Claims of ownership
- often referrd to as equities
- Two kinds:
1. legal title - one who has legal title may recover possession thereof even from hdc
2. equitiable title-may not recover posession from hdc but may do so from holder not hdc
sec 57
- defense referred to is personal. Such defense is cut off by negotiation to a hdc.
- hdc free from personal so commercial paper can circulate freely and prospective buyter are to accept
them routinely and willingly.
sec. 58
- meaning of real and personal defense (pages 160-161 de leon)
sec. 55
- hdc is not affected by this article. Hence, real owner cannot recover from hdc
REAL DEFENSE: - questions validity of the inst.
-forgery
-incapacity
-fraud in the excution
-some types of duress
-lack of delivery of an incomplete instrument
- Material alteration (relied to deny liability according to the altered terms)
PERSONAL DEFENSES: - questions validity of the agreement
-instrument obtained by (under sec 55):
fraud
duress
force and fear
other unlawful means
for an illegal consideration
- he negotiates the inst. (under sec 55):
in breach of faith
under such circumstances as amount to fraud
-want of consideration
-incompleteness of the instrument
-lack of delivery of completed instrument
- Illegality
-Material alteration ( when used to deny laibilty according to orgianl tenor of the instrument)
INCAPACITY (pdf 2)
- SEC 22 (p. 80 de leon)
- contract entered into by a minor is voidable to be ratifies upon reaching majority.
- other persons not capaciated to gove consent:
insane
demented
deaf-mute who do not know how to write
-- in this cases such incapcity may also be considered real for lack of of the essetial element consent.
ILLEGALITY (pdf 4)
- generally personal defense
- Art 1409 civil code enumerates contracts that are void and inexistent and incapable of ratification.
Among this contracts are contracts with illegal cause.
- Contracts with illegal cause is no contract at all, hence can be normally a
real defense.
- but sec 55 treats illegal consideration only as personal
- hence, although a gambling note may be unenforceable between original parties due to illegal cause,
the same is valid in the hands of hdc
NOTE: A statute may declare a contract void, hence defense of illegality becomes real.
FORGERY (pdf 6)
- SEC 23(p. 82) and sec 18(p 75)
- one voew holds that forgery can never be ratified because ratification includes the relation of agency
and the forger does not assume to act for another
- another view, distinguish forgery as either a crime or nor and allows a ratification on the latter case
only.
- A general indorser subsequent to the forgery warrants that the instrument is genuine, valid and
subsisting at the time of indorsement
-- hence, precludes him from setting it as a defense
- When the instrument is orginally a bearer instrument, holder who did not know about the forgery can
still enforce it against the drawer/ maker because he can cancel the forged indorsement as not being
necessary to his title
SEC 62 (pdf 17)
- (p 175 de leon)
- precluded from denying liability due based on forgery of the sig. of the drawer (under sec 23)
-- payment is more than an acceptance, coz while an acceptance is merely an obligation to pay, payment
is the discharge of such obligation
(read again and make a note for the price v neal doctrine)
OVERDRAFT (34 PDF) - occurs when a check is issued for an amount more than what the drawer has in
deposit with the drawee bank.
-- in this case, drawee-bank can no longer recover what he had paid by mistake to the holder
--- however, it has claims against the drawer
STOP PAYMENT ORDER (39 PDF)- is one issued by the drawer of a check countermanding his first order
to the drawee to pay
 Drawee bound to follow granting that it is received prior to its certification/ payment of the check
o If he does, payment is deemed voluntary. Hence, cannot reclaim from a holder
- Cannot charge the same to the drawer’s account, unless such payment dishcharges
drawer’s legitimate debt
o IF HOLDER IS HDC - Thus, although drawer stopped the payment, in its
subsequent action against drawee, the latter is subrogated to the rights of
hdc and may not be compelled to recredit the amount to drawer’s acct.
o HOLDER NOT HDC/ FRAUDULENT PAYEE - drawer would be entitled to
recredit. REASON: did not pay legitimate obligation.
 Drawee receives stop order after certification/ accepted the check
o Bank under duty to pay holder and will not be liable to drawer
Effect of negligence of depositor (40 pdf)
-
Bank is freed from any liability only if the proximate cause of its wrongful payment is
the negligence of the drawer, but not otherwise.
Includes situation where drawer’s signature is FORGED.
IF DEPOSITOR IS NEGLIGENT AND DEPRIVES BANK FROM RECOVERING AMOUNT
FROM THE FORGER
o Burden of loss is in the depositor
o
Cannot demand recrediting
EFFECT OF PAYMENT UNDER FORGED INDORSEMENT
-
Although an exception to the doctrine of payment under mistake is made in the
case of a drawee who accepts/ Pays a bill on which drawer’s signature is forged, NO
EXCEPTION LIES IN THE CASE OF THE DRAWEE’S ACCEPTANCE/ PAYMENT OF A
GENUINE BILL WHERE ONLY AN INDORSEMENT IS FORGED.
-
IN THIS CASE DRAWEE CAN RECOVER THE AMOUNT PAID since he makes no
warranty as to genuinnes of any indorsement.


Prompt notification (that indorsement is forged) to the holder paid
should be made. FAILURE to do so, he may lost his right to recover
due to negligence and cannot recover from drawer (under sec 23)
However, IF ORIGINALLY BEARER INSTRUMENT, drawee may debit
drawer’s account despite FORGED indorsement since indorsement
is not needed to holder’s title
MATERIAL ALTERATION (PDF 78)
-
Sec 124 & 125 (p 244, p 246)
 SUBSEQUENT INDORSERS IS EXCEPTED FROM THIS RULE because by his
indorsement he warrants among other things that the instrument is in all
respects what it purports to be and that the same is valid and subsisting.
 HDC may ENFORCED payment according to the original tenor
o This presupposes that ALTERATION is NOT APPARENT, OTHERWISE NO
HOLDER CAN BE A HDC (since it would render instrument irregular)
 ALTERATION IS OF THE AMOUNT
o HDC can recover the original amount.
o IF NOT HDC, he cannot recover anything and the drawee cannot charge
drawer’s acct
 INTEREST RATE IS ALTERED
o HDC, can recover principal with original interest rate
 DATE OF PAYMENT IS CHANGED
o Original date of maturity holds whether on is an hdc or not
-
Personal defense if used to deny laibilty according to orgianl tenor of the
instrument
Real defense relied to deny liability according to the altered terms
SEC 124 makes no distinction hence, can be avoided whether alteration is
fraudulent intent not
-