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 endorsing, as the case may be; and in such case the 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.
Suppose A makes a complete instrument: I promise to pay B or order the sum of P1000. (Sgd.) A. Later on, A tore up the instrument without delivering the note to B. Did B acquire any right to the said instrument? No did not acquire any right because no rights arise in respect to an instrument until it is delivered.
DBR vs SIMA WEI
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FACTS: Sima Wei issued two crossed checks payable to petitioner Bank drawn against China Banking
Corporation. The said checks were allegedly issued in full settlement of the drawer's account evidenced by the promissory note. These two checks were not delivered to Development Bank Of Rizal or to any of its authorized representatives. For reasons not shown, these checks came into the possession of respondent Lee Kian Huat, who deposited the checks without Development Bank Of Rizal's endorsement (forged or otherwise) to the account of respondent Plastic Corporation in Producers Bank.
Development Bank of Rizal now filed a complaint for a sum of money against respondents Sima Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson Tung, Asian Industrial Plastic Corporation and the Producers Bank.
ISSUE 1: Whether or not DBR has acquired any rights to the two crossed checks?
ISSUE 2: Whether petitioner Bank has a cause of action against any or all of the defendants.
HELD:
ISSUE 1: No. Under the NIL, Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its delivery to him. Delivery of an instrument means transfer of
possession, actual or constructive, from one person to another. Without the initial delivery of the instrument from the drawer to the payee, there can be no liability on the instrument. Moreover, such delivery must be intended to give effect to the instrument. In the instant case, the instrument was not delivered to DBR.
ISSUE 2: Without the delivery of said checks to DBR, the former did not acquire any right or interest therein and cannot therefore assert any cause of action, founded on said checks, whether against the drawer Sima Wei or against the Producers Bank or any of the other respondents. It does not necessarily follow that the drawer Sima Wei is freed from liability to petitioner Bank under the loan evidenced by the promissory note agreed to by her.
These checks were never delivered to petitioner Bank. And even granting, without admitting, that there was delivery to petitioner Bank, the delivery of checks in payment of an obligation does not constitute payment unless they are cashed or their value is impaired through the fault of the creditor.
Unless respondent Sima Wei proves that she has been relieved from liability on the promissory note by some other cause, petitioner Bank has a right of action against her for the balance due thereon.
However, insofar as the other respondents are concerned, petitioner Bank has no privity with them. Since petitioner Bank never received the checks on which it based its action against said respondents, it never owned them (the checks) nor did it acquire any interest therein. Thus, anything which the respondents may have done with respect to said checks could not have prejudiced petitioner Bank.
Give us the outline of rules on delivery of negotiable instruments under Section 15 and 16:
(1) Delivery is essential to the validity of any negotiable instrument.
(2) As between immediates parties, delivery must be coupled with the intention of transferring title to the instrument.
(3) An instrument signed by the drawer or maker but not completed by him and retained in his custody is invalid as to him for want of delivery even though stolen and negotiated to a holder in due course.
(4) When a mechanically complete by undelivered instrument is in the hands of a holder in due course, there is prima facie presumption of delivery.
(5) Where the custody of the incomplete instrument has been entrusted to another, who wrongfully completes and negotiates it to a holder in due course, delivery to the agent or custodian is sufficient delivery to bind the drawer or maker.
(6) A completed instrument in the possession of a holder not in due course, there is a prima facie presumption of delivery – but subject to rebuttal.
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(7) Where a complete but undelivered instrument is in the hands of a holder in due course, there is a conclusive presumption of delivery.
(8) Delivery of the instrument may be made on a parol condition or for a special purpose consistent with its written terms.
Can the maker or drawer revoke or tear out an instrument? Yes, before delivery, the maker or drawer can revoke, cancel or tear up the instrument.
What is the significance if the instrument is not yet delivered to the payee? The payee named in the instrument acquires no right until the instrument is delivered to him.
What is an immediate party?
Literal meaning – the “drawer” and the “payee” are immediate parties to each other. So are the “maker” and the “payee” to each other. So also are the “indorser” and “indorsee” to each other. (p178, 446)
Broader meaning – an immediate party is confined to “those who are immediate, in the sense of knowing or being held to know the conditions or limitations placed upon delivery of the instrument.” (p179, 447) What is a remote party?
Literal meaning – the “drawer” or “maker” to the “indorsee” is a remote party. (p178, 446)
Broader meaning – the criterion is whether or not the party in question knows of the conditins or limitations placed upon delivery or the fact that the instrument was not delivered but stolen.
If the party knows, he is an immediate party even though he is physically remote.
If he does not know, he is a remote party even though he is the next party physically. (p179, 447)
“M” made a promissory note, kept it inside his drawer. It was stolen by “B”. “A” knew that “B” got the promissory note from the latter “M”. Is “A” considered an immediate party? Yes, even if “A” is physically remote from “M”, “A” is an immediate party as far as “M” is concerned because he knows of the lack of delivery.
(p179, 448)
What is conditional delivery? It is delivery to another, with a condition.
Ex: “A” makes a complete note in favor of “B”, with the understanding that it is not to become binding on “A”
until it is also signed by “C.” (p180, 451)
“A” made a promissory note and then delivered to “B”, subject to the condition that “B” could not negotiate the same promissory until “B” passes the bar exam? Is that an example of a conditional delivery? Why? (p180, 452)
Yes, what is conditional here is the delivery, not the promise or order to pay.
Does conditional delivery affect the negotiability of the instrument? No, it is still negotiable because the condition was set on the delivery and not on the promise or order to pay.
Did the promissory note itself provide that it will be made payable only if “B” passes the bar exam? No, if it did then it would be rendered non-negotiable because a negotiable instrument must be an unconditional order or promise to pay.
What is delivery for special a purpose? Delivery for purposes of (1) safekeeping or (2) for collection only.
Ex: “A” delivers a complete note payable to bearer signed by him to “B” for (1) safekeeping or (2) for collection only. (p180, 453)
“A” completed a note which was stolen by “B”. Note was endorsed to “C”, “C” to “D”, “D” to “E”. “E” is now a
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holder in due course. May “A” raise the defense that the note was stolen? What type of defense is it? No, where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties to him is conclusively presumed. (p181, 454) It is a personal defense, it cannot be raised against a holder in due course.
(455)
What if the instrument was delivered but was not authorized, is it a personal defense? It is just a personal defense, it cannot be raised against a holder in due course.
What if the instrument was delivered on a condition or special purpose? personal? It is just a personal defense, it cannot be raised against a holder in due course.
What is the duty of a holder of a lost instrument? As soon as the owner discovers that he has lost a negotiable instrument, he should instantly give notice of the loss to all the parties on such paper and inform them not to pay the amount to any except to the loser or his order. (p182, 458)
What are the rights of a finder of a lost instrument? No title to a lost bill or note vests in the finder and, the owner, when he has identified it, may maintain trover against the finder. (p182, 459) The rules in the Civil Code in finding something does not apply in a lost negotiable instrument.
What is a trover? It is a common law concept. It is an action to recover the value of goods.
May an owner file an action for replevin for his instrument? Yes, the owner may likewise maintain an action for replevin against the finder. (459) Replevin – an action to recover goods from one who has wrongfully acquired such.
What if a finder of the note received payment for the note. May an action for money be filed against him?
Why?
Yes, because the finder acquired no rights when he found the lost instrument, likewise he acquired no right to receive payment for the note.
What if the party liable to the instrument pays the same. May the party of the said instrument be discharged of his liabilities? Ex. “Maker” –> “Payee” –> “A” –> “B” (lost the instrument) –> “C” (found the lost instrument)
“C” collected the amount from the “Maker”, is the “Maker” discharged from his liability? It depends, a party will not be discharged if he pays the amount to the holder of the lost instrument before maturity, as such payment is not made in the usual course of business. (460)
Ex. A promissory note dated Jan 10, 2014, on Jan 6, “C” went to “Maker” to collect 1M. Is the “Maker”
discharged from his liability? No, because he paid the 1M before the maturity of the promissory note. Also if
“B” already informed the “Maker” of the loss and despite being notified he still paid “C”, the “maker” is still not discharged. Otherwise if the “maker” was not notified by “B” of the loss, and the “maker” paid “C” upon the maturity of the promissory note, then the “maker” is discharged of his liability.
“A” made a note and placed it on his table and was taken by “B”. May “B” be criminally liable? Yes, Any person who with intent to gain, but without violence against or intimidation of persons nor force upon things, shall take the a negotiable instrument belonging to another without the latter’s consent is guilty of the crime of theft. (461)
The instrument was placed inside a locked compartment. The same was destroyed by B and took the instrument. May “B” be criminally liable? Yes, but not theft anymore since the taking with intent to gain was done with force upon things, the offender is now guilty of the crime of robbery.
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What if the person with intent to defraud another, removed, concealed or destroyed the said instrument.
What crime is he liable? What provision of the RPC? Yes, any person who shall defraud another by removing, concealing or destroying in whole or in part a negotiable instrument is guilty of the crime of estafa under Art 315 of the RPC.