[1]

Law 108: Negotiable Instruments

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[1]

CH. I: REQUISITES OF NEGOTIABILITY ASTRO ELECTRONICS CORP. v. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION 411 SCRA 462; AUSTRIA-MARTINEZ; Sept. 23, 2003 ~lora~ FACTS -Astro was granted several loans by the Philippine Trust Company amounting to P3,000,000.00 with interest and secured by three promissory notes. -In each promissory notes, petitioner Roxas signed twice, as President of Astro and in his personal capacity. Roxas also signed a Continuing Surety ship Agreement in favor of Philtrust Bank, as President of Astro and as surety. -Philguarantee, with the consent of Astro, guaranteed in favor of Philtrust the payment of 70% of Astros loan, subject to the condition that upon payment by Philguanrantee of said amount, it shall be proportionally subrogated to the rights of Philtrust against Astro. -As a result of Astros failure to pay its loan obligations, despite demands, Philguarantee paid 70% of the guaranteed loan to Philtrust. Subsequently, Philguarantee filed against Astro and Roxas a complaint for sum of money with the RTC of Makati. -In his Answer, Roxas disclaims any liability on the instruments, alleging that he merely signed the same in blank and the phrases in his personal capacity and in his official capacity were fraudulently inserted without his knowledge. -The RTC rendered its decision in favor of Philguarantee observing that if Roxas really intended to sign the instruments merely in his capacity as President of Astro, then he should have signed only once in the promissory note. -CA affirmed the RTC decision agreeing with the trial court that Roxas failed to explain satisfactorily why he had to sign twice in the contract and therefore the presumption that private transactions have been fair and regular must be sustained. ISSUE WON Roxas should be jointly and severally liable (solidary) with Astro for the sum awarded by the RTC. HELD

YES. Astros loan with Philtrust Bank is secured by three promissory notes. These promissory notes are valid and binding against Astro and Roxas. As it appears on the notes, Roxas signed twice: first, as president of Astro and second, in his personal capacity. In signing his name aside from being the President of Asro, Roxas became a co-maker of the promissory notes and cannot escape any liability arising from it. -Under the Negotiable Instruments Law, persons who write their names on the face of promissory notes are makers, promising that they will pay to the order of the payee or any holder according to its tenor. Thus, even without the phrase personal capacity, Roxas will still be primarily liable as a joint and several debtor under the notes considering that his intention to be liable as such is manifested by the fact that he affixed his signature on each of the promissory notes twice which necessarily would imply that he is undertaking the obligation in two different capacities, official and personal. -Unnoticed by both the trial court and the Court of Appeals, a closer examination of the signatures affixed by Roxas on the promissory notes, readily reveals that portions of his signatures covered portions of the typewritten words personal capacity indicating with certainty that the typewritten words were already existing at the time Roxas affixed his signatures thus demolishing his claim that the typewritten words were just inserted after he signed the promissory notes. If what he claims is true, then portions of the typewritten words would have covered portions of his signatures, and not vice versa. -As to the third promissory note, the copy submitted is not clear so that this Court could not discern the same observations on the notes. - The 3 promissory notes uniformly provide: FOR VALUE RECEIVED, I/We jointly, severally and solidarily, promise to pay to PHILTRUST BANK or order... -An instrument which begins with I, We, or Either of us promise to pay, when signed by two or more persons, makes them solidarily liable. Also, the phrase joint and several binds the makers jointly and individually to the payee so that all may be sued together for its enforcement, or the creditor may select one or more as the object of the suit. Having signed under such terms, Roxas assumed the solidary liability of a debtor and Philtrust Bank may choose to enforce the notes against him alone

or jointly with Astro. REQUIS Roxas claim that the phrases in his personal capacity and in his official capacity were inserted on the notes without his knowledge was correctly disregarded by the RTC and the Court of Appeals. It is not disputed that Roxas does not deny that he signed the notes twice. Roxas failed to prove the truth of such allegations. Bare allegations, when unsubstantiated by evidence, documentary or otherwise, are not equivalent to proof under our Rules of Court. -Roxas is a businessman who is presumed to take ordinary care of his concerns. Clearly, he knew the nature of the transactions and documents involved as he not only executed these notes on two different dates but he also executed, and again, signed twice, a continuing Surety ship Agreement notarized on July 31, 1981, wherein he guaranteed, jointly and severally with Astro the repayment of P3,000,000.00 due to Philtrust. Such continuing suretyship agreement even re-enforced his solidary liability Philtrust because as a surety, he bound himself jointly and severally with Astros obligation. -Philguarantee has all the right to proceed against petitioner, it is subrogated to the rights of Philtrust to demand for and collect payment from both Roxas and Astro since it already paid the value of 70% of the loan obligation. -Subrogation is the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights. It may either be legal or conventional. Legal subrogation is that which takes place without agreement but by operation of law because of certain acts. Instances of legal subrogation are those provided in Article 1302 of the Civil Code. Conventional subrogation, on the other hand, is that which takes place by agreement of the parties. -Roxas acquiescence is not necessary for subrogation to take place because the instant case is one of the legal subrogation that occurs by operation of law, and without need of the debtors knowledge. Further, Philguarantee, as guarantor, became the transferee of all the rights of Philtrust as against Roxas and Astro because the guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor. Disposition Decision of the Court of Appeals AFFIRMED in toto.

[2]

Law 108: Negotiable Instruments REHABILITATION FINANCE CORPORATION v. COURT OF APPEALS [Madrid and Anduiza] 94 Phil. 984; CONCEPCION; May 14, 1954 ~marge~

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[2]

WON the debtors were entitled to pay the obligation prior to Oct. 15, 1951 HELD: YES -At the outset, it should be noted that the makers of the promissory note quoted above promised to pay the obligation evidenced thereby "on or before October 31, 1951." Although the full amount of said obligation was not demandable prior to October 31, 1951, in view of the provision of the note relative to the payment in ten (10) annual installments, it is clear, therefore, that the makers or debtors were entitled to make a complete settlement of the obligation at any time before said date.

FACTS -Jesus de Anduiza & Quinatana Cano borrowed money from the Agricultural and Industrial Bank (now RFC), as evidenced by a promissory note dated October 31, 1941. In said note, they promised to pay the AIB, or order, on or before October 31, 1951, the sum of P13,800.00, with interest at the rate of 6% p.a.. Said note also recited that payments were to be made in ten equal annual installments in accordance with the given schedule of amortizations. -Mortgagors Anduiza and Cano failed to pay the yearly amortizations that fell due on October 31, 1942 and 1943. Learning of this, Estelito Madrid (who temporarily lived in the house of Anduiza) offered to pay and actually paid on October 30, 1944 the full amount of said indebtedness to AIB/RFC. -July 30, 1948: Madrid instituted the present action asking the court to (a) declare as paid the P16,425.17 Anduiza owed the AIB/RFC; (b) order AIB/RFC to cancel the mortgage and release the properties; (c) condemn Anduiza to pay Madrid the P16,425.17 with legal interest, etc. -In answer, AIB/RFC prayed that the complaint be dismissed. The bank argued that in as much as Madrids payment was unauthorized by Anduiza, Madrids deposit in the sum of P16,425.17 was null and void in accordance with EO No. 49, series of 1945. Anduiza, on the other hand, alleged that when Madrid paid his debt, the same was not yet due and demandable; hence, he may not be compelled to pay the latter. -RTC dismissed the complaint. On appeal, the CA reversed and directed AIB/RFC to cancel the mortgage and Anduiza to pay Madrid the P16,425.17. Hence this appeal by certiorari. AIB/RFCs Arguments: that payments by Madrid were made against the express will of Anduiza and over the objection of the Bank, hence not valid; that the obligation in question was not fully due and demandable at the time of the payments ISSUE (related to NEGO)

Another Issue: WON payment by third person [Madrid] was valid

YES. Madrid was entitled to pay the obligation of Anduiza irrespective of the latter's will or that of the Bank, and even over the objection of either or both. -Article 1158 of the Civil Code of Spain, which was in force in the Phils. at the time of the payments under consideration and of the institution of the present case provides: "Payment may be made by any person, whether he has an interest in the performance of the obligation or not, and whether the payment is known and approved by the debtor or whether he is unaware of it. One who makes a payment for the account of another may recover from the debtor the amount of the payment, unless it was made against his express will. In the latter case he can recover from the debtor only in so far as the payment has been beneficial to him." [The decision also cited comments from Manresa, Mucius Scaevola and Sanchez Roman - all in Spanish! I will not attempt to translate them. They do not deal with the NEGO topic under consideration. ^_^] -Payments in question were not made against the objection either of Anduiza or of the Bank! Anduiza impliedly, but clearly, acquiesced in the validity of the payment when he joined Madrid in appealing the decision of CFI Manila. Also, AIB/RFC issued receipts acknowledging payment w/out qualification and demanded a signed statement of Anduiza sanctioning said payments merely as a condition precedent, not to its acceptance, which had already been made, but to the execution of the deed of cancellation of the mortgage constituted in favor of said institution.

-This condition was null and void, for the creditor Bank had no other right than to exact payment. After such payment, the obligation in question, as regards said creditor, and the latters status and rights as such creditor, become automatically extinguished. Hence: (1) The good or bad faith of the payor is immaterial. The exercise of a right, vested by law without any qualification, can hardly be legally considered as tainted with bad faith. (2) The Bank cannot invoke the provision that the payor "may only recover from the debtor insolar as the payment has been beneficial to him," when made against his express will. This is a defense that may be availed of by the debtor, not by the Bank, for it affects solely the rights of the former. Disposition: CA affirmed. METROPOLITAN BANK & TRUST COMPANY V CA (GOLDEN SAVINGS & LOAN ASSOC., INC.) 194 SCRA 169; CRUZ; February 28, 1991 ~anton~ FACTS -Metropolitan Bank and Trust Co. (Metrobank) is a commercial bank, while Golden Savings and Loan Association (Golden Savings) was at that time operating in Calapan, Mindoro. -Jan. 1979: Eduardo Gomez opened an account with Golden Savings and deposited over a period of 2 months 38 treasury warrants totaling P1.755M. All were drawn by the Philippine Fish Marketing Authority and signed by its General Manager. Six were directly payable to Gomez while the others appeared to have been indorsed by their respective payees, with Gomez as second indorser. -On various dates between June 25 and July 16, 1979, all the warrants were subsequently indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account in the Metrobank branch in Calapan. They were sent for clearing by the branch office to the principal office of Metrobank, which forwarded them to the Bureau of Treasury for special clearing. -More than two weeks after the deposits, Castillo went to the Calapan branch several times to ask whether the warrants had been cleared. She was told to wait, and Gomez was not allowed to withdraw from his account.

[3]

Law 108: Negotiable Instruments

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[3]

-Exasperated over Castillos repeated inquiries and also as an accommodation for a valued client, the petitioner says it finally decided to allow Golden Savings to withdraw from the proceeds of the warrants. -Withdrawals were made three times, totaling P968,000.00. -In turn, Golden savings subsequently allowed Gomez to make withdrawals from his own account, totaling P1.168M from the proceeds of the apparently cleared warrants. -Jul. 21, 1979: Metrobank informed Golden Savings that 32 of the warrants had been dishonored by the Bureau on Jul. 19, 1979, and demanded Golden Savings to refund the amount previously withdrawn. Golden Savings refused, forcing Metrobank to sue (after trial trial court ruled in favor of Golden Savings). ISSUE(S) 1. WON Metrobank should be allowed to charge back any amount erroneously credited. 2. WON CA erred in holding that the treasury warrants involved in this case are not negotiable instruments. HELD 1. NO -Golden Savings had no clearing facilities of its own. It relied on Metrobank to determine the validity of the warrants through its own services. The proceeds of the warrants were withheld from Gomez until Metrobank allowed Golden Savings itself to withdraw them from its own deposit. It was only when Metrobank gave the go-signal that Gomez was finally allowed to withdraw. -Metrobank exhibited extraordinary carelessness for allowing three withdrawals without waiting for clearance. It was indeed negligent in giving Golden Savings the impression that the treasury warrants had been cleared and that, consequently, it was safe to allow Gomez to withdraw the proceeds thereof from his account with it. -Without such assurance, Golden Savings would not have allowed the withdrawals; with such assurance, there was no reason not to allow the withdrawal. Golden Savings might even have incurred liability for its refusal to return the money that to all appearances belonged to the depositor, who could therefore withdraw it any time.

-The argument that Golden Savings should have exercised more care in checking the circumstances does not hold water. It was Gomez who was entrusting the warrants, not Golden Savings that was extending him a loan. There was no question of Gomezs identity or of the genuineness of his signature. 2. NO. Clearly stamped on the face of the treasury warrants is the word non-negotiable; it is indicated that they are payable from a particular fund, Fund 501.

to withdraw this amount from his deposit because of the dishonor of the warrants. GARCIA V LLAMAS 417 SCRA 292 ; Panganiban; December 8, 2003 ~jonas~

Reasoning

SECTION 1.Form of negotiable instruments.An instrument to be negotiable must conform to the following requirements: xxx (b) Must contain an unconditional promise or order to pay a sum

of money.

SECTION 2.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 xxx

But an order or promise to pay out of a particular fund is not unconditional.

-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 nonnegotiable. There should be no question that the exception on Sec 3 of the NIL is applicable in the case. -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 Sec. 66 of the NIL. This law is not applicable to non-negotiable treasury warrants. -Golden Savings never represented that the warrants were negotiable but signed them only for the purpose of depositing them for clearance. DISPOSITION: The challenged decision is affirmed. The amount Gomez withdrew must be charged not to Golden Savings but to Metrobank, which must bear the consequences of its own negligence. But the balance of P586,589.00 should be debited to Golden Savings, as obviously Gomez can no longer be permitted

FACTS -A complaint for sum of money and damages was filed in the RTC by herein respondent Dionisio Llamas against herein Petitioner Romeo Garcia and Eduardo de Jesus, alleging (1) that petitioner and de Jesus borrowed P400k from respondent & executed a promissory note wherein they bound themselves jointly and severally; and (2) that the loan has long been overdue and, despite repeated demands, petitioner and de Jesus have failed and refused to pay it. Annexed to the complaint were the promissory note and a demand letter by respondent addressed to petitioner and de Jesus. - Petitioner Garcia, in his Answer, averred that he assumed no liability under the promissory note because he signed it merely as an accommodation party for de Jesus; and, alternatively, that he is relieved from any liability arising from the note as the loan had been paid by de Jesus by means of a check; and that, in any event, the issuance of the check and respondent's acceptance thereof novated the note. Respondents reply to Petitioner's answer asserted that the loan remained unpaid because the check issued by de Jesus bounced. Annexed to the reply were the face of the check and the reverse side thereof. - During the pre-trial conference de Jesus and his lawyer did not appear nor file any pre-trial brief. Neither did Petitioner Garcia file a pre-trial brief, and his counsel even manifested that he would no longer present evidence. The trial court gave respondent permission to present his evidence ex parte against de Jesus; and, as regards Petitioner Garcia, the trial court directed respondent to file a motion for judgment on the pleadings, and for Petitioner Garcia to file his comment or opposition thereto. - On July 7, 1998, the RTC disposed of the case by rendering judgment on the pleadings against petitioner and De Jesus, ordering them to pay, jointly and severally, the respondent the principal amount of P400k plus 5% interest thereon per month until the same shall have been fully paid, less the amount of

[4]

Law 108: Negotiable Instruments

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[4]

P120k representing interests already paid by de Jesus; & P100k as attorney's fees plus appearance fee of P2,000.00 for each day of court appearance, and the costs of the suit. - The CA ruled that the trial court had erred when it rendered a judgment on the pleadings against De Jesus as his Answer raised genuinely contentious issues and he was still required to present his evidence ex parte. As to petitioner, the CA treated his case as a summary judgment, because his Answer had failed to raise even a single genuine issue regarding any material fact. The appellate court ruled that no novation - express or implied - had taken place when respondent accepted the check from De Jesus. According to the CA, the check was issued precisely to pay for the loan that was covered by the promissory note jointly and severally undertaken by petitioner and De Jesus. Respondent's acceptance of the check did not serve to make De Jesus the sole debtor because, first, the obligation incurred by him and petitioner was joint and several; and, second, the check - which had been intended to extinguish the obligation - bounced upon its presentment. ISSUE WON the note was negotiable HELD NO. Petitioner avers that as a mere accommodation party, he was released as obligor when respondent agreed to extend the term of the obligation. This reasoning is misplaced, because the note herein is not a negotiable instrument. The note reads:

cannot avail himself of the NIL's provisions on the liabilities and defenses of an accommodation party. A non-negotiable note is merely a simple contract in writing and is evidence of such intangible rights as may have been created by the assent of the parties. The promissory note is thus covered by the general provisions of the Civil Code, not by the NIL. Even granting that the NIL was applicable, petitioner would be liable for the promissory note. Under Art. 29 of Act 2031, an accommodation party is liable for the instrument to a holder for value even if the latter knew the former to be only an accommodation party. The relation between an accommodation party and the party accommodated is, in effect, one of principal and surety. It is a settled rule that a surety is bound equally and absolutely with the principal and is deemed an original promisor and debtor from the beginning. -The liability is immediate and direct. Disposition Petition denied. Assailed decision affirmed. GSIS V CA (RACHO) 170 SCRA 530; REGALADO; February 23, 1989 ~monch~ NATURE Petition to review the judgment of the CA FACTS -Mr. and Mrs. Racho, together with Mr. and Mrs. Lagasca, executed 2 deeds of mortgage (11.5K and 3k). A parcel of land co-owned by the mortgagor spouses was given as security. A few years later, the Lagascas executed an instrument denominated Assumption of Mortgage, thus assuming sole responsibility of obligation to the GSIS. -The Lagascas failed to pay the amortizations. The land was extrajudicially foreclosed. -2 years later, the Rachos filed a complaint against the Lagascas and GSIS, praying that the foreclosure be declared void. They alleged that they signed the mortgage contracts not as sureties or guarantors of the Lagascas but they merely gave their common property to the latter who were to solely benefit from the loans. -RTC dismissed the case. The CA reversed, saying that the Rachos were an accommodation party. The mortgage was

therefore void as the GSIS failed to give personal notice (notice given was thru publication) to them as to the delinquency of the amortizations and as to the subsequent foreclosure. Thus, the foreclosure was declared void. ISSUE/S 1. WON the promissory note was a negotiable instrument 2. WON the property of the Rachos was liable under the mortgage contracts 3. WON there was a proper notice of the foreclosure HELD 1. NO

Ratio A negotiable instrument must be payable to order or to

bearer

Reasoning Both parties relied on Sec. 29 of the Negotiable

PROMISSORY NOTE P400,000.00 RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED THOUSAND PESOS, Philippine Currency payable on or before January 23, 1997 at No. 144 K-10 St. Kamias, Quezon City, with interest at the rate of 5% per month or fraction thereof. It is understood that our liability under this loan is jointly and severally [sic].
Done at Quezon City, Metro Manila this 23rd day of December, 1996. -By its terms, the note was made payable to a specific person rather than to bearer or to order - a requisite for negotiability under Act 2031, the Negotiable Instruments Law (NIL). Petitioner

instruments law, which defined the meaning of an accommodation party. Said provision is not applicable since the promissory note is not a negotiable instrument. It not was directly payable to a specified party, GSIS. 3. YES Ratio Article 2085 of the Civil code says third persons who are not parties may secure an obligation by mortgaging their own property. Reasoning So long as valid consent was given, the fact that the loans were solely for the benefit of the Lagasca spouses would not invalidate the mortgage with respect to Rachos share in the property. In consenting thereto, their share in the property would secure the performance of the principal obligation. 3. YES Ratio Act 3135 does not require personal notice to the mortgagor. Notice thru publication is sufficient Disposition Judgment reversed. CONSOLIDATED PLYWOOD INDUSTRIES, INC. (Wee and Vergara) V. IFC LEASING AND ACCEPTANCE CORP 149 SCRA 449; GUTIERREZ ; April 30, 1987 ~ice~ NATURE

[5]

Law 108: Negotiable Instruments

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[5]

Petition for Certiorari FACTS -Consolidated (petitioner) is a corporation engaged in the logging business, it needed 2 units of tractors for its projects. Atlantic Gulf & Pacific Company of Manila knew of the need and thus offered 2 used tractors to petitioner through its sister company and marketing arm, Industrial Products Marketing (the "sellerassignor"). Petitioner inspected the tractors while seller-assignor assured petitioner-corporation that the "Used" Allis Crawler Tractors which were being offered were fit for the job, and gave the corresponding warranty of ninety (90) days performance of the machines and availability of parts. With said assurance and warranty, and relying on the seller-assignor's skill and judgment, petitioner-corporation through petitioners Wee and Vergara, president and vice-president, respectively, agreed to purchase on installment said two (2) units of "Used" Allis Crawler Tractors. It also paid the down payment of Two Hundred Ten Thousand Pesos (P210,000.00). -Seller-assignor issued the sales invoice for the two (2) units of tractors. At the same time, the deed of sale with chattel mortgage with promissory note was executed. Simultaneously with the execution of the deed of sale with chattel mortgage with promissory note, the seller-assignor, by means of a deed of assignment, assigned its rights and interest in the chattel mortgage in favor of the respondent (IFC Leasing). -Barely fourteen (14) days had elapsed after their delivery when one of the tractors broke down and after another nine (9) days, the other tractor likewise broke down. -Vergara informed seller-assignor and asked for prompt action. The seller-assignor sent to the jobsite its mechanics to conduct the necessary repairs, but the tractors did not come out to be what they should be after the repairs were undertaken because the units were no longer serviceable. -Vergara advised the seller-assignor that the payments of the installments as listed in the promissory note would likewise be delayed until the seller-assignor completely fulfills its obligation under its warranty. Since the tractors were no longer serviceable, Wee asked the seller-assignor to pull out the units and have them reconditioned, and thereafter to offer them for sale. The proceeds were to be given to the respondent and the excess, if any, to be

divided between the seller-assignor and petitioner-corporation which offered to bear one-half (1/2) of the reconditioning cost. -No response was received by the petitioner-corporation and despite several follow-up calls, the seller-assignor did nothing with regard to the request, until the complaint in this case was filed by the IFC. -TC and IAC granted the complaint. ISSUE 1. [not important in our discussion] re: warranty held there is warranty and it could be rescinded if breached) 2. WON the promissory note in question is a negotiable instrument HELD No, it is not a negotiable instrument. -The pertinent portion of the note is as follows: "FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL PRODUCTS MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS & 71/100 only (P1,093,789.71), Philippine Currency, the said principal sum, to be payable in 24 monthly installments starting July 15, 1978 and every 15th of the month thereafter until fully paid. ... ." -"The instrument in order to be considered negotiable must contain the so called 'words of negotiability' ---- i.e., must be payable to 'order' or 'bearer'. These words serve as an expression of consent that the instrument may be transferred. This consent is indispensable since a maker assumes greater risk under a negotiable instrument than under a non-negotiable one. . . . . xxx xxx xxx "When instrument is payable to order. "SEC. 8. 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 . . . xxx xxx xxx "These are the only two ways by which an instrument may be made payable to order. There must always be a specified person named in the instrument. It means that the bill or note is to be paid to the person designated in the instrument or to any person to whom he has indorsed and delivered the same. Without the

words 'or order' or 'to the order of,' the instrument is payable only to the person designated therein and is therefore non-negotiable. Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a negotiable instrument, but will merely 'step into the shoes' of the person designated in the instrument and will thus be open to all defenses available against the latter." -Therefore, considering that the subject promissory note is not a negotiable instrument, it follows that the respondent can never be a holder in due course but remains a mere assignee of the note in question. Thus, the petitioner may raise against the respondent all defenses available to it as against the seller-assignor, Industrial Products Marketing. -This being so, there was no need for the petitioner to implead the seller-assignor when it was sued by the respondent-assignee because the petitioner's defenses apply to both or either of them. -The records also show that respondent IFC knew that they were mere assignees. -A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed of Assignment and the Disclosure of Loan/Credit Transaction shows that said documents evidencing the sale on installment of the tractors were all executed on the same day by and among the buyer, which is herein petitioner Consolidated Plywood Industries, Inc.; the seller-assignor which is the Industrial Products Marketing; and the assignee-financing company, which is the respondent. Therefore, the respondent had actual knowledge of the fact that the seller-assignor's right to collect the purchase price was not unconditional, and that it was subject to the condition that the tractors sold were not defective. The respondent knew that when the tractors turned out to be defective, it would be subject to the defense of failure of consideration and cannot recover the purchase price from the petitioners. Even assuming for the sake of argument that the promissory note is negotiable, the respondent, which took the same with actual knowledge of the foregoing facts so that its action in taking the instrument amounted to bad faith, is not a holder in due course. As such, the respondent is subject to all defenses which the petitioners may raise against the sellerassignor. -Lastly, the respondent failed to present any evidence to prove that it had no knowledge of any fact, which would justify its act of taking the promissory note as not amounting to bad faith.

[6]

Law 108: Negotiable Instruments

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[6]

-Sections 52 and 56 of the Negotiable Instruments Law provide that: "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. xxx xxx xxx "(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. xxx xxx xxx "SEC. 56. WHAT CONSTITUTES NOTICE OF DEFECT. To constitute 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 amounts to bad faith." -We subscribe to the view of Campos and Campos that a financing company is not a holder in good faith as to the buyer, to wit: "In installment sales, the buyer usually issues a note payable to the seller to cover the purchase price. Many times, in pursuance of a previous arrangement with the seller, a finance company pays the full price and the note is indorsed to it, subrogating it to the right to collect the price from the buyer, with interest. With the increasing frequency of installment buying in this country, it is most probable that the tendency of the courts in the United States to protect the buyer against the finance company will find judicial approval here. Where the goods sold turn out to be defective, the finance company will be subject to the defense of failure of consideration and cannot recover the purchase price from the buyer. As against the argument that such a rule would seriously affect 'a certain mode of transacting business adopted throughout the State,' a court in one case stated: "'It may be that our holding here will require some changes in business methods and will impose a greater burden on the finance companies. We think the buyer ---- Mr. & Mrs. General Public ---- should have some protection somewhere along the line. We believe the finance company is better able to bear the risk of the dealer's insolvency than the buyer and in a far better

position to protect his interests against unscrupulous and insolvent dealers . . . . "'If this opinion imposes great burdens on finance companies it is a potent argument in favor of a rule which will afford public protection to the general buying public against unscrupulous dealers in personal property..' (Mutual Finance Co. v. Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953])" Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law, Third Edition, p. 128).' " -In like manner, therefore, even assuming that the subject promissory note is negotiable, the respondent, a financing company which actively participated in the sale on installment of the subject two Allis Crawler tractors, cannot be regarded as a holder in due course of said note. It follows that the respondent's rights under the promissory note involved in this case are subject to all defenses that the petitioners have against the sellerassignor, Industrial Products Marketing For Section 58 of the Negotiable Instruments Law provides that "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. . . . ." -Prescinding from the foregoing and setting aside other peripheral issues, we find that both the trial and respondent appellate court erred in holding the promissory note in question to be negotiable. Such a ruling does not only violate the law and applicable jurisprudence, but would result in unjust enrichment on the part of both the seller-assignor and respondent assignee at the expense of the petitioner-corporation which rightfully rescinded an inequitable contract. We note, however, that since the sellerassignor has not been impleaded herein, there is no obstacle for the respondent to file a civil suit and litigate its claims against the seller-assignor in the rather unlikely possibility that it so desires. Disposition Annulled and set aside. ANG TEK LIAN V CA 87 PHIL 383; BENGZON; September 25, 1950 ~rean~ NATURE Petition for review on certiorari

FACTS -Ang Tek Lian, knowing he had no funds therefor, drew on Saturday, Nov. 16, 1946, 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. On Nov. 18, 1946, 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. -For having issued a rubber check, Ang Tek Lian was convicted of estafa in the CFI of Manila. CA affirmed the verdict. Hence, this petition with SC. -Ang Tek Lian argues that as the check had been made payable to "cash" and had not been endorsed by Ang Tek Lian, he is not guilty of the offense charged. Based on the proposition that "by uniform practice of all banks in the Philippines a check so drawn is invariably dishonored," the following line of reasoning is advanced in support of the argument: "When the offended party accepted the check from defendant, he did so with full knowledge that it would be dishonored upon presentment. In that sense, defendant could not be said to have acted fraudulently because the complainant, in so accepting the check as it was drawn, must be considered, by every rational consideration, to have done so fully aware of the risk he was running thereby." ISSUE WON Ang Tek Lian is not guilty of estafa since the check had been made payable to cash and had not been endorsed by him. HELD 1. NO. Ang Tek is guilty of estafa. Ratio 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. Reasoning SC is not aware of the uniformity of such practice, as the defendant points out. Instances have undoubtedly occurred wherein the Bank required the indorsement of the drawer before honoring a check payable to "cash." But cases there are too,

[7]

Law 108: Negotiable Instruments

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[7]

where no such requirement had been made. It depends upon the circumstances of each transaction. - 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. In other words, the bank, to which the check is presented for payment, need not have the holder identified, and is not negligent in failing to do so. -Anyway, it is significant, and conclusive, that the form of the check in question was totally unconnected with its dishonor. CA declared that it was returned unsatisfied because the drawer had insufficient funds - not because the drawer's indorsement was lacking. Disposition Decision is AFFIRMED, with costs.

[8]

Law 108: Negotiable Instruments

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[8]

CHAPTER II: TRANSFER GREAT ASIAN SALES CENTER CORPORATION V CA (BANCASIA FINANCE AND INVESTMENT CORP) 381 SCRA 557; CARPIO; April 25, 2002 ~jojo~ FACTS -Great Asian is engaged in the business of buying and selling household appliances. 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 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 2nd 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 March 1981 and 1982, 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 in payment for appliances and other merchandise. Arsenio endorsed all the 15 checks by signing his name at the back of the checks. Eight of the dishonored checks bore the endorsement of Arsenio below the stamped name of Great Asian Sales Center, while the rest of the dishonored checks just bore the signature of Arsenio. The drawee banks dishonored the fifteen checks 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. After the drawee bank dishonored the checks, Bancasia sent letters to Tan Chong Lin, notifying him of the dishonor and demanding payment from him. Neither Great Asian nor Tan Chong Lin paid Bancasia the dishonored checks. -In June 1982, Bancasia filed a complaint for collection of a sum of money against Great Asian and Tan Chong Lin. Great Asian raised the alleged lack of authority of Arsenio to sign the Deeds of

Assignment as well as the absence of consideration and consent of all the parties to the Surety Agreements signed by Tan Chong Lin. ISSUES 1. WON Arsenio had authority to execute the Deeds of Assignment and thus bind Great Asian 2. WON Great Asian is liable to Bancasia under the Deeds of Assignment for breach of contract pursuant to the civil code, independent of the negotiable instruments law 3. WON Tan Chong Lin is liable to Great Asian under the surety agreements. HELD 1. YES -The Corporation Code of the Philippines vests in the board of directors the exercise of the corporate powers of the corporation, save in those instances where the Code requires stockholders approval for certain specific acts. In the ordinary course of business, a corporation can borrow funds or dispose of assets of the corporation only on authority of the board of directors. The board of directors normally designates one or more corporate officers to sign loan documents or deeds of assignment for the corporation. -To secure a credit accommodation from Bancasia, the board of directors of Great Asian adopted 2 board resolutions on different dates. (text of resolutions shown in case) As plain as daylight, the 2 board resolutions clearly authorized Great Asian to secure a loan or discounting line from Bancasia. The 2 board resolutions also categorically designated Arsenio as the authorized signatory to sign and deliver all the implementing documents, including checks, for Great Asian. There is no iota of doubt whatsoever about the purpose of the 2 board resolutions, and about the authority of Arsenio to act and sign for Great Asian. Arsenio had all the proper and necessary authority from the board of directors of Great Asian to sign the Deeds of Assignment and to endorse the fifteen postdated checks. Arsenio signed the Deeds of Assignment as agent and authorized signatory of Great Asian under an authority expressly granted by its board of directors. The signature of Arsenio on the Deeds of Assignment

is effectively also the signature of the board of directors of Great Asian, binding on the board of directors and on Great Asian itself. 2. YES -Bancasias complaint against Great Asian is founded on the latters breach of contract under the Deeds of Assignment. The Deeds of Assignment uniformly provided for one vital suspensive condition: in case the drawers fail to pay the checks on maturity, Great Asian obligated itself to pay Bancasia the full face value of the dishonored checks, including penalty and attorneys fees. The failure of the drawers to pay the checks is a suspensive condition, the happening of which gives rise to Bancasias right to demand payment from Great Asian. This conditional obligation of Great Asian arises from its written contracts with Bancasia as embodied in the Deeds of Assignment. -By express provision in the Deeds of Assignment, Great Asian unconditionally obligated itself to pay Bancasia the full value of the dishonored checks. In short, Great Asian sold the postdated checks on with recourse basis against itself. This is an obligation that Great Asian is bound to faithfully comply because it has the force of law as between Great Asian and Bancasia, as provided in Art 1159 of the Civil Code. Great Asian and Bancasia agreed on this specific with recourse stipulation, despite the fact that the receivables were negotiable instruments with the endorsement of Arsenio. The contracting parties had the right to adopt the stipulation which is separate and distinct from the warranties of an endorser under the Negotiable Instruments Law. -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. -There is nothing in the Negotiable Instruments Law or in the Financing Company Act, that prohibits Great Asian and Bancasia parties from adopting the with recourse stipulation uniformly found in the Deeds of Assignment. Instead of being negotiated, a negotiable instrument may be assigned. Assignment of a negotiable instrument is actually the principal mode of conveying

[9]

Law 108: Negotiable Instruments

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[9]

accounts receivable under the Financing Company Act. Since in discounting of receivables the assignee is subrogated as creditor of the receivable, the endorsement of the negotiable instrument becomes necessary to enable the assignee to collect from the drawer. This is particularly true with checks because collecting banks will not accept checks unless endorsed by the payee. The purpose of the endorsement is merely to facilitate collection of the proceeds of the checks.

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. 3. YES -Tan Chong Lin, by signing the Surety Agreements, explicitly and unconditionally bound himself to pay Bancasia, solidarily with Great Asian, if the drawers of the checks fail to pay on due date. The condition on which Tan Chong Lins obligation hinged had happened. As surety, Tan Chong Lin automatically became liable for the entire obligation to the same extent as Great Asian.

-The purpose of the endorsement is not to make the assignee finance company a holder in due course because policy considerations militate against according finance companies the rights of a holder in due course. Otherwise, consumers who purchase appliances on installment, giving their promissory notes or checks to the seller, will have no defense against the finance company should the appliances later turn out to be defective. Thus, the endorsement does not operate to make the finance company a holder in due course. For its own protection, therefore, the finance company usually requires the assignor, in a separate and distinct contract, to pay the finance company in the event of dishonor of the notes or checks.
-As endorsee of Great Asian, Bancasia had the option to proceed against Great Asian under the Negotiable Instruments Law. Had it so proceeded, the Negotiable Instruments Law would have governed Bancasias cause of action. Bancasia, however, did not choose this route. Instead, Bancasia decided to sue Great Asian for breach of contract under the Civil Code, a right that Bancasia had under the express with recourse stipulation in the Deeds of Assignment. The exercise by Bancasia of its option to sue for breach of contract under the Civil Code will not leave Great Asian holding an empty bag. Great Asian, after paying Bancasia, is subrogated back as creditor of the receivables. Great Asian can then proceed against the drawers who issued the checks. Even if Bancasia failed to give timely notice of dishonor, still there would be no prejudice whatever to Great Asian. 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:

[10]

Law 108: Negotiable Instruments

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[10]

CHAPTER III: HOLDER IN DUE COURSE YANG V COURT OF APPEALS [PCIB, FEBTC, Equitable Bank, Chandiramani, David] 409 SCRA 159; QUISUMBING; Aug 15, 2003 ~yella~ FACTS -Yang and Chandiramani entered into an agreement whereby the latter was to give Yang a PCIB managers check in the amount of P4.2M in exchange for two of Yangs managers checks each in the amount of P2.087M, both payable to the order of Fernando David. Yang and Chandiramani agreed that the difference of P26k in the exchange would be their profit to be divided equally between them. -Yang and Chandiramani also further agreed that the former would secure from FEBTC a dollar draft in the amount of US$200k payable to PCIB FCDU Account which Chandiramani would exchange for another dollar draft in the same amount to be issued by Hang Seng Bank Ltd. of Hong Kong. -Yang gave the checks and dollar drafts to her business associate Albert Liong to be delivered to Chandiramani by Liongs messenger Danilo Rodrigo. Chandiramani allegedly did not appear at the meeting place and Ranigo lost the checks and dollar drafts. -Yang requested FEBTC and Equitable to stop payment on the instruments she believed to be lost. However, the checks and drafts were not lost because Chandiramani was able to get hold of them and deliver them to Fernando David in exchange of US$360k. -FEBTC and Equitable stopped payment on the instruments. However upon representation of PCIB, FEBTC subsequently lifted the stop payment order on the dollar draft, TF enabling the holder to receive the amount of US$200k. -Yang lodged a Complaint for injunction and damages against Equitable, Chandiramani, and David, with prayer for a TRO, with the RTC. It was subsequently amended to include a prayer for Equitable to return to Yang the amount of P2.087 million with interest -Yang filed a separate case for injunction vs. FEBTC, PCIB, Chandiramani and David with the RTC. It was later amended to

include a prayer that defendants therein return to Yang the amount of P2.087million with interest. -David moved for dismissal, it was denied. Cases were consolidated. -RTC rendered judgment in favor of David rationcinating thus:

The evidence thus shows that defendant David was a holder in due course for the reason that the cashiers checks were complete on their face when they were negotiated to him. They were not yet overdue when he became the holder thereof and he had no notice that the said checks were previously dishonored
-Yangs MR denied. On appeal, CA affirmed RTC. ISSUE WON respondent Fernando David was a holder in due course

-Petitioner fails to point any circumstances 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 Chandiramanis duty to deliver the checks to David as payee. Court cannot hold David as guilty of gross neglect amounting to legal absence of good faith, absent any showing that there was something amiss about Chandiramanis acquisition or possession of the checks. ATRIUM MANAGEMENT CORPORATION V CA [E.T. Henry & Co., de Leon, de Leon, Hi-Cement Corp] 353 SCRA 23; PARDO; February 28, 2001 ~javi~ FACTS -Hi-Cement Corporation (HCC) (through its corporate signatories de Leon and de las Alas) issued checks in favor of E.T. Henry and Co. Inc (ETH), as payee. ETH in turn endorsed the checks to petitioner Atrium Management Corp for valuable consideration. Upon presentment for payment, the drawee bank dishonored all four checks for the reason payment stopped. Atrium instituted this action after its demand for payment of the value of the checks was denied. -RTC rendered a decision ordering de Leon, ETC and HCC to pay Atrium, jointly and severally, P2 million, ++. -CA modified the decision, absolving HCC from liability and dismissing the complaint against it, in part because the subject checks were not issued for valuable consideration. ISSUE WON Atrium was a holder in due course and for value HELD: NO

HELD: YES. -Every holder of a negotiable instrument is deemed prima facie a holder in due course. However, this presumption arises only in favor of a person who is the payee or indorsee of a bill or note who is in possession of it or the bearer thereof. What is vital to the resolution of the issue is the concurrence of all requisites in Section 52 of the Negotiable Instruments Law. -What constitutes a holder in due course xxx

-Petitioners challenge to Davids status as a holder in due course hinges on the allegation that the last two requisites in Section 52 are missing -Section 24 of the Negotiable Instruments Law creates a presumption that every party to an instrument acquired the same for a consideration of for value. The law creates a presumption in favor of David. Also, factual findings of the lower court showed that David gave Chandiramani US$360,000 in exchange of the said instruments. Absent any proof from petitioner to the contrary, the presumption imposed the law is to be upheld.

1. That it is complete and regular upon its face 2. That he became the holder of it before it was overdue, and without such notice that it has been previously dishonored, is such was a fact 3. That he took it in good faith and for value 4. That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect of the title of the person negotiating it

Reasoning The Negotiable Instruments Law, Section 52 defines

a holder in due course, thus: "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;

[11]

Law 108: Negotiable Instruments

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[11]

(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 person negotiating it." -Here, the checks were crossed checks and specifically indorsed for deposit to payee's account only. From the beginning, Atrium was aware of the fact that the checks were all for deposit only to payee's account, meaning E.T. Henry. Clearly, then, Atrium could not be considered a holder in due course. -However, 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 can not 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. Dispositive decision of CA is affirmed BATAAN CIGAR AND CIGARETTE FACTORY, INC. V CA [State Investment House, Inc.] 230 SCRA 643; NOCON; March 3. 1994 ~brian b~ FACTS -Petitioner, a corp. involved in the manufacturing of cigarettes, engaged one of its suppliers, King Tim Pua George (herein after, George King), to deliver 2,000 bales of tobacco leaf starting Oct 1978. In consideration thereof, BCCFI, on July 13, 1978 issued crossed checks post dated sometime in March 1979 in the totaling P820K. -Relying on the King's representation that he would complete delivery w/in 3 mos. from Dec 5, 1978, petitioner agreed to purchase addl. 2,500 bales of tobacco leaves, despite the

supplier's failure to deliver in accordance with their earlier agreement. Again petitioner issued post dated crossed checks in the total amount of P1.1M payable sometime in Sep 1979. -During these times, King was simultaneously dealing with SIHI. On July 19, 1978, he sold at a discount check TCBT 551826 (P164K), post dated March 31, 1979, drawn by petitioner, w/ King as payee to SIHI. On Dec 19 and 26, 1978, he again sold to respondent checks TCBT Nos. 608967 & 608968, (both P100K) post dated Sep 15 & 30, 1979 respectively, drawn by petitioner in favor of King. -King failed to deliver the bales of tobacco leaf as agreed despite petitioner's demand. BCCFI issued on March 30, 1979, a stop payment order on all checks payable to George King, including check TCBT 551826, and subsequently, on checks TCBT Nos. 608967 & 608968 on Sep 14 & 28, 1979, respectively. -Efforts of SIHI to collect from BCCFI having failed, it instituted the present case, naming only BCCFI as party defendant. TC pronounced SIHI as having a valid claim being a holder in due course. ISSUE WON SIHI, a second indorser, a holder of crossed checks, is a holder in due course HELD: NO. -Crossing of 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 Negotiable Instruments Law, and as such the consensus of authority is to the effect that the holder of the check is not a holder in due course. Reasoning A check is defined by law as a bill of exchange drawn on a bank payable on demand. There are a variety of checks, the more popular of which are the memorandum check, cashier's check, traveler's check and crossed check. Crossed check is one where two parallel lines are drawn across its face or across a corner thereof. It may be crossed generally or specially. -A check is crossed specially when the name of a particular banker or a company is written between the parallel lines drawn. It is crossed generally when only the words "and company" are

written or nothing is written at all between the parallel lines. It may be issued so that the presentment can be made only by a bank. Veritably the Negotiable Instruments Law (NIL) does not mention "crossed checks," although Article 541 of the Code of Commerce refers to such instruments. -According to commentators, the negotiability of a check is not affected by its being crossed, whether specially or generally. 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 the parallel lines. This is specially true in England where the NIL originated. -In the Philippine business setting, however, we used to be beset with bouncing checks, forging of checks, and so forth that banks have become quite guarded in encashing checks, particularly those which name a specific payee. Unless one is a valued client, a bank will not even accept second indorsements on checks. -In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of 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. -The facts in the present case are on all fours to the case of State Investment House, Inc. v. IAC. In that case, New Sikatuna Wood Industries, Inc. (NSWI) also sold at a discount to SIHI 3 post dated crossed checks, issued by Anita Pea Chua naming as payee NSWI. The court said: The 3 checks had been crossed generally and issued payable to NSWI w/c could only mean that the drawer had intended the same for deposit only by the rightful person, i.e. the payee named therein. Apparently, it was not the payee who presented the same for payment and therefore, there was no proper presentment, and the liability did not attach to the drawer. Thus, in the absence of due presentment, the drawer did not become liable. Consequently, no right of recourse is available to petitioner (SIHI) against the drawer of the subject checks, private respondent wife (Anita), considering that petitioner is not

[12]

Law 108: Negotiable Instruments

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo defrauding him.

[12]

the proper party authorized to make presentment of the checks in question. xxx xxx xxx That the subject checks had been issued subject to the condition that private respondents (Anita and her husband) on due date would make the back up deposit for said checks but w/c condition apparently was not made, thus resulting in the nonconsummation of the loan intended to be granted by private respondents to NSWI, constitutes a good defense against petitioner who is not a holder in due course. -In the present case, BCCFI's 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. -The foregoing does not mean, however, that respondent could not recover from the checks. The only disadvantage of a holder who is not a holder in due course is that the instrument is subject to defenses as if it were non-negotiable. Hence, respondent can collect from the immediate indorser, in this case, George King. Disposition Petition granted. RTC decision as affirmed by CA reversed. CHIANG YA MIN V CA [RCBC, Papercon, Tom Pek] 355 SCRA 608; GONZAGA-REYES; March 28, 2001 ~mini~ FACTS -Petitioner: in 1979, $100,000 was sent by Hang Lung Bank of Hong Kong to RCBC; the remittance was for petitioners own account and was intended to qualify him as a foreign investor under Philippine laws; he sent it himself prior to his arrival in the Philippines. He said when he checked on it in 1985, he found that the dollar deposit was transferred to the Shaw Blvd branch of RCBC and converted to a peso account, which had a balance of only P1,362.10 as of October, 1979. A letter from RCBC in 1985 said that the account was opened with an initial deposit of P729,752.20, and a total of P728,390 was withdrawn by way of 5 checks apparently issued by petitioner in favor of Papercon and Tom Pek. Thus, the balance of P1,362.10.

-Petitioner insists he did not cause the transfer of his money to the Shaw Blvd branch, nor its conversion to pesos and the subsequent withdrawals, nor did he authorize anyone to perform these acts. -RCBC, after petitioner adduced his evidence, filed a third-party complaint against Papercon and Tom Pek, admitting that plaintiff conclusively appeared to have deposited the sum of US$100k with the bank and said foreign currency deposit was converted, adopting the prevailing rate of interest at the time, to P730k and deposited to plaintiffs Current Account No. 12-2009 which he opened with Shaw Boulevard branch, after which plaintiff issued Check No. 492327 to third-party defendant Papercon. for the amount of P700k and Check NO. 492328 to third-party defendant Tom Pek for the amount of P12,700.00. Respondent bank thus contended that should it be made liable to petitioner, said thirdparty defendants as payees and beneficiaries of the issued checks should be held solidarily liable with it. -Tom Pek and Papercon did not deny receiving the checks worth P712.7k but argued that unless proven otherwise, the said checks should be presumed to have been issued in their favor for a sufficient and valuable consideration. -TC held RCBC liable for the $100k, saying that the withdrawals were not made by petitioner nor authorized by him. The court also concluded that the withdrawals couldnt have been possible without the collusion of officers and employees of RCBC. It held RCBC solely culpable and exonerated the other private respondents. After MR, the decision was amended to hold Papercon and Tom Pek solidarily liable with RCBC. -CA reversed the decision, finding that the opening of the account and the withdrawals were authorized by petitioner. Defendant and third-party defendants were absolved of any liability. -Petitioner is now seeking the reversal of the CA decision, maintaining that the withdrawals on his account were unauthorized by him and that respondent bank connived with third persons to defraud him. ISSUE WON petitioner has proved that respondent bank connived with private respondents and third party defendants Papercon and Tom Pek in allowing the withdrawals, knowing them to be unauthorized by the petitioner, and with the purpose of

HELD NO. There is no evidence to demonstrate that respondent bank RCBC and Papercon and Tom Pek colluded to defraud petitioner of his money. What the evidence establishes is that the opening of the account and the withdrawals were authorized by petitioner, and the signatures appearing on the checks were petitioners. -Under either theory of fraud or negligence, it is incumbent upon petitioner to show that the withdrawals were not authorized by him. If he is unable to do so, his allegations of fraud or negligence are unsubstantiated and the presumption that he authorized the said withdrawals will apply. -Petitioners allegation that he did not authorize the opening of the current account and the issuance of the checks was countered by private respondents through the testimony of Catalino Reyes, the accountant of Pioneer Business Forms, Inc. (another business venture of Tom Pek) to the effect that the opening of Current Account No. 12-2009 and the issuance of the questioned checks were all upon the instructions of petitioner. Reyes stated that he first met petitioner in January or February 1979 when the latter was introduced to him by Tom Pek. He and his fellow employees were advised by Tom Pek to "personally help (Chiang Yia Min) in all his personal accounts." Reyes was charged with working on the incorporation of Philippine Color Scanning, a new business venture where petitioner will be the GM. He also assisted petitioner when the latter applied for a change of visa from tourist to special non-immigrant. Reyes testified that on the first week of February 1979, petitioner asked him to pick up the US$100k which he caused to be remitted in compliance with the capital requirements for foreign investors at Pacific Banking Corporation. Bringing with him the letter of advise from the bank, Reyes did as he was told and the bank released to him a cashiers check representing the peso equivalent of the US$100k. Reyes then showed the check to petitioner and upon the latters instructions, he went to the Shaw Boulevard branch of respondent bank to open a checking account in petitioners name, using the proceeds of the check as initial deposit. -Reyes describes the opening of the current account as having been done in haste, since petitioner was in a hurry to have the proceeds of the remittance credited to his checking account.

[13]

Law 108: Negotiable Instruments

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[13]

Because Reyes was well-known to the officers and employees of RCBC-Shaw Boulevard, he was allowed to bring out of the bank the application form, depositors card, and other forms which required petitioners signature as depositor. He then filled out the forms, and brought them to petitioner for signing. He witnessed petitioner sign the forms. Then he brought the signed forms, and petitioners passport, back to the bank, which approved the opening of the current account upon a comparison of the signatures on the forms and the passport. -The documentary evidence accurately supports Reyess statements. Pacific Banking Corporation confirmed receipt of the US$100k from Hang Lung Bank, Ltd. by telegraphic transfer on Feb 7, 1979. It had instructions to transmit the money "to Rizal Commercial Banking Corporation, Head Office, for (the) account of Chiang Yia Min"; however, the records also show that on Feb 8, 1979 Pacific Banking Corporation released the money to petitioner by way of Cashiers Check No. DD 244955, representing the peso equivalent of the US$100k, which check was in turn presented before the Board of Special Inquiry of the Bureau of Immigration as proof of petitioners compliance with the requirements for change of status from tourist to special nonimmigrant, i.e., foreign investor. On the same day, Feb 8, 1979, Current Account No. 12-2009, in the name of Chiang Yia Min, was opened in RCBC-Shaw Boulevard with an initial deposit of P729,752.20, "representing proceeds of inward remittance received from Pacific Banking Corporation." -There were five issued checks: two made payable to Papercon, and three made payable to cash (these three checks were all negotiated to Tom Pek). Catalino Reyes testified that on two separate instances, petitioner asked him to prepare two of the five checks questioned in this case, specifically, the check for P700k dated Feb 19, 1979 and payable to Papercon, and the check for P12,700.00, dated Feb 23, 1979 and payable to cash. He witnessed petitioner study the information typed on the checks, sign the checks, and hand them over to Tom Pek. The microfilm copies of these checks were submitted in evidence. They all bear the signature of petitioner. No shred of evidence was presented to show that the signatures were not petitioners. -Upon finding that the checks issued to Papercon and Tom Pek were in order, there being no indication that respondent bank colluded in paying the checks to them for any unlawful cause, or

was otherwise deceive or misled into doing the same, the presumption lies that they were holders for value and in good faith. Dispositive decision of CA is affirmed BANK OF THE PHIL. ISLANDS V CA [Eastern Plywood Corp. and Lim] 232 SCRA 302; DAVIDE; May 10, 1994 ~sarah~ FACTS -Eastern Plywood Corporation and Benigno D. Lim [officer and stockholder] held at least one joint bank account ("and/or" account) with the Commercial Bank and Trust Co. (CBTC), the predecessor-in-interest of petitioner BPI. -March 1975, a joint checking account ("and" account) with Lim in the amount of P120k was opened by Mariano Velasco with funds withdrawn from the account of Eastern and/or Lim. Various amounts were later deposited or withdrawn from the joint account of Velasco and Lim. The money therein was placed in the money market. -Velasco died on 7 April 1977. At the time of his death, the outstanding balance of the account stood at P662,522.87. On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim for himself and as Pres and GM of Eastern, of this amount was provisionally released and transferred to one of the bank accounts of Eastern with CBTC. -18 August 1978: Eastern obtained a loan of P73k from CBTC as "Additional Working Capital," evidenced by the "Disclosure Statement on Loan/Credit Transaction" (Disclosure Statement) signed by CBTC through its branch manager, Ceferino Jimenez, and Eastern, through Lim, as its Pres-GM. The loan was payable on demand with interest at 14% per annum. -For this loan, Eastern issued on the same day a negotiable promissory note for P73k payable on demand to the order of CBTC with interest at 14% per annum. The note was signed by Lim both in his own capacity and as Pres-GM of Eastern. No reference to any security for the loan appears on the note. In the Disclosure Statement, the box with the printed word "UNSECURED" was marked with "X". ---- meaning unsecured, while the line with the words "this loan is wholly/partly secured

by" is followed by the typewritten words "Hold-Out on 1:1 on C/A No. 2310-001-42," which refers to the joint account of Velasco and Lim with a balance of P331,261.44. -In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout Agreement," also dated 18 August 1978, wherein it was stated that "as security for the Loan [Lim and Eastern] have offered [CBTC] and the latter accepts a holdout on said [Current Account No. 2310-011-42 in the joint names of Lim and Velasco] to the full extent of their alleged interests therein as these may appear as a result of final and definitive judicial action or a settlement between and among the contesting parties thereto." Paragraph 02 of the Agreement provides as follows: Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust [CBTC], when and if their alleged interests in the Account Balance shall have been established with finality, ample and sufficient power as shall be necessary to retain said Account Balance and enable Comtrust to apply the Account Balance for the purpose of liquidating the Loan in respect of principal and/or accrued interest." And paragraph 05 thereof reads: The acceptance of this holdout shall not impair the right of Comtrust to declare the loan payable on demand at any time, nor shall the existence hereof and the non-resolution of the dispute between the contending parties in respect of entitlement to the Account Balance, preclude Comtrust from instituting an action for recovery against Eastply and/or Mr. Lim in the event the Loan is declared due and payable and Eastply and/or Mr. Lim shall default in payment of all obligations and liabilities thereunder." -In the meantime, a case for the settlement of Velasco's estate was filed with RTC Pasig. In said case, the whole balance of P331,261.44 in the said joint account of Velasco and Lim was being claimed as part of Velasco's estate. -9 Sept 1986, the intestate court granted the urgent motion of the heirs of Velasco to withdraw the deposit under the joint account of Lim and Velasco and authorized the heirs to divide among themselves the amount withdrawn. -2 Dec 1987: BPI filed with the RTC Manila a complaint against Lim and Eastern demanding payment of the promissory note for P73k. Defendants Lim and Eastern, in turn, filed a counterclaim against BPI for the return of the balance in the disputed account subject of the Holdout Agreement and the interests thereon after deducting the amount due on the promissory note.

[14]

Law 108: Negotiable Instruments

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[14]

-After due proceedings, RTC Manila dismissed the complaint and denied the counterclaim to avoid disturbing the resolution of the intestate court. -Both parties appealed to CA, which rendered a decision affirming the RTC decision. It, however, failed to rule on the defendants' partial appeal from the TC's denial of their counterclaim. Upon MR, CA promulgated an Amended Decision wherein it ruled that the settlement of Velasco's estate had nothing to do with the claim of the defendants for the return of the balance of their account with CBTC/BPI as they were not privy to that case, and that the defendants, as depositors of CBTC/BPI, are the latter's creditors; hence, CBTC/BPI should have protected the defendants' interest in the estate proceedings when the said account was claimed by Velasco's estate. It then ordered BPI "to pay defendants the amount of P331,261.44 representing the outstanding balance in the bank account of defendants." -22 April 1992: BPI failed the instant petition. ISSUES 1. WON BPI can demand payment of the loan of P73k despite the existence of the Holdout Agreement 2. WON BPI is still liable to the private respondents on the account subject of the Holdout Agreement after its withdrawal by the heirs of Velasco. HELD 1. YES. -The collection suit of BPI is based on the promissory note for P73k. On its face, the note is an unconditional promise to pay the said amount; it is a negotiable instrument. BUT BPI was not a holder in due course because the note was not indorsed to BPI by the payee, CBTC. Only a negotiation by indorsement could have operated as a valid transfer to make BPI a holder in due course. It acquired the note from CBTC by the contract of merger or sale between the two banks. BPI, therefore, took the note subject to the Holdout Agreement. -Holdout Agreement, par. 02: CBTC/BPI had every right to demand that Eastern and Lim settle their liability under the promissory note. It cannot be compelled to retain and apply the deposit in Lim and Velasco's joint account to the payment of the note. What the agreement conferred on CBTC was a power, not a

duty. Generally, a bank is under no duty or obligation to make the application. To apply the deposit to the payment of a loan is a privilege, a right of set-off which the bank has the option to exercise. -Also, par. 05 states that notwithstanding the agreement, CBTC was not in any way precluded from demanding payment from Eastern and from instituting an action to recover payment of the loan. What it provides is an alternative, not an exclusive, method of enforcing its claim on the note. When it demanded payment of the debt directly from Eastern and Lim, BPI had opted not to exercise its right to apply part of the deposit subject of the Holdout Agreement to the payment of the promissory note for P73k. Its suit for the enforcement of the note was then in order. 2. YES. -The counterclaim of Eastern and Lim for the return of the P331,261.44 was equivalent to a demand that they be allowed to withdraw their bank deposit. [Recall: Art. 1980, NCC: bank deposits governed by the provisions re: simple loan; Serrano vs. Central Bank of the Philippines: bank deposits are in the nature of irregular deposits; relationship between a depositor and a bank is one of creditor and debtor; bank deposit is payable on demand of depositor.] -The account was proved and established to belong to Eastern even if it was deposited in the names of Lim and Velasco. As the real creditor of the bank, Eastern has the right to withdraw it or to demand payment thereof. BPI cannot be relieved of its duty to pay Eastern simply because it already allowed the heirs of Velasco to withdraw the whole balance of the account. The petitioner should not have allowed such withdrawal. Order of the intestate court merely authorized the heirs of Velasco to withdraw account. BPI was not specifically ordered to release the account to the said heirs; hence, it was under no judicial compulsion to do so. -Payment made by the debtor to the wrong party does not extinguish the obligation as to the creditor who is without fault or negligence, even if the debtor acted in utmost good faith and by mistake as to the person of the creditor, or through error induced by fraud of a third person. Disposition Petition partly granted. CA decision re: dismissal of petitioner's complaint reversed and set aside; Award on counterclaim sustained subject to a modification of the interest.