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CONCEPTUAL FRAMEWORK
l. Birth/Creation of Negotiable Instruments (sec. 10-29)
II. Life (sec. 30-69)
Negotiability
Holder in due course
Parties
III. Death (sec. 70-189)
Proceedings
Defenses
Discharge
ACT NO. 2031
February 03, 1911
THE NEGOTIABLE INSTRUMENTS LAW
Introduction
History and Development
The term commercial paper refers to written promises or
obligations to pay sums of money that arise from the use of such
instruments as drafts, promissory notes, checks and trade
acceptances. (The most common instruments are checks and
promissory notes.)
4
However, the term commercial paper in its
broadest sense may refer to either negotiable or non-negotiable
instruments.
During the early part of the Middle Ages, merchants and
traders had to carry gold and silver to pay for the goods they
purchased at the various international fairs. Obviously these
precious metals were continually subject to loss or theft through
the perils of travel.
5
To eliminate the dangers of this sort, merchants began to
deposit their gold and silver with bankers. When they needed
4
Business Law Text and Cases, Second Edition, Howell, Allison, Henley,
1981, page 400
5
Ibid.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 2
funds to pay for goods they had purchased, they drew on them
by giving the seller a written order addressed to the bank, telling
it to deliver part of the gold or silver to the seller. These orders,
called bills of exchange, were thus substitutes for money. Today,
checks and the drafts and promissory notes that are payable on
demand serve this same basic purpose.
6
The second major purpose of commercial paper is to serve
as credit device; this came about as a logical extension of the
initial use of commercial paper. Soon after bills of exchange
became established as substitutes for money, merchants who
wished to purchase goods on credit discovered that sellers were
sometimes willing to accept bills of exchange that were not payable
until a stated time in the futuresuch as ninety days after date.
If the seller was satisfied as to the commercial reputation of the
bills drawer (the purchaser), he would take such an instrument
(called a time bill or draft) and wait until the maturity date to collect
it. In this way the seller/payee extended credit to the buyer/drawer.
7
Soon thereafter ways were devised by which payees could
sell these instruments to third parties, usually banks, and receive
immediate cash in return. Since the banks would then have to
wait for the maturity dates before receiving payment, the payees
would have to sell them the paper at a discountthat is, perhaps
five or ten percent less than the face amount. This meant, in
effect, that the purchasing banks were charging the sellers interest
in advance as compensation for their role in the transaction.
8
Today, because of the widespread use of time notes and
drafts, the credit aspect of commercial paper is as important to
the business community as its substitute for money aspect.
9
The negotiability of bills of exchange and promissory notes
originated in the customs of merchants. The statute of Anne, which
is declaratory of the common law, established the negotiability of
promissory notes.
10
6
Ibid. (italics supplied)
7
Ibid, pages 401-402.
8
Ibid.
9
Ibid.
10
Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 1
3
Negotiable Instrument; definition
A negotiable instrument is a special contract which on its
face is signed by the maker or drawer, making an unqualified
promise or order to pay on demand or at a fixed or determinable
future time, a sum certain in money, to order or bearer, and when
it is addressed to a drawee, the latter must be named or otherwise
indicated therein with reasonable certainty.
Or simply stated: It is a special contract which complies
with the requirements laid down under Section 1 of the Negotiable
Instruments Law.
Purpose of the enactment of the Negotiable Instruments Law
The Negotiable Instruments Law was enacted for the
purpose of facilitating, not hindering or hampering transactions in
commercial paper. Thus, the said statute should not be tampered
with haphazardly or lightly. Nor should it be brushed aside in
order to meet the necessities in a single case.
11
Functions of a Negotiable Instrument
1. Substitute for moneymerchants often do not want to
carry cash for fear of loss or theft.
2. Credit devicesome forms of negotiable instruments
extend credit from one party to another.
3. Recordkeeping devicethese records are used for
financial statements, tax returns, and the like.
Negotiable Instrument as a substitute for money
The essence of negotiability which characterizes a
negotiable paper as a credit instrument lies in its freedom to
circulate freely as a substitute for money.
12
(Firestone Tire &
Rubber Company of the Philippines vs. Court of Appeals and
Luzon Development Bank, G.R. No. 113236, March 5, 2011,
[Quisumbing, J.])
11
State Investment House, Inc. v. Court of Appeals, 217 SCRA 32 (1993),
cited in Osmea vs. Citibank, March 23, 2004
12
Traders Royal Bank vs. Court of Appeals, 269 SCRA 15, 26 (1997)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 4
Since a negotiable instrument is only a substitute for money
and not money, the delivery of such an instrument does not, by
itself, operate as payment (See. 189, Act 2031 on Neg. Inst..; Art.
1249, Civil Code; Bryan Landon Co. v. American Bank, 7 Phil.
255; Tan Suncor v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check,
whether a managers check or ordinary cheek, is not legal tender,
and an offer of a check in payment of a debt is not a valid tender
of payment and may be refused receipt by the obligee or creditor.
Mere delivery of checks does not discharge the obligation under
a judgment. The obligation is not extinguished and remains
suspended until the payment by commercial document is actually
realized (Art. 1249, Civil Code, par. 3).
13
Words of Negotiability
The language of negotiability which characterize a
negotiable paper as a credit instrument is its freedom to circulate
as a substitute for money. Hence, freedom of negotiability is the
touchstone relating to the protection of holders in due course,
and the freedom of negotiability is the foundation for the protection
which the law throws around a holder in due course (11 Am. Jur.
2d, 32).
As held in Caltex (Philippines), Inc vs. Court of Appeals,
14
The accepted rule is that the negotiability or non-
negotiability of an instrument is determined from the writing,
that is, from the face of the instrument itself. In the
construction of a bill or note, the intention of the parties is to
control, if it can be legally ascertained. While the writing
may be read in the light of the surrounding circumstance in
order to more perfectly understand the intent and meaning
of the parties, yet as they have constituted the writing to be
the only outward and visible expression of their meaning,
no other words are to be added to it or substituted in its
stead. The duty of the court in such case is to ascertain,
not what the parties may have secretly intended as
contradistinguished from what their words express, but what
is the meaning of the words they have used. What the
parties meant must be determined by what they said.
13
Philippine Airlines, Inc. vs. Court of Appeals, G.R. No. L-49188, Jan. 30,
1990, [Gutierrez, J.]
14
G.R. No. 97753, August 10, 1992, 212 SCRA 448, emphasis ours
5
Quasi-Negotiable Instruments
In one case, that of Capco vs. Macaset
15
, the Supreme Court
had an occasion to rule that: [c]ertificates of stocks are considered
as quasi-negotiable instruments. When the owner or shareholder
of these certificates signs the printed form of sale or assignment
at the back of every stock certificate without filling in the blanks
provided for the name of the transferee as well as for the name of
the attorney-in-fact, the said owner or shareholder, in effect,
confers on another all the indicia of ownership of the said stock
certificates. (Campos and Lopez-Campos, Notes and Cases on
Negotiable Instruments Law, 1971 ed., p 605)
The phrase quasi-negotiable has been termed as unhappy
one; and certainly it is far from satisfactory, as it conveys no
accurate, well-defined meaning. But still it described better than
any other short-hand expression the nature of those instruments
which, while not negotiable in the sense of the law merchant, are
so framed and so dealt with, as frequently to convey as good a
title to the transferee as it they were negotiable. (Daniel, The
Elements of Negotiable Instruments Law, page 27)
Very frequently by application of the principles of estoppels,
and to effectuate the ends of justice and the intention of the parties,
the courts decree a better title to the transferee than actually
existed in his transferrer; and the result reached in many cases is
the same as would be reached if the instrument were negotiable.
16
Types of Negotiable Instruments.
The Philippine Negotiable Instruments Law was basically
lifted from the provisions of the United States Uniform Currency
Act, in which Secs. 13-104 thereof specified four types of
instruments (e.g. drafts, checks, certificates of deposit, and notes).
In the Philippine setting, however, Act 2031 (Negotiable
Instruments Law) provides for three (e.g., promissory notes, bills
of exchange, checks), noteworthy is the inclusion of Drafts and
Certificates of Time Deposit through the decisions of the Supreme
Court interpreting our law on negotiable instruments.
15
G.R. No. 90888, September 13, 1990
16
Railroad Co. v. Howard, 7 Wall. 415
Basic Principles and Jurisprudence on the Negotiable Instruments Law 6
At present, in Philippine jurisdiction, we generally recognize
five types of negotiable instruments, to wit:
1. Promissory Notes
17
2. Bills of Exchange
18
3. Check
19
4. Draft
20
5. Certificates of Time Deposit
21
2002 Bar Question:
A. Define the following: (1) a negotiable promissory
note, (2) a bill of exchange and (3) a check. (3%)
B. You are Pedro Cruz. Draft the appropriate contract
language for (1) your negotiable promissory note and
(2) your check, each containing the essential
elements of a negotiable instrument. (2%)
ANSWER:
A. (1) Sec. 184, Act. 2031it is an unconditional promise
in writing made by one person to another, signed by
the maker, engaging to pay on demand, or at a fixed
or determinable future time, a sum certain in money
to order or to bearer.
(2) Sec. 126, Act 2031is an unconditional order in
writing addressed by one person to another, signed
by the person giving it, requiring the person to whom
it is addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to
order or to bearer.
(3) Sec. 185, Act 2031it is a bill of exchange drawn
on a bank payable on demand.
17
Sec. 184, Act 2031, Negotiable Instruments Law.
18
Sec. 126, ibid.
19
Sec. 185, ibid.
20
BPI vs. Commissioner of Internal Revenue,
21
Caltex (Philippines), Inc. vs. Court of Appeals, G.R. No. 97753, August 10,
1992.
7
B. (1) September 1, 2002
I promise to pay Pancho Dela Torre, or order,
ONE HUNDRED THOUSAND PESOS (Php
100,000.00), on December 25, 2002.
(Sgd)
Pedro Cruz
(2) Bank of the Philippine Islands-Malate, Manila
September 1, 2002
Pay to the order of Pancho Dela Torre, the
amount of ONE HUNDRED THOUSAND PESOS
(Php 100,000.00).
(Sgd)
Pedro Cruz
1. What is a Promissory Note?
It is an unconditional promise in writing made by one person
to another, signed by the maker, engaging to pay on demand, or
at a fixed or determinable future time, a sum certain in money to
order or to bearer. (Sec. 184, Negotiable Instruments Law)
In the case of Pentacapital Investment Corporation vs.
Makilito B. Mahinay,
22
citing Sierra vs. Court of Appeals,
23
it was
held that:
A promissory note is a solemn acknowledgment of a debt
and a formal commitment to repay it on the date and under
the conditions agreed upon by the borrower and the lender.
A person who signs such an instrument is bound to honor it
as a legitimate obligation duly assumed by him through the
signature he affixes thereto as a token of his good faith. If
he reneges on his promise without cause, he forfeits the
sympathy and assistance of this Court and deserves instead
its sharp repudiation.
22
G.R. No. 171736, July 5, 2010, [Nachura, J.:]
23
G.R. No. 90270, July 24, 1992, 211 SCRA 785, 795
Basic Principles and Jurisprudence on the Negotiable Instruments Law 8
Test to determine a promissory note
To constitute a good promissory note, no precise words of
contract are necessary, provided they amount, in legal effect, to a
promise to pay. In other words, if over and above the mere
acknowledgment of the debtor there may be collected from the
words used a promise to pay it, the instrument may be regarded
as a promissory note. (Jimenez vs. Bucoy, G.R. No. L-10221,
February 28, 1958, [Bengzon, J.])
Due A. B. $325, payable on demand, or I acknowledge
myself to be indebted to A in $ 109, to be paid on demand, for
value received, or I.O.U. $85 to be paid on May 5
th
, are held to
be promissory notes, significance being given to words of payment
as indicating a promise to pay. (1 Daniel Neg. Inst., see 39 and
cases cited [Cowan vs. Hallack, (Colo.) 13 Pacific Reporter 700,
703) (Supra)
An acknowledgment may become a promise by the addition
of words by which a promise of payment is naturally implied, such
as, payable, payable on a given day, payable on demand,
paidwhen called for,(10 Corpus Juris Secundump p. 523.)
(supra)
Who are the parties to a Promissory Note?
The maker, he is the person who drafted and issued the
promissory note, and made a promise that upon demand or at a
fixed or determinable future time, he will pay a sum certain in
money to order or to bearer to the holder of the instrument or to a
holder in due course.
The payee, is the person in whose favor the promissory
note was issued.
Intimidation, vitiation of consent in promissory notes
Carmela Brobio Mangahas vs. Eufrocina Brobio
G.R. No. 183852, October 20, 2010
NACHURA, J.:
9
FACTS: On January 10, 2002, Pacifico S. Brobio (Pacifico) died
intestate, leaving three parcels of land. He was survived
by his wife, respondent Eufrocina A. Brobio, and four
legitimate and three illegitimate children; petitioner
Carmela Brobio Mangahas is one of the illegitimate
children.
On May 12, 2002, the heirs of the deceased executed
a Deed of Extrajudicial Settlement of Estate of the Late
Pacifico Brobio with Waiver. In the Deed, petitioner and
Pacificos other children, in consideration of their love
and affecti on for respondent and the sum of
P150,000.00, waived and ceded their respective shares
over the three parcels of land in favor of respondent.
According to petitioner, respondent promised to give
her an additional amount for her share in her fathers
estate. Thus, after the signing of the Deed, petitioner
demanded from respondent the promised additional
amount, but respondent refused to pay, claiming that
she had no more money.
A year later, while processing her tax obligations with
the Bureau of Internal Revenue (BIR), respondent was
required to submit an original copy of the Deed. Left
with no more original copy of the Deed, respondent
summoned petitioner to her office on May 31, 2003
and asked her to countersign a copy of the Deed.
Petitioner refused to countersign the document,
demanding that respondent first give her the additional
amount that she promised. Considering the value of
the three parcels of land (which she claimed to be worth
P20M), petitioner asked for P1M, but respondent
begged her to lower the amount. Petitioner agreed to
lower it to P600, 000.00. Because respondent did not
have the money at that time and petitioner refused to
countersign the Deed without any assurance that the
amount would be paid, respondent executed a
promissory note. Petitioner agreed to sign the Deed
when respondent signed the promissory note which
read
Basic Principles and Jurisprudence on the Negotiable Instruments Law 10
31 May 2003
This is to promise that I will give [a] (sic) Financial
Assistance to CARMELA B. MANGAHAS the amount
of P600,000.00 Six Hundred Thousand only on June
15, 2003.
(SGD)
EUFROCINA A. BROBIO
When the promissory note fell due, respondent failed
and refused to pay despite demand. Petitioner made
several more demands upon respondent but the latter
kept on insisting that she had no money.
ISSUES: Was intimidation used to execute the promissory note
subject of the case?
RULING: Contracts are voidable where consent thereto is given
through mistake, violence, intimidation, undue
influence, or fraud. In determining whether consent is
vitiated by any of these circumstances, courts are given
a wide latitude in weighing the facts or circumstances
in a given case and in deciding in favor of what they
believe actually occurred, considering the age, physical
infirmity, intelligence, relationship, and conduct of the
parties at the time of the execution of the contract and
subsequent thereto, irrespective of whether the contract
is in a public or private writing.
Nowhere is it alleged that mistake, violence, fraud, or
intimidation attended the execution of the promissory
note. Still, respondent insists that she was forced into
signing the promissory note because petitioner would
not sign the document required by the BIR. In one case,
the Court in characterizing a similar argument by
respondents therein held that such allegation is
tantamount to saying that the other party exerted undue
influence upon them. However, the Court said that the
fact that respondents were forced to sign the
documents does not amount to vitiated consent.
11
There is undue influence when a person takes improper
advantage of his power over the will of another,
depriving the latter of a reasonable freedom of choice.
For undue influence to be present, the influence exerted
must have so overpowered or subjugated the mind of
a contracting party as to destroy his free agency,
making him express the will of another rather than his
own.
Respondent may have desperately needed petitioners
signature on the Deed, but there is no showing that
she was deprived of free agency when she signed the
promissory note. Being forced into a situation does not
amount to vitiated consent where it is not shown that
the party is deprived of free will and choice. Respondent
still had a choice: she could have refused to execute
the promissory note and resorted to judicial means to
obtain petitioners signature. Instead, respondent chose
to execute the promissory note to obtain petitioners
signature, thereby agreeing to pay the amount
demanded by petitioner.
Contrary to the CAs findings, the situation did not
amount to intimidation that vitiated consent. There is
intimidation when one of the contracting parties is
compelled to give his consent by a reasonable and
well-grounded fear of an imminent and grave evil
upon his person or property, or upon the person
or property of his spouse, descendants, or
ascendants. Certainly, the payment of penalties for
delayed payment of taxes would not qualify as a
reasonable and well-grounded fear of an imminent
and grave evil. (emphasis supplied) We join the RTC
in holding that courts will not set aside contracts merely
because sol i ci tati on, i mportuni ty, argument,
persuasion, or appeal to affection was used to obtain
the consent of the other party. Influence obtained by
persuasion or argument or by appeal to affection is not
prohibited either in law or morals and is not obnoxious
even in courts of equity.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 12
Question:
Does the reference to the penalty charges in the
promissory note constitute substantial compliance with
the disclosure requirement of the Truth in Lending Act?
ANSWER:
Yes.
The Court has affirmed that financial charges are amply
disclosed if stated in the promissory note.
In the case of Development Bank of the Philippines vs.
Arcilla, Jr. The Court there said, Under Circular 158 of the Central
Bank, the lender is required to include the information required
by R.A. 3765 in the contract covering the credit transaction or any
other document to be acknowledged and signed by the borrower.
In addition, the contract or document shall specify additional
charges, if any, which will be collected in case certain stipulations
in the contract are not met by the debtor. In this case, the
promissory notes signed by the Yus contained data, including
penalty charges, required by the Truth in Lending Act. They cannot
avoid liability based on a rigid interpretation of the Truth in Lending
Act that contravenes its goal. (Bank of the Philippine Islands, Inc.
vs. Sps Yu, G.R. No. 184122 January 20, 2010, [Abad, J.])
2. Bill of Exchange defined.
A Bill of Exchange is an unconditional order in writing
addressed by one person to another, signed by the person giving
it, requiring the person to whom it is addressed to pay on demand
or at a fixed or determinable future time a sum certain in money
to order or to bearer. (Sec. 126, Negotiable Instruments Law)
In the once celebrated case of Manuel Bastida vs. The Acting
Commissioner of Customs and The Court of Tax Appeals,
24
it was
held that:
[A]s bills exchange they are, fundamentally, negotiable
instruments. And a negotiable instrument is more like
24
G.R. No. L-24011, October 24, 2970, [Castro, J:]
13
money than a contract right or chose in action.
25
As
such, it may be the subject of conversion (Knight vs. Seney
290 Ill. 11) or of replevin (Rothwell vs. Taylor 303 Ill. 263.)
26
it may also be the subject of sale, like any other goods or
wares.
27
As the Tax Court aptly observed, checks may be
bought and sold like a commodity. As a matter of fact in the
United States the deposit of a check with a bank is
considered a sale (Helvering vs. Stein [CA 4] 115 F 2d 468;
Burton vs. United States, 196 US 283, 49 L ed 482). Money
orders, also considered as bills of exchange of limited
negotiability, possess the same attributes as other
negotiable instruments. Thus, they may, be bought and sold
like checks. (emphasis supplied)
As long as a commercial paper conforms with the definition
of a bill of exchange, that paper is considered a bill of exchange.
The nature of acceptance is important only in the
determination of the kind of liabilities of the parties involved,
but not in the determination of whether a commercial paper
is a bill of exchange or not. (Philippine Bank of Commerce vs.
Aruego, G.R. No. L-25836-37, January 31, 1981, [Fernandez, J.])
(emphasis supplied)
Illustrative Case:
Philippine Bank of Commerce vs. Jose M. Aruego
G.R. Nos. L-25836-37, January 31, 1981
FERNANDEZ, J.:
FACTS: On December 1, 1959, the Philippine Bank of
Commerce instituted an action against Jose M. Aruego
Civil Case No. 42066 for the recovery of the total sum
of about P35, 000.00 with daily interest thereon from
November 17, 1959 until fully paid and commission
equivalent to 3/8% for every thirty (30) days or fraction
thereof plus attorneys fees equivalent to 10% of the
total amount due and costs. The complaint filed by the
Philippine Bank of Commerce contains Twenty-Two
25
Ludwig Teller, Bills and Notes, p. 6 (1948)
26
Ibid., pp. 6-7
27
Ibid., p. 7
Basic Principles and Jurisprudence on the Negotiable Instruments Law 14
(22) causes of action referring to Twenty-Two (22)
transactions entered into by the said Bank and Aruego
on different dates covering the period from August 28,
1950 to March 14, 1951. The sum sought to be
recovered represents the cost of the printing of World
Current Events, a periodical published by the
defendant. To facilitate the payment of the printing the
defendant obtained a credit accommodation from the
plaintiff. Thus, for every printing of the World Current
Events, the printer Encal Press and Photo Engraving,
collected the cost of printing by drawing a draft against
the plaintiff, said draft being sent later to the defendant
for acceptance. As an added security for the payment
of the amounts advanced to Encal Press and Photo
Engraving, the plaintiff bank also required the
defendant Aruego to execute a trust receipt in favor of
said bank wherein said defendant undertook to hold in
trust for plaintiff the periodicals and to sell the same
with the promise to turn over to the plaintiff the proceeds
of the sale of said publication to answer for the payment
of all obligations arising from the draft.
Defendant contends that the drafts signed by him were
not really bills of exchange but mere pieces of evidence
of indebtedness because payments were made before
acceptance.
ISSUE: Is his contention tenable?
RULING: The contention is without merit.Under the Negotiable
Instruments Law, a bill of exchange is an unconditional
order in writing addressed by one person to another,
signed by the person giving it, requiring the person to
whom it is addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to
order or to bearer. As long as a commercial paper
conforms with the definition of a bill of exchange, that
paper is considered a bill of exchange. The nature of
acceptance is important only in the determination of
the kind of liabilities of the parties involved, but not in
the determination of whether a commercial paper is a
bill of exchange or not.
15
From the definition, does the bill of exchange operate as an
assignment of funds in the hands of the drawee?
A bill in itself does not operate as an assignment of the
funds in the hands of the drawee available for the payment thereof.
(Sec. 127, Negotiable Instruments Law)
Doctrine of Equitable Assignment
The doctrine of equitable assignment is the creature of courts
of equity, and the phrase equitable assignment is used because,
by the technicalities of pleadings at law, no legal assignment can
be effectuated.
28
It is contended that the bill, whether for the whole
of the fund or debt, or only a part, may be evidence to show an
assignment; and that with other circumstances indicating that such
was the intention, will vest in the holder an exclusive claim to the
debt or fund, and bind it in the hands of the drawee after notice.
29
The bill for the entire amount of debt or fund should operate as an
equitable assignment thereof.
30
Moreover, it may be regarded as a settled doctrine that an
order founded upon a good consideration, given for a specific
debt or fund owing by or in the hands of a third person, operates
as, or rather is evidence of, an equitable assignment of the demand
to the holder.
31
Who are the parties to a bill of exchange?
The drawer, is the person drawing an instrument making
an unconditional order in writing to the drawee, requiring him to
pay on demand or at a fixed or determinable future time a sum
certain in money to order or to bearer.
The drawee, is the person being required by the drawer
to pay on demand or at a fixed or determinable future time a
sum certain in money to the payee, or his order, or to the bearer
of the instrument.
28
Bank of Commerce v. Bogy, 44 Mo. 15; Grammel v. Cramer, 55 Mich. 201
29
Daniel on Negotiable Instruments, page 18; Mandeville v. Welch, 5 Whaet.
277; Buckner v. Sayre, 17 B. Monroe, 754, cited in the Elements of
Negotiable Instruments Law, Daniel, page 8
30
Supra
31
The Elements of Negotiable Instruments Law, Daniel, page 9
Basic Principles and Jurisprudence on the Negotiable Instruments Law 16
The payee, is the person in whose favor the bill of exchange
was issued.
What is the rule if the Bill of Exchange is addressed to more
than one drawee?
A bill may be addressed to two or more drawees jointly,
whether they are partners of not.
But not to two or more drawees in the alternative or in
succession.
Example:
To: Lancelot Borja and/or Margaux Borja
Bo. Obrero, Iloilo City
In the above instance, the drawee is addressed to two or
more persons jointly, whether they are partners or not. Thus,
payment of any one of them extinguishes the entire obligation.
To: Lancelot Borja, and in his incapacity or insolvency,
Margaux Borja;
Lancelot Borja, Margaux Borja, or Mizpah Borja in
succession.
In the second instance, the bill was addressed to two or
more drawees in the alternative or in succession, such is not
allowed under the law.
Bills of exchange are either foreign or inland
Foreign Bill of Exchangewhen drawn in one State or
country, and made payable in another State or country;
32
Inland Bill of Exchangewhen drawn, and made payable,
in the same State or country.
33
32
The Elements of Negotiable Instruments Law, Daniel, page 5
33
Ibid
17
Difference between bills and notes
In their original structure, a bill of exchange and a promissory
note do not strongly resemble each other. In a bill, there are
three original parties: drawer, drawee, and payee; in a note only
two: maker and payee. In a bill the acceptor is the primary debtor.
In a note the maker is the only debtor. But if the note be transferred
to a third party by the payee, it becomes strikingly similar to a bill.
The indorser becomes then, as it were, the drawer; the maker,
the acceptor; and the indorsee, the payee.
34
(The Elements of the
Law of Negotiable Instruments, by: John W. Daniel, 1908)
Bank notes or bank bills
Bank notes or bank bills (as they are equally as often called)
are the promissory notes of incorporated banks, designed to
circulate like money, and payable to bearer on demand.
35
The terms bank notes and bank bills are of the like
signification, and for the purposes of interpretation, both in criminal
and civil jurisprudence, are equivalent and interchangeable.
36
In form and substance they are promissory notes, and they
are governed by very many of the principles which apply to the
negotiable notes of individuals given in the course of trade. But
they are designed to constitute a circulating medium, and this
circumstance imparts to them peculiar characteristics, and
essentially varies the rules which govern promissory notes in
general. They have been held not securities for money, but money
itself.
37
Chief Characteristics of
Bank Bills
Always payable on demand;
38
34
Daniel on Negotiable Instruments, page 29
35
The Elements of Negotiable Instruments Law, Daniel, page 15 (Bold
supplied)
36
Ibid
37
Soutcot v. Watson, 3 Atk. 226; Daniel on Negotiable Instruments, page
1664, ibid
38
Daniel on Negotiable Instruments, page 1666
Basic Principles and Jurisprudence on the Negotiable Instruments Law 18
Usually payable to bearer, though sometimes expressed
to be payable to a person named or bearer;
39
A lawful tender in payment of debts, unless objected to
because they are not money.
40
Bank Notes
Are not, legally speaking, money, but in a popular sense
are often spoken of as money, and are conventionally
used in its stead with the like effect.
41
3. Draft, defined.
A draft is a form of a bill of exchange used mainly in
transactions between persons physically remote from each other,
an order made by one person, say the buyer of goods, addressed
to a person having in his possession funds of such buyer ordering
the addressee to pay the purchase price to the seller of the goods,
and where the order is made by one bank to another, it is referred
to as a bank draft. (Bank of the Philippine Islands vs. Commission
of Internal Revenue, 496 SCRA 601)
In order for a draft to work, one of two general conditions
must exist. Either the drawee must owe the drawer a debt (in
which case the drawer is simply telling the drawee to pay the debt
or a portion of it to a third party) or some kind of agreement or
relationship must exist between the parties under which the
drawee has consented to the drawing of the draft upon him or
her. If neither of these conditions existed, obviously the drawee
would not obey the order to pay the amount of the draft to the
payee or to any subsequent holder of the instrument.
42
A trade acceptance is a draft or bill of exchange drawn by
the seller of the goods on the purchaser of those goods and
accepted (signed) by the purchaser. The purpose of the
transaction is to enable the seller to raise money on the paper
before the purchasers obligation matures under the sales
contract.
43
39
Ibid, page 1665
40
Ibid, page 1672a
41
Ibid, page 1672
42
Business Law Text and Cases, Second Edition, Howell, Allison, Henley,
1981, page 402
19
To illustrate, X corporation has sold goods to Y company.
Due to the fact that Y company still wishes to utilize the cash
instead of paying in cash, X corporation (drawer) draws a trade
acceptance on Y company for the purchase of the goods. The
instrument orders Y company to pay the amount due to the order
of X corporation on a particular future time. It is then presented to
an officer of Y company who accepts it by signing the same and
returns it to X corporation. The acceptance in effect, would be a
promise of Y company to pay X corporation when the same
becomes due. It can now be negotiated to a third person, say X
corporations bank and receives cash immediately.
Nature of Draft, as distinguished from Bill of Exchange
The case of Republic of the Philippines vs. Philippine
National Bank, et al
44
, laid down a detailed discussion of the
nature of Drafts, to wit:
To begin with, we may say that a demand draft is a bill of
exchange payable on demand (Arnd vs. Aylesworth, 145 Iowa
185; Ward vs. City Trust Company, 102 N.Y.S. 50; Bank of
Republic vs. Republic State Bank, 42 S.W. 2d, 27). Considered
as a bill of exchange, a draft is said to be, like the former, an open
letter of request from, and an order by, one person on another to
pay a sum of money therein mentioned to a third person, on
demand or at a future time therein specified (13 Words and
Phrases, 371). As a matter of fact, the term draft is often used,
and is the common term, for all bills of exchange. And the words
draft and bill of exchange are used indiscriminately (Ennis vs.
Coshoctan Nat. Bank, 108 S.E., 811; Hinnermann vs. Rosenback,
39 N.Y. 98, 100, 101; Wilson vs. Bechenau, 48 Supp. 272, 275).
On the other hand, a bill of exchange within the meaning of
our Negotiable Instruments Law (Act No. 2031) does not operate
as an assignment of funds in the hands of the drawee who is not
liable on the instrument until he accepts it. This is the clear import
of Section 127. It says: A bill of exchange of itself does not operate
as an assignment of the funds in the hands of the drawee available
for the payment thereon and the drawee is not liable on the bill
unless and until he accepts the same. In other words, in order
43
Ibid.
44
G.R. No. L-16106, December 30, 1961
Basic Principles and Jurisprudence on the Negotiable Instruments Law 20
that a drawee may be liable on the draft and then become
obligated to the payee it is necessary that he first accepts
the same. In fact, our law requires that with regard to drafts or
bills of exchange there is need that they be presented whether
for acceptance or for payment within a reasonable time after their
issuance or after their last negotiation thereon as the case may
be (Section 71, Act 2031). Failure to make such presentment will
discharge the drawer from liability or to the extent of the loss
caused by the delay (Section 186, Ibid.) (emphasis supplied)
Since it is admitted that the demand drafts herein involved
have not been presented either for acceptance or for payment,
the inevitable consequence is that the appellee bank never had
any chance of accepting or rejecting them. Verily, appellee bank
never became a debtor of the payee concerned and as such the
aforesaid drafts cannot be considered as credits subject to escheat
within the meaning of the law.
Demand Draft distinguished from a cashiers or managers
check
In the very same case of Republic of the Philippines vs.
Philippine National Bank, et al, it has been held that: a demand
draft is very different from a cashiers or managers check, contrary
to appellants pretense, for it has been held that the latter is a
primary obligation of the bank which issues it and constitutes its
written promise to pay on demand. Thus, a cashiers check has
been clearly characterized In Re Bank of the United States, 277
N.Y.S. 96, 100, as follows:
A cashiers check issued by a bank, however, is not an
ordinary draft. The latter is a bill of exchange payable on
demand. It is an order upon a third party purporting to drawn
upon a deposit of funds. (Drinkall vs. Movious State Bank,
11 N.D. 10, 88 N.W. 724, 57 L.R.A. 341, 95 Am. St. Rep.
693; State vs. Tyler County State Bank (Tex. Com. App.)
277 S.W. 625, 42 A.L.R. 1347). A cashiers check is of a
very different character. It is the primary obligation of the
bank which issues it (Nissenbaum vs. State, 38 Ga. App.
253, S.E. 776) and constituted its written promise to pay
upon demand (Steinmetz vs. Schultz, 59 S.D. 603, 241
N.W. 734)
21
The following definitions cited by the appellant also confirm
this view:
A cashiers check is a check of the banks cashier on his or
another bank. It is in effect a bill of exchange drawn by a
bank on itself and accepted in advance by the act of issuance
(10 C.J.S. 409)
A cashiers check issued on request of a depositor is the
substantial equivalent of a certified check and the deposit
represented by the check passes to the credit of the
checkholder, who is thereafter a depositor to that amount.
(Lummus Cotton Gin Co. vs. Walker, 70 So. 754, 756, 195
Ala. 552)
A cashiers check, being merely bill of exchange drawn by
a bank on itself, and accepted in advance by the act of
issuance, is not subject to countermand by the payee after
indorsement, and has the same legal effects as a certificate
deposit or a certified check. (Walker vs. Sellers, 77 So. 715;
201 Ala. 189)
A demand draft is not therefore of the same category as a
cashiers check which should come within the purview of the law.
4. Certificates of Time Deposit; Negotiable Instrument.
A certificate of deposit is a receipt of a bank or banker for a
certain sum of money received upon deposit, and it is generally
framed in such a form as to constitute a promissory note, payable
to the depositor, or to the depositor or order, or to bearer. (The
Elements of Negotiable Instruments Law, Daniel, page 16)
In order, however, to be negotiable, a certificate of deposit
must possess the requisite features of certainty in respect to
parties, and time and mode of payment and the same causes
which deprive bills and notes of negotiability would affect it in like
manner. (ibid)
Illustrative case:
Caltex (Philippines), Inc. vs. Court of Appeals and Security
Bank and Trust Company
Basic Principles and Jurisprudence on the Negotiable Instruments Law 22
G.R. No. 97753, August 10, 1992
REGALADO, J.:
Facts: On various dates Security Bank and Trust Company
(SBTC) issued 280 certificates of time deposit (CTD)
in favor of one Angel dela Cruz who deposited with
SBTC the aggregate amount of Php 1,200,000.00. A
sample text of the certificates of time deposit is
reproduced below:
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22,
1982, 19____.
This is to Certify that BEARER has deposited
i n thi s Bank the sum of PESOS: FOUR
THOUSAND ONLY, SECURITY BANK SUCAT
OFFICE P4,000 & 00 CTS Pesos, Philippine
Currency, repayable to said depositor 731 days.
after date, upon presentation and surrender of
this certificate, with interest at the rate of 16%
per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
___________ ___________
AUTHORIZED SIGNATURES
Angel dela Cruz delivered the said CTDs to Caltex
(Philippines) Inc. (Caltex) in connection with his
purchased of fuel products from the latter. Sometime
in March 1982, Angel dela Cruz informed SBTC that
he lost all the certificates of time deposit in dispute.
On March 25, 1982, Angel dela Cruz negotiated and
obtained loan from defendant bank in the amount of
Php 875,000.00. On the same date, said depositor
23
executed a notarized Deed of Assignment of Time
Deposi t stated, among others, that del a Cruz
surrenders to SBTC full control of the indicated time
deposits from and after date of the assignment and
further authorizes said bank to pre-terminate, set-off
and apply the said time deposits to the payment of
whatever amount or amounts may be due on the loan
upon its maturity.
Sometime in 1982, plaintiffs agent went to the
defendant bank and presented for verification the CTD
declared lost by Angel dela Cruz alleging that the same
were delivered to herein plaintiff as security for
purchases made with Caltex. On November 26 1982,
defendant received a letter from herein plaintiff formally
informing it of its possession of the CTDs in question
and of its decision to pre-terminate the same.
Accordingly, defendant bank rejected the plaintiffs
demand and claim for payment of value of the CTDs.
In April 1983, the loan in the amount of Php 875,000.00
with defendant bank matured and fell due, and the latter
set-off and applied the time deposits in question to the
payment of the matured loan.
Plaintiff filed the instant complaint praying that the
defendant bank be ordered to pay it the aggregate value
of the certificates of time deposit of Php 1,120,000.00
plus interest and compounded interest therein at 16%
per annum, moral and exemplary damages as well as
attorneys fees.Trial court rendered its decision
dismissing the instant complaint.
Issue: Whether or not the Certificates of Time Deposit are
considered as negotiable instruments?
Ruling: The CTDs in question are negotiable instruments.
Section 1 Act No. 2031, otherwise known as the
Negotiable Instruments Law, enumerates the requisites
for an instrument to become negotiable.
The CTDs i n questi on undoubtedl y meet the
requirements of the law for negotiability. The parties
Basic Principles and Jurisprudence on the Negotiable Instruments Law 24
bone of contention is with regard to requisite (d) set
forth above. x x x
The documents provide that the amounts deposited
shall be repayable to the depositor. And who, according
to the document, is the depositor? It is the bearer.
The documents do not say that the depositor is Angel
dela Cruz and that the amounts deposited are
repayable specifically to him. Rather, the amounts are
to be repayable to the bearer of the documents or, for
that matter, whosoever may be the bearer at the time
of presentment.
x x x
On this score, the accepted rule is that the negotiability
or non-negotiability of an instrument is determined from
the writing, that is, from the fact of the instrument itself
45
.
In the construction of a bill or note, the intention of the
parties is to control, if it can be legally ascertained.
46
While the writing may be read in the light of the
surrounding circumstances in order to prove perfectly
understanding the intent and meaning of the parties,
yet as they have constituted the writing to be the only
outward and visible expression of their meaning, no
other words are to be added to it or substituted instead.
The duty of the court in such case is to ascertain, not
what the parties may have secretly intended as
contradistinguished from what their words express, but
what is the meaning of the words they have used. What
the parties meant must be determined by what they
said.
47
Certificates of Time Deposit; Issued without Valuable
Consideration; Not Covered by the Philippine Deposit
Insurance Corporation.
45
11 Am. Jur. 2d, Bills and Notes, 79.
46
Ibid, 86.
47
Ibid, 87-88.
25
Illustrative Case:
Philippine Deposit Insurance Corporation vs.
Court of Appeals and John Francis Cotaoco
G.R. No. 118917, December 22, 1997
KAPUNAN, J:
Petitioner Philippine Deposit Insurance Corporation (PDIC)
seeks the reversal of the decision of the Court of Appeals affirming
with modification the decision of the Regional Trial Court holding
petitioner liable for the value of thirteen (13) certificates of time
deposit (CTDs) in the possession of private respondents.
The facts, as found by the Court of Appeals, are as follows:
On September 22, 1983, plaintiffs-appellees invested in
money market placements with the Premiere Financing
Corporation (PFC) in the sum of P10,000.00 each for which
they were issued by the PFC corresponding promissory
notes and checks. On the same date (September 22, 1983),
John Francis Cotaoco, for and in behalf of plaintiffs-
appellees, went to the PFC to encash the promissory notes
and checks, but the PFC referred him to the Regent Saving
Bank (RSB). Instead of paying the promissory notes and
checks, the RSB, upon agreement of Cotaoco, issued the
subject 13 certificates of time deposit with Nos. 09648 to
09660, inclusive, each stating, among others, that the same
certifies that the bearer thereof has deposited with the RSB
the sum of P10,000.00; that the certificate shall bear 14%
interest per annum; that the certificate is insured up to
P15,000.00 with the PDIC; and that the maturity date thereof
is on November 3, 1983 (Exhs. B, B-1 to B-12).
On the aforesaid maturity dated (November 3, 1983),
Cotaoco went to the RSB to encash the said certificates.
Thereat, RSB Executive Vice President Jose M. Damian
requested Cotaoco for a deferment or an extension of a
few days to enable the RSB to raise the amount to pay for
the same (Exh. D). Cotaoco agreed. Despite said
extension, the RSB still failed to pay the value of the
certificates. Instead, RSB advised Cotaoco to file a claim
with the PDIC.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 26
Meanwhile, on June 15, 1984, the Monetary Board of the
Central Bank issued Resolution No. 788 (Exh. 2, Records,
p. 159) suspending the operations of the RSB. Eventually,
the records of RSB were secured and its deposit liabilities
were eventually determined. On December 7, 1984, the
Monetary Board issued Resolution No. 1496 (Exh. 1)
liquidating the RSB. Subsequently, a masterlist or inventory
of the RSB assets and liabilities was prepared. However,
the certificates of time deposit of plaintiffs-appellees were
not included in the list on the ground that the certificates
were not funded by the PFC or duly recorded as liabilities
of RSB.
On September 4, 1984, plaintiffs-appellees filed with the
PDIC their respective claims for the amount of the certificates
(Exhs. C, C-1 to C-12). Sabina Yu, James Ngkaion,
Elaine Ngkaion and Jeffrey Ngkaion, who have similar
claims on their certificates of time deposit with the RSB,
likewise filed their claims with the PDIC. To their dismay,
PDIC refused the aforesaid claims on the ground that the
Traders Royal Bank Check No. 299255 dated September
22, 1983 for the amount of P125,846.07 (Exh. B) issued
by PFC for the aforementioned certificates was returned by
the drawee bank for having been drawn against insufficient
funds; and said check was not replaced by the PFC, resulting
in the cancellation of the certificates as indebtedness or
liabilities of RSB.
48
Consequently, on March 31, 1987, private respondents filed
an action for collection against PDIC, RSB and the Central Bank.
On September 14, 1987, the trial court, declared the Central
Bank in default for failing to file an answer.
On May 29, 1989, the trial court rendered its decision
ordering the defendants therein to pay plaintiffs, jointly and
severally, the amount corresponding to the latters certificates of
time deposit.
Both PDIC and RSB appealed. The Central Bank, on the
other hand, filed a petition for certiorari, prohibition and mandamus
48
Rollo, pp. 30-31.
27
before the Court of Appeals praying that the writ of execution
issued by the trial court against it be set aside.
On February 8, 1995, the Court of Appeals rendered its
decision granting the Central Banks petition but dismissing the
appeals of PDIC and RSB. Hence, this petition by PDIC assigning
the following errors:
I
THE CA ERRED IN HOLDING THAT THE SUBJECT CTDS
ARE NEGOTIABLE INSTRUMENTS
II
THE CA ERRED IN HOLDING THAT THE CTDS WERE
ACQUIRED FOR VALUE AND CONSIDERATION
III
THE CA ERRED WHEN IT HELD THAT BECAUSE THE CTDS
STATE THAT THESE WERE INSURED PETITIONER
SHOULD BE HELD LIABLE FOR THE SAME.
We deal jointly with petitioners first and third assigned
errors.
Relying on this Courts ruling in Caltex (Philippines), Inc. v.
Court of Appeals and Security Bank and Trust Company,
49
the
Court of Appeals concluded that the subject CTDs are negotiable.
Petitioner, on the other hand, contends that the CTDs are non-
negotiable since they do not contain an unconditional promise or
order to pay a sum certain in money nor are they made payable
to order or bearer, as required by Section 1 of the Negotiable
Instruments Law.
Whether the CTDs in question are negotiable or not is,
however, immaterial in the present case. The Philippine Deposit
Insurance Corporation was created by law and, as such, is
governed primarily by the provisions of the special law creating
it.
50
The liability of the PDIC for insured deposits therefore is
49
212 SCRA 448 (1992).
50
Section 4, Corporation Code.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 28
statutory and, under Republic Act No. 3591,
51
as amended, such
liability rests upon the existence of deposits with the insured bank,
not on the negotiability or non-negotiability of the certificates
evidencing these deposits.
The authority for this conclusion finds support in decisions
by American state courts applying their respective bank guaranty
laws. Invariably, the plaintiffs in these cases argued that the
negotiability of the certificates of deposit in their possession
entitled them to be paid out of the bank guaranty fund, a contention
that the courts uniformly rejected.
Thus, the plaintiffs in Fourth Nat. Bank of Wichita v. Wilson
52
argued that:
. . . the court should hold the certificates to be guaranteed
because they are negotiable instruments, and were acquired
by the present holders in due course; otherwise it is said
certificates of deposit will be deprived of the quality of
commercial paper. Certificates of deposit have been
regarded as the highest form of collateral. They are of wide
currency in the banking and business worlds, and are
particularly useful to persons of small means, because they
bear interest, and may be readily cashed; therefore to
deprive them of the benefit of the guaranty fund would be a
calamity. . . .
The Supreme Court of Kansas, however, found the plaintiffs
contention to be without merit, ruling thus:
. . . The argument confuses negotiability of commercial paper
with statutory guaranty of deposits. The guaranty is
something extrinsic to all forms of evidence of bank
obligation; and negotiability of instruments has no
dependence on existence or nonexistence of the guaranty.
. . . Whatever the status of the plaintiffs may be as holders
in due course under the Negotiable Instruments Law, they
cannot be assignees of a deposit which was not made, and
51
Entitled An Act Establishing The Philippine Deposit Insurance Corporation,
Defining Its Powers And Duties And For Other Purposes.
52
204 Pac. 715 (1992), 110 Kan. 380.
29
cannot be entitled to the benefit of a guaranty which did not
come into existence. . . .
In arriving at the above decision, the Kansas Supreme Court
relied on its earlier ruling in American State Bank v. Foster,
53
which
arose from the same facts as the Fourth National Bank case.
There, the Court held:
. . . Even if the plaintiff were to be regarded as an innocent
purchaser of the certificates as negotiable instruments, its
situation would be in no wise bettered so far as relate to a
claim against the guaranty fund. The fund protects deposits
only. And if no deposit is made, or no deposit within the
protection of the guaranty law, the transfer of a certificate
cannot impose a liability on the fund. . . . where a certificate
of deposit is given under such circumstances that it is not
protected by the guaranty fund, although that fact is not
indicated by anything on its face, its indorsement to an
innocent holder cannot confer that quality upon it.
In like fashion did the Supreme Court of Nebraska brush
aside a similar contention in State v. Farmers Stale Bank:
54
In this contention we think the appellants fail to distinguish
between the liability of the maker of a negotiable instrument,
which rests upon the law pertaining to negotiable paper,
and the liability of the guaranty fund, which is purely statutory.
The circumstances under which the guaranty fund may be
liable are entirely apart from the law pertaining to negotiable
paper. A holder of a certificate of deposit in a bank who
seeks to hold the guaranty fund liable for its payment must
show that the transaction leading up to the issuance of the
certificate was such that the law holds the guaranty fund
liable for its payment. . . .
The Farmers State Bank ruling was reiterated by the
Nebraska Supreme Court in State v. Home State Bank of Dunning
55
and in State v. Kilgore State Bank.
56
The same ruling was adopted
by the Supreme Court of South Dakota in Mildenstein v. Hirning.
57
53
204 Pac. 709, 110 Kan. 520 (1922).
54
196 N.W. 908, 111 Neb. 117 (1923).
55
201 N.W. 971, 113 Neb. 93 (1925).
56
205 N.W. 297 (1925).
Basic Principles and Jurisprudence on the Negotiable Instruments Law 30
In the case at bar, the Court of Appeals initially found the
subject CTDs to be negotiable. Subsequently, however,
respondent court deemed the issue immaterial, albeit for entirely
different reasons.
. . . Besides, whether the certificates are negotiable or not
is of no moment. The fact remains that the certificates
categorically state that their bearer [sic] have a deposit in
the RSB; that the same will mature on November 3, 1993;
and that the certificates are insured by PDIC.
58
We disagree with respondent courts rationale. The fact that
the certificates state that the certificates are insured by PDIC does
not ipso facto make the latter liable for the same should the
contingency insured against arise. As stated earlier, the deposit
liability of PDIC is determined by the provisions of R.A. No. 3519,
and statements in the certificates that the same are insured by
PDIC are not binding upon the latter.
. . . The mere fact that a certificate recites on its face that a
certain sum has been deposited, or that officers of the bank
may have stated that the deposit is protected by the guaranty
law, does not make the guaranty fund liable for payment, if
in fact a deposit has not been made . . . . The banks have
nothing to do with the guaranty fund as such. It is a fund
raised by assessments against all state banks, administered
by officers of the state to protect deposits in banks. . . .
59
We come now to petitioners second assigned error.
In order that a claim for deposit insurance with the PDIC
may prosper, the law requires that a corresponding deposit be
placed in the insured bank. This is implicit from a reading of the
following provisions of R.A. 3519:
Sec. 1. There is hereby created a Philippine Deposit
Insurance Corporation . . . which shall insure, as provided,
the deposits of all banks which are entitled to the benefits
of insurance under this Act . . . . (Emphasis supplied).
57
207 N.W. 979 (1926).
58
Rollo, p. 38.
59
State v. Farmers State Bank, supra, note 6.
31
xxx xxx xxx
Sec. 10(a) . . .
xxx xxx xxx
(c) Whenever an insured bank shall have been closed on
account of insolvency, payment of the insured deposits
in such bank shall be made by the Corporation as soon
as possible . . . .(Emphasis supplied.)
A deposit as defined in Section 3(f) of R.A. No. 3591, may
be constituted only if money or the equivalent of money is received
by a bank:
Sec. 3. As used in this Act
(f) The term deposit means the unpaid balance of money
or its equivalent received by a bank in the usual course
of business and for which it has given or is obliged to
give credit to a commercial, checking, savings, time or
thrift account or which is evidenced by passbook, check
and/or certificate of deposit printed or issued in
accordance with Central Bank rules and regulations and
other applicable laws, together with such other
obligations of a bank which, consistent with banking
usage and practices, the Board of Directors shall
determine and prescribe by regulations to be deposit
liabilities of the Bank . . . . (Emphasis ours.)
Did RSB receive money or its equivalent when it issued the
certificates of time deposit? The Court of Appeals, in resolving
who between RSB and PFC issued the certificates to private
respondents, answered this question in the negative. A perusal of
the impugned decision, however, reveals that such finding is
grounded entirely on speculation, and thus, cannot bind this
Court:
60
Equally unimpressive is the contention of PDIC and RSB
that the certificates were issued to PFC which did not acquire
60
Cuizon vs. Court of Appeals, G.R. No. 102096, August 22, 1996.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 32
the same for value because the check issued by the latter
for the certificates bounced for insufficiency of funds. First,
granting arguendo that the certificates were originally issued
in favor of PFC, such issuance could only give rise to the
presumption that the amount stated in the certificates have
been deposited to RSB. Had not PFC deposited the amount
stated therein, then RSB would have surely refused to issue
the certificates certifying to such fact. Second, why did not
RSB demand that PFC pay the certificates or file a claim
against PFC on the ground that the latter failed to pay for
the value of the certificates? It could very well be that the
reason why RSB did not run after PFC for payment of the
value of the certificates was because the instruments were
issued to the latter by RSB for value or were already paid to
RSB by plaintiffs-appellees. Third, if it is true that at the
time RSB issued the certificates to PFC, the instruments
were paid for with checks still to be encashed, then why did
not RSB specifically state in the certificates that the validity
thereof hinges on the encashment of said check? Fourth,
even if it is true that PFC did not deposit with or pay the
RSB the amount stated in the certificates, the latter is not
be such reason freed from civil liability to plaintiffs-appellees.
For, by issuing the certificates, RSB bound itself to pay the
amount stated therein to whoever is the bearer upon its
presentment for encashment. Truly, there is no reason to
depart from the established principle that where a bank
issues a certificate of deposit acknowledging a deposit made
with a third person or an officer of the bank, or with another
bank representing it to be the certificate of the bank, upon
which assurance the depositor accepts it, the bank is liable
for the amount of the deposit (Michis, Banks and Banking,
Vol. 5A, pp. 48-49, as cited in the Decision on p. 3 thereof).
61
Moreover, such finding totally ignores the evidence
presented by defendants. Cardola de Jesus, RSB Deputy
Liquidator, testified that RSB received three (3) checks in
consideration for the issuance of several CTDs, including the ones
in dispute. The first check amounted to P159,153.93, the second,
P121,665.95, and the third, P125,846.07 In consideration of the
third check, private respondents received thirteen (13) certificates
of deposit with Nos. 09648 to 09660, inclusive, with a value of
61
Id., at 39-40.
33
P10,000.00 each or a total of P130,000.00. To conform with the
value of the third check, CTD No. 09648 was chopped, and only
the sum of P5,846.07 was credited in favor of private respondents.
The first two checks made good in the clearing while the third
was returned for being drawn against insufficient funds.
The check in question appears on the records as Exhibit
3 (for Regent),
62
and is described in RSBs offer or evidence as
Traders Royal Bank Check No. 292555 dated September 22,
1983 covering the amount or P125,846.07 . . . issued by Premiere
Financing Corporation.
63
At the back of said check are the words
Refer to Drawer,
64
indicating that the drawee bank (Traders Royal
Bank) refused to pay the value represented by said check. By
reason of the checks dishonor, RSB cancelled the corresponding
as evidence by an RSB ticket dated November 4, 1983.
65
These pieces of evidence convincingly show that the subject
CTDs were indeed issued without RSB receiving any money
therefor. No deposit, as defined in Section 3 (f) of R.A. No. 3591,
therefore came into existence. Accordingly, petitioner PDIC cannot
be held liable for value of the certificates of time deposit held by
private respondents.
ACCORDINGLY, the instant petition is hereby GRANTED
and the decision of the Court of Appeals REVERSED. Petitioner
is absolved from any liability to private respondents.
SO ORDERED.
Davide, Jr., Bellosillo and Vitug, JJ., concur.
5. Check defined.
A check is a bill of exchange drawn on a bank payable on
demand. (Sec. 185, Negotiable Instruments Law)
A check is (1) a draft or order (2) upon a bank or banking
house, (3) purporting to be drawn upon a deposit of funds (4) for
the payment at all events of a certain sum of money, (5) to a
62
Records, p. 161.
63
Id., at 155.
64
Exhibit 3-1 (Regent).
65
Exhibits 5 and 5-A (Regent); records, p. 163.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 34
certain person therein named, or to him or his order, or to bearer,
and (6) payable instantly on demand.
66
Except as herein otherwise provided, the provisions of this
Act applicable to a bill of exchange payable on demand apply to
a check.
A check which has been cleared and credited to the account
of the creditor shall be equivalent to a delivery to the creditor of
cash in an amount equal to the amount credited to his account.
(Equitable PCI Bank vs. Ong, 502 SCRA 119)
Check and Inland Bills of Exchange, distinguished
The Supreme Court of the United States, in the leading case
of Merchants Bank v. State Bank, says of checks when contrasted
with bills of exchange: Bank checks are not inland bills of
exchange, but have many of the properties of such commercial
paper, and many of the rules of the law merchants are alike
applicable to both. Each is for a specified sum, payable in
moneyin both cases, there is a drawer, a drawee, and payee.
Without acceptance, no action can be maintained by the holder,
upon either, against drawee. The chief points of difference are
that (1) a check is always drawn on a bank or banker; (2) the
drawer is not discharged by the laches of the holder in
presentment, unless he can show that he has sustained some
injury by the default; (3) it is not due until payment is demanded,
and the statute of limitations runs only from that time; (4) it is, by
its fact, the appropriation of so much money of the drawer, in the
hands of the drawee, to the payment of an admitted liability of the
drawer; (5) it is not necessary that the drawer of a bill should
have funds in the hands of the draweea check in such case
would be a fraud.
67
A check is a draft or order
A bill is also a draft or order; and it is often said that a check
is, in legal effect, a bill of exchange drawn on a bank or banking
66
Blair & Hoge v. Wilson, 28 Gratt. 170; Ridgely Bank v. Patton, 109 Ill, 484,
cited in Daniel, page 17
67
Merchants Bank v. State Bank, 10 Wall. 647, cited in Daniel, page 18
(italics supplied)
35
house, with some peculiarities.
68
In some cases it is called a bill
payable on demand,
69
and in others an inland bill, or in the nature
of an inland bill, payable on demand;
70
and the expression that a
check is like a bill has been criticized on the ground that nihil
simile est idem, whereas checks are bills, or rather bill is the
genus, and check is a species,
71
In form a check is a bill on a
banking house, and it is perfectly correct to say that it is a bill with
some peculiarities, or in other words, a species of bill of exchange.
(Daniel, page 18)
Characteristics of a check
A check has the character of negotiability and at the same
time it constitutes an evidence of indebtedness. By mutual
agreement of the parties, the negotiable character of a check may
be waived and the instrument may be treated simply as proof of
an obligation. (Sps. Pacheco vs. Court of Appeals, G.R. No.
126670, December 2, 1999, [Ynares-Santiago, J.])
A check is a negotiable instrument that serves as a substitute
for money and as a convenient form of payment in financial
transactions and negotiations. The use of checks as payment
allows commercial and banking transactions to proceed without
the actual handling of money, thus, doing away with the need to
physically count bills and coins whenever payment is made. It
permits commercial and banking transactions to be carried out
quickly and efficiently. But the convenience afforded by checks
is damaged by unfunded checks that adversely affect confidence
in our commercial and banking activities, and ultimately injure
public interest. (Mitra vs. People of the Philippines, G.R. No.
191404, July 5, 2010)
As a general rule, checks and other papers deposited in a
bank for collection remain the property of the depositor, and the
bank performs the service of collection as his agent, even though
it is authorized to apply the proceeds on a debt of the owner. (7
68
Billgerry v. Branch, 19 Gratt. 418; Cruger v. Armstrong, 3 Johns. Cas. 5;
State v. Crawford, 13 La. Ann. 301, ibid
69
Harker v. Anderson, 21 Wend. 372; Edwards on Bills, 396, ibid
70
Merchants Bank v. Spicer, 6 Wend. 445; Purell v. Allemong, 22 Gratt. 742,
ibid
71
Matter of Brown, 2 Story, 502, ibid
Basic Principles and Jurisprudence on the Negotiable Instruments Law 36
C. J., sec. 245, pp. 597, 598; Richardson vs. New Orleans Coffee
Co., 102 Fed., 785; Philadelphia vs. Eckles, 98 Fed., 485;
Commercial Nat. Bank vs. Armstrong, 148 U. S., 50; St. Louis,
etc. R. Co. vs. Johnston, 133 U. S., 566; Ward vs. Smith, 19 Law
ed., 207; Carpenter vs. National Shawmut Bank, 187 Fed., 1.)
72
Is Check considered a legal tender?
A check, whether a managers check or ordinary check, is
not legal tender, and an offer of a check in payment of a debt is
not a valid tender of payment and may be refused receipt by the
obligee or creditor. (Tibajia vs. CA, G.R. No. 100290, June 4, 1993,
[Padilla, J.]) However, in the case of Fortunado vs. Court of
Appeals
73
the Supreme Court stressed that, We are not, by this
decision, sanctioning the use of a check for the payment of
obligations over the objections of the creditor.
In Cebu International Finance Corporation vs. Courts
of Appeals, Vicente Alegre
74
, the High Court ruled that: [i]n a
loan transaction, the obligation to pay a sum certain in money
may be paid in money, which is the legal tender or, by the use of
a check. A check is not a legal tender, and therefore cannot
constitute valid tender of payment. In Philippine Airlines, Inc. vs.
Court of Appeals
75
, this Court held that: [s]ince a negotiable
instrument is only a substitute for money and not money, the
delivery of such an instrument does not, by itself, operate as
payment (citation omitted).
Moreover, the following provisions support the ruling of the
Tibajia case, to wit:
a. Article 1249 (NCC) The payment of debts in money shall
be made in the currency stipulated, and if it is not possible
to deliver such currency, then in the currency which is
legal tender in the Philippines.
The delivery of promissory notes payable to order, or
bills of exchange or other mercantile documents shall
72
Chinese Grocers Association vs. American Apothecaries Co., G.R. No. L-
43667, March 31, 1938, [Villa-Real, J.:]
73
G.R. No. 78556, 25 Paril 1991, 196 SCRA 269.
74
G.R. No. 123031, October 12, 1999
75
18 SCRA 557 (1990)
37
produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they
may have been impaired.
In the meantime, the action derived from the original
obligation shall be held in abeyance.
b. Section 1 (R.A. 529) Every provision contained in, or
made with respect to, any obligation which purports to
give the obligee the right to require payment in gold or
in any particular kind of coin or currency other than
Philippine currency or in an amount of money of the
Philippines measured thereby, shall be as it is hereby
declared against public policy null and void, and of no
effect, and no such provision shall be contained in, or
made with respect to, any obligation thereafter incurred.
Every obligation heretofore and hereafter incurred,
whether or not any such provision as to payment
contained therein or made with respect thereto, shall be
discharged upon payment in any coin or currency which
at the time of payment is legal tender for public and
private debts.
c. Section 63 (R.A. 265, Central Bank Act) Legal
CharacterChecks representing deposit money do not
have legal tender power and their acceptance in the
payment of debts, both public and private, is at the option
of the creditor: Provided, however, that a check which
has been cleared and credited to the account of the
creditor shall be equivalent to a delivery to the creditor
of cash in an amount equal to the amount credited to his
account.
However, noteworthy is the fact that the prohibition in
Section 1 of R.A. 529 does not apply when:
a. Transactions were the funds involved are the proceeds
of loans or investments made directly or indirectly,
through bona fide intermediaries or agents, by foreign
governments, their agencies and instrumentalities, and
international financial and banking institutions so long
as the funds are Identifiable, as having emanated from
the sources enumerated above;
Basic Principles and Jurisprudence on the Negotiable Instruments Law 38
b. Transactions affecting high priority economic projects
for agricultural industrial and power development as may
be determined by the National Economic Council which
are financed by or through foreign funds;
c. Forward exchange transactions entered into between
banks or between banks and individuals or juridical
persons;
d. Import-export and other international banking financial
investment and industrial transactions.
With the exception of the cases enumerated in items (a),
(b), (c) and (d) in the foregoing provision, in, which cases the
terms of the parties agreement shall apply, every other domestic
obligation heretofore or hereinafter incurred whether or not any
such provision as to payment is contained therein or made with
respect thereto, shall be discharged upon payment in any coin or
currency which at the time of payment is legal tender for public
and private debts: Provided, that if the obligation was incurred
prior to the enactment of this Act and required payment in a
particular kind of coin or currency other than Philippine currency,
it shall be discharged in Philippine currency measured at the
prevailing rates of exchange at the time the obligation was
incurred, except in case of a loan made in foreign currency
stipulated to be payable in the currency in which case the rate of
exchange prevailing at the time of the stipulated date of payment
shall prevail. All coins and currency, including Central Bank notes,
heretofore and hereinafter issued and drawn by the Government
of the Philippines shall be legal tender for all debts, public and
private. (As amended by RA 4100, Section 1, approved June 19,
1964)
Under the above-quoted provision of Republic Act 529, if
the obligation was incurred prior to the enactment of the Act and
require payment in a particular kind of coin or currency other than
the Philippine currency the same shall be discharged in Philippine
currency measured at the prevailing rate of exchange at the time
the obligation was incurred. As we have adverted to, Republic
Act 529 was enacted on June 16, 1950. In the case now before
us the obligation of the appellant to pay the appellee the 20% of $
140,000.00, or the sum of $ 28,000.00, accrued on August 25,
39
1961, or after the enactment of Republic Act 529. It follows that
the provision of Republic Act 529 which requires payment at the
prevailing rate of exchange when the obligation was incurred
cannot be applied. Republic Act 529 does not provide for the rate
of exchange for the payment of the obligation incurred after the
enactment of said Act. The logical conclusion, therefore, is that
the rate of exchange should be that prevailing at the time of
payment. This view finds support in the ruling of this Court in the
case of Engel vs. Velasco & Co.
76
where this Court held that even
if the obligation assumed by the defendant was to pay the plaintiff
a sum of money expressed in American currency, the indemnity
to be followed should be expressed in Philippine currency at the
rate of exchange at the time of judgment rather than at the rate of
exchange prevailing on the date of defendants breach. This is
also the ruling of American court as follows:
The value of domestic money of a payment made in foreign
money is fixed with respect to the rate of exchange at the time of
payment. (70 CJS p. 228)
According to the weight of authority the amount of recovery
depends upon the current rate of exchange, and not the par value
of the particular money involved. (48 C.J. 605-606)
The value in domestic money of a payment made in foreign
money is fixed in reference to the rate of exchange at the time of
such payment. (48 C.J. 605)
77
It is to be noted that while an agreement to pay in dollars is
declared as null and void and of no effect, what the law specifically
prohibits is payment in currency other than legal tender. It does
not defeat a creditors claim for payment, as it specifically provides
that every other domestic obligationwhether or not any such
provision as to payment is contained therein or made with respect
thereto, shall be discharged upon payment in any coin or currency
which at the time of payment is legal tender for public and private
debts. A contrary rule would allow a person to profit or enrich
himself inequitable at anothers expense. (Ponce vs. Court of
Appeals, G.R. No. L-49494, May 31, 1979, [Melencio-Herrera,
J.])
76
47 Phil 115, 142.
77
Kalalao vs. Luz, G.R. No. L-27782, July 31, 1970.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 40
As held in Eastbound Navigation, Ltd. vs. Juan Ysmael &
Co., Inc., 102 Phil 1 (1957), and Arrieta vs. National Rice & Corn
Corp.
78
, if there is any agreement to pay an obligation in a currency
other than Philippine legal tender, the same is null and void as
contrary to public policy, pursuant to Republic Act No 529, and
the most that could be demanded is to pay said obligation in
Philippine currency. In other words, what is prohibited by RA No.
529 is the payment of an obligation in dollars, meaning that a
creditor cannot oblige the debtor to pay him in dollars, even if the
loan were given in said currency. In such a case, the indemnity to
be allowed should be expressed in Philippine currency on the
basis of the current rate of exchange at the time of payment.
79
(supra)
Exception to the Rule; check not a legal tender.
In the case of Salvacion F. Vda. De Eduque vs. Jose M.
Ocampo
80
, the Supreme Court already upheld that Japanese
military notes were legal tender during Japanese occupation. But
appellant argues, further, that the consignation of a cashiers
check, which is not legal tender, is not binding upon him. This
question, however, has never been raised in the lower court. Upon
the contrary, defendant accepted impliedly in the consignation of
the cashiers check when he himself asked the court that out of
the money thus consigned he be paid the amount of the second
loan of P15,000. It is a rule that a cashiers check may
constitute a sufficient tender where no objection is made on
this ground.
81
If effect, when there is implied acceptance, it thus operates
as a waiver on the part of the person receiving it to later question
the same. He is estopped by virtue his act of implied acceptance.
What is a crossed-check?
This is a check with two parallel lines in the upper left hand
corner. (Bank of America, NT & SA, vs. Associated Citizens Bank,
G.R. No. 141001, 141018, May 21, 2009, [Carpio, J.])
78
10 SCRA 79 (1964)
79
Kalalo vs. Luz, 34 SCRA 337 (1970)
80
G.R. No. L-222, 26 April 1950, penned by Chief Justice Moran
81
62 C.J., p. 670; see also 40 Amer. Jur. P. 764 (emphasis supplied)
41
Under usual practice, crossing a check is done by placing
two parallel lines diagonally on the left portion of the check. The
crossing may be special wherein between the two parallel lines is
written the name of a bank or a business institution, in which case
the drawee should pay only with the intervention of that bank or
company, or crossing may be general wherein between two
parallel diagonal lines are written the words and Co. or none at
all as in the case at bar, in which case the drawee should not
encash the same but merely accept the same for deposit. (State
Investment House vs. Intermediate Appellate Court, G.R. No.
72764, July 13, 1989, [Fernan, C.J:])
Illustrative Case:
CHAN WAN vs. TAN KIM and CHEN SO
G.R. No. L-15380, Sept. 30, 1960
BENGZON, J:
This suit to collect eleven checks totaling P4,290.00 is here
for decision because it involves no issue of fact.
Such checks payable to cash or bearer and drawn by
defendant Tan Kim (the other defendant is her husband) upon
the Equitable Banking Corporation, were all presented for payment
by Chan Wan to the drawee bank, but they were all dishonored
and returned to him unpaid due to insufficient funds and/or causes
attributable to the drawer.
At the hearing of the case, in the Manila court of first
instance, the plaintiff did not take the witness stand. His attorney,
however, testified only to identify the checks which are Exhibits
A to K plus the letters of demand upon defendants.
On the other hand, Tan Kim declared without contradiction
that the checks had been issued to two persons named Pinong
and Muy for some shoes the former had promised to make and
were intended as mere receipts.
In view of such circumstances, the court declined to order
payment for two principal reasons: (a) plaintiff failed to prove he
was a holder in due course, and (b) the checks being crossed
Basic Principles and Jurisprudence on the Negotiable Instruments Law 42
checks should not have been deposited instead with the bank
mentioned in the crossing.
It may be stated in this connection, that defendants asserted
a counterclaim, the court dismissed it for failure of proof, and from
such dismissal they did not appeal.
The only issue is, therefore, the plaintiffs right to collect on
the eleven commercial documents.
The Negotiable Instruments Law regulating the issuance of
negotiable checks, the rights and the liabilities arising therefrom,
does not mention crossed checks. Art. 541 of the Code of
Commerce refers to such instruments.
82


The bills of Exchange
Act of England of 1882, contains several provisions about them,
some of which are quoted in the margin.
83
In the case of Philippine National Bank vs. Zulueta, 101
Phil., 1071; 55 Off. Gaz., 222, we applied some provisions of said
Bills of Exchange Act because the Negotiable Law, originating
82
SEC. 541. The maker or any legal holder of a check shall be entitled to
indicate therein that it be paid to certain banker or institution, which he
shall do by writing across the face the name of said banker or institution,
or only the words and company.
The payment made to a person other than the banker or institution
shall not exempt the person on whom it is drawn, if the payment was not
correctly made.
83
76. [General and Special Crossing Defined.] (1) Where a check bears
across its face an addition of
(a) The words and company or any abbreviation thereof between two
parallel transverse lines, either with or without the words not negotiable;
or
(b) Two parallel transverse lines simply, either with or without the words
not negotiable; that addition constitutes a crossing, and the cheque is
crossed generally.
(2) Where a cheque bears across its face an addition of the name of a
banker, either with or without the words not negotiable, that addition
constitutes a crossing, and the cheque is crossed specially and to that
banker.
79. . . . (2) Where the banker on whom a cheque is drawn which is so
crossed nevertheless pays the same, or pays the same, or pays a cheque
crossed generally otherwise than to a banker, or if crossed specially
otherwise than to the banker to whom it is crossed, or his agent for
collection being a banker, he is liable to the true owner of the cheque for
any loss he may sustain owing to the cheque having been so paid. (Taken
from Brannans Negotiable Instruments Law, 60th Ed. 1250-1251.)
43
from England and codified in the United States, permits resort
thereto in matters not covered by it and local legislation.
84
Eight of the checks here in question bear across their face
two parallel transverse lines between which these words are
written: non-negotiable China Banking Corporation. These
checks have, therefore, been crossed specially to the China
Banking Corporation, and should have been presented for
payment by China Banking, and not by Chan Wan.
85
Inasmuch
as Chan Wan did present them for payment himself the Manila
court said there was no proper presentment, and the liability
did not attach to the drawer.
We agree to the legal premises and conclusion. It must be
remembered, at this point, that the drawer in drawing the check
engaged that on due presentment, the check would be paid, and
that if it be dishonored . . . he will pay the amount thereof to the
holder.
86
Wherefore, in the absence of due presentment, the
drawer did not become liable.
Nevertheless we find, on the backs of the checks,
endorsements which apparently show they had been deposited
with the China Banking Corporation and were, by the latter,
presented to the drawee bank for collection. For instance, on the
back of the check Exhibit A (same as in Exh. B), this endorsement
appears:
For deposit to the account of White House Shoe Supply
with the China Banking Corporation and then this:
Cleared through the clearing office of Central Bank of
the Philippines. All prior endorsements and/or lack of
endorsements guaranteed. Chi na Banki ng
Corporation.
And on the back of Exh. G:
84
Sec. 196, Negotiable Instruments Law.
85
If it is not presented by said Bank for payment, the drawee runs the risk, in
case of payment to persons not entitled thereto. So the practice is for the
drawee to refuse when presented by individuals. The check is generally
deposited with the bank mentioned in the crossing, so that the latter may
take charge of the collection.
86
Sec. 61. Negotiable Instruments Law.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 44
For deposit to the credit of our account. Viuda e Hijos
de Chua Chiong Pio. Peoples Shoe Company.
followed by the endorsement of China Banking Corporation
as in Exhibits A and B. All the crossed checks have the
clearance endorsement of China Banking Corporation.
These circumstances would seem to show deposit of the
checks with China Banking Corporation and subsequent
presentation by the latter through the clearing office; but as drawee
had no funds, they were unpaid and returned, some of them
stamped account closed. How they reached his hands, plaintiff
did not indicate. Most probably, as the trial court surmised, this
is not a finding of fact he got them after they had been thus
returned, because he presented them in court with such account
closed stamps, without bothering to explain. Naturally and rightly,
the lower court held him not to be a holder in due course under
the circumstances, since he knew, upon taking them up, that the
checks had already been dishonored.
87
Yet it does not follow as a legal proposition, that simply
because he was not a holder in due course Chan Wan could not
recover on the checks. The Negotiable Instruments Law does
not provide that a holder
88
who is not a holder in due course,
may not in any case, recover on the instrument. If B purchases
an overdue negotiable promissory note signed by A, he is not a
holder in due course; but he may recover from A,
89
if the latter has
no valid excuse for refusing payment. The only disadvantage of
holder who is not a holder in due course is that the negotiable
instrument is subject to defense as if it were non- negotiable.
90
(emphasis supplied)
Now what defense did the defendant Tan Kim prove? The
lower courts decision does not mention any; evidently His Honor
had in mind the defense pleaded in defendants answer, but though
it [is] unnecessary to specify, because the crossing and
presentation incidents sufficed to bar recovery, in his opinion.
87
Sec. 52 (b), Negotiable Instruments Law.
88
He was a holder all right, because he had possession of the checks that
were payable to bearer.
89
Sec. 51. Negotiable Instruments Law.
90
SEC. 58 Negotiable Instruments Law.
45
Tan Kim admitted on cross-examination either that the
checks had been issued as evidence of debts to Pinong and Muy,
and/or that they had been issued in payment of shoes which
Pinong had promised to make for her.
Seeming to imply that Pinong had to make the shoes, she
asserted Pinong had promised to pay the checks for me. Yet
she did not complete the idea, perhaps because she was just
answering cross- questions, her main testimony having referred
merely to their counter-claim.
Needless to say, if it were true that the checks had been
issued in payment for shoes that were never made and delivered,
Tan Kim would have a good defense as against a holder who is
not a holder in due course.
91
Considering the deficiency of important details on which a
fair adjudication of the parties right depends, we think the record
should be and is hereby returned, in the interest of justice, to the
court below for additional evidence, and such further proceedings
as are not inconsistent with this opinion. With the understanding
that, as defendants did not appeal, their counterclaim must be
and is hereby definitely dismissed. So ordered.
Paras, C.J., Padilla, Bautista Angelo, Labrador, Concepcion,
Reyes, J.B.L., Barrera, Gutierrez David, Paredes and Dizon,
JJ., concur.
What are the effects of crossing a check?
It means that it could only be deposited and could not be
converted into cash. Thus, the effect of crossing a check relates
to the mode of payment, meaning that the drawer had intended
the check for deposit only by the rightful person, i.e., the payee
named therein. (Bank of America, NT & SA, vs. Associated Citizens
Bank, G.R. No. 141001, 141018, May 21, 2009, [Carpio, J.])
In Bataan Cigar v. Court of Appeals, the Supreme Court
enumerated the effects of crossing a check as follows:
a.) The check may not be encashed but only deposited in
the bank;
91
Lack of consideration is a defense. (Sec. 28, Negotiable Instruments Law.)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 46
b.) The check may be negotiated only onceto one who
has an account with a bank; and
c.) The act of crossing the check serves as a warning to the
holder that the check has been issued for a definite
purpose so that he must inquire if he has received the
check pursuant to that purpose; otherwise, he is not a
holder in due course.
The effect therefore of crossing a check relates to the mode
of its presentment for payment. Under Section 72 of the
Negotiable Instruments Law, presentment for payment to be
sufficient must be made (a) by the holder, or by some person
authorized to receive payment on his behalfAs to who the holder
or authorized person will depend on the instructions stated on the
face of the check. (State Investment House vs. Intermediate
Appellate Court, G.R. No. 72764, July 13, 1989, [Fernan, C.J:])
The act of crossing a check serves as a warning to the holder
that the check has been issued for a definite purpose so that the
holder thereof must inquire if he has received the check pursuant
to that purpose; otherwise, he is not a holder in due course. (Dino
vs. Loot, G.R. No. 170912, April 19, 2010, [Carpio, J.])
Duty of the collecting bank when dealing with crossed checks
In Philippine Commercial International Bank vs. Court of
Appeals and Ford Phils., Inc.,
92
it was held that: the crossing of
the check with the phrase Payees Account Only, is a warning
that the checks should be deposited only in the account of the
CIR. Thus, it is the duty of the collecting bank PCIBank to ascertain
that the check be deposited in payees account only. Therefore,
it is the collecting bank (PCIBank) which is bound to scrutinize
the check and to know its depositors before it could make the
clearing indorsement all prior indorsements and/or lack of
indorsement guaranteed.
In Banco de Oro and Mortgage Bank vs. Equitable Banking
Corporation,
93
we ruled:
92
G.R. Nos. 121413, 121479, 128604, January 29, 2011
93
157 SCRA 188 (1988)
94
Id. at 194
47
Anent petitioners liability on said instruments, this court is
in full accord with the ruling of the PCHCs Board of Directors
that:
In presenting the checks for clearing and for payment, the
defendant made an express guarantee on the validity of
all prior endorsements. Thus, stamped at the back of the
checks are the defendants clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS
GUARANTEED. Without such warranty, plaintiff would not
have paid on the checks.
No amount of legal jargon can reverse the clear meaning of
defendants warranty. As the warranty has proven to be
false and inaccurate, the defendant is liable for any damage
arising out of the falsity of its representation.
94
What may be the ways of crossing a check?
The crossing may be special wherein between the two
parallel lines is written the name of a bank or business institution,
in which case the drawee should pay only with the intervention of
that bank or company.
It may also be general wherein between two parallel
diagonal lines are written the words and Co. or none at all, in
which case the drawee should not encash the same but merely
accept the same for deposit. (Bank of America, NT & SA, vs.
Associated Citizens Bank, G.R. No. 141001, 141018, May 21,
2009, [Carpio, J.])
Liability of depository bank for allowing the deposit of
crossed checks which were issued in favor of and payable
to one person, and without being indorsed by the former, to
the account of another person
Vicente Go vs. Metropolitan Bank and Trust Co.
G.R. No. 168842, August 11, 2010
NACHURA, J.:
Basic Principles and Jurisprudence on the Negotiable Instruments Law 48
FACTS: Petitioner (Vicente Go) alleged that he was doing
business under the name Hope Pharmacy which sells
medicine and other pharmaceutical products in the City
of Cebu. Petitioner had in his employ Chua as his
pharmacist and trustee or caretaker of the business;
Tabaag, on the other hand, took care of the receipts
and invoices and assisted Chua in making deposits
for petitioners accounts in the business operations of
Hope Pharmacy.
Petitioner claimed that there were unauthorized
deposits and encashments made by Chua and
Tabaag in the total amount of One Hundred Nine
Thousand Four Hundred Thirty-three Pesos and Thirty
Centavos (P109,433.30).
Petitioner also averred that there were thirty-two (32)
checks with Hope Pharmacy as payee, for varying
sums, amounting to One Million Four Hundred Ninety-
Two Thousand Five Hundred Ninety-Five Pesos and
Six Centavos (P1,492,595.06), that were not endorsed
by him but were deposited under the personal account
of Chua with respondent bank.
Petitioner claimed that the said checks were crossed
checks payable to Hope Pharmacy only; and that
without the participation and connivance of respondent
bank (which was the depository of said crossed-
checks), the checks could not have been accepted for
deposit to any other account, except petitioners
account.
ISSUE: May the depository bank (Metrobank) be liable for
allowing the deposit of crossed checks which were
issued in favor of and payable to herein petitioner
(Vicente Go) and without being indorsed by the latter,
to the account of Maria Teresa Chua (one of the
respondents)?
RULING: A check is a bill of exchange drawn on a bank payable
on demand.

There are different kinds of checks. In
this case, crossed checks are the subject of the
49
controversy. A crossed check is one where two parallel
lines are drawn across its face or across the 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, as in this case.
It may be issued so that presentment can be made
only by a bank.
In order to preserve the credit worthiness of checks,
jurisprudence has pronounced that crossing of a check
has 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; and (c) the act of crossing the
check serves as warning to the holder that the check
has been issued for a definite purpose so that he must
inquire if he has received the check pursuant to that
purpose, otherwise, he is not a holder in due course.
The Court has taken judicial cognizance of the practice
that a check with two parallel lines in the upper left
hand corner means that it could only be deposited and
not converted into cash. The effect of crossing a check,
thus, relates to the mode of payment, meaning that
the drawer had intended the check for deposit only by
the rightful person, i.e., the payee named therein.

The
crossing of a check is a warning that the check should
be deposited only in the account of the payee. Thus, it
is the duty of the collecting bank to ascertain that the
check be deposited to the payees account only.
In the instant case, there is no dispute that the subject
32 checks with the total amount of P1,492,595.06 were
crossed checks with petitioner as the named payee. It
is the submission of petitioner that respondent bank
should be held accountable for the entire amount of
the checks because it accepted the checks for deposit
under Chuas account despite the fact that the checks
Basic Principles and Jurisprudence on the Negotiable Instruments Law 50
were crossed and that the payee named therein was
not Chua.
In its defense, respondent bank countered that
petitioner is not entitled to reimbursement of the total
sum of P1,492,595.06 from either Maria Teresa Chua
or respondent bank because petitioner was not
damaged thereby.
Respondent banks contenti on i s meri tori ous.
Respondent bank should not be held liable for the entire
amount of the checks considering that, as found by
the RTC and affirmed by the CA, the checks were
actually given to Chua as payments by petitioner for
loans obtained from the parents of Chua. Furthermore,
petitioners non-inclusion of Chua and Tabaag in the
petition before this Court is, in effect, an admission by
the petitioner that Chua, in representation of her
parents, had rightful claim to the proceeds of the
checks, as payments by petitioner for money he
borrowed from the parents of Chua. Therefore,
petitioner suffered no pecuniary loss in the deposit of
the checks to the account of Chua.
However, we affirm the finding of the RTC that
respondent bank was negligent in permitting the deposit
and encashment of the crossed checks without the
proper indorsement. An indorsement is necessary for
the proper negotiation of checks specially if the payee
named therein or holder thereof is not the one
depositing or encashing it. Knowing fully well that the
subject checks were crossed, that the payee was not
the hol der and that the checks contai ned no
indorsement, respondent bank should have taken
reasonable steps in order to determine the validity of
the representations made by Chua. Respondent bank
was amiss in its duty as an agent of the payee.
Prudence dictates that respondent bank should not
have merely relied on the assurances given by Chua.
xxx xxx
51
Negligence was committed by respondent bank in
accepting for deposit the crossed checks without
indorsement and in not verifying the authenticity of the
negotiation of the checks. The law imposes a duty of
extraordinary diligence on the collecting bank to
scrutinize checks deposited with it, for the purpose of
determining their genuineness and regularity.

As a
business affected with public interest and because of
the nature of its functions, the banks are under
obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary
nature of the rel ati onshi p.

The fact that thi s
arrangement had been practiced for three years without
Mr. Go/Hope Pharmacy raising any objection does not
detract from the duty of the bank to exerci se
extraordinary diligence. Thus, the Decision of the RTC,
as affirmed by the CA, holding respondent bank liable
for moral damages is sufficient to remind it of its
responsibility to exercise extraordinary diligence in the
course of its business which is imbued with public
interest.
WHEREFORE, the Decision dated May 27, 2005 and
the Resolution dated August 31, 2005 of the Court of
Appeals in CA-G.R. CV No. 63469 are hereby
AFFIRMED.
Within what time should a check be presented for payment?
A check must be presented for payment within a reasonable
period after its issue or the drawer will be discharged from liability
thereon to the extent of the loss caused by the delay. (Sec. 186,
Negotiable Instruments Law)
The present banking practice requires that a check must
be issued within six (6) months from the date of issuance,
otherwise, the check becomes stale, and the drawer will be
discharged from liability thereon to the extent of the loss caused
by the delay.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 52
A stale check is valueless
A stale check is one which has not been presented for
payment within a reasonable time after its issue. It is valueless
and, therefore should not be paid. Under the negotiable
instruments law, an instrument not payable on demand must be
presented for payment on the day it falls due. When the instrument
is payable on demand, presentment must be made within a
reasonable time after its issue. In the case of a bill of exchange,
presentment is sufficient if made within a reasonable time after
the last negotiation thereof.
95
(International Corporate Bank vs.
Sps. Gueco, G.R. No. 141968, February 12, 2001, [Kapunan, J.])
Moreover, in Crystal vs. Court of Appeals
96
, it has been
held that, if the check had become stale, it becomes imperative
that the circumstances that caused its non-presentment be
determined.
What constitutes reasonable time?
In determining what is a reasonable time, regard is to be
had to the nature of the instrument, the usage of trade or business
with respect to such instruments, and the facts of the particular
case. (Sec. 193, Negotiable Instruments Law)
The test is whether the payee employed such diligence as
a prudent man exercises in his own affairs.
97
This is because the
nature and theory behind the use of a check points to its
immediate use and payability. (International Corporate Bank vs.
Sps. Gueco, G.R. No. 141968, February 12, 2001) (emphasis
supplied)
Acceptance not required in checks; Acceptance
synonymous with Certification of Checks
A comprehensive discussion was laid down by the Supreme
Court in the case of Philippine National Bank vs. The National
City Bank of New York and Motor Service Company, Inc., G.R.
No. L-43596, October 31, 1936, wherein it was held that: [a] check
is a bill of exchange payable on demand and only the rules
95
Section 71, Negotiable Instruments Law
96
71 SCRA 443 (1976)
97
Jeff Bras, Stones vs. McCullough (1934) 188 Ark. 1108, 69 S.W. (2d) 863
53
governing bills of exchange payable on demand are applicable to
it, according to Section 185 of the Negotiable Instruments Law.
In view of the fact that acceptance is a step unnecessary, in so far
as bills of exchange payable on demand are concerned (Sec.
143), it follows that the provisions relative to acceptance are
without application to checks. Acceptance implies, in effect,
subsequent negotiation of the instrument, which is not true in case
of the payment of a check because from the moment the check is
paid it is withdrawn from circulation. The warranty established by
section 62, is in favor of holders of the instrument after its
acceptance. When the drawee bank cashes or pays a check, the
cycle of negotiation is terminated, and it is illogical thereafter to
speak of subsequent holders who can invoke the warranty
provided in section 62 against the drawee. Moreover, according
to section 191, acceptance means an acceptance completed
by delivery or notification and this concept is entirely incompatible
with payment, because when payment is made the check is
retained by the bank, and there is no such thing as delivery or
notification to the party receiving the payment. Checks are not to
be accepted, but presented at once for payment. (1 Bouviers
Law Dictionary, 476) There can be no such thing as acceptance
in the ordinary sense of the term. A check being payable
immediately and on demand, the bank can fulfill its duty to the
depositor only by paying the amount demanded. The holder has
no right to demand from the bank anything but payment of the
check, and the bank has no right, against the drawer, to do
anything but to pay it. (5 R.C.L., p. 516, par. 38) A check is not an
instrument which in the ordinary course of business calls for
acceptance. The holder can never claim acceptance as his legal
right. He can present for payment, and only for payment. (1 Morse
on Banks and Banking, 6
th
ed., pp. 898, 899.)
There is, however, nothing in the law or in, business practice
against the presentation of checks for acceptance, before they
are paid, in which case we have a certification equivalent to
acceptance according to section 187, which provides that where
a check is certified by the bank on which it is drawn, the certification
is equivalent to an acceptance, and it is then that the warranty
under section 62 exists. This certification or acceptance consists
in the signification by the drawee of his assent to the order of the
drawer, which must not express that the drawee will perform his
promise by any other means than the payment of money. (Section
Basic Principles and Jurisprudence on the Negotiable Instruments Law 54
132) When the holder of a check procures it to be accepted or
certified, the drawer and all indorsers are discharged from liability
thereon (sec. 188), and then the check operates as an assignment
of a part of the funds to the credit of the drawer with bank. (sec.
189) There is nothing in the nature of the check which intrinsically
precludes its acceptance, in like manner and with like effect as a
bill of exchange or draft may be accepted. The bank may accept
if it chooses; and it is frequently induced by convenience, by the
exigencies of business, or by the desire to oblige customers,
voluntarily to incur the obligation. The act by which the bank places
itself under obligation to pay to the holder the sum called for by a
check must be the expressed promise or undertaking of the bank
signifying its intent to assume the obligation, or some act from
which the law will imperatively imply such valid promise or
undertaking. The most ordinary form which such an act assumes
is the acceptance by the bank of the check, or, as it is perhaps
more often called, the certifying of the check. (1 Morse on Banks
and Banking, pp. 898, 899; 5 R.C.L., p. 520)
No doubt a bank may by an unequivocal promise in writing
make itself liable in any event to pay the check upon demand, but
this is not an acceptance of the check in the true sense of that
term. Although a check does not call for acceptance, and the
holder can present it only for payment, the certification of checks
is a means in constant and extensive use in the business of
banking, and its effects and consequences are regulated by the
law merchant. Checks drawn upon banks or banker, thus marked
or certified, enter largely into the commercial and financial
transactions of the country; they pass from hand to hand, in the
payment of debts, the purchase of property, and in the transfer of
balances from one house and one bank to another. x x x The
check becomes a basis of creditany easy mode of passing
money from hand to hand, and answers the purposes of money.
(5 R.C.L., pp. 516, 517)
What is the effect of a check being certified by the drawee
bank?
Where a check is certified by the bank on which it is drawn
the certification is equivalent to an acceptance. (Sec. 187,
Negotiable Instruments Law)
55
The purpose of procuring a check to be certified is to
impart strength and credit to the paper by obtaining an
acknowledgment from the certifying bank that the drawer has
funds therein sufficient to cover the check and securing the
engagement of the bank that the check will be paid upon
presentation. A certified check has a distinctive character as a
species of commercial paper, and performs important functions
in banking and commercial business. When a check is certified,
it ceases to possess the character, or to perform the
functions, of a check, and represents so much money on
deposit, payable to the holder on demand. (Philippine National
Bank vs. The National City Bank of New York, October 31, 1936)
(emphasis supplied)
In the case of New Pacific Timber & Supply Co., Inc. vs.
Seneris
98
, [s]ince the check had been certified by the drawee
bank, by the certification, the funds represented by the check are
transferred from the credit of the maker to that of the payee or
holder, and for all intents and purposes, the latter becomes the
depositor of the drawee bank, with rights and duties of one in
such situation. Where a check is certified by the bank on which it
is drawn, the certification is equivalent to acceptance. Said
certification implies that the check is drawn upon sufficient funds
in the hands of the drawee, that they have been set apart for its
satisfaction, and that they shall be so applied whenever the check
is presented for payment. It is an understanding that the check is
good then, and shall continue good, and this agreement is as
binding on the bank as its notes on circulation, a certificate of
deposit payable to the order of depositor, or any other obligation
it can assume. The object of certifying a check, as regards
both parties, is to enable the holder to use it as money. When
the holder procures the check to be certified, the check operates
as an assignment of a part of the funds to the creditors. Hence,
the exception to the rule enunciated under Section 63 of the
Central Bank to the effect that a check which has been cleared
and credited to the account of the creditor shall be equivalent to a
delivery to the creditor in cash in an amount equal to the amount
credited to his account x x x (Equitable PCI Bank vs. Rowena
Ong, G.R. No. 156207 [September 15, 2006]) (emphasis supplied)
98
G.R. No. L-41764, 19 December 1980, 101 SCRA 686, 693
Basic Principles and Jurisprudence on the Negotiable Instruments Law 56
All the authorities, both English and American, hold that a
check may be accepted, though acceptance is not usual. By the
law merchant, the certificate of the bank that a check is good is
equivalent to acceptance. It implies that the check is drawn upon
sufficient funds in the hands of the drawee, that they have been
set apart for its satisfaction, and that they shall be so applied
whenever the check is presented for payment. It is an undertaking
that the check is good then, and shall continue good, and this
agreement is as binding on the bank as its notes of circulation, a
certificate of deposit payable to the order of the depositor, or any
other obligation it can assume. The object of certifying a check
as regards both parties is to enable the holder to use it as money.
The transferee takes it with the same readiness and sense of
security that he would take the notes of the bank. It is available
also to him for all purposes of money. Thus it continues to perform
its important functions until in the course of business it goes back
to the bank for redemption, and is extinguished by payment. It
cannot be doubted that the certifying bank intended these
consequences, and it is liable accordingly. To hold otherwise
would render these important securities only a snare and a
delusion. A bank incurs no greater risk in certifying a check than
in giving a certificate of deposit. In well- regulated banks the
practice is at once to charge the check to the account of the drawer,
to credit in a certified check account, and, when the check is paid,
to debit that account in the amount. Nothing can be simpler or
safer than this process. (Merchants Bank vs. States Bank, 10
Wall., 604, at p. 647; 19 Law. Ed., 1008, 1009, cited in PNB vs.
National City Bank of New York, id.)
Ordinarily the acceptance or certification of a check is
performed and evidenced by some word or mark, usually the
words good, certified or accepted written upon the check by
the banker or bank officer. (1 Morse, Banks and Banking, 915; 1
Bouviers Law Dictionary, 476.) The bank virtually says, that check
is good; we have the money of the drawer here ready to pay it.
We will pay it now if you receive it. The holder says, No, I will not
take the money; you may certify the check and retain the money
for me until this check is presented. The law will not permit a
check, when due, to be thus presented, and the money to be left
with the bank for the accommodation of the holder without
discharging the drawer. The money being due and the check
presented, it is his own fault if the holder declines to receive the
57
pay, and for his own convenience has the money appropriated to
that check to its future presentment at any time within the statute
of limitations. (1 Morse on Banks and Banking, p. 920.)
What happens if the holder of the check procures it to be
certified?
Where the holder of a check procures it to be accepted or
certified, the drawer and all indorsers are discharged from liability
therefrom. (Sec. 188, Negotiable Instruments Law)
Payment and Certification of Checks distinguished
In the PNB case, the Supreme Court laid down a detailed
discussion and held that: [w]ith few exceptions, the weight of
authority is to the effect that payment neither includes nor implies
acceptance.
In National Bank vs. First National Bank ([19101, 141 Mo.
App., 719; 125 S.W., 513), the court asks, if a mere promise to
pay a check is binding on a bank, why should not the absolute
payment of the check should have the same effect? In response,
it is submitted that the two things, that is acceptance and
payment, are entirely different. If the drawee accepts the paper
after seeing it, and then permits it to go into circulation as genuine,
on all the principles of estoppel, he ought to be prevented from
setting up forgery to defeat liability to one who has taken the paper
on the faith of the acceptance, or certification. On the other hand,
mere payment of the paper at the termination of its course does
not act as an estoppel. The attempt to state a general rule covering
both acceptance and payment is responsible for a large part of
the conflicting arguments which have been advanced by the courts
with respect to the rule. (Annotation at 12 A.L.R., 1090 1921.])
In First National Bank vs. Brule National Bank ([1917], 12
A.L.R., 1079, 1085), the Court said:
We are of the opinion that payment is not acceptance.
Acceptance, as defined by Section 131, cannot be
confounded with payment
Acceptance, certification, or payment of a check, by the
express language of the statute, discharges the liability only
Basic Principles and Jurisprudence on the Negotiable Instruments Law 58
of the persons named in the statute, to wit, the drawer and
all indorsers, and the contract of indorsement by the
negotiator if the check is discharged by acceptance,
certification, or payment. But clearly the statute does not
say that the contract or warranty of the negotiator, created
by Section 65, is discharged by these acts.
The rule supported by the majority of the cases (14 A.L.R.
764), that payment of a check on a forged or unauthorized
indorsement of the payees name, and charging the same to the
drawers account, do not amount to an acceptance so as to make
the bank liable to the payee, is supported by all of the recent
cases in which the question is considered. (cases cited, Annotation
at 69 A.L.R., 1076, 1077 [1930])
Merely stamping a check paid upon its payment on a forged
or unauthorized indorsement is not an acceptance thereof so as
to render the drawee bank liable to the true payee. (Anderson vs.
Tacoma National Bank [1928], 146 Wash., 520 520; Pac., 8;
Annotation at 69 A.L.R., 1077, [1930])
In State Bank of Chicago vs. Mid-City Trust & Savings Bank
(12 A.L.R., 989; 991, 992), the Court said:
The defendant in error contends that the payment of the
check shows acceptance by the bank, urging that there can be
no more definite act by the bank upon which a check has been
drawn, showing acceptance than the payment of the check.
Section 184 of the Negotiable Instruments Act (Sec. 202) provides
that the provisions of the act applicable to bills of exchange apply
to a check, and section 131 (sec. 149), that the acceptance of a
bill must be in writing signed by the drawee. Payment is the final
act which extinguishes a bill. Acceptance is a promise to pay in
the future and continues the life of the bill. It was held in the First
National Bank vs. Whitman (94 U.S., 343; 24 L. ed., 229), that
payment of a check upon a forged indorsement did not operate
as an acceptance in favor of the true owner. The contrary was
held in Pickle vs. Muse (Fickle vs. Peoples Nat. Bank, 88 Tenn.,
380; 7 L.R.A., 93; 17 Am. St. Rep., 900; 12 S.W., 919), and Seventh
National Bank vs. Cook (73 Pa., 483; 13 Am. Rep. 751) at a time
when the Negotiable Instruments Act was not in force in those
states. The opinion of the Supreme Court of the United States
59
seems more logical, and the provision of the Negotiable
Instruments Act now require an acceptance to be in writing. Under
this statute the payment of a check on a forged indorsement,
stamping it paid, and charging it to the account of the drawer, do
not constitute an acceptance of the check or create a liability of
the bank to the true holder or the payee. (Elyria Sav. & Bkg. Co.
vs. Walker Bin Co., 92 Ohio St., 406; L.R.A. 1916 D, 433; 111
N.E., 147; Ann. Cas. 1917 D, 1055; Baltimore & O.R. Co. vs. First
National Bank, 102 Va., 753; 47 S.E., 837; State Bank of Chicago
vs. Mid-City Trust & Savings Bank 12 A.L.R., pp. 989, 991, 992.)
Before drawees acceptance of check there is no privity of
contract between drawee and payee. Drawees payment of check
on unauthorized indorsement does not constitute acceptance
of check. (Sinclair Refining Co. vs. Moultrie Banking Co., 165
S.E., 860 [1932])
The great weight of authority is to the effect that the payment
of a check upon a forged or unauthorized indorsement and the
stamping of it paid does not constitute an acceptance. (Dakota
Radio Apparatus Co. vs. First Nat. Bank of Rapid City, 244 N.W.,
351, 352 [1932].)
Paying of the check, cashing it on presentment is not
acceptance. (South Boston Trust Co. vs. Levin, 249 Mass., 45,
48, 49; 143 N.E., 816; Blocker, Shepard Co. vs. Granite Trust
Company, 187 Me., 53, 54 [1933].)
In Rauch vs. Bankers National Bank of Chicago (143 III.
App. 625, 636, 637 [1908]), the language of the decision was as
follows:
The plaintiffs say that this acceptance was made by the
very unauthorized payments of which they complain. This
suggestion does not seem forceful to us. It is the contention
which was made before the Supreme Court of the United
States in First National Bank vs. Whitman (94 U.S., 343),
and repudiated by that court. The language of the opinion
in that case is so apt in the present case that we quote it:
It is further contended that such an acceptance of a check
as creates a privity between the payee and the bank is
Basic Principles and Jurisprudence on the Negotiable Instruments Law 60
established by the payment of the amount of this check in
the manner described. This argument is based upon the
erroneous assumption that the bank has paid this check. If
this were true, it would have discharged all of its duty, and
there would be an end to the claim against it. The bank
supposed that it had paid the check, but this was an error.
The money it paid was upon a pretended and not a real
indorsement of the name of the payeeWe cannot
recognize the argument that payment of the amount of the
check or sight draft under such circumstances amounts to
an acceptance creating a privity of contract with the real
owner.
It is difficult to construe a payment as an acceptance under
any circumstancesA banker or individual may be ready
to make actual payment of a check or draft when presented,
while unwilling to make a promise to pay than to meet the
promise when required. The difference between the
transactions is essential and inherent.
And in Wharf vs. Seattle National Bank (24 Pac. [2d], 120,
123 [1933]):
It is the rule that payment of a check on unauthorized or
forged indorsement does not operate as an acceptance of
the check so as to authorize an action by the real owner to
recover its amount from the drawee bank. (Michie on Banks
and Banking, vol. 5, sec. 278, p. 521.) (See also, Federal
Land Bank vs. Collings, 156 Miss., 893; 127 So., 570; 69
A.L.R., 1068.)
In a very recent case, Federal Land Bank vs. Collins (69
A.L.R., 1068, 1072-1074), this question was discussed at
considerable length. The court said:
In the light of the first of these statutes, counsel for appellant
is forced to stand upon the narrow ledge that the payment of the
check by the two banks will constitute an acceptance. The drawee
bank simply marked it paid and did not write anything else except
the date. The bank first paying the check, the Commercial National
Bank and Trust Company, simply wrote its name as indorser and
passed the check on to the drawee bank; does this constitute
61
acceptance? The precise question has not been presented to
this court for decision. Without reference to authorities in other
jurisdictions it would appear that the drawee bank had never written
its name across the paper and therefore, under the strict terms of
the statute, could not be bound as the acceptor, in the second
place, it does not appear to us to be illogical and unsound to say
that the payment of a check by the drawee, and the stamping of it
paid, is equivalent to the same thing as acceptance of a check;
however, there is a variety of opinions in the various jurisdictions
on this question. Counsel correctly states that the theory upon
which numerous courts hold that the payment of a check creates
privity between the holder of the check and the drawee bank is
tantamount to a pro tanto assignment of that part of the funds. It
is most easily understood how the payment of the check, when
not authorized to be done by the drawee bank, might under such
circumstances create liability on the part of the drawee to the
drawer. Counsel cites the case of Pickle vs. Muse (88 Tenn, 380;
12 S.W., 919; 7 L.R.A., 93; 17 Am. St. Rep., 900), wherein Judge
Lurton held that the acceptance of a check was necessary order
to give the holder thereof a right of action thereon against the
bank, and further held in a case similar to this, so far as the
question is concerned, that the acceptance of a check by the bank
and its subsequent charge of the amount to the drawer, although
it was presented by, and payment made, an unauthorized person.
Judge Lurton cited the case of National Bank of the Republic vs.
Millard (10 Wall., 152; 19 L.ed., 897), wherein the Supreme Court
of the United States, not having such a case before it, threw out
the suggestion that, if it was shown that a bank had charged the
check on its books against the drawer and made settlement with
the drawee that the holder could recover on account of money
had and received, invoking the rule of justice and fairness, it might
be said there was an implied promise to the holder to pay it on
demand. (See National Bank of the Republic vs. Millard, 10 Wall.
[77 U.S.], 152; 19 L.ed., 899.) The Tennessee court then argued
that it would be inequitable and unconscionable for the owner
and payee of the check to be limited to an action against an
insolvent drawer and might thereby lose the debt. They recognized
the legal principle that there is no privity between the drawer bank
and the holder, or payee, of the check, and proceeded to hold
that no particular kind of writing was necessary to constitute an
acceptance and that it became a question of fact, and the bank
became liable when it stamped it paid and charged it to the
Basic Principles and Jurisprudence on the Negotiable Instruments Law 62
account of the drawer, and cites, in support of its opinion, Seventh
National Bank vs. Cook (73 Pa., 483; 13 Am. Rep. 751); Saylor
vs. Bushong (100 Pa., 23; 45 Am. Rep., 353); and Dodge vs.
Bank (20 Ohio St., 234; 5 Am. Rep., 648.)
This decision was in 1890, prior to the enactment of the
Negotiable Instruments Law by the State of Tennessee.
However, in this case Judge Snodgrass points out that the
Millard Case, supra, was dicta. The Dodge case, from the
Ohio court, held exactly as the Tennessee court, but
subsequently in the case of Elyria Bank vs. Walker Bin Co.
(92 Ohio St., 406; 111 N.E., 147; L.R.A. 1916 D, 433; Ann.
Cas. 1917 D, 1055), the court held to the contrary, called
attention to the fact that the Dodge case was no longer the
law, and proceeded to announce that, whatever might have
been the law before the passage of the Negotiable
Instrument Act in that state, it was no longer the law; and
the rule announced in the Dodge case had been discarded.
The court, in the latter case, expressed its doubts that the
courts of Tennessee and Pennsylvania would adhere to the
rule announced in the Pickle case, quoted supra, in the fact
of the Negotiable Instrument Law. Subsequent to the Millard
case, the Supreme Court of the United States, in the case
of First National Bank of Washington vs. Whitman (94 U.S.,
343, 347; 24 L.ed., 229), where the bank, without any
knowledge that the indorsement of the payee was
unauthorized, paid the check, and it was contended that by
the payment the privity of contract existing between the
drawer and drawee was imparted to the payee, said:
It is further contended that such an acceptance of the check
as creates a privity between the payee and the bank is
established by the payment of the amount of this check in
the manner described. This argument is based upon the
erroneous assumption that the bank has paid this check. If
this were true, it would have discharged all of its duty, and
there would be an end of the claim against it. The bank
supposed that it had paid the check; but this was an error.
The money it paid was upon a pretended and not a real
indorsement of the name of the payee. The real indorsement
of the payee was as necessary to a valid payment as the
real signature of the drawer; and in law the check remains
unpaid. Its pretended payment did not diminish the funds
63
of the drawer in the bank, or put money in the pocket of the
person entitled to the payment. The state of the account
was the same after the pretended payment as it was before.
We cannot recognize the argument that a payment of the
amount of a check or sight draft under such circumstances
amounts to an acceptance, creating a privity of contract with
the real owner. It is difficult to construe a payment as an
acceptance under any circumstances. The two things are
essentially different. One is a promise to perform at, the
other an actual performance. A banker or an individual may
be ready to make actual payment of a check or draft when
presented, while unwilling to make a promise to pay than to
meet the promise when required. The difference between
the transactions is essential and inherent.
Nature of a managers check.
A managers check is one drawn by a banks manager upon
the bank itself. It stands on the same footing as a certified check,
which is deemed to have been accepted by the bank that certified
it. As the banks own check, a managers check becomes the
primary obligation of the bank and is accepted in advance by the
act of its issuance. (Security Bank and Trust Company vs. Rizal
Commercial Banking Corporation, G.R. No. 170984, 170987,
January 30, 2009, [Quisumbing, J.])
A managers check is an order of the bank to pay, drawn
upon itself, committing in effect its total resources, integrity and
honor behind its issuance, and by its peculiar character and
general use in commerce, a managers check is regarded
substantially to be as good as the money it represents. (Citibank
N.A. (Formerly First National City Bank) vs. Sabeniano, 504 SCRA
378)
[It] stands on the same footing as a certified check.
99
The
effect of certification is found in Section 187, Negotiable
Instruments Law.
100
The effect of issuing a managers check was
99
Supra note 21 at 411 [Soler v. Court of Appeals, G.R. No. 123892, 21 May
2011, 358 SCRA 57, 64]
100
Sec. 187. Certification of check; effect of.Where a check is certified by
the bank on which it is drawn, the certification is equivalent to an
acceptance
Basic Principles and Jurisprudence on the Negotiable Instruments Law 64
incontrovertibly elucidated when [we] it was declared that [a]
managers check is one drawn by the banks manager upon the
bank itself. It is similar to a cashiers check both as to the effect
and use. A cashiers check is a check of the banks cashier on
his own or another check. In effect, it is a bill of exchange drawn
by the cashier of a bank upon the bank itself, and accepted in
advance by the act of its issuance. It is really the banks own
check and may be treated as a promissory note with the bank as
a maker. The check becomes the primary obligation of the bank
which issued it and constitutes its written promise to pay upon
demand. The mere issuance of it is considered an acceptance
thereof. x x x.
101
(Equitable PCI Bank vs. Rowena Ong, G.R. No.
156207, September 15, 2006, [Chico-Nazario, J.])
Given that a check is more than just an instrument of credit
used in commercial transactions for it also serves as a receipt or
evidence for the drawee bank of the cancellation of the said check
due to payment, then, the possession by the drawee bank of the
said Managers Checks (MCs), duly stamped Paid gives rise to
the presumption that the said Managers Checks (MCs) were
already paid out to the intended payee. (supra)
Cashiers Check deemed as cash
In the case of New Pacific Timber & Supply Company, Inc.
vs. Hon. Alberto Seneris,
102
it was held that:
It is to be emphasized in this connection that the check
deposited by the petitioner in the amount of P50, 000.00 is not an
ordinary check but a Cashiers Check of the Equitable Banking
Corporation, a bank of good standing and reputation. As testified
to by the Ex-Officio Sheriff with whom it has been deposited, it is
a certified crossed check.
103
It is a well-known and accepted
practice in the business sector that a Cashiers Check is deemed
as cash. Moreover, since the said check had been certified by the
drawee bank, by the certification, the funds represented by the
check are transferred from the credit of the maker to that of the
payee or holder, and for all intents and purposes, the latter
becomes the depositor of the drawee bank, with rights and duties
101
International Corporate Bank vs. Gueco, G.R. No. 141968, 12 February
2001
102
G.R. No. L-41764, December 19, 1980, [Concepcion, Jr., J.:]
103
p. 35, t.s.n., May 24, 1975
65
of one in such situation.
104
Where a check is certified by the bank
on which it is drawn, the certification is equivalent to acceptance.
105
Said certification implies that the check is drawn upon sufficient
funds in the hands of the drawee, that they have been set apart
for its satisfaction, and that they shall be so applied whenever the
check is presented for payment. It is an understanding that the
check is good then, and shall continue good, and this agreement
is as binding on the bank as its notes in circulation, a certificate of
deposit payable to the order of the depositor, or any other
obligation it can assume. The object of certifying a check, as
regards both parties, is to enable the holder to use it as money.
106
When the holder procures the check to be certified, the check
operates as an assignment of a part of the funds to the creditors.
107
Hence, the exception to the rule enunciated under Section 63 of
the Central Bank Act to the effect that a check which has been
cleared and credited to the account of the creditor shall be
equivalent to a delivery to the creditor in cash in an amount equal
to the amount credited to his account shall apply in this case.
Problem:
X delivered stocks of vegetable oil to Y sometime on
March 1993. As payment therefor, Y issued a personal
check in the amount of Php 348, 805.50. However, when
the check was encashed, it was dishonored by the
drawee bank. Y then assured X that he would replace
the bounced check with a cashiers check from the Bank
of the Philippine Islands (BPI). Thereafter, BPI cashiers
check no. 14428 in the amount of Php 348, 805.50 was
issued, drawn against the account of Y. The following
day, X returned to drawee bank to encash the check
but it was dishonored, the bank then informed X that
Ys account was closed on that date.
104
Gregorio Araneta, Inc. vs. Paz Tuazon de Paterno and Jose Vidal, L-
2886, August 22, 1952, 49 O.G. No. 1, p. 59
105
Section 187. Certification of check; effect of. Where a check is certified
by the bank on which it is drawn, the certification is equivalent to
acceptance. (Negotiable Instruments Law)
106
PNB vs. Nat. City Bank of New York, 63 Phil. 711, 718-719
107
PNB vs., Nat. City Bank of New York, supra, 711-717; Sec. 189. When
check operates as an assignment. A cheek of itself does not operate
as an assignment of any part of the funds to the credit of the drawer with
the bank. and the bank, is not liable to the holder unless and until it accepts
or certifies it. (Negotiable Instruments Law) [Emphasis supplied]
Basic Principles and Jurisprudence on the Negotiable Instruments Law 66
X then filed a complaint for collection of sum of money
against BPI. In its answer, BPI claimed that it issued
the check by mistake in good faith; that its dishonor
was due to lack of consideration; and that Xs remedy
was to sue Y who purchased the check.
a. Is X a holder in due course despite BPIs contention
that there was lack of consideration?
b. Is BPI liable to X for the amount of the cashiers
check?
c. What is the nature of a cashiers check?
ANSWER:
a. YES. X is a holder in due course.
Sec. 52. (NIL)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;
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.
Value in general terms may be some right, interest, profit
or benefit to the party who makes the contract or some
forbearance, detriment, loan, responsibility, etc., on the
other side. Here, there is no dispute that X received Ys
cashiers check as payment for the formers vegetable
oil. The fact that it was Y who purchased the cashiers
check from BPI will not affect Xs status as a holder for
value since the check was delivered to him as payment
for the vegetable oil he sold to Y. (Bank of the Philippine
Islands vs. Gregorio C. Roxas, G.R. No. 157833, October
15, 2007 [Sandoval-Gutierrez, J.]).
67
b. YES. BPI is liable for the amount of the cashiers check.
A cashiers check is really the banks own check and
may be treated as a promissory note with the bank as a
maker. The check becomes the primary obligation of
the bank which issues it and constitutes a written promise
to pay upon demand. (BPI vs. Roxas)
c. It is a well known and accepted practice in the business
sector that a cashiers check is deemed as cash. This
is because the mere issuance of a cashiers check is
considered acceptance thereof. (BPI vs. Roxas).
What is a Memorandum check?
A memorandum check is in the form of an ordinary check,
with the word memorandum, or memo or mem written across
its face, signifying that the maker or drawer engages to pay the
bona fide holder absolutely, without any condition concerning its
presentment.
108
(People of the Philippines vs. Hon. David Nitafan,
et al, G.R. No. 75954, October 22, 1992)
Such a check is an evidence of debt against the drawer
and although may not be intended to be presented,
109
has the
same effect as an ordinary check,
110
and if passed to the third
person, will be valid in his hands like any other check.
111
(Ibid.)
Feature of a Memorandum Check
A memorandum check may carry with it the understanding
that it is not [to] be presented at the bank but will be redeemed by
the maker himself when the loan falls due. This understanding
may be manifested by writing across the check Memorandum,
Memo, or Mem. (People vs. Nitafan, supra)
It presents all the features of other negotiable instruments
when transferred or indorsed to a bona fide holder for value. It is
a contract by which the maker engages to pay the bona fide holder
absolutely, and not upon a condition to pay if the bank upon which
108
Franklin Bank v. Freeman, 16 Pick 535
109
Cushing v. Gore, 15 Mass. 69.z
110
Dykes v. Leather Manufactures Bank, 11 Page 612
111
Franklin Bank v. Freeman, supra
Basic Principles and Jurisprudence on the Negotiable Instruments Law 68
it be drawn should not pay upon presentation at maturity, and if
due notice of the presentation and nonpayment should be given.
112
Liabilities of a drawee bank
The bank of which a check is drawn, known as the drawee
bank, is under strict liability, based on the contract between the
bank and its customer (drawer), to pay the check only to the payee
or the payees order. The drawers instructions are reflected on
the face and by the terms of the check.
When the drawee bank pays a person other than the payee
named on the check, it does not comply with the terms of the
check and violates its duty to charge the drawers account only
for properly payable items.
Thus, the Supreme Court ruled in Philippine National Bank
vs. Rodriguez, that a drawee should charge to the drawers
account only the payables authorized by the latter; otherwise, the
drawee will be violating the instructions of the drawer and shall
be liable for the amount charged to the drawers account.
(Bank of America, NT & SA, vs. Associated Citizens Bank, G.R.
No. 141001, 141018, May 21, 2009, [Carpio, J.])
Liability of an endorser bank under Section 66 of the
Negotiable Instruments Law
In check transactions, the collecting bank or last endorser
generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion
that the party making the presentment has done its duty to
ascertain the genuineness of the endorsements. (Bank of America,
NT & SA, vs. Associated Citizens Bank, G.R. No. 141001, 141018,
May 21, 2009, [Carpio, J.])
If a bank refuses to pay a check, can the payee-holder thereof
sue the bank?
No. If a bank refuses to pay a check (notwithstanding
sufficiency of funds), the payee-holder cannot sue the bankthe
112
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 407, citations omitted
69
payee-holder should instead sue the drawer who might in turn
sue the bank. (Villanueva vs. Nite, 496 SCRA 459 [2006]). Section
189
113
is sound law based on logic and established legal principles:
no privity of contract between the drawee-bank and the payee.
(supra)
Is there any difference between a Check and a Promissory
Note?
A check is a form of a bill of exchange wherein it is an
unconditional order in writing addressed by one person to another
(usually a bank), signed by the person giving it, requiring the
person to whom it is addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to
bearer, whereas, a promissory note is an unconditional promise
to pay made by one person addressed to another, on demand or
also at a fixed or determinable future time, a sum certain in money
to order or to bearer.
A check necessarily involves three individuals, the drawer,
the payee, and the drawee (bank), whereas, a promissory note
only involves two persons, the maker and the payee.
In checks, liability of the drawee bank arises from the
moment the latter accepts the check being presented either for
acceptance or payment, whereas in promissory notes, liability of
the maker attaches from the moment the instrument was delivered
to the payee for the purpose of giving effect thereto.
Questions:
Does a collecting bank, over the objections of the
depositor, have the authority to withdraw unilaterally
from such depositors account the amount it had
previously paid upon certain unindorsed order
instruments deposited by the depositor to another
account that she later closed?
113
SEC. 189. When check operates as an assignment. A check of itself
does not operate as an assignment of any part of the funds to the credit
of the drawer with the bank, and the bank is not liable to the holder, unless
and until it accepts or certifies the check. (emphasis ours)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 70
ANSWER:
This was the query poised by Justice Azcuna in the case of
Bank of the Philippine Islands vs. Court of Appeals, et
al, where it was held that:
The collecting bank, had the right to debit the depositors
account for the value of the checks it previously credited in her
favor. It is of no moment that the account debited by the collecting
bank was different from the original account to which the proceeds
of the check were credited because both admittedly belonged to
depositor.
114
The right to set-off was explained in Associated Bank vs.
Tan.
115
A bank generally has a right of set-off over the deposits
therein for the payment of any withdrawals on the part of a
depositor. The right of a collecting bank to debit a clients account
for the value of a dishonored check that has previously been
credited has fairly been established by jurisprudence. To begin
with, Article 1980 of the Civil Code provides that [f]ixed, savings,
and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning simple loan.
Hence, the relationship between banks and depositors has
been held to be that of creditor and debtor. Thus, legal
compensation under Article 1278 of the Civil Code may take place
when all the requisites mentioned in Article 1279 are present.
x x x
While, however, it is conceded that petitioner had the right
to set-off the amount it paid to Templonuevo against the deposit
of Salazar, the issue of whether it acted judiciously is an entirely
different matter.
116
As businesses affected with public interest,
and because of the nature of their functions, banks are under
obligation to treat the accounts of their depositors with meticulous
114
Bank of the Philippine Islands vs. Court of Appeals, et al, January 25,
2007, G.R. No. 136202
115
G.R. No. 156940, December 14, 2004, 446 SCRA 282
116
Id
71
care, always having in mind the fiduciary nature of their
relationship.
117
In this regard, petitioner was clearly remiss in its
duty to private respondent Salazar as its depositor.
To begin with, the irregularity appeared plainly on the face
of the checks. Despite the obvious lack of indorsement thereon,
petitioner permitted the encashment of these checks three times
on three separate occasions. This negates petitioners claim that
it merely made a mistake in crediting the value of the checks to
Salazars account and instead bolsters the conclusion of the CA
that petitioner recognized Salazars claim of ownership of the
checks and acted deliberately in paying the same, contrary to
ordinary banking policy and practice. It must be emphasized that
the law imposes a duty of diligence on the collecting bank to
scrutinize checks deposited with it, for the purpose of determining
their genuineness and regularity. The collecting bank, being
primarily engaged in banking, holds itself out to the public as the
expert on this field, and the law thus holds it to a high standard of
conduct.
118
The taking and collection of a bank without the proper
indorsement amount to a conversion of the check by the bank.
119
In depositing the check under his name, the depositor does
not automatically become the owner of the amount deposited
In Bank of the Philippine Islands vs. Court of Appeals
and Benjamin Napiza
120
: as correctly held by the Court of
Appeals, in depositing the check in his name, private respondent
did not become the outright owner of the amount stated therein.
Under the above rule, by depositing the check with petitioner,
private respondent was, in a way, merely designating petitioner
as the collecting bank. This is in consonance with the rule that a
negotiable instrument, such as a check, whether a managers
check or ordinary check, is not legal tender.
121
As such, after
receiving the deposit, under its own rules, petitioner shall credit
117
Prudential Bank v. CA, G.R. No. 125536, March 16, 2000, 328 SCRA 264;
Simex International [Manila], Inc. v. CA, G.R. No.88013, March 19, 1990,
183 SCRA 360; BPI v. IAC, G.R. No. 69162, February 21, 1992, 206 SCRA
408
118
Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corp.,
G.R. No. L-74917, January 20,1988, 157 SCRA 188
119
Associated Bank v. CA, G.R. No. 89802, May 7, 1992, 208 SCRA 465;
City Trust Banking Corp. v. IAC, G.R. No. 84281, May 27, 1994, 232 SCRA
559
120
February 29, 2000
Basic Principles and Jurisprudence on the Negotiable Instruments Law 72
the amount in private respondents account or infuse value thereon
only after the drawee bank shall have paid the amount of the
check or the check has been cleared for deposit. Again, this is in
accordance with ordinary banking practices and with this Courts
pronouncement that the collecting bank or last endorser generally
suffers the loss because [it] has the duty to ascertain the
genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion
that the party making the presentment has done its duty to
ascertain the genuineness of the endorsements.
122
The rule finds
more meaning in this case where the check involved is drawn on
a foreign bank and therefore collection is more difficult than when
the drawee bank is a local one even though the check in question
is a managers check.
123
"
Distinguish between Drawn Against Insufficient Funds
(DAIF) and Drawn Against Uncollected Deposit (DAUD).
ANSWER:
121
Philippine Airlines, Inc. v. Court of Appeals, L-49188, 181 SCRA 557, 568
(1990) citing Sec. 189 of the Negotiable Instruments Law; Art. 1249, Civil
Code; Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan Sunco v.
Santos, 9 Phil. 44 and 21 R.C.L. 60, 61
122
Associated Bank v. Court of Appeals, 322 Phil. 677, 699-700 citing Bank
of the Philippines Islands v. Court of Appeals, G.R. No. 102383, 216 SCRA
51, 63 (1992), Banco de Oro v. Equitable Banking Corporation, G.R. 74917,
157 SCRA 188 (1988) and Great Eastern Life Insurance Co. v. Hongkong
and Shanghai Banking Corporation, 43 Phil. 678
123
A managers check is like a cashiers check which, in the commercial
world, is regarded substantially to be as good as the money it represents
(Tan v. Court of Appeals, G.R. No. 108555, 239 SCRA 310, 322 (1944)
DAIF DAUD
Is a condition in which
a depositors balance
is inadequate for the
bank to pay a check.
It means that the account
has, on its face, sufficient
funds but not yet available to
the drawer because the
deposit, usually a check, had
not yet been cleared.
It subjects the
depositor to possible
prosecution for estafa
and Bouncing Checks
Law (BP 22)
It does not expose the
depositor the estafa and
BP 22
73
(Bank of the Philippine Islands vs. Suarez, G.R. No.
167750, March 15, 2010, [Carpio. J.])
Prescriptive Period to bring action
The statute of limitations begins to run when the bank gives
the depositor notice of the payment, which is ordinarily when the
check is returned to the alleged drawer as a voucher with a
statement of his account,
124
and an action upon a check is
ordinarily governed by the statutory period applicable to the
instruments in writing.
125
(Philippine Commercial International Bank
vs. Court of Appeals and Ford Philippines, Inc., January 29, 2001)
Our laws on the matter provide that the action upon a written
contract must be brought within ten years from the time the right
of action accrues.
126
Hence, the reckoning time for the prescriptive
period begins when the instrument was issued and the
corresponding check was returned by the bank to its depositor
(normally a month thereafter). Applying the same rule, the cause
of action for the recovery of the proceeds of Citibank Check No.
SN 04867 would normally be a month after December 19, 1977,
when Citibank paid the face value of the check in the amount of
P4,746,114.41. Since the original complaint for the cause of action
was filed on January 20, 1984, barely six years had lapsed. Thus,
we conclude that Fords cause of action to recover the amount of
Citibank Check No. SN 04867 was seasonably filed within the
period provided by law. (supra)
PHILIPPINE CLEARING HOUSE ACT
What is the purpose of the creation of the Philippine Clearing
House Corporation?
ANSWER:
The Philippine Clearing House Corporation was created to
facilitate the clearing of checks among member banks. (Insular
Savings Bank vs. Far Eastern Bank and Trust Company, G.R. No.
141818, June 22, 2006, [Ynares-Santiago, J.])
124
Supra note 20 at Section 605, Vda De Bataclan, et al vs. Medina, 102
Phil. 181, 186 (1957)
125
Ibid
126
Civil Code, Art. 1144
Basic Principles and Jurisprudence on the Negotiable Instruments Law 74
Under its Articles of Incorporation, the PCHC provides an
effective, convenient, efficient, economical and relevant exchange
and facilitate services limited to check processing and sorting by
way of assisting member banks, entities in clearing checks and
other clearing items as defined and existing in future Central Bank
of the Philippines Circulars, memoranda, circular letters rules and
regulations and policies in pursuance of Section 107 of RA 265.
Pursuant to its function involving the clearing of checks and other
clearing items, the PCHC has adopted rules and regulations
designed to provide member banks with a procedure whereby
disputes involving the clearance of checks and other negotiable
instruments undergo a process of arbitration prior to submission
to the courts below. This procedure not only ensures a uniformity
of rulings relating to factual disputes involving checks and other
negotiable instruments but also provides a mechanism for settling
minor disputes among participating and member banks who would
otherwise go directly to the trial courts. While the PCHC Rules
and Regulations allow appeal to the Regional Trial Courts only
on questions of fact already decided by the PCHC arbitration when
warranted and appropriate.
127
In Banco de Oro Savings and Mortgage Banks vs. Equitable
Banking Corporation
128
, this Court had the occasion to rule on the
validity of these rules as well as the jurisdiction of the PCHC as a
forum for resolving disputes and controversies involving checks
and other clearing items when it held that the participation of two
banksin the Clearing Operations of the PCHC (was) a
manifestation of its submission to its jurisdiction.
129
What is the extent of the jurisdiction of the Philippine Clearing
House Corporation (PCHC)?
Among the member banks of the PCHC exi sts a
compromissoire or an arbitration agreement embedded in their
contract wherein they consent that any future dispute or
controversy between its PCHC participants involving any check
would be submitted to the Arbitration Committee for arbitration.
127
Associated Bank vs. Court of Appeals, et al., G.R. No. 107918, June 14,
1994
128
157 SCRA 188 (1988)
129
Ibid., page 196, cited in Associated Bank vs. Court of Appeals, June 14,
1994
75
The PCHC has its own Rules and Procedure for Arbitration
(PCHC Rules). However, this is governed by Republic Act No.
876, also known as the Arbitration Law and supplemented by the
Rules of Court. (Insular Savings Bank vs. Far Eastern Bank and
Trust Company, G.R. No. 141818, June 22, 2006, [Ynares-
Santiago, J.])
Moreover, take note that, since the PCHC Rules came about
only as a result of an agreement between and among member
banks of PCHC and not by law, it cannot confer jurisdiction to the
RTC. Thus, the portion of the PCHC Rules granting jurisdiction
to the RTC review arbitral awards, only on questions of law, cannot
be given effect. (ibid.)
In the case of Associated Bank vs. Court of Appeals, et al.,
130
it was held that: [u]nder the rules and regulations of the Philippine
Clearing House Corporation (PCHC), the mere act of participation
of agreement by the parties to abide by its rules and regulations.
131
And as a consequence of such participation, a party cannot invoke
the jurisdiction of the courts over disputes and controversies which
fall under the PCHC Rules and Regulations without first going
through the arbitration processes laid out by the body. Since
claims relating to the regularity of checks cleared by banking
institutions are among those claims which should first be submitted
for resolution by the PCHCs Arbitration Committee, petitioner
Associated Bank, having voluntarily bound itself to abide by such
rules and regulations, is estopped from seeking relief from the
Regional Trial Court on the coattails of a private claim and in the
guise of a third party complaint without first having obtained a
decision adverse to its claim from the said body. It cannot bypass
the arbitration process on the basis of its averment that its third
party complaint is inextricably linked to the original complaint in
the Regional Trial Court.
The applicable PCHC provisions on the question of
jurisdiction provide:
Sec. 3AGREEMENT TO THESE RULES
It is the general agreement and understanding, that
any participant in the PCHC MICR clearing operations,
by the mere act of participation, thereby manifests its
Basic Principles and Jurisprudence on the Negotiable Instruments Law 76
agreement to these Rules and Regulations, and its
subsequent amendments.
xxx xxx xxx
Sec. 36ARBITRATIONS
36.1 Any dispute or controversy between two or more
clearing participants involving any check/item thru
PCHC shall be submitted to the Arbitration Committee,
upon written complaint of any involved participant by
filing the same with the PCHC serving the same upon
the other party or parties, who shall within fifteen (15)
days after receipt thereof, file with the Arbitration
Committee its written answer to such written complaint
and also within the same period serve the same upon
the complaining participant. This period of fifteen (15)
days may be extended by the Committee not more
than once for another period of fifteen (15) days, but
upon agreement in writing of the complaining party,
said extension may before such period as the latter
may agree to.
Section 36.6 is even more emphatic:
26.6 The fact that a bank participates in the clearing
operations of PCHC shall be deemed its written and
subscribed consent to the binding effect of this
arbi trati on agreement as i f i t had done so i n
accordance with Section 4 of the Republic Act No.
876 otherwise known as the Arbitration Law.
Thus, not only do the parties manifest by mere participation
their consent to these rules, but such participation is deemed (their)
written and subscribed consent to the binding effect of arbitration
agreements under the PCHC rules. Moreover, a participant
subject to the Clearing House Rules and Regulations of the PCHC
may go on appeal to any Regional Trial Courtswhere the head
office of any of the parties is located only after a decision or award
130
G.R. No. 107918, June 14, 1994, [Kapunan, J.]
131
PCHC Rules and Regulations, Sec. 3 9hereinafter cited as Rules)
77
has been rendered by the arbitration committee or arbitrator on
questions of law.
132
Clearly therefore, petitioner Associated Bank, by its voluntary
participation and its consent to the arbitration rules cannot go
directly to the Regional Trial Court when it finds it convenient to
do so. The jurisdiction of the PCHC under the rules and
regulations is clear, undeniable and is particularly applicable to
all the parties in the third party complaint under their obligation to
first seek redress of their disputes and grievances with the PCHC
before going to the trial court.
Third-Party Complaints
As a general rule, a trial court that has established
jurisdiction over the main action also acquires jurisdiction over a
third-party complaint, even if it could not have done so had the
latter been filed as an independent action. This rule, however,
does not apply to banks that have agreed to submit their disputes
over check clearings to arbitration under the rules of the Philippine
Clearing House Corporation. In that event, primary recourse
should be to the PCHC Arbitration Committee, without prejudice
to an appeal to the trial courts. In other words, without first resorting
to the PCHC, the third-party complaint would be premature. (Allied
Banking Corporation vs. Court of Appeals and Bank of the
Philippine Islands, Inc., G.R. No. 123871, August 31, 1998,
[Panganiban, J.:])
Illustrative Case:
Allied Banking Corporation vs. Court of Appeals
and Bank of the Philippine Islands, Inc.
G.R. No. 123871, August 31, 1998
PANGANIBAN, J.:
Hyatt Terraces Baguio issued two crossed checks drawn
against Allied Banking Corp. (hereinafter, ALLIED) in favor of
appellee Meszellen Commodities Services, Inc. (hereinafter,
MESZELLEN). Said checks were deposited on August 5, 1980
and August 18, 1980, respectively, with the now defunct
132
Rules, Sec. 13
Basic Principles and Jurisprudence on the Negotiable Instruments Law 78
Commercial Bank and Trust Company (hereinafter, COMTRUST).
Upon receipt of the above checks, COMTRUST stamped at the
back thereof the warranty All prior endorsements and/or lack of
endorsements guaranteed. After the checks were cleared through
the Philippine Clearing House Corporation (hereinafter, PCHC),
ALLIED BANK paid the proceeds of said checks to COMTRUST
as the collecting bank.
On March 17, 1981, the payee, MESZELLEN, sued the
drawee, ALLIED BANK, for damages which it allegedly suffered
when the value[s] of the checks were paid not to it but to some
other person.
Almost ten years later, or on January 10, 1991, before
defendant ALLIED BANK could finish presenting its evidence, it
filed a third party complaint against Bank of the Philippine Islands
(hereinafter, BPI, appellee herein) as successor-in-interest of
COMTRUST, for reimbursement in the event that it would be
adjudged liable in the main case to pay plaintiff, MESZELLEN.
The third party complaint was admitted [in] an Order dated May
16, 1991 issued by the Regional Trial Court of Pasig, Branch 162.
On July 16, 1991, BPI filed a motion to dismiss said third party
complaint grounded on the following: 1) that the court ha[d] no
jurisdiction over the nature of the action; and 2) that the cause of
action of the third party plaintiff ha[d] already prescribed.
On September 16, 1991, the trial court issued an order
dismissing the third party complaint. Defendant-third party
plaintiffs motion for reconsideration of this order was subsequently
denied.
133
Petitioner raises the following issues:
134
I. The Respondent Honorable Court of Appeals erred in
holding that the cause of action of the third-party
complaint ha[d] already prescribed.
II. The Respondent Honorable Court of Appeals erred in
holding that the filing of the third party complaint should
be disallowed as it would only delay the resolution of
the case.
133
CA Decision, pp. 1-2; rollo, pp. 24-25
134
Petition, p. 6; rollo, p. 16
79
The Courts Ruling
The petition is bereft of merit.
Critical Issue: Mandatory Recourse to PCHC
To buttress its claim, private respondent contends that
petitioners remedy rests with the PCHC, of which both Allied and
BPI are members, in consonance with the Clearing House Rules
and Regulations which, in part, states:
Sec. 38 Arbitration
Any dispute or controversy between two or more clearing
participants involving any check/item cleared thru PCHC
shall be submitted to the Arbitration Committee, upon written
complaint of any involved participant by filing the same with
the PCHC serving the same upon the other party or parties,
who shall within fifteen (15) days after receipt thereof file
with the Arbitration Committee its written answer to such
written complaint and also within the same period serve the
same upon the complaining participant, . . . .
Private respondent cites Banco de Oro Savings and
Mortgage Bank v. Equitable Banking Corporation
135
and
Associated Bank v. Court of Appeals,
136
which upheld the right of
the PCHC to settle and adjudicate disputes between member
banks. In Banco de Oro, the Court ruled:
The participation of the two banks, petitioner and private
respondent, in the clearing operations of PCHC is a
manifestation of their submission to its jurisdiction. Secs. 3
and 36.6 of the PCHC-CHRR clearing rules and regulations
provide:
Sec. 3. AGREEMENT TO THESE RULES. It is the
general agreement and understanding that any
parti ci pant i n the Phi l i ppi ne Cl eari ng House
Corporation, MICR clearing operations[,] by the mere
135
157 SCRA 188, January 20, 1988, per Gancayco, J
136
233 SCRA 137, June 14, 1994, per Kapunan, J
Basic Principles and Jurisprudence on the Negotiable Instruments Law 80
fact of their participation, thereby manifests its
agreement to these Rules and Regulations and its
subsequent amendments.
Sec. 36.6. (ARBITRATION) The fact that a bank
participates in the clearing operations of the PCHC
shall be deemed its written and subscribed consent
to the binding effect of this arbitration agreement as if
it had done so in accordance with section 4 of (the)
Republic Act. No. 876, otherwise known as the
Arbitration Law.
Further[,] Section 2 of the Arbitration Law mandates:
Two or more persons or parties may submit to the
arbitration of one or more arbitrators any controversy
existing between them at the time of the submission
and which may be the subject of any action, or the
parties of any contract may in such contract agree to
settle by arbitration a controversy thereafter arising
between them. Such submission or contract shall be
valid and irrevocable, save upon grounds as exist at
law for the revocation of any contract.
Such submission or contract may include question
ari si ng out of val uati ons, apprai sal s or other
controversies which may be collateral, incidental,
precedent or subsequent to any issue between the
parties. (Emphasis supplied.)
Associated Bank also disallowed a similar third-party
complaint, ruling thus:
Under the rules and regulations of the Philippine Clearing
House Corporation (PCHC), the mere act of participation of
the parties concerned in its operations in effect amounts to
a manifestation of agreement by the parties to abide by its
rul es and regul ati ons. As a consequence of such
participation, a party cannot invoke the jurisdiction of the
courts over disputes and controversies which fall under the
PCHC Rules and Regulations without first going through
the arbitration processes laid out by the body. Since claims
81
relating to the regularity of checks cleared by banking
institutions are among those claims which should first be
submitted for resolution by the PCHCs Arbitration
Committee, petitioner Associated Bank, having voluntarily
bound itself to abide by such rules and regulations, is
estopped from seeking relief from the Regional Trial Court
on the coattails of a private claim and in the guise of a third
party complaint without first having obtained a decision
adverse to its claim from the said body. It cannot bypass the
arbitration process on the basis of its averment that its third
party complaint is inextricably linked to the original complaint
in the Regional Trial Court.
xxx xxx xxx
Clearly therefore, petitioner Associated Bank, by its voluntary
participation and its consent to the arbitration rules cannot
go directly to the Regional Trial Court when it finds it
convenient to do so. The jurisdiction of the PCHC under the
rules and regulations is clear, undeniable and is particularly
applicable to all the parties in the third party complaint under
their obligation to first seek redress of their disputes and
grievances [from] the PCHC before going to the trial court.
Finally, the contention that the third party complaint should
not have been dismissed for being a necessary and
inseparable offshoot of the main case over which the court
a quo had already exercised jurisdiction misses the
fundamental point about such pleading. A third party
complaint is a mere procedural device which under the Rules
of Court is allowed only with the courts permission. It is an
action actually independent of, separate and distinct from
the plaintiffs complaint (s)uch that, were it not for the Rules
of Court, it would be necessary to file the action separately
from the original complaint by the defendant against the
third party. (Emphasis supplied.)
Banco de Oro and Associated Bank are clear and
unequivocal: a third-party complaint of one bank against another
involving a check cleared through the PCHC is unavailing, unless
the third-party claimant has first exhausted the arbitral authority
of the PCHC Arbitration Committee and obtained a decision from
said body adverse to its claim.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 82
Recognizing the role of the PCHC in the arbitration of
disputes between participating banks, the Court in Associated
Bank further held: Pursuant to its function involving the clearing
of checks and other clearing items, the PCHC has adopted rules
and regulations designed to provide member banks with a
procedure whereby disputes involving the clearance of checks
and other negotiable instruments undergo a process of arbitration
prior to submission to the courts below. This procedure not only
ensures a uniformity of rulings relating to factual disputes involving
checks and other negotiable instruments but also provides a
mechanism for settling minor disputes among participating and
member banks which would otherwise go directly to the trial
courts.
We defer to the primary authority of PCHC over the present
dispute, because its technical expertise in this field enables it to
better resolve questions of this nature. This is not prejudicial to
the interest of any party, since primary recourse to the PCHC
does not preclude an appeal to the regional trial courts on
questions of law. Section 13 of the PCHC Rules reads:
Sec. 13. The findings of facts of the decision or award
rendered by the Arbitration Committee or by the sole
Arbitrator as the case may be shall be final and conclusive
upon all the parties in said arbitration dispute. The decision
or award of the Arbitration Committee or of the Sole Arbitrator
shall be appealable only on questions of law to any of the
Regional Trial Courts in the National Capital Judicial Region
where the Head Office of any of the parties is located. The
appellant shall perfect his appeal by filing a notice of appeal
to the Arbitration Secretariat and filing a Petition with the
Regional Trial Court of the National Capital Region . . . .
Furthermore, when the error is so patent, gross and
prejudicial as to constitute grave abuse of discretion, courts may
address questions of fact already decided by the arbitrator.
137
137
Asia Construction and Development Corporation v. Construction Industry
Arbitration Commission, 218 SCRA 529, February 8, 1993; Sime Darby v.
Deputy Administrator, 180 SCRA 177, December 15, 1989
138
Regalado, Remedial Law Compendium, Vol. 1, 5th revised ed., p. 95;
Republic v. Central Surety and Insurance Co., 25 SCRA 641, October 26,
1968; Eastern Assurance & Surety Corporation v. Cui, 105 SCRA 622,
July 20, 1981; Talisay-Silay Milling Co. Inc. and J. Amado Araneta v. CIR
and Central Azucarera del Danao, 18 SCRA 894, November 29, 1966
83
We are not unaware of the rule that a trial court, which has
jurisdiction over the main action, also has jurisdiction over the
third-party complaint, even if the said court would have had no
jurisdiction over it had it been filed as an independent action.
138
However, this doctrine does not apply in the case of banks, which
have given written and subscribed consent to arbitration under
the auspices of the PCHC.
By participating in the clearing operations of the PCHC,
petitioner agreed to submit disputes of this nature to arbitration.
Accordingly, it cannot invoke the jurisdiction of the trial courts
without a prior recourse to the PCHC Arbitration Committee.
Having given its free and voluntary consent to the arbitration
clause, petitioner cannot unilaterally take it back according to its
whim. In the world of commerce, especially in the field of banking,
the promised word is crucial. Once given, it may no longer be
broken.
Upon the other hand, arbitration as an alternative method
of dispute resolution is encouraged by this Court. Aside from
unclogging judicial dockets, it also hastens solutions especially
of commercial disputes.
In view of the foregoing, a discussion of the issues raised
by the petitioners is unnecessary.
WHEREFORE, the petition is DENIED for lack of merit.
Costs against petitioner.
SO ORDERED.
Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.
Does PCHCs jurisdiction extend to non-negotiable checks?
As provided in the articles of incorporation of PCHC its
operation extend to clearing checks and other clearing items.
No doubt transactions on non-negotiable checks are within the
ambit of its jurisdiction. x x x The term check as used in the said
Articles of Incorporation of PCHC can only connote checks in
general use in commercial and business activities. It cannot be
conceived to be limited to negotiable checks only. Checks are
used between banks and bankers and their customers, and are
Basic Principles and Jurisprudence on the Negotiable Instruments Law 84
designed to facilitate banking operations. It is of the essence to
be payable on demand, because the contract between the banker
and the customer is that the money is needed on demand.
139
(Banco de Oro Savings and Mortgage Bank vs. Equitable Banking
Corporation, G.R. No. 74917, January 20, 1988, [Gancayco, J.])
Viewing these provisions (Sec. 3 and 36.6 PCHC-CHRR
clearing rules and regulations; Sec. 2 Arbitration Law; Sec. 21 of
the same rules), the conclusion is clear that the PCHC Rules and
Regulations should not be interpreted to be applicable only to
checks which are negotiable instruments but also to non-
negotiable instruments and that the PCHC has jurisdiction over
this case even as the checks subject of this litigations are
admittedly non-negotiable. (supra)
What may be some of the judicial remedies available to the
losing party in case the Philippine Clearing House
Commission Arbitration Committee denies its motion for
reconsideration?
ANSWER:
a. It may petition the proper Regional Trial Court to issue
an order vacating the award on the grounds provided
for under Section 24 of the Arbitration Law;
b. File a petition for review under Rule 43 of the Rules of
Court with the Court of Appeals on questions of fact, of
law, or mixed questions of fact and law; or
c. File a petition for certiorari under Rule 45 of the Rules of
Court on the ground that the Arbitrator Committee acted
without or in excess of jurisdiction or with grave abuse
of discretion amounting to lack or excess of jurisdiction.
(Insular Savings Bank vs. Far Eastern Bank and Trust Company,
G.R. No. 141818, June 22, 2006, [Ynares-Santiago, J.])
What are the grounds under Section 24 of the Arbitration Law
for the issuance of the Regional Trial Court of an order to
vacate the award granted by the Philippine Clearing House
Corporation Arbitration Committee?
85
ANSWER:
SEC. 24. Grounds for vacating award. In any one of the
following cases, the court must make an order vacating the
award upon the petition of any party to the controversy when
such party proves affirmatively that in the arbitration
proceedings:
(a) The award was procured by corruption, fraud or
other undue means; or
(b) That there was evident partiality or corruption in the
arbitrators or any of them; or
(c) That the arbitrators were guilty of misconduct in
refusing to postpone the hearing upon sufficient
cause shown, or in refusing to hear evidence
pertinent and material to the controversy; that one
or more of the arbitrators was disqualified to act as
such under section nine hereof, and willfully
refrained from disclosing such disqualification or of
any other misbehavior by which the rights of any
party have been materially prejudiced; or
(d) That the arbitrators exceeded their powers, or so
imperfectly executed them, that a mutual, final and
definite award upon the subject matter submitted
to them was not made.
x x x x
(Insular Savings Bank vs. Far Eastern Bank and
Trust Company, G.R. No. 141818, June 22, 2006,
[Ynares-Santiago, J.])
BATAS PAMBANSA BILANG 22
(BOUNCING CHECKS LAW)
Reason for the law
BP 22 or the Bouncing Checks Law was enacted for the
specific purpose of addressing the problem of the continued
issuance and circulation of unfunded checks by irresponsible
persons. To stem the harm caused by these bouncing checks to
the community, BP 22 considers the mere act of issuing an
unfunded check as an offense not only against property but also
Basic Principles and Jurisprudence on the Negotiable Instruments Law 86
against public order.
140
The purpose of BP 22 in declaring the
mere issuance of a bouncing check as malum prohibitum is to
punish the offender in order to deter him and others from
committing the offense, to isolate him from society, to reform and
rehabilitate him, and to maintain social order.
141
The penalty is
stiff. BP 22 imposes the penalty of imprisonment for at least 30
days or a fine of up to double the amount of the check or both
imprisonment and fine. (Mitra vs. People, G.R. No. 191404, July
5, 2010, [Mendoza, J.:])
Elements of violation of Section 1 of Batas Pambansa
Bilang 22
a) The making, drawing, and issuance of any check to apply
for account or for value;
b) The knowledge of the maker, drawer, or issuer that at
the time of issue he does not have sufficient funds in or
credit with the drawee bank for the payment of the check
in full upon its presentment; and
c) The subsequent dishonor of the check by the drawee
bank for insufficiency of funds or credit or dishonor for
the same reason had not the drawer, without any valid
cause, ordered the bank to stop payment.
(Ting vs. CA, 398 Phil. 481 (2000); Sycip, Jr. vs. CA,
G.R. No. 125059, March 17, 2000, 328 SCRA 447. See
Batas Pambansa Bilang 22 (1979), Section 1, cited in
Lunaria vs. People of the Philippines, G.R. No. 160127,
November 11, 2008)
Illustrative Case:
Eumelia Mitra vs. People of the Philippines and Felicisimo
Tarcelo
G.R. No. 191404, July 5, 2010
MENDOZA, J.:
FACTS: Petitioner Eumelia R. Mitra (Mitra) was the Treasurer,
and Florencio L. Cabrera, Jr. (now deceased) was the
President, of Lucky Nine Credit Corporation (LNCC),
a corporation engaged in money lending activities.
87
Between 1996 and 1999, private respondent Felicisimo
S. Tarcelo (Tarcelo) invested money in LNCC. As the
usual practice in money placement transactions,
Tarcelo was issued checks equivalent to the amounts
he invested plus the interest on his investments.
When Tarcelo presented these checks for payment,
they were dishonored for the reason account closed.
Tarcelo made several oral demands on LNCC for the
payment of these checks but he was frustrated.
Constrained, in 2002, he caused the filing of seven
informations for violation of Batas Pambansa Blg. 22
(BP 22) in the total amount of P925, 000.00 with the
MTCC in Batangas City.
ISSUES: Whether or not the elements of violation of Batas
Pambansa Bi l ang 22 must be proved beyond
reasonable doubt as against the corporation who owns
the current account where the subject checks were
drawn before liability attaches to the signatories?
RULING: A check is a negotiable instrument that serves as a
substitute for money and as a convenient form of
payment in financial transactions and obligations. The
use of checks as payment allows commercial and
banking transactions to proceed without the actual
handling of money, thus, doing away with the need to
physically count bills and coins whenever payment is
made. It permits commercial and banking transactions
to be carried out quickly and efficiently. But the
convenience afforded by checks is damaged by
unfunded checks that adversely affect confidence in
our commercial and banking activities, and ultimately
injure public interest.
BP 22 or the Bouncing Checks Law was enacted for
the specific purpose of addressing the problem of the
continued issuance and circulation of unfunded checks
by irresponsible persons. To stem the harm caused by
these bouncing checks to the community, BP 22
considers the mere act of issuing an unfunded check
as an offense not only against property but also against
Basic Principles and Jurisprudence on the Negotiable Instruments Law 88
public order. The purpose of BP 22 in declaring the
mere issuance of a bouncing check as malum
prohibitum is to punish the offender in order to deter
him and others from committing the offense, to isolate
him from society, to reform and rehabilitate him, and to
maintain social order. The penalty is stiff. BP 22
imposes the penalty of imprisonment for at least 30
days or a fine of up to double the amount of the check
or both imprisonment and fine.
Mitra posits in this petition that before the signatory to
a bouncing corporate check can be held liable, all the
elements of the crime of violation of BP 22 must first
be proven against the corporation. The corporation
must first be declared to have committed the violation
before the liability attaches to the signatories of the
checks.
The Court finds itself unable to agree with Mitras
posture. The third paragraph of Section 1 of BP 22
reads: Where the check is drawn by a corporation,
company or entity, the person or persons who actually
signed the check in behalf of such drawer shall be liable
under this Act. This provision recognizes the reality
that a corporation can only act through its officers.
Hence, its wording is unequivocal and mandatory - that
the person who actually signed the corporate check
shall be held liable for a violation of BP 22. This
provision does not contain any condition, qualification
or limitation.
In the case of Llamado v. Court of Appeals,
142
the Court
ruled that the accused was liable on the unfunded
corporate check which he signed as treasurer of the
corporation. He could not invoke his lack of involvement
in the negotiation for the transaction as a defense
because BP 22 punishes the mere issuance of a
bouncing check, not the purpose for which the check
was issued or in consideration of the terms and
conditions relating to its issuance. In this case, Mitra
142
337 Phil. 153, 160 (1997)
89
signed the LNCC checks as treasurer. Following
Llamado, she must then be held liable for violating BP
22.
Another essential element of a violation of BP 22 is
the drawers knowledge that he has insufficient funds
or credit with the drawee bank to cover his check.
Because this involves a state of mind that is difficult to
establish, BP 22 creates the prima facie presumption
that once the check is dishonored, the drawer of the
check gains knowledge of the insufficiency, unless
within five banking days from receipt of the notice of
dishonor, the drawer pays the holder of the check or
makes arrangements with the drawee bank for the
payment of the check. The service of the notice of
dishonor gives the drawer the opportunity to make good
the check within those five days to avert his prosecution
for violating BP 22.
Mitra alleges that there was no proper service on her
of the notice of dishonor and, so, an essential element
of the offense is missing. This contention raises a
factual issue that is not proper for review. It is not the
function of the Court to re-examine the finding of facts
of the Court of Appeals. Our review is limited to errors
of law and cannot touch errors of facts unless the
petitioner shows that the trial court overlooked facts or
circumstances that warrant a different disposition of
the case or that the findings of fact have no basis on
record. Hence, with respect to the issue of the propriety
of service on Mitra of the notice of dishonor, the Court
gives full faith and credit to the consistent findings of
the MTCC, the RTC and the CA.
The defense postulated that there was no demand
served upon the accused, said denial deserves scant
consideration. Positive allegation of the prosecution
that a demand letter was served upon the accused
prevails over the denial made by the accused.
Though, having denied that there was no demand letter
served on April 10, 2000, however, the prosecution
positively alleged and proved that the questioned
Basic Principles and Jurisprudence on the Negotiable Instruments Law 90
demand letter was served upon the accused on April
10, 2000, that was at the time they were attending Court
hearing before Branch I of this Court. In fact, the
prosecution had submitted a Certification issued by the
other Branch of this Court certifying the fact that the
accused were present during the April 10, 2010 hearing.
With such straightforward and categorical testimony
of the witness, the Court believes that the prosecution
has achieved what was dismally lacking in the three
(3) cases of Betty King, Victor Ting and Caras -
evidence of the receipt by the accused of the demand
letter sent to her. The Court accepts the prosecutions
narrative that the accused refused to sign the same to
evidence their receipt thereof. To require the
prosecution to produce the signature of the
accused on said demand letter would be imposing
an undue hardship on it. As well, actual receipt
acknowledgment is not and has never been required
of the prosecution either by law or jurisprudence.
[emphasis supplied]
Wi th the noti ce of di shonor dul y served and
disregarded, there arose the presumption that Mitra
and Cabrera knew that there were insufficient funds to
cover the checks upon their presentment for payment.
In fact, the account was already closed.
To reiterate the elements of a violation of BP 22 as
contained in the above-quoted provision, a violation
exists where:
1. a person makes or draws and issues a check to apply
on account or for value;
2. the person who makes or draws and issues the check
knows at the time of issue that he does not have
sufficient funds in or credit with the drawee bank
for the ful l payment of the check upon i ts
presentment; and
3. the check is subsequently dishonored by the drawee
bank for insufficiency of funds or credit, or would
have been dishonored for the same reason had not
91
the drawer, without any valid reason, ordered the
bank to stop payment.
There is no dispute that Mitra signed the checks
and that the bank dishonored the checks because
the account had been closed. Notice of dishonor
was properly given, but Mitra failed to pay the
checks or make arrangements for their payment
within five days from notice. With all the above
elements duly proven, Mitra cannot escape the civil
and criminal liabilities that BP 22 imposes for its
breach.
Ways of violating B.P. Blg. 22
There are two (2) ways of violating B.P. Blg. 22: (1) by making
or drawing and issuing a check to apply on account or for value
knowing at the time of issue that the check is not sufficiently
funded; and (2) by having sufficient funds in or credit with the
drawee bank at the time of issue but failing to keep sufficient
funds therein or credit with said bank to cover the full amount of
the check when presented to the drawee bank within a period of
ninety (90) days.
143
(Wong vs. Court of Appeals, G.R. No. 117857,
February 2, 2001)
Failure of the drawer to maintain funds in his bank to cover
the check for 90 days
Nowhere in the said provision does the law require a maker
to maintain funds in his bank account for only 90 days. Rather,
the clear import of the law is to establish a prima facie presumption
of knowledge of such insufficiency of funds under the following
conditions (1) presentment within 90 days from date of the check,
and (2) the dishonor of the check and failure of the maker to make
arrangements for payment in full within 5 banking days after notice
thereof. That the check must be deposited within ninety (90) days
is simply one of the conditions for the prima facie presumption of
knowledge of lack of funds to arise. It is not an element of the
offense. Neither does it discharge petitioner from his duty to
maintain sufficient funds in the account within a reasonable time
thereof. (Wong vs. Court of Appeals, G.R. No. 117857, February
2, 2001)
143
Section 1, B.P. Blg. 22
Basic Principles and Jurisprudence on the Negotiable Instruments Law 92
Lack of criminal intent irrelevant; gravamen of the offense
It bears repeating that the lack of criminal intent of the part
of the accused is irrelevant.
144
The law has made the mere act of
issuing a worthless check a malum prohibitum, an act proscribed
by legislature for being deemed pernicious and inimical to public
welfare.
145
In fact, even in cases where there had been payment,
through compensation or some other means, there could still be
prosecution for violation of B.P. 22. The gravamen of the offense
under this law is the act of issuing a worthless check that is
dishonored upon its presentment for payment, not the
nonpayment of the obligation.
146
(Lunaria vs. People of the
Philippines, G.R. No. 160127, November 11, 2008) (emphasis
supplied)
Congress, in the exercise of police power, enacted BP 22
i n order to mai ntai n publ i c confi dence i n commerci al
transactions.
147
(Spouses Yap vs. First e-Bank Corporation, G.R.
No. 169889, September 29, 2009, [Corona, J.], citing Lozano vs.
Martinez)
Intention of the parties in the issuance of the check
immaterial; criminal intent of the issuer of the check
immaterial
In Abarquez vs. Court of Appeals
148
, it was held that: [t]he
fact that petitioner issued the subject checks knowing the
144
People v. Lo Ho Wing, G.R. No. 88017, 21 January 1991, 193 SCRA 122,
130. See Macalalag v. People, G.R. No. 164358, December 20, 2006,
511 SCRA 400; Tan v. Mendez, 432 Phil. 760 (2002); People v. Laggui,
G.R. Nos. 76262-63, March 16, 1989, 171 SCRA 305, 311; People v.
Manzanilla, G.R. Nos. L-66003-04, 11 December 1987, 156 SCRA 279,
283
145
Macalalag v. People, G.R. No. 164358, December 20, 2006, 511 SCRA
400; Tan v. Mendez, 432 Phil. 760 (2002); People v. Laggui, G.R. Nos.
76262-63, March 16, 1989, 171 SCRA 305, 311; People v. Manzanilla,
G.R. Nos. L-66003-04, December 11, 1987, 156 SCRA 279, 283
146
Macalalag v. People, G.R. No. 164358; December 20, 2006, 511 SCRA
400; Tan v. Mendez, 432 Phil. 760 (2002); Lozano v. Martinez, G.R. No. L-
63419, December 18, 1986, 146 SCRA 323, 338
147
The gravamen of the offense punishable by BP 22 is the act of making
and issuing a worthless check or a check that is dishonored upon its
presentation for payment. It is not the nonpayment of an obligation which
the law punishes. The law
148
G.R. No. 148557, August 7, 2003
93
inadequacy of his funds in the bank to cover said checks makes
him liable under B.P. 22. As elaborated in Meriz vs. People
149
The Court has consistently declared that the cause or
reason for the issuance of the check is inconsequential in
determining criminal culpability under B.P. 22. The Court
has since said that a check issued as an evidence of a debt,
although not intended for encashment, has the same effect
like any other check and must thus be held to be within the
contemplation of B.P. 22. Once a check is presented for
payment, the drawee bank gives it the usual course whether
issued in payment of an obligation or just as a guaranty of
an obligation. B.P. 22 does not concern itself with what
might actually be envisioned by the parties, its primordial
intention being instead to ensure the stability and
commercial value of checks as being virtual substitutes for
currency. It is a policy that can easily be eroded if one has
yet to determine the reason for which checks are issued, or
the terms and conditions for their issuance, before an
appropriate application of legislative enactment can be
made. The gravamen of the offense under B.P. 22 is the
act of making or issuing a worthless check or a check that
is dishonored upon presentment for payment. The act
effectively declares the offense to be one of malum
prohibitum. The only valid query then is whether the law
has been breached, i.e., by the mere act of issuing a bad
check, without so much regard as to the criminal intent of
the issuer.
More so, in the case of Cruz vs. Court of Appeals,
150
where
it was held that:
When a check is presented for payment, the drawee bank
will generally accept the same regardless of whether it was
issued in payment of an obligation or merely to guarantee
the said obligation. What the law punishes is the issuance
of a bouncing check
151
not the purpose for which it was
issued nor the term and conditions relating to its issuance.
149
Pp. 531-532
150
G.R. No. 108738, June 17, 1994, [Kapunan, J.:]
151
Lozano vs. Martinez, 146 SCRA 523; People vs. Veridiano II, 132 SCRA
523
Basic Principles and Jurisprudence on the Negotiable Instruments Law 94
The mere act of issuing a worthless check is malum
prohibitum.
152
This point has been made clear by this Court,
thus:
It is now settled that Batas Pambansa Bilang 22
applies even in cases where dishonored checks are
issued merely in the form of a deposit or a guarantee.
The enactment in question does not make any
distinction as to whether the checks within its
contemplation are issued in payment of an obligation
or merely to guarantee the said obligation. In
accordance with the pertinent rule of statutory
construction, inasmuch as the law has not made any
distinction in this regard, no such distinction can be
made by means of interpretation or application.
Furthermore, the history of the enactment of subject
statute evinces the definite legislative intent to make
the prohibition all-embracing, without making any
exception from the operation thereof in favor of a
guarantee. This intent may be gathered from the
statement of the sponsor of the bill (Cabinet Bill No.
9) which was enacted later into Batas Pambansa
Bilang 22, when it was introduced before the Batasan
Pambansa, that the bill was introduced to discourage
the issuance of bouncing checks, to prevent checks
from becoming useless scraps of paper and to
restore respectability to checks, all without distinction
as to the purpose of the issuance of the checks. The
legislative intent as above said is made all the more
clear when it is considered that while the original text
of Cabinet Bill No. 9, supra, had contained a proviso
excluding from the coverage of the law a check issued
as a mere guarantee, the final version of the bill as
approved and enacted by the Committee on the
Revi si on of Laws i n the Batasan del eted the
abovementioned qualifying proviso deliberately for the
purpose of making the enforcement of the act more
effective (Batasan Record, First Regular Session,
December 4, 1978, Volume II, pp.1035-1036).
152
Que vs. People, 154 SCRA 160
95
Consequently, what are important are the facts that
the accused had deliberately issued the checks in
question to cover accounts and that the checks in
question to cover accounts and that the checks were
dishonored upon presentment regardless of whether
or not the accused merely issued the checks as a
guarantee. (pp. 4-5, Dec. IAC) [pp. 37-38, Rollo].
153
The importance of arresting the proliferation of worthless
checks need not be underscored. The mischief created by
unfunded checks in circulation is injurious not only to the
payee or holder, but to the public as well. This harmful
practice can very well pollute the channels of trade and
commerce, injure the banking system and eventually hurt
the welfare of society and the public interest.
154"
Knowledge of the payee of the insufficiency or lack of funds
of the drawer immaterial
The knowledge of the payee of the insufficiency or lack of
material funds of the drawer with the drawee bank is immaterial
as deceit is not an essential element of an offense penalized
by B.P. 22. The gravamen of the offense is the issuance of a bad
check, hence, malice and intent in the issuance thereof is
inconsequential.
155
(Ty vs. People of the Philippines, G.R. No.
149275, September 27, 2004) (emphasis supplied)
An essential element of the offense is knowledge on the
part of the maker or drawer of the check of the insufficiency of his
funds in or credit with the bank to cover the check upon its
presentment. Since this involves a state of mind difficult to
establish, the statute itself creates a prima facie presumption of
such knowledge where payment of the check is refused by the
drawee because of insufficient funds in or credit with such bank
when presented within ninety (90) days from the date of the check.
To mitigate the harshness of the law in its application, the statute
provides that such presumption shall not arise if within five (5)
banking days from receipt of the notice of dishonor, the maker or
drawer makes arrangements for payment of the check by the bank
153
Id., pp. 164-165
154
Lozano vs. Martinez, supra, p. 340
155
Cruz v. Court of Appeals, G.R. No. 108738, 17 June 1994, 233 SCRA 301
Basic Principles and Jurisprudence on the Negotiable Instruments Law 96
or pays the holder the amount of the check.
156
(Wong vs. Court of
Appeals, G.R. No. 117857, February 2, 2001)
No independent civil action
There is no independent civil action to recover civil liability
arising from the issuance of an unfunded check prohibited and
punished under Batas Pambansa Bilang 22 (BP 22). (Heirs of
Eduardo Simon vs. Chan and Court of Appeals, G.R. No. 157547,
February 23, 2011, [Bersamin, J.])
The Supreme Court has settled the issue of whether or not
a violation of BP 22 can give rise to civil liability in Banal v. Judge
Tadeo, Jr.,
157
holding:
x x x
Article 20 of the New Civil Code provides:
Every person, who contrary to law, willfully or negligently
causes damage to another, shall indemnify the latter for the
same.
Regardless, therefore, of whether or not a special law so
provides, indemnification of the offended party may be had
on account of the damage, loss or injury directly suffered
as a consequence of the wrongful act of another. The
indemnity which a person is sentenced to pay forms an
integral part of the penalty imposed by law for the
commission of a crime (Quemel v. Court of Appeals, 22
SCRA 44, citing Bagtas v. Director of Prisons, 84 Phil. 692).
Every crime gives rise to a penal or criminal action for the
punishment of the guilty party, and also to civil action for the
restitution of the thing, repair of the damage, and
indemnification for the losses (United States v. Bernardo,
19 Phil. 625)
x x x
Civil liability to the offended party cannot thus be denied.
The payee of the check is entitled to receive the payment of money
156
Lozano vs. Martinez, 146 SCRA 323, 330-331 (1986)
157
G.R. No. L-78911, December 11, 1987, 156 SCRA 325
97
for which the worthless check was issued. Having been caused
the damage, she is entitled to recompense.
Surely, it could not have been the intendment of the framer
of Batas Pambansa Blg. 22 to leave the offended party defrauded
and empty-handed by excluding the civil liability of the offender,
giving her only the remedy, which in many cases results in a Pyrrhic
Victory, of having to file a separate civil suit. To do so may leave
the offended party unable to recover even the face value of the
check due her, thereby unjustly enriching the errant drawer at the
expense of the payee. The protection which the law seeks to
provide would, therefore, be brought to naught. (supra)
Notice of dishonor essential
Both the spirit and letter of the Bouncing Checks Law require,
for the act to be punished under said law, not only that the
accused issued a check that was dishonored, but that
likewise the accused was actually notified in writing of the
fact of dishonor. The consistent rule is that penal statutes have
to be construed strictly against the State and liberally in favor of
the accused.
158
(Abarquez vs. Court of Appeals, G.R. No. 148557,
August 7, 2003, published in The New Philippine Law Report,
Vol. XXXI, No. 8, August 2003, page 21) (emphasis supplied)
Proof of receipt of the notice of dishonor of drawer must be
clearly established
In James Svendsen vs. People of the Philippines,
159
citing
Rico v. People of the Philippines,
160
this Court held:
x x x [I]f x x x notice of non-payment by the drawee bank is
not sent to the maker or drawer of the bum check, or if there
is no proof as to when such notice was received by the
drawer, then the presumption of knowledge as provided in
Section 2 of B.P. 22 cannot arise, since there would simply
be no way of reckoning the crucial five-day period.
158
Domagasang vs. CA, G.R. No. 139292, 5 December 2000, 347 SCRA 75,
83
159
G.R. No. 175381, February 26, 2008
160
440 Phil. 540 (2002)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 98
x x x In recent cases, we had the occasion to emphasize
that not only must there be a written notice of dishonor or
demand actually received by the drawer of a dishonored
check, but there must also be proof of receipt thereof that is
properly authenticated, and not mere registered receipt and/
or return receipt.
Thus, as held in Domagsang vs. Court of Appeals, while
Section 2 of B.P. 22 indeed does not state that the notice of
dishonor be in writing, this must be taken in conjunction
with Section 3 of the law, i.e., that where there is no sufficient
funds in or credit with such drawee bank, such fact shall
always be explicitly stated in the notice of dishonor or
refusal. A mere oral notice or demand to pay would appear
to be insufficient for conviction under the law. In our view,
both the spirit and letter of the Bouncing Checks Law require
for the act to be punished thereunder not only that the
accused issued a check that is dishonored, but also that
the accused has actually been notified in writing of the fact
of dishonor. This is consistent with the rule that penal
statutes must be construed strictly against the state and
liberally in favor of the accused. x x x
In fine, the failure of the prosecution to prove the existence
and receipt by petitioner of the requisite written notice of
dishonor and that he was given at least five banking days
within which to settle his account constitutes sufficient
ground for his acquittal.
161
(Italics in the original; underscoring
and emphasis omitted)
The evidence for the prosecution failed to prove the second
element. While the registry receipt,
162
which is said to cover the
letter-notice of dishonor and of demand sent to petitioner, was
presented, there is no proof that he or a duly authorized agent
received the same. Receipts for registered letters including return
receipts do not themselves prove receipt; they must be properly
authenticated to serve as proof of receipt of the letters.
163
Thus in
Ting v. Court of Appeals,
164
this Court observed:
161
Id. At 554-555
162
MeTC records, p. 49
163
Supra note 440 Phil. 540 (2002) at 540-555
164
398 Phil. 481 (2000)
99
x x x All that we have on record is an illegible signature on
the registry receipt as evidence that someone received the
letter. As to whether this signature is that of one of the
petitioners or of their authorized agent remains a mystery.
From the registry receipt alone, it is possible that petitioners
or their authorized agent did not receive the demand letter.
Possibilities, however, cannot replace proof beyond
reasonable doubt.
165
However, apparently, a contrary ruling was laid down in the
subsequent case of Eumelia Mitra vs. People of the Philippines
(G.R. No. 191404, July 5, 2010), wherein it was held that: positive
allegation of the prosecution that a demand letter was served upon
the accused prevails over the denial made by the accused. x x x
The court accepts the prosecutions narrative that the accused
refused to sign to evidence their receipt thereof. To require the
prosecution to produce the signature of the accused on said
demand letter would be imposing an undue hardship on it. x x x
As well, actual receipt acknowledgment is not and has never been
required of the prosecution either by law or jurisprudence.
As the rule now stands, the Mitra case is controlling.
Payment as a matter of defense in B.P. 22 cases
In the Abarquez case, the Supreme Court laid down the
following doctrines:
The prima facie presumption that the drawer has knowledge
of the insufficiency of funds or credit at the time of the issuance,
or on the payment for presentment, of the check may be rebutted
by payment of the value of the check either by the drawer or by
the drawee bank within five banking days from notice of the
dishonor given by the drawer. The payment thus becomes a
complete defense regardless of the strength of the evidence
offered by the prosecution. It must be presupposed, then, that
the issuer received a notice of dishonor and that, within five days
from receipt thereof, he failed to pay the amount of the check or
to make arrangement for its payment.
166
165
Id. At 494
166
Meriz vs. People, p. 533
Basic Principles and Jurisprudence on the Negotiable Instruments Law 100
In Caras vs. Court of Appeals
167
, we note that the law
provides for a prima facie rule of evidence. Knowledge of
insufficiency of funds in or credit with the bank is presumed from
the act of making, drawing, and issuing a check payment of which
is refused by the drawee bank for insufficiency of funds when
presented within 90 days from the date of issue. However, this
presumption is rebutted when it is shown that the maker or drawer
pays or makes arrangements for the payment of the check within
five banking days after receiving notice that such check had been
dishonored. Thus, it is essential for the maker or drawer to be
notified of the dishonor of her check, so he could pay the value
thereof or make arrangements for its payment within the period
prescribed by law.
In Griffith vs. Court of Appeals
168
, we held that:
While we agree with the private respondent that the
gravamen of violation of B.P. 22 is the issuance of worthless
checks that are dishonored upon their presentment for payment,
we should not apply penal laws mechanically. We must find if the
application of the law is consistent with the purpose and the reason
for the law. Ratione cessat lex, et cessat lex (When the reason
for the law ceases, the law ceases.) It is not the letter alone but
the spirit of the law also that give it life. This is especially so in
this case where a debtors criminalization would not serve the
ends of justice but in fact subvert it. The creditor having collected
already more than a sufficient amount to cover the value of the
checks for payment of rentals, via auction sale, we find that holding
the debtors president to answer for a criminal offense under B.P.
22 two years after said collection, is no longer tenable nor justified
by law or equitable consideration.
Matters to be proved by the prosecution in BP 22 cases
Under Batas Pambansa Bilang 22 (BP 22), the prosecution
must prove not only that the accused issued a check that was
subsequently dishonored. It must also [be] established that the
accused was actually notified that the check was dishonored, and
that he or she failed, within five banking days from receipt of notice,
167
G.R. No. 129900, 2 October 2001, 366 SCRA 371, 380
168
G.R. No. 129764, 12 March 2002
101
to pay the holder of the check the amount due therein or to make
arrangement for its payment. Absent proof that the accused
received such notice, a prosecution for violation of the Bouncing
Check Law cannot prosper. (Betty King vs. People of the
Philippines, G.R. No. 131540, December 2, 1999, [Panganiban,
J.])
I. FORM AND INTERPRETATION
Section 1. Form of negotiable instruments. - An instrument
to be negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or
drawer;
(b) Must contain an unconditional promise or order to
pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty.
Notes:
Parties to Negotiable Instruments:
In sum, parties to negotiable instruments may be primary,
or secondary or incidental.
Primary parties are those which are the primary participants
to the creation of a negotiable instrument (e.g., maker, drawer,
payee, drawee/acceptor).
Secondary or incidental parties are those which came in or
become involved only after the instrument is negotiated or
transferred to a third person (e.g., indorsers, indorsees).
They may also be classified as parties primarily liable and
parties secondarily liable.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 102
The person primarily liable on an instrument is the person
who, by the terms of the instrument, is absolutely required to pay
the same. All other parties are secondarily liable. (Sec. 192)
Parties to a Promissory Note, include:
a) Maker;
b) Payee
Parties to a Bill of Exchange, include:
a) Drawer;
b) Drawee;
c) Payee
At the onset, it ought to be proper for us to define the terms
that the reader would encounter throughout the entire study of
this subject matter, as specified in Section 191that unless the
contract otherwise requires:
Acceptance means an acceptance completed by delivery
or notification;
Action includes counterclaim and set-off;
Bank includes any person or association of persons
carrying on the business of banking, whether incorporated
or not;
Bearer means the person in possession of a bill or note
which is payable to bearer;
Bill means bill of exchange, and note means negotiable
promissory note;
Delivery means transfer of possession, actual or
constructive, from one person to another;
Holder means the payee or indorsee of a bill or note who
is in possession of it, or the bearer thereof;
Indorsement means an indorsement completed by delivery;
103
Instrument means negotiable instrument;
Issue means the first delivery of the instrument, complete
in form, to a person who takes it as a holder;
Person includes a body of persons, whether incorporated
or not;
Value means valuable consideration;
Written includes printed, and writing includes print.
The law does not require any particular form, either as to a
bill of exchange or promissory note, or other negotiable instrument,
and while it would be unwise to depart from the approved forms
in vogue amongst merchants, yet the law respects substance more
than form; and where the intention appears to assume the
obligations which devolve upon drawers and makers of negotiable
instruments, it will be enforced, although not evidenced in the
usual commercial form. Thus, an order written under a note,
Please pay the above note, and hold it against me in our
settlement, signed by the drawer and accepted by the drawee,
has been held a good bill;
169
and so, also, it has been held that a
like order written under an account is a bill of exchange.
170
And
where an indorsement was made on a bond, ordering the contents
to be paid to order for value received, it was held a good bill.
171
(Daniel, Elements of the Law of Negotiable Instruments Law,
page 35)
Must be in Writing
As a substitute for money, a negotiable instrument, similar
to money, must be written or contained in a medium, in such a
way that it could by physically transferrable from hand to hand.
Strictly speaking, there are no verbal negotiable instruments.
It may be written on any paper, cloth, board, parchment,
wood, plastic, so long as it has a semi-permanent character, so
as to manifest the intent of the maker or drawer to create a
169
Leonard v. Mason, 1 Wend. 252
170
Hoyt v. Lynch, 2 Sandf. 328
171
Bay v. Frazer, 1 Bay, 66
Basic Principles and Jurisprudence on the Negotiable Instruments Law 104
negotiable instrument, capable of being negotiated or transferred
from one person to another. Otherwise, if such is incapable of
being physically transferred its negotiable character would be
defeated.
[T]his writing can be handwritten, printed, or typewritten,
or it can consists of any other intentional [method of] reduction to
tangible form. (Business Law, Howell, p. 412)
For a negotiable instrument to operate practically as either
a substitute for cash or a credit device, or both, it is essential that
the instrument can be easily transferable without danger of being
uncollectible.
172
The whole of the bill or note must be expressed in writing.
Whether the instrument be a bill of exchange or a promissory
note, or otherwise, and whether or not it be negotiable, must be
determined by its face, without reference to any other source.
173
Signed by the Maker or Drawer
Section 1 requires that the instrument be signed either by
the maker or drawer. This is in line with the provision that No
person is liable on the instrument whose signature does not appear
thereon.
174
Moreover, a negotiable instrument being essentially
a contract requires that there be consent of the maker or drawer,
since they are the ones who start with the creation and initial
delivery of an instrument. Consent is thus, manifested by their
affixing their signature on the instrument.
The term signed means any symbol executed or adopted
by a party with [the] present intention to authenticate a writing.
Thus a signing can occur through the use of ones initials, a rubber
stamp, or some other type of signature, such as the mark X, so
long as it is made with the intention of giving assent to the writings
terms. (ibid, p. 413)
It does not matter upon what portion of the instrument, the
maker or drawer affixes his name, so long that he signs as drawer
172
Miller & Jentz, Business Law Today, 9th Edition, 2011, page 391
173
Daniel on Negotiable Instrument, 77; Gibbon v. Scott, 2 Stark, 268
174
Sec. 18, NIL
105
or maker.
175
It is not material whether the writing is in pencil or
ink,
176
although as matter of permanence and security, ink is, of
course, preferable. And the name may be printed a well as written,
though, in such cases, it cannot prove itself, and must be shown
to have been adopted and used by the party as his signature.
177
If another sign the name of the party in his presence and at his
request, it is the same as if he did it himself;
178
and if another sign
the partys name by verbal or other authority, it is sufficient.
179
The full name may be written; and at least the surname should
appear, and generally does. But this is not indispensablethe
initials are sufficient,
180
and any mark which the party uses to
indicate his intention to bind himself will be as effectual as his
signature,
181
whether there be a certificate of witnesses on the
instrument or not.
182
But, of course, a mark does not prove itself
like a signature, although it is an adminicle of proof.
183
Any
peculiarity in it may be shown as evidence of proof;
184
but, unless
there be an attesting witness, or one who saw it written, or is
familiar with its characteristics, the plaintiff cannot recover.
185
Nor
it is necessary that the substance upon which the instrument is
written should be paperparchment, cloth, leather, or any other
substitute for paper will suffice.
186
(Daniel, Elements of the Law of
Negotiable Instruments, page 35-36)
Must Contain Unconditional Promise or Order
In perspective, a negotiable instrument operates as an
undertaking of a person, be it a maker, who promises to pay, or a
drawer, which in turn, orders another person to pay on his behalf,
that is made without any condition to another person, identified
as the payee, and receiving anything of value in exchange thereof.
175
Clason v. Bailey, 14 Johns, 484; Schmidt v. Schmaeller, 45 Mo. 502
176
Reed v. Roark, 14 Tex. 329; Closson v. Stearns, 4 Vt. 11
177
Brown v. Butchers Bank, 6 Hill, 443; Schneider v. Norris, 2 Maule & S.
286
178
Sager v. Tupper, 42 Mich. 605
179
Daniel on Negotiable Instruments, page 274, 299
180
Merchants Bank v. Spicer, 6 Wend. 443; 1 Parsons on Notes and Bills,
36
181
Lyons v. Holmes, 11 S.C. 429
182
Willoughby v. Moulton, 47 N.H. 205; Shank v. Butach, 28 Ind. 19
183
Hilborn v. Alford, 22 Cal. 482; Flowers v. Billing, 45 Ala. 488
184
George v. Surrey, 1 Moody & M. 516; 2 Parsons on Notes and Bills, 480
185
Thompson on Bills, 30, 31, 33
186
Daniel on Negotiable Instruments, 77
Basic Principles and Jurisprudence on the Negotiable Instruments Law 106
Vital is the requirement that the promise or order to pay must be
unconditional. Since, a negotiable instrument is intended as a
substitute for money, the payee and the subsequent holder thereof
must be assured that they would be able to receive the amount
indicated on the face of the instrument without any other condition
or additional burden.
If a bill, it must contain a certain direction to payif a note,
a certain promise to pay. A bill is, in its nature, the demanding of
a right, not the mere asking of a favor, and therefore a supplication
made or authority given to pay an amount is not a bill. (Daniel,
Elements of the Law of Negotiable Instruments, page 45)
A promissory note must contain a certain promise to pay. I
promise to pay, or cause to be paid, would suffice, because the
undertaking that the payment be made is definite and certain.
187
It is said by Story, that it seems that to constitute a good
promissory note, there must be an express promise upon the fact
of the instrument to pay the money; for a mere promise implied
by law, founded upon an acknowledged indebtedness, will not be
sufficient.
188
But we think the better language is used by Byles,
who says: No precise words of contract are necessary, provided
they amount, in legal effect, to a promise to pay,
189
In other words,
if over and above the mere acknowledgment of debt, there may
be collected from the words used a promise to pay it, the
instrument may be regarded as a promissory note.
190
The instrument must be payable unconditionally and at all
events in order to be negotiable.
191
To be unconditional, the
payment of the instrument must not be made to depend upon a
future uncertain event, which may, or may not happen.
A promise is unconditional, although it is coupled with (a)
an indication of a particular fund out of which reimbursement is to
be made or a particular account to be debited with the amount; or
(b) a statement of the transaction which gives rise to the
instrument. (Sec. 2, NIL)
187
Lovell v. Hill, 6 Car. & P. 238; Caviness v. Rushton, 101 Ind. 500
188
Story on Promissory Notes, 14
189
Byles on Bills, 8
190
Daniel on Negotiable Instruments, 36; Cowan v. Hallack, 9 Colo. 578
191
Daniel, Elements of the Law of Negotiable Instruments, 46
107
And an instrument payable upon a contingency is not
negotiable, and the happening of the event does not cure the
defect.
192
The contingency implied deprives the instrument of its
negotiable character, as the events named may never happen.
193
If the time must certainly come, although the particular day
is not mentioned, the instrument is regarded as negotiable, as
the fact of payment is certain.
194
If the instrument is payable at, or
within a certain time after, a mans death, it is sufficient, because
the event must occur;
195
and a promise to pay on demand, after
my decease, $850, signed by the promissory, is a good note,
negotiable as any other, and binding on the promissors estate at
his death.
196
So a note payable one day after date or at my
death,
197
and if the day of payment must come at some time, it
has been said that the distance is immaterial.
198
(Daniel, Elements
of the Law of Negotiable Instruments, page 48)
However, an order or promise to pay out of a particular fund
is not unconditional. (Sec. 2, N.I.L.) In accordance with these
principles the negotiable character of the instrument is destroyed
if it be made payable expressly or impliedly out of a particular
fund.
199
Illustrations: The insertion in an order to pay a certain
sum on account of brick work done on a certain building
200
or
out of rents,
201
or out of my growing substance,
202
or out of a
certain claim,
203
or out of my part of the estate of A,
204
or out of
the amount due on contract.
205
On the same principle, receivers
certificates are not regarded as negotiable, although framed with
the negotiable words usual in promissory notes.
206
(Daniel,
Elements of the Law of Negotiable Instruments, page 50)
192
Sec. 4, NIL
193
Daniel, Elements of the Law of Negotiable Instruments, 47
194
Daniel on Negotiable Instruments, 43
195
Cooke v. Colehan, 2 Stra. 1217; Conn v. Thornton, 46 Ala. 587; Price v.
Jones, 105 Ind. 544.
196
Bristol v. Warner, 19 Conn. 7
197
Conn v. Thornton, 46 Ala. 588
198
Worth v. Case, 42 N.Y. 362
199
Daniel, Elements of the Law of Negotiable Instruments, 50
200
Pitman v. Crawford, 3 Gratt. 127
201
J Parsons on Notes and Bills, 43
202
Josselyn v. Lacier, 10 Mod. 294
203
Richardson v. Carpenter, 46 N.Y.661
204
Mills v. Kuykendale, 2 Black., 47
205
Hoagland v. Erck, 11 Neb. 580
206
Staunton v. Railroad Co., 31 Fed. 587; McCurdy v. Bowes, 88 Ind.583
Basic Principles and Jurisprudence on the Negotiable Instruments Law 108
An order to pay A, or order, $300.00 or what may be due
on my deposit book, is conditional.
207
Therefore, the same in
non-negotiable.
2011 Bar Question:
A writes a promissory note in favor of his creditor, B. It
says: Subject to my option, I promise to pay B Php1
Million or his order or give Php1 Million worth of cement
or to authorize him to sell my house worth Php1 Million.
Signed, A. Is the note negotiable?
A. No, because the exercise of the option to pay lies with
A, the maker and debtor.
B. No, because it authorizes the sale of collateral securities
in case the note is not paid at maturity.
C. Yes, because the note is really payable to B or his order,
the other provisions being merely optional.
D. Yes, because an election to require something to be done
in lieu of payment of money does not affect negotiability.
To Pay a sum certain in Money
The sum or amount which is promised or ordered to be paid
by the maker or drawer as the case may be must be certain. This
would enable to payee or any subsequent holder to be able to
know how much they are going to claim from the person primarily
liable thereon.
Thus, if an instrument is to be a substitute for money and
have an equivalent degree of acceptability, the necessity that the
amount be a sum certain is obvious. This requirement of certainty
is met if the holder can determine from the terms of the instrument
itself the amount he or she is entitled to receive at maturity. (Ibid,
Howell, p. 417)
The amount which the debtor promises or engages to pay
must either be stated in the instrument itself, in figures or words,
or must be ascertainable from data somewhere on the paper.
207
The Negotiable Instruments Law Annotated, by Joseph Doddridge
Brannan, Second Edition 1911, page 3, citing National Sav. Bank v. Cable,
73 Conn. 568 Atl. 428.
109
Illustrations: A note to pay a certain sum, and all other sums
which may be due is not negotiable, as the aggregate amount is
not capable of definite ascertainment.
208
So, if it be for a certain
sum and whatever sum you may collect of me for C,;
209
or if it be
for the proceeds of a shipment of goods, value about 2,000,
consigned by me to you;
210
or the demands of the sick club in
part of interest;
211
or a certain sum, the same to go as set-off;
212
or if it be expressed, deducting all advances and expenses;
213
or if it be due for $800 and such additional premium as may be
due on policy No. 218,171.
214
But a promise to pay bearer a
certain sum per acre for so many acres as a certain tract contained
was held to be negotiable as soon as the number of acres was
indorsed upon it.
215
(Daniel, Elements of the Law of Negotiable
Instruments, page 51)
It is essential to the negotiability of the bill or note that it
purports to be only for the payment of money. Such at least may
be stated to be the general rule, for if any other agreement of a
different character be engrafted upon it, it becomes a special
contract clogged and involved with other matters, and has been
deemed to l ose thereby i ts character as a commerci al
instrument.
216
(ibid, page 55)
Payable on Demand or at a Fixed or Determinable Future Time
This requirement recognizes that the holder of an instrument
wants to know with certainty when he or she will be entitled to
payment. Any appreciable uncertainty as to time of payment
makes the instrument commercially unacceptable and defeats
the concept that a negotiable instrument is a substitute for money.
(Howell, p. 418)
An instrument is payable on demand: (a) when it is so
expressed to be payable on demand, or at sight, or on
208
Smith v. Nightinglare, 2 Stark, 375
209
Legro v. Staples, 16 Me. 252; Lime Rock F. & M. Ins. Co. v. Hewitt, 60 Me.
407
210
Jones v. Simpson, 2 B & C, 318
211
Bolton v. Dugdale, 4 B & Ad. 619
212
Clarke v. Percival, 2 B & Ad. 660
213
Cashman v. Haynes, 20 Pick, 132
214
Marret v. Equitable Ins. Co., 54 Me. 537
215
Smith v. Clopton, 4 Tex. 109
216
Fletcher v. Thompson, 55 N.H. 308; Ingham v. Dudley, 60 Iowa 16
Basic Principles and Jurisprudence on the Negotiable Instruments Law 110
presentation; or (b) in which no time for payment is fixed. (Sec. 7,
NIL)
Where an instrument is issued, accepted, or indorsed when
overdue, it is, as regards the person so issuing, accepting, or
indorsing it, payable on demand. (ibid)
An instrument may also be payable on a fixed future time,
as on its face, the holder can clearly discern the date and time
when the instrument shall become due. Example: April 8, 2012;
or April 3, 2007.
When an instrument is payable at a determinable future time,
the holder thereof would be able to know the date and time when
instrument would become due by referring to a fixed or known
future event. Example: 10-days after Christmas this year; or 15-
days after New Year of next year.
Payable to Order or Bearer
The requirement that an instrument be made payable to
Order or Bearer are what we call words of negotiability, this
implies that an instrument, provided it complies with all other
requisites of Section 1 of the Negotiable Instruments Law, can be
negotiated or transferred to other persons, in the manner provided
for under the law.
Without these so-called words of negotiability, an instrument
would not be negotiable, as on its face it would be intended only
to be payable to the person named therein, thus, preventing it to
be further negotiated.
An instrument is payable to Order where it is drawn payable
to the order of a specified person or to him or his order. (Sec. 8,
NIL)
It may be drawn payable to the order of
217
:
a) A payee who is not maker, drawer, or drawee; or
b) The drawer or maker; or
c) The drawee; or
d) Two or more payees jointly; or
111
e) One or some of several payees; or
f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must
be named or otherwise indicated therein with reasonable
certainty.
218
On the other hand, an instrument is payable to Bearer
219
:
a) When it is expressed to be so payable; or
b) When it is payable to a person named therein or
bearer; or
c) When it is payable to the order of a fictitious or non-
existing person, and such fact was known to the
person making it so payable; or
d) When the name of the payee does not purport to
be the name of any person; or
e) When the onl y or l ast i ndorsement i s an
indorsement in blank.
2000 Bar Question:
MP bought a used cellphone from JR. JR preferred cash
but MP is a friend so JR accepted MPs promissory note
for P10,000.00. JR thought of converting the note into
cash by endorsing it to his brother KR. The promissory
note is a piece of paper with the following hand-printed
notation: MP WILL PAY JR TEN THOUSAND PESOS IN
PAYMENT FOR HIS CELLPHONE 1 WEEK FROM
TODAY. Below this notation MPs signature with 8/1/
00 next to it, indicating the date of the promissory note.
When JR presented MPs note to KR, the latter said it
was not a negotiable instrument under the law and so
could not be a valid substitute for cash. JR took the
opposite view, insisting on the notes negotiability. You
are asked to referee. Which of the opposing views is
correct? Explain. (3%)
ANSWER:
KRs view is correct. The promissory note does not meet
the requirements of Sec. 1, Act 2031, which requires that
Basic Principles and Jurisprudence on the Negotiable Instruments Law 112
the instrument be payable to bearer or order, therefore it is
non-negotiable.
Drawee must be named or otherwise Indicated therein with
reasonable certainty
It should be noted that the requirement on Sec. 1 (e) applies
only if the instrument is a Bill of Exchange, wherein, the Drawer
orders a Drawee to pay the payee or his Order, or Bearer thereof,
in which case, the drawee, who becomes subsequently the
acceptor thereof is the person primarily liable to pay the instrument.
As for the requirements of a Promissory Note, Sec. 1 (a) to
(d) would suffice.
Whether the Bill is payable on demand or at a fixed or
determinable future time, so long as the holder would be able to
know or identify the person to whom he would be demanding or
enforcing payment of the instrument.
The requisite is that the drawee must be Named.
Example:
Pepito Aguilar
1002, Santos Avenue, Sta. Cruz, Manila
Or
Luis Lustriano of Luzurriaga & Associates
Ortigas Center, Pasig City
Drawee may also be Indicated with Reasonable Certainty.
Example:
Brgy. Captain
Brgy. Sto Domingo, Laguna
Or
Hon. Municipal Mayor
Municipality of Oton, Iloilo
113
The instrument can only be negotiable if it complies with
Section 1
A document will only become a Negotiable Instrument if it
complies with the requisites of Section 1 of the Negotiable
Instruments law, unconditionally and in a single document.
It should be noted that the existence of a negotiable
instrument is different on who is liable on the instrument. The
existence of a negotiable instrument is answered if the paper
strictly complies with Section 1 of the Negotiable Instruments Law,
liability, on the other hand may be addressed taking into
consideration certain factors, like, proper negotiation, existence
of a consideration, holder in due course, and the like.
Thus, if what we have is a mere innominate contract, without
complying with Section 1 of the said law, then, it may be governed
by the Civil Code, or other pertinent provisions of the Code of
Commerce, but it cannot avail of the provisions of Act 2031.
Distinction between a negotiable and non-negotiable
instrument
In the case of Consolidated Plywood Industries, Inc. vs. IFC
Leasing and Acceptance Corp.,
220
this Court had the occasion to
clearly distinguish between a negotiable and non-negotiable
instrument.
Among others, 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. Under Section 8 of the
Negotiable Instruments Law, there are only two ways by which an
instrument may be made payable to order. There must always
be a specified person named in the instrument and 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
220
149 SCRA 459 (1987).
Basic Principles and Jurisprudence on the Negotiable Instruments Law 114
the latter. (Juanita Salas vs. Court of Appeals, G.R. No. 76788,
January 22, 1990, [Fernan, C.J.:])
In the above-mentioned case of Juanita Salas vs. Court of
Appeals, the pertinent portion of the note reads:
PROMISSORY NOTE
(MONTHLY)
P58,138.20
San Fernando, Pampanga, Philippines
Feb. 11, 1980
For value received, I/We jointly and severally, promise to pay
Violago Motor Sales Corporation or order, at its office in San
Fernando, Pampanga, the sum of FIFTY EIGHT THOUSAND ONE
HUNDRED THIRTY EIGHT & 201/100 ONLY (P58,138.20)
Philippine currency, which amount includes interest at 14% per
annum based on the diminishing balance, the said principal sum,
to be payable, without need of notice or demand, in installments of
the amounts following and at the dates hereinafter set forth, to wit:
P1,614.95 monthly for 36 months due and payable on the 21st
day of each month starting March 21, 1980 thru and inclusive of
February 21, 1983. P_________ monthly for ______ months due
and payable on the ______ day of each month starting
_____198__ thru and inclusive of _____, 198________ provided
that interest at 14% per annum shall be added on each unpaid
installment from maturity hereof until fully paid.
xxx xxx xxx
Maker; Co-Maker:
(SIGNED) JUANITA SALAS _________________
Address: ____________________ ________________________
WITNESSES
SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE
TAN # TAN #
PAY TO THE ORDER OF
FILINVEST FINANCE AND LEASING CORPORATION
VIOLAGO MOTOR SALES CORPORATION
BY: (SIGNED) GENEVEVA V. BALTAZAR
Cash Manager
115
A careful study of the questioned promissory note shows
that it is a negotiable instrument, having complied with the
requisites under the law as follows: [a] it is in writing signed by
the maker Juanita Salas; [b] it contains an unconditional promise
to pay the amount of P58,138.20; [c] it is payable at a fixed or
determinable future time which is p1,614.95 monthly for 36
months due and payable on the 21
st
day of each month starting
March 21, 1980 thru and inclusive of Feb. 21, 1983; [d] it is
payable to Violago Motor Sales Corporation, or order and as such,
[e] the drawee is named or indicated with certainty. (supra)
The case of Narcisa Buencamino, et. al., vs. Hernandez, et
al.
1
talks about the negotiability of Government negotiable land
certificates, which provide as follows, to wit:
AMOUNT: P10,000.00
NEGOTIABLE LAND CERTIFICATE
THE GOVERNMENT OF THE REPUBLIC OF
THE PHILIPPINES
is indebted unto the
BEARER
in the sum of TEN THOUSAND PESOS. This certificate is issued in
accordance with the provisions of Section 9, Republic Act No. 1400,
entitled AN ACT DEFINING A LAND TENURE POLICY, PROVIDING
FOR AN INSTRUMENTALITY TO CARRY OUT THE POLICY, AND
APPROPRIATING FUNDS FOR ITS IMPLEMENTATION, approved
September 9, 1955, and is due and payable to BEARER on demand
and upon presentation at the Central Bank of the Philippines without
interest, if presented for payment within five years from the date of
issue; with interest at the rate of 4 per centum per annum, if presented
for payment after five years from the date of issue; with interest at
the rate of 4- per centum per annum, if presented for payment
after ten years from the date of issue; and, with interest at the rate of
5 per centum per annum, if presented for payment after fifteen years
from the date of issue. Both principal and interest are payable by the
Treasurer of the Philippines, through the Central Bank of the
Philippines, in legal tender currency of the Philippines.
This land certificate is part of the total negotiable land certificates
issued and limited to the aggregate principal sum of SIXTY MILLION
PESOS a year, to be issued during the first two years from September
9, 1955 when Republic Act No. 1400 was approved, and P30 million
each year during the succeeding years, for the purchase of private
221
G.R. No. L-14883, July 31, 1963, [Regals, J.:]
Basic Principles and Jurisprudence on the Negotiable Instruments Law 116
agricultural lands for resale at cost to bona-fide tenants or occupants,
or, in the case of estates abandoned by the owners for the last five
years, to private individuals who will work the lands themselves and
who are qualified to acquire or own lands, but who do not own more
than six hectares of lands in the Philippines.
Manila, Philippines, August 9, 1957.
Encashment of this certificate may not be made until after five (5)
years from the date of execution of the Deed of Sale of Hacienda de
Leon, pursuant to the conditions under Paragraph b of the
Memorandum Agreement executed between the Land Tenure
Administration and the owners of Hacienda de Leon on May 11, 1957,
acknowledged before Marcelo Lagramada, Notary Public for Manila,
as Doc. No. 324, Page 66, Book No. 6, Series of 1957.
(Sgd.) JUAN CAIZARES
Registrar of the Central
Bank of the Philippines
(Sgd.) CARLOS P. GARCIA
President of the Phil.
(Sgd.) VICENTE GELLA
Treasurer of the Phil.
Date of issue: August 9, 1957
Recorded: Illegible
Examined: Illegible
Under Republic Act No. 1400, the land certificates, as in
this case, shall be payable to bearer upon demand. The one
issued, however, were, payable to bearer only after the lapse of
five years from a given period. Obviously then, the requirement
that they should be payable on demand was not met since an
instrument payable on demand is one which is (a) expressed to
be payable on demand, or at sight, or on presentation; or (b)
expresses no time for payment (Sec. 7, Negotiable Instruments
Law), the five-year period within which the certificates could not
be encashed was an expression of the time for the payment
contrary to the paragraph (b) of the last law cited.
In another significant case, that of Consolidated Plywood
Industri es, Inc., et al vs. IFC Leasi ng and Acceptance
Corporation
222
, [t]he pertinent portion of the note is as follows:
117
FOR VALUE RECEIVED, I/we jointly and severally
promi se to pay to the INDUSTRIAL PRODUCTS
MARKETING, the sum of ONE MILLION NINETY THREE
THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS
& 71/100 only (P 1,093,789.71), Philippine Currency, the
sai d pri nci pal sum, to be payabl e i n 24 monthl y
installments starting July 15, 1978 and every 15th of the
month thereafter until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable
Instruments Law requires that a promissory note must be payable
to order or bearer, it cannot be denied that the promissory note
in question is not a negotiable instrument.
The instrument in order to be considered negotiable-i.e.
must contain the so-called word of negotiability, 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,
222
G.R. No. 72593, April 30, 1987.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 118
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.
(Campos and Campos, Notes and Selected Cases on
Negotiable Instruments Law, Third Editions, page 38).
(Emphasis supplied)
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.
Treasury warrant; not a Negotiable Instrument.
Treasury warrants do not fall within the purview of the
Negotiable Instruments Law. Treasury warrants are payable from
a particular appropriation of an order payable out of a particular
fund, and is not unconditional.
Postal Money Orders; not a Negotiable Instrument.
It is not disputed that our postal statues were patterned after
statutes in force in the United States. For this reason, ours are
generally construed in accordance with the construction given in
the United States to their own postal statutes, in the absence of
any special reason justifying a departure from this policy or
practice. The weight of authority in the United States is that postal
money orders are not negotiable instruments (Bolognesi vs. U.S.
189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed.
912), the reason behind this rule being that, in establishing and
operating a postal money order system, the government is not
engaging in commercial transactions but merely exercises a
governmental power for the public benefit. (Philippine Education
Co., Inc., vs. Soriano, G.R. No. L-22405, June 30, 1971, [Dizon,
J.])
It is to be noted in this connection that some of the
restrictions imposed upon money orders by postal laws and
119
regulations are inconsistent with the character of negotiable
instruments. For instance, such laws and regulations usually
provide for not more than one endorsement; payment of money
orders may be withheld under a variety of circumstances. (49 C.J.
1153, supra)
Central Bank Certificate of Indebtedness; not a Negotiable
Instrument
In the case of Traders Royal Bank vs. Court of Appeals,
Filriters Guaranty Assurance Corporation and Central Bank
of the Philippines
223
, it was held that: the subject CBCI is not a
negotiable instrument in the absence of words of negotiability
within the meaning of the negotiable instruments law (Act 2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
The Central Bank of the Philippines (the Bank) for value received,
hereby promises to pay bearer, of if this Certificate of indebtedness
be registered, to FILRITERS GUARANTY ASSURANCE
CORPORATION, the registered owner hereof, the principal sum
of FIVE HUNDRED THOUSAND PESOS.
xxx xxx xxx
Properly understood, a certificate of indebtedness pertains
to certificates for the creation and maintenance of a permanent
improvement revolving fund, is similar to a bond (82 Minn. 202).
Being equivalent to a bond, it is properly understood as
acknowledgment of an obligation to pay a fixed sum of money, it
is usually used for the purpose of long term loans.
Problem:
What is the nature and characteristic of a NOW account?
Is it Negotiable within the ambit of the Negotiable
Instruments Law?
223
G.R. No. 93397, March 3, 1997, [Torres, J.]
Basic Principles and Jurisprudence on the Negotiable Instruments Law 120
ANSWER:
Negotiable Orders of Withdrawals (NOW Accounts) is
defined as savings accounts from which funds may be
withdrawn by means of negotiable orders of withdrawal.
They shall be kept and maintained separately from the
regular savings deposits subject to withdrawal through the
presentation of withdrawal slips and passbooks. Only
natural persons shall be eligible to maintain NOW Accounts.
The authority to offer NOW Accounts shall be granted only
to thrift banks that meet the requirements laid down by the
Central Bank Regulations.
They are not negotiable within the provisions of the
Negotiable Instruments Law because of certain limits and
restrictions, to wit:
(a.) The order of withdrawal shall be payable only to a
specific person, natural or juridical, and not to bearer
nor to the order of a specified person;
Only the payee can encash this order of withdrawal with
drawee bank, or deposit it in his account with the drawee bank or
with any other bank.
When is an instrument considered to be complete? When is
it incomplete?
An i nstrument i s compl ete i f i t compl i es wi th the
requirements of Section 1 of the Negotiable Instruments Law,
embodied in a single document or medium, and that there must
be no other conditions imposed for its validity or compliance.
An instrument is incomplete if it lacks any material particular
essential for its completion.
Essentials of a Bill or Note
224
To be a negotiable bill of exchange or promissory note, the
instrument must have the following essential characteristics:
a) The bill must contain an order
224
Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 26
121
b) The note must contain a promise
c) The order or promise must be unconditional
d) It must be an absolute order or promise for the
payment of money alone
e) The amount of money must be certain
f) The time of payment must be a time certain to arrive
g) The instrument must be specific as to all its parties
h) The instrument must be delivered
What are the effects if the instrument is incomplete?
Strictly speaking, we do not have any negotiable instrument.
An instrument only comes within the purview of the Negotiable
Instruments Law if it complies with the requisites of Section 1 of
the Negotiable Instruments Law, in the absence thereof, we only
have a private document or contract, in which the Negotiable
Instruments Law has no application.
Sec. 2. What constitutes certainty as to sum. - The sum
payable is a sum certain within the meaning of this Act,
although it is to be paid:
(a) With interest; or
(b) By stated installments; or
(c) By stated installments, with a provision that, upon
default in payment of any installment or of interest,
the whole shall become due; or
(d) With exchange, whether at a fixed rate or at the
current rate; or
(e) With costs of collection or an attorneys fee, in case
payment shall not be made at maturity.
Notes:
When sum is considered certain.
The sum becomes certain if the maker, drawee, or holder
of the instrument would be able to discern with exact certainty
how much would he pay or collect, as the case may be, on the
value of the negotiable instrument.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 122
With Interest
The sum is considered certain although coupled with the
payment of interest. It should be borne in mind that the payment
of the interest is only in addition to the principal sum to be paid,
thus, the sum payable is still certain.
Example:
P30,000.00 plus 2% monthly interest; or
Pay 10% of P100,000.00
By stated installments
Though coupled with payment in stated installments, the
sum is still considered certain. The main reason is that said
installment, is only a mode of payment of the main obligation,
certainly entire sum due or payable could still be identified.
Example:
Promise to pay bearer P10,000.00 in 2 equal
installments; or
Promise to pay bearer five installments of P2,000.00
each.
By stated installments, with a provision that, upon default in
payment of any installment or of interest, the whole shall
become due
This is similar to payment by stated installments as
previously mentioned, but this one contains an acceleration clause,
where, default in the payment of any installment or of interest, the
whole sum or amount becomes due.
In Acceleration Clauses: Instruments due at a fixed future
date sometimes have clauses providing that the date of maturity
shall be moved ahead if a specified event occurs prior to the stated
due date. An instrument issued this year with a maturity date [of]
two years hence might contain, for example, either of these
acceleration clauses: (1) This instrument shall become
immediately due and payable upon the makers (or acceptors)
bankruptcy; or (2) for a note payable in monthly installments: If
123
any instrument is not paid when due, the entire instrument is due
and demandable. (Howell, p. 421)
With exchange, whether at a fixed rate or at the current rate
The sum is still certain, though it is made coupled with
exchange whether fixed rate or at current rate. In this instance, a
reasonable prudent person would still be able to determine the
sum payable.
Example:
Pay to bearer an amount equivalent to $100.00; or
Pay to bearer an amount equivalent to the prevailing
rate of $100.00; or
Pay to bearer an amount equivalent to $100.00 at an
exchange rate of Php 43.50 per dollar.
With costs of collection or an attorneys fee, in case payment
shall not be made at maturity
This would be self-explanatory. Again the most important
fact to determine is whether or not the holder would be able to
determine the amount due, despite the additional cost of collection
or attorneys fee.
The attorneys fee is due if the unpaid note is placed in the
hands of an attorney for collection, although no suit is brought. A
stipulation in a mortgage securing the note for fees in case of suit
on the mortgage securing the note for fees in case of suit on the
mortgage is cumulative and not restrictive of the provision of the
note. (Brannan, page 5, citing, Morrison v. Ornbaun, 30 Mont.
111, 75 Pac. 953.)
A provision in a promissory note for attorneys fees if
collected by attorney, or if suit is brought on this note, is a promise
to pay attorneys fees for collection only after dishonor, and does
not impair the negotiability of the note. (Ibid, citing First Natl. Bank
of Shawano v. Miller, 139 Wis. 126, 120 N.W. 820, S.C. sec. 104.)
Likewise, [a] provision in a note for an attorneys fee, but
leaving blank the amount thereof, amounts to a promise to pay a
reasonable sum as an attorneys fee, and does not render the
Basic Principles and Jurisprudence on the Negotiable Instruments Law 124
note non-negotiable. Where the plaintiff employed an attorney, it
is sufficient to show what is a reasonable fee, and it is not
necessary to prove an express agreement as to fees, or that
plaintiff paid the attorney before the suit. (Brannan, page 6, citing
McCormick v. Swem (Utah) 102 Pac. 626)
Example:
For value received, I promise to pay David Lancelot, or
order, the amount of Php 100,000.00, ten days after sight. It
is understood that an amount equivalent to the cost of
collection would be made payable in addition to the principal
amount, and an amount equivalent to Twenty-Five Per Cent
(25%) of the amount due as Attorneys Fees, should there be
default in the payment after demand.
(sgd)
Abigail Margaux
In the case of H.R. Andreas vs. B.A. Green
225
, the promissory
note was worded as follows:
P15,000.00 MANILA, P. I
Aug. 19th, 1921
On or before the 19th day of November, 1921, or on
thirty (30) days written demand notice, for value received, I
promise to pay to Harry Bridge, at Manila, P.I., the sum of
fifteen thousand pesos (P15, 000) with interest thereon at
the rate of twelve per cent (12%) per annum. If not paid
when due after thirty days written demand notice, this note
shall bear interest at the rate of 12 per cent per annum until
paid; and a further sum equal to 10 per cent of the total
amount due as and for expenses of collection for attorneys
fees whether actually incurred or not and in addition to all
costs as provided for in the Code of Civil Procedure.
This note is secured by real-estate mortgage of even date.
(Sgd.) B. A. GREEN
225
G.R. No. L-24322, December 16, 1925
125
The Supreme Court in the above-mentioned case held that:
[s]tipulations in negotiable instruments for the payment of
collection and attorneys fees are not forbidden by lay in this
jurisdiction. x x x The purpose of a stipulation in a note for a
reasonable attorneys fees is not to give the lender a larger
compensation for the loan than the law allows, but is to safeguard
the lender against future loss or damage by being compelled to
retain counsel to institute judicial proceedings to collect his debt.
Sec. 3. When promise is unconditional. - An unqualified order
or promise to pay is unconditional within the meaning of this
Act though coupled with:
(a) An indication of a particular fund out of which
reimbursement is to be made or a particular account
to be debited with the amount; or
(b) A statement of the transaction which gives rise to
the instr ument.
But an order or promise to pay out of a particular fund is not
unconditional
Notes:
When is promise to pay unconditional?
A promise to pay is unconditional if no other requirement or
qualification or condition is needed for its payment.
Moreover, an unqualified order or promise to pay is
unconditional, though coupled with:
a. An i ndi cati on of a parti cul ar fund out of whi ch
reimbursement is to be made or a particular account to
be debited with the amount; or
b. A statement of the transaction which gives rise to the
instrument.
An indication of a particular fund out of which reimbursement
is to be made or a particular account to be debited with the
amount
Basic Principles and Jurisprudence on the Negotiable Instruments Law 126
In this instance, the promise or order to pay is still
unconditional because payment is not premised upon any
condition, or subject to the availability of funds of a particular
account. The holder of the instrument is assured that he be paid
upon presentment of the instrument. It should be taken into
consideration that the law uses the word reimbursement, which
implies that payment is to be advanced by the person primarily
liable and merely reimburse the same from a particular account.
Thus, regardless of the availability of funds in that account, the
holder receives payment.
Example:
To: Maria Santos
1020 Licauco Drive, Ortigas Center, Pasig
This 26
th
day of October 2011
Please pay, Mario Delos Santos, or order, P10,000.00
five (5) days after sight, and reimburse said amount from
my savings account with PSBank account number 01-
092837-99.
(sgd)
Jose Santos
An order drawn by the X company directing payment of a
certain sum, on account of contract between you (the drawee)
and the X Company held negotiable, the words on account of
not having the same effect as out of the proceeds of. (Brannan,
page 6, citing First Nat. Bank v. Lightner, 74 Kans. 736, 88 Pac.
59, 8 L.R.A. (N.S.) 231, 118 Am. St. Rep. 353.)
An order to pay on or before a fixed day and charge the
same to the $1,800 payment, is not conditional. (Ibid, citing
Shepard v. Abbott, 179 Mass. 300, 60 N.E. 782)
A bill of exchange is not made non-negotiable because it
contains the words charge to my account and credit according to
a registered letter I have addressed to you. These words do not
mean according to the conditions mentioned in the letter, but
merely charge my account and credit according to the letter. (Ibid,
citing In re Boyse, 33 Ch. Div. 612)
127
A statement of the transaction which gives rise to the
instrument
Though an instrument may contain the reason for the
issuance thereof, it does not in any way impose a condition upon
the payment of the instrument. What is important is that the
statement of transactions must not be made as the condition for
payment of the instrument.
Examples:
As payment for the 10 crates of apple, I promise to pay
Mario Santos, or his order, Php 100,000.00 five (5) days
after sight.
(sgd)
Maria Delos Santos
Note that in the example above, the statement of the
transaction which gave rise to the instrument did not render the
instrument conditional, thus, the same is negotiable.
However, what if, say for instance that in the same example,
the 10 crates of apple were not delivered to Maria, but she had
already parted with her promissory note, will that make the
instrument non-negotiable?
The answer is no, it should be remembered that an
instrument is negotiable the moment it complies with Section 1 of
the negotiable instruments law. However, if the question pertains
to Marias liability on the promissory note, then we have a different
answer, which will be later on discussed in the succeeding pages
of this work.
It should be remembered that the existence of a negotiable
instrument differs from the question of who? is liable on the
negotiable instrument. The former merely requires compliance
with Section 1 of the law, while the latter takes into consideration
other aspects of liability, e.g., holder in due course, not a holder in
due course, transfer or negotiation, etc.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 128
What about if the order or promise is to pay out of a particular
fund, is it still unconditional?
No. An order or promise to pay out of a particular fund is not
unconditional. (Sec. 3, Negotiable Instruments Law) It is
conditional because from the phrase itself, pay out of a particular
fund, makes the payment of the instrument dependent upon the
available funds on the account, thus, the same is conditional,
therefore, non-negotiable. It is of no moment if there are indeed
actual available funds on the account, what matters is what is the
implication of the written words on the face of the paper.
Treasury warrants, which, by their nature are payable out of
particular funds which are the subject of appropriations for which
these treasury warrants were issued are non-negotiable, simply
because the repayment of which is dependent upon the availability
of a particular fund.
Sec. 4. Determinable future time; what constitutes. - An
instrument is payable at a determinable future time, within
the meaning of this Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future time
specified therein; or
(c) On or at a fixed period after the occurrence of a
specified event which is certain to happen, though
the time of happening be uncertain.
An instrument payable upon a contingency is not negotiable,
and the happening of the event does not cure the defect.
Notes:
What constitutes a determinable future time?
An instrument to be negotiable must be made either payable
on a fixed date or at a determinable future time, the latter phrase
means a period of time which could be determined with reference
to another particular time, or event which is certain to happen
though the time of happening is uncertain.
129
Fixed period after date or sight
This refers to a fixed or definite time after seeing, or
accepting the instrument, or on the date specified on the
instrument.
Example:
Ten days after sight; or
Ten days after date of the instrument
On or before a fixed or determinable future time specified
therein
This provision is self-explanatory.
Example:
Pay bearer P1, 000.00 on or before January 9, 2012
Pay bearer P1, 000.00 on or before Christmas day of 2012
If the instrument is made payable upon a contingency, is it
negotiable? What if the contingency occurred?
An instrument payable upon a contingency is not negotiable,
and the happening of the event does not cure the defect. (Sec. 4,
Negotiable Instruments Law)
What is a contingency?
Contingency refers to future uncertain events, or past events
unknown to parties, or circumstances which may or may not
happen.
Example:
I promise to pay bearer, or order, P1, 000.00 after passing
the bar exams
Pay bearer, P500.00 to buy umbrella when it rains on
December 25, 2011
Notes, payable at a certain time, but secured by a mortgage
executed as part of the same transaction, and reciting that the
whole debt shall be due in case of sale or removal of the property
Basic Principles and Jurisprudence on the Negotiable Instruments Law 130
by the mortgagor without the consent of the mortgagee, or in case
the mortgagee deems himself insecure, are uncertain as to time
and amount of payment and are therefore not negotiable.
(Brannan, page 8, citing Iowa Nat. Bank v. Carter (Iowa), 123
N.W. 237, S.C. secs. 25, 26)
Reason for the rule
As a substitute for money, payment of the negotiable
instrument must never be subject to any uncertainties, or
contingency, to do so would create a situation where the holder of
the instrument could not enforce payment on the person primarily
liable by reason of the event or contingency upon which an
obligation to pay would arise never occurred. This, entirely defeats
the purpose for the creation of the negotiable instrument.
2011 Bar Question:
A promissory note states, on its face: I, X, promise to
pay Y the amount of Php 5,000.00 five days after
completion of the on-going construction of my house.
Signed, X. Is the note negotiable?
A. Yes, since it is payable at a fixed period after the
occurrence of a specified event.
B. No, since it is payable at a fixed period after the
occurrence of an event which may not happen.
C. Yes, since it is payable at a fixed period or determinable
future time.
D. No, since it should be payable at a fixed period before
the occurrence of a specified event.
Sec. 5. Additional provisions not affecting negotiability. - An
instrument which contains an order or promise to do any act
in addition to the payment of money is not negotiable. But
the negotiable character of an instrument otherwise
negotiable is not affected by a provision which:
(a) Authorizes the sale of collateral securities in case
the instrument be not paid at maturity; or
(b) Authorizes a confession of judgment if the
instrument be not paid at maturity; or
131
(c) Waives the benefit of any law intended for the
advantage or protection of the obligor; or
(d) Gives the holder an election to require something to
be done in lieu of payment of money.
But nothing in this section shall validate any provision or
stipulation otherwise illegal.
Notes:
If an act is imposed in addition to the order or promise to pay
a sum certain in money, is the instrument still negotiable?
No. An instrument which contains an order or promise to
do any act in addition to the payment of money is not negotiable.
(Sec. 5, Negotiable Instruments Law)
This would impose additional burden to the person primarily
liable on the instrument.
2011 Bar Question:
B borrowed Php1 million from L and offered to him his
BMW car worth Php1 Million as collateral. B then
executed a promissory note that reads: I, B, promise
to pay L or bearer the amount of Php1 Million and to
keep my BMW car (loan collateral) free from any other
encumbrance. Signed, B. Is this note negotiable?
A. Yes, since it is payable to bearer.
B. Yes, since it contains an unconditional promise to pay a
sum certain in money.
C. No, since the promise to just pay a sum of money is
unclear.
D. No, since it contains a promise to do an act in addition
to the payment of money.
2002 Bar Question:
Which of the following stipulations or features of a
promissory note (PN) affect or do not affect its
Basic Principles and Jurisprudence on the Negotiable Instruments Law 132
negotiability, assuming that the PN is otherwise
negotiable? Indicate your answer by writing the
paragraph number of the stipulation or feature of the
PN as shown below and your corresponding answer,
either Affected or Not affected. Explain. (5%)
(1) The date of the PN is February 30, 2002.
(2) The PN bears interest payable on the last day of
each calendar quarter at a rate equal to five percent
(5%) above the then prevailing 91-day Treasury Bill
rate as published at the beginning of such calendar
quarter.
(3) The PN gives the maker the option to make payment
either in money or in quantity of palay of equivalent
value.
(4) The PN gives the holder the option either to require
payment in money or to require the maker to serve
as the bodyguard or escort of the holder for 30 days.
ANSWER:
(1) Not affected; Sec. 12, Negotiable Instruments Law, the
instrument is not invalid for the reason only that it is ante-
dated or post-dated, provided this is not done for an
illegal or fraudulent purpose. Thus, date is not essential
for its negotiability.
(2) Not affected; Sec. 2, Act 2031, the sum payable is a
sum certain within the meaning of this Act, although it is
to be paid with installments, or with exchange, whether
at a fixed rate or at the current rate.
(3) Affected; it makes the payment of the instrument
conditional by giving the maker an option to pay in money
or other palay.
(4) Not Affected; Sec. 5 (d), Act 2031, the negotiable
character of an instrument otherwise negotiable is not
affected by a provision which gives the holder an election
to require something to be done in lieu of payment of
money.
133
What may be some provisions added to the instrument which
would not affect its negotiability?
The negotiable character of an instrument otherwise
negotiable is not affected by a provision which:
a. Authorizes the sale of collateral securities in case the
instrument is not paid at maturity; or
b. Authorizes a confession of judgment if the instrument
be not paid at maturity; or
c. Waives the benefit of any law intended for the advantage
or protection of the obligor; or
d. Gives the holder an election to require something to be
done in lieu of payment of money.
Authorization of sale of collateral securities in case the
instrument be not paid at maturity
A note, reciting that the title to property for which it is given
shall remain in the payee, and that he shall have the right to declare
the money due and take possession of the property whenever he
may deem himself insecure, even before the maturity of the note,
is not negotiable. (Brannan, page 9, citing Kimpton v. Studebaker
Bros. Co., 14 Idaho, 552, 94 Pac. 1039, 125 Am. St. Rep. 185)
Warrants of Attorney to Confess Judgment
In the case of Philippine National Bank vs. Manila Oil
Refining & By-Products Company, Inc.
226
the written instrument
read as follows:
RENEWAL
P61,000.00
MANILA, P.I., May 8, 1920.
On demand after date we promise to pay to the order of
the Philippine National Bank sixty-one thousand only pesos
at Philippine National Bank, Manila, P.I.
226
G.R. No. L-18103, June 8, 1922, [Malcom, J.:].
Basic Principles and Jurisprudence on the Negotiable Instruments Law 134
Without defalcation, value received; and to hereby
authorize any attorney in the Philippine Islands, in case
this note be not paid at maturity, to appear in my name
and confess judgment for the above sum with interest, cost
of suit and attorneys fees of ten (10) per cent for collection,
a release of all errors and waiver of all rights to inquisition
and appeal, and to the benefit of all laws exempting
property, real or personal, from levy or sale. Value received.
No. ____ Due ____
MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
(Sgd.) VICENTE SOTELO,
Manager.
MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
(Sgd.) RAFAEL LOPEZ,
Treasurer
The question raised in reference to the aforementioned
Promissory Note concerns the validity of one of its provisions
whereby in case the same is not paid at maturity, the maker
authorizes any attorney to appear and confess judgment thereon
for the principal amount, with interest, costs, and attorneys fees,
and waives all errors, rights to inquisition, and appeal, and all
property exceptions.
The attorney for the appellee contends that the Negotiable
Instruments Law (Act No 2031) expressly recognizes judgment
notes, and that they are enforceable under the regular procedure.
The Negotiable Instruments Law, in Section 5, provides that The
negotiable character of an instrument otherwise negotiable is not
affected by a provision which. . . (b) Authorizes a confession of
judgment if the instrument be not paid at maturity. We do not
believe, however, that his provision of law can be taken to sanction
judgments by confession, because it is a portion of a uniform law
which merely provides that, in jurisdiction where judgment notes
are recognized, such clauses shall not affect the negotiable
character of the instrument. Moreover, the same section of the
135
Negotiable Instruments Law concludes with these words. But
nothing in this section shall validate any provision or otherwise
illegal.
Judgments by confession as appeared at common law were
considered an amicable, easy, and cheap way to settle and secure
debts. They are a quick remedy and serve to save the courts
time. They also save the time and money of the litigants and the
government the expenses that a long litigation entails. In one
sense, instruments of this character may be considered as special
agreements, with power to enter up judgments on them, binding
the parties to the result as they themselves viewed it.
On the other hand, there are disadvantages to the
commercial world which outweigh the considerations just
mentioned. Such warrants of attorney are void as against public
policy, because they enlarge the field of fraud, because under
these instruments the promissory bargains away his right to a
day in court, and because the effect of the instrument is to strike
down the right of appeal accorded by statute. The recognition of
such a form of obligation would bring about a complete
reorganization of commercial customs and practices, with
reference to short-term obligations. It can readily be seen that
judgment notes, instead of resulting to the advantage of
commercial life in the Philippines might be the source of abuse
and oppression, and make the court involuntary parties thereto.
We are of the opinion that warrants of attorney to confess
judgment are not authorized nor contemplated by our law. We
are further of the opinion that provisions in notes authorizing
attorneys to appear and confess judgments against makers should
not be recognized in this jurisdiction by implication and should
only be considered as valid when given express legislative
sanction. (supra)
In the Memoranda of Amici Curiae in the case of PNB,
Professor Jose A. Espiritu, of the University of the Philippines,
states:
1. Confession of judgment has been defined as a voluntary
submission to the jurisdiction of the court, giving consent
and without the service of process, what could otherwise
Basic Principles and Jurisprudence on the Negotiable Instruments Law 136
be obtained by summons and complaint, and other
formal proceedi ngs, an acknowl edgment of
indebtedness, upon which it is contemplated that a
judgment may and will be rendered. (8 Cyc., pp. 563,
564)
2. As to the general effects of confession of judgment, the
following statements may be mentioned: A warrant to
confess judgment does not destroy the negotiability of
the note. Such a note is commonly called a judgment
note. Decisions to the contrary in the States where the
Negotiable Instruments Law is now in force are
abrogated thereby, since it expressly provides that the
negotiable character of an instrument otherwise
negotiable is not affected by a provision which authorizes
a confession of judgment, if the instrument is not paid at
maturity. However, this statutory provision does not apply
to stipulations for the confession of judgment prior to
maturity. (8 C.J., p. 128, sec. 222)
3. Nature of Requisites. A judgment may be rendered
upon the confession of defendant, either in an action
regularly commenced against him by the issuance and
service of process, in which case the confession may
be made by his attorney of record, or, without the
institution of a suit, upon a confession by defendant in
person or by his attorney in fact. It implies something
more than a mere admission of a debt to plaintiff, in
addition, it is defendants consent that a judgment shall
be entered against him.. (23 cyc., 699)
4. Statutory Provisions, Statutes regulating the confession
of judgments without action, or otherwise than according
to the course of the common law, are strictly construed,
and a strict compliance with their provisions must be
shown in order to sustain the validity of the judgment.
(Chapin vs. Tompson, 20 Cla., 681) And this applies
also to statutory restriction upon the right to confess
judgment, as that authority to confess judgment shall
not be given in the same instrument which contains the
promise or obligation to pay the debt, or that such
confession shall not be authorized by any instrument
executed prior to suit brought. (23 Cyc., 699, 700)
137
5. Warrant or Power of AttorneyValidity and Necessity.
A judgment by confession may be entered upon a written
authority, called a warrant or letter of attorney, by which
the debtor empowers an attorney to enter an appearance
for him, waive process, and confess judgment against
him for a designated sum, except where this method of
proceeding is prohibited by statute. The warrant as the
basis of judgment is generally required to be placed on
file in the clerks office, and no judgment can be so
entered until it is so filed. (23 Cyc., 703)
6. Requisites and Sufficiency. A warrant or power of
attorney to confess judgment should be in writing and
should conform to the requirements of the statute in force
at the time of its execution, although in the absence of
specific authority directions it is sufficient, without much
regard to its form, if it contains the essential of a good
power and clearly states its purpose. It must be signed
by the person against whom the judgment is to be
entered.. (23 Cyc., 704)
How about illegal provisions or stipulations?
Nothing in this section (Sec. 5) shall validate any provision
or stipulation otherwise illegal.
Sec. 6. Omissions; seal; particular money. - The validity and
negotiable character of an instrument are not affected by the
fact that:
(a) It is not dated; or
(b) Does not specify the value given, or that any value
had been given therefor; or
(c) Does not specify the place where it is drawn or the
place where it is payable; or
(d) Bears a seal; or
(e) Designates a particular kind of current money in
which payment is to be made.
But nothing in this section shall alter or repeal any statute
requiring in certain cases the nature of the consideration to
be stated in the instrument.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 138
Notes:
This provision thus rejects the possible view that such
omissions cause an instrument to be incomplete and therefore
nonnegotiable.
227
These Omissions does not in any way affect
the validity and negotiable character of an instrument so long as
the same adheres with the requirements of Sec. 1.
Undated instrument
Negotiability of an instrument is not affected by an omission
of the date. Sec. 7 (b) of the N.I.L. provides that where no time
for payment is expressed on the face of the instrument, the same
shall be presumed to be payable on demand.
Also, Sec. 11, makes a presumption on instrument dates,
where the instrument or an acceptance or any indorsement
thereon is dated, such date is deemed prima facie to be the true
date of the making, drawing, acceptance or indorsement, as the
case may be.
Moreover, Sec. 12, N.I.L. also recognizes that an instrument
is not invalid by reason only that it is post-dated or ante-dated, so
long as it is not done for an illegal or fraudulent purpose.
Subsequently, Sec. 13 thereof also declares that a proper date
may be inserted on an undated instrument.
Thus, date is not an essential requirement for the validity or
negotiability of a Bill or Note.
No mention of the value given in exchange of the Bill of Note
The validity and negotiability of a Bill or Note is not affected
by the mere fact that the instrument does not specify the value
given, or that any value had been given therefor.
228
This is because
the law presumes that every negotiable instrument is deemed
prima facie to have been issued for a valuable consideration; and
every person whose signature appears thereon to have become
a party thereto for value.
229
227
Business Law, Second Edition, Rate A. Howell, 1981, p. 425
228
Sec. 6 (b), N.I.L.
229
Sec. 24, N.I.L.
139
Designation of a particular kind of current money in which
payment is made
Note that the law makes mention of a current money,
referring to a particular currency. Thus, [a] check payable in
current funds is not payable in money and is not negotiable.
(Brannan, page 9, citing Dille v. White, 132 Iowa, 327, 109 N.W.
909, 10 L.R.A. (N.S.) 510, following former Iowa cases, but not
citing the N.I.L. S.C. sec. 65, emphasis supplied)
Payment in current money is different from current funds, in
as much as the latter implies that payment of the instrument is
premised upon the availability of the current fund, eventually
making it conditional.
Sec. 7. When payable on demand. - An instrument is payable
on demand:
(a) When it is so expressed to be payable on demand,
or at sight, or on presentation; or
(b) In which no time for payment is expressed.
Where an instrument is issued, accepted, or indorsed when
overdue, it is, as regards the person so issuing, accepting, or
indorsing it, payable on demand.
Notes:
When note is expressed to be payable on demand
A note payable on demand after date is a demand note,
and presentment need not be made the day after date, but only
within a reasonable time to hold an indorser. (Brannan, page 11,
citing Hardon v. Dixon, 77 App. Div. 241, 78 N.Y.S. 106), holding
that the Statute of Limitations did not begin to run on such a note
until the day after its date, said to have no application. (Ibid, citing
Schlesinger v. Schultz, 110 App. Div. 356, 96 N.Y.S. 383, S.C.
secs. 71, 73)
What would be the effect if the instrument is dated and was
issued, accepted, or indorsed when already overdue?
Where an instrument is issued, accepted, or indorsed when
overdue, it is, as regards the person so issuing, accepting, or
Basic Principles and Jurisprudence on the Negotiable Instruments Law 140
indorsing it, payable on demand. (Sec. 7, Negotiable Instruments
Law)
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. It may be drawn payable to the
order of:
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be
named or otherwise indicated with reasonable certainty.
Notes:
Pay to order means pay to my order, and a bill so
reading and indorsed by the drawer is a valid bill of exchange.
(Brannan, page 12, citing Chamberlain v. Young [1893], 2 Q.B.
206)
An order means any form of words implying a right on the
part of the drawer to command, and a corresponding duty on the
part of the drawee to make, the payment specified.
230
The order to pay must be distinguished from a mere request
to pay
Prof. Norton said: [o]ur purpose here is to illustrate the
difference between a mandatory form of words directing payment
and a mere request. The theory of a bill of exchange is that
the drawer has funds in the hands of the drawee, which he
orders or directs to be delivered or paid over to the payee or
indorsee of the bill. Hence, where the instrument is so written
230
Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 27
141
as to show that the drawee has or attempts to exercise no right to
order the money paid, it is not a bill of exchange. To determine
whether or not the instrument is so written is, of course, a question
purely of the construction of the instrument. Parol evidence cannot
be admitted, since, if the bill is to operate as money, the instrument
must be pronounced to be a bill or note according to its face. The
point to be determined is whether the terms of the instrument, on
the one hand, leave compliance or refusal optional, or, on the
other hand, amount to an imperative direction. In the former case
it is a mere request; in the latter it is a demand, with which the
drawee must in common honesty comply, and amount to the order
which is a necessary constituent of a bill of exchange.
231
(emphasis supplied)
The payee must be named or otherwise indicated therein with
reasonable certainty
In the case of Equi tabl e Banki ng Corporati on vs.
Intermediate Appellate Court
232
, the subject check reads:
Pay to the EQUITABLE BANKING CORPORATION Order
of A/C OF CASVILLE ENTERPRISES, INC.
The said check was declared by the Supreme Court to be
equivocal and patently ambiguous. x x x the payee ceased to be
indicated with reasonable certainty in contravention of Section 8
of the Negotiable Instruments Law.
233
As worded, it could be
accepted as deposit to the account of the party named after the
symbols A/C or payable to the Bank as trustee, or as an agent,
for Casville Enterprises, Inc., with the latter being the ultimate
beneficiary.
Sec. 9. When payable to bearer. - The instrument is payable
to bearer:
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or
bearer; or
231
Id., footnotes omitted.
232
G.R. No. 74451, May 25, 1988
233
Section 8, Negotiable Instruments Law
Basic Principles and Jurisprudence on the Negotiable Instruments Law 142
(c) When it is payable to the order of a fictitious or non-
existing person, and such fact was known to the
person making it so payable; or
(d) When the name of the payee does not purport to be
the name of any person; or
(e) When the only or last indorsement is an indorsement
in blank.
Notes:
When the payee of the check is not intended to be the true
recipient of its proceeds, is it payable to order or bearer?
As a rule, when the payee is fictitious or not intended to
be the true recipient of the proceeds, the check is considered as
a BEARER instrument.
The distinction between bearer and order instruments lies
in their manner of negotiation. Under Section 30 of the NIL, an
order instrument requires an indorsement from the payee or holder
before it may be validly negotiated. A bearer instrument, on the
other hand, does not require an indorsement to be validly
negotiated. It is negotiable by delivery. (Philippine National Bank
vs. Erlando T. Rodriguez and Norma Rodriguez, G.R. No. 170325,
September 26, 2008, Reyes, R.T., J.])
When instrument is payable to the order of a fictitious or non-
existing person
A check that is payable to a specified payee is an order
instrument. However, under Section 9 (c) of the NIL, a check
payable to a specified payee may nevertheless be considered as
a bearer instrument if it is payable to the order of a fictitious or
non-existing person, and such fact is known to the person making
it so payable. Thus, checks issued to Prinsipe Abante or Si
Malakas at si Maganda, who are well-known characters in
Philippine mythology, are bearer instruments because the named
payees are fictitious and non-existent. (Philippine National Bank
vs. Erlando T. Rodriguez and Norma Rodriguez, supra)
143
Term Fictitious as used under Section 9 (c)
We have yet to discuss a broader meaning of the item
fictitious as used in the NIL. It is for this reason that we look
somewhere for guidance. Court rulings in the United States are a
logical starting point since our law on negotiable instruments was
directly lifted from the Uniform Negotiable Instruments Law of the
United States.
234
A review of the US jurisprudence yields that an actual
existing and living payee may also be fictitious if the maker of
the check did not intent for the payee to receive the proceeds of
the check. This usually occurs when the maker places a name of
an existing payee on the check for convenience or to cover up an
illegal activity.
235
Thus, a check made expressly payable to a non-
fictitious and existing person is not necessarily an order instrument.
If the payee is not the intended recipient of the proceeds of the
check, the payee is considered a fictitious payee and the check
is a bearer instrument. (Philippine National Bank vs. Erlando T.
Rodriguez and Norma Rodriguez, supra)
FICTITIOUS-PAYEE RULE; Who is liable under it; exceptions.
When a person making the check so payable did not intend
for the specified payee to have any part in the transaction, the
payee is considered as fictitious payee. (Mueller & Martin vs.
Liberty Insurance Bank). Fictitious-payee rule extends protection
even to non-bank transferee of the checks. (Getty Petroleum Corp.
vs. American Express Travel Related Services Company, Inc, 90
NY 2d 322 (1997), citing the Uniform Commercial Code, Sec. 3-
405)
In a fictitious-payee situation, the drawee bank is absolved
from liability and the drawer bears the loss. When faced with a
check payable to a fictitious payee, it is treated as a bearer
instrument that can be negotiated by delivery. The underlying
theory is that one cannot expect a fictitious payee to negotiate
the check by placing his indorsement thereon. And since the
234
Campos, J.C., Jr. and Lopez-Campos, M.C., Notes and Selected Cases
on Negotiable Instruments Law (1994), 5th ed, pp.8-9
235
Bourne v. Maryland Casualty, 192 SE 605 (1937); Norton v. City Bank &
Trust Co., 294 F.839 (1923); United States v. Chase Nat. Bank, 250 F.
105 (1918)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 144
maker knew this limitation, he must have intended for the
instrument to be negotiated by mere delivery. Thus, in case of
controversy, the drawer of the check will bear the loss. This rule
is justified for otherwise, it will be most convenient for the maker
who desires to escape payment of the check to always deny the
validity of the indorsement. This despite the fact that the fictitious
payee was purposely named without any intention that the payee
should receive the proceeds of the check.
236
(Philippine National
Bank vs. Erlando T. Rodriguez and Norma Rodriguez, supra)
The rule protects the depositary bank and assigns the loss
to the drawer of the check who was in a better position to prevent
the loss in the first place. (Getty Petroleum Corp. vs. American
Express Travel Related Services Company, Inc.)
However, there is a commercial bad faith exception to the
fictitious-payee rule. A showing of commercial bad faith on the
part of the drawee bank, or any transferee of the check for that
matter, will work to strip it of its defense. The exception will cause
it to bear the loss. Commercial bad faith is present if the transferee
of the checks acts dishonestly, and is a party to the fraudulent
scheme. (Philippine National Bank vs. Erlando T. Rodriguez, et
al, G.R. No. 170325, September 26, 2008 [Reyes, R.T., J.])
The payee in an order instrument was not properly identified
with reasonable certainty, what would be the effect thereof
to the instrument?
Where the instrument is payable to order, the payee must
be named or otherwise indicated therein with reasonable certainty,
otherwise, it would be considered as a bearer instrument.
Knowledge of the drawer of the fictitious and non-existing
character of the payee controls
A requested a bank to draw a draft to the order of C Bros.,
an existing firm who were ignorant of the transaction. A indorsed
the draft in the name of C Bros., and the indorsee collected it
from the drawee. Held, that the knowledge of the drawer of the
fictitious or non-existing character of the payee controls, not the
knowledge of the person at whose request the draft is drawn.
236
Mueller & Martin v. Liberty Insurance Bank, 187 Ky. 44, 218 SW 465
(1920)
145
That the draft was not payable to bearer and that the drawee
could recover the money from the indorsee. (Brannan, pages 13-
14, citing, Seaboard Nat. Bank v. Bank of America, 193 N.Y. 26,
85 N.E. 829; Jordan Marsh Co. v. Nat. Shawmut Bank, 201 Mass.
397, 87 N.E. 740 accord, italics supplied)
Illustrative cases:
A clerk had a power of attorney to draw checks on his
employers bank account. The clerk fraudulently drew checks to
X, an existing person, but who had no interest in the checks and
was not intended by the clerk to receive them. The clerk indorsed
the name of X and negotiated the checks for his own purposes,
and the drawee bank paid them in good faith. Held, that the payee
was a fictitious person within the section, that the checks were
payable to bearer and that the payment by the bank was rightful.
(Brannan, page 14, citing Snyder v. Corn Exch. Nat. Bank, 221
Pa. 599, 70 Atl. 876, S.C. sec. 124)
The name of the drawer was forged to checks made payable
to real persons. It did not appear who the forger was, but he
knew that the payees would never have any interest in the checks.
The drawee bank paid the checks to defendant, a holder in due
course, on the forged indorsement of the payee. Held, that the
payees were fictitious, that the checks were payable to bearer,
and that the drawer could not recover the money from defendant.
(Ibid, citing Trust Company of America v. Hamilton Bank, 127 App.
Div. 515, 112 N.Y. Supp. 84)
An instrument knowingly made payable to the order of a
fictitious or non-existing person is negotiable without indorsement,
but to recover upon the instrument as payable to bearer, it must
be shown that the maker had knowledge of the fiction, and if the
plaintiff declares only upon the instrument as payable to order, it
is not necessary to decide whether there is evidence of such
knowledge, as the issue is not open. (Ibid, citing Boles v. Harding,
201 Mass. 103, 87 N.E. 481)
A bill payable to a real person not intended by the drawer to
have any interest in it is payable to a fictitious person, and is to be
treated as payable to bearer, and the acceptors ignorance of the
fiction is immaterial. (Ibid, citing Bank of England v. Vagliano
[1891], A.C. 107)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 146
The drawers ignorance that the payee is non-existing is
also immaterial. (Ibid, citing Clutton v. Attenborough [1897], A.C.
9). But if the payee is a real person intended by the drawer to be
the payee, he is not a fictitious person, and the drawer is not
liable to one claiming under a forged indorsement of the payees
name, although the payee really had no interest in the instrument.
(Brannan, page 15, citing Bank of England v. Vagliano and Clutton
v. Attenborough, distinguished. Vinden v. Huges [1905], 1 K.B.
795; North & South Wales Bank v. Macbeth [1908], App. Cas.
137)
When the only or last indorsement is an indorsement in blank
A promissory note indorsed in blank by the payee is payable
to bearer. (Brannan, page 16, citing Mass. Nat. Bank v. Snow,
187 Mass. 159, 72 N.E. 959, S.C. secs. 16, 56, 124, 191; Unaka
Nat. Bank v. Butler, 113 Tenn. 574, 83 S.W. 655 (a check), S.C.
sec. 56)
The indorsement in blank of a non-negotiable promissory
note does not make it negotiable, and the indorser is liable only
as an assignor. (Ibid, citing Wettlaufer v. Baxter (Ky.), 125 S.W.
741)
Sec. 10. Terms, when sufficient. - The instrument need not
follow the language of this Act, but any terms are sufficient
which clearly indicate an intention to conform to the
requirements hereof.
Notes:
Substantial compliance with the requirements of negotiability
The law does not require that the Bill or Note have to literally
follow the language of the Negotiable Instruments Law, it is enough
that looking at the face of the instrument, substantial compliance
from Sec. 1 of the said law can be inferred.
Illustrative case:
A certificate of deposit reciting that X has deposited in the
Y bank three thousand dollars to the credit of himself, payable in
current funds on return to this certificate properly indorsed on July
1, 1909 is a negotiable instrument under the N.I.L. (Brannan,
147
page 16, citing, Forest v. Safety Banking & Trust Co. (E.D. Pa.),
174 Fed. 345)
Sec. 11. Date, presumption as to. - Where the instrument or
an acceptance or any indorsement thereon is dated, such
date is deemed prima facie to be the true date of the making,
drawing, acceptance, or indorsement, as the case may be.
Notes:
A Date in a bill or note is not essential to its validity
The date of an instrument is not necessary to it in law, that
its absence avoids the instrument. It is not an essential
characteristic of the instrument, as other qualities are characteristic
of the instrument or of its negotiability. For this reason the date
may be supplied by parol, the date of delivery being the day of
date; or it may be antedated or postdated, or, if the date be left
blank, all parties are deemed to consent that the holder may fill
up the blank with a date. Legally speaking, the chief importance
of a date is that it is presumptive evidence of the time of its actual
execution, a presumption, however, which may be contradicted
by parol evidence.
5
Sec. 12. Ante-dated and post-dated. - The instrument is not
invalid for the reason only that it is ante-dated or post-dated,
provided this is not done for an illegal or fraudulent purpose.
The person to whom an instrument so dated is delivered
acquires the title thereto as of the date of delivery.
Notes:
An indorsee of a post-dated check is not put upon inquiry
merely because of its negotiation prior to its date. (Brannan, page
17, citing Albert v. Hoffman, 64 Misc. Rep. 87; 117 N.Y. Supp.
1043, S.C. sec. 25.)
A post-dated check is not invalid, and may be properly
stamped as a bill payable on demand. (Ibid, citing, Royal Bank v.
Tottenham, [1894] 2 Q.B. 715; Hitchcock v. Edwards, 60 L.T. Rep.
636.)
A post-dated check is not irregular x x x so as to charge the
holder with equities. (Ibid)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 148
Sec. 13. When date may be inserted. - Where an instrument
expressed to be payable at a fixed period after date is issued
undated, or where the acceptance of an instrument payable
at a fixed period after sight is undated, any holder may insert
therein the true date of issue or acceptance, and the
instrument shall be payable accordingly. The insertion of a
wrong date does not avoid the instrument in the hands of a
subsequent holder in due course; but as to him, the date so
inserted is to be regarded as the true date.
Notes:
If the instrument is issued undated, is it a negotiable
instrument?
ANSWER:
Yes.
Where
a. an instrument expressed to be payable at a fixed
date is issued undated or
b. where the acceptance of an instrument payable at
a fixed period after sight is undated
Then any holder may insert therein the true date of
issue or acceptance, and the instrument shall be
paid accordingly. (Sec. 13, Negotiable Instruments
Law)
The validity and negotiable character of an
instrument is not affected by the fact that it is not
dated. (Sec. 5, Negotiable Instruments Law)
What if a wrong date was inserted by the holder?
The insertion of a wrong date does not avoid the instrument
in the hands of a subsequent holder in due course but it is as to
him, the date so inserted is to be regarded as the true date. (Sec.
13, Negotiable Instruments Law)
149
Illustrative case:
An undated note, payable four months after date, was
delivered to the payee by an accommodation indorser on
December 1
st
. The payee, without authority, filled in the date
December 30
th
. Held, that in the absence of other authority the
payee could only fill in the blank with the date of issue and that
the indorser was discharged. (Brannan, page 17, citing Bank of
Houston v. Day, (Mo. App.), 122 S.W. 756.)
Sec. 14. Blanks; when may be filled. - Where the instrument
is wanting in any material particular, the person in possession
thereof has a prima facie authority to complete it by filling up
the blanks therein. And a signature on a blank paper delivered
by the person making the signature in order that the paper
may be converted into a negotiable instrument operates as a
prima facie authority to fill it up as such for any amount. In
order, however, that any such instrument when completed
may be enforced against any person who became a party
thereto prior to its completion, it must be filled up strictly in
accordance with the authority given and within a reasonable
time. But if any such instrument, after completion, is
negotiated to a holder in due course, it is valid and effectual
for all purposes in his hands, and he may enforce it as if it
had been filled up strictly in accordance with the authority
given and within a reasonable time.
Notes:
What happens when there are blanks on the instrument?
When there are blanks on the instrument, so long as they
are material to the completion of the instrument, it may be filled
up by the person in possession thereof.
Illustrative case:
Defendant signed a note in blank on the statement that it
was to be used to borrow money for a co-defendant who was
jointly liable with the plaintiff to a bank. The note was filled up in
the presence of plaintiffs, who were made payees, and delivered
them, and they paid the co-defendants share of the debt to the
Basic Principles and Jurisprudence on the Negotiable Instruments Law 150
bank. Held, that the note was filled up in accordance with the
authority given, that the payees were holders for value and could
recover on the note. (Brannan, page 19, citing Hermanns Exr. v.
Gregory (Ky.), 115 S.W. 809, S.C.sec. 25.)
General Rule: When there are blanks on the instrument,
consisting of material particulars, the person in possession thereof
has a prima facie authority to fill it up. Provided, that he fills it up
strictly in accordance with the authority given and within a
reasonable time.
We have here an instance, where a paper, which has yet to
comply with Sec. 1, there being wanting of any material particular,
may be filled up by the person in possession thereof. But in order
to bind any person who became a party to the instrument prior to
its completion, such blanks must be filled up strictly in accordance
with the authority given to the person in possession thereof.
However, if the instrument, after completion, regardless of whether
or not he complied with the authority given him, is negotiated to a
holder in due course, it is valid and effectual for all purposes in
his hands, irrespective of how the blank was filled up, as the law
gives a presumption that it had been filled up strictly in accordance
with the authority given and within a reasonable time.
What if the instrument which was irregularly filled up was
negotiated to a person not a holder in due course? Will the answer
be the same?
No. The answer will not be the same. If it was negotiated
to a person not a holder in due course, he cannot enforce the
instrument, as it was not filled up strictly in accordance with the
authority given and within a reasonable time.
How must the blanks to the instrument be filled up?
They must be filled up:
a) Strictly in accordance with the authority give; AND
Ex. If the authority was for the payment of bills due and
it was filled up strictly for that purpose.
b) Within a reasonable time.
151
Ex. In the above example, it was filled up almost
immediately thereafter the knowledge of the bills
due.
Materiality of the blanks to the completion of the instrument
The word material in this section is not synonymous with
necessary so as to restrict the right of filling a blank to something
essential to a complete negotiable instrument. Therefore the name
of a place may be written after delivery in a blank space after the
word at and the instrument will not be thereby avoided in the
hands of a holder in due course. (Brannan, page 18, citing
Johnston v. Hoover, 139 Iowa, 143; 117 N.W. 277)
Where the maker of a note signed and delivered it, leaving
a blank after the amount between the words at and value
received, the payee or any subsequent holder was authorized to
fill the blank with a place of payment either without or without the
State, and such act was not an alteration avoiding the note. (Ibid,
citing Diamond Distilleries Co. v. Gott (Ky.), 126 S.W. 131.)
Presumption of authority to sign
Hence, the law merely requires that the instrument be in
the possession of a person other than the drawer or maker. From
such possession, together with the fact that the instrument is
wanting in a material particular, the law presumes agency to fill
up the blanks.
238
Because of this, the burden of proving want of
authority or that the authority granted was exceeded, is placed on
the person questioning such authority.
239
(John Dy vs. People of
the Philippines, et al, G.R. No. 158312, November 14, 2008,
[Quisumbing, Acting C.J.])
Suppose a person signed a blank instrument and delivered
it to the payee, would the holder still have the authority to
convert it into a negotiable instrument?
Yes. A signature on a blank paper delivered by the person
making the signature in order that the paper may be converted
238
I.A.F. Agbayani, Commentaries and Jurisprudence on the Commercial
Laws of the Philippines, 168 (1987 ed)
239
J.C. Campos, Jr. and M.C. Lopez-Campos, Notes and Selected Cases
on Negotiable Instruments Law, 351 (3rd ed., 1971)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 152
into a negotiable instrument operates as a prima facie authority
to fill it up as such for any amount. (Sec. 14, Negotiable
Instruments Law)
Burden to prove authority
The burden is on the plaintiff, a party prior to the completion
of an instrument signed in blank, to prove that the blanks were
filled up within a reasonable time. From October to the following
June 9 is, if unexplained, more than a reasonable time. (Brannan,
page 19, citing Madden v. Gaston, 121 N.Y. Supp. 951, semble,
S.C. sec. 16)
Sec. 15. Incomplete instrument not delivered. - Where an
incomplete instrument has not been delivered, it will not, if
completed and negotiated without authority, be a valid
contract in the hands of any holder, as against any person
whose signature was placed thereon before delivery.
Notes:
Incomplete and undelivered instruments
A class of cases, illustrative of want of consent, arises when
in an incomplete instrument has been signed and stolen, without
any delivery to an agent in trust, or otherwise, intervening. In
such cases no trust for any purpose has been created. No
instrument has been perfected. No appearance of validity has
been given it. No negligence can be imputed. Therefore if the
blank be filled, it is sheer forgery, in which the maker is in no wise
involved, and he is not therefore bound, even to a bona fide holder
without notice.
240
(Daniel, Elements of the Law of Negotiable
Instruments, page 140)
What is required in order that the completed blank instrument
may be enforceable against any person?
In order that any such instrument when completed may be
enforced against any person who became a party thereto prior to
its completion, it must be filled up strictly in accordance with the
authority given and within a reasonable time.
240
1 Parsons on Notes and Bills, 114; Daniel on Negotiable Instruments, 839
153
What if the above-indicated instrument was negotiated to a
holder in due course?
If such instrument, after completion, is negotiated to a holder
in due course, it is valid and effectual for all purposes in his hands,
and he may enforce it as if it had been filled up strictly in
accordance with the authority given and within a reasonable time.
What is the rule in incomplete and undelivered instruments?
Where an incomplete instrument has not been delivered, it
will not, if completed and negotiated without authority, be a valid
contract in the hands of any holder, as against any person whose
signature was placed thereon before delivery. (Sec. 15, Negotiable
Instruments Law)
Does Section 15 include a holder in due course?
Yes. There was no intention of the part of the person whose
signature was placed before delivery to make or draw a negotiable
instrument, thus, it will not be binding upon him.
What if the instrument is later on completed, but not delivered
While it cannot be said that the authorities are uniform, it
may be stated to be safely settled that if a negotiable instrument
has been fully completed in form and signed by the drawer or
maker, and, before delivery, is stolen from the possession of the
party who has signed it, and passed by the thief to a bona fide
holder for value in the usual course of business, it would afford
him no defense against such bona fide holder. Whether the
instrument be payable to bearer, or to the order of the thief, if it be
indorsed by him, we can see no reason why the bona fide holder
should not be entitled to recover. The want of delivery is a defect
not apparent on the face of the bill or note. That party has given
the appearance of validity to his paper. His signature is itself an
assurance that his obligation has been perfected by delivery; and
it being necessary that the loss should fall upon one of two innocent
parties, it should fall upon the one whose act had opened the
door for it to enter.
241
(Daniel, Elements of the Law of Negotiable
Instruments, page 129)
241
Daniel on Negotiable Instruments, 837; Kinyon v. Wohlford, 17 Minn. 239
Basic Principles and Jurisprudence on the Negotiable Instruments Law 154
Where the maker has perfected the instrument, and left it
undelivered in a safe, desk, or other receptacle, it should then be
at his hazard. Such papers are made for use, and not for
preservation. The maker creates the risk of their being eloigned
by keeping them on hand, and places them on the same basis as
negotiable papers which have been put upon the market. When
once issued the purchaser is protected and the owner loses, even
though he had guarded his property with bolt and bar; and if
bankers and others who must necessarily be in possession of
negotiable securities in the course of trade are not protected, we
can discover no principle which can be invoked to protect one
who holds his own paper contrary to the ordinary wants and usages
of trade.
242
(Ibid)
Illustrative Case:
Bank of America NT & SA vs. Philippine Racing Club
G.R. No. 150228, July 30, 2009
LEONARDO-DE CASTRO, J.:
FACTS: Philippine Racing Club Inc. (PRCI) maintained a
Current Account with Bank of America. The authorized
joint signatories with respect to said account were the
President (Antonia Reyes) and Vice-President for
Finance (Gregorio Reyes).On or about the 2
nd
week of
December 1988, the President and Vice President were
scheduled to go out of the country in connection with
the corporations business. In order not to disrupt
operations in their absence, they pre-signed several
checks relating to said account. The intention was to
insure continuity of the corporations operations by
making available cash/money especially to settle
obligations that might become due. These checks were
entrusted to the accountant with instruction to make
use of the same as the need arose. The internal
arrangement was, in the event there was need to make
use of the checks, the accountant would prepare the
corresponding voucher and thereafter complete the
entries on the pre-signed checks.
242
Thompson on Bills (Wilsons ed.), 92; 1 Parsons on Notes and Bills, 114
155
On December 16, 1988, a John Doe presented two (2)
checks to the bank for encashment a couple of the
pre-signed checks worth Php 110,000.00 each.
The two (2) checks had similar entries with similar
infirmities and irregularities. Despite the highly irregular
entries on the face of the checks, the bank, without as
much as verifying and/or confirming the legitimacy of
the checks considering the substantial amount involved
and the obvious infirmity/defect of the check on their
faces, encashed said checks. A verification process,
even by way of a telephone call to PRCI office, would
have taken less than ten (10) minutes. But this was
not done by the bank. Investigation conducted by PRCI
yielded the fact that there was no transaction involving
PRCI that call for the payment of Php 220,000.00 to
anyone. The checks appeared to have come into the
hands of any employee of PRCI who eventually
completed without authority the entries on the pre-
signed checks. PRCIs demand for the bank to pay
fell on deaf ears. Hence, complaint was filed.
ISSUE: Whether the proxi mate cause of the wrongful
encashment of the checks in question was due to (a)
petitioners failure to make a verification regarding the
said checks with the respondent in view of the
misplacement of entries on the face of the checks.
RULING: It is well-settled that banks are engaged in a business
impressed with public interest, and it is their duty to
protect in return their many clients and depositors who
transact business with them. They have the obligation
to treat their clients account meticulously and with the
highest degree of care, considering the fiduciary nature
of their relationship. The diligence required of banks,
therefore, is more than of a good father of a family.
243
In the case at bar, extraordinary diligence demands
that petitioner should have ascertained from the
243
Samsung Construction Company Philippines, Inc. v. Far East Bank and
Trust Company, Inc., G.R. No. 129015, August 13, 2004, 436 SCRA 402,
421
Basic Principles and Jurisprudence on the Negotiable Instruments Law 156
respondent the authenticity of the subject checks or
the accuracy of the entries therein not only because of
the presence of highly irregular entries on the face of
the checks but al so of the deci dedl y unusual
circumstances surrounding their encashment. x x x the
confluence of the irregularities on the face of the checks
and circumstances that depart from the usual banking
practice of respondent should have put petitioners
employees on guard that the checks were possibly not
issued by the respondent in due course of its business.
Petitioners subtle sophistry cannot exculpate it from
behavior that fell extremely short of the highest degree
of care and diligence required of it as a banking
institution.
In defense of its cashier/tellers questionable action,
petitioner insists that pursuant to Sections 14
244
and
16
245
of the NIL, it could validly presume, upon
presentation of the checks, that the party who filled up
the blanks had authority and that a valid and intentional
delivery to the party presenting the checks had taken
244
Sec. 14. Blanks, when may be filled. Where the instrument is wanting in
any material particular, the person in possession thereof has a prima facie
authority to complete it by filling up the blanks therein. And a signature on
a blank paper delivered by the person making the signature in order that
the paper may be converted into a negotiable instrument operates as a
prima facie authority to fill it up as such for any amount. In order, however,
that any such instrument when completed may be enforced against any
person who became a party thereto prior to its completion, it must be
filled up strictly in accordance with the authority given and within a
reasonable time. But if any such instrument, after completion, is negotiated
to a holder in due course, it is valid and effectual for all purposes in his
hands, and he may enforce it as if it had been filled up strictly in accordance
with the authority given and within a reasonable time.
245
Sec. 16, Delivery; when effectual; when presumed. Every contract on a
negotiable instrument is incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto. As between immediate
parties, and as regards a remote party other than a holder in due course,
the delivery in order to be effectual, must be made either by or under the
authority of the party making, drawing, accepting, or indorsing as the case
may be; and in such case the delivery may be shown to have been
conditional, or for a special purpose only, and not for the purpose of
transferring the property in the instrument. But where the instrument is in
the hands of a holder of a due course, a valid delivery thereof by all parties
prior to him so as to make them liable to him is conclusively presumed.
And where the instrument is no longer in the possession of a party whose
signature appears thereon, a valid and intentional delivery by him is
presumed until the contrary is proved
157
place. Thus, in petitioners view, the sole blame for
this debacle should be shifted to respondent for having
its signatories pre-sign and deliver the subject
checks.
246
Petitioner argues that there was indeed
delivery in this case because, following American
jurisprudence, the gross negligence of respondents
accountant in safekeeping the subject checks which
resulted in their theft should be treated as a voluntary
delivery by the maker who is estopped from claiming
non-delivery of the instrument.
247
Petitioners contention would have been correct if the
subject checks were correctly and properly filled out
by the thief and presented to the bank in good order.
In that instance, there would be nothing to give notice
to the bank of any infirmity in the title of the holder of
the checks and it could validly presume that there was
proper delivery to the holder. The bank could not be
faul ted i f i t encashed the checks under those
circumstances. However, the undisputed facts plainly
show that there were circumstances that should have
alerted the bank to the likelihood that the checks were
not properly delivered to the person who encashed the
same. In all, we see no reason to depart from the
finding in the assailed CA Decision that the subject
checks are properly characterized as incomplete and
undelivered instruments this making Section 15
248
of
the NIL applicable in this case.
2000 Bar Question:
PN makes a promissory note for P5, 000.00, but leaves
the name of the payee in blank because he wanted to
verify its correct spelling first. He mindlessly left the
note on top of his desk at the end of the workday. When
he returned the following morning, the note was
missing. It turned up later when X presented it to PN
246
Rollo, p. 304
247
Id. at 306
248
Sec. 15. Incomplete instrument not delivered. Where an incomplete
instrument has not been delivered it will not, if completed and negotiated,
without authority, be a valid contract in the hands of any holder, as against
any person whose signature was placed thereon before delivery
Basic Principles and Jurisprudence on the Negotiable Instruments Law 158
for payment. Before X, T, who turned out to have filched
the note from PNs office, had endorsed the note after
inserting his own name in the blank space as the payee.
PN dishonored the note, contending that he did not
authorize its completion and delivery. But X said he
had no participation in, or knowledge about, the
pilferage and alteration of the note and therefore he
enjoys the rights of a holder in due course under the
Negotiable Instruments Law. Who is correct and why?
(3%)
ANSWER:
A. PN is correct. Sec. 15, Act 2031, provides that where
an incomplete instrument has not been delivered, it will
not, if completed and negotiated without authority be a
valid contract in the hands of any holder, as against any
person whose signature was placed thereon before
delivery. Therefore PN is correct when he dishonored
the note.
Sec. 16. Delivery; when effectual; when presumed. - Every
contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of
giving effect thereto. As between immediate parties and as
regards a remote party other than a holder in due course, the
delivery, in order to be effectual, must be made either by or
under the authority of the party making, drawing, accepting,
or indorsing, as the case may be; and, in such case, the
delivery may be shown to have been conditional, or for a
special purpose only, and not for the purpose of transferring
the property in the instrument. But where the instrument is
in the hands of a holder in due course, a valid delivery thereof
by all parties prior to him so as to make them liable to him is
conclusively presumed. And where the instrument is no
longer in the possession of a party whose signature appears
thereon, a valid and intentional delivery by him is presumed
until the contrary is proved.
Notes:
Delivery is the final step necessary to perfect the existence
of any written contract; and, therefore, as long as a bill or note
159
remains in the hands of the drawer or maker, it is a nullity.
249
(Daniel, Elements of the Law of Negotiable Instruments,
page 42)
The inception of a note is defined by Judge Platt to mean
when it was first given, or when it first became the evidence of
an existing contract. It has no legal inception until it is delivered
as evidence of a subsisting debt. The mere writing and signing of
a bill or note, which the drawer or maker retains in his hands,
forms no contract. No person has then a right of action upon it
any more than if it were blank paper. The inception of the paper
is when there came into existence a right of action upon it. This is
because while the note or bill is in the makers hands, it can be
erased, canceled, or revoked. It cannot, therefore, be an evidence
of indebtedness until it is beyond such possibility. The decisive
step for this is the delivery.
250
So essential is delivery that it has been held that where a
promissory note, the existence of which was unknown to the
grantee, lay in the grantors possession, and was found amongst
his papers after death, the payee could not claim or sue upon
it;
251
and though such a note should be found, accompanied with
written directions to deliver it to the payee, the payee will still have
no right of action, unless the directions be valid as a testament.
252
(Ibid)
When can there be Delivery?
Two things must concur in a delivery. The first is the transfer,
actual or constructive, of the possession of the instrument; the
second an intent to transfer the title on the part of the transferrer.
The minds of both parties, to this extent, must concur.
253
On the other hand, such acts as handing completed notes
to the payee, who, though objecting to the form, retained them; or
depositing completed notes, properly addressed, in the post office;
249
Devries v. Shumate, 53 Md. 216; Purviance v. Jones, 120 Ind. 164
250
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 68, citations omitted
251
Disher v. Disher, 1 P. Wms. 204
252
Gough v. Findon, 7 Exch. 48
253
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 69, citations omitted
Basic Principles and Jurisprudence on the Negotiable Instruments Law 160
or giving a duplicate bill in place of one lost, which the payee
treated as an original,have been held to constitute sufficient
deliveries. It is to be noted, however, that the delivery needs to
be to the payee, nor need the intent of the transferrer to transfer
title be communicated to him. For, as will be seen, a bill or note
may be delivered in escrow, and take effect on performance of
the condition, without knowledge or actual assent of the payee,
and a note delivered in a sealed envelope, to be opened after the
makers death, is operative, although the payee does not become
aware of the existence of the note until after the death occurs.
The outward and visible indication of delivery is possession.
254
Types of Delivery
Delivery may be constructive a well as actual. (Ibid)
There is actual delivery, when it is effected by the manual
passing of the instrument itself to the payee or his agent.
255
There is constructive delivery, when it is effected by direction
to a third person in actual possession of the instrument to deliver
it to, or to hold it for, the payee.
256
Delivery may also be upon conditions. Deliveries upon
conditions are of two classes: delivery as an escrow, and delivery
to the other party to the instrument upon a condition. Delivery as
an escrow is defined as a delivery to a third person, made to
await the happening of an event, or performance of a condition,
or some affirmative action on the part of the other party, before he
is entitled to the absolute delivery of the instrument, as
distinguished from the affirmative action of the party who delivers
the instrument in escrow. The authorities agree that a delivery in
escrow has two elements: It must be to some person not ultimately
entitled to receive it; and the delivery must take effect and the title
to the instrument pass the instant condition of the escrow is fulfilled,
even though the depositary has not formally delivered it to the
person entitled to the possession. In these respects it is like the
escrow of a deed, from the analogy of which it is in fact drawn.
There are, however, these distinctions: A deed once delivered to
254
Id., pp. 69-70
255
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 67
256
Id.
161
be held in escrow by a third party, and wrongly passed on by him,
is subject to defenses, even in the hands of a purchaser for value
without notice, but a negotiable instrument is not. A deed being
delivered conditionally to the obligee, parol evidence that it was
conditional is admissible.
257
A delivery upon a condition is where the instrument is
delivered to the payee, to be held by him pending some future
event.
258
A direction to a third person, who is in actual custody of the
instrument, to hold it subject to the payees or transferees order,
or an order to the depositary to deliver it, or a delivery to a third
person for the payee without condition is sufficient in legal
contemplation. In either of the cases suggested the delivery would
be constructive.
259
(Elements of the Law of Negotiable Instruments,
page 42)
Without delivery there can be no valid and binding contract
Every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument to the payee for the
purposes of giving effect thereto.
260
The first delivery of the
instrument, complete in form, to the payee who takes it as a holder,
is called issuance of the instrument.
261
Without the initial delivery
of the instrument from the drawer of the check to the payee, there
can be no valid and binding contract and no liability on the
instrument. (Gempesaw vs. Court of Appeals, G.R. No. 92244,
February 9, 1993)
This is further explained in People vs. Yabut
262
, the place
where the bills were written, signed, or dated does not necessarily
fix or determine the place where they were executed. What is of
decisive importance is the delivery thereof. The delivery of the
254
Id., pp. 69-70
255
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 67
256
Id.
257
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, pp. 70-71, citations, omitted
258
Id., p. 71
259
Gordon v. Adams, 127 Ill. 225; Howe v. Ould, 28 Gratt. 7
260
NIL, Sec. 16
261
Ibid., Sec. 191, par. 10
262
No. L-42902, 29 April 1977, 76 SCRA 624
Basic Principles and Jurisprudence on the Negotiable Instruments Law 162
instrument is the final act essential to its consummation as an
obligation. An undelivered bill or note is inoperative. Until delivery,
the contract is revocable. And the issuance as well as the delivery
of the check must be to a person who takes it as a holder, which
means (t)he payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof. Delivery of the check
signifies transfer of possession, whether actual or constructive,
from one person to another with intent to transfer title thereto.
Delivery denotes physical transfer
Significantly, delivery is the final act essential to the
negotiability of an instrument. Delivery denotes physical transfer
of the instrument by the maker or drawer coupled with an intention
to convey title to the payee and recognize him as a holder.
263
It
means more than handing over to another; it imports such transfer
of the instrument to another as to enable the latter to hold it for
himself.
264
(John Dy vs. People of the Philippines, et al, G.R. No.
158312, November 14, 2008, [Quisumbing, Acting C.J.])
In the case of Development Bank of Rizal vs. Sima Wei,
et al,
265
it was ruled by the High Court that it had had long been
recognized the business custom of using printed checks where
blanks are provided for the date of issuance, the name of the
payee, the amount payable and the drawers signature. All the
drawer has to do when he wishes to issue a check is to properly
fill up the blanks and sign it. However, the mere fact that he has
done these does not give rise to any liability on his part, until and
unless the check is delivered to the payee or his representative.
A negotiable instrument, of which a check is, is not only a written
evidence of a contract right but also a species of property. Just
as a deed to a piece of land must be delivered in order to convey
title to the grantee, so must a negotiable instrument be delivered
to the payee in order to evidence its existence as a binding
contract. (emphasis supplied)
263
De la Victoria vs. Burgos, G.R. No. 111190, June 27, 1995, 245 SCRA
374, 379
264
Lewis County et al. v. State Bank of Peck, 170 Pacific Reporter 98, 100
(1918), citing Bigelow, Bills, Notes and Checks, 2nd Ed., p. 13
265
G.R. No. 85419, March 9, 1993, [Campos, Jr., J.:]
266
In re Martens Estate, 226 Iowa 162, 283 N.W. 885 (1939); Shriver vs.
Danby, 113 A. 612 (1921).
267
Negotiable Instruments Law, Sec. 191, par. 6.
163
Thus, the payee of a negotiable instrument acquires no
interest with respect thereto until its delivery to him.
266
Delivery of
an instrument means transfer of possession, actual or constructive,
from one person to another.
267
Without the initial delivery of the
instrument from the drawer to the payee, there can be no liability
on the instrument. Moreover, such delivery must be intended to
give effect to the instrument. (supra)
When does the instrument become effectual between the
parties?
Every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of giving
effect thereto.
And where the instrument is no longer in the possession of
a party whose signature appears thereon, a valid and intentional
delivery by him is presumed until the contrary is proved.
As ordinarily understood, delivery means the transfer of the
possession of the instrument by the maker or drawer with intent
to transfer title to the payee and recognize him as the holder
thereof. (Dela Victoria vs. Burgos, G.R. No. 111190, June 27, 1995,
[Bellosillo, J.])
A bill of exchange payable to the order of the drawer does
not come into existence until it is delivered as well as indorsed by
the payee. (Brannan, page 19, citing Stouffer v. Curtis, 198 Mass.
560, 85 N.E. 180)
Intention essential
It is essential to delivery that the minds of both parties should
assent, in order to bind them; and if, through inattention, infirmity,
or otherwise, one does not assent, the act of the other is
nugatory.
268
Therefore, leaving a check on the desk of a clerk of
a bank, and without knowledge of such clerk of an officer of the
bank, does not constitute delivery.
269
268
Daniel on Negotiable Instruments, 67
269
Chicopee Bank v. Philadelphia Bank, 8 Wall. 641; Kinney v. Ford, 52 Barb.
194
Basic Principles and Jurisprudence on the Negotiable Instruments Law 164
Delivery must be for purposes of giving effect thereto
Note however that delivery as the term is used in the
aforementioned provision means that the party delivering did so
for the purpose of giving effect thereto.
270
Otherwise, it cannot be
said that there has been delivery of the negotiable instrument.
Once there is delivery, the person to whom the instrument is
delivered gets the title to the instrument completely and irrevocably.
(San Miguel Corporation vs. Puzon, G.R. No. 167567, September
22, 2010, [Del Castillo, J.:])
San Miguel Corporation vs. Bartolome Puzon, Jr.
G.R. No. 167567, September 22, 2010
DEL CASTILLO, J.:
Puzon was a dealer of beer products of San Miguel
Corporation (SMC). He purchased products on credit. To ensure
payment and as a business practice, SMC required him to issue
post-dated checks equivalent to the value of the products
purchased on credit before the same were released to him. Said
checks were returned to Puzon when the transactions covered
by these checks were paid or settled in full. On December 31,
2000, Puzon purchased products on credit amounting to
P11,820,327.00 for which he issued, and gave to SMC, BPI Check
Nos. 27904 (for P309,500.00) and 27903 (for P11,510,827.00) to
cover the said transaction. On January 23, 2001, Puzon, together
with his accountant, visited the SMC Sales Office to reconcile his
account with SMC. During that visit Puzon allegedly requested
to see BPI Check No. 17657. However, when he got hold of BPI
Check No. 27903 which was attached to a bond paper together
with BPI Check No. 17657 he allegedly immediately left the office
with his accountant, bringing the checks with them. SMC sent a
letter to Puzon demanding the return of the said checks. Puzon
ignored the demand hence SMC filed a complaint against him for
theft with the City Prosecutors Office.
The High Court held that: [t]he essential elements of the
crime of theft are the following: (1) that there be a taking of personal
property; (2) that said property belongs to another; (3) that the
taking be done with intent to gain; (4) that the taking be done
without the consent of the owner; and (5) that the taking be
165
accomplished without the use of violence or intimidation against
persons or force upon things.
271
Considering that the second element is that the thing taken
belongs to another, it is relevant to determine whether ownership
of the subject check was transferred to petitioner. On this point
the Negotiable Instruments Law provides:
Sec. 12. Antedated and Postdatedthe instrument is not
invalid for the reason only that it is antedated or postdated,
provided this is not done for an illegal or fraudulent purpose. The
person to whom an instrument so dated is delivered acquires the
title thereto as of the dated of delivery. (underscoring supplied)
Note however that delivery as the term is used in the
aforementioned provision means that the party delivering did so
for the purpose of giving effect thereto.
272
Otherwise, it cannot be
said that there has been delivery of the negotiable instrument.
Once there it delivery, the person to whom the instrument is
delivered gets the title to the instrument completely and irrevocably.
If the subject check was given by Puzon to SMC in payment
of the obligation, the purpose of giving effect to the instrument is
evident thus title to or ownership of the check was transferred
upon delivery. However, if the check was not given as payment,
there being no intent to give effect to the instrument, then
ownership of the check was not transferred to SMC.
The evidence of SMC failed to establish that the check was
given in payment of the obligation of Puzon. There was no
provisional receipt or official receipt issued for the amount of the
check. What was issued was a receipt for the document, a
POSTDATED CHECK SLIP.
273
Furthermore, the petitioners demand letter sent to
respondent states As per company policies on receivables, all
270
Sec. 16 of the Negotiable Instruments Law
271
Aoas v. People, G.R. No. 155339, March 3, 2008; 547 SCRA 311, 317-
318; People v. Puig, G.R. Nos. 173654-765, August 28, 2008, 563 SCRA
564, 570; Cruz v. People, G.R. No. 176504, September 3, 2008, 564 SCRA
99, 110.
272
Sec. 16 of the Negotiable Instruments Law
273
Rollo, p. 76
Basic Principles and Jurisprudence on the Negotiable Instruments Law 166
issuances are to be covered by post-dated checks. However,
you have deviated from this policy by forcibly taking away the
check you have issued to us to cover the December issuance.
274
Notably, the term payment was not issued instead the terms
covered and cover were used.
When taken in conjunction with the counter-affidavit of
Puzonwhere he stated that As the [liquid beer] contents are
paid for, the SMC return[s] to me the corresponding PDCs or
request[s] me to replace them with whatever was the unpaid
balance.
275
it becomes clear that both parties did not intend for
the check to pay for the beer products. The evidence proves that
the check was accepted, not as payment, but in accordance with
the long-standing policy of SMC to require its dealers to issue
postdated checks to cover its receivables. The check was only
meant to cover the transaction and in the meantime Puzon was
to pay for the transaction by some other means other than the
check. This being so, title to the check did not transfer to SMC; it
remained with Puzon. The second element of the felony of theft
was therefore not established. Petitioner was not able to show
that Puzon took a check that belonged to another. Hence, the
prosecutor and the DOJ were correct in finding no probable cause
for theft.
How must the delivery of the instrument be made for it to be
effectual?
The delivery, in order to be effectual as between immediate
parties and as regards a remote party other than a holder in due
course, must be made either by or under the authority of the party
making, drawing, accepting, or indorsing, as the case may be.
Illustrative Case:
Loreto Dela Victoria vs. Hon. Jose P. Burgos and Raul H.
Sesbreo
G.R. No. 111190, June 27, 1995
BELLOSILLO, J:
274
Demand letter. Id. At 79.
275
Id. At 113.
167
FACTS: Raul H. Sesbreo filed a complaint for damages against
Assistant City Fiscals Bienvenido N. Mabanto, Jr., and
Dario D. Rama, Jr., before the Regional Trial Court of
Cebu City. After trial judgment was rendered ordering
the defendants to pay P11, 000.00 to the plaintiff, private
respondent herein. The decision having become final
and executory, on motion of the latter, the trial court
ordered its execution. A notice of garnishment was
served on petitioner Loreto dela Victoria as City Fiscal
of Mandaue City where defendant Mabanto, Jr. was
then detailed. The notice directed petitioner not to
disburse, transfer, release or convey to any other
person except to the deputy sheriff concerned the salary
checks or other checks, monies, or cash due or
belonging to Mabanto, Jr., under penalty of law.
Petitioner moved to quash the notice of garnishment
claiming that he was not in possession of any money,
funds, credit, property or anything of value belonging
to Mabanto, Jr., except his salary and RATA checks,
but that said checks were not yet properties of Mabanto,
Jr., until delivered to him. He further claimed that, as
such, they were still public funds which could not be
subject of garnishment.
ISSUE: Whether a check still in the hands of the maker or its
duly authorized representative is owned by the payee
before physical delivery to the latter?
RULING: Garnishment is considered as a species of attachment
for reaching credits belonging to the judgment debtor
owing to him from a stranger to the litigation. Emphasis
is laid on the phrase belonging to the judgment debtor
since it is the focal point in resolving the issues raised.
As Assistant City Fiscal, the source of the salary of
Mabanto, Jr., is public funds. He received his
compensati on i n the form of checks from the
Department of Justice through petitioner a City Fiscal
of Mandaue City and head of office. Under Sec. 16 of
the Negotiable Instruments Law, every contract on a
negotiable instrument is incomplete and revocable until
delivery of the instrument for the purpose of giving effect
thereto. As ordinarily understood, delivery means the
Basic Principles and Jurisprudence on the Negotiable Instruments Law 168
transfer of the possession of the instrument by the
maker or drawer with intent to transfer title to the payee
and recognize him as the holder thereof.
According to the trial court, the checks of Mabanto, Jr.,
were already released by the Department of Justice
duly signed by the officer concerned through petitioner
and upon service of the writ of garnishment by the
sheriff petitioner was under obligation to hold them for
the judgment creditor. It recognized the role of the
petitioner as custodian of the checks. At the same time
however it considered the checks as no longer
government funds and presumed delivered to the
payee based on the last sentence of Sec. 16 of the
Negotiable Instruments Law which states: And where
the instrument is no longer in the possession of a party
whose signature appears thereon, a valid and
intentional delivery by him is presumed. Yet, the
presumption is not conclusive because the last portion
of the provision says until the contrary is proved.
However this phrase was deleted by the trial court for
no apparent reason. Proof of the contrary is its own
finding that the checks were in the custody of the
petitioner. Inasmuch as said checks had not yet been
delivered to Mabanto, Jr., they did not belong to him
and still had the character of public funds. In Tiro v.
Hontanosas
276
we ruled that-
The salary check of a government officer of employee
such as a teacher does not belong to him before it is
physically delivered to him. Until that time the check
belongs to the government. Accordingly, before there
is actual delivery of the check, the payee has no power
over it; he cannot assign it without the consent of the
Government.
What if the instrument is in the hands of a holder in due
course, is delivery conclusively presumed?
Where the instrument is in the hands of a holder in due
course, a valid delivery thereof by all the parties prior to him so as
to make them liable to him is conclusively presumed.
276
No. L-32312, 25 November 1983, 125 SCRA 697.
169
But the presumption both as to the fact and the time of
delivery may be rebutted.
277
As a bill or note takes effect only by
delivery, so it takes effect only on delivery; and if this be subsequent
to its date, it will be binding only from the day of actual delivery.
278
If the bill or note bears no date, the time must be computed
from its delivery; and if the day of actual delivery cannot be proved,
it will be computed from the earliest day on which it appears to
have been in the hands of the payee or any holder.
279
Burden of proving delivery
Under the last clause of section 16 and section 14, the
burden is on the defendant to show the agreement under which a
negotiable instrument signed in blank was delivered and that the
terms have been violated. (Brannan, page 22, citing Madden v.
Gaston (Misc. Rep.) 121 N.Y. Supp. 951 S.C. sec. 14)
Sec. 17. Construction where instrument is ambiguous. -
Where the language of the instrument is ambiguous or there
are omissions therein, the following rules of construction
apply:
(a) Where the sum payable is expressed in words and
also in figures and there is a discrepancy between
the two, the sum denoted by the words is the sum
payable; but if the words are ambiguous or uncertain,
reference may be had to the figures to fix the amount;
(b) Where the instrument provides for the payment of
interest, without specifying the date from which
interest is to run, the interest runs from the date of
the instrument, and if the instrument is undated, from
the issue thereof;
(c) Where the instrument is not dated, it will be
considered to be dated as of the time it was issued;
(d) Where there is a conflict between the written and
printed provisions of the instrument, the written
provisions prevail;
277
Woodford v. Dorwin, 3 Vt. 82; Scaife v. Byrd, 39 Ark. 568
278
Lovejoy v. Whipple, 18 Vt. 379
279
Clark v. Sigourney, 17 Conn. 511; Richardson v. Lincoln, 5 Metc. (Mass.)
201
Basic Principles and Jurisprudence on the Negotiable Instruments Law 170
(e) Where the instrument is so ambiguous that there is
doubt whether it is a bill or note, the holder may treat
it as either at his election;
(f) Where a signature is so placed upon the instrument
that it is not clear in what capacity the person making
the same intended to sign, he is to be deemed an
indorser;
(g) Where an instrument containing the word I promise
to pay is signed by two or more persons, they are
deemed to be jointly and severally liable thereon.
Notes:
Where sum payable is written in words or figures
The law mandates that where the sum payable is expressed
in words and also in figures and there is a discrepancy between
the two, the sum denoted by the words is the sum payable.
Example:
Sum payable is Eleven Million Seven Hundred Six
Thousand Pesos (Php 11,706.00); in this instance we
follow the sum expressed in words.
But if the words are ambiguous or uncertain, reference may
be had to the figures to fix the amount.
Example:
Sum payable is Six Million Seven Fifty Pesos (Php
6,000,750.00); in this instance there is ambiguity in the
sum payable in words, thus, reference may be had to the
figures to fix the amount.
In another illustration, the instrument provides that the sum
payable is Eleven Million Six Hundred Fifty Seven Thousad Nine
Hundred Fifty Pesos (Php 6,750,980.00). What should be the
construction of the instrument?
171
The instrument is not negotiable, the sum payable is
uncertain. The sum payable in words and figures must be
reconciled in order for Sec. 17 (a) to apply, otherwise, we have a
non-negotiable instrument for being uncertain as to the amount
payable.
2011 Bar Question:
X issued a check in favor of his creditor, Y. It reads:
Pay to Y the amount of Seven Thousand Hundred
Pesos (Php700, 000.00). Signed, X. What amount
should be construed as true in such a case?
A. Php700, 000.00.
B. Php700.00.
C. Php7, 000.00.
D. Php700, 100.00.
Where the instrument provides for the payment of interest
Where the instrument provides for the payment of interest,
without specifying the date from which the interest is to run, the
interest runs from the date of the instrument.
Example:
For value received I promise to pay David Lancelot,
or his order, Php 1,000.00 with 10% interest per annum.
(Sgd)
Abigail Margaux
(January 1, 2011)
In the above-cited example, there was no date specified as
to when the interest will start to run, applying Sec. 17 (b), the rate
of interest will start to run on January 1, 2011, which is the date of
the instrument.
However, where the said instrument is undated, interest runs
from the time of issuance thereof.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 172
In the above example, assuming the instrument is undated,
the 10% interest shall commence from the time of the actual
issuance or delivery thereof, as the holder of an undated
instrument has a prima facie authority to insert the proper date as
may be necessary.
Undated Instrument
This provision is self-explanatory. The same rule as above-
mentioned shall be followed. This manifests that date is not
essential to the validity of the instrument, but only as with regards
to liability.
Conflict between the Written and Printed provisions
Printed provisions here would mean those printed by the
use of a typewriter, risograph, or any other mark which came about
as a result of a mechanical process. Whereas, written provisions
are those writings made by hand. And in case of conflict, written
provisions prevail over the printed ones.
Ambiguity of whether a Bill or a Note
An instrument in the following form:
$1000 New York 190
Pay to the order of Rosario Didato
Value received and charge on account to 38 Stanton Street
Lansa Rosalia
May be declared upon as a promissory note. (Brannan, page
24, citing Didato v. Coniglio, 50 Misc. R. 280, 100 N.Y. Supp. 466)
Where there is ambiguity whether the instrument is a bill or a
note, the holder may treat it as either at his election. (Sec. 17 (e),
N.I.L.)
Where signature is placed in such a way that the capacity of
the signatory is uncertain; signature may be treated as an
indorser
173
This provision applies only to cases of doubt arising out of
the location of the signature. Therefore one who signed in the
place of the makers name is not an indorser. (Ibid, citing Germania
Natl. Bank v. Mariner, 129 Wis. 544, 109 N.W. 574, S.C. secs. 63,
64.)
Joint and Several Liability
A promissory note reads:
I/We hereby consent to any extension which may be
requested by anyone of us
for the payment of the note.
It was held that said promissory note expressly provides
that the signatories engaged to pay, jointly and severally, the
amount specified therein. And that this did not guarantee the
payment of one signatory by the other signatories, but in fact bound
themselves solidarily to pay the said amount. (China Banking
Corporation vs. Court of Appeals, G.R. No. L-59887, August 31,
1982, [Relova, J.:])
In another case, that of Republic Planters Bank vs. Court
of Appeals and Fermin Canlas
280
, defendant Shozo Yamaguchi
and private respondent Fermin Canlas were President/Chief
Operating Officer and Treasurer respectively, of Worldwide
Garment Manufacturing, Inc., by virtue of Board Resolution No. 1
dated August 1, 1979, defendant Shozo Yamaguchi and private
respondent Fermin Canlas were authorized to apply for credit
facilities with the petitioner Republic Planters Bank in the forms
of export advances and l etters of credi t/trust recei pts
accommodations, worded in the following manner:
___________, after date, for value received, I/we, jointly
and severally promise to pay to the ORDER of the
REPUBLIC PLANTERS BANK, at its office in Manila,
Philippines, the sum of ___________ PESOS(....)
Philippine Currency...
280
G.R. No. 93073, December 21, 1992, [Campos, J.]
Basic Principles and Jurisprudence on the Negotiable Instruments Law 174
Please credit proceeds of this note to:
________ Savings Account ______XX Current
Account No. 1372-00257-6
of WORLDWIDE GARMENT MFG. CORP.
The only issue material to the resolution of the Honorable
Court is whether private respondent Fermin Canlas is solidarily
liable with the other defendants, on the promissory notes?
It was held by the Supreme Court that: private respondent
Fermin Canlas is solidarily liable on each of the promissory notes
bearing his signature for the following reasons:
The promissory notes are negotiable instruments and must
be governed by the Negotiable Instruments Law.
281
Under the Negotiable Instruments Law, persons who write
their names on the face of promissory notes are makers and are
liable as such.
282
By signing the notes, the maker promises to
pay to the order of the payee or any holder
283
according to the
tenor thereof.
284
Based on the above provisions of law, there is
no denying that private respondent Fermin Canlas is one of the
co-makers of the promissory notes. As such, he cannot escape
liability arising therefrom.
Where an instrument containing the words I promise to pay
is signed by two or more persons, they are deemed to be jointly
and severally liable thereon.
285
An instrument which begins I,
We, or Either of us promise to pay, when signed by two or
more persons, makes them solidarily liable.
286
The fact that the
singular pronoun is used indicates that the promise is individual
as to each other; meaning that each of the co-signers is deemed
to have made an independent singular promise to pay the notes
in full.
281
Act 2031, enacted on February 3, 1911
282
Negotiable Instruments Law, section 184; H.D. Lee Mercantile Co. vs.
Mercantile Co., 275 P. 807 (1929)
283
Ibid, Section 1
284
Ibid, Section 60
285
Ibid, Section 17 (g).
286
Powell vs- Mobley, 142 S.E. 678 (1928); Keenig vs. Currans Restaurant,
159 Atl. 553 (1932)
175
In the case at bar, the solidary liability of private respondent
Fermin Canlas is made clearer and certain, without reason for
ambiguity, by the presence of the phrase joint and several as
describing the unconditional promise to pay to the order of
Republic Planters Bank. A joint and several note is one in which
the makers bind themselves both 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.
287
A joint
and several obligation in common law corresponds to a civil law
solidary obligation; that is, one of several debtors bound in such
wise that each is liable for the entire amount, and not merely for
his proportionate share.
288
By making a joint and several promise
to pay to the order of Republic Planters Bank, private respondent
Fermin Canlas assumed the solidary liability of a debtor and the
payee may choose to enforce the notes against him alone or jointly
with Yamaguchi and Pinch Manufacturing Corporation as solidary
debtors.
As to whether the interpolation of the phrase and (in) his
personal capacity below the signatures of the makers in the notes
will affect the liability of the makers, we do not find it necessary to
resolve and decide, because it is immaterial and will not affect to
the liability of private respondent Fermin Canlas as a joint and
several debtor of the notes. With or without the presence of said
phrase, private respondent Fermin Canlas is primarily liable as a
co-maker of each of the notes and his liability is that of solidary
debtor.
289
Philippine National Bank vs. Concepcion Mining
Company, Inc., et al
G.R. No. L-16968, July 31, 1962
LABRADOR, J:
Appeal from a judgment or decision of the Court of First
Instance of Manila, Hon. Gustavo Victoriano, presiding, sentencing
defendants Concepcion Mining Company and Jose Sarte to pay
jointly and severally to the plaintiff the amount of P7, 197.26 with
287
Rice vs.Gove, 22 pick Mass 158; 33 AM Dec. 724
288
Blacks Law Dictionary, p. 1249 (5th ed., 1979
289
Republic Planters Bank vs. Court of Appeals, G.R. No. 93073, December
21, 1992, [Campos, Jr., J]
Basic Principles and Jurisprudence on the Negotiable Instruments Law 176
interest up to September 29, 1959, plus a daily interest of P1.3698
thereafter up to the time the amount is fully paid, plus 10% of the
amount as attorneys fees, and costs of this suit.
The present action was instituted by the plaintiff to recover
from the defendants the face of a promissory note the pertinent
part of which reads as follows:
Manila, March 12, 1954
NINETY DAYS after date, for value received, I promise
to pay to the order of the Philippine National Bank . . .
In case it is necessary to collect this note by or through an
attorney-at-law, the makers and indorsers shall pay ten percent
(10%) of the amount due on the note as attorneys fees, which in
no case shall be less than P100.00 exclusive of all costs and fees
allowed by law as stipulated in the contract of real estate mortgage.
Demand and Dishonor Waived. Holder may accept partial payment
reserving his right of recourse again each and all indorsers.
(Purpose mining industry)
CONCEPCION MINING COMPANY, INC.,
By:
(Sgd.) VICENTE LEGARDA
President
(Sgd.) VICENTE LEGARDA
(Sgd.) JOSE S SARTE
Please issue check to
Mr. Jose S. Sarte
Upon the filing of the complaint the defendants presented
their answer in which they allege that the co-maker the promissory
note Don Vicente L. Legarda died on February 24, 1946 and his
estate is in the process of judicial determination in Special
Proceedings No. 29060 of the Court of First Instance of Manila.
On the basis of this allegation it is prayed, as a special defense,
177
that the estate of said deceased Vicente L. Legarda be included
as party-defendant. The court in its decision ruled that the inclusion
of said defendant is unnecessary and immaterial, in accordance
with the provisions of Article 1216 of the Civil Code and section
17 (g) of the Negotiable Instruments Law.
A motion to reconsider this decision was denied and
thereupon defendants presented a petition for relief, asking that
the effects of the judgment be suspended for the reason that the
deceased Vicente L. Legarda should have been included as a
party-defendant and his liability should be determined in
pursuance of the provisions of the promissory note. This motion
for relief was also denied, hence defendant appealed to this Court.
Section 17 (g) of the Negotiable Instruments Law provides
as follows:
SEC. 17. Construction where instrument is ambiguous.
Where the language of the instrument is ambiguous or there
are omissions therein, the following rules of construction
apply:
x x x x x x x x x
(g) Where an instrument containing the word I promise
to pay is signed by two or more persons, they are
deemed to be jointly and severally liable thereon.
And Article 1216 of the Civil Code of the Philippines also
provides as follows:
ART. 1216. The creditor may proceed against any one of
the solidary debtors or some of them simultaneously. The
demand made against one of them shall not be an obstacle
to those which may subsequently be directed against the
others so long as the debt has not been fully collected.
In view of the above quoted provisions, and as the
promissory note was executed jointly and severally by the same
parties, namely, Concepcion Mining Company, Inc. and Vicente
L. Legarda and Jose S. Sarte, the payee of the promissory note
had the right to hold any one or any two of the signers of the
Basic Principles and Jurisprudence on the Negotiable Instruments Law 178
promissory note responsible for the payment of the amount of the
note. This judgment of the lower court should be affirmed.
Our attention has been attracted to the discrepancies in the
printed record on appeal. We note, first, that the names of the
defendants, who are evidently the Concepcion Mining Co., Inc.
and Jose S. Sarte, do not appear in the printed record on appeal.
The title of the complaint set forth in the record on appeal does
not contain the name of Jose Sarte, when it should, as two
defendants are named in the complaint and the only defense of
the defendants is the non-inclusion of the deceased Vicente L.
Legarda as a defendant in the action. We also note that the copy
of the promissory note which is set forth in the record on appeal
does not contain the name of the third maker Jose S. Sarte.
Fortunately, the brief of appellee on page 4 sets forth said name
of Jose S. Sarte as one of the co-maker of the promissory note.
Evidently, there is an attempt to mislead the court into believing
that Jose S. Sarte is not one of the co-makers. The attorney for
the defendants Atty. Jose S. Sarte himself and he should be held
primarily responsible for the correctness of the record on appeal.
We, therefore, order the said Atty. Jose S. Sarte to explain why in
his record on appeal his own name as one of the defendants
does not appear and neither does his name appear as one of the
co-signers of the promissory note in question. So ordered.
Bengzon, C.J., Padilla, Bautista Angelo, Concepcion,
Barrera, Paredes, Dizon, Regala and
Makalintal, JJ., concur.
Reyes, J.B.L., J., took no part.
2001 Bar Question:
X, Y, and Z signed a promissory note in favor of A stating:
We promise to pay A on December 31, 2001 the sum of
P5, 000.00. When the note fell due, A sued X and Y
who put up the defense that A should have impleaded
Z. Is the defense valid?
ANSWER:
No. Sec. 17 (g), Act 2031, where an instrument containing
the word I promise to pay is signed by two or more persons,
they are deemed to be jointly and severally liable thereon.
179
Sec. 18. Liability of person signing in trade or assumed name.
- No person is liable on the instrument whose signature does
not appear thereon, except as herein otherwise expressly
provided. But one who signs in a trade or assumed name
will be liable to the same extent as if he had signed in his
own name.
Notes:
Who may be liable on the negotiable instrument?
Only persons signing under their name are liable on the
instrument. No person is liable on the instrument whose signature
does not appear thereon, except as herein otherwise expressly
provided.
Since a negotiable instrument is a special form of contract,
the signature of the parties is needed as a manifestation of their
consent to be bound the said instrument.
What may be the liability of a person signing under a trade or
assumed name?
A person who signs in under a trade or assumed name will
be liable to the same extent as if he had signed in his own name.
(Sec. 18, Negotiable Instrument Law)
Example:
Alex Cruz issued a promissory note to the order of Nico
Santos, but instead of using the name Alex Cruz, he signed under
his trade-name Curzifix Radio Works, thus, under the law he will
be treated as if he signed as Alex Cruz.
Indication of a maker
Under the Negotiable Instruments Law, persons who write
their names on the face of the promissory notes are makers and
are liable as such.
290
By signing the notes, the maker promises to
pay to the order of the payee or to any holder
291
according to the
290
Negotiable Instruments Law, section 184; H.D. Lee Mercantile Co. vs.
Mercantile Co., 276 P. 807 (1929).
291
Ibid, Section 1.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 180
tenor thereof
292
. (Republic Planters Bank vs. Court of Appeals,
G.R. No. 93073, December 21, 1992, [Campos, Jr., J])
No application to an oral guaranty by the payee
This section has no application to an oral guaranty by the
payee upon transferring a note for value without indorsement,
the guaranty being an original and absolute obligation to which
the note is collateral. (Brannan, page 25, citing Swenson v. Stoltz,
Wash. 318, 78 Pac. 999, S.C. sec. 49.)
Sec. 19. Signature by agent; authority; how shown. - The
signature of any party may be made by a duly authorized
agent. No particular form of appointment is necessary for
this purpose; and the authority of the agent may be
established as in other cases of agency.
Notes:
May the signature be made through an agent? How should
the authority be shown?
Yes, the signature of any party may be made by a duly
authorized agent. For this purpose, no particular form of
appointment is necessary.
A person may become a party to, or transfer, a bill or note
by the hand of an agent. Whether one whose name purports to
have been signed by another as drawer, acceptor, maker, or
indorser is liable as such depends upon the authority express or
implied, of the person who wrote the signature. If such authority
existed, the principal, and he alone, is bound. No particular form
of appointment is necessary, and the authority of the agent may
be established as in other cases of agency.
293
The best mode for an agent to sign or indorse a negotiable
instruments for his principal, so that it may clearly appear that he
is the mere scribe who applies the executive hand as the
instrument of another, is as follows: A.B. by his attorney or agent,
C.D.; or A.B. by C.D., agent; or, C.D., for A.B.; or, C.D., agent
292
Ibid, Section 60.
293
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 65
181
for A.B.
294
(Daniel, Elements of the Law of Negotiable Instruments,
page 79)
When an instrument payable to X, was indorsed X by Y
with power of attorney plaintiff, in order to prove his title, must
show the authority of the agent to indorse. (Ibid, citing Scotland
County Nat. Bank v. Hohn (Mo. App.), 125 S.W. 539, S.C.
sec. 30.)
What are particular cases or instances which establishes
agency?
In a contract of agency, one binds oneself to render some
service or to do something in representation or on behalf of
another, with the latters consent or authority. The following are
the elements of agency: (1) the parties consent, express or
implied, to establish the relationship; (2) the object, which is the
execution of a juridical act in relation to a third person; (3) the
representation, by which the one who acts as agent does so, not
for oneself, but as a representative; (4) the limitation that the agent
acts within the scope of his or her authority. As the basis of agency
is representation, there must be, on the part of the principal, an
actual intention to appoint, an intention naturally inferable from
the principals words or actions. In the same manner, there must
be an intention on the part of the agent to accept the appointment
and act upon it. Absent such mutual intent, there is generally no
agency. (Dominion Insurance Corp. vs. CA, 426 Phil. 620 [2002];
Tuazon, et al. vs. Heirs of Bartolome Ramos, G.R. No. 156262,
July 14, 2005, cited in Civil Law Reviewer, Albano, Albano, Jr.,
Albano-Pua, Albano III, 2008 Edition, page 836)
Agency may be express or implied from the acts of the
principal, from his silence or lack of action, or his failure to
repudiate the agency knowing that another person is acting on
his behalf without authority. (Ibid, p. 837)
Agency may be oral, unless the law requires a specific form.
(Ibid, Art. 1869, NCC)
294
Bradlee v. Boston Glass Co., 46 Pick. 347; Weaver v. Carnall, 35 Ark.
198; 1 Parsons on Notes and Bills, 91; Tannant v. Rocky Mountain Nat.
Bank, 1 Colo. 278
Basic Principles and Jurisprudence on the Negotiable Instruments Law 182
General Rule:
The power of persons to incur liability as parties to, and to
transfer, negotiable instruments by the hands of others is governed
by the general rules applicable to principals and agents.
295
EXCEPTION
An undisclosed principal cannot sue or be sued as a party
to a negotiable instrument.
296
Sec. 20. Liability of person signing as agent, and so forth. -
Where the instrument contains or a person adds to his
signature words indicating that he signs for or on behalf of a
principal or in a representative capacity, he is not liable on
the instrument if he was duly authorized; but the mere
addition of words describing him as an agent, or as filling a
representative character, without disclosing his principal,
does not exempt him from personal liability.
Notes:
All persons who are themselves competent to become
parties to a negotiable contract, in their own individual right, can
do so through the instrumentality of an agent. (Daniel, Elements
of the Law of Negotiable Instruments, page 75)
If the agent signs a note with his own name, and discloses
no principal, he is personally bound. The party so signing must
have intended to bind somebody upon the instrument, and no
promissor but himself thereon appearing, it must be construed as
his note or as a nullity.
297
And although he term himself agent,
such suffix to his name will be regarded as a mere description
personae, or as an earmark of the transaction, and may be rejected
as surplusage.
298
(ibid, page 80)
Three things are essential to the creation of an obligation
on the part of one individual by and through the act of another,
295
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 65
296
Ibid.
297
Arnold v. Stackpole, 11 Mass. 27; Sharpe v. Bellis, 61 Pa. St. 71; Finan v.
Babcock, 58 Mich. 305
298
Toledo Iron & Agr. Works v. Heisser, 51 Mo. 128; Arnold v. Sprague, 34
Vt. 409
183
viz: (1) The principal himself must be competent; (2) The agent
must be competent to act as such; (3) Authority, express or implied,
verbal or in writing, must be conferred by the principal upon the
agent. (ibid, page 75)
If the agent exceeded his authority in signing his principals
name, or sign his own professedly as binding his principal, who is
named, he is not bound as a party to the paper itself, but only in
an action of tort for falsely assuming authority to bind another.
(ibid, page 80)
What is the liability of a person signing as an agent?
He is not liable on the instrument, where he adds to his
signature words indicating that he signs for or on behalf of a
principal or in a representative capacity if he was duly authorized.
However, the mere addition of words describing him as an
agent, or as filling a representative character, without disclosing
his principal, does not exempt him from personal liability. (Sec.
20, Negotiable Instruments Law)
Illustrative Case:
Philippine Bank of Commerce vs. Jose M. Aruego
G.R. Nos. L-25836-37, January 31, 1981
FERNANDEZ, J.:
FACTS: On December 1, 1959, the Philippine Bank of
Commerce instituted an action against Jose M. Aruego
Civil Case No. 42066 for the recovery of the total sum
of about P35,000.00 with daily interest thereon from
November 17, 1959 until fully paid and commission
equivalent to 3/8% for every thirty (30) days or fraction
thereof plus attorneys fees equivalent to 10% of the
total amount due and costs. The complaint filed by the
Philippine Bank of Commerce contains Twenty-Two
(22) causes of action referring to Twenty-Two (22)
transactions entered into by the said Bank and Aruego
on different dates covering the period from August 28,
1950 to March 14, 1951. The sum sought to be
recovered represents the cost of the printing of World
Basic Principles and Jurisprudence on the Negotiable Instruments Law 184
Current Events, a periodical published by the
defendant. To facilitate the payment of the printing the
defendant obtained a credit accommodation from the
plaintiff. Thus, for every printing of the World Current
Events, the printer Encal Press and Photo Engraving,
collected the cost of printing by drawing a draft against
the plaintiff, said draft being sent later to the defendant
for acceptance. As an added security for the payment
of the amounts advanced to Encal Press and Photo
Engraving, the plaintiff bank also required the
defendant Aruego to execute a trust receipt in favor of
said bank wherein said defendant undertook to hold in
trust for plaintiff the periodicals and to sell the same
with the promise to turn over to the plaintiff the proceeds
of the sale of said publication to answer for the payment
of all obligations arising from the draft.
Aruego contends that he signed the bills of exchange
referred to in the plaintiffs complaint in a representative
capacity, as the then President of the Philippine
Education Foundation Company, publisher of World
Current Events and Decision Law Journal, printed by
Encal Press and Photo-Engraving, drawer of the said
bills of exchange in favor of the plaintiff bank;
ISSUE: Is his contention tenable?
RULING: Section 20 of the Negotiable Instruments Law provides
that Where the instrument contains or a person add
to his signature words indicating that he signs for or on
behalf of a principal or in a representative capacity, he
is not liable on the instrument if he was duly authorized;
but the mere addition of words describing him as an
agent or as filing a representative character, without
disclosing his principal, does not exempt him from
personal liability.
An inspection of the drafts accepted by the defendant
shows that nowhere has he disclosed that he was
signing as a representative of the Philippine Education
Foundation Company. He merely signed as follows:
JOSE ARUEGO (Acceptor) (SGD) JOSE ARUEGO.
185
For failure to disclose his principal, Aruego is personally
liable for the draft he has accepted.
Principal must be disclosed
It is a general principle of commercial law that a negotiable
instrument must wear no mask, but must reveal its character upon
its face. And it extends to the liability of parties thereto, who must
appear as distinctly as the terms of the instrument itself, in order
to be bound thereby. It follows, therefore, that no party can be
charged as principal upon a negotiable instrument unless his name
is disclosed therein. The reason for this rule is that each party
who takes a negotiable instrument makes his contracts with the
parties who appear on its face to be bound for its payment; it is a
courier without luggage, whose countenance is its passport; and
in suits upon negotiable instruments, no evidence is admissible
to charge any person as a principal party thereto, unless his name
in some way is disclosed upon the instrument itself;
299
although
upon other written contracts, not negotiable, it is often competent
to show that, although signed in the name of the agent only, they
were executed in the business of the principal, and with the intent
that he should be bound. (Daniel, Elements of the Law of
Negotiable Instruments, page 79-80)
A note was written on a lithographed receipt form, with the
name of a corporation at the head, and the impressed seal of the
company upon the paper, but not referred to in the note, and the
defendants added the word president and secretary
respectively to their signatures. Held, not such disclosure of a
principal as will exempt the signers from personal liability.
(Brannan, page 27, citing Daniel v. Glidden, 38 Wash. 556, 80
Pac. 811, sub nom. Daniel v. Buttner.)
Where defendant signed a note as a trustee, held, that as
to holders in due course the principal must be disclosed on the
face of the note in order to relieve defendant of personal liability
(semble), but as between defendant and the payee the disclosure
might be made aliunde, and is a question of fact x x x. (Ibid, citing
Megowan v. Peterson, 173 N.Y. 1, 65 N.E. 738.)
299
Cragin v. Lovell, 109 U.S. 194; Texas Land Co. v. Carroll, 63 Tex. 51;
Brown v. Baker, 7 Allen, 339
Basic Principles and Jurisprudence on the Negotiable Instruments Law 186
If the payee knows the nature and object of the trust, and
that the maker of the note was acting in his capacity as trustee,
the maker is not individually liable to the payee, although none of
such information appears on the note. (Ibid, citing Kerby v.
Ruegamer, 107 App. Div. 491, 95 N.Y. Supp. 408.)
Effect of non-disclosure
Where the agent signs his name but nowhere in the
instrument has he disclosed the fact that he is acting in a
representative capacity or the name of the third party for whom
he might have acted as agent, the agent is personally liable to
take holder of the instrument and cannot be permitted to prove
that he was merely acting as agent of another and parol or extrinsic
evidence is not admissible to avoid the agents personal liability.
(Republic Planters Bank vs. Court of Appeals, G.R. No. 93073,
December 21, 1992, [Campos, Jr., J:], citing, Crocker National
Bank vs. Say, 209 Cal 436; 288 P 69 (1930); Dayries vs. Lindsly,
54 So. 791 (1911); Granada vs. PNB, 18 SCRA 1 (1966)
As a general rule, officers or directors under the old
corporate name bear no personal liability for acts done or contracts
entered into by officers of the corporation, if duly authorized.
Inasmuch as such officers acted in their capacity as agent of the
old corporation and the change of name meant only the
continuation of the old juridical entity, the corporation bearing the
same name is still bound by the acts of its agents if authorized by
the Board.
300
Certainly an agent who actually makes a contract, and who
has notice of all equities emanating therefrom, can stand on no
better footing that his principal with respect to commercial paper
growing out of the transaction. To place him on any higher plane
would be incompatible with the fundamental conception underlying
the relation of the principal and agent. (Fossum vs. Hermanos,
G.R. No. L-19461, March 28, 1923, [Street, J:])
It is a well-known rule of law that if the original payee of a
note unenforceable for lack of consideration repurchase the
instrument after transferring it to a holder in due course, the paper
again becomes subject in the payees hands to the same defenses
300
Ibid.
187
to which it would have been subject if the paper had never passed
through the hands of a holder in due course. (Fossum vs.
Hermanos, G.R. No. L-19461, March 28, 1923, [Street, J:], citing
Kost vs. Bender, 25 Mich., 515; Shade vs. Hayes, L.R.A. [1915
D], 271; 8 C.J., 470.) The same is true where the instrument is
retransferred to an agent of the payee. (supra, citing Battersbee
vs. Calkins, 128 Mich., 569)
In Dollarhide vs. Hopkins (72 III. App., 509), the plaintiff, as
agent of a corporation engaged in manufacturing agricultural
implements, sold to the defendant a separator for threshing small
grain, with a general warranty that the machine, properly handled,
would thresh and clean grain as well as any other separator of
like size. The notes in suit were executed by the defendant in
payment of the separator, and were assigned to the plaintiff before
maturity. They were then indorsed by the plaintiff bank which
became holder in due course; but afterwards, and before the
commencement of the action, the notes were retransferred by
the bank to the plaintiff. In an action upon the notes the defendant
alleged and proved breach of warranty and showed that the plaintiff
knew of the defect in the separator at the time he purchased the
notes. It was hel d that the pl ai nti ff coul d not recover,
notwithstanding the fact that the notes had passed through a bank,
in whose hands they would not have been subject to the defense
which had been interposed (54 L.R.A., 678)
Ratification
A corporation, as well as an individual, may ratify the acts
of another, when such acts are done and performed in the name
of the alleged principal; and the ratification may be by express
consent, or by conduct of the alleged principal inconsistent with
any other hypothesis than that he approved and intended to adopt
what had been done in his name. Intelligent acquiescence
amounts to a binding ratification.
301
Three things are essential to a ratification: (1) The party
must have the capacity to have made the contract in the particular
mode adopted; (2) The principal must have known all of the facts
attending the transaction; (3) The contract must have been
301
Knox County v. Aspinwall, 32 How. 544; Supervisors v. Schenck, 5 Wall.
782; Bissell v. Jeffersonville, 24 How. 299; Daniel on Negotiable
Instruments, 317
Basic Principles and Jurisprudence on the Negotiable Instruments Law 188
originally lawful.
302
(Daniel, Elements of the Law of Negotiable
Instruments, page 81)
Revocation of agency
A general authority to an agent is presumed to continue
until its revocation is generally known. And if A is the agent of B
to draw bills in his name, B will be liable as drawer to ignorant
indorsees, who had no knowledge of the change in the relationship
of the parties, or of the revocation of the agency.
303
(Ibid)
Other Illustrative cases:
A note reading six months after demand I promise to pay
and signed J.H.S. Laundry and Dye Works, J.H.S. Managing
Director is the note of the company and J.H.S. is not personally
liable. (Brannan, page 26, citing, Chapman v. Smethurst [1909],
1 K.B. 927)
However, in a different case, A check was drawn in favor of
plaintiff was stamped near the top with the words B. Marcus &
Co. (Limited) and signed by the two defendants as follows: B.
Marcus, Director, S.H. Davids, DirectorSecretary, the space
for the signature of the secretary left blank. The name of the
company appeared only at the top of the check. Held, that the
defendants were personally liable on the check. (Ibid, citing
Landes v. Marcus and Davids (K.B. Div. Mar. 31, 1909), 25 T.L.
Rep. 478)
Sec. 21. Signature by procuration; effect of. - A signature by
procuration operates as notice that the agent has but a
limited authority to sign, and the principal is bound only in
case the agent in so signing acted within the actual limits of
his authority.
Notes:
Whenever an authority purports to be derived from a written
instrument, or the agent signs the paper with the words by
procuration, in such a case the party dealing with him is bound to
302
Daniel on Negotiable Instruments, 318-320
303
Chitty on Bill [32]. 42; Story on Agency, 470, 473; Smith v. Stranger, Peake
Add. 116
189
take notice that there is a written instrument of procuration, and
he ought to call for and examine the instrument itself to see
whether it justifies the act of the agent. Under such circumstances,
he is chargeable with inquiry as to the extent of the agents
authority; and if, without examining into it when he knows of its
existenceand especially if he has it in his possessionhe
ventures to deal with the agent, he acts at his peril, and must
bear the loss if the agent transcended his authority.
304
But no
duty exists to make inquiry respecting private instructions to the
agent from his principal, whether written or oral, for they may well
be presumed to be of a secret and confidential nature.
305
(Daniel,
Elements of the Law of Negotiable Instruments, page 77)
What is a signature by procuration? What is the effect
thereof?
Signature by procuration operates as notice that the agent
has but a limited authority to sign, and the principal is bound only
in case the agent in so signing acted within the actual limits of his
authority. (Sec. 21, Negotiable Instruments Law)
Illustrative Cases:
The manager of a company in order to obtain a guarantee
for the companys business, without authority, gave a note signed
for myself and in representation of the company. This was not
necessary or in the ordinary course of the companys business.
Held. That the company was not liable on the note. (Brannan,
page 27, citing Re Cunningham & Co., 36 Ch. D. 532.)
An agent of a company drew a check per proc., in excess
of his authority. The company is not liable on the check to one
who cashed it in good faith, but must account for any money which
came into its possession and was employed for its benefit. (Ibid,
citing Reid v. Rigby & Co. [1984] 2 Q.B. 40. See also Bissel v.
Fox, 53 L.T.R. 193, S.C. infra, p. 309.)
Directors of a company which had no power to accept bills,
accepted a bill per proc. The company. Held, that they were
304
Stainback v. Bank of Virginia, 11 Gratt. 259; North River Bank v. Aymar, 3
Hill, 262
305
North River Bank v. Aymar, 3 Hill, 262; Story on Agency, 73
Basic Principles and Jurisprudence on the Negotiable Instruments Law 190
personally liable in an action for false representations. (Ibid, citing
West London Commercial Bank v. Kitson, 13 Q.B.D. 360.)
Where an agent accepts or indorses per proc., the taker
of a bill or note so accepted or indorsed is bound to inquire as to
the extent of the agents authority. But when the agent has the
authority to do the act in question, his abuse of such authority will
not affect bona fide holder for value. (Ibid, citing Bryant, Powis &
Bryant v. Quebec Bank, [1893] A.C. 170, 179.)
2011 Bar Question:
Under the Negotiable Instruments Law, a signature by
procuration operates as a notice that the agent has but
a limited authority to sign. Thus, a person who takes a
bill that is drawn, accepted, or indorsed by procuration
is duty-bound to inquire into the extent of the agents
authority by:
A. examining the agents special power of attorney.
B. examining the bill to determine the extent of such
authority.
C. asking the agent about the extent of such authority.
D. asking the principal about the extent of such
authority.
In a signature by procuration, the principal is bound
only in case the agent acted within the actual limits of
his authority. The signature of the agent in such a case
operates as notice that he has
A. a qualified authority to sign.
B. a limited authority to sign.
C. a special authority to sign.
D. full authority to sign.
Sec. 22. Effect of indorsement by infant or corporation.- The
indorsement or assignment of the instrument by a
corporation or by an infant passes the property therein,
191
notwithstanding that from want of capacity, the corporation
or infant may incur no liability thereon.
Notes:
What is the effect of an indorsement by an infant or a
corporation?
ANSWER:
The indorsement or assignment of the instrument by a
corporation or by an infant passes the property therein,
notwithstanding that from want of capacity, the corporation
or infant may incur no liability. (Sec. 22, Negotiable
Instruments Law)
Indorsements made by infant or corporations
Infant, as bei ng referred to by Sec. 22 means
unemancipated minors, who lack the capacity to act with legal
effect. Under Sec. 22, their indorsement, notwithstanding the fact
of their want of legal capacity to act transfers title of the instrument
to another, without incurring any liability thereafter.
Same rule is applied to a corporation, who, in this instance,
may have acted ultra vires.
This provision deals with the lack of legal capacity of the
infant or corporation, which, despite their incapacity may validly
transfer title over the instrument without incurring any liability.
The capacity of parties is in general governed by the same
rules as their power to make a contract. It is of two kinds:
306
(31)
a) Capacity to incur liability.
b) Capacity to transfer the instrument.
The following classes of persons incur no liability, though
they may make a valid transfer of the instrument:
307
(32)
a) A person non compos mentis.
306
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 63
307
Id.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 192
b) An infant.
c) In some jurisdictions, a married woman.
d) A corporation, when the act is ultra vires.
Sec. 23. Forged signature; effect of. - When a signature is
forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a discharge therefor,
or to enforce payment thereof against any party thereto, can
be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded
from setting up the forgery or want of authority.
Notes:
Forgery
The counterfeiting of any writing, consisting in the signing
of anothers name with intent to defraud, is forgery.
308
(Bank of
the Philippine Islands vs. CASA Montessori Internationale, G.R.
Nos. 149454, 149507, May 28, 2004, [Panganiban, J.]) The most
usual species of forgery is fraudulently writing the name of an
existing person; but where one is in possession of a paper
containing a genuine signature, and fraudulently fills it up so as
to make it appear to be signed as maker, or indorser, or other
party to a bill or note, it is as much a forgery as if the signature
itself had been forged.
309
Intent to defraud, and uttering, essential
An intent to defraud is essential to constitute forgery, and
although a bill or note will not be binding upon those whom it
purports to bind if their names have been signed to it, or it has
been altered without authority, the party who has ignorantly or
innocently executed or altered it under a supposed authority, will
not be deemed guilty of forgery.
310
(Elements of the Law of
Negotiable Instruments, Daniel, 285)
308
Agbayani, Commentaries and Jurisprudence on the Commercial Laws of
the Philippines, Vol I (1989 ed.), page 191
309
Rex V. Hales, 17 St. Trials; Powell v. Commonwealth, 1T Gratt. 822
310
Roscoes Cr. Ev. 505
193
The delivery of a bill or note, or other written contract, is
necessary to its validity; and so the uttering, which is the term
used to describe the delivery by a forger or counterfeiter to some
person of the forged instrument, is necessary in order to complete
the crime of forgery. Giving the bill or note to a confederate to
utter is an uttering thereof.
311
(Ibid)
What is the effect of forgery to the instrument?
When a signature is forged or made without the authority of
the person whose signature it purports to be, -
It is wholly inoperative,
And no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against
any party thereto can be acquired through or under such
signature.
The case of Natividad Gempesaw vs. The Honorable
Court of Appeals and Philippine Bank of Communications
312
,
the Supreme Court, speaking through Justice Campos laid down
a detailed discussion on the nature and effect of forgery, to wit:
Under the aforecited provision, forgery is a real or absolute
defense by the party whose signature was forged. A party
whose signature to an instrument was forged was never a
party and never gave his consent to the contract which gave
rise to the instrument. Since his signature does not appear
in the instrument, he cannot be held liable thereon by
anyone, not even by a holder in due course. Thus, if a
persons signature is forged as a maker of a promissory
note, he cannot be made to pay because he never made
the promise to pay. Or where a persons signature as a
drawer of a check is forged, he cannot charge the amount
thereof against the drawers account because he never gave
the bank the order to pay. And said section does not refer
only to the forged signature of the maker of a promissory
note and of the drawer of a check. It covers also a forged
indorsement, i.e., the forged signature of the payee or
indorsee of a note or a check. Since under said provision a
311
Chitty on Bills [785]
312
G.R. No. 92244, February 9, 1993
Basic Principles and Jurisprudence on the Negotiable Instruments Law 194
forged signature is wholly inoperative, no one can gain
title to the instrument through such forged indorsement.
Such an indorsement prevents any subsequent party from
acquiring any right as against any party whose name
appears prior to the forgery. Although rights may exist
between and among parties subsequent to the forged
indorsement, not one of them can acquire rights against
parties prior to the forgery. Such forged indorsement cuts
off the rights of all subsequent parties as against parties
prior to the forgery. However, the law makes an exception
to these rules where a party is precluded from setting up
forgery as a defense.
Types of forgeries:
1. Where forgery was accomplished by a person not
associated with the drawerfor example a mail
robbery; and
2. Where the indorsement was forged by an agent of
the drawer.
This difference in situations would determine the effect of
the drawers negligence with respect to forged indorsements.
While there is no duty resting on the depositor to look for forged
indorsements on his cancelled checks in contrast to a duty
imposed upon him to look for forgeries of his own name, a
depositor is under a duty to set up an accounting system and a
business procedure as are reasonably calculated to prevent or
render difficult the forgery of indorsements, particularly by the
depositors own employees. And if the drawer (depositor) learns
that a check drawn by him has been paid under a forged
indorsement, the drawer is under duty promptly to report such
fact to the drawee bank.
313
For his negligence or failure either to
discover or to report promptly the fact of such forgery to the
drawee, the drawer losses his right against the drawee who has
debited his account under a forged indorsement.
314
In other words,
he is precluded from using forgery as a basis for his claim for re-
crediting of his account. (Gempesaw vs. Court of Appeals, [1993])
313
Britton, Bills and Notes, Sec. 143, pp. 663-664
314
City of New York vs. Bronx County Trust Co., 261 N.Y. 64, 184 N.E. 495
(1933); Detroit Piston Ring Co. vs. Wayne County & Home Savings Bank,
252 Mich. 163, 233 N.W. 185 (1930); C.E. Erickson Co. vs. Iowa Nat.
Bank 211 Iowa 495, 230 N.W. 342 (1930)
195
Illustrative case:
The Great Eastern Life Assurance Co., vs. Hong
Kong & Shanghai Banking Corporation and Philippine
National Bank
G.R. No. L-18657, August 23, 1922
JOHNS, J.:
FACTS: May 3, 1920, the plaintiff drew its check for P2,000 on
the Hongkong and Shanghai Banking Corporation with
whom it had an account, payable to the order of Lazaro
Melicor.
E. M. Maasim fraudulently obtained possession of the
check, forged Melicors signature, as an endorser, and
then personally endorsed and presented it to the
Philippine National Bank where the amount of the
check was placed to his credit.
After having paid the check, and on the next day, the
Philippine national Bank endorsed the check to the
Hongkong and Shanghai Banking Corporation which
paid it and charged the amount of the check to the
account of the plaintiff. In the ordinary course of
busi ness, the Hongkong Shanghai Banki ng
Corporation rendered a bank statement to the plaintiff
showing that the amount of the check was charged to
its account, and no objection was then made to the
statement.
About four months after the check was charged to the
account of the plaintiff, it developed that Lazaro Melicor,
to whom the check was made payable, had never
received it, and that his signature, as an endorser, was
forged by Maasim, who presented and deposited it to
his private account in the Philippine National Bank. With
this knowledge, the plaintiff promptly made a demand
upon the Hongkong and Shanghai Banking Corporation
that it should be given credit for the amount of the forged
check, which the bank refused to do, and the plaintiff
commenced this action to recover the P2,000 which
Basic Principles and Jurisprudence on the Negotiable Instruments Law 196
was paid on the forged check. On the petition of the
Shanghai Bank, the Philippine National Bank was
made defendant. The Shanghai Bank denies any
liability, but prays that, if a judgment should be rendered
against it, in turn, it should have like judgment against
the Philippine National Bank which denies all liability
to either party.
ISSUES: Who is responsible for the refund to the drawer of the
amount of the check drawn and payable to order, when
its value was collected by a third person by means of
forgery of the signature of the payee?Is it the drawee
or the last indorser, who ignored the forgery at the time
of making the payment, or the forger?
RULING: Plaintiffs check was drawn on Shanghai Bank payable
to the order of Melicor. In other words, the plaintiff
authorized and directed the Shanghai Bank to pay
Melicor, or his order, P2,000. It did not authorize or
direct the bank to pay the check to any other person
than Melicor, or his order, and the testimony is
undisputed that Melicor never did part with his title or
endorse the check, and never received any of its
proceeds. Neither is the plaintiff estopped or bound
by the banks statement, which was made to it by the
Shanghai Bank. This is not a case where the plaintiffs
own signature was forged to one of its checks. In such
a case, the plaintiff would have known the forgery, and
it would have been its duty to have promptly notified
the bank of any forged signature, and any failure on its
part would have released the bank from any liability.
That is not this case. Here, the forgery was that of
Melicor, who was the payee of the check, and the legal
presumption is that the bank would not honor the check
without the genuine endorsement of Melicor. In other
words, when the plaintiff received its bank statement,
it had a right to assume that Melicor had personally
endorsed the check, and that, otherwise, the bank
would not have paid it.
x x x
The money was on deposit in the Shanghai Bank, and
it had no legal right to pay it out to anyone except the
197
plaintiff or its order. Here, the plaintiff ordered the
Shanghai Bank to pay the P2,000 to Melicor, and the
money was actually paid to Maasim and was never
paid to Melicor, and he never paid to Melicor, and he
never personally endorsed the check, or authorized any
one to endorse it for him, and the alleged endorsement
was a forgery. Hence, upon the undisputed facts, it
must follow that the Shanghai Bank has no defense to
this action.
It is admitted that the Philippine National Bank cashed
the check upon a forged signature, and placed the
money to the credit of Maasim, who was a forger. That
the Philippine National Bank then endorsed the check
and forwarded it to the Shanghai Bank by whom it was
paid. The Philippine National Bank had no license or
authority to pay the money to Maasim or anyone else
upon a forge[d] signature. It was its legal duty to know
that Melicors endorsement was genuine before
cashing the check. Its remedy is against Maasim to
whom it paid the money.
Adopting of forged signature
If ones signature is forged, it is, as a general rule, a mere
nullity as to him. It is legally accurate to say that he did not make
the instrument. But if the person whose signature has been forged
pronounces it genuine, or the instrument valid, the question arises
whether or not such declaration renders him liable as if he were a
party to a genuine instrument; and a variety of circumstances affect
its just solution. (Elements of the Law of Negotiable Instruments,
Daniel, 285)
In the first place, when third parties buy the paper on his
assurances or representations of the genuineness of his signature,
or of the validity of the instrument, or are induced to act upon
such assurances or representations, and would suffer loss if he
were permitted to set up forgery as a defense, it is quite clear
upon principles of estoppel that such defense cannot be made.
315
(Ibid)
315
Workman v. Wright, 33 Ohio St. 405; Woodruff v. Monroe, 33 Md. 158;
Beeman v. Duck, 11 M & W 251
Basic Principles and Jurisprudence on the Negotiable Instruments Law 198
In the second place, if no principle of estoppel applies, and
if through mistake a party stated that a signature is genuine, and
afterward he discovers his error, and speedily corrects it, and
before the holder has changed his relation to the paper, or anyone
has dealt with it upon the faith of his admission, forgery can be
successfully pleaded.
316
(Ibid, pp. 285-286)
In the third place, it may be stated that where the party,
knowing his signature to be a forgery, deliberately and
understandingly adopts it as his own, he would be bound, because
ratification thus made is equivalent to a previous authority,
provided, however, that an innocent third party has been induced
to act upon the faith of the adoption in such a way as to suffer
loss by its repudiation. This is based upon the familiar principles
of estoppel. But whether such deliberate adoption of a forgery,
without the consequent loss to a third party, acting on the faith
thereof, would be binding is a mooted question, both in England
and America.
317
(Ibid, p. 286)
2011 Bar Question:
Due to his debt to C, D wrote a promissory note which
is payable to the order of C. Cs brother, M,
misrepresenting himself as agent of C, obtained the note
from D. M then negotiated the note to N after forging
the signature of C. May N enforce the note against D?
A. Yes, since D is the principal debtor.
B. No, since the signature of C was forged.
C. No, since it is C who can enforce it, the note being
payable to the order of C.
D. Yes, since D, as maker, is primarily liable on the
note.
Forgery committed by an agent having authority to indorse
An agent having authority to indorse checks payable to his
principal and to deposit them in a certain bank for collection,
indorsed his principals name and transferred the checks to a third
316
Daniel on Negotiable Instruments, 1352; Woodruff v. Monroes, 33 Md.
158
317
on Negotiable Instruments, 1352a, 1352b, and cases cited
199
person who deposited them in defendants bank, which collected
and paid the amount to such third person in good faith. Held, that
the indorsement by the agent was not a forgery and the defendant
was not liable to the principal for a conversion of the checks.
(Brannan, page 29, citing Salen v. Bank, 110 App. Div. 636, 97
N.Y. Supp. 361.)
Is there any exception to the forgery rule?
Yes. Section 23 of the Negotiable Instruments Law further
provides that, unless the party against whom the instrument is
sought to enforce such right is precluded from setting up the
forgery or want of authority.
Who are these persons that are precluded from setting up
the defense of forgery?
Those persons who warrant or admit the genuineness of
the signature in question (e.g., indorsers, persons negotiating by
delivery, acceptors of bills of exchange)
Those who, by their acts, silence or negligence, are
estopped from setting up the defense of forgery. (estoppel)
When the forged signature is unnecessary to the title of the
holder as when the indorsement is forged on an instrument
payable to bearer.
When one party is estopped to deny the genuineness of
anothers signature
The relation of one party to a negotiable instrument is often
such that he cannot deny the genuineness of anothers signature,
for, having treated it himself as genuine, it would be fraud to permit
him to assert the contrary. Having issued or transferred the
instrument as genuine in all respects, he would not only be bound
by his guaranty that it is genuine, but it would be unjust to and
fraudulent upon other to permit him to deny it; and proof of his
having so issued or used it would be sufficient to entitle the holder
to recover against him.
318
(Elements of the Law of Negotiable
Instruments, Daniel, p. 286)
318
Hortsman v. Henshaw, 11 How. 177; Meacher v. Fort, 3 Hill (S.C.) 227;
Alleman v. Wheeler, 101 Ind. 144
Basic Principles and Jurisprudence on the Negotiable Instruments Law 200
If a bank pays out on a forged check, is it liable to reimburse
the drawer from whose account the funds were paid out?
General rule remains that the drawee who has paid upon
the forged signature bears the loss. The exception to this rule
arises only when negligence can be traced on the part of the
drawer whose signature was forged, and the need arises to weigh
the comparative negligence between the drawer and the drawee
to determine who should bear the burden of loss. x x x
The general rule is to the effect that a forged signature is
wholly inoperative, and payment made through or under such
signature is ineffectual or does not discharge the instrument. If
payment is made, the drawee cannot charge it to the drawers
account. The traditional justification for the result is that the drawee
is in a superior position to detect a forgery because he has the
makers signature and is expected to know and compare it. The
rule has a healthy cautionary effect on banks by encouraging care
in the comparison of the signatures against those on the signature
cards they have on file. Moreover, the very opportunity of the
drawee to insure and to distribute the cost among its customers
who use checks makes the drawee an ideal party to spread the
risk to insurance. (Samsung Construction Company Philippines,
Inc. vs. Far East Bank and Trust Company, G.R. No. 129015,
August 13, 2004 [Tinga, J.])
Moreover, the same case held that:
Under Section 23 of the Negotiable Instruments Law,
forgery is a real or absolute defense by the party whose signature
is forged.
x x x
Still, even if the bank performed with utmost diligence, the
drawer whose signature was forged may still recover from the
bank as long as he or she is not precluded from setting up the
defense of forgery. After all, Section 23 of the Negotiable
Instruments Law plainly states that no right to enforce the payment
of check can arise out of a forged signature. x x x Consequently,
if a bank pays a forged check, it must be considered as paying
out its funds and cannot charge the amount so paid to the account
of the depositor. A bank is liable, irrespective of its good faith, in
paying a forged check.
201
x x x
Judicial notice can be taken that it is highly unusual in
practice for a business establishment to draw a check for close to
a million pesos and make it payable to cash or bearer, and not to
order.
x x x
The Court recently emphasized that the highest degree of
care and diligence is required of banks.
Banks are engaged in a business impressed with public
interest, and it is their duty to protect in return their many
clients and depositor who transact business with them. They
have the obligation to treat their clients account meticulously
and with the highest degree of care, considering the fiduciary
nature of their relationship. The diligence required of banks,
therefore, is more than that of a good father of a family.
Given the circumstances, extraordinary diligence dictates
that FEBTC should have ascertained from Jong personally that
the signature in the questionable check is his.
A bank is bound to know the signatures of its customers;
and if it pays a forged check, it must be considered as making the
payment out of its own funds, and cannot ordinarily charge the
amount so paid to the account of the depositor whose name was
forged. (7 C.J., 683, cited in San Carlos Milling Co., Ltd. vs. Bank
of the Philippine Islands and China Banking Corporation, G.R.
No. L-37467, December 11, 1933, [Hull, J.])
Forgery committed by drawer-payors confidential employee;
liability
In Philippine Commercial International Bank vs. Court
of Appeals and Form Philippines, Inc., [t]he mere fact that the
forgery was committed by a drawer-payors confidential employee
or agent, who by virtue of his position had unusual facilities for
perpetrating fraud and imposing the forged paper upon the bank,
does not entitle the bank the shift the loss to the drawer-payor, in
the absence of some circumstance raising estoppel against the
drawer.
39
This rule likewise applies to the checks fraudulently
319
Am Jur 2d, Volume 10, Banks Section 604 (1963 Edition)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 202
negotiated or diverted by the confidential employees who hold
them in their possession.
x x x
On this point, jurisprudence regarding the imputed
negligence of employer in a master-servant relationship is
instructive. Since a master may be held for his servants wrongful
act, the law imputes to the master the act of the servant, and if
the act is negligent or wrongful and proximately results in an injury
to a third person, the negligence or wrongful conduct is the
negligence or wrongful conduct of the master, for which he is
liable.
320
The general rule is that if the master is injured by the
negligence of a third person and the concurring contributory
negligence of his own servant or agent, the latters negligence is
imputed to his superior and will defeat the superiors action against
the third person, assuming, of course that the contributory
negligence was the proximate cause of the injury of which
complaint is made.
321
Duty of the encashing bank
In the same case of Philippine Commercial International
Bank vs. Court of Appeals and Form Philippines, Inc., it was
ruled that: [l]astly, banking business requires that the one who
first cashes and negotiates the check must take some precautions
to learn whether or not it is genuine. And if the one cashing the
check through indifference or other circumstance assists the forger
in committing the fraud, he should not be permitted to retain the
proceeds of the check from the drawee whose sole fault was that
it did not discover the forgery or the defect in the title of the person
negotiating the instrument before paying the check. For this
reason, a bank which cashes a check drawn upon another bank,
without requiring proof as to the identity of the persons presenting
it, or making inquiries with regard to them, cannot hold the
proceeds against the drawee when the proceeds of the checks
were afterwards diverted to the hands of a third party. In such
cases the drawee bank has a right to believe that the cashing
bank (or the collecting bank) had, by the usual proper investigation,
satisfied itself of the authenticity of the negotiation of the checks.
Thus, one who encashed a check which had been forged or
320
Am Jur 2d, Volume 58, Negligence, Section 458
321
Am Jur 2d, Volume 58, Negligence Section 464
203
diverted in turn received payment thereon from the drawee, is
guilty of negligence which proximately contributed to the success
of the fraud practiced on the drawee bank. The latter may recover
from the holder the money paid on the check.
322

Depositor owes a duty to the drawee bank to examine his


cancelled checks for forgery of his own signature; his failure
to do so is tantamount to his negligence which bar his
recovery; however, he has no similar duty as to forged
indorsements
As held by the Supreme Court in the case of Gempesaw
vs. Court of Appeals
323
, [a]s a rule, a drawee bank who has
paid a check on which an indorsement has been forged cannot
charge the drawers account for the amount of said check. An
exception to this rule is where the drawer is guilty of such
negligence which causes the bank to honor such a check or
checks. If a check is stolen from the payee, it is quite obvious
that the drawer cannot possibly discover the forged indorsement
by mere examination of his cancelled check. This accounts for
the rule that although a depositor owes a duty to his drawee bank
to examine his cancelled checks for forgery of his own signature,
he has no similar duty as to forged indorsements. A different
situation arises where the indorsement was forged by an employee
or agent of the drawer, or done with active participation of the
latter. Most of the cases involving forgery by an agent or employee
deal with the payees indorsement. The drawer and the payee
often time shave business relations of long standing. The
continued occurrence of business transactions of the same nature
provides the opportunity for the agent/employee to commit the
fraud after having developed familiarity with the signatures of the
parties. However, sooner or later, some leak will show on the
drawers books. It will then be just a question of time until the
fraud is discovered. This is especially true when the agent
participates a series of forgeries as in the case at bar.
The fact that forgery was committed by an employee of the
party whose signature was forged cannot necessarily imply
that such partys negligence was the cause for the forgery
322
Supra note 20 at Section 611, (Vda De Bataclan et al, vs. Medina, 102
Phil. 181, 186 (1957)
323
February 9, 1993, G.R. No. 92244
Basic Principles and Jurisprudence on the Negotiable Instruments Law 204
The discussion laid down by the Supreme Court in the case
of Samsung Construction Co. Phils., Inc. vs. Far East Bank &
Trust Company
324
is extensive on the matter, to wit:
We recognize that Section 23 of the Negotiable Instruments
Law bars a party from setting up the defense of forgery if it is
guilty of negligence. Yet, we are unable to conclude that Samsung
Corporation was guilty of negligence in this case. The appellate
court failed to explain precisely how the Korean accountant was
negligent or how more care and prudence on his part would have
prevented the forgery. We cannot sustain this tar and feathering
resorted to without any basis.
The bare fact that the forgery was committed by an employee
of the party whose signature was forged cannot necessarily imply
that such partys negligence was the cause for the forgery.
Employers do not possess the preternatural gift of cognition as to
the evil that may lurk within the hearts and minds of their
employees. The Courts pronouncement in PCI Bank v. Court of
Appeals, applies in this case, to wit:
[T]he mere fact that the forgery was committed by a drawer-
payors confidential employee or agent, who by virtue of his
position had unusual facilities for perpetrating fraud and
imposing the forged paper upon the bank, does not entitle
the bank to shift the loss to the drawer-payor, in the absence
of some circumstance raising estoppels against the drawer.
Still, in the absence of evidence to the contrary, we can
conclude that there was no negligence on Samsung Constructions
part. The presumption remains that every person takes ordinary
care of his concerns, and that the ordinary course of business
has been followed. Negligence is not presumed, but must be
proven by him who alleges it. While the complaint was lodged at
the instance of Samsung Construction, the matter it had to prove
was the claim it had allegedwhether the check was forged. It
cannot be required as well to prove that it was not negligent,
because the legal presumption remains that ordinary care was
employed.
324
August 13, 2004, published in The New Philippine Law Report, Vol. XXXII
No. 8, August 2004, pages 30-31
205
Thus, it was incumbent upon FEBTC, in defense, to prove
the negative fact that Samsung Construction was negligent. While
the payee, as in this case, may not have the personal knowledge
as to the standard procedures observed by the drawer, it well has
the means of disputing the presumption of regularity. Proving a
negative fact may be a difficult office, but necessarily so, as it
seeks to overcome a presumption in law. FEBTC was unable to
dispute the presumption of ordinary care exercised by Samsung
Construction, hence we cannot agree with the Court of Appeals
finding of negligence.
The assailed Decision replicated the extensive efforts which
FEBTC devoted to establish that there was no negligence on the
part of the bank in its acceptance and payment of the forged check.
However, the degree of diligence exercised by the bank would be
irrelevant if the drawer is not precluded from setting up the defense
of forgery under Section 23 by his own negligence. The rule of
equity enunciated in PNB v. National City Bank of New York, as
relied upon by the Court of Appeals, deserves careful examination.
The point in issue has sometimes been said to be that of
negligence. The drawee who has paid upon the forged
signature is held to bear the loss, because he has been
negligent in failing to recognize that the handwriting is not
that of his customer. But it follows obviously that if the payee,
holder, or presenter of the forged paper has himself been in
default, if he was himself been guilty of a negligence prior
to that of the banker, or if any act of his own he has at all
contributed to induce the bankers negligence, then he may
lose his right to cast the loss upon the banker.
Quite palpably, the general rule remains that the drawee
who has paid upon the forged signature bears the loss. The
exception to his rule arises only when negligence can be traced
on the part of the drawer whose signature was forged, and the
need arises to weigh the comparative negligence between the
drawer and the drawee to determine who should bear the loss.
The Court finds no basis to conclude that Samsung Construction
was negligent in the safekeeping of checks. For one, the settled
rule is that the mere fact that the depositor leaves his check book
lying around does not constitute such negligence as will free the
bank from liability to him, where a clerk of the depositor or other
Basic Principles and Jurisprudence on the Negotiable Instruments Law 206
persons taking advantage of the opportunity, abstract some of
the check blanks, forges the depositors signature and collect on
the checks from the bank. And for another, in point of fact
Samsung Construction was not negligent at all since it reported
the forgery almost immediately upon discovery.
Forged Indorsement; effect thereof
In the case of Republic Bank vs. Mauricia Ebrada
325
, a
question was poised by the ponente, Justice Martin in this wise,
[i]t is clear from the provision that where the signature on a
negotiable instrument if forged, the negotiation of the check
is without force or effect. But does this mean that the
existence of one forged signature therein will render void all
the other negotiations of the check with respect to the other
parties whose signature are genuine?
The Court held that: [i]n the case of Beam vs. Farrel, (135
Iowa 670, 113 N.W. 590), where a check has several indorsements
on it, it was held that it is only the negotiation based on the forged
or unauthorized signature which is inoperative. Applying this
principle to the case before us, it can be safely concluded that it
is only the negotiation predicated on the forged indorsement that
should be declared inoperative. This means that the negotiation
of check in question from Martin Lorenzo (who died seven (7)
years before the issuance of the instrument in question), the
original payee, to Ramon R. Lorenzo, the second indorser, should
be declared of no effect, but the negotiation of the aforesaid check
from Ramon R. Lorenzo to Adelaida Dominguez, the third indorser,
and from Adelaida Dominguez to the defendant-appellant who
did not know of the forgery, should be considered valid and
enforceable, barring any claim of forgery.
326
A subsequent question was then again raised by Justice
Martin, when he asked: What happens then, if, after the drawee
bank has paid the amount of the check to the holder thereof,
it was discovered that the signature of the payee was forged?
Can the drawee bank recover from the one who encashed
the check?
325
G.R. No. L-40796, July 31, 1975, [Martin, J.], bold supplied
326
Since endorsers are precluded from setting up the defense of forgery
207
The High Court answered this query citing the case of State
vs. Broadway Mut. Bank
327
, wherein it was held that: the drawee
of a check can recover from the holder the money paid to him on
a forged instrument. It is not supposed to be its duty to ascertain
whether the signatures of the payees or indorsers are genuine or
not. This is because the indorser is supposed to warrant to the
drawee that the signatures of the payee and pervious indorsers
are genuine, warranty not extending only to holders in due course.
One who purchases a check or draft is bound to satisfy himself
that the paper is genuine and that by indorsing it or presenting it
for payment or putting it into circulation before presentation he
impliedly asserts that he has performed his duty and that drawee
who has paid the forged check, without actual negligence on his
part, may recover the money paid from such negligent purchasers.
In such cases the recovery is permitted because although the
drawee was in a way negligent in failing to detect the forgery, yet
if the encasher of the check had performed his duty, the forgery
would in all probability, have been detected and the fraud defeated.
The reason for allowing the drawee bank to recover from the
encahser is:
Every one with the least experience in business knows that
no business man would accept a check in exchange for
money or goods unless he is satisfied that the check is
genuine. He accepts it only because he has proof that it is
genuine, or because he has sufficient confidence in the
honesty and financial responsibility of the person who
vouches for it. If he is deceived he has suffered a loss of
his cash or goods through his own mistake. His own
credulity or recklessness, or misplaced confidence was the
sole cause of his loss. Why should he be permitted to shift
the loss due to his own fault in assuming the risk, upon the
drawee, simply because of the accidental circumstance that
the drawee afterwards failed to detect the forgery when the
check was presented?
328
327
282 S.W. 196, 197
328
Gloucester Bank v. Salem Bank, 17 Mass. 33; Bank of U.S. Bank of
Georgia, 10 Wheat 333, 6 L. Ed. 384; National Bank of America v. Bangs,
196 Mass. 441, 8 Am. Rep. 349; First National Bank of Danvers v. First
National Bank of Salem, 151 Mass. 280, 24 N.E. 44, 21 Am. St. Rep. 450;
First National Bank v. Ricker, 71 Ill. 439, 22 Am. Rep. 104; Rouvant v.
Bank, 63 Tex. 610; Bank v. Bank, 30 Ill. 96 Am. Dec. 554; Peoples Bank
v. Franklyn Bank, 88
Basic Principles and Jurisprudence on the Negotiable Instruments Law 208
Similarly, in the case before us, the defendant-appellant,
upon receiving the check in question from Adelaida Dominguez,
was duty-bound to ascertain whether the check in question was
genuine before presenting it to the plaintiff-bank for payment. Her
failure to do so makes her liable for the loss and the plaintiff-bank
may recover from her the money she received for the check. As
reasoned out above, had she performed the duty of ascertaining
the genuineness of the check, in all probability the forgery would
have been detected and the fraud defeated.
Moreover, in the same case, the court held that: [i]n our
jurisdiction, we have a case of similar import
329
The Great Eastern
Life Insurance Company drew its check for P2000.00 on
Hongkong and Shanghai Banking Corporation payable to the order
of Lazaro Melicor. A certain E.M. Maasin fraudulently obtained
the check and forged the signature of Melicor, as an indorser,
and then personally indorsed and presented the check to the
Philippine National Bank where the amount of the check was
placed to his (Maasins) credit. On the next day, the Philippine
National Bank indorsed the check to the Hongkong and Shanghai
Banking Corporation which paid it and charged the amount of the
check to the insurance company. They Court held that the
Hongkong and Shanghai Banking Corporation was liable to the
insurance company for the amount of the check and that the
Philippine National Bank was in turn liable to the Hongkong and
Shanghai Banking Corporation. Said the Court:
Where a check is drawn payable to the order of one person
and is presented to a bank by another and purports upon its
face to have been duly indorsed by the payee of the check,
it is the duty of the bank to know that the check was duly
indorsed by the original payee, and where the bank pays
the amount of the check to a third person, who has forged
the signature of the payee, the loss falls upon the bank who
cashed the check, and its only remedy is against the person
to whom it paid the money.
Tenn. 299, 12 S.W. 716, 6 L.R.A. 724, 17 Am St. Rep. 884; Ellis & Morton
v. Trust Co., 4 Ohio St. 628, 64 Am. Dec. 610; Bank v. Bank, 58 Ohio St.
207, 50 N.E. 723; Bank v. Bank, 22 Neb. 769, 36 N.W. 289, 3 Am. St.
Rep. 294; Canadian Bank v. Bingham, 20 Wash. 484, 71 Pac. 43, 60
L.R.A. 955
329
Great Eastern Life Insurance Company vs. Hongkong and Shanghai
Banking Corporation, 43 Phil. 678
209
2011 Bar Question:
D, debtor of C, wrote a promissory note payable to the
order of C. Cs brother, M, misrepresenting himself as
Cs agent, obtained the note from D, then negotiated it
to N after forging Cs signature. N indorsed it to E, who
indorsed it to F, a holder in due course. May F recover
from E?
A. No, since the forgery of Cs signature results in the
discharge of E.
B. Yes, since only the forged signature is inoperative
and E is bound as indorser.
C. No, since the signature of C, the payee, was forged.
D. Yes, since the signature of C is immaterial, he being
the payee.
Exception to the Rule; Payment made upon a check to which
the name of the drawer has been forged; comparative
negligence
The Supreme Court in the case of Philippine National Bank
vs. The National City Bank of New York
330
, speaking through
Justice Recto held:
[T]he rule is perfectly well settled that in determining the
relative rights of a drawee who, under a mistake of fact, has
paid, and a holder who has received such payment, upon a
check to which the name of the drawer has been forged, it
is only fair to consider the question of diligence or negligence
of the parties in respect thereto. (Woods and Malone vs.
Colony Bank [1902[, 56 L.R.A., 929, 932.)
The responsibility of the drawee who pays a forged check,
for the genuineness of the drawers signature, is absolute
only in favor of one who has not, by his own fault or
negligence, contributed to the success of the fraud or to
mislead the drawee. (National Bank of America vs. Bangs,
106 Mass., 441; 8 am. Rep., 349; Woods and Malone vs.
330
October 31, 1936
Basic Principles and Jurisprudence on the Negotiable Instruments Law 210
Colony Bank, supra, de Fereit vs. Bank of America, 23 La.,
Ann., 310; B.B. Ford & Co. vs. Peoples Bank of Orangeburg,
74 S.C., 180; 180 L.R.A. [N.S.], 63.)
If it appears that the one to whom payment was made was
not an innocent sufferer, but was guilty of negligence in not
doing something, which plain duty demanded, and which, if
it had been done would have avoided entailing loss on any
one, he is not entitled to retain the moneys paid through a
mistake on the part of the drawee bank. (First Nat. Bank of
Danvers vs; First Nat. Bank of Salem, 151 Mass., 280; 24
N.E., 44; 21 A. S. R., 450; First Nat. Bank of Orleans vs.
State Bank of Alma, 22 Neb., 769; 36 N. W., 289; 3 A. S. R.,
294; American Exp. Co. vs. State Nat. Bank, 27 Okla., 824;
113 Pac., 711; 33 L. R. A. [N. S.], 188; B. B. Ford & Co. vs.
Peoples Bank of Orangeburg, 74 S. C., 180; 54 S. E., 204;
114 A. S. R., 986; 7 Ann. Cas., 744; 10 L. R. A. [N. S.], 63;
Peoples Bank vs. Franklin Bank, 88 Tenn. 299; 12 S. W.,
716; 17 A. S. R.) 884; 6 L. R. A., 724; Canadian Bank of
Commerce vs. Bingham, 30 Wash., 484; 71 Pac., 43; 60 L.
R. A., 955.)
In other words, to entitle the holder of a forged check to
retain the money obtained he must be able to show that the
whole responsibility of determining the validity of the
signature was upon the drawee, and that the negligence of
such drawee was not lessened by any failure of any
precaution which, from his implied assertion in presenting
the check as a sufficient voucher, the drawee had the right
to believe he had taken. (Ellis vs. Ohio Life Insurance &
Trust Co., 4 Ohio St., 628; Rouvant vs. Bank, 63 Tex., 610;
Bank vs. Ricker, 71 Ill., 429; First National Bank of Danvers
vs. First Nat. Bank of Salem, 24 N. E., 44, 45; B. B. Ford &
Co. vs. Peoples Bank of Orangeburg, supra.)
The recovery is permitted in such case, because, although
the drawee was constructively negligent in failing to detect
the forgery, yet if the purchaser had performed his duty, the
forgery would in all possibility have been detected and the
fraud defeated. (First National Bank of Lisbon vs. Bank of
Wyndmere, 15 N. D., 209; 10 L. R. A. [N. S.], 49.)
211
In the absence of actual fault on the part of the drawee, his
constructive fault in not knowing the signature of the drawer
and detecting the forgery will not preclude his recovery from
the one who took the check under circumstances of
suspicion without proper precaution, or whose conduct has
been such as to mislead the drawee or induce him to pay
the check without the usual scrutiny or other precautions
against mistake or fraud. (National Bank of America vs.
Bangs, supra; First National Bank vs. Indiana National Bank,
30 N. E., 808-810; Woods and Malone vs. Colony Bank,
supra; First National Bank of Danvers vs. First Nat. Bank of
Salem, 151 Mass., 280.)
Where a loss, which must be borne by two parties alike
innocent of forgery, can be traced to the neglect or fault of
either, it is unreasonable that it would be borne by him, even
if innocent of any intentional fraud, through whose means it
has succeeded. (Gloucester Bank vs. Salem Bank, 17
Mass., 33; First Nat. Bank of Danvers vs. First National Bank
of Salem, supra; B. B. Ford & Co. vs. Peoples Bank of
Orangeburg, supra.)
Again if the indorser is guilty of negligence in receiving and
paying the check or draft, or has reason to believe that the
instrument is not genuine, but fails to inform the drawee of
his suspicions the indorser according to the reasoning of
some courts will be held liable to the drawee upon his implied
warranty that the instrument is genuine. (B. B. Ford & Co.
vs. Peoples Bank of Orangeburg, supra; Newberry Sav.
Bank vs. Bank of Columbia, 93 S. C., 294; 38 L. R. A. [N. S],
1200.)
Most of the courts now agree that one who purchases a
check or draft is bound to satisfy himself that the paper is
genuine; and that by indorsing it or presenting it for payment
or putting it into circulation before presentation he impliedly
asserts that he has performed his duty, the drawee, who
has, without actual negligence on his part, paid the forged
demand, may recover the money paid from such negligent
purchaser. (Lisbon First National Bank vs. Wyndmere Bank,
supra.) Of course, the drawee must, in order to recover
Basic Principles and Jurisprudence on the Negotiable Instruments Law 212
back the holder, show that he himself was free from fault.
(See also 5 R. C. L., pp. 556-558.)
So, if a collecting bank is alone culpable, and, on account
of its negligence only, the loss has occurred, the drawee
may recover the amount it paid on the forged draft or check.
(Security Commercial & Sav. Bank vs. Southern Trust & C.
Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)
But we are aware of no case in which the principle that the
drawee is bound to know the signature of the drawer of a
bill or check which he undertakes to pay has been held to
be decisive in favor of a payee of a forged bill or check to
which he himself given credit by his indorsement. (See also,
Mckleroy vs. Bank, 14 La. Ann., 458; Canal Bank vs. Bank
of Albany, 1 Hill, 287; Rouvant vs. Bank, supra, First Nat.
Bank vs. Indiana National Bank; 30 N. E., 808-810.)
In First Nat Bank vs. United States National Bank
331
, the
court declared: A holder cannot profit by mistake which his
negligent disregard of duty has contributed to induce the
drawee to commitThe holder must refund, if by his
negligence he has contributed to the consummation of the
mistake on the part of the drawee by misleading himIf the
only fault attributable to the drawee is the constructive fault
which the law raises from the bald fact that he has failed to
detect the forgery, and if he is not chargeable with factual
fault in addition to such constructive fault, then he is not
precluded from recovery from a holder whose conduct has
been such as to mislead the drawee or induce him to pay
the check or bill of exchange without the usual security
against fraud. The holder must refund to a drawee who is
not guilty of actual fault if the holder was negligent in not
making due inquiry concerning the validity of the check
before he took it, and if the drawee can be said to have
been excused from making inquiry before taking the check
because of having had a right to, presume that the holder
had made such inquiry.
Where a bank, without inquiry or identification of the person
presenting a forged check, purchases it, indorses it, generally,
331
([1921], 100 Or., 264; 14 A. L. R., 479; 197 Pac., 547)
213
and presents it to the drawee bank, which pays it, the latter may
recover if its only negligence was its mistake in having failed to
detect the forgery, since its mistake, did not mislead the purchaser
to bring about a change in position. (Security Commercial &
Savings Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App.,
734; 241 Pac., 945.)
Also, a drawee could recover from another bank the portion
of the proceeds of a forged check cashed by the latter and
deposited by the foreigner in the second bank and never
withdrawn, upon the discovery of the forgery three months later,
after the drawee had paid the check and returned the voucher to
the purported drawer, where the purchasing bank was negligent
in taking the check, and was not injured by the drawees
negligence in discovering and reporting the forgery as to the
amount left on deposit, since it was not a purchaser for value.
(First State Bank & T. Co. vs. First Nat. Bank [1924], 314 Ill., 269;
145 N. E., 382.)
Similarly, it has been held that the drawee of a check could
recover the amount paid on the check, after discovery of the
forgery, from another bank, which put the check into circulation
by cashing it for the one who had forged the signature of both the
drawer and payee, without making an inquiry as to who he was
although he was a stranger, after which the check reached, and
was paid by, the drawee, after going through the hands of several
intermediate indorsees. (71 A. L. R., p. 340.)
It has been held by many courts that a drawee of a check,
who is deceived by forgery of the drawers signature may recover
the payment back, unless his mistake has placed an innocent
holder of the paper in a worse position than he would have been
in if the discovery of the forgery had been made on presentation.
(5 R.C.L., p. 559; 2 Daniel on Negotiable Instruments, 1538.)
Forgeries often deceived the eye of the most cautious experts;
and when a bank has been deceived, it is a harsh rule which
compels it to suffer although no one has suffered by its being
deceived. (17 A.L.R. 891; 5 R.C.L., 559.)
Daniel, in his treatise on Negotiable Instruments, has the
following to say:
Basic Principles and Jurisprudence on the Negotiable Instruments Law 214
In all the cases which hold the drawee absolutely estopped
by acceptance or payment from denying genuineness of the
drawers name, the loss is thrown upon him on the ground of
negligence on his part in accepting or paying, until he has
ascertained the bill to be genuine. But the holder has preceded
him in negligence, by himself not ascertaining the true character
of the paper before he received it, or presented it for acceptance
or payment. And although, as a general rule, the drawee is more
likely to know the drawers handwriting than a stranger is, if he is
in fact deceived as to its genuineness, we do not perceive that he
should suffer more deeply by mistake than a stranger, who, without
knowing the handwriting, has taken the paper without previously
ascertaining its genuineness. And the mistake of the drawee
should always be allowed to be corrected, unless the holder, acting
upon faith and confidence induced by his honoring the draft, would
be placed in a worse position by according such privilege to him.
This view has been applied in a well considered case, and is
imitated in another, and is forcefully presented by Mr. Chitty, who
says it is going a great way to charge the acceptor with knowledge
of his correspondents handwriting, unless some bona fide holder
has purchased the paper on the faith of such an act. Negligence
in making payment under a mistake of fact is not now deemed a
bar to recovery of it, and we do not see why any exception should
be made to the principle, which would apply as well as to release
an obligation not consummated by payment. (Vol. 2, 6
th
edition,
pp. 1537-1539.)
Forged Signature of the drawer differs in treatment than a
forged signature of the indorser
Further, in the case of Samsung Construction
332
, it was stated
that: [i]t is also worth noting that the forged signatures in PNB v.
National City Bank of New York were not of the drawer, but of
indorsers. The same circumstance attends PNB v. Court of
Appeals (25 SCRA 693 [1968]), which was also cited by the Court
of Appeals. It is accepted that a forged signature of the drawer
differs in treatment than a forged signature of the indorser.
The justification for the distinction between forgery of the
signature of the drawer and forgery of an indorsement is
332
Samsung Construction vs. FEBTC [2004], published in The New Philippine
Law Reports Vol. No. XXXVII, No. 8, August 2004, page 31
215
that the drawee is in a position to verify the drawers
signature by comparison with one in his hands, but has
ordinarily no opportunity to verify an indorsement.
Thus, a drawee bank is generally liable to his depositor in
paying a check which bears either a forgery of the drawers
signature or a forged indorsement. But the bank may, as a
general rule, recover back the money which it has paid on a
check bearing a forged indorsement, whereas it has not
this right to the same extent with reference to a check
bearing a forgery of the drawers signature.
2011 Bar Question:
Forgery of bills of exchange may be subdivided into, a)
forgery of an indorsement on the bill and b) forgery of
the drawers signature, which may either be with
acceptance by the drawee, or
A. with acceptance but the bill is paid by the drawee.
B. without acceptance but the bill is paid by the drawer.
C. without acceptance but the bill is paid by the drawee.
D. with acceptance but the bill is paid by the drawer.
Forged signature of the Payee; effects thereof
In the case of Westmont Bank vs. Ong
333
, it was held that:
[s]ince the signature of the payee, in the case at bar, was forged
to make it appear that he had made an endorsement in favor of
the forger, such signature should be deemed as inoperative and
ineffectual. Petitioner, as the collecting bank, grossly erred in
making payment by virtue of said forged signature. The payee,
herein respondent, should therefore be allowed to recover from
the collecting bank.
The collecting bank is liable to the payee and must bear the
loss because of its legal duty to ascertain that the payees
endorsement was genuine before cashing the check. As a general
rule, a bank or corporation who has obtained possession of a
333
G.R. No. 132560, January 30, 2002, published in Philippine Law Report
Vol. XXX, No. 1, January 2002, page 9
Basic Principles and Jurisprudence on the Negotiable Instruments Law 216
check upon an unauthorized or forged indorsement of the payees
signature and who collects the amount of the check from the
drawee, is liable for the proceeds thereof to the payee or other
owner, notwithstanding that the amount has been paid to the
person from whom the check was obtained.
The theory of the rule is that the possession of the check
on the forged or unauthorized indorsement is wrongful, and when
the money had been collected on the check, the bank or other
person or corporation can be held as for moneys had and received,
and the proceeds are held for the rightful owners who may recover
them. The position of the bank taking the check on the forged or
unauthorized indorsement is the same as if had taken the check
and collected the money without indorsement at all and the act of
the bank amount to conversion of the check.
2011 Bar Question:
X found a check on the street, drawn by Y against ABC
Bank, with Z as payee. X forged Zs signature as an
indorser, then indorsed it personally and delivered it to
DEF Bank. The latter, in turn, indorsed it to ABC Bank
which charged it to the Ys account. Y later sued ABC
Bank but it set up the forgery as its defense. Will it
prosper?
A. No, since the payees signature has been forged.
B. No, since Ys remedy is to run after the forger, X.
C. Yes, since forgery is only a personal defense.
D. Yes, since ABC Bank is bound to know the signature
of Y, its client.
Doctrines Laid down in the case of Philippine National Bank
v. The National City Bank of New York on the Rule on Forgery
1. That where a check is accepted or certified by the bank
on which it is drawn, the bank is estopped to deny the
genuineness of the drawers signature and his capacity
to issue the instrument;
2. That if a drawee bank pays a forged check which was
previously accepted or certified by the said bank it cannot
217
recover from a holder who did not participate in the
forgery and did not have actual notice thereof;
3. That the payment of a check does not include or imply
its acceptance in the sense that this would be used in
section 62 of the Negotiable Instruments Law;
4. That in case of the payment of a forged check, even
without former acceptance, the drawee cannot recover
from a holder in due course not chargeable with any act
of negligence or disregard of duty;
5. That to entitle the holder of a forged check to retain the
money obtained thereon, there must be a showing that
the duty to ascertain the genuineness of the signature
rested entirely upon the drawee, and that the constructive
negligence of such drawee in failing to detect the forgery
was not affected by any disregard of duty on the part of
the holder, or by failure of any precaution which, from
his implied assertion in presenting the check as a
sufficient voucher, the drawee had the right to believe
he had taken;
6. That in the absence of actual fault on the part of the
drawee, his constructive fault in not knowing the
signature of the drawer and detecting the forgery will
not preclude his recovery from the one who took the
check under circumstances of suspicion and without
proper precaution, or whose conduct has been such as
to mislead the drawee or induce him to pay the check
without the usual scrutiny or other precautions against
mistake or fraud;
7. That one who purchases a check or draft is bound to
satisfy himself that the paper is genuine, and that by
indorsing it or presenting it for payment or putting it into
circulation before presentation he impliedly asserts that
he performed his duty;
8. That while the foregoing rule, chosen from a welter of
decisions on the use as the correct one, will not hinder
the circulation of two recognized mediums of exchange
by which the great bulk of business is carried on, namely,
drafts and checks, on the other hand, it will encourage
and demand prudent business methods on the part of
those receiving such mediums of exchange;
Basic Principles and Jurisprudence on the Negotiable Instruments Law 218
9. That it being a matter of record in the present case, that
the appellee bank in no more chargeable with the
knowledge of the drawers signature that the appellant
is, as the drawer was as much the customer of the
appellant as of the appellee, the presumption that the
drawee bank is bound to know more than any indorser
the signature of its depositor does not hold;
10. That according to the undisputed facts of the case the
appellant in purchasing the papers in question from
unknown persons without making any inquiry as to the
identity and authority of the said persons negotiating and
indorsing them, acted negligently and contributed to the
appellees constructive negligence in failing to detect the
forgery;
11. That under the circumstances of the case, if the appellee
bank is allowed to recover, there will be no change of
position as to the injury or prejudice of the appellant.
II. CONSIDERATION
Sec. 24. Presumption of consideration. - Every negotiable
instrument is deemed prima facie to have been issued for a
valuable consideration; and every person whose signature
appears thereon to have become a party thereto for value.
Notes:
By consideration, is meant a benefit or gain of some kind to
the party making the promise, or a loss or injury of some kind to
the party to whom it is made. By the common law a promise
made without consideration was invalid, and in order to enforce
any contract it was necessary to aver and prove a consideration.
(Daniel, Elements of the Law of Negotiable Instruments, page
56)
What is the rule on presumption of consideration in
negotiable instruments?
Every negotiable instrument is deemed prima facie to have
been issued for a valuable consideration; and every person whose
signature appears thereon to have become a party thereto for
value. (Sec. 24, Negotiable Instruments Law)
219
However, [t]he presumption that a negotiable instrument is
issued for a valuable consideration is only prima facie. It can be
rebutted by proof to the contrary. (Bank of the Philippine Islands
vs. Laguna Coconut Oil Co., et al, 48 Phil 5, cited in Pineda vs.
Dela Rama, G.R. No. L-31831, April 28, 1983, [Gutierrez, Jr., J.:])
If the Act establishes this presumption for the case where
there might be doubt with respect to the existence of a valuable
consideration, in order to avoid taking of evidence in the matter,
when the consideration appears from the instrument itself by the
expression of the value, the introduction of evidence is entirely
unnecessary and improper. (concurring opinion, Justice Torres,
in the case of Maulini, et al vs. Serrano, December 16, 1914.)
Moreover, it has been stated that: [t]he omission of the
words for value received does not weaken the presumption of
valuable consideration. (Brannan, page 32, citing McLeod v.
Hunter, 29 Misc. R. 558, 61 N.Y. Supp. 73.)
Burden of proof is shifted to the party alleging the absence
of consideration
Where the maker pleads want of consideration, plaintiff
(payee) may recover in the absence of evidence in support of the
plea. But if defendant gives evidence tending to show want of
consideration the burden is on the plaintiff to show by a fair of
preponderance of evidence upon the whole case that there was
consideration. (Brannan, page 31, citing Bringman v. Van Glahn,
71 App. Div. 537, 75 N.Y. Supp. 845, semble.)
In Cely Yang vs. Court of Appeals, et al
334
, with respect to
consideration, Section 24 of the Negotiable Instruments Law
created a presumption that every party to an instrument acquired
the same for a consideration or for value. Thus, the law itself
creates a presumption in Davids favor that he gave valuable
consideration for the checks in question. In alleging otherwise,
the petitioner has the onus to prove that David got hold of the
checks absent said consideration. In other words, the petitioner
must present convincing evidence to overthrow the presumption.
334
G.R. No. 138074, August 15, 2003, published in The New Philippine Law
Report, Vol. XXXI, No.8, August 2003, page 17, citations omitted
Basic Principles and Jurisprudence on the Negotiable Instruments Law 220
Negotiable Instrument, Issued for an Illegal Consideration
The Supreme Court held in the case of Pineda vs. Dela
Rama
335
, [w]hether or not the supposed cash advance reached
the destination is of no moment. The consideration for the
promissory noteto influence public officers in the performance
of their dutiesis contrary to law and public policy. The promissory
note is void ab initio and no cause of action for the collection
cases can arise from it.
Sec. 25. Value, what constitutes. Value is any consideration
sufficient to support a simple contract. An antecedent or pre-
existing debt constitutes value; and is deemed such whether
the instrument is payable on demand or at a future time.
Notes:
What is value?
Value is any consideration sufficient to support a simple
contract.
A promise to forbear suing on an antecedent debt is value.
(Brannan, page 34, citing Milius v. Kauffmann, 104 App. Div. 442,
93 N.Y. Supp. 669.)
The surrender of a non-negotiable note is sufficient
consideration for a negotiable note. (Ibid, citing Petrie v. Miller,
57 App. Div. 17, 67 N.Y. Supp. 1042, affirmed 173 N.Y. 596 without
report.)
How about pre-existing debts? Are they considered as value?
Yes. An antecedent or pre-existing debt constitutes value;
and is deemed such whether the instrument is payable on demand
or at a fixed or at a future time. (Sec. 25, Negotiable Instruments
Law)
According to section 25 of the same Act, value is any
consideration sufficient to support a simple contract, and so broad
is the scope the law gives to the meaning of value in this kind of
instruments that it considers as such a prior of preexistent debt,
335
G.R. No. L-31831 April 28, 1983
221
whether the instrument be payable on demand or at some future
date. (concurring opinion, Justice Torres, in the case of Maulini,
et al vs. Serrano, December 16, 1914.)
Payment or part payment of a pre-existing debt is value.
(Brannan, page 33, citing Bigelow Co. v. Automatic Gas Co., 56
Misc. R. 389, 107 N.Y. Supp. 894; other citations omitted)
An antecedent or pre-existing debt is value, even though
the instrument is transferred merely as collateral security for such
debt. (Brannan, page 33, citing Brewster v. Sharder, 26 Misc. R.
480, 57 N.Y. Supp. 606, S.C. sec. 112; other citations omitted)
There is no doubt that a pre-existing debt of the drawer,
maker, or acceptor is a valid consideration for his drawing or
accepting a bill or executing a note, and indeed is as frequently
the consideration of negotiable paper as a debt contracted at the
time,
336
and it is equally as valid and sufficient consideration for
the indorsement and transfer to the creditor of the bill or note of a
third party which is in his hands. (Daniel, Elements of the Law of
Negotiable Instruments, page 61)
What includes a valuable consideration
Valuable consideration may in general terms, be said to
consist either in some right, interest, profit or benefit accruing to
the party who makes the contract, or some forbearance, detriment,
loss or some responsibility, to act, or labor, or service given,
suffered or undertaken by the other aide. Simply defined, valuable
consideration means an obligation to give, to do, or not to do in
favor of the party who makes the contract, such as the maker or
indorser.
337
(Ty vs. People of the Philippines, G.R. No. 149275,
September 27, 2004)
In an exchange of checks each check is a consideration for
the other; each is an independent obligation and not conditional
on the payment of the other. Hence, one who bona fide gives his
check for that of a third person without notice of the illegality of
such check is not bound to stop payment of his own check upon
336
Swift v. Tyson, 16 Pet. 1; Townsley v. Sumrall, 2 Pet. 170; McIntyre v.
Yates, 104 Ill. 500
337
Agbayani, Aguedo, Commentaries and Jurisprudence on the Commercial
Laws of the Philippines, 1992 Edition, p. 235; Citations omitted
Basic Principles and Jurisprudence on the Negotiable Instruments Law 222
receiving notice of the illegality of the check exchanged for his,
and he may recover against the drawer of such check. (Brannan,
page 33, citing Matlock v. Scheuerman, 51 Oregon 49, 93 Pac.
823, 17 L.R.A. (N.S.) 747, S.C. secs. 53, 56, 186.)
Consideration sufficient, even if it benefited a third person
The case of Bridges vs. Vann, et al,
338
tells us that it is no
defense to an action on a promissory note for the maker to say
that there was no consideration which was beneficial to him
personally; it is sufficient if the consideration was a benefit
conferred upon a third person, or a detriment suffered by the
promise, at the instance of the promissory. It is enough if the
obligee foregoes some right or privilege or suffers some detriment
and the release and extinguishment of the original obligation of
George Vann, Sr., for that of appellants meets the requirement.
Appellee accepted one debtor in place of another and gave up a
valid, subsisting obligation for the note executed by the appellants.
This, of itself, is sufficient consideration for the new notes. (supra)
Consequently, a sale of goods to the maker of a note is a
consideration for the indorsement of a third person before the
delivery of the note. (Brannan, page 32, citing, Mohlman v.
McKane, 60 App. Div. 546, 69 N.Y. Supp. 1046.)
Consideration must be absolute
In one case, a bank receiving a certificate of deposit and
crediting the same to the depositor, does not give value where
the credit was not absolute but conditional upon the collection of
the certificate. (Brannan, page 32, citing Commercial Nat. Bank
v. State Bank, 132 Iowa 706, 109 N.W. 198.)
Effect of absence of valuable consideration
In one case, [d]efendant, by mistake, gave a check to the
payee who indorsed it to a plaintiff as a loan. Held, that plaintiff
was not a holder in due course, having given no value. (Brannan,
page 33, citing Rosenthal v. Parson, 110 N.Y. Supp. 223.)
338
88 Kan 98, 127 Pacific Reporter 604, 9 November 1912; Citations omitted
223
Sec. 26. What constitutes holder for value. - Where value has
at any time been given for the instrument, the holder is
deemed a holder for value in respect to all parties who
become such prior to that time.
2011 Bar Question:
X executed a promissory note with a face value of Php
50,000.00, payable to the order of Y. Y indorsed the note
to Z, to whom Y owed Php 30,000.00. If X has no defense
at all against Y, for how much may Z collect from X?
A. Php 20,000.00, as he is a holder for value to the
extent of the difference between Ys debt and the
value of the note.
B. Php 30,000.00, as he is a holder for value to the
extent of his lien.
C. Php 50,000.00, but with the obligation to hold Php
20,000.00 for Ys benefit.
D. None, as Zs remedy is to run after his debtor, Y.
Sec. 27. When lien on instrument constitutes holder for value.
Where the holder has a lien on the instrument arising either
from contract or by implication of law, he is deemed a holder
for value to the extent of his lien.
Notes:
What constitutes a holder for value?
ANSWER:
A holder for value is a holder which has given anything of
value for the instrument. Thus, where value has at anytime been
given for the instrument, the holder is deemed a holder for value
in respect to all parties who became such prior to that time. (Sec.
26, Negotiable Instruments Law).
Moreover, where the holder has a lien on the instrument
arising either from contract or by implication of law, he is deemed
a holder for value to the extent of his lien. (Sec. 27, Negotiable
Instruments Law)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 224
In the case of Maulini, et al vs. Serrano
339
, Supreme Court
Associate Justice Torres wrote the foregoing concurring opinion,
to wit: [s]ection 26 provides that where value has at any time
been given for the instrument, the holder is deemed a holder for
value, both in respect to the maker and to the defendant indorser,
it is immaterial whether he did so directly to the person who
appears in the promissory note as the maker or whether he
delivered the sum to the defendant in order that this latter might
in turn deliver it to the maker.
Illustrative case:
The holder of a note for $2,000, surrendered it for a payment
of $500, and a new note for $1,500 executed by the maker and
indorsed by defendant. Held, that the holder of the note was a
holder for value. (Brannan, page 35, citing Van Norden Trust Co.
v. L. Rosenburg, 62 Misc. R. 285, 114 N.Y. Supp. 1025.)
2011 Bar Question:
Under the Negotiable Instruments Law, if the holder has
a lien on the instrument which arises either from a
contract or by implication of law, he would be a holder
for value to the extent of
A. his successors interest.
B. his predecessors interest.
C. the lien in his favor.
D. the amount indicated on the instruments face.
Sec. 28. Effect of want of consideration. - Absence or failure
of consideration is a matter of defense as against any person
not a holder in due course; and partial failure of consideration
is a defense pro tanto, whether the failure is an ascertained
and liquidated amount or otherwise.
Notes:
Want, failure, or illegality of consideration
339
supra
225
Prof. Daniel said: [w]hile consideration is presumed in all
cases of negotiable contracts, and the plaintiff can rely upon this
presumption, and thus cast the burden of showing its absence
upon the defendant, the presumption is rebuttable, and when the
want or failure of a sufficient consideration is attacked and
substantial evidence is offered to sustain this defense, the burden
shifts, and it rests with the plaintiff upon the whole case to show
by a preponderance of evidence a consideration sufficient to
support the instrument sued on. The defense of absence or failure
of consideration is good only between immediate parties. The
consideration is presumed to be legal, and, so far as presumptions
and burden of proof are concerned, is governed by the same
principles that apply to want or failure of consideration; but if in
consequence of the illegality of consideration, the instrument is
by law declared void, thus defense avails not only as between
the immediate parties, but also against the bona fide holder for
value. (Elements of the Law of Negotiable Instruments, Daniel,
p. 304)
What is the effect of lack of consideration?
The absence or failure of consideration is a matter of
defense as against any person not a holder in due course; and
partial failure of consideration is a defense pro tanto, whether the
failure is ascertained and liquidated amount or otherwise. (Sec.
28, Negotiable Instruments Law)
The defense that there was fai l ure or absence of
consideration can only be invoked by the drawer if the holder was
a privy to the purpose for which the instrument were issued and
therefore is not a holder in due course. (State Investment House
vs. Court of Appeals and Nora B. Moulic, G.R. No. 101163, January
11, 1993, [Bellosillo, J:])
The drawee by acceptance becomes liable to the payee or
his indorsee, and also to the drawer himself. But the drawer and
acceptor are the immediate parties to the consideration, and if
the acceptance be without consideration, the drawer cannot
recover from the acceptor. The payee holds a different relation;
he is a stranger to the transaction between the drawer and the
acceptor, and is, therefore, in a legal sense a remote party. In a
suit by him against the acceptor, the question of consideration
between the drawer and the acceptor cannot be inquired into.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 226
The payee or holder gives value to the drawer, and if he is ignorant
of the equities between the drawer and the acceptor, he is in the
position of a bona fide indorsee. Hence, it is no defense to a suit
against the acceptor of a draft which has been discounted, and
upon which money has been advanced by the plaintiff, that the
draft was accepted or the accommodation of the drawer.
(Philippine National Bank vs. Bartolome Picornell, et al, G.R. No.
L-18751, 18915, September 26, 1922, [Romualdez, J:], citing 3
R.C.L., pp. 1143, 1144, par, 358.)
It is a well-known rule of law that if the original payee of a
note unenforceable for lack of consideration repurchase the
instrument after transferring it to a holder in due course, the paper
again becomes subject in the payees hands to the same defenses
to which it would have been subject if the paper had never passed
through the hands of a holder in due course. (Fossum vs.
Hermanos, G.R. No. L-19461, March 28, 1923, [Street, J:], citing
Kost vs. Bender, 25 Mich., 515; Shade vs. Hayes, L.R.A. [1915
D], 271; 8 C.J., 470.) The same is true where the instrument is
retransferred to an agent of the payee. (supra, citing Battersbee
vs. Calkins, 128 Mich., 569)
Illustrative Case:
A check was made by A to the order of B to be used to pay
C for withdrawing a charge of rape against B, alleged to be a
false charge, and to prevent his re-arrest on said charge. The
check was indorsed by B to C and by C to the plaintiff, without
consideration, and upon payment being stopped plaintiff sued A.
Held, that A could not defend on the ground of duress which was
not exercised on him, but that he could defend on the ground of
want of consideration. (Brannan, page 36, citing Weiss v. Reiser,
62 Misc. Rep. 292, 114 N.Y. Supp. 983.)
In a suit between remote parties to a bill of exchange, as
the payee or indorsee and the acceptor, to sustain the defense of
no consideration, there must have been no consideration received
by the defendant and plaintiff must have been given no
consideration. (Ibid, citing National Park Bank v. Saitta, 127 App.
Div. 624, 111 N.Y. Supp. 927, S.C. sec. 133.)
227
Partial Want of Consideration
Whenever the defendant is entitled to go into the question
of consideration, he may set up the partial as well as the total
want of consideration.
340
So, where a father gives his son a note partly for services
and partly as a gratuity, the partial want of consideration might be
pleaded as to such portion of the amount as was gratuitous; and
it would be no objection that no distinct amount was fixed upon
as compensation for the services, but it would be for the jury [judge]
to settle what amount was founded on the one consideration, and
what on the other.
341
If a note be given by mistake on settlement
of account for an amount greater than that actually due, there is
want of consideration as to the excess, and between the parties it
may be pleaded.
342
(Daniel, Elements of the Law of Negotiable
Instruments, page 66-67)
Total and Partial failure of consideration
The total failure of consideration is a good defense to a suit
upon a bill or note as the original want of it, and is confined to the
like parties. If the contract is rescinded, the consideration of the
bill or note totally fails, and payment of it cannot be enforced.
343
And a partial failure of the consideration is a good defense
pro tanto.
344
But such part as is alleged to have failed must be
distinct and definite, for only a total failure, or the failure of a specific
and ascertained part, can be availed of by way of defense; and if
it be an unliquidated claim the defendant must resort to his cross-
action.
345
Thus, where bills have been accepted in consideration
of the payee giving the acceptor the lease of a house, and he let
him into possession, but gave no lease, it was held no defense to
an action on the bill, but that there was merely a counter-claim for
damages.
346
So where the bill was given for work to be done, and
the work when done was bungled in part, and not worth the amount
340
McGregor v. Bishop, 14 Ont. 10; Daniel on Negotiable Instruments, 201
341
Parish v. Stone, 14 Pick. 198
342
Seeley v. Engell, 13 N.Y. 542; Claxon v. Demaree, 14 Bush. 173
343
Hacker v. Brown, 81 Mo. 68; Maltz v. Fletcher, 52 Mich. 484
344
Agnew v. Aldem, 84 Ala. 502; Torinus v. Buckham, 29 Minn. 128
345
Elminger v. Drew, 4 McLean, 388; Stobe v. Peake, 16 Vt. 213; Pulsifer v.
Hotchkiss, 12 Conn. 234
346
Moggridge v. Jones, 14 East, 485
Basic Principles and Jurisprudence on the Negotiable Instruments Law 228
of the bill.
347
(Daniel, Elements of the Law of Negotiable
Instruments, page 68)
Partial Illegality of consideration
When the defense is founded on illegality of consideration,
it is to be distinguished from a defense on the ground of a want or
failure of consideration by this peculiaritythat a partial illegality
vitiates the bill or note in too, while the partial want of consideration
only vitiates it pro tanto.
348
(ibid)
Who are parties privy in negotiable instruments
The same rule which admits inquiry into the consideration
of negotiable paper between the original payor and payee extends
to admit such inquiry in any suit between parties between whom
there is privity. That is to pay, between immediate parties to any
contract evidenced by the drawing, accepting, making or indorsing
a bill or note, or may be shown that there was no consideration
(as, that it was for accommodation);
349
or that consideration has
failed, or a set-off may be pleaded; but as between other parties
remote to each other, none of these defenses are admissible. It
becomes important then to determine who are to be regarded as
the immediate parties, or parties between whom there is a privity,
to a negotiable instrument, and who are remote. Among the former
may be classed: (1) The drawer and acceptor of a bill;
350
or (2)
The drawer and payee
351
of a bill as a general rule; (3) The maker
and payee of a note;
352
and (4) The indorser and immediate
indorsee of a bill or note.
353
(ibid, page 69)
Who are remote parties to negotiable instruments
But want of consideration, or the failure thereof, cannot be
pleaded in a suit brought: (1) By an indorsee against the maker of
a note;
354
(2) By an indorsee against a prior, but not his immediate
347
Trickey v. Larne, 6 M & W 278
348
Hanauer v. Doane, 12 Wall. 342; Hyslop v. Clark, 14 Johns 465; Mn Namra
v. Gargett, 68 Mich. 454
349
Murphy v. Keyes, 39 N.Y. Sup. Ct. 18; Wilson v. Ellsworth, 25 Nebr. 246
350
Thomas v. Thomas, 7 Wis. 476; Spurgeon v. McPheeters, 42 Ind. 527
351
McCulloch v. Hoffman, 10 Hun, 133; Spurgeon v. McPheeters, 42 Ind.
527
352
Kennedy v. Goodman, 14 Nebr. 585; Flaun v. Wallace, 9 S.E. 571
353
Barnett v. Offerman, 7 Watts, 130; Klein v. Keyes, 17 Mo. 326; Platt v.
Snipe, 43 Ark. 23
354
Price v. Keen, 40 N.J.L 332; Brunes v. Scott, 117 U.S. 582
229
indorser;
355
(3) By the indorsee against the acceptor of a bill, as a
general rule.
356
They are regarded as remote parties to each other,
and between such parties two distinct considerations must be
inquired into in order to perfect a defense against the holder: (1)
The consideration which the defendant received for his liability;
and (2) That which the plaintiff gave for his title.
357
And if any
immediate holder gave value for the instrument, that intervening
consideration will sustain the plaintiffs title.
358
(ibid)
Want, Failure, or Fraudulency of consideration
If the original consideration were tainted with fraud or
illegality, or has failed in whole, or in part, and the bill or note has
passed into the hands of a bona fide holder for value without notice,
yet if returned for a valuable consideration to the payee who is a
privy to the original consideration, he could stand upon no better
footing than if the instrument had remained in his hands.
359
(ibid)
Defenses between privy parties
1. That the bill or note has been lost or stolen;
360
2. Was executed under duress;
361
3. Under fraudulent misrepresentations;
362
4. Fraudulent consideration;
363
5. Illegal consideration;
364
6. Fraudulently obtained from an immediate holder;
365
7. Been in any way the subject of fraud or felony;
366
355
Ethridge v. Gallagher, 55 Miss. 464; 1 Parsons on Notes and Bills, 176
356
Flower v. Sadler, 10 Q.B. Div. 572
357
Laflin & Rand Power Co. v. Sinsheimer, 48 Md. 411; Hoffman & Co. v.
Bank of Milwaukee, 12 Wall. 181
358
United States v. Bank of Metropolis, 15 Pwt. 393; Swift v. Tyson, 16 Pet.
1; Goetz v. Bank of Kansas City, 119 U.S. 556
359
Swayner v. Wiswell, 9 Allen, 42; Kost v. Bender, 25 Mich. 516; Cline v.
Templeton, 78 Ky. 550
360
Mills v. Barner, 1 M & W, 425
361
Clark v. Peace, 41 N.H. 414; Griffith v. Sitgreaves, 90 Pa. St. 161
362
Vathir v. Zane, 6 Gratt. 246; Hutchinson v. Bogg, 28 Pa. St. 294
363
Rogers v. Morton, 12 Wend. 484
364
Shirley v. Howard, 53 Ill. 455; Holden v. Cosgrove, 12 Gray, 216
365
1 Parsons on Notes and Bills, 188
366
Holden v. Cosgrove, 12 Gray, 216; Western Bank v. Mills, 7 Cush. 546
Basic Principles and Jurisprudence on the Negotiable Instruments Law 230
How illegality may be purgedrenewal of instrument
If the consideration of the original bill or note be illegal, a
renewal of it will be open to the same objection and defense;
367
and if the original instrument was obtained by fraud, a renewal of
it by the original parties without knowledge of the fraud, would
stand in the same footing.
368
But if at the time the renewal was
executed the parties signing knew of the fraud in the original,
they will be regarded as purging the contract of the fraud, and
cannot then plead it.
369
So if the maker of a note held by an
indorsee who knew that the consideration between the maker
and the payee had failed when he took it, executes to him a new
note, it had been held to be a waiver of the defense, and the
payee of the new note can recover.
370
(ibid, page 71-72)
Partial Illegality of the instrument
If a note or bill be given for a consideration which is in part
illegal, a new note for the same, or in renewal of the first, is equally
void.
371
But a new note for that part of the consideration which is
legal is good and valid. And if several new notes are given for the
old one, some of the new one may be taken for the legal part, and
so be valid, especially if they are only adequate to their part or if
the deduction be otherwise favored by circumstances.
372
(Ibid,
page 72)
Sec. 29. Liability of accommodation party. - An
accommodation party is one who has signed the instrument
as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to
some other person. Such a person is liable on the instrument
to a holder for value, notwithstanding such holder, at the time
of taking the instrument, knew him to be only an
accommodation party.
Notes:
367
Schutt v. Evans, 109 Pa. St. 627; Wegner v. Biering, 65 Tex. 511; Sawyer
v. Wiswell, 9 Allen, 39
368
Sawyer v. Wiswell, 9 Allen, 39
369
Sawyer v. Wiswell, 9 Allen, 39; Calvin v. Sterrett, 41 Kan, 220
370
Gil v. Morris, 11 Heisk, 614; Keyes v. Mann, 63 Iowa, 560
371
Chapman v. Black, 2 B & Ald. 588; Seeligson v. Lewis, 65 Tex. 115; Preston
v. Jackson, 2 Stark. 237
372
Daniel on Negotiable Instruments, 206; Crookshank v. Rose, 5 Car. & P.
19
231
Who is an accommodation party?
An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name
to some other person. (Sec. 29, Negotiable Instruments Law)
In lending his name to the accommodated party, the
accommodation party is in effect a surety for the latter. He lends
his name to enable the accommodated party to obtain credit or to
raise money. He receives no part of the consideration for the
instrument but assumes liability to the other parties thereto
because he wants to accommodate another. (Philippine Bank of
Commerce vs. Aruego, G.R. No. L-25836-37, January 31, 1981,
[Fernandez, J.]; Ang vs. Associated Bank, G.R. No. 146511,
September 5, 2007, 532 SCRA 244, 272-273, cited in Claude P.
Bautista vs. Auto Plus Traders, Inc., G.R. No. 166405, August 6,
2008, [Quisumbing, J:])
In accommodati on transacti ons recogni zed by the
Negotiable Instruments Law, an accommodation party lends his
credit to the accommodated party, by issuing or indorsing a check
which is held by a payee or indorsee as a holder in due course,
who gave full value therefor to the accommodated party. The
latter, in other words, receives or realizes full value which the
accommodated party then must repay to the accommodating party,
unless of course the accommodating party intended to make a
donation to the accommodated party. But the accommodating
party is bound on the check to the holder in due course who
necessarily a third party and is not the accommodated party.
Having issued or indorsed the check, the accommodating party
has warranted to the holder in due course that he will pay the
same according to its tenor. (Travel-On, Inc. vs. Court of Appeals
and Arturo Miranda, G.R. No. L-56169, June 26, 1992, [Feliciano,
J:])
Nature of the relationship between the accommodation party
and the accommodated party
[T]he relation between an accommodation party and the
accommodated party is one of principal and suretythe
accommodation party being the surety.
373
As such, he is deemed
an original promissors and debtor from the beginning,
374
he is
Basic Principles and Jurisprudence on the Negotiable Instruments Law 232
considered in law as the same party as the debtor in relation to
whatever is adjudged touching the obligation of the latter since
their liabilities are interwoven as to be inseparable.
375
Although a
contract of suretyship is in essence accessory or collateral to a
valid principal obligation, the suretys liability to the creditor is
immediate, primary and absolute; he is directly and equally bound
with the principal.
376
As an equivalent of a regular party to the
undertaking, a surety becomes liable to the debt and duty of the
principal obligor even without possessing a direct or personal
interest in the obligations nor does he receive any benefit
therefrom.
377
(Eusebio Gonzales vs. Philippine Commercial and
International Bank, et. al., G.R. No. 180257, February 23, 2011,
[Velasco, J.:])
An accommodation bill or note is not considered a real
security, but a mere blank, until it has been negotiated, and it
then becomes binding upon all of the accommodation indorsers
in like manner and to the like effect as if they were successive
indorsers,
378
but until it has been negotiated any party may
withdraw his indorsement, acceptance, or other liability upon it,
and rescind his engagement;
379
and that right is not impaired by
the circumstance that he may be indemnified by an assignment,
or other security.
380
(Daniel, Elements on the Law of Negotiable
Instruments, page 59)
373
Garcia v. Llamas, supra at 305; Agro Conglomerates, Inc. v. Court of
Appeals, 401 Phil. 644, 654- 655 (2000); Spouses Gardose v. Tarroza,
supra at 807; Caneda, Jr. v. Court of Appeals, G.R. No. 81322, February
5, 1990, 181 SCRA
762, 772; Crisologo-Jose v. Court of Appeals, supra at 598; Prudencio v.
Court of Appeals, 227 Phil. 7, 12 (1986); and Philippine Bank of Commerce
v. Aruego, supra at 539
374
Garcia v. Llamas, supra at 305
375
Trade & Investment Development Corp. v. Roblett Industrial Construction
Corp., G.R. No. 139290, November 11, 2005, 474 SCRA 510, 531
376
International Finance Corporation v. Imperial Textile Mills, Inc., G.R. No.
160324, November 15, 2005, 475 SCRA 149, 160; Trade & Investment
Development Corp. v. Roblett Industrial Construction Corp., id. at 531;
Garcia v. Llamas, supra at 305; Agro Conglomerates, Inc. v. Court of
Appeals, supra at 655; and Philippine Bank of Commerce v. Aruego, supra
at 540
377
International Finance Corporation v. Imperial Textile Mills, Inc., id. at 160-
161 and Trade & Investment Development Corp. v. Roblett Industrial
Construction Corp., id. at 531
278
Withworth v. Adams, 5 Rand. 342; May v. Boisseau, 8 Leigh, 164
379
Second Nat. Bank v. Howe, 40 Minn, 390
380
May v. Boisseau, 8 Leight, 164
233
To whom does the accommodation refer to?
The accommodation to which reference is made in the
section quoted is not the person who takes the notethat is, the
payee or indorsee, but one to the maker or indorser of the note.
(Maulini, et al vs. Serrano, G.R. No. L-8844, December 16, 1914,
[Moreland, J.])
What are the requisites of an accommodation party?
An accommodation party is one who meets all the three
requisites:
(a) He must be a Party to the instrument, signing as a maker,
drawer, acceptor, or indorser;
(b) He must not receive value therefor; and
(c) And he must sign for the purpose of lending his name or
credit to some other person. (Claude P. Bautista vs. Auto
Plus Traders, Inc., G.R. No. 166405, August 6, 2008,
[Quisumbing, J.]; Ernestina Crisologo-Jose vs. Court of
Appeals, G.R. No. 80599, September 15, 1989 )
Without receiving value therefor.
Based on the foregoing requisites, it is not a valid defense
that the accommodation party did not receive any valuable
consideration when he executed the instrument. From the
standpoint of contract law, he differs from the ordinary concept of
a debtor therein in the sense that he has not received any valuable
consideration for the instrument he signs. Nevertheless, he is
liable to a holder for value as if the contract was not for
accommodation
381
in whatever capacity such accommodation
party signed the instrument, whether primary or secondarily. Thus,
it has been held that in lending his name to the accommodated
party, the accommodation party is in effect a surety for the latter.
382
(Ernestina Crisologo-Jose vs. Court of Appeals, et al, G.R. No.
80599, September 15, 1989, [Regalado, J.])
As to whether or not the defendant is an accommodation
party, it should be taken into account that by putting his signature
381
Ang Tiong vs. Ting, et al., 22 SCRA 713 (1968)
382
Philippine Bank of Commerce vs. Aruego, 102 SCRA 530 (1981)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 234
to the note, he lent his name, not to the creditor, but to those who
signed with him placing himself with respect to the creditor in the
same position and with the same liability as the said signers. It
should be noted that the phrase without receiving value
therefor, as used in Section 29 of the foresaid Act, means
without receiving value by virtue of the instrument and not,
as it apparently is supposed to mean, without receiving payment
for lending his name. If, as in the instant case, a sum of money
was received by virtue of the note, it is immaterial, so far as the
creditor is concerned, whether one of the signers has, or has not,
received anything in payment of the use of his name. In reality
the legal situation of the defendant in this case may properly be
regarded as that of a joint surety rather than of an accommodation
party. The defendant, as a joint surety, may, upon the maturity of
the note, pay the debt, demand the collateral security and dispose
of it to his benefit; but there is no proof whatever that this was
done. As to the plaintiff, he is the holder for value, under the
phrase of said Section 29, for he had paid the money to the signers
at the time the note was executed and delivered to him. (R.N.
Clark vs. George C. Sellner, G.R. No. L-16477, November 22,
1921, [Romualdez, J:]) (emphasis supplied)
The phrase without receiving value therefor used in Sec.
29 of the NIL means without receiving payment value by virtue of
the instrument and not as it is apparently supposed to mean,
without receiving payment for lending his name.
383
Stated
differently, when a third person advances the face value of the
note to the accommodated party at the time of its creation, the
consideration for the note as regards its makers is the money
advanced to the accommodated party. It is enough that value
was given for the note at the time of its creation.
384
(Tomas Ang
vs. Associated Bank and Antonio Ang Eng Liong, G.R. No. 146511,
September 5, 2007, [Azcuna, J.])
In the words of Joseph Doddridge Brannan: the words
value therefor in section 29 mean value for the negotiable
instrument, not value for the use of the name, and that one may
be an accommodating party although he is paid nothing for the
383
Clark v. Sellner, 42 Phil. 384, 386 (1921)
384
Caneda, Jr. v. Court of Appeals, supra at 772
235
use of his name. (citing Morris County Brick Co. v. Austin (N.J.)
75 Atl. 550.)
385
The Rule on Accommodation party does not apply to
corporations
The aforequoted provision of the Negotiable Instruments
Law which holds an accommodation party liable on the instrument
to a holder for value, although such holder at the time of taking
the instrument knew him to be only an accommodation party, does
not include nor apply to corporations which are accommodation
parties.
386
This is because the issue or indorsement of negotiable
paper by a corporation without consideration and for the
accommodation of another is ultra vires.
387
Hence, one who has
taken the instrument with knowledge of the accommodation nature
thereof cannot recover against a corporation where it is only an
accommodation party. If the form of the instrument, or the nature
of the transaction, is such as to charge the indorsee with
knowledge that the issue or indorsement of the instrument by the
corporation is for the accommodation of another, he cannot
recover against the corporation thereon.
388
(Ernestina Crisologo-
Jose vs. Court of Appeals, et al, G.R. No. 80599, September 15,
1989, [Regalado, J.])
In other relevant and older cases, it was held that: a
manufacturing corporation has no power to bind itself as an
accommodation party. Therefore in such a case the plaintiff must
show both that he paid value and also that he did not know of the
accommodation character of the instrument. (Brannan, page 38,
citing Nat. Bank v. Snyder Co., 117 App. Div. 370, 102 N.Y. Supp..
478; Bradley Engineering Co., v. Heyburn (Wash.), 106 Pac. 170,
S.C. sec. 119; Cf. In re Troy & Cohoes Shirt Co., infra, sec. 56.)
The possession and negotiation by the maker of a note with the
indorsement of the payee imports that the indorsement was for
accommodation, and neither sec. 29 nor sec. 22 give power to a
corporation to make accommodation indorsements. (Ibid, citing
Oppenheim v. Simon Reigel Cigar Co., 90 N.Y. Supp. 355.)
385
Cited in the Negotiable Instruments Law Annotated, Joseph Doddridge
Brannan, second edition, 1911, page 38
386
11 C.J.S. 309
387
14A C.J. 732
388
Oppenheim vs. Simon Reigel Cigar Co., 90 N.Y.S. 355, cited in 11 C.J.S.
309
Basic Principles and Jurisprudence on the Negotiable Instruments Law 236
Exception
By way of exception, an officer or agent of a corporation
shall have the power to execute or indorse a negotiable paper in
the name of the corporation for the accommodation of a third
person only if specifically authorized to do so.
389
Corollarily,
corporate officers, such as the president and vice-president, have
no power to execute for mere accommodation a negotiable
instrument of the corporation for their individual debts or
transactions arising from or in relation to matter in which the
corporation has no legitimate concern. Since such accommodation
paper cannot thus be enforced against the corporation, especially
since it is not involved in any aspect of the corporate business or
operations, the inescapable conclusion in law and in logic is that
the signatories thereof shall be personally liable therefor, as well
as the consequences arising from their acts in connection
therewith. x x x The fact that for lack of capacity the corporation is
not bound by an accommodation paper does not thereby absolve,
but should render personally liable, the signatories of said
instrument where the facts show that the accommodation involved
was for their personal account, undertaking and the creditor was
aware thereof. (supra)
Does the accommodation party have any liability?
Yes, such a person is liable on the instrument to a holder
for value, notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party. (Sec.
29, Negotiable Instruments Law)
To paraphrase, the accommodation party is liable to a holder
for value as if the contract was not for an accommodation. It is
not a valid defense that the accommodation party did not receive
any valuable consideration when he executed the instrument. Nor
is it correct to say that the holder for value is not a holder in due
course merely because at the time he acquired the instrument,
he knew that the indorser was only an accommodation party.
390
389
In re Wrentham Mfg. Co., 2 Low. 119; Hall vs. Auburn Turnp. Co., 27 Cal.
255, cited in 14A C.J. 461
390
Beutels Brannan Negotiable Instruments Law, 7th ed., pp. 568-569; Stuart
del Rosario, Treatise on Negotiable Instruments, 1961 ed., 165, 242-243;
Alvendia, The Negotiable Instruments Law, pp 55, 57-58; National Bank
vs. Maza, et al, 48 Phil. 210.
237
(Ang Tiong vs. Lorenzo Ting, G.R. No. L-26767, February 22, 1968,
[Castro, J:])
Illustrative Case:
Philippine Bank of Commerce vs. Jose M. Aruego
G.R. Nos. L-25836-37, January 31, 1981
FERNANDEZ, J.:
FACTS: On December 1, 1959, the Philippine Bank of
Commerce instituted an action against Jose M. Aruego
Civil Case No. 42066 for the recovery of the total sum
of about P35,000.00 with daily interest thereon from
November 17, 1959 until fully paid and commission
equivalent to 3/8% for every thirty (30) days or fraction
thereof plus attorneys fees equivalent to 10% of the
total amount due and costs. The complaint filed by the
Philippine Bank of Commerce contains Twenty-Two
(22) causes of action referring to Twenty-Two (22)
transactions entered into by the said Bank and Aruego
on different dates covering the period from August 28,
1950 to March 14, 1951. The sum sought to be
recovered represents the cost of the printing of World
Current Events, a periodical published by the
defendant. To facilitate the payment of the printing the
defendant obtained a credit accommodation from the
plaintiff. Thus, for every printing of the World Current
Events, the printer Encal Press and Photo Engraving,
collected the cost of printing by drawing a draft against
the plaintiff, said draft being sent later to the defendant
for acceptance. As an added security for the payment
of the amounts advanced to Encal Press and Photo
Engraving, the plaintiff bank also required the
defendant Aruego to execute a trust receipt in favor of
said bank wherein said defendant undertook to hold in
trust for plaintiff the periodicals and to sell the same
with the promise to turn over to the plaintiff the proceeds
of the sale of said publication to answer for the payment
of all obligations arising from the draft.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 238
Aruego contends that he signed the bills of exchange
not as principal obligor, but as accommodation or
additional party obligor, to add to the security of said
plaintiff bank. His reason is that unlike real bills of
exchange, where payment of the face value is
advanced to the drawer only upon acceptance of the
same by the drawee, in the case in question, payment
for the supposed bill of exchange were made before
acceptance; so that in effect, although these documents
are labeled bills of exchange, legally they are not bills
of exchange but mere i nstruments evi denci ng
indebtedness of the drawee of who received the face
value thereof, with the defendant as only a additional
security of the same.
ISSUE: Is his contention tenable?
RULING: Defendant contends that he signed the drafts only as
an accommodation party and as such, should be made
liable only after showing that the drawer is incapable
of paying. This contention is without merit.
An accommodation party is one who has signed the
instrument as maker, drawer, indorser, without receiving
value therefor and for the purpose of lending his name
to some other person. Such person is liable on the
instrument to a holder for value, notwithstanding such
holder, at the time of the taking of the instrument knew
him to be only an accommodation party. In lending his
name to the accommodated party, the accommodation
party is in effect a surety for the latter. He lends his
name to enable the accommodated party to obtain
credit or to raise money. He receives no part of the
consideration for the instrument but assumes liability
to the other parties thereto because he wants to
accommodate another. In the instant case, the
defendant signed as a drawee/acceptor. Under the
Negotiable Instrument Law, a drawee is primarily liable.
Thus, if the defendant who is a lawyer, he should not
have signed as an acceptor/drawee. In doing so, he
became primarily and personally liable for the drafts.
239
Prudencio vs. Court of Appeals
391
, held that: In the case
of Philippine Bank of Commerce v. Aruego (102 SCRA 530, 539),
we held that in lending his name to the accommodated party,
the accommodation party is in effect a surety However, unlike
in a contract of suretyship, the liability of the accommodation party
remains not only primary but also unconditional to a holder for
value such that even if the accommodated party received an
extension of the period for payment without the consent of the
accommodation party, the latter is still liable for the whole
obligation and such extension does not release him because as
far as the holder for value is concerned, he is a solidary co-debtor.
Expoundi ng on the nature of the l i abi l i ty of an
accommodation party under the aforequoted section, we ruled in
Ang Tiong v. Ting (22 SCRA 713, 716):
[3.] That the appellant, again assuming him to be an
accommodation indorser, may obtain security from the
maker to protect himself against the danger of insolvency
of the latter, cannot in any manner affect his liability to the
appellee, as the said remedy is a matter of concern
exclusively between the accommodation indorser and
accommodated party. So that the appellant stands only as
a surety in relation to the maker, granting this to be true for
the sake of argument, is immaterial to the claim of the
appellee, and does not a whit diminish nor defeat the rights
of the latter who is a holder for value. The liability of the
appellant remains primary and unconditional. To sanction
the appellants theory is to give unwarranted legal
recognition to the patent absurdity of a situation where an
indorser, when sued on an instrument by a holder in due
course and for value, can escape liability on his indorsement
by the convenient expedient of interposing the defense that
he is a mere accommodation indorser.
There is, therefore, no question that as accommodation
makers, petitioners would be primarily and unconditionally liable
on the promissory note to a holder for value, regardless of whether
they stand as sureties or solidary co-debtors since such distinction
would be entirely immaterial and inconsequential as far as a holder
391
G.R. No. L-34539, July 14, 1986.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 240
for value is concerned. Consequently, the petitioners cannot claim
to have been released from their obligation simply because the
time of payment of such obligation was temporarily deferred by
PNB without their knowledge and consent. There has to be
another basis for their claim of having been freed from their
obligation. The question which should be resolved in this instant
petition, therefore, is whether or not PNB can be considered a
holder for value under Section 29 of the Negotiable Instruments
Law such that the petitioners must be necessarily barred from
setting up the defense of want of consideration or some other
personal defenses which may be set up against a party who is
not a holder in due course.
A holder for value under Section 29 of the Negotiable
Instruments Law is one who must meet all the requirements of a
holder in due course under Section 52 of the same law expect
notice of want of consideration. (Agbayani, Commercial Law of
the Philippines, 1964, p.208). If he does not qualify as a holder in
due course then he holds the instrument subject to the same
defenses as if it were non-negotiable. (Section 58, Negotiable
Instruments Law).
Problem:
Mr. B, in his capacity as President and Presiding Officer
of BB Bus Lines, Inc., purchased various spare tires from AA
Auto Supply, and issued two (2) post-dated checks to cover
his purchases. The checks were subsequently dishonored.
Thereafter, two counts of violation of BP 22 were filed
against Mr. B. The criminal cases were eventually dismissed
on a demurrer to evidence filed by Mr. B, but the latter was
directed to pay AA Auto Supply the value of the checks with
interest of 12% per annum and cost. Mr. B through a petition
for review on certiorari with the Supreme Court raised the
issue that he being an officer of the corporation, he should
not be personally and civilly held liable for the value of the
checks.
AA Auto Supply, on the other hand, contends that, Mr.
B, by issuing his check to cover the obligation of the
corporation, became an accommodation party, thus, he is
liable on the instrument to a holder for value.
241
Is Mr. B liable?
ANSWER:
No.
Judicial entities have personalities separate and distinct from
its officers and the persons composing it. Generally, the
stockholders and officers are not personally liable for the
obligations of the corporations except only when the veil of
corporate fiction is being used as a cloak or cover for fraud or
illegality, or to work injustice. These situations, however, do not
exist in this case. The evidence shows that it is BB Bus Lines,
Inc. that has obligations to AA Auto Supply for tires. There is no
agreement that Mr. B shall be held liable for the corporations
obligations in his personal capacity. Hence, he cannot be held
liable for the value of the checks.
Likewise, Mr. B cannot be considered liable as an
accommodation party. An accommodation party lends his name
to enable the accommodated party to obtain credit or to raise
money; he received no part of the consideration for the instrument
but assumes liability to the other party/ies thereto. The first two
elements are present here, however there is insufficient evidence
presented in the instant case to show the presence of the third
requisite. All that the evidence shows is that Mr. B signed the
check corresponding to the spare tires received by BB Bus Lines,
Inc. There is no showing of when petitioner issued the check and
in what capacity. In the absence of concrete evidence it cannot
just be presumed that Mr. B intended to lend his name to the
corporation. Hence, Mr. B cannot be considered as an
accommodation party. (Claude P. Bautista vs. Auto Plus Traders,
Inc., G.R. No. 166405, August 6, 2008, [Quisumbing, J.])
Extent of liability of the Accommodation Party
In Ang vs Associated Bank,
392
, the High Court held that: the
liability of an accommodation party remains not only primary but
also unconditional to a holder for value, even if the accommodated
party received an extension of the period for payment without the
consent of the accommodation party, the latter is still liable for the
392
supra
Basic Principles and Jurisprudence on the Negotiable Instruments Law 242
whole obligation and such extension does not release him
because as far as a holder for value is concerned, he is a solidary
co-debtor.
393
In Clark v. Sellner,
394
this Court held:
x x x The mere delay of the creditor in enforcing the guaranty
has not by any means impaired his action against the
defendant. It should not be lost sight of that the defendants
signature on the note is an assurance to the creditor that
the collateral guaranty will remain good, and that otherwise,
he, the defendant, will be personally responsible for the
payment.
True, that if the creditor had done any act whereby the
guaranty was impaired in its value, or discharged, such an
act would have wholly or partially released the surety, but it
must be born in mind that it is a recognized doctrine in the
matter of suretyship that with respect to the surety, the
creditor is under no obligation to display any diligence in
the enforcement of his rights as a creditor. His mere inaction,
indulgence, passiveness, or delay in proceeding against the
principal debtor, or the fact that he did not enforce the
guaranty or apply on the payment of such funds as were
available, constitute no defense at all for the surety, unless
the contract expressly requires diligence and promptness
on the party of the creditor, which is not the case in the
present action. There is in some decisions a tendency
toward holding that the creditors laches may discharge the
surety, meaning by laches a negligent forbearance. This
theory, however, is not generally accepted and the courts
almost universally consider it essentially inconsistent with
the relation of the parties to the note. (21 R.C.L., 1032-
1034)
395
"
Solidary Accommodation Maker
On principle, a solidary accommodation makerwho made
paymenthas the ri ght to contri buti on, from hi s co-
accommodation maker, in the absence of agreement to the
contrary between them, and subject to conditions imposed by law.
393
Prudencio v. Court of Appeals, supra at 12-13
394
42 Phil. 384 (1921)
395
Id. at 387-388
243
This right springs from an implied promise between the
accommodation makers to share equally the burdens that may
ensue from their having consented to stamp their signatures on
the promissory note.
396
For having lent their signatures to the
principal debtor, they clearly placed themselvesin so far as
payment made by one may create liability on the otherin the
category of mere joint grantors of the former.
397
This is as it should
be. Not one of them benefited by the promissory note. They
stand on the same footing. In misfortune, their burdens should
be equally spread. (Intestate Estate of Victor Sevilla, et al vs.
Francisco Sevilla, G.R. No. L-17845, April 27, 1967, [Sanchez,
J:])
The rule is that: (1) A joint and several accommodation
maker of a negotiable promissory note may demand from the
principal debtor reimbursement for the amount that he had paid
to the payee; and (2) a joint and several accommodation maker
who pays on the promissory note may directly demand
reimbursement from his co-accommodation maker without first
directing his action against the principal debtor provided that (a)
he made the payment by virtue of a judicial demand, or (b) a
principal debtor is insolvent. (supra)
In the case of Ernestina Crisologo-Jose vs. Court of
Appeals, et al
398
, it was held: [t]he fact that he was only a co-
signatory does not detract from his personal liability. A co-maker
or co-drawee under the circumstances in this case is as much an
accommodation party as the other co-signatory or, for that matter,
as a lone signatory in an accommodation instrument. Under the
doctrine in Philippine Bank of Commerce vs. Aruego, supra, he is
in effect a co-surety for the accommodated party with whom he
and his co-signatory, as the other co-surety, assume solidary
liability ex lege for the debt involved.
On the other hand, an accommodation maker of a note is
liable to one whom it was indorsed in payment of an antecedent
debt, the use of the note having been restricted by the maker.
396
Daniel on Negotiable Instruments, id., p. 1597.
397
Daniel on Negotiable Instruments, id., p. 1595; and Footnote 65: The
liability of co-sureties to each other for contribution is not joint [joint and
several] but several, citing Vansant vs. Gardner, 240 Ky. 318, 42 S.W.
(2nd) 300; Voss vs. Lewis, 126 Ind. 155, 25 N.E. 892.
398
G.R. No. 80599, September 15, 1989
Basic Principles and Jurisprudence on the Negotiable Instruments Law 244
(Brannan, page 39, citing English v. Schlesinger, 55 Misc. R. 584,
105 N.Y. Supp. 989.)
Accommodation Indorser
In case of accommodation indorsement the indorser makes
the indorsement for the accommodation of the maker. Such
indorsement is generally for the purpose of better securing the
payment of the notethat is, he lend his name to the maker,
not the holder. Putting it another way: An accommodation note
is one to which the accommodation party has put his name, without
consideration, for the purpose of accommodating some other party
who is to use it and is expected to pay it. The credit given to the
accommodation party is sufficient consideration to bind the
accommodation maker. Where, however, an indorsement is made
as a favor to the indorsee, who requests it, not the better to secure
payment, but to relieve himself from a distasteful situation, and
where the only consideration for such indorsement passes from
the indorser to the indorsee, the situation does not present one
creating an accommodation indorsement, nor one where there is
a consideration sufficient to sustain an action on the indorsement.
(Maulini, et al vs. Serrano)
Right of the Accommodation Party to sue the Accommodated
Party
[I]t may be properly remarked that when the accommodation
parties make payment to the holder of the notes, they have the
right to sue the accommodated party for reimbursement, since
the relation between them is in effect that of principal and sureties,
the accommodation parties being the sureties. (Philippine
National Bank vs. Ramon Maza and Francisco Mecenas, G.R.
No. L-24224, November 3, 1925)
Extinction of an Accommodation Note
If an accommodation note has once been negotiated and
paid at maturity it is extinguished and cannot be re-issued so as
to bind the accommodating party. A repeated use of the instrument
is not within the authority given. (Brannan, page 38, citing
Comstock v. Buckley, (Wis.), 124 N.W. 414, S.C. sec. 58.)
245
Knowledge of an indorsee for value that the note was given
for the accommodation payee is not a defense
Knowledge of an indorsee for value that the note was given
for the accommodation of the payee is not a defense to an action
by the indorsee against the accommodating maker. Nor is an
agreement between the payee and maker that the note should
be deposited in a bank as collateral security for advances to be
made to the payee (and which were made) and that the bank
should hold and not negotiate the note, although the indorsee of
the bank had knowledge of the agreement. The bank being a
holder in due course could transfer its rights to the plaintiff.
(Brannan, page 38, citing Black v. Bank of Westminster, 96 Md.
399, 54 Atl. 88, S.C. sec. 56.)
Illustrative Cases:
Where it was agreed between the maker and the payee of
a note that each should receive one-half the proceeds of the
discount and pay one-half of the note, the maker was not an
accommodation maker. (Brannan, page 38, citing, Reyburn v.
Queen City Savings Bank & Trust Co., 171 Fed. 609, 96 C.C.A.
373.)
An accommodation note may be negotiated after maturity
even though it be the first negotiation and to one having knowledge
of the accommodation so as to make the accommodation maker
liable. (Ibid, citing Marling v. Jones, 138 Wis. 82, 119 N.W. 931;
Mersick v. Alderman, 77 Conn. 634, 60 Atl. 109, semble, S.C.
sec. 52.)
III. NEGOTIATION
Sec. 30. What constitutes negotiation. - An instrument is
negotiated when it is transferred from one person to another
in such manner as to constitute the transferee the holder
thereof. If payable to bearer, it is negotiated by delivery; if
payable to order, it is negotiated by the indorsement of the
holder and completed by delivery.
Notes:
Basic Principles and Jurisprudence on the Negotiable Instruments Law 246
What constitutes negotiation?
An instrument is negotiated when it is transferred from one
person to another in such manner as to constitute the transferee
the holder thereof. (Sec. 30, Negotiable Instruments Law)
It is important to bear in mind that the negotiation of a
negotiable instrument must be distinguished from the assignment
or transfer of an instrument whether that be negotiable or non-
negotiable. Only an instrument qualifying as a negotiable
instrument under the relevant statute may be negotiated either by
indorsement thereof coupled with delivery, or by delivery alone
where the negotiable instrument is in bearer form. A negotiable
instrument may, however, instead of being negotiated, also be
assigned or transferred. The legal consequences of negotiation
as distinguished from assignment of a negotiable instrument are,
of course, different. A non-negotiable instrument may, obviously,
not be negotiated; but it may be assigned or transferred, absent
an express prohibition against assignment or transfer written in
the face of the instrument. (Sesbreo vs. CA, G.R. No. 89252,
May 24, 1993, [Feliciano, J.])
The words not negotiable, stamped on the face of the bill
of lading, did not destroy its assignability, but the sole effect was
to exempt the bill from the statutory provisions relative thereto,
and a bill, though not negotiable, may be transferred by
assignment, the assignee taking subject to the equities between
the original parties. (supra)
Distinction between Assignability and Negotiability
399
1. Assignability pertains to contracts in general.
2. An assignment is the legal method of transferring
property or rights evidenced by a contract.
3. An assignment is an impracticable method, as regards
circulating medium, because:
a. Title created by assignment, as against the debtor,
is not complete without notice to the debtor.
399
Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 9
247
b. No subsequent purchaser of the property or rights
can acquire better title than that of his immediate
assignor.
4. Negotiability pertains to a special class of contracts.
5. Negotiability facilitates their transfer as a circulating
medium, because:
a. The bona fide purchaser for value is presumed to be
the true owner, and has good title.
b. Transfer is effected by indorsement or delivery.
c. In general, a consideration for the contractual relation
is conclusively presumed as between parties not
immediate.
Purpose of Negotiability
400
Negotiable bills and notes in some respects play the part of
money in business affairs. The fundamental purpose of
negotiability is to endow them with all the qualities necessary for
a limited commercial medium.
401
Professor Charles Norton goes on to say that: [p]robably
the primary object of negotiability is to give bills or notes the effect
which money, in the shape of government bills or notes, plays in
commercial transactions. These last are an unquestioned medium
of payment for debts or for the transfer of property rights. They
are such an unquestioned medium because the credit or solvency
of the government, which has caused them to be issued, is behind
them. It is the distinct promise of a whole nation to exchange for
the bill or note itself, in precious metal, a sum of money intrinsically
worth its face. x x x A mans credit is rated at the amount of property
or valuable rights he has or can procure. He makes this credit
available in his bill or note because his credit is its guaranty of
future payment. The elements of credit may be either his earning
capacity or the accumulated property he owns. Business men
rely upon these as the source of probable future payment. And
so the merchant sells goods, and the bank discounts for the seller
the buyers note or draft. And business men who have no property
in cash are by means of credit enabled to conduct and carry to
400
Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 17
401
Id.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 248
completion business and commercial enterprises. Other business
men will take these promises of men of undoubted credit, and
treat them as cash. Thus we see bills and notes going from hand
to hand in commercial markets, and credit taking the part of money
in commercial transactions. And here, perhaps, as a part of this
theory of negotiability, it is well to show how far and under what
circumstances courts have treated negotiable instruments as
liquidation of indebtedness.
402
If an instrument is payable to bearer, how is it negotiated?
If the instrument is payable to bearer, it is negotiated by
delivery.
How about if the instrument is payable to order?
If payable to order, it is negotiated by the indorsement of
the holder and completed by delivery.
Effect of a defective negotiation; Legal title to instrument not
vested in plaintiff
According to Prof. Daniel: [a]s has been seen, the transferee
of a non-negotiable contract must bring action in the name of the
original payee, to the use of the transferee. This is upon the theory
that, notwithstanding the assignment, the legal title remains in
the original owner. But the transfer of a negotiable contract carries
with it the legal title thereto, and the owner thereof must bring
action in his own name. It follows that if the plaintiff is not the
legal owner of the instrument, he cannot maintain suit thereon in
his own name. Any defense which attacks the method and manner
of transferring the legal title to a negotiable instrument, or that
would invalidate the transfer, or any denial of the existence of a
transfer to the plaintiff, either by delivery, or by indorsement and
deliver, as the case may be, would, if made out, constitute a legal
bar to an action brought thereon. What has been heretofore said
on the subject transfer by indorsement and deliver, and of the
steps that may be necessary in detail to effectuate a change of
legal ownership from one person to another, need not be repeated
here. x x x It is generally sufficient here to say that if the plaintiff is
not the owner or the agent or trustee of the owner, a defense
402
Id.
249
successfully setting up the fact will defeat recovery. (Elements of
the Law of Negotiable Instruments, Daniel, p. 305-306)
Illustrative Case:
The plaintiff made a note to the order of X, who was to
negotiate it for plaintiffs benefit. About three months later after
several unsuccessful attempts to negotiate the note, plaintiff asked
X for the note and was falsely told that it had been destroyed.
About six months thereafter but before its maturity X delivered
the note, without indorsing it, to defendant as collateral for a loan
to himself. Plaintiff sued to restrain defendant from disposing of
the note and for its cancellation. Held, that the relief should not
be granted, that although defendant was not a holder in due course
under the Negotiable Instruments Law, yet plaintiff was liable to
him on the ground that X was his agent to borrow money from
him. (Brannan, page 40, citing Sublette v. Brewington (Mo. App.),
122 S.W. 1150.)
In another case, the cashier of a bank sold certain notes,
indorsed in blank by the payee, to defendant who deposited them
in his private box in the bank. The cashier had a key to the box
and was authorized by defendant to collect the notes. The cashier
abstracted the notes from the box and sold them to plaintiff, a
bona fide purchaser. Plaintiff deposited them in his private box,
authorizing the cashier to collect them. When the notes were
due the cashier got new notes from the maker, payable to the
order of the defendant, forged defendants indorsement and
deposited the notes in plaintiffs box where they were found after
the suicide of the cashier. Held, that there was sufficient delivery
of the original notes to plaintiff to complete a valid transfer, whether
they were deposited in his box by him or by the cashier, and that
plaintiff was entitled to impress a trust on the new notes taken in
place thereof. (Ibid, citing Irwin v. Deming, 142 Iowa, 299; 120
N.W. 645.)
Sec. 31. Indorsement; how made. - The indorsement must be
written on the instrument itself or upon a paper attached
thereto. The signature of the indorser, without additional
words, is a sufficient indorsement.
Notes:
Basic Principles and Jurisprudence on the Negotiable Instruments Law 250
Meaning of term indorsement
INDORSEMENTIs the writing of the name of the indorser
on the instrument with the intent wither to transfer the title to the
same, or to strengthen the security of the holder by assuming a
contingent liability for its future payment, or both. It strictly applies
only to negotiable instruments.
403
Indorsing an instrument, in its literal sense means writing
ones name on the back thereof; and, in its technical sense, it
means writing ones name thereon with intent to pass title thereto
and to incur the liability of a party who warrants payment of the
instrument, provided it is duly presented to the principal at maturity,
not paid by him, and such fact is duly notified to the indorser.
Indorsement, strictly speaking, is applicable only to negotiable
paper, and the term includes delivery for value to the indorsee,
but it is otherwise as to an instrument not negotiable.
404
(Daniel,
Elements of the Law of Negotiable Instruments, page 107-108)
The formal requisites of an indorsement are:
405
a) Though usually on the back of the instrument, an
indorsement is on its face, but it must be somewhere
upon it. When by reason of rapid circulation the
instrument becomes filled with indorsements, the law
merchant permits the holder to paste on a slip of paper
for his own and subsequent indorsements. This is called
an allonge.
406
b) The usual form of indorsement is the signature of the
indorser, with or without a direction to pay the indorsee
described or to him or order. Any form of words with the
signature from which the intent of the holder to incur the
liability of an indorser may be gathered is a sufficient
indorsement.
407
By an indorsement, therefore, a party not only passes his
interest in the bill to another, but also pledges his credit for the
403
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 106
404
Daniel of Negotiable Instruments, 666
405
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 106
406
Id.
407
Id.
251
honor of the bill. In other words, an indorsement is at once a
transfer and a contract.
408
Nature of Indorsement
The nature of an indorsement is a follows: It is
a) A contract which the indorser assumes with his indorsee
and subsequent holder that, if the drawee, acceptor, or
maker fails to honor the bill or note, he will, upon the
performance of certain conditions imposed by the law
merchant, indemnify the holder for all loss incurred by
reason of the dishonor of the bill or note.
409
b) A transfer of the title to the instrument.
410
The student must fully grasp this idea,that the indorsement
is a contract, and a contract to which the law merchant and the
common law have appended very peculiar conditions. It is contract
something in the nature of a guaranty, something in the nature of
a warranty, and to the liability under which the laws have attached
the very unusual conditions of presentment, demand, and notice
of dishonor. It is, to be sure, an evidence of a transfer of title, but
it is principally a development of a form of contract at the hands
of the creators of the body of rules of the law merchant.
411
The last general element of an indorsement is that it is a
transfer of the title to the instrument. It is sufficient here to say, in
general terms, that by this is meant nothing more than that it is a
mere purchase and sale of a piece of property. The indorser or
transferrer is viewed in many respects as a vendor, and the
indorsee or transferee as a vendee. It is, of course, not tangible
property, but a chose in action, and as such transferee or vendee
the indorsee merely purchases the rights of the indorser.
412
Requisites of indorsement
The requisites of an indorsement are as follows:
413
408
Id., p. 107, citations omitted
409
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 128
410
Id.
411
Id., citations omitted
412
Id., p. 132
413
Id.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 252
a) It must follow the tenor of the bill or note.
b) It must be by the payee or a subsequent holder.
c) It is only complete upon delivery.
It must follow the tenor of the bill or note.
The indorser, as well as the acceptor, may not alter the
amount of money obligated in the instrument to be paid, nor the
time, place, or manner of payment. If, for instance, the indorser
ordered payment of part of the sum called for in the original
instrument to one person, and part to another, it would amount to
an apportionment of the contract, and the acceptor or maker would
thus, by the indorsers act, be liable to two actions where, by the
terms of the original contract, he was liable to but one. Were the
rule otherwise, the indorser would be empowered to make a
contract for the maker or acceptor without his assent,a reduction
ad absurdum. But this does not mean that, when an instrument
has been paid in part, a receipt for the amount paid may not be
written on its back, and the indorser may not transfer the balance,
nor that the note may not be transferred to two or more persons,
who hold it on co-ownership as a joint right, nor that an instrument
may not be indorsed to a third person as collateral security for a
claim equaling but part of the amount called for in the instrument
itself. All these are perfectly proper courses, because they transfer
but one right of action. The test is, does the transfer cut up the
right of action, or vary it, or invest different persons with different
rights of action against different parties to the instrument? If it
does, the indorsement is void as such.
414
Who may indorse.
The sense of this rule is, however, restricted. x x x [A] person
who is not a holder or owner of the instrument in any sense, but
who puts his name upon it merely to support its circulation by his
credit, may incur liability as a so-called irregular indorser. All
that we would here say is that in case of instruments payable to
order the payee must be in the first instance the first indorser.
415
414
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, pp. 131-132
415
Id., p. 134
253
This is because of several reasons. The first is that the
property of the instrument is in the payee. Until he indorses it, the
legal title is not transferred. Mere possession by someone else
of the instrument unendorsed does not entitle that other person
to the full rights of a bona fide purchaser, and if the maker or
acceptor pays it to such person, it is at the risk of possible re-
payment.
416
But this rule is not universal in its application. An
i ndorsement i s onl y necessary to transfer the l egal as
distinguished from the equitable title to the paper. If by mistake,
accident, or fraud, the indorsement has been omitted, when it
was intended that the indorsement should be made, the payee
may be compelled by a court of equity to make the indorsement.
Meantime the transferee holds the bill or note under the same
rights that he would have acquired under the assignment of paper
not negotiable. In other words, he is the beneficial owner, and
has those rights and only those rights against prior parties which
the payee or his assignor must have,and every equitable
defense available against them is available against him. This
rule applies to subsequent holders. In cases of indorsements in
full, the indorsee in such indorsement named must for the same
reasons himself indorse the instrument. In no other way will the
transfer convey the legal title to the holder, so that he can at law
hold the other parties liable to him.
417
The second reason rests upon the theory that the liability of
indorsers to each other is regulated by the position of their names.
This reason also is restricted in its application. To this rule, too,
the irregular indorser, who has not owned the paper, and to whom
no such transfer has been made, is also an exception; although,
of course, where the second accommodation indorser of an
instrument has paid and taken it up, he becomes a holder for
value, and may compel the first accommodation indorser to pay
him, although both are accommodation indorsers.
418
[T]he contract which each indorser makes when he indorses
the paper is that he is liable to every subsequent indorsee, just as
416
Id.
417
Id., pp. 134-135
418
Id., p. 135
Basic Principles and Jurisprudence on the Negotiable Instruments Law 254
every antecedent party is liable to him. The liability is several. It
is successive. And the object of the rule is only to maintain these
indorsements in the regular order of their liability. It does not go
further than this.
419
Thus where A made a note payable to B or order, and B
afterwards indorsed the note to C, who afterwards indorsed it to
B again, the court, upon suit by B against C, refused a recovery
because it was a prior indorser calling upon a subsequent one;
and the inference of the decision is that this course was not allowed
because it involved circuitry of action. One who has indorsed a
bill or note, and become liable as indorser, cannot, as a rule, on
having the instrument reindorsed to him by the other, bring an
action against him on the indorsement, for the intermediate
indorsee would have his remedy over, and the result of the action
would be to place the parties in precisely the same situation as
before any action at all. But if such prior indorser had indorsed
without recourse, or if the circumstances otherwise negative the
right of his intermediate indorsee to sue upon the indorsement,
the objection as to circuitry of action would be removed, and the
prior indorser could recover under the indorsement back as
indorsee.
420
Necessity for Delivery.
As in the case of the inception of the original contract rights
under the principal terms of the instrument, and also under the
acceptance, an indorsement requires delivery. And the rules and
reasons relating to the delivery of an indorsed instrument by the
payee or indorser are in most respects the same as those already
given relating to the delivery of bills and notes and of acceptances.
The negotiation of the instrument begins with the act of
indorsement as distinguished from the intention of the parties to
indorse, and is consummated by the delivery of the instrument
and its acceptance with the intention to pass and vest title. On
these simple acts the whole contract rests. The law prima facie
presumes the other elements of contract. For example, delivery
once being made and the title having once passed, these facts of
themselves import a consideration. Possession of the instruments
419
Id.
420
Id., citations omitted
255
obviates the necessity of pleading delivery, non-delivery being
wholly a matter of affirmative defense. And the terms indorsed
in pleading includes delivery for value to the indorsee. But both
indorsement and delivery must concur in the transfer. The
indorsement without delivery is nothing, although the indorser has
in fact signed his name and the indorsee knows that it is signed.
Still the contracts so far as it has gone may be revoked by the
indorser, and the indorsement countermanded, unless some
contract right other than that of the indorsement itself exists in the
indorsee. The delivery must be made by the indorser, otherwise
the transfer of the instrument is not by his order. His executor or
administrator even cannot make delivery, although the payee
before his decease has written a name upon it. So, too, if a
transferee of a bill or note send it back to his indorser, refusing to
accept it, this is a refusal of an offer, and his subsequent getting
possession of the instrument without assent of the indorser will
not invest him with title, because there was then no intention to
contract present between them, and hence no contract.
421
How should the indorsement be made?
The indorsement must be written on the instrument itself or
upon a paper attached thereto.
Moreover, the signature of the indorser, without additional
words, is sufficient indorsement. (Sec. 31, Negotiable Instruments
Law)
An indorsement is necessary for the proper negotiation of
check specially if the payee named therein or holder thereof is
not the one depositing or encashing it. (Vicente Go vs. Metropolitan
Bank and Trust Co., G.R. No. 168842, August 11, 2010)
Thus, it was held that stamping the name of the payee on
the back with a rubber stamp with his authority and with intent to
indorse the instrument, is a valid indorsement. (Brannan, page
41, citing Mayers v. McRimmon, 140 N.C. 640, 53 S.E. 447, 111
Am. St. Rep. 879, S.C. sec. 49.)
421
Id., pp. 136-137
Basic Principles and Jurisprudence on the Negotiable Instruments Law 256
Where shall an indorsement be written?
While an indorsement, as its derivation and meaning would
indicate, should be, and generally is, placed on the back of the
instrument, it may be writtenalthough unusual and irregular
on any other portion of it, even on the face, and under the makers
name.
422
(Daniel, Elements of the Law of Negotiable Instruments,
page 111)
At any rate, the indorsement must, as a general rule, be
somewhere on the paper itself, or attached thereto, and unless it
is, the party cannot be held liable as an indorser,
423
but a promise
made on a sufficient consideration will sustain an action upon its
breach.
424
(ibid, page 112)
Allonge
It is not necessary, however, that the indorsement should
be upon the original bill or note, in order to constitute it such, in
the full sense of the term. It sometimes happens that by rapid
circulation from hand to hand, the back of the paper is completely
covered by indorsements; and in such cases the holder may tack
or paste on a piece of paper sufficient to bear his own and
subsequent indorsements, and thereon the indorsements may
be made. Such addition of the original instruments is called and
an allonge, and it becomes for the purposes above named,
incorporated as a part of it.
425
(ibid, page 112)
What is the effect of transfer without indorsement?
Where the holder of an instrument payable to his order
transfers it for value without indorsing it, the transfer vests in the
transferee such title as the transferor had therein. (Sec. 49,
Negotiable Instruments Law)
In the case of banks, they are deemed to be negligent when
they accept for deposit crossed checks without indorsement and
in not verifying the authenticity of the negotiation of the checks.
426
422
Partridge v. Davis, 20 Vt. 449; Bigelow on Bills and Notes, 135
423
Fenn v. Harrison, 3 T.R. 757; Daniel on Negotiable Instruments, 748
424
Moxon v. Pulling, 4 Campb. 51; French v. Tunrner, 15 Ind. 59
425
Crosby v. Roub, 16 Wis. 622; Folger v. Chase, 18 Pick. 63
426
Vicente Go vs. Metropolitan Bank and Trust Co., G.R. No. 168842
257
Irregular Indorsements
A person whose name is on the back of a bill or note payable
to the order of the maker or drawer, or payable to bearer, is deemed
to be a indorser.
427
If an instrument is payable to bearer, or to order of the maker
or drawer, and indorsed in blank, so that it passes by delivery, a
person, not otherwise a party to the instrument, whose name
appears on the back of the instrument, is deemed to be an indorser
only. In such case the name of the indorser appears in its regular
place upon the instrument, and is treated, as in fact it appears to
be, as if it had been made by one to whom the instrument had
been delivered, and who, before himself transferring it by delivery,
had indorsed it in order to incur the liability of indorser to his
transferee and subsequent holders. The effect of the indorsement
cannot be varied by parol proof.
428
Indorsement in full
It is one which mentions the name of the person in whose
favor it is made; and to whom or to whose order, the sum is to be
paid. For instance: Pay to B, or order, signed A, is an
indorsement in full by A, the payee or holder of the paper to B. An
indorsement in full prevents the bill or note from being indorsed
by anyone but the indorsee.
429
(Daniel, Elements of the Law of
Negotiable Instruments, page 112)
Can the transferee force the transferor to make his
indorsement?
Yes, the transferee acquires in addition, the right to have
the indorsement of the transferor. (Sec. 49, Negotiable Instruments
Law)
But for the purpose of determining whether the transferee
is a holder in due course, the negotiation takes effect as of the
time when the indorsement is actually made. (ibid)
427
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 138
428
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, pp. 138-139
429
Mead v. Young, 4 T.R. 28
Basic Principles and Jurisprudence on the Negotiable Instruments Law 258
Can there be partial indorsement?
As a general rule, no, there can be no partial indorsement
of the instrument. The indorsement must be an indorsement of
the entire instrument.
As an exception to the rule, however, where the instrument
has been paid in part, it may indorsed as to the residue.
Sec. 32. Indorsement must be of entire instrument. - The
indorsement must be an indorsement of the entire instrument.
An indorsement which purports to transfer to the indorsee a
part only of the amount payable, or which purports to transfer
the instrument to two or more indorsees severally, does not
operate as a negotiation of the instrument. But where the
instrument has been paid in part, it may be indorsed as to
the residue.
Notes:
What is the effect of partial indorsement?
ANSWER:
An indorsement which purports to transfer to the indorsee a
part only of the amount payable, or which purports to transfer the
instrument to two or more indorsees severally, does not operate
as a negotiation of the instrument. (Section 32, Negotiable
Instruments Law)
Example:
An instrument reads:
Pay to David Lancelot, or order, Php 1,000.00 upon
demand.
Applying Sec. 32, the instrument must be indorsed in its
entirety to a subsequent holder, if for instance, the instrument is
indorsed only to the extent of Php 500.00, said indorsement does
not operate as a negotiation of the instrument. But, if there was
payment made by the maker to the extent of Php 750.00, the
259
instrument may be further indorsed, only to the extent of the
residue which in this case is Php 250.00
Sec. 33. Kinds of indorsement. - An indorsement may be either
be special or in blank; and it may also be either restrictive or
qualified or conditional.
Notes:
What are the different kinds of indorsements?
ANSWER:
1. Special indorsement;
2. Indorsement in blank;
3. Restrictive indorsement;
4. Qualified indorsement.
Sec. 34. Special indorsement; indorsement in blank. - A
special indorsement specifies the person to whom, or to
whose order, the instrument is to be payable, and the
indorsement of such indorsee is necessary to the further
negotiation of the instrument. An indorsement in blank
specifies no indorsee, and an instrument so indorsed is
payable to bearer, and may be negotiated by delivery.
Notes:
What constitutes a special indorsement?
ANSWER:
A special indorsement specifies the person to whom, or to
whose order, the instrument is to be payable, and the indorsement
of such indorsee is necessary to the further negotiation of the
instrument. (Sec. 34, Negotiable Instruments Law)
An instrument which is originally payable to bearer, or which
has been indorsed in blank, though afterwards specially indorsed,
is still payable to bearer; except as to the special indorser, who,
Basic Principles and Jurisprudence on the Negotiable Instruments Law 260
on such an instrument, after such an indorsement, is only liable
on his indorsement to such parties as make title through it.
430
Where an instrument is specially indorsed, title can only be
transferred from the indorsee by his indorsement. In the very
outset, this principle must be sharply contrasted with the case of
bills or notes payable to bearer or indorsed in blank. With bills or
notes payable to bearer or indorsed in blank, the holder is
presumed to be the true owner. Possession and title are one and
the same thing and this though the party possession it is in no
wise a party to the instrument. But where the direction in the
contract is to pay specially to some person, that person and no
other can direct that the money is to be paid in its turn. No other
person can personate this indorsee, and by forgery satisfy the
condition of this contract. And it does not avail even that the bills
is paid under a forged indorsement. Such payment or transfer
was not in contemplation of the parties making the contract, and
is utterly void.
431
What constitutes indorsement in blank?
ANSWER:
Indorsement in blank specifies no indorsee, and an
instrument so indorses is payable to bearer, and may be negotiated
by delivery. (Sec. 34, Negotiable Instruments Law)
It is one which does not mention the name of the indorsee,
and generally consists simply of the name of the indorser written
on the back of the instrument. When the bill or note is indorsed in
blank, it is, as has been said, transferable by mere delivery to the
transferee; but one indorsed in full must be indorsed again by the
indorsee, in order to render it transferable to every intentfor he
who indorses to a particular person, declares his intention not to
be made liable except by that persons indorsement over. (Daniel,
Elements of the Law of Negotiable Instruments, page 113)
The student must keep in mind that this relates only to an
instrument held by a bona fide holder. Where the instrument is
430
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 116
431
Id., p. 117
261
not in the possession of a bona fide holder, but of the finder or the
thief, this extreme rule does not apply. The instrument is, then,
like all other property. It cannot be enforced by the wrongful holder.
But, when once it is in the hands of the bona fide holder, then it is
treated as money in the ordinary course of business. Alike in
case of money and of paper indorsed in blank, where either has
been stolen or found, the true owner cannot recover it after it has
been paid away fairly and honestly upon a valuable consideration,
because it is necessary for the purpose of commerce that its
currency should be established and secured.
432
Illustrative Cases:
An indorsement in blank is not nullified by a guaranty
following it and guaranteeing the payment of a greater rate of
interest, and costs of collection, and waiving demand and notice
of non-payment. (Brannan, page 42,citing Elgin City Banking,
Co. v. Hall, 119 Tenn. 548, 108 S.W. 1068, S.C. secs. 38, 52-3.)
Sec. 35. Blank indorsement; how changed to special
indorsement. - The holder may convert a blank indorsement
into a special indorsement by writing over the signature of
the indorser in blank any contract consistent with the
character of the indorsement.
Notes:
The receiver of a negotiable instrument indorsed in blank,
or any bona fide holder of it, may write over it an indorsement in
full to himself, or to another, or any contract consistent with the
character of an indorsement;
433
but he cannot enlarge the liability
of the indorser in blank by writing over it a waiver of any of his
rights, such as demand and notice;
434
and he cannot fill it up so
as to make the instrument payable in part to one person and in
part to another. The indorsers contract is single and entire, and
the obligation created thereby cannot be broken into fragments,
and the indorser required to pay in fractions to different persons.
435
432
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, pp. 111-112, citations omitted
433
Evans v. Gee, 11 Pet. 80; Condon v. Pearce, 43 Mid. 83; Johnson v.
Mitchell, 50 Tex. 212
434
Daniel on Negotiable Instruments, 694
435
Erwin v. Lynn, 16 Ohio (N.S.), 547
Basic Principles and Jurisprudence on the Negotiable Instruments Law 262
(Daniel, Elements of the Law of Negotiable Instruments, page
113)
Combination of the rules
In case of the combi nati on of the two cl asses,
indorsements in blank and in full,the application of the rules is
somewhat confusing to the student. For example, let us assume
that there are indorsed upon an instrument some blank
indorsements, then some special indorsements, and after these
again some indorsements in blank. The special indorser will be
liable only to those who can make their title through his special
indorsement. The rule is well settled that if a note or bill be once
indorsed in blank, though afterwards indorsed in full, it will still, as
against the drawer, the payee, and prior indorsers, by payable to
bearer, though, as against the special indorser himself, title must
be made through his indorsee.
436
Can a blank indorsement be changed to a special
indorsement?
ANSWER:
Yes. The holder may convert a blank indorsement into a
special indorsement by writing over the signature of the indorser
in blank any contract consistent with the character of indorsement.
(Sec. 35, Negotiable Instruments Law)
Sec. 36. When indorsement restrictive. - An indorsement is
restrictive which either:
(a) Prohibits the further negotiation of the instrument;
or
(b) Constitutes the indorsee the agent of the indorser;
or
(c) Vests the title in the indorsee in trust for or to the
use of some other persons.
But the mere absence of words implying power to negotiate
does not make an indorsement restrictive.
436
Id., p. 118
263
Notes:
A RESTRICTIVE INDORSEMENTMeans that the
indorsee is deputed by the indorser to be his agent in collecting
the bill or note, or else that the title is vested in the indorsee as a
trustee or for the use or for the benefit of a third person.
437
An indorsement may be so worded as to restrict the further
negotiability of the instrument; and it is then called a restrictive
indorsement. Thus, pay the contents to J.S. only, or to J.S. for
my use, or to order for my use, or for me, are restrictive
indorsements, and put an end to the negotiability of the paper.
438
Of the like character is an indorsement, credit my account, or
pay J.S. or order for account or on account of C.D., or for
collection, or for collection and immediate returns.
439
These
and similar restrictive words indicate that the indorsee is merely
an agent to receive the money, and that he paid no consideration
for the paper, as a purchaser would not intelligently accept such
an indorsement. The indorsee in such a case can only collect the
money; he cannot sell or hypothecate the instrument for his own
benefit, nor can he hold the indorser liable to himself. The
restrictive words of the indorsement give notice of the trust
engrafted upon it, and if the indorsee passes it off for his own
debt, or in any other manner violate the trust, the transferee would
take it subject to the trust.
440
(Daniel, Elements of the Law of
Negotiable Instruments, page 114)
2011 Bar Question:
Z wrote out an instrument that states: Pay to X the
amount of Php1 Million for collection only. Signed, Z.
X indorsed it to his creditor, Y, to whom he owed Php1
million. Y now wants to collect and satisfy Xs debt
through the Php1 million on the check. May he validly
do so?
A. Yes, since the indorsement to Y is for Php1 Million.
437
Id., p. 119
438
Wilson v. Holmes, 5 Mass. 543; Williams v. Potter, 72 Ind. 354
439
First Nat. Bank v. Reno County, 3 Fed. 257; White v. National Bank, 102
U.S. 658; Continental Nat. Bank v. Weems, 69 Tex. 489
440
Hook v. Pratt, 78 N.Y. 371; Claflin v. Wilson, 51 Iowa, 15; Daniel on
Negotiable Instrument, 698
Basic Principles and Jurisprudence on the Negotiable Instruments Law 264
B. No, since Z is not a party to the loan between X and
Y.
C. No, since X is merely an agent of Z, his only right
being to collect.
D. Yes, since X owed Y Php1 Million.
When is indorsement considered restrictive?
ANSWER:
An indorsement is considered restrictive which either:
1. Prohibits the further negotiation of the instrument; or
2. Constitutes the indorsee the agent of the indorser; or
3. Vests the title in the indorsee in trust for or to the use of
some other persons.
What if on the face of the instrument, there is the absence of
words implying the power to negotiate, does it make the
indorsement restrictive?
ANSWER:
No. The mere absence of words implying power to negotiate
does not make an indorsement restrictive. (Sec. 36, Negotiable
Instruments Law)
Only after complying with Sec. 36 (a) to (c) will there be a
restrictive indorsement. The law does not presume it from the
mere absence of words implying the power to negotiate.
Must be written in express words at the back of the instrument
In this kind of restrictive indorsement, the prohibition to
transfer or negotiate must be written in express words at the
back of the instrument, so that any subsequent party may be
forewarned that it ceases to be negotiable. However, the restrictive
indorsee acquires the right to receive payment and bring any action
thereon as any indorser, but he can no longer transfer his rights
as such indorsee where the form of the indorsement does not
265
authorize him to do so.
441
(Gempesaw vs. Court of Appeals, G.R.
No. 92244, February 9, 1993, bold supplied)
Sec. 37. Effect of restrictive indorsement; rights of indorsee.
- A restrictive indorsement confers upon the indorsee the
right:
(a) To receive payment of the instrument;
(b) To bring any action thereon that the indorser could
bring;
(c) To transfer his rights as such indorsee, where the
form of the indorsement authorizes him to do so.
But all subsequent indorsees acquire only the title of the first
indorsee under the restrictive indorsement.
Notes:
What are the effects of restrictive indorsement?
ANSWER:
A restrictive indorsement confers upon the indorsee the right:
1. To receive payment of the instrument;
2. To bring any action thereon that the indorser could
bring;
3. To transfer his rights as such indorsee, where the form
of the indorsement authorizes him to do so.
But all subsequent indorsees acquire only the title of
the first indorsee under the restrictive indorsement.
Indorsee for collection can sue in his own name
An indorsee for collection can sue in his own name, but he
takes the instrument subject to all equities existing between his
indorser and the maker. Payment by the maker to the indorser
after the indorsement is a good defense, and parol evidence to
show that the indorsee was the actual owner of part of the note is
441
NIL, Sec. 37
Basic Principles and Jurisprudence on the Negotiable Instruments Law 266
inadmissible as tending to contradict the indorsement. (Brannan,
page 44, citing Smith v. Bayer, 46 Or. 143, 79 Pac. 497, 114 Am.
St. Rep. 858.)
Kinds of restrictive indorsement
The first and the commonest variety, and the one which is
general l y spoken of by some text wri ters as restri cti ve
indorsement, is that where the holder deputes to some person
the business of collecting the bill; the other where the holder
indorses the instrument to one person for the use or benefit
of, or as the trustee of, another. Upon an indorsement of the
first kind the instrument is no longer negotiable; the second variety
of indorsement does not, however, restrict its circulation.
Examples of the first species of indorsement are indorsements
For collection, the indorsement for collection meaning that the
holder takes no title to it and can transfer to none, but can merely
present it and receive the money upon it. In construing these and
other cases like them, such as Pay to A only, or Pay to A for my
use, or Pay to A for me, or Pay to my steward and no other
person, or Pay to my servant for my use, the courts have been
governed by two principles. The first and most important is the
reason that the natural construction of such a form of words is
that it implies a mere authority to receive the money called for in
the instrument for the use of the indorser himself, or according to
his directions. It therefore vests a mere agency in the indorsee,
and shows that he, at least, did not give a valuable consideration
for the bill or note and is not therefore its absolute owner. It follows
from this that the restrictive indorser, in creating such agency, did
not intend to pass the title to the indorsee, but rather to retain it in
himself. And hence, there being no intention to transfer, the
instrument cannot be negotiated through the indorsement. The
second is the reason that the restrictive indorsement, like the
conditional indorsement, operates as notice both to the persons
called upon to pay the instrument and those who might acquire it
after the indorsement as purchasers. No subsequent purchaser
could take the instrument in good faith, because whoever reads
the indorsement, as it would be every purchasers legal duty to
read it, must see that its operation was limited. Such a purchaser
must see that the object of the indorser was to prevent the money
received from being applied to the use of any other person than
himself. And therefore, whomsoever the money might be paid, it
267
would be paid in trust for the indorser, and wheresoever the
instrument traveled it carried that trust on the face of it.
442
2011 Bar Question:
A negotiable instrument can be indorsed by way of a
restrictive indorsement, which prohibits further
negotiation and constitutes the indorsee as agent of
the indorser. As agent, the indorsee has the right,
among others, to
A. demand payment of the instrument only.
B. notify the drawer of the payment of the instrument.
C. receive payment of the instrument.
D. instruct that payment be made to the drawee.
May the indorsee of a promissory note indorsed to him
for deposit file a suit against the indorser?
A. Yes, as long as the indorser received value for the
restrictive indorsement.
B. Yes, as long as the indorser received value for the
conditional indorsement.
C. Yes, whether or not the indorser received value for
the conditional indorsement.
D. Yes, whether or not the indorser received value for
the restrictive indorsement.
Sec. 38. Qualified indorsement. - A qualified indorsement
constitutes the indorser a mere assignor of the title to the
instrument. It may be made by adding to the indorsers
signature the words without recourse or any words of
similar import. Such an indorsement does not impair the
negotiable character of the instrument.
Notes:
AN INDORSEMENT WITHOUT RECOURSEmeans that
442
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, pp. 125-127
Basic Principles and Jurisprudence on the Negotiable Instruments Law 268
the indorser exempts himself from liability to indemnify the holder
upon the dishonor of the bill or note.
443
An indorsement qualified by the words without recourse,
sans recourse, or at the indorsees own risk, renders the
indorser a mere assignor of the title of the instrument, and relieves
him of all responsibility for its payment,
444
though not from certain
liabilities which have been already enumerated.
445
But such an
indorsement does not throw any suspicion upon the character of
the paper.
446
(Daniel, Elements of the Law of Negotiable
Instruments, pages 114-115)
The indorsement without recourse is in form of words,
Without recourse, or Sans recourse, or At the indorsees own
risk, or I hereby indorse and transfer my right and interest in this
bill to C D, or order, but with this express condition: that I shall not
be liable to him or to any subsequent holder for the acceptance
or payment of the bill. Such indorsements throw no discredit on
the bill. Such an indorser does not escape from the effect of the
warranties, as explained hereafter. The promise of a negotiable
bill or note indorses it to a third person, merely stipulating that, as
indorser, he is not to be responsible if the acceptor or maker does
not pay it. This he may do, because he has the property in the bill
or note, and he may dispose of it on what terms he pleases. Such
and indorsement does not render the negotiable security no longer
negotiable. The bill or note remains negotiable in the hands of
the indorsee, although he has no remedy against the indorser
without recourse. And, into whose hands so ever the bill or note
may come, the maker is still liable according to the terms of his
original contract. The question with the courts in construing
indorsements without recourse is whether the words of
indorsement are such that they clearly express an intention on
the part of the indorser not to be bound, and a corresponding
intention on the part of the immediate subsequent indorsees,
evidenced by their acceptance of the instrument with such an
indorsement, to exempt the indorser from his liability. The
presumption is rather that the usual liability of an indorser is
443
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 119
444
Wilson v. Codmans Exr., 3 Cranch, 192; Borden v. Clark, 26 Mich. 410
445
See ante, 173
446
Lomax v. Picot, 2 Rand. 260; Kelley v. Whitnet, 45 Wis. 117
269
intended to be incurred. And, to overcome this, it must clearly
appear that the transfer of the instrument was only to transfer the
title to it, and not to indemnify the indorsee against loss in case it
was not paid by the acceptor or maker. (Handbook of the Laws of
Bills and Notes, Charles P. Norton, Third Edition, 1900, pp. 120-
121, citations omitted)
Act No. 2031, known as the Negotiable Instruments Law, x
x x establishes various kinds of indorsements by means of which
the liability of the indorser is in some manner limited, distinguishing
it from that of the regular or general indorser, and among those
kinds is that of the qualified indorsement which, pursuant to section
38 of the same Act, constitutes the indorser a mere assignor of
the title to the instrument, and may be made by adding to the
indorsers signature the words without recourse or any words of
similar import. (concurring opinion, Torres, J., in (Maulini, et al vs.
Serrano [1914])
If it was not its purpose or intent to assume and agree to
pay the notes, it should have indorsed them without recourse,
or in such a manner as to disclaim any personal liability. When a
person makes an unqualified indorsement of a promissory note,
the Negotiable Instruments Law specifies and defines his liability,
and parol testimony is not admissible to explain or defeat such
liability. (Jose Velasco vs. Tan Liuan & Co., G.R. No. 17230, March
17, 1922, [Johns, J;])
Such an indorsement relieves the indorser of the general
obligation to pay if the instrument is dishonored but not of the
liability arising from the warranties on the instrument as provided
in Section 65 of the Negotiable Instruments Law. (Metropol
(Bacolod) Financing & Investment Corporation vs. Sambok Motors
Company, G.R. No. L-39641, February 28, 1983, [De Castro, J.])
Recourse means resort to a person who is secondarily
liable after the default of the person who is primarily liable.
447
Appellant by indorsing the note with recourse does not make
itself a qualified indorser but a general indorser who is secondarily
liable, because by such indorsement, it agreed that if Dr. Villaruel
fails to pay the note, plaintiff-appellee can go after said appellant.
447
Ogden, the Law of Negotiable Instruments, p.200 citing Industrial Bank
and Trust Company vs. Hesselberg, 195 S.W. (2d) 470
Basic Principles and Jurisprudence on the Negotiable Instruments Law 270
The effect of such indorsement is that the note was indorsed
without qualification. A person who indorses without qualification
engages that on due presentment, the note shall be accepted or
paid, or both as the case may be, and that if it be dishonored, he
will pay the amount thereof to the holder.
448
(Ibid)
Liability of indorser without recourse
When the indorsement is without recourse the indorser
specially decline to assume any responsibility as a party to the
bill or note; but the very act of transferring it, he engages that it is
what it purports to bethe valid obligation of those whose names
are upon it. He is like a drawer who draws without recourse; but
is nevertheless liable if he draws upon a fictitious party, or one
without funds. And, therefore, the holder may recover against
the indorser without recourse, (1) if any of the prior signatures
were not genuine; or (2) if the note was invalid between the original
parties, because of the want, or illegality of, the consideration; or
if (3) prior party was incompetent, or (4) the indorser was without
title.
449
(Daniel, Elements of the Law of Negotiable Instruments,
page 109)
2011 Bar Question:
X is the holder of an instrument payable to him (X) or
his order, with Y as maker. X then indorsed it as follows:
Subject to no recourse, pay to Z. Signed, X. When Z
went to collect from Y, it turned out that Ys signature
was forged. Z now sues X for collection. Will it prosper?
A. Yes, because X, as a conditional indorser, warrants
that the note is genuine.
B. Yes, because X, as a qualified indorser, warrants
that the note is genuine.
C. No, because X made a qualified indorsement.
D. No, because a qualified indorsement does not
include the warranty of genuineness.
448
Ang Tiong vs. Ting, 22 SCRA 715
449
Dumont v. Williamson, 18 Ohio (N.S.) 515; Seeley v. Reed, 28 Fed. 167;
Challiss v. McCrum, 22 Kan. 127
271
What is a qualified indorsement? How is it made?
ANSWER:
A qualified indorsement constitutes the indorser a mere
assignor of the title of the instrument. It may be made by adding
to the indorsers signature the words without recourse or any
words of similar import. (Sec. 38, Negotiable Instruments Law)
Does a qualified indorsement impair the negotiable character
of the instrument?
ANSWER:
No. Such an indorsement does not impair the negotiable
character of the instrument.
Illustrative case:
The payee wrote on the back of the instrument the words, I
hereby transfer and assign all my rights, title, and interest to and
in within the note. Held, that this is a qualified indorsement and
equivalent to an indorsement without recourse. (Brannan, page
45, citing Evans v. Freeman, 143 N.C. 61, 54 S.E. 847.)
The fact that an indorsement is without recourse is not
enough to put a purchaser upon notice of equities. (Ibid, citing
Elgin City Banking Co. v. Hall, 119 Tenn. 548, 108 S.W. 1068,
S.C. secs. 34, 52-3.)
Sec. 39. Conditional indorsement. - Where an indorsement
is conditional, the party required to pay the instrument may
disregard the condition and make payment to the indorsee
or his transferee whether the condition has been fulfilled or
not. But any person to whom an instrument so indorsed is
negotiated will hold the same, or the proceeds thereof,
subject to the rights of the person indorsing conditionally.
Notes:
A CONDITIONAL INDORSEMENTMeans an indorsement
by which the title to the instrument does not pass until the condition
mentioned in the indorsement is fulfilled.
450
Basic Principles and Jurisprudence on the Negotiable Instruments Law 272
Rationale of the provision
The conditional indorsement is a device by which a payee
or an indorsee may part with the possession of an instrument, but
not with the legal title to it. Mr. Daniel instances Pay to A B, or
order, if he arrives at 21 years of age, or Pay to A B, or order,
unless before payment I give you notice to the contrary, as
examples of conditional indorsement, the former being an
indorsement upon a condition precedent, and the latter one upon
a condition subsequent. These conditional indorsement have not
come very often before the courts, but they are recognized as
distinct class. It may be said, by way of criticism, that in them
commercial convenience has overridden the strict theory of
negotiability. This theory would not permit to exist a condition
which charged every subsequent indorsee with the duty of seeing
whether the condition had been fulfilled before he could legally
own the instrument. For, certainly, with the conditional
indorsement, as well as with the conditional bill or note, it would
be a most effective restriction to circulation as a medium of
payment.
451
[I]t is well to note the authority usually referred to as the
l eadi ng case upon the subj ect,ROBERTSON v.
KENSINGTON.
452
There is this indorsement was made upon an
ordinary draft: Pay the within sum of Messrs. Clerk & Ross, or
order, upon my name appearing in the Gazette as ensign in any
regiment of the line, between the 1
st
and 64
th
, if within two months
from this date. This was transferred to bona fide holders, and
the acceptors paid the bill on its maturity to one of these. In the
meantime the indorsers name had never appeared in the Gazette
as an ensign, and he brought suit as the payee of the bill against
the acceptors who had accepted the bill after this indorsement
had been written upon it. And it is to be inferred from the report of
the case that the court decided that such an indorsement was
only a conditional transfer of the absolute interest in the bill, and,
its condition never having been performed, the transfer was
defeated. As appears from the cases, the point emphasized is
that the condition operates as notice, and, being merely a notice,
450
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, p. 119
451
Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, pp. 121-122
452
ROBERTSON v. KENSINGTON, 4 Taunt. 30
273
it does not destroy the negotiability of the bill or note. Thus, where
a note in usual form had these words upon it, signed by the makers,
The within obligation is to be delivered to the payees of the note
as a consideration for a judgment which has to be assigned to
the makers, the court properly said the words were no part of the
note. Their effect is only to show the consideration, and to operate
as a notice to any person who might purchase the note. By this
was meant that it was the intention of the parties that it was not to
affect the original contract. And in cases of conditional
indorsement, when it is not the intention of the original parties
that the main instrument should be contingent, the act of the
conditional indorser is not to be understood as operating to change
the main instrument. The terms of the face of the instrument still
remain an absolute negotiable order or promise of payment to
someone. That someone might in turn negotiate the bill or note
to someone else, who in his turn might continue his negotiation
until it came to the conditional indorser. But he, on parting with it,
having the right of property himself, might make a special contract
which would be distinct from the contract embodied on the face
of the instrument. And the only purpose and result of this contract
would be to notify every holder subsequent to himself, and the
maker or acceptor, when the time for the payment of the instrument
arrived, that he as an indorser parted with the instrument upon
the understanding that his ownership of it was not to cease until
some stated condition was fulfilled. As between the immediate
indorser and indorsee, there can be little doubt that this is a correct
and proper rule. As to them the contract of indorsement is but an
ordinary contract, open to all objections and defenses to which
other contracts are open. Some of these objections and defenses
may even be shown by parol evidence. This is because the
contract consists partly of written indorsement, partly of the act of
delivery of the bill to the indorsee, and partly of the mutual intention
with which the delivery is made by the indorser and received by
the indorsee. But when the question is not one between the
immediate indorser and indorsee, but between the indorser or
indorsee and third parties holding in good faith and for value, it
becomes much more embarrassing. It is clear that parol evidence
or evidence of intention cannot be allowed to engraft a condition
upon the instrument such that it will affect third parties. But where
the indorsement is in writing, the rule is so far settled that the
maker or acceptor and probably prior parties are bound to take
notice of the title of the indorsee, and, having such notice, they
Basic Principles and Jurisprudence on the Negotiable Instruments Law 274
pay the instrument to him or to subsequent parties at the risk of
repayment to the conditional indorser, if the condition is unfulfilled.
But, on the other hand, the conditional indorser cannot restrict
the negotiability of the instrument and prevent its further
indorsement by his indorsee. The terms of the original instrument
making it negotiable prevail, and persons other than the conditional
indorsee may take it subject to the notice of the condition. And
though there is little, if any, authority upon the point, still it may be
assumed that in the absence of an express warranty no other
than a conditional warranty of title in the subsequent indorser would
be implied. There seems to be no reason why the other implied
warranties should not remain a part of the contract. But the notice
of a conditional title with which the subsequent purchaser of the
instrument would be charged would seem to expressly except
warranty of title from the obligations of the indorser. (Handbook
of the Laws of Bills and Notes, Charles P. Norton, Third Edition,
1900, pp. 121-124)
Absolute and Conditional indorsements
An absolute indorsement is one by which the indorser binds
himself to pay, upon no other condition than the failure of prior
parties to do so, and of due notice to him of such failure (protest
preceding it when necessary, as in the case of a foreign bill). A
conditional indorsement is one by which the indorser annexes
some other condition to his liability. Sometimes the condition is
precedent, and sometimes subsequent. Thus, Pay to A.B. or
order, of he arrives at twenty-one years of age, or, if he is living
when it becomes due, is an indorsement upon a condition
precedent. Pay A.B. or order, unless, before payment, I give you
notice to the contrary, is upon a condition subsequent. The
condition attached to the indorsement in no manner affect the
negotiability of the paper.
453
(Daniel, Elements of the Law of
Negotiable Instruments, pages 113-144)
In conditional indorsements, can the fact that the condition
had not yet been fulfilled be disregarded by the party required
to pay?
453
Story on Notes, 140; Daniel on Negotiable Instruments, 697
275
ANSWER:
Yes. Where an indorsement is conditional, the party required
to pay the instrument may disregard the condition and make
payment to the indorsee or his transferee whether the condition
has been fulfilled or not.
What if the aforementioned instrument was indorsed to
another person?
ANSWER:
Any person to whom an instrument so indorsed is negotiated
will hold the same, or the proceeds thereof, subject to the rights
of the person indorsing conditionally. (Sec. 39, Negotiable
Instruments Law)
Sec. 40. Indorsement of instrument payable to bearer. - Where
an instrument, payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery; but the person
indorsing specially is liable as indorser to only such holders
as make title through his indorsement.
Notes:
What is the effect of an indorsement made on an instrument
which is payable to bearer?
ANSWER:
Where an instrument, payable to bearer, is indorsed
specially it may nevertheless be further negotiated by delivery;
but the person indorsing specially is liable as indorser to only
such holders as make title through his indorsement. (Sec. 40,
Negotiable Instruments Law)
Furthermore, the holder may at any time strike out any
indorsement which is not necessary to his title. The indorser
whose indorsement is struck out, and all indorsers subsequent to
him, are thereby relieved from liability on the instrument. (Sec.
48, Negotiable Instruments Law)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 276
Illustration:
The instrument reads:
Pay to Margaux, or bearer, Php 1,000.00.
(sgd)
Lance
The instrument was thereafter negotiated by delivery from
Margaux to Karl, but Karl indorsed it and delivered it to Kate.
In this instance, Kate can further negotiate the note by
delivery to a subsequent holder, and Karl then becomes liable as
an indorser to Kate and to subsequent holders.
Sec. 41. Indorsement where payable to two or more persons.
- Where an instrument is payable to the order of two or more
payees or indorsees who are not partners, all must indorse
unless the one indorsing has authority to indorse for the
others.
Notes:
If a bill or note be made payable to several persons not
partners, the transfer can only be made by a joint indorsement of
all of them; and as Chitty says, If a bill has been transferred to
several persons not in partnership, the right to transfer is in all
collectively, and not in any one individually.
454
Where, however,
one of two or more joint payees or transferees undertake to transfer
the instrument, the extent of the transfer will depend upon the
nature of his interest. Such interest, whatever it is, passes to his
indorsee or assignee; but nothing beyond that, as against his co-
party, unless indeed there be some other element in the transaction
in the nature of fraud, agency, or other circumstance, modifying
the rights of the parties.
455
No action could be maintained on the
indorsement of one of the joint parties,
456
the interest passing
thereby being equitable merely. (Daniel, Elements of the Law of
Negotiable Instruments, page 115)
454
Chitty on Bills [201], 232; Daniel on Negotiable Instruments, 701a
455
Brown v. Dickinson, 27 Gratt. 693
456
Caverick v. Vickery, 2 Dough. 652
277
An assignment by one joint payee of his interest to another
payee carries with it authority to indorse instrument for him.
(Brannan, page 47, citing Kaufman v. State Sav. Bank, 151 Mich.
65, 114 N.W. 863, 18 L.R.A. (N.S.) 630, 123 Am. St. Rep. 259.)
How can an instrument be indorsed if it is payable to two or
more persons?
Where an instrument is payable to the order of two or more
payees or indorsees who are not partners, all must indorse unless
the one indorsing has authority to indorse for the others. (Sec.
41, Negotiable Instruments Law)
Illustrative Case:
Metropolitan Bank and Trust Company (formerly
Asianbank Corporation)
vs. BA Finance Corporation and Malayan Insurance
Co., Inc.
G.R. No. 179952, December 4, 2009
CARPIO-MORALES, J.:
Bitanga obtained from BA Finance a loan in the amount of
Php 329, 280 secured by a chattel mortgage. As required by the
mortgage agreement, Bitanga insured his car with Malayan
Insurance Co., Inc. Policy contains a stipulation that: Loss, if
any shall be payable to BA FINANCE CORP. as its interest may
appear. It is hereby expressly understood that his policy or any
renewal thereof, shall not be cancelled without prior notification
and conformity by BA FINANCE CORPORATION. The car was
stolen, and on Bitangas claim, Malayan Insurance issued a check
payable to the order of B.A. Finance Corporation and Lamberto
Bitanga. For Php 224, 500, drawn against China Banking
Corporation. The check was crossed with the notation For
Deposit Payees Account Only. Without the indorsement or
authority of his co-payee BA Finance, Bitanga deposited the check
to his account with the Asianbank Corporation, now merged with
Metropolitan Bank and Trust Company. Bitanga subsequently
withdrew the entire proceeds of the check. BA Finance upon
knowing of the same instituted a complaint for sum of money and
damages.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 278
The Court held that: [w]here an instrument is payable to
the order of two or more payees or indorsees who are not partners,
all must indorse unless the one indorsing has authority to indorse
for the others.
457
Bitanga alone endorsed the crossed check, and
petitioner allowed the deposit and release of the proceeds thereof,
despite the absence of authority of Bitangas co-payee BA Finance
to endorse it on its behalfThe payment of an instrument over a
missing indorsement is the equivalent of payment on a forged
indorsement
458
or an unauthorized indorsement in itself in the case
of joint payees.
459
Clearly, petitioner, through its employee, was
negligent when it allowed the deposit of the crossed check, despite
the lone endorsement of Bitanga, ostensibly ignoring the fact that
the check did not, it bears repeating, carry the indorsement of BA
Finance.
460
As has been repeatedly emphasized, the banking business
is imbued with public interest such that the highest degree of
diligence and highest standards of integrity and performance are
expected of banks in order to maintain the trust and confidence
of the public in general in the banking sector.
461
Undoubtedly, BA
Finance has a cause of action against petitioner.
Subsequently, this question was raised therein on whether
or not petitioner Metrobank is liable to BA Finance for the full
value of the check?
The Court held that provisions of the Negotiable
Instruments Law and underlying jurisprudential teachings on the
black-letter law provide definitive justification for petitioners full
liability on the value of the check.
To be sure, a collecting bank, Asianbank in this case, where
a check is deposited and which indorses the check upon
457
Sec. 41, Act 2031
458
Kelly v. Central Bank and Trust Co. (Colo App), 794 P2d 1037, 12
UCCRS2d 1089; Humberto Decorators, Inc. v. Plaza Natl Bank, 180 NJ
Super 170, 434 A2d 618, 32 UCCRS 494; Vide: 11 Am Jur 2d, Bills and
Notes, 224, at p. 557
459
Beyer v. First Natl Bank, 188 Mont 208, 612 P2d 1285, 29 UCCRS 563;
Vide: 11 Am Jur 2d, Bills and Notes, 224, at p. 557
460
Gempesaw v. Court of Appeals, G.R. No. 92244, Feb. 9, 1993, 218 SCRA
682, 695
461
Philippine Commercial International Bank v. Court of Appeals, G.R. No.
121413, January 29, 2001, 350 SCRA 446
279
presentment with the drawee bank, is an indorser.
462
This is
because in indorsing a check to the drawee bank, a collecting
bank stamps the back of the check with the phrase all prior
endorsements and/or lack of endorsement guaranteed
463
and,
for all intents and purposes, treats the check as a negotiable
instrument, hence, assumes the warranty of an indorser.
464
Without Asianbanks warranty, the drawee bank (China Bank in
this case) would not have paid the value of the subject check.
Petitioner, as the collecting bank or last indorser, generally
suffers the loss because it has the duty to ascertain the
genuineness of all prior indorsements considering that the act of
presenting the check for payment to the drawee is an assertion
that the party making the presentment has done its duty to
ascertain the genuineness of prior indorsements.
465
Sections 65
and 66 of the Negotiable Instruments Law state that:
Accordingly, one who credits the proceeds of a check to the
account of the indorsing payee is liable in conversion to the non-
indorsing payee for the entire amount of the check.
466
"
465
Sections 65 and 66 of the Negotiable Instruments Law state that:
Sec. 65. Every person negotiating an instrument by delivery or by a
qualified indorsement warrants:
(a) That the instrument is genuine and in all respects what it purports to
be;
(b) That he has good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the validity
of the instrument or render it valueless.
But when the negotiation is by delivery only, the warranty extends in favor
of no holder other than the immediate transferee.
The provisions of subdivision (c) of this section do not apply to a person
negotiating public or corporation securities other than bills and notes.
Sec. 66. Liability of general indorser. Every indorser who indorses without
qualification, warrants to all subsequent holders in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of
the next preceding section; and
(b) That the instrument is, at the time of his indorsement, valid and
subsisting;
And in addition, he engages that, on due presentment, it shall be accepted
or paid, or both, as the case may be, according to its tenor, and that if it
be dishonored and the necessary proceedings on dishonor be duly taken,
he will pay the amount thereof to the holder, or to any subsequent indorser
who may be compelled to pay it
466
Vide Peoples Nat. Bank v. American Fidelity Fire Ins. Co., 39 Md. App.
614, 386 A.2d 1254, 24 U.C.C. Rep. Serv. 362 (1978); Middle States
Leasing Corp. v. Manufacturers Hanover Trust Co., 62 A.D.2d 273, 404
N.Y.S.2d 846, 23 U.C.C. Rep. Serv. 1215 (1st Dept 1978); Vide 11 Am
Jur 2d, Bills and Notes, 225, at p. 557
Basic Principles and Jurisprudence on the Negotiable Instruments Law 280
Sec. 42. Effect of instrument drawn or indorsed to a person
as cashier. - Where an instrument is drawn or indorsed to a
person as cashier or other fiscal officer of a bank or
corporation, it is deemed prima facie to be payable to the
bank or corporation of which he is such officer, and may be
negotiated by either the indorsement of the bank or
corporation or the indorsement of the officer.
Notes:
Where the president of a bank by authority of the directors
discharges the duties ordinarily performed by a cashier, a draft
drawn payable to the president by name with the addition of pt
is payable to the bank. (Brannan, page 48, citing Griffin v. Erskine,
131 Iowa, 444, 109 N.W. 13.)
S was cashier of the C bank. A certificate of deposit issued
by the C bank to the order of S Cashier was indorsed S Cashier
and came to the plaintiff, a holder in due course. Held, that the
indorsement was that of the bank, and that it was not competent
of the bank to show that S acted in his own interest and in violation
of his duty to the bank. (Ibid, citing Johnson v. Buffalo Bank, 134
Iowa, 731, 112 N.W. 165.)
Where a note was indorsed to A, parol evidence is not
admissible to show that a bank was intended as indorsee, even
though A is, in fact, cashier of such bank. If A delivers the note to
the bank without indorsement, the bank may sue upon it, but
subject to equities. (Ibid, citing First Nat. Bank v. McCullough, 50
Oregon, 508, 93 Pc. 366, 17 L.R.A. (N.S.) 1105, 126 Am. St. Rep.
758.)
Sec. 43. Indorsement where name is misspelled, and so forth.
- Where the name of a payee or indorsee is wrongly
designated or misspelled, he may indorse the instrument as
therein described adding, if he thinks fit, his proper signature.
Notes:
What is the remedy if the name of the payee or indorsee is
wrongly misspelled?
281
ANSWER:
Where the name of the payee or indorsee is wrongly
designated or misspelled, he may endorse the instrument as
therein described adding, if he thinks fit, his proper signature.
(Sec. 43, Negotiable Instruments Law)
This is an instance where a bill or note is indorsed specially
designating the name of the person to be indorsed, and his name
is wrongly designated or misspelled. The remedy here is for that
person whose name was misspelled to indorse using his proper
name or signature.
Sec. 44. Indorsement in representative capacity. - Where any
person is under obligation to indorse in a representative
capacity, he may indorse in such terms as to negative
personal liability.
Notes:
How could an instrument be indorsed in a representative
capacity?
ANSWER:
Where any person is under obligation to indorse in a
representative capacity, he may indorse in such terms as to
negative personal liability. (Sec. 44, Negotiable Instruments Law)
He may do so by disclosing his principal and signing for or
in behalf of said principal. Otherwise, if he signs without disclosing
his principal, he may be personally liable as an indorser of the bill
or note.
Sec. 45. Time of indorsement; presumption. - Except where
an indorsement bears date after the maturity of the
instrument, every negotiation is deemed prima facie to have
been effected before the instrument was overdue.
Notes:
Basic Principles and Jurisprudence on the Negotiable Instruments Law 282
What is the presumption regarding the time of the
indorsement of the instrument? Is there any exception to
the presumption?
ANSWER:
Every negotiation is deemed prima facie effected before
the instrument was overdue.
Except where an indorsement bears date after the maturity
of the instrument. (Sec. 45, Negotiable Instruments Law)
The presumption is grounded upon good faith and sound
business practices, and only applies when there is no date
indicated for the maturity of the instrument, otherwise, the written
date will govern.
Sec. 46. Place of indorsement; presumption. - Except where
the contrary appears, every indorsement is presumed prima
facie to have been made at the place where the instrument is
dated.
Notes:
What is the presumption regarding the place of indorsement
of the instrument?
ANSWER:
Every instrument is presumed prima facie to have been
made at the place where the instrument is dated. Except where
the contrary appears. (Sec. 46, Negotiable Instruments Law)
Sec. 47. Continuation of negotiable character. - An instrument
negotiable in its origin continues to be negotiable until it has
been restrictively indorsed or discharged by payment or
otherwise.
Notes:
What is the rule on the continuity of a negotiable instrument?
283
ANSWER:
An instrument negotiable in its origin continues to be
negotiable until it has been restrictively indorsed or discharged
by payment or otherwise. (Sec. 47, Negotiable Instruments Law)
However, the same rule is subject to the statute of limitations.
Overdue note still negotiable
An overdue promissory note is still negotiable within a statute
exempting from attachment debts secured by bills of exchange
or negotiable promissory notes, and hence the amount due
thereon is exempt from foreign attachment. (Brannan, page 49,
citing Oaskdale Mfg. Co. v. Clarke, 29 R.I. 192, 69 Atl. 681.)
After maturity, negotiable paper circulates, but transferee only
acquires the right and title of the transferrer
After maturity negotiable paper still passes from hand to
hand ad infinitum until paid. Moreover, the indorser, after maturity,
writes in the same form, and is bound only upon the same
condition of demand upon the drawer and notice of nonpayment
as any other indorser. The paper retains its commercial attributes,
and circulates as such in the community; but there is this vital
distinction between the rights of a transferee who received the
paper before, and of one who received it after maturity. The
transferee of negotiable paper to whom it is transferred after
maturity, acquires nothing but the actual right and title of the
transferrer;
467
and the like rule applies to the transferee who takes
the paper after a refusal to accept by the drawee, provided he
had notice of such refusal.
468
In other words, the transferee of
negotiable paper refused acceptance (with notice thereof), or
overdue, takes it subject to all the equities with which it was
encumbered in the hands of the party from whom he received it;
for it comes, to use Lord Ellenboroughs words, disgraced to him.
Thus, if he took it from a thief, or finder, or from a bankrupt
incapacitated by law to make the transfer, he could not recover
on it, inasmuch as the thief, finder, or bankrupt could not.
469
467
Texas v. Hardenburg, 10 Wall. 68; Morgan v. United States, 113 U.S. 500
468
OKeefe v. Dunn, 6 Taunt. 305; Bartlett v. Benson, 14 M & W 733
469
Byles on Bills [161], 284; Ashurst v. Royal Bank, 27 Law Times, 168
Basic Principles and Jurisprudence on the Negotiable Instruments Law 284
(Daniel, Elements of the Law of Negotiable Instruments, pages
126-127)
Sec. 48. Striking out indorsement. - The holder may at any
time strike out any indorsement which is not necessary to
his title. The indorser whose indorsement is struck out, and
all indorsers subsequent to him, are thereby relieved from
liability on the instrument.
Notes:
Where an indorsement is not necessary to the title of the
holder of the bill or note, he may, as a rule, strike it out and all
indorsers subsequent to him are relieved from their liability. It
should be taken into consideration that indorsers incur liability
once they indorse the bill or note. And once that indorsement is
stricken off, all subsequent indorsers are relieved from liability.
Illustrative cases:
An indorsee indorsed the note to a bank for collection, and
upon its dishonor received it back. Held, such indorsee in
possession of the note was a holder under sec. 191, and that he
could sue upon it without striking out his indorsement. Mere
possession was sufficient evidence of ownership to support the
suit (sec. 51). (Brannan, page 49, citing New Haven Mrg. Co. v.
New Haven Pulp Co., 76 Conn. 126, 55 Atl. 604.)
One in possession of negotiable paper, indorsed in blank
by the payee, is prima facie the owner thereof, and the mere
erasure of subsequent indorsements does not destroy this
presumption. (Ibid, citing King v. Bellamy (Kan.), 108 Pac. 117.)
Plaintiff sued the maker and the payee on a note indorsed
by the payee in blank, under which indorsement appeared the
words to acct of B.F.E. Held, that even if these words constituted
a subsequent restrictive indorsement, it was not necessary to
plaintiffs title, and he could strike it out at the trial and recover as
bearer. (Ibid, citing Jerman v. Edwards, 29 App. D.C. 535.)
Sec. 49. Transfer without indorsement; effect of. - Where the
holder of an instrument payable to his order transfers it for
285
value without indorsing it, the transfer vests in the transferee
such title as the transferor had therein, and the transferee
acquires in addition, the right to have the indorsement of the
transferor. But for the purpose of determining whether the
transferee is a holder in due course, the negotiation takes
effect as of the time when the indorsement is actually made.
Notes:
Section 49 of the Negotiable Instruments Law contemplates
a situation whereby the payee or indorsee delivers a negotiable
instrument for value without indorsing it.
470
It bears stressing that
the above transaction is an equitable assignment and the
transferee acquires the instrument subject to defenses and
equities available among prior parties. Thus, if the transferor had
legal title, the transferee acquires such title and, in addition, the
right to have the indorsement of the transferor and also the right,
as holder of the legal title, to maintain legal action against the
maker or acceptor or other party liable to the transferor. The
underlying premises of this provision, however, is that a valid
transfer of ownership of the negotiable instrument in question has
taken place.
471
Transferees in this situation do not enjoy the presumption
of ownership in favor of holders since they are neither payees nor
indorsees of such instruments. The weight of authority is that the
mere possession of a negotiable instrument does not in itself
conclusively establish neither the right of the possessor to receive
payment, or of the right of one who has made payment to be
discharged from liability. Thus, something more than mere
possession by persons who are not payees or indorsers of the
instruments is necessary to authorize payment to them in the
absence of any other facts from which the authority to receive
payment may be inferred.
472
It is an exception to the general rule for a payee of an order
instrument to transfer the instrument without indorsement.
470
Bank of the Philippine Islands vs. Court of Appeals, et al, G.R. No. 136202,
January 25, 2007, [Azcuna, J.]
471
Ibid.
472
11 Am Jur 2d, 988, citing Doubleday v. Kress, 50 NY 410, Hoffmaster v.
Black, 84 NE 423, and First Nat. Bank v. Gorman, 21 P2d 549
Basic Principles and Jurisprudence on the Negotiable Instruments Law 286
Precisely because the situation is abnormal, it is but fair to the
maker and to prior holders to require possessors to prove without
the aid of an initial presumption in their favor, that they came into
possession by virtue of a legitimate transaction with the last
holder.
473
It has been held in Scotland that under the Bills of Exchange
Act, section 31 (4) which is the same as section 49, N.I.L., the
transferee for value, but without indorsement, of a bill accepted
for the accommodation of the drawer-payee gets the title of the
transferor and may hold the acceptor without first getting an
indorsement. (Hood v. Stewart, 17 Session Cases (4
th
Series)
749. x x x Section 49 seems to change the law to the extent that
transfer for value, even without indorsement, of an instrument,
payable to order, passes the legal title, although subject to equities.
But accommodation, as against a transferee for value, is not,
properly speaking, an equity but only a defense against the
accommodated party and transferees without value. (cited in
Brannan, pages 50-51)
This section vests the title in the transferee without
indorsement, and is not affected by secs. 30, 31. (Swenson v.
Stoltz, 36 Wash. 318, 78 Pac. 999, S.C. sec. 18; Meuer v. Phoenix
Nat. Bank, 94 App. Div. 331, 88 N.Y. Supp. 83, S.C. sec. 187.)
But the transferee without indorsement of a note payable to order
cannot be a holder in due course, notwithstanding sec. 59, for
under sec. 191 he is neither holder, because not a payee or
indorsee, nor bearer, because the instrument is not payable to
bearer. (Mayers v. McRimmon, 140 N.C. 640, 53 S.E. 447, 111
Am. St. Rep. 879, S.C. sec. 31, cited in Brannan, page 51)
Illustrative Cases:
Plaintiff sued the maker on a note, on the back of which
appeared an indorsement of the name of the payee, but gave no
proof of genuineness of the indorsement. Held, that plaintiff could
recover as the equitable owner of the note, subject to any defenses
against the payee. (Johnson County Savings Bank v. Scoggin
Drug Co. (N.C.), 67 S.E. 253.)
473
Campos Jr. and Lopez Campos, Notes and Selected Cases on Negotiable
Instruments Law, p. 108, (1994)
287
Defendant, to accommodate C, drew a bill to his own order
on C, who accepted the bill and transferred it to plaintiff for a
loan. Defendant neglected to indorse the bill, which was not
noticed by plaintiff when he made the advance. Held, that
defendant was the holder of the bill within sec. 2 (N.I.L. sec.
191), that he transferred it by means of C to the plaintiff, and that
plaintiff was entitled to have the indorsement of defendant and to
recover against him on the bill. (Walters v. Neary, 21 T.L.R. 146;
cf. Day v. Longhurst, Weekly notes (1893), 3, S.C. sec. 191., cited
in Brannan, page 52)
Sec. 50. When prior party may negotiate instrument. - Where
an instrument is negotiated back to a prior party, such party
may, subject to the provisions of this Act, reissue and further
negotiable the same. But he is not entitled to enforce payment
thereof against any intervening party to whom he was
personally liable.
Notes:
Can a prior party further negotiate the instrument?
ANSWER:
Yes. Where an instrument is negotiated back to a prior
party, such party may, subject to the provisions of the Negotiable
Instruments Law, reissue and further negotiate the same. (Sec.
50, Negotiable Instruments Law)
Are there limitations on the reissuance or further negotiation
of the instrument?
ANSWER:
Yes. The prior party is not entitled to enforce payment of
the instrument against any intervening party to whom he was
personally liable. (Sec. 50, Negotiable Instruments Law)
Illustration:
A indorsed the note to B, B to C, C to D, then D back to B.
Applying this rule, B can still further reissue or negotiate said note,
Basic Principles and Jurisprudence on the Negotiable Instruments Law 288
however, the limitation is that he cannot enforce payment against
C and D (hereto referred as intervening parties), in case the note
is dishonored by the maker, this is because B is also liable to C
and D as an indorser, before the note was negotiated back to
him.
IV. RIGHTS OF THE HOLDER
It is a general principle of the law merchant that, as between
the immediate parties to a negotiable instrumentparties between
whom there is a privitythe only superiority of such an instrument
over other unsealed evidences of debt is that it prima facie imports
a consideration. But a bona fide holder for value of such an
instrument takes it discharged of all the equities existing between
antecedent parties, and may recover it although it be without any
validity as between the parties prior to himself, as, for example, if
it was without consideration originally, or the consideration has
failed, or the instrument was subsequently released or paid, or
even through it was originally obtained by fraud, theft, or robbery.
474
This general rule is subject to certain exceptions, treated of in the
succeeding sections. (Daniel, Elements of the Law of Negotiable
Instruments, page 122)
It should be observed, however, that as between him and
his immediate predecessor, or party between whom and himself
a privity exists, he stands upon the same footing as the payee of
a note against the maker. Fraud, illegality, want or failure of
consideration may be pleaded against him by such immediate
party as freely as if the instrument were not negotiable.
475
(Ibid)
Sec. 51. Right of holder to sue; payment. - The holder of a
negotiable instrument may to sue thereon in his own name;
and payment to him in due course discharges the instrument.
Notes:
Holder with legal title may sue
Any holder of a bill or note who can trace a clear legal title
to it, is entitled to sue upon it in his own name, whether he
possesses the beneficial interest in its contents or not.
476
If the
474
Daniel on Negotiable Instruments, 169a, and cases cited
475
Daniel on Negotiable Instruments, 810
476
Caldwell v. Lawrence, 84 Ill. 161; Harpending v. Daniel, 80 Ky. 456
289
note by payable to A or B, it may be sued upon by them jointly or
by either one of them.
477
If there be a special indorsement, or
assignment to a particular person, he is the proper person to sue;
and if he is in possession he may sue although his name be
indorsed on the paper, after the special indorsement or
assignment. For in such case his indorsement will be presumed
to be a mere memorandum, or evidence that he had negotiated
the paper and then taken it up.
478
(Ibid, page 268)
Agents, receivers, assignees, trustees, or personal
representatives, may sue on a note or bill payable to bearer, or
indorsed in blank.
479
And the done cause mortis of a note payable
to the donor s order may use the name of his personal
representative, even against his protest.
480
But a mere depositary
of such a note cannot maintain suit.
481
If the paper be indorsed
specially to a particular person, none but such person or his
representative can sue.
482
A party for accommodation who pays
the bill may sue prior parties, but not subsequent ones. If an
acceptor or maker for accommodation pays the bill he cannot
sue drawer or indorser upon the bill, because, according to its
terms, he is liable to them. But he may sue the accommodation
party for money paid at his request.
483
(Ibid, page 269)
Cause of action indivisible
It is a general principle of law that a party cannot divide an
entire demand or cause of action, and maintain several suits for
its recovery; and a recovery for part of an entire demand will bar
an action for the remainder, if due at the time that the first action
was brought. (Ibid, page 271)
When instrument payable to bearer
An action on a bill or note payable to bearer, or indorsed in
blank, may be maintained in the name of the nominal holder who
477
Westgate v. Healy, 4 R.I. 524
478
Humphreyville v. Culver, 73 Ill. 485
479
Law v. Parnell, 7 C.B. (N.S.) 282; Bowman v. Wood, 15 Mass, 534; Haxtun
v. Bishop, 3 Wend. 13; Daniel on Negotiable Instruments, 264; 2 Parsons
on Notes and Bills, 446
480
Grover v. Grover, 24 Pick. 261; Sessions v. Mosley, 4 Cush. 87
481
Sherwood v. Roys, 14 Pick. 172
482
Daniel on Negotiable Instruments, 692, 1181a
483
Stark v. Alford, 49 Tex. 260
Basic Principles and Jurisprudence on the Negotiable Instruments Law 290
is not the owner by the owners consent; and that possession by
such nominal holder is prima facie sufficient evidence of his right
to sue, and cannot be rebutted by proof that he has no beneficial
interest, or by anything else but proof of mala fides.
484
If it were
shown that the plaintiff upon suing upon a note payable to bearer
or indorsed in blank, has no interest in it, and in addition that he is
suing against the will of the party beneficially interested, he could
not recover, and his conduct would be in bad faith.
485
It matters
not that such nominal holder will receive the amount as trustee,
agent, or pledge.
486
The suit by him holding the paper shows his
title to recover; and it cannot matter to the defendant who
discharges the debt that the plaintiff is accountable over to a third
party. Evidence, however, that the plaintiff has no interest in the
instrument will be competent when foundation has been laid for
its introduction by offer to prove offset, or other defense, available
against a third person who is its true owner.
487
(Ibid, page 273)
Rights of a holder under a blank indorsement
The holder of a note blank as to the payee may fill it up with
his own name and sue upon it.
488
If payable to a fictitious person,
it may be sued on as payable to bearer.
489
The holder of such a
paper, in transferring it, should not use the fictitious name, but
pass it by delivery only, or by indorsement,
490
and even after the
trial, where judgment has gone for the plaintiff under the
impression that the indorsement had been filled up, the correction
being made nunc pro tunc.
491
(Ibid, page 274)
But the filling up of the blank indorsement is formal merely,
and not necessary that it should be filled up at all, for the mere
act of suing upon it by the holder evidences his intention to treat
the indorser as a transferrer and indorser to himself.
492
And if the
plaintiff omit to state in his declaration all the indorsements after
484
Demuth v. Cutler, 50 Me. 300; Rubelman v. McNichol, 13 Mo. App. 584
485
Tonne v. Wasson, 128 Mass. 517
486
Nicolay v. Fritschle, 40 Mo. 67; King v. Fleece, 7 Heisk. 67; Bowman v.
Wood, 15 Mass. 534
487
Logan v. Cassell, 88 Pa. St. 290
488
Crutchley v. Clarence, 2 Maule & S 90
489
Parsons on Notes and Bills, 448
490
Maniort v. Roberts, 4 E.D. Smith, 83
491
Whitter v. Hayden, 9 Allen, 408
492
Rees v. Conococheague Bank, 5 Rand. 329; Poorman v. Mills, 35 Cal.
118
291
the first indorsement in blank, he may strike out the intervening
indorsements, and aver that the first blank indorser indorsed
immediately to himself.
493
(Ibid)
When indorsement is in full
If the bill or note be not payable to bearer or indorsed in
blank, or indorsed specially to himself, the holder cannot (unless
authorized by statute) sue in his own name, for although he may
possess the entire beneficial interest, the legal title is still
outstanding in his transferrer, and he must use his name in order
to maintain the suit.
494
By leaving the instrument unendorsed, the
transferrer necessitates and authorizes the use of his name to
the recovery of the amount; and he cannot object to its use, or
release the action when instituted.
495
If the transferrer indorses
the paper, then his name cannot be used save by his own consent;
for then the legal title and right to sue is vested in his indorsee.
496
But if the suit is commenced without his consent, he may
subsequently assent to it.
497
(Ibid, pages 274-275)
Possession is prima facie evidence of ownership
Possession is in itself prima facie evidence of the right of
the party to sue and receive money when he holds under a legal
title, and also that the title, although not expressly, is actually vested
in him. And therefore in order to defeat his suit, it must be shown
that he is a mala fide holder.
498
As said in a Maryland case by
Chambers, J.: A bill payable to bearer, or a bill payable to order
and indorsed in blank, will pass by delivery, and bare possession
is prima facie evidence of title, and for that reason possession of
such a bill would entitle the holder to sue.
499
And possession of
the note or bill is prima facie evidence that the same was indorsed
by the person by whom it purports to be indorsed;
500
and production
493
Rand. V. Dovey, 83 Pa. St. 281; Merz v. Kaiser, 20 La. Ann. 379; Byles on
Bills [149], 268
494
Allen v. Newbury, 8 Iowa 65; Robinson v. Wilkinson, 38 Mich. 301; Marsh
v. Hayford, 80 Mc. 97
495
Paese v. Hirst, 10 B & C 123; Amherst Academy v. Cowles, 6 Pick, 427;
Royce v. Nye, 52 Vt. 372
496
Bowie v. Duval, 1 Gill & J 175; Mosher v. Allen, 16 Mass. 451
497
Golder v. Foss, 43 Me, 364
498
Wheeler v. Johnson, 97 Mass. 39; Wilson Sewing Machine Co. v. Spears,
50 Mich, 534; Union Nat. Bank v. Barber, 56 Iowa, 562
499
Whiteford v. Burckmyer, 1 Gill, 127
500
Bank v. Mallan, 37 Minn. 404
Basic Principles and Jurisprudence on the Negotiable Instruments Law 292
at the trial is prima facie evidence that it remains unpaid. But
possession of the instrument is not always necessary in order to
institute a suit. If the holder has indorsed a note in blank and
pledged it as collateral security, he may negotiate it to a third
person, while still pledged, and such person may sue as indorsee
while it is still in pledge, and maintain an action by discharging
the lien and producing the note at the trial.
501
(Ibid, page 275)
Who may be sued? General Principle
As a general rule, the holder may sue all the prior parties
on the bill or note, but not any subsequent party. Thus a payee
may sue the acceptor or maker. An indorsee may sue the acceptor
or maker, and all prior indorsers. (Ibid, page 276)
When indorser can sue acceptor or maker
The indorser of a bill or note cannot sue the acceptor or
maker until he has paid or satisfied it. But as soon as he does
this he may sue the acceptor or maker.
502
And if one indorser
sues a prior party, it is not necessary for him to show that he had
received notice, provided it was duly received by such prior party.
503
Where there are a number or indorsers, any one may sue, by
arrangement between them, all indorsers subsequent to his being
stricken out.
504
(Ibid)
When drawer can sue acceptor and vice versa
The drawer, says Mr. Chitty, may maintain an action on
the bill against the acceptor, in case of a refusal to pay a bill already
accepted, but not on a refusal to accept, in which latter case the
action must be special on the contract to accept.
505
Certainly the
drawer may sue the acceptor if he had to pay the bill, or may
leave it in the hands of the indorsee to sue for his benefit;
506
but is
has been held that he cannot recover without evidence that he
has paid the bill.
507
(Ibid, page 277)
501
Fisher v. Bradford, 7 Greenl. 28
502
Hoyt v. Wilkinson, 10 Pick. 31; McDonald v. Magruder, 3 Pet. 470
503
Ellsworth v. Brewer, 11 Pick, 316
504
Walwyn v. St. Quintin, 1 Bos & P 652
505
Chitty on Bills [537], 608
506
Louviere v. Laubray, 10 Mod. 36; Thurman v. Van Brunt, 19 Barb. 410;
Williams v. James, 15 Ad & El (N.S.) 69
507
Thompson v. Flower, 1 Mart. N.S. (La) 301; 2 Parsons on Notes and Bills,
453
293
Where the acceptance is for the drawers accommodation,
and the acceptor pays the bill, he cannot sue the drawer upon the
bill, for it imports no liability to him, but he may sue for money
paid at his request.
508
But an acceptor for honor of the drawer or
indorser may sue such drawer or indorser upon the bill itself.
509
(Ibid)
Sec. 52. What constitutes a holder in due course. - A holder
in due course is a holder who has taken the instrument under
the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue,
and without notice that it has been previously
dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no
notice of any infirmity in the instrument or defect in
the title of the person negotiating it.
Notes:
The act of crossing a check serves as a warning to the holder
that the check has been issued for a definite purpose so that the
holder thereof must inquire if he has received the check pursuant
to that purpose; otherwise, he is not a holder in due course. (Dino
vs. Loot, G.R. No. 170912, April 19, 2010, [Carpio, J.])
However, the fact that respondents are not holders in due
course does not automatically mean that they cannot recover on
the check. The Negotiable Instruments Law does not provide
that holder who is not a holder in due course may not in any case
recover on the instrument. The only disadvantage of a holder
who is not in due course is that the negotiable instrument is subject
to defenses as if it were non-negotiable. Among such defenses
is the absence or failure of consideration, which petitioner
sufficiently established in this case. Petitioner issued the subject
check supposedly for a loan in favor of Consings group, who
turned out to be a syndicate defrauding gullible individuals. Since
508
Bell v. Norwood, 7 La. 95; Stark v. Alford, 49 Tex. 260
509
2 Parsons on Notes and Bills, 455
Basic Principles and Jurisprudence on the Negotiable Instruments Law 294
there is in fact no valid loan to speak of, there is no consideration
for the issuance of the check. Consequently, petitioner cannot
be obliged to pay the face value of the check. (supra)
An allegation in an answer that plaintiff is not a holder in
due course is a conclusion of law and insufficient to show which
of the conditions named in sec. 52 has not been complied with.
(Rogers v. Morton, 46 Misc. R. 494, 95 N.Y. Supp. 49, S.C. secs.
26, 30, cited in Brannan, page 54)
A woman delivered to her husband a check made payable
to a certain creditor, with instructions to pay her debt with it. The
husband handed the check to the creditor as payment upon a
debt of his own to the same creditor who accepted it as such in
good faith. Held, the creditor was a holder in due course of the
check. (Boston Steel & Iron Co. v. Steuer, 183 Mass. 140, 66
N.E. 646, 97 Am. St. Rep. 426, S.C. sec. 14, Ibid)
A note payable to the makers order was indorsed in blank
to a bank. The note was afterwards altered by inserting payable
with interest. The bank made a deed of trust of all its property
including the note to secure its creditors. Held, that in Virgina a
pre-existing debt is a valuable consideration for a deed of trust to
secure it, and that the trustee was a holder in due course and
could recover on the note according to its original tenor, under
sec. 124. (Trustees of American Bank v. McComb, 105 Va. 473,
54 S.E. 14, S.C. secs. 25, 52-1, cited in Brannan, pages 54-55)
The payee of a note agreed with the accommodation maker
that it should not be negotiated to one R, of which fact R was
aware. The payee offered to sell the note to R, who lent the money
to S, who bought the note. Before maturity S sold the note to
plaintiff, who was ignorant that it was an accommodation note
and of the agreement, and who paid for it by his own note to S,
who still held it. Held, plaintiff could recover of the maker the full
amount of the latters note. (Mehlinger v. Harriman, 185 Mass.
245, 70 N.E. 51., cited in Brannan, page 55)
Complete and Regular upon its Face
The fact that the words payable with interest are written
on a blank space after the words value received in the same
295
handwriting as the other written parts of the note, does not prevent
the note being complete and regular on its face. (Trustees of
American Bank v. McComb, 105 Va. 473, 54 S.E. 14, sec. 25, 52,
cited in Brannan, page 55)
A partner in a firm which had dissolved, but without giving
notice thereof, signed notes in blank payable to X and sent them
to X or to a bank where they were filled up as to date, amount,
and maturity by the cashier as occasion required, and the proceeds
placed to the credit of X. Held, that the bank was not a holder in
due course, and could not recover against the retired partner
without proof that he had authorized or ratified the issue of the
notes. (Hunder v. Allen, 127 App. Div. 572; 111 N.Y. Supp. 820,
ibid)
A post-dated check is valid and negotiable, and is complete
and regular on its face, notwithstanding it is stamped as a check,
and not as a bill of exchange payable on time. (Hitchcock v.
Edwards, 60 L.T. Rep. 636, cited in Brannan, page 56.)
The defendant accepted a bill otherwise complete, but the
place for the drawers signature was left blank and under it was
written, Drawn to the order of X. The bill was sent to X to be
used for a certain purpose. X instead of using the bill for such
purpose transferred it to plaintiff, who paid value bonafide. X
indorsed the bill, but neglected to sign it was drawer until after it
was overdue and dishonored. Held, that the bill was not complete
and regular when plaintiff took it and that he could not recover.
(South Wales, etc., Co. v.. Underwood (Q.B. Div. 1899), 15 T.L.
Rep. 157, ibid)
Became Holder before Overdue
A note providing that any delinquency in the payment of
interest shall cause the note to immediately become due and
collectible is made overdue by the failure to pay the interest when
due, and a subsequent taker cannot be a holder in due course.
(Hodge v. Wallace, 129 Wis. 84, 108 N.W. 212, 116 Am. St. Rep.
938, cited in Brannan, page 56)
A note payable one day after date is not overdue at any
time on the day after its date. (Wilkins v. Usher, 123 Ky. 696, 97
S.W. 37, S.C. sec. 25, Brannan, page 56)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 296
A bill drawn for the acceptors accommodation but which
had never been negotiated was in the hands of the drawer after
maturity, and having come into the possession of the drawers
solicitors, the latter claimed a lien on it for services previously
rendered the drawer in an action to recover the bill from a
converter, and sued the acceptor on the bill. Held, that plaintiffs
taking the bill overdue could acquire no rights against the
acceptor. (Redfern v. Rosenthal, 86 L.T. Rep. 855, cited in
Brannan, page 56)
In his own right is used merely in contradistinction to a
right in a representative capacity, but indicates a right not subject
to that of another person, and good against all the world. x x x A
gave a demand note payable to B or order on the understanding
that it would not be negotiated. B, however, indorsed the note for
value to C. Afterwards A paid B the amount of the note. B then
obtained the note from C by fraud and gave it to A. Held, that A
was not a holder for value, the previous payment not being a
consideration given when he received back the note, and he is
still liable to C on the note. (Nash v. DeFreville [1900] 2 Q.B. 72,
cited in Brannan, page 56)
Meaning of term before maturity
The holder in order to acquire a better right and title to the
paper than his transferrer, must have possessed of it before it is
overdue. For if it were already paid by the maker or acceptor,
and had been left outstanding, it would be already discharged,
and they would not be bound to pay it again to anyone who
acquired if after the period when payment was due. And if it were
not paid at maturity, it is then considered as dishonored; and
although still transferable in like manner and form as before, yet
the fact of its dishonor, which is apparent from its face, is equivalent
to notice to the holder that he takes it subject to its infirmities, and
can acquire no better title than his transferrer.
510
The doctrine
applicable to this subject has been admirably stated by Chief
Justice Shaw, who says: Where a negotiable note is found in
circulation after its due, it carries suspicion on the fact of it. The
question instantly arises: Why is it in circulation? Why is it not
paid? There is something wrong. Therefore, although it does not
510
Morgan v. United States, 113 U.S. 500; Speck v. Pullman Car Co., 121 Ill.
57
297
give the indorsee notice of any specific matter of defense, such
as set-off payment, or fraudulent acquisition, yet it puts him on
inquiry; he takes only such title as the indorser himself has, and
subject to any defense which might be made if the suit were
brought by the indorser.
511
But there is this limitation to this
doctrine: that if the holder acquired the paper after maturity, from
one who became a bona fide holder for value and without notice
before maturity, he is then protected by the strength of his
transferrers title.
512
(Daniel, Elements of the Law of Negotiable
Instruments, pages 151-152)
Took it in Good Faith and for Value
A bank discounting a note and obtaining credit in favor of
the seller in another solvent bank for the amount, is a holder for
value. But the mere statement that such credit was given, when
it does not appear how it was given or that it was ever used, is not
enough to enable the court to determine whether the credit was
real or substantial. (Elgin City Banking Co. v. Hall, 119 Tenn.
548 S.W. 1068, S.C. secs, 34, 38, cited in Brannan, page 57)
The manager of a bank stole negotiable securities from
the bank and pledged them with A. He afterwards got them back,
with other negotiable securities from A by fraud and replaced them
in the bank. The bank knew nothing of the transaction. Held,
that the bank was a holder in due course and entitled to keep the
securities. (Brannan, page 58 citing London & County Banking
Co. v. London & River Plate Bank, 21 Q.B.D. 535.)
The purchaser must have acquired the instrument for a
valuable consideration.
513
In some cases it is said that the holder
must have parted with full value, sometimes fair value, and
sometimes the expression for value is used. And if he does so
at any price, the holder acquires full rights and interests in the
instrument as against all parties, unless he had notice of defects,
or willfully abstained from inquiry under circumstances which justify
the imputation of bad faith. (Daniel, Elements of the Law of
Negotiable Instruments, page 145)
511
Fisher v. Leland, 4 Cush. 456
512
Ante, 201
513
See ante 90-115 (Murray v. Lardner, 2 Wall. 710)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 298
Without notice of fraud or defect of title, and illegality
In order to stand upon a better footing than his transferrer,
the holder must acquire the instrument without notice of fraud,
defect of title, illegality of consideration, or other fact which
impeaches its validity in his tranferrers hands; and word notice in
this connection signifies the same as knowledge. Knowledge of
fraud or illegality impeaches the bona fides of the holder, or at
least destroys the superiority of his title, and leaves him in the
shoes of the transferrer.
514
And any fraud upon the transferrer
incapacitates the transferee or one acquiring from him with notice
from recovering against the transferrer.
515
(Daniel, Elements of
the Law of Negotiable Instruments, page 155)
Illustrative Case:
Crossed Checks; Holder in Due Course.
State Investment House vs.
Intermediate Appellate Court, Anita Chua and Harris
Chua
G.R. No. 72764, July 13, 1989
FERNAN, C.J:
Petitioner State Investment House seeks a review of the
decision of respondent Intermediate Appellate Court (now Court
of Appeals) in AC-G.R. CV No. 04523 reversing the decision of
the Regional Trial Court of Manila, Branch XXXVII dated April 30,
1984 and dismissing the complaint for collection filed by petitioner
against private respondents Spouses Anita Pea Chua and Harris
Chua.
It appears that shortly before September 5, 1980, New
Sikatuna Wood Industries, Inc. requested for a loan from private
respondent Harris Chua. The latter agreed to grant the same
subject to the condition that the former should wait until December
1980 when he would have the money. In view of this agreement,
514
Hanauer v. Doane, 12 Wall. 342; Crampton v. Perkins, 65 Md. 24; Mace
v. Kennedy, 68 Mich. 70
515
Lenheim v. Fay, 27 Mich. 70
299
private respondent-wife, Anita Pea Chua issued three (3) crossed
checks payable to New Sikatuna Wood Industries, Inc. all
postdated December 22, 1980 as follows:
DRAWEE BANK CHECK NO. DATE AMOUNT
1. China Banking 589053 Dec. 22, 1980 P98,750.00
Corporation
2. International 04045549 Dec. 22, 1980 102,313.00
Corporate
Bank
3. Metropolitan 036512 Dec. 22, 1980 98,387.00
Bank &
Trust Co.
The total value of the three (3) postdated checks amounted
to P 299,450.00.
Subsequently, New Sikatuna Wood Industries, Inc. entered
into an agreement with herein petitioner State Investment House,
Inc. whereby for and in consideration of the sum of Pl,047,402.91
under a deed of sale, the former assigned and discounted with
peti ti oner el even (11) postdated checks i ncl udi ng the
aforementioned three (3) postdated checks issued by herein
private respondent-wife Anita Pea Chua to New Sikatuna Wood
Industries, Inc.
When the three checks issued by private respondent Anita
Pea Chua were allegedly deposited by petitioner, these checks
were dishonored by reason of insufficient funds, stop payment
and account closed, respectively. Petitioner claims that despite
demands on private respondent Anita Pea to make good said
checks, the latter failed to pay the same necessitating the former
to file an action for collection against the latter and her husband
Harris Chua before the Regional Trial Court of Manila, Branch
XXXVII docketed as Civil Case No. 82-10547.
Private respondents-defendants filed a third party complaint
against New Sikatuna Wood Industries, Inc. for reimbursement
and indemnification in the event that they be held liable to
Basic Principles and Jurisprudence on the Negotiable Instruments Law 300
petitioner-plaintiff. For failure of third party defendant to answer
the third party complaint despite due service of summons, the
latter was declared in default.
On April 30, 1984, the lower court
516
rendered judgment
against herein private respondents spouses, the dispositive
portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the
plaintiff or against the defendants ordering the defendants
to pay jointly and severally to the plaintiff the following
amounts:
1. P 229,450.00 with interest at the rate of 12% per
annum from February 24,1981 until fully paid;
2. P 29,945.00 as and for attorneys fees; and
3. the costs of suit.
On the third party complaint, third party defendant New
Sikatuna Wood Industries, Inc. is ordered to pay third party
plaintiffs Anita Pea Chua and Harris Chua all amounts said
defendants third- party plaintiffs may pay to the plaintiff on
account of this case.
517
On appeal filed by private respondents in AC-G.R. CV No.
04523, the Intermediate Appellate Court
518
(now Court of Appeals)
reversed the lower courts judgment in the now assailed decision,
the dispositive portion of which reads:
WHEREFORE, finding this appeal meritorious, We Reverse
and Set Aside the appealed judgment, dated April 30, 1984
and a new judgment is hereby rendered dismissing the
complaint, with costs against plaintiff-appellee.
519
Hence, this petition.
516
Presided over by then Judge (now Court of Appeals Justice) Bienvenido
C. Ejercito.
517
Petition, Annex A, RTC Decision, Rollo, pp. 42- 43.
518
Penned by Justice Eduardo P. Caguioa, concurred in by Presiding Justice
Ramon G. Gaviola, Jr., Justices Ma. Rosario Quetulio-Losa and Leonor
Ines-Luciano.
519
Rollo, p. 51.
301
The pivotal issue in this case is whether or not petitioner is
a holder in due course as to entitle it to proceed against private
respondents for the amount stated in the dishonored checks.
Section 52(c) of the Negotiable Instruments Law defines a
holder in due course as one who takes the instrument in good
faith and for value. On the other hand, Section 52(d) provides
that in order that one may be a holder in due course, it is necessary
that at the time the instrument was negotiated to him he had no
notice of any x x x defect in the title of the person negotiating it.
However, under Section 59 every holder is deemed prima facie to
be a holder in due course.
Admittedly, the Negotiable Instruments Law regulating the
issuance of negotiable checks as well as the rights and liabilities
arising therefrom, does not mention crossed checks. But this
Court has taken cognizance of the practice that a check with two
parallel lines in the upper left hand corner means that it could
only be deposited and may not be converted into cash.
Consequently, such circumstance should put the payee on inquiry
and upon him devolves the duty to ascertain the holders title to
the check or the nature of his possession. Failing in this respect,
the payee is declared guilty of gross negligence amounting to
legal absence of good faith and as such the consensus of authority
is to the effect that the holder of the check is not a holder in good
faith.
520
Petitioner submits that at the time of the negotiation and
endorsement of the checks in question by New Sikatuna Wood
Industries, it had no knowledge of the transaction and/or
arrangement made between the latter and private respondents.
We agree with respondent appellate court.
Relying on the ruling in Ocampo v. Gatchalian (supra), the
Intermediate Appellate Court (now Court of Appeals), correctly
elucidated that the effects of crossing a check are: the check may
not be encashed but only deposited in the bank; the check may
be negotiated only once to one who has an account with a bank;
and the act of crossing the check serves as a warning to the holder
520
Ocampo & Co. v. Gatchalian, 3 SCRA 603 (1961).
Basic Principles and Jurisprudence on the Negotiable Instruments Law 302
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. Further, the appellate
court said:
It results therefore that when appellee rediscounted the
check knowing that it was a crossed check he was knowingly
violating the avowed intention of crossing the check.
Furthermore, his failure to inquire from the holder, party
defendant New Sikatuna Wood Industries, Inc., the purpose
for which the three checks were cross despite the warning
of the crossing, prevents him from being considered in good
faith and thus he is not a holder in due course. Being not a
holder in due course, plaintiff is subject to personal defenses,
such as lack of consideration between appellants and New
Sikatuna Wood Industries. Note that under the facts the
checks were postdated and issued only as a loan to New
Sikatuna Wood Industries, Inc. if and when deposits were
made to back up the checks. Such deposits were not made,
hence no loan was made, hence the three checks are
without consideration (Sec. 28, Negotiable Instruments
Law).
Likewise New Sikatuna Wood Industries negotiated the
three checks in breach of faith in violation of Article (sic) 55,
Negotiable Instruments Law, which is a personal defense
available to the drawer of the check.
521
In addition, such instruments are mentioned in Section 541
of the Negotiable Instruments Law as follows:
Sec. 541. The maker or any legal holder of a check shall be
entitled to indicate therein that it be paid to a certain banker
or institution, which he shall do by writing across the face
the name of said banker or institution, or only the words
and company.
The payment made to a person other than the banker or
institution shall not exempt the person on whom it is drawn,
if the payment was not correctly made.
521
Petition, Annex B, IAC Decision, Rollo, pp. 50- 51.
303
Under usual practice, crossing a check is done by placing
two parallel lines diagonally on the left top portion of the check.
The crossing may be special wherein between the two parallel
lines is written the name of a bank or a business institution, in
which case the drawee should pay only with the intervention of
that bank or company, or crossing may be general wherein
between two parallel diagonal lines are written the words and
Co. or none at all as in the case at bar, in which case the drawee
should not encash the same but merely accept the same for
deposit.
The effect therefore of crossing a check relates to the mode
of its presentment for payment. Under Section 72 of the Negotiable
Instruments Law, presentment for payment to be sufficient must
be made (a) by the holder, or by some person authorized to receive
payment on his behalf ... As to who the holder or authorized person
will be depends on the instructions stated on the face of the check.
The three subject checks in the case at bar had been
crossed generally and issued payable to New Sikatuna Wood
Industries, Inc. which 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.
522
Consequently, no right of recourse is
available to petitioner against the drawer of the subject checks,
private respondent wife, considering that petitioner is not the
proper party authorized to make presentment of the checks in
question.
Yet it does not follow as a legal proposition that simply
because petitioner was not a holder in due course as found by
the appellate court for having taken the instruments in question
with notice that the same is for deposit only to the account of
payee named in the subject checks, petitioner could not recover
on the checks. The Negotiable Instruments Law does not provide
that a holder who is not a holder in due course may not in any
522
Chan Wan v. Tan Kim and Chen So, L-15380, September 30, 1960,109
Phil. 706 (1960).
Basic Principles and Jurisprudence on the Negotiable Instruments Law 304
case recover on the instrument for in the case at bar, petitioner
may recover from the New Sikatuna Wood Industries, Inc. if the
latter has no valid excuse for refusing payment. The only
disadvantage of a holder who is not in due course is that the
negotiable instrument is subject to defenses as if it were non-
negotiable.
523
That the subject checks had been issued subject to the
condition that private respondents on due date would make the
backup deposit for said checks but which condition apparently
was not made, thus resulting in the non-consummation of the
loan intended to be granted by private respondents to New
Sikatuna Wood Industries, Inc., constitutes a good defense against
petitioner who is not a holder in due course.
WHEREFORE, the decision appealed from is hereby
AFFIRMED with costs against petitioner.
SO ORDERED.
Gutierrez, Jr., Bidin and Cortes, JJ., concur.
Feliciano, J., is on leave.
Bataan Cigar and Cigarette Factory vs.
The Court of Appeals and State Investment House,
Inc.
G.R. No. 93048, March 3, 1994
NOCON, J:
For our review is the decision of the Court of Appeals in the
case entitled State Investment House, Inc. v. Bataan Cigar &
Cigarette Factory Inc.,
524
affirming the decision of the Regional
Trial Court
525
in a complaint filed by the State Investment House,
Inc. (hereinafter referred to as SIHI) for collection on three unpaid
checks issued by Bataan Cigar & Cigarette Factory, Inc.
(hereinafter referred to as BCCFI). The foregoing decisions
unanimously ruled in favor of SIHI, the private respondent in this
case.
523
Chan Wan v. Tan Kim and Chen So, supra.
524
CA-G.R. CV No. 03032, Justice Jorge R. Coquia, ponente, Justices Josue
N. Bellosillo and Venancio D. Aldecoa, Jr., concurring, November 13, 1987.
525
Judge Agusto E. Villarin, presiding, Branch XL, National Capital Region,
Manila.
305
Emanating from the records are the following facts.
Petitioner, Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a
corporation involved in the manufacturing of cigarettes, engaged
one of its suppliers, King Tim Pua George (herein after referred
to as George King), to deliver 2,000 bales of tobacco leaf starting
October 1978. In consideration thereof, BCCFI, on July 13, 1978
issued crossed checks post dated sometime in March 1979 in
the total amount of P820,000.00.
526
Relying on the suppliers representation that he would
complete delivery within three months from December 5, 1978,
petitioner agreed to purchase additional 2,500 bales of tobacco
leaves, despite the suppliers failure to deliver in accordance with
their earlier agreement. Again petitioner issued post dated crossed
checks in the total amount of P1,100,000.00, payable sometime
in September 1979.
527
During these times, George King was simultaneously
dealing with private respondent SIHI. On July 19, 1978, he sold
at a discount check TCBT 551826
528
bearing an amount of
P164,000.00, post dated March 31, 1979, drawn by petitioner,
naming George King as payee to SIHI. On December 19 and 26,
1978, he again sold to respondent checks TCBT Nos. 608967 &
608968,
529
both in the amount of P100,000.00, post dated
September 15 & 30, 1979 respectively, drawn by petitioner in favor
of George King.
In as much as George King failed to deliver the bales of
tobacco leaf as agreed despite petitioners demand, BCCFI issued
on March 30, 1979, a stop payment order on all checks payable
to George King, including check TCBT 551826. Subsequently,
stop payment was also ordered on checks TCBT Nos. 608967 &
608968 on September 14 & 28, 1979, respectively, due to George
Kings failure to deliver the tobacco leaves.
Efforts of SIHI to collect from BCCFI having failed, it
instituted the present case, naming only BCCFI as party defendant.
The trial court pronounced SIHI as having a valid claim being a
526
Exhibit 1, Folder of Exhibits, p. 11.
527
Exhibit 4, Folder of Exhibits, p. 14.
528
Annex A, Folder of Exhibits, p. 3.
529
Annexes B and C, Folder of Exhibits, pp. 4-5.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 306
holder in due course. It further said that the non-inclusion of King
Tim Pua George as party defendant is immaterial in this case,
since he, as payee, is not an indispensable party.
The main issue then is whether SIHI, a second indorser,
a holder of crossed checks, is a holder in due course, to be
able to collect from the drawer, BCCFI.
The Negotiable Instruments Law states what constitutes a
holder in due course, thus:
Sec. 52 A holder in due course is a holder who has taken
the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue,
and without notice that it had been previously dishonored,
if such was the fact;
(c) That he took it in good faith and 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.
Section 59 of the NIL further states that every holder is
deemed prima facie a holder in due course. However, when it is
shown that the title of any person who has negotiated the
instrument was defective, the burden is on the holder to prove
that he or some person under whom he claims, acquired the title
as holder in due course.
The facts in this present case are on all fours to the case of
State Investment House, Inc. (the very respondent in this case) v.
Intermediate Appellate Court
530
wherein we made a discourse on
the effects of crossing of checks.
As preliminary, a check is defined by law as a bill of
exchange drawn on a bank payable on demand.
531
There are a
variety of checks, the more popular of which are the memorandum
check, cashiers check, travelers check and crossed check.
530
G.R. No. 72764, 175 SCRA 310.
531
Sec. 185, Negotiable Instruments Law.
307
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
532
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.
533
This is specially true in England where
the Negotiable Instrument Law 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
532
Article 541 The maker of any legal holder of a check shall be entitled to
indicate therein that it be paid to a certain banker or institution, which he
shall do by writing across the face the name of said banker or institution,
or only the words and company.
533
CAMPOS AND LOPEZ-CAMPOS, Negotiable Instruments Law, p. 574-
575; AGBAYANI, AGUEDO, Commercial Laws of the Philippines, Vol. 1,
1987 Ed., p. 446.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 308
inquire if he has received the check pursuant to that purpose,
otherwise, he is not a holder in due course.
534
The foregoing was adopted in the case of SIHI v. IAC, supra.
In that case, New Sikatuna Wood Industries, Inc. also sold at a
discount to SIHI three post-dated crossed checks, issued by Anita
Pea Chua naming as payee New Sikatuna Wood Industries,
Inc. Ruling that SIHI was not a holder in due course, we then
said:
The three checks in the case at bar had been crossed
generally and issued payable to New Sikatuna Wood
Industries, Inc. which 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 di d not become l i abl e.
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 backup deposit for said checks
but which condition apparently was not made, thus resulting
in the non-consummation of the loan intended to be granted
by private respondents to New Sikatuna Wood Industries,
Inc., constitutes a good defense against petitioner who is
not a holder in due course.
535
It is then settled that crossing of checks should put the holder
on inquiry and upon him devolves the duty to ascertain the
534
Ocampo v. Gatchalian, G.R. No. L-15126, 3 SCRA 603 (1961); Associated
Bank v. Court of Appeals, G.R. No. 89802, 208 SCRA 465; SIHI v. IAC,
supra.
535
Id. at pp. 316-317.
309
indorsers 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,
536
and as such the consensus
of authority is to the effect that the holder of the check is not a
holder in due course.
In the present case, BCCFIs defense in stopping payment
is as good to SIHI as it is to George King. Because, really, the
checks were issued with the intention that George King would
supply BCCFI with the bales of tobacco leaf. There being failure
of consideration, SIHI is not a holder in due course. Consequently,
BCCFI cannot be obliged to pay the checks.
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.
537
Hence,
respondent can collect from the immediate indorser, in this case,
George King.
WHEREFORE, finding that the court a quo erred in the
application of law, the instant petition is hereby GRANTED. The
decision of the Regional Trial Court as affirmed by the Court of
Appeals is hereby REVERSED. Cost against private respondent.
SO ORDERED.
Narvasa, C.J., Regalado and Puno, JJ., concur.
Padilla, J., took no part.
Security Checks; Holder in Due Course.
State Investment House, Inc. vs. Court of Appeals and
Nora B. Moulic
G.R. No. 101163, January 11, 1993
BELLOSILLO, J:
536
quoted supra.
537
Chan Wan v. Tan Kim and Chen So, L-15380, 109 Phil., 706 (1960); SIHI
v. IAC, supra.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 310
The liability to a holder in due course of the drawer of checks
issued to another merely as security, and the right of a real estate
mortgagee after extrajudicial foreclosure to recover the balance
of the obligation, are the issues in this Petition for Review of the
Decision of respondent Court of Appeals.
Private respondent Nora B. Moulic issued to Corazon
Victoriano, as security for pieces of jewelry to be sold on
commission, two (2) post-dated Equitable Banking Corporation
checks in the amount of Fifty Thousand Pesos (P50,000.00) each,
one dated 30 August 1979 and the other, 30 September 1979.
Thereafter, the payee negotiated the checks to petitioner State
Investment House. Inc. (STATE).
MOULIC failed to sell the pieces of jewelry, so she returned
them to the payee before maturity of the checks. The checks,
however, could no longer be retrieved as they had already been
negotiated. Consequently, before their maturity dates, MOULIC
withdrew her funds from the drawee bank.
Upon presentment for payment, the checks were dishonored
for insufficiency of funds. On 20 December 1979, STATE allegedly
notified MOULIC of the dishonor of the checks and requested
that it be paid in cash instead, although MOULIC avers that no
such notice was given her.
On 6 October 1983, STATE sued to recover the value of the
checks plus attorneys fees and expenses of litigation.
In her Answer, MOULIC contends that she incurred no
obligation on the checks because the jewelry was never sold and
the checks were negotiated without her knowledge and consent.
She also instituted a Third-Party Complaint against Corazon
Victoriano, who later assumed full responsibility for the checks.
On 26 May 1988, the trial court dismissed the Complaint as
well as the Third-Party Complaint, and ordered STATE to pay
MOULIC P3,000.00 for attorneys fees.
STATE elevated the order of dismissal to the Court of
Appeals, but the appellate court affirmed the trial court on the
ground that the Notice of Dishonor to MOULIC was made beyond
311
the period prescribed by the Negotiable Instruments Law and that
even if STATE did serve such notice on MOULIC within the
reglementary period it would be of no consequence as the checks
should never have been presented for payment. The sale of the
jewelry was never effected; the checks, therefore, ceased to serve
their purpose as security for the jewelry.
We are not persuaded.
The negotiability of the checks is not in dispute. Indubitably,
they were negotiable. After all, at the pre-trial, the parties agreed
to limit the issue to whether or not STATE was a holder of the
checks in due course.
538
In this regard, Sec. 52 of the Negotiable Instruments Law
provides
Sec. 52. What constitutes a holder in due course. A holder
in due course is a holder who has taken the instrument under
the following conditions: (a) That it is complete and regular
upon its face; (b) That he became the holder of it before it
was overdue, and without notice that it was 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.
Culled from the foregoing, a prima facie presumption
exists that the holder of a negotiable instrument is a holder
in due course.
539
Consequently, the burden of proving that STATE
is not a holder in due course lies in the person who disputes the
presumption. In this regard, MOULIC failed.
The evidence clearly shows that: (a) on their faces the post-
dated checks were complete and regular: (b) petitioner bought
these checks from the payee, Corazon Victoriano, before their
due dates;
540
(c) petitioner took these checks in good faith and for
value, albeit at a discounted price; and, (d) petitioner was never
538
Rollo, pp. 13-14.
539
State Investment House, Inc. v. Court of Appeals, G.R. No. 72764, 13 July
1989; 175 SCRA 310, bold supplied
540
Per Deeds of Sale of 2 July 1979 and 25 July 1979, respectively; Rollo, p.
13.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 312
informed nor made aware that these checks were merely issued
to payee as security and not for value.
Consequently, STATE is indeed a holder in due course. As
such, it holds the instruments free from any defect of title of prior
parties, and from defenses available to prior parties among
themselves; STATE may, therefore, enforce full payment of the
checks.
541
MOULIC cannot set up against STATE the defense that there
was failure or absence of consideration. MOULIC can only invoke
this defense against STATE if it was privy to the purpose for which
they were issued and therefore is not a holder in due course.
That the post-dated checks were merely issued as security
is not a ground for the discharge of the instrument as against a
holder in due course. For the only grounds are those outlined in
Sec. 119 of the Negotiable Instruments Law:
Sec. 119. Instrument; how discharged. A negotiable
instrument is discharged: (a) By payment in due course by
or on behalf of the principal debtor; (b) By payment in due
course by the party accommodated, where the instrument
is made or accepted for his accommodation; (c) By the
intentional cancellation thereof by the holder; (d) By any
other act which will discharge a simple contract for the
payment of money; (e) When the principal debtor becomes
the holder of the instrument at or after maturity in his own
right.
Obviously, MOULIC may only invoke paragraphs (c) and
(d) as possible grounds for the discharge of the instrument. But,
the intentional cancellation contemplated under paragraph (c) is
that cancellation effected by destroying the instrument either by
tearing it up,
542
burning it,
543
or writing the word cancelled on the
instrument. The act of destroying the instrument must also be
made by the holder of the instrument intentionally. Since MOULIC
541
Salas v. Court of Appeals, G.R. No. 76788, 22 January 1990; 181 SCRA
296.
542
Montgomery v. Schwald, 177 Mo App 75, 166 SW 831; Wilkins v. Shaglund,
127 Neb 589, 256 NW 31.
543
See Henson v. Henson, 268 SW 378.
313
failed to get back possession of the post-dated checks, the
intentional cancellation of the said checks is altogether impossible.
On the other hand, the acts which will discharge a simple
contract for the payment of money under paragraph (d) are
determined by other existing legislations since Sec. 119 does not
specify what these acts are, e.g., Art. 1231 of the Civil Code
544
which enumerates the modes of extinguishing obligations. Again,
none of the modes outlined therein is applicable in the instant
case as Sec. 119 contemplates of a situation where the holder of
the instrument is the creditor while its drawer is the debtor. In the
present action, the payee, Corazon Victoriano, was no longer
MOULICs creditor at the time the jewelry was returned.
Correspondingly, MOULIC may not unilaterally discharge
herself from her liability by the mere expediency of withdrawing
her funds from the drawee bank. She is thus liable as she has no
legal basis to excuse herself from liability on her checks to a holder
in due course.
Moreover, the fact that STATE failed to give Notice of
Dishonor to MOULIC is of no moment. The need for such notice
is not absolute; there are exceptions under Sec. 114 of the
Negotiable Instruments Law:
Sec. 114. When notice need not be given to drawer.
Notice of dishonor is not required to be given to the drawer
in the following cases: (a) Where the drawer and the drawee
are the same person; (b) When the drawee is a fictitious
person or a person not having capacity to contract; (c) When
the drawer is the person to whom the instrument is presented
for payment: (d) Where the drawer has no right to expect or
require that the drawee or acceptor will honor the instrument;
(e) Where the drawer had countermanded payment.
Indeed, MOULICS actuations leave much to be desired.
She did not retrieve the checks when she returned the jewelry.
She simply withdrew her funds from her drawee bank and
544
Art. 1231. Obligations are extinguished: (1) By payment or performance;
(2) By the loss of the thing due; (3) By the condonation or remission of the
debt; (4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation; (6) By novation . . . . .
Basic Principles and Jurisprudence on the Negotiable Instruments Law 314
transferred them to another to protect herself. After withdrawing
her funds, she could not have expected her checks to be honored.
In other words, she was responsible for the dishonor of her checks,
hence, there was no need to serve her Notice of Dishonor, which
is simply bringing to the knowledge of the drawer or indorser of
the instrument, either verbally or by writing, the fact that a specified
instrument, upon proper proceedings taken, has not been
accepted or has not been paid, and that the party notified is
expected to pay it.
545
In addition, the Negotiable Instruments Law was enacted
for the purpose of facilitating, not hindering or hampering
transactions in commercial paper. Thus, the said statute should
not be tampered with haphazardly or lightly. Nor should it be
brushed aside in order to meet the necessities in a single case.
546
The drawing and negotiation of a check have certain effects
aside from the transfer of title or the incurring of liability in regard
to the instrument by the transferor. The holder who takes the
negotiated paper makes a contract with the parties on the face of
the instrument. There is an implied representation that funds or
credit are available for the payment of the instrument in the bank
upon which it is drawn.
547
Consequently, the withdrawal of the
money from the drawee bank to avoid liability on the checks cannot
prejudice the rights of holders in due course. In the instant case,
such withdrawal renders the drawer, Nora B. Moulic, liable to
STATE, a holder in due course of the checks.
Under the facts of this case, STATE could not expect
payment as MOULIC left no funds with the drawee bank to meet
her obligation on the checks,
548
so that Notice of Dishonor would
be futile.
The Court of Appeals also held that allowing recovery on
the checks would constitute unjust enrichment on the part of
STATE Investment House, Inc. This is error.
545
Martin v. Browns, 75 Ala 442.
546
Reinhart v. Lucas, 118 W Va 466, 190 SE 772.
547
11 Am Jur 589.
548
See Agbayani, Commercial Laws of the Philippines, Vol. 1, 1984 Ed.,
citing Ellenbogen v. State Bank, 197 NY Supp 278.
315
The record shows that Mr. Romelito Caoili, an Account
Assistant, testified that the obligation of Corazon Victoriano and
her husband at the time their property mortgaged to STATE was
extrajudicially foreclosed amounted to P1.9 million; the bid price
at public auction was only P1 million.
549
Thus, the value of the
property foreclosed was not even enough to pay the debt in full.
Where the proceeds of the sale are insufficient to cover the
debt in an extrajudicial foreclosure of mortgage, the mortgagee is
entitled to claim the deficiency from the debtor.
550
The step thus
taken by the mortgagee-bank in resorting to an extra-judicial
foreclosure was merely to find a proceeding for the sale of the
property and its action cannot be taken to mean a waiver of its
right to demand payment for the whole debt.
551
For, while Act 3135,
as amended, does not discuss the mortgagees right to recover
such deficiency, it does not contain any provision either, expressly
or impliedly, prohibiting recovery. In this jurisdiction, when the
legislature intends to foreclose the right of a creditor to sue for
any deficiency resulting from foreclosure of a security given to
guarantee an obligation, it so expressly provides. For instance,
with respect to pledges, Art. 2115 of the Civil Code
552
does not
allow the creditor to recover the deficiency from the sale of the
thing pledged. Likewise, in the case of a chattel mortgage, or a
thing sold on installment basis, in the event of foreclosure, the
vendor shall have no further action against the purchaser to
recover any unpaid balance of the price. Any agreement to the
contrary will be void.
553
It is clear then that in the absence of a similar provision in
Act No. 3135, as amended, it cannot be concluded that the creditor
loses his right recognized by the Rules of Court to take action for
the recovery of any unpaid balance on the principal obligation
simply because he has chosen to extrajudicially foreclose the real
549
TSN, 25 April 1985, pp. 16-17.
550
Philippine Bank of Commerce v. de Vera, No. L-18816, 29 December
1962; 6 SCRA 1029.
551
Medina v. Philippine National Bank, 56 Phil 651.
552
Art. 2115. The sale of the thing pledged shall extinguish the principal
obligation, whether or not the proceeds of the sale are equal to the amount
of the principal obligation, interest and expenses in a proper case. . . . If
the price of the sale is less, neither shall the creditor be entitled to recover
the deficiency, notwithstanding any stipulation to the contrary.
553
Art. 1484 [3] of the Civil Code.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 316
estate mortgage pursuant to a Special Power of Attorney given
him by the mortgagor in the contract of mortgage.
554
The filing of the Complaint and the Third-Party Complaint
to enforce the checks against MOULIC and the VICTORIANO
spouses, respectively, is just another means of recovering the
unpaid balance of the debt of the VICTORIANOs.
In fine, MOULIC, as drawer, is liable for the value of the
checks she issued to the holder in due course, STATE, without
prejudice to any action for recompense she may pursue against
the VICTORIANOs as Third-Party Defendants who had already
been declared as in default.
WHEREFORE, the petition is GRANTED. The decision
appealed from is REVERSED and a new one entered declaring
private respondent NORA B. MOULIC liable to petitioner STATE
INVESTMENT HOUSE, INC., for the value of EBC Checks Nos.
30089658 and 30089660 in the total amount of P100,000.00,
P3,000.00 as attorneys fees, and the costs of suit, without
prejudice to any action for recompense she may pursue against
the VICTORIANOs as Third-Party Defendants. Costs against
private respondent.
SO ORDERED.
Cruz and Grio-Aquino, JJ., concur.
Padilla, J., took no part.
Holder in due Course; Holder in good faith and for value
Vicente R. De Ocampo & Co., vs. Anita Gatchalian, et al
G.R. No. L-15126, November 30, 1961
LABRADOR, J:
Appeal from a judgment of the Court of First Instance of
Manila, Hon. Conrado M. Velasquez, presiding, sentencing the
defendants to pay the plaintiff the sum of P600, with legal interest
from September 10, 1953 until paid, and to pay the costs.
554
See Note 14.
317
The action is for the recovery of the value of a check for
P600 payable to the plaintiff and drawn by defendant Anita C.
Gatchalian. The complaint sets forth the check and alleges that
plaintiff received it in payment of the indebtedness of one Matilde
Gonzales; that upon receipt of said check, plaintiff gave Matilde
Gonzales P158.25, the difference between the face value of the
check and Matilde Gonzales indebtedness. The defendants admit
the execution of the check but they allege in their answer, as
affirmative defense, that it was issued subject to a condition, which
was not fulfilled, and that plaintiff was guilty of gross negligence
in not taking steps to protect itself.
At the time of the trial, the parties submitted a stipulation of
facts, which reads as follows:
Pl ai nti ff and defendants through thei r respecti ve
undersigned attorneys respectfully submit the following
Agreed Stipulation of Facts;
First. That on or about 8 September 1953, in the evening,
defendant Anita C. Gatchalian who was then interested in
looking for a car for the use of her husband and the family,
was shown and offered a car by Manuel Gonzales who was
accompanied by Emil Fajardo, the latter being personally
known to defendant Anita C. Gatchalian;
Second. That Manuel Gonzales represented to defend
Anita C. Gatchalian that he was duly authorized by the owner
of the car, Ocampo Clinic, to look for a buyer of said car
and to negotiate for and accomplish said sale, but which
facts were not known to plaintiff;
Third. That defendant Anita C. Gatchalian, finding the
price of the car quoted by Manuel Gonzales to her
satisfaction, requested Manuel Gonzales to bring the car
the day following together with the certificate of registration
of the car, so that her husband would be able to see same;
that on this request of defendant Anita C. Gatchalian, Manuel
Gonzales advised her that the owner of the car will not be
willing to give the certificate of registration unless there is a
showing that the party interested in the purchase of said
car is ready and willing to make such purchase and that for
Basic Principles and Jurisprudence on the Negotiable Instruments Law 318
this purpose Manuel Gonzales requested defendant Anita
C. Gatchalian to give him (Manuel Gonzales) a check which
will be shown to the owner as evidence of buyers good
faith in the intention to purchase the said car, the said check
to be for safekeeping only of Manuel Gonzales and to be
returned to defendant Anita C. Gatchalian the following day
when Manuel Gonzales brings the car and the certificate of
registration, but which facts were not known to plaintiff;
Fourth. That relying on these representations of Manuel
Gonzales and with his assurance that said check will be
only for safekeeping and which will be returned to said
defendant the following day when the car and its certificate
of registration will be brought by Manuel Gonzales to
defendants, but which facts were not known to plaintiff,
defendant Anita C. Gatchalian drew and issued a check,
Exh. B; that Manuel Gonzales executed and issued a
receipt for said check, Exh. 1;
Fifth. That on the failure of Manuel Gonzales to appear
the day following and on his failure to bring the car and its
certificate of registration and to return the check, Exh. B,
on the following day as previously agreed upon, defendant
Anita C. Gatchalian issued a Stop Payment Order on the
check, Exh. 3, with the drawee bank. Said Stop Payment
Order was issued without previous notice on plaintiff not
being know to defendant, Anita C. Gatchalian and who
furthermore had no reason to know check was given to
plaintiff;
Sixth. That defendants, both or either of them, did not
know personally Manuel Gonzales or any member of his
family at any time prior to September 1953, but that
defendant Hipolito Gatchalian is personally acquainted with
V. R. de Ocampo;
Seventh. That defendants, both or either of them, had no
arrangements or agreement with the Ocampo Clinic at any
time prior to, on or after 9 September 1953 for the
hospitalization of the wife of Manuel Gonzales and neither
or both of said defendants had assumed, expressly or
319
impliedly, with the Ocampo Clinic, the obligation of Manuel
Gonzales or his wife for the hospitalization of the latter;
Eight. That defendants, both or either of them, had no
obligation or liability, directly or indirectly with the Ocampo
Clinic before, or on 9 September 1953;
Ninth. That Manuel Gonzales having received the check
Exh. B from defendant Anita C. Gatchalian under the
representations and conditions herein above specified,
delivered the same to the Ocampo Clinic, in payment of the
fees and expenses arising from the hospitalization of his
wife;
Tenth. That plaintiff for and in consideration of fees and
expenses of hospitalization and the release of the wife of
Manuel Gonzales from its hospital, accepted said check,
applying P441.75 (Exhibit A) thereof to payment of said
fees and expenses and delivering to Manuel Gonzales the
amount of P158.25 (as per receipt, Exhibit D) representing
the balance on the amount of the said check, Exh. B;
Eleventh. That the acts of acceptance of the check and
application of its proceeds in the manner specified above
were made without previous inquiry by plaintiff from
defendants:
Twelfth. That plaintiff filed or caused to be filed with the
Office of the City Fiscal of Manila, a complaint for estafa
against Manuel Gonzales based on and arising from the
acts of said Manuel Gonzales in paying his obligations with
plaintiff and receiving the cash balance of the check, Exh.
B and that said complaint was subsequently dropped;
Thirteenth. That the exhibits mentioned in this stipulation
and the other exhibits submitted previously, be considered
as parts of this stipulation, without necessity of formally
offering them in evidence;
WHEREFORE, it is most respectfully prayed that this agreed
stipulation of facts be admitted and that the parties hereto
be given fifteen days from today within which to submit
Basic Principles and Jurisprudence on the Negotiable Instruments Law 320
simultaneously their memorandum to discuss the issues of
law arising from the facts, reserving to either party the right
to submit reply memorandum, if necessary, within ten days
from receipt of their main memoranda. (pp. 21-25,
Defendants Record on Appeal).
No other evidence was submitted and upon said stipulation
the court rendered the judgment already alluded above.
In their appeal defendants-appellants contend that the check
is not a negotiable instrument, under the facts and circumstances
stated in the stipulation of facts, and that plaintiff is not a holder in
due course. In support of the first contention, it is argued that
defendant Gatchalian had no intention to transfer her property in
the instrument as it was for safekeeping merely and, therefore,
there was no delivery required by law (Section 16, Negotiable
Instruments Law); that assuming for the sake of argument that
delivery was not for safekeeping merely, delivery was conditional
and the condition was not fulfilled.
In support of the contention that plaintiff-appellee is not a
holder in due course, the appellant argues that plaintiff-appellee
cannot be a holder in due course because there was no negotiation
prior to plaintiff-appellees acquiring the possession of the check;
that a holder in due course presupposes a prior party from whose
hands negotiation proceeded, and in the case at bar, plaintiff-
appellee is the payee, the maker and the payee being original
parties. It is also claimed that the plaintiff-appellee is not a holder
in due course because it acquired the check with notice of defect
in the title of the holder, Manuel Gonzales, and because under
the circumstances stated in the stipulation of facts there were
circumstances that brought suspicion about Gonzales possession
and negotiation, which circumstances should have placed the
plaintiff-appellee under the duty, to inquire into the title of the
holder. The circumstances are as follows:
The check is not a personal check of Manuel Gonzales.
(Paragraph Ninth, Stipulation of Facts).
Plaintiff could have inquired why a person would use the
check of another to pay his own debt. Furthermore, plaintiff
had the means of knowledge inasmuch as defendant
321
Hipolito Gatchalian is personally acquainted with V. R. de
Ocampo (Paragraph Sixth, Stipulation of Facts.).
The maker Anita C. Gatchalian is a complete stranger to
Manuel Gonzales and Dr. V. R. de Ocampo (Paragraph
Sixth, Stipulation of Facts).
The maker is not in any manner obligated to Ocampo Clinic
nor to Manuel Gonzales. (Par. 7, Stipulation of Facts.)
The check could not have been intended to pay the hospital
fees which amounted only to P441.75. The check is in the
amount of P600.00, which is in excess of the amount due
plaintiff. (Par. 10, Stipulation of Facts).
It was necessary for plaintiff to give Manuel Gonzales
change in the sum P158.25 (Par. 10, Stipulation of Facts).
Since Manuel Gonzales is the party obliged to pay, plaintiff
should have been more cautious and wary in accepting a
piece of paper and disbursing cold cash.
The check is payable to bearer. Hence, any person who
holds it should have been subjected to inquiries. EVEN IN
A BANK, CHECKS ARE NOT CASHED WITHOUT
INQUIRY FROM THE BEARER. The same inquiries should
have been made by plaintiff. (Defendants-appellants brief,
pp. 52-53)
Answering the first contention of appellant, counsel for
plaintiff-appellee argues that in accordance with the best authority
on the Negotiable Instruments Law, plaintiff-appellee may be
considered as a holder in due course, citing Brannans Negotiable
Instruments Law, 6th edition, page 252. On this issue Brannan
holds that a payee may be a holder in due course and says that to
this effect is the greater weight of authority, thus:
Whether the payee may be a holder in due course under
the N. I. L., as he was at common law, is a question upon
which the courts are in serious conflict. There can be no
doubt that a proper interpretation of the act read as a whole
leads to the conclusion that a payee may be a holder in due
Basic Principles and Jurisprudence on the Negotiable Instruments Law 322
course under any circumstance in which he meets the
requirements of Sec. 52.
The argument of Professor Brannan in an earlier edition of
this work has never been successfully answered and is here
repeated.
Section 191 defines holder as the payee or indorsee of a
bill or note, who is in possession of it, or the bearer thereof.
Sec. 52 defendants defines a holder in due course as a
holder who has taken the instrument under the following
conditions: 1. That it is complete and regular on its face. 2.
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. 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 in the title of the
person negotiating it.
Since holder, as defined in sec. 191, includes a payee
who is in possession the word holder in the first clause of
sec. 52 and in the second subsection may be replaced by
the definition in sec. 191 so as to read a holder in due
course is a payee or indorsee who is in possession, etc.
(Brannans on Negotiable Instruments Law, 6th ed., p. 543).
The first argument of the defendants-appellants, therefore,
depends upon whether or not the plaintiff-appellee is a holder in
due course. If it is such a holder in due course, it is immaterial
that it was the payee and an immediate party to the instrument.
The other contention of the plaintiff is that there has been
no negotiation of the instrument, because the drawer did not
deliver the instrument to Manuel Gonzales with the intention of
negotiating the same, or for the purpose of giving effect thereto,
for as the stipulation of facts declares the check was to remain in
the possession Manuel Gonzales, and was not to be negotiated,
but was to serve merely as evidence of good faith of defendants
in their desire to purchase the car being sold to them. Admitting
that such was the intention of the drawer of the check when she
delivered it to Manuel Gonzales, it was no fault of the plaintiff-
appellee drawee if Manuel Gonzales delivered the check or
323
negotiated it. As the check was payable to the plaintiff-appellee,
and was entrusted to Manuel Gonzales by Gatchalian, the delivery
to Manuel Gonzales was a delivery by the drawer to his own agent;
in other words, Manuel Gonzales was the agent of the drawer
Anita Gatchalian insofar as the possession of the check is
concerned. So, when the agent of drawer Manuel Gonzales
negotiated the check with the intention of getting its value from
plaintiff-appellee, negotiation took place through no fault of the
plaintiff-appellee, unless it can be shown that the plaintiff-appellee
should be considered as having notice of the defect in the
possession of the holder Manuel Gonzales. Our resolution of this
issue leads us to a consideration of the last question presented
by the appellants, i.e., whether the plaintiff-appellee may be
considered as a holder in due course.
Section 52, Negotiable Instruments Law, defines 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.
The stipulation of facts expressly states that plaintiff-appellee
was not aware of the circumstances under which the check was
delivered to Manuel Gonzales, but we agree with the defendants-
appellants that the circumstances indicated by them in their briefs,
such as the fact that appellants had no obligation or liability to the
Ocampo Clinic; that the amount of the check did not correspond
exactly with the obligation of Matilde Gonzales to Dr. V. R. de
Basic Principles and Jurisprudence on the Negotiable Instruments Law 324
Ocampo; and that the check had two parallel lines in the upper
left hand corner, which practice means that the check could only
be deposited but may not be converted into cash all these
circumstances should have put the plaintiff-appellee to inquiry as
to the why and wherefore of the possession of the check by Manuel
Gonzales, and why he used it to pay Matildes account. It was
payees duty to ascertain from the holder Manuel Gonzales what
the nature of the latters title to the check was or the nature of his
possession. Having failed in this respect, we must declare that
plaintiff-appellee was guilty of gross neglect in not finding out the
nature of the title and possession of Manuel Gonzales, amounting
to legal absence of good faith, and it may not be considered as a
holder of the check in good faith. To such effect is the consensus
of authority.
In order to show that the defendant had knowledge of such
facts that his action in taking the instrument amounted to
bad faith, it is not necessary to prove that the defendant
knew the exact fraud that was practiced upon the plaintiff
by the defendants assignor, it being sufficient to show that
the defendant had notice that there was something wrong
about his assignors acquisition of title, although he did not
have notice of the particular wrong that was committed.
Paika v. Perry, 225 Mass. 563, 114 N.E. 830.
It is sufficient that the buyer of a note had notice or
knowledge that the note was in some way tainted with fraud.
It is not necessary that he should know the particulars or
even the nature of the fraud, since all that is required is
knowledge of such facts that his action in taking the note
amounted bad faith. Ozark Motor Co. v. Horton (Mo. App.),
196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz.
621, 229 Pac. 391.
Liberty bonds stolen from the plaintiff were brought by the
thief, a boy fifteen years old, less than five feet tall, immature
in appearance and bearing on his face the stamp a
degenerate, to the defendants clerk for sale. The boy stated
that they belonged to his mother. The defendants paid the
boy for the bonds without any further inquiry. Held, the
plaintiff could recover the value of the bonds. The term bad
faith does not necessarily involve furtive motives, but means
325
bad faith in a commercial sense. The manner in which the
defendants conducted their Liberty Loan department
provided an easy way for thieves to dispose of their plunder.
It was a case of no questions asked. Although gross
negligence does not of itself constitute bad faith, it is
evidence from which bad faith may be inferred. The
circumstances thrust the duty upon the defendants to make
further inquiries and they had no right to shut their eyes
deliberately to obvious facts. Morris v. Muir, 111 Misc. Rep.
739, 181 N.Y. Supp. 913, affd. in memo., 191 App. Div. 947,
181 N.Y. Supp. 945. (pp. 640-642, Brannans Negotiable
Instruments Law, 6th ed.).
The above considerations would seem sufficient to justify
our ruling that plaintiff-appellee should not be allowed to recover
the value of the check. Let us now examine the express provisions
of the Negotiable Instruments Law pertinent to the matter to find
if our ruling conforms thereto. Section 52 (c) provides that a holder
in due course is one who takes the instrument in good faith and
for value; Section 59, that every holder is deemed prima facie to
be a holder in due course; and Section 52 (d), that in order that
one may be a holder in due course it is necessary that at the
time the instrument was negotiated to him he had no notice of
any . . . defect in the title of the person negotiating it; and lastly
Section 59, that every holder is deemed prima facie to be a holder
in due course.
In the case at bar the rule that a possessor of the instrument
is prima facie a holder in due course does not apply because
there was a defect in the title of the holder (Manuel Gonzales),
because the instrument is not payable to him or to bearer. On the
other hand, the stipulation of facts indicated by the appellants in
their brief, like the fact that the drawer had no account with the
payee; that the holder did not show or tell the payee why he had
the check in his possession and why he was using it for the
payment of his own personal account show that holders title
was defective or suspicious, to say the least. As holders title was
defective or suspicious, it cannot be stated that the payee acquired
the check without knowledge of said defect in holders title, and
for this reason the presumption that it is a holder in due course or
that it acquired the instrument in good faith does not exist. And
having presented no evidence that it acquired the check in good
Basic Principles and Jurisprudence on the Negotiable Instruments Law 326
faith, it (payee) cannot be considered as a holder in due course.
In other words, under the circumstances of the case, instead of
the presumption that payee was a holder in good faith, the fact is
that it acquired possession of the instrument under circumstances
that should have put it to inquiry as to the title of the holder who
negotiated the check to it. The burden was, therefore, placed upon
it to show that notwithstanding the suspicious circumstances, it
acquired the check in actual good faith.
The rule applicable to the case at bar is that described in
the case of Howard National Bank v. Wilson, et al., 96 Vt. 438,
120 At. 889, 894, where the Supreme Court of Vermont made the
following disquisition:
Prior to the Negotiable Instruments Act, two distinct lines of
cases had developed in this country. The first had its origin
in Gill v. Cubitt, 3 B. & C. 466, 10 E. L. 215, where the rule
was distinctly laid down by the court of Kings Bench that
the purchaser of negotiable paper must exercise reasonable
prudence and caution, and that, if the circumstances were
such as ought to have excited the suspicion of a prudent
and careful man, and he made no inquiry, he did not stand
in the legal position of a bona fide holder. The rule was
adopted by the courts of this country generally and seem to
have become a fixed rule in the law of negotiable paper.
Later in Goodman v. Harvey, 4 A. & E. 870, 31 E. C. L. 381,
the English court abandoned its former position and adopted
the rule that nothing short of actual bad faith or fraud in the
purchaser would deprive him of the character of a bona fide
purchaser and let in defenses existing between prior parties,
that no circumstances of suspicion merely, or want of proper
caution in the purchaser, would have this effect, and that
even gross negligence would have no effect, except as
evidence tending to establish bad faith or fraud. Some of
the American courts adhered to the earlier rule, while others
followed the change inaugurated in Goodman v. Harvey.
The question was before this court in Roth v. Colvin, 32 Vt.
125, and, on full consideration of the question, a rule was
adopted in harmony with that announced in Gill v. Cubitt,
which has been adhered to in subsequent cases, including
those cited above. Stated briefly, one line of cases including
our own had adopted the test of the reasonably prudent
327
man and the other that of actual good faith. It would seem
that it was the intent of the Negotiable Instruments Act to
harmonize this disagreement by adopting the latter test. That
such is the view generally accepted by the courts appears
from a recent review of the cases concerning what
constitutes notice of defect. Brannan on Neg. Ins. Law, 187-
201. To effectuate the general purpose of the act to make
uniform the Negotiable Instruments Law of those states
which should enact it, we are constrained to hold (contrary
to the rule adopted in our former decisions) that negligence
on the part of the plaintiff, or suspicious circumstances
sufficient to put a prudent man on inquiry, will not of
themselves prevent a recovery, but are to be considered
merely as evidence bearing on the question of bad faith.
See G. L. 3113, 3172, where such a course is required in
construing other uniform acts.
It comes to this then: When the case has taken such shape
that the plaintiff is called upon to prove himself a holder in
due course to be entitled to recover, he is required to
establish the conditions entitling him to standing as such,
including good faith in taking the instrument. It devolves upon
him to disclose the facts and circumstances attending the
transfer, from which good or bad faith in the transaction may
be inferred.
In the case at bar as the payee acquired the check under
circumstances which should have put it to inquiry, why the holder
had the check and used it to pay his own personal account, the
duty devolved upon it, plaintiff-appellee, to prove that it actually
acquired said check in good faith. The stipulation of facts contains
no statement of such good faith, hence we are forced to the
conclusion that plaintiff payee has not proved that it acquired the
check in good faith and may not be deemed a holder in due course
thereof.
For the foregoing considerations, the decision appealed from
should be, as it is hereby, reversed, and the defendants are
absolved from the complaint. With costs against plaintiff-appellee.
Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera,
Paredes, Dizon and De Leon, JJ., concur.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 328
Bengzon, C.J., concurs in the result.
Non-applicability of lack of notice or infirmity in the
instrument, to accommodation party transaction
To be sure, as regards an accommodation party (such
as STEELWELD), the fourth condition, i.e., lack of notice of any
infirmity in the instrument or defect in the title of the persons
negotiating it, has no application. This is because Section 29
of the law above quoted preserves the right of recourse of a
holder in due course against the accommodation party
notwithstanding that such holder, at the time of taking the
instrument knew him to be only an accommodation party.
(Stelco Marketing Corporation vs., Court of Appeals and Steelweld
Corporation of the Philippines, Inc., G.R. No. 96160, June 17,
1992, [Narvasa, C.J:], citing Agbayani, Commercial Laws of the
Philippines, 1975 ed., Vol. I, citing Prudential Bank and Trust Co.
vs. Ramesh Trading Co., C.A. 32908-R, Sept. 10, 1964, bold
supplied)
Financing Company, not a holder in good faith as to the buyer
In the case of Consolidated Plywood Industries, Inc. et al
vs. IFC Leasing and Acceptance Corporation
555
, the High Court
held, subscribing 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 United States to protect the
buyer against the finance company will, 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
555
G.R. No. 72593, April 30, 1987.
329
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 buyerMr. & 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 dealers 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 public
buying 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 the case of Commercial Credit Corporation v. Orange
County Machine Works (34 Cal. 2d 766) involving similar facts, it
was held that in a very real sense, the finance company was a
moving force in the transaction from its very inception and acted
as a party to it. When a finance company actively participates in
a transaction of this type from its inception, it cannot be regarded
as a holder in due course of the note given in the transaction.
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 two subject Allis Crawler tractors, cannot be regarded as a
holder in due course of said note. If follows that the respondents
rights under the promissory note involved in this case are subject
to all defenses that the petitioner 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
Basic Principles and Jurisprudence on the Negotiable Instruments Law 330
Whether or not payee is deemed a holder in due course
On this note, the ruling of the Supreme Court in the case of
Prudencio vs. Court of Appeals, G.R. No. L-34539, July 14, 1986,
is controlling, wherein it was held that: [a]lthough as a general
rule, a payee may be considered a holder in due course we think
that such a rule cannot apply with respect to the respondent PNB.
Not only was PNB an immediate party or in privy to the promissory
note, that is, it had dealt directly with the petitioners knowing fully
well that the latter only signed as accommodation makers but
more important, it was the Deed of Assignment executed by the
Construction Company in favor of PNB which principally moved
the petitioners to sign the promissory note also in favor of PNB.
Petitioners were made to believe and on that belief entered into
the agreement that no other conditions would alter the terms
thereof and yet, PNB altered the sameFrom the foregoing
circumstances, PNB cannot be regarded as having acted in good
faith which is also one of the requisites of a holder in due course
under Section 52 of the Negotiable Instruments Law. The PNB
knew that the promi ssory note whi ch i t took from the
accommodation makers was signed by the latter because of full
reliance of the Deed of Assignment, which, PNB had no intention
to comply with strictlyWe, therefore, hold that respondent PNB
is not a holder in due course.
In those cases where a payee was considered a holder
in due course, such payee either acquired the note from
another holder or has not directly dealt with the maker thereof.
As was held in the case of Bank of Commerce and Savings v.
Randell (186 NorthWestern Reporter 71) (emphasis supplied):
We conclude, therefore, that a payee who receives a
negotiable promissory note, in good faith, for value,
before maturity, and without any notice of any infirmity,
from a holder, not the maker to whom it was negotiated
as a completed instrument, is a holder in due course
within the purview of [a] Negotiable Instruments Law,
so as to preclude the defense of fraud and failure of
consideration between the maker and the holder to
whom the instrument, was delivered. (supra) (emphasis
supplied)
331
Similarly, in the case of Stone v. Goldberg & Lewis (60
Southern Reporter 748) on rehearing and quoting Daniel on
Negotiable Instruments, it was held:
It is a general principle of the law merchant that, as between
the immediate parties to a negotiable instrument-the parties
between whom there is a privity-the consideration may be
inquired into; and as to them the only superiority of a bill or
note over other unsealed evidence of debt is that it prima
facie imports a consideration. (supra)
2000 Bar Question:
Can the payee in a promissory note be a holder in due
course within the meaning of the Negotiable
Instruments Law (Act 2031) Explain your answer. (2%)
ANSWER:
Yes. Provided, such payee acquired the note from another
holder or has not directly dealt with the maker thereof. Sec. 191,
Act 2031, defines a holder as the payee or indorsee of a bill or
note who is in possession of it, or the bearer thereof, and in Sec.
59, every holder is deemed prima facie to be a holder in due
course.
Sec. 53. When person not deemed holder in due course. -
Where an instrument payable on demand is negotiated on
an unreasonable length of time after its issue, the holder is
not deemed a holder in due course.
Illustrative cases:
Sixteen months is not an unreasonable time where
payments of monthly interest were made to the payee and also to
plaintiff after he took the instrument. (Brannan, page 59, citing
McLean v. Bryer, 24 R.I. 599, 54 Atl. 378, S.C. sec. 64-1.)
Five days between the issue and negotiation of a cashiers
check is not an unreasonable time, such a check, whether certified
or not, being a bill of exchange payable on demand. (Mfg. Co. v.
Summers, 143 N.C. 102, 55 S.E. 522, S.C. sec. 59, cited in
Brannan, page 59)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 332
A check dated and issued on one day and negotiated at
noon the next day is not overdue so as to convey notice to the
indorsee of its illegality or of its previous dishonor. (Ibid, citing
Matlock v. Scheuerman, 51 Oregon, 49, 93 Pac. 823, 17 L.R.S.
(N.S.) 747, S.C. secs. 25, 56, 186.)
Sec. 54. Notice before full amount is paid. - Where the
transferee receives notice of any infirmity in the instrument
or defect in the title of the person negotiating the same before
he has paid the full amount agreed to be paid therefor, he will
be deemed a holder in due course only to the extent of the
amount therefore paid by him.
Illustrative case:
Where a bank discounted a note and placed the proceeds
to the credit of the debtor, quaere whether the mere fact that the
note was not paid when due is such notice of defect of title of the
depositor as to make the subsequent payment of the balance of
the proceeds a wrongful payment. (Albany County Bank v.
Peoples Ice Co., 92 Ap. Div. 47, 86 N.Y. Supp. 773, Ibid)
Sec. 55. When title defective. - The title of a person who
negotiates an instrument is defective within the meaning of
this Act when he obtained the instrument, or any signature
thereto, by fraud, duress, or force and fear, or other unlawful
means, or for an illegal consideration, or when he negotiates
it in breach of faith, or under such circumstances as amount
to a fraud.
Notes:
Breach must be committed by the perpetrator
Pursuant to this provision, it is vital to show that the
negotiation is made by the perpetrator in breach of faith amounting
to fraud. The person negotiating must have gone beyond the
authority given by his principal. If the principal could prove that
there was no negligence in the performance of his duties, he may
set up the personal defense to escape liability and recover from
other parties who, through their own negligence, allowed the
commission of the crime. (Philippine Commercial International
333
Bank vs. Court of Appeals and Ford Philippines, Inc., G.R. Nos.
121413, 121479, 128604, January 29, 2011, [Quisumbing, J.])
Reason for the Rule
Justice Street, in his dissent in the case of Asia Banking
Corporation vs. Ten Sen Guan, G.R. No. L-19397, February 16,
1923, explained that [t]he reason for this statutory rule given by
the courts in innumerable decisions is that the guilty maker of an
instrument vitiated by fraud or illegality will naturally seek to put it
in the hands of some other person in order to cut off the defense
to which the instrument is subject, and a presumption arises
against the bona fides of the transfer. The law therefore requires
the holder of such paper to manifest the most complete can do
and show exactly the circumstances under which the paper was
acquired.
This fraud having been set up in the defendants answer
and established by the proof, it became incumbent upon the
plaintiff in this case to prove that it occupies the position of a
bona fide purchaser of said draft for value and without notice.
Illustrative Cases:
The title of the payee of a note is defective where the only
consideration is accrued interest on a loan previously made at an
unlawful rate of interest. (Keene v. Behan, 40 Wash. 505, 82
Pac. 884, cited in Brannan. Page 60)
If one of the signatures of several makers is obtained by
fraud so as to make the title of the payee defective as to him, it
will be defective as to the other makers also, since the equality of
burden is thus disturbed and increased as to them. (Hodge v.
Smith, 130 Wis. 326, 110 N.W. 192, S.C. secs. 16, 52-3, cited in
Brannan, page 60). But a holder in due course can recover
against those who signed. (First Nat. Bank of Durand v. Shaw,
157 Mich. 192, 121 N.W. 811, ibid) The fraud consisted in the
fact that the signatures of some of the makers were forged. (Ibid)
X owed plaintiff. In order to provide funds to pay the debt,
defendant at Xs request drew a check payable to X or order,
which X was to pay into his bank to meet his check for the same
amount to plaintiff. X indorsed the defendants check, paid it into
Basic Principles and Jurisprudence on the Negotiable Instruments Law 334
his bank and gave his own check to plaintiff. Defendant changed
his mind and stopped his check, whereupon X stopped his check
and indorsed and delivered defendants check to plaintiff who had
notice of its dishonor. Held, that as the check was an
accommodation bill and plaintiff, even assuming that he gave
consideration for it, not being a holder in due course, since he
took the check with notice that it had been dishonored, took it
subject to any defect of title at the time of dishonor, and as X had
negotiated it to plaintiff in breach of faith, there was a defect of
title attaching to it and the plaintiff could not recover. (Hornby v.
McLaren (C.A., March 31, 1908). 24 T.L. Rep. 494, cited in
Brannan, page 60)
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 amounted to bad faith.
Notes:
This provision is self-explanatory. That in order to constitute
a notice of defect in the instrument or defect in the title of the
person negotiating the same, the person to whom it is negotiated
must have actual knowledge of the infirmity or defect, or
knowledge of such facts that his action in taking the instrument
amounted to bad faith. The same is a matter of evidentiary fact
which must be established by actual knowledge.
Sec. 57. Rights of holder in due course. - A holder in due
course holds the instrument free from any defect of title of
prior parties, and free from defenses available to prior parties
among themselves, and may enforce payment of the
instrument for the full amount thereof against all parties liable
thereon.
Notes:
A holder in due course, as established in Sec. 52, has the
right to:
335
a) Hold the bill or note free from any defect of title of prior
parties,
b) Be free from defenses available to prior parties, and
c) Enforce payment of the instrument for the full amount
thereof against parties liable thereon.
Right to hold the bill or note free from any defect of title of
prior parties
A holder in due course holds the instrument free from any
defect of title of prior parties; thus, they acquire better title over
the bill or note than their predecessors in interest. It does not
matter if the title of the previous holder is tainted with irregularities,
so long as the holder qualifies as a holder in due course, he ipso
facto acquires a valid and effectual title over the instrument and
supersedes any defect of title of prior parties.
Be free from defenses available to prior parties
As a consequence of the right to hold the instrument free
from any defect of title of prior parties, a holder in due course is
also free from any defenses available to prior parties. So that the
maker of a promissory note cannot raise a defense of absence of
consideration, because it only affects the title of the transferor,
but never the validity and enforceability of the note when it is
acquired by a holder in due course.
Enforce payment of the instrument for the full amount thereof
against parties liable thereon
Ultimately, as indicated under Sec. 51, the holder has the
right to sue for the payment of the instrument. Corollary, the holder
in due course has the right to enforce payment of the instrument
for the full amount thereof against parties liable thereon. In as
much as the holder has the right to hold the instrument free from
any defect of title of prior parties, and free from any defenses
available against them, as a consequence, he has the absolute
right to enforce payment to its full amount.
2011 Bar Question:
A holder in due course holds the instrument free from
any defect of title of prior parties and free from defenses
Basic Principles and Jurisprudence on the Negotiable Instruments Law 336
available to prior parties among themselves. An
example of such a defense is
A. fraud in inducement.
B. duress amounting to forgery.
C. fraud in esse contractus.
D. alteration.
Sec. 58. When subject to original defense. - In the hands of
any holder other than a holder in due course, a negotiable
instrument is subject to the same defenses as if it were non-
negotiable. But a holder who derives his title through a holder
in due course, and who is not himself a party to any fraud or
illegality affecting the instrument, has all the rights of such
former holder in respect of all parties prior to the latter.
Notes:
Owner, though not himself bona fide holder, acquires title of
his transferor
A transferee can generally get as good a title as his
transferrer possesses, and it is, therefore, a settled principle that
if the party who transferred the instrument to the holder acquired
the note before maturity, and was himself unaffected by any
infirmity in it, the holder acquires as good a title as he held,
although it were overdue and dishonored at the time of transfer.
556
Thus, it has been held that in an action by a second indorsee of a
bill given for a smuggling debt, he could recover against the
acceptor, although he took it overdue, his indorser having acquired
it bona fide, without notice before it fell due.
557
And, therefore,
even if he have notice that there was fraud in the inception of the
paper, or that it was lost or stolen, or that the consideration has
failed between some anterior parties, or the paper be overdue
and dishonored, he is, nevertheless, entitled to recover, provided
his immediate indorser was a bona fide holder for value unaffected
by any of these defenses. As soon as the paper comes into the
hands of a holder, unaffected by any defect, its character as a
556
Woodman v. Churchill, 52 Me. 58; Bassett v. Avery, 15 Ohio St. 209
557
Chalmers v. Lanion, 1 Campb. 383
337
negotiable security is established; and the power of transferring it
to others, with the same immunity which attached in his own hands,
is incident to his legal right, and necessary to sustain the character
and value of the instrument as property, and to protect the bona
fide holder in its enjoyment. To prohibit him from selling as good
a right and title as himself has, would destroy the very object for
which they are secured to himwould indeed be paradoxical.
And it has been justly said that this doctrine is indispensable to
the security and circulation of negotiable instruments, and is
founded on the most comprehensive and liberal principles of public
policy.
558
But this rule is subject to the single exception that if the
note were invalid as between maker and payee, the payee could
not himself by purchase from a bona fide holder become a
successor to his rights; it not being essential to such bona fide
holders protection to extend the principle so far.
559
(Daniel,
Elements of the Law of Negotiable Instruments, pages 124-125)
Illustrative Cases:
A payee whose title is defective cannot better it by selling
the instrument to a holder in due course and buying it back again.
(Andrews v. Robertson, 111 Wis. 334, 87 N.W. 190, 87 Am. St.
Rep. 870, cited in Brannan, page 68)
A note, made or i ndorsed by defendants for the
accommodation of a third person, was delivered to an agent to
be negotiated and the proceeds paid to such third person. The
agent sold the note to a bona fide purchaser but appropriated the
proceeds to his own use. At maturity the note was protested for
non-payment, and the agent paid it and afterwards sold it to the
plaintiff, who had notice of the dishonor and agreed with the agent
to extend the time. Held, that the agent having fraudulently sold
the note could not acquire a good title by payment to or purchase
from the bona fide purchaser and could not give a good title to
plaintiff. (Comstock v. Buckley, (Wis.) 124 N.W. 414, S.C. sec.
29, ibid)
558
Scotland County v. Hill, 132 U.S. 117; Porter v. Pittsburg Steel Co., 122
U.S. 267
559
Todd v. Wick, 38 Ohio St. 387; Sawyer v. Wiswell, 9 Allen, 42
Basic Principles and Jurisprudence on the Negotiable Instruments Law 338
Sec. 59. Who is deemed holder in due course. - Every holder
is deemed prima facie to be a holder in due course; but when
it is shown that the title of any person who has negotiated
the instrument was defective, the burden is on the holder to
prove that he or some person under whom he claims acquired
the title as holder in due course. But the last-mentioned rule
does not apply in favor of a party who became bound on the
instrument prior to the acquisition of such defective title.
Notes:
Meaning of term bona fide holder; presumption
Two presumptions may be considered as settled principles
of commercial lawprinciples which have been, for the most part,
reiterated by the Supreme Court of the United States, and prevail
throughout the Union:
First. That to entitled one to the rights and protection of a
purchase of holder of a negotiable instrument, as set out in the
preceding paragraphs of this chapter, the paper must have been
acquired (1) bona fide, (2) for a valuable consideration, (3) in the
usual and ordinary course of business, (4) before maturity, or rather
when it was not overdue, and (5) without notice of facts which
impeach its validity as between antecedent parties.
560
Second. The mere possession of a negotiable instrument,
produced in evidence by the indorsee, or by the assignee where
no indorsement is necessary, imports prima facie that he acquired
it bona fide for full value, in the usual course of business, before
maturity, and without notice of any circumstance impeaching its
validity; and that he is the owner thereof, entitled to recover the
full amount against all prior parties. In other words, the production
of the instrument and proof that it is genuine (where indeed such
proof is necessary), prima facie establishes his case; and he may
there rest it.
561
(Daniel, Elements of the Law of Negotiable
Instruments, page 123)
Culled from the foregoing, a prima facie presumption
exists that the holder of a negotiable instrument is a holder
560
Daniel on Negotiable Instruments, 769a
561
Daniel on Negotiable Instruments, 812, and cases cited
339
in due course. Consequently, the burden of proving that [the
holder] is not a holder in due course lies in the person who
disputes the presumption. (State Investment House vs. Court
of Appeals and Nora B. Moulic, G.R. No. 101163, January 11,
1993, [Bellosillo, J:], bold supplied)
The presumption expressed in [this] section arise only
in favor of a person who is a holder in the sense defined in
Section 191 of the same Law, that is, a payee or indorsee
who is in possession of the draft, or the bearer thereof. Under
this definition, in order to be a holder, one must be in
possession of the note or the bearer thereof. (Night & Day
Bank vs. Roseenbaum, 191 Mo. App., 559, 574.) If this action
had been instituted by the bank itself, the presumption that the
bank was a holder in due course would have arisen from the tenor
of the draft and the fact that it was in the banks possession; but
when the instrument passed out of the possession of the bank
and into the possession of the present plaintiff, no presumption
arises as to the character in which the bank held the paper. The
banks relation to the instrument became past history when it
delivered the document to the plaintiff; and it was incumbent upon
the plaintiff in this action to show that the bank had in fact acquired
the instrument for value and under such conditions as would
constitute it a holder in due course. In the entire absence of proof
on this point, the action must fail. (Fossum vs. Hermanos, G.R.
No. L-19461, March 28, 1923, [Street, J:], bold supplied)
The defendant being the holder of the instrument, he is also
unquestionably the holder in due course. In the first place, in
order to avoid doubts with respect to this matter which might
require the introduction of evidence, the Act before mentioned
has provided, in section 59, that every holder is deemed prima
facie to be a holder in due course, and such is the weight it gives
to this presumption and to the consequences derived therefrom,
that it imposes upon the holder the burden to prove that he or
some person under whom he claims acquired the title in due
course, only when it is shown that the title of any person who has
negotiated the instrument was defective. This rule, however,
pursuant to the said section, does not apply in favor of a party
who became bound on the instrument prior to the acquisition of
such defective title, in which case the defendant Serrano is not
included, because, in the first place, he was not bound on the
Basic Principles and Jurisprudence on the Negotiable Instruments Law 340
instrument prior to the acquisition of the title by the plaintiff, but it
was the maker of the promissory note who was bound on the
instrument executed in favor of the defendant or indorser prior to
the acquisition of the title by the plaintiff, and, in the second place,
it does not appear, nor was it proved, as will be seen hereinafter,
that the title in question was defective. (concurring opinion, Justice
Torres, in the case of Maulini, et al vs. Serrano, December 16,
1914.)
This section is declaratory of the common law. The
Negotiable Instrument Act is in the main a codification of the
common law rules. Where it lays down a new rule it controls; but
where its language is consistent with the rule previously
recognized, it should be construed as simply declaratory of the
law as it was before the adoption of the Act. (Cambell v. Fourth
Nat. Bank (Ky.), 126 S.W. 114, S.C. sec. 25, cited in Brannan,
page 69)
Illustrative Cases:
In an action by an indorsee against the maker, where
defendant admits that the note was made for a valuable
consideration, but denies, on information and belief, the
indorsements, it was sufficient for the plaintiff to introduce the
note in evidence with the indorsements thereon. (Beck v. Maller,
131 App. Div. 243, 115 N.Y. Supp. 596, Ibid)
When defendant has proved fraud, the further inquiry is
not whether defendant has shown that plaintiff took with notice of
the fraud, but whether plaintiff had shown that he took in good
faith and without notice. (Cox v. Cline, 139 Iowa 128, 117 N.W.
48, Ibid)
Where the evidence establishes that the title of the party
negotiating the instrument was defective, the holder claiming to
be a purchaser in good faith for value and without notice must
make his claim good by the greater weight of evidence. (Mfg.
Co. v. Summers, 143 N.C. 102, 55 S.E. 522, S,C. sec. 53; other
American cases omitted, Ibid)
Proof that plaintiff gave value before maturity is not enough
to show good faith. (Natl Bank v. Foley, 54 Misc. R. 126, 103
N.Y. Supp. 553, S.C. secs. 25, 52-3, Ibid)
341
Bona fides essential
The holder, in order to be entitled to protection against offsets
and equities and defenses based upon frauds, pleaded by prior
parties, must have acquired the paper in good faith from his
predecessor. Fraud cuts down everything,
562
and although the
holder may pay value, yet, if his acquisition of the paper be in any
respect fraudulentas where it is made or transferred to give
him preference over other parties to a compromise of creditors
he cannot claim the position of a bona fide holder.
563
In pleading,
mala fides must be distinctly alleged, and an allegation that the
party is not the bona fide holder is not sufficient.
564
It is the bona
fides of the holder alone that is to be considered, not that of his
transferrer, and the fact that the payee had interest to part with
the paper, is not a circumstance which affects the rights of his
indorsee.
565
(Ibid, 142)
V. LIABILITIES OF PARTIES
Defenses; Classification
The defenses that may be interposed to an action upon a
negotiable contract may be grouped or arranged into five classes:
1. That the defendant did not make the instrument.
a. Forgery (Sec. 23);
b. Material Alterations (Sec. 125)
2. That the contract sued upon is in law unenforceable
a. Incapacity of the party;
b. Want, failure, or illegality of the consideration
c. That the paper was obtained by fraud;
d. That it was obtained by duress
3. That the plaintiff is not entitled to sue thereon
a. That the legal title to the instrument is not vested in
the plaintiff
562
Rogers v. Hadley, 32 L.J. Exch. 248
563
Daniel on Negotiable Instruments, 193 et seq
564
Uther v. Rich, 10 Ad & El 784
565
Helmer v. Krolick, 36 Mich. 373
Basic Principles and Jurisprudence on the Negotiable Instruments Law 342
4. That the obligation created has been discharged:
a. By payment;
b. By bankruptcy, or assignment under insolvent laws;
c. By accord and satisfaction;
d. By release;
e. By covenant not to sue;
f. By substitution of another obligation;
g. By set-off;
h. Under what circumstances a surety or guarantor is
discharged when the principal is not
5. That the action upon the instrument is barred by statute
of limitations
Defenses available against a bona fide holder for value, and
without notice, as against any other party
They are those which go to show that the instrument was
absolutely and utterly void, and not merely voidable
1. By reason of the incapacity of the party assuming to
contract;
2. By reason of some positive interdiction of law; or
3. By reason of the want of consent of the party sought to
be bound to the particular contract.
566
Real and Personal Defenses
Mr. Norton, in his treatise on the subject of Bills and Notes,
adopts the classification of Professor Ames in his work on that
subject, and classifies defenses into real and personal,grouping
all defenses that are good against a bona fide holder for value
under the class described by him as real defenses, and all the
defenses good as between immediate parties, but not available
against a bona fide holder, he groups under class denominated
as personal defenses. He thus defines the two classes of
defenses:
566
Daniel on Negotiable Instruments, 806
343
(a) RealOr those that attach to the instrument itself,
and are good against all persons.
(b) PersonalOr those that grow out of the agreement
or conduct of a particular person in regard to the instrument, which
renders it inequitable for him, though holding the legal title, to
enforce it against the defendant, but which are not available against
bona fide purchasers for value without notice.
567
(Daniel, Elements
of the Law of Negotiable Instruments, page 142)
In general, this classification shows that a bona fide holder
can recover when the defense interposed is a personal defense,
but cannot recover when the defense is real. In the case of
immediate parties, all defenses are available, because each
independent contract is governed by the general laws of contract.
In the case of remote parties, where the holder enforcing the
instrument is a purchaser for value without notice, a personal
defense cannot be successfully interposed, and only the real
defenses are allowed by the courts.
568
With real defenses the right sought to be enforced has
never existed, or has ceased to exist. They are called real
defenses because they attach to the res or the thing, irrespective
of the conduct or agreement of the parties to it. It cannot be
enforced by the holder because there is no contract to enforce.
Personal defenses, in contrast to this, are founded upon the act,
conduct, or agreement of the parties with reference to the
instrument.
569
Personal Defenses:
Lack or Failure of Considerationis essentially a breach of
contract. It exists in a commercial paper where a maker or drawer
of an instrument issues it to the payee in any case where the
payee does not give consideration under ordinary contract law
principles. In such situations want of consideration can be
asserted by the maker or drawer against an ordinary holder. To
illustrate: D, a distant relative of P, drafts a check and makes a
gift of it to P so that P can attend college. P negotiates the check
567
Norton on Bills and Notes, 216
568
Norton on Bills and Notes, page 217
569
Id.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 344
to H. P does not go to college, and D, in disgust, stops payment
of the check. If H sues D on the instrument, D can successfully
assert the defense of want of considerationbut only if H fails
to qualify as an HDC (holder in due course).
570
Fraud in the inducementwhere a person signs a negotiable
instrument (knowing it to be such) has been induced to sign by
some intentional misrepresentation of the other party.
571
For
instance, X agrees to buy Ys car for Php 120,000.00 after the
assurance that the latter brought it brand-new and is only eight
months old, X issues a check for Php 70,000.00 as downpayment
and a post-dated check for Php 50,000.00, thereafter he learned
that said car was brought by Y second-hand from a junkshop for
only Php 20,000.00. Ys intentional misrepresentation constitutes
fraud in the inducement, and X can assert his defense against Y
and against any subsequent holder who does not qualify as an
HDC.
572
Illegalitylike the general defense of fraud, some types of
illegality constitute personal defenses and other constitute real
defenses. This is so because although certain transactions are
illegal (prohibited) under state statutes or ordinances, the
applicable statutes do not always provide that the prohibited
transactions are void. If a statute voids the transaction, the defense
is real; if it does not, the defense is merely personal.
573
Nondelivery of an instrumentsometimes and instrument finds
its way into the hands of a subsequent holder through loss or
theft. In such a case the maker or drawer of the instrument has
available the defense of nondelivery. To illustrate: M is the maker
of a bearer instrument that is stolen from her home by X and
negotiated to H. If H is merely an ordinary holder, he takes the
instrument subject to the defense of nondelivery and therefore
cannot enforce it against M.
574
Unauthorized completion of an incomplete but delivered
instrumentIn Sec. 14 of Act 2031, where an instrument is
lacking in any material particular or where a person placed his
570
Business Law, Howell, page 455-456 with notation
571
Id.
572
Id., page 457
573
Id.
574
Id.
345
signature on a blank paper, the holder thereof has the prima facie
authority to fill it up, strictly in accordance with the authority granted
and within a reasonable time. Thus, where said holder filled up
the blanks in the instrument but not in accordance with the authority
given, this, in effect can be set up as a defense, however, the
same does not apply against a holder in due course.
Prior paymentIf for instance the bill or note is already paid by
the person primarily liable, but, for some reason the instrument is
not physically surrendered to him, and said instrument is further
negotiated to another person, the maker or named drawee, as
the case may be, may set-up the defense of prior payment, which
already extinguishes their liability on the instrument. Thus, it is a
personal defense as it can be availed only by the person who
already made the prior payment, but not by the person who
subsequently negotiated it to the subsequent holder.
When instrument which is materially altered and is in the
hands of a holder in due course not a party to the alteration
In such a case, the holder in due course may enforce the payment
of the instrument, but only up to the extent of its original tenor,
before it was materially altered.
Real Defenses:
ForgeryIn Sec. 23, Act 2031, where the signature of a person
is forged or made without the authority of the person it purports to
be, it is wholly inoperative and no right to retain the instrument, or
give a discharge thereof against any party thereto, can be acquired
through or under such signature, unless the party against whom
it is sought to enforce such right is precluded from setting up the
forgery or want of authority.
Fraud in the execution (Fraud in factum)in this case, a person
is caused to sign a negotiable instrument under circumstances in
which he or she honestly and reasonably believes it to be
something other than a negotiable instrument.
575
Material Alteration (Deliberate)Sec. 124, Act 2031 states that
where a negotiable instrument is materially altered without the
assent of all parties liable thereon, it is avoided, except as against
575
Business Law, Howell, page 459
Basic Principles and Jurisprudence on the Negotiable Instruments Law 346
a party who has himself made, authorized, or assented to the
alteration and subsequent holders.
Illegality (When declared by the statute)When a law is passed
declaring void any contract on which the negotiable instrument
may be based, it will in effect invalidate any negotiable instrument
issued as consideration for such an illegal act. It should be taken
into consideration that the freedom to enter into contracts and
conduct trade and commerce is always subject to the qualification
that the same should not be contrary to any law, duly passed and
enacted by the State.
Incapacitywhere the maker or drawer is a minor, or is insane,
or his capacity to act is prevented by civil interdiction, strictly
speaking, he cannot act with any valid or legal effect, thus, if a
minor makes a promissory note, his minority can be raised as a
real defense, as being a minor, he cannot enter into contracts,
much more issue a promissory note. The minor cannot be held
liable for the note he issued, but his parents or guardian may be
held subsidiarily liable for civil indemnity, for they exercise parental
authority over him.
2011 Bar Question:
P sold to M a pair of gecko (tuko) for Php50,000.00. M
then issued a promissory note to P promising to pay
the money within 90 days. Unknown to P and M, a law
was passed a month before the sale that prohibits and
declares void any agreement to sell gecko in the
country. If X acquired the note in good faith and for
value, may he enforce payment on it?
A. No, since the law declared void the contract on
which the promissory note was founded.
B. No, since it was not X who bought the gecko.
C. Yes, since he is a holder in due course of a note
which is distinct from the sale of gecko.
D. Yes, since he is a holder in due course and P and
M were not aware of the law that prohibited the sale
of gecko.
347
Types of Fraud
Two kinds of fraud are recognized in the area of commercial
paper; one creates a personal defense and the other a real
defense. Fraud in the inducement falls into the personal category.
It arises where a person who signs a negotiable instrument
(knowing it to be such) has been induced to sign by some
misrepresentation from the other party.
576
Unlike fraud in the
inducement, in the case of Fraud in the execution (fraud in factum)
a person is caused to sign a negotiable instrument under
circumstances in which he or she honestly and reasonably
believes it to be something other than a negotiable instrument.
577
Sec. 60. Liability of maker. - The maker of a negotiable
instrument, by making it, engages that he will pay it according
to its tenor, and admits the existence of the payee and his
then capacity to indorse.
Notes:
Liabilities and warranties of the maker
By making the note, the maker
a) Engages that he will pay it according to the tenor of
the note;
b) Admits the existence of the payee; and
c) Admits the payees capacity to indorse.
In effect, the maker is estopped or precluded from making
a stand in contrary to the foregoing.
Sec. 61. Liability of drawer. - The drawer by drawing the
instrument admits the existence of the payee and his then
capacity to indorse; and engages that, on due presentment,
the instrument will be accepted or paid, or both, according
to its tenor, and that if it be dishonored and the necessary
proceedings on dishonor be duly taken, he will pay the
amount thereof to the holder or to any subsequent indorser
who may be compelled to pay it. But the drawer may insert in
576
Business Law, Howell, page 457
577
Id., with notations, page 459
Basic Principles and Jurisprudence on the Negotiable Instruments Law 348
the instrument an express stipulation negativing or limiting
his own liability to the holder.
Notes:
Liabilities and warranties of the drawer
The drawer, by drawing the bill
a) Admits the existence of the payee;
b) Admits the payees capacity to indorser;
He further engages that
c) On due presentment, the instrument will be
accepted or paid, or both, according to its tenor;
and
d) If it be dishonored and the necessary proceedings
on dishonor be duly take, he will pay the amount
thereof to the holder or to any subsequent indorser
who may be compelled to pay it.
Limitation of liability
The drawer may insert in the written instrument an express
stipulation negativing or limiting his own liability to the holder.
Liability of drawer before acceptance
The drawer of a bill undertakes that when it is presented to
the drawee be will accept it; and by acceptance is meant an
undertaking on the acceptors part to pay the bill according to its
tenor.
578
Until the bill has been accepted, the drawer is the
primary debtor, and his liability is contingent and conditioned
upon a strict compliance with the law as to presentment of
the bill for acceptance (if the bill be of such a character that it is
necessary to present it for acceptance), and due protest and notice
of di shonor. After acceptance, the drawer becomes
secondarily liable, and his position is that of the first indorser
upon a promissory note.
579
(Daniel, Elements of the Law of
Negotiable Instruments, page 172) (emphasis supplied)
578
Story on Bills, 272; Cox v. National Bank, 100 U.S. 712
579
Daniel on Negotiable Instruments, 479
349
Relation of drawee to bill before acceptance
Until he has accepted the bill, so entirely is the drawee a
stranger to it, that he may himself discount it. And he may then
transfer it as the bona fide holder to another, who may sue and
charge the drawer.
580
He may discount it either for the drawer,
the payee, or an indorsee. If the acceptor discounts the bill for
the drawer, and then indorses it away, the drawer will be liable
upon it to the holder, and the transfer by the drawer to the acceptor
will operate as an indorsement, although, at the time, the drawer
does not intend to transfer by way of indorsement, being under
the impression that the bill is discharged by coming into the hands
of the acceptor. Nor will the payment of the amount, less the
discount, be deemed a payment of the bill by the acceptor.
581
(Daniel, Elements of the Law of Negotiable Instruments, pages
172-173)
The effect of acceptance of a bill
Is to constitute the acceptor the principal debtor.
582
The bill
becomes by the acceptance very similar to a promissory note
the acceptance being the promissory, and the drawer standing in
the relation of an indorser. (Ibid)
But in respect to the acceptors position with regard to the
drawer, and the amount for which he renders himself liable by
accepting the bill, it is well to observe that the acceptance does
not entitle the acceptor to charge it in account against the drawer
from the date of acceptance, unless he pays the whole amount at
the time, or discharges the drawer from all responsibility.
583
(Ibid)
Like the maker of a note, the acceptor is bound by all the
terms of the instrument, and if it contains a stipulation for payment
of attorneys fees, he is bound by it.
584
(Ibid)
If the acceptance be for the drawers accommodation, the
acceptor does not thereby become entitled to sue the drawer upon
580
Desha v. Stewart, 6 Ala. 852; Swope v. Ross, 40 Pa. St. 186
581
Swope v. Ross, 40 Pa. St. 186
582
Heutematte v. Morris, 101 N.Y. 63; Capital City Ins. Co. v. Quinn, 73 Ala.
560
583
Bracton v. Willing, 4 Call, 288
584
Smith v. Muncie Nat. Bank, 29 Ind. 158
Basic Principles and Jurisprudence on the Negotiable Instruments Law 350
the bill; but when he has paid the bill, and not before, he may
recover back the amount from the drawer in an action for money
had and received.
585
If the acceptor put the bill in circulation, he
is estopped from showing it was then paid.
586
(Ibid)
2011 Bar Question:
D draws a bill of exchange that states: One month from
date, pay to B or his order Php100,000.00. Signed, D.
The drawee named in the bill is E. B negotiated the bill
to M, M to N, N to O, and O to P. Due to non-acceptance
and after proceedings for dishonor were made, P asked
O to pay, which O did. From whom may O recover?
A. B, being the payee
B. N, as indorser to O
C. E, being the drawee
D. D, being the drawer
Sec. 62. Liability of acceptor. - The acceptor, by accepting
the instrument, engages that he will pay it according to the
tenor of his acceptance and admits:
(a) The existence of the drawer, the genuineness of his
signature, and his capacity and authority to draw the
instrument; and
(b) The existence of the payee and his then capacity to
indorse.
Notes:
Comment of Dean James Barr Ames
587
: Since an acceptor,
by section 62, engages to pay the bill according to the tenor
of his acceptance, he must pay to the innocent payee or
subsequent holder the amount called for by the amount
ordered by the drawer. A bank certifying a raised check is in the
585
Christian v. Keen, 80 Va. 377; Martin v. Muncy, 40 La. Ann. 190
586
Hinton v. Bank of Columbus, 9 Port. (Ala.) 463
587
Dean, Harvard Law School, cited in The Negotiable Instruments Law
Annotated, by Joseph Doddridge Brannan, Second Edition, 1911, page
74, citing 4 Harvard Law Review, 306, 307, bold supplied.
351
same case, since section 187 assimilates a certification to an
acceptance. If an acceptor or certifying bank must honor his
acceptance or certification in such a case, a fortiori a drawee who
pays a raised bill or check, without acceptance or certification,
should not recover the money paid from an innocent holder. These
are changes for the better, and, so far as adopted, bring the law
of this country into harmony with the law of nearly, if not indeed
all, of the European States.
Defendant bank, without negligence cashed a forged check
on plaintiff bank, indorsed it, Indorsement guaranteed. Pay any
national or state bank or order, and sent it for collection and it
was paid by plaintiff, who upon discovery of the forgery, sued to
recover the money. Held, that plaintiff could not recover; that
section 62 was intended to adopt the doctrine of Price v. Neal, 3
Burrow 1354, and applied as well to payment as to an acceptance
by the drawee of a forged bill or check. Also, that the indorsement
of the defendant bank was not a guaranty to the drawee, but only
to indorsees, Semble, that such an indorsement is only for
collection and does not transfer title to an indorsee. (National
Bank of Rolla v. First Nat. Bank of Salem (Mo. App.) 125 S.W.
513; National Bank of Commerce v. Mechanics Am. Nat. Bank
(Mo. App.), 127 S.W. 429 accord, cited in Brannan, page 74)
Section 62 does not apply to instruments acquired without
consideration
Some unknown person forged a check on plaintiff bank
and paid the same to the city to discharge a street assessment
on defendants land, which defendants subsequently sold. The
plaintiff bank having paid the check and charged the account of
its depositor, upon discovery of the forgery, credited the sum back
to the depositor and sued defendants for the amount.
Held, that section 62, N.I.L. has no application in behalf of
one who has acquired the paper without consideration. That the
plaintiff was entitled to be subrogated to the lien of the city as
against the proceeds of the sale of the land in the hands of
defendants, if it should appear upon a new trial that the payment
of the assessments were purely gratuitous and not in discharge
of a real or supposed obligation on the part of the depositor or the
unknown forger. (Title Guarantee & Trust Co., v. Haven, 196
N.Y. 487, 89 N.E. 1082, cited in Brannan, page 74)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 352
Diligence required of the collecting bank
The case of Banco de Oro vs. Equitable Bank
588
, citing the
case of American Exchange National Bank vs. Yorkville Bank
589
,
held that: the drawer owes no duty of diligence to the collecting
bank (one who had accepted an altered check and had paid over
the proceeds to the depositor) except of seasonably discovering
the alteration by a comparison of its returned checks and check
stubs or other equivalent record, and to inform the drawee thereof.
In this case it was further held that:
The real and underlying reasons why negligence of the
drawer constitutes no defense to the collecting bank
are that there is no privity between the drawer and the
collecting bank (Corn Exchange Bank vs. Nassau Bank,
204 N.Y.S. 80) and the drawer owe to that bank no duty
of vigilance (New York Produce Exchange Bank vs. Twelfth
Ward Bank, 204 N.Y.S. 54) and no act of the collecting
bank is induced by any act or representation or
admission of the drawer (Seaboard National Bank vs.
Bank of America (supra) and it follows that negligence
on the part of the drawer cannot create any liability from
it to the collecting bank, and the drawer thus is neither
a necessary nor a proper party to an action by the
drawee bank against such bank. It is quite true that
depositors in banks are under the obligation of examining
their passbooks and returned vouchers as a protection
against the payment by the depositary bank against forged
checks, and negligence in the performance of that obligation
may relieve that bank of liability for the repayment of
amounts paid out on forged checks, which but for such
negligence it would be bound to repay. A leading case on
that subject is Morgan vs. United States Mortgage and Trust
Col. 208 N.Y. 218, 101 N.E. 871 Amn. Cas. 1914D, 462,
L.R.A. 1915D, 74.
Thus we hold that while the drawer generally owes no duty
of diligence to the collecting bank, the law imposes a duty of
diligence on the collecting bank to scrutinize checks deposited
with it for the purpose of determining their genuineness and
588
January 20, 1988, bold supplied
589
204 N.Y.S. 621 101 N.E. 87l Anm. Cas. 1914D, 462, L.RA. 191D, 74
353
regularity. The collecting bank being primarily engaged in banking
holds itself out to the public as the expert and the law holds it to a
high standard of conduct. (supra)
Problem:
Sometime on June 1998, Samuel Tagoe, a foreigner,
purchased from a Jewelry Store several pieces of
jewelry valued at Php 258, 000.00. In payment of the
same, he offered a Foreign Draft issued in favor of
United Overseas Bank (Malaysia)-UOB, addressed to
Land Bank of the Philippines (LBP), payable to the
Jewelry Store for Php 380, 000.00. Subsequently said
draft was cleared and the collecting bank, Far East Bank
was credited with the amount. Three (3) weeks
thereafter, LBP informed Far East that the amount in
the Foreign Draft had been materially altered from Php
300.00 to Php 380, 000.00 and it was returning the same.
Far East Bank then refunded the amount and debited
the same from the account of the Jewelry Store,
however, there is a deficiency of Php 211, 946.64, thus
Far East Bank demanded for the payment thereof, and
when the same went futile, they filed a case for sum of
money against the Jewelry Store. RTC ruled in favor of
Far East Bank, however, on appeal, the CA reversed the
ruling that Far East Bank could not charge the Jewelry
Store on its secondary liability as an indorser. Bank
appealed the ruling to the SC.
Is the petition for review on certiorari under rule 45,
meritorious?
ANSWER:
No.
Act No. 2031, or the Negotiable Instruments Law (NIL),
explicitly provides that the acceptor, by accepting the instrument,
engages that he will pay it according to the tenor of his acceptance.
This provision applies with equal force in case the drawee pays a
bill without having previously accepted it. His actual payment of
the amount in the check implies not only his assent to the order of
Basic Principles and Jurisprudence on the Negotiable Instruments Law 354
the drawer and a recognition of his corresponding obligation to
pay the aforementioned sum, but also, his clear compliance with
that obligation. Actual payment by the drawee is greater than his
acceptance, which is merely a promise in writing to pay. The
payment of a check includes its acceptance.
Unmistakable herein is the fact that the drawee bank cleared
and paid the subject foreign draft and forwarded the amount
thereof to the collecting bank. The latter then credited to the
Jewelry Stores account the payment it received. Following the
plain language of the law, the drawee, by said payment, recognized
and complied with its obligation to pay in accordance with the
tenor of his acceptance. The tenor of his acceptance is
determined by the terms of the bill as it is when the drawee
accepts. Stated simply, LBP was liable on its payment of the
check according to the tenor of the check at the time of payment,
which was the raised amount.
Because of that engagement, LBP could no longer repudiate
the payment it erroneously made to a due course holder. We
note at his point that Gold Palace (Jewelry Store) was not a
participant in the alteration of the draft, was not negligent, and
was a holder in due courseit received the draft complete and
regular on its face, before it became overdue and without notice
of any dishonor, in good faith and for value, and absent any
knowledge of any infirmity in the instrument or defect in the title
of the person negotiating it. Having relied on the drawee banks
clearance and payment of the draft and not being negligent,
respondent Store is amply protected by the said Section 62.
Commercial policy favors the protection of anyone who, in due
course, changes his position on the faith of the drawee banks
clearance and payment of a check or draft. (Far East Bank &
Trust Company vs. Gold Palace Jewelry Company, G.R. No.
168274, August 20, 2008 [Nachura, J.])
2011 Bar Question:
A bill of exchange has D as drawer, E as drawee and F
as payee. The bill was then indorsed to G, G to H, and H
to I. I, the current holder presented the bill to E for
acceptance. E accepted but, as it later turned out, D is
a fictitious person. Is E freed from liability?
355
A. No, since by accepting, E admits the existence of
the drawer.
B. No, since by accepting, E warrants that he is solvent.
C. Yes, if E was not aware of that fact at the time of
acceptance.
D. Yes, since a bill of exchange with a fictitious drawer
is void and inexistent.
Can a drawee who accepts a materially altered check
recover from the holder and the drawer?
A. No, he cannot recover from either of them.
B. Yes from both of them.
C. Yes but only from the drawer.
D. Yes but only from the holder.
A bill of exchange states on its face: One (1) month
after sight, pay to the order of Mr. R the amount of
Php50,000.00, chargeable to the account of Mr. S.
Signed, Mr. T. Mr. S, the drawee, accepted the bill upon
presentment by writing on it the words I shall pay
Php30,000.00 three (3) months after sight. May he
accept under such terms, which varies the command
in the bill of exchange?
A. Yes, since a drawee accepts according to the tenor
of his acceptance.
B. No, since, once he accepts, a drawee is liable
according to the tenor of the bill.
C. Yes, provided the drawer and payee agree to the
acceptance.
D. No, since he is bound as drawee to accept the bill
according to its tenor.
Sec. 63. When a person deemed indorser. - A person placing
his signature upon an instrument otherwise than as maker,
drawer, or acceptor, is deemed to be indorser unless he
clearly indicates by appropriate words his intention to be
bound in some other capacity.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 356
Notes:
Justice Torres, in his concurring opinion in the case of
Fernando Maulini, et al vs. Antonio G. Serrano
590
, stated that:
[s]ection 63 of the Act above-cited says that a person placing his
signature upon an instrument otherwise than as maker, drawer,
or acceptor is deemed to be an indorser, unless he clearly
indicated by appropriate words his contention to be bound in some
other capacity. This provision of the law clearly indicates that
in every negotiable instrument it is absolutely necessary to
specify the capacity in which the person intervenes who is
mentioned therein or takes part in its negotiation, because
only by so doing can it be determined what liabilities arise
from that intervention and from whom, how and when they
must be exacted. And if, in the event of a failure to express
the capacity in which the person who signed the negotiable
instrument intended to be bound, he should be deemed to
be an indorser, when the very words of the instrument expressly
and conclusively show that such he is, as occurs in the present
case, and when the indorsement contains no restriction,
modification, condition or qualification whatsoever, there cannot
be attributed to him, without violating the provisions of the said
Act, any other intention than that of being bound in the capacity in
which he appears in the instrument itself, not can evidence be
admitted or, if already admitted, taken into consideration, for the
purpose of proving such other intention, for the simple reason
that if the law has already fixed and determined the capacity in
which it must be considered that the person who signed the
negotiable instrument intervened and the intention of his being
bound in a definite capacity, for no other purpose, undoubtedly,
than that there shall be no other evidence given in the matter,
when the capacity appears in the instrument itself and the intention
is determined by the very same capacity as occurs in this case,
the admission of evidence in reference thereto is entirely
unnecessary, unless, and contrary to the purposes of the law,
which is clear and precise in its provisions and admits of no
subterfuges or evasions for escaping obligations contracted upon
the basis of credit, with evident and sure detriment to those who
intervened or took part in the negotiation of the instrument.
590
G.R. No. L-8844, December 16, 1914, bold supplied
357
Illustrative Cases:
Where defendants signature appeared with another in the
place for the makers name, he is not deemed an indorser although
the body of the instrument names the other signer as a promissor
without mention of defendants name. (Germania Nat. Bank v.
Mariner, 129 Wis. 544, 109 N.W. 574, S.C. secs. 17-6, 64, cited
in Brannan, page 75)
The payee of a note, who indorsed it to enable the maker
to negotiate it for his own benefit, is liable merely as an
accommodation indorser and is discharged if no notice of dishonor
is given. (Ibid, citing Mechanics & Farmers Savings Bank v.
Katterjohn (Ky.), 125 S.W. 1071, S.C. secs. 109, 196.)
Upon a sale of property the seller required the buyer to
procure an indorser to a note to be given for part of the price. The
buyer executed a note to the seller with the blank indorsement of
the defendant. Held, that defendant was liable as an indorser
and not as a maker. (Roesale v. Lancaster, 130 App. Div. 1, 114
N.Y. Supp. 387, cited in Brannan, pages 75-76)
Sec. 64. Liability of irregular indorser. - Where a person, not
otherwise a party to an instrument, places thereon his
signature in blank before delivery, he is liable as indorser, in
accordance with the following rules:
(a) If the instrument is payable to the order of a third
person, he is liable to the payee and to all subsequent
parties.
(b) If the instrument is payable to the order of the maker
or drawer, or is payable to bearer, he is liable to all
parties subsequent to the maker or drawer.
(c) If he signs for the accommodation of the payee, he
is liable to all parties subsequent to the payee.
Notes:
If instrument is payable to the order of a third person, he is
liable to the payee and all subsequent parties
This section has no application to a case where the
signature was placed on the instrument after its delivery to the
Basic Principles and Jurisprudence on the Negotiable Instruments Law 358
payee. (Kohn v. Consolidated Bank Co., 30 Misc. R. 725, 63
N.Y. Supp. 265.)
If the instrument is payable to the order of the maker or
drawer, or is payable to bearer, he is liable to all parties
subsequent to the maker or drawer
Professor Ames, a legal scholar in the field of Negotiable
Instruments made the following comment on this provision, on
the following wise: [t]his section (referring to Section 64 (2) is an
otherwise excellent piece of codification, but defective because
under subsecti on 2 a party si gni ng as i ndorser for the
accommodation of an acceptor would not be liable to a drawer-
payee, but only to subsequent parties.. However, the U.S.
Supreme Court held in the case of Haddock, Blanchard & Co. v.
Haddock
591
, that [o]ne who endorsed a bill in blank before delivery
for the purpose of backing the acceptor is liable to the drawer-
payee, who had indorsed and transferred the instrument and was
compelled to take it up. In this case the court reached the
desirable result advocated by Professor Ames without an
amendment of the section, by holding that sections 63 and 64-2
merely established a presumption and that parol evidence was
admissible to show an intention that the indorser should be liable
to the drawer.
592
In Jenkings v. Coomber [1898] 2 Q.B. 168, it was held that,
where A drew a bill on B, payable to his own order, which B
accepted, and C, in accordance with a previous agreement to
guarantee its payment, wrote his name on the back, and the bill
was delivered to A, C was not liable as indorser, as the bill had
not been indorsed by A before C put his name on the back.
593
Illustrative Cases:
A note recited The A.B. Co. promise to pay to the order of
C, and was signed by A. B. Co., E.R.S. Treasurer, J.W.M. Held,
section 64 was not applicable, because J.W.M. did not place his
signature in blank on the note and he was therefore not liable as
indorser. That there was a plain ambiguity on the face of the
591
192 N.Y. 499, 85 N.E. 682, S.C. secs. 29, 64-3, 68.
592
Brannan, page 78
593
Ibid, page 79
359
note, and that evidence was admissible even against a holder in
due course to show that J.W.M. was secretary of the A.B. Co. and
intended to sign as such but omitted his title by mistake.
(Germania Nat. Bank v. Mariner, 129 Wis. 544, 109 N.W. 574,
S.C. secs. 17-6, 63, cited in Brannan, page 77)
This section deals only with the liability of an irregular
indorser to the payee and subsequent parties and does not define
the rights and liabilities of several irregular indorsers as between
themselves. This is done by section 68. (Wilson v. Hendee, 74
N.J. Law 640, 66 Atl. 413, S.C. secs. 63, 64-1, 68, Ibid)
One who endorses under this section is entitled to the same
defenses as to legality or consideration as the maker for whose
accommodation he signed. (Leonard v. Drapper, 187 Mass, 536,
73 N.E. 644, semble S.C. sec. 66, ibid)
Sec. 65. Warranty where negotiation by delivery and so forth.
Every person negotiating an instrument by delivery or by
a qualified indorsement warrants:
(a) That the instrument is genuine and in all respects
what it purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would
impair the validity of the instrument or render it
valueless.
But when the negotiation is by delivery only, the
warranty extends in favor of no holder other than the
immediate transferee.
The provisions of subdivision (c) of this section do not
apply to a person negotiating public or corporation securities
other than bills and notes.
Notes:
That the instrument is genuine and in all respects what it
purports to be
Basic Principles and Jurisprudence on the Negotiable Instruments Law 360
The warranty that the instrument is genuine and in all
respects what it purports to be covers all the defects in the
instrument affecting the validity thereof, including a forged
indorsement. Thus, the last indorser will be liable for the amount
indicated in the negotiable instrument even if a previous
indorsement was forged. We held in a line of cases that a
collecting bank which indorses a check bearing a forged
indorsement and presents it to the drawee bank guarantees all
prior indorsements, including forged indorsement itself, and
ultimately should be held liable therefor.
594
(Allied Banking
Corporation vs. Lim Sio Wan, et al, G.R. No. 133179, March 27,
2008)
Exception
However, this general rule is subject to exceptions. One
such exception is when the issuance of the check itself was
attended with negligence. Thus, in the cases cited above where
the collecting bank is generally held liable, in two of the cases
where checks were negligently issued, this Court held the
institution issuing the check just as liable as or more liable than
the collecting bank. (supra)
Illustrative Cases:
The payee of a note secured by chattel mortgage transferred
the note and mortgage, indorsing the note as follows: By
agreement with recourse after all security has been exhausted
waiving protest. Held, that the indorser was liable only for the
balance due after the security has been exhausted, and as no
cause of action accrues against him until the security is exhausted
he cannot be joined as a defendant in the action to foreclose the
mortgage. (Smith v. Bradley, 16 N. Dak. 306, 112 N.W. 1062, cited
in Brannan, page 81)
594
Traders Royal Bank v. Radio Philippines Network, Inc., G.R. No. 138510,
October 10, 2002, 390 SCRA 608, 617; Associated Bank v. Court of
Appeals, G.R. No. 107382, January 31, 1996, 252 SCRA 620, 633; Bank
of the Philippine Islands v. Court of Appeals, G.R. No. 102383, November
26, 1992, 216 SCRA 51, 63; Banco de Oro Savings and Mortgage Bank
v. Equitable Banking Corporation, G.R. No. 74917, January 20, 1988, 157
SCRA 188, 198; Republic Bank v. Ebrada, No. L-40796, July 31, 1975,
65 SCRA 680, 687-688
361
An action for cancellation of a note because cashiers checks
received therefor were worthless is not an action for breach of
warranty in negotiation of the checks, and is therefore not governed
by this section. (Dille v. White, 132 Iowa, 327, 109 N.W. 909, 10
L.R.A. (N.S.) 510, S.C. supra, sec. 6-5, ibid)
The transferor by delivery of a forged note is not released
from liability as warrantor by the act of the transferee in receiving
interest from the alleged maker and extending the note, without
the consent of the transferor, all the parties still in ignorance of
the forgery. (Cluseau v. Wagner (La.), 52 So. 547, ibid)
Sec. 66. Liability of general indorser. - Every indorser who
indorses without qualification, warrants to all subsequent
holders in due course:
(a) The matters and things mentioned in subdivisions
(a), (b), and (c) of the next preceding section; and
(b) That the instrument is, at the time of his indorsement,
valid and subsisting;
And, in addition, he engages that, on due presentment,
it shall be accepted or paid, or both, as the case may be,
according to its tenor, and that if it be dishonored and the
necessary proceedings on dishonor be duly taken, he will
pay the amount thereof to the holder, or to any subsequent
indorser who may be compelled to pay it.
Notes:
Matters mentioned in subdivisions (a), (b) and (c) of Section
65 are the following:
(a)That the instrument is genuine and in all respects what it
purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract
2011 Bar Question:
Which of the following indorsers expressly warrants in
negotiating an instrument that 1) it is genuine and true;
Basic Principles and Jurisprudence on the Negotiable Instruments Law 362
2) he has a good title to it; 3) all prior parties have
capacity to negotiate; and 4) it is valid and subsisting
at the time of his indorsement?
A. The irregular indorser.
B. The regular indorser.
C. The general indorser.
D. The qualified indorser.
Liabilities of an indorser
In People v. Maniego,
595
this Court described the liabilities
of an indorser as follows:
Appellants contention that as a mere indorser, she may not
be liable on account of the dishonor of the checks indorsed
by her, is likewise untenable. Under the law, the holder or
last indorsee of a negotiable instrument has the right to
enforce payment of the instrument for the full amount
thereon against all parties liable thereon. Among the parties
liable thereon is an indorser of the instrument, i.e., a person
placing his signature upon an instrument otherwise than as
a maker, drawer or acceptor x x x unless he clearly indicated
by appropriate words his intention to be bound by some
other capacity. Such an indorser who indorses without
qualification, inter alia engages that on due presentment,
x x x (the instrument) shall be accepted or paid, or both, as
the case may be, according to its tenor, and that if it be
dishonored, and the necessary proceedings of dishonor be
duly taken, he will pay the amount thereof to the holder, or
any subsequent indorser who may be compelled to pay it.
Maniego may also be deemed an accommodation party
in the light of the facts, i.e., a person who has signed the
instrument as maker drawer, acceptor, or indorser, without
receiving value thereof, and for the purpose of lending his
name to some other person. As such, she is under the law
l i abl e on the i nstrument to a hol der for val ue,
notwithstanding such holder at the time of taking the
instrument knew x x x (her) to be only an accommodation
595
L-30910, 148 SCRA 30, 25 (1987), cited in Bank of the Philippine Islands
vs. Court of Appeals and Benjamin C. Napiza, February 29, 2000
363
party, although she has the right, after paying the holder, to
obtain reimbursement from the party accommodated, since
the relation between them is in effect that of principal and
surety, the accommodation party being a surety.
It is thus clear that ordinarily private respondent may be
hel d l i abl e as an i ndorser of the check or even as an
accommodation party.
596
2011 Bar Question:
M, the maker, issued a promissory note to P, the payee
which states: I, M, promise to pay P or order the amount
of Php1 Million. Signed, M. P negotiated the note by
indorsement to N, then N to O also by indorsement, and
O to Q, again by indorsement. But before O indorsed
the note to Q, Os wife wrote the figure 2 on the note
after Php1 without Os knowledge, making it appear
that the note is for Php12 Million. For how much is O
liable to Q?
A. Php1 Million since it is the original tenor of the note.
B. Php1 Million since he warrants that the note is
genuine and in all respects what it purports to be.
C. Php12 Million since he warrants his solvency and
that he has a good title to the note.
D. Php12 Million since he warrants that the note is
genuine and in all respects what it purports to be.
Notice of dishonor necessary to charge all indorsers
The Negotiable Instruments Law contains provisions
establishing the liability of a general indorser and giving the
procedure for a notice of dishonor. The general indorser of
negotiable instrument engages that if it be dishonored and the
necessary proceedings of dishonor be duly taken, he will pay the
596
In Town Savings and Loan Bank, Inc. v. Court of Appeals, G.R. No. 106011,
223 SCRA 459 (1993), the Court held that the accommodation parties to
a promissory note are liable for the amount of the loan notwithstanding
that they were not the actual beneficiaries of such loan as they merely
signed the promissory note in order that the party accommodated could
be granted the full amount of the loan
Basic Principles and Jurisprudence on the Negotiable Instruments Law 364
amount thereof to the holder. (Sec. 66, Negotiable Instruments
Law) In this connection, it has been held in a long line of authorities
that notice of dishonor is in order to charge all indorser and
that the right of action against him does not accrue until the
notice is given. (Paulino Gullas vs. Philippine National Bank,
G.R. No. L-43191, November 13, 1935, [Malcom, J:]; citing Asia
Banking Corporation vs. Javier [1923] 44 Phil., 777, bold supplied)
Section 66 cannot be used by a party which introduced a
defect in the instrument
In Melva Theresa Alviar Gonzales vs. Rizal Commercial
Banking Corporation
597
, petitioner is an employee of the
respondent bank, the formers mother was issued a foreign check
in the amount of $7,500, her mother then endorsed the check.
Since respondent bank gives special accommodations to its
employees to receive the checks value without awaiting the
clearing period, petitioner presented the foreign check to
respondent banks Head of Retail Banking. After examination
the head of retail banking requested petitioner to endorse it which
the latter did. Olivia Gomez (Head of Retail Banking) acquiesced
to the early encashment of the check and signed the check but
indicated thereon her authority of up to P17,500.00 only.
Afterwards, Olivia Gomez directed Gonzales to present the check
to RCBC employee Carlos Ramos and procure his signature. After
inspecting the check, Carlos Ramos also signed it with an ok
annotation. After getting the said signatures Gonzales presented
the check to Rolando Zornosa, Supervisor of the Remittance
section of the Foreign Department of the RCBC Head Office, who
after scrutinizing the entries and signatures therein authorized its
encashment. Gonzales then received its peso equivalent of P155,
270.85. Thereafter respondent bank tried to collect the amount
of the check with the foreign drawee bank, however, the check
was twice dishonored by reason of irregular endorsement and
again dishonored due to account closed. Respondent RCBC filed
a case against petitioner for the collection of the amount.
The Supreme Court held that: [t]he foreign drawee bank,
Wilkshire Center Bank N.A., refused to pay the bearer of this dollar-
check drawn against it because of the defect introduced by
respondent RCBC, through its employee, Olivia Gomez. It is,
597
G.R. No. 156294, November 29, 2006
365
therefore, a useless piece of paper if returned in that state to its
original payee, Eva Alviar.
There is no doubt in the mind of the Court that a subsequent
party which caused the defect in the instrument cannot have any
recourse against any of the prior endorsers in good faith.
x x x
This provision (Sec. 66, NIL), however, cannot be used by
the party which introduced a defect on the instrument, such as
respondent RCBC in this case, which qualifiedly endorsed the
same, to hold prior endorsers liable on the instrument x x x results
in the absurd situation whereby a subsequent party may render
an instrument useless and inutile and let innocent parties bear
the loss while he himself gets away scot-free.
Section 66 of the Negotiable Instruments Law which further
states that the general endorser additionally engages that, on due
presentment, the instrument shall be accepted or paid, or both,
as the case may be, according to its tenor, and that if it be
dishonored and the necessary proceedings on dishonor be duly
taken, he will pay the amount thereof to the holder, or to any
subsequent endorser who may be compelled to pay it, it must be
read in the light of the rule in equity requiring that those who come
to court should come with clean hands. The holder or subsequent
endorser who tries to claim under the instrument which had been
dishonored for irregular endorsement must not be the irregular
endorser himself who gave cause for the dishonor. Otherwise, a
clear injustice results when any subsequent party to the instrument
may simply make the instrument defective and later claim from
prior endorsers who have no knowledge or participation in causing
or introducing said defect to the instrument, which thereby caused
its dishonor.
Refusal of the Bank to pay the check drawn upon it.
As a general rule, a bank has a right to set-off the deposits
in its hands for the payment of any indebtedness to it on the part
of a depositor. In Louisiana, however, a civil law jurisdiction, the
rule is denied, and it is held that a bank has no right, without an
order from or special assent of the depositor to retain out of his
deposit an amount sufficient to meet his indebtedness. The basis
Basic Principles and Jurisprudence on the Negotiable Instruments Law 366
of the Louisiana doctrine is the theory of confidential contracts
arising from irregular deposits, e.g., the deposit of money with a
banker. With freedom of selection and after full preference to the
minority rule as more in harmony with modern banking practice.
(1 Morse on Banks and Banking, 5
th
ed., Sec. 324; Garrison vs.
Union Trust Company [1905], 111 A.S.R, 407; Louisiana Civil Code
Annotated, Arts. 2207 et seq.; Gordon & Gomila vs. Muchler
[1882], 34 L. Ann., 604; 8 Manrea, Comentarios al Codigo Civil
Espaol, 4
th
ed., 359 et seq., 11 Manresa pp. 694 et seq.)
Starting, therefore, from the premise that the Philippine
National Bank had with respect to the deposit of Gullas a right of
set-off, we next consider if that remedy was enforced properly.
The fact we believe is undeniable that prior to the mailing of notice
of dishonor, and without waiting for any action by Gullas, the bank
made use of the money standing in his account to make good for
the treasury warrant. At this point recall that Gullas was merely
an indorser and had issued in good faith.
As to a depositor who has funds sufficient to meet payment
of a check drawn by him in favor of a third party, it has been held
that he has a right of action against the bank for its refusal to pay
such a check in the absence of notice to him that the bank has
applied the funds so deposited in extinguishment of past due
claims held against him. (Callahan vs. Bank of Anderson [1904],
2 Ann. Cas., 203). The decision cited represents the minority
doctrine, for on principle it would seem that notice is not necessary
to a maker because the right is based on the doctrine that the
relationship is that of creditor and debtor. However this may be,
as to an indorser the situation is different, and notice should
actually have been given him in order that he might protect his
interests. (Paulino Gullas vs. Philippine National Bank, G.R. No.
L-43191, November 13, 1935, [Malcom, J:])
Endorser is estopped from claiming that the check is non-
negotiable
In the case of Banco de Oro Savings and Mortgage Bank
vs. Equitable Banking Corporation, Philippine Clearing House
Corporation, and Regional Trial Court of Quezon City, Branch
XCII (92)
598
, the plaintiff (BDO) drew six (6) crossed Managers
598
G.R. No. 74917, January 20, 1988
367
Check payable to certain member establishments of Visa Card,
deposited with the defendant. Following normal procedures, and
after stamping at the back of the Checks the usual endorsements.
All prior and/or lack of endorsement guaranteed the defendant
sent the checks for clearing through the Philippine Clearing House
Corporation. Accordingly, plaintiff paid the checks, thereafter it
was discovered that the endorsements appearing at the back of
the Checks and purporting to be that of the payees were forged
and/or unauthorized or otherwise belong to persons other than
the payees.
The Supreme Court ruled: petitioner (BDO) is estopped
from raising the defense of non-negotiability of the checks in
question. It stamped its guarantee on the back of the checks and
subsequently presented these checks for clearing and it was on
the basis of these endorsements by the petitioner that the proceeds
were credited in its clearing account.
The petitioner by its own acts and representation cannot
now deny liability because it assumed the liabilities of an endorser
by stamping its guarantee at the back of the checks.
The petitioner having stamped its guarantee of all prior
endorsements and/or lack of endorsements is now estopped from
claiming that the checks under consideration are not negotiable
instruments. The checks were accepted for deposit by the
petitioner stamping thereon its guarantee, in order that it can clear
the said checks with the respondent bank. By such deliberate
and positive attitude of the petitioner it has for all intents and
purposes treated the said checks as negotiable instruments and
accordingly assumed the warranty of the endorser when it stamped
its guarantee of prior endorsements at the back of the checks. It
led the said respondent to believe that it was acting as endorser
of the checks and on the strength of its guarantee said respondent
cleared the checks in question and credited the account of the
petitioner. Petitioner is now barred from taking an opposite posture
by claiming that the disputed checks are not negotiable instrument.
A commercial bank cannot escape the liability of an endorser
of a check and which may turn out to be a forged endorsement.
Whenever any bank treats the signature at the back of the checks
as endorsements and thus logically guarantees the same as such
Basic Principles and Jurisprudence on the Negotiable Instruments Law 368
there can be no doubt said bank has considered the checks as
negotiable.
Apropos the matter of forgery in endorsements, this Court
has succinctly emphasized that the collecting bank or last endorser
generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion
that the party making the presentment has done its duty to
ascertain the genuineness of the endorsements. This is laid down
in the case of PNB vs. National City Bank
599
. In another case,
this court held that if the drawee-bank discovers that the signature
of the payee was forged after it has paid the amount of the check
to the holder thereof, it can recover the amount paid from the
collecting bank
600
.
We made clear in Our decision in Philippine National Bank
vs. The National City Bank of NY & Motor Service Co., that:
1. Where a check is accepted or certified by the bank on
which it is drawn, the bank is estopped to deny the
genuineness of the drawers signature and his capacity
to issue the instrument;
2. If a drawee bank pays a forged check which was
previously accepted or certified by the said bank, it can
recover from a holder who did not participate in the
forgery and did not have actual notice thereof;
3. The payment of a check does not include or imply its
acceptance in the sense that this word is used in Section
82 of the Negotiable Instruments Act.
601
Reason for the rule
In the same case, This Court enunciated in Philippine
National Bank vs. Court of Appeals
602
, a point relevant to the issue
when it stated the doctrine of estoppels is based upon the grounds
of public policy, fair dealing, good faith and justice and its purpose
is to forbid one to speak against his own act, representations or
599
63 Phil. 711
600
Republic Bank vs. Ebrada, 65 SCRA 680
601
Supra (10 Saura Import & Export Co., 24 SCRA 974)
602
94 SCRA 357
369
commitments to the injury of one whom they were directed and
who reasonably relied thereon.
A truism stated by this Court is thatThe doctrine of
estoppels precludes a party from repudiating an obligation
voluntarily assumed after having accepted benefits therefrom. To
countenance such repudiation would be contrary to equity and
put premium on fraud or misrepresentation.
603
"
Illustrative Case:
A made a note to the order of B, forged Bs indorsement,
then procured Cs indorsement for As accommodation, and
negotiated the note. Held, C by his indorsement, guaranteed the
genuineness of Bs signature, and was liable to a holder in due
course. (Packard v. Windholz, 88 App. Div. 365, 84 N.Y. Supp.
666, cited in Brannan, page 83)
An indorser of a check does not warrant the genuineness
of the drawers signature to the drawee who pays it. The drawee
is not a holder in due course under Sec. 52, nor a holder under
the definition in Sec. 191. The drawee when he accepts a check
becomes the guarantor thereof. (Farmers Bank v. Bank of
Rutherford, 115 Tenn. 64, 88 S.W. 939, 112 Am. St. Rep. 817)
But the drawee may recover back the money when the drawee
was without fault and the indorser was guilty of negligence in not
discovering the forgery. (Williamsburgh Trust Co. v. Tum Suden,
120 App. Div. 518, 105 N.Y. Supp. 335)
A note made by a corporation was indorsed by defendants
before its delivery to the payee. The consideration was known to
all parties to be an illegal purchase by the corporation of its own
capital stock. Held, that the payee was not a holder in due course
because he knew of the illegality and want of consideration, and
could not hold the indorsers upon their warranty. (Burke v.Smith,
(Md.), 75 Atl. 114)
2011 Bar Question:
P sold to M 10 grams of shabu worth Php 5,000.00. As
he had no money at the time of the sale, M wrote a
603
10 Saura Import & Export Co., 24 SCRA 974
Basic Principles and Jurisprudence on the Negotiable Instruments Law 370
promissory note promising to pay P or his order Php
5,000. P then indorsed the note to X (who did not know
about the shabu), and X to Y. Unable to collect from P,
Y then sued X on the note. X set up the defense of
illegality of consideration. Is he correct?
A. No, since X, being a subsequent indorser, warrants
that the note is valid and subsisting.
B. No, since X, a general indorser, warrants that the
note is valid and subsisting.
C. Yes, since a void contract does not give rise to any
right.
D. Yes, si nce the note was born of an i l l egal
consideration which is a real defense.
Sec. 67. Liability of indorser where paper negotiable by
delivery. Where a person places his indorsement on an
instrument negotiable by delivery, he incurs all the liability of
an indorser.
Notes:
See, cross-reference comments and notes on Sec. 48.
Sec. 68. Order in which indorsers are liable. - As respect one
another, indorsers are liable prima facie in the order in which
they indorse; but evidence is admissible to show that, as
between or among themselves, they have agreed otherwise.
Joint payees or joint indorsees who indorse are deemed to
indorse jointly and severally.
2011 Bar Question:
M makes a promissory note that states: I, M, promise
to pay Php5,000.00 to B or bearer. Signed, M. M
negotiated the note by delivery to B, B to N, and N to O.
B had known that M was bankrupt when M issued the
note. Who would be liable to O?
A. M and N since they may be assumed to know of
Ms bankruptcy
371
B. N, being Os immediate negotiator of a bearer note
C. B, M, and N, being indorsers by delivery of a bearer
note
D. B, having known of Ms bankruptcy
Sec. 69. Liability of an agent or broker. - Where a broker or
other agent negotiates an instrument without indorsement,
he incurs all the liabilities prescribed by Section Sixty-five of
this Act, unless he discloses the name of his principal and
the fact that he is acting only as agent.
VI. PRESENTATION FOR PAYMENT
Obligations of maker, acceptor, drawer, and indorser,
respectively, as to payment; general rule
The engagement entered into by the acceptor of a bill and
the maker of a note is, that it shall be paid at its maturitythat is,
on the day that it falls due, and at the place specified for payment,
if any place be designatedupon its presentment. This
engagement is absolute, but that of the drawer of a bill and the
indorser of a bill or note is conditional, and contingent upon the
true presentment at maturity, and notice in case it is not paid.
The maker and acceptor are bound, although the bill or note be
not presented on the day it falls due;
604
but the drawer and indorsers
are discharged if such presentment be not made, unless some
sufficient cause excuses the holder for failure to perform that
duty.
605
It is important, therefore, to ascertain how the presentment
should be provided for by the holder of the bill or note, lest by
failure to observe the necessary precautions, the drawer and
indorsers may be discharged, and the solvency of his debt
destroyed or impaired. We shall consider, therefore, in order:
(1) The person by and whom the instrument should be
presented.
(2) The time of presentment.
(3) The place of presentment.
(4) The mode of presentment.
604
Sims v. National Com. Bank, 73 Ala. 251
605
Magruder v. Bank of Washington, 3 Pet. 92; Cox v. National Bank, 100
U.S. 712; Harvey v. Girard Nat. Bank, 119 Pa. St. 212
Basic Principles and Jurisprudence on the Negotiable Instruments Law 372
Sec. 70. Effect of want of demand on principal debtor. -
Presentment for payment is not necessary in order to charge
the person primarily liable on the instrument; but if the
instrument is, by its terms, payable at a special place, and he
is able and willing to pay it there at maturity, such ability and
willingness are equivalent to a tender of payment upon his
part. But except as herein otherwise provided, presentment
for payment is necessary in order to charge the drawer and
indorsers.
Illustrative Case:
Presentment for payment is unnecessary to charge the
person primarily liable whether the instrument is payable on time
or on demand, although it is made payable at a particular place.
(Farmers Nat. Bank v. Venner, 192 Mass. 531, 78 N.E. 540;
Hyman v. Doyle, 53 Misc. R. 597, 103 N.Y. Supp. 778, cited in
Brannan, page 88)
Where a note names no place of payment, it is generally
payable at the makers residence or place of business. Where a
note, payable on or before a given date with the option to the
holder to declare the whole due on default as to monthly
installments of interest, did not fix a place of payment and the
maker had a place of business in the city where the note was
payable and was able and willing to make interest payments as
they matured, the holder could not declare the note due for failure
to pay installments of interest, without presentment, demand and
refusal at the makers place of business, although the note may
not be, under section 70 N.I.L., By its terms payable at a special
place. (Bradley v. Washington Mill Co. (Wash.), 103 Pac. 822,
ibid)
Sec. 71. Presentment where instrument is not payable on
demand and where payable on demand. - Where the
instrument is not payable on demand, presentment must be
made on the day it falls due. Where it is payable on demand,
presentment must be made within a reasonable time after its
issue, except that in the case of a bill of exchange,
presentment for payment will be sufficient if made within a
reasonable time after the last negotiation thereof.
373
Notes:
Under this section and section 193 the burden is on the
holder to prove presentment without a reasonable time, and the
defendant indorser need not plead failure to make due
presentment. Where the facts are ascertained and not in dispute
reasonable time is a question of law. Circumstances held to make
three and a half years an unreasonable time. (Commercial Nat.
Bank v. Zimmerman, 185 N.Y., 210 77 N.E. 1020, cited in Brannan,
page 89)
Bills payable on demand or at sight without grace (which
are immediately payable in presentment), or payable at a certain
number of days after date, need not be presented, for acceptance
at all, but only for payment. And the fact that such bills are payable
at a bank, or other particular place, does not alter the rule on the
subject.
606
But it is usual and best, when the bill is payable at a
future day, to present it for acceptance, in order to ascertain
whether it will certainly be honored, and to procure the assurance
of the acceptors liability.
607
And in such cases, if acceptance be
refused, the holder must make protest, and give notice in the same
manner as if the bill were payable at so many days after sight.
There are, however, three exceptions to this general rule that is
not necessary to present a bill payable at a fixed time for
acceptance, but only at maturity for payment: First, when there is
an express direction to the payee or holder of a bill; second, when
it is put into the hands of an agent for negotiation; and, third,
where the drawer and drawer are either the same person, or the
drawer is a member of the firm or connected with the corporation
which is the drawee. (Daniel, Elements of the Law of Negotiable
Instruments, pages 163-164)
Bills payable at sight, or at so many days after sight, or after
demand, or after any other event not absolutely fixed, must be
presented to the drawee for acceptance and payment, or for
acceptance only, without unreasonable delay, or the drawer and
indorsers will be discharged, for they have an interest in having
the bills accepted immediately in order to shorten the time of
payment, and thus put a limit to the period of their liability and
also enable them to protect themselves by other means before it
606
Bank of Washington v. Triplett, 1 Pet. 25; Townley v. Sumrall, 2 Pet. 170
607
United Stated v. Barker, 4 Wash. C.C. 464; Story on Bills, 288
Basic Principles and Jurisprudence on the Negotiable Instruments Law 374
is too late, if the bill is not accepted and paid within the time
originally contemplated by them.
608
When the words acceptance
waived are embodied in a bill, the ordinary proceedings in
acceptance are dispensed with, and merged into those of payment
or nonpayment.
609
(Ibid, page 164)
Presentment to the drawee, it has been held, is necessary
even though the drawer has requested him not to accept;
610
but
the holder is not bound to present again after refusal to accept
and notice given, even though the drawer requests him to do so,
and promises that the bill shall be honored.
611
(Ibid)
The only cases in which the holder of a bill which, according
to its tenor, should be presented for acceptance, can charge the
drawer without presenting it for acceptance, arise when the
relations between the drawer and drawee are such as to constitute
the drawing of the bill a fraud upon the holder.
612
When the bill is
presented the acceptance must be according to its tenor to pay in
money. If it be to pay another bill, it is no acceptance, and the bill
should be protested.
613
What constitutes a reasonable time?
No hard and fast demarcation line can be drawn between
what may be considered as a reasonable or unreasonable time,
because reasonable time depends upon the peculiar facts and
circumstances in each case. (Tolentino, Comments and
Jurisprudence on Commercial Laws of the Philippines, Vol. I, Eight
Edition, p. 327)
Reasonable time has been defined as so much time as is
necessary under the circumstances for a reasonable prudent and
diligent man to do, conveniently, what the contract or duty requires
should be done, having a regard for the rights, and possibility of
loss, if any, to the other party. (Far East Realty Investment Inc. vs.
608
Bell v. First Nat. Bank, 115 U.S. 379; Mitchell v. De Grand, 1 Mason, 176;
Robinson v. Ames, 20 Johns, 146
609
Carson v. Russel, 26 Tex. 472; English v. Wall, 12 Rob. (La.) 132; Webb
v. Mears, 9 Wright, 222
610
Hill v. Heap, Dowl. & R.N.P. 57; 1 Parsons on Notes and Bills, 388
611
Hickligg v. Hardey, 7 Taunt. 312
612
Bank of Washington v. Triplett. 1 Pet. 25; Smiths Mercantile Law
(Holcombe & Gholsons ed.), 304
613
Russel v. Phillips, 14 Q.B. 891
375
Court of Appeals, Dy Hian Tat, et al, G.R. No. L-36549, October 5,
1988, citing Citizens Bank Bldg. v. L& E. Werthiermer 189 S.W.
361, 362, 126 Ark, 38, Ann. Cas. 1917 E, 520)
Sec. 72. What constitutes a sufficient presentment. -
Presentment for payment, to be sufficient, must be made:
(a) By the holder, or by some person authorized to
receive payment on his behalf;
(b) At a reasonable hour on a business day;
(c) At a proper place as herein defined;
(d) To the person primarily liable on the instrument, or
if he is absent or inaccessible, to any person found
at the place where the presentment is made.
Notes:
Presentment by the Holder or his authorized agent
The bill must be presented by the holder or his authorized
agent, and to the drawee or his authorized agent. The party in
possession of the bill is with ostensible legal title thereto, presumed
to be the holder, and to have the right to make presentment for
acceptance of payment.
614
The drawee may accept without risk,
and if he refuse, the protest will inure to the benefit of the rightful
holder.
615
If the drawee cannot be found, and any person has
been indicated to be resorted to in case of need (au besoin), the
bill should be presented to that person.
616
(Daniel, Elements of
the Law of Negotiable Instruments, page 165)
Any bona fide holder of a negotiable instrument, or anyone
lawfully in possession of it for the purpose of receiving payment,
may present it for payment at maturity.
617
(supra, page 200)
The mere possession of a negotiable instrument which is
payable to the order of the payee, and is indorsed by him in blank,
or of a negotiable instrument payable to bearer, is in itself sufficient
614
Bank of Utica v. Smith, 18 Johns. 230; Freemen v. Boynton, 7 Mass. 483;
Agnew v. Bank of Gettysburg, 2 Harr & Groll, 478
615
Chitty on Bills (13th Am. Ed.), 311
616
Story on Bills, 229; Edwards on Bills, 402
617
Leftly v. Mills, 4 T.R. 170; Bachellor v. Priest, 12 Pick. 399
Basic Principles and Jurisprudence on the Negotiable Instruments Law 376
evidence of his right to present it, and to demand payment
thereof.
618
And payment to such person will always be valid, unless
he is known to the payor to have acquired possession wrongfully.
And if the party holding possession of a negotiable instrument
which is not indorsed by the payee, or has been indorsed by him
specially, to another, and has not been indorsed over by such
indorsee but has been placed in the holders hands as agent, for
the purpose of receiving payment to him will be valid; even, as it
has been held, although made in a manner different from that
provided for in the instructions to the agent. The fact that the
instrument is not indorsed by the owner is, as has been held,
under such circumstances, of no importance. Such indorsement
would be necessary to the negotiation of the instrument, but would
not be necessary to the validity of the payment. (Ibid)
As has been indicated, the presentment may be made by
the holder or owner himself, or by his duly authorized agent, and
his authority need not be in writing, although possibly the maker
or acceptor may insist upon a written authorization or indorsement
to the agent before being required to make payment.
619
(Ibid)
To whom; general rule
Presentment for payment must be made to the drawee or
acceptor of the bill, or maker of the note, or to an authorized agent.
A personal demand is not necessary, and it is sufficient to make
the demand at his usual residence or place of business of his
wife, or other agent; for it is the duty of an acceptor or promissory,
if he is not present himself, to leave provision for the payment of
his bills or notes.
620
(Supra, page 203)
Sec. 73. Place of presentment. - Presentment for payment is
made at the proper place:
(a) Where a place of payment is specified in the
instrument and it is there presented;
(b) Where no place of payment is specified but the
address of the person to make payment is given in
the instrument and it is there presented;
618
Weber v. Orten, 91 Mo. 680; Jackson v. Love, 82 N.C. 405
619
Tiedeman on Bills and Notes, 311, note 2
620
Matthews v. Haydon, 2 Esp. 509; Brown v. McDermott, 5 Esp. 265
377
(c) Where no place of payment is specified and no
address is given and the instrument is presented at
the usual place of business or residence of the
person to make payment;
(d) In any other case if presented to the person to make
payment wherever he can be found, or if presented
at his last known place of business or residence.
Notes:
Presentment to person on premises
If presentment be made at the place specified in the
instrument, or in the case of one payable generally at the place of
business of the acceptor or maker during business hours, or at
his domicile during a reasonable hour of the day, it is sufficient if
it be made to any person to be found upon the premises, especially
if the maker be absent or inaccessible.
621
Where presentment
was made to the wife of the maker, she informing the holder that
her husband was out of town, it was held sufficient.
622
And so it
was deemed sufficient to charge the indorser where the holder
presented the bill to an inmate of the makers house, who was
coming out, and who stated that the acceptor had removedthe
holder leaving a card containing notice for the acceptor of the
maturity of the bill.
623
Where there is no one to answer,
presentment at the makers dwelling is sufficient.
624
(Daniel,
Elements of the Law of Negotiable Instruments, page 204)
Illustrative Cases:
A note payable at a bank is properly presented for payment
at the bank although the bank is in the hands of a receiver and
closed. Presentment need not be made to the receiver personally,
he having no authority to pay. (Schlesinger v. Schultz, 110 App.
Div. 356, 96 N.Y. Supp. 383, S.C. secs. 7-1, 71, cited in Brannan,
page 92)
621
Cromwell v. Hynson, 2 Campb. 596; Phillips v. Astberg, 2 Taunt. 206;
Draper v. Clemons, 4 Mo. 52
622
Moodie v. Morrall, 1 Const. Rep. 367
623
Buxton v. Jone, 1 M & G 83; Story on Bills (Bennetts ed.), 350, note 1
624
Stivers v. Prentice, 3 B. Mon. 461
Basic Principles and Jurisprudence on the Negotiable Instruments Law 378
Where a note is payable at a certain store, presentment for
payment at such store to a person connected therewith is sufficient
and no personal demand on the maker is necessary. (Nelson v.
Grondahl, 13 N.D. 363, 100 N.W. 1093, ibid)
Where a note is payable at a designated branch of a trust
company, presentation at the original office of the company on
the date of maturity and at the branch after banking hours on the
day following is not sufficient as against an indorser. (Ironclad
Mfg. Co. v. Sackin, 129 App. Div. 555, 114 N.Y. Supp. 43, cited in
Brannan, page 93)
A note was made payable at the home of the maker and at
maturity he was called up by telephone and asked what he was
going to do about it, and answered that he could not pay, and was
told that the note would be protested. Held, that the right of the
maker under section 74 to the exhibition of the note was waived,
and that the demand over the telephone was a sufficient
presentment to charge the indorser. (Gilpin v. Savage, 60 Misc.
Rep. 605, 112 N.Y. Supp. 802, ibid)
Sec. 74. Instrument must be exhibited. - The instrument must
be exhibited to the person from whom payment is demanded,
and when it is paid, must be delivered up to the party paying
it.
Notes:
Must be actually exhibited
Presentment of the bill or note, and demand of payment,
should be made by an actual exhibition of the instrument itself; or
at least the demand of payment should be accompanied by some
clear indication that the instrument is at hand, ready to be
delivered, and such must really be the case.
625
This is requisite in
order that the drawee or acceptor may be able to judge (1) of the
genuineness of the instrument; (2) of the right of the holder to
receive payment; and (3) that he may immediately reclaim
possession of it upon paying the amount. If, on demand of
payment, the exhibition of the paper is not asked for, and the
625
Musson v. Laek, 4 How. 262; Nailor v. Bowie, 3 Md. 251; Crandall v.
Schroeppel, 1 Hun, 557; Etheridge v. Ladd, 44 Barb. 69
379
party to whom demand is made declines to pay on other grounds,
a more formal presentment by actual exhibition of the paper will
be considered as waived.
626
x x x The demand of payment should
not vary from the tenor of the paper; and if it be payable simply in
money, without specifying the kind, a demand for gold coin would
be insufficient to charge and indorser.
627
(Daniel, Elements of the
Law of Negotiable Instruments, page 220)
Presentment by mail
Bills of exchange are most frequently drawn on parties at
distant places, and it is undoubtedly legal, customary, and proper
to forward them by mail to correspondents or other agents at the
place where the drawee is addressed, to -be by them presented,
in due course. (Ibid, pages 220-221)
Leaving instrument in debtors hands
A bill or note, when presented for payment, cannot be left in
the debtors hands as when presented for acceptance; and if it is
so left, presentment cannot be considered as made until payment
is demanded. (Ibid)
Sec. 75. Presentment where instrument payable at bank. -
Where the instrument is payable at a bank, presentment for
payment must be made during banking hours, unless the
person to make payment has no funds there to meet it at any
time during the day, in which case presentment at any hour
before the bank is closed on that day is sufficient.
Notes:
As to mode of presentment of negotiable paper payable at a
bank
When a bill or note is made payable at a bank, it is
considered a sufficient presentment of it if it is actually in the bank
at maturity, read to be delivered up to any party who may be entitled
to it on payment of the amount due; and if, at the close of business
hours, the bill or note remains unpaid, it is considered as
dishonored, and notice should be immediately given to the proper
626
Lockwood v. Crawford, 18 Conn. 361; King v. Crowell, 61 Me. 244
627
Langenberger v. Kroeger, 48 Cal. 147
Basic Principles and Jurisprudence on the Negotiable Instruments Law 380
parties.
628
Such also is the case when the instrument is payable
at a particular place.
629
Sometimes a formal presentment of the
bill or note, in such cases, at the bank, or upon the maker, is
made; and the cases are uniform in holding that such a
presentment at the bank is sufficient, even when the place is
mentioned in the memorandum;
630
but it is settled that nothing
more than the presence of the paper there is necessary.
631
(Daniel,
Elements of the Law of Negotiable Instruments, page 222)
The person to make payment has until the close of banking
hours of the bank where the instrument is made payable in which
to pay it, and if before the close of such hours he deposits money
enough to pay it, a demand earlier in the day is premature.
(German-American Bank v. Milliman, 31 Misc. R. 87, 65 N.Y. Supp.
242, cited in Brannan, page 94)
Sec. 76. Presentment where principal debtor is dead. - Where
the person primarily liable on the instrument is dead and no
place of payment is specified, presentment for payment must
be made to his personal representative, if such there be, and
if, with the exercise of reasonable diligence, he can be found.
Notes:
When acceptor or maker is dead
If the acceptor or maker be dead at the time of the maturity
of the bill or note, it should be presented to his personal
representative, if one be appointed, and his place of residence
can, by reasonable inquiries, be ascertained.
632
If there be no
personal representative, the presentment should be made, and
payment demanded, at the dwelling-house of the deceased, if
the instrument were payable generally.
633
But if it was drawn
628
Chicopee Bank v. Philadelphia Bank, 8 Wall. 641; Peoples Bank v. Brooks,
31 Md. 7; Folger v. Chase, 18 Pick. 63
629
Hunt v. Maybee, 7 N.Y. 266
630
Bank of Utica v. Smith, 18 Johns 230; Woodbridge v. Brigham, 13 Mass
556; Saunderson v. Judge, 2 H. Bl. 509
631
Fullerton v. Bank of United States, 1 Pet. 604; Merchants Bank v. Elderkin,
25 N.Y. 178
632
Magruder v. Union Bank, 3 Pet. 87; Juniata Bank v. Hale, 16 Serg. & R.
167
633
Magruder v. Union Bank, 3 Pet. 87; Juniata Bank v. Hale, 16 Serg. & R.
167; Story on Notes, 253
381
payable at a particular place, then it will be sufficient that it was
presented at such place.
634
(Daniel, Elements of the Law of
Negotiable Instruments, page 204)
Illustrative case:
Calling two or three times at the banking office of the
administrator of a deceased maker, and again seeking him at a
railroad station near the seat of his other business interests at a
time when he might be expected to be there, warrants a finding of
reasonable diligence to present a note for payment. (Reed v.
Spear, 107 App. Div. 144, 94 N.Y. Supp. 1007, S.C. secs. 89, 96,
ibid)
Sec. 77. Presentment to persons liable as partners. - Where
the persons primarily liable on the instrument are liable as
partners and no place of payment is specified, presentment
for payment may be made to any one of them, even though
there has been a dissolution of the firm.
Sec. 78. Presentment to joint debtors. - Where there are
several persons, not partners, primarily liable on the
instrument and no place of payment is specified, presentment
must be made to them all.
Notes:
Where there are several promissors
When the note is executed by several joint promissors who
are not partners, but liable only as joint and several promissors, it
has been held, and, as we think correctly, that presentment should
be made to each, in order to fix the liability of an indorser.
635
But
presentment of a bill drawn upon or accepted by, and of a note
executed by, a co-partnership firm, is sufficient, if made to any
one of the members of such firm.
636
And if the signature of the
parties entitled to presentment be apparently that of a partnership,
634
Boyds Admr. V. City Sav. Bank, 15 Gratt. 501; Holtz v. Boppe, 37 N.Y.
634; Philport v. Bryant, 1 Moore & P. 754
635
Blake v. McMillen, 33 Iowa, 150; Union Bank v. Willis, 8 Metc. (Mass.)
504; Arnold v. Dresser, 8 Allen, 435
636
Branch of State Bank v. McLeran, 26 Iowa, 306; Shedd v. Brett, 1 Pick.
401
Basic Principles and Jurisprudence on the Negotiable Instruments Law 382
as, for instance, if signed Walter & Burr, presentment to either is
sufficient.
637
(Daniels, Elements of the Law of Negotiable
Instruments, page 205)
Even after the dissolution of the firm, presentment to any
one of the partners is sufficient, for as to the bill or note upon
which they are liable, the liability continues until duly satisfied or
discharged.
638
(Ibid)
In the event of the death of one of the members of the firm
to which presentment should be made before the maturity of the
bill or note, the presentment should be made to the survivors,
and not to the personal representative of the deceased, because
the liability devolves upon the surviving partner.
639
The same rule
obtains in the event of the death of one of two or more joint makers
not partners.
640
(Ibid)
Sec. 79. When presentment not required to charge the drawer.
- Presentment for payment is not required in order to charge
the drawer where he has no right to expect or require that
the drawee or acceptor will pay the instrument.
Sec. 80. When presentment not required to charge the
indorser. -Presentment is not required in order to charge an
indorser where the instrument was made or accepted for his
accommodation and he has no reason to expect that the
instrument will be paid if presented.
2011 Bar Question:
X executed a promissory note in favor of Y by way of
accommodation. It says: Pay to Y or order the amount
of Php50,000.00. Signed, X. Y then indorsed the note
to Z, and Z to T. When T sought collection from Y, the
latter countered as indorser that there should have been
a presentment first to the maker who dishonors it. Is Y
correct?
637
Erwin v. Downs, 15 N.Y. 375
638
Crowley v. Barry, 4 Gill, 194; Hubbard v. Matthews, 4 N.Y. 50
639
Cayuga Bank v. Hunt, 2 Hill, 635; Story on Bills, 346-362
640
Daniel on Negotiable Instruments, 596
383
A. No, since Y is the real debtor and thus, there is no
need for presentment for payment and dishonor by
the maker.
B. Yes, since as an indorser who is secondarily liable,
there must first be presentment for payment and
dishonor by the maker.
C. No, since the absolute rule is that there is no need
for presentment for payment and dishonor to hold
an indorser liable.
D. Yes, since the secondary liability of Y and Z would
only arise after presentment for payment and
dishonor by the maker.
Sec. 81. When delay in making presentment is excused. -
Delay in making presentment for payment is excused when
the delay is caused by circumstances beyond the control of
the holder and not imputable to his default, misconduct, or
negligence. When the cause of delay ceases to operate,
presentment must be made with reasonable diligence.
Sec. 82. When presentment for payment is excused. -
Presentment for payment is excused:
(a) Where, after the exercise of reasonable diligence,
presentment, as required by this Act, cannot be
made;
(b) Where the drawee is a fictitious person;
(c) By waiver of presentment, express or implied.
Sec. 83. When instrument dishonored by non-payment. - The
instrument is dishonored by non-payment when:
(a) It is duly presented for payment and payment is
refused or cannot be obtained; or
(b) Presentment is excused and the instrument is
overdue and unpaid.
Sec. 84. Liability of person secondarily liable, when
instrument dishonored. - Subject to the provisions of this
Act, when the instrument is dishonored by non-payment, an
Basic Principles and Jurisprudence on the Negotiable Instruments Law 384
immediate right of recourse to all parties secondarily liable
thereon accrues to the holder.
Notes:
For Section 84 to apply, the check must be presented for
payment within a reasonable period of time after its issue
The applicability of this provision is subject to the condition
imposed under Sec. 186, to the effect that the check must be
presented for payment within a reasonable period of time after its
issue. (Philippine National Bank vs., Benito Seeto, G.R. No. L-
4388, August 13, 1952, [Labrador, J:]) It must however be noted
that Sec. 186 explicitly provides for the discharge of the drawer.
The silence of Section 186 as to the indorser is due to the fact
that his discharge is already expressly covered by the provision
of Section 84, the indorser being a person secondarily liable on
the instrument. The reason for the difference between the liability
of the indorser and that of the drawer in case of dishonor is that
the drawer is not probably or necessarily prejudiced thereby, while
an indorser is, actually or by legal presumption. (supra)
When does liability arise?
After an instrument is dishonored by nonpayment, indorsers
cease to be merely secondarily liable; they become principal
debtors whose liability becomes identical to that of the original
obligor. The holder of a negotiable instrument need not even
proceed against the maker before suing the indorser.
641
(Tuazon
vs. Heirs of Bartolome Ramos, G.R. No. 156262, July 14, 2005)
Sec. 85. Time of maturity. - Every negotiable instrument is
payable at the time fixed therein without grace. When the day
of maturity falls upon Sunday or a holiday, the instruments
falling due or becoming payable on Saturday are to be
presented for payment on the next succeeding business day
except that instruments payable on demand may, at the option
of the holder, be presented for payment before twelve oclock
noon on Saturday when that entire day is not a holiday.
641
Metropol (Bacolod) Financing & Investment Corp. v. Sambok Motors
Company, 205 Phil. 758, 762, February 28, 1983
385
Notes:
The third sentence of this section presents the anomaly that
while an instrument falling due on Saturday must be presented
on Monday in order to hold drawers and indorsers, yet if the
instrument is payable at a special place and the person primarily
liable is able and willing to pay it there at maturity (see section
70), it must be presented on Saturday in order to charge the parties
liable for such payment with interest after Saturday. This question
has arisen in a practical way in Boston, and counsel for both parties
agreed upon this construction of the sentence, but the question
has not been submitted to a court. It seems also that if a bank or
other collecting agent should fail to present the instrument on
Saturday such agent might be chargeable with negligence and
liable for any loss thereby caused to the principal. (Brannan, page
99)
General rule as to time
In respect to the maker of a note and the acceptor of a bill,
it is not important upon what day the presentment is made,
provided it be made at some time before the statute of limitations
bar action against them.
642
In respect, however, to the drawer of
a bill and the indorser of a bill or note, it is essential to the fixing of
their liability that the presentment should be made on the day of
maturity, provided it is within the power of the holder to make it.
643
If the presentment be made before the bill or note is due, it is
entirely premature and nugatory, and, so far as it affects the drawer
or indorser, a perfect nullity.
644
(Daniel, Elements of the Law of
Negotiable Instruments, page 206)
When instrument payable on demand
All bills of exchange payable on demand are closely
assimilated to checks, and contemplate the immediate payment
of the amount called for. They are payable immediately on
presentment, without grace, and if the drawee and the payee or
indorsee reside in the same place, it is laid down by a number of
the authorities that they must be presented within business hours
642
Chitty on Bills [354], 396; Metzger v. Waddell, 1 N. Mex. 409
643
1 Parsons on Notes and Bills, 373; Pendleton v. Knickerbocker Life Ins.
Co., 7 Fed. 170
644
Griffin v. Goff, 12 Johns, 423; Jackson v. Newton, 8 Watts, 401; Farmers
Bank v. Duvall, 7 Gill & J 78
Basic Principles and Jurisprudence on the Negotiable Instruments Law 386
of the day on which they are drawn in order to holder the drawer
in the event of the failure of the drawee to honor them.
645
And if
the drawee resides in a different place they must be forwarded by
the regular post of the day after they were received.
646
But these
rules are not inflexible. What is reasonable time must depend
upon circumstances and in many cases upon the time, the mode,
and the place of receiving bills, and upon the relations of the parties
between whom the question arises.
647
Where the draft required
indorsement by a school board, which had to be convened, delay
of a week to forward it was held justifiable.
648
(Supra, page 208)
Sec. 86. Time; how computed. - When the instrument is
payable at a fixed period after date, after sight, or after that
happening of a specified event, the time of payment is
determined by excluding the day from which the time is to
begin to run, and by including the date of payment.
Sec. 87. Rule where instrument payable at bank. - Where the
instrument is made payable at a bank, it is equivalent to an
order to the bank to pay the same for the account of the
principal debtor thereon.
Notes:
A bank has no authority to pay notes of a depositor made
before the adoption of the Negotiable Instruments Law ad payable
at another bank. (Elliot v. Worcester Trust Co., 189 Mass. 542,
75 N.E. 944) When the depositor sues the bank, the bank cannot
claim the rights of a bona fide purchaser for value before maturity
when it simply pleads a general denial and payment and files no
claim in set-off. (Ibid, cited in Brannan, page 101)
Sec. 88. What constitutes payment in due course. - Payment
is made in due course when it is made at or after the maturity
of the payment to the holder thereof in good faith and without
notice that his title is defective.
645
Kampmann v. Williams, 70 Tex. 571; McMonigal v. Brown, 45 Ohio St.
504
646
Chitty on Bills (13th Am. Ed.), 432; Parker v. Reddick, 65 Miss. 246
647
Morgan v. United States, 113 U.S. 501; Marbourg v. Brinkman, 23 Mo.
App. 513
648
Muncy Borough School Dist. V. Commonwealth, 84 Pa. St. 464
387
Notes:
The payee of a demand note held a mortgage to secure the
debt. He sold and transferred the mortgage to one person for full
value and afterwards indorsed the note to a holder in due course.
Held, that the note was not paid by the sale of the mortgage.
(Glasscock v. Balls, 24 Q.B.D. 13, S.C. sec. 119-1, ibid)
VII. NOTICE OF DISHONOR
Necessity of notice; general rule
When a negotiable bill or note is dishonored by non-
acceptance on presentment for acceptance, or by nonpayment at
its maturity, it is the duty of the holder to give immediate notice of
such dishonor to the drawer, if it be a bill, and to the indorser,
whether it be a bill or note. The party primarily liable is not entitled
to notice, for it was his duty to have provided for payment of the
paper; and the fact that he is the maker or acceptor for
accommodation does not change the rule.
649
(Daniel, Elements
of the Law of Negotiable Instruments, page 234)
Notice is not due to any party of a bill or note not negotiable,
the rules of the law merchant concerning notice and protest
applying to none but strictly commercial instruments.
650
(Supra)
It is regarded as entering a condition in the contract of the
drawer and indorser of a bill, and of the indorser of a note, that he
shall only be bound in the event that acceptance or payment is
only demanded; and he notified if it is not made. And in default of
notice of non-acceptance or nonpayment, the party entitled to
notice is at once discharged, unless some excuse exist which
exonerates the holder.
651
(Supra)
Failure to notify party entitled to notice discharges debt for
which bill was drawn or indorsed
So absolute is the necessity for notice to an indorser, in
order to charge him, that if a note has been indorsed to the holder
in conditional payment of a debt, the failure to give notice to the
649
Hays v. N.W. Bank, 9 Gratt. 127
650
Pitman v. Breckinridge, 3 Gratt. 129
651
Rothschild v. Currie, 41 Eng. C.L. 43; Musson v. Lake, 4 How. 262
Basic Principles and Jurisprudence on the Negotiable Instruments Law 388
indorser will not only discharge the indorser as a party to the notice,
but also a debtor upon the original consideration, even though it
be secured by a mortgage or deed of trust. The notes, then, is
made an absolute discharge of his liability, and the indorsee must
look solely to prior parties.
652
(Supra, page 234-235)
Sec. 89. To whom notice of dishonor must be given. - Except
as herein otherwise provided, when a negotiable instrument
has been dishonored by non-acceptance or non-payment,
notice of dishonor must be given to the drawer and to each
indorser, and any drawer or indorser to whom such notice is
not given is discharged.
Notes:
Professor Ames states: By section 89, if the drawer of a
check is not notified of the dishonor, he will be absolutely
discharged, although he has suffered no loss by the failure to
give him notice. Yet by section 186 the drawer is only discharged
to the extent of loss caused by delay in presentment of the check
for payment within a reasonable time.
653
Where notice of dishonor to the drawer of a check is required
it must be alleged in the complaint. (Ewald v. Faulhaber Co., 105
N.Y. Supp. 114, cited in Brannan, page 102)
Judgment for the payees of a check against the drawer
cannot be sustained in the absence of proof that notice of dishonor
was given to the drawer. (Kuflick v. Glasser, 114 N.Y. Supp. 870,
ibid)
The drawer of a check is discharged by failure to give him
notice of dishonor, the bank refusing to pay because it was short
of funds, and subsequently proving to be insolvent. (Bacigalupo
v. Parrillo, 112 N.Y. Supp. 1040, ibid)
In an action against the indorser of a note it is not sufficient
to allege that upon maturity the note was duly presented for
payment, and the indorser duly notified of non-payment. The
allegation and evidence must show the demand and note to have
652
Shipman v. Cook, 1 Green, 251; Peacock v. Purcell, 14 C.B. (N.S.) 728
653
Cited in Brannan, page 101
389
been upon such a day as will charge the defendant. (Hoyland v.
National Bank of Middlesborough (Ky.), 126 S.W. 356, Brannan,
page 102-103)
An allegation that due notice of the protest of a note was
duly given to an indorser is sufficient allegation of notice of
dishonor; the term protest including a popular sense all the steps
taken to fix the liability of an indorser, and the word duly, in legal
parlance, meaning according to law, and relating not to form
only, but including both form and substance. (Sherman v. Ecker,
59 Misc. Rep. 216, 110 N.Y. Supp. 265, cited in Brannan, page
103)
Failure to notify an indorser of an installment note of the
non-payment of previous installments does not affect his liability
for later installments of the non-payment of which he has been
duly notified. (Hopkins v. Merrill, 79 Conn. 626, 66 Atl. 174, S.C.
sec. 66, ibid)
A joint maker, though a surety, is not an indorser and is
primarily liable, and, therefore, is not entitled to notice of dishonor.
(Rouse v. Wooten, 140 N.C. 557, 53 S.E. 430, 111 Am. St. Rep.
875, ibid)
Although presentment is excused because no administrator
had been appointed (sec. 76), yet if the instrument is dishonored
(sec. 83) notice of dishonor must be given to the indorser in
compliance with sec. 89. (Reed v. Spear, 107 App. Div. 144, 94
N.Y. Supp. 1007, S.C. secs. 76, 96, ibid)
An action against an indorser after legal notice of dishonor
is not barred because judgment was rendered in his favor in a
previous action solely for the reason that he had not been notified
before that action was brought. (Peck v. Eston, 74, Conn. 456,
51 Atl. 134, S.C. sec. 64-1, ibid)
Illustrative Case:
Asian Banking Corporation vs. Juan Javier
G.R. No. L-19051, April 4, 1923
AVANCEA, J:
Basic Principles and Jurisprudence on the Negotiable Instruments Law 390
On May 10, 1920, Salvador B. Chaves drew a check on the
Philippine National Bank for P11,000 in favor of La Insular, a
concern doing business in this city. This check was indorsed by
the limited partners of La Insular, and then deposited by Salvador
B. Chaves in his current account with the plaintiff, Asia Banking
Corporation. The deposit was made on July 14, 1920.
On June 25, 1920, Salvador B. Chaves drew another check
for P18,785.30 on the Philippine National Bank, in favor of the
aforesaid La Insular. This check was also indorsed by the limited
partners of La Insular, and was likewise deposited by Salvador B.
Chaves in his current account with the plaintiff, Asia Banking
Corporation, on July 6, 1920.
The amount represented by both checks was used by
Salvador B. Chaves after they were deposited in the plaintiff bank,
by drawing checks on the plaintiff. Subsequently these checks
were presented by the plaintiff to the Philippine National Bank for
payment, but the latter refused to pay on the ground that the
drawer, Salvador B. Chaves, had no funds therein.
The plaintiff now brings this action against the defendant,
as indorser, for the payment of the value of both checks.
The lower court sentenced the defendant to pay the plaintiff
P11,000, upon the check of May 10, 1920, with interest thereon
at 9 per cent per annum from July 10, 1920, and P18,778.34 on
the check of June 25, 1920, with interest thereon at 9 per cent per
annum from August 5, 1920. From this judgment the defendant
appealed.
One of the contentions of the appellant in support of this
appeal is, that at all events its liability as indorser of the checks in
question was extinguished. We may say in connection with this
assignment of error that the liability of the defendant never arose.
Section 89 of the Negotiable Instruments Law (Act No. 2031)
provides that, when a negotiable instrument is dishonored for non-
acceptance or non-payment, notice thereof must be given to the
drawer and each of the indorsers, and those who are not notified
shall be discharged from liability, except where this act provides
otherwise. According to this, the indorsers are not liable unless
391
they are notified that the document was dishonored. Then,
under the general principle of the law of procedure, it will be
incumbent upon the plaintiff, who seeks to enforce the defendants
liability upon these checks as indorser, to establish said liability
by proving that notice was given to the defendant within the time,
and in the manner, required by the law that the checks in question
had been dishonored. If these facts are not proven, the plaintiff
has not sufficiently established the defendants liability. There is
no proof in the record tending to show that plaintiff gave any notice
whatsoever to the defendant that the checks in question had been
dishonored, and there it has not established its cause of action.
(bold supplied)
For the foregoing, the judgment appealed from is reversed
and the defendant is absolved from the complaint without special
pronouncement as to costs.
So ordered.
Araullo, C. J., Street, Malcolm, and Ostrand., concur.
Effect of Notice of Dishonor; required only to preserve the
right of the payee to recover on the check
A notice of dishonor is required only to preserve the
right of the payee to recover on the check. It preserves the
liability of the drawer and the indorsers on the check. Otherwise,
if the payee fails to give notice to them, they are discharged from
their liability thereon, and the payee is precluded from enforcing
payment on the check. (Bank of the Philippine Islands vs. Spouses
Royeca, G.R. No. 176664, July 21, 2008, bold supplied)
Sec. 90. By whom given. - The notice may be given by or on
behalf of the holder, or by or on behalf of any party to the
instrument who might be compelled to pay it to the holder,
and who, upon taking it up, would have a right to
reimbursement from the party to whom the notice is given.
Sec. 91. Notice given by agent. - Notice of dishonor may be
given by any agent either in his own name or in the name of
any party entitled to given notice, whether that party be his
principal or not.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 392
Illustrative Case:
A note made by A to the order of B, indorsed by B and also
by A, was protested for non-payment. Notice addressed to B was
sent to A, who forwarded it to B. Held, that although A could not
give notice in his own behalf to B under Sec. 90, since B was
presumptively an accommodation indorser for A and not liable,
yet A could forward it to B, on behalf of the holder, and as his
agent. (Traders Royal Bank v. Jones, 104 App. Div. 433, 93 N.Y.
Supp. 768, cited in Brannan, page 104)
Sec. 92. Effect of notice on behalf of holder. - Where notice is
given by or on behalf of the holder, it inures to the benefit of
all subsequent holders and all prior parties who have a right
of recourse against the party to whom it is given.
Sec. 93. Effect where notice is given by party entitled thereto.
- Where notice is given by or on behalf of a party entitled to
give notice, it inures to the benefit of the holder and all parties
subsequent to the party to whom notice is given.
Sec. 94. When agent may give notice. - Where the instrument
has been dishonored in the hands of an agent, he may either
himself give notice to the parties liable thereon, or he may
give notice to his principal. If he gives notice to his principal,
he must do so within the same time as if he were the holder,
and the principal, upon the receipt of such notice, has himself
the same time for giving notice as if the agent had been an
independent holder.
Notes:
Illustrative Case:
A branch of a country banking company sent to a London
bank for collection a bill bearing several indorsements. Upon
dishonor the London bank sent notice by post on the next day to
another branch of the forwarding bank. The next day notice was
sent by telegraph to the right branch, and the subsequent notices
of sufficient notice of dishonor were given in due time. Held, that
sufficient notice of dishonor was given and the first indorser was
393
liable. (Fielding v. Corry [1898] 1 Q.B. 268, cited in Brannan,
page 105)
Sec. 95. When notice sufficient. - A written notice need not
be signed and an insufficient written notice may be
supplemented and validated by verbal communication. A
misdescription of the instrument does not vitiate the notice
unless the party to whom the notice is given is in fact misled
thereby.
Illustrative Case:
Where the notice of protest described the note correctly and
the envelope was correctly addressed and was received and
opened by the indorser, the notice was sufficient, although the
notice was on its face by mistake addressed to the maker. (Wilson
v. Peck, 121 N.Y. Supp. 344, S.C. secs. 103-3, 106) But it was
held otherwise where both the notice and the envelope containing
it were addressed to another party. (Marshall v. Sonneman, 216
Pa. 65, 64 Atl. 874, S.C. sec. 97, cited in Brannan, page 105)
Sec. 96. Form of notice. - The notice may be in writing or
merely oral and may be given in any terms which sufficiently
identify the instrument, and indicate that it has been
dishonored by non-acceptance or non-payment. It may in all
cases be given by delivering it personally or through the
mails.
Notes:
Form of notice
No particular phrase or form is necessary. The object of it
is to inform the party to whom it is sent: (1) That the bill or note
has been presented; (2) That it has been dishonored by non-
acceptance, or nonpayment; and (3) That the holder considers
him liable, and looks to him for payment. And in framing the notice,
all that is necessary to appraise the party of the dishonor of the
instrument is, to intimate that he is expected to pay it. (Daniel,
Elements of the Law of Negotiable Instruments, page 236)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 394
In order that a notice should answer these conditions, and
duly intimate dishonor to the drawer or indorser, it should therefore,
either expressly or by just and natural implication, comprise the
following elements: (1) A sufficient description of the bill or note
to ascertain its identity. (2) That it has been duly presented for
acceptance or payment to the drawee, acceptor, or maker. (3)
That it has been dishonored by non-acceptance or nonpayment.
(4) That the holder looks to the party notified for payment.
654
(Ibid)
Notice may be verbal or written
The notice need not be in writing; it is sufficient if it be given
verbally;
655
but for precision and safety written notice is preferable.
Verbal notice must be necessarily confined to those cases in which
notice is directly given to the party in person, or is sent by a
messenger to his place of business or residence. It seems that a
verbal notice is less strictly construed than a written one, especially
when its sufficiency is impliedly admitted by the partys response.
656
Mere knowledge of dishonor does not constitute notice.
657
Notice
signifies more; but when the fact of dishonor is communicated by
one entitled to call for payment, it becomes notice, as it is then to
be inferred that the intention is to hold the party notified
responsible.
658
(Daniel, Elements of the Law of Negotiable
Instruments, page 235-236)
Description of the bill or note dishonored
The notice should describe the bill or note in unmistakable
terms; should state where the note is, that the party notified may
find it; should state who the holder is, and who gives the notice,
or at whose request it is given. Such, at least in theory, are the
requisites of a proper notice; and a good business man should
never neglect to comply with them. But the courts are not strict in
requiring this thorough description of the dishonored instrument;
and the requirements of the law are considered as satisfied by
any description which, under all the circumstances of the case,
654
Bank of Old Dominion v. McVeigh, 29 Gratt. 558; Thompson v. Williams,
14 Cal. 162; Story on Notes, 348; Daniel on Negotiable Instruments, 973
655
Boyds Admr. V. City Sav. Bank, 15 Gratt. 501; First Nat. Bank v. Ryerson,
23 Iowa, 508; Stanley v. McElrath, 25 Pac. 16
656
Phillips v. Gould, 8 C & P 355; Byles on Bills [264], 211, 212
657
Juniata Bank v. Hale, 16 Serg & R 157; Bank of Old Dominion v. McVeigh,
29 Gratt. 559
658
Caunt v. Thompson, 7 C.B. 400; Miers v. Brown, 11 M & W 372
395
so designates the bill or note as to leave no doubt in the mind of
the party, as a reasonable man, what bill or note was intended.
659
Story says that the description of the note should be sufficiently
definite to enable the indorser to know to what one in particular
the notice applies; for an indorser may have indorsed many notes
of very different dates, sums, and times of payment, and payable
to different persons, so that he may be ignorant, unless the
description in the note is special, to which it properly applies or
which it designates.
660
But no misdescription of the amount, or
of the date, or of the names of the parties, or of the time the paper
fell due, or other defect will vitiate the notice, unless it misleads
the party to whom sent.
661
(Supra, page 236-237)
By whom notice given
The notice of dishonor should emanate from the holder of
the instrument at the time of its dishonor, and should be
communicated to all the parties whom he means to hold liable for
its payment. But it is not absolutely necessary that it should come
from him, for the holder is entitled to the benefit of notice given in
due time by any party to the instrument who would be liable to
him if he, the holder, had himself given him notice of dishonor.
147
(Ibid)
Illustrative Cases:
After several efforts to find an indorser, notice of the dishonor
was delivered at his store to his wife, who acted as his assistant.
Held, a sufficient service, especially when the indorser actually
received the notice upon the same day. (Reed v. Spear, 107 App.
Div. 144, 94 N.Y. Supp. 1007, S.C. secs. 76, 89, cited in Brannan,
page 106)
The certificate of protest being (by statute) prima facie
evidence of the facts therein stated, the burden is on the indorser
659
Gilbert v. Dennis, 3 Metc. (Mass.) 495; Shelton v. Braithwaite, 7 M & W
436; Glickman v. Early, 47 N.W. 272
660
Story on Notes, 349
661
Bank of Alexandria v. Swan, 9 Pet. 33; Mills v. Bank of United States, 11
Wheat 431; Dennistoun v. Stewart, 17 How. 606; Smith v. Whiting, 12
Mass, 6
662
Chapman v. Keene, 3 Ad. & El. 193; Bank of United States v. Goddard, 5
Mason, 366; Stafford v. Yates, 18 Johns, 327
Basic Principles and Jurisprudence on the Negotiable Instruments Law 396
to show that he did not receive notice either personally or through
the mails, where the certificate alleges that he was duly notified
of the dishonor. (ibid)
A notice which contained a copy of the note and declared
that payment had been demanded and refused, is sufficient.
(Marshall v. Sonneman, 216 Pa. 65, 65 Atl. 874 infra, S.C. sec.
97, ibid)
Sec. 97. To whom notice may be given. - Notice of dishonor
may be given either to the party himself or to his agent in
that behalf.
Notice:
To whom notice should be given; general rule
Each indorser of a bill or note is entitled to notice, and so
also is the drawer of a bill payable to a third party, as bill generally
are.
663
The acceptor of a bill and the maker of a note are not
entitled to notice, the being the primary debtors, nor are those
who, from their irregular execution of the instrument, are adjudged
joint makers or sureties, their contract being to pay in default of
the principal, at all events.
664
Where there are several successive
indorsers, the holder may, and ordinarily does, give notice to all,
with a view to preserve his recourse upon all. But he is not bound
to give notice to all, in order to bind those to whom he does give
it. He may, if he please, give notice to any one or more of the
indorsers, who are then made liable to him; and the indorser
receiving notice must then notify antecedent indorsers in order to
assure himself.
665
It is not, therefore, necessary for the notary to
take any notice of the residence of the maker of the note, or make
any inquiry as to the residence of any of the indorsers except the
last. A different rule would obstruct business, and is not required.
666
(Daniel, Elements of the Law of Negotiable Instruments, page
240-241)
663
Joseph v. Salomon, 19 Fla. 623; Sweet v. Swift, 65 Mich. 91
664
Fitch v. Citizens Nat. Bank, 97 Ind. 212; Hofheimer v. Losen, 24 Mo. App.
657
665
Cardwell v. Allen, 33 Gratt. 167; Wood v. Callaghan, 61 Mich. 402
666
Lawson v. Farmers Bank, 1 Ohio St. 206; Warren v. Gilman, 17 Me. 360
397
Notice to agent
Notice to the agent of the part for the general conduct of his
business is the same as if given to the principal in person.
667
But
notice to the partys attorney or solicitor, unless he is specially
authorized to receive it, is insufficient.
668
If an agent draws a bill
in his own name, notice should be given to him, and if given to his
principal it will be insufficient, he being no party to the paper.
669
If
the paper be signed by a duly authorized agent in the principals
name, notice should be given to the principal, who is the party
liable.
670
If a note be payable by installments, demand and notice
as to the last installment binds the indorser as to that.
671
(Ibid,
page 241)
Illustrative Case:
Leaving the notice at the window of the cashier of a hotel
corporation is not sufficient service, it not appearing that any ones
attention was drawn to the notice, or that any one was present,
and the president and managers having testified that it was not
brought to their attention. (Am. Exch. Nat. Bank v Am. Hotel
Victoria Co., 103 App. Div. 372, 92 N.Y. Supp. 1006, cited in
Brannan, page 106)
But the notice of dishonor and the envelope containing it
were addressed to the second indorser and delivered by a notary
public to the first indorser. Held, that this did not fix the liability of
the first indorser, even though he read the notice; it did not inform
him that he was looked to for payment. (Marshall v. Sonneman,
ibid)
Sec. 98. Notice where party is dead. - When any party is dead
and his death is known to the party giving notice, the notice
must be given to a personal representative, if there be one,
and if with reasonable diligence, he can be found. If there be
no personal representative, notice may be sent to the last
residence or last place of business of the deceased.
667
Crosse v. Smith, 1 Maule & S. 545; Lake Shore Nat. Bank v. Colliery Co.,
58 N.Y.S.C. 68
668
Louisiana State Bank v. Ellery, 16 Mart. 87; Crosse v. Smith, 1 Maule & S.
545
669
Grosvenor v. Stone, 8 Pick. 79
670
Clay v. Oakley, 17 Mart. 137
671
Eastman v. Turman, 24 Cal. 383
Basic Principles and Jurisprudence on the Negotiable Instruments Law 398
Illustrative Case:
Notice to the representative of a deceased indorser of a
note, made and payable in Canada, must be given in accordance
with the laws of Canada, although the indorsers residence has
been in New York. (Merchants Bank v. Brown, 86 App. Div. 599,
83 N.Y. Supp. 1037, cited in Brannan, page 107)
Sec. 99. Notice to partners. - Where the parties to be notified
are partners, notice to any one partner is notice to the firm,
even though there has been a dissolution.
Sec. 100. Notice to persons jointly liable. - Notice to joint
persons who are not partners must be given to each of them
unless one of them has authority to receive such notice for
the others.
Sec. 101. Notice to bankrupt. - Where a party has been
adjudged a bankrupt or an insolvent, or has made an
assignment for the benefit of creditors, notice may be given
either to the party himself or to his trustee or assignee.
Sec. 102. Time within which notice must be given. - Notice
may be given as soon as the instrument is dishonored and,
unless delay is excused as hereinafter provided, must be
given within the time fixed by this Act.
Sec. 103. Where parties reside in same place. - Where the
person giving and the person to receive notice reside in the
same place, notice must be given within the following times:
(a) If given at the place of business of the person to
receive notice, it must be given before the close of
business hours on the day following.
(b) If given at his residence, it must be given before the
usual hours of rest on the day following.
(c) If sent by mail, it must be deposited in the post office
in time to reach him in usual course on the day
following.
399
Notes:
What is meant by expression same place
According to once class of cases, all persons are to be
regarded as of the same place who receive their mails through
the same post-office. (Daniel, Elements of the Law of Negotiable
Instruments, page 246)
Illustrative Case:
A notice placed in a small chute on the day of protest, but
not postmarked until the next day at noon, is mailed in time and it
will be presumed, in the absence of evidence to the contrary that
the notice reached its destination by 5 oclock, which would be
before the close of business hours, both parties residing in
Manhattan. The indorser swore that he did not get the notice
until the following day, but did not testify that he was at his office
on the day that it was mailed. This was not enough to show that
the notice was not received on time. (Wilson v. Peck (Misc. Rep.)
121, N.Y. Supp. 344, S.C. secs. 95, 106, cited in Brannan, page
108)
Sec. 104. Where parties reside in different places. - Where
the person giving and the person to receive notice reside in
different places, the notice must be given within the following
times:
(a) If sent by mail, it must be deposited in the post office
in time to go by mail the day following the day of
dishonor, or if there be no mail at a convenient hour
on last day, by the next mail thereafter.
(b) If given otherwise than through the post office, then
within the time that notice would have been received
in due course of mail, if it had been deposited in the
post office within the time specified in the last
subdivision.
Sec. 105. When sender deemed to have given due notice. -
Where notice of dishonor is duly addressed and deposited
in the post office, the sender is deemed to have given due
notice, notwithstanding any miscarriage in the mails.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 400
Illustrative Case:
Although non-receipt of a duly mailed notice of dishonor
does not discharge an indorser, evidence of such non-receipt is
competent on the question whether the note was actually mailed.
(Union Bank of Brooklyn v. Deshel (App. Div.), 123 N.Y. Supp.
585, cited in Brannan, page 109)
Sec. 106. Deposit in post office; what constitutes. - Notice is
deemed to have been deposited in the post-office when
deposited in any branch post office or in any letter box under
the control of the post-office department.
Sec. 107. Notice to subsequent party; time of. - Where a party
receives notice of dishonor, he has, after the receipt of such
notice, the same time for giving notice to antecedent parties
that the holder has after the dishonor.
Illustrative Case:
When the answer alleged that the indorser had no notice of
dishonor, the burden is on the holder to show that due notice was
given. It is not shown by testimony of a notary that, not knowing
the address of the indorser, he enclosed the notice of dishonor to
a subsequent indorser with postage for forwarding the notice to
the prior indorser. (Fuller Buggy Co. v. Waldorn, 112 App. Div.
814, 99 N.Y. Supp, 920, cited in Brannan, page 110)
Plaintiff indorsed and deposited a check for collection in
bank on the 28
th
. On the 29
th
he was notified of the dishonor of
the check, and on the 30
th
he notified the defendant indorser by
telegraph. Held, that the notice was in due time. (Jurgens v
Wichmann, 124 App. Div. 531, 108 N.Y. Supp. 881, ibid)
Sec. 108. Where notice must be sent. - Where a party has
added an address to his signature, notice of dishonor must
be sent to that address; but if he has not given such address,
then the notice must be sent as follows:
(a) Either to the post-office nearest to his place of
residence or to the post-office where he is
accustomed to receive his letters; or
401
(b) If he lives in one place and has his place of business
in another, notice may be sent to either place; or
(c) If he is sojourning in another place, notice may be
sent to the place where he is so sojourning.
But where the notice is actually received by the party
within the time specified in this Act, it will be sufficient, though
not sent in accordance with the requirement of this section.
Notes:
Illustrative Cases:
Notice of protest addressed merely C.H., N.Y., is not
sufficient where there is no evidence that the indorser lived or
ever had lived, or was sojourning in New York, or that any inquiry
was made to ascertain the fact. (Fonesca v. Hartman, 84 N.Y.
Supp. 131, cited in Brannan, page 111)
The indorser lived at the place where the note was dated,
but moved from said place at some time not stated. Held, that
notice of dishonor mailed to said place was sufficient, the court
assuming that there had been no change of residence up to that
time. (Mohlman v. McKane, 60 App. Div. 546, 69 N.Y. Supp. 1046,
ibid)
Notice to an indorser, who has added no address to his
signature, mailed to the post office of his place of residence is
good, but not if addressed to a house where the indorser does
not reside or do business or receive his letters, even though he
owned the house and his sons did business there. (Ebling Brewing
Co. v. Reinheimer, 32 N.Y. Misc. R. 594, 66 N.Y. Supp. 458, ibid)
Where a notary inquired of several persons as to the post
office address of an indorser, all of whom seemed to have some
information and stated their belief that a certain town was the
nearest town to the farm where the indorser lived, and a much
larger place than the town where the indorser actually received
his mail, a notice of dishonor sent to such nearest town was
sufficient, although the indorser did not received it within a
reasonable time. (Vogel v. Starr, 132 Mo. App. 430, 112 S.W. 27,
ibid)
Basic Principles and Jurisprudence on the Negotiable Instruments Law 402
Plaintiff, the payee of a dishonored note, knew that the
defendant indorser lived in New York City, but claimed that he did
not know his address. Defendant testified that plaintiff had
frequently corresponded with defendant at his New York address.
The notice of dishonor was mailed to defendant in the care of the
maker, but not delivered to defendant. Held, that this was not
sufficient notice, and that defendant was discharged. (E.I. Dupont,
etc., Power Co. v. Rooney, 63 Rep. 344, 117 N.Y. Supp. 220, ibid)
Sec. 109. Waiver of notice. - Notice of dishonor may be waived
either before the time of giving notice has arrived or after the
omission to give due notice, and the waiver may be expressed
or implied.
Illustrative Cases:
If presentment for payment be waived (see secs. 82 and
83) notice of dishonor is dispensed with. (Baumeister v. Kuntz,
53 Fla. 340, 42 So. 886, S.C. sec. 64-1, cited in Brannan, page
112)
Defendant was one of several payees and indorsers of a
note. Some days before its maturity defendant indorsed a renewal
note having also several payees. The maker struck out the name
of one of the payees in the renewal note and substituted his own
name as payee, and several day after maturity of the original note
took it up by the renewal note. Held, that defendant had not waived
notice of dishonor of the original note and was not liable on it.
(First Nat. Bank v. Gridley, 112 App. Div. 398, 98 N.Y. Supp. 445,
S.C. secs. 66, 119-4, ibid)
A mere oral promise to renew a note, made after its maturity
by an accommodation indorser, is not a waiver of the failure to
give notice of dishonor; such promise is not an acknowledgment
of liability. (Mechanics and Farmers Savings Bank v. Katterjohn
(Ky.), 125 S.W. 1071, S.C. secs. 63, 196, ibid)
Plaintiff, an indorser of a check deposited by him with
defendant bank, was not given due notice of its dishonor. With
knowledge thereof, plaintiff gave his own check for the dishonored
check and sued defendant for its failure to give him due notice of
such dishonor. Held, that plaintiff had waived the banks laches
403
and could not recover. (Weil v. Corn Exchange Bank, 63 Misc.
Rep. 300, 116 N.Y. Supp. 665, ibid)
A bill was drawn by A Company to its own order on the B
Company and accepted and indorsed to the C Company. All three
companies knew that the bill would be dishonored. No notice of
dishonor was given to the drawer, because the secretary of the C
Company, who was also secretary of the other two companies,
knew it never was intended to make the drawer liable. Held, that
it was not the duty of the secretary of the C Company to
communicate his knowledge of the dishonor to the drawer, that
his knowledge was therefore not notice to the drawer, and that
the latter was discharged. (In re Fenwick [1902] 1 Ch. 507, ibid)
Sec. 110. Whom affected by waiver. - Where the waiver is
embodied in the instrument itself, it is binding upon all parties;
but, where it is written above the signature of an indorser, it
binds him only.
Sec. 111. Waiver of protest. - A waiver of protest, whether in
the case of a foreign bill of exchange or other negotiable
instrument, is deemed to be a waiver not only of a formal
protest but also of presentment and notice of dishonor.
Sec. 112. When notice is dispensed with. - Notice of dishonor
is dispensed with when, after the exercise of reasonable
diligence, it cannot be given to or does not reach the parties
sought to be charged.
Illustrative Case:
Failure, after the exercise of reasonable diligence, to find
the drawer of a dishonored bill at the address given by him, does
not dispense with notice if an address at which he is to be found
comes to the holders knowledge before action brought. (Studdy
v. Beesty, 60 T.L. Rep. 647, cited in Brannan, page 113)
Sec. 113. Delay in giving notice; how excused. - Delay in giving
notice of dishonor is excused when the delay is caused by
circumstances beyond the control of the holder and not
imputable to his default, misconduct, or negligence. When
Basic Principles and Jurisprudence on the Negotiable Instruments Law 404
the cause of delay ceases to operate, notice must be given
with reasonable diligence.
Notes:
Delay in giving notice of dishonor caused by the necessity
of making inquiries as to the address of the party to be notified is
excusable, the holder being ignorant of the address. (The Elmville,
[1904], P. 319, ibid)
Sec. 114. When notice need not be given to drawer. - Notice
of dishonor is not required to be given to the drawer in either
of the following cases:
(a) Where the drawer and drawee are the same person;
(b) When the drawee is fictitious person or a person not
having capacity to contract;
(c) When the drawer is the person to whom the
instrument is presented for payment;
(d) Where the drawer has no right to expect or require
that the drawee or acceptor will honor the
instrument;
(e) Where the drawer has countermanded payment.
Illustrative Cases:
Defendant gave a check which was duly presented to the
drawee bank and dishonored, for what reason did not appear.
Notice of dishonor was not given to defendant for fourteen days
thereafter. Held, that the failure to give notice is dispensed with
only under defined circumstances, and that the burden is on the
holder of the check, or one claiming under him, to excuse the
failure to give notice. (Cassel v. Regierer, 114 N.Y. Supp. 601,
cited in Brannan, page 114)
Sec. 115. When notice need not be given to indorser. Notice
of dishonor is not required to be given to an indorser in either
of the following cases:
(a) When the drawee is a fictitious person or person not
having capacity to contract, and the indorser was
405
aware of that fact at the time he indorsed the
instrument;
(b) Where the indorser is the person to whom the
instrument is presented for payment;
(c) Where the instrument was made or accepted for his
accommodation.
Notes:
Neither the receipt by defendant, with other of property of
the maker of a note on an agreement to take care of the note at
maturity, nor an admission that defendant, with others, was
responsible for the note, will support an action against defendant
alone on the ground that such receipt of property or such
admission is a waiver of presentment and notice of dishonor or
an excuse therefrom. (Jordan v. Reed (N.J.), 71 Atl. 280, cited in
Brannan, page 115)
Illustrative Cases:
A stockholder of a corporation, who endorsed, before
delivery, a note made by another stockholder, to raise money for
the corporation is not entitled to notice of dishonor, because the
instrument was really for his benefit. (Mercantile Bank v. Busby
(Tenn.), 113 S.W. 390, S.C. supra, sec. 64, ibid)
2011 Bar Question:
Notice of dishonor is not required to be made in all
cases. One instance where such notice is not necessary
is when the indorser is the one to whom the instrument
is suppose to be presented for payment. The rationale
here is that the indorser
A. already knows of the dishonor and it makes no
sense to notify him of it.
B. is bound to make the acceptance in all cases.
C. has no reason to expect the dishonor of the
instrument.
D. must be made to account for all his actions.
Basic Principles and Jurisprudence on the Negotiable Instruments Law 406
Sec. 116. Notice of non-payment where acceptance refused.
- Where due notice of dishonor by non-acceptance has been
given, notice of a subsequent dishonor by non-payment is
not necessary unless in the meantime the instrument has
been accepted.
Sec. 117. Effect of omission to give notice of non-acceptance.
- An o