XVI.

PROMISSORY NOTES AND CHECKS

Sec 184. Promissory note defined.

A negotiable promissory note within the meaning of this Act is an UNCONDITIONAL PROMISE in
WRITING made by one person to another, SIGNED by the maker, engaging to PAY on DEMAND, or
at a FIXED or DETERMINABLE FUTURE time, a SUM CERTAIN in money to ORDER or BEARER. Where
a note is drawn to the MAKER’s OWN ORDER, it is NOT COMPLETE until INDORSED by him.

Note payable to maker’s order

 NO DELIVERY: maker is NOT liable to ANY HOLDER where his indorsement is FORGED.

 Same with BOE payable to DRAWER’s order: NO obligation arises and bill is INCOMPLETE until
drawer indorses and delivers it to another

 Principle DOES NOT apply AFTER drawer ACCEPTS: acceptance makes bill complete

Special types of promissory notes

1. Certificate of Deposit

WRITTEN ACKNOWLEDGMENT by a BANK of the RECEIPT of money on deposit which the bank
PROMISES to REPAY to depositor, bearer, or some other person, to the order of the DEPOSITOR, or to
him or his order, at LATER DATE or ON DEMAND

 Not the same as deposit slip: deposit slip is a MERE RECEIPT

 CD is negotiable or non-negotiable, depending on its terms

 NEGOTIABLE: only if drawn with all the ESSENTIAL ELEMENTS of a negotiable paper

 Negotiability: allows it to be INDORSED or SOLD to pay debts or serve as security for a loan

 Not the same as savings deposit

 MOST COMMON: TIME DEPOSIT of money with a bank

 ABSENCE of PROMISE to PAY: MERE RECEIPT

2. Bond

EVIDENCE of INDEBTEDNESS issued by a public or private corporation, promising to pay a sum of

money on a DAY CERTAIN in the FUTURE
 Runs for a LONGER period than PN

 Issued for debts of LARGER AMOUNTS

(a) Registered bond

i. payable ONLY to person whose name appears on face of certificate

ii. NOT negotiable

iii. Is TRANSFERRABLE by registration of the transferee’s name in the books of the

company

(b) Coupon bond

i. Attached coupons which entitle the holder to INTEREST when due

ii. Interest coupons may be DETACHED and NEGOTIATED like PNs independent of the
main instrument

3. Bank Note

Instrument issued by a BANK for CIRCULATION as MONEY payable to BEARER on DEMAND

4. Due Bill

Shows on its face an ACKNOWLEDGMENT by a person of his INDEBTEDNESS to another. The word
“due” is usually used

5. Mortgage Note

6. Title-retaining Note

A CONDITIONAL SALES CONTRACT which ordinarily provides that the TITLE to the GOODS shall
REMAIN in the payee’s name UNTIL the note is PAID in FULL

 Used to SECURE the PURCHASE PRICE of the goods

7. Collateral Note

 Maker PLEDGES SECURITIES to payee to secure payment of amount of note

 Securities usually placed with the holder as COLLATERAL SECURITY

 SIGNATURE NOTE: short-term UNSECURED LOANS or loans without collaterals

8. Judgment Note

 Added to a POWER OF ATTORNEY

 Enables payee to take judgment against maker WITHOUT the formality of a TRIAL if note not
paid when due

9. Installment Note

 Payable in SPECIFIED or PERIODIC installments at PREDETERMINED times

Sec 185. Check defined.

A CHECK is a BOE drawn on a BANK payable on DEMAND. Except as herein otherwise provided, the
provisions of this Act applicable to a BOE payable on demand apply to a check.

Check defined

 WRITTEN ORDER addressed to a BANK or persons carrying on the business of banking

 By a party having money in their hands

 Requesting them to pay on PRESENTMENT to a person named therein or his order, or bearer

 A named SUM of money

Check|Ordinary bill of exchange

CHECK ORDINARY BILL

Bank or banker DRAWEE May not be drawn on a bank

Payable on demand NATURE Payable on demand;

a fixed determinable future

time

Previous deposit of funds SOURCE OF PAYMENT Need not be against a deposit

x PRESENTMENT  In certain cases for

acceptance
Immediate payment PURPOSE Circulation as instrument of
credit

If with knowledge of bank, EFFECT OF DEATH OF DRAWER Does not revoke authority of
revokes authority of bank to drawee to pay
pay

Within reasonable time after its TIME OF PRESENTMENT Within reasonable time after its
issue last negotiation

Drawer discharged from liability EFFECT OF DELAY IN Drawer totally discharged

to extent of loss caused by PRESENTMENT
delay

Drawer and indorsers are ACCEPTANCE OR Drawer and indorsers remain

discharged from liability CERTIFICATION liable in spite of acceptance

Special types of checks

 Usually 3-party instruments

 In CASHIER’s and MANAGER’s check: bank can serve as both drawer and drawee

 Most common type is PERSONAL check

 Check drawn by depositor of a bank

1. Memorandum check

 Like ordinary check except with “memorandum” etc on face of check

 Drawer engages to pay the BONA FIDE holder ABSOLUTELY

 Not upon condition to pay upon presentment at maturity and if due notice of the
presentment and non-payment should be given

 Drawer may be SUED the same as a maker upon a PN

2. Cashier’s check

 Drawn by cashier of bank upon bank itself

 Payable ON DEMAND to payee

 Deemed ACCEPTED by the ACT of ISSUANCE

 Really is bank’s OWN check

 May be treated as PN with the bank as maker

 Operates as an ASSIGNMENT of funds represented by the check to the credit of payee or holder
 BANK DRAFT: check drawn by bank upon another bank

 Accepted business practice: Cashier’s check deemed as CASH

3. Manager’s check

 drawn by bank’s manager upon bank itself

 Similar to cashier’s check both to EFFECT and USE

4. Traveler’s check

 Holder’s SIGNATURE must appear TWICE

 One affixed by time it is ISSUED

 Second or COUNTER-SIGNATURE affixed in PRESENCE of PAYEE before it is paid

 Otherwise: INCOMPLETE

 PURPOSE: provide traveler safe and convenient method by which to suppy himself with funds in
almost all parts of world without carrying money

 Technically, MOST are not checks but are DRAFTS

 DRAWEE is ordinarily NOT a bank

 Bank or company ISSUING instrument has RIGHT to REFUSE to PAY when it does NOT bear the
COUNTERSIGN agreed

 OWNER of check has RIGHT to INSIST that it will not be paid when not countersigned

5. Certified check

 Bears upon its face an AGREEMENT by DRAWEE BANK that the check will be paid on
PRESENTATION

 Usual practice: stamping or writing “certified”

 Similar to certificate of deposit in some respects

 PURPOSE: enable HOLDER to USE it as MONEY

6. Crossed-check

 Bears ACROSS its face TWO PARALLEL lined drawn diagonally

(a) Crossed Specially

 i. Name of PARTICULAR BANK or COMPANY is written

ii. Drawee bank must pay check ONLY upon PRESENTMENT by such bank or company

(b) Crossed Generally

i. Only the words “and Co.” are written

ii. Drawee bank must pay check through the INTERVENTION of some bank or banker

 Actual practice: check crossed generally is deposited with a bank by the holder where he KEEPS
an ACCOUNT and the bank takes charge of the COLLECTION

 If crossed specially, he deposits it with the bank indicated between parallel lines

 A CROSSED CHECK can ONLY be DEPOSITED but may NOT be CONVERTED to CASH

 PURPOSE: insure payment to the payee particularly when it is FORWARDED by MAIL or when it is
entrusted to an AGENT.

Stale check

 One NOT presented for PAYMENT within a REASONABLE time AFTER its ISSUE

 It is VALUELESS and therefore should NOT be PAID

 Banking practice: a check outstanding for MORE than 6 MONTHS is stale

 Banks will normally not pay without consulting the depositor (drawer)

 Drawer is NOT DISCHARGED by the MERE DELAY in the PRESENTATION of check for payment if
he does not SUFFER from any LOSS of the DELAY

Sec 186. Within what time a check must be presented.

A check must be PRESENTED for payment within a REASONABLE TIME AFTER its ISSUE or the
DRAWER will be DISCHARGED from LIABILITY thereon to the EXTENT of the LOSS caused by the
DELAY.

When drawer of check discharged from liability

 3 requisites

(a) check NOT PRESENTED within a reasonable time after its issue

(b) Drawer SUFFERS LOSS

(c) LOSS is attributable to the LOSS

 No notice of dishonor within prescribed time: drawer will be DISCHARGED from liability
  Even if check was presented for payment within reasonable time

Discharge of drawer and indorser in case presentment delayed

 Only to EXTENT of LOSS caused by the DELAY in case of DRAWER

 Cause of loss: INSOLVENCY of the bank SUBSEQUENT to delivery and PRIOR to presentment
of the check

 Drawer DISCHARGED from LIABILITY only to EXTENT of the LOSS caused by DELAY in
PRESENTMENT

 BURDEN of proving loss is on the drawer

 NO LOSS shown: drawer is NOT discharged

 WHOLLY discharged in case of INDORSER

 Irrespective of any question of loss or injury by delay of presentment

 Unless presentment is EXCUSED or DISPENSED with

 REASON for difference between liability

 DRAWER is not probably or necessarily prejudiced thereby

 INDORSER is actually or by legal presumption

Sec 187. certification of check, effect of.

Where a check is CERTIFIED by the BANK on which it is drawn, the CERTIFICATION is EQUIVALENT to
an ACCEPTANCE.

Effects of certification of checks

 Certification: AGREEMENT by the bank against whom check is drawn that the check will be PAID
when PRESENTED for PAYMENT

 Stamping of “certified” on face of check with NAME of bank, DATE, and HANDWRITTEN
SIGNATURE or INITIALS of the officer making the certification

 Effects:

 EQUIVALENT to acceptance

 Bank PRIMARILY liable

 DISCHARGES persons SECONDARILY liable

 If procured by holder

 Operates as an ASSIGNMENT of funds of drawer in the hands of DRAWEE bank

 Payee or holder, becomes the DEPOSITOR of drawee bank

  DRAWER may NOT issue a STOP PAYMENT ORDER on the certified check

Object of certifying checks

 Enables person not well acquainted with each other to close promptly business transactions
since holder knows that he can compel drawee bank to cash it

 Avoids DELAY and RISKS of receiving, counting, and passing from hand to hand LARGE sums of
money

 Enables HOLDER to USE it as MONEY

 When holder PROCURES a check to be CERTIFIED, the check operates as an ASSIGNMENT to him
of the amount certified

Sec 188. Effect where the holder of a check procures it to be accepted or certified.

Where the HOLDER of a check PROCURES it to be ACCEPTED or CERTIFIED, the DRAWER and ALL
INDORSERS are DISCHARGED from liability thereon.

Effect where holder procures certification of check

 Drawer and all indorsers are discharged

 Same effect as id the holder had drawn the money, REDEposited it and taken a CERTIFICATE of
DEPOSIT for it

 DRAWER is DISCHARGED both on CHECK and ORIGINAL DEBT

Effect where certification obtained by others

 SECONDARY parties are NOT discharged

 Like when it is obtained by drawer even at the request of the payee or even though the
drawer is also the payee

 Reason: holder has NOT yet RECEIVED payment

 In Phil, practice is to certify ONLY at the REQUEST of DRAWER

 Cashier’s/Manager’s check stands on SAME footing as CERTIFIED check

 Most banks charge for the service

Sec 189. when check operates as an assignment.

A check of ITSELF does NOT operate as an ASSIGNMENT to ANY part of the FUNDS to the credit of
the drawer with the bank, and the BANK is NOT liable to the HOLDER, unless and until it ACCEPTS or
CERTIFIES the check.

Right before acceptance or certification of check

 Until PAYMENT is made by DRAWEE bank

 its ISSUANCE and CIRCULATION have NO EFFECT on the funds of the drawer in the bank

 Do NOT DISCHARGE the debt in payment for which check was issued

When check operates as assignment of drawer’s funds

 Moment check is CERTIFIED

 Funds CEASE to be under CONTROL of the drawer

 As if the bank had paid the money upon the check

 Certification: funds represented by the check are TRANSFERRED from the credit of the drawer to
that of the payee by holder

 Holder becomes depositor of drawee bank

Cases when bank may refuse payment

1. Bank is INSOLVENT

2. Drawer’s deposit is INSUFFICIENT or he has NO ACCOUNT with bank or said account CLOSED or
GARNISHED

3. Drawer is INSOLVENT and PROPER NOTICE received by bank

4. Drawer DIES and proper notice received by bank

5. Drawer COUNTERMANDED payment

6. Holder REFUSES to IDENTIFY himself

7. Bank has REASON to BELIEVE that the check is a FORGERY

8. Check is STALE or POST DATED

Relation between depositor and bank

1. Creditor and Debtor

  Contract between banker and depositor is not deposit but is a LOAN

 Bank is bound to HONOR the check of its depositor for SUMS NOT IN EXCESS of the amount
of his deposit

2. Principal and Agent

 Checks received by bank MERELY for COLLECTION and DEPOSIT: relationship is one of
AGENCY

 Bank is to COLLECT from the drawees of the check of its depositor

 DEPOSITARY BANK: FIRST bank to receive a check for payment is

 PAYOR BANK: Bank on which check is drawn

 COLLECTING BANK: Any bank EXCEPT the PAYOR bank that handles a check during
some phase of the COLLECTION process

 INTERMEDIATE BANK: any bank EXCEPT the PAYOR bank, to which a check is
TRANSFERRED in the course of the collection process

 Remember: DELIVERY of a check does NOT in itself constitute PAYMENT