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(2018 Bar Examinations)

Atty. Maria Diory Rabajante


Since a negotiable instrument is only a substitute for money and not money, the
delivery of such an instrument does not, by itself, operate as payment. Mere delivery of checks
does not discharge the obligation under a judgment. The obligation is not extinguished and
remains suspended until the payment by commercial document is actually realized. (BPI v.
Spouses Royeca, G.R. No. 176664, 21 July 2008)


The negotiability or non-negotiability of an instrument is determined from the writing,

that is, from the face of the instrument itself. In the construction of a bill or note, the intention
of the parties is to control, if it can be legally ascertained. While the writing may be read in the
light of surrounding circumstances in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to be the only outward and
visible expression of their meaning, no other words are to be added to it or substituted in its
stead. The duty of the court in such case is to ascertain, not what the parties may have secretly
intended as contradistinguished from what their words express, but what is the meaning of the
words they have used. What the parties meant must be determined by what they said. (Caltex
v. Court of Appeals, GR No. 97753, 10 August 1992)


The negotiation of a negotiable instrument must be distinguished from

the assignment or transfer of an instrument whether that be negotiable or non-negotiable. Only
an instrument qualifying as a negotiable instrument under the relevant statute may
be negotiated either by indorsement thereof coupled with delivery, or by delivery alone where
the negotiable instrument is in bearer form. A negotiable instrument may, however, instead of
being negotiated, also be assigned or transferred. The legal consequences of negotiation as
distinguished from assignment of a negotiable instrument are, of course, different. A non-
negotiable instrument may, obviously, not be negotiated; but it may be assigned or transferred,
absent an express prohibition against assignment or transfer written in the face of the
instrument. (Sesbreño v. Court of Appeals, G.R. No. 89252, 24 May 1993)


The distinction between bearer and order instruments lies in their manner of
negotiation. Under Section 30 of the Negotiable Instruments Law (NIL), an order instrument
requires an indorsement from the payee or holder before it may be validly negotiated. A bearer
instrument, on the other hand, does not require an indorsement to be validly negotiated. It is
negotiable by mere delivery. (PNB v. Rodriguez, G.R. No. 170325, 26 September 2008)

The check which was made payable to cash was payable to the bearer and could be
negotiated by mere delivery without the need of an indorsement. (People v. Wagas, G.R. No.
157943, 4 September 2013)
A check that is payable to a specified payee is an order instrument. (PNB v. Rodriguez,
supra.) However, under Section 9(c) of the NIL, a check payable to a specified payee may
nevertheless be considered as a bearer instrument if it is payable to the order of a fictitious or
non-existing person, and such fact is known to the person making it so payable. Thus, checks
issued to Prinsipe Abante or Si Malakas at si Maganda, who are well-known characters in
Philippine mythology, are bearer instruments because the named payees are fictitious and
non-existent. (Id.) If the payee is not the intended recipient of the proceeds of the check, the
payee is considered a fictitious payee and the check is a bearer instrument. (Id.)


In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer
bears the loss. When faced with a check payable to a fictitious payee, it is treated as a bearer
instrument that can be negotiated by delivery. The underlying theory is that one cannot expect
a fictitious payee to negotiate the check by placing his indorsement thereon. And since the
maker knew this limitation, he must have intended for the instrument to be negotiated by mere
delivery. Thus, in case of controversy, the drawer of the check will bear the loss. This rule is
justified for otherwise, it will be most convenient for the maker who desires to escape payment
of the check to always deny the validity of the indorsement. This despite the fact that the
fictitious payee was purposely named without any intention that the payee should receive the
proceeds of the check. (PNB v. Rodriguez, supra.)


There is a commercial bad faith exception to the fictitious-payee rule. A showing of

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


Section 52(c) of the NIL states that a holder in due course is one who takes the
instrument "in good faith and for value." Acquisition in good faith means taking without
knowledge or notice of equities of any sort which could be set up against a prior holder of the
instrument. It means that he does not have any knowledge of fact which would render it
dishonest for him to take a negotiable paper. The absence of the defense, when the instrument
was taken, is the essential element of good faith. (Alvin Patrimonio v. Napoleon Gutierrez,
G.R. No. 187769, 4 June 2014)

The holder’s knowledge that the maker is not a party or privy to the contract of loan,
and correspondingly had no obligation or liability to him, renders him dishonest, hence, in bad
faith. Thus, where the blanks in the checks were not filled up in accordance with the authority
the maker gave, and the holder is in bad faith, said holder has no right to enforce payment
against the maker. The maker cannot be obliged to pay the face value of the check. (Alvin
Patrimonio v. Napoleon Gutierrez, supra.)


The payee of a negotiable instrument acquires no interest with respect thereto until its
delivery to him. Delivery of an instrument means transfer of possession, actual or constructive,
from one person to another. Without the initial delivery of the instrument from the drawer to
the payee, there can be no liability on the instrument (Development Bank v. Sima Wei, G.R.
No. 85419, 9 March 1993)


Section 14 of the NIL applies to an incomplete but delivered instrument. Under this
rule, if the maker or drawer delivers a pre-signed blank paper to another person for the purpose
of converting it into a negotiable instrument, that person is deemed to have prima facie
authority to fill it up. It merely requires that the instrument be in the possession of a person
other than the drawer or maker and from such possession, together with the fact that the
instrument is wanting in a material particular, the law presumes agency to fill up the blanks.
(Alvin Patrimonio v. Napoleon Gutierrez, supra.)

In order, however, that one who is not a holder in due course can enforce the
instrument against a party prior to the instrument’s completion, two requisites must exist: (1)
that the blank must be filled strictly in accordance with the authority given; and (2) it must be
filled up within a reasonable time. If it was proven that the instrument had not been filled up
strictly in accordance with the authority given and within a reasonable time, the maker can set
this up as a personal defense and avoid liability. However, if the holder is a holder in due
course, there is a conclusive presumption that authority to fill it up had been given and that
the same was not in excess of authority. (Alvin Patrimonio v. Napoleon Gutierrez, supra.)


An innocent alteration (generally, changes on items other than those required to be

stated under Sec. 1, NIL) and spoliation (alterations done by a stranger) will not avoid the
instrument, but the holder may enforce it only according to its original tenor. (PNB v. CA, G.R.
No. 107508, 25 April 1996)

If what was altered is the serial number of the check in question, an item which, it can
readily be observed, is not an essential requisite for negotiability under Section 1 of the NIL,
the alteration is immaterial. Said alteration did not change the relations between the
parties. The name of the drawer and the drawee were not altered. The intended payee was
the same. The sum of money due to the payee remained the same. (PNB v. CA, supra.)

In PNB v. CA (supra.), the Supreme Court gave the following as examples of material
a. Substituting the words or bearer for order;
b. Writing protest waived above blank indorsements;
c. A change in the date from which interest is to run;
d. A check was originally drawn as follows: Iron County Bank, Crystal Falls, Mich. Aug.
5, 1901. Pay to G.L. or order $9 fifty cents CTR. The insertion of the figure 5 before
the figure 9, the instrument being otherwise unchanged;
e. Adding the words with interest with or without a fixed rate;
f. An alteration in the maturity of a note, whether the time for payment is thereby curtailed
or extended;
g. An instrument was payable First Natl Bank, the plaintiff added the word Marion;
h. Plaintiff, without consent of the defendant, struck out the name of the defendant as
payee and inserted the name of the maker of the original note;
i. Striking out the name of the payee and substituting that of the person who actually
discounted the note; and
j. Substituting the address of the maker for the name of a co-maker.
In the same case of PNB v. CA (supra.), the Supreme Court likewise gave the following
as examples of immaterial alterations:
a. Changing “I promise to pay” to “We promise to pay,” where there are two makers;
b. Adding the word “annual” after the interest clause;
c. Adding the date of maturity as a marginal notation;
d. Filling in the date of the actual delivery where the makers of a note gave it with the
date in blank, July . . .;
e. An alteration of the marginal figures of a note where the sum stated in words in the
body remained unchanged;
f. The insertion of the legal rate of interest where the note had a provision for interest at
. . . per cent;
g. A printed form of promissory note had on the margin the printed words, Extended to .
. . The holder on or after maturity wrote in the blank space the words May 1, 1913, as
a reference memorandum of a promise made by him to the principal maker at the time
the words were written to extend the time of payment;
h. Where there was a blank for the place of payment, filling in the blank with the place
i. Adding to an indorsees name the abbreviation Cash when it had been agreed that the
draft should be discounted by the trust company of which the indorsee was cashier;
j. The indorsement of a note by a stranger after its delivery to the payee at the time the
note was negotiated to the plaintiff; and
k. An extension of time given by the holder of a note to the principal maker, without the
consent of a surety co-maker.


A forged signature, whether it be that of the drawer or the payee, is wholly inoperative
and no one can gain title to the instrument through it. A person whose signature to an
instrument was forged was never a party and never consented to the contract which allegedly
gave rise to such instrument. Section 23 of the NIL does not avoid the instrument but only the
forged signature. Thus, a forged indorsement does not operate as the payee's indorsement.
(Associated Bank v. Court of Appeals, G.R. Nos. 107382 and 107612, 31 January 1996)

Where a loss must be borne by one of two innocent persons, can be traced to the
neglect or fault of either, it is reasonable that it would be borne by him, even if innocent of any
intentional fraud, through whose means it has succeeded. (Samsung Construction Company
v. FEBTC, G.R. No. 129015, 13 August 2014)


In bearer instruments, the signature of the payee or holder is unnecessary to pass title
to the instrument. Hence, when the indorsement is a forgery, only the person whose signature
is forged can raise the defense of forgery against a holder in due course. (Associated Bank v.
Court of Appeals, supra.)


a. If Indorser’s Signature is Forged

Where the instrument is payable to order at the time of the forgery, the signature of its
rightful holder is essential to transfer title to the same instrument. When the holder's
indorsement is forged, all parties prior to the forgery may raise the real defense of forgery
against all parties subsequent thereto. (Associated Bank v. Court of Appeals, supra.)

An indorser of an order instrument warrants "that the instrument is genuine and in all
respects what it purports to be; that he has a good title to it; that all prior parties had capacity
to contract; and that the instrument is at the time of his indorsement valid and subsisting." He
cannot interpose the defense that signatures prior to him are forged. (Associated Bank v. Court
of Appeals, supra.)

A collecting bank where a check is deposited and which indorses the check upon
presentment with the drawee bank, is such an indorser. So even if the indorsement on the
check deposited by the bank's client is forged, the collecting bank is bound by his warranties
as an indorser and cannot set up the defense of forgery as against the drawee bank.
(Associated Bank v. Court of Appeals, supra.)

The bank on which a check is drawn, known as the drawee bank, is under strict liability
to pay the check to the order of the payee. The drawer's instructions are reflected on the face
and by the terms of the check. Payment under a forged indorsement is not to the drawer's
order. When the drawee bank pays a person other than the payee, it does not comply with the
terms of the check and violates its duty to charge its customer's (the drawer) account only for
properly payable items. Since the drawee bank did not pay a holder or other person entitled
to receive payment, it has no right to reimbursement from the drawer. The general rule then
is that the drawee bank may not debit the drawer's account and is not entitled to
indemnification from the drawer. The risk of loss must perforce fall on the drawee bank.
(Associated Bank v. Court of Appeals, supra.)

However, if the drawee bank can prove a failure by the customer/drawer to exercise
ordinary care that substantially contributed to the making of the forged signature, the drawer
is precluded from asserting the forgery. (Associated Bank v. Court of Appeals, supra.) If at the
same time the drawee bank was also negligent to the point of substantially contributing to the
loss, then such loss from the forgery can be apportioned between the negligent drawer and
the negligent bank. (Id.)

b. If Drawer’s Signature is Forged

In cases involving a forged check, where the drawer's signature is forged, the drawer
can recover from the drawee bank. No drawee bank has a right to pay a forged check. If it
does, it shall have to recredit the amount of the check to the account of the drawer. The liability
chain ends with the drawee bank whose responsibility it is to know the drawer's signature
since the latter is its customer. (Associated Bank v. Court of Appeals, supra.)

In cases involving checks with forged indorsements, the chain of liability does not end
with the drawee bank. The drawee bank may not debit the account of the drawer but may
generally pass liability back through the collection chain to the party who took from the forger
and, of course, to the forger himself, if available. In other words, the drawee bank can seek
reimbursement or a return of the amount it paid from the presentor bank or person.
Theoretically, the latter can demand reimbursement from the person who indorsed the check
to it and so on. The loss falls on the party who took the check from the forger, or on the forger
himself. (Associated Bank v. Court of Appeals, supra.)

An accommodation party lends his name to enable the accommodated party to obtain
credit or to raise money; he receives no part of the consideration for the instrument but
assumes liability to the other party/ies thereto. The accommodation party is liable on the
instrument to a holder for value even though the holder, at the time of taking the instrument,
knew him or her to be merely an accommodation party, as if the contract was not for
accommodation. (Ang v. Associated Bank, G.R. No. 146511, 5 September 2007)

The relation between an accommodation party and the accommodated party is one of
principal and surety, the accommodation party being the surety. As such, he is deemed an
original promisor and debtor from the beginning; he is considered in law as the same party as
the debtor in relation to whatever is adjudged touching the obligation of the latter since their
liabilities are interwoven as to be inseparable. Although a contract of suretyship is in essence
accessory or collateral to a valid principal obligation, the surety's liability to the creditor
is immediate, primary and absolute; he is directly and equally bound with the principal. A surety
becomes liable to the debt and duty of the principal obligor even without possessing a direct
or personal interest in the obligations nor does he receive any benefit therefrom. (Ang v.
Associated Bank, supra.)


Clearing should not be confused with acceptance. Manager’s and cashier’s checks are
still the subject of clearing to ensure that the same have not been materially altered or
otherwise completely counterfeited. However, manager’s and cashier’s checks are pre-
accepted by the mere issuance thereof by the bank, which is both its drawer and drawee.
Thus, while manager’s and cashier’s checks are still subject to clearing, they cannot be
countermanded for being drawn against a closed account, for being drawn against insufficient
funds, or for similar reasons such as a condition not appearing on the face of the check. Long
standing and accepted banking practices do not countenance the countermanding of
manager’s and cashier’s checks on the basis of a mere allegation of failure of the payee to
comply with its obligations towards the purchaser. On the contrary, the accepted banking
practice is that such checks are as good as cash. (MBTC v. Wilfred Chiok, G.R. Nos. 172652,
175302 and 175394, 26 November 2014)


As the rule now stands, the 24-hour rule is still in force, that is, any check which should
be refused by the drawee bank in accordance with long standing and accepted banking
practices shall be returned through the Philippine Clearing House Corporation (PCHC) / local
clearing office, as the case may be, not later than the next regular clearing (24-hour). (Cesar
V. Areza v. Express Savings Bank, Inc., 10 September 2014)

However, items which have been the subject of material alteration or bearing forged
endorsement may be returned even beyond 24 hours so long that the same is returned within
the prescriptive period fixed by law. The consensus among lawyers is that the prescriptive
period is ten (10) years because a check or the endorsement thereon is a written contract.
Moreover, the item need not be returned through the clearing house but by direct presentation
to the presenting bank. (Cesar V. Areza v. Express Savings Bank, Inc., supra.)

A drawer of a check is entitled to a notice of dishonor and only if said drawer fails to
make good the same within five (5) banking days from receipt of said notice that bad faith or
fraud is prima facie presumed to exist. (Cabrera v. People, G.R. No. 150618, 24 July 2003)

The absence of a notice of dishonor necessarily deprives an accused an opportunity

to preclude a criminal prosecution. (Cabrera v. People, supra., citing Lao v. CA [274 SCRA

It is not enough for the prosecution to prove that a notice of dishonor was sent to the
drawee of the check. It must also show that the drawer of the check received said notice
because the fact of service provided for in the law is reckoned from receipt of such notice of
dishonor by the drawee of the check. (Cabrera v. People, supra.)

The notice must be in writing. (Resterio v. People, G.R. No. 177438, 24 September

A mere oral notice or demand to pay is insufficient compliance with the requirements
of the law. (Cabrera v. People, supra., citing Domagsang v. CA [347 SCRA 75])