:
Sec. 10. Terms, when sufficient. - The instrument need not follow the language of this Act, but any terms are sufficient
which clearly indicate an intention to conform to the requirements hereof.
Garcia v. Llamas
Garcia and De Jesus were ordered by to pay, jointly and severally, Llamas based on a promissory note they issued in
favor of the latter. Garcia raised the defense that he signed the note merely as an accommodation party to De Jesus. SC
ruled that Garcia cannot avail himself of NIL’s provisions on the liabilities and defenses of an accommodation party
because the note herein is not a negotiable instrument. The note was made payable to a specific person rather than to
bearer or to order. The promissory note is thus covered by the general provisions of the Civil Code, not the NIL.
(a) When instrument is payable to order

● There must always be a specified person named in the instrument. It means that the bill or note is to be paid to the
person designated in the instrument or to any person to whom he has indorsed and delivered the same.
Sec. 8. When payable to order. - The instrument is payable E.g., I promise to pay to the order of Juan Cruz;
to order where it is drawn payable to the order of a I promise to pay Juan Cruz or order
specified person or to him or his order. Xxx Note: Without the words “to the order of” or “to order,” the
instrument is payable only to the person designated
therein and is therefore non-negotiable.
(b) When instrument is payable to bearer
Sec. 9. When payable to bearer. - The instrument is payable to bearer:

(a) When it is expressed to be so payable; or E.g., I promise to pay to bearer/holder the sum of P100
(b) When it is payable to a person named therein or E.g., I promise to pay Juan Cruz or bearer
bearer; or
(c) When it is payable to the order of a fictitious or non- A name is fictitious when it is feigned or pretended.
existing person, and such fact was known to the person E.g., I promise to pay John Doe or order
making it so payable; or Note: An actual, existing, and living payee may also be
fictitious if the maker did not intend for the payee to in fact
receive the proceeds.
If the payee is not known by the maker or drawer to be
fictitious or non-existing: Instrument is payable to order
Note: There is no one who can indorse it, so in effect it
cannot be validly negotiated.
If the payee is known by the maker or drawer to be fictitious
or non-existing: Instrument becomes payable to bearer
Why? The theory is that since the payee is not capable of
indorsing and since the maker or drawer knew of this fact,
he must have intended the instrument to be transferred by
mere delivery.
(d) When the name of the payee does not purport to be It is presumed that the maker or drawer, by using an
the name of any person; or impersonal payee, intends the instrument to be payable to
bearer.
E.g., I promise to pay to cash
(e) When the only or last indorsement is an indorsement Note: A blank indorsement cannot convert a non-negotiable
in blank. instrument to a negotiable one.
Philippine National Bank v. Spouses Rodriguez

PNB closed the PEMSLA account upon discovering that PEMSLA officers were able to take out loans in the names of
unknowing members and then give it to the spouses for rediscounting. As a result, the spouses filed a complaint for
damages as the PEMSLA checks were dishonored while the checks issued by them were debited from their account and
credited to the PEMSLA account. SC ordered PNB to return the value of the spouses’ checks. The fictitious-payee rule is
not available as a defense because PNB was not able to show that the spouses did not intend the specified payees to be
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part of the transaction involving the checks. Thus, the spouses’ checks are deemed payable to order. PNB was negligent
in allowing the checks to be paid to the PEMSLA account even without indorsement from the named payees.
People v. Wagas
Because the check he issued in favor of Ligaray as payment for 200 bags of rice was dishonored, Wagas was found guilty
of estafa. On appeal, SC acquitted Wagas since the prosecution failed to prove with certainty that it was Wagas who had
defrauded Ligaray by issuing the check. The check herein was made payable to cash. This type of check was payable to
the bearer and could be negotiated by mere delivery without the need of an indorsement. This rendered it highly
probable that Wagas had issued the check to somebody else like Cañada who then negotiated it to Ligaray, as Wagas
claimed.
Parties must be designated with certainty [Sec. 1(e)]
(a) Maker and Drawer

● The maker of a note or the drawer of a bill must sign the instrument and his signature is usually written at the
lower right-hand corner thereof.
● The payee and the successive indorsees negotiate the instrument by signing on the back.
● Note: If ambiguity arises because it is not clear from the instrument in what capacity a party signs (i.e., it deviates
from the commercial usage with respect to the place of the signature), the law solves this by considering such a
person as an indorser.
Continental Illinois Bank & Trust Co. v. Clement

The court dismissed the defense that the promissory note, which was the basis of the suit, was a joint obligation of
Clement and Thorpe and that the Bank could not recover because one of them was not made a party defendant to the
case. If an instrument worded in the singular is executed by several (e.g., ‘I promise to pay’ signed by two or more
persons, as in this case), the obligation is a joint and several one.
(b) Payee
Sec. 8. When payable to order. - xxx It may be drawn payable to the order of:
(a) A payee who is not maker, drawer, or drawee; or E.g., I promise to pay Juan Cruz or order the sum of P100
(Sgd.) Pedro Reyes
(b) The drawer or maker; or E.g., I promise to pay myself or order the sum of P100
(Sgd.) Pedro Reyes
Note: Sec. 184: xxx Where a note is drawn to the maker’s
own order, it is not complete until indorsed by him.
(c) The drawee; or E.g., Pay to the order of yourself the sum of P100
(Sgd.) Pedro Reyes
To: Juan Cruz
(d) Two or more payees jointly; or E.g., I promise to pay to the order of Juan Cruz and Jose
Santos the sum of P100.
(Sgd.) Pedro Reyes
Note: When negotiating the instrument, all the joint
payees must indorse.
(e) One or some of several payees; or E.g., I promise to pay to the order of Juan Cruz or Jose
Santos the sum of P100.
(Sgd.) Pedro Reyes
Note: When negotiating the instrument, only one of the
several payees need indorse.
(f) The holder of an office for the time being. E.g., I promise to pay to the order of the Secretary of X
Association the sum of P100.
(Sgd.) Pedro Reyes
Interpretations Effect
(1) The payee must the Non-negotiable. The payee
person who will hold is uncertain.
the office at maturity.
(2) The payee must be the Not desirable. The person
person holding the will continue to be the
office at the time of the payee although he has
issuance of the ceased to be the holder of
instrument. the office.
(3) The payee must be the Floating promise. This is
person who happens to the most acceptable because
be the holder at any the payee is certain and
particular moment. easily determinable.
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Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable
certainty.
Note:
Sec. 43. Indorsement where name is misspelled, and so E.g., if the payee is designated as Juan Gonzalez instead of
forth. - Where the name of a payee or indorsee is wrongly Juan Gonzales, he should indorse the instrument by
designated or misspelled, he may indorse the instrument signing “Juan Gonzalez” and not “Gonzales,” but he may
as therein described adding, if he thinks fit, his proper add the latter if he wants to
signature.
(c) Drawee
Sec. 128. Bill addressed to more than one drawee. - A bill E.g., a bill may be addressed “To: Juan Cruz and Jose
may be addressed to two or more drawees jointly, whether Reyes,” but not “To: Juan Cruz or Jose Reyes”
they are partners or not; but not to two or more drawees in Why? Because otherwise, there would be no certainty as
the alternative or in succession. the person to whom the bill should be presented for
payment or acceptance.
Sec. 130. When bill may be treated as promissory note. - Why? Because otherwise, no one can ever be made
Where in a bill the drawer and drawee are the same primarily liable on the bill. Since the drawer was
person or where the drawee is a fictitious person or a responsible for naming such a drawee, it is to be assumed
person not having capacity to contract, the holder may that he intended to be primarily liable himself.
treat the instrument at his option either as a bill of
exchange or as a promissory note.
CHAPTER II TRANSFER
1. Delivery & Issuance
Sec. 191. Definition and meaning of terms. - In this Act, unless the contract otherwise requires:
"Delivery" means transfer of possession, actual or constructive, from one person to another
"Issue" means the first delivery of the instrument, complete in form, to a person who takes it as a holder
 Actual – by manual transfer of possession
 Constructive – by any other act manifesting intent to transfer right of possession
Sec. 16. Delivery; when effectual; when presumed. - Every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of giving effect thereto.
 Without the initial delivery of the instrument from the maker to the payee, there can be no liability on the
instrument.
 Delivery must be intended to give effect to the instrument, otherwise, there is no delivery within the meaning of the
above provision.
 Presumption: Once the delivery is no longer in the possession of the person who signed it, a valid delivery by him is
presumed, until the contrary is proved; and as to the holder in due course, the presumption is conclusive, provided
the instrument is complete.
In re Martens’ Estate
The Court affirmed the decision of the trial court, which denied the claim of appellant Mabel Martens Bonk against the
administrator of her mother’s estate based on a note for $1,500, stating that the note sued upon could not be made the
basis of a valid claim against the estate since there was no legal delivery of the same during the lifetime of the decedent.
That the note was prepared and executed by the decedent; that she told one Simon Fisher that the note was in favor of
the appellant; and that she had placed it inside a safety deposit box do not show a legal delivery of the note in question.
San Miguel Corporation v. Puzon

To ensure payment of their products, SMC required Puzon to issue postdated checks equivalent to the value of the
products purchased on credit before the same were released. The said checks were returned to Puzon when the
transactions covered by these checks were paid or settled in full. When Puzon got hold of one of the checks, SMC filed a
complaint against Puzon for theft. The case should be dismissed. Ownership of the subject check was not transferred to
SMC because there was no intent to deliver the checks as payment for the purchased products. It was only meant to
cover the transaction until it was fully paid.
Patrimonio v. Gutierrez
Patrimonio entrusted blank checks to Gutierrez, instructing the latter not to use them without his consent and to use
them only for business expenses. Gutierrez loaned from Octavio Marasigan using a blank check. Gutierrez had prima
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facie authority to fill out the checks under Sec. 14 of the NIL . Under this rule, if the maker or drawer delivers a pre-
signed blank paper to another person in order to convert it to a negotiable instrument, that person is deemed to have
prima facie authority to fill it up. While under the law, Gutierrez had prima facie authority to complete the check, such
prima facie authority does not extend to its transfer or negotiation. In this case, no evidence shows that Gutierrez
obtained Patrimonio’s approval to fill up the blank or to use the check. SC held that Marasigan was not a holder in due
course and that Patrimonio could avail of the defense that Gutierrez exceeded his authority to fill out and use the check
in order to avoid liability to Marasigan under the negotiable instrument aka the check.
2. Negotiation
"Bearer" means the person in possession of a bill or note which is payable to bearer;
"Holder" means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof
 Where an instrument is payable to bearer: The person in possession of the instrument is the bearer as well as the
holder
 Where an instrument is payable to order: The payee or indorsee in possession of the instrument is the holder
Sec. 30. What constitutes negotiation. - An instrument is negotiated when it is transferred 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; if
payable to order, it is negotiated by the indorsement of the holder and completed by delivery.
Negotiation Transfer
It is the transfer of a negotiable instrument made in such It is a broader term than negotiation. If an instrument is
manner that the transferee becomes a holder and thus transferred without negotiation, the transfer is a mere
possibly a holder in due course capable of acquiring a assignment which constitutes the transferee as a mere
better title to the instrument that that of his transferor. assignee not a holder, subject to all defenses existing
Note: A negotiation may be for value as in a sale, or by way among prior parties.
of gift. In either case, there will be a valid transfer.
However, the rights acquired by the transferee in each Thus, transfer includes both an ordinary assignment and a
case may be different. negotiation.
3. Methods of negotiation
Instrument Method of negotiation

Payable to Indorsement by the payee or present An indorsement constitutes a transfer or sale of the instrument
order holder + delivery to the transferee or to the indorsee or transferee and signifies the agreement of the
indorsee, who now becomes the holder indorser to answer for the amount represented by the instrument
in case of default of the maker or the party primarily liable.
Payable to Delivery One who negotiates by delivery, although he assumes the
bearer liabilities of a seller or transferor of the note or bill, does not
warrant that he will pay in case the primary party fails to pay.
Note: It is a common practice, however to indorse a bearer

instrument whenever it is transferred as an additional security
to the transferee, since he can hold the indorsee liable as such,
not only on his warranties as the seller of the bill or note, but
also on his warranty that he will pay in case of default of the
primary party.
4. How indorsement made
a. By signature on instrument or on allonge
Sec. 31. Indorsement; how made. - The indorsement must be written on the instrument itself or upon a paper attached
thereto. The signature of the indorser, without additional words, is a sufficient indorsement.
 Allonge – a slip of paper attached to a negotiable instrument for the purpose of receiving additional indorsements
when there is no longer any room on the instrument itself
o Paper must be so firmly attached to the instrument as to become a part thereof.
b. In case of joint payees
Instrument is payable or indorsed How indorsement made

to:
A and B (joint) General rule: Both payees
Exception: The payee indorsing is authorized
by the other
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A or B (alternative) General rule: Either payee
c. If name misspelled
Sec. 43. Indorsement where name is misspelled, and so forth. - Where the name of a payee or indorsee is wrongly
designated or misspelled, he may indorse the instrument as therein described adding, if he thinks fit, his proper
signature.
 The indorsement should be made by the holder in the manner he was designated, otherwise the signature will prima
facie not be a valid indorsement of the instrument. After such indorsement, he may sign his correct name.
5. Indorsement must be of entire instrument
Sec. 32. Indorsement must be of entire instrument. - The indorsement must be an indorsement of the entire instrument.
An indorsement which purports to transfer to the indorsee a part E.g., if a bill for P100 is indorsed by the payee to
only of the amount payable, or which purports to transfer the A for P50; if a bill for P100 is indorsed by the
instrument to two or more indorsees severally, does not operate as a payee to A for P50 and to B for P50
negotiation of the instrument. Note: However, where the payees are joint, i.e.,
“pay to A and B,” the negotiation is valid.
But where the instrument has been paid in part, it may be indorsed E.g., if a note payable by installments, where
as to the residue. some installments have been paid, the
instrument may still be negotiated for the
remaining unpaid installments
 Purpose: To protect the obligors from more than one action on the instrument
o The maker and all the prior parties, in assuming liability, took the risk of only one cause of action against them.
 Effect of indorsement that does not comply with the provision: The transfer is not necessarily void. It remains valid,
not as a negotiation, but as a mere assignment which subjects the holder to all defenses on the instrument.
 The provision does not prohibit a transaction where the indorsee pays the indorser less that the face amount of the
instrument, title transferring to the indorsee. This is called a discount of the instrument.
o There is no splitting of the cause of action for it belongs wholly to the purchaser who buys at a discount.
o The discount is given in consideration of the period during which the purchase has to wait before he can cash
the instrument with the maker or acceptor, which can be done only at the maturity of the instrument.
6. Kinds of indorsements
Sec. 33. Kinds of indorsement. - An indorsement may be either special or in blank; and it may also be either restrictive or
qualified or conditional.
a. Basis of classification
 Where only the signature of the indorser appears, it is called a blank indorsement.
 Where indorsements contain additional words which modify the rights of subsequent holders or the liabilities of the
indorser, they are classified into special, restrictive, qualified, and conditional.
 Note: The provision does not provide for one classification scheme.
Special or in blank Has to do with the future mode of negotiation, whether by indorsement and
delivery or by delivery alone
Restrictive or non-restrictive Has to do with the kind of title transferred
Qualified or unqualified Has to do with the scope of the liability assumed by the indorser
Conditional or unconditional Has to do with the presence or absence of express limitations put by the
indorser upon the primary obligor’s privileges of paying the holder
b. Special & blank indorsements
Sec. 34. Special indorsement; indorsement in blank. - A special indorsement specifies the person to whom, or to whose
order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further negotiation of
the instrument. An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and
may be negotiated by delivery.
Sec. 40. Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer, is indorsed specially, it
may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such
holders as make title through his indorsement.
Special indorsement Blank indorsement

There are two forms of special indorsement: “Pay X” or A blank indorsement specifies no indorsee, and instrument
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“Pay X or order,” followed by the signature of the indorser. so indorsed is payable to bearer, and may be negotiated by
In either case, the indorsement of the special indorsee is delivery. Thus, where only the signature of the indorser
necessary for the further negotiation of the instrument. appears, with no indication of the person to whom it is
payable it is a blank indorsement, and further negotiation
of such instrument may be effected by mere delivery
regardless of whether the instrument is on its face payable
to bearer or not.
Note: It is not as safe as a special indorsement.
Illustration: A makes an instrument payable to bearer and delivers it to B, who in turn negotiates and delivers it to C. C
indorses it specially to D, who in turn indorses it specially to E. E however negotiates it to F by mere delivery.
A bearer (B)
(maker) (no indorsement)
C
Pay to D
(sgd.) C
Pay to E
(sgd.) D
(no indorsement by E)
F
 A person who negotiates by mere delivery is liable only to his immediate transferee. A special indorsee however is
liable to subsequent holders, unless the instrument is an originally bearer instrument, in which case he is liable
only to those who take title through his indorsement. Thus:
o B is liable only to and not to D, E, and F.
o C and D, the special indorsers, are not liable to F who does not take his title through their indorsements.
o C is however liable to both D and E because they take title through his indorsement.
o D is liable only to E, since the latter is the only one who takes through his indorsement.
o E is of course liable to F.
Sec. 35. Blank indorsement; how changed to special indorsement. - The holder may convert a blank indorsement into a
special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of
the indorsement.
 Thus, the holder may write his name above the signature of the indorser in blank, thus converting the indorsement
into a special one, rendering it negotiable by indorsement and delivery, unless it is upon an originally bearer
instrument.
Instrument payable to order on its face Instrument payable to bearer on its

face
It may be converted into a bearer It always remains a bearer instrument,
instrument by means of a blank i.e., may be further negotiated by
indorsement and may later be delivery alone, whether the last
reconverted into an order instrument indorsement is a blank or special one.
by a subsequent special indorsement, An indorsement of a bearer instrument
the last indorsement always controlling does not convert it to an instrument
the means of further negotiation payable to order.
c. Qualified indorsement
Sec. 38. Qualified indorsement. - A 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 does not impair the negotiable character of the instrument.
 An indorser by his indorsement impliedly enters into two contracts. If he wants to relieve himself of either contract
he must do so in clear and express terms.
(1) A contract of sale or assignment of the instrument; and

(2) A contract to pay the instrument if the maker is E.g., “without recourse,” “sans recourse,” “at indorsee’s
unable to pay on maturity own risk” above his (indorser’s) signature, thus he becomes
a mere assignor of the title of the instrument
 A qualified indorsement rould still be a negotiation and the transferee would still be a holder capable of acquiring a
title free from defenses of prior parties. The only effect is to relieve the qualified indorser of his liability to pay the
instrument should the maker be unable to pay at maturity.
o He does not guarantee the solvency of the maker, but merely his legal title to the instrument.
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o The qualification has no effect on the negotiability of the instrument and it may be further negotiated with the
same freedom as if it had not been so indorsed.
Fay v. Witte
Witte indorsed a note to Fay before maturity. Fay filed the action due to non-payment. Witte argues that he is not liable
as he is a qualified indorser. The Court held that he was an unqualified indorser that was liable for the non-payment.
Under the NIL, there is no implied qualified indorsement. The words “without recourse” or other words of similar
import must be used. In the indorsement signed by Witte, no such words were used. The payee’s name being on the back
of the note gives rise to the presumption that he is an unqualified indorser, unless there are words expressing a different
intention.
Hutson vs. Rankin

Rankin, the maker of a promissory note, failed to pay his liability, so he was sued upon for recovery. An entry was made
and signed by the payee on the back of the negotiable promissory note: “For value received we hereby guarantee
payment of the within note, including interest and costs at maturity or any time thereafter demanded.” Rankin
contended that this guaranty was not an indorsement but merely a transfer subject to all defenses of the maker against
the original payee. HELD: The entry on the back of the note operated as a transfer of the title to the note and as an
indorsement thereof.
Conditional indorsement
● Unconditional or absolute indorsement: Every indorser is liable to pay the instrument on two implied
conditions: (1) that due demand or presentment be made on the party primarily liable on the date of maturity,
and (2) that should the party primarily liable fail to pay on such presentment, a notice of dishonor be promptly
sent to the indorser.
● Conditional indorsement: An additional express condition is annexed to the indorser’s liability. Such condition
does not impair the negotiability of the instrument and is binding upon all holders subsequent to the conditional
indorsement. Example: indorsement by payee to X “if he marries before the age of 25.”
Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the party required to pay the instrument may
disregard the condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or not. But
any person to whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of
the person indorsing conditionally.
● An indorsee who does not fulfill the condition on or before the date of maturity cannot compel the maker to pay
him.
● The maker, if he chooses, may disregard the condition and pay the holder. Reason: The maker has the right to
terminate his liability on the date agreed by him and cannot be burdened with conditions which were not part of
his contract.
Restrictive indorsement
Sec. 36. When indorsement restrictive. - An indorsement is restrictive which either: (a) Prohibits the further negotiation of the
instrument; or (b) Constitutes the indorsee the agent of the indorser; or (c) Vests the title in the indorsee in trust for or to the
use of some other persons. But the mere absence of words implying power to negotiate does not make an indorsement
restrictive.
Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A restrictive indorsement confers upon the indorsee the right: (a)
to receive payment of the instrument; (b) to bring any action thereon that the indorser could bring; (c) to transfer his rights as
such indorsee, where the form of the indorsement authorizes him to do so. But all subsequent indorsees acquire only the title of
the first indorsee under the restrictive indorsement.
A restrictive indorsement either:

● Restricts the right of the indorsee to further negotiate the instrument, or
● Reserves beneficial interest therein in the indorser or in a third person. In this case, although the instrument
may be further negotiated, all subsequent indorsees take subject to the rights of the restrictive indorser or the
third person.
Examples:
● “Pay to X” = not restrictive.
● “Pay to X only” = restrictive, for it prohibits further negotiation of the instrument.
● “Pay to X for collection” = restrictive, for it makes the indorsee an agent to collect in behalf of the indorser.
● “Pay to X for Y’s use” = restrictive, for it vests the title of the indorsee in trust for or to the use of some other
person.
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Indorsement to or by collecting bank
A holder of a check may:

● Cash the check with the drawee bank. In this case, payment to the holder by the drawee bank will discharge the
instrument and terminate all rights and liabilities of the parties thereto.
● Deposit the check to his credit in the drawee bank. In this case, the effect is akin to payment.
● Deposit the check with a bank other than the drawee bank. In this case, the holder is negotiating the check to
such bank, since he would have to indorse the check before the bank will accept it for deposit.
Examples:
● “Pay to X Bank for deposit” = generally held to be a restrictive indorsement wherein the bank obligates itself as
the depositor’s collecting agent, assuming no responsibility beyond care in selecting correspondents.
● “Prior indorsements and/or lack of indorsements guaranteed” = generally non-restrictive since it does not
indicate that the bank obligates itself as a collecting agent. However, if such statement appears in the deposit
slip filled up by the holder, the bank obligates itself as a collecting agent.
● “For payee’s account only” = restrictive (?), for it requires that the check be deposited in a bank in which the
payee has an account.
Leonardi vs. Chase National Bank

John and Florence Leonardi held an account at the Bank of Bay Biscayne. They deposited a check drawn on the Bank of
Manhattan Trust Company in their account with this indorsement: “For deposit of John and Florence Leonardi.” Chase
National was the New York correspondent of the Bay Biscayne. It received the check from the Bay Biscayne, and after
the check cleared, credited the amount to Bay Biscayne on its books. The next day, Bay Biscayne failed to open due to
insolvency. At the time, Bay Biscayne still had over a million dollars in debt to Chase National. Chase National set off
this debt against the credits it had to the bank, which included the sum represented by the Leonardis’ check. The couple
sued Chase National, claiming that by setting off the indebtedness, Chase National converted the proceeds of the check
which properly belonged to them. HELD: The Court ruled against the Leonardi couple, holding that after Chase
National credited the amount to Bay Biscayne, it ceased to act as a collecting agent, and a creditor-debtor relationship
between the Leonardis and Bay Biscayne was established. Thus, the couple have no special claim to the proceeds of the
check. The indorsement of a check to a bank “for deposit” is restrictive. Therefore, the bank now serves as a collecting
agent and cannot own the item. Pursuant to the indorsement, after the check is deposited for collection and credit, final
payment is made to the forwarding bank by collection, and as a result the depositor becomes a creditor of the bank.
Negotiation by joint or alternative payees or indorsees
Sec. 41. Indorsement where payable to two or more persons. - Where an instrument is payable to the order of two or more
payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others.
● Joint payees: Sec. 8(d). Example: “Pay to the order of X and Y.”
● Alternative payees: Sec. 8(e). Example: “Pay to the order of X or Y.”
● Joint payees or joint indorsees who are partners (Sec. 41): This provision must be interpreted in the light of our
civil law concept of partnership, which states that a partnership is a juridical person. Thus, if an instrument is
intended to be negotiated to X and Y as partners, then the indorsement must name such firm as indorsee, and
not X and Y as joint payees or indorsees. Example: “Pay to the order of X or Y Co.”
Unindorsed instruments
Sec. 49. Transfer without indorsement; effect of. - Where the holder of an instrument payable to his order transfers it for value
without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in
addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a
holder in due course, the negotiation takes effect as of the time when the indorsement is actually made.
The transferee of an unindorsed instrument acquires the defenses and equities available among the prior parties, but he
cannot be considered a holder or a bearer. He may only be considered a holder by obtaining the indorsement of his
transferor. This indorsement is generally considered to be unqualified.
Cancellation of indorsements
Sec. 48. Striking out indorsement. - The holder may at any time strike out any indorsement which is not necessary to his title.
The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the
instrument.
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● If an instrument is payable to the bearer on its face, then any indorsements on the back of the instrument are
immaterial to the title of the bearer, who is presumptively the owner and holder by his mere possession of such
instrument.
● If the instrument is payable to order on its face, special indorsements appearing on the back of the instrument
are necessary to the holder’s title and cannot be struck out.
Indorsement by agent
Sec. 44. Indorsement in representative capacity. - Where any person is under obligation to indorse in a representative capacity,
he may indorse in such terms as to negative personal liability.
The authority of the agent need not be in writing. Upon signing, the agent should make it plain that he is merely signing
in behalf of the principal, otherwise he may be held personally liable. Example of indorsement by agent: “X by Y, agent.”
Presumption as to indorsements
Sec. 45. Time of indorsement; presumption. - Except where an indorsement bears date after the maturity of the instrument,
every negotiation is deemed prima facie to have been effected before the instrument was overdue.
Sec. 46. Place of indorsement; presumption. - Except where the contrary appears, every indorsement is presumed prima facie
to have been made at the place where the instrument is dated.
Sec. 42. Effect of instrument drawn or indorsed to a person as cashier. - Where an instrument is drawn or indorsed to a person
as "cashier" or other fiscal officer of a bank or corporation, it is deemed prima facie to be payable to the bank or corporation of
which he is such officer, and may be negotiated by either the indorsement of the bank or corporation or the indorsement of the
officer.
Examples:
● “Pay to Cashier, XYZ Corporation” = there is a rebuttable presumption that the instrument is payable not to
the officer personally, but to his corporation.
● “Pay to Treasurer of the town of X” = payable to the town, which is the real payee. But generally the term
“corporation” in Sec. 42 does not include cities and towns.
Continuation of negotiable character
Sec. 47. Continuation of negotiable character. - An instrument negotiable in its origin continues to be negotiable until it has
been restrictively indorsed or discharged by payment or otherwise.
● Overdue instrument: retains its negotiability until it has been restrictively endorsed so as to prohibit further
negotiation.
Other cases
Arreza vs. Express Savings Bank

A depositary/collecting bank where a check is deposited, and which endorses the check upon presentment with the
drawee bank, is an endorser. Under Section 66 of the NIL, an endorser warrants that the instrument is genuine and in
all respects what it purports to be; that he has good title to it; that all prior parties had capacity to contract; and that the
instrument is at the time of his endorsement valid and subsisting. In check transactions, the depositary/collecting bank
or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements
considering that the act of presenting the check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the endorsements. If any of the warranties made by the
depositary/collecting bank turns out to be false, then the drawee bank may recover from it up to the amount of the check.
The law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it for the purpose of
determining their genuineness and regularity. The collecting bank being primarily engaged in banking holds itself out to
the public as the expert and the law holds it to a high standard of conduct.
Great Asian vs. Court of Appeals

Parties = Drawer: Great Asian’s customers; Drawee: various banks; Assignor: Great Asian (through Arsenio as agent);
Assignee: Bancasia; Surety: Tan Chong Lin. Great Asian had four contracts (Deeds of Assignment) assigning its 15
postdated checks to Bancasia expressly stipulating the suspensive condition that in the event the drawers of the checks
failed to pay, Great Asian itself would pay Bancasia. HELD: Great Asian was liable because Arsenio, its Treasurer and
GM, was fully authorized through resolutions by the BOD to enter into the loan and discounting arrangement with
Bancasia. Bancasia has a right to sue Great Asian for breach of contract instead of under the NIL by virtue of the “with
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recourse” provision. Since the 15 checks were dishonored, an obligation on the part of Great Asian arose from the four
contracts, and that obligation is to pay Bancasia the full value of the checks, including the stipulated penalty and
attorney’s fees. The Court also explained that a negotiable instrument may be assigned instead of being negotiated.
Since in discounting of receivables the assignee is subrogated as creditor of the receivable, the endorsement of the
negotiable instrument becomes necessary to enable the assignee to collect from the drawer. This is particularly true with
checks because collecting banks will not accept checks unless endorsed by the payee. The purpose of the endorsement is
merely to facilitate collection of the proceeds of the checks.
CHAPTER III – HOLDER IN DUE COURSE
Sec. 52. What constitutes a holder in due course. - A holder in due course is a holder who has taken the instrument
under the following conditions:
(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 in the instrument or defect in the title of
the person negotiating it.
 These four requisites must concur; if any one of them is absent, the holder cannot be considered a holder in due
course.
Yang v. CA
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. Yang delivered her part of the agreement but did
not receive anything in return. Chandimari was able to get hold of the checks and deliver them to David. Yang filed a
complaint seeking the return of the value of the instruments she delivered.
SC: Every holder of a negotiable instrument is presumed to be a holder in due course. This is especially true if one is a
holder because he is the payee or indorsee of the instrument, as in this case. Given the circumstances, David had no
obligation to ask Chandiramani how he acquired possession of the checks. He was not privy to the transaction between
Yang and Chandiramani. David is not guilty of gross neglect amounting to legal absence of good faith, absent any
showing that there was something amiss about Chandiramani’s acquisition of the checks.
I. Rights of a holder in due course
 The fact that a holder is not in due course will in no way affect the negotiability of the instrument. It only affects
such holder’s rights, and does not necessarily prevent subsequent holders from acquiring the status of due course
holder.
(1) He can acquire a better title than his predecessors because he takes the instrument free from any defect of title
of prior parties.
Sec. 57. Rights of holder in due course. - A holder in due course holds the instrument free from any defect of title of prior
parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument
for the full amount thereof against all parties liable thereon.
(2) He is free from defenses available to prior parties among themselves.
Sec. 58. When subject to original defense. - In the hands of any holder other than a holder in due course, a negotiable
instrument is subject to the same defenses as if it were non-negotiable. But a holder who derives his title through a
holder in due course, and who is not 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.
II. Holder for value [Sec. 52(c), NIL]
i. What constitutes value
"Value" means valuable consideration
 “Value” and “consideration” are generally convertible terms. However, they may have different implications:
o When the payee of a note sues the maker, or the payee of a bill sues the drawer, or an indorsee sues his
immediate indorser, the term “consideration” is the more proper term to use.
o Where a holder sues any part to the instrument with whom he himself has not dealt, the term “value” is the
more proper term to use.
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Sec. 24. Presumption of consideration. - Every negotiable instrument is deemed prima facie to have been issued for a
valuable consideration; and every person whose signature appears thereon to have become a party thereto for value.
Sec. 25. Value, what constitutes. — Value is any consideration sufficient to support a simple contract. An antecedent or
pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future
time.
 If negotiable instrument was given as a gift – whatever defenses can be set up against the transferor can also be set
up against the transferee
 If negotiable instrument was given for a valuable consideration (and other requisites of Sec. 52 are present) – the
transferee will be free from such defenses
 Note: Value need not be full and a holder will be one for value even if he gave less than the face value of the
instrument, provided that intention of the transferor is to transfer the full amount represented by the instrument.
ii. Bank credit as value
 Question: When the holder of a check deposits it with his bank (assuming it is not the drawee bank) and the bank
credits it to his account, is the bank at this stage a holder for value?
 Majority: No. The bank has parted with nothing. The crediting is a mere bookkeeping entry.
o The bank become a holder for value only when the depositor withdraws the amount of the deposited instrument.
And where such withdrawal takes place before maturity an before the bank receives notice of any defense on the
instrument, the bank is a holder in due course against whom such defense would be unavailable.
 Question: How can one determine whether the funds represented by the deposited instrument have been
withdrawn?
 Majority: The first money in is presumed to be the first money paid out.
 Minority: As long as the balance in the depositor’s account equals or exceeds the amount of the
instrument deposited, the latter cannot be considered as withdrawn for the purpose of treating the
bank as a holder for value.
iii. What constitutes a holder for value
Sec. 26. What constitutes holder for value. - Where value has at any time been given for the instrument, the holder is
deemed a holder for value in respect to all parties who become such prior to that time.
 If A (maker) issues a note to B (payee) without consideration – B indorses it to C without consideration – C indorses
it to D for value, then D is a holder for value not only as against C, but also as against A and B.
 If A (maker) issues a note to B (payee) without consideration – B indorses it to C for value – C indorses it to D
without consideration, then D is a holder for value as against A and B, but not as against C.
 The mere fact that the present holder paid nothing for a note or is not a holder for value does not preclude recovery,
but only lets in all defenses if any, that might be urged against the original payee.
iv. Where holder has a lien on instrument
Sec. 27. When lien on instrument constitutes holder for value. — Where the holder has a lien on the instrument arising
either from contract or by implication of law, he is deemed a holder for value to the extent of his lien.
 If a negotiable instrument is given as a collateral for a debt, the holder has a lien on the instrument.
o If the amount called for by the instrument < principal debt secured by the instrument, then the pledgee is a
holder for value of the full amount and may therefore recover all.
o If the amount called for by the instrument > principal debt secured by the instrument, and there are no existing
defenses among prior parties, then the pledgee is a holder for value only to the extent of the lien but may still
recover all, holding the excess merely as a trustee.
 This is in conformity with the general rule against splitting the cause of action under Sec. 32, NIL.
o If the amount called for by the instrument > principal debt secured by the instrument, AND there are existing
defenses among prior parties of which the pledgee had no knowledge, then the pledgee is a holder for value only
to the extent of the lien and may recover only the amount of the debt.
 Note: The above principles should not be confused with the rights of a purchaser who buys the instrument at a
discount. Such purchaser is entitled to recover the full amount although he paid less for the instrument.
v. Burden of proof
Sec. 24. Presumption of consideration. - Every negotiable instrument is deemed prima facie to have been issued for a
valuable consideration; and every person whose signature appears thereon to have become a party thereto for value.
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 Whether or not the words “for value received” appear in an instrument is immaterial. In their absence, the
presumption fills in the gap. On the other hand, their presence will not preclude evidence to show lack of
consideration. The presumption is prima facie and may be rebutted by proof to the contrary.
Sec. 28. Effect of want of consideration. - Absence or failure of consideration is a matter of defense as against any person
not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an
ascertained and liquidated amount or otherwise.
Atrium Management Corp v. CA

Atrium filed an action for collection of the proceeds of 4 postdated checks (issued by Hi-Cement) indorsed to it by E.T.
Henry, because they were dishonored by RCBC.
SC: (1) Atrium not a holder in due course. It was aware of the fact that the checks were crossed checks and specifically
indorsed for deposit to payees account only, E.T. Henry. (2) NIL does not provide that a holder not in due course can not
recover on the instrument. The only disadvantage of Atrium in not being a holder in due course is that the negotiable
instrument is subject to defenses as if it were non-negotiable. One such defense is absence or failure of consideration, as
in this case. Hi-Cement issued the 4 checks to extend financial assistance to E.T. Henry, not as payment of the cost of
hydro oil delivered by E.T. Henry to Hi-Cement. Hi-Cement absolved from liability.
III. Holder in good faith [Sec. 52(c)(d), NIL]
 The holder must have taken the instrument in good faith and at the time it was negotiated to him he had no notice
of any infirmity in the instrument or defect in the title of the person negotiating it.
 Note: Due course holding is not affected by the holder’s acquisition of knowledge after he has taken the instrument.
Sec. 55. When title defective. - The title of a person who negotiates an instrument is defective within the meaning of this
Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful
means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount
to a fraud.
Sec. 56. What constitutes notice of defect. - To constitutes notice of an infirmity in the instrument or defect in the title of
the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or
defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith.
 In order to constitute notice, (1) the holder must have actual and not merely constructive knowledge of the defect, or
(2) he must have acted in bad faith.
 Gross negligence in itself would not constitute notice. Anything short of either actual knowledge or bad faith will not
constitute notice.
i. Notice; bad faith; effect of suspicious circumstances
 Bad faith, being a state of mind, can only be proven by circumstantial evidence. The question of good faith or bad
faith thus is a question of fact which must be determined in accordance with the particular circumstances of each
case.
 General rule: Negligence in tracking down a suspicious circumstance which would put a prudent man on inquiry is
not of itself sufficient, though it may properly be admitted, together with other circumstances, as evidence of bad
faith.
o Exception: Where the suspicious circumstances are so cogent and obvious that to remain passive would amount
to bad faith, the holder will be subject to defenses.
 There is a difference between the existence of suspicious circumstances and actual suspicion of the purchaser. If he
does in fact suspect and fails to make investigation lest is disclose a defense, he is not a purchaser in good faith.
 “A blundering fool may, therefore, be found to have acted in good faith, though under like circumstances a shrewd
businessman might be deemed to have acted in bad faith.”
 In order to show that the defendant had “knowledge of such facts that his action in taking the instrument amounted
to bad faith” it is not necessary to prove that the defendant knew the exact fraud that was practiced upon the
plaintiff by the defendant’s assignor, it being sufficient to show that the defendant had notice that there was
something wrong about his assignor’s acquisition of title, although he did not have notice of the particular wrong
that was committed.
 Bad faith may under certain circumstances be imputed from knowledge of the purchaser of other suspicious
transactions of the transferor.
o E.g., knowledge of the indorsee that the payee had previously sold to other parties worthless chattels similar to
those sold to the defendant is admissible to show bad faith
State Investment House v. IAC
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New Sikatuna Wood requested for a loan from Spouses Chua. Latter issued post-dated crossed checks in favor of former.
Thereafter, New Sikatuna Wood sold checks to SIHI, which upon deposit were dishonored. SIHI filed an action for
collection against the Spouses Chua.
SC: 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 subject checks were crossed generally and
issued payable to NSW which could only mean that the drawer has intended the same for deposit only by the rightful
person. Consequently, no right of recourse is available to SIHI against Spouses Chua considering that NSW is the proper
party authorized to make presentment of the checks in question.
Unaka National Bank v. Butler

Harris drew a check against the bank payable to the order of Butler. Butler indorsed the check in blank and negotiated
it to Davis, who on the next day lost it. Within a week after the check’s issuance, merchants Ward & Fryberg collected on
the check. The bank paid them despite stop order. Butler sued the bank.
SC: The purchaser of a negotiable instrument does not have any duty to actively inquire into the title of the party in
possession, and that circumstances of suspicion and gross negligence are not of themselves bad faith, but only evidence
tending to establish it. In this case, Ward & Fryberg purchased this check for value in due course of trade and without
actual knowledge of the infirmity in the title of the holder. Because there was no bad faith in the transaction, they
acquired a perfect title to the check by their purchase, and had the right to collect it.
De Ocampo v. Gatchalian
Manuel purported himself to be selling the car of De Ocampo. Manuel advised Gatchalian to draw a check of P600.00
payable to De Ocampo so that Manuel may show it to De Ocampo and that Manuel in the meantime will hold it for
safekeeping. Gatchalian agreed and gave Manuel the check. Meanwhile, Manuel gave the check to his wife who in turn
gave the check to De Ocampo as payment of her bills with the clinic.
SC: De Ocampo is not a holder in due course for his lack of good faith. De Ocampo should have inquired as to the legal
title of Manuel to the said check. The fact that Gatchalian has no obligation to De Ocampo and yet he’s named as the
payee in the check should have apprised De Ocampo; that the check did not correspond to Manuel’s wife’s obligation with
the clinic because of the fact that it was for P600.00 – more than the indebtedness; that why was Manuel in possession of
the check – all these gave De Ocampo the duty to ascertain from the holder Manuel Gonzales what the nature of the
latter’s title to the check was or the nature of his possession.
Financing company not a holder in good faith as to buyer
This is the usual process during installment sales:

● The buyer issues a note payable to the seller to cover the purchase price.
● Pursuant to a previous arrangement between the seller and the finance company: (1) The finance company pays
the full price of the property sold. (2) The seller indorses the note to the finance company.
● The finance company is thus subrogated to the right to collect the purchase price from the buyer.
Effects of the finance company not being a holder in good faith:

● The company is subject to the defense of failure of consideration.
● The company cannot recover the purchase price from the buyer
Reason for this rule: To protect the general buying public from finance companies.
Effect of purchase at a discount
General rule: Purchase of an instrument at a discount does not, of itself, constitute bad faith.
Exception: The following factors may be considered to prove bad faith:

● A heavy discount.
● The maker is known to be solvent.
● The note is amply secured.
● The discount is given by a total stranger.
Ham vs. Merritt
Merritt executed a $300 note to Vaughan, representative of the Southern Hospital Association, who was selling its stock.
Vaughan then assigned the note to Brunson, who sold it to Ham for $100 only. Ham now brings this suit against Merritt
to recover upon the note. Merritt’s testimony shows that the note was obtained from her through fraud. The issue was
whether Ham was a bona fide purchaser, without notice. Held: The fact that the note was sold for so small an amount,
standing alone, it is not sufficient to show that Ham is not a bona fide purchaser. There is no other evidence that Ham
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had any notice of infirmity. He is therefore a bona fide purchaser and should be allowed to recover.
Doctrine: The mere fact that a purchaser takes the note at a large discount is not sufficient, standing alone, to constitute
bad faith under Section 56 of the NIL.
Effect of notice before full payment
General rule: Notice of defenses to a purchaser before he has acquired title and before he has paid any portion of the
purchase price prevents him from being a holder in due course.
Exception: Partial payment under Section 54 of the NIL.
Sec. 54. Notice before full amount is paid. - Where the transferee receives notice of any infirmity in the instrument or
defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he
will be deemed a holder in due course only to the extent of the amount theretofore paid by him.
The word “paid” under Section 54 includes any performance by the purchaser, such as:
● The payment of money.
● The giving of credit.
● The assumption of obligations.
● The rendition of services.
● The transfer of title to property.
● The performance of any other promise.
Applicability of Section 54:

● Applicable where the obligation incurred by the holder is such that, upon receiving the notice of infirmity, he is
relieved from the obligation to make further payment.
● Not applicable where the holder has given for the instrument a promise which he must perform. In such a case,
the holder is in the same position as one who had paid money or property at the time of the transfer.
What if the purchaser pays the remainder despite receiving the notice of infirmity? He cannot recover such amount
from the maker because, to that extent, the purchaser is subject to the defenses the maker may have.
Constructive notice not sufficient
A purchaser of a negotiable instrument:

● Is not put on inquiry.
● Is not charged with notice or defenses or equities disclosed by public records.
● Is not affected by the doctrine of lis pendens.
Notice to an agent is chargeable against the principal.
Notice of accommodation not notice of defect
Sec. 29. Liability of accommodation party. - An accommodation party is one who has signed the instrument as maker,
drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other
person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of
taking the instrument, knew him to be only an accommodation party.
The accommodation party is a surety for the principal debtor. The title of the holder for value is not impaired by his
knowledge that the party sought to be held liable merely is an accommodation maker. Hence, the accommodation maker
can’t refuse to pay on the ground of such knowledge.
Complete and regular [Section 52 (a)]
COMPLETE & INCOMPLETE INSTRUMENTS
Examples of complete instruments:

● An instrument that merely fails to affix revenue stamps.
● An instrument executed in blank, subsequently filled up, and issued to the first holder without knowledge of the
execution in blank.
Examples of incomplete instruments:
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● An instrument payable “within __ days after date.”

● An instrument which specifies the date but not the year of maturity.
● An instrument which is blank as to the payee.
● An instrument executed in blank, subsequently filled up, and issued to the first holder with knowledge of the
execution in blank.
Effect of an incomplete instrument: Lets in all defenses and equities.
REGULAR & IRREGULAR INSTRUMENTS
Sec. 124. 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 not a party to the
alteration, he may enforce payment thereof according to its original tenor.
Effects of alteration:
Alteration is apparent on the face of the instrument.. Alteration is apparent and material.
Instrument is irregular under Section 52 (a), even if the Instrument is void.

parties authorized or assented to the alteration.
The purchaser is put on inquiry as to all defenses and The holder is not a holder in due course.
equities.
Completion and regularity vs. good faith:
Section 52 (a) of the NIL Section 52 (c) and (d)
Completion and regularity General good faith
Bad faith found on the face of the instrument Bad faith where the evidence relies on extrinsic
circumstances
Purchaser is put on inquiry as to all defenses and equities Putting the purchaser on inquiry would hamper the main
function of negotiable instruments
Considered subordinate to 52 (c) and (d) Considered superior to 52 (a)
Miles City Bank vs. Askin
Miles City Bank filed an action to recover on a $5,000 check issued by the respondent and drawn on Bank of Baker.
Miles City Bank cashed the check and paid it to J.W. Clark, without first sending the check to Bank of Baker for
collection. The check payment was stopped by the issuer. Held: Miles City Bank was negligent for encashing the check
without sending the same through collection first, which is not the usual and ordinary course of business. Moreover, the
alteration on the check was so obvious as to impart notice to the plaintiff, that failure to take notice amounted to bad
faith and gross negligence.
Doctrine: If the circumstances surrounding the presentment of the check were sufficient to have cause suspicious of its
apparent alterations and infirmities, failure to take notice thereof constitutes bad faith so as to overcome the legal
presumption that one is a holder in due course.
Holder at or after maturity and without notice of dishonor [Section 52 (b)]
Two ways to dishonor:
Non-acceptance Non-payment
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Applies to bills of exchange Applies to both notes and bills
Drawee refuses to accept the order of the drawer as stated Maker or acceptor fails to pay at the date of maturity
in the will
May occur even before maturity Occurs at the time of maturity
Date of maturity:
● For instruments payable after sight: Fixed by the date of presentment.
● For instruments with a suspensive condition: Fixed by the happening of the event.
● For instruments with fixed maturity but subject to acceleration: Fixed by the date of maturity for the purpose of
determining whether a purchaser is a holder in due course, unless such purchaser had knowledge of an earlier
maturity at the time he acquired title.
Sec. 53. Where person not deemed holder in due course. - Where an instrument payable on demand is negotiated on an
unreasonable length of time after its issue, the holder is not deemed a holder in due course.
Reasonable time is determined by the following factors (Sec. 193)
1. Nature of the instrument: Which instrument generally lasts longer depending on its function? Demand
certificate of deposit > demand note > demand bill of exchange > check.
2. Usage of trade or business: Usage must be both general and local.
3. Facts of the case
4. Payment of interest
Which instrument generally lasts longer depending on its function?

Demand certificate of deposit > demand note > demand bill of exchange > check.
Other rules:
● For instruments with undated indorsement: Presumed negotiated before overdue.
● For instruments purchased after maturity: Remain negotiable and retain their commercial attributes. The
purchaser takes the instrument subject to all defenses and equities.
Bliss vs. California Coop Producers
Shidler, Winchester, and Galbeath executed three installment notes payable to CCP in consideration of insurance
premiums. CCP negotiated these notes to Bliss to secure the payment of one of CCP’s notes ($5,000) in which CCP was
the maker and Bliss was the holder. CCP soon became insolvent and bankrupt. CCP defaulted on the payment of its
$5,000 note held by Bliss, so the latter sued Shidler, Winchester, and Galbeath on their notes. There was an issue of
whether Bliss was a holder in due course, considering that the first installment of one of the notes was unpaid. Held:
Court remanded the case for further proceedings, ruling that the lower court had to figure out whether the transferee
had notice of the unpaid installment.
Doctrine: A transferee of an installment note is a holder in due course as to the installments to mature in the future
when the transfer is made after one or more but not all of the installments are due on its face, unless the past due
installments have not in fact been paid, and he has notice of that fact. He is put on inquiry that there may be some
defenses against it, and he cannot be a holder in due course.
Chiang Yia Min vs. CA
Chiang Yia Min allegedly remitted $100,000 to the Philippines through Pacific Banking Corporation to RCBC Makati, to
be used by him to qualify as a foreign investor under Philippine laws. However, the money was sent to RCBC Shaw and
was subsequently withdrawn by way of checks issued in favor of Papercom and Tom Pek. Chiang filed a complaint
against RCBC, Papercom, and Tom Pek claiming that he did not allow the opening of the account at RCBC Shaw and
that he did not authorize its withdrawal. Held: The opening of the account and the withdrawal were authorized by
Chiang Yia Min. Chiang failed to show that Papercom and Tom Pek colluded to defraud him.
Doctrine: The person who alleges fraud or negligence must prove it, because the general presumption is that men act
with care and prudence. Good faith is always presumed and it is the burden of the party claiming otherwise to adduce
clear and convincing evidence to the contrary.
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Effect of postdating or antedating

Sec. 12. Antedated or Postdated. – The instrument is not invalid for the reason that it is antedated or postdated,
provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered,
acquires the title thereto as of the date of delivery.
 Antedated- if the instrument bears a date earlier than the date of its actual issuance.
 Postdated – if the instrument bears a date later than the date of its issuance; a postdated check is payable
either at a fixed or determinable future time specified on the check OR on demand or after the date of the
instrument if no time is expressed.
 The instrument is not only valid but also negotiable though antedated or posdated. Hence, a holder of it may be
a holder in due course.
Effect of qualified, conditional, and restrictive indorsements

 The status of a holder as a holder in due course is not affected by:
o Qualified indorsement – an indorsement “without recourse” only limits the liability of the indorser but
is not a defect in the instrument
o Conditional indorsement – The condition is not an infirmity in the instrument so long as all the
requisites of Sec. 52, NIL are fulfilled.
o Restrictive indorsement which prohibits further negotiation – The named payee is the only holder in
due course.
o Restrictive indrosement which vests title in the indorsee in trust or for use of another – A restrictive
indorsee who holds the instrument in trust for a third person can be a holder in due course, regardless
of the status of the restrictive indorser.
 The status of a holder as a holder in due course is affected by:

o A restrictive indorsement which constitutes the indorsee as an agent of the indorser – The agent
(restrictive indorsee) is a holder in due course if the principal (restrictive indorser) is a holder in due
course.
BPI v. Court of Appeals, Eastern Plywood Corp., and Benigno Lim

Lim and EastPly held a joint account with Commercial Bank and Trust Co. (CBTC). Funds from this account were
withdrawn and deposited to the joint account of Velasco and Lim with CBTC. Velasco passed away. After sometime,
EastPly obtained a loan from CBTC amounting to P73,000 for which a promissory note was issued payable on demand to
the order of CBTC. The parties also agreed to a Holdout Agreement where the joint account of Lim and Velasco was
held-out as security for the loan. Meanwhile, the heirs of Velasco was authorized by the intestate court to withdraw the
deposit under the joint account. After the merger of CBTC and BPI, the latter filed a case demanding payment of the
promissory note but was dismissed since it was BPI’s duty under the Holdout Agreement to debit the account of
defendants to set off the loan. On appeal, BPI argued that CBTC was not under the duty to set-off the account yet until
the suspensive condition of filing a judicial action stated in the Houldout Agreement was satisfied.
SC: The suspensive condition theory of BPI is untenable. Although BPI was not a holder in due course as the note was
not indorsed to it by the payee CBTC but was merely negotiated through the contract of merger, BPI still had every right
to demand that Eastern and Lim settle their liability under the promissory note. The Holdout Agreement merely
conferred power on CBTC to set-off the loan against the joint account it if pleases, but it is under no duty or obligation to
make the application. What it provides is an alternative and not an exclusive method of enforcing its claim on the note.
Payee as holder in due course

Two opposing views:
 A payee cannot be a holder in due course since he does not acquire the instrument by negotiation as it is not
indorsed but issued to him.
 A payee may be a holder in due course as negotiation is not limited to a transfer by a holder but may include a
transfer by the maker or drawer. The Supreme Court follows this view as ruled in the case of De Ocampo v
Gatchalian.
Rights of a purchaser from a holder in due course

Sec. 58. When subject to the original defenses. – In the hands of any holder other than a holder in due course, a
negotiable instrument is subject to the same defenses as if it were non-negotiable. But a holder who derives his title
through a holder in due course, and who is not 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.
 A holder who derives title to the instrument through a holder in due course has all the rights of the latter even
though he himself does not satisfy any of the requisites under Section 52, NIL.
 A purchaser from a holder in due course acquires all the rights of the latter and is free from defenses even if:
o The purchaser has notice of defect in the title
o The purchaser acquired it after maturity
o The holder did not acquire it for value such as in the case of a donee
 However, if the purchaser from a holder in due course was a party to the fraud or illegality affecting the
instrument, he does not acquire the rights of his predecessor.
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Pierce v Carlton
M.J. Carlton and others issued three promissory notes payable to Crawford & Ceas for an amount of $2100. The notes
were dated February 11, 1913 and payable on June 1, 1914, June 1, 1915, and June 1, 1916 respectively. The payee
indorsed the notes in blank, which the plaintiff bought for $1800, allegedly without notice or knowledge of any infirmity
affecting the notes. Plaintiff then sold and delivered the notes to his brother Thomas for $2100. However, he bought
them back in June 1915 for the same amount as there was a dispute about the notes. Defendants manifested that the
plaintiff had actually aided the payees in procuring the notes fraudulently and had knowledge of the infirmity the first
time he acquired them. Judgment was rendered against Pierce.
SC: The general rule is that one who acquires title from a holder in due course may recover, though he may have had
notice of the infirmity when he acquired the instrument from such holder. However, if the note was invalid between the
maker and the payee, the latter cannot be a bona fide holder even if he acquires the same from a holder in due course. In
this case, although his brother Thomas was a holder in due course, the plaintiff already had knowledge of the infirmity
of the notes at the time he acquired them for the first time. A holder who reacquires from a holder in due course and
who, at the time he first held title had knowledge of the defense of a prior party, is disqualified from obtaining the rights
of a holder in due course.
Presumption in favor of due course holding

Sec. 59. Who is deemed holder in due course. – Every holder is deemed prima facie to be a holder in due course; but when
it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to
prove that he or some person under whom he claims acquired the title as a holder in due course. But the last mentioned
rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective
title.
 The presumption is in favor of holders only and not to other kinds of transferees.
 The holder must prove the following:
o the genuineness of the maker’s or drawer’s signature, to establish the existence of the obligation
o the genuineness of all indorsements necessary to his title, to establish his link to the maker
 The second sentence of Sec. 59 places the burden of proving due course holding to the defendant if he is a party
on the instrument prior to the acquisition of the defective title.
Fossum v. Fernandez Hermanos

Fossum, agent of American Iron Products Company, Inc. (AIPCI), received an order from Fernandez Hermanos (FH) for
a tail shaft. AIPCI drew a time draft worth $2,250 payable 60 days after sight to the order of PNB addressed to FH as
drawee, which accepted the draft. After some delay, the shaft was delivered, but it could not be used for its intended
purpose. FH refused to pay the draft. PNB indorsed the draft in blank, without consideration, and delivered it to Fossum
who then filed with the trial court an action on the draft against FH.
SC: Fossum is not a holder in due course, since he was privy to the contract for which the instrument was drafted, said
contract having failed, which led to failure of consideration of the draft. Fossum also failed to prove that PNB was a
holder in due course in order to prove the point that he derived title from a holder in due course.
Transferee of unindorsed instrument

Sec. 49. Transfer without indorsement; Effect of. – Where the holder of an insturment payable to his order transfers it
for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the
transferee acquires, in addition, the right to have the indorsement of the transferor. But for the purpose of determining
whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is
actually made.
 If the transferor who did not indorse is a holder in due course, the transferee acquires the title but not
necessarily all the rights of the transferor. The transferee must first acquire the latter’s indorsement.
 If the transferor who did not indorse is not a holder in due course, the transferee is subject to all defenses as if
the intrument were non-negotiable.
Commercial Bank of Lafayette & Trust Co. v. Barry

Barry signed notes as a trustee in behalf of his Bank, the Bank of Lafayette Trust Company. This was part of a scheme
where the bank itself bought its own shares. The Commercial Bank of Lafayette bought all the bank’s assets including
one of the notes signed by Barry. It tried to sue Barry on the note.
SC: The Court ruled against it, noting that the note was unendorsed, thus Lafayette was not a holder in due course, and
Barry could successfully raise the defense that there was no consideration in order to be absolved from liability. A
transferee of a note payable to order could not and did not obtain the legal title thereto, except by the endorsement of the
payee, and a holder without such endorsement took it `subject to all the equities vested in prior parties. In other words,
the holder of an unendorsed note payable to order, is not a holder in due course.
CHAPTER IV - DEFENSES AND EQUITIES
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1. In General – Liability of signatories to a NI depends on whether there are existing defenses or claims of
ownership on it.
a. Kinds
i. Real defenses – available against all holders, including HDCs. These attach to the instrument
itself and generally disclose an absence of one of the elements of a contract or where the
admitted contract is void for all reasons of public policy.
ii. Personal defenses – can be raised only against those not HDCs. A true contract exists but for
some reason, such as fraud, the defendant is excused from the obligation to perform.
b. Two kinds of claims of ownership (a.k.a. equities)
i. Legal title – One who has legal title to the instrument may recover possession even from a
HDC.
ii. Equitable title – May not recover its possession from a HDC but may recover from one who is
not a HDC.
Sec. 57. Rights of holder in due course. - A holder in due course holds the instrument free from any defect of title of prior
parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument
for the full amount thereof against all parties liable thereon.
Sec. 58. When subject to original defense. - In the hands of any holder other than a holder in due course, a negotiable
instrument is subject to the same defenses as if it were non-negotiable. But a holder who derives his title through a
holder in due course, and who is not 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.
 If a holder is not in due course, the general rules on contract apply and there will be no need to distinguish
between real or personal defenses because the assignee cannot acquire a better title than his transferor.
Sec. 55. When title defective. - The title of a person who negotiates an instrument is defective within the meaning of this
Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful
means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount
to a fraud.
 Real defenses – forgery (23, NIL), incapacity (22), fraud in the execution, some types of duress, and lack of
delivery of an incomplete instrument (15).
 Personal defenses – those mentioned in Section 55, want of consideration (28), incompleteness of the instrument
(14), and lack of delivery of a complete instrument (16).
2. Incapacity
Sec. 22. Effect of indorsement by infant or corporation.- The indorsement or assignment of the instrument by a
corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or
infant may incur no liability thereon.
 Should a minor indorse a NI, although he cannot be held liable on his contract of indorsement, title to the
instrument passes to the indorsee who can rightfully recover from the maker, free from the defense of minority
and other personal defenses if he is a HDC.
 Minority is a real defense available ONLY to a minor and not a personal defense which may be availed of other
than such minor. The same rules apply to a corporation which has no capacity to indorse under its charter.
 Insane or demented persons, deaf-mutes who do not know how to write – such incapacitites are real defenses
likened to vitiated consent.
o Why? Sections 60, 61, 62, 65, 66 – the maker, drawer, acceptor and indorser admit the capacity of the payee
to indorse and hence cannot set up such incapacity as a defense.
Murray v. Thompson, et al.
Murray was injured while in the employ of a brick company and was paid $1,750 as damages. The note was to mature on
June 1, 1915, the date on which he would attain majority but his father later sold the note to respondent Thompson
without informing him the he was not the payee. Father and son received the payment and invested in a saloon business
but lost. The court ruled that the contract of indorsement of a minor is not void and the indorsee has a right to enforce
payment from all parties prior to the infant indorser. The incapacity of the minor cannot be availed of by prior parties.
However, the words “passes the property therein” cannot mean to deprive the infant of the right to disaffirm and recover
the note from the possession of the indorsee who takes with constructive notice of the incapacity.
3. Illegality
 Generally a personal defense not available against HDCs.
 Such a contract is equivalent to an inexistent contract in the NCC for having an illegal cause.
 On the other hand, the NIL provides that although a NI may have been issued for an illegal
consideration, only the parties involved in the illegality and subsequent parties who are not HDCs can
be adversely affected by such defect.
Example: Although a gambling note may be unenforceable between the original parties because of
illegal consideration, it is valid and enforceable in the hands of a HDC who can recover the full amount
from the maker.
24
 This is a situation where, although the contract lacks the essential element of a lawful cause or
consideration (NCC), the NIL treats the defect as a defense only available against those NOT HDCs.
The NCC and NIL are not inconsistent since they deal with different situations.
 A statute may declare a contract void in which case the defense of illegality becomes real.
Rodriguez v. Martinez
Martinez issued a check payable to Montalvo in consideration of a gambling debt. Montalvo subsequently indorsed it to
Rodriguez, who did not have any knowledge of the underlying transaction for which the check was executed. When
Martinez refused to pay, Rodriguez filed a case for collection against him. The Court held that as a holder in due course,
Rodriguez could recover the full amount of the check despite it being issued for an illegal consideration.
Although a gambling note may be unenforceable between the original parties by reason of illegal consideration, it is valid
and enforceable in the hands of a holder in due course, who can recover its full amount against the maker.
4. Forgery
a. In general –
Sec. 23. Forged signature; effect of. - When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor,
or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the
party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.
 Under Section 23, forgery is a real defense. A person whose signature was forged was never a party and never
consented to the contract, thus he cannot be held liable, not even by a HDC.
 The fact that a holder is a HDC is immaterial since there is no true maker or drawer of the instrument.
Sec. 18. Liability of person signing in trade or assumed name. - No person is liable on the instrument whose signature
does not appear thereon, except as herein otherwise expressly provided. But one who signs in a trade or assumed name
will be liable to the same extent as if he had signed in his own name.
 This section deals with 2 sets of situations:

1. Signature on the instrument is affixed by one who purports be an agent but does not have the authority
to bind the alleged principal; and
2. Signature is affixed by one who does not claim to act as an agent and who has no authority to bind the
apparent signer.
 In both cases, the signature is wholly inoperative and no one can gain title to the instrument and a party is
precluded from using the defense of forgery.
 A general indorser subsequent to the forgery warrants that the instrument is genuine and that it is valid and
subsisting at the time of the indorsement. Therefore, his warranty precludes him from setting up forgery as a
defense.
 Similarly, an acceptor is precluded from claiming that the drawer’s signature is forged because under Section
62, he warrants its genuineness.
Illustration: A makes a note payable to B. B indorses it specially to C, and later it was stolen by D. D forges C’s
signature and sells the note to E. E indorses if to F, a HDC.
F cannot go against A or B because his rights against them were cut off by the forged signature of C. Neither
can he go against C because C has no privity with him unless C is guilty of estoppels.
He may go against E, a general indorser, who warranted the genuineness and validity of the instrument at the
time of indorsement. C also has a right against A and B because he is the real owner and his rights were not affected by
the forgery.
C may recover possession of the instrument from F even if the latter is a HDC because F has no right to retain
the instrument and should surrender it to the rightful owner, C, who may enforce it against A or B.
 Section 23 does not avoid the instrument but only the forged signature.
 If the instrument is originally payable to bearer, the effects of a forged instrument will be different.
o The holder can enforce a forged instrument against the drawer or maker because he can cancel the
forged instrument as not being necessary to his title (48, NIL)
o However, if the forged note is subsequently indorsed and the holder is not able to recover from the
maker, he may have a right of recourse against his immediate indorser on his warranty.
 The burden of proving the genuineness of a signature is on the person claiming such.
Cayanan v. North Star International Travel

Virgina Balagtas, as the general manager of North Star, sent $85,000 to View Sea Ventures upon the instruction of its
client, Engr. Cayanan. In turn, Cayanan issued to North Star 5 postdated checks, but all were dishonored, so North Star
instituted a BP 22 case against him. Cayanan’s defense was that the checks were issued without a valuable
consideration, since 1) the funds were paid to Veiw Sea Venture and 2) the money was drawn from from the personal
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account of Virginia and not from North Star’s corporate account. The Court held Cayanan civilly liable on the checks, as
he was not able to refute the presumption under Sec. 24, NIL that the same were issued for valuable consideration.
In the absence of evidence to the contrary, it is presumed that checks were issued for valuable consideration, which may
consist either in some right, interest, profit or benefit accruing to the party who makes the contract, or some forbearance,
detriment, loss or some responsibility, to act, or labor, or service given, suffered or undertaken by the other side. Under
the Negotiable Instruments Law, it is presumed that every party to an instrument acquires the same for a consideration
or for value. The burden of proof is on the person who alleges otherwise.
Mendoza v. Fermin
In the testate proceedings of her father’s estate, Aurora discovered a Deed of Absolute Sale conveying her father’s
property in Paranaque to one Eduardo C. Sanchez. She filed a case for annulment of the Deed and the corresponding
TCT on the belief that her father’s signature thereon was forged. The Court held that the preponderance of evidence was
in her favor. In comparing Leonardo’s specimen signatures and the questioned signatures, it found that the latter were
awkwardly made. Questionable circumstances also surrounded the sale itself.
The general rule is, forgery cannot be presumed and must be proved by clear, positive and convincing evidence; the
burden of proof of which lies on the party alleging forgery. The best evidence of a forged signature in the instrument is
the instrument itself reflecting the alleged forged signature. The fact of forgery can only be established by comparison
between the alleged forged signature and the authentic and genuine signature of the person whose signature is theorized
upon to have been forged.
b. Acceptance and payment under mistake –

1. When the drawee accepts or pays a forged instrument –
 If a drawer’s signature is forged on an instrument, the drawee who pays it without having detected the forgery
cannot charge the amount to the drawer’s account.
 The instrument is deemed inoperative and does not give him the right to discharge it.
 How will the drawee recover?
General principle: Money paid under mistake may be recovered.

Exception: in NIL (Price v. Neal, Lord Mansfield) – the drawee who paid an accepted bill as well as a non-
accepted bill, each bearing the signature of the drawer, could not recover the money.
Basis: Commercial convenience and necessity. Confidence in negotiable paper would be diminished and
commercial transactions would become unstable if a drawee which mistakenly paid a forged instrument will be
allowed to recover.
Rule: There should be a definitive determination of the signature made by the drawee at the time of
presentment and payment. The drawee should know the signature of the drawer and should bear the loss in
case it turns out to be forged.
The rule in Price v. Neal was embodied in Section 62, NIL:
Sec. 62. Liability of acceptor. - The acceptor, by accepting the instrument, engages that he will pay it according to the
tenor of his acceptance and admits:
(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the
instrument; and
(b) The existence of the payee and his then capacity to indorse.
 Since the acceptor admits the genuineness of the drawer’s signature, he is precluded by Section 23 from denying
liability based on forgery.
 If he accepts the instrument and then subsequently learns of the forgery before he has paid it, he cannot refuse
payment. Neither can he recover what he paid under Section 62.
 Prevailing views dictate that whether or not a drawee has accepted the instrument and subsequently paid it, he
cannot recover because he is bound to know the drawer’s signature.
 Section 62 applies to both to accepted and non-accepted bills.
Exceptions:
1. (Price v. Neal) – The drawee can recover if a person is guilty of fraud or negligence in obtaining the bill or if
he did not give value therefor. The drawee can also recover from the one who bought the instrument from a
known forger.
2. A purchaser who took from a complete stranger without making inquiries which would have revealed the
forgery is guilty of negligence and cannot retain the proceeds of the forged bill.
Price v. Neal
Neal sold two bills (and indorsed one) to Price, who paid a valuable consideration for both. It was later discovered that
the instruments were forged. There was no drawer at all, and the forger was hanged, so Price filed an action against
Neal. Neal was found to be innocent and bona fide. There was neglect on the part of Price, so he was barred from
recovering from Neal.
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In a case of a misfortune which has happened without the defendant’s fault or neglect, and without neglect also on the
plaintiff’s part, there is no reason to throw off the loss from one innocent man upon another innocent man.
PNB v. CA and PCIB

Lim (holder) deposited in his account with PCIB (collecting bank) a GSIS (drawer) check drawn against PNB (drawee).
PCIB forwarded the check for clearing to PNB, which paid its amount to the PCIB and debited it against the account of
GSIS, notwithstanding its receipt of notice from the GSIS that said check had been lost and its request that payment be
stopped. Upon demand from the GSIS, the amount of the check was re-credited to the latter’s account, for the reason
that the signatures of its officers on the check were forged. Hence, the present action by PNB against PCIB for the
recovery of the amount.
SC: PNB induced PCIB, not only to believe that the check was genuine and good in every respect, but, also, to pay its
amount to Lim. PNB was the primary or proximate cause of the loss, and, hence, may not recover from PCIB.
Doctrine: Actual payment of the amount of a check implies not only an assent to said order of the drawer and a
recognition of the drawer’s obligation to pay the aforementioned sum, i.e., acceptance, but, also, a compliance with such
obligation. The prevailing view, therefore, is that Sec. 62, NIL (liability of acceptor) applies in the case of a drawee who
pays a bill without having previously accepted it.
EXTENSIONS OF PRICE V. NEAL DOCTRINE
Recall:
 General rule: Money paid under a mistake may be recovered.
 Exception (Price v. Neal): The drawee who pays an accepted bill or a non-accepted bill, which bears the forged
signature of the drawer could not recover the money paid out on either bill.
o The drawee is bound to know the signature of the drawer and must therefore bear the loss in case it
turns out to be forged.
 Exception to the exception: A person guilty of fraud or negligence in obtaining the bill, or who had not given
value therefor, has no right to retain the money paid to him by the drawee of a forged bill.
o Thus, the drawee can recover from the forger or from one who bought from a known forger.
(1) OVERDRAFT (doctrine extended to cover the drawee of a bill who honors an overdraft)
 Overdraft – occurs when a check is issued for an amount more than what the drawer has in deposit with the
drawee bank.
 It is the drawee’s duty before accepting or paying the bill to find out whether he owed the drawer that amount;
on the other hand, the payee or holder had no means of knowing what the actual account of the drawer was, and
he had the right to assume that the drawee would not accept or pay the bill unless he had sufficient funds of the
drawer to cover it.
(2) STOP PAYMENT ORDER (doctrine extended to cover the drawee who pays the check despite the stop order)
 Stop payment order – issued by the drawer of a check countermanding his first order to the drawee bank to pay
said check, i.e., the drawer is ordering the drawee bank not to pay the check issued by him.
 The drawee bank is bound to follow the stop order, provided it is received prior to its certification or payment of
the check.
o If the stop order comes after the bank has certified or accepted the check, the bank is under legal duty
to pay the holder and will not be liable to the drawer for doing so.
 Payment by the drawee bank despite the stop order is considered voluntary because it was under no legal
obligation to pay, and its negligence in paying precludes it from reclaiming the amount from a bona fide holder.
EFFECT OF NEGLIGENCE OF DEPOSITOR
 If the negligence of the depositor should delay discovery of the forgeries and this negligence should deprive the
bank of the opportunity to recover from the forger, the depositor would have to bear the burden of the loss and
cannot thereafter demand a re-crediting by the bank, i.e., the bank is freed from liability only if the proximate
cause of its wrongful payment is the negligence of the drawer, but not otherwise.
EFFECT OF PAYMENT UNDER FORGED INSTRUMENTS
 General rule: Price v. Neal doctrine not applicable in the case of the drawee’s acceptance or payment of a
genuine bill where only an indorsement has been forged. Thus, the drawee can recover the amount paid out by
him from the holder who received payment; he cannot, however, recover from the drawer should the latter be
insolvent.
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 Exception: Where the negligence of the drawee bank is the proximate cause of a collecting bank’s payment of a
check with a forged instrument, the former may be held liable to the latter bank.
o Where both the drawee and collecting banks are guilty of negligence, the degree of negligence of each
will be weighed in considering the amount of loss which each should bear.
Great Eastern Life Insurance v HSBC and PNB

Great Eastern (drawer) drew a check against HSBC (drawee) payable to the order of Melicor (payee). Maasim (holder)
forged Melicor’s signature, as an indorser, and they personally indorsed and presented it to PNB (collecting bank) where
the amount of the check was placed to his credit. PNB indorsed the check to HSBC which paid it and charged the
amount of the check to the account of Great Eastern. Four months after, the forgery was discovered. Hence, the present
action by Great Eastern against HSBC and PNB for the recovery of the amount.
SC: Great Eastern ordered the HSBC to pay Melicor, and the money was actually paid to Maasim and was never paid to
Melicor, and he never paid to Melicor, and he never personally endorsed the check, or authorized any one to endorse it
for him, and the alleged endorsement was a forgery. Thus, HSBC is liable. However, HSBC may recover from PNB for it
was the latter’s duty to know whether or not Melicor’s indorsement was genuine before cashing the check. PNB’s remedy
is against Maasim to whom it paid the money.
Doctrine: Where a check is drawn payable to the order of one person and is presented to a bank by another and purports
upon its face to have been duly indorsed by the payee of the check, it is the duty of the bank to know that the check was
duly indorsed by the original payee, and where the bank pays the amount of the check to a third person, who has forged
the signature of the payee, the loss falls upon the bank who cashed the check, and its only remedy is against the person
to whom it paid the money.
Jai Alai Corporation v. BPI

10 checks payable to Inter-Island Gas Service (payee) were acquired from its sales agent Ramirez by Jai Alai (holder)
who deposited it to BPI (collecting bank). Inter-Island discovered that the indorsements made on the checks purportedly
by its cashiers were forgeries and informed all the parties concerned. Upon demand, BPI debited the account of Jai Alai
and paid the drawee banks, which, in turn, paid Inter-Island. Thereafter, Jai Alai issued a check for payment of shares
of stock but was dishonored for insufficient funds. Hence, the present action by Jai Alai against BPI for the recovery of
the amount.
SC: Considering that Jai Alai indorsed the checks when it deposited them with BPI, the former as an indorser
guaranteed the genuineness of all prior indorsements thereon. BPI which relied upon Jai Alai’s warranty should not be
held liable for the resulting loss.
Doctrine: Under Sec. 67, NIL (liability of indorser where paper negotiable by deliver), “Where a person places his
indorsement on an instrument negotiable by delivery he incurs all the liability of an indorser,” and under Sec. 66, NIL
(liability of a general indorser), a general indorser warrants that the instrument “is genuine and in all respects what it
purports to be.”
Republic Bank v. CA and Ebrada

Ebrada (holder) encashed a check issued by the Bureau of Treasury (drawer) drawn against Republic Bank (drawee)
payable to the order of Lorenzo (payee). Bank refunded the Bureau after it was informed that the alleged indorsement of
Lorenzo was a forgery since the latter was already dead almost 11 years before the check was issued. Hence, the present
action by the Bank against Ebrada.
Note: Back of the check bears the following signatures: (1) Martin Lorenzo; (2) Ramon Lorenzo; (3) Delia Dominguez; (4)
Mauricia Ebrada
SC: It is only the negotiation based on the forged or unauthorized signature which is inoperative. Thus, negotiation from
(1) to (2) inoperative; while negotiation from (2) to (3) and from (3) to (4) are valid. Bank has the remedy to recover from
Ebrada who, as the last indorser of the check, warranted that she has good title to it.
Doctrine: The drawee of a check can recover from the holder the money paid to him on a forged instrument. This is
because the indorser is supposed to warrant to the drawee that the signatures of the payee and previous indorsers are
genuine. One who purchases a check or draft is bound to satisfy himself that the paper is genuine and that by indorsing
it or presenting it for payment or putting it into circulation before presentation he impliedly asserts that he has
performed his duty and the drawee who has paid the forged check, without actual negligence on his part, may recover
the money paid from such negligent purchasers.
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NEGOTIABLE INSTRUMENTS • PROF.

JACINTO • CAROLINO, COSTALES, DELA CRUZ & ORACION • E2018

Kinds of negotiable instruments

Promissory an instrument that evidences a promise to pay money

Parties and the nature of their liabilities

PARTY DEFINITION LIABILITY

maker the promissor in a promissory note primary

payee the person to whom the promise is made in a

indorsee the person to whom the instrument is negotiated or

Astro Electronics v. Phil. Export Guarantee

Functions of negotiable instruments

The concept of negotiability

Firestone Tire & Rubber Company v. CA and Luzon Development Bank

Applicability of the NIL

1. Written form & signature

Signature binding whether handwritten, printed, engraved, lithographed, or photographed, as long as it is

2. Unconditional order or promise to pay

Examples for promissory notes Unconditional promise to pay?

Statement of a certain time to pay (e.g. “on demand”) Yes

Examples for bills of exchange Unconditional order to pay?

A demand upon the drawee to pay, but using polite Yes

(a) When unconditional

Powell & Powell v. Greenleaf & Currier

3. Sum payable must be certain

(c) by stated installments, with a provision that, upon

5. Certainty of time of payment [Sec. 1(c)]

(a) When payable on demand

Sec. 7. When payable on demand. - An instrument is payable on demand:

(b) Payable at a fixed time

(c) Payable at a determinable future time

(d) Effect of acceleration provisions

Who has the option to What is the effect on the negotiability of

Puget State Bank v. Washington Paving

(e) Provisions extending time of payment

Who has the option to What is the effect on the negotiability of

6. Must be payable to order or bearer [Sec. 1(d)]

(a) When instrument is payable to order

(b) When instrument is payable to bearer

Sec. 9. When payable to bearer. - The instrument is payable to bearer:

Philippine National Bank v. Spouses Rodriguez

Parties must be designated with certainty [Sec. 1(e)]

(a) Maker and Drawer

Continental Illinois Bank & Trust Co. v. Clement

1. Delivery & Issuance

San Miguel Corporation v. Puzon

Instrument Method of negotiation

Note: It is a common practice, however to indorse a bearer

4. How indorsement made

a. By signature on instrument or on allonge

Instrument is payable or indorsed How indorsement made

A or B (alternative) General rule: Either payee

5. Indorsement must be of entire instrument

b. Special & blank indorsements

Special indorsement Blank indorsement

Instrument payable to order on its face Instrument payable to bearer on its

(1) A contract of sale or assignment of the instrument; and

Hutson vs. Rankin

A restrictive indorsement either:

Indorsement to or by collecting bank

A holder of a check may:

Leonardi vs. Chase National Bank

Negotiation by joint or alternative payees or indorsees

Continuation of negotiable character

Arreza vs. Express Savings Bank