LAW FINALS REVIEWER

1. Pancho drew a check to Bong and Gerard jointly. Bong endorsed the check and also forged Gerard’s
endorsement. The Payor Bank paid the check and charged Pancho’s account for the amount of the
check. Gerard received nothing from the payment.

a. Pancho asked the payor bank to recredit his account. Should the bank comply?
 Sec. 41: Where an instrument is payable to the order of two or more payees or endorsees
who are not partners, all must endorse unless the one endorsing has the authority to
endorse for the others. In the stated facts, Bong endorsed the check as well as forged
Gerard’s signature so, this makes the instrument wholly inoperative and therefore non-
negotiable since only one of them endorsed the note and had no authority to endorse for
the other as stated in Sec. 41. Yes, the payor bank must comply to recredit Pancho’s
account. The drawee bank cannot debit the drawer’s (pancho) account since the payee’s
signature was forged and so the drawee bank must bear the loss. The payor bank should
not have paid the forged check because banks must have extra-ordinary diligence in its
transactions. In this case, the Payor bank lacked extra-ordinary diligence so the payor bank
is required and liable to recredit Pancho’s account.

b. Based on the facts, was Pancho as drawer discharged on the instrument? Why?

 According to Sec. 119, a negotiable instrument is discharged: By payment in due course

by or on behalf of the principal debtor; by payment in due course by the party
accommodated, where the instrument is made or accepted for accommodation; by the
intentional cancellation thereof by the holder; by any other act which will discharge a
simple contract for the payment of money; when the principal debtor becomes the
holder of the instrument at or after maturity in his own right.

 No, Pancho as drawer was not discharged on the instrument. The payee Gerard can
recover the money as he still retains his claim on the debt of pancho.

2. R issued a check for P1M which he used to pay S for killing his political enemy.

a. Can the check be considered a negotiable instrument?

 Yes it is still considered a negotiable instrument since the validity of the consideration is
not one of the requisites of a negotiable instrument in Sec. 1 but merely constitutes a
defect in the title.
b. Does S have a cause of action against R in case dishonor by the drawee bank?
 No, S cannot have a cause of action against R in case the drawee bank dishonors it. S is not
a holder in due course since he had notice of the defect in the title of R so R can raise the
defense that the check was issued for an illegal consideration.

c. If S negotiated the check to T, who accepted it in good faith and for value, may R be held
secondarily liable by T?
  Since T took the check in good faith and for value and had no notice of any infirmity in the
instrument or defect in the title of S, then T is a holder in due course. R cannot then raise
the defense of illegal consideration (personal defense) so he is secondarily liable to T.

3. X Borrowed money from Y in the amount of 1M and as payment issued a check. Y then indorsed
the check to his sister, Z, for no consideration, when Z deposited to her account, the check was
dishonored for insufficiency of funds. Is Z a holder in due course?

Z is not a holder in due course because she did not take the check for value which is one of the
requisites in being a holder in due course according to Sec. 52.

4. AB Corporation drew a check for payment to XY bank. The check was given to an officer of AB
corp who was instructed to deliver it to XY bank. Instead, the officer intending to defraud the
corp filled up the check by making himself as the payee and delivered it to xy bank to deposit to
his personal acct. xy bank debited ab corp’s acct. ab corp came to know about the officer’s
fraudulent act after he absconded. Ab corp asked xy bank to recredit its amount. Xy bank refused.
If you were the judge, what issues would you consider relevant to solve this case.

The issues I would consider relevant to solve this case was whether or not AB Corp was negligent
and if its negligence was the cause as to how the officer came to defraud the corporation. Also,
whether or not there is contributory negligence in the part of XY Bank. The instrument was
incomplete but delivered. In this case, the officer was able to fill up his name as payee which
shows that AB Corp. was negligent for issuing a check with a blank payee section which facilitated
the fraudulent act done by the officer. It implied that the holder has prima facie authority to fill
up the instrument. AB Corporation is liable for its negligence in delivering an incomplete
instrument to the officer. XY Bank is not liable to recredit AB Corp’s account so the corporation
must bear the loss.

5. Mario Guzman issued to Honesto Santos a check for P50KT as payment for a 2nd hand car. Without
the knowledge of Mario, Honesto changed the amount to P150K which alteration could not be
detected by the naked eye. Honesto deposited the altered check with Shure Bank which forwarded
the same to Progressive Bank for payment. Progressive Bank without noticing the alteration paid
the check, debiting P150K from the account of Mario. Honesto withdrew the amount of P150K
from Shure Bank and disappeared. After receiving his bank statement, Mario discovered the
alteration and demanded restitution from Progressive Bank. Discuss fully the rights and the
liabilities of the parties concerned.
Progressive Bank has no right to deduct from Mario’s Account since the amount written by Mario
was different. The Progressive Bank must have had extra-ordinary diligence which although the
alteration cannot be detected by the naked eye, but it is a standard operating procedure for banks
to be meticulous before they deduct anything from client’s account. Progressive Bank was at fault
and Mario has the right to restitution from Progressive Bank. Progressive Bank must bear the loss
since it failed to notify Shure Bank that there was an infirmity in the face of the instrument.
Progressive Bank is liable for the negligence of its employees.
6. A check for P50,000.00 was drawn against drawee bank and made payable to XYZ Marketing or
order. The check was deposited with payee‘s account at ABC Bank which then sent the check for
 clearing to drawee bank. Drawee bank refused to honor the check on ground that the serial number
thereof had been altered. XYZ marketing sued drawee bank.
a. Is it proper for the drawee bank to dishonor the check for the reason that it had been altered?
Explain.
No because the alteration of the serial number does not constitute material alteration of the
instrument so it is still valid and so the drawee bank cannot dishonour the check. The serial number
is not material to the negotiability of the instrument.
b. In instant suit, drawee bank contended that XYZ Marketing as payee could not sue the drawee bank
as there was no privity between them. Drawee theorized that there was no basis to make it liable
for the check. Is this contention correct? Explain.
Yes. As a general rule, the drawee is not liable under the check because there is no privity of
contract between XYZ Marketing, as payee, and ABC Bank as the drawee bank.

However, if the action taken by the bank is an abuse of right which caused damage not only to the
issuer of the check but also to the payee, the payee has a cause of action under quasi-delict.

7. CX maintained a checking account with UBANK, Makati Branch. One of his checks in a stub of
fifty was missing. Later, he discovered that Ms. DY forged his signature and succeeded to
encash P50,000 from another branch of the bank. DY was able to encase the check when ET, a
friend, guaranteed due execution, saying that she was a holder in due course. Can CX recover the
money from the bank? Reason briefly.
Yes CX can recover from the bank. First of all the instrument was incomplete and undelivered.
Second, the signature was forged. The forged check is wholly inoperative in relation to CX. CX can
put up the defense of forgery and want of delivery of incomplete instrument to all holders, even
to a holder in due course since the defenses mentioned are real defenses. The bank had no right
or authority to deduct from CX’s account.
8. Jose loaned Mario some money and, to evidence his indebtedness, Mario
executed and delivered to Jose a promissory note payable to his order. Jose endorsed the
note to Pablo. Bert fraudulently obtained the note from Pablo and endorsed it to Julian by
forging Pablo’s signature. Julian endorsed the note to Camilo.

a) May Camilo enforce the said promissory note against Mario and Jose?
Camilo may not enforce said promissory note against Mario and Jose. The promissory note
at the time of forgery being payable to order, the signature of Pablo was essential for the
instrument to pass title to subsequent parties. A forged signature was inoperative (Sec 23
NIL). Accordingly, the parties before the forgery are not juridically related to parties after the
forgery to allow such enforcement.
b) May Camilo go against Pablo?
Camilo cannot go against Pablo since Pablo didn’t endorse the instrument himself.
c) May Camilo enforce said note against Julian?
Camilo may enforce the instrument against Julian because of his special indorsement to
Camilo, thereby making him secondarily liable, both being parties after the forgery.
d) Against whom can Julian have the right of recourse?
Julian, in turn, may enforce the instrument against Bert who, by his forgery, has rendered
himself primarily liable.
 e) May Pablo recover from either Mario or Jose?
Pablo preserves his right to recover from either Mario or Jose who remain parties juridically
related to him. Mario is still considered primarily liable to Pablo. Pablo may, in case of
dishonor, go after Jose who, by his special indorsement, is secondarily liable.

9. X makes a promissory note for PHP 10,000 payable to A, a minor, to help him buy school books. A
indorses the note to B for value, who in turn indorses it to C. C knows A is a minor. If C sues X on
the note, Can X set up the defense of minority and lack of consideration?
Firstly, the note is not considered a negotiable instrument since it was only “payable to A” and

not to “or order” or “or bearer”, making C not a holder in due course and the instrument was

non-negotiable in the first place. All defenses, real or personal, may be used against C since he is

not a holder in due course. X however cannot use the defense of minority because in the first

place, he is not a minor and it does not apply to him. The lack of consideration is only between

immediate parties but X not being an immediate party cannot use this defense against C.

10.