Zarah Case Doctrines

LEX LEONUM FRATERNITAS Case Doctrines Commercial Law Atty. Zarah Villanueva-Castro

I – Corporation Law FELICIANO vs. Commission on Audit Congress cannot enact a law creating a private corporation with a special charter. Local water districs are not private corporations because they are not created under the Corporation Code. Local water districts exist by virtue of PD 198, which constitutes their special charter. Since under the Constitution only GOCCs may have special charters, Local water districts can validly exist only if they are government owned or controlled. To claim that local water districs are private corporations with a special charter is to admit that their existence is constitutionally infirm. Magsaysay-Labrador vs. CA Shareholders are in no legal sense owners of corporate property, which is owned by the corporation as a distinct person. Sulo ng Bayan vs. Araneta Absent any showing of interest, a corporation has no personality to bring an action to recover property belonging to its members or stockholders in their personal capacities. Bataan Shipyard and Engineering Co., Inc. vs. PCGG The right of self-incrimination has no application to juridical persons. While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follw that a corporation, vested with special privileges and franchises, may refuse to show its hand when charged with an abuse of such privileges. There is a reserved right on the part of the legislature to inquire if the corporation has abused its privileges. Luxuria Homes vs. CA

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to disregard the separate juridical personality of a corporation, the wrong doing must be clearly and convincingly established, and that it cannot be presumed Concept Builders, inc. vs. NLRC No hard and fast rule can be accurately laid dwn, but certainly, there are some probative factors of identity that will justify the application of the doctrine of piecrcing the veil of corporate fiction, to wit: 1. 2. 3. 4.

stock ownership by one or common ownership of both corporations; identity of directors and officers; the manner of kiiping the corporate books and records; the methods of conducting the business.

The following are the tests in determining the applicatbility of the doctrine of piercing the veil of corporate fiction: a. There must be control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy, and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had, at that time, no separate mind, will or existence of its own; b. Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive duty, or dishonest and unjust act in contravention of plaintiff’s legal rights; and c. Such control and breach of duty must proximately cause the injury to the plaintiff. Villarey Transit vs. Ferrer The corporate veil may be pierced to enforce a non-competition clause entered into by the controlling stockholder in his personal capacity, if the same is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the cachievment or perfection of a monopoly or generally, the perpetration of knavery or a crime. The veil with which the law covers and isolates the corporation from the members or stckholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals. Fransisco Motors Corporation vs. CA obligations of the stockholders are not the obligations of the corporation.


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PNB vs. Andrada Electric and Engineering Co., Inc. The corporate veil may be lifted obly if it has been used to shield Grace Christian Highschool vs. CA A provision in the By-laws granting a permanent seat in the BOD is contrary to the Corporation Code. Gokongwei, Jr. vs. SEC A by-law provision that forbids a competitor to be elected as corporate director is valid. Western Institute of Technology vs. Salas Members of the board may receive compensation in addition to reasonable per diems, when they render services to the corporation in a capacity other than as directors or trustees. Nacpil vs. IBC The BOD may also be empowered under the by-laws to create additional officers as may be necessary. People’s Aircargo and Warehousing co vs CA If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him ut to the pyblic as possessing the power to do those acts, and tus, the corporation will, as against any one who has in god faith dealt with it through such agent, be estopped form denying the agent’s authority. Prime White Cement vs. IAC A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. In case his interests conflict with those of the corporation, he cannot sacrifice the latter to his wn advantage or benefit. On the other hand, a director’s contract with his corporation is not at all instances void or voidable. If the contract is fair and reasonable under the


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circumstances, it may be ratified by the stockholders provided a full discolosure of his adverse interest is made. Santos vs. NLRC In Tramat Merchantile vs. CA, the Court has collated the settled instances when, without necessarily piercing the veil of corporate fiction, personal civil liability can also be said to lawfully attach to a corporate director, trustee or officer, to wit: 1. he assents (a) to patently unlawful acts of the corporation or, (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; 2. he consents to the issuance of watered stocks or who, having knowledge thereof, does not fortwith file with the corporate secretary his written objection therto; 3. he agrees to hold himself personally and solidarily liable with the corporation; or 4. he is made, by a specific provision of law, to personally answer for his corporate action. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient groung for disregarding the separate corporate personality. SPS David vs. Construction Industry and Arbitration Committee Bad faith exists when a material deviation from the structural plan was made without the clients being consulted first especially where it appears that the act was done to lower the cost of contruction. Hence, personal liability for damages could attch to the officer of the construction company. Malayang Smahan ng mga Manggagawa sa M. Greenfield vs. Ramos In labor cases, corporate directors and fficers are solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith. Atrium Management Corporation vs. CA The act of issuing checks for the purpose of securing a loan to finance the activities of the corporation is well within the ambit of a valid corporate act, hence, not an ultra vires act. A treasure of a corporation whose negligence in signin a cnfirmanion letter for rediscounting of crssed checks, knowing fully will that the checks ere strictly 4 By NIKKO LAGMAY and ANGELO FERNANDO San Sebastian Law


enforsed for deposit only to the payee’s account and not to be further negotiated, resulting in damage to the corporatin may be personally liable therefore. BA Savings Bank vs. SIA The certificate of non-forum shopping required by S.C. Circular 28-91 may be signed, by a specifically authorized lawyer who has personal knowledge of the facts to be disclosed in such document. Unlike natural persons, corporations may perform physical actions only through properly delegated individuals, namely, its officers and/or agents. Inter-Asia Investment Industries, inc. vs. CA An officer of a corporation who is authorized to purchase the stock of another corporation has the implied power to perform all other obligations areising therefrom such as payment of shares of stock. Lapu-Lapu Foundation, inc. vs. CA If a corporation konowingly permits one of its officers to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped form denying the agent’s authority. Hydro Resources Contractors Corporation vs. NIA It would be preposterous for the NIA administrator to have the power of granting claims without the authority to verify the computation of such claims. A corporation may be estopped from denying as against a third person the authority of its officers or agents who have been clothed by it with ostensible or apparent authority. Although an officer or agent acts without or in excess of his actual authority but acts within the scope of an apparent authorit with which the corporation has clothed him by holding out or permitteing him to appear as having such authority, the corporation is bound thereby in foavor of a person who deals with him in good faith in reliance on such apparent authority. Monfort Hermanos Agricultural Development Corporation vs. Monfort III To correct the alleged error in the General Information Sheet, the retained accountant of the Corporation informed the SEC the non-inclusison of the lawfully elected directors was attributable to the oversight and not the fault of the By NIKKO LAGMAY and ANGELO FERNANDO San Sebastian Law

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Corporation. This belated attempt, however, did not erase the doubt as to whether an election was indeed held. By the express mandate of the Corporation Code, Sec. 26, all corporations duly organized pursuant thereto are required to submit within the period stated therein (30 days) to the SEC the names, nationalities, and residences of the directors, trustees and officers elected. Lyceum of the Philippines vs. CA The fact that other schools use “Lyceum” as part of their school’s name is not a deceptive use thereof relative to Lyceum of the Philippines. Under the doctrine of secondary meaning, a word or phrase originally incapable of exclusive appropriation with reference to an article appropriation with relevance to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusive by one producer with reference to his article that, in that trade and to that brance to the purchasing public, the work or phrase has come to mean that the article was his product. Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus, HSK vs. Iglesia ng Dios Parties organizing a corporation must choose a name at their peril; and the use of a name similar adopted by another corporation, whether a business or a nonprofit organization, if misleading or likely to injure in the exercise of its corporate functions, regardless of intent, may be prevented by the corporation having prior right, by a suit for injunction against the new corporation to prevent the use of name. Ordering a religious society or corporation to change its corporate name is not a violation of its constitutionally guaranteed right to religious freedom. In so doing, the SEC merely compelled petitioner to abide by one of the SEC guifelines in the approval of corporate names, namely its undertaking to manifest its willingness to change its corporate name in the event another person, firm, or entity has acquired a prir right to use the said firm name or one deceptively or confusingly similar to it. Industrial Refractories Corporation of the Philippines vs. CA Confusing and deceptive similarity of corporate names prohibited under section 18 of the Corporation Code. IG Summit Holdings vs. CA


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A public utility is a business or service engaged in regularly supplying the public with some commodity or service of public consequence such as electricity, gas, water, transportation, telephone or telegraph service. By nature, a shipyard is not a public utility. A shipyard is a place or enclosure where ships are built or repaired. Its nature dictates that it serves but a clientele whom it may wish or choose to serve at its discretion. While it offers its facilities to whoever may wish to avail of its services, a shipyard is not legally obliged to vender its services indiscriminately to the public. Young Auto Supply Co vs. CA A corporation is in a metaphysical sense a resident of the place where its principal office is located as stated in the articles of incorporation. Republic Planters Bank vs. Agana Preferences granted to preferred stockholders do not give them a lien upon the property of the corporation not make them creditors of the corporation, the right of the former being always subordinate to the latter. Shareholders, both common and preferred, are considered risk takers who invest capital in the business and who can look only to what is left after corporate debt and liabilities are fully paid. Castillo vs. Balinghsasay Section 6 of the Corporation Code explicitly provides that no share may be deprived of voting rights except those classified and issued as preferred or redeemable shares, unless otherwise provided in this Code, and that there shall always be a class or series of class which have complete voting rights. There is nothing in the articles of incorporation or an iota of evidence on record that shows class “B” shares were categorized as either preferred or redeemable shares. Nielson and Company, inc. vs. Lepanto Consolidated Mining Company A share of stock coming from stck dividends declared cannot be issued to one who is not a stockholder of a corporation. Islamic Directorate of the Philippines vs. CA


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A juridical person cannot be considered essentially a formal party to a case where it was not duly represented by its legitimate governing board. Dee vs. Sec The pre-emptive right of stockholders is recognized only with respect to new issue of shares, and not with respect to additional issues of originally authorized shares. Firme vs. Bukal Enterprises and Development Corp. A corporation can only exercise its powers and transact its business through its board of directors and through its officers and agents when authorized by a board resolution or its by-laws. Loyola Grand Villas Home owners (south) Association vs. CA A corporation would not ipso facto lose its powers for failure to file the required by-laws. China Banking Corporation vs. CA In order to be bound, a third party must have acquired knowledge of the pertinent by-laws at the time the transaction or agreement between said third person and the shareholder was entered into. Lee vs. CA In order to be eligible as a director, what is material is the legal title to, not beneficial ownership of, the stock as appearing on the books of the corporation. A voting trust agreement results in the separation of the voting rihts of a stockholder from his other riths such as the right to receive dividends and other rights to which a stockholder may be entitled until the liquidation of the corporation. Republic vs. Sandiganbayan 402 SCRA 84 PCGG cannot vote sequestered shares except when there are “demonstrably weighty and defensible grounds” or “when essential to prevent disappearance or wastage of corporate property”. Republic vs. COCOFED


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The government should be allowed to continue voting sequestered UCPB shares inasmuch as they were purchased with cconut levy funds – funds that are prima facie public in character or, at the very least, are clearly affected with public interest. Evangelista vs. Santos In a derivative suit, it is the corporation itself and not the plaintiff stockholder that is the real party in interest, so that such damages as may be recovered shall pertain to the corporation. Gochan vs. Young Personal injury siffered by stockholders cannot disqualify them from filing a derivative suit. It merely gives rise to an additional cause of action for damages against the erring directors. Chua vs. CA Not every suit filed in behalf of the corporation is a derivative suit. For a derivative suit to prosper, it is required that the minority stockholder suing for and on behalf of the corppration must allege that he is suing on a derivative cause of action on behalf of the corporation and all owther stockholder similarly situated who may which to join him in the suit. It is a condition sine qua non that the corporation be impleaded as a party because not only is the corporation an indispensable party, but it is also the present rule that it must be served with process. Expertravel and Tours, inc. vs. CA In this age of modern technology, the courts may take judicial notice that business transations may be made by individuals through teleconferencig. In the Philippines, teleconferencing and video conferencing of members of board of directors of private corporations is a reality, in light of RA No. 8792. The SEC issued SEC Memorandum Circular No 15, on November 30, 2001, providing the guidelines to be comnplied with related to such conferences. Nava v. Peers Marketing Corporation


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Where no stock certificate was issued to original subscriber representing that portion of hi subscription which he paid for, the assignment of said subscriber’s corporate share is effective only between the parties to the transaction and the transferee cannot demand from the corporation the issuance of certificate of stock representing the paid subscribed shares. Lim Tay v. CA A mere pledgee is not entitled to ownership of shares. Rural Bank of Lipa City v. CA Delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the transferee. Ponce v. Alsons Cement Corporation A transfer of shares of stock not recorded in the stock and transfer book of the corporation is non- existent as far as the corporation is concerned. Hence, a corporate secretary may not be compelled to issue stock certificates without such registration. Ong Yong v. Tiu A subscription contract necessarily involves the corporation as one of the contracting parties since the subject matter of the transaction is property owned by the corporation—its shares of stock. Considering therefore that the real contracting parties to the subscription agreement were FLADS (the corporation) and the Ongs (subscribers) alone, a civil case for rescission on the ground of breach of contract filed by the TIUs (stockholders) in their personal capacities will not prosper. Furthermore, to allow rescission disregards the separate juridical personality of FLADS (the corporation). Gonzales v. PNB A stockholder has the duty of showing good motive or purpose for demanding an examination of corporate books. One who acquired one share of stock of a bank to be able to examine its books can hardly be said to have been motivates with good faith or proper purpose in demanding inspection of the bank’s transactions before he became a stockholder.

Associated Bank v. CA The merger does not become effective upon the mere agreement of the constituent corporations- the merger shall be effective only upon the issuance by the SEC of a certificate of merger. 10 By NIKKO LAGMAY and ANGELO FERNANDO San Sebastian Law


Babst v. CA It is settled that in the merger of two existing corporations, one of the corporations survives and continues the business, while the other is dissolved and all its rights, properties and liabilities are acquired by the surviving corporation. Long v. Basa Section 91 of the Corporation Code provides that membership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by- laws. In the case at bar, the petitioners really have no reason to bewail the lack of prior notice in the By- laws. They have waived such notice by adhering to those Bylaws. They became members of the Church voluntarily. They entered into its covenant and subscribed to its rules. By doing so, they are bound by their consent. Consequently, the expulsion was not tained with any arbitrary treatment from the members of the Board of Directors who, since 1988 up to August 30, 1993, or approximately 5 years, have patiently exhorted and warned the dissident members. This long period of time is more than adequate an opportunity for the erring members and their followers to contemplate upon their covenant with the Church on their duty to protect and promote its Principled of Faith and not to violate them. It is a well settled principle in law that what due process contemplates is freedom from arbitrariness, what it re quires is fairness and justice, substance rather than form, being paramount. What it prohibits is not the absence of previous notice but the absolute absence thereof. A formal or trial type hearing is not at all times and in all instances essential. Sta. Clara Homeowners’ Association v. Gaston Homeowners cannot be compelled to become members of a homeowners’ association by the simple expedient of including them in its Article of Incorporation and By- laws without their express or implied consent, without violating the constitutionally guaranteed freedom of association. PADCOM Condominium Corporation v. Ortigas Center Association, Inc. If among the terms and conditions in a deed of sale, there is a requirement that the transferee must become member of as association, the same binds the holder of the title and the whole world. It cannot be argued that there is a violation of freedom of association because the transferee was never forced to become a member of the association. Manuel R. Dulay Enterprises, Inc. v. CA Petitioner corporation is classified as a close corporation and consequently a board resolution authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for the action of its president. At any rate, a corporate action taken at a board meeting without proper call or notice in a close corporation is deemed ratified by the absent director unless the latter promptly files 11 By NIKKO LAGMAY and ANGELO FERNANDO San Sebastian Law


his written objection with the secretary of the corporation after having knowledge of the meeting which, in this case, petitioner Virgilio Dulay failed to do. San Juan Structural and Steel Fabricators, Inc. v. CA A corporation does not become a close corporation just because a man and his wife owns 99.866% of its subscribed capital stock. So, too, a narrow distribution of ownership does not, by itself, make a close corporation. Facilities Management Corporation v. De La Rosa A foreign corporation not doing business in the Philippines may be sued here for acts done against persons in the Philippines. Home Insurance Company v. Eastern Shipping Lines Insofar as litigation is concerned, the foreign corporation or its assignee may not maintain any suit for the recovery of any debt, claim or demand whatever. A contract entered into by a foreign insurance corporation not licensed to do business in the Philippines is not void. The statute does not fix any time within which foreign corporations shall comply with the Act. If such contracts were void, no suits could be prosecuted on them in any court. The primary purpose of our statute is to compel a foreign corporation desiring to do business within the state to submit itself to the jurisdiction of the courts of their state. Mentholatum Co., Inc. v. Mangiliman The true test to determine whether a foreign company is “doing business in the Philippines” is whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another. Eriks Pte., Ltd. v. CA The grant and extension of 90- day credit terms by a foreign corporation to do a domestic corporation for every purchase made unarguably shows an intention to continue transacting with the latter since in the usual course of commercial transactions, credit extended only to customers in good standing or to those on whom there is an intension to maintain long- term relationship. MR Holdings, Inc. v. Bajar While petitioner may just be an assignee to the Deed of Assignment, it may still fall within the meaning of “doing business” based on the ruling of the Supreme Court that “where a single act or transaction however is not merely incidental or casual but indicates the foreign corporation’s intention to do other business in the Philippines, said single act or transaction constitutes doing or engaging in or transacting business in the Philippines. Hutchison Ports Philippines Limited v. SBMA


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Participating in the bidding process constitutes “doing business” because it shows the foreign corporation’s intention to engage in the business here. The bidding for the concession contract is but an exercise of the corporation’s reason for its existence. It is the performance by a foreign corporation of the acts for which it was created, regardless of the volumes of business, that determines whether a foreign corporation needs license or not. Antham Cosolidated v. CA Where the three transactions indicate no intent by foreign corporation to engage in a continuity of transactions, they do not constitute doing business; Foreign corporation not doing business in the Philippines is not required to obtain a license to do business to have the capacity to sue. Merrill Lynch Futures, Inc. v. CA A foreign corporation doing business in the Philippines may sue in the Philippine courts although not authorized to do business here against a Philippine citizen who had contracted with and been benefited by said corporation. Agilent Technologies Singapore (Pte) Ltd. v. Integrated Silicon Technology Philippines Corporation In the Agreement, the foreign company’s activities in the Philippines were confined to (1) maintaining a stock of goods solely for the purpose of having the same processed by another company; and (2) consignment of equipment with such company to be used in the processing of products for export. Such foreign corporation cannot be considered doing business in the Philippines. By and large, to constitute “doing business”, the activity to be undertaken in the Philippines is one that is for profit- making. Under Section 1 of the Implementing Rules and Regulations of the Foreign Investment Act, the foregoing activities do not constitute doing business in the Philippines. The general tests to determine whether a foreign corporation id doing business in the Philippines are: 1. Substance Test- whether the foreign corporation is continuing the body of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another. 2. continuity test – continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in the progressive prosecution of the purpose and object of its organization.


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Expert Travel and Tours Inc. vs. CA Being a residential agent of a foreign corporation does not mean that he is authorized to execute the requirste certificate against forum shopping because hwne a resident agent ma be aware of actions against hie principal (a foreign corporation doing business in the Philippines), he may not be aware of actions initiated by its principal, whether in the Philippines against a domestic corporation or private individual, or in the coutry where such corporation is organized and registered , against a Philippine registered corporation or a Filipino citizen.

II - NEGOTIABLE INSTRUMENTS Firestone Tire and Rubber Company vs. CA The essence of negotiability which characterizes a negotiable paper as a credit instrument lies in its freedom to circulate freely as a substitute for money. Caltex vs. CA In determining the negotiability of an instrument, the instrument in its entirety and what appears on its fact must be considered. It must comply with the requirements of sec. 1, Act. No. 2031 Philippine Education Company vs. CA Postal money orders are not negotiable intruments. It does not contain ac unconditional promise or order to pay required in Sec. 1 of the NIL. Regulations and restrictions imposedc on postal money orders are inconsisten with the character of negotiable instruments. Tibajia, Jr. vs. CA A check, whther manager’s check or ordinary check, is not legal ender, and an oofer of a check in payment of a debt is not a valid tender of payment and may be refused recept by the creditor. PAL vs. CA


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A check, whether 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 pament and may be refused receipt by the creditor. Sesbreno vs. CA An instrument thaough marked non-negotiable, may nevertheless be assigned or transferred. Metrbank vs. CA Treasury warrants are non-negotiable instrument because there is an indication of the fund as the source of pament of the disbursement. Ang Tek Lian vs. CA A check 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. PNB vs Manila Oil Refining And By products Company Inc Provisions in notes authorizing attorbeys to appear and confess judgments against makers should not be recognized in this jurisdiction because the same is considered void for being against public policy. However, sec. 5 of the NIL provides that the negotiable character of an instrument therwise negotiable is not affected by a provision which authorizes confession of judgment if the instrument be not paid at maturity. In other words, only the stipulation is avoided. Republic Planters Bank vs. CA Where an instrument containing the words “I promise to pay” is isgned by two or more persons, they are deemed to be jointly and severally liable thereon. The phrase “and in his personal capacity” below the signatures of the makers in the note will not affect the liability of the makers. GSIS vs. CA An instrument that is payable to a specified person or entity is not negotiable because the NIL requires that the instrument must be payable to order or the bearer. 15 By NIKKO LAGMAY and ANGELO FERNANDO San Sebastian Law


An accommodation party applies only to negotiable instruments. Consolidated Plywood Inc., vs. IFC Leasing If an instrument is not negotiable, it can still be transferred but only throught assignment. The transferee is an assignee who merely steps into the shoes of the transferor. De la Victoria vs. Burgos Delivery is defined as the transfer of the possession of the instrument by the maker or draer with intent to transfer title to the payee and recognize him as the holder therof. Where checks due a government employee have not yet been delivered to him, they do not belong to him and still have the character of public funds. Checks due a government employee may not be garnsihed to satisfy judgment. Development Bank of Rizal vs. Sima Wei 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. Metropol (Bacolod) Financing vs. Sambok Motors “Recourse” means resort to a peson who is secondary liable after the default of the person who is primary liable. Indorsing the note “with recourse” makes a party a general indorser. The effect is that the note was indorsed withut qualification. Gempesaw vs. CA 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 this rule is where the drawer is guilty of such negligence which causes the bank to honor such check.


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Although a depositor owes a duty to his drawee bank to examine his cancelled checks for forgery of his own signature, he has no similar duty to forged instruments. The negligence of a depositor which will prevent recovery of an unauthorized payment is based on failure of the depositor to act as a prudent businessman would under the circumstances. De Ocampo vs. Gatchalian Gross negligence may amount to legal absence of good faith. Where a holder’s title is defective or suspicius, it cannot be stated that the payee acquired the check without the knowledge of said defect in holder’s title, and for this reason the presumption that it is a hlder in due cours or that it acquired the instrument in good faith does not exist. Stelco Marketing Corporation vs. CA Lack of notice of any infirmity in the instrument r defect in the title of the person negotiating it does not apply to an accommodation party. Bataan Cigar and Cigarrette Factory vs. CA A person who takes a crssed check without making further inquiries is not a holder in due course. The act of crossing a check produces 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 on e who has an account with the bank; and c. the act of crossing the check serves as warning to the hlder 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 vs. CA The fact that a check is merely issued as security is not a ground for the discharge of the instrument against a holder in due course. PNB vs. Picornell The drawee by accepting becomes liable to the payee or his indorsee, and also to the drawer himself. But the drawer and acceptor are immediate parties to the 17 By NIKKO LAGMAY and ANGELO FERNANDO San Sebastian Law


consideration, and if the acceptance be without consideration, the drawer cannot recover from the acceptor. The payee holds a different relation; he is a stranger to 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 acceptor, he is in the position of a bonafide indorsee. Hence, it is no defense to a suit against the acceptor draft which has been discounted, and upon which money has been advanced by the plaintiff, that the draft was accepted for the accommodation of the drawer. People of the Philippines vs. Maniego Acquittal on reasonable doubt of the accused does nt operate to absolve the same from civil liability. appelant’s cnetntion 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 thereonf.” Crisologo-Jose vs. CA A corporation cannot act as an accommodation party. The issuance or indorsement of a negotiable intruemnt by a corporation without consideration and for accommodation is ultra vires. Salas vs. CA Petitioner alleged that she issued the promissory note in question based on the alleged bad faith, fraud and misrepresentation of the payee (fraud in inducement). Unfortunately, the note was later negotiated to a holder in due course. Hence, such holder holds the instrument free from personal defenses available to prior parties among themselves and may enforce payment of the instrument for the full amount thereof.


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PNB vs. CA An alteration of the serial number of a check does not constitute material alteration because it does not alter the effect of the insturmetn, nor des it modify in any respect the obligation of a party thereto. It does not change the items which aree required to be stated under sec. 1 of the NIL. Associated Bank vs. CA In bearer instruments, 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 cours even if an indorsement was forged after the issuance of the note. The liability chain ends with the drawee bank whose responsibility is to know the drawer’s signature since the latter is its customer. Great Eastern Life Insurance co. vs. HSBC It is the obligation of the collecting bank to reimburse the drawee bank the value of the checks subsequently found to contain forged indorsement of the payee. The reason is that the bank with which the check was deposited has no right to pay the sum stated therein to the forger or any one else upon a forged signature. It is the collecting bank’s duty to know that the indorsement is genuine before cashing the check. Republic vs. Ebrada The indorser is liable on the insruemtn although the signature of the payee is forged because the indorser by his indorement guaranteed that the instrument is genuine, therefore, impliedly, that the instrument is valid, otherwise, there wuld be nothing for the indorser to guarantee. Philippine Commercial International Bank vs. CA The prescriptive period for the filing of a claim based on negotiable instruments is ten years from the time the cause of action accrued. In case of 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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Papa vs. Au Valencia Failure of the pay to encash a check for more than 10 years “undoubtedly resulted in the impairment of the check through his unreasonable and unexplained delay. A lapse of 10 years will bar any action base on the check. Far East Reality Invetment inc vs. CA If the instrument is not presented for payment within a reasonable time after issue, or last negotiation as the case may be, the persons secondarily liable are discharged. Wong vs. CA With respect to checks, the SC had taken cognizance of the current banking practice that a check becomes stale after more than months or 180 days. International Corproate Bank vs. Sps. Gueco Even assuming that presentment is needed, failure to present for payment within a reasonable time will resoult to the discharge of the drawer only to the extent of the loss caused by the delay. Failure to present on time, thus, does not totally wipe out all liability. deifinitely, the original obligation to pay has not been erased. Asia Banking Corporation vs. Javier When a negotiable instrument has been dishonored by non-acceptance or nor-paymnet, notice of dishonor must be given to the drawer or indorser to whom such notice is not given is discharged. Nyco Sales Corporation vs. BA Finance Corporation 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. New Pacific Timber vs. Seneris Certification of check by drawee bank is equivalent to acceptance.


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Said certification implies that the check is drawn upon sufficient funds un the hands of the drawee, that they have been set apart for its satisfaction, and that they shell be so applied whenever the check is presented for payment. PNB vs. National City Bank of New York The certification of checks is a means in constant and extneseve use in the business of banking, and its effects and conseqences are regulated by the law of merchant. Sps. Moran vs. CA Failure of a bank to pay the check of a merchant or a trader, when deposit is sufficient, entitles the drawer to substantial damages without any proof of actual damages.


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Zarah Case Doctrines

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