Midterm Exam Answers:

I.
a. The commercial functions of a negotiable paper are to serve as a substitute
for money, although it is not considered as legal tender, and to serve as a
medium of exchange. A negotiable paper could also serve as a medium for
commercial transactions and as a symbol of credit in facilitating trade.
b. A negotiable instrument is governed by the Negotiable Instruments Law and
is capable of accumulating secondary contracts resulting from indorsements
at the back thereof. It is also an instrument which complies with the
requirements set forth under Section 1 of the NIL and has the feature of being
negotiated from one person to another by indorsement or delivery. (Order or
Bearer Instrument)
II.
a. Not affected. (Explain)
b. Not affected. (Explain)
c. Affected. (Explain)
d. Not affected. (Explain)
III.
a. A bill of exchange has the following requisites:
a. It must be in writing and signed by the drawer;
b. Must contain an unconditional order to pay a sum certain in money;
c. Must be payable on demand, or at a fixed or determinable future time;
d. Must be payable to order or to bearer; and
e. Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
b. Under section 9 of the NIL, the check is a bearer instrument since the name
of the payee does not purport to be the name of any person. The check in
this case may be transferred by delivery without indorsement and payment
to any person in possession thereof (Sec. 191.) in good faith and without
notice that his title is defective, at or after maturity (Sec. 88.), discharges the
instrument. (Sec. 119.) Delivery alone is enough to effect negotiation of the
instrument. (Sec. 30.) Yes the bank is justified in paying it to a person
presenting it for payment as it is a bearer instrument which is negotiated by
mere delivery. Whoever possesses it is the bearer and has a right to demand
payment on the instrument.
IV.
ABC is right. The instrument is incomplete and undelivered. It did not create any
contract that would bind ABC to an obligation to pay the amount thereof. Under
section 15 of the NIL, an incomplete instrument which 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 whose signature was placed thereon before
delivery. The defense under section 15 of the NIL is a real defense available even
against a holder in due course.
 V.
I distinguish.
If Pepe is not a holder in due course, Maria can set up the personal defense that
Under Sec. 14 of the NIL, in order to enforce an incomplete but delivered instrument
against a prior party, it must be filled-up strictly in accordance with the authority
given. In the case at bar, the negotiable promissory note was not filled up strictly in
accordance with the authority given to Pilar and in doing so, Maria cannot be made
liable on the promissory note. A personal defense is available as against a holder
who is not a holder in due course. It is Pilar who will be liable for the whole amount
of P4,000 being the person who negotiated the note to Pepe and also the person
who filled up the note for the wrong amount.
If Pepe was a holder in due course, Maria is liable for the whole amount of P4,000 on
the promissory note as the defense available under section 14 of the NIL is merely a
personal defense which is not available against a holder in due course. Hence, Maria
cannot escape payment on the note based on a personal defense against Pepe who
is a holder in due course. Moreover, under the doctrine of comparative negligence,
it is Maria who should be made to liable under such circumstances.
VI.
a. An accommodation Party is one who has signed the instrument as maker,
drawer or acceptor, or indorser, without receiving value therefore, and for the
purpose of lending hi name to some other person. The accommodation
partys liability is jointly and severally.
b. One of the rights of an accommodation party is to demand reimbursement
from the party accommodated in the event he has paid the instrument for
and in behalf of the latter. The liability of the accommodation party remains
not only primary but also unconditional to a holder for value such that even if
the accommodated party receives an extension of the period for payment
without the consent of the accommodation party, the latter is still liable for
the whole obligation and such extension does not release him because as far
as a holder for value is concerned, he is a solidary co-debtor.
c. The concept of negotiation happens when an instrument is negotiated when
it is transferred from one person to another in such manner as to constitute
the transferee the holder thereof. If payable to bearer, it is negotiated by
delivery; if payable to order, it is negotiated by the indorsement of the holder
completed by delivery.
VII.
a. Under section 52 of the NIL, a holder in due course is a holder who has taken
the instrument under the following conditions:
a. That it is complete and regular upon its face;
b. That he became the holder of it before it was overdue, and without
notice that it had been previously dishonored, if such was the fact;
c. That he took it in good faith and for value;
 d. 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.
b. Under section 56 of the NIL, to constitute notice of an infirmity in the
instrument or defect in the title of the person negotiating the same, the
person to whom it is negotiated must have had actual knowledge of the
infirmity or defect, or knowledge of such facts that his action in taking the
instrument amounted to bad faith. Actual knowledge is usually shown by the
instrument itself.
VIII.
a. The effects of crossing a check are:
i. That the check may not be encashed but only deposited in the
bank;
ii. That the check may be negotiated only once- to one who has an
account with a bank;
iii. That the act of crossing the check serves as a warning to the
holder that the check has been issued for definite purpose so
that he must inquire if he has received the check pursuant to the
purpose. Otherwise, he is not a HIDC (State Investment House v.
IAC, 175 SCRA 310).
b. No, a second indorser and holder of the crossed check cannot be
considered as a holder in due course since it is a crossed check, the
second holder should be placed on notice that the check may be
negotiated only once, to one who has an account with a bank.
IX.
Under section 34 of the NIL, an indorsement in blank specifies no indorsee, and an
instrument so indorsed is payable to bearer, and may be negotiated by delivery.
X.
C cannot seek reimbursement from any of the parties secondarily liable. P, A and B
did not receive any notice of dishonor and under section 89 of the NIL, any drawer
or indorser to whom such notice is not given is discharged. P, A and B in the case at
bar are parties prior to C and have no right of recourse against the latter. Hence, the
notice of dishonor given to C does not inure to the benefit of P, A and B.