Negotiable Instruments, Campos (Abbr.

I. Introduction a) Secondary party – the party who can be held

A. Definition – instruments are negotiable when they responsible should the primary parties fail to
conform to all the requirements prescribed by the pay
Negotiable Instruments Law (Act No. 2031) (1) On a promissory note, it is the indorser
1. Not considered legal tender, but often take the (2) On a bill of exchange, it is the drawer or
place of money as a means of payment indorser
B. Kinds of negotiable instruments b) Conditions for secondary liability
1. Promissory note – evidences a promise to pay (1) That a demand or presentment be duly
money (I promise to pay the order of person the made on the primary party
sum of amount on or before date) (2) Should the said party dishonor (i.e. fail to
a) Certificates of deposit – instrument issued pay or accept) such instrument, that a
by a bank reciting deposit of a sum of money notice of dishonor be given to the
b) Bonds – evidence of indebtedness issued by secondary party sought to be charged
a corporation, public or private, payable at a c) Implied contracts of indorsement
definite date in the future (1) Indorser is selling or transferring the
2. Bill of exchange – an order made by one person instrument to his indorsee, thus
to another to pay money to a third person (after assuming liabilities similar to a seller or
date, pay to person or order the sum of amount) transferor of personal property
a) Check – a bill of exchange wherein the one (2) Indorser warrants that he will pay the
who issues it orders his bank to pay the instrument when the two conditions
person named on the check above have been fulfilled
b) Draft – a form of bill of exchange used mainly E. Functions of negotiable instruments
in transactions between persons physically 1. Substitute for money in payment
remote from each other a) Its validity as a means of payment is
(1) Bank draft – from one bank to another conditioned on its being honored by the
(2) Usually covered by a letter of credit person bound by its terms to pay it
C. Parties 2. Means of creating and transferring credit
1. In general 3. Facilitate the sale of goods
a) Promissor, who is called the maker F. Concept of negotiability – a person who takes a
b) Payee, to whom the promise to pay is made negotiable instrument can rely on its face and need not
2. Bill of exchange or draft inquire into past events that gave rise to its execution
a) Drawer, who gives the order to pay 1. Once the negotiable instrument is negotiated to a
b) Drawee, who is the addressee of the order third person, it becomes completely independent
c) Payee, to whom the payment is to be made of the obligation that gave rise to it
3. When payee of an instrument transfers it to G. History of the negotiable instruments law – a
another by signing it verbatim reproduction of the Uniform Negotiable
a) Indorser, negotiates or indorses the same Instruments Law of the United States, which was
b) Indorsee, to whom he negotiates the same, patterned after the English Bill of Exchange Act
who becomes the holder of the instrument H. Applicability of the negotiable instruments law – it
D. Nature of liability applies only to negotiable instruments, which are those
1. Primary liability instruments that confirm with the requisites in Sec. 1,
a) Primary party – the party who is absolutely or else the instrument would not be negotiable and
and unconditionally required to pay the would be governed by the law on contracts
instrument when it falls due 1. Law merchant – a system of law which does not
(1) On a promissory note, it is the maker rest exclusively on positive institutions and local
(2) On a bill of exchange, it is the drawee, customs of any particular country but consists of
but there is no person primarily liable to certain principles of equity and usages of trade
pay until and unless the drawee accepts which general convenience and a common sense
the order of the drawer to pay of justice has established
(a) Before he accepts, the drawee is not II. Requisites of negotiability (Ch. 1)
liable on the instrument and cannot A. Form of negotiable instruments (Sec. 1)
be compelled by the holder to accept 1. Must be in writing and signed by the maker or
or pay it drawer
(b) When he accepts, he becomes an 2. Must contain an unconditional promise or order to
acceptor who is absolutely bound to pay a sum certain in money
pay on the date specified 3. Must be payable on demand, or at a fixed or
2. Secondary liability determinable future time
4. Must be payable to order or to bearer

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5. Where the instrument is addressed to a drawee, G. Payable in money – must be capable of being
he must be named or otherwise indicated therein transformed into money, not necessarily limited to legal
with reasonable certainty tender but any particular kind of current money
B. Promissory note (Sec. 184) – an unconditional 1. Additional acts – an instrument which contains an
promise in writing made by one person to another, order or promise to do an act in addition to the
signed by the maker, engaging to pay on demand, or payment of money is not negotiable
at a fixed or determinable future time, a sum certain in a) Exception – if the order or promise gives the
money to order or to bearer holder, not the maker, an election to require
C. Bill of exchange (Sec. 126) – an unconditional order something to be done in lieu of payment of
in writing addressed by one person to another, signed money, negotiability would not be impaired
by the person giving it, requiring the person to whom it H. Certainty of time of payment
is addressed to pay on demand or at a fixed or 1. When payable on demand (Sec. 7)
determinable future time a sum certain in money to a) Where it is expressed to be payable on
order or to bearer demand, or at sight, or on presentation
D. Written form and signature b) In which no time for payment is expressed
1. Written form includes print and not only what is c) Where an instrument is issued, accepted or
written, but also what has been typed indorsed when overdue, as regards the
2. Signature is binding whether it is in one’s person so issuing, accepting, or indorsing it
handwriting, or printed, engraved, lithographed or 2. Payable at a fixed time
photographed, so long as it is indeed or adopted 3. Payable at a determinable future time (Sec. 4)
as that of the signer or made with his authority a) At a fixed period after date or sight
a) If the signature is so placed that it is not clear b) On or before a fixed or determinable future
in what capacity the person intended to sign, time specified therein
he is deemed an indorser c) On or at a fixed period after the occurrence of
E. Unconditional order or promise to pay a specified event which is certain to happen,
1. Not a mere acknowledgement of a debt though the time of happening be uncertain
a) Including the word “promise” is not absolutely d) Acceleration provisions
necessary, any expression equivalent is (1) Where the option to accelerate is on the
sufficient (ex. “due on demand”) maker, the negotiability is not affected,
2. Not a mere request or authority to pay whether such option is absolute or
a) An order is a command or imperative conditional
direction, thus its language must clearly (2) Where the option to accelerate is on the
indicate a demand upon the drawee to pay holder, whether such provision renders
3. When unconditional (Sec. 3) – an unqualified the instrument non-negotiable depends
order or promise to pay is unconditional though on the nature of the provision
coupled with: (a) Non-negotiable if unconditional
a) An indication of a particular fund out of which e) Provisions extending time of payment – also
reimbursement is to be made, or a particular an acceleration at the option of the maker,
account to be debited with the amount thus would not affect negotiability
b) A statement of the transaction which gives (1) Exception – where a note with a fixed
rise to the instrument maturity provides that the maker has the
c) However, conditional when it is an order or option to extend the payment until the
promise to pay out of a particular fund, or if happening of a contingency, the
the indicated condition is fulfilled instrument is non-negotiable (Sec. 4)
F. Certainty as to sum (Sec. 2) – the sum payable is a I. Must be payable to order or bearer – must contain
sum certain although it is to be paid: the so-called “words of negotiability”, i.e. must be
1. With interest payable to “order” or “bearer”, which are expressions
2. By stated installments of consent that the instrument may be transferred
a) Stated – the amount of each installment and 1. The instrument need not follow the language of the
its due date are fixed in the instrument law, but any term which indicates an intention to
3. Acceleration provision – by stated installments conform to the legal requirements is sufficient
with a provision that upon default in payment of a) Where the words “or bearer” printed on a
any installment or of interest, the whole shall check are cancelled by the drawer, the
become due instrument becomes non-negotiable
4. With exchange, whether at a fixed rate or at the 2. When payable to order (Sec. 8) – where drawn
current rate payable “to the order of a specified person” or “to
5. With costs of collection or an attorney’s fee, in him or his order”, which means it is to be paid to
case payment shall not be made at maturity the person designated or to any person to whom
he has indorsed or delivered the same
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a) Without the words “to order” or “to the order L. Omissions not affecting negotiability (Sec. 6)
of”, the instrument is payable only to the 1. It is not dated (Sec. 17, 13)
person designated and is non-negotiable 2. Does not specify the value given, or that any value
b) In the above case, any subsequent purchaser has been given therefor (Sec. 24)
will not enjoy the advantages of a holder, but 3. Does not specify the place where it is drawn or the
will merely step in the shoes of the person place where it is payable (Sec. 73)
designated 4. Bears a seal
3. When payable to bearer (Sec. 9) 5. Designates a particular kind of current money in
a) When it is expressed to be so payable which payment is to be made
b) When it is payable to a person named therein M. Rules of construction (Sec. 17)
or bearer 1. Where the sum payable is expressed in words and
c) When it is payable to the order of a fictitious also in figures and there is a discrepancy between
or non-existing person, and such fact was the two, the sum denoted by the words is the sum
known to the person making it so payable payable
d) When the name of the payee does not purport a) If the words are ambiguous, reference may be
to be the name of any person had to the figures to fix the amount
e) When the only or last indorsement is an 2. Where the instrument provides for the payment of
indorsement in blank interest, without specifying the date from which
J. Parties must be designated with certainty interest is to run, the interest runs from the date of
1. Maker and drawer – the maker of a note or the the instrument
drawer of a bill must sign the instrument, while the a) If the instrument is undated, from the issue
payee and the successive indorsees negotiate the 3. Where the instrument is not dated, it will be
instrument by signing on the back considered to be dated as of the time it was issued
a) Ambiguity – once a party to an instrument 4. Where there is conflict between the written and
deviates from commercial usage with respect printed provisions of the instrument, the written
to the place of signature, and it is not clear provisions prevail
from the instrument in what capacity he signs, 5. Where the instrument is so ambiguous that there
the party is considered as an indorser is doubt whether it is a bill or note, the holder may
2. Payee (Sec. 8) – drawn payable to the order of: treat it as either at his election
a) A payee who is not maker, drawer, or drawee 6. Where a signature is so placed upon the
b) The drawer or maker instrument that it is not clear in what capacity the
c) The drawee person making the same intended to sign, he is to
d) Two or more payees jointly be deemed an indorser
e) One or some of several payees 7. Where an instrument containing the words “I
f) The holder of an office for the time being promise to pay” signed by two or more persons,
3. Drawee they are deemed jointly and severally liable
a) Bill addressed to more than one drawee (Sec. III. Transfer (Ch. 2)
128) – a bill may be addressed to two or more A. Delivery and issuance (Sec. 16) – every contract on
drawees jointly, but not two or more drawees a negotiable instrument is incomplete and revocable
in the alternative or in succession until delivery of the instrument for the purpose of giving
b) When bill treated as a promissory note (Sec. effect thereto, therefore, without the initial delivery of
130) – where in a bill the drawer and drawee the instrument from the maker to the payee, there can
are the same person, or where the drawee is be no liability on said instrument
a fictitious person, or a person not having 1. Delivery – transfer of possession, actual or
capacity to contract, the holder may treat the constructive, from one person to another
instrument, at his option, as a bill or a note 2. Such delivery must be intended to give effect to
(1) If bill names no drawee but is accepted the instrument, however, once the instrument is no
by a third party, although the issuer of the longer in the possession of the person who has
bill cannot be held as drawer, the signed it, a valid delivery by him is presumed
acceptor could be held as a maker a) As to the holder in due course, the
K. Provisions not affecting negotiability (Sec. 5) presumption is conclusive, provided the
1. Authorizes the sale of collateral securities in case instrument is complete (Sec. 16)
the instrument be not paid at maturity 3. Issue or issuance of the instrument – the first
2. Authorizes a confession of judgment if the delivery of the instrument complete in form to a
instrument be not paid at maturity person who takes it as a holder
3. Waives the benefit of any law intended for the B. Negotiation (Sec. 30) – an instrument is negotiated
advantage or protection of the obligor when it is transferred from one person to another in
4. Gives the older an election to require something to such manner as to constitute the transferee the holder
be done in lieu of the payment of money
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1. The transfer of a negotiable instrument made in indorsee a part only of the amount payable, or to
such a manner that the transferee becomes a transfer the instrument to two or more indorsees
holder and thus possibly a holder in due course severally, does not operate as negotiation
capable of acquiring a better title to the instrument 1. However, where the payees or indorsees are joint,
than that of his transferor the negotiation is valid since it is indorsed in its
a) May be for value or by way of gift entirety to both indorsees
b) If an instrument is transferred without 2. Discount – a transaction where the indorsee pays
negotiation, the transfer is a mere assignment the indorser less than the face amount of the
which constitutes the transferee as an instrument, which is allowed
assignee, subject to all defenses existing F. Kinds of indorsements (Sec. 33)
among prior parties 1. Basis of classification
2. If payable to bearer, it is negotiated by delivery a) Blank vs. special – has to do with the future
a) Bearer – the person in possession of a bill or method of negotiation, whether by
note which is payable to bearer indorsement and delivery or by delivery only
3. If payable to order, it is negotiated by the b) Restrictive vs. nonrestrictive – has to do
indorsement of the holder completed by delivery with the kind of title transferred
a) Holder – the payee or indorsee of a bill or c) Qualified vs. unqualified – has to do with
note, who is in possession of it, or the bearer scope of the liability assumed by the indorser
C. Methods of negotiation d) Conditional vs. unconditional – has to do
1. Instrument payable to order with the presence or absence of express
a) Indorsement by the payee or present holder limitations put by the indorser upon the
(1) Indorsement – the signature of the primary obligor’s privileges of paying the
indorser usually on the back of the holder
instrument 2. Special and blank (Sec. 34, 40, 35)
b) Delivery to the transferee or indorsee a) Special – a special indorsement specifies the
2. Instrument payable to bearer person to whom, or to whose order, the
a) Delivery – however, it is common practice to instrument is to be payable
indorse a bearer instrument whenever it is (1) Indorsement of such indorsee is
transferred as an additional security necessary to the further negotiation of
(1) Does not include warranty that transferor the instrument
will pay in case the primary party fails to b) Blank – specifies no indorsee, and an
pay, but he does assume the liabilities of instrument so indorsed is payable to bearer
a seller or transferor and may be negotiated by delivery
3. Ordinary assignment – a transfer effected (1) May be converted into a special
otherwise than by negotiation when an order indorsement by writing over the signature
instrument is delivered without indorsement or of the indorser in blank any contract
where the indorsement is not made properly as consistent with the character of the
required by law indorsement
D. How indorsement made (Sec. 31) – the indorsement 3. Qualified and unqualified (Sec. 38)
must be written on the instrument itself or upon a paper a) Qualified – constitutes the indorser a mere
attached thereto, even without additional words (no assignor of the title to the instrument
need for words of negotiability) (1) Made by adding the words “without
1. By signature on instrument or on allonge recourse” or any words of similar import
a) The common law rule is that an allonge can (2) Effect: to relieve the qualified indorser of
be validly used only where there is no longer his liability to pay the instrument should
any room on the instrument for further the maker be unable to pay at maturity
indorsements, or else it will not be sufficient 4. Conditional and unconditional (Sec. 39)
2. In case of joint payees – if indorsed to “A and B”, a) Conditional – one where an additional
they are joint payees, but if indorsed to “A or B”, condition is annexed to the indorser’s liability
they are alternative payees (1) Must be express
3. If name misspelled (Sec. 43) – payee or indorsee (2) Party required to pay may disregard the
may indorse the instrument adding, if he thinks fit, condition and make payment to the
his proper signature indorsee or his transferee
a) Indorsement should be made by the holder in (3) Party to whom an instrument so indorsed
the manner he was designated, otherwise the is negotiated will hold the same or the
signature will prima facie not be valid proceeds, subject to the rights of the
b) Afterwards, he may sign his correct name person indorsing conditionally
E. Indorsement must be of entire instrument (Sec. 32) b) Unconditional – an indorsement without any
– an indorsement which purports to transfer to the other condition than that due demand or
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presentment be made on the party primarily 2. In determining whether the transferee is a holder
liable on the date of maturity, and that should in due course, the negotiation takes effect as of
the latter fail to pay on such, a notice of the time when indorsement is actually made
dishonor be promptly sent to the indorser J. Cancellation of indorsements (Sec. 48) – the holder
5. Restrictive and nonrestrictive (Sec. 36) may at any time strike out any indorsement which is not
a) Restrictive – one which either: necessary to his title, and the indorser whose
(1) Prohibits the further negotiation of the indorsement is struck out and all of the subsequent
instrument (pay to X only) indorsers are relieved from liability on the instrument
(a) Destroys negotiability 1. If the instrument is payable to bearer on its face,
(2) Constitutes the indorsee the agent of the then indorsements on the back are immaterial to
indorser the title of the bearer, who is the presumed owner
(3) Vests the title in the indorsee in trust for 2. If all indorsements are special, then all of them
or to the use of some other person would be necessary to the holder’s title
(a) For (2) and (3), the instrument may K. Indorsement by agent (Sec. 44) – where any person
be further negotiated but reserves is under obligation to indorse in a representative
the beneficial interest therein in the capacity, he may indorse in such terms as to negative
indorser or a third person personal liability
b) Rights of indorsee 1. An instrument may be indorsed through an agent,
(1) To receive payment of the instrument whose authority need not be in writing
(2) To bring any action thereon that the 2. In signing, an agent should make it plain that he is
indorser could bring signing on behalf of the principal, otherwise he
(3) To transfer his rights as such indorsee, may be held personally liable
where the form of the indorsement L. Presumption as to indorsements
authorizes him to do so 1. Time of indorsement (Sec. 45) – except when an
(4) All subsequent indorsees acquire only indorsement bears date after the maturity of the
the title of the first indorsee instrument, every negotiation is deemed prima
G. Indorsement to or by collecting bank facie to have been effected before the instrument
1. A holder of a check may: is overdue
a) Cash it with the drawee bank a) Though indorsements after maturity are good
(1) Payment by the drawee bank would to transfer title, they prevent a holder from
discharge the instrument and terminate becoming a holder in due course
all rights and liabilities of the parties 2. Place of indorsement (Sec. 46) – except where
b) Deposit it to his credit either in the drawee the contrary appears, every indorsement is
bank or in another bank presumed prima facie to have been made at the
(1) Holder would in effect be negotiating the place where the instrument is dated
check to such bank since he would have a) The law of the place of dating will govern any
to indorse the check before the bank will controversy should there be a conflict of laws
accept it for deposit 3. Effect of instrument drawn or indorsed to a
2. If the indorsement is “for collection”, it is a person as cashier or other fiscal officer of a
restrictive indorsement where the bank is merely bank or corporation (Sec. 42) – deemed prima
an agent for collection (Sec. 36[2]) facie to be payable to the bank or corporation of
3. Rule: indorsement made by the depositor of a which he is such officer and may be negotiated by
check would be in blank and not show any either the indorsement of the bank or corporation,
restriction to the collecting bank’s title or the indorsement of the officer
a) However, the deposit slip which the depositor M. Continuation of negotiable character (Sec. 47) – an
fills up will usually state that the bank is a instrument negotiable in its origin continues to be
mere collecting agent negotiable until it has been restrictively indorsed or
H. Negotiation by joint or alternative payees or discharged by payment or otherwise
indorsees (Sec. 41) – where an instrument is payable 1. Even if overdue, it retains its negotiability until it
to the order of two or more payees or indorsees who has been paid or restrictively indorsed specifically
are not partners, all must indorse, unless the one to prohibit further negotiation
indorsing has authority for the others 2. The fact that it is overdue does not affect the right
I. Unindorsed instruments (Sec. 49) – where the holder of the holder to further negotiate it, but merely
of an instrument payable to his order transfers it for prejudices the status of subsequent holders as
value without indorsing it, the transfer vests in the they cannot be considered holders in due course
transferee such title as the transferor had IV. Holder in due course (Ch. 3)
1. Transferee acquires the right to have the A. Requisites of a holder in due course (Sec. 52) –
indorsement of the transferor must be a holder (actual possession) who has taken
the instrument under the following conditions:
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1. That it is complete and regular upon its face 3. Where holder has a lien on the instrument
2. That he became the holder of it before it was (Sec. 27) – where the holder has a lien on the
overdue, and without (actual) notice that it had instrument, arising either from contract or by
been previously dishonored, if such was the fact implication of law, he is deemed a holder for value
3. That he took it in good faith and for value to the extent of his lien
4. That at the time it was negotiated to him he had no a) If a negotiable instrument is given as
notice of any infirmity in the instrument or defect in collateral for a debt, the holder has a lien on
the title of the person negotiating it the instrument
B. Rights of a holder in due course (Sec. 57, 58) b) If the amount of the instrument is less than the
1. Holds the instrument free from any defect of title of principal debt secured, the pledgee is a holder
prior parties for value for the full amount
a) A holder in due course can acquire a better c) If the amount of the instrument is more than
title because he takes the instrument free the principal debt secured, and there are no
from any defect of title of prior parties existing defenses, the pledgee can recover
2. Holds the instrument free from defenses available all, but the excess is held in trust for
to prior parties among themselves whomsoever is entitled to it
a) If the holder is not a holder in due course, the (1) If there are existing defenses among
negotiable instrument is subject to the same prior parties, of which the pledgee had no
defenses as if it were non-negotiable knowledge, he can recover only the
b) However, real defenses which attach to the amount of the debt
instrument would be available even against a D. Holder in good faith – at the time the instrument was
holder in due course negotiated to the holder, the holder must have had no
3. May enforce payment of the instrument for the full notice of any infirmity in the instrument or defect in the
amount thereof against all parties liable thereon title of the person negotiating the said instrument
C. Holder for value 1. When title defective (Sec. 55) – the title of a
1. What constitutes value person who negotiates an instrument is defective:
a) Presumption of consideration (Sec. 24) – a) When he obtained the instrument, or any
every negotiable instrument is deemed to signature thereto, by fraud, duress, or force
have been issued for valuable consideration and fear, or other unlawful means
(1) Every person whose signature appears b) When he negotiates it in breach of faith, or
to have become a party thereto for value under circumstances amounting to fraud
b) What constitutes consideration (Sec. 25) – 2. What constitutes notice (Sec. 56) – To constitute
value is any consideration sufficient to notice of an infirmity in the instrument or defect in
support a simple contract, such as an the title, the person to whom it is negotiated must
antecedent or pre-existing debt have had:
(1) Value need not be full and a holder will a) Actual knowledge of the infirmity or defect, or
be one for value even if he gave less than b) Knowledge of such facts that his action in
the face value, provided that the intention taking the instrument amounts to bad faith
is to transfer the full amount 3. What does not constitute notice
c) Bank credit as value – the bank becomes a a) Constructive knowledge of the defect
holder for value only when the depositor b) Gross negligence in itself, since it is not
withdraws the amount of the deposited equivalent to bad faith or actual knowledge
instrument, not upon crediting to account 4. Bad faith and suspicious circumstances
(1) Where withdrawal takes place before a) Bad faith can only be proven by circumstantial
maturity and before the bank receives evidence, it is a question of fact determined
notice of any defense, said defense on a case to case basis
would be unavailable against the bank b) Negligence in tracking down a suspicious
(2) First money in, first money paid out circumstance which would put a prudent man
2. What constitutes a holder for value (Sec. 26) – on inquiry is not of itself sufficient
where value has at any time been given for the c) Where the suspicious circumstances are so
instrument, the holder is deemed a holder for cogent and obvious, then the holder will be
value in respect to all parties who became such subject to defenses
prior to that time (1) But it is not necessary to prove that the
a) The mere fact that the present holder paid defendant knew the exact fraud, only that
nothing for a note or is not a holder for value he had notice of something wrong
does not preclude recovery (2) For example, knowledge of the holder of
(1) However, it lets in all defenses, if any, other suspicious transactions of the
urged against the original payee transferor may be sufficient to hold that
said holder had notice of former’s fraud
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5. Effect of purchase at discount also to those which have nothing to do with

a) This does not, of itself, constitute bad faith such irregularity
(1) However, if the instrument is purchased 4. Effect of alteration of instrument (Sec. 124) –
at a heavy discount, this fact may be where a negotiable is materially altered without the
taken into account, with other facts, in assent of all parties liable thereon, it is avoided,
determining purchase in good faith except as against a party who has himself made,
6. Effect of notice before full payment (Sec. 54) – authorized, or assented to the alteration and
where the transferee receives notice of any subsequent indorsers
infirmity or defect before he has paid the full a) But when an instrument has been materially
amount agreed to be paid therefor, he will be altered and is in the hands of a holder in due
deemed a holder in due course only to the extent course, not a party to the alteration, he may
of the amount paid by him enforce payment according to original tenor
a) Where the purchaser receives notice of b) If the alteration is apparent on the face of the
defenses after he has partially paid the instrument, it renders the latter irregular under
instrument, he is a holder in due course as to Sec. 52, even if the change may have been
such amount paid by him authorized or assented to by all parties
b) Should he pay the remainder despite notice, c) If the unauthorized alteration is apparent and
he cannot recover the remainder material, then not only is the holder deprived
c) The term “paid” includes any performance by of the rights of a holder in due course, but the
the purchaser, not limited to payment of instrument is entirely void
money, such as assumption of obligations F. Holder before or at maturity and without notice of
d) The purchaser is relieved from all further legal dishonor – must become holder of the instrument
obligation to make further payment before it is overdue and without notice that it has been
(1) Does not apply where the holder has previously dishonoured if such was the fact
given a promise for the instrument, in 1. The fact that the instrument is overdue is a strong
which case he would be in the same indication that it was dishonored
position as one who had paid money or a) The law puts the potential holder on inquiry as
property at the time of transfer to whether it was dishonored and the reason
7. Constructive notice not sufficient – a purchaser therefor
of an instrument is not charged with notice of 2. Dishonor
defenses or equities disclosed by public records, a) By non-acceptance – can refer only to a bill
nor is he affected by lis pendens of exchange and takes place when the
8. Notice of accommodation not notice of defect drawee refuses to accept the order of the
(Sec. 29) – an accommodation party is liable on drawer as stated in the bill
the instrument to a holder for value, even if the (1) May occur even before maturity
holder at the time of taking the instrument knew b) By non-payment – occurs at the time of
him to be only an accommodation party maturity when the party primarily liable fails to
a) Accommodation party – one who has pay the instrument at the date of maturity
signed the instrument as maker, drawer, 3. Where person not deemed holder in due
acceptor, or indorser, without receiving value course (Sec. 53) – where an instrument payable
therefor, and for the purpose of lending his on demand is negotiated an unreasonable length
name to some other person of time after its issue, the holder is not deemed a
E. Complete and regular – he must have taken the holder in due course
instrument complete and regular on its face a) If the purchase of a demand instrument is
1. If a purchaser of a negotiable paper takes prior to made outside of the reasonable time after
completion or contemporaneously with the act of issue, the purchase is one of an overdue
completion, he is not a holder in due course instrument
2. Where the instrument is executed in blank and is b) Reasonable time (Sec. 193) – consider the
subsequently filled up and issued to the first holder nature of the instrument, usage of trade or
who has no knowledge of the execution in blank, business with respect to such instrument, and
the holder is a holder in due course facts of the particular case
a) However, if the first holder takes the c) Negotiation of an instrument through an
instrument complete in form with knowledge undated endorsement establishes prima facie
of the original execution in blank, he is not a that it was negotiated before it was overdue
holder in due course (Sec. 45)
3. A purchaser who takes an instrument irregular on (1) One who denies that the holder of such
its face is not a holder in due course an instrument is a holder in due course
a) He is subject not only to defenses and has the burden of proving his allegation
equities related to the irregularity involved, but
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 Negotiable Instruments, Campos (Abbr.)

d) An instrument remains negotiable even after a) However, there may be circumstances under
maturity, the main distinction lies between the which he is insulated from the maker or
rights of a transferee before and of a drawer by a third party, such as a remitter
transferee after maturity b) As such, if he meets the requirements of Sec.
(1) The purchaser after maturity takes the 52, he may still be considered a holder in due
instrument subject to all defenses and course
equities with which it was encumbered J. Rights of a purchaser from a holder in due course
G. Effect of postdating or antedating (Sec. 12) – the (Sec. 58) – in the hands of any holder other than a
instrument is not invalid for the reason only that it is holder in due course, a negotiable instrument is subject
antedated or postdated, provided this is not done for to the defenses as if it were non-negotiable
an illegal or fraudulent purpose 1. However, a holder who derives his title through a
1. The instrument is not only valid but also negotiable holder in due course, and who is not a party to any
though it be antedated or postdated fraud or illegality affecting the instrument, has all
2. A holder thereof can be a holder in due course, he the rights of such former holder in respect of all
is not put on inquiry by the mere fact of its being parties prior to the latter
antedated or postdated a) The above is true even if the subsequent
H. Effect of qualified, conditional, and restrictive holder satisfies none of the requirements of
indorsements – as a general rule, there is no effect due course holding
1. Qualified – the status of a holder in due course is b) Ex. a purchaser, even with notice of defect of
not affected by his taking under a qualified title, who takes from a holder in due course,
indorsement acquires all the rights of the latter and is free
a) If there is any defect and the holder under a from defenses
qualified indorsement did not know about it 2. If the purchaser from a holder in due course was a
and took the instrument for value, in good party to the fraud or illegality affecting the
faith, and before it was overdue, he would be instrument, he does not acquire the latter’s rights
free from any defense based on such defect a) It has even been held that a holder who
2. Conditional – does not by itself deprive the reacquires from a holder in due course and
conditional indorsee or any subsequent holder of who, at the time he first held title had
the rights of a holder in due course knowledge of a defense, is disqualified from
a) The fact that a condition is imposed on the obtaining the rights of a holder in due course
indorsee does not necessarily mean there is 3. The rights passed down are granted only in
some defect of title or infirmity in the respect to parties prior to the holder in due course
instrument through whom the title is acquired
3. Restrictive – will not prevent the indorsee from K. Presumption in favor of due course holding (Sec.
being a holder in due course 59) – every holder is deemed prima facie to be a holder
a) However, should he violate the prohibition in due course
and indorse the instrument to another, then 1. However, when it is shown that the title of any
the latter cannot be a holder in due course person who has negotiated the instrument was
(1) There is no valid negotiation, therefore defective, the burden is on the holder to prove that
the transferee cannot even be a holder he or some person under whom he claims,
(2) The restrictive indorsement also serves acquired the title as a holder in due course
as a notice to any purchaser of the a) The above does not apply in favor of a party
instrument of the prohibition to negotiate who became bound on the instrument prior to
b) A restrictive indorsement constituting the the acquisition of such defective title
indorsee as agent of the indorser can vest him 2. The presumption applies in favor of holders only,
with the rights of a holder in due course if his not to other kinds of transferees
principal is a holder in due course a) Before the presumption can be availed of, the
(1) Any subsequent holder from the plaintiff must prove that he is a holder
indorsee-agent will have the same rights (1) He has to prove the genuineness of the
as the indorsee-agent maker or drawer’s signature to establish
(2) If the principal is not a holder in due the existence of the obligation
course, neither is the restrictive indorsee (2) He has to prove the genuineness of all
I. Payee as holder in due course indorsements necessary to his title, to
1. Normally, a payee cannot be a holder in due establish his link to the maker and his
course because he has dealt directly with the status as a holder
maker or drawer and thus must have knowledge 3. This presumption refers only to the status of the
of facts which may create a defense present holder and not to any previous holder

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 Negotiable Instruments, Campos (Abbr.)

a) Thus, if the present holder’s rights depend on a) Those wherein a true contract appears, but
a previous holder’s status as a holder in due where for some reason, such as fraud, the
course, he would have to prove the fact defendant is excused from the obligation
4. If the defendant claims to have a personal defense (1) Ex. inducement, want of consideration,
and duly proves it, the burden of proving due incompleteness of the instrument, lack of
course holding will be on the plaintiff-holder delivery of a completed instrument
a) However, the above does not apply where the b) Cannot affect a holder in due course
defendant’s defense is not his own, that is, 3. Legal title – one who has legal title may recover
where the defendant became bound on the possession even from a holder in due course
instrument prior to the acquisition of the 4. Equitable title – one who has equitable title may
defective title relied on by him as a defense not recover its possession from a holder in due
L. Transferee of unindorsed instrument (Sec. 49) – course but may do so from any other holder
where the holder of an instrument payable to his order 5. When title defective (Sec. 55) – obtained the
transfers it for value without indorsing it, the transfer instrument, or any signature thereto, by fraud,
vests in the transferee such title as the transferor had duress, or force and fear, or other unlawful means,
1. In addition, the transferee acquires the right to or for an illegal consideration or he negotiates it in
have the indorsement of the transferor breach of faith, or under such circumstances as
a) But for the purpose of determining whether amount to fraud
the transferee is a holder in due course, the a) These circumstances render a holder’s title
negotiation takes effect as of the time when defective and implies the right of the real
the indorsement is actually made owner of the instrument to get it back from the
(1) No retroactive effect guilty holder or from any subsequent holder
(2) As such, if at the time of indorsement, the who is not a holder in due course
transferee already know of the defense, b) If it is in the hands of a holder in due course,
or obtains the indorsement after maturity, the latter is free from the defect of title of any
such indorsement will not improve his prior party and the true owner will not have the
status right to recover possession from him
2. If his transferor had legal title, then so does he B. Incapacity (Sec. 22) – the indorsement or assignment
a) It seems to be the prevalent view that if his of the instrument by a corporation or an infant passes
transferor was a holder in due course, then he the property therein, notwithstanding that from want of
acquires rights of a holder in due course capacity the corporation or infant may incur no liability
b) If the transferor who did not indorse was not a thereon
holder in due course, then his transferee is VI.
subject to all defenses as if the instrument
were non-negotiable, although he himself
may satisfy the requirements, unless he
obtains the former’s indorsement
3. An intention by both parties at the time of the
transfer to have the paper indorsed is not enough,
it is the actual act of indorsement which constitutes
the negotiation
a) In the absence of proof of the time of the
subsequent indorsement, the presumption
that every negotiation is prima facie deemed
effected before the instrument was overdue
V. Defenses and equities (Ch. 4)
A. Defenses and equities in general
1. Real defenses
a) Those which attach to the instrument itself
and generally disclose an absence of one of
the essential elements of a contract or where
the contract is void by reason of public policy
(1) Ex. forgery, incapacity, fraud in the
execution1, some types of duress, lack of
delivery of an incomplete instrument
(2) Can affect a holder in due course
2. Personal defenses

1
No intent to issue a negotiable instrument
9