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Mercantile Law: Arranged and Sequenced

This document provides a summary of negotiable instrument law topics and sample bar exam questions and answers related to negotiable instruments from past Philippine bar examinations from 1990 to 2019. It discusses the definition and characteristics of negotiable instruments, and whether various instruments like postal money orders, certificates of deposit, letters of credit, and treasury warrants qualify as negotiable instruments. The document also contains sample questions that test distinguishing features between negotiable instruments and documents, and issues around negotiability when instruments are missing dates or have alternative drawees. Further questions address liability of parties in cases involving forged or stolen negotiable instruments.

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Mercantile Law: Arranged and Sequenced

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FROM Nth Time BAR CHALLENGER TO ATTORNEY

MERCANTILE LAW
ARRANGED BAR QUESTIONS AND ANSWERS 1990 TO 2019

ARRANGED AND SEQUENCED
BASED ON THE MOST FREQUENTY ASKED TOPICS
1990 - 2019 BAR EXAMINATIONS
Page | 1

MERCANTILE LAW
The questions for the 2019 COMLAW bar examinations are all recycled popular
topics of the past exams. WALANG BINAGO saved for Data Privacy Act. KAGAYA
NG LABOR LAW, MUKHA LANG MAHIRAP ANG MERCANTILE LAW PERO
LIMITED LANG ANG MGA TOPICS NA TINATANONG. WHY IS IT SO? Take for
example ang Insurance law. Napaka-haba niyan pero halos 10% lang niyan ang
relevant sa atin. Unlike Crim and Poli law, mga 40-60 % ng provisions ng isang
batas ay dapat madaanan ng mata mo.

After reading all the bar questions, I suggest you get the book of Judge Miravite.
Yan ang pinka-mahusay na book sa ComLaw Review dahil siya lang ang may Bar
Questions discussion. Yung Iba walang BQA, sagana lang sa maputing papel
hahaha. Manipis lang yan. Basahin ninyo lahat kasi selected na ginawa ni Judge M
sa book niya. Wonderful Book. Mura at napakahusay. Kalimitan sa mga mahuhusay
na book yung mga self-published like Miravite and Nachura for Poli. Pag published
ng third party, shortchanged sa discussion at napaka-mahal. Let us support those
authors.

Also, read current events – lalo na yung Data Privacy at National ID system. I think
if may new questions to come up manggagaling ito sa mga topics na yan.

I can’t imagine how many 2019 bar students spent as much as P100,000 sa mga
school materials, big books and centers. Ang kailangan lang naman is to familiarize
with bqas and a simple book to quick scan to pass the 2019bar. Kaya, save your
money, enjoy while studying smart for your bar exam.

THIS BAR REVIEW MATERIAL is composed of 249 pages. The sources used are UPLC, PALS, books with
BQAs and other materials that can be found in the internet. I just have the patience to ARRANGE them based
on the most asked topics from 1987 to 2019, and SEQUENCE them by year. Some answers were paraphrased
to suit the ALAC format and some were found to be so informative in lecture type answer and better left out as
they are. We are giving credits to the authors of those materials.

KINLDY REFER BAR QUESTIONS AND ANSWERS TO YOUR COLLEAGUES PARA GOOD VIVES.

BAR QUESTIONS AND ANSWERS 1990-2019

MERCANTILE LAW
FIRST EDITION
OCTOBER 8, 2020
MANILA, PHILIPPINES

DEFINITION & CHARACTERISTICS

Page | 45
(2005) What is a negotiable instrument? Give the characteristics of a negotiable instrument. (2%)

Negotiable Instrument is a written contract for the payment of money which is intended as a substitute for money and passes from one
person to another as money, in such a manner as to give a holder in due course the right to hold the instrument free from defenses
available to prior parties. Such instrument must comply with Sec. 1 of the Negotiable Instrument Law to be considered negotiable.

The characteristics of a negotiable instrument are the following:

1) Negotiability - That quality or attribute whereby a bill, note or check passes or may pass from hand to hand, similar to money,
so as to give the holder in due course the right to hold the instrument and collect the sum payable for himself free from defenses.
2) Accumulation of Secondary Contracts as they are transferred from one person to another.

(2005) State and explain whether the following are negotiable instruments under the Negotiable Instruments Law: (5%)

1) Postal Money Order;

2) A certificate of time deposit which states “This is to certify that bearer has deposited in this bank the sum of FOUR THOUSAND
PESOS (P4,000.00) only, repayable to the depositor 200 days after date.”
3) Letters of credit;
4) Warehouse receipts;
5) Treasury warrants payable from a specific fund.

1) Postal Money Order – Non-Negotiable as it is governed by postal rules and regulation which may be inconsistent with the NIL
and it can only be negotiated once.
2) A certificate of time deposit which states “This is to certify that bearer has deposited in this bank the sum of FOUR THOUSAND
PESOS (P4,000.00) only, repayable to the depositor 200 days after date.” – Non-Negotiable as it does not comply with the requisites of
Sec. 1 of NIL
3) Letters of credit - Non-Negotiable
4) Warehouse receipts - Non-Negotiable for the same as Bill of Lading it merely represents good, not money.
5) Treasury warrants payable from a specific fund - Non-Negotiable being payable out of a particular fund.

(2005) Distinguish a negotiable document from a negotiable instrument. (2%)

Negotiable Instrument have requisites of Sec. 1 of the NIL, a holder of this instrument have right of recourse against intermediate parties
who are secondarily liable, Holder in due course may have rights better than transferor, its subject is money and the Instrument itself is
property of value. On the other hand, negotiable document does not contain requisites of Sec. 1 of NIL, it has no secondary liability of
intermediate parties, transferee merely steps into the shoes of the transferor, its subject are goods and the instrument is merely evidence
of title; thing of value are the goods mentioned in the document.

(1997) Can a bill of exchange or a promissory note qualify as a negotiable instrument if –

a. it is not dated; or
b. the day and the month, but not the year of its maturity, is given; or
c. it is payable to “cash”’ or

a) Yes. Date is not a material particular required by Sec 1 NIL for the negotiability of an instrument.
b) No. The time for payment is not determinable in this case. The year is not stated.
c) Yes. Sec 9d NIL makes the instrument payable to bearer because the name of the payee does not purport to be the name of
any person.
Page | 46
d) A bill may not be addressed to two or more drawees in the alternative or in succession, to be negotiable (Sec 128 NIL). To do
so makes the order conditional.

(1998) Richard Clinton makes a promissory note payable to bearer and delivers the same to Aurora Page. Aurora Page, however,
endorses it to X in this manner:

“Payable to X. Signed: Aurora Page.”

Later, X, without endorsing the promissory note, transfers and delivers the same to Napoleon. The note is subsequently dishonored by
Richard Clinton. May Napoleon proceed against Richard Clinton for the note? (5%)

Yes. Richard Clinton is liable to Napoleon under the promissory note. The note made by Richard Clinton is a bearer instrument. Despite
special indorsement made by Aurora Page thereon, the note remained a bearer instrument and can be negotiated by mere delivery.
When X delivered and transferred the note to Napoleon, the latter became a holder thereof. As such holder, Napoleon can proceed
against Richard Clinton.

(1997) A delivers a bearer instrument to B. B then specially indorses it to C and C later indorses it in blank to D. E steals the instrument
from D and, forging the signature of D, succeeds in “negotiating” it to F who acquires the instrument in good faith and for value.

a) If, for any reason, the drawee bank refuses to honor the check, can F enforce the instrument against the drawer?
b) In case of the dishonor of the check by both the drawee and the drawer, can F hold any of B, C and D liable secondarily on
the instrument?

a) Yes. The instrument was payable to bearer as it was a bearer instrument. It could be negotiated by mere delivery despite the
presence of special indorsements. The forged signature is unnecessary to presume the juridical relation between or among the parties
prior to the forgery and the parties after the forgery. The only party who can raise the defense of forgery against a holder in due course
is the person whose signature is forged.
b) Only B and C can be held liable by F. The instrument at the time of the forgery was payable to bearer, being a bearer
instrument. Moreover, the instrument was indorsed in blank by C to D. D, whose signature was forged by E cannot be held liable by F.

(2001) A issued a promissory note payable to B or bearer. A delivered the note to B. B indorsed the note to C. C placed the note in his
drawer, which was stolen by the janitor X. X indorsed the note to D by forging C’s signature. D indorsed the note to E who in turn delivered
the note to F, a holder in due course, without indorsement. Discuss the individual liabilities to F of A, B and C. (5%)

A is liable to F. As the maker of the promissory note, A is directly or primarily liable to F, who is a holder in due course. Despite the
presence of the special indorsements on the note, these do not detract from the fact that a bearer instrument, like the promissory note in
question, is always negotiable by mere delivery, until it is indorsed restrictively “For Deposit Only.”

B, as a general indorser, is liable to F secondarily, and warrants that the instrument is genuine and in all respects what it purports to be;
that he has good title to it; that all prior parties had capacity to contract; that he has no knowledge of any fact which would impair the
validity of the instrument or render it valueless; that at the time of his indorsement, the instrument is valid and subsisting; and that on due
presentment, it shall be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay.

C is not liable to F since the latter cannot trace his title to the former. The signature of C in the supposed indorsement by him to D was
forged by X. C can raise the defense of forgery since it was his signature that was forged.

ALTERNATIVE ANSWER:
As a general endorser, B is secondarily liable to F. C is liable to F since it is due to the negligence of C in placing the note in his drawer Page | 47
that enabled X to steal the same and forge the signature of C relative to the indorsement in favor of D. As between C and F who are both
innocent parties, it is C whose negligence is the proximate cause of the loss. Hence C should suffer the loss.

NOTICE DISHONOR
When is notice of dishonor not required to be given to the drawer?

Notice of dishonor is not required to be given to the drawer in any of the following cases:
a) Where the drawer and drawee are the same person;
b) When the drawee is a fictitious person or a person not having capacity to contract;
c) When the drawer is the person to whom the instrument is presented for payment;
d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument;
e) Where the drawer has countermanded payment (Sec 114 NIL)

PLACE OF PAYMENT
PN is the holder of a negotiable promissory note within the meaning of the Negotiable Instruments Law (Act 2031). The note was originally
issued by RP to XL as payee. XL indorsed the note to PN for goods bought by XL. The note mentions the place of payment on the
specified maturity date as the office of the corporate secretary of PX Bank during banking hours. ON maturity date, RP was at the
aforesaid office ready to pay the note but PN did not show up. What PN later did was to sue XL for the face value of the note, plus interest
and costs. Will the suit prosper? Explain. (5%)

Yes. The suit will prosper as far as the face value of the note is concerned, but not with respect to the interest due subsequent to the
maturity of the note and the costs of collection. RP was ready and willing to pay the note at the specified place of payment on the specified
maturity date, but PN did not show up. PN lost his right to recover the interest due subsequent to the maturity of the note and the costs
of collection.

NEGOTIABILITY
(2018) On November 23, 2017, Yas Ysmael (Ysmael) loaned the amount of PhP 5 million to Yarn & Thread Corporation (YTC), through
its President, Ylmas Yektas (Yektas), which loan was evidenced by a Promissory Note (PN), which reads as follows:

Date: _______

Within one year from date hereof, I promise to pay to the order of YAS YSMAEL, the sum of PhP 5 million with interest at 120% per
annum.

YARN & THREAD Corporation

By:

(Sgd.)

Ylmas Yektas

A year later, Ysmael inserted the date of "November 23, 2017" on the date section of the PN, and made a formal demand upon YTC,
through Yektas, to pay the note, but which was refused on the ground that Yektas was no longer the President and controlling shareholder
of YTC. By this time, all the shares of YTC had already been sold to a new group of investors. Ysmael deposited the personal check Page | 48
issued by Yektas which was dishonored. He then filed a collection suit against YTC and Yektas including the accrued interest.

The defendants raised the following defenses in the collection suit. Rule on the merits of each defense. (2% each)

(a) A PN issued with a blank date is one that is not payable on demand or on a fixed or determinable future time, and therefore the
insertion of the date constituted material alteration that nullified it, so that no cause of action arose.

A. The defense is not meritorious. Where the instrument is not dated, it will be considered to be dated as of the time it was issued (Section
17 of NIL ( C ). Section 14 of NIL also concedes to the payee the prima facie authority to fill-in the blanks in a negotiable instrument.
Such prima facie stands in the absence of evidence to the contrary.

(b) Yektas cannot be made liable on the PN since he signed in his capacity as President of YTC, which fact was known to Ysmael
although not indicated on the PN.

B. The defense is not meritorious. Where the instrument contains or a person adds to his signature words indicating that he signs for or
on behalf of a principal or in a representative capacity, he must disclose his principal and must indicate that he is acting on behalf of his
principal (Section 20 of NIL).

Alternative answer

The defense is meritorious. Since the matter of signing the note by Yektas on behalf of YTC is known to Ysmael, then, Yektas has no
personal liability as it may be inferred from the note that he is acting only in a representative capacity.

(c) Yektas signed the PN merely as an accommodation to YTC. As he received no consideration for the PN, it is void for lack of
consideration.

C. The defense is not meritorious. An accommodation party signs a negotiable instrument as a maker, drawer, endorser, acceptor without
receiving value therefor and only for the purpose of lending his name in another. He is liable to a holder for value notwithstanding such
holder, at the time of taking the instrument, knew him only to be an accommodation party ( Section 29 of NIL )

(d) YTC, now owned by new owners, cannot be held liable on the PN since it was entered into by its former owner and President, which
act the new Board of Directors did not ratify.

D. The defense is not meritorious. In stock sales, where shareholder sell a block of stock to new or existing shareholders, the transaction
takes place at the shareholder level only. Because the corporation has a legal personality separate and distinct from that of its
shareholders, a change in the composition of shareholders will not affect its existence nor extinguish its separate legal personality (SME
Bank vs Samson, GR No. 186641, October 8, 2013)

(e) The PN .is void for being in violation of the Usury Law seeking interest at an unconscionable rate of 120% p.a.

E. The defense is not meritorious. The Usury law is currently suspended in view of CB Circular 905 series of 1982 which lifted the ceiling
on interest rate for loans. Moreover, if the interest rate is deemed to be unconscionable despite the absence of the Usury Law, the legal
rate of interest shall be deemed to apply. Thus, the PN remains valid

Alternative answer

The PN remains valid because the obligation to pay the principal amount of the loan is distinct from the obligation to pay the interest on
the loan.

(A) A promissory note with promise to pay out of the U.S. Dollar account of the maker in XYZ Bank

(B) A promissory note which designates the U.S. Dollar currency in which payment is to be made

(C) A promissory note which contains in addition a promise to paint the portrait of the bearer Page | 49
(D) A promissory note made payable

(1993) Discuss the negotiability or non-negotiability of the following notes

1) Manila, September 1, 1993

P2,500.00
I promise to pay Pedro San Juan or order the sum of P2,500.

(Sgd.) Noel Castro

2) Manila, June 3, 1993 P10,000.00

For value received, I promise to pay Sergio Dee or order the sum of P10,000.00 in five (5) installments, with the first
installment payable on October 5, 1993 and the other installments on or before the fifth day of the succeeding month or
thereafter.

(Sgd.) Lito Villa

The promissory note is negotiable as it complies with Sec 1, NIL.

• Firstly, it is in writing and signed by the maker, Noel Castro.
• Secondly, the promise is unconditional to pay a sum certain in money, that is, P2,500.00
• Thirdly, it is payable on demand as no date of maturity is specified.
• Fourth, it is payable to order.

The promissory note is negotiable. All the requirements of Sec 1 NIL are complied with. The sum to be paid is still certain despite that
the sum is to be paid by installments (Sec 2b NIL)

(2013) Antonio issued the following instrument:

August 10, 2013

Makati City

P100,000.00
Sixty days after date, I promise to pay Bobby or his designated representative the sum of ONE HUNDRED THOUSAND PESOS
(P100,000.00) from my BPI Acct. No. 1234, if, by this due date, the sun still sets in the west to usher in the evening and rises in the
east the following morning to welcome the day.

The instrument contains a promise to pay and was signed by the maker, Antonio Reyes (Section 1(a) of Negotiable Instruments Law).
The promise to pay is unconditional insofar as the reference to the setting of the sun in the west in the evening and its rising in the east
in the morning are concerned. These are certain to happen (Section 4(c) of Negotiable Instruments Law). The promise to pay is
Page | 50
conditional, because the money will be taken from a particular fund, BPI Account No. 1234 (Section 3 of Negotiable Instruments Law).
The Instrument contains a promise to pay a sum certain in money, P100,000.00 (Section (b) of Negotiable Instruments Law). The money
is payable at a determinable future time, sixty days after August 10, 2013 (Section 4(a) of Negotiable Instruments Law). The instrument
is not payable to order or to bearer (Section 1(d) of Negotiable Instruments Law).

(2012) Indicate and explain whether the promissory note is negotiable or non- negotiable.
I promise to pay A or bearer Php100,000.00 from my inheritance which I will get after the death of my father. (2%)

Not negotiable. There is no unconditional promise to pay a sum certain in money (Sec. 1 [b], NIL) as the promise is to pay the amount
out of a particular fund, i.e., the inheritance from the father of the promisor (Sec. 3, NIL).

I promise to pay A or bearer Php100,000 plus the interest rate of ninety (90) – day treasury bills. (2%)

Not negotiable. There is no unconditional promise to pay a sum certain in money. The promise to pay “the interest rate of ninety
(90)-day treasury bills” is vague because, first, there are no 90-day treasury bills (although there are 91-day, 182-day, and
364-days bills); second the promise does not specify whether the so-called “interest rate” is that established at the primary market (where
new T-bills are sold for the first time by the Bureau of Treasury) or at the secondary market (where T-bills can be bought and sold after
they have been issued in the primary market).; and third, T-bills are conventionally quoted in terms of their discount rate, rather than their
interest rate. They do not pay any interest directly; instead, they are sold at a discount of their face value and this “earn” by selling at face
value upon maturity.

I promise to pay A or bearer the sum of Php100,000 if A passes the 2012 bar exams. (2%)

Not negotiable. The promise to pay is subject to a condition, i.e., that A will pass the 2012 bar exams (Sec.1[b],NIL).

I promise to pay A or bearer the sum of Php100.000 on or before December 30, 2012. (2%)

Negotiable. It conforms fully with the requirements of negotiability under Section 1, NIL.

I promise to pay A or bearer the sum of Php100,000. (2%)

Negotiable. It conforms fully with the requirements of negotiability under Section 1,NIL. It is payable on demand because the note does
not express a time for its payment (Sec.7[b], NIL).

(2002) Which of the following stipulations or features of a promissory note (PN) affect or do not affect its negotiability, assuming that the
PN is otherwise negotiable? Indicate your answer by writing the paragraph number of the stipulation or feature of the PN as shown below
and your corresponding answer, either “Affected” or “Not affected.” Explain (5%).

a) The date of the PN is “February 30, 2002.”

b) The PN bears interest payable on the last day of each calendar quarter at a rate equal to five percent (5%) above the then
prevailing 91-day Treasury Bill rate as published at the beginning of such calendar quarter.
c) The PN gives the maker the option to make payment either in money or in quantity of palay or equivalent value.
d) The PN gives the holder the option either to require payment in money or to require the maker to serve as the bodyguard or
escort of the holder for 30 days.

The ARRANGER is a humble partner to succeed in your quest for a law degree and to clinch the evasive “Attorney”
title to your name. He believes that no one has the monopoly of knowledge so you may email him for any correction,
modification and suggestion at [email protected]. Other law subjects will soon be available for
2020 Bar Exams. For orders visit FB Page: Law Reviewers, Books and Bookstand for Sale/OR TEXT 09325293595
FROM Nth Time BAR CHALLENGER TO ATTORNEY
MERCANTILE LAW
ARRANGED BAR QUESTIONS AND ANSWERS 1990 TO 2019

a) Paragraph 1 – negotiability is “NOT AFFECTED.” The date is not one of the requirements for negotiability.
b) Paragraph 2 – negotiability is “NOT AFFECTED” The interest is to be computed at a particular time and is determinable. It
does not make the sum uncertain or the promise conditional.
c) Paragraph 3 – negotiability is “AFFECTED.” Giving the maker the option renders the promise conditional
d) Paragraph 4 – negotiability is “NOT AFFECTED.” Giving the option to the holder does not make the promise conditional.
Page | 51
(2002)
A. Define the following: (1) a negotiable promissory note, (2) a bill of exchange and (3) a check. (3%)
B. You are Pedro Cruz. Draft the appropriate contract language for (1) your negotiable promissory note and (2) your check, each
containing the essential elements of a negotiable instrument (2%)

(1) A negotiable promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging
to pay on demand or at a fixed or determinable future time, a sum certain in money to order or bearer.
(2) A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring
the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to
bearer.
(3) A check is a bill of exchange drawn on a bank payable on demand.

B. (1) Negotiable promissory note -

“September 15, 2002

“For value received, I hereby promise to pay Juan Santos or order the sum of TEN THOUSAND PESOS (P10,000) thirty (30) days from
date hereof.

(Signed) Pedro Cruz to: Philippine National Bank

Escolta, Manila Branch”

(1996) What are the requisites of a negotiable instrument?

The requisites of a negotiable instrument are as follows:

a) It must be in writing and signed by the maker or drawer;

b) It must contain an unconditional promise or order to pay a sum certain in money;
c) It must be payable to order or to bearer; and
d) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.
(Sec 1 NIL)

(2009) (D) A document, dated July 15, 2009 that reads: ―Pay to X or order the sum of P5,000.00 five days after his pet dog,
Sparky, dies. Signed Y is a negotiable instrument.

True. The document is subject to a term and not a condition. The dying of the dog is a day which is certain to come. Therefore, the order
to pay is unconditional, in compliance with Section 1 of the Negotiable Instruments Law (NIL).

(Note: This answers presumes that there is a drawee)

(2000)
a) MP bought a used cell phone from JR. JR preferred cash but MP is a friend so JR accepted MR’s promissory note for P10,000.
JR thought of converting the note into cash by endorsing it to his brother KR. The promissory note is a piece of paper with the following

b) TH is an indorsee of a promissory note that simply states: “PAY TO JUAN TAN OR ORDER 400 PESOS.” The note has no
date, no place of payment and no consideration mentioned. It was signed by MK and written under his letterhead specifying the address,
Page | 52
which happens to be his residence. TH accepted the promissory note as payment for services rendered to SH, who in turn received the
note from Juan Tan as payment for a prepaid cell phone card worth 450 pesos. The payee acknowledged having received the note on
August 1, 2000. A Bar reviewee had told TH, who happens to be your friend, that TH is not a holder in due course under Article 52 of the
Negotiable Instruments Law (Act 2031) and therefore does not enjoy the rights and protection under the statute. TH asks for our advice
specifically in connection with the note being undated and not mentioning a place of payment and any consideration. What would your
advice be? (2%).

a) KR is right. The promissory note is not negotiable. It is not issued to order or bearer. There is no word of negotiability containing
therein. It is not issued in accordance with Section 1 of the Negotiable Instruments Law

b) The fact that the instrument is undated and does not mention the place of payment does not militate against its being
negotiable. The date and place of payment are not material particulars required to make an instrument negotiable.

The fact that no mention is made of any consideration is not material. Consideration is presumed.

Ambiguous Instruments
(1998) How do you treat a negotiable instrument that is so ambiguous that there is doubt whether it is a bill or a note? (5%)

1. Where a negotiable instrument is so ambiguous that there is doubt whether it is a bill or a note, the holder may treat it either as a bill
of exchange or a promissory note at his election.

BILL OF EXCHANGE AS PROMISSORY NOTE

(2015) (C) When can you treat a bill of exchange as a promissory note? (3%)

A bill of exchange may be treated as a promissory note in the following instances:

1. the drawee is a fictitious person or a person not having the capacity to contract;

2. the drawer and the drawee are one and the same person;

3. where the instrument is so ambiguous that there is a doubt as to whether the instrument is a bill or a note, the holder may treat it either
as a bill or note, at the option of the holder (Sections 130 and 17 of the Negotiable Instruments Law).

7653).

to the order of Jose Cruz or Josefa Cruz

INDORSER
Irregular Indorser vs. General Indorser (2005)
Distinguish an irregular indorser from a general indorser. (3%)

The ARRANGER is a humble partner to succeed in your quest for a law degree and to clinch the evasive “Attorney”
title to your name. He believes that no one has the monopoly of knowledge so you may email him for any correction,
modification and suggestion at [email protected]. Other law subjects will soon be available for
2020 Bar Exams. For orders visit FB Page: Law Reviewers, Books and Bookstand for Sale/OR TEXT 09325293595
FROM Nth Time BAR CHALLENGER TO ATTORNEY
MERCANTILE LAW
ARRANGED BAR QUESTIONS AND ANSWERS 1990 TO 2019

Irregular Indorser is not a party to the instrument but he places his signature in blank before delivery. He is not a party but he becomes
one because of his signature in the instrument. Because his signature he is considered an indorser and he is liable to the parties in the
instrument. While, a General Indorser warrants that the instrument is genuine, that he has a good title to it, that all prior parties had
capacity to contract; that the instrument at the time of the indorsement is valid and subsisting; and that on due presentment, the instrument
will be accepted or paid or both accepted and paid according to its tenor, and that if it is dishonored, he will pay if the necessary
proceedings for dishonor are made.
Page | 53

DEFENSES
FORGERY: LIABILITIES OF PRIOR & SUBSEQUENT PARTIES
(1990) 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?
b) May Camilo go against Pablo?
c) May Camilo enforce said note against Julian?
d) Against whom can Julian have the right of recourse?
e) May Pablo recover from either Mario or Jose?

a) 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) Camilo may not go against Pablo, the latter not having indorsed the instrument.
c) 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) Julian, in turn, may enforce the instrument against Bert who, by his forgery, has rendered himself primarily liable.
e) 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.
Note: It is possible that an answer might distinguish between blank and special indorsements of prior parties which can thereby materially
alter the above suggested answers. The problem did not clearly indicate the kind of indorsements made.

(1995) Alex issued a negotiable PN (promissory note) payable to Benito or order in payment of certain goods. Benito indorsed the PN to
Celso in payment of an existing obligation. Later Alex found the goods to be defective. While in Celso’s possession the PN was stolen
by Dennis who forged Celso’s signature and discounted it with Edgar, a money lender who did not make inquiries about the PN. Edgar
indorsed the PN to Felix, a holder in due course. When Felix demanded payment of the PN from Alex the latter refused to pay. Dennis
could no longer be located.

1. What are the rights of Felix, if any, against Alex, Benito, Celso and Edgar? Explain
2. Does Celso have any right against Alex, Benito and Felix? Explain.

1. Felix has no right to claim against Alex, Benito and Celso who are parties prior to the forgery of Celso’s signature by Dennis.
Parties to an instrument who are such prior to the forgery cannot be held liable by any party who became such at or subsequent to the
forgery. However, Edgar, who became a party to the instrument subsequent to the forgery and who indorsed the same to Felix, can be
held liable by the latter.

INCOMPLETE AND UNDELIVERED INSTRUMENT

(2018) Yolanda executed and signed a promissory note with all the requisites for negotiability being present, except for the amount which
was left blank. She kept the promissory note in her desk and decided to place the amount at a later date. The indicated payee, Yohann, Page | 54
managed to obtain the promissory note from Yolanda's desk and filled out the amount for the sum of PhP 10 million, which was the
amount actually lent by him to Yolanda, but excluding the agreed interest. Yohann later endorsed and delivered the check to Yvette,
under circumstances that would constitute the latter to be a holder in due course.

(a) May Yvette hold Yolanda liable on the note? (2.5%)

A. Yvette cannot hold Yolanda liable on the note. This a case of incomplete and undelivered instrument insofar as Yolanda is concerned.
Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in
the hands of any holder, including a holder in due course as against Yolanda, whose signature was placed thereon before delivery
(Section 15 of the Negotiable instruments law)

(2000) PN makes a promissory note for P5,000.00, but leaves the name of the payee in blank because he wanted to verify its correct
spelling first. He mindlessly left the note on top of his desk at the end of the workday. When he returned the following morning, the note
was missing. It turned up later when X presented it to PN for payment. Before X, T, who turned out to have filched the note from PN’s
office, had endorsed the note after inserting his own name in the blank space as the payee. PN dishonored the note, contending that he
did not authorize its completion and delivery. But X said he had no participation in, or knowledge about, the pilferage and alteration of
the note and therefore he enjoys the rights of a holder in due course under the Negotiable Instruments Law.

a) Who is correct and why? (3%)

b) Can the payee in a promissory note be a “holder in due course” within the meaning of the Negotiable Instruments Law (Act 2031)?
Explain your answer. (2%)

a) PN is right. The instrument is incomplete and undelivered. It did not create any contract that would bind PN to an obligation
to pay the amount thereof.

b) A payee in a promissory note cannot be a “holder in due course” within the meaning of the Negotiable Instruments Law,
because a payee is an immediate party in relation to the maker. The payee is subject to whatever defenses, real of personal,
available to the maker of the promissory note.

ALTERNATIVE ANSWER:
b) A payee can be a “holder in due course.” A holder is defined as the payee or indorsee of the instrument who is in possession
of it. Every holder is deemed prima facie to be a holder in due course.

(2008) AB Corporation drew a check for payment to XY Bank. The check was given to an officer of AB Corporation who was
instructed deliver it to XY Bank. Instead , the officer intending to defraud the Corporation, filled up the check by making himself as
the payee and delivered it to XY Bank for deposit to his personal account. XY Bank debited AB Corporation’s account. AB
Corporation came to know of the officer’s fraudulent act after he absconded. AB Corporation asked XY Bank to re-credit its
amount. XY Bank refused.
If you were the judge, what issues would you consider relevant to resolve the case? Explain. (3%)

The filling up by the officer of his name as payee does not constitute forgery, and contemplates a mechanically incomplete but delivered
instrument. Under Sec. 14 of the NIL, in order to enforce an incomplete but delivered instrument against a prior party, it must be filled-up

How would you decide the case? Explain. (2%)

I would fin AB Corp. liable for its negligence in delivering an incomplete instrument to XY Bank (Sec. 14, NIL). Page | 55

(1997) A, single proprietor of a business concern, is about to leave for a business trip and, as he so often does on these occasions, signs
several checks in blank. He instructs B, his secretary, to safekeep the checks and fill them out when and as required to pay accounts
during his absence. B fills out one of the checks by placing her name as payee, fills in the amount, endorses and delivers the check to C
who accepts it in good faith as payment for goods sold to B. B regrets her action and tells A what she did. A directs the Bank in time to
dishonor the check. When C encashes the check, it is dishonored. Can A be held liable to C?

Yes, A can be held liable to C, assuming that the latter gave notice of dishonor to A. This is a case of an incomplete instrument but
delivered as it was entrusted to B, the secretary of A. Moreover, under the doctrine of comparative negligence, as between A and C, both
innocent parties, it was the negligence of A in entrusting the check to B which is the proximate cause of the loss.

INCOMPLETE & DELIVERED

(2004) AX, a businessman, was preparing for a business trip abroad. As he usually did in the past, he signed several checks in blank
and entrusted them to his secretary with instruction to safeguard them and fill them out only when required to pay accounts during his
absence. OB, his secretary, filled out one of the checks by placing her name as the payee. She filled out the amount, endorsed and
delivered the check to KC, who accepted it in good faith for payment of gems that KC sold to OB. Later, OB told AX of what she did with
regrets. AX timely directed the bank to dishonor the check. Could AX be held liable to KC? Answer and reason briefly. (5%)

Yes. AX could be held liable to KC. This is a case of an incomplete check, which has been delivered. Under Section 14 of the Negotiable
Instruments Law, KC, as a holder in due course, can enforce payment of the check as if it had been filled up strictly in accordance with
the authority given by AX to OB and within a reasonable time.

(2005) Brad was in desperate need of money to pay his debt to Pete, a loan shark. Pete threatened to take Brad’s life if he failed to pay.
Brad and Pete went to see Señorita Isobel, Brad’s rich cousin, and asked her if she could sign a promissory note in his favor in the
amount of P10,000.00 to pay Pete. Fearing that Pete would kill Brad, Señorita Isobel acceded to the request. She affixed her signature
on a piece of paper with the assurance of Brad that he will just fill it up later. Brad then filled up the blank paper, making a promissory
note for the amount of P100,000.00. He then indorsed and delivered the same to Pete, who accepted the note as payment of the debt.

What defense or defenses can Señorita Isobel set up against Pete? Explain. (3%)

The defense (personal defense) which Señorita Isobel can set up against Pete is that the amount of P100,000.00 is not in accordance
with the authority given to her to Brad (in the presence of Pete) and that Pete was not a holder in due course for acting in bad faith when
accepted the note as payment despite his knowledge that it was only 10,000.00 that was allowed by Señorita Isobel during their meeting
with Brad.

INCOMPLETE DELIVERED INSTRUMENTS VS. INCOMPLETE UNDELIVERED INSTRUMENT

(2006) Jun was about to leave for a business trip. As his usual practice, he signed several blank checks. He instructed Ruth, his secretary,
to fill them as payment for his obligations. Ruth filled one check with her name as payee, placed P30,000.00 thereon, endorsed and
delivered it to Marie. She accepted the check in good faith as payment for goods she delivered to Ruth. Eventually, Ruth regretted what

1. Is Jun liable to Marie? (5%)

Yes. This covers the delivery of an incomplete instrument, under Section 14 of the Negotiable Instruments Law, which provides that
Page | 56
there was prima facie authority on the part of Ruth to fill-up any of the material particulars thereof. Having done so, and when it is first
completed before it is negotiated to a holder in due course like Marie, it is valid for all purposes, and Marie may enforce it within a
reasonable time, as if it had been filled up strictly in accordance with the authority given.

2. Supposing the check was stolen while in Ruth's possession and a thief filled the blank check, endorsed and delivered it to
Marie in payment for the goods he purchased from her, is Jun liable to Marie if the check is dishonored? (5%)

No. Even though Marie is a holder in due course, this is an incomplete and undelivered instrument, covered by Section 15 of the
Negotiable Instruments Law. Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without
authority, be a valid contract in the hands of any holder, as against any person, including Jun, whose signature was placed thereon before
delivery. Such defense is a real defense even against a holder in due course, available to a party like Jun whose signature appeared
prior to delivery.

COMPLETE AND UNDELIVERED INSTRUMENT

(2018) Yolanda executed and signed a promissory note with all the requisites for negotiability being present, except for the amount which
was left blank. She kept the promissory note in her desk and decided to place the amount at a later date. The indicated payee, Yohann,
managed to obtain the promissory note from Yolanda's desk and filled out the amount for the sum of PhP 10 million, which was the
amount actually lent by him to Yolanda, but excluding the agreed interest. Yohann later endorsed and delivered the check to Yvette,
under circumstances that would constitute the latter to be a holder in due course.

(a) May Yvette hold Yolanda liable on the note? (2.5%)

(b) Would your answer be the same if the promissory note was actually completed by Yolanda (including the amount of PhP 10 million),
but stolen from her desk by Yohann? Can Yvette enforce the note against Yolanda? (2.5%)

B. The answer will not be the same. Now that the instrument is complete but undelivered and in the hands of Yvette, a holder in due
course, a valid and intentional delivery to make all parties prior to Yvette liable is conclusively presumed under Section 16 of the NIL.
Therefore, Yvette can hold Yolanda, a prior party, liable. A complete but undelivered instrument is only a personal defense not available
against a holder in due course.

ILLICIT/ILLEGAL CONSIDERATION

(2007) R issued a check for P1m which he used to pay S for killing his political enemy. (10%)

Can be the check be considered a negotiable instrument?

Yes, the check can be considered a negotiable instrument even if it was issued to pay S to kill his political enemy. The validity of the
consideration is not one of the requisites of a negotiable instruments (Section 1, Negotiable Instruments Law.) it merely constitute a
defect of title (Section 55, Negotiable Instruments Law).

Does S have a cause of action against R in case of dishonor by the drawee bank?

No, S does not have a cause of action against R in case of dishonor of the check by the drawee bank. S is not a holder in due course,
thus, R can raise the defense that the check was issued for an illegal consideration (Section 58, Negotiable Instruments Law).
Page | 57
If S negotiated the check to T, who accepted it in good faith and for value, may R be held secondarily liable by T?

Yes, R may be held secondarily liable by T who took the check in good faith and for value. T is a holder in due course. R cannot raise
the defense of illegality of the considerarion, because T took the check fre from the defect of title of S (Section 57, Negotiable Instrumets
Law).

(2009) Lorenzo drew a bill of exchange in the amount of P100,000.00 payable to Barbara or order, with his wife, Diana, as drawee. At
the time the bill was drawn. Diana was unaware that Barbara is Lorenzo’s paramour. Barbara then negotiated the bill to her sister, Elena,
who paid for it for value, and who did not know who Lorenzo was. On due date, Elena presented the bill to Diana for payment, but the
latter promptly dishonored the instrument because, by then, Diana had already learned of her husband’s dalliance.

Was the bill lawfully dishonored by Diana? Explain. (3%)

No, the bill was not lawfully dishonored by Diana. Elena, to whom the instrument was negotiated, was a holder in due course inasmuch
as she paid value therefore in good faith.

Does the illicit cause or consideration adversely affect the negotiability of the bill? Explain. (3%)

No. the illicit cause or consideration does not adversely affect the negotiability of the bill, especially in the hands of a holder in due course.
Under Sec. 1 of the Negotiable Instruments law, the bill of exchange is a negotiable instrument. Every negotiable instrument is deemed
prima facie to have been issued for valuable consideration, and every person whose signature appears thereon is deemed to have
become a party thereto for value (Sec. 24, Negotiable Instruments Law).

HOLDER IN DUE COURSE

(2017) Forgery is a real defense but may only be raised against a holder not in due course. (2%)

FALSE. Being a real defense, it can be raised even against a holder in due course.

FORGERY

(2016) After securing a Pl million loan from B, A drew in B's favor a bill of exchange with C as drawee. The bill reads:

"October 1, 2016. Pay to the order of B the sum of Pl million. To: C (drawee).

Signed, A."

A then delivered the bill to B who, however, lost it. It turned out that it was stolen by D, B's brother. D lost no time in forging B's signature
and negotiated it to E who acquired it for value and in good faith.

May E recover on the bill from C, the drawee? Explain. (5%)

E cannot recover from C, the drawee. The forged endorsement of B did not result in transfer of the title in favor of E as no right can be
acquired under such forged endorsement.

Alternative Answer

Take this as a lecture

Yes. E may recover on the bill from C, the drawee; Provided, that C accepts the instrument presented by E.

Section 62 of the Negotiable Instruments Law, provides that the acceptor, by accepting the instrument, engages that he will pay it
Page | 58
according to the to the tenor of his acceptance and admits:

a) the existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and

b) the existence of the payee and his then capacity to indorse.

Upon C’s acceptance of the instrument, he shall automatically be primarily liable to the holder of the instrument even if the drawer’s
signature is really forged, because at the time of making his acceptance, he warrants that the drawer’s signature is genuine.

(1992) Perla brought a motor car payable on installments from Automotive Company for P250th. She made a down payment of P50th
and executed a promissory note for the balance. The company subsequently indorsed the note to Reliable Finance Corporation which
financed the purchase. The promissory note read:

“For value received, I promised to pay Automotive Company or order at its office in Legaspi City, the sum of P200,000.00 with interest at
twelve (12%) percent per annum, payable in equal installments of P20,000.00 monthly for ten (10) months starting October 21, 1991.

Manila September 21, 1991.

(sgd) Perla

Pay to the order of Reliable Finance Corporation.

Automotive Company By: (Sgd) Manager

Because Perla defaulted in the payment of her installments, Reliable Finance Corporation initiated a case against her for a sum of
money. Perla argued that the promissory note is merely an assignment of credit, a non-negotiable instrument open to all defenses
available to the assignor and, therefore, Reliable Finance Corporation is not a holder in due course.

a) Is the promissory note a mere assignment of credit or a negotiable instrument? Why?

b) Is Reliable Finance Corp a holder in due course? Explain briefly.

a) The promissory note in the problem is a negotiable instrument, being in compliance with the provisions of Sec 1 NIL. Neither
the fact that the payable sum is to be paid with interest nor that the maturities are in stated installments renders uncertain the amount
payable (Sec 2 NIL)

b) Yes, Reliable Finance Corporation is a holder in due course given the factual settings. Said corporation apparently took the
promissory note for value, and there are no indications that it acquired it in bad faith (Sec 52 NIL see Salas v CA 181 s 296)

(2012) X borrowed money from Y in the amount of Php1Million and as payment, issued a check. Y then indorsed the check to his sister
Z for no consideration. When Z deposited the check to her account, the check was dishonored for insufficiency of funds. Is Z a holder in
due course? Explain your answer. (5%)

Z is not a holder in due course. She did not give any valuable consideration for the check. To be a holder in due course, the holder must
have taken the check in good faith and for value (Sec. 52[c], Negotiable Instruments Law).

X, the drawer, will be liable. As the drawer, X engaged that on due presentment the check would be paid according to its tenor and that
if it is dishonored and he is given notice of dishonor, he will pay the amount to the holder (Sec. 61, NIL). No notice of dishonor need be
given to X if he is aware that he has insufficient funds in his account. Under Section 114(d) of the Negotiable Instruments Law, notice of
dishonor is not required to be given to the drawer where he has no right to expect that the drawee will honor the instrument. Z cannot
Page | 59
hold Y, the endorser, liable as the latter can raise the defense that there was no valuable consideration for the endorsement of the check
(Sec. 58, NIL).

(1993) Larry issued a negotiable promissory note to Evelyn and authorized the latter to fill up the amount in blank with his loan account
in the sum of P1,000. However, Evelyn inserted P5,000 in violation of the instruction. She negotiated the note to Julie who had knowledge
of the infirmity. Julie in turn negotiated said note to Devi for value and who had no knowledge of the infirmity.

1) Can Devi enforce the note against Larry and if she can, for how much? Explain.
2) Supposing Devi endorses the note to Baby for value but who has knowledge of the infirmity, can the latter enforce the note
against Larry?

1) Yes, Devi can enforce the negotiable promissory note against Larry in the amount of P5,000. Devi is a holder in due course
and the breach of trust committed by Evelyn cannot be set up by Larry against Devi because it is a personal defense. As a holder in due
course, Devi is not subject to such personal defense.

2) Yes. Baby is not a holder in due course because she has knowledge of the breach of trust committed by Evelyn against Larry
which is just a personal defense. But having taken the instrument from Devi, a holder in due course, Baby has all the rights of a holder
in due course. Baby did not participate in the breach of trust committed by Evelyn who filled the blank but filled up the instrument with
P5,000 instead of P1,000 as instructed by Larry (Sec 58 NIL)

(1996) What constitutes a holder in due course?

A holder in due course is one who has taken the instrument under the following conditions:

1. That it is complete and regular upon its face;

2. That he became holder of it before it was overdue and without notice that it had been previously dishonored, if such was the
fact;
3. That he took it in good faith and for value;
4. That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person
negotiating it. (Sec 52, NIL)

(1996) Eva issued to Imelda a check in the amount of P50th post-dated Sep 30, 1995, as security for a diamond ring to be sold on
commission. On Sep 15, 1995, Imelda negotiated the check to MT investment which paid the amount of P40th to her. Eva failed to sell
the ring, so she returned it to Imelda on Sep 19, 1995. Unable to retrieve her check, Eva withdrew her funds from the drawee bank. Thus,
when MT Investment presented the check for payment, the drawee bank dishonored it. Later on, when MT Investment sued her, Eva
raised the defense of absence of consideration, the check having been issued merely as security for the ring that she could not sell. Does
Eva have a valid defense? Explain.

No. Eva does not have a valid defense. First, MT Investment is a holder in due course and, as such, holds the postdated check free from
any defect of title of prior parties and from defenses available to prior parties among themselves. Eva can invoke the defense of absence
of consideration against MT Investment only if the latter was privy to the purpose for which the checks were issued and, therefore, not a
holder in due course. Second, it is not a ground for the discharge of the postdated check as against a holder in due course that it was
issued merely as security. The only grounds for the discharge of negotiable instruments are those set forth in Sec 119 of the NIL and

(1998) X makes a promissory note for P10,000 payable to A, a minor, to help him buy school books. A endorses the note to B for value,
who in turn endorses the note to C. C knows A is a minor. If C sues X on the note, can X set up the defenses of minority and lack of
consideration? (3%)
Page | 60
Yes. C is not a holder in due course. The promissory note is not a negotiable instrument as it does not contain any word of negotiability,
that is, order or bear, or words of similar meaning or import. Not being a holder in due course, C is to subject such personal defenses of
minority and lack of consideration. C is a mere assignee who is subject to all defenses.

ALTERNATIVE ANSWER:
X cannot set up the defense of the minority of A. Defense of minority is available to the minor only. Such defense is not available to X.

X cannot set up the defense against C. Lack of consideration is a personal defense which is only available between immediate parties
or against parties who are not holders in due course. C’s knowledge that A is a minor does not prevent C from being a holder in due
course. C took the promissory note from a holder for value, B.

(2002)
A. AB issued a promissory note for P1,000 payable to CD or his order on September 15, 2002. CD indorsed the note in blank
and delivered the same to EF. GH stole the note from EF and on September 14, 2002 presented it to AB for payment. When asked by
AB, GH said CD gave him the note in payment for two cavans of rice. AB therefore paid GH P1,00 on the same date. On September 15,
2002, EF discovered that the note of AB was not in his possession and he went to AB. It was then that EF found out that AB had already
made payment on the note. Can EF still claim payment from AB? Why? (3%)

B. As a sequel to the same facts narrated above, EF, out of pity for AB who had already paid P1,000.00 to GH, decided to forgive
AB and instead go after CD who indorsed the note in blank to him. Is CD still liable to EF by virtue of the indorsement in blank? Why?
(2%)

A. No. EF cannot claim payment from AB. EF is not a holder of the promissory note. To make the presentment for payment, it is
necessary to exhibit the instrument, which EF cannot do because he is not in possession thereof.

B. No, because CD negotiated the instrument by delivery.

(2008) (A) As a rule under the Negotiable Instruments Law, a subsequent party may hold a prior party liable but not vice versa. Give two
(2) instances where a prior party may hold a subsequent party liable.

In the following cases, a prior party may hold a subsequent party liable:

(1) where an instrument is negotiated back to a prior party, and he reissues and further negotiates the same, he is entitled to en force
payment against a subsequent party who qualifies as an intervening party to whom the prior party is not personally liable; and
(2) in the case of an accommodation party arrangement, where the accommodation party may recover from the party accommodated,
even when the latter is a subsequent party (Sec. 29, NIL).

(B) How does the shelter principle embodied in the Negotiable Instruments Law operate to give the rights of a holder- in-dine course to
a holder who does not have the status of a holder-in-due course? Briefly explain. (2%)

The “shelter principle” provides that a holder who is not himself a holder in due course but is not a party to any fraud or illegality affecting

CHECKS
KINDS OF CHECKS Page | 61
(2015) (B) Is a manager’s check as good as cash? Why or why not? (2%)

(B) Yes, the Supreme Court held in various decisions that a manager’s check is good as cash. A manager’s check is a check drawn by
the bank against itself. It is deemed pre-accepted by the bank from the moment of issuance. The check becomes the primary obligation
of the bank which issues it and constitutes its written promise to pay. By issuing it, the bank in effect commits its total resources, integrity
and honor behind the check (Tan v. Court of Appeals, G.R. No. 108555, December 20, 1994, 239 SCRA 310; International Corporate
Bank V. Gueco, G.R. No. 141968, February 12, 2001. 351 SCRA 516; Metrobank and Trust Company v. Chiok, G.R. No. 172652,
November 26, 2014).

ALTERNATIVE ANSWER

Manager’s check is not legal tender because under Article 1249 of the Civil Code, checks do not produce the effect of payment until
encashed, or through the fault of the creditor, their value has been impaired. Moreover, under the Central Bank Act, the debtor cannot
compel the creditor to accept checks in payment of a debt whether public or private.

(2014) Paul George Pua (Pua) filed a complaint for a sum of money against the spouses Benito and Caroline James (Spouses James).
In the complaint, Pua prayed that the defendants pay Pua the amount of P8,500,000.00, covered by a check. Pua asserts that defendants
owed him a sum of money way back in 1988 for which the Spouses James gave him several checks. These checks, however, had all
been dishonored and Pua has not been paid the amount of the loan plus the agreed interest. In 1996, the Spouses James approached
Pua to get the computation of their liability including the 2% compounded interest. After bargaining to lower the amount of their liability,
the Spouses James gave Puaa postdated check bearing the discounted amount of P8,500,000.00. Like the 1988 checks, the drawee
bank likewise dishonored this check. To prove his allegations, Pua submitted the original copies of the 17 checks issued by Caroline in
1988 and the check issued in 1996, Manila trust Check No. 750. The Spouses James, on the other hand, completely denied the existence
of the debt asserting that they had never approached Pua to borrow money in 1988 or in 1996. They assert, instead, that Pua is simply
acting at the instance of his sister, Lilian, to file a false charge against them using a check left to fund a gambling business previously
operated by Lilian and Caroline. Decide. (5%)

I will decide against the Spouses James’ position. A check is evidence of indebtedness and proof of an obligation. It can be used in lieu
of and for the same purpose as a promissory note. In other words, a check functions more than a promissory note since it not only
contains an undertaking to pay an amount of money but is an order addressed to a bank and partakes of a representation that the drawer
has funds on deposit against which the check is drawn, sufficient to ensure payment upon its presentation to the bank. A check, the
entries of which are in writing, could prove a loan transaction. Thus, under the NIL, every negotiable instrument is deemed prima facie to
have been issued for a valuable consideration, and every person whose signature appears thereon to have become a party for value.
(Pua vs Spouse Benito Tiong (2013)

CROSSED CHECKS
(2005) What is a crossed check? What are the effects of crossing a check? Explain.

A Crossed Check under accepted banking practice, crossing a check is done by writing two parallel lines diagonally on the left top portion
of the checks. The crossing is special where the name of the bank or a business institution is written between the two parallel lines, which
means that the drawee should pay only with the intervention of that company.

Effects of Crossed Checks

1) The check may not be encashed but only deposited in the bank.
2) The check may be negotiated only once—to one who has an account with a bank.
3) The act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose, so that
he must inquire if he has received the check pursuant to that purpose; otherwise, he is not a holder in due course.
Page | 62
(2004) Distinguish clearly (1) crossed checks from cancelled checks;

A crossed check is one with two parallel lines drawn diagonally across its face or across a corner thereof. On the other hand, a cancelled
check is one marked or stamped "paid" and/or "cancelled" by or on behalf of a drawee bank to indicate payment thereof.

(1996) What are the effects of crossing a check?

The effects of crossing a check are as follows:

a. The check may not be encashed but only deposited in a bank;

b. The check may be negotiated only once to one who has an account with a bank;
c. The act of crossing a check serves as a warning to the holder thereof that the check has been issued for a definite purpose
so that the holder must inquire if he has received the check pursuant to that purpose, otherwise he is not a holder in due course (See
Bataan Cigar and Cigarette Factory, Inc. v CA GR 93048, Mar 3, 1994)

(1996) On March 1, 1996, Pentium Company ordered a computer from CD Bytes, and issued a crossed check in the amount of P30,000
post-dated Mar 31, 1996. Upon receipt of the check, CD Bytes discounted the check with Fund House. On April 1, 1996, Pentium stopped
payment of the check for failure of CD Bytes to deliver the computer. Thus, when Fund House deposited the check, the drawee bank
dishonored it.

If Fund House files a complaint against Pentium and CD Bytes for the payment of the dishonored check, will the complaint prosper?
Explain.

The complaint filed by Fund House against Pentium will not prosper but the one against CD Bytes will. Fund House is not a holder in due
course and, therefore, Pentium can raise the defense of failure of consideration against it. The check in question was issued by Pentium
to pay for a computer that it ordered from CD Bytes. The computer not having been delivered, there was a failure of consideration. The
check discounted with Fund House by CD Bytes is a crossed check and this should have put Fund House on inquiry. It should have
ascertained the title of CD Bytes to the check or the nature of the latter’s possession. Failing in this respect, Fund House is deemed guilty
of gross negligence amounting to legal absence of good faith and, thus, not a holder in due course. Fund House can collect from CD
Bytes as the latter was the immediate indorser of the check. (See Bataan Cigar and Cigarette Factory v CA et al GR 93048 Mar 3, 1994)

(1994) Po Press issued in favor of Jose a postdated crossed check, in payment of newsprint which Jose promised to deliver. Jose sold
and negotiated the check to Excel Inc. at a discount. Excel did not ask Jose the purpose of crossing the check. Since Jose failed to
deliver the newsprint, Po ordered the drawee bank to stop payment on the check. Efforts of Excel to collect from Po failed. Excel wants
to know from you as counsel:

1) What are the effects of crossing a check?

2) Whether as second indorser and holder of the crossed check, is it a holder in due course?
3) Whether Po’s defense of lack of consideration as against Jose is also available as against Excel?

1) The effects of crossing a check are:

a. The check is for deposit only in the account of the payee
b. The check may be indorsed only once in favor of a person who has an account with a bank

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c. The check is issued for a specific purpose and the person who takes it not in accordance with said purpose does
not become a holder in due course and is not entitled to payment thereunder.
2) No. It is a crossed check and Excel did not take it in accordance with the purpose for which the check was issued. Failure on
its part to inquire as to said purpose, prevented Excel from becoming a holder in due course, as such failure or refusal constituted bad
faith.
3) Yes. Not being a holder in due course, Excel is subject to the personal defense which Po Press can set up against Jose
Page | 63
(State Investment House v IAC 175 S 310)

(1995) On Oct 12, 1993, Chelsea Straights, a corp engaged in the manufacture of cigarettes, ordered from Moises 2,000 bales of
tobacco. Chelsea issued to Moises two crossed checks postdated 15 Mar 94 and 15 Apr 94 in full payment therefor. On 19 Jan 94 Moises
sold to Dragon Investment House at a discount the two checks drawn by Chelsea in his favor. Moises failed to deliver the bales of tobacco
as agreed despite Chelsea’s demand. Consequently, on 1 Mar 94 Chelsea issued a “stop payment” order on the 2 checks issued to
Moises. Dragon, claiming to be a holder in due course, filed a complaint for collection against Chelsea for the value of the checks.

Rule on the complaint of Dragon. Give your legal basis.

(1991) Mr Pablo sought to borrow P200th from Mr Carlos. Carlos agreed to loan the amount in the form of a postdated check which
was crossed (i.e. 2 parallel lines diagonally drawn on the top left portion of the check). Before the due date of the check, Pablo discounted
it with Noble On due date, Noble deposited the check with his bank. The check was dishonored. Noble sued Pablo. The court dismissed
Noble’s complaint. Was the court’s decision correct?

The court’s decision was incorrect. Pablo and Carlos, being immediate parties to the instrument, are governed by the rules of privity.
Given the factual circumstances of the problem, Pablo has no valid excuse from denying liability, (State investment House v IAC GR
72764 13 July 1989). Pablo undoubtedly had benefited in the transaction. To hold otherwise would also contravene the basic rules of
unjust enrichment. Even in negotiable instruments, the Civil Code and other laws of general application can still apply suppletorily.

ALTERNATIVE ANSWER:
The dismissal by the court was correct. A check whether or not post-dated or crossed, is still a negotiable instrument and unless Pablo
is a general indorser, which is not expressed in the factual settings, he cannot be held liable for the dishonor of the instrument. In State
Investment House v IAC (GR 72764 13Jul1989), the court did not go so far as to hold that the fact of crossing would render the instrument
non-negotiable.

ALTERNATIVE ANSWER:
In State Investment House v IAC (GR 72764 13Jul1989), the SC considered a crossed check as subjecting a subsequent holder thereof
to the contractual covenants of the payor and the payee. If such were the case, then the instrument is not one which can still be said to
contain an unconditional promise to pay or order a sum certain in money. In the transfer of non-negotiable credits by assignment, the
transferor does not assume liability for the fault of the debtor or obligor. Accordingly the court’s decision was correct.

ALTERNATIVE ANSWER:
Yes. The check is crossed. It should have forewarned Mr. Noble that it was issued for a specific purpose. Hence, Mr Noble could not be
a holder in due course. He is subject to the personal defense of breach of trust/ agreement by Mr. Pablo. Such defense is available in
favor of Mr Carlos against Mr Noble.

Dragon cannot collect from Chelsea. The instruments are crossed checks which were intended to pay for the 2,000 bales of tobacco to
be delivered to Moises. It was therefore the obligation of Dragon to inquire as to the purpose of the issuance of the 2 crossed checks
before causing them to be discounted. Failure on its part to make such inquiry, which resulted in its bad faith, Dragon cannot claim to be
a holder in due course. Moreover, the checks were sold, not endorsed, by him to Dragon which did not become a holder in due course.

REASONABLE TIME TO ENCASH THE CHECK

(2017) In 2006, Donald, an American temporarily residing in Cebu City, issued to Rhodora a check for $50,000 drawn against Wells Page | 64
Fargo Bank with offices in San Francisco, California. Rhodora negotiated the check and delivered it to Yaasmin, a Filipina socialite who
frequently travelled locally and internationally. Because of her frequent travels, Yaasmin misplaced the check. It was only 11 years later
on, in 2017, when she found the check inside a diary kept in her vault in her Hollywood, California house.

Discuss and explain the rights of Yaasmin on the check. (4%)

The check is considered a stale one already, and Yaasmin cannot expect payment on it. A stale check is one which has not been
presented for payment within a reasonable time after its issue. It is valueless and, therefore, should not be paid. Under the negotiable
instruments law, a check must be presented for payment within a reasonable time after its issue. In banking parlance, that is 6 months
from issue date. Failure of a payee to encash a check for more than ten years undoubtedly resulted in the check becoming stale.

LIABILITY OF DRAWEE BANK

(2019) B.8. Mrs. T maintained a checking account with Bank U. While Mrs. T was abroad, she left her checkbook inside her office drawer,
which she kept under lock and key. However, Mrs. T’s long-time secretary, Ms. S, knew where the checkbook was hidden. Ms. S then
broke the lock on the office drawer, took one of Mrs. T’s blank checks, and succeeded to encash ₱200,000.00 from Bank U by imitating
Mrs. T’s signature. As soon as Mrs. T returned from abroad and discovered the incident, she immediately reported the matter to Bank U,
seeking that the transaction be reversed. However, the bank refused, contending that Mrs. T should bear the loss arising from the forgery.

(a) Is the imitation of Mrs. T’s signature considered as a material alteration under the Negotiable Instruments Law? Explain.

No, the imitation of Mrs. T’s signature is not considered a material alteration.

Section 124 of the Negotiable Instruments Law explicitly relates to a negotiable instrument being altered and Section 125 enumerates
what can be altered in order to become material alteration. They presuppose that there is already an existing negotiable instrument before
an alteration can occur. A blank and unissued check, as in this case, lacks all the requisites of a negotiable instrument. Ms. S cannot
materially alter what is not a negotiable instrument. Therefore, the imitation of Ms. U’s signature cannot be considered as material
alteration.

(b) Is Bank U’s contention tenable? Explain.

No, Bank U’s contention is not tenable. In the case of Samsung Construction Company Phils., Inc. v. FEBTC the Supreme Court held
that the drawee who has paid upon the forged signature bears the loss. The exception to this rule arises only when negligence can be
traced on the part of the drawer whose signature was forged. In this case, there was no negligence on the part of Ms. U in keeping her
checkbook. Bank U must be considered as paying out of its funds and cannot charge the amount so paid to the account of the depositor.
Therefore, Bank U’s contention is untenable.

(2015) (A) Nadine has a checking account with Fair & Square Bank. One day, she lost her checkbook and the finder was able to forge
her signature and encash the forged check. Will Nadine be able to recover the amount debited from her checking account from Fair &
Square Bank? Justify your answer. (3%)

Yes, Nadine should be able to recover the amount debited from her checking account from Fair and Square Bank. The Bank is supposed
to know the signature of its clients. The Bank was thus negligent in not detecting the forgery of Nadine’s signature, and paying the check.
Under the circumstances, there was no negligence on the part of Nadine which would preclude her from invoking forgery (Philippine
National Bank v. Quimpo, G.R. No. 53194, March 14, 1988, 158 SCRA 582).

(1998) X draws a check against his current account with the Ortigas branch of Bonifacio Bank in favor of B. Although X does not have
sufficient funds, the bank honors the check when it is presented for payment. Apparently, X has conspired with the bank’s bookkeeper

The bank cannot recover the amount paid to B for the check. When the bank honored the check, it became an acceptor. As acceptor,
the bank became primarily and directly liable to the payee/holder B. The recourse of the bank should be against X and its bookkeeper
who conspired to make X’s ledger show that he has sufficient funds.
Page | 65
ALTERNATIVE ANSWER:
The bank can recover from B. This is solutio indebiti because there is payment by the bank to B when such payment is not due. The
check issued by X to B as payee had no sufficient funds.

LIABILITY OF DRAWER AND DRAWEE BANK

(2010) Marlon deposited with LYRIC Bank a money market placement of P1 million for tern of 31 days. On Maturity date, one claiming
to be Marlon called up the LYRIC Bank account officer and instructed him to give the manager’s check representing the proceeds of the
money market placement to Marlon’s girlfriend Ingrid. The check, which bore the forged signature of Marlon, was deposited in
Ingrid’s account with YAMAHA Bank. YAMAHA Bank stamped a guaranty on the check reading: ―All prior endorsements
and/or lack of endorsement guaranteed.
Upon presentment of the check, LYRIC Bank funds the check. Days later, Marlon goes to LYRIC Bank to collect his money market
placement and discovers the foregoing transactions. Marlon thereupon sues LYRIC Bank which in turn files a third-party complaint against
YAMAHA Bank. Discuss the respective rights and liabilities of the banks. (5%)

Since the money market placement of Marlon is in the nature of a loan to Lyric Bank, and since he did not authorize the release of the
money market placement to Ingrid, the obligation of Lyric Bank to him has not been paid. Lyric Bank still has the obligation to pay him.
Since Yamaha Bank indorsed the check bearing the forged indorsement of Marlon and guaranteed all indorsements, including the forged
indorsement, when it presented the check to Lyric Bank, it should be held liable to it. However, since the issuance of the check was
attended with the negligence of Lyric Bank, it should share the loss with Yamaha Bank on a fifty percent basis (Allied Banking Corporation
v. Lim Sio Wan, 549 SCRA 504 (2008)).

(2009) A bank is bound to know its depositor’s signature‖ is an inflexible rule in determining the liability of a bank in forgery cases.

False. In cases of forgery, the forger may not necessarily be a depositor of the bank, especially in the case of a drawee bank. Yet in
many cases of forgery, it is the drawee that is held liable for the loss.

(1995) Mario Guzman issued to Honesto Santos a check for P50th as payment for a 2nd hand car. Without the knowledge of Mario,
Honesto changed the amount to P150th 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 P150th from the account of Mario. Honesto withdrew the amount of P15th 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.

The demand of Mario for restitution of the amount of P150,000 to his account is tenable. Progressive Bank has no right to deduct said
amount from Mario’s account since the order of Mario is different. Moreover, Progressive Bank is liable for the negligence of its employees
in not noticing the alteration which, though it cannot be detected by the naked eye, could be detected by a magnifying instrument used
by tellers.

LIABILITY OF COLLECTING BANK

(2017) Alfred issued a check for P1,000 to Benjamin, his friend, as payment for an electronic gadget. The check was drawn against
Alfred’s account with Good Bank. Benjamin then indorsed the check specially in favor of Cesar. However, Cesar misplaced the check. Page | 66
Dexter, a dormmate of Cesar, found the check, altered its amount to P91,000 and forged Cesar’s indorsement by way of a blank
indorsement in favor of Felix, a known jeweler. Felix then caused the deposit of the check in his account with Solar Bank. As collecting
bank, Solar Bank stamped “all previous indorsements guaranteed” on the check. Seeing such stamp of the collecting bank, Good Bank
paid the amount of P91,000 on the check.

May Good Bank claim reimbursement from Alfred? Explain your answer.

The figure being a material alteration, the instrument can be enforced according to its original tenor, which is P1,000 only, on Alfred.
However, considering that there was an indorsement by Solar Bank, Good Bank, in case of dishonor of the check by Alfred, can collect
from Solar Bank the sum of P91,000. Solar Bank acted as an indorser and thus warrants, among others, the genuineness of the
instrument.

(2016) Company X issued a Bank A Check No. 12345 in the amount of P500,000.00 payable to the Bureau of Internal Revenue (BIR)
for the company's taxes for the third quarter of 1997. The check was deposited with Bank B, the collecting bank with which the BIR has
an account. The check was subsequently cleared and the amount of P500,000.00 was deducted from the company's balance. Thereafter,
Company X was notified by the BIR of its non-payment of its unpaid taxes despite the P500,000.00 debit from its account. This prompted
the company to seek assistance from the proper authorities to investigate on the matter.

The results of the investigation disclosed that unknown then to Company X, its chief accountant Bonifacio Santos is part of a syndicate
that devised a scheme to syphon its funds. It was discovered that though deposited, the check was never paid to the BIR but was passed
on by Santos to Winston Reyes, Bank B's branch manager and Santos' co-conspirator. Instead of bringing the check to the clearing
house, Reyes replaced Check No. 12345 with a worthless check bearing the same amount, and tampered documents to cover his tracks.
No amount was then credited to the BIR. Meanwhile, Check No. 12345 was subsequently cleared and the amount therein credited into
the accounts of fictitious persons, to be later withdrawn by Santos and Reyes.

Company X then sued Bank B for the amount of P500,000.00 representing the amount deducted from its account. Bank B interposed the
defense that Company X was guilty of contributory negligence since its confidential employee Santos was an integral part of the scheme
to divert the proceeds of Check No. 12345. Is Company X entitled to reimbursement from Bank B, the collecting bank? Explain. ( 5%)

Yes. Company X is entitled to reimbursement from the collecting bank. In similar case, the Supreme Court ruled that the drawer could
recover the amount deducted from its account because it failed to ensure that the check be paid to the designated payee while the
collecting bank should share ½ of the loss because its branch manager conspired in the fraud.

Take this as a lecture.

On this point, jurisprudence regarding the imputed negligence of employer in a master- servant relationship is instructive. Since a master
may be held for his servant’s wrongful act, the law imputes to the master the act of the servant, and if that act is negligent or wrongful
and proximately results in injury to a third person, the negligence or wrongful conduct is the negligence or wrongful conduct of the master,
for which he is liable. The general rule is that if the master is injured by the negligence of a third person and by the concurring contributory
negligence of his own servant or agent, the latter’s negligence is imputed to his superior and will defeat the superiors action against the
third person, assuming, of course that the contributory negligence was the proximate cause of the injury of which complaint is made.

As defined, proximate cause is that which, in the natural and continuous sequence, unbroken by any efficient, intervening cause produces
the injury, and without which the result would not have occurred.

It appears that although the employee initiated the transactions attributable to an organized syndicate, their actions were not the proximate
cause of encashing the checks payable to the BIR. The degree of the company’s negligence, if any, could not be characterized as the
proximate cause of the injury to the parties.

Given these circumstances, the mere fact that the forgery was committed by a drawer-payor’s confidential employee or agent, who by
virtue of his position had unusual facilities for perpetrating the fraud and imposing the forged paper upon the bank, does not entitle the
bank to shift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against the drawer. This rule likewise
applies to the checks fraudulently negotiated or diverted by the confidential employees who hold them in their possession. Page | 67
Indeed, the crossing of the check with the phrase Payees Account Only, is a warning that the check should be deposited only in the
account of the CIR. Thus, it is the duty of the collecting bank to ascertain that the check be deposited in payees account only.

Therefore, it is the collecting bank which is bound to scrutinize the check and to know its depositors before it could make the clearing
indorsement all prior indorsements and/or lack of indorsement guaranteed. (PCIB vs CA)

NOTICE OF DISHONOR
(2009) Gaudencio, a store owner, obtained a P1-million loan from Bathala Financing Corporation (BFC). As security, Gaudencio
executed a ―Deed of Assignment of Receivables. Assigning fifteen checks received from various customers who bought
merchandise from his store. The checks were duly indorsed by Gaudencio’s customers.

The Deed of Assignment contains the ff. stipulation:

―If, for any reason, the receivables or any part thereof cannot be paid by the obligors, the ASSIGNOR unconditionally and irrevocably
agrees to pay the same, assuming the liability to pay by way of penalty, three percent of the total amount unpaid, for the period of delay
until the same is fully paid.”

When the checks became due, BFC deposited them for collection, but the drawee banks dishonored all the checks for one of the ff.
reasons: ―account closed, ―payment stopped, ―account under garnishment, ―or ―insufficiency of funds.

BFC wrote Gaudencio notifying him of the dishonored checks, and demanding payment of the loan. Because Gaudencio did not
pay, BFC filed a collection suit.

In his defense, Gaudencio contended that BFC did not give timely notice of dishonor (of the checks); and (b) considering that the checks
were duly indorsed, BfC should proceed against the drawers and the indorsers of the checks.

Are Gaudencio’s defenses tenable? Explain.

No. Gaudencio’s defenses are untenable. The cause of action of BFC was really on the contract of loan, with the checks merely
serving as collateral to secure the payment of the loan. By virtue of the Deed of Assignment which he signed, Gaudencio undertook
to pay for the receivables if for any reason they cannot be paid by the obligors (Velasquez v. Solidbank Corporation, 550 SCRA 119
(2008)).

PRESENTMENT
(1994) Gemma drew a check on September 13, 1990. The holder presented the check to the drawee bank only on March 5, 1994. The
bank dishonored the check on the same date. After dishonor by the drawee bank, the holder gave a formal notice of dishonor to Gemma
through a letter dated April 27, 1994.

1) What is meant by “unreasonable time” as applied to presentment?

2) Is Gemma liable to the holder?

1) As applied to presentment for payment, “reasonable time: is meant not more than 6 months from the date of issue. Beyond
said period, it is “unreasonable time” and the check becomes stale.

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2) No. Aside form the check being already stale, Gemma is also discharged form liability under the check, being a drawer and a
person whose liability is secondary, this is due to the giving of the notice of dishonor beyond the period allowed by law. The giving of
notice of dishonor on April 27, 1994 is more than one (1) month from March 5, 1994 when the check was dishonored. Since it is not
shown that Gemma and the holder resided in the same place, the period within which to give notice of dishonor must be the same time
that the notice would reach Gemma if sent by mail. (NIL Sec 103 & 104; Far East Realty Investment Inc v CA 166 S 256)
Page | 68
ALTERNATIVE ANSWER:
2) Gemma can still be liable under the original contract for the consideration of which the check was issued.

WAIVER OF BANK’S LIABILITY FOR NEGLIGENCE

(1991) Mr. Lim issued a check drawn against BPI Bank in favor of Mr Yu as payment of certain shares of stock which he purchased. On
the same day that he issued the check to Yu, Lim ordered BPI to stop payment. Per standard banking practice, Lim was made to sign a
waiver of BPI’s liability in the event that it should pay Yu through oversight or inadvertence. Despite the stop order by Lim, BPI
nevertheless paid Yu upon presentation of the check. Lim sued BPI for paying against his order. Decide the case.

In the event that Mr. Lim, in fact, had sufficient legal reasons to issue the stop payment order, he may sue BPI for paying against his
order. The waiver executed by Mr Lim did not mean that it need not exercise due diligence to protect the interest of its account holder. It
is not amiss to state that the drawee, unless the instrument has earlier been accepted by it, is not bound to honor payment to the holder
of the check that thereby excludes it from any liability if it were to comply with its stop payment order (Sec 61 NIL)

ALTERNATIVE ANSWER:
BPI would not be liable to Mr Lim. Mr Lim and BPI are governed by their own agreement. The waiver executed by Mr Lim, neither being
one of future fraud or gross negligence, would be valid. The problem does not indicate the existence of fraud or gross negligence on the
part of BPI so as to warrant liability on its part.

DEFENSES
NOVATION

(2014) Bong bought 300 bags of rice from Ben for P300,000.00. As payment, Bong indorsed to Ben a Bank of the Philippine Islands
(BPI) check issued by Baby in the amount of P300,000.00. Upon presentment for payment, the BPI check was dishonored because
Baby’s account from which it was drawn has been closed. To replace the dishonored check, Bong indorsed a crossed Development Bank
of the Philippines (DBP) check issued also by Baby for P300,000.00. Again, the check was dishonored because of insufficient funds. Ben
sued Bong and Baby on the dishonored BPI check. Bong interposed the defense that the BPI check was discharged by novation when
Ben accepted the crossed DBP check as replacement for the BPI check. Bong cited Section 119 of the Negotiable Instruments Law
which provides that a negotiable instrument is discharged "by any other act which will discharge a simple contract or the payment of
money." Is Bong correct? (4%)

Bong is not correct. THERE WAS NO NOVATION OF THE OLD OBLIGATION. His claim that the BPI check was discharged by novation
when Ben accepted the crossed DBP check as replacement for the BPI check is unmeritorious. Ben’s acceptance of the DBP check,
which replaced the dishonored BPI check, did not result in novation as there was no express agreement to establish that Bong was
already discharged from the liability to pay Ben the amount of P300,000.00 as payment for the 300 bags of rice. Novation is never
presumed. There must be an express intention to novate. In fact, when the DBP check was delivered to Ben, the same was also indorsed
by Bong which shows Bong’s recognition of the existing obligation to Ben to pay P300,000.00 subject of the replaced BPI check.

Moreover, Ben’s acceptance of the DBP check did not result in any incompatibility, since the two checks – BPI and DBP checks – were
precisely for the purpose of paying the amount of P300,000.00,

MATERIAL ALTERATIONS

(2019) B.8. Mrs. T maintained a checking account with Bank U. While Mrs. T was abroad, she left her checkbook inside her office drawer, Page | 69
which she kept under lock and key. However, Mrs. T’s long-time secretary, Ms. S, knew where the checkbook was hidden. Ms. S then
broke the lock on the office drawer, took one of Mrs. T’s blank checks, and succeeded to encash ₱200,000.00 from Bank U by imitating
Mrs. T’s signature. As soon as Mrs. T returned from abroad and discovered the incident, she immediately reported the matter to Bank U,
seeking that the transaction be reversed. However, the bank refused, contending that Mrs. T should bear the loss arising from the forgery.

(a) Is the imitation of Mrs. T’s signature considered as a material alteration under the Negotiable Instruments Law? Explain.

No, the imitation of Mrs. T’s signature is not considered a material alteration.

(b) Is Bank U’s contention tenable? Explain.

(1999) 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 (2%)
b. In instant suit, drawee bank contended that XYZ Marketing as payee could not sue the drawee bank as there was no privity
between then. Drawee theorized that there was no basis to make it liable for the check. Is this contention correct? Explain.

a. No. The serial number is not a material particular of the check. Its alteration does not constitute material alteration of the
instrument. The serial number is not material to the negotiability of the instrument.
b. 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.

(1996) William issued to Albert a check for P10,000 drawn on XM Bank. Albert altered the amount of the check to P210,000 and deposited
the check to his account with ND Bank. When ND Bank presented the check for payment through the Clearing House, XM Bank honored
it. Thereafter, Albert withdrew the P210,000 and closed his account. When the check was returned to him after a month, William
discovered the alteration. XM Bank recredited P210,000 to William’s current account, and sought reimbursement from ND Bank. ND
Bank refused, claiming that XM Bank failed to return the altered check to it within 24 hour clearing period.

ND Bank should bear the loss if XM Bank returned the altered check to ND Bank within twenty-four hours after its discovery of the
alteration. Under the given facts, William discovered the alteration when the altered check was returned to him after a month. It may
safely be assumed that William immediately advised XM Bank of such fact and that the latter promptly notified ND Bank thereafter.
Central Bank Circular No. 9, as amended, on which the decisions of the Supreme Court in Hongkong & Shanghai Banking Corp v People’s
Page | 70
Bank & Trust Co and Republic Bank vs CA were based was expressly cancelled and superseded by CB No 317 dated Dec 23 1970. The
latter was in turn amended by CB Circular No 580, dated Sept 19, 1977. As to altered checks, the new rules provide that the drawee
bank can still return them even after 4:00 pm of the next day provided it does so within 24 hours from discovery of the alteration but in
no event beyond the period fixed or provided by law for filing of a legal action by the returning bank against the bank sending the same.
Assuming that the relationship between the drawee bank and the collecting bank is evidenced by some written document, the prescriptive
period would be 10 years.

ALTERNATIVE ANSWER:
XM Bank should bear the loss. When the drawee bank (XM Bank) failed to return the altered check to the collecting bank (ND Bank)
within the 24 hour clearing period provided in Sec 4c of CB Circular 9, dated Feb 17, 1949, the latter is absolved from liability. (See HSBC
v PB&T Co GR L-28226 Sep 30 1970; also Rep Bank v CA GR 42725 Apr 22, 1991)

FORGED CHECKS

(2008) Pancho drew a check to Bong and Gerard jointly, Bong indorsed the check and also forged Gerard’s indorsement . The
payor bank paid the check and charged Pancho’s account for the amount of the Check. Gerard received nothing from the payment.
Pancho asked the payor bank to recredit his account. Should the bank comply? Explain fully. (3%)

Yes, Sec. 41 of the NIL provides that all payees or indorsees who are not partners must indorse jointly, unless the one indorsing has
authority to endorse for the others. Since the signature of Gerard was forged, then the endorsement by Bong was wholly inoperative.
The Bank is under strict liability to pay to the order of payee. Payment under a forged endorsement is not to the drawer’s order,
and consequently, the drawee bank must bear the loss as against the drawer (Associated Bank v. CA, G.R. Nos. 107382 and 107612,
31 January 1996).

Based on the facts, was Pancho as drawer discharged on the instrument? Why? (2%)

No. The payee Gerard can recover as he still retains his claim on the debt of Pancho.

(2006) Discuss the legal consequences when a bank honors a forged check. (5%)

The legal consequences when a bank honors a forged check are as follows:

(a) When Drawer's Signature is Forged: Drawee-bank by accepting the check cannot set up the defense of forgery, because by
accepting the instrument, the drawee bank admits the genuineness of signature of drawer. (Sec. 23 NIL)

Unless a forgery is attributable to the fault or negligence of the drawer himself, the remedy of the drawee-bank is against
the party responsible for the forgery. Otherwise, drawee-bank bears the loss. A drawee-bank paying on a forged check must
be considered as paying out of its funds and cannot charge the amount to the drawer. If the drawee-bank has charged
drawer's account, the latter can recover such amount from the drawee-bank.

However, the drawer may be precluded or estopped from setting up the defense of forgery as against the drawee- bank,
when it is shown that the drawer himself had been guilty of gross negligence as to have facilitated the forgery.

Drawee Bank versus Collecting Bank — When the signature of the drawer is forged, as between the drawee- bank and
collecting bank, the drawee-bank sustains the loss, since the collecting bank does not guarantee the signature of the drawer.
The payment of the check by the drawee bank constitutes the proximate negligence since it has the duty to know the
Page | 71
signature of its client-drawer. (Philippine National Bank v. Court of Appeals, G.R. No. L-26001, October 29, 1968).

(b) Forged Payee's Signature: When drawee-bank pays the forged check, it must be considered as paying out of its funds and
cannot charge the amount so paid to the account of the depositor. In such case, the bank becomes liable since its primary
duty is to verify the authenticity of the payee's signature.

(c) Forged Indorsement:

• Drawer's account cannot be charged, and if charged, he can recover from the drawee-bank (Associated Bank v.
Court of Appeals, G.R. No. 107382 January 31,1996).
• Drawer has no cause of action against collecting bank, since the duty of collecting bank is only to the payee. A
collecting bank is not guilty of negligence over a forged indorsement on checks for it has no way of ascertaining the authority
of the endorsement and when it caused the checks to pass through the clearing house before allowing withdrawal of the
proceeds thereof (Manila Lighter Transportation, Inc. v. Court of Appeals, G.R. No. 50373, February 15, 1990). On the other
hand, a collecting bank which endorses a check bearing a forged endorsement and presents it to the drawee bank
guarantees all prior endorsements including the forged endorsement itself and should be held liable therefor (Traders
Royal Bank v. RPN, G.R. No. 138510, October 10, 2002).
• Drawee-bank can recover from the collecting bank (Great Eastern Life Ins. Co. v. Hongkong & Shanghai Bank,
G.R. No. 18657, August 23,1922) because even if the indorsement on the check deposited by the bank's client is forged,
collecting bank is bound by its warranties as an indorser and cannot set up defense of forgery as against drawee bank
(Associated Bank v. Court of Appeals, G.R. No. 107382, January 31, 1996).

(2004) 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 P15,000 from another branch of the bank. DY was able to encash
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. (5%)

Yes, CX can recover from the bank. Under Section 23 of the Negotiable Instruments Law, forgery is a real defense. The forged check is
wholly inoperative in relation to CX. CX cannot be held liable thereon by anyone, not even by a holder in due course. Under a forged
signature of the drawer, there is no valid instrument that would give rise to a contract which can be the basis or source of liability on the
part of the drawer. The drawee bank has no right or authority to touch the drawer's funds deposited with the drawee bank.

ACCOMMODATION PARTY

(2014) A criminal complaint for violation of B.P. 22 was filed by Foton Motors (Foton), an entity engaged in the business of car dealership,
against Pura Felipe (Pura) with the Office of the City Prosecutor of Quezon City. The Office found probable cause to indict Pura and filed
an information before the Metropolitan Trial Court (MeTC) of Quezon City, for her issuance of a postdated check in the amount of
P1,020,000.00 which was subsequently dishonored upon presentment due to "Stop Payment."

Pura issued the check because her son, Freddie, attracted by a huge discount of P220,000.00, purchased a Foton Blizzard 4x2 from
Foton. The term of the transaction was Cash-on-Delivery and no downpayment was required. The car was delivered on May 14, 1997,
but Freddie failed to pay upon delivery. Despite non-payment, Freddie took possession of the vehicle.

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MERCANTILE LAW
ARRANGED BAR QUESTIONS AND ANSWERS 1990 TO 2019

Pura was eventually acquitted of the charge of violating B.P. 22 but was found civilly liable for the amount of the check plus legal interest.
Pura appealed the decision as regards the civil liability, claiming that there was no privity of contract between Foton and Pura. No civil
liability could be adjudged against her because of her acquittal from the criminal charge. It was Freddie who was civilly liable to Foton,
Pura claimed. Pura added that she could not be an accommodation party either because she only came in after Freddie failed to pay the
purchase price, or six (6) months after the execution of the contract between Foton and Freddie. Her liability was limited to her act of
issuing a worthless check, but by her acquittal in the criminal charge, there was no more basis for her to be held civilly liable to Foton.
Pura’s act of issuing the subject check did not, by itself, assume the obligation of Freddie to Foton or automatically make her a party to
Page | 72
the contract. Is Pura liable? (5%)

Pura is liable as an accommodation party. Under Sec. 29 of the NIL, an accommodation party is one who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person.
Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew
him to be only an accommodation party.

Pura’s liability existed although Pura issued the check after the delivery of the car. Under Sec. 25 of the NIL, and antecedent or pre-
existing debt constitutes value and is deemed such whether the instrument is payable on demand or at a future time.

CONSIDER THIS AS A LECTURE

Pura is liable to Foton Motors because it sold a car to her son and was a holder for value of the check issued in its favor by Pura. Any
person criminally liable for felony is also civilly liable. Thus, her acquittal in the criminal charge does not carry with it extinction of her civil
liability unless the extinction proceeds from a declaration in a final judgment that the fact from which the civil might arise did not exist.
(People vs Maniego (1987)

(1990) To accommodate Carmen, maker of a promissory note, Jorge signed as indorser thereon, and the instrument was negotiated to
Raffy, a holder for value. At the time Raffy took the instrument, he knew Jorge to be an accomodation party only. When the promissory
note was not paid, and Raffy discovered that Carmen had no funds, he sued Jorge. Jorge pleads in defense the fact that he had endorsed
the instrument without receiving value therefor, and the further fact that Raffy knew that at the time he took the instrument Jorge had not
received any value or consideration of any kind for his indorsement. Is Jorge liable? Discuss.

Yes. Jorge is liable. Sec 29 of the NIL provides that an accommodation party is liable on the instrument to a holder for value,
notwithstanding the holder at the time of taking said instrument knew him to be only an accommodation party. This is the nature or the
essence of accommodation.

(1991) On June 1, 1990, A obtained a loan of P100th from B, payable not later than 20 Dec 1990. B required A to issue him a check for
that amount to be dated 20 Dec 1990. Since he does not have any checking account, A, with the knowledge of B, requested his friend,
C, President of Saad Banking Corp (Saad) to accommodate him. C agreed, he signed a check for the aforesaid amount dated 20 Dec
1990, drawn against Saad’s account with the ABC Commercial Banking Co. The By-laws of Saad requires that checks issued by it must
be signed by the President and the Treasurer or the Vice-President. Since the Treasurer was absent, C requested the Vice-President to
co-sign the check, which the latter reluctantly did. The check was delivered to B. The check was dishonored upon presentment on due
date for insufficiency of funds.

a) Is Saad liable on the check as an accommodation party?

b) If it is not, who then, under the above facts, is/are the accommodation party?

a) Saad is not liable on the check as an accommodation party. The act of the corporation in accommodating a friend of the
President, is ultra vires (Crisologo-Jose v CA GR 80599, 15Sep1989). While it may be legally possible for the corporation, whose business
is to provide financial accommodations in the ordinary course of business, such as one given by a financing company to be an
accommodation party, this situation, however, is not the case in the bar problem.

(1996) Nora applied for a loan of P100th with BUR Bank. By way of accommodation, Nora’s sister, Vilma, executed a promissory note in
favor of BUR Bank. When Nora defaulted, BUR Bank sued Vilma, despite its knowledge that Vilma received no part of the loan. May
Vilma be held liable? Explain. Page | 73
Yes, Vilma may be held liable. Vilma is an accommodation party. As such, she is liable on the instrument to a holder for value such as
BUR Bank. This is true even if BUR Bank was aware at the time it took the instrument that Vilma is merely an accommodation party and
received no part of the loan (See Sec 29, NIL; Eulalio Prudencio v CA GR L-34539, Jul 14, 1986)

(1998) For the purpose of lending his name without receiving value therefore, Pedro makes a note for P20,000 payable to the order of
X who in turn negotiates it to Y, the latter knowing that Pedro is not a party for value.

1. May Y recover from Pedro if the latter interposes the absence of consideration? (3%)
2. Supposing under the same facts, Pedro pays the said P20,000 may he recover the same amount from X? (2%)

1. Yes. Y can recover from Pedro. Pedro is an accommodation party. Absence of consideration is in the nature of an
accommodation. Defense of absence of consideration cannot be validly interposed by accommodation party against a holder in due
course.

2. If Pedro pays the said P20,000 to Y, Pedro can recover the amount from X. X is the accommodated party or the party ultimately
liable for the instrument. Pedro is only an accommodation party. Otherwise, it would be unjust enrichment on the part of X if he is not to
pay Pedro.

(2003) Susan Kawada borrowed P500,000 from XYZ Bank which required her, together with Rose Reyes who did not receive any
amount from the bank, to execute a promissory note payable to the bank, or its order on stated maturities. The note was executed as so
agreed. What kind of liability was incurred by Rose, that of an accommodation party or that of a solidary debtor? Explain. (4%)

Rose may be held liable. Rose is an accommodation party. Absence of consideration is in the nature of an accommodation. Defense of
absence of consideration cannot be validly interposed by accommodation party against a holder in due course.

(2003) Juan Sy purchased from “A” Appliance Center one generator set on installment with chattel mortgage in favor of the vendor. After
getting hold of the generator set, Juan Sy immediately sold it without consent of the vendor. Juan Sy was criminally charged with estafa.

To settle the case extra judicially, Juan Sy paid the sum of P20,000 and for the balance of P5,000.00 he executed a promissory note for
said amount with Ben Lopez as an accommodation party. Juan Sy failed to pay the balance.

1) What is the liability of Ben Lopez as an accommodation party? Explain.

2) What is the liability of Juan Sy?

1) Ben Lopez, as an accommodation party, is liable as maker to the holder up to the sum of P5,000 even if he did not receive
any consideration for the promissory note. This is the nature of accommodation. But Ben Lopez can ask for reimbursement from Juan
Sy, the accommodation party.

2) Juan Sy is liable to the extent of P5,000 in the hands of a holder in due course (Sec 14 NIL). If Ben Lopez paid the promissory
note, Juan Sy has the obligation to reimburse Ben Lopez for the amount paid. If Juan Sy pays directly to the holder of the promissory
note, or he pays Ben Lopez for the reimbursement of the payment by the latter to the holder, the instrument is discharged.

(2005) Dagul has a business arrangement with Facundo. The latter would lend money to another, through Dagul, whose name would
appear in the promissory note as the lender. Dagul would then immediately indorse the note to Facundo. Is Dagul an accommodation
party? Explain. (2%)

YES! Dagul is an accommodation party because in the case at bar, he is essentially, a person who signs as maker without receiving any
Page | 74
consideration, signs as an accommodation party merely for the purpose of lending the credit of his name. And as an accommodation
party he cannot set up lack of consideration against any holder, even as to one who is not a holder in due course.

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Mercantile Law: Arranged and Sequenced

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Mercantile Law: Arranged and Sequenced

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FROM Nth Time BAR CHALLENGER TO ATTORNEY

BAR QUESTIONS AND ANSWERS 1990-2019

DEFINITION & CHARACTERISTICS

The characteristics of a negotiable instrument are the following:

1) Postal Money Order;

(2005) Distinguish a negotiable document from a negotiable instrument. (2%)

(1997) Can a bill of exchange or a promissory note qualify as a negotiable instrument if –

“Payable to X. Signed: Aurora Page.”

YARN & THREAD Corporation

(1993) Discuss the negotiability or non-negotiability of the following notes

1) Manila, September 1, 1993

(Sgd.) Noel Castro

2) Manila, June 3, 1993 P10,000.00

(Sgd.) Lito Villa

The promissory note is negotiable as it complies with Sec 1, NIL.

(2013) Antonio issued the following instrument:

August 10, 2013

I promise to pay A or bearer the sum of Php100,000. (2%)

a) The date of the PN is “February 30, 2002.”

B. (1) Negotiable promissory note -

“September 15, 2002

(Signed) Pedro Cruz to: Philippine National Bank

(1996) What are the requisites of a negotiable instrument?

The requisites of a negotiable instrument are as follows:

a) It must be in writing and signed by the maker or drawer;

(Note: This answers presumes that there is a drawee)

BILL OF EXCHANGE AS PROMISSORY NOTE

A bill of exchange may be treated as a promissory note in the following instances:

to the order of Jose Cruz or Josefa Cruz

INCOMPLETE AND UNDELIVERED INSTRUMENT

(a) May Yvette hold Yolanda liable on the note? (2.5%)

a) Who is correct and why? (3%)

How would you decide the case? Explain. (2%)

INCOMPLETE & DELIVERED

INCOMPLETE DELIVERED INSTRUMENTS VS. INCOMPLETE UNDELIVERED INSTRUMENT

1. Is Jun liable to Marie? (5%)

COMPLETE AND UNDELIVERED INSTRUMENT

(a) May Yvette hold Yolanda liable on the note? (2.5%)

Can be the check be considered a negotiable instrument?

Was the bill lawfully dishonored by Diana? Explain. (3%)

HOLDER IN DUE COURSE

May E recover on the bill from C, the drawee? Explain. (5%)

Take this as a lecture

b) the existence of the payee and his then capacity to indorse.

Manila September 21, 1991.

Pay to the order of Reliable Finance Corporation.

a) Is the promissory note a mere assignment of credit or a negotiable instrument? Why?

(1996) What constitutes a holder in due course?

1. That it is complete and regular upon its face;

B. No, because CD negotiated the instrument by delivery.

Effects of Crossed Checks

(1996) What are the effects of crossing a check?

The effects of crossing a check are as follows:

a. The check may not be encashed but only deposited in a bank;

1) What are the effects of crossing a check?

1) The effects of crossing a check are:

Rule on the complaint of Dragon. Give your legal basis.

REASONABLE TIME TO ENCASH THE CHECK

Discuss and explain the rights of Yaasmin on the check. (4%)

LIABILITY OF DRAWEE BANK

(b) Is Bank U’s contention tenable? Explain.

LIABILITY OF DRAWER AND DRAWEE BANK

LIABILITY OF COLLECTING BANK

Take this as a lecture.

The Deed of Assignment contains the ff. stipulation:

Are Gaudencio’s defenses tenable? Explain.

1) What is meant by “unreasonable time” as applied to presentment?

WAIVER OF BANK’S LIABILITY FOR NEGLIGENCE

(b) Is Bank U’s contention tenable? Explain.

(c) Forged Indorsement:

CONSIDER THIS AS A LECTURE

a) Is Saad liable on the check as an accommodation party?

1) What is the liability of Ben Lopez as an accommodation party? Explain.

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