V.

DEFENSES  good faith in Section 52(c) but viewed from a somewhat different angle. Said clause
A. In general-§55,57,58NIL  has regard to the attitude of the taker of the instrument, while Section 55 emphasizes
SEC. 55. When title defective. — The title of a person who negotiates an instrument rather the honesty of the negotiator as brought to the notice of the taker. The object
is defective within the meaning of this Act when he obtained the instrument, or any of the whole is, however, a single one — to require a thoroughly honest and fair
signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for transaction to constitute one a holder in due course. (Fehr v. Campbell, 52 ALR 506.
an illegal consideration, or when he negotiates it in breach of faith, or under such
circumstances as amount to a fraud. B. Incapacity-§22, NIL; see also Articles 3127,1388,1390 of the Civil Code 
SEC. 22. Effect of indorsement by infant or corporation. —The corporation,
SEC. 57. Rights of holder in due course. — A holder in due course holds the indorsement or assignment of the instrument by a corporation or by an infant passes
instrument free from any defect of title of prior parties, and payee from defenses the property therein, notwithstanding that from want, of capacity the corporation or
available to prior parties among themselves. and  may enforce payment of the infant may incur no liability thereon.
instrument for the full amount thereof against all parties liable thereon.
Art. 1388. Whoever acquires in bad faith the things alienated in fraud of creditors,
SEC. 58. When subject to original defenses. — In the hands of any holder other than shall indemnify the latter for damages suffered by them on account of the alienation,
a holder in due course, a negotiable instrument is subject to the same defenses as if it whenever, due to any cause, it should be impossible for him to return them.
were nonnegotiable. But a holder who derives his title through a holder in due
course, and who is not himself a party to any fraud or illegality affecting the If there are two or more alienations, the first acquirer shall be liable first, and so on
instrument, has all the rights of such former holder in respect of all parties prior to successively.
the latter.
Art. 1390. The following contracts are voidable or annullable, even though there may
Defective title in general have been no damage to the contracting parties:
Defects of title are defined in Section 55 to cover all those situations which are (1) Those where one of the parties is incapable of giving consent to a contract;
(2) Those where the consent is vitiated by mistake, violence, intimidation, undue
known as personal or equitable defenses (infra.) and also to cover those equities of
influence or fraud.
ownership where there is a breach of faith in negotiation.
These contracts are binding, unless they are annulled by a proper action in court.
Infirmities then must include things that are wrong with the instrument itself as They are susceptible of ratification. (n)
distinguished from those things that are lacking in the contracts on the instruments.
Such infirmities are to be found in situations arising under Sections 13, 14, 15, 16 Effect of indorsement by incapacitated persons.
(usually defects of title), 21, 23,124, and 125. (Beutel's Brannan, op. cit., p. 706.) (1) Minors. —As a general rule, contracts entered into by a minor are voidable (Arts.
1327,1329,1390, Civil Code.) at his instance or at the instance of his guardian.
When title of a person defective. The title of a person who negotiates an instrument
is defective under Section 55 in two ways, namely: (1) In the acquisition. — when he (a) A minor is not bound by his indorsement for lack of capacity. He is, however, not
obtained the instrument or any signature thereto by fraud, duress, or force and fear or incapacitated to transfer certain rights. Section 22 merely provides that the
other unlawful means, or for an illegal consideration; or (2) In the negotiation. — indorsement of an infant is not void and that his incapacity is not a defense in favor
when he negotiates the instrument in breach of faith, or under such circumstance as of prior parties, and does not take away the infant7 s right to disaffirm his
indorsement and recover the instrument even against an innocent indorsee or
amount to a fraud. Duress or force and fear include all acts which overcome the
subsequent holder for value. (Murray v. Thompson, 188 S.W. 578.) Minority is not
signer's will. (28 Harvard L-Rev. 358.)
even a personal defense which may be set up by parties other than the minor; but it is
real defense available to the minor. Hence, he may also disaffirm and recover the
Good faith of taker and negotiator. instrument from a holder in due course, (see Sees. 57,58).
The object of Section 55, when taken in connection with Section 56, is to prevent
one from becoming a holder in due Sec. 55 NEGOTIABLE INSTRUMENTS IN (b) A minor, however, may be held bound by his signature in an instrument where he
GENERAL 209 IV. Rights of the Holder course who takes an instrument with notice is guilty of actual fraud (see 43 C.J.S. 206.) committed by specifically stating that he
that his transferor is not acting honestly. It is the. same object as it is found in the is of age when, in fact, he is not. (see Mercado v. Espiritu, 37 Phil. 215 [1917].)
 SEC. 62. Liability of acceptor.— The acceptor by accepting the instrument engages
(2) Other incapacitated persons. — The rule in Section 22 applies to other that he will pay it according to the tenor of his acceptance; and admits—
incapacitated persons as well. Other persons, besides minors, who have no capacity
to give consent are insane or demented persons and deaf-mutes who do not know (a)   The existence of the drawer, the genuineness of his signature, and his capacity
how to write. (Art. 1327, Civil Code.) As far as the incapacitated person himself is and authority to draw the instrument; and
concerned, his incapacity is a real defense that is, it is available even against a holder (b)   The existence of the payee and his then capacity to indorse.
in due course, (see Sees. 57, 58.) He is not even bound to restore anything he has
received by virtue of his contract, except to the extent to which he has been benefited Forgery explained.
thereby. (Art. 1399, Civil Code.) By forgery is meant the counterfeit-making or fraudulent alteration of a writing, and
may consist in the signing of another's name or the alteration of an instrument in the
Effect of indorsement by a corporation. name, amount, description of the person and the like, with intent thereby to defraud."
As regards corporations, Section 22 applies to cases where the corporation has
committed ultra vires acts or acts beyond its powers. It has been held that a "Mere variance of signatures cannot be considered conclusive proof that the same
corporation is not liable on notes in a suit thereon by an indorsee, where the were forged. Forgery and convincing evidence, the burden of proof lies on the party
corporation is without capacity to make the contract in fulfillment of which they a
were executed. (Pearce vs. Madison & I.R. Co., 21 How [US] 441.) One who deals
with the officers or agents of a corporation is bound to know their powers and the The intent to defraud distinguishes forgery from innocent alteration and spoliation.
extent of their authority. (Alexander v. Cauldwell, 83 N.Y. 480.) (Ogden, op. cit., p. 318.)

If the act or obligation under the law is merely voidable at the election of the obligor, Application of Section 23.
and not entirely null and void, the defense is cut off. (see Uniform Commercial (1) Two cases. — This provision consists of two (2) parts. The first part states the
Code, 3-305[b]; Sioux City Terminal & Warehouse Co. v. Trust Co. of N.A., 173 US general rule while the second piart states the exception to the general rule. It applies
99.) only to two cases:
(a) Where the signature on the instrument is affixed by one who does not claim to act
C. Illegality as an agent and who has no authority to bind the person whose signature he has
  forged; and
(b) Where the signature is affixed by one who purports to be an agent but has no
authority to bind the alleged principal.

(2) Effect of forged signature. — In both cases, the signature is wholly inoperative
D. Forgery - § 23, 18, 62, NIL
and so no right can be acquired through the forged signature. Payment made
SEC. 23. Forged signature; effect of. —When a signature is forged or made without "through or under such forged signature" is ineffectual and does not discharge the
the authority of the person whose signature it purports to be, it is wholly inoperative, Instrument. A person whose signature was forged as maker, drawer, payee or
and no right to retain the instrument, or to give a discharge therefor, or to enforce indorsee of a note or check was never a party or never gave his consent to the
payment thereof against any party thereto, can be acquired through or under such contract which gave rise to the instrument. Since his signature does not appear in the
signature, unless the party against whom it is sought to enforce such right is instrument, he cannot be held liable thereon by anyone. (Gempesaw v. Court of
precluded from setting up the forgery or want of authority. Appeals, 218 SCRA 682 [1993].) Forgery is, therefore, a real or absolute defense
even against a holder in due course, (see Sec. 58.)
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 (3) Proof of forgery. — Forgery, as any other mechanism of fraud, must be proven
otherwise expressly provided.   But one who signs in a trade or assumed name will clearly and convincingly, and the burden of proof lies on the party alleging forgery.
be liable to the same extent as if he had signed in his own name. It cannot be presumed. A person who denies issuing a note or check puts into
question the genuineness and authenticity of the. signature appearing thereon; it is he
who has the burden of proving the signature is a forgery. Mere variance of signatures
cannot be considered conclusive proof that the same were forged. (Chiang Yia Min
v. Court of Appeals, 355 SCRA 608 [2001].). (JN Development Corp. v. Philippine "Precluded," as used in Section 23, is synonymous with "estopped," and does not
Export and Foreign Loan Guarantee Corp., 468 SCRA 555 [2005].) include ratification or adoption in their strict primary meaning but only when they
involve some of the elements of estoppel. (Olsgard v. Lemke, 156 N.W. 102.)
(1) Divided into two general classes. —Those precluded from setting up the defense
Cases of forgery in general. of forgery may be divided into two general classes. They are:
The cases of forgery may be divided as follows: (a) Those who by their acts, silence, or negligence, are estopped from
(1) Forgery of promissory notes which may be subdivided into: setting up the defense of forgery; and
(a) Forgery of an indorsement on the note; and (b) Those who warrant or admit the genuineness of the signatures in
(b) Forgery of the maker's signature. question, namely:
1) indorsers;
(2) Forgery of bills of exchange which may be subdivided into: 2) acceptors; and
(a) Forgery of an indorsement on the bill; and 3) persons negotiating by delivery, (see Sec. 65.)
(b) Forgery of the drawer's signature; either
1) with acceptance by the drawee; or (2) Right to recover damages. —A party precluded from raising the defense of
2) without such acceptance but the bill is paid by the drawee. forgery such as by reason of negligence may still recover damages under the Civil
Code provisions on quasidelicts. (Gempesaw v. Court of Appeals,supra;see Sec.
Extent of the effect of forgery. 196.)
Section 23 does not purport to declare the instrument totally void nor the genuine
signatures thereon inoperative. It is only the forged or unauthorized signature that is E. Material Alteration-§124,125NIL 
declared to be inoperative. In other words, rights may still exist and be enforced by SEC. 124. Alteration of instrument; effect of.— Where an instrument is materially
virtue of such instrument as to those whose signatures thereto are found to be altered without the assent of all parties liable thereon, it is avoided, except as against
genuine. A forged indorsement prevents any subsequent party from acquiring any a party who has himself made, authorized, or assented to the alteration, and
right as against any party whose name appears prior to the forgery. Although rights subsequent indorsers.
may exist between and among parties subsequent to the forged indorsement, not one
of them can acquire rights against parties prior to the forgery. Such an indorsement But when an instrument has been materially altered and is in the hands of a holder in
cuts off the rights of all subsequent parties as against parties prior to the forgery. due course, not a party to the alteration, he may enforce payment thereof according
However, the law makes an exception to these rules where a party is precluded from to its original tenor.
setting forgery as a defense. (Gempesaw v. Court of Appeals,supra.)
SEC 125. What constitutes a material alteration.— Any alteration which changes—
Exceptions to the general rule.
There are actually two (2) exceptions to the general rule that no right or title can be (a) The date;
acquired to a negotiable instrument through or under a forged or unauthorized (b) The sum payable, either for principal or interest;
signature, namely: (c)   The time or place of payment;
(1) If the party against whom it is sought to enforce such right is precluded from (d)   The number or the relations of the parties;
setting up the forgery or want of authority (Sec. 23.); and (e)   The medium or currency in which payment is to be made;
(2) Where the forged signature is not necessary to the holder's title in which case the
forgery may be disregarded, (see Sec. 48.) 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
There is seldom any practical distinction in the negotiable instrument field between a material alteration.
case where there has been no forgery or want of authority and a case where a party
against whom it is sought to enforce a right is precluded from setting up the forgery F. Fraud
or want of authority. (Cohen v. Lincoln Sav. Bank, 10 NE 2d 457; see 11 Am. Jur.
Fraud in factum and fraud in inducement distinguished.
2d 789-791.)
There are two kinds of fraud relating to negotiable instrument, namely:
Persons precluded from setting up the defense of forgery. (1) Fraud in the execution or fraud in factum. — 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 drawing, accepting, or indorsing, as the case may be; and in such case the delivery
knowledge of it, as where a note was signed by one under the belief that he was may be shown to have been conditional, or for a special purpose only, and not for the
signing as a witness to a deed, or where the signature was procured by fraudulent use purpose of transferring the property in the instrument. But where the instrument is in
of carbon paper. the hands of a holder in due course, a valid delivery thereof by all parties prior to
This kind of fraud is a real defense (see Sec. 14.) because there is no contract. It him so as to make them liable to him is conclusively presumed. And where the
implies that the person did not know what he was signing. But where the signer by instrument is no longer in the possession of a party whose signature appears thereon,
the exercise of reasonable diligence could have discovered the nature of the a valid and intentional delivery by him is presumed until the contrary is proved.
instrument, the fraud cannot be considered a real defense, as where a person, who Rules where instrument incomplete but delivered.
can read, signed a note but failed to read it; and (1) Authority to fill up the blanks. — The holder or the person in possession has
prima facie authority to complete an incomplete instrument by filling up the blanks
(2) Fraud in the inducement or simple fraud. — It is that which relates to the quality, therein.
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 and, (a) The law speaks of material particular. It may be defined as any particular
therefore, necessarily signed with knowledge that the instrument would probably proper to be inserted in a negotiable instrument to make it complete; and the
pass into the hands of an innocent purchaser. Here, the deceit is not in the character power to fill in blanks extends, therefore, to every incomplete feature or the
of the instrument but in its amount or its terms. (Ogden, op. cit.f p. 326.) It implies instrument. (Linthlicum v. Bagby, 102 AtL 997.)
that the signer knew what he was signing but that he was induced by fraud to sign.
(Babb & Martin, op. cit., p. 231.) A clear illustration of this fraud exists where a The word "material," as used in Section 14, is not synonymous with "necessary"
person is induced to sign a note for the price of a worthless stock which was so as to restrict the right of filling a blank to something essential to a complete
fraudulently represented by the payee as to its value. Such type of fraud is only a negotiable instrument. (Johnson v. Hoover, 117 N.W. 277.) Thus, blanks for
personal defense because it does not prevent a contract. Mere carelessness or date, due date, name of payee, amount, or rate of interest may be filled in. It has
negligence, in the absence of any fraud, is neither a real nor personal defense. been held that even the blank for the name of the drawer may be filled in.
(Commercial Investment Co. v. Whitlock, 247 S.W. 833.) Also, a blank for the
G. Duress  place of payment (Johnson v. Hoover, 117 S.W. 277.) for the amount of
attorney's fees where it supplies a manifest omission and is in accord with the
character and object of the blank. (Kramer v. Schmitzer, 109, S.W. 695.)
Steps in issuance of negotiable instrument.
There are always two steps involved in the issuance of every negotiable instrument, (2) Authority to put any amount. — A signature on a blank paper delivered in order
namely: that it may be converted into a negotiable instrument operates as a prima facie
authority to fill it up as such for any amount.
(1) the mechanical act of writing the instrument completely and in accordance
with the requirements of Section 1; and (3) Right against party prior to completion. — The instrument may be enforced only
(2) (2) the delivery of the complete instrument by the maker or the drawer to against a party prior to completion if filled up strictly in accordance with the
the payee or holder with the intention of giving effect to it. authority given and within a reasonable time.
Such instrument, complete and delivered, is negotiable and may be enforced
accordingly. (a) If an instrument is incomplete when delivered, the holder has prima facie
authority to fill up the blanks thereon. If a blank paper is delivered by the person
H. Complete Instrument which is Undelivered - § 16 NIL making the signature, the holder has prima facie authority to fill it up for any amount
SEC. 16. Delivery; when effectual: when presumed. —Every contract on a if the person making the signature intended to convert it into a negotiable instrument.
negotiable instrument is incomplete and revocable until delivery of the instrument In either case, the presumption is that the blank was filled up in accordance with the
for the purpose of giving effect thereto. As between immediate parties, and as authority given and within a reasonable time, (see Sec. 193.)
regards a remote party other than a holder in due course, the delivery, in order to be
effectual, must be made either by or under the authority of the party making,
(b) The person who signed his name has the burden to rebut the presumption of
agency by contrary proof of want of authority, or proving that the authority granted When considering Section 14, it is important to bear in mind the distinction between
was exceeded. Such "reasonable time" for filling up the Instrument is to be reckoned the two classes of instruments:
from the time of the issuance of the instrument because the interest involved is that (1) Those in which obvious blanks are left at the time they are made or indorsed, of
of the issuer, and! not from the time of each successive negotiation. such a character as manifestly to indicate that the instruments are incomplete until
such blanks shall be filled up; and
(4) Right of holder in due course. — The defense that the instrument had not been (2) Those which are apparently complete, containing blanks only because the written
filled up in accordance with the authority given and within a reasonable time is not matter does not so fully occupy the entire paper as to preclude the insertion of
available as against a holder in due course. additional words or figures, or both.
 
I. Incomplete Instrument which is Undelivered - §15 NIL  With respect to the first class, one who signs or indorses is liable to bona fide holders
SEC. 15. Incomplete instrument not delivered. —Where an incomplete instrument thereof on the doctrine of implied authority, while with respect to the second class,
has not been delivered it will not, if completed and negotiated, without authority, be the liability for the amount of the instrument which has been increased by filling up
a valid contract in the hands of any holder, as against any person whose signature unoccupied spaces therein is placed upon the doctrine of negligence. (Canon v.
was placed thereon before delivery. Gregslay, 116 111. 151; National Exchange Bank v. Lester, 194 N.Y. 464.

(1) Defense even against a holder in due course. — The fact that an incomplete K. Consideration-§28NIL 
instrument, completed without authority, has not been delivered, is a defense even SEC. 28. Effect of want of consideration. —Absence or failure of consideration is
against a holder in due course. matter of defense as against any person not a holder in due course; and
partial failure of consideration is a defense pro tanto, whether the failure is an
(2) Defense even against a holder in due course. — The fact that an incomplete ascertained and liquidated amount or otherwise.
instrument, completed without authority, has not been delivered, is a defense even
against a holder in due course. Meaning of absence or want of consideration.
Absence of consideration means a total lack of any valid consideration for the
J. Incomplete Instrument which is Delivered - §14 NIL  contract, in consequence of which the alleged contract must fall. (Klein v. Roteman,
SEC. 14. Blanks; when may be filled. —Where the instrument is wanting in any 6 Ohio App. 145.)
material particular, the person in possession thereof has a prima facie authority to
complete it by filling up the blanks therein. And a signature on a blank paper Meaning of failure of consideration.
delivered by the person making the signature in order that the paper may be Failure of consideration means the failure or refusal of one of the parties to do,
converted into a negotiable instrument operates as a prima facie authority to fill it up perform or comply with the consideration agreed upon. In other words, something
as such for any amount. In order, however, that any such instrument when completed was agreed upon as consideration but for some cause, such agreed consideration
may be enforced against any person who became a party thereto prior to its failed to materialize.
completion, it must be filled up strictly in accordance with the authority given and
within a reasonable time.   But if any such instrument, after completion, is negotiated 1. Accommodation Party 
to a holder in due course, it is valid and effectual for all purposes in his hands, and he Accommodation party is one who has signed the instrument (a) as maker, drawer,
may enforce it as if it had been filled up strictly in accordance with the authority acceptor, or indorser, (b) without receiving value for the signature and (c) for the
given and within a reasonable time. purpose of lending his name to some other person. (Sec. 29.) He usually expects that
not he, but the accommodated party, will provide payment of the bill or note when it
falls due. He actually lends his credit to the party to whom the accomodation is
Application of Sections 14,15, and 16. made. He is classified according to the accommodated party's status. If the
Section 14 applies only to an incomplete instrument which has been delivered by the accommodated party is a maker, for example, he is liable on the instrument to
maker or the drawer to the payee or holder; Section 15, to an incomplete instrument subsequent parties as if he were the maker. In lending his name to the accommodated
and undelivered; and Section 16, to a complete instrument but undelivered.
party, the accommodation party is, in effect, a surety for the former. (Phil. Bank of
Commerce vs. Aruego, 102 SCRA 530 [1981].)