Negotiable Instruments Law 2031

NEGOTIABLE INSTRUMENTS LAW I.

INTRODUCTION

A.

GOVERNING LAWS – – ACT No. 2031 effective June 2, 1911 (which amended some of the provisions of the Rules of the Law Merchant), the Code of Commerce and the Civil Code.

provide that an accommodation party is one who has signed an instrument as maker, drawer, acceptor of indorser without receiving value therefor, but is held liable on the instrument to a holder for value although the latter knew him to be only an accommodation party. This approach of both parties appears to be misdirected and their reliance misplaced. The promissory note hereinbefore quoted, as well as the mortgage deeds subject of this case, are clearly not negotiable instruments. These documents do not comply with the fourth requisite to be considered as such under Section 1 of Act No. 2031 because they are neither payable to order nor to bearer. The note is payable to a specified party, the GSIS. Absent the aforesaid requisite, the provisions of Act No. 2031 would not apply, governance shall be afforded, instead, by the provisions of the Civil Code and special laws on mortgages.

– the B. APPLICABILITY OF THE NEGOTIABLE INSTRUMENTS INSTRUMENTS LAW – Act applies only to negotiable instruments or those that meet the requirements under Sec. 1 of Act No. 2031. KRAUFFMAN VS. PNB (GR No. 16454, Sept. 29, 1921) - Herein plaintiff was entitled to P98,000 of the Philippine Fiber and Produce Company’s dividend for the year 1917. George B. Wicks, treasurer of the Company, requested that a telegraphic transfer of $45,000 to the plaintiff in New York City. Wicks drew and delivered a check for the amount of P90,355.50, total cost of said transfer, including exchange and cost of message which was accepted by the officer selling the exchange in payment of the transfer in question. question. As evidence of this transaction transaction a document was made out and delivered to Wicks, which is referred to by the bank's assistant cashier as its official receipt. On the same day the Philippine National Bank dispatched to its New York agency a cablegram for $45,000. However, the bank's representative in New York replied suggesting the advisability of withholding this money from Kauffman. The PNB dispatched to its New York agency another message to withhold the Kauffman payment as suggested. Meanwhile, upon advice of Wicks that the money has been placed to his credit, Kauffman presented himself at the office of the Philippine National Bank in New York and demanded the money. By this time, however, the message from the Philippine National Bank directing the withholding of payment had been received in New York, and payment was therefore refused. Thus the present complaint to recover said sum, with interest and costs. ISSUE: WON Act No. 2031 is applicable in the above case? HELD: NO. The provisions of the Negotiable Instruments Law to come into operation, there must be a document in existence of the character described in section 1 of the Law; and no rights properly speaking arise in respect to said instrument until it is delivered. In the case before us there was an order transmitted transmitted by the defendant bank to its New York branch, for the payment of a specified sum of money to George A. Kauffman. But this order was not made payable "to order or "to bearer," as required in Section 1(d) of that Act; and inasmuch as it never left the possession of the bank, or its representative in New York City, there was no delivery in the sense intended in Section 16 of the same Law. In this connection it is unnecessary to point out that the official receipt delivered by the bank to the purchaser of the telegraphic order, and already set out above, cannot itself be viewed in the light of a negotiable instrument, although it affords complete proof of the obligation actually assumed by the bank. GSIS VS. CA (GR No. L-40824, Feb. 23, 1989) - Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the Lagasca spouses, executed a deed of mortgage in favor of petitioner GSIS. Subsequently, another deed of mortgage was executed in connection with earlier two loans granted. A parcel of land, co-owned by said mortgagor spouses, was given as security under the aforesaid two deeds and they also executed a "promissory note". The Lagasca spouses executed an instrument denominated "Assumption of Mortgage" under which they obligated themselves to assume assume obligation to the GSIS. This undertaking was not fulfilled. Upon failure of the mortgagors to comply with the conditions of the mortgage, particularly the payment of the amortizations due, GSIS extra-judicially foreclosed the mortgage and caused the mortgaged property to be sold at public auction. Private respondents filed a complaint against the petitioner and the Lagasca spouses praying that the extrajudicial foreclosure be declared null and void. In their aforesaid complaint, they alleged that they signed the mortgage contracts not as sureties or guarantors for the Lagasca spouses but they merely gave their common property to the said co-owners who were solely benefited by the loans from the GSIS. Trial court dismissed the case. CA reversed decision stating that the respondents are that only of an accommodation party. ISSUE: WON the NIL is applicable to the promissory note and mortgage deed? HELD: No. Both parties relied on the provisions of Section 29 of Act No. 2031, otherwise known as the Negotiable Instruments Law, which

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C.

CONCEPT OF NEGOTIABLE INSTRUMENTS 1.

DEFINITION: Negotiable Instruments are written statements signed by the maker or drawer containing an unconditional promise or order to pay a sum certain money, payable on demand or at a fixed or determinable future time, to order or to bearer.

2.

FUNCTIONS OF NEGOTIABLE INSTRUMENTS a. Substitute for money - although they are not considered legal tender. One of its distinct characteristics is its negotiability which allows it to go from hand to hand in the commercial markets and to take the part of money in commercial transactions free from all personal defenses available against the original owner. b. Media of exchange – – they thus increase the purchasing medium in circulation. They are a safe and convenient means of doing business that eliminate the risk of dealing in cash. c. Medium of credit transactions – – they allow men of undoubted credit (such as those with illiquid properties) to carry on business enterprise upon their promissory notes, bills of exchange and checks knowing that other businessmen will treat these promises as cash.

Checks are primarily used for immediate payment ( substitute for money); while ordinary bill of exchange and the promissory note are intended for the circulation of credits ( credit instruments) 3.

– that amount which the creditor can be compelled LEGAL TENDER – that to accept as payment.

Sec. 52, New Central Bank Act

Sec. 60

— All notes and coins issued by the Legal Tender Power. — All Bangko Sentral shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private: Provided, however , That, unless otherwise fixed by the Monetary Board, coins shall be legal tender in amounts not exceeding Fifty pesos (P50.00) for denominations of Twentyfive centavos and above, and in amounts not exceeding Twenty pesos (P20.00) for denominations of Ten centavos. — Checks representing demand deposits Legal Character. — Checks do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor: Provided, however, That a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account

TIBAJIA VS. CA (GR No. 100290, June 4, 1993) - A writ of attachment was issued by the trial court in connection to the collection of a sum of money filed by Eden Tan against the Tibajia spouses. The fund was then on deposit with the cashier of the Regional Trial Court of Pasig. The Tibajia spouses thereafter delivered to the Deputy Sheriff the total money judgment in the form of Cashier's Check worth P262,750.00. However, Eden Tan, refused to accept the payment made and instead insisted that the garnished funds deposited with the cashier of the Regional Trial Court

Cesar Nickolai F. Soriano Jr. Arellano University School of Law 2011-0303 NEGOTIABLE INSTRUMENTS LAW (Act No. 2031) based on the book of Aquino and De Leon and Audio Lecture of Dean Sundiang

of Pasig be withdrawn to satisfy the judgment obligation. Petitioners filed a motion to lift the writ of execution on the ground that the judgment debt had already been paid but was denied by the trial court on the ground that payment in cashier's check is not payment in legal tender. When the petitioners' motion for reconsideration was denied, the spouses Tibajia filed herein petition. ISSUE: WON the delivery of the cashier's check is considered payment in legal tender? HELD: No. A check, whether a manager's check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. ( Philippine Airlines, Inc. vs. Court of Appeals and Roman Catholic Bishop of Malolos, Inc. vs. Intermediate Appellate Court). The ruling in the two (2) abovementioned cases decided by the Supreme Court applies the statutory provisions which lay down the rule that a check is not legal tender and that a creditor may validly refuse payment by check, whether it be a manager's, cashier's or personal check. PAL VS. CA (GR No. 49188, Jan. 30, 1990) - CFI Manila ruled in favor of Amelia Tan [under the name and style of Able Printing Press] in a complaint for damages against petitioner Philippine Airlines. On appeal, the CA upheld the decision of the CFI with minor modifications as to the damages to be awarded. The corresponding writ of execution was duly referred to Deputy Sheriff Emilio Z. Reyes for enforcement with checks in the name of the latter. Four months later, Amelia Tan moved for the issuance of an alias writ of execution since the judgment remained unsatisfied. The petitioner filed an opposition to the motion for the issuance of an alias writ of execution stating that it had already fully paid its obligation to plaintiff through the deputy sheriff of the respondent court, Emilio Z. Reyes, as evidenced by cash vouchers properly signed signed and received by said Emilio Z. Reyes. On March 3,1978, the Court of Appeals denied the issuance of the alias writ for being premature, ordering the executing sheriff Emilio Z. Reyes to appear with his return and explain the reason for his failure to surrender the amounts paid to him by petitioner PAL. However, the order could not be served upon Deputy Sheriff Reyes because he already absconded or disappeared. ISSUE: WON the payment rendered through a check made by PAL to the absconding sheriff in his name operate to satisfy the judgment debt? HELD: Under ordinary circumstances, payment by the judgment debtor to the sheriff should be valid payment to extinguish the judgment debt. There are circumstances, however, which compel a different conclusion such as when the payment made by the petitioner to the absconding sheriff was not in cash or legal tender but in checks. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance. Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment. A check, whether a manager’s check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3). PAL created a situation which permitted the said Sheriff to personally encash said checks and misappropriate the proceeds thereof to his exclusive personal benefit. For the prejudice that resulted, the petitioner himself must bear the fault. As between two innocent persons, one of whom must suffer the consequence of a breach of trust, the one who made it possible by his act of confidence must bear the loss. D.

CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS 1.

2.

– is that quality or attribute of a bill or note NEGOTIABILITY – whereby it may pass from one person to another similar to money, so as to give the holder in due course the right to collect on the instrument the sum payable for himself free from any defect in the title of any of the prior parties or defenses available to them among themselves. – as they are ACCUMULATION ACCUMULATION OF SECONDARY CONTRACTS – transferred from one person to another. Once an instrument is issued, additional parties can become involved.

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E.

INCIDENTS IN THE LIFE OF NEGOTIABLE INSTRUMENTS PROMISSORY NOTE BILL OF EXCHANGE Preparation & Signing Issuance Negotiation Presentment for Acceptance Acceptance Dishonor by Non-acceptance Presentment for payment Dishonor by Non-payment Notice of Dishonor Payment Discharge

F.

G.

KINDS OF NEGOTIABLE INSTRUMENTS 1.

– An unconditional promise PROMISSORY NOTES (Sec. 184, NIL) – An in writing mace 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 to bearer. a. Parties to a Negotiable Promissory Note are (1) Maker and (2) Payee; b. Kinds of Negotiable Promissory Note include certificates of deposits, bank notes, due bills and bonds.

2.

– An unconditional BILLS OF EXCHANGE (Sec. 126, 185, NIL) – order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or bearer. a. Parties to a Bill of Exchange are (1) Drawer, (2) Payee and (3) Drawee; b. Kinds of Bills of Exchange include drafts, trade acceptances and banker’s acceptances.

WHEN BILLS TREATED AS NOTES

Sec. 130

Sec. 17(e)

When bill may be treated as promissory note. - Where in a bill the drawer and drawee are the same person or where the drawee is a fictitious person or a person not having capacity to contract, the holder may treat the instrument at his option either as a bill of exchange or as a promissory note Construction where instrument is ambiguous. - Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply: (e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election;

H.

BILLS AND NOTES DISTINGUISHED

PROMISSORY NOTES 2 parties – parties – Maker and Payee

Maker cannot be the payee There is unconditional PROMISE by the maker Presentment for payment without prior acceptance Liability of the maker is primary and absolute I.

BILLS OF EXCHANGE 3 parties – – Drawer, Payee and Drawee Drawer and payee may be the same person There is unconditional ORDER by the drawer to the drawee Some Bills need prior acceptance by the drawee before presentment for payment Liability of the drawer is secondary and conditional

NEGOTIABLE INSTRUMENTS COMPARE WITH OTHER PAPERS (Negotiability vs. Assignability) Assignability) SESBRENO VS. CA (GR No. 89252, May 24, 1993) - Petitioner Sesbreno made a money market placement in the amount of P300,000 with the


of Pasig be withdrawn to satisfy the judgment obligation. Petitioners filed a motion to lift the writ of execution on the ground that the judgment debt had already been paid but was denied by the trial court on the ground that payment in cashier's check is not payment in legal tender. When the petitioners' motion for reconsideration was denied, the spouses Tibajia filed herein petition. ISSUE: WON the delivery of the cashier's check is considered payment in legal tender? HELD: No. A check, whether a manager's check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. ( Philippine Airlines, Inc. vs. Court of Appeals and Roman Catholic Bishop of Malolos, Inc. vs. Intermediate Appellate Court). The ruling in the two (2) abovementioned cases decided by the Supreme Court applies the statutory provisions which lay down the rule that a check is not legal tender and that a creditor may validly refuse payment by check, whether it be a manager's, cashier's or personal check. PAL VS. CA (GR No. 49188, Jan. 30, 1990) - CFI Manila ruled in favor of Amelia Tan [under the name and style of Able Printing Press] in a complaint for damages against petitioner Philippine Airlines. On appeal, the CA upheld the decision of the CFI with minor modifications as to the damages to be awarded. The corresponding writ of execution was duly referred to Deputy Sheriff Emilio Z. Reyes for enforcement with checks in the name of the latter. Four months later, Amelia Tan moved for the issuance of an alias writ of execution since the judgment remained unsatisfied. The petitioner filed an opposition to the motion for the issuance of an alias writ of execution stating that it had already fully paid its obligation to plaintiff through the deputy sheriff of the respondent court, Emilio Z. Reyes, as evidenced by cash vouchers properly signed signed and received by said Emilio Z. Reyes. On March 3,1978, the Court of Appeals denied the issuance of the alias writ for being premature, ordering the executing sheriff Emilio Z. Reyes to appear with his return and explain the reason for his failure to surrender the amounts paid to him by petitioner PAL. However, the order could not be served upon Deputy Sheriff Reyes because he already absconded or disappeared. ISSUE: WON the payment rendered through a check made by PAL to the absconding sheriff in his name operate to satisfy the judgment debt? HELD: Under ordinary circumstances, payment by the judgment debtor to the sheriff should be valid payment to extinguish the judgment debt. There are circumstances, however, which compel a different conclusion such as when the payment made by the petitioner to the absconding sheriff was not in cash or legal tender but in checks. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance. Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment. A check, whether a manager’s check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3). PAL created a situation which permitted the said Sheriff to personally encash said checks and misappropriate the proceeds thereof to his exclusive personal benefit. For the prejudice that resulted, the petitioner himself must bear the fault. As between two innocent persons, one of whom must suffer the consequence of a breach of trust, the one who made it possible by his act of confidence must bear the loss. D.

CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS 1.

2.

– is that quality or attribute of a bill or note NEGOTIABILITY – whereby it may pass from one person to another similar to money, so as to give the holder in due course the right to collect on the instrument the sum payable for himself free from any defect in the title of any of the prior parties or defenses available to them among themselves. – as they are ACCUMULATION ACCUMULATION OF SECONDARY CONTRACTS – transferred from one person to another. Once an instrument is issued, additional parties can become involved.

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E.

INCIDENTS IN THE LIFE OF NEGOTIABLE INSTRUMENTS PROMISSORY NOTE BILL OF EXCHANGE Preparation & Signing Issuance Negotiation Presentment for Acceptance Acceptance Dishonor by Non-acceptance Presentment for payment Dishonor by Non-payment Notice of Dishonor Payment Discharge

F.

G.

KINDS OF NEGOTIABLE INSTRUMENTS 1.

– An unconditional promise PROMISSORY NOTES (Sec. 184, NIL) – An in writing mace 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 to bearer. a. Parties to a Negotiable Promissory Note are (1) Maker and (2) Payee; b. Kinds of Negotiable Promissory Note include certificates of deposits, bank notes, due bills and bonds.

2.

– An unconditional BILLS OF EXCHANGE (Sec. 126, 185, NIL) – order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or bearer. a. Parties to a Bill of Exchange are (1) Drawer, (2) Payee and (3) Drawee; b. Kinds of Bills of Exchange include drafts, trade acceptances and banker’s acceptances.

WHEN BILLS TREATED AS NOTES

Sec. 130

Sec. 17(e)

When bill may be treated as promissory note. - Where in a bill the drawer and drawee are the same person or where the drawee is a fictitious person or a person not having capacity to contract, the holder may treat the instrument at his option either as a bill of exchange or as a promissory note Construction where instrument is ambiguous. - Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply: (e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election;

H.

BILLS AND NOTES DISTINGUISHED

PROMISSORY NOTES 2 parties – parties – Maker and Payee

Maker cannot be the payee There is unconditional PROMISE by the maker Presentment for payment without prior acceptance Liability of the maker is primary and absolute I.

BILLS OF EXCHANGE 3 parties – – Drawer, Payee and Drawee Drawer and payee may be the same person There is unconditional ORDER by the drawer to the drawee Some Bills need prior acceptance by the drawee before presentment for payment Liability of the drawer is secondary and conditional

NEGOTIABLE INSTRUMENTS COMPARE WITH OTHER PAPERS (Negotiability vs. Assignability) Assignability) SESBRENO VS. CA (GR No. 89252, May 24, 1993) - Petitioner Sesbreno made a money market placement in the amount of P300,000 with the


Philippine Underwriters Finance Corporation (PhilFinance), with a term of 32 days. PhilFinance issued to Sesbreno (1) the Certificate Certificate of C onfirmation of Sale of a Delta Motor Corporation Promissory Note, (2) the Certificate of Securities Delivery Receipt indicating the sale of the note with notation that said security was in the custody of Pilipinas Bank, and (3) post-dated checks drawn against the Insular Bank of Asia and America for P304,533.33 P304,533.33 payable on March 13, 1981. The checks were dishonored for having been drawn against insufficient funds. Pilipinas Bank never released the note, nor any instrument related thereto, to Sesbreno; but Sesbreno learned that the Delta Promissory Note maturing on 6 April 1981, has a face value of P2,300,833.33 with PhilFinance as payee and Delta Motors as maker; and was stamped “non“non -negotiable” on its face. PhilFrance was later on placed under the custody of the Securities and Exchange Commission. As Sesbreno was unable to collect his investment and interest thereon, he filed an action for damages against Delta Motors and Pilipinas Bank. Delta Motors contends that said promissory note was not intended to be negotiated or otherwise transferred by Philfinance as manifested by the word "non-negotiable" stamped across the face of the Note. The trial court and the CA dismissed petitioner’s complaint and appeal, respectively, for lack of cause of action. If anything, petitioner has a cause of action against Philfrance, which, however, was not impleaded. ISSUE: WON the non-negotiability of a promissory note prevents its assignment? HELD: No. A negotiable instrument, instead of being negotiated, may also be assigned or transferred. The legal consequences of negotiation and assignment of the instrument are different. A nonnegotiable instrument may not be negotiated but may be assigned or transferred, absent an express prohibition against assignment or transfer written in the face of the instrument. The subject promissory note, while marked "non-negotiable," was not at the same time stamped "non-transferable" or "non-assignable." It contained no stipulation which prohibited Philfinance from assigning or transferring such note, in whole or in part. J.

II. FORM AND INTERPRETATION OF NEGOTIABLE INSTRUMENTS A.

CALTEX VS. COURT OF APPEALS (GR No. 97753, Aug. 10, 1992) Respondent bank issued 280 certificates of time deposit (CTDs) in favor of Angel dela Cruz who delivered the same to herein petitioner in connection with his purchased fuel products. Eventually, dela Cruz executed and delivered an Affidavit of Loss for the reissuance of the CTDs. Dela Cruz later on obtained a loan from respondent bank and negotiated the said CTDs, executing a Deed of Assignment of Time Deposit which stated, among others, that the bank has full control of the indicated time deposits from and after date of the assignment and may set-off such and apply the same to the payment of amount or amounts that may be due on the loan upon maturity.

Petitioner then went to the Sucat branch for verification of the CTDs declared lost, alleging that the same were delivered to herein petitioner as “security for purchases made with Caltex Philippines, Inc.” and requested that the CTDs be pre-terminated, which was refused by the respondent bank due to the failure of petitioner to present requested documents to prove such allegation. Petitioner then filed a complaint in the RTC, which was dismissed. On appeal, the CA affirmed the decision of the RTC. Thus, the present petition. ISSUE: WON the CTDs are considered negotiable? is reproduced HELD: Yes. A sample text of the certificates of time deposit is below: SECURITY BANK AND TRUST COMPANY 6778 Ayala Ave., Makati No. 90101 Metro Manila, Philippines SUCAT OFFICE P4,000.00 CERTIFICATE OF DEPOSIT Rate 16% Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____ This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said depositor 731 days. after date, upon presentation and surrender of this certificate, with interest at the rate of 16% per cent per annum . (Sgd. Illegible) (Sgd. Illegible) AUTHORIZED SIGNATURES

SOME NON-NEGOTIABLE INSTRUMENTS – like a certificate of stock, bill of lading and 1. Document of Title – warehouse receipt (non-negotiable because there is no unconditional promise or order to pay a certain sum in money); – a letter from a merchant or bank or banker in 2. Letter of Credit – a one place, addressed to another, in another place or country, requesting the addressee to pay money or deliver goods to a third party therein named, the writer of the letter undertaking to provide him the money for the goods or to repay him. It is a letter requesting one person to make advances to a third person on the credit of the writer. (It is in favor of a certain person and not to order) government warrant for the payment of 3. Treasury Warrant - it is a government money such as that issued in favor of a public officer or employee covering payment or replenishment of cash advances for official expenditures. (It is payable out of a specific fund or appropriation) 4. Postal Money Order PHILIPPINE EDUCATION CO. VS. SORIANO (GR No. L-22405, June 30, 1971) - Enrique Montinola sought to purchase from the Manila Post Office 10 money orders (P200 each), offering to pay for them with a private check. Montinola was able to leave the building with his check and the 10 money orders without the knowledge of the teller. Upon discovery, message was sent to all postmasters and banks involving the unpaid money orders. One of the money orders was received by the Philippine Education Co. as part of its sales receipt. It was deposited by the company with the Bank of America, which cleared it with the Bureau of Post. The Postmaster, through the Chief of the Money Order Division of the Manila Post Office informed the bank of the irregular issuance of the money order. The bank debited the account of the company. The company moved for reconsideration. ISSUE: WON postal money orders are negotiable instruments? HELD: No. Philippine postal statutes are patterned from those of the United States, and the weight of authority in said country is that Postal money orders are not negotiable instruments inasmuch as the establishment of a postal money order is an exercise of governmental power for the public’s benefit. Furthermore, some of the restrictions imposed upon money order by postal laws and regulations are inconsistent with the character of negotiable instruments. For instance, postal money orders may be withheld under a variety of circumstances, and which are restricted to not more than one indorsement

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HOW NEGOTIABILITY IS DETERMINED?

Section 1, of Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites for an instrument to become negotiable. The CTDs in question undoubtedly meet the requirements of the law for negotiability. The accepted rule is that the negotiability or nonnegotiability of an instrument is determined from the writing, that is, from the fact of the instrument itself. Contrary to what respondent court held (that the CTDs are payable to the th e “depositor” which is Angel dela Cruz), the documents provide that the amounts deposited shall be repayable to the depositor. And who, according to the document is the depositor? It is the “bearer”. The documents do not say that the depositor is Angel dela dela Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment. B.

EFFECT OF ESTOPPEL BANCO DE ORO SAVINGS VS. EQUITABLE BANKING CORP. (GR No. 74917, Jan. 20, 1988) - Manager's checks (Checks) having an aggregate amount of P45,982.23 and payable to certain member establishments of Visa Card. Subsequently, the Checks were deposited with the defendant (respondent Equitable) to the credit of its depositor (Aida Trencio’s account). Following normal procedures, and after stamping at the back of the Checks the usual endorsements (All prior and/or lack of endorsement guaranteed), Equitable sent the checks for clearing through the Philippine Clearing House Corporation (PCHC). Accordingly, BDO paid the Checks; its clearing account was debited for the value of the Checks and defendant's clearing account account was credited credited for the same amount. Thereafter, BDO discovered that the endorsements appearing at the back of the Checks, purporting to be that of the payees, were forged and/or unauthorized or otherwise belong to persons other than the payees. Pursuant to the PCHC Clearing Rules and Regulations, it presented the Checks directly to


Equitable for the purpose of claiming reimbursement from the latter. However, Equitable refused to do so. After an exhaustive investigation and hearing, the Arbiter rendered a decision in favor of BDO and against Equitable ordering the PCHC to debit the clearing account of the defendant (E), and to credit the clearing account of the plaintiff (B) of the foregoing amount with interest at the rate of 12% per annum from date of the complaint. The Board of Directors of the PCHC affirmed the decision of the Arbiter. Hence this petition. ISSUE 1: Were the subject checks nonnegotiable and if not, does it fall under the ambit of the power of the PCHC? OR Does the PCHC has jurisdiction over the controversy involved in view of petitioner’s claim petitioner’s claim that the subject matter of the case (the Checks) was not negotiable. HELD: Yes. As provided in the articles of incorporation of PCHC, its operation extend to "clearing checks and other clearing items." No doubt transactions on non-negotiable checks are within the ambit of its jurisdiction. The term check as used in the said Articles of Incorporation of PCHC can only connote checks in general use in commercial and business activities. It cannot be conceived to be limited to negotiable checks only. Checks are used between banks and bankers and their customers, and are designed to facilitate banking operations. It is of the essence to be payable on demand, because the contract between the banker and the customer is that the money is needed on demand. Further, the participation of the two banks, petitioner and private respondent, in the clearing operations of PCHC is a manifestation of their submission to its jurisdiction. ISSUE 2: How does principle of estoppel apply? HELD: Petitioner is estopped from raising the defense of nonnegotiability of the checks in question. It stamped its guarantee on the back of the checks and subsequently presented these checks for clearing and it was on the basis of these endorsements by the petitioner that the proceeds were credited in its clearing account. The principle of estoppel effectively prevents the defendant from denying liability for any damages sustained by the plaintiff which, relying upon an action or declaration of the defendant, paid on the Checks. The same principle of estoppel effectively prevents the defendant from denying the existence of the Checks. The petitioner by its own acts and representation cannot now deny liability because it assumed the liabilities of an endorser by stamping its guarantee at the back of the checks. The petitioner having stamped its guarantee of "all prior endorsements and/or lack of endorsements" (Exh. A-2 to F-2) is now estopped from claiming that the checks under consideration are not negotiable instruments. The checks were accepted for deposit by the petitioner stamping thereon its guarantee, in order that it can clear the said checks with the respondent bank. By such deliberate and positive attitude of the petitioner it has for all legal intents and purposes treated the said cheeks as negotiable instruments and accordingly assumed the warranty of the endorser when it stamped its guarantee of prior endorsements at the back of the checks. It led the said respondent to believe that it was acting as endorser of the checks and on the strength of this guarantee said respondent cleared the checks in question and credited the account of the petitioner. Petitioner is now barred from taking an opposite posture by claiming that the disputed checks are not negotiable instrument. PBCOM VS. JOSE ARUEGO (GR No. L-25836-37, Jan. 31, 1981) - Herein plaintiff instituted against an action against defendant for the recovery of the total sum of money plus interests and attorney’s fees. The complaint filed by the Philippine Bank of Commerce contains twenty-two (22) causes of action referring to twenty-two (22) transactions entered into by the said Bank and Aruego on different dates. The sum sought to be recovered represents the cost of the printing of "World Current Events," a periodical published by the defendant. To facilitate the payment of the printing the defendant obtained a credit accommodation from the plaintiff. Thus, for every printing of the "World Current Events," the printer collected the cost of printing by drawing a draft against the plaintiff, said draft being sent later to the defendant for acceptance. As an added security for the payment of the amounts advanced to printer, the plaintiff bank also required defendant Aruego to execute a trust receipt in favor of said bank wherein said defendant undertook to hold in trust for plaintiff the periodicals and to sell the same with the promise to turn over to the plaintiff the proceeds of the sale of said publication to answer for the payment of all obligations arising arising from the draft. Defendant filed an answer interposing for his defense that he signed the drafts in a representative capacity, that he signed only as accommodation party and that the drafts signed by him were not really bills of exchange but mere

4

pieces of evidence of indebtedness because payments were made before acceptance. ISSUE1: WON the drafts Aruego signed were bills of exchange? HELD: YES. Under the Negotiable Instruments Law, a bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. As long as a commercial paper conforms with the definition of a b ill of exchange, that paper is considered a bill of exchange. The nature of acceptance is important only in the determination of the kind of liabilities of the parties involved, but not in the determination of whether a commercial paper is a bill of exchange or not. ISSUE2: WON Aruego is personally liable? HELD: YES. Firstly, Section 20 of the Negotiable Instruments Law provides that "Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent or as filing a representative character, without disclosing his principal, does not exempt him from personal liability." An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he was signing as a representative of the Philippine Education Foundation Company. He merely signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his principal, Aruego is personally liable for the drafts he accepted. Secondly, an accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value therefor and for the purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of the taking of the instrument knew him to be only an accommodation accommodation party. In lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. He lends his name to enable the accommodated party to obtain credit or to raise money. He receives no part of the consideration for the instrument but assumes liability to the other parties thereto because he wants to accommodate another. In the instant case, the defendant signed as a drawee/acceptor. Under the Negotiable Instrument Law, a drawee is primarily liable. Thus, if the defendant who is a lawyer, he should not have signed as an acceptor/drawee. In doing so, he became primarily and personally liable for the drafts. C.

REQUISITES OF NEGOTIABILITY

Section 1. Form of negotiable instruments. - An instrument to be negotiable must conform to the following requirements

(a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. (a) It must be in writing and signed by the maker or drawer; Section 191. Definition and meaning of terms . “Written “Written ” includes printed, and “writing ” includes print.

of the maker or drawer is usually written, preferably with the full Signature of name or at least the surname. However, initials or any mark will be sufficient, provided that such signature be used as a substitute and the maker or drawer intends to be bound by it. Signature is presumed valid , the person denying and to whom the signature operates must provide evidence of its invalidity. (b) Must contain an unconditional promise or order to pay a sum certain in money; Money is the medium of exchange authorized or adopted by a domestic or foreign government as part of its currency. In a literal sense, the term means “cash”. It includes includes all legal tender tender which has been defined in p.1.


1.

Sec. 10

Promise or Order to Pay Terms, when sufficient. - The instrument need not follow the language of this Act, but any terms are sufficient which clearly indicate an intention to conform to the requirements hereof.

Clear intention of the parties – the substance of the transaction rather than the form is the criterion of negotiability. Instead of “promise” the words “bind myself” may be used; instead of “on demand”, the words “on call” may be used and instead of “bearer”, the word “holder” may be used. Mere defect in language or grammatical error – The words “himself order” may be construed as “himself or order” and thus not render the instrument non-negotiable. 2.

Promise or Order to Pay Must be Unconditional

Condition – Resolutory or Suspensive - In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition (Art. 1181, NCC) Period – As opposed to a condition, is when the event is certain to happen or come. 3.

When is a promise unconditional

Promissory Notes : It is not essential that the word “promise” be used. Any words equivalent to a promise or assumption of responsibility for the payment of the note (like “payable”, “to be paid”, “I agree to pay”, “I guarantee to pay”, “M obliges himself to pay”, “good for”, “due on demand”, etc.) are sufficient to constitute a “promise to pay”.

However, bare acknowledgements like “IOU”, “Due P1,000” or “for value received” do not constitute promise to pay and are non-negotiable, unless words constituting a promise to pay is added, like “IOU (or Due) P1,000 to be paid on Jan. 8”. Bills of Exchange: It is not necessary to use the word “order”. Any other words like “Let the bearer” or “Drawer obliges the drawee to pay P or order” are sufficient.

An order is a command or imperative direction and, therefore, a mere request, supplication, or authority (like “I request you to pay”, or “I hope you will pay” or “I authorize you to pay”) is not sufficient. However, the use of polite words like “please” does not convert an order to a request. Sec. 3

When promise is unconditional. - An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with:

(a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or (b) A statement of the transaction which gives rise to the instrument.

Sec. 39

But an order or promise to pay out of a particular fund is not unconditional. Conditional indorsement., - see Part III, Conditional Indorsement, p. 13.

Sec. 3 (a): does not render the instrument non-negotiable because the reimbursement is a subsequent act to the payment, which still makes it absolute. Same is true if there is indication of a particular fund to be “debited”, like “Pay P or order the sum of P10,000 and charge it to my account”, because here the instrument is payable absolutely, the “debit” of the account is also a subsequent act to the payment. Sec. 3, last paragraph : The instrument is deemed non-negotiable because

5

the payment depends upon the adequacy or existence of the fund designated. It is immaterial, whether the fund has sufficient funds at maturity. METROPOLITAN BANK & TRUST CO. VS. CA (GR No. 88866; Feb. 18, 1991) - Eduardo Gomez opened an account with Golden Savings and deposited over a period of two months 38 treasury warrants. They were all drawn by the Philippine Fish Marketing Authority and purportedly signed by its General Manager and counter-signed by its Auditor. Six of these were directly payable to Gomez while the others appeared to have been indorsed by their respective payees, followed by Gomez as second indorser. On various dates all these warrants were subsequently indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account in the Metrobank. They were then sent for clearing by the branch office to the principal office of Metrobank, which forwarded them to the Bureau of Treasury for special clearing. After being told to wait several times, Gloria Castillo and Gomez made subsequent withdrawals at Metrobank with the impression that the treasury warrants had been cleared. Metrobank informed Golden Savings that 32 of the warrants had been dishonored by the Bureau of Treasury and demanded the refund by Golden Savings of the amount it had previously withdrawn, to make up the deficit in its account. The demand was rejected. ISSUE : WON treasury warrants are negotiable instruments? HELD: No. The treasury warrants in question are not negotiable instruments. Clearly stamped on their face is the word "non-negotiable." Moreover, it is indicated that they are payable from a particular fund, to wit, Fund 501. Sections 1 and 3 of the Negotiable Instruments Law especially underscored this requirement. The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the order or promise to pay "not unconditional" and the warrants themselves non-negotiable. Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that they were "genuine and in all respects what they purport to be," in accordance with Section 66 of the Negotiable Instruments Law. The simple reason is that this law is not applicable to the non-negotiable treasury warrants. The indorsement was made by Gloria Castillo not for the purpose of guaranteeing the genuineness of the warrants but merely to deposit them with Metrobank for clearing. 4.

Provisions which do not affect certainty of sum

The Basic Test : is whether the holder can determine by calculation or computation the amount payable when the instrument is due.

Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum certain within the meaning of this Act, although it is to be paid: (a) with interest; or (b) by stated installments; or (c) by stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; or (d) with exchange, whether at a fixed rate or at the current rate; or (e) with costs of collection or an attorney's fee, in case payment shall not be made at maturity. Sec. 2(b) : STATED instalments must clearly indicate the amount due on each instalment and the interest, if any. A bill or note indicating “payable in tw o instalments” or “in instalments” does not fulfil the requirement of the law. Sec. 2(c): Stated instalments with acceleration clause: Acceleration clause – requires the debtor to pay off the balance sooner than the due date if some specified event occurs, such as failure to pay an instalment. Insecurity clause – allows the creditor to demand immediate and full payment of the loan balance if the creditor has reason to believe that the debtor is about to default, as when the debtor suddenly loses a significant source of income. Extension clause – allows additional time for the payment of the loan due. Acceleration at the option of the HOLDER will render the instrument nonnegotiable. Sec. 2(d): refers to instruments payable in foreign currency. Exchange is the charge for the expense of providing funds at the place where the instrument is


payable to meet the instrument which is issued at another place. It may be at a fixed rate or at the current rate. Ex. M promises to pay P or order $1,000 “with exchange at ¾%” or “at the current rate”. Sec. 2(e): does not affect negotiability because such takes place after maturity.

Sec. 5

Sec. 6

Additional provisions not affecting negotiability. - An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. But the negotiable character of an instrument otherwise negotiable is not affected by a provision which:

(a) authorizes the sale of collateral securities in case the instrument be not paid at maturity; or (b) authorizes a confession of judgment if the instrument be not paid at maturity; or (c) waives the benefit of any law intended for the advantage or protection of the obligor; or (d) gives the holder an election to require something to be done in lieu of payment of money. But nothing in this section shall validate any provision or stipulation otherwise illegal. Omissions; seal; particular money. - The validity and negotiable character of an instrument are not affected by the fact that: (e) designates a particular kind of current money in which payment is to be made.

General Rule is that, an additional act, aside from payment of money, is prohibited. This is based on the fact that while the “payment of m oney” may be indorsed, the “additional act” would have to be assigned. The following clauses have been held to render non-negotiable the instrument: * “pay for taxes assessed upon the note or its mortgage security” (Hubard vs. Robert Wallace Co.); * “keep free from encumbrance property on which the value of collateral pledged for security of the instrument depends” (Streckhold vs. National Salt Co.) * “promise to insure the property pledged as security” (First State Savings Bank vs. Russel)

accommodation party – when his obligation will arise. Sec. 4. Determinable future time; what constitutes . - An instrument is payable at a determinable future time, within the meaning of this Act, which is expressed to be payable: (a) At a fixed period after date or sight; or (b) On or before a fixed or determinable future time specified therein; or (c) On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain. An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect Time Instruments Sec. 4(a): To pay on Aug. 12, 2013; Sec. 4(b): To pay sixty days after date; Sec. 4(c): To pay after P dies. Sec. 4, last paragraph: refers to a condition which may or may not happen. A negotiable instrument must be payable in all events.

Sec. 7. When payable on demand. - An instrument is payable on demand: (a) When it is so expressed to be payable on demand, or at sight, or on presentation; or (b) In which no time for payment is expressed. Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand. Demand Instruments are those which are payable on demand, due and payable immediately after delivery. It is a present debt due at once. (d) Payable to order or bearer

Sec. 8

(a) A payee who is not maker, drawer, or drawee; or (b) The drawer or maker; or (c) The drawee; or (d) Two or more payees jointly; or (e) One or some of several payees; or (f) The holder of an office for the time being.

Exceptions are: Sec. 5(a) : “I promise to pay P or order the sum of P1,000 secured by a ring I delivered to him by way of pledge and which he could sell should I fail to pay him at maturity” – the additional act is to be performed after non-payment at maturity. Until maturity, the promise is to pay money only. Sec. 5(b) : “I promise to pay P or order P10,000 and I hereby authorize my attorney-at-law to appear in any court of record after the obligation becomes due and waive the issuing and service of processes and confess a judgment against me in favor of the holder and thereupon waive all errors in any such proceedings and waive all right of appeal” – confession of judgment is a written acknowledgment by the defendant of his indebtedness and liability to the plaintiff. It enables the holder to obtain a judgment without the delay usually incident to a lawsuit. While not authorized in this jurisdiction, because it deprives the maker or drawer a day in court, it nevertheless does not affect negotiability. A confession of judgment given AFTER the action is brought to save expenses is valid. Sec. 5(c): “Notice of dishonor waived” – even waiver of protest, presentment for payment, or demand, would not destroy negotiability. Sec. 5(d): “or an airconditioner at the option of the holder” – since the holder has the choice, the instrument is still negotiable because he can still demand payment of money. If the option is on the promisor, it would be difficult to compel him to make payment in money. (c) Payable on demand or at a fixed or determinable future time Time must be certain so that the holder will know when he may enforce the instrument, and the person liable – maker, drawee, or acceptor – when he may be required to pay, or the secondary parties – drawer, indorser or

6

When payable to order . - The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of:

Sec. 9

Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. When payable to bearer . - The instrument is payable to bearer: (a) When it is expressed to be so payable; or (b) When it is payable to a person named therein or bearer; or (c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or (d) When the name of the payee does not purport to be the name of any person; or (e) When the only or last indorsement is an indorsement in blank.

Payable to Order : when it is payable to the (1) order of a specified person; or (2) to him or his order. Consequently, an instrument payable to a specified person (Pay to P), is not a negotiable order instrument. Sec. 8(b) : An instrument payable to the maker is not complete until indorsed by him. (Sec. 184) Sec. 8(c): Being payable to the drawee, he may pay himself at maturity from the funds of the drawer. Sec. 8(d): Pay to A and B; for Sec. 8(e), Pay to A or B. Sec. 8(f): Pay to the order of the Commissioner of Internal Revenue. Sec. 8, last paragraph : If there is no payee, there is nobody who could give the order or authority to collect or otherwise indorse and, therefore, there is no


point in considering it negotiable. Bearer Instruments produce the following effect: (a) it is payable to bearer; (b) payment to any person in possession thereof in good faith and without notice that his title is defective, at or after maturity (Sec. 88) discharges the instrument (Sec. 119); (c) Delivery alone is enough to effect negotiation (Sec. 30). Sec. 9(a) and (b) are originally bearer instruments. Those under subsection (c), (d) and (e) are order instruments on the face converted to bearer instruments. Sec. 9(c): A fictitious person is meant to be one who, though named, as payee, has no right to it because the maker or drawer so intended and it matters not, whether the name of the payee used by him be that one living or dead, or one who never existed. (Snyder vs. Com. Exch. Nat. Bank) Sec. 9(c) and (d): They are treated as bearer instruments because it is impossible to indorse when it is payable to “cash, sundries” or a fictitious person. ANG TEK LIAN VS. CA (GR No. L-2516; Sept. 25, 1950) - Petitioner Ang Tek Lian approached Lee Hua and asked him if he could give him P4,000.00. He said that he is supposed to withdraw from the bank but his bank was already closed. In exchange, he gave respondent Lee Hua a check which is “ payable to the order of ‘cash”. When Lee Hua presented the check for payment the next day, he discovered that it has an insufficient funds, hence, was dishonored by the bank. In his defense, Ang Tek Lian argued that he did not indorse the check to Lee Hua when the latter accepted the check without his indorsement. ISSUE: WON Ang Tek Lian’s indorsement of the said check is necessary to hold him liable for the dishonored check? HELD: No. Under Section 9 of the Ne gotiable Instruments Law, a check drawn payable to the order of “cash” is a check payable to bearer and the bank may pay it to the person presenting it for payment without drawer’s indorsement . Consequently, the form of the check was totally unconnected with its dishonor. The check was returned unsatisfied because the drawer had insufficient funds and not because the drawer’s indorsement was lacking . Hence, Ang Tek Lian may be held liable for estafa because under article 315, paragraph d, subsection 2 of the Revised Penal Code, one who issues a check payable to cash to accomplish deceit and knows that at the time he had no sufficient deposit with the bank to cover the amount of the check and without informing the payee of such circumstances is guilty of estafa.

easy, and cheap way to settle and secure debts. They are quick remedy serve to save the court's time. They also save time and money of the litigants and the government the expenses that a long litigation entails. In one sense, instruments of this character may be considered as special agreements, with power to enter up judgments on them, binding the parties to the result as they themselves viewed it. On the other hand, are disadvantages to the commercial world which outweigh the considerations just mentioned. Such warrants of attorney are void as against public policy, because they enlarge the field for fraud, because under these instruments the promissor bargains away his right to a day in court, and because the effect of the instrument is to strike down the right of appeal accorded by statute. The recognition of such form of obligation would bring about a complete reorganization of commercial customs and practices, with reference to short-term obligations. It can readily be seen that judgment notes, instead of resulting to the advantage of commercial life in the Philippines, might be the source of abuse and oppression, and make the courts involuntary parties thereto. If the bank has a meritorious case, the judgment is ultimately certain in the courts. The Court is of the opinion thus that warrants of attorney to confess judgment are not authorized nor contemplated by Philippine law; and that provisions in notes authorizing attorneys to appear and confess judgments against makers should not be recognized in this jurisdiction by implication and should only be considered as valid when given express legislative sanction. 1.

Sec. 6

Sec. 11

Sec. 12

D.

OMISSIONS AND NEGOTIABILITY

PROVISIONS

THAT

DO

NOT

7

Sec. 13

AFFECT

PNB VS. MANILA OIL REFINING (GR No. L-18103; June 8, 1922) The manager and treasurer of respondent company executed and delivered to the Philippine National Bank (PNB), a promissory note which provides a promise to pay petitioner bank the amount of P61,000 and that in case payment was not made at time of maturity, any lawyer in the Philippines is authorize to represent the company and confess judgment for the said sum with interest, cost of suit and attorney's fees of ten% for collection, a release of all errors and waiver of all rights to inquisition and appeal, and to the benefit of all laws exempting property, real or personal, from levy or sale. Indeed, Manila Oil has failed to pay on demand. This prompted the bank to file a case in court, wherein an attorney associated with them entered his appearance for the defendant. To this the defendant objected. ISSUE : WON provisions in notes authorizing attorneys to appear and confess judgments against makers should not be recognized in Philippine jurisdiction by implication? HELD: No. Judgments by confession as appeared at common law were considered an amicable,

Omissions; seal; particular money. - The validity and negotiable character of an instrument are not affected by the fact that:

(a) it is not dated; or (b) does not specify the value given, or that any value had been given therefor; or (c) does not specify the place where it is drawn or the place where it is payable; or (d) bears a seal; or (e) designates a particular kind of current money in which payment is to be made.

(e) Identity of the drawee Sec. 130. When bill may be treated as promissory note. - Where in a bill the drawer and drawee are the same person or where the drawee is a fictitious person or a person not having capacity to contract, the holder may treat the instrument at his option either as a bill of exchange or as a promissory note

OMISSIONS

Sec. 14

But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument. Date, presumption as to. - Where the instrument or an acceptance or any indorsement thereon is dated, such date is deemed prima facie to be the true date of the making, drawing, acceptance, or indorsement, as the case may be. Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery. When date may be inserted. - Where an instrument (1) expressed to be payable at a fixed period after date is issued undated , or (2) where the acceptance of an instrument payable at a fixed period after sight is undated , any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date. (emphasis supplied) Blanks; when may be filled. - 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. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party


thereto prior to its completion , it must be (1) filled up strictly in accordance with the authority given and (2) within a reasonable time.

But 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.

Sec. 17 Sec. 53 Sec. 71

(separation and emphasis supplied) Construction where instrument is ambiguous. – see E. Interpretation of Instruments. When person not deemed holder in due course. – see HOLDER IN DUE COURSE, p. 16 Presentment where instrument is not payable on demand and where payable on demand. – (1) Where the instrument is not payable on demand, presentment must be made on the day it falls due. Where it is payable on demand, presentment must be made within a reasonable time after its issue, except that in the case of a bill of exchange, presentment for payment will be sufficient if made within a reasonable time after the last negotiation thereof.

Sec. 11: He who claims that some other date is the true date has the burden of establishing such claim. Sec. 13: If an undated note payable to P matures on Aug. 29, 2013, 30 days after issuance, but P inserted July 15 to hasten maturity date, P cannot enforce payment because it is avoided as to him who ante-dated for fraudulent purposes (Sec. 12). But if it was indorsed to A, a holder in due course, he may collect on Aug. 14, as if the date inserted was the true date.

E.

INTERPRETATION OF INSTRUMENTS Sec. 17. Construction where instrument is ambiguous . - Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply:

(a) Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount; (b) Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof; (c) Where the instrument is not dated, it will be considered to be dated as of the time it was issued; (d) Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail; (e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; (f) Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser; (g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon. Sec. 17(d): Reason for this rule is that, the written words are deemed to express the true intention of the maker or drawer because they are placed there by himself. Also, because the amount in words are harder to alter (Sundiang, 2010 audio lecture). Sec. 17(g): Joint and Solidary Obligation

Sec. 14 : Material Particular is any particular proper to be inserted in a negotiable instrument to make it complete. Authority to Complete does not carry with it the authority to alter (Sec. 124). Authority to put any amount – there must be showing of intention to convert it to a negotiable instrument. Otherwise, it cannot be enforced against the maker, even by a holder in due course (Sec. 15). Holder NOT in due course of an instrument filled up in excess of the authority given is treated as a holder of a materially altered instrument (Sec. 124) and therefore cannot collect to parties prior to completion who did not assent to the alteration. If M issues a note and authorized P, payee, to insert P1,000, but P inserts P2,000, N, a subsequent holder NOT in due course cannot enforce it against M. But if N was a holder in due course, he can enforce the instrument against M upto the stated amount of P2,000 since it is conclusive that there was authority to fill up the instrument and the same was not done in excess of authority. 2.

ADDITIONAL PROVISIONS NOT AFFECTING NEGOTIABILITY – Sec. 5 (supra, p.6) a. Confession of Judgment – see p.6 a.1 Warrant of attorney – to confess judgment, however, are not authorized nor contemplated by our law because under these instruments, the promisor bargains away his right to a day in court. (PNB vs. MANILA OIL REFINING, supra, p.6 ) a.2 Cognovit Actionem – “he has confessed the action” a.3 Relicta Verificationem – “his pleading being abandoned”; a confession of judgment accompanied by a withdrawal of the plea. b. Waiver of Obligor – Sec. 109. Waiver of notice . - Notice of dishonor may be waived either before the time of giving notice has arrived or after the omission to give due notice, and the waiver may be expressed or implied.

8

REPUBLIC PLANTERS BANK VS. CA (GR No. 93073; Dec. 21, 1992) In 1979, World Garment Manufacturing, through its board authorized Shozo Yamaguchi (president) and Fermin Canlas (treasurer) to obtain credit facilities from Republic Planters Bank (RPB). For this, 9 promissory notes were executed. Each promissory note was uniformly written in the following manner: ___________, after date, for value received, I/we, jointly and severally promise to pay to the ORDER of the REPUBLIC PLANTERS BANK, at its office i n Manila, Philippines, the s um of ___________ PESOS(….) Philippine Currency … Please credit proceeds of this note to: ________ Savings Account ______XX Current Account No. 1372-00257-6 of WORLDWIDE GARMENT MFG. CORP. Sgd. Shozo Yamaguchi Sgd. Fermin Canlas

The note became due and no payment was made. RPB eventually sued Yamaguchi and Canlas. Canlas, in his defense, averred that he should not be held personally liable for such authorized corporate acts that he performed inasmuch as he signed the promissory notes in his capacity as officer of the defunct Worldwide Garment Manufacturing. ISSUE: WON Canlas should be held liable for the promissory notes? HELD: Yes. The solidary liability of private respondent Fermin Canlas is made clearer and certain, without reason for ambiguity, by the presence of the phrase “joint and several” as describing the unconditional promise to pay to the order of Republic Planters Bank. Where an instrument containing the words “I promise to pay” is signed by two or more persons, they are deemed to be jointly and severally liable thereon . Canlas is solidarily liable on each of the promissory notes bearing his signature for the following reasons: The promissory notes are negotiable instruments and must be governed by the Negotiable Instruments Law. Under the Negotiable lnstruments Law, persons who write their names on the face of promissory notes are makers and are liable as such. By signing the notes, the maker promises to pay to the order of the payee or any holder according to the tenor thereof.


SPS. EVANGELISTA VS. MERCATER FINANCE CORP. (GR No. 148864; Aug. 21, 2003) - Petitioner spouses filed a complaint against respondents for the foreclosure of the mortgage on their property and eventual its eventual sale, claiming, among others, that they executed the said mortgage on their capacity as officers of Embassy Farms, and not on their personal capacity, thus, there is no consideration received by them, making the mortgage voidable. Respondent, on the other hand, claims that the promissory note for the loan, for which the mortgage was executed, shows that the spouses signed as co-makers, also with the succeeding promissory notes. The RTC, upon motion of the respondent, granted summary judgment and dismissed the complaint. On appeal, the CA affirmed in toto the decision of the RTC. ISSUE: WON petitioners are solidarily liable with Embassy Farms for the loan as evidenced by the promissory note? HELD: Yes. The promissory note reads: For value received, I/We jointly and severally promise to pay to the order of MERCATOR FINANCE CORPORATION at its office, the principal sum of EIGHT HUNDRED FORTY-FOUR THOUSAND SIX HUNDRED TWENTY-FIVE PESOS & 78/100 (P 844,625.78), Philippine currency, x x x, in installments as follows:

from one person to another; " Issue " means the first delivery of the instrument, complete in form, to a person who takes it as a holder Section 15 : Example: M makes a note for P10,000 with the name of the payee in blank and keeps it in his drawer. P steals the note, names himself as the payee and indorses the note to A, A to B, B to C, a holder in due course.

NOTE: C, even though a holder in due course, cannot enforce said note against M by virtue of Sec. 15, but C can go after P, A and B. Section 16 : As regards immediate parties and a remote party other than a holder in due course, delivery is a rebuttable presumption, as such can either be conditional or for a special purpose (without intention of transferring title).

As regards a holder in due course, valid delivery, of a complete instrument (as opposed to an incomplete instrument under Sec. 15), by all parties prior to him is conclusively presumed (admission of evidence to the contrary is not allowed).

September 16, 1982

-

P154,267.87

October 16, 1982

-

P154,267.87

B.

November 16, 1982

-

P154,267.87

December 16, 1982

-

P154,267.87

January 16, 1983

-

P154,267.87

February 16, 1983

-

P154,267.87

Sec. 30. What constitutes negotiation. - An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof . If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder and completed by delivery. (emphasis supplied)

NEGOTIATION DEFINED

1. The note was signed by petitioners and Embassy Farms, Inc. with the signature of Eduardo Evangelista below it. Sec. 17 of the Negotiable Instruments Law provide: “Construction where instrument is ambiguous – Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction shall apply: (g) Where an instrument containing the word “I promise to pay” is signed by two or more persons, they are deemed to be jointly and severally liable thereon. As such, the promissory note itself proves that petitioners are solidarily liable with Embassy Farms. Moreover, even if petitioners signed merely as officers, it does not erase the fact that they subsequently executed a continuing suretyship agreement which makes them solidarily liable with the principal . They cannot eventually claim that they did not personably receive any consideration for the contract. III. ISSUE, TRANSFER AND NEGOTIATION A.

ISSUANCE/DELIVERY OF NEGOTIABLE INSTRUMENTS

Sec. 15

Sec. 16

Sec. 191

Incomplete instrument not delivered. - Where an incomplete instrument has not been delivered, 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. Delivery; when effectual; when presumed. - Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties and as 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, drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But 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. And 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. Definition and meaning of terms . - In this Act, unless the contract otherwise requires: " Delivery " means transfer of possession, actual or constructive,

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2.

Instruments payable to order: two steps are required for negotiation: (a) indorsement and (b) delivery. Instruments payable to bearer: delivery alone without indorsement.

C. ASSIGNMENT AND NEGOTIATION DISTINGUISHED Assignment is the transfer of the title to an instrument, with the assignee generally taking only such title or rights as his assignor has, subject to all defenses available against his assignor. It is the less usual method which may or may not involve an indorsement in the sense of writing on the back of the instrument.

Applicable Law Type of transaction or instrument: Nature of the transferee: Rights acquired:

Availability of personal defenses

NEGOTIATION Negotiable Instruments Law

ASSIGNMENT Civil Code of the Philippines

Negotiable instruments only

Contracts in general assignable rights

Transferee is a holder who may be a holder in due course

Transferee is a mere assignee and can never be a holder in due course Transferee cannot acquire more rights than the transferor because he merely steps into the shoes of the transferor Transferee is always subject to personal defenses

The transferee-holder may acquire more rights than the transferor if he is a holder in due course Transferee-holder may be free from personal defenses if he is a holder in due course

or

CASABUENA VS. COURT OF APPEALS (GR No. 115410; Feb. 27, 1998) - Ciriaco Urdaneta was a grantee of a parcel of land purchased by the City of Manila and conveyed to its less privileged inhabitants, through its land reform program. Subsequently, he assigned his rights a nd interests in 1/2 of the lot to Arsenia Benin covering full payment of his indebtedness in the amount of P500. A deed of sale with mortgage was executed, with Urdaneta undertaking to pay the City the amount figured for a period of forty years in 480 equal installments. Another deed of assignment involving the whole lot, with assignee Benin agreeing to shoulder all obligations including the payment of amortization to the City, in accordance with the contract between it and Urdaneta. As stated in their verbal agreement, Urdaneta could redeem the property upon


payment of the loan within 3yrs. from the date of assignment; failure to pay would transfer physical possession of the lot to Benin for a period of 15 years, without actual transfer of title and ownership thereto. Meanwhile, the administration of the property was assigned to brothers Candido and Juan Casabuena, to whom Benin had transferred her right, title and interest for a consideration of P7,500. Notwithstanding this assignment, Benin constructed a duplex (apartment) on the lot separately occupied by Jose Abejero and Juan Casabuena, who collected rentals from the former. After the lot was fully paid for by the Urdanetas, a Release of Mortgage was executed and period of non-alienation of the land was extended from 5 to 20 years. Casabuena was Benin's rental collector but their relationship soured resulting in a litigation involving issue on ownership, of which the cause was the latter’s failure to pay rentals. Upon learning of the litigation between petitioner and Benin, Urdaneta asked them to vacate the property and surrender to him possession thereof within 15 days from notice. Petitioner's adamant refusal to comply with such demand resulted in a complaint for ejectment and recovery of possession of property filed by Urdaneta against Casabuena and Benin. Amid the sprouting controversies involving the lot, the Urdaneta spouses succeeded in having the Court declare them as its true and lawful owners with the deed of assignment to Benin merely serving as evidence of Ciriaco's indebtedness to her in view of the prohibition against the sale of the land imposed by the City government. ISSUE: WON a deed of assignment can transfer ownership of the property to the assignee? HELD: At the bottom of this controversy is the undisputed fact that Ciriaco Urdaneta was indebted to Benin, to secure which debt the spouses ceded their rights over the land through a deed of assignment. An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, transfers his credit and its accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could have enforced it against the debtor. Stated simply, it is the process of transferring the right of the assignor to the assignee, who would then be allowed to proceed against the debtor. The assignment involves no transfer of ownership but merely effects the transfer rights which the assignor has at the time, to the assignee. Benin having been deemed subrogated to the rights and obligations of the spouses, she was bound by exactly the same conditions to which the latter were bound. This being so, she and the Casabuenas were bound to respect the prohibition against selling the property within the five-year period imposed by the City government. The act of assignment could not have operated to efface liens or restrictions burdening the right assigned, because an assignee cannot acquire a greater right than that pertaining to the assignor. At most, an assignee can only acquire rights duplicating those which his assignor is entitled by law to exercise. In the case at bar, the Casabuenas merely stepped into Benin's shoes, who was not so much an owner as a mere assignee of the rights of her debtors. Not having acquired any right over the land in question, it follows that Benin conveyed nothing to defendants with respect to the property.

all executed on the same day by and among the parties. Barely 14 days after delivery, the tractors broke down. Mechanics were sent to do repairs but the tractors were no longer serviceable. CPII logging operations were delayed so Vergara advised IPM that the installment payments would likewise be delayed until it fulfills its obligation under its warranty. IFC then filed a collection suit against petitioners for the recovery of the principal sum plus interest, attorney's fees and costs of suit contending that it was a holder in due course of a negotiable promissory note. ISSUE: WON IFC is a holder in due course of a negotiable promissory note so as to bar all defenses of CPII against IPM? HELD: No. The note in question fails to meet the requirement under Sec. 1(d) of Act No. 2013. IFC is not and will never be a holder in due course of the promissory note but is merely an assignee. The note in question is not a negotiable instrument for lack of the so-called words of negotiability. The sellerassignor IPM is liable for breach of warranty and such liability as a general rule extends to the corporation (IFC) to whom it assigned its rights and interests. Even assuming that the note is negotiable, IFC which actively participated in the sale on installment transaction from its inception cannot be regarded as a holder in due course. Thus, petitioners may raise against the respondent all defenses available to it as against the seller-assignor, IPM. TRADERS ROYAL BANK VS. COURT OF APPEALS (GR No. 93397; Mar. 3, 1997) - Assailed in this Petition is the Decision of the Court of Appeals affirming the nullity of the transfer of Central Bank Certificate of Indebtedness (CBC), with a face value of P500,000 from Philippine Underwriters Finance Corporation (Philfinance) - without a uthorization – to petitioner Traders Royal Bank. ISSUE: WON Central Bank Certificate of Indebtedness (CBCI) is a negotiable instrument? HELD: No. The instrument provides for a promise to pay the registered owner Filriters. Very clearly, the instrument was only payable to Filriters. It lacked the words of negotiability which should have served as an expression of the consent that the instrument may be transferred by negotiation. The language of negotiability which characterizes a negotiable paper as a credit instrument is its freedom to circulate as a substitute for money. Hence, freedom of negotiability is the touchstone relating to the protection of holders in due course, and the freedom of negotiability is the foundation for the protection, which the law throws around a holder in due course. This freedom in negotiability is totally absent in a certificate of indebtedness as it merely acknowledges to pay a sum of money to a specified person or entity for a period of time. The transfer of the instrument from Philfinance to TRB was merely an assignment, and is not governed by the negotiable instruments law. The pertinent question then is —was the transfer of the CBCI from Filriters to Philfinance and subsequently from Philfinance to TRB, in accord with existing law, so as to entitle TRB to have the CBCI registered in its name with the Central Bank? Clearly shown in the record is the fact that Philfinance’s title over CBCI is defective since it acquired the instrument from Filriters fictitiously. Although the deed of assignment stated that the transfer was for ‘value received‘, there was really no consideration involved. What happened was Philfinance merely borrowed CBCI from Filriters, a sister corporation. Thus, for lack of any consideration, the assignment made is a complete nullity. Furthermore, the transfer wasn't in conformity with the regulations set by the CB. Giving more credence to rule that there was no valid transfer or assignment to petitioner.

Art. 348, Code of Commerce. The conveyer shall answer for the legality of the credit and for the capacity in which he made the transfer; but he shall not answer for the solvency of the debtor, unless there is an express agreement requiring him to do so D.

HOW ARE NEGOTIABLE INSTRUMENTS AND NON-NEGOTIABLE INSTRUMENTS TRANSFERRED? SESBRENO VS. COURT OF APPEALS (supra, p.3) CONSOLIDATED PLYWOOD INDUSTRIES, INC. VS. IFC LEASING (GR No. 72593; April 30, 1987) - Consolidated Plywood Industries, Inc. (CPII) needed two tractors for its logging business. Atlantic Gulf & Pacific Company through its sister company Industrial Products Marketing (IPM) offered to sell two “used" tractors. IPM inspected the job site and assured that the tractors were fit for the job and gave a 90-day warranty for machine performance and availability of parts. CPII officers Wee and Vergara purchased the tractors on installment and paid the down payment. The deed of sale with chattel mortgage with promissory note and the deed of assignment, where IPM assigned its rights and interest in the chattel mortgage in favor of IFC Leasing and Acceptance Corp., were

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E.

HOW NEGOTIATION TAKES PLACE

Sec. 30 Sec. 40

What constitutes negotiation. (supra, p. 9) Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement.

An instrument payable to bearer is not converted into an instrument payable to order by being indorsed specially. However, the person who indorsed specially is liable only to those holders who can trace their title to the instrument by a series of unbroken indorsements from such special indorser. Instruments originally payable to order : Sec. 40 does not apply to instruments originally payable to o rder which was indorsed in black.


LIM VS. CA (GR No. 107898; Dec. 19, 1995) - Manuel Lim and Rosita Lim are the officers of the Rigi Bilt Industries, Inc. (RIGI) which had been transacting business with Linton Commercial Company, Inc. The Lims ordered several steel plates and purlins from Linton and were delivered to the Lim’s place of business which was in Caloocan. To pay Linton, the petitioners issued seven checks. When the checks were presented to the drawee bank (Solidbank), they were dishonored because payment for the checks had been stopped and/or insufficiency of funds. As a result, petitioners were found guilty with Estafa and 7 counts of violation of BP 22 by the Malabon RTC. On appeal, the CA reversed the trial court’s decision on Estafa but upheld the decision on violation of BP 22, hence, this petition. ISSUE: WON the issue was within the jurisdiction of the Malabon RTC? HELD: The venue of jurisdiction lies either in the RTC Caloocan or Malabon Trial Court. BP 22 is a continuing crime. A person charged with a transitory crime may be validly tried in any municipality or territory where the offense was partly committed. In determining the proper venue, the ff. must be considered. 1) 7 checks were issued to Linton in its place of business in Navotas. 2) The checks were delivered Linton in the same place. 3) The checks were dishonored in Caloocan 4) The Lims had knowledge of their insufficiency of funds. Under Section 191 of the Negotiable Instruments Law, issue means the first delivery of the instrument complete in its form to a person who takes it as holder. The term holder on the other hand refers to the payee or endorsee of a bill or note who is in possession of it or the bearer thereof. The place where the bills were written, signed or dated does not necessarily fix or determine the place where they were executed. It is the delivery that is important. It is the final act essential to its consummation of an obligation. An undelivered bill is unoperative . The issuance and delivery of the check must be to a person who takes it as a holder. In the case at bar, although Linton sent a collector who received the checks from the petitioners’ place of business, the checks were actually issued and delivered to Linton in Navotas. The collector is not a holder or an agent, he was just an employee. LORETO DELA VICTORIA VS. HON. BURGOS (GR No. 111190; June 27, 1995) - Raul Sebreño filed a complaint for damages against Fiscal Bienvenido Mabanto Jr. of Cebu City. Sebreño won and he was awarded the payment of damages. Judge Burgos ordered De La Victoria, custodian of the paychecks of Mabanto, to hold the checks and convey them to Sebre ño instead. De La Victoria assailed the decision as he said that the paychecks and the amount thereon are not yet the property of Mabanto because they are not yet delivered to him; that since there is no delivery of the checks to Mabanto, the checks are still part of the public funds; and the checks due to the foregoing cannot be the proper subject of garnishment. ISSUE: WON De La Victoria is correct? HELD: Yes. Under Section 16 of the Negotiable Instruments Law, every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As ordinarily understood, delivery means the transfer of the possession of the instrument by the maker or drawer with intent to transfer title to the payee and recognize him as the holder thereof. DEVELOPMENT BANK OF RIZAL VS. SIMA WEI (GR No. 85419; June 9, 1983) - In consideration for a loan extended by petitioner Bank to respondent Sima Wei, the latter executed and delivered to the former a promissory note, engaging to pay the petitioner Bank or order the amount of P1,820,000.00 on or before June 24, 1983 with interest at 32% per annum . Sima Wei made partial payments on the note, leaving a balance of P1,032,450.02. On November 18, 1983, Sima Wei issued two crossed checks payable to petitioner Bank drawn against China Banking Corporation, bearing respectively the serial numbers 384934, for the amount of P550,000.00 and 384935, for the amount of P500,000.00. The said checks were allegedly issued in full settlement of the drawer's account evidenced by the promissory note. These two checks were not delivered to the petitioner-payee or to any of its authorized representatives. For reasons not shown, these checks came into the possession of respondent Lee Kian Huat, who deposited the checks without the petitioner-payee's indorsement (forged or otherwise) to the account of respondent Plastic Corporation, at the Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy, Branch Manager of the

11

Balintawak branch of Producers Bank, relying on the assurance of respondent Samson Tung, President of Plastic Corporation, that the transaction was legal and regular, instructed the cashier of Producers Bank to accept the checks for deposit and to credit them to the account of said Plastic Corporation, inspite of the fact that the checks were crossed and payable to petitioner Bank and bore no indorsement of the latter. Hence, petitioner filed the complaint as aforestated. ISSUE: WON petitioner Bank has a cause of action against any or all of the defendants, in the alternative or otherwise? HELD: A cause of action is defined as an act or omission of one party in violation of the legal right or rights of another. The essential elements are: (1) legal right of the plaintiff; (2) correlative obligation of the defendant; and (3) an act or omission of the defendant in violation of said legal right. The normal parties to a check are the drawer, the payee and the drawee bank. Courts have long recognized the business custom of using printed checks where blanks are provided for the date of issuance, the name of the payee, the amount payable and the drawer's signature. All the drawer has to do when he wishes to issue a check is to properly fill up the blanks and sign it. However, the mere fact that he has done these does not give rise to any liability on his part, until and unless the check is delivered to the payee or his representative. A negotiable instrument, of which a check is, is not only a written evidence of a contract right but is also a species of property. Just as a deed to a piece of land must be delivered in order to convey title to the grantee, so must a negotiable instrument be delivered to the payee in order to evidence its existence as a binding contract. Section 16 of the Negotiable Instruments Law, which governs checks, provides in part: “Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto”. Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its delivery to him. Delivery of an instrument means transfer of possession, actual or constructive, from one person to another. Without the initial delivery of the instrument from the drawer to the payee, there can be no liability on the instrument. Moreover, such delivery must be intended to give effect to the instrument. The allegations of the petitioner in the original complaint show that the two (2) China Bank checks, numbered 384934 and 384935, were not delivered to the payee, the petitioner herein. Without the delivery of said checks to petitioner-payee, the former did not acquire any right or interest therein and cannot therefore assert any cause of action, founded on said checks , whether against the drawer Sima Wei or against the Producers Bank or any of the other respondents. In the original complaint, petitioner Bank, as plaintiff, sued respondent Sima Wei on the promissory note, and the alternative defendants, including Sima Wei, on the two checks. On appeal from the orders of dismissal of the Regional Trial Court, petitioner Bank alleged that its cause of action was not based on collecting the sum of money evidenced by the negotiable instruments stated but on quasi-delict — a claim for damages on the ground of fraudulent acts and evident bad faith of the alternative respondents. This was clearly an attempt by the petitioner Bank to c hange not only the theory of its case but the basis of his cause of action. It is well-settled that a party cannot change his theory on appeal, as this would in effect deprive the other party of his day in court. Notwithstanding the above, it does not necessarily follow that the drawer Sima Wei is freed from liability to petitioner Bank under the loan evidenced by the promissory note agreed to by her. Her allegation that she has paid the balance of her loan with the two checks payable to petitioner Bank has no merit for, as We have earlier explained, these checks were never delivered to petitioner Bank. And even granting, without admitting, that there was delivery to petitioner Bank, the delivery of checks in payment of an obligation does not constitute payment unless they are cashed or their value is impaired through the fault of the creditor. None of these exceptions were alleged by respondent Sima Wei. Therefore, unless respondent Sima Wei proves that she has been relieved from liability on the promissory note by some other cause, petitioner Bank has a right of action against her for the balance due thereon. However, insofar as the other respondents are concerned, petitioner Bank has no privity with them. Since petitioner Bank never received the checks on which it based its action against said respondents, it never owned them (the checks) nor did it acquire any interest therein. Thus, anything which the respondents may have done with respect to said checks could not have prejudiced petitioner Bank. It had no right or interest in the checks which could have been violated by said respondents. Petitioner Bank has therefore no cause of action against said respondents, in the alternative or otherwise. If at all,


it is Sima Wei, the drawer, who would have a cause of action against her co-respondents, if the allegations in the complaint are found to be true. F.

INCOMPLETE NEGOTIATION OF ORDER INSTRUMENT

Sec. 49. Transfer without indorsement; effect of. - Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made. Equitable Assignment – the transfer of an order instrument without indorsement where the transferee acquires the instrument subject to defenses and equities available among prior parties.

The transferee acquires the legal title the transferor had and in addition, the right to have the indorsement of the transferor, without which he cannot be considered a “holder” within the definition under Sec. 191 and thus cannot negotiate it. He also cannot be considered a “bearer” since the instrument is not payable to bearer. G.

WHERE INDORSEMENT SHOULD BE PLACED?

Sec. 31. Indorsement; how made. - The indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement. Indorsement is the writing of the name of the payee on the instrument with the intent either to transfer the title to the same, or to strengthen the security of the holder by assuming a contingent liability for its future payment, or both. Allonge - is a slip of paper sometimes attached to a negotiable instrument for the purpose of receiving further indorsements when the original paper is filled with indorsements. Generally, an allonge may not be utilized for indorsement if there is still sufficient space on the instrument itself. H.

WHEN PERSON DEEMED INDORSER

Sec. 63. When a person deemed indorser. - A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to be indorser unless he clearly indicates by appropriate words his intention to be bound in some other capacity An indorser cannot show by parol evidence (i.e., outside the instrument itself) his intention to be bound in some other capacity, as for example, he signed merely as an agent. I.

OTHER RULES ON INDORSEMENT ENRIQUE MONTINOLA VS. PNB (GR No. L-2861 ; Feb. 26, 1951) - In 1942, Mariano Ramos, as disbursing officer of an army division of United States Armed Forces in the Far East (USAFFE) and based in Misamis Oriental, procured cash advances in the amount of Php800,000 with the Provincial Treasurer (PT) of Lanao for the use of USAFFE in Cagayan de Misamis. PT-Lanao did not have that amount in cash so he gave Ramos P300,000 in emergency notes and a check for P500,000. Thereafter, Ramos presented the check to their PT in their province for encashment. PT-Misamis did not have enough cash to cover the check so he gave Ramos P400,000 in emergency notes and a check for P100,000 drawn on the PNB as he had previously deposited P500,000 emergency notes in the PNB branch in Cebu and thus he expected to have the check issued by him cashed in Cebu against said deposit. Ramos was unable to encash said check for he was captured by the Japanese and later made a prisoner of war. After his release, sometime in 1945, Ramos allegedly indorsed the check to herein plaintiff-appellant. According to Montinola’s version of the circumstances that roused the present controversy, Ramos, who then was no longer connected with the USAFFE but already a civilian who needed the money only for himself and his family, offered to sell the check to him. But as stated by Ramos, he and Montinola agreed to the sale of said check and the agreement regarding the transfer of the check was that he was

12

selling only P30,000 of it and for such reason, at the back of the document he wrote in longhand: Pay to the order of Enrique P. Montinola P30,000 only. The balance to be deposited in the Philippine National Bank to the credit of M. V. Ramos . Ramos further said that in exchange for this assignment of P30,000, Montinola would pay him P90,000 in Japanese military notes but that the latter gave him only two checks of P20,000 and P25,000, leaving a balance unpaid of P45,000. The writing made at the back of the check was, however, mysteriously obliterated and in its place, a supposed indorsement appearing on the back of the check was made for the whole amount of the check. ISSUE: WON the check was legally negotiated within the meaning of the NIL in view of the fact that the instrument was indorsed for a lesser amount? HELD: NO. Section 32 of the NIL provides that "the indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable (as in this case) does not operate as a negotiation of the instrument." As to what was really written at the back of the check which Montinola claims to be a full indorsement of the check, the Court agreed with trial court that the original writing of Ramos on the back of the check was to the effect that he was assigning only P30,000 of the value of the document and that he was instructing the bank to deposit to his credit the balance. Montinola may therefore not be regarded as an indorsee. At most he may be regarded as a mere assignee of the P30,000 sold to him by Ramos, in which case, as such assignee, he is subject to all defenses available to the drawer Provincial Treasurer of Misamis Oriental and against Ramos. ANG TEK LIAN VS. CA (GR No. L-2516; Sept. 25, 1950) - Knowing he had no funds therefor, petitioner Ang Tek Lian drew a check upon the China Banking Corporation for the sum of P4,000, payable to the order of “cash”. He delivered it to Lee Hua Hong in exchange for money which the latter handed in the act. The next business day, the check was presented by Lee Hua Hong to the drawee bank for payment, but it was dishonored for insufficiency of funds, the balance of the deposit of Ang Tek Lian on both dates being P335 only. Petitioner was sued for estafa. In his d efense, however, he argues that as the check had been made payable to “cash” and had not been endorsed by Ang Tek Lian, the defendant is not guilty of the offense charged. ISSUE: WON a check payable to “cash” needs indorsement? HELD: NO. Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the order of “cash” is a check payable to bearer, and the bank may pay it to the person presenting it for payment without the drawer’s indorsement. Where a check is made payable to the order of ‘cash’, the word cash ‘does not purport to be the name of any person’, and hence the instrument is payable to bearer. The drawee bank need not obtain any indorsement of the check, but may pay it to the person presenting it without any indorsement.

Sec. 21. Signature by procuration; effect of. - A signature by "procu ration” operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his auth ority. Procuration is the act by which a principal gives power to another to act in his place as he could himself. It is otherwise understood as agency or proxy.

Sec. 32

Sec. 40 Sec. 41

Sec. 42

Indorsement must be of entire instrument. - The indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the instrument. But where the instrument has been paid in part, it may be indorsed as to the residue. Indorsement of instrument payable to bearer. (supra, p. 10) Indorsement where payable to two or more persons. Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others. Effect of instrument drawn or indorsed to a person as cashier.- Where an instrument is drawn or indorsed to a person as " cashier” or other fiscal officer of a bank or corporation, it is deemed prima facie to be payable to the bank or corporation of which he is such officer, and may be negotiated by either the indorsement of the bank or corporation or the indorsement of the


Sec. 43

Sec. 44

Sec. 45

Sec. 46

Sec. 48

Sec. 49

officer. Indorsement where name is misspelled, and so forth. Where the name of a payee or indorsee is wrongly designated or misspelled , he may indorse the instrument as therein described adding, if he thinks fit, his proper signature. (emphasis supplied) Indorsement in representative capacity. - Where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability. Time of indorsement; presumption. - Except where an indorsement bears date after the maturity of the instrument, every negotiation is deemed prima facie to have been effected before the instrument was overdue Place of indorsement; presumption. - Except where the contrary appears, every indorsement is presumed prima facie to have been made at the place where the instrument is dated Striking out indorsement. - The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument Transfer without indorsement; effect of. (supra, p.12)

Sec. 32: Reason: negotiation requires delivery, and there can be no partial delivery of one instrument. Also, to avoid multiplicity of suits and a bill or note divided into different parts divides a single cause of action. Sec. 41: Does not apply to instruments payable to two or more payees severally, such as “payable to A or B”, which may be negotiated by either A or B. In order to make an indorsement of an instrument payable to two or more persons effective, all must indorse to effect a negotiation. Sec. 48: An instrument payable to bearer remains a bearer instrument and the holder thereof can strike out any special indorsements by virtue of Sec. 48.

An instrument originally payable to order but converted by virtue of a blank indorsement, the holder thereof can remove all subsequent special indorsements as he can acquire title only by delivery. But the holder cannot strike out the indorsements prior to the blank indorsement since it would be necessary for his acquisition of title. J.

KINDS OF INDORSEMENT 1. Blank and Special Indorsements

Sec. 33

Sec. 34

Sec. 35

2.

Sec. 38

Sec. 65

Kinds of indorsement. - An indorsement may be either special or in blank; and it may also be either restrictive or qualified or conditional. Special indorsement; indorsement in blank. - A special indorsement specifies the person to whom, or to whose order, the instrument is to be payable , and the indorsement of such indorsee is necessary to the further negotiation of the instrument. An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery. (emphasis supplied) Blank indorsement; how changed to special indorsement. - The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement. Qualified Indorsements Qualified indorsement. - A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument. Warranty where negotiation by delivery and so forth. — — Every person negotiating an instrument by delivery or by a qualified indorsement warrants:

(a) That the instrument is genuine and in all respects what it

13

purports to be; (b) That he has a good title to it; (c) That all prior parties had capacity to contract; (d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation securities other than bills and notes. Sec. 38: When the indorser wants to transfer his rights over the instrument but does not want to assume responsibilities under the secondary contracts, he may do so by resorting to qualified indorsement, by virtue of which he disclaims his liability to any holder or any subsequent party who might be compelled by another.

He is only liable for breach of warranties under Sec. 65. METROPOL (BACOLOD) FINANCING & INVESTMENT CORP. VS. SAMBOK MOTORS (GR No. L-39641 ; Feb. 28, 1983) - Sambok Motors Company negotiated and indorsed the note in favor of plaintiff Metropol Financing & Investment Corporation with the following indorsement: "Pay to the order of Metropol Bacolod Financing & Investment Corporation with recourse. Notice of Demand; Dishonor; Protest; and Presentment are hereby waived. SAMBOK MOTORS CO. (BACOLOD) By: RODOLFO G. NONILLO Asst. General Manager". The maker, Dr. Villaruel defaulted in the payment. Plaintiff notified Sambok as indorsee of said note of the fact that the same has been dishonored and demanded payment. Sambok failed to pay. Trial court rendered its decision in favor of Plaintiff. Appellant Sambok argues that by adding the words "with recourse" in the indorsement of the note, it becomes a qualified indorser; that being a qualified indorser, it does not warrant that if said note is dishonored by the maker on presentment, it will pay the amount to the holder. ISSUE: WON Sambok is a qualified indorser? HELD: Appellant, by indorsing the note "with recourse'' does not make itself a qualified indorser but a general indorser who is secondarily liable, because by such indorsement, it agreed that if Dr. Villaruel fails to pay the note, plaintiffappellee can go after said appellant. The effect of such indorsement is that the note was indorsed without qualification. A person who indorses without qualification engages that on due presentment, the note shall be accepted or paid, or both as the case may be, and that if it be dishonored, he will pay the amount thereof to the holder. Appellant Sambok's intention of indorsing the note without qualification is made even more apparent by the fact that the notice of' demand, dishonor, protest and presentment were all waived. The words added by said appellant do not limit his liability, but rather confirm his obligations as a general indorser. 3.

Conditional Indorsement

Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the party required to pay the instrument may disregard the condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or not. But any person to whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of the person indorsing conditionally If payment is made prior to the fulfilment of the condition, the holder will hold the payment subject to the rights of the conditional indorser. Such that, when the condition did not happen, he is obliged to return the amount he recovered to the conditional indorser. 4.

Sec. 36

Restrictive Indorsement When indorsement restrictive. - An indorsement is restrictive which either:

(a) Prohibits the further negotiation of the instrument; or (b) Constitutes the indorsee the agent of the indorser; or (c) Vests the title in the indorsee in trust for or to the use of


some other persons.

Sec. 37

But the mere absence of words implying power to negotiate does not make an indorsement restrictive. Effect of restrictive indorsement; rights of indorsee. - A restrictive indorsement confers upon the indorsee the right: (a) to receive payment of the instrument; (b) to bring any action thereon that the indorser could bring; (c) to transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so.

drawer. (c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee. K.

WHEN INDORSEMENT NECESSARY – Sec. 8(b) (p.6), Sec. 30 (p.10), Sec. 184 (p.2)

L.

INDORSEMENT OF ENTIRE INSTRUMENT – Sec. 32 (p.40)

M.

INDORSEMENT OF BEARER INSTRUMENT – Sec. 40 (p.10)

N.

INDORSEMENT WHEN PAYABLE TO TWO OR MORE PERSONS – Sec. 41 (p.12)

O.

INDORSEMENT IN REPRESENTATIVE CAPACITY – Sec. 44 (p.13)

P.

PRESUMPTION ON TIME, PLACE OF INDORSEMENT – Sec. 45 and 46 (p.13)

Q.

CONTINUATION OF NEGOTIABLE CHARACTER

But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement. Sec. 36(a) is the only type of indorsement that bars further negotiation. Those under (b) and (c) may still be further negotiated, but the subsequent indorsees will also be an agent or trustee. NATIVIDAD GEMPESAW VS. CA (GR No. 92244; Feb. 9, 1993) Natividad Gempesaw issued checks, prepared by her bookkeeper, a total of 82 checks in favor of several supplies. Most of the checks for amounts in excess of actual obligations as shown in their corresponding invoices. It was only after the lapse of more than 2 years did she discovered the fraudulent manipulations of her bookkeeper. It was also learned that the indorsements of the payee were forged, and the checks were brought to the chief accountant of Philippine Bank of Commerce (the Drawee Bank, Buendia Branch) who deposited them in the accounts of Alfredo Romero and Benito Lam. Gempesaw made demand upon the bank to credit the amount charged due the checks. The bank refused. Hence, the present action. ISSUE: Who shall bear the loss resulting from the forged indorsements? HELD: As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot charge the drawer’s account for the amount of said check. An exception to the rule is where the drawer is guilty of such negligence which causes the bank to honor such checks. Gempesaw did not exercise prudence in taking steps that a careful and prudent businessman would take in circumstances to discover discrepancies in her account. Her negligence was the proximate cause of her loss, and under Section 23 of the Negotiable Instruments Law, is precluded from using forgery as a defense. On the other hand, the banking rule banning acceptance of checks for deposit or cash payment with more than one indorsement unless cleared by some bank officials, does not invalidate the instrument; neither does it invalidate the negotiation or transfer of said checks. The only kind of indorsement which stops the further negotiation of an instrument is a restrictive indorsement which prohibits the further negotiation thereof, pursuant to Section 36 of the Negotiable Instruments Law. In light of any case not provided for in the Act that is to be governed by the provisions of existing legislation, pursuant to Section 196 of the Negotiable Instruments Law, the bank may be held liable for damages in accordance with Article 1170 of the Civil Code. The drawee bank, in its failure to discover the fraud committed by its employee and in contravention banking rules in allowing a chief accountant to deposit the checks bearing second indorsements, was adjudged liable to share the loss with Gempesaw on a 50:50 ratio. 5. 6.

Sec. 47. Continuation of negotiable character . - An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise. Restrictive indorsement as used in this provision pertains only to Sec. 36(a), since, as discussed earlier, (b) and (c) thereof do not prevent further negotiation. Discharge by payment or otherwise are enumerated under Sec. 119 (p.) R.

NEGOTIATION BY PRIOR PARTY

Sec. 50

Sec. 121

(a) Where it is payable to the order of a third person and has been paid by the drawer; and (b) Where it was made or accepted for accommodation and has been paid by the party accommodated. S.

STRIKING OUT OF INDORSEMENT

Sec. 48

Absolute Indorsement Joint Indorsement

Sec. 41. Indorsement where payable to two or more persons. – see p. 12

When prior party may negotiate instrument. - Where an instrument is negotiated back to a prior party, such party may, subject to the provisions of this Act, reissue and further negotiable the same. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable. (emphasis supplied) Right of party who discharges instrument. - Where the instrument is paid by a party secondarily liable thereon, it is not discharged; but the party so paying it is remitted to his former rights as regard all prior parties, and he may strike out his own and all subsequent indorsements and against negotiate the instrument, except:

Sec. 50

Striking out indorsement. - The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument When prior party may negotiate instrument . (supra, p.14)

T.

EFFECT OF TRANSFER WITHOUT INDORSEMENT – Sec. 49 (p.12)

U.

DIFFERENT COMBINATIONS OF INDORSEMENT

Liability of irregular indorser . - Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following rules:

V.

RIGHT OF PRIOR PARTY TO NEGOTIATE – Sec. 50 (p.14)

(a) If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties. (b) If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all parties subsequent to the maker or

Sec. 24

7.

Irregular Indorser

14

W. CONSIDERATION FOR ISSUANCE AND SUBSEQUENT TRANSFER Presumption of consideration. - Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon


Sec. 25

Sec. 26

Sec. 27

to have become a party thereto for value. Value, what constitutes. Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time. What constitutes holder for value. - Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time. When lien on instrument constitutes holder for value . — Where the holder has a lien on the instrument arising either from contract or by implication of law, he is deemed a holder for value to the extent of his lien.

Consideration is not presumed when there is transfer without indorsement as in Sec. 49. Simple Contract as used in Sec. 25 is that found under the Civil Code. Such that, a negotiable instrument is issued for a valuable consideration which may be to give, to do or not to do. Value Sufficient need not mean that the amount of consideration and the promise to pay in the instrument are equal, so long as it is not grossly inadequate. Sec. 27 : If a negotiable instrument was delivered by way of pledge, the transferee is a holder for value up to the extent of the amount secured. If the sum certain state in the instrument is P50,000 and the same was pledged for P30,000, the transferee is a holder for value upto P30,000 only. Value previously given : If M issued a note to P, then P to A, A to B and B to C, as a way of gift. C is a holder for value as to A, since value has previously given by B to A. X.

WHAT CONSTITUTES VALUE – Sec. 24 BIBIANO BANAS VS. CA (GR No. 102967; Feb. 10, 2000) – Petitioner sold to Ayala Investment Corporation (Ayala) a lot for P2,308,770 to be paid P461,754 upon signing of the contract and the balance covered by a promissory note to be paid in four equal annual installments. On the same day, petitioner discounted the promissory note with Ayala. On the year of sale, petitioner reported the P461,754 as sales proceeds and the balance as unrealized, and consistently reported in the succeeding years the installment that fell due. On 1978, Revenue Director of Manila authorized herein respondents Tuazon and Talon to examine the books and records of petitioner to which they assessed him for deficiency taxes, arguing that since the note evidencing the installment nature of the sale was discounted the same year it was issued, the sale should be treated as a cash transaction and not installment and accordingly the whole amount of gain on disposition should have been reported in 1976, the year of sale. ISSUE: WON the proceeds of the discounted note should have been reported as taxable income during 1976 and not deferred on installments? HELD: Yes. As a general rule, the whole profit accruing from a sale of property is taxable as income in the year the sale is made. But, if not all of the sale price is received during such year, and a statute provides that income shall be taxable in the year in which it is “received”, the profit from an installment sale is to be apportioned between or among the years in which the installments are paid and received. However, the proceeds from the disposition or discounting of receivable, though not considered in computing for “initial payments” under Sec. 43 and Sec. 175 of the Ta x Code, it is still taxable in the year it was converted to cash. Non-dealer sales of property may be reported as income under the installment method provided that the obligation is still outstanding at the close of the year. Where an installment obligation is discounted at a bank or finance company, a taxable disposition results. Clearly, the indebtedness of the buyer is discharged, while the seller acquires money for the settlement of his receivables. Logically then, the income should be reported at the time of the actual gain.

Y. Z.

EFFECT OF VALUE PREVIOUSLY GIVEN – Sec. 26 (p.15) HOLDER FOR VALUE – Sec. 27 (p.15)

IV. HOLDERS A.

WHAT IS A HOLDER?

A Holder means the payee or indorsee of a bill or note who is in possession of it or the bearer thereof (Sec. 191), who may sue on his own name (Sec. 51).

Sec. 51

Sec. 193

CHAN WAN VS. TAN KIM (G.R. No. L-15380; September 30, 1960) - Eleven checks payable to "cash or bearer" and drawn by defendant Tan upon the Equitable Banking Corporation, were all presented for payment by Chan Wan to the drawee bank, but they "were all dishonored and returned to him unpaid due to insufficient funds and/or causes attributable to the drawer." The drawer in drawing the check engaged that "on due presentment, the check would be paid, and that if it be dishonored . . . he will pay the amount thereof to the holder". On the backs of the checks, endorsements which apparently show they had been deposited with the China Banking Corporation and were, by the latter, presented to the drawee bank for collection. The court declined to order payment for two principal reasons: (a) plaintiff failed to prove he was a holder in due course, and (b) the checks being crossed checks should not have been deposited instead with the bank mentioned in the crossing. ISSUE: WON a holder who is not a holder in due course may recover on the checks? HELD: YES. The Negotiable Instruments Law does not provide that a holder, who is not a holder in due course, may not in any case, recover on the instrument. If B purchases an overdue negotiable promissory note signed by A, he is not a holder in due course; but he may recover from A, if the latter has no valid excuse for refusing payment. The only disadvantage of holder who is not a holder in due course is that the negotiable instrument is subject to defense as if it were non- negotiable. ATRIUM MANAGEMENT CORPORATION VS. CA (G.R. No. 109491; February 28, 2001) - Hi-Cement Corp. issued checks in favor of E.T. Henry and Co. Inc., as payee. The latter, in turn, endorsed the checks to Atrium for valuable consideration. But upon presentment for payment, the drawee bank dishonored the checks for the common reason "payment stopped" which prompted petitioner to institute this action. The trial court rendered a decision ordering E.T. Henry and Co., Inc. and Hi-Cement to pay petitioner Atrium, jointly and severally, the amount corresponding to the value of the checks. CA, however, absolved & ruled, inter alia, that Lourdes de Leon of Hi-Cement was not authorized to issue the subject checks in favor of E.T. Henry, Inc. ISSUE: WON petitioner Atrium is a holder in due course? HELD: To emphasize, the checks were crossed checks and specifically indorsed for deposit to payee's (E.T. Henry) account only. Atrium was aware of the fact that the checks were all for deposit only to payee's account. Clearly, then, Atrium could not be considered a holder in due course. The SC, however, held that it does not follow as a legal proposition that simply because petitioner Atrium was not a holder in due course for having taken the instruments in question with notice that the same was for deposit only to the account of payee E.T. Henry that it was altogether precluded from recovering on the instrument. The Negotiable Instruments Law does not provide that a holder not in due course cannot recover on the instrument. The disadvantage of Atrium in not being a holder in due course is that the negotiable instrument is subject to defenses as if it were non-negotiable. One such defense is absence or failure of consideration. B.

CLASSES OF HOLDER

Sec. 51 Sec. 26

Sec. 52 Sec. 57

15

Right of holder to sue; payment. - The holder of a negotiable instrument may to sue thereon in his own name; and payment to him in due course discharges the instrument Reasonable time, what constitutes. - In determining what is a "reasonable time" regard is to be had to the nature of the instrument, the usage of trade or business with respect to such instruments, and the facts of the particular case.

Rights of holder to sue. (supra) What constitutes holder for value. - Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time What constitutes a holder in due course. – see C. HOLDER IN DUE COURSE, p. Rights of holder in due course. – see Rights of A Holder In


Due Course, p. 19. MARCELO MESINA VS. CA (G.R. No. 70145 November 13, 1986) - Jose Go purchased from Associated Bank a cashier's check for P800,000.00. Unfortunately, he left said check on the top of the desk of the bank manager when he left the bank. The bank manager entrusted the check for safekeeping to a bank official, a certain Albert Uy. While Uy went to the men's room, the check was stolen by his visitor in the person of Alexander Lim. Upon discovering that the check was lost, Jose Go accomplished a "STOP PAYMENT" order. Two days later, Associated Bank received the lost check for clearing from Prudential Bank. After dishonoring the same check twice, Associated Bank received summons and copy of a complaint for damages of Marcelo Mesina who was in possession of the lost check and is demanding payment. Petitioner claims that a cashier's check cannot be countermanded in the hands of a holder in due course. ISSUE: WON petitioner can collect on the stolen check on the ground that he is a holder in due course? HELD: No. Petitioner failed to substantiate his claim that he is a holder in due course and for consideration or value as shown by the established facts of the case. Admittedly, petitioner became the holder of the cashier's check as endorsed by Alexander Lim who stole the check. He refused to say how and why it was passed to him. He had therefore notice of the defect of his title over the check from the start. The holder of a cashier's check who is not a holder in due course cannot enforce such check against the issuing bank which dishonors the same. A person who became the holder of a cashier's check as endorsed by the person who stole it and who ref used to say how and why it was passed to him is not a holder in due course C.

2.

Taken Before Overdue and Before Notice of Dishonor

Overdue – an instrument is overdue after the date of maturity fixed therein or upon happening of an event certain, and a person taking an overdue instrument must be put on inquiry why the instrument is still in circulation Dishonor may be by non-acceptance (bills of exchange) under Sec. 149 or by non-payment (promissory notes and bills of exchange) under Sec. 83. A holder who has knowledge that the instrument was previously dishonored is not a holder in due course.

Sec. 4 Sec. 7 Sec. 87

Sec. 53 Sec. 143

Determinable future time, what constitutes . (supra, p.6) When payable on demand (supra, p.6) Rule where instrument payable at bank. - Where the instrument is made payable at a bank, it is equivalent to an order to the bank to pay the same for the account of the principal debtor thereon. When person not deemed a holder in due course (supra) When presentment for acceptance must be made . Presentment for acceptance must be made:

(a) Where the bill is payable after sight , or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or (b) Where the bill expressly stipulates that it shall be presented for acceptance; or (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.

HOLDER IN DUE COURSE

Sec. 52. What constitutes a holder in due course . .- A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

Sec. 83

Sec. 149

Holder - the first requisite is that he should be a “holder” as defined under Sec. 191. If a possessor of a negotiable instrument is not a holder (i.e., he is neither payee nor indorsee or bearer of a bearer instrument), he can NEVER be a holder in due course.

Sec. 53 Sec. 57 Sec. 59

When person not deemed holder in due course. – see 2. Overdue, b. Rule in case of demand instruments. Rights of a holder in due course . See Rights of a Holder in Due Course p. 19 Who is deemed holder in due course. - Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in due course. But the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title.

Sec. 47 Sec. 5 a.

b. 1.

In no other case is presentment for acceptance necessary in order to render any party to the bill liable. When instrument dishonored by non-payment. - The instrument is dishonored by non-payment when: (a) It is duly presented for payment and payment is refused or cannot be obtained; or (b) Presentment is excused and the instrument is overdue and unpaid. When dishonored by nonacceptance. - A bill is dishonored by non-acceptance: (a) When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or cannot be obtained; or (b) When presentment for acceptance is excused and the bill is not accepted. Continuation of negotiable character (supra, p.14) Additional provisions not affecting negotiability (p.6) Rule in case of installment instruments – a purchaser of an installment note after an installment is overdue may be a holder in due course as to the balance if he has no notice of failure to pay the first installment. The holder may assume that the regular course of business has been followed and that each installment was paid when due. A transferee has no reason to conclude from the mere fact that a note circulates after the due date of one or more installments that such installments were not paid (Bliss vs. California Co-op Producers) Rule in case of demand instruments

Instrument Complete and Regular

Complete - it is complete when it is not wanting of any material particular or particular proper to be inserted in a negotiable instrument without which the same will not be complete. Examples of material particulars are name of payee, amount, signature of maker or drawer, or rates of interest, if any. Regular – It is regular upon its face when it does not contain any material alterations or if there are, they are not apparent or visible on the face of the instrument. A Holder upon receiving an instrument which is incomplete or irregular (containing visible and apparent alterations) must be put on inquiry why it is such. If he fails to do so, he takes the instrument subject to all defenses.

16

Sec. 53. When person not deemed holder in due course. - Where an instrument payable on demand is negotiated on an unreasonable length of time after its issue, the holder is not deemed a holder in due course. “Unreasonable” is relative and must be determined in relation to Sec. 193 (p.15) c.

Overdue interest payments – the mere fact that interests on a note was overdue does not, in the absence of an acceleration clause on failure to pay interest, affect an indorsee with notice of dishonor or put him on inquiry.

3.

Notice of Infirmity or Defect


Infirmity means any irregularity in the instrument. Thus, notice of an alteration which is apparent is notice of an infirmity in the instrument, as well as notice of forgery in the maker or drawer’s signature. Sec. 56 provides what constitutes notice of defect.

Sec. 54

Sec. 55

Sec. 56

Sec. 57

Notice before full amount is paid. - Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the extent of the amount therefore paid by him. When title defective. - The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud. What constitutes notice of defect. - To constitutes notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith . Rights of a holder in due course . (supra)

Sec. 54: M makes a note for P100,000 payable to the order of P, P indorsed it to A, B stole the note, and forged A’s signature, B then indorsed it to C who paid P50,000 before knowing that A’s signature was forged. In this case, C is a holder in due course upto P50,000 only. 4.

Good Faith

Crossed Checks produce the following effect: (a) The check may not be encashed but only deposited in the bank; (b) The check may be negotiated only once – to one who has an account with a bank; and (c) The act of crossing the check serves as warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course. (State Investment House Inc. vs. CA; Bataan Cigar and Cigarette Factory vs. CA) VICENTE DE OCAMPO & CO. VS. ANITA GATCHALIAN (GR No. L- Herein defendants issued a check 15126 ;Nov. 30, 1961) – Facts: amounting to P600 to one Manuel Gonzales, who represented himself as authorized by the owner of the car, Ocampo Clinic, which will be shown to the owner as evidence of defendants’ good faith in the intention to purchase the said car. Without knowledge of this transaction, plaintiff received from Gonzales the subject check for the payment of the hospitalization of his wife. On the failure of Gonzales to appear the day following, to bring the car and its certificate of registration and to return the check on the following day as previously agreed upon, defendant Gatchalian issued a "Stop Payment Order" on the check, with the drawee bank. The CFI of Manila then ordered defendants to pay the plaintiff the sum of P600 with legal interest until paid. In this action, defendants seek to recover the value of the check, contending that plaintiff is not a holder in due course. ISSUE: WON plaintiff is a holder in due course? HELD: Under the Negotiable Instruments Law, Section 52 (c) provides that a holder in due course is one who takes the instrument "in good faith and for value;" Section 59, "that every holder is deemed prima facie to be a holder in due course;" and Section 52 (d), that in order that one may be a holder in due course it is necessary that "at the time the instrument was negotiated to him "he had no notice of any . . . defect in the title of the person negotiating it;" and lastly Section 59, that every holder is deemed prima facie to be a holder in due course. In the case at bar the rule that a possessor of the instrument is prima facie a holder in due course does not apply because there was a defect in the title of the holder (Manuel Gonzales), because the instrument is not payable to him or to bearer. On the other hand, the stipulation of facts indicated by the appellants in their brief, like the fact that the drawer had no account with the payee; that the holder did not show or tell the payee why he had the

17

check in his possession and why he was using it for the payment of his own personal account — show that holder's title was defective or suspicious, to say the least. As holder's title was defective or suspicious, it cannot be stated that the payee acquired the check without knowledge of said defect in holder's title, and for this reason the presumption that it is a holder in due course or that it acquired the instrument in good faith does not exist. And having presented no evidence that it acquired the check in good faith, it (payee) cannot be considered as a holder in due course. In other words, under the circumstances of the case, instead of the presumption that payee was a holder in good faith, the fact is that it acquired possession of the instrument under circumstances that should have put it to inquiry as to the title of the holder who negotiated the check to it. The burden was, therefore, placed upon it to show that notwithstanding the suspicious circumstances, it acquired the check in actual good faith. In the case at bar as the payee acquired the check under circumstances which should have put it to inquiry, why the holder had the check and used it to pay his own personal account, the duty devolved upon it, plaintiff-appellee, to prove that it actually acquired said check in good faith . The stipulation of facts contains no statement of such good faith, hence, plaintiff payee has not proved that it acquired the check in good faith and may not be deemed a holder in due course thereof. It was payee's duty to ascertain from the holder Manuel Gonzales what the nature of the latter's title to the check was or the nature of his possession. Having failed in this respect, we must declare that plaintiff-appellee was guilty of gross neglect in not finding out the nature of the title and possession of Manuel Gonzales, amounting to legal absence of good faith, and it may not be considered as a holder of the check in good faith. To such effect is the consensus of authority CELY YANG VS. CA (GR No. 138074; Aug. 15, 2003) – Cely Yang and Prem Chandiramani were to exchange dollar drafts and checks with the difference to be divided equally as their profit. Chandiramani did not appear at the rendezvous and Ranigo, Yang’s representative, allegedly lost the two cashier’s checks and the dollar draft bought by petitioner. Ranigo reported the alleged loss of the checks and the dollar draft to Liong. Liong, in turn, informed Yang, and the loss was then reported to the police. The checks and the dollar draft were not lost because Chandiramani was able to get hold of said instruments, without delivering the exchange consideration consisting of the PCIB manager’s check and the Hang Seng Bank dollar draft. Yang requested FEBTC and Equitable to stop payment on the instruments she believed to be lost. Both banks complied with her request, but upon the representation of PCIB, FEBTC subsequently lifted the stop payment order on FEBTC Dollar Draft No. 4771. Yang lodged a Complaint for injunction and damages against Equitable, Chandiramani, and David (payee of the subject checks). The Court rendered judgment in favor of defendant Fernando David against the plaintiff Cely Yang and declaring the former entitled to the proceeds of the two (2) cashier’s checks. ISSUE: WON Fernando David is a holder in due course? HELD: Yes. Petitioner fails to point any circumstance which should have put David on inquiry as to the why and wherefore of the possession of the checks by Chandiramani. David was not privy to the transaction between petitioner and Chandiramani. Instead, Chandiramani and David had a separate dealing in which it was precisely Chandiramani’s duty to deliver the checks to David as payee. The evidence shows that Chandiramani performed said task to the letter. Petitioner admits that David took the step of asking the manager of his bank to verify from FEBTC and Equitable as to the genuineness of the checks and only accepted the same after being assured that there was nothing wrong with said checks. At that time, David was not aware of any "stop payment" order. Under these circumstances, David thus had no obligation to ascertain from Chandiramani what the nature of the latter’s title to the checks was, if any, or the nature of his possession. Thus, we cannot hold him guilty of gross neglect amounting to legal absence of good faith, absent any showing that there was something amiss about Chandiramani’s acquisition or possession of the checks. David did not close his eyes deliberately to the nature or the particulars of a fraud allegedly committed by Chandiramani upon the petitioner, absent any knowledge on his part that the action in taking the instruments amounted to bad faith. Moreover, the factual circumstances in De Ocampo and in Bataan Cigar are not present in this case. For here, there is no dispute that the crossed checks were delivered and duly deposited by David, the payee


named therein, in his bank account. In other words, the purpose behind the crossing of the checks was satisfied by the payee. BATAAN CIGAR AND CIGARETTE FACTORY VS. CA (GR No. 93048; March 3, 1994) - BCCFI issued to King Tim Pua George (George King) post-dated crossed checks for the delivery tobacco leaves. George King later on sold at a discount the subject checks to SIHI. In as much as George King failed to deliver the bales of tobacco leaves as agreed, despite petitioner’s demand, BCCFI issued a stop payment order on all checks payable to George King. Unable to collect, SIHI instituted an action to recover from herein petitioner and was granted relief by the trial court and later on upheld by the CA. Hence, the present petition. ISSUE: WON SIHI, a second indorser, a holder of crossed checks, a holder in due course? HELD: No. Sec. 52 of the Negotiable Instruments Law (NIL) states what constitutes a holder in d ue course, thus:

Sec. 52 – A holder in due course is a holder who has taken the instrument under the following conditions: a. That it is complete and regular upon its face; b. That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; c. That he took it in good faith and f or value; d. That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. Jurisprudence has pronounced that crossing a check should have the following effects: (a) the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once – to one who has an account with a bank; (c) and the act of crossing the check serves as warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course . It is settled that crossing the checks should put the holder on inquiry and upon him devolves the duty to ascertain the indorser’s title to the check or the nature of his possession. Failing in this respect, the holder is declared guilty of gross negligence amounting to legal absence of good faith, contrary to Sec. 52(c) of the NIL. In the present case, BCCFIs defense in stopping payment is as good to SIHI as it is to George King. Because, really, the checks were issued with the intention that George King would supply BCCFI with the bales of tobacco leaf. There being failure of consideration, SIHI is not a holder in due course. Consequently, BCCFI cannot be obliged to pay the checks STELCO MARKETING CORPORATION VS. CA (GR No. 96160; June 17, 1992) – Stelco Marketing Corporation is engaged in the distribution and sale to the public of structural steel bars. On 7 different occasions in September and October 1980, it sold to RYL Construction, Inc. quantities of steel bars of various sizes and rolls of G.I. wire. These bars and wire were delivered at different places at the indication of RYL Construction, Inc. The aggregate price for the purchases was P126,859.61. Although the corresponding invoices issued by STELCO stipulated that RYL would pay "COD" (cash on delivery), the latter made no payments for the construction materials thus ordered and delivered despite insistent demands for payment by the former. On April 4, 1981, RYL gave to Armstrong Industries — described by STELCO as its "sister corporation" and "manufacturing arm" — a check drawn against Metrobank in the amount of P126,129.86, numbered 765380 and dated 4 April 1981. That check was a company check of another corporation, Steelweld Corporation of the Philippines, signed by its President, Peter Rafael Limson, and its Vice-President, Artemio Torres. The check was issued by Limson at the behest of his friend, Romeo Y. Lim, President of RYL. Romeo Lim had asked Limson for financial assistance, and the latter had agreed to give Lim a check only by way of accommodation, "only as guaranty but not to pay for anything." Why the check was made out in the amount of P126,129.86 is not explained. The check was actually issued in said amount of P126,129.86, and as already stated, was given by R.Y. Lim to Armstrong, Industries, in payment of an obligation. When the latter deposited the check at its bank, it was dishonored because "drawn against insufficient funds." When so deposited, the check bore two (2) indorsements, that of "RYL Construction," followed by that of "Armstrong

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Industries." On account of the dishonor of Metrobank Check 765380, and on complaint of Armstrong Industries (through a Mr. Young), Rafael Limson and Artemio Torres were charged in the Regional Trial Court of Manila with a violation of Batas Pambansa Bilang 22. They were acquitted in a decision rendered on 28 June 1984 "on the ground that the check in question was not issued by the drawer 'to apply on account for value,' it being merely for accommodation purposes." That judgment however conditioned the acquittal with the pronouncement that "this is not however to release Steelweld Corporation from its liability under Sec. 29 of the Negotiable Instruments Law for having issued it for the accommodation of Romeo Lim." Eleven months later — and some 4 years after issuance of the check — in May, 1985, STELCO filed with the Regional Trial Court of Caloocan City a civil complaint against both RYL and STEELWELD for the recovery of the value of the steel bars and wire sold to and delivered to RYL in the amount of P126,129.86, plus 18% interest from 20 August 1980 and 25% of the total amount sought to be recovered as and by way of attorney's fees. A preliminary attachment was issued by the trial court on the basis of the averments of the complaint but was shortly dissolved upon the filing of a counter-bond by STEELWELD. RYL could no longer be located and could not be served with summons. It never appeared. Only STEELWELD filed an answer, under date of 16 July 1985. Judgment was rendered on 26 June 1986. The judgment sentenced Steelweld to pay to Stelco the amount of P126,129.86 with legal rate of interest from 9 May 1985, when the case was instituted until fully paid, plus another sum equivalent to 25% of the total amount due as and for attorney's fees. STELCO's motion for reconsideration was denied by the Appellate Tribunal's resolution dated 13 November 1990. STELCO appealed. ISSUE NO. 1 WON the fourth condition, i.e. as to notice, for a holder in due course is applicable to an accommodation party? HELD: "A holder in due course," says the law, "is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the persons negotiating it." As regards an accommodation party (such as STEELWELD), the fourth condition, i.e., lack of notice of any infirmity in the instrument or defect in title of the persons negotiating it, has no application. This is because Section 29 of the law above quoted preserves the right of recourse of a "holder for value" against the accommodation party notwithstanding that "such holder, at the time of taking the instrument, knew him to be only an accommodation party." ISSUE NO.2: WON STELCO ever became a holder in due course of Check 765380, a bearer instrument within the contemplation of the Negotiable Instruments Law? HELD: NO. It never did. There is no evidence whatever that STELCO's possession of Check 765380 ever dated back to any time before the instrument's presentment and dishonor. There is no evidence whatsoever that the check was ever given to it, or indorsed to it in any manner or form in payment of an obligation or as security for an obligation, or for any other purpose before it was presented for payment. On the contrary, STELCO never became a holder for value and that "(n)owhere in the check itself does the name of Stelco Marketing appear as payee, indorsee or depositor thereof." What the record shows is that: (1) the STEELWELD company check in question was given by its president to R.Y. Lim; (2) it was given only by way of accommodation, to be "used as collateral for another obligation;" (3) in breach of the agreement, however, R.Y. Lim indorsed the check to Armstrong in payment of an obligation; (4) Armstrong deposited the check to its account, after indorsing it; (5) the check was dishonored. The record does not show any intervention or participation by STELCO in any manner or form whatsoever in these transactions, or any communication of any sort between STEELWELD and STELCO, or between either of them and Armstrong Industries, at any time before the dishonor of the check. The record does show that after the check had been deposited and dishonored, STELCO came into possession of it in some way, and was able, several years after the dishonor of the check, to give it in evidence at the trial of the civil case it had instituted against the drawers of the check (Limson and Torres) and RYL. Possession of a negotiable instrument after presentment and dishonor, or payment, is utterly inconsequential; it does not make the possessor a holder for value within the meaning of the law; it gives rise to no liability on the part of the maker or drawer and indorsers. It is clear


from the relevant circumstances that STELCO cannot be deemed a holder of the check for value. It does not meet two of the essential requisites prescribed by the statute. It did not become "the holder of it before it was overdue, and without notice that it had been previously dishonored," and it did not take the check "in good faith and for value." Neither is there any evidence whatever that Armstrong Industries, to whom R.Y. Lim negotiated the check, accepted the instrument and attempted to encash it in behalf, and as agent of STELCO. On the contrary, the indications are that Armstrong was really the intended payee of the check and was the party actually injured by its dishonor; it was after all its representative (a Mr. Young) who instituted the criminal prosecution of the drawers, Limson and Torres, albeit unsuccessfully. 5.

Sec. 25 Sec. 26 Sec. 27

D.

Value, what constitutes (supra, p.15) What constitutes holder for value (supra, p.15) When lien on instrument constitutes holder for value (supra, p.15)

PRESUMPTION OF DUE COURSE HOLDING

Sec. 53 Sec. 59 E.

HOLDER FOR VALUE

When person not deemed holder in due course (p.16) Who is deemed a holder in due course (p.16)

RIGHTS OF A HOLDER IN DUE COURSE – Sec. 57

Sec. 57. Rights of a holder in due course . A holder in due course (1) holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among themselves , and (2) may enforce payment of the instrument for the full amount thereof against all parties liable thereon (emphasis supplied) SALAS VS. CA (G.R. No. 76788 January 22, 1990) - Juanita Salas (Petitioner) bought a motor vehicle from the Violago Motor Sales Corporation (VMS) as evidenced by a promissory note. This note was subsequently endorsed to Filinvest Finance & Leasing Corporation (private respondent) which financed the purchase. Petitioner defaulted in her installments allegedly due to a discrepancy in the engine and chassis numbers of the vehicle delivered to her and those indicated in the sales invoice, certificate of registration and deed of chattel mortgage, which fact she discovered when the vehicle figured in an accident. This failure to pay prompted private respondent to initiate an action for a sum of money against petitioner before the Regional Trial Court. ISSUE : WON private respondent is a holder in due course? HELD: YES. The Promissory Note was negotiated by indorsement in writing on the instrument itself payable to the Order of Filinvest Finance and Leasing Corporation and it is an indorsement of the entire instrument. Under the circumstances, there appears to be no question that Filinvest is a holder in due course, having taken the instrument under the following conditions: [a] it is complete and regular upon its face; [b] it became the holder thereof before it was overdue, and without notice that it had previously been dishonored; [c] it took the same in good faith and for value; and [d] when it was negotiated to Filinvest, the latter had no notice of any infirmity in the instrument or defect in the title of VMS Corporation. Accordingly, respondent corporation holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof. This being so, petitioner cannot set up against respondent the defense of nullity of the contract of sale between her and VMS. STATE INVESTMENT HOUSE VS. CA (GR No. ; July 13, 1989) – New Sikatuna Wood Industries, Inc. requested for a loan from Chua. The latter agreed to grant the same subject to the condition that the former should wait until December 1980 when he would have the money. In view of this agreement, private respondent Chua issued three (3) "crossed checks" payable to New Sikatuna Wood Industries, Inc. all postdated December 22, 1980. Subsequently, New Sikatuna entered into an agreement with herein petitioner State Investment House, Inc. whereby New Sikatuna assigned and discounted with petitioner eleven (11) postdated checks including the aforementioned three (3) postdated checks issued by Chua.

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The checks, however, were dishonored by reason of "insufficient funds", "stop payment" and "account closed", respectively. Petitioner claims that despite demands on Chua to make good said checks, the latter failed to pay the same necessitating the former to file an action for collection. When the CA reversed the trial court ruling favoring State Investment House, the latter elevated the issue before the SC. ISSUE: WON petitioner is a holder in due course as to entitle it to proceed against private respondents Chua for the amount stated in the dishonored checks? HELD: The Intermediate Appellate Court (now Court of Appeals), correctly elucidated that the effects of crossing a check are: the check may not be encashed but only deposited in the bank; the check may be negotiated only once to one who has an account with a bank; and the act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise he is not a holder in due course. It results therefore that when State Investment House rediscounted the check knowing that it was a crossed check he was knowingly violating the avowed intention of crossing the check. Furthermore, his failure to inquire from the holder, party defendant New Sikatuna Wood Industries, Inc., the purpose for which the three checks were cross despite the warning of the crossing, prevents him from being considered in good faith and thus he is not a holder in due course . Being not a holder in due course, plaintiff is subject to personal defenses, such as lack of consideration between appellants and New Sikatuna Wood Industries. Note that under the facts the checks were postdated and issued only as a loan to New Sikatuna Wood Industries, Inc. if and when deposits were made to back up the checks. Such deposits were not made, hence no loan was made, hence, the three checks are without consideration (Sec. 28, Negotiable Instruments Law). 1.

When subject to original defense

Sec. 58. When subject to original defense. - In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. 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 instrument, has all the rights of such former holder in respect of all parties prior to the latter. PRUDENCIO VS. CA (GR No.; July 14, 1986) – In 1955, Concepcion and Tamayo Construction Enterprise had a contract with the Bureau of Public Works. The firm needed fund to push through with the contract so it convinced spouses Eulalio and Elisa Prudencio to mortgage their parcel of land with the Philippine National Bank for P10,000.00. Prudencio, without consideration, agreed and so he mortgaged the land and executed a promissory note for P10k in favor of PNB. Prudencio also authorized PNB to issue the P10k check to the construction firm. In December 1955, the firm executed a Deed of Assignment in favor of PNB which provides that any payment from the Bureau of Public Works in consideration of work done (by the firm) so far shall be paid directly to PNB – this will also ensure that the loan gets to be paid off before maturity. Notwithstanding the provision in the Deed of Assignment, the Bureau of Public Works asked PNB if it can make the payments instead to the firm because the firm needs the money to buy construction materials to complete the project. Notwithstanding the provision of the Deed of Assignment, PNB agreed. And so the loan matured without PNB actually receiving any payment from the Bureau of Public Works. Prudencio, upon learning that no payment was made on the loan, petitioned to have the mortgage cancelled (to save his property from foreclosure). The trial court ruled against Prudencio; the Court of Appeals affirmed the trial court. ISSUE: WON Prudencio should pay the promissory note to PNB? HELD: No. PNB is not a holder in due course. Prudencio is an accommodation party for he signed the promissory note as maker but he did not receive value or consideration therefor. He expected the firm (accommodated party) to pay the loan – this obligation was shifted to the Bureau of Public Works by way of the Deed of Assignment). As a general rule, an accommodation party is liable on the instrument to a holder for value/in due course, notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party. The exception is that if the holder, in this case PNB, is not a holder in due course. The court finds that PNB is not a holder in due course because it has not acted in good faith when it waived the supposed payments from the


Bureau of Public Works contrary to the Deed of Assignment. Had the Deed been followed, the loan would have been paid off at maturity. STELCO MARKETING CORPORATION VS. CA (supra, p. 18) - STELCO came into possession of it in some way, and was able, several years after the dishonor of the check, to give it in evidence at the trial of the civil case it had instituted against the drawers of the check (Limson and Torres) and RYL. Possession of a negotiable instrument after presentment and dishonor, or payment, is utterly inconsequential; it does not make the possessor a holder for value within the meaning of the law; it gives rise to no liability on the part of the maker or drawer and indorsers. It is clear from the relevant circumstances that STELCO cannot be deemed a holder of the check for value. It does not meet two of the essential requisites prescribed by the statute. It did not become "the holder of it before it was overdue, and without notice that it had been previously dishonored," and it did not take the check "in good faith and for value." Neither is there any evidence whatever that Armstrong Industries, to whom R.Y. Lim negotiated the check, accepted the instrument and attempted to encash it in behalf, and as agent of STELCO. On the contrary, the indications are that Armstrong was really the intended payee of the check and was the party actually injured by its dishonor; it was after all its representative (a Mr. Young) who instituted the criminal prosecution of the drawers, Limson and Torres, albeit unsuccessfully. F.

RIGHTS OF HOLDER NOT IN DUE COURSE

Sec. 51 Sec. 58

Rights of holder to sue. (supra, p.15) When subject to original defense (supra, p.19)

G. ACCOMMODATION PARTIES – Sec. 29. Sec. 29. Liability of accommodation party. - An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party H.

PAYEE AS HOLDER IN DUE COURSE VICENTE DE OCAMPO VS. ANITA GATCHALIAN (supra, p.17) Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. Sec. 52 defines a holder in due course as "a holder who has taken the instrument under the conditions enumerated therein. ” Since "holder", as defined in sec. 191, includes a payee who is in possession the word holder in the first clause of sec. 52 and in the second subsection may be replaced by the definition in sec. 191 so as to read "a holder in due course is a payee or indorsee who is in possession," etc. (Brannan's on Negotiable Instruments Law, 6th ed., p. 543). EULALIO PRUDENCIO VS. CA (supra, p. 19) – Petitioners contend that the payee PNB is an immediate party and, therefore, is not a holder in due course and stands on no better footing than a mere assignee. In those cases where a payee either acquired the note from another holder or has not directly dealt with the maker thereof. As was held in Bank of Commerce and Savings vs. Randell: “We conclude, therefore, that a payee who receives a negotiable promissory note, in good faith, for value, before maturity, and without any notice of any infirmity, from a holder, not the maker, to whom it was negotiated as a completed instrument, is a holder in due course within the purview of Negotiable Instruments Law, so as to preclude the defense of fraud and failure of consideration between the maker and the holder to whom the instrument was delivered.

I.

SHELTER RULE

Sec. 58. When subject to original defense. - In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. 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 instrument, has all the rights of

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such former holder in respect of all parties prior to the latter. If a Holder is not a holder in due course, he is subject to personal defenses as between prior parties. The only exception is an ordinary holder who derived his title from a holder in due course, this is known in American case law as “Shelter Rule”. Sec. 58: does not apply to a holder who repurchased the instrument either personally or through an agent. CHARLES FOSSUM VS. FERNANDEZ HERMANOS (GR No. L-19461) - Herein petitioner was the resident agent in Manila of the American Iron Products Company, Inc. (AIPCI), engaged in business in New York City, while Fernandez Hermanos is a general commercial partnership engaged in business in the Philippines. Fossum, acting as agent of AIPCI, procured an order from respondent to deliver a tail shaft, to be installed on the ship Romulus . It was stipulated that the tail shaft would be in accordance with the specifications contained in a blueprint given to Fossum and that the shaft should be shipped from New York in March or April 1920. The manufacture and shipment of the shaft was delayed considerably. Meanwhile AIPCI had drawn a time draft for $2250, at 60 days, upon Fernandez Hermanos, for the price of the shaft, and payable to Philippine National Bank (PNB). It was presented to Fernandez Hermanos for acceptance, and was accepted by the firm according to its tenor. Subsequently, the shaft was found not to be in conformity with the specifications and was incapable of use for its intended purpose. Upon discovering this, Fernandez Hermanos refused to pay the draft, and it remained for a time dishonored in PNB Manila. Later the bank indorsed the draft in blank, without consideration, and delivered it to Fossum, who then instituted this action against Fernandez Hermanos. The trial court held that the consideration for the draft and for its acceptance by Fernandez Hermanos has completely failed and no action whatever can be maintained on the instrument by AIPCI, or by any other person against whom the defense of failure of consideration is available. ISSUE: WON Fossum is a holder in due course, such that an action can be maintained on the instrument? HELD: NO. Fossum is far from being a holder in due course. He was himself a party to the contract which supplied the consideration for the draft, albeit acting in a representative capacity. Also, he procured the instrument to be indorsed by the bank and delivered to himself without the payment of value, after it was overdue, and with full notice that, as between the original parties, the consideration had completely failed. Under these circumstances, recovery on the draft is out of the question. He calls attention, however, to the familiar rule that a person who is not himself a holder in due course may yet recover against the person primarily liable where it appears that such holder derives his title through a holder in due course. There is not a line of proof tending to show that the bank itself was ever a holder in due course. It was incumbent on Fossum to show that the bank was a holder in due course, and can have no assistance from the presumption expressed in sec 59 of NIL, to the effect that every holder is deemed prima facie to be a holder in due course. This presumption arises only in favor of a person who is a holder in the sense defined in sec 191 of NIL, that is, a payee or indorsee who is in possession of the draft, or the bearer thereof. Under this definition, in order to be a holder, one must be in possession of the note or the bearer thereof. (Night & Day Bank vs. Rosenbaum) If this action had been instituted by the bank itself, the presumption that the bank was a holder in due course would have arisen from the tenor of the draft and the fact that it was in the bank's possession; but when the instrument passed out of the possession of the bank and into the possession of Fossum, no presumption arises as to the character in which the bank held the paper. The bank's relation to the instrument became past history when it delivered the document to Fossum; and it was incumbent upon him to show that the bank had in fact acquired the instrument for value and under such conditions as would constitute it a holder in due course. Moreover, Fossum personally made the contract which constituted the consideration for the draft. He was therefore a party in fact, if not in law, to the transaction giving origin to the instrument; and it is difficult to see how he could strip himself of the character to agent with respect to the origin of the contract and maintain this action in his own name where his principal could not. An agent who actually makes a contract, and who has notice of all equities emanating therefrom, can stand on no better footing than his principal with respect to commercial paper growing out of the


transaction. To place him on any higher plane would be incompatible with the fundamental conception underlying the relation of principal and agent. If the original payee of a note unenforceable for lack of consideration repurchases the instrument after transferring it to a holder in due course, the paper again becomes subject in the payee's hands to the same defenses to which it would have been subject if the paper had never passed through the hands of a holder in due course. The same is true where the instrument is retransferred to an agent of the payee. J.

PAYMENT BY PARTY SECONDARY LIABLE

Sec. 121

RIGHTS OF HOLDER IN BILLS IN SET

Bills in Set involve one bill although drawn in set. The problem arises when different parts of the set are negotiated to separate persons who are holders in due course.

Sec. 178

Sec. 179

Sec. 180

Sec. 181

V. A.

B.

Bills in set constitute one bill. - Where a bill is drawn in a set, each part of the set being numbered and containing a reference to the other parts, the whole of the parts constitutes one bill. Right of holders where different parts are negotiated. Where two or more parts of a set are negotiated to different holders in due course, the holder whose title first accrues is, as between such holders, the true owner of the bill. But nothing in this section affects the right of a person who, in due course, accepts or pays the parts first presented to him. Liability of holder who indorses two or more parts of a set to different persons. - Where the holder of a set indorses two or more parts to different persons he is liable on every such part, and every indorser subsequent to him is liable on the part he has himself indorsed, as if such parts were separate bills. Acceptance of bill drawn in sets. - The acceptance may be written on any part and it must be written on one part only. If the drawee accepts more than one part and such accepted parts negotiated to different holders in due course, he is liable on every such part as if it were a separate bill.

Sec. 68 Sec. 70

Sec. 89

Sec. 118

Sec. 119

PARTIES WHO ARE LIABLE PRIMARY AND SECONDARY LIABLE DISTINGUISHED

Active Subject in the negotiable instrument is the holder . He is given the right to demand the performance of the obligation reflected in the negotiable instrument, that is, the obligation to pay a sum certain in money. Passive Subject is the one against whom the holder can enforce the right presented by the instrument who may be primary or secondarily liable (Sec. 192).

Sec. 61

Sec. 65 Sec. 66 Sec. 192

Liability of drawer. - The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder Warranty where negotiation by delivery and so forth (supra, p. 13) Liability of general indorser. – see d. Indorsers, General Indorser Persons primarily liable on instrument. - The person "primarily" liable on an instrument is the person who, by the terms of the instrument, is absolutely required to pay the same. All other parties are "secondarily" liable.

Primary and Secondary Liability, in general: Instrument Primary Promissory Note Maker Bill of Exchange Acceptor

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Secondary General Indorsers Drawer and Indorsers

Sec. 120

Sec. 184

Sec. 151

Right of party who discharges instrument. - Where the instrument is paid by a party secondarily liable thereon, it is not discharged; but the party so paying it is remitted to his former rights as regard all prior parties, and he may strike out his own and all subsequent indorsements and again negotiate the instrument, except:

(a) Where it is payable to the order of a third person and has been paid by the drawer; and (b) Where it was made or accepted for accommodation and has been paid by the party accommodated. Order in which indorsers are liable. – see liability of indorsers Effect of want of demand on principal debtor. - Presentment for payment is not necessary in order to charge the person primarily liable on the instrument; but if the instrument is, by its terms, payable at a special place, and he is able and willing to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part. But except as herein otherwise provided, presentment for payment is necessary in order to charge the drawer and indorsers To whom notice of dishonor must be given. - Except as herein otherwise provided, when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged When protest need not be made; when must be made. Where any negotiable instrument has been dishonored, it may be protested for non-acceptance or non-payment, as the case may be; but protest is not required except in the case of f oreign bills of exchange. Instrument; how discharged. - 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. When persons secondarily liable on the instrument are discharged. - 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 h older'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. 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 to bearer. Where a note is drawn to the maker's own order, it is not complete until indorsed by him, Rights of holder where bill not accepted. - When a bill is dishonored by nonacceptance, an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary


C.

making any inquiry as to his authority to exchange checks belonging to the payee-corporation. In Insular Drug Co. vs. National, the Court made the pronouncement that: ". . . The right of an agent to indorse commercial paper is a very responsible power and will not be lightly inferred. A salesman with authority to collect money belonging to his principal does not have the implied authority to indorse checks received in payment. Any person taking checks made payable to a corporation, which can act only by agents, does so at his peril, and must abide by the consequences if the agent who indorses the same is without authority." Respondent which relied upon the petitioner's warranty should not be held liable for the resulting loss. The depositor of a check as indorser warrants that it is genuine and in all respects what it purports to be. Having indorsed the checks to respondent bank, petitioner is deemed to have given the warranty prescribed in Section 66 of the NIL that every single one of those checks "is genuine and in all respects what it purports to be."

LIABILITY DISTINGUISHED FROM WARRANTIES

The primary and secondary liability makes the parties liable to pay the sum certain in money stated in the instrument. While warranties are affirmations of fact on the part of the parties that impose no direct obligation to pay in the absence of breach thereof. In case of breach of warranties, the person who breached the same may (1) either be liable; or (2) he may be barred from asserting a particular defense. Unlike secondary liability which requires a notice of dishonor, an action based on breach of warranty is not so conditioned, the latter occurring as it does at the time of the transfer, may be brought at any time. D. 1.

LIABILITY AND/OR WARRANTIES OF PARTIES Maker – primary and unconditional c.

Sec. 60. Liability of maker. - The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse 2.

a.

b.

Drawer – secondary liability. But the drawer may insert in the instrument an express stipulation negativing or limiting is own liability to the holder (see Sec. 61, p.21) Relationship with Drawee – there is a contractual relation between the drawer and the drawee. Thus, a drawer may have drawn the bill against the drawee because the latter is holding an amount in trust for the drawer, or the drawee may have extended credit to the drawer and agreed to honor any bill drawn by the drawer against said drawee. Relationship with Collecting Bank – the privity of contract is between the holder-depositor and the collecting bank. There is no privity of contract between the drawer and the collecting bank. JAI ALAI CORP OF THE PHILS. VS. BPI (GR No. L-29432; Aug. 6, 1975) – Petitioner deposited 10 checks in its current account with BPI which were acquired from Antonio Ramirez, a regular jai-alai bettor and a sales agent of the Inter-Island Gas. All the checks were payable to InterIsland Gas Service, Inc. or order. After the checks had been submitted to Inter-bank clearing, Inter-Island Gas discovered that all the indorsements made on the checks purportedly by its cashiers were forgeries. The drawers of the checks demanded reimbursement from the drawee-banks, who in turn demanded from BPI. BPI thus debited the value of the checks against petitioner's current account and forwarded to the latter the checks containing the forged indorsements which petitioner refused to accept. ISSUE: WON BPI had the right to debit from petitioner's current account the value of the checks with the forged indorsements? HELD: Yes. BPI acted within legal bounds when it debited the petitioner's account. When the petitioner deposited the checks with the respondent, the nature of the relationship created at that stage was one of agency, that is, the bank was to collect from the drawees of the checks the corresponding proceeds. It is true that the respondent had already collected the proceeds of the checks when it debited the petitioner's account, so that following the rule in Gullas vs. Philippine National Bank 2 it might be argued that the relationship between the parties had become that of creditor and debtor as to preclude the respondent from using the petitioner's funds to make payments not authorized by the latter. It is our view nonetheless that no creditor-debtor relationship was created between the parties. Since the indorsements were forgeries, they are inoperative, the payment made by the drawee banks therefore is inoperative and relationship of a creditor and debtor was not created. Having indorsed the checks to respondent bank, petitioner is deemed to have given the warranty prescribed in Section 66 of the NIL that every single one of those checks "is genuine and in all respects what it purports to be." BPI, being the collecting bank is liable to the drawee banks when it submitted the checks for clearing. The petitioner was, moreover, grossly recreant in accepting the checks in question from Ramirez. It could not have escaped the attention of the petitioner that the payee of all the checks was a corporation — the InterIsland Gas Service, Inc. Yet, the petitioner cashed these checks to a mere individual who was admittedly a habitue at its jai-alai games without

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Acceptor – it is only from the moment the drawee accepts the bill or certifies the check that the drawee becomes primarily liable. (see Sec. 127). He becomes liable to the holder by his unconditional acceptance (Westminster Bank vs. Torres & K. Nassor, Inc., GR No. L-38139; Oct. 27, 1932)

Sec. 62

Sec. 127

Sec. 143

Sec. 164

Sec. 165

Sec. 189

Liability of acceptor. - The acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance and admits: (a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee and his then capacity to indorse. Bill not an assignment of funds in hands of drawee. - A bill of itself does not operate as an assignment of the funds in the hands of the drawee available for the payment thereof, and the drawee is not liable on the bill unless and until he accepts the same. When presentment for acceptance must be made. Presentment for acceptance must be made: (a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or (b) Where the bill expressly stipulates that it shall be presented for acceptance; or (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.

In no other case is presentment for acceptance necessary in order to render any party to the bill liable. Liability of the acceptor for honor. - The acceptor for honor is liable to the holder and to all parties to the bill subsequent to the party for whose honor he has accepted. Agreement of acceptor for honor. - The acceptor for honor, by such acceptance, engages that he will, on due presentment, pay the bill according to the terms of his acceptance provided it shall not have been paid by the drawee and provided also that is shall have been duly presented for payment and protested for non-payment and notice of dishonor given to him. When check operates as an assignment. - 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.

PNB vs. BARTOLOME PICORNELL (GR No. L-18751/L-18915; September 26, 1922) - Bartolome Picornell executed a bill of exchange ordering Hyndman, Tavera & Ventura (HTV) to pay PNB for the amount used to purchase bales of tobacco and Picornell’s commission. HTV later on accepted the bill, and re-accepted it after the requested extension. However, the bill was not paid upon maturity, HTV arguing that the quality of the bales of tobacco fell short of what was expected. ISSUE: WON HTV is still liable on the instrument considering that the bales of tobacco delivered were of poor quality? HELD: Yes. The question of whether or not the tobacco was worth the value of the bill, does not concern the plaintiff bank. Such partial want of consideration, if it was, does not exist with respect to the bank which paid to Picornell the full value of said bill of exchange. The bank was a holder in due course, and was such for value


and complete. The HTV company cannot escape liability in view of Sec. 28 of the Negotiable Instruments Law. The drawee by acceptance becomes liable to the payee or his indorsee, and also to the drawer himself. But the drawer and acceptor are the immediate parties to the consideration, and if the acceptance be without consideration, the drawer cannot recover of the acceptor. The payee holds a different relation; he is a stranger t o the transaction between the drawer and the acceptor, and is, therefore, in a legal sense a remote party. In a suit by him against the acceptor, the question as to the consideration between the drawer and the acceptor cannot be inquired into. The payee or holder gives value to the drawer, and if he is ignorant of the equities between the drawer and the acceptor, he is in the position on a bona fide indorsee. Hence, it is no defense to a suit against the acceptor of a draft which has been discounted, and upon which money has been advance by the plaintiff, that the draft was accepted or the accommodation of the drawer. . . . (3 R. C. L., pp. 1143, 1144, par, 358.) Payment Without Acceptance PNB VS. CA (GR No. L-26001; Oct. 29, 1968) – Agusto Lim deposited GSIS check no. 645915-B with respondent bank Philippine Commercial and Industrial Bank, who in turn submitted said check to PNB, through Central Bank, for clearing which the latter paid. Upon demand of GSIS that the signatures of its officers on the check were forged, PNB re-credited the account of GSIS. PNB requested reimbursement from PCIB, the latter refused. Hence, the present action. ISSUE: WON prior acceptance before payment is required in the case of checks? HELD: No. In general, "acceptance", in the sense in which this term is used in the Negotiable Instruments Law is not required for checks, for the same are payable on demand. Indeed, "acceptance" and "payment" are, within the purview of said Law, essentially different things, for the former is "a promise to perform an act," whereas the latter is the " actual performance " thereof. In the words of the Law, "the acceptance of a bill is the signification by the drawee of his assent to the order of the drawer," which, in the case of checks, is the payment, on demand, of a given sum of money. Upon the other hand, actual payment of the amount of a check implies not only an assent to said order of the drawer and a recognition of the drawer's obligation to pay the aforementioned sum, but, also, a compliance with such obligation. Sec. 62 of the NIL is applicable to a drawee who pays a bill without having previously accepted it . d.

Indorsers

Sec. 63 Sec. 68

When a person deemed indorser. supra, p.12 Order in which indorsers are liable. - As respect one another, indorsers are liable prima facie in the order in which they indorse ; but evidence is admissible to show that, as between or among themselves, they have agreed otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally.

General Indorser Sec. 66 Liability of general indorser. - Every indorser who indorses without qualification, warrants to all subsequent holders in due course:

(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section (sec. 65 – warranties of a person negotiating by delivery or by qualified indorsement); and (b) That the instrument is, at the time of his indorsement, valid and subsisting; And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. ANG TIONG vs. LORENZO TING (G.R. No. L-26767, February 22, 1968) - Lorenzo Ting issued a check payable to “cash or bearer.” With Felipe

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Ang’s signature (indorsement in blank) at the back thereof, the instrument was received by Ang Tiong who thereafter presented it to the bank for payment. The drawee bank dishonored it. Ang Tiong made written demands on both Ting and Ang to make good the amount represented by the check. These demands unheeded, Ang Tiong then filed a suit for collection. The trial court adjudged for herein petitioner. Only Felipe Ang appealed, maintaining that he is only an accommodation party. ISSUE: WON Felipe Ang is an accommodation party? What is the liability of an accommodation indorser? HELD: NO. Felipe Ang is a general indorser (Section 63, NIL), in the absence of any indication by appropriate words his intention to be bound in some other capacity. Even on the assumption that Ang is a mere accommodation party as he professes to be, he is nevertheless by the clear mandate of section 29 of the Negotiable Instruments Law. That the appellant, again assuming him to be an accommodation indorser, may obtain security from the maker to protect himself against the danger of insolvency of the latter, cannot in any manner affect his liability to the appellee, as the said remedy is a matter of concern exclusively between accommodation indorser and accommodated party. So that the fact that the appellant stands only as a surety in relation to the maker, granting this to be true for the sake of argument, is immaterial to the claim of the appellee, and does not a whit diminish nor defeat the rights of the latter who is a holder for value. The liability of the appellant remains primary and unconditional. To sanction the appellant's theory is to give unwarranted legal recognition to the patent absurdity of a situation where an indorser, when sued on an instrument by a holder in due course and for value, can escape liability on his indorsement by the convenient expedient of interposing the defense that he is a mere accommodation indorser. PEOPLE VS. MANIEGO (G.R. No. L-30910 February 27, 1987) - Accused Julia T. Maniego was indicted, together with Rizalino Ubay and Milagros Pamintuan, for Malversation, by drawing checks. Maniego was acquitted in the absence of evidence against her but ordered to pay jointly and severally the amount of P57,434.50 to the government. Maniego sought reconsideration of the judgment, praying that she be absolved from civil liability or, at the very least, that her liability be reduced. The Court declined to negate her civil liability, but did reduce the amount. She appealed. ISSUE: WON Maniego could properly be held civilly liable after her acquittal? HELD: Yes. Appellant's contention that as mere indorser, she may not be made liable on account of the dishonor of the checks indorsed by her, is untenable. Under the law, the holder or last indorsee of a negotiable instrument has the right to "enforce payment of the instrument for the full amount thereof against all parties liable thereon." Among the "parties liable thereon" is an indorser of the instrument i.e., "a person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor ** unless he clearly indicates by appropriate words his intention to be bound in some other capacity.” Such an indorser "who indorses without qualification," inter alia "engages that on due presentment, ** (the instrument) shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it." Qualified Indorser Sec. 65. Warranty where negotiation by delivery and so forth. — Every person negotiating an instrument by delivery or by a qualified indorsement warrants:

(a) That the instrument is genuine and in all respects what it purports to be; (b) That he has a good title to it; (c) That all prior parties had capacity to contract; (d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation securities other than bills and notes.


While a general indorser warrants that the instrument is valid and subsisting at the time of his indorsement, the qualified indorser warrants that he has no knowledge of any fact which would impair the validity of the instrument or render it valueless, and the qualified indorser does not breach his warranty even if the instrument was already impaired at the time he negotiated it, as long as he has no knowledge of such fact. A qualified indorser neither warrants payment nor binds himself to pay, nevertheless, if judgment for the amount of the note is defeated by the maker on the ground that the indorser, as payee, obtained it by fraud or without consideration, the holder may recover from the qualified indorser the consideration paid by him with interest (Cressler vs. Brown). Order of Liability – see Sec. 68 under d. Indorsers PEOPLE VS. MANIEGO (supra) - Such an indorser "who indorses without qualification," inter alia "engages that on due presentment, ** (the instrument) shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it." e.

Persons Negotiating by Delivery – see Warranties of a Person Negotiating by mere delivery under Sec. 65 under Qualified Indorsement – p.13. or Qualified Indorser from the preceding section.

Warranties of a person negotiating by delivery are similar to a qualified indorser, except that the former’s warranties extend only in favor of his immediate transferee. f.

Other Cases Irregular Indorser – is a person, not otherwise a party to an instrument, who placed thereon his signature in blank before delivery or a person who indorses the instrument in an unusual, singular or peculiar manner. If an instrument payable to A, but at the back has B as the first indorser, B is an irregular indorser.

Sec. 64. Liability of irregular indorser . - Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following rules: (a) If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties. (b) If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all parties subsequent to the maker or drawer. (c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee. Indorser of Bearer Instrument – Sec. 40, 65 and 67

Sec. 40 Sec. 65 Sec. 67

Indorsement of instrument payable to bearer. – supra under How Negotiation Takes Place, p. 10 Sec. 65. Warranty where negotiation by delivery and so forth. – see under Qualified Indorser from previous section Liability of indorser where paper negotiable by delivery. — Where a person places his indorsement on an instrument negotiable by delivery, he incurs all the liability of an indorser.

Conditions precedent to make unqualified indorser liable Accommodation Party – Sec. 29, p. 20.

The accommodation party lends his name to the accommodated party, to enable the latter to obtain credit or to raise money. He receives no part of the consideration for the instrument but assumes liability to the other parties thereto. He is liable to a holder for value as if the contract was not for accommodation. It is not a valid defense that the accommodation party did not receive any valuable consideration. Nor is it correct to say

24

that the holder for value is not a holder in due course merely because at the time he acquired the instrument, he knew that the indorser was only an accommodation party. Corporations – the rule on the liability of an accommodation party does not apply to corporations. ERNESTINA CRISOLOGO-JOSE VS. CA (GR No. 80599; Sept. 15, 1989) - The Vice-president of Mover Enterprises, Inc. issued a check drawn against Traders Royal Bank, payable to petitioner Ernestina Crisologo-Jose, for the accommodation of his client. Petitioner-payee was charged with the knowledge that the check was issued at the instance and for the personal account of the President who merely prevailed upon respondent vice-president to act as co-signatory in accordance with the arrangement of the corporation with its depository bank. While it was the corporation's check which was issued to petitioner for the amount involved, petitioner actually had no transaction directly with said corporation. ISSUE: WON private respondent, one of the signatories of the check issued under the account of Mover Enterprises, Inc., is an accommodation party under NIL and a debtor of petitioner to the extent of the amount of said check. HELD: Yes. To be considered an accommodation party, a person must (1) be a party to the instrument, signing as maker, drawer, acceptor, or indorser, (2) not receive value therefor, and (3) sign for the purpose of lending his name for the credit of some other person. It is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument. He is liable to a holder for value as if the contract was not for accommodation, in whatever capacity such accommodation party signed the instrument, whether primarily or secondarily. Thus, it has been held that in lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. The foregoing notwithstanding, the liability of an accommodation party to a holder for value, although such holder does not include nor apply to corporations which are accommodation parties. This is because the issue or indorsement of negotiable paper by a corporation without consideration and for the accommodation of another is ultra vires. One who has taken the instrument with knowledge of the accommodation nature thereof cannot recover against a corporation where it is only an accommodation party. By way of exception, an officer or agent of a corporation shall have the power to execute or indorse a negotiable paper in the name of the corporation for the accommodation of a third person only if specifically authorized to do so. Corollarily, corporate officers, such as the president and vice-president, have no power to execute for mere accommodation a negotiable instrument of the corporation for their individual debts or transactions arising from or in relation to matters in which the corporation has no legitimate concern. Since such accommodation paper cannot thus be enforced against the corporation, especially since it is not involved in any aspect of the corporate business or operations, the signatories thereof (president and vice-president) shall be personally liable therefor, as well as the consequences arising from their acts in connection therewith. RN CLARK VS. GEORGE SELLNER (GR No. 16477; Nov. 22, 1921) Herein defendant, together with two other persons, signed a note in favor of the plaintiff which stipulates that six months after date of the same, the former shall pay the latter the sum of P12,000 with interest at rate of 10% per annum from date until paid, payable quarterly. The note matured, but its amount was not paid. Counsel for the defendant allege that the latter did not receive in that transaction either the whole or any part of the amount of the debt; that the instrument was not presented to the defendant for payment; and that the defendant, being an accommodation party, is not liable unless the note is negotiated, which was not done, as shown by the evidence. ISSUE: WON defendant is liable given the defenses raised by him? HELD: The liability of the defendant, as one of the signers of the note, is not dependent on whether he has, or has not, received any part of the amount of the debt. The defendant is really and expressly one of the joint and several debtors on the note, and as such he is liable under the provisions of Sec. 70 of NIL. As provided in Sec. 70 of the said law, as to presentment for payment, such action is not necessary in order to charge the person primarily liable, as is the defendant. And as to whether or not the defendant is an accommodation party, it should be taken into account that by putting his signature to the note, he lent his name, not to the creditor, but to those who signed with him placing


himself with respect to the creditor in the same position and with the same liability as the said signers. It should be noted that the phrase "without receiving value therefor," as used in section 29 of the aforesaid Act, means "without receiving value by virtue of the instrument" and not, as it apparently is supposed to mean, "without receiving payment for lending his name." If, as in the instant case, a sum of money was received by virtue of the note, it is immaterial, so far as the creditor is concerned, whether one of the singers has, or has not, received anything in payment of the use of his name. In reality the legal situation of the defendant in this case may properly be regarded as that of a joint surety rather than that of an accommodation party. The defendant, as a joint surety, may, upon the maturity of the note, pay the debt, demand the collateral security and dispose of it to his benefit; but there is no proof whatever that this was done. As to the plaintiff, he is the "holder for value," under the phrase of said section 29, for he had paid the money to the signers at the time the note was executed and delivered to him. FERNANDO MAULINI VS. ANTONIO SERRANO (GR No. 8844; Dec. 16, 1914) – The promissory note reads: 3,000. Due 5th of September, 1912. We jointly and severally agree to pay to the order of Don Antonio G. Serrano on or before the 5th day of September, 1912, the sum of three thousand pesos (P3,000) for value received for commercial operations. Notice and protest renounced. If the sum herein mentioned is not completely paid on the 5th day of September, 1912, this instrument will draw interest at the rate of 1½ per cent per month from the date when due until the date of its complete payment. The makers hereof agree to pay the additional sum of P500 as attorney's fees in case of failure to pay the note. Manila, June 5, 1912. (Sgd.) For Padern, Moreno & Co., by F. Moreno, member of the firm. For Jose Padern, by F. Moreno. Angel Gimenez.

The note was indorsed on the back as follows: Pay note to the order of Don Fernando Maulini, value received. Manila, June 5, 1912. (Sgd.) A.G. Serrano.

Maulini's business as a broker consisted in looking up and ascertaining persons who had money to loan as well as those who desired to borrow money and, acting as a mediary, negotiate a loan between the two. According to the method usually followed, the broker delivered the money personally to the borrower, took note in his own name and immediately transferred it by indorsement to the lender. At the special request of the indorsee and simply as a favor to him, the latter stating to the broker that he did not wish his name to appear on the books of the borrowing company as a lender of money and that he desired that the broker take the note in his own name, immediately transferred to him title thereto by indorsement. The trial court held that it was immaterial whether there was a consideration for the transfer or not, as the indorser, under the evidence offered, was an accommodation indorser. ISSUE: WON Serrano was an accommodation indorser? HELD: No. There was never a moment that Serrano was the real owner of the note. It was always the note of the indorsee, Maulini, he having furnished the money which was the consideration or the note directly to the maker and being the only person who had the slightest interest therein. Serrano, the broker, acting solely as an agent, a vehicle by which the naked title to the note passed from the borrower to the lender. The only payment the broker received was for his services in negotiating the loan. He was paid absolutely nothing for becoming responsible as an indorser to the paper, nor did the indorsee lose, pay or forego anything, or alter his position thereby. He is also not an accommodation party under Sec. 29. The accommodation to which reference is made in Sec. 29, is not one to the person who takes the note – that is, the payee or indorsee, but one to the maker or indorser of the note. An accommodation note is one to which the accommodation party has put his name, without consideration, for the purpose of accommodating some other party who is to use it and is expected to pay it. Where, however, an indorsement is made as a favor to the indorsee, who requests it, not the better to secure payment, but to relieve himself from a distasteful situation, and where the only

25

consideration for such indorsement passes from the indorser to the indorsee, the situation does not present one creating an accommodation indorsement, nor one where there is a consideration sufficient to sustain an action on the indorsement. PNB VS. MAZA (GR No. 24224; Nov. 3, 1925) - PNB is suing Ramon Maza and Francisco Mecenas on five promissory notes of P10,000 each, two of which is due 3 months after date, the three were due 4 months after date. The notes were not taken up by Maza and Mecenas at maturity. The special defines interposed by the defendants was that the promissory notes were sent in blank to them by Enrique Echaus with the request that they sign them so that Echaus might negotiate them with the PNB in case of need; that the defendants have not negotiated the note with the bank nor have they received the value thereof, or delivered them to the bank in payment of any pre-existing debt; and that it was Echaus who negotiated the note with the bank and who is accordingly the real party in interest and the party liable for the payment of the notes. Defendants move for the inclusion of Echaus as defending party, which was denied. The court rendered a judgment in favor of PNB. ISSUE: WON Ramon Maza and Francisco Mecenas are liable even if classified as accommodation parties? HELD: Yes. The most plausible and reasonable stand for the defendants is that they are accommodation parties. But as accommodation parties, the defendants having signed the instrument without receiving value therefor and for the purpose of lending their names to some other person, are still liable on the instruments. The law now is that the accommodation party can claim no benefit as such, but he is liable according to the face of his undertaking, the same as if he were himself financially interested in the transaction. To fasten liability upon an accommodation maker, it is not necessary that any consideration should move to him. The consideration which supports the promise of the accommodation maker is that parted with by the person taking the note and received by the person accommodated. The accommodation parties may make payment to the holder of the notes and have the right to sue the party accommodated for reimbursement, since the relation between them is in effect that of principal and sureties. TOWN SAVINGS & LOAN BANK VS. CA (GR No. 106011; June 17, 1993) - Spouses Hipolito applied for and was granted a loan by the bank, which was secured by a promissory note. For failure to pay their monthly payments, they were declared in default. The spouses denied having any liability. They stated that the real party-in-interest is the sister of the husband, Pilarita Reyes. The spouses, not having received part of the loan, were mere guarantors of Reyes. As such, they protested against being dragged into the litigation. The trial court held that they were liable as accommodation parties to the promissory note. This was reversed by the Court of Appeals. ISSUE: WON Respondent spouses are liable on the promissory note which they executed in favor of the petitioner? HELD: Yes. In lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. He lends his name to enable the accommodated party to obtain credit or to raise money. He receives no part of the consideration for the instrument but assumes liability to the other parties thereto because he wants to accommodate another. In the case at bar, it is indisputable that the spouses signed the promissory note to enable Reyes to secure a loan from the bank. She was the actual beneficiary of the loan and the spouses accommodated her by signing the note. Unlike in the Maulini case, there was no agreement here, written or verbal, that in signing the promissory note, the spouses were acting as agents for the money lender, the Bank. The consideration of the note signed by the Hipolitos was received by them through Pilarita. They acted as agents of Pilarita, not the Bank. They signed the promissory note as a favor to Pilarita, to help her raise the funds that she needed. It was Pilarita whom they accommodated, not the bank, contrary to the erroneous finding of the appellate court. Liability of Agent or Broker

Sec. 69

Sec. 19

Liability of an agent or broker. - Where a broker or other agent negotiates an instrument without indorsement, he incurs all the liabilities prescribed by Section Sixty-five of this Act, unless he discloses the name of his principal and the fact that he is acting only as agent Signature by agent; authority; how shown. - The signature


Sec. 20

Sec. 21

of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be established as in other cases of agency Liability of person signing as agent, and so forth. - Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not e xempt him from personal liability Signature by procuration; effect of. - A signature by " procuration" operates as notice that the agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority

PBCOM VS. ARUEGO (supra, p.4) - Sec. 20 provides that “a person (who) adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability. An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he was signing as representative of the Philippine Education Foundation Company. He merely signed as follows: “JOSE ARUEGO (Acceptor) (SGD) JOSE ARUEGO”. For failure to disclose his principal, Aruego is personally liable for the drafts he accepted. Signature by Procuration – Sec. 21, supra, p. 12 . g.

Person who should sign

A person must sign the negotiable instrument before he can be made liable under the same instrument. For example, a maker must sign as such maker before he can be made primarily liable. 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 otherwise expressly provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name

By way of EXCEPTION , the following persons who did not sign in their own names, or persons whose signatures do appear in the instrument itself, are still liable: 1. 2. 3. 4. 5. 6.

One who signs in a trade or assumed name (Sec. 18); One who signs through an agent or authorized representative (Sec. 19); Incapacitated persons who sign through their legal guardians; Forgers of signatures (Sec. 23); Persons whose signatures were forged but who are precluded from setting up the defense of forgery (Sec. 23); In case of constructive acceptance

Sec. 137. Liability of drawee returning or destroying bill. - Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within twenty-four hours after such delivery or within such other period as the holder may allow, to return the bill accepted or non-accepted to the holder, he will be deemed to have accepted the same. 7. 8.

Indorsers who sign on a separate piece of paper known as allonge (see p. 12); Persons who negotiate by mere d elivery. They are liable for breach of warranty although they did not sign. (Sec. 65)

VI. DEFENSES A.

REAL AND PERSONAL DEFENSE DISTINGUISHED

Real Defenses may be raised against all holders even against a holder in due course and attaches to the instrument itself. Personal Defenses (also called

26

equitable defenses) may be raised only against holders who are not holders in due course which are brought out of conduct of persons and makes it inequitable to impose payment. Professor William Britton: In the main, real defenses are those wherein the facts disclose an absence of one or more of the essential elements of a contract, or where the admitted contract is vitiated for all purposes for reasons of public policy. Personal defenses are those wherein the facts present a true contract but where, for various reasons, such as fraud, duress, mistake, prior breach of contract by the holder, discharge before maturity, and the like, the defendant is excused from his obligation to perform. Defenses distinguished from EQUITIES OF OWNERSHIP : the latter is raised by persons who may have legal claim over the instrument. They have different purposes, one is to claim the instrument and the other to resist a claim for payment. For example, the person from whom a bearer instrument was stolen may claim the instrument from a holder who is not in due course because of his equity of ownership. He may also resist the claim of a holder not in due course by raising the defense of non-delivery. REAL DEFENSES AND PERSONAL DEFENSES REAL DEFENSE Minority (available only to the minor) Forgery Non-delivery of Incomplete Instrument Material Alteration

Ultra Vires act of Corporation Fraud in Factum or Esse Contractus Illegality – if declared void for any purpose Vicious Force or Violence Want of authority Prescription Discharge in Insolvency

B. 1.

PERSONAL DEFENSE Failure or Absence of Consideration

Illegal Consideration Non-delivery of Complete Instrument Conditional delivery of complete instrument Fraud in inducement Filling up blank not within authority Duress or Intimidation Filling up blank beyond reasonable time Transfer in breach of faith Mistake Insertion of wrong date Ante-dating or Post-dating for illegal or fraudulent purpose

REAL D EFENSES MINORITY AND ULTRA VIRES ACTS

Sec. 22. Effect of indorsement by infant or corporation.- The indorsement or assignment of the instrument by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon a.

Minor – the defense of minority is real and may be enforced against all holders but is only available to the minor himself.

b.

Ultra Vires Acts – are acts done beyond the power conferred upon a corporation by law and such want of authority may be raised as a real defense but the negotiation of the corporation may pass title to the instrument. ATRIUM MANAGEMENT VS. CA (supra, p. 15) – ISSUE: WON the issuance of the checks were ultra vires? HELD: No. the act of issuing the checks was well within the ambit of a valid corporate act, for it was for securing a loan to finance the activities of the corporation, hence, not an ultra vires act. An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the power conferred upon it by law" The term "ultra vires" is "distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated. CRISOLOGO-JOSE VS. CA (supra, p.24) - The liability of an accommodation party to a holder for value, although such holder does not


2.

include nor apply to corporations which are accommodation parties. This is because the issue or indorsement of negotiable paper by a corporation without consideration and for the accommodation of another is ultra vires.

ORDER – Where the instrument of the payee is forged in a note payable to order, the instrument cannot be enforced against the payee and the maker. But the indorsers after the forgery are liable because they warrant that they have good title to the instrument.

NON-DELIVERY OF INCOMPLETE INSTRUMENT

Example: M made a note payable to the order of P who indorsed it to A. F stole the note and indorsed it to C who indorsed it to D, present holder.

Sec. 15

Incomplete instrument not delivered. - Where an incomplete instrument has not been delivered, 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.

1.

See under p. 9

2. 3.

FRAUD IN FACTUM (or Fraud in execution or Fraud in esse contractus)

a.

DEFINITION: It is present when a person is induced to sign an instrument not knowing its character as a note or a bill. The person signing does not know that he is signing a negotiable instrument and may be used as a defense even against a holder in due course. NOT APPLICABLE: When the person had reasonable opportunity to obtain knowledge of the character or essential terms of the instrument. FACTORS FOR REASONABLE OPPORTUNITY: (1) age and sex of the obligor; (2) intelligence, education and business experience; (3) ability to read and understand the language used; (4) representations made to him and his reason to rely on them or to have confidence in the person making them; (5) the presence or absence of any third person who might read or explain the instrument to him, or any other information; and (6) apparent necessity, or lack of it, for acting without delay (Milton Roberts, Fraud as Defense Against Holder in Due Course)

3.

b. c.

4.

c.

SALAS VS. CA (supra, p. 19) – ISSUE: WON VMS’ fraud in the conduct of its business, specifically in the delivery of a defective truck, would release petitioner-maker from paying First Finance the amount stated in the note? HELD: No. The note was a negotiable instrument and was validly negotiated to private respondent who is a holder in due course and as such holds the instrument free from defenses available to prior parties among themselves. This being so, petitioner cannot set up against respondent the defense of nullity of the contract of sale between her and VMS.

Forgery of Indorser’s Signature in a promissory note payable to BEARER – the signature of the payee or holder is unnecessary to pass title to the instrument. Hence, the maker may still be liable to a holder in due course even if an indorsement was forged after the issuance of the note since according to Sec. 60 he is to pay the instrument “according to its tenor” and considering that the “tenor” of the instrument is that he engages to pay any bearer of the instrument. However, if the holder is not a holder in due course, the person whose signature is forged may raise the defense of non-delivery of a complete instrument.

Example: M made a note payable to P or bearer, P delivered the note to A, who indorsed it specially to B. F stole the note and forged B’s signature and later on indorsed it to C, who in turn delivered it to H. 1. 2.

4.

PRUDENCIO VS. CA (supra, p. 19) - The court finds that PNB is not a holder in due course because it has not acted in good faith when it waived the supposed payments from the Bureau of Public Works contrary to the Deed of Assignment. Had the Deed been followed, the loan would have been paid off at maturity.

3.

FORGERY AND WANT OF AUTHORITY

4.

Forgery of signatures and the placing of a signature in behalf of another without authority are real defenses. Sec. 23. Forged signature; effect of. - When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority A forged signature, whether it be that of the drawer, maker, payee or any other party, is wholly inoperative and no one can gain title to the instrument through such forged signature against parties prior to the forgery. a.

b.

Forgery of Maker’s Signature – the maker is not liable to all subsequent parties whether the instrument is an order or bearer instrument. However, indorsers after the forgery are still secondarily liable to the holder by virtue of their warranty. Forgery of Indorser’s Signature in a promissory note payable to

27

D, even if he is a holder in due course, cannot recover from parties prior to the forgery. Thus, he cannot recover from A, P and M. Because F forged the signature of A, D did not acquire any right against A, P and M because A did not transfer his right over the instrument; D, however, can enforce the instrument against C, who is an indorser after the forgery and is secondarily liable to subsequent parties due to their warranties; Later on, C can recover what he paid from the forger, F, who becomes principal debtor because of his wrongful act of forging a signature in the note. A, whose signature was forged, has a remaining equity of ownership, hence, his right to recover from either M who is still primarily liable or P who is secondarily liable in case M dishonors the note.

H can collect from M since the liability remains that he will pay the bearer of the instrument. P, A and B cannot be liable since under Sec. 40, they will only be liable to those who can trace their title to the indorsments, notwithstanding the fact that B’s signature was forged. If, however C indorsed it to H, a holder in due course, the latter may recover from A considering that he can trace his title to A. But B, whose signature was forged, may raise the defense of forgery even against a holder in due course. If H is not a holder in due course, M, A and B may raise the defense of non-delivery of a complete instrument as a defense.

d.

Forgery of Drawer’s Signature – barring gross negligence on the part of the drawer where his signature is forged, he is not liable whether or not the instrument is payable to bearer or order because the drawer was never a party to the instrument – he did not promise to pay anybody.

e.

Forgery of Indorser’s Signature in a bill of e xchange payable to ORDER – subsequent holders cannot enforce payment against the drawee, drawer, payee or the indorser whose signature was forged, or those parties prior to the forged indorsement. Indorsers AFTER the forgery are still secondarily liable because of their warranties. See BDO vs. Equitable Banking Corp

f.

Forgery of Indorser’s Signature in a bill of exchange payable to BEARER – same rule with bearer promissory note.

g.

Situation with a COLLECTING BANK 1. Payee can claim against Collecting Bank – a payee whose signature is forged may directly proceed against the collecting bank (Westmont Bank vs. Eugene Ong);


2.

3.

Drawer and Collecting Bank – the drawer cannot opt to recover from the collecting bank since there is no privity of contract between him and the collecting bank (Associated Bank vs. CA); Warranty of Collecting Bank The collecting bank which indorses a check bearing a forged indorsement and presents it to the drawee bank guarantees all prior indorsements, including the forged indorsement itself, and ultimately should be held liable therefor. (Traders Royal Bank vs. RPN); An EXCEPTION is when the issuance of the check itself was attended with negligence. Collecting Bank, for having indorsed the checks, is solely liable when the checks were deposited in an account other than that of the payees on the strength of forged instruments (Republic Bank vs. Ebrada; BDO vs. EBC; Traders Royal Bank vs. RPN); In other cases, the collecting bank and the drawee bank were made to share in the liability because of the relative negligence that they exhibited (BPI vs. CA); Recourse of Collecting Bank – the collecting bank may recover from its depositor who had not given value for the money paid to him. 







4.

ASSOCIATED BANK VS. CA (GR No. 107382; 107612; Jan. 31, 1996) – The Province of Tarlac maintains a current account with the Philippine National Bank where the provincial funds are deposited. A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. The allotment checks for said government hospital are drawn to the order of "Concepcion Emergency Hospital, Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion, Tarlac”. It was later discovered that the hospital did not receive several allotment checks drawn by the Province. After the checks were examined, it was learned that 30 checks were encashed by one Fausto Pangilinan, with the Associated Bank acting as collecting bank. It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee hospital, collected the questioned checks from the office of the Provincial Treasurer claiming to be assisting or helping the hospital on the release of the checks. To encash the checks, he forged the signature of Dr. Adena Canlas chief of the payee hospital. All the checks bore the stamp of Associated Bank which reads "All prior endorsements guaranteed ASSOCIATED BANK." The Provincial Treasurer sought to recover from PNB various amounts debited from the current account of the Province. In turn, PNB demanded reimbursement from the Associated Bank who refused to pay interposing the defense of forgery. ISSUE: WON Associated Bank (collecting bank) may interpose the real defense of forgery against PNB (drawee bank) as to bar recovery by the latter? HELD : NO. Where the instrument is payable to order at the time of the forgery, such as the checks in this case, the signature of its rightful holder (here, the payee hospital) is essential to transfer title to the same instrument. When the holder's indorsement is forged, all parties prior to the forgery may raise the real defense of forgery against all parties subsequent thereto. An indorser of an order instrument warrants "that the instrument is genuine and in all respects what it purports to be; that he has a good title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid and subsisting ." He cannot interpose the defense that signatures prior to him are forged. A collecting bank where a check is deposited and which indorses the check upon presentment with the drawee bank, is such an indorser. So even if the indorsement on the check deposited by the bank's client is forged, the collecting bank is bound by his warranties as an indorser and cannot set up the defense of forgery as against the drawee bank. The loss incurred by drawee bank-PNB can be passed on to the collecting bank-Associated Bank which presented and indorsed the checks to it. Associated Bank can, in turn, hold the forger, Fausto Pangilinan, liable. The drawee bank is not similarly situated as the collecting bank because the former makes no warranty as to the genuineness of any indorsement. The drawee bank's duty is but to verify the genuineness of the drawer's signature and not of the indorsement because the drawer is its client. GEMPESAW VS. CA (supra, p. 14) - Under Sec. 23 of the Negotiable Instruments Law, a forged signature is “wholly inoperative, no one

28

can gain title to the instrument through such forged indorsement. Such an indorsement prevents any subsequent party from acquiring any right as against any party whose name appears prior to the forgery. Such forged indorsement cuts-off the rights of all subsequent parties as against parties prior to the forgery. As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot charge the drawer’s account for the amount of said check. An exception to the rule is where the drawer is guilty of such negligence which causes the bank to honor such checks. Gempesaw did not exercise prudence in taking steps that a careful and prudent businessman would take in circumstances to discover discrepancies in her account. Her negligence was the proximate cause of her loss, and under Section 23 of the Negotiable Instruments Law, is precluded from using forgery as a defense. REPUBLIC BANK VS. EBRADA (GR No. L-40769; July 31, 1975) - This is a case of what appeared to be an indorsed check by one Martin Lorenzo who turned out to be dead since 1952. The forged signature of the deceased appeared at the dorsal portion of the check indorsed in favor of one Ramon Lorenzo. From Ramon Lorenzo the same was indorsed to one Delia Dominguez and then from Dominguez to herein respondent Ebrada. Subsequently, Ebrada encashed the same in 1963 at herein petitioner Republic Bank's main office in Escolta. Upon informing petitioner Republic Bank, however, that the payee's (Lorenzo) indorsement was a forgery, the Bureau of Treasury requested the Bank to refund them the amount given to Ebrada. The Bank sued Ebrada upon the latter’s refusal to return the money of the forged check. ISSUE: WON Ebrada is liable to return the money paid to him by Republic Bank subject of a forged check and may the petitioner recover the proceeds given? HELD: It is clear from the provision of Section 23 of the NIL that where the signature on a negotiable instrument if forged, the negotiation of the check is without force or effect. But does this mean that the existence of one forged signature therein will render void all the other negotiations of the check with respect to the other parties whose signature are genuine? No. Applying the principle of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, it can be safely concluded that it is only the negotiation predicated on the forged indorsement that should be declared inoperative. This means that the negotiation of the check in question from Martin Lorenzo, the original payee, to Ramon R. Lorenzo, the 2 nd indorser, should be declared of no effect, but the negotiation of the aforesaid check from Ramon R. Lorenzo to Adelaida Dominguez, the 3 rd indorser, and from Adelaida Dominguez to the defendant-appellant who did not know of the forgery, should be considered valid and enforceable, barring any claim of forgery. Being the last indorser, however, Ebrada warrants that she has good title to the check subject of this action. The petitioner, drawee of the check can recover from the holder [Ebrada] the money paid to the latter on a forged instrument. It is not supposed to be its duty to ascertain whether the signatures of the payee or indorsers are genuine or not. This is because the indorser is supposed to warrant to the drawee that the signatures of the payee and previous indorsers are genuine, warranty not extending only to holders in due course. Ebrada, upon receiving the check in question from Dominguez, was duty-bound to ascertain whether the check in question was genuine before presenting it to plaintiff Bank for payment. Indorsers own credulity or recklessness or misplaced confidence was the sole cause of the loss. Why should he be permitted to shift the loss due to his own fault in assuming the risk, upon the drawee, simply because of the accidental circumstance that the drawee afterwards failed to detect the forgery when the check was presented for payment. Persons precluded from setting up forgery MWSS VS. CA (GR No. L-62943; July 14, 1986) - 23 checks were deposited by the payees Dizon, Sison and Mendoza in their respective current accounts with the PCIB and PBC. Thru the Central Bank Clearing, these checks were presented for payment by PBC and PCIB to the defendant PNB, and were paid. At the time of their presentation to PNB, these checks bear the standard indorsement which reads 'all prior indorsement and/or lack of endorsement guaranteed.' Subsequent investigation however, conducted by the NBI showed that Raul Dizon, Arturo Sison and Antonio Mendoza were all fictitious persons. NWSA addressed a letter to PNB requesting the immediate restoration to its Account No. 6, of the total sum of P3,457,903.00 corresponding to the total amount of these twenty-three (23) checks claimed by NWSA to be forged and/or spurious checks. ISSUE : WON THE DRAWEE


BANK WAS LIABLE FOR THE LOSS UNDER SECTION 23 OF THE NEGOTIABLE INSTRUMENTS LAW? HELD : The NBI does not declare or prove that the signatures appearing on the questioned checks are forgeries. These reports did not touch on the inherent qualities of the signatures which are indispensable in the determination of the existence of forgery. There must be conclusive findings that there is a variance in the inherent characteristics of the signatures and that they were written by two or more different persons. Forgery cannot be presumed. It must be established by clear, positive, and convincing evidence. This was not done in the present case. Even if the twenty-three (23) checks in question are considered forgeries, considering the petitioner's gross negligence, it is barred from setting up the defense of forgery under Section 23 of the Negotiable Instruments Law. One factor which facilitates this fraud was the delay in the reconciliation of bank (PNB) statements with the NAWASA bank accounts. The records likewise show that the petitioner failed to provide appropriate security measures over its own records thereby laying confidential records open to unauthorized persons. We cannot fault the respondent drawee Bank for not having detected the fraudulent encashment of the checks because the printing of the petitioner's personalized checks was not done under the supervision and control of the Bank. Under the circumstances, therefore, the petitioner was in a better position to detect and prevent the fraudulent encashment of its checks. METROPOLITAN BANK VS. CA (supra, p.5) - ISSUE: WON Metropolitan Bank can use forgery of the warrants as defense, hence, making Golden Savings liable? HELD: No. There was no question of Gomez's identity or of the genuineness of his signature as checked by Golden Savings. In fact, the treasury warrants were dishonored allegedly because of the forgery of the signatures of the drawers, not of Gomez as payee or indorser. Under the circumstances, it is clear that Golden Savings acted with due care and diligence and cannot be faulted for the withdrawals it allowed Gomez to make. By contrast, Metrobank exhibited extraordinary carelessness. Despite the lack of such clearance, it allowed Golden Savings to withdraw from the uncleared treasury warrants. The supposed reason for the dishonor, to wit, the forgery of the signatures of the general manager and the auditor of the drawer corporation, has not been established. This was the finding of the lower courts which must not be disturbed. As held in MWSS v. Court of Appeals, forgery cannot be presumed. It must be established by clear, positive and convincing evidence. This was not done in the present case. Hence, petition was denied. SAMSUNG CONSTRUCTION VS. FAR EAST BANK (GR No. 129015; Aug. 15, 2003) - Petitioner maintained a current account with respondent bank. The sole signatory to petitioner’s account was Jong Kyu Lee ("Jong"), its Project Manager, while the checks remained in the custody of the company’s accountant, Kyu Yong Lee ("Kyu"). A certain Roberto Gonzaga presented for payment FEBTC Check to the bank. The check, payable to cash and drawn against Samsung Construction’s current account, was in the amount of P999, 500.00. After the bank teller ascertained that there were enough funds to cover the check and compared the signature as contained in the specimen signature, the bank teller forwarded the check with two other bank branch officers, who counterchecked the signature. One of the bank officers noticed Sempio, the assistant accountant of Samsung Construction, was also in the bank and when asked, Sempio vouched for the genuineness of Jong’s signature. The following day, Kyu examined the balance of the bank account and discovered that a check amounting to P999, 500.00 had been encashed. Aware that he had not prepared such a check for Jong’s signature, Kyu perused the checkbook and found that the last blank check was missing. He reported the matter to Jong, who then proceeded to the bank. Jong learned of the encashment of the check, and realized that his signature had been forged. Samsung Construction filed before the RTC against respondent bank for violation of Section 23 of the Negotiable Instruments Law who ruled in favor of Samsung Construction while the CA reversed the RTC Decision and absolved FEBTC from any liability. The Court of Appeals invoked the ruling in PNB v. National City Bank of New York that, if a loss, which must be borne by one or two innocent persons, can be traced to the neglect or fault of either, such loss would be borne by the negligent party, even if innocent of intentional fraud. (equity principle). ISSUE: WON Samsung Construction was precluded from setting up the defense of forgery under Section 23 of the Negotiable Instruments Law? HELD: No. On the premise that Jong’s signature was indeed forged, FEBTC is liable for the loss since it authorized the discharge of the forged check. Such liability attaches even if the bank

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exerts due diligence and care in preventing such faulty discharge. Forgeries often deceive the eye of the most cautious experts; and when a bank has been so deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being deceived. The forgery may be so near like the genuine as to defy detection by the depositor himself, and yet the bank is liable to the depositor if it pays the check. The Court recognize that Section 23 of the Negotiable Instruments Law bars a party from setting up the defense of forgery if it is guilty of negligence. Yet, we are unable to conclude that Samsung Construction was guilty of negligence in this case. The appellate court failed to explain precisely how the Korean accountant was negligent or how more care and prudence on his part would have prevented the forgery. We cannot sustain this "tar and feathering" resorted to without any basis. When the bank receives the deposit, it impliedly agrees to pay ONLY UPON THE DEPOSITOR’S ORDER. When the Bank pays a check, on which the depositor’s signature is a forgery, it has failed to comply with its contract in this respect. PNB VS. QUIMPO (GR No. L-53194, March 14, 1988) - Private Respondent Francisco Gozon went to the Caloocan City Branch of PNB with his friend Ernesto Santos, who he left in the car while he transacted business in the bank. Santos saw that Gozon left his checkbook, he took a check therefrom, filled it up for P5,000 and forged the signature of Gozon. Santos was later on apprehended and admitted that he stole the check and encashed the same with the bank. Gozon filed an action to recover the amount from the Bank which the court granted. Hence the petition. ISSUE: WON Gozon who left his checkbook into hands of Santos was indeed the proximate cause of the loss and thus precluded from setting up the defense of forgery? HELD: No. A bank is bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily change the amount so paid to the account of the depositor whose name was forged' (San Carlos Milling Co. vs. Bank of the P.I). This rule is absolutely necessary to the circulation of drafts and checks, and is based upon the presumed negligence of the drawee in failing to meet its obligation to know the signature of its correspondent. ... There is nothing inequitable in such a rule. If the paper comes to the drawee in the regular course of business, and he, having the opportunity ascertaining its character, pronounces it to be valid and pays it, it is not only a question of payment under mistake, but payment in neglect of duty which the commercial law places upon him, and the result of his negligence must rest upon him. The prime duty of the bank is to ascertain the genuineness of the signature of the drawer or the depositor on the check being encashed. It is expected to use reasonable business prudence in accepting and cashing a check presented to it. Obviously, petitioner was negligent in encashing said forged check without carefully examining the signature which shows marked variation from the genuine signature of private respondent. The act of the plaintiff in leaving his checkbook in the car cannot be considered negligence sufficient to excuse the defendant bank from its own negligence. Santos could not have been expected to know that Santos, a long time classmate and friend, would remove a check from his checkbook . BANCO DE ORO VS. EQUITABLE BANKING CORPORATION (supra, p.3) - A commercial bank cannot escape the liability of an endorser of a check and which may turn out to be a forged endorsement. Whenever any bank treats the signature at the back of the checks as endorsements and thus logically guarantees the same as such there can be no doubt said bank has considered the checks as negotiable. Apropos the matter of forgery in endorsements, this Court has succinctly emphasized that the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements (PNB vs. National City Bank) In another case, this court held that if the drawee-bank discovers that the signature of the payee was forged after it has paid the amount of the check to the holder thereof, it can recover the amount paid from the collecting bank. WESTMONT BANK VS. EUGENE ONG (GR No. 132250; Jan. 30, 2002) - It was undisputed that Respondent Eugene Ong maintained a current account with petitioner, formerly the Associated Banking Corporation, but now known as Westmont Bank. Sometime in May 1976, he sold certain shares of stocks


through Island Securities Corporation. To pay Ong, Island Securities purchased two (2) Pacific Banking Corporation manager’s checks, both dated May 4, 1976, issued in the name of Eugene Ong as payee. Before Ong could get hold of the checks, his friend Paciano Tanlimco got hold of them, forged Ong’s signature and deposited these with petitioner, where Tanlimco was also a depositor. Even though Ong’s specimen signature was on file, petitioner accepted and credited both checks to the account of Tanlimco, without verifying the ‘signature indorsements’ appearing at the back thereof. Tanlimco then immediately withdrew the money and absconded. ISSUE: WON Westmont Bank is precluded from setting up the forgery or want of authority and therefore, should suffer the loss and be made liable to herein Respondent Ong? HELD: YES. Citing the ruling in Associated Bank vs. Court of Appeals, the collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements. The collecting bank is also made liable because it is privy to the depositor who negotiated the check. The bank knows him, his address and history because he is a client. Hence, it is in a better position to detect forgery, fraud or irregularity in the indorsement. Further, respondent Ong, at the time the fraudulent transaction took place, was a depositor of petitioner bank. Banks are engaged in a business impressed with public interest, and it is their duty to protect in return their many clients and depositors who transact business with them. They have the obligation to treat their client’s account meticulously and with the highest degree of care, considering the fiduciary nature of their relationship. The diligence required of banks, therefore, is more than that of a good father of a family. Since the signature of the payee, in the case at bar, was forged to make it appear that he had made an indorsement in favor of the forger, such signature should be deemed as inoperative and ineffectual. Petitioner, as the collecting bank, grossly erred in making payment by virtue of said forged signature. The payee, herein respondent, should therefore be allowed to recover from the collecting bank. The theory of said rule is that the collecting bank’s possession of such check is wrongful. ILLUSORIO VS. CA (GR No. 139130; Nov. 27, 2002) – Petitioner was a depositor in good standing of respondent bank, the Manila Banking Corporation. As he was then running about 20 corporations, and was going out of the country a number of times, petitioner entrusted to his secretary, Katherine E. Eugenio, his credit cards and his checkbook with blank checks. It was also Eugenio who verified and reconciled the statements of said checking account. Between the dates September 5, 1980 and January 23, 1981, Eugenio was able to encash and deposit to her personal account about seventeen (17) checks drawn against the account of the petitioner at the respondent bank. Upon learning that Eugenio has been using his credit cards, petitioner fired Eugenio immediately, and instituted a criminal action against her for estafa thru falsification. Private respondent also lodged a complaint for estafa thru falsification of commercial documents against Eugenio on the basis of petitioner’s statement that his signatures in the ch ecks were forged. Petitioner then requested the respondent bank to credit back and restore to its account the value of the checks which were wrongfully encashed but respondent bank refused. Hence, petitioner filed the instant case. Petitioner contends that Manila Bank is liable for damages for its negligence in failing to detect the discrepant checks. He adds that as a general rule a bank which has obtained possession of a check upon an unauthorized or forged endorsement of the payee’s signature and which collects the amount of the check from the drawee is liable for the proceeds thereof to the payee. Petitioner further contends that under Section 23 of the Negotiable Instruments Law a forged check is inoperative, and that Manila Bank had no authority to pay the forged checks. ISSUE : WON petitioner may put up the defense of forgery against Manila bank? HELD: NO. True, it is a rule that when a signature is forged or made without the authority of the person whose signature it purports to be, the check is wholly inoperative. No right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party, can be acquired through or under such signature. However, the rule does provide for an exception, namely: “unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.” In the instant case, it is the exception that applies. In our view, petitioner is precluded from setting up the forgery, assuming there is forgery, due to his own negligence in entrusting to his secretary his credit cards and checkbook including the verification of his statements of account. Petitioner’s reliance on Associated Bank vs. Court of Appeals and Philippine Bank of Commerce vs. CA to buttress his contention that respondent Manila

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Bank as the collecting or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements is misplaced. In the cited cases, the fact of forgery was not in issue. In the present case, the fact of forgery was not established with certainty. In those cited cases, the collecting banks were held to be negligent for failing to observe precautionary measures to detect the forgery. In the case before us, both courts below uniformly found that Manila Bank’s personnel diligently performed their duties, having compared the signature in the checks from the specimen signatures on record and satisfied themselves that it was petitioner’s. TRADERS ROYAL BANK VS. RPN (GR No. 138510; Oct. 10, 2002) - The BIR assessed plaintiffs Radio Philippines Network (RPN), Intercontinental Broadcasting Corporation (IBC), and Banahaw Broadcasting Corporation (BBC) of their tax obligations for the taxable years 1978 to 1983. To pay the assessed taxes, respondent networks purchased from petitioner Traders Royal Bank (TRB) three manager’s checks which was turned over through Aida Nuñez, TRB Branch Manager, to Mrs. Lourdes C. Vera, the financial comptroller of respondents. The 3 manager’s checks, however, were never delivered nor paid to the BIR but instead, the checks were presented for payment by unknown persons to Security Bank, Taytay Branch. Respondents sent letters to both TRB and Security Bank thereafter demanding that the amounts covered by the checks be reimbursed or credited to their account. An action was filed where it was decided that the networks should be reimbursed for the amounts of the checks by petitioner bank and the latter in turn, must be reimbursed by Security Bank. In the appellate court, it was held that Traders Bank should be the only Bank liable. ISSUE: WON Traders Royal Bank should solely bare the loss for its negligence? HELD: YES. If a bank pays a forged check, it must be considered as paying out of its funds and cannot charge the amount so paid to the account of the depositor. Petitioner TRB ought to have known that where checks drawn payable to the order of one person and is presented for payment by another and purports upon its face to have been duly indorsed by the payee of the check, it is the primary duty of petitioner to know that the check was duly indorsed by the original payee and, w here it pays the amount of the check to a third person who has forged the signature of the payee, the loss falls upon petitioner who cashed the check. Its only remedy is against the person to whom it paid the money. A bank is engaged in a business impressed with public interest and it is its duty to protect its many clients and depositors who transact business with it. It is under the obligation to treat the accounts of the depositors and clients with meticulous care, whether such accounts consist only of a few hundred or millions of pesos. Since TRB did not pay the rightful holder or other person or entity entitled to receive payment, it has no right to reimbursement. Petitioner TRB was remiss in its duty and obligation, and must therefore suffer the consequences of its own negligence and disregard of established banking rules and procedures. It should be further noted that one of the checks was a crossed check. The crossing of the check should have put petitioner on guard; it was duty-bound to ascertain the indorser’s title to the check or the nature of his possession. MATERIAL ALTERATION

A material alteration is only a partial real defense because the holder in due course can enforce it according to its original tenor. Sec. 124

Sec. 125

Alteration of instrument; effect of. - Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers.

But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce payment thereof according to its original tenor. What constitutes a material alteration. - Any alteration which changes: (a) The date; (b) The sum payable, either for principal or interest; (c) The time or place of payment: (d) The number or the relations of the parties; (e) The medium or currency in which payment is to be made; (f) 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 material alteration. a.

Concept

PNB VS. CA (GR No. 107508; April 25, 1996) - A check with serial number 7-3666-223-3, dated August 7, 1981 in the amount of P97,650.00 was issued by the Ministry of Education and Culture payable to F. Abante Marketing. This check was drawn against Philippine National Bank (herein petitioner). F. Abante Marketing, a client of Capitol City Development Bank (Capitol), deposited the questioned check in its savings account with said bank. In turn, Capitol deposited the same in its account with the Philippine Bank of Communications (PBCom) which, in turn, sent the check to petitioner for clearing. Petitioner cleared the check as good and, thereafter, PBCom credited Capitol’s account for the amount stated in the check. However, petitioner PNB returned the check to PBCom and debited PBCom’s account for the amount covered by the check, the reason being that there was a “material alteration” of the check number. PBCom, as collecting agent of Capitol, then proceeded to debit the latter’s account for the same amount. On the other hand, Capitol could not, in turn, debit F. Abante Marketing’s account since the latter had already withdrawn the amount of the check. ISSUE: WON AN ALTERATION OF THE SERIAL NUMBER OF A CHECK IS A MATERIAL ALTERATION UNDER THE NEGOTIABLE INSTRUMENTS LAW? HELD: No. An alteration is said to be material if it alters the effect of the instrument. It means an unauthorized change in an instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party. In other words, a material alteration is one which changes the items which are required to be stated under Section 1 of the Negotiable Instrument Law. The case at the bench is unique in the sense that what was altered is the serial number of the check in question, an item which, it can readily be observed, is not an essential requisite for negotiability under Section 1 of the Negotiable Instruments Law. The aforementioned alteration did not change the relations between the parties. The name of the drawer and the drawee were not altered. The intended payee was the same. The sum of money due to the payee remained the same. If the purpose of the serial number is merely to identify the issuing government office or agency, its alteration in this case had no material effect whatsoever on the integrity of the check. The identity of the issuing government office or agency was not changed thereby and the amount of the check was not charged against the account of another government office or agency which had no liability under the check. ENRIQUE MONTINOLA VS. PNB (supra, p. 12) – Provincial Treasurer (PT) of Misamis Oriental Ubaldo Laya issued the check in question as PT and not as agent of PNB when he signed it as drawer payable to the order of MV Ramos who later on sold the check to Montinola. On trial, the check was severely mutilated and beneath Laya’s signature appears the words “Agent, Phil. National Bank. HELD: The insertion of the words "Agent, Phil. National Bank" which converts the bank from a mere drawee to a drawer and therefore changes its liability, constitutes a material alteration of the instrument without the consent of the parties liable thereon, and so discharges the instrument. b.

Alteration that totally prevents recovery – in the case of Montinola vs. PNB above, even if it was negotiated to a holder in due course, such holder cannot enforce the instrument against the bank as drawer. The drawee cannot be compelled to pay unless he accepts, and the drawer cannot be made liable until the instrument is dishonored. As a drawee, he cannot be made to pay because there was no acceptance, the Bank cannot also be made to pay as a drawer considering that the change of liability was due to the alteration. Same rule applies if the alteration is in the payee’s name, since the holder in due course cannot enforce it according to its original tenor, which contains a different payee.

5.

EXTINCTIVE PRESCRIPTION

The prescriptive period for the filing of a claim based no negotiable instruments is ten years from the time the cause of action accrued (Pay vs. Vda. De Palanca) . With respect to CHECKS, the action of the depositor against his drawee bank commences to run from the time he is given notice of payment.

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PHILIPPINE COMMERCIAL INTERNATIONAL BANK VS. CA (GR No. 121413; Jan. 29, 2001) - Ford Philippines filed actions to recover from the drawee bank Citibank and collecting bank PCIB the value of several checks payable to the Commissioner of Internal Revenue as payment of percentage or manufacturer's sales taxes. What prompted this action was the drawing of a check by Ford, which it deposited to PCIB as payment and was debited from their Citibank account. It was later on found out that the payment wasn’t received by the Commissioner. Meanwhile, according to the NBI report, one of the checks issued by Ford was withdrawn from PCIB for alleged mistake in the amount to be paid. This was replaced with manager’s check by PCIB, which were allegedly stolen by a syndicate and deposited in their own account. The trial court decided in favor of Ford. In this petition, PCIB claims that the action of Ford had prescribed because of its inability to seek judicial relief seasonably, considering that the alleged negligent act took place prior to December 19, 1977 but the relief was sought only in 1983, or seven years thereafter. ISSUE: WON Ford’s cause of action has prescribed, hence, cannot recover anymore from PCIB? HELD: The statute of limitations begins to run when the bank gives the depositor notice of the payment, which is ordinarily when the check is returned to the alleged drawer as a voucher with a statement of his account. An action upon a check is ordinarily governed by the statutory period applicable to instruments in writing. Our laws on the matter provide that the action upon a written contract must be brought within ten years from the time the right of action accrues. Hence, the reckoning time for the prescriptive period begins when the instrument was issued and the corresponding check was returned by the bank to its depositor. Applying the same rule, the cause of action for the recovery of the proceeds of Citibank would normally be a month after December 19, 1977, when Citibank paid the face value of the check in the amount of P4,746,114.41. Since the original complaint for the cause of action was filed on January 20, 1984, barely six years had lapsed. Thus, Ford's cause of action to recover the amount was seasonably filed within the period provided by law. Hence, PCIB was declared solely responsible for the loss of the proceeds of Citibank in the amount P4,746,114.41, which shall be paid together with 6% interest thereon to Ford from the date when the original complaint was filed until said amount is fully paid. PAPA VS. AU VALENCIA (GR NO. 105188; Jan. 23, 1998) - Private respondents filed in the RTC a complaint for specific performance against petitioner herein, in his capacity as administrator of the Testate Estate of Angela Butte. The RTC ruled in favor of the PR allowing PR to redeem the subject property and ordering petitioner to execute a Deed of Sale in favor of PR Penarroyo covering the property in question and to deliver the peaceful possession of the said property. Petitioner appealed the aforesaid decision of the trial court to the Court of Appeals, alleging among others that the sale was never "consummated" as he did not encash the check (in the amount of P40,000.00) given by respondents Valencia and Peñarroyo in payment of the full purchase price of the subject lot. He maintained that what said respondent had actually paid was only the amount of P5,000.00 (in cash) as earnest money. The Court of Appeals rendered a decision, affirming with modification the trial court's decision. ISSUE: WON alleged sale of the subject property had been consummated? HELD: The Court finds no merit in petitioner’s arguments. It is an undisputed fact that respondents Valencia and Peñarroyo had given petitioner P5, 000.00 in cash, P40, 000.00 in check, in payment of the purchase price of the subject lot. Petitioner's assertion that he never encashed the aforesaid check is not substantiated and is at odds with his statement in his answer that "he can no longer recall the transaction which is supposed to have happened 10 years ago." After more than ten (10) years from the payment in party by cash and in part by check, the presumption is that the check had been encashed. As already stated, he even waived the presentation of oral evidence. Granting that petitioner had never encashed the check, his failure to do so for more than ten (10) years undoubtedly resulted in the impairment of the check through his unreasonable and unexplained delay. While it is true that the delivery of a check produces the effect of payment only when it is cashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the debtor is prejudiced by the creditor's unreasonable delay in presentment. The acceptance of a check implies an undertaking of due diligence in presenting it for payment, and if he from whom it is received sustains loss by want of such diligence, it will be held to operate as actual payment of the debt or obligation for which it was given. It has, likewise, been held that if no presentment is made at


all, the drawer cannot be held liable irrespective of loss or injury unless presentment is otherwise excused. This is in harmony with Article 1249 of the Civil Code under which payment by way of check or other negotiable instrument is conditioned on its being cashed, except when through the fault of the creditor, the instrument is impaired. The payee of a check would be a creditor under this provision and if its no-payment is caused by his negligence, payment will be deemed effected and the obligation for which the check was given as conditional payment will be discharged. Considering that respondents Valencia and Peñarroyo had fulfilled their part of the contract of sale by delivering the payment of the purchase price, said respondents, therefore, had the right to compel petitioner to deliver to them the owner's certificate of title. C.

PERSONAL DEFENSES

1.

ANTEDATING OR POST-DATING

that under the facts the checks were postdated and issued only as a loan to New Sikatuna Wood Industries, Inc. if and when deposits were made to back up the checks. Such deposits were not made, hence no loan was made, hence, the three checks are without consideration. 5.

SIMPLE FRAUD, DURESS, INTIMIDATION, FORCE OR FEAR, ILLEGALITY OF CONSIDERATION, BREACH OF FAITH

Sec. 55

Sec. 56 Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose . The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery.

Sec. 57

Example: Where the maximum allowed interest rate is 24% per annum, a check was ante-dated for six months in order to collect additional 12% without indicating it in the contract to hide the usurious nature of the transaction – in considered made for fraudulent purposes and may give rise to the personal defense of antedating against the one who made the ante-dating.

a.

2.

INSERTION OF A WRONG DATE

Sec. 13.When date may be inserted. - Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date.

Example: On Jan. 1, 2013, M issued a promissory note payable to the order of P for P10,000 with 12% within 6 months from date and the date is not specified in the instrument. If A inserted Dec. 1, 2012 as the date to collect more interest and thereafter indorsed it to B. a. b.

If B was aware of the fraudulent insertion of the wrong date, the instrument is avoided as to him; If B is a holder in due course, he can treat Dec. 1, 2012 as the true date.

3.

FILLING UP BLANKS BEYOND AUTHORITY

a.

Filling up in excess of the authority given as provided in Sec. 14 is only a personal defense. See p.8 for discussion on Sec. 14 and illustration. Signed blank piece of paper – (1) there must delivery of the instrument to another person; (2) the paper that was delivered was a blank paper containing the signature of the person who will deliver; and (3) there must be intention to convert it to a negotiable instrument.

b.

Absent no. (3) above, the instrument cannot be enforced against the one who delivered the instrument. Example: If P a fan of Vilma Aunor, asked for her autograph and later on filled-up the paper to be a promissory note payable to his order. P then endorsed it to A. In this example, even if A is a holder in due course, he cannot enforce it against Vilma Aunor, as the act of P converting the blank piece of paper into a negotiable instrument, without intention from the indicated maker, would constitute fraud in factum , which, as discussed earlier, is a real defense which may be raised even against a holder in due course. 4.

ABSENCE OR FAILURE OF CONSIDERATION STATE INVESTMENT HOUSE VS. CA (supra, p. 19) - Being not a holder in due course, plaintiff is subject to personal defenses, such as lack of consideration between appellants and New Sikatuna Wood Industries. Note

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b.

When title defective. - The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud. What constitutes notice of defect. - To constitutes notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith. Rights of holder in due course. - A holder in due course holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon.

DURESS AND INTIMIDATION 1. Generally, duress and/or intimidation exerted against a person gives the latter a personal defense and is available even if there is some form of consideration. 2. To constitute duress, there must be an actual or threatened exercise or power possessed by the party benefited thereby, for the purpose of obtaining the note (or bill), such as to deprive the maker of the quality of mind essential to making of a contract. 3. Duress is relative, hence threats to a feeble and old person might be duress to one while it may not be so to a nother. 4. Duress is a real defense if it is vicious or if it is what is referred to as duress amounting to forgery, like when a person who exerted the same is practically writing the note itself by holding the hands of another. ILLEGALITY 1. Generally, illegality of the transaction that gave rise to a particular transaction is only a personal defense. For example, if a check was issued as payment for marijuana, the transaction involved is illegal but the same cannot be raised against a holder in due course. 2. Exception to the rule is when the law which declares the transaction or document issued in connection thereto is void against a ny party.

GREAT EASTERN LIFE INSURANCE CO. (GELIC) VS. HONGKONG & SHANGHAI BANKING CORP (HSBC) and PNB (GR No. 18657; Aug. 23, 1922) - In May 1920, petitioner GELIC drew its check for P2,000 on HSBC whom it had an account, payable to the order of Lazaro Melicor. E. M. Maasim fraudulently obtained possession of the check, forged Melicor's signature, as an endorser, and then personally endorsed and presented it to PNB where the amount of the check was placed to his credit. After having paid the check, and on the next day, PNB endorsed the check to HSBC which paid it and charged the amount of the check to the account of the plaintiff. In the ordinary course of business, HSBC rendered a bank statement to GELIC showing that the amount of the check was charged to its account, and no objection was then made to the statement. About four (4) months after the check was charged to the account of the plaintiff, it developed that Lazaro Melicor, to whom the check was made payable, had never received it, and that his signature, as an endorser, was forged by Maasim, who presented and deposited it to his private account in PNB. With this knowledge, the plaintiff promptly made a demand upon the HSBC that it should be given credit for the amount of the forged check, which the bank refused to do, and GELIC commenced this action to recover the P2,000 which was paid on the forged check. On the petition of HSBC, PNB was made defendant. The former Bank denies any liability, but prays that, if a judgment should be rendered against it, in turn, it should have like judgment against the latter Bank which denies all liability to either party. Upon the issues being joined, a trial was had and judgment was rendered against


GELIC and in favor HSBC and PNB from which GELIC appealed. ISSUE: WON plaintiff GELIC can recover? HELD: Yes. GELIC’s check was drawn on HSBC payable to the order of Melicor. In other words, GELIC authorized and directed HSBC to pay Melicor, or his order, P2,000. It did not authorize or direct the bank to pay the check to any other person than Melicor, or his order, and the testimony is undisputed that Melicor never did part with his title or endorse the check, and never received any of its proceeds. Neither is GELIC estopped or bound by the bank statement, which was made to it by the HSBC. This is not a case where the GELIC's own signature was forged to one of it checks. In such a case, the plaintiff would have known of the forgery, and it would have been its duty to have promptly notified the bank of any forged signature, and any failure on its part would have released bank from any liability. That is not this case. Here, the forgery was that of Melicor, who was the payee of the check, and the legal presumption is that the bank would not honor the check without the genuine endorsement of Melicor. In other words, when GELIC received its banks statement, it had a right to assume that Melicor had personally endorsed the check, and that, otherwise, the bank would not have paid it. Sec. 23 of the NIL is square in point. The money was on deposit in HSBC, and it had no legal right to pay it out to anyone except GELIC or its order. Here, GELIC ordered HSBC to pay the P2,000 to Melicor, and the money was actually paid to Maasim and was never paid to Melicor, and he never paid to Melicor, and he never personally endorsed the check, or authorized any one to endorse it for him, and the alleged endorsement was a forgery. Hence, upon the undisputed facts, it must follow that HSBC has no defense to this action. It is admitted that the PNB cashed the check upon a forged signature, and placed the money to the credit of Maasim, who was a forger. That the PNB then endorsed the check and forwarded it to HSBC by whom it was paid. PNB had no license or authority to pay the money to Maasim or anyone else upon a forge signature. It was its legal duty to know that Melicor's endorsement was genuine before cashing the check. Its remedy is against Maasim to whom it paid the money. The Supreme Court reversed the lower court's judgment, and entered another in favor of GELIC and against HSBC for P2,000, with interest thereon from 8 November 1920, at the rate of 6% per annum, and the costs of the action, and a corresponding judgment will be entered in favor of HSBC against PNB for the same amount, together with the amount of its costs in the action. QUIRINO GONZALEZ LOGGING VS. CA (GR No. 126568; April 20, 2003) In the expansion of its logging business, petitioner Quirino Gonzales Logging Concessionaire (QGLC), through its proprietor, general manager - co-petitioner Quirino Gonzales, applied for credit accommodations with respondent Republic Bank . The Bank approved QGLC’s application. In separate transactions, petitioners, to secure certain advances from the Bank in connection with QGLC’s exportation of logs, executed a promissory note in 1964 in favor of the Bank. They were to execute three more promissory notes in 1967. On January 27, 1977, alleging non-payment of the balance of QGLC’s obligation, and nonpayment of the promissory notes despite repeated demands, the Bank filed a complaint for “sum of money” against petitioners. The complaint listed ten causes of action, the sixth to ninth of which were anchored on the promissory notes issued by petitioners allegedly to secure certain advances from the Bank in connection with the exportation of logs as reflected above. The notes were payable 30 days after date and provided for the solidary liability of petitioners as well as attorney’s fees at ten percent of the total amount due in the event of their non-payment at maturity. Petitioners seek to avoid liability by claiming that Quirino and Eufemia Gonzales signed the promissory notes in blank; that they had not received the value of said notes, and that the credit line thereon was unnecessary in view of their money deposits, and unremitted proceeds on log exports from the Bank. ISSUE: WON petitioners may interpose the defense of lack of consideration and that the Promissory Notes were signed in blank against the bank? HELD: NO. The genuineness and due execution of the notes had been deemed admitted by petitioners, they having failed to deny the same under oath. Their claim that they signed the notes in blank does not thus lie. Petitioners’ admission of the genuineness and due execution of the promissory notes notwithstanding, they raise want of consideration thereof. The promissory notes, however, appear to be negotiable as they meet the requirements of Section 1 of the Negotiable Instruments Law. Such being the case, the notes are prima facie deemed to have been issued for consideration. It bears noting that no sufficient evidence was adduced by petitioners to show otherwise. In any case, it is no defense that the promissory notes were signed in blank as Section 14 of the Negotiable Instruments Law concedes the prima facie authority of the

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person in possession of negotiable instruments, such as the notes herein, to fill in the blanks. VII. A.

ENFORCEMENT OF LIABILITY PARTIES PRIMARILY AND SECONDARILY LIABLE How to Enforce Primary Liability

Sec. 60

Sec. 62

Liability of maker. - The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse Liability of acceptor. - The acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance and admits:

(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee and his then capacity to indorse. The unconditional promise attaches the moment the maker makes the instrument while the acceptor’s assent to the unconditional order attaches the moment he accepts the instrument. No further act is necessary in order for the liability to accrue. What is only necessary later is for the holder to e nforce such liability by presenting it for payment. B. 1.

GENERAL STEPS IN ENFORCING SECONDARY LIABILITY Promissory Notes a.

Presentment for payment must be made within the required period to the maker;

Sec. 70. Effect of want of demand on principal debtor. - Presentment for payment is not necessary in order to charge the person primarily liable on the instrument; but if the instrument is, by its terms, payable at a special place, and he is able and willing to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part. But except as herein otherwise provided, presentment for payment is necessary in order to charge the drawer and indorsers. b.

Notice of dishonor should be given, if promissory note is disonored by non-payment by the maker;

Sec. 89. To whom notice of dishonor must be given . - Except as herein otherwise provided, when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged Other than PRESENTMENT FOR ACCEPTANCE, the rules under Bills of Exchange are similar to Promissory Notes as regards Presentment for Payment and Dishonor. 2.

Bills of Exchange

PRESENTMENT FOR ACCEPTANCE

Sec. 143. When presentment for acceptance must be made . Presentment for acceptance must be made: (a) Where the bill is payable after sight , or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or (b) Where the bill expressly stipulates that it shall be presented for acceptance; or (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. In no other case is presentment for acceptance necessary in order to render any party to the bill liable.


Sec. 143 provides three instances when presentment for acceptance is required, otherwise, it is dispensable and the instrument maybe directly presented for payment. a.

Sec. 145

How Made; Time for Presentment Presentment; how made . - Presentment for acceptance must be made by or on behalf of the holder at a reasonable hour, on a business day and before the bill is overdue, to the drawee or some person authorized to accept or refuse acceptance on his behalf; and

(a) Where a bill is addressed to two or more drawees who are not partners, presentment must be made to them all unless one has authority to accept or refuse acceptance for all, in which case presentment may be made to him only;

other means than the payment of money.

If the drawee merely stated that “I return the drawer’s order. Balance of his account is in the same as order”, confirming the amount in the instrument, does not necessarily signify assent to the order, and consequently, its acceptance. How made? i. Proof of Acceptance

Sec. 133

Sec. 134

(b) Where the drawee is dead, presentment may be made to his personal representative;

Sec. 146

Sec. 85

Sec. 72

(c) Where the drawee has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors, presentment may be made to him or to his trustee or assignee . On what days presentment may be made. - A bill may be presented for acceptance on any day on which negotiable instruments may be presented for payment under the provisions of Sections seventy-two and eighty-five of this Act. When Saturday is not otherwise a holiday, presentment for acceptance may be made before twelve o'clock noon on that day. Time of maturity. - Every negotiable instrument is payable at the time fixed therein without grace. When the day of maturity falls upon Sunday or a holiday, the instruments falling due or becoming payable on Saturday are to be presented for payment on the next succeeding business day except that instruments payable on demand may, at the option of the holder, be presented for payment before twelve o'clock noon on Saturday when that entire day is not a holiday What constitutes a sufficient presentment. – see PRESENTMENT FOR PAYMENT.

The Rule under Sec. 146 is different from Sec. 85 in that when the instrument is payable on a Saturday which is not a holiday, presentment may be made before 12:00 noon on that day, this rule is applicable in Sec. 85 if the instrument is payable on demand, Sec. 146 makes no such distinction. In Summary, the following rules should be followed: 1. Fixed day for presentment for acceptance – day fixed; 2. If the day fixed falls on a Sunday or holiday – next succeeding business day; 3. If payable on demand – at the option of the holder, before 12:00 noon on a Saturday when the entire day is not a holiday. b.

When Time is Insufficient

Sec. 147. Presentment where time is insufficient. - Where the holder of a bill drawn payable elsewhere than at the place of business or the residence of the drawee has no time, with the exercise of reasonable diligence, to present the bill for acceptance before presenting it for payment on the day that it falls due, the delay caused by presenting the bill for acceptance before presenting it for payment is excused and does not discharge the drawers and indorsers. EXAMPLE: When the instrument is payable in Pasay City two days after acceptance, and is required to be accepted in Davao City, the delay for the presentment for payment is excused and does not discharge the drawers and indorsers. ACCEPTANCE

Sec. 132. Acceptance; how made, by and so forth . - The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. The acceptance must be (1) in writing and (2) signed by the drawee. (3) It must not express that the drawee will perform his promise by any

34

Holder entitled to acceptance on face of bill. - The holder of a bill presenting the same for acceptance may require that the acceptance be written on the bill, and, if such request is refused, may treat the bill as dishonored. Acceptance by separate instrument. - Where an acceptance is written on a paper other than the bill itself, it does not bind the acceptor except in favor of a person to whom it is shown and who, on the faith thereof, receives the bill for value.

Acceptance may be made on the instrument itself or in a separate instrument. However, under Sec. 133, the holder may require the acceptance on the bill itself, otherwise, it may be treated as dishonored. Sec. 134 : If acceptance is made by a telegram, the acceptance stated therein will not bind the acceptor to the subsequent holder if the said holder is not aware thereof. ii. When Deemed Accepted

Sec. 137. Liability of drawee returning or destroying bill. - Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within twenty-four hours after such delivery or within such other period as the holder may allow, to return the bill accepted or non-accepted to the holder, he will be deemed to have accepted the same. iii. Future Bills

Sec. 135. Promise to accept; when equivalent to acceptance. - An unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who, upon the faith thereof, receives the bill for value. iv. Time to Accept

Sec. 136

Sec. 147

Time allowed drawee to accept. - The drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept the bill; the acceptance, if given, dates as of the day of presentation. Presentment where time is insufficient – see When Time is Insufficient, p. 34

SEC. 136 vs. SEC. 137: The bill is at all times the property of the holder, and he is entitled to have it if he wants it. If the holder should demand return before the 24 hours provided by Sec. 136, the drawee would be required to comply on pain of being held as an acceptor; but return within 24 hours unaccepted would not be a dishonor; the drawee can still accept by notification within 24 hours; if the drawee after returning the bill still refused to act after the expiration of the time allowed, the holder then would be required to treat the bill as dishonored or lose his rights against prior parties (Beutel’s Brannan’s, p. 1248). v. Rule When Incomplete Bill is Accepted

Sec. 138. Acceptance of incomplete bill . - A bill may be accepted before it has been signed by the drawer, or while otherwise incomplete, or when it is overdue, or after it has been dishonored by a previous refusal to accept, or by non-payment. But when a bill payable after sight is dishonored by nonacceptance and the drawee subsequently accepts it, the holder, in the absence of any different agreement, is entitled to have the bill accepted as of the date of the first presentment.


vi. Kinds of Acceptance

Sec. 139

Sec. 140

Sec. 141

Sec. 142

Kinds of acceptance. - An acceptance is either (1) general or (2) qualified. A general acceptance assents without qualification to the order of the drawer. A qualified acceptance in express terms varies the effect of the bill as drawn What constitutes a general acceptance. - An acceptance to pay at a particular place is a general acceptance unless it expressly states that the bill is to be paid there only and not elsewhere Qualified acceptance. - An acceptance is qualified which is:

(a) Conditional; that is to say, which makes payment by the acceptor dependent on the fulfillment of a condition therein stated; (b) Partial; that is to say, an acceptance to pay part only of the amount for which the bill is drawn; (c) Local; that is to say, an acceptance to pay only at a particular place; (d) Qualified as to time; (e) The acceptance of some, one or more of the drawees but not of all. Rights of parties as to qualified acceptance. – (1) The holder may refuse to take a qualified acceptance and if he does not obtain an unqualified acceptance , he may treat the bill as dishonored by non-acceptance.

payable on demand, presentment must be made within a reasonable time after its issue , except that in the case of a bill of exchange , presentment for payment will be sufficient if made within a reasonable time after the last negotiation thereof . i. Rule in determining MATURITY

Sec. 85. Time of maturity. - Every negotiable instrument is payable at the time fixed therein without grace. When the day of maturity falls upon Sunday or a holiday, the instruments falling due or becoming payable on Saturday are to be presented for payment on the next succeeding business day except that instruments payable on demand may, at the option of the holder, be presented for payment before twelve o'clock noon on Saturday when that entire day is not a holiday. See p. 34, time for presentment for acceptance ii. Rule in computing time

Sec. 86. Time; how computed. - When the instrument is payable at a fixed period after date, after sight, or after that happening of a specified event, the time of payment is determined by excluding the day from which the time is to begin to run, and by including the date of payment. iii. Rule if payable AT A BANK

(2) Where a qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill unless they have expressly or impliedly authorized the holder to take a qualified acceptance , or subsequently assent thereto . (3) When the drawer or an indorser receives notice of a qualified acceptance , he must, within a reasonable time, express his dissent to the holder or he will be deemed to have assented thereto. (segregation and emphasis supplied)

Sec. 75

Sec. 87

WHEN PRESENTMENT EXCUSED

Sec. 148. Where presentment is excused . - Presentment for acceptance is excused and a bill may be treated as dishonored by non-acceptance in either of the following cases: (a) Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to contract by bill. (b) Where, after the exercise of reasonable diligence, presentment cannot be made. (c) Where, although presentment has been irregular, acceptance has been refused on some other ground. PRESENTMENT FOR PAYMENT

In presentment for payment, the holder exhibits the instrument to the maker or the acceptor to demand payment of the amount reflected in the negotiable instrument or whatever balance that is due. a.

Requisites for Sufficiency

Sec. 127

Sec. 187

SEC. 127 & 87 : A check of itself does not operate as 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. Nevertheless, even if there is no assignment of funds, the statement in the instrument that it is payable at a bank is equivalent to an order to the bank to pay the same for the account of the principal debtor thereof. However, the order must specify the particular bank. c.

Sec. 73

Sec. 72. What constitutes sufficient presentment. - Presentment for payment, to be sufficient, must be made: (HRPT) (a) By the holder, or by some person authorized to receive payment on his behalf; (b) At a reasonable hour on a business day; (c) At a proper place as herein defined; (d) To the person primarily liable on the instrument, or if he is absent or inaccessible, to any person found at the place where the presentment is made. b.

Date of Presentment

Sec. 71. Presentment where instrument is not payable on demand and where payable on demand. - Where the instrument is not payable on demand, presentment must be made on the day it falls due. Where it is

35

Presentment where instrument payable at bank. - Where the instrument is payable at a bank, presentment for payment must be made during banking hours, unless the person to make payment has no funds there to meet it at any time during the day , in which case presentment at any hour before the bank is closed on that day is sufficient Rule where instrument payable at bank. - Where the instrument is made payable at a bank, it is equivalent to an order to the bank to pay the same for the account of the principal debtor thereon. Bill not an assignment of funds in hands of drawee. - A bill of itself does not operate as an assignment of the funds in the hands of the drawee available for the payment thereof, and the drawee is not liable on the bill unless and until he accepts the same. 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.

Sec. 70

Place of Presentment Place of presentment. - Presentment for payment is made at the proper place:

(a) Where a place of payment is specified in the instrument and it is there presented; (b) Where no place of payment is specified but the address of the person to make payment is given in the instrument and it is there presented; (c) Where no place of payment is specified and no address is given and the instrument is presented at the usual place of business or residence of the person to make payment; (d) In any other case if presented to the person to make payment wherever he can be found, or if presented at his last known place of business or residence. Effect of want of demand on principal debtor. - Presentment for payment is not necessary in order to charge the person primarily liable on the instrument; but if the instrument is, by its terms,


(a) Where, after the exercise of reasonable diligence, presentment, as required by this Act, cannot be made; (b) Where the drawee is a fictitious person; (c) By waiver of presentment, express or implied.

payable at a special place, and he is able and willing to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part. But except as herein otherwise provided, presentment for payment is necessary in order to charge the drawer and indorsers

If the holder will not present the instrument for payment at such special place provided under Sec. 70, he loses his right to the payment of interest. PLACE OF PAYMENT means a house, bank, counting room, store, or place of business, where the holder can present a note, where the maker can deposit or provide funds to meet it, and where a legal offer to pay can be made (Hutchinson vs. Crutcher). Thus, a designation of a town or city is not sufficient. d.

Presentment to the Party Primarily Liable

i. How Presentment Made

Sec. 74. Instrument must be exhibited. - The instrument must be exhibited to the person from whom payment is demanded, and when it is paid, must be delivered up to the party paying it. ii. Rule in case Party Primarily Liable is Dead

Sec. 76. Presentment where principal debtor is dead. - Where the person primarily liable on the instrument is dead and no place of payment is specified, presentment for payment must be made to his personal representative, if such there be, and if, with the exercise of reasonable diligence, he can be found. iii. Presentment to Partners

Sec. 77. Presentment to persons liable as partners. - Where the (1) persons primarily liable on the instrument are liable as partners and (2) no place of payment is specified, presentment for payment may be made to any one of them, even though there has been a dissolution of the firm. EXAMPLE: A and B, partners, issued a note payable at #8 Ayala Ave., Makati City, to C who indorsed it to D, present holder, who resides in Quezon City, where A also resides. Even if it would be more convenient for D to present the note for payment at A’s residence, he cannot do so, since there is a specified place for presentment for payment. Note that the instrument may be presented for payment to ANY partner only if there is no place of payment specified. iv. Presentment to Joint Debtors

Sec. 78. Presentment to joint debtors. - Where there are several persons, not partners, primarily liable on the instrument and no place of payment is specified, presentment must be made to them all. e.

Sec. 79

Sec. 80

Sec. 81

Sec. 82

When Presentment is NOT NECESSARY or EXCUSED When presentment not required to charge the drawer. - Presentment for payment is not required in order to charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument. When presentment not required to charge the indorser. - Presentment is not required in order to charge an indorser where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented . When delay in making presentment is excused. - Delay in making presentment for payment is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, presentment must be made with reasonable diligence. When presentment for payment is excused. - Presentment for payment is excused:

Sec. 79: When the drawer does not have sufficient funds with the drawee so as to require or expect it to pay the check, presentment for payment is excused (Vda. De Victoria vs. Gutierrez). “REASONABLE TIME” LUIS WONG VS. CA (G.R. No. 117857; February 2, 2001) - Petitioner Wong was an agent of Limtong Press. Inc. (LPI). LPI would print sample calendars, then give them to agents to present to customers. The agents would get the purchase orders of customers and forward them to LPI. After printing the calendars, LPI would ship the calendars directly to the customers. Thereafter, the agents would come around to collect the payments. Petitioner, however, had a history of unremitted collections, which he duly acknowledged in a confirmation receipt he co-signed with his wife. Hence, petitioner’s customers were required to issue post -dated checks before LPI would accept their purchase orders. Wong issued six (6) postdated checks initially intended to guarantee the calendar orders of customers who failed to issue post-dated checks. However, following company policy, LPI refused to accept the checks as guarantees. Instead, the parties agreed to apply the checks to the payment of petitioner’s unremitted. Before the maturity of the checks, petitioner prevailed upon LPI not to deposit the checks and promised to replace them within 30 days. However, petitioner reneged on his promise. LPI deposited the checks with Rizal Commercial Banking Corporation (RCBC) which were returned because the account was closed. Despite receipt of the notice of dishonor, petitioner failed to make arrangements for payment within five (5) banking days so he was charged with violation of BP 22. ISSUE: What constitutes REASONABLE TIME for checks? HELD: Contrary to petitioner’s assertions, the law does not require a maker to maintain funds in his bank account for only 90 days. Under Section 186 of the Negotiable Instruments Law, "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." By current banking practice, a check becomes stale after more than six (6) months, or 180 days . Private respondent herein deposited the checks 157 days after the date of the check. Hence said checks cannot be considered stale. Only the presumption of knowledge of insufficiency of funds was lost, but such knowledge could still be proven by direct or circumstantial evidence. As found by the trial court, private respondent did not deposit the checks because of the reassurance of petitioner that he would issue new checks. Upon his failure to do so, LPI was constrained to deposit the said checks. After the checks were dishonored, petitioner was duly notified of such fact but failed to make arrangements for full payment within five (5) banking days thereof. There is, on record, sufficient evidence that petitioner had knowledge of the insufficiency of his funds in or credit with the drawee bank at the time of issuance of the checks. And despite petitioner’s insistent plea of innocence, we find no error in the respondent court’s affirmance of his conviction by the trial court for violations of the Bouncing Checks Law. DISHONOR If DISHONORED BY NON-ACCEPTANCE

Sec. 149

Sec. 150

Sec. 151

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When dishonored by nonacceptance. - A bill is dishonored by non-acceptance:

(a) When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or cannot be obtained; or (b) When presentment for acceptance is excused and the bill is not accepted. Duty of holder where bill not accepted. - Where a bill is duly presented for acceptance and is not accepted within the prescribed time, the person presenting it must treat the bill as dishonored by non-acceptance or he loses the right of recourse against the drawer and indorsers. Rights of holder where bill not accepted. - When a bill is


dishonored by nonacceptance, an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary.

Sec. 149

NOTICE OF DISHONOR

Sec. 89. To whom notice of dishonor must be given. - Except as herein otherwise provided, when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged ASIA BANKING VS. JAVIER (GR No. L-19051; April 4, 1923) - Salvador Chaves drew two checks against PNB in favor of La Insular. This check was indorsed by the limited partners of La Insular, and then deposited by Chaves in his current account with the plaintiff, Asia Banking Corporation. The amount represented by both checks was used by Chaves after they were deposited in the plaintiff bank, by drawing checks on the plaintiff. Subsequently these checks were presented by the plaintiff to the Philippine National Bank for payment, but the latter refused to pay on the ground that the drawer, Chaves, had no funds therein. The lower court sentenced the defendant, as indorser, to pay the plaintiff, hence, this petition. ISSUE: WON defendant’s liability can be enforced? HELD: No. Section 89 of the Negotiable Instruments Law (Act No. 2031) provides that, when a n egotiable instrument is dishonored for non-acceptance or non-payment, notice thereof must be given to the drawer and each of the indorsers, and those who are not notified shall be discharged from liability, except where this act provides otherwise. According to this, the indorsers are not liable unless they are notified that the document was dishonored. Then, under the general principle of the law of procedure, it will be incumbent upon the plaintiff, who seeks to enforce the defendant's liability upon these checks as indorser, to establish said liability by proving that notice was given to the defendant within the time, and in the manner, required by the law that the checks in question had been dishonored. If these facts are not proven, the plaintiff has not sufficiently established the defendant's liability. There is no proof in the record tending to show that plaintiff gave any notice whatsoever to the defendant that the checks in question had been dishonored, and there it has not established its cause of action. Hence, petition was granted. GULLAS VS PNB (GR. NO. L-43191; NOV. 13, 1935) - The Treasurer of the United States issued a warrant in the amount of $361 payable to Francisco Bacos. Petitioner and Pedro Lopez signed as endorsers of this check. Thereupon it was cashed by PNB. Subsequently the treasurer warrant was dishonored by the Insular Treasurer. At that time, Gullas has an outstanding balance of P509 with PNB and had issued certain checks before he left his residence for Manila. The bank on learning of the dishonor of the treasury warrant sent notices by mail to Gullas which could not delivered to him because he is not in Manila. In view of this, the bank applied the o utstanding balances of Gullas’ current account with the PNB for the payment of the check. On the return of Gullas, notice of dishonor was received and the unpaid balance of the US Treasury was paid by him. As a result of this, the checks issued by him before he left for Manila were not paid because of lack of funds standing to his credit in the bank. ISSUE: WON PNB has the right to apply a deposit to the debt of the depositor to the bank? HELD: No. The NIL contains provisions establishing the liability of a general indorser and giving the procedure for a notice of dishonor. The general indorser engages that if he be dishonored and the necessary proceedings of dishonor be duly taken, he will pay the amount to the holder. The notice of dishonor is in order to charge all indorser and that the right of action against him does not accrue until the notice is given. As a general rule, a bank has a right to set off the deposits in its hands for the payment of any indebtedness to it on the part of the depositor. In the case at bar, though this right to set off exist, the remedy was not properly enforced because prior to the mailing of the notice of dishonor, and without waiting for any action by Gullas, the bank made use of the money standing in his account to make good for the treasury warrant. a.

Sec. 83

When instrument considered dishonored When instrument dishonored by non-payment. - The instrument is dishonored by non-payment when: (a) It is duly presented for payment and payment is refused or cannot be obtained; or

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Sec. 151

b.

(b) Presentment is excused and the instrument is overdue and unpaid. When dishonored by nonacceptance. - A bill is dishonored by non-acceptance: (a) When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or cannot be obtained; or (b) When presentment for acceptance is excused and the bill is not accepted. Rights of holder where bill not accepted. - When a bill is dishonored by nonacceptance, an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary

Effect of Absence of Notice on Separate Contract

Failure to give notice of dishonor will not necessarily result in absence of liability on the part of the drawer. The right of the payee to recover from the drawer based on the latter’s contractual obligation that is separate from the negotiable instrument is still binding. The drawer may no longer be secondarily liable but his contractual liability is preserved (Producers Bank of the Philippines vs. Excelsa Industries, Inc.) NYCO SALES CORPORATION VS. BA FINANCE CORPORATION (GR No. 71694; Aug. 16, 1991) - Nyco Sales has discounting privileges with BA Finance. In 1978, brothers Renato Fernandez and Santiago Renato (officers of Sanshell Corporation) approached Rufino Yao, president and general manager of Nyco Sales Corporation (Nyco) for a credit accommodation in order for the brothers to make use of Nyco’s discounting privileges. Nyco agreed and so on November 15, 1978, Sanshell issued a post-dated (November 17, 1978) BPI check to Nyco in the amount of P60,000. Following the discounting process agreed upon, Nyco, thru its president Rufino Yao, endorsed the check in favor of BA Finance. Thereafter, BA Finance issued a check payable to Nyco which endorsed it in favor of Sanshell. Sanshell then made use of and/or negotiated the check. Accompanying the exchange of checks was a Deed of Assignment executed by Nyco (assignor) in favor of BA Finance (assignee) with the conformity of Sanshell. The check bounced. BA Finance notified Sanshell. Sanshell substituted the BPI check with a Security Bank and Trust Company check. This check again bounced. BA Finance made repeated demands to Nyco and Sanshell but neither of the two settled the obligation. Hence, BA Finance sued Nyco who averred that it received no notice of dishonor when the second check was dishonored. ISSUE: WON Nyco Sales is liable to pay BA Finance? HELD: Yes. The relationship between Nyco and BA Finance is one of assignor-assignee. The assignor-vendor warrants both the credit itself (its existence and legality) and the person of the debtor (his solvency), if so stipulated, as in the case at bar. Consequently, if there be any breach of the above warranties, the assignorvendor should be held answerable therefor. There is no question then that the assignor-vendor is indeed liable for the invalidity of whatever he assigned to the assignee-vendee. Considering now the facts of the case at bar, it is beyond dispute that Nyco executed a deed of assignment in favor of BA Finance with Sanshell Corporation as the debtor-obligor. BA Finance is actually enforcing said deed and the check covered thereby is merely an incidental or collateral matter. This particular check merely evidenced the credit which was actually assigned to BA Finance. Thus, the designation is immaterial as it could be any other check. It is only what is represented by the said checks that Nyco is being asked to pay. Nyco’s pretension that it had not been notified of the fact of dishonor is belied not only by the formal demand letter issued by BA Finance but also by the fact that Nyco and Sanshell had frequent contacts before, during and after the dishonor. More importantly, as long as the credit remains outstanding, Nyco Sales shall continue to be liable to BA Finance as its assignor. The dishonor of an assigned check simply stresses its liability and the failure to give a notice of dishonor will not discharge it from such liability. This is because the cause of action stems from the breach of the warranties embodied in the Deed of Assignment, and not from the dishonoring of the check alone. c.

Sec 90

Who should give notice By whom given. - The notice may be given by or on behalf of the holder, or by or on behalf of any party to the instrument who might


be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the party to whom the notice is given. Notice given by agent. - Notice of dishonor may be given by any agent either in his own name or in the name of any party entitled to given notice, whether that party be his principal or not. Effect of notice on behalf of holder . - Where notice is given by or on behalf of the holder, it inures to the benefit of all subsequent holders and all prior parties who have a right of recourse against the party to whom it is given. Effect where notice is given by party entitled thereto. Where notice is given by or on behalf of a party entitled to give notice, it inures to the benefit of the holder and all parties subsequent to the party to whom notice is given.

Sec. 91

Sec. 92

Sec. 93

EXAMPLE: If M issued a note to P or his order, who indorsed it to A, A to B, B to C, C to D, present holder, and M dishonors the instrument, D may notify C, who in turn may notify B, A and P. B may notify A and P and A may notify P. If D gave notice of dishonor to P, A, B and C: C may not notify P, A and B because the notice by the holder inures to the benefit of all prior parties who have the right of recourse against the party to whom it is given. On the other hand, if D notified only C but C, in turn, notified P, A and B, D can already hold P, A and B liable because notice by an indorser inures to the benefit of the holder. Additionally, P need not be notified by A and B because the notice given by C inures to the benefit of all parties subsequent to the party to whom notice is given. d.

Time and Place to give notice

Sec. 103

Sec. 104

Sec. 105

Sec. 106

Sec. 107

Sec. 108

Where parties reside in same place . - Where the person giving and the person to receive notice reside in the same place, notice must be given within the following times:

(a) If given at the place of business of the person to receive notice, it must be given before the close of business hours on the day following . (b) If given at his residence, it must be given before the usual hours of rest on the day following . (c) If sent by mail, it must be deposited in the post office in time to reach him in usual course on the day following . Where parties reside in different places . - Where the person giving and the person to receive notice reside in different places, the notice must be given within the following times: (a) If sent by mail, it must be deposited in the post office in time to go by mail the day following the day of dishonor , or if there be no mail at a convenient hour on last day, by the next mail thereafter . (b) If given otherwise than through the post office, then within the time that notice would have been received in due course of mail , if it had been deposited in the post office within the time specified in the last subdivision. When sender deemed to have given due notice. - Where notice of dishonor is duly addressed and deposited in the post office, the sender is deemed to have given due notice, notwithstanding any miscarriage in the mails. Deposit in post office; what constitutes. - Notice is deemed to have been deposited in the post-office when deposited in any branch post office or in any letter box under the control of the post-office department. Notice to subsequent party; time of. - Where a party receives notice of dishonor, he has, after the receipt of such notice, the same time for giving notice to antecedent parties that the holder has after the dishonor. Where notice must be sent. - Where a party has added an address to his signature, notice of dishonor must be sent to that address; but if he has not given such address, then the notice must be sent as follows:

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(a) Either to the post-office nearest to his place of residence or to the post-office where he is accustomed to receive his letters; or (b) If he lives in one place and has his place of business in another, notice may be sent to either place; or (c) If he is sojourning in another place, notice may be sent to the place where he is so sojourning. But where the notice is actually received by the party within the time specified in this Act, it will be sufficient, though not sent in accordance with the requirement of this section. FAR EAST REALTY INVESTMENT INC., vs. THE HONORABLE COURT OF APPEALS, DY HIAN TAT, SIY CHEE and GAW SUY AN [G.R. No. L- 36549, October 5, 1988] - Respondent Dy Hian Tat, Siy Chee and Gaw Suy An sought the extension of an accommodation loan from petitioner Far East Realty Investment which the former will use to further their business. Respondents promised to pay, jointly and severally, in one month time. To insure payment, respondents delivered to Far East Realty Investment a China Bank Check drawn by Dy Hian Tat issued on September 13, 1960, and signed by them at the back of said check, with the assurance that after one month from September 13, 1960, the said check would be redeemed by respondents by paying cash or the said check can be presented for payment on or immediately after one month. The loan was actually extended but when the check was presented for payment on March 5, 1964, it was dishonored —the account on which it is drawn has long been closed. The trial court held in favor of petitioner but this was reversed by the CA by ruling that the said check wasn’t presented within reasonable time and after its issuance. Petitioner contends that presentment for payment and notice of dishonor are not necessary as when funds are insufficient to meet a check, the drawer is liable, whether such presentment and notice be totally omitted or merely delayed. ISSUE: WON presentment for payment and notice of dishonor of the questioned check were made within reasonable time? HELD: No. Where the instrument is not payable on demand, presentment must be made on the day it falls due. Where it is payable on demand, presentment must be made within a reasonable time after issue, except that in the case of a bill of exchange, presentment for payment will be sufficient if made within a reasonable time after the last negotiation thereof. (Section 71, Negotiable Instruments Law). "Reasonable time" has been defined as so much time as is necessary under the circumstances for a reasonable prudent and diligent man to do, conveniently, what the contract or duty requires should be done, having a regard for the rights and possibility of loss, if any, to the other party. In the instant case, the check in question was issued on September 13, 1960, but was presented to the drawee bank only on March 5, 1964, and dishonored on the same date. After dishonor by the drawee bank, a formal notice of dishonor was made by the petitioner through a letter dated April 27, 1968. Under these circumstances, the petitioner undoubtedly failed to exercise prudence and diligence on what he ought to do as required by law. The petitioner likewise failed to show any ju stification for the unreasonable delay. Notice may be given as soon as instrument has been dishonored and unless delay is excused must be given within the time fixed by law Sec. 104: If a note is dishonored on March 1, 2013: (a) by mail: the notice must be deposited with the appropriate address duly stamped in such a way that it would be part of the mail that would depart on March 2, 2013; (b) personal service: within the same time that the mail will normally reach the destination. Thus, if it usually takes 3 days, then the person may give notice personally within such 3 days. e.

When Notice Not Required, Excused or Dispensed With

Sec. 109

Sec. 110

Waiver of notice . - Notice of dishonor may be waived either before the time of giving notice has arrived or after the omission to give due notice, and the waiver may be expressed or implied. Whom affected by waiver . - Where the waiver is embodied in the instrument itself, it is binding upon all parties; but, where it is written above the signature of an indorser, it binds him only

By waiver, the person renounces the benefit of the act or matter in his favor, which in the case of Sec. 109 is the benefit of the notice. Accordingly, by waiver of notice, a drawer or indorser is not discharged from liability by failure


of the holder to give notice, in fact, the giving of the notice is not necessary anymore to hold them liable. It may be made either (1) expressly or (2) impliedly; It may be given either (1) before the time of giving of notice; or (2) after the failure to give notice. BINDING EFFECT: If the instrument reads “Pay to the order of P, P10,000 on March 1, 2013. Notice of dishonor waived”, it is binding upon all parties secondarily liable thereon. If the waiver is found on an indorsement only, such as “Pay to the order of A. Notice of Dishonor Waived, Sgd. P”, the waiver is binding only on P. Sec. 111. Waiver of protest. - A waiver of protest, whether in the case of a foreign bill of exchange or other negotiable instrument, is deemed to be a waiver not only of a formal protest but also of presentment and notice of dishonor. PROTEST is a formal statement in writing made by a notary public at the instance of the holder declaring that the instrument has been presented for payment or for acceptance but the same was dishonored.

Such is indispensable only in a FOREIGN BILL OF EXCHANGE but may also be the subject of a waiver. Sec. 118. When protest need not be made; when must be made. Where any negotiable instrument has been dishonored, it may be protested for non-acceptance or non-payment, as the case may be; but protest is not required except in the case of foreign bills of exchange. NOTICE OF DISHONOR VS. PROTEST

NOTICE OF DISHONOR Apply to inland bills

PROTEST Required in foreign bills, permissive inland bills Always in writing Made by a notary public or a respectable resident Protest or noting thereof should be made on the day of dishonor As a rule to be made in the place of dishonor

May be verbal or written Made by a holder or any person who may be compelled to pay Required to be made usually within one day after dishonor Not made or given in the place of dishonor but in the residence of the parties and other places mentioned in Sec. 103 Sec. 112 When notice is dispensed with. - Notice of dishonor is dispensed with when, after the exercise of reasonable diligence, it cannot be given to or does not reach the parties sought to be charged. Sec. 113 Delay in giving notice; how e xcused. - Delay in giving notice of dishonor is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, notice must be given with reasonable diligence.

Sec. 114 (c): When the drawer is the agent of the drawee, and the former dishonors the bill. Sec. 114 (d): When the drawer closed his account or does not have sufficient funds with the drawee. Sec. 114 (e): When the drawer directed or ordered the drawee not to pay, such as in ordering a Stop Payment. GREAT ASIAN SALES CENTER CORPORATION and TAN CHONG LIN VS. CA and BANCASIA FINANCE AND INVESTMENT CORPORATIO (G.R. No. 105774; April 25, 2002) - In March 1981, the board of directors of Great Asian approved a resolution authorizing its Treasurer and GM, Arsenio Lim Piat, Jr. to secure a loan from herein Respondent (Bancasia) in an amount not to exceed P1M and also authorized Arsenio to sign all papers, documents or promissory notes necessary to secure the loan. In Feb. 1982, the board of directors of Great Asian approved a second resolution authorizing Great Asian to secure a discounting line with Bancasia in an amount not exceeding P2M and also designated Arsenio as the authorized signatory to sign all instruments, documents and checks necessary to secure the discounting line. In turn, Great Asian President, Tan Chong Lin, signed 2 Surety Agreements in favor of Bancasia to guarantee, solidarily, the debts of Great Asian to Bancasia. Great Asian, through Arsenio, signed 4 Deeds of Assignment of Receivables, assigning to Bancasia 15 postdated checks issued by various customers, which were dishonored on maturity when deposited for collection by Bancasia, with any of the following as reason for the dishonor: “account closed”, “payment stopped”, “account under garnishment”, and “insufficiency of funds”. ISSUE: WON Petitioner’s liability remains despite absence of notice of dishonor from Respondent. HELD: YES. Great Asian’s four contracts assigning its fifteen (15) postdated checks to Bancasia expressly stipulate the suspensive condition that in the event the drawers of the checks fail to pay, Great Asian itself will pay Bancasia. Since the common condition in the contracts had transpired, an obligation on the part of Great Asian arose from the four contracts, and that obligation is to pay Bancasia the full value of the checks, including the stipulated penalty and attorney’s fees. It is to be noted that under the Negotiable Instruments Law, notice of dishonor is not required if the drawer has no right to expect or require the bank to honor the check, or if the drawer has countermanded payment. In the instant case, all the checks were dishonored for any of the following reasons: "account closed", "account under garnishment", insufficiency of funds", or "payment stopped". In the first three instances, the drawers had no right to expect or require the bank to honor the checks, and in the last instance, the drawers had countermanded payment. Furthermore, the explicit with recourse stipulation against Great Asian effectively enlarges, by agreement of the parties, the liability of Great Asian beyond that of a mere endorser of a negotiable instrument. Thus, whether or not Bancasia gives notice of dishonor to Great Asian, the latter remains liable to Bancasia because of the with recourse stipulation which is independent of the warranties of an endorser under the Negotiable Instruments Law.

Sec. 115. When notice need not be given to indorser. — Notice of dishonor is not required to be given to an indorser in either of the following cases:

EXAMPLE: If notice was not given due to a calamity like flood and typhoon, the delay is excused. However, the holder must give notice once the flood or typhoon ceases.

(a) When the drawee is a fictitious person or person not having capacity to contract, and the indorser was aware of that fact at the time he indorsed the instrument; (b) Where the indorser is the person to whom the instrument is presented for payment; (c) Where the instrument was made or accepted for his accommodation.

Sec. 114. When notice need not be given to drawer. - Notice of dishonor is not required to be given to the drawer in either of the following cases:

Sec. 115 (c): Since the indorser is the principal, he cannot really expect the accommodation maker to pay.

(a) Where the drawer and drawee are the same person; (b) When the drawee is fictitious person or a person not having capacity to contract; (c) When the drawer is the person to whom the instrument is presented for payment; (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; (e) Where the drawer has countermanded payment.

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f.

Notice when previously dishonored by non-acceptance

Sec. 116. Notice of non-payment where acceptance refused. - Where due notice of dishonor by non-acceptance has been given, notice of a subsequent dishonor by non-payment is not necessary unless in the meantime the instrument has been accepted. EXAMPLE: DR issued a bill of exchange against DW, drawee, payable to P or order. P indorsed the same to A, then A to B. When B presented it for


acceptance, DW dishonored it. B thereafter gave notice of dishonor to DR, P and A. Later, B still presented: 1. For payment and dishonored, there would be no need to give a second notice of dishonor for the non-payment; 2. For acceptance and it was accepted, then later on dishonored by nonpayment, it is necessary to give a notice of dishonor for non-acceptance.

payment to the acceptor for honor or referee in case of need f.

Presentment for Payment and Dishonor by Non-Payment

Sec. 168

Presentment for payment to acceptor for honor, how made. - Presentment for payment to the acceptor for honor must be made as follows:

ACCEPTANCE FOR HONOR

Sec. 165. Agreement of acceptor for honor. - The acceptor for honor, by such acceptance, engages that he will, on due presentment, pay the bill according to the terms of his acceptance provided it shall not have been paid by the drawee and provided also that is shall have been duly presented for payment and protested for non-payment and notice of dishonor given to him. Sec. 169 The liability of the acceptor for honor is in effect secondary because his engagement is to pay only if it shall not have been paid by the drawee and provided also that it shall have been duly presented for payment and protested for non-payment and notice of dishonor given to him. Acceptance for honor is also called acceptance supra protest or acceptance after protest. a.

Sec. 170

Requisites

Sec. 161. When bill may be accepted for honor. - When a bill of exchange has been (1) protested for dishonor by non-acceptance or protested for better security and is (2) not overdue, (3) any person not being a party already liable thereon may, (4) with the consent of the holder, intervene and accept the bill supra protest for the honor of any party liable thereon or for the honor of the person for whose account the bill is drawn. The acceptance for honor may be for part only of the sum for which the bill is drawn; and where there has been an acceptance for honor for one party, there may be a further acceptance by a different person for the honor of another party.

ORDINARY ACCEPTANCE VS. ACCEPTANCE FOR HONOR ACCEPTANCE FOR HONOR Protest is a prerequisite The acceptor must be a stranger

There must be an express statement that it is for honor Consent of the holder is necessary Liability of acceptor is secondary Payment of the acceptor will not discharge the bill Acceptance may be in favor of only one or some of the parties

Sec. 162. Acceptance for honor; how made. - An acceptance for honor supra protest (5) must be in writing and indicate that it is an acceptance for honor and must be signed by the acceptor for honor. (formal requisites) b.

In whose favor?

Sec. 163. When deemed to be an acceptance for honor of the drawer. Where an acceptance for honor does not expressly state for whose honor it is made, it is deemed to be an acceptance for the honor of the drawer. c.

Liability of Acceptor for Honor

Sec. 164. Liability of the acceptor for honor. - The acceptor for honor is liable to the holder and to all parties to the bill subsequent to the party for whose honor he has accepted EXAMPLE: DR issued a bill of exchange ordering DW to pay P or order P10,000. P indorsed it to A, A to B, B to C, C to D, present holder. DW refused to accept the instrument and protest was duly made. X accepted the instrument in favor of B. X is liable as acceptor for honor to B and the parties subsequent to him (C and D); X is not liable to P and A. d.

A.

B.

HOW INSTRUMENT IS DISCHARGED

Sec. 119

Instrument; how discharged. - 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.

EXAMPLE: If a bill is payable 10 days after sight and was dishonored by nonacceptance on March 1, 2013 but was accepted for honor on March 5, 2013, the maturity date shall be March 11, 2013 not March 15, 2013. Protest required

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CONCEPT

Discharge means release from further liability, obligation, or from the binding effect of the negotiable instrument. 1. As to the paper itself, it puts an end to it as a contractual obligation; 2. As to the parties to the instrument, it operates as a release of some or all of them from further obligation and liability under the instrument although the instrument may not be discharged, as where only part of the obligors are released.

Maturity Date of Sight Bills

Sec. 167. Protest of bill accepted for honor, and so forth. - Where a dishonored bill has been accepted for honor supra protest or contains a referee in case of need, it must be protested for non-payment before it is presented for

ORDINARY ACCEPTANCE Protest is not necessary The person who accepts is a party – the drawee Any word indicating an acceptance is enough Consent of the holder is not necessary Acceptor is primarily liable Payment by the acceptor in due course discharges the bill Acceptance involves the entire instrument

VIII. DISCHARGE

Sec. 166. Maturity of bill payable after sight; accepted for honor. Where a bill payable after sight is accepted for honor, its maturity is calculated from the date of the noting for non-acceptance and not from the date of the acceptance for honor

e.

(a) If it is to be presented in the place where the protest for nonpayment was made, it must be presented not later than the day following its maturity. (b) If it is to be presented in some other place than the place where it was protested, then it must be forwarded within the time specified in Section one hundred and four. When delay in making presentment is excused. - The provisions of Section eighty-one apply where there is delay in making presentment to the acceptor for honor or referee in case of need Dishonor of bill by acceptor for honor. - When the bill is dishonored by the acceptor for honor, it must be protested for non-payment by him

A.

Payment in Due Course

Sec. 88. What constitutes payment in due course. - 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 a nd without notice that his title is defective a. 1. 2. 3.

b.

By Whom Made: Primary Party Liabile, i.e., a maker or acceptor; Surety for the principal debtor, signing as a secondary party; A person paying “on behalf of the principal debtor” also discharges the instrument under the principles of the law on agency; Payment By Person Secondarily Liable does not discharge the instrument; EXCEPTIONS.

Sec. 121. Right of party who discharges instrument. - Where the instrument is paid by a party secondarily liable thereon, it is not discharged; but the party so paying it is remitted to his former rights as regard all prior parties, and he may strike out his own and all subsequent indorsements and against negotiate the instrument, except: (a) Where it is payable to the order of a third person and has been paid by the drawer; and (b) Where it was made or accepted for accommodation and has been paid by the party accommodated. Payment by the drawer discharges the instrument since he is the one ultimately liable. If he were to seek reimbursement from the payee, indorsee(s) or the drawee, the liability to such parties would ultimately be his. Unless, the amount in the instrument has been advanced by the drawer to the drawee, in such case, he may recover the amount paid to the holder from such drawee. Payment by the accommodated party discharges the instrument because he is the principal in the case contemplated by Sec. 121(b). c.

Payment by a Third Person

Payment by a third person who pays for the benefit or in behalf of the maker and does not wish to acquire any right over the instrument also discharges the instrument. If he intends to acquire a right over such instrument, he may be considered a holder or assignee, as the case may be. Under the Civil Code, a creditor, though not bound to accept payment from a third person, is not prohibited from doing so. d.

cancellation was made unintentionally or under a mistake or without authority Unlike renunciation, the law does not require cancellation to be in writing. Thus, there is cancellation if the agent of the holder burned the note with the knowledge and consent of the said holder. D. Acts that Discharges Simple Contracts – Sec. 1199(d)

Civil Code, Art. 1231. 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. STATE INVESTMENT HOUSE VS. COURT OF APPEALS (217 SCRA 32 [1993]) – Nora Moulic issued checks to Corazon Victoriano as deposit for jewelry that she obtained from the latter which were meant to be sold to other persons. When she was returning the jewelry, the payee failed to return the checks because she already negotiated the same to the petitioner. Moulic withdrew her funds from the drawee bank. ISSUE: WON the obligation is extinguished? HELD: No. The acts which will discharge a simple contract for the payment of money under Sec. 119(d) are determined by other existing legislations, e.g., Art. 1231 of the Civil Code. None of the modes outlined therein is applicable in the instant case as Sec. 199 contemplates of a situation where the holder is the creditor while its drawer is the debtor. In the present action, the payee, Corazon Victoriano, was no longer Moulic’s creditor at the time the jewelry were returned. E.

a. b.

To Whom

Payment must be to the holder. Payment to a payee who already negotiated the instrument will not discharge the instrument because he is no longer the holder, the same is true when payment is made to a possessor to whom the instrument was not indorsed. e.

c. d.

Renunciation

Sec. 122. Renunciation by holder. - The holder may expressly renounce his rights against any party to the instrument before, at, or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument. But a renunciation does not affect the rights of a holder in due course without notice. A renunciation must be in writing unless the instrument is delivered up to the person primarily liable thereon. C.

Intentional Cancellation – Sec. 119(c)

F.

Payment for Honor

Sec. 171

Sec. 172

Rule in Case of Unintentional Cancellation

Sec. 123. Cancellation; unintentional; burden of proof. - 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

41

An instrument is discharged when the principal debtor becomes the holder of the instrument at or after maturity date in his own right. “In his own right” has been construed to exclude a case where a maker acquires the instrument in a purely representative capacity. Thus, the note is not discharged when the maker acquires it as agent of another. Nor is it discharged when the maker becomes the holder for example, as executor or administrator. HOWEVER, the maker is discharged even if he acquired the instrument through an agent who did not disclose his principal.

SIGLER VS. SIGLER (98 Kans. 158, p. 864 [1916]) – A certain Joseph Sigler issued a negotiable note to Ode Sigler. Later, Joseph employed RC Wilson to purchase the note from Ode at the lowest possible price. When Ode learned that Wilson was really the agent of Joseph, he sued the latter but Joseph claimed that the instrument was discharged. HELD: The Court sustained Joseph explaining that there is no principle of law that would prevent an individual from going into the market and purchasing, at a discount or otherwise, securities upon which he is indebted and which he has put in circulation. If he may do so himself, he may accomplish the same thing through an agent who acts without disclosing the agency.

Good Faith

Sec. 88 also requires that the payor be in good faith and without notice that the payee’s title is defective. Accordingly, a holder who has been deprived of the instrument may still enforce payment against a payor who HAD NOTICE of defect in the payee’s title. B.

Principal Debtor Becomes the Holder – Sec. 119(e)

Sec. 173

Who may make payment for honor. - Where a bill has been protested for non-payment, any person may intervene and pay it supra protest for the honor of any person liable thereon or for the honor of the person for whose account it was drawn. Payment for honor; how made. - The payment for honor supra protest, in order to operate as such and not as a mere voluntary payment, must be attested by a notarial act of honor which may be appended to the protest or form an extension to it. Declaration before payment for honor. - The notarial act of honor must be founded on a declaration made by the payer for honor or by his agent in that behalf declaring his intention to pay the bill for honor and for whose honor he pays


honor payment is made a.

Preference G.

Sec. 174. Preference of parties offering to pay for honor. - Where two or more persons offer to pay a bill for the honor of different parties, the person whose payment will discharge most parties to the bill is to be given the preference. b.

Effect on Subsequent Parties

Sec. 175. Effect on subsequent parties where bill is paid for honor. Where a bill has been paid for honor, all parties subsequent to the party for whose honor it is paid are discharged but the payer for honor is subrogated for, and succeeds to, both the rights and duties of the holder as regards the party for whose honor he pays and all parties liable to the latter. EXAMPLE: DR issued a bill of exchange ordering DW to pay P or order. P indorsed it to A, A to B, B to C and C to D, present holder. Later, DW refused to pay and protest was duly made. X made a payment for the honor of A. 1. B, C and D are discharged; 2. X has a right of recourse against the persons liable to A, i.e., DR and P. c.

Holder has no option

Sec. 176. Where holder refuses to receive payment supra protest. - Where the holder of a bill refuses to receive payment supra protest, he loses his right of recourse against any party who would have been discharged by such payment. In the previous example, if D refused to accept payment for the honor of A, he loses his right of recourse against B and C, who would have been discharged. d.

Rights of Payer

Sec. 177. Rights of payer for honor. - The payer for honor, on paying to the holder the (1) amount of the bill and the (2) notarial expenses incidental to its dishonor, is entitled to receive both the bill itself and the protest. e.

Payment for Honor vs. Acceptance for Honor

PAYMENT FOR HONOR There must be protest for nonpayment

The bill is already overdue The person who will pay may be a stranger or a party The consent of the holder is not necessary and the holder who refuses to accept payment loses his right of recourse against any party who may be discharged by such payment. f.

ACCEPTANCE FOR HONOR There must be prior protest for non-acceptance or for better security The bill is not yet overdue The acceptor must be a stranger

The consent of the holder is a requisite

Payment for Honor vs. Payment by Person Primarily Liable PAYMENT FOR HONOR

There must be protest for nonpayment A notarial act is necessary The person who will pay may be a stranger or may be a party It cannot be payment in due course and payment discharges only the parties after the party in whose favor payment for honor is made In favor of a specified person and the law requires that there is a statement of the person for whose

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PAYMENT BY PERSON PRIMARILY LIABLE There is no need to protest for non-payment or non-acceptance A notarial act is not necessary The person who will pay is a party – maker or drawee-acceptor Payment in due course discharges the instrument

The instrument must be surrendered to the payor whenever discharge is by payment by or in behalf of the principal debtor, payment by the accommodated party, by renunciation or by any other ground that discharges simple contracts. If the instrument is not surrendered, it may fall in the hands of a holder in due course who may have the right to enforce the instrument despite the previous payment that was made. H.

Discharge of Persons SECONDARILY LIABLE

Sec. 120. When persons secondarily liable on the instrument are discharged. - 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 e xpressly reserved. Sec. 120(a): Those previously discussed mentioned in Sec. 119; Sec. 120(b) and (c): The cancellation of an indorsement of a person secondarily liable may result in the discharge of that person whose signature was stricken-off and also of subsequent parties, as provided in Sec. 48 (see p. 13) . The subsequent parties are likewise discharged since they are deprived of their right of recourse against the party whose signature was stricken-off. Sec. 120(c): As suggested by the majority view, does not include discharge by operation of law, such as bankruptcy, insolvency, prescription or failure to give notice of dishonor but only those discharged by virtue of some act of the creditor. Sec. 120(d): “Tender of Payment” means the act by one which produces and offers to a person holding a claim or demand against him the amount of money which he considers and admits to be due, in satisfaction of such claim or demand without any stipulation or condition. The rule is only fair because it is the fault of the holder that he did not receive payment. If he accepted the tender of payment by a prior party, the subsequent party would have been discharged. Sec. 120(e): When the principal debtor is released from liability, the parties secondarily liable loses their right of recourse against the former. Under this paragraph, in order to holder the secondary liability, there must be express reservation of the right of recourse against parties secondarily liable, which produces the implied reservation of their (parties secondarily liable) right of recourse against the maker. Sec. 120(f): Extension of Term: the assurance of the drawer and the indorsers is payment according to the tenor of the instruments, an extension of time agreed by the holder and the principal debtor, therefore, releases those parties from secondary liability which varies from the original undertaking of the secondary parties. It is suggested by Aquino that this rule applies to an accommodated party who is the principal debtor but not to an accommodation indorser, who must also be discharged by the extension agreed upon by the principal debtor and the holder. IX. CHECKS A.

Payment is not in favor of specific parties

Surrender of Instrument Upon Discharge

CHECKS DEFINED

Sec. 185. Check, defined. - 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 are used between banks and bankers and their customers, and are designed to facilitate banking operations. It is the essence to be payable on demand, because the contract between the banker and the customer is that the money is needed on demand (Banco de Oro Savings vs. Equitable Banking Corporation, supra, p.3) B.

possesses funds of a depositor, it is bound to honor his checks to the extent of the amount of his deposits. The failure of the bank to pay the check when the deposit is sufficient, entitles the drawer to substantial damages without any proof of actual damages. Conversely, a bank is not liable for its refusal to pay a check on account of insufficient funds, notwithstanding the fact that a deposit may be made later in the day.

DISINGUISHED FROM DRAFT REPUBLIC OF THE PHILIPPINES VS. PNB (GR No. L-16106; Dec. 30, 1961) – A demand draft is a bill of exchange payable on demand, as such, it is an open letter request from, and an order by, one person on another to pay a sum of money therein mentioned to a third person, on demand or at a future time specified therein. In fact, the term “draft” is often used, and is the common term, for all “bills of exchange”. And the two words are used indiscriminately.

A bill of exchange, within the meaning of NIL does not operate as an assignment of funds in the hands of the drawee who is not liable on the instrument until he accepts it (Sec. 127). In fact, our law requires that they be presented either for acceptance or for payment within a reasonable time after their issuance or after their last negotiation (Sec. 71), failure of which will discharge the drawer from liability or to the extent of the loss caused by the delay (Sec. 186).

This relationship between the drawer and the drawee bank makes the drawee bank liable to the drawer in case of wrongful dishonor of checks. A drawee bank who wrongfully dishonors a check is not liable to the payee for lack of privity but it is liable to the drawer because of breach of contract. Sec. 189. When check operates as an assignment. - 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. As a consequence of the above provision, the drawee is not liable to the payee just because the drawer actually issued the check to him for valuable consideration. There is no obligation on the drawee’s part to honor the check and the payee has no cause of action against the drawee even if the dishonor was wrongful.

A demand draft is very different from a cashier’s or manager’s check, contrary to appellant’s pretense, for it has been held that the latter is a primary obligation of the bank which issues it and constitutes its written promise to pay upon demand. In In Re Bank of the United States (277 NYS 96, 100) , a cashier’s check has been characterized as follows:

HSBC INTERNATIONAL TRUSTEE LIMITED vs. CECILIA DIEZ CATALAN (G.R. No. 159590 & 15959; October 18, 2004) - Frederick Arthur Thomson drew 5 checks payable to Catalan in the total amount of HK$3.2 million. Catalan presented these checks to HSBC. The checks were dishonored for having insufficient funds. Thomson demanded that the checks be made good because he, in fact, had sufficient funds. Catalan knowing that Thomson had communicated with the Bank, asked HSBC Bank to clear the checks and pay her the said amount. HSBC did not heed her. Thomson died but Catalan was not paid yet. The account was transferred to HSBC [Trustee]. Catalan then requested Trustee to pay her. They still refused and even asked her to submit back to them the original checks for verification. Catalan and her lawyer went to Hongkong on their own expense to personally submit the checks. They still were not honored, leading Catalan to file a suit against HSBC to collect her HK$3.2M. ISSUE: Whether or not Catalan has a cause of action. HELD: Yes. Although Catalan has no cause of action because under Section 189, they payee may sue the drawee based on tort under Art. 19 of the Civil Code. HSBC is not being sued on the value of the check itself but for how it acted in relation to Catalan’s claim for payment despite the repeated directives of the drawer Thomson to recognize the check the latter issued. Catalan may have prayed that she be paid the value of the checks but it is axiomatic that what determines the nature of an action, as well as which court has jurisdiction over it, are the allegations of the complaint, irrespective of whether or not the plaintiff is entitled to recover upon all or some of the claims asserted therein.

“A cashier's check issued by a bank, however, is not an ordinary draft. The latter is a bill of exchange payable demand. It is an order upon a third party purporting to be drawn upon a deposit of funds. A cashier's check is of a very different character. It is the primary obligation of the bank which issues it (Nissenbaum v. State, 38 Ga. App. 253, S.E. 776) and constitutes its written promise to pay upon demand (Steinmetz v. Schultz, 59 S.D. 603, 241 N.W. 734)…” The following definitions cited by appellant also confirm this view: “ A cashier's check is a check of the bank's cashier on his or another bank. It is in effect a bill of exchange drawn by a bank on itself and accepted in advance by the act of issuance (10 C.J.S. 409).” “ A cashier's check issued on request of a depositor is the substantial equivalent of a certified check and the deposit represented by the check passes to the credit of the checkholder, who is thereafter a depositor to that amount (Lummus Cotton Gin Co. v. Walker, 70 So. 754, 756, 195 Ala. 552). ” “ A cashier's check, being merely a bill of exchange drawn by a bank on itself, and accepted in advance by the act of issuance, is not subject to countermand by the payee after indorsement, and has the same legal effects as a certificate deposit or a certified check (Walker v. Sellers, 77 So. 715, 201 Ala. 189).”

D.

KINDS OF CHECK

1.

Cashier’s Check and Manager’s Check

A demand draft is not therefore of the same category as a cashier's check which should come within the purview of the law.

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:

C.

RELATIONSHIP BETWEEN DRAWER, DRAWEE AND PAYEE

1.

Ordinarily, checks are drawn on bank accounts that are opened by drawers on drawee banks. The drawer of the check is a depositor of the drawee bank.

2.

The drawer issues checks in payment of an obligation to a payee. But a payee does not have contractual relationship with the drawee bank. SPOUSES MORAN AND LIBRADA MORAN VS. CA (GR No. 105836; March 7, 1994) – The relationship between the bank and the depositor is that of a debtor and creditor. By virtue of the contract of deposit between them, the banker agrees to pay checks drawn by the depositor provided that said depositor has money in the hands of the bank. Hence, where the bank

43

BSP Circular No. 291 – Series of 2001

a. That the amount of each check shall not exceed P10,000; b. That the buyer of the check is properly identified as required under Circular No. 259 dated 29 September 2000; and c. That a register of gift checks issued shall be maintained with the following minimum information: 1. Date issued; 2. Amount; 3. Name of buyer; 4. Date paid;


5.

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 moneylaundering 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.

a.

b.

c.

PNB VS. NATIONAL CITY BANK OF NEW YORK (63 Phil 11) – When a check is certified, it ceases to possess the character, or to perform the functions, of a check, and represents so much money on deposit, payable to the holder on demand. The check becomes a basis of credit – an easy mode of passing money from hand to hand, and answers the purposes of money.

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.

Sec. 187

Sec. 188

Sec. 189

Certified Check

A certified check is 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. It is analogous to a certificate of deposit of a certifying bank. Certification is similar to acceptance but different in the sense that: (1) Certification at the instance of the holder discharges while there is no discharge in an ordinary acceptance; (2) In certification, the bank debits the drawer’s account at the time of certification and sets aside funds out of the drawer’s control. Thus, the effect of certification is the same as thought the money had been paid by the bank to the holder and redeposited by him in his own credit.

NEW PACIFIC TIMBER & SUPPLY COMPANY, INC. vs. HON. ALBERTO V. SENERIS RICARDO A. TONG and EX-OFFICIO SHERIFF HAKIM S. ABDULWAHID [G.R. No. L-41764 December 19, 1980] - A compromise judgment was rendered by the respondent Judge against New Pacific Timber. For failure of the petitioner to comply with his judgment obligation, a writ of execution was issued for the amount of P63,130.00 pursuant to which, the Ex-Officio Sheriff levied upon the following personal properties of the petitioner. Prior to the auction sale, petitioner deposited with the CFI, in his capacity as Ex-Officio Sheriff of Zamboanga City, the sum of P63,130.00. Private respondent refused to accept the check as well as the cash deposit. Private respondent requested the scheduled auction to proceed if the petitioner cannot produce the cash. In the course of the proceedings, Deputy Sheriff Castro sold the levied properties item by item to the private respondent as the highest bidder in the amount of P50,000.00. As a result thereof, the Ex-Officio Sheriff declared a deficiency of P13,130.00. Petitioner filed an ex-parte motion for issuance of certificate of satisfaction of judgment. This motion was denied by the respondent Judge. Petitioner now questions said order as there was already a full satisfaction of the judgment before the auction sale was conducted. ISSUE: WON the private respondent can validly refuse acceptance of the payment of the judgment obligation in Cashier's check which it deposited with the Ex-Officio Sheriff before the date of the scheduled auction sale? HELD: No valid reason for the private respondent to have refused acceptance of the payment of the obligation in his favor. It is to be emphasized in this connection that the check deposited by the petitioner in the amount of P50,000.00 is not an ordinary check but a Cashier's Check of the Equitable Banking Corporation, a bank of good standing and reputation. As testified to by the Ex-Officio Sheriff with whom it has been deposited, it is a certified crossed check . It is a well-known and accepted practice in the business sector that a Cashier's Check is deemed as cash. Moreover, since the said check had been certified by the drawee bank, by the certification, the funds represented by the check are transferred from the credit of the maker to that of the payee or holder, and for all intents and purposes, the latter becomes the depositor of the drawee bank, with rights and duties of one in such situation. The exception to the rule enunciated under Section 63 of the Central Bank Act to the effect "that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to his account" shall apply in this case.

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Provisions in NIL Related to Certified Checks 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 Effect where the holder of check procures it to be certified. - Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon When check operates as an assignment. - 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

Sec. 188: The holder, by requesting such certification instead of payment, enters into a new contract with the bank, and one not within the contemplation of the drawer or a prior indorser, since they expect that the check will be presented for payment and not to be certified. 3.

Crossed Checks

ASSOCIATED BANK VS CA (GR No. 89802; May 7, 1992) – ISSUE: WON Private Respondent Merle Reyes, doing business under the name and style Melissa’s RWT, has a cause of action against petitioners Associated Bank and Conrado Cruz for their encashment and payment to another person of certain crossed checks issued in her favor? HELD: Yes. Under accepted banking practice, crossing a check is done by writing two parallel lines diagonally on the left top portion of the checks. The crossing is special where the name of a bank or a business institution is written between the two parallel lines, which means that the drawee should pay only with the intervention of that company. The crossing is general where the words written between the two parallel lines are "and Co." or "for payee's account only," as in the case at bar. This means that the drawee bank should not encash the check but merely accept it for deposit. In State Investment House Inc vs. IAC (supra, p. 19), the Court declared the effects of crossing a check. The effects therefore of crossing a check relate to the mode of its presentment for payment. Under Sec. 72 of the Negotiable Instruments Law, presentment for payment, to be sufficient, must be made by the holder or by some person authorized to receive payment on his behalf. Who the holder or authorized person is depends on the instruction stated on the face of the check. The six checks in the case at bar had been crossed and issued "for payee's account only." This could only signify that the drawers had intended the same for deposit only by the person indicated, to wit, Melissa's RTW. There being no evidence that the crossed checks were actually received by the private respondent, she would have a right of action against the drawer companies, which in turn could go against their respective drawee banks, which in turn could sue the herein petitioner as collecting bank. In a similar situation, it was held that, to simplify proceedings, the payee of the illegally encashed checks should be allowed to recover directly from the bank responsible for such encashment regardless of whether or not the checks were actually delivered to the payee. a.

APPLICABLE LAW

There is no provision in the NIL that governs crossed check. However, a provision concerning such type of check can be found in the Code of Commerce: Sec. 541. The maker or 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”. The payment made to a person other than the banker or institution shall not exempt the person on whom it is drawn, if the payment was not correctly made.


And the Bills of Exchange Act of 1882, cited in Chan Wan vs. Tan Kim (supra, p. 15) : 76

Respondent Court with violation of B.P. 22 in an Information alleging that he drew and issued to one Fatima Cortez Sasaki a check in the amount of Php143,000.00, well knowing, however, that at the time of issue, he did not have sufficient funds with the drawee bank – the reason for the latter to dishonor the subject check. Respondent Lim, despite receipt of notice of such dishonor, failed to pay Sasaki the amount of said check or to make arrangement for full payment of the same within five (5) banking days after receiving said notice. In his Motion to Quash, Lim averred that the facts did not constitute a felony because the kind of check he issued, it being a memorandum check, was in the nature of a promissory note, perforce, and civil in nature. Citing U.S. v. Isham, private respondent contended that although a memorandum check may not differ in form and appearance from an ordinary check, such a check is given by the drawer to the payee more in the nature of memorandum of indebtedness and, should be sued upon in a civil action. Consequently, herein Respondent Judge Nitafan, ruling that B.P. 22 on which the Information was based was unconstitutional, issued the questioned Order quashing the Information. Hence, this petition for review on certiorari filed by the Solicitor General in behalf of the government. ISSUE: WON the parameters of a concept of check under B.P. 22 include all checks, specifically, memorandum check, that are drawn against bank? HELD: YES. A 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 a check is an evidence of debt against the drawer, and although may not be intended to be presented, has the same effect as an ordinary check, and if passed to the third person, will be valid in his hands like any other check. From the above definition, it is clear that a memorandum check, which is in the form of an ordinary check, is still drawn on a bank and should therefore be distinguished from a promissory note, which is but a mere promise to pay. If private respondent seeks to equate memorandum check with promissory note, as he does to skirt the provisions of B.P. 22, he could very well have issued a promissory note, and this would be have exempted him form the coverage of the law. In the business community a promissory note, certainly, has less impact and persuadability than a check. A memorandum check must therefore fall within the ambit of B.P. 22 which does not distinguish but merely provides that "[a]ny person who makes or draws and issues any check knowing at the time of issue that he does not have sufficient funds in or credit with the drawee bank . . . which check is subsequently dishonored . . . shall be punished by imprisonment.

General and special crossings defined. (1)Where a cheque bears across its face an addition of — (a)The words “and company” or any abbreviation thereof between two parallel transverse lines, either with or without the words “not negotiable”; or (b)Two parallel transverse lines simply, either with or without the words “not negotiable”; That addition constitutes a crossing, and the cheque is crossed generally. (2)Where a cheque bears across its face an addition of the name of a banker, either with or without the words “not negotiable,” that addition constitutes a crossing, and the cheque is crossed specially and to that banker. Crossing by drawer or after issue.

77

(1)A cheque may be crossed generally or specially by the drawer. (2)Where a cheque is uncrossed, the holder may cross it generally or specially. (3)Where a cheque is crossed generally the holder may cross it specially. (4)Where a cheque is crossed generally or specially, the holder may add the words “not negotiable.” (5)Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker for collection. (6)Where an uncrossed cheque, or a cheque crossed generally, is sent to a banker for collection, he may cross it specially to himself. b.

EFFECTS OF CROSSING CHECKS STATE INVESTMENT HOUSE INC. VS. IAC (supra, p.19) – (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 a bank; and (3) the act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise he is not a holder in due course.

BATAAN CIGAR AND CIGARETTE FACTORY, INC. VS. CA (supra, p. 18) – The negotiability of the check is not affected by it being crossed, whether generally or specially. It may legally be negotiated from one person to another as long as the one who encashes the check with the drawee bank is another bank, or if it is specially crossed, by the bank mentioned between parallel lines. GEMPESAW VS. CA (supra, p. 14) – Issuing a crossed check imposes no obligation on the drawee not honor such a check. It is more of a warning to the holder that the check cannot be presented to the drawee bank for payment in cash. Instead, the check can only be deposited with the payee’s bank which in turn must present it for payment against the drawee bank in the course of normal banking transactions between banks. The crossed check cannot be presented for payment but it can only be deposited and the drawee bank may only pay to another bank in the payee’s or indorser’s account. 4.

MEMORANDUM AND TRAVELLER’S CHECK a.

Memorandum Check

PEOPLE VS. NITAFAN (GR No. 75954; Oct. 22, 1992) - Accused K.T. Lim a.k.a Mariano Lim, herein Private Respondent, was charged before

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b.

Traveller’s Check

Traveller’s checks are 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 (Black’s Law Dictionary). E.

CHECKS AND BILLS OF EXCHANGE DISTINGUISHED BILLS OF EXCHANGE Not necessarily drawn on a deposit

CHECKS It is necessary that a check is drawn on a deposit Death of the drawer of a check, with the knowledge of the bank, revokes the authority of the banker to pay Must be presented for payment within a reasonable time after its issue

Death of a drawer of a BOE with the knowledge of the bank does not revoke the authority of the banker to pay May be presented for payment within a reasonable tie after its last negotiation if payable on demand The drawee may or may not be a The drawee is always a bank bank Presentment for acceptance is Presentment for acceptance is not necessary for certain types of bills necessary of exchange May be payable on demand or at a Always payable on demand fixed or determinable future time


F.

J.

CRIMES INVOLVING CHECKS

1.

Estafa

WHEN REQUIRED TO BE PRESENTED FOR PAYMENT

Sec. 185. Check, defined. - 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.

RPC, Art. 315. Swindling (Estafa) . – Any person who shall defraud another by any of the means mentioned hereinbelow shall be punished by: xxx

G.

EFFECT OF DEATH OF DRAWER

The authority of the drawee bank to honor a check drawn against it is said to be terminated by the death of the drawer. There is no provision in the NIL expressing this rule. However, the Bill of Exchange Act of 1882 provides that notice of the customer’s death revokes the banker’s authority to pay. Moreover, the National Internal Revenue Code already disallows withdrawal from the bank account of the deceased unless proper taxes are paid to the Bureau of Internal Revenue. H.

1.

2. 3. 4.

5. 6.

I.

COLLECTION OF CHECKS

The holder of the check may either present it for payment or he may deposit it in his account with his bank known as the depositary bank or collecting bank. The depositary bank will then make a provisional credit to his account in the amount of the check. The check thereafter goes through the process of clearing through the “clearinghouse” The clearinghouse is defined as “an association of banks or other payors for the purpose of settling accounts with each other on a daily basis. Each member of the clearinghouse forwards all deposited checks drawn on other members and receives from the clearinghouse all checks drawn on it. Balances are adjusted and settled each day.” It is only after the check has been cleared and collected from the drawee bank that final credit is made in the payee-depositor’s account. The normal bank policy is to disallow withdrawal from the account of the amount covered by the check. IN some cases, the collecting bank may be held liable for damages if it allows withdrawal of deposit even if the check has not yet been cleared by the drawee bank. PERTINENT RULES

PHILIPPINE

CLEARING

HOUSE

CORPORATION

Section 102. Interbank Settlement . - The Bangko Sentral shall establish facilities for interbank clearing under such rules and regulations as the Monetary Board may prescribe: Provided, That the Bangko Sentral may charge administrative and other fees for the maintenance of such facilities. The deposit reserves maintained by the banks in the Bangko Sentral in accordance with the provisions of Section 94 of this Act shall serve as basis for the clearing of checks and the settlement of interbank balances, subject to such rules and regulations as the Monetary Board may issue with respect to such operations: Provided, That any bank which incurs on overdrawing in its deposit account with the Bangko Sentral shall fully cover said overdraft, including interest thereon at a rate equivalent to one-tenth of one percent (1/10 of 1%) per day or the prevailing ninety-one-day treasury bill rate plus three percentage points, whichever is higher, not later than the next clearing day: Provided, further, That settlement of clearing balances shall not be effected for any account which continues to be overdrawn for five (5) consecutive banking days until such time as the overdrawing is fully covered or otherwise converted into an emergency loan or advance pursuant to the provisions of Section 84 of this Act: Provided, finally, That the appropriate clearing office shall be officially notified of banks with overdrawn balances. Banks with existing overdrafts with the Bangko Sentral as of the effectivity of this Act shall, within such period as may be prescribed by the Monetary Board, either convert the overdraft into an emergency loan or advance with a plan of payment, or settle such overdrafts, and that, upon failure to so comply herewith, the Bangko Sentral shall take such action against the bank as may be warranted under this Act.

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2. By means of any of the following false pretenses or fraudulent acts executed prior to or simultaneously with the commission of the fraud: xxx (d) By postdating a check, or issuing a check in payment of an obligation when the offender had no funds in the bank, or his funds deposited therein were not sufficient to cover the amount of the check . The failure of the drawer of the check to deposit the amount necessary to cover his check within three (3) days from receipt of notice from the bank and/or payee or holder that said check has been dishonored for lack or insufficiency of funds shall be prima facie evidence of deceit constituting false pretense or fraudulent act. ESSENTIAL ELEMENTS: a. That the offender postdated or issued a check in payment of an obligation contracted at the time the check was issued; b. That such postdating or issuing a check was done when the offender had no funds in the bank, or his funds deposited therein were not sufficient to cover the amount of the check; c. Deceit or damage to the payee thereof. 2.

Bouncing Checks Law (Batas Pambansa Bilang 22)

BP Blg 22 was enacted to prevent the proliferation of worthless checks in the mainstream of daily business and to avert not only the undermining of the banking system of the country but also the infliction of damage and injury upon trade and commerce occasioned by the indiscriminate issuances of such checks. ELEMENTS: a. The making, drawing and issuance of any check to apply for account or for value; b. The knowledge of the maker, drawer, or issuer that at the time of issue he does not have sufficient funds in or credit with the drawee bank for the payment of such check in full upon its presentment; and c. The subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or dishonor for the same reason had not the drawer, without any valid cause, ordered the bank to stop payment. DOMAGASANG VS. CA (347 SCRA 75 [2000]) – While Sec. 2 of BP Blg. 22 does not state that the notice of dishonor be in writing, taken in conjunction, however, with Sec. 3 of the law, a mere oral notice or demand to pay would appear to be insufficient for conviction under the law. 3.

Check Kiting

Art. 315, 1: With unfaithfulness or abuse of confidence, namely: xxx (b) By misappropriating or converting, to the prejudice of another, money, goods or any other personal property received by the offender in trust, or on commission, or for administration, or under any other obligation involving the duty to make delivery of, or to return the same, even though such obligation be totally or partially guaranteed by a bond; or by denying having received such money, goods or other property. a. KITING is the wrongful practice of taking advantage of the float, the time that elapses between the deposit of the check in one bank and its collection at another. b. The depositary bank will honor the checks even if it has not yet been cleared. In anticipation of the dishonor of the check that was deposited, the


Negotiable Instruments Law 2031

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