9. Negotiable Instruments LAW AND ANTI- Bouncing Checks LAW AND Estafa PDF

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NEGOTIABLE INSTRUMENTS LAW I.

CONCEPTS, CHARACTERISTICS AND FUNCTIONS

ACT NO. 2031 or the Negotiable Instruments Law became effective June 2, 1911. APPLICABILITY: the Negotiable Instruments Law applies only to Negotiable Instruments, or those that comply with Section 1 of the Negotiable Instruments Law. FUNCTIONS: 1. Operates as a substitute for money 2. It is a means of creating and transferring credit 3. It facilitates the sale of goods 4. It increases the purchasing medium in circulation NOT LEGAL TENDER – Sec. 52 of the New Central Bank Act provides that only notes and coins issued by the BSP are considered legal tender. Section 60 of the same law provides that checks are not legal tender and its acceptance is at the option of the creditor. Under Art. 1249 of the Civil Code, the payment through a negotiable instrument produces the effect of payment only when: 1. It is encashed; or 2. Its value becomes impaired through the fault of the creditor. TWO IMPORTANT FEATURES: 1. NEGOTIABILITY – the ability to pass from hand to hand similar to money so as to give the holder in due course the right to collect the sum payable for himself free from defenses personal to the parties prior to him. 2. ACCUMULATION OF SECONDARY CONTRACTS – each negotiation is a contract in itself. II.

COMMON FORMS

KINDS OF NEGOTIABLE INSTRUMENTS: 1. BILL OF EXCHANGE – 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 bearer. 2. PROMISSORY NOTE – 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 bearer. STAGES IN THE LIFE OF A NEGOTIABLE INSTRUMENT PROMISSORY NOTE Preparation & Signing Issuance Negotiation

BILL OF EXCHANGE

Presentment for Acceptance Acceptance Dishonor by Non-acceptance Presentment for payment Dishonor by Non-payment Notice of Dishonor Payment Discharge

WHEN A BILL IS TREATED AS A PROMISSORY NOTE: 1. The drawer and the drawee are the same person 2. The drawee is a fictitious person 3. The drawee has no capacity to contract 4. When the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election BILL OF EXCHANGE VS. PROMISSORY NOTE BILL OF EXCHANGE Unconditional order 3 parties Maker primary liable

PROMISSORY NOTE Promise 2 parties Drawee primarily liable; drawer secondarily liable

Only one presentment

III.

Generally 2 presentment: for acceptance and payment.

REQUISITES OF NEGOTIABILITY A.

It must be in writing and signed by the maker/drawer 1. 2.

B.

It must be in writing – may be printed, in ink or in pencil and it may be written in paper or any material that substitutes paper. Signed by the maker/drawer – preferably his full signature. If he leaves only a mark, or a single letter, it is still valid as long as (a) he intends it to be a substitute for his signature; and (b) he intends to be bound on the instrument by such mark.

It must contain an unconditional promise or order to pay a sum certain in money 1. 2.

Promise – is the undertaking made by the maker Order – is a command made by the drawer addressed to the drawee that the later pay a sum certain in money

The words “promise” or “order” need not be stated, words that connote the same satisfies the requirement. Use of the words “hope” or “authorize” do not connote command since it appears that the drawer is merely asking the drawee to pay and payment is discretionary on the part of the drawee. Use of words of courtesy such as “Please” or “kindly” does not affect negotiability as long as there is a command for the drawee to pay. 3.

Unconditional – the promise/order must not be subject to any condition such as passing the board exam.

“when the debtor’s means permit him to do so” while considered as one with a term in Civil Law, is considered a condition for purposes of the Negotiable Instruments Law.

Particular Fund a. b.

Out of which reimbursement can be had – is valid. Since the reimbursement is an act subsequent to the fact of payment. Out of which payment may be had – is conditional. Since the payment would depend on the existence or sufficiency of the fund.

Benjamin Abubakar vs. the Auditor General – treasury warrants 4.

Sum certain in money – even if it will require mathematical computation.

Certainty of sum is not affected by: a. Interest b. By stated installments – the requirement is that the (1) amount and (2) date of each installment must be indicated c. Acceleration clause, insecurity clause or extension clause d. Exchange, whether fixed or at the current rate e. With costs of collection or an attorney’s fees in case payment shall not be made at maturity. Additional acts in addition to payment of money a. General Rule: it affects negotiability, since the act must likewise be assigned. b. Exceptions: 1. If the doing of the act is at the option of the holder – here the holder can still require the payment of money 2. If the act is to be done after the payment: i. Authorize the sale of collaterals ii. Authorize confession of judgment iii. Waiver of benefits under the law intended for the obligor (waiver of notice of dishonor) C.

It must be payable on demand, or at a fixed, or determinable future time 1.

Payable on demand (Sec. 7) a. Expressly stated b. No time is expressed c. When overdue and it was issued, accepted or indorsed – it is considered payable on demand as to the person so issuing, accepting or indorsing.

2. 3.

Payable on a fixed date – a specific date is provided, e.g., February 5, 2018 Payable on a determinable future time (Sec. 4)

a. b. c.

D.

At a fixed period after date or sight, e.g., 60 days after Feb. 5, 2018 On or before a fixed or determinable future time specified, e.g. on or before Feb. 5, 2018 On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of the happening be uncertain, e.g., “upon the death of X” or “20 days after the death of X”

It must be payable to order or bearer 1.

Payable to Order (Sec. 8 ) a. Order of a specified person – Order of P b. Specific person or order – P or order When it is payable to order – there must be a payee or otherwise indicated with reasonable certainty. Without a payee, nobody can give the order/authority to collect. Payees: a. Payee who is not the maker, drawer or drawee b. Drawer or maker c. Drawee d. 2 or more drawees jointly (A and B) e. One or more several payees (A or B) f. The holder of a specific office for the time being

2.

Payable to Bearer (Sec. 9) a. Expressly stated b. Person named and or bearer c. Order of a fictitious person or non-existing person d. Name of the payee does not purport to be the name of any person (cash) e. When the last indorsement is blank

Ang Tek Lian vs. CA – ATL drew a check for P4,000 payable to the order of “cash” and gave it to Mr. LHH in exchange for cash, reasoning that he is in bad need of cash and the bank is already closed. The following day, Mr. LHH presented the check for payment but was dishonored by the bank for insufficient funds. ATL was charged with Estafa. In his defense, he said that he did not indorse the check so LHH should not have presented the same for payment. SC: A check payable to cash is a bearer instrument. No indorsement is necessary for its negotiation E.

Where it is addressed to a drawee, he must be named therein or otherwise indicated with reasonable certainty To enable the holder to know to whom the BOE shall be presented for acceptance/payment. 1. 2.

One or more drawees jointly – allowed. D1 and D2 One or more drawees in the alternative or succession – not allowed. D1 or D2. (Sec. 128)

Omissions that do not affect negotiability a. • • •

Date Sec. 11 provides for presumption of validity of date indicated Sec. 12: ante-dating or post-dating: does not invalidate the instrument. Person to whom an instrument is delivered acquires title as of date of delivery. Sec. 13: When date may be inserted: 1. Payable at a fixed period after issuance 2. Payable at a fixed period after acceptance Any holder may insert the date of issuance or acceptance

b. c. d. e. IV.

Insertion of a wrong date will not invalidate the instrument in the hands of a HIDC. Date so inserted is regarded as true date. does not specify the value given, or that any value had been given therefor; or does not specify the place where it is drawn or the place where it is payable; or bears a seal; or designates a particular kind of current money in which payment is to be made.

CONSTRUCTION OF NEGOTIABLE INSTRUMENTS Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply:

(a) Sum in words vs. sum in numbers – words; if words are ambigious and uncertain, reference may be had to the figures to fix the amount. (b) With interest but no date from when interest is to run – date of instrument or if undated the issuance. (c) Note dated – dated as of the date of issuance (d) written vs. printed – written (e) Ambiguity as to whether it is a bill or note – the holder may treat it as either at his election. (f) signature is place not sure of capacity – indorser (g) “I promise to pay” signed by 2 or more – solidary liability. V.

TRANSFER AND NEGOTIATION Types of transfers: 1. Negotiation – to constitute the transferee a holder 2. Assignment – the transferee merely steps into the shoes of the transferor (example: when an order instrument is merely delivered) Issue: is the first delivery of the instrument complete in for to a person (usually the payee) who takes it as a holder. Delivery: the transfer of possession of the instrument by the maker or drawer with the intention to transfer title and recognize the transferee as a holder. Negotiation: transfer of possession with the intention to constitute the transferee a holder. a. Payable to bearer – by mere delivery b. Payable to holder – indorsement completed by delivery

Once a bearer instrument, always a bearer instrument (Sec. 40) Even if indorsed specially, it can be further negotiated by mere delivery Any person indorsing specially is liable as indorser only to such holders as make title through his indorsment.

• •

Incomplete negotiation of an order instrument – delivered only without indorsement: the transferee is a mere assignee He acquires the right to have the indorsement of the transferor (Sec. 49) For the purpose of determining whether the transferee is a HIDC, the negotiation takes effect as of the time when indorsement is actually made. e.g. M was induced fraudulently by P to make a promissory note payable to his order. P then delivered the instrument to A on Feb. 5, 2018, without indorsing it. A asked for the indorsement of P which was placed on Feb 15, 2018. a. If A knew of the fraud on Feb 10, 2018 – he is not a HIDC because at the time of the negotiation was complete he already had knowledge of the defect in the title of P. b. If he knew of the fraud after the indorsement – he is a HIDC

• • •

VI.

INDORSEMENT 1.

2.

3. 4.

Where: a. On the instrument itself; or b. Separate piece of paper attached to the instrument called allonge. Amount: should be entire instrument. An instrument for P15,000 cannot be indorsed for less like P5,000 only – will be treated as mere assignment. Except: when there was already partial payment. 2 or more indorsees severally: considered only as an assignment. Kinds: a. Blank – no indorsee is indicated and indorser indicates only his signature; converts the instrument into a bearer instrument. b. Special indorsment – designates the indorsee e.g. Pay to X. A holder may convert the blank indorsement to a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of indorsement. (Sec. 35) c.

d.

Qualified indorsement – “without recourse” • constitutes the indorSER a mere assignee • does not impair the negotiable character of the instrument • Not liable to subsequent indorsees • does not free the indorser of liability if the warranties under Sec. 65 are not met. Conditional indorsement – Pay to X if he passes the board exam • Party required to pay (Drawee or maker) can disregard the condition since he is not a party to the same • The indorsee holds the payment in trust for the indorser if the condition is not met.

e.

Restrictive indorsement • Prohibits further negotiation – pay to X only – instrument is no longer negotiable • Constitute the indorsee as an agent – pay to X for collection • Constitute the indorsee as a trustee – pay to X in trust for Y In the first type, the instrument will cease to be negotiable. In the other two, the instrument is still negotiable. Rights of restrictive indorsees: • Receive payment • Bring any action on the instrument that the indorser can bring • Transfer his rights as such indorsee, where authorized. All subsequent indorsees acquire only the title of the first indorsee under restrictive indorsement.

5.

Negotiation by prior party – M to P, P to A, to B, to C, to P again. • • •

VII.

P may reissue against the instrument He cannot enforce payment against any intervening party to whom he is personally liable He may strike out intervening indorsements because they are not necessary for his title and he is liable to them because of his initial indorsement.

DEFECTIVE NEGOTIABLE INSTRUMENTS 1.

Incomplete Instruments: Sec. 14: Blanks, when may be filled: a. Par. 1: Instrument wanting of any material particular – the person in possession has prima facie authority to complete it b. Par. 2: Signature of a blank piece of paper – for the purpose of converting it into a negotiable instrument – prima facie authority to fill it up as such for any amount. c. Par. 3: In order to bind parties prior to completion: the instrument must be filled up: a. Strictly in accordance with the authority given b. Within a reasonable time d. Par. 4: after completion, negotiated to a holder in due course, valid and effectual for all purposes in his hands and may enforce it as if it had been filled up in accordance with the authority given and within a reasonable time. If not a HIDC, as if the instrument is materially altered and cannot be enforced against parties prior to completion.

2.

Incomplete Undelivered Instruments Sec. 15 covers Incomplete and Undelivered Instruments which is a real defense against ANY holder. Example: M had a blank signed check in his drawer, P, his secretary stole the same and indicated his name as the payee and put the amount P10,000. He then indorsed it to A, then A to B, B to C. C cannot enforce the check whether or not he is a holder in due course. This is because an incomplete undelivered instrument is not a valid contract in the hands of any holder.

3.

Complete Undelivered Instruments Delivery is essential to the validity of any negotiation (whether PN or BOE) (Sec. 30). Moreover, prior to delivery an instrument is revocable. Delivery may be: a. Negotiation b. Conditional, for a specific purpose and not for the purpose of transferring title. In the hands of a HIDC – valid delivery by all parties prior to him is conclusively presumed.

VIII.

HOLDERS IN DUE COURSE, REQUISITES AND RIGHTS 1. 2.

HOLDERS – a payee or indorsee of a bill or note who is in possession of it or the bearer thereof. (Sec. 191) HOLDER IN DUE COURSE – a holder who has taken the instrument under the following conditions: (COVN) a. That it is complete and regular upon its face b. That he became the holder of it before it as overdue and without notice that it has been previously dishonored, if such was the fact c. The he took it in good faith and for value d. The 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.

3.

HOLDER NOT IN DUE COURSE: if any of the above are not present, the holder is not a holder in due course. a. He can still enforce payment on the instrument b. Payment to him discharges the instrument c. However, he is subject to personal defenses of prior party, as if the instrument is non-negotiable.

4.

PAYEE AS A HOLDER IN DUE COURSE: Note that the definition of a holder in due course is “a holder” and a holder is defined as a “payee or indorsee or the bearer thereof”. So the payee, who takes the instrument under the above circumstances can be considered a HIDC. Example: D is indebted to C for P100,000. In order to raise money, he sold his car to X and asked that the check be issued in the name of C for payment of his debt. Not known to D and C, the car was already burned. C is still holder in due course because all the requirements are present and nothing in the case would raise suspicion on his part as to the issuance of the check. De Ocampo vs. Gatchalian: Gatchalian issued a check to Manuel Gonzales for the purchase of a car belonging to de Ocampo, of the Ocampo Clinic, in the amount of P600,000 for the purpose of showing good faith; that the check would be returned together with its registration certificate for presentation to Gatchalian. Gonzales then used the check as payment for the hospitalization of his wife amounting to P158,250 When Gonzales did not appear at the meeting place, Gatchalian issued a stop payment. SC: A payee can be a holder in due course. Every holder is deemed prima facie to be a holder in due course (Sec. 59) Not in this case, because: • Requirement: “no notice of any defect in the title of the person negotiating it” • The drawer, Gatchalian had no account with Ocampo clinic • Check is crossed check which is issued for a specific purpose and for deposit only • The amounts were not the same • As holder's title was defective or suspicious, it cannot be stated that the payee acquired the check without knowledge of said defect in holder's title, and for this reason the presumption that it is a holder in due course or that it acquired the instrument in good faith does not exist. • In the case at bar as the payee acquired the check under circumstances which should have put it to inquiry, why the holder had the check and used it to pay his own personal account, the duty devolved upon it, plaintiffappellee, to prove that it actually acquired said check in good faith

5.

CROSSED CHECKS – a person who takes a crossed check without making further inquiries is not a holder in due course. The act of crossing a check serves as warning to the holder that the check has been issued for definite purpose so that he must inquire if he has received the check pursuant to that purpose.

6.

HOLDER FOR VALUE – a consideration sufficient to support a simple contract. Partial payment – HIDC only to the extent of the amount paid if he received notice or infirmity prior to making full payment.

7.

RIGHTS OF A HOLDER IN DUE COURSE – a holder in due course holds the instrument free from any defenses personal to the prior parties.

Inquiry – is not required of the holder. Only when circumstances indicate defect, then the holder has to inquire, such as in the case of De Ocampo vs. Gatchalian and in case of crossed-checks. 8.

SHELTER RULE: a holder who is not a holder in due course but derives his title from a holder in due course (Sec. 58) has all the rights o...