Sec. 119. Instrument; how discharged. - A negotiable instrument is discharged:
 
      (a)  By payment  in due course by or on behalf of the  principal debtor;
        
      (b)  By  payment  in  due  course  by  the  party  accommodated, where the instrument is made or accepted for his accommodation;
        
      (c) By the intentional cancellation thereof by the holder;
        
      (d) By any other act which will discharge a simple contract for the payment of money;
        
      (e)  When  the  principal  debtor  becomes  the  holder  of  the instrument at or after maturity in his own right.  
 

PAYMENT BY PRINCIPAL DEBTOR

•      In order to discharge the instrument, the payment must be a payment in due course, and second, a payment made by the principal debtor
•      If payment is made before the date of maturity, the instrument is not discharged as the payment is not in due course
•      Where payment is made by a party who is not a primary obligor or an accommodation party, his payment only conceals his own liability and those  who  are  obligated  after  him.    All  prior  parties  primarily  or secondarily liable on the bill, are liable to such a payer, and the payer may  cancel  indorsements  subsequent  to  his  own  and  reissue  the paper, and it will be valid as against the prior parties
 

PAYMENT BY THIRD PERSONS

•      If payment is made by a third person, the instrument is not discharged because payment is not made by the person principally liable
•      Not any one who desires may pay the instrument and then recover of the maker.  He must be a person who has in some way made himself liable for the payment of the instrument.
•      Exception:  where  an  instrument  has  been  protested  and  someone voluntarily  makes  payment  supra  protest  or  for  honor.    And  if  the instrument   was   to   give   money   in   payment,   the   instrument   is discharged.
 

SUMMARY OF DISCHARGE BY PAYMENT

1.    Payment  by  a  person  ultimately  liable,  whatever  his  position  in  the paper, is a discharge of the instrument
2.    Payment   by   an   accommodation   party   isn’t   a   discharge   of   the instrument,   whatever   his   position   thereon   and   whether   the indorsement be regular or anomalous
3.    Payment by the drawer or indorser is not a discharge of the instrument
 
PRINCIPAL DEBTOR
•      Person ultimately bound to pay the debt
 

PAYMENT BY CHECK OR OTHER NEGOTIABLE PAPER

1.    When they actually have been cashed or
2.    When, through the fault of the creditor, they have been impaired
•      A creditor isn’t bound to accept a check in satisfaction of his demand because  a  check,  even  if  good  when  offered,  doesn’t  meet  the requirements of legal tender
 

WAIVER OF OBJECTION TO TENDER OF PAYMENT BY CHECK

•      It is the general rule that an object to a tender must, to be available to the creditor, be made in good time and that the grounds for objection must be specified; and that an objection to tender on one ground is a waiver of all other objections which could have been made at that time
•      It is ordinarily required of one to whom payment is offered in the form of a check, that he makes his objection at the time of the offer of by check instead of an offer of payment in money
•      Reason for the rule—to afford the debtor the opportunity to secure the specific money which the law prescribes shall be accepted in payment of debts
 

PAYMENT BY ACCOMMODATED PARTY

•      The  one  ultimately  liable  on  the  accommodation  instrument  is  the latter
•      Hence,  his  payment  in  due  course  discharges  the  instrument  as  if payment was made by the principal debtor under paragraph (a)
 

INTENTIONAL CANCELLATION

•      The cancellation must be intentional and made by the holder
•      There  must  be  an  intention  to  cancel  a  negotiable  instrument  by  the holder  thereof  as  such  intention  is  an  essential  element  of  discharge on a negotiable instrument and a negotiable note in a torn condition is presumed cancelled by the holder thereof
 

WILL AN EXTENSION OF TIME GRANTED BY THE HOLDER TO THE DEBTOR DISCHARGE THE INSTRUMENT?

•      No, according to the majority view
•      Because while it isn’t  omitted in Section 120, it  is omitted in Section 119
•      Shows the legislative intent to that an extension of time by the holder will not discharge the instrument
 

PRINCIPAL DEBTOR ACQUIRES INSTRUMENT

•      Reacquisition must be by the principal debtor and in his own right at or after the date of maturity
•      In his own right—not in a representative capacity
 

WHEN INSTRUMENT REACQUIRED BEFORE MATURITY

•      A  reacquisition  by  the  principal  debtor  in  his  own  right  but  before maturity will not discharge the instrument
•      It will merely be a negotiation back to the principal debtor
 
DISCHARGE BY OPERATION OF LAW 

Sec.  120.  When  persons  secondarily  liable  on  the  instrument  are discharged.  -  A  person  secondarily  liable  on  the  instrument  is discharged:
 
      (a) By any act which discharges the instrument;
       
      (b)  By  the  intentional  cancellation  of  his  signature  by  the holder;
       
      (c) By the discharge of a prior party;
       
      (d) By a valid tender or payment made by a prior party; 

      (e) By a release of the principal debtor unless the holder's right of  recourse  against  the  party  secondarily   liable  is  expressly reserved;
       
      (f)  By  any  agreement  binding  upon  the  holder  to  extend  the time  of  payment  or  to  postpone  the  holder's  right  to  enforce  the instrument  unless  made  with  the  assent  of  the  party  secondarily liable or unless the right of recourse against such party is expressly reserved. 
 

EFFECT OF SECTION 120 IS A SURETYSHIP

•      Generally the courts regard this provision as exclusive, as a complete codification  of  the  law  of  discharge  of  secondary  parties  by  the  six methods therein set forth
 

ACTS THAT DISCHARGE INSTRUMENT

•      Any  of  the  acts  that  will  discharge  an  instrument  under  Section  119 will  discharge  a  party  secondarily  liable  thereon,  such  as  payment  in due course by the maker.  This will discharge the indorsers in the note.
 

DISCHARGE BY OPERATION OF LAW IS NOT INCLUDED

1.    Discharge by reason of bankruptcy
2.    Discharge of a party not given due notice of dishonor
3.    Discharge by the statute of limitations
 

VALID TENDER OF PAYMENT

•      If  D  an  indorser  validly  tenders  payment  and  F  unjustifiably refuses to do accept, D is discharged
•      Tender  of  payment:  act  by  which  one  produces  and  offers  to  a person  holding  a  claim  or  demand  against  him  the  amount  of money which he considers and admits to be due, in satisfaction of
such claim or demand without any stipulation or condition
 

RELEASE MUST BE ACT OF HOLDER
 
RELEASE MUST BE FOR VALUE
 

EFFECT OF RELEASE ON ACCOMMODATION MAKER OR ACCEPTOR

•      General rule is that he is not discharged by the holder’s release of the principal  debtor  even  if  the  release  be  made  with  knowledge  or  true relation   of   the   parties   and,   conversely,   the   release   of   the accommodation  maker  or  acceptor  doesn’t  discharge  the  principal debtor through the latter occupies the position of a party secondarily liable on the instrument
 

EXTENSION OF TIME

•      If the holder agrees to extend the time of payment, the indorsers are discharged
•      However,  where  the  extension  of  time  is  consented  to  by  the  party secondarily  liable,  he  is  not  discharged.    Also,  where  the  holder expressly reserves his  right of recourse against the party  secondarily liable, the latter is not discharged.
 

REQUISITES OF AGREEMENT FOR EXTENSION OF TIME

1.    It must be a binding contract, supported by valuable consideration and for a definite period
2.    It  must  be  made  with  the  principal  debtor  and  not  with  a  third party
 
Sec.  121.  Right  of  party  who  discharges  instrument.  -  Where  the instrument  is  paid  by  a  party  secondarily  liable  thereon,  it  is  not discharged;  but  the  party  so  paying  it  is  remitted  to  his  former  rights as regard all prior parties, and he may strike out his own and all subsequent indorsements and against negotiate the instrument, except:
 
      (a) Where it is payable to the order of a third  person and has been paid by the drawer; and
       
      (b) Where it was made or accepted for accommodation and has been paid by the party accommodated. 

Sec.  122.  Renunciation  by  holder.  -  The  holder  may  expressly renounce his rights against any party to the instrument before, at, or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of  the  instrument  discharges  the  instrument.  But  a  renunciation does not affect the rights of a holder in due course without notice. A  renunciation   must  be  in  writing  unless  the   instrument  is delivered up to the person primarily liable thereon.
 

APPLICATION OF SECTION 122

1.    Applies only to renunciation by the unilateral act of the holder without consideration and in cases where the instrument is not delivered up to the person intended to be released
2.    Renunciation—act of surrendering a right or claim without recompense but  it  can  be  applied  with  equal  propriety  to  the  relinquishing  of  a demand upon an agreement supported by a consideration
 
FORM OF RENUNCIATION
     It must be in writing and must be express
 
TIME FOR MAKING RENUNCIATION
1.    Before maturity
2.    At maturity
3.    After maturity
 

WHEN RENUNCIATION DISCHARGES INSTRUMENT

1.    Renunciation  discharges  the  instrument  when  it  is  absolute  and unconditional
2.    It is made in favor of the person primarily liable 
3.    It is made at or after maturity
 
Sec.   123.   Cancellation;   unintentional;   burden   of   proof.   -   A cancellation  made  unintentionally  or  under  a  mistake  or  without the authority of the holder, is inoperative but where an instrument or  any  signature  thereon  appears  to  have  been  cancelled,  the burden of proof lies on the party who alleges that the cancellation was made unintentionally or under a mistake or without authority.
 

MEANING OF CANCELLATION

     Signifies  not  only  the  drawing  of  criss-cross  lines  but  also  tearing, obliterations, erasures or burning 
     It may be made by any other means by which the intention to cancel the instrument may be evident
 

WHEN CANCELLATION IS INOPERATIVE

1.    When made unintentionally

2.    When made under mistake
3.    When made without the authority of the holder
 
BURDEN  OF  PROOF  IS  UPON  THE  PERSON WHO  CLAIMS  THAT  THE CANCELLATION IS INOPERATIVE