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CASE DIGEST - NEGOTIABLE INSTRUMENTS LAW

B. Form and Interpretation

NIL, Secs. 1-13, 126, and 184

Cases:

1. Caltex (Philippines) Inc. vs. CA


G.R. No. 97753. 10 August 1992
Regalado, J.

Doctrine:
A negotiable instrument that is payable to bearer may be negotiated by mere delivery. No further act other
than delivery is necessary in order to negotiate the instrument and to make the transferee a holder.

Facts:
On various dates, Security Bank and Trust Co. (SEBTC), through its Sucat branch, issued 280 certificates of
time deposit (CTD) in favor of one Angel dela Cruz who deposited with the bank the aggregate amount of
P1.12 million. Anger de la Cruz delivered the CTDs to Caltex in connection with his purchase of fuel products
from the latter. Subsequently, dela Cruz informed the bank that he lost all the CTDs, and thus executed an
affidavit of loss to facilitate the issuance of the replacement CTDs. De la Cruz was able to obtain a loan of
P875,000 from the bank, and in turn, he executed a notarized Deed of Assignment of Time Deposit in favor
of the bank. Thereafter, Caltex presented for verification the CTDs (which were declared lost by de la Cruz)
with the bank. Caltex formally informed the bank of its possession of the CTDs and its decision to
preterminate the same. The bank rejected Caltex’ claim and demand, after Caltex failed to furnish copy of
the requested documents evidencing the guarantee agreement, etc. In 1983, de la Cruz’ loan matured and
the bank set-off and applied the time deposits as payment for the loan. Caltex filed the complaint, but which
was dismissed.

Issue: Whether the Certificates of Time Deposit (CTDs) are negotiable instruments.

Held: The CTDs in question meet the requirements of the law for negotiability. Contrary to the lower court’s
findings, the CTDs are negotiable instruments (Section 1). Negotiability or non-negotiability of an
instrument is determined from the writing, i.e. from the face of the instrument itself. The documents
provided that the amounts deposited shall be repayable to the depositor. The amounts are to be repayable
to the bearer of the documents, i.e. whosoever may be the bearer at the time of presentment.

2. Metropolitan Bank & Trust Company vs. Court of Appeals


G.R. No. 88866. February 18, 1991
Cruz, J.

Doctrine:
An instrument to be negotiable instrument must contain an unconditional promise or orders to pay a sum
certain in money. As provided by Sec 3 of NIL an unqualified order or promise to pay is unconditional though
coupled with: 1st, an indication of a particular fund out of which reimbursement is to be made or a particular

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Case Digest - Negotiable Instruments Law

account to be debited with the amount; or 2nd, a statement of the transaction which give rise to the instrument.
But an order to promise to pay out of particular fund is not unconditional.

Facts:
Eduardo Gomez opened an account with Golden Savings and deposited 38 treasury warrants. All warrants
were subsequently indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings
account in Metrobank branch in Calapan, Mindoro. They were sent for clearance. Meanwhile, Gomez is not
allowed to withdraw from his account, later, however, “exasperated” over Floria repeated inquiries and also
as an accommodation for a “valued” client Metrobank decided to allow Golden Savings to withdraw from
proceeds of the warrants. In turn, Golden Savings subsequently allowed Gomez to make withdrawals from
his own account. Metrobank informed Golden Savings that 32 of the warrants had been dishonored by the
Bureau of Treasury and demanded the refund by Golden Savings of the amount it had previously withdrawn,
to make up the deficit in its account. The demand was rejected. Metrobank then sued Golden Savings.

Issue:

1. Whether or not Metrobank can demand refund against Golden Savings with regard to the amount
withdraws to make up with the deficit as a result of the dishonored treasury warrants.

2. Whether or not treasury warrants are negotiable instruments

Held:
No. Metrobank is negligent in giving Golden Savings the impression that the treasury warrants had
been cleared and that, consequently, it was safe to allow Gomez to withdraw. Without such assurance,
Golden Savings would not have allowed the withdrawals. Indeed, Golden Savings might even have incurred
liability for its refusal to return the money that all appearances belonged to the depositor, who could
therefore withdraw it anytime and for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited them to its
account with Metrobank. Golden Savings had no clearing facilities of its own. It relied on Metrobank to
determine the validity of the warrants through its own services. The proceeds of the warrants were withheld
from Gomez until Metrobank allowed Golden Savings itself to withdraw them from its own deposit.

Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that they
were genuine and in all respects what they purport to be,” in accordance with Sec. 66 of NIL. The simple
reason that NIL is not applicable to non-negotiable instruments, treasury warrants.

No. The treasury warrants are not negotiable instruments. Clearly stamped on their face is the word:
non-negotiable.” Moreover, and this is equal significance, it is indicated that they are payable from a
particular fund, to wit, Fund 501. An instrument to be negotiable instrument must contain an unconditional
promise or orders to pay a sum certain in money. As provided by Sec 3 of NIL an unqualified order or
promise to pay is unconditional though coupled with: 1st, 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 2nd, a statement
of the transaction which give rise to the instrument. But an order to promise to pay out of particular fund
is not unconditional. The indication of Fund 501 as the source of the payment to be made on the treasury
warrants makes the order or promise to pay “not conditional” and the warrants themselves non-negotiable.
There should be no question that the exception on Section 3 of NIL is applicable in the case at bar.

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Case Digest - Negotiable Instruments Law

3. Consolidated Plywood Industries Inc. vs. IFC Leasing and Acceptance Corp.
G.R. No. 72593. 30, April 1987
Gutierrez Jr.

Facts:
Consolidated Plywood Industries Inc. (CPII) is a corporation engaged in the logging business. It had for its
program of logging activities for the year 1978 the opening of additional roads, and simultaneous logging
operations along the route of said roads, in its logging concession area at Baganga, Manay, and Caraga,
Davao Oriental. For this purpose, it needed 2 additional units of tractors. Cognizant of CPII's need and
purpose, Atlantic Gulf & Pacific Company of Manila, through its sister company and marketing arm,
Industrial Products Marketing (IPM), a corporation dealing in tractors and other heavy equipment business,
offered to sell to CPII 2 "Used" Allis Crawler Tractors, 1 an HD-21-B and the other an HD-16-B. In order to
ascertain the extent of work to which the tractors were to be exposed, and to determine the capability of
the "Used" tractors being offered, CPII requested the seller-assignor to inspect the jobsite. After conducting
said inspection, IPM assured CPII that the "Used" Allis Crawler Tractors which were being offered were fit
for the job and gave the corresponding warranty of 90 days performance of the machines and availability
of parts. With said assurance and warranty, and relying on the IPM's skill and judgment, CPII through Henry
Wee and Rodolfo T. Vergara, president and vice president, respectively, agreed to purchase on installment
said 2 units of "Used" Allis Crawler Tractors. It also paid the down payment of P210,000.00. On 5 April 1978,
IPM issued the sales invoice for the 2 units of tractors. At the same time, the deed of sale with chattel
mortgage with promissory note was executed. Simultaneously with the execution of the deed of sale with
chattel mortgage with promissory note, IPM, by means of a deed of assignment, assigned its rights and
interest in the chattel mortgage in favor of IFC Leasing and Acceptance Corporation. Immediately thereafter,
IPM delivered said 2 units of "Used" tractors to CPII's jobsite and as agreed, IPM stationed its own mechanics
to supervise the operations of the machines. Barely 14 days had elapsed after their delivery when one of
the tractors broke down and after another 9 days, the other tractor likewise broke down. On 25 April 1978,
Vergara formally advised IPM of the fact that the tractors broke down and requested for IPM's usual prompt
attention under the warranty. In response to the formal advice by Vergara, IPM sent to the jobsite its
mechanics to conduct the necessary repairs, but the tractors did not come out to be what they should be
after the repairs were undertaken because the units were no longer serviceable. Because of the breaking
down of the tractors, the road building and simultaneous logging operations of CPII were delayed and
Vergara advised IPM that the payments of the installments as listed in the promissory note would likewise
be delayed until IPM completely fulfills its obligation under its warranty. Since the tractors were no longer
serviceable, on 7 April 1979, Wee asked IPM to pull out the units and have them reconditioned, and
thereafter to offer them for sale. The proceeds were to be given to IFC Leasing and the excess, if any, to be
divided between IPM and CPII which offered to bear 1/2 of the reconditioning cost. No response to this
letter was received by CPII and despite several follow-up calls, IPM did nothing with regard to the request,
until the complaint in the case was filed by IFC Leasing against CPII, Wee, and Vergara. The complaint was
filed by IFC Leasing against CPII, et al. for the recovery of the principal sum of P1,093,789.71, accrued interest
of P151,618.86 as of 15 August 1979, accruing interest thereafter at the rate of 12% per annum, attorney's
fees of P249,081.71 and costs of suit. CPII, et al. filed their amended answer praying for the dismissal of the
complaint and asking the trial court to order IFC leasing to pay them damages in an amount at the sound
discretion of the court, P20,000.00 as and for attorney's fees, and P5,000.00 for expenses of litigation, among
others. In a decision dated 20 April 1981, the trial court rendered judgment, ordering CPII, et al. to pay
jointly and severally in their official and personal capacities the principal sum of P1,093,798.71 with accrued
interest of P151,618.86 as of 15 August 1979 and accruing interest thereafter at the rate of 12% per annum;
and attorney's fees equivalent to 10% of the principal and to pay the costs of the suit. On 8 June 1981, the
trial court issued an order denying the motion for reconsideration filed by CPII, et al. CPII, et al.appealed to

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Case Digest - Negotiable Instruments Law

the Intermediate Appellate Court. On 17 July 1985, the Intermediate Appellate Court issued the decision
affirming in toto the decision of the trial court. CPII et al.'s motion for reconsideration was denied by the
Intermediate Appellate Court in its resolution dated 17 October 1985, a copy of which was received by CPII,
et al. on 21 October 1985. CPII, et al. filed the petition for certiorari under rule 45 of the Rules of Court.

Issue: Whether the promissory note in question is a negotiable instrument.

Held:
The pertinent portion of the note provides that ""FOR VALUE RECEIVED, I/we jointly and severally promise
to pay to the INDUSTRIAL PRODUCTS MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND
SEVEN HUNDRED EIGHTY NINE PESOS & 71/100 only (P1,093,789.71), Philippine Currency, the said principal
sum, to be payable in 24 monthly installments starting July 15, 1978 Commercial Law – Negotiable
Instruments Law, 2006 ( 13 ) Narratives (Berne Guerrero) and every 15th of the month thereafter until fully
paid." Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a
promissory note "must be payable to order or bearer," it cannot be denied that the promissory note in
question is not a negotiable instrument. The instrument in order to be considered negotiable must contain
the so called "words of negotiability" — i.e., must be payable to "order" or "bearer." These words serve as
an expression of consent that the instrument may be transferred. This consent is indispensable since a
maker assumes greater risk under a negotiable instrument than under a nonnegotiable one. Without the
words "or order" or "to the order of," the instrument is payable only to the person designated therein and
is therefore non-negotiable. Any subsequent purchaser thereof will not enjoy the advantages of being a
holder of a negotiable instrument but will merely "step into the shoes" of the person designated in the
instrument and will thus be open to all defenses available against the latter. Therefore, considering that the
subject promissory note is not a negotiable instrument, it follows that IFC Leasing can never be a holder in
due course but remains a mere assignee of the note in question. Thus, CPII may raise against IFC Leasing
all defenses available to it as against IPM. This being so, there was no need for CPII to implead IPM when it
was sued by IFC Leasing because CPII's defenses apply to both or either of them.

4. Equitable Banking Corp vs. IAC


G.R. No. L-74451, May 25, 1988
Melencio-Herrera, J.

Facts:
 In 1975 Casals (who represented himself as general manager of Casville Enterprises, a business
engaged in processing and procurement of lumber products) went to Edward J. Nell Co. and told
the company’s sales engineer Claustro of his interest in purchasing a Garrett skidder, one of the
many merchandises the company was selling.
 Casals was referred to Javier, Nell’s EVP, who asked for cash payment for the skidders. Casals said
that Casvile had a credit line with Equitable Bank. Javier then agreed to have two units of skidders
paid by way of domestic letter of credit instead of cash. Each unit was to cost P485,000. The
domestic letter of credit was to be payable in 36 months and was to be opened within 90 days after
date of shipment of the skidders. The first installement was to be due 180 days after shipment and
interest was pegged at 14% p.a.
 Casals requested that one unit be delivered to Cagayan de Oro before April 24, 1976 together with
all its accessories. The letter of credit was to be opened on or before June 30, 1976. The skidder
was shipped on May 3.

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 June 15, 1976 – Casals handed Nell Co. a check amounting to P300,000 postdated August 4, 1976
followed by another check with the same date. Nell Co. considered the checks as partial payment
for the skidder or as reimbursement for the marginal deposit due from Casals.
 Casals informed Nell Co. that its application for a letter of credit had been approved by Equitable
but informed the company that a sum of P400,000 was needed to stand as collateral in favor of
Equitable. The amount includes P100,000 to clear the title of the Estrada property which was to act
as security for the trust receipts issued by the bank. To facilitate the transaction, Nell Co. issued a
check for the said amount in favor of Equitable even if the marginal deposit was supposed to be
produced by Casville.
 Casals wrote Equitable to apply for two letters of credit (an on-sight letter of credit for P485,000, a
36-month letter of credit for P606,000 and cash marginal deposit of P300,000) to cover its purchase
of the skidders. The skidders were to be mortgaged as security. The bank responded favorably,
stipulating a required 30% cash margin deposit, a real estate collateral and chattel mortgage of the
equipment.
 Casville sent three postdated checks to Nell Co. attached to a letter informing the latter of the bank
requirements. The cash margin deposit was to amount to P327,300 and adding the P100,000
needed for the Estrada property, the total amount due to Equitable was P427,300. The postdated
checks from Casville were intended to cover the checks issued by Nell Co. to Equitable. The
postdated checks amounted to P427,300.
 Nell Co. issued a check worth P427,300 payable to Equitable Bank. The check was made payable
to the “order of Equitable Banking Corp. A/C of Casville Enterprises.” The check was sent to
Equitable through Casals. Casals deposited the check in Equitable Bank and the teller accepted it
as deposit in Casals checking account. Casals then withdrew the amount deposited.
 Upon presentation for encashment, Nell Co. discovered that the three checks amounting to
P427,300 were all dishonored for having been drawn against a closed account. Nell Co. checked
the status of the letter of credit and was informed by Equitable that no letter of credit had been
opened and that the entire amount of P427,300 had been withdrawn.
 Casals and Casville recognized their liability towards Nell Co. so they assigned the Garrett skidder
to the latter for the amount of P450,000 as partial satisfaction.
 In determining the liability of Equitable Bank to Nell Co., the trial court held that Casals, Casville and
Equitable Bank were solidarily liable to Nell Co. for the amount of P427,300 erroneously credited
by Equitable to Casville’s account.

Issue: WON Equitable is liable to Nell Co.

Held: NO
 The check was patently ambiguous. By making the check read “Pay to Equitable Banking Corp.,
order of A/C of Casville Enterprises,” the payee ceased to be indicated with reasonable certainty.
As worded it could be accepted as deposit to the account of the party named after the symbols
A/C or payable to the bank as trustee or as agent for Casville Enterprises with the latter being the
ultimate beneficiary. The ambiguity was to be construed against Nell Co. who caused the
ambiguity.
 The check was also initially negotiable, and neither was it crossed. The crossing of the check and
the stamping of the words “non-negotiable” were made by the bank and not by Nell. It simply
meant that the same check would thereafter be no longer negotiated.
 Nell’s own acts and omissions were the proximate causes of its own defraudation.

Disposition Petition granted.

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Case Digest - Negotiable Instruments Law

Nil, Secs. 14-23

Cases:

1. Development Bank of Rizal vs. Sima Wei, et. al.


G.R. No. 85419. March 9, 1993
Campos, Jr., J.

Doctrine:
The payee of a negotiable instrument acquires no interest with respect thereto until its delivery to him. Delivery
of an instrument means transfer of possession, actual or constructive, from one person to another. Without
the initial delivery of the instrument from the drawer to the payee, there can be no liability on the instrument.
Moreover, such delivery must be intended to give effect to the instrument.

Facts:
Respondent Sima Wei executed and delivered to petitioner Bank a promissory note engaging to pay the
petitioner Bank or order the amount of P1,820,000.00. Sima Wei subsequently issued two crossed checks
payable to petitioner Bank drawn against China Banking Corporation in full settlement of the drawer's
account evidenced by the promissory note. These two checks however were not delivered to the petitioner-
payee or to any of its authorized representatives but instead came into the possession of respondent Lee
Kian Huat, who deposited the checks without the petitioner-payee's indorsement to the account of
respondent Plastic Corporation with Producers Bank. Inspite of the fact that the checks were crossed and
payable to petitioner Bank and bore no indorsement of the latter, the Branch Manager of Producers Bank
authorized the acceptance of the checks for deposit and credited them to the account of said Plastic
Corporation.

Issue:
Whether petitioner Bank has a cause of action against Sima Wei for the undelivered checks.

Ruling:
No. A negotiable instrument must be delivered to the payee in order to evidence its existence as a binding
contract. Section 16 of the NIL 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 a
negotiable instrument acquires no interest with respect thereto until its delivery to him. Without the initial
delivery of the instrument from the drawer to the payee, there can be no liability on the instrument.
Petitioner however has a right of action against Sima Wei for the balance due on the promissory note.

2. Natividad Gempesaw vs. CA


G.R. No. 92244. 9 February 1993
Campos Jr. J.

Doctrine:
A forged signature is wholly inoperative, no one can gain title to the instrument through such forged
insdorsement. Such indorsement prevents any subsequent party from acquiring any right as against parties
prior to the forgery. Although rights may exist between and among parties subsequent to the forged
instrument, not one of the can acquire rights against parties prior to the forgery. Such forged instrument cuts-

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off the rights of all subsequent parties as against parties prior to the forgery. However, the law makes an
exception to these rules where party is precluded from setting up forgery as a defense.

Facts:
Natividad Gempesaw issued checks, prepared by her bookkeeper, a total of 82 checks in favor of several
supplies. Most of the checks for amounts in excess of actual obligations as shown in their corresponding
invoices. It was only after the lapse of more than 2 years did she discovered the fraudulent manipulations
of her bookkeeper. It was also learned that the indorsements of the payee were forged, and the checks were
brought to the chief accountant of Philippine Bank of Commerce (the Drawee Bank, Buendia Branch) who
deposited them in the accounts of Alfredo Romero and Benito Lam. Gempesaw made demand upon the
bank to credit the amount charged due the checks. The bank refused. Hence, the present action.

Issue [1]: Whether or not the petitioner can raise the defense of forgery, therefore the drawee
bank alone shall bear the loss.

Ruling [2]:
Gempesaw precluded from using forgery as a defense; Gempesaw’s negligence was proximate cause of her
loss. Had Gempesaw examined her records more carefully, she would have noticed discrepancies. Had
Gempesaw been more vigilant in going over her current account by taking careful note of
the daily reports made by the drawee Bank on her issued checks, or at least made random scrutiny of
her cancelled checks returned by drawee Bank at the close of each month, she could have easily
discovered the fraud being perpetrated by Alicia Galang, and could have reported the matter to the
drawee Bank. The drawee Bank then could have taken immediate steps to prevent further
commission of such fraud. Thus, Gempesaw's negligence was the proximate cause of her loss. And
since it was her negligence which caused the drawee Bank to honor the forged checks or
prevented it from recovering the amount it had already paid on the checks, Gempesaw cannot
now complain should the bank refuse to recredit her account with the amount of such checks. Under
Section 23 of the NIL, she is now precluded from using the forgery to prevent the bank's debiting of her
account.

Section 23 of the NIL provides that" when a signature is forged or made without the authority of the
person whose signature it purports to be, itis 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."

Issue [2]: Who shall bear the loss resulting from the forged indorsements.

Held [2]:
As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot charge
the drawer’s account for the amount of said check. An exception to the rule is where the drawer is guilty of
such negligence which causes the bank to honor such checks. Gempesaw did not exercise prudence in
taking steps that a careful and prudent businessman would take in circumstances to discover discrepancies
in her account. Her negligence was the proximate cause of her loss, and under Section 23 of the Negotiable
Instruments Law, is precluded from using forgery as a defense. On the other hand, the banking rule banning
acceptance of checks for deposit or cash payment with more than one indorsement unless cleared by some
bank officials does not invalidate the instrument; neither does it invalidate the negotiation or transfer of
said checks. The only kind of indorsement which stops the further negotiation of an instrument is a

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restrictive indorsement which prohibits the further negotiation thereof, pursuant to Section 36 of the
Negotiable Instruments Law. In light of any case not provided for in the Act that is to be governed by the
provisions of existing legislation, pursuant to Section 196 of the Negotiable Instruments Law, the bank may
be held liable for damages in accordance with Article 1170 of the Civil Code. The drawee bank, in its failure
to discover the fraud committed by its employee and in contravention banking rules in allowing a chief
accountant to deposit the checks bearing second indorsements, was adjudged liable to share the loss with
Gempesaw on a 50:50 ratio.

3. Republic Planters Bank vs. CA


G.R. No. 93073. 21 December 1992
Second Division, Campos Jr. (J)

Facts:
Republic Planters Bank issued 9 promissory notes signed by Shozo Yamaguchi (President) and Fermin
Canlas (Treasurer) of Worldwide Garment Manufacturing Inc. Yamaguchi and Canlas were authorized by the
corporation to apply for credit facilities with the bank in form of export advances and letters of credit or
trust receipts accommodations. Three years after, the bank filed an action to recover the sums of money
covered by the promissory notes. Worldwide Garment Manufacturing changed its name to Pinch
Manufacturing Corp. Canlas alleged he was not liable personally for the corporate acts that he performed,
and that the notes were still blank when he signed them.

Issue: Whether the corporate treasurer is liable for the amounts in the promissory notes.

Held:
Canlas is a co-maker of the promissory notes, under the law, and cannot escape liability arising therefrom.
Inasmuch as the instrument contained the words “I promise to pay” and is signed by two or more persons,
said persons are deemed to be jointly and severally liable thereon. As the promissory notes are stereotype
ones issued by the bank in printed form with blank spaces filled up as per agreed terms of the loan, following
customary procedures, leaving the debtors to do nothing but read the terms and conditions therein and to
sign as makers or co-makers. Section 14 of the Negotiable Instruments Law, therefore, does not apply.

Canlas is solidarily liable with the corporation for the amount of the 9 promissory notes.

4. Philippine National Bank (PNB) vs. Picornell et al.


G.R. No. L-18751. 26 September 1922; also, PNB vs. Picornell G.R. No. L-18915
First Division, Romualdez (J)

Facts:
Bartolome Picornell, following instruction Hyndman, Tavera & Ventura, bought in Cebu 1,735 bales of
tobacco. Picornell obtained from the branch of the National Bank in Cebu the sum of P39,529,83, the value
of the tobacco, together with his commission of 1 real per quintal, having, in turn, drawn the a bill of
exchange. This instrument was delivered to the branch of the Philippine National Bank (PNB) in Cebu,
together with the invoice and bill of lading of the tobacco, which was shipped in the boat Don Ildefonso,
on 27 February 1920, consigned to Hyndman, Tavera & Ventura at Manila. The invoice and bill of lading
were delivered to PNB with the understanding that the bank should not deliver them to Hyndman, Tavera
& Ventura except upon payment of the bill; which condition was expressed by the well-known formula

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"D/P" (documents for [against] payment). The central office of PNB in Manila received the bill and the
aforesaid documents annexed thereto. On 3 March 1920, PNB presented the bill to Hyndman, Tavera &
Ventura, who accepted it, stating on the bill face thereof that "Accepted, 3d March 1920. Due, 2d April 1920,
Hyndman, Tavera & Ventura, by (Sgd.) J. Pardo de Tavera, member of the firm." The tobacco having arrived
at Manila, the firm of Tambunting, owner of the ship Don Ildefonso, that brought the shipment, requested
Hyndman, Tavera & Ventura to send for the goods, which was done by the company without the knowledge
of PNB which retained and always had in its possession the invoice and bill of lading of the tobacco, until it
presented them as evidence at the trial. Hyndman, Tavera & Ventura proceeded to the examination of the
tobacco, which was deposited in their warehouses, and wrote and cabled to Picornell, notifying him that of
the tobacco received, there was a certain portion which was of no use and was damaged. Through these
communications, therefore, Picornell learned that Hyndman, Tavera & Ventura had in their possession the
tobacco. In view of the question raised by the said company as to the quality of the aforesaid tobacco, more
correspondence was exchanged between the company and Picornell. Picornell requested PNB to extend
the time for payment of the bill for P39,529,83 against Messrs. Hyndman, Tavera & Ventura of Manila for
30 days. PNB granted the request of Picornell; wherefore Hyndman, Tavera & Ventura reaccepted the bill
in the terms: "Accepted for thirty days. Due May 2d, 1920. Hyndman, Tavera & Ventura, by (Sgd.) J. Pardo
de Tavera, member of the firm." 2 May 1920, arrived and the bill was not paid. On the 4th of the same
month, Hyndman, Tavera & Ventura sent a letter to PNB informing the latter that it absolutely refise to pay
draft 2 for P39,529.83, referring to 1,871,235 quintals of Leaf Tobacco Barili, owing to noncompliance of the
contract by the drawer. PNB protested the bill, took possession of the tobacco, and had it appraised on the
12th of the same month, its value having been fixed at P28,790.72. The bank brought the action for the
recovery of the value of the bill of exchange, and about September 1921, sold the tobacco, obtaining from
the sale P6,708.82. In a decision rendered 9 January 1922, and amended by an order of February 18th next,
the Court of First Instance of Manila sentenced Bartolome Picornell et al. to pay solidarily to the Philippine
National Bank (PNB) the sum of P28, 790.72 with interest at the rate of 9% per annum from 3 May 1921,
and costs; and Picornell, specifically, to pay PNB the sum of P10,739.11 with interest at 9% per annum, all
as aforesaid, deducting the sum of P6, 708.82 from such amounts to be paid by Picornell et al. This total
sum which Picornell et al are required to pay represents the value of a bill of exchange drawn by Picornell
in favor of PNB, against the firm of Hyndman, Tavera & Ventura, now dissolved, its only successor being
Joaquin Pardo de Tavera. From this judgment Picornell et al. appealed.

Issue [1]: Whether Hyndman, Tavera & Ventura company can escape liability due to want of full
consideration.

Held [1]:
Whether the tobacco was worth the value of the bill, does not concern PNB. Such partial want of
consideration, if it was, does not exist with respect to the bank which paid to Picornell the full value of said
bill of exchange. The bank was a holder in due course and was such for value full and complete. The
Hyndman, Tavera & Ventura company cannot escape liability in view of section 28 of the Negotiable
Instruments Law. The drawee by acceptance becomes liable to the payee or his indorsee, and also to the
drawer himself. But the drawer and acceptor are the immediate parties to the consideration, and if the
acceptance be without consideration, the drawer cannot recover of the acceptor. The payee holds a different
relation; he is a stranger to the transaction between the drawer and the acceptor, and is, therefore, in a legal
sense a remote party. In a suit by him against the acceptor, the question as to the consideration between
the drawer and the acceptor cannot be inquired into. The payee or holder gives value to the drawer, and if
he is ignorant of the equities between the drawer and the acceptor, he is in the position of a bona fide
indorsee. Hence, it is no defense to a suit against the acceptor of a draft which has been discounted, and

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upon which money has been advanced by the plaintiff, that the draft was accepted for the accommodation
of the drawer.

Issue [2]: Whether Bartolome Picornell, even as a commissioned agent of Hyndman, Tavera & Ventuta in
the purchase of the tobacco, is liable for the bill.

Held [2]:
As to Bartolome Picornell, he warranted, as drawer of the bill, that it would be accepted upon proper
presentment and paid in due course, and as it was not paid, he became liable to the payment of its value
to the holder thereof, which is the plaintiff bank. (Sec. 61, Negotiable Instruments Law.) The fact that
Picornell was a commission agent of Hyndman, Tavera & Ventura, in the purchase of the tobacco, does not
necessarily make him an agent of the company in its obligations arising from the drawing of the bill by him.
His acts in negotiating the bill constitute a different contract from that made by his having purchased the
tobacco on behalf of Hyndman, Tavera & Ventura. Furthermore, he cannot exempt himself from
responsibility by the fact of his having been a mere agent of this company, because nothing to this effect
was indicated or added to his signature on signing the bill. (Sec. 20, Negotiable Instruments Law.) The fact
that the tobacco was or was not of inferior quality does not affect the responsibility of Picornell, because
while it may have an effect upon the contract between him and the firm of Hyndman, Tavera, Ventura, yet
it cannot have upon the responsibility of both to the bank, upon the bill drawn and accepted as above
stated.

(Upon the non-payment of the bill by the drawee-acceptor, the bank had the right of recourse, which it
exercised, against the drawer. [Sec. 84, Negotiable Instruments Law] The drawee, the Hyndman, Tavera &
Ventura company, or its successors, J. Pardo de Tavera, accepted the bill and is primarily liable for the value
of the negotiable instrument, while the drawer, Bartolome Picornell, is secondarily liable.)

5. Philippine Bank of Commerce vs. Aruego


G.R. No. L-25836-37. 31 January 1981
First Division, Fernandez (J)

Doctrine:
There is a difference between a qualified indorser and a person negotiating by mere delivery. While a
qualified indorser warrants to all subsequent holders, the warranties of the person negotiating by mere
delivery extends only in favor of his immediate transferee.

Facts:
Jose Aruego publishes a periodical called “World Current Events.” To facilitate payment of theprinting,
Aruego obtained a credit accommodation from the Philippine Bank of Commerce. For every printing of the
periodical, the printer (Encal Press and Photo-Engraving) collected the cost of printing by drawing a draft
against the bank, said draft being sent later to Aruego for acceptance. As an added security for the payment
of the amounts advanced to the printer, the bank also required Aruego to execute a trust receipt in favor
of the bank wherein Aruego undertook to hold in trust for the bank the periodicals and to sell the same
with the promise to turn over to the bank the proceeds of the sale to answer for the payment of all
obligations arising from the draft. The bank instituted an action against Aruego to recover the cost of
printing of the latter’s periodical for the period of 28 August 1950 to 14 March 1951.

Issue [1]: Whether the drafts were bills of exchange or mere pieces of evidence of indebtedness.

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Held [1]:
Under the Negotiable Instruments Law, a bill of exchange is an unconditional order in writing addressed by
one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay
on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. As long
as a commercial paper conforms with the definition of a bill of exchange, that paper is considered a bill of
exchange. The nature of acceptance is important only in the determination of the kind of liabilities of the
parties involved, but not in the determination of whether a commercial paper is a bill of exchange or not.

Issue [2]: Whether Aruego is an agent of Philippine Education Foundation Company when he signed the
supposed bills of exchange.

Held [2]:
Nowhere in the drafts accepted by Aruego that he disclosed that he was signing as representative of
the Philippine Education Foundation Company. For failure to disclose his principal, Aruego is personally
liable for the drafts he accepted, pursuant to Section 20 of the Negotiable Instruments Law.

Issue [3]: Whether Aruego is primarily liable.

Held [3]:
An accommodation party is one who has signed the instrument as maker, drawer, acceptor, indorser,
without receiving value therefor and for the purpose of lending his name to some other person. Herein,
Aruego signed as a drawee / acceptor. Under the Negotiable Instruments Law, a drawee is primarily liable.
If Aruego intended to be secondarily liable only, he should not have signed as an acceptor / drawee. In
doing so, he became primarily and personally liable for the drafts.

6. Jai-Alai Corp. of the Phil. vs. Bank of the Phil. Islands


G.R. No. L-29432, August 6, 1975, 66 SCRA 29
Castro, J.

Doctrine:
Holders of checks may obtain payment from the drawee bank by presenting it for payment directly with the
bank or by depositing it in his account in another bank known as the collecting bank or depositary bank. When
the holder deposits his check with the collecting bank, the nature of the relationship created at that stage is
one of agency, that is the bank is to collect from the drawee of the check the corresponding proceeds.

Facts:
Petitioner deposited 10 checks in its current account with BPI. The checks which were acquired by petitioner
from Ramirez, a sales agent of the Inter-Island Gas were all payable to Inter-Island Gas Service, Inc. or order.
After the checks had been submitted to Inter-bank clearing, Inter-Island Gas discovered that all the
indorsements made on the checks purportedly by its cashiers were forgeries. BPI thus debited the value of
the checks against petitioner's current account and forwarded to the latter the checks containing the forged
indorsements which petitioner refused to accept.

Issue: Whether BPI had the right to debit from petitioner's current account the value of the checks with the
forged indorsements.

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Ruling:
YES. The respondent BPI acted within legal bounds when it debited the petitioner's account. When the
petitioner deposited the checks with the respondent, the nature of the relationship created at that stage
was one of agency, that is, the bank was to collect from the drawees of the checks the corresponding
proceeds.

Pursuant to Sec. 23 of the NIL, a forged signature in a negotiable instrument 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 the forgery. It stands to reason, upon the facts of record, that the
respondent, 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. In legal contemplation, therefore, the payments made by the drawee-banks to
the respondent on account of the said checks were ineffective; and, such being the case, the relationship of
creditor and debtor between the petitioner and the respondent had not been validly affected, the checks
not having been properly and legitimately converted into cash.

It is the obligation of the collecting bank to reimburse the drawee-bank the value of the checks
subsequently found to contain the forged indorsement of the payee. The reason is that the bank with which
the check was deposited has no right to pay the sum stated therein to the forger "or anyone else upon a
forged signature."

In contrast, it was petitioner’s duty to that the payee's endorsement was genuine before cashing the check.
The petitioner must in turn shoulder the loss of the amounts which the respondent; as its collecting agent,
had to reimburse to the drawee-banks. Having indorsed the checks to respondent bank, petitioner is
deemed to have given the warranty prescribed in Section 66 of the NIL that every single one of those checks
"is genuine and in all respects what it purports to be." Respondent which relied upon the petitioner's
warranty should not be held liable for the resulting loss. (Issue on Indorsement) Jai Alai Corporation is
negligent in accepting the checks without question from Antonio Ramirez notwithstanding that the payee
was the Inter-Island Gas Services, Inc. and it did not appear that he was authorized to indorse it.

**The depositor of a check as indorser warrants that it is genuine and in all respects what it purports to be.
Having indorsed the checks to respondent bank, petitioner is deemed to have given the warranty prescribed
in Section 66 of the NIL that every single one of those checks " is genuine and in all respects what it purports
to be."

7. Republic Bank vs. Ebrada


G.R. No. L-40796. 31 July 1975
Martin J.

Doctrine:
Where the signature on a negotiable instrument is forged, the negotiation of the check is without force or
effect. However, where a check has several indorsersment on it, it is only the negotiation based on the forged
or unauthorized signature is inoperative. It will not render void all the other negotiations of the check with
respect to other parties whose signatures are genuine.

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Facts:
On or about 27 February 1963, Mauricia T. Ebrada, encashed Back Pay Check 508060 dated 15 January 1963
for P1,246.08 at the main office of the Republic Bank at Escolta, Manila. The check was issued by the Bureau
of Treasury. Republic Bank was later advised by the said bureau that the alleged indorsement on the reverse
side of the aforesaid check by the payee, "Martin Lorenzo" was a forgery since the latter had allegedly died
as of 14 July 1952. Republic Bank was then requested by the Bureau of Treasury to refund the amount of
P1,246.08. To recover what it had refunded to the Bureau of Treasury, Republic Bank made verbal and formal
demands upon Ebrada to account for the sum of P1,246.08, but Ebrada refused to do so. So Republic Bank
sued Ebrada before the City Court of Manila. On 11 July 1966, Ebrada filed her answer denying the material
allegations of the complaint and as affirmative defenses alleged that she was a holder in due course of the
check in question, or at the very least, has acquired her rights from a holder in due course and therefore
entitled to the proceeds thereof. She also alleged that the Republic Bank has no cause of action against her;
that it is in estoppel, or so negligent as not to be entitled to recover anything from her. On the same date,
Ebrada filed a Third-Party complaint against Adelaida Dominguez who, in turn, filed on 14 September 1966
a Fourth-Party complaint against Justina Tinio. On 21 March 1967, the City Court of Manila rendered
judgment for the Republic Bank against Ebrada; for Ebrada against Dominguez, and for Dominguez against
Tinio. From the judgment of the City Court, Ebrada took an appeal to the Court of First Instance of Manila,
where a partial stipulation of facts was submitted. Based on the stipulation of facts and the documentary
evidence presented, the trial court rendered a decision, ordering Ebrada to pay Republic Bank the amount
of P1,246.08, with interest as the legal rate from the filing of the complaint on 16 June 1966, until fully paid,
plus the costs in both instances against Ebrada; reserving therein the right of Ebrada to file whatever claim
she may have against Dominguez in connection with the case, as well as the right of the estate of
Dominguez to file the fourth-party complaint against Tinio. Ebrada appealed.

Issue [1]: Whether the bank can recover from the last indorser.

Held [1]:
According to Section 23 of the Negotiable Instruments Law, where the signature on a negotiable instrument
is forged, the negotiation of the check is without force or effect. However, following the ruling in Beam vs.
Farrel (US case), where a check has several indorsements on it, only the negotiation based on the forged or
unauthorized signature which is inoperative. The last indorser, Ebrada, was duty-bound to ascertain whether
the check was genuine before presenting it to the bank for payment. Her failure to do so makes her liable
for the loss and the Bank may recover from her the money she received for the check. Had she performed
her duty, the forgery would have been detected and fraud defeated. Even if she turned over the amount to
Dominguez immediately after receiving the cash proceeds of the check, she is liable as an accommodation
party under Section 29 of the Negotiable Instruments Law.

Issue [2]: Whether the existence of one forged signature in a negotiable instrument will render void all the
other negotiations of the check with respect to the other parties whose signature are genuine.

Held [2]:
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a check has several indorsements on it, it
was held that it is only the negotiation based on the forged or unauthorized signature which is inoperative.
Applying this principle to the case, it can be safely concluded that it is only the negotiation predicated on
the forged indorsement that should be declared inoperative. This means that the negotiation of the check
in question from Martin Lorenzo, the original payee, to Ramon R. Lorenzo, the second indorser, should be
declared of no effect, but the negotiation of the aforesaid check from Ramon R. Lorenzo to Adelaida

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Dominguez, the third indorser, and from Adelaida Dominguez to Ebrada who did not know of the forgery,
should be considered valid and enforceable, barring any claim of forgery.

Issue [3]: Whether the drawee bank recover from the one who encashed the check if, after the drawee bank
has paid the amount of the check to the holder thereof, it was discovered that the signature of the payee
was forged.

Held [3]:
In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held that the drawee of a check can
recover from the holder the money paid to him on a forged instrument. It is not supposed to be its duty to
ascertain whether the signatures of the payee or indorsers are genuine or not. This is because the indorser
is supposed to warrant to the drawee that the signatures of the payee and previous indorsers are genuine,
warranty not extending only to holders in due course. One who purchases a check or draft is bound to
satisfy himself that the paper is genuine and that by indorsing it or presenting it for payment or putting it
into circulation before presentation he impliedly asserts that he has performed his duty and the drawee
who has paid the forged check, without actual negligence on his part, may recover the money paid from
such negligent purchasers. In such cases the recovery is permitted because although the drawee was in a
way negligent in failing to detect the forgery, yet if the encasher of the check had performed his duty, the
forgery would in all probability, have been detected and the fraud defeated. The reason for allowing the
drawee bank to recover from the encasher is that "Every one with even the least experience in business
knows that no business man would accept a check in exchange for money or goods unless he is satisfied
that the check is genuine. He accepts it only because he has proof that it is genuine, or because he has
sufficient confidence in the honesty and financial responsibility of the person who vouches for it. If he is
deceived he has suffered a loss of his cash or goods through his own mistake. His own credulity or
recklessness, or misplaced confidence was the sole cause of the loss. Why should he be permitted to shift
the loss due to his own fault in assuming the risk, upon the drawee, simply because of the accidental
circumstance that the drawee afterwards failed to detect the forgery when the check was presented?"
Herein, Ebrada, upon receiving the check in question from Adelaida Dominguez, was duty-bound to
ascertain whether the check in question was genuine before presenting it to Republic Bank for payment.
Her failure to do so makes her liable for the loss and the Republic Bank may recover from her the money
she received for the check. Had she performed the duty of ascertaining the genuineness of the check, in all
probability the forgery would have been detected and the fraud defeated. As held in the Great Eastern Life
Insurance Company case, "Where a check is drawn payable to the order of one person and is presented to
a bank by another and purports upon its face to have been duly indorsed by the payee of the check, it is
the duty of the bank to know that the check was duly indorsed by the original payee, and where the Bank
pays the amount of the check to a third person, who has forged the signature of the payee, the loss falls
upon the bank who cashed the check, and its only remedy is against the person to whom it paid the money."
Hence, the Republic Bank should suffer the loss when it paid the amount of the check in question to Ebrada,
but it has the remedy to recover from the latter the amount it paid to her. Although Ebrada to whom the
Republic Bank paid the check was not proven to be the author of the supposed forgery, yet as last indorser
of the check, she has warranted that she has good title to it even if in fact she did not have it because the
payee of the check was already dead 11 years before the check was issued. The fact that immediately after
receiving the cash proceeds of the check in question in the amount of P1,246.08 from the Republic Bank,
Ebrada immediately turned over said amount to Dominguez who in turn handed the amount to Tinio on
the same date would not exempt her from liability because by doing so, she acted as an accommodation
party in the check for which she is also liable under Section 29 of the Negotiable Instruments Law.

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8. The Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Banking Corp.
G.R. No. 18657. 23 August 1922
Johns J.

Facts:
The Great Eastern Life Insurance Co. (GELIC) is an insurance corporation, while Hongkong & Shanghai
Banking Corp. (HSBC) and Philippine National Bank (PNB) are banking corporations, and each ism duly
licensed to do its respective business in the Philippine Islands. On 3 May 1920, GELIC drew its check for
P2,000 on HSBC with whom it had an account, payable to the order of Lazaro Melicor. E.M. Maasim
fraudulently obtained possession of the check, forged Melicor's signature, as an endorser, and then
personally endorsed and presented it to PNB where the amount of the check was placed to his credit. After
having paid the check, and on the next day, PNB endorsed the check to HSBC, which paid it, and charged
the amount of the check to the account of GELIC. In the ordinary course of business, HSBC rendered a bank
statement to GELIC showing that the amount of the check was charged to its account, and no objection was
then made to the statement. About 4 months after the check was charged to the account of GELIC, it
developed that Melicor, to whom the check was made payable, had never received it, and that his signature,
as an endorser, was forged by Maasim, who presented and deposited it to his private account in PNB. With
this knowledge, GELIC promptly made a demand upon HSBC that it should be given credit for the amount
of the forged check, which the bank refused to do, and GELIC commenced the action to recover the P2,000
which was paid on the forged check. On the petition of HSBC, PNB was made defendant. HSBC denies any
liability, but prays that, if a judgment should be rendered against it, in turn, it should have like judgment
against PNB which denies all liability to either party. Upon the issued being joined, a trial was had and
judgment was rendered against GELIC and in favor HSBC and PNB from which GELIC appealed.

Issue: Whether GELIC can recover inasmuch as Melicor’s indorsement was forged.

Held:
GELIC's check was drawn on HSBC payable to the order of Melicor. In other words, GELIC authorized and
directed HSBC to pay Melicor, or his order, P2,000. It did not authorize or direct the bank to pay the check
to any other person than Melicor, or his order, and the testimony is undisputed that Melicor never did part
with his title or endorse the check, and never received any of its proceeds. Neither is GELIC estopped or
bound by the bank statement, which was made to it by HSBC. This is not a case where GELIC's own signature
was forged to one of its checks. The forgery was that of Melicor, who was the payee of the check, and the
legal presumption is that the bank would not honor the check without the genuine endorsement of Melicor.
In other words, when GELIC received its bank statement, it had a right to assume that Melicor had personally
endorsed the check, and that, otherwise, the bank would not have paid it. Section 23 of the Negotiable
Instruments Law is square in point. The money was on deposit in HSBC, and it had no legal right to pay it
out to anyone except GELIC or its order. Here, GELIC ordered HSBC to pay the P2,000 to Melicor, and the
money was actually paid to Maasim and was never paid to Melicor, and he never personally endorsed the
check, or authorized any one to endorse it for him, and the alleged endorsement was a forgery. Hence,
upon the undisputed facts, it must follow that HSBC has no defense to the present action. It is admitted
that

PNB cashed the check upon a forged signature, and placed the money to the credit of Maasim, who was
the forger. That PNB then endorsed the check and forwarded it to HSBC by whom it was paid. PNB had no
license or authority to pay the money to Maasim or anyone else upon a forged signature. It was its legal
duty to know that Melicor's endorsement was genuine before cashing the check. Its remedy is against
Maasim to whom it paid the money. The Supreme Court reversed the lower court's judgment, and entered

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another in favor of GELIC and against HSBC for P2,000, with interest thereon from 8 November 1920, at the
rate of 6% per annum, and the costs of the action, and a corresponding judgment will be entered in favor
of HSBC against PNB for the same amount, together with the amount of its costs in the action.

9. MWSS vs. CA
G.R. No. L-62943. 14 July 1986
Gutierrez Jr. J.

Doctrine:
It is basic that whoever alleges forgery must prove such fact. Forgery cannot be presumed, it must be duly
established.

Facts:
By special arrangement with PNB, MWSS used personalized checks in drawing from its account. The checks
were printed by its printer, F. Mesina Enterprises. 23 checks were paid and cleared by PNB, and debited
against MWSS’ account from March to May 1969. The checks were deposited by payees Raul Dizon, Arturo
Sison, and Antonio Mendoza in their account with PCIBank. Said persons were later found to be fictitious.
MWSS requested PNB to restore the amount debited due to the 23 checks, allegedly forged, to its account.
The bank refused. Hence, the present action.

Issue: Who shall bear the loss resulting from the alleged forged checks.

Held:
There was no express and categorical finding that the 23 checks were forged or signed by persons other
than the authorized MWSS signatories. Forgery is not presumed but should be established by clear, positive
and convincing evidence. MWSS is barred from setting up defense of forgery under Section 23 of the
Negotiable Instruments Law as MWSS committed gross negligence in the printing of its personalized
checks, failed to reconcile its bank statements with its own records, and failed to provide appropriate
security measures over its own record. PNB, the drawee bank, had taken necessary measures in the detection
of forged checks and the prevention of their fraudulent encashment through constant reminders to all its
current account bookkeepers informing them of the activities of forgery syndicates. MWSS’ gross
negligence was the proximate cause of the loss (P3 million) and should bear the loss.

10. Ramon K. Ilusorio vs. Court of Appeals


G.R. No. 139130. November 27, 2002
Quisumbing, J.

Doctrine:
The collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the
genuineness of all prior indorsements considering that the act of presenting the check for payment to the
drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness
of the indorsements. As between the drawer and the drawee bank, the drawee bank should bear the loss. The
drawee bank shall have recourse against the collecting bank because such collecting bank guarantees that all
prior endorsements are genuine. The collecting bank then can go against the forger. In cases involving a forged
check, where the drawer’s is forged, drawer can recover from the drawee bank. No drawee bank has a right to
pay a forged check. If it does, it shall have to recredit the amount of check to the account of the drawer. The

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liability chain ends with drawee bank whose responsibility it is to know the drawer’s signature since the latter
is its customer.

Facts:
Ramon Ilusorio entrusted his credit cards and checkbooks and blank checks to his secretary. Apparently, his
secretary was able to encash and deposit to her personal account 17 checks drawn against his account.
Ilusorio requested to restore to his account the value of the checks that were wrongfully encashed but the
bank refused, hence the case. In court, the bank testified that they make sure that the sign on the check is
verified. When asked by the NBI to submit standard signs to compare, Ilusorio failed to comply. The lower
held held in favor of defendant.

Issue: Whether the bank was negligent in receiving the checks.

Ruling:
The SC affirmed the lower court's decision. Ilusorio failed to prove that the bank was negligent on their part
as he has the burden of proof. The bank's employees did not know the secretary's modus operandi as she
was always transacting in behalf of Ilusorio.

The SC even held that it was Ilusorio who was negligent as he trusted his secretary of unusual degree.

Ilusorio also cites Sec. 23 of the NIL that a forged check is inoperative and that the bank has no authority
to pay. While true, the case at bar falls under the exception stated in the section. The SC held that Ilusorio
is precluded from setting up the forgery, assuming there is forgery, due to his own negligence in entrusting
his secretary.

11. San Carlos Milling vs. BPI


G.R. No. 37467. 11 December 1933
Second Division, Hull (J)

Facts:
Joseph Wilson, the principal employee of San Carlos Milling Co. Ltd. in the Manila Office, conspired with
one Alfredo Dolores, a messenger-clerk in the same office, in sending a cablegram in code to the company
in Honolulu requesting a telegraphic transfer of $100,000 to China Bank of Manila. Upon receipt of the
money, China Bank sent an exchange contract to San Carlos Milling offering the sum of P201,000, which
was then the current rate of exchange. On this contract was forged the name of Newland Baldwin. A
manager’s check on China Bank payable to San Carlos Milling or order was receipt for by Dolores. The check
was deposited with BPI indorsed by a spurious signature of Baldwin. After clearing, BPI received a letter,
purportedly signed by Baldwin, directing the shipment and delivery of P201,000. Dolores witnessed the
packing of the money and returned with the check for P201,000 purportedly signed by Baldwin. Dolores
turned the money over to Wilson and received as his share P10,000. When the crime was discovered, BPI
refused to credit San Carlos Milling’s account with the amount withdrawn by the forged checks.

Issue: Who shall be liable for the value of the forged check.

Held:
A bank that cashes a check must know to whom it pays. It is an elementary principle both in banking and
of the Negotiable Instruments Law that a bank is bound to know the signatures of its customers; and if it

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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. As the
proximate cause of loss was due to the negligence of BPI in honoring and cashing the forged checks, it is
liable for the amount of P201,000 with legal interest thereon from 23 December 1928, until payment.

12. PNB vs. National City Bank of New York


G.R. No. 43596. 31 October 1936
En Banc, Recto (J)

Facts:
Facts: On April 7 and 9, 1933, an unknown person or persons negotiated with Motor Service Company, Inc.
(MSCI), two checks in payment for automobile tires purchased from MSCI's stores, purporting to have been
issued by the 'Pangasinan Transportation Co., Inc. (Pantranco) by J.L. Klar, Manager and Treasurer', against
the Philippine National Bank (PNB) and in favor of the International Auto Repair Shop, for P144.50 and
P215.75. Said checks were indorsed by said unknown persons in the manner indicated at the back thereof,
the MSCI, believing at the time that the signatures of J.L. Klar, Manager and Treasurer of Pantranco on both
checks were genuine. The checks were then indorsed for deposit by MSCI at the National City Bank of New
York and the former was accordingly credited with the amounts thereof, or P144.50 and P215.75. On April
8 and 10, 1933, the said checks were cleared at the clearing house and PNB credited the National City Bank
for the amounts thereof, believing at the time that the signatures of the drawer were genuine, that the
payee is an existing entity and the endorsements at the bank thereof regular and genuine. The PNB then
found out that the purported signatures of J.L. Klar, as Manager and Treasurer of Pantranco were forged
when so informed by the said Company, and it accordingly demanded from the National City Bank and
MSCI and the reimbursement of the amounts for which it credited the National City Bank at the clearing
house and for which the latter credited MSCI, but MSCI and National City Bank refused, and continue to
refuse, to make such reimbursements. Pantranco objected to have the proceeds of said check deducted
from their deposit. PNB filed the case in the municipal court of Manila against National City Bank and MSCI.
Upon PNB's motion, the case was dismissed before trial as to the National City Bank. A decision was
thereafter rendered giving PNB judgment for the total amount of P360.25, with interest and costs. From this
decision MSCI appealed.

Issue [1]: Whether MSCI's negligence in purchasing the checks in question is such as to give PNB the right
to recover upon said checks, and on the other hand, whether PNB was not itself negligent, except for its
constructive fault in now knowing the signature of the drawer and detecting the forgery.

Held [1]:
Check number 637023-D was dated 6 April 1933, whereas check number 637020-D and is dated 7 April
1933. Therefore, the later check, which is prior in number to the former check, is however, issued on a later
date. This circumstance must have aroused at least the curiosity of MSCI. MSCI further accepted the two
checks from unknown persons. Furthermore, check 637023-D was indorsed by a subagent of the agent of
the payee, International Auto Repair Shop. MSCI made no inquiry whatsoever as to the extent of the
authority of these unknown persons. Check 637020-D, aside from having been indorsed by a supposed
agent of the International Auto Repair Shop is crossed generally. The existence of two parallel lines
transversally drawn on the face of this check was a warning that the check could only be collected through
a banking institution. Yet MSCI accepted the check in payment for merchandise. The facts of case do not
make it one between two equally innocent persons, the drawee bank and the holder. Section 23 of the
Negotiable Instruments Act provides that "when a signature is forged or made without the authority of the

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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." It not appearing that PNB did not warrant to
MCSI the genuineness of the checks in question, by its acceptance thereof, nor did it perform any act which
would have induced MSCI to believe in the genuineness of said instruments before MSCI purchased them
for value, it cannot be said that PNB is precluded from setting up the forgery and, therefore, MSCI is not
entitled to retain the amount of the forged check paid to it by PNB.

Issue [2]: Whether the drawee bank should be allowed recovery, as MSCI's position would not become
worse than if the drawee had refused the payment of these checks upon their presentation.

Held [2]:
A drawee of a check, who is deceived by a forgery of the drawer's signature may recover the payment back,
unless his mistake has placed an innocent holder of the paper in a worse position than he would have been
in if the discover of the forgery had been made on presentation. Forgeries often deceived
the eye of the most cautions experts; and when a bank has been so deceived, it is a harsh rule which compels
it to suffer although no one has suffered by its being deceived. Herein, MSCI has lost nothing by anything
which the drawee has done. It had in its hands some forged worthless papers. It did not purchase or acquire
these papers because of any representation made to it by the drawee. It purchased them from unknown
persons and under suspicious circumstances. It had no valid title to them, because the persons from whom
it received them did not have such title. MSCI could not have compelled the drawee to pay them, and the
drawee could have refused payment had it been able to detect the forgery. By making a refund, MSCI would
only be returning what it had received without any title or right. And when MCSI pays back the money it
has received it will be entitled to have restored to it the forged papers it parted with. There is no good
reason why the accidental payment made by PNB should inure to the benefit of MSCI. If there were injury
to MCSI said injury was caused not by the failure of PNB to detect the forgery but by the very negligence
of MCSI in purchasing commercial papers from unknown persons without making inquiry as to their
genuineness.

C. Consideration and Accommodation Party

NIL Secs. 24- 29

Cases:

1. Travel On vs. CA
G.R. No. 56169. 26 June 1992
Third Division, Feliciano (J)

Doctrine:
Check which is regular on its face is deemed prima facie to have been issued for a valuable consideration and
every person whose signature appears thereon is deemed to have become a party thereto for value. Further
the rule is quite settled that a negotiable instrument is presumed to have been given or indorsed for a sufficient
consideration unless otherwise contradicted and overcome by another evidence.

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In the accommodation transactions recognized by the NIL, an accommodating party lends his credit to the
accommodated party, by issuing or indorsing a check which is held by the payee or indorsee as a holder in
due course, who gave full value which the accommodated party must repay the accommodating party, unless
of course the accommodating party intended to make a donation to the accommodated party. But the
accommodating party is bound on the check to the holder in due course who is necessarily a third party and
is not the accommodated party. Having issued or indorsed the check, the accommodating party has warranted
to the holder in due course that he will pay the same according to its tenor.

Facts:
Petitioner Travel-On Inc. is a travel agency from which Arturo Miranda procured tickets on behalf of airline
passengers and derived commissions therefrom. Miranda was sued by petitioner to collect on the six
postdated checks he issued which were all dishonored by the drawee banks. Miranda, however, claimed
that he had already fully paid and even overpaid his obligations and that refunds were in fact due to him.
He argued that he had issued the postdated checks not for the purpose of encashment to pay his
indebtedness but for purposes of accommodation, as he had in the past accorded similar favors to
petitioner. Petitioner however urges that the postdated checks are per se evidence of liability on the part
of private respondent and further argues that even assuming that the checks were for accommodation,
private respondent is still liable thereunder considering that petitioner is a holder for value.

Issue: Whether Miranda is liable on the postdated checks he issued even assuming that said checks were
issued for accommodation only.

Ruling:
There was no accommodation transaction in the case at bar. In accommodation transactions recognized
by the Negotiable Instruments Law, an accommodating party lends his credit to the accommodated party,
by issuing or indorsing a check which is held by a payee or indorsee as a holder in due course, who gave
full value therefor to the accommodated party. The latter, in other words, receives or realizes full value
which the accommodated party then must repay to the accommodating party. But the accommodating
party is bound on the check to the holder in due course who is necessarily a third party and is not the
accommodated party. In the case at bar, Travel-On was payee of all six (6) checks, it presented these checks
for payment at the drawee bank but the checks bounced. Travel-On obviously was not an accommodated
party; it realized no value on the checks which bounced. Miranda must be held liable on the checks involved
as petitioner is entitled to the benefit of the statutory presumption that it was a holder in due course and
that the checks were supported by valuable consideration.

Link: http://legalmatters101.blogspot.com/2010/12/travel-on-vs-ca.html

2. Sadaya vs. Sevilla


G.R. No. L-17845. April 27, 1967
Sanchez, J.

Doctrine:
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.

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Facts:
 March 28, 1949: Victor Sevilla, Oscar Varona and Simeon Sadaya executed, jointly and severally, in
favor of the BPI, or its order, a promissory note for P15,000.00 with interest at 8% per annum,
payable on demand.
 The P15,000.00 proceeds were received by Oscar Varona alone.
 Victor Sevilla and Simeon Sadaya signed the promissory note as co-makers only as a favor to Oscar
Varona.
 June 15, 1950: outstanding balance is P4,850.00. No payment thereafter made.
 Oct 16 1952: bank collected from Sadaya total of P5,416.12(w/ int)
 Varona failed to reimburse Sadaya despite repeated demands. V
 Victor Sevilla died Francisco Sevilla was named administrator.
 Sadaya filed a creditor's claim for the above sum of P5,746.12, plus attorney’s fees in the sum of
P1,500.00
 The administrator resisted the claim upon the averment that the deceased Victor Sevilla "did not
receive any amount as consideration for the promissory note," but signed it only "as surety for
Oscar Varona
 June 5, 1957: Trial court order the administrator to pay
 CA reversed.

Issue: W/N Sadaya can claim against the estate of Sevilla as co-accomodation party when Verona as
principal debtor is not yet insolvent

Held: NO. Affirmed


 Varona is bound by the obligation to reimburse Sadaya
 solidary accommodation maker — who made payment — has the right to contribution, from his
co-accommodation maker, in the absence of agreement to the contrary between them, and subject
to conditions imposed by law
 requisites before one accommodation maker can seek reimbursement from a co-accommodation
maker.
 ART. 2073. When there are two or more guarantors of the same debtor and for the same debt, the
one among them who has paid may demand of each of the others the share which is proportionally
owing from him.
 If any of the guarantors should be insolvent, his share shall be borne by the others, including the
payer, in the same proportion.
 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;
 a joint and several accommodation maker who pays on the said promissory note may directly
demand reimbursement from his co-accommodation maker without first directing his action
against the principal debtor provided that
a) he made the payment by virtue of a judicial demand, or -no judicial demand just voluntarily
b) a principal debtor is insolvent. - Varona is not insolvent

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3. Crisologo-Jose vs. Court of Appeals


G.R. No. 80599. 15 September 1989
Second Division, Regalado J.

Doctrine:
The provision of NIL which holds an accommodation party liable on the instrument to holder for value,
although such holder at the time of taking the instrument knew him to be only an accommodation party, does
not include nor apply to corporations which are accommodation parties. This is because the issue or
indorsement of negotiable paper by a corporation without consideration and for accommodation 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.

Facts:
In 1980, Ricardo S. Santos, Jr. was the vice-president of Mover Enterprises, Inc. in-charge of marketing and
sales; and the president of the said corporation was Atty. Oscar Z. Benares. On 30 April 1980, Atty. Benares,
in accommodation of his clients, the spouses Jaime and Clarita Ong, issued Check 093553 drawn against
Traders Royal Bank, dated 14 June 1980, in the amount of P45,000.00 payable to Ernestina Crisologo-Jose.
Since the check was under the account of Mover Enterprises, Inc., the same was to be signed by its president,
Atty. Oscar Z. Benares, and the treasurer of the said corporation. However, since at that time, the treasurer
of Mover Enterprises was not available, Atty. Benares prevailed upon Santos to sign the aforesaid check as
an alternate signatory. Santos did sign the check. The check was issued to Crisologo-Jose in consideration
of the waiver or quitclaim by Crisologo-Jose over a certain property which the Government Service
Insurance System (GSIS) agreed to sell to the clients of Atty. Benares, the spouses Ong, with the
understanding that upon approval by the GSIS of the compromise agreement with the spouses Ong, the
check will be encashed accordingly. However, since the compromise agreement was not approved within
the expected period of time, the aforesaid check for P45,000.00 was replaced by Atty. Benares with another
Traders Royal Bank check bearing 379299 dated 10 August 1980, in the same amount of P45,000.00, also
payable to Crisologo-Jose. This replacement check was also signed by Atty. Benares and by Santos When
Crisologo-Jose deposited this replacement check with her account at Family Savings Bank, Mayon Branch,
it was dishonored for insufficiency of funds. A subsequent redepositing of the said check was likewise
dishonored by the bank for the same reason. Hence, Crisologo-Jose through counsel was constrained to
file a criminal complaint for violation of Batas Pambansa 22 (BP22) with the Quezon City Fiscal's Office
against Atty. Benares and Santos The investigating Assistant City Fiscal, Alfonso Llamas, accordingly filed an
amended information with the court charging both Benares and Santos for violation of BP 22 (Criminal Case
Q-14867) of then Court of First Instance of Rizal, Quezon City. Meanwhile, during the preliminary
investigation of the criminal charge against Benares and Santos, before Assistant City Fiscal Llamas, Santos
tendered cashier's check CC 160152 for P45,000.00 dated 10 April 1981 to Crisologo-Jose, the complainant
in that criminal case. Crisologo-Jose refused to receive the cashier's check in payment of the dishonored
check in the amount of P45,000.00. Hence, Santos encashed the aforesaid cashier's check and subsequently
deposited said amount of P45,000.00 with the Clerk of Court on 14 August 1981. Incidentally, the cashier's
check adverted to above was purchased by Atty. Benares and given to Santos to be applied in payment of
the dishonored check. After trial, the court a quo, holding that it was "not persuaded to believe that
consignation referred to in Article 1256 of the Civil Code is applicable to this case," rendered judgment
dismissing Santos' complaint for consignation and Crisologo-Jose's counterclaim. On appeal and on 8
September 1987, the appellate court reversed and set aside said judgment of dismissal and revived the
complaint for consignation, directing the trial court to give due course thereto. Crisologo-Jose filed the
petition.

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Issue [1]: Whether Santos, as an accommodation party, is liable thereon under the Negotiable Instruments
Law.

Held [1]:
Section 29 (Liability of accommodation party) of the Negotiable Instruments Law provides that "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." Consequently, to be considered an
accommodation party, a person must (1) be a party to the instrument, signing as maker, drawer, acceptor,
or indorser, (2) not receive value therefor, and (3) sign for the purpose of lending his name for the credit of
some other person. Based on the foregoing requisites, it is not a valid defense that the accommodation
party did not receive any valuable consideration when he executed the instrument. From the standpoint of
contract law, he differs from the ordinary concept of a debtor therein in the sense that he has not received
any valuable consideration for the instrument he signs. Nevertheless, he is liable to a holder for value as if
the contract was not for accommodation, in whatever capacity such accommodation party signed the
instrument, whether primarily or secondarily. Thus, it has been held that in lending his name to the
accommodated party, the accommodation party is in effect a surety for the latter.

Issue [2]: Whether Mover Enterprises, Inc. may be held liable on the accommodation instrument, i.e. the
check issued in favor of Crisologo-Jose.

Held [2]:
The provision of the Negotiable Instruments Law which holds an accommodation party liable on the
instrument to a holder for value, although such holder at the time of taking the instrument knew him to be
only an accommodation party, does not include nor apply to corporations which are accommodation
parties. This is because the issue or indorsement of negotiable paper by a corporation without consideration
and for the accommodation 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 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.

Issue [3]: Whether Santos, who signed the check in question in a representative capacity as vice-president
of Mover Enterprises Inc., is liable thereon under the Negotiable Instruments Law.

Held [3]:
An officer or agent of a corporation shall have the power to execute or indorse a negotiable paper in the
name of the corporation for the accommodation of a third person only if specifically authorized to do so.
Corollarily, corporate officers, such as the president and vice president, have no power to execute for mere
accommodation a negotiable instrument of the corporation for their individual debts or transactions arising
from or in relation to matters in which the corporation has no legitimate concern. Since such
accommodation paper cannot thus be enforced against the corporation, especially since it is not involved
in any aspect of the corporate business or operations, the inescapable conclusion in law and in logic is that
the signatories thereof shall be personally liable therefor, as well as the consequences arising from their
acts in connection therewith.

Issue [4]: Whether the lack of capacity of the corporation absolved the signatories of the instrument.

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Held [4]:
The fact that for lack of capacity the corporation is not bound by an accommodation paper does not thereby
absolve, but should render personally liable, the signatories of said instrument where the facts show that
the accommodation involved was for their personal account, undertaking or purpose and the creditor was
aware thereof. Crisologo-Jose was evidently charged with the knowledge that the check was issued at the
instance and for the personal account of Atty. Benares who merely prevailed upon Santos to act as
cosignatory in accordance with the arrangement of the corporation with its depository bank. That it was a
personal undertaking of said corporate officers was apparent to Crisologo-Jose by reason of her personal
involvement in the financial arrangement and the fact that, while it was the corporation's check which was
issued to her for the amount involved, she actually had no transaction directly with said corporation. There
should be no legal obstacle, therefore, to Crisologo-Jose's claims being directed personally against Atty.
Benares and Santos, president and vice-president, respectively, of Mover Enterprises, Inc.

D. Negotiation

NIL, Secs. 30-50

Cases;

1. Sesbreno vs. CA
G.R. No. 89252. 24 May 1993
Third Division, Feliciano (J)

Doctrine:
Only an instrument qualifying as a negotiable instrument under the relevant statute may be negotiated either
by indorsement thereof coupled with delivery, or by delivery alone if it is in bearer form. A negotiable
instrument, instead of being negotiated, may also be assigned or transferred. The legal consequences of
negotiation and assignment of the instrument are different. A negotiable instrument may not be negotiated
but may be assigned or transferred, absent an express prohibition against assignment or transfer written in
the face of the instrument.

Facts:
On 9 February 1981, Raul Sesbreno made a money market placement in the amount of P300,000 with the
Philippine Underwriters Finance Corporation (PhilFinance), with a term of 32 days. PhilFinance issued to
Sesbreno the Certificate of Confirmation of Sale of a Delta Motor Corporation Promissory Note (2731), the
Certificate of Securities Delivery Receipt indicating the sale of the note with notation that said security was
in the custody of Pilipinas Bank, and postdated checks drawn against the Insular Bank of Asia and America
for P304,533.33 payable on 13 March 1981. The checks were dishonored for having been drawn against
insufficient funds. Pilipinas Bank never released the note, nor any instrument related thereto, to Sesbreno;
but Sesbreno learned that the security was issued 10 April 1980, maturing on 6 April 1981, has a face value
of P2,300,833.33 with PhilFinance as payee and Delta Motors as maker; and was stamped “non-negotiable”
on its face. As Sesbreno was unable to collect his investment and interest thereon, he filed an action for
damages against Delta Motors and Pilipinas Bank.

Issue: Whether non-negotiability of a promissory note prevents its assignment.

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Held:
Only an instrument qualifying as a negotiable instrument under the relevant statute may be negotiated
either by indorsement thereof coupled with delivery, or by delivery alone if it is in bearer form. A negotiable
instrument, instead of being negotiated, may also be assigned or transferred. The legal consequences of
negotiation and assignment of the instrument are different. A negotiable instrument may not be negotiated
but may be assigned or transferred, absent an express prohibition against assignment or transfer written in
the face of the instrument. herein, there was no prohibition stipulated.

2. Bank of the Philippine Islands vs. Court of Appeals


G.R. No. 136202. January 25, 2007
Azcuna, J.

Doctrine:
Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; every
person whose signature appears thereon to have become a party thereto for value. Therefore, it is up to the
party who alleges that there was absence of consideration to prove such fact. The presumption will operate
only if there was negotiation. Consideration is not presumed if there was transfer without indorsement.

Facts:
A.A. Salazar Construction and Engineering Services filed an action for a sum of money with damages against
herein petitioner Bank of the Philippine Islands (BPI) on December 5, 1991 before Branch 156 of the Regional
Trial Court (RTC) of Pasig City. The complaint was later amended by substituting the name of Annabelle A.
Salazar as the real party in interest in place of A.A. Salazar Construction and Engineering Services. Private
respondent Salazar prayed for the recovery of the amount of Two Hundred Sixty-Seven Thousand, Seven
Hundred Seven Pesos and Seventy Centavos (P267,707.70) debited by petitioner BPI from her account. She
likewise prayed for damages and attorney’s fees. Petitioner BPI, in its answer, alleged that on August 31,
1991, Julio R. Templonuevo, third-party defendant and herein also a private respondent, demanded from
the former payment of the amount of Two Hundred Sixty-Seven Thousand, Six Hundred Ninety-Two Pesos
and Fifty Centavos (P 267,692.50) representing the aggregate value of three (3) checks, which were allegedly
payable to him, but which were deposited with the petitioner bank to private respondent Salazar’s account
(Account No. 0203-1187-67) without his knowledge and corresponding endorsement. Accepting that
Templonuevo’s claim was a valid one, petitioner BPI froze Account No. 0201-0588-48 of A.A. Salazar and
Construction and Engineering Services, instead of Account No. 0203-1187-67 where the checks were
deposited, since this account was already closed by private respondent Salazar or had an insufficient
balance.

Issue: Whether or not respondent is entitled to the proceeds of the checks even without prior indorsement.

Held:
No. Section 49 of the Negotiable Instruments Law contemplates a situation whereby the payee or indorsee
delivers a negotiable instrument for value without indorsing it, thus:

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.

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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 under Section 131(s) of the Rules of Court stating that a negotiable instrument was given
for a sufficient consideration will not inure to the benefit of Salazar because the term “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.
Negotiable instruments are negotiated by “transfer to one person or another in such a 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 completed by delivery.” The present case involves checks payable
to order. Not being a payee or indorsee of the checks, private respondent Salazar could not be a holder
thereof.

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.23 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.

3. Caltex (Philippines) Inc. vs. CA


G.R. No. 97753. 10 August 1992
Regalado, J.

Facts:
On various dates, Security Bank and Trust Co. (SEBTC), through its Sucat branch, issued 280 certificates of
time deposit (CTD) in favor of one Angel dela Cruz who deposited with the bank the aggregate amount of
P1.12 million. Anger de la Cruz delivered the CTDs to Caltex in connection with his purchase of fuel products
from the latter. Subsequently, dela Cruz informed the bank that he lost all the CTDs, and thus executed an
affidavit of loss to facilitate the issuance of the replacement CTDs. De la Cruz was able to obtain a loan of
P875,000 from the bank, and in turn, he executed a notarized Deed of Assignment of Time Deposit in favor
of the bank. Thereafter, Caltex presented for verification the CTDs (which were declared lost by de la Cruz)
with the bank. Caltex formally informed the bank of its possession of the CTDs and its decision to
preterminate the same. The bank rejected Caltex’ claim and demand, after Caltex failed to furnish copy of
the requested documents evidencing the guarantee agreement, etc. In 1983, de la Cruz’ loan matured and
the bank set-off and applied the time deposits as payment for the loan. Caltex filed the complaint, but which
was dismissed.

Issue: Whether the CTDs’ negotiation require delivery only.

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Held:
Although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement
between it (Caltex) and de la Cruz requires both delivery and indorsement; as the CTDs were delivered to it
as security for dela Cruz’ purchases of its fuel products, and not for payment. Herein, there was no
negotiation in the sense of a transfer of title, or legal title, to the CTDs in which situation mere delivery of
the bearer CTDs would have sufficed. The delivery thereof as security for the fuel purchases at most
constitutes Caltex as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose
cannot be affected by mere delivery of the instrument since the terms thereof and the subsequent
disposition of such security, in the event of non-payment of the principal obligation, must be contractually
provided for.

E. Right of the Holder

NIL, Secs. 51-59

Cases:

1. Consolidated Plywood Industries Inc. vs. IFC Leasing and Acceptance Corp.
G.R. No. 72593. 30 April 1987
Gutierrez Jr.

Facts:
 Consolidated (buyer pays promossor note) > IPM (seller-assignor who violated warranty) > IFC
(holder in due course or merely an assignee?)
 Consolidated Plywood Industries, Inc (Consolidated) is a corporation engaged in the logging
business
 For the purpose of opening of additional roads and simultaneous logging operations along the
route of roads, it needed 2 additional units of tractors
 Atlantic Gulf & Pacific Company of Manila, through its sister company and marketing arm, Industrial
Products Marketing (IPM) (seller-assignor) offered to sell 2 "Used" Allis Crawler Tractors
 IPM inspected the job site and assured that the tractors were fit for the job and gave a 90-days
performance warranty of the machines and availability of parts.
 Consolidated purchased on installment.
 It paid the down payment of P210,000
 April 5, 1978: IPM issued the sales invoice and the deed of sale with chattel mortgage with
promissory note was executed
 IPM, by means of a deed of assignment, assigned its rights and interest in the chattel mortgage in
favor of IFC Leasing and Acceptance Corp. (IFC)
 After 14 days, one of the tractors broke down and after another 9 days, the other tractor too

 Because of the breaking down of the tractors, the road building and simultaneous logging
operations were delayed
 Consolidated unilaterally rescinded the contract w/ IPM
 April 7, 1979: Wee of Consolidated asked IPM to pull out the units and have them reconditioned,
and thereafter to offer them for sale.
 The proceeds were to be given to IFC and the excess will be divided between:
 IPM

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 Consolidated which offered to bear one-half 1/2 of the reconditioning cost


 IPM didn't do anything
 IFC filed against Consolidated for the recovery of the principal sum P1,093,789.71, interest and
attorney's fees
 RTC and CA: favored IFC
 breach of warranty if any, is not a defense available to Consolidated either to withdraw from the
contract and/or demand a proportionate reduction of the price with damages in either case

Issue: W/N IFC is a holder in due course of the negotiable promissory note so as to bar completely all the
available defenses of the Consolidated against IPM

Held: CA reversed and set aside

 Consolidated is a victim of warranty


 The Civil Code provides that:

ART. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing sold
may have, should they render it unfit for the use for which it is intended, or should they diminish its fitness
for such use to such an extent that, had the vendee been aware thereof, he would not have acquired it or
would have given a lower price for it; but said vendor shall not be answerable for patent defects or those
which may be visible, or for those which are not visible if the vendee is an expert who, by reason of his trade
or profession, should have known them.

ART. 1562. In a sale of goods, there is an implied warranty or condition as to the quality or fitness of the
goods, as follows:

(1) Where the buyer, expressly or by implication makes known to the seller the particular purpose for
which the goods are acquired, and it appears that the buyer relies on the seller’s skill or judge judgment
(whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be
reasonably fit for such purpose;

ART. 1564. An implied warranty or condition as to the quality or fitness for a particular purpose may be
annexed by the usage of trade.

ART. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold even
though he was not aware thereof.

This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of the
hidden faults or defects in the thing sold. (Emphasis supplied).

 GR: extends to the corporation to whom it assigned its rights and interests
 EX: assignee is a holder in due course of the promissory note
 assuming the note is negotiable
 Consolidated's defenses may not prevail against it.
 Articles 1191 and 1567 of the Civil Code provide that:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.

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The injured party may choose between the fulfillment and the rescission of the obligation with the payment
of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.

ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee may elect between
withdrawing from the contract and demanding a proportionate reduction of the price, with damages in
either case. (Emphasis supplied)

 Consolidated, having unilaterally and extrajudicially rescinded its contract with the seller-assignor,
can no longer sue IPM except by way of counterclaim if IPM sues it because of the rescission
 Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a
promissory note "must be payable to order or bearer" - in this case it is non-negotiable
 = expression of consent that the instrument may be transferred
 consent is indispensable since a maker assumes greater risk under a negotiable instrument than
under a non-negotiable one
 When instrument is payable to order

SEC. 8. WHEN PAYABLE TO ORDER. - The instrument is payable to order where it is drawn payable to the
order of a specified person or to him or his order. . . .

 Without the words "or order" or “to the order of, "the instrument is payable only to the person
designated therein and is therefore non-negotiable.
 Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a negotiable
instrument but will merely "step into the shoes" of the person designated in the instrument and will
thus be open to all defenses available against the latter
 Even conceding for purposes of discussion that the promissory note in question is a negotiable
instrument, the IFC cannot be a holder in due course due to absence of GF for knowing that the
tractors were 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:

(c) That he took it in good faith and for value


(d) That the time it was negotiated by him he had no notice of any infirmity in the instrument of
defect in the title of the person negotiating it

SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. - To constitute notice of an infirmity in the instrument
or defect in the title of the person negotiating the same, the person to whom it is negotiated must have
had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the
instrument amounts to bad faith. (Emphasis supplied)

 We believe the finance company is better able to bear the risk of the dealer's insolvency than the
buyer and in a far better position to protect his interests against unscrupulous and insolvent dealers.

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2. Chan Wan Vs. Tan Kim and Chen So


G.R. No. L-15380. September 30, 1960
Bengzon, J.

Facts:
Tan Kim and her husband (Chen So) issued 11 checks payable to “cash or bearer” to be drawn against their
account with the Equitable Banking Corporation. The checks were negotiated to the White House Shoe
Supply (company). White House then deposited the checks to their China Bank account. China Bank then
presented the checks to Equitable Bank, but the checks were returned because Equitable Bank then had no
funds to cover the checks. China Bank then stamped the checks with “Account Closed” and “Non-negotiable
- China Bank Corporation”.

But somehow, Chan Wan got hold of these checks (Chan Wan was not able to explain in court how he got
hold of the checks). Chan Wan now wants to encash the checks but Equitable Bank refused accept the said
checks.

Issue: Whether or not Chan 'an is a holder in due course.

Held:
No. As a general rule, a dishonored check/instrument may still be negotiated either by indorsement or
delivery and the holder may be a holder in due course provided that he received no notice regarding the
dishonor of the instrument. In this case, the checks were already crossed on their face hence Chan Wan was
properly notified of the dishonor of the checks at the time of his acquisition.

3. De Ocampo vs. Gatchalian


G.R. No. L-15126. 30 November 1961
En Banc, Labrador (J):

Doctrine:
Good faith on the part of the holder is presumed, such presumption is destroyed if the payee or indorsee
acquired possession of the instrument under circumstances that should have put it to inquiry as to the title of
the holder who negotiated the instrument. The burden is now on the part of the holder to show that
notwithstanding the suspicious circumstances, it acquired in the actual good faith.

Facts:
On or about 8 September 1953, in the evening, Anita C. Gatchalian who was then interested in looking
for a car for the use of her husband and the family, was shown and offered a car by Manuel Gonzales who
was accompanied by Emil Fajardo, the latter being personally known to Gatchalian. Gonzales represented
to Gatchalian that he was duly authorized by the owner of the car, Ocampo Clinic, to look for a buyer of
said car and to negotiate for and accomplish said sale. Gatchalian, finding the price of the car quoted by
Gonzales to her satisfaction, requested Gonzales to bring the car the day following together with the
certificate of registration of the car, so that her husband would be able to see same. On this request of
Gatchalian, Gonzales advised her that the owner of the car will not be willing to give the certificate of
registration unless there is a showing that the party interested in the purchase of said car is ready and willing
to make such purchase and that for this purpose Gonzales requested Gatchalian to give him a check which
will be shown to the owner as evidence of buyer's good faith in the intention to purchase the said car, the
said check to be for safekeeping only of Gonzales and to be returned to Gatchalian the following day when

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Gonzales brings the car and the certificate of registration. Relying on these representations of Gonzales and
with this assurance that said check will be only for safekeeping and which will be returned to Gatchalian the
following day when the car and its certificate of registration will be brought by Gonzales to Gatchalian,
Gatchalian drew and issued a check that Gonzales executed and issued a receipt for said check. On the
failure of Gonzales to appear the day following and, on his failure, to bring the car and its certificate of
registration and to return the check on the following day as previously agreed upon, Gatchalian issued a
"Stop Payment Order" on the check with the drawee bank. When Gonzales received the check from
Gatchalian under the representations and conditions above specified, he delivered the same to the Ocampo
Clinic, in payment of the fees and expenses arising from the hospitalization of his wife. Vicente R. De
Ocampo & Co. for and in consideration of fees and expenses of hospitalization and the release of the wife
of Gonzales from its hospital, accepted said check, applying P441.75 thereof to payment of said fees and
expenses and delivering to Gonzales the amount of P158.25 representing the balance on the amount of the
said check. The acts of acceptance of the check and application of its proceeds in the manner specified were
made without previous inquiry by De Ocampo from Gatchalian. De Ocampo filed with the Office of the City
Fiscal of Manila, a complaint for estafa against
Gonzales based on and arising from the acts of Gonzales in paying his obligations with De Ocampo and
receiving the cash balance of the check and that said complaint was subsequently dropped.

De Ocampo subsequently filed an action for the recovery of the value of a check for P600 payable to De
Ocampo and drawn by Gatchalian. The Court of First Instance of Manila, through Hon. Conrado M. Vasquez,
presiding, sentenced Gatchalian and Gonzales to pay De Ocampo the sum of P600, with legal interest from
10 September 1953 until paid, and to pay the costs. Gatchalian, et al. appealed.

Issue [1]: Whether De Ocampo is a holder in due course.

Held [1]:
NO. Section 52, Negotiable Instruments Law, defines holder in due course as "A holder in due course is a
holder who has taken the instrument under the following conditions: (a) That it is complete and
regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it
had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That
at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title
of the person negotiating it." Although De Ocampo was not aware of the circumstances under which the
check was delivered to Gonzales, the circumstances -- such as the fact that Gatchalian had no obligation or
liability to the Ocampo Clinic, that the amount of the check did not correspond exactly with the obligation
of Matilde Gonzales to Dr. V. R. de Ocampo; and that the check had two parallel lines in the upper left hand
corner, which practice means that the check could only be deposited but may not be converted into cash
—- should have put De Ocampo to inquiry as to the why and wherefore of the possession of the check by
Gonzales, and why he used it to pay Matilde's account. It was payee's duty to ascertain from the holder
Gonzales what the nature of the latter's title to the check was or the nature of his possession. Having failed
in this respect, De Ocampo was guilty of gross neglect in not finding out the nature of the title and
possession of Gonzales, amounting to legal absence of good faith, and it may not be considered as a holder
of the check in good faith.

Issue [2]: Whether the rule that a possessor of the instrument is prima facie a holder in due course applies.

Held [2]:
The rule that a possessor of the instrument is prima facie a holder in due course does not apply because
there was a defect in the title of the holder (Manuel Gonzales), because the instrument is not payable to

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him or to bearer. On the other hand, the stipulation of facts -- like the fact that the drawer had no account
with the payee; that the holder did not show or tell the payee why he had the check in his possession and
why he was using it for the payment of his own personal account —- show that holder's title was defective
or suspicious, to say the least. As holder's title was defective or suspicious, it cannot be stated that the payee
acquired the check without knowledge of said defect in holder's title, and for this reason the presumption
that it is a holder in due course or that it acquired the instrument in good faith does not exist. And having
presented no evidence that it acquired the check in good faith, it (payee) cannot be considered as a holder
in due course. In other words, under the circumstances of the case, instead of the presumption that payee
was a holder in good faith, the fact is that it acquired possession of the instrument under circumstances
that should have put it to inquiry as to the title of the holder who negotiated the check to it. The burden
was, therefore, placed upon it to show that notwithstanding the suspicious circumstances, it acquired the
check in actual good faith.

4. Green, et. al. vs. Lopez, et. al.


G.R. No. 11526. January 2, 1917
Carson, J.

Summary:
Lopez et al. issued a negotiable note to a payee. Then, it was bought by Green et al from the payee. However,
Lopez et al refuses to pay the negotiable note saying that Green et al were not holders in due course. The
Court held that

Facts:
A negotiable note was issued by LOPEZ ET AL (maker) to a certain payee. After that, this payee indorsed the
note to the present holders, GREEN ET AL. The note indorsed by the payee to GREEN ET AL said “for value
received”.

LOPEZ ET AL refused to pay the note alleging that GREEN ET AL were not bona fide holders of the note by
indorsement, because they had knowledge of the existence of certain equitable defenses which the makers
were entitled to set up as against the payee of the noted, before they acquired it by indorsement from the
payee. On the other hand, Green claims that he sent an employee to call upon the makers of the note to
inquire whether it was a good note which would be paid at maturity, and that upon his return this employee
stated that he had been informed by the makers of the note that it was a good note duly executed by them
and that it would be paid when due.

Issue: Whether or not the defendant could refuse payment on the note? - NO

Ruling:
No. The court ruled that the allegations of the defendant were either wholly false or he failed to make
himself understood resulting to the fact that no knowledge of the existence of equitable defenses was made
known to the plaintiff, the purchaser of the note.

There was nothing on the face of the note to put the purchasers on notice of the existence of such equitable
defenses. It was entirely regular in form and came into their possession in the usual course of business.
Under these circumstances the burden of proof was manifestly upon the maker of the note to establish the
fact of knowledge of the equitable defenses before they could be permitted to rely upon such defenses as
against the purchasers.

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Equitable defenses of this nature can in no event defeat the right of the holders of a negotiable note by
indorsement and for valuable consideration, until and unless knowledge of the existence of such equitable
defenses is brought home to them, or until it appears that the holders had such knowledge of the existence
of defects in the instrument as to charge them with bad faith in acquiring it under all the attendant
circumstances.

The indorsement was made for a valuable consideration, the purchasers were clearly entitles to judgment
for the face value of the note.

By the decisive weight of authority in this country, where negotiable paper has been put in circulation,
and there is no infirmity or defense between the antecedent parties thereto, a purchaser of such
security is entitled to recover thereon, as against the maker, the whole amount, irrespective of what
he may have paid therefor. (146 U. S., 327.)

5. Charles A. Fossum vs. Fernandez Hermanos


G.R. No. L-19461. March 28, 1923
Street, J.

Facts:
Fernandez and Hermanos, as managers of La Compañía Marítima, ordered a tail shaft to Charles A. Fossum,
as the resident agent of American Iron Products Company, Inc. Said tail shaft is to be installed on the ship
Romulus. Thus, it was agreed that it would be in accordance with the specifications contained in a blueprint
and the shaft should be shipped from New York. Meanwhile, the American Iron Products Company, Inc.,
had drawn a time draft upon Fernandez Hermanos for the purchase price of the shaft and payable to the
PNB. In due course the draft was presented to Fernandez Hermanos for acceptance and was accepted by
said firm according to its tenor.
However, upon inspection of the shaft, it was found not to be in conformity with the specifications and was
incapable of use for the purpose for which it had been intended. For this reason, Fernandez Hermanos
refused to pay the draft, and it remained for a time dishonored in the hands of the PNB. Later the bank
indorsed the draft in blank, without consideration, and delivered it to Charles A. Fossum, who thereupon
instituted an action on the instrument against the acceptor Fernandez Hermanos, among others.

Issue: WON Fossum is a holder in due course.

Ruling:
No. Fossum himself is far from being a holder of this draft in due course. He was himself a party to the
contract which supplied the consideration for the draft, albeit he there acted in a representative capacity.
Moreover, he procured the instrument to be indorsed by the bank and delivered to him without the
payment of value, after it was overdue, and with full notice that, as between the original parties, the
consideration had completely failed. Under these circumstances recovery on this draft by Fossum by virtue
of any merit in his own position is out of the question.

It is a well-known rule of law that if the original payee of a note unenforceable for lack of consideration
repurchase the instrument after transferring it to a holder in due course, the paper again becomes subject

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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. The same

F. Liabilities of Parties

NIL, Secs. 60-69

Cases:

1. State Investment House vs. IAC


G.R. No. 72764. 13 July 1989
Third Division, Fernan (J)

Facts:
Shortly before 5 September 1980, New Sikatuna Wood Industries, Inc. (NSWII) requested for a loan
from Harris Chua. The latter agreed to grant the same subject to the condition that the former should wait
until December 1980 when he would have the money. In view of this agreement, Anita Pena Chua (Harris
Chua's wife) issued 3 crossed checks payable to NSWII all postdated 22 December 1980. The total value of
the postdated checks amounted to P 299,450.00. Subsequently, NSWII entered into an agreement with
State Investment House, Inc. (SIHI) whereby for and in consideration of the sum of Pl,047,402.91 under a
deed of sale, the former assigned and discounted with SIHI 11 postdated checks including the 3 postdated
checks issued by Peña Chua to NSWII. When the three checks issued by Pena Chua were allegedly deposited
by SIHI, these checks were dishonored by reason of "insufficient funds", "stop payment" and "account
closed", respectively. SIHI claimed that despite demands on Peña Chua to make good said checks, the latter
failed to pay the same necessitating the former to file an action for collection against the latter and her
husband before the Regional Trial Court of Manila, Branch XXXVII (Civil Case 82-10547). The spouses Chua
filed a third-party complaint against NSWII for reimbursement and indemnification in the event that they
be held liable to SIHI. For failure of NSWII to answer the third-party complaint despite due service of
summons, the latter was declared in default. On 30 April 1984, the lower court rendered judgment against
the spouses, ordering them to pay jointly and severally to SIHI P 229,450.00 with interest at the rate of 12%
per annum from 24 February 1981 until fully paid; P 29,945.00 as and for attorney's fees; and the costs of
suit. On the third-party complaint, NSWII was ordered to pay the spouses all amounts said spouses may
pay to SIHI on account of the case. On appeal filed by the spouses (AC-GR CV 04523), the Intermediate
Appellate Court (now Court of Appeals) reversed the lower court's judgment in its decision, dismissing the
complaint, with costs against SIHI. SIHI filed the petition for review.

Issue: Whether State Investment is a holder in due course and is thus entitled to hold the spouses liable for
the dishonored checks.

Held:
No. CA judgement AFFIRMED.

Ratio:
 State Investment is not a holder in due course and cannot allege that it had no knowledge of the
transaction/arrangement between New Sikatuna and spouses Chua because the checks in question
are crossed checks. When it rediscounted the checks knowing that it was crossed check, it was
knowingly violating avowed intention of crossing the check. Its failure to inquire from New Sikatuna

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the purpose of the crossed checks prevents him from being considered in good faith and is thus
not a holder in due course.
 Sec. 541, NIL provides that the maker or any legal holder of a check is entitled to indicate that such
be paid to a certain banker or institution, by writing across the face the name of said banker or
institution, or only the words “and company”. Under usual practice, crossing a check is done by
placing two parallel lines diagonally on the left top portion of the check.
 The effect of crossing a check relates to the mode of its presentment of payment. Under Sec.72,
NIL presentment for payment is sufficient when it is made by the holder, or by some authorized
person to receive payment. Who the holder or authorized person depends on the instructions on
the face of the check.
 In the present case, said 3 crossed checks were issued payable to New Sikatuna and only means
that the drawer had intended the same for deposit only by the rightful person (payee name therein).
It was not the payee who presented, therefore, there was no proper presentment, and the liability
did not attach to the drawer.
 In the absence of due presentment, the drawer does not become liable. No right of recourse is
available to State Investment against the drawer, Anita. It was not the proper party authorized to
make presentment of the checks.

*State investment may recover from New Sikatuna, especially if it has no valid excuse for refusing payment.

2. Chan Wan vs. Tan Kim and Chen So


G.R. No. L-15380. September 30, 1960
Bengzon, J.

Facts:
Eleven checks payable to “cash or bearer” and drawn by defendant Tan upon the Equitable Banking
Corporation, were all presented for payment by Chan Wan to the drawee bank, but they “were all
dishonored and returned to him unpaid due to insufficient funds and/or causes attributable to the drawer.”

The drawer in drawing the check engaged that “on due presentment, the check would be paid, and that if
it be dishonored . . . he will pay the amount thereof to the holder”.

On the backs of the checks, endorsements which apparently show they had been deposited with the China
Banking Corporation and were, by the latter, presented to the drawee bank for collection.

The court declined to order payment for two principal reasons: (a) plaintiff failed to prove he was a holder
in due course, and (b) the checks being crossed checks should not have been deposited instead with the
bank mentioned in the crossing.

Issue: WON a holder who is not a holder in due course may recover on the checks?

Held:
YES. The Negotiable Instruments Law does not provide that a holder who is not a holder in due course, may
not in any case, recover on the instrument. If B purchases an overdue negotiable promissory note signed
by A, he is not a holder in due course; but he may recover from A, if the latter has no valid excuse for
refusing payment. The only disadvantage of holder who is not a holder in due course is that the negotiable
instrument is subject to defense as if it were non- negotiable.

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3. Far East Bank vs. Gold Palace Jewellery Co.


G.R. No. 168274. August 20, 2008
Nachura, J. ***

Facts:
In June 1998, a foreigner, identified as Samuel Tagoe, purchased from the respondent Gold Palace Jewellery
Co. several pieces of jewelry valued at P258,000.00. In payment of the same, he offered Foreign Draft No.
M-069670 issued by the United Overseas Bank (Malaysia) addressed to the Land Bank of the Philippines,
Manila (LBP), and payable to the respondent company for P380,000.00.

Yang issued Cash Invoice, to the foreigner, informing him that the pieces of jewelry would be released when
the draft had already been cleared. Respondent Julie Yang-Go, the manager of Gold Palace deposited the
draft in the company’s Far East account. LBP cleared the draft, and GoldPalace’s account with Far East was
credited. The foreigner was then able to get the goods, and because the amount in the draft was more than
the value of the goods purchased, she issued, as his change, Far East Check No. 173088 for P122,000.00.
This check was later presented for encashment and was, in fact, paid by the said bank.

On June 1998, or after around three weeks, LBP informed Far East that the amount in said Foreign Draft had
been materially altered from P300.00 to P380,000.00 and that it was returning the same. Intending to debit
the amount from respondent’s account, Far East subsequently refunded the P380,000.00 earlier paid by LBP.
Meanwhile, Far East was able to debit only P168,053.36 from the GoldPalace’s account as the respondent
has already utilized their funds. This was debited without their permission. The bank informed the
GoldPalace later thru a phone call.

On August 1998, petitioner demanded from respondents the payment of P211,946. Because Gold Palace
did not heed the demand, Far East consequently instituted civil case for sum of money and damages before
the RTC in Makati.

RTC ruled in favor of Far East, ordering Gold Palace to pay the former P211,946.64 as actual damages and
P50,000.00 as attorney’s fees. The trial court ruled that, on the basis of its warranties as a general indorser,
Gold Palace was liable to Far East.

On appeal, the CA, reversed the ruling of the trial court and awarded respondents’ counterclaim. It ruled in
the main that Far East failed to undergo the proceedings on the protest of the foreign draft or to notify
Gold Palace of the draft’s dishonor; thus, Far East could not charge Gold Palace on its secondary liability as
an indorser.

Issue: Whether or not GoldPalace can be held liable

Held:
No. Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by
accepting the instrument, engages that he will pay it according to the tenor of his acceptance. His actual
payment of the amount in the check implies not only his assent to the order of the drawer and a recognition
of his corresponding obligation to pay the aforementioned sum, but also, his clear compliance with that
obligation. In this case, the drawee bank cleared and paid the subject foreign draft and forwarded the
amount thereof to the collecting bank. The latter, Far East, then credited to GoldPalace’s account the
payment it received. Following the plain language of the law, the drawee, by the said payment, recognized
and complied with its obligation to pay in accordance with the tenor of his acceptance. Stated simply, LBP

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was liable on its payment of the check according to the tenor of the check at the time of payment, which
was the raised amount.

SC also notes that Respondent Gold Palace was not a participant in the alteration of the draft, was not
negligent, and was a holder in due course—it received the draft complete and regular on its face. Gold
Palace relied on the drawee bank’s clearance and payment of the draft. Respondent is also protected by the
said Section 62. Commercial policy favors the protection of any one who, in due course, changes his position
on the faith of the drawee bank’s clearance and payment of a check or draft.

The fault is in LBP; having the most convenient means to correspond with UOB, did not first verify the
amount of the draft before it cleared and paid the same. Gold Palace, on the other hand, had no facility to
ascertain with the drawer, UOB Malaysia, the true amount in the draft. Thus, the collecting agent, Far East,
should not have debited the money paid by the drawee bank from respondent company’s account.

When Gold Palace deposited the check with Far East, the latter, under the terms of the deposit and the
provisions of the NIL, became an agent of the former for the collection of the amount in the draft. Far East
then was able to collect from LBP. As the transaction in this case had been closed and the principal-agent
relationship between the payee (GoldPalace) and the collecting bank (Far East) had already ceased, the
latter in returning the amount to the drawee bank (LBP) was already acting on its own and should now be
responsible for its own actions. The drawee bank had no right to recover what it paid.

Likewise, Far East cannot invoke the warranty of the payee/depositor who indorsed the instrument for
collection to shift the burden it brought upon itself. This is precisely because the said indorsement is only
for purposes of collection which, under Section 36 of the NIL, is a restrictive indorsement.[47] It did not in
any way transfer the title of the instrument to the collecting bank. Far East did not own the draft, it merely
presented it for payment. Considering that the warranties of a general indorser as provided in Section 66
of the NIL are based upon a transfer of title and are available only to holders in due course. Without any
legal right to do so, the collecting bank, therefore, could not debit respondent’s account for the amount it
refunded to the drawee bank.

SC ruled that, for doing so, Far East must return what it had erroneously taken. The remedy under the law
is not against Gold Palace but against the drawee-bank or the person responsible for the alteration.

4. Associated Bank vs. CA


G.R. No. 107382. 31 January 1996
Second Division, Romero (J)

Doctrine:
When a check is deposited with the collecting bank, it takes a risk on its depositor. It is only logical that this
bank be held accountable for checks deposited by its customers. It is important to mention that Payee whose
signature was forged may directly proceed against the collecting bank. However, the drawer cannot opt to
recover from the collecting bank. There is no privity of contract between the drawer and the collecting bank.

Facts:
The Province of Tarlac maintains a current account with the Philippine National Bank (PNB Tarlac Branch)
where the provincial funds are deposited. Portions of the funds were allocated to the Concepcion
Emergency Hospital. Checks were issued to it and were received by the hospital’s administrative officer and

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cashier (Fausto Pangilinan). Pangilinan, through the help of Associated Bank but after forging the signature
of the hospital’s chief (Adena Canlas), was able to deposit the checks in his personal account. All the checks
bore the stamp “All prior endorsement guaranteed Associated Bank.” Through post-audit, the province
discovered that the hospital did not receive several allotted checks and sought the restoration of the debited
amounts from PNB. In turn, PNB demanded reimbursement from Associated Bank. Both banks resisted
payment. Hence, the present action.

Issue: Who shall bear the loss resulting from the forged checks.

Held:
PNB is not negligent as it is not required to return the check to the collecting bank within 24 hours as the
banks involved are covered by Central Bank Circular 580 and not the rules of the Philippine Clearing House.
Associated Bank, and not PNB, is the one duty-bound to warrant the instrument as genuine, valid and
subsisting at the time of indorsement pursuant to Section 66 of the Negotiable Instruments Law. The stamp
guaranteeing prior indorsement is not an empty rubric; the collecting bank is held accountable for checks
deposited by its customers. However, due to the fact that the Province of Tarlac is equally negligent in
permitting Pangilinan to collect the checks when he was no longer connected with the hospital, it shares
the burden of loss from the checks bearing a forged indorsement. Therefore, the Province can only recover
50% of the amount from the drawee bank (PNB), and the collecting bank (Associated Bank) is liable to PNB
for 50% of the same amount.

5. Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corp.


G.R. No. 74917. January 20, 1988
Gancayco, J.

Doctrine:
If the instrument involved is a check, the drawee cannot charge the account of the drawer if the payee’s or
indorser’s signature is forged. The drawee, in turn has the right of recourse against the collecting bank.

The drawer generally owes no duty of diligence to the collecting bak, 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
and the law holds it to high standard of conduct.

It is the collecting bank that generally suffers the loss with regard to forged indorsements because it
had the duty to ascertain the genuineness of all prior indorsements considering that the act of presenting
the check for payment to the drawee is an assertion that the party making the presentment has done its duty
to ascertain the genuineness of the indorsements.

Facts:
Equitable Bank drew six crossed manager’s check payable to certain member establishments of Visa Card.
Subsequently, the checks were deposited with Banco De Oro (BDO) to the credit of its depositor. Following
normal procedures and after stamping at the back of the checks the usual endorsements, BDO sent the
checks for clearing through the Philippine Clearing House Corporation (PCHC). Accordingly, Equitable
Banking paid the checks; its clearing account was debited for the value of the checks and BDO’s clearing
account was credited for the same amount. Thereafter, Equitable Banking discovered that the endorsements
appearing at the back of the checks and purporting to be that of the payees were forged and/or

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unauthorized or otherwise belong to persons other than the payees. Equitable Banking presented the
checks directly to BDO for the purpose of claiming reimbursement from the latter. However, BDO refused
to accept such direct presentation and to reimburse Equitable Banking for the value of the checks.

Issues: Whether or not BDO can escape liability by reasons of forgery.

Ruling:
NO. A commercial bank cannot escape the liability of an endorser of a check and which may turn out to be
a forged endorsement. Whenever any bank treats the signature at the back of the checks as endorsements
and thus logically guarantees the same as such there can be no doubt said bank has considered the checks
as negotiable. The collecting bank or last endorser generally suffers the loss because it has the duty to
ascertain the genuineness of all prior endorsements considering that the act of presenting the check for
payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain
the genuineness of the endorsements.

G. Presentment of Payment

NIL, Secs. 70-88

Cases:

1. Far East Realty Investment Inc. vs. Court of Appeals


G.R. No. L-36549. 5 October 1988
Second Division, Paras (J)

Doctrine:
• 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 the
case of a bill of exchange, presentment for payment will be sufficient if made within a reasonable time after
the last negotiation thereof.

• Reasonable Time has been defined as so much time as is necessary under the circumstances for a reasonable
prudent and diligent man to do, conveniently, what the contract or duty requires should be done, having a
regard for the rights, and possibility of loss, if any, to the other party.

• No hard and fast demarcation line can be drawn between what may be considered as a reasonable or an
unreasonable time, because “reasonable time” depends upon the peculiar facts and circumstances in each
case.

Facts:
Private respondents asked the petitioner to extend an accommodation loan in the sum of P4,500.00.
Respondents delivered to the petitioner a check for P4,500.00, drawn by Dy Hian Tat, and signed by them
at the back of said check, with the assurance that after one month from September 13, 1960, the said check
would be redeemed by them by paying cash in the sum of P4,500.00, or the said check can be presented
for payment on or immediately after one month. Petitioner agreed and extended an accommodation loan

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The aforesaid check was presented for payment to the China Banking Corporation, but said check bounced
and was not cashed by said bank, for the reason that the current account of the drawer thereof had already
been closed. Petitioner demanded payment from the private but the latter failed and refused to pay
notwithstanding repeated demands.

Both private respondents raised the defense that both have been wholly discharged by delay in presentment
of the check for payment.
The Lower Court ruled in favor of the petitioner. However, this was reversed by the CA upon appeal by the
respondents, ruling that the check was not given as collateral to guarantee a loan secured since the check
passed through other hands before reaching the petitioner and the said check was not presented within a
reasonable time. Hence this petition.

Petitioner argues that presentment for payment and notice of dishonor are not necessary as when funds
are insufficient to meet a check, thus the drawer is liable, whether such presentment and notice be totally
omitted or merely delayed.

Issues:
1. Whether or not presentment for payment can be dispensed with
2. Whether or not presentment for payment and notice of dishonor of the questioned check were made
within reasonable time

Held:
1. No. 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 the case of a bill of exchange, presentment for payment will be sufficient if made within a reasonable
time after the last negotiation thereof (Section 71, Negotiable Instruments Law).

2. No. It is obvious in this case that presentment and notice of dishonor were not made within a reasonable
time.

“Reasonable time” has been defined as so much time as is necessary under the circumstances for a
reasonable prudent and diligent man to do, conveniently, what the contract or duty requires should be
done, having a regard for the rights, and possibility of loss, if any, to the other party (Citizens’ Bank Bldg. v.
L & E. Wertheirmer 189 S.W. 361, 362, 126 Ark, 38, Ann. Cas. 1917 E, 520).

Notice may be given as soon as the instrument is dishonored; and unless delay is excused must be given
within the time fixed by the law (Section 102, Negotiable Instruments Law).

In the instant case, the check in question was issued on September 13, 1960, but was presented to the
drawee bank only on March 5, 1964 and dishonored on the same date. After dishonor by the drawee bank,
a formal notice of dishonor was made by the petitioner through a letter dated April 27, 1968. Under these
circumstances, the petitioner undoubtedly failed to exercise prudence and diligence on what he ought to
do al. required by law. The petitioner likewise failed to show any justification for the unreasonable delay.

No hard and fast demarcation line can be drawn between what may be considered as a reasonable or an
unreasonable time, because “reasonable time” depends upon the peculiar facts and circumstances in each
case (Tolentino, Commentaries and Jurisprudence on Commercial Laws of the Philippines, Vol. I, Eighth
Edition, p. 327).

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2. PNB vs. Benito Seeto


G.R. No. L-4388. August 13, 1952
Labrador, J ***

Facts:
On 13 March, Seeto indorsed to PNB-Surigao a bearer check dated 10 March drawn against PBC-Cebu.
PNB-Surigao mailed the check to its Cebu branch on 20 March & was presented to the drawee bank on 09
April. The check was dishonored for insufficient funds because the delay in presentment cause the
exhaustion of the drawer's funds. Indorser Seeto asked that the suit be deferred while he made inquiries.
He assured PNB that he would refund the value in case of dishonor.

Held:
The indorser is discharged from liability by reason of the delay in the presentment for payment, under Sec.
84. Drawer had enough funds when he issued the check because his subsequent checks drawn against the
same bank had been encashed. The assurances of refund by the indorser are the ordinary obligation of an
indorser which are discharged by the unreasonable delay in presentation of the check.

3. The International Corporate Bank (now Union Bnak of the Philippines) vs. Spouses Gueco G.R. No.
141968. 12 February 2001
First Division, Kapunan (J)

Doctrine:
A stale check is one which has not been presented for payment within a reasonable time after its issue. It is
valueless and, therefore, should not be paid. Under the negotiable instruments law, an instrument not payable
on demand must be presented for payment on the day it falls due. When the instrument is payable on demand,
presentment must be made within a reasonable time after its issue. In the case of a bill of exchange,
presentment is sufficient if made within a reasonable time after the last negotiation thereof. A check must be
presented for payment within a reasonable time after its issue, and in determining what is a "reasonable time,"
regard is to be had to the nature of the instrument, the usage of trade or business with respect to such
instruments, and the facts of the particular case. The test is whether the payee employed suchdiligence as a
prudent man exercises in his own affairs. This is because the nature and theory behind the useof a check points
to its immediate use and payability.

Facts:
Spouses Francis S. Gueco and Ma. Luz E. Gueco obtained a loan from petitioner International Corporate
Bank (now Union Bank of the Philippines) to purchase a car — a Nissan Sentra 1600 4DR, 1989 Model. In
consideration thereof, the Spouses executed promissory notes which were payable in monthly installments
and chattel mortgage over the car to serve as security for the notes. The Spouses defaulted in payment of
installments. Consequently, the Bank filed on 7 August 1995 a civil action (Civil Case 658-95) for "Sum of
Money with Prayer for a Writ of Replevin" before the Metropolitan Trial Court of Pasay City, Branch 45. On
25 August 1995, Dr. Francis Gueco was served summons and was fetched by the sheriff and representative
of the bank for a meeting in the bank premises. Desi Tomas, the Bank's Assistant Vice President demanded
payment of the amount of P184,000.00 which represents the unpaid balance for the car loan. After some
negotiations and computation, the amount was lowered to P154,000.00, However, as a result of the non-
payment of the reduced amount on that date, the car was detained inside the bank's compound. On 28
August 1995, Dr. Gueco went to the bank and talked with its Administrative Support Auto Loans/Credit Card
Collection Head, Jefferson Rivera. The negotiations resulted in the further reduction of the outstanding loan

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to P150,000.00. On 29 August 1995, Dr. Gueco delivered a manager's check in the amount of P150,000.00
but the car was not released because of his refusal to sign the Joint Motion to Dismiss. It is the contention
of the Gueco spouses and their counsel that Dr. Gueco need not sign the motion for joint dismissal
considering that they had not yet filed their Answer. the Bank, however, insisted that the joint motion to
dismiss is standard operating procedure in their bank to effect a compromise and to preclude future filing
of claims, counterclaims or suits for damages. After several demand letters and meetings with bank
representatives, the Gueco spouses initiated a civil action for damages before the Metropolitan Trial Court
of Quezon City, Branch 33. The Metropolitan Trial Court dismissed the complaint for lack of merit. On appeal
to the Regional Trial Court, Branch 227 of Quezon City, the decision of the Metropolitan Trial Court was
reversed. In its decision, the RTC held that there was a meeting of the minds between the parties as to the
reduction of the amount of indebtedness and the release of the car but said agreement did not include the
signing of the joint motion to dismiss as a condition sine qua non for the effectivity of the compromise. The
court further ordered the bank to return immediately the subject car to the spouses in good working
condition; and to pay the spouses the sum of P50,000.00 as moral damages; P25,000.00 as exemplary
damages, and P25,000.00 as attorney's fees, and to pay the cost of suit. In other respect, the court affirmed
the decision of the Metropolitan Trial Court Branch 33. The case was elevated to the Court of Appeals, which
on 17 February 2000, issued the decision, denying the petition for review on certiorari and affirming the
Decision of the RTC of Quezon City, Branch 227, in Civil Case Q-97-31176, in toto; with costs against the
bank. The bank filed the petition for review on certiorari with the Supreme Court.

(Short facts: In the meeting of 29 August 1995, Dr. Gueco delivered a manager's check representing the
reduced amount of P150,000.00. Said check was given to Mr. Rivera, a representative of the bank However,
since Dr. Gueco refused to sign the joint motion to dismiss, he was made to execute a statement to the effect
that he was withholding the payment of the check. Subsequently, in a letter addressed to Ms. Desi Tomas, vice
president of the bank, dated 4 September 1995, Dr. Gueco instructed the bank to disregard the "hold order"
letter and demanded the immediate release of his car, to which the former replied that the condition of signing
the joint motion to dismiss must be satisfied and that they had kept the check which could be claimed by Dr.
Gueco anytime. While there is controversy as to whether the document evidencing the order to hold payment
of the check was formally offered as evidence by the bank, it appears from the pleadings that said check has
not been encashed.)

Issue: Whether the bank was negligent in opting not to deposit or use the manager’s check.

Held:
NO. A stale check is one which has not been presented for payment within a reasonable time after its
issue. It is valueless and, therefore, should not be paid. Under the negotiable instruments law, an instrument
not payable on demand must be presented for payment on the day it falls due. When the instrument is
payable on demand, presentment must be made within a reasonable time after its issue. In the case of a bill
of exchange, presentment is sufficient if made within a reasonable time after the last negotiation thereof. A
check must be presented for payment within a reasonable time after its issue, and in determining what is a
"reasonable time," regard is to be had to the nature of the instrument, the usage of trade or business with
respect to such instruments, and the facts of the particular case. The test is whether the payee employed
such diligence as a prudent man exercises in his own affairs. This is because the nature and theory behind
the use of a check points to its immediate use and payability. In a case, a check payable on demand which
was long overdue by about two and a half (2-1/2) years was considered a stale check. Failure of a payee to
encash a check for more than 10 years undoubtedly resulted in the check becoming stale. Thus, even a
delay of 1 week or two (2) days, under the specific circumstances of the certain cases constituted
unreasonable time as a matter of law. Herein, the check involved is not an ordinary bill of exchange but a

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manager's check. A manager's check is one drawn by the bank's manager upon the bank itself. It is similar
to a cashier's check both as to effect and use. A cashier's check is a check of the bank's cashier on his own
or another check. In effect, it is a bill of exchange drawn by the cashier of a bank upon the bank itself and
accepted in advance by the act of its issuance. It is really the bank's own check and may be treated as a
promissory note with the bank as a maker. The check becomes the primary obligation of the bank which
issues it and constitutes its written promise to pay upon demand. The mere issuance of it is considered an
acceptance thereof. If treated as promissory note, the drawer would be the maker and in which case the
holder need not prove presentment for payment or present the bill to the drawee for acceptance. 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. Failure to present on time,
thus, does not totally wipe out all liability. In fact, the legal situation amounts to an acknowledgment of
liability in the sum stated in the check. In this case, the Gueco spouses have not alleged, much less shown
that they or the bank which issued the manager's check has suffered damage or loss caused by the delay
or non-presentment. Definitely, the original obligation to pay certainly has not been erased. It has been
held that, if the check had become stale, it becomes imperative that the circumstances that caused its non-
presentment be determined. Herein, the bank held on the check and refused to encash the same because
of the controversy surrounding the signing of the joint motion to dismiss. The Court saw no bad faith or
negligence in this position taken by the Bank.

4. Metropol (Bacolod) Financing & Investment Corporation vs. Sambok Motors Company and Ng
Sambok Sons Motors Co., Ltd.
G.R. No. L-39641. February 28, 1983
De Castro, J. ***

Doctrine:
A qualified indorserment 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
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 by section 65 of NIL.

Recourse means resort to a person who is secondarily liable after the default of the person who is primarily
liable. A person who indorses without qualification engages that on due presentment, the note shall be
accepted or paid, or both as the case maybe, and that if it be dishonored, he will pay the amount thereof to
the holder.

Facts:
On April 15, 1969 Dr. Javier Villaruel executed a promissory note in favor of Ng Sambok Sons Motors Co.,
Ltd., in the amount of P15, 939.00 payable in 12 equal monthly installments, beginning May 18, 1969, with
interest of 1% per month. It is further provided that in case on non-payment of any of the installments, the
remaining unpaid balance shall become due and payable with an additional interest equal to 25% of the
total amount due. On the same date, Sambok Motors Company, sister company of Ng Sambok Sons Motors
Co., Ltd., negotiated and indorsed the note in favor of plaintiff Metropol Financing & Investment
Corporation. Dr. Villaruel defaulted in the payment of his installments when they became due. He also failed
to pay as demanded, hence plaintiff Metropol notified Sambok as indorsee of said note of the fact that the
same has been dishonored and demanded payment. Sambok also failed to pay which led plaintiff to file a
complaint for collection of a sum of money. During the pendency of the case in the trial court, defendant
Dr. Villaruel died. Thus, the tiral court ordered Sambok Motors Company to pay the plaintiff.

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Issue: WON Sambok Motors Company is a qualified indorser of the subject promissory.

Ruling:
No. 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. 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. 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. 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 all waived. The words added by said appellant do not limit his liability, but rather confirm
his obligation as a general indorser.

Lastly, after an instrument is dishonored by non-payment, the person secondarily liable thereon ceases to
be such and becomes a principal debtor. His liabiliy becomes the same as that of the original obligor.
Consequently, the holder need not even proceed against the maker before suing the indorser.

5. Crystal vs. CA
G.R. No. L-35767. 18 June 1976
Resolution of the Second Division, Barredo (J) ***

Facts:
The Supreme Court, in its decision of 25 February 1975, affirmed the decision of the Court of Appeals,
holding that Raymundo Crystal’s redemption of the property acquired by Pelagia Ocang, Pacita, Teodulo,
Felicisimo, Pablo, Lydia, Dioscoro and Rodrigo, all surnamed de Garcia, was invalid as the check which Crystal
used in paying the redemption price has been either dishonored or had become stale (Ergo, the value of
the check was never realized). Crystal filed a motion for reconsideration.

Issue: Whether the conflicting circumstances of the check being dishonored and becoming stale affect the
validity of the redemption sale.

Held: For a check to be dishonored upon presentment and to be stale for not being presented at all in time
are incompatible developments that have variant legal consequences. If indeed the questioned check was
dishonored, the redemption was null and void. If it had only become state, it becomes imperative that the
circumstances that caused its non-presentment be determined, for if it was not due to the fault of the
drawer, it would be unfair to deprive him of the rights he had acquired as redemptioner. Herein, it appears
that there is a strong showing that the check was not dishonored, although it became stale, and that Pelagia
Ocang had actually been paid the full value thereof. The Supreme Court, thus, reconsidered its decision and
remanded the case to the trial court for further proceedings.

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6. State Investment House vs. IAC


G.R. No. 72764. 13 July 1989
Third Division, Fernan (J)

Facts:
Shortly before 5 September 1980, New Sikatuna Wood Industries, Inc. (NSWII) requested for a loan
from Harris Chua. The latter agreed to grant the same subject to the condition that the former should wait
until December 1980 when he would have the money. In view of this agreement, Anita Pena Chua (Harris
Chua's wife) issued 3 crossed checks payable to NSWII all postdated 22 December 1980. The total value of
the postdated checks amounted to P 299,450.00. Subsequently, NSWII entered into an agreement with
State Investment House, Inc. (SIHI) whereby for and in consideration of the sum of Pl,047,402.91 under a
deed of sale, the former assigned and discounted with SIHI 11 postdated checks including the 3 postdated
checks issued by Peña Chua to NSWII. When the three checks issued by Pena Chua were allegedly deposited
by SIHI, these checks were dishonored by reason of "insufficient funds", "stop payment" and "account
closed", respectively. SIHI claimed that despite demands on Peña Chua to make good said checks, the latter
failed to pay the same necessitating the former to file an action for collection against the latter and her
husband before the Regional Trial Court of Manila, Branch XXXVII (Civil Case 82-10547). The spouses Chua
filed a third party complaint against NSWII for reimbursement and indemnification in the event that they
be held liable to SIHI. For failure of NSWII to answer the third party complaint despite due service of
summons, the latter was declared in default. On 30 April 1984, the lower court rendered judgment against
the spouses, ordering them to pay jointly and severally to SIHI P 229,450.00 with interest at the rate of 12%
per annum from 24 February 1981 until fully paid; P 29,945.00 as and for attorney's fees; and the costs of
suit. On the third-party complaint, NSWII was ordered to pay the spouses all amounts said spouses may
pay to SIHI on account of the case. On appeal filed by the spouses (AC-GR CV 04523), the Intermediate
Appellate Court (now Court of Appeals) reversed the lower court's judgment in its decision, dismissing the
complaint, with costs against SIHI. SIHI filed the petition for review.

Issue: Whether SIHI is a proper party authorized to make presentment of the cross checks in question.

Held:
NO. Under usual practice, crossing a check is done by placing two parallel lines diagonally on the left top
portion of the check. The crossing may be special wherein between the two parallel lines is written the name
of a bank or a business institution, in which case the drawee should pay only with the intervention of that
bank or company, or crossing may be general wherein between two parallel diagonal lines are written the
words "and Co." or none at all as in the case at bar, in which case the drawee should not encash the same
but merely accept the same for deposit. The effect therefore of crossing a check relates to the mode of its
presentment for payment. Under Section 72 of the Negotiable Instruments Law, presentment for payment
to be sufficient must be made (a) by the holder, or by some person authorized to receive payment on his
behalf. As to who the holder or authorized person will be depends on the instructions stated on the face of
the check. Herein, the three subject checks had been crossed generally and issued payable to NSWII which
could only mean that the drawer had intended the same for deposit only by the rightful person, i.e., the
payee named therein. Apparently, it was not the payee who presented the same for payment and therefore,
there was no proper presentment, and the liability did not attach to the drawer. Thus, in the absence of due
presentment, the drawer did not become liable. Consequently, no right of recourse is available to SIHI
against the drawer of the subject checks, Pena Chua, considering that SIHI is not the proper party authorized
to make presentment of the checks in question.

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H. Notice of Dishonor

NIL, Secs. 89-118

Cases:

1. Paulino Gullas vs. The Philippine National Bank


G.R. No. L-43191. November 13, 1935
Malcolm, J.

Facts:
The Treasurer of the United States for the United States Veterans Bureau issued a Warrant, payable to the
order of Francisco Sabectoria Bacos. Paulino Gullas and Pedro Lopez signed as endorsers of this check.
Thereupon it was cashed by the PNB. Subsequently the treasury warrant was dishonored by the Insular
Treasurer. Prior to the mailing of notice of dishonor, and without waiting for any action by Gullas, the bank
made use of the money standing in his account to make good for the treasury warrant.

Issue: WON PNB can apply a deposit to the debt of depositor to the bank.

Ruling:
No. Under the NIL, Paulino Gullas, as a general indorser of 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. Said Law further provides that a notice of dishonoris necessary in order to charge all indorser
and that the right of action against him does not accrue until the notice is given. In this case, the act of the
bank in making use of the money standing in Gullas’ account to make good for the treasury warrant prior
to the mailing of notice of dishonor is prejudicial to the rights of Gulla. As an indorser, notice should actually
have been given him first in order that he might protect his interests.

2. Metropol (Bacolod) Financing & Investment Corporation vs. Sambok Motors Company and Ng
Sambok Sons Motors Co., Ltd.
G.R. No. L-39641. February 28, 1983
De Castro, J.

Please click G-4.

I. Discharge of Negotiable Instruments

NIL, Secs. 89-118

Cases:

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1. Ang vs Associated Bank, et. al.


G.R. No. 146511. September 5, 2007
Azcuna, J.

Facts:
On August 28, 1990, respondent Associated Bank (formerly Associated Banking Corporation and now
known as United Overseas Bank Philippines) filed a collection suit against Antonio Ang Eng Liong and
petitioner Tomas Ang for the two (2) promissory notes that they executed as principal debtor and co-maker,
respectively. In the Complaint, respondent Bank alleged that on October 3 and 9, 1978, the defendants
obtained a loan of P evidenced by a promissory note bearing PN-No. DVO-78-382, and P 50,000, 30,000,
evidenced by a promissory note bearing PNNo. DVO-78-390. As agreed, the loan would be payable, jointly
and severally, on January 31, 1979 and December 8, 1978, respectively. In addition, subsequent amendments
to the promissory notes as well as the disclosure statements6 stipulated that the loan would earn 14%
interest rate per annum, 2% service charge per annum, 1% penalty charge per month from due date until
fully paid, and attorney’s fees equivalent to 20% of the outstanding obligation. Despite repeated demands
for payment, the latest of which were on September 13, 1988 and September 9, 1986, on Antonio Ang Eng
Liong and Tomas Ang, respectively, respondent Bank claimed that the defendants failed and refused to
settle their obligation, resulting in a total indebtedness of P 539,638.96 as of July 31, 1990. In his Answer,
Antonio Ang Eng Liong only admitted to have secured a loan amounting to P 80,000. He pleaded though
that the bank “be ordered to submit a more reasonable computation” considering that there had been “no
correct and reasonable statement of account” sent to him by the bank, which was allegedly collecting
excessive interest, penalty charges, and attorney’s fees despite knowledge that his business was destroyed
by fire, hence, he had no source of income for several years. For his part, petitioner Tomas Ang filed an
Answer with Counterclaim and Cross-claim. He interposed the affirmative defenses that: the bank is not the
real party in interest as it is not the holder of the promissory notes, much less a holder for value or a holder
in due course; the bank knew that he did not receive any valuable consideration for affixing his signatures
on the notes but merely lent his name as an accommodation party; he accepted the promissory notes in
blank, with only the printed provisions and the signature of Antonio Ang Eng Liong appearing therein.

Issue: Whether or not Petitioner is liable to the obligation despite being a mere co-maker and
accommodation party.

Held:
Yes. Notably, Section 29 of the NIL defines an accommodation party as a person “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.” As gleaned from the text, an accommodation party is one who
meets all the three requisites, viz: (1) he must be a party to the instrument, signing as maker, drawer,
acceptor, or indorser; (2) he must not receive value therefor; and (3) he must sign for the purpose of lending
his name or credit to some other person. An accommodation party 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 party/ies thereto. The accommodation party is liable on the
instrument to a holder for value even though the holder, at the time of taking the instrument, knew him or
her to be merely an accommodation party, as if the contract was not for accommodation.

As petitioner acknowledged it to be, the relation between an accommodation party and the accommodated
party is one of principal and surety – the accommodation party being the surety. from the beginning; As
such, he is deemed an original promisor and debtor he is considered in law as the same party as the debtor
in relation to whatever is adjudged touching the obligation of the latter since their liabilities are interwoven

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as to be inseparable. Although a contract of suretyship is in essence accessory or collateral to a valid


principal obligation, the surety’s liability to the creditor is immediate, primary and absolute; he is directly
and equally bound with the principal. As an equivalent of a regular party to the undertaking, a surety
becomes liable to the debt and duty of the principal obligor even without possessing a direct or personal
interest in the obligations nor does he receive any benefit therefrom.

In the instant case, petitioner agreed to be “jointly and severally” liable under the two promissory notes that
he co-signed with Antonio Ang Eng Liong as the principal debtor. This being so, it is completely immaterial
if the bank would opt to proceed only against petitioner or Antonio Ang Eng Liong or both of them since
the law confers upon the creditor the prerogative to choose whether to enforce the entire obligation against
any one, some or all of the debtors. Nonetheless, petitioner, as an accommodation party, may seek
reimbursement from Antonio Ang Eng Liong, being the party accommodated.

Consequently, in issuing the two promissory notes, petitioner as accommodating party warranted to the
holder in due course that he would pay the same according to its tenor. value therefore It is no defense to
state on his part that he did not receive any because the phrase “without receiving value therefor” used in
Sec. 29 of the NIL means “without receiving value by virtue of the instrument” and not as it is apparently
supposed to mean, “without receiving payment for lending his name.” Stated differently, when a third
person advances the face value of the note to the accommodated party at the time of its creation, the
consideration for the note as regards its maker is the money advanced to the accommodated party. It is
enough that value was given for the note at the time of its creation. As in the instant case, a sum of money
was received by virtue of the notes, hence, it is immaterial so far as the bank is concerned whether one of
the signers, particularly petitioner, has or has not received anything in payment of the use of his name.

Furthermore, since the liability of an accommodation party remains not only primary but also unconditional
to a holder for value, even if the accommodated party receives an extension of the period for payment
without the consent of the accommodation party, the latter is still liable for the whole obligation and such
extension does not release him because as far as a holder for value is concerned, he is a solidary co-debtor.

Link: https://blacknwhitethoughtsblog.wordpress.com/2016/08/31/ang-vs-associated-bank-etal-
532-scra-244/

2. American Bank vs. Macondray & Co.


G.R. No. 1808. August 23, 1905
Johnson, J.

Facts:
 A bill of exchange was drawn by V.S. Wolff against F. H. TAYLOR & Co., payable to himself.
 The defendant, certified that the signature, V. S. Wolff, to said bill of exchange was genuine.
 The same was indorsed to American Bank in the US and later on was protested because F. H.
TAYLOR & Co. could not be found nor its representative after diligent search.
 American Bank then claims the right to recover from defendant upon the theory that the defendant
guaranteed the payment of said bill of exchange.
 Defendant denies that part of the statement which appears in his alleged indorsement, "Payment
guaranteed. Protest, demand, and notice of nonpayment waived," as this was added to said
indorsement after the signature of Macondray & Co. had been affixed to said indorsement.

Issue: Whether Macondray & Co. is liable upon said bill of exchange as an indorser.

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Ruling:
No. 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.

Notwithstanding that the defendant is relieved from liability by reason of this material alteration in his
indorsement, his original indorsement created no liability whatever. The original indorsement by the
defendant was for the purpose only of assuring the plaintiff that the signature of V. S. Wolff, as attached to
the original bill of exchange, was genuine —that is to say, that the person whom he represented himself to
be. It was an indorsement of identification of the person only, and not for the purpose of incurring any
liability as to the payment of such bill of exchange. There was no attempt to show that the drawer of said
bill of exchange, V. S. Wolff, was not the person who actually drew and signed said bill of exchange.

3. Enrique P. Montinola vs. PNB, et. al.


G.R. No. L-2861. Feb 26, 1951
Montemayor, J.

Facts:
In May 1942, Ubaldo Laya, as provincial treasurer of Misamis Oriental issued a P100,000.00 Philippine
National Bank (PNB) check to Mariano Ramos. The said check was to be used by Ramos, as disbursing officer
of the US forces at that time, for military purposes.

On the back of the check, Ramos wrote:

Pay to the order of Enrique P. Montinola P30,000 only. The balance to be deposited in the Philippine
National Bank to the credit of M. V. Ramos.

Before Ramos can encash the check, he was made a prisoner of war by the invading Japanese forces. When
he got free in December 1944, he needed some cash for himself and so he went to a certain Enrique
Montinola and made arrangements. In consideration thereof, Montinola promised to pay 85,000 in
Japanese notes (that time peso notes are valued higher). However, he was only able to pay 45k in Japanese
notes to Ramos.

Later, Montinola sought to have the check encashed but PNB dishonored the check. It appears that there
was an insertion made. Under the signature of Laya, the words “Agent, Philippine National Bank” was
inserted, thus making it appear that Laya disbursed the check as an agent of PNB and not as provincial
treasurer of Misamis Oriental

Issue: Whether or not the material alteration discharges the instrument?

Held:
Yes.

First, the Court pointed out: “It was not negotiated according to the Negotiable Instruments Law (NIL) hence
it is not a negotiable instrument. There was only a partial indorsement and not a negotiation contemplated
under the NIL. Only P30k of the P100k amount of the check was indorsed. This merely make Montinola a

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mere assignee – and this is the clear intent of Ramos. Ramos was merely assigning P30k to Montinola.
Montinola may therefore not be regarded as an indorsee and PNB has all the right to dishonor the check.
As mere assignee, he is subject to all defenses available to the drawer Provincial Treasurer of Misamis
Oriental and against Ramos.

Anent the issue of alteration, the apparent purpose of which is to make the drawee (PNB) the drawer against
which Montinola can recover from directly. 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. (Section 124 of the Negotiable Instruments Law).

The check was not legally negotiated within the meaning of the Negotiable Instruments Law. Section 32 of
the same law 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, . . . (as in this
case) does not operate as a negotiation of the instrument.” Montinola may therefore not be regarded as an
indorsee. At most he may be regarded as a mere assignee of the P30,000 sold to him by Ramos, in which
case, as such assignee, he is subject to all defenses available to the drawer Provincial Treasurer of Misamis
Oriental and against Ramos. Neither can Montinola be considered as a holder in due course because section
52 of said law defines a holder in due course as a holder who has taken the instrument under certain
conditions, one of which is that he became the holder before it was overdue. When Montinola received the
check, it was long overdue. And, Montinola is not even a holder because section 191 of the same law defines
holder as the payee or indorsee of a bill or note and Montinola is not a payee. Neither is he an indorsee for
as already stated, at most he can be considered only as assignee. Neither could it be said that he took it in
good faith. As already stated, he has not paid the full amount of P90,000 for which Ramos sold him P30,000
of the value of the check. In the second place, as was stated by the trial court in its decision, Montinola
speculated on the check and took a chance on its being paid after the war.

At any rate, even assuming that there is proper negotiation, Montinola can no longer encash said check
because when he sought to have it encashed in January 1945, it is already stale there being two and half
years passing since its time of issuance.

4. Metrobank vs. First National City Bank


G.R. No. L-55079. November 19, 1982
Melencio-Herrera, J.

Doctrine:
When the indorsement itself is very clear when it begins with the words “For clearance, clearing office” such
indorsement must be read together with the 24-hour rule regulation of the House operations of the Central
Bank. Once that 24-hour period is over, the liability on such indorsement has ceased. Failure of drawee bank
to call the attention of collecting bank to the alteration of the check in question until after the lapse of 24
hours negates whatever right it might have against the collecting bank. Its remedy lies not against collecting
bank but against the party responsible for the changing of the name of the payee and the amount on the face
of the check.

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Facts:

 August 25, 1964: Check dated July 8, 1964 for P50,000.00, payable to CASH, drawn by Joaquin
Cunanan & Company on First National City Bank (FNCB) was deposited with Metropolitan Bank and
Trust Company (Metro Bank) by Salvador Sales.
 Earlier that day, Sales had opened a current account with Metro Bank depositing P500.00 in cash
 Metro Bank immediately sent the cash check to the Clearing House of the Central Bank with the
following words stamped at the back of the check:
 Metropolitan Bank and Trust Company Cleared (illegible) office All prior endorsements and/or Lack
of endorsements Guaranteed.

 The check was cleared the same day. Private respondent paid petitioner through clearing the
amount of P50,000.00, and Sales was credited with the said amount in his deposit with Metro Bank.
 August 26, 1964: Sales made his 1st withdrawal of P480.00 from his current account
 August 28, 1964: he withdrew P32,100.00
 August 31, 1964: he withdrew the balance of P17,920 and closed his account with Metro Bank
 September 3, 1964: FNCB returned cancelled Check to drawer Joaquin Cunanan & Company,
together with the monthly statement of the company's account with FNCB.
 notified FNCB that the check had been altered
 actual amount of P50.00 was raised to P50,000.00
 name of the payee, Manila Polo Club, was superimposed the word CASH.
 September 10, 1964: FNCB wrote Metro Bank asking for reimbursement
 June 29, 1965: FNCB filed for recovery
 CA affirmed Trial Court: Metro Bank to reimburse FNCB

Issue: W/N Metrobank should reimburse FNCB for the altered amount as indorser

Held: NO. FNCB liable.


 Under the procedure prescribed, the drawee bank receiving the check for clearing from the Central
Bank Clearing House must return the check to the collecting bank within the 24-hour period if the
check is defective for any reason. - FNCB failed to do so

 indorsement must be read together with the 24-hour regulation on clearing House Operations of
the Central Bank

 Metro Bank cannot be held liable for the payment of the altered check.

 Moreover, FNCB did not deny the allegation of Metro Bank that before it allowed the withdrawal
of the balance of P17,920.00 by Salvador Sales, Metro Bank withheld payment and first verified,
through its Assistant Cashier Federico Uy, the regularity and genuineness of the check deposit from
Marcelo Mirasol, Department Officer of FNCB, because its (Metro Bank) attention was called by the
fast movement of the account

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5. State Investment House vs. CA


G.R. No. 101163. January 11, 1993
Bellosillo, J.

Doctrine:
The withdrawal of the money from the drawee bank to avoid liability on the checks cannot prejudice the rights
of holders in due course. For the reason that the holder who takes the negotiated paper makes a contract with
the parties on the face of the instrument; there is an implied representation that funds or credit are available
for the payment of the instrument in the bank upon which it is withdrawn.

Facts:
Nora B. Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be sold on commission, 2
post-dated Equitable Banking Corporation checks in the amount of P50,000 each, one dated 30 August
1979 and the other, 30 September 1979. Thereafter, the payee negotiated the checks to the State
Investment House Inc. (SIHI). Moulic failed to sell the pieces of jewelry, so she returned them to the payee
before maturity of the checks. The checks, however, could no longer be retrieved as they had already been
negotiated. Consequently, before their maturity dates, Moulic withdrew her funds from the drawee bank.
Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20 December
1979, SIHI allegedly notified Moulic of the dishonor of the checks and requested that it be paid in cash
instead, although Moulic avers that no such notice was given her. On 6 October 1983, SIHI sued to recover
the value of the checks plus attorney's fees and expenses of litigation. In her Answer, Moulic contends that
she incurred no obligation on the checks because the jewelry was never sold and the checks were negotiated
without her knowledge and consent. She also instituted a Third-Party Complaint against Corazon Victoriano,
who later assumed full responsibility for the checks. On 26 May 1988, the trial court dismissed the Complaint
as well as
the Third-Party Complaint, and ordered SIHI to pay Moulic P3,000.00 for attorney's fees. SIHI elevated the
order of dismissal to the Court of Appeals, but the appellate court affirmed the trial court on the ground
that the Notice of Dishonor to Moulic was made beyond the period prescribed by the Negotiable
Instruments Law and that even if SIHI did serve such notice on Moulic within the reglementary period it
would be of no consequence as the checks should never have been presented for payment. SIHI filed the
petition for review.

Issue [1]: Whether the alleged issuance of the post-dated checks as security is a ground for the discharge
of the instrument as against a holder in due course.

Held [1]:
Section 119 of the Negotiable Instrument Law outlined the grounds in which an instrument is discharged.
The provision states that "A negotiable instrument is discharged: (a) By payment in due course by or on
behalf of the princi. Whether the post-dated checks, issued as security, is a ground for the discharge of the
instrument as against a holder in due course. pal debtor; (b) By payment in due course by the party
accommodated, where the instrument is made or accepted for his accommodation; (c) By the intentional
cancellation thereof by the holder; (d) By any other act which will discharge a simple contract for the
payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity
in his own right." Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the
discharge of the instrument. But, the intentional cancellation contemplated under paragraph (c) is that
cancellation effected by destroying the instrument either by tearing it up, burning it, or writing the word
"cancelled" on the instrument. The act of destroying the instrument must also be made by the holder of the

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instrument intentionally. Since MOULIC failed to get back possession of the post-dated checks, the
intentional cancellation of the said checks is altogether impossible. On the other hand, the acts which will
discharge a simple contract for the payment of money under paragraph (d) are determined by other existing
legislations since Section 119 does not specify what these acts are, e.g., Art. 1231 of the Civil Code which
enumerates the modes of extinguishing obligations. Again, none of the modes outlined therein is applicable
in the instant case as Section 119 contemplates of a situation where the holder of the instrument is the
creditor while its drawer is the debtor. Herein, the payee, Corazon Victoriano, was no longer MOULIC's
creditor at the time the jewelry was returned. Correspondingly, MOULIC may not unilaterally discharge
herself from her liability by the mere expediency of withdrawing her funds from the drawee bank. She is
thus liable as she has no legal basis to excuse herself from liability on her checks to a holder in due course.

Issue [2]: Whether the requirement that SIHI should give Notice of Dishonor to MOULIC is indispensable.

Held [2]:
The need for notice is not absolute; there are exceptions under Section 114 of the Negotiable Instruments
Law. Section 114 (When notice need not be given to drawer) provides that "Notice of dishonor is not
required to be given to the drawer in the following cases: (a) Where the drawer and the drawee are the
same person; (b) When the drawee is a fictitious person or a person not having capacity to contract; (c)
When the drawer is the person to whom the instrument is presented for payment; (d) Where the drawer
has no right to expect or require that the drawee or acceptor will honor the instrument; (e) Where the
drawer had countermanded payment." Indeed, MOULIC'S actuations leave much to be desired. She did not
retrieve the checks when she returned the jewelry. She simply withdrew her funds from her drawee bank
and transferred them to another to protect herself. After withdrawing her funds, she could not have
expected her checks to be honored. In other words, she was responsible for the dishonor of her checks,
hence, there was no need to serve her Notice of Dishonor, which is simply bringing to the knowledge of the
drawer or indorser of the instrument, either verbally or by writing, the fact that a specified instrument, upon
proper proceedings taken, has not been accepted or has not been paid, and that the party notified is
expected to pay it. In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating,
not hindering or hampering transactions in commercial paper. Thus, the said statute should not be
tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a
single case. The holder who takes the negotiated paper makes a contract with the parties on the face of the
instrument. There is an implied representation that funds or credit are available for the payment of the
instrument in the bank upon which it is drawn. Consequently, the withdrawal of the money from the drawee
bank to avoid liability on the checks cannot prejudice the rights of holders in due course. Herein, such
withdrawal renders the drawer, Moulic, liable to SIHI, a holder in due course of the checks. SIHI could not
expect payment as MOULIC left no funds with the drawee bank to meet her obligation on the checks, so
that Notice of Dishonor would be futile.

6. Far East Bank vs. Gold Palace Jewellery Co.


G.R. No. 168274. August 20, 2008
Nachura, J.

Please see F-3.

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J. Bills of Exchange

NIL, Secs. 126-183

Cases:

1. New Pacific Timber & Supply Company vs. Seneris


G.R. No. L-41764. 19 December 1980
Second Division, Concepcion Jr. (J)

Facts:
New Pacific Timber & Supply Company, Inc. (NPTSCI) is the defendant in a complaint for collection of a sum
of money filed by Ricardo A. Tong. On 19 July 1974, a compromise judgment was rendered by Judge Alberto
V. Seneris in accordance with an amicable settlement entered into by the parties the terms and conditions
of which are (1) that NPTSCI will pay to Tong the amount of P54,500.00 at 6% interest per annum to be
reckoned from 25 August 1972; (2) that NPTSCI will pay to Tong the amount of P6,000.00 as attorney's fees
for which P5,000.00 had been acknowledged received by Tong under Consolidated Bank and Trust
Corporation Check 16-135022 amounting to P5,000.00 having a balance of P1,000.00; (3) that the entire
amount of P54,500.00 plus interest, plus the balance of P1,000.00 for attorney's fees will be paid by NPTSCI
to Tong within 5 months from 19 July 1974; and (4) that failure on the part of NPTSCI to comply with any
of the conditions, a writ of execution may be issued by the Court for the satisfaction of the obligation. For
failure of NPTSCI to comply with his judgment obligation, Judge Seneris, upon motion of Tong, issued an
order for the issuance of a writ of execution on 21 December 1974. Accordingly, writ of execution was issued
for the amount of P63,130.00 pursuant to which, the Ex-Officio Sheriff (Hakim S. Abdulwahid) levied upon
personal properties of NPTSCI, i.e. a unit of American Lathe 24", 1 Unit of American Lathe 18" Cracker
Wheeler, and 1 Unit Rockford Shaper 24"; and set the auction sale thereof on 15 January 1975. The auction
sale was then postponed on the following day, 16 January 1975 at 10:00 a.m. In the course of the
proceedings, Deputy Sheriff Castro sold the levied properties item by item to Tong as the highest bidder in
the amount of P50,000.00. As a result thereof, the Ex-Officio Sheriff declared a deficiency of P13,130.00.
Thereafter, on 16 January 1975, the Ex-Officio Sheriff issued a "Sheriff's Certificate of Sale" in favor of Tong
for the total amount of P50,000.00 only. Subsequently, on 17 January 1975, NPTSCI filed an ex-parte motion
for issuance of certificate of satisfaction of judgment. This motion was denied by Judge Seneris in his order
dated 28 August 1975. In view thereof, NPTSCI filed the petition for certiorari with preliminary injunction.

Issue: Whether Tong can validly refuse acceptance of the payment of the judgment obligation made by
NPTSCI consisting of P50,000.00 in Cashier's Check and P13,130.00 in cash which it deposited with the
ExOfficio Sheriff before the date of the scheduled auction sale.

Held:
The check deposited by NPTSCI in the amount of P50,000.00 is not an ordinary check but a Cashier's
Check of the Equitable Banking Corporation, a bank of good standing and reputation. As testified to by the
Ex-Officio Sheriff with whom it has been deposited, it is a certified crossed check. 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. Where a
check is certified by the bank on which it is drawn, the certification is equivalent to acceptance. Said
certification "implies that the check is drawn upon sufficient funds in the hands of the drawee, that they

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have been set apart for its satisfaction, and that they shall be so applied whenever the check is presented
for payment. It is an understanding that the check is good then, and shall continue good, and this agreement
is as binding on the bank as its notes in circulation, a certificate of deposit payable to the order of the
depositor, or any other obligation it can assume. The object of certifying a check, as regards both parties,
is to enable the holder to use it as money." When the holder procures the check to be certified, "the check
operates as an assignment of a part of the funds to the creditors". Hence, the exception to the rule
enunciated under Section 63 of the Central Bank Act to the effect "that a check which has been cleared and
credited to the account of the creditor shall be equivalent to a delivery to the creditor in cash in an amount
equal to the amount credited to his account" shall apply in the present case. Considering that the whole
amount deposited by NPTSCI consisting of Cashier's Check of P50,000.00 and P13,130.00 in cash covers the
judgment obligation of P63,000.00 as mentioned in the writ of execution, then, the Court sees no valid
reason for Tong to have refused acceptance of the payment of the obligation in his favor. The auction sale,
therefore, was uncalled for. NPTSCI's motion for the issuance of a certificate of satisfaction of judgment is
clearly meritorious and Judge Seneris gravely abused his discretion in not granting the same under the
circumstances.

2. PNB vs. National City Bank of New York


G.R. No. 43596. 31 October 1936
En Banc, Recto (J)

Facts:
Facts: On April 7 and 9, 1933, an unknown person or persons negotiated with Motor Service Company, Inc.
(MSCI), two checks in payment for automobile tires purchased from MSCI's stores, purporting to have been
issued by the 'Pangasinan Transportation Co., Inc. (Pantranco) by J.L. Klar, Manager and Treasurer', against
the Philippine National Bank (PNB) and in favor of the International Auto Repair Shop, for P144.50 and
P215.75. Said checks were indorsed by said unknown persons in the manner indicated at the back thereof,
the MSCI, believing at the time that the signatures of J.L. Klar, Manager and Treasurer of Pantranco on both
checks were genuine. The checks were then indorsed for deposit by MSCI at the National City Bank of New
York and the former was accordingly credited with the amounts thereof, or P144.50 and P215.75. On April
8 and 10, 1933, the said checks were cleared at the clearing house and PNB credited the National City Bank
for the amounts thereof, believing at the time that the signatures of the drawer were genuine, that the
payee is an existing entity and the endorsements at the bank thereof regular and genuine. The PNB then
found out that the purported signatures of J.L. Klar, as Manager and Treasurer of Pantranco were forged
when so informed by the said Company, and it accordingly demanded from the National City Bank and
MSCI and the reimbursement of the amounts for which it credited the National City Bank at the clearing
house and for which the latter credited MSCI, but MSCI and National City Bank refused, and continue to
refuse, to make such reimbursements. Pantranco objected to have the proceeds of said check deducted
from their deposit. PNB filed the case in the municipal court of Manila against National City Bank and MSCI.
Upon PNB's motion, the case was dismissed before trial as to the National City Bank. A decision was
thereafter rendered giving PNB judgment for the total amount of P360.25, with interest and costs. From this
decision MSCI appealed.

Issue: Whether the payment of the checks in question made by the drawee bank constitutes an
"acceptance", and, consequently, the case should be governed by the provisions of section 62 of the
Negotiable Instruments Law.

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Held:
A check is a bill of exchange payable on demand and only the rules governing bills of exchange payable on
demand are applicable to it, according to section 185 of the Negotiable Instruments Law. In view of the fact
that acceptance is a step unnecessary in so far as bills of exchange payable on demand are concerned, it
follows that the provisions relative to "acceptance" are without application to checks. Acceptance implies,
in effect, subsequent negotiation of the instrument, which is not true in case of the payment of a check
because from the moment a check is paid it is withdrawn from circulation. The warranty established by
section 62, is in favor of holders of the instrument after its acceptance. When the drawee bank cashes or
pays a check, the cycle of negotiation is terminated, and it is illogical thereafter to speak of subsequent
holders who can invoke the warranty provided in section 62 against the drawee. Moreover, according to
section 191, "acceptance" means "an acceptance completed by delivery or notification" and this concept is
entirely incompatible with payment, because when payment is made the check is retained by the bank, and
there is no such thing as delivery or notification to the party receiving the payment. There can be no such
thing as "acceptance" in the ordinary sense of the term. A check being payable immediately and on demand,
the bank can fulfill its duty to the depositor only by paying the amount demanded. The holder has no right
to demand from the bank anything but payment of the check, and the bank has no right, as against the
drawer, to do anything but pay it. A check is not an instrument which in the ordinary course of business
calls for acceptance. The holder can never claim acceptance as his legal right. He can present for payment,
and only for payment.

K. Promissory Notes and Checks

NIL, Secs. 184-189

Cases:

1. New Pacific Timber & Supply Company vs. Seneris


G.R. No. L-41764. 19 December 1980
Second Division, Concepcion Jr. (J)

Facts:
Petitioner, New Pacific Timber & Supply Co. Inc. was the defendant in a complaint for collection of money
filed by private respondent, Ricardo A. Tong. In this complaint, respondent Judge rendered a compromise
judgment based on the amicable settlement entered by the parties wherein petitioner will pay to private
respondent P54,500.00 at 6% interest per annum and P6,000.00 as attorney's fee of which P5,000.00 has
been paid. Upon failure of the petitioner to pay the judgment obligation, a writ of execution worth
P63,130.00 was issued levied on the personal properties of the petitioner. Before the date of the auction
sale, petitioner deposited with the Clerk of Court in his capacity as the Ex-Officio Sheriff P50,000.00 in
Cashier's Check of the Equitable Banking Corporation and P13,130.00 in cash for a total of P63,130.00.
Private respondent refused to accept the check and the cash and requested for the auction sale to proceed.
The properties were sold for P50,000.00 to the highest bidder with a deficiency of P13,130.00.

Petitioner subsequently filed an ex-parte motion for issuance of certificate of satisfaction of judgment which
was denied by the respondent Judge. Hence this present petition, alleging that the respondent Judge
capriciously and whimsically abused his discretion in not granting the requested motion for the reason that
the judgment obligation was fully satisfied before the auction sale with the deposit made by the petitioner
to the Ex-Officio Sheriff.

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In upholding the refusal of the private respondent to accept the check, the respondent Judge cited Article
1249 of the New Civil Code which provides that payments of debts shall be made in the currency which is
the legal tender of the Philippines and Section 63 of the Central Bank Act which provides that checks
representing deposit money do not have legal tender power. In sustaining the contention of the private
respondent to refuse the acceptance of the cash, the respondent Judge cited Article 1248 of the New Civil
Code which provides that creditor cannot be compelled to accept partial payment unless there is an express
stipulation to the contrary.

APPLICABLE LAWS: Section 63 of the Central Bank Act:

Sec. 63. Legal Character. — Checks representing deposit money do not have legal tender power and their
acceptance in payment of debts, both public and private, is at the option of the creditor, Provided, however,
that a check which has been cleared and credited to the account of the creditor shall be equivalent to a
delivery to the creditor in cash in an amount equal to the amount credited to his account.

Article 1249 of the New Civil Code:

Art. 1249. — The payment of debts in money shall be made in the currency stipulated, and if it is not
possible to deliver such currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall
produce the effect of payment only when they have been cashed, or when through the fault of the creditor
they have been impaired. In the meantime, the action derived from the original obligation shall be held in
abeyance.

Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially
to receive the presentations in which the obligation consists. Neither may the debtor be required to make
partial payment.

However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the
debtor may effect the payment of the former without waiting for the liquidation of the latter.

Issue: Can the check be considered a valid payment of the judgment obligation?

Ruling:
(directly in SC for a special action of certiorari) YES. It is to be emphasized that it is a well-known and accepted
practice in the business sector that a Cashier's Check is deemed cash. Moreover, since the check has been
certified by the drawee bank, this certification implies that the check is sufficiently funded in the drawee
bank and the funds will be applied whenever the check is presented for payment. The object of certifying a
check is to enable the holder to use it as money. When the holder procures the check to be certified, it
operates as an assignment of a part of the funds to the creditors. Hence, the exception provided in Section
63 of the Central Bank Act which states that checks which have been cleared and credited to the account of
the creditor shall be equivalent to a delivery to the creditor in cash the amount equal to that which is
credited to his account. The Cashier's Check and the cash are valid payment of the obligation of the
petitioner. The private respondent has no valid reason to refuse the acceptance of the check and cash as
full payment of the obligation.

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2. Tibajia Jr. vs. Court of Appeals


G.R. No. 100290. June 4, 1993
Padilla (J).

Facts:
Tibajia spouses delivered to Sheriff the total money judgment in cashier’s check and cash.Private
respondent, Eden Tan, refused to accept the payment made by the Tibajia spouses and instead insisted that
the garnished funds deposited with the cashier of the Regional Trial Court of Pasig, Metro Manila be
withdrawn to satisfy the judgment obligation. Tibajias filed a motion to lift the writ of execution on the
ground that the judgment debt had already been paid. The motion was denied.

Issue: Whether or not payment by means of cashier’s check is considered payment in legal tender.

Ruling:
NO. 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 a valid tender of payment and may be refused receipt by the obligee or creditor.
A check is not legal tender and that a creditor may validly refuse payment by check, whether it be a
manager’s, cashier’s or personal check. The Supreme Court stressed that, “We are not, by this decision,
sanctioning the use of a check for the payment of obligations over the objection of the creditor.”

3. Natividad Gempesaw vs. CA


G.R. No. 92244. 9 February 1993
Campos Jr. J.

Facts:
Petitioner argues that respondent drawee Bank should not have honored the checks because they were
“crossed checks”.

Issue: Whether or not the issuance of “crossed checks” is restrictive indorsement.

Ruling:
NO. They are not the same. In restrictive indorsement, the prohibition to transfer or negotiate must be
written in express words at the back of the instrument, so that any subsequent party may be forewarned
that ceases to be negotiable. Crossed checks, on the other hand, is done by drawing two parallel lines across
the face of the check to mean that it cannot be presented for payment in cash but can only be deposited
in payee’s account. Crossing of checks do not ipso facto cause the cessation of its negotiable character.

4. Associated Bank vs. CA


G.R. No. 89802. 7 May 1992
First Division, Cruz (J)

Facts:
Melissa’s RTW’s customers issued cross checks payable to Melissa’s RTW, which its proprietor Merle Reyes
did not receive. It was learned that the checks had been deposited with the Associated Bank by one Rafael
Sayson. Sayson was not authorized by Reyes to deposit and encash said checks. Reyes filed an action for
the recovery of the total value of the checks plus damages.

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Issue: Whether the bank was negligent for the loss.

Held:
Crossing a check means that the drawee bank should not encash the check but merely accept it for deposit,
that the check may be negotiated only once by one who has an account in a bank, and that the check serves
as warning that it was issued for a definite purpose so that he must inquire if he has received the check
pursuant to that purpose. The effect, thus, relate to the mode of its presentment for payment, in accordance
with Section 72 of the Negotiable Instruments Law. The bank paid the checks notwithstanding that title had
not passed to the indorser, as the checks had been crossed and issued “for payee’s account only.” It does
did so in its own peril and became liable to the payee for the value of the checks. The failure of the bank to
make an inquiry as to Sayson’s authority was a breach of its duty. The bank is negligent and is thus liable
to Reyes.

5. Moran vs. CA
G.R. No. 105836. 7 March 1994
Second Division, Regalado (J)

Facts:
George and Librada Moran maintained 3 joint accounts with CityTrust Banking Corporation. The Morans
issued checks in favor of Petrophil Corporation, which were dishonored for insufficiency of funds. Moran
deposited the amount that would cover the checks the day after the check’s clearing. Petrophil did not
deliver the Morans’ fuel orders for their Wack-Wack Petron Gasoline station, prompting the latter to
temporarily stop business operations. The Morans sued the bank for damages.

Issue: Whether a bank is liable for its refusal to pay a check on account of insufficient funds, notwithstanding
the fact the fact that a deposit was made later in the day.

Held:
A check is a bill of exchange drawn on a bank payable on demand. Where the bank possesses funds of a
depositor, it is bound to honor his checks to the extent of the amount of the deposits. Failure to do so,
when deposit is sufficient, entitles the drawer to substantial damages without proof of actual damages.
Herein, however, the balance of the account maintained in the bank was not enough to cover either of the
two checks when they were dishonored. A check, as distinguished from an ordinary bill of exchange, is
supposed to be
drawn against a previous deposit of funds. As such, 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 the checks he previously issued. A bank is under no obligation
to make part payment on a check, up to only the amount of the drawer’s funds, where the check is drawn
for an amount larger than what the drawer has on deposit. A check is intended not only to transfer a right
to the amount named in it, but to serve the further purpose of affording evidence for the bank of the
payment of such amount when the check is taken up. Clearly, a bank is not 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 bank depositor may maintain a suit to recover a specific amount from his bank, he must first
show that he had on deposit sufficient funds to meet his demand.

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6. PNB vs. Quimpo


G.R. No. L-53194. 14 March 1988
First Division, Gancayco (J)

Facts:
Francisco Gozon was a depositor of the Philippine National Bank (PNB Caloocan City branch). Ernesto
Santos, Gozon’s friend, took a check from the latter’s checkbook which was left in the car, filled it up for the
amount of P5,000, forged Gozon’s signature, and encashed it. Gozon learned about the transaction upon
receipt of the bank’s statement of account and requested the bank to recredit the amount to his account.
The bank refused. Hence, the present action.

Issue: Who shall bear the loss resulting from the forged check.

Held:
The prime duty of a bank is to ascertain the genuineness of the signature of the drawer or the depositor on
the check being encashed. It is expected to use reasonable business prudence in accepting and cashing a
check being encashed or presented to it. Payment in neglect of duty places upon him the result of such
negligence. Still, Gozon’s act in leaving his checkbook in the car, where his trusted friend remained in, cannot
be considered negligence sufficient to excuse the bank from its own negligence. The bank bears the loss.

7. Republic Bank vs. CA


G.R. No. 42725. 22 April 1991
First Division, Grino Aquino (J)

Doctrine:
The 24-hour clearing house rule is valid rule applicable to commercial banks. As general rule, the collecting
bank or last endorser bears the loss when the indorsement was forged. But the unqualified endorsement of
the collecting bank on the check should be read together with the 24-hour regulation on the clearing house
operation. Thus, when the drawee bank fails to return a forged or altered check to the collecting bank is
absolved from liability. Unless an alteration is attributable to the fault or negligence of the drawer himself, the
remedy of the drawee bank that negligently clears a forged and/or honor altered check for payment is against
the party responsible for the forgery or alteration, otherwise, it bears the loss.

Facts:
San Miguel Corporation issued a dividend check for P240 in favor of J. Roberto Delgado, a stockholder.
Delgado altered the amount of the check to P9,240. The check was indorsed and deposited by Delgado
with Republic Bank. Republic Bank endorsed the check to First National City Bank (FNCB), the drawee bank,
by stamping on the back of the check “all prior and / or lack of indorsements guaranteed. Relying on the
endorsement, FNCB paid the amount to Republic Bank. Later on, San Miguel informed FNCB of the material
alteration of the amount. FNCB recredited the amount to San Miguel’s account, and demanded refund from
Republic Bank. Republic Bank refused. Hence, the present action.

Issue: Who shall bear the loss resulting from the altered check.

Held:
When an indorsement is forged, the collecting bank or last indorser, as a general rule, bears the loss. But
the unqualified indorsement of the collecting bank on the check should be read together with the 24-hour

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regulation on clearing house operation. Thus, when the drawee bank fails to return a forged or altered check
to the collecting bank within the 24-hour clearing period (as provided by Section 4c of Central Bank Circular
9, as amended), the collecting bank is absolved from liability. The drawee bank, FNCB, should bear the loss
for the payment of the altered check for its failure to detect and warn Republic Bank of the fraudulent
character of the check within the 24-hour clearing house rule.

8. Westmont Bank v Ong


G.R. No. 132560. 30 Jan 2002
Quisumbing, J.

Facts:
Two manager’s checks in respondent’s name were issued as payment of the shares of stocks he sold. His
friend got hold of the checks, forged respondent’s signature and deposited them with petitioner bank,
where both are depositors. Petitioner accepted and credited both checks to the forger’s account without
verifying the signature indorsements against respondent’s specimen signature. His friend immediately
withdrew the money and absconded.

Issue: Whether or not petitioner is liable for the payment of the forged check.

Ruling:
YES. The collecting bank is liable to the payee and must bear 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 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 the amount has been paid to the person from
whom the check was obtained.

9. Crystal vs. CA
G.R. No. L-35767. 18 June 1976
Resolution of the Second Division, Barredo (J)

Please See G-5.

10. PNB vs. Benito Seeto


G.R. No. L-4388. August 13, 1952
Labrador, J.

Please see G-2.

11. Violet Mcguire Sumacad, et al. vs. The Province of Samar, The Philippine National Bank
G.R. No. L-8155. October 23, 1956
Paras, J.

Facts:
While the province of Samar was still occupied by Japanese military forces, a check was issued by said
province to Paulino M. Santos (then the postmaster of Borongan) for the sum of P25,000, drawn against the
Philippine National Bank Cebu Branch. The payee negotiated the check with James McGuire, an American

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citizen and resident of the municipality of Borongan. James McGuire presented the check to the municipal
treasurer of Borongan for payment, but the latter (who merely noted it) was not able or did not choose to
pay the same.

James McGuire wrote letters to the Bureau of Posts seeking payment of the check, which were in turn
referred to the PNB. As of this date the province of Samar still had a deposit of P84,287.47 in the PNB. PNB
requested James McGuire to present the check to the provincial treasurer and the provincial auditor for
certification. Before the check could be certified by the authorities concerned as being in order and entitled
to priority of payment, the province of Samar, withdraw the amount of P83,504.07, leaving a balance of only
P743.43.

In the meantime, James McGuire transferred his rights to the check to the herein Plaintiffs who, unable to
cash it.

Issue: WON defendants herein are solidarily liable to pay the check.

Held:
The obligation of the Appellant bank is merely subsidiary. An implied acceptance of the check by the
Appellant bank was thereby created. The request by the Appellant bank from the Bureau of Posts for
photostatic copies of the check and the subsequent requirement by it for its presentation by James McGuire
to the provincial treasurer and the provincial auditor for certification, would be an empty gesture if the
Appellant did not 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 of
Samar being primarily liable to pay the check.

12. PNB vs. National City Bank of New York


G.R. No. 43596. 31 October 1936
En Banc, Recto (J)

Facts:
Facts: On April 7 and 9, 1933, an unknown person or persons negotiated with Motor Service Company, Inc.
(MSCI), two checks in payment for automobile tires purchased from MSCI's stores, purporting to have been
issued by the 'Pangasinan Transportation Co., Inc. (Pantranco) by J.L. Klar, Manager and Treasurer', against
the Philippine National Bank (PNB) and in favor of the International Auto Repair Shop, for P144.50 and
P215.75. Said checks were indorsed by said unknown persons in the manner indicated at the back thereof,
the MSCI, believing at the time that the signatures of J.L. Klar, Manager and Treasurer of Pantranco on both
checks were genuine. The checks were then indorsed for deposit by MSCI at the National City Bank of New
York and the former was accordingly credited with the amounts thereof, or P144.50 and P215.75. On April
8 and 10, 1933, the said checks were cleared at the clearing house and PNB credited the National City Bank
for the amounts thereof, believing at the time that the signatures of the drawer were genuine, that the
payee is an existing entity and the endorsements at the bank thereof regular and genuine. The PNB then
found out that the purported signatures of J.L. Klar, as Manager and Treasurer of Pantranco were forged
when so informed by the said Company, and it accordingly demanded from the National City Bank and
MSCI and the reimbursement of the amounts for which it credited the National City Bank at the clearing
house and for which the latter credited MSCI, but MSCI and National City Bank refused, and continue to
refuse, to make such reimbursements. Pantranco objected to have the proceeds of said check deducted
from their deposit. PNB filed the case in the municipal court of Manila against National City Bank and MSCI.

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Upon PNB's motion, the case was dismissed before trial as to the National City Bank. A decision was
thereafter rendered giving PNB judgment for the total amount of P360.25, with interest and costs. From this
decision MSCI appealed.

Issue [1]: Whether the law or business practice prevents the presentation of checks for acceptance before
they are paid.

Held [1]:
There is nothing in the law or in business practice against the presentation of checks for acceptance, before
they are paid, in which case there is a "certification" equivalent to "acceptance" according to section 187,
which provides that "where a check is certified by the bank on which it is drawn, the certification is equivalent
to an acceptance", and it is then that the warranty under section 62 exists. This certification or acceptance
consists in the signification by the drawee of his assent to the order of the drawer, which must not express
that the drawee will perform his promise by any other means than the payment of money. When the holder
of a check procures it to be accepted or certified, the drawer will perform his promise by any other means
than the payment of money. When the holder of a check procedures it to be accepted or certified, the
drawer and all indorsers are discharged from liability thereon, and then the check operates as an assignment
of a part of the funds to the credit of the drawer with the bank. There is nothing in the nature of the check
which intrinsically precludes its acceptance, in like manner and with like effect as a bill of exchange or draft
may be accepted. The bank may accept if it chooses; and it is frequently induced by convenience, by the
exigencies of business, or by the desire to oblige customers, voluntarily to incur the obligation. The act by
which the bank places itself under obligation to pay to the holder the sum called for by a check must be
the expressed promise or undertaking of the bank signifying its intent to assume the obligation, or some
act from which the law will imperatively imply such valid promise or undertaking. The most ordinary form
which such an act assumes is the acceptance by the bank of the check, or, as it is perhaps more often called,
the certifying of the check.

13. Far East Bank vs. Gold Palace Jewellery Co.


G.R. No. 168274. August 20, 2008
Nachura, J.

Please see F-3.

14. Allied Banking Corp. vs. Lim Sio Wan


G.R. No. 133179. March 27, 2008
Velasco, Jr., J.

Facts:
 Lim Sio Wan (deposited 1st money market) > Allied Bank > (pre-terminated and withdrawn) Santos
> (through forged indorsement of Lim Sio Wan deposited in FCC account) Metrobank > (release in
exchange of undertaking of reimbursement) FCC > (through Santos, as officer of Producers bank,
deposited money market) Producers Bank
 September 21, 1983: FCC had deposited a money market placement for P 2M with Producers Bank
 Santos was the money market trader assigned to handle FCC’s account
 Such deposit is evidenced by Official Receipt and a Letter
 When the placement matured, FCC demanded the payment of the proceeds of the placement

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 November 14, 1983: Lim Sio Wan deposited with Allied Banking Corporation (Allied) a money
market placement of P 1,152,597.35 for a term of 31 days

 December 5, 1983: a person claiming to be Lim Sio Wan called up Cristina So, an officer of Allied,
and instructed the latter to pre-terminate Lim Sio Wan’s money market placement, to issue a
manager’s check representing the proceeds of the placement, and to give the check to Deborah
Dee Santos who would pick up the check. Lim Sio Wan described the appearance of Santos
 Santos arrived at the bank and signed the application form for a manager’s check to be issued
 The bank issued Manager’s Check representing the proceeds of Lim Sio Wan’s money market
placement in the name of Lim Sio Wan, as payee, cross-checked "For Payee’s Account Only" and
given to Santos
 Allied manager’s check was deposited in the account of Filipinas Cement Corporation (FCC) at
Metropolitan Bank and Trust Co. (Metrobank), with the forged signature of Lim Sio Wan as indorser
 Metrobank stamped a guaranty on the check, which reads: "All prior endorsements and/or lack of
endorsement guaranteed."
 Upon the presentment of the check, Allied funded the check even without checking the authenticity
of Lim Sio Wan’s purported indorsement.
 amount on the face of the check was credited to the account of FCC
 December 9, 1983: Lim Sio Wan deposited with Allied a second money market placement to mature
on January 9, 1984
 December 14, 1983: upon the maturity date of the first money market placement, Lim Sio Wan went
to Allied to withdraw it. She was then informed that the placement had been pre-terminated upon
her instructions which she denied
 Lim Sio Wan filed with the RTC against Allied to recover the proceeds of her first money market
placement
 Allied filed a third-party complaint against Metrobank and Santos
 Metrobank filed a fourth party complain against FCC
 FCC for its part filed a fifth party complaint against Producers Bank.
 Summonses were duly served upon all the parties except for Santos, who was no longer connected
with Producers Bank
 May 15, 1984: Allied informed Metrobank that the signature on the check was forged
 Metrobank withheld the amount represented by the check from FCC.
 Metrobank agreed to release the amount to FCC after the FCC executed an undertaking, promising
to indemnify Metrobank in case it was made to reimburse the amount
 Lim Sio Wan thereafter filed an amended complaint to include Metrobank as a party-defendant,
along with Allied.
 RTC: Allied Bank to pay Lim Sio Wan plus damages and atty. fees
 Allied Bank’s cross-claim against Metrobank is DISMISSED.
 Metrobank’s third-party complaint as against Filipinas Cement Corporation is DISMISSED
 Filipinas Cement Corporation’s fourth-party complaint against Producer’s Bank is DISMISSED
 CA: Modified. Allied Banking Corporation to pay 60% and Metropolitan Bank and Trust Company
40%

Issue: W/N Allied should be solely liable to Lim Sio Wan.

Held: YES. CA affirmed. Modified Porudcers Bank to reimburse Allied and Metrobank.

 Articles 1953 and 1980 of the Civil Code

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 Art. 1953. A person who receives a loan of money or any other fungible thing acquires the
ownership thereof and is bound to pay to the creditor an equal amount of the same kind and
quality.
 Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loan.
 bank deposit is in the nature of a simple loan or mutuum
 money market is a market dealing in standardized short-term credit instruments (involving large
amounts) where lenders and borrowers do not deal directly with each other but through a middle
man or dealer in open market. In a money market transaction, the investor is a lender who loans
his money to a borrower through a middleman or dealer.
 Lim Sio Wan, as creditor of the bank for her money market placement, is entitled to payment upon
her request, or upon maturity of the placement, or until the bank is released from its obligation as
debtor
 GR: collecting bank which indorses a check bearing a forged indorsement and presents it to the
drawee bank guarantees all prior indorsements, including the forged indorsement itself, and
ultimately should be held liable therefor
 EX: when the issuance of the check itself was attended with negligence.
 Allied negligent in issuing the manager’s check and in transmitting it to Santos without even a
written authorization
 Allied did not even ask for the certificate evidencing the money market placement or call up Lim
Sio Wan at her residence or office to confirm her instructions.
 Allied’s negligence must be considered as the proximate cause of the resulting loss.
 When Metrobank indorsed the check without verifying the authenticity of Lim Sio Wan’s
indorsement and when it accepted the check despite the fact that it was cross-checked payable to
payee’s account only
 contributed to the easier release of Lim Sio Wan’s money and perpetuation of the fraud
 Given the relative participation of Allied and Metrobank to the instant case, both banks cannot be
adjudged as equally liable. Hence, the 60:40 ratio of the liabilities of Allied and Metrobank, as ruled
by the CA, must be upheld.
 FCC, having no participation in the negotiation of the check and in the forgery of Lim Sio Wan’s
indorsement, can raise the real defense of forgery as against both banks
 Producers Bank was unjustly enriched at the expense of Lim Sio Wan
 Producers Bank should reimburse Allied and Metrobank for the amounts ordered to pay Lim Sio
Wan

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II. Documents Title

D. Code of Commerce (CC)

1. Letter of Credit

CC, 567-572

Cases:

a. Bank of the Philippine Islands vs. Commissioner of Internal Revenue


G.R. No. 137002. July 27, 2006
Chico-Nazario, J.

Facts:
From 28 February 1986 to 8 October 1986, petitioner Bank of the Philippine Islands (BPI) sold to the Central
Bank of the Philippines (now Bangko Sentral ng Pilipinas) U.S. dollars for P 1,608,541,900.00. BPI instructed,
by cable, its correspondent bank in New York to transfer U.S. dollars deposited in BPI’s account therein to
the Federal Reserve Bank in New York for credit to the Central Bank’s account therein. Thereafter, the Federal
Reserve Bank sent to the Central Bank confirmation that such funds had been credited to its account and
the Central Bank promptly transferred to the petitioner’s account in the Philippines the corresponding
amount in Philippine pesos. In 1988, respondent CIR ordered an investigation to be made on BPI’s sale of
foreign currency. As a result thereof, the CIR issued a pre-assessment notice informing BPI that in
accordance with Section 195 (now Section 182) of the NIRC, BPI was liable for documentary stamp tax at
the rate of P 0.30 per P Total tax liability was assessed at P 200.00 on all foreign exchange sold to the Central
Bank. 3,016,316.06, which consists of a documentary stamp tax liability of P2,412,812.85, a 25% surcharge
of P 603,203.21, and a compromise penalty of P 300.00.

Issue: Whether or not the transactions covered is a bill of exchange liable for DST.

Held:
Yes. A definition of a “bill of exchange” is provided by Section 39 of Regulations No. 26, the rules governing
documentary taxes promulgated by the Bureau of Internal Revenue (BIR) in 1924:

Sec. 39. Definition of “bill of exchange”. The term bill of exchange denotes checks, drafts, and
all other kinds of orders for the payment of money, payable at sight, or on demand or after a specific
period after sight or from a stated date.

Section 126 of The Negotiable Instruments Law (Act No. 2031) reiterates that it is an “order for the payment
of money” and specifies the particular requisites that make it negotiable.

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 fixed or determinable future time a sum certain in money
to order or to bearer.

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Section 129 of the same law classifies bills of exchange as inland and foreign, the distinction is laid down
by where the bills are drawn and paid. Thus, a “foreign bill of exchange” may be drawn outside the
Philippines, payable outside the Philippines, or both drawn and payable outside of the Philippines.

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.

A bill of exchange and a letter of credit may differ as to their negotiability, and as to who owns the funds
used for the payment at the time payment is made. However, in both bills of exchange and letters of credit,
a person orders another to pay money to a third person.

Section 195 (now Section 182) of the NIRC covers foreign bills of exchange, letters of credit, and orders of
payment for money, drawn in Philippines, but payable outside the Philippines. From this enumeration, two
common elements need to be present: (1) drawing the instrument or ordering a drawee, within the
Philippines; and (2) ordering that drawee to pay another person a specified amount of money outside the
Philippines. What is being taxed is the facility that allows a party to draw the draft or make the order to pay
within the Philippines and have the payment made in another country.

b. Transfield Philippines vs. Luzon Hydro Electric Corp.


G.R. No. 146717. November 22, 2004
Tinga, J.

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.

Facts:
Transfield Philippines (Transfield) entered into a turn-key contract with Luzon Hydro Corp. (LHC).Under the
contract, Transfield were to construct a hydro-electric plants in Benguet and Ilocos. Transfield was given the
sole responsibility for the design, construction, commissioning, testing and completion of the Project. The
contract provides for a period for which the project is to be completed and also allows for the extension of
the period provided that the extension is based on justifiable grounds such as fortuitous event. In order to
guarantee performance by Transfield, two stand-by letters of credit were required to be opened. During the
construction of the plant, Transfield requested for extension of time citing typhoon and various disputes
delaying the construction. LHC did not give due course to the extension of the period prayed for but referred
the matter to arbitration committee. Because of the delay in the construction of the plant, LHC called on
the stand-by letters of credit because of default. However, the demand was objected by Transfield on the
ground that there is still pending arbitration on their request for extension of time.

Issue [1]: WON the “Independence Principle” on Letter of Credit may be invoked by a beneficiary. YES

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Held [2]:
Yes, the beneficiary can invoke the independence principle. In a letter of credit transaction where the credit
is stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary
provided that the stipulated documents are presented, and the conditions of the credit are complied with,
and particularly, the independence principle liberates the issuing bank from the duty of ascertaining
compliance by the parties of the main contract. As it is, the independence doctrine works for the benefit of
both issuing bank and the beneficiary.

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. 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 of the original transaction. With the letter of credit, the party
who obtained the letter of credit may present it to the beneficiary as a security to convince the latter to
enter into the business transaction. On the other hand, the beneficiary 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 party who presented the letter of credit fails to perform his part.

Prior resolution of any dispute before beneficiary is entitled to call on the letter of credit would convert it
into a mere guarantee.

In this case, the Court ruled that ANZ and SBC banks were left with little or no alternative but to honor the
credit and that it was “ministerial for them to honor the call for payment. Also, Luzon’s right to call on the
securities was rooted on the following provisions of the contract:

… provide security to the Employer in the form of 2 irrevocable and confirmed standby letters of credit

… if the contractor fails to comply, the contractor shall pay the Employer by way of liquidated damages

… Employer may deduct the amount of such damages by drawing on the security …

Issue [2]: Whether or not LHC can collect from the letters of credit despite the pending arbitration case

Held [2]:
Transfield’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.

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.

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

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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.

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. Under this principle,
banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or
legal effect of any documents, or for the general and/or particular conditions stipulated in the documents
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 documents,
or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the
carriers, or the insurers of the goods, or any other person whomsoever.

2. Bills of Lading

CC, Arts. 349-354 and Arts. 706-718

Cases:

a. Keng Hua Products vs. CA


G.R. No. 116863. February 12, 1998
Panganiban, J.

Facts:
 On June 29, 1982, Sea-Land, a shipping company received at its Hong Kong terminal a sealed
container containing 76 bales of “unsorted waste paper” for shipment to Keng Hua in Manila. Sea-
Land issued a bill of lading to cover the shipment.
 On July 9, 1982, the shipment as discharged at Manila International Container Port but for 481 days,
Keng Hua failed to discharge the shipment from the container.
 During the 481 day-period, demurrage charges accrued.
 Sea-Land sent Keng Hua letters demanding payment.
 Keng Hua refused to settle its obligation which eventually amounted to P67,340.
 Sea-Land filed a civil action for collection and damages
 Keng Hua’s defense: Under the letter of credit, they had purchased only 50 tons of waste paper
from Hong Kong shipper Ho Kee Waste Paper; the remaining balance of shipment was only 10
metric tons, but Sea-Land was asking Keng Hua to accept all 20MT of shipment, which would violate
Central Bank rules and regulations and customs and tariff laws; Sea-Land had no cause of action
against Keng Hua because the latter did not hire the former to carry the merchandise; that the
cause of action should be against the shipper which contracted Sea-Land about the wrong
shipment.
 RTC Found Keng Hua liable for demurrage (P67,340; with interest at the legal rate from the date
of the extrajudicial demand until fully paid), attorney’s fees and expenses of litigation.
 Keng Hua appealed to the Court of Appeals, arguing that the lower court erred in (1) awarding
P67,340 in favor of Sea-Land, (2) rejecting Keng Hua’s contention that there was over shipment, (3)

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ruling that Keng Hua’s recourse was against the shipper, and (4) computing legal interest from the
date of extrajudicial demand.
 CA denied Keng Hua’s appeal and affirmed in toto the RTC judgement.
 Hence, Keng Hua’s petition with the Supreme Court.

Issue: Whether or not Keng Hua had accepted the bill of lading.

Held:
 Yes. Keng Hua contends that it should not be bound by the bill of lading because it never gave its
consent thereto. Although it admits “physical acceptance” of the bill of lading, it argues that its
subsequent actions belie the finding that it accepted the terms and conditions printed therein. Keng
Hua cites as support the “Notice of Refused or On Hand Freight” it received on November 2, 1982
from Sea-Land, which acknowledged that Keng Hua declined to accept the shipment. Keng Hua
adds that it sent a copy of the said notice to the shipper on December 29, 1982. Keng Hua points
to its January 24, 1983 letter to Sea-Land, stressing “that its acceptance of the bill of lading would
be tantamount to an act of smuggling as the amount it had imported (with full documentary
support) was only (at that time) for 10,000 kilograms and not for 20,313 kilograms as stated in the
bill of lading” and “could lay them vulnerable to legal sanctions for violation of customs and tariff
as well as Central Bank laws.” Keng Hua further argues that the demurrage “was a consequence of
the shipper’s mistake” of shipping more than what was bought. The discrepancy in the amount of
waste paper it actually purchased, as reflected in the invoice the excess amount in the bill of lading,
allegedly justifies its refusal to accept the shipment.

 We are not persuaded. Keng Hua admits that it “received the bill of lading immediately after the
arrival of the shipment” on July 8, 1982. Having been afforded an opportunity to examine the said
document, it did not immediately object to or dissent from any term or stipulation therein. Only six
months later, on January 24, 1983, did it send a letter to Sea-Land saying that it could not accept
the shipment. Keng Hua’s inaction for such a long period conveys the clear inference that it
accepted the terms and conditions on the bill of lading. Moreover, said letter spoke only of Keng
Hua’s inability to use the delivery permit, ie. To pick up the cargo, due to the shipper’s failure to
comply with the terms and conditions of the letter of credit, for which reason the bill of lading and
other shipping documents were returned by the “banks” to the shipper. The letter merely proved
Keng Hua’s refusal to pick up the cargo, not its rejection of the bill of lading.

 Keng Hua’s reliance on the Notice of Refused or On Hand Freight, as proof of its non-acceptance
of the bill of lading, is of no consequence. Said notice was not written by Keng Hua; it was sent by
Sea-Land to Keng Hua in November 1982, or four months after Keng Hua received the bill of lading.
If the notice has any legal significance at all, it is to highlight Keng Hua’s prolonged failure to object
to the bill of lading. The notice and the letter support - not belie - the findings of the two lower
courts that the bill of lading was impliedly accepted by Keng Hua.

 In any event, the issue of whether Keng Hua accepted the bill of lading was raised for the first time
only in its memorandum before this Court. Clearly, we cannot now entertain an issue raised for the
very first time on appeal.

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E. Trust Receipts Law

Cases:

1. Edward C. Ong vs. The Court of Appeals and The People of The Philippines
G.R. No. 119858. April 29, 2003
Carpio, J.

Facts:
Assistant City Prosecutor Dina P. Teves of the City of Manila charged petitioner and Benito Ong with two
counts of estafa under separate Informations dated 11 October 1991.

In Criminal Case No. 92-101989, the Information indicts petitioner and Benito Ong of the crime of estafa
committed as follows:

That on or about July 23, 1990, in the City of Manila, Philippines, the said accused, representing ARMAGRI
International Corporation, conspiring and confederating together did then and there willfully, unlawfully
and feloniously defraud the SOLIDBANK Corporation represented by its Accountant, DEMETRIO LAZARO, a
corporation duly organized and existing under the laws of the Philippines located at Juan Luna Street,
Binondo, this City, in the following manner, to wit: the said accused received in trust from said SOLIDBANK
Corporation the following, to wit: 10,000 bags of urea valued at P2,050,000.00 specified in a Trust Receipt
Agreement and covered by a Letter of Credit No. DOM GD 90-009 in favor of the Fertiphil Corporation.

In Criminal Case No. 92-101990, the Information likewise charges petitioner of the crime of estafa
committed as follows:

That on or about July 6, 1990, in the City of Manila, Philippines, the said accused, representing ARMAGRI
International Corporation, defraud the SOLIDBANK Corporation represented by its Accountant, DEMETRIO
LAZARO. The said accused received in trust from said SOLIDBANK Corporation the following goods, to wit:
125 pcs. Rear diff. assy RNZO 49” 50 pcs. Front & Rear diff assy. Isuzu Elof, 85 units 1-Beam assy. Isuzu Spz
all valued at P2,532,500.00 specified in a Trust Receipt Agreement and covered by a Domestic Letter of
Credit No. DOM GD 90-006 in favor of the Metropole Industrial Sales with address at P.O. Box AC 219,
Quezon City.

Issue: WON petitioner was necessarily the one responsible for the offense, by the mere circumstance that
petitioner acted as agent and signed for the entrustee corporation.

Held:
Section 13 of the Trust Receipts Law which provides: x x x. If the violation 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 offense. We hold that petitioner is a person
responsible for violation of the Trust Receipts Law.

The Trust Receipts Law is violated whenever the entrustee fails to: (1) turn over the proceeds of the sale of
the goods, or (2) return the goods covered by the trust receipts if the goods are not sold.[18] The mere

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failure to account or return gives rise to the crime which is malum prohibitum.[19] There is no requirement
to prove intent to defraud.[20]

The Trust Receipts Law recognizes the impossibility of imposing the penalty of imprisonment on a
corporation. Hence, if the entrustee is a corporation, the law makes the officers or employees or other
persons responsible for the offense liable to suffer the penalty of imprisonment. The reason is obvious:
corporations, partnerships, associations and other juridical entities cannot be put to jail. Hence, the criminal
liability falls on the human agent responsible for the violation of the Trust Receipts Law.

2. Rosemarie Lee vs. Hon. Rodil


G.R. No. 80544. July 5, 1989
Gutierrez, Jr., J.

Facts:
 Lee was the representative of CS Lee Enterprises Inc. which opened a letter of credit worth Php
154,711.97 with Philippine Bank of Communications for the purchase of merchandise.
 1982: Culture Media received the necessary document and the executed a trust receipt for the
said merchandise: Lee obligated herself to hold the merchandise in trust to sell the same in
cash for the account of the bank; To account for the proceeds if sold; To return the merchandise
to the bank in case failure to sell the same;
 Despite repeated demands, she failed to comply with her obligation and instead
appropriated the merchandise for her own personal use.
 1985: Lee was charged estafa . She moved to quash the information on the ff grounds:

 The violation of a trust agreement does not constitute estafa despite an express
provision in the Trust Receipts characterizing it as estafa.
 PD 115 is violative of the right that no person shall be imprisoned for non-payment
of debt.

 RTC denied the motion to quash and upheld the constitutionality of the law.
 MR denied. Hence, the present petition

Issue: Does the violation of the Trust Receipts agreement constitute estafa? YES

Ratio:
 PD 115, Sec. 3 expressly provides: 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 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
estafa…

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3. Jose O. Sia vs. The People of The Philippines


G.R. No. L-30896. April 28, 1983
De Castro, J.

Facts:
 Jose Sia, president and GM of Metal Manufacturing Company of the Phil., on behalf of said
company, obtained delivery of 150 cold rolled steel sheets valued at P71,023.60under a trust receipt
agreement.
 Said sheets were consigned to the Continental Bank, under the express obligation on the part of
Sia of holding the sheets in trust and selling them and turning over the proceeds to the bank. Sia,
however, allegedly failed and refused to return the sheets or account for the proceeds thereof if
sold, converting it to his own personal use and benefit.
 Continental Bank filed a complaint for estafa against Sia. The trial court and CA ruled against Sia.

Issue: Whether or not Sia, acting as President of MMCP, may be held liable for estafa. No. Sia was acquitted.
CA decision is reversed.

Ratio:
An officer of a corporation can be held criminally liable for acts or omissions done in behalf of the
corporation only where the law directly requires the corporation to do an act in a given manner. In the
absence of a law making a corporate officer liable for a criminal offense committed by the corporation, the
existence of the criminal liability of the former may not be said to be beyond doubt. Hence in the absence
of an express provision of law making Sia liable for the offense done by MMCP of which he is President, as
in fact there is no such provision under the Revised Penal Code, Sia cannot be said to be liable for estafa.

The case of People vs. Tan Boon Kong (54 Phil. 607) provides for the general principle that for crimes
committed by a corporation, the responsible officers thereof would personally bear the criminal liability as
a corporation is an artificial person, an abstract being. However, the Court ruled that such principle is not
applicable in this case because the act alleged to be a crime is not in the performance of an act directly
ordained by law to be performed by the corporation. The act is imposed by agreement of parties, as a
practice observed in the usual pursuit of a business or a commercial transaction. The offense may arise, if
at all, from the peculiar terms and condition agreed upon by the parties to the transaction, not by direct
provision of the law. In the absence of an express provision of law making the petitioner liable for the
criminal offense committed by the corporation of which he is a president as in fact there is no such
provisions in the Revised Penal Code under which petitioner is being prosecuted, the existence of a criminal
liability on his part may not be said to be beyond any doubt. In all criminal prosecutions, the existence of
criminal liability for which the accused is made answerable must be clear and certain. Further, the civil
liability imposed by the trust receipt is exclusively on the Metal Company. Speaking of such liability alone,
the petitioner was never intended to be equally liable as the corporation. Without being made so liable
personally as the corporation is, there would then be no basis for holding him criminally liable, for any
violation of the trust receipt.

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