Sec.  31.  Indorsement;  how  made.  -  The  indorsement  must  be written on the instrument itself or upon a paper attached thereto. The  signature  of  the  indorser,  without  additional  words,  is  a sufficient indorsement.
 

NATURE OF AN INDORSEMENT

•      It is not only a mode of transfer
•      It is also a contract
•      Every indorser is a new drawer and the terms are found on the face of the bill or note
•      The  indorsement  of  the  bill  or  not  implies  an  undertaking  from  the indorser  to  the  person  in  whose  favor  it  is  made  and  to  every  other person to whom the bill or note may afterwards be transferred, exactly similar  to  that  which  is  implied  by  drawing  a  bill  except  that,  in  the case  of  drawing  a  bill,  the  stipulations  with  respect  to  the  drawer’s responsibility and undertaking don't apply
•      The  general  indorser  in  effect,  states  to  every  person  who  follows him—this instrument will be paid by the maker, if a note, or accepted  the drawee or paid by the acceptor, if a bill.  If it is dishonored by
non-payment or non-acceptance, and you give me notice thereof, I will pay it.
 

WHERE THE INDORSEMENT IS WRITTEN

•      The  indorsement  may  be  written  on  the  instrument  itself  or  upon  a paper attached thereto
•      Allonge: paper attached to the instrument
 

MAY  ALLONGE  BE  USED  WHERE  THERE  IS  ROOM  ON  INSTRUMENT  FOR INDORSEMENT?

•      It  has  been  held  that  the  use  of  an  allonge  is  allowable  only  when there  is  a  physical  impossibility  of  writing  the  indorsement  on  the instrument  itself,  and  an  indorsement  on  a  separate  piece  of  paper where there is sufficient space on the instrument for indorsement will be considered as a mere assignment and not a negotiation

HOW INDORSEMENT WRITTEN?

•      Means must show that there is indorsement

Sec.   32.   Indorsement   must   be   of   entire   instrument.   -   The indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of   the   amount   payable,   or   which   purports   to   transfer   the instrument to two or more indorsees severally, does not operate as a negotiation of the instrument. But where the instrument has been paid in part, it may be indorsed as to the residue.
 

INDORSEMENT MUST BE OF THE WHOLE INSTRUMENT

•      The  general  rule  is  that  the  instrument  must  be  of  the  entire instrument 
•      Accordingly,  an  indorsement  of  a  part  of  the  instrument  doesn't operate as a negotiation thereof
 

EFFECT OF PARTIAL INDORSEMENT

•      It doesn't operate as an indorsement
•      It  may  constitute  a  valid  assignment  though  binding  between  the parties
•      The  person  to  whom  the  instrument  is  indorsed  would  not  be considered  an  indorsee  but  merely  an  assignee  and  would  therefore take  the  instrument  subject  to  the  defenses  available  between  the original parties
 

EXCEPTION

•      But where the instrument has been paid in part, it may be indorsed as to the residue
 

TRANSFER TO TWO OR MORE INDORSEES SEVERALLY

•      An  indorsement  which  purports  to  transfer  the  instrument  to  two  or more  indorsees  severally,  doesn't  operate  as  a  negotiation  of  the instrument
 

 
FACTS:
*Remember  the  case  with  the  Japanese  occupation  and  the  mutilated
check.
 
HELD:
Where  the  indorsement  of  the  check  was  only  for  a  part  of  the  amount payable,  it  is  not  legally  negotiated  within  the  meaning  of  Section  32, which provides that the indorsement must be an indorsement of the entire instrument.  An indorsement which purports to transfer to the indorsee a
part  only  of  the  amount  payable  doesn't  operate  as  a  negotiation  of  the instrument.  Montinola may therefore be not regarded as an indorsee.  At most he may be regarded as a mere assignee of the P30,000 sold to him. 

In  which  case,  as  an  assignee,  he  is  subject  to  the  defenses  available  to the drawer Provincial Treasurer.  Sec.  33.  Kinds  of  indorsement.  -  An  indorsement  may  be  either special or in blank; and it may also be either restrictive or qualified or conditional.
 

KINDS OF INDORSEMENT

1.    Special
2.    In blank
3.    Absolute
4.    Conditional
5.    Restrictive
6.    Qualified 
7.    Joint
8.    Successive
9.    Irregular
10.  Facultative 
 
Sec.  34.  Special  indorsement;  indorsement  in  blank.  -  A  special indorsement specifies the person to whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is  necessary  to  the  further  negotiation  of  the  instrument.  An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery.
 

SPECIAL AND BLANK INDORSEMENT

HOW FURTHER NEGOTIATED

1.    Where  the  instrument  is  originally  payable  to  order  and  it  is negotiated by the payee by special indorsement, it can be further negotiated  by  the  indorsee  of  the  instrument  completed  by delivery
2.    Where  the  instrument  is  originally  payable  to  order  and  it  is negotiated  by  the  payee  in  blank  indorsement,  it  can  be  further negotiated by the holder by mere delivery.  The reason is that the
effect of a blank indorsement is to make the instrument payable to bearer 

3.    Where  the  instrument  is  originally  payable  to  bearer,  it  can  be further  negotiated  by  mere  delivery,  even  if  the  original  bearer negotiated it by special indorsement
 
Sec. 35. Blank indorsement; how changed to special indorsement. - The  holder  may  convert   a  blank  indorsement  into  a  special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement.
 

APPLICATION OF SECTION 35

•      Suppose  that  A  makes  a  note  with  B  as  payee.    It  is  indorsed  as follows:
o      (Indorsement in blank) (Sgd.) B.
•      Delivery was then made to C.  C may place above the signature of B, “Pay to C.” so as to make the indorsement thus: 
o      Pay to C.      
 
(Sgd.) B.
•      This converts the blank indorsement to a special indorsement
 

LIMITATION UPON CONVERSION OF BLANK INDORSEMENT

•      Holder   must   not   write   any   contract   not   consistent   with   the indorsement,  that  is,  the  contract  so  written  must  not  change  the contract of the blank indorser
•      The  following  has  been  held  to  be  inconsistent  with  the  contract  of blank indorsement—“pay to X and Y”, “Demand and notice waived”, “I guaranty payment”, “Without recourse”
 
Sec.   36.   When   indorsement   restrictive.   -   An   indorsement   is restrictive which either:
 
      (a) Prohibits the further negotiation of the instrument; or
       
      (b) Constitutes the indorsee the agent of the indorser; or
       
      (c) Vests the title in  the  indorsee in trust for or  to the use of some other persons. 
 
But the  mere absence of words  implying  power  to negotiate does not make an indorsement restrictive.
 

PROHIBITION OF FURTHER NEGOTIATION

1.    Pay to C only
2.    Pay to C and no other person
 
INDORSEE AGENT OF THE INDORSER
•      Known as the agency-type of indorsement
 
“Pay to C for collection”
(Sgd.) B
 
•      Hence,  any  action  the  indorsee  may  file  is  subject  to  defenses available against the indorser such as lack of consideration
•      Thus, where the proof tends to show that the plaintiff holds the draft for  collection  only,  and  that  the  acceptance  of  it  by  defendants  was conditional, and that after such an acceptance, the defendants refused to  accept  the  goods  evidenced  by  the  draft,  which  were  returned  to and  accepted  by  the  plaintiff,  who  agreed  to  release  the  defendants from any liability, plaintiff thereafter cannot recover
 

INDORSEMENTS FOR DEPOSIT

•      An  indorsement  for  deposit  constitutes  the  indorsee  the  agent  of  the indorser
•      “Pay  to  C  for  deposit  (Sgd.)  B”—such  an  indorsement,  like  an indorsement  for  collection,  constitutes  a  relation  of  title  in  the depositor in the absence of any practice or agreement to the contrary
•      In any event, a restrictive indorsement of an instrument for collection or  deposit,  or  to  the  use  of  the  indorser  and  for  his  benefit,  in  the absence of any other circumstances, will not divest the indorser of his title thereto until the money is paid
•      Indorsements for deposits are usually informal
 

VESTS TITLE IN INDORSEE IN TRUST FOR ANOTHER

1.    Pay to X in trust for C
2.    Pay to X for use of C
 

CAN  THE  MAKER  SET  UP  AGAINST  THE  INDORSEE  HIS  DEFENSES AGAINST THE RESTRICTIVE INDORSER?

There are two views to this question:
1.    Sulbrason-Dickinson  v.  Hopkins:  an  indorsement  to  A  for  the benefit  of  B  was  held  restrictive  under  Section  47  of  the  NIL, making  the  indorsee  and  its  successors  subject  to  the  good defenses against the restrictive indorser
2.    Some learned writers held this view to be unsound.  Thus, it has been held that the indorsee of a check indorsed in trust for a third person  who  is  a  holder  in  due  course  could  recover  from  the
drawer who had a defense of failure of consideration, for while the restrictive indorsement creating a trust gives notice of this trust to  subsequent   purchasers,   it   did   not   give   notice   of   defenses obtaining between prior parties.  
•      TO MAKE IT EASIER TO UNDERSTAND—first, you have to make a distinction  between  what  kind  of  restrictive  indorsement  was made.  Was it a trust type or an agency type?  If it was an agency type, the indorsee just fills in the shoes of the restrictive indorser.  And  thus,  he  is  susceptible  and  open  to  the  defenses  that  the maker  can  have  against  the  indorser.    It  is  different  if  it  is  trust type  because  the  indorsee  does  not  step  inside  the  shoes of  the indorser  and  thus,  the  maker  can  no  longer  set  up  against  the indorsee his defenses against the indorser.  
 

PRESUMPTION OF CONSIDERATION IN RESTRICTIVE INDORSEMENTS

•      As a general rule, an indorsement of a negotiable bill which purports to pass  the  title  to  the  bill  to  the  indorsee,  imports  a  consideration  and the  burden  of  proving  want  of  consideration  rests  upon  the  party alleging it
•      The   restrictive   indorsements   which   are   held   to   negative   the presumption  of  a consideration  are  such  as  to  indicate  that  they  are intended to pass title but merely to enable the indorsee to collect for the  benefit  of  the  indorser,  such  as  indorsements  “for  collection”  or others showing that the indorser is entitled to the proceeds
•      But  an  indorsement  to  one  person  for  the  use  or  benefit  of  another, affords no such indication.  The indorser parts with the whole title to the bill and the presumption is that he done so for a consideration.
•      The only effect of such an indorsement, by way of restriction, is to give notice  of  the  rights  of  the  beneficiary  named  in  the  indorsement  and protect him against misappropriation
 

EFFECT OF OMISSION OF WORDS OF NEGOTIABILITY

•      The  mere  absence  of  words  of  negotiability  doesn't   make  the indorsement restrictive
•      While  the  omission  of  words  in  the  indorsement  doesn't  affect negotiability of the instrument, such omission in the body thereof will render the instrument non-negotiable
 
Sec.  37.  Effect  of  restrictive  indorsement;  rights  of  indorsee.  -  A restrictive indorsement confers upon the indorsee the right:
 
      (a) to receive payment of the instrument;
       
      (b) to bring any action thereon that the indorser could bring;
       
      (c)  to  transfer  his  rights  as  such  indorsee,  where  the  form  of the indorsement authorizes him to do so. 
 
But  all  subsequent  indorsees  acquire  only  the  title  of  the  first indorsee under the restrictive indorsement.
 

RESTRICTIVE INDORSEE MAY RECEIVE PAYMENT

•      A  restrictive  indorsement  confers  upon  the  indorsee  the  right  to receive payment of the instrument
 

RESTRICTIVE INDORSEE MAY BRING AN ACTION

•      A restrictive indorsement confers upon the indorsee the right to bring any action thereon that the indorser could bring
•      In a restrictive indorsement “for deposit”, can the indorsee such as B in the illustration, bring an action against the indorser, such as A?  Yes if the indorser received value for said indorsement
 

RESTRICTIVE INDORSEE MAY TRANSFER HIS RIGHTS

•      It is stated in the interpretation of the clause in Section 47 declaring a paper  negotiable  in  its  origin  to  continue  negotiable  until  it  has  been restrictively indorsed, is that the words “until it has been restrictively indorsed”  don't  contemplate  every  restrictive  indorsement  but  a restrictive  indorsement  that  prohibits  the  further  negotiation  of  the instrument under subdivision 1 of Section 36
•      Section  46  didn't  mean  to  declare  the  effects  of  a  restrictive indorsement but to preserve as far as possible the negotiability of an instrument negotiable in its origin and that the implication of Section
47  should  not  be  taken  as  destroying  negotiability  of  an  instrument heretofore universally accepted as negotiable
 

EXTENT OF NEGOTIABILITY AFTER RESTRICTIVE INDORSEMENT

•      That  all  forms  of  restrictive  negotiability  impose  some  degree  of limitation on negotiability
•      That they don't all impose the same degree of limitation
•      That the indorsement itself discloses the extent of the limitation in the particular case
 

LIMITATION ON TRANSFER OF RIGHT: ILLUSTRATION

•      But  all  subsequent  indorsees  acquire  only  title  of  the  first  indorsee under the restrictive indorsement
•      Illustrations of this rule:
o      In the indorsement, “pay to A for collection,” the rights of the subsequent    indorsees    are    subject    to    the    restrictive indorsement—namely,   he   can   collect   only   for   being   a restrictive  indorsee,  he  acquires  only  the  title  of  the  first indorsee whose right is merely to collect
o      Suppose the P1000 note is indorsed as “Pay to B for deposit only.  (Sgd.)  A”  and  that B  owes  Y  P1000,  B  cannot  transfer the note to Y for said debt.  Or suppose B transfers the note to another person for P1000, B cannot use the P1000 for his own personal expenses.  He must safely keep the money for
the benefit of A.
o      “Pay to A for account of B”—gives notice that the instrument cannot be negotiated by A for his own debt or benefit 
 
Sec.   38.   Qualified   indorsement.   -   A   qualified   indorsement constitutes  the  indorser  a  mere  assignor  of  the  title  to  the instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import. Such an  indorsement  does  not  impair  the  negotiable  character  of  the instrument.
 

HOW QUALIFIED INDORSEMENT IS MADE

•      By  adding  to  the  indorser’s  signature  the  words  “without  recourse”, “Sans recours”, “indorser not holden”, or “with intent to transfer title only and not to incur liability as indorser”, “at indorsee’s own risk”
 

EFFECT OF QUALIFIED INDORSEMENT 

•      Constitutes the indorser a mere assignor of the title to the instrument 
•      One who indorses without recourse states that all parties to the paper are genuine; I am the lawful owner of the paper and I have title to it and  know  of  no  reason  why  you  could  not  recover  on  it  as  a  valid instrument,  but  on  thing  I  don't  guarantee;  I  don't  guarantee  the financial responsibility on that paper but I do say that I hold the title the same as any other personal property
 

QUALIFIED INDORSER HAS LIMITED SECONDARY LIABILITY

•      He is secondarily liable on his warranties as an indorser under Section 65,  that  is,  the  qualified  indorser  is  liable  if  the  instrument  is dishonored by non-acceptance or non-payment due to:
1.    Forgery
2.    Lack of good title on the part of the indorser
3.    Lack of capacity to indorse on the part of the prior parties
4.    The fact that, at the time of the indorsement, the instrument was valueless or not valid and he knew of that fact
 

A   QUALIFIED   INDORSEMENT   DOESN'T   IMPAIR   THE   NEGOTIABLE CHARACTER OF THE INSTRUMENT

Sec.  39.  Conditional  indorsement.  -  Where  an  indorsement  is conditional, the party required to pay the instrument may disregardthe condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or not. But any person to whom an instrument so indorsed is negotiated will hold the same, or  the  proceeds  thereof,  subject  to  the  rights  of  the  person indorsing conditionally.

ABSOLUTE INDORSEMENT

•      One  by  which  the  indorser  binds  himself  to  pay  upon  no  other condition than the failure of prior parties to do so and upon due notice to him of such failure
 

CONDITIONAL INDORSEMENT

•      An  indorsement  subject  to  a  contingent  event,  that  is,  an event  that may or may not happen, or a past event unknown to the parties
•      Suppose  a  note  for  P1000  with  A  maker,  and  B  payee.    It  is  then indorsed as follows “Pay to Y if he passes the bar examinations. (Sgd.) B”—this is a conditional indorsement as Y may or may not pass the bar examination.
 

OBLIGATION OF CONDITIONAL INDORSEE

•      Y indorsee holds the note or the proceeds thereof, if he is paid by A, subject to the rights of B
•      If  A  disregards  the  condition  and  pays  Y  without  waiting  for  the condition  to  be  fulfilled,  Y  doesn't  immediately  acquire  ownership  of the sum
•      Y must hold in trust while the condition is not fulfilled
•      It is upon the fulfillment of the condition that such ownership over the proceeds of the note is absolutely acquired by the conditional indorsee Y
 

A CONDITIONAL INDORSEMENT DOESN'T RENDER AN INSTRUMENT NON-NEGOTIABLE

 
Sec. 40. Indorsement of instrument payable to bearer. - Where an instrument,   payable   to   bearer,   is   indorsed   specially,   it   may nevertheless  be  further  negotiated  by  delivery;  but  the  person indorsing  specially  is  liable  as  indorser  to  only  such  holders  as make title through his indorsement.
 

APPLICATION OF SECTION 40

•      Section  applies  only  to  instruments  which  are  originally  payable  to bearer
•      Cannot apply where the paper is originally made payable to order and indorsed in blank; for by Section 9, a note or bill which is payable to order  becomes  payable  only  when  the  last  indorsement  is  in  blank;
and  hence,  when  a  blank  indorsement  is  followed  by  a  special indorsement, the instrument is not within the terms of Section 9.
 

NEGOTIATION  OF  INSTRUMENT  PAYABLE  TO  BEARER  BUT  SPECIALLY INDORSED

•      Where   an   instrument   payable   to   bearer   is   indorsed,   it   may nevertheless be further negotiated by delivery 
•      An instrument which is originally payable to bearer is always payable to bearer
•      Hence, even when it has been specially indorsed, it is still payable to bearer
 

EFFECT ON LIABILITY OF SPECIAL INDORSER

Pay P1000 to bearer
(Sgd.) A
*C is bearer and he delivered to D
*D specially indorsed it to E
*E specially indorsed it to F
*F delivered to G, bearer.
•      Is D liable to G being the first who specially indorsed the instrument?  No,  because  G  didn't  take  title  through  D’s  indorsement  but  through delivery of D
•      To whom D is liable? To E and F, because they acquired the title to the instrument  through  the  special  indorsement  of  D.    Had  F  merely indorsed the instrument to G, D would be liable also to G for the same reason.
 
Sec.  41.  Indorsement  where  payable  to  two  or  more  persons.  - Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others.
 
APPLICATION OF SECTION 41
•      Applies only to instruments payable to two or more payees jointly 
 

HOW INDORSEMENT OF JOINT PAYEES MADE

•      Where  the  instrument  is  payable  to  two  or  more  payees,  all  payees must each indorse in order to negotiate the instrument
•      If only one indorses, he passes only his part of the instrument—such an indorsement wouldn't operate as such because it would not be an indorsement of the whole instrument
•      Exceptions to the rule:
1.    Where the payee or person indorsing has authority to indorse for the others
2.    Where the payee or indorsees are partners
 
Sec.  42.  Effect  of  instrument  drawn  or  indorsed  to  a  person  as cashier. - Where an instrument is drawn or indorsed to a person as "cashier"  or  other  fiscal  officer  of  a  bank  or  corporation,  it  is
deemed  prima  facie  to  be  payable  to  the  bank  or  corporation  of which  he  is  such  officer,  and  may  be  negotiated  by  either  the indorsement of the bank or corporation or the indorsement of the
officer.
 
APPLICATION OF SECTION 42
Pay P1000 to the order of cashier, Lyceum of the Philippines.
 
(Sgd.) A
 
•      Presumption is that the note is payable to Lyceum, not to the cashier personally
•      And  the  note  may  be  indorsed  by  any  duly  authorized  officer  of Lyceum other than the cashier
 

DISPUTABLE PRESUMPTION

 
Sec.  43.  Indorsement  where  name  is  misspelled,  and  so  forth.  - Where  the  name  of  a  payee  or  indorsee  is  wrongly  designated  or misspelled,  he  may  indorse  the  instrument  as  therein  described
adding, if he thinks fit, his proper signature.
 
APPLICATION OF SECTION 43
•      An instrument drawn or indorsed to “Juan Dytuco” whose real name is “Juan Dyjuco” may be indorsed as follows:
o      Pay to Y (Sgd.) Juan Dytuco    Juan Dyjuco
o      Or (Sgd.) Juan Dyjuco

Sec.  44.  Indorsement  in  representative  capacity.  -  Where  any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability. 
 

HOW AGENT MUST INDORSE?

1.    He must add words describing himself as agent
2.    At the same time, disclose his principal
3.    He must be duly authorized
 
Sec.  45.  Time  of  indorsement;  presumption.  -  Except  where  an indorsement bears date after the maturity of the instrument, every negotiation is deemed prima facie to have been effected before the instrument was overdue.
 
DISPUTABLE PRESUMPTION
 

IMPORTANCE OF THIS PROVISION

•      This  provision  becomes  importance  when  considered  in  connection with Section 52 (b)
•      Under  the  provision,  in  order  that  one  may  become  a  holder  in  due course,  the  instrument  must  be  negotiated  to  him  before  it  becomes overdue
•      The  indorsement  without  date  establishes  a  prima  facie  presumption that the instrument was indorsed before maturity and one who denies that  the  holder  of  such  instrument  is  a  holder  in  due  course  has  the burden of proof
 
Sec.  46.  Place  of  indorsement;  presumption.  -  Except  where  the contrary  appears,  every  indorsement  is  presumed  prima  facie  to have been made at the place where the instrument is dated.
 

IMPORTANCE OF PLACE OF INDORSEMENT

•      The   place   of   indorsement   is   sometimes   material   because   an indorsement is governed by the laws of the state where it is indorsed, although the instrument is drawn or made in a different state
 
Sec.  47.  Continuation  of  negotiable  character.  -  An  instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise.
 

WHEN NEGOTIABLE INSTRUMENT RENDERED NON-NEGOTIABLE

1.    Restrictive   indorsement   which   further   prohibits   the   further negotiation of an instrument 
2.    By a discharge thereof by payment or otherwise
 

NEGOTIABILITY AFTER DATE OF MATURITY

•      FIRST  VIEW:  negotiability  ceases  in  the  full  commercial  sense  after maturity  and  negotiability  ceases  by  default  of  the  maker  in  his payment
•      SECOND VIEW: negotiability continues even after maturity
•      RECONCILIATION  OF  THE  TWO:  the  mercantile  character  of  the instrument  as  a  negotiable  paper  and  of  the  contracts  of  the  several parties to it, continues after maturity and until it is paid except: that an indorsee or a transferee after maturity takes the instrument subject to  defenses  between  original  parties,  because  after  maturity  such subsequent parties take the instrument after it becomes overdue and therefore,  under  paragraph  b  of  Section  52,  they  are  not  holders  in due course
•      After  maturity,  an  instrument  originally  negotiable  continues  to  be negotiable in the sense that the contracts of the parties to it continue and are governed by the Negotiable Instruments Law
•      After maturity the instrument ceases to be negotiable in the sense that a transferee after maturity is not a holder in due course and therefore not free from defenses obtaining between prior parties
 

LEGAL POSITION OF HOLDER TAKING OVERDUE INSTRUMENT

•      He is a holder with notice.  He may or may not be a holder for value and his rights will be regulated accordingly.  He takes a bill which on the face of it, ought to have been paid.
•      He is bound to make two inquiries—has what ought to have been done really have been done?  And if not, why not?
 

RIGHT OF HOLDER NOT IN DUE COURSE

•      He can recover checks in his possession but the only disadvantage is that the negotiable instrument is subject to the defenses as if it were non-negotiable

Indorsement of Negotiable Instruments