A: Because HDC may still demand payment but according to its original tenor.
“OR ANY OTHER CHANGE OR ADDITION WHICH ALTERS EFFECT OF INSTRUMENT IN ANY RESPECT” is a catch all phrase.
Q: What is the condition/term of the instrument at the time it was altered?
A: The instrument is materially complete
What constitutes material alteration?
A: It is defined under SEC 125 to be one which changes the date, sum payable, time or place of payment, number or relations of the parties, the currency in which payment is to be made of one 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.
What is the effect of material alteration?
A: It avoids the instrument, except as against the party who made, authorizes or assented to the alteration and subsequent indorsers. HDC can enforce it according to its original tenor.
Does alteration on the serial number of the check constitute material alteration?
A; NO, alterations on the serial numbers do not constitute material alteration within NIL. Alteration is material if it alters the effect of the instrument. It is an unauthorized change in an instrument that purports to modify in any respect the obligation of the parties or an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party. It is one which changes the items required to be stated in SEC 1.
When the drawee bank pays a materially altered check, can it claim reimbursement fro the drawer? Are there exceptions?
A: NO, when the drawee-bank alters the check, it violates the terms of the check and its duty to charge its client’s account only for bona fide disbursements he had made. Since drawee-bank did not pay according to the original tenor of the instrument, as directed by the drawer, it has no right to claim
reimbursement fro the drawer’s account or does it have a the right to deduct the erroneous payment.
EXCEPTION: when drawer was the one who made or authorized the alteration or when he failed to exercise reasonable diligence to avoid it.
Kingdao issued postdated checks and delivered the same to Taipao. The checks were payable to cash. One of the checks issued was the check in question, Check 467322 for 200,000 dated MAY 8, 1988. It is alleged that it was a stale guarantee check, originally dated AUG 28, 1987 but was altered to make it appear that it was dated MAY 8, 1988. Was the check materially altered?
A: YES, take note also of the fact that such alteration was not countersigned by the drawer to make it a valid correction of its date as consented by its drawer to make a valid correction of its date as the standard operation procedure of the bank.
The payee admitted that while it did not dispute the fact of alteration, it denied that the alteration was done without the maker’s consent and that part of its company practice is to rubber stamp the old PN which has been renewed to make it appear that there is a new obligation. The maker did not rebut the same. Will the alteration of PN effectively relieve the maker of liability?
A: NO, while the PN is evidence of an indebtedness, it is not the only evidence, for the existence of the obligation can be proven by other documentary evidence such as a written memorandum signed by the parties. A check that was issued to secure in lieu of and for the same purpose as a PN and can be presented to establish the existence of indebtedness.
WHEN ALTERATION IS MATERIAL—if it alters effect of instrument WHEN ALTERATION IS IMMATERIAL 1. Subsituting words “or bearer” for “order”
2. Writing “protest waived” above blank indorsements 3. Change in date from which interest is to run
4. Insertion of number before original figure, otherwise instrument unchanged
5. Adding “with interest” with or without a fixed rate 6. Alteration in maturity of note, whether time is curtailed
or extended
7. Instrument was payable to “First National Bank”, added word “Marion”
1. “I promise to pay” to “We promise to pay”, where there are 2 makers 2. Adding “annual” after interest clause
3. Adding date of maturity as marginal notation
4. Filling in date of actual delivery where makers of note gave it date in blank,
“July…”
5. Alteration of marginal figures where sum stated in words remained unchanged
6. Insertion of legal rate of interest where note had provision for “interest at…
per cent”
7. Printed form of PN had on margin printed words, “Extended to…” Holder on
8. Plaintiff struck out name of payee and inserted name of maker of original note
9. Striking out name of payee and substituting person who actually discounted note
10. Substituting address of maker for name of co-maker
or after maturity wrote in blank space “May 1, 1913” as reference memorandum of promise made by him to principal maker at time words were written to extend time of payment
8. There was a blank for place of payment, filling in blank with place desired 9. Adding to indorsee’s name, abbreviation “Cash” when it had been agreed
that draft should be discounted by trust company of which indorsee was cashier
10. Indorsement by stranger after delivery to payee at time note was negotiated to plaintiff
11. Extension of time given by holder to principal maker, without consent of surety co-maker
Extinctive
prescription It is a real defense. Prescriptive period for filing of a claim based on negotiable instruments is 10 years from the time of cause of action accrued. In case of checks, the action of depositor against his drawee bank commences from time he is given notice of payment.
Myron Papa vs. AU Valencia—payee did not encash the check for more than 10 years from issuance. This failure resulted in the impairment of the check through his unreasonable and unexplainable delay. Court invoked ART 1249 stating that acceptance of payee of check implies an undertaking of due diligence in presenting it for payment, and if he from whom it received sustains loss by want of such diligence, it will be held to operate as actual payment of the debt or obligation for which it was given.
International Corporate Bank vs. Spouses Gueco—contractual obligation remains even if the check is not presented for payment (CONTRADITORY RULING).
Spoilation Change of an instrument has no effect if original meaning can be ascertained. That is, if alteration be made by a stranger, rights of parties are not affected.
However, SEC 124 abrogates doctrine of spoliation. Effect is, where alteration is made by party, HDC can recover on original tenor.
Material alteration innocently made or made by stranger—instrument is discharged but debt survives Material alteration made by party and as forgery—original debt and instrument are discharged Duress amount to
forgery If physical pressure where duress amounts to forgery, such duress is legal or real defense. But even so, it seems negotiation an instrument would be under such circumstances as amount to fraud, still a HDC should be protected.
Duress (taken by force) is merely a personal defense. But where it amounts to forgery, it is a real defense.
Ex. A takes B’s hand and forces him to sign his name.
Insanity Contracts with person judicially to be insane and for whom a committee or guardian has been appointed are not valid and cannot be enforced if disaffirmed or avoided. Defense is not available not only as between immediate parties but also to HDC. If insanity is known, contract is VOID. But where there is a conflict of authority as to whether ignorant of incompetency of a person with whom contracts will be protected. He will be protected if he has acted in GF and taken no undue advantage of afflicted person.
Ultra vires act of corporation is certain cases
Where corporation is absolutely prohibited from issuing any commercial paper, paper cannot be enforced even by HDC. However, indorser cannot set up defense that execution of bill or note by a corporation was ultra vires.
Want of authority of agent in certain cases
Where agent is without authority, want of authority is a legal or real defense. Principal will not be bound beyond authority given to agent.
Illegality of contract in certain cases
Contract or instrument which is expressly made illegal by statue, not merely manner of execution or consideration, illegality of contract or instruction is real defense.
But illegality of contract is a personal or equitable defense where law declares to be illegal is not instrument itself but merely manner or consideration given. True even when consideration is in direct violation of law.
In other words, distinction is to be made between a consideration simply illegal and one which, by statute, expressly makes bill VOID. In former case, HDC can recover.
Confession of
judgment Stipulations have been declared void by judicial decision. But they are usually separable from principal contract which can be enforced.
3. Personal defenses
Q: Determination of whether the person is HDC or not is material. Why?
A: Because only holders not in due course can raise these defenses.
Ante-dating or post
dating SEC 12. ANTE-DATED AND POST-DATED—The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery
WHEN ANTE-DATING or POST-DATING INVALIDATES INSTRUMENT—when done for illegal and fraudulent purposes
Ex. A wants to charge 24% on loan of P1000. He may require borrower to make PN and ante-date it 1 year to make it appear that period for payment is 2 years and interest is 12%/year.
WHEN TITLE ACQUIRED—person to whom instrument is delivered acquires title or ownership over it, not as of the date written on instrument but as of the date of actual delivery.
Insertion of wrong
date SEC 13. WHEN DATE MAY BE INSERTED—Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date.
PRINCIPLE: One who made possible the infirmity shall bear the loss.
If E is the HDC and A is the maker, though both E and A are innocent, A shall suffer the consequences for he made it possible the loss. If E is not an HDC and A is the maker, E is not innocent but A is, E cannot hold A liable.
EFFECT OF INSERTION OF WRONG DATE—knowingly inserting wrong date in an undated instrument will avoid it as to the party so inserting the wrong date.
Implied in this section that insertion makes the instrument void as to B, who has knowledge of the true date made the wrong inserting. Under SEC 12, also void because it was ante-dated for a fraudulent purpose.
AS TO HDC: Ex. B, after inserting wrong date, indorses to C, C is HDC.
Is instrument also avoided as to C as HDC? No. Insertion of wrong date does not avoid the instrument in hands of HDC. Date inserted will be regarded as true date.
A negotiable PN payable at a fixed period after date was issued, undated and without any amount and was delivered to the payee named therein. Will the filling up of the balnks with any date and for any value avoid the note in the hands of a holder?
A: NO, SEC 13 states that insertion of a wrong date will not avoid the instrument in the hands of HDC, but as to him, the date so inserted is to be regarded as the true date. SEC 14 states that if an incomplete instrument, after completion is negotiated to HDC, it is valid and effectual for all purposes in his hands and he may enforce it as if it had been filled up strictly in accordance with authority given and within reasonable time.
(ABUSE OF AUTHORITY) Filing up the blanks beyond authority
SEC 14. BLANKS; WHEN MAY BE FILLED—Where the instrument is wanting any material particular, the person in possession has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands and he
may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time.
It is inequitable for a person to set up this defense against a more innocent party.
Q: Is there any recourse to the holder?
A: YES, to run against the indorsers
Subsequent indorsers cannot put up the defense of good faith.
EX:
Q: The amount should be filled upto 50,000 only.
A -> B -> C -> D
B inserted an amout of 80,000. Is there a defense?
A: YES
Q: Can it be used?
A: It depends whether the holder is HDC or not. If he is HDC, A cannot raise the defense. If not in due course, he can use it as a defense. The holder not in due course is not an innocent party as far as the maker is concerned, thus the contract is avoided.
RECOURSE: Go after the immediate transferor in case of bearer instrument or the indorsers in case of order instrument.
One who takes negotiable instrument, knowing that it contained blanks when it was delivered, will not put on inquiry as to extent of agent’s authority and may recover notwithstanding authority given has been exceeded. This is true even when blanks are filled up in transferee’s presence or by transferee himself, by agent’s authority.
Jo Cla pre-signed several checks, which had no payee’s name, date or amount, to answer for the expenses for his business. The blank checks were entrusted to his business partner, Paulo Co, with the specific instruction to the latter not to fill them out without previous notification to and approval by Jo Cla. Paulo Co however went to Marti Lio to secured a loan stating that Jo CLa needed the money for construction of his house. Marti Lio granted the request and gave Paulo Co 2M. In exchange, Paulo Co simultaneously delivered to Marti one of the blank checks Jo Cla earlier signed with the blank portions filed out with the words
“Cash”, “2M” and dated “23 May 2014”. When Marti deposited the check, it was dishonored for “account closed”. When Marti demanded payment fro Jo, Jo denied authorizing the loan or the check’s negotiation and asserted that he was not a privy to the loan agreement. It turned out that Marti knew that Jo was not privy to the loan. Is Jo liable to Marti?
A: NO, SEC 14 states that if the maker or drawer delivers a pre-signed blank paper to another person for the purpose of converting it into a negotiable instrument, that person is deemed to have prima facie authority to fill it up. In order however that any such instrument, when completed, may be enforced against any person who became a party thereto prior to its completion, there are 2 REQUISITES:
1. Blank must be filled strictly in accordance with authority given 2. It must be filled up within reasonable tie.
If it was proved that it was not filled up strictly in accordance with authority given and within reasonable tie, maker can set up a personal defense and avoid liability.
In this case, Paulo exceed his authority when he filled up the blanks and used the check, which was limited to the use of operation expenses and on the condition that Jo’s prior approval be first secured. While Paulo had prima facie authority to complete the check, such authority does not extend to its use (subsequent transfer or negotiation) once the check is completed. Thus, only the authority to complete the check is presumed. There is no evidence that Paulo ever secured prior approval from Jo to fill up the blank or use the check.
In addition, Marti’s knowledge that Jo is not privy to the contract of loan and correspondingly had no obligation or liability to hi renders him dishonest.
Hence, he cannot be HDC. Accordingly, the defense of incomplete but delivered instrument under SEC 14 will lie against him.
Want of delivery of a complete instrument
SEC 16. DELIVERY: WHEN EFFECTUAL; WHEN PRESUMED—Every contract on a negotiable instrument is incomplete and revocable until delivery of instrument for the purpose of giving effect thereto. As between immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in such case, delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due
course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved.
Q: A issued a complete instrument but he has no intention of negotiating it yet. B got the instrument accidentally. B negotiated it to C, C to D and D to E. E is an HDC. Can C be HDC?
A: YES, as long as he has no knowledge of the infirmity.
Q: Between E and A, can A raise the defense?
A: NO, because the defense is a personal defense.
PRINCIPLE: One who makes the infirmity possible shall bear the loss.
RECOURSE: Go after the indorsers
REASON: Breach of warranty (i.e. they had good title to the instruent).
As against persons not HDC, it can be shown that no delivery was made or delivery is conditional or for a special purpose.
As against persons not HDC, it can be shown that no delivery was made or delivery is conditional or for a special purpose.