Negotiable Instruments: Notes on Material Alteration (Sec 125, NIL)

CONCEPT OF MATERIAL ALTERATION:

1. Define material alteration of instrument.

Under Sec. 125 of the Negotiable Instruments Law (NIL), material alteration is any alteration which
changes:

(a) The date;

(b) The sum payable, either for principal or interest;

(c) The time or place of payment;

(d) The number or the relations of the parties;

(e) The medium or currency in which payment is to be made; or which adds a place of payment where
no place of payment is specified, or any other change or addition which alters the effect of the
instrument in any respect is a material alteration.

*In other words, it refers to any change in the instrument which affects or changes the liability of the
parties in any way.

2. Give examples of material alteration in an instrument:

- Unauthorized change in an instrument that purports to modify in any respect the obligation of a
party;

- Unauthorized addition of words or numbers;

- Other change to an incomplete instrument relating to the obligations of a party;

- Substitution of the words: “or bearer” for “or order” (Builders Lime & Cement Co. v. Weymer, 151
N.W. 100);

- Writing the words “protest waived” above a blank indorsement (Sawyer State Bank v. Sutherland,
162 N.W. 966); and

- Erasure of the words “without recourse” above the signature of the indorser (Waltham State Bank
v. Tuttle, 199 N.W. 970)

- The insertion of the words "Agent, Phil. National Bank," which converts the bank from a mere
drawee to a drawer and therefore changes its liability, constitutes a material alteration of the
instrument (Montinola v. PNB, GR No. L-2861, February 26, 1951)

- One which changes the items which are required to be stated under Sec. 1 of NIL (PNB v. CA, 256
SCRA 491).

3. Provide examples when alteration is NOT material to the instrument.

- Adding words implied by law or making marginal figures to make them correspond to the sum
written in words (Smith v. Smith, 1 R.I. 398.)

- A serial number is an item which is not an essential requisite for negotiability under Sec. 1 of NIL,
and which does not affect the rights of the parties, hence its alteration is not material. (PNB vs. CA, 256
SCRA 491)

- An extension of time given by the holder of a note to the principal maker without the consent of a
surety co-maker, because alteration refers to physical alteration.

4. Section 125 provides for material alterations in the instrument sufficient to avoid the instrument as
against those who did not consent thereto. Is the list exclusive?

NO. The enumerated instances are not exclusive in view of the last part of the above section which
reads “any other change or addition which alters the effect of the instrument in any respect.”

5. Is material alteration a personal defense or a real defense?

Material alteration is a personal defense when it is used to deny liability according to the original tenor
of the instrument. It can also be a real defense when relied on to deny liability according to altered
terms.

EFFECTS OF MATERIAL ALTERATION:

6. Generally, what is the effect of any material alteration in the instrument?

(A) When alteration is made by a party, it avoids the instrument except as against the party who
made, authorized or assented to the alteration, and subsequent indorsers.

- In other words, the effect of a material alteration by the holder is to discharge the instrument and
all prior parties thereto who did not give their consent to such alteration. Since no distinction is made, it
does not matter whether it is favorable or unfavorable to the party making the alteration (Franklin Ins.
Co. v. Courtney, 60 Ind. 134) or the interests of prior parties (Keller v. State Bank, 24 N.E. 94), or
whether it is innocently or fraudulently made. (First Nat. Bank of Sparta v. Yowell, 294 S.W. 1101). So
that where the instrument has been altered although innocently, it is discharged but the innocent party
can sue upon the original debt for which it has been given. (First Nat. Bank of Sparta v. Yowell, 294 S.W.
1101).

What is the exception to the above general rule?

When the altered instrument is in the hands of a holder in due course (HDC), not a party to the
alteration, he may enforce payment thereof according to its original tenor (Section 124, NIL).

EXAMPLE 1:
 M makes a promissory note for P3,000 payable to P or order. P negotiates the note to A who, with
the consent of P, raises the amount to P8,000 and thereafter indorses it to B, B to C, and C to D, under
circumstances which make D not a holder in due course.

The note is discharged as against M; hence, D cannot enforce it against M even for the original
tenor. A, however, would be liable to D for P8,000 as he is the party who himself made the alteration
although D is not a holder in due course. Moreover, as indorser, A warrants that the instrument is
genuine and in all respects what it purports to be (Secs. 65 and 66, NIL).

P would also be liable to D for P8,000 as he authorized or assented to the alteration. Likewise, B
and C would be liable to D for P8,000 as they are subsequent indorsers.

EXAMPLE 2:

Where a promissory note made for P5,000, payable to P was altered in the amount by P or
subsequent holder to P9,000, the instrument is null and void because of the material alteration, unless it
reaches the hands of a HDC who can enforce it according to the tenor of the instrument before it was
altered (for P5,000 only instead of P9,000).

(B) When alteration was made by a stranger (spoliation), the effect is the same as where the alteration is
made by a party which a HDC can recover on the original tenor of the instrument. (Sec. 124, NIL)

BAR QUESTION 1 (1977, 1972 Bar)

Pedro writes out a check for P1,000 in favor of Jose or order against his current account with Bank of
America. Juan steals the checks, erases the name of Jose and superimproses his own name. Juan
deposits the check at Citibank and after clearing; Juan withdraws the amount and absconds. Upon
discovery by Pedro of the material alteration, he lodged a complaint at the Bank of America, who
credited the amount to Pedro. Bank of America demands reimbursement from Citibank which refuses
on the ground that it only acted as an agent for collection.

Who bears the loss? Why?

ANSWER: Between Bank of America, the drawee bank and Citibank, the bank which received for deposit
the materially altered check (collecting bank), the latter will have to bear the loss.

Under the NIL, where a negotiable instrument is materially altered without the assent of the
parties liable thereon (Pedro, the drawer in the problem), it is avoided, except as against a party who
has himself made, authorized or assented to the alteration and subsequent indorsers.

In banking practice the collecting bank (Citibank in the problem) “guarantees all prior
indorsements”. By virtue of said indorsement, the collecting bank becomes liable to the drawee bank
under the said indorsement, and therefore will have to reimburse the drawee bank the amount of the
materially altered check.

It is true that Citibank acted only as collecting agent for its depositor, but since the check was
materially altered after it left the drawer’s hands, the collecting bank had no right at all to pay the sum
stated therein to the person responsible for the material alteration or anyone else deriving his right
from the materially altered instrument.
 Citibank which previously had been paid by Bank of America the amount of the materially altered
check has to reimburse Bank of America the said amount, without prejudice to Citibank running after
Juan, the person who materially altered the check and who deposited the check with it (Citibank).

BAR QUESTION 2 (1993 bar)

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.

a. Can Devi enforce the note against Larry, and if she can, for how much? Explain.

Yes. Devi can enforce the note against Larry for P5,000.00 because she is a HDC hence fee from any
defect of tile of prior parties and from defenses available to prior parties among themselves, and may
enforce the instrument for the full amount (see Section 57, NIL).

b. Supposing Devi endorses the note to Baby for value but who has knowledge of the infirmity, can the
latter enforce the note against Larry?

Yes, Baby can enforce the note against Larry. Even if she is not a HDC because she has knowledge of the
infirmity of the note, she has all the rights of a HDC because she derived her title from Devi, a HDC, and
was not a party to the fraud or illegality of the instrument (see section 58, NIL).

BAR QUESTION 3 (1971 bar)

A executed a bill of exchange for P500 in favor of B, who altered the amount to P5,000 and presented
the bill to the drawee for acceptance. The drawee, not knowing the alteration which was neatly done,
accepted the bill. Thereafter, B negotiated the bill to C, who now seeks to hold the drawee liable for
P5,000. The drawee contends that under the rule on alteration, he can only be liable up to P500.

a. Is the drawee’s contention tenable? Reason.

Yes, the drawee’s contention is tenable. Even if C is a HDC, he can enforce payment only according to
the original tenor of the instrument. As the instrument was originally drawn for P500, C can enforce the
instrument for P500 only; its original tenor.

b. Can the drawee debit the account of A and, if so, to what extent? Reason.

Yes, the drawee can debit A’s account but only up to P500, because the bill binds A also up to that
amount only.

BAR QUESTION 4

In consideration of some goods he bought, A issued to B a personal check in the amount of P280.
Without the knowledge of A, B raised the amount of P2,800. The alteration is not apparent to the naked
eye. B then deposited the altered check in his account with the PNB, which released it for clearing. BPI,
which is the drawee bank did not notice the alteration and the check was therefore cleared.

B was able to withdraw the P2,800 after which he closed his account. When A received his bank
statements and cancelled checks for that month, he noticed the discrepancy in the amount when he
compared the altered check with his check stub. He immediately notified BPI and demanded a re-credit.
The BPI in turn demanded re-credit from the PNB, which cannot now locate B. Discuss the rights and
liabilities of the parties under the circumstances.

ANSWER: This is a case of an altered check. Under the NIL, when an altered check reaches the hands of a
HDCA, the latter may endorse the instrument according to its tenor before it was altered.

Applied to the case at bar, PNB would have the status of a HDC and can enforce payment of the check
against the drawer bank, BPI for P280.00, the original unaltered tenor of the check, but it cannot collect
the difference (P2,520) from BPI. BPI in turn will have to re-credit A’s account with P2,520, the increase
in the amount consequent to the alteration.

As BPI cleared the check, in effect paying PNB the amount of the altered check, PNB will have to re-
credit BPI with the P2,520 difference. PNB’s recourse for P2,520 is against B if he can be found.

BAR QUESTION 5 (1996 bar)

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
re-credited 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.
Who, as between, XM Bank and ND Bank, should bear the loss? Explain.

SUGGESTED ANSWER:

ND Bank should bear the loss if XM Bank returned the altered check to ND Bank within 24 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 and Shanghai
Banking Corp v. People’s Bank & Trust Co and Republic 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 4:00pm 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. (Campos, NIL 5th ed 454-455)

(C) If negotiated to a NHIDC, he cannot enforce payment against the party prior to the alteration.
He may however enforce payment according to the altered tenor from the person who caused the
alteration and from the indorsers. (Sec. 124, NIL)

7. Give the liability of the acceptor.

The acceptor by accepting the instrument engages that he will pay it according to the tenor of his
acceptance, and admits:

(a) The existence of the drawer, the genuiness 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.

QUESTION 1:

M makes a promissory note for P10,000 payable to the order of P. After the issuance to him of the note,
P altered the amount to US$10,000. P then indorsed the note to A, A to B, and B to H. Only P knew of
the alteration.

The parties and their possible liabilities are:

1. M, P10,000

2. M, US $10,000

3. M, nothing

4. A and B, P10,000.00

5. A and B, US $10,000.00

6. A and B, nothing

If H is a holder in due course, the parties from where he may collect and the amount of the said parties’
liability are:

a. 1 and 4

b. 2 and 5

c. 1 and 5

d. 3 and 4
QUESTION 2:

M delivers a promissory note payable to the order of P for P10,000. P alters the amount to P 40,000 and
thereafter indorses the note to A who had no knowledge of the alteration; then A to H, HDC. Which of
the following is incorrect?

a. H can recover P10,000 from M.

b. H can recover P40,000 from P.

c. H can recover P40,000 from A.

d. H cannot recover any amount from M because M is a party before the alteration. H cannot also
recover from A because A was not aware of the alteration.

QUESTION 3:

M made a promissory note in favor of P or order. The note, which was payable after 60 days from date
of issue, amounts to P100,000 and bears interest at 10% per annum. After the delivery of the note to
him, P altered the interest rate to 18% per annum without the knowledge of M and indorsed it to A who
knew nothing of the alteration. Thereafter, A indorsed the note to H, a HDC.

a. H may not collect any amount, whether of the principal or of the interest, from M.

b. H may collect P100,000 and interest at 10% per annum from M.

c. H may collect P100,000 and interest at 18% per annum from M.

d. H may collect any amount, whether of the principal or of the interest, from A, since A was not aware
of the alteration.

Sec. 31. Indorsement; how made. - The indorsement must be written on the instrument itself or
upon a paper attached thereto. The signature of the indorser, without additional words, is a
sufficient indorsement.

NATURE OF AN INDORSEMENT

• It is not only a mode of transfer

• It is also a contract
• Every indorser is a new drawer and the terms are found on the face of the bill or note
• The indorsement of the bill or not implies an undertaking from the
indorser to the person in whose favor it is made and to every other person to whom the bill or
note may afterwards be transferred, exactly
similar to that which is implied by drawing a bill except that, in the
case of drawing a bill, the stipulations with respect to the drawer’s responsibility and undertaking
don't apply
• The general indorser in effect, states to every person who follows him—this instrument will be
paid by the maker, if a note, or accepted the drawee or paid by the acceptor, if a bill. If it is dishonored
by
non-payment or non-acceptance, and you give me notice thereof, I will pay it.

WHERE THE INDORSEMENT IS WRITTEN

• The indorsement may be written on the instrument itself or upon a paper attached thereto
• Allonge: paper attached to the instrument

MAY ALLONGE BE USED WHERE THERE IS ROOM ON INSTRUMENT FOR INDORSEMENT?

• It has been held that the use of an allonge is allowable only when
there is a physical impossibility of writing the indorsement on the
instrument itself, and an indorsement on a separate piece of paper where there is sufficient space
on the instrument for indorsement will be considered as a mere assignment and not a negotiation

HOW INDORSEMENT WRITTEN?

• Means must show that there is indorsement

Sec. 32. Indorsement must be of entire instrument. - The indorsement must be an

indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a
part only of the amount payable, or which purports to transfer the instrument to two or
more indorsees severally, does not operate as a negotiation of the instrument. But where the
instrument has been paid in part, it may be indorsed as to the residue.

INDORSEMENT MUST BE OF THE WHOLE INSTRUMENT

• The general rule is that the instrument must be of the entire instrument
• Accordingly, an indorsement of a part of the instrument doesn't operate as a negotiation
thereof

EFFECT OF PARTIAL INDORSEMENT

• It doesn't operate as an indorsement

• It may constitute a valid assignment though binding between the parties
• The person to whom the instrument is indorsed would not be
considered an indorsee but merely an assignee and would therefore
take the instrument subject to the defenses available between the original parties

EXCEPTION
• But where the instrument has been paid in part, it may be indorsed as to the residue

TRANSFER TO TWO OR MORE INDORSEES SEVERALLY

• An indorsement which purports to transfer the instrument to two or

more indorsees severally, doesn't operate as a negotiation of the instrument

MONTINOLA V. PNB

88 PHIL 178

FACTS:
*Remember the case with the Japanese occupation and the mutilated
check.

HELD:
Where the indorsement of the check was only for a part of the amount
payable, it is not legally negotiated within the meaning of Section 32, which provides that the
indorsement must be an indorsement of the entire instrument. An indorsement which purports to
transfer to the indorsee a
part only of the amount payable doesn't operate as a negotiation of the instrument. Montinola
may therefore be not regarded as an indorsee. At most he may be regarded as a mere assignee of the
P30,000 sold to him.

In which case, as an assignee, he is subject to the defenses available to the drawer Provincial
Treasurer. Sec. 33. Kinds of indorsement. - An indorsement may be either special or in blank; and
it may also be either restrictive or qualified or conditional.

KINDS OF INDORSEMENT

1. Special
2. In blank
3. Absolute
4. Conditional
5. Restrictive
6. Qualified
7. Joint
8. Successive
9. Irregular
10. Facultative

Sec. 34. Special indorsement; indorsement in blank. - A special indorsement specifies the person
to whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee
is necessary to the further negotiation of the instrument. An indorsement in blank specifies no
indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery.

SPECIAL AND BLANK INDORSEMENT

HOW FURTHER NEGOTIATED

1. Where the instrument is originally payable to order and it is negotiated by the payee by special
indorsement, it can be further negotiated by the indorsee of the instrument completed by delivery
2. Where the instrument is originally payable to order and it is
negotiated by the payee in blank indorsement, it can be further negotiated by the holder by mere
delivery. The reason is that the
effect of a blank indorsement is to make the instrument payable to bearer

3. Where the instrument is originally payable to bearer, it can be

further negotiated by mere delivery, even if the original bearer negotiated it by special
indorsement

Sec. 35. Blank indorsement; how changed to special indorsement. -

The holder may convert a blank indorsement into a special indorsement by writing over the
signature of the indorser in blank any contract consistent with the character of the indorsement.

APPLICATION OF SECTION 35

• Suppose that A makes a note with B as payee. It is indorsed as follows:

o (Indorsement in blank) (Sgd.) B.
• Delivery was then made to C. C may place above the signature of B, “Pay to C.” so as to make the
indorsement thus:
o Pay to C.

(Sgd.) B.
• This converts the blank indorsement to a special indorsement

LIMITATION UPON CONVERSION OF BLANK INDORSEMENT

• Holder must not write any contract not consistent with the
indorsement, that is, the contract so written must not change the contract of the blank indorser
• The following has been held to be inconsistent with the contract of blank indorsement—“pay
to X and Y”, “Demand and notice waived”, “I guaranty payment”, “Without recourse”

Sec. 36. When indorsement restrictive. - An indorsement is restrictive which either:

(a) Prohibits the further negotiation of the instrument; or

 (b) Constitutes the indorsee the agent of the indorser; or

(c) Vests the title in the indorsee in trust for or to the use of some other persons.

But the mere absence of words implying power to negotiate does not make an indorsement
restrictive.

PROHIBITION OF FURTHER NEGOTIATION

1. Pay to C only
2. Pay to C and no other person

INDORSEE AGENT OF THE INDORSER

• Known as the agency-type of indorsement

“Pay to C for collection”

(Sgd.) B

• Hence, any action the indorsee may file is subject to defenses available against the indorser
such as lack of consideration
• Thus, where the proof tends to show that the plaintiff holds the draft
for collection only, and that the acceptance of it by defendants was conditional, and that after
such an acceptance, the defendants refused
to accept the goods evidenced by the draft, which were returned to
and accepted by the plaintiff, who agreed to release the defendants from any liability, plaintiff
thereafter cannot recover

INDORSEMENTS FOR DEPOSIT

• An indorsement for deposit constitutes the indorsee the agent of the indorser
• “Pay to C for deposit (Sgd.) B”—such an indorsement, like an
indorsement for collection, constitutes a relation of title in the depositor in the absence of any
practice or agreement to the contrary
• In any event, a restrictive indorsement of an instrument for collection
or deposit, or to the use of the indorser and for his benefit, in the absence of any other
circumstances, will not divest the indorser of his title thereto until the money is paid
• Indorsements for deposits are usually informal

VESTS TITLE IN INDORSEE IN TRUST FOR ANOTHER

1. Pay to X in trust for C

2. Pay to X for use of C
CAN THE MAKER SET UP AGAINST THE INDORSEE HIS DEFENSES AGAINST THE RESTRICTIVE
INDORSER?

There are two views to this question:

1. Sulbrason-Dickinson v. Hopkins: an indorsement to A for the
benefit of B was held restrictive under Section 47 of the NIL,
making the indorsee and its successors subject to the good defenses against the restrictive indorser
2. Some learned writers held this view to be unsound. Thus, it has been held that the indorsee of a
check indorsed in trust for a third person who is a holder in due course could recover from the
drawer who had a defense of failure of consideration, for while the restrictive indorsement creating a
trust gives notice of this trust to subsequent purchasers, it did not give notice of defenses
obtaining between prior parties.
• TO MAKE IT EASIER TO UNDERSTAND—first, you have to make a
distinction between what kind of restrictive indorsement was made. Was it a trust type or an
agency type? If it was an agency type, the indorsee just fills in the shoes of the restrictive
indorser. And thus, he is susceptible and open to the defenses that the
maker can have against the indorser. It is different if it is trust
type because the indorsee does not step inside the shoes of the
indorser and thus, the maker can no longer set up against the indorsee his defenses against the
indorser.

PRESUMPTION OF CONSIDERATION IN RESTRICTIVE INDORSEMENTS

• As a general rule, an indorsement of a negotiable bill which purports to

pass the title to the bill to the indorsee, imports a consideration and
the burden of proving want of consideration rests upon the party alleging it
• The restrictive indorsements which are held to negative the presumption of a
consideration are such as to indicate that they are intended to pass title but merely to enable the
indorsee to collect for the benefit of the indorser, such as indorsements “for collection” or others
showing that the indorser is entitled to the proceeds
• But an indorsement to one person for the use or benefit of another, affords no such
indication. The indorser parts with the whole title to the bill and the presumption is that he done so for
a consideration.
• The only effect of such an indorsement, by way of restriction, is to give
notice of the rights of the beneficiary named in the indorsement and protect him against
misappropriation

EFFECT OF OMISSION OF WORDS OF NEGOTIABILITY

• The mere absence of words of negotiability doesn't make the indorsement restrictive
• While the omission of words in the indorsement doesn't affect negotiability of the instrument,
such omission in the body thereof will render the instrument non-negotiable

Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A restrictive indorsement confers
upon the indorsee the right:
 (a) to receive payment of the instrument;

(b) to bring any action thereon that the indorser could bring;

(c) to transfer his rights as such indorsee, where the form of the indorsement authorizes him to
do so.

But all subsequent indorsees acquire only the title of the first indorsee under the restrictive
indorsement.

RESTRICTIVE INDORSEE MAY RECEIVE PAYMENT

• A restrictive indorsement confers upon the indorsee the right to receive payment of the
instrument

RESTRICTIVE INDORSEE MAY BRING AN ACTION

• A restrictive indorsement confers upon the indorsee the right to bring any action thereon that the
indorser could bring
• In a restrictive indorsement “for deposit”, can the indorsee such as B in the illustration, bring an
action against the indorser, such as A? Yes if the indorser received value for said indorsement

RESTRICTIVE INDORSEE MAY TRANSFER HIS RIGHTS

• It is stated in the interpretation of the clause in Section 47 declaring a

paper negotiable in its origin to continue negotiable until it has been restrictively indorsed, is that
the words “until it has been restrictively
indorsed” don't contemplate every restrictive indorsement but a
restrictive indorsement that prohibits the further negotiation of the instrument under subdivision 1
of Section 36
• Section 46 didn't mean to declare the effects of a restrictive indorsement but to preserve as
far as possible the negotiability of an instrument negotiable in its origin and that the implication of
Section
47 should not be taken as destroying negotiability of an instrument heretofore universally
accepted as negotiable

EXTENT OF NEGOTIABILITY AFTER RESTRICTIVE INDORSEMENT

• That all forms of restrictive negotiability impose some degree of limitation on negotiability
• That they don't all impose the same degree of limitation
• That the indorsement itself discloses the extent of the limitation in the particular case
LIMITATION ON TRANSFER OF RIGHT: ILLUSTRATION

• But all subsequent indorsees acquire only title of the first indorsee under the restrictive
indorsement
• Illustrations of this rule:
o In the indorsement, “pay to A for collection,” the rights of the
subsequent indorsees are subject to the restrictive indorsement—
namely, he can collect only for being a
restrictive indorsee, he acquires only the title of the first indorsee whose right is merely to collect
o Suppose the P1000 note is indorsed as “Pay to B for deposit only. (Sgd.) A” and that
B owes Y P1000, B cannot transfer the note to Y for said debt. Or suppose B transfers the note to
another person for P1000, B cannot use the P1000 for his own personal expenses. He must safely keep
the money for
the benefit of A.
o “Pay to A for account of B”—gives notice that the instrument cannot be negotiated by A for his own
debt or benefit

Sec. 38. Qualified indorsement. - A qualified indorsement

constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding
to the indorser's signature the words "without recourse" or any words of similar import. Such
an indorsement does not impair the negotiable character of the instrument.

HOW QUALIFIED INDORSEMENT IS MADE

• By adding to the indorser’s signature the words “without recourse”, “Sans recours”, “indorser
not holden”, or “with intent to transfer title only and not to incur liability as indorser”, “at indorsee’s
own risk”

EFFECT OF QUALIFIED INDORSEMENT

• Constitutes the indorser a mere assignor of the title to the instrument

• One who indorses without recourse states that all parties to the paper are genuine; I am the lawful
owner of the paper and I have title to
nd know of no reason why you could not recover on it as a valid
instrument, but on thing I don't guarantee; I don't guarantee the financial responsibility on that
paper but I do say that I hold the title the same as any other personal property

QUALIFIED INDORSER HAS LIMITED SECONDARY LIABILITY

• He is secondarily liable on his warranties as an indorser under Section

65, that is, the qualified indorser is liable if the instrument is dishonored by non-acceptance or
non-payment due to:
1. Forgery
2. Lack of good title on the part of the indorser
3. Lack of capacity to indorse on the part of the prior parties
4. The fact that, at the time of the indorsement, the instrument was valueless or not valid and he knew
of that fact

A QUALIFIED INDORSEMENT DOESN'T IMPAIR THE NEGOTIABLE CHARACTER OF THE

INSTRUMENT

Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the party required to
pay the instrument may disregardthe condition and make payment to the indorsee or his transferee
whether the condition has been fulfilled or not. But any person to whom an instrument so indorsed is
negotiated will hold the same, or the proceeds thereof, subject to the rights of the person
indorsing conditionally.

ABSOLUTE INDORSEMENT

• One by which the indorser binds himself to pay upon no other condition than the failure of
prior parties to do so and upon due notice to him of such failure

CONDITIONAL INDORSEMENT

• An indorsement subject to a contingent event, that is, an event that may or may not happen,
or a past event unknown to the parties
• Suppose a note for P1000 with A maker, and B payee. It is then indorsed as follows “Pay to
Y if he passes the bar examinations. (Sgd.) B”—this is a conditional indorsement as Y may or may not
pass the bar examination.

OBLIGATION OF CONDITIONAL INDORSEE

• Y indorsee holds the note or the proceeds thereof, if he is paid by A, subject to the rights of B
• If A disregards the condition and pays Y without waiting for the
condition to be fulfilled, Y doesn't immediately acquire ownership of the sum
• Y must hold in trust while the condition is not fulfilled
• It is upon the fulfillment of the condition that such ownership over the proceeds of the note is
absolutely acquired by the conditional indorsee Y

A CONDITIONAL INDORSEMENT DOESN'T RENDER AN INSTRUMENT NON-NEGOTIABLE

Sec. 40. Indorsement of instrument payable to bearer. - Where an

instrument, payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery; but the person
indorsing specially is liable as indorser to only such holders as make title through his
indorsement.

APPLICATION OF SECTION 40

• Section applies only to instruments which are originally payable to bearer

• Cannot apply where the paper is originally made payable to order and indorsed in blank; for by
Section 9, a note or bill which is payable to
order becomes payable only when the last indorsement is in blank;
and hence, when a blank indorsement is followed by a special indorsement, the instrument is not
within the terms of Section 9.

NEGOTIATION OF INSTRUMENT PAYABLE TO BEARER BUT SPECIALLY INDORSED

• Where an instrument payable to bearer is indorsed, it may nevertheless be further

negotiated by delivery
• An instrument which is originally payable to bearer is always payable to bearer
• Hence, even when it has been specially indorsed, it is still payable to bearer

EFFECT ON LIABILITY OF SPECIAL INDORSER

Pay P1000 to bearer

(Sgd.) A
*C is bearer and he delivered to D
*D specially indorsed it to E
*E specially indorsed it to F
*F delivered to G, bearer.
• Is D liable to G being the first who specially indorsed the
instrument? No, because G didn't take title through D’s indorsement but through delivery of D
• To whom D is liable? To E and F, because they acquired the title to the
instrument through the special indorsement of D. Had F merely indorsed the instrument to G, D
would be liable also to G for the same reason.

Sec. 41. Indorsement where payable to two or more persons. - Where an instrument is payable
to the order of two or more payees or indorsees who are not partners, all must indorse unless the one
indorsing has authority to indorse for the others.

APPLICATION OF SECTION 41
• Applies only to instruments payable to two or more payees jointly

HOW INDORSEMENT OF JOINT PAYEES MADE

• Where the instrument is payable to two or more payees, all payees must each indorse in
order to negotiate the instrument
• If only one indorses, he passes only his part of the instrument—such an indorsement wouldn't
operate as such because it would not be an indorsement of the whole instrument
• Exceptions to the rule:
1. Where the payee or person indorsing has authority to indorse for the others
2. Where the payee or indorsees are partners

Sec. 42. Effect of instrument drawn or indorsed to a person as cashier. - Where an instrument is
drawn or indorsed to a person as "cashier" or other fiscal officer of a bank or corporation, it is
deemed prima facie to be payable to the bank or corporation of
which he is such officer, and may be negotiated by either the indorsement of the bank or
corporation or the indorsement of the
officer.

APPLICATION OF SECTION 42
Pay P1000 to the order of cashier, Lyceum of the Philippines.

(Sgd.) A

• Presumption is that the note is payable to Lyceum, not to the cashier personally
• And the note may be indorsed by any duly authorized officer of Lyceum other than the
cashier

DISPUTABLE PRESUMPTION

Sec. 43. Indorsement where name is misspelled, and so forth. -

Where the name of a payee or indorsee is wrongly designated or
misspelled, he may indorse the instrument as therein described
adding, if he thinks fit, his proper signature.

APPLICATION OF SECTION 43
• An instrument drawn or indorsed to “Juan Dytuco” whose real name is “Juan Dyjuco” may be
indorsed as follows:
o Pay to Y (Sgd.) Juan Dytuco Juan Dyjuco
o Or (Sgd.) Juan Dyjuco

Sec. 44. Indorsement in representative capacity. - Where any person is under obligation to
indorse in a representative capacity, he may indorse in such terms as to negative personal liability.

HOW AGENT MUST INDORSE?

1. He must add words describing himself as agent

2. At the same time, disclose his principal
3. He must be duly authorized

Sec. 45. Time of indorsement; presumption. - Except where an indorsement bears date after the
maturity of the instrument, every negotiation is deemed prima facie to have been effected before the
instrument was overdue.

DISPUTABLE PRESUMPTION

IMPORTANCE OF THIS PROVISION

• This provision becomes importance when considered in connection with Section 52 (b)
• Under the provision, in order that one may become a holder in due
course, the instrument must be negotiated to him before it becomes overdue
• The indorsement without date establishes a prima facie presumption that the instrument was
indorsed before maturity and one who denies
that the holder of such instrument is a holder in due course has the burden of proof

Sec. 46. Place of indorsement; presumption. - Except where the

contrary appears, every indorsement is presumed prima facie to have been made at the place
where the instrument is dated.

IMPORTANCE OF PLACE OF INDORSEMENT

• The place of indorsement is sometimes material because an indorsement is governed by

the laws of the state where it is indorsed, although the instrument is drawn or made in a different state

Sec. 47. Continuation of negotiable character. - An instrument negotiable in its origin continues to
be negotiable until it has been restrictively indorsed or discharged by payment or otherwise.

WHEN NEGOTIABLE INSTRUMENT RENDERED NON-NEGOTIABLE

1. Restrictive indorsement which further prohibits the further negotiation of an instrument

2. By a discharge thereof by payment or otherwise

NEGOTIABILITY AFTER DATE OF MATURITY

• FIRST VIEW: negotiability ceases in the full commercial sense after

maturity and negotiability ceases by default of the maker in his payment
• SECOND VIEW: negotiability continues even after maturity
• RECONCILIATION OF THE TWO: the mercantile character of the
instrument as a negotiable paper and of the contracts of the several parties to it, continues after
maturity and until it is paid except: that an indorsee or a transferee after maturity takes the instrument
subject to defenses between original parties, because after maturity such subsequent parties take
the instrument after it becomes overdue and
therefore, under paragraph b of Section 52, they are not holders in due course
• After maturity, an instrument originally negotiable continues to be negotiable in the sense that
the contracts of the parties to it continue and are governed by the Negotiable Instruments Law
• After maturity the instrument ceases to be negotiable in the sense that a transferee after maturity
is not a holder in due course and therefore not free from defenses obtaining between prior parties

LEGAL POSITION OF HOLDER TAKING OVERDUE INSTRUMENT

• He is a holder with notice. He may or may not be a holder for value and his rights will be regulated
accordingly. He takes a bill which on the face of it, ought to have been paid.
• He is bound to make two inquiries—has what ought to have been done really have been
done? And if not, why not?

RIGHT OF HOLDER NOT IN DUE COURSE

• He can recover checks in his possession but the only disadvantage is that the negotiable instrument
is subject to the defenses as if it were non-negotiable