Defenses 3r5r73

VI. DEFENSES Kinds: 1. Real/Absolute Defenses - those that attach to the instrument itself and are available against all holders, whether in due course or not. Examples: a. Alteration; b. Non-delivery of incomplete instrument; c. Duress amounting to forgery; d. Fraud in factum or fraud in esse contractus; e. Minority; f. Marriage in the case of a wife; g. Insanity where the insane person has a guardian appointed by the court; h. Ultra vires acts of a corporation, where the corporation is absolutely prohibited by its charter or statute from issuing any commercial paper under any circumstances; i. Want of authority of agent; j. Execution of instrument between public enemies; k. Illegality of contract where it is the contract or instrument itself which is expressly made illegal by statute; and l. Forgery. Personal/Equitable Defenses – those which are available only against a person not a holder in due course or a subsequent holder who stands in privity with him. Examples: a. Absence or failure of consideration, partial or total; b. Want of delivery of complete instrument; c. Insertion of wrong date in an instrument, where it is payable at a fixed period after date and it is issued undated or where it is payable at a fixed period after sight and the acceptance is undated; d. Filling up of blank contrary to authority given or not within reasonable time, where the instrument is delivered; e. Fraud in inducement; f. Acquisition of instrument by force, duress, or fear; g. Acquisition of the instrument by unlawful means; h. Acquisition of the instrument for an illegal consideration; i. Negotiation in breach of faith; j. Negotiation under circumstances that amount to fraud; k. Mistake; l. Intoxication (according to better authority); m. Ultra vires acts of corporations where the corporation has the power to issue negotiable paper but the issuance was not authorized for the particular purpose for which it was issued; n. Want of authority of agent where he has o. apparent authority; p. Insanity where there is no notice of insanity on the part of the one contracting with the insane person; and q. Illegality of contract where the form or consideration is illegal.

diligence could have discovered the nature of the instrument, the fraud cannot be considered a real defense, as where a person, who can read, signed a note but failed to read it. Effects of Defenses: 1.

Complete and undelivered instrument • as between immediate parties and as regards a remote party other than a holder in due course, the delivery must be authorized in order to be effectual • where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed • where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved

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Incomplete but delivered instrument • where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. • it must be filled up strictly in accordance with the authority given and within a reasonable time • if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time.

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Incomplete and undelivered instrument • it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. • However, subsequent indorsers are liable.

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Forgery • counterfeit making or fraudulent alteration of any writing, which may consist of: 1. g of another’s name with intent to defraud; or 2. alteration of an instrument in the name, amount, name of payee, etc. with intent to defraud.

2.

FRAUD IN FACTUM 1. It exists in those cases in which a person, without negligence, has signed an instrument which was in fact a negotiable instrument, but was deceived as to the character of the instrument and without knowledge of its, as where a not was signed by one under the belief that he was g as a witness to a deed. 2. This kind of fraud is a real defense because there is no contract. It implies that the person did not know what he was g. But where the signer by the exercise of reasonable

FRAUD IN INDUCEMENT 1. It is that which related to the quality, quantity, value or character of the consideration of the instrument. In this case, the signer is led by deception to execute what he knows is a negotiable instrument. It implies that the signer knew what he was g but that he was induced by fraud to sign. 2. Such type of fraud is only a personal defense because it does not prevent a contract.

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Effect: signature is wholly inoperative, and no right to retain the instrument, or to give a discharge therefore, or to enforce payment thereof against any party thereto, can be acquired through or under such signature Exception: unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.

Cut-Off Rule General Rule: Parties prior to the forged signature are cutoff from the parties after the forgery in the sense that prior parties cannot be held liable and can raise the defense of forgery. The holder can only enforce the instrument against parties who became such after the forgery. Exception: When the prior parties are precluded from setting up the defense of forgery. Persons precluded from setting up the defense of forgery are: 1. Those who by their acts, silence, or negligence, are estopped from setting up the defense of forgery; 2. Those who warrant or it the genuineness of the signature in question. These include acts or omissions that amount to ratification, express or implied. Note: Persons precluded from setting up the defense of forgery may still recover damages under the NCC provisions on quasidelicts.

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Rules on Forgery: Promissory Notes 1. Maker’s signature forged Order Instrument a. Maker is not liable because he never became a party to the instrument. b. Indorsers subsequent to forgery are liable because of their warranties. c. Party who made the forgery is liable. Bearer Instrument a. Maker is not liable. b. Indorsers may be made liable to those persons who obtain title through their indorsements. c. Party who made the forgery is liable. 2. Payee’s signature forged Order Instrument a. Maker and payee not liable b. Indorsers subsequent to the forgery is liable. c. Party who made the forgery is liable Bearer Instrument a. Maker is liable. Indorsement is not necessary to title and the maker engages to pay holder. b. Party who made the forgery is liable 3. Indorser’s signature forged Order Instrument a. Maker, payee, and indorser who signature was forged is not liable. b. Indorsers subsequent to forgery are liable because of their warranties. c. Party who made the forgery is liable. Bearer Instrument a. Maker is liable. Indorsement is not necessary to title and the maker engages to pay holder. b. Indorser whose signature was forged is not liable Party who made the forgery is liable. • A.

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B. Bill of Exchange 1. Drawer’s signature forged In an Order Instrument a. Drawer is not liable. b. Drawee is liable if it paid (nor recourse to drawer) because he itted the genuineness of the drawer’s signature. Drawee cannot recover from the collecting bank because there is no privity between the collecting bank and the drawer. There is no warranty as to the signature of the drawer. (Associated Bank v. CA) c. Indorsers subsequent to forgery are liable. d. Party who made the forgery is liable In a Bearer Instrument a. Drawer is not liable b. Drawee is liable if it paid. Drawee cannot recover from the collecting bank because it is bound to known the drawer’s signature since the latter is its depositor. c. Party who made the forgery is liable. 2.

Payee’s signature forged Order Instrument a. Drawer, drawee and payee not liable. Cut-off rule applies. b. Indorsers subsequent to forgery are liable. c. Party who made the forgery is liable Bearer Instrument a. Drawer is liable. His indorsement is not necessary to title. b. Drawee is liable. No privity between drawer and

c. d. e. 3.

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payee because indorsement of payee is not necessary (Ang Tek Lian case, 87 SCRA 383) Payee is not liable Collecting bank is liable because of warranty. Party who made the forgery is liable.

Indorser’s signature forged Order Instrument a. Drawer, payee and indorser whose signature was forged are not liable. b. Drawee is liable if it paid. c. Indorsers subsequent to forgery are liable. d. Party who made the forgery is liable. Bearer Instrument a. Drawer is liable. Indorsement is not necessary to title. b. Drawee is liable. c. Indorser whose signature was forged is liable because indorsement is not necessary to title. d. Party who made the forgery is liable

Alteration • Effect: the instrument is avoided • Exceptions: 1. against a party who has himself made, authorized, or assented to the alteration 2. subsequent indorsers 3. holder in due course not a party to the alteration - he may enforce payment according to its original tenor • Changes constituting material alteration: 1. date; 2. sum payable, either for principal or interest; 3. time or place of payment; 4. number or relations of the parties; 5. medium or currency in which payment is to be made; 6. that which adds a place of payment where no place of payment is specified; and 7. any other change or addition which alters the effect of the instrument in any respect. Note: a material alteration is one that alters the effect of the instrument; one which changes the items required to be stated under Sec. 1, NIL. • •

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Spoliation – alteration made by a stranger. The general rule denies the drawee bank’s right to charge against the drawer’s the amount of an altered check. However, the latter’s negligence, before or after the alteration, may estop him from setting such alteration as against an innocent drawee bank who has paid the check. In cases of altered checks and checks with forged indorsements, the drawee bank must notify and return them to the collecting bank before 4:00 p.m. of the next day of clearing, but the drawee bank may still return them even after such time provided he does so within 24 hours from its discovery of the alteration or forged instruments so that recovery of the amount may be had. BUT, in no event beyond the period fixed or provided by law for filing of a legal action by the returning bank against the bank sending the same. Note: Alteration is only a partial real defense because a holder in due course can still enforce it according to its original tenor.