DEFENSES AND EQUITIES 4. MATERIAL ALTERATION
INCOMPLETE, UNDELIVERED INSTRUMENT
KINDS OF DEFENSES
A. Real defense – attaches to instrument; on the
principle that the right sought to be enforced never
existed/there was no contract at all
B. Personal defense – growing out of agreement;
renders it inequitable to be enforced vs. defendant
The following are the DEFENSES
1. INCAPACITY: real defenses; indorsement/assign
by corp/infant: passes property but corp/infant no
liability
2. ILLEGALITY/LACK OF CONSIDERATION:
personal defense, even if no K because void under
CC 1409
3. FORGERY: real defense (lack of consent): forged
and made without authority of person whose
signature it purports to be.
General Rule:
wholly inoperative or no right to retain
instrument, or give discharge, or enforce
payment vs. any party, can be acquired
through or under such signature (unless
forged signature unnecessary to holder’s title)
Exception:
unless the party against whom it is sought
to enforce such right is precluded from setting
up forgery/want of authority precluded:
parties who make certain warranties, like a
general indorser or acceptor estopped
/negligent parties
* note rules on Acceptance/Payment Under Mistake
as applied to:
1. overdraft
2. stop payment order
3. forged indorsements
1
8.
Where NI materially altered w/o assent of all
parties liable thereon, avoided, except as vs. a party
who has himself made, authorized or assented to
alteration and subsequent indorsers.
But when an instrument has been materially
altered and is in the hands of a HDC not a party to the
alteration, HDC may enforce payment thereof
according to original tenor
MATERIAL ALTERATION
change date
sum payable, either for principal or interest
time of payment
number/relations of parties
medium/currency of payment, adds place of
payment where none specified, other change/addition
altering effect of instrument in any respect.
*material alteration is a personal defense when used
to deny liability according to original tenor of
instrument, but real defense when relied on to deny
liability according to altered terms.
5. FRAUD
Fraud in execution: real defense (didn’t know it
was NI)
Fraud in inducement: personal defense (knows it’s
NI but deceived as to value/terms)
6. DURESS
Personal, unless so serious as to give rise to a real
defense for lack of contractual intent
7. COMPLETE, UNDELIVERED INSTRUMENT
Personal defense (sec. 16)
If instrument not in pass. Of party who signed,
delivery prima facie presumed
If holder is HDC, delivery conclusively presumed
Real defense (sec. 15)
Instrument will not, if completed and negotiated
without authority, be a valid contract in the hands of
any holder, as against any person whose signature
was placed thereon before delivery
9. INCOMPLETE, DELIVERED
Personal defense (sec. 14)
2 Kinds of Writings:
Where instrument is wanting in any material
particular: person in possession has prima facie
authority to complete it by filing up blanks therein
Signature on blank paper delivered by person
making the signature in order that the paper may be
converted into a NI: prima facie authority to fill up as
such for any amount
In order that any such instrument, when
completed, ma be enforced vs. any person who
became a party thereto prior to its completion:
1. must be filled up strictly in accordance w/
authority given
2. within a reasonable time but if any such
instrument after completion is negotiated to
HDC, it’s valid for all purposes in his hands,
he may enforce it as if it had been filled up
properly.
1. Mr Pablo sought to borrow P200th from Mr Carlos.
Carlos agreed to loan the amount in the form of a
post- dated 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?
Answer: 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 13July1989).
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.
2. 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?
Answer:
1) The effects of crossing a check are:
The check is for deposit only in the account of the
payee
The check may be indorsed only once in favor of a
person who has an account with a bank
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 (State Investment House v IAC
175 S 310)
3. 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.
Answer: 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. Not being a holder in
due course, Dragon is subject to the personal defense
on the part of Chelsea concerning the breach of trust
on the part of Moises Lim in not complying with his
obligation to deliver the 2000 bales of tobacco.
How does the “shelter principle” embodied in the
Negotiable Instruments Law operate to give the rights of a
holder in due course to a holder who does not have the
status of a holder in due course? Briefly explain.
the shelter principle, a person who does not qualify
as a holder in due course can, nonetheless, acquire
the rights and privileges of a holder in due course if
he derives his title to the instrument through a holder
in due course. However, a person who previously
held the instrument cannot improve his position by
later reacquiring it from a holder in due course if the
former holder was a party to fraud or illegal activity
affecting the instrument or had notice of a claim or
defense against the instrument. (2008 Bar Question)
DOCTRINE OF DESIRABLE SHORT CUT—plaintiff
uses one action to reach,
by desirable short cut, the person who ought to
be ultimately liable as among the innocent persons
involved in the transaction. In other words, the payee
ought to be allowed to recover directly from the
collecting bank, regardless of whether the check was
delivered to the payee or not.
On the issue of laches, Ong didn't sit on his
rights. He immediately sought the intervention of
Tamlinco’s family to collect the sum of money, and
later
the Central Bank. Only after exhausting all the
measures to settle the issue amicably did he file the
action.