Organic matter removal

A. Concept of Discharge

Discharge means a release of all parties, whether primary or secondary, from the obligations arising thereunder. It renders the instrument without force and effect and consequently, it can no longer be negotiated.

*Applies to the instrument or to the source of liability.

B. How instrument is discharge

Sec. 119 of the Negotiable Instrument Law provides that: “A negotiable instrument is discharged: (a) By payment in due course by or on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right.”

1. Payment in due course

Sec. 88 of the Negotiable Instrument Law provides that:

“Payment is made in due course when it is made at or after the maturity of the payment to the holder thereof in good faith and without notice that his title is defective.”

a. By the principal debtor

Sec. 119 (a) of the Negotiable Instrument Law states that: “A

negotiable instrument is

discharged: (a) By payment in due course by or on behalf of the principal debtor; x x x”

b. By the accommodated party

Sec. 119 (b) of the Negotiable Instrument Law provides that: “A

negotiable instrument is

discharged: x x x (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; x x x”

2. Intentional cancellation

a. Rule in case of unintentional cancellation

Sec. 123 of the Negotiable Instrument Law states that: “A cancellation made unintentionally or under a mistake or without the authority of the holder, is

inoperative but where an instrument or any signature thereon appears to have been cancelled, the burden of proof lies on the party who alleges that the

cancellation was made

unintentionally or under a mistake or without authority.”

3. Any act that discharge simple contracts

*The law on Obligations and Contracts will apply.

Article 1231 of the New Civil Code provides that: “Obligations are extinguished: (1) By payment or performance: (2) By the loss of the thing due: (3) By the condonation or remission of the debt; (4) By the confusion or merger of the rights of creditor and debtor; (5) By compensation; (6) By novation. Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code.”

*Although these ways discharge the instrument as between immediate parties, they will not do so in the hands of a holder in due course.

4. Principal debtor becomes a holder C. Discharge of persons secondarily liable

Sec. 120 of the Negotiable Instrument Law provides that: “A person secondarily liable on the instrument is discharged: (a) By any act which discharges the instrument; (b) By the intentional cancellation of his signature by the holder; (c) By the discharge of a prior party; (d) By a valid tender or payment made by a prior party; (e) By a release of the principal debtor unless the holder's right of recourse against the party secondarily liable is expressly reserved; (f) By any agreement binding upon the holder to extend the time of payment or to postpone the holder's right to enforce the instrument unless made with the assent of the party secondarily liable or unless the right of recourse against such party is expressly reserved.”

CHECKS:

A. Checks defined

Sec. 185 of the Negotiable Instrument Law provides that: “A check

is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check.”

*Checks need not be presented for acceptance

*Checks are always payable on demand

*Checks are always drawn against a bank

*In case of refusal by drawee bank, payee or holder cannot compel drawee bank to pay because there is no privity of contract.

Recourse: Serve notice of dishonour to drawer; ran after the drawer

B. Distinguished from Draft Other Bill of

Exchange

Check Not drawn on a

deposit. It is not necessary that a drawer of a Bill of Exchange should have funds in the hands of the drawee.

Exist for circulation

It is necessary that a check is drawn on a previous deposit.

Otherwise, there would be fraud.

Always bank as a drawee, need not be presented for acceptance. Exist

for immediate

payment Death of the drawer

of a Bill of Exchange with the knowledge of the bank, does not revoke the authority of the banker to pay.

Death of the drawer of a check, with the knowledge by the bank, revokes the authority of the banker to pay.

May be presented for payment within a reasonable time after its last negotiation.

Must be presented for payment within a reasonable time after its issue.

Checks become

stale after 6 months from issue.

C. Relationship between drawer, drawee and payee

Drawer – is a secondarily liable; admits the existence of a payee and his capacity to indorse and engages that the instrument will be accepted or paid by the party primarily liable and engages that if the instrument is dishonored and proper proceedings are brought he will pay to the party entitled to be paid.

Drawee – primarily liable; engages to pay according to the tenor of his acceptance;

admits the existence of the drawer, the genuineness of his signature and his capacity and authority to draw the

instrument and admits the existence of the payee and his capacity to indorse.

Payee – the person who is named to received the payment. The one who can indorse for further negotiation.

D. Kinds of check

1. Cashier’s and manager’s check a bill of exchange drawn by a bank upon itself, and is accepted by its issuance.

*Treated as good as cash.

*The drawee and the drawer are one and the same.

BSP Circular 259 series of 2000 provides that: “Pursuant to Monetary Board Resolution No. 1494 dated 1 September 2000, additional anti-money laundering rules and regulations for banks are hereby issued as follows: Section 1. Issuance of Cashier’s, Manager’s or Certified Checks. Banks shall not issue cashier’s, manager’s or certified checks or other similar instruments payable to cash, bearer, fictitious payee or numbered account. When the person purchasing the above-mentioned instruments is not a regular bank client, the issuing bank shall require the purchaser to present his/her proof of residence together with his/her driver’s license, passport, employment I.D. or other photo identification card. A register for cashier’s, manager’s or certified checks issued shall be maintained by the bank. Section 2. Sanction. Any violations of the provision of this Circular shall be subject to a fine of P30,000 per transaction.”

BSP Circular No. 291 series 2001 provides that: “The Monetary Board, in its Resolution No. 707 dated 10 May 2001 decided to authorize the issuance of cashier’s, manager’s or certified checks or other similar instruments in blank or payable to cash, bearer or numbered account as an exception from the provisions of Circular no. 259, subject to the following conditions: a. That the amount of each check shall not exceed P10,000.00; b. That the buyer of the check is properly identified as required under Circular No. 259 dated 29 September; c. That a register of said checks shall be maintained with the

following minimum information: 1.

Date issued; 2. Amount; 3. Name of buyer; 4. Date paid; 5. If the aggregate instruments purchased by the same person within any thirty (30) day period amounts to at least fifty thousand pesos (P50,000), the purpose of the buyer should be stated.; d. That banks which issue as well as those which accept as deposits, said cashier’s, manager’s or certified checks or other similar instruments issued in blank or payable to cash, bearer or numbered account shall take such measure(s) as may be necessary to ensure that said instruments are not being used/resorted to by the buyer or depositor in furtherance of a money-laundering activity; e. That the deposit of said instruments shall be

subject to the same

requirements/scrutiny applicable to cash deposits; f. That transactions involving said instruments should be accordingly reported to the Bangko Sentral ng Pilipinas if there is reasonable ground to suspect that said transactions are being used to launder funds of illegitimate origin.”

2. Certified check one drawn by a depositor upon funds to his credit in a bank which a proper officer of the bank certifies will be paid when duly presented for payment.

*There is a guarantee that upon presentment it will be accepted.

*It is accepted in advance.

*Certification is equivalent to acceptance.

*It is forbidden to issue a stop order payment.

Sec. 187 of the Negotiable Instrument Law provides that:

“Where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance.”

Sec. 188 of the Negotiable Instrument Law provides that:

“Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon.”

Sec. 189 of the Negotiable Instrument Law provides that: “A check of itself does not operate as an assignment of 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.”

3. Crossed Check done by writing two parallel lines diagonally on the left top portion of the checks.

Article 541 of the Code of Commerce provides that: “The maker of any legal holder of a check shall be entitled to indicate therein that it be paid to a certain banker or institution, which he shall do by writing across the face the name of said banker or institution, or only the words "and company".

a. Effects of crossing a check

1. The check may not be encashed but only deposited in the bank

2. The check may be negotiated only once – to one who has an account with the bank

3. The act of crossing serves as a warning to the holder that the check has been issued for a definite purpose so that he may inquire if he has received the check pursuant to that purpose.

4. Memorandum and traveller’s check Memorandum Check is in the form of an ordinary check, with the word

“memorandum”, “memo” or “mem”

written across its face, signifying that the maker or drawer engages to pay the bona fide holder absolutely, without any condition concerning its presentment. Such check is an evidence of debt against the drawer, and although it may not be intended to be presented, has the same effect as an ordinary check, and if passed to a third person, will be valid in his hands like any other check.

Traveller’s Check instruments purchased from banks, express companies, or the like, in various denominations, which can be used like cash upon second signature by the purchaser. It has the characteristics of a cashier’s check of the issuer. It requires the signature of the purchaser at the time he buys it and also at the time he uses it – that is when he obtains the check from the bank and also at the time he delivers the same to the establishment that will be paid thereby.

E. When required to be presented for payment

Sec. 186 of the Negotiable Instrument Law provides that: “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.”

F. Effect of death of drawer

*In case of death of the drawer, the bank may refuse payment provided that there was a proper notice of the death of the drawer given to bank.

G. Pertinent Philippine Clearing House Corporation rules