NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 1 of 190
NOTES FOR WEEK #1
•
JUNE 12 - 16, 2007
INTRODUCTION TO NEGOTIABLE INSTRUMENTS
PURPOSE OF CODIFICATION

Chief purpose was to produce uniformity in the laws of the different
states upon this important subject, so that the citizens of each state
might know the rules which would be applied to their notes, checks,
and other negotiable paper in every other state in which the law was
enacted, since it is an absolute impossibility for the commercial
purchaser

Second purpose was to preserve the law as nearly as possible as it
then existed
LAW EMBRACES SUBTANTIVE AND ADJECTIVE LAW
MOST COMMON FORMS OF NEGOTIABLE INSTRUMENTS
1. Promissory notes
2. Bills of exchange
3. Checks, which are also bills of exchange, but of a special kind
PROMISSORY NOTE, SECTION 184

“A negotiable promissory note, within the meaning of this act, is an
unconditional promise in writing by one person to another, signed by
the maker (1), engaging to pay on demand or at a fixed or
determinable future time (2), a sum certain in money (3) to order or
to bearer (4). Where a note is drawn to the maker’s own order, it is
not complete until indorsed by them.”

Essentially a promise in writing to pay a sum certain in money

The promise is to pay on demand or on a fixed or determinable future
time

General characteristics: amount; place where contract to pay is
executed; due date; absolute promise to pay something; payable to
order/bearer; payee; maker of the note
BILL OF EXCHANGE, SECTION 126
•
“A bill of exchange is an unconditional order in writing addressed by
one person to another signed by the person giving it (1), requiring the
person to whom it is addressed to pay on demand or at a fixed or
determinable future time (2) a sum certain in money (3) to order or to
bearer (4).”
General characteristics: the order or command to pay; drawer/maker;
drawee
CHECK

A bill of exchange drawn on a bank payable on demand
CHECK
BILL OF EXCHANGE
Always drawn upon a bank or May or may not be drawn upon a
banker
bank
Not necessary to present for Necessary
acceptance
Drawn on a deposit
Not drawn
Death of drawer revokes the Does not revoke
authority of banker to pay
Must be presented for payment May be presented for payment
within a reasonable time after its within a reasonable time after its
issue
last negotiation
TO
1.
2.
3.
WHOM INSTRUMENTS MAY BE PAYABLE
Bearer
Order
To a specified person
WHEN IS IT PAYABLE TO BEARER?
1. When it is expressed to be so payable
2. When it is payable to a person named therein or bearer
WHEN IS IT PAYABLE TO ORDER?
1. When it is expressed to be payable to the order of a specified person
2. To a specified person or his order
WHEN IS IT PAYABLE TO A SPECIFIED PERSON?

When the instrument is payable to a specified person named in the
instrument and no other
PARTIES TO A PROMISSORY NOTE
1. Maker—the person who executes the written promise to pay
2. Payee, if the instrument is payable to order—the person in whose
favor the promissory note is made payable
3. Bearer, if the instrument is payable to bearer
PARTIES TO A BILL OF EXCHANGE
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 2 of 190
1.
2.
3.
4.
Drawer—the person who executes the written order to pay
Payee, if the instrument is payable to order—the person in whose
favor a bill of exchange is drawn payable
Bearer, if the instrument is payable to bearer
Acceptor—the drawee who signifies his assent to the order of the
drawer. It is only when he accepts the bill that he becomes a party
thereto and liable thereon.
OTHER PARTIES TO NEGOTIATED INSTRUMENTS
1. Indorser and
2. Indorsee, in the case of instruments payable to order
3. Persons negotiating by mere delivery
4. Persons to whom the instrument is negotiated by delivery
INDORSER AND INDORSEE

When the negotiation is by indorsement completed by delivery, the
parties added are the indorser and indorsee

Indorser—the one who negotiates the instrument

Indorsee—the one to whom the instrument is negotiated by
indorsement
WHERE INSTRUMENT IS PAYABLE TO BEARER
•
Where the instrument is payable to bearer, it can be negotiated by
mere delivery without necessity of indorsement
HOLDER

The payee or indorsee of a bill or note, who is in possession of it, or
the bearer thereof

If the instrument is payable to order, he who is the payee or indorsee
and who is in possession thereof

If the instrument is payable to bearer, he who is in possession thereof
INCIDENTS IN THE “LIFE” OF A NEGOTIABLE INSTRUMENT
1. Issue
2. Negotiation
3. Presentment for acceptance, in certain kinds of bills of exchange
4. Acceptance
5. Dishonor by non-acceptance
6. Presentment for payment
7. Dishonor by non-payment
8. Notice of dishonor
9. Payment
ISSUE
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010

First delivery of the instrument, complete in form to a person who
takes it as a holder
DELIVERY

Consists principally of placing the transferee in possession of the
instrument, but it must be accompanied by the intent to transfer title

“every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of giving
effect thereto”
NEGOTIATION
•
Transfer of an instrument from one person to another as to constitute
the transferee the holder of the instrument
•
Mode of transferring an instrument
•
Effect is to make the transferee the holder of the instrument
HOW INSTRUMENT PAYABLE TO BEARER IS NEGOTIATED

May be negotiated by mere delivery
HOW INSTRUMENT PAYABLE TO ORDER IS NEGOTIATED

Must be negotiated by indorsement completed by delivery

Indorsement is necessary to make the transferee the indorsee and
delivery is necessary to place the transferee in possession of the
instrument
INDORSEMENT

Legal transaction, effected by the writing of one’s own name on the
back of the instrument or upon a paper attached thereto, with or
without additional words specifying the person to whom or to whose
order the instrument is to be payable whereby one not only transfers
one’s full legal title to the paper transferred but likewise enters into an
implied guaranty that the instrument will be duly paid
SPECIAL INDORSEMENT

Specifies the person to whom or to whose order the instrument is to
be payable
BLANK INDORSEMENT

One that doesn’t specify the person to whom or to whose order the
instrument is to be payable
NEGOTIATION, INDORSEMENT, DELIVERY, COMPARED.
1.
Indorsement is merely the first step in the process of negotiating
an instrument which is payable to order
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 3 of 190
2.
Where the instrument is payable to order, neither is delivery
equivalent to negotiation
3.
But where the instrument is payable to bearer, delivery is
equivalent to negotiation
PRESENTMENT FOR ACCEPTANCE

Exhibiting the bill to the drawee and demanding that he accept it, that
is, signify his assent to the order or command of the drawer
ACCEPTANCE

Signification of the drawee of his assent to the order of the drawer
DISHONOR BY ACCEPTANCE

Where the bill is presented for acceptance, and acceptance is refused
by the drawee, or cannot be obtained, or where presentment for
acceptance is excused, and the bill is not accepted
PRESENTMENT FOR PAYMENT

Consists of exhibiting the instrument to the person primarily liable
thereon and demanding payment form him on the date of maturity
DISHONOR BY NON-PAYMENT

Where the instrument is presented for payment and payment is
refused or cannot be obtained, or where presentment for payment is
excused and the instrument is overdue and unpaid
NOTICE OF DISHONOR

When an instrument has been dishonored by non-payment or nonacceptance
DISCHARGE
•
An instrument is discharged by payment in due course by or on behalf
of the principal debtor
PARTIES PRIMARILY AND SECONDARILY LIABLE
•
Under the NIL, 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
IN BILLS OF EXCHANGE
•
The acceptor is the one primarily liable
•
He is absolutely required to pay the instrument as he engages that he
will pay it according to the tenor of his acceptance
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
SECONDARY LIABILITY OF DRAWER
•
By the mere drawing of the instrument, the drawer assumes
liability stated in Section 61
•
The general tenor of the liability of the drawer is that he will pay
bill if the drawee doesn’t accept or pay the bill.
•
In other words, he is not absolutely required to pay the bill—if
drawee pays, then he is not required to pay. It is only when
drawee doesn’t pay that he will be required to pay.
the
the
the
the
SECONDARY LIABILITY OF INDORSER

He will pay the instrument if the person primarily liable will not pay.
SECONDARY LIABILITY OF ONE NEGOTIATING BY DELIVERY

By merely delivering an instrument payable to bearer, without saying
anything more, the person negotiating by mere delivery assumes the
liability mentioned in Section 65.

Under said section, the general tenor of liability is similar to that of an
indorser
IN PROMISSORY NOTES

The maker is primarily liable

Agreement of the maker is that he will pay the instrument according to
the tenor
FUNCTION OF NEGOTIABLE INSTRUMENTS
1. Substitute for money
2. Increase the purchasing medium in circulation
PAYMENT BY NEGOTIABLE INSTRUMENTS

W/N the giving and taking of a promissory note or bill of exchange is
prima facie absolute payment as in the case of money or merely a
prima facie conditional payment?

The delivery of the promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the effect of
payment only when they have been cashed, or when, through the fault
of the creditor, they have been impaired
PRINCIPAL FEATURES OF NEGOTIABLE INSTRUMENTS
1. Negotiability
2. Accumulation of secondary contracts as they are transferred from one
person to another
NEGOTIABILITY
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 4 of 190

Attribute or property whereby a bill, note or check passes or may pass
from hand to hand similar to money, so as to give the holder in due
course the right to hold the instrument and collect the sums payable
for himself free from defense.
PRIMARY PURPOSE OF NEGOTIABILITY

To allow bills and notes the effect which money, in the form of
government bills or notes, supplies in the commercial world
ACCUMULATION OF SECONDARY CONTRACTS

Most important characteristic of negotiable instruments is the
accumulation of secondary contracts which they pick up and carry with
them as they are negotiated from one person to another

Advantage: they improve as they pass from hand to hand, as more
debtors are added
NEGOTIABILITY VS. ASSIGNABILITY
ASSIGNABILITY
More comprehensive term and
pertains to contracts in general
Subject to the defenses obtaining
among the original parties
It was necessary to allege and
prove consideration to maintain an
action on a common law instrument
Assignor in good faith doesn’t
warrant the solvency of the debtor
unless it has been expressly
stipulated or unless the insolvency
was prior to the assignment and of
common knowledge
NEGOTIABILITY
Pertains only to a special class of
contracts—negotiable instruments
Takes it free from personal defenses
available among the parties
Consideration is presumed and need
not be alleged and proved
Indorser is not liable on his
indorsement
unless
there
be
presentment
for
payment
at
maturity and prompt notice of
dishonor in case of dishonor
General indorser is secondarily
liable for any cause for which the
party
primarily
liable
on
a
negotiable instrument doesn’t or
cannot pay.
He warrants the solvency of the
person primarily liable.
The
qualified indorser and the person
negotiating by mere delivery have a
limited secondary liability
Sec. 126. 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
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
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.
TYPES OF BILLS OF EXCHANGE
1. Draft
2. Trade acceptance
3. Banker’s acceptance
4. Treasury warrants
5. Money orders
6. Clean bills of exchange
7. Documentary bill of exchange
8. D/A bills of exchange
9. D/P bills of exchange
10. Time or usance bills
11. Bills in set
12. Inland bills
13. Foreign bills
DRAFT

Common term
synonymously
for
all
bills
of
exchange
and
they
are
used
IN BANK DRAFTS, DRAWER AND DRAWEE BANK ARE LIABLE TO
PURCHASER OF DRAFT FOR NOT COMPLYING WITH HIS INSTRUCTIONS

The drawee bank acting as “payor” bank is solely liable for acts not
done in accordance with the instructions of the drawer bank or of the
purchaser of the draft

The drawee bank has the burden of proving that it didn’t violate
TRADE ACCEPTANCE

A bill of exchange payable to order and at a certain maturity, drawn by
a seller against the purchaser of goods as drawee, for a fixed sum of
money, showing on its face the acceptance of the purchaser of goods
and that it has arisen out of a purchase of goods by the acceptor

A draft drawn by the seller on the purchaser of goods sold and
accepted by such purchaser

States upon its face that the obligation of the acceptor arises out of
purchase of goods from the drawer

Arises from credit obligations arising from the sale of goods and must
have a definite maturity
BANKER’S ACCEPTANCE
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 5 of 190



Draft of which the acceptor is a bank or banker engaged generally in
the business of granting banker’s acceptance credit
Similar to a trade acceptance
Drawn against the bank instead of the buyer
TRUST RECEIPT

The written or printed document signed by the entrustee in favor of
the entruster containing terms and conditions substantially complying
with the provisions of this decree

The legal title to the matter entrusted remains in the entruster but the
entruster gives to the trustee a form of title which is good and legal
against everybody except the entruster

Entrustee—the person having or taking possession of goods,
documents or instruments under a trust receipt transaction, and any
successor in interest of such person for the purpose or purposes
specified in the trust receipt agreement

Entruster—person holding title over the goods, documents, or
instruments subject of a TRA and any successor-in-interest of such
person
Sec. 184. Promissory note, defined.
A negotiable promissory note within the meaning of this Act 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. Where a note is drawn to the maker's own order, it is not
complete until indorsed by him.
SPECIAL TYPES OF PROMISSORY NOTES
1. Certificate of deposit
2. Bonds
3. Bank notes
4. Due bills
CERTIFICATE OF DEPOSIT

Written acknowledgement by a bank of the receipt of money on
deposit which the bank promises to pay to the depositor, bearer, or to
some other person or order
BONDS

A promise, under seal to pay money

More formal in character

Runs for a longer period of time

Issued under different legal circumstances
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
CLASSES OF BONDS
1. Mortgage bonds
2. Equipment bonds
3. Collateral trust bonds
4. Guaranteed bonds
5. Debentures
6. Income bonds
7. Convertible
8. Redeemable
9. Registered bonds
10. Coupon bonds
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.
REQUISITES AS TO A NEGOTIABLE NOTE
1.
It must be in writing and signed by the maker
2.
It must contain an unconditional promise to pay a sum certain in
money
3.
It must be payable on demand, or at a fixed or determinable
future time
4.
It must be payable to order or to bearer
REQUISITES AS TO A NEGOTIABLE BILL
1.
It must be in writing and signed by the maker
2.
It must contain an unconditional order to pay a sum certain in
money
3.
It must be payable on demand, or at a fixed or determinable
future time
4.
It must be payable to order or to bearer
5.
The drawee must be named or otherwise indicated therein with
reasonable certainty
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 6 of 190
THE INSTRUMENT MUST BE IN WRITING

There must be a writing of some kind, for if the instrument were not in
writing, there would be nothing to be negotiated or passed from hand
to hand
SUM PAYABLE MUST BE DEFINITE AND CERTAIN

The amount of money to be paid must be determinable by inspection
and must be stated plainly on the face of the instrument, and like the
denomination of money, must be started in the body of the instrument
THE INSTRUMENT MUST BE SIGNED BY THE MAKER OR DRAWER

Full name must be written

At least the surname should appear and generally, the signature
usually is by writing the signer’s name

But, where the name is not signed, the holder must prove that what is
written is intended as a signature of the person sought to be charged

Commonly, it is found in the lower part of the instrument. It could
also be signed anywhere as long as the maker or drawer acknowledges
the signature to be his own.
SUM MUST BE PAYABLE IN MONEY ONLY

Money is the one standard of value in actual business or more stable
standard of value

Legal tender—that kind of money which the law compels the creditor
to accept in payment of his debt when tendered by the debtor in the
right amount

But if authorized by law or consent of creditor, cash may be
substituted by other means, or may be check

Instrument need not be payable in legal tender
IF A BILL, IT MUST CONTAIN AN ORDER TO PAY
•
It is an instrument demanding right
•
Any words which are equivalent to order or which show the drawer’s
will that the money should be paid, are sufficient to make the
instrument a bill of exchange
INSTRUMENT MUST SPECIFY DENOMINATION

Instruments should express the specific denomination of money when
it is payable in the money of a foreign country in order that the courts
may be able to ascertain its equivalent value; otherwise, it is nonnegotiable
AN INSTRUMENT WITH AN EFFECT OF MERE AUTHORITY TO PAY

It is not negotiable because it is not an order to pay

“I hereby authorize you to pay P1000 to Pedro Cruz”
PAYABLE ON DEMAND OR ON A FIXED OR DETERMINABLE FUTURE TIME

On demand

At a fixed or determinable future time
EFFECT OF MERE REQUEST TO PAY

The instrument is not negotiable as it is not an order to pay but a
mere request to pay

“Please to let the bearer have P70 and place to my account and you
will oblige”
WHERE NO YEAR IS SPECIFIED

Neither payable on demand or on a fixed or determinable future time

Time of payment is not determinable as the year is not stated
EFFECT OF MERE WORDS OF CIVILITY

The mere fact that it contains words of civility or courtesy doesn’t
make it non-negotiable
WHERE INSTRUMENT IS A NOTE, IT MUST CONTAIN A PROMISE TO PAY
1.
It is enough that words of equivalent meaning are used
2.
The promise is implied from promissory words contained in the
instrument
THE PROMISE OR ORDER TO PAY MUST BE UNCONDITIONAL

It must not be subject to a condition

It must be unconditional and absolute
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
THE INSTRUMENT MUST BE PAYABLE TO ORDER OR TO BEARER

An instrument is not negotiable unless made payable to a person or
his order or bearer or unless words of the similar or equivalent import
are used such as assigns or assignees or holder
WHERE PAYABLE TO THE ORDER OF BEARER

Also negotiable

This was held to be payable to order

The payee of such an instrument is the bearer and it can only be
negotiated by his indorsement
WHERE PAYABLE TO A CERTAIN PERSON

Where the instrument is payable to a specified person, it’s not payable
to order

Payable to a certain person or his agent
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 7 of 190

Where payable to “bearer B”
THE DRAWEE MUST BE NAMED

Requirement that refers only to bills of exchange

Drawee’s name may be omitted and be filled in under implied authority
like any other blank

An acceptance may supply the omission of the designation
IMPORTANCE OF FORMALITIES

Essential for the security of the mercantile transactions

Distinguish the negotiable instrument from the ordinary
transferrable written contract
non-
NECESSITY OF COMPLIANCE WITH PROVISIONS

Where the instrument doesn’t conform with the requirements laid
down in Section 1, then it is not governed by NIL
DETERMINATION OF NEGOTIABILITY

By the provisions of the NIL, particularly Section 1 thereof

By considering the whole of the instrument

By what appears on the face of the instrument and not elsewhere
SECTION 1: CASE DIGESTS
1
CEBU INTERNATIONAL V. CA
316 SCRA 488
FACTS:
Petitioner is a quasi-banking institution involved in money market
transactions. Alegre invested with petitioner P500,000. Petitioner issued
then a promissory note, which would mature approximately after a month.
The note covered for Alegre’s placement plus interest. On the maturity of
the note, petitioner issued a check payable to Alegre, covering the whole
amount due. It was drawn from petitioner’s current account in BPI. When
the wife of Alegre tried to deposit the check, the bank dishonored the
check. Petitioner was notified of this matter and Alegre demanded the
immediate payment in cash. In turn, petitioner promised to replace the
check on the impossible premise that the first issued be returned to them.
This prompted Alegre to file a complaint against petitioner and petitioner in
turn, filed a case against BPI for allegedly unlawfully deducting from its
account counterfeit checks. The trial court decided in favor of Alegre.
ISSUE: W/N NIL is applicable to the money market transaction held
between petitioner and Alegre?
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
HELD:
Considering the nature of the money market transaction, Article 1249 of
the CC is the applicable provision should be applied. A money market has
been defined to be a market dealing in standardized short-term credit
instruments where lenders and borrowers don’t deal directly with each
other but through a middleman or dealer in the open market. In a money
market transaction, the investor is the lender who loans his money to a
borrower through a middleman or dealer.
In the case at bar, the transaction is in the nature of a loan. Petitioner
accepted the check but when he tried to encash it, it was dishonored. The
holder has an immediate recourse against the drawer, and consequently
could immediately file an action for the recovery of the value of the check.
Further, in 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 legal tender, and therefore cannot constitute valid tender of
payment.
2
ROMAN CATHOLIC OF MALOLOS V. IAC
191 SCRA 411
FACTS:
Petitioner was the owner of a parcel of land. It then entered into a
contract of lease agreement with Robes-Fransisco Realty for the parcel of
land.
The agreement was that there would be downpayment plus
installments with interest. Robes-Fransisco was then in default. Knowing
that it was in its payment of the installments, it requested for the
restructuring of the installment payments but was denied. It then asked
for grace period to pay the same and tendered a check thereafter. Such
was refused and the contract was cancelled.
HELD:
A check whether a manager’s check or ordinary check is not legal tender
and an offer of a check in payment of a debt is not valid tender of payment
and may be refused receipt by the obligee or creditor. As this is the case,
the subsequent consignation of the check didn't operate to discharge
Robes-Fransisco from its obligation to petitioner.
3
FACTS:
BPI EXPRESS CARD CORPORATION V. CA
292 SCRA 260
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 8 of 190
Marasigan was the holder of a BPI credit card. Due to his delinquency in
payment, immediate demand was given by BPI to pay account. Marasigan
issued a postdated check. The check was thereafter kept in custiody by
BPI and card was temporarily suspended.
And on a relevant date,
Marasigan after eating in Café Adriatico tried to use his card to pay but it
was dishonored.
HELD:
The issuance of the postdated check was not effective payment on the part
of Marasigan and thus, the bank was justified in suspending temporarily his
use of the credit card. A check is only a substitute for money and not
money, and the delivery of such instrument doesn't itself operate as
payment.
4
DEVELOPMENT BANK OF RIZAL V. SIMA WEI
219 SCRA 736
FACTS:
Sima Wei executed a promissory note in consideration of a loan secured
from petitioner bank. She was able to pay partially for the loan but failed
to pay for the balance. She then issued two checks to pay the unpaid
balance but for some unexplainable reason, the checks were not received
by the bank but ended up in the hands of someone else. The bank
instituted actions against Sima Wei and other people. The trial court
dismissed the case and the CA affirmed this decision.
HELD:
A negotiable instrument, of which a check is, is not only a written evidence
of a contract right but is 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. Section 16 provides that
every contract on a negotiable instrument is incomplete and revocable until
delivery of the instrument for the purpose of giving effect thereto. Thus,
the payee of the negotiable instrument acquires no interest with respect
thereto until its delivery to him. Delivery of an 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.
5
CF SHARP & CO., INC. V. NORTHWEST AIRLINES, INC.
381 SCRA 314
FACTS:
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Petitioner was authorized to sell tickets of Northwest Airlines-Japan, but
failed to remit the proceeds. This prompted NWA to file suit against
petitioner in Tokyo and judgment was rendered in its favor. Thereafter,
the RTC issued a writ of execution for foreign court’s decision. The
petitioner filed for certiorari, asserting it has already made partial
payments. The CA lowered the amount to be paid and included in its
decision that the amount may be paid in local currency at rate prevailing at
time of payment.
HELD:
Under RA 529, stipulations on the satisfaction of obligations in foreign
currency are void. Payments of monetary obligations, subject to certain
exceptions, shall be discharged in the currency which is the legal tender of
the Philippines. But since the law doesn't provide for the rate of exchange
for the payment of foreign currency obligations incurred after its
enactment, jurisprudence held that the exchange rate should be the
prevailing rate at time of payment. This law has been amended, allowing
payments for obligations to be made in currency other than Philippine
currency but then again, it failed to state what the exchange rate that
should be used. This being the case the jurisprudence regarding the use of
the exchange rate at time of payment shall be used.
6
TIBAJIA V. CA
223 SCRA 163
FACTS:
Tan filed a suit against spouses Tibaija. Decision was rendered in her
favor. She then filed a motion of execution for the amount deposited and
the cashier of RTC was garnished for the amount deposited therein by the
spouses. This prompted the spouses to deliver cash and check but Tan
refused to accept.
HELD:
A check is not valid legal tender and the creditor may validly refuse
payment by check.
7
CALTEX V. CA
12 SCRA 448
FACTS:
Security bank issued Certificates of Time Deposits to Angel dela Cruz. The
same were given by Dela Cruz to petitioner in connection to his purchase of
fuel products of the latter. On a later date, Dela Cruz approached the bank
manager, communicated the loss of the certificates and requested for a
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 9 of 190
reissuance. Upon compliance with some formal requirements, he was
issued replacements. Thereafter, he secured a loan from the bank where
he assigned the certificates as security.
Here comes the petitioner,
averred that the certificates were not actually lost but were given as
security for payment for fuel purchases. The bank demanded some proof
of the agreement but the petitioner failed to comply. The loan matured
and the time deposits were terminated and then applied to the payment of
the loan. Petitioner demands the payment of the certificates but to no
avail.
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 B E A R E R has deposited in this 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
HELD:
CTDs are negotiable instruments. 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 de la 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.
If it was really the intention of respondent bank to pay the amount to
Angel de la Cruz only, it could have with facility so expressed that fact in
clear and categorical terms in the documents, instead of having the word
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
"BEARER" stamped on the space provided for the name of the depositor in
each CTD. On the wordings of the documents, therefore, the amounts
deposited are repayable to whoever may be the bearer thereof. Thus,
petitioner's aforesaid witness merely declared that Angel de la Cruz is the
depositor "insofar as the bank is concerned," but obviously other parties
not privy to the transaction between them would not be in a position to
know that the depositor is not the bearer stated in the CTDs. Hence, the
situation would require any party dealing with the CTDs to go behind the
plain import of what is written thereon to unravel the agreement of the
parties thereto through facts aliunde. This need for resort to extrinsic
evidence is what is sought to be avoided by the Negotiable Instruments
Law and calls for the application of the elementary rule that the
interpretation of obscure words or stipulations in a contract shall not favor
the party who caused the obscurity.
The next query is whether petitioner can rightfully recover on the CTDs.
This time, the answer is in the negative. The records reveal that Angel de
la Cruz, whom petitioner chose not to implead in this suit for reasons of its
own, delivered the CTDs amounting to P1,120,000.00 to petitioner without
informing respondent bank thereof at any time. Unfortunately for
petitioner, although the CTDs are bearer instruments, a valid negotiation
thereof for the true purpose and agreement between it and De la Cruz, as
ultimately ascertained, requires both delivery and indorsement. For,
although petitioner seeks to deflect this fact, the CTDs were in reality
delivered to it as a security for De la Cruz' purchases of its fuel products.
Any doubt as to whether the CTDs were delivered as payment for the fuel
products or as a security has been dissipated and resolved in favor of the
latter by petitioner's own authorized and responsible representative
himself.
In a letter dated November 26, 1982 addressed to respondent Security
Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These
certificates of deposit were negotiated to us by Mr. Angel dela Cruz to
guarantee his purchases of fuel products." This admission is conclusive
upon petitioner, its protestations notwithstanding. Under the doctrine of
estoppel, an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person
relying thereon
8
FACTS:
TRADERS ROYAL BANK V. CA
269 SCRA 15
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 10 of 190
Filriters through a Detached Agreement transferred ownership to
Philfinance a Central Bank Certificate of Indebtedness. It was only through
one of its officers by which the CBCI was conveyed without authorization
from the company.
Petitioner and Philfinance later entered into a
Repurchase agreement, on which petitioner bought the CBCI from
Philfinance. The latter agreed to repurchase the CBCI but failed to do so.
When the petitioner tried to have it registered in its name in the CB, the
latter didn't want to recognize the transfer.
HELD:
The CBCI is not a negotiable instrument. The instrument provides for a
promise to pay the registered owner Filriters. Very clearly, the instrument
was only payable to Filriters. It lacked the words of negotiability which
should have served as an expression of the consent that the instrument
may be transferred by negotiation.
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.
This freedom in negotiability is totally absent in a certificate of
indebtedness as it merely acknowledges to pay a sum of money to a
specified person or entity for a period of time.
The transfer of the instrument from Philfinance to TRB was merely an
assignment, and is not governed by the negotiable instruments law.
The
pertinent question then is—was the transfer of the CBCI from Filriters to
Philfinance and subsequently from Philfinance to TRB, in accord with
existing law, so as to entitle TRB to have the CBCI registered in its name
with the Central Bank? Clearly shown in the record is the fact that
Philfinance’s title over CBCI is defective since it acquired the instrument
from Filriters fictitiously. Although the deed of assignment stated that the
transfer was for ‘value received‘, there was really no consideration
involved. What happened was Philfinance merely borrowed CBCI from
Filriters, a sister corporation. Thus, for lack of any consideration, the
assignment made is a complete nullity. Furthermore, the transfer wasn't in
conformity with the regulations set by the CB. Giving more credence to
rule that there was no valid transfer or assignment to petitioner.
9
INCIONG V. CA
257 SCRA 578
FACTS:
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
A promissory note was issued by petitioner together with 2 others jointly
and severally, to make them liable to PBC. Thereafter was a default on the
payment of the note. PBC proceeded against Inciong and in the action filed
by the bank, the court decided in its favor.
HELD:
Where the promissory note expressly states that the three signatures
therein are jointly and severally liable, any one or some or all of them may
be proceeded against for the entire obligation—the choice is left to the
solidary creditor to determine against whom he will enforce collection.
10
FIRESTONE TIRE V. CA
353 SCRA 601
FACTS:
Fojas Arca and Firestone Tire entered into a franchising agreement wherein
the former had the privilege to purchase on credit the latter’s products. In
paying for these products, the former could pay through special withdrawal
slips. In turn, Firestone would deposit these slips with Citibank. Citibank
would then honor and pay the slips. Citibank automatically credits the
account of Firestone then merely waited for the same to be honored and
paid by Luzon Development Bank.
As this was the circumstances,
Firestone believed in the sufficient funding of the slips until there was a
time that Citibank informed it that one of the slips was dishonored. It
wrote then a demand letter to Fojas Arca for the payment and damages
but the latter refused to pay, prompting Firestone to file an action against
it.
HELD:
The withdrawal slips, at the outset, are non-negotiable. Hence, the rule on
immediate notice of dishonor is non-applicable to the case at hand. Thus,
the bank was under no obligation to give immediate notice that it wouldn't
make payment on the subject withdrawal slips. Citibank should have
known that withdrawal slips are not negotiable instruments. It couldn't
expect then the slips be treated like checks by other entities. Payment or
notice of dishonor from respondent bank couldn't be expected immediately
in contrast to the situation involving checks.
In the case at bar, Citibank relied on the fact that LDB honored and paid
the withdrawal slips which made it automatically credit the account of
Firestone with the amount of the subject withdrawal slips then merely
waited for LDB to honor and pay the same. It bears stressing though that
Citibank couldn't have missed the non-negotiable character of the slips.
The essence of negotiability which characterizes a negotiable paper as a
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 11 of 190
credit instrument lies in its freedom to be a substitute for money.
withdrawal slips in question lacked this character.
The
this however, the jewelry was redeemed by a Tomasa de Leon who
presented the pawnshop ticket.
The withdrawal slips deposited were not checks as Firestone admits and
Citibank generally was not bound to accept the withdrawal slips as a valid
mode of deposit. Nonetheless, Citibank erroneously accepted the same as
such and thus, must bear the risks attendant to the acceptance of the
instruments. Firestone and Citibank could not now shift the risk to LDB for
their committed mistake.
HELD:
Having been informed by the petitioner and the police that jewelry pawned
to it was either stolen or involved in an embezzlement of the proceeds of
the pledge, pawnbroker became duty bound to hold the things pledged and
to give notice to the petitioner and authorities of any effort to redeem
them. Such a duty was imposed by Article 21 of the CC. The circumstance
that the pawn ticket stated that the pawn was redeemable by the bearer,
didn’t dissolve this duty. The pawn ticket wasn’t a negotiable instrument
under the NIL, nor was it a negotiable document of title under Article 1507
of the CC.
11
SESBRENO V. CA
222 SCRA 466
FACTS:
Petitioner made a placement with Philfinance. The latter delivered to him
documents, some of which was a promissory note from Delta Motors and a
post-dated check. The post-dated checks were dishonored. This prompted
petitioner to ask for the promissory note from DMC and it was discovered
that the note issued by DMC was marked as non-negotiable. As Sesbreno
failed to recover his money, he filed case against DMC and Philfinance.
HELD:
The non-negotiability of the instrument doesn’t mean that it is nonassignable or transferable. It may still be assigned or transferred in whole
or in part, even without the consent of the promissory note, since consent
is not necessary for the validity of the assignment.
In assignment, the assignee is merely placed in the position of the
assignors and acquires the instrument subject to all the defenses that
might have been set up against the original payee.
12
SERRANO V. CA
196 SCRA 107
FACTS:
Serrano bought some jewelry from Ribaya. Due to need of finances, she
decided to have the jewelry pawned. She instructed her secretary to do so
for her, which the secretary did but absconded after receiving the
proceeds. It is to be noted that the pawnshop ticket indicated that the
jewelry was redeemable “by presentation by the bearer.” Afterwards,
there was a lead on where the jewelry was pawned. An investigation was
done to verify the suspicion. The jewelry was to be sold in a public auction
then. The petitioner and police authorities informed the pawnshop owner
not to sell the jewelry as she was the rightful owner thereof. Despite of
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
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 attorney's fee, in case payment
shall not be made at maturity.
WITH INTEREST

The fact that the sum payable is to be paid with interest doesn’t render
the sum uncertain

Amount can easily be computed

When interest is stipulated but not specified, the legal interest shall be
used

Where there is no stipulation, the legal rate shall be paid when the
debtor incurs delay

Interest due shall earn legal interest from the time it is judicially
demaned, although the instrument may be silent upon this point
ESCALATION
AND
DEESCALATION
CLAUSE—FORMER
VALID
IF
ACCOMPANIED BY THE LATTER

May stipulate that the rate of interest agreed upon may be increased
in the event that the applicable maximum rate of interest is increased
by law or by the MB
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 12 of 190

Deescalation clause—stipulation in the agreement that the rate of
interest agreed upon shall be reduced if the maximum rate of interest
is decreased by law or by the MB
BY STATED INSTALLMENTS
1. Must be stated
2. The maturity of each installment must be fixed or determinable—
required in order to comply with the requisite that the instrument, if
not payable on demand, must be payable on a fixed or determinable
future time
BY STATED INSTALLMENTS, WITH ACCELERATION CLAUSE

Acceleration clause—“upon default in the payment of any installment,
the whole sum payable shall become due”

It hastens the payment of the whole note
WITH EXCHANGE

While the rate of exchange is not always the same and while it is
technically true that the resort must be had to extrinsic evidence to
ascertain what it is, yet the current rate of exchange between two
places at a particular date is a matter of common commercial
knowledge, or at least easily ascertained by anyone so that the parties
can always, without difficulty, ascertain the exact amount necessary to
discharge the paper

Applies only to instruments drawn in one country and payable in
another
SECTION 2: CASE DIGESTS
13
MEDEL V. CA
299 SCRA 481
FACTS:
Four loans were involved in this case.
The first loan was secured by the spouses Medel from Gonzales in the
amount of P50,000 wherein P3,000 was withheld by the latter as advance
interest. This was secured by a P/N.
The second loan obtained was for P90,000.
P84,000.
The spouses only received
The third loan was for P300,000 and this was secured by a real estate
mortgage.
The spouses failed to pay for the aforementioned three loans. This was
consolidated into one loan in the amount of P500,000. An additional
P60,000 was loaned to make the payable P500,000. This was covered with
a promissory note containing an accelaration clause. Again the spouses
failed to pay.
The appellate court modified the interest to be paid by saying that that the
interest should be 5.5% per month.
EXCHANGE

Difference in value of the same amount of money in different countries

Current rate or fixed rate
HELD:
The interest was exorbitant, iniquitous, and unconscionable and hence, it
contrary to morals, if not the law.
WITH COSTS AND ATTORNEY’S FEES

An instrument may thus stipulate that costs of collection and
attorney’s fees shall be paid by the debtor in addition to the principal
in case the instrument shall not be paid in maturity

Although the stipulation will make the sum after maturity uncertain, it
will not affect the certainty of the sum payable at maturity and
therefore, will not affect the negotiability of the instrument in which it
is stipulated
The interest should be lowered down.
NOTES FOR WEEK 2
JUNE 18 - 23, 2007
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
14
RADIOWEALTH FINANCE V. INTERNATIONAL CORPORATE
BANK
182 SCRA 862
FACTS:
The petitioner entered into a Credit Facilities agreement with Interbank.
This is secured by a promissory note, trust receipts, security
arrangements, which included provisions on payment of attorney’s fees and
costs of collection in case of default. The petitioner failed to pay. A
compromise agreement was entered into by the parties but this agreement
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 13 of 190
failed to include the attorney’s fees and costs of collection. The trial court
reduced the percentage of attorney’s fees in its decision.
HELD:
The courts may modify the attorney’s fees previously agreed upon where
the amount appears to be unconscionable and unreasonable. For the law
recognizes the validity of stipulations included in documents such as
negotiable instruments and mortgages with respect. The fees in this case
are reasonable and fair.
15
BACHRACH V. GOLINGCO
39 PHIL 139
FACTS:
Bachrach sold a truck to Golingco, which was secured by a promissory note
and a chattel mortgage on the truck. The promissory note provided that
there would be payment of 25% attorney’s fees.
HELD:
It may lawfully be stipulated in favor of the creditor that in the event that it
becomes necessary, by reason of the delinquency of the debtor, to employ
counsel to enforce payment of the obligation, a reasonable attorney’s fee
shall be paid by the debtor, in addition to amount due of principal and
interest. The legality of this stipulation, when annexed to the negotiable
instrument, is recognized by the NIL.
The courts have the power to limit the amount recoverable under a special
provision in a promissory note, whereby the debtor obligates himself to pay
a specified amount, or a certain per centum of the principal debt, in
satisfaction of attorney’s fees for which the creditor would become liable in
suing upon the note.
*Normally, if there is absence of any agreement as to attorney’s fees, then
the court would only grant nominal amounts.
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
instrument.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
But an order or promise to pay out of a particular fund is not
unconditional.
APPLICATION OF SECTION

Whether or not the indication of a particular fund or particular account,
or the statement of the transaction which gives rise to the instrument,
would make the promise or order conditional
INDICATION OF A PARTICULAR FUND

First case, the particular fund is not the direct source of the payment,
only the source of reimbursement

Unconditional—drawee pays the payee from his own funds and
afterwards, the drawee pays himself from the particular fund indicated


But an order or promise to pay out of a particular fund is not
unconditional—particular fund is the direct source of payment
Conditional—where the payment to the payee is directly from the
funds indicated, the payment is the subject to the condition that the
funds indicated are sufficient
PARTICULAR ACCOUNT TO BE DEBITED

The instrument is to be paid first and afterwards, the particular
account indicated will be debited

The payment is not subject to the sufficiency or adequacy of the
particular account to be debited
STATEMENT OF TRANSACTION

Instruments are not issued without any transaction upon which they
are based

Generally negotiable but a statement of transaction will render the
instrument non-negotiable where the promise or order to pay is made
subject to the conditions and terms of the transactions stated, then
the instrument is rendered non-negotiable
AS PER CONTRACT NOTES

The appearance of words “as per contract” on the face of the
instruments in any position doesn’t affect the negotiability of the
instrument
CHATTEL NOTES

A promissory note given for a chattel and stipulating that the title to
the chattel shall remain in the vendor-payee until the note is paid, is
not conditional
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 14 of 190
REFERENCE TO MORTGAGES

Provisions in the mortgage doesn’t affect the negotiability of the
instrument it secures

Where a note otherwise negotiable contains the words “this note is
secured by a mortgage” and the mortgage contains clauses promising
to do many acts other than the payment of money, it was held that
the note is not rendered non-negotiable
WHEN REFERENCE TO A MORTGAGE RENDERS INSTRUMENT NONNEGOTIABLE

When there is uncertainty in amount or when such provisions become
part of the note, even though they aren’t in the note itself, the
instrument is also rendered non-negotiable
SECTION 3: CASE DIGESTS
16
ABUBAKAR V. AUDITOR GENERAL
81 PHIL. 359
FACTS:
The auditor general refuses to authorize the payment of the treasury
warrant issued in the name of Placido Urbanes, now in the hands of
Benjamin Abubakar. The auditor general refuses to do so because, first,
the money available for redemption of treasury warrants was appropriated
by law and the subject warrant doesn’t fall within the purview of the law;
second, one of the requirements was not complied with, which is it must be
sworn that the holders of the warrant covering payment or replenishment
of cash advances for official expenditures received them in payment of
definite government obligations.
HELD:
Petitioner holds that he is a holder in good faith and for value of a
negotiable instrument and is entitled to the rights and privileges of a holder
in due course, free from defenses. But this treasury warrant is within the
scope of the NIL. For one thing, the document bearing on its face the
words “payable from the appropriation for food administration”, is actually
an order for payment out of a particular fund, and is not unconditional, and
doesn’t fulfill one of the essential requirements of a negotiable instrument.
17
METROPOLITAN BANK V. CA
194 SCRA 169
FACTS:
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Gomez opened an account with Golden Savings bank and deposited 38
treasury warrants. All these warrants were indorsed by the cashier of
Golden Savings, and deposited it to the savings account in a Metrobank
branch. They were sent later on for clearing by the branch office to the
principal office of Metrobank, which forwarded them to the Bureau of
Treasury for special clearing. On persistent inquiries on whether the
warrants have been cleared, the branch manager allowed withdrawal of the
warrants, only to find out later on that the treasury warrants have been
dishonored.
HELD:
The treasury warrants were not negotiable instruments. Clearly, it is
indicated that it was non-negotiable and of equal significance is the
indication that they are payable from a particular fund, Fund 501. This
indication as the source of payment to be made on the treasury warrant
makes the promise to pay conditional and the warrants themselves nonnegotiable.
Metrobank then cannot contend that by indorsing the warrants in general,
GS assumed that they were genuine and in all respects what they purport
it to be, in accordance to Section 66 of the NIL. The simple reason is that
the law isn’t applicable to the non-negotiable treasury warrants. The
indorsement was made for the purpose of merely depositing them with
Metrobank for clearing. It was in fact Metrobank which stamped on the
back of the warrants: “All prior indorsements and/or lack of endorsements
guaranteed…”
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.
“AFTER SIGHT”
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 15 of 190

After the drawee has seen the instrument upon presentment for
acceptance
I promise to pay B or his order P100 ten days after
sight.
Signed A
ACCELARATION NOTES

There are certain notes which contain acceleration provisions

Make it possible for the maker to pay the instrument at an earlier date
or make it possible for the holder to require payment of the instrument
at an earlier date
I promise to pay B or order P100 on or before July 1,
2007.
Signed A
*Type of acceleration note wherein the option to accelerate belongs to the
maker, in the above case is A.
EXAMPLES OR ILLUSTRATIONS OF ACCELARATION NOTES
1. That contain acceleration clauses on the maker’s default in payment of
installments or of interest, or on the happening of an extrinsic event
2. Or contain, in notes secured by collateral, a provision that the maker
shall supply additional collateral in case of depreciation in the value of
the original deposit, with the holder’s right to declare the note due
immediately on failure to make good the depreciation
a. Non-negotiable—time for payment becomes uncertain and
indefinite
b. It doesn’t render it non-negotiable—that from the standpoint
of expediency as encouraging circulation and of business
custom on account of their common acceptance by the
commercial world, such clauses should be interpreted as not
affecting negotiability
3. Or contain provisions for acceleration when holder deems himself
insecure
a. It is rendered non-negotiable where it is payable at a fixed
and future time, but with an option on the part of the holder
to declare it due and demandable before maturity whenever
he deems it insecure but to hold them non-negotiable is a
spurious construction of the Act
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
b.
It is rendered non-negotiable when the whole condition is
lodged to the holder—middle ground is so long as the basis is
dependent on factors not within the control of the holder,
then it would still be negotiable
WORD USED IS AFTER

The word used in the law is “after” and not before
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
(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
stipulation otherwise illegal.
shall
validate
any
provision
or
GENERAL RULE AS TO THE ADDITIONAL ACT

The general rule is that an instrument must not contain an order or
promise to do any act in addition to the payment of money.
Otherwise, the instrument wouldn’t be negotiable.
FOUR EXCEPTIONS TO THE GENERAL RULE
1. SALE OF COLLATERAL SECURITIES if the instrument be not paid at
maturity
2. Authorizes CONFESSION OF JUDGMENT if the instrument be not paid
at maturity
3. WAIVER OF BENEFIT OF LAW for the protection and benefit of the
obligor
4. Gives the HOLDER an election to require something to be done in lieu
of payment of money
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 16 of 190
PROMISE TO FURNISH ADDITIONAL SECURITY

A promise of the maker to render additional collateral will render the
note non-negotiable, as that would be an additional act to the promise
to pay money

However, they are to be distinguished from those instruments in which
the holder may demand collateral, and failure to furnish it accelerates
the instrument which are clearly negotiable, but merely accelerable on
the non-performance of an optional act
SALE OF COLLATERAL SECURITIES

The law gives exceptions to the general rule that “an instrument which
contains an order or promise to do any act in addition to the payment
of money is non-negotiable”

Sometimes, the obligation arising from the transaction which gives rise
to the instrument is secured by a mortgage or pledge

The additional act to be performed is to be executed after the date of
maturity, when the instrument c eases to be negotiable in the full
commercial sense

Before date of maturity, however,
the sale of collateral securities
would render the instrument non-negotiable
CONFESSION OF JUDGMENT

Must be after the date of maturity

Second exception to the rule
TWO CLASSES OF CONFESSION OF JUDGMENT
1. Cognovit actionem—a written confession of an action by the
defendant, subscribed but not sealed, and irrevocably authorizing any
attorney of any court of record to confess judgment and issue
execution usually for the sum named. It is given in order to save
expense and differs from a warrant of attorney, which is given to an
expressly designated attorney before the commencement of any action
and is under seal.
2. Confession relicta verificatione—confession of judgment made after
plea is pleaded
WARRANT OF ATTORNEY

Instrument in writing addressed to one or more attorneys named
therein, authorizing them, generally to appear in court, or in some
specified court on behalf of the person giving it, and to confess
judgment in favor of some particular person named therein in an
action for debt
EFFECT OF CONFESSION OF JUDGMENT IN THE PHILIPPINES
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
In the Philippines, a confession of judgment is considered void as it is
against public policy-1. Because they enlarge the field for fraud
2. Because under this treatment, the promissory bargains away his right
to a day in court
3. Because the effect of the instrument is to strike down the right to
appeal accorded by statute
WAIVER OF BENEFIT

Waives the benefit of any law intended for the advantage and
protection of the obligor

Examples: presentment for payment, notice of dishonor, protest
ELECTION OF HOLDER TO REQUIRE SOME OTHER ACT

Fourth exception to the rule

Even if there is an additional act, the instrument still remains to be
negotiable provided that the right to choose between payment of
money or the performance of the additional act is in the hands of the
holder
CASE DIGESTS: SECTION 5
18
NATIONAL BANK V. MANILA OIL REFINING
43 PHIL 444
FACTS:
Manila Oil has issued a promissory note in favor of National Bank which
included a provision on a confession of judgment in case of failure to pay
obligation. Indeed, Manila Oil has failed to pay on demand. This prompted
the bank to file a case in court, wherein an attorney associated with them
entered his appearance for the defendant. To this the defendant objected.
HELD:
Warrants of attorney to confess judgment aren’t authorized nor
contemplated by our law. Provisions in notes authorizing attorneys to
appear and confess judgments against makers should not be recognized in
our jurisdiction by implication and should only be considered as valid when
given express legislative sanction.
ATTY. MERCADO’S QUESTIONS:
1. What are the arguments for the validity of a confession of judgment?
2. One of the arguments is that the NIL acknowledges the validity of a
stipulation for a confession of judgment. Is this sufficient? The
answer is no.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 17 of 190
19
TRADERS INSURANCE V. DY ENG BIOK
104 PHIL 806
FACTS:
Dy Eng Giok was a provincial sales agent of distillery corporation, with the
responsibility of remitting sales proceeds to the principal corporation. He
has a running balance and to satisfy payment, a surety bond was issued
with petitioner as guarantor, whereby they bound themselves liable to the
distillery corporation.
More purchases was made by Dy Eng Giok and he was able to pay for
these additional purchases. Nonetheless, the payment was first applied to
his prior payables. A remaining balance still is unpaid. Thus, an action
was filed against sales agent and surety company.
Judgment was
rendered in favor of the corporation.
HELD:
The remittances of Dy Eng Giok should first be applied to the obligation
first contracted by him and covered by the surety agreement. First, in the
absence of express stipulation, a guaranty or suretyship operates
prospectively and not retroactively. It only secures the debts contracted
after the guaranty takes effect. To apply the payment to the obligations
contracted before the guaranty would make the surety answer for debts
outside the guaranty. The surety agreement didn't guarantee the payment
of any outstanding balance due from the principal debtor but only he would
turn out the sales proceeds to the Distileria and this he has done, since his
remittances exceeded the value of the sales during the period of the
guaranty.
Second, since the Dy Eng Biok’s obligations prior to the guaranty were not
covered, and absent any express stipulation, any prior payment made
should be applied to the debts that were guaranteed since they are to be
regarded as the more onerous debts.
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.
EFFECT OF OMISSION OF DATE

Even where the instrument is not dated, still the instrument is not
rendered non-negotiable

There are however instances, wherein the date is needed for the
instrument to become negotiable

When are these instances?
o
When it is payable in a period after date or after sight
o
When it is allowed to write the date… (Section 13)
ATTY. MERCADO: “WHEN IS DATING REQUIRED TO COMPLETE THE
INSTRUMENT?”
EFFECT OF OMISSION OF VALUE

Usually, what is stated in the instrument is that it is being used for
“value received” without specifying what that value is

Nevertheless, the absence of value given, doesn’t render the
instrument non-negotiable
PARTICULAR KIND OF MONEY

Even if the money in which the instrument is to be payable is not legal
tender, provided that it is current money or foreign money which has a
fixed value in relation to the money in the country in which the
instrument is payable, still the negotiability of the instrument is not
affected, as the instrument still is considered payable in money
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.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 18 of 190

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.
EXPRESSED TO BE PAYABLE ON DEMAND

An instrument is payable on demand where it is expressed to be
payable on demand, on sight, or on presentation

It is payable on demand also when no date of payment is specified

It is payable on demand when the time of payment is left blank or
unfilled
INSTRUMENT ON DEMAND ONLY AS BETWEEN THE PARTIES

That after the date of maturity, the instrument can no longer be
negotiated as to make the parties who acquire the instrument after the
date of maturity holders in due course because they become holders
thereof with notice that it is already overdue, as this can be
determined from the face of the instrument itself
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 therein with reasonable certainty.
WORDS OF NEGOTIABILITY

Among others, for an instrument to be negotiable, it should contain
words of negotiability

There are only 2 ways by which an 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 or delivered the same

Without the words “or order” or “to order of”, the instrument is
payable only to the person designated therein and therefore, is nonnegotiable
MEANING OF THE PHRASE “TO ORDER”
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Pay the payee or the person designated by the payee
NECESSITY OF NAMING THE PAYEE

The law requires that the payee must be named or otherwise indicated
with reasonable certainty

Must be a person in being, whether natural or legal, and ascertained at
the time of issue

If there is no named payee, where the instrument is payable to order,
no one could indorse the instrument. Consequently, it is useless to
consider it as negotiable.
WHERE THE BLANK FOR NAME OF PAYEE UNFILLED

Not payable to order because the payee is not named neither is he
designated with reasonable certainty
Pay to Y or order the amount of P100.
Sgd. A
To: X
Pay to the order of the President of Ateneo de Manila University on
June 20, 2010.
Sgd. A
To: X Corporation
CASE DIGESTS: SECTION 8
20
SALAS V. CA
181 SCRA 296
FACTS:
Petitioner bought a car from Viologo Motor Sales Company, which was
secured by a promissory note, which was later on indorsed to Filinvest
Finance, which financed the transaction. Petitioner later on defaulted in
her installment payments, allegedly due to the fraud imputed by VMS in
selling her a different vehicle from what was agreed upon. This default in
payment prompted Filinvest Finance to initiate a case against petitioner.
The trial court decided in favor of Filinvest, to which the appellate court
upheld by increasing the amount to be paid.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 19 of 190
It is the contention of petitioner that since the agreement between her and
the motor company was inexistent, none had been assigned in favor of
private respondent.
HELD:
Petitioner’s liability on the promissory note, the due execution and
genuineness of which she never denied under oath, is under the foregoing
factual milieu, as inevitable as it is clearly established.
The records reveal that involved herein is not a simple case of assignment
of credit as petitioner would have it appear, where the assignee merely
steps into the shoes of, is open to all defenses available against and can
enforce payment only to the same extent as, the assignor-vendor.
The instrument to be negotiable must contain the so-called words of
negotiability. There are only 2 ways for an instrument to be 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 thus non-negotiable. Any
subsequent purchaser thereof will not enjoy the advantages of being a
holder in due course but will merely step into the shoes of the person
designated in the instrument and will thus be open to the defenses
available against the latter.
In the case at bar, the promissory notes is earmarked with negotiability
and Filinvest is a holder in due course.
21
CONSOLIDATED PLYWOOD V. IFC
149 SCRA 448
FACTS:
Petitioner bought from Atlantic Gulf and Pacific Company, through its sister
company Industrial Products Marketing, two used tractors. Petitioner was
issued a sales invoice for the two used tractors. At the same time, the
deed of sale with chattel mortgage with promissory note was issued.
Simultaneously, the seller assigned the deed of sale with chattel mortgage
and promissory note to respondent. The used tractors were then delivered
but barely 14 days after, the tractors broke down.
The seller sent
mechanics but the tractors were not repaired accordingly as they were no
longer serviceable. Petitioner would delay the payments on the promissory
notes until the seller completes its obligation under the warranty.
Thereafter, a collection suit was filed against petitioner for the payment of
the promissory note.
HELD:
It is patent that the seller is liable for the breach in warranty against the
petitioner. This liability as a general rule extends to the corporation to
whom it assigned its rights and interests unless the assignee is a holder in
due course of the promissory note in question, assuming the note is
negotiable, in which case, the latter’s rights are based on a negotiable
instrument and assuming further that the petitioner’s defense may not
prevail against it.
The promissory note in question is not a negotiable instrument. The
promissory note in question lacks the so-called words of negotiability. And
as such, it follows that the respondent can never be a holder in due course
but remains merely an assignee of the note in question.
Thus, the
petitioner may raise against the respondents all defenses available to it
against the seller.
22
FACTS:
Two deeds of mortgages were issued by spouses Racho in favor of GSIS as
security for two loans obtained by them. They also executed a promissory
note. Due to the failure to comply with the terms of the mortgage, the
mortgages were extrajudicially foreclosed.
The foreclosure was being
assailed by the spouses as they alleged that the mortgage contracts were
signed not as guarantees or sureties but merely gave their common
property for the sole benefit of the other spouses. Both sides of the case
used the provisions on accommodation parties in the NIL.
The trial court dismissed the action but this was reversed by the appellate
court.
HELD:
Both parties rely on the NIL but this is misplaced. The promissory note
and the deeds of mortgage are not negotiable instruments as they lack the
fourth requisite which is it must be payable to order or bearer.
23
FACTS:
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
GSIS V. CA
170 SCRA 533
PECO V. SORIANO
39 SCRA 587
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 20 of 190
Montinola purchased money orders from the postal office. He issued a
personal check to pay for the money orders and since it is irregular to have
checks as payments, he was advised to see the Chief of the Money Order
Division. He didn’t do so but left the office with the money orders and the
check. A notice was thereafter issued to all post offices as well as the Bank
of America, about the irregularly issued money orders and the order not to
accept such orders.
Plaintiff was one of those who received the subject money orders and
encashed it with the Bank of America. At first, it was given the money but
later on, his account was debited in pursuance of the letter given by the
Chief.
HELD:
Postal money orders are not negotiable instruments. In establishing and
operating a postal money order system, the government is not engaged in
commercial transactions but merely exercises a governmental power for
the public benefit. Moreover, some restrictions imposed money orders by
postal laws and regulations are inconsistent with the character of
negotiable instruments.
24
EQUITABLE BANKING V. IAC
161 SCRA 518
FACTS:
Nell Company issued a check to help Casals and Casville Enterprises obtain
a letter of credit from Equitable Banking in connection with equipment, a
garrett skidder, which Casals and Casville were buying from Nell. Nell
indicated the payee as follows “EQUITABLE BANKING CORPORATION A/C
CASVILLE ENTERPRISES INC.”
Casals deposited the check with the bank and the bank teller accepted the
same and in accordance with customary bank practice, stamped in the
check the words “non-negotiable”. The amount was withdrawn after the
deposit.
This prompted Nell to file a case against the bank, Casals and Casville.
While the instant case was being tried, Casals and Casville assigned the
garrett skidder to plaintiff which credited in favor of defendants the amount
of P450,000, as partial satisfaction of its claim against them.
HELD:
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Equitable is not liable to Nell. Nell should bear the loss as it was through
its own acts, which put it into the power of Casals and Casville Enterprises
to perpetuate the fraud against it.
The check wasn’t initially non-negotiable. Neither was it cross-checked.
The rubber-stamping transversally on the face of the check was only made
the bank teller in accordance with customary bank practice, and not by Nell
as the drawer of the check, and simply meant that thereafter the same
check could no longer be negotiated.
The payee was not indicated with reasonable certainty in contravention of
Section 8. As worded, it could be accepted as deposit to the account of the
party named therein after the symbols of A/C, or payable to the bank as
trustee, or as an agent, for Casville 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
(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.
PAYABLE TO THE ORDER OF A FICTITIOUS OR NON-EXISTENT PERSON
1. The payee named must be fictitious or non-existent
2. The one making the instrument so payable must know him to be
fictitious or non-existing
FICTITIOUS PERSON

Not limited to persons having no real existence

To be a person who has no right to the instrument because the drawer
or maker of it so intended, and therefore, it doesn’t matter whether
the name of the payee used by the drawer or drawee be that of the
living or the dead, or one who never existed
EXISTING PAYEE INTENDED TO RECEIVE PROCEEDS; NOT PAYABLE TO
BEARER
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 21 of 190

A negotiable paper made payable to the name of an existing person
known or believed by the maker or drawer to be existing, with intent
that he should receive it or its proceeds, or that it be paid to him or
upon his indorsement, IS NOT PAYABLE TO A FICTITIOUS PAYEE OR
TO BEARER, although as a matter of fact such person has no interest
in the paper and it was procured by fraud of a third person or of the
maker’s or drawer’s employee or agent whose knowledge or intent is
not imputable to the principal or employer, and cashed by the person
having possession upon the forged instrument of the payee
NON-EXISTING PAYEE, OR ONE WITHOUT INTEREST, BUT BELIEVED
EXISTING OR WITH INTEREST, AND INTENDED TO RECEIVE PROCEEDS;
NOT PAYABLE TO BEARER
NON-EXISTING PAYEE, OR ONE WITHOUT INTEREST, KNOWN OR
BELIEVED NON-EXISTING NOT INTENDED TO RECEIVE PROCEEDS;
PAYABLE TO BEARER
PERSON TO WHOM THE FICTITIOUS OR NON-EXISTING CHARACTER OF
PAYEE MUST BE KNOWN

The drawer drawing a bill or the maker making a note is the person to
whom the fictitious or non-existing character of the payee must be
known

Where the instrument is drawn or made by an agent or prepared by an
employee with the maker or drawer signing only, the question arises
as to whose intent should control

Another difficulty: who is the person who makes the instrument
payable to the payee—the clerk or the treasurer?

Agbayani’s view: that the signer does after all create the instrument
and should determine who owns it
WHERE AGENT HAS NO AUTHORITY TO EXECUTE INSTRUMENT

The knowledge of the principal or employer is controlling, and if he
doesn’t have any knowledge of the fictitious or non-existing character
of the payee, the knowledge of the employee or the agent will not
avail to call into application as to fictitious payees and the instrument
will not be considered as payable to bearer
NAME OF PAYEE NOT NAME OF PERSON

Pay to cash

Pay to the order of money

Pay to the order of cash
WHERE PAYABLE TO THE ESTATE OF A DEAD PERSON
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010


It has been held to be payable to bearer
Agbayani: estate is a juridical person in a limited way and thus it
shouldn’t be payable to bearer
CASE DIGESTS: SECTION 9
25
ANG TEK LIAN V. CA
87 PHIL 383
FACTS:
Knowing he had insufficient funds, Ang Tek Lian issued a check for P4000,
payable to cash. This was given to Lee Hua Hong in exchange for cash.
Upon presentment of the check, it was dishonored for having insufficient
funds. It is argued that the check, being payable to cash, wasn’t indorsed
by the defendant, and thus, isn’t guilty of the crime charged.
HELD:
A check drawn to the order of “cash” is payable to bearer, and the bank
may pay it to the person presenting it for payment without the drawer’s
indorsement. Of course, if the bank is not sure of the bearer’s identity or
financial solvency, it has the right to demand for identification and/or
assurance against possible complications—for instance, forgery of the
drawer’s signature, loss of the check by the rightful owner, raising the
amount payable, etc. The bank therefore, requires for its protection that
the indorsement of the drawer—or some other persons known to it—be
obtained. A check payable to bearer is authority for payment to the
holder. Where a check is in the ordinary form and is payable to bearer so
that no indorsement is required, a bank to which it is presented for
payment need not have the holder identified, and is not negligent in failing
to do so.
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.
CASE DIGESTS: SECTION 10
26
JIMENEZ V. BUCOY
103 PHIL 40
FACTS:
In the intestate of the estate of spouses Young, Jimenez presents a
promissory note signed by Pacita Young for different amounts totaling
P21,000. The administrator is willing to pay the promissory note on the
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 22 of 190
premise that the amount be adjusted. Claimant assails the adjustment and
hence, she instituted a case for collection of sum of money.
*Note: “6 months after the war”
HELD:
The administrator calls attention to the fact that the notes contained no
express promise to pay for a certain amount. This is without merit. An
acknowledge may become a promise to pay by the addition of words by
which a promise of payment is naturally implied, such as “payable”,
“payable” on a given date, “payable on demand”, “paid…when called for”.
To constitute a good promissory note, no precise words of contract are
necessary, provided they amount, in legal effect, a promise to pay.
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.
WHEN DATE NECESSARY

Under Section 6, the insertion of date is unnecessary

However, it may be necessary to determine the date of maturity

In the following cases, the date is also necessary:
o
Where interest is stipulated, to determine when interest is to
run, but not to make the instrument negotiable
o
To determine where a party has acted within a reasonable
time, but not make the instrument negotiable
INSTRUMENT PAYABLE AT A FIXED PERIOD AFTER DATE
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.
APPLICATION OF SECTION 11
1. The instrument contains the date of issue—prima facie the true date of
the making or drawing of the instrument
2. In an accepted bill of exchange, the acceptance is dated—prima facie
the date of acceptance
3. An instrument is indorsed, and the indorsement is dated—prima facie
date of indorsement
PRIMA FACIE

Evidence produces for the time being a certain result but that result
may be repealed by contrary evidence

Apparent, as it first appears
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.
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
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
(UNDATED)
I PROMISE TO PAY TO B OR ORDER P1000, 60 DAYS AFTER DATE.
SGD. A
EFFECT OF INSERTION OF WRONG DATE

Knowingly inserting the wrong date in an undated instrument will
avoid it as to the party so inserting the wrong date

It is implied that the instrument void as to the person who knowingly
inserted the wrong date

Also, under Section 12, it is void for ante-dating an instrument for
fraudulent purposes

To a holder in due course, the instrument is not void, after the
instrument is indorsed to him. The insertion of the wrong date doesn’t
avoid the instrument in the hands of a holder in due course.
CASE DIGESTS: SECTIONS 12 TO 13
27
PACHECO V. CA
319 SCRA 595
FACTS:
Due to dire financial needs of petitioner spouses who were engaged in the
construction business, they secured loans from Vicencio. At every loan
secured, the lender compelled the spouses to issue an undated check
despite the admission of spouses that their bank account has insufficient
funds or as on a later date, already closed. Lender assured them that the
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 23 of 190
issuance of the check was only evidence of indebtedness, that it would not
be presented to the bank, and it would be for formalities only. On the date
wherein there was an unpaid balance to the loans secured by the spouses,
the lender had them place a date on two of the later checks issued.
Surprised later on, the spouses were charged with estafa as the checks
were presented for encashment and was dishonored.
HELD:
BY MUTUAL AGREEMENT OF THE PARTIES, THE NEGOTIABLE CHARACTER
OF A CHECK MAY BE WAIVED AND THE INSTRUMENT BE SIMPLY TREATED
AS PROOF OF AN OBLIGATION. There cannot be deceit on the part of the
spouses because they agreed with the lender at the time of the issuance
and postdating of the checks that the same shall not be encashed or
presented to the bank. As per assurance of the lender, the checks are
nothing but evidence of the loan or security thereof in lieu of and for the
same purpose as a promissory note.
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.
ILLUSTRATION

Authority was only to fill in the blank for an amount not more than
P100; before it was complete, the instrument was given to B.
I promise to pay B or order P400 on June 20, 2010.
Sgd. A

For it to be enforceable against the next holder, the completion must
be strictly in accordance with the authority given and within a
reasonable time.
ILLUSTRATION #2

One sees Manny Pacquiao in person and has a blank sheet of paper
signed by Pacquiao. He then filled it up to show the following:
I promise to pay Jonathan Nepomuceno or order P10,000.
Sgd. Manny Pacquiao

For the above to be a valid negotiable instrument, it should have been
delivered by the person signing the instrument with the intent of
converting the blank paper into a negotiable instrument.
SCOPE OF SECTION 14

There are 2 steps in the execution of a negotiable instrument—
o
The act of writing the instrument completely and in
accordance with Section 1 of the NIL
o
The delivery of the instrument with the intention of giving
effect to it
THE MATERIAL PARTICULAR REFERRED TO IN THIS PROVISION MAY BE—
1. A particular the omission of which will render the instrument nonnegotiable
2. A particular the omission of which will not render the instrument nonnegotiable
FACTS FROM WHICH PRIMA FACIE AUTHORITY PRESUMED
1. Want of a material particular in the instrument
2. Possession thereof by a person, a third fact
3. That such person had authority to fill up the blank
THE LAW PRESUMES THE EXISTENCE OF AUTHORITY TO FILL THE
INSTRUMENT UP TO ANY AMOUNT FROM THE FOLLOWING FACTS
1. A signature on blank paper
2. That the person signing in blank delivers it in order that the paper may
be converted into a negotiable instrument
REQUISITES TO HOLD PRIOR PARTIES LIABLE
1. The blank must be filled strictly in accordance with the authority given
2. It must be filled up within a reasonable time
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 24 of 190
RIGHT OF HOLDER OF DUE COURSE WHERE BLANK WRONGFULLY FILLED

First view: One who is not a holder in due course cannot enforce the
instrument if the same is not filled up strictly in accordance with the
authority given or within reasonable time

Second view: the holder can enforce the instrument accordance with
the authorized tenor

According to Agbayani, the better view is the first view is the better
view to have. The law provides that in order be one who is not a
holder in due course may enforce mechanically incomplete but
delivered instrument, the two requisites must exist. The implication is
that one or both are not present, the instrument may not be enforced.
REASONABLE TIME

Regard is had to the nature of the instrument, the usage of trade or
business with respect to such instrument and the facts of the particular
case

Term is very relative
PERSONAL DEFENSE

Defense available only to holders who are not holders in due course
SUMMARY OF RULES WHEN INSTRUMENT IS INCOMPLETE BUT DELIVERED
1. Where the holder is a holder in due course, he can enforce the
instrument as completed against parties prior or subsequent to the
completion
2. Where the holder is not a holder in due course, he can enforce the
instrument as completed as against the parties subsequent to the
completion but not against those prior thereto
NOTES FOR WEEK #3 :
JUNE 26 - JUL Y 1, 2007
CASE DIGESTS: SECTION 14
28
REPUBLIC PLANTERS BANK V. CA
219 SCRA 736
FACTS:
Yamaguchi and Canlas are officers of the Worldwide Garment
Manufacturing, which later changed its name to Pinch Manufacturing. They
were authorized to apply for credit facilities with the petitioner bank. The
two officers signed the promissory notes issued to secure the payment of
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
the obligations. Later, the bank instituted an action for collection of
money, impleading also the two officers. The trial court held the two
officers personally liable also.
HELD:
Canlass is solidarily liable on each of the promissory notes to which his
signature appears.
The promissory notes in question are negotiable
instruments and thus, governed by the NIL.
Under the NIL, persons who write their names in the instrument are
makers are liable as such. By signing the note, the maker promises to pay
to the order of the payee or any holder the tenor of the obligation. Based
on the above provisions of the law, there is no denying that Canlass is one
of the co-makers of the promissory note.
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.
APPLICATION OF PROVISION

Section applies to an incomplete and undelivered instrument
INSTRUMENT NOT VALID AGAINST PARTY BEFORE DELIVERY

Situation: A signs a blank check, which was subsequently stolen by B
and fills up the amount and a fictitious name as payee. He then
indorses the same to C, C to D, D to E, and E to F. Can F enforce the
instrument against A?

The answer is NO, because against A, whose signature was placed on
the check prior to delivery, the instrument is not valid.

The answer would still be the same in case F was a holder in due
course. Why? The law doesn’t discriminate on what kind of holder.

However, the invalidity of the instrument is only with reference to
parties whose signature appears in the same prior to delivery. As to
parties whose signature appears after delivery, it may be valid.
IT IS A REAL DEFENSE

The possible defense of a party whose signature appears on an
instrument prior to delivery is that, as against him, the instrument is
not valid for having been incomplete and undelivered

Want of delivery of a mechanically incomplete instrument—defense
that cannot only be interposed against one who is not a holder in due
course but also a holder in due course
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 25 of 190
DELIVERY IS NOT CONCLUSIVELY PRESUMED WHERE INSTRUMENT IS
INCOMPLETE

Section 15 and 16 read together
BUT DELIVERY PRESUMED PRIMA FACIE

But where an incomplete and undelivered instrument is in the hands of
a holder in due course, there is prima facie presumption of delivery
which the maker may rebut by proof of non-delivery

Where the custody of an incomplete instrument has been entrusted to
another, who wrongfully completes and negotiates it to a holder in due
course, delivery to an agent or custodian is a sufficient delivery to bind
the drawer or maker.
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.
SCOPE OF SECTION

Applies to an instrument mechanically complete but undelivered
UNDELIVERED INSTRUMENT IS INCOMPLETE

Every contract on a negotiable instrument is incomplete and revocable
until delivery of the instrument for the purpose of giving effect thereto
DELIVERY AND ISSUE

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

Issue—the first delivery of the instrument, complete in form, to a
person who takes it as a holder
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
OUTLINE OF RULES ON DELIVERY OF NEGOTIABLE INSTRUMENTS
1. Delivery is essential to the validity of any negotiable instrument
2. As between immediate parties, or those in like cases, delivery must
have been with the intention of passing title
3. An instrument signed by the drawer/maker but not completed by him
and retained in his own custody, is invalid as to him for want of
delivery, even though stolen or negotiated to a holder in due course
4. But when the instrument mentioned above is in the hands of a holder
of due course, there is prima facie presumption of delivery which the
maker/drawer may rebut by proof of non-delivery
5. Where the custody of the incomplete instrument has been entrusted to
another, who wrongfully completes and negotiates it to a holder in due
course, delivery to an agent or custodian is sufficient delivery to bind
the drawer or maker
6. Where maker or drawer executes a complete instrument which is
found in the possession of another other than a holder in due course,
there is a prima facie presumpton of delivery—but subject to rebuttal
7. Where the instrument mentioned above is in the hands of a holder in
due course, there is a conclusive presumption of delivery
8. Delivery of the instrument may be made on a parol condition or for a
special purpose not inconsistent with its written terms, where the
validity of the instrument is to arise out of the performance of the
condition or consummation of the purpose. But such condition or
specification or purpose doesn't affect the rights of a holder in due
course. Such conditions is a condition precedent, and is to be sharply
distinguished from a condition subsequent, the happening or nonhappening of which is to defeat or qualify the instrument. Such
condition subsequent contradicts the written terms and may not be set
up by parol evidence.
RIGHT TO REVOKE

Before delivery, the maker or drawer can revoke, cancel, or tear up
the instrument
LITERAL MEANING OF IMMEDIATE AND REMOTE PARTIES

The drawer and payee are immediate parties to one another

Maker and payee are immediate parties to one another

Indorser and indorsee are also immediate parties to one another
BROAD MEANING OF IMMEDIATE AND REMOTE PARTIES

Immediate parties are confined to “those who are immediate, in the
sense of knowing or being held to know the conditions or limitations
placed upon the delivery of the instrument—privity and not proximity
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 26 of 190

Criterion: W/N the party in question knows of the conditions or
limitations placed upon the delivery of the fact that the instrument was
not delivered but stolen..
o
If the party in question knows, he is an immediate party even
if he is not physically remote
o
If he doesn’t know, he is not an immediate party even if he is
the next party immediately
PRESUMPTION OF VALID DELIVERY AS TO IMMEDIATE PARTY OR REMOTE
PARTY NOT HOLDER IN DUE COURSE

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

Presumption is however rebuttable
DELIVERY FOR SPECIAL PURPOSES

For safekeeping or for collection only
PRESUMPTION OF DELIVERY AS TO HOLDER IN DUE COURSE

Conclusively presumed

There is conclusive presumption where the contrary proof is barred
PERSONAL DEFENSE

The possible defense of a party sought to be charged is that the
instrument wasn't delivered, or if delivered, the delivery wasn't
authorized or only on a condition or for a special purpose

“Want of delivery of a mechanically complete instrument” defense

It can however be interposed against an immediate party and
remote parties not holders in due course inasmuch as the
presumption of valid and intentional delivery is only rebuttable as
to immediate parties and to remote parties who are not holders in
due course

Only personal defense
CONCLUSIVE
PRESUMPTION
INSTRUMENTS
NOT
APPLICABLE
TO
INCOMPLETE
DEFENSES UNDER THE SECOND SENTENCE OF SECTION 16
1. It wasn’t delivered either by or under the authority of the party
making, delivering, accepting or indorsing the instrument
2. It was for a conditional purpose
3. It was for a special purpose only
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
IT IS A PERSONAL DEFENSE IF IT IS AVAILABLE ONLY
AGAINST A PERSON WHO IS NOT A HOLDER IN DUE
COURSE.
IT IS A REAL DEFENSE IF IT IS AVAILABLE AGAINST ANY
HOLDER.
CASE DIGESTS: SECTION 16
29
MANUEL LIM V. COURT OF APPEALS
251 SCRA 408
FACTS:
Spouses Lim were charged with estafa and violations of BP22 for allegedly
purchasing goods from Linton Commercial Corporation and issuing checks
as payment thereof.
The checks when presented to the bank were
dishonored for insufficiency of funds or the payment for the checks has
been stopped.
HELD:
It is settled that venue in criminal cases is a vital ingredient of jurisdiction.
It shall be where the crime or offense was committed or any one of the
essential ingredients thereof took place. In determining the proper venue
for these cases, the following are material facts—the checks were issued at
the place of business of Linton; they were delivered to Linton at the same
place; they were dishonored in Kalookan City; petitioners had knowledge of
the insufficiency of funds in their account.
Under Section 191 of the NIL, issue means the first delivery of the
instrument complete in its form to a person who takes it as holder. The
term holder on the other hand refers to the payee or indorsee of a bill or
note who is in possession of it or the bearer thereof. The important place
to consider in the consummation of a negotiable instrument is the place of
delivery. Delivery is the final act essential to its consummation as an
obligation.
30
PEOPLE V. GROSPE
157 SCRA 154
FACTS:
Parolan was an authorized wholesale dealer of SMC. He was charged with
violations of BP22 and estafa for allegedly issuing checks in favor of SMC
but when the check was presented, it was dishonored for having
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 27 of 190
insufficiency funds. This is even more aggravated by the allegation that
Paralan failed to make good the check to the prejudice of SMC.
HELD:
Estafa by postdating or issuing a bad check may be a transitory or
continuing offense. Its basic elements of deceit and damage may arise
independently in separate places. In this case, it did and jurisdiction may
be conferred in any of the two places wherein the two elements arose.
For while the subject check was issued in Bulacan, it wasn't completely
drawn thereat, but in Pampanga. What is of decisive importance is the
delivery thereof. The delivery of the instrument is the final act essential to
its consummation as an obligation. For although the check was received
by the SMC Supervisor in Bulacan, that was not delivery in the
contemplation of law. The rule is that the issuancve as well as the delivery
of the check must be to a person who takes it as a holder, which means
the payee or indorser of a bill or note, who is in possession of it, or the
bearer thereof. The said representative had to forward the check to the
SMC regional office, who thereafter forwarded it to the Finance Officer and
later on to the depository bank.
31
DELA VICTORIA V. BURGOS
245 SCRA 374
FACTS:
Sesbreno filed a case against Mabanto Jr. among other people wherein the
court decided in favor of the plaintiff, ordering the defendants to pay
former a definite amount of cash. The decision had become final and
executory and a writ of execution was issued. This was questioned in the
CA by the defendants. In the meanwhile, a notice of garnishment was
issued to petitioner who was then the City Fiscal. She was asked to
withhold any check or whatnot in favor of Mabanto Jr. The CA then
dismissed the defendant’s petition and the garnishment was commenced
only to find out that petitioner didn't follow instructions of sheriff. She is
now being held liable.
HELD:
Garnishment is considered as the species of attachment for reaching
credits belonging to the judgment debtor owing to him from a stranger in
litigation. Emphasis is laid on the phrase belonging to the judgment debtor
since it is the focal point of resolving the issues raised.
As Assistant City Fiscal, the source of Mabanto’s salary is public funds.
Under Section 16 of the NIL, every contract on a negotiable instrument is
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
incomplete and revocable until delivery of the instrument for the purpose
of giving effect thereto. 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.
The petitioner is the custodian of the checks. Inasmuch as said checks
were in the custody of the petitioner and not yet delivered to Mabanto,
they didn't belong to him and still had the character of public funds. The
salary check of a government officer or employee doesn't belong to him
before it has been 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.
*If public funds would be allowed to be garnished, then basic services of
the government may be hampered.
32
DEVELOPMENT BANK OF RIZAL V. SIMA WEI
219 SCRA 736
FACTS:
Sima Wei executed a promissory note in consideration of a loan secured
from petitioner bank. She was able to pay partially for the loan but failed
to pay for the balance. She then issued two checks to pay the unpaid
balance but for some unexplainable reason, the checks were not received
by the bank but ended up in the hands of someone else. The bank
instituted actions against Sima Wei and other people. The trial court
dismissed the case and the CA affirmed this decision.
HELD:
A negotiable instrument, of which a check is, is not only a written evidence
of a contract right but is 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. Section 16 provides that
every contract on a negotiable instrument is incomplete and revocable until
delivery of the instrument for the purpose of giving effect thereto. Thus,
the payee of the negotiable instrument acquires no interest with respect
thereto until its delivery to him. Delivery of an 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.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 28 of 190
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;
*In this case, the sum payable is P12,345, following the rule that when the
words are ambiguous or uncertain, reference may be had to the figures to
fix the amount.
I promise to pay B or order the sum of one two three four five (P12,345)
on June 27, 2008 with interest.
Sgd. AA
*The interest should run on the date of instrument but if it is undated, then
it will reckon on the date of issue.
CASE DIGESTS: SECTION 17
(c) Where the instrument is not dated, it will be considered to
be dated as of the time it was issued;
33
(d) Where there is a conflict between the written and printed
provisions of the instrument, the written provisions prevail;
FACTS:
Complainant was a radio commentator who interviewed the two accused
regarding their marketing business, which solicits funds from the general
public, promising an 800% profit. The latter induced the complainant to
invest in the business, in the process thereof, issued a postdated check
wherein the amount in figures was P1,200,000 and the amount in words
was P1,000,200. The check when presented in the bank was dishonored
and the accused refused to redeem or pay the check. This prompted the
complainant to file a case of estafa against the accused to which they were
found guilty of.
(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.
WHEN SECTION APPLICABLE

Rules stated in this section shall not be availed of if the terms of the
instrument in question is clear and admit of no doubt

Applicable only when the instrument in question is ambiguous,
doubtful or obscure, or when there are omissions therein that the
I promise to pay B or order the sum of one two three four five (P12,345)
Sgd. AA
HELD:
Accused tried to contend that if the trial court followed the admission and
stipulation of facts submitted by them, it would prove that there was
sufficient funds. The check had a discrepancy between the amount in
figures and in words.
Following NIL, the check was issued for
P1,000,200—meaning that this could be validly supported by their
business’ funds.
Nonetheless, this is misplaced since this rule of
interpretation finds no room in this case. The agreement was perfectly
clear that at the end of 21 days, the investment of complainant would
increase by 800% or P1,200,000.
34
FACTS:
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
PEOPLE V. ROMERO
306 SCRA 90
PNB V. CONCEPCION MINING
115 PHIL 723
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 29 of 190
A case for collection of a sum of money was filed against defendants in
connection with a promissory note they issued with others.
The
defendants move that since their co-makers have died, claim should be
also against the estates of such. This was denied by the court.
HELD:
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. By virtue of this provision found in Section 17, and as the
promissory note was executed jointly and severally by the parties, the
payee of the promissory note had the right to hold any one of the them
responsible for the payment of the amount of the note.
35
REPUBLIC PLANTERS BANK V. COURT OF APPEALS
216 SCRA 738
FACTS:
Yamaguchi and Canlas are officers of the Worldwide Garment
Manufacturing, which later changed its name to Pinch Manufacturing. They
were authorized to apply for credit facilities with the petitioner bank. The
two officers signed the promissory notes issued to secure the payment of
the obligations. Later, the bank instituted an action for collection of
money, impleading also the two officers. The trial court held the two
officers personally liable also.
HELD:
Canlass is solidarily liable on each of the promissory notes to which his
signature appears.
The promissory notes in question are negotiable
instruments and thus, governed by the NIL.

A person whose signature doesn’t appear on the instrument is not
liable
EXCEPTIONS TO THE GENERAL RULE
1. Where a duly authorized agent signs for a person, the person is liable
2. Where a person sought to be charged forges the signature of another
person, the forger is liable even if his signature doesn’t appear thereon
3. Where a person sought to be charged signs on a paper separate from
the instrument itself, as in an allonge, although the allonge may be
considered a part of the instrument, or where an acceptance is written
on a paper other than the bill itself
4. Where the person uses an assumed name or trade name—one may
become a party to a negotiable instrument by any designation he
desires
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.
SIGNATURE THROUGH AGENT, FORM

The party may sign personally or through an agent

Agency may be written or oral

No particular form required by the law and the agency may be proved
through oral or written evidence, unless specific provisions of the law,
such as the Statute of Frauds, requires otherwise
Under the NIL, persons who write their names in the instrument are
makers are liable as such. By signing the note, the maker promises to pay
to the order of the payee or any holder the tenor of the obligation. Based
on the above provisions of the law, there is no denying that Canlass is one
of the co-makers of the promissory note.
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.
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.
REQUISITES FOR AGENT TO ESCAPE LIABILITY
1. Be duly authorized
2. Add words to his signature indicating that he signs as an agent, that
is, for or on behalf of a principal, or a representative capacity
3. Disclose his principal
GENERAL RULE AS TO LIABILITY OF PERSON WHOSE SIGNATURE IS NOT
ON INSTRUMENT
CASE DIGESTS: SECTION 19 AND 20
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 30 of 190
36
REMO V. COURT OF APPEALS
172 SCRA 405
FACTS:
The Board of Directors of Akron, which includes petitioner Remo,
authorized the purchase of 13 trucks to be used in the business through a
resolution. The president then of the corporation purchased from private
respondent the trucks evinced by a deed of absolute sale, with terms of
payment as follows—downpayment, balance payable within 60 days from
date of execution of agreement. It was also agreed upon that until said
balance, the downpayment shall constitute as rentals for the trucks. And if
there would be failure of payment, the balance shall constitute as chattel
mortgage lien. This is further secured by a promissory note—that the
balance would be paid from a loan to be obtained from a bank. After
several days, private respondent made several demands but the
corporation failed to pay. This prompted the private respondent to file a
complaint. Meanwhile, petitioner sold his shares to Coprada and the name
of the corporation was modified.
HELD:
If the private respondent is the victim of fraud in this transaction, it has
not been clearly shown that petitioner had any part or partcipation in the
perpetration of the same.
Fraud must be established by clear and
convincing evidenced. If at all, the principal character on whom fault
should be attributed is the president Coprada, whom private respondent
dealt with personally all through out.
37
INSULAR DRUGS V. PNB
55 PHIL 634
FACTS:
Foerster was a collector for Insular Drugs. Upon collection of checks for
payment to the company, he deposited the checks in his own personal
account.
This came to the knowledge of the company and upon
investigation, the salesman committed suicide thereafter. Insular Drugs
filed an action against the bank, to credit to its account the amount
Foerster and his wife took from them. The indorsements took various
forms.
HELD:
When a
company
credits to
to make
company
and proved that after the money was withdrawn from the bank, it passed
to the drug company which thus suffered no loss.
38
FACTS:
Checks were deposited by petitioner in its current account with the bank.
These checks were from a certain Ramirez, a consistent better in its
games, who was a sales agent from Inter-Island Gas. Inter-Island later
found out that of the forgeries committed in the checks and thus, it
informed all the parties concerned. Upon the demands on the bank as the
collecting bank, it debited the account of petitioner. Thereafter, petitioner
tried to issue a check for payment of shares of stock but such was
dishonored for insufficient funds. It filed a complaint against the bank.
HELD:
Respondent bank acted within legal bounds when it debited the account of
petitioner. When the petitioner deposited the checks to its account, the
relationship created was one of agency still and not of creditor-debtor. The
bank was to collect from the drawees of the checks with the corresponding
proceeds.
Bank may have the proceeds already when it debited the account of
petitioner. Nonetheless, there is still no creditor-debtor relationship.
Following Section 23, a forged signature is wholly inoperative and no right
to discharge it or enforce its payment can be acquired through or under the
forged signature except against a party who cannot invoke its forgery or
want of authority. It stands to reason that as a collecting bank which
indorsed the checks to the drawee-banks for clearing, should be liable to
the latter for reimbursement for the indorsements on the checks had been
forged prior to their delivery to the petitioner. The payments made by the
drawee banks to respondent were ineffective—the creditor-debtor
relationship hadn’t been validly effected.
39
bank accepts the indorsements on checks made out to the
and the indorsements of the salesman’s wife and clerk, and
the personal account of the salesman and his wife, allowing them
withdrawals, the bank makes itself responsible to the drug
for the amounts represented by the checks, unless it is pleaded
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
JAI ALAI V. BPI
66 SCRA 29
PNB V. PICORNELL
46 PHIL 716
FACTS:
Picornell followed the instructions of Hyndman, Tavera and Venutra by
buying bales of tobacco. He was able to obtain in National Bank a sum of
money together with his commission. He drafted a bill of exchange against
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 31 of 190
the firm and in favor of the bank. It was received by National Bank and
was accepted thereafter by the firm. However, on alleged conditions of the
tobacco, the bill of exchange was not paid.
collect payments from the GSIS. Further, they opened an account with a
bank from which checks would be issued by Fransisco and the GSIS
president.
HELD:
This action for recovery is for the value of the bill of exchange. The firm
accepted the bill unconditionally but did not pay it at maturity, wherefore
its responsibility to pay the same is clear. The question whether or not the
tobacco was worth the value of the bill doesn’t concern the bank. Such
partial want of consideration if it was, doesn’t exist with respect to the
bank which paid Picornell the full value of the said bill of exchange. The
bank was a holder in due course, and was such for value full and complete.
The firm cannot escape liability.
HCCC later on filed a complaint for the unpaid balance in pursuance to its
agreement with AFRDC. However, an amicable settlement ensued, which
was embodied in a Memorandum of Agreement. It was embodied in said
agreement that GSIS recognizes its indebtedness to HCCC and that HCCC
would also pay its obligations to AFRDC.
40
PHILIPPINE BANK OF COMMERCE V. ARUEGO
102 SCRA 530
FACTS:
Aruego, on behalf of World Current Events, entered into a Credit
Agreement with PBCom, for the publication of the company’s periodicals.
At every printing endeavor by the printing press, a bill of exchange is
drawn against PBCom. The instruments are signed by Aruego, without any
indication that he is an agent of World Current Events. When he was being
held liable by PBCom, he averred that he only signed the instrument in the
capacity of agent of the company.
HELD:
An inspection of the drafts accepted by the defendant would show nowhere
that he has disclosed that he was signing in representation of the Philippine
Education Foundation Company. He merely signed his name. For failure to
disclose his principal, Aruego was personally liable for the drafts he
accepted.
41
A year later, it was found out that Diaz and Fransisco had drawn checks
payable to Ong. Ong denied accepting said checks and it was further found
out that Diaz entrusted the checks to Fransisco who later forged the
signature of Ong, showing that he indorsed the checks to her and then she
deposited the checks to her personal savings account.
This incident
prompted Ong to file a complaint against Fransisco.
HELD:
Ong’s signature was found to be forged by Fransisco.
Fransisco’s contention that he was authorized to sign Ong’s name in her
favor giving her authority to collect all the receivables of HCCC from GSIS.
This contention is bereft of any merit. The NIL provides that when a
person is under obligation to indorse in a representative capacity, he may
indorse in such terms as to negative personal liability. An agent, when so
signing, should indicate that he is merely signing as an agent in behalf of
the principal and must disclose the name of his principal. Otherwise, he
will be held liable personally. And assuming she was indeed authorized,
she didn't comply with the requirements of the law. Instead of signing
Ong’s name, she should have signed in her own name as agent of HCCC.
Thus, her contentions cannot support or validate her acts of forgery.
42
FRANSISCO V. COURT OF APPEALS
319 SCRA 354
FACTS:
A. Fransisco Realty and Development and Herby Commercial and
Construction Corporation entered into a Land Development and
Construction Contract. Fransisco was the president of AFRDC while Ong
was the president of HCCC.
It was agreed upon that HCCC would
undertake the construction of housing units and the development of a large
parcel of land. The payment would be on a turnkey basis. To facilitate the
payment, AFDRC executed a Deed of Assignment to enable the HCCC to
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
ASTRO ELECTRONICS CORP. V. PHIL. EXPORT
411 SCRA 462
FACTS:
Astro obtained loans from Philtrust Bank, secured by promissory notes that
were signed by Roxas, both as President of Astro Electronics and in his
personal capacity. Thereafter, PhilGuarantee bound itself as a guarantor.
At default of Astro, PhilGuarantee paid the obligation. It then filed an
action for collection of money from Astro and Roxas.
HELD:
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 32 of 190
Under the NIL, 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.
At the study of the instrument, the allegations of Roxas are bereft of any
merit—that is, the words “in his personal capacity” were added after he
signed the instrument.
43
SOLIDBANK CORPORATION V. MINDANAO FERROALLOY
CORPORATION
GR 153535, JULY 28, 2005
FACTS:
Mindanao Ferroalloy corporation is the fruit of a joint venture agreement
between a Filipino corporation and Korean Corporation. In its operations,
its liabilities ballooned over its assets that it had to secure loans from
petitioner Solidbank. The loans were later consolidated and restructured,
evinced by a promissory note. The promissory note was signed by Cu and
Hong, both officers of the corporation. The corporation, through the same
officers also executed a deed of assignment. Thereafter, the corporation
stopped its operations and the loan was left unpaid. The bank was
prompted to file a complaint against the corporation, and with it,
impleading the officers who signed the agreement and promissory notes.
The trial court held in favor of the bank but didn't adjudge liability of the
officers. Both the trial court and CA held that there was no solidary liability
on the part of the officers impleaded by the bank.
HELD:
Though Hong and Cu signed above the “maker/borrower” and the printed
name of the corporation, without the word “by” preceding their signatures,
the fact that they signed in their personal capacities is negated by the facts
that name and address of the corporation also appeared on the space
provided for in the “maker/borrower” and their signatures only appeared
once when it should be twice if indeed it was in their personal capacities.
Further, they didn't sign on the portion allocated for the co-maker, and
there was also indicia of it being signed as authorized representatives.
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.
HOW SIGNATURE PER PROCURATION IS MADE
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010

“Luis Martin Tan, Per Procuration: Ryan Teehankee” on which Luis Tan
is the principal while Ryan Teehankee is the agent
EFFECT OF SIGNATURE PER PROCURATION

Constitutes a warning that an agent has a limited authority

A person who takes the instrument so signed is bound at his peril to
inquire into the extent and nature of the agent’s authority, and this
applies to every person
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, notwithstanding that from
want of capacity, the corporation or infant may incur no liability
thereon.//
INDORSEMENT OF MINOR OR CORPORATION

If a minor or corporation indorses an instrument, the indorsee acquires
title to it and can enforce it against the maker or acceptor or other
parties prior to the minor

Such prior parties cannot escape liability by setting a defense the
incapacity of the indorser

Also applies to other incapacitated persons
A (INCOMPLETE, UNDELIVERED)  B  C  D  E (MINOR)  F
*F cannot enforce against A the instrument, following Section 15 of the NIL
*General rule in an indorsement by an infant or corporation: it shall be
enforceable against the maker, acceptor, or other parties prior to the minor
NOTES FOR WEEK #4:
July 2, 2007 - July 7, 2007
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.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 33 of 190
FORGERY, DEFINED AND EXPLAINED

Counterfeit making or fraudulent alteration of any writing, and may
consist in the signing of another’s name, or the alteration of an
instrument, in the name, amount, description of the person and the
like, with the intent to defraud

Section 23 only applies to forged signatures or signatures made
without the authority of the person whose signature purports it to be
FRAUD AMOUNTING TO FORGERY

Fraud in factum or fraud in esse contractus

There is no intention to issue an instrument
FRAUD IN FACTUM
Does amount to forgery
Real defense
FRAUD IN INDUCEMENT
Doesn’t amount to forgery
Personal defense
A sells to B what he represents as a
diamond ring, when it is actually
made of glass. B issues a check.
The fraud is in inducing B to issue
the check.
Promissory notemaker
indorser
Bill of Exchangedrawer
indorser
Sgd. A
*Suppose that B forged A’s signature. Is the instrument valid? It is totally
inoperative.
*If ABCDE, and B’s signature was forged, it is totally inoperative
and ineffectual against A and B. C and D are precluded to set up the
defense of forgery since as indorsers, they warrant the validity of the
instrument.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Sgd. A
Additional fact: B has account with RCBC Makati.
*Process is that RCBC will send the check to X Bank for clearing and X
Bank would consequently debit the account of A.
*What if the signature of A is forged? What is the recourse of A? The
recourse is for A to approach X Bank and demand to credit the his
account. X Bank was the proximate cause of the loss of A and it should
know the drawer’s signature. Generally, X Bank is liable when the drawer’s
signature is forged and his account was debited.
FRAUDULENT IMPERSONATION
•
Suppose X represents himself as Juan Cruz when he is not to Y. Due
to such misrepresentation, he obtained from Y a note payable to the
order of Juan Cruz. If Y intends that the proceeds of the note will go
to the real Juan Cruz and not X, but to whom Y issued the note on the
belief that X was Juan Cruz, would be a forgery.
DOUBLE INTENT IN FRAUDULENT IMPERSONATION
1. He intends to make the instrument payable to the person before him
or to the person writing at the other end of the line, in case the
negotiation is by correspondence
2. He intends to make the instrument payable to the person whom he
believes the stranger to be
GENERAL RULE IN FRAUDULENT IMPERSONATION
•
The first one is the controlling intent except where the name of the
payee was already known to the maker or drawer or was particularly
identified in some manner
I promise to pay B or order P100,000
Pay to the order of B P100,000
To X Bank Alabang (drawee)
REASON FOR RULE: THEORY OF ACTUAL INTENT
•
Throws the loss on the drawer
•
In the absence of anything to show that the drawer had any doubt as
to the identity of the person to whom he delivered the paper as
payee—the drawee, in paying the paper, or the holder, in taking it
upon the indorsement of the impostor in the name of which the payee
was described, carries out the intention that the drawer entertained at
the time of delivery of the paper to the impostor, although that
intention was conceived in consequence of the fraud of the impostor as
to his identity and ownership of the property which represented the
consideration
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 34 of 190
ANOTHER REASON FOR THE RULE: THEORY OF ESTOPPEL
•
As between two innocent persons, the one whose act was the cause of
the loss should bear the consequences
•
It was the drawer’s duty to use diligence to ascertain the identity of
the party with whom he has dealt. Failing to make this discovery, he
became the victim of the fraud. The impostor having succeeded in this
first and essential step in the practice of the fraud, the next was
comparatively an easy one.
RULE IS QUALIFIED WHERE IMPOSTOR REPRESENTS HIMSELF AS AGENT
OF PAYEE
•
There is a distinction between cases where the paper is delivered to
the impostor as payee, in the belief that he is the person to whom the
instrument it would be paid, and cases where the paper is delivered to
the impostor upon his representation, in the belief that he is agent of
the person named as payee
•
The loss falls on the drawee or purchaser, as the case may be, rather
than on the drawer where the impostor upon whose indorsement the
paper was purchased or paid, represented himself to be the agent of
the payee and not the payee himself
ADMISSION OF GENUINENESS AND DUE EXECUTION
•
When an action or defense is founded upon a written instrument such
as a negotiable instrument, copied in or attached to the corresponding
pleading, the genuineness and due execution of the instrument shall
be deemed admitted unless specifically denied under oath by the
adverse party
•
Consequently, the genuineness and due execution of the written
instrument or document copied in or attached to the opponent’s
pleading as the basis of his claim or defense, should be denied
specifically under oath, otherwise they are deemed admitted.
MEANING OF ADMISSION OF GENUINENESS AND DUE EXECUTION
1. That he signed it or that it was signed by another for him and with his
authority
2. That at the time it was signed, it was in words and figures exactly as
set out in the pleading of the party relying upon it,
3. That any formal requisites required by law, such as swearing and
acknowledgment, or revenue stamp which it requires, are waived by
him
DEFENSES CUT OFF BY ADMISSION OF GENUINENESS, ETC.
1. The defense that the signature is a forgery
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
2.
3.
That it was unauthorized, as in the case of an agent signing for his
principal, or one signing on behalf of a partnership or corporation or
that in case of the latter, that the corporation was not authorized
under its charter to sign the instrument
That the party charged signed the instrument in some other capacity
than that alleged in the pleading setting it out
FAILURE TO IDENTIFY PROMISSORY NOTE WILL NOT NECESSARILY
DEFEAT CLAIM
EFFECT OF FORGERY IN GENERAL
1. That the signature forged or made without authority is wholly
inoperative
2. That no right to retain the instrument, or to give discharge thereof, or
to enforce payment thereof against any party thereto, can be acquired
through or under such a signature forged or made without authority
3. That nevertheless, as against a party precluded from setting up the
forgery or want of authority, the signature forged or made without
authority is operative, and rights to retain the instrument, to give
discharge therefore, or to enforce payment thereof, can be acquired
through or under the signature forged or made without authority
EXTENT OF THE EFFECT OF THE FORGERY
1. Only the signature forged or made without authority is stated by the
law to be inoperative but neither the instrument itself is, nor the
genuine signatures are, rendered inoperative
2. The instrument can be enforced by holders to whose title over the
instrument the forged signature is not necessary, such as, the
indorsement of an instrument which on its face is payable to bearer
3. The instrument can be enforced against those who are precluded from
setting up the defense of forgery, even against those whose signatures
have been forged
PERSONS PRECLUDED FROM SETTING UP DEFENSE OF FORGERY
1. Those who warrant or admit to the genuineness of the signature in
question—indorsers, persons negotiating by delivery, and acceptors
2. Those who, by their acts, silence or negligence, are estopped from
setting up the defense of forgery
INDORSERS AS WARRANTORS
•
Whether general or qualified
•
Warrant that the instrument indorsed by them is genuine in all
respects what it purports it to be
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 35 of 190
PERSONS NEGOTIATING BY DELIVERY AS WARRANTORS
•
Persons negotiating by mere delivery also warrant that the instrument
negotiated by them is genuine and in all respects what it purports to
be
•
They are consequently precluded from setting up the defense of
forgery
ACCEPTORS AS WARRANTORS
•
A drawee, by accepting the bill, admits the genuineness off the
signature of the drawer
PRECLUDED
•
Includes those cases where they are estoppels against the party
desiring to set up the forgery
ESTOPPEL AS TO FORGERY OF INSTRUMENTS
•
Whenever a party has, by his own declaration, act, or omission,
intentionally and deliberately led another to believe that his or
another’s signature in an instrument is genuine, and to act upon such
belief, he cannot, in any litigation arising out of such declaration, act,
or omission, be permitted to set up the forgery of such signature/s
•
Estoppel may arise from a declaration, act or omission/negligence
UNREASONABLE DELAY
•
Unreasonable delay, after his discovery of the forgery, on the part of
one having the opportunity and duty to speak, in disclosing the forgery
upon commercial paper to the one who ought to be apprised thereof,
estops the former from thereafter asserting the forgery as against the
latter where the latter is prejudiced by such delay or failure
•
Requisites:
o
That the delay be unreasonable
o
That the one who ought to be apprised of the forgery has
been prejudiced
REASONABLY PROMPT NOTICE
•
Depends upon the circumstances of the case, and the situation of the
parties with reference to the remedies against any party is a proper
element to enter into the estimate of the reasonableness of the notice
WHEN PREJUDICED AND WHEN NOT PREJUDICED
•
A bank is prejudiced—at the time one discovered that his attorney
forged his indorsement to a draft in his favor, it had assets of the
attorney in its possession to protect itself but at the time it was
notified of the forgery, it has parted with such assets
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
•
It is not prejudiced by the delay where at no time after the discovery
of the forgery did the cashier have any property with which to
indemnify the bank
ESTOPPEL BY NEGLIGENCE IN DELIVERY
•
A drawer may be precluded from defense of forgery of the payee’s
indorsement if delivery by him to the payee is negligent
CASES OF FORGERY IN GENERAL
1. Forgery of promissory notes which may be further subdivided into—
forgery of indorsement in the note; forgery of the maker’s signature
2. Forgery of bills of exchange which may be further classified into—
forgery of an indorsement on the bill; forgery of the drawer’s
signature, either with acceptance by the drawee, or without such
acceptance but the bill is paid by the drawee
RIGHTS OF PARTIES IN FORGERY OF INDORSEMENT IN NOT PAYABLE TO
ORDER
Where the indorsement is forged and the note is payable to order, the
party whose indorsement is forged and parties prior to him including the
maker cannot be held liable by the holder, whether that holder is a holder
in due course or not:
1. The reason is that, inasmuch as the indorsement is forged, it is
inoperative.
But since the note is payable to order, it can be
negotiated only by indorsement completed by delivery, and therefore,
the forged instrument is the only means one could acquire any rights
to it or its proceeds
2. The law further provides that no right to retain the note, give
discharge thereof, or enforce payment thereof, could be acquired
through and under the forged signature. Hence the holder didn’t
acquire at least those rights as against the party whose signature is
forged and parties prior to him, including the maker
3. The forger usually obtains possession of the note by fraudulent or
other unlawful means and therefore, he has no right whatsoever in the
note
RIGHTS OF PARTIES IN FORGERY OF INDORSEMENT IN A NOTE PAYABLE
TO BEARER
•
May be held liable by a holder in due course but not by the one who is
not a holder in due course
•
Provided that the note was mechanically complete before the forgery
•
Forged instrument is not necessary to the title of a holder since
instruments payable by bearer can be negotiated by mere delivery
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 36 of 190
RIGHTS OF PARTIES IN FORGERY OF MAKER’S SIGNATURE
•
Where the maker’s signature is forged, he cannot be held liable by any
holder, whether the holder is in due course or not
•
Purported maker is not a party to the instrument as his forged
signature is inoperative and no right to retain, enforce, or discharge
the note, may be acquired against him
COLLECTING BANK BOUND TO SCRUTINIZE CHECKS DEPOSITED WITH IT
TO DETERMINE GENUINENESS AND REGULARITY
CONVERSION
•
An unauthorized assumption and exercise of the right of ownership
over goods or personal chattels belonging to another, to the alteration
of their condition or exclusion of the owner’s right
DRAWEE CANNOT CHARGE ACCOUNT OF DRAWER
•
In an action by the drawee against the drawer for the amount charged
by the drawee against the account of the drawer where the drawee
paid a check on a forged indorsement, the drawee has no defense
against the drawer and the drawer may recover from the drawee for
an instrument paid on a forged indorsement
•
Depository owes to the depositor an absolute and contractual duty to
pay the check only to the person to whom it is made payable or upon
his genuine indorsement
AS AFFECTED BY QUESTION OF DELIVERY TO PAYEE
•
The checks didn’t reach the hands of the payee. The bearing of such
absence of delivery is considered in some cases and held not to be
material
•
Where there is no delivery to the payee and no title vests upon him,
he ought not to be allowed to recover on the ground that he lost
nothing because he never became owner of the check and still retained
his claim against the drawer
DRAWER CANNOT RECOVER FROM THE COLLECTING BANK
•
Drawer has no right to recover the amount paid from the collecting
bank as the duty of the collecting to exercise care in collection is due
only to the payee, and as the drawer suffers no loss since it can
recover the amount paid from the drawee bank which has no right to
charge the drawer’s account
PAYEE CANNOT RECOVER FROM THE DRAWEE
•
An action cannot be maintained by a payee of a check against the
bank on which it is drawn unless the check has been certified or
accepted by the bank on which it is drawn, without acceptance or
certification, as provided by the statute, there is no privity of contract
between the drawee bank and the payee, or holder of the check
DRAWEE CAN RECOVER FROM COLLECTING BANK
•
The drawee may recover from the recipient of payment, such as the
collecting bank, under a forged indorsement
•
Rule allowing the payee to recover from the recipient of the payment
under a forged indorsement
RIGHTS OF PARTIES IN FORGERY OF INDORSEMENT IN BILL PAYABLE TO
BEARER
•
Holder may recover if he is a holder in due course
PAYEE CAN RECOVER FROM RECEIPT OF PAYMENT
•
According to the general rule, a bank or other corporation or an
individual, who has obtained possession of a check, upon an
unauthorized or forged indorsement of the payee’s 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
they have been paid to the person whom the check was obtained
•
The possession of the check on the forged indorsement is wrongful and
when the money had been collected on the check, the bank or other
person or corporation, can be held as far as moneys had and received
and the proceeds are held for the rightful owners of the payment and
may be recovered by them
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
RIGHTS OF PARTIES IN FORGERY OF DRAWER’S SIGNATURE WHERE
DRAWEE HASN’T ACCEPTED BILL BUT PAID IT
•
In the 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 or negligence or disregard of duty
•
As between equally innocent parties, the drawee who pays money on a
check the signature to which is forged, cannot recover the money from
the one who received it
BUT PAYMENT NOT EQUIVALENT TO ACCEPTANCE OR CERTIFICATION
•
The payment of a forged check doesn’t include or imply its acceptance
in the sense that this word is used in Section 62 of NIL
•
Basis of the general rule is not that the drawee is precluded from
setting up forgery because, by paying the check, it has accepted the
check and therefore admitted the genuineness of the drawer’s
signature
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 37 of 190
•
By paying the check the drawer is presumed negligent or deemed
constructively negligent
NEGLIGENCE IN FORGERY OF INDORSEMENTS IN BILL
•
It presupposes that the drawer himself wasn’t negligent or guilty of
such conduct as would estop him from asserting the forged character
of the indorsement as against the depository and that if he was
negligent or guilty of such conduct, the loss must fall on him
WHERE A DEPOSITOR IS USING ITS OWN PERSONALIZED CHECKS, ITS
FAILURE TO PROVIDE ADEQUATE SECURITY MEASURES TO PREVENT
FORGERIES OF ITS CHECKS CONSTITUTES GROSS NEGLIGENCE AND
BARS IT FROM SETTING UP THE DEFENSE OF FORGERY
BUT FAILURE OF DEPOSITOR TO MAKE PROMPT RECONCILIATION OF THE
MONTHLY BANK STATEMENTS FURNISHED BY THE BANK CONSTITUTES
NEGLIGENCE FOR WHICH THE BANK CANNOT BE BLAMED IN CASE
DEPOSITOR’S CASE ARE FORGED
BUT DRAWER NOT GENERALLY NEGLIGENT WHERE HIS CHECK IS STOLEN
PAYEE’S NEGLIGENCE IN FORGERY OF DRAWER’S SIGNATURE
•
The payee in a check may be supposed to have knowledge of the
circumstances under which it is drawn and generally, of the person
drawing it, and is in a better position to judge the genuineness of the
paper than are indorsees.
•
And there is a tendency to place greater responsibility upon him and
he is much more likely to be required to return the proceeds of the
paper than are the indorsees
INDORSER’S NEGLIGENCE
•
After a draft or check has once been negotiated so that it is in
circulation, there is little opportunity for negligence on the part of
those through whose hands it passes; but as to them, in most cases,
the rule will apply that, as between innocent parties, the loss must fall
on the drawee
DUTY OF PURCHASER OF CHECK OR BILL
•
One who purchases a bill or check is bound to satisfy himself that the
paper is genuine; and that by indorsing or presenting it for payment or
putting it in circulation before presentation, he impliedly asserts that
he has performed his duty and the drawee who has without actual
negligence on his part, paid the forged demand, may recover the
money paid from such negligent purchaser
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
PAPER FORWARDED FOR COLLECTION
•
The fact that the paper wasn’t cashed and indorsed with unrestricted
indorsement but was taken for collection and forwarded for that
purpose under an indrosement giving notice of that fact, may place a
greater burden upon the drawee than it would otherwise bear
FORGERY OF SIGNATURE IN INSTRUMENT IS FALSIFACTION OF PRIVATE
DOCUMENT
FORGER NEED NOT IMITATE GENUINE SIGNATURE
•
One who signs in the name of another without the latter’s authority, as
drawer in a check, and thereby makes it appear falsely that the
alleged drawer of the check was a real party thereto, when as a matter
of fact he didn’t participate in the transaction, is guilty of falsification
COMMERCIAL DOCUMENTS
•
Documents or instruments which are used by businessmen or
merchants to promote or facilitate trade or credit transactions
CASE DIGESTS: SECTION 23
(FORGED SIGNATURE OF DRAWER)
44
SAN CARLOS MINING V. BPI
59 PHIL 59
FACTS:
Wilson, a principal employee of petitioner, together with Wilson, a
messenger-clerk, conspired to withdraw cash from the petitioner’s account
through forgery of a check, in the name of the agent authorized to sign the
check.
While the authorized agent of petitioner was on vacation, Wilson and
Dolores sent a cablegram to China Banking for the transfer of $100,000.
On the contract, the name of Baldwin was forged and it was indicated
therein that a certified check be issued. Thereafter, this was received and
deposited with the BPI. Upon deposit, an indorsement in the name of
Baldwin was placed. The bank account was credited. Later, a letter was
sent to the bank, purporting to be signed by Baldwin asking that it be
withdrawn. This was done in supervision of Dolores. Dolores and Wilson
then was able to get the money. This eventually came to the knowledge of
plaintiff who filed an action against China Banking and BPI. The trial court
dismissed the case.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 38 of 190
HELD:
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.
There is no act of the plaintiff that led the bank astray. If it was in fact
lulled into the false sense of security, it was by the effrontery of Dolores,
the messenger to whom it entrusted this large sum of meny.
The proximate cause of the loss must therefore be due to the negligence of
the bank in honoring and cashing the two forged checks.
45
PNB V. QUIMPO
158 SCRA 582
FACTS:
While Gozon was in the bank with Santos left in the car, the latter stole a
check and forged the signature of the former. He was able to encash the
check. He was later apprehended by the police authorities and he admitted
to stealing the check. The court decided in favor of Gozon. The bank now
posed the issue on whether Gozon’s act of leaving his checkbook in the car
the proximate cause of the loss.
HELD:
Where the private respondent’s check was removed and stolen without his
knowledge and consent, he cannot be considered negligent in this case.
46
PNB V. CA
25 SCRA 693
FACTS:
Lim deposited in his PCIB account a GSIS check drawn against PNB.
Following standard banking procedures, the check was sent to petitioner
for clearing. He didn’t return said check but paid the amount to PCIB as
well as debited it against the account of GSIS. Thereafter, a demand was
received from GSIS asking for the credit of the amount since the
signatures found in the check were forged. This was done by PNB and it
now comes after PCIB but the latter wouldn’t want to return the money.
HELD:
Acceptance is not required for checks, for the same are payable on
demand. Acceptance and payment are distinguished with each other. The
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
former pertains to a promise to perform an act while the latter is the actual
performance of the act.
PNB had also been negligent with the particularity that it had been guilty of
a greater degree of negligence because it had a previous and formal notice
from GSIS that the check had been lost, with the request that payment be
stopped. Just as important is that it is its acts, which are the proximate
cause of the loss.
47
MWSS V. CA
143 SCRA 20
FACTS:
MWSS had an account from PNB. Its treasurer, auditor, and General
Manager are the ones authorized to sign checks. During a period of time,
23 checks were drawn and debited against the account of petitioner.
Bearing the same check numbers, the amounts stated therein were again
debited from the account of petitioner. The amounts drawn were deposited
in the accounts of the payees in PCIB. It was found out though that the
names stated in the drawn checks were all fictitious. Petitioner demanded
the return of the amounts debited but the bank refused to do so. Thus, it
filed a complaint.
HELD:
There was no categorical finding that the 23 checks were signed by
persons other than those authorized to sign. On the contrary, the NBI
reports shows that the fraud was an “inside job” and that the delay in the
reconciliation of the bank statements and the laxity and loss of records
control in the printing of the personalized checks facilitated the fraud. It
further doesn’t provide that the signatures were forgeries.
Forgery cannot be presumed. It should be proven by clear, convincing and
positive evidence. This wasn’t done in the present case.
The petitioner cannot invoke Section 23 because it was guilty of negligence
not only before the questioned checks but even after the same had already
been negotiated.
48
REPUBLIC V. EQUITABLE BANK
10 SCRA 8
FACTS:
The corporation had acquired 24 treasury warrants by accommodating its
former trusted employee who asked the corporation to cash the warrants,
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 39 of 190
alleging it was difficulty to do directly with the government and that his
wife expected a sort of commission for the encashment. The corporation
acceded to the request provided that it be first cleared and that the
corporation would receive the amount before paying for it. The warrants
were then cleared but later on, at different periods of time, the treasurer
returned 24 warrants to the CB on the ground that they have forged. The
bank refused to return the cash.
The clearing of the checks, it should be noted, was in accordance to the
24-hour clearing rule by the CB.
HELD:
The warrants were cleared and paid by the Treasurer, in view of which
Equitable and PI bank credited the corresponding amounts to the
respective depositors of the warrants and then honored the checks for said
amounts. Thus, the treasury had not been only negligent in clearing its
own warrants but had already thereby induced the banks to pay the
amounts thereof to said depositors. This gross negligence becomes more
apparent when each of the warrants were valued for more than the
authority of the treasurer to approve.
49
PNB V. NATIONAL CITY BANK OF NY
63 PHIL 711
FACTS:
Unknown persons negotiated with Motor Services Company checks, which
were part of the stipulation in payment of automobile tires purchased from
the latter’s store.
It purported to have been issued by Pangasinan
Transportation Company. The said checks were indorsed at the back by
said unknown persons, the Motor company believing at that time that the
signatures contained therein were genuine.
The checks were later
deposited with the company’s account in National City Bank of NY. The
said checks were consequently cleared and PNB credited National City Bank
with the amounts. Thereafter, PNB discovered that the signatures were
forged and it demanded the reimbursement of the amounts for which it
credited the other bank.
HELD:
A check is a bill of exchange payable on demand and only the rules
governing bills of exchanges payable on demand are applicable to it. in
view of the fact that acceptance is a step necessary insofar as negotiable
instruments are concerned, it follows that the provisions relative to
acceptance are without application to checks.
Acceptance impies
subsequent negotiation of the instrument, which is not true in the case of
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
checks because from the moment it is paid, it is withdrawn from
circulation. When the drawee banks 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 warrant against the drawee.
Further, in determining the relative rights of a drawee who under a mistake
of fact, has paid, 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 and negligence of the parties in respect thereto.
The responsibility of the drawee who pays a forged check, for the
genuineness of the drawer’s 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.
According to the undisputed facts, National City Bank in purchasing the
papers in question from unknown persons without making any inquiry as to
the identity and authority of said persons negotiating and indorsing them,
acted negligently and contributed to the constructive loss of PNB in failing
to detect the forgery. Under the circumstances of the case, if the appellee
bank is allowed to recover, there will be no change in position as to the
injury or prejudice of the appellant.
DRAWER: PANGASINAN
PAYEE: IASMOTOR SERVICE
DRAWEE: PNB
COLLECTING BANK: NATIONAL CITY BANK OF NEW YORK
50
METROPOLITAN BANK V. CA
194 SCRA 169
FACTS:
Gomez opened an account with Golden Savings bank and deposited 38
treasury warrants. All these warrants were indorsed by the cashier of
Golden Savings, and deposited it to the savings account in a Metrobank
branch. They were sent later on for clearing by the branch office to the
principal office of Metrobank, which forwarded them to the Bureau of
Treasury for special clearing. On persistent inquiries on whether the
warrants have been cleared, the branch manager allowed withdrawal of the
warrants, only to find out later on that the treasury warrants have been
dishonored.
HELD:
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 40 of 190
The treasury warrants were not negotiable instruments. Clearly, it is
indicated that it was non-negotiable and of equal significance is the
indication that they are payable from a particular fund, Fund 501. This
indication as the source of payment to be made on the treasury warrant
makes the promise to pay conditional and the warrants themselves nonnegotiable.
Metrobank then cannot contend that by indorsing the warrants in general,
GS assumed that they were genuine and in all respects what they purport
it to be, in accordance to Section 66 of the NIL. The simple reason is that
the law isn’t applicable to the non-negotiable treasury warrants. The
indorsement was made for the purpose of merely depositing them with
Metrobank for clearing. It was in fact Metrobank which stamped on the
back of the warrants: “All prior indorsements and/or lack of endorsements
guaranteed…”
51
PCIB V. CA
350 SCRA 446
FACTS:
Ford Philippines filed actions to recover from the drawee bank Citibank and
collecting bank PCIB the value of several checks payable to the
Commissioner of Internal Revenue which were embezzled allegedly by an
organized syndicate. What prompted this action was the drawing of a
check by Ford, which it deposited to PCIB as payment and was debited
from their Citibank account. It later on found out that the payment wasn’t
received by the Commissioner. Meanwhile, according to the NBI report,
one of the checks issued by petitioner was withdrawn from PCIB for alleged
mistake in the amount to be paid. This was replaced with manager’s check
by PCIB, which were allegedly stolen by the syndicate and deposited in
their own account.
The trial court decided in favor of Ford.
ISSUE:
Has Ford the right to recover the value of the checks intended as payment
to CIR?
HELD:
The checks were drawn against the drawee bank but the title of the person
negotiating the same was allegedly defective because the instrument was
obtained by fraud and unlawful means, and the proceeds of the checks
were not remitted to the payee. It was established that instead paying the
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Commissioner, the checks were diverted and encashed for the envetual
distribution among members of the syndicate.
Pursuant to this, it is vital to show that the negotiation is made by the
perpetrator in breach of faith amounting to fraud. The person negotiating
the checks 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.
It should be resolved if Ford is guilty of the imputed contributory
negligence that would defeat its claim for reimbursement, bearing in mind
that its employees were among the members of the syndicate. It appears
although the employees of Ford initiated the transactions attributable to
the organized syndicate, their actions were not the proximate cause of
encashing the checks payable to CIR. The degree of Ford’s negligence
couldn’t be characterized as the proximate cause of the injury to parties.
The mere fact that the forgery was committed by a drawer-payor’s
confidential employee or agent, who by virtue of his position had unusual
facilities for perpetrating the fraud and imposing the forged paper upon the
bank, doesn’t entitle the bank to shift the loss to the drawer-payor, in the
absence of some circumstance raising estoppel against the drawer.
Note: not only PCIB but also Citibank is responsible for negligence.
Citibank was negligent in the performance of its duties as a drawee bank.
It failed to establish its payments of Ford’s checks were made in due
course and legally in order.
52
ILLUSORIO V. CA
393 SCRA 89
FACTS:
Petitioner was a prominent businessman who, because of different business
commitments, entrusted to his then secretary the handling of his credit
cards and checkbooks. For a material period of time, the secretary was
able to encash and deposit in her personal account money from the
account of petitioner.
Upon knowledge of her acts, she was fired
immediately and criminal actions were filed against her.
Thereafter,
petitioner requested the bank to restore its money but the bank refused to
do so.
HELD:
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 41 of 190
The petitioner doesn’t have a course of action against the bank. To be
entitled to damages, petitioner has the burden of proving negligence on the
part of the bank for failure to detect the discrepancy in the signatures on
the checks. It is incumbent upon petitioner to establish the fact of forgery.
Curiously though, petitioner failed to supply additional signature specimens
as requested by the NBI. The bank was not also remiss in performance of
its duties, it practices due diligence in encashing checks. The bank didn’t
have any hint of the modus operandi of Eugenio as she was a regular
customer, designated by the petitioner himself to transact on his behalf.
It was petitioner who was negligent in this case. He failed to examine his
bank statements and this was the proximate cause of his own damage.
Because of this negligence, he is precluded from setting up the defense of
forgery with regard the checks.
53
BPI V. CASA MONTESORRI INTERNATIONALE
430 SCRA 261
FACTS:
CASA has a current account with BPI. It was discovered that for a material
period of time, several checks were encashed by a certain Sonny Santos,
who eventually was known to be a fictitious name used by the external
auditor of CASA. The external auditor admitted forging the signature of
CASA’s president to be able to encash the checks. The trial court held the
bank liable but this was modified. The modified decision apportioned the
loss between BPI and CASA.
HELD:
A forged signature is a real and absolute defense, and a person whose
signature appears on a negotiable instrument is forged is deemed to never
have become a party thereto and to have never consented to the contract
that allegedly gave rise to it.
The counterfeiting of any writing, consisting in the signing of another’s
name with intent to defraud, is forgery.
First, there was really a finding of forgery. The forger admitted even in his
affidavit of his forgery.
Second, there was a finding by the police laboratory that indeed the
signatures were forged.
Furthermore, the negligence is attributable to BPI alone. Its negligence
consisted in the omission of the degree of diligence required of a bank.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
*Loss borne by proximate cause of negligence
54
CITIBANK N.A V. CABAMONGAN
488 SCRA 517
FACTS:
Spouses Cabamongan opened a joint and/or foreign currency time deposit
in favor of their two children with Citibank. On a material date, a person
who claimed to be Carmelita sought the pretermination of the account.
She presented identification cards to ascertain her identity to the then
account officer. When she left with the money, she left an identification
card. The account officer then called up the address. The spouses and
their family knew of the incident. They were presently residing in the US
and there was a prior incident wherein they got robbed in their house with
the jewelry box and cards stolen. Spouses made several demands for the
return of the amount but Citibank refused to do so.
HELD:
Citibank was negligent. First, the “depositor” didn’t present the Certificate
of Deposit. Second, from the internal memorandum issued by the Account
Officer, he admitted to the fact that the specimen signature was different
from the one who misrepresented herself as Carmelita. Third, the bank
kept in its records pictures of its depositors. It is inconceivable how the
bank was duped by an imposter.
CASE DIGESTS: SECTION 23
(FORGED INDORSEMENT)
55
GREAT EASTERN LIFE V. HSBC
43 PHIL 678
FACTS:
The plaintiff is an insurance corporation, which drew a check in favor of
Melicor. This was stolen by Maasim, forged the signature of Melicor and
deposited the check to his account in PNB. Thereafter, PNB endorsed the
check to HSBC who later debited the account of plaintiff. Plaintiff believed
all along that Melicor received the payment. Upon knowledge of the debit
HSBC did on its account, it demanded that the same amount be credited.
HELD:
The banks are liable. The money was in deposit with the bank and it had
no legal right to pay it out to anyone except the plaintiff or its order.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 42 of 190
The only remedy of the bank paying a check to a person who has forged
the name of the payee is against the forger.
56
GEMPESAW V. CA
218 SCRA 682
FACTS:
Gempensaw was the owner of many grocery stores. She paid her suppliers
through the issuance of checks drawn against her checking account with
respondent bank. The checks were prepared by her bookkeeper Galang.
In the signing of the checks prepared by Galang, Gempensaw didn't bother
herself in verifying to whom the checks were being paid and if the
issuances were necessary. She didn't even verify the returned checks of
the bank when the latter notifies her of the same. During her two years in
business, there were incidents shown that the amounts paid for were in
excess of what should have been paid. It was also shown that even if the
checks were crossed, the intended payees didn't receive the amount of the
checks. This prompted Gempensaw to demand the bank to credit her
account for the amount of the forged checks. The bank refused to do so
and this prompted her to file the case against the bank.
HELD:
Forgery is a real defense by the party whose signature was forged. A party
whose signature was forged was never a party and never gave his consent
to the instrument. Since his signature doesn’t appear in the instrument,
the same cannot be enforced against him even by a holder in due course.
The drawee bank cannot charge the account of the drawer whose signature
was forged because he never gave the bank the order to pay.
In the case at bar the checks were filled up by petitioner’s employee
Galang and were later given to her for signature. Her signing the checks
made the negotiable instruments complete. Prior to signing of the checks,
there was no valid contract yet. Petitioner completed the checks by
signing them and thereafter authorized Galang to deliver the same to their
respective payees. The checks were then indorsed, forged indorsements
thereon.
As a rule, a drawee bank who has paid a check on which an indorsement
has been forged cannot debit the account of a drawer for the amount of
said check. An exception to this rule is when the drawer is guilty of
negligence which causes the bank to honor such checks. Petitioner in this
case has relied solely on the honesty and loyalty of her bookkeeper and
never bothered to verify the accuracy of the amounts of the checks she
signed the invoices attached thereto. And though she received her bank
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
statements, she didn't carefully examine the same to double-check her
payments. Petitioner didn't exercise reasonable diligence which eventually
led to the fruition of her bookkeeper’s fraudulent schemes.
57
BANCO DE ORO SAVING V. EQUITABLE
157 SCRA 188
FACTS:
BDO drew checks payable to member establishments. Subsequently, the
checks were deposited in Trencio’s account with Equitable. The checks
were sent for clearing and was thereafter cleared.
Afterwards, BDO
discovered that the indorsements in the back of the checks were forged. It
then demanded that Equitable credit its account but the latter refused to
do so. This prompted BDO to file a complaint against Equitable and PCHC.
The trial court and RTC held in favor of the Equitable and PCHC.
HELD:
First, PCHC has jurisdiction over the case in question. The articles of
incorporation of PHHC extended its operation to clearing checks and other
clearing items. No doubt transactions on non-negotiable checks are within
the ambit of its jurisdiction. Further, the participation of the two banks in
the clearing operations is submission to the jurisdiction of the PCHC.
Petitioner is likewise estopped from raising the non-negotiability of the
checks in issue. It stamped its guarantee at the back of the checks and
subsequently presented it for clearing and it was in the basis of these
endorsements by the petitioner that the proceeds were credited in its
clearing account. The petitioner cannot now deny its liability as it assumed
the liability of an indorser by stamping its guarantee at the back of the
checks.
Furthermore, the bank cannot escape liability of an indorser of a check and
which may turn out to be a forged indorsement. Whenever a bank treats
the signature at the back of the checks as indorsements and thus logically
guarantees the same as such there can be no doubt that said bank had
considered the checks as negotiable.
A long line of cases also held that in the matter of forgery in
endorsements, it is the collecting bank that generally suffers the loss
because it had the dutyh 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 the indorsements.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 43 of 190
58
BPI V. CA
216 SCRA 51
FACTS:
Someone who identified herself to be Fernando called up BPI, requesting
for the pre-termination of her money market placement with the bank.
The person who took the call didn't bother to verify with Fernando’s office if
whether or not she really intended to preterminate her money market
placement. Instead, he relied on the verification stated by the caller. He
proceeded with the processing of the termination. Thereafter, the caller
gave delivery instructions that instead of delivering the checks to her
office, it would be picked up by her niece and it indeed happen as such. It
was found out later on that the person impersonated Fernando and her
alleged niece in getting the checks. The dispatcher also didn't bother to
get the promissory note evincing the placement when he gave the checks
to the impersonated niece. This was aggravated by the fact that this
impersonator opened an account with the bank and deposited the subject
checks. It then withdrew the amounts.
The day of the maturity of the money market placement happened and the
real Fernando surfaced herself. She denied preterminating the money
market placements and though she was the payee of the checks in issue,
she didn't receive any of its proceeds.
This prompted the bank to
surrender to CBC the checks and asking for reimbursement on alleged
forgery of payee’s indorsements.
HELD:
The general rule shall apply in this case. Since the payee’s indorsement
has been forged, the instrument is wholly inoperative.
However,
underlying circumstances of the case show that the general rule on forgery
isn’t applicable. The issue as to who between the parties should bear the
loss in the payment of the forged checks necessitates the determination of
the rights and liabilities of the parties involved in the controversy in
relation to the forged checks.
The acts of the employees of BPI were tainted with more negligence if not
criminal than the acts of CBC. First, the act of disclosing information about
the money market placement over the phone is a violation of the General
Banking Law. Second, there was failure on the bank’s part to even
compare the signatures during the termination of the placement, opening
of a new account with the specimen signature in file of Fernando. And
third, there was failure to ask the surrender of the promissory note
evidencing the placement.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
The acts of BPI employees was the proximate cause to the loss.
Nevertheless, the negligence of the employees of CBC should be taken also
into consideration. They closed their eyes to the suspicious large amount
withdrawals made over the counter as well as the opening of the account.
59
JAI ALAI V. BPI
66 SCRA 29
FACTS:
Checks were deposited by petitioner in its current account with the bank.
These checks were from a certain Ramirez, a consistent better in its
games, who was a sales agent from Inter-Island Gas. Inter-Island later
found out that of the forgeries committed in the checks and thus, it
informed all the parties concerned. Upon the demands on the bank as the
collecting bank, it debited the account of petitioner. Thereafter, petitioner
tried to issue a check for payment of shares of stock but such was
dishonored for insufficient funds. It filed a complaint against the bank.
HELD:
Respondent bank acted within legal bounds when it debited the account of
petitioner. When the petitioner deposited the checks to its account, the
relationship created was one of agency still and not of creditor-debtor. The
bank was to collect from the drawees of the checks with the corresponding
proceeds.
Bank may have the proceeds already when it debited the account of
petitioner. Nonetheless, there is still no creditor-debtor relationship.
Following Section 23, a forged signature is wholly inoperative and no right
to discharge it or enforce its payment can be acquired through or under the
forged signature except against a party who cannot invoke its forgery or
want of authority. It stands to reason that as a collecting bank which
indorsed the checks to the drawee-banks for clearing, should be liable to
the latter for reimbursement for the indorsements on the checks had been
forged prior to their delivery to the petitioner. The payments made by the
drawee banks to respondent were ineffective—the creditor-debtor
relationship hadn’t been validly effected.
60
FACTS:
REPUBLIC V. EBRADA
65 SCRA 680
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 44 of 190
Ebrada encashed a “Back Pay Check” issued by the Bureau of Treasury at
the Republic Bank in Escolta Manila. The Bureau of Treasury advised the
Republic Bank that the instrument was forged. It informed the bank that
the original payee of the check died 11 years before the check was issued.
Therefore, there was a forgery of his signature.
This is the sequence:
Martin Lorenzo
Ramon Lorenzo
Delia Dominguez
Mauricia Ebrada
The
deceased
person,
“payee”,
where
the
happened
original
forgery
Defendant-appelant
Ebrada refuses to return the proceeds of the check claiming that she
already gave it to Delia Dominguez. She also claims that she is a HDC
(holder in due course) and that the bank is already estopped.
HELD:
Ebrada should return the proceeds of the check to Republic Bank. As an
indorser of the check, she was supposed to have warranted that she has
good title to said check. See Section 65.
Section 23: When the 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 instruments, or to 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.
It is only the negotiation based on the forged or unauthorized signature
which is inoperative. Therefore:
Martin Lorenzo
Ramon Lorenzo
Delia Dominguez
Mauricia Ebrada
Signature inoperative
To Dominguez: operative
To Ebrada: operative
Drawee bank can collect from the one who encashed the check. If Ebrada
performed the duty of ascertaining the genuiness of the check, in all
probability, the forgery wouyld have been detected and the fraud defeated.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
NOTES FOR WEEK #5:
JULY 10 - 15, 2007
61
MANILA LIGHTER TRANS V. CA
182 SCRA 251
FACTS:
Perez was able to collect the checks payable to petitioner. The petitioner
wasn't able however to receive the checks. Instead, the payee’s signatures
therein were forged and was able to land in the hands of third persons who
deposited the same to their account in China bank. Petitioner sued
Chinabank for the sum of money. The trial court held that there was equal
negligence on the part of petitioner and bank but the appellate court held
that the bank had no liability whatsoever.
HELD:
Since the petitioner had no account with the bank and wasn't a client
thereof, the latter had no way of ascertaining the authenticities of its
indorsements on the checks which were deposited in the accounts of the
third party defendants in said bank. Respondent bank wasn't negligent
because, in accordance with banking practice, it caused the checks to pass
through the clearing house before it allowed their proceeds to be
withdrawn by the depositors.
62
ASSOCIATED BANK V. CA
208 SCRA 465
FACTS:
Reyes was engaged in the RTW business and held transactions with
different department stores. She was about to collect payments from the
department stores when she was informed that the payments had already
been made, through crossed checks issued in her business’ name and the
same were deposited with the bank. The bank consequently allowed its
transfer to Sayson who later encashed the checks. This prompted Reyes to
sue the bank and its manager for the return of the money. The trial and
appellate court ruled in her favor.
HELD:
There is no doubt that the checks were crossed checks and for payee’s
account only. Reyes was able to show that she has never authorized
Sayson to deposit the checks nor to encash the same; that the bank had
allowed all checks to be deposited, cleared and paid to one Sayson in
violation of the instructions in the said crossed checks that the same were
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 45 of 190
for payee’s account only; and that Reyes maintained a savings account
with the bank which never cleared the said checks.
Under accepted banking practice, crossing a check is done by writing two
parallel lines diagonally on the top left portion of the checks. The crossing
is special where the name of a bank or a business institution is written
between the two parallel lines, which means that the drawee should pay
only with the intervention of the company. The crossing is general where
the words written in between are “And Co.” and “for payee’s account only”,
as in the case at bar. This means that the drawee bank should not encash
the check but merely accept it for deposit.
The effects of crossing a check are as follows:
1. That the check may not be encashed but only deposited in the
bank
2. That the check may be negotiated only once—to one who has an
account with a bank
3. That 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 the
purpose
The subject checks were accepted for deposit by the bank for the account
of Sayson although they were crossed checks and the payee wasn't Sayson
but Reyes.
The bank stamped thereon its guarantee that all prior
endorsements and/or lack of endorsements guaranteed.
By such
deliberate and positive act, the bank had for all legal intents and purposes
treated the said checks as negotiable instruments and accordingly assumed
the warranty of the endorser.
When the bank paid the checks so endorsed notwithstanding that title has
not passed to the endorser, it did so at its peril and became liable to the
payee for the value of the checks.
63
ASSOCIATED BANK V. CA
252 SCRA 620
FACTS:
The province of Tarlac maintains an account with PNB-Tarlac. Part of its
funds is appropriated for the benefit of Concepcion Emergency Hospital.
During a post-audit done by the province, it was found out that 30 of its
checks weren’t received by the hospital. Upon further investigation, it was
found out that the checks were encashed by Pangilinan who was a former
cashier and administrative officer of the hospital through forged
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
indorsements.
This prompted the provincial treasurer to ask for
reimbursement from PNB and thereafter, PNB from Associated Bank. As
the two banks didn't want to reimburse, an action was filed against them.
HELD:
There is a distinction on forged indorsements with
instruments and instruments payable to order.
regard
bearer
With instruments payable to bearer, the signature of the payee or holder is
unnecessary to pass title to the instrument. Hence, when the indorsement
is a forgery, only the person whose signature is forged can raise the
defense of forgery against holder in due course.
In instruments payable to order, the signature of the rightful holder is
essential to transfer title to the same instrument. When the holder’s
signature is forged, all parties prior to the forgery may raise the real
defense of forgery against all parties subsequent thereto. In connection to
this, an indorser warrants that the instrument is genuine. A collecting
bank is such an indorser. So even if the indorsement is forged, the
collecting bank is bound by his warranties as an indorser and cannot set up
the defense of forgery as against the drawee bank.
Furthermore, in cases involving checks with forged indorsements, such as
the case at bar, the chain of liability doesn't end with the drawee bank.
The drawee bank may not debit the account of the drawer but may
generally pass liability back through the collection chain to the party who
took from the forger and of course, the forger himself, if available. In
other words, the drawee bank can seek reimbursement or a return of the
amount it paid from the collecting bank or person. The collecting bank
generally suffers the loss because it has te 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 indorsements.
With regard the issue of delay, a delay in informing the bank of the
forgery, which deprives it of the opportunity to go after the forger, signifies
negligence on the part of the drawee bank and will preclude it from
claiming reimbursement. In this case, PNB wasn't guilty of any negligent
delay. Its delay hasn't prejudiced Associated Bank in any way because
even if there wasn't delay, the fact that there was nothing left of the
account of Pangilinan, there couldn't be anymore reimbursement.
64
WESTMONT BANK V. ONG
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 46 of 190
373 SCRA 212
FACTS:
Ong was supposed to be the payee of the checks issued by Island
Securities. Ong has a current account with petitioner bank. He opted to
sell his shares of stock through Island Securities. The company in turn
issued checks in favor of Ong but unfortunately, the latter wasn't able to
receive any. His signatures were forged by Tamlinco and the checks were
deposited in his own account with petitioner. Ong then sought to collect
the money from the family of Tamlinco first before filing a complaint with
the Central Bank. As his efforts were futile to recover his money, he filed
an action against the petitioner. The trial and appellate court decided in
favor of Ong.
HELD:
Since the signature of the payee was forged, such signature should be
deemed 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 collect from the
collecting bank.
It should be liable for the loss because it is its legal duty to ascertain that
the payee’s endorsement was genuine before cashing the check. As a
general rule, a bank or corporation who has obtained possession of a check
with an unauthorized or forged indorsement of the payee’s signature and
who collects the amount of the check other from the drawee, is liable for
the proceeds thereof to the payee or the other owner, notwithstanding that
the amount has been paid to the person from whom the check was
obtained.
FACTS:
RPN, IBC and BBC were all assessed for tax by the BIR. To pay the
assessed taxes, they bought manager’s checks from petitioner bank. None
of these checks were paid to the BIR. They were found to have been
deposited in the account of a third person in Security Bank. As the taxes
remained unpaid, the BIR issued a levy, distraint and garnishment against
the three networks. An action was filed wherein it was decided that the
networks should be reimbursed for the amounts of the checks by petitioner
bank and the latter in turn, must be reimbursed by Security Bank. In the
appellate court, it was held that Traders Bank should be the only bank
liable.
HELD:
Petitioner ought to have known that where a check is drawn payable to the
order of one person and is presented for payment by another and purports
upon its face to have been duly indorsed by the payee of the check, it is
the primary duty of the petitioner to know that the check was duly
indorsed by the original payee, and it pays the amount of the check to the
third person, who has forged the signature of the payee, the loss falls upon
the petitioner who cashed the check. Its only remedy is against the person
to whom it paid the money.
It should be further noted that one of the checks was a crossed check. The
crossing of the check should have put petitioner on guard; it was dutybound to ascertain the indorser’s title to the check or the nature of his
possession.
DOCTRINE OF DESIRABLE SHORT CUT—plaintiff uses one action to reach,
by desirable short cut, the person who ought to be ultimately liable as
among the innocent persons involved in the transaction. In other words,
the payee ought to be allowed to recover directly from the collecting bank,
regardless of whether the check was delivered to the payee or not.
Sec. 124. Alteration of instrument; effect of. - Where a negotiable
instrument is materially altered without the assent of all parties
liable thereon, it is avoided, except as against a party who has
himself made, authorized, or assented to the alteration and
subsequent indorsers.
But when an instrument has been materially altered and is in the
hands of a holder in due course not a party to the alteration, he
may enforce payment thereof according to its original tenor.
On the issue of laches, Ong didn't sit on his rights. He immediately sought
the intervention of Tamlinco’s family to collect the sum of money, and later
the Central Bank. Only after exhausting all the measures to settle the
issue amicably did he file the action.
RIGHTS OF ONE NOT HOLDER IN DUE COURSE
•
Where an instrument has been materially altered, it is avoided in the
hands of one who is not a holder in due course as against a prior party
who has not assented to the alteration
65
WHERE INSTRUMENT NOT AVOIDED AS TO HOLDER NOT IN DUE COURSE
1. A party who has made the material alteration
2. A party who has authorized the material alteration
TRADERS ROYAL BANK V. RPN
390 SCRA 608
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 47 of 190
3.
4.
A party who has assented to the material alteration
Any subsequent indorsers
RIGHTS OF HOLDER IN DUE COURSE
•
He may enforce the instrument in its original tenor
•
He could recover the altered tenor to any party who has made,
authorized or assented the alteration, or any subsequent indorser of
the instrument
NO DISTINCTION BETWEEN FRAUDULENT AND INNOCENT ALTERATION
RIGHT TO COLLECT ORIGINAL CONSIDERATION
•
When the alteration wasn't fraudulently done, the holder may recover
the original consideration
WHERE DRAWEE BANK PAYS ALTERED AMOUNT, DRAWER HAS THE RIGHT
TO HAVE HIS ACCOUNT DEBITED WITH CORRECT AMOUNT ONLY
BANKS ARE BOUND BY THE 24-HOUR CLEARING HOUSE RULE AND MUST
NOTIFY THE COLLECTING BANKS WITHIN 24 HOURS OF ALTERATION OF
CHECKS
SECTION 23
Forgery with regard the signature of
the drawer or indorser
Real defense
SECTION 124 AND 125
Forgery on any other material in the
instrument
Personal defense—the instrument is
not avoided when it comes to a
holder in due course; the holder
may enforce the original tenor still
of the instrument
(f) Or which adds a place of payment where no place of
payment is specified, or any other change or addition which alters
the effect of the instrument in any respect, is a material alteration.
CASE DIGESTS: SECTIONS 124 AND 125
66
FACTS:
People’s Bank is sought to be liable for the amount involved in checks
subject of this case. This arose from the following facts:
PLDT drew a check on HSBC with the latter being the payee. The check
landed in the hands of a third person who successfully substituted his
name as payee and deposited the check with the People’s Bank. Upon
knowledge of this, reimbursement was being sought from the People’s
Bank and it refused to do so. This prompted to an action against it.
HELD:
The entire case of HSBC relied on the indorsement that has been
heretofore copied—namely, a guarantee of all prior indorsements made by
People’s Bank and since such an indorsement carries with it a concomitant
guarantee of genuineness, the People’s Bank is liable to HSBC for alteration
of the name of the payee. On the other hand, the People’s Bank relied on
the 24-hour regulation of the Central Bank that required after a clearing,
that all cleared items must be returned not later than 24 hours. It should
be noted that the checks were returned by HSBC 27 days later. Dismissal
of its complaint was therefore called for.
67
Sec. 125. What constitutes a material alteration. - Any alteration
which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment:
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
HSBC V. PEOPLE’S BANK
35 SCRA 140
REPUBLIC BANK V. CA
196 SCRA 100
FACTS:
SMC issued a dividend check in favor of Delgado and the check was drawn
against FBTC. Delgado was able to alter the check, increased the amount
of the same and deposited it with his account in Republic Bank. RB
indorsed it with FBTC. The SMC notified FBTC of the alterations made and
demanded for reimbursement.
Republic Bank then didn't want to
reimburse. The trial court held it liable.
HELD:
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 48 of 190
The 24-hour clearing rule is a valid rule applicable to commercial banks. It
is true that when an indorsement is forged, the collecting bank or last
indorser, as a general rule, bears the loss.
But the unqualified
endorsement of the collecting bank of the checks should be read together
with the 24-hour regulation on clearing house operation. Thus, when a
drawee bank fails to return the forged check to the collecting bank within
the 24-hour clearing rule, the collecting bank is absolved from liability.
In view of the foregoing, the embassy as the drawer of the 3 checks in
question cannot be held liable. It is apparent that the said 3 checks were
(fraudulently altered) by Boncan as to their accounts and therefore wholly
inoperative (note: should be “avoided”).
68
FACTS:
DECS issued a check in favor of Abante Marketing containing a specific
serial number, drawn against PNB. The check was deposited by Abante in
its account with Capitol and the latter consequently deposited the same
with its account with PBCOM which later deposited it with petitioner for
clearing. The check was thereafter cleared. However, on a relevant date,
petitioner PNB returned the check on account that there had been a
material alteration on it. Subsequent debits were made but Capitol cannot
debit the account of Abante any longer for the latter had withdrawn all the
money already from the account.
This prompted Capitol to seek
reclarification from PBCOM and demanded the recrediting of its account.
PBCOM followed suit by doing the same against PNB. Demands unheeded,
it filed an action against PBCOM and the latter filed a third-party complaint
against petitioner.
BANCO ATLANTICO V. AUDITOR GENERAL
81 SCRA 335
FACTS:
Boncan was the Finance Officer of the Philippine Embassy in Madrid who on
many occasions negotiated with Banco Atlantico checks, allegedly endorsed
to her by the embassy. On these occasions, the bank allowed the payment
of the checks, notwithstanding the fact that the drawee bank has not yet
cleared the checks for collection. This was premised on the finding that
Boncan had special relations with the employees of the bank. And that
upon presentment to the drawee bank, the checks were dishonored due to
non-acceptance allegedly on the ground that the drawer has ordered the
stoppage of payment. This prompted Banco Atlantico to collect from the
Philippine Embassy for the funds released to Boncan but the latter refused.
This eventually led to filing of money claim of the bank with the Auditor
General.
HELD:
On whether or not Banco Atlantico was a holder in due course, it is not.
Following the decision of the Auditor General in denying the claim of the
bank, the checks were demand notes. It should have been put on guard
when Boncan negotiated the checks with them and subsequently deposited
the same to her account.
Even though it were demand notes, she
instructed the bank that the same be not presented for collection till a later
date. The fact that the amount was quite big and it was the payee herself
who made the request that the same be not presented for collection until a
fixed date in the future was proof of a glaring infirmity or defect in the
instrument. It loudly proclaims “Take me at your own risk.” It was
obvious by then that the bank had knowledge of the infirmity or defect of
the checks. Furthermore, what it did when it allowed payment before
clearing is beyond the normal and ordinary banking practice especially
when the bank involved is a foreign bank and the amounts involved were
large. Boncan wasn't even a client of the bank but was someone who had
special relations with its officers.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
69
PNB V. CA
256 SCRA 491
HELD:
An alteration is said to be material if it alters the effect of the instrument.
It means an unauthorized change in the instrument that purports to modify
in any respect the obligation of a party or an unauthorized addition of
words or numbers or other change to an incomplete instrument relating to
the obligation of the party. In other words, a material alteration is one
which changes the items which are required to be stated under Section 1 of
the NIL.
In this case, the alleged material alteration was the alteration of the serial
number of the check in issue—which is not an essential element of a
negotiable instrument under Section 1. PNB alleges that the alteration was
material since it is an accepted concept that a TCAA check by its very
nature is the medium of exchange of governments, instrumentalities and
agencies. As a safety measure, every government office or agency is
assigned checks bearing different serial numbers.
But this contention has to fail. The check’s serial number is not the sole
indicia of its origin. The name of the government agency issuing the check
is clearly stated therein. Thus, the check’s drawer is sufficiently identified,
rendering redundant the referral to its serial number.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 49 of 190
Therefore, there being no material alteration in the check committed, PNB
could not return the check to PBCOM. It should pay the same.
ATTY. MERCADO’S QUESTION: HOW DO YOU RECONCILE THE OPINION
OF VITUG WITH AGBAYANI’S RE: MATERIAL ALTERATION?
Vitug only refers to innocent alterations not affecting negotiability and
those under Section 124 and 125
70
AMERICAN BANK V. MACONDRAY
4 PHIL 695
FACTS:
MANILA, P. I., August 12, 1902.
$300.00
At sight pay to my order three hundred dollars, value received, and charge
to my account.
V. S. WOLFF.
To F. H. TAYLOR & Co.,
Louisville, Kentucky.
No ................................
[Indorsements.]
V. S. Wolff. The signature is O. K. payment guaranteed. Protest, demand,
and notice of nonpayment waived. Macondray & Company.
Pay to First National Bank of San Francisco, or order. American Bank,
Manila, P. I. H. B. Mulford, cashier.
Pay to 3rd National Bank or order. The First National Bank of San
Francisco. James K. Lynch, cashier.
American Bank claims the right to recover from Wolff the amount of the bill
of exchange upon the theory that Macondray guaranteed the payment of
the instrument. This was refuted by Macondray by saying that it didn't
guarantee the payment of the instrument. Instead, it only certified the
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
signature of Wolff and that the statement “payment guaranteed xxx” was
not written on said indorsement at the time it signed the firm name.
HELD:
An examination of the alleged indorsement of Macondray & Co. which
appeared upon the said bill of exchange at the time of the trial, and the
indorsement of said company at the time of the protest of said bill of
exchange, shows beyond peradventure of doubt that the contention of the
defendant is true, and that part of the indorsement which says "Payment
guaranteed. Protest, demand, and notice of nonpayment waived" was
added by some person after the signature of the defendant, Macondray &
Co., and after the protest of said bill. The indorsement made by Macondray
& Co. was changed, after said indorsement by said company, by adding
thereto the statement "Payment guaranteed. Protest, demand, and notice
of nonpayment waived," and that the indorsement actually made by
Macondray & Co. was in the following form:
V. S. Wolff. The signature is O. K. Macondray & Co.
The liability of an indorser of a bill of exchange, after due protest and
notice of nonpayment and dishonor, is the same as that of the original
obligors on such a contract, and any material alteration in the terms of this
contract by the holder of the same, without the consent of the obligor, will
relieve such obligor from all liability thereon.
The original indrosement then of the company was for the purpose only of
assuring the American Bank that the signature of Wolff was genuine—that
is to say, that the person whom he represented himself to be. It was an
indorsement for identification of the person only and not for the purpose of
incurring liability to the payment of such bill of exchange.
71
MONTINOLA V. PNB
88 PHIL 178
FACTS:
Ramos, as a disbursing officer of an army division of the USAFE, made cash
advancements w/ the Provincial Treasurer of Lanao. In exchange, the
Prov’l Treasurer of Lanao gave him a P500,000 check. Thereafter, Ramos
presented the check to Laya for encashment. Laya in his capacity as
Provincial Treasurer of Misamis Oriental as drawer, issued a check to
Ramos in the sum of P100000, on the Philippines National Bank as drawee;
the P400000 value of the check was paid in military notes.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 50 of 190
Ramos was unable to encash the said check for he was captured by the
Japanese. But after his release, he sold P30000 of the check to Montinola
for P90000 Japanese Military notes, of which only P45000 was paid by the
latter. The writing made by Ramos at the back of the check was to the
effect that he was assigning only P30000 of the value of the document with
an instruction to the bank to pay P30000 to Montinola and to deposit the
balance to Ramos's credit. This writing was, however, mysteriously
obliterated and in its place, a supposed indorsement appearing on the back
of the check was made for the whole amount of the check. At the time of
the transfer of this check to Montinola, the check was long overdue by
about 2-1/2 years.
Montinola instituted an action against the PNB and the Provincial Treasurer
of Misamis Oriental to collect the sum of P100,000, the amount of the
aforesaid check. There now appears on the face of said check the words in
parenthesis "Agent, Phil. National Bank" under the signature of Laya
purportedly showing that Laya issued the check as agent of the Philippine
National Bank.
HELD:
The words "Agent, Phil. National Bank" now appearing on the face of the
check were added or placed in the instrument after it was issued by the
Provincial Treasurer Laya to Ramos. The check was issued by only as
Provincial Treasurer and as an official of the Government, which was under
obligation to provide the USAFE with advance funds, and not as agent of
the bank, which had no such obligation. The addition of those words was
made after the check had been transferred by Ramos to Montinola. The
insertion of the words "Agent, Phil. National Bank," which converts the
bank from a mere drawee to a drawer and therefore changes its liability,
constitutes a material alteration of the instrument without the consent of
the parties liable thereon, and so discharges the instrument
72
THE INTERNATIONAL CORPORATE BANK V. CA AND PNB
501 SCRA 20
FACTS:
Here comes again the Ministry of Education issuing checks drawn against
PNB. It was deposited with petitioner bank and the latter consequently
submitted the checks to PNB for clearing. After the 24-hour clearing period
without any reply from the latter, the petitioner bank credited the account
with the values of the checks. Thereafter, PNB returned the checks without
clearing them for allegedly being materially altered.
HELD:
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
The alterations in the checks were made on its serial numbers. This has
been long decided in a previous case involving PNB, the same bank in this
case. An alteration on the serial number is not to be considered as a
material alteration. A material alteration is one which changes the items
relating to any of the essential requisites mentioned in Section 1.
There is no need to rule on the 24-hour clearing period since there was no
material alteration to speak of. PNB had no right to dishonor the checks
and return them to petitioner. Thus, PNB is liable for the value of the
checks.
**Modification of the 24-hour clearing rule. Now, its notice after 24 hours
of discovering the fraud or material alteration.
73
METROBANK V. CABLIZO
510 SCRA 259
FACTS:
Cablizo maintained an account with petitioner. It drew a check payable to
cash payable to a certain Marquez, for the latter’s sales commission. The
check was subsequently deposited in Westmont bank and the latter
submitted it with Metrobank for clearing. The check was cleared.
Thereafter, the bank’s representative asked Cablizo if he issued a check for
P91,000. The answer was in the negative. This prompted Cablizo to call
Metrobank and ask for the recrediting of P90,000 but petitioner failed to
recredit the amount prompting Cablizo to file an action against it.
HELD:
An alteration is said to be material if it alters the effect of the instrument.
It means an unauthorized change in the instrument that purports to modify
in any respect the obligation of a party or an unauthorized addition of
words or numbers or other change to an incomplete instrument relating to
the obligation of the party. In other words, a material alteration is one
which changes the items which are required to be stated under Section 1 of
the NIL.
The check in issue was materially altered when its amount was increased
from P1000 to P91000. Cablizo was not the one who authorized or made
such increase. There is no showing that he was negligent in exercising
what was due in a prudent man which could have otherwise prevented the
loss. Cablizo was never remiss in the preparation and issuance of the
check.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 51 of 190
The doctrine of equitable estoppel is inapplicable against Cablizo. This
doctrine states that when one of the two innocent person, each guiltiness
of an intentional or moral wrong, must suffer a loss, it must be borne by
the one whose erroneous conduct, either by omission or commission, was
the cause of the injury. Negligence is never presumed.
Metrobank was actually the one remiss in its duties. The CA took into
consideration that the alterations were actually visible in the eye and yet
the bank allowed someone not acquainted with the examination of checks
to do the same. Furthermore, it cannot rely on the indorsement of
Westmont Bank of the check. It should have exercised meticulous care in
handling the affairs of its clients especially if the client’s money is involved.
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.
48 PHIL 5
FACTS:
Laguna Coconut Oil Company executed the following promissory note in
favor of the Philippine Vegetable Oil Company:
P50,000.00.
One month after date we promise to pay to the Philippine Vegetable Oil
Company, Inc., or order at City of Manila, Philippine Islands, the sum of
fifty thousand pesos (P50,000), Philippine currency; value received.
In case of non-payment of this note at maturity, we are to pay interest at
the rate of nine per cent (9%) per annum on the said amount and the
further sum of P5,000 in full, without any deduction as and for costs,
expenses and attorney's fees for collection whether actually incurred or
not.
Manila, Philippine Islands, April 26, 1920.
PRESUMPTION OF CONSIDERATION IS DISPUTABLE
•
One of the disputable presumptions laid down by our Rules of Court is
that a negotiable instrument was given or indorsed for a sufficient
consideration
LAGUNA COCONUT OIL CO.
By BALDOMERO COSME
President
CONSIDERATION NEED NOT ALLEGED OR PROVED
•
In an action based on a negotiable instrument, it is unnecessary to
aver or prove consideration for it is imported and presumed from the
fact that it is a negotiable instrument
After a month, Fidelity & Surety Company of the Philippine Islands made
the following notation on the note:
MERE INTRODUCTION OF INSTRUMENT SUFFICIENT
•
The mere introduction of the instrument sued on in evidence, prima
facie entitles the plaintiff of a recovery and unless such prima facie
case is overcome by evidence produced by the defendant the plaintiff
is entitled to recover
EFFECT OF LACK OF CONSIDERATION
•
The same is without legal effect and the payment for the note is not
demandable
CASE DIGESTS: SECTION 24
74
BANK OF THE PHILIPPINE ISLANDS V. LAGUNA COCONUT
OIL
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
For value received, we hereby obligate ourselves to hold the Laguna
Cocoanut Oil Co. harmless against loss for having discounted the foregoing
note at the value stated therein.
Philippine Vegetable Oil Company indorsed the note to BPI, which at
maturity date demanded payment from both Laguna Oil and Fidelity
Surety. Both having failed to pay, BPI instituted actions against them. PNB
pleaded the note with its indorsements by copy and alleged that the
Fidelity & Surety Company by having undertaken to hold the Laguna Oil
harmless for having discounted the note, contracted the obligation to pay
said note on behalf of the Laguna Oil and to be surety for the latter. The
trial court held against Fidelity and Surety and demanded it to pay the
note. The trial court also held that the words “BPI” should have been
placed in the indorsement rather than “Laguna Oil”.
HELD:
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 52 of 190
The trial court underestimated the importance of pleading the supposed
mistake in the complaint. The judgment as it stands clearly involves a
reformation of the contract of guaranty and it is elementary that the facts
upon which relief by reformation is sought must be put in issue by the
pleadings. Jurisprudence states that a court of equity cannot reform an
instrument except on allegations, which make out a case for the equitable
remedy asked. The allegations must show that the instrument sought to be
reformed fails to express the real agreement or transaction between the
parties by reason of their mutual mistake or on account of fraud of one
them or fraud or inequitable condition on one side and mistake on the
other.
The indorsement upon which this action is brought does not in terms show
any obligation in favor of PNB and the action can only be maintained upon
the theory that the writing does not express the true intent of the parties.
It could be speculated that the guarantee in question was intended for the
benefit of the party who subsequently discounted the note, but this cannot
be certain. The note may have been merely an accommodation not and the
guarantee may have been intended for the protection of the maker in the
event of the discounting of the note or its transfer to a third party. The
appellee contends that this hypothesis is negatived by the fact that the
words "value received" appear in the note as quoted in the stipulation of
facts. But that proves nothing definitely or conclusively. Unless otherwise
stated in the instrument, a negotiable promissory note implied prima facie
valuable consideration moving to the maker whether the words "value
received" appear in it or not.
An accommodation note showing on its face in express terms that it had
been issued for no consideration would be of little or no use to the payee,
and for that reason, if for no other, practically all accommodation notes are
so drawn as to either express or imply a valuable consideration prima facie.
There is therefore nothing in the note here in question to distinguish it
from an ordinary accommodation note. This being so and the guarantee of
the Fidelity & Surety Company by its terms being in favor of the maker of
the note, there is at least a possibility that the Fidelity, if called upon to do
so, might have been able to prove that the note was given as an
accommodation to the Vegetable Oil Company. This possibility existing, the
court was not justified in virtually reforming the document by mere
construction without proper pleadings. In this connection it should be borne
in mind that contracts of suretyship and guarantee are strictly construed in
favor of the surety or guarantor.
75
TRAVEL ON V. CA
210 SCRA 351
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
FACTS:
Petitioner was a travel agency involved in ticket sales on a commission
basis for and on behalf of different airline companies. Miranda has a
revolving credit line with the company. He procured tickets on behalf of
others and derived commissions from it.
Petitioner filed a collection suit against Miranda for the unpaid amount of
six checks. Petitioner alleged that Miranda procured tickets from them
which he paid with cash and checks but the checks were dishonored upon
presentment to the bank. This was being refuted by Miranda by saying
that he actually paid for his obligations, even in the excess. He argued
that the checks were for accommodation purposes only. The company
needed to show to its Board of Directors that its accounts receivable was in
good standing. The RTC and CA held Miranda not to be liable.
HELD:
Reliance by the lower and appellate court on the company’s financial
statements were wrong, to see if Miranda was liable or not. This financial
statements were actually not updated to show that there was indebtedness
on the part of Miranda. The best evidence that the courts should have
looked at were the checks itself. There is a prima facie presumption that a
check was issued for valuable consideration and the provision puts the
burden upon the drawer to disprove this presumption. Miranda was unable
to relieve himself of this burden.
Only clear and convincing evidence and not mere self-serving evidence of
drawer can rebut this presumption. The company was entitled to the
benefit conferred by the statutory provision. Miranda failed to show that
the checks weren’t issued for any valuable consideration. The checks were
clear by stating that the company was the payee and not a mere
accommodated party. And also, notice was given to the fact that the
checks were issued after a written demand by the company regarding
Miranda’s unpaid liabilities.
76
PINEDA V. DELA RAMA
121 SCRA 671
FACTS:
Pineda was caught in a case against the NARIC for his alleged
misappropriation of many cavans of palay. He hired Atty. Dela Rama to
delay the filing of the complaint against him, on alleged representation of
the lawyer that he is a friend of the NARIC administrator.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 53 of 190
Pineda then issued a promissory note in favor of dela Rama to pay for the
advances that the lawyer made to the administrator to delay the filing of
the complaint.
Dela Rama on the other hand contended that the
promissory note was for the loan advanced to Pineda by him. Dela Rama
filed an action against Pineda for the collection of the amount of the note.
HELD:
The presumption that a negotiable instrument was issued for valuable
consideration is a rebuttable presumption. It can be rebutted by proof to
the contrary.
In the case at bar, the claims of dela Rama that the promissory note was
for a loan advanced to Pineda is unbelievable. The grant of a loan by a
lawyer to a moneyed client and whom he has known for only 3 months can
not be relied on. Pineda had actually just purchased numerous properties.
It is highly illogical that he would loan from dela Rama P9500 for 5 days
apart.
Furthermore, the note was void ab initio because the consideration given
was to influence the administrator to delay charges against Pineda. The
consideration was void for being against law and public policy.
Sec. 25. Value, what constitutes. — Value is any consideration
sufficient to support a simple contract. An antecedent or preexisting debt constitutes value; and is deemed such whether the
instrument is payable on demand or at a future time.
VALUABLE CONSIDERATION, IN GENERAL
•
Consideration is the inducement—cause or impelling influence which
induces a contracting party to enter into the contract
•
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 side
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.
MEANING OF A HOLDER FOR VALUE
•
One who gives valuable consideration for an instrument issued or
negotiated to him is a holder for value
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
•
Not limited to one who is known to have given valuable
consideration for the instrument he holds—it refers to any holder
of an instrument for which value has been given at any time
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.
APPLICATION OF SECTION 27
•
Suppose that A makes a note in the sum of P1000 payable to the order
of B. B owes C P600. C is said to have a lien on the note to the
extent of P600 only, and to that extent, he is a holder for value.
•
Can C as indorsee collect the whole amount of P1000 from A, or only
P600? It depends. If A maker, has defenses against B indorser, such
as absence of consideration, C, even if a holder in due course can
collect only P600 from A, the extent of his lien.
•
Reason for the rule: C is actually a holder in due course for P600 only.
He is a holder in due course for such as he is a holder for value for
only P600. For the balance of P400 he is not a holder for value, and
since being a holder for value is one of the requisites of a holder in due
course, he cannot be a holder in due course as far as the P400 is
concerned.
•
If A has personal defenses, he cannot use such as far as the P600 is
concerned.
•
If A on the other hand has real defenses, C cannot collect anything.
•
But if A maker doesn't have any defenses at all against B indorser,
then C can collect the whole amount of P1000 and hold the P400 for
the benefit of B.
NOTES FOR WEEK #6:
JULY 16 - JU LY 20, 2007
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.
ABSENCE OF CONSIDERATION
•
It is total lack of any valid consideration
•
Examples—note for future illicit cohabitation; note of husband to wife,
upon promise of wife to withdraw all opposition to proceedings of
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 54 of 190
•
divorce instituted by him; a note given in consideration of an
agreement to stifle or hinder a public prosecution for a felony;
consideration for commercial paper is clearly fraudulent
Embraces transactions where no consideration was intended to pass
FAILURE OF CONSIDERATION
•
It is the neglect or failure of one of the parties to give, to do or
perform the consideration agreed upon
•
Implies that the giving of valuable consideration was contemplated but
that it failed to pass
ABSENCE AND FAILURE OF CONSIDERATION AS DEFENSES
•
Matter of defense against persons who are not holders in due course
•
They are personal defenses
EFFECT OF WANT OF CONSIDERATION BETWEEN THE DRAWER AND
ACCEPTOR AS TO HOLDER
•
The drawee, by accepting unconditionally the bill, becomes liable to
the holder, and cannot allege want of consideration between him and
drawer
•
Holder is a stranger to the transaction between the drawer and drawee
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.
ACCOMODATION PARTY: REQUISITES
•
One who has signed the instrument as maker, drawer, indorser,
acceptor, without receiving any value therefore and for the purpose of
lending his name to some other person
•
Requisites:
1. He must be a party to the instrument, signing as maker, acceptor,
indorser, or drawer
2. He must not receive any value therefore
3. He must sign for the purpose of lending his name or credit
RIGHTS AND LEGAL POSITION OF AN ACCOMODATION PARTY
•
The accommodation party is generally regarded as a surety for the
party accommodated
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
•
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 a
principal and sureties, the accommodation parties being the sureties
ACCOMODATED PARTY CANNOT RECOVER FROM ACCOMODATION PARTY
•
Absence of consideration is a defense
•
In fact as between them, the understanding is that the accommodated
party either is to
1. To reimburse the amount which the accommodation party may be
obliged to pay
2. To pay the instrument directly to the holder
LIABILITY OF THE ACCOMODATION PARTY
•
The accommodation party is liable on the instrument to a holder in
value, notwithstanding such holder at any time of the taking of the
instrument knew him to be only an accommodation party
•
The accommodation party doesn't receive any valuable consideration
for the instrument he signs but he is liable to a holder for value as if
the contract wasn't for accommodation
CORPORATIONS ARE NOT LIABLE AS ACCOMODATION PARTIES EVEN TO
HOLDERS FOR VALUE
OFFICERS SIGNING FOR CORPORATION AS ACCOMODATION PARTY
WITHOUT AUTHORITY TO DO SO FOR THEIR INDIVIDUAL DEBTS OR
TRANSACTIONS ARE PERSONALLY LIABLE THEREON
HOLDER MUST OTHERWISE BE A HOLDER IN DUE COURSE
ACCOMODATION PARTY MAY ACCOMMODATE ONE WHO IS NOT A PARTY
TO THE INSTRUMENT
ACCOMMODATION PARTY CAN INTERPOSE DEFENSE OF WANT
CONSIDERATION AGAINST ONE NOT HOLDER IN DUE COURSE.
OF
CASE DIGESTS: SECTION 29
77
CLARK V. SELINER
42 PHIL 384
FACTS:
Sellner with two other persons, signed a promissory note solidarily binding
themselves to pay to the order of R.N Clark. The note matured but the
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 55 of 190
amount wasn't paid. The defendant alleges that he didn't receive any
amount of the debt; that the instrument wasn't presented to him for
payment and being an accommodation party, he is not liable unless the
note is negotiated, which wasn't done.
HELD:
On the first issue, the liability of Sellner as one of the signers of the note,
is not dependent on whether he has or has not, received any part of the
debt. The defendant is really and expressly one of the joint and several
debtors of the note and as such he is liable under the provisions of Section
60 of the NIL.
As to the presentment for payment, such action is not necessary in order
to charge the person primarily liable, as is the defendant Sellner.
As to whether or not Sellner is an accommodation party, it should be taken
into account that by putting his signature to the note, he lent his name, not
to the creditor, but to those who signed with him placing him in the same
position and with the same liability as the said signers. It should be noted
that the phrase”without receiving value therefore” as used in section 29
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.” It is immaterial as far as the creditor is concerned, whether one of
the signers has or has not received anything in payment for the use of his
name. In this case, the legal situation of Sellner is that of a joint surety
who upon the maturity of the note, pay the debt, demand the collateral
security and dispose of it to his benefit. As to the plaintiff, he is a holder
for value.
78
CANEDA V. CA
181 SCRA 762
FACTS:
Gueson for value received, executed a promissory note in favor of Caneda,
promising to pay monthly installments with interest per annum. That to
secure the obligation, he executed a chattel mortgage and used a Toyota
Jiffy jeep as collateral; that it is expressly provided for in the promissory
note that in case of default in any installment would deem that whole
obligation demandable. This promissory note was later assigned to FNCB.
Gueson then defaulted in his obligation and had an outstanding balance.
Despite demands on Gueson, he failed and refused to pay. This prompted
FNCB to file an action for replevin and sum of money, and in the
alternative, prayed for the payment of the outstanding balance plus
interest.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Gueson in his answer alleged that he was just an accommodation party in
favor of Caneda. This was denied by Caneda.
The trial court held that Gueson was indeed an accommodation party in
favor of Caneda; that there was a novation in the form of substitution of
debtors when Caneda executed the undertaking assuming the liability of
Gueson in favor of FNCB; that the phrase “with recourse to Gueson in case
of default” found in the undertaking was inserted only after Caneda and
FNCB had already signed the undertaking and without the knowledge of
Gueson and that Caneda was in bad faith when it tried to evade payment
of a justly-secured legal obligation.
HELD:
As to the merits of the case, it is undisputed that Gueson executed a
promissory note in favor of Caneda, secured by a chattel mortgage on a
Toyota Jiffy jeep as collateral; which promissory note and chattel mortgage
was assigned by Caneda in favor of FNCB evidently to secure his obligation
with said company, with the knowledge and consent of Gueson. The
records also clearly established that FNCB tried to collect from Gueson,
Caneda consented and affixed his signature in an undertaking thereby
acknowledging indebtedness in favor of FNCB.
As between Gueson and Caneda, it is obvious that whether private
agreement between them is binding on them alone and not on FNCB whose
only concern in the whole transaction is the repayment of the loan it has
extended.
As regards FNCB, Caneda is the real debtor of the company and Gueson is
only an accommodation party of Caneda. The trial court held that there
was novation as there was substitution of debtors when Caneda executed
the undertaking. But the CA is correct, by saying that there was no
novation. Novation is never presumed. It must be explicitly stated.
Caneda merely confirmed that he was the real debtor of FNCB in the
undertaking signed, while Gueson merely accommodated Caneda in signing
the promissory note and executing the chattel mortgage. Thus, it has been
ruled that one who signs as maker, drawer, acceptor or indorser, without
receiving value therefore, and for the purpose of lending his name to some
other person is liable to the instrument to a holder for value,
notwithstanding the fact that such holder at the time of the taking the
instrument knew him to be only an accommodation party. Nonetheless,
after paying the holder, he is entitled to obtain reimbursement from the
party accommodated.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 56 of 190
Likewise, it is no defense to state that Caneda and Gueson didn't receive
any value for the promissory note executed, both claiming to be
accommodation parties. A third person advances the face value of the
note to the accommodated party at the time of the creation of the note,
the consideration for the note as regards the maker is the money advanced
to the accommodated party, and it cannot be said that the note is lacking
in consideration as to the accommodating party just becaue he himself
received some of the money. It is enough that the value given for the note
at the time of its creation.
79
TOWN SAVINGS AND LOAN BANK V. CA
223 SCRA 459
FACTS:
Spouses Hipolito applied for and was granted a loan by the bank, which
was secured by a promissory note. For failure to pay their monthly
payments, they were declared in default.
The spouses denied having any liability. They stated that the real party-ininterest is the sister of the husband, Pilarita Reyes. The spouses, not
having received part of the loan, were mere guarantors of Reyes. As such,
they protested against being dragged into the litigation.
The trial court held that they were liable as accommodation parties to the
promissory note. This was reversed by the Court of Appeals.
HELD:
An accommodation party is one who has signed the instrument as maker,
drawer, indorser, without receiving value therefore 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 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 case at bar, it is indisputable that the spouses signed the promissory
note to enable Reyes to secure a loan from the bank. She was the actual
beneficiary of the loan and the spouses accommodated her by signing the
note.
80
MAULINI V. SERRANO
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
28 PHIL 640
FACTS:
This is an appeal from a judgment of the Court of First Instance of the city
of Manila in favor of the plaintiff for the sum of P3,000, with interest
thereon at the rate of 11⁄2 per cent month from September 5, 1912,
together with the costs.
The action was brought by the plaintiff upon the contract of indorsement
alleged to have been made in his favor by the defendant upon the following
promissory note:
3,000.
Due 5th of September, 1912.
We jointly and severally agree to pay to the order of Don Antonio G.
Serrano on or before the 5th day of September, 1912, the sum of three
thousand pesos (P3,000) for value received for commercial operations.
Notice and protest renounced. If the sum herein mentioned is not
completely paid on the 5th day of September, 1912, this instrument will
draw interest at the rate of 11⁄2 per cent per month from the date when
due until the date of its complete payment. The makers hereof agree to
pay the additional sum of P500 as attorney's fees in case of failure to pay
the note.
Manila, June 5, 1912.
(Sgd.) For Padern, Moreno & Co., by F. Moreno, member of the firm. For
Jose Padern, by F. Moreno. Angel Gimenez.
The note was indorsed on the back as follows:
Pay note to the order of Don Fernando Maulini, value received. Manila,
June 5, 1912. (Sgd.) A.G. Serrano.
HELD:
1.
The accommodation to which reference is made in Section 29 is
not one to the person who takes the note but one to the maker or
indorser of the note. It is true, that in the case at bar, it was an
accommodation to the plaintiff, in the popular sense, to have the
defendant indorse the note; but it wasn't the accommodation
described in the law but rather a mere favor to him and one which
in no way bound Serrano.
In cases of accommodation
indorsement, the indorser makes the indorsement for the
accommodation of the maker. Such an indorsement is generally
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 57 of 190
2.
81
for the purpose of better securing the payment of the note—that
is, he lends his name to the maker and not the holder.
Parol evidence is admissible for the purposes named.
The
prohibiton against parol evidence is to prevent alteration, change,
modification, or contradiction of the term of a written instrument,
admittedly existing, by the use of some parol evidence except in
cases specifically named in the action. The case at bar is not one
where the evidence offered varies, alters, modifies, or contradicts
the terms of the indorsement admittedly existing. The evidence
was not offered for that purpose. The purpose was to show that
the contract of indorsement ever existed; that the minds of the
parties never met on the terms of such contract; that they never
mutually agreed to enter into such contract; and that there never
existed a consideration upon which such an agreement could be
founded.
ACUNA V. VELOSO
50 PHIL 241
FACTS:
At the time of execution of the note, Xavier was the agent of Veloso in the
management of the latter’s real property in Manila. Though lacking in
capital, Xavier was engaged in real estate trading, so far as his credit
permitted, upon his own account. His attention was then attracted to a
piece of property, which was then on the market. Xavier communicated to
his principal his desire to acquire the property and at the same time
requested that Veloso assist him in the matter. Veloso was later convinced
to help out Xavier. Thereafter, Gonzales lent a helping hand by advancing
the money needed by Xavier, on the condition that a note should be issued
jointly and severally by Xavier and Veloso; and that Xavier should agree to
purchase ½ interest from Gonzales which the latter possessed in a
mortgage credit.
MANILA, .................................................
On or before six months after date we will jointly and severally pay in
Manila to the order of ........................... the sum of twenty-five thousand
pesos (P25,000), Philippine currency, for value received of the same in
cash, for commercial operations, and with interest at 10 per cent per
annum, payable monthly.
Protest waived.
(Sgd.) N XAVIER
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
M. G. VELOSO.
Witness:
Sgd.) MODESTO ALBERTO
The sale of the property ensued. It was found out that the property has
already been encumbered by a mortgage with Shanghai Life. And as the
value of the property was more than the property mortgaged by Xavier,
Gonzales demanded another second mortgage.
A foreclosure proceeding took place and while the result of such was
pending, the note was transferred to the hands of Acuna who filed an
action against Veloso and Xavier, both of which denied liability. Xavier
posed the special defense that he had executed a second mortgage to
secure the note and that he already sold the mortgaged property and
another has assumed the indebtedness.
The trial court decided that Veloso and Xavier were solidarily liable to
Acuna/Gonzales. Nonetheless, Veloso was held to be an accommodation
party, who has a right to reimbursement from Xavier for whatever he may
pay for the note.
HELD:
The case being cited by defendants is not applicable to the case at bar.
The case of Rylee v. Wilkinson contemplates a situation wherein an
accommodation maker executes a note in favor of an accommodated party.
In the case at bar, the accommodation party and accommodated party
execute a note jointly and severally to a person who advances the face
value of the note to one of its makers at the very time of its creation. The
consideration for the note is the money advanced to Xavier. Value was
given for the note and that is enough. In equity as between Veloso and
Xavier, Veloso is entitled to the rights as a surety and Xavier is the real
debtor; but as to the creditor who gave value for the note at the time of its
creation, both of Veloso and Xavier are mere joint and several makers.
82
PNB V. MAZA AND MECENAS
48 PHIL 207
FACTS:
Maza and Macenas executed a total of five promissory notes. These were
not paid at maturity. And to recover the amounts stated on the face of the
NEGOTIABLE INSTRUMENTS NOTES
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Page 58 of 190
promissory notes, PNB initiated an action against the two. The special
defense posed by the two is that the promissory notes were delivered to
them in blank by a certain Enchaus and were made to sign the notes so
that the latter could secure a loan from the bank. They also alleged that
they never negotiated the notes with the bank nor have they received any
value thereof.
They also prayed that Enchaus be impleaded in the
complaint but such was denied. The trial court then held in favor of the
bank.
HELD:
The defendants attested to the genuineness of the instruments sued on.
Neither did they point out any mistake in regard to the amount and
interest that the lower court sentenced them to pay. Given such, the
defendants are liable. They appear as the makers of the promissory notes
and as such, they must keep their engagement and pay as promised.
And assuming that they are accommodation parties, the defendants having
signed the instruments without receiving value thereof, for the purpose of
lending their names to some other person, are still liable for the promissory
notes. The law now is such that an accommodation party cannot claim no
benefit as such, but he is liable according to the face of his undertaking,
the same as he himself financially interest in the transaction. It is also no
defense to say that they didn't receive the value of the notes. To fasten
liability however to an accommodation maker, it is not necessary that any
consideration should move to him. The accommodation which supports the
promise of the accommodation maker is that parted with by the person
taking the note and received by the person accommodated.
83
PRUDENCIO V. CA
143 SCRA 7
FACTS:
Appellants are the owners of a property, which they mortgaged to help
secure a loan of a certain Domingo Prudencio. On a later date, they were
approached by their relative who was the attorney-in-fact of a construction
company, which was in dire need of funds for the completion of a municipal
building. After some persuasion, the appellants amended the mortgage
wherein the terms and conditions of the original mortgage was made an
integral part of the new mortgage. The promissory note covering the
“second loan” was signed by their relative. It was also signed by them,
indicating the request that the check be released by the bank.
After the amendment of the mortgage was executed, a deed of assignment
was made by Toribio, assigning all the payments to the Bureau to the
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
construction company. This notwithstanding, the Bureau with approval of
the bank, conditioned however that they should be for labor and materials,
made three payments to the company. The last request was denied by the
bank, averring that the account was long overdue, the remaining balance
of the contract price should be applied to the loan.
The company abandoned the work and as consequence, the Bureau
rescinded the contract and assumed the work. Later on, the appellants
wrote to the PNB that since the latter has authorized payments to the
company instead of on account of the loan guaranteed by the mortgage,
there was a change in the conditions of the contract without the knowledge
of appellants, which entitled the latter to cancel the mortgage contract.
The trial court held them still liable together with their co-makers. It has
also been held that if the judgment is not satisfied within a period of time,
the mortgaged properties would be foreclosed and sold in public auction.
In their appeal, petitioners contend that as accommodation makers, the
nature of their liability is only that of mere sureties instead of solidary codebtors such that a material alteration in the principal contract, effected by
the creditor without the knowledge and consent of the sureties, completely
discharges the sureties from all liabilities on the contract of suretyship.
HELD:
There is 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 for value is concerned. Consequently, the petitioners
cannot claim to have been released from their obligation simply because at
the time of payment of such obligation was temporarily deferred by the
PNB without their knowledge and consent. There has to be another basis
for their claim of having been freed from their obligation. It has to be
determined if PNB was a holder for value.
A holder for value is one who meets the requirement of being a holder in
due course except the notice for want of consideration. In the case at bar,
PNB may not be considered as a holder for value. Not only was PNB an
immediate party or privy to the promissory note, knowing fully well that
petitioners only signed as accommodation parties, but more importantly it
was the Deed of Assignment which moved the petitioners to sign the
promissory note. Petitioners also relied on the belief that there will be no
alterations to the terms of the agreement. The deed provided that there
will no further conditions which could possibly alter the agreement without
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 59 of 190
the consent of the petitioner such as the grant of greater priority to
obligations other than the payment of the loan. This notwithstanding, the
bank approved the release of payments to the Company instead of the
same to the bank. This was in violation of the deed of assignment and
prejudiced the rights of petitioners. The bank was not in good faith—a
requisite for a holder to be one in due course.
84
STELCO MARKETING V. CA
210 SCRA 51
FACTS:
Petitioner was engaged in the distribution and sale of structiural steel bars.
RYL bought on several occasion large quantities of steel bars but the same
were never paid for despite several demands by petitioner.
On a relevant date, RYL gave to Armstrong Industries a check in payment
of its obligations.
The check was drawn by Steelweld Corporation—
allegedly the owner of RYL persuaded the president of Steelweld to
accommodate the former in its obligation. The check, when deposited was
thereafter dishonored due to insufficient funds.
A case ensued for
violations of BP22 but the case was dismissed as the check was held to be
for accommodation purposes only.
Thereafter a complaint was filed by petitioner against RYL and Steelweld
for the recovery of sum of money in payment of the steel bars ordered.
RYL was nowhere to be found that is why the proceedings commenced as
against Steelweld only. The trial court decided in favor of petitioner but
this was reversed by the CA.
HELD:
Petitioner contends that the acquittal of Lim and Tianson didn't operate to
release Steelweld from its liability as an accommodation party. Noteworthy
is that neither said pronouncement nor any other part of the judgment of
acquittal declared it liable to petitioner.
To be sure, as regards an
accommodation party, the condition of lack of notice of any infirmity or
defect in title of the persons negotiating it is of no application since the law
preserves the right of recourse of a holder for value against an
accommodation party notwithstanding knowledge that at the time of taking
the instrument, knew him only as an accommodation party.
Further, there is no evidence to show that petitioner possessed the check
before the instrument’s presentment and dishonor. In what transpired
during the transactions involving the check, evidence and facts show that
there was any participation or intervention on the part of petitioner. What
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
the record shows is that only after the check was deposited and
dishonored, petitioner came into possession of it in some way and was able
to give it in evidence at the trial of the civil case it has instituted against
the drawers of the check.
85
ANG TIONG V. TING
22 SCRA 713
FACTS:
Ting issued a PBCom check payable to cash or bearer. This was indorsed
by Ang at the back and it was received by plaintiff. Upon encashment of
the check, the same was dishonored. Plaintiff moved that the two make
good the value of the check but despite demands, he was unheeded,
prompting him to file a complaint. The trial court decided in his favor.
HELD:
Even on the assumption that the appellant was an accommodation
indorser, as he professes to be, he is nevertheless by the clear mandate of
section 29, liable on the instrument to a holder for value, notwithstanding
that such holder at the time of taking the instrument knew him to be an
accommodation party. And assuming that he was an accommodation
party, he may obtain security from the maker to protect himself against
the danger of insolvency of the latter but this doesn't affect his liability to
the appellee, as the said remedy is a matter of recourse between him and
the maker.
86
SADAYA V. SEVILLA
19 SCRA 924
FACTS:
Sadaya, Sevilla and Varona signed solidarily a promissory note in favor of
the bank. Varona was the only one who received the proceeds of the note.
Sadaya and Sevilla both signed as co-makers to accommodate Varona.
Thereafter, the bank collected from Sadaya. Varona failed to reimburse.
Consequently, Sevilla died and intestate estate proceedings were
established. Sadaya filed a creditor’s claim on his estate for the payment
he made on the note. The administrator resisted the claim on the ground
that Sevilla didn't receive any proceeds of the loan. The trial court
admitted the claim of Sadaya though tis was reversed by the CA.
HELD:
Sadaya could have sought reimbursement from Varona, which is right and
just as the latter was the only one who received value for the note
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 60 of 190
executed. There is an implied contract of indemnity between Sadaya and
Varona upon the former’s payment of the obligation to the bank.
Surely enough, the obligations of Varona and Sevilla to Sadaya cannot be
joint and several. For indeed, had payment been made by Varona, Varona
couldn't had reason to seek reimbursement from either Sadaya or Sevilla.
After all, the proceeds of the loan went to Varona alone.
On principle, a solidary accommodation maker—who made payment—has
the right to contribution, from his co-accomodation maker, in the absence
of agreement to the contrary between them, subject to conditions imposed
by law. This right springs from an implied promise to share equally the
burdens thay may ensue from their having consented to stamp their
signatures on the promissory note.
The following are the rules:
1. A joint and several accommodation maker of a negotiable
promissory note may demand from the principal debtor
reimbursement for the amount that he paid to the payee
2. A joint and several accommodation maker who pays on the said
promissory note may directly demand reimbursement from his coaccommodation maker without first directing his action against the
principal debtor provided that
a. He made the payment by virtue of a judicial demand
b. A principal debtor is insolvent.
It was never shown that there was a judicial demand on Sadaya to pay the
obligation and also, it was never proven that Varona was insolvent. Thus,
Sadaya cannot proceed against Sevilla for reimbursement.
87
AGRO CONGLOMERATES V. SORIANO
348 SCRA 450
FACTS:
Petitioner sold to Wonderland Food Industries two parcels of land. They
stipulated under a Memorandum of Agreement that the terms of payment
would be P1,000,000 in cash, P2,000,000 in shares of stock, and the
balance would be payable in monthly installments.
Thereafter, an
addendum was executed between them, qualifying the cash payment.
Instead of cash payment, the vendee authorized the vendor to obtain a
loan from the financier on which the vendee bound itself to pay for. This
loan was to cover for the payment of P1,000,000. This addendum was not
notarized.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Petitioner Soriano signed as maker the promissory notes payable to the
bank. However, the petitioners failed to pay the obligations as they were
due.
During that time, the bank was in financial distress and this
prompted it to endorse the promissory notes for collection. The bank gave
ample time to petitioners then to satisfy their obligations.
The trial court held in favor of the bank. It didn't find merit to the
contention that Wonderland was the one to be held liable for the
promissory notes.
HELD:
First, there was no contract of sale that materialized.
The original
agreement was that Wonderland would pay cash and petitioner would
deliver possession of the farmlands. But this was changed through an
addendum, that petitioner would instead secure a loan and the settlement
of the same would be shouldered by Wonderland.
Petitioners became liable as accommodation parties. They have the right
after paying the instrument to seek reimbursement from the party
accommodated, since the relation between them has in effect became one
of principal and surety.
Furthermore, as it turned out, the contract of surety between Woodland
and petitioner was extinguished by the rescission of the contract of sale of
the farmland. With the rescission, there was confusion in the persons of
the principal debtor and surety. The addendum thereon likewise lost its
efficacy.
88
CRISOLOGO JOSE V. CA
177 SCRA 594
FACTS:
The president of Movers Enterprises, to accommodate its clients Spouses
Ong, issued a check in favor of petitioner Crisologo-Jose. This was in
consideration of a quitclaim by petitioner over a parcel of land, which the
GSIS agreed to sell to spouses Ong, with the understanding that upon
approval of the compromise agreement, the check will be encahsed
accordingly. As the compromise agreement wasn't approved during the
expected period of time, the aforesaid check was replaced with another one
for the same value. Upon deposit though of the checks by petitioner, it
was dishonored. This prompted the petitioner to file a case against Atty.
Bernares and Santos for violation of BP22.
Meanwhile, during the
preliminary investigation, Santos tried to tender a cashier’s check for the
value of the dishonored check but petitioner refused to accept such. This
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 61 of 190
was consigned by Santos with the clerk of court and he instituted charges
against petitioner. The trial court held that consignation wasn't applicable
to the case at bar but was reversed by the CA.
HELD:
Petitioner averred that it is not Santos who is the accommodation party to
the instrument but the corporation itself. But assuming arguendo that the
corporation is the accommodation party, it cannot be held liable to the
check issued in favor of petitioner. The rule on accommodation party
doesn't include or apply to corporations which are accommodation parties.
This is because the issue or indorsement of another is ultra vires. 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 the 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.
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 party only is specifically
authorized to do so. Corollarily, corporate officers have no power to
execute for mere accommodation a negotiable instrument of the
corporation for their individual debts and transactions arising frm or in
relation to matters in which the corporation has no legitimate concern.
Since such accommodation paper cannot be enforced against the
corporation, the signatories thereof shall be personally liable therefore, as
well as the consequences arising from their acts in connection therewith.
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.
METHOD OF TRANSFER
1. By assignment
2. By operation of law
3. By negotiation, which may be completed by indorsement completed by
delivery or by mere delivery
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
ASSIGNMENT
•
Method of transferring a non-negotiable instrument whereby the
assignee is merely placed in the position of the assignor and acquires
the instrument subject to all defenses that might have been setup
against the original payee
MODE OF ASSIGNMENT
•
Differs in no respect from that of any other contract
•
Although some sort of written instrument is customarily employed, it
may be written either on the instrument itself or on a separate piece of
paper
EFFECT OF ASSIGNMENT OF A NON-NEGOTIABLE INSTRUMENT
•
The effect of the assignment is that the party holding the right drops
out of the contract and another takes his place
•
The assignee is substituted in place of the assignor
•
The assignee and every subsequent person to whom the instrument
comes by assignment may be considered as the person who made the
instrument in the first instance and as having said and done
everything in making the instrument which the original assignor did or
said.
•
Each assignee takes his chance as to the exact position in which any
party making an assignment of it stands
•
And as it is called in law, the assignee takes the contract subject to
equities, that is, to defenses to the contract which would avail in favor
of the original party up to the time the notice of the assignment is
given to the person against whom the contract is sought to be
enforced
ASSIGNMENT OF A NEGOTIABLE INSTRUMENT
•
A person taking a negotiable instrument by assignment in a separate
piece of paper takes it subject to the rules applying to assignment
•
And where the holder of a bill payable to order transfers it without
indorsement, it operates an equitable assignment
TRANSFER BY OPERATION OF LAW
1. By the death of his holder where the title vests in his
representative, or
2. By the bankruptcy of the holder, where title vests in his
or trustee
3. Upon the death of a joint payee or indorsee in which
general rule is that the title vests at once in the surviving
trustee
personal
assignee
case the
payee or
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 62 of 190
NEGOTIATION
•
Transfer of the instrument from one person to another in such a
manner as to constitute the transferee the holder thereof
•
May either be by indorsement completed by delivery or by mere
delivery
This is to Certify that B E A R E R has deposited in this 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.
IS DELIVERY TO PAYEE A NEGOTIATION?
•
First view: no because negotiation refers to an existing negotiable
instrument and before delivery to the payee, the instrument is
incomplete.
•
Second or better view: under this section and section 191, an
instrument is negotiated when it is delivered to the payee or to an
indorsee
(Sgd. Illegible) (Sgd. Illegible)
CASE DIGESTS: SECTION 30
89
CALTEX V. CA
212 SCRA 448
FACTS:
Security bank issued Certificates of Time Deposits to Angel dela Cruz. The
same were given by Dela Cruz to petitioner in connection to his purchase of
fuel products of the latter. On a later date, Dela Cruz approached the bank
manager, communicated the loss of the certificates and requested for a
reissuance. Upon compliance with some formal requirements, he was
issued replacements. Thereafter, he secured a loan from the bank where
he assigned the certificates as security.
Here comes the petitioner,
averred that the certificates were not actually lost but were given as
security for payment for fuel purchases. The bank demanded some proof
of the agreement but the petitioner failed to comply. The loan matured
and the time deposits were terminated and then applied to the payment of
the loan. Petitioner demands the payment of the certificates but to no
avail.
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____
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
—————————— ———————————
AUTHORIZED SIGNATURES
HELD:
CTDs are negotiable instruments. 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 de la 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.
If it was really the intention of respondent bank to pay the amount to
Angel de la Cruz only, it could have with facility so expressed that fact in
clear and categorical terms in the documents, instead of having the word
"BEARER" stamped on the space provided for the name of the depositor in
each CTD. On the wordings of the documents, therefore, the amounts
deposited are repayable to whoever may be the bearer thereof. Thus,
petitioner's aforesaid witness merely declared that Angel de la Cruz is the
depositor "insofar as the bank is concerned," but obviously other parties
not privy to the transaction between them would not be in a position to
know that the depositor is not the bearer stated in the CTDs. Hence, the
situation would require any party dealing with the CTDs to go behind the
plain import of what is written thereon to unravel the agreement of the
parties thereto through facts aliunde. This need for resort to extrinsic
evidence is what is sought to be avoided by the Negotiable Instruments
Law and calls for the application of the elementary rule that the
interpretation of obscure words or stipulations in a contract shall not favor
the party who caused the obscurity.
The next query is whether petitioner can rightfully recover on the CTDs.
This time, the answer is in the negative. The records reveal that Angel de
la Cruz, whom petitioner chose not to implead in this suit for reasons of its
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 63 of 190
own, delivered the CTDs amounting to P1,120,000.00 to petitioner without
informing respondent bank thereof at any time. Unfortunately for
petitioner, although the CTDs are bearer instruments, a valid negotiation
thereof for the true purpose and agreement between it and De la Cruz, as
ultimately ascertained, requires both delivery and indorsement. For,
although petitioner seeks to deflect this fact, the CTDs were in reality
delivered to it as a security for De la Cruz' purchases of its fuel products.
Any doubt as to whether the CTDs were delivered as payment for the fuel
products or as a security has been dissipated and resolved in favor of the
latter by petitioner's own authorized and responsible representative
himself.
In a letter dated November 26, 1982 addressed to respondent Security
Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These
certificates of deposit were negotiated to us by Mr. Angel dela Cruz to
guarantee his purchases of fuel products." This admission is conclusive
upon petitioner, its protestations notwithstanding. Under the doctrine of
estoppel, an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person
relying thereon
90
MANUEL LIM V. CA
251 SCRA 408
FACTS:
Spouses Lim were charged with estafa and violations of BP22 for allegedly
purchasing goods from Linton Commercial Corporation and issuing checks
as payment thereof.
The checks when presented to the bank were
dishonored for insufficiency of funds or the payment for the checks has
been stopped.
to consider in the consummation of a negotiable instrument is the place of
delivery. Delivery is the final act essential to its consummation as an
obligation.
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.
NATURE OF AN INDORSEMENT
•
It is not only a mode of transfer
•
It is also a contract
•
Every indorser is a new drawer and the terms are found on the face of
the bill or note
•
The indorsement of the bill or not implies an undertaking from the
indorser to the person in whose favor it is made and to every other
person to whom the bill or note may afterwards be transferred, exactly
similar to that which is implied by drawing a bill except that, in the
case of drawing a bill, the stipulations with respect to the drawer’s
responsibility and undertaking don't apply
•
The general indorser in effect, states to every person who follows
him—this instrument will be paid by the maker, if a note, or accepted
b the drawee or paid by the acceptor, if a bill. If it is dishonored by
non-payment or non-acceptance, and you give me notice thereof, I will
pay it.
WHERE THE INDORSEMENT IS WRITTEN
•
The indorsement may be written on the instrument itself or upon a
paper attached thereto
•
Allonge: paper attached to the instrument
HELD:
It is settled that venue in criminal cases is a vital ingredient of jurisdiction.
It shall be where the crime or offense was committed or any one of the
essential ingredients thereof took place. In determining the proper venue
for these cases, the following are material facts—the checks were issued at
the place of business of Linton; they were delivered to Linton at the same
place; they were dishonored in Kalookan City; petitioners had knowledge of
the insufficiency of funds in their account.
MAY ALLONGE BE USED WHERE THERE IS ROOM ON INSTRUMENT FOR
INDORSEMENT?
•
It has been held that the use of an allonge is allowable only when
there is a physical impossibility of writing the indorsement on the
instrument itself, and an indorsement on a separate piece of paper
where there is sufficient space on the instrument for indorsement will
be considered as a mere assignment and not a negotiation
•
Agbayani: Questionable view however
Under Section 191 of the NIL, issue means the first delivery of the
instrument complete in its form to a person who takes it as holder. The
term holder on the other hand refers to the payee or indorsee of a bill or
note who is in possession of it or the bearer thereof. The important place
HOW INDORSEMENT WRITTEN?
•
Means must show that there is indorsement
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 64 of 190
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.
which provides that 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 doesn't operate as a negotiation of the
instrument. Montinola may therefore be not regarded as an indorsee. At
most he may be regarded as a mere assignee of the P30,000 sold to him.
In which case, as an assignee, he is subject to the defenses available to
the drawer Provincial Treasurer.
INDORSEMENT MUST BE OF THE WHOLE INSTRUMENT
•
The general rule is that the instrument must be of the entire
instrument
•
Accordingly, an indorsement of a part of the instrument doesn't
operate as a negotiation thereof
Sec. 33. Kinds of indorsement. - An indorsement may be either
special or in blank; and it may also be either restrictive or qualified
or conditional.
EFFECT OF PARTIAL INDORSEMENT
•
It doesn't operate as an indorsement
•
It may constitute a valid assignment though binding between the
parties
•
The person to whom the instrument is indorsed would not be
considered an indorsee but merely an assignee and would therefore
take the instrument subject to the defenses available between the
original parties
EXCEPTION
•
But where the instrument has been paid in part, it may be indorsed as
to the residue
TRANSFER TO TWO OR MORE INDORSEES SEVERALLY
•
An indorsement which purports to transfer the instrument to two or
more indorsees severally, doesn't operate as a negotiation of the
instrument
CASE DIGESTS: SECTION 32
91
MONTINOLA V. PNB
88 PHIL 178
FACTS:
*Remember the case with the Japanese occupation and the mutilated
check.
HELD:
Where the indorsement of the check was only for a part of the amount
payable, it is not legally negotiated within the meaning of Section 32,
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
KINDS OF INDORSEMENT
1. Special
2. In blank
3. Absolute
4. Conditional
5. Restrictive
6. Qualified
7. Joint
8. Successive
9. Irregular
10. Facultative
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.
SPECIAL AND BLANK INDORSEMENT
HOW FURTHER NEGOTIATED
1. Where the instrument is originally payable to order and it is
negotiated by the payee by special indorsement, it can be further
negotiated by the indorsee of the instrument completed by
delivery
2. Where the instrument is originally payable to order and it is
negotiated by the payee in blank indorsement, it can be further
negotiated by the holder by mere delivery. The reason is that the
effect of a blank indorsement is to make the instrument payable
to bearer
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 65 of 190
3.
Where the instrument is originally payable to bearer, it can be
further negotiated by mere delivery, even if the original bearer
negotiated it by special indorsement
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.
APPLICATION OF SECTION 35
•
Suppose that A makes a note with B as payee. It is indorsed as
follows:
o
(Indorsement in blank)
(Sgd.) B.
•
Delivery was then made to C. C may place above the signature of B,
“Pay to C.” so as to make the indorsement thus:
o
Pay to C.
(Sgd.) B.
•
This converts the blank indorsement to a special indorsement
LIMITATION UPON CONVERSION OF BLANK INDORSEMENT
•
Holder must not write any contract not consistent with the
indorsement, that is, the contract so written must not change the
contract of the blank indorser
•
The following has been held to be inconsistent with the contract of
blank indorsement—“pay to X and Y”, “Demand and notice waived”, “I
guaranty payment”, “Without recourse”
Sec. 36. When indorsement restrictive. - An
restrictive which either:
indorsement is
(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.
PROHIBITION OF FURTHER NEGOTIATION
1. Pay to C only
2. Pay to C and no other person
INDORSEE AGENT OF THE INDORSER
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
•
Known as the agency-type of indorsement
“Pay to C for collection”
(Sgd.) B
•
•
Hence, any action the indorsee may file is subject to defenses
available against the indorser such as lack of consideration
Thus, where the proof tends to show that the plaintiff holds the draft
for collection only, and that the acceptance of it by defendants was
conditional, and that after such an acceptance, the defendants refused
to accept the goods evidenced by the draft, which were returned to
and accepted by the plaintiff, who agreed to release the defendants
from any liability, plaintiff thereafter cannot recover
INDORSEMENTS FOR DEPOSIT
•
An indorsement for deposit constitutes the indorsee the agent of the
indorser
•
“Pay to C for deposit (Sgd.) B”—such an indorsement, like an
indorsement for collection, constitutes a relation of title in the
depositor in the absence of any practice or agreement to the contrary
•
In any event, a restrictive indorsement of an instrument for collection
or deposit, or to the use of the indorser and for his benefit, in the
absence of any other circumstances, will not divest the indorser of his
title thereto until the money is paid
•
Indorsements for deposits are usually informal
VESTS TITLE IN INDORSEE IN TRUST FOR ANOTHER
1. Pay to X in trust for C
2. Pay to X for use of C
CAN THE MAKER SET UP AGAINST THE INDORSEE HIS DEFENSES
AGAINST THE RESTRICTIVE INDORSER?
There are two views to this question:
1. Sulbrason-Dickinson v. Hopkins: an indorsement to A for the
benefit of B was held restrictive under Section 47 of the NIL,
making the indorsee and its successors subject to the good
defenses against the restrictive indorser
2. Some learned writers held this view to be unsound. Thus, it has
been held that the indorsee of a check indorsed in trust for a third
person who is a holder in due course could recover from the
drawer who had a defense of failure of consideration, for while the
restrictive indorsement creating a trust gives notice of this trust to
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 66 of 190
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subsequent purchasers, it did not give notice of defenses
obtaining between prior parties.
TO MAKE IT EASIER TO UNDERSTAND—first, you have to make a
distinction between what kind of restrictive indorsement was
made. Was it a trust type or an agency type? If it was an agency
type, the indorsee just fills in the shoes of the restrictive indorser.
And thus, he is susceptible and open to the defenses that the
maker can have against the indorser. It is different if it is trust
type because the indorsee does not step inside the shoes of the
indorser and thus, the maker can no longer set up against the
indorsee his defenses against the indorser.
PRESUMPTION OF CONSIDERATION IN RESTRICTIVE INDORSEMENTS
•
As a general rule, an indorsement of a negotiable bill which purports to
pass the title to the bill to the indorsee, imports a consideration and
the burden of proving want of consideration rests upon the party
alleging it
•
The restrictive indorsements which are held to negative the
presumption of a consideration are such as to indicate that they are
intended to pass title but merely to enable the indorsee to collect for
the benefit of the indorser, such as indorsements “for collection” or
others showing that the indorser is entitled to the proceeds
•
But an indorsement to one person for the use or benefit of another,
affords no such indication. The indorser parts with the whole title to
the bill and the presumption is that he done so for a consideration.
•
The only effect of such an indorsement, by way of restriction, is to give
notice of the rights of the beneficiary named in the indorsement and
protect him against misappropriation
EFFECT OF OMISSION OF WORDS OF NEGOTIABILITY
•
The mere absence of words of negotiability doesn't make the
indorsement restrictive
•
While the omission of words in the indorsement doesn't affect
negotiability of the instrument, such omission in the body thereof will
render the instrument non-negotiable
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;
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
(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.
RESTRICTIVE INDORSEE MAY RECEIVE PAYMENT
•
A restrictive indorsement confers upon the indorsee the right to
receive payment of the instrument
RESTRICTIVE INDORSEE MAY BRING AN ACTION
•
A restrictive indorsement confers upon the indorsee the right to bring
any action thereon that the indorser could bring
•
In a restrictive indorsement “for deposit”, can the indorsee such as B
in the illustration, bring an action against the indorser, such as A? Yes
if the indorser received value for said indorsement
RESTRICTIVE INDORSEE MAY TRANSFER HIS RIGHTS
•
It is stated in the interpretation of the clause in Section 47 declaring a
paper negotiable in its origin to continue negotiable until it has been
restrictively indorsed, is that the words “until it has been restrictively
indorsed” don't contemplate every restrictive indorsement but a
restrictive indorsement that prohibits the further negotiation of the
instrument under subdivision 1 of Section 36
•
Section 46 didn't mean to declare the effects of a restrictive
indorsement but to preserve as far as possible the negotiability of an
instrument negotiable in its origin and that the implication of Section
47 should not be taken as destroying negotiability of an instrument
heretofore universally accepted as negotiable
EXTENT OF NEGOTIABILITY AFTER RESTRICTIVE INDORSEMENT
•
That all forms of restrictive negotiability impose some degree of
limitation on negotiability
•
That they don't all impose the same degree of limitation
•
That the indorsement itself discloses the extent of the limitation in the
particular case
LIMITATION ON TRANSFER OF RIGHT: ILLUSTRATION
•
But all subsequent indorsees acquire only title of the first indorsee
under the restrictive indorsement
•
Illustrations of this rule:
o
In the indorsement, “pay to A for collection,” the rights of the
subsequent indorsees are subject to the restrictive
indorsement—namely, he can collect only for being a
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 67 of 190
o
o
restrictive indorsee, he acquires only the title of the first
indorsee whose right is merely to collect
Suppose the P1000 note is indorsed as “Pay to B for deposit
only. (Sgd.) A” and that B owes Y P1000, B cannot transfer
the note to Y for said debt. Or suppose B transfers the note
to another person for P1000, B cannot use the P1000 for his
own personal expenses. He must safely keep the money for
the benefit of A.
“Pay to A for account of B”—gives notice that the instrument
cannot be negotiated by A for his own debt or benefit
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 indorser's signature
the words "without recourse" or any words of similar import. Such
an indorsement does not impair the negotiable character of the
instrument.
HOW QUALIFIED INDORSEMENT IS MADE
•
By adding to the indorser’s signature the words “without recourse”,
“Sans recours”, “indorser not holden”, or “with intent to transfer title
only and not to incur liability as indorser”, “at indorsee’s own risk”
EFFECT OF QUALIFIED INDORSEMENT
•
Constitutes the indorser a mere assignor of the title to the instrument
•
One who indorses without recourse states that all parties to the paper
are genuine; I am the lawful owner of the paper and I have title to it
and know of no reason why you could not recover on it as a valid
instrument, but on thing I don't guarantee; I don't guarantee the
financial responsibility on that paper but I do say that I hold the title
the same as any other personal property
QUALIFIED INDORSER HAS LIMITED SECONDARY LIABILITY
•
He is secondarily liable on his warranties as an indorser under Section
65, that is, the qualified indorser is liable if the instrument is
dishonored by non-acceptance or non-payment due to:
1. Forgery
2. Lack of good title on the part of the indorser
3. Lack of capacity to indorse on the part of the prior parties
4. The fact that, at the time of the indorsement, the instrument was
valueless or not valid and he knew of that fact
A QUALIFIED INDORSEMENT DOESN'T
CHARACTER OF THE INSTRUMENT
IMPAIR
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
THE
NEGOTIABLE
CASE DIGESTS: SECTION 38
92
METROPOL V. SAMBOK MOTORS CO.
120 SCRA 864
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.
ABSOLUTE INDORSEMENT
•
One by which the indorser binds himself to pay upon no other
condition than the failure of prior parties to do so and upon due notice
to him of such failure
CONDITIONAL INDORSEMENT
•
An indorsement subject to a contingent event, that is, an event that
may or may not happen, or a past event unknown to the parties
•
Suppose a note for P1000 with A maker, and B payee. It is then
indorsed as follows “Pay to Y if he passes the bar examinations. (Sgd.)
B”—this is a conditional indorsement as Y may or may not pass the bar
examination.
OBLIGATION OF CONDITIONAL INDORSEE
•
Y indorsee holds the note or the proceeds thereof, if he is paid by A,
subject to the rights of B
•
If A disregards the condition and pays Y without waiting for the
condition to be fulfilled, Y doesn't immediately acquire ownership of
the sum
•
Y must hold in trust while the condition is not fulfilled
•
It is upon the fulfillment of the condition that such ownership over the
proceeds of the note is absolutely acquired by the conditional indorsee
Y
A CONDITIONAL INDORSEMENT DOESN'T RENDER AN INSTRUMENT NONNEGOTIABLE
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
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 68 of 190
indorsing specially is liable as indorser to only such holders as
make title through his indorsement.
APPLICATION OF SECTION 40
•
Section applies only to instruments which are originally payable to
bearer
•
Cannot apply where the paper is originally made payable to order and
indorsed in blank; for by Section 9, a note or bill which is payable to
order becomes payable only when the last indorsement is in blank;
and hence, when a blank indorsement is followed by a special
indorsement, the instrument is not within the terms of Section 9.
HOW INDORSEMENT OF JOINT PAYEES MADE
•
Where the instrument is payable to two or more payees, all payees
must each indorse in order to negotiate the instrument
•
If only one indorses, he passes only his part of the instrument—such
an indorsement wouldn't operate as such because it would not be an
indorsement of the whole instrument
•
Exceptions to the rule:
1. Where the payee or person indorsing has authority to indorse for
the others
2. Where the payee or indorsees are partners
NEGOTIATION OF INSTRUMENT PAYABLE TO BEARER BUT SPECIALLY
INDORSED
•
Where an instrument payable to bearer is indorsed, it may
nevertheless be further negotiated by delivery
•
An instrument which is originally payable to bearer is always payable
to bearer
•
Hence, even when it has been specially indorsed, it is still payable to
bearer
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.
EFFECT ON LIABILITY OF SPECIAL INDORSER
Pay P1000 to the order of cashier, Lyceum of the Philippines.
Pay P1000 to bearer
(Sgd.) A
*C is bearer and he delivered to D
*D specially indorsed it to E
*E specially indorsed it to F
*F delivered to G, bearer.
•
•
Is D liable to G being the first who specially indorsed the instrument?
No, because G didn't take title through D’s indorsement but through
delivery of D
To whom D is liable? To E and F, because they acquired the title to the
instrument through the special indorsement of D. Had F merely
indorsed the instrument to G, D would be liable also to G for the same
reason.
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.
APPLICATION OF SECTION 41
•
Applies only to instruments payable to two or more payees jointly
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
APPLICATION OF SECTION 42
(Sgd.) A
•
•
Presumption is that the note is payable to Lyceum, not to the cashier
personally
And the note may be indorsed by any duly authorized officer of
Lyceum other than the cashier
DISPUTABLE PRESUMPTION
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.
APPLICATION OF SECTION 43
•
An instrument drawn or indorsed to “Juan Dytuco” whose real name is
“Juan Dyjuco” may be indorsed as follows:
o
Pay to Y (Sgd.) Juan Dytuco
Juan Dyjuco
o
Or (Sgd.) Juan Dyjuco
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 69 of 190
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.
HOW AGENT MUST INDORSE?
1. He must add words describing himself as agent
2. At the same time, disclose his principal
3. He must be duly authorized
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.
DISPUTABLE PRESUMPTION
IMPORTANCE OF THIS PROVISION
•
This provision becomes importance when considered in connection
with Section 52 (b)
•
Under the provision, in order that one may become a holder in due
course, the instrument must be negotiated to him before it becomes
overdue
•
The indorsement without date establishes a prima facie presumption
that the instrument was indorsed before maturity and one who denies
that the holder of such instrument is a holder in due course has the
burden of proof
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.
IMPORTANCE OF PLACE OF INDORSEMENT
•
The place of indorsement is sometimes material because an
indorsement is governed by the laws of the state where it is indorsed,
although the instrument is drawn or made in a different state
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.
WHEN NEGOTIABLE INSTRUMENT RENDERED NON-NEGOTIABLE
1. Restrictive indorsement which further prohibits the
negotiation of an instrument
2. By a discharge thereof by payment or otherwise
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
further
NEGOTIABILITY AFTER DATE OF MATURITY
•
FIRST VIEW: negotiability ceases in the full commercial sense after
maturity and negotiability ceases by default of the maker in his
payment
•
SECOND VIEW: negotiability continues even after maturity
•
RECONCILIATION OF THE TWO: the mercantile character of the
instrument as a negotiable paper and of the contracts of the several
parties to it, continues after maturity and until it is paid except: that
an indorsee or a transferee after maturity takes the instrument subject
to defenses between original parties, because after maturity such
subsequent parties take the instrument after it becomes overdue and
therefore, under paragraph b of Section 52, they are not holders in
due course
•
After maturity, an instrument originally negotiable continues to be
negotiable in the sense that the contracts of the parties to it continue
and are governed by the NIL
•
After maturity the instrument ceases to be negotiable in the sense that
a transferee after maturity is not a holder in due course and therefore
not free from defenses obtaining between prior parties
LEGAL POSITION OF HOLDER TAKING OVERDUE INSTRUMENT
•
He is a holder with notice. He may or may not be a holder for value
and his rights will be regulated accordingly. He takes a bill which on
the face of it, ought to have been paid.
•
He is bound to make two inquiries—has what ought to have been done
really have been done? And if not, why not?
RIGHT OF HOLDER NOT IN DUE COURSE
•
He can recover checks in his possession but the only disadvantage is
that the negotiable instrument is subject to the defenses as if it were
non-negotiable
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.
WHEN HOLDER MAY OR MAY NOT STRIKE OUT INDORSEMENT
•
But where the instrument is transferred by special indorsement, the
holder has no right to strike out the name of the person mentioned in
such indorsement and insert his own name in place thereof; nor can
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 70 of 190
•
he strike out such name and convert such special indorsement into a
blank indorsement
The holder who acquires title subsequent to the succeeding special
indorsement must trace his title not only through the blank
indorsement but through the special indorsement as well
EFFECT OF STRIKING OUT
1. The indorser whose indorsement is struck out is relieved from his
liability on the instrument
2. All subsequent indorsers are also relieved from their liability on
the instrument
Sec. 49. Transfer without indorsement; effect of. - 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, 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.
APPLICATION OF SECTION 49
•
Applies only to instruments payable to order
•
Contemplates a case wherein delivery and payment of value but there
was no indorsement
•
One element lacking for the negotiation of the instrument
RIGHTS OF TRANSFEREES FOR VALUE
1. The transferee acquires only the rights of the transferor. This
means that if a defense is available against the transferor, that
defense is also available against the transferees
2. The transferee has also the right to require the transferor to
indorse the instrument
CASE DIGESTS: SECTION 49
93
BPI V. COURT OF APPEALS
GR 136202, JANUARY 25, 2007
FACTS:
Templonuevo demanded payment from petitioner of a sum of money
representing the aggregate value of three checks which were allegedly
payable to him but which were deposited with the petitioner to Salazar’s
account, without his knowledge and corresponding endorsement. Finding
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
merit in the demands of Templonuevo, the bank then froze the account of
the engineering firm as the account of Salazar was already closed or had
insufficient funds. Failure of any settlement between Templonuevo and
Salazar, this prompted the bank to debit the account of Salazar and give
back the money to Templonuevo through cashier’s check. The account of
Salazar was also debited for whatever charges incurred for the issuance of
the cashier’s check.
The trial court held in favor of Salazar.
ISSUE: does a collecting bank, over the objections of its depositor, have
the authority to withdraw unilaterally from such depositor’s account the
amount it had previously paid upon certain unendorsed order instruments
deposited by the depositor to another account that she later closed?
HELD:
In the present case, the records do not support the finding made by the CA
and the trial court that a prior arrangement existed between Salazar and
Templonuevo regarding the transfer of ownership of the checks. This fact is
crucial as Salazar’s entitlement to the value of the instruments is based on
the assumption that she is a transferee within the contemplation of Section
49 of the Negotiable Instruments Law.
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 either 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
instrument is necessary to authorize payment to them in the absence of
any other facts from which the authority to receive payment may be
inferred.
Even if the delay in the demand for reimbursement is taken in conjunction
with Salazar’s possession of the checks, it cannot be said that the
presumption of ownership in Templonuevo’s favor as the designated payee
therein was sufficiently overcome. This is consistent with the principle that
if instruments payable to named payees or to their order have not been
indorsed in blank, only such payees or their indorsees can be holders and
entitled
to
receive
payment
in
their
own
right.
The presumption that a negotiable instrument was given for a sufficient
consideration will not inure to the benefit of Salazar because the term
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 71 of 190
“given” does not pertain merely to a transfer of physical possession of the
instrument. The phrase “given or indorsed” in the context of a negotiable
instrument refers to the manner in which such instrument may be
negotiated.
It is an exception to the general rule for a payee of an order instrument to
transfer the instrument without indorsement. 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. Salazar failed to discharge this burden,
and the return of the check proceeds to Templonuevo was therefore
warranted under the circumstances despite the fact that Templonuevo may
not have clearly demonstrated that he never authorized Salazar to deposit
the checks or to encash the same. Noteworthy also is the fact that
petitioner stamped on the back of the checks the words: "All prior
endorsements and/or lack of endorsements guaranteed," thereby making
the assurance that it had ascertained the genuineness of all prior
endorsements. Having assumed the liability of a general indorser,
petitioner’s liability to the designated payee cannot be denied.
Consequently, petitioner, as the collecting bank, had the right to debit
Salazar’s account for the value of the checks it previously credited in her
favor. However, the issue of whether it acted judiciously is an entirely
different matter. 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 care, always having in mind
the fiduciary nature of their relationship. 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 petitioner’s claim that it merely made a mistake in crediting the
value of the checks to Salazar’s account and instead bolsters the conclusion
of the CA that petitioner recognized Salazar’s claim of ownership of 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.
The taking and collection of a check without the proper
indorsement amount to a conversion of the check by the bank.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
More importantly, however, solely upon the prompting of Templonuevo,
and with full knowledge of the brewing dispute between Salazar and
Templonuevo, petitioner debited the account held in the name of the sole
proprietorship of Salazar without even serving due notice upon her. This
ran contrary to petitioner’s assurances to private respondent Salazar that
the account would remain untouched, pending the resolution of the
controversy between her and Templonuevo.
For the above reasons, the Court finds no reason to disturb the award of
damages granted by the CA against petitioner. This whole incident would
have been avoided had petitioner adhered to the standard of diligence
expected of one engaged in the banking business. A depositor has the right
to recover reasonable moral damages even if the bank’s negligence may
not have been attended with malice and bad faith, if the former suffered
mental anguish, serious anxiety, embarrassment and humiliation
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.
RIGHT OF PARTY PRIOR TO NEGOTIATE; ILLUSTRATION
•
Suppose that A makes a note for P1000 with B as payee
•
Indorsement from: B to C; C to Jose Soriano; C to D; D to E; E to F; F
back to Jose Soriano
•
Can Jose Soriano negotiate the note? Under this section, he may do
so.
EFFECT OF NEGOTIATION TO PRIOR PARTIES
•
Jose Soriano cannot enforce the payment of the note against C, D, E
and F to whom he is liable
•
This is to avoid circuity of suits
NOTES FOR WEEK #7
JULY 23 - 27, 2007
IV. RIGHTS OF THE HOLDER
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.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 72 of 190
RIGHTS OF A HOLDER IN GENERAL
1. He may sue on the instrument in his own name
2. He may receive payment and if the payment is in due course, the
instrument is discharged
RIGHT TO SUE
•
Holder of a negotiable instrument may sue on his own name, even if
he be a holder only for collection or as a pledge of the instrument
RIGHT OF TRANSFEREE OF UNINDORSED INSTRUMENT
•
Such possessor may sue in his own name if his transferor could have
done so
•
Under Section 49, a transfer for value, but without indorsement, of an
instrument is payable to order vests in the transferee such title as the
transferor had therein.
EFFECT OF PAYMENT TO THE HOLDER
•
The payment in due course to the holder of the instrument discharges
the instrument
•
It is in due course if it is made at or after the maturity of the
instrument; or to the holder thereof; in good faith and without notice
that his title is defective
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.
PRESUMPTION HOLDER IN DUE COURSE
•
Generally, every holder is prima facie a holder in due course
•
Any one, therefore, who claims otherwise must prove that the holder
in question acquired the instrument with one or more of the conditions
lacking
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
•
Any holder proved to have taken an instrument with one of the
conditions enumerated lacking is not a holder in due course
ACQUISITION BEFORE THE INSTRUMENT IS OVERDUE
•
The holder of the instrument must have become the holder before the
instrument has become overude
•
Illustrations—
o
One who has purchased 2 promissory notes without the
necessary indorsement on the part of the holder after
payment thereof had already been one year overdue and
without having made inquiries about the solvency of the
makers cannot be considered as a holder in due course
o
One taking past due paper is chargeable with notice of all
equities between the original parties but nbt with equities
between intermediate indorsers
o
If the instrument is overdue, it is also a notice that it has
been dishonored
WHEN INSTRUMENT IS OVERDUE
•
When it after the date of maturity
•
On the date of maturity, the instrument is not overdue and a holder
who acquires the instrument on that date is a holder in due course
•
If the instrument is overdue, there might be something wrong with the
instrument
AS TO ACCELERATED INSTRUMENTS
•
When the instrument contains an acceleration clause, knowledge of
the holder at the time of acquisition thereof that one installment or
interest, or both, as the case may be, is unpaid, is notice that the
instrument is overdue
AS TO INTEREST
•
One who purchases in good faith an instrument upon which the
interest is overdue is a holder in due course
•
But where by the terms of the instrument, the principal was to become
due upon default of the payment of instrument, then one who takes
the instrument upon which the interest is overdue is not a holder in
due course
WHAT IS AN ACQUISITION IN GOOD FAITH?
•
Good faith refers to the indorsee or transferee and not to the seller of
the paper
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 73 of 190
•
Taking in good faith means that he doesn't have any knowledge of fact
which would render it dishonest for him to take a particular piece of
negotiable paper
MEANING OF HOLDER IN GOOD FAITH
•
Holder without knowledge or notice of equities of any sort which could
be set up against a prior holder of an instrument
o
o
o
o
o
o
Acquisition of the instrument by fraud
Acquisition of the instrument by force, duress or fear
Acquisition of the instrument by unlawful means
Acquisition of the instrument by for an illegal consideration
Negotiation of the instrument in breach of faith
Negotiation of the instrument under circumstances which
amount to fraud
EFFECT OF FAILURE TO MAKE INQUIRY
•
Ordinarily, failure to inquire after notice merely sufficient to cause a
person of ordinary prudence to make inquiry as to an infirmity in a
negotiable instrument and defect in the holder’s title, is not evidence
of purchaser’s bad faith so as to bar him from recovery
•
TEST OF HONESTY—whether or not his purpose is dishonest?
DEFENSES
•
Include those common law defenses outside those covered in Section
55
•
These include mistake, absence and failure of consideration covered in
Section 28, minority and other forms of incapacity, lack of authority of
an agent
WHEN FAILURE TO MAKE INQUIRY IS INDICIA OF BAD FAITH?
•
Failure to make inquiry when circumstances strongly indicate defect,
renders the holder not a holder in due course
INFIRMITIES
•
Things that are wrong with the instrument itself
•
What are these?
o
Wrong date inserted where the instrument is expressed to be
payable at a fixed period after sight is undated
o
Filling up a blank instrument not strictly in accordance with
the authority given or not within authority given or not within
the reasonable time, where it was delivered wanting in a
material alteration
o
Filling up without authority an incomplete and undelivered
instrument
o
Lack of valid and intentional delivery
o
Forgery
o
Material alteration
ACQUISITION FOR VALUE
•
Where the holder gave no valuable consideration for the transfer of the
instrument to him, he cannot be a holder in due course
•
Discounting of a negotiable instrument is still considered to be taking
for value
EFFECT OF INADEQUACY OF INSTRUMENT
•
Generally, lesion or inadequacy of cause shall not invalidate a contract,
unless there has been fraud, mistake or undue influence
•
It may be an evidence of fraud
•
An amount paid for an instrument if a trifling sum should be a red flag
and may by itself establish notice
ACQUISITION WITHOUT NOTICE OF DEFECT OF TITLE OR OF INFIRMITY
•
The following may be chargeable with notice—one taking an
instrument which is overdue; and one acquiring an instrument for a
grossly inadequate consideration
GOOD FAITH MEANS LACK OF NOTICE OF DEFECT OR INFIRMITY
DEFECTS OF TITLE
•
All those situations which at common law were known as equitable
defenses and also to cover those equities of ownership where there
was breach of faith in negotiation
•
Examples?
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
MAY A PAYEE BE A HOLDER IN DUE COURSE?
•
Yes, if he satisfies the requirements as set forth in Section 52
MAY A DRAWEE BE A HOLDER IN DUE COURSE?
•
A holder refers to one who has taken the instrument as it passes along
in the course of negotiation towards the drawee and not the drawee,
who, on the acceptance and payment of the instrument, thereby strips
the instrument of all negotiability and reduces it to a mere voucher or
proof of payment
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.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 74 of 190
WHAT CONSTITUTES UNREASONABLE LENGTH OF TIME?
•
Jurisprudence doesn't state an exact period, nonetheless, there is
practically no authorities hold that a reasonable time for negotiating a
demand note could be extended beyond a year
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.
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.
DEFECTIVE TITLE IN GENERAL
•
In the acquisition or negotiation thereof
Sec. 56. What constitutes notice of defect. - To constitutes 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.
NOTICE OF DEFECT IN GENERAL
To constitute a notice of defect or infirmity, the holder must have actual
knowledge either:
1. Of the defect or infirmity
2. Or of facts that his action in taking the instrument amounts to bad
faith
ACTUAL KNOWLEDGE
•
Actual knowledge is required and not mere suspicion, surmise or fear
TAKING AMOUNTING TO BAD FAITH
•
Bad faith consists in guilty knowledge, or willful ignorance, showing a
vicious or evil mind
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
•
While mere suspicion is not enough, where there is knowledge of
suspicious circumstances, coupled with means of verifying them,
taking the instrument may amount to bad faith
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.
RIGHTS OF A HOLDER IN DUE COURSE
1. He may sue on the instrument in his won name
2. He may receive payment and if the payment is in due course, the
instrument is discharged
3. He holds the instrument free from any defect of title of prior
parties and free from defenses available to prior parties among
themselves
4. And he may enforce payment of the instrument for the full
amount thereof against all parties liable thereto
LEGAL AND EQUITABLE DEFENSES
•
The holder in due course is free from equitable defenses only
AN ALTERATION MAY BE A REAL OR PERSONAL DEFENSE. WHY?
•
An alteration irrespective of original tenor, it can be enforced—real
•
Irrespective of difference between original and altered tenor, can
collect only limited amount—personal
EQUITABLE OR PERSONAL DEFENSES
•
Those which grow out of the agreement or conduct of a particular
person in regard to the instrument which renders it inequitable for
him, though holding legal title, to enforce it against the defendant, but
which are not available against bona fide purchasers for value without
notice
LEGAL OR REAL DEFENSE
•
Attach to the instrument itself and can be set up against the whole
world, including a holder in due course
•
The right sought to be enforced has never existed or ceased to exist
•
Defense against everybody
THE INSTRUMENT SUBJECT TO A REAL DEFENSE CAN STILL BE
ENFORCED. IT CANNOT BE ENFORCED WITH REGARD THE PERSON TO
WHOM THE LEGAL DEFENSE IS AVAILABLE.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 75 of 190
BETWEEN WHOM DEFENSE CAN BE RAISED IN NOTES
•
In general, the defense of want of consideration may only be raised
between immediate parties
•
But this could be raised in the instance that the holder has notice of
the want in consideration
BETWEEN WHOM DEFENSE MAY BE RAISED IN BILLS
•
The want or failure of consideration may be interposed in an action
brought by the payee against the drawer or by the indorsee against
the payee indorsing, or by the drawer against the acceptor, but not in
an action between the payee and acceptor
•
In the latter case, the defense is available only if there is no
consideration received by the defendant for his liability and plaintiff
must have given no consideration for his title
WANT OF DELIVERY OF COMPLETE INSTRUMENT
•
Where the instrument is mechanically complete and is not wanting in
any material particular, want of delivery is an equitable defense
•
As against holders not in due course, it can be shown that no delivery
was made, or that the delivery was conditional or for a special purpose
•
Where the instrument is stolen, the defense is also equitable
•
But where the instrument is payable to order, it is a real defense—for
the person would have to commit forgery on the instrument
FRAUD IN INDUCEMENT IS A PERSONAL OR EQUITABLE DEFENSE
•
Relates to the quantity, quality, value or character of the consideration
of the instrument
FOR MISTAKE TO INVALIDATE CONSENT
•
It should refer to the substance of the thing which is the object of the
contract, or those conditions which have principally moved one or both
parties to enter into the contract
FRAUD IN FACTUM OR FRAUD IN ESSE CONTRACTUS IS A LEGAL DEFENSE
•
This fraud exists in those cases which a person without negligence has
signed an instrument which was in fact a negotiable instrument but
was deceived as to the character of the instrument and without
knowledge of it
•
Essential element is that the maker or indorser, as the case may be,
must have exercised ordinary diligence and in no manner contributed
negligently to the imposition
MINORITY IS A LEGAL DEFENSE ONLY AVAILABLE TO THE MINOR
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
WHERE THE CORPORATION IS ABSOLUTELY PROHIBITED FROM ISSUING
ANY NEGOTIABLE INSTRUMENT, THE PAPER CANNOT BE ENFORCED EVEN
BY A HOLDER IN DUE COURSE
WHERE THE CONTRACT OR INSTRUMENT ITSELF IS MADE VOID BY
STATUTE, THE ILLEGALITY OF THE INSTRUMENT IS A REAL DEFENSE
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.
RIGHTS OF A HOLDER NOT IN DUE COURSE
1. He may sue on his own name
2. He may receive payment and if the payment is in due course, the
instrument is discharged
3. He holds the instrument subject to the same defenses as if it were
non-negotiable
4. But a holder not in due course who derives his title from a holder
in due course and who isn’t a party himself to any fraud or
illegality affecting the instrument, has all the rights of such former
holder in respect of parties prior to the latter
THE HOLDER ACQUIRING FROM A HOLDER IN DUE COURSE HAS THE
BURDEN OF PROOF TO SHOW PREDECESSOR IS INDEED A HOLDER IN
DUE COURSE
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.
IN WHOSE FAVOR PRESUMPTION ARISES
•
In order to be a holder, he must be in possession of the note or the
bearer thereof
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 76 of 190
WHEN PRESUMPTION ACCRUES
•
It is presumed that the holder acquired the note under all the
circumstances required under Section 52
•
Before the presumption arises, he must prove that he is the holder of
the instrument, that is, that he is the indorsee in possession of the
instrument, as it is payable to order
WHEN BURDEN IS SHIFTED
•
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 under whom he claims, acquired the title as holder in due
course
THE PRESUMPTION IS NOT APPLICABLE WHEN THE HOLDER’S TITLE WAS
DEFECTIVE OR SUSPICIOUS
NOTES FOR WEEK #8
JULY 30 - AUG US T 4, 2007
CASE DIGESTS: SECTIONS 51 TO 59
94
CHAN WAN V. TAN KIM
109 PHIL 706
FACTS:
Tam Kim issued 11 checks payable to cash or bearer. Chan Wan presented
these for payment but were dishonored for insufficiency of funds. This
prompted Chan Wan to institute an action against Tam Kim. She didn't
take the witness stand and merely presented the checks for payment. Tan
Kim on the other hand alleged that the checks were for mere receipts only.
The trial court dismissed the complaint as Chan Wan failed to show that
she wa a holder in due course.
HELD:
Eight of the checks were crossed checks specially to Chinabank and should
have been presented for payment by Chinabank and not by Chan Wan.
Inasmuch as Chan Wan didn't present them for payment himself, there
was no proper presentment, and the liability didn't attach to the drawer.
The facts show that the checks were indeed deposited with Chinabank and
were by the latter presented for collection to the drawee bank. But as the
account had no sufficient funds, they were unpaid and returned, some of
them stamped “account closed”. How it reached the hands of Chan Wan,
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
she didn't indicate.
Most probably, as the trial court surmised, she
acquired them after they have been dishonored.
Chan Wan is then not a holder in due course. Nonetheless, it doesn't mean
that she couldn't collect on the checks. He can still collect against Tan Kim
if the latter has no valid excuse for refusing payment.
The only
disadvantage for Chan Kim is that she is susceptible to defenses of Tan
Kim but what are the defenses of latter? This has to be further deliberated
by the trial court.
95
STELCO MARKETING V. CA
210 SCRA 51
FACTS:
Petitioner was engaged in the distribution and sale of structiural steel bars.
RYL bought on several occasion large quantities of steel bars but the same
were never paid for despite several demands by petitioner.
On a relevant date, RYL gave to Armstrong Industries a check in payment
of its obligations.
The check was drawn by Steelweld Corporation—
allegedly the owner of RYL persuaded the president of Steelweld to
accommodate the former in its obligation. The check, when deposited was
thereafter dishonored due to insufficient funds.
A case ensued for
violations of BP22 but the case was dismissed as the check was held to be
for accommodation purposes only.
Thereafter a complaint was filed by petitioner against RYL and Steelweld
for the recovery of sum of money in payment of the steel bars ordered.
RYL was nowhere to be found that is why the proceedings commenced as
against Steelweld only. The trial court decided in favor of petitioner but
this was reversed by the CA.
HELD:
Petitioner contends that the acquittal of Lim and Tianson didn't operate to
release Steelweld from its liability as an accommodation party. Noteworthy
is that neither said pronouncement nor any other part of the judgment of
acquittal declared it liable to petitioner.
To be sure, as regards an
accommodation party, the condition of lack of notice of any infirmity or
defect in title of the persons negotiating it is of no application since the law
preserves the right of recourse of a holder for value against an
accommodation party notwithstanding knowledge that at the time of taking
the instrument, knew him only as an accommodation party.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 77 of 190
Further, there is no evidence to show that petitioner possessed the check
before the instrument’s presentment and dishonor. In what transpired
during the transactions involving the check, evidence and facts show that
there was any participation or intervention on the part of petitioner. What
the record shows is that only after the check was deposited and
dishonored, petitioner came into possession of it in some way and was able
to give it in evidence at the trial of the civil case it has instituted against
the drawers of the check.
96
BATAAN CIGAR V. CA
230 SCRA 642
FACTS:
Bataan Cigar has engaged one of its suppliers, George King, to deliver
bales of tobacco leaves. Petititoner then issued postdated crossed checks
in favor of King. This was continued despite the failure to deliver the bales.
Simultaneous to these transactions was the discounting of King of the
checks to State Investment House. Bataan then stopped payment and
SIHI tried to collect.
HELD:
The negotiability of the check isn’t affected by it being crossed, whether
specially or generally. It may be legally negotiated from one person to
another as long as the one who encashes the check with the drawee bank
or if its specially crossed, by the bank mentioned between the parallel
lines.
Jurisprudence provides the following effects of crossing a check:
1. The check may not be encashed but only deposited in the bank
2. The check may be negotiated only once—to one who has an
account with a bank
3. The act of crossing the check serves the 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 check should placed the holder in 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 amount to legal absence of good faith.
In the present case, petitioner’s defense in stopping payment is as good to
SIHI as it is to King because really the consideration for the checks were
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
the delivery of the bales of tobacco leaves which King failed to do. There
being failure of consideration, SIHI is not a holder in due course.
97
STATE INVESTMENT HOUSE V. IAC
175 SCRA 310
FACTS:
New Sikatuna requested for a loan from Spouses Chua. Latter issued postdated crossed checks in favor of former. Thereafter, Sikatuna sold checks
to SIHI which upon deposit, checks were dishonored. The trial court
decided the case in favor of SIHI.
HELD:
Jurisprudence provides the following effects of crossing a check:
1. The check may not be encashed but only deposited in the bank
2. The check may be negotiated only once—to one who has an
account with a bank
3. The act of crossing the check serves the 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 checks in issue were crossed generally and issued payable to New
Sikatuna Wood which could only mean that the drawer has intended the
same for deposit only by the rightful person. Apparently, it was not the
payee who presented the same for payment and therefore, there was no
proper presentment and the liability didn't attach to the drawer. Thus, in
the absence of due presentment, the drawer didn't become liable.
Consequently, no right of recourse is available to petitioner against the
drawer of the subject checks considering that the petitioner is the proper
party authorized to make presentment of the checks in question.
Nonetheless, the holder could still collect from New Sikatuna if the latter
doesn't have a valid excuse from refusing payment.
98
STATE INVESTMENT HOUSE V. CA
217 SCRA 32
FACTS:
Moulic issued checks as security to Victoriano, for pieces of jewelry to be
sold on commission. Moulic failed to sell the pieces of jewelry, so she
returned them to Victoriano. The checks however could not be recovered
by Moulic as these have been discounted already in favor of petitioner.
Consequently, before the maturity dates, Moulic withdrew her funds from
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 78 of 190
her account. Thereafter, petitioner presented the checks for payment but
these were dishonored. This prompted the petitioner to initiate an action
against Moulic.
HELD:
A prima facie presumption exists that a holder of a negotiable instrument is
a holder in due course. The burden of proving that State is not a holder in
due course is upon Moulic. In this regard, she failed to do so.
The evidence shows that the dated checks were complete and regular;
petitioner bought the checks from Victoriano before their due dates; it took
the checks in good faith and for value; and it was never informed nor made
aware that these checks were merely issued to payee as security.
Consequently, State is a holder in due course. Moulic cannot set up the
defense that there was failure or want of consideration. It can only invoke
the defense if State was a privy to the purpose for which they were issued
and therefore is not a holder in due course.
Furthermore, the mere fact that the checks were issued as security is not
sufficient ground to discharge the instrument as against a holder in due
course.
And also, Moulic was responsible for the dishonor of her checks. She
withdrew her funds from her account and could not have expected her
checks to be honored by then.
99
BANCO ATLANTICO V. AUDITOR GENERAL
81 SCRA 335
FACTS:
Boncan was the Finance Officer of the Philippine Embassy in Madrid who on
many occasions negotiated with Banco Atlantico checks, allegedly endorsed
to her by the embassy. On these occasions, the bank allowed the payment
of the checks, notwithstanding the fact that the drawee bank has not yet
cleared the checks for collection. This was premised on the finding that
Boncan had special relations with the employees of the bank. And that
upon presentment to the drawee bank, the checks were dishonored due to
non-acceptance allegedly on the ground that the drawer has ordered the
stoppage of payment. This prompted Banco Atlantico to collect from the
Philippine Embassy for the funds released to Boncan but the latter refused.
This eventually led to filing of money claim of the bank with the Auditor
General.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
HELD:
On whether or not Banco Atlantico was a holder in due course, it is not.
Following the decision of the Auditor General in denying the claim of the
bank, the checks were demand notes. It should have been put on guard
when Boncan negotiated the checks with them and subsequently deposited
the same to her account.
Even though it were demand notes, she
instructed the bank that the same be not presented for collection till a later
date. The fact that the amount was quite big and it was the payee herself
who made the request that the same be not presented for collection until a
fixed date in the future was proof of a glaring infirmity or defect in the
instrument. It loudly proclaims “Take me at your own risk.” It was
obvious by then that the bank had knowledge of the infirmity or defect of
the checks. Furthermore, what it did when it allowed payment before
clearing is beyond the normal and ordinary banking practice especially
when the bank involved is a foreign bank and the amounts involved were
large. Boncan wasn't even a client of the bank but was someone who had
special relations with its officers.
In view of the foregoing, the embassy as the drawer of the 3 checks in
question cannot be held liable. It is apparent that the said 3 checks were
(fraudulently altered) by Boncan as to their accounts and therefore wholly
inoperative (note: should be “avoided”).
100
SALAS V. CA
181 SCRA
FACTS:
Petitioner bought a car from Viologo Motor Sales Company, which was
secured by a promissory note, which was later on indorsed to Filinvest
Finance, which financed the transaction. Petitioner later on defaulted in
her installment payments, allegedly due to the fraud imputed by VMS in
selling her a different vehicle from what was agreed upon. This default in
payment prompted Filinvest Finance to initiate a case against petitioner.
The trial court decided in favor of Filinvest, to which the appellate court
upheld by increasing the amount to be paid.
It is the contention of petitioner that since the agreement between her and
the motor company was inexistent, none had been assigned in favor of
private respondent.
HELD:
Petitioner’s liability on the promissory note, the due execution and
genuineness of which she never denied under oath, is under the foregoing
factual milieu, as inevitable as it is clearly established.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 79 of 190
The records reveal that involved herein is not a simple case of assignment
of credit as petitioner would have it appear, where the assignee merely
steps into the shoes of, is open to all defenses available against and can
enforce payment only to the same extent as, the assignor-vendor.
The instrument to be negotiable must contain the so-called words of
negotiability. There are only 2 ways for an instrument to be 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 thus non-negotiable. Any
subsequent purchaser thereof will not enjoy the advantages of being a
holder in due course but will merely step into the shoes of the person
designated in the instrument and will thus be open to the defenses
available against the latter.
In the case at bar, the promissory notes is earmarked with negotiability
and Filinvest is a holder in due course.
101
CONSOLIDATED PLYWOOD V. IFC LEASING
149 SCRA 448
FACTS:
Petitioner bought from Atlantic Gulf and Pacific Company, through its sister
company Industrial Products Marketing, two used tractors. Petitioner was
issued a sales invoice for the two used tractors. At the same time, the
deed of sale with chattel mortgage with promissory note was issued.
Simultaneously, the seller assigned the deed of sale with chattel mortgage
and promissory note to respondent. The used tractors were then delivered
but barely 14 days after, the tractors broke down.
The seller sent
mechanics but the tractors were not repaired accordingly as they were no
longer serviceable. Petitioner would delay the payments on the promissory
notes until the seller completes its obligation under the warranty.
Thereafter, a collection suit was filed against petitioner for the payment of
the promissory note.
HELD:
It is patent that the seller is liable for the breach in warranty against the
petitioner. This liability as a general rule extends to the corporation to
whom it assigned its rights and interests unless the assignee is a holder in
due course of the promissory note in question, assuming the note is
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
negotiable, in which case, the latter’s rights are based on a negotiable
instrument and assuming further that the petitioner’s defense may not
prevail against it.
The promissory note in question is not a negotiable instrument. The
promissory note in question lacks the so-called words of negotiability. And
as such, it follows that the respondent can never be a holder in due course
but remains merely an assignee of the note in question.
Thus, the
petitioner may raise against the respondents all defenses available to it
against the seller.
102
DE OCAMPO V. GATCHALIAN
3 SCRA 596
FACTS:
Gatchalian was interested in buying a car and for this reason, Gonzales
offered and shown to her the same.
He represented himself to be
authorized by the owner of the car to sell the same. After negotiation,
Gatchalian agreed to buy the car and wanted Gonzales to bring the
certificate of registration so that her husband could verify it. Gonzales
excused himself from bringing said certificate as allegedly the owner
wanted to be secure that the buyer would be in good faith. This led to him
asking Gatchalian to issue a check as evidence of good faith. He promised
that said check wouldn't be deposited but merely shown to the owner.
Relying on this promise, she issued the check but Gonzales failed to show
up the next day. She ordered the stoppage of payment of the check,
which the plaintiff didn't knew about. The plaintiff accepted the check from
Gonzales as payment for hospitalization later on.
HELD:
The stipulation of facts would show that De Ocampo wasn't aware of the
circumstances that led to the issuance of the check. Nonetheless, he
should have been placed into inquiry, with the showing that the check was
crossed—that the check could only be deposited and not encashed. He
should have made an inquiry as to why Gonzales had with him the check
and not deposited in account. He had the duty to ascertain that Gonzales
had legal title to the instrument. Having failed in this accord, he was
grossly negligent in not finding out the nature of the title and possession of
Gonzales, amounting to legal absence of good faith.
In taking an instrument with a defect or infirmity, it could not be said that
the holder took it as a holder in due course.
103
MONTINOLA V. PNB
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 80 of 190
88 PHIL 178
FACTS:
*Remember the case with the Japanese occupation and the mutilated
check.
HELD:
Montinola could not be considered as a holder in due course. Why? For
one to be a holder in due course, one should take the instrument before it
has become overdue. Remember that in this case, Montinola took the
check which has long become overdue. He cannot even be in the slightest
be considered as a holder because the NIL defines a holder as being the
payee or the indorsee of the negotiable instrument. In this case, he wasn't
the payee nor was he the indorsee of the check in issue.
104
PEOPLE V. MANIEGO
148 SCRA 30
FACTS:
The accused were charged and later on found guilty of committing
malversation. Ubay was the disbursing officer in the Office of the Chief of
Finance in a military camp and together with his co-accused, were able to
take personal checks drawn against the PNB and BPI, of which Pamintuan
was the drawer and Maniego was the indorser. The checks were encashed
and used, to the prejudice of the government.
Maniego averred that the trial court erred in adjudging her as liable as an
indorser to the government.
HELD:
The contention of Maniego that as a mere indorser, she may not be liable
on account of the dishonor of the checks indorsed by her is untenable. The
holder or last indorsee of a negotiable instrument has the right to enforce
payment of the instrument for the full amount thereof and against all
parties liable thereon. Among the parties liable thereon is the indorser
unless he clearly indicates that his intention to be bound in some other
capacity. Maniego may also be considered as an accommodation party and
as such, is liable to a holder for value notwithstanding if the holder knew
that she was only an accommodation party.
105
UCPB V. IAC
183 SCRA 38
FACTS:
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Petitioner bank issued a manager’s check in favor of Makati Bel-Air as
purchased by Altiura as payment for a condominium unit. Thereafter,
Altiura requested the bank to hold payment as there was a discrepancy
between the areas of the unit purchased to what has been agreed upon.
The bank then told Makati Bel-Air of this request. This request happened
two times.
On the second time, Bel-Air denied such request, which
prompted the bank to file a complaint-interpleader so that the two other
parties could settle their claims with one another. This led to a civil case
and another. Altiura filed for rescission of the contract between him and
Bel-Air. Bel-Air filed counterclaims against the bank and Altiura. During
the pendency of these actions, the bank moved that it first deposit the
amount of the check in a special account, which was approved by the trial
court. Later on, it moved for the dismissal of the complaint it filed for the
reason that there is no more conflict between Altiura and Bel-Air. Bel-Air
returned the check to the bank. In resolving the motion to withdraw, the
court held that the motion is rendered moot and academic by its earlier
order ordering the bank to return the amount to Altiura.
This was
appealed by the bank.
HELD:
Makati Bel-Air was a party to the contract of sale of the office condominium
unit to Altiura. Accordingly, it was aware that at the time it had received
the manager’s check, that there was or had arisen at least partial failure of
consideration since it was unable to comply with its obligation to deliver
the office space to Altiura. Makati Bel-Air was also aware that the bank
had been informed of the claimed defect in its title to the check or of its
right to the proceeds thereof. Vis a vis both Altiura and the bank, Makati
Bel-Air cannot be considered as a holder in due course.
106
YANG V. COURT OF APPEALS
409 SCRA 159
FACTS:
Yang and Chandimari entered into an agreement that the latter would issue
to the former a manager’s check in exchange for two checks that Yang has
payable to the order of David. The difference in amount would be the
profit of the two of them. It was further agreed upon that Yang would
secure a dollar draft, which Chandimari would exchange with another dollar
draft to be secured from a Hong Kong bank. At the agreed time of
rendezvous, it was reported by Yang’s messenger that Chandimari didn't
show up and the drafts and checks were allegedly stolen. This wasn't true
however. Chandimari was able to get hold of the drafts and checks. He
was even able to deliver to David the two checks and was able to get
money in return. Consequently, Yang asked for the stoppage of payment
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 81 of 190
of the checks she believed to be lost, relying on the report of her
messenger. The stoppage order was eventually lifted by the banks and the
drafts and checks were able to be encashed. Yang then filed an action for
injunction and damages against the banks, Chandimari and David. The
trial court and CA held in favor of David as a holder in due course.
HELD:
Every holder of a negotiable instrument is presumed to be a holder in due
course. This is specially true if one is a holder because he is the payee or
indorsee of the instrument. In the case at bar, it is evident that David was
the payee of the checks. The prima facie presumption of him being a
holder in due course is in his favor. Nonetheless, this presumption is
disputable. On whether he took the check under the conditions set forth in
Section 52 must be proven. Petitioner relies on two arguments on why
David isn’t a holder in due course—first, because he took the checks
without valuable consideration; and second, he failed to inquire on
Chandimari’s title to the checks given to him.
The law gives rise to the presumption of valuable consideration. Petitioner
has the burden of debunking such presumption, which it failed to do so.
Her allegation that David received the checks without consideration is
unsupported and devoid of any evidence.
Furthermore, petitioner wasn't able to show any circumstance which should
have placed David in inquiry as to why and wherefore of the possession of
the checks by Chandimari. David wasn't a privy to the transactions
between Yang and Chandimari. Instead, Chandimari and David had the
agreement between themselves of the delivery of the checks. David even
inquired with the banks on the genuineness of the checks in issue. At that
time, he wasn't aware of any request for the stoppage of payment. Under
these circumstances, David had no obligation to ascertain from Chandimari
what the nature of the latter’s title to the checks was, if any, or the nature
of his possession.
107
MESINA V. IAC
145 SCRA 497
FACTS:
Jose Go purchased from Associate Bank a Cashier’s Check, which he left on
top of the manager’s desk when left the bank. The bank manager then
had it kept for safekeeping by one of its employees. The employee was
then in conference with one Alexander Lim. He left the check in his desk
and upon his return, Lim and the check were gone. When Go inquired
about his check, the same couldn't be found and Go was advised to request
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
for the stoppage of payment which he did. He executed also an affidavit of
loss as well as reported it to the police.
The bank then received the check twice for clearing. For these two times,
they dishonored the payment by saying that payment has been stopped.
After the second time, a lawyer contacted it demanding payment. He
refused to disclose the name of his client and threatened to sue. Later, the
name of Mesina was revealed. When asked by the police on how he
possessed the check, he said it was paid to him Lim. An information for
theft was then filed against Lim.
A case of interpleader was filed by the bank and Go moved to participate
as intervenor in the complaint for damages.
Mesina moved for the
dismissal of the case but was denied.
The trial court ruled in the
interpleader case ordering the bank to replace the cashier’s check in favor
of Go.
HELD:
Petitioner cannot raise as arguments that a cashier’s check cannot be
countermanded from the hands of a holder in due course and that a
cashier’s check is a check drawn by the bank against itself. Petitioner
failed to substantiate that he was a holder in due course.
Upon
questioning, he admitted that he got the check from Lim who stole the
check. He refused to disclose how and why it has passed to him. It simply
means that he has notice of the defect of his title over the check from the
start. The holder of a cashier’s check who is not a holder in due course
cannot enforce payment against the issuing bank which dishonors the
same. If a payee of a cashier’s check obtained it from the issuing bank by
fraud, or if there is some other reason why the payee is not entitled to
collect the check, the bank would of course have the right to refuse
payment of the check when presented by payee, since the bank was aware
of the facts surrounding the loss of the check in question.
108
ASIA BANKING CORPORATION V. TEN SEN GUAN
44 PHIL 511
FACTS:
Ten Sen Guan ordered from Snow’s Ltd. ten cases of mercerized bastite to
be shipped from New York to Manila. Upon the arrival of the merchandise,
a draft drawn by Snow’s Ltd. against Ten Sen Guan was presented to them
for acceptance. The delivery of the bill of lading and other documents were
being put on hold pending acceptance of the draft that is why Ten Sen
Guan accepted the same. When the cases were opened however, it was
found out that the merchandise wasn't bastite but instead were burlap.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 82 of 190
Ten Sen Guan then was prompted to return the bill of lading and other
documents and requested Asia Banking Corporation, the agent of Snow
Ltd. to cancel its acceptance, which the corporation promised to do so.
However it didn't do good its promise since it sued Ten Sen Guan for the
amount of the draft. The trial court however ruled in favor of Ten Sen
Guan.
Fernandez Hermanos to show that indeed the chain was defective. But as
the trial court found out, there was a failure of proof.
HELD:
It is undisputed that the defendants placed the order with Snow Ltd. for 10
cases of mercerized bastite and that the draft was drawn from the
corresponding value of 10 cases of mercerized bastite including incidental
expenses. That when the cases were examined it was found out that it
wasn't bastite but instead were burlap, of which the corporation was
notified and that Ten Sen Guan refused to refused the goods.
The
corporation alleges that it is a holder for value but it failed to prove such
allegation. If indeed it was a holder for value, it could have easily proven
such fact by competent evidence but it failed to do so. It wasn't able to
give an authentic account of the transactions. It being a fact that it is not
a holder for value, it is susceptible to any defenses available to Ten Sen
Guan.
AUG UST 20 - 25, 2007
According to the findings, the acceptance was conditional. The draft was
for collection and also, the evidence established that the corporation has
released Ten Sen Guan from liability from the draft.
109
FOSSUM V. FERNANDEZ
44 PHIL 675
FACTS:
Fernandez Hermanos placed an order with the products company for the
manufacturing of a chain given a set of specifications. The chain was duly
prepared and delivered. A draft was drawn by the company and was
accepted by Fernandez Hermanos. Thereafter, the draft was negotiated
with Fossum who demanded payment on the instrument but was refused
by Fernandez on alleged failure of the chain delivered to satisfy the
specifications given.
HELD:
It devolved around Fernandez Hermanos to allege and prove its claim that
which was delivered and received didn't comply with the specifications and
didn't answer the purposes for which it was intended. It alleged that the
chain didn't meet the specifications given by the contract. Nonetheless,
there was failure to identify the so-called defects of the chain. It was upon
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
**WEEK 9: MID TER MS WEEK
NOTES FOR WEEK 10
V. LIABILITIES OF PARTIES
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.
MAKER PRIMARILY LIABLE
•
Engagement of the maker is to pay absolutely for the note according
to its tenor
•
His liability is primarily and unconditional
•
One who has signed an instrument as a maker is presumed to have
acted with care and to have signed the instrument with full knowledge
of its contents, unless of course, if fraud is proved
MAKER MUST PAY ACCORDING TO THE TERMS OF THE NOTE
•
The maker bound himself to pay personally. He cannot shift the
obligation without the consent of the payee. He cannot allege that he
spend the money on expenses which should be charged to a trust
administered by a creditor because it is not the payee’s concern to
know how the proceeds should be spent. That is the sole concern of
the maker. The payee’s interest is merely to see that the note is paid
according to its term.
LIABILITY OF 2 OR MORE MAKERS
•
When 2 or more makers sign jointly or severally, each of them is
individually liable for the payment of the full amount of their obligation
even if one of them didn’t receive part of the value given therefor, as
he would be considered as an accommodation party
PAYEE’S EXISTENCE, ETC.
•
The maker also admits of the existence of the payee and his then
capacity to indrose
•
He is precluded from setting up the following defenses:
o
That the payee is a fictitious person because by making the
note, he admits that the payee exists
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 83 of 190
o
That the payee was insane, a minor, or a corporation acting
ultra vires because by making the note, he admits the then
capacity of the payee to indorse
CASE DIGESTS: SECTION 60
110
PNB V. MAZA AND MACENAS
48 PHIL 207
FACTS:
Maza and Macenas executed a total of five promissory notes. These were
not paid at maturity. And to recover the amounts stated on the face of the
promissory notes, PNB initiated an action against the two. The special
defense posed by the two is that the promissory notes were delivered to
them in blank by a certain Enchaus and were made to sign the notes so
that the latter could secure a loan from the bank. They also alleged that
they never negotiated the notes with the bank nor have they received any
value thereof.
They also prayed that Enchaus be impleaded in the
complaint but such was denied. The trial court then held in favor of the
bank.
HELD:
The defendants attested to the genuineness of the instruments sued on.
Neither did they point out any mistake in regard to the amount and
interest that the lower court sentenced them to pay. Given such, the
defendants are liable. They appear as the makers of the promissory notes
and as such, they must keep their engagement and pay as promised.
And assuming that they are accommodation parties, the defendants having
signed the instruments without receiving value thereof, for the purpose of
lending their names to some other person, are still liable for the promissory
notes. The law now is such that an accommodation party cannot claim no
benefit as such, but he is liable according to the face of his undertaking,
the same as he himself financially interest in the transaction. It is also no
defense to say that they didn't receive the value of the notes. To fasten
liability however to an accommodation maker, it is not necessary that any
consideration should move to him. The accommodation which supports the
promise of the accommodation maker is that parted with by the person
taking the note and received by the person accommodated.
111
ARANETA V. PEREZ
14 SCRA 498
FACTS:
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Perez executed a promissory note in favor of Araneta. Perez failed to pay
upon maturity of the note and despite demands, still failed to pay. Araneta
was then prompted to file a case against him. As defense, he alleged that
the proceeds were used to pay for the medical treatment of his daughter
who was then the beneficiary of the trust then administered by Araneta.
Perez was adjudged to pay Araneta. And by virtue of this judgment, Perez
filed a case against Araneta for reimbursement for his alleged advances for
the medical treatment of his daughter.
HELD:
Perez bound himself to pay personally said promissory note which he
cannot shift to another without the consent of the payee. Such is the
undertaking of the maker. The maker of a negotiable instrument by
making it engages that he will pay it according to the tenor and admits the
existence of the payee and his then capacity to indorse. Given such, Perez
could not now escape his liability by alleging that he spent the money for
the treatment of his daughter since it is not the concern of the payee how
the said proceeds would be spent. This is the sole concern of the maker.
The interest of the payee is the payment of the instrument.
112
TAN SIN V. YU BIAO
56 PHIL 707
FACTS:
Plaintiff were the heirs of Sontuan while the defendant is the partnership to
which he belonged. After his death, there was dispute over the share of
the heirs correlative the share of the deceased partner in the partnership.
An agreement was made between the surviving partners and heirs. There
was liquidation of the deceased’s share. The share was then retained in
the hands of the partnership in the nature of a loan, which was secured by
a promissory note.
The partnership defaulted in payment and this
prompted the heirs to file a case against them. Judgment was rendered
against the partnership and the other solidary maker. The solidary maker
appealed and averred that he signed the note by mistake only.
HELD:
Inasmuch as the appellant is a businessman and is of age, he is presumed
to have acted with due care, and to have signed the document in question
with full knowledge of its contents. And this presumption of law is not
overcome by the evidence adduced by the appellant, consisting in his own
testimony. There being no evidence of fraud, and the appellant having
admitted to the genuineness of his signature, the same must be given legal
effects.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 84 of 190
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 the instrument an express stipulation
negativing or limiting his own liability to the holder.
DRAWER SECONDARILY LIABLE
•
He engages merely that the bill will be accepted or paid or both,
according to its tenor, and that he will pay only when
1. It is dishonored
2. And the necessary proceedings of dishonor are duly taken
•
The liability of the drawer is subject to the two conditions and attaches
only upon their fulfillment
•
The drawer, by merely drawing the bill and signing his name in the bill
as such drawer, without more, impliedly engages to be so secondarily
liable, as if he has incorporated the provisions of Section 61 in the bill
•
If the bill is not paid, accordingly, if a bill is not paid, the drawer
becomes liable for the payment of its value to the holder provided that
notice of dishonor is given
TO WHOM DRAWER IS SECONDARILY LIABLE
1. The holder
2. Or if any of the indorsers intervening between the holder and the
drawer is compelled to pay by the holder, the drawer, will be liable
to that indorser so compelled to pay
IS DRAWER OF UNACCEPTED BILL PRIMARILY LIABLE?
•
Yes
•
It was held that until the bill has been accepted, the drawer is the
principal debtor and after acceptance, the drawee or acceptor is the
principal debtor and the drawer becomes secondarily liable
PAYEE’S EXISTENCE
•
Like the maker, the drawer admits to the existence of the payee and
his capacity to indorse
NEGATIVES HIS LIABILITY
•
The law allows the drawer to negative or limit his liability by express
stipulation
•
By adding words such as “without recourse” or “I shall not be liable in
case of non-payment or non-acceptance”
CASE DIGESTS: SECTION 61
113
FACTS:
Picornell followed the instructions of Hyndman, Tavera and Venutra by
buying bales of tobacco. He was able to obtain in National Bank a sum of
money together with his commission. He drafted a bill of exchange against
the firm and in favor of the bank. It was received by National Bank and
was accepted thereafter by the firm. However, on alleged conditions of the
tobacco, the bill of exchange was not paid.
HELD:
This action for recovery is for the value of the bill of exchange. The firm
accepted the bill unconditionally but did not pay it at maturity, wherefore
its responsibility to pay the same is clear. The question whether or not the
tobacco was worth the value of the bill doesn’t concern the bank. Such
partial want of consideration if it was, doesn’t exist with respect to the
bank which paid Picornell the full value of the said bill of exchange. The
bank was a holder in due course, and was such for value full and complete.
The firm cannot escape liability.
114
BANCO ATLANTICO V. AUDITOR GENERAL
81 SCRA 335
FACTS:
Boncan was the Finance Officer of the Philippine Embassy in Madrid who on
many occasions negotiated with Banco Atlantico checks, allegedly endorsed
to her by the embassy. On these occasions, the bank allowed the payment
of the checks, notwithstanding the fact that the drawee bank has not yet
cleared the checks for collection. This was premised on the finding that
Boncan had special relations with the employees of the bank. And that
upon presentment to the drawee bank, the checks were dishonored due to
non-acceptance allegedly on the ground that the drawer has ordered the
stoppage of payment. This prompted Banco Atlantico to collect from the
Philippine Embassy for the funds released to Boncan but the latter refused.
This eventually led to filing of money claim of the bank with the Auditor
General.
HELD:
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
PNB V. PICORNELL
46 PHIL 706
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 85 of 190
On whether or not Banco Atlantico was a holder in due course, it is not.
Following the decision of the Auditor General in denying the claim of the
bank, the checks were demand notes. It should have been put on guard
when Boncan negotiated the checks with them and subsequently deposited
the same to her account.
Even though it were demand notes, she
instructed the bank that the same be not presented for collection till a later
date. The fact that the amount was quite big and it was the payee herself
who made the request that the same be not presented for collection until a
fixed date in the future was proof of a glaring infirmity or defect in the
instrument. It loudly proclaims “Take me at your own risk.” It was
obvious by then that the bank had knowledge of the infirmity or defect of
the checks. Furthermore, what it did when it allowed payment before
clearing is beyond the normal and ordinary banking practice especially
when the bank involved is a foreign bank and the amounts involved were
large. Boncan wasn't even a client of the bank but was someone who had
special relations with its officers.
In view of the foregoing, the embassy as the drawer of the 3 checks in
question cannot be held liable. It is apparent that the said 3 checks were
(fraudulently altered) by Boncan as to their accounts and therefore wholly
inoperative (note: should be “avoided”).
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.
ACCEPTOR PRIMARILY LIABLE
•
Acceptor engages to pay absolutely according to the tenor of its
acceptance
•
His liability is not subject to any condition
•
The acceptor is the drawee who accepts the bill
•
His acceptance immediately places a legal liability on him for the
payment of the bill in favor of one who became a holder thereof after
acceptance, and if he wants to escape liability, it is up to him to show
that he is a mere agent of the drawer, or allege and prove any other
defense which he has to the liability
EFFECT OF MORTGAGE EXECUTED BY ACCEPTOR
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
•
Where being unable to pay certain bills of exchange which the drawee
has accepted, the latter makes a mortgage in favor of the holder of
said bills upon certain merchandise the value of which is sought to be
collected through said bills, in order to secure the payment of said
amount if the merchandise is sold and the integrity thereof while the
sale is not effected, the execution of said mortgage doesn’t constitute
a Novation of the obligation represented by said accepted bills unless it
is expressly stated in the mortgage
ACCEPTOR TO PAY ACCORDING TO TENOR OF HIS ACCEPTANCE
•
While the maker of a note engages to pay according to the tenor of the
note, an acceptor engages to pay according to the tenor of his
acceptance, not of the bill he accepts
•
Tenor of his acceptance may be different from the tenor of the bill, as
the acceptor may accept the bill with qualifications
•
If his acceptance is general, the tenor of then bill is the same tenor as
the tenor of his acceptance
WHERE ORIGINAL TENOR IS ALTERED BEFORE ACCEPTANCE
•
Suppose the bill is originally for P1000. Before the drawee X accepts
it, it is altered by the payee B to P4000. Then X accepts it. How much
is X liable to a holder in due course?
•
According to one view, X is liable for P4000 and not P1000. The
reason is that the tenor of X’s acceptance is for P4000.
EFFECT OF SECTION 124
•
Under the first view, what is the effect of Section 124 which provides
that a holder in due course can recover only the original tenor of the
instrument?
•
It seems that this refers to the original tenor of instrument taken from
the standpoint of the person primarily liable, in X’s standpoint. In
other words, the original tenor of the instrument is P4000, which is the
tenor of X’s acceptance.
•
If after his acceptance, a subsequent indorsee alters the bill to read
P9000, then X could be liable for P4000 only, the original tenor of his
acceptance, even as to a holder of due course.
ADMISSION OF DRAWER’S EXISTENCE, ETC.
•
Drawer’s existence
•
The genuineness of the drawer’s signature
•
The capacity and authority of the drawer to draw the instrument
•
He doesn’t admit the genuineness of the indorser’s signatures
EFFECT OF ACCEPTOR’S ADMISSIONS
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 86 of 190
1.
2.
3.
Acceptor consequently precluded from setting up the defense that
the drawer is non-existent or fictitious because of his admission of
the drawer’s existence
Neither can he claim the drawer’s signature is a forgery because
he admits the genuineness of the drawer’s signature
Neither can the drawee escape liability by alleging want of
consideration between him and the drawer as by accepting the
bill, he admits the capacity and authority of the drawer to draw
the bill
CASE DIGESTS: SECTION 62
115
FOSSUM V. FERNANDEZ
64 PHIL 675
FACTS:
Fernandez Hermanos placed an order with the products company for the
manufacturing of a chain given a set of specifications. The chain was duly
prepared and delivered. A draft was drawn by the company and was
accepted by Fernandez Hermanos. Thereafter, the draft was negotiated
with Fossum who demanded payment on the instrument but was refused
by Fernandez on alleged failure of the chain delivered to satisfy the
specifications given.
HELD:
It devolved around Fernandez Hermanos to allege and prove its claim that
which was delivered and received didn't comply with the specifications and
didn't answer the purposes for which it was intended. It alleged that the
chain didn't meet the specifications given by the contract. Nonetheless,
there was failure to identify the so-called defects of the chain. It was upon
Fernandez Hermanos to show that indeed the chain was defective. But as
the trial court found out, there was a failure of proof.
**Fernandez Hermanos accepted the instrument and thus, made certain
warranties regarding the same. These warranties have many effects and
one of it is being precluded from raising the defense of want of
consideration. In case he raises the said defense, he should be able to
present evidence to support such allegation. Failure to do so would make
the presumption still subsisting.
116
PNB V. CA
25 SCRA 693
FACTS:
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Lim deposited in his PCIB account a GSIS check drawn against PNB.
Following standard banking procedures, the check was sent to petitioner
for clearing. He didn’t return said check but paid the amount to PCIB as
well as debited it against the account of GSIS. Thereafter, a demand was
received from GSIS asking for the credit of the amount since the
signatures found in the check were forged. This was done by PNB and it
now comes after PCIB but the latter wouldn’t want to return the money.
HELD:
Acceptance is not required for checks, for the same are payable on
demand. Acceptance and payment are distinguished with each other. The
former pertains to a promise to perform an act while the latter is the actual
performance of the act.
PNB had also been negligent with the particularity that it had been guilty of
a greater degree of negligence because it had a previous and formal notice
from GSIS that the check had been lost, with the request that payment be
stopped. Just as important is that it is its acts, which are the proximate
cause of the loss.
117
PNB V. NATIONAL CITY BANK
63 PHIL 711
FACTS:
Unknown persons negotiated with Motor Services Company checks, which
were part of the stipulation in payment of automobile tires purchased from
the latter’s store.
It purported to have been issued by Pangasinan
Transportation Company. The said checks were indorsed at the back by
said unknown persons, the Motor company believing at that time that the
signatures contained therein were genuine.
The checks were later
deposited with the company’s account in National City Bank of NY. The
said checks were consequently cleared and PNB credited National City Bank
with the amounts. Thereafter, PNB discovered that the signatures were
forged and it demanded the reimbursement of the amounts for which it
credited the other bank.
HELD:
A check is a bill of exchange payable on demand and only the rules
governing bills of exchanges payable on demand are applicable to it. in
view of the fact that acceptance is a step necessary insofar as negotiable
instruments are concerned, it follows that the provisions relative to
acceptance are without application to checks.
Acceptance impies
subsequent negotiation of the instrument, which is not true in the case of
checks because from the moment it is paid, it is withdrawn from
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 87 of 190
circulation. When the drawee banks 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 warrant against the drawee.
Further, in determining the relative rights of a drawee who under a mistake
of fact, has paid, 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 and negligence of the parties in respect thereto.
The responsibility of the drawee who pays a forged check, for the
genuineness of the drawer’s 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.
According to the undisputed facts, National City Bank in purchasing the
papers in question from unknown persons without making any inquiry as to
the identity and authority of said persons negotiating and indorsing them,
acted negligently and contributed to the constructive loss of PNB in failing
to detect the forgery. Under the circumstances of the case, if the appellee
bank is allowed to recover, there will be no change in position as to the
injury or prejudice of the appellant.
DRAWER: PANGASINAN
PAYEE: IASMOTOR SERVICE
DRAWEE: PNB
COLLECTING BANK: NATIONAL CITY BANK OF NEW YORK
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.
WHEN PERSON DEEMED INDORSER
•
In the absence of any indication in what capacity a person whose
signature is written on the instrument intends to be bound, he shall be
deemed as an indorser
INDICATION TO BE BOUND OTHERWISE THAN INDORSER
•
Will not be deemed as an indorser if he indicates by appropriate words
his intention to be bound in some other capacity
•
But anyone who assumes the responsibility of identifying the payee of
a check is answerable to the bank cashing the check if the bank pays
its amount to such payee so identified
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
ADMISSIBILITY OF PAROL EVIDENCE
•
The statutory command that the legal effect of a blank instrument
cannot be changed by parol proof or by evidence from other source
•
The intent to be bound in some other capacity than as an indorser
must be indicated in the indorsement or on the face of the instrument
and cannot be shown by parol
CASE DIGESTS: SECTION 63
118
ANG TIONG V. TING
22 SCRA 713
Ting issued a PBCom check payable to cash or bearer. This was indorsed
by Ang at the back and it was received by plaintiff. Upon encashment of
the check, the same was dishonored. Plaintiff moved that the two make
good the value of the check but despite demands, he was unheeded,
prompting him to file a complaint. The trial court decided in his favor.
HELD:
There is nothing in the check in question indicates that the appellant is not
a general indorser.
When a person placing his signature upon an instrument otherwise than a
maker, drawer, or acceptor, he is deemed to be a general indorser, unless
he clearly indicates by appropriate words his intention to be bound in some
other capacity, which he did not do so.
Even on the assumption that the appellant was an accommodation
indorser, as he professes to be, he is nevertheless by the clear mandate of
section 29, liable on the instrument to a holder for value, notwithstanding
that such holder at the time of taking the instrument knew him to be an
accommodation party. And assuming that he was an accommodation
party, he may obtain security from the maker to protect himself against
the danger of insolvency of the latter but this doesn't affect his liability to
the appellee, as the said remedy is a matter of recourse between him and
the maker.
119
TUAZON V. HEIRS OF BARTOLOME RAMOS
463 SCRA 408
FACTS:
Respondents alleged that on a relevant date, spouses Tuazon purchased
from their predecessor-in-interest cavans of rice. That on the total number
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 88 of 190
of cavans, only a certain portion has been paid for. In payment thereof,
checks have been issued but on presentment, the checks were dishonored.
Respondents alleged that since spouses anticipated the forthcoming suit
against them, they made fictitious sales over their properties. As defense,
the spouses averred that it was the wife of Bartolome who effected the sale
and that Maria was merely her agent in selling the rice. The true buyer of
the cavans was Santos. The spouses further averred that when Ramos got
the check from Santos, she took it in good faith and didn't knew that the
same were unfunded.
HELD:
First, there is no contract of agency.
If it was truly the intention of the parties to have a contract of agency,
then when the spouses sued Santos on a separate civil action, they should
have instituted the same on behalf and for the respondents. They didn't do
so.
The filing in their own names negate their claim that they acted as
mere agents in selling the rice.
Second, the spouses are liable on the check.
As indorser, Tuazon warranted that upon due presentment, according to
their tenor, and that in case they were dishonored, she would pay the
corresponding amount.
After the instrument is dishonored by nonpayment, indorsers cease to be merely secondarily liable. They became
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.
Santos is not an
indispensable party to the suit against the spouses.
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.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
IRREGULAR INDORSEMENT
•
An irregular indorser is one who not otherwise a party to an
instrument, places his signature thereon his signature in blank before
delivery
IRREGULAR INDORSEMENT
•
Its an indorsement in an unusual, peculiar, or singular manner
•
His name appears where he would naturally expect another name
BEFORE DELIVERY
•
It means the initial delivery
•
Provision doesn’t apply if the signature was placed after delivery
PAY TO X OR HIS ORDER P1000
SGD. B
SGD. Y
PAY TO D
PAY TO E
SGD. X
SGD. D
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.
APPLICATION OF SECTION 65
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 89 of 190
1. A person negotiating by mere delivery
2. A person negotiating by qualified indorsement
LIABILITY OF PERSON NEGOTIATING BY DELIVERY
I promise to pay P1000 to bearer.
Sgd. A
*A delivers the note to B.
*B negotiates the note to C by mere delivery.
•
A person negotiating by mere delivery becomes liable to the holder
only when the holder cannot obtain payment by reason of the fact that
any of the warranties of the person negotiating by delivery is or
becomes false
I promise to pay B or bearer P1000.
Sgd. A
Sgd. B
To D Sgd. C
To E Sgd. D
(blank) Sgd. E
*E negotiated the note to F.
F negotiated to G.
•
•
E is not liable to G. G’s right didn’t derive from the indorsement of F
F is liable to G.
CASE DIGESTS: SECTION 65
120
METROPOL V. SAMBOK MOTORS CO.
120 SCRA 864
A qualified indorsement constitutes the indorser a mere assignor of the title
to the instrument. It may be made by adding to the indorser's signature
the words "without recourse" or any words of similar import. Such an
indorsement relieves the indorser of the general obligation to pay if the
instrument is dishonored but not of the liability arising from warranties on
the instrument as provided in Section 65 of the Negotiable Instruments
Law already mentioned herein. However, appellant Sambok indorsed the
note "with recourse" and even waived the notice of demand, dishonor,
protest and presentment.
"Recourse" means resort to a person who is secondarily liable after the
default of the person who is primarily liable. 3 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. 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. 4 Appellant Sambok's intention of indorsing the note without
qualification is made even more apparent by the fact that the notice of
demand, dishonor, protest and presentment were an waived. The words
added by said appellant do not limit his liability, but rather confirm his
obligation as a general indorser.
Sec. 66. Liability of general indorser. - Every indorser who indorses
without qualification, warrants to all subsequent holders in due
course: (holders in good faith)
(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;
FACTS:
Dr. Villareal issued a promissory note in favor of Sambok, which was
payable in monthly installments. The promissory note was then indorsed
to Metropol. Villareal defaulted payment and this prompted Metropol to
run after Sampol. Sampol alleged that it is not liable since it was a
qualified indorser through the wordings it inserted in its indorsement—with
recourse.
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.
HELD:
APPLICATION OF SECTION 66
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 90 of 190
•
•
Deals with the liability or warranties of one negotiating by general
indorsement, as distinguished from qualified indorsers or persons
negotiating by mere delivery
It has been held that this section includes an indorser for collection
LIABILITY OF GENERAL INDORSER
1. That the instrument is genuine and in all respects what it purports
to be
2. That he has a good title to it
3. That all prior parties had capacity to contract
4. And that the instrument is, at the time of his indorsement, valid
and subsisting
FOURTH WARRANTY OF GENERAL INDORSER AND QUALIFIED INDORSER,
DISTINGUISHED
•
While the qualified indorser or person negotiating by delivery warrants
that he is ignorant of any fact that will render the instrument valueless
or impair its validity, the general indorser warrants that the instrument
he is indorsing is valid and subsisting regardless of whether he is
ignorant of that fact or not
THE WARRANTIES OF A GENERAL INDORSER EXTEND TO THE FOLLOWING
1. Holders in due course
2. Persons who derive their title from holders in due course
3. Immediate transferees even if they are not holders in due course
WARRANTIES DON’T EXTEND TO DRAWEE
•
The indorser of a check doesn’t warrant the genuineness of the
drawer’s signature to the drawee who pays it since the drawee is not a
holder in due course
•
The warranties provided do not run in favor of the drawee in respect to
the genuineness of the drawer’s signature but only in favor of
subsequent holders in due course
A  B  C  D (FORGED)  E  F
*Is C liable? No.
OTHER LIABILITTY OF GENERAL INDORSER
•
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 of dishonor be duly taken,
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
he will pay the amount to the holder, or to any subsequent indorser
who may be compelled to pay it
GENERAL INDORSER IS SECONDARILY LIABLE
•
Secondary liability not confined to the four warranties
•
He is liable if for any reason, the person primarily liable cannot pay, as
distinguished from the limited secondary liability of the qualified
indorser or of the person negotiating by mere delivery
•
The reason for dishonor need not be established. As long as there was
dishonor, this is sufficient.
SUMMARY OF
NEGOTIATING
DISTINCTIONS
BETWEEN
GENERAL
INDORSER
EXTENSION
WARRANTY
OF
FOURTH
WARRANTY
WHEN DOES HE
PAY?
All
subsequent
parties
Warrants
that
the instrument
is
valid
and
subsisting
Engages to pay
the holder or
any intervening
party who may
be compelled to
pay
if
the
instrument
is
dishonored
either by nonacceptance
or
non-payment
LIABILITIES
QUALIFIED
INDORSER
OF
PERSONS
NEGOTIATING
BY MERE
DELIVERY
Immediate
transferee
All
subsequent
parties—who
acquire
title
through
their
indorsement
Warrants that the
valid and subsisting
instrument is
Doesn’t
engage
to
pay
the
instrument if it is dishonored by
non-acceptance or non-payment
except when such dishonor arises
from his four warranties
LIABILITY OF ASSIGNOR
•
The vendor in good faith shall be responsible for the existence and
legality of the credit at the time of the sale unless it should have been
sold as doubtful but not for the solvency of the debtor unless it has
been so expressly stipulated or unless the insolvency was prior to the
sale and of common knowledge
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 91 of 190
CASE DIGESTS: SECTION 66
121
PEOPLE V. MANIEGO
148 SCRA 30
FACTS:
The accused were charged and later on found guilty of committing
malversation. Ubay was the disbursing officer in the Office of the Chief of
Finance in a military camp and together with his co-accused, were able to
take personal checks drawn against the PNB and BPI, of which Pamintuan
was the drawer and Maniego was the indorser. The checks were encashed
and used, to the prejudice of the government.
Maniego averred that the trial court erred in adjudging her as liable as an
indorser to the government.
HELD:
The contention of Maniego that as a mere indorser, she may not be liable
on account of the dishonor of the checks indorsed by her is untenable. The
holder or last indorsee of a negotiable instrument has the right to enforce
payment of the instrument for the full amount thereof and against all
parties liable thereon. Among the parties liable thereon is the indorser
unless he clearly indicates that his intention to be bound in some other
capacity. Maniego may also be considered as an accommodation party and
as such, is liable to a holder for value notwithstanding if the holder knew
that she was only an accommodation party.
122
METROPOLITAN BANK V. CA
194 SCRA 169
FACTS:
Gomez opened an account with Golden Savings bank and deposited 38
treasury warrants. All these warrants were indorsed by the cashier of
Golden Savings, and deposited it to the savings account in a Metrobank
branch. They were sent later on for clearing by the branch office to the
principal office of Metrobank, which forwarded them to the Bureau of
Treasury for special clearing. On persistent inquiries on whether the
warrants have been cleared, the branch manager allowed withdrawal of the
warrants, only to find out later on that the treasury warrants have been
dishonored.
HELD:
The treasury warrants were not negotiable instruments. Clearly, it is
indicated that it was non-negotiable and of equal significance is the
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
indication that they are payable from a particular fund, Fund 501. This
indication as the source of payment to be made on the treasury warrant
makes the promise to pay conditional and the warrants themselves nonnegotiable.
Metrobank then cannot contend that by indorsing the warrants in general,
GS assumed that they were genuine and in all respects what they purport
it to be, in accordance to Section 66 of the NIL. The simple reason is that
the law isn’t applicable to the non-negotiable treasury warrants. The
indorsement was made for the purpose of merely depositing them with
Metrobank for clearing. It was in fact Metrobank which stamped on the
back of the warrants: “All prior indorsements and/or lack of endorsements
guaranteed…”
123
PRUDENCIO V. CA
143 SCRA 7
FACTS:
Appellants are the owners of a property, which they mortgaged to help
secure a loan of a certain Domingo Prudencio. On a later date, they were
approached by their relative who was the attorney-in-fact of a construction
company, which was in dire need of funds for the completion of a municipal
building. After some persuasion, the appellants amended the mortgage
wherein the terms and conditions of the original mortgage was made an
integral part of the new mortgage. The promissory note covering the
“second loan” was signed by their relative. It was also signed by them,
indicating the request that the check be released by the bank.
After the amendment of the mortgage was executed, a deed of assignment
was made by Toribio, assigning all the payments to the Bureau to the
construction company. This notwithstanding, the Bureau with approval of
the bank, conditioned however that they should be for labor and materials,
made three payments to the company. The last request was denied by the
bank, averring that the account was long overdue, the remaining balance
of the contract price should be applied to the loan.
The company abandoned the work and as consequence, the Bureau
rescinded the contract and assumed the work. Later on, the appellants
wrote to the PNB that since the latter has authorized payments to the
company instead of on account of the loan guaranteed by the mortgage,
there was a change in the conditions of the contract without the knowledge
of appellants, which entitled the latter to cancel the mortgage contract.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 92 of 190
The trial court held them still liable together with their co-makers. It has
also been held that if the judgment is not satisfied within a period of time,
the mortgaged properties would be foreclosed and sold in public auction.
In their appeal, petitioners contend that as accommodation makers, the
nature of their liability is only that of mere sureties instead of solidary codebtors such that a material alteration in the principal contract, effected by
the creditor without the knowledge and consent of the sureties, completely
discharges the sureties from all liabilities on the contract of suretyship.
HELD:
There is 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 for value is concerned. Consequently, the petitioners
cannot claim to have been released from their obligation simply because at
the time of payment of such obligation was temporarily deferred by the
PNB without their knowledge and consent. There has to be another basis
for their claim of having been freed from their obligation. It has to be
determined if PNB was a holder for value.
A holder for value is one who meets the requirement of being a holder in
due course except the notice for want of consideration. In the case at bar,
PNB may not be considered as a holder for value. Not only was PNB an
immediate party or privy to the promissory note, knowing fully well that
petitioners only signed as accommodation parties, but more importantly it
was the Deed of Assignment which moved the petitioners to sign the
promissory note. Petitioners also relied on the belief that there will be no
alterations to the terms of the agreement. The deed provided that there
will no further conditions which could possibly alter the agreement without
the consent of the petitioner such as the grant of greater priority to
obligations other than the payment of the loan. This notwithstanding, the
bank approved the release of payments to the Company instead of the
same to the bank. This was in violation of the deed of assignment and
prejudiced the rights of petitioners. The bank was not in good faith—a
requisite for a holder to be one in due course.
124
AMERICA BANK V. MACONDRAY
4 PHIL 695
FACTS:
MANILA, P. I., August 12, 1902.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
$300.00
At sight pay to my order three hundred dollars, value received, and charge
to my account.
V. S. WOLFF.
To F. H. TAYLOR & Co.,
Louisville, Kentucky.
No ................................
[Indorsements.]
V. S. Wolff. The signature is O. K. payment guaranteed. Protest, demand,
and notice of nonpayment waived. Macondray & Company.
Pay to First National Bank of San Francisco, or order. American Bank,
Manila, P. I. H. B. Mulford, cashier.
Pay to 3rd National Bank or order. The First National Bank of San
Francisco. James K. Lynch, cashier.
American Bank claims the right to recover from Wolff the amount of the bill
of exchange upon the theory that Macondray guaranteed the payment of
the instrument. This was refuted by Macondray by saying that it didn't
guarantee the payment of the instrument. Instead, it only certified the
signature of Wolff and that the statement “payment guaranteed xxx” was
not written on said indorsement at the time it signed the firm name.
HELD:
An examination of the alleged indorsement of Macondray & Co. which
appeared upon the said bill of exchange at the time of the trial, and the
indorsement of said company at the time of the protest of said bill of
exchange, shows beyond peradventure of doubt that the contention of the
defendant is true, and that part of the indorsement which says "Payment
guaranteed. Protest, demand, and notice of nonpayment waived" was
added by some person after the signature of the defendant, Macondray &
Co., and after the protest of said bill. The indorsement made by Macondray
& Co. was changed, after said indorsement by said company, by adding
thereto the statement "Payment guaranteed. Protest, demand, and notice
of nonpayment waived," and that the indorsement actually made by
Macondray & Co. was in the following form:
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 93 of 190
V. S. Wolff. The signature is O. K. Macondray & Co.
The liability of an indorser of a bill of exchange, after due protest and
notice of nonpayment and dishonor, is the same as that of the original
obligors on such a contract, and any material alteration in the terms of this
contract by the holder of the same, without the consent of the obligor, will
relieve such obligor from all liability thereon.
The original indrosement then of the company was for the purpose only of
assuring the American Bank that the signature of Wolff was genuine—that
is to say, that the person whom he represented himself to be. It was an
indorsement for identification of the person only and not for the purpose of
incurring liability to the payment of such bill of exchange.
125
VELASCO V. TAN LIVAN
43 PHIL 196
FACTS:
Defendant issued to Soo 4 promissory notes. Later, Soo drew a bill of
exchange in favor of PNB. The latter refused at first to encash the bill,
which made Velasco indorse it so that it would be encashed. When it was
encashed, Velasco didn't receive a single penny and it was claimed that the
proceeds was received instead by Tan Liuan. In the ordinary course of
business, the draft was dishonored when presented, and later Velasco was
required to make a promissory note in favor of PNB.
HELD:
126
ASSOCIATED BANK V. CA
208 SCRA 465
FACTS:
Reyes was engaged in the RTW business and held transactions with
different department stores. She was about to collect payments from the
department stores when she was informed that the payments had already
been made, through crossed checks issued in her business’ name and the
same were deposited with the bank. The bank consequently allowed its
transfer to Sayson who later encashed the checks. This prompted Reyes to
sue the bank and its manager for the return of the money. The trial and
appellate court ruled in her favor.
HELD:
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
There is no doubt that the checks were crossed checks and for payee’s
account only. Reyes was able to show that she has never authorized
Sayson to deposit the checks nor to encash the same; that the bank had
allowed all checks to be deposited, cleared and paid to one Sayson in
violation of the instructions in the said crossed checks that the same were
for payee’s account only; and that Reyes maintained a savings account
with the bank which never cleared the said checks.
Under accepted banking practice, crossing a check is done by writing two
parallel lines diagonally on the top left portion of the checks. The crossing
is special where the name of a bank or a business institution is written
between the two parallel lines, which means that the drawee should pay
only with the intervention of the company. The crossing is general where
the words written in between are “And Co.” and “for payee’s account only”,
as in the case at bar. This means that the drawee bank should not encash
the check but merely accept it for deposit.
The effects of crossing a check are as follows:
1. That the check may not be encashed but only deposited in the
bank
2. That the check may be negotiated only once—to one who has an
account with a bank
3. That 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 the
purpose
The subject checks were accepted for deposit by the bank for the account
of Sayson although they were crossed checks and the payee wasn't Sayson
but Reyes.
The bank stamped thereon its guarantee that all prior
endorsements and/or lack of endorsements guaranteed.
By such
deliberate and positive act, the bank had for all legal intents and purposes
treated the said checks as negotiable instruments and accordingly assumed
the warranty of the endorser.
When the bank paid the checks so endorsed notwithstanding that title has
not passed to the endorser, it did so at its peril and became liable to the
payee for the value of the checks.
127
FACTS:
GULLAS V. PNB
62 PHIL 519
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 94 of 190
The US government issued a warrant payable to the order of Bacos. Gullas
and Lopez appeared as indorsers of the warrant. It was then encashed by
the PNB.
Subsequently, the warrant was dishonored by the Insular
Treasurer. Upon learning of the dishonor, notices were sent to Gullas by
the bank but it wasn’t receive by Gullas as he was currently not within the
vicinity. In the said notices served to Gullas and Lopez, it was indicated
therein that since there was dishonor of the warrant, their corresponding
accounts have been charged. It was only after the return of Gullas in Cebu
when he received the notices. This caused prior inconvenience to Gullas.
First, he wasn’t able to pay for his insurance due to the lack of credit in his
bank account and second, the incident was given prominence in Cebu to
the great mortification of Gullas.
HELD:
The general indorser of a negotiable instrument engages that if it be
dishonored and the necessary proceedings of dishonor be duly taken, he
will pay the amount thereof to the holder. In this connection, it has been
held by a long line of authorities that notice of dishonor is necessary in
order to charge an indorser and that the right of action against him doesn’t
accrue until the notice is given.
As a general rule, a bank has a right of setoff of the deposits in its hands
for payment of any indebtedness on the part of a depositor but this should
be enforced properly. It is undeniable in this case that PNB didn’t enforce
its right properly. It made used of the money in the account of Gullas prior
to its sending of notice of dishonor.
128
ASSOCIATED BANK V. TAN
446 SCRA 282
FACTS:
Tan deposited with the bank a check issued to him by Cheng. The check
was reflected in the bank record and consequently, after being informed
that the check has been cleared, Tan withdrew an amount from his
account. He then deposited money again to his account to make good the
value of the checks he issued to his suppliers. To his surprise, his suppliers
went back to him and told him that the checks he issued all bounced due to
insufficient funds. He demanded the bank to take positive steps about the
incident but the bank didn’t do anything.
HELD:
As a general rule, a bank has the right of setoff of the deposits in its hands
for payment of any indebtedness on the part of a depositor but this should
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
be enforced properly. This is the question to be resolved in this case—on
whether the remedy was properly exercised by the bank.
It is undisputed that purportedly as an act of accommodation to a valued
client, petitioner allowed the withdrawal of the face value of the check prior
to its clearing. That act certainly disregarded the clearance requirement of
the banking system. Such a practice is unusual, because a check is not
legal tender or money and its value can be properly transferred to a
depositor’s account only after the check has been cleared by the drawee
bank.
Under ordinary banking practice, after receiving a check for deposit, the
bank either credits the amount to a depositor’s account or infuse value to
that account only after the drawee bank shall have paid the amount.
Before clearance, the collecting bank can only assume the risk that the
check would be cleared and paid out. In this case, bank shouldn’t have
allowed Tan to withdraw as it exceeded his outstanding account balance.
Furthermore, there was failure to show immediate notice to Tan. Notice
was proper and ought to be expected given that Tan was a valued client.
Also, as a general indorser, a notice of dishonor should have been first
served upon him. And lastly, the deposit made by Tan was not unusual for
a reputed businessman like Tan who ordinarily takes note of the amount of
money he takes and releases to immediately deposit money in his current
account to answer for the postdated checks he had issued.
129
GONZALES V. RCBC
508 SCRA 459
FACTS:
Gonzales’ mother received a foreign check from the US, drawn by a certain
doctor on behalf of a medical group.
Since the bank gives special
accommodations to its employees to receive the full value of a check
without awaiting the clearing period, Gonzales presented the foreign check
to Gomez, the head of Retail Banking. After examining the same, Gonzales
was asked to indorse it and so she did. Gomez then acquiesced to the
early encashment of the check, signed the check but indicated therein her
authority of “up to P17500 only”. Afterwards, Gonzales was asked to
procure from another employee his signature and she was good to go. She
did what she was asked to do and she received the value of the check.
Thereafter, the check was dishonored due to having an irregular
indorsement. Gonzales was informed about this. The first arrangement
was that the value of the check would be deducted from her salary.
Thereafter, she was asked to pay the check but she didn’t.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 95 of 190
HELD:
The warranties for which Alviar and Gonzales are liable as general
indorsers in favor of subsequent indorsers extend only to the state of the
instrument at the time of their indorsements, specifically that the
instrument is genuine and in all respects what it purports to be; that they
have good title thereto; that all prior parties had capacity to contract; and
that the instrument, at the time of their endorsements, is valid and
subsisting. This however cannot be used by someone which introduced the
defect in the instrument, such as the bank in this case, which qualifiedly
indorsed the same, to hold prior parties liable on the instrument because it
results to an 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. It cannot be overstressed that had it not
been for the qualified indorsement of Gomez, there would have been no
reason for the dishonor of the check.
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.
CASE DIGESTS: SECTION 67
130
JAI ALAI V. BPI
66 SCRA 29
FACTS:
Checks were deposited by petitioner in its current account with the bank.
These checks were from a certain Ramirez, a consistent better in its
games, who was a sales agent from Inter-Island Gas. Inter-Island later
found out that of the forgeries committed in the checks and thus, it
informed all the parties concerned. Upon the demands on the bank as the
collecting bank, it debited the account of petitioner. Thereafter, petitioner
tried to issue a check for payment of shares of stock but such was
dishonored for insufficient funds. It filed a complaint against the bank.
HELD:
Considering that the petitioner indorsed the said checks when it deposited
them with the respondent, the petitioner as an indorser guaranteed the
genuineness of all prior indorsements thereon. The respondent which
relied upon the petitioner’s warranty should not be held liable for the
resulting loss.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Furthermore, the provision in the deposit slip on the right of reservation by
the bank applies only when there is actual receipt of current funds or
solvent credits. But as earlier on indicated, the transfer on account of the
checks were ineffectual because it was made under the mistaken and valid
assumption that the indorsements of the payee thereon were genuine.
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.
APPLICATION OF SECTION
•
Applies only with respect to an indorser as against another but not as
against a holder in due course
•
Every indorser is liable to all indorsers subsequent to him but not
those prior to him whom he in turn makes liable
JOINT AND SEVERAL LIABILITY OF JOINT PAYEES
•
Joint payees or joint indorsees are deemed to indorse solidarily
EFFECT OF LACK OF NOTICE OF DISHONOR, ETC.
•
One of the joint indorsers cannot escape liability because proper notice
of dishonor wasn’t given to his joint indorser
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.
APPLICATION OF SECTION 69
•
Instruments payable to bearer
•
To escape personal liability as a party negotiating by delivery, the
agent must disclose his principal and state that he is acting only as an
agent
VI. PRESENTATION FOR PAYMENT
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
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 96 of 190
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.
MEANING OF PRESENTMENT FOR PAYMENT
•
Production of a bill of exchange to the drawee for his acceptance, or to
the drawee or acceptor for payment or the production of the
promissory note to the person liable for payment of the same
1. Personal demand for payment at the proper place
2. With the bill or note in readiness to exhibit it as required and
to receive payment and surrender it if the debtor is willing to
pay
PRESENTMENT FOR PAYMENT NOT NECESSARY TO CHARGE PERSONS
PRIMARILY LIABLE
•
It cannot be validly claimed that it is presentment of the bill which is
the operative act that makes the acceptor liable under his acceptance
PAYABLE AT A SPECIAL PLACE
•
If the bill is payable at the PNB, is it necessary to make presentment
for payment to X in order to charge him? No, the rule is the same.
The only effect is that if, X is able and willing to pay the bill at the PNB
at maturity, it is equivalent to a tender of payment on the part of
drawee X.
PRESENTMENT NECESSARY TO CHARGE PERSONS SECONDARILY LIABLE
NECESSARY STEPS TO CHARGE PERSONS SECONDARILY LIABLE IN BILLS
OF EXCHANGE
1. In the three steps required by law, presentment for acceptance to
the drawee or negotiation within reasonable time after acquisition
unless excused
2. If the bill is dishonored by non-acceptance, notice of dishonor by
non-acceptance must be given to persons secondarily liable
unless excused and in case of foreign bills, protest for dishonor
by non-acceptance must be made unless excused
3. But if the bill is accepted, or if the bill isn’t required to be
presented for acceptance, it must be presented for payment to
the persons primarily liable unless excused
4. If the bill is dishonored by non-payment, notice of dishonor by
non-payment must be also be given to person secondarily liable
unless excused, and in case of foreign bills, protest for dishonor
by non-pay7ment must be made unless excused
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
NECESSARY STEPS TO CHARGE PERSONS SECONDARILY LIABLE
•
Presentment for payment must be made within the period required to
the person primarily liable unless excused
•
If the note is dishonored by non-payment, notice of dishonor by nonpayment must be given to the person secondarily liable unless excused
CASE DIGESTS: SECTION 70
131
CLARK V. SELLNER
42 SCRA 384
FACTS:
Sellner with two other persons, signed a promissory note solidarily binding
themselves to pay to the order of R.N Clark. The note matured but the
amount wasn't paid. The defendant alleges that he didn't receive any
amount of the debt; that the instrument wasn't presented to him for
payment and being an accommodation party, he is not liable unless the
note is negotiated, which wasn't done.
HELD:
On the first issue, the liability of Sellner as one of the signers of the note,
is not dependent on whether he has or has not, received any part of the
debt. The defendant is really and expressly one of the joint and several
debtors of the note and as such he is liable under the provisions of Section
60 of the NIL.
As to the presentment for payment, such action is not necessary in order
to charge the person primarily liable, as is the defendant Sellner.
As to whether or not Sellner is an accommodation party, it should be taken
into account that by putting his signature to the note, he lent his name, not
to the creditor, but to those who signed with him placing him in the same
position and with the same liability as the said signers. It should be noted
that the phrase”without receiving value therefore” as used in section 29
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.” It is immaterial as far as the creditor is concerned, whether one of
the signers has or has not received anything in payment for the use of his
name. In this case, the legal situation of Sellner is that of a joint surety
who upon the maturity of the note, pay the debt, demand the collateral
security and dispose of it to his benefit. As to the plaintiff, he is a holder
for value.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 97 of 190
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.
WHEN PAYABLE AT A FIXED OR DETERMINABLE FUTURE TIME
•
The presentment must be made at the date of maturity
WHEN PAYABLE ON DEMAND IN CASE OF NOTES
•
The time for presentment depends upon whether the instrument is a
bill or a note
•
If it is a note, it must be presented for payment within reasonable time
for issue
•
If it is a bill, it must be presented for payment within reasonable time
from last negotiation and not for issue, as in the case of notes
CASE DIGESTS: SECTION 71
132
FAR EAST REALTY INVESTMENT V. CA
166 SCRA 256
FACTS:
Private respondents approached petitioner and asked the latter to extend
to them an accommodation loan. They proposed to pay with interest.
They even gave a check, signed by Tat, drawn against Chinabank, and
signed at the back by the private respondents. They said that they will
change the check with cash after one month and if not, the check could be
presented for payment and it would be paid. The loan was actually
extended but when the check was presented for payment, it was
dishonored—the account on which it is drawn has long been closed. The
trial courts held in favor of petitioner but this was reversed by the appellate
court by ruling that the check has passed through other hands before
reaching the petitioner and the said check wasn’t presented within
reasonable time and after its issuance.
HELD:
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 issue, except that in case of a
bill of exchange, presentment for payment is sufficient if made within
reasonable time after the last negotiation thereof.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Notice may be given as soon as instrument has been dishonored and
unless delay is excused must be given within the time fixed by law.
In this case, presentment and notice of dishonor were not made within
reasonable time.
September 1960—date when the check was drawn
March 1964—presented to drawee bank
April 1968—notice of dishonor
133
REPUBLIC V. PNB
3 SCRA 851
FACTS:
The government filed a complaint for escheat of certain unclaimed bank
deposits balances pursuant to a law, which provides that unclaimed
balances—credits, money, bullion, security or other evidence of
indebtedness of any kind, and interest with banks—shall be deposited with
the government if it remains to be unclaimed within a period of 10 years of
more.
One of the banks against the complaint has been filed is First National City
Bank. Although it concedes that the government had the right to claim the
unclaimed deposit balances, it seeks to exclude some which, according to
it, are not within the purview of credits and deposits as defined in law. the
trial court held in favor of the bank, excluding from the claim the
manager’s checks and other demand drafts.
HELD:
Credit is a sum credited on the books of a company to a person who
appears to be entitled to it. it presupposes a creditor-debtor relationship
and may be said to imply ability, by reason of property or estates, to make
a promised payment. It is correlative to indebtedness, and that which is
due to any person, as distinguished to that which he owes.
Do demand drafts and telegraphic orders come within the purview of
credits or deposits employed in the law?
Since the demand drafts herein involved have not been presented either
for acceptance or payment, the inevitable consequence is that the bank
never had the chance of accepting or receiving them. Verily, the bank
never became a debtor of the payee concerned and as such the aforesaid
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 98 of 190
drafts cannot be considered as credits subject to escheat within the
meaning of the law.
Further, a demand draft is different from a cashier’s check for this is a
primary obligation of the bank which issues it and constitutes a written
promise to pay upon demand. It is an order to a third party purporting to
be drawn upon a deposit of funds.
If there is any consolation, the telegraphic orders can be escheated in favor
of the government.
The agreement to remit creates a contractual
obligation and has been termed a purchase and sale transaction. The
purchaser of a telegraphic transfer upon making payment completes the
transaction insofar as he is concerned, though insofar as the remitting
bank is concerned the contract is executory until the credit is established.
The drawer bank has already been paid the value of the telegraphic order.
It appears in the books of the bank that the amounts represented by the
orders appear in the names of respective payees. If the latter choose to
demand payment, the bank had the obligation to pay them.
134
THE INTERNATIONAL
GUECO
351 SCRA 516
CORPORATE
BANK
V.
SPOUSES
FACTS:
Gueco spouses obtained a loan from ICB (now Union Bank) to purchase a
car. In consideration thereof, the debtors executed PNs, and a chattel
mortgage was made over the car. As the usual story goes, the spouses
defaulted in payment of their obligations and despite the lowering of the
amount to be paid, they still failed to pay. Thereafter, they tendered a
manager’s check in favor of the bank. Nonetheless, the car was still
detained for the spouses refused to sign the joint motion to dismiss. The
bank averred that the joint motion to dismiss is part of standard office
procedure to preclude the filing of other claims. Because of this, the
spouses filed an action for damages against the bank. And by the time the
case was instituted, the check had become stale in the hands of the bank.
HELD:
The main issue though unrelated to NIL in this case was whether or not the
signing of the joint motion to dismiss a part of the compromise agreement
between the spouses and the bank. The answer is no, it is not a part of
the compromise agreement entered by the parties. And thus, the signing
is dispensible in releasing the car to the spouses.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
And on the ancillary issue of the case, which is the relevant issue for the
subject, whether or not the spouses should replace the check they paid to
the bank after it became stale, the answer is yes. It appeared that the
check has not been encashed. The delivery of the manager’s check did not
constitute payment. The original obligation to pay still exists. Indeed, the
circumstances that caused the non-presentment of the check should be
considered to determine who should bear the loss. In this case, ICB held
on the check and refused to encash the same because of the controversy
surrounding the signing of the joint motion to dismiss. There is no bad faith
or negligence on the part of ICB.
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. A check should be presented for payment within a reasonable time
after its issue. Here, what is involved is a manager’s check, which is
essentially a bank’s own check and may be treated as a PN with the bank
as a maker. Even assuming that presentment is needed, failure to present
for payment within a reasonable time will result to the discharge of the
drawer only to the extent of the loss caused by the delay—but here there is
no loss sustained. Still, such failure to present on time does not wipe out
liability.
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.
APPLICATION OF SECTION
•
Establishes the requisites for a sufficient presentment for payment
WHO MAKES PRESENTMENT
•
Presentment for payment must be made by the holder of the
instrument or by some person authorized to receive payment on his
behalf
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 99 of 190
TIME FOR MAKING PRESENTMENT
•
At a reasonable hour on a business day
CASE DIGESTS: SECTION 72
135
STATE INVESTMENT HOUSE V. IAC
175 SCRA 310
FACTS:
New Sikatuna requested for a loan from Spouses Chua. Latter issued postdated crossed checks in favor of former. Thereafter, Sikatuna sold checks
to SIHI which upon deposit, checks were dishonored. The trial court
decided the case in favor of SIHI.
HELD:
Jurisprudence provides the following effects of crossing a check:
1. The check may not be encashed but only deposited in the bank
2. The check may be negotiated only once—to one who has an
account with a bank
3. The act of crossing the check serves the 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 checks in issue were crossed generally and issued payable to New
Sikatuna Wood which could only mean that the drawer has intended the
same for deposit only by the rightful person. Apparently, it was not the
payee who presented the same for payment and therefore, there was no
proper presentment and the liability didn't attach to the drawer. Thus, in
the absence of due presentment, the drawer didn't become liable.
Consequently, no right of recourse is available to petitioner against the
drawer of the subject checks considering that the petitioner is the proper
party authorized to make presentment of the checks in question.
Nonetheless, the holder could still collect from New Sikatuna if the latter
doesn't have a valid excuse from refusing payment.
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;
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
(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;
(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. (ORDER OF PREFERENCE)
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.
NECESSITY OF EXHIBITION OF INSTRUMENT
•
Presentment includes not only demand for payment but also the
exhibition of the instrument
•
Purpose is to enable the debtor to determine the genuineness of the
instrument and the right of the holder to receive payment and to
enable him to retain possession upon payment
A DEMAND BY TELEPHONE IS INSUFFICIENT
WHEN EXHIBITION EXCUSED
1. When the debtor doesn’t demand to see the instrument but
refuses payment on some other grounds
2. When the instrument is lost or destroyed
CASE DIGESTS: SECTION 74
136
ANSALDO V. CA
177 SCRA 8
FACTS:
TFC issued promissory notes in favor of PCIB. At about the same time,
TFC extended loans to Ansaldo and Reyes. These loans were evidenced by
promissory notes, each waiving demand, presentment, protest, and notice
of protest and non-payment. TFC then paid part of its obligation with
PCIB. To pay for its outstanding balance, it endorsed the notes issued by
Ansaldo and Reyes.
Claiming that the notes have matured without
payment by Ansaldo and Reyes, the bank instituted actions against them.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 100 of 190
HELD:
The contention of Ansaldo that the instrument should have been first
presented to him is bereft of merit.
First, it couldn’t be first raised on appeal.
Second, it is a petty issue for if according to him, such an exhibition was
needed to give him opportunity to determine the genuineness of the
instrument, this was rendered unnecessary not only by his omission to
contest it, but also by his admission of the authenticity of the note implicit
from his averment that he made substantial payments thereon and second,
he made a waiver of demand, presentment, etc.
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.
SGD. A
This gives rise to the presumption that A has an account with RCBC
Rockwell and the bank would pay on account of A.
NOTES FOR WEEK #11
AUG UST 27 - SEPTEM BER 1, 2007
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.
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.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
SECTIONS 76 TO 78 NOT APPLICABLE WHERE PLACE SPECIFIED
•
Applies only where there is no place specified
WHERE PERSON PRIMARILY LIABLE DEAD
•
Presentment must be made to the executor or administrator if there is
one and if he can be found
•
The holder must use diligence to find the personal representative if
there be one
•
The person primarily liable is dead, there is a personal representative,
and no place of payment indicated in the instrument—if there is a
place indicated, then presentment should be done there
WHERE PERSONS PRIMARILY LIABLE ARE PARTNERS THE PRESENMENT
MUST BE MADE TO ANY ONE OF THEM
WHERE PERSONS PRIMARILY LIABLE ARE JOINT DEBTORS, PRESENTMENT
MUST BE MADE TO ALL OF THEM
I PROMISE TO PAY B P1000 AT RCBC ROCKWELL.
•
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.
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.
APPLICATION OF SECTION 79 AND 80
•
These provisions give exceptions to the general rule that if no
presentment for payment is made, the persons primarily liable are
discharged
WHERE DRAWER NEED NOT BE GIVEN NOTICE
•
Where A withdraws his funds from X, drawee bank, so that they are
not sufficient to pay the bill, he has no right to expect or require that
the drawee or acceptor would pay the instrument
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 101 of 190
•
Accordingly, where F holder doesn’t make a presentment to X, A
drawer would not be discharged by such failure
PRESENTMENT IS NOT REQUIRED TO CHARGE THE DRAWER IN THE
FOLLOWING CASES
1. In case the check upon which payment has been stopped
2. Where the drawer’s balance is less than the amount of the check.
The mere fact however that the drawer has no funds with drawee
at the time he draws, doesn’t render presentment unnecessary if
he still has reasonable grounds to believe that the instrument will
be paid, particularly when provision has been made for payment
of any bill drawn by the drawer on the drawee
3. Where the drawer of a bill containing the words “Pay from
balance” had no money on deposit with the drawee but expected
to arrange with the broker to cover drafts
WHEN INDORSER NEED NOT BE GIVEN NOTICE
•
A makes a note for the accommodation of B, payee.
Sgd. A
BC
CD
DE
EF
•
•
•
•
F need not make presentment for payment to A in order to charge B
indorser
B didn’t give any value to A
B has no reason to expect that the note will be paid upon presentment
B is considered to be the ultimately liable party since he is the
accommodated party
With regard C and D, presentment for payment is still required
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.
EXCUSES FOR DELAY
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Overwhelming calamity, malignant diseases, interruption of trade
negotiations by political circumstances, etc.
Sec. 82. When presentment for payment is excused. - Presentment
for payment is excused:
(a) Where, after the exercise of reasonable
presentment, as required by this Act, cannot be made;
diligence,
(b) Where the drawee is a fictitious person;
(c) By waiver of presentment, express or implied.
APPLICATION OF SECTION 82
•
What is excused is failure to make presentment for payment and not
mere delay
WAIVER MAY BE EXPRESS OR IMPLIED
I promise to pay B P1000.
•
•
IMPLIED WAIVER
•
Implied waiver of presentment may be manifested by any language or
conduct or any agreement between the parties reasonably calculated
to lead the holder to believe that presentment is waived or to mislead
or prevent him from treating the bill as he otherwise would
SUMMARY OF RULES AS TO PRESENTMENT FOR PAYMENT
1. Presentment for payment is not necessary to charge persons primarily
liable
2. But it is necessary to charge a person secondarily liable except
a. As to drawer, under Section 79
b. As to indorser, under Section 80
c. When dispensed with under Section 82
d. When the instrument has been dishonored by non-acceptance
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.
WHEN PAYMENT REFUSED, ETC.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 102 of 190
•
The instrument must be duly presented for payment and payment is
either refused or cannot be obtained
WHEN PRESENTMENT IS EXCUSED
•
Presentment for payment is excused
•
Instrument is overdue
•
It is 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 immediate right of
recourse to all parties secondarily liable thereon accrues to the
holder.
AFTER DISHONOR, INDORSERS, ETC. ARE PRIMARILY LIABLE
•
As to holder, after an instrument is dishonored by non-payment , the
persons secondarily liable thereon ceases to be secondarily liable
•
They become principal debtors and their liability becomes the same as
that of the principal obligors—provided a notice of dishonor has been
given to them
•
If no notice is given, they are discharged
•
If they are charged by dishonor and notice, while it is true that they
become principal debtors as to the holder, yet as among themselves,
persons secondarily liable are presumed liable in the order that they
become parties to the instrument
CASE DIGEST: SECTION 84
137
PNB V. SEETO
91 SCRA 757
FACTS:
Seeto called at a branch of bank and presented a check payable to cash or
bearer, and drawn by Kiao against PBC. After consultation with the
employees, Seeto made a general and qualified indorsement of the check.
He was then paid the amount of the check by bank. The check was
consequently dishonored, a letter was sent to Seeto and was asked to
refund the money given to him. A second letter was sent to him and he
averred that case against him be deferred while he inquired about why the
check was dishonored. Thereafter, he refused to pay, alleging that the
account against the check was drawn had sufficient funds when the check
was drawn and if the bank didn’t delay in clearing the check, there would
have been sufficient funds.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
The appellate court reversed the lower court in its decision. It ruled that
the bank was guilty of unreasonably retaining and withholding the check,
and that the delay in the presentment was inexcusable, so that respondent
thereby was discharged from liability.
HELD:
Section 84 is applicable, nonetheless, it should be read in correlation with
Section 186, which says that presentment should be within reasonable
time.
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 o'clock noon on Saturday when that entire
day is not a holiday.
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.
EFFECT OF FAILURE TO MAKE PRESENTMENT FOR PAYMENT—BUT
SUPPOSE THAT B OR ANY SUBSEQUENT HOLDER FAILS TO MAKE A
PRESENTMENT FOR PAYMENT AT THE PNB, IS A DRAWER DISCHARGED?
•
There is a conflict of authorities
•
Agbayani’s view: A is not discharged because he is primarily liable
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.
REQUISITES FOR PAYMENT IN DUE COURSE
1. Payment must be made at or after the date of maturity
2. Payment must be to the holder
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 103 of 190
3.
•
•
•
Payment must be made by the debtor in good faith and without
notice that his title is defective
If payment is made before maturity, it would constitute a negotiation
back to the person primarily liable and he can renegotiate it. Payment
doesn’t discharge the instrument.
Payment to indorsee who is not in possession of the instrument is not
payment to a person other than the holder is at the risk of the party so
paying if the person wasn’t authorized by the holder to receive
payment. So also, the payment to the original payee after the note
had been transferred by him to a holder in due course doesn’t
discharge the note
Payment to a person by the debtor who knows that such person stole
it, is not payment in due course, as such payment is not in good faith.
The maker of a note or the acceptor of a bill must satisfy himself,
when it is presented for payment, that the holder traces his title
through genuine indorsements, and if there is a forged indorsement, it
is a nullity and no right passes by it
PAYMENT MUST BE MADE TO POSSESSOR OF INSTRUMENT
•
The party making payment must insist on the presentment of the
paper by the party demanding payment in order to make sure that it is
at the time in his possession and not outstanding in another
•
A receipt taken is no protection
•
If at the time he makes payment, it is outstanding and in the hands of
a holder in due course, he must pay it again
•
Possession of notes by the maker is presumptive evidence
•
When an instrument is dishonored by NON-ACCEPTANCE or NONPAYMENT, notice of such dishonor must be given to persons
secondarily liable, as the case may be. Otherwise, such parties are
discharged
I PROMISE TO PAY F OR ORDER.
SGD. A
*BCDEF
*F makes presentment for payment to A, maker, on the date of maturity.
A refuses to pay.
*If F doesn’t give notice of dishonor to B, C, D and E and prove the same,
they are discharged and F cannot file an action against them.
BURDEN OF PROOF
•
It is upon the plaintiff who seeks to enforce the defendant’s liability
upon a negotiable instrument 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 instrument in question had
been dishonored
•
Where these facts are not proven, the plaintiff doesn’t sufficiently
establish the defendant’s liability
•
Where there is no proof in record tending to show that the plaintiff
gave any notice whatsoever to the defendant that the instrument in
question had been dishonored, said plaintiff hasn’t established its
cause of action
VII. NOTICE OF DISHONOR
PERSONS PRIMARILY LIABLE NEED NOT BE NOTIFIED
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.
DOES FAILURE TO GIVE NOTICE OF DISHONOR OF A PREVIOUS
INSTALLMENT TO PERSONS SECONDARILY LIABLE ALSO DISCHARGE
THEM ON THE SUCCEEDING INSTALLMNETS?
•
It depends on whether the instrument contains an acceleration clause
MEANING OF NOTICE
•
By notice of dishonor is meant bringing either verbally or by writing, to
the knowledge of the drawer or indorser of an instrument, the fact that
a specified negotiable instrument, upon proper proceedings taken, has
not been accepted or hasn’t been paid, and that the party notified is
expected to paid it
RULE WHERE THERE IS NO ACCELERATION CLAUSE
•
Where the instrument contains no acceleration clause, failure to give
notice of dishonor on previous installment doesn’t discharge drawers
and indorsers as to the succeeding installments, and therefore, the
holder can file an action against them for such succeeding
installments, notice is given
•
The reason is that each separate installment is equivalent to another
note
NECESSITY AND PURPOSE OF NOTICE
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 104 of 190
RULE WHERE THERE IS AN ACCELERATION CLAUSE
•
It depends whether the clause is optional or automatic
•
If it is automatic, failure to give notice of dishonor as to a previous
installment will discharge the persons secondarily liable as to the
succeeding installments
•
If it is optional and it is not exercised, the rule would be the same as
where there is no acceleration clause
EXCEPTIONS TO REQUIREMENT OF NOTICE
•
The law provides for exceptions on failure to give notice would
discharge drawer or indorsers
CASE DIGESTS: SECTION 89
139
ASIA BANKING CORPORATION V. JAVIER
44 PHIL 777
FACTS:
Chaves drew 2 checks on different occasions against PNB in favor La
Insular. These checks were indorsed by the limited partners of La Insular
and subsequently deposited by Chaves in his account with Asia Bank.
These were then presented for payment by Asia Bank but was dishonored
by PNB on reason that there was insufficient funds. This prompted Asia
Bank to file a case against one of the partners of La Insular for payment.
HELD:
When a negotiable instrument is dishonored by non-payment or nonacceptance, notice thereof must be given to the drawer and each of the
inodrsers, 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 they are notified that the instrument is dishonored.
Then, under the general principle of law on procedure, it will be incumbent
upon plaintiff, who seeks to enforce the defendant’s liability upon these
checks as indorser, to establish said liability by proving that notice was
given within the time and in the manner required by law. if these facts are
not proven, the plaintiff has not sufficiently established the defendant’s
liability. There is no proof in record to show that plaintiff has indeed gave
any notice to defendant that the checks had been dishonored. Therefore
there is no cause of action established.
140
FIRESTONE V. CA
353 SCRA 601
FACTS:
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Fojas Arca and Firestone Tire entered into a franchising agreement wherein
the former had the privilege to purchase on credit the latter’s products. In
paying for these products, the former could pay through special withdrawal
slips. In turn, Firestone would deposit these slips with Citibank. Citibank
would then honor and pay the slips. Citibank automatically credits the
account of Firestone then merely waited for the same to be honored and
paid by Luzon Development Bank.
As this was the circumstances,
Firestone believed in the sufficient funding of the slips until there was a
time that Citibank informed it that one of the slips was dishonored. It
wrote then a demand letter to Fojas Arca for the payment and damages
but the latter refused to pay, prompting Firestone to file an action against
it.
HELD:
The withdrawal slips, at the outset, are non-negotiable. Hence, the rule on
immediate notice of dishonor is non-applicable to the case at hand. Thus,
the bank was under no obligation to give immediate notice that it wouldn't
make payment on the subject withdrawal slips. Citibank should have
known that withdrawal slips are not negotiable instruments. It couldn't
expect then the slips be treated like checks by other entities. Payment or
notice of dishonor from respondent bank couldn't be expected immediately
in contrast to the situation involving checks.
In the case at bar, Citibank relied on the fact that LDB honored and paid
the withdrawal slips which made it automatically credit the account of
Firestone with the amount of the subject withdrawal slips then merely
waited for LDB to honor and pay the same. It bears stressing though that
Citibank couldn't have missed the non-negotiable character of the slips.
The essence of negotiability which characterizes a negotiable paper as a
credit instrument lies in its freedom to be a substitute for money. The
withdrawal slips in question lacked this character.
The withdrawal slips deposited were not checks as Firestone admits and
Citibank generally was not bound to accept the withdrawal slips as a valid
mode of deposit. Nonetheless, Citibank erroneously accepted the same as
such and thus, must bear the risks attendant to the acceptance of the
instruments. Firestone and Citibank could not now shift the risk to LDB for
their committed mistake.
WHAT IF THE SLIPS WERE NEGOTIABLE?
•
Citibank would be the holder, LDB the drawee, Fojas Arca the drawer
and Firestone would be indorser
•
Applying the rules on notice of dishonor, Citibank as the “holder”
should have sent the notices of dishonor to Fojas Arca and Firestone,
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 105 of 190
being the drawer and indorser respectively. Another, Firestone may
have sent the notice to Fojas Arca.
141
GULLAS V. PNB
62 PHIL 519
FACTS:
The US government issued a warrant payable to the order of Bacos. Gullas
and Lopez appeared as indorsers of the warrant. It was then encashed by
the PNB.
Subsequently, the warrant was dishonored by the Insular
Treasurer. Upon learning of the dishonor, notices were sent to Gullas by
the bank but it wasn’t receive by Gullas as he was currently not within the
vicinity. In the said notices served to Gullas and Lopez, it was indicated
therein that since there was dishonor of the warrant, their corresponding
accounts have been charged. It was only after the return of Gullas in Cebu
when he received the notices. This caused prior inconvenience to Gullas.
First, he wasn’t able to pay for his insurance due to the lack of credit in his
bank account and second, the incident was given prominence in Cebu to
the great mortification of Gullas.
HELD:
The general indorser of a negotiable instrument engages that if it be
dishonored and the necessary proceedings of dishonor be duly taken, he
will pay the amount thereof to the holder. In this connection, it has been
held by a long line of authorities that notice of dishonor is necessary in
order to charge an indorser and that the right of action against him doesn’t
accrue until the notice is given.
As a general rule, a bank has a right of setoff of the deposits in its hands
for payment of any indebtedness on the part of a depositor but this should
be enforced properly. It is undeniable in this case that PNB didn’t enforce
its right properly. It made used of the money in the account of Gullas prior
to its sending of notice of dishonor.
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.
NOTICE MAY BE GIVEN BY
1. The holder
2. Another in behalf of the holder
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
3.
4.
Any party to the instrument who may be compelled to pay it to
the holder—against any party whom he has a right of
reimbursement should such party giving notice pay the instrument
Another person in behalf of such party
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.
NOTICE OF AGENT
•
Notice may be given by the agent and it is not necessary that the
agent be authorized by the principal
•
He may give the notice in his name or in the name of his principal
•
A collecting bank may give notice, and where it has done so, no notice
from the owner is necessary
•
And where the cashier of the drawee bank which had refused to pay a
check gave the check to a notary to protest, which was done, it was
held that the possession of the check by the cashier was evidence of
his agency of the holder to present it for protest
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.
MEANING OF BENEFIT
•
Benefit refers to the right to charge the person secondarily liable who
received notice
•
The party to whom this benefit inures can charge the party receiving
notice of dishonor, even if himself didn’t give the notice
INURES TO THE BENEFIT OF THE FOLLOWING
1. All parties prior to the holder, who have a right of recourse
against the party to whom the notice is given
2. All holders subsequent to the holder giving notice
I PROMISE TO PAY B OR ORDER P1000.
SGD.A
*BCDEF
*F notifies B, C, D, E
1. The notice of F to B inures to the benefit of C, D and E, as they
are parties prior to F, who have a right of recourse against B
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 106 of 190
2.
3.
4.
The notice of F to C inures to the benefit of D and E but not for
the benefit of B
The notice of F to D inures to the benefit of E but not to B and C
Suppose that after notice given by F, further negotiation was
made to G; GHI. The notice given by F inures to the benefit of
all of them. And they don’t need to give another notice of
dishonor to B, C, D, and E to make them liable.
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.
APPLICATION OF THIS SECTION
•
Follows the same principle as the preceding section but this time, the
person giving notice is not the holder but a party to the instrument
who might be compelled to pay it to the holder, and who, upon taking
it up, would have a right of reimbursement from 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.
WHEN AGENT’S NOTICE MUST BE GIVEN
•
When an instrument is dishonored in the hands of an agent, he can do
either of the following
o
Directly give notice to the persons secondarily liable thereon
o
Give notice to his principal
•
If the agent decides to give notice to the principal, he must give notice
within the time allowed by law as if he were a holder
•
The principal has also the same time to give notice to the persons
secondarily liable
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.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
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 nonacceptance or non-payment. It may in all cases be given by
delivering it personally or through the mails.
FORM AND CONTENTS OF NOTICE
•
It may be oral or in writing
•
Whether oral or in writing, it must contain
1. SUFFICIENT DESCRIPTION OF THE INSTRUMENT TO IDENTIFY IT,
and
2. A STATEMENT THAT IT HAS BEEN PRESENTED FOR PAYMENT AND
FOR ACCEPTANCE, AND THAT IT HAS BEEN DISHONORED, and
3. A STATEMENT THAT THE PARTY GIVING NOTICE INTENDS TO
LOOK FOR THE PARTY ADDRESSED FOR PAYMENT
EFFECTS OF DEFECTS IN NOTICE
•
If the notice is not signed, it will not invalidate it
•
If the notice is written and doesn’t contain #2 and #3, it can be
supplemented by oral communication stating the things lacking
•
If there is misdescription, it would only vitiate the notice if the person
is misled thereby
NOTICE BY PHONE
•
This could be done however it must be shown that the party to be
notified was really communicated with, that is, fully identified as to the
party at the receiving end of the line
MANNER OF GIVING NOTICE
•
May be given by personal delivery or by mail
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 MAY BE GIVEN
1. To the party himself
2. To his agent in his behalf
•
An accommodation indorser is entitled to notice
•
An irregular indorser must also be given notice if he is to be charged
•
And if notice is given to an agent, he must be duly authorized to
receive the notice of dishonor
AGENT DISTINGUISHED FROM PERSON PRESENT IN ABSENCE OF PARTY
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 107 of 190
•
Notice to agent must be distinguished from notice attempted to be
given to party himself where he is absent at his place of business or
residence. In such a case, the notice may be left with anyone found in
charge therein
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.
REQUISITES FOR NOTICE TO REPRESENTATIVE
1. Death is known to the party giving notice
2. There is a personal representative
3. If with reasonable diligence he could be found
WHEN NOTICE MAY BE SENT TO THE LAST RESIDENCE OR PLACE OF
BUSINESS
1. If his death is not known to the party giving notice
2. Or although his death is known to the party giving notice but
there is no personal representative
3. If there be one but he cannot be found with reasonable diligence
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.
PROVISION WOULD APPLY ONLY TO JOINT DRAWERS
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.
APPLICATION OF SECTION
1. Where the party secondarily liable has been declared a bankrupt
or an insolvent
2. Where he has made an assignment of his properties for the
benefits of creditors
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
•
In such cases, notice be given to the party himself or 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.
MAY NOTICE OF DISHONOR BE GIVEN BEFORE THE DATE OF MATURITY
•
No, such notice would be insufficient because an instrument cannot be
said to be dishonored for non-payment unless presented and
presentment must be made on the date of maturity unless of course,
presentment is excused
•
But even in such cases, the instrument cannot be said to be
dishonored by non-payment unless it is overdue and unpaid
•
Notice of dishonor can be given only after the instrument has been
actually dishonored, and notice given before the paper due is
premature and insufficient, regardless of the indorser’s knowledge that
the maker was in default
MAY NOTICE OF DISHONOR BE GIVEN ON THE DATE OF MATURITY?
•
Yes, provided that the instrument has been presented for payment and
is has been dishonored
•
But if the instrument is payable at a bank, it is not dishonored if the
maker deposits the amount of the instrument before the close of
banking hours. Hence, notice of dishonor must be given after the
close of banking hours on the date of maturity
PURPOSE OF PROMPT NOTICE
•
To give the persons secondarily liable every opportunity to secure
themselves such as to enable the party to be charged to preserve and
protect his rights against prior parties
CASE DIGESTS: SECTION 102
142
FAR EAST REALTY INVESTMENT V. CA
166 SCRA 256
FACTS:
Private respondents approached petitioner and asked the latter to extend
to them an accommodation loan. They proposed to pay with interest.
They even gave a check, signed by Tat, drawn against Chinabank, and
signed at the back by the private respondents. They said that they will
change the check with cash after one month and if not, the check could be
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 108 of 190
presented for payment and it would be paid. The loan was actually
extended but when the check was presented for payment, it was
dishonored—the account on which it is drawn has long been closed. The
trial courts held in favor of petitioner but this was reversed by the appellate
court by ruling that the check has passed through other hands before
reaching the petitioner and the said check wasn’t presented within
reasonable time and after its issuance.
HELD:
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 issue, except that in case of a
bill of exchange, presentment for payment is sufficient if made within
reasonable time after the last negotiation thereof.
Notice may be given as soon as instrument has been dishonored and
unless delay is excused must be given within the time fixed by law.
In this case, presentment and notice of dishonor were not made within
reasonable time.
September 1960—date when the check was drawn
March 1964—presented to drawee bank
April 1968—notice of dishonor
143
LINA LIM LAO V. CA
274 SCRA 572
FACTS:
Lao was a junior officer of Premier Investment House. She was authorized
to sign checks in behalf of the corporation. On a relevant date, she met Fr.
Palijo, the provincial treasurer for the Society of the Divine World. Palijo
was authorized to invest donations with Premiere and had been investing
the Society’s money with Premiere. Thereafter, he was issued checks by
Premiere, signed by its authorized officers, one of them being Lao. Upon
presentment however for encashment, said checks were dishonored as
they were drawn on insufficient funds. Palijo immediately made demands
to Premiere but to no avail. Premiere was then placed under receivership.
This prompted Palijo to file cases against Lao and Asprec who was the then
head of operations.
HELD:
The following are the elements of the first paragraph of BP22:
1. That a person makes or draws or issues any check
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
2.
3.
4.
That the check is made or drawn or issued to apply on account or
for value
That the person who makes or draws and issues the check knows
at the time of issue that he doesn’t have sufficient funds or in
credit with the drawee bank for the payment of such check in full
upon its presentment
That the check is subsequently dishonored by the drawee for
insufficiency of funds or credit, or would have been dishonored for
the same reason had not the drawer, without any valid reason,
ordered the bank to stop payment.
In the present case, the fact alone that petitioner was a signatory to the
checks subsequently dishonored merely engenders the prima facie
presumption that she knew of the insufficiency of funds, but it doesn’t
render her automatically guilty of violating BP22. The prosecution has the
burden of proof to prove all the elements of the crime. If such knowledge
of insufficiency of funds is proven to be actually absent or non-existent, the
accused shouldn’t be held liable for the offense defined under the first
paragraph of BP22.
Although the offense is mala prohibitum, the
prosecution thereby is not excused from its responsibility of proving
beyond reasonable doubt all the elements of the crime, one of which is
knowledge of insufficiency of funds.
Lao didn’t have actual knowledge of the insufficiency of funds from the
time she drew the checks up to the time that the checks were subsequently
dishonored by the bank.
Further, the scope of Lao’s duties didn’t
encompass the funding of the corporation’s checks, her duties were limited
to the marketing department of the Binondo branch. It was further found
out in the trial court that when Lao drew the checks, she signed the check
blank as to the name of the payee and the amount to be drawn, and
without knowledge of the transaction for which they were issued.
Furthermore, there was no notice of dishonor sent to Lao. The notice of
dishonor may be sent by the offended party or the drawee bank. The trial
court itself found that there was absence of any personal notice of dishonor
served upon Lao by the drawee bank. The notice, if any consolation, was
given to the main office of Premiere and not on its branch office. Nor was
there any notice sent to Lao by the offended party.
Because no notice was sent, the prima facie presumption of knowledge
cannot be applied in this case.
144
BETTY KING V. PEOPLE
319 SCRA 666
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 109 of 190
FACTS:
On several occasions, King discounted with Fernando several checks
amounting to P1,070,000 for the amount of P1,000,000.
Upon
presentment for encashment however, these checks were dishonored for
being drawn on insufficient funds. Despite demands, King wasn’t able to
make good the checks. This prompted Fernando to file a case against King
for violation of BP22.
HELD:
The elements of the crime are as follows:
1. The accused makes, draws, issues any check to apply for account
or for value
2. The check is subsequently dishonored by the drawee bank for
insufficiency of funds or credit, or it would have been dishonored
for the same reason had not the drawer, without any valid reason,
ordered the bank to stop payment
3. The accused knows at the time of the issuance that he doesn’t
have sufficient funds or credit with the drawee bank for the
payment of the check in full upon presentment
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. (TO REACH HIM IN USUAL COURSE
THE DAY FOLLOWING)
TIME FOR GIVING NOTICE IN GENERAL
•
The law provides for a different period for giving notice of dishonor
depending on whether—the party giving notice and the party to
receive notice reside in the same place; or the party giving notice and
the party to receive reside in different places
Among the elements, to show that there is prima facie presumption of
knowledge of insufficiency of funds, it should be shown that he received a
notice of dishonor and within 5 banking days thereafter, failed to satisfy
the amount of the check or make arrangement for its payment.
MEANING OF “THE SAME PLACE”
•
Refers to the corporate limits of a town or city where the presentment
is made or where the holder resides
To prove the knowledge of King, it was shown that a letter was sent by
Fernando. Nonetheless, it wasn’t proven that indeed King received the
demand letter. The letter was even shown to have been returned to
sender.
EFFECT OF NOTICE GIVEN OUT OF TIME
•
Unless excused, notice given out of time would be considered not to
have been given
•
Hence, the party to receive notice would be discharged
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:
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.
(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.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
APPLICATION OF SECTION 105
•
A party giving notice is deemed to have given due notice where the
notice of dishonor is duly addressed and deposited in the post office,
even when there is miscarriage of mail
CONCLUSIVE PRESUMPTION
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 110 of 190
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.
DEPOSIT IN LETTER BOX
•
The letter box must be under the control of the post office department
•
Otherwise, notice wouldn’t deemed to have been deposited in the post
office
•
Thus, a notice of protest properly addressed and left in a place in a
notary’s office where mail was usually collected by his postman was
held not a mailing of the notice as required by the statute
2.
After omission to give due notice
IMPLIED WAIVER
•
Waiver may be implied from acts, declarations, or silence
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. 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.
WHOM AFFECTED BY WAIVER IN GENERAL
•
The persons affected by waiver depends upon whether the waiver is in
the instrument itself or is written above the signature of the indorser
•
If the waiver is embodied in the instrument itself, it is binding upon all
parties
•
If the waiver is written above the signature of an indorser, it binds him
only
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:
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.
(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
WHERE PROTEST IS WAIVED, THE FOLLOWING ARE INCLUDED AND ARE
DEEMED WAIVED ALSO
1. Presentment
2. Notice of dishonor
•
Where presentment for payment is waived, notice of dishonor is also
waived
•
But where notice of dishonor is waived, presentment for payment is
not waived
(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.
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.
WHEN WAIVER MAY BE MADE
1. Before the time of giving notice, such as express waiver in the
body of the instrument or added to the signature of the party
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
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.
WHEN NOTICE EXCUSED
•
When political disturbances interrupt and obstruct the ordinary
negotiations of trade, they constitute a sufficient excuse for want of
presentment or notice, upon the same principle that controls in cases
of military operations or interdictions of commerce
•
Prevalence of a malignant, contagious, infectious disease…
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 111 of 190
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 the cause of delay
ceases to operate, notice must be given with reasonable diligence.
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.
CASE DIGESTS: SECTION 114
145
STATE INVESTMENT HOUSE V. CA
217 SCRA 32
FACTS:
Moulic issued checks as security to Victoriano, for pieces of jewelry to be
sold on commission. Moulic failed to sell the pieces of jewelry, so she
returned them to Victoriano. The checks however could not be recovered
by Moulic as these have been discounted already in favor of petitioner.
Consequently, before the maturity dates, Moulic withdrew her funds from
her account. Thereafter, petitioner presented the checks for payment but
these were dishonored. This prompted the petitioner to initiate an action
against Moulic.
HELD:
A prima facie presumption exists that a holder of a negotiable instrument is
a holder in due course. The burden of proving that State is not a holder in
due course is upon Moulic. In this regard, she failed to do so.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
The evidence shows that the dated checks were complete and regular;
petitioner bought the checks from Victoriano before their due dates; it took
the checks in good faith and for value; and it was never informed nor made
aware that these checks were merely issued to payee as security.
Consequently, State is a holder in due course. Moulic cannot set up the
defense that there was failure or want of consideration. It can only invoke
the defense if State was a privy to the purpose for which they were issued
and therefore is not a holder in due course.
Furthermore, the mere fact that the checks were issued as security is not
sufficient ground to discharge the instrument as against a holder in due
course.
And also, Moulic was responsible for the dishonor of her checks. She
withdrew her funds from her account and could not have expected her
checks to be honored by then.
146
GREAT ASIAN SALES V. CA
381 SCRA 488
FACTS:
Great Asian Sales was a business engaged in the selling and buying of
merchandise. In 2 of its board resolutions, it first authorized Arsenio, its
treasurer, to secure a loan from Bancasia as well as to sign any pertinent
documents related to such. Second, it authorized Arsenio to obtain from
Bancasia a discounting line. Pursuant to these, deeds of assignments were
issued by Great Asian in favor of Bancasia for receivables—specifically
checks. Almost all the checks assigned by Great Asian were dishonored.
Notice of dishonor was sent by the bank and its lawyer to Tan Chong Lin.
Later, Great Asian filed for insolvency and in its petition, Bancasia was one
of those listed as its creditors. In the meanwhile, a complaint was filed
against Great Asian and Tan Chong Lin because of the surety agreement it
signed in favor of Bancasia.
HELD:
First, under the 2 board resolutions, indeed Arsenio was authorized to
obtain a loan and sign any document related to the securing of the loan.
The question is whether the deeds of assignment signed by Arsenio was
within the ambits of his authority.
The deeds of assignment enabled Great Asian to generate instant cash,
with checks which were not due and demandable then.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 112 of 190
In the financing industry, a discounting line means a credit facility with a
financing bank or company, which allows a business entity to sell, on a
continuing basis, its accounts receivable at a discount. The term discount
means the sale of a receivable at less than its face value. The purpose of
discounting line is to enable a business entity to generate instate cash out
of its receivables which are still to mature at future debts. The financing
company or bank which buys the receivables makes its profits out of the
difference between the face value of the receivable and the discounted
price.
Clearly, the discounting arrangements entered into by Arsenio were the
same arrangements authorized under the board resolutions.
Second, on the issue of breach of contract, Bancasia alleged that Great
Asian committed a breach. In the deeds of assignment, it was stipulated
that there is a vital suspensive condition—in case the drawers fail to pay
the checks on maturity, Great Asian obligated itself to pay Bancasia the full
face value of the dishonored checks, including penalties and other costs.
Failure to pay would give rise to the obligation to pay Bancasia.
Great Asian and Bancasia agreed on this specific with recourse stipulation,
despite that the receivables were negotiable instruments. The contracting
parties are allowed such stipulation in addition to the warranties of an
indorser under the NIL. The explicit with recourse stipulation against Great
Asian enlarges the liability of Great Asian beyond that of a mere indorser of
a negotiable instrument. Thus, whether or not Bancasia gives notice of
dishonor to Great Asian, the latter remains liable because of the with
recourse stipulation.
The recourse of Bancasia to file an action for breach of contract doesn’t
leave Great Asian with an empty bag. It is then subrogated back as
creditor of the receivables. Great Asian can now proceed against the
drawers who issued the checks. Even if there was no timely notice of
dishonor, Great Asian is not prejudiced. A 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.
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 aware of that fact at the
time he indorsed the instrument;
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
(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.
WHEN NOTICE RELATIVELY EXCUSED
1. Where he has knowledge of the dishonor by means other than
through a formal notice, as when he is both the drawee and
drawer or when presentment is made to him
2. Where he has no reason to expect that the instrument will be
honored, as when he has countermanded payment or where the
drawee is fictitious or without capacity to contract
NO RIGHT TO EXPECT OR REQUIRE PAYMENT AS TO DRAWER
1. Where the drawer of the check has no account with the drawee
bank
2. When the drawer of a check payable abroad has no funds with the
drawee bank to meet it
3. When the knowledge that previous drafts on the same consignee
had been dishonored.
•
In the foregoing, the drawer has no right to receive notice of dishonor
DRAWER HAS COUNTERMANDED PAYMENT
•
A drawer tells drawee B not to pay the bill. F holder need not give
notice to A drawer. An allegation that payment of a check had been
countermanded is sufficiently set out where the check was set forth
with the indorsement across the face “Payment stopped”
DRAWEE FICTITIOUS, ETC. MUST BE MADE KNOWN AS TO INDORSERS
•
The indorser must be aware of the fact that the drawee is fictitious or
not having capacity to contract. Otherwise, notice of dishonor must be
given to such indorser to charge him. But the fact that that the
indorser knew the maker to be insolvent or that the instrument was
dishonored doesn’t dispense with the necessity of notice
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.
ILLUSTRATION
•
Note is payable on December 31, 1950
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 113 of 190
•
•
•
•
•
F the holder presents it for acceptance to X drawee on December 1,
1950
X refuses to accept the bill
F then gives notice of dishonor to drawer A and to the indorsers B, C,
D and E
Under section 151, there is no necessity for presentment for payment
and under this section, need not give a notice of dishonor by nonpayment
But suppose X drawee accepts the bill on December 15. F must then
present the bill for payment to X on December 31. If X refuses to pay,
F must give notice of dishonor to A, B, C, D, and E in order to charge
them, as in the meantime the instrument has been accepted.
Sec. 117. Effect of omission to give notice of non-acceptance. - An
omission to give notice of dishonor by non-acceptance does not
prejudice the rights of a holder in due course subsequent to the
omission.
ILLUSTRATION
f.
As to a holder in due course without notice
Sec. 118. When protest need not be made; when must be made. Where any negotiable instrument has been dishonored, it may be
protested for non-acceptance or non-payment, as the case may be;
but protest is not required except in the case of foreign bills of
exchange.
WHEN PROTEST NECESSARY
•
Protest is necessary with regard foreign bills of exchange
•
Mere fact of protest is not conclusive upon the dishonor of the
instrument and due notice to the indorser; other evidence is
competent on these questions
•
While protest is not required in cases of promissory notes and inland
bills, it is usual to protest these instruments also when dishonored
since the notary’s certificate of protest is the most convenient and
certain mode of proving the facts
NOTES FOR WEEK #11
PAY TO B OR ORDER P1000.
SEPTEMBER 3 - 7, 2007
SGD. A
TO: X
*BCDEFG (holder in due course)
VIII. DISCHARGE OF NEGOTIABLE INSTRUMENTS
*F, when the instrument was still in his hands, presented the bill for
acceptance to X and the latter refuses to accept the bill. F fails to give
notice to B, C, D, and E.
*B, C, D, E are not discharged with regard to G because omission to give
notice of dishonor by non-acceptance doesn’t prejudice the rights of a
holder in due due course subsequent to the omission.
Sec. 119. Instrument; how discharged. - A negotiable instrument is
discharged:
SUMMARY AS TO NOTICE OF DISHONOR
1. Like presentment for payment, notice of dishonor need not be
given to persons primarily liable in order to charge them
2. But aside from presentment for payment to persons primarily
liable, notice of dishonor to persons secondarily liable is necessary
to charge the latter except—
a. When notice is waived
b. When dispensed with under Section 112
c. As to drawer, under Section 114
d. As to indorser, under Section 115
e. Where due notice of dishonor by non-acceptance has
been given
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
(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.
PAYMENT BY PRINCIPAL DEBTOR
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 114 of 190
•
•
•
In order to discharge the instrument, the payment must be a payment
in due course, and second, a payment made by the principal debtor
If payment is made before the date of maturity, the instrument is not
discharged as the payment is not in due course
Where payment is made by a party who is not a primary obligor or an
accommodation party, his payment only conceals his own liability and
those who are obligated after him. All prior parties primarily or
secondarily liable on the bill, are liable to such a payer, and the payer
may cancel indorsements subsequent to his own and reissue the
paper, and it will be valid as against the prior parties
PAYMENT BY THIRD PERSONS
•
If payment is made by a third person, the instrument is not discharged
because payment is not made by the person principally liable
•
Not any one who desires may pay the instrument and then recover of
the maker. He must be a person who has in some way made himself
liable for the payment of the instrument.
•
Exception: where an instrument has been protested and someone
voluntarily makes payment supra protest or for honor. And if the
instrument was to give money in payment, the instrument is
discharged.
•
•
must be specified; and that an objection to tender on one ground is a
waiver of all other objections which could have been made at that time
It is ordinarily required of one to whom payment is offered in the form
of a check, that he makes his objection at the time of the offer of by
check instead of an offer of payment in money
Reason for the rule—to afford the debtor the opportunity to secure the
specific money which the law prescribes shall be accepted in payment
of debts
PAYMENT BY ACCOMMODATED PARTY
•
The one ultimately liable on the accommodation instrument is the
latter
•
Hence, his payment in due course discharges the instrument as if
payment was made by the principal debtor under paragraph (a)
INTENTIONAL CANCELLATION
•
The cancellation must be intentional and made by the holder
•
There must be an intention to cancel a negotiable instrument by the
holder thereof as such intention is an essential element of discharge
on a negotiable instrument and a negotiable note in a torn condition is
presumed cancelled by the holder thereof
SUMMARY OF DISCHARGE BY PAYMENT
1. Payment by a person ultimately liable, whatever his position in the
paper, is a discharge of the instrument
2. Payment by an accommodation party isn’t a discharge of the
instrument, whatever his position thereon and whether the
indorsement be regular or anomalous
3. Payment by the drawer or indorser is not a discharge of the instrument
WILL AN EXTENSION OF TIME GRANTED BY THE HOLDER TO THE DEBTOR
DISCHARGE THE INSTRUMENT?
•
No, according to the majority view
•
Because while it isn’t omitted in Section 120, it is omitted in Section
119
•
Shows the legislative intent to that an extension of time by the holder
will not discharge the instrument
PRINCIPAL DEBTOR
•
Person ultimately bound to pay the debt
PRINCIPAL DEBTOR ACQUIRES INSTRUMENT
•
Reacquisition must be by the principal debtor and in his own right at or
after the date of maturity
•
In his own right—not in a representative capacity
PAYMENT BY CHECK OR OTHER NEGOTIABLE PAPER
1. When they actually have been cashed or
2. When, through the fault of the creditor, they have been impaired
•
A creditor isn’t bound to accept a check in satisfaction of his demand
because a check, even if good when offered, doesn’t meet the
requirements of legal tender
WAIVER OF OBJECTION TO TENDER OF PAYMENT BY CHECK
•
It is the general rule that an object to a tender must, to be available to
the creditor, be made in good time and that the grounds for objection
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
WHEN INSTRUMENT REACQUIRED BEFORE MATURITY
•
A reacquisition by the principal debtor in his own right but before
maturity will not discharge the instrument
•
It will merely be a negotiation back to the principal debtor
DISCHARGE BY OPERATION OF LAW
CASE DIGESTS: SECTION 119
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 115 of 190
147
STATE INVESTMENT HOUSE V. CA
217 SCRA 32
FACTS:
Moulic issued checks as security to Victoriano, for pieces of jewelry to be
sold on commission. Moulic failed to sell the pieces of jewelry, so she
returned them to Victoriano. The checks however could not be recovered
by Moulic as these have been discounted already in favor of petitioner.
Consequently, before the maturity dates, Moulic withdrew her funds from
her account. Thereafter, petitioner presented the checks for payment but
these were dishonored. This prompted the petitioner to initiate an action
against Moulic.
HELD:
A prima facie presumption exists that a holder of a negotiable instrument is
a holder in due course. The burden of proving that State is not a holder in
due course is upon Moulic. In this regard, she failed to do so.
The evidence shows that the dated checks were complete and regular;
petitioner bought the checks from Victoriano before their due dates; it took
the checks in good faith and for value; and it was never informed nor made
aware that these checks were merely issued to payee as security.
Consequently, State is a holder in due course. Moulic cannot set up the
defense that there was failure or want of consideration. It can only invoke
the defense if State was a privy to the purpose for which they were issued
and therefore is not a holder in due course.
The note covered for Alegre’s placement plus interest. On the maturity of
the note, petitioner issued a check payable to Alegre, covering the whole
amount due. It was drawn from petitioner’s current account in BPI. When
the wife of Alegre tried to deposit the check, the bank dishonored the
check. Petitioner was notified of this matter and Alegre demanded the
immediate payment in cash. In turn, petitioner promised to replace the
check on the impossible premise that the first issued be returned to them.
This prompted Alegre to file a complaint against petitioner and petitioner in
turn, filed a case against BPI for allegedly unlawfully deducting from its
account counterfeit checks. The trial court decided in favor of Alegre.
ISSUE: W/N NIL is applicable to the money market transaction held
between petitioner and Alegre?
HELD:
Considering the nature of the money market transaction, Article 1249 of
the CC is the applicable provision should be applied. A money market has
been defined to be a market dealing in standardized short-term credit
instruments where lenders and borrowers don’t deal directly with each
other but through a middleman or dealer in the open market. In a money
market transaction, the investor is the lender who loans his money to a
borrower through a middleman or dealer.
Furthermore, the mere fact that the checks were issued as security is not
sufficient ground to discharge the instrument as against a holder in due
course.
In the case at bar, the transaction is in the nature of a loan. Petitioner
accepted the check but when he tried to encash it, it was dishonored. The
holder has an immediate recourse against the drawer, and consequently
could immediately file an action for the recovery of the value of the check.
Further, in 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 legal tender, and therefore cannot constitute valid tender of
payment.
And also, Moulic was responsible for the dishonor of her checks. She
withdrew her funds from her account and could not have expected her
checks to be honored by then.
Sec. 120. When persons secondarily liable on the instrument are
discharged. - A person secondarily liable on the instrument is
discharged:
(a) By any act which discharges the instrument;
148
CEBU INTERNATIONAL V. CA
316 SCRA 488
FACTS:
Petitioner is a quasi-banking institution involved in money market
transactions. Alegre invested with petitioner P500,000. Petitioner issued
then a promissory note, which would mature approximately after a month.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
(b) By the intentional cancellation of his signature by the
holder;
(c) By the discharge of a prior party;
(d) By a valid tender or payment made by a prior party;
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 116 of 190
(e) By a release of the principal debtor unless the holder's right
of recourse against the party secondarily liable is expressly
reserved;
(f) By any agreement binding upon the holder to extend the
time of payment or to postpone the holder's right to enforce the
instrument unless made with the assent of the party secondarily
liable or unless the right of recourse against such party is expressly
reserved.
EFFECT OF SECTION 120 IS A SURETYSHIP
•
Generally the courts regard this provision as exclusive, as a complete
codification of the law of discharge of secondary parties by the six
methods therein set forth
ACTS DISCHARGE INSTRUMENT
•
Any of the acts that will discharge an instrument under Section 119
will discharge a party secondarily liable thereon, such as payment in
due course by the maker. This will discharge the indorsers in the note.
INTENTIONAL CANCELLATION
•
A, maker B, payee
•
BCDEF
•
F then successively cancels the signature of D. D is discharged.
•
No consideration is necessary to support a discharge by intentional
cancellation of an indorser’s signature by the holder.
DISCHARGE OF PRIOR PARTY
•
The intentional cancellation of D’s signature also discharges E, as D is
a prior party to E
•
And according to this paragraph, the discharge of a prior party
discharges parties subsequent thereto.
DISCHARGE BY OPERATION OF LAW IS NOT INCLUDED
1. Discharge by reason of bankruptcy
2. Discharge of a party not given due notice of dishonor
3. Discharge by the statute of limitations
VALID TENDER OF PAYMENT
•
If D an indorser validly tenders payment and F unjustifiably
refuses to do accept, D is discharged
•
Tender of payment: act by which one produces and offers to a
person holding a claim or demand against him the amount of
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
money which he considers and admits to be due, in satisfaction of
such claim or demand without any stipulation or condition
RELEASE OF PRINCIPAL DEBTOR
•
If the holder F discharges A maker, the parties secondarily liable, B, C,
D, E are also discharged, as this discharges the instrument and two, it
deprives them of their right of recourse against A maker.
•
But if on releasing A, F reserves his right of recourse against the
indorsers, then they are not discharged. The effect of such reservation
is the implied reservation of their right of recourse against A. In other
words, while the holder cannot hold A liable, he can hold B, C, D, and
E liable, but they in turn can hold A liable should any of them be made
to pay F. This reservation of the right of recourse cannot be implied
from acts and conduct but must be express.
RELEASE MUST BE ACT OF HOLDER
RELEASE MUST BE FOR VALUE
EFFECT OF RELEASE ON ACCOMMODATION MAKER OR ACCEPTOR
•
General rule is that he is not discharged by the holder’s release of the
principal debtor even if the release be made with knowledge or true
relation of the parties and, conversely, the release of the
accommodation maker or acceptor doesn’t discharge the principal
debtor through the latter occupies the position of a party secondarily
liable on the instrument
EXTENSION OF TIME
•
If the holder agrees to extend the time of payment, the indorsers are
discharged
•
However, where the extension of time is consented to by the party
secondarily liable, he is not discharged.
Also, where the holder
expressly reserves his right of recourse against the party secondarily
liable, the latter is not discharged.
REQUISITES OF AGREEMENT FOR EXTENSION OF TIME
1. It must be a binding contract, supported by valuable consideration
and for a definite period
2. It must be made with the principal debtor and not with a third
party
Sec. 121. Right of party who discharges instrument. - Where the
instrument is paid by a party secondarily liable thereon, it is not
discharged; but the party so paying it is remitted to his former
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 117 of 190
rights as regard all prior parties, and he may strike out his own and
all subsequent indorsements and against negotiate the instrument,
except:
(a) Where it is payable to the order of a third person and has
been paid by the drawer; and
(b) Where it was made or accepted for accommodation and has
been paid by the party accommodated.
ILLUSTRATION OF SECTION 121
•
A is the drawer of the bill addressed to X, drawee, payable to the order
of B.
•
BCDEF
•
Suppose D pays the bill. What are the effects?
o
The first effect: instrument is not discharged but it discharges
D.
o
Second effect: D is remitted to his former rights against
parties prior to him, such as A, B and C. If D was formerly a
holder in due course, even if at the time of payment he had
already notice of defects of title, he can enforce his rights
against any of them free from defenses, as he is remitted to
his former rights. But it is a well-known rule of law that if the
original payee of a note unenforceable for lack of
consideration repurchases the instrument after transferring it
to a holder in due course, the paper again becomes subject in
the payee’s 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.
o
Third effect: D can strike out his indorsement and the
subsequent indorsements of E and F
o
Fourth effect: D can renegotiate the instrument
EXCEPTIONS TO RIGHT TO RENEGOTIATE
1. If instead of D, it is A drawer who pays and as the bill is payable
to the order of a third person, B, A can no longer negotiate the
instrument
2. Or if B payee is an accommodated party, and B pays, he cannot
negotiate the bill, as B is the ultimate party to pay it, and he
doesn’t have a right of recourse against either X drawee or A
drawer
Sec. 122. Renunciation by holder. - The holder may expressly
renounce his rights against any party to the instrument before, at,
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
or after its maturity. An absolute and unconditional renunciation of
his rights against the principal debtor made at or after the maturity
of the instrument discharges the instrument. But a renunciation
does not affect the rights of a holder in due course without notice.
A renunciation must be in writing unless the instrument is
delivered up to the person primarily liable thereon.
APPLICATION OF SECTION 122
1. Applies only to renunciation by the unilateral act of the holder without
consideration and in cases where the instrument is not delivered up to
the person intended to be released
2. Renunciation—act of surrendering a right or claim without recompense
but it can be applied with equal propriety to the relinquishing of a
demand upon an agreement supported by a consideration
FORM OF RENUNCIATION

It must be in writing and must be express
TIME FOR MAKING RENUNCIATION
1. Before maturity
2. At maturity
3. After maturity
WHEN RENUNCIATION DISCHARGES INSTRUMENT
1. Renunciation discharges the instrument when it is absolute and
unconditional
2. It is made in favor of the person primarily liable
3. It is made at or after maturity
Sec. 123. Cancellation; unintentional; burden of proof. - A
cancellation made unintentionally or under a mistake or without
the authority of the holder, is inoperative but where an instrument
or any signature thereon appears to have been cancelled, the
burden of proof lies on the party who alleges that the cancellation
was made unintentionally or under a mistake or without authority.
MEANING OF CANCELLATION

Signifies not only the drawing of criss-cross lines but also tearing,
obliterations, erasures or burning

It may be made by any other means by which the intention to cancel
the instrument may be evident
WHEN CANCELLATION IS INOPERATIVE
1. When made unintentionally
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 118 of 190
2.
3.
When made under mistake
When made without the authority of the holder


BURDEN OF PROOF IS UPON THE PERSON WHO CLAIMS THAT THE
CANCELLATION IS INOPERATIVE
Sec. 126. 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.
TYPES OF BILLS OF EXCHANGE
1. Draft
2. Trade acceptance
3. Banker’s acceptance
4. Treasury warrants
5. Money orders
6. Clean bills of exchange
7. Documentary bill of exchange
8. D/A bills of exchange
9. D/P bills of exchange
10. Time or usance bills
11. Bills in set
12. Inland bills
13. Foreign bills
DRAFT

Common term
synonymously
for
all
bills
of

A draft drawn by the seller on the purchaser of goods sold and
accepted by such purchaser
States upon its face that the obligation of the acceptor arises out of
purchase of goods from the drawer
Arises from credit obligations arising from the sale of goods and must
have a definite maturity
HOW TRADE ACCEPTANCE HANDLED

The seller sends with the goods or the invoice a filled-in trade
acceptance form, often in duplicate to enable the buyer to retain a
copy for his files

The buyer accepts the bill by signing his name across its face, with
date, designating the bank where it is payable

It is returned to the seller who may hold it at maturity or may discount
it at the bank

At maturity, it is collected exactly as if it were a check

Usually, the buyer of goods is given a cash discount and other options
beside the acceptance privilege
BANKER’S ACCEPTANCE

Draft of which the acceptor is a bank or banker engaged generally in
the business of granting banker’s acceptance credit

Similar to a trade acceptance

Drawn against the bank instead of the buyer
exchange
and
they
are
used
IN BANK DRAFTS, DRAWER AND DRAWEE BANK ARE LIABLE TO
PURCHASER OF DRAFT FOR NOT COMPLYING WITH HIS INSTRUCTIONS

The drawee bank acting as “payor” bank is solely liable for acts not
done in accordance with the instructions of the drawer bank or of the
purchaser of the draft

The drawee bank has the burden of proving that it didn’t violate
TRADE ACCEPTANCE

A bill of exchange payable to order and at a certain maturity, drawn by
a seller against the purchaser of goods as drawee, for a fixed sum of
money, showing on its face the acceptance of the purchaser of goods
and that it has arisen out of a purchase of goods by the acceptor
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
ILLUSTRATIONS OF THE USE OF BANKER’S ACCEPTANCE
1. B importer makes an application with PNB for the issuance to A
exporter of a letter of credit, if the PNB is satisfactory to A
exporter. B the originator of the letter of credit is variously called
the accredited buyer, consignee, or the account of the importer.
The PNB is called the opening bank while A is termed the
beneficiary.
2. If PNB is willing, it issues the letter either by mail or by cable. If
by cable, PNB instructs its correspondent bank in NYC to notify A.
Such respondent bank is called the notifying bank. If by mail,
PNB can send directly to A or B.
3. A then draws a draft or bill of exchange against the PNB pursuant
to the letter of credit. When A ships the goods to B, A receives
the bill of lading from the shipping company. He attaches this
document to the draft or bill of exchange. The draft with the
document attached is called the documentary bill and so long as
the document is attached to the bill, the holder of the bill has title
to the goods and is protected to the value thereof.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 119 of 190
TRUST RECEIPT

The written or printed document signed by the entrustee in favor of
the entruster containing terms and conditions substantially complying
with the provisions of this decree

The legal title to the matter entrusted remains in the entruster but the
entruster gives to the trustee a form of title which is good and legal
against everybody except the entruster

Entrustee—the person having or taking possession of goods,
documents or instruments under a trust receipt transaction, and any
successor in interest of such person for the purpose or purposes
specified in the trust receipt agreement

Entruster—person holding title over the goods, documents, or
instruments subject of a TRA and any successor-in-interest of such
person

TREASURY WARRANTS

Bearing on its face the words payable from the appropriation for food
administration is actually an order for payment out of a particular fund
and is not unconditional and doesn’t fulfill one of the essential
requirements of a negotiable instrument
FACTS:
Samara purchased from Cititrust a bank draft, the payee being Thai
Airways and the corresponding bank in the US is Marine Midland. Later on,
Samara executed a stop payment order of the bank draft, instructing
Citytrust to inform Marine Midland about the order through telex. Cititrust
informed Marine Midland the next day and followed it up by cable, which
the latter bank acknowledged to have received the order and stopped
payment of the bank draft. Thereafter, the account of Samara was
credited but was debited again after knowing that Midland had debited its
account. This is despite that it admitted to not have paid the bank draft.
MONEY ORDER

Species of draft drawn by the post office upon another for the amount
of money deposited at the first office by the person purchasing the
money order and payable at the second office to a payee named in the
order

Being under the restrictions and limitation which postal laws and
regulations place on them and which are inconsistent with the
character of negotiable instruments, postal money orders are not
negotiable
Documents against acceptance bill: is a time bill to which are attached
documents to be delivered and surrendered to the drawee when he
accepts the bill
TIME OR USUANCE BILLS

Sight bills are bills which are payable upon presentation or at sight or
demand

Time or usuance bills are bills which are payable at a fixed furture time
or at a determinable future time
CASE DIGESTS: SECTION 126
149
CITYTRUST BANKING CORPORATION V. CA
196 SCRA 553
On the first appeal on a different issue, it was held that petitioner and
Midland were solidarily liable to Samara but it was Midland which was
ultimately liable to pay for damages—it had to reimburse petitioner for
whatever amount it would pay Samara.
CLEAN AND DOCUMENTARY BILLS OF EXCHANGE

Clean bill of exchange is one to which are not attached documents of
title to be delivered to the person against whom the bill is drawn when
he either accepts or pays the bill

Documentary bill of exchange is one to which are attached documents
of title to be delivered and surrendered to the drawee when he accepts
or pays the bill
HELD:
The defenses of petitioner and Marine Midland are distinct with each other.
They were not in privity with each other in a transaction involving payment
of a bank draft. A bank draft is a bill of exchange drawn by a bank upon
its corresponding bank issued at the solicitation of a stranger who
purchases and pays therefor. It is also defined as an order for payment of
money.
D/A AND D/P BILLS OF EXCHANGE

Documents against payment bill: is a sight or time bill to which are
attached documents to be delivered and surrendered to the drawee
when he has paid the corresponding bill
In the case at bar, petitioner from which Samara purchased the bank draft,
was the drawer of the draft through which it ordered Marine Midland, the
drawee bank to pay the amount of $40,000 in favor of Thai Airways. The
drawee bank acting as a payor bank is solely liable for acts not done in
accordance with the instructions of the drawer bank or of the purchaser of
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 120 of 190
the draft. The drawee bank has the burden of proving that it didn’t violate.
Meanwhile, the drawer, if sued by the purchaser of the draft is liable for
the act of debiting the customer’s account despite an instruction to stop
payment. The drawer has the duty to prove that he complied with the
order to inform the drawee.
Meanwhile, if the drawer is sued by the purchaser of the draft, he is liable
for the act of debiting the customer’s account despite an instruction to stop
payment. The drawer has the burden of proving that he complied with the
order to inform the drawee to stop payment. So, we see that the liabilities
and obligations of the two parties are different, and their defenses are also
different.
Since their rights are not so interwoven, the appeal by Marine Midland of
the decision cannot generally affect the case as regards Citytrust, which
failed to appeal. As a matter of strict procedure, therefore, the decision on
the appeal by Marine Midland should not apply to Citytrust.
However, the SC made an exception in this case and allowed the Marine
Midland decision to apply to Citytrust as a matter of justice and equity,
since it would lead to an absurd situation wherein Samara can claim an
even bigger amount if it chooses to collect from Citytrust who was not even
the proximate cause of the loss.
150
PHIL. BANK OF COMMERCE V. ARUEGO
102 SCRA 530
FACTS:
Aruego, on behalf of World Current Events, entered into a Credit
Agreement with PBCom, for the publication of the company’s periodicals.
At every printing endeavor by the printing press, a bill of exchange is
drawn against PBCom. The instruments are signed by Aruego, without any
indication that he is an agent of World Current Events. When he was being
held liable by PBCom, he averred that he only signed the instrument in the
capacity of agent of the company.
HELD:
An inspection of the drafts accepted by the defendant would show nowhere
that he has disclosed that he was signing in representation of the Philippine
Education Foundation Company. He merely signed his name. For failure to
disclose his principal, Aruego was personally liable for the drafts he
accepted
NOTES: WEEK #12
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
SEPTEMBER 10 - 14, 2007
LETTERS OF CREDIT
NATURE AND IMPORTANCE

A letter of credit is a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interests of the seller, who refuses
to part with his goods before he is paid, and a buyer, who wants to
have control of the goods before paying

To break the impasse, the buyer may be required to contract a bank to
issue a letter of credit, the issuing bank can authorize the seller to
draw drafts and engage to pay them upon their presentment
simultaneously with the tender of documents required by the letter of
credit. The buyer and seller agree on what documents are to be
presented for payment, but ordinarily they are documents of title
evidencing or attesting to the shipment of the goods to the buyer

Once the letter of credit is established, the seller ships the goods to
the buyer and in the process secures the required shipping documents
and documents of title. To get paid, the seller executes a draft and
presents it together with the required documents to the issuing bank

The issuing bank redeems the draft and pays cash to the seller if it
finds that the documents submitted by the seller conform with what
the letter of credit requires. The bank then obtains possession of the
documents upon paying the seller. The transaction is completed when
the buyer reimburses the issuing bank and acquires the documents
entitling him to the goods. The seller gets paid only if he delivers the
documents of title over the goods while the buyer acquires the said
documents and control over the goods only after reimbursing the
bank.
INDEPENDENCE PRINCIPLE

What characterizes letters of credit, as distinguished from other
accessory contract, is the ENGAGEMENT OF THE ISSUING BANK TO
PAY THE SELLER ONCE THE DRAFT AND THE REQUIRED SHIPPING
DOCUMENTS ARE PRESENTED TO IT.
In turn, this arrangement
ASSURES THE SELLER OF PROMPT PAYMENT, INDEPENDENT OF ANY
BREACH OF THE MAIN SALES CONTRACT.
LAWS GOVERNING A LETTER OF CREDIT TRANSACTION

Uniform Customs and Practice for Documentary Credits (UCP) issued
by the International Chamber of Commerce
PARTIES TO A LETTER OF CREDIT TRANSACTION
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 121 of 190
1.
2.
3.
4.
Buyer—procures the letter of credit and obliges himself to
reimburse the issuing bank upon receipt of the documents of title.
He is the one initiating the operation of the transaction as buyer of
the merchandise and also of the credit instrument. His contract
with the bank which is to issue the instrument and is represented
by the Commercial Credit Agreement form which he signs,
supported by the mutually made promises contained in the
agreement
Opening bank—usually the buyer’s bank which issues the letter of
credit and undertakes to pay the seller upon receipt of the draft
and proper documents of titles to surrender the documents to the
buyer upon reimbursement.
As it is the one issuing the
instrument, it should be a strong bank, well known and well
regarded in international trading circles.
Seller—in compliance with the contract of sale, ships the goods to
the buyer and delivers the documents of title and draft to the
issuing bank to recover payment. He is also the beneficiary of the
credit instrument because the instrument is addressed to him and
is in his favor. While the bank cannot compel the seller to ship
the goods and avail of the benefits of the instruments, however,
the seller may recover from the bank the value of his shipment is
made within the terms of the instrument, even though he hasn’t
given the bank any direct consideration for the bank’s promises
contained in the instrument
Correspondent bank/advising bank—to convey to the seller the
existence of the credit or a confirming bank which will lend
credence to the letter of credit issued by the lesser known issuing
bank or paying bank which undertakes to encash the drafts drawn
by the exporter.
Furthermore, another bank known as the
negotiating bank may be approached by the buyer to have the
draft discounted instead of going to the place of the issuing bank
to claim payment
RESPONSIBILITIES OF BANKS IN COMMERCIAL CREDIT TRANSACTIONS

If the beneficiary is to be advised by the issuing bank by cable, the
services of an ADVISING OR NOTIFYING BANK must always be utilized

The responsibility of the NOTIFYING BANK is merely to convey or
transmit to the seller or beneficiary the existence of the credit.
However, if the beneficiary requires that the obligation of the issuing
bank shall also be made the obligation of the bank to himself, there is
what is known as a CONFIRMED COMMERCIAL CREDIT and the bank
notifying the beneficiary of the credit shall become a CONFIRMING
BANK. In this case, the liability of the confirming bank is primary and
it is as if the credit were issued by the issuing and confirming banks
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010


jointly, thus giving the beneficiary or a holder for value of drafts drawn
under the credit, the right to proceed against either or both banks, the
moment the credit instrument has been breached.
The paying bank on which the drafts are to be drawn it may be the
issuing bank or the advising bank. If the beneficiary is to draw and
receive payment in his own currency, the advising bank may be
indicated as the paying bank also. When the draft is to be paid in this
manner, the paying bank assumes no responsibility but merely pays
the beneficiary and debits the payment immediately to the account
which the issuing bank has with it. IF THE ISSUING BANK HAS NO
ACCOUNT WITH THE PAYING BANK, the paying bank reimburses itself
by drawing a bill of exchange on the issuing bank, in dollars, for the
equivalent of the local currency paid to the beneficiary, at the buyeing
rate for dollar exchange.
The beneficiary is entirely out of the
transaction because his draft is completely discharged by the payment,
and the credit arrangement between the paying bank and issuing bank
doesn’t concern him.
If the draft contemplated by the credit instrument, is to be drawn on
the issuing bank or on other designated banks not in the city of the
seller, any bank in the city of the seller which buys or discounts the
draft of the beneficiary becomes a negotiating bank. As a rule,
whenever, the facilities of an advising or notifying bank are used, the
beneficiary is apt to offer his drafts to the advising bank for
negotiation, thus giving the advising bank the character of a
negotiating bank becomes an endorser and bona fide holder of the
drafts and within the protection of the credit instrument. It is also
protected by the drawer’s signature, as the drawer’s contingent
liability, as drawer, continues until discharged by the actual payment
of the bills of exchange.
LIABILITY IN COMMERCIAL CREDIT TRANSACTIONS

A commercial bank which departs from what has been stipulated under
the letter of credit, as when it accepts a faulty tender, acts on its own
risk, and it may not thereafter be able to recover from the buyer or
issuing bank, as the case may be, the money thus paid to the
beneficiary

In the case of a discounting arrangement, wherein a negotiating bank
pays the draft of a beneficiary of a letter of credit in order to save such
beneficiary from the hardship of presenting the documents directly to
the issuing bank, the negotiating bank can seek reimbursement of
what has been paid to the beneficiary who as drawer of the draft
continues to assume a contingent liability thereon.
Thus, the
negotiating bank has the ordinary right of recourse against the seller
or beneficiary in the event of dishonor by the issuing bank.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 122 of 190
PROTOTYPE EXPORT TRANSACTION
1. PROFORMA INVOICE—all the particulars for the proposed
shipment which are then known to the buyer
2. PRICE QUOTATION FAS AND CIF—FAS stands for “free along side”
which means that the seller will be responsible for the cost and
risks of the goods “along side” an overseas vessel at the stated
location: the buyer bears the costs and risks from that point. CIF
on the other hand means “cost, freight and insurance”, that in
exchange for this stated price, the seller undertakes not only to
supply the goods but also to obtain and pay for insurance and
bear the freight charges to the stated pointy.
3. BUYER’S PURCHASE ORDER
4. LETTER OF CREDIT
a. One way for a seller to be assured of payment is to ship
goods under a negotiable bill of lading and arrange for a
bank in buyer’s city to hold the bill of lading until the
buyer pays the draft in the usual foreign sale this
arrangement for securing payment of the price is not
adequate
b. In some situations, sellers may need assurance of
payment even before the time of payment. This problem
arises in contracts which call for the manufacture of
goods to the buyer’s specifications.
c. Although the proforma invoice may not specify, the seller
will expect the letter of credit to be confirmed by the
local bank in its location. But why does a local bank
confirm rather than issue a letter of credit? The bank
that issues the letter of credit needs assurance that it will
be reimbursed by the buyer, on whose behalf it pays the
seller. The buyer’s bank can take steps to minimize or
remove the hazards. It will receive the negotiable bill of
lading controlling the goods which will provide security
for the customer’s obligation to reimburse the bank; in
addition, the buyer’s own bank can judge in the light of
its knowledge of his financial standing whether added
security is needed and can insist on such security before
it issues the letter of credit
d. To meet the seller’s letter of credit requirements, the
buyer will request its bank to arrange for the issuance of
a letter of credit which will comply with the terms of the
proforma invoice. The buyer will then sign a detailed
application and agreement for commercial credit
prepared by the bank. The issuing bank, after approving
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
5.
the buyer’s credit standing transmits a letter of credit by
cable to the confirming bank. This confirming bank will
then deliver to seller a document advising the latter that
the issuing bank opened a letter of credit in its favor and
adding the confirming bank’s confirmation.
In this
arrangement, the seller is assured of payment of its sight
drafts drawn on the confirming bank in the amount of the
total amount of the sale, provided it presents the
documents called for in the letter of credit.
An
examination of the letter of credit will also reveal that the
bill of lading is to be consigned to the order of the buyer’s
bank, thereby giving the bank control over the goods,
with the consequent security for its claim against the
buyer.
ACCEPTANE; SHIPMENT
a. On the receipt of the confirmed letter of credit, the seller
will send the order acknowledgment. This document will
repeat the description and price of the goods which has
also appeared on the proforma invoice and states the
number and expiration date of the letter of credit.
b. Further, the arrival of the letter of credit is the go-signal
for the seller to send the goods. The seller then prepares
the COMMERCIAL INVOICE which provides a complete
record of the transaction and is an important source of
information to such interested parties as a bank
discounting a draft or an underwriting extending
issuance.
c. As the time of shipment approaches, the seller will
contact its forwarder and give its shipping instructions. It
will inform that to comply with the requirements of the
letter of credit, the bill of lading must be made to the
order of the issuing bank. It will also send copies of the
commercial invoice, a packing list, and a Shipper’s export
declaration.
When the forwarder receives these
documents, he takes over all further documentation as
the agent of the shipper, the latter merely has to
dispatch the goods from the factory in accordance with
the forwarder’s instructions.
d. The seller will then send the truck to the pier where they
are delivered to the ocean carrier’s receiving clerk who
signs the dock receipt.
The dock receipt is a form
supplied by the ocean carrier which contains information
relevant to the shipping of the bearings such as the
number of the pier, and the name of the ship. The dock
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6.
7.
receipt is NON-NEGOTIABLE and serves as a temporary
receipt for the goods until they are loaded on board.
e. The ocean carrier is soon ready to receive the cargo.
When the goods are loaded on board, the steamship line
issues a bill of lading which, to comply with the letter of
credit, is CONSIGNED TO ORDER OF THE ISSUING BANK.
The bill of lading is initially prepared by the forwarder on
a form supplied by the ocean carrier, it sets forth the
markings and numbers of the packages, description of
the goods, and the number and weight of the packages.
On its dorsal side, it will state that the goods are received
for shipment, but a statement FREIGHT PREPAID ON
BOARD is initiated by a representative of the steamship
line after loading. The forwarder then delivers the bill of
lading and the commercial invoice to the seller.
INSURANCE
PAYMENT; THE DRAFT.
a. The confirming bank stated in their letter that the
estimated CIF price would be “available by your drafts on
us at sight” when accompanied by the listed documents
b. Seller accordingly draws a sight draft on the confirming
bank.
The sight draft together with the commercial
invoice, insurance certificate, full set of bills of lading,
and the packing list are presented to the confirming
bank.
When the bank receives these documents, it
issues its bank draft to seller’s order and transmits the
documents by air mail to issuing bank, which will
reimburse the confirming bank.
c. The documents, sent by airmail, will reach the buyer’s
bank well ahead of the ocean shipment. The time for
release of the documents to buyer and reimbursement to
the bank will depend upon the arrangement which was
made between the bank and buyer when the letter of
credit was initially established.
d. If the buyer plans to resell the goods, he may not be able
to reimburse the bank until the goods arrive and he
resells the goods. In this event, the issuing bank may
need to take further steps to secure its claim against the
buyer.
ICC UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY
CREDITS (UCP 500)
GENERAL PROVISIONS AND DEFINITIONS
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
ARTICLE 1: Application of UCP
The Uniform Customs and Practice for Documentary Credits, 1993
Revision, ICC Publication No. 50O, shall apply to all Documentary Credits
(including to the extent to which they may be applicable, Standby Letter(s)
of Credit) where they are incorporated into the text of the Credit. They are
binding on all parties thereto, unless otherwise expressly stipulated in the
Credit.
ARTICLE 2: Meaning of Credit
For the purposes of these Articles, the expressions "Documentary
Credit(s)" and "Standby Letter(s) of Credit" (hereinafter referred to as
"Credit(s)"), mean any arrangement, however named or described,
whereby a bank (the "Issuing Bank") acting at the request and on the
instructions of a customer (the "Applicant") or on its own behalf,
i. is to make a payment to or to the order of a third party (the
"Beneficiary"), or is to accept and pay bills of exchange (Draft(s)) drawn by
the Beneficiary,
or
ii. authorizes another bank to effect such payment, or to accept and pay
such bills of exchange (Draft(s)),
or
iii. authorizes another bank to negotiate, against stipulated document(s),
provided that the terms and conditions of the Credit are complied with.
For the purposes of these Articles, branches of a bank in different countries
are considered another bank.
ARTICLE 3: Credits v. Contracts
A. Credits, by their nature, are separate transactions from the sales or
other contract(s) on which they may be based and banks are in no way
concerned with or bound by such contract(s), even if any reference
whatsoever to such contract(s) is included in the Credit. Consequently, the
undertaking of a bank to pay, accept and pay Draft(s) or negotiate and/or
to fulfill any other obligation under the Credit, is not subject to claims or
defenses by the Applicant resulting from his relationships with the Issuing
Bank or the Beneficiary.
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B. A Beneficiary can in no case avail himself of the contractual relationships
existing between the banks or between the Applicant and the Issuing Bank.
ARTICLE 4: Documents v. Goods/Services/Performances
In Credit operations all parties concerned deal with documents, and not
with goods, services and/or other performances to which the documents
may relate.
FORM AND NOTIFICATION OF CREDITS
ARTICLE 6: Revocable v. Irrevocable Credits
ARTICLE 8: Revocation of a Credit
A. A revocable Credit may be amended or canceled by the Issuing Bank at
any moment and without prior notice to the Beneficiary.
B. However, the Issuing Bank must:
i. reimburse another bank with which a revocable Credit has been made
available for sight payment, acceptance or negotiation for any payment,
acceptance or negotiation made by such bank prior to receipt by it of
notice of amendment or cancellation, against documents which appear on
their face to be in compliance with the terms and conditions of the Credit;
i. revocable,
ii. reimburse another bank with which a revocable Credit has been made
available for deferred payment, if such a bank has, prior to receipt by it of
notice of amendment or cancellation, taken up documents which appear on
their face to be in compliance with the terms and conditions of the Credit.
or
ARTICLE 9: Liability of Issuing and Confirming Banks
ii. irrevocable.
A. An irrevocable Credit constitutes a definite undertaking of the Issuing
Bank, provided that the stipulated documents are presented to the
Nominated Bank or to the Issuing Bank and that the terms and conditions
of the Credit are complied with:
A. A Credit may be either
B. The Credit, therefore, should clearly indicate whether it is revocable or
irrevocable.
C. In the absence of such indication the Credit shall be deemed to be
irrevocable.
ARTICLE 7: Advising Bank's Liability
A. A Credit may be advised to a Beneficiary through another bank (the
"Advising Bank") without engagement on the part of the Advising Bank, but
that bank, if it elects to advise the Credit, shall take reasonable care to
check the apparent authenticity of the Credit which it advises. If the bank
elects not to advise the Credit, it must so inform the Issuing Bank without
delay.
B. If the Advising Bank cannot establish such apparent authenticity it must
inform, without delay, the bank from which the instructions appear to have
been received that it has been unable to establish the authenticity of the
Credit and if it elects nonetheless to advise the Credit it must inform the
Beneficiary that it has not been able to establish the authenticity of the
Credit.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
i. if the Credit provides for sight payment to pay at sight;
ii. if the Credit provides for deferred payment to pay on the maturity
date(s) determinable in accordance with the stipulations of the Credit; iii. if
the Credit provides for acceptance;
a. by the Issuing Bank to accept Draft(s) drawn by the Beneficiary on the
Issuing Bank and pay them at maturity,
or
b. by another drawee bank to accept and pay at maturity Draft(s) drawn
by the Beneficiary on the Issuing Bank in the event the drawee bank
stipulated in the Credit does not accept Draft(s) drawn on it, or to pay
Drafts(s) accepted but not paid by such drawee bank at maturity;
iv. if the Credit provides for negotiation to pay without recourse to drawers
and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or
document(s) presented under the Credit. A Credit should not be issued
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available by Draft(s) on the Applicant. If the Credit nevertheless calls for
Draft(s) on the Applicant, banks will consider such Draft(s) as an additional
document(s).
D. i. Except as otherwise provided by Article 48, an irrevocable Credit can
neither be amended nor canceled without the agreement of the Issuing
Bank, the Confirming Bank, if any, and the Beneficiary.
B. A confirmation of an irrevocable Credit by another bank (the "Confirming
Bank") upon the authorization or request of the Issuing Bank, constitutes a
definite undertaking of the Confirming Bank, in addition to that of the
issuing Bank, provided that the stipulated documents are presented to the
Confirming Bank or to any other Nominated Bank and that the terms and
conditions of the Credit are complied with:
ii. The Issuing Bank shall be irrevocably bound by an amendment(s) issued
by it from the time of the issuance of such amendment(s). A Confirming
Bank may extend its confirmation to an amendment and shall be
irrevocably bound as of the time of its advice of the amendment. A
Confirming Bank may, however, choose to advise an amendment to the
Beneficiary without extending its confirmation and if so, must inform the
Issuing Bank and the Beneficiary without delay.
i. If the Credit provides for sight payment to pay at sight;
ii. if the Credit provides for deferred payment to pay on the maturity
date(s) determinable in accordance with the stipulations of the Credit;
iii. if the Credit provides for acceptance:
a. by the Confirming Bank to accept Draft(s) drawn by the Beneficiary on
the Confirming Bank and pay them at maturity,
or
b. by another drawee bank to accept and pay at maturity Draft(s) drawn
by the Beneficiary on the Confirming Bank, in the event the drawee bank
stipulated in the Credit does not accept Draft(s) drawn on it, or to pay
Draft(s) accepted but not paid by such drawee bank at maturity;
iv. if the Credit provides for negotiation to negotiate without recourse to
drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or
document(s) presented under the Credit. A Credit should not be issued
available by Draft(s) on the Applicant. If the Credit nevertheless calls for
Draft(s) on the Applicant, banks will consider such Draft(s) as an additional
document(s).
C. i. If another bank is authorized or requested by the Issuing Bank to add
its confirmation to a Credit but is not prepared to do so, it must so inform
the Issuing Bank without delay.
ii. Unless the Issuing Bank specifies otherwise in its authorization or
request to add confirmation, the Advising Bank may advise the Credit to
the Beneficiary without adding its confirmation.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
iii. The terms of the original Credit (or a Credit incorporating previously
accepted amendment(s)) will remain in force for the Beneficiary until the
Beneficiary communicates his acceptance of the amendment to the bank
that advised such amendment. The Beneficiary should give notification of
acceptance or rejection of amendment(s). If the Beneficiary fails to give
such notification, the tender of documents to the Nominated Bank or
Issuing Bank, that conform to the Credit and to not yet accepted
amendment(s), will be deemed to be notification of acceptance by the
Beneficiary of such amendment(s) and as of that moment the Credit will be
amended.
iv. Partial acceptance of amendments contained in one and the same
advice of amendment is not allowed and consequently will not be given any
effect.
ARTICLE 10: Types of Credit
A. All Credits must clearly indicate whether they are available by sight
payment, by deferred payment, by acceptance or by negotiation.
B. i. Unless the Credit stipulates that it is available only with the Issuing
Bank, all Credits must nominate the bank (the "Nominated Bank") which is
authorized to pay, to incur a deferred payment undertaking, to accept
Draft(s) or to negotiate. In a freely negotiable Credit, any bank is a
Nominated Bank.
Presentation of documents must be made to the Issuing Bank or the
Confirming Bank, if any, or any other Nominated Bank.
ii. Negotiation means the giving of value for Draft(s) and/or document(s)
by the bank authorized to negotiate. Mere examination of the documents
without giving of value does not constitute a negotiation.
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C. Unless the Nominated Bank is the Confirming Bank, nomination by the
Issuing Bank does not constitute any undertaking by the Nominated Bank
to pay, to incur a deferred payment undertaking, to accept Draft(s), or to
negotiate. Except where expressly agreed to by the Nominated Bank and
so communicated to the Beneficiary, the Nominated Bank's receipt of
and/or examination and/or forwarding of the documents does not make
that bank liable to pay, to incur a deferred payment undertaking, to accept
Draft(s), or to negotiate.
D. By nominating another bank, or by allowing for negotiation by any bank,
or by authorizing or requesting another bank to add its confirmation, the
Issuing Bank authorizes such bank to pay, accept Draft(s) or negotiate as
the case may be, against documents which appear on their face to be in
compliance with the terms and conditions of the Credit and undertakes to
reimburse such bank in accordance with the provisions of these Articles.
LIABILITIES AND RESPONSIBILITIES
ARTICLE 13: Standard for Examination of Documents
A. Banks must examine all documents stipulated in the Credit with
reasonable care, to ascertain whether or not they appear, on their face, to
be in compliance with the terms and conditions of the Credit. Compliance
of the stipulated documents on their face with the terms and conditions of
the Credit, shall be determined by international standard banking practice
as reflected in these Articles. Documents which appear on their face to be
inconsistent with one another will be considered as not appearing on their
face to be in compliance with the terms and conditions of the Credit.
Documents not stipulated in the Credit will not be examined by banks. If
they receive such documents, they shall return them to the presenter or
pass them on without responsibility.
B. The Issuing Bank, the Confirming Bank, if any, or a Nominated Bank
acting on their behalf, shall each have a reasonable time, not to exceed
seven banking days following the day of receipt of the documents, to
examine the documents and determine whether to take up or refuse the
documents and to inform the party from which it received the documents
accordingly.
C. If a Credit contains conditions without stating the document(s) to be
presented in compliance therewith, banks will deem such conditions as not
stated and will disregard them.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
ARTICLE 14: Discrepant Documents and Notice
A. When the Issuing Bank authorizes another bank to pay, incur a deferred
payment undertaking, accept Draft(s), or negotiate against documents
which appear on their face to be in compliance with the terms and
conditions of the Credit, the Issuing Bank and the Confirming Bank, if any,
are bound:
i. to reimburse the Nominated Bank which has paid, incurred a deferred
payment undertaking, accepted Draft(s), or negotiated,
ii. to take up the documents.
B. Upon receipt of the documents the Issuing Bank and /or Confirming
Bank, if any, or a Nominated Bank acting on their behalf, must determine
on the basis of the documents alone whether or not they appear on their
face to be in compliance with the terms and conditions of the Credit. If the
documents appear on their face not to be in compliance with the terms and
conditions of the Credit, such banks may refuse to take up the documents.
C. If the Issuing Bank determines that the documents appear on their face
not to be in compliance with the terms and conditions of the Credit, it may
in its sole judgment approach the Applicant for a waiver of the
discrepancy(ies). This does not, however, extend the period mentioned in
sub Article 13 (b).
D. i. If the Issuing Bank and/or Confirming Bank, if any, or a Nominated
Bank acting on their behalf, decides to refuse the documents, it must give
notice to that effect by telecommunication or, if that is not possible, by
other expeditious means, without delay but no later than the close of the
seventh banking day following the day of receipt of the documents. Such
notice shall be given to the bank from which it received the documents, or
to the Beneficiary, if it received the documents directly from him.
ii. Such notice must state all discrepancies in respect of which the bank
refuses the documents and must also state whether it is holding the
documents at the disposal of, or is returning them to, the presenter.
iii. The Issuing Bank and/or Confirming Bank, if any, shall then be entitled
to claim from the remitting bank refund, with interest, of any
reimbursement which has been made to that bank.
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E. If the Issuing Bank and/or Confirming Bank, if any, fails to act in
accordance with the provisions of this Article and/or fails to hold the
documents at the disposal of, or return them to the presenter, the Issuing
Bank and/ or Confirming Bank, if any, shall be precluded from claiming that
the documents are not in compliance with the terms and conditions of the
Credit.
strikes or lockouts. Unless specifically authorized, banks will not, upon
resumption of their business, pay, incur a deferred payment undertaking,
accept Draft(s) or negotiate under Credits which expired during such
interruption of their business.
F. If the remitting bank draws the attention of the Issuing Bank and/or
Confirming Bank, if any, to any discrepancy(ies) in the document(s) or
advises such banks that it has paid, incurred a deferred payment
undertaking, accepted Draft(s) or negotiated under reserve or against an
indemnity in respect of such discrepancy(ies), the Issuing Bank and/or
Confirming Bank, if any, shall not be thereby relieved from any of their
obligations under any provision of this Article. Such reserve or indemnity
concerns only the relations between the remitting bank and the party
towards whom the reserve was made, or from whom, or on whose behalf,
the indemnity was obtained.
A. Banks utilizing the services of another bank or other banks for the
purpose of giving effect to the instructions of the Applicant do so for the
account and at the risk of such Applicant.
ARTICLE 15: Disclaimer on Effectiveness of Documents
Banks assume no liability or responsibility for the form, sufficiency,
accuracy, genuineness, falsification or legal effect of any document(s), or
for the general and/or particular conditions stipulated in the document(s)
or superimposed thereon; nor do they assume any liability or responsibility
for the description, quantity, weight, quality, condition, packing, delivery,
value or existence of the goods represented by any document(s), or for the
good faith or acts and/or omissions, solvency, performance or standing of
the consignors, the carriers, the forwarders, the consignees or the insurers
of the goods, or any other person whomsoever.
ARTICLE 16: Disclaimer on the Transmission of Messages
Banks assume no liability or responsibility for the consequences arising out
of delay and/or loss in transit of any message(s), letter(s) or document(s),
or for delay, mutilation or other error(s) arising in the transmission of any
telecommunication. Banks assume no liability or responsibility for errors in
translation and/or interpretation of technical terms, and reserve the right
to transmit Credit terms without translating them.
ARTICLE 17: Force Majeure
Banks assume no liability or responsibility for the consequences arising out
of the interruption of their business by Acts of God, riots, civil commotions,
insurrections, wars or any other causes beyond their control, or by any
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
ARTICLE 18: Disclaimer for Acts of an Instructed Party
B. Banks assume no liability or responsibility should the instructions they
transmit not be carried out, even if they have themselves taken the
initiative in the choice of such other bank(s).
C. i. A party instructing another party to perform services is liable for any
charges, including commissions, fees, costs or expenses incurred by the
instructed party in connection with its instructions.
iu. Where a credit stipulates that such charges are for the account of a
party other than the instructing party, and charges cannot be collected, the
instructing party remains ultimately liable for the payment thereof.
D. The Applicant shall be bound by and liable to indemnify the banks
against all obligations and responsibilities imposed by foreign laws and
usages.
UNIFORM COMMERCIAL CODE
ARTICLE 5 LETTERS OF CREDIT
§ 5-102. Definitions.
(a) In this article:
(1) "Adviser" means a person who, at the request of the issuer, a
confirmer, or another adviser, notifies or requests another adviser to notify
the beneficiary that a letter of credit has been issued, confirmed, or
amended.
(2) "Applicant" means a person at whose request or for whose account a
letter of credit is issued. The term includes a person who requests an
issuer to issue a letter of credit on behalf of another if the person making
the request undertakes an obligation to reimburse the issuer.
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(3) "Beneficiary" means a person who under the terms of a letter of credit
is entitled to have its complying presentation honored. The term includes a
person to whom drawing rights have been transferred under a transferable
letter of credit.
(11) "Nominated person" means a person whom the issuer (i) designates
or authorizes to pay, accept, negotiate, or otherwise give value under a
letter of credit and (ii) undertakes by agreement or custom and practice to
reimburse.
(4)
"Confirmer" means a nominated person who undertakes, at the
request or with the consent of the issuer, to honor a presentation under a
letter of credit issued by another.
(12)
"Presentation" means delivery of a document to an issuer or
nominated person for honor or giving of value under a letter of credit.
(5) "Dishonor" of a letter of credit means failure timely to honor or to take
an interim action, such as acceptance of a draft, that may be required by
the letter of credit.
(6)
"Document" means a draft or other demand, document of title,
investment security, certificate, invoice, or other record, statement, or
representation of fact, law, right, or opinion (i) which is presented in a
written or other medium permitted by the letter of credit or, unless
prohibited by the letter of credit, by the standard practice referred to in
Section 5-108(e) and (ii) which is capable of being examined for
compliance with the terms and conditions of the letter of credit.
A
document may not be oral.
(7) "Good faith" means honesty in fact in the conduct or transaction
concerned.
(8) "Honor" of a letter of credit means performance of the issuer's
undertaking in the letter of credit to pay or deliver an item of value.
Unless the letter of credit otherwise provides, "honor" occurs (i) upon
payment,(ii) if the letter of credit provides for acceptance, upon acceptance
of a draft and, at maturity, its payment, or(iii) if the letter of credit
provides for incurring a deferred obligation, upon incurring the obligation
and, at maturity, its performance.
(9) "Issuer" means a bank or other person that issues a letter of credit,
but does not include an individual who makes an engagement for personal,
family, or household purposes.
(10) "Letter of credit" means a definite undertaking that satisfies the
requirements of Section 5-104 by an issuer to a beneficiary at the request
or for the account of an applicant or, in the case of a financial institution, to
itself or for its own account, to honor a documentary presentation by
payment or delivery of an item of value.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
(13) "Presenter" means a person making a presentation as or on behalf of
a beneficiary or nominated person.
(14) "Record" means information that is inscribed on a tangible medium,
or that is stored in an electronic or other medium and is retrievable in
perceivable form.
(15)
"Successor of a beneficiary" means a person who succeeds to
substantially all of the rights of a beneficiary by operation of law, including
a corporation with or into which the beneficiary has been merged or
consolidated, an administrator, executor, personal representative, trustee
in bankruptcy, debtor in possession, liquidator, and receiver.
(b) Definitions in other Articles applying to this article and the sections in
which they appear are:
"Accept" or "Acceptance"
"Value"
Section 3-409
Sections 3-303, 4-211
(c) Article 1 contains certain additional general definitions and principles of
construction and interpretation applicable throughout this article.
§ 5-108. Issuer's Rights and Obligations
(a) Except as otherwise provided in Section 5-109, an issuer shall honor a
presentation that, as determined by the standard practice referred to in
subsection (e), appears on its face strictly to comply with the terms and
conditions of the letter of credit. Except as otherwise provided in Section
5-113 and unless otherwise agreed with the applicant, an issuer shall
dishonor a presentation that does not appear so to comply.
(b) An issuer has a reasonable time after presentation, but not beyond the
end of the seventh business day of the issuer after the day of its receipt of
documents:
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(1) to honor,
(2) if the letter of credit provides for honor to be completed more than
seven business days after presentation, to accept a draft or incur a
deferred obligation, or
(3) to give notice to the presenter of discrepancies in the presentation.
(c) Except as otherwise provided in subsection (d), an issuer is precluded
from asserting as a basis for dishonor any discrepancy if timely notice is
not given, or any discrepancy not stated in the notice if timely notice is
given.
(d) Failure to give the notice specified in subsection (b) or to mention
fraud, forgery, or expiration in the notice does not preclude the issuer from
asserting as a basis for dishonor fraud or forgery as described in Section 5109(a) or expiration of the letter of credit before presentation.
(1) is entitled to be reimbursed by the applicant in immediately available
funds not later than the date of its payment of funds;
(2) takes the documents free of claims of the beneficiary or presenter;
(3) is precluded from asserting a right of recourse on a draft under
Sections 3-414 and 3-415;
(4) except as otherwise provided in Sections 5-110 and 5-117, is precluded
from restitution of money paid or other value given by mistake to the
extent the mistake concerns discrepancies in the documents or tender
which are apparent on the face of the presentation; and
(5) is discharged to the extent of its performance under the letter of credit
unless the issuer honored a presentation in which a required signature of a
beneficiary was forged.
(e) An issuer shall observe standard practice of financial institutions that
regularly issue letters of credit. Determination of the issuer's observance
of the standard practice is a matter of interpretation for the court. The
court shall offer the parties a reasonable opportunity to present evidence of
the standard practice.
CASE DIGESTS: LETTERS OF CREDIT
(f) An issuer is not responsible for:
FACTS:
Dameron ordered t-shirts from National Marketing, which was based in
Amman, Jordan.
To facilitate the transaction, Dameron sought the
issuance of 2 letters of Credit from First American Bank of Virginia.
Dameron executed an application and agreement for international
commercial letter of credit, as well as signed two commercial notes, to
secure the letters of credit. Consequently, Dameron executed continuing
guaranties to further secure any debts it owed to First American. First
American issued then its irrevocable letters of credit. These letters stated
that they were in favor of National Marketing and for the account of
Dameron. These letters authorized drafts to be drawn on First American
within 30 days of submission to First American of specific, listed
documents. At the request of National Marketing and Petra bank, the
letters were amended to provide that the drafts under the letters could be
drawn directly on Petra International in Washington DC, Petra’s American
affiliate. In this transaction, PIBC became the confirming bank, First
American is the issuing bank, Dameron is the account customer, and
National was the beneficiary.
(1) the performance or nonperformance of the underlying contract,
arrangement, or transaction,
(2) an act or omission of others, or
(3) observance or knowledge of the usage of a particular trade other than
the standard practice referred to in subsection (e).
(g) If an undertaking constituting a letter of credit under Section 5102(a)(10) contains nondocumentary conditions, an issuer shall disregard
the nondocumentary conditions and treat them as if they were not stated.
(h)
An issuer that has dishonored a presentation shall return the
documents or hold them at the disposal of, and send advice to that effect
to, the presenter.
(i) An issuer that has honored a presentation as permitted or required by
this article:
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
152
PETRA INTERNATIONAL BANKING
AMERICAN BANK OF VIRGINIA
758 F. SUPP. 1120
CORP.
V.
FIRST
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 130 of 190
One of the required documents to be submitted is the certification of the
quality of the shirts by an independent inspection company and statement
by the beneficiary.
The shirts were received by Dameron and PIBC made the corresponding
payments to National Marketing.
Another shipment was made and
National demanded payment. Dameron was informed that there was
discrepancies on the documents submitted, specifically the one pertaining
to the inspection of the quality of the shirts. This was waived by Dameron
and payment would be subsequently made.
Dameron was subsequently dissatisfied with the quality of the shirts
shipped. It then undertook negotiations with National about the payment.
Dameron then undertook to get extensions of time for payment. It then
informed First American that it didn’t want to pay National for the defective
shirts. Negotiations were made but were unfruitful. Dameron was able to
obtain from court an order of attachment, precluding First American from
making payments to PIBC. It then filed a suit against National, which
ended in a compromise agreement between the two—Dameron was able to
keep the shirts and was paid an amount by National. The order of
attachment was subsequently lifted. PIBC demanded then payment from
First American but the latter refused, alleging that PIBC overlooked the
lack of statement of the beneficiary as part of the documents. Dameron in
turn refused to pay First American.
HELD:
On First American’s obligation to pay PIBC…
PIBC requests summary judgment on Count I of its Complaint, which
alleges that First American wrongfully refused to honor the Letters and pay
the $95,904 plus interest to PIBC. First American contends that PIBC's
failure to note the missing Statement of the Beneficiary relieves it of any
obligation to honor the drafts drawn under the Letters. The threshold issue
is the choice of governing law. The Letters state on their face that they are
to be governed by the Uniform Customs and Practices for Documentary
Credits (1983 Revision), International Chamber of Commerce Publication
No. 400 (“the UCP”). Given this, the Court finds that the UCP should be
applied in this case.
The pertinent UCP provision is Article 16, which states that if an issuing
bank desires to “refuse documents,” it must do so “without delay” by
stating the discrepancies it has found and “holding the documents at the
disposal of, or ... returning them to, the presentor (remitting bank or the
beneficiary, as the case may be).” If the issuing bank fails to perform these
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
requirements, it “shall be precluded from claiming that the documents are
not in accordance with the terms and conditions of the credit.” In the
instant case, First American received the documents on or about October
25, 1988. Not only did it fail to note any discrepancies or to hold the
documents at PIBC's disposal, it transferred the documents to its account
customer and formally notified PIBC on November 16, 1988 that “the
transaction was accepted and, at maturity, we will remit proceeds....” First
American did not mention any discrepancies to PIBC until more than one
year after receipt of the documents. In the interim, it made several
promises to pay in exchange for extensions of time. First American is
therefore precluded by Article 16 from asserting noncompliance.
The full text of Article 16 of the UCP is as follows:
(a) If a bank so authorized effects payment, or incurs a deferred payment
undertaking, or accepts or negotiates against documents which appear on
their face to be in accordance with the terms and conditions of a credit, the
party giving such authority shall be bound to reimburse the bank which has
effected payment, or incurred a deferred payment undertaking, or has
accepted or negotiated, and to take up the documents.
(b) If, upon receipt of the documents, the issuing bank considers that they
appear on their face not to be in accordance with the terms and conditions
of the credit, it must determine, on the basis of the documents alone,
whether to take up such documents, or to refuse them and claim that they
appear on their face not to be in accordance with the terms and conditions
of the credit.
(c) The issuing bank shall have a reasonable time in which to examine the
documents and to determine as above whether to take up the documents
or to refuse the documents.
(d) If the issuing bank decides to refuse the documents, it must give notice
to that effect without delay by telecommunication or, if that is not possible,
by other expeditious means, to the bank from which it received the
documents (the remitting bank), or to the beneficiary, if it received the
documents directly from him. Such notice must state the discrepancies in
respect of which the issuing bank refuses the documents and must also
state whether it is holding the documents at the disposal of, or is returning
them to, the presentor (remitting bank or the beneficiary, as the case may
be). The issuing bank shall then be entitled to claim from the remitting
bank any refund of any reimbursement which may have been made to that
bank.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 131 of 190
(e) If the issuing bank fails to act in accordance with the provisions of
paragraphs (c) and (d) of this article and/or fails to hold the documents at
the disposal of, or to return them to, the presentor, the issuing bank shall
be precluded from claiming that the documents are not in accordance with
the terms and conditions of the credit.
The abovementioned Article 16 of the UCP reflects commercial practices
and the rules developed in the preceding common law of letters of credit.
Article 16, when interpreted according to the plain meaning of its terms,
adequately provides for the insertion of one or more confirming banks
between the issuing bank and the beneficiary. As each bank, including the
issuer, receives a documentary draft, it must reject it “expeditiously” if it
finds inconsistencies. It must then hold the documents at the disposal of
the prior holder in the chain, or be bound to pay the draft and keep the
documents. If the documentary draft is dishonored by one party, the
preceding party, who has already bound itself to pay the draft by not itself
rejecting the draft in timely fashion, is still bound to honor the draft. The
preceding party nevertheless receives the documents, and hence has a
claim on the goods underlying the transaction, which it can use to
compensate itself for having paid for the goods.
On the obligation of Dameron to First American…
Having found that PIBC has a legal right to payment from First American,
but not from Dameron, the Court turns next to First American's claim that
Dameron must reimburse it for any amount it must pay PIBC under the
Letters. First American relies on the Agreements executed by Dameron to
obtain the Letters. In the Agreements, Dameron pledged to indemnify First
American for the latter's acts with respect to the Letters as long as such
acts were taken in good faith. And, First American correctly notes that
Dameron has not shown any bad faith on the part of First American with
respect to accepting the documents. Dameron argues, however, that the
good faith standard in the Agreements violates Virginia law and hence is
void. Therefore, Dameron continues, First American's failure to note the
missing Statement of the Beneficiary, though not a breach of good faith,
nevertheless relieves Dameron of any obligation to reimburse First
American.
A review of the few existing, apposite cases indicates that under the
common law of letters of credit an account customer, by accepting
documents from the issuing bank and subsequently “surrendering the
documents [to shippers or customs officials] and accepting a substantial
portion of the goods ... waive [s] its right to seek strict enforcement of the
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
letter of credit.” Fundamental to letter of credit transactions is the principle
that both the letter of credit and also the separate agreement between
account customer and issuing bank are transactions in documents entirely
independent from the underlying sale of goods. This principle compels the
conclusion that an account customer who has failed to reject documents in
timely fashion and, instead, has used them to obtain the goods is deemed
to have waived any claim of documentary inconsistencies. Even if the
Court were to accept the notion that an account customer should be able to
accept documents and goods and then sue for direct damages resulting
from a bank's acceptance of nonconforming documents, it would not permit
Dameron to reduce the payment owed to First American by any damages
stemming from National Marketing's delivery of faulty goods. Such
damages stem from the seller's breach, not First American's. Moreover,
even if the court were to hold that an account customer could receive
damages from the issuing bank stemming from the receipt of faulty goods,
Dameron has already been compensated for such receipt through its
settlement with National Marketing. There is no reason in this case for
Dameron not to reimburse First American for the full amount First
American paid for the goods.
153
UNION EXPORT COMPANY V. NIB INTERMARKET
756 S.W.2D 628
FACTS:
The facts in this case are undisputed. Sometime prior to August 26, 1986,
Union, a Nashville based company, agreed to purchase 1500 metric tons of
calcium chloride, a chemical used in snow removal, from N.I.B., a Swedish
exporter. In order to guarantee payment, Union had First American issue
N.I.B. an irrevocable letter of credit in the amount of $345,000. The letter
of credit required the presentment of a draft payable 150 days after sight
along with certain other documents.
On December 1, 1986, First American received from Skanska Banken
(Skanska) a $345,000 time draft, drawn and endorsed in blank by N.I.B.,
together with other documents, all of which complied with the letter of
credit. First American accepted the draft on December 1, 1986 by affixing
its signature thereto, and on the next day, December 2, sent notice of its
acceptance by Telex to Skanska. The acceptance had a maturity date of
April 30, 1987.
Upon receiving notice of the acceptance, Skanska made two loans to N.I.B.
totaling $345,000, taking as security N.I.B.'s claim under the letter of
credit.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 132 of 190
In February, 1987, Union notified First American that the shipment of
chemicals it purchased from N.I.B. was defective. Because First American
indicated it would pay its acceptance when it matured, Union commenced
this action.
HELD:
A commercial letter of credit transaction involves three separate
contractual relationships: (1) the underlying contract between the buyer
(in this case, Union) and the seller (N.I.B.); (2) the agreement between
the issuer (First American) and its customer (Union) in which the issuer
agrees to issue the letter of credit in return for the customer's promise to
reimburse it and pay a commission; and (3) the letter of credit itself which
is an engagement by the issuer that it will honor drafts presented by the
beneficiary or a transferee beneficiary upon compliance with the terms and
conditions specified in the letter of credit.
The fundamental principle governing these transactions is the doctrine of
independent contracts, which provides that the issuing bank's obligation to
honor drafts drawn on a letter of credit by the beneficiary is separate and
independent from any obligation of its customer to the beneficiary under
the sale of goods contract and separate as well from any obligation of the
issuer to its customer under their agreement.
In the case at bar, both the trial court and the Court of Appeals found that
the injunction against payment under the letter of credit was proper under
the limited exception to the doctrine of independence found at Tenn.Code
Ann. § 47-5-114(2).
Under the general rule the issuer must honor the draft when the
documents presented comply with the terms of the letter of credit,
however, when a required document does not conform to the necessary
warranties, is forged, is fraudulent, or there is fraud in the transaction, an
issuer acting in good faith is not required to, but may honor a draft drawn
under a letter of credit if the documents presented appear on their face to
comply with the terms of the letter of credit. In addition, a court may
enjoin an issuer from honoring such a draft if the issuer fails to do so on its
own. Notwithstanding this exception, if the person presenting a draft drawn
on a letter of credit is a holder in due course (Tenn.Code Ann. § 47-3-302),
the issuer must pay the draft, whether or not it has notice of forgery or
fraud.
In this case, the element of fraud is undisputed.
whether or not Skanska is a holder in due course.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Now, on the issue of
The issuing bank accepted two drafts drawn under a letter of credit. The
drafts were payable after sight in 60 days. After acceptance, but before
payment, the customer discovered fraud in the transaction, and the trial
court enjoined the issuer from payment. The intermediate appellate court
reversed and vacated the injunction, and the Court of Appeals affirmed,
both acting under § 4-303.
In addition to holding that § 4-303 prevailed by its own terms, the Court
noted the following policy reason supporting the result:
Important policy considerations suggest the result also. Letters of credit
provide a quick, economic and predictable means of financing transactions
for parties not willing to deal on open accounts by permitting the seller to
rely not only on the credit of the buyer but also on that of the issuing bank.
By its terms, the credit often reflects a conscious negotiation of risk
allocation between customer and beneficiary and its utility rests heavily on
strict adherence to the agreed terms and the doctrine of independent
contract ( see, J. White & R. Summers, Handbook on Uniform Commercial
Code § 18-1, at 704-08 [2d ed.] ). It is this predictability of credit
arrangements which permits not only the financing of sale of goods
transactions between widely separated parties in different jurisdictions but
also has permitted the development of a market in trade or bankers'
acceptances of time drafts. Once a draft payable in the future is accepted
by a bank, it becomes known as a bankers' *632 acceptance, and such
acceptances can be, and regularly are, sold in conjunction with letter of
credit transactions to obtain financing prior to the date of maturity in a
market sanctioned by the Federal Reserve Board ( see, 12 U.S.C. § 372;
PLI, Letters of Credit and Bankers' Acceptances 231-34, 236). If the courts
intervene to enjoin issuing banks from paying drafts they have previously
accepted they seriously undermine this market and limit the use of
acceptances as a financing tool.
The same policy considerations apply in Tennessee. We therefore hold that,
under Tenn.Code Ann. § 47-4-303(1), Union's injunction against payment
of the time draft drawn pursuant to the letter of credit was untimely
because it was issued after First American had already accepted the draft.
We therefore reverse the decision of the Court of Appeals, and we order
the injunction vacated.
154
FACTS:
ANDINA COFFEE V. NATIONAL WESTMINSTER BANK
160 A.D.2D 104
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 133 of 190
Plaintiff Andina Coffee, Inc., a New York corporation, was engaged in the
importation of coffee from defendant Gonchecol, Ltda., at one time a major
Columbian exporter of coffee. To pay for its purchases, Andina delivered to
Gonchecol letters of credit which it obtained from a number of commercial
banks in New York, including defendants National Westminster Bank USA
(NatWest) and Cooperatieve Centrale Raiffeisenboerenleenbank B.A.
(Rabobank). As the beneficiary of *106 the letters of credit, Gonchecol
apparently used all or some of the funds to borrow money from defendant
Banco Credito y Commercio de Columbia (BCCC) and other Colombian
banks in order to finance its business operations. In June 1986, BCCC
advanced $2,100,000 to Gonchecol in exchange for which it was to be
reimbursed through a $2,100,000 check drawn on a Panamanian bank.
However, Gonchecol's check bounced, and BCCC was left with an unpaid
$2,100,000 loan. According to NatWest and Rabobank, this event could
only have served to confirm what BCCC had already learned from its own
sources; that is, that Gonchecol had already lost millions of dollars and was
experiencing severe financial difficulties. As was the situation with most of
the moneys made available by BCCC to Gonchecol, the source of
repayment would have to be proceeds from the letters of credit provided to
Gonchecol from the issuing banks.
Beginning in May of 1986, coffee financed under the various letters of
credit, which were to be paid on the presentation of interior truck bills of
lading, failed to materialize. Consequently, representatives of the New York
banks were dispatched to Colombia in August of 1986 when it was
discovered that Gonchecol had caused fraudulent truck bills of lading to be
furnished for large quantities of coffee which were, in fact, never shipped,
thereby resulting in substantial financial losses to New York banks. The
four letters of credit involved here are the last outstanding instruments
which were not drawn against prior to the disclosure of the exporter's
dishonest practices. In that regard, NatWest and Rabobank had each
supplied two of the letters of credit, one for $2,104,000 and the other
three in the amount of $1,000,000, pursuant to which they agreed to make
payment upon the presentation within a specified period of time of drafts
and certain documents, among which were to be the "original railroad
and/or truck bill of lading". The bill of lading was supposed to show that
the coffee was actually in existence, that it had left the control of the
growers and that it was in the hands of the shipper and en route from the
interior of Colombia to a seaport.
On July 9, 1986, 15 days after BCCC had already advanced $2,100,000 to
Gonchecol against the latter's bad check, it received from NatWest a letter
of credit in the amount of $2,104,000. The following day, almost six weeks
before the earliest possible date for presentment under that instrument,
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
BCCC accepted from Gonchecol its draft and accompanying *107
documents. These documents included truck bills of lading which were
dated August 22, 1986, almost six weeks after the date submitted to
BCCC, and purported to show that 8,000 bags of coffee had been delivered
to a trucking company for transport to a Colombian port. BCCC sent the
draft and documents to NatWest with a cover letter dated July 15, 1986.
By telex dated July 22, 1986, NatWest advised BCCC that it would not pay
under the letter of credit because of four enumerated discrepancies in the
documents, including the fact that the draft and documents were presented
prior to the earliest date mentioned in the letter of credit and that the truck
bills of lading were postdated.
BCCC thereupon requested that the bills of lading and other documents be
returned to it by mail. It then reviewed the documents received under the
other three letters of credit and perceived that the bills of lading in those
instances were similarly postdated. Consequently, it sent all of the bills of
lading back to Gonchecol so that the exporter could revise the dates to
comply with the letters of credit. Indeed, some of the changes were made
twice in an attempt to bring the documents into conformity with both the
form and date mandates of the letters of credit. Thus, it appears that the
documents were designed more to effect payment under the letters of
credit than to reflect accurately the business transactions that they were
intended to evince. In any event, by the time that the documents had been
altered and realtered, the full extent of Gonchecol's fraud had been
detected, and payment was rejected by NatWest and Rabobank on the
ground that, in part, the bills of lading were postdated and fraudulent.
HELD:
The mere fact that the documents presented in connection with the letters
of credit may have been complete forgeries and that no coffee was
delivered to the trucker for export is insufficient to avoid payment under
the letter of credit (see, First Commercial Bank v Gotham Originals, 64
NY2d 287; Barclay Knitwear Co. v king'swear Enters., supra). What is
critical is whether the bills of lading complied with the requirements of the
letters of credit or whether BCCC possessed actual knowledge of the fraud
(see, Chemical Bank v Haskell, 51 NY2d 85) or otherwise acted in bad
faith. Thus, according to the Court of Appeals in First Commercial Bank v
Gotham Originals (supra, at 295): "Under the general rule the issuer must
honor the draft when the documents presented comply with the terms of
the letter of credit (Uniform Commercial Code § 5-114 [1]). But when a
required document does not conform to the necessary warranties or is
forged or fraudulent or there is fraud in the transaction, an issuer acting in
good faith may, but is not required to, refuse to honor a draft under a
letter of credit when the documents *110 presented appear on their face to
NEGOTIABLE INSTRUMENTS NOTES
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Page 134 of 190
comply with the terms of the letter of credit. Further than that, a customer
may also enjoin an issuer from honoring such a draft if the issuer fails to
do so on its own .... Notwithstanding this exception, if the person
presenting a draft drawn on a letter of credit is a holder in due course ...
the issuer must pay the draft, whether it has notice of forgery or fraud or
not".
in due course has the burden of establishing that he or some person under
whom he claims is in all respects a holder in due course" (Uniform
Commercial Code § 3-307 [3]). Since NatWest and Rabobank have
demonstrated a viable defense with respect to the letters of credit, BCCC
must now prove that it is a holder in due course, and, consequently,
summary judgment in its favor is not warranted.
It is settled that New York law mandates strict compliance with the terms
of a letter of credit (United Commodities-Greece v Fidelity Intl. Bank, 64
NY2d 449, 455; Eximetals Corp. v Pinheiro Guimaraes, 73 AD2d 526, affd
51 NY2d 865). The postdating of bills of lading is not only a departure from
the requirements of the letters of credit but also constitutes a form of
fraudulent practice. Contrary to the Supreme Court's characterization that
the objections to the accompanying documents raised by NatWest and
Rabobank were frivolous and highly technical, the discrepancies were, in
reality, material. At the very least, they would have had the effect of
concealing the actual shipment dates (even assuming that they had
represented genuine, and not fictitious, transactions) and, in fact, did not,
as required by the letters of credit, "evidence shipment" of the coffee.
Further, while there is authority that by its previous acceptance of
nonconforming documents, as admittedly occurred herein, the issuing bank
does not waive the right to reject future defects (Courtaulds N. Am. v
North Carolina Natl. Bank, 528 F2d 802; Texpor Traders v Trust Co. Bank,
720 F Supp 1100; Far E. Textile v City Natl. Bank & Trust Co., 430 F Supp
193), and the preclusion rule contained in the UCP (Uniform Customs and
Practice for Documentary Credits) is by no means absolute, at most the
failure to assert an objection on a previous occasion presents a question of
fact as to whether there was a waiver (see, Eximetals Corp. v Pinheiro
Guimaraes, supra).
A South American bank which accepted drafts drawn upon letters of credit
is not a holder in due course of the letters as a matter of law and, thus,
may not compel the issuing banks to make payment under the letters
where the accompanying documents, whose presentation was necessary to
trigger payment, consisted of postdated bills of lading, since New York law
mandates strict compliance with the terms of a letter of credit and the
*105 postdating of bills of lading is not only a departure from the
requirements of the letters of credit, but also constitutes a form of fraud.
The discrepancies in the bills of lading were material, having the effect of
concealing actual shipment dates, and did not, as required by the letters,
evidence shipment of the goods for which payment was intended under the
letters. Failure of the issuing banks to assert an objection on a previous
occasion merely presents a question of fact as to whether there was a
waiver of the right to reject future defects. Moreover, in light of the fact
that the South American bank played an active role in revising the bills of
lading, particularly after it had proof of the financial instability of the
beneficiary of the letters in the form of a bad check issued by the
beneficiary, raises questions of fact as to whether it was acting in good
faith and without actual knowledge of the beneficiary--exporter's fraud, the
intended goods having never been shipped.
Unless the postdating was expressly allowed under the letters of credit,
and there is no indication that this is the situation, or the parties' prior
course of conduct conclusively demonstrates otherwise, the documents
provided under the letters of credit did not comply with the terms thereof,
and BCCC may not compel payment. Equally significant is the BCCC's
apparently active role in obtaining the revisions of the documents,
particularly after it was confirmed with definite proof of Gonchecol's
financial instability in the form of a bad check, raises questions of fact as to
whether it was acting in good faith and without actual knowledge of the
exporter's *111 fraud. The record of the present matter clearly presents
sufficient unresolved matters precluding summary judgment as to whether
BCCC participated in a scheme whereby the bills of lading were altered
simply to render them in conformity with the letters of credit. Once it has
been "shown that a defense exists a person claiming the rights of a holder
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
155
BANK OF AMERICA V. CA
228 SCRA 357
FACTS:
Petitioner Bank of America received by mail an Irrevocable Letter of Credit
purportedly issued by Bank of Ayudhya for the account of General
Chemicals of Thailand in the amount of $2.7M to cover the sale of plastic
ropes and "agricultural files," with the petitioner as advising bank and
private respondent Inter-Resin Industrial Corporation as beneficiary. Bank
of America then wrote Inter-Resin informing the latter of the foregoing and
transmitting, along with the bank's communication, the letter of credit.
Upon receipt of the letter-advice with the letter of credit, Inter-Resin sent
Atty. Tanay to Bank of America to have the letter of credit confirmed. The
bank did not; the bank employee in charge of letters of credit explained to
Atty. Tanay that there was no need for confirmation because the letter of
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 135 of 190
credit would not have been transmitted if it were not genuine. Inter-Resin
sought to partially avail under the letter of credit by submitting to Bank of
America invoices, the corresponding packing list, export declaration and bill
of lading. After being satisfied that Inter-Resin's documents conformed
with the conditions expressed in the letter of credit, Bank of America issued
in favor of Inter-Resin a Cashier's Check for P10M, the Peso equivalent of
the draft drawn by Inter-Resin. This check was picked up by Inter-Resin's
Executive Vice-President Barcelina Tio. Thereafter, the Bank of America
wrote Bank of Ayudhya advising the latter of the availment under the letter
of credit and sought the corresponding reimbursement therefor.
Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the
documents for the second availment under the same letter of credit
consisting of a packing list, bill of lading, invoices, export declaration and
bills in set, evidencing the second shipment of goods. Upon receipt of a
telex from Bank of Ayudhya declaring the letter of credit fraudulent, Bank
of America stopped the processing of Inter-Resin's documents and sent a
telex to its branch office in Bangkok, Thailand, requesting assistance in
determining the authenticity of the letter of credit. Bank of America kept
Inter-resin informed of the developments. Sensing a fraud, Bank of
America sought the assistance of the NBI. The latter discovered that the
vans exported by Inter-Resin did not contain ropes but plastic strips,
wrappers, rags and waste materials. NBI also investigated Inter-Resin's
President and Executive Vice President Barcelina who, thereafter, were
criminally charged for estafa through falsification of commercial
documents. Bank of America sued Inter-Resin for the recovery of P10M,
the peso equivalent of the draft on the partial availment of the now
disowned letter of credit. Inter-Resin claimed that not only was it entitled
to retain P10M on its first shipment but also to the balance covering the
second shipment.
HELD:
Bank of America cannot be held liable.
Bank of America has only been an advising bank, not confirming, as
reflected by the provisions of the letter of credit itself, the petitioner bank's
letter of advice, its request for payment of advising fee, and the admission
of Inter-Resin that it has paid the same. It was the one that asked InterResin to submit documents required by the letter of credit and eventually
has paid the proceeds thereof, did not obviously make it a confirming bank.
The fact, too, that the draft required by the letter of credit is to be drawn
under the account of General Chemicals (buyer) only means that the same
had to be presented to Bank of Ayudhya (issuing bank) for payment.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
The letter of credit is an engagement of the issuing bank, not the advising
bank, to pay the draft. As an advising or notifying bank, Bank of America
did not incur any obligation more than just notifying Inter-Resin of the
letter of credit issued in its favor, let alone to confirm the letter of credit
The bare statement of the bank employee in responding to the inquiry
made by Atty. Tanay, Inter-Resin's representative, on the authenticity of
the letter of credit certainly did not have the effect of novating the letter of
credit and Bank of America's letter of advise, nor can it justify the
conclusion that the bank must now assume total liability on the letter of
credit. Bringing the letter of credit to the attention of the seller is the
primordial obligation of an advising bank. The view that Bank of America
should have first checked the authenticity of the letter of credit with Bank
of Ayudhya, by using advanced mode of business communications, before
dispatching the same to Inter-Resin is not supported in U.C.P w/c states
that: "Banks assume no liability or responsibility for the consequences
arising out of the delay and/or loss in transit of any messages, letters or
documents, or for delay, mutilation or other errors arising in the
transmission of any telecommunication . . ."
As advising bank, Bank of America is bound only to check the apparent
authenticity of the letter of credit, which it did.
As to the issue on whether or not Bank of America can recover on the
letter of credit, the answer is yes.
The transaction in issue is a discounting arrangement. Bank of America,
has acted independently as a negotiating bank, thus saving Inter-Resin
from the hardship of presenting the documents directly to Bank of Ayudhya
to recover payment. As a negotiating bank, Bank of America has a right of
recourse against the issuer bank and until reimbursement is obtained,
Inter-Resin, as the drawer of the draft, continues to assume a contingent
liability thereon. While Bank of America failed to allege material facts in its
complaint that might have likewise warranted the application of the
Negotiable Instruments Law and possibly then allowed it to even go after
the indorsers of the draft, this failure does not preclude petitioner bank's
right (as a negotiating bank) of recovery from Inter-Resin itself. InterResin admits having received P10M from Bank of America on the letter of
credit transaction and in having executed the corresponding draft. That
payment to Inter-Resin has given Bank of America the right of
reimbursement from the issuing bank, Bank of Ayudhya which, in turn,
could then seek indemnification from the buyer (the General Chemicals of
Thailand). Since Bank of Ayudhya disowned the letter of credit, however,
Bank of America may now turn to Inter-Resin for restitution.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 136 of 190
156
FEATI BANK AND TRUST COMPANY V. CA
196 SCRA 576
FACTS:
Villaluz sold lauan logs to Christiansen. After inspecting the logs, buyer
issued a purchase order. Christiansen later on made arrangements with
Hanmi Trade. Hanmi caused Security Pacific National Bank to issue an
Irrevocable Letter of Credit available at sight in favor of Villaluz for the
logs. The LOC was mailed to FEATI with the instruction that the enclosed
letter of credit be forwarded to the beneficiary. The LOC further provided
that the draft to be drawn should be accompanied with certain documents
(i.e. Signed Commercial Invoice, Tally sheets. Ocean Bills of Lading;
Certification by Christiansen). The logs, as loaded on the shipping vessel
were inspected and found to be in good condition. But Christiansen refused
to issue a certification despite the requests of Villaluz. And because of the
absence of this certification, FEATI refused to advance the payment on the
LOC. The logs arrived in Korea and were received by Hanmi. It later sold
the logs to Taisung Lumber. Meanwhile, Villaluz instituted an action for
mandamus and specific performance against Christiansen and FEATI.
bank—that the correspondent bank gives an absolute assurance to the
beneficiary that it will undertake the issuing bank’s obligation as its own
according to the terms and conditions of the credit. A notifying bank
assumes no liability except to notify and/or transmit to the beneficiary the
existence of the LOC. A negotiating bank, buys or discounts a draft under
the LOC. Whereas a confirming bank assumes a direct obligation to the
seller and its liability is a primary one as is it in itself issued the LOC. The
instructions upon FEATI clearly indicate that it is merely a notifying bank.
Since FEATI is merely a notifying bank, it is not a privy to the contract
between buyer and seller. Unless it is shown that FEATI has confirmed the
LOC, Villaluz has no cause of action against it.
In any event, even if Villaluz tenders all the documents required under the
LOC, FEATI may refuse to negotiate or accept the draft drawn thereunder
and it will not be held liable for its only engagement is to notify and/or
transmit to the seller the LOC. If however, FEATI is a confirming bank, it
still cannot pay the amount as there was a failure on the part of Villaluz to
comply with the terms of the LOC.
While the case is pending, Christiansen left the country so Villaluz sought
to have FEATI be solidarily liable.
Though there is injustice caused to seller, the court is constrained to apply
what the law is...dura lex sed lex.
HELD:
FEATI cannot be held liable on the LOC due to the non-compliance with the
terms by the beneficiary.
157
In commercial transactions involving letters of credit, the documents
tendered must strictly conform to the terms of the LOC. The tender of
documents by the beneficiary (seller) must include all documents required
by the letter. The Uniform Customs and Practice for Documentary Credit
(UCP) further provided that the bank may only negotiate, accept or pay, if
the documents tendered to it are on their face in accordance with the
terms and conditions of the documentary credit. The absence of any
required document justifies a refusal of payment.
FEATI was just a notifying bank (in contrast to being a confirming bank).
When FEATI accepted the obligation to notify Villaluz that the irrevocable
credit has been transmitted to it, such does not amount to a confirmation
of the letter. An irrevocable credit is not synonymous to a confirmed credit.
The former refers to the duration of the letter of credit—it simply means
that the issuing bank may not without the consent of the beneficiary and
the buyer revoke his undertaking under the letter. Whereas a confirmed
credit pertains to the kind of obligation assumed by the correspondent
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
KENG HUA PAPER PRODUCTS V. CA
286 SCRA 257
FACTS:
Sea land Service is a shipping company. On a relevant date, it received in
its Hong Kong terminal a sealed container with 76 bales of unsorted waste
paper. A bill of lading was issued for this. On the next month, this
shipment was discharged in Manila. Notices of arrival were transmitted to
Keng Hua but the shipment remained in Sea land's container. After 481
days, the shipment was unloaded from the container. Keng Hua refuses to
settle its obligation because the shipment was 10 metric tons more than it
asked from Ho Kee (seller).
Keng Hua contends that first, it did not consent to the shipment as
evidenced by the "Notice of Refused or On Hand Frieght" which it received
from Sea land. Second, acceptance of the shipment would amount to
smuggling. And third the amount of the demurrage ballooned from 37K to
67K.
HELD:
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 137 of 190
Keng Hua received the bill of lading immediately after the arrival of the
shipment. It had every opportunity to show its dissent, however, it was
only after six months that it sent a letter to Sea land informing the latter
that it could not accept the shipment. Such inaction conveys the clear
inference that it accepted the terms of the bill of lading.
Moreover, the letter merely proves the petitioner's refusal to pick up the
cargo and not its rejection to the bill of lading. First, the notice of refused
or on hand freight has no value because it was not made by Keng Hua. It
was sent by Sea Land to the former. Its significance is to highlight the fact
that Keng Hua failed to object to the bill of lading.
Second, mere
apprehension of violating said laws without a clear demonstration that
taking delivery of the shipment has become impossible cannot defeat
petitioner's contractual oblifation under the bill of lading.
Third, the
discrepancy was a result of the variance in the dates when such claims
were made. Of course, the longer the cargo remained unclaimed, the
higher the demurrage.
Any discrepancy between the amount of the goods in the commercial
invoice and the amount allowed in the letter of credit will not affect the
validity of the contract of carriage. The carrier is not expected to go
beyond the representations of the shipper in the bill of lading. The contract
was under the arrangement of Shippers Load and Count. Hence, Ho Kee is
responsible for the loading and Sea land was oblivios to the contents of the
shipment. Keng Hua's remedy is against Ho Kee.
STANDBY LETTERS OF CREDIT OR GUARANTEES
HISTORY AND PURPOSE

Sometime ago, it is common in international dealings to require the
furnishing of a cash deposit as security, but with the expansion of
international trade this became prohibitively expensive for the
counterparty and in due course gave way to a more convenient
safeguard, the provision of a written undertaking by a bank in favor of
the buyer or employer payable on demand

Demand guarantees as substitute for cash are designed to provide the
beneficiary with a speedy monetary remedy against the counterparty
to the underlying contract and to that end are primary in form and
documentary in character.

The demand guarantee is expressed to be payable solely on
presentation of a written demand and any other specified documents.
Accordingly, any demand within the maximum amount stated must in
principle be paid by the guarantor, regardless whether the underlying
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
contract has in fact been broken and regardless of the loss actually
suffered by the beneficiary
A CONCISE DEFINITION: DEMAND GUARANTEES

Undertaking given for payment of a stated or maximum sum of money
on presentation to the party giving the undertaking of a demand or
payment and such other documents as may be specified in the
guarantee within the period and in conformity with the other
conditions of the guarantee

Procured by the seller in favor of the buyer for the latter to be paid in
case the seller doesn’t comply with contract provisions. The economic
burder is upon the party who breaches the contract
TYPICAL USES OF DEMAND GUARANTEES

Employed typically in construction contracts and contracts for
international sale of goods

Demand guarantees are intended to safeguard the other party against
non-performance or late or defective performance by the supplier or
contractor
GUARANTEE STRUCTURES AND TERMINOLOGY: DIRECT (3RD PARTY)
GUARANTEES

Involves a minimum of three parties
1. Account party/principal—party to the underlying contract
whose performance is required to be covered by the
guarantee and who gives instruction for its
2. Issuer/guarantor—the bank or other party issuing the
guarantee on behalf of the customer the principal
3. The beneficiary—the other party to the underlying contract, in
whose favor the guarantee is issued

Usually the guarantee in the 3-party structure is the principal’s bank
and carries on business in the same country as the principal, whilst the
beneficiary carries on business in a foreign country

Known as direct guarantees because the guarantee is issued to directly
by the principal’s bank, not by the local bank in the beneficiary’s
country
P (ENGLAND)CONSTRUCTION OF A PLANT IN SAUDI ARABIAB (S.A.)
BENEFICIARY
BANK DEMAND GUARANTEE
G BANK (GUARANTY)
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 138 of 190
1.


G bank may decide to have the guarantee advised and transmitted to
B by LB, a local bank in buyer’s location. LB’s function in this case is
limited to the checking that the signatures on the guarantee appear to
be genuine and advising and transmitting the guarantee issued by G
bank. It incurs no liability under the guarantee itself unless it is
requested and agrees to confirm it.
There are three distinct contracts
1. Underlying contract between P and B
2. The counter-indemnity or reimbursement contract between P
and G bank
3. Contract established by the guarantee issued by G
INDIRECT OR 4-PARTY GUARANTEES

Where the beneficiary requires the guarantee to be issued by a bank in
his own country and the principal doesn’t bank with such a bank, the
principal asks his bank to arrange for the issue of the guarantee by the
local bank

Instructions are then given by the principal’s bank/instructing party to
a bank in the beneficiary’s country to issue a guarantee against a
counter-guarantee by the instructing party, who in turn is entitled to
an indemnity from its customer, the principal.

Its an indirect guarantee because instead of P’s bank issuing it directly
to B as in the direct guarantee structure, that bank as instructing party
arranges for its issue by C bank against a counter-guarantee

In this structure, there are 4 distinct contracts
1. The underlying contract between P and B
2. Counter-indemnity or reimbursement contract between P and
IP bank
3. Counter-guarantee issued by IP bank to C bank
4. Guarantee issued by C bank to B
2.
3.
4.
P (ENGLAND)CONSTRUCTION OF PLANT IN SAUDI ARABIAB (SAUDI A.)
IP BANK (INSTRUCTING PARTY)
G BANK (GUARANTEE)
5.
PRINCIPAL TYPES OF DEMAND GUARANTEES
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Tender or bid guarantee
a. Where tenders are invited it is often a condition of
consideration of the tender that the tenderer undertakes
to sign the contract if its awarded to him, to procure the
issue of any performance or other guarantee required by
the guarantee and not to modify or withdraw his tender
in the meantime
b. Purpose—safeguard the beneficiary against breach of
such an undertaking
c. If the tenderer is successful and fails to sign the contract
and to furnish the requisite performance or other
guarantee, or withdraws his tender before its expiry, the
beneficiary can call upon the guarantor to pay a specified
sum designed to compensate him for the trouble and
expense he suffered in reawarding the contract, as well
as any additional cost of the contract
Performance guarantee
a. Guarantee of the central performance of the contract
from commencement to completion
b. Given for a specified percentage of the contract sum
c. But there are stages in the relationship between the
parties
which
precede
and
follow
the
central
performance, and there may be distinct segments of
liability to be covered within that performance
Advance payment or repayment guarantee
a. Underlying contract may entitle the principal to payment
of stated sums in advance of performance
b. The advance payment guarantee is designed to secure
the beneficiary’s right to repayment of the advance if the
performance to which it relates is not furnished
Retention guarantee
a. Construction contracts usually provide for stage
payments against architect’s or engineer’s certificate and
for a specified percentage of the amount certified in each
certificate to be retained by the employer for a specified
period of time as safeguard against defects
b. The employer may be willing to release such retention
moneys against a retention guarantee securing
repayment of the released retention moneys if defects
are later found or if the contractor fails to complete the
contract
Maintenance or warranty guarantee
a. Construction contracts usually provide that on completion
part of the retention moneys are to be retained for a
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 139 of 190
specified period to cover the cost of any defects or
malfunction which become manifest during that period

GUARANTEES NOT GUARANTEED BY UNDERLYING CONTRACT

Not all guarantees are meant to be in favor of a party in the underlying
contract

For example are customs guarantees which are issued to the customs
to cover any duty that may become payable when imported goods
which would be exempt from duty if reexported within a specified time
are not in fact reexported within that time
THE LEGAL NATURE OF A DEMAND GUARANTEE

A demand guarantee is an abstract payment undertaking that is, a
promise of payment which, though intended to preserve the
beneficiary from loss in connection with the underlying transaction is
detached from the underlying contract between principal and
beneficiary and is in form a primary undertaking between the
guarantor and beneficiary which becomes binding solely by virtue of its
issue

A secondary guarantee is both secondary in form and intent. The
intention of the parties is that the guarantor will be called upon to pay
only if the principal defaults in performance, and then only to the
extent of the principal’s liability and subject to any defenses available
to the principal

A documentary credit is both primary in intent and form. The parties
to the underlying contract intend that the bank issuing the credit is a
to be the first port of call for payment, and this is the effect of the
agreement between them.
Whereas in the case of a suretyship
guarantee, the beneficiary cannot look to the guarantor without
establishing default by the principal, the reverse is true of the
documentary credit. The parties have designated payment by the
bank as the primary payment method and only if it fails without fault
on the part of the beneficiary is entitled to resort to the buyer under
the contract of sale.

DEMAND
GUARANTEE
STANDS
BETWEEN
THE
SURETYSHIP
GUARANTEE AND THE DOCUMENTARY CREDIT—SECONDARY IN
INTENT AND PRIMARY IN FORM. Performance is due in the first
instance from the principal, and the guarantee is intended to be
resorted to only if the principal has failed to perform. But though this
is the intent of the parties, the guarantee isn’t in form linked to default
under the underlying contract, nor there is any question of
performance to hold the beneficiary harmless up to the agreed
maximum; and the sole condition of the guarantors payment liability is
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
the presentation of a demand and other documents specified in the
guarantee in the manner of and within the period of the guarantee
THE GUARANTOR HAS NO CONCERN WITH THE UNDERLYING
CONTRACT AND IF DEMAND IS DULY PRESENTED, PAYMENT MUST BE
MADE DESPITE ALLEGATIONS BY THE PRINCIPAL HAS FULLY
PERFORMED THE CONTRACT—IN THE ABSENCE OF ESTABLISHED
FRAUD OR OTHER EVENT CONSTITUTING GROUND FOR NONPAYMENT
STANDBY LETTERS OF CREDIT

Undertaking primary in form but intended to be used only as a fallback
in the event of default by the principal under the underlying contract

Standby credit in legal perspective is simply another term for demand
guarantees

The standby credit has developed into an all-purpose financial support
instrument embracing a much wider range of uses than the normal
demand guarantee.
Thus, standby credits are used to support
financial and non-financial obligations of the principal and to provide
credit enhancement for the primary financial undertaking
KEY ELEMENTS IN A DEMAND GUARANTEE
1. The parties
2. A reference to the underlying contract
3. The amount or maximum amount of the guarantee and any
agreement for reduction or increase
4. The currency of payment
5. The documents, if any, to be presented for the purpose of a
demand or of reduction or expiry
6. The expiry date or other expiry provisions as well as any
agreement for extension

Where it is intended that the guarantee shall not commence until
presentation of a particular document, this fact should be specified

Direct guarantee: principal, guarantor, and beneficiary should be
identified

Indirect guarantee: principal, instructing party, beneficiary, and
counter-guarantee

Central to the demand guarantee is its documentary character: the
rights and obligations it creates are to be determined solely from the
terms of the guarantee and from any document presented in
accordance with the guarantee, without the need to ascertain external
facts
DISTINCT NATURE OF CONTRACTUAL RELATIONSHIPS
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 140 of 190





Guarantor’s commitment to the beneficiary arises solely by virtue of
the issue of the guarantee and his duty to pay is conditioned only on
presentation of demand and other specified documents in conformity
with the terms and within the duration of the guarantee
Principal is not concerned with the contract between the guarantor and
beneficiary
Beneficiary has no concern with the contract between the principal and
guarantor
The relationship of principal and guarantor has an internal mandate—
the guarantor is obliged to act in accordance with the terms of the
contract, failing which he may forfeit his right to reimbursement but
those terms are of no concern to the beneficiary, whose right to
payment depends solely on his acting on conformity with the terms of
the guarantee
In indirect contracts, there is an additional mandate which has 2
facets—the mandate from the instructing party to the guarantor as to
the issue of the guarantee, which the guarantor as mandatory must
comply with if he accepts the instruction; and two, the counterguarantee which the guarantor exacts from the instructing party as a
precondition of issuing the guarantee and which is separate from the
mandate
1. Abstract character of the payment undertaking—binding
solely by virtue of issue of the guarantee, subject to the
beneficiary not rejecting it
2. Independence of the guarantee from the underlying
transaction

Guarantee is separate from that contract and the
rights and obligations created by the guarantee are
independent of those arising under the underlying
contract

In the absence of established fraud by the
beneficiary, the guarantor is not entitled to refuse
payment and the principal is not entitled to have
payment restrained merely because of a dispute
between the principal and beneficiary
3. Independence of the guarantee from the principal-guarantor
relationship—the guarantee is separate from the contract
between the principal and the guarantor is not entitled to
invoke a breach of that contract
4. Documentary character of guarantee—amount and duration of
the duty to pay, the conditions of payment and termination of
payment obligation depend solely on the terms of the
guarantee itself and presentation of required documents
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
5.
6.
7.
8.
9.
Requirement of compliance of the demand with the terms of
the guarantee
Guarantor’s duty of examination limited to apparent good
order of the document
Guarantor’s duty limited the exercise of good faith and
reasonable care
Independence of counter-guarantee from guarantee
Independence of counter-guarantee from mandate received
from instructing party
UNITED NATIONS CONVENTION ON INDEPENDENT GUARANTEES
AND STAND-BY LETTERS OF CREDIT
CHAPTER I. SCOPE OF APPLICATION
Article 2
Undertaking
1. For the purposes of this Convention, an undertaking is an independent
commitment, known in international practice as an independent guarantee
or as a stand-by letter of credit, given by a bank or other institution or
persons ("guarantor/issuer") to pay to the beneficiary a certain or
determinable amount upon simple demand or upon demand accompanied
by other documents, in conformity with the terms and any documentary
conditions of the undertaking, indicating, or from which it is to be inferred,
that payment is due because of a default in the performance of an
obligation, or because of another contingency, or for money borrowed or
advanced, or on account of any mature indebtedness undertaken by the
principal/applicant or another person.
2.
The undertaking may be given:
(a)
At the request or on the instruction
("principal/applicant") of the guarantor/issuer;
of
the
customer
(b)
On the instruction of another bank, institution or person
("instructing party") that acts at the request of the customer
("principal/applicant") of that instructing party; or
(c)
On behalf of the guarantor/issuer itself.
3. Payment may be stipulated in the undertaking to be made in any form,
including:
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 141 of 190
(a)
(b)
(c)
(d)
Payment in a specified currency or unit of account;
Acceptance of a bill of exchange (draft);
Payment on a deferred basis;
Supply of a specified item of value.
4. The undertaking may stipulate that the guarantor/issuer itself is the
beneficiary when acting in favour of another person.
(c) "Counter-guarantee" means an undertaking given to the
guarantor/issuer of another undertaking by its instructing party and
providing for payment upon simple demand or upon demand accompanied
by other documents, in conformity with the terms and any documentary
conditions of the undertaking, indicating, or from which it is to be inferred,
that payment under that other undertaking has been demanded from, or
made by, the person issuing that other undertaking;
Article 3
Independence of undertaking
(d)
"Counter-guarantor"
guarantee;
For the purposes of this Convention, an undertaking is independent where
the guarantor/issuer's obligation to the beneficiary is not:
(a)
Dependent upon the existence or validity of any underlying
transaction, or upon any other undertaking (including stand-by letters of
credit or independent guarantees to which confirmations or counterguarantees relate); or
(e) "Confirmation" of an undertaking means an undertaking added to
that of the guarantor/issuer, and authorized by the guarantor/issuer,
providing the beneficiary with the option of demanding payment from the
confirmer instead of from the guarantor/issuer, upon simple demand or
upon demand accompanied by other documents, in conformity with the
terms and any documentary conditions of the confirmed undertaking,
without prejudice to the beneficiary's right to demand payment from the
guarantor/issuer;
(b) Subject to any term or condition not appearing in the undertaking, or
to any future, uncertain act or event except presentation of documents or
another such act or event within a guarantor/issuer's sphere of operations.
CHAPTER II. INTERPRETATION
Article 5
Principles of interpretation
In the interpretation of this Convention, regard is to be had to its
international character and to the need to promote uniformity in its
application and the observance of good faith in the international practice of
independent guarantees and stand-by letters of credit.
Article 6
Definitions
For the purposes of this Convention and unless otherwise indicated in a
provision of this Convention or required by the context:
(a) "Undertaking" includes "counter-guarantee" and "confirmation of an
undertaking";
(b) "Guarantor/issuer" includes "counter-guarantor" and "confirmer";
means
the
person
issuing
a
counter-
(f)
"Confirmer" means the person adding a confirmation to an
undertaking;
(g) "Document" means a communication made in a form that provides
a complete record thereof.
CHAPTER III. FORM AND CONTENT OF UNDERTAKING
Article 7: Issuance, form and irrevocability of undertaking
1.
Issuance of an undertaking occurs when and where the undertaking
leaves the sphere of control of the guarantor/issuer concerned.
2. An undertaking may be issued in any form which preserves a complete
record of the text of the undertaking and provides authentication of its
source by generally accepted means or by a procedure agreed upon by the
guarantor/issuer and the beneficiary.
3. From the time of issuance of an undertaking, a demand for payment
may be made in accordance with the terms and conditions of the
undertaking, unless the undertaking stipulates a different time.
4. An undertaking is irrevocable upon issuance, unless it stipulates that it
is revocable.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 142 of 190
CHAPTER IV. RIGHTS, OBLIGATIONS AND DEFENCES
Article 13: Determination of rights and obligations
1. The rights and obligations of the guarantor/issuer and the beneficiary
arising from the undertaking are determined by the terms and conditions
set forth in the undertaking, including any rules, general conditions or
usages specifically referred to therein, and by the provisions of this
Convention.
2. In interpreting terms and conditions of the undertaking and in settling
questions that are not addressed by the terms and conditions of the
undertaking or by the provisions of this Convention, regard shall be had to
generally accepted international rules and usages of independent
guarantee or stand-by letter of credit practice.
Article 14: Standard of conduct and liability of guarantor/issuer
1.
In discharging its obligations under the undertaking and this
Convention, the guarantor/issuer shall act in good faith and exercise
reasonable care having due regard to generally accepted standards of
international practice of independent guarantees or stand-by letters of
credit.
2. A guarantor/issuer may not be exempted from liability for its failure to
act in good faith or for any grossly negligent conduct.
Article 15: Demand
1.
Any demand for payment under the undertaking shall be made in a
form referred to in paragraph 2 of article 7 and in conformity with the
terms and conditions of the undertaking.
2.
Unless otherwise stipulated in the undertaking, the demand and any
certification or other document required by the undertaking shall be
presented, within the time that a demand for payment may be made, to
the guarantor/issuer at the place where the undertaking was issued.
3. The beneficiary, when demanding payment, is deemed to certify that
the demand is not in bad faith and that none of the elements referred to in
subparagraphs (a), (b) and (c) of paragraph 1 of article 19 are present.
Article 16: Examination of demand and accompanying documents
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
1. The guarantor/issuer shall examine the demand and any accompanying
documents in accordance with the standard of conduct referred to in
paragraph 1 of article 14. In determining whether documents are in facial
conformity with the terms and conditions of the undertaking, and are
consistent with one another, the guarantor/issuer shall have due regard to
the applicable international standard of independent guarantee or stand-by
letter of credit.
2. Unless otherwise stipulated in the undertaking or elsewhere agreed by
the guarantor/issuer and the beneficiary, the guarantor/issuer shall have
reasonable time, but not more than seven business days following the day
of receipt of the demand and any accompanying documents, in which to:
(a) Examine the demand and any accompanying documents;
(b) Decide whether or not to pay;
(c) If the decision is not to pay, issue notice thereof to the beneficiary.
The notice referred to in subparagraph (c) above shall, unless otherwise
stipulated in the undertaking or elsewhere agreed by the guarantor/issuer
and the beneficiary, be made by teletransmission or, if that is not possible,
by other expeditious means and indicate the reason for the decision not to
pay.
Article 17: Payment
1. Subject to article 19, the guarantor/issuer shall pay against a demand
made in accordance with the provisions of article 15.
Following a
determination that a demand for payment so conforms, payment shall be
made promptly, unless the undertaking stipulates payment on a deferred
basis, in which case payment shall be made at the stipulated time.
2.
Any payment against a demand that is not in accordance with the
provisions of article 15 does not prejudice the rights of the
principal/applicant.
Article 18: Set-off
Unless otherwise stipulated in the undertaking or elsewhere
agreed by the guarantor/issuer and the beneficiary, the
guarantor/issuer may discharge the payment obligation under the
undertaking by availing itself of a right of set-off, except with any
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claim assigned to it by the principal/applicant or the instructing
party.
Article 19: Exception to payment obligation
1.
If it is manifest and clear that:
(a) Any document is not genuine or has been falsified;
(b) No payment is due on the basis asserted in the demand and
the
supporting documents; or
(c) Judging by the type and purpose of the undertaking, the
demand has no conceivable basis, the guarantor/issuer, acting in
good faith, has a right, as against the beneficiary, to withhold
payment.
2.
For the purposes of subparagraph (c) of paragraph 1 of this
article, the following are types of situations in which a demand has
no conceivable basis:
(a) The contingency or risk against which the undertaking was
designed to secure the beneficiary has undoubtedly not
materialized;
(b) The underlying obligation of the principal/applicant has
been declared invalid by a court or arbitral tribunal, unless the
undertaking indicates that such contingency falls within the risk to
be covered by the undertaking;
(c) The underlying obligation has undoubtedly been fulfilled to
the satisfaction of the beneficiary;
(d) Fulfilment of the underlying obligation has clearly been
prevented by wilful misconduct of the beneficiary;
(e) In the case of a demand under a counter-guarantee, the
beneficiary of the counter-guarantee has made payment in bad
faith as guarantor/issuer of the undertaking to which the counterguarantee relates.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
3. In the circumstances set out in subparagraphs (a), (b) and (c)
of paragraph 1 of this article, the principal/applicant is entitled to
provisional court measures in accordance with article 20.
CHAPTER V. PROVISIONAL COURT MEASURES
Article 20: Provisional court measures
1. Where, on an application by the principal/applicant or the instructing
party, it is shown that there is a high probability that, with regard to a
demand made, or expected to be made, by the beneficiary, one of the
circumstances referred in subparagraphs (a), (b) and (c) of paragraph 1 of
article 19 is present, the court, on the basis of immediately available
strong evidence, may:
(a) Issue a provisional order to the effect that the beneficiary does
not receive payment, including an order that the guarantor/issuer hold the
amount of the undertaking, or
(b) Issue a provisional order to the effect that the proceeds of the
undertaking paid to the beneficiary are blocked, taking into account
whether in the absence of such an order the principal/applicant would be
likely to suffer serious harm.
2. The court, when issuing a provisional order referred to in paragraph 1
of this article, may require the person applying therefor to furnish such
form of security as the court deems appropriate.
3. The court may not issue a provisional order of the kind referred to in
paragraph 1 of this article based on any objection to payment other than
those referred to in subparagraphs (a), (b) and (c) of paragraph 1 of article
19, or use of the undertaking for a criminal purpose.
159
EDWARD OWEN ENGINEERING V. BARCLAYS BANK
1977 QB 159 (TRIVIA: QB STANDS FOR QUEEN’S BENCH)
FACTS:
EDWARD OWEN ENGRSUPPLY & INSTALL GREENHOUSESADC (LIBYA)
20%
50%
10%
15%
payable in advance of delivery
presentation of shipping documents
when materials on site
when there was a provisional handing over
DOCUMENTARY CREDIT
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5% final handling over
PERFORMANCE BOND AT 10%
(GUARANTEE)
BARCLAY’S
(GUARANTEE)
UNCONFIRMED LETTER OF CREDIT) UMMA BANK
GUARANTEE
*LC expressly provided that payment only to be made when the Libyan
customers authorized it.
The English suppliers made every effort to get the Libyan customers to
amend the LC but to no avail. Then it consulted with its bank, Barclay’s. it
wrote a letter to the Libyan customers stating that the LC was
unacceptable to them because among other things, it was agreed that the
LC should be confirmed but it is not. And more importantly, it said in its
letter that since the LC was inoperative, the guarantee is also inoperative.
Nonetheless, the Libyan customers demanded from the guarantee.
Consequently, Umma bank claimed from Barclay’s bank. The English
suppliers were able to obtain a writ of injunction to restrain the bank from
paying. Later on, Barclay’s was able to get the discharge of the injunction.
In granting its motion, the court held that the relations of the banks with
each other were independent of the underlying contract and Barclay’s
should have paid Umma bank.
HELD:
A performance bond is similar to a letter of credit. It has been long
established that when a LC is issued and confirmed by the bank, the bank
must pay it if the documents are in order and the terms of the credit are
satisfied. Any dispute between the buyer and seller must be settled
between themselves. The bank must honor the credit. The only exception
to this is when there is established or obvious fraud to the knowledge of
the bank.
Such is the principle with letters of credit.
performance guarantees?
How about with regard
Performance guarantees are virtually promissory notes payable on
demand. So long as the Libyan customers make an honest demand, the
banks are bound to pay and the banks will rarely if ever be in a position to
know whether the demand is honest or not. At any rate they will not be
able to prove it to be dishonest. So they will have to pay.
All this leads to the conclusion that the performance guarantee is in the
same footing as a letter of credit. A bank which gives a performance
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
guarantee must honor the guarantee according to its terms. It is not
concerned in the least with the relations of the buyer and seller. The bank
must pay according to its guarantee, on demand, if so stipulated without
proof or conditions. The only exception is when there is clear fraud of
which bank has notice.
With respect to the English supplier, the only remedy available to it would
be to file for damages against the Libyan customers.
160
GROUND AIR TRANSFER V. WESTATES AIRLINES
899 F.2D. 1269
FACTS:
WESTATES AIRLINESCHARTER AIR SERVICECHARTER ONE
STANDBY LETTER OF CREDIT
MICHIGAN BANK
Each alleged breach of contract of the other party. This led Westates to
call the standby letter of credit. Charter One was able to obtain an
injunction and this prompted Westates to appeal the same.
HELD:
The courts may not “normally ” issue an injunction because of an important
exception to the general “no injunction” rule.
The exception concerns
“fraud” so serious as to make it obviously pointless and unjust to permit
the beneficiary to obtain the money. Where the circumstances “plainly ”
show that the underlying contract forbids the beneficiary to call a letter of
credit, where they show that the contract deprives the beneficiary of even
a “colorable ” right to do so, where the contract and circumstances reveal
that the beneficiary's demand for payment has “absolutely no basis in
fact,”; where the beneficiary's conduct has “so vitiated the entire
transaction that the legitimate purposes of the independence of the issuer's
obligation would no longer be served,”; then a court may enjoin payment.
The Uniform Commercial Code, as adopted in most states, says:
Unless otherwise agreed when documents appear on their face to comply
with the terms of a credit but a required document ... is forged or
fraudulent or there is fraud in the transaction:
....
(b) [except in certain circumstances listed in subsection (a) not here
applicable] an issuer acting in good faith may honor the draft or demand
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for payment despite notification from the customer of fraud, forgery or
other defect not apparent on the face of the documents but a court of
appropriate jurisdiction may enjoin such honor.
The “fraud” exception does not apply in this case, however, for the record
shows nothing “fraudulent” about Westates' demand for payment, nor did
the district court find to the contrary.
As our earlier discussion of the
contract dispute makes clear, the record reveals that Westates' claims and
defenses are, at the least, “colorable.”
Since the letter of credit at issue is an ordinary “standby” or “guarantee”
letter, since Westates can readily fulfill the letter's expressed “call”
conditions, and since, in doing so, Westates' call would not amount to
“fraud,” commercial law, as embodied in the law of most states, would
forbid a court to enjoin Westates from calling the letter, whether or not
that court believed that eventually Westates would lose its case on the
underlying contract.
161
INSULAR BANK OF ASIA AND AMERICA V. IAC
167 SCRA 450
FACTS:
SPOUSES MENDOZA
LOAN K (X)
PHILAM LIFE
TWO IRREVOCABLE STANDBY LC
REAL ESTATE MORTGAGE (X)
TWO PROMISSORY NOTES (X)
INSULAR BANK OF ASIA AND AMERICA
*FIRST: P500000
*SECOND: P100000
IBAA sued Spouses Mendoza. In the trial court’s decision, the trial court
deducted from the supposed liability of IBAA the payments made by the
spouses to Philam Life. This was affirmed by the appellate court.
HELD:
The subject standby LC secure the payment of any obligation of the
spouses to Philam Life including all interests, surcharges and expenses.
But while they are security arrangements they are not converted into
contracts of guaranty. That would make them ultra vires rather than a
letter of credit, which is within the powers of a bank. The standby LC are
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
in effect an absolute undertaking to pay the money advanced or the
amount for which the credit is given on the faith of the instrument. They
are primary obligations and not accessory contract. Being separate and
independent contracts, the payments made by the spouses cannot be
added in computing the liability of IBAA under its own standby LC.
162
TRANSFIELD PHILIPPINES V. LUZON HYDRO CORP.
443 SCRA 307
FACTS:
TRANSFIELD TURNKEY CONTRACT: POWER PLANT LUZON HYDRO
SECURED STANDBY LC’S
($75000/DAY OF DELAY)
ANZ BANK, SECURITY BANK
Petitioner asked for several extensions in completing construction due to
different reasons but were denied by Luzon Hydro. These resulted to
different legal actions. And upon foreseeing that Luzon Hydro would call on
the standby letters of credit, petitioner advised the banks that proceedings
were pending between the two parties and that Luzon Hydro doesn’t have
any right to call on the LCs. And like a self-fulfilling prophecy, Luzon did
notified petitioner of its failure to comply with the contract and that it
would call in the standby letters of credit. Petitioner filed a complaint for
injunction but this was denied ultimately.
HELD:
At the core of the present controversy is the applicability of the
“independence principle” and “fraud exception rule” in letters of credit.
Thus, a discussion of the nature and use of letters of credit, also referred
to simply as “credits,” would provide a better perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only way to
understand all its facets is to recognize that it is an entity unto itself. The
relationship between the beneficiary and the issuer of a letter of credit is
not strictly contractual, because both privity and a meeting of the minds
are lacking, yet strict compliance with its terms is an enforceable right. Nor
is it a third-party beneficiary contract, because the issuer must honor
drafts drawn against a letter regardless of problems subsequently arising in
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the underlying contract. Since the bank’s customer cannot draw on the
letter, it does not function as an assignment by the customer to the
beneficiary.
Nor, if properly used, is it a contract of suretyship or
guarantee, because it entails a primary liability following a default. Finally,
it is not in itself a negotiable instrument, because it is not payable to order
or bearer and is generally conditional, yet the draft presented under it is
often negotiable.
In commercial transactions, a letter of credit is a financial device developed
by merchants as a convenient and relatively safe mode of dealing with
sales of goods to satisfy the seemingly irreconcilable interests of a seller,
who refuses to part with his goods before he is paid, and a buyer, who
wants to have control of the goods before paying. The use of credits in
commercial transactions serves to reduce the risk of nonpayment of the
purchase price under the contract for the sale of goods. However, credits
are also used in non-sale settings where they serve to reduce the risk of
nonperformance. Generally, credits in the non-sale settings have come to
be known as standby credits.
There are three significant differences between commercial and standby
credits. First, commercial credits involve the payment of money under a
contract of sale. Such credits become payable upon the presentation by the
seller-beneficiary of documents that show he has taken affirmative steps to
comply with the sales agreement. In the standby type, the credit is
payable upon certification of a party's nonperformance of the agreement.
The documents that accompany the beneficiary's draft tend to show that
the applicant has not performed. The beneficiary of a commercial credit
must demonstrate by documents that he has performed his contract. The
beneficiary of the standby credit must certify that his obligor has not
performed the contract.
By definition, a letter of credit is a written instrument whereby the writer
requests or authorizes the addressee to pay money or deliver goods to a
third person and assumes responsibility for payment of debt therefor to the
addressee. A letter of credit, however, changes its nature as different
transactions occur and if carried through to completion ends up as a
binding contract between the issuing and honoring banks without any
regard or relation to the underlying contract or disputes between the
parties thereto.
Since letters of credit have gained general acceptability in international
trade transactions, the ICC has published from time to time updates on the
Uniform Customs and Practice (UCP) for Documentary Credits to
standardize practices in the letter of credit area. The vast majority of
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
letters of credit incorporate the UCP. First published in 1933, the UCP for
Documentary Credits has undergone several revisions, the latest of which
was in 1993.
The engagement of the issuing bank is to pay the seller or beneficiary of
the credit once the draft and the required documents are presented to it.
The so-called “independence principle” assures the seller or the beneficiary
of prompt payment independent of any breach of the main contract and
precludes the issuing bank from determining whether the main contract is
actually accomplished or not.
The independent nature of the letter of credit may be: (a) independence in
toto where the credit is independent from the justification aspect and is a
separate obligation from the underlying agreement like for instance a
typical standby; or (b) independence may be only as to the justification
aspect like in a commercial letter of credit or repayment standby, which is
identical with the same obligations under the underlying agreement. In
both cases the payment may be enjoined if in the light of the purpose of
the credit the payment of the credit would constitute fraudulent abuse of
the credit.
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the
instant case and assuming it is so, it is a defense available only to
respondent banks. LHC, on the other hand, contends that it would be
contrary to common sense to deny the benefit of an independent contract
to the very party for whom the benefit is intended. As beneficiary of the
letter of credit, LHC asserts it is entitled to invoke the principle.
Given the nature of letters of credit, petitioner’s argument—that it is only
the issuing bank that may invoke the independence principle on letters of
credit—does not impress this Court. To say that the independence principle
may only be invoked by the issuing banks would render nugatory the
purpose for which the letters of credit are used in commercial transactions.
As it is, the independence doctrine works to the benefit of both the issuing
bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter into
commercial transactions, not for the benefit of the issuing bank but mainly
for the benefit of the parties to the original transactions. With the letter of
credit from the issuing bank, the party who applied for and obtained it may
confidently present the letter of credit to the beneficiary as a security to
convince the beneficiary to enter into the business transaction. On the
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other hand, the other party to the business transaction, i.e., the
beneficiary of the letter of credit, can be rest assured of being empowered
to call on the letter of credit as a security in case the commercial
transaction does not push through, or the applicant fails to perform his part
of the transaction. It is for this reason that the party who is entitled to the
proceeds of the letter of credit is appropriately called “beneficiary.”
Petitioner’s argument that any dispute must first be resolved by the
parties, whether through negotiations or arbitration, before the beneficiary
is entitled to call on the letter of credit in essence would convert the letter
of credit into a mere guarantee. Jurisprudence has laid down a clear
distinction between a letter of credit and a guarantee in that the settlement
of a dispute between the parties is not a pre-requisite for the release of
funds under a letter of credit.
In other words, the argument is
incompatible with the very nature of the letter of credit. If a letter of credit
is drawable only after settlement of the dispute on the contract entered
into by the applicant and the beneficiary, there would be no practical and
beneficial use for letters of credit in commercial transactions.
While it is the bank which is bound to honor the credit, it is the beneficiary
who has the right to ask the bank to honor the credit by allowing him to
draw thereon. The situation itself emasculates petitioner’s posture that
LHC cannot invoke the independence principle and highlights its puerility,
more so in this case where the banks concerned were impleaded as parties
by petitioner itself. Furthermore, Luzon Hydro is given the right to call as
provided in their contract.
Next, petitioner invokes the “fraud exception” principle. It avers that LHC’s
call on the Securities is wrongful because it fraudulently misrepresented to
ANZ Bank and SBC that there is already a breach in the Turnkey Contract
knowing fully well that this is yet to be determined by the arbitral tribunals.
It asserts that the “fraud exception” exists when the beneficiary, for the
purpose of drawing on the credit, fraudulently presents to the confirming
bank, documents that contain, expressly or by implication, material
representations of fact that to his knowledge are untrue. In such a
situation, petitioner insists, injunction is recognized as a remedy available
to it.
Would injunction then be the proper remedy to restrain the alleged
wrongful draws on the Securities?
Fraud is an exception to the independence principle. The untruthfulness of
a certificate accompanying a demand for payment under a standby credit
may qualify as fraud sufficient to support an injunction against payment.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
The remedy for fraudulent abuse is an injunction. However, injunction
should not be granted unless:
(a) there is clear proof of fraud;
(b) the fraud constitutes fraudulent abuse of the independent purpose of
the letter of credit and not only fraud under the main agreement; and
(c) irreparable injury might follow if injunction is not granted or the
recovery of damages would be seriously damaged.
Generally, injunction is a preservative remedy for the protection of one’s
substantive right or interest; it is not a cause of action in itself but merely
a provisional remedy, an adjunct to a main suit. The issuance of the writ
of preliminary injunction as an ancillary or preventive remedy to secure the
rights of a party in a pending case is entirely within the discretion of the
court taking cognizance of the case, the only limitation being that this
discretion should be exercised based upon the grounds and in the manner
provided by law.
Before a writ of preliminary injunction may be issued, there must be a
clear showing by the complaint that there exists a right to be protected and
that the acts against which the writ is to be directed are violative of the
said right. It must be shown that the invasion of the right sought to be
protected is material and substantial, that the right of complainant is clear
and unmistakable and that there is an urgent and paramount necessity for
the writ to prevent serious damage. Moreover, an injunctive remedy may
only be resorted to when there is a pressing necessity to avoid injurious
consequences, which cannot be remedied under any standard
compensation.
In the instant case, petitioner failed to show that it has a clear and
unmistakable right to restrain LHC’s call on the Securities which would
justify the issuance of preliminary injunction.
By petitioner’s own
admission, the right of LHC to call on the Securities was contractually
rooted and subject to the express stipulations in the Turnkey Contract.
PRESIDENTIAL DECREE No. 115 January 29, 1973
PROVIDING
FOR
TRANSACTIONS
THE
REGULATION
OF
TRUST
RECEIPTS
WHEREAS, the utilization of trust receipts, as a convenient business
device to assist importers and merchants solve their financing
problems, had gained popular acceptance in international and
domestic business practices, particularly in commercial banking
transactions;
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WHEREAS, there is no specific law in the Philippines that governs
trust receipt transactions, especially the rights and obligations of
the parties involved therein and the enforcement of the said rights
in case of default or violation of the terms of the trust receipt
agreement;
WHEREAS, the recommendations contained in the report on the
financial system which have been accepted, with certain
modifications by the monetary authorities included, among others,
the enactment of a law regulating the trust receipt transactions;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the
Philippines, by virtue of the powers vested in me by the
Constitution, as Commander-in-Chief of all the Armed Forces of the
Philippines, and pursuant to Proclamation No. 1081, dated
September 21, 1972, and General Order No. 1, dated September 22,
1972, as amended, and in order to effect the desired changes and
reforms in the social, economic, and political structure of our
society, do hereby order and decree and make as part of the law of
the land the following:
Section 1. Short Title. This Decree shall be known as the Trust
Receipts Law.
(b) "Entrustee" shall refer to the person having or taking
possession of goods, documents or instruments under a trust
receipt transaction, and any successor in interest of such person
for the purpose or purposes specified in the trust receipt
agreement.
(c) "Entruster" shall refer to the person holding title over the
goods, documents, or instruments subject of a trust receipt
transaction, and any successor in interest of such person.
(d) "Goods" shall include chattels and personal property other
than: money, things in action, or things so affixed to land as to
become a part thereof.
(e) "Instrument" means any negotiable instrument as defined in
the Negotiable Instrument Law; any certificate of stock, or bond or
debenture for the payment of money issued by a public or private
corporation, or any certificate of deposit, participation certificate or
receipt, any credit or investment instrument of a sort marketed in
the ordinary course of business or finance, whereby the entrustee,
after the issuance of the trust receipt, appears by virtue of
possession and the face of the instrument to be the owner.
"Instrument" shall not include a document as defined in this
Decree.
Section 2. Declaration of Policy. It is hereby declared to be the
policy of the state (a) to encourage and promote the use of trust
receipts as an additional and convenient aid to commerce and
trade; (b) to provide for the regulation of trust receipts
transactions in order to assure the protection of the rights and
enforcement of obligations of the parties involved therein; and (c)
to declare the misuse and/or misappropriation of goods or
proceeds realized from the sale of goods, documents or
instruments released under trust receipts as a criminal offense
punishable under Article Three hundred and fifteen of the Revised
Penal Code.
(f) "Purchase" means taking by sale, conditional sale, lease,
mortgage, or pledge, legal or equitable.
Section 3. Definition of terms. As used in this Decree, unless the
context otherwise requires, the term
(i) "Person" means, as the case may be, an individual, trustee,
receiver, or other fiduciary, partnership, corporation, business trust
or other association, and two more persons having a joint or
common interest.
(a) "Document" shall mean written or printed evidence of title to
goods.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
(g) "Purchaser" means any person taking by purchase.
(h) "Security Interest" means a property interest in goods,
documents or instruments to secure performance of some
obligations of the entrustee or of some third persons to the
entruster and includes title, whether or not expressed to be
absolute, whenever such title is in substance taken or retained for
security only.
(j) "Trust Receipt" shall refer to the written or printed document
signed by the entrustee in favor of the entruster containing terms
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and conditions substantially complying with the provisions of this
Decree. No further formality of execution or authentication shall be
necessary to the validity of a trust receipt.
(k) "Value" means any consideration sufficient to support a simple
contract.
TRUST RECEIPT

Shall refer to the written or printed document signed by the entrustee
in favor of the entruster containing terms and conditions substantially
complying with the provisions of this Decree. No further formality of
execution or authentication shall be necessary to the validity of a trust
receipt
ENTRUSTER

Person holding title over the goods, documents, or instruments subject
of a trust receipt transaction, and any successor in interest of such
person

Has security interest—property interest in goods, documents or
instruments to secure performance of some obligations of the
entrustee or of some third persons to the entruster and includes title,
whether or not expressed to be absolute, whenever such title is in
substance taken or retained for security only
ENTRUSTEE

Person having or taking possession of goods, documents or
instruments under a trust receipt transaction, and any successor in
interest of such person for the purpose or purposes specified in the
trust receipt agreement
Section 4. What constitutes a trust receipt transaction. A trust
receipt transaction, within the meaning of this Decree, is any
transaction by and between a person referred to in this Decree as
the entruster, and another person referred to in this Decree as
entrustee, whereby the entruster, who owns or holds absolute title
or security interests over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee
upon the latter's execution and delivery to the entruster of a signed
document called a "trust receipt" wherein the entrustee binds
himself to hold the designated goods, documents or instruments in
trust for the entruster and to sell or otherwise dispose of the
goods, documents or instruments with the obligation to turn over
to the entruster the proceeds thereof to the extent of the amount
owing to the entruster or as appears in the trust receipt or the
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
goods, documents or instruments themselves if they are unsold or
not otherwise disposed of, in accordance with the terms and
conditions specified in the trust receipt, or for other purposes
substantially equivalent to any of the following:
1. In the case of goods or documents, (a) to sell the goods or
procure their sale; or (b) to manufacture or process the goods with
the purpose of ultimate sale: Provided, That, in the case of goods
delivered under trust receipt for the purpose of manufacturing or
processing before its ultimate sale, the entruster shall retain its
title over the goods whether in its original or processed form until
the entrustee has complied fully with his obligation under the trust
receipt; or (c) to load, unload, ship or tranship or otherwise deal
with them in a manner preliminary or necessary to their sale; or
2. In the case of instruments,
a) to sell or procure their sale or exchange; or
b) to deliver them to a principal; or
c) to effect the consummation of some transactions involving
delivery to a depository or register; or
d) to effect their presentation, collection or renewal
The sale of goods, documents or instruments by a person in the
business of selling goods, documents or instruments for profit who,
at the outset of the transaction, has, as against the buyer, general
property rights in such goods, documents or instruments, or who
sells the same to the buyer on credit, retaining title or other
interest as security for the payment of the purchase price, does not
constitute a trust receipt transaction and is outside the purview
and coverage of this Decree.
Section 5. Form of trust receipts; contents. A trust receipt need not
be in any particular form, but every such receipt must substantially
contain (a) a description of the goods, documents or instruments
subject of the trust receipt; (2) the total invoice value of the goods
and the amount of the draft to be paid by the entrustee; (3) an
undertaking or a commitment of the entrustee (a) to hold in trust
for the entruster the goods, documents or instruments therein
described; (b) to dispose of them in the manner provided for in the
trust receipt; and (c) to turn over the proceeds of the sale of the
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goods, documents or instruments to the entruster to the extent of
the amount owing to the entruster or as appears in the trust
receipt or to return the goods, documents or instruments in the
event of their non-sale within the period specified therein.
The trust receipt may contain other terms and conditions agreed
upon by the parties in addition to those hereinabove enumerated
provided that such terms and conditions shall not be contrary to
the provisions of this Decree, any existing laws, public policy or
morals, public order or good customs.
Section 6. Currency in which a trust receipt may be denominated. A
trust receipt may be denominated in the Philippine currency or any
foreign currency acceptable and eligible as part of international
reserves of the Philippines, the provisions of existing law,
executive orders, rules and regulations to the contrary
notwithstanding: Provided, however, That in the case of trust
receipts denominated in foreign currency, payment shall be made
in its equivalent in Philippine currency computed at the prevailing
exchange rate on the date the proceeds of sale of the goods,
documents or instruments held in trust by the entrustee are turned
over to the entruster or on such other date as may be stipulated in
the trust receipt or other agreements executed between the
entruster and the entrustee.
Section 7. Rights of the entruster. The entruster shall be entitled to
the proceeds from the sale of the goods, documents or instruments
released under a trust receipt to the entrustee to the extent of the
amount owing to the entruster or as appears in the trust receipt, or
to the return of the goods, documents or instruments in case of
non-sale, and to the enforcement of all other rights conferred on
him in the trust receipt provided such are not contrary to the
provisions of this Decree.
The entruster may cancel the trust and take possession of the
goods, documents or instruments subject of the trust or of the
proceeds realized therefrom at any time upon default or failure of
the entrustee to comply with any of the terms and conditions of the
trust receipt or any other agreement between the entruster and the
entrustee, and the entruster in possession of the goods, documents
or instruments may, on or after default, give notice to the
entrustee of the intention to sell, and may, not less than five days
after serving or sending of such notice, sell the goods, documents
or instruments at public or private sale, and the entruster may, at a
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
public sale, become a purchaser. The proceeds of any such sale,
whether public or private, shall be applied (a) to the payment of
the expenses thereof; (b) to the payment of the expenses of retaking, keeping and storing the goods, documents or instruments;
(c) to the satisfaction of the entrustee's indebtedness to the
entruster. The entrustee shall receive any surplus but shall be
liable to the entruster for any deficiency. Notice of sale shall be
deemed sufficiently given if in writing, and either personally served
on the entrustee or sent by post-paid ordinary mail to the
entrustee's last known business address.
RIGHTS OF THE ENTRUSTER
1. He shall be entitled to the proceeds from the sale of the goods,
documents or instruments released under a trust receipt to the
entrustee to the extent of the amount owing to the entruster or as
appears in the trust receipt, or to the return of the goods,
documents or instruments in case of non-sale, and to the
enforcement of all other rights conferred on him in the trust
receipt provided such are not contrary to the provisions of this
Decree.
2. He may cancel the trust and take possession of the goods,
documents or instruments subject of the trust or of the proceeds
realized therefrom at any time upon default or failure of the
entrustee to comply with any of the terms and conditions of the
trust receipt or any other agreement between the entruster and
the entrustee, and the entruster in possession of the goods,
documents or instruments may, on or after default, give notice to
the entrustee of the intention to sell, and may, not less than five
days after serving or sending of such notice, sell the goods,
documents or instruments at public or private sale, and the
entruster may, at a public sale, become a purchaser.
3. The proceeds shall be applied
a. To the payment of the expenses thereof;
b. To the payment of the expenses of re-taking, keeping
and storing the goods, documents or instruments;
c. To the satisfaction of the entrustee's indebtedness to the
entruster.
d. The entrustee shall receive any surplus but shall be liable
to the entruster for any deficiency.
4. Notice of sale shall be deemed sufficiently given if in writing, and
either personally served on the entrustee or sent by post-paid
ordinary mail to the entrustee's last known business address.
5. The entruster holding a security interest shall not, merely by
virtue of such interest or having given the entrustee liberty of sale
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or other disposition of the goods, documents or instruments under
the terms of the trust receipt transaction be responsible as
principal or as vendor under any sale or contract to sell made by
the entrustee.
Section 8. Entruster not responsible on sale by entrustee. The
entruster holding a security interest shall not, merely by virtue of
such interest or having given the entrustee liberty of sale or other
disposition of the goods, documents or instruments under the
terms of the trust receipt transaction be responsible as principal or
as vendor under any sale or contract to sell made by the entrustee.
Section 9. Obligations of the entrustee. The entrustee shall (1) hold
the goods, documents or instruments in trust for the entruster and
shall dispose of them strictly in accordance with the terms and
conditions of the trust receipt; (2) receive the proceeds in trust for
the entruster and turn over the same to the entruster to the extent
of the amount owing to the entruster or as appears on the trust
receipt; (3) insure the goods for their total value against loss from
fire, theft, pilferage or other casualties; (4) keep said goods or
proceeds thereof whether in money or whatever form, separate
and capable of identification as property of the entruster; (5)
return the goods, documents or instruments in the event of nonsale or upon demand of the entruster; and (6) observe all other
terms and conditions of the trust receipt not contrary to the
provisions of this Decree.
OBLIGATIONS OF THE ENTRUSTEE
1. Hold the goods, documents or instruments in trust for the
entruster and shall dispose of them strictly in accordance with the
terms and conditions of the trust receipt;
2. Receive the proceeds in trust for the entruster and turn over the
same to the entruster to the extent of the amount owing to the
entruster or as appears on the trust receipt;
3. Insure the goods for their total value against loss from fire, theft,
pilferage or other casualties;
4. Keep said goods or proceeds thereof whether in money or
whatever form, separate and capable of identification as property
of the entruster;
5. Return the goods, documents or instruments in the event of nonsale or upon demand of the entruster; and
6. Observe all other terms and conditions of the trust receipt not
contrary to the provisions of this Decree.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Section 10. Liability of entrustee for loss. The risk of loss shall be
borne by the entrustee. Loss of goods, documents or instruments
which are the subject of a trust receipt, pending their disposition,
irrespective of whether or not it was due to the fault or negligence
of the entrustee, shall not extinguish his obligation to the entruster
for the value thereof.
LIABILITY OF ENTRUSTEE FOR LOSS

The risk of loss is borne by the entrustee

Loss of goods, documents or instruments which are the subject of a
trust receipt, pending their disposition, irrespective of whether or not it
was due to the fault or negligence of the entrustee, shall not
extinguish his obligation to the entruster for the value thereof.
Section 11. Rights of purchaser for value and in good faith. Any
purchaser of goods from an entrustee with right to sell, or of
documents or instruments through their customary form of
transfer, who buys the goods, documents, or instruments for value
and in good faith from the entrustee, acquires said goods,
documents or instruments free from the entruster's security
interest.
RIGHTS OF PURCHASER FOR VALUE AND IN GOOD FAITH

Any purchaser of goods from an entrustee with right to sell, or of
documents or instruments through their customary form of transfer,
who buys the goods, documents, or instruments for value and in good
faith from the entrustee, acquires said goods, documents or
instruments free from the entruster's security interest.

Doesn’t have recourse against the entrustor when there are warranty
claims or defects with regard the sale of the goods
Section 12. Validity of entruster's security interest as against
creditors. The entruster's security interest in goods, documents, or
instruments pursuant to the written terms of a trust receipt shall
be valid as against all creditors of the entrustee for the duration of
the trust receipt agreement.
VALIDITY OF ENTRUSTER’S SECURITY INTEREST AS AGAINST CREDITORS

The entruster's security interest in goods, documents, or instruments
pursuant to the written terms of a trust receipt shall be valid as
against all creditors of the entrustee for the duration of the trust
receipt agreement.
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Section 13. Penalty clause. The failure of an entrustee to turn over
the proceeds of the sale of the goods, documents or instruments
covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the
crime of estafa, punishable under the provisions of Article Three
hundred and fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known
as the Revised Penal Code. If the violation or offense is committed
by a corporation, partnership, association or other juridical
entities, the penalty provided for in this Decree shall be imposed
upon the directors, officers, employees or other officials or persons
therein responsible for the offense, without prejudice to the civil
liabilities arising from the criminal offense.
FAILURE OF AN ENTRUSTEE TO TURN OVER THE PROCEEDS OF THE SALE
OF THE GOODS, DOCUMENTS OR INSTRUMENTS COVERED BY A TRUST
RECEIPT TO THE EXTENT OF THE AMOUNT OWING TO THE ENTRUSTER OR
AS APPEARS IN THE TRUST RECEIPT OR TO RETURN SUCH GOODS,
DOCUMENTS OR INSTRUMENTS IF THEY WERE NOT SOLD OR DISPOSED
OF IN ACCORDANCE WITH THE TERMS OF THE TRUST RECEIPT

Shall constitute the crime of estafa, punishable under the provisions of
Article Three hundred and fifteen, paragraph one (b) of Act Numbered
Three thousand eight hundred and fifteen, as amended, otherwise
known as the Revised Penal Code

If the violation or offense is committed by a corporation, partnership,
association or other juridical entities, the penalty provided for in this
Decree shall be imposed upon the directors, officers, employees or
other officials or persons therein responsible for the offense, without
prejudice to the civil liabilities arising from the criminal offense.
Section 14. Cases not covered by this Decree. Cases not provided
for in this Decree shall be governed by the applicable provisions of
existing laws.
CASE DIGESTS: TRUST RECEIPTS LAW
163
VINTOLA V. IBAA
150 SCRA 140
FACTS:
SPOUSES VINTOLA SALE OF PUCA & OLIVE SHELLS E. ALANI
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
LETTER OF CREDIT
TRUST RECEIPT AGREEMENT
IBAA
HELD:
A trust receipt is a security agreement, pursuant to which a bank acquires
a "security interest" in the goods. "It secures an indebtedness and there
can be no such thing as security interest that secures no obligation. ...
As elucidated in Samo vs. People "a trust receipt is considered as a security
transaction intended to aid in financing importers and retail dealers who do
not have sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to acquire credit
except through utilization, as collateral, of the merchandise imported or
purchased. "
Contrary to the allegation of the VINTOLAS, IBAA did not become the real
owner of the goods. It was merely the the holder of appeals security title
for the advances it had made to the VINTOLAS the goods the VINTOLAS
had purchased through IBAA financing remain their own property and they
hold it at their own risk. The trust receipt arrangement did not convert the
IBAA into an investor; the latter remained a lender and creditor.
... for the bank has previously extended a loan which the L/C represents to
the importer, and by that loan, the importer should be the real owner of
the goods. If under the trust receipt, the bank is made to appear as the
owner, it was but an artificial expedient, more of a legal fiction than fact,
for if it were so, it could dispose of the goods in any manner it wants,
which it cannot do, just to give consistency with the purpose of the trust
receipt of giving a stronger security for the loan obtained by the importer.
To consider the bank as the true owner from the inception of the
transaction would be to disregard the loan feature thereof. ...
Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot
justifiably claim that because they have surrendered the goods to IBAA and
subsequently deposited them in the custody of the court, they are
absolutely relieved of their obligation to pay their loan because of their
inability to dispose of the goods. The fact that they were unable to sell the
seashells in question does not affect IBAA's right to recover the advances it
had made under the Letter of Credit.
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To support their case, the VINTOLAS argue that their return of the goods
amounted to recovery by IBAA and to order them to further make payment
would be tantamount to double recovery. According to them, "the situation
is akin to an act or omission constituting both a quasi-delict under the Civil
Code and also criminal negligence under the Revised Penal Code" hence
they invoke the rule under Art. 2177 of the New Civil Code against double
recovery.
The VINTOLAS' reliance on said provision of law is erroneous. As correctly
argued by IBAA, there is no double recovery since the bank has not yet
recovered from them, The VINTOLAS' deposit in court of the puka and olive
shells does not amount to recovery by IBAA.
164
PRUDENCIAL BANK V. IAC
216 SCRA 257
FACTS:
PHIL RAYON IMPORTATION OF TEXTILE MACHINES NISSHO JAPAN
LETTER OF CREDIT
TRUST RECEIPT (SURETY SOLIDARILY LIABLE TO PB UPON FAILURE OF
PHIL RAYON TO PAY) (X)
PRUDENTIAL BANK
The trial court held Phil Rayon liable but not for the reimbursement of what
the bank paid for the machineries. This was appealed to the appellate
court.
HELD:
A letter of credit is defined as an engagement by a bank or other person
made at the request of a customer that the issuer will honor drafts or other
demands for payment upon compliance with the conditions specified in the
credit. Through a letter of credit, the bank merely substitutes its own
promise to pay for one of its customers who in return promises to pay the
bank the amount of funds mentioned in the letter of credit plus credit or
commitment fees mutually agreed upon. In the instant case then, the
drawee was necessarily the herein petitioner. It was to the latter that the
drafts were presented for payment. In fact, there was no need for
acceptance as the issued drafts are sight drafts. Presentment for
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
acceptance is necessary only in the cases expressly provided for in Section
143 of the Negotiable Instruments Law (NIL).
Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment
at maturity of any accepted draft, bill of exchange or indebtedness shall
not be extinguished or modified" does not, contrary to the holding of the
public respondent, contemplate prior acceptance by Philippine Rayon, but
by the petitioner. Acceptance, however, was not even necessary in the first
place because the drafts which were eventually issued were sight drafts
And even if these were not sight drafts, thereby necessitating acceptance,
it would be the petitioner and not Philippine Rayon which had to accept the
same for the latter was not the drawee. Presentment for acceptance is
defined an the production of a bill of exchange to a drawee for acceptance.
THE TRIAL COURT AND THE PUBLIC RESPONDENT, THEREFORE, ERRED IN
RULING THAT PRESENTMENT FOR ACCEPTANCE WAS AN INDISPENSABLE
REQUISITE FOR PHILIPPINE RAYON'S LIABILITY ON THE DRAFTS TO
ATTACH. Contrary to both courts' pronouncements, Philippine Rayon
immediately became liable thereon upon petitioner's payment thereof.
Such is the essence of the letter of credit issued by the petitioner. A
different conclusion would violate the principle upon which commercial
letters of credit are founded because in such a case, both the beneficiary
and the issuer, Nissho Company Ltd. and the petitioner, respectively,
would be placed at the mercy of Philippine Rayon even if the latter had
already received the imported machinery and the petitioner had fully paid
for it.
The trial court and the public respondent likewise erred in disregarding the
trust receipt and in not holding that Philippine Rayon was liable thereon.
Under P.D. No. 115, otherwise known an the Trust Receipts Law, which
took effect on 29 January 1973, a trust receipt transaction is defined as
"any transaction by and between a person referred to in this Decree as the
entruster, and another person referred to in this Decree as the entrustee,
whereby the entruster, who owns or holds absolute title or security
interests' over certain specified goods, documents or instruments, releases
the same to the possession of the entrustee upon the latter's execution and
delivery to the entruster of a signed document called the "trust receipt"
wherein the entrustee binds himself to hold the designated goods,
documents or instruments in trust for the entruster and to sell or otherwise
dispose of the goods, documents or instruments with the obligation to turn
over to the entruster the proceeds thereof to the extent of the amount
owing to the entruster or as appears in the trust receipt or the goods,
instruments themselves if they are unsold or not otherwise disposed of, in
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accordance with the terms and conditions specified in the trusts receipt, or
for other purposes substantially equivalent to any one of the following"

It is alleged in the complaint that private respondents "not only have
presumably put said machinery to good use and have profited by its
operation and/or disposition but very recent information that (sic) reached
plaintiff bank that defendants already sold the machinery covered by the
trust receipt to Yupangco Cotton Mills," and that "as trustees of the
property covered by the trust receipt, . . . and therefore acting in fiduciary
(sic) capacity, defendants have willfully violated their duty to account for
the whereabouts of the machinery covered by the trust receipt or for the
proceeds of any lease, sale or other disposition of the same that they may
have made, notwithstanding demands therefor; defendants have
fraudulently misapplied or converted to their own use any money realized
from the lease, sale, and other disposition of said machinery." While there
is no specific prayer for the delivery to the petitioner by Philippine Rayon of
the proceeds of the sale of the machinery covered by the trust receipt,
such relief is covered by the general prayer for "such further and other
relief as may be just and equitable on the premises." And although it is
true that the petitioner commenced a criminal action for the violation of the
Trust Receipts Law, no legal obstacle prevented it from enforcing the civil
liability arising out of the trust, receipt in a separate civil action. Under
Section 13 of the Trust Receipts Law, the failure of an entrustee to turn
over the proceeds of the sale of goods, documents or instruments covered
by a trust receipt to the extent of the amount owing to the entruster or as
appear in the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime of estafa, punishable
under the provisions of Article 315, paragraph 1(b) of the Revised Penal
Code. Under Article 33 of the Civil Code, a civil action for damages, entirely
separate and distinct from the criminal action, may be brought by the
injured party in cases of defamation, fraud and physical injuries. Estafa
falls under fraud.
CAN DRAWER THEN SUE THE DRAWEE BASED ON THE ABOVEMENTIONED
CHECK WHEN THE LATTER DISHONORS THE CHECK?

No, there is no right of recourse against drawee

But is there any other right of recourse using another law than the
NIL? Yes. There could be an action for breach of contract. When
there are sufficient funds, the bank is bound to pay. But if the bank
refuses to pay, then there will be a breach of contract.
Sec. 127. Bill not an assignment of funds in hands of drawee.
bill of itself does not operate as an assignment of the funds in
hands of the drawee available for the payment thereof, and
drawee is not liable on the bill unless and until he accepts
same.
- A
the
the
the
CAN A PAYEE SUE A BANK FOR DISHONORING A CHECK FOR NONPAYMENT?

No, since until the drawee bank pays or accepts the check, it will not
be liable for the instrument
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
The recourse would be to go after the parties secondarily liable,
namely, the drawer
CASE DIGESTS: SECTION 127
165
REPUBLIC V. NATIONAL CITY BANK
3 SCRA 851
FACTS:
The government filed a complaint for escheat of certain unclaimed bank
deposits balances pursuant to a law, which provides that unclaimed
balances—credits, money, bullion, security or other evidence of
indebtedness of any kind, and interest with banks—shall be deposited with
the government if it remains to be unclaimed within a period of 10 years of
more.
One of the banks against the complaint has been filed is First National City
Bank. Although it concedes that the government had the right to claim the
unclaimed deposit balances, it seeks to exclude some which, according to
it, are not within the purview of credits and deposits as defined in law. the
trial court held in favor of the bank, excluding from the claim the
manager’s checks and other demand drafts.
HELD:
Credit is a sum credited on the books of a company to a person who
appears to be entitled to it. it presupposes a creditor-debtor relationship
and may be said to imply ability, by reason of property or estates, to make
a promised payment. It is correlative to indebtedness, and that which is
due to any person, as distinguished to that which he owes.
Do demand drafts and telegraphic orders come within the purview of
credits or deposits employed in the law?
Since the demand drafts herein involved have not been presented either
for acceptance or payment, the inevitable consequence is that the bank
never had the chance of accepting or receiving them. Verily, the bank
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Page 155 of 190
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.
Further, a demand draft is different from a cashier’s check for this is a
primary obligation of the bank which issues it and constitutes a written
promise to pay upon demand. It is an order to a third party purporting to
be drawn upon a deposit of funds.
If there is any consolation, the telegraphic orders can be escheated in favor
of the government.
The agreement to remit creates a contractual
obligation and has been termed a purchase and sale transaction. The
purchaser of a telegraphic transfer upon making payment completes the
transaction insofar as he is concerned, though insofar as the remitting
bank is concerned the contract is executory until the credit is established.
The drawer bank has already been paid the value of the telegraphic order.
It appears in the books of the bank that the amounts represented by the
orders appear in the names of respective payees. If the latter choose to
demand payment, the bank had the obligation to pay them.
Sec. 128. Bill addressed to more than one drawee. - A bill may be
addressed to two or more drawees jointly, whether they are
partners or not; but not to two or more drawees in the alternative
or in succession.
BILL ADDRESSED TO MORE THAN ONE DRAWEE: VALID
Pay to X or order P1000.
Sgd. A
To: Y and Z
BILL ADDRESSED TO MORE THAN ONE DRAWEE: INVALID
Pay to X or order P1000.
Sgd. A
To: Y or Z
Pay to X or order P1000.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Sgd. A
To: Y or in default of Y, Z
Sec. 129. Inland and foreign bills of exchange. - An inland bill of
exchange is a bill which is, or on its face purports to be, both
drawn and payable within the Philippines. Any other bill is a foreign
bill. Unless the contrary appears on the face of the bill, the holder
may treat it as an inland bill.
INLAND BILL

Where the instrument is drawn and made payable in the Philippines
Pay to X or order P1000.
Sgd. A
To: Y, Manila, Philippines
FOREIGN BILL
1. Where the bill is not drawn and not payable in the Philippines
2. Where the bill is drawn in but not made payable in the Philippines
3. Where the bill is not drawn but made payable in the Philippines
Sec. 130. When bill may be treated as promissory note. - Where in
a bill the drawer and drawee are the same person or where the
drawee is a fictitious person or a person not having capacity to
contract, the holder may treat the instrument at his option either
as a bill of exchange or as a promissory note.
WHEN BILL MAY BE TREATED AS PROMISSORY NOTE
1. Where the drawer and drawee are the same person
2. Where the drawee is a fictitious person
3. Where the drawee is a person not having capacity to contract

The holder may treat the instrument at his option either as a bill of
exchange or a promissory note
Sec. 131. Referee in case of need. - The drawer of a bill and any
indorser may insert thereon the name of a person to whom the
holder may resort in case of need; that is to say, in case the bill is
dishonored by non-acceptance or non-payment. Such person is
called a referee in case of need. It is in the option of the holder to
resort to the referee in case of need or not as he may see fit.
NEGOTIABLE INSTRUMENTS NOTES
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Page 156 of 190

NOTES: WEEK #13
SEPTEMBER 17 TO 21, 2007
X. ACCEPTANCE
Sec. 132. Acceptance; how made, by and so forth. - The acceptance
of a bill is the signification by the drawee of his assent to the order
of the drawer. The acceptance must be in writing and signed by the
drawee. It must not express that the drawee will perform his
promise by any other means than the payment of money.
ACCEPTANCE, DEFINED.

The signification of the drawee of his assent to the order of the drawer

Act by which a person on whome the bill of exchange is drawn assents
to the request of the drawer to pay it

It may be actual, constructive, general or qualified
REQUISITES OF ACCEPTANCE
1. Must be in writing
2. Signed by the drawee
3. It must not express that the drawee will perform his promise by
any other means than payment of money
4. It must be communicated or delivered to the holder
ACCEPTANCE MUST BE IN WRITING

The acceptance cannot be made orally

Sound public policy requires substantial and tangible evidence of
contract, and more reliable in its nature than the statement or
recollection of witnesses

An oral acceptance is not binding on the drawee

Acceptance by phone is not acceptance
ACCEPTANCE, HOW MADE

Usually done by writing across the face of the bill the word “accepted”
followed by the signature of the drawee

But any words written by the drawee not negativing directly the order
of the drawer, would constitute sufficient acceptance, such as “holder”,
“presented” or “seen”, or “honored” or “I will pay the bill” or the
signature of the drawee, without more

Acceptance by telegram has been held to be sufficient
WHEN ACCEPTANCE NOT REQUIRED
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
In general, acceptance in the sense in which the term is used in NIL
isn’t required for checks, for the same are payable on demand
THE DRAWEE MUST SIGN

Without the signature of the drawee, he would not be bound pursuant
to the principle enumerated in Section 18
PAYMENT IN MONEY

Acceptance must be expressed to be payable in money only
NECESSITY OF DELIVERY

The acceptance is incomplete until delivery or notification

And the acceptor or drawee who hasn’t communicated his acceptance
or transmitted the accepted bill to the holder, may revoke an
acceptance before delivery and cancel the written acceptance
EFFECT OF ACCEPTANCE

Upon acceptance, the drawee becomes liable on the bill

The bill becomes in effect a note, the acceptor standing in the place of
the maker, and the drawer, in the place of the first indorser

But should the drawee refuse to accept, the payee or other holder has
no recourse against him but only against the drawer or indorsers, if
any
PAYMENT NOT ACCEPTANCE

Payment of a check doesn’t include or imply its acceptance in the
sense that this word is used in Section 62 of the NIL

Payment is the actual performance while acceptance is the promise to
perform an act
CASE DIGESTS: SECTION 132
166
SUMACAD V. PROVINCE OF SAMAR
100 PHIL 72
FACTS:
While the Province of Samar was still occupied by Japanese military forces,
it issued a check in favor of Santos. This check was then negotiated to
McGuire, an American citizen and resident of Borongan.
After the
liberation, McGuire presented the check to the municipal treasurer of
Borongan for payment but the latter wasn’t able or didn’t choose to pay the
same. This prompted McGuire to write letters seeking payment of the
check. This matter was referred to PNB. The bank received photostatic
copies of the check to verify its authencity. The bank then instructed
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 157 of 190
McGuire to present the check to the provincial treasurer as the province
still had funds with the bank. Again, McGuire requested to expedite the
actions taken on his check.
Before the check was certified by the
authorities however, the province withdrew a substantial amount from its
account, leaving a balance insufficient to fund the check. This happened
when McGuire has transferred his rights to McGuire Sumacad. This led to a
complaint filed against the province and PNB.
The position of PNB is that it didn’t issue the check and was merely called
upon to pay the same upon being presented for encashment if and when
funds for the purpose were available. That it couldn’t have paid said check
because it was never presented to it with the required certification under
the circular of the Secretary of Finance. That the relationship between the
bank and the province is of debtor and creditor. That there is nothing in
the records to show that the holder of the check ever requested the bank
to withhold the amount of the check or ever filed with the proper
authorities any order to withhold the amount covered by the check. That
in any event, the bank cannot be held solidarily liable because the province
is the drawee of the check and therefore primarily liable to pay the same.
HELD:
Bank’s contentions are in the main correct.
But in view of the fact that upon its own request, it was furnished with
photostatic copies of the check in question and went to the trouble of
requiring to present the check to the provincial treasurer for necessary
certification, it voluntarily assumed the obligation of holding so much of the
deposit of the province as would be sufficient to cover the amount of the
check, or before allowing the withdrawal that exhausted said deposit, of
making the necessary inquiry on the matter.
There was implied acceptance of the check by the bank was thereby
created. The request by the bank from Bureau of Posts for photostatic
copies of the check and the subsequent requirement by it for its
presentation by McGuire to the provincial treasurer and the auditor for
certification, would be an empty gesture if the appellant didn’t thereby
mean to assume the obligation of paying the check and holding sufficient
deposit of the drawer for the purpose. Even so, appellant’s resulting
obligation is merely subsidiary, the province being primarily liable to pay
the check.
DISSENTING OPINION: there was no proper presentment for acceptance
and payment and thus, there couldn’t have been acceptance made by the
bank of the bill.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
167
PNB V. CA
25 SCRA 693
FACTS:
Lim deposited in his PCIB account a GSIS check drawn against PNB.
Following standard banking procedures, the check was sent to petitioner
for clearing. He didn’t return said check but paid the amount to PCIB as
well as debited it against the account of GSIS. Thereafter, a demand was
received from GSIS asking for the credit of the amount since the
signatures found in the check were forged. This was done by PNB and it
now comes after PCIB but the latter wouldn’t want to return the money.
HELD:
Acceptance is not required for checks, for the same are payable on
demand. Acceptance and payment are distinguished with each other. The
former pertains to a promise to perform an act while the latter is the actual
performance of the act.
PNB had also been negligent with the particularity that it had been guilty of
a greater degree of negligence because it had a previous and formal notice
from GSIS that the check had been lost, with the request that payment be
stopped. Just as important is that it is its acts, which are the proximate
cause of the loss.
Sec. 133. Holder entitled to acceptance on face of bill. - The holder
of a bill presenting the same for acceptance may require that the
acceptance be written on the bill, and, if such request is refused,
may treat the bill as dishonored.
Sec. 134. Acceptance by separate instrument. - Where an
acceptance is written on a paper other than the bill itself, it does
not bind the acceptor except in favor of a person to whom it is
shown and who, on the faith thereof, receives the bill for value.
Sec. 135. Promise to accept; when equivalent to acceptance. - An
unconditional promise in writing to accept a bill before it is drawn
is deemed an actual acceptance in favor of every person who, upon
the faith thereof, receives the bill for value.
WHERE ACCEPTANCE IS WRITTEN
Acceptance may be made
1. On the bill itself
2. On a separate paper
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 158 of 190
3.
If on a separate paper,
a. It may be acceptance as to the existing bill
b. It may be acceptance as to a non-existing bill (virtual
acceptance). If the bill is non-existent, the acceptance
on a separate paper must comply with the following
requirements
i. That the contemplated drawee shall describe the
bill to be drawn, and promise to accept it
ii. That the bill shall be drawn within a reasonable
time after such promise is written
iii. That the holder shall take the bill upon the credit
of the promise
RIGHT TO REQUIRE ACCEPTANCE ON BILL

The holder has the right to require that the acceptance must be
written on the bill itself

If the drawee refuses, the holder may treat the bill as dishonored, and
he must therefore, give a notice of dishonor

Otherwise, persons secondarily liable are discharged

This section isn’t applicable to sight bills but to bills of exchange
ILLUSTRATION OF SECTION 134

B the payee of the bill writes to X drawee, asking him whether he
would accept the bill

X write back stating that he accepts the bill

But a telegram that a draft is good in answer to a telegram asking a
bank if it would pay the draft isn’t acceptance nor an agreement to
accept

Court says that “good” constitutes an acceptance if written on the bill
or check but not when written in a collateral document such as a
telegram
ILLUSTRATION OF SECTION 135

Before the bill is drawn, B prospective payee, writes to X, prospective
drawee, if he would accept A’s bill for P1000 to cover cost of goods
purchased.

X writes through telegram “yes”

The promise to accept must be in writing

But although the acceptance of a bill may be conditional, a collateral
written promise to accept a bill upon a condition isn’t an acceptance
EFFECT OF ACCEPTANCE ON SEPARATE PAPER

Suppose that B payee, indorses the bill to C who neither saw nor knew
of the letter of acceptance.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010



C indorses the bill to D who saw the letter, and on faith thereof,
received the bill.
Can C enforce the bill against A? No, because the acceptance binds X
only in favor of those whom it is shown and who, on faith thereof,
receive the bill for value, and C neither saw nor knew of the
acceptance
But B and D can enforce the bill against X because they received the
bill for value on faith of the separate acceptance
Sec. 136. Time allowed drawee to accept. - The drawee is allowed
twenty-four hours after presentment in which to decide whether or
not he will accept the bill; the acceptance, if given, dates as of the
day of presentation.
ILLUSTRATION

A bill is payable 30 days after sight

B the payee presents it for acceptance on January 2, 1950 to X drawee

X has 24 hours to accept the bill

But even if he accepts the bill on the next day, the acceptance will
date back to January 2

Hence the date of maturity of the bill would be February 1 and not
February 2

The time allowed begins from the time of delivery and not after
demand for a return of the bill and the time for returning the bill to the
holder doesn’t begin to run from the demand for its return but from
the date of its delivery
SECTION 136 NOT APPLICABLE TO CHECKS

But a drawee bank isn’t entitled to 24 hours to decide whether to pay
a check or not since a check is presented for payment, not acceptance
NEGLIGENCE OF DRAWEE

The drawee bank contends that the collecting bank is guilty of
negligence in not discovering that the signatures of the drawer are
forged

Assuming this to be true, the drawee bank is guilty of a greater degree
of negligence because it has a previous and formal notice from the
drawer that the check had been lost, with the request that payment
thereof be stopped.

The collecting bank didn’t cash the check upon its presentation by the
last indorser and on the same day sent it for clearing through the
Central Bank
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 159 of 190


The drawee bank didn’t return the check and said failure to return the
check implied that it did considered the check good and would honor
it, as it in fact did honor and pay
The drawee bank may not recover from the collecting bank
Sec. 137. Liability of drawee returning or destroying bill. - Where a
drawee to whom a bill is delivered for acceptance destroys the
same, or refuses within twenty-four hours after such delivery or
within such other period as the holder may allow, to return the bill
accepted or non-accepted to the holder, he will be deemed to have
accepted the same.
CONSTRUCTIVE ACCEPTANCE
1. Where the drawee to whom the bill is delivered for acceptance
destroys it
2. Where the drawee refuses, within 24 hours after such delivery, or
within such time as is given him, to return the bill acceptected or
not accepted

In any of these cases, the drawee will be deemed to have accepted the
bill even if there is no actual written acceptance by him

Accordingly, the drawee will be primarily liable as an acceptor
DRAWEE NOT ENTITLED TO KEEP BILL

The drawee isn’t entitled to keep the bill while he makes up his mind

The bill is at all times the property of the holder and he is entitled to
have it when he wants it

If the holder should demand its return before 24 hours, the drawee
would be required to comply on pain of being held as an acceptor; but
return within 24 hours unaccepted wouldn’t be a dishonor

The drawee could still accept by notification within 24 hours
MERE RETENTION IS EQUIVALENT TO ACCEPTANCE

Mere failure to return the bill within 24 hours is an acceptance

The presentation for acceptance is a demand for acceptance which, if
the bill is retained by the drawee, implies a demand for its return if
acceptance is declined
SECTION 136 AND 137 COVER PRESENTMENT FOR ACCEPTANCE AND
PAYMENT

It expressly mentions presentment for acceptance but not
presentment for payment

The considerations for both are the same

He must return the instrument or be liable for its face value as
acceptor
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010

Rule forces uniform treatment of instruments whether presented for
payment or acceptance and establishes certain and predictable results
where it is not clear for which purpose the instrument was presented
CASE DIGESTS: SECTION 137
168
CEBU INTERNATIONAL V. CA
316 SCRA 488
FACTS:
Petitioner is a quasi-banking institution involved in money market
transactions. Alegre invested with petitioner P500,000. Petitioner issued
then a promissory note, which would mature approximately after a month.
The note covered for Alegre’s placement plus interest. On the maturity of
the note, petitioner issued a check payable to Alegre, covering the whole
amount due. It was drawn from petitioner’s current account in BPI. When
the wife of Alegre tried to deposit the check, the bank dishonored the
check. Petitioner was notified of this matter and Alegre demanded the
immediate payment in cash. In turn, petitioner promised to replace the
check on the impossible premise that the first issued be returned to them.
This prompted Alegre to file a complaint against petitioner and petitioner in
turn, filed a case against BPI for allegedly unlawfully deducting from its
account counterfeit checks. The trial court decided in favor of Alegre.
ISSUE: W/N NIL is applicable to the money market transaction held
between petitioner and Alegre?
HELD:
Considering the nature of the money market transaction, Article 1249 of
the CC is the applicable provision should be applied. A money market has
been defined to be a market dealing in standardized short-term credit
instruments where lenders and borrowers don’t deal directly with each
other but through a middleman or dealer in the open market. In a money
market transaction, the investor is the lender who loans his money to a
borrower through a middleman or dealer.
In the case at bar, the transaction is in the nature of a loan. Petitioner
accepted the check but when he tried to encash it, it was dishonored. The
holder has an immediate recourse against the drawer, and consequently
could immediately file an action for the recovery of the value of the check.
Further, in 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 legal tender, and therefore cannot constitute valid tender of
payment.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 160 of 190
Sec. 138. Acceptance of incomplete bill. - A bill may be accepted
before it has been signed by the drawer, or while otherwise
incomplete, or when it is overdue, or after it has been dishonored
by a previous refusal to accept, or by non payment. But when a bill
payable after sight is dishonored by non-acceptance and the
drawee subsequently accepts it, the holder, in the absence of any
different agreement, is entitled to have the bill accepted as of the
date of the first presentment.
WHEN ACCEPTANCE MAY BE MADE
1. Before the bill has been signed by the drawer
2. Even when the bill is otherwise incomplete
3. Even when the bill is overdue
4. Even after it has been dishonored by non-acceptance or nonpayment
Sec. 139. Kinds of acceptance. - An acceptance is either general or
qualified. A general acceptance assents without qualification to the
order of the drawer. A qualified acceptance in express terms varies
the effect of the bill as drawn.
Sec. 140. What constitutes a general acceptance. - An acceptance
to pay at a particular place is a general acceptance unless it
expressly states that the bill is to be paid there only and not
elsewhere.
Sec. 141. Qualified acceptance. - An acceptance is qualified which
is:
OTHER KINDS OF ACCEPTANCE
1. General acceptance—assents without qualification to the order of
the drawer
2. Qualified acceptance—which in express terms varies the effect of
the bills as drawn
a. Conditional
PAY TO B OR ORDER P1000 10 DAYS AFTER SIGHT.
SGD. A
TO X BANK
X could accept the bill with the qualification he will pay upon
the happening of a condition, let’s say when D would sell out
his shares in a company.
b.
Partial
PAY TO B OR ORDER P1000 10 DAYS AFTER SIGHT.
SGD.A
TO: X
X would accept but only accept to pay P500.
c.
Local
PAY TO B OR ORDER P1000 10 DAYS AFTER SIGHT.
SGD. A
TO: X
(a) Conditional; that is to say, which makes payment by the
acceptor dependent on the fulfillment of a condition therein stated;
X would accept but make a qualification that he would pay
only in RCBC Rockwell.
(b) Partial; that is to say, an acceptance to pay part only of the
amount for which the bill is drawn;
d.
Qualified as to time
PAY TO B OR ORDER P1000 10 DAYS AFTER SIGHT.
(c) Local; that is to say, an acceptance to pay only at a
particular place;
(d) Qualified as to time;
(e) The acceptance of some, one or more of the drawees but
not of all.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
SGD. A
TO: X
X accepts but will pay 20 days after sight.
e.
The acceptance of some, one or more of the drawees but
not all
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 161 of 190
PAYMENT AT A PARTICULAR PLACE

But the mere fact that the acceptance is to pay at a particular place
doesn’t make the acceptance qualified
Sec. 142. Rights of parties as to qualified acceptance. - The holder
may refuse to take a qualified acceptance and if he does not obtain
an unqualified acceptance, he may treat the bill as dishonored by
non-acceptance. Where a qualified acceptance is taken, the drawer
and indorsers are discharged from liability on the bill unless they
have expressly or impliedly authorized the holder to take a
qualified acceptance, or subsequently assent thereto. When the
drawer or an indorser receives notice of a qualified acceptance, he
must, within a reasonable time, express his dissent to the holder or
he will be deemed to have assented thereto.
RIGHTS OF HOLDER TO REQUIRE GENERAL ACCEPTANCE

The holder has the right to require the drawee to accept the bill
without qualification

If the drawee refuses, the holder can treat the bill as dishonored by
non-acceptance

Accordingly, the holder must give notice of dishonor
EFFECT OF TAKING QUALIFIED ACCEPTANCE

Where the holder takes a qualified acceptance, the drawer and
indorsers are discharged

Reason? The drawer and indorsers warrant that the bill would be paid
as drawn, or as indorsed by them, and a qualified acceptance would
vary their contract without their consent

If the drawer or indorsers give their consent to the qualified
acceptance, then they are not discharged. They will be considered to
have given consent when after receiving notice of the qualified
acceptance, he doesn’t express his dissent thereto within a reasonable
time
XI. PRESENTMENT FOR ACCEPTANCE
Sec. 143. When presentment for acceptance must be made. Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any other case,
where presentment for acceptance is necessary in order to fix the
maturity of the instrument; or
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
(b) Where the bill expressly stipulates that it shall be presented
for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the
residence or place of business of the drawee.
In no other case is presentment for acceptance necessary in order
to render any party to the bill liable.
CASE DIGESTS: SECTION 143
169
PRUDENTIAL BANK V. IAC
216 SCRA 257
FACTS:
PHIL RAYON IMPORTATION OF TEXTILE MACHINES NISSHO JAPAN
LETTER OF CREDIT
TRUST RECEIPT (SURETY SOLIDARILY LIABLE TO PB UPON FAILURE OF
PHIL RAYON TO PAY) (X)
PRUDENTIAL BANK
The trial court held Phil Rayon liable but not for the reimbursement of what
the bank paid for the machineries. This was appealed to the appellate
court.
HELD:
A letter of credit is defined as an engagement by a bank or other person
made at the request of a customer that the issuer will honor drafts or other
demands for payment upon compliance with the conditions specified in the
credit. Through a letter of credit, the bank merely substitutes its own
promise to pay for one of its customers who in return promises to pay the
bank the amount of funds mentioned in the letter of credit plus credit or
commitment fees mutually agreed upon. In the instant case then, the
drawee was necessarily the herein petitioner. It was to the latter that the
drafts were presented for payment. In fact, there was no need for
acceptance as the issued drafts are sight drafts. Presentment for
acceptance is necessary only in the cases expressly provided for in Section
143 of the Negotiable Instruments Law (NIL).
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 162 of 190
Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment
at maturity of any accepted draft, bill of exchange or indebtedness shall
not be extinguished or modified" does not, contrary to the holding of the
public respondent, contemplate prior acceptance by Philippine Rayon, but
by the petitioner. Acceptance, however, was not even necessary in the first
place because the drafts which were eventually issued were sight drafts
And even if these were not sight drafts, thereby necessitating acceptance,
it would be the petitioner and not Philippine Rayon which had to accept the
same for the latter was not the drawee. Presentment for acceptance is
defined an the production of a bill of exchange to a drawee for acceptance.
THE TRIAL COURT AND THE PUBLIC RESPONDENT, THEREFORE, ERRED IN
RULING THAT PRESENTMENT FOR ACCEPTANCE WAS AN INDISPENSABLE
REQUISITE FOR PHILIPPINE RAYON'S LIABILITY ON THE DRAFTS TO
ATTACH. Contrary to both courts' pronouncements, Philippine Rayon
immediately became liable thereon upon petitioner's payment thereof.
Such is the essence of the letter of credit issued by the petitioner. A
different conclusion would violate the principle upon which commercial
letters of credit are founded because in such a case, both the beneficiary
and the issuer, Nissho Company Ltd. and the petitioner, respectively,
would be placed at the mercy of Philippine Rayon even if the latter had
already received the imported machinery and the petitioner had fully paid
for it.
170
PHIL. BANK OF COMMERCE V. ARUEGO
102 SCRA 530
FACTS:
Aruego, on behalf of World Current Events, entered into a Credit
Agreement with PBCom, for the publication of the company’s periodicals.
At every printing endeavor by the printing press, a bill of exchange is
drawn against PBCom. The instruments are signed by Aruego, without any
indication that he is an agent of World Current Events. When he was being
held liable by PBCom, he averred that he only signed the instrument in the
capacity of agent of the company.
HELD:
An inspection of the drafts accepted by the defendant would show nowhere
that he has disclosed that he was signing in representation of the Philippine
Education Foundation Company. He merely signed his name. For failure to
disclose his principal, Aruego was personally liable for the drafts he
accepted.
Sec. 144. When failure to present releases drawer and indorser. Except as herein otherwise provided, the holder of a bill which is
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
required by the next preceding section to be presented for
acceptance must either present it for acceptance or negotiate it
within a reasonable time. If he fails to do so, the drawer and all
indorsers are discharged.
PRESENTMENT FOR PAYMENT, DEFINED

Production of a bill of exchange to the drawee for his acceptance
GENERAL RULE AS TO PRESENTMENT FOR ACCEPTANCE

Presentment for acceptance is not necessary for cases aside from the
three enumerated above

In those three cases, to charge persons secondarily liable it is
necessary
o
To make presentment for acceptance
o
To negotiate the bill within a reasonable time
ILLUSTRATION
1. Where the bill is payable after sight. A bill is payable 30 days
after sight.
The law requires the bill to be presented for
acceptance. The date of maturity will not be fixed if the bill isn’t
presented.
2. Where there is express stipulation. The bill contains a stipulation
that it must be presented for acceptance. Such a bill must be
presented for acceptance.
3. Where bill is drawn elsewhere than at the residence of drawee.
The bill reads as follows
a. The bill must be presented for acceptance in order to
inform the drawee X of the existence of the bill so that he
can make arrangements for its payment at the PNB
Manila
Pay to B or order P1000 at the PNB, Manila.
Sgd. A
To X, Davao City
Sec. 145. Presentment; how made. - Presentment for acceptance
must be made by or on behalf of the holder at a reasonable hour,
on a business day and before the bill is overdue, to the drawee or
some person authorized to accept or refuse acceptance on his
behalf; and
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 163 of 190
(a) Where a bill is addressed to two or more drawees who are
not partners, presentment must be made to them all unless one has
authority to accept or refuse acceptance for all, in which case
presentment may be made to him only;
(b) Where the drawee is dead, presentment may be made to his
personal representative;
(c) Where the drawee has been adjudged a bankrupt or an
insolvent or has made an assignment for the benefit of creditors,
presentment may be made to him or to his trustee or assignee.
TIME FOR MAKING PRESENTMENT FOR ACCEPTANCE
1. Before the bill is overdue
2. And within reasonable time after acquisition thereof

Where presentment is for acceptance, it may be made for all kinds of
bills before 12 o’clock noon on Saturday provided that day isn’t a
holiday
Sec. 147. Presentment where time is insufficient. - Where the
holder of a bill drawn payable elsewhere than at the place of
business or the residence of the drawee has no time, with the
exercise of reasonable diligence, to present the bill for acceptance
before presenting it for payment on the day that it falls due, the
delay caused by presenting the bill for acceptance before
presenting it for payment is excused and does not discharge the
drawers and indorsers.
MANILA, PHILS.
September 17, 2007
TO WHOM PRESENTMENT MADE
1. Generally, presentment must be made to the drawee or some
person authorized to accept or refuse acceptance on his behalf
2. Where there are two or more drawees, presentment must be
made to both of them unless—
a. One is duly authorized to accept or refuse acceptance
b. They are partners, subject to the limitation set forth in
the partnership law
3. With regard to a drawee who is dead, paragraph b is merely
permissive since presentment is excused where the drawee is
dead
4. With regard to an insolvent or bankrupt drawee, it indicates
merely a permission to adopt either one of two alternative
methods of presentment stated—not permission to omit
presentment altogether
PAY TO B OR ORDER AT THE PNB MANILA P1000 ON SEPTEMBER 20, 2007.
Sec. 146. On what days presentment may be made. - A bill may be
presented for acceptance on any day on which negotiable
instruments may be presented for payment under the provisions of
Sections seventy-two and eighty-five of this Act. When Saturday is
not otherwise a holiday, presentment for acceptance may be made
before twelve o'clock noon on that day.
(a) Where the drawee is dead, or has absconded, or is a
fictitious person or a person not having capacity to contract by bill.
SECTION 146 COMPARED WITH SECTIONS 72 AND 85

The only difference between Sections 72 and 85 is that under Section
146, there is no distinction between instruments payable at a fixed or
determinable future time and instruments payable on demand
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
SGD. A
TO X, WASHINGTON, DC.



Presentment where time is insufficient
The delay for presentment for acceptance is excused
Nonetheless, still, the payee must do everything in the process in
presenting to the drawee for acceptance the instrument
Sec. 148. Where presentment is excused. - Presentment for
acceptance is excused and a bill may be treated as dishonored by
non-acceptance in either of the following cases:
(b) Where, after the exercise
presentment cannot be made.
of
reasonable
diligence,
(c) Where, although presentment has been
acceptance has been refused on some other ground.
irregular,
APPLICATION OF SECTION 148
1. Where the drawee is dead, presentment for acceptance is not
necessary. Hence, it seems that under paragraph b of Section
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 164 of 190
2.
3.
145, the presentment to the representative is merely optional.
Presentment is excused in this case and in case the drawee has
absconded, or is fictitious or a person not having capacity to
contract because it would then be futile
Where presentment cannot be made notwithstanding the exercise
of due diligence, presentment is excused
An irregular indorsement in which acceptance is refused on some
other ground is where presentment is made on a Sunday, it is
irregular but the acceptance is refused on the ground that the
drawer has no funds in the hands of the drawee
Sec. 149. When dishonored by nonacceptance. - A bill is dishonored
by non-acceptance:
(a) When it is duly presented for acceptance and such an
acceptance as is prescribed by this Act is refused or can not be
obtained; or
(b) When presentment for acceptance is excused and the bill is
not accepted.
Sec. 150. Duty of holder where bill not accepted. - Where a bill is
duly presented for acceptance and is not accepted within the
prescribed time, the person presenting it must treat the bill as
dishonored by nonacceptance or he loses the right of recourse
against the drawer and indorsers.
DUTY OF HOLDER WHERE BILL IS DISHONORED BY NON-ACCEPTANCE

Where the bill is dishonored by non-acceptance, the holder must give
notice of dishonor and protest, when required

Otherwise, the drawer and indorsers will be discharged
Sec. 151. Rights of holder where bill not accepted. - When a bill is
dishonored by nonacceptance, an immediate right of recourse
against the drawer and indorsers accrues to the holder and no
presentment for payment is necessary.
RIGHTS OF HOLDER WHERE BILL DISHONORED BY NON-ACCEPTANCE

When a bill is dishonored by non-acceptance, there is no necessity of
making a presentment of the bill for payment

But of course, if after previous non-acceptance, the bill is subsequently
accepted, presentment for payment is necessary

And when the bill has been accepted for honor, to charge the acceptor
for honor, presentment for payment is also necessary
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010

The holder, after giving notice of dishonor, and protesting when
required, can IMMEDIATELY file an action against the parties
secondarily liable on the bill. This is true even when the bill is payable
at a fixed or determinable future time and the date of maturity hasn’t
yet arrived. The holder need not wait for that day to arrive.
XII. PROTEST
Sec. 152. In what cases protest necessary. - Where a foreign bill
appearing on its face to be such is dishonored by nonacceptance, it
must be duly protested for nonacceptance, by nonacceptance is
dishonored and where such a bill which has not previously been
dishonored by nonpayment, it must be duly protested for
nonpayment. If it is not so protested, the drawer and indorsers are
discharged. Where a bill does not appear on its face to be a foreign
bill, protest thereof in case of dishonor is unnecessary.
NECESSITY OF PROTEST

Protest is required only for foreign bills but not for inland bills or notes.
However, they may also be protested if desired.

Omission of protest, where protest is required, will discharge the
drawer and the indorsers

Protest is required—
1. Where the foreign bill is dishonored by non-acceptance
2. Where the foreign bill is dishonored by non-payment, it not having
been previously dishonored by non-acceptance
3. Where the bill has been accepted for honor, it must be protested
for non-payment before it is presented for payment to the
acceptor for honor
4. Where the bill contains a referee in case of need, it must be
protested for non-payment before it is presented for payment to
the referee in case of need
MEANING OF PROTEST

A formal statement in writing made by a notary under his seal of office
at the request of the holder of a bill or note, in which it is declared that
the same was on a certain day presented for payment was refused,
whereupon the notary protests against all parties to such instrument
and declares that they will be held responsible for all loss or damage
arising from its dishonor

All the steps or acts accompanying the dishonor of a bill or note
necessary to charge an indorser
CASE DIGESTS: SECTION 152
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 165 of 190
171
ALLIED BANKING CORPORATION V. CA
494 SCRA 467
FACTS:
ALLIEDDISCOUNTING AGREEMENT: EXPORT BILLGG SPORTSWEAR
GUARANTYGIDWANI; ALCRON
SURETYDE VILLA; GIDWANI
Allied purchased from GG Sportswear an export bill to which the latter is
the beneficiary. It was drawn under a letter of credit for the transit of
training suits to West Germany. It was issued by Chekiang First Bank of
Hong Kong. With the purchase, it credited the account of GG Sportswear.
On this same date, Gidwani and Alcron executed their respective letters of
guaranty for the export bill, holding themselves liable in case the bill is not
paid.
Consequently, de Villa and Gidwani issued a letter of surety,
guaranteeing payment of the bill. Part of the stipulations of these two
guarantee arrangements is that any notice of protest is waived. The date
came when Allied presented the check for payment to Chekiang Bank but
such was dishonored for lacking material documents with regard the letter
of credit.
This prompted Allied Bank to demand payment from the
respondents but the latter refused to do so. One of their averments is that
they couldn’t be made liable on the export bill absent any notice of protest
coming from petitioner.
The trial court dismissed the case filed by
petitioner and this was modified by the appellate court by holding GGS
liable but exonerating the guarantors from any liability.
HELD:
What transpired in this case was a discounting arrangment.
The
beneficiary, GGS, instead of proceeding to the issuing bank, negotiated the
draft with petitioner. Before petitioner agreed to purchase the export bill,
it required letters of guaranty and surety to cover the payment of the bill in
case it wouldn’t be paid.
In this case, it must be stressed that obligations from contracts have the
force of law between the parties and should be complied with in good faith.
Nothing can stop the parties from establishing stipulations and clauses as
they may deem convenient.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Here, the provisions on guaranty is pertinent. The respondents undertook
and bound themselves as guarantors and sureties to pay the full amount of
the export bill.
Respondents claim that the petitioner failed to give a notice of protest and
given such, they are exonerated of their liabilities. Nonetheless, their
contention should fail. The provisions on indorsers is not applicable to this
case. The contract of indorsement is primarily of transfer and a guaranty
is a personal security. The liability of a guarantor is broader than that of
an indorser. Unless the bill is promptly presented for payment at maturity
and due notice of dishonor given to the indorser, he will be discharged
from liability thereon. On the other hand, except where required by the
provisions of the contract of suretyship, a demand or notice of default is
not required to fix the liability of the surety. Therefore, no notice of
protest is necessary to charge the respondents solidarily on the export bill.
Sec. 153. Protest; how made. - The protest must be annexed to the
bill or must contain a copy thereof, and must be under the hand
and seal of the notary making it and must specify:
(a) The time and place of presentment;
(b) The fact that presentment was made and the manner
thereof;
(c) The cause or reason for protesting the bill;
(d) The demand made and the answer given, if any, or the fact
that the drawee or acceptor could not be found.
PROCEDURE FOR PROTEST

Where the instrument is presented for payment and payment is
refused, the instrument may be taken by the notary public to the party
and the party may state that he refuses to pay it; the notary makes a
statement to that effect and attaches his seal that it has been
dishonored, and he has protested it for non-payment.

The notary keeps this or he may send his sworn statement, one copy
to one person and one to the other

The above is the protest. It is not the notice of protest.

The protest is a solemn declaration made by the notary public that the
paper has been dishonored
CERTIFICATE OF PROTEST AS EVIDENCE
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 166 of 190



When suit is brought on the paper, it is absolutely necessary that proof
be shown
So when one comes to prove his case as the holder of an instrument
he must prove that there has been a protest of the instrument, that it
has been presented for payment or acceptance to the person liable
and that it has been refused.
At the trial, the statement of the protest by the notary is a part of his
case
NOTICE OF PROTEST

After the notary protests the instrument, he sends notice to all the
parties on the instrument

He can do this in several ways. He might send it to the person who
sent the paper for collection. Then the notary public would send the
notice of protest for the other parties on the instrument, to the last
person on the instrument, and he would say “Notices enclosed
herewith to be sent to the other parties”

If the holder has sent notice to all parties he is entield to come in and
recover because he has performed the contract. He has sent notices
to all the parties on the instrument that he intends to recover against
them.
REASONS FOR REQUIRING PROTEST
1. For uniformity in international transactions because most
countries require it
2. In order to furnish authentic and satisfactory evidence of the
dishonor to the drawer who, from his residence abroad, may
experience difficulty in verifying the matter and may be forced to
rely on the representations of the holder
MEASURE OF DAMAGES
1. Face value of the bill
2. Interest thereon
3. Protest fees
4. Re-exchange, being the additional expense of procuring a new bill
for the same amolunt payable in the same place as day of
dishonor
Sec. 154. Protest, by whom made. - Protest may be made by:
(a) A notary public; or
(b) By any respectable resident of the place where the bill is
dishonored, in the presence of two or more credible witnesses.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Sec. 155. Protest; when to be made. - When a bill is protested, such
protest must be made on the day of its dishonor unless delay is
excused as herein provided. When a bill has been duly noted, the
protest may be subsequently extended as of the date of the noting.
MEANING OF “DULY NOTED”

The notary public jots down a note on the bill, or a paper attached
thereto, or in his registry book, consisting of his initials or signature
and those matters required to be stated in Section 153

The noting must be made on the day of dishonor but it may be
extended into a formal protest afterwards

The protest may even be made in the trial
Sec. 156. Protest; where made. - A bill must be protested at the
place where it is dishonored, except that when a bill drawn payable
at the place of business or residence of some person other than the
drawee has been dishonored by nonacceptance, it must be
protested for non-payment at the place where it is expressed to be
payable, and no further presentment for payment to, or demand on,
the drawee is necessary.
PLACE FOR MAKING PROTEST

Generally, the protest must be made at the place where the
instrument is dishonored

The exception is where the bill is payable at a place other than the
residence of the payee
Sec. 157. Protest both for non-acceptance and non-payment. - A
bill which has been protested for non-acceptance may be
subsequently protested for non-payment.
PROTEST FOR NON-PAYMENT OPTIONAL AFTER PROTEST FOR NONACCEPTANCE

Where a bill has already been protested for non-acceptance, protest
for non-payment is merely optional

Under Section 151, after a bill has been dishonored by nonacceptance, presentment for payment is not necessary
Sec. 158. Protest before maturity where acceptor insolvent. Where the acceptor has been adjudged a bankrupt or an insolvent
or has made an assignment for the benefit of creditors before the
bill matures, the holder may cause the bill to be protested for
better security against the drawer and indorsers.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 167 of 190

PROTEST FOR BETTER SECURITY

One made by the holder against the drawer and indorsers where the
acceptor has been adjudged bankrupt or an insolvent or has made an
assignment for the benefit of creditors before the bill matures

Such a protest isn’t necessary to charge the drawer or indorsers

It is optional on the part of the holder
WHEN PROTEST FOR BETTER SECURITY MADE
1. After acceptance
2. But before the date of maturity
3. When the acceptor has been adjudged bankrupt or insolvent or
has made an assignment for the benefit of creditors
PURPOSE OF PROTEST FOR BETTER SECURITY

When the acceptor is declared bankrupt, he probably wouldn’t be able
to pay for the bill

The protest for better security is to give notice to the drawer or
indorsers of this fact in order to enable them to make the necessary
arrangements so that they will not be held liable thereon and prevent
loss of re-exchange
Sec. 159. When protest dispensed with. - Protest is dispensed with
by any circumstances which would dispense with notice of
dishonor. Delay in noting or protesting is excused when 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, the bill must be noted or
protested with reasonable diligence.
Sec. 160. Protest where bill is lost and so forth. - When a bill is lost
or destroyed or is wrongly detained from the person entitled to
hold it, protest may be made on a copy or written particulars
thereof.
EFFECT OF LOSS OR DESTRUCTION OF BILL

Loss or destruction of the bill doesn’t excuse the making of the protest

In a case, checks indorsed without restriction and deposited in the
defendant bank which credited the amount to the depositor’s account
and mailed them to its correspondent for collection, were lost and not
found until after the drawer became bankrupt

They were not dishonored due to the failure of defendant to attempt to
collect them as lost paper
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
It was held that the bank must stand the loss and cannot charge the
amount of the checks to the depositor’s account
XIII. ACCEPTANCE FOR HONOR
Sec. 161. When bill may be accepted for honor. - When a bill of
exchange has been protested for dishonor by non-acceptance or
protested for better security and is not overdue, any person not
being a party already liable thereon may, with the consent of the
holder, intervene and accept the bill supra protest for the honor of
any party liable thereon or for the honor of the person for whose
account the bill is drawn. The acceptance for honor may be for part
only of the sum for which the bill is drawn; and where there has
been an acceptance for honor for one party, there may be a further
acceptance by a different person for the honor of another party.
ACCEPTANCE FOR HONOR

An acceptance of bill made by a stranger to it before maturity, where
the drawee of the bill has refused to accept it, and the bill has been
protested for non-acceptance, or where the bill has been protested for
better security

Such an acceptance is also called an acceptance supra protest

This is a peculiar kind of acceptance. It most frequently happens when
the original drawee refuses to accept the bill in which case a stranger
may accept the bill for the honor of some one of the parties thereto,
which acceptance will inure to the benefit of all parties subsequent to
him for whose honor it was accepted
PURPOSE FOR ACCEPTANCE FOR HONOR

To save the credit of the parties to the instrument or some party to it,
as the drawer, drawee, or indorser or somebody else

Someone desires to save the credit of another on the bill and he does
so by writing accepted on the bill

The court holds that the consideration is presumed and the
presumption is that he does have funds or money for the party for
whose honor he accepts
REQUISITES FOR ACCEPTANCE FOR HONOR
1. The bill must have been previously protested for non-acceptance
or for better security
2. The bill isn’t overdue at the time of the acceptance for honor
3. The acceptor for honor must be a stranger to the bill. If he is a
party, his acceptance for honor wouldn’t give any additional
security to the holder, as such a party is already liable thereon
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 168 of 190
4.
The holder must give his consent
Sec. 162. Acceptance for honor; how made. - An acceptance for
honor supra protest must be in writing and indicate that it is an
acceptance for honor and must be signed by the acceptor for honor.
HOW ACCEPTANCE IS MADE

Acceptance for honor must be in writing and indicate that it is an
acceptance for honor and signed by the person making the acceptance
ACCEPTOR FOR HONOR MUST APPEAR BEFORE NOTARY

It is essential that the acceptor for honor appear before the notary and
declare that he accepts the protested bill in honor of the drawer or
indorser, as the case may be, and that he will pay it at the appointed
time
Sec. 163. When deemed to be an acceptance for honor of the
drawer. - Where an acceptance for honor does not expressly state
for whose honor it is made, it is deemed to be an acceptance for
the honor of the drawer.
Sec. 164. Liability of the acceptor for honor. - The acceptor for
honor is liable to the holder and to all parties to the bill subsequent
to the party for whose honor he has accepted.
Sec. 165. Agreement of acceptor for honor. - The acceptor for
honor, by such acceptance, engages that he will, on due
presentment, pay the bill according to the terms of his acceptance
provided it shall not have been paid by the drawee and provided
also that is shall have been duly presented for payment and
protested for non-payment and notice of dishonor given to him.
TO WHOM ACCEPTOR IS LIABLE

Suppose A is the drawer of a bill with B as payee and X as drawee

It is successively indorsed to C, D, E and F. X drawee at maturity
refuses to accept the bill and F protests it.

Before the date of maturity, Y as a stranger accepts the bill for the
honor of C.

Subject to 165, Y is liable to F holder, and to D and E, parties
subsequent to C, the party for whose honor Y accepted the bill
CONTRACT OF ACCEPTOR FOR HONOR

The liability of an acceptor for honor is secondary and not primary or
absolute
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010

He agrees to pay if—presentment for payment has been made; the
drawee doesn’t pay; the bill is protested for non-payment; and notice
of dishonor is given to him
Sec. 166. Maturity of bill payable after sight; accepted for honor. Where a bill payable after sight is accepted for honor, its maturity
is calculated from the date of the noting for non-acceptance and
not from the date of the acceptance for honor.
Sec. 167. Protest of bill accepted for honor, and so forth. - Where a
dishonored bill has been accepted for honor supra protest or
contains a referee in case of need, it must be protested for nonpayment before it is presented for payment to the acceptor for
honor or referee in case of need.
Sec. 168. Presentment for payment to acceptor for honor, how
made. - Presentment for payment to the acceptor for honor must
be made as follows:
(a) If it is to be presented in the place where the protest for
non-payment was made, it must be presented not later than the
day following its maturity.
(b) If it is to be presented in some other place than the place
where it was protested, then it must be forwarded within the time
specified in Section one hundred and four.
Sec. 169. When delay in making presentment is excused. - The
provisions of Section eighty-one apply where there is delay in
making presentment to the acceptor for honor or referee in case of
need.
Sec. 170. Dishonor of bill by acceptor for honor. - When the bill is
dishonored by the acceptor for honor, it must be protested for nonpayment by him.
NECESSITY OF PROTEST

The holder must protest for non-payment by the acceptor for honor in
order to fix the liabilities of the indorsers
NOTES: WEEK #14
SEPTEMBER 24 - 28, 2007
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 169 of 190
XIV. PAYMENT FOR HONOR
Sec. 171. Who may make payment for honor. - Where a bill has
been protested for non-payment, any person may intervene and
pay it supra protest for the honor of any person liable thereon or
for the honor of the person for whose account it was drawn.
Sec. 172. Payment for honor; how made. - The payment for honor
supra protest, in order to operate as such and not as a mere
voluntary payment, must be attested by a notarial act of honor
which may be appended to the protest or form an extension to it.
Sec. 173. Declaration before payment for honor. - The notarial act
of honor must be founded on a declaration made by the payer for
honor or by his agent in that behalf declaring his intention to pay
the bill for honor and for whose honor he pays.
REQUISITES FOR PAYMENT FOR HONOR
1. The bill has been protested for non-payment
2. And any person even a party thereto, may pay supra protest
FORM FOR PAYMENT FOR HONOR
1. The payment must be attested by notarial act appended to the
protest or form an extension of it
2. The notarial act must be based on a declaration by the payer for
honor
PROCEDURE FOR PAYMENT FOR HONOR
1. The payer or his agent goes to a notary public and declares his
intention to pay the bill and for whose honor he pays
2. The notary then records the declaration in the protest or in a
separate paper attached to it
3. The payer then notifies the person for whose honor he pays within
reasonable time
PURPOSE FOR PAYMENT FOR HONOR

Instead of simple negotiation to the person desiring to pay, payment
for honor may be availed of when the holder doesn’t want to indorse
the bill and thereby incur the liabilities of an indorser or of one
negotiating by mere delivery
Sec. 174. Preference of parties offering to pay for honor. - Where
two or more persons offer to pay a bill for the honor of different
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
parties, the person whose payment will discharge most parties to
the bill is to be given the preference.
Sec. 175. Effect on subsequent parties where bill is paid for honor.
- Where a bill has been paid for honor, all parties subsequent to the
party for whose honor it is paid are discharged but the payer for
honor is subrogated for, and succeeds to, both the rights and duties
of the holder as regards the party for whose honor he pays and all
parties liable to the latter.
ILLUSTRATION OF EFFECT OF PAYMENT FOR HONOR
PAY TO B OR ORDER P1000.
SGD.A
TO: X DRAWEE
BCDEF
X REFUSES TO PAY.
F HAS DULY PROTESTED FOR NON-PAYMENT
Y PAYS FOR THE HONOR OF C

D and E, being subsequent to C, for whose honor the payment is
made, are discharged

Y acquires the rights of F, as against C, A, B and X parties who are
liable to C but the payor for honor shall notify within reasonable time,
the party for whose honor he pays.

Otherwise, the party is not bound to refund.
PREFERENCE OF PARTIES OFFERING TO PAY

If Z offers to pay for the honor of B, he is to be preferred as Z’s
payment for the honor of B will discharge C, D, and E while Y’s
payment for C would only discharge D and E
Sec. 176. Where holder refuses to receive payment supra protest. Where the holder of a bill refuses to receive payment supra protest,
he loses his right of recourse against any party who would have
been discharged by such payment.
Sec. 177. Rights of payer for honor. - The payer for honor, on
paying to the holder the amount of the bill and the notarial
expenses incidental to its dishonor, is entitled to receive both the
bill itself and the protest.
RIGHTS OF PAYER FOR HONOR
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 170 of 190
1.
2.
He acquires the rights of a holder under Section 175 and in
addition
The payor for honor has also the right to receive both the bill and
the protest. This is to enable him to enforce his rights against
those who are liable to him.
Wednesday: 185 and 186 plus cases
XV. BILLS IN SET
Sec. 178. Bills in set constitute one bill. - Where a bill is drawn in a
set, each part of the set being numbered and containing a
reference to the other parts, the whole of the parts constitutes one
bill.
BILL IN SET

One composed of various parts, each part being numbered, and
containing a reference to the other parts, all of which parts constitute
one bill
ILLUSTRATION OF A BILL IN SET CONSISTING OF TWO PARTS
Exchange for P2000
First
First part
Manila, Philippines
September 24, 2007
30 days after sight of this First of Exchange (Second part unpaid), pay to
the order of B P2000.
Sgd. A
To X
48 Exchange Place
New York City
Second part
Exchange for P2000
Second
Manila, Philippines
September 24, 2007
30 days after sight of this Second of Exchange (First part unpaid), pay to
the order of B, P2000.
Sgd. A
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
To X
48 Exchange Place
New York City
PURPOSE OF BILL IN SET

Bills in set are for the purpose of increasing the probability of the bill
reaching its destination

For this reason, each part is sent by different conveyances

B, the payee, is supposed to negotiate only one part, or if he is paid on
one, he cannot be paid on the second part
Sec. 179. Right of holders where different parts are negotiated. Where two or more parts of a set are negotiated to different
holders in due course, the holder whose title first accrues is, as
between such holders, the true owner of the bill. But nothing in
this section affects the right of a person who, in due course,
accepts or pays the parts first presented to him.
ILLUSTRATION OF SECTION 179

B, payee, wants to raise P4000.
In violation of his rights, he
negotiates the first part of the bill to C and the second part to D, both
of whom are holders in due course. Who is the true owner of the bill?

If B negotiates to C on September 25 and to D on September 27, C is
the true owner, as C’s title accrues first.

But if D succeeds in presenting his part of the bill for acceptance for
payment and X the drawee, accepts or pays the second part in due
course, X is protected and X can refuse to accept C’s part of the bill.
Sec. 180. Liability of holder who indorses two or more parts of a set
to different persons. - Where the holder of a set indorses two or
more parts to different persons he is liable on every such part, and
every indorser subsequent to him is liable on the part he has
himself indorsed, as if such parts were separate bills.
LIABILITY OF HOLDER WHO INDORSES TWO OR MORE PARTS

B is liable on both parts as if there are two bills, on the first to C and
on the second to D

In other words, as a result of his negotiation of the 2 parts, B is liable
for a total of P4000

But A, the drawer, or X, the drawee, is liable only on one part or for
P2000 unless the drawee accepts both parts
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 171 of 190

Suppose that C and D respectively negotiate the parts they have to E,
the first part, and F, the second part. C is liable to E for the part he
endorsed to E and D is liable to F for the part he indorsed to F.
Sec. 181. Acceptance of bill drawn in sets. - The acceptance may be
written on any part and it must be written on one part only. If the
drawee accepts more than one part and such accepted parts
negotiated to different holders in due course, he is liable on every
such part as if it were a separate bill.
Sec. 184. Promissory note, defined.
A negotiable promissory note within the meaning of this Act 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. Where a note is drawn to the maker's own order, it is not
complete until indorsed by him.
DRAWEE MUST ACCEPT ONLY ONE PART

The drawee X must accept only one part

But if he accepts both parts and they are negotiated to holders in due
course, he is liable on every such part as if it were a separate bill, that
is, for a total of P4000

But he can ask for reimbursement from A, drawer, on only one part,
that is P2000, because the order of the drawer to him is to pay only
one part, not both parts
IS MAKER LIABLE AS INDORSER?

The maker of a note payabloe to himself who indorses it is not liable
as indorser but only as maker.

Since the indorsement by the maker-payee isn’t part of a sale of the
note, it should not give rise to any warranty.

In the absence of such warranties, it is immaterial whether the
defendant is sued as an indorser or as maker since, in either event, he
may set up the defense of fraud against the plaintiff unless the plaintiff
is a holder in due course.
Sec. 182. Payment by acceptor of bills drawn in sets. - When the
acceptor of a bill drawn in a set pays it without requiring the part
bearing his acceptance to be delivered up to him, and the part at
maturity is outstanding in the hands of a holder in due course, he is
liable to the holder thereon.
SPECIAL TYPES OF PROMISSORY NOTES
1. Certificate of deposit
2. Bonds
3. Bank notes
4. Due bills
ILLUSTRATION

Suppose that X accepts only the first part. Then he pays the second
part without requiring the return of the first part.

On the date of maturity, X would still be liable to the holder of the first
part on which it appears his acceptance
CERTIFICATE OF DEPOSIT

Written acknowledgement by a bank of the receipt of money on
deposit which the bank promises to pay to the depositor, bearer, or to
some other person or order
Sec. 183. Effect of discharging one of a set. - Except as herein
otherwise provided, where any one part of a bill drawn in a set is
discharged by payment or otherwise, the whole bill is discharged.
EFFECT OF DISCHARGE ON ONE PART

Subject to the exceptions in Section 180, 181, and 182, if one part is
discharged, the whole bill is discharged

The reason is that the bill constitutes only one bill

Thus, suppose that in the illustration, X the acceptor pays the first part
which he accepted.

The second and third parts are also discharged
XVI. PROMISSORY NOTES AND CHECKS
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
BONDS

A promise, under seal to pay money

More formal in character

Runs for a longer period of time

Issued under different legal circumstances
CLASSES OF BONDS
1. Mortgage bonds
2. Equipment bonds
3. Collateral trust bonds
4. Guaranteed bonds
5. Debentures
6. Income bonds
7. Convertible
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 172 of 190
8. Redeemable
9. Registered bonds
10. Coupon bonds
BANK NOTES

Bank notes are the promissory notes of the issuing bank payable to
bearer on demand and intended to circulate as money

Regarded as cash and pass from hand to hand without any evidence of
title in the holder than that which arises from possessession

However, they are not money
DUE BILL

Instrument whereby one person acknowledges his indebtedness to
another
CLEARING HOUSE DUE BILL

Device of clearing house associations to save inconvenience and labor
incident to the settling of balances between the members of the
association

The certificates or due bills are issued, instead of actual payment of
money, by one member of the association to another

They are not merely certificates of deposit creating a contract of
bailment but are negotiable as checks payable to bearer, or as
promissory notes payable to order or bearer
Sec. 185. Check, defined. - A check is a bill of exchange drawn on a
bank payable on demand. Except as herein otherwise provided, the
provisions of this Act applicable to a bill of exchange payable on
demand apply to a check.
CHECK, DEFINED

Bill of exchange drawn on a bank payable on demand
CHECK DISTINGUISHED FROM A PROMISSORY NOTE; USED AS
SUBSTITUTE FOR MONEY; EFFECT OF WORTHLESS CHECKS ON TRADE
CIRCLES AND BANKING COMMUNITY

A check is not a mere undertaking to pay an amount of money

It is an order addressed to a bank and partakes of a representation
that the drawer has funds on deposit against which the check is
drawn, sufficient to ensure payment upon its presentment to the bank

Element of assurance or certainity that the instrument will be paid
upon presentation
ISSUING CHECK WITHOUT FUNDS AS ESTAFA
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010

Issuing a check without sufficient funds in the drawee bank constitutes
estafa if it is done as a means of obtaining money and merchandise
but not if the check is given for a pre-existing debt
BP 22: BOUNCING CHECKS LAW
ELEMENTS OF OFFENSE DEFINED IN THE FIRST PARAGRAPH OF SECTION
1: BP 22
1. That a person makes or draws and issues any check.
2. That the check is made or drawn and issued to apply on account or for
value.
3. That the person who makes or draws and issues the check knows at the
time of issue that he does not have sufficient funds
4. In or credit with the drawee bank for the payment of such check in full
upon its presentment.
5. That 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 the drawee, without any valid reason, ordered the
bank to stop payment.
NOTE: Failure to make good within 5 banking days prima facie evidence
of knowledge of lack and insufficiency
ELEMENTS OF THE OFFENSE DEFINED IN THE SECOND PARAGRAPH OF
SECTION 1: BP 22
1. That a person has sufficient funds in or credit with the drawee bank
when he makes or draws and issues a check.
2. That he fails to keep sufficient funds or to maintain a credit to cover the
full amount of the check if presented within
3. A period of 90 days from the date appearing thereon.
4. That the check is dishonored by the drawee bank.
NOTE: Failure to make good within 5 banking days prima facie evididence
of knowledge of lack and insufficiency
BP 22 IS CONSTITUTIONAL; NOT VIOLATIVE OF PROHIBITION AGAINST
IMPRISONMENT FOR DEBT, FREEDOM OF CONTRACT; EQUAL PROTECTION
OF LAW, PROHIBITION AGAINST UNDUE DELEGATION OF POWER; AND
PROHIBITION ON AMENDMENTS ON THIRD READING
ISSUING CHECKS WITHOUT OR WITH INSUFFICIENT FUNDS UNDER BP22
1. Issuing a check with knowledge of insufficiency of funds to pay for
the check, and the check is subsequently dishonored by the
drawer bank for insufficiency of funds or credit or would have
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 173 of 190
2.
been dishonored for the same reason had not the drawer, without
any valid reason, ordered the bank to stop payment
Issuing a check with sufficient funds or credit to pay for the same,
but with failure to keep sufficient funds or maintain a credit to
cover a full amount of the check if presented within 90 days from
the date appearing thereon, for which reason the check is
dishonored
ELEMENTS OF THE OFFENSE OF ISSUING BOUNCING CHECKS
1. The making, drawing and issuance of any check to apply to
account or for value
2. The maker, drawer, or issuer knows at the time of issue that he
doesn’t have sufficient funds in or credit with the drawee bank for
the payment of such check in full upon its presentment
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 the drawer, without any valid reason,
ordered the bank to stop payment
ISSUANCE OF BUM CHECKS GIVE RISE TO PRIMA FACIE PRESUMPTION OF
KNOWLEDGE

Gravamen of the offense under BP22 is the act of making and issuing a
worthless check or a check that is dishonored upon its presentment for
payment

The law made the mere act of issuing a bum check a malum
prohibitum
BP22 PENALIZES ACT OF MAKING OR DRAWING AND ISSUANCE OF
BOUNCING CHECKS, NOT ONLY DISHONOR

The law penalizes the act or making or drawing and issuance of a
bouncing check and not only the fact of dishonor

Where the bouncing check was issued before the effectivity of BP22,
but dishonored after such effectivity, the accused who issued the
bouncing check didn’t commit a violation thereof as there was no law
that was violated
KNOWLEDGE OF MAKER OR DRAWER OF CHECK OF INSUFFICIENCY OF
FUNDS ESSENTIAL ELEMENT OF OFFENSE
FILING OF ACTION TO ANNUL DEED OF SALE ON WHICH BOUNCING
CHECK WAS ISSUED, NOT A PREJUDICIAL QUESTION
IT IS NOT A DEFENSE THAT THE CHECK WAS ISSUED TO GUARANTEE OR
SECURE PAYMENT OF OBLIGATION
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
FOREIGN CHECKS ARE COVERED BY BP22
ACCUSED MAY BE CONVICTED OF BOTH BP22 AND ESTAFA
AS ELEMENT OF VIOLATION OF BP22, KNOWLEDGE OF INSUFFICIENCY OF
FUNDS IS CONTINUING EVENTUALITY FROM ISSUANCE OF DISHONOR
VIOLATION OF BOUNCING CHECKS LAW IS TRANSITORY AND
CONTINUING CRIME AND ITS VENUE IS ANY OF PLACES WHERE IN PART
COMMITTED
IS ISSUANCE OF CHECK FOR PREEXISTING DEBT DEFENSE UNDER BP22?

Under the cases, the issuance of a check without or with insufficient
funds is not estafa where it is issued for a preexisting debt. But would
the issuance of such check be a defense under BP22?

Section 1 of said law in making the drawing or issuance of a check
under the circumstances stated in the law of a crime, uses the words
“to apply for account or for value”

Account—to refer to a claim or demand growing out of the sale of
goods, performance on services and the like; preexisting debt
JURISDICTION ON BOUNCING CHECKS LAW VIOLATION IS DETERMINED
BY ALLEGATIONS IN INFORMATION, PLACE OF ISSUANCE OF CHECKS
ELEMENTS OF ESTAFA BY POSTDATING A CHECK OR ISSUING A CHECK
IN PAYMENT OF AN OBLIGATION
1. That the offender postdated a check, or issued a check in payment of an
obligation.
2. That such postdating or issuing a check was done when the offender had
no funds in the bank or his funds deposited therein were not sufficient to
cover the amount of the check.
WHEN POSTDATING CHECK IS NOT ESTAFA
1. Postdating a check or issuing it for payment of an obligation, the
offender knowing that at the time he had no funds in the bank, or
the funds deposited by him in the bank weren’t sufficient to cover
the amount of the check, and without informing the payee of such
circumstances isn’t a crime in itself as estafa
2. However, under BP22, such issuance of a check would be a crime,
where subsequently, the check is dishonored for insufficiency of
fund or credit, or would have been dishonored for the same
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 174 of 190
3.
4.
reason had not the drawer, without any valid reason ordered the
bank to stop payment
If the payee was informed that the check wasn’t covered by
adequate funds and it is expected that such funds would be
available when the check became due, the drawer isn’t guilty of
bad faith in issuing it. Where a person issued a post dated check
without funds to cover it and informs the payee of that fact, he
isn’t guilty of estafa because there is no deceit
Accused issuing unfunded check but with OD or DAUD privilege
not guilty of fraudulent intent
DRAWING OF A CHECK WITH INSUFFICIENT FUNDS ISN’T FALSIFICATION
WHEN POSTDATING CHECK IS A CRIME

The payee or the person receving the check must be defrauded by the
act of the offender

To defraud is to deprive of some right, interest, or property by a
deceitful device
DISTINCTIONS BETWEEN ESTAFA CONSISTING OF ISSUING CHECKS
WITHOUT FUNDS AND VIOLATION OF BP22
ESTAFA
Deceit and damage are essential
elements of the crime
BP22
Deceit and damage are not essential
elements of the crime
Mala in se
Malum prohibitum
THEFT OF CHECKS

Checks are personal property and may be subject to theft even when
they are not indorsed
SPECIAL TYPES OF CHECKS
1. Cashier’s check—one drawn by the cashier of a bank in the name
of the bank against the bank itself payable to a third person or
order
2. Manager’s check—check drawn by the manager of a bank in the
name of the bank against the bank itself payable to a third person
3. Memorandum check—check on which is written the word
“memorandum” signifying that the drawer engages to pay the
bona fide holder absolutely and not upon a condition to pay upon
presentment or non-payment
4.
5.
Certified checks—a check on which the drawee bank has written
an agreement whereby it undertakes to pay the check at any
future time when presented for payment, such as, by stamping on
the check the word “certified” and underneath it is written the
signature of the cashier
Crossed checks
HOW CROSSING OF CHECK IS DONE

Usually done by drawing two parallel lines transversally on the face of
the check

A check may be crossed specially or generally
CROSSING SPECIALLY

A check is crossed specially when the name of a particular banker or a
company is written between parallel lines drawn transversally on the
face of the check
PNB
Check #1234
Phil. Trust Co.
Manila, Philippines
September 24, 2007
Pay to B or order P1000 only.
Sgd. A
CROSSING GENERALLY

A check is crossed generally when only the words “And company” are
written between the parallel lines, or when nothing is written at all
between the parallel lines

In this case, payment must be made through the intervention of any
company which is duly authorized.

Otherwise, the payment will be not valid.

In actual practice, the holder of a crossed check merely deposits it for
collection with the bank indicated between the parallel lines or with
any bank where he keeps an account in the case of a check crossed
generally
Check #1234
Phil. Trust Co.
Manila, Philippines
September 24, 2007
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 175 of 190
172
Pay to B or order P1000 only.
Sgd. A
UNDER CROSSED CHECK, THE PAYEE HAS DUTY TO ASCERTAIN HOLDER’S
TITLE TO CHECKS

The SC recognizes 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 to cash

Such circumstances should put the payee into inquiry and upon him
devolves the duty to ascertain the holder’s 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 isn’t holder in
good faith

The NIL doesn’t provide that a holder isn’t a holder in due course may
not in any case recover on the instrument if the drawee if the latter
has no valid excuse for refusing payment
DRAWEE SHOULDN’T ENCASH A CROSSED CHECK BUT MERELY ACCEPT
THE SAME FOR DEPOSIT

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 two 2 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 2 parallel diagonal lines
are written the words “And Co.” or none at all as in the case at bar, in
which case the drawee shouldn’t encash the same but merely accept
the same for deposit
WHERE OTHER THAN PAYEE OF CROSSED CHECKS PRESENTED IT FOR
PAYMENT, THERE IS NO PROPER PRESENTMENT AND DRAWER IS NOT
LIABLE THEREON
ADVANTAGES OF CROSSING A CHECK

It is good precaution when it is to be forwarded by mail or when it is
entrusted to an agent and the drawer wants to be sure that it will be
paid to the rightful owner
CASE DIGESTS: SECTION 185
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
MORAN V. CA
230 SCRA 799
FACTS:
Spouses Moran were the owners of a gasoline station. They regularly
purchased bulk fuel products on COD basis. These orders were made
through telephone and payments were effectuated through personal checks
upon delivery. Since the spouses were valued clients of the bank, they had
with the latter a pre-authorized transfer wherein they were allowed to
maintain a zero balance current account and transfers were allowed from
their savings account.
Two checks were drawn by petitioners and made payable to Petrophil.
Subsequently, these were deposited with PNB, the collecting bank. The
check underwent clearing and it was seen that the current account had
zero balance. Thereafter, the husband deposited in their savings account
money.
The wife then informed her husband days after that there was refusal to
deliver the orders since the checks they paid previously have both been
dishonored upon presentment for payment. This incident prompted the
spouses to stop business operations, which caused losses and damages. In
addition, Petrophil cancelled their credit accommodation and this led them
to pay in cash. This prompted the spouses to demand an explanation from
the bank. They were informed that a bank officer committed a grave error.
The bank manager then visited the spouses, made them sign an
agreement for the issuance of a manager’s check to replace the 2
dishonored checks payable to Petrophil. The husband then on a chance
meeting with Petrophil’s credit manager, was informed that Petrophil
received notification that the two checks were dishonored due to
operational error.
The spouses six months after wrote the bank claiming that due to the
dishonor of their checks, they suffered besmirched business and personal
reputation. The bank didn’t act on their demands however.
HELD:
Where the bank possesses funds of a depositor, it is bound to honor his
checks to the extent of the amount of the deposits. The failure of the bank
to pay the check of a merchant or trader, when the deposit is sufficient,
entitles the drawer to substantial damages without any proof of actual
damages.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 176 of 190
However, a bank isn’t liable for its refusal to pay a check on account of
insufficient funds, notwithstanding the fact that a deposit may be made
later in the day. Before a depositor may maintain a suit to recover a
specific amount from his bank, he must show first that he had on deposit
sufficient funds to meet his demand.
The issue in this case is that whether or not petitioners had sufficient funds
in their account when the checks were dishonored.
Following clearing house rules, it is supposed to be processed on the date it
was presented for clearing. It was the available balance the day before the
date the funds were deposited was used by the bank in determining
whether or not there was sufficient cash deposited to fund the checks since
it was December 15 was the actual date when the checks were processed.
The funds during which the checks were dishonored wasn’t enough to
cover the two checks. When the check was presented for payment, there
was insufficiency of funds. It was only the next day when the funds to
cover the checks were deposited, which unfortunately was too late to
prevent the dishonor of the checks.
Petitioner had no reason to complain, for they alone were at fault. A
drawer must remember his responsibilities every time he issues a check.
He must personally keep track of his available balance in the bank and not
rely on the bank to notify him of the necessity to fund certain checks he
previously issued. A check as distinguished from a bill of exchange, is
supposed to be drawn against a previously deposit of funds for it is
ordinarily intended for immediate payment.
Moreover, on the issuance of the checks on day 1 and 2, and the time for
presentment on day 3, the petitioners had more than 24 hours to replenish
their accounts in the bank.
It should also be noted that the bank has no responsibility to pay a check
partly when the amount drawn on the check is larger than the amount
deposited in the account. There would naturally be a conflict of interests
between the payee and the bank. The bank would then want the return of
the check while the payee will not want to do so since there is still balance
left unpaid.
Furthermore, when the drawer has two accounts—a savings account and
open account—and a check was drawn with the open account having
insufficient funds, the bank has no authority to use the funds to be found in
the savings account to cover the insufficiency of the funds.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
173
FIRESTONE TIRE V. INES CHAVEZ
18 SCRA 356
FACTS:
Firestone filed a complaint against Chavez for an amount representing the
price of automobile tires, tubes, and other accessories, which the former
had sold and delivered to Chavez on different dates. The trial court held in
favor of Firestone and awarded the principal as well as attorney’s fees.
Chavez questioned this in the appellate court and in the SC as well. It
raised the argument that the court erred in finding her to be in bad faith.
The claim is made that when the check was issued, Firestone knew that
there were no funds to back it up and that Chavez expected that such
funds would be available when the check became due.
HELD:
Of course, if Firestone agreed to accept the check, knowing that it wasn’t
covered by adequate funds, no finding of bad faith can be made against
Chavez. In a number of cases it was held that where a person issues a
post dated check without funds to cover it and informs the payee of this
fact, he cannot be held guilty of estafa because there is no deceit.
Nonetheless, it was nowhere to be found in the records that there was
knowledge on the part of Firestone.
174
BATAAN CIGAR V. CA
230 SCRA 643
FACTS:
Bataan Cigar has engaged one of its suppliers, George King, to deliver
bales of tobacco leaves. Petititoner then issued postdated crossed checks
in favor of King. This was continued despite the failure to deliver the bales.
Simultaneous to these transactions was the discounting of King of the
checks to State Investment House. Bataan then stopped payment and
SIHI tried to collect.
HELD:
The negotiability of the check isn’t affected by it being crossed, whether
specially or generally. It may be legally negotiated from one person to
another as long as the one who encashes the check with the drawee bank
or if its specially crossed, by the bank mentioned between the parallel
lines.
Jurisprudence provides the following effects of crossing a check:
1. The check may not be encashed but only deposited in the bank
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 177 of 190
2.
3.
The check may be negotiated only once—to one who has an
account with a bank
The act of crossing the check serves the 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 check should have placed the holder in 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 amount to legal absence of good faith.
In the present case, petitioner’s defense in stopping payment is as good to
SIHI as it is to King because really the consideration for the checks were
the delivery of the bales of tobacco leaves which King failed to do. There
being failure of consideration, SIHI is not a holder in due course.
175
REPUBLIC V. PNB
3 SCRA 851
FACTS:
The government filed a complaint for escheat of certain unclaimed bank
deposits balances pursuant to a law, which provides that unclaimed
balances—credits, money, bullion, security or other evidence of
indebtedness of any kind, and interest with banks—shall be deposited with
the government if it remains to be unclaimed within a period of 10 years of
more.
One of the banks against the complaint has been filed is First National City
Bank. Although it concedes that the government had the right to claim the
unclaimed deposit balances, it seeks to exclude some which, according to
it, are not within the purview of credits and deposits as defined in law. the
trial court held in favor of the bank, excluding from the claim the
manager’s checks and other demand drafts.
HELD:
Credit is a sum credited on the books of a company to a person who
appears to be entitled to it. it presupposes a creditor-debtor relationship
and may be said to imply ability, by reason of property or estates, to make
a promised payment. It is correlative to indebtedness, and that which is
due to any person, as distinguished to that which he owes.
Do demand drafts and telegraphic orders come within the purview of
credits or deposits employed in the law?
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Since the demand drafts herein involved have not been presented either
for acceptance or payment, the inevitable consequence is that the bank
never had the chance of accepting or receiving them. Verily, the 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.
Further, a demand draft is different from a cashier’s check for this is a
primary obligation of the bank which issues it and constitutes a written
promise to pay upon demand. It is an order to a third party purporting to
be drawn upon a deposit of funds.
176
MESINA V. IAC
145 SCRA 497
FACTS:
Jose Go purchased from Associate Bank a Cashier’s Check, which he left on
top of the manager’s desk when left the bank. The bank manager then
had it kept for safekeeping by one of its employees. The employee was
then in conference with one Alexander Lim. He left the check in his desk
and upon his return, Lim and the check were gone. When Go inquired
about his check, the same couldn't be found and Go was advised to request
for the stoppage of payment which he did. He executed also an affidavit of
loss as well as reported it to the police.
The bank then received the check twice for clearing. For these two times,
they dishonored the payment by saying that payment has been stopped.
After the second time, a lawyer contacted it demanding payment. He
refused to disclose the name of his client and threatened to sue. Later, the
name of Mesina was revealed. When asked by the police on how he
possessed the check, he said it was paid to him Lim. An information for
theft was then filed against Lim.
A case of interpleader was filed by the bank and Go moved to participate
as intervenor in the complaint for damages.
Mesina moved for the
dismissal of the case but was denied.
The trial court ruled in the
interpleader case ordering the bank to replace the cashier’s check in favor
of Go.
HELD:
Petitioner cannot raise as arguments that a cashier’s check cannot be
countermanded from the hands of a holder in due course and that a
cashier’s check is a check drawn by the bank against itself. Petitioner
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 178 of 190
failed to substantiate that he was a holder in due course.
Upon
questioning, he admitted that he got the check from Lim who stole the
check. He refused to disclose how and why it has passed to him. It simply
means that he has notice of the defect of his title over the check from the
start. The holder of a cashier’s check who is not a holder in due course
cannot enforce payment against the issuing bank which dishonors the
same. If a payee of a cashier’s check obtained it from the issuing bank by
fraud, or if there is some other reason why the payee is not entitled to
collect the check, the bank would of course have the right to refuse
payment of the check when presented by payee, since the bank was aware
of the facts surrounding the loss of the check in question.
177
PEOPLE V. REYES
454 SCRA 635
FACTS:
Reyes was charged with estafa. The facts that led to this are as follows—
She together with her daughter and another person issued a check in favor
of Alabastro for payment of an obligation. Alabastro was never able to get
the value of the check because when he presented it for payment in the
bank, it was dishonored for the account it was drawn upon is closed.
Reyes alleges that her liability should only be civil and not criminal for the
check was issued for payment of a pre-existing obligation.
As per the testimony of the bank manager, the accused maintained a
negotiable order of withdrawal account under her name. It was explained
that checks may be drawn against the account but only to a specific payee.
He verified also that the check issued to Alabastro is a NOW check.
As per the testimony of Alabastro, he established that the checks issued to
him were for a discounting agreement. This was countered by the accused
by saying also that the checks were dated and completed by Alabastro.
The trial court convicted the accused and she avers that the checks issued
by her doesn’t fall within the meaning of checks under the NIL. First, the
NOW check was drawn against a savings account. Second, it is only
payable to a certain payee or specific person.
HELD:
It is inconsequential that the check shall be only payable to a specific
person. The same restriction is produced when the check is crossed, only
the payee named therein in the check may deposit it in the bank. If a third
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
person accepts a crossed check and pays cash for value despite the
warning of the crossing, he cannot be considered in good faith and thus,
not a holder in due course. The purpose of the crossing is to ensure that
the check will be encashed by the rightful payee only. Yet, despite the
restriction on negotiability of crossed checks, they were held to be
negotiable instruments.
To be sure, it is the fraud or deceit employed which is the gravamen of the
offense of estafa and not the negotiability of the check.
Nonetheless, the accused should be acquitted of estafa. It was held in a
prior case that when the payee knew that the check was drawn on an
account with insufficient funds, there would be no liability for estafa. First,
Alabastro presented 4 different checks with 4 different dates. When he
deposited the first check, he was then informed that the account was
closed and yet, on later dates, he still deposited the other four checks.
Second, was his own admission to this knowledge.
(Doctrine of
Concomitance)
Sec. 186. Within what time a check must be presented. - A check
must be presented for payment within a reasonable time after its
issue or the drawer will be discharged from liability thereon to the
extent of the loss caused by the delay.
WHEN CHECK MUST BE PRESENTED FOR PAYMENT

A check must be presented within a reasonable time after its issue

The whole theory and use of a check points to its immediate payability

A depositor places his money with his bank or banker; where it is
subject at any time to his order; and by his check or order, he desires
to appropriate so much of it to another person, and the bank or
banker, in consideration of its temporary use of the money, agrees to
pay it in whole, or in parcels, to the depositor’s order when demanded

But he doesn’t agree to contract to pay at a future day by acceptance
and the depositor cannot require it

Although under Section 185, a check is a bill of exchange payable on
demand, it is intended for immediate use and not to circulate as a
promissory note. Therefore, the transfer of a check to successive
holders, where it is drawn and delivered in the place where the drawee
bank is located, doesn’t extend the time for presentment. If the check
isn’t delivered on one day and isn’t presented before the close of
banking hours the next business day, the drawer is discharged to the
extent of any loss suffered from the failure to present.
REASONABLE TIME
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 179 of 190


Did the payee employ such diligence as a prudent man exercises his
own affairs?
The payee’s failure to present a check to the drawee bank and who
didn’t present the check for one week after its receipt, was held to
have delayed presentment for an unreasonable time as a matter of law
FAILURE TO PRESENT ON TIME DOESN’T TOTALLY WIPE OUT ALL
LIABILITY
WHEN DELAY 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.
STALE CHECK

One which isn’t presented for payment within reasonable time after its
issue
EFFECT OF DELAY ON LIABILITY OF DRAWER

When a check isn’t presented for payment within a reasonable time
after its issue, the drawer is discharged but only to the extent of the
loss caused by the delay

Hence, if no loss or injury is shown, the drawer is not discharged

The only injury which would be sustained by the drawer in case
presentment wasn’t made within a reasonable time would be caused
by the failure of the bank subsequent to the delivery and prior to the
presentment of the check
EFFECT OF FAILURE TO GIVE NOTICE TO DRAWER

Where the check is dishonored by non-payment and the drawer isn’t
given notice of dishonor, the drawer is totally discharged from liability
on the instrument

But the drawer may be held liable by the payee on the basis of the
original consideration between him and said payee
HOLDERS OF STALE CHECKS

But it is clear that the maturity of the check for the purpose of
presentment for payment and of dishonor in order to bind parties to it,
is not identical with the maturity which will charge subsequent holders
with notice of defect of title or infirmities in the instrument

In applying the rule, the courts are disposed to be governed rather by
the circumstances under which the plaintiff received the check than by
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
the precise age of the instrument—that is, the good or bad faith
exercised the prime consideration. The result is that the plaintiff has
been treated as a holder in due course of checks transferred several
months after their issue
EFFECT OF DELAY AS TO INDORSERS

An unreasonable delay in the presentment of a check for payment will
discharge the indorsers thereon, whether or not he is injured by the
delay as it is presumed that he is prejudiced

Exception: when there is affirmative proof that the indorsers knew that
there was delay in presentment
CASE DIGESTS: SECTION 186
178
PNB V. SEETO
91 PHIL 756
FACTS:
Seeto called at a branch of bank and presented a check payable to cash or
bearer, and drawn by Kiao against PBC. After consultation with the
employees, Seeto made a general and qualified indorsement of the check.
He was then paid the amount of the check by bank. The check was
consequently dishonored, a letter was sent to Seeto and was asked to
refund the money given to him. A second letter was sent to him and he
averred that case against him be deferred while he inquired about why the
check was dishonored. Thereafter, he refused to pay, alleging that the
account against the check was drawn had sufficient funds when the check
was drawn and if the bank didn’t delay in clearing the check, there would
have been sufficient funds.
The appellate court reversed the lower court in its decision. It ruled that
the bank was guilty of unreasonably retaining and withholding the check,
and that the delay in the presentment was inexcusable, so that respondent
thereby was discharged from liability.
HELD:
Section 84 is applicable, nonetheless, it should be read in correlation with
Section 186, which says that presentment should be within reasonable
time.
*Section 186 applies when the bank suddenly becomes bankrupt.
179
CRYSTAL V. CA
71 SCRA 443
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 180 of 190
FACTS:
Petitioner redeemed property, which has been sold upon execution, with a
check issued to the buyer Ocang. The CA found that the check for P11200
paid by petitioner for the redemption in dispute has been dishonored, in
the face of the other findings in the same decision of the CA indicating that
instead of having been dishonored, the said check had only become stale,
albeit it being replaced with new ones from time to time.
HELD:
Surely, for a check to be dishonored upon presentment, on the one hand,
and to be stale for not being presented at all in time, are incompatible
developments that naturally have variantly legal consequences. Thus, if
indeed the check in question had been dishonored, then there can be no
doubt that the petitioner’s redemption was null and void. On the other
hand, if it had only become stale, then it becomes imperative that the
circumstances that caused its non-presentment be determined, for if this
wasn’t due to the fault of petitioner, then it would be unfair to deprive him
of the rights he acquired as redemptioner, particularly, if after all, the
value of the check has otherwise been received or realized by the party
concerned.
The case was remanded to the trial court to receive all relevant and
competent evidence to the issue of whether or not Ocang has received in
one form or another, the full amount as redemption price of the four
parcels of land in dispute as well as to the other facts.
It was found out that Ocang, when he applied for a writ of possession,
there was payment of redemption price by Crystal. Thus, there was a
proper redemption.
180
MONTINOLA V. PNB
88 SCRA 178
FACTS:
Ramos, as a disbursing officer of an army division of the USAFE, made cash
advancements w/ the Provincial Treasurer of Lanao. In exchange, the
Prov’l Treasurer of Lanao gave him a P500,000 check. Thereafter, Ramos
presented the check to Laya for encashment. Laya in his capacity as
Provincial Treasurer of Misamis Oriental as drawer, issued a check to
Ramos in the sum of P100000, on the Philippines National Bank as drawee;
the P400000 value of the check was paid in military notes.
Ramos was unable to encash the said check for he was captured by the
Japanese. But after his release, he sold P30000 of the check to Montinola
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
for P90000 Japanese Military notes, of which only P45000 was paid by the
latter. The writing made by Ramos at the back of the check was to the
effect that he was assigning only P30000 of the value of the document with
an instruction to the bank to pay P30000 to Montinola and to deposit the
balance to Ramos's credit. This writing was, however, mysteriously
obliterated and in its place, a supposed indorsement appearing on the back
of the check was made for the whole amount of the check. At the time of
the transfer of this check to Montinola, the check was long overdue by
about 2-1/2 years.
Montinola instituted an action against the PNB and the Provincial Treasurer
of Misamis Oriental to collect the sum of P100,000, the amount of the
aforesaid check. There now appears on the face of said check the words in
parenthesis "Agent, Phil. National Bank" under the signature of Laya
purportedly showing that Laya issued the check as agent of the Philippine
National Bank.
HELD:
Montinola could not be considered as a holder in due course. Why? For
one to be a holder in due course, one should take the instrument before it
has become overdue. Remember that in this case, Montinola took the
check which has long become overdue. He cannot even be in the slightest
be considered as a holder because the NIL defines a holder as being the
payee or the indorsee of the negotiable instrument. In this case, he wasn't
the payee nor was he the indorsee of the check in issue.
181
PACHECO V. CA
319 SCRA 595
FACTS:
Due to dire financial needs of petitioner spouses who were engaged in the
construction business, they secured loans from Vicencio. At every loan
secured, the lender compelled the spouses to issue an undated check
despite the admission of spouses that their bank account has insufficient
funds or as on a later date, already closed. Lender assured them that the
issuance of the check was only evidence of indebtedness, that it would not
be presented to the bank, and it would be for formalities only. On the date
wherein there was an unpaid balance to the loans secured by the spouses,
the lender had them place a date on two of the later checks issued.
Surprised later on, the spouses were charged with estafa as the checks
were presented for encashment and was dishonored.
HELD:
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 181 of 190
BY MUTUAL AGREEMENT OF THE PARTIES, THE NEGOTIABLE CHARACTER
OF A CHECK MAY BE WAIVED AND THE INSTRUMENT BE SIMPLY TREATED
AS PROOF OF AN OBLIGATION. There cannot be deceit on the part of the
spouses because they agreed with the lender at the time of the issuance
and postdating of the checks that the same shall not be encashed or
presented to the bank. As per assurance of the lender, the checks are
nothing but evidence of the loan or security thereof in lieu of and for the
same purpose as a promissory note.
182
THE INTERNATIONAL
GUECO
315 SCRA 516
CORPORATE
BANK
V.
SPOUSES
FACTS:
Gueco spouses obtained a loan from ICB (now Union Bank) to purchase a
car. In consideration thereof, the debtors executed PNs, and a chattel
mortgage was made over the car. As the usual story goes, the spouses
defaulted in payment of their obligations and despite the lowering of the
amount to be paid, they still failed to pay. Thereafter, they tendered a
manager’s check in favor of the bank. Nonetheless, the car was still
detained for the spouses refused to sign the joint motion to dismiss. The
bank averred that the joint motion to dismiss is part of standard office
procedure to preclude the filing of other claims. Because of this, the
spouses filed an action for damages against the bank. And by the time the
case was instituted, the check had become stale in the hands of the bank.
HELD:
The main issue though unrelated to NIL in this case was whether or not the
signing of the joint motion to dismiss a part of the compromise agreement
between the spouses and the bank. The answer is no, it is not a part of
the compromise agreement entered by the parties. And thus, the signing
is dispensible in releasing the car to the spouses.
And on the ancillary issue of the case, which is the relevant issue for the
subject, whether or not the spouses should replace the check they paid to
the bank after it became stale, the answer is yes. It appeared that the
check has not been encashed. The delivery of the manager’s check did not
constitute payment. The original obligation to pay still exists. Indeed, the
circumstances that caused the non-presentment of the check should be
considered to determine who should bear the loss. In this case, ICB held
on the check and refused to encash the same because of the controversy
surrounding the signing of the joint motion to dismiss. There is no bad faith
or negligence on the part of ICB.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
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. A check should be presented for payment within a reasonable time
after its issue. Here, what is involved is a manager’s check, which is
essentially a bank’s own check and may be treated as a PN with the bank
as a maker. Even assuming that presentment is needed, failure to present
for payment within a reasonable time will result to the discharge of the
drawer only to the extent of the loss caused by the delay—but here there is
no loss sustained. Still, such failure to present on time does not wipe out
liability.
183
WONG V. CA
351 SCRA 100
FACTS:
Petitioner was an agent for Limtong Press, a manufacturer of calendars.
LPI would give sample calendars to their agents and the agents would get
the purchase orders of customers and present them to the company. The
company would then make the calendars and ship them to the customers.
The agents would then collect the payments and remit it to the company.
He had a record of unremitted payments and a confirmation receipt
evidenced this.
Because of this, it became a company policy that
postdated checks must be issued by customers to secure payment for the
orders. Thereafter, Wong issued 6 postdated checks. But this wasn’t
accepted by the company since it was against its policy to accept checks
from its agents. It was then agreed upon that the checks would be applied
to its unremitted payments. When the checks were about to be deposited,
Wong requested that it be deferred and he will replace the same. But this
didn’t happen.
The checks were then subsequently deposited and
dishonored which prompted the company to sue Wong.
HELD:
The trial and appellate court both ruled that Wong’s checks were to be
used as guarantees but due to refusal of the company, it was agreed upon
that it will be used as payment for Wong’s unremitted payments.
On the issue if all the elements of violations of BP22 has been committed,
there are two ways of violating BP22:
1. By making or drawing or issuing a check to apply on account or
for value knowing at the time of issue that the check isn’t
sufficiently funded
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
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 182 of 190
presented to the drawee bank for payment within a period of 90
days
ELEMENTS OF OFFENSE DEFINED IN THE FIRST PARAGRAPH OF SECTION
1: BP 22
1. That a person makes or draws and issues any check.
2. That the check is made or drawn and issued to apply on account or for
value.
3. That the person who makes or draws and issues the check knows at the
time of issue that he does not have sufficient funds
4. In or credit with the drawee bank for the payment of such check in full
upon its presentment.
5. That 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 the drawee, without any valid reason, ordered the
bank to stop payment.
For the first act, the petitioner averred that the first element is not present
for he didn’t issue the checks for value or for account.
This was
established by the trial and appellate courts to be false and unsupported by
evidence.
184
NAGRAMPA V. PEOPLE
386 SCRA 412
FACTS:
The sales manager of Fedcor brought into the plant Nagrampa in order for
the latter to purchase an excavation machine. He made a downpayment
and for the balance, he issued a postdated check. The checks were drawn
against Security Bank.
Upon the guarantee of the salesman, the
equipment was delivered. However, when the checks were presented for
payment, they were dishonored on the ground that the account against
which it is drawn has long been closed. The company notified petitioner
but it still failed to make payments. This prompted the company to file a
case for estafa and violation of BP22 against Nagrampa. The trial court
and appellate court both found him guilty.
HELD:
Petitioner admitted the issuance of the two checks but he would like to
argue that the same had been presented more than the 90-day period
stated in the law. This is to no avail though since the 90-day period is for
the presumption of knowledge to arise. It is not an essential element of
the offenses committed within the purview of BP22.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
In this case, the checks were presented within 6 months from the issuance
of the checks and wouldn’t therefore have been considered stale had
petitioner’s account had been existing.
Although the presumption of
knowledge didn’t arise, such knowledge was sufficiently proven during the
trial upon the testimony of one of the bank’s employees.
Likewise, for estafa, it is the same. All the elements were present. It was
the allegation however of accused that there was no damage done against
the company. He even averred that there was a return of the equipment.
Nonetheless, damage contemplated in estafa may consist in the offended
party being deprived of his money or property as a result of the
defraudation, disturbance in property rights, or temporary prejudice. In
this case, the deprivation of property was apparent. The backhoe was
delivered precisely to the accused because of his downpayment and the
issuance of the checks.
185
TY V. PEOPLE
439 SCRA 220
FACTS:
Ty’s mother was confined in Manila Doctors. As the daughter, she signed
the acknowledgement of responsibility for payment. Her sister was also
subsequently confined in the same hospital. She then drew promissory
notes, promising to pay her obligations to the hospital. She issued 7
checks and these were thereafter deposited on their due dates. But these
checks were dishonored for the account against which they were drawn
against had been closed. The hospital then sent demand letters but to no
avail. This prompted it to file a complaint for 7 counts of violations of
BP22.
HELD:
Ty doesn’t deny to have issued the checks in issue. She claims that the
issuance was under the impulse of an uncontrollable fear of a greater
injury or in avoidance of a greater evil or injury.
It seems that all the factual findings are not disputed except for the
allegation of uncontrollable fear or injury. Nonetheless, this is insufficient
to exempt the accused of her liabilities. For uncontrollable fear or injury
to become an exempting circumstance—
1. Existence of an uncontrollable fear
2. The fear must be real and imminent
3. The fear of injury is greater than or at least equal to that
committed
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 183 of 190
In this case, far from it, the fear, if any, harbored by Ty wasn’t real or
imminent. Ty claims that she was compelled to issue the checks—a
condition the hospital commanded of her before her mother can be
discharged. This is only speculative fear.
It is also bereft of merit to raise the justifying circumstance of state of
necessity, which has the following elements—
1. That the evil sought to be avoided actually exists
2. That the injury feared be greater than the one done to avoid it
3. That there be no other practical and less harmful means of
preventing it
And to her claim of lack of consideration because she wasn’t the patient, 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 promisee, at the instance of the promissor.
It is enough that the obligee foresees some right or privilege or suffers
some detriment and the release and extinguishment of the original
obligation.
186
GREAT ASIAN SALES V. CA
381 SCRA 557
FACTS:
Great Asian Sales was a business engaged in the selling and buying of
merchandise. In 2 of its board resolutions, it first authorized Arsenio, its
treasurer, to secure a loan from Bancasia as well as to sign any pertinent
documents related to such. Second, it authorized Arsenio to obtain from
Bancasia a discounting line. Pursuant to these, deeds of assignments were
issued by Great Asian in favor of Bancasia for receivables—specifically
checks. Almost all the checks assigned by Great Asian were dishonored.
Notice of dishonor was sent by the bank and its lawyer to Tan Chong Lin.
Later, Great Asian filed for insolvency and in its petition, Bancasia was one
of those listed as its creditors. In the meanwhile, a complaint was filed
against Great Asian and Tan Chong Lin because of the surety agreement it
signed in favor of Bancasia.
HELD:
First, under the 2 board resolutions, indeed Arsenio was authorized to
obtain a loan and sign any document related to the securing of the loan.
The question is whether the deeds of assignment signed by Arsenio was
within the ambits of his authority.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
The deeds of assignment enabled Great Asian to generate instant cash,
with checks which were not due and demandable then.
In the financing industry, a discounting line means a credit facility with a
financing bank or company, which allows a business entity to sell, on a
continuing basis, its accounts receivable at a discount. The term discount
means the sale of a receivable at less than its face value. The purpose of
discounting line is to enable a business entity to generate instate cash out
of its receivables which are still to mature at future debts. The financing
company or bank which buys the receivables makes its profits out of the
difference between the face value of the receivable and the discounted
price.
Clearly, the discounting arrangements entered into by Arsenio were the
same arrangements authorized under the board resolutions.
Second, on the issue of breach of contract, Bancasia alleged that Great
Asian committed a breach. In the deeds of assignment, it was stipulated
that there is a vital suspensive condition—in case the drawers fail to pay
the checks on maturity, Great Asian obligated itself to pay Bancasia the full
face value of the dishonored checks, including penalties and other costs.
Failure to pay would give rise to the obligation to pay Bancasia.
Great Asian and Bancasia agreed on this specific with recourse stipulation,
despite that the receivables were negotiable instruments. The contracting
parties are allowed such stipulation in addition to the warranties of an
indorser under the NIL. The explicit with recourse stipulation against Great
Asian enlarges the liability of Great Asian beyond that of a mere indorser of
a negotiable instrument. Thus, whether or not Bancasia gives notice of
dishonor to Great Asian, the latter remains liable because of the with
recourse stipulation.
The recourse of Bancasia to file an action for breach of contract doesn’t
leave Great Asian with an empty bag. It is then subrogated back as
creditor of the receivables. Great Asian can now proceed against the
drawers who issued the checks. Even if there was no timely notice of
dishonor, Great Asian is not prejudiced. A 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.
Wednesday: 187 and 189
NOTES: L AS T WEEK
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 184 of 190
OCTOBER 1 - 6, 2007
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.
CERTIFICATION OF CHECK

A certification is an agreement whereby the bank against whom a
check is drawn, undertakes to pay it at any future time when
presented for payment

But a bank is not obligated to the depositor to certify checks

And the drawee is not liable to the holder for refusal of the bank to
certify the fcheck

The refusal of the bank doesn’t dispense with the requirement of
presentment for payment since a check is of right presentable only for
payment at the bank on which it is drawn
FORM OF CERTIFICATION

No particular form is required but it must be in writing

The usual method is by stamping on the check the word “certified” and
underneath it the signature of the cashier, or by writing upon the
check the word “good” with the date of certification and signature of
the officer of the bank having the express or implied authority to
certify checks, has been held to be a sufficient certification

The letters “OK” with the initials of the cashier of a bank doesn’t
constitute a sufficient certification under modern banking practice
EFFECT OF CERTIFICATION
1. Equivalent to acceptance and is the operative act that makes the
drawee bank liable
2. It operates as an assignment of the funds of the drawer in the
hands of the drawee bank
3. If obtained by the holder, it discharges the persons secondarily
liable
CERTIFICATION EQUIVALENT TO ACCEPTANCE

Certification is equivalent to acceptance in the drawee bank is bound
on the instrument upon certification

And it is immaterial to such liability in favor of a holder in due course
whether the drawer had funds or not in the bank or the drawer was
indebted to the bank for more than the amount of the check

The certifying bank has all the liabilities of an acceptor under Section
62
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
IMPLICATION OF CERTIFICATION FURTHER EXPLAINED

The bank virtually says that the check is good and we have the
mo0ney of the drawer here ready to pay it. We will pay it now if you
will receive it. The holder says no, I will not take the money; you may
now 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 fault if the holder
declines to receive the payment, and for his own convenience has the
money appropriated to that check subject to its future presentment at
any time within the statute of limitations.
FUNCTIONS OF CERTIFIED CHECKS

Although a check doesn’t 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
against banks, thus marked and certified, enter largely into the
commercial and financial transactions of the country; they pass from
hand to hand, in the payment of balances from one house and one
bank to another. In the great commercial centers, they make up no
inconsiderable portion of the circulation and thus perform a useful,
valuable and an almost indispensable office
PURPOSE OF PROCURING CHECKS TO BE CERTIFIED

To impart strength and credit to the paper by 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

When a check is certified, it ceases to possess the character, or to
perform its functions, of a check, and represents so much money on
deposit, payable to the holder on demand.

The check becomes a basis for credit and an easy mode of passing
money from hand to hadn and answers the purposes of money
PAYMENT NEITHER INCLUDES NOR IMPLIES ACCEPTANCE

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
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 185 of 190



On the other hand, mere payment of the paper at the termination of
its course doesn’t act as an act of estoppel
Payment is the final act which extinguishes a bill
Acceptance is the promise to pay in the future and continues the life of
the bill
RIGHT OF THE HOLDER TO SUE DRAWER WHERE CHECK NOT CERTIFIED

The drawer of a check certifies that it will be paid on presentment but
not that it will be certified

This is the theory on which the law discharging the drawer and
indorsers upon certification is based

Certification is different from acceptance in that the refusal of the
drawee bank to certify doesn’t amount to a dishonor of the check

There is no need for a notice of non-certification and the check must
still be presented for paymenht
CASE DIGESTS: SECTION 187
187
PANLILIO V. DAVID
50 PHIL 105
FACTS:
Panlilio and David are both bidders for lease of a big chunk of land owned
by the government. Panlilio had a higher bid than David. Both of their
bids were accompanied by uncertified checks, the amount for David’s is
lesser than that of Panlilio’s. Later, David equaled the bid of Panlilo by
adding cash to the amount of his check. With this, the lease was awarded
to David. His check was encashed and the proceeds were deposited with
the Treasury. This award was questioned by Panlilio by averting that the
bid of David should have been denied since the check he offered was
uncertified. This prompted the withdrawal of the award to David and
instead, the lease was awarded to Panlilio, whom it was thought to have
submitted a certified check. After knowing that he too didn’t have a
certified check, his award was cancelled.
Both appealed this to the
appellate court.
HELD:
The rule that the check to be offered should be certified is an office rule. It
sought to prevent the presentation of frivolous bids and to avoid difficulties
in the collection of the amount of the accepted bid. The Director of Lands
therefore had the authority to reject both bids in question on the ground
that they weren’t accompanied by certified checks. Nonetheless, this
doesn’t mean that if he accepted one of them, a merely formal defect
would vitiate the award. When David’s bid was accepted and the amount
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
of the bid was paid and covered into the Treasury, the government could
hardly be heard to say that the award was invalid because the amount paid
was originally represented in part by an uncertified check.
188
NEW PACIFIC TIMBER V. SENERIS
101 SCRA 686
FACTS:
New Pacific Timber and Supply was the defendant in a case for collection of
money. Upon failure to comply with the compromise agreement, a writ of
execution was issued and its properties were levied. Prior though to the
auction sale, petitioner deposited with the trial court a cashier’s check but
private respondent refused to accept.
HELD:
The check deposited by the petitioner is no ordinary check but a cashier’s
check. It is a well-known and accepted practice in the business sector that
a cashier’s 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 of one in
such situation. The certification by the bank is equivalent to acceptance.
It is an understanding that the check is good then, and shall continuegood,
and this agreement is 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 the check as regards
both parties is to enable the holder to use it as money. Hence the
exception to the rule on Section 64 of the CB 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 a creditor in cash in an amount equal to the
amount credited to his account” shall apply in this case.
189
PNB V. NATIONAL CITY BANK OF NY
63 PHIL 711
FACTS:
Unknown persons negotiated with Motor Services Company checks, which
were part of the stipulation in payment of automobile tires purchased from
the latter’s store.
It purported to have been issued by Pangasinan
Transportation Company. The said checks were indorsed at the back by
said unknown persons, the Motor company believing at that time that the
signatures contained therein were genuine.
The checks were later
deposited with the company’s account in National City Bank of NY. The
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 186 of 190
said checks were consequently cleared and PNB credited National City Bank
with the amounts. Thereafter, PNB discovered that the signatures were
forged and it demanded the reimbursement of the amounts for which it
credited the other bank.
HELD:
A check is a bill of exchange payable on demand and only the rules
governing bills of exchanges payable on demand are applicable to it. in
view of the fact that acceptance is a step necessary insofar as negotiable
instruments are concerned, it follows that the provisions relative to
acceptance are without application to checks.
Acceptance impies
subsequent negotiation of the instrument, which is not true in the case of
checks because from the moment it is paid, it is withdrawn from
circulation. When the drawee banks 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 warrant against the drawee.
Further, in determining the relative rights of a drawee who under a mistake
of fact, has paid, 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 and negligence of the parties in respect thereto.
The responsibility of the drawee who pays a forged check, for the
genuineness of the drawer’s 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.
According to the undisputed facts, National City Bank in purchasing the
papers in question from unknown persons without making any inquiry as to
the identity and authority of said persons negotiating and indorsing them,
acted negligently and contributed to the constructive loss of PNB in failing
to detect the forgery. Under the circumstances of the case, if the appellee
bank is allowed to recover, there will be no change in position as to the
injury or prejudice of the appellant.
DRAWER: PANGASINAN
PAYEE: IASMOTOR SERVICE
DRAWEE: PNB
COLLECTING BANK: NATIONAL CITY BANK OF NEW YORK
190
ARANETA V. PAZ TUAZON
91 PHIL 786
FACTS:
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
Tuazon owned a big parcel of land, which was subdivided into smaller lots.
These lots were leased to people and under the contract of lease, the
lessees had the right of first refusal, in case Tuazon decides to sell the lots.
Tuazon then obtained loans from Vidal, which was secured by mortgages
over the same land. Thereafter, Tuazon and Araneta entered into a
promise to buy and sell, subject to the decision of the lessees if they will
purchase the lots. Many lessees took advantage of this proposition and
bought the lots. The only encumbrance left is the mortgage to Vidal.
Tuazon tried to tender a check for payment of the full mortgage obligation
but Vidal refused to accept the check, prompting the former to file an
action against the latter. Attached to the complaint was the check refused
by Vidal, another certified check, and an ordinary check. This action
however wasn’t pursued. The records and the checks were destroyed in a
fire and wasn’t reconstituted. Since one of the checks was issued by
Araneta in favor of Vidal, and there was a stipulation that Tuazon would be
held liable, Araneta ran after Tuazon for the value of the checks.
HELD:
The stipulation holding Tuazon liable for the loss of the checks issued was a
valid stipulation, nonetheless, Tuazon should not be held liable for the loss
of the certified checks. The matter of who should bear the loss doesn’t
depend upon the validity of the sale but on the extent and scope of the
clause hereinbefore quoted as applied to the facts of the present case.
Some of the checks was issued by Araneta and payable to Vidal, and were
drawn against BPI with which Araneta had a deposit in the current account.
They were certified and the certification stated that they were to be void if
not presented for payment at the office within 90 days from date of
acceptance. Under banking laws and practices, by the certification, the
funds represented by the check were transferred from the credit of the
maker to that of the payee or holder, and for all intents and purposes, the
latter became the depositor of the bank, with rights and duties of one in
such relation. But the transfer of the corresponding funds from the credit
of the depositor to that of the payee had to be co-extensive with the life of
the checks, which in this case was 90 days. If the checks were not
presented for payment within that period they became invalid and the
funds were automatically restored to the credit of the drawer though not as
a current deposit but as special deposit.
The checks were never collected and the account against which they were
drawn wasn’t used or claimed by Araneta and since the account was
opened during the Japanese occupation and in Japanese currency, the
checks became obsolete as the account subject thereto is considered null
and void.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 187 of 190
Whether BPI could lawfully limit the negotiability of the certified checks to
a period less than what is provided by the statute of limitations doesn’t
seem material. The limitation imposed by the bank as to the time would
adversely only affect the payee Vidal but in this case, Vidal actually refused
to accept the checks.
But as to Araneta and Tuazon, the conditions specified in the certification
and the prevailing regulations of the bank were the law of the case. Not
only this, but they were aware of and abided by those reghulations and
practice, as instanced by the fact that the parties presented testimony to
prove those regulations and practice. And that Araneta knew that Vidal
hadn’t cashed the checks within 90 days is not, and couldn’t successfully
be, denied.
In these circumstances, the stipulation that the defendant or seller shall
not hold the buyer responsible for the loss of the checks is unconscionable
and void insofar as this would stretch Tuazon’s liability for more than 90
days.
191
EQUITABLE PCI BANK V. ONG
502 SCRA 119
FACTS:
Sarande deposited a check with her account. After getting assurance that
the said check had been cleared, she issued two checks in the same
amount as of the proceeds of the check. One of the checks issued was
given to Ong. Thereafter, Ong instead of depositing the check given, had a
manager’s check issued to him in the same value of the check. This she
tried to deposit but she received a notice that the bank has stopped
payment of the check. Despite her demands to make good the value of
her check, she was refused.
HELD:
PCI should be held liable. It had certified the check and since certification
is equivalent to acceptance, the bank as drawee bank is bound on the
instrument upon certification and it is immaterial to such liability in favor of
the plaintiff who is a holder in due course whether the drawer had funds or
not with the bank or the drawer was indebted to the bank for more than
the amount of the check as the certifying bank had the same liabilities as
acceptor.
It may be true that the check which was paid to her had no funds to
support it, nonetheless, as a holder in due course, the bank cannot
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
interpose the defense of want of consideration because that defense is only
personal. Therefore, when the check was accepted and certified, there was
already a valid consideration.
Furthermore, what was issued was a manager’s check. It stands in the
same footing as a certified check. Where a check is certified by a bank on
which it is drawn, the certification is equivalent to acceptance.
Sec. 188. Effect where the holder of 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 thereon.
EFFECT WHERE HOLDER OBTAINS CERTIFICATION

When the certification is obtained by the holder, the drawer and the
indorsers are discharged

The certification has the same effect as if the holder has drawn the
money redeposited it and taken a certificate of deposit for it

Only the indorsers at the time of the certification are discharged
REASON FOR THE RULE

The moment that the check is certified, the funds ceased to exist to be
under the control of the original depositrors and pass under the control
of the person who procures the certification of the check drawn in his
favor
EFFECT WHERE CERTIFICATION OBTAINED BY OTHERS

Where the certification is obtained by the drawer, even when the
drawer procures the certification at the instance of the payee

Where the certification is obtained by a person who is neither the
holder nor drawer
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.
CERTIFICATION OPERATES AS ASSIGNMENT OF FUNDS

When the holder procures the check to be certified, the check operates
as an assignment of a part of the funds to the credit of the drawer with
the bank
DURATION OF TRANSFER OF FUND
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 188 of 190

As stated, “Under banking laws and practices, by the certification, the
funds represented by the check were transferred from the credit of the
maker to that of the payee or holder, and for all intents and purposes,
the latter became the depositor of the bank, with rights and duties of
one in such relation. But the transfer of the corresponding funds from
the credit of the depositor to that of the payee had to be co-extensive
with the life of the checks, which in this case was 90 days. If the
checks were not presented for payment within that period they
became invalid and the funds were automatically restored to the credit
of the drawer though not as a current deposit but as special deposit.”
UNCERTIFIED CHECK IS NOT AN ASSIGNMENT OF FUNDS

A check of itself is not an assignment of the funds of the drawer in the
bank

A general deposit in the bank is so much money to the depositor’s
credit. It is a debt to him by the bank, payable on demand to his
order, not property capable of identification and specific appropriation.
A check drawn upon the bank in usual form, not accepted or certified
by its cashier to be good, doesn’t constitute transfer of any money to
the credit of the holder.
It is simply an order which may be
countermanded and payment forbidden by the drawer at any time
before it is actually cashed. It creates no lien on the money which the
holder can enforce against the bank. It doesn’t of itself operate as an
equitable assignment.
DRAWEE BANK NOT LIABLE TO HOLDER ON CHECK UNLESS ACCEPTED OR
CERTIFIED

Before acceptance or certification, the bank isn’t liable and the holder
has no right to sue the drawee bank on the check

On this question, we conclude that the general rule is that an action
cannot be maintained by the payee of the check against the bank on
which it is drawn, unless the check has been certified or accepted by
the bank in compliance with the statute, even though at the time the
check is that an action cannot be maintained by the payee of the
drawer of the check out of which the check is legally payable; and that
the payment of the check by the bank on which it is drawn, even
though paid on the unauthorized indorsement of the name of the
holder; doesn’t constitute as certification thereof, neither is it an
acceptance thereof; and without acceptance or certification, as
provided by statute, there is no privity of contract between the drawee
bank and the payee, or the holder of the check. Neither is there
assignment of the funds where the check isn’t drawn on a particular
fund, or doesn’t show on its face that it is an assignment of a
particular fund.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
SUMMARY OF RIGHTS AND LIABILITIES OF PARTIES
1. The holder has no action against it as a check is not in itself an
assignment of funds of the drawer in the hands of the drawee
bank, and the drawee bank isn’t liable on the check until it has
accepted or certified it
2. Neither has the holder a right of action against the drawer where
the drawee bank refuses to accept or certify the check but he has
a right of action against the drawer where the drawee bank
refuses to pay
3. And while the holder has no right of action against the drawee
bank which refuses to pay, accept or certify the check, the drawer
has a right of action against the drawee bank so refusing. Such
right of action, however, isn’t based on the check drawn but on
the original contract of deposit between them
DUTY OF DEPOSITOR TO BANK

Where a drawer of a check has prepared his check so negligentlythat it
can be altered easily without giving the instrument a suspicious
appearance and alterations are afterwards made, he cannot blame
anyone but himself and in such case, he cannot hold the bank liable
for the consequences of his own negligence in the respect

But negligence of depositor in drawing a check will not excuse the
paying bank unless it is misled by such negligent act, and if the drawer
of a check is first in fault and if his negligence contributes directly to
its wrongful and fraudulent appropriation, he isn’t entitled to recover
DUTY OF DEPOSITOR WHERE PASSBOOK RETURNED TO HIM

It is his duty to examine such checks within a reasonable time and if
they disclose forgeries or alterations, to report them to the bank,
dispute the correctness of payments thereafter made by it on similar
checks.

This rule assumes that the bank itself hasn’t been guilty of negligence
in making the payment for when, by the exercise of proper case, it
could have discovered the alteration of forgery, it must bear the loss
notwithstanding that the depositor failed in his duty to examine the
accounts
STOPPING PAYMENT

As a check is itself doesn’t operate as an assignment of funds to the
credit of the drawer, the latter may countermand payment before its
acceptance or certification.

The order to stop payment must be communicated to the bank before
the check to which it refers has been paid; and in the absence of this
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 189 of 190
rule of the bank that stop orders must be in writing, a verbal notice is
sufficient.
WHEN STOPPING PAYMENT CONSTITUTES A CRIME

It would constitute the crime of estafa where the accused issues a
check and receives money, not goods, for them to the offended party,
and where at the time the accused has received money for the check
from the offended party, he has the intention of stopping payment on
it.
CASE DIGESTS: SECTION 189
190
TAN V. CA
239 SCRA 310
FACTS:
Tan was a businessman who maintained an account with RCBC. To avoid
the risk of bringing with him cash, he bought a manager’s check from PCIB
and deposited it in his account. On the same day, RCBC erroneously sent
the check for clearing which was sent back for having been missent or
misrouted. This caused RCBC to debit the account of Tan. Thereafter,
without being informed of his account being debited, Tan issued two checks
with the same value of the manager’s check he deposited. This naturally
bounced and this prompted Tan to file an action against RCBC.
HELD:
RCBC cannot exculpate itself from liability by claiming that the depositor
has implied instructed it to send the check for clearing by filling a local
check deposit slip. Such posture is disingenuous to say the least. First,
why would the bank follow a patently erroneous act born of ignorance or
inattention or both. Second, bank transactions pass through a succession
of bank personnel whose duty is to check and countercheck transactions
for possible errors. As soon as their deposits are accepted by the bank
teller, they wholly repose trust in the bank personnel’s mastery of banking,
their and the bank’s sworn profession of diligence and meticulousness in
giving irreproachable service.
In the instant case, it was the bank which was remiss in its duties. The
two checks were issued 45 days after the cashier’s check was deposited.
The bank had ample time to have cleared the cashier’s check had it
corrected its missending the same upon the return from CB using the
correct slip this time so that it can be cleared properly. Instead, the bank
has promptly debited the account of Tan.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010
RCBC insists that immediate payment of a certified check is discretionary
on the bank whom the check was presented and such being the case, its
refusal to immediately pay the check in this case is not to be equated with
negligence on its part.
This is without merit.
An ordinary check is not a mere undertaking to pay an amount of money.
There is an element of certainty or assurance that it will be paid upon
presentation that is why it is perceived as a convenient substitute for
currency in commercial transactions.
The basis of perception being
confidence. Any practice which destroys this confidence will impair the
usefulness of the check.
What was presented in this case was a cashier’s check payable to the
account of the depositor himself. A cashier’s check is a primary obligation
of the issuing bank and accepted in advance by its mere issuance. By its
very nature, a cashier’s check is a bank’s order to pay drawn upon itself,
committing in effect its total resources, integrity and honor behind the
check. It is regarded to be as good as the money which it represents. In
this case, PCIB by issuing the check created an unconditional credit in favor
of the collecting bank.
191
VILLANUEVA V. NITE
496 SCRA 459
FACTS:
Nite obtained a loan from Villanueva. This was secured by an ABC check
but when the check was deposited, it was dishonored for having been
materially altered. Afterwards, Nite remitted to Villanueva partial payment
of the loan. Nonetheless, the latter filed an action for collection of sum of
money from the former for the whole value of the check. The lower court
decided in favor of Villanueva and ordered ABC to pay the former.
Thereafter, when Nite tried to withdraw money from her account she
couldn’t do so. This prompted Nite to file with the CA for annulment of
judgment which she was granted.
HELD:
Villanueva obviously acted on bad faith. Barely 6 days after accepting the
partial payment from Nite, he acted with haste in filing the action. He
didn’t even implead Nite in his action against the bank, showing his intent
to prevent Nite from opposing his action.
NEGOTIABLE INSTRUMENTS NOTES
BASED ON AGBAYANI’S BOOK AND ATTY. MERCADO’S LECTURES
Page 190 of 190
Furthermore, if a bank refuses to pay a check notwithstanding the
sufficiency of funds, the payee cannot sue the bank. The payee should
instead sue the drawer who might in turn sue the bank.
Villanueva should have not sued ABC. Contracts take effect only between
the parties, assigns and heirs, except in cases where the rights and
obligations arising from the contract are not transmissible in nature, by
stipulation or by provision of law. None of the foregoing exceptions to the
relativity of contracts applies in this case.
The contract of loan was between Villanueva and Nite. Consequentially,
Nite should have been made an indispensable party in the former’s action
against ABC.
192
MIRANDA V. PDIC; BSP AND PRIME
501 SCRA 288
FACTS:
Miranda had an account with Prime Savings. She withdrew some of her
money but instead of asking for cash, she requested that she be issued two
crossed cashier’s check. She then deposited these in another account. But
these checks weren’t paid, since the BSP suspended the clearing privileges
of Prime Savings. Thereafter, Prime Savings declared bank holiday and
was placed under receivership. The checks were then returned to Miranda
unpaid and this prompted her to file an action for collection of sum of
money from PDIC, the receiver.
HELD:
The two cashier’s check in issued don’t constitute an assignment of funds
in the hands of Miranda as there were no funds in the first place. The bank
was insolvent for sometime even before the checks were issued in favor of
Miranda.
Second, the claim of Miranda is subject to the jurisdiction of the liquidation
court. Regular courts don’t have jurisdiction over claims against insolvent
bank.
Third, it is only Prime Savings that is liable to pay for the amount of the
cashier’s check. Solidary liability cannot attach to the BSP in its capacity
as regulator of banks, and the PDIC as statutory receiver because they are
principal government agencies mandated by law to determine the financial
viability of banks and quasi-banks, and facilitate receivership and
liquidation of closed financial institutions upon factual determination of the
latter’s insolvency.
BY: MA. ANGELA LEONOR C. AGUINALDO
ATENEO LAW 2D BATCH 2010