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LIABILITIES OF PARTIES IN NEGOTIABLE INSTRUMENTS

 
Sec. 60. Liability of maker. - The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse.
 

MAKER PRIMARILY LIABLE

•      Engagement of the maker is to pay absolutely for the note according to its tenor
•      His liability is primarily and unconditional
•      One  who  has  signed  an  instrument  as  a  maker  is  presumed  to  have acted with care and to have  signed the instrument with full knowledge of its contents, unless of course, if fraud is proved
 

MAKER MUST PAY ACCORDING TO THE TERMS OF THE NOTE

•      The  maker  bound  himself  to  pay  personally.    He  cannot  shift  the obligation without the consent of the payee.  He cannot allege that he spend  the  money  on  expenses  which  should  be  charged  to  a  trust administered  by  a  creditor  because  it  is  not  the  payee’s  concern  to know how the proceeds should be spent.  That is the sole concern of the maker.  The payee’s interest is merely to see that the note is paid according to its term.
 

LIABILITY OF 2 OR MORE MAKERS

•      When  2  or  more  makers  sign  jointly  or  severally,  each  of  them  is individually liable for the payment of the full amount of their obligation even if one of them didn’t receive part of the value given therefor, as he would be considered as an accommodation party
 

PAYEE’S EXISTENCE, ETC.

•      The  maker  also  admits  of  the  existence  of  the  payee  and  his  then capacity to indrose
•      He is precluded from setting up the following defenses:
o      That  the  payee  is  a  fictitious  person  because  by  making  the note, he admits that the payee exists

o      That the payee was insane, a  minor,  or a corporation acting ultra  vires  because  by  making  the  note,  he  admits  the  then capacity of the payee to indorse 

Sec.   61.   Liability   of   drawer.   -   The   drawer   by   drawing   the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it  be  dishonored  and  the  necessary  proceedings  on  dishonor  be duly taken, he will pay the amount thereof to the holder or to any subsequent  indorser  who  may  be  compelled  to  pay  it.  But  the drawer   may   insert   in   the   instrument   an   express   stipulation negativing or limiting his own liability to the holder.
 

DRAWER SECONDARILY LIABLE

•      He  engages  merely  that  the  bill  will  be  accepted  or  paid  or  both, according to its tenor, and that he will pay only when 
1.    It is dishonored
2.    And the necessary proceedings of dishonor are duly taken
•      The liability of the drawer is subject to the two conditions and attaches only upon their fulfillment 
•      The drawer, by merely drawing the bill and signing his name in the bill as such drawer, without more, impliedly engages to be so secondarily liable, as if he has incorporated the provisions of Section 61 in the bill
•      If  the  bill  is  not  paid,  accordingly,  if  a  bill  is  not  paid,  the  drawer becomes liable for the payment of its value to the holder provided that notice of dishonor is given
 

TO WHOM DRAWER IS SECONDARILY LIABLE

1.    The holder
2.    Or if any of the indorsers intervening between the holder and the drawer is compelled to pay by the holder, the drawer, will be liable to that indorser so compelled to pay
 

IS DRAWER OF UNACCEPTED BILL PRIMARILY LIABLE?

•      Yes
•      It  was  held  that  until  the  bill  has  been  accepted,  the  drawer  is  the principal  debtor  and  after  acceptance,  the  drawee  or  acceptor  is  the principal debtor and the drawer becomes secondarily liable
 

PAYEE’S EXISTENCE

•      Like the maker, the drawer admits to the existence of the payee and his capacity to indorse
 

NEGATIVES HIS LIABILITY

•      The law allows the drawer to negative or limit his liability  by express stipulation 
•      By adding words such as “without recourse” or “I shall not be liable in case of non-payment or non-acceptance” 

Sec.  62.  Liability  of  acceptor.  -  The  acceptor,  by  accepting  the instrument, engages that he will pay it according to the tenor of his acceptance and admits:
 
      (a)  The  existence  of  the  drawer,  the  genuineness  of  his signature, and his  capacity and authority to draw the instrument; and
       
      (b) The existence of the payee and his then capacity to indorse. 
 

ACCEPTOR PRIMARILY LIABLE

•      Acceptor  engages  to  pay  absolutely  according  to  the  tenor  of  its acceptance
•      His liability is not subject to any condition
•      The acceptor is the drawee who accepts the bill
•      His  acceptance  immediately  places  a  legal  liability  on  him  for  the payment of the bill in favor of one who became a holder thereof after acceptance, and if he wants to escape liability, it is up to him to show that he is a mere agent of the drawer, or allege and prove any other defense which he has to the liability
 

EFFECT OF MORTGAGE EXECUTED BY ACCEPTOR

•      Where being unable to pay certain bills of exchange which the drawee has  accepted,  the  latter  makes  a  mortgage  in  favor  of  the  holder  of said bills upon certain merchandise the value of which is sought to be collected  through  said  bills,  in  order  to  secure  the  payment  of  said amount if the merchandise is  sold and the integrity thereof while the sale is not effected, the execution of said mortgage doesn’t constitute a Novation of the obligation represented by said accepted bills unless it is expressly stated in the mortgage
 

ACCEPTOR TO PAY ACCORDING TO TENOR OF HIS ACCEPTANCE

•      While the maker of a note engages to pay according to the tenor of the note,  an  acceptor  engages  to  pay  according  to  the  tenor  of  his acceptance, not of the bill he accepts
•      Tenor of his acceptance may be different from the tenor of the bill, as the acceptor may accept the bill with qualifications
•      If his acceptance is general, the tenor of then bill is the same tenor as the tenor of his acceptance
 

WHERE ORIGINAL TENOR IS ALTERED BEFORE ACCEPTANCE

•      Suppose the bill is originally for P1000.  Before the drawee X accepts it, it is altered by the payee B to P4000.  Then X accepts it.  How much is X liable to a holder in due course?  
•      According  to  one  view,  X  is  liable  for  P4000  and  not  P1000.    The reason is that the tenor of X’s acceptance is for P4000.
 

EFFECT OF SECTION 124

•      Under the first view, what is the effect of Section 124 which provides that a holder in due course can recover only the original tenor of the instrument?
•      It seems that this refers to the original tenor of instrument taken from the  standpoint  of  the  person  primarily  liable,  in  X’s  standpoint.    In other words, the original tenor of the instrument is P4000, which is the tenor of X’s acceptance.  
•      If  after  his  acceptance,  a  subsequent  indorsee  alters  the  bill  to  read P9000, then X could be liable for P4000 only, the original tenor of his acceptance, even as to a holder of due course.
 

ADMISSION OF DRAWER’S EXISTENCE, ETC.

•      Drawer’s existence
•      The genuineness of the drawer’s signature
•      The capacity and authority of the drawer to draw the instrument
•      He doesn’t admit the genuineness of the indorser’s signatures
 

EFFECT OF ACCEPTOR’S ADMISSIONS 

1.    Acceptor consequently precluded from setting up the defense that the drawer is non-existent or fictitious because of his admission of the drawer’s existence
2.    Neither can he claim the drawer’s signature is a forgery because he admits the genuineness of the drawer’s signature
3.    Neither  can  the  drawee  escape  liability  by  alleging  want  of consideration  between  him  and  the  drawer  as  by  accepting  the bill,  he  admits  the  capacity  and  authority  of  the  drawer  to  draw
the bill