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NEGOTIABLE INSTRUMENTS: CHAPTER IV - DEFENSES & EQUITIES - Coggle…

- - - - FORGERY
        
        A. IN GENERAL
        
        B. ACCEPTANCE & PAYMENT UNDER MISTAKE
        
        WHEN DRAWEE ACCEPTS OR PAYS FORGED INSTRUMENT
        
        EXTENSION OF PRICE v. NEAL DOCTRINE
        
        (a) OVERDRAFT
        
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        EFFECT OF NEGLIGENCE OF DEPOSITOR
        
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        IF DRAWER'S SIGNATURE IS FORGED, DRAWEE CANNOT CHARGE IT TO DRAWER'S ACCOUNT
        Where the drawer's signature is forged on a bill or check, the drawee who pays it without having detected the forgery cannot charge the amount thereof to the drawer's account.
        The forged signature is wholly inoperative and does not give him the right to discharge it.
        
        FROM WHOM MAY THE DRAWEE RECOVER?
        Since the forger would usually be insolvent, the drawee would have to look for recourse elsewhere and his most logical target would be the person to whom he paid the forged bill or check. Would the drawee have the right to recover from such recipient the amount represented by the forged bill?
        
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        CUT-OFF RULE (SEC. 62)
        NIL 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.
        
        DOES NOT APPLY TO CHECKS OR
        BOEs PAYABLE ON DEMAND
        
        SEC. 62 DOES NOT APPLY TO PAYMENT OF CHECK TO DRAWEE
        
        The warranty established by Sec. 62 is in favor of holders of the instrument after its acceptance.
        
        When the drawee bank cashes or pays a check, the cycle of negotiation is terminated, and it is illogical thereafter to speak of subsequent holders who can invoke the warranty provided in Sec. 62 against the drawee.
        
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        ACCEPTANCE IN SEC. 191 DOES NOT APPLY TO PAYMENT OF CHECK TO DRAWEE TOO.
        Under Sec. 191, "acceptance" means "an acceptance completed by delivery or notification" and this concept is entirely incompatible with payment
        
        The holder can never claim acceptance as his legal right. He can present for payment.
        
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        FORGERY IS A REAL DEFENSE
        Forgery is a real or absolute defense by the party whose signature is forged.
        (Samsung v. FEBTC)
        
        v If drawer’s sign forged
        ³ Drawee liable
        ³ Drawer not
        ³ Indorser liable
        v If indorser sign forged
        ³ Drawee liable because subsequent to forgery
        ³ Drawer not liable because prior
        ³ Indorser – only those subsequent to forgery is liable
        
        FORGERY OF DRAWEE-ACCEPTOR'S SIGN DOES NOT MAKE DRAWEE LIABLE
        v If drawee acceptor signature forged
        ³ Drawee himself not liable
        EFFECTS NON-ACCEPTANCE TRIGGERING LIABILITY OF SECONDARY PARTIES
        ³ Drawer & ondorser liable as secondary liable parties
        ³ Cut off rule NOT applicable since only applies to nego
        ® For BoE, go back to basic principle of liability
        ® If drawer sign forged, then that means there was non-cceptance
        ® If primarily liable drawee no accept or no pay, secondarily liable will come in
        ® Aka holder recourse will go to secondary liabile parties drawer and indorsers
        
        Sec. 23. Forged signature; effect of. - When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.
        
        Sec. 18. Liability of person signing in trade or assumed name. - No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise expressly provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name.
        
        Under Section 23, forgery is a real defense. A person whose signature to an instrument was forged was never a party and never consented to the contract which allegedly gave rise to such instrument. Since his signature does not appear on the instrument, he cannot be held liable thereon by anyone, not even by a holder in due course. If a person's signature is forged as a maker of a promissory note, how can he be made to pay when he never made the promise? Similarly, where a person's signature is forged as a drawer of a check, how can the drawee bank charge the amount thereof against the alleged drawer's account when he never gave the bank any order to pay? The fact that the holder is a holder in due course is clearly immaterial since there is no true maker or drawer of the instrument.
        
        Section 23 deals with two sets of situations:
        (1) where the signature on the instrument is affixed by one who purports to be an agent but who does not have the authority to bind the alleged principal; and
        (2) where the signature is affixed by one who does not claim to act as an agent and who has no authority to bind the apparent signer. The signature in both cases is "wholly inoperative" and no one can gain title to the instrument through it. Any party subsequent to the forgery would be unable to acquire any rights against any party prior to the forgery. The law makes an exception to this rule where the party against whom it is sought to enforce a right is precluded from setting up the forgery or want of authority. Whether estoppel is present or not will depend on the facts of each case. As to whether "precluded" includes ratification has been the subject of conflicting views. One view holds that a forged signature cannot be i:atified because ratification involves the relation of agency, and a forger does not assume to act for an• other. 16 Another view distinguishes between forgery which amounts to a crime and one which does not, and allows ratification in the letter case only. 17 Others make no such distinction, and hold that one whose signature has been forged and who, knowing all the circumstances, acknowledges the signature is bound as if the note had been signed by him originally, regardless of whether his acknowledgment amounts to an estoppel or not.
        
        The NIL gives at least two situations where a party is precluded to use the defense of forgery. A general indorser subsequent to the forgery warrants among other things that the instrument is genuine, and that it is valid and subsisting at the time of his indorsement. His warranty therefore precludes him from setting up forgery as a defense. Similarly, an acceptor is precluded from claiming that the drawer's signature is forged, because under Section 62 he warrants its genuineness,
        
        The inoperativeness of a forged signature may be illustrated as follows:
        Suppose A makes a note payable to B or order. B indorses i~ specially to C, in whose hands it is stolen by D. D forges C's S1gnature and sells the instrument to E. E indorses it to F. a holder in due course. We have thus the following indorsements on the back of the note.
        
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        MATERIAL ALTERATION
        
        a. IN GENERAL
        
        b. EFFECT OF NEGLIGENCE OF DRAWER OF CHECKS
        
        c. EFFECT OF DRAWEE'S PAYMENT OR ACCEPTANCE OF ALTERED CHECK
        
        WHAT MATERIAL ALTERATION CONSTITUTES: ANY CHANGE OF:
        Sec. 125. What constitutes a material alteration. - Any alteration which changes:
        
        DATE
        (a) The date;
        
        SUM PAYABLE
        a. PRINCIPAL; OR
        b. INTEREST
        (b) The sum payable, either for principal or interest;
        
        TIME or PLACE OF PAYMENT
        (c) The time or place of payment
        
        NUMBER or RELATIONS OF PARTIES
        (d) The number or the relations of the parties;
        
        MEDIUM/CURRENCY IN WHICH PAYMENT IS MADE
        (e) The medium or currency in which payment is to be made;
        
        ADDING PLACE OF PAYMENT
        a. WHEN NO PLACE OF PAYMENT IS SPECIFIED
        
        ANY OTHER CHANGE OR ADDITION ALTERING THE EFFECT OF THE INSTRUMENT IN ANY RESPECT
        (f) Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration.
        
        HIDC MAY DEMAND ORIGINAL AMOUNT/INTEREST IF SUCH WAS ALTERED
        Where the alteration is of the amount, the holder in due course can recover the original sum.
        Where the interest rate is altered, the holder in due course can recover the principal sum with the original rate of interest. 54
        
        IF NOT HIDC, HE CANNOT RECOVER ANYTHING. THE DRAWEE BANK CANNOT CHARGE THE DRAWER'S ACCOUNT
        If the holder is not one in due course, he cannot recover anything and the drawee bank cannot charge any part of the amount against the drawer's account.
        
        MATERIAL ALTERATION
        AVOIDS THE INSTRUMENT REGARDLESS OF FRAUD OR BENEFIT/PREJUDICE
        Since Section 124 makes no distinction, the instrument will be avoided whether the material alteration was made with or without fraudulent intent, and whether it proves beneficial or prejudicial to the interests of prior parties. 66
        
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        DRAWEE MAY CHARGE THE DRAWER'S ACCOUNT FOR THE ORIGINAL AMOUNT
        The drawee bank can likewise charge the drawer's account with the original amount.
        
        IF DATE OF PAYMENT IS CHANGED, ORIGINAL DATE OF MATURITY DETERMINES WHETHER THE HOLDER IS HIDC.
        Where the date of payment is changed, the original date of maturity controls in determining whether or not a holder is a holder in due course. 55
        
        MATERIAL ALTERATION
        PERSONAL DEFENSE IF USED TO DENY LIABILITY ACCORDING TO ORIGINAL TENOR
        Material alteration is therefore a personal defense when used to deny liability according to the original tenor of the instrument, but is a real defense when relied on to deny liability according to the altered terms.
        
        REAL DEFENSE WHEN RELIED TO DENY LIABILITY ACCORDING TO ALTERED TERM.
        
        MATERIAL ALTERATION = AVOIDED
        Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided,
        
        BUT NOT AVOIDED TO:
        
        PARTY WHO AUTHORIZED OR ASSENTED TO THE ALTERATION; AND
        
        SUBSEQUENT INDORSERS
        except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers.
        
        HOLDERS IN DUE COURSE MAY ENFORCE PAYMENT
        But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce payment thereof according to its original tenor.
        
        PRESUPPOSES THAT INST HAS NO IRREGULARITY ON ITS FACE
        On the other hand, a holder in due course may enforce the altered instrument according to its original tenor. This presupposes of course that the alteration is not apparent on the face of the instrument, otherwise it would be irregular and no holder thereof can be a holder in due course.
        
        RATIONALE: NOT AVOIDED TO SUBSEQUENT INDORSER BECAUSE OF HIS WARRANTY
        A subsequent indorser is excepted from this rule because by the indorsement he warrants, among other things, that the instrument is in all respects what it purports to be and that it was valid and subsisting at the time of his indorsement.
        
        RATIONALE: CHANGES THE CONTRACT
        A material alteration, since it changes the contract of the parties, avoids the instrument and discharges all parties, unless they authorized or consented to the alteration. (Campos)
      - Illegality is generally a personal defense not available against holders in due course. Article 1409 of the Civil Code enumerates the contracts which are void, inexistent, and incapable of ratification. Among these is a contact with an illegal cause. Since such a contract is not merely voidable but is no contract at all, its illegality should normally be a real defense available even as against holders in due course. On the other hand, Section 55 of the NIL treats illegal consideration as a mere personal defense. Thus we have here a situation where although the contract lacks the essential element of a lawful cause or consideration, the law treats the defect as a defense available only as against holders not in due course. The Civil Code and the NIL are not inconsistent with each other because they deal with different situations. While the former specifies what contracts are void and inexistent, the latter in effect provides that though a negotiable instrument may have been issued or negotiated for an illegal consideration, only the parties involved in the illegality and subsequent parties who are not holders in due course can be adversely affected by such defect. Thus, although a gambling note may be unenforceable between the original parties by reason of illegal consideration, it is valid and enforceable in the hands of a holder in due course, who can recover its full amount against the maker.13 This is so not only because of Section 55 but also because Act 1757 provides that a promise to pay money lost at gambling is void, except as to a purchaser for value before maturity, in good faith and without notice. u
        
        The defense of usury is merely personal and not real under Section 7 of the Usury Law which in part provides:
        
        " ... And provided further, that 11othing herein contained shall be construed to prevent the purchase by an innocent purchaser of a negotiable mercantile paper usurious or otherwise, for valuable consideration before maturity when there has been no intention on the part of said purchaser to evade the provisions of this Act and said purchase was not part of the original usurious transaction. In any case, however, the maker of said note shall have the right to recover from said original holder the whole interest paid by him thereon and, in case of litigation, also the costs and such attorney's fees as may be allowed by the court." (Act 2655 as amended.)
        
        A statute may however declare a contract void for all purposes, in which case the defense of illegality becomes real. 15
    - - Suppose A makes a note payable to B, a minor. B indorses the note to C, who in turn indorses it to D. Upon maturity, D sues the maker A. May A set up the defense of minority of B? He cannot do so because under Section 22, the indorsement of the instrument by an infant passes the property therein. Furthermore, under Section 60, he warrants the capacity of the payee to indorse.
        
        Suppose that A cannot pay the instrument because he is insolvent, and D sues B, may B set up the defense of minority against D? Yes, because B's contract of indorsement is voidable under our law, and this law, as previously stated, is not changed by Section 22 which precisely states that title passes to the minor's indorsee, notwithstanding that from want of capacity the infant may incur no liability on .the instrument.
        
        Suppose that D sues C instead, is O liable to D? Yes, not only because of Section 22 but also because of Section 66, under which an indorser warrants the capacity of all prior parties.
        
        Suppose that in the same illustration, D knew at the time he took the note that B is a minor, can he still be a holder in due course? It is submitted that he can because his knowledge of the minority will not constitute notice of "defect" or "infirmity", for Section 22 precisely cures that defect or infirmity by allowing title to pass to the minor's indorsee. Therefore, suppose that A, besides the defense of minority, sets up against D the defense of failure of consideration between A and B (which defense is merely personal, as we shall see later), D, who takes with notice of B's minority but without notice of the failure of consideration, can still recover from A.
        
        Minority is therefore a real defense available only to the minor, and is not even a personal defense which may be availed of by parties other than such minor.
        
        The same rules would apply in case the indorser is a corporation which has no capacity to indorse under its charter.
        
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  - - - Section 55 enumerates the circumstances which renders a holder's title defective and implies the right of the real owner of the instrument who was deprived of his possession through any of such circumstances to get the instrument back from the guilty holder or from any subsequent holder who is not a holder in due course. If it comes to the hands of a holder in due course, the latter is free from the defect of title of any prior party and the true owner will therefore not have the right to recover its possession from him.
        
        Real defenses include forgery,• incapacity,6 fraud in the execution, some types of duress, and lack of delivery of an incomplete instrument.6 Personal defenses would include those mentioned in Section 55, want of consideration,7 incompleteness of the instrument, 8 and lack of delivery of a completed instrument. 9
        
        Though "equities" refer to claims of ownership, the term "defenses" is often used to include them. In the following discussion, the distinction in terms will not be stressed, and attention will be centered mainly on whether a claim or defense is available against all holders or only against holders not in due course
  - - - Sec. 55. When title defective. - The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud.