[1] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V.

Quevedo [1]

CH. I: REQUISITES OF
NEGOTIABILITY REQUIS

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.
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.



REHABILITATION FINANCE CORPORATION v.
COURT OF APPEALS [Madrid and Anduiza]
94 Phil. 984; CONCEPCION; May 14, 1954
~marge~
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)
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.
[2] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [2]

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.
-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.
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 non-negotiable. 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 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~
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
[3] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [3]

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 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:
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 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 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
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 "seller-assignor"). 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
[4] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [4]

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 seller-assignor.
-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.
-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 seller-assignor,
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 seller-assignor 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.

[5] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [5]

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, 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.
[6] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [6]

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 2
nd
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 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.
-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: 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.

[7] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [7]

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

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
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
-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.
-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
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;
(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
[8] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [8]

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 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 non-consummation 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 third-party 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 defrauding him.

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.
[9] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [9]

-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. 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 non-immigrant,
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.
-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,
[10] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [10]

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.