[1] Law 108: Negotiable Instruments
Quevedo [1]
CH. I: REQUISITES OF NEGOTIABILITY
REQUIS
ASTRO ELECTRONICS CORP. v.
PHILIPPINE EXPORT AND FOREIGN
LOAN GUARANTEE CORPORATION
411 SCRA 462; AUSTRIA-MARTINEZ; Sept. 23, 2003
~lora~
FACTS
-Astro was granted several loans by the Philippine Trust
Company amounting to P3,000,000.00 with interest
and secured by three promissory notes.
-In each promissory notes, petitioner Roxas signed
twice, as President of Astro and in his personal
capacity. Roxas also signed a Continuing Surety ship
Agreement in favor of Philtrust Bank, as President of
Astro and as surety.
-Philguarantee, with the consent of Astro, guaranteed in
favor of Philtrust the payment of 70% of Astro’s loan,
subject to the condition that upon payment by
Philguanrantee of said amount, it shall
proportionally subrogated to the rights of Philtrust
against Astro.
-As a result of Astro’s failure to pay its loan obligations,
despite demands, Philguarantee paid 70% of the
guaranteed loan to Philtrust. Subsequently,
Philguarantee filed against Astro and Roxas a complaint
for sum of money with the RTC of Makati.
-In his Answer, Roxas disclaims any liability on the
instruments, alleging that he merely signed the same in
blank and the phrases “in his personal capacity” and
“in his official capacity” were fraudulently inserted
without his knowledge.
-The RTC rendered its decision in favor of Philguarantee
observing that if Roxas really intended to sign the
instruments merely in his capacity as President of
Astro, then he should have signed only once in the
promissory note.
-CA affirmed the RTC decision agreeing with the trial
court that Roxas failed to explain satisfactorily why he
had to sign twice in the contract and therefore the
presumption that private transactions have been fair
and regular must be sustained.
ISSUE
WON Roxas should be jointly and severally liable
(solidary) with Astro for the sum awarded by the RTC.
HELD
YES. Astro’s loan with Philtrust Bank is secured by
three promissory notes. These promissory notes are
valid and binding against Astro and Roxas. As it
appears on the notes, Roxas signed twice: first, as
First Semester AY 2008-09
president of Astro and second, in his personal capacity.
In signing his name aside from being the President of
Asro, Roxas became a co-maker of the promissory
notes and cannot escape any liability arising from it.
-Under the Negotiable Instruments Law, persons who
write their names on the face of promissory notes are
makers, promising that they will pay to the order of the
payee or any holder according to its tenor. Thus, even
without the phrase “personal capacity,” Roxas will still
be primarily liable as a joint and several debtor under
the notes considering that his intention to be liable as
such is manifested by the fact that he affixed his
signature on each of the promissory notes twice which
necessarily would imply that he is undertaking the
obligation in two different capacities, official and
personal.
-Unnoticed by both the trial court and the Court of
Appeals, a closer examination of the signatures affixed
by Roxas on the promissory notes, readily reveals that
portions of his signatures covered portions of the
typewritten words “personal capacity” indicating with
certainty that the typewritten words were already
be
existing at the time Roxas affixed his signatures thus
demolishing his claim that the typewritten words were
just inserted after he signed the promissory notes. If
what he claims is true, then portions of the typewritten
words would have covered portions of his signatures,
and not vice versa.
-As to the third promissory note, the copy submitted is
not clear so that this Court could not discern the same
observations on the notes.
- The 3 promissory notes uniformly provide: “FOR
VALUE RECEIVED, I/We jointly, severally and solidarily,
promise to pay to PHILTRUST BANK or order...”
-An instrument which begins with “I”, “We”, or “Either
of us” promise to pay, when signed by two or more
persons, makes them solidarily liable. Also, the phrase
“joint and several” binds the makers jointly and
individually to the payee so that all may be sued
together for its enforcement, or the creditor may select
one or more as the object of the suit. Having signed
under such terms, Roxas assumed the solidary liability
of a debtor and Philtrust Bank may choose to enforce
the notes against him alone or jointly with Astro.
Roxas’ claim that the phrases “in his personal capacity”
and “in his official capacity” were inserted on the notes
without his knowledge was correctly disregarded by the
RTC and the Court of Appeals. It is not disputed that
Roxas does not deny that he signed the notes twice.
Roxas failed to prove the truth of such allegations.
Bare allegations, when unsubstantiated by evidence,
documentary or otherwise, are not equivalent to proof
under our Rules of Court.
-Roxas is a businessman who is presumed to take
Prof. Rogelio V.
ordinary care of his concerns. Clearly, he knew the
nature of the transactions and documents involved as
he not only executed these notes on two different dates
but he also executed, and again, signed twice, a
“continuing Surety ship Agreement” notarized on July
31, 1981, wherein he guaranteed, jointly and severally
with Astro the repayment of P3,000,000.00 due to
Philtrust. Such continuing suretyship agreement even
re-enforced his solidary liability Philtrust because as a
surety, he bound himself jointly and severally with
Astro’s obligation.
-Philguarantee has all the right to proceed against
petitioner, it is subrogated to the rights of Philtrust to
demand for and collect payment from both Roxas and
Astro since it already paid the value of 70% of the loan
obligation.
-Subrogation is the transfer of all the rights of the
creditor to a third person, who substitutes him in all his
rights. It may either be legal or conventional. Legal
subrogation is that which takes place without
agreement but by operation of law because of certain
acts. Instances of legal subrogation are those provided
in Article 1302 of the Civil Code. Conventional
subrogation, on the other hand, is that which takes
place by agreement of the parties.
-Roxas’ acquiescence is not necessary for subrogation
to take place because the instant case is one of the
legal subrogation that occurs by operation of law, and
without need of the debtor’s knowledge. Further,
Philguarantee, as guarantor, became the transferee of
all the rights of Philtrust as against Roxas and Astro
because the “guarantor who pays is subrogated by
virtue thereof to all the rights which the creditor had
against the debtor.”
Disposition Decision of the Court of Appeals
AFFIRMED in toto.
REHABILITATION FINANCE
CORPORATION v.
COURT OF APPEALS [Madrid and
Anduiza]
94 Phil. 984; CONCEPCION; May 14, 1954
~marge~
FACTS
-Jesus de Anduiza & Quinatana Cano borrowed money
from the Agricultural and Industrial Bank (now RFC), as
evidenced by a promissory note dated October 31,
1941. In said note, they promised to pay the AIB, or
order, on or before October 31, 1951, the sum of
P13,800.00, with interest at the rate of 6% p.a.. Said
[2] Law 108: Negotiable Instruments
note also recited that payments were to be made in ten
equal annual installments in accordance with the given
schedule of amortizations.
-Mortgagors Anduiza and Cano failed to pay the yearly
amortizations that fell due on October 31, 1942 and
1943. Learning of this, Estelito Madrid (who temporarily
lived in the house of Anduiza) offered to pay and
actually paid on October 30, 1944 the full amount of
said indebtedness to AIB/RFC.
-July 30, 1948: Madrid instituted the present action
asking the court to
(a) declare as paid the P16,425.17 Anduiza owed the
AIB/RFC;
(b) order AIB/RFC to cancel the mortgage and release
the properties;
(c) condemn Anduiza to pay Madrid the P16,425.17
with legal interest, etc.
-In answer, AIB/RFC prayed that the complaint be
dismissed. The bank argued that in as much as
Madrid’s payment was unauthorized by Anduiza,
Madrid’s deposit in the sum of P16,425.17 was null and
void in accordance with EO No. 49, series of 1945.
Anduiza, on the other hand, alleged that when Madrid
paid his debt, the same was not yet due and
demandable; hence, he may not be compelled to pay
the latter.
-RTC dismissed the complaint. On appeal, the CA
reversed and directed AIB/RFC to cancel the mortgage
and Anduiza to pay Madrid the P16,425.17. Hence this
appeal by certiorari.
AIB/RFC’s Arguments: that payments by Madrid were
made against the express will of Anduiza and over the
objection of the Bank, hence not valid; that the
obligation in question was not fully due and
demandable at the time of the payments
ISSUE (related to NEGO)
WON the debtors were entitled to pay the obligation
prior to Oct. 15, 1951
HELD: YES
-At the outset, it should be noted that the makers of the
promissory note quoted above promised to pay the
obligation evidenced thereby "on or before October 31,
1951." Although the full amount of said obligation was
not demandable prior to October 31, 1951, in view of
the provision of the note relative to the payment in ten
(10) annual installments, it is clear, therefore, that the
makers or debtors were entitled to make a complete
settlement of the obligation at any time before said
date.
Another Issue: WON payment by third person [Madrid]
was valid
First Semester AY 2008-09
YES. Madrid was entitled to pay the obligation of
Anduiza irrespective of the latter's will or that of the
Bank, and even over the objection of either or both.
-Article 1158 of the Civil Code of Spain, which was in
force in the Phils. at the time of the payments under
consideration and of the institution of the present case
provides: "Payment may be made by any person,
whether he has an interest in the performance of the
obligation or not, and whether the payment is known
and approved by the debtor or whether he is unaware
of it. One who makes a payment for the account of
another may recover from the debtor the amount of the
payment, unless it was made against his express will.
In the latter case he can recover from the debtor only
in so far as the payment has been beneficial to him."
[The decision also cited comments from Manresa,
Mucius Scaevola and Sanchez Roman - all in Spanish! I
will not attempt to translate them. They do not deal
with the NEGO topic under consideration. ^_^]
-Payments in question were not made against the
objection either of Anduiza or of the Bank! Anduiza
impliedly, but clearly, acquiesced in the validity of the
payment when he joined Madrid in appealing the
decision of CFI Manila. Also, AIB/RFC issued receipts
acknowledging payment w/out qualification and
demanded a signed statement of Anduiza sanctioning
said payments merely as a condition precedent, not to
its acceptance, which had already been made, but to
the execution of the deed of cancellation of the
mortgage constituted in favor of said institution.
-This condition was null and void, for the creditor Bank
had no other right than to exact payment. After such
payment, the obligation in question, as regards said
creditor, and the latter’s status and rights as such
creditor, become automatically extinguished. Hence:
(1) The good or bad faith of the payor is immaterial.
The exercise of a right, vested by law without any
qualification, can hardly be legally considered as
tainted with bad faith.
(2) The Bank cannot invoke the provision that the
payor "may only recover from the debtor insolar as the
payment has been beneficial to him," when made
against his express will. This is a defense that may be
availed of by the debtor, not by the Bank, for it affects
solely the rights of the former.
Disposition: CA affirmed.
METROPOLITAN BANK & TRUST
COMPANY V CA (GOLDEN SAVINGS &
LOAN ASSOC., INC.)
194 SCRA 169; CRUZ; February 28, 1991
~anton~
Prof. Rogelio V. Quevedo [2]
FACTS
-Metropolitan Bank and Trust Co. (Metrobank) is a
commercial bank, while Golden Savings and Loan
Association (Golden Savings) was at that time
operating in Calapan, Mindoro.
-Jan. 1979: Eduardo Gomez opened an account with
Golden Savings and deposited over a period of 2
months 38 treasury warrants totaling P1.755M. All were
drawn by the Philippine Fish Marketing Authority and
signed by its General Manager. Six were directly
payable to Gomez while the others appeared to have
been indorsed by their respective payees, with Gomez
as second indorser.
-On various dates between June 25 and July 16, 1979,
all the warrants were subsequently indorsed by Gloria
Castillo as Cashier of Golden Savings and deposited to
its Savings Account in the Metrobank branch in
Calapan. They were sent for clearing by the branch
office to the principal office of Metrobank, which
forwarded them to the Bureau of Treasury for special
clearing.
-More than two weeks after the deposits, Castillo went
to the Calapan branch several times to ask whether the
warrants had been cleared. She was told to wait, and
Gomez was not allowed to withdraw from his account.
-Exasperated over Castillo’s repeated inquiries and also
as an accommodation for a “valued client,” the
petitioner says it finally decided to allow Golden
Savings to withdraw from the proceeds of the warrants.
-Withdrawals were made three times, totaling
P968,000.00.
-In turn, Golden savings subsequently allowed Gomez
to make withdrawals from his own account, totaling
P1.168M from the proceeds of the apparently cleared
warrants.
-Jul. 21, 1979: Metrobank informed Golden Savings that
32 of the warrants had been dishonored by the Bureau
on Jul. 19, 1979, and demanded Golden Savings to
refund the amount previously withdrawn. Golden
Savings refused, forcing Metrobank to sue (after trial
trial court ruled in favor of Golden Savings).
ISSUE(S)
1. WON Metrobank should be allowed to charge back
any amount erroneously credited.
2. WON CA erred in holding that the treasury warrants
involved in this case are not negotiable
instruments.
HELD
1. NO
-Golden Savings had no clearing facilities of its own. It
relied on Metrobank to determine the validity of the
warrants through its own services. The proceeds of the
[3] Law 108: Negotiable Instruments
warrants were withheld from Gomez until Metrobank
allowed Golden Savings itself to withdraw them from its
own deposit. It was only when Metrobank gave the go-
signal that Gomez was finally allowed to withdraw.
-Metrobank exhibited extraordinary carelessness for
allowing three withdrawals without waiting for
clearance. It was indeed negligent in giving Golden
Savings the impression that the treasury warrants had
been cleared and that, consequently, it was safe to
allow Gomez to withdraw the proceeds thereof from his
account with it.
-Without such assurance, Golden Savings would not
have allowed the withdrawals; with such assurance,
there was no reason not to allow the withdrawal.
Golden Savings might even have incurred liability for its
refusal to return the money that to all appearances
belonged to the depositor, who could therefore
withdraw it any time.
-The argument that Golden Savings should have
exercised more care in checking the circumstances
does not hold water. It was Gomez who was entrusting
the warrants, not Golden Savings that was extending
him a loan. There was no question of Gomez’s identity
or of the genuineness of his signature.
2. NO. Clearly stamped on the face of the treasury
warrants is the word “non-negotiable;” it is
indicated that they are payable from a particular
fund, Fund 501.
Reasoning
SECTION 1.—Form of negotiable instruments.—An
instrument to be negotiable must conform to the
following requirements:
xxx
(b) Must contain an unconditional promise or order to
pay a sum of money.
SECTION 2.—When promise is unconditional.—An
unqualified order or promise to pay is unconditional
within the meaning of this Act though coupled with—
(a) An indication of a particular fund out of which
reimbursement is to be made or a particular account to
be debited with the amount; or xxx
But an order or promise to pay out of a particular fund
is not unconditional.
-The indication of Fund 501 as the source of the
payment to be made on the treasury warrants makes
the order or promise to pay “not unconditional” and the
warrants themselves non-negotiable. There should be
no question that the exception on Sec 3 of the NIL is
applicable in the case.
-Metrobank cannot contend that by indorsing the
warrants in general, Golden Savings assumed that they
were “genuine and in all respects what they purport to
First Semester AY 2008-09
be,” in accordance with Sec. 66 of the NIL. This law is
not applicable to non-negotiable treasury warrants.
-Golden Savings never represented that the warrants
were negotiable but signed them only for the purpose
of depositing them for clearance.
DISPOSITION: The challenged decision is affirmed.
The amount Gomez withdrew must be charged not to
Golden Savings but to Metrobank, which must bear the
consequences of its own negligence. But the balance of
P586,589.00 should be debited to Golden Savings, as
obviously Gomez can no longer be permitted to
withdraw this amount from his deposit because of the
dishonor of the warrants.
GARCIA V LLAMAS
417 SCRA 292 ; Panganiban; December 8, 2003
~jonas~
FACTS
-A complaint for sum of money and damages was filed
in the RTC by herein respondent Dionisio Llamas
against herein Petitioner Romeo Garcia and Eduardo de
Jesus, alleging (1) that petitioner and de Jesus borrowed
P400k from respondent & executed a promissory note
wherein they bound themselves jointly and severally;
and (2) that the loan has long been overdue and,
despite repeated demands, petitioner and de Jesus
have failed and refused to pay it. Annexed to the
complaint were the promissory note and a demand
letter by respondent addressed to petitioner and de
Jesus.
- Petitioner Garcia, in his Answer, averred that he
assumed no liability under the promissory note because
he signed it merely as an accommodation party for de
Jesus; and, alternatively, that he is relieved from any
liability arising from the note as the loan had been paid
by de Jesus by means of a check; and that, in any
event, the issuance of the check and respondent's
acceptance thereof novated the note. Respondent’s
reply to Petitioner's answer asserted that the loan
remained unpaid because the check issued by de Jesus
bounced. Annexed to the reply were the face of the
check and the reverse side thereof.
- During the pre-trial conference de Jesus and his
lawyer did not appear nor file any pre-trial brief.
Neither did Petitioner Garcia file a pre-trial brief, and
his counsel even manifested that he would no longer
present evidence. The trial court gave respondent
permission to present his evidence ex parte against de
Jesus; and, as regards Petitioner Garcia, the trial court
directed respondent to file a motion for judgment on
the pleadings, and for Petitioner Garcia to file his
comment or opposition thereto.
Prof. Rogelio V. Quevedo [3]
- On July 7, 1998, the RTC disposed of the case by
rendering judgment on the pleadings against petitioner
and De Jesus, ordering them to pay, jointly and
severally, the respondent the principal amount of
P400k plus 5% interest thereon per month until the
same shall have been fully paid, less the amount of
P120k representing interests already paid by de Jesus;
& P100k as attorney's fees plus appearance fee of
P2,000.00 for each day of court appearance, and the
costs of the suit.
- The CA ruled that the trial court had erred when it
rendered a judgment on the pleadings against De Jesus
as his Answer raised genuinely contentious issues and
he was still required to present his evidence ex parte.
As to petitioner, the CA treated his case as a summary
judgment, because his Answer had failed to raise even
a single genuine issue regarding any material fact. The
appellate court ruled that no novation - express or
implied - had taken place when respondent accepted
the check from De Jesus. According to the CA, the
check was issued precisely to pay for the loan that was
covered by the promissory note jointly and severally
undertaken by petitioner and De Jesus. Respondent's
acceptance of the check did not serve to make De Jesus
the sole debtor because, first, the obligation incurred
by him and petitioner was joint and several; and,
second, the check - which had been intended to
extinguish the obligation - bounced upon its
presentment.
ISSUE
WON the note was negotiable
HELD
NO. Petitioner avers that as a mere accommodation
party, he was released as obligor when respondent
agreed to extend the term of the obligation. This
reasoning is misplaced, because the note herein is not
a negotiable instrument. The note reads:
PROMISSORY NOTE
P400,000.00
RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of
FOUR HUNDRED THOUSAND PESOS, Philippine
Currency payable on or before January 23, 1997 at No.
144 K-10 St. Kamias, Quezon City, with interest at the
rate of 5% per month or fraction thereof.
It is understood that our liability under this loan is
jointly and severally [sic].
Done at Quezon City, Metro Manila this 23rd day of
December, 1996.
-By its terms, the note was made payable to a specific
person rather than to bearer or to order - a requisite for
negotiability under Act 2031, the Negotiable
Instruments Law (NIL). Petitioner cannot avail himself of
[4] Law 108: Negotiable Instruments
the NIL's provisions on the liabilities and defenses of an
accommodation party. A non-negotiable note is merely
a simple contract in writing and is evidence of such
intangible rights as may have been created by the
assent of the parties. The promissory note is thus
covered by the general provisions of the Civil Code, not
by the NIL. Even granting that the NIL was applicable,
petitioner would be liable for the promissory note.
Under Art. 29 of Act 2031, an accommodation party is
liable for the instrument to a holder for value even if
the latter knew the former to be only an
accommodation party. The relation between an
accommodation party and the party accommodated is,
in effect, one of principal and surety. It is a settled rule
that a surety is bound equally and absolutely with the
principal and is deemed an original promisor and
debtor from the beginning. -The liability is immediate
and direct.
Disposition Petition denied. Assailed decision
affirmed.
GSIS V CA (RACHO)
170 SCRA 530; REGALADO; February 23, 1989
~monch~
NATURE
Petition to review the judgment of the CA
FACTS
-Mr. and Mrs. Racho, together with Mr. and Mrs.
Lagasca, executed 2 deeds of mortgage (11.5K and 3k).
A parcel of land co-owned by the mortgagor spouses
was given as security. A few years later, the Lagascas
executed an instrument denominated “Assumption of
Mortgage”, thus assuming sole responsibility of
obligation to the GSIS.
-The Lagascas failed to pay the amortizations. The land
was extrajudicially foreclosed.
-2 years later, the Rachos filed a complaint against the
Lagascas and GSIS, praying that the foreclosure be
declared void. They alleged that they signed the
mortgage contracts not as sureties or guarantors of the
Lagascas but they merely gave their common property
to the latter who were to solely benefit from the loans.
-RTC dismissed the case. The CA reversed, saying that
the Rachos were an accommodation party. The
mortgage was therefore void as the GSIS failed to give
personal notice (notice given was thru publication) to
them as to the delinquency of the amortizations and as
to the subsequent foreclosure. Thus, the foreclosure
was declared void.
ISSUE/S
First Semester AY 2008-09
1. WON the promissory note was a negotiable
instrument
2. WON the property of the Rachos was liable under the
mortgage contracts
3. WON there was a proper notice of the foreclosure
HELD
1. NO
Ratio A negotiable instrument must be payable to
order or to bearer
Reasoning Both parties relied on Sec. 29 of the
Negotiable instruments law, which defined the meaning
of an accommodation party. Said provision is not
applicable since the promissory note is not a negotiable
instrument. It not was directly payable to a specified
party, GSIS.
3. YES
Ratio Article 2085 of the Civil code says third persons
who are not parties may secure an obligation by
mortgaging their own property.
Reasoning So long as valid consent was given, the
fact that the loans were solely for the benefit of the
Lagasca spouses would not invalidate the mortgage
with respect to Racho’s share in the property. In
consenting thereto, their share in the property would
secure the performance of the principal obligation.
3. YES
Ratio Act 3135 does not require personal notice to the
mortgagor. Notice thru publication is sufficient
Disposition Judgment reversed.
CONSOLIDATED PLYWOOD INDUSTRIES,
INC. (Wee and Vergara) V. IFC LEASING
AND ACCEPTANCE CORP
149 SCRA 449; GUTIERREZ ; April 30, 1987
~ice~
NATURE
Petition for Certiorari
FACTS
-Consolidated (petitioner) is a corporation engaged in
the logging business, it needed 2 units of tractors for its
projects. Atlantic Gulf & Pacific Company of Manila
knew of the need and thus offered 2 used tractors to
petitioner through its sister company and marketing
arm, Industrial Products Marketing (the "seller-
assignor"). Petitioner inspected the tractors while
seller-assignor assured petitioner-corporation that the
"Used" Allis Crawler Tractors which were being offered
were fit for the job, and gave the corresponding
warranty of ninety (90) days performance of the
Prof. Rogelio V. Quevedo [4]
machines and availability of parts. With said assurance
and warranty, and relying on the seller-assignor's skill
and judgment, petitioner-corporation through
petitioners Wee and Vergara, president and vice-
president, respectively, agreed to purchase on
installment said two (2) units of "Used" Allis Crawler
Tractors. It also paid the down payment of Two
Hundred Ten Thousand Pesos (P210,000.00).
-Seller-assignor issued the sales invoice for the two (2)
units of tractors. At the same time, the deed of sale
with chattel mortgage with promissory note was
executed. Simultaneously with the execution of the
deed of sale with chattel mortgage with promissory
note, the seller-assignor, by means of a deed of
assignment, assigned its rights and interest in the
chattel mortgage in favor of the respondent (IFC
Leasing).
-Barely fourteen (14) days had elapsed after their
delivery when one of the tractors broke down and after
another nine (9) days, the other tractor likewise broke
down.
-Vergara informed seller-assignor and asked for prompt
action. The seller-assignor sent to the jobsite its
mechanics to conduct the necessary repairs, but the
tractors did not come out to be what they should be
after the repairs were undertaken because the units
were no longer serviceable.
-Vergara advised the seller-assignor that the payments
of the installments as listed in the promissory note
would likewise be delayed until the seller-assignor
completely fulfills its obligation under its warranty.
Since the tractors were no longer serviceable, Wee
asked the seller-assignor to pull out the units and have
them reconditioned, and thereafter to offer them for
sale. The proceeds were to be given to the respondent
and the excess, if any, to be divided between the seller-
assignor and petitioner-corporation which offered to
bear one-half (1/2) of the reconditioning cost.
-No response was received by the petitioner-
corporation and despite several follow-up calls, the
seller-assignor did nothing with regard to the request,
until the complaint in this case was filed by the IFC.
-TC and IAC granted the complaint.
ISSUE
1. [not important in our discussion] re: warranty
– held there is warranty and it could be rescinded if
breached)
2. WON the promissory note in question is a negotiable
instrument
HELD
No, it is not a negotiable instrument.
-The pertinent portion of the note is as follows:
[5] Law 108: Negotiable Instruments
"FOR VALUE RECEIVED, I/we jointly and severally
promise to pay to the INDUSTRIAL PRODUCTS
MARKETING, the sum of ONE MILLION NINETY THREE
THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS &
71/100 only (P1,093,789.71), Philippine Currency, the
said principal sum, to be payable in 24 monthly
installments starting July 15, 1978 and every 15th of
the month thereafter until fully paid. ... ."
-"The instrument in order to be considered negotiable
must contain the so called 'words of negotiability' ----
i.e., must be payable to 'order' or 'bearer'. These words
serve as an expression of consent that the instrument
may be transferred. This consent is indispensable since
a maker assumes greater risk under a negotiable
instrument than under a non-negotiable one. . . . .
xxx xxx xxx
"When instrument is payable to order.
"SEC. 8. WHEN PAYABLE TO ORDER. The instrument
is payable to order where it is drawn payable to the
order of a specified person or to him or his order . . .
xxx xxx xxx
"These are the only two ways by which an instrument
may be made payable to order. There must always be a
specified person named in the instrument. It means
that the bill or note is to be paid to the person
designated in the instrument or to any person to whom
he has indorsed and delivered the same. Without the
words 'or order' or 'to the order of,' the instrument is
payable only to the person designated therein and is
therefore non-negotiable. Any subsequent purchaser
thereof will not enjoy the advantages of being a holder
of a negotiable instrument, but will merely 'step into
the shoes' of the person designated in the instrument
and will thus be open to all defenses available against
the latter."
-Therefore, considering that the subject promissory
note is not a negotiable instrument, it follows that the
respondent can never be a holder in due course but
remains a mere assignee of the note in question. Thus,
the petitioner may raise against the respondent all
defenses available to it as against the seller-assignor,
Industrial Products Marketing.
-This being so, there was no need for the petitioner to
implead the seller-assignor when it was sued by the
respondent-assignee because the petitioner's defenses
apply to both or either of them.
-The records also show that respondent IFC knew that
they were mere assignees.
-A mere perusal of the Deed of Sale with Chattel
Mortgage with Promissory Note, the Deed of
Assignment and the Disclosure of Loan/Credit
Transaction shows that said documents evidencing the
sale on installment of the tractors were all executed on
the same day by and among the buyer, which is herein
First Semester AY 2008-09
petitioner Consolidated Plywood Industries, Inc.; the
seller-assignor which is the Industrial Products
Marketing; and the assignee-financing company, which
is the respondent. Therefore, the respondent had actual
knowledge of the fact that the seller-assignor's right to
collect the purchase price was not unconditional, and
that it was subject to the condition that the tractors
sold were not defective. The respondent knew that
when the tractors turned out to be defective, it would
be subject to the defense of failure of consideration and
cannot recover the purchase price from the petitioners.
Even assuming for the sake of argument that the
promissory note is negotiable, the respondent, which
took the same with actual knowledge of the foregoing
facts so that its action in taking the instrument
amounted to bad faith, is not a holder in due course. As
such, the respondent is subject to all defenses which
the petitioners may raise against the seller-assignor.
-Lastly, the respondent failed to present any evidence
to prove that it had no knowledge of any fact, which
would justify its act of taking the promissory note as
not amounting to bad faith.
-Sections 52 and 56 of the Negotiable Instruments Law
provide that:
"SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE
COURSE. A holder in due course is a holder who has
taken the instrument under the following conditions.
xxx xxx xxx
"(c ) That he took it in good faith and for value;
"(d) That at the time it was negotiated to him he had
no notice of any infirmity in the instrument or defect in
the title of the person negotiating it.
xxx xxx xxx
"SEC. 56. WHAT CONSTITUTES NOTICE OF DEFECT.
To constitute notice of an infirmity in the instrument or
defect in the title of the person negotiating the same
the person to whom it is negotiated must have had
actual knowledge of the infirmity or defect, or
knowledge of such facts that his action in taking the
instrument amounts to bad faith."
-We subscribe to the view of Campos and Campos that
a financing company is not a holder in good faith as to
the buyer, to wit:
"In installment sales, the buyer usually issues a note
payable to the seller to cover the purchase price. Many
times, in pursuance of a previous arrangement with the
seller, a finance company pays the full price and the
note is indorsed to it, subrogating it to the right to
collect the price from the buyer, with interest. With the
increasing frequency of installment buying in this
country, it is most probable that the tendency of the
courts in the United States to protect the buyer against
the finance company will find judicial approval here.
Where the goods sold turn out to be defective, the
Prof. Rogelio V. Quevedo [5]
finance company will be subject to the defense of
failure of consideration and cannot recover the
purchase price from the buyer. As against the
argument that such a rule would seriously affect 'a
certain mode of transacting business adopted
throughout the State,' a court in one case stated:
"'It may be that our holding here will require some
changes in business methods and will impose a greater
burden on the finance companies. We think the buyer
---- Mr. & Mrs. General Public ---- should have some
protection somewhere along the line. We believe the
finance company is better able to bear the risk of the
dealer's insolvency than the buyer and in a far better
position to protect his interests against unscrupulous
and insolvent dealers . . . .
"'If this opinion imposes great burdens on finance
companies it is a potent argument in favor of a rule
which will afford public protection to the general buying
public against unscrupulous dealers in personal
property..' (Mutual Finance Co. v. Martin, 63 So. 2d 649,
44 ALR 2d 1 [1953])" Campos and Campos, Notes and
Selected Cases on Negotiable Instruments Law, Third
Edition, p. 128).' "
-In like manner, therefore, even assuming that the
subject promissory note is negotiable, the respondent,
a financing company which actively participated in the
sale on installment of the subject two Allis Crawler
tractors, cannot be regarded as a holder in due course
of said note. It follows that the respondent's rights
under the promissory note involved in this case are
subject to all defenses that the petitioners have against
the seller-assignor, Industrial Products Marketing For
Section 58 of the Negotiable Instruments Law provides
that "in the hands of any holder other than a holder in
due course, a negotiable instrument is subject to the
same defenses as if it were non-negotiable. . . . ."
-Prescinding from the foregoing and setting aside other
peripheral issues, we find that both the trial and
respondent appellate court erred in holding the
promissory note in question to be negotiable. Such a
ruling does not only violate the law and applicable
jurisprudence, but would result in unjust enrichment on
the part of both the seller-assignor and respondent
assignee at the expense of the petitioner-corporation
which rightfully rescinded an inequitable contract. We
note, however, that since the seller-assignor has not
been impleaded herein, there is no obstacle for the
respondent to file a civil suit and litigate its claims
against the seller-assignor in the rather unlikely
possibility that it so desires.
Disposition Annulled and set aside.
ANG TEK LIAN V CA
[6] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [6]
87 PHIL 383; BENGZON; September 25, 1950 such requirement had been made. It depends upon the
~rean~ circumstances of each transaction.
- Where a check is made payable to the order of
NATURE “cash”, the word “cash” does not purport to be the
Petition for review on certiorari name of any person', and hence the instrument is
payable to bearer. The drawee bank need not obtain
FACTS any indorsement of the check, but may pay it to the
-Ang Tek Lian, knowing he had no funds therefor, drew person presenting it without any indorsement. In other
on Saturday, Nov. 16, 1946, a check upon the China words, the bank, to which the check is presented for
Banking Corporation for the sum of P4,000, payable to payment, need not have the holder identified, and is
the order of "cash". He delivered it to Lee Hua Hong in not negligent in failing to do so.
exchange for money which the latter handed in the act. -Anyway, it is significant, and conclusive, that the form
On Nov. 18, 1946, the next business day, the check of the check in question was totally unconnected with
was presented by Lee Hua Hong to the drawee bank for its dishonor. CA declared that it was returned
payment, but it was dishonored for insufficiency of unsatisfied because the drawer had insufficient funds -
funds, the balance of the deposit of Ang Tek Lian on not because the drawer's indorsement was lacking.
both dates being P335 only. Disposition Decision is AFFIRMED, with costs.
-For having issued a rubber check, Ang Tek Lian was
convicted of estafa in the CFI of Manila. CA affirmed the
verdict. Hence, this petition with SC.
-Ang Tek Lian argues that as the check had been made
payable to "cash" and had not been endorsed by Ang
Tek Lian, he is not guilty of the offense charged. Based
on the proposition that "by uniform practice of all banks
in the Philippines a check so drawn is invariably
dishonored," the following line of reasoning is advanced
in support of the argument: "When the offended party
accepted the check from defendant, he did so with full
knowledge that it would be dishonored upon
presentment. In that sense, defendant could not be
said to have acted fraudulently because the
complainant, in so accepting the check as it was drawn,
must be considered, by every rational consideration, to
have done so fully aware of the risk he was running
thereby."

ISSUE
WON Ang Tek Lian is not guilty of estafa since the
check had been made payable to “cash” and had not
been endorsed by him.

HELD
1. NO. Ang Tek is guilty of estafa.
Ratio Under the Negotiable Instruments Law (sec. 9
[d]), a check drawn payable to the order of "cash" is a
check payable to bearer, and the bank may pay it to
the person presenting it for payment without the
drawer's indorsement.
Reasoning SC is not aware of the uniformity of such
practice, as the defendant points out. Instances have
undoubtedly occurred wherein the Bank required the
indorsement of the drawer before honoring a check
payable to "cash." But cases there are too, where no
[7] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [7]
CHAPTER II: TRANSFER ISSUES suspensive condition, the happening of which gives rise
1. WON Arsenio had authority to execute the Deeds of to Bancasia’s right to demand payment from Great
Assignment and thus bind Great Asian Asian. This conditional obligation of Great Asian arises
GREAT ASIAN SALES CENTER 2. WON Great Asian is liable to Bancasia under the from its written contracts with Bancasia as embodied in
CORPORATION V CA Deeds of Assignment for breach of contract pursuant to the Deeds of Assignment.
(BANCASIA FINANCE AND INVESTMENT the civil code, independent of the negotiable -By express provision in the Deeds of Assignment,
instruments law Great Asian unconditionally obligated itself to pay
CORP) 3. WON Tan Chong Lin is liable to Great Asian under Bancasia the full value of the dishonored checks. In
381 SCRA 557; CARPIO; April 25, 2002
the surety agreements. short, Great Asian sold the postdated checks on with
~jojo~
recourse basis against itself. This is an obligation that
HELD Great Asian is bound to faithfully comply because it has
FACTS
1. YES the force of law as between Great Asian and Bancasia,
-Great Asian is engaged in the business of buying and
-The Corporation Code of the Philippines vests in the as provided in Art 1159 of the Civil Code. Great Asian
selling household appliances. In March 1981, the board
board of directors the exercise of the corporate powers and Bancasia agreed on this specific with recourse
of directors of Great Asian approved a resolution
of the corporation, save in those instances where the stipulation, despite the fact that the receivables were
authorizing its Treasurer and GM, Arsenio Lim Piat, Jr. to
Code requires stockholders’ approval for certain negotiable instruments with the endorsement of
secure a loan from Bancasia in an amount not to
specific acts. In the ordinary course of business, a Arsenio. The contracting parties had the right to adopt
exceed P1M and also authorized Arsenio to sign all
corporation can borrow funds or dispose of assets of the stipulation which is separate and distinct from the
papers, documents or promissory notes necessary to
the corporation only on authority of the board of warranties of an endorser under the Negotiable
secure the loan. In Feb. 1982, the board of directors of
directors. The board of directors normally designates Instruments Law.
Great Asian approved a 2nd resolution authorizing Great
one or more corporate officers to sign loan documents -The explicit with recourse stipulation against Great
Asian to secure a discounting line with Bancasia in an
or deeds of assignment for the corporation. Asian effectively enlarges, by agreement of the parties,
amount not exceeding P2M and also designated
-To secure a credit accommodation from Bancasia, the the liability of Great Asian beyond that of a mere
Arsenio as the authorized signatory to sign all
board of directors of Great Asian adopted 2 board endorser of a negotiable instrument. Thus, whether or
instruments, documents and checks necessary to
resolutions on different dates. (text of resolutions not Bancasia gives notice of dishonor to Great Asian,
secure the discounting line.
shown in case) As plain as daylight, the 2 board the latter remains liable to Bancasia because of the
-In March 1981 and 1982, Tan Chong Lin signed 2
resolutions clearly authorized Great Asian to secure a with recourse stipulation which is independent of the
Surety Agreements in favor of Bancasia to guarantee,
loan or discounting line from Bancasia. The 2 board warranties of an endorser under the Negotiable
solidarily, the debts of Great Asian to Bancasia. Great
resolutions also categorically designated Arsenio as the Instruments Law.
Asian, through Arsenio, signed 4 Deeds of Assignment
authorized signatory to sign and deliver all the -There is nothing in the Negotiable Instruments Law or
of Receivables, assigning to Bancasia 15 postdated
implementing documents, including checks, for Great in the Financing Company Act, that prohibits Great
checks issued by various customers in payment for
Asian. There is no iota of doubt whatsoever about the Asian and Bancasia parties from adopting the with
appliances and other merchandise. Arsenio endorsed
purpose of the 2 board resolutions, and about the recourse stipulation uniformly found in the Deeds of
all the 15 checks by signing his name at the back of the
authority of Arsenio to act and sign for Great Asian. Assignment. Instead of being negotiated, a negotiable
checks. Eight of the dishonored checks bore the
Arsenio had all the proper and necessary authority from instrument may be assigned. Assignment of a
endorsement of Arsenio below the stamped name of
the board of directors of Great Asian to sign the Deeds negotiable instrument is actually the principal mode of
“Great Asian Sales Center”, while the rest of the
of Assignment and to endorse the fifteen postdated conveying accounts receivable under the Financing
dishonored checks just bore the signature of Arsenio.
checks. Arsenio signed the Deeds of Assignment as Company Act. Since in discounting of receivables the
The drawee banks dishonored the fifteen checks on
agent and authorized signatory of Great Asian under an assignee is subrogated as creditor of the receivable,
maturity when deposited for collection by Bancasia,
authority expressly granted by its board of directors. the endorsement of the negotiable instrument becomes
with any of the following as reason for the dishonor:
The signature of Arsenio on the Deeds of Assignment is necessary to enable the assignee to collect from the
“account closed”, “payment stopped”, “account under
effectively also the signature of the board of directors drawer. This is particularly true with checks because
garnishment”, and “insufficiency of funds”. After the
of Great Asian, binding on the board of directors and on collecting banks will not accept checks unless endorsed
drawee bank dishonored the checks, Bancasia sent
Great Asian itself. by the payee. The purpose of the endorsement is
letters to Tan Chong Lin, notifying him of the dishonor
merely to facilitate collection of the proceeds of the
and demanding payment from him. Neither Great Asian
2. YES checks.
nor Tan Chong Lin paid Bancasia the dishonored
-Bancasia’s complaint against Great Asian is founded -The purpose of the endorsement is not to make
checks.
on the latter’s breach of contract under the Deeds of the assignee finance company a holder in due
-In June 1982, Bancasia filed a complaint for collection
Assignment. The Deeds of Assignment uniformly course because policy considerations militate
of a sum of money against Great Asian and Tan Chong
provided for one vital suspensive condition: in case the against according finance companies the rights
Lin. Great Asian raised the alleged lack of authority of
drawers fail to pay the checks on maturity, Great Asian of a holder in due course. Otherwise, consumers
Arsenio to sign the Deeds of Assignment as well as the
obligated itself to pay Bancasia the full face value of who purchase appliances on installment, giving
absence of consideration and consent of all the parties
the dishonored checks, including penalty and attorney’s their promissory notes or checks to the seller,
to the Surety Agreements signed by Tan Chong Lin.
fees. The failure of the drawers to pay the checks is a will have no defense against the finance
[8] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [8]
company should the appliances later turn out to
be defective. Thus, the endorsement does not
operate to make the finance company a holder in
due course. For its own protection, therefore,
the finance company usually requires the
assignor, in a separate and distinct contract, to
pay the finance company in the event of dishonor
of the notes or checks.
-As endorsee of Great Asian, Bancasia had the option to
proceed against Great Asian under the Negotiable
Instruments Law. Had it so proceeded, the Negotiable
Instruments Law would have governed Bancasia’s
cause of action. Bancasia, however, did not choose this
route. Instead, Bancasia decided to sue Great Asian for
breach of contract under the Civil Code, a right that
Bancasia had under the express with recourse
stipulation in the Deeds of Assignment.
The exercise by Bancasia of its option to sue for breach
of contract under the Civil Code will not leave Great
Asian holding an empty bag. Great Asian, after paying
Bancasia, is subrogated back as creditor of the
receivables. Great Asian can then proceed against the
drawers who issued the checks. Even if Bancasia failed
to give timely notice of dishonor, still there would be no
prejudice whatever to Great Asian. Under the
Negotiable Instruments Law, notice of dishonor is not
required if the drawer has no right to expect or require
the bank to honor the check, or if the drawer has
countermanded payment. In the instant case, all the
checks were dishonored for any of the following
reasons: “account closed”, “account under
garnishment”, insufficiency of funds”, or “payment
stopped”. In the first three instances, the drawers had
no right to expect or require the bank to honor the
checks, and in the last instance, the drawers had
countermanded payment.

3. YES
-Tan Chong Lin, by signing the Surety Agreements,
explicitly and unconditionally bound himself to pay
Bancasia, solidarily with Great Asian, if the drawers of
the checks fail to pay on due date. The condition on
which Tan Chong Lin’s obligation hinged had happened.
As surety, Tan Chong Lin automatically became liable
for the entire obligation to the same extent as Great
Asian.
[9] Law 108: Negotiable Instruments
CHAPTER III: HOLDER IN DUE COURSE
YANG V COURT OF APPEALS
[PCIB, FEBTC, Equitable Bank,
Chandiramani, David]
409 SCRA 159; QUISUMBING; Aug 15, 2003
~yella~
FACTS
-Yang and Chandiramani entered into an agreement
whereby the latter was to give Yang a PCIB manager’s
check in the amount of P4.2M in exchange for two of
Yang’s manager’s checks each in the amount of
P2.087M, both payable to the order of Fernando David.
Yang and Chandiramani agreed that the difference of
P26k in the exchange would be their profit to be
divided equally between them.
-Yang and Chandiramani also further agreed that the
former would secure from FEBTC a dollar draft in the
amount of US$200k payable to PCIB FCDU Account
which Chandiramani would exchange for another dollar
draft in the same amount to be issued by Hang Seng
Bank Ltd. of Hong Kong.
-Yang gave the checks and dollar drafts to her business
associate Albert Liong to be delivered to Chandiramani
by Liong’s messenger Danilo Rodrigo. Chandiramani
allegedly did not appear at the meeting place and
Ranigo lost the checks and dollar drafts.
-Yang requested FEBTC and Equitable to stop payment
on the instruments she believed to be lost. However,
the checks and drafts were not lost because
Chandiramani was able to get hold of them and deliver
them to Fernando David in exchange of US$360k.
-FEBTC and Equitable stopped payment on the
instruments. However upon representation of PCIB,
FEBTC subsequently lifted the stop payment order on
the dollar draft, TF enabling the holder to receive the
amount of US$200k.
-Yang lodged a Complaint for injunction and damages
against Equitable, Chandiramani, and David, with
prayer for a TRO, with the RTC. It was subsequently
amended to include a prayer for Equitable to return to
Yang the amount of P2.087 million with interest
-Yang filed a separate case for injunction vs. FEBTC,
PCIB, Chandiramani and David with the RTC. It was
later amended to include a prayer that defendants
therein return to Yang the amount of P2.087million with
interest.
-David moved for dismissal, it was denied. Cases were
consolidated.
-RTC rendered judgment in favor of David
rationcinating thus: The evidence thus shows that
defendant David was a holder in due course for the
First Semester AY 2008-09
reason that the cashier’s checks were complete on
their face when they were negotiated to him. They
were not yet overdue when he became the holder
thereof and he had no notice that the said checks were
previously dishonored…
-Yang’s MR denied. On appeal, CA affirmed RTC.
ISSUE
WON respondent Fernando David was a holder in due
course
HELD: YES.
-Every holder of a negotiable instrument is deemed
prima facie a holder in due course. However, this
presumption arises only in favor of a person who is the
payee or indorsee of a bill or note who is in possession
of it or the bearer thereof. What is vital to the
resolution of the issue is the concurrence of all
requisites in Section 52 of the Negotiable Instruments
Law.
-What constitutes a holder in due course xxx
1. That it is complete and regular upon its face
2. That he became the holder of it before it was
overdue, and without such notice that it has been
previously dishonored, is such was a fact
3. That he took it in good faith and for value
4. That at the time it was negotiated to him, he had no
notice of any infirmity in the instrument or defect of
the title of the person negotiating it
-Petitioner’s challenge to David’s status as a holder in
due course hinges on the allegation that the last two
requisites in Section 52 are missing
-Section 24 of the Negotiable Instruments Law creates
a presumption that every party to an instrument
acquired the same for a consideration of for value. The
law creates a presumption in favor of David. Also,
factual findings of the lower court showed that David
gave Chandiramani US$360,000 in exchange of the
said instruments. Absent any proof from petitioner to
the contrary, the presumption imposed the law is to be
upheld.
-Petitioner fails to point any circumstances which
should have put David on inquiry as to the why and
wherefore of the possession of the checks by
Chandiramani. David was not privy to the transaction
between petitioner and Chandiramani. Instead,
Chandiramani and David had a separate dealing in
which it was precisely Chandiramani’s duty to deliver
the checks to David as payee. Court cannot hold David
as guilty of gross neglect amounting to legal absence of
good faith, absent any showing that there was
something amiss about Chandiramani’s acquisition or
possession of the checks.
Prof. Rogelio V. Quevedo [9]
ATRIUM MANAGEMENT CORPORATION V
CA
[E.T. Henry & Co., de Leon, de Leon, Hi-
Cement Corp]
353 SCRA 23; PARDO; February 28, 2001
~javi~
FACTS
-Hi-Cement Corporation (HCC) (through its corporate
signatories de Leon and de las Alas) issued checks in
favor of E.T. Henry and Co. Inc (ETH), as payee. ETH in
turn endorsed the checks to petitioner Atrium
Management Corp for valuable consideration. Upon
presentment for payment, the drawee bank dishonored
all four checks for the reason “payment stopped”.
Atrium instituted this action after its demand for
payment of the value of the checks was denied.
-RTC rendered a decision ordering de Leon, ETC and
HCC to pay Atrium, jointly and severally, P2 million, ++.
-CA modified the decision, absolving HCC from liability
and dismissing the complaint against it, in part because
the subject checks were not issued for valuable
consideration.
ISSUE
WON Atrium was a holder in due course and for value
HELD: NO
Reasoning The Negotiable Instruments Law, Section
52 defines a holder in due course, thus: "A holder in
due course is a holder who has taken the instrument
under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was
overdue, and without notice that it had been previously
dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no
notice of any infirmity in the instrument or defect in the
title of the person negotiating it."
-Here, the checks were crossed checks and specifically
indorsed for deposit to payee's account only. From the
beginning, Atrium was aware of the fact that the checks
were all for deposit only to payee's account, meaning
E.T. Henry. Clearly, then, Atrium could not be
considered a holder in due course.
-However, it does not follow as a legal proposition that
simply because petitioner Atrium was not a holder in
due course for having taken the instruments in
question with notice that the same was for deposit only
to the account of payee E.T. Henry that it was
altogether precluded from recovering on the
instrument. The Negotiable Instruments Law does not
[10] Law 108: Negotiable Instruments
provide that a holder not in due course can not recover
on the instrument.
-The disadvantage [of Atrium] in not being a holder in
due course is that the negotiable instrument is subject
to defenses as if it were non-negotiable. One such
defense is absence or failure of consideration.
Dispositive decision of CA is affirmed
BATAAN CIGAR AND CIGARETTE
FACTORY, INC. V CA
[State Investment House, Inc.]
230 SCRA 643; NOCON; March 3. 1994
~brian b~
FACTS
-Petitioner, a corp. involved in the manufacturing of
cigarettes, engaged one of its suppliers, King Tim Pua
George (herein after, George King), to deliver 2,000
bales of tobacco leaf starting Oct 1978. In consideration
thereof, BCCFI, on July 13, 1978 issued crossed checks
post dated sometime in March 1979 in the totaling
P820K.
-Relying on the King's representation that he would
complete delivery w/in 3 mos. from Dec 5, 1978,
petitioner agreed to purchase add’l. 2,500 bales of
tobacco leaves, despite the supplier's failure to deliver
in accordance with their earlier agreement. Again
petitioner issued post dated crossed checks in the total
amount of P1.1M payable sometime in Sep 1979.
-During these times, King was simultaneously dealing
with SIHI. On July 19, 1978, he sold at a discount check
TCBT 551826 (P164K), post dated March 31, 1979,
drawn by petitioner, w/ King as payee to SIHI. On Dec
19 and 26, 1978, he again sold to respondent checks
TCBT Nos. 608967 & 608968, (both P100K) post dated
Sep 15 & 30, 1979 respectively, drawn by petitioner in
favor of King.
-King failed to deliver the bales of tobacco leaf as
agreed despite petitioner's demand. BCCFI issued on
March 30, 1979, a stop payment order on all checks
payable to George King, including check TCBT 551826,
and subsequently, on checks TCBT Nos. 608967 &
608968 on Sep 14 & 28, 1979, respectively.
-Efforts of SIHI to collect from BCCFI having failed, it
instituted the present case, naming only BCCFI as party
defendant. TC pronounced SIHI as having a valid claim
being a holder in due course.
ISSUE
WON SIHI, a second indorser, a holder of crossed
checks, is a holder in due course
HELD: NO.
First Semester AY 2008-09
-Crossing of checks should put the holder on inquiry
and upon him devolves the duty to ascertain the
indorser's title to the check or the nature of his
possession. Failing in this respect, the holder is
declared guilty of gross negligence amounting to legal
absence of good faith, contrary to Sec. 52(c) of the
Negotiable Instruments Law, and as such the
consensus of authority is to the effect that the holder of
the check is not a holder in due course.
Reasoning A check is defined by law as a bill of
exchange drawn on a bank payable on demand. There
are a variety of checks, the more popular of which are
the memorandum check, cashier's check, traveler's
check and crossed check. Crossed check is one where
two parallel lines are drawn across its face or across a
corner thereof. It may be crossed generally or specially.
-A check is crossed specially when the name of a
particular banker or a company is written between the
parallel lines drawn. It is crossed generally when only
the words "and company" are written or nothing is
written at all between the parallel lines. It may be
issued so that the presentment can be made only by a
bank. Veritably the Negotiable Instruments Law (NIL)
does not mention "crossed checks," although Article
541 of the Code of Commerce refers to such
instruments.
-According to commentators, the negotiability of a
check is not affected by its being crossed, whether
specially or generally. It may legally be negotiated from
one person to another as long as the one who encashes
the check with the drawee bank is another bank, or if it
is specially crossed, by the bank mentioned between
the parallel lines. This is specially true in England where
the NIL originated.
-In the Philippine business setting, however, we used to
be beset with bouncing checks, forging of checks, and
so forth that banks have become quite guarded in
encashing checks, particularly those which name a
specific payee. Unless one is a valued client, a bank will
not even accept second indorsements on checks.
-In order to preserve the credit worthiness of checks,
jurisprudence has pronounced that crossing of a
check should have the following effects: (a) the check
may not be encashed but only deposited in the bank;
(b) the check may be negotiated only once -to one who
has an account with a bank; (c) and the act of crossing
the check serves as warning to the holder that the
check has been issued for a definite purpose so that he
must inquire if he has received the check pursuant to
that purpose, otherwise, he is not a holder in due
course.
-The facts in the present case are on all fours to the
case of State Investment House, Inc. v. IAC. In that
case, New Sikatuna Wood Industries, Inc. (NSWI) also
Prof. Rogelio V. Quevedo [10]
sold at a discount to SIHI 3 post dated crossed checks,
issued by Anita Peña Chua naming as payee NSWI. The
court said: “The 3 checks had been crossed generally
and issued payable to NSWI w/c could only mean that
the drawer had intended the same for deposit only by
the rightful person, i.e. the payee named therein.
Apparently, it was not the payee who presented the
same for payment and therefore, there was no proper
presentment, and the liability did not attach to the
drawer. Thus, in the absence of due presentment, the
drawer did not become liable. Consequently, no right of
recourse is available to petitioner (SIHI) against the
drawer of the subject checks, private respondent wife
(Anita), considering that petitioner is not the proper
party authorized to make presentment of the checks in
question. xxx xxx xxx
“That the subject checks had been issued subject to the
condition that private respondents (Anita and her
husband) on due date would make the back up deposit
for said checks but w/c condition apparently was not
made, thus resulting in the non-consummation of the
loan intended to be granted by private respondents to
NSWI, constitutes a good defense against petitioner
who is not a holder in due course.”
-In the present case, BCCFI's defense in stopping
payment is as good to SIHI as it is to George King.
Because, really, the checks were issued with the
intention that George King would supply BCCFI with the
bales of tobacco leaf. There being failure of
consideration, SIHI is not a holder in due course.
Consequently, BCCFI cannot be obliged to pay the
checks.
-The foregoing does not mean, however, that
respondent could not recover from the checks. The only
disadvantage of a holder who is not a holder in due
course is that the instrument is subject to defenses as if
it were non-negotiable. Hence, respondent can collect
from the immediate indorser, in this case, George King.
Disposition Petition granted. RTC decision as affirmed
by CA reversed.
CHIANG YA MIN V CA
[RCBC, Papercon, Tom Pek]
355 SCRA 608; GONZAGA-REYES; March 28, 2001
~mini~
FACTS
-Petitioner: in 1979, $100,000 was sent by Hang Lung
Bank of Hong Kong to RCBC; the remittance was for
petitioner’s own account and was intended to qualify
him as a foreign investor under Philippine laws; he sent
it himself prior to his arrival in the Philippines. He said
when he checked on it in 1985, he found that the dollar
deposit was transferred to the Shaw Blvd branch of
[11] Law 108: Negotiable Instruments
RCBC and converted to a peso account, which had a
balance of only P1,362.10 as of October, 1979. A letter
from RCBC in 1985 said that the account was opened
with an initial deposit of P729,752.20, and a total of
P728,390 was withdrawn by way of 5 checks apparently
issued by petitioner in favor of Papercon and Tom Pek.
Thus, the balance of P1,362.10.
-Petitioner insists he did not cause the transfer of his
money to the Shaw Blvd branch, nor its conversion to
pesos and the subsequent withdrawals, nor did he
authorize anyone to perform these acts.
-RCBC, after petitioner adduced his evidence, filed a
third-party complaint against Papercon and Tom Pek,
admitting that plaintiff conclusively appeared to have
deposited the sum of US$100k with the bank and said
foreign currency deposit was converted, adopting the
prevailing rate of interest at the time, to P730k and
deposited to plaintiff’s Current Account No. 12-2009
which he opened with Shaw Boulevard branch, after
which plaintiff issued Check No. 492327 to third-party
defendant Papercon. for the amount of P700k and
Check NO. 492328 to third-party defendant Tom Pek for
the amount of P12,700.00. Respondent bank thus
contended that should it be made liable to petitioner,
said third-party defendants as payees and beneficiaries
of the issued checks should be held solidarily liable with
it.
-Tom Pek and Papercon did not deny receiving the
checks worth P712.7k but argued that unless proven
otherwise, the said checks should be presumed to have
been issued in their favor for a sufficient and valuable
consideration.
-TC held RCBC liable for the $100k, saying that the
withdrawals were not made by petitioner nor
authorized by him. The court also concluded that the
withdrawals couldn’t have been possible without the
collusion of officers and employees of RCBC. It held
RCBC solely culpable and exonerated the other private
respondents. After MR, the decision was amended to
hold Papercon and Tom Pek solidarily liable with RCBC.
-CA reversed the decision, finding that the opening of
the account and the withdrawals were authorized by
petitioner. Defendant and third-party defendants were
absolved of any liability.
-Petitioner is now seeking the reversal of the CA
decision, maintaining that the withdrawals on his
account were unauthorized by him and that respondent
bank connived with third persons to defraud him.
ISSUE
WON petitioner has proved that respondent bank
connived with private respondents and third party
defendants Papercon and Tom Pek in allowing the
withdrawals, knowing them to be unauthorized by the
First Semester AY 2008-09
petitioner, and with the purpose of defrauding him.
HELD
NO. There is no evidence to demonstrate that
respondent bank RCBC and Papercon and Tom Pek
colluded to defraud petitioner of his money. What the
evidence establishes is that the opening of the account
and the withdrawals were authorized by petitioner, and
the signatures appearing on the checks were
petitioners.
-Under either theory of fraud or negligence, it is
incumbent upon petitioner to show that the
withdrawals were not authorized by him. If he is unable
to do so, his allegations of fraud or negligence are
unsubstantiated and the presumption that he
authorized the said withdrawals will apply.
-Petitioner’s allegation that he did not authorize the
opening of the current account and the issuance of the
checks was countered by private respondents through
the testimony of Catalino Reyes, the accountant of
Pioneer Business Forms, Inc. (another business venture
of Tom Pek) to the effect that the opening of Current
Account No. 12-2009 and the issuance of the
questioned checks were all upon the instructions of
petitioner. Reyes stated that he first met petitioner in
January or February 1979 when the latter was
introduced to him by Tom Pek. He and his fellow
employees were advised by Tom Pek to "personally
help (Chiang Yia Min) in all his personal accounts."
Reyes was charged with working on the incorporation
of Philippine Color Scanning, a new business venture
where petitioner will be the GM. He also assisted
petitioner when the latter applied for a change of visa
from tourist to special non-immigrant. Reyes testified
that on the first week of February 1979, petitioner
asked him to pick up the US$100k which he caused to
be remitted in compliance with the capital
requirements for foreign investors at Pacific Banking
Corporation. Bringing with him the letter of advise from
the bank, Reyes did as he was told and the bank
released to him a cashier’s check representing the peso
equivalent of the US$100k. Reyes then showed the
check to petitioner and upon the latter’s instructions,
he went to the Shaw Boulevard branch of respondent
bank to open a checking account in petitioner’s name,
using the proceeds of the check as initial deposit.
-Reyes describes the opening of the current account as
having been done in haste, since petitioner was in a
hurry to have the proceeds of the remittance credited
to his checking account. Because Reyes was well-
known to the officers and employees of RCBC-Shaw
Boulevard, he was allowed to bring out of the bank the
application form, depositor’s card, and other forms
which required petitioner’s signature as depositor. He
Prof. Rogelio V. Quevedo [11]
then filled out the forms, and brought them to
petitioner for signing. He witnessed petitioner sign the
forms. Then he brought the signed forms, and
petitioner’s passport, back to the bank, which approved
the opening of the current account upon a comparison
of the signatures on the forms and the passport.
-The documentary evidence accurately supports
Reyes’s statements. Pacific Banking Corporation
confirmed receipt of the US$100k from Hang Lung
Bank, Ltd. by telegraphic transfer on Feb 7, 1979. It had
instructions to transmit the money "to Rizal
Commercial Banking Corporation, Head Office, for (the)
account of Chiang Yia Min"; however, the records also
show that on Feb 8, 1979 Pacific Banking Corporation
released the money to petitioner by way of Cashier’s
Check No. DD 244955, representing the peso
equivalent of the US$100k, which check was in turn
presented before the Board of Special Inquiry of the
Bureau of Immigration as proof of petitioner’s
compliance with the requirements for change of status
from tourist to special non-immigrant, i.e., foreign
investor. On the same day, Feb 8, 1979, Current
Account No. 12-2009, in the name of Chiang Yia Min,
was opened in RCBC-Shaw Boulevard with an initial
deposit of P729,752.20, "representing proceeds of
inward remittance received from Pacific Banking
Corporation."
-There were five issued checks: two made payable to
Papercon, and three made payable to cash (these three
checks were all negotiated to Tom Pek). Catalino Reyes
testified that on two separate instances, petitioner
asked him to prepare two of the five checks questioned
in this case, specifically, the check for P700k dated Feb
19, 1979 and payable to Papercon, and the check for
P12,700.00, dated Feb 23, 1979 and payable to cash.
He witnessed petitioner study the information typed on
the checks, sign the checks, and hand them over to
Tom Pek. The microfilm copies of these checks were
submitted in evidence. They all bear the signature of
petitioner. No shred of evidence was presented to show
that the signatures were not petitioner’s.
-Upon finding that the checks issued to Papercon and
Tom Pek were in order, there being no indication that
respondent bank colluded in paying the checks to them
for any unlawful cause, or was otherwise deceive or
misled into doing the same, the presumption lies that
they were holders for value and in good faith.
Dispositive decision of CA is affirmed
BANK OF THE PHIL. ISLANDS V CA
[Eastern Plywood Corp. and Lim]
232 SCRA 302; DAVIDE; May 10, 1994
~sarah~
[12] Law 108: Negotiable Instruments
FACTS
-Eastern Plywood Corporation and Benigno D. Lim
[officer and stockholder] held at least one joint bank
account ("and/or" account) with the Commercial Bank
and Trust Co. (CBTC), the predecessor-in-interest of
petitioner BPI.
-March 1975, a joint checking account ("and" account)
with Lim in the amount of P120k was opened by
Mariano Velasco with funds withdrawn from the
account of Eastern and/or Lim. Various amounts were
later deposited or withdrawn from the joint account of
Velasco and Lim. The money therein was placed in the
money market.
-Velasco died on 7 April 1977. At the time of his death,
the outstanding balance of the account stood at
P662,522.87. On 5 May 1977, by virtue of an Indemnity
Undertaking executed by Lim for himself and as Pres
and GM of Eastern, ½ of this amount was provisionally
released and transferred to one of the bank accounts of
Eastern with CBTC.
-18 August 1978: Eastern obtained a loan of P73k from
CBTC as "Additional Working Capital," evidenced by the
"Disclosure Statement on Loan/Credit Transaction"
(Disclosure Statement) signed by CBTC through its
branch manager, Ceferino Jimenez, and Eastern,
through Lim, as its Pres-GM. The loan was payable on
demand with interest at 14% per annum.
-For this loan, Eastern issued on the same day a
negotiable promissory note for P73k payable on
demand to the order of CBTC with interest at 14% per
annum. The note was signed by Lim both in his own
capacity and as Pres-GM of Eastern. No reference to
any security for the loan appears on the note. In the
Disclosure Statement, the box with the printed word
"UNSECURED" was marked with "X". ---- meaning
unsecured, while the line with the words "this loan is
wholly/partly secured by" is followed by the typewritten
words "Hold-Out on 1:1 on C/A No. 2310-001-42," which
refers to the joint account of Velasco and Lim with a
balance of P331,261.44.
-In addition, Eastern and Lim, and CBTC signed another
document entitled "Holdout Agreement," also dated 18
August 1978, wherein it was stated that "as security for
the Loan [Lim and Eastern] have offered [CBTC] and
the latter accepts a holdout on said [Current Account
No. 2310-011-42 in the joint names of Lim and Velasco]
to the full extent of their alleged interests therein as
these may appear as a result of final and definitive
judicial action or a settlement between and among the
contesting parties thereto." Paragraph 02 of the
Agreement provides as follows: “Eastply [Eastern] and
Mr. Lim hereby confer upon Comtrust [CBTC], when and
if their alleged interests in the Account Balance shall
have been established with finality, ample and
First Semester AY 2008-09
sufficient power as shall be necessary to retain said
Account Balance and enable Comtrust to apply the
Account Balance for the purpose of liquidating the Loan
in respect of principal and/or accrued interest." And
paragraph 05 thereof reads: “The acceptance of this
holdout shall not impair the right of Comtrust to declare
the loan payable on demand at any time, nor shall the
existence hereof and the non-resolution of the dispute
between the contending parties in respect of
entitlement to the Account Balance, preclude Comtrust
from instituting an action for recovery against Eastply
and/or Mr. Lim in the event the Loan is declared due
and payable and Eastply and/or Mr. Lim shall default in
payment of all obligations and liabilities thereunder."
-In the meantime, a case for the settlement of Velasco's
estate was filed with RTC Pasig. In said case, the whole
balance of P331,261.44 in the said joint account of
Velasco and Lim was being claimed as part of Velasco's
estate.
-9 Sept 1986, the intestate court granted the urgent
motion of the heirs of Velasco to withdraw the deposit
under the joint account of Lim and Velasco and
authorized the heirs to divide among themselves the
amount withdrawn.
-2 Dec 1987: BPI filed with the RTC Manila a complaint
against Lim and Eastern demanding payment of the
promissory note for P73k. Defendants Lim and Eastern,
in turn, filed a counterclaim against BPI for the return of
the balance in the disputed account subject of the
Holdout Agreement and the interests thereon after
deducting the amount due on the promissory note.
-After due proceedings, RTC Manila dismissed the
complaint and denied the counterclaim to avoid
disturbing the resolution of the intestate court.
-Both parties appealed to CA, which rendered a
decision affirming the RTC decision. It, however, failed
to rule on the defendants' partial appeal from the TC's
denial of their counterclaim. Upon MR, CA promulgated
an Amended Decision wherein it ruled that the
settlement of Velasco's estate had nothing to do with
the claim of the defendants for the return of the
balance of their account with CBTC/BPI as they were
not privy to that case, and that the defendants, as
depositors of CBTC/BPI, are the latter's creditors;
hence, CBTC/BPI should have protected the defendants'
interest in the estate proceedings when the said
account was claimed by Velasco's estate. It then
ordered BPI "to pay defendants the amount of
P331,261.44 representing the outstanding balance in
the bank account of defendants."
-22 April 1992: BPI failed the instant petition.
ISSUES
Prof. Rogelio V. Quevedo [12]
1. WON BPI can demand payment of the loan of P73k
despite the existence of the Holdout Agreement
2. WON BPI is still liable to the private respondents on
the account subject of the Holdout Agreement after its
withdrawal by the heirs of Velasco.
HELD
1. YES.
-The collection suit of BPI is based on the promissory
note for P73k. On its face, the note is an unconditional
promise to pay the said amount; it is a negotiable
instrument. BUT BPI was not a holder in due course
because the note was not indorsed to BPI by the payee,
CBTC. Only a negotiation by indorsement could have
operated as a valid transfer to make BPI a holder in due
course. It acquired the note from CBTC by the contract
of merger or sale between the two banks. BPI,
therefore, took the note subject to the Holdout
Agreement.
-Holdout Agreement, par. 02: CBTC/BPI had every right
to demand that Eastern and Lim settle their liability
under the promissory note. It cannot be compelled to
retain and apply the deposit in Lim and Velasco's joint
account to the payment of the note. What the
agreement conferred on CBTC was a power, not a duty.
Generally, a bank is under no duty or obligation to
make the application. To apply the deposit to the
payment of a loan is a privilege, a right of set-off which
the bank has the option to exercise.
-Also, par. 05 states that notwithstanding the
agreement, CBTC was not in any way precluded from
demanding payment from Eastern and from instituting
an action to recover payment of the loan. What it
provides is an alternative, not an exclusive, method of
enforcing its claim on the note. When it demanded
payment of the debt directly from Eastern and Lim, BPI
had opted not to exercise its right to apply part of the
deposit subject of the Holdout Agreement to the
payment of the promissory note for P73k. Its suit for
the enforcement of the note was then in order.
2. YES.
-The counterclaim of Eastern and Lim for the return of
the P331,261.44 was equivalent to a demand that they
be allowed to withdraw their bank deposit. [Recall: Art.
1980, NCC: bank deposits governed by the provisions
re: simple loan; Serrano vs. Central Bank of the
Philippines: bank deposits are in the nature of irregular
deposits; relationship between a depositor and a bank
is one of creditor and debtor; bank deposit is payable
on demand of depositor.]
-The account was proved and established to belong to
Eastern even if it was deposited in the names of Lim
and Velasco. As the real creditor of the bank, Eastern
[13] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [13]
has the right to withdraw it or to demand payment
thereof. BPI cannot be relieved of its duty to pay
Eastern simply because it already allowed the heirs of
Velasco to withdraw the whole balance of the account.
The petitioner should not have allowed such
withdrawal. Order of the intestate court merely
authorized the heirs of Velasco to withdraw account.
BPI was not specifically ordered to release the account
to the said heirs; hence, it was under no judicial
compulsion to do so.
-Payment made by the debtor to the wrong party does
not extinguish the obligation as to the creditor who is
without fault or negligence, even if the debtor acted in
utmost good faith and by mistake as to the person of
the creditor, or through error induced by fraud of a
third person.
Disposition Petition partly granted. CA decision re:
dismissal of petitioner's complaint reversed and set
aside; Award on counterclaim sustained subject to a
modification of the interest.