Bar Q and A #59

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1.) Brad was in desperate need of money to pay his debt to Pete, a loan shark. Pete threatened to take Brad’s life if he failed to pay. Brad and Pete went to see Señorita Isobel, Brad’s rich cousin, and asked her if she could sign a promissory note in his favor in the amount of P10,000.00 to pay Pete. Fearing that Pete would kill Brad, Señorita Isobel acceded to the request. She affixed her signature on a piece of paper with the assurance of Brad that he will just fill it up later. Brad then filled up the blank paper, making a promissory note for the amount of P100,000.00. He then indorsed and delivered the same to Pete who accepted the note as payment of the debt. What defense or defenses can Señorita Isobel set up against Pete? Explain.

Señorita Isobel can set-up both real and personal defenses against Pete, who cannot claim to be a holder in due course because he knew of the compulsion used upon Señorita Isobel, thus:

a. the real defenses available are incompleteness of the instrument because Señorita Isobel only signed on a blank piece of paper, duress amounting to forgery, alteration of the holder by changing the amount to a higher figure; and

b. the personal defenses of fraud in inducement incompleteness when the paper was delivered, and lack of consideration.

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2.) Susan Kawada borrowed P500,000 from XYZ Bank which required her, together with Rose Reyes who did not receive any amount from the bank, to execute a promissory note payable to the bank, or its order on stated maturities. The note was executed as so agreed. What kind of liability was incurred by Rose, that of an accommodation party or that of a solidary debtor? Explain.

Rose incurs the liability of an accommodation party since she executed the promissory without receiving value therefor and for the purpose of lending his name to Susan Kawada, the accommodated party. Nonetheless, as an accommodation maker, Rose is primarily and unconditionally liable on the promissory note to a holder for value, regardless of whether she stands as a surety or solidary co-debtor since such distinction would be entirely immaterial and inconsequential as far as a holder for value is concerned.

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3.) Juan Sy purchased from “A” Appliance Center one generator set on installment with chattel mortgage in favor of the vendor. After getting hold of the generator set, Juan Sy immediately sold it without consent of the vendor. Juan Sy was criminally charged with estafa. To settle the case extra judicially, Juan Sy paid the sum of P20,000 and for the balance of P5,000.00 he executed a promissory note for said amount with Ben Lopez as an accommodation party. Juan Sy failed to pay the balance. a. What is the liability of Ben Lopez as an accommodation party? Explain. b. What is the liability of Juan Sy?

a. Section 29 of the NIL provides that an accommodation party is liable on the instrument to a holder for value, notwithstanding that such holder at the time of taking the instrument knew him to be only an accommodation party. As an accommodation party, Ben Lopez is primarily and unconditionally liable on the promissory note to a holder for value as if the contract was not for accommodation.

b. Under Section 14 of the NIL, Juan Sy is primarily liable to the extent of P5,000 in the hands of a holder in due course. However, if Ben Lopez paid the note, Juan Sy has the obligation to reimburse the former to the extent of the amount paid.

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4.) Dagul has a business arrangement with Facundo. The latter would lend money to another, through Dagul, whose name would appear in the promissory note as the lender. Dagul would then immediately indorse the note to Facundo. Is Dagul an accommodation party? Explain.

An accommodation note is one to which the accommodation party has put his name, without consideration, for the purpose of accommodating some other party who is to use it and is expected to pay it. The accommodation is not one to the person who takes the note — that is, the payee or indorsee, but one to the maker or indorser of the note. In this case, the indorser, Dagul, in making the indorsement to the lender, Facundo, was merely acting as agent for the latter or, as a mere vehicle for the transference of the naked title from the borrower or maker of the note and was not acting as an accommodation party.

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5.) As a rule under the Negotiable Instruments Law, a subsequent party may hold a prior party liable but not vice-versa. Give two (2) instances where a prior party may hold a subsequent party liable.

In case of an accommodated party and in case of an acceptor for honor. An accommodation party may hold the party accommodated liable to him, even if the party accommodated is a subsequent party. The relation between them is that of a principal and a surety. (PNB v. Maza, 1925) For the same reason, an acceptor for honor may hold the party for whose honor he has accepted a bill of exchange liable to him. (Sec. 161, NIL) A payer for honor is subrogated to the rights of the holder as regards the party for whose honor he paid and all parties liable to the latter. (Sec. 175, NIL)

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6.) Anna makes a promissory note payable to bearer and delivers it to Bing. In turn, Bing negotiates it by mere delivery to Carmen, who endorses it especially to Dong. Dong negotiates it by special indorsement to Emma, who negotiates it to Fe by mere delivery. Anna did not pay. To whom are Bing, Carmen, Dong and Emma liable? Explain your answer fully.

Bing, not being an indorser, may only be held liable for breach of warranty but the facts in the problem do not disclose any such breach.

Carmen, under her special indorsement, may be held secondarily liable by Dong and Emma since the latter (Dong and Emma) derived title under Carmen’s special indorsement. Carmen is not secondarily liable to Fe since the latter obtained it by mere delivery from Emma and therefore did not obtain title through Carmen’s special indorsement.
Dong holds himself secondarily liable to Emma since the latter derived title under Dong’s special indorsement but not to Fe who acquired the instrument only by delivery.

Emma, not being an indorser, is not secondarily liable to Fe. Emma’s only possible source of liability to Fe would be for a breach of warranty but the facts in the problem do not disclose any such breach.

Secondary liability requires due notice of dishonor, unless excused, which we assume had properly been observed.

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7.) What constitutes a holder in due course?

A holder in due course is one who has taken the instrument under the following conditions:

1. That it is complete and regular upon its face;
2. That he became a holder of it before it was overdue and without notice that it had been previously dishonored, if such was the fact;
3. That he took it in good faith and for value;
4. 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.

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8.) Perla brought a motor car payable in installments from Automotive Company for P250,000. She made a down payment of P50,000 and executed a promissory note for the balance. The company subsequently indorsed the note to Reliable Finance Corporation which financed the purchase. The promissory note read: “For value received, I promise to pay Automotive Company or order at its office in Legaspi City, the sum of P200,000.00 with interest at twelve (12%) per cent per annum, payable in equal installments of P20,000.00 monthly for ten (10) months starting October 21, 1991. Manila September 21, 1991. (Sgd.) Perla Pay to the order of Reliable Finance Corp. Automotive Company By: (Sgd.) Manager Because Perla defaulted in the payment of her installments, Reliable Finance Corporation initiated a case against her for a sum of money. Perla argued that the promissory note is merely open to all defenses available to the assignor and, therefore, Reliable Finance Corporation is not a holder in due course. a. Is the promissory note a mere assignment of credit or a negotiable instrument? Why? b. Is Reliable Finance Corporation a holder in due course? Explain briefly.

a. The promissory note in the problem is a negotiable instrument, being in compliance with the provisions of Section 1 of the NIL. Neither the fact that the payable sum is to be paid with interest nor that the maturities are in stated installments renders uncertain the amount payable.

b. YES. Reliable Finance Corporation is a holder in due course given the factual settings. Said corporation apparently took the promissory note for value, and there are no indications that it acquired it in bad faith.

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9.) 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 no 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. 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?

a. Devi can enforce the note against Larry since she is a holder in due course. Since the document delivered to Evelyn is in blank and she was authorized to fill up the amount in the promissory note, Devi can enforce against Larry the amount of P5,000.00 as this case falls squarely under Sec 14 of the Negotiable Instruments Law. As against a holder in due course, the instrument is always valid and enforceable to the full extent. The defense of filing- up contrary to authorization is a mere personal or equitable defense. (Villanueva, Commercial Law Review, 2009 edition)

b. Baby cannot enforce the note against Larry since she is not a holder in due course because Larry could interpose the real and personal defenses to defeat the claim of Baby. However, because of the shelter principle in Negotiable Instruments Law, Baby could be elevated to a status of a holder in due course since a person not holder in due course steps in the shoes of the prior party. Therefore, Baby could enforce the note against Larry the same way as Devi could enforce it.

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10.) PN makes a promissory note for P5,000, but leaves the name of the payee in blank because he wanted to verify its correct spelling first. He mindlessly left the note on top of his desk at the end of the workday. When he returned the following morning, the note was missing. It turned up later when X presented it to PN for payment. Before X, T, who turned out to have filched the note from PN’s office, had endorsed the note after inserting his own name in the blank space as the payee. PN dishonored the note, contending that he did not authorize its completion and delivery. Xxx Can the payee in a promissory note be a “holder in due course” within the NIL? Explain your answer.

NO, a payee in a promissory note cannot be a “holder in due course” within the meaning of the NIL, because a payee is an immediate party in relation to the maker. The payee is subject to whatever defenses, real or personal, available to the maker of the promissory note.

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