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
• 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
MONTINOLA V. PNB
88 PHIL 178
*Remember the case with the Japanese occupation and the mutilated
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
2. In blank
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.
• 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”
• 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:
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.
• 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
• 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
*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
APPLICATION OF SECTION 42
Pay P1000 to the order of cashier, Lyceum of the Philippines.
• 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
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.
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