Bar Q and A #61

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1.) Marlon deposited with LYRIC bank a money market placement of P1M for a term of 31 days. On maturity date, one claiming to be Marlon called up the LYRIC Bank account officer and instructed him to give the manager’s check representing the proceeds of the money market placement to Marlon’s girlfriend, Ingrid. The check, which bore the forged signature of Marlon, was deposited in Ingrid’s account with YAMAHA Bank. YAMAHA Bank stamped a guaranty on the check reading: “All prior endorsements and/or lack of endorsement guaranteed.” Upon presentment of the check, LYRIC Bank funds the check. Days later, Marlon goes to LYRIC Bank to collect his money market placement and discovers the foregoing transactions. Marlon thereupon sues LYRIC Bank which in turn files a third-party complaint against YAMAHA Bank. Discuss the respective rights and liabilities of the two banks.

Since the money market placement of Marlon is in the nature of a loan to Lyric Bank, and since he did not authorize the release of the money market placement to Ingrid, the obligation of Lyric Bank to him has not been paid. Lyric Bank still has the obligation to pay him.

Since Yamaha Bank indorsed the check bearing the forged endorsement of Marlon and guaranteed all endorsements, including the forged endorsement, when it presented the check to Lyric Bank, it should be held liable to it. However, since the issuance of the check was attended with the negligence of Lyric Bank, it should share the loss with Yamaha Bank on a 50% basis.

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2.) Distinguish an irregular indorser from a general indorser.

An irregular indorser, not otherwise a party to the instrument, places his signature thereon in blank before delivery to add credit thereto. A general indorser is a regular party to the instrument like a maker, drawer or acceptor and he signs upon delivery of the instrument while an irregular indorser signs for valuable consideration.

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3.) Pancho drew a check to Bong and Gerard jointly. Bong indorsed the check and also forged Gerard’s indorsement. The payor bank paid the check and charged Pancho’s account for the amount of the check. Gerard received nothing from the payment. Pancho asked the payor bank to recredit his account. Should the bank comply? Explain fully.

YES, the bank should recredit the full amount of the check to the account of Pancho, considering that the check was payable to the account of Pancho. Considering that the check was payable to Bong and Gerard jointly, the indorsement of Gerard was necessary to negotiate the check pursuant to Sec. 41 of the NIL, to wit: Where an instrument is payable to the order of 2 or more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others. Since Bong forged the signature of Gerard without authority, the indorsement was wholly inoperative.

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4.) a. AB issued a promissory note for P1,000 payable to CD or his order on September 15, 2002. CD indorsed the note in blank and delivered the same to EF. GH stole the note from EF and on September 14, 2002 presented it to AB for payment. When asked by AB, GH said CD gave him the note in payment for two cavans of rice. AB therefore paid GH P1,000 on the same date. On September 15, 2002, EF discovered that the note of AB was not in his possession and he went to AB. It was then that EF found out that AB had already made payment made payment on the note. Can EF still claim payment from AB? Why? b. As a sequel to the same facts narrated above, EF, out of pity for AB who had already paid P1,000to GH, decided to forgive AB and instead go after CD who indorsed the note in blank to him. Is CD still liable to EF by virtue of the indorsement in blank? Why?

a. Since the instrument became a bearer instrument, EF could no longer claim payment from AB. EF is not a holder of the promissory note. To make the presentment for payment, it is necessary to exhibit the instrument, which EF cannot do because he is not in possession thereof.

b. NO, because CD negotiated the instrument by delivery.

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5.) Gemma drew a check on September 13, 1990. The holder presented the check to the drawee bank only on March 5, 1994. The bank dishonored the check on the same date. After dishonor by the drawee bank, the holder gave a formal notice of dishonor to Gemma through a letter dated April 27, 1994. a. What is meant by “unreasonable time” as applied to presentment? b. Is Gemma liable to the holder?

a. As applied to presentment for payment, “reasonable time” is meant not more than 6 months from the date of issue. Beyond said period, it is “unreasonable time” and the check becomes stale.

b. NO. Aside from the check being already stale, Gemma is also discharged from liability under the check, being a drawer and a person whose liability is secondary, this is due to the giving of the notice of dishonor beyond the period allowed by law. The giving of notice of dishonor on April 27, 1994 is more than 1 month from March 5, 1994 when the check was dishonored. Since it is not shown that Gemma and the holder resided in the same place, the period within which to give notice of dishonor must be the same time that the notice would reach Gemma if sent by mail.

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6.) When is notice of dishonor not required to be given to the drawer?

Notice of dishonor not required to be given to the drawer in any of the following cases:

1. Where the drawer and the drawee are the same person;
2. When the drawee is a fictitious person or a person not having capacity to contract;
3. When the drawer is the person to whom the instrument is presented for payment;
4. Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument;
5. Where the drawer has countermanded payment

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7.) Bong bought 300 bags of rice from Ben for P300,000. As payment, Bong indorsed to Ben a BPI check issued by Baby in the amount of P300,000. Upon presentment for payment, the BPI check was dishonored because Baby’s account from which it was drawn has been closed. To replace the dishonored check, Bong indorsed a crossed DBP check issued also by Baby for P300,000. Again, the check was dishonored because of insufficient funds. Ben sued Bong and Baby on the dishonored BPI check. Bong interposed the defense that the BPI check was discharged by novation when Ben accepted the crossed DBP check as replacement for the BPI check. Bong cited Section 119 of the NIL which provides that a negotiable instrument is discharged “by any other act which will discharge a simple contract for the payment of money.” Is Bong correct?

NO. Bong is not correct. While Section 119 of the NIL in relation to Article 1231 of the Civil Code provides that one of the modes of discharging a negotiable instrument is by any other act which will discharge a simple contract for the payment of money, such as novation, the acceptance by the holder of another check which replaced the dishonored bank check did not result to novation.

There are only 2 ways which indicate the presence of novation and thereby produce the effect of extinguishing an obligation by another which substitutes the same. First, novation must be explicitly stated and declared in unequivocal terms as novation is never presumed. Secondly, the old and the new obligation must be incompatible on every point.In the instant case, there was no express agreement that the holder’s acceptance of the replacement check will discharge the drawer and endorser from liability. Neither is there incompatibility because both checks were given precisely to terminate a single obligation arising from the same transaction.

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8.) PN is the holder of a negotiable promissory note within the meaning of the NIL. The note was originally issued by RP to XL as payee. XL indorsed the note to PN for goods bought by XL. The note mentions the place of payment on the specified maturity date as the office of the corporate secretary of PX bank during banking hours. On maturity date, RP was at the aforesaid office ready to pay the note but PN did not show up. What PN later did was to sue XL for the face value of the note, plus interest and costs. Will the suit prosper? Explain.

YES. The suit will prosper as far as the face value of the note is concerned, but not with respect to the interest due subsequent to the maturity of the note and the costs of collection. RP was ready and willing to pay the note at the specified place of payment on the specified maturity date, but PN did not show up. PN lost his right to recover the interest due subsequent to the maturity of the note and the cost of collection.

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9.) William issued to Albert a check for P100,000 drawn on XM Bank. Albert alerted the amount of the check to P210,000, and deposited the check to his account with ND Bank. When ND Bank presented the check for payment through the Clearing House, XM Bank honored it. Thereafter, Albert withdrew the P210, 000 and closed his account. When the check was returned to him after a month, William discovered the alteration. XM Bank recredited P210,000 to William’s current account, and sought reimbursement from ND Bank. ND Bank refused, claiming that XM Bank failed to return the altered check to it within the 24- hour clearing period. Who, as between, XM Bank and ND Bank, should bear the loss? Explain.

ND Bank should bear the loss if XM Bank returned the altered check to ND Bank within 24 hours after its discovery of the alteration. Under the given facts, William discovered the alteration when the altered check was returned to him after a month. It may safely be assumed that William immediately advised XM Bank of such fact and that William immediately advised XM Bank of such fact and that the latter promptly notified ND Bank thereafter. CB Circular No. 9, as amended, on which the decisions of the Supreme Court, in the Hongkong & Shanghai Banking Corporation v. People’s Bank & Trust Co. and Republic Bank v. CA, et al. were based was expressly cancelled and superseded by the CB Circular No. 317, dated December 23, 1970. The latter was in turn amended by CB Circular No. 580, dated September 19, 1977. As to the altered checks, the new rules provide that the drawee bank can still return them even after 4:00pm of the next day provided it does so within 24 hours from discovery of the alteration but in no event beyond the period fixed or provided by law for filing of a legal action by the returning bank against the bank sending the same. Assuming that the relationship between the drawee bank and the collecting bank is evidenced by some written document, the prescriptive period would be 10 years.

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10.) Mr. Pablo sought to borrow P200,000 from Mr. Carlos. The latter agreed to loan the amount in the form of a post-dated check which was crossed (i.e., two parallel lines diagonally drawn on the top left portion of the check). Before the due date of the check, Mr. Pablo discounted it with Mr. Noble. On due date, Mr. Noble deposited the check with his bank. The check was dishonored. Mr. Noble sued Mr. Pablo. The court dismissed Mr. Noble’s complaint. Was the court’s decision correct?

The court’s decision was incorrect. Mr. Pablo and Mr. Carlos, being immediate parties to the instrument, are governed by the rules of privity. Given the factual circumstances of the problem, Mr. Pablo has no valid excuse from denying liability. Mr. 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.

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